<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 11, 1996
REGISTRATION NO. 333-
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
DATAWORKS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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CALIFORNIA 7373 33-0209937
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification No.)
organization)
</TABLE>
------------------------
DATAWORKS CORPORATION
5910 PACIFIC CENTER BOULEVARD, SUITE 300
SAN DIEGO, CALIFORNIA 92121
TELEPHONE: (619) 546-9600
(Address, including ZIP code, and telephone number, including area code, of
registrant's principal executive offices)
------------------------
STUART W. CLIFTON
CHIEF EXECUTIVE OFFICER, PRESIDENT AND CHAIRMAN OF THE BOARD
DATAWORKS CORPORATION
5910 PACIFIC CENTER BOULEVARD, SUITE 300
SAN DIEGO, CALIFORNIA 92121
TELEPHONE: (619) 546-9600
(Name, address, including ZIP code, and telephone number, including area code,
of agent for service)
------------------------
COPIES TO:
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FREDERICK T. MUTO, ESQ. WILLIAM B. PAYNE, ESQ.
THOMAS A. COLL, ESQ. DORSEY & WHITNEY LLP
COOLEY GODWARD CASTRO HUDDLESON & TATUM 220 SOUTH SIXTH STREET
4365 EXECUTIVE DRIVE, SUITE 1100 MINNEAPOLIS, MINNESOTA 55402
SAN DIEGO, CALIFORNIA 92121 TELEPHONE: (612) 340-2600
TELEPHONE: (619) 550-6000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As promptly as practicable after this Registration Statement becomes
effective and after the effective time of the proposed Merger described in this
Registration Statement.
------------------------
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
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- ------------------------------------------------------------------------------------------------------
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF MAXIMUM OFFERING AGGREGATE AMOUNT OF
SECURITIES TO BE AMOUNT TO BE PRICE PER OFFERING REGISTRATION
REGISTERED REGISTERED SHARE(1) PRICE(1) FEE (2)
- ------------------------------------------------------------------------------------------------------
Common Stock, no par value.... 1,800,000 $1.52 $2,740,478 $950
- ------------------------------------------------------------------------------------------------------
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</TABLE>
(1) Estimated solely for the purpose of computing the registration fee pursuant
to Rule 457(f)(2) under the Securities Act of 1933, as amended, on the basis
of the book value per share of $5.22 of DCD Corporation Common Stock
(525,000 shares) on June 30, 1996, divided by an Applicable Multiple of
3.4286 to determine an equivalent share price.
(2) An amount in excess of the registration fee was already paid in connection
with the filing of preliminary proxy materials on August 26, 1996. In
accordance with Rule O-11(a)(2) promulgated under the Securities Exchange
Act of 1934, as amended, no filing fee is being submitted herewith.
------------------------
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 THAT 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> 2
DATAWORKS CORPORATION
CROSS-REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS
OF INFORMATION REQUIRED BY ITEMS OF FORM S-4
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FORM
S-4
REGISTRATION
STATEMENT
ITEM
AND
HEADING LOCATION IN PROSPECTUS
- ---- -------------------------------------
<C> <S> <C>
(INFORMATION ABOUT THE TRANSACTION)
1. Forepart of Registration Statement and Outside
Front Cover Page of Prospectus................... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus....................................... Table of Contents; Available
Information
3. Risk Factors, Ratio of Earnings to Fixed Charges
and Other Information............................ Summary; Risk Factors; Selected
Historical Financial Data; Selected
Pro Forma Financial Data; Comparative
Per Share Data; The Merger and
Related Transactions; Unaudited Pro
Forma Combined Condensed Financial
Statements
4. Terms of the Transaction......................... Summary; The Merger and Related
Transactions; Comparison of Rights of
DataWorks Shareholders and DCD
Shareholders
5. Pro Forma Financial Information.................. Summary; Unaudited Pro Forma Combined
Condensed Financial Statements
6. Material Contacts with the Company Being
Acquired......................................... Summary; The Merger and Related
Transactions
7. Additional Information Required For Reoffering By
Persons and Parties Deemed to be Underwriters.... *
8. Interests of Named Experts and Counsel........... Experts; Legal Matters
9. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities... *
(INFORMATION ABOUT REGISTRANT)
10. Information with Respect to S-3 Registrants...... *
11. Incorporation of Certain Information by
Reference........................................ *
12. Information with Respect to S-2 or S-3
Registrants...................................... *
13. Incorporation of Certain Information by
Reference........................................ *
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
FORM
S-4
REGISTRATION
STATEMENT
ITEM
AND
HEADING LOCATION IN PROSPECTUS
- ---- -------------------------------------
<C> <S> <C>
14. Information with Respect to Registrants Other
Than S-2 or S-3 Registrants...................... Available Information; Summary;
Selected Historical Financial Data;
Selected Pro Forma Financial Data;
Comparative Per Share Data; Unaudited
Pro Forma Condensed Combined
Financial Statements; Risk Factors;
DataWorks Management's Discussion and
Analysis of Financial Condition and
Results of Operations; DataWorks
Business; DataWorks Management;
Certain Transactions; DataWorks
Principal Shareholders; Description
of DataWorks Capital Stock;
Comparison of Rights of DataWorks
Shareholders and DCD Shareholders;
DataWorks Financial Statements
(INFORMATION ABOUT THE COMPANY BEING ACQUIRED)
15. Information with Respect to S-3 Companies........ *
16. Information with Respect to S-2 or S-3
Companies........................................ *
17. Information with Respect to Companies Other Than
S-2 or S-3 Companies............................. Summary; Selected Historical
Financial Data; Selected Pro Forma
Financial Data; Comparative Per Share
Data; Unaudited Pro Forma Condensed
Combined Financial Statements; Risk
Factors; DCD Management's Discussion
and Analysis of Financial Condition
and Results of Operations; DCD
Business; DCD Management; DCD
Principal Shareholders; Comparison of
Rights of DataWorks Shareholders and
DCD Shareholders; DCD Financial
Statements
(VOTING AND MANAGEMENT INFORMATION)
18. Information if Proxies, Consents or
Authorizations are to be Solicited............... Front Cover Page; Summary; The
DataWorks Meeting; The DCD Meeting;
DataWorks Management; DataWorks
Principal Shareholders; DCD
Management; DCD Principal
Shareholders; The Merger and Related
Transactions
19. Information if Proxies, Consents or
Authorizations are not to be Solicited or in an
Exchange Offer................................... *
</TABLE>
- ---------------
* Not Applicable.
<PAGE> 4
DATAWORKS CORPORATION
5910 PACIFIC CENTER BOULEVARD, SUITE 300
SAN DIEGO, CA 92121
SEPTEMBER , 1996
Dear Fellow Shareholder:
You are cordially invited to attend a special meeting of shareholders (the
"DataWorks Meeting") of DataWorks Corporation, a California corporation
("DataWorks"), which will be held on September 30, 1996 at 8:00 a.m., local
time, at DataWorks' offices at 5910 Pacific Center Boulevard, Suite 300, San
Diego, California.
At the DataWorks Meeting, you will be asked to consider and vote upon a
proposal to (i) approve and adopt an Agreement and Plan of Merger and
Reorganization, dated August 16, 1996, among DataWorks, DataWorks Acquisition
Sub., Inc., a newly formed, wholly owned Minnesota subsidiary of DataWorks
("DataWorks Sub"), DCD Corporation, a Minnesota corporation ("DCD"), and certain
shareholders of DCD (the "Merger Agreement"), and (ii) approve the merger of
DataWorks Sub with and into DCD, pursuant to which, among other things,
DataWorks Sub will cease to exist and DCD will survive as a wholly owned
subsidiary of DataWorks (the "Merger"). As a result of the Merger, DCD will
become a wholly owned subsidiary of DataWorks and each outstanding share of DCD
Common Stock (other than dissenting DCD shares, if any) will be converted into
the right to receive up to the Applicable Multiple (as defined below) of a share
of DataWorks Common Stock. The "Applicable Multiple" will be determined by
dividing (a) 1,800,000 reduced by the Deduction (as defined below) by (b) the
aggregate number of shares of DCD Common Stock outstanding immediately prior to
the consummation of the Merger. The "Deduction" shall be the number of whole
shares of DataWorks Common Stock that could be purchased, at the average of the
last quoted sales prices of DataWorks Common Stock as traded on the Nasdaq
National Market for the twenty (20) market trading days immediately preceding
the date of the DataWorks Meeting, with the amount equal to the sum of (x) the
aggregate amount of fees and expenses of DCD's investment banking advisors
incurred in connection with the Merger and (y) the amount by which the fees and
expenses of DCD's legal and accounting advisors incurred subsequent to July 17,
1996 in connection with the Merger exceed $100,000. On September 9, 1996, the
closing sales price of a share of DataWorks Common Stock as reported on the
Nasdaq National Market was $24.75. If the requisite approval of the shareholders
of DataWorks and DCD is received and other conditions to the Merger are
satisfied or waived, the Merger is expected to be consummated on or after
September 30, 1996.
In the material accompanying this letter, you will find a Notice of Special
Meeting of Shareholders and a Prospectus/Joint Proxy Statement relating to the
actions to be taken by DataWorks shareholders at the DataWorks Meeting. The
Prospectus/Joint Proxy Statement more fully describes the proposed Merger and
the other proposals submitted hereby (collectively, the "Merger Proposal") and
includes information about DataWorks and DCD. I urge you to read the
Prospectus/Joint Proxy Statement carefully.
After careful consideration, your Board of Directors has approved the
Merger Agreement and the transactions provided for therein and has concluded
that these proposals are in the best interests of DataWorks and its
shareholders. Your Board of Directors has recommended that the shareholders of
DataWorks approve the Merger Proposal.
I URGE YOU TO VOTE FOR APPROVAL OF THE MERGER PROPOSAL. ON BEHALF OF YOUR
BOARD OF DIRECTORS, THANK YOU FOR YOUR SUPPORT.
Sincerely,
STUART W. CLIFTON
Chairman of the Board, President
and Chief Executive Officer
<PAGE> 5
DATAWORKS CORPORATION
5910 PACIFIC CENTER BOULEVARD, SUITE 300
SAN DIEGO, CALIFORNIA 92121
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD SEPTEMBER 30, 1996
NOTICE IS HEREBY GIVEN that a special meeting of shareholders (the
"DataWorks Meeting") of DataWorks Corporation, a California corporation
("DataWorks"), will be held on September 30, 1996 at 8:00 a.m., local time, at
DataWorks' offices at 5910 Pacific Center Drive, Suite 300, San Diego,
California.
The special meeting is for the following purposes:
1. To consider and vote upon a proposal to (i) approve and adopt an
Agreement and Plan of Merger and Reorganization, dated August 16, 1996,
among DataWorks, DataWorks Acquisition Sub., Inc., a newly formed,
wholly owned Minnesota subsidiary of DataWorks ("DataWorks Sub"), DCD
Corporation, a Minnesota corporation ("DCD"), and certain shareholders
of DCD, and (ii) approve the merger of DataWorks Sub with and into DCD,
pursuant to which, among other things, DataWorks Sub will cease to exist
and DCD will survive as a wholly owned subsidiary of DataWorks (the
"Merger"). As a result of the Merger, DCD will become a wholly owned
subsidiary of DataWorks and each outstanding share of DCD Common Stock
(other than dissenting DCD shares, if any) will be converted into the
right to receive up to the Applicable Multiple (as defined below) of a
share of DataWorks Common Stock. The "Applicable Multiple" will be
determined by dividing (a) 1,800,000 reduced by the Deduction (as
defined below) by (b) the aggregate number of shares of DCD Common Stock
outstanding immediately prior to the consummation of the Merger. The
"Deduction" shall be the number of whole shares of DataWorks Common
Stock that could be purchased, at the average of the last quoted sales
prices of DataWorks Common Stock as traded on the Nasdaq National Market
for the twenty (20) market trading days immediately preceding the date
of the DataWorks Meeting, with the amount equal to the sum of (x) the
aggregate amount of fees and expenses of DCD's investment banking
advisors incurred in connection with the Merger and (y) the amount by
which the fees and expenses of DCD's legal and accounting advisors
incurred subsequent to July 17, 1996 in connection with the Merger
exceed $100,000.
2. To transact such other business as may properly come before the
DataWorks Meeting or any adjournment or postponement thereof.
The foregoing items of business are more fully described in the
Prospectus/Joint Proxy Statement accompanying this Notice.
Holders of DataWorks Common Stock who vote against the Merger may, by
complying with Chapter 13 of the California General Corporation Law, be entitled
to dissenters' rights as set forth therein, and the shares of DataWorks Common
Stock held by such persons will be deemed to be dissenting shares.
THE BOARD OF DIRECTORS OF DATAWORKS RECOMMENDS THAT YOU VOTE FOR ALL OF THE
PROPOSALS DESCRIBED ABOVE.
Only holders of record of DataWorks Common Stock at the close of business
on September 10, 1996 are entitled to notice of, and will be entitled to vote
at, the DataWorks Meeting or any adjournment or postponement thereof.
BY ORDER OF THE BOARD OF DIRECTORS
RICK E. RUSSO
Secretary
San Diego, California
September , 1996
<PAGE> 6
DCD CORPORATION
600 HIGHWAY 169
2000 INTERCHANGE TOWER
MINNEAPOLIS, MINNESOTA 55426
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON SEPTEMBER 30, 1996
NOTICE IS HEREBY GIVEN that a special meeting of the shareholders (the "DCD
Meeting") of DCD Corporation, a Minnesota corporation ("DCD"), will be held on
September 30, 1996, at 8:00 a.m., local time, at DCD's offices at 2000
Interchange Tower, 600 Highway 169, Minneapolis, Minnesota 55426.
The DCD Meeting is for the following purposes:
1. To consider and vote upon a proposal to (i) approve and adopt an
Agreement and Plan of Merger and Reorganization, dated August 16, 1996
(the "Merger Agreement"), among DCD, DataWorks Corporation, a California
corporation ("DataWorks") , DataWorks Acquisition Sub., Inc., a newly
formed, wholly owned Minnesota subsidiary of DataWorks ("DataWorks
Sub"), and certain shareholders of DCD, and (ii) approve the merger of
DataWorks Sub with and into DCD (the "Merger"), pursuant to which, among
other things, DataWorks Sub will cease to exist and DCD will survive as
a wholly owned subsidiary of DataWorks. As a result of the Merger, DCD
will become a wholly owned subsidiary of DataWorks and each outstanding
share of DCD Common Stock (other than dissenting DCD shares, if any)
will be converted into the right to receive up to the Applicable
Multiple (as defined below) of a share of DataWorks Common Stock. The
"Applicable Multiple" will be determined by dividing (a) 1,800,000
reduced by the Deduction (as defined below) by (b) the aggregate number
of shares of DCD Common Stock outstanding immediately prior to the
consummation of the Merger. The "Deduction" shall be the number of whole
shares of DataWorks Common Stock that could be purchased, at the average
of the last quoted sales prices of DataWorks Common Stock as traded on
the Nasdaq National Market for the twenty (20) market trading days
immediately preceding the date of the special meeting of DataWorks
shareholders at which the DataWorks shareholders will be asked to
consider and vote upon the Merger Proposal (as defined below), with the
amount equal to the sum of (x) the aggregate amount of fees and expenses
of DCD's investment banking advisors incurred in connection with the
Merger and (y) the amount by which the fees and expenses of DCD's legal
and accounting advisors incurred subsequent to July 17, 1996 in
connection with the Merger exceed $100,000; and
2. To transact such other business as may properly come before the DCD
Meeting.
The Merger is more fully described in, and the Merger Agreement is attached
in its entirety to, the Prospectus/Joint Proxy Statement accompanying this
Notice.
Only the shareholders of record at the close of business on September 10,
1996 (the "Record Date") are entitled to notice of, and to vote at, the DCD
Meeting or at any adjournment(s) or postponement(s) thereof. Approval of the
Merger and the Merger Agreement (collectively, the "Merger Proposal") will
require the affirmative vote of the holders of a majority of the shares of DCD
Common Stock outstanding on the Record Date. If the Merger is consummated,
shareholders of DCD who do not vote in favor of the Merger Proposal and who
otherwise comply with Sections 302A.471 and 302A.473 of the Minnesota Business
Corporation Act may be entitled to dissenters' appraisal rights.
THE BOARD OF DIRECTORS OF DCD RECOMMENDS THAT YOU VOTE FOR ALL OF THE
PROPOSALS DESCRIBED ABOVE.
BY ORDER OF THE BOARD OF DIRECTORS
ROBERT W. BRANDEL
Secretary
Minneapolis, Minnesota
September , 1996
<PAGE> 7
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 SEPTEMBER 11, 1996
DATAWORKS CORPORATION
AND
DCD CORPORATION
PROSPECTUS/JOINT PROXY STATEMENT
FOR THE SPECIAL MEETING OF DATAWORKS SHAREHOLDERS
AND THE SPECIAL MEETING OF DCD SHAREHOLDERS
TO BE HELD ON SEPTEMBER 30, 1996
This Prospectus/Joint Proxy Statement is being furnished to the shareholders
of DataWorks Corporation, a California Corporation ("DataWorks"), on behalf of
the DataWorks Board of Directors (the "DataWorks Board") for use at the Special
Meeting of Shareholders of DataWorks (the "DataWorks Meeting") to be held on
September 30, 1996 at 8:00 a.m., local time, at DataWorks' offices at 5910
Pacific Center Boulevard, Suite 300, San Diego, California, and at any
adjournments or postponements thereof.
This Prospectus/Joint Proxy Statement is also being furnished to the
shareholders of DCD Corporation, a Minnesota corporation ("DCD"), on behalf of
the DCD Board of Directors (the "DCD Board") for use at the Special Meeting of
Shareholders of DCD (the "DCD Meeting") to be held on September 30, 1996 at 8:00
a.m., local time, at DCD's offices at 2000 Interchange Tower, 600 Highway 169,
Minneapolis, Minnesota, and at any adjournments or postponements thereof.
The DataWorks Meeting and the DCD Meeting are being called in connection
with the proposed merger of DataWorks Acquisition Sub., Inc., a newly formed,
wholly owned Minnesota subsidiary of DataWorks ("DataWorks Sub"), with and into
DCD (the "Merger"), pursuant to an Agreement and Plan of Merger and
Reorganization (the "Merger Agreement"), dated August 16, 1996, among DataWorks,
DataWorks Sub, DCD and certain shareholders of DCD (the "Designated
Shareholders"). Pursuant to the Merger, DataWorks Sub will cease to exist and
DCD will survive as a wholly owned subsidiary of DataWorks. Upon effectiveness
of the Merger, each outstanding share of DCD Common Stock (other than dissenting
DCD shares, if any) will be converted into the right to receive up to the
Applicable Multiple (as defined below) of a share of DataWorks Common Stock. The
"Applicable Multiple" will be determined by dividing (a) 1,800,000 reduced by
the Deduction (as defined below) by (b) the aggregate number of shares of DCD
Common Stock outstanding immediately prior to the consummation of the Merger.
The "Deduction" shall be the number of whole shares of DataWorks Common Stock
that could be purchased, at the average of the last quoted sales prices of
DataWorks Common Stock as traded on the Nasdaq National Market for the twenty
(20) market trading days immediately preceding the date of the DataWorks
Meeting, with the amount equal to the sum of (x) the aggregate amount of fees
and expenses of DCD's investment banking advisors incurred in connection with
the Merger and (y) the amount by which the fees and expenses of DCD's legal and
accounting advisors incurred subsequent to July 17, 1996 in connection with the
Merger exceed $100,000. On September 9, 1996, the closing sales price of a share
of DataWorks Common Stock as reported on the Nasdaq Stock Market's National
Market (the "Nasdaq National Market") was $24.75.
Holders of DataWorks Common Stock may, by complying with Chapter 13 of the
California General Corporation Law (the "California Law"), be entitled to
dissenters' rights as set forth therein with respect to the proposed Merger. See
"The Merger and Related Transactions -- Dissenters' Rights of DataWorks
Shareholders" and Appendix C to this Prospectus/Joint Proxy Statement which sets
forth Chapter 13 of the California Law.
Holders of DCD Common Stock may, by complying with Sections 302A.471 and
302A.473 of the Minnesota Business Corporation Act (the "Minnesota Law"), be
entitled to dissenters' rights as set forth therein with respect to the proposed
Merger. See "The Merger and Related Transactions -- Dissenters' Rights of DCD
Shareholders" and Appendix D to this Prospectus/Joint Proxy Statement which sets
forth Sections 302A.471 and 302A.473 of the Minnesota Law.
If the requisite approvals of the shareholders of DataWorks and DCD are
received and other conditions to the Merger are satisfied or waived, the Merger
is expected to be consummated on or after September 30, 1996 (the "Closing").
All information contained in this Prospectus/Joint Proxy Statement relating
to DataWorks has been supplied by DataWorks, and all information relating to DCD
has been supplied by DCD.
This Prospectus/Joint Proxy Statement is first being delivered to
shareholders of DataWorks and DCD on or about September , 1996.
THE ABOVE MATTERS ARE DISCUSSED IN DETAIL IN THIS PROSPECTUS/JOINT PROXY
STATEMENT. THE PROPOSED MERGER IS A COMPLEX TRANSACTION. SHAREHOLDERS OF
DATAWORKS AND DCD ARE STRONGLY URGED TO READ AND CONSIDER CAREFULLY THIS
PROSPECTUS/JOINT PROXY STATEMENT IN ITS ENTIRETY, PARTICULARLY THE MATTERS
REFERRED TO UNDER "RISK FACTORS," BEGINNING ON PAGE 15.
THE SHARES OF DATAWORKS COMMON STOCK TO BE ISSUED IN THE MERGER HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS/JOINT PROXY STATEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus/Joint Proxy Statement is , 1996.
<PAGE> 8
NO PERSON HAS BEEN AUTHORIZED BY DATAWORKS OR DCD TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS/JOINT PROXY
STATEMENT IN CONNECTION WITH THE OFFERING OF SECURITIES MADE HEREBY AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY DATAWORKS OR DCD. THIS PROSPECTUS/JOINT PROXY
STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY THE SECURITIES OFFERED BY THIS PROSPECTUS/JOINT PROXY STATEMENT IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT WOULD BE UNLAWFUL TO MAKE SUCH
AN OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS/JOINT PROXY STATEMENT NOR ANY
DISTRIBUTION OF THE SECURITIES TO WHICH THIS PROSPECTUS/JOINT PROXY STATEMENT
RELATES SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE INFORMATION CONTAINED HEREIN SINCE THE DATE HEREOF.
AVAILABLE INFORMATION
DataWorks is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). These materials can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's regional offices at Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World
Trade Center, New York, New York 10048. Copies of these materials can also be
obtained from the Commission at prescribed rates by writing to the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549. The Commission also maintains a site on the World Wide Web that contains
reports, proxy and information statements and other information regarding
DataWorks. The address for such site is http://www.sec.gov.
Under the rules and regulations of the Commission, the solicitation of
proxies from shareholders of DCD to approve the Merger Proposal constitutes an
offering of the DataWorks Common Stock to be issued in connection with the
Merger. Accordingly, DataWorks has filed with the Commission a Registration
Statement on Form S-4 under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to such offering (as amended from time to time,
the "Registration Statement"). This Prospectus/Joint Proxy Statement constitutes
the prospectus of DataWorks that is filed as part of the Registration Statement.
Other parts of the Registration Statement are omitted from this Prospectus/Joint
Proxy Statement in accordance with the rules and regulations of the Commission.
Copies of the Registration Statement, including the exhibits to the Registration
Statement and other material that is not included herein, may be inspected,
without charge, at the regional offices of the Commission referred to above, or
obtained at prescribed rates from the Public Reference Section of the Commission
at the address set forth above.
Statements made in this Prospectus/Joint Proxy Statement concerning the
contents of any contract or other document accurately describe the material
provisions of such contract or other document but are not necessarily complete.
With respect to each contract or other document attached as an appendix to the
Prospectus/Joint Proxy Statement, reference is hereby made to that appendix for
a more complete description of the matter involved, and each such statement is
hereby qualified in its entirety by such reference.
------------------------
This Prospectus/Joint Proxy Statement contains trademarks and registered
trademarks of DataWorks, DCD and other companies.
i
<PAGE> 9
TABLE OF CONTENTS
<TABLE>
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PAGE
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AVAILABLE INFORMATION.................................................................. i
SUMMARY................................................................................ 1
General.............................................................................. 1
The Parties.......................................................................... 1
The Merger........................................................................... 2
Meetings of DataWorks and DCD Shareholders........................................... 3
Recommendations of Boards of Directors............................................... 3
Opinion of DataWorks' Financial Advisor.............................................. 4
Merger Agreement..................................................................... 4
Escrow Agreement and Related Agreements.............................................. 5
Other Matters Related to the Merger.................................................. 6
Market Price Data.................................................................... 8
Selected Historical Financial Data................................................... 9
Selected Pro Forma Combined Condensed Financial Data................................. 12
RISK FACTORS........................................................................... 15
Integration of Operations............................................................ 15
Fluctuations in Operating Results.................................................... 15
Competition.......................................................................... 16
Ability to Recruit Sales, Service and Implementation Personnel....................... 18
Management of Growth; Operating History.............................................. 18
Dependence on Key Employees.......................................................... 18
Dependence on Principal Products..................................................... 18
Rapid Technological Change and New Products.......................................... 18
Dependence on Manufacturing Industry................................................. 19
Dependence on Third Party Software and Hardware...................................... 19
Intellectual Property and Proprietary Rights......................................... 20
Product Liability.................................................................... 20
Control by Existing Shareholders..................................................... 20
Possible Volatility of Stock Price................................................... 21
Effect of Certain Charter Provisions................................................. 21
Additional Shares to be Issued by DataWorks; Shares Eligible for Future Sale......... 21
THE DATAWORKS MEETING.................................................................. 22
THE DCD MEETING........................................................................ 24
THE MERGER AND RELATED TRANSACTIONS.................................................... 25
General.............................................................................. 25
Effects of the Merger................................................................ 25
Background of the Merger............................................................. 26
Reasons for the Merger............................................................... 27
DataWorks Board Recommendation....................................................... 28
DCD Board Recommendation............................................................. 28
Opinion of Furman Selz LLC........................................................... 29
Merger Agreement..................................................................... 35
Escrow Agreement and Related Agreements; Interests of Certain Persons in the
Merger............................................................................ 38
Regulatory Matters................................................................... 39
Certain Federal Income Tax Matters................................................... 39
Accounting Treatment................................................................. 41
</TABLE>
ii
<PAGE> 10
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Dissenters' Rights of DataWorks Shareholders........................................... 41
Dissenters' Rights of DCD Shareholders................................................. 43
Merger Expenses and Fees and Other Costs............................................... 45
Affiliates' Restrictions on Sale of DataWorks Common Stock............................. 45
PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION..................................... 47
DATAWORKS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS........................................................................... 51
DATAWORKS BUSINESS..................................................................... 57
DATAWORKS MANAGEMENT................................................................... 72
DATAWORKS PRINCIPAL SHAREHOLDERS....................................................... 82
DCD MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS........................................................................... 83
DCD BUSINESS........................................................................... 87
DCD MANAGEMENT......................................................................... 90
DCD PRINCIPAL SHAREHOLDERS............................................................. 91
DESCRIPTION OF DATAWORKS CAPITAL STOCK................................................. 92
COMPARISON OF RIGHTS OF DATAWORKS SHAREHOLDERS AND DCD SHAREHOLDERS.................... 94
EXPERTS................................................................................ 100
LEGAL MATTERS.......................................................................... 100
INDEX TO FINANCIAL STATEMENTS.......................................................... F-1
</TABLE>
THE FOLLOWING APPENDICES ALSO CONSTITUTE PART OF THIS PROSPECTUS/JOINT PROXY
STATEMENT:
A -- Agreement and Plan of Merger and Reorganization
B -- Opinion of Furman Selz LLC
C -- Chapter 13 of the California General Corporation Law
D -- Sections 302A.471 and 302A.473 of the Minnesota Business Corporation
Act
iii
<PAGE> 11
SUMMARY
The following is a summary of certain information contained elsewhere in
this Prospectus/Joint Proxy Statement. The summary does not contain a complete
description of the terms of the Merger and is qualified in its entirety by
reference to the full text of this Prospectus/Joint Proxy Statement and the
Appendices hereto. Shareholders of DataWorks and DCD are urged to read this
Prospectus/Joint Proxy Statement and the Appendices in their entirety.
Except for the historical information contained herein, the discussion in
this Prospectus/Joint Proxy Statement contains forward-looking statements that
involve risks and uncertainties. DataWorks', DCD's and the combined entity's
actual results could differ materially from those discussed here. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed in the sections entitled "Risk Factors," "DataWorks Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"DataWorks Business," "DCD Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "DCD Business," as well as those
discussed elsewhere in this Prospectus/Joint Proxy Statement.
GENERAL
This Prospectus/Joint Proxy Statement is being provided to shareholders of
DataWorks and DCD in connection with the proposed Merger of DataWorks Sub with
and into DCD, pursuant to which DataWorks Sub will cease to exist and DCD will
survive the Merger as a wholly owned subsidiary of DataWorks. The Merger will be
effected pursuant to the Merger Agreement, a copy of which is attached hereto as
Appendix A.
THE PARTIES
DataWorks
DataWorks develops, markets, implements and supports open systems,
client/server-based Enterprise Resource Planning ("ERP") software for mid-sized
discrete manufacturing companies. DataWorks was incorporated in California in
1986. Unless otherwise indicated, "DataWorks" refers to DataWorks Corporation, a
California corporation, and its subsidiaries. DataWorks' executive offices are
located at 5910 Pacific Center Boulevard, Suite 300, San Diego, California
92121. Its telephone number is (619) 546-9600.
See "DataWorks Business" for a more detailed description of DataWorks'
business and "Risk Factors" for a discussion of the risks associated with the
ownership of DataWorks Common Stock, including risks related to the Merger.
DataWorks Sub
DataWorks Sub was incorporated in Minnesota in August 1996 for the purpose
of effecting the acquisition of DCD. It is a wholly owned subsidiary of
DataWorks and has no material assets or liabilities and has not engaged in any
activities except in connection with the proposed acquisition of DCD. DataWorks
Sub's executive offices are located at 5910 Pacific Center Boulevard, Suite 300,
San Diego, California 92121. Its telephone number is (619) 546-9600.
DCD
DCD designs, develops, markets and supports business management software
for "make-to-order" manufacturing companies, primarily job shops and custom
manufacturers. DCD was incorporated in Minnesota in 1975. Unless otherwise
indicated, "DCD" refers to DCD Corporation. DCD's executive offices are located
at 2000 Interchange Tower, 600 Highway 169, Minneapolis, Minnesota 55426. Its
telephone number is (612) 544-7077.
See "DCD Business" and "Risk Factors" for a more detailed description of
DCD's business.
1
<PAGE> 12
THE MERGER
General. As a result of the Merger, DCD will become a wholly owned
subsidiary of DataWorks and each outstanding share of DCD Common Stock (other
than dissenting DCD shares, if any) will be converted into the right to receive
up to the Applicable Multiple (as defined below) of a share of DataWorks Common
Stock. The "Applicable Multiple" will be determined by dividing (a) 1,800,000
reduced by the Deduction (as defined below) by (b) the aggregate number of
shares of DCD Common Stock outstanding immediately prior to the consummation of
the Merger. The "Deduction" shall be the number of whole shares of DataWorks
Common Stock that could be purchased, at the average of the last quoted sales
prices of DataWorks Common Stock as traded on the Nasdaq National Market for the
twenty (20) market trading days immediately preceding the date of the Special
Meeting, with the amount equal to the sum of (x) the aggregate amount of fees
and expenses of DCD's investment banking advisors incurred in connection with
the Merger and (y) the amount by which the fees and expenses of DCD's legal and
accounting advisors incurred subsequent to July 17, 1996 in connection with the
Merger exceed $100,000. Cash will be paid in lieu of issuing fractional shares.
Provided there are no dissenting DCD shares, an aggregate of up to
1,800,000 shares of DataWorks Common Stock (the "Merger Consideration") will be
issuable in the Merger. Ten percent (10%) of the Merger Consideration (the
"Escrow Shares"), however, will be issued in the name of an escrow agent to be
held in escrow ("Escrow") in accordance with an Escrow and Indemnity Agreement
in the form attached as Exhibit B to the Merger Agreement ("Escrow Agreement")
as security for the representations, warranties, covenants and other obligations
of DCD under the Merger Agreement. The Escrow Shares will be released, with
certain limitations, beginning one year after the Closing. See "The Merger and
Related Transactions -- Escrow Agreement and Related Agreements; Interests of
Certain Persons in the Merger."
Further, pursuant to the Merger Agreement and the Escrow Agreement, the
shareholders of DCD shall be indemnified against breaches of representations,
warranties, covenants and other obligations, of DataWorks or DataWorks Sub under
the Merger Agreement, until six months following the Closing, subject to certain
limitations set forth in the Escrow Agreement.
Including the shares to be held in escrow pursuant to the Escrow Agreement,
the former holders of DCD Common Stock will own shares of DataWorks Common Stock
representing up to approximately 22.9% of the shares of DataWorks Common Stock
to be outstanding immediately after consummation of the Merger (calculated on
the basis of 6,052,060 shares of DataWorks Common Stock outstanding as of
September 10, 1996, and the Merger Consideration of up to 1,800,000 shares to be
issued in the Merger). See "The Merger and Related Transactions -- Effects of
the Merger -- Conversion of Shares."
Other Effects of the Merger. The Merger will be consummated promptly after
the approval by the DataWorks shareholders and the DCD shareholders of the
Merger Proposal and the satisfaction or waiver of the other conditions to
consummation of the Merger (the "Closing Date"). The Merger will become
effective on the date the Articles of Merger are duly filed with the Minnesota
Secretary of State (the "Effective Date"). On the Effective Date, DataWorks Sub
will merge with and into DCD, with the result that DCD will be the surviving
corporation in the Merger and a wholly owned subsidiary of DataWorks (the
"Surviving Subsidiary"). The shareholders of DCD (other than dissenting DCD
shareholders, if any) will become shareholders of DataWorks (as described
below), and their rights will be governed by DataWorks' Articles of
Incorporation, as amended (the "DataWorks Articles"), the Bylaws of DataWorks
(the "DataWorks Bylaws") and the California Law. See "Comparison of Rights of
DataWorks Shareholders and DCD Shareholders."
There will be no change in the current DataWorks Board and the officers of
DataWorks as a result of the Merger, except that Robert W. Brandel, the current
President of DCD, will become a Vice President of DataWorks.
2
<PAGE> 13
MEETINGS OF DATAWORKS AND DCD SHAREHOLDERS
Date, Time and Place
The DataWorks Meeting will be held on September 30, 1996 at 8:00 a.m.,
local time, at DataWorks' offices at 5910 Pacific Center Boulevard, Suite 300,
San Diego, California.
The special meeting of DCD shareholders (the "DCD Meeting"), will be held
on September 30, 1996 at 8:00 a.m., local time, at DCD's offices at 600 Highway
169, 2000 Interchange Tower, Minneapolis, Minnesota.
Purposes of the Meetings
DataWorks Meeting. At the DataWorks Meeting, shareholders of DataWorks
will be asked to consider and vote upon proposals (referred to herein as the
"Merger Proposal") to (i) approve and adopt the Merger Agreement, a copy of
which is attached hereto as Appendix A, and (ii) approve the Merger.
DCD Meeting. At the DCD Meeting, shareholders of DCD will be asked to
consider and vote upon the Merger Proposal.
Record Date; Shares Entitled to Vote
DataWorks. Only holders of record of DataWorks Common Stock at the close
of business on September 10, 1996 (for purposes of both the DataWorks Meeting
and the DCD Meeting, the "Record Date") are entitled to notice of and to vote at
the DataWorks Meeting. At the close of business on the Record Date, there were
outstanding and entitled to vote 6,052,060 shares of DataWorks Common Stock,
each of which will be entitled to one vote on each matter to be acted upon at
the DataWorks Meeting, held by
holders of record.
DCD. Only holders of record of DCD Common Stock at the close of business
on the Record Date are entitled to notice of and to vote at the DCD Meeting. At
the close of business on the Record Date, there were outstanding and entitled to
vote 525,000 shares of DCD Common Stock, each of which will be entitled to one
vote on each matter to be acted upon at the DCD Meeting, held by nine holders of
record.
Vote Required
DataWorks. Approval of the Merger Proposal requires the affirmative vote
of the holders of a majority of the shares of DataWorks Common Stock outstanding
on the Record Date and entitled to vote on the Merger Proposal. As a group, all
executive officers and directors of DataWorks and their respective affiliates
beneficially owned 1,991,734 shares, or approximately 32.6%, of the DataWorks
Common Stock outstanding as of the Record Date.
DCD. Approval of the Merger Proposal requires the affirmative vote of the
holders of a majority of the shares of DCD Common Stock outstanding on the
Record Date and entitled to vote on the Merger Proposal. As a group, all
executive officers and directors of DCD beneficially owned 254,850 shares, or
approximately 49%, of the DCD Common Stock outstanding as of the Record Date.
RECOMMENDATIONS OF BOARDS OF DIRECTORS
The DataWorks Board. The DataWorks Board has approved the Merger Agreement
and the Merger and has determined that the Merger is in the best interests of
DataWorks and its shareholders. The DataWorks Board has recommended approval of
the Merger Proposal by the DataWorks shareholders. The primary factors
considered and relied upon by the DataWorks Board in reaching its recommendation
are described below under "The Merger and Related Transactions -- Reasons for
the Merger -- DataWorks' Reasons for the Merger."
3
<PAGE> 14
The DCD Board. The DCD Board has approved the Merger Agreement and the
Merger and has recommended approval of the Merger Proposal by the DCD
shareholders. See "The Merger and Related Transactions -- Reasons for the
Merger -- DCD's Reasons for the Merger."
OPINION OF DATAWORKS' FINANCIAL ADVISOR
Furman Selz LLC ("Furman Selz"), DataWorks' financial advisor, has
delivered to the DataWorks Board its written opinion dated August 16, 1996, to
the effect that, as of such date, the Merger Consideration to be paid by
DataWorks is fair, from a financial point of view, to DataWorks. The full text
of the opinion of Furman Selz, which sets forth the assumptions made, matters
considered and limitations on the review undertaken by Furman Selz, is attached
as Appendix B to this Prospectus/Joint Proxy Statement. DataWorks shareholders
are urged to read the opinion in its entirety. See "The Merger and Related
Transactions -- Opinion of Furman Selz LLC."
MERGER AGREEMENT
Representations and Covenants. Under the Merger Agreement, each of
DataWorks and DCD has made a number of representations regarding the
organization and capital structures of the respective companies and their
affiliates, their operations, financial condition and other matters, including
their authority to enter into the Merger Agreement and to consummate the Merger.
Further, to facilitate the Merger, each of DataWorks and DCD has covenanted to
use commercially reasonable efforts to cause certain conditions to be satisfied
on a timely basis, and to call and hold a meeting of its shareholders as
promptly as practical for the purposes of permitting them to approve the Merger.
Under the Merger Agreement, DCD and the Designated Shareholders have each
covenanted that, until the consummation of the Merger or the termination of the
Merger Agreement, they will not take certain actions relating to the operation
of DCD's business without DataWorks' consent. DCD and the Designated
Shareholders have each also agreed that they will not solicit, encourage,
negotiate, provide information for, or otherwise cooperate in any way with or
facilitate any proposal to merge, consolidate or otherwise acquire DCD (other
than the Merger Proposal). DCD has further agreed, among other things, to (i)
use commercially reasonable efforts to maintain its business organization and
business relationships, (ii) deliver certain financial and operating data and
any other documents to DataWorks that DataWorks may reasonably request regarding
the business of DCD, and make all necessary filings and obtain all required
consents prior to the Merger, (iii) obtain and deliver to DataWorks the Related
Agreements (as defined below) and certain other documents, and (iv) provide
certain tax representations to be used in connection with certain legal
opinions. In addition, DCD has agreed to take such actions prior to Closing as
DataWorks deems reasonably necessary, subject to certain limitations, with
respect to the qualification and compliance of an employee stock option plan
(the "DCD ESOP"). See Note 4 to the DCD Financial Statements for an explanation
of the DCD ESOP.
Under the Merger Agreement, DataWorks has also agreed, among other things,
to (i) provide reasonable access to documents and information previously
publicly filed or disclosed (and supporting documentation reasonably related
thereto) and to make available its executive officers to answer questions of DCD
relating to DataWorks' business; (ii) make all filings and give all notices
required to be made and given in connection with the Merger and related
transactions, and obtain all required consents relating thereto; and (iii)
provide certain tax representations to be used in connection with certain legal
opinions.
Conditions to the Merger. In addition to the requirement that the Merger
Proposal be approved by the requisite votes of the DataWorks and DCD
shareholders, the obligations of DataWorks and DCD to consummate the Merger are
subject to the satisfaction of a number of other conditions that, if not
satisfied or waived, may cause the Merger not to be consummated and the Merger
Agreement to be terminated. The parties' obligations are conditioned on, among
other things, (i) no shareholders of DataWorks and holders of less than 2% of
the shares of DCD Common Stock having asserted dissenters' rights under the
California Law and the Minnesota Law, respectively, (ii) the absence of any
order by any court or governmental agency to enjoin or otherwise prevent the
consummation of the Merger Agreement or the Merger, (iii) the accuracy, in
4
<PAGE> 15
all material respects, of the representations and warranties made by the other
party, except for any inaccuracies which, individually and taken as a whole,
have not had a material adverse effect on DCD, (iv) the performance, in all
material respects, by the other party of its covenants, (v) the receipt of
certain legal opinions, (vi) the receipt of all approvals, consents,
authorizations and modifications of governmental authorities and third parties,
and (vii) the execution of certain employment, consulting and noncompetition
agreements with shareholders and other officers of DCD, and other agreements and
certificates. See "The Merger and Related Transactions -- Escrow Agreement and
Related Agreements; Interests of Certain Persons in the Merger."
DataWorks' obligations to consummate the Merger are further conditioned
upon, among other things, (i) the receipt of a letter from Ernst & Young LLP,
DataWorks' independent auditors, relating to the applicability of
pooling-of-interests accounting treatment to the Merger, (ii) the receipt of a
letter from Price Waterhouse LLP, DCD's independent accountants, relating to the
applicability of pooling-of-interests accounting treatment to DCD and, (iii) the
receipt of the resignation of each director of DCD and certain trustees of
benefits plans of DCD.
At any time prior to the Closing Date, to the extent legally allowed,
DataWorks or DCD, without approval of the shareholders of DataWorks or DCD, may
waive compliance with any of the agreements or conditions contained in the
Merger Agreement to be performed by the other party.
Termination or Amendment. The Merger Agreement may be terminated at any
time prior to the Closing Date, whether before or after the approval of the
shareholders of DataWorks and DCD, under certain circumstances. See "The Merger
and Related Transactions -- Merger Agreement."
The Merger Agreement may be amended by a written instrument executed by
DataWorks, DCD and a majority of interest of the Designated Shareholders.
Registration Rights. Although the shares of DataWorks Common Stock to be
issued pursuant to the Merger will have been registered under the Securities
Act, any shareholder of DCD receiving such stock who is an affiliate of DCD at
the time of the DCD Meeting (as "affiliate" is defined for purposes of Rule 145
promulgated under the Securities Act ("Rule 145")) will be subject to the resale
restrictions set forth in Rule 145. See "The Merger and Related
Transactions -- Affiliates' Restrictions on Sale of DataWorks Common Stock."
The Merger Agreement contemplates that certain holders of the shares of
DataWorks Common Stock to be issued in the Merger who are DCD affiliates within
the meaning of Rule 145 will be entitled to certain demand and piggyback
registration rights with respect to such shares. See "The Merger and Related
Transactions -- Merger Agreement -- Registration Rights."
ESCROW AGREEMENT AND RELATED AGREEMENTS
Escrow Agreement
The Escrow Agreement was entered into as of August 16, 1996, in connection
with the Merger Agreement, among DataWorks, the Designated Shareholders, Robert
W. Brandel as representative of the shareholders of DCD, and ChaseMellon
Shareholder Services as the Escrow Agent. The Escrow Agreement provides that,
subject to certain limitations and other terms described in the Escrow
Agreement, DataWorks, DataWorks Sub and other affiliates and representatives of
DataWorks shall be indemnified, defended and held harmless out of the Escrow
Shares from and against any loss, expense, liability or other damages, including
the reasonable costs of investigation, penalties and attorneys' and accountants'
fees incurred in connection with or arising from or attributable to (i) any
breach of or inaccuracy in any representation or warranty made by DCD in the
Merger Agreement or in any certificate or document delivered in connection with
the Merger, (ii) any breach or failure to perform of any covenant of DCD set
forth in the Merger Agreement, (iii) certain actions taken prior to and after
the Closing Date relating to the DCD ESOP, (iv) brokerage or finder's fee claims
relating to the Merger, or (v) incurrence by DCD of certain fees and expenses.
5
<PAGE> 16
In addition to the indemnity provided by the Escrow Shares after the
Closing, the Escrow Agreement provides that DCD shall remain liable prior to the
Closing, and the Designated Shareholders shall remain liable at all times, for
breaches of their representations, warranties and covenants in the Merger
Agreement and other agreements and instruments entered into in connection with
the Merger. In addition, subject to certain limitations and other terms
described in the Escrow Agreement, DataWorks is obligated to defend, hold
harmless and indemnify the shareholders of DCD from and against any loss,
expense, liability or other damages, including the reasonable costs of
investigation, penalties and attorneys' and accountants' fees, incurred from the
date of the Merger Agreement through six months following the Closing Date in
connection with or arising from or attributable to (i) any breach of or
inaccuracy in any representation or warranty made by DataWorks or DataWorks Sub
in the Merger Agreement or any document delivered by DataWorks pursuant to the
Merger Agreement, or (ii) any breach or failure to perform any agreement or
covenant of DataWorks or DataWorks Sub in the Merger Agreement or any document
delivered by DataWorks in connection therewith.
The Merger Agreement provides that the Escrow Shares shall be ten percent
(10%) of the Merger Consideration and will be issued in the name of the Escrow
Agent at the Closing as security for the representations, warranties, covenants
and other obligations of DCD under the Merger Agreement. See "The Merger and
Related Transactions -- Escrow Agreement and Related Agreements; Interests of
Certain Persons in the Merger."
In connection with the Merger Agreement, certain shareholders and employees
of DCD will enter into related agreements (the "Related Agreements"), as
described below:
Affiliate Agreements. To help ensure that the Merger will be accounted for
as a pooling-of-interests, it is a condition to Closing that DCD affiliates
within the meaning of Rule 145 enter into agreements that prohibit such persons
from disposing of their shares of DataWorks Common Stock until DataWorks
publicly releases its first report of the combined financial results of DCD and
DataWorks for a period of at least 30 days of "combined operations," as defined
by the Commission. Such affiliates also have agreed not to sell, pledge or
otherwise transfer such shares, except in compliance with Rule 145 or under
certain other limited circumstances. See "The Merger and Related
Transactions -- Escrow Agreement and Related Agreements; Interests of Certain
Persons in the Merger -- Affiliate Agreements."
Employment; Separation and Consulting; and Separation, Consulting and
Noncompetition Agreements. At the Closing, each of Richard D. Borg, William J.
Borg and Robert W. Brandel, current DCD employees and shareholders, shall enter
into an employment letter agreement with DCD; Marde S. Olson, a current DCD
consultant and shareholder, shall enter into a Separation and Consulting
Agreement with DataWorks; and Dwayne E. Borg, a current DCD employee and
shareholder, shall enter into a Separation, Consulting and Noncompetition
Agreement with DataWorks. See "The Merger and Related Transactions -- Escrow
Agreement and Related Agreements; Interests of Certain Persons in the
Merger -- Employment; Separation and Consulting; and Separation, Consulting and
Non-Competition Agreements."
OTHER MATTERS RELATED TO THE MERGER
Certain Federal Income Tax Consequences. The Merger is expected to be a
tax-free reorganization for federal income tax purposes, so that no gain or loss
will be recognized by the DCD shareholders on the exchange of DCD Common Stock
for DataWorks Common Stock or by the DataWorks shareholders pursuant to the
Merger, except to the extent that DCD shareholders receive cash in lieu of
fractional shares and except to the extent that DCD shareholders or DataWorks
shareholders receive cash for dissenting shares. DCD will not obtain a ruling
from the Internal Revenue Service as to the tax consequences of the Merger. As a
condition to each of DataWorks' and DCD's obligations to consummate the Merger,
DataWorks and DCD will receive an opinion at the Closing Date from the other's
respective legal counsel to the effect that the Merger will be treated as a
tax-free reorganization for federal income tax purposes. DCD shareholders are
urged to consult their own tax advisors regarding the tax consequences of the
Merger. See "The Merger and Related Transactions -- Certain Federal Income Tax
Matters."
6
<PAGE> 17
Accounting Treatment. The Merger is intended to be treated as a pooling of
interests for accounting purposes. It is a condition to DataWorks' obligation to
consummate the Merger that DataWorks receive a letter to such from Ernst & Young
LLP, DataWorks' independent auditors, relating to the applicability of
pooling-of-interests accounting treatment, and a letter from Price Waterhouse
LLP, DCD's independent accountants, relating to the applicability of
pooling-of-interests accounting treatment to DCD. See "The Merger and Related
Transactions -- Accounting Treatment."
Dissenters' Rights. If the Merger Agreement is approved by the required
vote of DataWorks shareholders and is not abandoned or terminated, the holders
of DataWorks Common Stock are entitled to exercise dissenters' rights, pursuant
to Chapter 13 of the California Law, a copy of which is attached hereto as
Appendix C, with respect to shares voted in opposition to the Merger, provided
that five percent or more of the shares of DataWorks Common Stock are voted
against the Merger. However, it is a condition precedent to the obligations of
the parties under the Merger Agreement that no holders of outstanding DataWorks
Common Stock be, or have the right to become, entitled to dissenters' rights
pursuant to Chapter 13 of the California Law. See "The Merger and Related
Transactions -- Dissenters' Rights of DataWorks Shareholders."
If the Merger Agreement is approved by the required vote of DCD
shareholders and is not abandoned or terminated, holders of DCD Common Stock who
did not vote in favor of the Merger may, by complying with Sections 302A.471 and
302A.473 of the Minnesota Law, a copy of which is attached hereto as Appendix D,
assert dissenters' rights as described therein, and the shares of DCD Common
Stock held by such persons will be deemed to be "Dissenting Shares." However, it
is a condition precedent to the obligations of the parties under the Merger
Agreement that holders of fewer than 2% of the outstanding shares of DCD Common
Stock be, or have the right to become, entitled to dissenters' rights pursuant
to Sections 302A.471 and 302A.473 of the Minnesota Law. See "The Merger and
Related Transactions -- Dissenters' Rights of DCD Shareholders."
Merger Expenses and Fees and Other Costs. Whether or not the Merger is
consummated, each party will bear its own costs and expenses in connection with
the Merger and the transactions provided for therein. If the Merger is
consummated, the consideration to be received by the DCD shareholders will be
reduced by the amount of DCD's investment banking fees and the amount in excess
of $100,000 of the legal and accounting fees incurred by DCD subsequent to July
17, 1996 in connection with the Merger. Further, the Escrow Shares will,
pursuant to the Escrow Agreement, provide limited indemnification (up to the
value of the Escrow Shares) to DataWorks, DataWorks Sub and their affiliates
(including DCD post-Merger) from certain additional costs and expenses of DCD in
connection with the Merger. DataWorks and DCD have agreed to pay Furman Selz and
Wessels, Arnold & Henderson, L.L.C. ("Wessels"), respectively, for financial and
advisory services rendered. See "The Merger and Related Transactions -- Merger
Agreement -- Merger Expenses and Fees and Other Costs."
DataWorks estimates that it will incur direct transaction costs of
approximately $2.3 million, net of taxes, associated with the Merger. These
nonrecurring transaction costs will be charged to operations upon consummation
of the Merger. See "Unaudited Pro Forma Combined Condensed Financial
Information" included elsewhere herein.
7
<PAGE> 18
MARKET PRICE DATA
The following table sets forth, for the fiscal quarters indicated, the
range of high and low sales prices per share of DataWorks Common Stock as
reported on the Nasdaq National Market under the symbol "DWRX."
<TABLE>
<CAPTION>
QUARTERLY PERIOD HIGH LOW
------------------------------------------------------------------- ------ ------
<S> <C> <C>
Fiscal year ended December 31, 1995
4th Quarter...................................................... $15.00 $10.75
Fiscal year ending December 31, 1996
1st Quarter...................................................... 14.25 10.25
2nd Quarter...................................................... 19.50 11.50
3rd Quarter (through September 9, 1996).......................... 24.75 15.75
</TABLE>
There is no public trading market for the DCD Common Stock.
As of the Record Date, there were nine shareholders of record of DCD Common
Stock, as shown on the stock records of DCD.
DataWorks has never paid any cash dividends on its capital stock, and
DataWorks anticipates that, for the foreseeable future, it will continue to
retain any earnings for use in the operation of its business. DataWorks is party
to a credit agreement that restricts payment of dividends or distribution of
assets. See "DataWorks Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
During 1993, 1994 and 1995, DCD paid dividends totalling $94,376, $393,133
and $649,026, respectively, on the Class A Common Stock owned by the DCD ESOP.
The following table sets forth the last reported sales price of DataWorks
Common Stock on the Nasdaq National Market on August 20, 1996, the last trading
day prior to the public announcement by DataWorks of the signing of the Merger
Agreement, and on September 9, 1996, the most recent practicable trading day
prior to the printing of this Prospectus/Joint Proxy Statement, and equivalent
per share prices for DCD Common Stock based on the DataWorks Common Stock
prices:
<TABLE>
<CAPTION>
DCD
DATAWORKS COMMON
COMMON STOCK EQUIVALENT(1)
------------ ------------
<S> <C> <C>
August 20, 1996.......................................... $19.25 $66.00
September 9, 1996........................................ $24.75 $84.86
</TABLE>
- ---------------
(1) Represents the price of the equivalent of one share of DCD Common Stock
calculated by multiplying the sales price of DataWorks Common Stock by an
assumed Applicable Multiple of 3.4286.
8
<PAGE> 19
SELECTED HISTORICAL FINANCIAL DATA
The selected historical financial data set forth below with respect to
DataWorks' statements of operations for each of the three years in the period
ended December 31, 1995, and with respect to DataWorks' balance sheets at
December 31, 1994 and 1995, are derived from the audited consolidated financial
statements of DataWorks, prepared by Ernst & Young LLP, included elsewhere in
this Prospectus/Joint Proxy Statement. The selected historical financial data
set forth below with respect to DataWorks' statements of operations for each of
the two years in the period ended December 31, 1992 and with respect to
DataWorks' balance sheets at December 31, 1991 and 1992 are derived from the
unaudited financial statements, and the balance sheet at December 31, 1993 is
derived from the audited consolidated financial statements of DataWorks not
included in this Prospectus/Joint Proxy Statement. The selected historical
financial data set forth below with respect to the statements of operations of
DCD, for each of the three years in the period ended December 31, 1995 and with
respect to DCD's balance sheets at December 31, 1994 and 1995, are derived from
financial statements of DCD audited by Price Waterhouse LLP, independent
accountants, included elsewhere in this Prospectus/Joint Proxy Statement. The
selected historical financial data set forth below with respect to the
statements of operations of DCD for each of the two years in the period ended
December 31, 1992 and with respect to DCD's balance sheets at December 31, 1991,
1992 and 1993 are derived from the audited financial statements of DCD not
included in this Prospectus/Joint Proxy Statement.
The selected historical financial data for DataWorks and DCD for the six
months ended June 30, 1995 and 1996 are derived from the unaudited financial
statements included elsewhere in this Prospectus/Joint Proxy Statement. In each
case, in the opinion of DataWorks' and DCD's managements, the unaudited
financial statements include all adjustments, consisting only of normal
recurring accruals, that such company considers necessary for a fair
presentation of the financial position and results of operations for these
periods. Operating results for DataWorks for the six months ended June 30, 1996
and for DCD for the six months ended June 30, 1996 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1996.
The data set forth should be read in conjunction with, and are qualified by
reference to, financial statements and the notes related thereto, DataWorks
Management's Discussion and Analysis of Financial Condition and Results of
Operations and DCD Management's Discussion and Analysis of Financial Condition
and Results of Operations.
9
<PAGE> 20
DATAWORKS SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------------------------ -------------------
1991 1992 1993 1994 1995 1995 1996
------ ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA(1):
Revenues:
Software licenses......................... $1,810 $ 2,468 $ 4,638 $ 8,141 $15,993 $ 6,743 $11,339
Hardware.................................. 1,998 1,642 3,685 3,453 6,497 2,531 2,601
Maintenance and other services............ 1,903 1,862 2,617 5,165 9,038 3,894 6,215
------ ------- ------- ------- ------- ------- -------
Total revenues...................... 5,711 5,972 10,940 16,759 31,528 13,168 20,155
Cost of revenues:
Software licenses......................... 106 174 253 963 1,509 582 923
Hardware.................................. 1,443 1,246 2,196 2,713 5,109 1,984 1,944
Maintenance and other services............ 1,430 2,288 2,356 3,431 6,371 2,737 4,911
------ ------- ------- ------- ------- ------- -------
Total cost of revenues.............. 2,979 3,708 4,805 7,107 12,989 5,303 7,778
------ ------- ------- ------- ------- ------- -------
Gross profit................................ 2,732 2,264 6,135 9,652 18,539 7,865 12,377
Operating expenses:
Sales and marketing....................... 1,143 1,805 2,500 5,476 8,189 3,640 5,604
Research and development.................. 860 951 891 2,001 2,512 1,180 1,892
General and administrative................ 1,070 1,572 1,704 2,227 3,867 1,864 2,543
------ ------- ------- ------- ------- ------- -------
Total operating expenses............ 3,073 4,328 5,095 9,704 14,568 6,684 10,039
------ ------- ------- ------- ------- ------- -------
Income (loss) from operations............... (341) (2,064) 1,040 (52) 3,971 1,181 2,338
Interest income (expense), net.............. (293) (246) (416) (1,088) (1,360) (914) 179
------ ------- ------- ------- ------- ------- -------
Income (loss) before income taxes and
extraordinary item........................ (634) (2,310) 624 (1,140) 2,611 267 2,517
Credit (provision) for income taxes......... -- -- -- 394 (1,019) (112) (982)
------ ------- ------- ------- ------- ------- -------
Income (loss) before extraordinary item..... (634) (2,310) 624 (746) 1,592 155 1,535
Extraordinary item, net of income taxes..... -- -- -- (157) (1,017) -- --
------ ------- ------- ------- ------- ------- -------
Net income (loss)........................... $ (634) $(2,310) $ 624 $ (903) $ 575 $ 155 $ 1,535
====== ======= ======= ======= ======= ======= =======
Per share information (2):
Income (loss) before extraordinary item... $ (.24) $ (.86) $ .22 $ (.27) $ .40 $ .05 $ .24
Extraordinary item........................ -- -- -- (.05) (.26) -- --
------ ------- ------- ------- ------- ------- -------
Net income (loss)......................... $ (.24) $ (.86) $ .22 $ (.32) $ .14 $ .05 $ .24
====== ======= ======= ======= ======= ======= =======
Shares used in per share computations(2).... 2,691 2,691 2,790 2,783 4,005 3,321 6,357
====== ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE
------------------------------------------------------- 30,
1991 1992 1993 1994 1995 1996
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............................ $ 10 $ -- $ 76 $ 618 $10,727 $ 8,253
Working capital (deficit)............................ (2,666) (4,904) (4,866) (3,858) 14,892 15,098
Total assets......................................... 1,856 854 2,718 12,419 31,525 35,678
Long-term debt, less current portion(3).............. 73 201 13 7,108 -- --
Total shareholders' equity (deficit)(3).............. (2,444) (4,754) (4,129) (4,854) 21,176 23,050
</TABLE>
- ---------------
(1) After May 27, 1994, the above amounts reflect the combination with
Madic-Compufact Corporation, a wholly owned subsidiary of DataWorks, which
was accounted for as a purchase. See Note 2 of Notes to Consolidated
Financial Statements.
(2) See Note 1 of Notes to Consolidated Financial Statements describing the
determination of the number of shares used in computing per share
information.
(3) In October 1995, DataWorks completed its initial public offering resulting
in net proceeds to DataWorks of $18.0 million. The net proceeds from such
offering were used to repay outstanding indebtedness, to increase working
capital and for general corporate purposes.
10
<PAGE> 21
DCD SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------------ -----------------
1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Software and related products............... $3,093 $2,876 $3,016 $4,329 $7,685 $2,947 $4,942
Services.................................... 931 1,100 1,566 1,994 3,798 1,544 2,369
------ ------ ------ ------ ------ ------ ------
Total revenues....................... 4,024 3,976 4,582 6,323 11,483 4,491 7,311
Cost of Revenues:
Software and related products............... 406 400 557 652 1,061 449 682
Services.................................... 802 911 1,131 1,080 1,721 786 1,322
------ ------ ------ ------ ------ ------ ------
Total cost of revenues............... 1,208 1,311 1,688 1,732 2,782 1,235 2,004
------ ------ ------ ------ ------ ------ ------
Gross Profit.................................. 2,816 2,665 2,894 4,591 8,701 3,256 5,307
Operating expenses:
Sales and marketing......................... 1,206 909 1,299 1,887 3,820 1,569 2,278
Research and development.................... 129 114 339 519 505 241 154
General and administrative.................. 1,006 1,060 690 1,018 1,410 640 1,180
ESOP contribution(1)........................ 100 199 387 429 445 223 --
------ ------ ------ ------ ------ ------ ------
Total operating expenses............. 2,441 2,282 2,715 3,853 6,180 2,673 3,612
------ ------ ------ ------ ------ ------ ------
Income from operations........................ 375 383 179 738 2,521 583 1,695
Other income (expense)........................ 106 22 (85) (52) 22 5 71
------ ------ ------ ------ ------ ------ ------
Income before income taxes.................... 481 405 94 686 2,543 588 1,766
Provision for income taxes(2)................. -- -- -- (131) (762) (176) (744)
------ ------ ------ ------ ------ ------ ------
Net income.................................... $ 481 $ 405 $ 94 $ 555 $1,781 $ 412 $1,022
====== ====== ====== ====== ====== ====== ======
Net income per common share(3)(4)............. N/A N/A $ .30 $ 1.51 $ 3.94 $ .97 $ 1.95
====== ====== ====== ====== ====== ====== ======
Shares used in net income per share N/A N/A 314 368 452 425 525
computation(3)(4)...........................
====== ====== ====== ====== ====== ====== ======
Dividends per share(5)........................ -- -- $ .35 $ 1.47 $ 2.42 -- --
====== ====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------ JUNE 30,
1991 1992 1993 1994 1995 1996
------ ------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................. $ 560 $ 491 $ 560 $ 840 $2,278 $2,058
Working capital (deficit)............................. 249 (164) (345) (42) 1,066 1,928
Total assets.......................................... 1,844 1,461 1,494 2,720 6,628 6,543
Long-term debt, less current portion.................. -- 2,275 1,488 723 -- --
Total stockholders' equity (deficit)(4)............... 959 (2,129) (1,521) (504) 1,716 2,738
</TABLE>
- ---------------
(1) In November 1992, DCD established the DCD ESOP. See Note 4 to the DCD
Financial Statements for an explanation of the DCD ESOP and the impact on
DCD's financial statements.
(2) Effective November 13, 1992, DCD terminated its S corporation status and
elected to be taxed as a C corporation. As an S corporation, DCD's
shareholders were allocated their pro rata share of DCD's net income or loss
on their individual income tax returns. Accordingly, no provision for income
taxes was recorded by DCD during the S corporation periods.
(3) See Note 2 to the DCD Financial Statements for an explanation of the number
of shares used to compute net income per share.
(4) DCD's net income per common share for 1991 and 1992 has not been presented
as it is not considered meaningful in view of the recapitalization of DCD
that occurred in 1992. See Note 4 to the DCD Financial Statements for
further discussion on the recapitalization.
(5) DCD declared dividends in 1993, 1994 and 1995 only on its Class A common
shares. The dividends per share calculation relates only to such Class A
common shares. See Note 4 to the DCD Financial Statements for discussion on
dividends.
11
<PAGE> 22
SELECTED PRO FORMA COMBINED CONDENSED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The selected pro forma combined financial data are derived from the
unaudited pro forma combined condensed financial statements and notes thereto,
appearing elsewhere herein, which give effect to the Merger as a
pooling-of-interests and should be read in conjunction with, and are qualified
by reference to, such pro forma statements and the notes thereto and the
separate financial statements of DataWorks and DCD included elsewhere in this
Prospectus/Joint Proxy Statement. For purposes of the unaudited pro forma
operating data, DataWorks' consolidated financial statements for the three years
ended December 31, 1995 and for the six months ended June 30, 1995 and 1996 have
been combined with the financial statements of DCD for the three years ended
December 31, 1995 and for the six months ended June 30, 1995 and 1996,
respectively. For purposes of the unaudited pro forma combined balance sheet
data, DataWorks' consolidated financial data at June 30, 1996 has been combined
with DCD's financial data at June 30, 1996. No dividends have been declared or
paid on DataWorks Common Stock. DataWorks is a party to a credit agreement which
restricts payment of dividends or distribution of assets. See "DataWorks
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." During 1994 and 1995, DCD paid
dividends totalling $393,133 and $649,026, respectively, on the Class A Common
Stock owned by the DCD ESOP.
The pro forma data is presented for illustrative purposes only and is not
necessarily indicative of the operating results or financial position that would
have been achieved if the Merger had been consummated as of the beginning of the
periods indicated, nor is it necessarily indicative of future financial position
or results of operations of DataWorks and DCD.
12
<PAGE> 23
SELECTED PRO FORMA COMBINED CONDENSED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------ -------------------
1993 1994(1) 1995(1) 1995 1996
------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
PRO FORMA COMBINED STATEMENT OF OPERATIONS
DATA:
Revenues:
Software licenses....................... $7,654 $12,470 $23,678 $ 9,690 $16,281
Hardware................................ 3,685 3,453 6,497 2,531 2,601
Maintenance and other services.......... 4,183 7,158 12,836 5,438 8,584
------ ------- ------- ------- -------
Total revenues............................ 15,522 23,081 43,011 17,659 27,466
Cost of revenues:
Software licenses....................... 810 1,615 2,570 1,031 1,604
Hardware................................ 2,196 2,713 5,109 1,984 1,944
Maintenance and other services.......... 3,487 4,511 8,092 3,523 6,234
------ ------- ------- ------- -------
Total cost of revenues.................... 6,493 8,839 15,771 6,538 9,782
------ ------- ------- ------- -------
Gross profit.............................. 9,029 14,242 27,240 11,121 17,684
------ ------- ------- ------- -------
Operating expenses:
Sales and marketing..................... 3,799 7,362 12,010 5,209 7,882
Research and development................ 1,230 2,521 3,017 1,421 2,045
General and administrative.............. 2,394 3,244 5,276 2,504 3,724
ESOP contribution(2).................... 387 429 446 223 --
------ ------- ------- ------- -------
Income from operations.................... 1,219 686 6,491 1,764 4,033
Interest income (expense), net............ (500) (1,141) (1,337) (909) 250
------ ------- ------- ------- -------
Income (loss) before income taxes......... 719 (455) 5,154 855 4,283
Credit (provision) for income taxes....... -- 264 (1,780) (288) (1,726)
------ ------- ------- ------- -------
Income (loss) before extraordinary item... $ 719 $ (191) $ 3,374 $ 567 $ 2,557
====== ======= ======= ======= =======
Earnings per share data:
Income (loss) before extraordinary
item................................. $ .19 $ (.05) $ .61 $ .12 $ .31
====== ======= ======= ======= =======
Weighted average common and common
equivalent shares outstanding........... 3,867 4,046 5,554 4,779 8,157
====== ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
1996
--------
<S> <C>
PRO FORMA COMBINED BALANCE SHEET DATA:
Working capital.................................................................... $ 14,526
Total assets....................................................................... 42,221
Long-term obligations, net of current portion...................................... --
Shareholders' equity............................................................... 23,288
</TABLE>
- ---------------
(1) In 1994 and 1995, DataWorks incurred an extraordinary loss resulting from
the early repayment of certain debt obligations.
(2) In 1992, DCD established an employee stock option plan (the "DCD ESOP"). See
Note 4 to the DCD Financial Statements for an explanation of the DCD ESOP.
The DCD ESOP liability was repaid during 1995 and future contributions will
not be required.
13
<PAGE> 24
COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data of
DataWorks and DCD and combined per share data on an unaudited pro forma basis
after giving effect to the Merger on a pooling-of-interests basis of accounting
assuming the Merger had been effected during all periods presented. This data
should be read in conjunction with the selected financial data, the unaudited
pro forma combined condensed financial information and the separate historical
financial statements of DataWorks and DCD, and notes thereto, included elsewhere
in this Prospectus/Joint Proxy Statement. The pro forma combined financial data
is not necessarily indicative of the operating results that would have been
achieved had the Merger been consummated as of the beginning of the periods
indicated nor is such data necessarily indicative of future financial condition
or results of operations. For purposes of the comparative per share data,
DataWorks' financial data at December 31, 1993, 1994 and 1995 and June 30, 1995
and 1996 have been combined with DCD's financial data at December 31, 1993, 1994
and 1995 and June 30, 1995 and 1996, respectively.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------- ----------------
1993 1994 1995 1995 1996
------ ------ ----- ------ -----
<S> <C> <C> <C> <C> <C>
HISTORICAL -- DATAWORKS:
Net income (loss) per share before
extraordinary item......................... $ .22 $ (.27) $ .40 $ .05 $ .24
Book value per share(1)....................... $(2.10) $(2.29) $3.74 $(2.20) $3.87
HISTORICAL -- DCD:
Net income per share.......................... $ .30 $ 1.51 $3.94 $ .97 $1.95
Book value per share(1)....................... $(4.74) $(1.23) $3.27 $ .41 $5.22
Cash dividend per share on Class A common
stock...................................... $ .35 $ 1.47 $2.42 -- --
PRO FORMA COMBINED INCOME (LOSS):
Per DataWorks share........................... $ .19 $ (.05) $ .61 $ .12 $ .31
Per DCD equivalent share(4)................... $ .65 $ (.17) $2.09 $ .41 $1.06
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
1996
--------
<S> <C>
PRO FORMA COMBINED BOOK VALUE PER SHARE(2)(3):
Per DataWorks share............................................................... $ 3.00
Equivalent per share of DCD Common Stock(4)....................................... $10.30
</TABLE>
- ---------------
(1) The historical book value per share is computed by dividing shareholders'
equity by the number of shares of Common Stock (including as to DCD, all
Class B common shares and only Class A common shares which are allocated to
DCD ESOP participants and committed to be released at the end of each
period).
(2) DataWorks and DCD estimate they will incur direct transaction costs of
approximately $2.3 million, net of taxes, associated with the Merger, which
will be charged to operations upon consummation of the Merger. In addition,
it is expected that, after the Merger, DataWorks will incur additional
charges to operations, currently estimated to be $200,000, net of taxes, to
reflect costs associated with integrating the two companies. The Pro Forma
Combined Book Value Per Share data give effect to estimated costs,
resulting in a $2.5 million minimum charge, net of taxes, as if such costs
and charges had been incurred as of June 30, 1996. These costs and charge
are not included in the pro forma income per share data. See "Unaudited Pro
Forma Condensed Combined Financial Information" and accompanying notes
thereto.
(3) The Pro Forma Combined Book Value Per Share is computed by dividing pro
forma shareholders' equity by the pro forma number of shares of DataWorks
Common Stock or DCD Common Stock outstanding at the end of each period.
(4) The DCD Equivalent Pro Forma Combined Per Share amounts are calculated by
multiplying the DataWorks combined pro forma per share amounts by an
assumed Applicable Multiple of 3.4286 per share of DCD Common Stock.
14
<PAGE> 25
RISK FACTORS
The following risk factors should be considered by holders of DataWorks and
DCD Common Stock in evaluating whether to approve the Merger Proposal. These
factors should be considered in conjunction with the other information included
and incorporated by reference in this Prospectus/Joint Proxy Statement.
The discussion in this Prospectus/Joint Proxy Statement contains
forward-looking statements that involve risks and uncertainties. DataWorks',
DCD's and the combined entity's actual results could differ materially from
those discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed below and in the sections
entitled "DataWorks Management's Discussion and Analysis of Financial Condition
and Results of Operations," "DataWorks Business," "DCD Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "DCD
Business," as well as those discussed elsewhere in this Prospectus/Joint Proxy
Statement.
INTEGRATION OF OPERATIONS
If the combined company is to realize the anticipated benefits of the
Merger, the operations of the two companies must be integrated and combined
efficiently. The process of rationalizing management services, administrative
organizations, facilities, management information systems and other aspects of
operations, while managing a larger and geographically expanded entity, will
present a significant challenge to the management of the combined company. There
can be no assurance that the integration process will be successful or that the
anticipated benefits of the business combination will be fully realized. The
dedication of management resources to such integration may detract attention
from the day-to-day business of the combined company. The difficulties of
integration may be increased by the necessity of coordinating geographically
separated organizations, integrating personnel with disparate business
backgrounds and combining different corporate cultures. There can be no
assurance that there will not be substantial costs associated with the
integration process, that such activities will not result in a decrease in
revenues or that there will not be other material adverse effects of these
integration efforts. Such effects could materially reduce the short-term
earnings of the combined company. Subsequent to the Merger, DataWorks expects to
incur a charge of approximately $2.5 million, net of taxes, to reflect the
transaction and integration costs expected to result from the combination of the
two companies. This amount is a preliminary estimate only. There can be no
assurance that DataWorks will not incur additional charges in the current
quarter and subsequent quarters to reflect costs associated with the Merger.
FLUCTUATIONS IN OPERATING RESULTS
Each of DataWorks and DCD has experienced significant fluctuations in its
revenues and operating results from quarter to quarter and anticipates that it
and the combined company will continue to experience such quarterly
fluctuations. DataWorks' and DCD's revenues and operating results have generally
been significantly higher in the fourth fiscal quarter than in any preceding
quarter of each fiscal year. DataWorks believes that fourth quarter revenues are
positively impacted by year-end capital purchases by some large corporate
customers, as well as by DataWorks' sales compensation plans. Seasonal factors,
which DataWorks believes are common in the computer software industry, are
likely to increase as DataWorks and the combined company focus on larger
corporate accounts. As a result of these seasonal factors, first quarter
revenues in any year are typically lower than revenues in the immediately
preceding fourth quarter. In addition, DataWorks' and DCD's revenues occur
predominantly in the third month of each fiscal quarter and tend to be
concentrated in the latter half of that third month. Accordingly, DataWorks' and
DCD's quarterly results of operations are difficult to predict, and delays in
product delivery or in closings of sales near the end of the quarter could cause
quarterly revenues and, to a greater degree, net income to fall substantially
short of anticipated levels. Factors that may contribute to such fluctuations in
addition to seasonal factors include: the number of new orders and product
shipments; the size and timing of individual orders; the timing of shipment of
hardware or database software by third party vendors necessary in order for
DataWorks to recognize revenues; the timing of introduction of products or
product enhancements by DataWorks or DCD, DataWorks' and DCD's competitors or
other providers of hardware, software and components for DataWorks' and DCD's
markets; competition and pricing in the software industry; market acceptance of
new products;
15
<PAGE> 26
reduction in demand for existing products and shortening of product life cycles
as a result of new product introductions by competitors; product quality
problems; customer order deferrals in anticipation of new products; changes in
customer budgets; changes in operating expenses; changes in strategy; personnel
changes; foreign currency exchange rates; mix of products sold; conditions or
events in the manufacturing industry; and general economic conditions.
DataWorks' sales generally reflect a relatively high amount of revenues per
order. The loss or delay of individual orders, therefore, could have a more
significant impact on the revenues and quarterly results of DataWorks and of the
combined company than on those of companies with higher sales volumes and lower
revenues per order. DataWorks' and DCD's software products generally are shipped
as orders are received, and revenues are recognized upon delivery of the
products, provided no significant vendor obligation exists and collection of the
related receivable is deemed probable. As a result, software license revenues in
any quarter are substantially dependent on orders booked and shipped in that
quarter. The timing of receipt of license revenue is difficult to predict
because of the length of DataWorks' and DCD's sales cycle, which is typically
six to twelve months from the initial contact. Because DataWorks' and DCD's
operating expenses are based on anticipated revenue trends and because a high
percentage of DataWorks' and DCD's expenses are relatively fixed, a delay in the
recognition of revenue from a limited number of license transactions could cause
significant variations in operating results from quarter to quarter and could
result in losses. To the extent such expenses precede, or are not subsequently
followed by, increased revenues, DataWorks' and the combined company's operating
results would be materially adversely affected. In addition, the achievement of
anticipated revenues is substantially dependent on the ability of DataWorks and
the combined company to attract, on a timely basis, and retain skilled
personnel, especially sales, service and implementation personnel. As a result
of these factors, revenues for any quarter are subject to significant variation,
and DataWorks and DCD believe that period-to-period comparisons of their results
of operations are not necessarily meaningful and should not be relied upon as
indications of future performance. Fluctuations in operating results may also
result in volatility in the price of DataWorks' Common Stock.
COMPETITION
The business information systems industry is intensely competitive, rapidly
changing and significantly affected by new product offerings and other market
activities. A number of companies offer products similar to DataWorks' and DCD's
products. Many of DataWorks' and DCD's existing competitors, as well as a number
of potential competitors, have more established and larger marketing and sales
organizations, significantly greater financial and technical resources and a
larger installed base of customers than DataWorks and DCD. DataWorks and DCD
have no proprietary barriers to entry which would limit competitors from
developing similar products or selling competing products in DataWorks' and
DCD's markets. Accordingly, there can be no assurance that such competitors will
not offer or develop products that are superior to DataWorks' or the combined
company's products or that achieve greater market acceptance. In addition,
suppliers of relational database management systems ("RDBMS") products or
companies that develop management information software applications for large
multinational manufacturers are beginning to market to the midsized
manufacturers targeted by DataWorks or otherwise develop applications that
compete effectively in DataWorks' and the combined company's markets.
Furthermore, DataWorks intends increasingly to focus its marketing and product
development efforts and those of the combined company toward the upper end of
its target market. As a result, competition (including price competition) is
likely to increase substantially, which may result in price reductions and loss
of market share. DataWorks and the combined company may also face resistance
from potential customers which have a large installed base of legacy systems,
and, therefore, may be reluctant to commit the time and resources necessary to
convert to an open systems-based client/server software product. In addition,
potential customers may increasingly demand that ERP systems incorporate certain
popular RDBMS software not currently integrated in DataWorks' product offerings.
As the client/server computing market expands, a large number of companies, some
with significantly greater resources than DataWorks, may enter the market or
increase their market share by acquiring or entering into alliances with
competitors of DataWorks or the combined company. There can be no assurance that
DataWorks or the combined company will be able to compete successfully against
its competitors or that the competitive pressures faced by DataWorks or the
combined company will not adversely affect its financial performance.
16
<PAGE> 27
DataWorks has, and the combined company will have, a large number of
competitors that vary in size, primary computer platforms and overall product
scope. Within the market, the primary competition comes from independent
software vendors in four distinctive groups including (i) large multinational
system developers in the upper end of DataWorks' mid-range market, including
Baan Company, Oracle and qad, Inc., (ii) companies offering high levels of
functionality on the AS/400 platform such as System Software Associates, Inc.
and J.D. Edwards Company, (iii) traditional mid-range market sector firms such
as ROI Systems and Symix Systems, Inc., and (iv) in the low-end of DataWorks'
market, lower priced PC network-based offerings from companies such as Fourth
Shift Corporation and Macola Software, Inc. There is also a large number of
regional manufacturing software suppliers who leverage their concentrated local
support, reputation and, typically, lower price as competitive advantages.
DataWorks' and DCD's principal markets are highly fragmented and consist of
a few large multinational suppliers, in the case of DataWorks, and a much larger
number of small, regional competitors in the case of both companies. DataWorks
believes that its industry will experience consolidation as management
information systems become more complex and as more manufacturers adopt
sophisticated management information systems, forcing smaller companies in the
industry to specialize or merge with their competitors. In order to compete
effectively in the broad markets which DataWorks presently targets, DataWorks
and the combined company will need to continue to grow and attain sufficient
size to ensure that it can develop new products on a timely basis in response to
evolving technology and new customer demands and can sell such products on a
timely basis to a variety of manufacturing industries worldwide. No assurance
can be given that DataWorks or the combined company will be able to grow
sufficiently to enable it to compete effectively.
Due to intense competition in the computer hardware market and an
increasing tendency for customers, particularly new accounts, to elect to
purchase hardware directly from third party vendors, DataWorks has experienced
declining hardware revenues as a percentage of new account systems. Recently,
gross profit from hardware sales has not been a significant part of DataWorks'
total gross profit, and DataWorks believes this trend will continue.
DataWorks believes that its success has been due in part to its strategy of
focusing marketing and development resources on six specific industry types
within the mid-range discrete manufacturing market sector. DataWorks is unaware
that any of its competitors is specifically targeting the same group of
industries. DataWorks plans to continue to pursue a market leadership position
in this select group, but there can be no assurance that competitors with
significantly greater financial, technical and marketing resources than
DataWorks will not target these particular industries.
DataWorks believes its use of open systems technologies is an important
competitive factor. DataWorks also believes that the number of competitors
offering open systems solutions will grow significantly over the next several
years. Additionally, DataWorks believes that the typical mid-range customer
desires an easy-to-use, highly functional 4GL environment, fully integrated
throughout the ERP system, which DataWorks has provided through its internally
produced development tool set. DataWorks anticipates that a significant source
of future competition may be from larger manufacturing software companies that
may tailor their products for the mid-range market. Only a few of the larger and
better capitalized software systems companies currently compete in DataWorks'
targeted market. There can be no assurance that such companies will not develop
products that are superior to DataWorks' or the combined company's products or
that achieve greater market acceptance.
The principal elements affecting the buying decision of customers in the
mid-range sector are comprehensive application functionality that addresses a
wide range of business areas, rapid system deployment, ease-of-use, strong
performance, quality of customer support, a fully integrated application set
supported by a user-oriented 4GL development environment that allows for easy
modification to applications where needed, price and customer references. It is
also mandatory that the ERP system be enhanced on a regular basis throughout the
license or maintenance term and that such product enhancements be properly
supported by necessary revision control software provided by the vendor. Based
on these factors, DataWorks believes it has competed effectively to date. In
order to be successful in the future, DataWorks and the combined company must
respond effectively to customer needs and properly select and incorporate those
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technologies and application functionalities that will meet the challenges posed
by competitors' innovations. To accomplish this critical objective, DataWorks
and the combined company must continue to invest in enhancing its current
products and, when necessary, introduce new products to remain competitive.
ABILITY TO RECRUIT SALES, SERVICE AND IMPLEMENTATION PERSONNEL
The ability to achieve anticipated revenues is substantially dependent on
the ability of DataWorks, DCD and the combined company to attract on a timely
basis and retain skilled personnel, especially sales, service and implementation
personnel. In addition, DataWorks believes that its future success and that of
the combined company will depend in large part on its ability to attract and
retain highly skilled technical, managerial, marketing and professional services
personnel to ensure the quality of products and services provided to its
customers. Competition for such personnel, in particular for product
development, sales and implementation personnel, is intense, and DataWorks and
DCD compete in the market for such personnel against numerous companies,
including larger, more established companies with significantly greater
financial resources than DataWorks and DCD. There can be no assurance that
DataWorks or the combined company will be successful in attracting and retaining
skilled personnel. DataWorks' or the combined company's inability to attract and
retain qualified employees could have a material adverse effect on DataWorks' or
the combined company's business and operations.
MANAGEMENT OF GROWTH; OPERATING HISTORY
Historical losses of DataWorks have resulted in an accumulated deficit of
$3.3 million as of June 30, 1996. DataWorks and DCD have each undergone a period
of rapid growth. There can be no assurance that the combined company will be
able to manage its recent growth and assimilate its new employees successfully.
To manage its growth effectively, the combined company will be required to
expand, train and manage its employee base and to enhance its operating and
financial systems. If the combined company continues to grow, there can be no
assurance that the management skills and systems currently in place will be
adequate or that the combined company will be able to manage any additional
growth effectively.
DEPENDENCE ON KEY EMPLOYEES
The combined company's continued success will depend to a significant
extent upon its ability to retain certain key employees, including Stuart W.
Clifton, Norman R. Farquhar and Mark S. Howlett, currently employees of
DataWorks, and Robert W. Brandel, currently the President of DCD. The loss of
certain key employees or the combined company's inability to attract and retain
other qualified employees could have a material adverse effect on the combined
company's business and operations.
DEPENDENCE ON PRINCIPAL PRODUCTS
Substantially all of DataWorks' revenue is derived from the sale of turnkey
information systems, primarily the DataFlo and Man-Fact II systems, and related
support services. Substantially all of DCD's revenue is derived from the sale of
information systems, primarily the Vista and Vantage products, and related
support services. Accordingly, any event that adversely affects fees derived
from the sale of such systems, such as competition from other products,
significant flaws in DataWorks' or DCD's software products or incompatibility
with third party hardware or software products, negative publicity or
evaluation, or obsolescence of the hardware platforms or software environments
in which the systems run, could have a material adverse effect on DataWorks' or
the combined company's business and operations. DataWorks' and the combined
company's future financial performance will depend, in substantial part, on the
continued development and introduction of new and enhanced versions of DataFlo,
Man-Fact II, Vista, Vantage and other products, and customer acceptance of such
new and enhanced products.
RAPID TECHNOLOGICAL CHANGE AND NEW PRODUCTS
The market for DataWorks' and DCD's software products is characterized by
rapid technological advances, evolving industry standards, changes in end-user
requirements and frequent new product introduc-
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tions and enhancements. The introduction of products embodying new technologies
and the emergence of new industry standards could render DataWorks' and DCD's
existing products and products currently under development obsolete and
unmarketable. Accordingly, DataWorks' and the combined company's future success
will depend upon their ability to enhance their current products and develop and
introduce new products that keep pace with technological developments, satisfy
varying end-user requirements and achieve market acceptance. Any failure by
DataWorks or the combined company to anticipate or respond adequately to
technological developments or end-user requirements, or any significant delays
in product development or introduction, could damage DataWorks' and the combined
company's competitive position and have an adverse effect on revenues. There can
be no assurance that DataWorks or the combined company will be successful in
developing and marketing new products or product enhancements on a timely basis
or that DataWorks or the combined company will not experience significant delays
in the future, which could have a material adverse effect on DataWorks' or the
combined company's business and operations. In addition, there can be no
assurance that new products or product enhancements developed by DataWorks or
the combined company will achieve market acceptance. DataWorks and the combined
company may need to increase the size of their product development staff in the
near term to meet these challenges. There can be no assurance that DataWorks or
the combined company will be successful in hiring and training adequate product
development personnel to meet their needs.
Software programs as complex as those offered by DataWorks and DCD may
contain undetected errors or "bugs" when first introduced or as new versions are
released that, despite testing by DataWorks and DCD, are discovered only after a
product has been installed and used by customers. There can be no assurance that
errors will not be found in future releases of DataWorks' or the combined
company's software, or that any such errors will not impair the market
acceptance of these products and adversely affect operating results. Problems
encountered by customers installing and implementing new releases or with the
performance of DataWorks' or the combined company's products could have a
material adverse effect on DataWorks' or the combined company's business and
operations.
DEPENDENCE ON MANUFACTURING INDUSTRY
DataWorks' business depends substantially upon the capital expenditures of
mid-sized discrete manufacturers, which in part depends upon the demand for such
manufacturers' products. DCD's business depends substantially upon the capital
expenditures of small and mid-sized discrete manufacturers, which in part
depends upon the demand for such manufacturers' products. A recession or other
adverse event affecting the manufacturing industry in the United States, United
Kingdom or other markets served by DataWorks or the combined company could
affect such demand, forcing manufacturers in DataWorks' and the combined
company's target markets to curtail or postpone capital expenditures on business
information systems. Any such change in the amount or timing of capital
expenditures in its target markets could have a material adverse effect on
DataWorks' or the combined company's business and operations.
DEPENDENCE ON THIRD PARTY SOFTWARE AND HARDWARE
DataFlo and Man-Fact II incorporate and use software products and computer
hardware and equipment developed by other entities. The relational database
management systems used in DataWorks' products, which DataWorks believes are the
best-suited RDBMS products for mid-range discrete manufacturers, have been
developed by UniData and VMARK and the operating systems on which DataWorks'
products can function (UNIX, SCO-UNIX, UnixWare, VMS and Microsoft NT) have been
developed or are owned by Novell, DEC and Microsoft. The computer hardware and
related equipment sold as part of DataWorks' turnkey systems are manufactured by
Hewlett-Packard, IBM, DEC and others. DCD's products incorporate and use
software products developed by Progress and Microsoft. There can be no assurance
that all of these entities will remain in business, that such entities will
continue to support these product lines, that their product lines will remain
viable or that these products will otherwise continue to be available to
DataWorks or the combined company. If any of these entities ceases to do
business or abandons or fails to enhance a particular product line, DataWorks or
the combined company may need to seek other suppliers. This could have a
material adverse effect on DataWorks' or the combined company's business and
operations. In addition, there can be
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no assurance that DataWorks' or DCD's current suppliers will not significantly
alter their pricing in a manner adverse to DataWorks or the combined company.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
DataWorks and DCD rely on a combination of copyright, trademark and trade
secret laws, employee and third-party nondisclosure agreements and other
industry standard methods for protecting ownership of their proprietary
software. There can be no assurance, however, that, in spite of these
precautions, an unauthorized third party will not copy or reverse-engineer
certain portions of DataWorks', DCD's or the combined company's products or
obtain and use information that DataWorks, DCD or the combined company regards
as proprietary. DataWorks and DCD provide the source codes for their respective
application software under licenses to their customers to enable them to
customize the software to meet particular requirements. Although DataWorks' and
DCD's respective source code licenses contain confidentiality and nondisclosure
provisions, there can be no assurance that such customers will take adequate
precautions to protect DataWorks' and DCD's source codes or other confidential
information. In addition, the laws of some foreign countries do not protect
DataWorks' and DCD's proprietary rights to the same extent as do the laws of the
United States. There can be no assurance that the mechanisms used by DataWorks
or the combined company to protect its software will be adequate or that
DataWorks' or the combined company's competitors will not independently develop
software products that are substantially equivalent or superior to DataWorks' or
the combined company's software products.
DataWorks and DCD may receive notices from third parties claiming that
DataWorks' and DCD's respective products infringe third party proprietary
rights. DataWorks and DCD expect that, as the number of software products in the
industry increases and the functionality of these products further overlaps,
software products will increasingly be subject to such claims. Any such claim,
with or without merit, could result in costly litigation and require DataWorks
or the combined company to enter into royalty or licensing arrangements. Such
royalty or license arrangements, if required, may not be available on terms
acceptable to DataWorks or the combined company or at all.
PRODUCT LIABILITY
Because DataWorks markets and sells its software products on a turnkey
basis, which includes rendering professional consulting services, DataWorks
incurs significant risks of professional and other liability. No assurance can
be given that the limitations of liability set forth in DataWorks' and DCD's
license agreements or other contracts would be enforceable or would otherwise
protect DataWorks, DCD or the combined company from liability for damages to a
customer resulting from a defect in one of DataWorks', DCD's or the combined
company's products or arising as a result of professional services rendered by
DataWorks, DCD or the combined company. Such a claim, if successful and of
sufficient magnitude, could have a material adverse effect on DataWorks', DCD's
or the combined company's business and operations.
CONTROL BY EXISTING SHAREHOLDERS
As of the Record Date, DataWorks' executive officers, directors and their
affiliates, in the aggregate, beneficially owned approximately 32.6% of
DataWorks' outstanding shares of Common Stock (on a fully diluted basis). Upon
the consummation of the Merger, the combined company's executive officers,
directors and their affiliates will beneficially own up to 34.0% of DataWorks'
outstanding shares of Common Stock (on a fully diluted basis). As a result,
these shareholders, if acting together, would be able to control effectively
most matters requiring approval by the shareholders of DataWorks or the combined
company, including the election of a majority of the directors. The voting power
of these shareholders under certain circumstances could have the effect of
delaying or preventing a change in control of DataWorks or the combined company.
DataWorks has entered into agreements with its executive officers and directors
indemnifying them against losses they may incur in legal proceedings arising
from their service to DataWorks.
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POSSIBLE VOLATILITY OF STOCK PRICE
The market price of DataWorks' Common Stock may be subject to significant
fluctuations in response to variations in quarterly operating results of
DataWorks, announcements of new products by DataWorks or by its competitors and
general trends in the software industry, as well as fluctuations in the stock
market that are unrelated to the operating performance of particular companies.
Consequently, the market price of DataWorks Common Stock may vary from the price
on the date hereof, or on the dates on which DataWorks and DCD shareholders vote
on the Merger Proposal, as a result of changes in the business, operations,
financial results and prospects of DataWorks or DCD, market assessments of the
likelihood that the Merger will be consummated and the timing thereof, general
market and economic conditions and other factors. The Applicable Multiple will
be affected by fluctuations in the market price of the DataWorks Common Stock
during the twenty market trading days prior to the DCD Meeting. As a result,
there can be no assurance as to the fair market value of the Merger
Consideration upon consummation of the Merger.
EFFECT OF CERTAIN CHARTER PROVISIONS
DataWorks' Board of Directors has the authority to issue up to 5,000,000
shares of Preferred Stock and to determine the price, rights, preferences and
privileges of those shares without any further vote or action by the
shareholders. The rights of the holders of Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any Preferred Stock
that may be issued in the future. The issuance of Preferred Stock, while
providing flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire a majority of the outstanding voting stock of DataWorks.
DataWorks has no present plan to issue any shares of Preferred Stock.
ADDITIONAL SHARES TO BE ISSUED BY DATAWORKS; SHARES ELIGIBLE FOR FUTURE SALE
As a result of the Merger, it is anticipated that DataWorks will issue up
to 1,800,000 shares of DataWorks Common Stock. In general, those shares will be
eligible for sale in the public market following the Merger, subject to certain
volume and other resale limitations for affiliates of DCD or DataWorks, pursuant
to Rules 144 and/or 145 under the Securities Act and to agreements not to sell
to the extent required to cause the Merger to be accounted for as a pooling of
interests. An aggregate of approximately 874,000 of the shares issued in the
Merger will be beneficially owned by persons who may be deemed to be affiliates
of DCD and, therefore, subject to such limitations. Despite such resale
limitations, however, certain holders receiving DataWorks Common Stock in the
Merger are entitled to certain demand and piggyback registration rights with
respect to such shares. The sale of a significant number of the foregoing shares
may cause substantial fluctuations in the market price of DataWorks Common
Stock. See "The Merger and Related Transactions -- Affiliate Agreements" and
"The Merger and Related Transactions -- Merger Agreement -- Registration
Rights."
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THE DATAWORKS MEETING
DATE, TIME AND PLACE OF MEETING
The DataWorks Meeting will be held on September 30, 1996 at 8:00 a.m.,
local time, at 5910 Pacific Center Boulevard, Suite 300, San Diego, California.
DataWorks intends to deliver this Prospectus/Joint Proxy Statement on or about
September , 1996, to all DataWorks shareholders entitled to vote at the
DataWorks Meeting.
RECORD DATE AND OUTSTANDING SHARES
Only holders of record of DataWorks Common Stock at the close of business
on the Record Date are entitled to notice of and to vote at the DataWorks
Meeting. As of the close of business on the Record Date, there were 6,052,060
shares of DataWorks Common Stock outstanding and entitled to vote, held of
record by 62 shareholders. Each DataWorks shareholder is entitled to one vote
for each share of DataWorks Common Stock held as of the Record Date.
VOTING OF PROXIES
The DataWorks proxy accompanying this Prospectus/Joint Proxy Statement is
solicited on behalf of the DataWorks Board for use at the DataWorks Meeting and
at any adjournment or postponement thereof. DataWorks shareholders are requested
to complete, date and sign the accompanying proxy and promptly return it in the
accompanying envelope. All proxies that are properly executed and returned, and
that are not revoked, will be voted at the DataWorks Meeting in accordance with
the instructions indicated on the proxies or, if no direction is indicated, to
approve the Merger Proposal and the other proposals submitted to the DataWorks
shareholders, each as recommended by the DataWorks Board, as indicated herein.
The DataWorks Board is not currently aware of any business to be brought before
the DataWorks Meeting other than the specific proposals referred to in this
Prospectus/Joint Proxy Statement and specified in the accompanying notice of the
DataWorks Meeting. As to any other business that may properly come before the
DataWorks Meeting, however, it is intended that proxies, in the form enclosed,
will be voted in respect thereof in accordance with the judgment of the persons
voting such proxies.
REVOCABILITY OF PROXIES
A DataWorks shareholder who has given a proxy may revoke it at any time
before it is exercised at the DataWorks Meeting by (i) delivering to the
Secretary of DataWorks (by any means, including facsimile) a written notice,
bearing a date later than the date of the proxy, stating that the proxy is
revoked, (ii) signing and so delivering a proxy relating to the same shares and
bearing a later date prior to the vote at the DataWorks Meeting or (iii)
attending the DataWorks Meeting and voting in person (although attendance at the
DataWorks Meeting will not, by itself, revoke a proxy).
VOTE REQUIRED
Approval of the Merger Proposal requires the affirmative vote of the
holders of a majority of the shares of DataWorks Common Stock outstanding on the
Record Date. As a group, all executive officers and directors of DataWorks and
their respective affiliates beneficially owned 1,991,734 shares, or
approximately 32.6%, of the DataWorks Common Stock outstanding as of the Record
Date.
QUORUM; ABSTENTIONS; BROKER NON-VOTES
The presence, in person or by proxy, of a majority of the shares of
DataWorks Common Stock outstanding on the Record Date is necessary to constitute
a quorum for the transaction of business at the DataWorks Meeting. Abstentions
and broker non-votes will each be included in determining whether a quorum is
present. Abstentions will have the same effect as a vote against a proposal.
Broker non-votes will not be counted for any purpose in determining whether any
of the proposals have been approved.
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SOLICITATION OF PROXIES AND EXPENSES
DataWorks will bear the entire cost of the solicitation of votes of
DataWorks shareholders, including printing, assembly and mailing of this
Prospectus/Joint Proxy Statement, the proxy and any additional information
furnished to its shareholders. DataWorks has engaged the firm of Georgeson &
Company Inc. to assist it in the distribution and solicitation of proxies and
has agreed to pay Georgeson & Company Inc. a fee of $5,000 plus expenses for its
services. Copies of the solicitation materials will be furnished to banks,
brokerage houses, fiduciaries and custodians holding in their names shares of
DataWorks Common Stock beneficially owned by others to forward to such
beneficial owners. DataWorks may reimburse persons representing beneficial
owners of DataWorks Common Stock for their costs of forwarding solicitation
materials to such beneficial owners. Original solicitation of proxies by mail
may be supplemented by telephone, telegram, letter or personal solicitation by
directors, officers or other employees of DataWorks and by Georgeson & Company
Inc. No additional compensation will be paid to directors, officers and other
regular employees for such services.
BOARD RECOMMENDATION
THE DATAWORKS BOARD BELIEVES THAT THE MERGER IS FAIR TO AND IN THE BEST
INTERESTS OF DATAWORKS AND ITS SHAREHOLDERS AND THEREFORE RECOMMENDS A VOTE FOR
APPROVAL OF THE MERGER PROPOSAL.
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THE DCD MEETING
DATE, TIME AND PLACE OF MEETING
The DCD Meeting will be held on September 30, 1996 at 8:00 a.m., local
time, at DCD's offices at 600 Highway 169, 2000 Interchange Tower, Minneapolis,
Minnesota 55426. DCD intends to deliver this Prospectus/Joint Proxy Statement on
or about September , 1996, to all DCD shareholders entitled to vote at the DCD
Meeting and to all participants in the DCD ESOP.
RECORD DATE AND OUTSTANDING SHARES
Only shareholders of record of DCD Common Stock at the close of business on
the Record Date are entitled to notice of and to vote at the DCD Meeting. As of
the Record Date, there were 525,000 shares of DCD Common Stock outstanding and
entitled to vote, consisting of 267,750 shares of Class A Common Stock held by
the DCD ESOP and 257,250 shares of Class B Common Stock held of record by eight
shareholders. The principal shareholders of DCD are identified below under "DCD
Principal Shareholders."
SHAREHOLDER VOTE REQUIRED
The presence, in person or by proxy, of a majority of the shares of DCD
Common Stock outstanding on the Record Date is necessary to constitute a quorum
at the DCD Meeting.
Approval of the Merger and the Merger Agreement requires the affirmative
vote of holders of a majority of the shares of DCD Common Stock outstanding on
the Record Date. Each record holder of DCD Common Stock on the Record Date is
entitled to cast one vote per share, exercisable in person or by properly
executed proxy, on each matter properly submitted for the vote of the
shareholders at the Special Meeting.
As a group, all directors and executive officers of DCD and their
respective affiliates beneficially owned 254,850 shares, or approximately 49%,
of the DCD Common Stock outstanding as of the Record Date. It is expected that
all such shares will be voted for approval of the Merger and the Merger
Agreement.
EXPENSES
DCD will bear the costs of solicitation of votes from its shareholders,
including all costs in connection with the preparation and mailing of this
Prospectus/Joint Proxy Statement to DCD shareholders, except that DataWorks will
pay the fees and expenses, other than attorneys' fees, incurred in connection
with the printing of this Prospectus/Joint Proxy Statement.
DISSENTERS' RIGHTS
Shareholders of record of DCD Common Stock may under certain circumstances,
and by following procedures prescribed by the Minnesota Law, exercise
dissenters' appraisal rights and receive cash for their respective shares of DCD
Common Stock. The failure of any dissenting shareholder of DCD to follow the
appropriate procedures may result in the termination or waiver of such rights.
BOARD RECOMMENDATION
THE DCD BOARD RECOMMENDS A VOTE FOR APPROVAL OF THE MERGER AND MERGER
AGREEMENT.
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THE MERGER AND RELATED TRANSACTIONS
GENERAL
This section of the Prospectus/Joint Proxy Statement describes certain
aspects of the proposed Merger. The Merger Agreement provides for the merger of
DataWorks Sub, a newly formed, wholly owned Minnesota subsidiary of DataWorks,
with and into DCD. The discussion in this Prospectus/Joint Proxy Statement of
the Merger and the description of the principal terms of the Merger Agreement
are accurate in all material respects but do not purport to be complete and are
subject to and qualified in their entirety by reference to the Merger Agreement,
a copy of which is attached to this Prospectus/Joint Proxy Statement as Appendix
A and incorporated herein by reference. All DataWorks and DCD shareholders are
urged to read the Merger Agreement in its entirety.
EFFECTS OF THE MERGER
General
The Merger will be consummated promptly following approval of the Merger
Proposal by the DataWorks and DCD shareholders and the satisfaction or waiver of
all other conditions to consummation of the Merger. The Merger will become
effective on the date the Articles of Merger are duly filed with the Minnesota
Secretary of State (the "Effective Date"). On the Effective Date, DataWorks Sub
will merge with and into DCD, with the result that DCD will be the Surviving
Subsidiary in the Merger and will be wholly owned by DataWorks. As described
below, the shareholders of DCD will become shareholders of DataWorks, and their
rights will be governed by the DataWorks Articles, the DataWorks Bylaws and the
California Law. See "Comparison of Rights of DataWorks Shareholders and DCD
Shareholders."
There will be no change in the current DataWorks Board and officers of
DataWorks as a result of the Merger, except that Robert W. Brandel will become a
Vice President of DataWorks. On the Effective Date, the officers of DCD (as the
Surviving Subsidiary) will be Stuart W. Clifton, Norman R. Farquhar, Robert W.
Brandel, Richard D. Borg and William J. Borg, and the directors of DCD will be
Robert W. Brandel, Stuart W. Clifton and Norman R. Farquhar.
Operations of the Combined Company Following the Merger
If the combined company is to realize the anticipated benefits of the
Merger, the operations of the two companies must be integrated and combined
efficiently. The process of rationalizing management services, administrative
organizations, facilities, management information systems and other aspects of
operations, while managing a larger and geographically expanded entity, will
present a significant challenge to the management of the combined company. There
can be no assurance that the integration process will be successful or that the
anticipated benefits of the business combination will be fully realized. The
dedication of management resources to such integration may detract attention
from the day-to-day business of the combined company. The difficulties of
integration may be increased by the necessity of coordinating geographically
separated organizations, integrating personnel with disparate business
backgrounds and combining different corporate cultures. There can be no
assurance that there will not be substantial costs associated with the
integration process, that such activities will not result in a decrease in
revenues or that there will not be other material adverse effects of these
integration efforts. Such effects could materially reduce the short-term
earnings of the combined company. Subsequent to the Merger, DataWorks expects to
incur a charge of approximately $2.5 million to reflect the combination of the
two companies, including transaction and integration costs. This amount is a
preliminary estimate only. There can be no assurance that DataWorks will not
incur additional charges in the current quarter and subsequent quarters to
reflect costs associated with the Merger.
Conversion of Shares
Applicable Multiple. On the Effective Date, each outstanding share of DCD
Common Stock (other than dissenting DCD shares, if any) will be converted into
the right to receive up to the Applicable Multiple
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(as defined below) of a share of DataWorks Common Stock. The "Applicable
Multiple" will be determined by dividing (a) 1,800,000 reduced by the Deduction
(as defined below) by (b) the aggregate number of shares of DCD Common Stock
outstanding immediately prior to the consummation of the Merger. The "Deduction"
shall be the number of whole shares of DataWorks Common Stock that could be
purchased at the average of the last quoted sales prices of DataWorks Common
Stock as traded on the NASDAQ National Market for the twenty (20) market trading
days immediately preceding the date of the Special Meeting (the "Deemed Value"),
with the amount equal to the sum of (x) the aggregate amount of fees and
expenses of DCD's investment banking advisors incurred in connection with the
Merger and (y) the amount by which the fees and expenses of DCD's legal and
accounting advisors incurred subsequent to July 17, 1996 in connection with the
Merger exceed $100,000.
Provided there are no Dissenting Shares, an aggregate of up to 1,800,000
shares of DataWorks Common Stock will be issued in the Merger, and the former
holders of DCD Common Stock will own shares of DataWorks Common Stock
representing up to approximately 22.9% of the shares of DataWorks Common Stock
to be outstanding immediately after consummation of the Merger (calculated on
the basis of 6,052,060 shares of DataWorks Common Stock outstanding as of the
Record Date, and the Merger Consideration of up to 1,800,000 shares to be issued
in the Merger). Provided there are no dissenting DCD shares, an aggregate of up
to 1,800,000 shares of DataWorks Common Stock (the "Merger Consideration") will
be issued in the Merger. Ten percent (10%) of the Merger Consideration, however,
will be issued in the name of an escrow agent to be held in the Escrow in
accordance with the Escrow Agreement as security for the representations,
warranties and covenants, and other obligations, of DCD under the Merger
Agreement. The Escrow Shares will be released, with certain limitations,
beginning one year after the Closing. See "The Merger and Related
Transactions -- Escrow Agreement and Related Agreements; Interests of Certain
Persons in the Merger."
Fractional Shares. No fractional shares of DataWorks Common Stock will be
issued in the Merger. Instead, each DCD shareholder who would otherwise be
entitled to receive a fraction of a share of DataWorks Common Stock will receive
an amount in cash (without interest) determined by multiplying such fraction by
the average of the last quoted sale prices of DataWorks Common Stock as traded
on the Nasdaq National Market for the twenty trading days immediately preceding
the date of the DataWorks Meeting. DataWorks intends to use its current cash
resources to fund the payments for fractional shares.
BACKGROUND OF THE MERGER
In June 1995, the DCD Board determined that DCD should explore its merger
or other strategic alternatives and retained Wessels, Arnold & Henderson L.L.C.
("Wessels") to assist it in this process. Wessels began preparation of a
confidential memorandum describing DCD. In cooperation with DCD management,
Wessels developed a potential list of 49 companies that it believed might have
some interest in acquiring DCD. Wessels initiated contact with those companies,
and based upon indications expressed, furnished the confidential memorandum to
13 companies, including DataWorks. Wessels had further discussions with six of
those companies, including DataWorks.
DataWorks initially expressed interest in a possible transaction in October
1995, but no further activity developed until April 1996, when DataWorks and its
representatives, on the one hand, and DCD, its representatives and shareholders,
on the other hand, explored a possible combination of their businesses.
DataWorks performed due diligence, and the parties explored a basis of a
combination. By July, the parties were able to frame a transaction acceptable to
the parties and DCD's shareholders, and negotiated and finally entered into a
letter of intent ("Letter of Intent") on July 17, 1996. Thereafter, the parties
prepared and extensively negotiated the Merger Agreement.
The DataWorks Board and the DCD Board approved the Merger on August 14 and
16, 1996, respectively.
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REASONS FOR THE MERGER
DataWorks' Reasons for the Merger
The DataWorks Board believes that the following are reasons for
shareholders of DataWorks to vote FOR approval and adoption of the Merger
Agreement and approval of the Merger:
- The combined company may possess increased international opportunities
with the inclusion of DCD's current products.
- The increase in customer base from DCD may provide the combined company
with a "critical mass" necessary to maintain and increase its leadership
position in the mid-range manufacturing market.
- The inclusion of DCD's products, built on Windows-based platforms,
provide support for the combined company's emphasis on NT platforms.
- As the large customer base from DCD expands and grows, the DataWorks
products will provide them with a migration path that may further
increase the combined company's potential growth.
- The Merger represents a strategic opportunity to diversify DataWorks'
product and services offering and to create a larger supplier of such
products and services.
- The combined company may be able to achieve certain operating
efficiencies as a result of the Merger.
- The Merger may result in increased earnings per share for the combined
company.
In the course of its deliberations, DataWorks Board reviewed with
management a number of other factors relevant to the Merger, including, among
other things: (i) information concerning DataWorks' and DCD's respective
businesses, prospects, financial performances, financial conditions, operations
and new product lines; (ii) the presentation made by Furman Selz to the
DataWorks Board and their opinion rendered in connection therewith (see
"-- Opinion of Furman Selz LLC"); (iii) an analysis of the respective
contributions to revenues, operating profits and net profits of the combined
company; (iv) the compatibility of the managements of DataWorks and DCD; (v)
alternatives for growth in the markets served by DataWorks and DCD; and (vi)
reports from management and legal advisors on the results of DataWorks' due
diligence investigation of DCD.
The DataWorks Board also considered a variety of potentially negative
factors concerning the Merger, including (i) the risk that the combined company
might not achieve revenue equal to the sum of the separate companies'
anticipated revenue; (ii) the risk that the combined company might not achieve
sufficient operating efficiencies to ensure that the Merger would not have a
negative effect on DataWorks' earnings per share; (iii) the charges expected to
be incurred in connection with the Merger, including transaction costs and costs
of integrating the businesses of the companies, to be reflected in a charge of
approximately $2.5 million (see "Unaudited Pro Forma Combined Condensed
Financial Information"); (iv) the risk that the combined company's ability to
increase or maintain revenue might be diminished by intensified competition
among providers of similar or related services; (v) the risk that other benefits
sought to be obtained by the Merger would not be obtained; and (vi) other risks
described above under "Risk Factors."
Based on the factors described above, the DataWorks Board determined that
the Merger is fair to and in the best interests of DataWorks and its
shareholders, approved the Merger Agreement and the transactions contemplated by
the Merger Agreement and recommended that the shareholders of DataWorks vote for
adoption of the Merger Agreement.
The foregoing discussion of the information and factors considered is not
intended to be exhaustive but is believed to include the material factors
considered by the DataWorks Board. In reaching a determination whether to
approve the Merger, in view of the wide variety of factors considered, the
DataWorks Board did not find it practical to quantify or otherwise attempt to
assign any relative or specific weights to the foregoing factors, and individual
directors may have given differing weights to different factors.
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DCD's Reasons for the Merger
At a special meeting held on August 14, 1996, DCD's Board of Directors
convened to consider the Merger Proposal. At that meeting, the Board received
advice or presentations from, and reviewed the terms of the Merger Agreement
with DCD's management, Wessels, Dorsey & Whitney LLP, DCD's outside counsel, and
Price Waterhouse LLP, DCD's independent accountants.
Wessels reviewed with the Board the sale process and outlined the principal
features of the Merger. It presented an analysis of the net value of the
consideration to be paid by DataWorks and that consideration as a multiple of
(a) DCD's historic revenues and planned revenues for 1996 and 1997 and (b) DCD's
historic net income and planned net income for 1996 and 1997. Wessels also
presented the relative contribution of DataWorks and DCD to the combined
business on a pro forma basis in terms of share ownership, revenues (historic
and for 1996 and 1997), net income (historic and for 1996 and 1997), employees
and total assets. In the case of revenues and net income, Wessels based
DataWorks' future results on analysts' estimates. Wessels also compared DCD to
certain financial indices of other publicly held software companies (including
DataWorks).
Wessels identified seven transactions in which a private target in the
software business was acquired by a public company in the software business and
compared the value of the transaction in each of those cases as a multiple of
net sales and net income of the target company.
Wessels also indicated that, based on analysts' estimates, the acquisition
of DCD could be accretive to the earnings of DataWorks for the fourth quarter of
1996 and for the entirety of 1996 and 1997.
Other alternatives to the sale were also discussed.
Wessels presented a stock price and volume chart on the DataWorks Common
Stock since its public offering in October 1995.
Wessels then reviewed information about DataWorks, including its business,
market position, management, trends, financial position and the benefits of the
acquisition of DCD. It reviewed key issues pertaining to DataWorks, including
analysts' estimates, accounting policies, the level of DataWorks' receivables,
competition and technology issues.
DCD's legal advisors then outlined several key matters concerning the
Merger Agreement. Members of the Board had been consulted in connection with the
Letter of Intent and had reviewed drafts of the Merger Agreement that had been
negotiated between representatives of DataWorks and DCD. The DCD Board expressed
concern with certain terms of the Merger Agreement. After discussion,
representatives of DCD were instructed to continue to negotiate the Merger
Agreement and spent August 14, 15 and 16 negotiating with DataWorks.
The DCD Board convened by telephone the evening of August 16 to consider
the draft of the Merger Agreement that had been renegotiated. Mr. Brandel and
legal counsel reported on the changes that had been negotiated. After
discussion, the DCD Board determined that such changes were responsive to its
concerns and authorized Mr. Brandel to execute the Merger Agreement on behalf of
DCD.
DATAWORKS BOARD RECOMMENDATION
THE DATAWORKS BOARD HAS DETERMINED THAT THE MERGER IS ADVISABLE AND IN THE
BEST INTERESTS OF DATAWORKS AND ITS SHAREHOLDERS AND HAS RECOMMENDED A VOTE FOR
APPROVAL OF THE MERGER PROPOSAL.
DCD BOARD RECOMMENDATION
THE DCD BOARD HAS RECOMMENDED A VOTE FOR APPROVAL OF THE MERGER PROPOSAL.
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OPINION OF FURMAN SELZ LLC
The following description of the opinion and presentation of Furman Selz
contains forward-looking information. Without limiting the generality of the
foregoing, the projections and forecasts furnished to Furman Selz were prepared
by the respective managements of DataWorks and DCD. DataWorks does not publicly
disclose internal management projections of the type provided to Furman Selz in
connection with its analyses of the Merger, and such projections were not
prepared with a view toward public disclosure. These projections were based on
numerous variables and assumptions that are inherently uncertain and may be
beyond the control of management, including, without limitation, factors related
to general economic and competitive conditions and prevailing interest rates.
Accordingly, actual results could vary significantly from those set forth in the
opinions.
DataWorks retained Furman Selz to act as its financial advisor and, in
connection with the Merger, to render an opinion to the DataWorks Board as to
whether the Merger Consideration to be paid to the shareholders of DCD is fair,
from a financial point of view, to DataWorks. On August 14, 1996, Furman Selz
rendered its opinion, subsequently confirmed in writing, to the DataWorks Board
that, as of such date and based upon and subject to certain considerations and
assumptions, the Merger Consideration to be paid to the shareholders of DCD as
specified in the Merger Agreement was fair, from a financial point of view, to
DataWorks. In connection with rendering its written opinion dated August 16,
1996, Furman Selz confirmed the appropriateness of its reliance on the analyses
used to render its opinion on August 14, 1996 by performing procedures to update
certain of such analyses and by reviewing the assumptions on which such analyses
were based and the factors considered therewith. References herein to the
"Furman Selz Opinion" or similar references refer to the written opinion of
Furman Selz dated August 16, 1996. The full text of the Furman Selz Opinion,
which sets forth the assumptions made, matters considered and scope and
limitations of the review undertaken and procedures followed by Furman Selz in
rendering its opinion, is attached to this Prospectus/Joint Proxy Statement as
Appendix B hereto -- and is incorporated herein by reference. THE FOLLOWING
DESCRIPTION OF THE FURMAN SELZ OPINION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO THE FULL TEXT OF THE OPINION. DATAWORKS SHAREHOLDERS ARE URGED TO READ
CAREFULLY THE OPINION OF FURMAN SELZ IN ITS ENTIRETY. NO LIMITATIONS WERE
IMPOSED BY DATAWORKS ON FURMAN SELZ WITH RESPECT TO THE INVESTIGATIONS MADE OR
PROCEDURES FOLLOWED IN RENDERING THIS OPINION.
In conducting its analysis and arriving at its opinion, Furman Selz
reviewed and analyzed, among other things: (i) the Merger Agreement and the
specific terms of the Merger; (ii) DCD's financial and operating information for
the three-year period ended December 31, 1995 and the six-month period ended
June 30, 1996; (iii) certain financial and operating information regarding the
business, operations and prospects of DCD, including forecasts and projections,
provided to Furman Selz by the managements of DCD and DataWorks; (iv) DataWorks'
Annual Reports to Shareholders and Annual Reports on Form 10-K for the fiscal
years ended December 31, 1992 through 1995 and the Quarterly Report on Form 10-Q
for the quarter ended March 31, 1996; (v) certain financial and operating
information regarding the business, operations and prospects of DataWorks,
including forecasts and projections, provided to Furman Selz by the management
of DataWorks; (vi) the trading history of DataWorks' Common Stock from its
initial public offering on October 27, 1995 through August 16, 1996 and a
comparison of that trading history with those of other companies that Furman
Selz deemed relevant; (vii) a comparison of the historical and projected
financial results and financial condition of DCD with those of other companies
and businesses that Furman Selz deemed relevant; (viii) a comparison of the
historical and projected financial results and financial condition of DataWorks
with those of other companies and businesses that Furman Selz deemed relevant;
and (ix) a comparison of the financial terms of the Merger with the financial
terms of certain other recent transactions that Furman Selz deemed relevant. In
addition, in arriving at its opinion, Furman Selz also held discussions with
DCD's and DataWorks' managements concerning their businesses, operations,
assets, financial conditions and prospects, including the prospects of DataWorks
after the Merger has been consummated. Furman Selz also undertook such other
studies, analyses and investigations as it deemed appropriate.
In arriving at its opinion, although Furman Selz visited certain properties
and facilities of DataWorks and DCD, Furman Selz did not make, obtain or assume
any responsibility for any independent evaluation or appraisal of such
properties and facilities or of the assets and liabilities (contingent or
otherwise) of
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DataWorks or DCD. Furman Selz assumed and relied upon the accuracy and
completeness of the financial and other information supplied to or otherwise
used by it in arriving at its opinion and did not attempt independently to
verify, or undertake any obligation to verify, such information. Furman Selz
further relied upon the assurances of the managements of DCD and DataWorks that
they were not aware of any facts that would make such information inaccurate or
misleading. In addition, Furman Selz assumed that the forecasts and projections
provided to Furman Selz by DCD and DataWorks represent the best currently
available estimates and judgment of DCD's and DataWorks' managements as to the
future financial condition and results of operations of DCD and DataWorks,
respectively, and assumed that such forecasts and projections have been
reasonably prepared based on such currently available estimates and judgments.
Furman Selz assumed no responsibility for and expressed no view as to such
forecasts and projections or the assumptions on which they are based. Furman
Selz further assumed, with the consent of DataWorks, that the Merger will
qualify as a tax free reorganization within the meaning of Section 368(a) of the
Internal Revenue Code, as amended, and that, for accounting purposes, the Merger
will be accounted for as a pooling of interests. Furman Selz also assumed that
the Merger described in the Merger Agreement would be consummated on the terms
set forth therein, without waiver of any of such terms.
Furman Selz also took into account its assessment of general economic,
market and financial conditions and its experience in similar transactions, as
well as its experience in securities valuation in general. Furman Selz noted
that its opinion was necessarily based upon conditions as they currently existed
and that could be evaluated on the date of its opinion.
Furman Selz did not express any view as to what the value of DataWorks'
stock will be when issued to DCD shareholders pursuant to the Merger, or the
price at which DataWorks' stock will trade prior to or subsequent to the closing
of the Merger. Furman Selz's opinion is for the benefit and use of the DataWorks
Board in its consideration of the Merger. The opinion does not constitute a
recommendation of the Merger over any alternative transactions that may be
available to DataWorks and does not address the underlying business decision of
the DataWorks Board to proceed with or effect the Merger. Furthermore, the
opinion does not constitute a recommendation by Furman Selz to any shareholder
to vote in favor of the Merger.
Furman Selz believes that its analyses must be considered in the aggregate,
and that selecting portions of its analyses or the factors considered by it
without considering all factors and analyses considered by Furman Selz could
create a misleading view of the processes underlying its opinion. The
preparation of a fairness opinion is a complex process and is not necessarily
susceptible to partial analysis or summary description. In arriving at its
opinion, Furman Selz did not attribute any particular weight to any one analysis
or factor considered by it, but rather made qualitative judgments as to the
significance and relevance of each analysis and factor. In its analyses, Furman
Selz made numerous implicit assumptions about industry and general economic
conditions, and other matters, many of which are beyond the control of DataWorks
or DCD. Any estimates contained therein are not necessarily indicative of future
results or actual values, which may be significantly more or less favorable than
such estimates. Estimates of values of companies do not purport to be appraisals
or necessarily reflect the prices at which companies may actually be sold.
Because such estimates are inherently subject to uncertainty, none of DataWorks,
DCD, Furman Selz or any other person assumes responsibility for their accuracy.
The following is a brief summary of the financial analyses utilized by
Furman Selz in rendering its opinion. Such summary does not purport to be a
complete description of all of the analyses performed by, or all the factors
considered by, Furman Selz in connection with its opinion.
Analyses Relating to DataWorks
Comparable Company Analysis. Furman Selz compared selected historical,
current and projected financial and operating results of DataWorks with the
publicly reported operating results of selected publicly traded enterprise
resource planning software companies that, in Furman Selz's judgment, were most
closely comparable to DataWorks (the "DataWorks Comparable Companies"). The
DataWorks Comparable Companies were chosen by Furman Selz as companies that,
based upon publicly available data, possess general business, operating and
financial characteristics representative of companies in the industry in which
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DataWorks operates, although Furman Selz recognized that each of the DataWorks
Comparable Companies is distinguishable from DataWorks in certain respects. Such
DataWorks Comparable Companies consisted of: Consilium, Inc.; Datalogix
International Inc.; Datastream Systems, Inc.; Fourth Shift Corporation; Hyperion
Software Corporation; Manugistics Group, Inc.; Marcam Corporation; Project
Software & Development, Inc.; Symix Systems, Inc.; and WonderWare Corporation.
Furman Selz considered with respect to the DataWorks Comparable Companies, among
other things, (i) selected balance sheet data; (ii) operating statement data,
including latest twelve months (previously reported four quarters, or "LTM")
revenue, gross profit, earnings before interest, taxes, depreciation and
amortization ("EBITDA"), earnings before interest, taxes and amortization
("EBITA") and estimated 1996 net revenue, EBITDA and EBITA; (iii) LTM earnings
per share ("EPS") and 1996 and 1997 estimated EPS; and (iv) historical stock
price performance. All 1996 and 1997 estimates are based on publicly available
estimates.
Furman Selz calculated a range of market multiples for the DataWorks
Comparable Companies by dividing the Total Market Capitalization as of August
16, 1996 (total common shares outstanding multiplied by closing market price per
share, or "Equity Market Capitalization," plus total debt and minority
interests, minus cash and cash equivalents) for each DataWorks Comparable
Company by, among other things, such company's LTM revenue, EBITDA and EBITA and
estimated 1996 net revenue, EBITDA and EBITA. For the DataWorks Comparable
Companies: the LTM revenue multiples ranged from 0.36x to 8.53x and the
estimated 1996 revenue multiples ranged from 0.78x to 7.11x; the LTM EBITDA
multiples ranged from 5.5x to 27.6x and the estimated 1996 EBITDA multiples
ranged from 5.0x to 27.3x; and the LTM EBITA multiples ranged from 9.3x to 38.7x
and the estimated 1996 EBITA multiples ranged from 8.5x to 30.1x. Furman Selz
also calculated multiples by dividing each of the DataWorks Comparable
Companies' closing sale price per share on August 16, 1996 by the respective LTM
EPS, estimated 1996 EPS and estimated 1997 EPS. Such stock price to estimated
LTM EPS multiples ranged from 16.2x to 79.4x, such stock price to estimated 1996
EPS multiples ranged from 14.1x to 45.2x, and such stock price to estimated 1997
EPS multiples ranged from 14.9x to 33.3x.
Based upon the closing price per share of DataWorks' Common Stock on July
22, 1996 of $17.75, which was the price per share prior to announcement of the
Merger after close of the market: DataWorks' LTM and estimated 1996 revenue
multiples were 2.81x and 2.27x, respectively; DataWorks' LTM and estimated 1996
EBITDA multiples were 16.8x and 14.0x, respectively; DataWorks' LTM and
estimated 1996 EBITA multiples were 18.7x and 15.4x, respectively; and
DataWorks' LTM and estimated 1996 EPS were 33.0x and 28.2x, respectively.
Because of the inherent differences in the business, operations and prospects of
DataWorks and the business, operations and prospects of the DataWorks Comparable
Companies, Furman Selz believed it was inappropriate to, and therefore did not,
rely solely on the quantitative results of the analysis, but rather also made
qualitative judgments concerning the differences between the financial and
operating characteristics and prospects of DataWorks and the DataWorks
Comparable Companies that would affect the public trading values of each.
Discounted Cash Flow Analysis. Furman Selz performed a discounted cash
flow analysis of DataWorks based upon projections prepared by the management of
DataWorks for calendar years ending December 31, 1997 through December 31, 2001
(the "DataWorks Projections"). Furman Selz discounted the projected free cash
flows (EBITA less taxes, capital expenditures, and changes in net working
capital plus depreciation) plus the terminal value (calculated as a multiple of
future EBITA) derived from the DataWorks Projections to arrive at a present
value ("Present Value") for DataWorks. Furman Selz utilized multiples of EBITA
ranging from 5.0x to 9.0x. From this Present Value, Furman Selz subtracted all
debt obligations appearing on DataWorks' balance sheet at June 30, 1996 and
added the excess cash balance on such balance sheet to arrive at an equity value
("Equity Value") for DataWorks. Furman Selz performed sensitivity analyses to
understand the effect on the Equity Value of different discount rates and
terminal value multiples. Such analyses were performed under discount rate
assumptions ranging from 12% to 18%, based upon assumptions regarding such
factors as inflation rates, interest rates, DataWorks' cost of capital, and the
inherent business risk of DataWorks as well as of the enterprise resource
planning software industry as a whole. Based on the DataWorks Projections,
Furman Selz observed that the implied Equity Value per share for DataWorks
ranged from $17.73 to $34.27 per share.
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Relative Contribution Analysis. Furman Selz analyzed two separate combined
company scenarios: (i) a combined company analysis utilizing the DataWorks
Projections and a "base case" (the "Base Case DCD Projections") (together, the
"Combined Company Projections 1") and (ii) a combined company analysis utilizing
the DataWorks Projections and a "conservative case" (the "Conservative Case DCD
Projections") (together, the "Combined Company Projections 2"). The Base Case
DCD Projections provided by DCD's management represent DCD's budget which is
used for setting financial performance goals and targets. The Base Case
Projections contain certain adjustments deemed appropriate by the management of
DataWorks which reflect more conservative assumptions relating to the future
prospects of DCD. The Conservative DCD Projections were entirely supplied by
DataWorks and were generated by making additional conservative adjustments to
the Base Case DCD Projections. Neither of the two Combined Company Projections
included assumptions related to synergies of the combined company. Furman Selz
examined certain historical financial information for DataWorks, DCD and the pro
forma combined entity resulting from the Merger. Furman Selz analyzed the
relative pro forma contribution of DCD to DataWorks' pro forma actual and
projected revenue, EBITDA, EBITA and net income for the years ended December 31,
1995, 1996 and 1997 utilizing the Combined Company Projections 1 and Combined
Company Projections 2. Utilizing Combined Company Projections 1, Furman Selz
observed that immediately following the consummation of the Merger, shareholders
of DCD are expected to own approximately 23.5% of DataWorks. This analysis
indicated that, for the actual year ending December 31, 1995, DCD would
contribute approximately 26.7%, 37.8%, 39.1% and 55.3% to the revenue, EBITDA,
EBITA and net income, respectively, of the pro forma combined entity. For the
projected year ending December 31, 1996, DCD is projected to contribute
approximately 26.0%, 37.2%, 38.4% and 40.4% to the revenue, EBITDA, EBITA and
net income, respectively, of the pro forma combined entity. For the projected
year ending December 31, 1997, DCD is projected to contribute approximately
28.6%, 36.2%, 37.1% and 38.7% to the revenue, EBITDA, EBITA and net income,
respectively, of the pro forma combined entity. Utilizing Combined Company
Projections 2, Furman Selz observed that immediately following the consummation
of the Merger, shareholders of DCD are expected to own approximately 23.5% of
DataWorks. This analysis indicated that, for the projected year ending December
31, 1996, DCD is projected to contribute approximately 24.0%, 31.5%, 32.4% and
34.4% to the revenue, EBITDA, EBITA and net income, respectively, of the pro
forma combined entity. For the projected year ending December 31, 1997, DCD is
projected to contribute approximately 24.1%, 28.3%, 28.9% and 30.4% to the
revenue, EBITDA, EBITA and net income, respectively, of the pro forma combined
entity. This analysis also indicated that DCD will contribute approximately
15.7% of the pro forma combined entity's projected total assets at June 30,
1996. The results of this contribution analysis are not necessarily indicative
of what the actual contributions of the respective businesses to the combined
entity will be in the future.
Separately, Furman Selz noted that, based on the Combined Company
Projections 1 and 2, the Merger would be accretive under each scenario, on an
average EPS basis (excluding any transaction costs associated with the Merger),
to shareholders of the combined company in the years ending 1995, 1996 and 1997
before any post-Merger cost savings or revenue enhancements.
Analysis Relating to DCD
Comparable Company Analysis. Furman Selz compared selected historical,
current and projected financial and operating results of DCD with the publicly
reported operating results of selected publicly traded enterprise resource
planning software companies that, in Furman Selz's judgment, were most closely
comparable to DCD (the "DCD Comparable Companies"). The DCD Comparable Companies
were chosen by Furman Selz as companies that, based upon publicly available
data, possess general business, operating and financial characteristics
representative of companies in the industry in which DCD operates, although
Furman Selz recognized that each of the DCD Comparable Companies is
distinguishable from DCD in certain respects. Such DCD Comparable Companies
consisted of: Consilium, Inc.; Datalogix International Inc.; Datastream Systems,
Inc.; Fourth Shift Corporation; Hyperion Software Corporation; Manugistics
Group, Inc.; Marcam Corporation; Project Software & Development, Inc.; Symix
Systems, Inc.; and WonderWare Corporation. Furman Selz considered with respect
to the DCD Comparable Companies, among other things, (i) selected balance sheet
data; (ii) operating statement data, including latest twelve month (previously
reported four quarters, or "LTM") revenue, earnings before interest, taxes,
depreciation and amortization
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("EBITDA"), earnings before interest, taxes and amortization ("EBITA") and
estimated 1996 net revenue, EBITDA and EBITA; (iii) LTM earnings per share
("EPS") and 1996 and 1997 estimated EPS; and (iv) historical stock price
performance. All 1996 and 1997 estimates are based on publicly available
estimates.
Furman Selz calculated a range of market multiples for the DCD Comparable
Companies by dividing the Total Market Capitalization as of August 9, 1996
(total common shares outstanding multiplied by closing market price per share,
or "Equity Market Capitalization," plus total debt and minority interests, minus
cash and cash equivalents) for each DCD Comparable Company by, among other
things, such company's LTM revenue, EBITDA and EBITA and estimated 1996 net
revenue, EBITDA and EBITA. For the DCD Comparable Companies: the LTM revenue
multiples ranged from 0.36x to 8.53x and the estimated 1996 revenue multiples
ranged from 0.78x to 7.11x; the LTM EBITDA multiples ranged from 5.5x to 27.6x
and the estimated 1996 EBITDA multiples ranged from 5.0x to 27.3x; and the LTM
EBITA multiples ranged from 9.3x to 38.7x and the estimated 1996 EBITA multiples
ranged from 8.5x to 30.1x. Furman Selz also calculated multiples by dividing
each of the DCD Comparable Companies' closing price per share on August 16, 1996
by the respective LTM EPS, estimated 1996 EPS, and estimated 1997 EPS. Such
stock price to estimated LTM EPS multiples ranged from 16.2x to 79.4x, such
stock price to estimated 1996 EPS multiples ranged from 14.1x to 45.2x, and such
stock price to estimated 1997 EPS multiples ranged from 14.9x to 33.3x.
Based upon the implied value of consideration paid per share of DCD's
Common Stock on August 16, 1996 of $67.71 and assuming the Base Case DCD
Projections provided by the management of DCD and adjusted by DataWorks to
reflect more conservative assumptions: DCD's LTM and estimated 1996 revenue
multiples were 2.34x and 2.00x, respectively; DCD's LTM and estimated 1996
EBITDA multiples were 8.6x and 7.3x, respectively; DCD's LTM and estimated 1996
EBITA multiples were 8.9x and 7.7x, respectively; and, DCD's LTM and estimated
1996 EPS were 16.2x and 13.0x, respectively. Based upon the implied value of
consideration paid per share of DCD's Common Stock on August 16, 1996 of $67.71
and assuming the Conservative Case DCD Projections provided by the management of
DataWorks: DCD's LTM and estimated 1996 revenue multiples were 2.34x and 2.23x,
respectively; DCD's LTM and estimated 1996 EBITDA multiples were 8.6x and 9.5x,
respectively; DCD's LTM and estimated 1996 EBITA multiples were 8.9x and 9.9x,
respectively; and, DCD's LTM and estimated 1996 EPS were 16.2x and 16.8x,
respectively. Because of the inherent differences in the business, operations
and prospects of DCD and the business, operations and prospects of the DCD
Comparable Companies, Furman Selz believed it was inappropriate to, and
therefore did not, rely solely on the quantitative results of the analysis, but
rather also made qualitative judgments concerning the differences between the
financial and operating characteristics and prospects of DCD and the DCD
Comparable Companies that would affect the public trading values of each.
Discounted Cash Flow Analysis. Furman Selz performed a discounted cash
flow analysis of DCD based upon a series of financial projections prepared by
the managements of DCD and DataWorks for calendar years ending December 31, 1997
through December 31, 2001 (the "DCD Projections"). Furman Selz discounted the
projected free cash flows (EBITA less taxes, capital expenditures, and changes
in net working capital plus depreciation) plus the terminal value (calculated as
a multiple of future EBITA) derived from the DCD Projections to arrive at a
present value ("Present Value") for DCD. Furman Selz utilized multiples of EBITA
ranging from 5.0x to 9.0x. From this Present Value, Furman Selz subtracted all
debt obligations appearing on DCD's balance sheet at June 30, 1996 and added the
excess cash balance on such balance sheet to arrive at an Equity Value for DCD.
Furman Selz performed sensitivity analyses to understand the effect on the
Equity Value of DCD of different discount rates and terminal value multiples.
Such analyses were performed under discount rate assumptions ranging from 12% to
18%, based upon assumptions regarding such factors as inflation rates, interest
rates, DCD's cost of capital, and the inherent business risk of DCD as well as
of the enterprise resource planning software industry as a whole. Based on the
Base Case DCD Projections, Furman Selz observed that the implied Equity Value
per share for DCD ranged from $136 to $265 per share. Based on the Conservative
Case DCD Projections, Furman Selz observed that the implied Equity Value per
share for DCD ranged from $71 to $136 per share.
Comparable Transaction Analysis. Furman Selz evaluated publicly available
information regarding nine acquisitions, completed during the past three years,
of selected enterprise resource planning software
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companies (the "Acquired ERP Software Companies"). Furman Selz calculated
revenue, EBITDA and EBITA multiples based on the ratio of LTM revenue, EBITDA
and EBITA (calculated immediately prior to the acquisition) to an adjusted
purchase price (offer price plus latest reported total debt and preferred stock
minus total cash and cash equivalents) for each Acquired ERP Software Company.
Such financial multiples ranged as follows: (i) 1.11x to 2.26x for LTM revenue,
(ii) 6.8x to 11.5x for LTM EBITDA; and (iii) 7.8x to 10.7x for LTM EBITA. These
multiples were applied to DCD's LTM revenue, EBITDA and EBITA to derive a range
of implied values for DCD. Based on the implied value of consideration paid of
$67.71 per share for DCD's Common Stock on August 16, 1996, DCD's multiples of
2.34x LTM revenue, 8.6x LTM EBITDA and 8.9x LTM EBITA were within the range of
the aforementioned multiples.
None of such acquisitions, however, took place under market conditions or
competitive circumstances that were directly comparable to those of the Merger,
and each of the Acquired ERP Software Companies is distinguishable from DCD in
certain respects. Accordingly, an analysis of the results of the foregoing is
not mathematical or necessarily precise; rather, it involves complex
considerations and judgments concerning differences in financial and operating
characteristics of companies and other factors that could affect results.
Other Factors
In rendering its opinion, Furman Selz considered certain other factors,
including (i) the businesses and operations of, and the industries in which,
DataWorks and DCD operate; (ii) DataWorks' and DCD's historical operating
results; (iii) the Combined Company Projections 1 and 2; (iv) the current and
historical stock price performance of DataWorks; (v) and other factors it deemed
relevant.
The summary set forth above does not purport to be a complete description
of the analyses performed by Furman Selz. The preparation of a fairness opinion
involves various determinations as to the most appropriate and relevant methods
of financial analysis and the application of these methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
summary description. Furman Selz believes that its analyses and the summary set
forth above must be considered as a whole and that selecting portions of its
analyses and factors considered, without considering all analyses and factors,
would create an incomplete view of the process underlying the analyses prepared
for the DataWorks Board. In addition, Furman Selz may have given various
analyses more or less weight than other analyses, and may have deemed various
assumptions more or less probable than other assumptions, so that the range of
valuations resulting from any particular analysis described above should not be
taken to be Furman Selz's view of the actual value of DCD, DataWorks or the
combined entity.
Furman Selz is an investment banking firm engaged in, among other things,
the valuation of businesses and securities in connection with mergers,
acquisitions, underwritings, sales and distributions of listed and unlisted
securities, private placements and valuations for estate, corporate and other
purposes. Furman Selz is a nationally recognized investment banking firm which
has substantial experience in merger and acquisition transactions. Furman Selz
previously served as the managing underwriter in DataWorks' initial public
offering of 2,500,000 shares of Common Stock on October 27, 1995. In the
ordinary course of its business, Furman Selz may actively trade in the equity
and debt securities of DataWorks and for its own account and the accounts of its
customers, and accordingly, may at any time hold a long or short position in
such securities for the accounts of its customers, the firm and/or the officers
of the firm. Furman Selz's research department has, from time to time, issued
research reports regarding DataWorks.
Pursuant to the terms of an engagement letter, DataWorks has agreed to pay
Furman Selz an aggregate of 1.75% of the Merger transaction value up to $20
million and 0.75% of the Merger transaction value over $20 million at the
closing for services provided to DataWorks in connection with the Merger, of
which the total represents advisory fees and the fee for rendering its opinion.
DataWorks also has agreed to reimburse Furman Selz for its out-of-pocket
expenses, including reasonable fees and expenses for its legal counsel, and to
indemnify Furman Selz and certain related parties against certain liabilities,
including liabilities under the federal securities laws, arising out of or in
connection with the services rendered by Furman Selz under the engagement
letter. The terms of the fee arrangement with Furman Selz were negotiated at
arm's length between DataWorks' management and Furman Selz.
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MERGER AGREEMENT
Representations and Covenants
Under the Merger Agreement, DCD has made a number of representations,
including representations regarding the organization and capital structure of
DCD, its operations, financial condition, tax matters, material contracts,
employees, benefits plans, litigation and claims, compliance with laws,
environmental matters, properties, intellectual property, disclosure,
transactions with affiliates and other matters, including its authority to enter
into the Merger Agreement and to consummate the Merger. Under the Merger
Agreement, DataWorks has also made a number of representations, including
representations regarding the organization and capital structure of DataWorks
and its affiliates, their operations, compliance with laws, filings with the
Commission, financial statements, benefits plans, litigation and claims,
disclosure, common stock to be issued and other matters, including the authority
of DataWorks and DataWorks Sub to enter into the Merger Agreement and to
consummate the Merger.
DataWorks and DCD have agreed in the Merger Agreement to (i) use
commercially reasonable efforts to perform and fulfill all conditions and
obligations under the Merger Agreement; (ii) use commercially reasonable efforts
to obtain all authorizations, consents and permits of others required to permit
the consummation of the Merger; (iii) file with any governmental agencies or
departments all notices, reports and other documents required by law with
respect to the Merger Agreement and the Merger and (iv) seek the approval of the
Merger Agreement and the Merger by their respective shareholders. Further, each
of DataWorks and DCD has agreed to (i) promptly notify the other of certain
changes or the occurrence of any event that causes the representations or
warranties made by the relevant representing party in the Merger Agreement to be
incomplete or inaccurate in any material respect; (ii) promptly notify the other
of any material breach by the other of any relevant representation, warranty or
covenant; and (iii) promptly notify the other of any event, condition, fact or
circumstance that would make unlikely or impossible the timely satisfaction of
the conditions to the obligations of the other party to consummate the Merger.
DCD and the Designated Shareholders have each covenanted that, until the
consummation of the Merger or the termination of the Merger Agreement, they will
not take certain actions relating to the operation of DCD without the consent of
DataWorks. DCD and the Designated Shareholders have also agreed that neither
they nor any of their affiliates will solicit, initiate, encourage, negotiate,
provide information for or otherwise cooperate in any way with or facilitate any
of the following: (i) any merger or consolidation of DCD with any person other
than DataWorks or DataWorks Sub; (ii) any sale of all or a material portion of
the business or assets of DCD to any person other than DataWorks or DataWorks
Sub; or (iii) the issuance, disposition or acquisition of any capital stock or
other equity security of DCD.
DCD has further agreed, among other things: (i) to use commercially
reasonable efforts to preserve intact its business organization, to keep
available the services of its present officers and employees and to maintain the
goodwill of all suppliers, customers and others having business relations with
it; (ii) to permit DataWorks and its authorized representatives to have
reasonable access to all of its personnel, assets, records, tax returns,
contracts and documents and to furnish to DataWorks such financial and other
information, and all copies, as DataWorks may from time to time reasonably
request; (iii) to deliver to DataWorks at the Closing the resignations of all
directors of DCD and certain trustees of benefit plans of DCD; (iv) to conduct
its business and operations in the ordinary course and in substantially the same
manner as prior to the execution of the Merger Agreement; (v) not to declare any
dividend, issue any capital stock, amend its articles of incorporation or
bylaws, or form a subsidiary or acquire an interest in another entity; and (vi)
to deliver to DataWorks or cause its counsel or accountants to deliver to
DataWorks certain closing documents referred to the Merger Agreement. In
addition, DCD has agreed to take such actions prior to Closing as DataWorks
deems reasonably necessary with respect to the qualification and compliance of
the DCD ESOP.
Under the Merger Agreement, DataWorks has also agreed: (i) to provide
certain access to documents and information previously publicly filed or
disclosed and make available its executive officers to answer questions of DCD
relating to DataWorks' business; (ii) to deliver certain closing documents
referred to in the Merger Agreement; and (iii) following the Closing (if prior
to November 30, 1996) and prior to January 31, 1997, to issue a press release
reporting its consolidated earnings for 1996.
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Conditions to the Merger
In addition to the requirement that the Merger Proposal be approved by the
requisite votes of the shareholders of DataWorks and DCD, the obligations of
DataWorks and DCD to consummate the Merger are subject to the satisfaction of a
number of other conditions, including, among other things, (i) the accuracy, in
all material respects, of the representations and warranties made by the other
party as of the Closing Date, except for any inaccuracies which, individually
and taken as a whole, have not had a material adverse effect on DCD (provided,
however, that with respect to any representation identifying any contract in the
disclosure schedule to the Merger Agreement, such representation shall not be
deemed materially inaccurate as of the Closing by reason of DCD entering into
additional contracts to be identified on such disclosure schedule between the
date of the Merger Agreement and the Closing Date); (ii) the performance, in all
material respects, by the other party of its covenants; and (iii) no
shareholders of DataWorks and holders of less than 2% of the outstanding shares
of DCD Common Stock having asserted dissenters' rights under the California Law
or the Minnesota Law, as the case may be; (iv) the execution of certain
employment, consulting and noncompetition agreements with shareholders and
officers of DCD, and other agreements and certificates; (v) the receipt of
certain legal opinions; (vi) the receipt by the parties of all governmental
approvals, consents, authorizations or modifications as may be required to
permit the performance in compliance with applicable law by the parties of their
respective obligations under the Merger Agreement and the consummation of the
Merger; and (vii) the absence of any order by any court or governmental agency
to enjoin or otherwise prevent the consummation of the Merger Agreement or the
Merger.
DataWorks' obligations to consummate the Merger are further conditioned
upon, among other things, (i) the receipt of a letter from Ernst & Young LLP,
DataWorks' independent accountants, relating to the applicability of
pooling-of-interests accounting treatment to the Merger; (ii) the receipt of a
letter from Price Waterhouse LLP, DCD's independent accountants, relating to the
applicability of pooling-of-interests accounting treatment with respect to DCD;
(iii) the receipt of resignations of each director of DCD and certain trustees
of benefits plans of DCD; and (iv) the execution and delivery to DataWorks of
certain other documents, including the Related Agreements. See "Related
Agreements; Interests of Certain Persons in the Merger."
DCD's obligations to consummate the Merger are further conditioned upon,
among other things, the execution and delivery by DataWorks of certain
documents, including the Related Agreements.
At any time at or prior to the Closing Date, DataWorks or DCD, without
approval of the shareholders of DataWorks or DCD, may waive compliance with any
of the agreements or conditions contained in the Merger Agreement to be
performed by the other party.
Termination
At any time prior to the Effective Date, the Merger Agreement may be
terminated as follows: (i) by DataWorks if DataWorks reasonably determines that
the timely satisfaction of any condition to DataWorks' performance under the
Merger Agreement has become impossible (other than as a result of any failure on
the part of DataWorks or DataWorks Sub to comply with or perform any of their
respective covenants or obligations set forth in the Merger Agreement); (ii) by
DCD if DCD reasonably determines that the timely satisfaction of any condition
to DCD's performance under the Merger Agreement has become impossible (other
than as a result of any failure on the part of DCD or any of the Designated
Shareholders to comply with or perform any of their respective covenants or
obligations set forth in the Merger Agreement); (iii) by mutual consent of all
of the parties; (iv) by DataWorks if there has been a material breach by DCD of
any covenant, representation or warranty contained in the Merger Agreement,
DataWorks has notified DCD in writing of the existence of such breach, and DCD
has failed to cure such breach within ten days after receiving such notice; (v)
by DCD if there has been a material breach by DataWorks of a covenant,
representation or warranty contained in the Merger Agreement, DCD has notified
DataWorks in writing of the existence of such breach, and DataWorks has failed
to cure such breach within ten days after receiving such notice; (vi) by either
DataWorks or DCD if there should be a non-appealable order of a federal or state
court in effect preventing consummation of the Merger, or there shall be any
action taken or any statutes, rules, regulations
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or orders enacted, promulgated, issued or deemed applicable to the Merger by any
governmental entity that would make consummation of the Merger illegal; (vii) by
either DataWorks or DCD if, upon a vote at a duly held meeting of shareholders,
or any adjournment thereof, any required approval of holders of DataWorks and
DCD capital stock shall not have been obtained; or (viii) by either DataWorks or
DCD if the respective conditions of the other party have not been satisfied by
the earlier of November 30, 1996 or the Closing Date.
At any time prior to the Closing Date, DataWorks, DataWorks Sub or DCD may
extend the time for the performance of any of the obligations or other acts of
DataWorks, DataWorks Sub or DCD.
Amendment
The Merger Agreement may not be amended except by an instrument in writing
signed on behalf of DataWorks, DCD and a majority in interest of the Designated
Shareholders.
Registration Rights
Although the shares of Dataworks Common Stock to be issued pursuant to the
Merger will have been registered under the Securities Act, any shareholder of
DCD receiving such stock who is an affiliate of DCD at the time of the DCD
Meeting (as "affiliate" is defined for purposes of Rule 145) will be subject to
the resale restrictions pursuant to Rule 145. See "The Merger and Related
Transactions -- Affiliates' Restrictions on Sale of Dataworks Common Stock."
The Merger Agreement contemplates that certain holders of the shares of
Dataworks Common Stock to be issued in the Merger will be entitled to certain
demand registration rights on Form S-3 and certain piggyback registration rights
with respect to such shares. The demand registration rights may only be
exercised by notice delivered to Dataworks by holders who, in the aggregate, are
holders of greater than 50% of the then outstanding Registrable Securities (as
defined in the Merger Agreement) (the "Initiating Holders"). Subject to certain
limitations, the Initiating Holders may exercise the demand registration rights
commencing on the later of February 1, 1997 and the date on which Dataworks
publishes financial results covering at least 30 days of combined operations of
DCD and Dataworks. Under the terms of the Merger Agreement, the holders of such
registration rights are limited to an aggregate of three demand registrations,
provided that such registrations have been declared or ordered effective, and an
aggregate of not more than 225,000 shares may be included in any such demand
registration, which number shall increase by an additional 225,000 shares at the
expiration of each six-month period following February 1, 1997, not to exceed
the total number of shares issued in the Merger; provided, however, that each
such lot of 225,000 shares may be increased to a maximum of 400,000 shares if,
with respect to the resale of the shares issued in the Merger, Rules 145(c) and
(d) are not available to all of the Designated Shareholders, Robert W. Brandel
and any person holding shares issued in the Merger to whom registration rights
have been transferred in accordance with the terms of the Merger Agreement.
The right of any holder of shares of Dataworks Common Stock issued in the
Merger to participate in any registration initiated by Dataworks is conditioned
upon such holder's participation in any underwriting agreement (if the offering
is underwritten), and the inclusion of such holder's shares of Dataworks Common
Stock in the underwriting is subject to such limitations and cutbacks as the
underwriter of the offering may request.
All such registration expenses incurred by Dataworks shall be borne by
Dataworks. All selling expenses (i.e., discounts and commissions) relating to
the shares registered on behalf of the holder thereof shall be borne by the
holders of such shares pro rata on the basis of the number of shares registered.
Each holder including such shares in a registration pursuant to the terms
of the Merger Agreement will be obligated to furnish Dataworks such information
regarding the holder, the shares and the proposed distribution of such shares as
Dataworks may request in connection with such registration. In addition, each
holder including such shares in a registration pursuant to the terms of the
Merger Agreement will be subject to certain customary indemnification
obligations with respect to certain liabilities arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact in the
registration statement, prospectus or
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other document or any omission (or alleged omission) of a material fact required
to be stated in such registration statement, prospectus or other document to
make the statements therein not misleading, but only to the extent such untrue
statement or omission (or alleged untrue statement or omission) is made in
reliance on and in conformity with written information furnished to Dataworks by
such holder for use in the registration statement, prospectus or other document,
and then such holder's liability under such indemnity is limited to the amount
of net proceeds received by such holder, except if such liability arises out of
willful misconduct by such holder. Each holder including shares in a
registration pursuant to the terms of the Merger Agreement will also be entitled
to indemnification by Dataworks and by the other holders of such shares included
in such registration with respect to certain liabilities arising out of or based
on any untrue statement (or alleged untrue statement) of a material fact in the
registration statement, prospectus or other document or any omission (or alleged
omission) of a material fact required to be stated in such registration
statement, prospectus or other document to make the statements therein not
misleading.
The rights of any holder of shares of Dataworks Common Stock issued in the
Merger to cause Dataworks to register such shares may be assigned only in
connection with a transfer by will or intestacy or a transfer constituting a
bona fide gift.
The right of any holder of shares of Dataworks Common Stock issued in the
Merger to request registration or inclusion in any registration shall terminate
on such date as all of such shares then held by such holder may be sold under
Rule 144 or Rule 145 during any 90-day period.
For more complete information regarding registration of the shares of
Dataworks Common Stock issued in the Merger for resale by the holders of such
shares, see Section 9 of the Merger Agreement.
Indemnity
The parties have certain rights to indemnification as set forth in the
Escrow Agreement.
ESCROW AGREEMENT AND RELATED AGREEMENTS; INTERESTS OF CERTAIN PERSONS IN THE
MERGER
Escrow Agreement
The Escrow Agreement provides that, subject to certain limitations such as
those described below, and other terms described in the Escrow Agreement,
DataWorks, DataWorks Sub and other affiliates and representatives of DataWorks
shall be indemnified, defended and held harmless out of the Escrow Shares from
and against any loss, expense, liability or other damages, including the
reasonable costs of investigation, penalties and attorneys' and accountants'
fees incurred in connection with or arising from or attributable to (i) any
breach of or inaccuracy in any representation or warranty made by DCD in the
Merger Agreement or in any certificate or document delivered in connection with
the Merger, (ii) any breach or failure to perform of any covenant of DCD set
forth in the Merger Agreement, (iii) certain actions relating to the DCD ESOP,
(iv) brokerage or finder's fee claims relating to the Merger, or (v) incurrence
by DCD of certain fees and expenses. Such indemnification rights as they relate
to certain occurances or circumstances under the foregoing clauses (i) and (ii)
are subject to a basket of $400,000, so that liability under the foregoing
clauses (i) and (ii) will not exist as a result of such occurances or
circumstances until and except to the extent the aggregate amount of such
liability exceeds $400,000. Further, such indemnification rights shall be the
sole recourse of DataWorks, DataWorks Sub and their affiliates following the
Closing Date for claims against DCD.
In addition to the indemnity provided by the Escrow Shares after the
Closing, the Escrow Agreement provides that DCD shall remain liable prior to the
Closing, and the Designated Shareholders shall remain liable at all times, for
breaches of their representations, warranties and covenants in the Merger
Agreement and other agreements and instruments entered into in connection with
the Merger. In addition, subject to a $400,000 basket, a cap equal to the value
of the Escrow Shares and other limitations, DataWorks is obligated to defend,
hold harmless and indemnify the shareholders of DCD from and against any loss,
expense, liability or other damages, including the reasonable costs of
investigation, penalties and attorneys' and accountants' fees, incurred from the
date of the Merger Agreement through six months following the Closing Date in
connection with or arising from or attributable to any breach or inaccuracy of
any representation or warranty made by DataWorks or DataWorks Sub in the Merger
Agreement or any document delivered by DataWorks
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pursuant to the Merger Agreement, or any breach or failure to perform any
agreement or covenant of DataWorks or DataWorks Sub in the Merger Agreement or
any document delivered by DataWorks in connection therewith.
The Merger Agreement provides that the Escrow Shares shall be ten percent
(10%) of the Merger Consideration and will be issued in the name of the Escrow
Agent. In the event of indemnification claims for which compensation is granted
pursuant to the terms of the Escrow Agreement, shares with a value sufficient to
provide indemnification will be issued in the name of DataWorks. The Escrow
Shares will be released, with certain limitations, beginning one year after the
Closing.
Affiliate Agreements
To help ensure that the Merger will be accounted for as a
pooling-of-interests, DCD affiliates (as defined for purposes of Rule 145) will
enter into agreements that prohibit such persons from disposing of their shares
of DataWorks Common Stock (except in certain de minimis transfers permitted in
pooling-of-interests transactions) until DataWorks publicly releases its first
report of financial statements including the combined financial results of DCD
and DataWorks for a period of at least 30 days of "combined operations," as
defined by the Commission. Such affiliates will also agree not to sell, pledge
or otherwise transfer such shares except in compliance with Rule 145 or under
certain other limited circumstances.
Employment; Separation and Consulting; and Separation, Consulting and
Non-Competition Agreements
At the Closing, each of Richard D. Borg, William J. Borg and Robert W.
Brandel will enter into an employment letter agreement with DCD, under which
they will each receive a retention bonus of $80,000 and will continue their
employment by DCD on their current terms or as otherwise agreed by the parties.
Marde S. Olson will enter into a Separation and Consulting Agreement with
DataWorks, under which she will receive a separation payment of $60,000 and a
$20,000 retainer for one year's consulting services. Dwayne E. Borg will enter
into a Separation, Consulting and Noncompetition Agreement with DataWorks, under
which he will receive a separation payment of $250,000 and will agree not to
compete with the combined company for a term of three years and to provide
consulting services for two years for an additional payment of $500,000.
REGULATORY MATTERS
Other than compliance with the federal securities laws and applicable
securities and "blue sky" laws of the various states, DataWorks and DCD are not
aware of any governmental or regulatory approvals required for consummation of
the Merger.
CERTAIN FEDERAL INCOME TAX MATTERS
The following discussion summarizes the material federal income tax
considerations of the Merger that are generally applicable to holders of DCD
Common Stock. This discussion is based on currently existing provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), existing and proposed
Treasury Regulations thereunder and current administrative rulings and court
decisions, all of which are subject to change. Any such change, which may or may
not be retroactive, could alter the tax consequences to DataWorks, the DataWorks
shareholders, DCD or DCD's shareholders, as described herein.
DCD shareholders should be aware that this discussion does not deal with
all federal income tax considerations that may be relevant to particular DCD
shareholders in light of their particular circumstances, such as shareholders
who are dealers in securities, who are subject to the alternative minimum tax
provisions of the Code, who are foreign persons or who acquired their shares in
connection with stock option or stock purchase plans or in other compensatory
transactions. In addition, the following discussion does not address the tax
consequences of the Merger under foreign, state or local tax laws or the tax
consequences of transactions effectuated prior to or after the Merger (whether
or not such transactions are in connection with the Merger). ACCORDINGLY, DCD
SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC
CONSEQUENCES OF THE MERGER TO THEM, INCLUDING THE APPLICABLE FEDERAL, STATE,
LOCAL AND FOREIGN TAX CONSEQUENCES OF THE MERGER IN THEIR PARTICULAR
CIRCUMSTANCES.
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Neither DataWorks nor DCD has requested, or will request, a ruling from the
Internal Revenue Service (the "IRS") with regard to any of the federal income
tax consequences of the Merger. As a condition to consummation of the Merger,
Cooley Godward Castro Huddleson & Tatum, counsel to DataWorks ("Cooley
Godward"), and Dorsey & Whitney LLP, counsel to DCD, will each render an opinion
(the "Tax Opinions") to the DataWorks and DCD shareholders, respectively, that
the Merger will constitute a tax-free reorganization under Sections 368(a)(1)(A)
and 368(a)(2)(E) of the Code (a "Reorganization"). The Tax Opinions will be
based on certain assumptions, as well as representations received and to be
received from DataWorks, DCD, DataWorks Sub and the shareholders of DCD and will
be subject to the limitations discussed below. Moreover, the Tax Opinions will
not be binding on the IRS nor preclude the IRS from adopting a contrary
position. The discussion below assumes that the Merger will qualify as a
Reorganization, based upon the Tax Opinions. The tax description set forth below
has been prepared and reviewed by Cooley Godward and Dorsey & Whitney LLP, and
in their opinion, to the extent such description relates to statements of law,
it is correct in all material respects.
Subject to the limitations and qualifications referred to herein, and as a
result of the Merger's qualifying as a Reorganization, the following federal
income tax consequences should, under currently applicable law, result:
- No gain or loss will be recognized for federal income tax purposes by the
holders of DCD Common Stock upon the receipt of DataWorks Common Stock
solely in exchange for such DCD Common Stock in the Merger (except to the
extent that cash is received in lieu of fractional shares).
- The aggregate tax basis of the DataWorks Common Stock so received by DCD
shareholders in the Merger (including any fractional shares of DataWorks
Common Stock not actually received) will be the same as the aggregate tax
basis of the DCD Common Stock surrendered in exchange therefor.
- The holding period of the DataWorks Common Stock so received by each DCD
shareholder in the Merger will include the period for which the DCD
Common Stock surrendered in exchange therefor was considered to be held,
provided that the DCD Common Stock so surrendered is held as a capital
asset at the Effective Date of the Merger.
- Cash payments received by holders of DCD Common Stock in lieu of
fractional shares will be treated as if such fractional shares of
DataWorks Common Stock had been issued in the Merger and then redeemed by
DataWorks. A DCD shareholder receiving such cash will recognize gain or
loss upon such payment, measured by the difference (if any) between the
amount of cash received and the basis in such fractional shares. The gain
or loss should be capital gain or loss, provided that each such
fractional share of DataWorks Common Stock was held as a capital asset at
the Effective Date of the Merger.
- A holder of DCD Common Stock or a holder of DataWorks Common Stock who
exercises dissenters' rights with respect to a share of DCD Common Stock
or DataWorks Common Stock and receives a cash payment for such share
generally should recognize capital gain or loss (if such share was held
as a capital asset at the Effective Date of the Merger) measured by the
differences between the shareholder's basis in such share and the amount
of cash received, provided that such payment is not a Dividend Equivalent
Transaction. A sale of shares pursuant to an exercise of dissenters'
rights generally will not be a Dividend Equivalent Transaction if, as a
result of such exercise, the shareholder exercising dissenters' rights
owns no shares of capital stock of DataWorks (either actually or
constructively within the meaning of Section 318 of the Code) immediately
after the Merger.
The Tax Opinion will be subject to certain assumptions and qualifications
and will be based on the truth and accuracy of certain representations of
DataWorks, DCD, DataWorks Sub and the shareholders of DCD, including
representations in certain certificates delivered to counsel by the respective
managements of DataWorks, DCD and DataWorks Sub and the shareholders of DCD. See
"The Merger and Related Transactions -- Escrow Agreement and Related Agreements;
Interests of Certain Persons in the Merger -- Affiliate Agreements."
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One key assumption is that the "continuity of interest" requirement will be
satisfied in the Merger. In order for this requirement to be met, shareholders
of DCD must not, pursuant to a plan or intent existing at or prior to the
Effective Date of the Merger, dispose of so much of (i) their DCD Common Stock
in anticipation of the Merger, plus (ii) the DataWorks Common Stock received in
the Merger (collectively, the "Planned Dispositions") such that the DCD
shareholders, as a group, would no longer have a "significant equity interest"
in the DCD business being conducted by DataWorks after the Merger. DCD
shareholders will generally be regarded as having a significant equity interest
as long as the DataWorks Common Stock received in the Merger (after taking into
account Planned Dispositions), in the aggregate, represents a "substantial
portion" of the entire consideration received by the DCD shareholders in the
Merger. This requirement is frequently referred to as the "continuity of
interest" requirement. If the continuity of interest requirement is not
satisfied, the Merger would not be treated as a Reorganization. The law is
unclear as to what constitutes a "significant equity interest" or a "substantial
portion." The IRS ruling guidelines require 50% continuity (although such
guidelines do not purport to represent the applicable substantive law). The
Merger Agreement and the Continuity of Interest Certificates contemplate that
the fifty percent (50%) standard will be applied. No assurance, however, can be
made that the "continuity of interest" requirement will be satisfied, and if
such requirement is not satisfied, the Merger will not be treated as a
Reorganization.
A successful IRS challenge to the Reorganization status of the Merger would
result in significant tax consequences. A DCD shareholder would recognize gain
or loss with respect to each share of DCD Common Stock surrendered equal to the
difference between the shareholder's basis in such share and the fair market
value, as of the Effective Date, of the DataWorks Common Stock received in
exchange therefor. In such event, a shareholder's aggregate basis in the
DataWorks Common Stock so received would equal its fair market value, and the
shareholder's holding period for such stock would begin the day after the Merger
is consummated.
Even if the Merger qualifies as a Reorganization, a recipient of DataWorks
Common Stock would recognize income to the extent that, for example, any such
shares were determined to have been received in exchange for services, to
satisfy obligations or in consideration for anything other than the DCD Common
Stock surrendered. Generally, such income is taxable as ordinary income upon
receipt. In addition, to the extent that a DCD shareholder were treated as
receiving (directly or indirectly) consideration other than DataWorks Common
Stock in exchange for such shareholder's DCD Common Stock, gain or loss would
have to be recognized.
ACCOUNTING TREATMENT
The Merger is intended to qualify as a pooling of interests for accounting
purposes. Under this accounting treatment, the recorded assets and liabilities
and the operating results of both DataWorks and DCD are carried forward to the
combined operations of the surviving corporation at their recorded amounts. No
recognition of goodwill in the combination is required of either party to the
Merger.
To support the treatment of the Merger as a pooling of interests, the
affiliates of DCD will enter into agreements imposing certain resale limitations
on their stock. It is a condition to DataWorks' obligations to consummate the
Merger that, among other things, DataWorks receive a letter from Ernst & Young
LLP relating to the applicability of pooling-of-interests accounting treatment
with respect to the Merger and a letter from Price Waterhouse LLP relating to
the applicability of pooling-of-interests accounting treatment with respect to
DCD.
DISSENTERS' RIGHTS OF DATAWORKS SHAREHOLDERS
THE FOLLOWING SUMMARY OF DISSENTERS' RIGHTS UNDER CALIFORNIA LAW IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO CHAPTER 13 OF THE CALIFORNIA LAW, THE
COMPLETE TEXT OF WHICH IS ATTACHED HERETO AS APPENDIX C.
FAILURE TO STRICTLY FOLLOW THE PROCEDURES SET FORTH IN CHAPTER 13 OF THE
CALIFORNIA LAW MAY RESULT IN THE LOSS, TERMINATION OR WAIVER OF APPRAISAL
RIGHTS. A DATAWORKS SHAREHOLDER WHO FAILS TO SIGN AND RETURN A PROXY CARD
DISAPPROVING AND WITHHOLDING AUTHORIZATION FOR THE
41
<PAGE> 52
MERGER OR TO ATTEND THE DATAWORKS MEETING AND VOTE HIS OR HER SHARES AGAINST THE
MERGER WILL NOT HAVE A RIGHT TO EXERCISE DISSENTERS' RIGHTS. A DATAWORKS
SHAREHOLDER WHO DESIRES TO EXERCISE HIS OR HER DISSENTERS' RIGHTS MUST ALSO
SUBMIT A WRITTEN DEMAND FOR PAYMENT TO DATAWORKS BEFORE THE DATE OF THE
DATAWORKS MEETING. IN ADDITION, NO DATAWORKS SHAREHOLDER, UNDER ANY
CIRCUMSTANCES, WILL HAVE A RIGHT TO DISSENT FROM THE MERGER AGREEMENT IF LESS
THAN FIVE PERCENT (5%) OF THE OUTSTANDING SHARES OF DATAWORKS COMMON STOCK DO
NOT PERFECT THEIR RIGHT TO DISSENT AND EXERCISE THEIR DISSENTERS' RIGHTS IN
ACCORDANCE WITH CHAPTER 13 OF THE CALIFORNIA LAW.
Under Chapter 13 of the California Law, each DataWorks shareholder as of
the Record Date who votes against the Merger and who submits a written demand
for payment to DataWorks prior to the date of the DataWorks Meeting is entitled
to receive payment of the fair value of all or any portion of such holder's
shares of DataWorks Common Stock owned by such holder if the Merger is
consummated and if demands for payment are made with respect to five percent
(5%) or more of the outstanding shares of DataWorks Common Stock. The fair value
of such shares is determined as of July 21, 1996, the last day before the first
announcement of the terms of the Merger. Any DataWorks shareholder who elects to
perfect such holder's dissenters' rights and demands payment of the fair value
of such holder's shares must strictly comply with Chapter 13 of the California
Law. The following summary does not purport to be complete and is qualified in
its entirety by reference to Chapter 13 of the California Law, the text of which
is attached hereto as Appendix C and is incorporated herein by reference. Any
holder of shares of DataWorks Common Stock considering demanding dissenters'
rights is advised to consult legal counsel. Dissenters' rights will not be
available unless and until the Merger (or a similar business combination) is
consummated. To perfect the right to dissent and receive the fair value of such
holder's shares, a DataWorks shareholder must vote against the Merger.
Prior to the date set for approval of the Merger, each DataWorks
shareholder who elects to exercise his or her dissenters' rights must make a
written demand upon DataWorks for the purchase of his or her DataWorks shares.
The DataWorks shareholder' s demand must state the number and class of shares
held of record by the DataWorks shareholder which the DataWorks shareholder
demands that DataWorks purchase, as well as a statement by the DataWorks
shareholder as to what such holder claims the fair market value of such shares
was as of the day prior to the announcement of the Merger. The statement of fair
market value constitutes an offer by the DataWorks shareholder to sell the
shares at such price. Voting against the Merger shall not constitute such
written demand.
Within 10 days after the date of approval of the Merger, DataWorks will
mail to each DataWorks shareholder who did not vote in favor of the Merger
notice (the "DataWorks Notice") of the approval of the Merger by the DataWorks
shareholders, accompanied by a copy of Sections 1300 through 1304 of the
California Law. The DataWorks Notice shall also state the price determined by
DataWorks to be the fair market value of shares of DataWorks Common Stock with
respect to which dissenters' rights are properly exercised under the California
Law ("DataWorks Dissenting Shares") and a brief description of the procedure to
be followed by a shareholder who elects to dissent.
Within the 30-day period following the mailing of the DataWorks Notice, the
dissenting shareholder must submit to DataWorks for endorsement certificates for
any shares which the DataWorks shareholder demands that DataWorks purchase. If
DataWorks and the DataWorks shareholder agree upon the price of the DataWorks
Dissenting Shares, the dissenting DataWorks shareholder is entitled to the
agreed price with interest at the legal rate on judgments from the date of such
agreement. Payment must be made within 30 days of the later of the date of the
agreement between the DataWorks shareholder and DataWorks or the date the
contractual conditions to the Merger are satisfied or waived.
If DataWorks and the DataWorks shareholder cannot agree as to the fair
market value or as to the fact that such shares are DataWorks Dissenting Shares,
such DataWorks shareholder may file within six months of the date of mailing of
the DataWorks Notice a complaint with the California Superior Court for the
County of
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<PAGE> 53
San Diego demanding judicial determination of such matters. DataWorks will then
be required to make any payments in accordance with such judicial determination.
If the complaint is not filed within the specified six-month period, the
DataWorks shareholder's rights as a dissenter are lost.
DataWorks Dissenting Shares lose their status as such if (i) DataWorks
abandons the Merger; (ii) the shares are transferred prior to submission for
endorsement or are surrendered for conversion into shares of another class in
accordance with the Articles of Incorporation; (iii) the DataWorks shareholder
and DataWorks do not agree as to the fair market value of such shares and a
complaint is not filed within six months of the date that the DataWorks Notice
was mailed; or (iv) the dissenting DataWorks shareholder withdraws, with the
consent of DataWorks, his or her demand for purchase of such shares.
IT IS A CONDITION TO DATAWORKS' AND DCD'S OBLIGATIONS TO CONSUMMATE THE
MERGER THAT THE HOLDERS OF DATAWORKS COMMON STOCK NOT HAVE DISSENTERS' RIGHTS.
If demands for payment are made with respect to five percent (5%) or more of the
outstanding shares of DataWorks Common Stock, and, as a consequence dissenting
shareholders of DataWorks become entitled to exercise dissenters' rights, then
DataWorks will not be obligated to consummate the Merger. Further, purchase by
DataWorks of five percent (5%) or more of the outstanding DataWorks Common Stock
would prevent the Merger from being accounted for as a pooling of interests. The
receipt of a letter from Ernst & Young LLP relating to the applicability of
pooling-of-interests accounting for the Merger and a letter from Price
Waterhouse LLP relating to the applicability of pooling-of-interests accounting
only as to DCD is a condition to DataWorks' obligation to consummate the Merger.
See "The Merger and Related Transactions -- Merger Agreement."
DISSENTERS' RIGHTS OF DCD SHAREHOLDERS
THE FOLLOWING SUMMARY OF THE APPLICABLE PROVISIONS OF SECTIONS 302A.471 AND
302A.473 OF THE MINNESOTA LAW IS NOT INTENDED TO BE A COMPLETE STATEMENT OF SUCH
PROVISIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH SECTIONS, THE
FULL TEXTS OF WHICH ARE ATTACHED AS APPENDIX D TO THIS PROSPECTUS/JOINT PROXY
STATEMENT. THESE SECTIONS SHOULD BE REVIEWED CAREFULLY BY ANY HOLDER WHO WISHES
TO EXERCISE DISSENTERS' RIGHTS OR WHO WISHES TO PRESERVE THE RIGHT TO DO SO,
SINCE FAILURE TO COMPLY WITH THE PROCEDURES SET FORTH HEREIN OR THEREIN WILL
RESULT IN THE LOSS OF DISSENTERS' RIGHTS.
Sections 302A.471 and 302A.473 of the Minnesota Law provide for rights of
shareholders to dissent and obtain payment of the "fair value" of their shares,
as defined in the statute, in the event of a merger. The procedures for
asserting dissenters' rights are set forth in such sections, the full texts of
which are reprinted as Appendix D to this Prospectus/Joint Proxy Statement. All
references in Sections 302A.471 and 302A.473 and in this summary to a
"shareholder" are to the record holder of the shares of DCD Common Stock as to
which rights are asserted. A person having beneficial ownership of shares of DCD
Common Stock that are held of record in the name of another person, such as a
broker, nominee, trustee or custodian, must act promptly to cause the record
holder to follow the steps summarized below properly and in a timely manner in
order to perfect whatever dissenters' rights the beneficial owner may have.
SHAREHOLDERS WHO WISH TO ASSERT THEIR DISSENTERS' RIGHTS MUST FULLY COMPLY WITH
THE STATUTORY REQUIREMENTS IN ORDER TO PRESERVE THE RIGHT TO OBTAIN PAYMENT FOR
THEIR SHARES.
Any shareholder who wishes to dissent and obtain payment for his or her
shares (i) must file with DCD, before the taking of the shareholder vote on the
Merger and the Merger Agreement at the Special Meeting, a written notice stating
the shareholder's intention to demand payment of the fair value of his or her
shares if the Merger is effectuated, and (ii) must not vote his or her shares
for adoption of the Merger and the Merger Agreement. Such notice must be filed
at DCD's executive offices, 600 Highway 169, 2000 Interchange Tower,
Minneapolis, Minnesota 55426, and should specify the shareholder's name and
mailing address, the number of shares of DCD Common Stock owned and that the
shareholder intends to demand the value of his or her shares. Voting against,
abstaining from voting or failing to vote on the Merger will not constitute a
demand for
43
<PAGE> 54
appraisal or the required written notice described in (i) above. A shareholder
must satisfy requirement (ii) above by voting against approval of the Plan of
Merger in person at the Special Meeting or by proxy. In addition, a shareholder
may satisfy requirement (ii) above by abstaining from voting his or her shares.
The shareholders can so abstain by not voting in favor of approval of the Merger
and the Merger Agreement at the Special Meeting. A shareholder's failure to vote
against the Merger will not constitute a waiver of dissenters' rights.
After approval of the Merger and the Merger Agreement by the shareholders
at the Special Meeting, DCD will send a written notice to each shareholder who
filed a written demand for dissenters' rights. The notice will contain the
address to which the shareholder shall send a demand for payment and the stock
certificates in order to obtain payment and the date by which they must be
received, a form to be used in connection therewith and other related
information.
In order to receive fair value for his or her shares, a dissenting
shareholders must, within 30 days after the date such notice was given, send his
or her stock certificates, and all other information specified in the notice
from DCD, to the address specified in such notice. A dissenting shareholder will
retain all rights as a shareholder until the Effective Time. After a valid
demand for payment, the related stock certificates and other information are
received, or after the Effective Time, whichever is later, DCD will remit to
each dissenting shareholder who has complied with the statutory requirements the
amount DCD estimates to be the fair value of such shareholder's Common Stock,
with interest commencing five days after the Effective Date at a rate prescribed
by statute. Such remittance will be accompanied by DCD's closing balance sheet
and statement of income for a fiscal year ending not more than 16 months before
the Effective Date, together with the latest available interim financial data,
an estimate of the fair value of the shareholder's shares and a brief
description of the method used to reach the estimate, a brief description of the
procedure to be followed demanding supplemental payment, and copies of Sections
302A.471 and 302A.473.
If the dissenting shareholder believes that the amount remitted by DCD is
less than the fair value of such holder's shares, plus interest, the shareholder
may give written notice to DCD of such holder's own estimate of the fair value
of the shares, plus interest, within 30 days after the mailing date of the
remittance and demand payment of the difference. Such notice must be given at
the DCD's executive offices at the address set forth above. A shareholder who
fails to give such written notice within the time period is entitled only to the
amount remitted by DCD.
Within 60 days after receipt of a demand for supplemental payment, DCD must
either pay the shareholder the amount demanded or agreed to by such shareholder
after discussion with DCD or petition a court for the determination of the fair
value of the shares, plus interest. The petition shall name as parties all
shareholders who have demanded supplemental payment and have not reached an
agreement with DCD. The court, after determining that the shareholder or
shareholders in question have complied with all statutory requirements, may use
any valuation method or combination of methods it deems appropriate to use,
whether or not used by DCD or the dissenting shareholder, and may appoint
appraisers to recommend the amount of the fair value of the shares. The court's
determination will be binding on all shareholders of DCD who properly exercised
dissenters' rights and did not agree with DCD as to the fair value of the
shares. Dissenting shareholders are entitled to judgment for the amount by which
the court-determined fair value per share, plus interest, exceeds the amount per
share, plus interest, remitted to the shareholders by DCD. The shareholders
shall not be liable to DCD for any amounts paid by DCD which exceed the fair
value of the shares as determined by the court, plus interest. The costs and
expenses of such a proceeding, including the expenses and compensation of any
appraisers, will be determined by the court and assessed against DCD, except
that the court may, in its discretion, assess part or all of those costs and
expenses against any shareholder whose action in demanding supplemental payment
is found to be arbitrary, vexatious or not in good faith. The court may award
fees and expenses to an attorney for the dissenting shareholders out of the
amount, if any, awarded to such shareholders. Fees and expenses of experts or
attorneys may also be assessed against any person who acted arbitrarily,
vexatiously or not in good faith in bringing the proceeding.
DCD may withhold the remittance of the estimated fair value, plus interest,
for any shares owned by any person who was not a shareholder or who is
dissenting on behalf of a person who was not a beneficial owner on
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<PAGE> 55
July 22, 1996, the date on which the proposed Merger was first announced to the
public (the "Public Announcement Date"). DCD will forward to any such dissenting
shareholder who has complied with all requirements in exercising dissenters'
rights the notice and all other materials sent after shareholder approval of the
Merger and the Merger Agreement to all shareholders who have properly exercised
dissenters' rights, together with a statement of the reason for withholding the
remittance and an offer to pay the dissenting shareholder the amount listed in
the materials if the shareholder agrees to accept that amount in full
satisfaction. The shareholder may decline this offer and demand payment by
following the same procedure as that described for demand of supplemental
payment by shareholders who owned their shares as of the Public Announcement
Date. Any shareholder who did not own shares on the Public Announcement Date and
who fails properly to demand payment will be entitled only to the amount offered
by DCD. Upon proper demand by any such shareholder, rules and procedures
applicable in connection with receipt by DCD of the demand for supplemental
payment given by a dissenting shareholder who owned shares on the Public
Announcement Date will also apply to any shareholder properly giving a demand
but who did not own shares of record or beneficially on the Public Announcement
Date, except that any such shareholder is not entitled to receive any remittance
from DCD until the fair value of the shares, plus interest, has been determined
pursuant to such rules and procedures.
Shareholders considering exercising dissenters' rights should bear in mind
that the fair value of their shares determined under Sections 302A.471 and
302A.473 could be more than, the same as or, in certain circumstances, less than
the consideration they would receive pursuant to the Merger Agreement if they do
not seek appraisal of their shares, and that the opinion of any investment
banking firm as to fairness, from a financial point of view, is not an opinion
as to fair value under such Sections.
IT IS A CONDITION TO DATAWORKS' AND DCD'S OBLIGATIONS TO CONSUMMATE THE
MERGER THAT THE HOLDERS OF NOT MORE THAN 2% OF THE OUTSTANDING SHARES OF DCD
COMMON STOCK EXERCISE DISSENTERS' RIGHTS.
MERGER EXPENSES AND FEES AND OTHER COSTS
Except as described below, whether or not the Merger is consummated, each
party will bear its own costs and expenses in connection with the Merger
Agreement and the transactions provided for therein, other than as set forth in
the Escrow Agreement. See "-- Merger Agreement -- Escrow Agreement and Related
Agreements; Interests of Certain Persons in the Merger."
DataWorks has agreed to pay to Furman Selz an aggregate of 1.75% of the
Merger transaction value up to $20 million and 0.75% of the Merger transaction
value over $20 million in connection with, among other services, rendering its
fairness opinion and to reimburse Furman Selz for reasonable out-of-pocket
expenses incurred by Furman Selz in rendering services to DataWorks in
connection with the Merger. DataWorks has also agreed to indemnify Furman Selz
against certain claims and liabilities, including certain claims arising under
the federal securities laws.
DCD has agreed to pay Wessels an aggregate of 2% of the Merger transaction
value and to reimburse Wessels for reasonable out-of-pocket expenses incurred by
Wessels for the independent financial advisory services provided to DCD in
connection with the Merger. DCD has also agreed to indemnify Wessels against
certain claims and liabilities relating to or arising out of the Merger.
DataWorks estimates that it will incur direct transaction costs of
approximately $2.3 million, net of taxes associated with the Merger. These
nonrecurring transaction costs will be charged to operations upon consummation
of the Merger. See "Unaudited Pro Forma Combined Condensed Financial
Information" and "Risk Factors -- Integration of Operations."
AFFILIATES' RESTRICTIONS ON SALE OF DATAWORKS COMMON STOCK
The shares of DataWorks Common Stock to be issued pursuant to the Merger
and the Merger Agreement will have been registered under the Securities Act
pursuant to the Registration Statement, thereby allowing such shares to be
traded without restriction by all former holders of DCD Common Stock who
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<PAGE> 56
(i) are not deemed to be affiliates of DCD at the time of the DCD Meeting (as
"affiliates" is defined for purposes of Rule 145) and (ii) who do not become
affiliates of DataWorks after the Merger. The Designated Shareholders and Robert
W. Brandel are deemed to be affiliates of DCD at the time of the DCD Meeting.
Robert W. Brandel is the only DCD shareholder who will become an executive
officer and an affiliate of DataWorks after the Merger. See "DCD Management."
The affiliates of DCD will to enter into agreements not to make public
sales of any DataWorks Common Stock received upon conversion of DCD Common Stock
in the Merger prior to the date DataWorks shall have publicly released financial
results for a period that includes at least 30 days of combined operations of
DCD and DataWorks (unless otherwise permitted by certain de minimis exceptions
relating to pooling-of-interests transactions), and thereafter not to make any
sale of DataWorks Common Stock received upon conversion of DCD Common Stock in
the Merger, except in compliance with Rule 145 or under certain other limited
circumstances. See "Related Agreements; Interests of Certain Persons in the
Merger -- Affiliate Agreements." In general, Rule 145, as currently in effect,
imposes restrictions on the manner in which such affiliates may make resales of
DataWorks Common Stock and also on the number of shares of DataWorks Common
Stock that such affiliates and others (including persons with whom the
affiliates act in concert) may sell within any three-month period. Rule 145 will
not generally preclude sales by affiliates. These Rule 145 restrictions will
generally apply for a period of at least two years after the Effective Date (or
longer if the person remains or becomes an affiliate of DataWorks).
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<PAGE> 57
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
The following unaudited pro forma combined condensed financial statements
give effect to the Merger of DataWorks and DCD accounted for using the
pooling-of-interests method of accounting. These pro forma financial statements
are presented for illustrative purposes only and therefore are not necessarily
indicative of the operating results or financial position that might have been
achieved had the Merger occurred as of an earlier date, nor are they necessarily
indicative of operating results or financial position which may occur in the
future.
A pro forma combined condensed balance sheet is provided as of June 30,
1996, giving effect to the Merger as though it had been consummated on that
date. Pro forma combined condensed statements of operations are provided for the
six-month periods ended June 30, 1995 and 1996 and the years ended December 31,
1993, 1994 and 1995, giving effect to the Merger as though it had occurred at
the beginning of the earliest period presented.
The pro forma combined condensed statements of operations for each of the
three years in the period ended December 31, 1995 are derived from the audited
historical consolidated financial statements of DataWorks and audited historical
financial statements of DCD and should be read in conjunction with DataWorks'
audited historical consolidated financial statements, "DataWorks Management's
Discussion and Analysis of Financial Condition and Results of Operations," DCD's
audited historical financial statements and "DCD Management's Discussion and
Analysis of Financial Condition and Results of Operations," included elsewhere
in this Prospectus/Joint Proxy Statement. The pro forma combined condensed
financial statements as of and for the six-month periods ended June 30, 1995 and
1996 have been prepared on the same basis as the historical information derived
from the audited financial statements. In the opinion of DataWorks' and DCD's
management, the unaudited financial statements of DataWorks and DCD referred to
above include all adjustments, consisting only of normal recurring accruals,
necessary for a fair presentation of the financial position and results for such
periods.
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<PAGE> 58
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEETS
JUNE 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
DATAWORKS DCD ADJUSTMENTS COMBINED
--------- ------ ----------- ---------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents......................... $ 8,253 $2,058 $10,311
Accounts receivable, net.......................... 13,299 2,965 16,264
Deferred income taxes............................. 1,516 495 2,011
Other current assets.............................. 2,646 215 2,861
------- ------ -------
Total current assets...................... 25,714 5,733 31,447
Equipment, furniture and fixtures, net.............. 2,105 760 2,865
Receivable from officer............................. 155 -- 155
Acquired and developed software costs, net.......... 3,371 -- 3,371
Intangible assets, net.............................. 4,211 50 4,261
Other assets........................................ 122 -- 122
------- ------ -------
Total assets.............................. $35,678 $6,543 $42,221
======= ====== =======
Current liabilities:
Accounts payable.................................. $ 3,356 $ 137 $ 3,493
Accrued compensation.............................. 1,584 -- 1,584
Other accrued liabilities......................... 2,606 655 $ 2,500(2) 5,761
Customer deposits................................. -- 133 133
Deferred revenue.................................. 3,070 2,880 5,950
------- ------ ----- -------
Total current liabilities................. 10,616 3,805 2,500 16,921
Deferred rent....................................... 126 -- 126
Deferred income taxes............................... 1,886 -- 1,886
Commitments
Shareholders' equity:
Common stock...................................... 26,344 1 26,345
Retained earnings (accumulated deficit)........... (3,294) 2,737 (2,500)(2) (3,057)
------- ------ ----- -------
Total shareholders' equity................ 23,050 2,738 (2,500) 23,288
------- ------ ----- -------
Total liabilities and shareholders'
equity.................................. $35,678 $6,543 $ -- $42,221
======= ====== ===== =======
</TABLE>
See Notes to Unaudited Pro Forma Combined Condensed Balance Sheets.
48
<PAGE> 59
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------- -----------------
1993 1994(1) 1995(1) 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenues:
Software licenses.............................. $ 7,654 $12,470 $23,678 $ 9,690 $16,281
Hardware....................................... 3,685 3,453 6,497 2,531 2,601
Maintenance and other services................. 4,183 7,158 12,836 5,438 8,584
------- ------- ------- ------- -------
Total revenues......................... 15,522 23,081 43,011 17,659 27,466
Cost of revenues:
Software licenses.............................. 810 1,615 2,570 1,031 1,604
Hardware....................................... 2,196 2,713 5,109 1,984 1,944
Maintenance and other services................. 3,487 4,511 8,092 3,523 6,234
------- ------- ------- ------- -------
Total cost of revenues................. 6,493 8,839 15,771 6,538 9,782
------- ------- ------- ------- -------
Gross profit..................................... 9,029 14,242 27,240 11,121 17,684
------- ------- ------- ------- -------
Operating expenses:
Sales and marketing............................ 3,799 7,362 12,010 5,209 7,882
Research and development....................... 1,230 2,521 3,017 1,421 2,045
General and administrative..................... 2,394 3,244 5,276 2,504 3,724
ESOP contribution(2)........................... 387 429 446 223 --
------- ------- ------- ------- -------
Income from operations........................... 1,219 686 6,491 1,764 4,033
Interest income (expense), net................... (500) (1,141) (1,337) (909) 250
------- ------- ------- ------- -------
Income (loss) before income taxes................ 719 (455) 5,154 855 4,283
Credit (provision) for income taxes.............. -- 264 (1,780) (288) (1,726)
------- ------- ------- ------- -------
Income (loss) before extraordinary item.......... $ 719 $ (191) $ 3,374 $ 567 $ 2,557
======= ======= ======= ======= =======
Earnings per share data:
Income (loss) before extraordinary item........ $ .19 $ (.05) $ .61 $ .12 $ .31
======= ======= ======= ======= =======
Weighted average common and common equivalent
shares outstanding............................. 3,867 4,046 5,554 4,779 8,157
======= ======= ======= ======= =======
</TABLE>
- ---------------
(1) In 1994 and 1995, DataWorks incurred an extraordinary loss resulting from
the early repayment of certain debt obligations.
(2) In 1992, DCD established an employee stock option plan (the "DCD ESOP"). See
Note 4 to the DCD Financial Statements for an explanation of the DCD ESOP.
The DCD ESOP liability was repaid during 1995 and future contributions will
not be required.
49
<PAGE> 60
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
1. The unaudited pro forma combined condensed financial statements of
DataWorks and DCD give retroactive effect to the Merger using the
pooling-of-interests method of accounting, and, as a result, the unaudited pro
forma combined condensed balance sheets and statements of operations are
presented as if the combining companies had been combined for all periods
presented. The unaudited pro forma combined condensed financial statements will
become the historical financial statements of DataWorks upon issuance of
financial statements for a period that includes the Merger date. The unaudited
pro forma combined condensed financial statements reflect the issuance of
1,800,000 fully paid and nonassessable shares of DataWorks Common Stock for each
share of DCD Common Stock to effect the Merger. The unaudited pro forma combined
condensed financial statements, including the notes thereto, should be read in
conjunction with the historical financial statements of DataWorks and DCD
included in this Prospectus/Joint Proxy Statement.
2. The unaudited pro forma combined condensed balance sheets combined
DataWorks' June 30, 1996 unaudited consolidated balance sheet with DCD's June
30, 1996 unaudited balance sheet. The adjustments relate to the estimated costs
of the transaction and integration of the businesses and are estimated to be
approximately $2.5 million, net of estimated tax benefit of approximately
$500,000.
3. The unaudited pro forma statements of operations combine DataWorks'
historical results for each of the three years in the period ended December 31,
1995 and the unaudited six months ended June 30, 1996 with the DCD historical
results for each of the three years in the period ended December 31, 1995 and
the unaudited six months ended June 30, 1996, respectively.
4. The unaudited pro forma data are presented for informational purposes
only and do not give effect to any synergies that may occur due to the combining
of DataWorks' and DCD's existing operations. DataWorks expects to incur charges
currently estimated to be approximately $2.5 million, net of taxes, to reflect
costs associated with combining the operations of the two companies and
transaction fees and costs incident to the Merger. This charge is reflected in
the unaudited pro forma combined condensed balance sheet but is not included in
the unaudited pro forma combined condensed statement of operations.
5. The accounting policies of the separate companies are currently being
studied from a conformity perspective. The impact of conforming accounting
policies, if any, is not presently estimable.
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DATAWORKS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements that involve
risks and uncertainties. DataWorks' and the combined entity's actual results
could differ materially from those discussed here. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in the sections entitled "Risk Factors" and "DataWorks Business," as well as
those discussed elsewhere in this Prospectus/Joint Proxy Statement.
OVERVIEW
DataWorks was incorporated in 1986 to develop, market, implement and
support open systems, client/server based ERP software for mid-sized discrete
manufacturing companies. In late 1988, DataWorks entered into a strategic
marketing alliance with NCR Corporation ("NCR") to supply NCR's national
manufacturing sales team with new application software to replace its own
proprietary 3GL-based products. In connection with the alliance, DataWorks
initiated an aggressive national expansion to support the NCR relationship.
Pursuant to the alliance, NCR was to supply the direct sales force while
DataWorks focused on technical support and system implementation services. Due
to major changes in NCR's business model in the 1989 to 1990 period, leading
ultimately to the sale of NCR to AT&T Corporation in 1991, DataWorks' alliance
with NCR was terminated, although significant revenues were achieved in 1990.
During 1991 and 1992, subsequent to the termination of the alliance, DataWorks
experienced depressed earnings resulting from high costs incurred in rebuilding
DataWorks' independent marketing and sales infrastructure and service
organization. Profitability was further reduced by considerable emphasis on
customer development in connection with DataWorks' transition from NCR-dominant
platforms to a client/server open systems environment operating on a wide
variety of UNIX platforms.
In May 1994, DataWorks acquired Madic-Compufact Corporation ("MCC")
principally for cash in a purchase transaction. DataWorks believes that its
acquisition of MCC allowed it to achieve several important strategic objectives,
including the addition of a complementary product to better serve the
make-to-order market and a significant expansion of DataWorks' customer and
revenue base. Because the acquisition of MCC was accounted for as a purchase,
the financial results of MCC prior to June 1994 are not included in DataWorks'
financial results. The MCC acquisition had a significant effect on DataWorks'
financial results in the second half of 1994 and in 1995.
To date, substantially all of DataWorks' revenues have been derived from
domestic operations. Internationally, DataWorks established a wholly-owned
subsidiary in the United Kingdom in 1994 to serve its European operations.
DataWorks has recently begun to expand its international presence through
distributor agreements.
DataWorks expects that the factors affecting its growth will include
expansion in the range and capabilities of its ERP software products, continued
focus on licensing products to new customers and licensing additional sites and
modules to existing customers, extended availability of sales and services
through the expansion of regional centers and investment in infrastructure to
support anticipated growth in sales and service requirements.
The following discussion should be read in conjunction with the
consolidated financial statements included elsewhere within this
Prospectus/Joint Proxy Statement. Fluctuations in quarterly and annual results
may occur as a result of factors affecting demand for DataWorks' product such as
the timing of DataWorks' and competitors' new product introductions and product
enhancements. Due to such fluctuations, historical results and percentage
relationships are not necessarily indicative of the operating results for any
future period. The forward-looking comments contained in the following
discussion involve risks and uncertainties. DataWorks' actual results may differ
materially from those discussed here. Factors that could cause or contribute to
such differences can be found in the following discussion and elsewhere
throughout this Prospectus/Joint Proxy Statement.
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RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
of total revenues represented by certain consolidated statement of operations
data:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER SIX MONTHS ENDED
31, JUNE 30,
---------------------- ----------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA
Revenues:
Software licenses............................... 42% 49% 51% 51% 56%
Hardware........................................ 34 21 20 19 13
Maintenance and other services.................. 24 30 29 30 31
--- --- --- --- ---
Total revenues.......................... 100 100 100 100 100
--- --- --- --- ---
Cost of revenues:
Software licenses............................ 2 6 5 4 5
Hardware..................................... 20 16 16 15 10
Maintenance and other services............... 22 20 20 21 24
--- --- --- --- ---
Total cost of revenues.................. 44 42 41 40 39
--- --- --- --- ---
Gross profit...................................... 56 58 59 60 61
Operating expenses:
Sales and marketing.......................... 23 33 26 28 28
Research and development..................... 8 12 8 9 9
General and administrative................... 15 13 12 14 12
--- --- --- --- ---
Total operating expenses................ 46 58 46 51 49
--- --- --- --- ---
Income from operations............................ 10 -- 13 9 12
Interest income (expense), net.................... (4) (6) (5) (7) 1
--- --- --- --- ---
Income (loss) before income taxes and
extraordinary item.............................. 6 (6) 8 2 13
Credit (provision) for income taxes............... -- 2 (3) (1) (5)
Extraordinary item, net of income taxes........... -- (1) (3) -- --
--- --- --- --- ---
Net income (loss)................................. 6% (5)% 2% 1% 8%
=== === === === ===
</TABLE>
TOTAL REVENUES
DataWorks' principal sources of revenue consist of software license fees
and related services, including software maintenance, consulting and custom
programming. In addition, DataWorks resells third party hardware and operating
systems software to provide turnkey systems solutions.
Total revenues increased 53% from 1993 to 1994 and 88% from 1994 to 1995.
These increases were due primarily to significant growth in software license
fees and related service fees resulting from the expansion of DataWorks'
customer base and the inclusion of revenues from MCC. Total revenues for the six
months ended June 30, 1996 increased 53% to $20.2 million from $13.2 million for
the same period in 1995. The increase in revenue was primarily due to growth in
software license revenues and maintenance and other service revenues over the
same period in 1995.
Software License Revenues
Revenues from DataWorks' noncancellable software licenses are recognized
upon delivery of the products, provided that no significant vendor obligations
remain and collection of the related receivable is deemed probable.
Software license revenues increased 76% from 1993 to 1994 and 96% from 1994
to 1995. The increase in software license revenues in 1994 resulted primarily
from the acquisition of MCC, expansion of DataWorks' product offerings,
including the addition of new software application modules, the extension of
existing
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modules, and the impact of an expanded sales force working through newly
established regional centers located in various important markets throughout the
United States. The increase in software license revenues in 1995 resulted from
the acquisition of MCC, the introduction in the fall of 1994 of DataWorks' major
account marketing program, placing strategic focus on DataWorks' larger
accounts, the continued effects of regionalization and expansion of the sales
force and marketing efforts of DataWorks. Growth in software license revenues in
1994 and 1995 also reflected an increase in the software component of total
sales per customer and increased sales to DataWorks' existing customer base, as
well as sales to new accounts.
Software license revenues increased 68% during the six months ended June
30, 1996 over the same period in 1995. This growth is attributable to increased
marketing efforts, expansion of the sales force and increased capacity created
by the growth in DataWorks' service organization. DataWorks expects that
revenues attributable to its existing customer base will continue to increase as
these customers expand their operations, although there can be no assurance of
any such increase.
Cost of Software License Revenues
The cost of software license revenues consists primarily of the cost of
software products sold with DataWorks' systems that are provided by third party
suppliers, as well as any royalty payments. Although these costs have not been
significant in 1993, 1994 and 1995, the costs related to software license
revenues increased 59% for the six months ended June 30, 1996 as compared to the
same period in 1995 representing approximately 4% and 5%, respectively, of total
revenues. This increase is directly related to the increase in software license
revenues, and third party software costs will continue to increase to the extent
that DataWorks integrates third party software in its base systems.
Hardware Revenues
Hardware revenues include computers (primarily servers), peripherals and
related network and communications products purchased from third party vendors
and sold through DataWorks to its customers for inclusion in DataWorks' turnkey
systems.
Hardware revenues decreased 6% from 1993 to 1994. The decrease in hardware
revenues in 1994 reflects unusually high hardware revenues recorded in 1993, as
well as the election by a larger percentage of new customers to purchase
hardware directly from third party vendors. Hardware revenues in 1994, however,
remained significant and reflect the inclusion of hardware sales to MCC's
customer base. Hardware revenues in 1995 increased 88% from 1994, due, in part,
to the acquisition of MCC as well as the overall increase in sales transactions.
For the six months ended June 30, 1996 hardware revenues as a percentage of
total revenue declined 6% as compared to the same period in 1995 reflecting an
increasing tendency for new customers who purchase smaller systems to purchase
hardware directly from third party vendors. Due to intense competition in the
computer hardware market and an increasing tendency for customers, particularly
new accounts, to elect to purchase hardware directly from third party vendors,
DataWorks has experienced declining hardware revenues as a percentage of new
account systems. Recently, gross profit from hardware sales has not been a
significant part of DataWorks' total gross profit, and DataWorks believes this
trend will continue.
Cost of Hardware Revenues
The cost of hardware revenues consists primarily of the cost of the
computers (primarily servers), peripherals and related network and
communications products purchased from third party vendors and sold as part of
DataWorks' turnkey systems. DataWorks attempts to maintain a 20% gross profit on
hardware sales. The 40% gross profit on hardware sales in 1993 was atypical and
was attributable to a single large, high margin transaction.
Service Revenues
Service revenues include fees primarily from software maintenance,
consulting and custom programming services. Software maintenance revenues are
generally prepaid and recognized ratably over the period of the
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maintenance agreement. Consulting and custom programming revenues are generally
paid and recognized as the services are performed.
Service revenues increased 97% from 1993 to 1994 and 75% from 1994 to 1995.
Software maintenance, consulting and custom programming revenues increased in
1994 and 1995 as a result of the significant number of new accounts and growth
within DataWorks' existing account base, including the addition of MCC
customers. Service revenues increased 60% during the six months ended June 30,
1996 over the same period in 1995. This growth is attributable to increased
marketing efforts, expansion of the sales force and increased capacity created
by the growth in DataWorks' service organization.
Cost of Service Revenues
DataWorks provides its software maintenance, consulting and custom
programming service through a professional in-house staff. The cost of these
services is primarily based on salary and a portion of DataWorks' overhead cost.
The cost of service revenues increased by 46% from 1993 to 1994 and 86% from
1994 to 1995. The cost increase from 1993 to 1994 and from 1994 to 1995
primarily reflected the increased costs associated with the acquisition of the
MCC service staff in June 1994, the initial staffing increases to support the
establishment of regional training centers in Chicago and Boston and a general
increase in salaries to remain competitive within the industry. The increase in
gross profit in 1994 over 1993 is primarily attributable to the addition of the
MCC service business, which had higher overall margins. Both revenues and costs
of services increased in 1995, with gross profit as a percentage of service
revenues decreasing primarily due to the delay between the time of incurring the
cost associated with hiring a significant number of new service personnel and
the generation of revenue from services provided by such personnel. The cost of
maintenance and other service revenues increased by 79% for the six months ended
June 30, 1996 as compared to the same period in 1995. This increase is due to
the expansion of DataWorks' professional service resources required to support
the current and expected growth in new customer accounts.
Sales and Marketing Expenses
Sales and marketing expenses increased 119% from 1993 to 1994 and 50% from
1994 to 1995. The 1994 increase reflected the expansion of DataWorks' sales and
marketing staff in the regional sales offices opened by DataWorks and the
acquisition of MCC. The increase in sales and marketing expenses in 1995
reflected the same factors that contributed to the increase in 1994, as well as
the expansion of user group programs and increased sales activity in this
period. As a percentage of total revenues, sales and marketing expenses
decreased to 26% in 1995 from 33% in 1994, due primarily to the increased rate
of growth of total revenues. This decrease also reflected the delay between the
expenses incurred by DataWorks in hiring additional sales and marketing
personnel in 1994 and the realization of revenues generated by such personnel in
1995. Sales and marketing expenses increased 54% to $5.6 million for the six
months ended June 30, 1996 from $3.6 million for the same period in 1995
representing 28% of total revenues for each of the respective periods. The
increase in sales and marketing expenses was attributable to DataWorks'
expansion of its direct sales force, increased marketing efforts and commissions
and other expenses related directly to the increased sales force. DataWorks
expects that sales and marketing expenses will continue to increase in absolute
dollars in 1996 as DataWorks continues to expand its sales and marketing
programs.
Research and Development Expenses
Research and development expenses are comprised primarily of salary and a
portion of DataWorks' overhead for DataWorks' in-house staff and amounts paid to
outside consultants hired by DataWorks, as appropriate, to supplement the
product development efforts of the in-house staff. DataWorks believes that a
significant investment to develop new and enhanced products is necessary to
achieve and maintain a market leadership position in its targeted markets.
Research and development expenses are charged to operations as incurred. Certain
software production costs related to DataWorks' new ECS product, however, are
capitalized as required by Statement of Financial Accounting Standards No. 86,
"Accounting for Software Cost." Amortization of these costs will begin when the
product is available for general release, which is expected in 1997. DataWorks
does not currently capitalize developed software costs for any product other
than ECS.
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Gross research and development expenditures, including capitalized amounts,
increased 178% from 1993 to 1994. The most significant factor in the increase in
1994 was the expansion of research and development efforts with respect to
DataFlo(primarily on new modules) and Man-Fact II. In addition, the creation of
the development group for ECS occurred in early 1994. DataWorks began
capitalizing production costs in June 1994, once technological feasibility of
the ECS product had been established. The 55% increase in gross expenditures in
1995 from 1994 resulted primarily from the inclusion of MCC expenditures in 1995
that are not included in the first five months of 1994. Gross research and
development expenditures increased 68% to $3.0 million for the six months ended
June 30, 1996 from $1.8 million for the same period in 1995, representing
approximately 14% and 15%, respectively, of total revenues. This increase in
expenditures reflects DataWorks' belief that investments in research and
development are necessary to maintain a market leadership position in its
targeted markets, and therefore DataWorks continues to increase its expenditures
on research and development primarily through the employment of additional
development personnel. For the foreseeable future, DataWorks anticipates
continued increased expenditures on research and development for both the
enhancement of current products and the addition of new products.
General and Administrative Expenses
General and administrative expenses increased 31% from 1993 to 1994 and 74%
from 1994 to 1995. The 1994 and 1995 increases were due primarily to the
expansion of DataWorks' administrative staff arising from the increase in
business following the MCC acquisition and the amortization of certain
intangibles in connection with the MCC acquisition. General and administrative
expenses increased 36% to $2.5 million for the six months ended June 30, 1996
from $1.9 million for the same period in 1995, representing 12% and 14% of total
revenues for the six months ended June 30, 1996 and 1995, respectively. The
increase in expense is primarily due to the increase in administrative staff
necessary to manage the growth of DataWorks.
Interest Income and Expense
Interest expense relates primarily to long-term debt and the amortization
of debt issue cost with respect to prior financings. Interest expense increased
162% from $416,000 to $1,088,000 in 1994 and 25% to $1,360,000 in 1995. The
increases in 1994 and 1995 are due primarily to debt financing obtained in
connection with the MCC acquisition. DataWorks repaid in full all outstanding
debt incurred in connection with prior financings from the proceeds of
DataWorks' Series A Preferred Stock financing and initial public offering. With
the prepayment of such indebtedness, DataWorks recognized an extraordinary
expense of approximately $1,017,000, net of income tax benefit, arising from the
write-off of the unamortized debt issue cost, debt discount and other related
fees. See Note 4 to Notes to Consolidated Financial Statements. DataWorks
reported net interest income of approximately $179,000 for the six months ended
June 30, 1996, as compared to net interest expense of approximately $914,000 for
the same period in 1995. The net interest income for the first six months of
1996 relates primarily to the income from the investment of DataWorks' excess
cash. The interest expense recorded for the same period in 1995 relates
primarily to long-term debt and the amortization of debt issue cost with respect
to prior financings, all of which were retired with a portion of the proceeds
from DataWorks' initial public offering in October 1995.
Income Taxes
DataWorks' effective tax rate was 35% and 39% for the years ended December
31, 1994 and December 31, 1995, respectively. DataWorks' effective tax rate for
the six months ended June 30, 1996 was 39% as compared to 42% for the same
period in 1995. The expected combined statutory federal and state rate is
approximately 40%. The difference between DataWorks' effective rate and the
combined statutory rates is due to benefits from certain tax credit
carryforwards. For 1993, DataWorks' effective tax rate was zero because of the
realization of tax loss carryforwards. See Note 5 to Notes to Consolidated
Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Prior to its initial public offering in October 1995, DataWorks had funded
its operations primarily through long-term debt, term loans and bank lines of
credit directly tied to DataWorks' available accounts receivable.
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In May 1994, DataWorks obtained $5,477,000 through the issuance of subordinated
debt and borrowed $2,000,000 under a term loan in connection with the
acquisition of MCC. In April 1995, DataWorks incurred an additional $1,250,000
of subordinated debt. DataWorks currently finances its operations primarily
through cash flow from operations and its current cash and short-term investment
balances.
In 1995, DataWorks' operating activities used net cash of approximately
$1,597,000, primarily due to the increase in accounts receivable from the
unusually low levels at December 31, 1994. DataWorks' accounts receivable
balances generally are the highest at the end of each quarter due to normal
sales cycle factors. This was not the case, however, at December 31, 1994 when
timing delays for third party hardware shipments deferred a series of
transactions into 1995. An additional $2,426,000 was used during 1995 to invest
in capital equipment and DataWorks' new ECS product.
In August 1995, DataWorks obtained $5,000,000 through the sale of Series A
Preferred Stock. In addition, $1,250,000 of subordinated debt was converted into
Series A Preferred Stock. In September 1995, DataWorks also secured a new
banking facility (up to a maximum of $6,000,000, secured by certain assets, at
the bank's prime rate) expiring in June 1997, to finance eligible receivables,
approximately $2,700,000 of which was used to retire the senior term loan from
the May 1994 debt financing and related obligations. As of June 30, 1996, there
were no borrowings outstanding under this facility.
In October 1995, DataWorks completed an initial public offering of
2,500,000 shares of Common Stock at $13.00 per share, of which 1,600,000 shares
were sold by DataWorks for net proceeds of approximately $18.0 million. The net
proceeds received by DataWorks were used to repay outstanding indebtedness in
the aggregate amount of $9,160,000. The remaining proceeds were used for general
corporate purposes and to increase working capital. DataWorks did not receive
any of the proceeds from the sale of shares by the selling security holders.
Due to the prepayment of the debt obligations from the proceeds of
DataWorks' sale of Series A Preferred Stock and initial public offering in 1995,
DataWorks recorded extraordinary charges of $1,017,000, net of taxes.
In connection with DataWorks' initial public offering in 1995, $1,000,000
and $300,000 of the subordinated notes were converted to exercise warrants to
purchase 235,671 and 70,701 shares of Common Stock, respectively. See Notes 4
and 8 of Notes to Consolidated Financial Statements.
Effective January 1996 DataWorks purchased certain assets of Arrowkey
Systems ("Arrowkey") for $450,000. In addition, DataWorks may be required to pay
Arrowkey up to $75,000 annually through 1998 if certain sales levels of Arrowkey
software products are achieved. Arrowkey software products provide shop floor
data collection systems, which are highly integrated with the current DataFlo
product.
For the six months ended June 30, 1996, operating activities required cash
of approximately $384,000 primarily to support increases in accounts receivable
resulting from the growth in software licensing activity. DataWorks' principal
uses of cash for investing activities were for capital equipment of
approximately $926,000, the funding of DataWorks' new ECS product of $1.1
million and the purchase of certain software products from Arrowkey Systems of
$450,000. The increase in capital equipment was primarily the result of the
increase in personnel.
As of June 30, 1996, DataWorks had cash and cash equivalents totaling
approximately $8.3 million.
DataWorks' principal commitments as of June 30, 1996 consisted primarily of
leases on facilities and equipment. There were no material commitments for
capital expenditures.
DataWorks' capital resources may be used to support working capital
requirements, product development, capital equipment requirements and possible
acquisitions of businesses, products or technologies complementary to DataWorks'
current business. DataWorks believes that the current cash reserves and cash
flow from operations are sufficient to fund its operations for at least the next
twelve months. In the event that acquisitions of businesses, products or
technologies complementary to DataWorks' current business requires significant
cash from these resources, DataWorks' credit facility would be utilized, if
necessary, to finance operations.
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DATAWORKS BUSINESS
The following discussion contains forward-looking statements that involve
risks and uncertainties. DataWorks' and the combined entity's actual results
could differ materially from those discussed here. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in the sections entitled "Risk Factors" and "DataWorks Management's Discussion
and Analysis of Financial Condition and Results of Operations," as well as those
discussed elsewhere in this Prospectus/Joint Proxy Statement.
DataWorks develops, markets, implements and supports open systems,
client/server-based Enterprise Resource Planning ("ERP") software for mid-sized
discrete manufacturing companies. DataWorks' products and services facilitate
enterprise-wide management of resources and information and allow these
manufacturers to reduce order fulfillment cycle times, improve operating
efficiencies and measure critical company performance against defined plan
objectives. DataWorks' products allow its customer to manage make-to-stock and
make-to-order production methods, as well as multiple hybrid or "mixed mode"
production methods, within a single manufacturing site or across multiple sites.
DataWorks' products also help its customers adapt to growth, changing levels of
operations and business process re-engineering ("BPR") that is becoming
commonplace among manufacturing concerns.
DataWorks' ERP application products, DataFlo and Man-Fact II, contain a
series of 34 and 32, respectively, integrated software application modules that
comprehensively support a manufacturer's business processes, including business
planning and engineering, sales, distribution and customer service, production
and material operations, and finance and administration. DataWorks offers a
powerful suite of development tools that help customers implement DataWorks' ERP
solutions rapidly with minimal disruption to their businesses. These tools
empower workers with workflow capabilities and assist them in incorporating
product enhancements periodically introduced by DataWorks. Preview is DataWorks'
fourth generation language ("4GL") development tool that provides a framework
for the creation of screens and reports with multi-level security. SmartLinks
provides a parameterized interface to link DataFlo and Man-Fact II with third
party applications. SmartTools is used by customers to convert data files from
legacy systems or third party applications to the appropriate DataWorks files
automatically.
DataWorks implements its systems and turnkey solutions by integrating its
software products with third party computer and network hardware, operating
system and database software and application software products. DataWorks also
offers a full complement of services to help its customers maximize the benefits
of DataWorks' software products, including initial system implementation,
consultation, customer support desk and maintenance activities, technical and
programming services, and annual enhancement releases of software products.
BACKGROUND
Manufacturers worldwide are attempting to re-engineer their businesses as
they react to increasing global competitive pressures, demanding vendor-customer
relationships and rapidly changing market requirements. In implementing these
re-engineering efforts, domestic manufacturing companies in the mid-range sector
are increasingly orienting their operations to respond to customer needs by
shortening product development and delivery cycles, enhancing product quality
and providing products configured to meet customer requirements. To achieve
these objectives, manufacturers must increase the efficiency of their
operations, within the limits of budgetary constraints, by increasing the
productivity of personnel and the efficient management of assets throughout
their enterprises. Manufacturing companies also require the flexibility to
modify and expand operations in response to market demand. All of these factors
contribute to the need for information systems ("IS") that offer enterprise-wide
availability and integrated use of a broad range of accurate and current
information that enables manufacturers to respond more quickly to their
customers and to manage their organizations more efficiently. The IS needs of
manufacturers depend to some degree on the nature of their manufacturing
processes, which may include make-to-stock, in which parts are assembled into
finished products based on a standard bill order; make-to-order, in which parts
are assembled into a finished product based on customer specifications; and
configure-to-order, in which the final assembly of parts can be configured to
create many different models and styles based on customer orders. Firms using
configure-to-
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order production methods are referred to as mixed mode manufacturers because
they assemble products using elements of both make-to-stock and make-to-order.
Mixed mode manufacturing can create significant market advantages for companies
embracing this latest production process approach but is extremely difficult to
implement properly without responsive information systems.
Since the early 1970s, there has been a steady evolution of manufacturing
software systems available from third party developers or developed internally
by the manufacturers themselves. Initially, Material Requirements Planning
("MRP") systems were introduced to allow manufacturers to manage the flow of
materials at various stages of the manufacturing process. These MRP systems were
superseded in the 1980s by a broader, more expansive Manufacturing Resource
Planning ("MRP II") approach that incorporates labor and equipment planning for
the production process as part of a materials planning methodology. MRP II
systems are usually based on proprietary mainframe and minicomputer platforms
using third generation languages ("3GL") and hierarchical database facilities. A
large number of installed MRP II systems are highly customized to meet
particular customer needs, typically cannot support diverse manufacturing
processes and provide limited flexibility to integrate new technologies and
factory-wide information sources effectively. Furthermore, access to the
centrally located and controlled computers typically utilized in MRP II systems
is limited, and the information produced is generally not widely accessible
across the organization and is often not available on a timely basis.
More recently, in response to the evolving needs of manufacturing
companies, there has been a significant shift away from the traditional MRP II
planning-oriented systems in favor of more comprehensive ERP systems that
provide actual enterprise-wide management of resources, integration of more
sophisticated forecasting and reporting and the capability to measure the
quality levels and delivery cycle responsiveness. ERP systems based on open
systems, client/server platforms offer further advantages to manufacturers by
providing access to information throughout the manufacturing enterprise on a
timely basis, providing a wider distribution of applications and databases and
permitting the integration of a diverse array of new software components and
technologies as they become available. Well-designed ERP systems are also
scaleable to permit deployment of localized information systems resources within
departments and individual business units or across an enterprise, as well as to
provide adequate support for organizational growth.
Despite its virtues, open systems, client/server-oriented ERP computing has
not historically been readily available to manufacturers in the mid-range
sector. There are several key contributing factors that have traditionally
precluded mid-sized companies from reaping the full benefits of the new
technologies which have been made available to larger manufacturing firms in
recent years. In complex, diverse manufacturing environments, many ERP systems
require significant IS staff, either internal to the organization or contracted
at substantial expense from outside the company, and a high level of expertise
to establish the proper design and configuration of a client/server system that
meets a company's specific needs. Implementation of these systems has often been
lengthy and costly. In addition, large global ERP suppliers have continued to
price their products beyond the financial capabilities of the typical mid-sized
firm.
In order to achieve their business re-engineering objectives, mid-range
manufacturers need the benefits of open systems, client/server ERP solutions
that are affordable and can be quickly implemented, with minimal disruption to
business, and maintained with a limited IS staff. These ERP systems must also
provide sufficient depth of functionality and flexibility to enable
manufacturers to respond to varying customer needs and offer scalability for
growth in operations. The demand for a new generation of turnkey ERP solutions
that address the needs of the mid-range manufacturing market is significant and
growing.
DATAWORKS' SOLUTION
DataWorks offers open systems, client/server-based ERP software that
enables discrete manufacturing companies to re-engineer their businesses to
compete more effectively, while responding to the specific needs and limitations
of the mid-range market. DataWorks believes that mid-sized manufacturers in its
targeted
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industry segments represent a significantly higher growth sector than the
general manufacturing community at large. The principal elements of DataWorks'
ERP solutions are as follows:
- OPEN SYSTEMS AND ADVANCED RDBMS ARCHITECTURE
DataWorks' family of products addresses the dynamic environment faced by
mid-sized manufacturers through a commitment to open systems architecture.
DataWorks' software products operate on most major client/server hardware
platforms, as well as on the UNIX, SCO-UNIX, UnixWare, Microsoft Corporation
("Microsoft") NT and VMS operating systems, wide area networks ("WANs"), local
area networks ("LANs") and prominent user interfaces, including Microsoft
Windows, Apple Macintosh and ASCII. The company believes that the two advanced,
multi-dimensional RDBMS products it uses, UniData, Inc. ("UniData") and
uniVerse, are the ones best-suited for these mid-range manufacturers because
they provide the requisite database performance at a lower cost than existing
two-dimensional RDBMS products, such as those currently offered by Oracle
Corporation ("Oracle"), Sybase Corporation (" Sybase") and Informix Corporation
("Informix").
- BREADTH OF APPLICATIONS AND DEPTH OF FUNCTIONALITY
DataWorks' DataFlo and Man-Fact II systems consist of 34 and 32
applications modules, respectively. These modules provide and integrate
feature-rich applications in the areas of (i) Business Planning and Engineering,
(ii) Sales, Distribution and Customer Service, (iii) Production and Material
Operations and (iv) Finance and Administration. New application modules are
introduced periodically and are compatible with the current in-field software
release. In addition, DataWorks' development and implementation support tools
provide and interface to an increasing number of third party application
products that are seamlessly integrated into DataWorks' ERP products through its
proprietary application programming interface ("API") technology.
- RAPID DEPLOYMENT
To minimize the effects of business interruption and inconvenience from the
introduction of a new system and to accelerate the financial return on ERP
system investment, DataWorks has developed a highly responsive implementation
planning process supported by focused consulting and training services.
DataWorks' SmartTools product supports rapid ERP system deployment by
facilitating smooth and comprehensive data and procedure conversion from the
customer's prior disparate data sources. As a result of these programs,
DataWorks' primary application software can generally be implemented in a
six-month or shorter period.
- FLEXIBILITY/ADAPTABILITY/SECURITY
A critical element to achieving initial user acceptance of a new system and
facilitating rapid implementation is the ability to adapt DataWorks' standard
software to conform more closely to the particular needs of users. Preview,
DataWorks' highly user-oriented 4GL development tool product, permits ready
adoption of the system to meet initial needs during the implementation phase and
responds to a customer's unique system refinements and ongoing changes in
production and operational processes. Preview also accommodates the creation of
tailored workflow-oriented application processes and information needs for
individual users or work groups. Multi-level security provided by Preview is
controllable at the individual or group level and allows security down to the
data element or field level. Preview provides a standard look and feel to, and
is fully implemented across, all modules of application software offered by
DataWorks.
- SCALABILITY
Many of DataWorks' customers start with a small number of local concurrent
users and expand to many hundreds of concurrent users across LANs and WANs over
several years. In addition to allowing for potential sizable growth of users
without sacrificing performance, the scalability of DataWorks' systems also
allows
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mid-sized manufacturers to change levels of operations and expand application
functionality to accommodate growth.
- SUPERIOR PRICE/PERFORMANCE
DataWorks seeks to achieve superior price/performance by providing
comprehensive solutions within the budgetary needs of its mid-range
manufacturing customers. DataWorks' ERP system emphasizes standard application
modules that require minimum customization, advanced yet cost-effective RDBMS
and other technologies and DataWorks' own highly user-oriented 4GL development
environment. Furthermore, DataWorks has standardized the implementation process
and supported it with DataWorks' proprietary software tools, resulting in a
lower cost and more rapid initial deployment of its ERP products than its
competitors.
STRATEGY
DataWorks' mission is to be a leading provider of business information
solutions and related products and services to mid-range discrete manufacturers
within selected markets. To achieve this objective, DataWorks' strategy
incorporates the following elements:
- COMMITMENT TO OPEN SYSTEMS, CLIENT/SERVER TECHNOLOGIES
DataWorks designs its products using open systems, client/server
technologies that provide customers a wide choice of operating system
environments, including UNIX and Microsoft NT, and computer hardware platforms.
DataWorks evaluates the feasibility of integrating its software products with
new developments in such technologies as they gain acceptance in the
marketplace. DataWorks has also embarked on an aggressive path of providing,
through its API technology, seamless integration of a broad range of third party
applications that DataWorks believes provide tangible benefits to its customers.
- IMPLEMENTATION OF SOFTWARE THROUGH TURNKEY SOLUTIONS
DataWorks offers turnkey solutions to its customers' business information
requirements, thereby minimizing customers' dependence on their own internal
resources. DataWorks believes companies in the mid-range manufacturing sector
are increasingly requiring their software suppliers to assume turnkey
responsibility for hardware selection, network configuration, system
implementation and maintenance in light of the increased complexity and
diversity of these systems and internal pressures to reduce their overall IS
budgets.
- FOCUSED MARKET APPROACH
DataWorks targets manufacturing companies with annual revenues between $10
and $500 million and has historically focused its efforts on discrete, rather
than process, manufacturers. DataWorks has principally concentrated on six
primary manufacturing sectors: industrial equipment; computer/office equipment;
consumer electronics; instrumentation and controls; medical/dental products; and
aerospace products. This approach has enabled DataWorks to better understand the
needs of its customers and use that knowledge to tailor its products and
services to those needs. DataWorks plans to continue to rely on its experience
and reputation in these select markets to enhance its competitive position.
- COMMITMENT TO USER EMPOWERMENT
DataWorks develops its applications and development tools to maximize
ease-of-use by the ultimate end user. These applications and tools permit the
end user, under full security control, to customize the application to specific
needs while providing access to enterprise-wide resources. DataWorks' believes
that its user Empowerment strategy results in broader acceptance of the system
across the enterprise and faster system implementation, enabling DataWorks'
customers to reduce costs and increase productivity.
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- ACHIEVEMENT OF HIGH LEVELS OF CUSTOMER SATISFACTION
DataWorks is committed to continued achievement of consistently high levels
of customer satisfaction with DataWorks' ERP systems. To achieve this objective,
DataWorks focuses its efforts on delivering high quality products that address
specific application needs, are easy to implement and enable increased
productivity. DataWorks is also dedicated to recruiting, training and
maintaining high quality personnel to service and support its products.
- SUPPORT OF MIXED MODE MANUFACTURING
DataWorks' target customers are increasingly adopting mixed mode production
methods to address new market opportunities. DataWorks' family of products is
designed to facilitate the concurrent management of multiple hybrid or mixed
mode production methods within a single manufacturing site. Accordingly,
manufacturers that use DataWorks' ERP systems can assemble products using
elements of both make-to-stock and make-to-order processes. This strategy
enables DataWorks to address the software and hardware needs of a wide range of
individual manufacturers that differ depending on the nature of the product
manufactured and the degree to which the product is manufactured to customer
specifications.
MARKETS AND CUSTOMERS
DataWorks' principal target is primarily mid-sized discrete manufacturing
companies in the United States with annual revenues between $10 and $500
million. To date, DataWorks has focused its marketing, product and services
resources on six principal industries within its target market: industrial
equipment; computer/office equipment; consumer electronics; instrumentation and
controls; medical/dental products; and transportation/aerospace products.
According to an analysis by Gartner Group of U.S. Census and Dun & Bradstreet
data, in these targeted industries there are approximately 16,500 companies in
the United States and 37,000 companies worldwide with revenues above $10
million. Based on information gathered by DataWorks from selected customers, the
companies in the revenue range targeted by DataWorks generally have multiple
sites, averaging three sites per company. Advanced Manufacturing Research
estimates that worldwide ERP revenues grew by approximately 33% in 1994 to $2.8
billion, and were expected to increase by approximately 35% to $3.8 billion in
1995 and to $7 billion by 1997.
The business needs and resource requirements of mid-sized discrete
manufacturers tend to be considerably different than those of larger companies.
Because customers in this market generally have small IS departments, budget
constraints and limited experience with the advanced technologies inherent in
ERP systems, DataWorks has designed its product family to be affordable and to
incorporate a broad range of applications, depth of functionality, ease of use
and an ability to be deployed rapidly. The average price of DataWorks' ERP
systems (exclusive of hardware) sold to new customer sites in DataWorks' target
market increased to approximately $250,000 in 1995 from approximately $190,000
in 1994. As of June 30, 1996, DataWorks products were licensed to over 400
customers at over 600 customer sites.
PRODUCTS
DataWorks provides application software, consulting and education services
that integrate industry standard hardware, network communications, RDBMS and
certain third party applications. Preview, DataWorks' powerful 4GL development
environment, manages all aspects of database design, security, system
navigation, documentation and deployment. It allows the RDBMS and DataWorks'
application software to be tailored to the unique needs of users, while insuring
the integrity of the baseline application. Traditional screens and reports are
managed as templates and forms to provide flexible user views into the database.
The applications employ an integrated Windows-based graphical user interface
("GUI") which provides a consistent, familiar desktop interface and network
connectivity to a wide variety of third party products.
APPLICATION SOFTWARE
DataWorks has two principal application software products. DataFlo is
directed toward manufacturers generally making high-volume products that are
either make-to-stock or configure-to-order, and which may
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have some smaller make-to-order requirements. DataFlo also supports customers
who have mixed-mode manufacturing techniques. Man-Fact II is oriented toward
make-to-order or engineer-to-order manufacturers that typically have diverse
project management and project costing requirements, as well as a smaller
element of make-to-stock requirements.
The DataFlo and Man-Fact II systems are comprised of groups of modules that
comprehensively support a manufacturing company's business process. The
functional components of the principal application packages offered by DataWorks
include the following:
DATAWORKS APPLICATION MODULE GROUPS
<TABLE>
<CAPTION>
BUSINESS PLANNING SALES, DISTRIBUTION PRODUCTION AND FINANCE AND
AND ENGINEERING AND CUSTOMER MATERIAL OPERATIONS ADMINISTRATION
- ---------------------- ---------------------- ---------------------- ----------------------
<S> <C> <C> <C>
Capacity Customer Service Inventory Management Accounts Payable
Requirements Electronic Data Lot/Serial Control Accounts
Planning Interchange Multi-Plant Control Receivable
Engineering Estimating Production Activity Budgeting
Change Control Field Service Management Cost Accounting
Forecasting Quotations Project Management Currency and VAT
Master Production Sales Order Purchasing/Receiving Executive
Scheduling Shipping/Returned Quality Control Information
Material Material Repetitive System
Requirements Manufacturing Fixed Assets
Planning Shop Floor Data General Ledger
Product Collection Payroll
Configuration Work Order Control Personnel
Product Definition
</TABLE>
The modules of DataFlo and Man-Fact II provide and integrate feature-rich
applications, are built upon a common set of design and development standards
and tools, and share a common database architecture. Both DataFlo and Man-Fact
II products are highly modular in nature and can be scaled from small to large
configurations on a variety of platforms supporting the UNIX, SCO-UNIX,
UNIXWARE, Microsoft NT and Digital Equipment Corporation ("DEC") VMS operating
systems. These enterprise-wide systems can be implemented in a variety of
multi-currency, multi-company and multi-plant environments networked through
client and host-server configurations. DataFlo was developed by DataWorks and
Man-Fact II was acquired in connection with the purchase of MCC. Substantially
all of DataWorks' revenue is derived from the sale of turnkey information
systems, primarily the DataFlo and Man-Fact II systems, and related support
services. Accordingly, any event that adversely affects fees derived from the
sale of such systems, such as competition from other products, significant flaws
in DataWorks' software products or incompatibility with third party hardware or
software products, negative publicity or evaluation, or obsolescence of the
hardware platforms or software environments in which the systems run, could have
a material adverse effect on DataWorks' business and operations.
Business Planning and Engineering Group. The Business Planning and
Engineering Group enables manufacturing companies to create high-level business
plans from current and historical sales, production and purchasing data. These
plans are used to generate specific product and product family forecasts that
flow into final and sub-assembly manufacturing scheduling and purchase orders
through the Master Production Scheduling ("MPS") and MRP modules. These product
plans can be measured against planned and available capacity in both the
Capacity Requirements Planning module and the MPS module with its rough-cut
capabilities. Production and rough-cut capacity plans can be simulated for cost
and detailed capacity analysis. A fundamental capability of the Business
Planning and Engineering Group is the ability to convert plans to actual orders
with the entry of authorization codes, without the need for duplicate data
entry.
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Product structures are defined in the Product Definition and Product
Configurator modules which utilize the Engineering Change Control module to
provide visibility for the production plan to anticipated changes in the
structure of assemblies. Engineering revisions can be distributed to product
structures, routings and drawings via a workflow-oriented electronic
notification and authorization process. The design process can be managed
separately from production, allowing integrated development and prototyping of
new products. Completed designs can be released directly to manufacturing and
production upon authorization.
Sales, Distribution and Customer Service Group. The Sales, Distribution
and Customer Service Group allows a manufacturer to quote standard products to
both current and prospective customers through the Quotations module, as well as
unique, or one-of-a-kind, products through the Estimating module, which can be
accessed from the Quotations module. Gross margin and delivery schedules can
then be simulated based on a variety of different cost and price parameters that
can be revised through the life of the quotation. High probability quotations
can be planned through the MPS module and converted to customer sales orders
through the Sales Order module once a sales agreement is finalized.
The Sales Order module interfaces with both the MPS and MRP modules to
contrast actual demand with forecasted demand. Several demand consumption
options within the MPS module provide a variety of means for sales demand rather
than forecasted demand to drive the production schedule. Unique configurations
can be created in the Product Configurator module utilizing user-generated rules
through either a dialog-based question and answer session, or through
interpretation of an intelligent part number. These configured sales items,
processed through the Quotations and Sales Order modules, can directly create
and schedule multi-level production orders within the Production and Material
Operations Group.
Orders from customers can be received and order status and shipment advice,
as well as invoices, can be transmitted to the customer via the Electronic Data
Interchange module. Transactions are received and sent in a variety of formats
as specified in an agreement between customer and manufacturer. Once shipped,
items are tracked by the Customer Service and Field Service modules, using the
Lot/Serial Control module. When repairs occur, all changes to a customer's
particular product configuration made in the Field Service module and in the
Shipping/Returned Material module update a customer configuration database. At
any time, either a summarized or detailed analysis of quantity, cost, price, lot
or serial number can be obtained for all customers and products properly
reflecting all repairs made historically.
Production and Material Operations Group. The Production and Material
Operations Group provides a means to record and measure material, labor, machine
and cost flows both within an organization and to and from its suppliers.
Material transactions are logged to the Inventory Management module by the
production execution systems of the Repetitive Manufacturing and Work Order
Control modules and from Purchasing/Receiving module transactions. The Inventory
Management module is also affected by shipment and returned materials
transactions from the Sales Order, Field Service and Shipping/Returned Material
modules. Purchasing transactions are generated as a function of the planning
modules as well as by interfacing with the production systems for processing of
value-added transactions performed by third party organizations. All costed
transactions flow in an integrated fashion to the General Ledger module.
Material movement, labor and machine data can be recorded through keyboard
entry or through the Shop Floor Data Collection module, which provides
interfaces to barcode, cell controllers and automated data collection terminals.
The Production Activity Management module provides methods for alerting
production supervisors to schedule deviations and the means for rescheduling the
associated or effected departments or production orders. Rate and cell-based
scheduling can be transacted through the Repetitive Manufacturing module which
features a Kanban capability. The term Kanban refers to a signaling and
scheduling system that pulls material through the manufacturing process. DataFlo
employs both visual and real-time, electronic Kanbans to control material flow
during Just-In-Time ("JIT") production processes.
Work order production encompasses traditional picklist and operation
reporting along with newer strategies for rapid processing by means of material
and labor backflushing. Quick work order and one-step production backflush
processes simplify material movement and production reporting for unplanned and
JIT production. Both vendor performance and production operation performance is
recorded and monitored through the Quality Control Module. All material
transactions are updated in real-time to the Inventory
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Management module. Perpetual inventory is monitored to the plan, warehouse,
inventory, bin and lot levels. Inventory accuracy can be measured and reported
using either physical or cycle count methodologies. Interplant movement of
material for the purpose of planning, sales, production or purchasing is managed
in the Multi-Plant Control module.
Finance and Administration Group. The Finance and Administration Group
flows from the operational modules included in the groups described above. All
associated costs and revenues are captured to the General Ledger module as
subsidiary ledgers of the Accounts Payable, Accounts Receivable, Payroll,
Inventory Management, Shop Floor Data Collection, Shipping/Returned Material and
Cost Accounting modules. Payroll data can be generated directly through the
payroll process or as a function of labor entry in the production modules.
The costing systems support both actual and standard cost methodologies
with additional capabilities for unlimited cost simulation, modeling and
reporting. The Accounts Payable and Accounts Receivable modules support both
distributed and consolidated processing in a multi-company environment and
provide complete foreign currency and tax capabilities. The Accounts Payable
module supports paperless, three-way matching between purchasing, receiving and
invoicing. The Accounts Receivable module provides integrated electronic credit
authorization and control to Sales Order, Quotations, Field Service, Customer
Service and Shipping/Returned Material modules. All inquiries provide
point-and-click "drill down" capabilities to specific transactional details. For
example, a user may rapidly source an invoice to the associated shipping,
receiving, sales or purchasing transactions. Integrated universal notes provide
tracking and a complete history of all internal or external communications
relating to any system transaction.
Budgets from the Budgeting module can be compared against general ledger
data graphically, in spreadsheets and in user-specified formats designed in the
General Ledger report writer. Statements can be reported in user-defined
accounting periods and can be consolidated for multi-company and multi-plant
purposes. Foreign currency transactions flow to the General Ledger module from
the Sales Order, Accounts Receivable, Purchasing/Receiving, Accounts Payable and
Inventory Management modules.
DEVELOPMENT AND IMPLEMENTATION SUPPORT TOOLS
Preview. Preview is a 4GL development tool created by DataWorks that
provides a framework for developers and IS personnel to design and implement
high quality screens, updates and report processes without the need to
manipulate cumbersome programming code segments. It provides a means of
specifying database layouts in both the UniData and VMARK Software, Inc.
("VMARK") uniVerse multi-dimensional RDBMS and sharing object-like code segments
throughout applications. Preview also offers standardized data input, retrieval
and documentation that provides a common user interface to all application
modules. Preview features a multi-level security system that is controllable at
the individual or group level and allows security down to the data element or
field level. All user documentation is accessible on-line via the Help button or
key.
Through the use of Preview, DataWorks is able to deliver either DataFlo or
Man-Fact II to multiple operating systems with one set of code per application.
DataWorks currently has customers with application servers processing on the
many types of UNIX, and on Microsoft's NT and DEC's VMS operating systems.
Hardware platforms (with operating system variants) currently in use are:
Hewlett-Packard Company ("Hewlett-Packard") HP-9000 (HP-UX) series,
International Business Machines Corporation ("IBM") RS6000 and PowerPC (AIX)
series, Digital Alpha (OSF1, VMS and OpenVMS) series, Data General Aviion
(DG-UX), AT&T GIS 3000 (System V) series, Prime Information series and various
Intel Corporation ("Intel") PCs (SCO-UNIX, UnixWare and Microsoft NT).
The System Control module of Preview allows IS managers to configure
security, user display preferences and mail and network interfaces. Alerts may
be defined by type and sent as the result of user or programmatic action to a
specific user or to a workgroup. Printer output can be directed at a variety of
devices dependent upon either process or user specification. Printed queries may
be processed directly to a printer or held for deferred printing through the
Batch Control sub-module. In the Development module of Preview, menus,
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screens, documentation, data dictionaries, searches and zooms can be tailored to
user requirements to provide a workflow environment unique to each user's
business needs.
SmartLinks. DataWorks' SmartLinks interface to third party applications
provides a standard parameterized interface mechanism between DataFlo and
Man-Fact II modules and data, and associated data and modules within selected
third party applications. Links have been established to a broad range of third
party applications, such as Microsoft Office and Autodesk's AutoCad, for
computer aided design, scanned images, database graphics, word processing,
spreadsheets, pictures, sales contact management, forecasting and project
planning. If a link between a data record in either the DataFlo or Man-Fact II
systems corresponds to information in one or more of the linked third party
applications, the user is informed by means of an icon and transported to the
associated data once the icon is clicked.
SmartTools. DataWorks' SmartTools data conversion system is a means for
new customers, implementation consultants or existing customers to convert data
from either their old systems, or third party applications, and process that
data through standard data entry screens. SmartTools can greatly shorten the
time needed to build conversion routines and significantly increase conversion
accuracy. SmartTools electronically takes conversion data from the legacy system
and simulates the data being entered through a keyboard or generated
programmatically by the DataWorks system. In this manner, all data validation is
performed against other related and authentic files, and the proper parameters
are put in place to support the new system. Utilizing a conversion template for
each "foreign" file, SmartTools automatically loads the selected data entry
module with selected data to be converted and processes the item as if it were
being manually entered into the system. Items that pass all data validation
checks update all applicable DataWorks files, while those that fail are
transferred to a hold and edit file. Once the held data is corrected, it may be
reprocessed by the automatic load system. SmartTools, by establishing a highly
realistic and complete operating environment, is an important aid in the pilot
program simulations conducted during the implementation process. In this manner,
the customer is able to achieve a smoother conversion with fewer interruptions
to normal business flow and accomplish full deployment in less time.
THIRD PARTY PRODUCTS
RDBMS. DataWorks separately licenses to its customers the UniData or
uniVerse RDBMS software already incorporated in DataWorks' products. DataWorks
has chosen these multi-dimensional relational databases in order to maximize the
throughput of its customers' transactions and to provide realistic models of
business data. DataWorks believes that these databases provide the requisite
performance at a lower cost than existing two-dimensional RDBMS products, such
as those currently offered by Oracle, Sybase and Informix. DataWorks' agreement
with UniData commenced in March 1994 and is automatically renewed each year for
four years. The agreement may be terminated by either party for breach of any
material provision, for bankruptcy or insolvency or upon prior written notice in
advance of each automatic renewal period. DataWorks' agreement (through its
subsidiary, MCC) with VMARK for the uniVerse RDBMS software commenced in October
1993 and has an initial three-year term. The agreement may be terminated by
either party for failure to perform under the agreement or by VMARK if MCC
assigns its rights under the agreement.
Client-Based Middleware. wIntegrate, a third party product from UniData,
provides a PC-based GUI that manages application presentation, tools and network
communications facilities on the client workstation. Through this medium,
DataFlo and Man-Fact II provide screens that use the Windows point-and-click
metaphor with icon-based toolbars, sculpted dialog boxes, drop-down lists,
on-line search and Help facilities. Sophisticated file transfer and Dynamic Data
Exchange ("DDE") capabilities provide near immediate access to foreign databases
and other host applications via network and direct connect. The integrated query
builder allows point and shoot database access for user-defined and custom
report generation. DataWorks' SmartLinks interface uses wIntegrate Dynamic Link
Libraries ("DLL") to link host database information directly with a variety of
Microsoft Windows-based, third party applications such as word processing,
spreadsheets, imaging and graphics software.
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Hardware. As part of its turnkey solutions, DataWorks sells complete third
party computer hardware systems and related computer peripherals. DataWorks
implements its ERP systems on a number of hardware platforms, including
Hewlett-Packard (with which DataWorks has a volume-reseller agreement and which
accounts for approximately 50% of DataWorks' hardware shipments), IBM, Data
General, DEC and several Intel Pentium and other x86-based systems.
Configurations may be host-based UNIX server-oriented, or highly networked
solutions, in which DataWorks may participate in network hardware arrangements.
In addition, DataWorks has established reseller and support agreements with
peripherals and communications equipment manufacturers to facilitate the sale of
related equipment to DataWorks' customers.
Network. DataWorks supports a wide variety of network communication
protocols as part of its turnkey product support. LAN and WAN topologies such as
TCP/IP, Token Ring and Novell Corporation's ("Novell's") Netware represent the
majority of current installations. DataWorks has support agreements with
regional and national communications and network suppliers to facilitate the
design and implementation of these environments.
SERVICE AND SUPPORT
DataWorks offers a full complement of services that allow its customers to
maximize the benefits of DataWorks' software products, including project
management, consulting, implementation, education and training, professional
programming, system integration and support, maintenance and customer service.
DataWorks' services are not included in the price of its software but are
contracted for and billed separately from software and hardware. Maintenance
services are billed in advance, while implementation, consulting and programming
services are billed monthly as incurred.
IMPLEMENTATION SUPPORT PROGRAM
DataWorks offers its customers an Implementation Support Program ("ISP")
with their initial system order or significant upgrade to an existing system
installation. ISP provides a variety of project management and consulting
services to assist in rapid implementation and deployment of DataWorks' business
solutions. Services offered include a variety of site-specific technical and
consulting services to assist in all phases of the implementation process.
DataWorks may also provide assistance in integrating its products with the
customer's other software, such as automated systems and devices for factory
automation and shop floor data collection. In addition, DataWorks offers "first
call" support that allows customers to call DataWorks with service inquiries. As
part of the implementation of its software, DataWorks employs a pilot program
that allows its customers to simulate running their businesses with the new
software prior to full-scale "live" implementation of the new system. The entire
implementation process, and specifically the pilot programs, are greatly aided
by DataWorks' SmartTools product. Pilot program simulations are conducted in an
integrated series of hands-on classroom exercises that emphasize system controls
and procedures, using a database generated by SmartTools that accurately
represents the customer's business. By simulating a number of relevant business
scenarios, the pilot program gives key users valuable experience with DataWorks'
software, generates involvement in and commitment to the new system and provides
a means to track the progress of the implementation of the system before actual
full-scale use.
CUSTOMER SUPPORT PROGRAM
DataWorks offers its customers a Comprehensive Support Program ("CSP"). The
cost of CSP is based on a percentage of list price of the DataWorks software
purchased and is generally billed annually in advance. Through CSP, DataWorks
provides product enhancements and updates that maintain the customers' software
and documentation to the then-current standard release level licensed and
supported by DataWorks. CSP also includes hotline telephone support during
extended business hours (5 am-6 pm Pacific Time) for questions regarding
software use. This support is available to customers up to 24-hours per day,
seven days per week, as a separately priced option.
DataWorks' customer service department also offers programming and
consulting services for software modifications during and following full
implementation of the system.
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EDUCATION AND TRAINING
DataWorks offers education and training services that provide customers
with a formalized program to ensure that applications are implemented and
utilized in an efficient and cost-effective manner. Customers are also offered a
variety of software installation, technical support and user training services,
both on-site and in DataWorks' regional training centers. Customized education
and training programs are also available to meet customers' specific development
needs.
PROFESSIONAL CONSULTING SERVICES
DataWorks provides an array of on-site and classroom implementation and
training services. Each customer site is assigned an Account Manager who
coordinates DataWorks' activities with the customer. These activities include
project management, hardware/software installation scheduling, classroom
education scheduling, on-site training, conversion planning and pilot simulation
supervision. Windows-based project management software maintains a detailed
project plan, resource list, and schedule of events for each phase of the
implementation. Designed to meet the return on investment objectives of the
customer, the project plan is the customer's key feedback and monitoring
mechanism for managing the success of the implementation. The Account Manager,
and associated team, is responsible for guiding the new customer from initial
installation through successful operation of the system in a live environment.
The Account Managers are also the initial point of contact to introduce other
DataWorks resources to the customer.
PROFESSIONAL PROGRAMMING SERVICES
DataWorks provides professional programming services, including custom
applications analysis, design, development, training and deployment. Custom
software projects may range from simple report development to designing and
programming complete applications and integrating legacy systems. Throughout the
project, software and design reviews are provided to the customer as defined in
the project specification. Upon project completion, custom software is delivered
under revision control to a test database where compliance testing is conducted
by the customer. The revision control tools within DataFlo and Man-Fact II allow
testing, deployment and management of new enhancements without effecting current
software releases. All software enhancements, regardless of scope, are created
using the Preview development tools and conform to DataWorks' published
guidelines for standards and conventions.
PRODUCT DEVELOPMENT
DataWorks' product development efforts are focused on enhancement of its
existing products and introduction of its enterprise client/server ("ECS")
product. DataWorks' gross research and development expenditures were $3,846,000,
$2,476,000 and $891,000 for the years ended December 31, 1995, 1994, and 1993,
respectively, and $2,998,000 for the six months ended June 30, 1996. At June 30,
1996, DataWorks had approximately 80 full-time employees in product development.
ENHANCEMENTS OF DATAFLO AND MAN-FACT II
DataWorks plans to continue to enhance its DataFlo and Man-Fact II
application products to suit the evolving needs of the manufacturing market
served by DataWorks. In particular, DataWorks intends to pursue improved
functionality on existing application modules and the creation of new modules.
As an example, during the past year DataWorks released a Customer Service module
that allows its customers to increase their emphasis on customer-oriented
operations.
In addition to applications development, DataWorks will seek to improve and
expand Preview, its 4GL development tool, with two fundamental objectives:
continued user empowerment with emphasis on ease-of-use, and increased
flexibility to make changes to the base products to suit specific customer
requirements. DataWorks is developing Windows '95 support within its Preview
product. Additionally, DataWorks plans to continue to expand its API technology
to permit integration of a wider range of third party software products into its
modular systems, further enhancing the enterprise-wide capabilities of
DataWorks' ERP solutions.
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ENTERPRISE CLIENT/SERVER PRODUCT
In late 1993, DataWorks initiated development of an advanced ECS product.
This ECS system will initially incorporate a database supplied by Sybase, but is
designed to support a number of major databases. DataWorks expects to introduce
the ECS product in 1997.
DataWorks' ECS system has been designed as a second generation
client/server application for manufacturing, planning, inventory, engineering,
distribution, service and finance. While the DataFlo and Man-Fact II systems
provide a tightly coupled 4GL tool set and database architecture, ECS is built
on tools and database architectures from established market leaders, such as
Microsoft and Sybase, to promote flexibility and technology independence.
DataWorks believes that, by leveraging its manufacturing application development
experience with new, evolving client/server technologies, it can attract the
favorable support of the large IS departments of manufacturing companies in the
upper end of DataWorks' target market (typically, manufacturers with $200 to
$500 million in annual revenues). These organizations typically have substantial
IS staff because supporting a variety of both standard and custom applications
in a dynamic, multi-national corporation requires a significant investment in
information services. These enterprises are better able to invest in the tools
and technology necessary to support a complex, fully distributed client/server
computing environment and to provide the depth of staff and technological
expertise to maintain a more "customized" application set.
Technically, ECS employs a three-tier client/server architecture, in which
the business logic, database, and presentation layers can be allocated
independently across multiple processors (servers or clients). This distributed
model allows large corporations to deploy a series of smaller, departmental or
company servers to replace their existing mainframe computers. These systems are
then linked over a wide area network to provide significantly more computing
power than a single, centralized system. The three-tier structure of ECS has
been designed to optimize performance, flexibility and scalability across
enterprise-wide operations.
DataWorks believes that an enterprise framework for development, deployment
and support has been a missing element in earlier client/server deployment
efforts, yet such a framework is critical to success in the high end of the
mid-range market. At the core of the ECS system is a Company developed product
suite, Client Server Infrastructure ("CSI"), a library of reusable "objects" for
systems development and applications support. CSI has been created to streamline
the myriad of technical issues and architectural options of distributed
client/server systems into a consistent set of software tools and procedures.
Designed to support the complex development and deployment requirements of a
global enterprise, CSI's "object libraries" are intended to ensure a consistent
look and feel to all functions encompassed by ECS wherever they are used in the
enterprise. Furthermore, DataWorks believes that CSI will significantly reduce
the time and cost of custom application development for the end user/customer.
The CSI product suite and its integrated Computer Aided Software Engineering
("CASE") environment are being developed to provide full revision and change
control to facilitate migration of custom development to future releases and
upgrades of ECS.
DataWorks believes that there are few mature applications currently
delivered into DataWorks' target market that match the true client/server
paradigm. Current high-end products are typically complex and expensive and
usually require "custom implementation" over a multi-year period. DataWorks
believes that it can develop products for the high end of its markets that are
complementary to DataFlo and Man-Fact II, which will be competitive to the
products provided by the large ERP system vendors, by offering more standard
functionality, a more open solution and competitive pricing. There can be no
assurance, however, that DataWorks will successfully complete the development of
ECS, or any future product, on a timely basis or that any such product will
achieve significant market acceptance.
DataWorks' agreement with Sybase regarding the RDBMS product incorporated
in the ECS product commenced in December 1993, has an initial term of three
years and may be extended upon mutual agreement of the parties. The agreement
may be terminated by either party upon prior written notice, for breach, for
bankruptcy or insolvency or for failure to make payments when due.
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SALES AND MARKETING
DataWorks currently has 14 offices across the United States and plans to
expand its domestic sales and service operations to approximately 20 locations
by the end of 1996. Internationally, DataWorks established a wholly-owned
subsidiary in the United Kingdom in 1994 to serve its European operations.
DataWorks has recently begun to expand its international presence through
distributor agreements.
DataWorks believes a key to its success in the domestic marketplace is the
completion of its "regionalization" process. DataWorks recently established its
fifth region in Atlanta, serving the Southeast, and intends to operate a sixth
region by late-1996. Under the regionalization concept, DataWorks desires to
decentralize to the regional level as much customer service and overall customer
involvement as possible. DataWorks believes a strong local presence is an
important factor in addressing the needs of mid-range manufacturing businesses
and establishing mutually beneficial long term relationships.
COMPETITION
The business information systems industry is intensely competitive, rapidly
changing and significantly affected by new product offerings and other market
activities. A number of companies offer products similar to DataWorks' products,
which are directed at the market for ERP systems. Many of DataWorks' existing
competitors, as well as a number of potential competitors, have more established
and larger marketing and sales organizations, significantly greater financial
and technical resources and a larger installed base of customers than DataWorks.
DataWorks has no proprietary barriers to entry which would limit competitors
from developing similar products or selling competing products in DataWorks'
markets. Accordingly, there can be no assurance that such competitors will not
offer or develop products that are superior to DataWorks' products or that
achieve greater market acceptance. In addition, suppliers of RDBMS products or
companies that develop management information software applications for large
multinational manufacturers are beginning to market to the mid-sized
manufacturers targeted by DataWorks or otherwise develop applications that
compete effectively in DataWorks' markets. Furthermore, DataWorks intends
increasingly to focus its marketing and product development efforts toward the
upper end of its target market. As a result, competition (including price
competition) is likely to increase substantially, which may result in price
reductions and loss of market share. DataWorks may also face resistance from
potential customers which have a large installed base of legacy systems, and,
therefore, may be reluctant to commit the time and resources necessary to
convert to an open systems-based client/server software product. In addition,
potential customers may increasingly demand that ERP systems incorporate certain
popular RDBMS software not currently integrated in DataWorks' product offerings.
As the client/server computing market expands, a large number of companies, some
with significantly greater resources than DataWorks, may enter the market or
increase their market share by acquiring or entering into alliances with
competitors of DataWorks. There can be no assurance that DataWorks will be able
to compete successfully against its competitors or that the competitive
pressures faced by DataWorks will not adversely affect its financial
performance.
DataWorks has a large number of competitors that vary in size, primary
computer platforms and overall product scope. Within the market, the primary
competition comes from independent software vendors in four distinctive groups
including (i) large multinational system developers in the upper end of
DataWorks' mid-range market, including Baan Company, Oracle and qad, Inc., (ii)
companies offering high levels of functionality on the AS/400 platform such as
System Software Associates, Inc. and J.D. Edwards Company, (iii) traditional
mid-range market sector firms such as ROI Systems and Symix Systems, Inc., and
(iv) in the low-end of DataWorks' market, lower priced PC network-based
offerings from companies such as Fourth Shift Corporation and Macola Software,
Inc. There is also a large number of regional manufacturing software suppliers
who leverage their concentrated local support, reputation and, typically, lower
price as competitive advantages.
DataWorks' principal market is highly fragmented and consists of a few
large multinational suppliers and a much larger number of small, regional
competitors. DataWorks believes that its industry will experience consolidation
as management information systems become more complex and as more manufacturers
adopt sophisticated management information systems, forcing smaller companies in
the industry to specialize or
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<PAGE> 80
merge with their competitors. In order to compete effectively in the broad
markets which DataWorks presently targets, DataWorks will need to continue to
grow and attain sufficient size to ensure that it can develop new products on a
timely basis in response to evolving technology and new customer demands and can
sell such products on a timely basis to a variety of manufacturing industries
worldwide. No assurance can be given that DataWorks will be able to grow
sufficiently to enable it to compete effectively.
Due to intense competition in the computer hardware market and an
increasing tendency for customers, particularly new accounts, to elect to
purchase hardware directly from third party vendors, DataWorks has experienced
declining hardware revenues as a percentage of new account systems. Recently,
gross profit from hardware sales has not been a significant part of DataWorks'
total gross profit, and DataWorks believes this trend will continue.
DataWorks believes that its success has been due in part to its strategy of
focusing marketing and development resources on six specific industry types
within the mid-range discrete manufacturing market sector. DataWorks is unaware
that any of its competitors is specifically targeting the same group of
industries. DataWorks plans to continue to pursue a market leadership position
in this select group, but there can be no assurance that competitors with
significantly greater financial, technical and marketing resources than
DataWorks will not target these particular industries.
DataWorks believes its use of open systems technologies is an important
competitive factor. DataWorks also believes that the number of competitors
offering open systems solutions will grow significantly over the next several
years. Additionally, DataWorks believes that the typical midrange customer
desires an easy-to-use, highly functional 4GL environment, fully integrated
throughout the ERP system, which DataWorks has provided through its internally
produced development tool set. DataWorks anticipates that a significant source
of future competition may be from larger manufacturing software companies that
may tailor their products for the mid-range market. Only a few of the larger and
better capitalized software systems companies currently compete in DataWorks'
targeted market. There can be no assurance that such companies will not develop
products that are superior to DataWorks' products or that achieve greater market
acceptance.
The principal elements affecting the buying decision of customers in the
mid-range sector are comprehensive application functionality that addresses a
wide range of business areas, rapid system deployment, ease-of-use, strong
performance, quality of customer support, a fully integrated application set
supported by a user-oriented 4GL development environment that allows for easy
modification to applications where needed, price and customer references. It is
also mandatory that the ERP system be enhanced on a regular basis throughout the
license or maintenance term and that such product enhancements be properly
supported by necessary revision control software provided by the vendor. Based
on these factors, DataWorks believes it has competed effectively to date. In
order to be successful in the future, DataWorks must respond effectively to
customer needs and properly select and incorporate those technologies and
application functionalities that will meet the challenges posed by competitors'
innovations. To accomplish this critical objective, DataWorks must continue to
invest in enhancing its current products and, when necessary, introduce new
products to remain competitive.
INTELLECTUAL PROPERTY
DataWorks regards its products as proprietary trade secrets and
confidential information. DataWorks relies on a combination of copyright,
trademark and trade secret laws, employee and third party nondisclosure
agreements and other industry standard methods for protecting ownership of its
proprietary software. There can be no assurance, however, that, in spite of
these precautions, an unauthorized third party will not copy or reverse-engineer
certain portions of DataWorks' products or obtain and use information that
DataWorks regards as proprietary. In addition, the laws of some foreign
countries do not protect DataWorks' proprietary rights to the same extent as do
the laws of the United States. There can be no assurance that the mechanisms
used by DataWorks to protect its software will be adequate or that DataWorks'
competitors will not independently develop software products that are
substantially equivalent or superior to DataWorks' software products.
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<PAGE> 81
DataWorks licenses DataFlo and Man-Fact II products to end users under
license agreements which are generally in standard form, although each license
is individually negotiated and may contain variations. The standard form
agreement allows the end user to use the DataFlo and Man-Fact IIproducts solely
on the end user's computer equipment for the end user's internal purposes, and
the end user is generally not permitted to sublicense or transfer the DataFlo
and Man-Fact II products. DataWorks licenses the source code for its application
software to its customers to enable them to customize the software to meet
particular requirements. DataWorks' standard form agreement includes a
confidentiality clause protecting the DataFlo and Man-Fact II products. In the
event of termination of the license agreement, the end user remains responsible
for any accrued and unpaid license fees and confidentiality obligations.
However, there can be no assurance that such customers will take adequate
precautions to protect DataWorks' source code or other confidential information.
None of DataWorks' software is patented. DataWorks believes that it has all
necessary rights to market its products, although there can be no assurance that
third parties will not assert infringement claims in the future. DataWorks may
receive notices from third parties claiming that DataWorks' products infringe
third party proprietary rights. DataWorks expects that, as the number of
software products in the industry increases and the functionality of these
products further overlaps, software products will increasingly be subject to
such claims. Any such claim, with or without merit, could result in costly
litigation and require DataWorks to enter into royalty or license arrangements.
Such royalty or license arrangements, if required, may not be available on terms
acceptable to DataWorks or at all.
DataWorks believes that, due to the rapid pace of innovation within the
computer industry, factors such as technological and creative skill of
personnel, knowledge and experience of management, name recognition, maintenance
and support of software products, the ability to develop, enhance, market and
acquire software products and services, and strategic relationships in the
industry are more important in establishing and maintaining a leading position
within the industry than are patent, copyright and other legal protections for
intellectual property.
EMPLOYEES
At June 30, 1996, DataWorks had 313 full-time employees, including 74 in
sales and marketing, 80 in product development, 133 in support services and 26
in finance and administration. DataWorks also has 38 part-time employees,
primarily in the telemarketing area. DataWorks' employees are not represented by
any collective bargaining organization, and DataWorks has never experienced a
work stoppage. DataWorks believes that its relations with its employees are
good. The loss of certain key employees or DataWorks' inability to attract and
retain other qualified employees could have a material adverse effect on
DataWorks' business and operations.
PROPERTY
DataWorks leases approximately 28,000 square feet of office space for its
corporate headquarters in San Diego, California, under a lease expiring in 1999.
DataWorks leases approximately 14,800 square feet of office space for its Los
Angeles/ Orange County division in Garden Grove, California under a lease
expiring in 1996. In September 1996, DataWorks will be relocating this operation
into 25,000 square feet of office space in Irvine, California under a lease
expiring in September 2001.
DataWorks also has approximately 14,000 square feet of office space under
lease and rental agreements in various locations across the United States in
support of its regional activities and approximately 1,200 square feet of office
space in the United Kingdom on behalf of DataWorks' subsidiary.
LEGAL PROCEEDINGS
DataWorks is not a party to any material legal proceedings.
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DATAWORKS MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information as of June 30, 1996, regarding
the directors and executive officers of DataWorks:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------- ---- ----------------------------------------------------------------
<S> <C> <C>
Stuart W. Clifton.......... 52 Chairman of the Board, President and Chief Executive Officer
Norman R. Farquhar......... 50 Executive Vice President, Chief Financial Officer and Director
Mark S. Howlett............ 50 Executive Vice President and Director
Rick E. Russo.............. 45 Vice President, Finance and Secretary
Nathan W. Bell............. 36 Director
Finis F. Conner............ 52 Director
Ronald S. Parker........... 51 Director
</TABLE>
Stuart W. Clifton has served as President, Chief Executive Officer and as
Chairman of the Board of Directors since January 1987, when he and Mr. Howlett
acquired control of DataWorks. Between 1971 and 1987, Mr. Clifton held various
management positions at Triad Systems Corporation, a vertical distribution
software company, in which he was involved from its inception, most recently as
Executive Vice President and General Manager.
Norman R. Farquhar has served as Executive Vice President and Chief
Financial Officer of DataWorks since February 1996 and as a director of
DataWorks since August 1995. From April 1993 to December 1995, Mr. Farquhar
served as Senior Vice President, Chief Financial Officer and Secretary of
Wonderware Corporation, a manufacturer of software for the industrial automation
industry. From December 1991 to April 1993, he was Vice President of Finance and
Chief Financial Officer of MTI Technology Corporation, a developer of
system-managed storage solutions. From November 1987 to December 1991, he was
Senior Vice President and Chief Financial Officer of Amperif Corporation, a
manufacturer of cache-based data storage subsystems.
Mark S. Howlett has served as Executive Vice President of DataWorks since
January 1987, when he and Mr. Clifton acquired control of DataWorks. In 1981, he
joined Triad Systems Corporation, where he became its National Sales Manager.
Rick E. Russo has served as Vice President, Finance since July 1994 and as
Secretary since April 1995. From February 1992 to July 1994, Mr. Russo served as
Chief Financial Officer of MCC. Prior to joining DataWorks, Mr. Russo served
from 1985 to 1991 as Vice President of Finance for Media Duplication Services
Ltd., a subsidiary of Polaroid Corporation which provided software manufacturing
services. Mr. Russo is a Certified Public Accountant.
Nathan W. Bell has served as a director of DataWorks since April 1995. Mr.
Bell is a founding general partner of Pacific Private Capital ("PPC"), the
general partner of Pacific Mezzanine Fund, L.P. ("PMF"), an investment firm
formed in March 1994. From January 1990 to March 1994, Mr. Bell was the managing
director of BW Capital Corporation, an investment firm.
Finis F. Conner has served as a director of DataWorks since April 1995.
From 1986 to February 1996, Mr. Conner served as the Chairman and Chief
Executive Officer of Conner Peripherals, Inc., a supplier of disk management
systems and related products. He also serves as a director of Gyration, Inc.
Ronald S. Parker has served as a director of DataWorks since July 1994. Mr.
Parker has served as Chairman of the Board of Parker, Mulcahy & Associates
("PMA"), an investment firm, since May 1992. From March 1991 to April 1992, he
was Executive Vice President, Corporate Banking Group, of Security Pacific Bank
in Los Angeles. From January 1984 to March 1991, he was Executive Vice
President, Corporate Banking Group, of Wells Fargo Bank in Los Angeles. He also
serves as a director of CU Bancorp, California United Bank, USC School of
Medicine, USC Norris Cancer Center Development Board, CNA Sales Group, Inc. and
Performance Marketing, Inc.
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DIRECTOR COMPENSATION
The members of the Board of Directors are not compensated for attendance at
Board and Committee meetings. They are, however, eligible for reimbursement for
their expenses incurred in connection with such attendance in accordance with
Company policy.
Non-employee directors are also eligible for grants of options under the
1995 Non-Employee Directors' Stock Option Plan (the "Directors' Plan"). The
Directors' Plan provides for automatic grants of options to purchase shares of
Common Stock to eligible non-employee directors of DataWorks. Option grants
under the Directors' Plan are non-discretionary and are not intended to qualify
as incentive stock options under the Internal Revenue Code of 1986, as amended
(the "Code").
The maximum number of shares of Common Stock that may be issued pursuant to
options granted under the Directors' Plan is 75,000. On May 23, 1996, in
connection with the Annual Stockholders' Meeting, options to purchase 15,000
shares of DataWorks Common Stock were granted to eligible non- employee
directors of DataWorks under the Directors' Plan at an exercise price of $18.25
per share.
In April 1995, in connection with his election to the Board of Directors,
Mr. Conner received a grant of a nonstatutory stock option outside DataWorks'
1995 Equity Incentive Plan (the "Incentive Plan") to purchase 34,615 shares of
Common Stock at an exercise price of $1.30 per share. Such option vests monthly
over three years, with vesting tied to Mr. Conner's continued service as a
member of the Board of Directors.
In August 1995, in connection with his election to the Board of Directors,
Mr. Farquhar received a grant of a nonstatutory stock option outside of the
Incentive Plan to purchase 19,230 shares of Common Stock at an exercise price of
$5.20 per share. Such option vests monthly over three years, with vesting tied
to Mr. Farquhar's continued service as a member of the Board of Directors.
DataWorks has entered into certain loan agreements with, and has issued
warrants to purchase Common Stock to, affiliates of Messrs. Bell and Parker,
directors of DataWorks. Such loan agreements were terminated in November 1995.
In connection with DataWorks' Series A Preferred Stock financing in August 1995,
DataWorks issued to a trust of which Mr. Conner is a trustee a warrant to
purchase 345 shares of Common Stock and to Mr. Bell a warrant to purchase 69
shares of Common Stock. See "DataWorks Principal Shareholders" and "Certain
Transactions."
In connection with the resignation of Alfred R. Alteslane as an officer and
director of DataWorks in August 1995, DataWorks and Mr. Alteslane entered into a
consulting and non-compete agreement pursuant to which Mr. Alteslane acted as a
consultant to DataWorks through May 31, 1996. Under the agreement, Mr. Alteslane
received an aggregate of $66,665 for consulting services and $110,000 for his
agreement not to compete with DataWorks. Mr. Alteslane's stock options vested
through May 31, 1996. Mr. Alteslane exercised the remaining balance of his
options on May 31, 1996.
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<PAGE> 84
EXECUTIVE OFFICER COMPENSATION
The following table shows for the fiscal years ended December 31, 1994 and
1995, certain compensation awarded or paid to, or earned by, DataWorks' Chief
Executive Officer and the three highest compensated executive officers of
DataWorks who earned more than $100,000 in the fiscal year ended December 31,
1995, including one former executive officer who resigned from such position in
DataWorks during fiscal 1995 (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION
COMPENSATION(1) AWARDS(2)
----------------------------------- -------------
OTHER
ANNUAL SECURITIES ALL OTHER
NAME AND PRINCIPAL FISCAL SALARY BONUS COMPEN- UNDERLYING COMPENSATION
POSITION YEAR ($) ($) SATION($) OPTIONS(#)(3) ($)(4)
- ----------------------------- ------ -------- -------- --------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Stuart W. Clifton............ 1995 $250,000 $301,700(5) 30,000 $ 14,738
Chairman of the Board, 1994 263,333 80,000(5) 10,008
President and Chief Executive
Officer
Mark S. Howlett.............. 1995 240,000(6) 15,000 20,000 7,108
Executive Vice President 1994 191,550(7) 50,334 2,433
Rick E. Russo(8)............. 1995 108,250 60,000(9) 38,076 388
Vice President, Finance and 1994 59,500 166
Secretary
Alfred R. Alteslane(10)...... 1995 112,500 76,923 111,015(11)
Former Executive Vice 1994 116,667 639
President and Chief
Operations Officer
</TABLE>
- ---------------
(1) As permitted by rules promulgated by the SEC, no amounts are shown with
respect to certain perquisites where such amounts do not exceed the lesser
of 10% of the sum of the amount in the salary and bonus columns or $50,000.
(2) None of the named executive officers held restricted stock awards as of
June 30, 1996.
(3) All options were granted under the Incentive Plan. Reference is made to
"Employee Benefit Plans -- 1995 Equity Incentive Plan" for a more detailed
description of option grants under the Incentive Plan.
(4) Includes the value of excess group term life insurance premiums paid on
behalf of Messrs. Clifton, Howlett, Russo and Alteslane.
(5) Mr. Clifton's bonus for 1995 includes, and his bonus for 1994 excludes,
advances of $91,700 made in 1994 and approved by the Board as a 1995 bonus
in June of 1995. Also includes a bonus of $210,000 for services rendered in
1995, which bonus was paid in 1996.
(6) Includes sales commissions in the amount of $90,000.
(7) Includes sales commissions in the amount of $23,550.
(8) Includes compensation beginning in June 1994 when Mr. Russo joined
DataWorks.
(9) Includes a bonus for services rendered in 1995, which bonus was paid in
fiscal 1996.
(10) Includes compensation beginning in June 1994 when Mr. Alteslane joined
DataWorks. Mr. Alteslane resigned as an officer and director of DataWorks
in August 1995.
(11) Includes $110,000 paid to Mr. Alteslane for an agreement not to compete
with DataWorks in connection with his termination from DataWorks.
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<PAGE> 85
STOCK OPTION GRANTS AND EXERCISES
DataWorks grants options to its executive officers under its Incentive
Plan. The following tables show, for the fiscal year ended December 31, 1995,
certain information regarding options granted to, exercised by, and held at year
end by, the Named Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
INDIVIDUAL GRANTS REALIZABLE VALUE
-------------------------------------------------------------------------- AT ASSUMED
NUMBER OF % OF ANNUAL RATES OF
SECURITIES TOTAL OPTIONS STOCK PRICE
UNDERLYING GRANTED TO APPRECIATION FOR
OPTIONS EMPLOYEES IN EXERCISE OR MARKET OPTION TERM(3)
GRANTED FISCAL BASE PRICE VALUE ON EXPIRATION -------------------
NAME (#)(1) YEAR(2) (S/SH) GRANT DATE DATE 5%($) 10%($)
- ------------------- ---------- ------------- ----------- ---------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Stuart W.
Clifton.......... 30,000(4) 8.9% 10.725 9.75 10/04/05 202,703 511,583
Mark S. Howlett.... 20,000(4) 5.9% 9.75 9.75 10/04/05 122,850 310,050
Rick E. Russo...... 15,000(4) 4.4% 9.75 9.75 10/04/05 92,138 232,538
3,846(5) 1.1% 2.86 2.86 5/08/05 6,930 17,489
19,230(5) 5.7% 0.65 0.65 2/01/05 7,875 19,874
Alfred R.
Alteslane........ -- -- -- -- -- -- --
</TABLE>
- ---------------
(1) The options will fully vest upon a change in control of DataWorks as defined
in the Incentive Plan unless the acquiring company assumes the options or
substitutes similar options. The term of the options is generally 10 years.
(2) Based on options to purchase 338,570 shares granted to employees, including
Named Executive Officers, under the Incentive Plan in fiscal 1995.
(3) The potential realizable value is calculated based on the term of the option
at its time of grant (10 years). It is calculated assuming that the stock
price on the date of grant appreciates at the indicated annual rate,
compounded annually for the entire term of the option and that the option is
exercised and sold on the last day of its term for the appreciated stock
price. These amounts represent certain assumed rates of appreciation only,
in accordance with the rules of the SEC, and do not reflect DataWorks'
estimate or projection of future stock price performance. Actual gains, if
any, are dependent on the actual future performance of DataWorks' Common
Stock and no gain to the optionee is possible unless the stock price
increases over the option term, which will benefit all shareholders.
(4) Options become exercisable over a three-year period with shares vesting in
36 equal monthly installments.
(5) Options become exercisable over a four-year period with 25% vesting one year
from the date of grant and the remaining shares vesting in 36 equal monthly
installments thereafter.
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<PAGE> 86
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information with respect to the exercise of stock
options by the Named Executive Officers during the fiscal year ended December
31, 1995 and the number and value of securities underlying unexercised options
held by the Named Executive Officers at December 31, 1995:
<TABLE>
<CAPTION>
SHARES NUMBER OF SECURITIES VALUE OF UNEXERCISED
ACQUIRED UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT
ON VALUE AT DECEMBER 31, 1995 (#)(1) DECEMBER 31, 1995 ($)(2)
EXERCISE REALIZED ------------------------------- ------------------------
NAME (#) ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ------------------------ -------- -------- ------------------------------- ------------------------
<S> <C> <C> <C> <C>
Stuart W. Clifton....... -- -- 1,666/28,334 3,165/53,835
Mark S. Howlett......... -- -- 1,111/18,889 3,222/54,306
Rick E. Russo........... -- -- 833/14,167 2,395/40,730
0/3,846 0/37,556
0/19,230 0/230,279
Alfred R.
Alteslane(2).......... -- -- 8,013/8,013 99,175/99,175
</TABLE>
- ---------------
(1) Includes both "in-the-money" and "out-of-the-money" options. "In-the-money"
options are options with an exercise price below the fair market value of
DataWorks' Common Stock.
(2) Fair market value of DataWorks' Common Stock as of December 31, 1995
($12.625) minus the exercise price.
(3) In connection with Mr. Alteslane's resignation as an officer and director of
DataWorks in August 1995, such options terminated with respect to 38,462
shares.
EMPLOYMENT AGREEMENTS
Pursuant to an executive employment agreement between DataWorks and Stuart
W. Clifton entered into in May 1994, Mr. Clifton receives an annual salary of no
less than $250,000 and bonuses and equity compensation as determined by the
Compensation Committee of the Board of Directors. In addition, during each
quarter, DataWorks makes available to Mr. Clifton advances in the amount of
$33,000, provided that the aggregate amount of all outstanding advances does not
exceed $264,000. The advances will be repaid by deduction from any annual bonus
awarded to Mr. Clifton and net proceeds from any sale of DataWorks' securities
held by him. If the advances for any calendar year are not repaid from his
annual bonus awarded for such year or from his net proceeds from sales of
DataWorks' securities owned by him during such year, the advances will commence
bearing interest on the date bonuses are determined by the Compensation
Committee during such year. All outstanding advances, including interest accrued
thereon, are due and payable in full five years from the effective date of the
agreement. The principal amount of such advances outstanding as of June 30, 1996
was $155,300. If Mr. Clifton's employment is terminated by DataWorks without
cause, he will receive as severance $375,000 payable in equal monthly
installments over the 12-month period following the date of termination,
continued health insurance benefits and automatic forgiveness by DataWorks of
any outstanding advances in principal sum not exceeding $198,000 and all accrued
interest thereon. If Mr. Clifton's employment is terminated by DataWorks for
cause or he resigns, all of his executive compensation will cease immediately,
no severance benefits will be provided and all outstanding advances and accrued
interest thereon will be automatically due and payable in full.
Pursuant to an executive employment agreement between DataWorks and Mark S.
Howlett entered into in May 1994, Mr. Howlett receives an annual base salary of
$150,000 and bonuses and equity compensation as determined by the Compensation
Committee of the Board of Directors. If Mr. Howlett's employment is terminated
without cause, he will receive as severance $150,000 payable in equal monthly
installments over the 12-month period following the date of termination,
continued health insurance benefits and automatic forgiveness by DataWorks of
all outstanding loans and interest accrued thereon. If Mr. Howlett's employment
is terminated for cause or he resigns, his compensation and benefits will cease
immediately and he will not be
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<PAGE> 87
entitled to severance benefits. Additionally, if DataWorks terminates Mr.
Howlett's employment for cause, all outstanding loans, including interest
accrued thereon, will be immediately due and payable in full.
In connection with the resignation of Alfred R. Alteslane as an officer and
director of DataWorks in August 1995, DataWorks and Mr. Alteslane entered into a
consulting and non-compete agreement pursuant to which Mr. Alteslane acted as a
consultant to DataWorks through May 31, 1996. Under the agreement, Mr. Alteslane
received an aggregate of $66,665 for consulting services and $110,000 for his
agreement not to compete with DataWorks.
Pursuant to an offer letter dated January 17, 1996, Norman R. Farquhar
receives an annual base salary of $200,000 and a cash bonus of $50,000 for the
fiscal year beginning January 1, 1996, which bonus will be paid if certain
financial and non-financial objectives are achieved. Upon commencement of his
employment in February 1996, Mr. Farquhar was granted an option to purchase
135,000 shares of Common Stock at an exercise price equal to the fair market
value on the date of grant, which option vests monthly over a three-year period.
If Mr. Farquhar's employment is terminated without cause, he will receive an
amount equal to his then annual base salary payable in equal monthly
installments over the 12-month period following the date of termination in
consideration for which Mr. Farquhar agrees, for one year following such
termination, to (i) not solicit any employee, consultant or independent
contractor of DataWorks to terminate his or her relationship with DataWorks in
order to become an employee, consultant or independent contractor to or for any
other person or business, (ii) be available to DataWorks on a transitional basis
and (iii) not become financially interested in, be employed by or have any
connection with a competitor of DataWorks.
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS ON EXECUTIVE
COMPENSATION(1)
DataWorks' executive compensation program is administered by the
Compensation Committee (the "Committee") of the Board of Directors (the
"Board"). The Committee is appointed by the Board and is comprised of two
non-employee Directors. The Committee has responsibility for all compensation
matters concerning DataWorks' executive officers.
COMPENSATION PHILOSOPHY
The Board's executive compensation program strongly links management pay
with DataWorks' annual and long-term performance. The program is intended to
attract, motivate and retain senior management by providing compensation
opportunities that are consistent with Company performance. The program provides
for base salaries which reflect such factors as level of responsibility,
individual performance, internal fairness and external competitiveness; annual
incentive cash bonus awards which are payable upon DataWorks' achievement of
annual financial and strategic objectives approved by the Board; and long-term
incentive opportunities, generally in the form of stock options which strengthen
the mutuality of interest between management and DataWorks' shareholders.
The following is a discussion of each of the elements of DataWorks'
executive compensation program including a description of the decisions and
actions taken by the Committee with respect to compensation in fiscal 1995 for
the Chief Executive Officer and all executive officers as a group.
MANAGEMENT COMPENSATION PROGRAM
Compensation paid to DataWorks' executive officers for fiscal 1995 (as
reflected in the foregoing tables with respect to the Named Executive Officers)
consisted of the following elements: base salary, cash bonuses and stock options
granted under the Incentive Plan.
- ---------------
(1) The material in this report is not "soliciting material", is not deemed
"filed" with the SEC, and is not to be incorporated by reference into any filing
of DataWorks under the 1933 Act or 1934 Act whether made before or after the
date hereof and irrespective of any general incorporation language contained in
such filing.
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BASE SALARY
With respect to determining the base salary of executive officers, the
Committee takes into consideration a variety of factors including the
executive's levels of responsibility and individual performance, and the
salaries of similar positions in DataWorks and in comparable companies in
DataWorks' industry. The Committee believes that its process for determining and
adjusting the base salary of executive officers is fully consistent with sound
personnel practices and is subject to the terms and conditions of their
respective employment agreements. Annual adjustments in base salaries typically
are made effective at the beginning of the calendar year for which they are
intended to apply and therefore reflect in large part prior year's business and
individual performance achievements.
ANNUAL BONUS PROGRAM
DataWorks' bonus program encourages executive officers to achieve both
corporate and individual business unit objectives. Bonus earnings opportunities
primarily derive from the achievement of corporate objectives, which objectives
are based on a scale commensurate with the executive's ability to effect
company-wide goals. Incentive bonuses are awarded if certain minimum corporate
earnings thresholds are met. Below such minimum, no corporate incentive bonus is
permitted. DataWorks' bonus program applied to certain senior executive officers
of DataWorks in 1995 and has been extended to cover all other executive officers
of DataWorks beginning in 1996.
1995 EQUITY INCENTIVE PLAN
The long term incentive element of DataWorks' management compensation
program provides for grants of stock awards, which include (i) incentive stock
options, (ii) nonstatutory stock options, (iii) stock bonuses, (iv) rights to
purchase restricted stock and (v) stock appreciation rights. These discretionary
stock awards are granted and administered by the Committee under the Incentive
Plan, which is intended to create an opportunity for employees of DataWorks to
acquire an equity ownership interest in DataWorks and thereby enhance their
efforts in the service of DataWorks and its shareholders. The compensatory and
administrative features of the Incentive Plan conform in all material respects
to the design of standard comparable plans in industry and are, in the
Committee's estimation, fair and reasonable.
In October 1995, the Committee approved grants of stock options to certain
executive officers (including those Named Executive Officers reflected in the
foregoing tables) and other employees of DataWorks, all at the exercise price of
$9.75 per share, the then-current fair market value of the Common Stock, except
the option granted to Mr. Clifton, a holder of more than 10% of the outstanding
Common Stock, has an exercise price of $10.725, 110% of the then-current fair
market value of the Common Stock. The stock options become exercisable over a
three-year period with shares vesting in 36 equal monthly installments. The
Committee believes that by rationing the exercisability of these stock options
over a three-year period, the executive retention impact of the Incentive Plan
will be strengthened and management's motivation to enhance the value of
DataWorks' stock will be constructively influenced.
CHIEF EXECUTIVE OFFICER COMPENSATION
Pursuant to an executive employment agreement between DataWorks and Stuart
W. Clifton, Chairman of the Board, President and Chief Executive Officer of
DataWorks, entered into in May 1994, Mr. Clifton received a salary of $250,000
in 1995. In addition, in accordance with such employment agreement, advances are
made each year by DataWorks to Mr. Clifton. Such advances are repaid by
deduction from any annual bonus earned for such year and net proceeds from any
sale of DataWorks' securities held by him. If the advances are not repaid, such
advances will bear interest commencing on the date the Compensation Committee
determines annual bonuses for such year. See "Employment Agreements."
Among the factors considered by the Committee in its consideration of Mr.
Clifton's ongoing performance were the continued expansion of DataWorks' core
businesses into both domestic and international markets, the continued success
of DataWorks' new product development, sales and marketing efforts, and the
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<PAGE> 89
fiscal 1995 financial performance of DataWorks and its subsidiaries measured by
actual-versus-target sales and actual-versus-target earnings.
Mr. Clifton's annual bonus award for fiscal 1995 was earned under the
program established and approved by the Committee at the beginning of fiscal
1995. As the senior corporate executive officer, his bonus generally reflected
the significant growth and financial performance of DataWorks in fiscal 1995.
The $91,700 bonus awarded in June 1995 reflected various substantial
achievements, including the successful completion of DataWorks' acquisition of
Madic-Compufact Corporation ("MCC") and the subsequent integration of the two
companies, the successful consummation of multiple financings and significant
sales growth apart from the MCC acquisition. The $210,000 bonus awarded in
February 1996 was based on various factors, including the favorable financial
and operating performance of DataWorks against DataWorks' Plan during 1995, the
continuing success of the integration of MCC into DataWorks, the successful
completion of the Preferred Stock financing of DataWorks in August 1995, the
completion of DataWorks' initial public offering in October 1995 and the
recruitment of additional senior management personnel.
SECTION 162(m) OF THE INTERNAL REVENUE CODE
Section 162(m) of the Code limits DataWorks to a deduction for federal
income tax purposes of no more than $1 million of compensation paid to certain
Named Executive Officers in a taxable year. Compensation above $1 million may be
deducted if it is "performance-based compensation" within the meaning of the
Code.
The statute containing this law and the applicable Treasury regulations
offer a number of transitional exceptions to this deduction limit for
pre-existing compensation plans, arrangements and binding contracts. As a
result, the Compensation Committee believes that at the present time it is quite
unlikely that the compensation paid to any Named Executive Officer in a taxable
year which is subject to the deduction limit will exceed $1 million. Therefore,
the Compensation Committee has not yet established a policy for determining
which forms of incentive compensation awarded to its Named Executive Officers
shall be designed to qualify as "performance-based compensation." The
Compensation Committee intends to continue to evaluate the effects of the
statute and to comply with Code Section 162(m) in the future to the extent
consistent with the best interests of DataWorks.
SUBMITTED BY THE COMPENSATION
COMMITTEE OF THE BOARD OF DIRECTORS:
FINIS F. CONNER
RONALD S. PARKER
CERTAIN TRANSACTIONS
DataWorks has entered into indemnity agreements with certain officers and
directors which provide, among other things, that DataWorks will indemnify such
officer or director, under the circumstances and to the extent provided for
therein, for expenses, damages, judgments, fines and settlements he may be
required to pay in actions or proceedings which he is or may be made a party be
reason of his position as a director, officer or other agent of DataWorks, and
otherwise to the full extent permitted under California law and DataWorks'
Bylaws.
DataWorks entered into loan agreements dated as of May 27, 1994, as amended
as of April 23, 1995, with (among other parties) PMF and PMA. Nathan W. Bell, a
director of DataWorks, is a general partner of PPC, which is the sole general
partner of PMF, and Ronald S. Parker, a director of DataWorks, is the Chairman
and a majority shareholder of PMA. PMF loaned DataWorks $3,400,000 in 1994 and
an additional $775,972 in 1995. PMF received an aggregate of $125,279 in
processing fees for its loans. PMA loaned DataWorks $1,327,000 in 1994 and an
additional $302,858 in 1995. PMA received an aggregate of $48,896 in processing
fees for its loans. These loans bore interest at 12.0% per annum. DataWorks
prepaid these loans in full in November 1995 using a portion of the net proceeds
of DataWorks' initial public offering. In connection with these loans, DataWorks
issued to (i) PMF warrants to purchase an aggregate of 1,411,730 shares of
Common
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<PAGE> 90
Stock, (ii) PMA warrants to purchase an aggregate of 550,990 shares of Common
Stock and (iii) PPC warrants to purchase an aggregate of 28,097 shares of Common
Stock. Upon the completion of DataWorks' initial public offering (i) 668,087
shares of such warrants held by PMF terminated and an aggregate of 57,421 shares
of Common Stock were issued to PMF upon the net exercise of the remaining
warrants, (ii) 13,662 shares of such warrants held by PMA terminated and an
aggregate of 85,504 shares of Common Stock were issued to PMA upon the net
exercise of the remaining warrants and (iii) 13,296 shares of such warrants held
by PPC terminated and an aggregate of 5,195 shares of Common Stock were issued
to PPC upon the net exercise of the remaining warrants.
In August 1995, DataWorks completed a financing of its Series A Preferred
Stock (the "Series A Financing"). In connection with the Series A Financing,
DataWorks issued (i) 138,350 shares of Series A Preferred Stock to PMF (in
exchange for cancellation of approximately $1,000,000 of indebtedness), (ii)
1,383 shares of Series A Preferred Stock to Mr. Bell, (iii) 186,773 shares of
Series A Preferred Stock to DataWorks Partners IV, L.P., of which PMA is the
general partner and a limited partner and of which Mr. Parker is a limited
partner, and (iv) 6,917 shares of Series A Preferred Stock to a trust of which
Finis F. Conner, a director of DataWorks, is a trustee. The purchase price for
the Series A Preferred Stock was $7.23 per share. In connection with the Series
A Financing, DataWorks issued to (i) PMF a warrant to purchase an aggregate of
3,458 shares of Common Stock, (ii) Mr. Bell a warrant to purchase 69 shares of
Common Stock, (iii) PMA a warrant to purchase 13,662 shares of Common Stock and
(iv) a trust of which Mr. Conner is a trustee a warrant to purchase 345 shares
of Common Stock. These warrants have an exercise price of $8.68 per share. The
shares of Common Stock into which such Series A Preferred Stock was converted
upon completion of DataWorks' initial public offering are entitled to certain
demand and piggyback registration rights.
In connection with DataWorks' initial public offering in October 1995 and
the subsequent exercise of the underwriters' overallotment option in November
1995, the following persons sold Common Stock and/or warrants to purchase Common
Stock in the amounts set forth below: (i) Stuart W. Clifton, Chairman of the
Board, President and Chief Executive Officer of DataWorks, sold 119,527 shares
of Common Stock, 40,000 of which was held by a trust of which Mr. Clifton is a
trustee; (ii) Mr. Bell sold 5,665 shares of Common Stock; (iii) PPC sold
warrants to purchase 4,774 shares of Common Stock; (iv) PMF sold warrants to
purchase 303,491 shares of Common Stock; (v) Mark S. Howlett, Executive Vice
President and a director of DataWorks, sold 42,599 shares of Common Stock, 8,000
shares of which was held by a trust of which Mr. Howlett is a trustee; (vi) PMA
sold warrants to purchase 110,000 shares of Common Stock; (vii) DataWorks
Partners IV, L.P. sold 93,386 shares of Common Stock; and (viii) Alfred R.
Alteslane, former Executive Vice President and Chief Operations Officer, sold
28,398 shares of Common Stock. In addition, upon the completion of DataWorks'
initial public offering, an aggregate of 4,723 shares of Common Stock were
issued to Mr. Bell upon the net exercise of his remaining warrants.
At December 31, 1993 and 1994, DataWorks owed Mr. Clifton $481,000 and
$50,000, respectively, for loans made by him bearing interest at rates from 6%
to 15% per annum. Such loans owed to Mr. Clifton were repaid in September 1995.
The principal amount of all outstanding advances paid to Mr. Clifton pursuant to
his executive employment contract as of June 30, 1996 was $155,300. See
"Employment Agreements."
In May 1994, in connection with the loan received by DataWorks from
Greyhound Financial Corporation, Mr. Clifton entered into a Guaranty and
Subordination whereby Mr. Clifton guaranteed payment in full of the term loan.
This guaranty terminated in connection with the repayment of the loan in
September 1995.
In January 1996, DataWorks entered into an agreement with Norman R.
Farquhar, Executive Vice President, Chief Executive Officer and a director of
DataWorks, regarding his employment with DataWorks. See "Employment Agreements."
In January 1995, Mr. Russo received a grant of a stock option under the
Incentive Plan to purchase up to 19,230 shares of Common Stock at an exercise
price of $.65 per share of which he exercised 4,800 shares in February 1996. In
May 1995, Mr. Russo received a grant of a stock option under the Incentive Plan
to purchase up to 3,846 shares of Common Stock at an exercise price of $2.86 per
share. Such options vest over a four-year period. In April 1995, in connection
with his election to the Board of Directors, Mr. Conner received a grant of a
nonstatutory stock option outside of the Incentive Plan to purchase up to 34,615
share of Common
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Stock at an exercise price of $1.30 per share. Such option vests monthly over
three years, with vesting tied to Mr. Conner's continued service as a member of
the Board of Directors. In August 1995, in connection with his election to the
Board of Directors, Mr. Farquhar received a grant of a nonstatutory stock option
outside of the Incentive Plan to purchase up to 19,230 shares of Common Stock at
an exercise price of $5.20 per share. Such option vests monthly over three
years, with vesting tied to Mr. Farquhar's continued service as a member of the
Board of Directors. In October 1995, Messrs. Clifton, Howlett and Russo received
grants of stock options under the Incentive Plan to purchase up to 30,000,
20,000 and 15,000 shares of Common Stock, respectively, at an exercise price of
$10.725, $9.75 and $9.75 per share, respectively. Such options vest monthly over
a three-year period. In February 1996, in connection with his employment with
DataWorks, Mr. Farquhar received a grant of an option under the Incentive Plan
to purchase 135,000 shares of Common Stock at an exercise price of $11.0265 per
share. Such option vests monthly over a three-year period.
DataWorks has entered into certain additional transactions with its
directors and officers, as described under the caption "Executive Compensation."
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DATAWORKS PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the ownership
of DataWorks' Common Stock as of July 31, 1996 by: (i) each director; (ii) each
of the executive officers named in the Summary Compensation Table; (iii) all
executive officers and directors of DataWorks as a group; and (iv) all those
known by DataWorks to be beneficial owners of more than five percent of its
Common Stock.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP (1)
------------------------------------------
NUMBER OF PERCENT OF PERCENT AFTER
BENEFICIAL OWNER SHARES TOTAL MERGER
------------------------------------------------- --------- ---------- -------------
<S> <C> <C> <C>
Stuart W. Clifton(2)............................. 1,125,215 18.7% 14.4%
Nathan W. Bell(3)................................ 417,944 7.0% 5.4%
Pacific Mezzanine Fund, L.P.(4)
2200 Powell Street, Suite 1250
Emeryville, CA 94608........................... 407,158 6.8% 5.2%
Mark S. Howlett(5)............................... 331,012 5.5% 4.2%
Ronald S. Parker(6).............................. 189,691 3.2% 2.4%
Finis F. Conner(7)............................... 24,024 * *
Norman R. Farquhar(8)............................ 34,745 * *
Rick E. Russo(9)................................. 15,274 * *
All executive officers and directors
as a group (7 persons)(10)..................... 2,137,905 35.1% 27.1%
</TABLE>
- ---------------
* Less than one percent.
(1) This table is based upon information supplied by officers, directors and
principal shareholders. Unless otherwise indicated in the footnotes to this
table and subject to community property laws where applicable, DataWorks
believes that each of the shareholders named in this table has sole voting
and investment power with respect to the shares indicated as beneficially
owned. Applicable percentages are based on 6,006,240 shares outstanding on
July 31, 1996, adjusted as required by rules promulgated by the Securities
and Exchange Commission (the "SEC"), and assume that the DCD shareholders
will receive 1,800,000 shares of DataWorks Common Stock upon consummation
of the Merger.
(2) Includes 9,166 shares subject to options exercisable within 60 days of July
31, 1996.
(3) Includes 69 shares issuable upon exercise of a warrant held by Mr. Bell,
3,458 shares issuable upon exercise of a warrant held by PMF, 412,700
shares held by PMF and 5,195 shares held by PPC. Mr. Bell is a general
partner of PPC, which is the general partner of PMF. He disclaims
beneficial ownership of securities held by PMF and PPC, except to the
extent of his pro rata interest therein. Includes 416 shares subject to
options exercisable within 60 days of July 31, 1996.
(4) Includes 3,458 shares issuable upon exercise of a warrant held by PMF.
(5) Includes 6,111 shares subject to options exercisable within 60 days of July
31, 1996.
(6) Includes 85,504 shares held by PMA, of which Mr. Parker is Chairman of the
Board and a majority shareholder, and 93,387 shares held by DataWorks
Partners IV, L.P., of which PMA is a general partner. Includes 416 shares
subject to options exercisable within 60 days of July 31, 1996.
(7) Includes 6,917 shares of Common Stock and 345 shares issuable upon exercise
of a warrant held by a trust of which Mr. Conner is a trustee and 16,762
shares subject to options exercisable within 60 days of July 31, 1996.
(8) Includes 33,194 shares subject to options exercisable within 60 days of
July 31, 1996.
(9) Includes 9,078 shares subject to options exercisable within 60 days of July
31, 1996.
(10) Includes 603,703 shares held by entities affiliated with directors of
DataWorks, 75,143 shares subject to options held by officers and directors
exercisable within 60 days of July 31, 1996 and 3,872 shares issuable upon
exercise of warrants held by directors and entities affiliated with
directors. See notes (2), (3), (5), (6), (7), (8) and (9).
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DCD MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements that involve
risks and uncertainties. DCD's and the combined entity's actual results could
differ materially from those discussed here. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in the sections entitled "Risk Factors" and "DCD Business," as well as those
discussed elsewhere in this Prospectus/Joint Proxy Statement.
DCD designs, develops, markets and supports business management software
for use by small and mid-sized manufacturers in the make-to-order (MTO)
manufacturing industry. Make-to-order manufacturers are often referred to as
custom manufacturers, contract manufacturers or job shops. DCD's products and
services are employed by manufacturers to enhance their overall business
performance. This is accomplished by providing the information facilities
necessary to reduce manufacturing lead time, minimize material inventory,
improve operating efficiencies and improve the communication of information
necessary for tactical management.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
of total revenues represented by certain statement of operations data:
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------- ---------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues:
Software and related products........... 66 % 68 % 67 % 66 % 68 %
Services................................ 34 32 33 34 32
--- --- --- --- ---
Total revenues.................. 100 100 100 100 100
=== === === === ===
Cost of revenues:
Software and related products........... 12 10 9 10 9
Services................................ 25 17 15 18 18
--- --- --- --- ---
Total cost of revenues.......... 37 27 24 28 27
Gross profit:............................. 63 73 76 72 73
--- --- --- --- ---
Operating expenses:
Sales and marketing..................... 28 30 33 35 32
Research and development................ 7 8 5 5 2
General and administrative.............. 15 16 12 14 16
ESOP contribution....................... 9 7 4 5 0
--- --- --- --- ---
Total operating expenses........ 59 61 54 59 50
--- --- --- --- ---
Income from operations.................... 4 12 22 13 23
Other income (expense).................... (2) (1) 0 0 1
--- --- --- --- ---
Income before income taxes................ 2 11 22 13 24
Provision for income taxes................ -- 2 7 4 10
--- --- --- --- ---
Net income................................ 2 % 9 % 15 % 9 % 14 %
=== === === === ===
</TABLE>
TOTAL REVENUES
DCD's principal sources of revenue consist of software licenses and related
services, including software maintenance, consulting and custom programming. In
addition, DCD resells third party pre-printed customized forms including quote
forms, invoices, checks, time cards and others for use by its customers. Some
Vista
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revenue is generated through the resale of third party software used in the
deployment of DCD's software products. A small amount of revenue is generated
through the sale of third party hardware.
Total revenues increased 38% from 1993 to 1994, 82% from 1994 to 1995 and
63% in the first six months of 1996 compared to the first six months of 1995.
The increases seen in 1994 and subsequent periods were due primarily to the
availability of the new Vista and Vantage products beginning in the middle of
1994. The Vista product contributed significantly to growth in the number of
sales to manufacturers while the Vantage product contributed to sizable
increases in the average dollar sale per customer in its target markets. During
the early 1990s, DCD invested in revamping its sales strategy from one partially
dependent on independent third parties to one based only on internal direct
sales and telesales channels within DCD. Continued investments in expanding
product functionality and market channels contributed to ongoing growth in 1996.
Software License Revenues
Revenues from DCD's noncancellable software licenses are recognized upon
delivery of the products provided that no significant Company obligations remain
and collection of the related receivable is deemed probable.
DCD's Vista product line is sold over the telephone to smaller
manufacturing entities and carries a 30-day money back guarantee. DCD books this
revenue upon shipment and maintains adequate reserves to cover any returns which
typically average approximately 10%. Vantage software, being a more
sophisticated product for customers needing enhanced functionality, is sold
through a direct sales force. Software sales increased by 70% from 1993 to 1994
as a result of the introduction of the Vantage and Vista products. Added product
functionality, combined with ongoing investments in building sales channel
strength and market presence contributed to software sales growth of 97% between
1994 and 1995. Increased marketing activity as well as a solid referral base and
expanded functionality resulted in growth of 75% during the first six months of
1996 compared to the same period in 1995.
Cost of Software License Revenues
The cost of software license revenues includes the costs of software
related products sold with DCD's software systems that are provided by third
parties, printed installation and operating information supplied with the
product and the cost of packaging for shipment. With the introduction of new
products in 1994, DCD improved the packaging associated with these items to
provide an image consistent with their performance. The Vantage product cost
also includes the cost of Progress software -- client run-time and server
database costs. There are no run-time or database costs related to the Vista
product; however, the Vista product costs do include an external firmware device
for security. The Classic product can employ both software and hardware methods
for porting to alternate computer hardware platforms.
Other Related Product Revenues
DCD occasionally incorporates and sells elements of computer and electronic
hardware with its software products and systems. Hardware revenue consists of
products provided as a convenience to customers, including touchscreen computer
monitors, data entry light pens and bar code data collection wands. These
products are commercially available to customers from a variety of alternative
sources. The amount of revenue and costs associated with these products has
consistently been less than 5% of total revenues.
For the convenience of its customers, DCD sells various forms and supplies
to complement the utilization of its software products, including pre-printed
forms with customized logos for order acknowledgments, packing slips, purchase
orders, AP and payroll checks, envelopes, labels, time cards and other forms of
paper documentation. These items are printed by a third-party and drop-shipped
to the customer. With the introduction of Vista and Vantage products, which
employ laser printing technology, DCD had expected this business element to
decline. Although forms revenue has continued to grow in absolute dollars, it
has declined as a percentage of total revenues from 8% in 1994 to 5% in 1995.
During the first six months of 1996 and for the comparable 1995 period, revenue
from forms and supplies constituted only 5% of total sales.
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The forms and supplies sold to customers are printed by a third party and
drop-shipped direct to the customer. Margins on these items were 61% in 1994 and
58% in 1995. Margins for the first six months of 1996 were 57%. The decline in
margin is attributed to increased printing costs.
Services Revenues
Services revenues include fees associated with software maintenance and
support services, consulting, education and training and custom programming.
Software maintenance and support service revenues are generally prepaid and
recognized ratably over the period of the associated service agreement.
Consulting, education, training and custom programming fees are generally paid
and recognized as the services are performed.
Services revenues increased 27% from 1993 to 1994 and 90% from 1994 to
1995. During the first six months of 1996, such revenues were 53% above 1995
levels for the same period. Custom programming remained relatively flat during
the 1993-1995 period as a result of DCD's focus on maximizing standard product
functionality in the near term. Revenues associated with product implementation
and ongoing support and maintenance increased throughout the period as a result
of the growing software customer base.
Cost of Services Revenues
Services available to customers to provide software maintenance and support
(including minor costs of product enhancements and updates for existing
products), consulting and customized programming are provided through an
in-house staff of professionals. The costs associated with these services are
based on salaries plus a portion of overhead costs. Out-of-pocket expenses
related to travel to customer facilities are paid by the customer. From 1993 to
1994 the cost of services decreased by 4%. From 1994 to 1995 the costs increased
by 59% and for the first six months of 1996 the associated costs were 68% above
1995 levels. Cost increases are directly related to increases in
revenue-generating customer services provided by DCD. Margins have generally
increased throughout the period as a result of increased prices and better
operating efficiencies realized through added internal systems and refined
processes.
Sales and Marketing Expenses
Sales and marketing expenses increased 45% from 1993 to 1994 and 102% from
1994 to 1995 as a result of heightened marketing required for the introduction
of the new Vista and Vantage product lines, including an aggressive marketing
and market awareness campaign and the addition of personnel to DCD's sales and
marketing organizations. Sales and marketing expenses increased 45% in the first
six months of 1996 from the comparable period in 1995 as a result of expanded
market coverage through direct mail advertising and other promotional programs.
DCD expects sales and marketing expenses to continue to increase as a driving
element toward increasing revenues for the future in existing and new markets.
Research and Development and Expenses
Software design and programming expenses associated with product
development are expensed as incurred, as such costs primarily represent the cost
of establishing technological feasibility of a development project. The flow of
development provides for a relatively short time span between when technological
feasibility is attained and general release occurs. As a result, DCD has not
capitalized any costs related to software development. Research and development
expenses increased 53% from 1993 to 1994 as DCD finalized the development of the
initial phases of the Vista and Vantage product lines. With the primary elements
of both products effectively completed, ongoing development in 1995 remained
relatively flat as development efforts have focused only on expanded
functionality and limited new module design. The majority of development effort
and investment in the first six months of 1996 was focused on providing expanded
product functionality for horizontal and vertical market expansion and is
evidenced in increased cost of services revenues. The resources required for
this effort have been at lower levels as compared to the levels required for the
development and enhancement of Vista and Vantage in 1994 and 1995. To continue
to build
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its technology position in the marketplace, research and development expenses
are expected to increase both in absolute dollars and as a percentage of
revenue.
General and Administrative Expenses
General and administrative expenses increased 48% between 1993 and 1994 and
38% between 1994 and 1995 as a result of increased employee head count
throughout DCD. Relocation to a larger facility in 1995 also contributed to
ongoing increased costs. General and administrative expenses increased 84% in
the first six months of 1996 compared to the first six months of 1995 due to
administrative expenses associated with increasing employment population
including facility and internal systems costs.
DCD ESOP Contributions and Dividends
DCD established the DCD ESOP for the benefit of all employees meeting
certain eligibility requirements. In November 1992, all outstanding common stock
was exchanged for shares of Class B common stock at a ratio of 600 shares of
Class B Common Stock for each share of common stock. On November 12, 1992, DCD
obtained financing of $2,550,000 from a commercial bank and advanced proceeds to
the DCD ESOP which purchased 267,750 shares of Class B common stock from the
selling stockholder of DCD. The DCD ESOP's shares were immediately converted to
Class A common stock. Class A and Class B common stock have identical voting and
liquidation rights. If dividends are declared to only one class of stock, the
dividends must be declared to the shares of Class A common stock held by the DCD
ESOP. DCD recorded the funds advanced to the DCD ESOP as a "Receivable from
ESOP" which was a reduction to stockholders' equity. As DCD made annual
contributions to the DCD ESOP, the contributions were used to repay the
obligation. As the principal amount of the loan was repaid, the "Receivable from
ESOP" was reduced accordingly. During 1995, the DCD ESOP note payable and
"Receivable from ESOP" were paid in full.
Other Income and Expense
From November 1992 to September 1995 DCD had outstanding debt associated
with the DCD ESOP. The debt was retired in September 1995. Since that time DCD's
cash accounts have been increasing, resulting in interest income as reported.
Other Income/Expense has been relatively insignificant.
Income Taxes
Income taxes are provided based upon the provisions of Statement of
Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income
Taxes." SFAS 109 requires the asset and liability method of accounting for
income taxes and calls for the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
included in the financial statements and tax returns. DCD realized tax benefits
from 1992 through 1995 from the deduction of contributions and dividends paid on
common stock held by the DCD ESOP used to make DCD ESOP debt service payments,
which have reduced DCD's effective tax rate in those periods.
LIQUIDITY AND CAPITAL RESOURCES
DCD has to date funded its operations and growth primarily through cash
generated from ongoing business operations. Cash flow provided by operations was
$248,591, $757,401 and $2,598,153 in 1993, 1994 and 1995, respectively. In 1995
DCD obtained a $225,000 line of credit from its commercial bank. In July 1996
the credit line was increased to $1,000,000. No amounts were outstanding on the
line of credit at December 31, 1994 and 1995.
In the years 1993, 1994 and 1995, DCD generated cash to repay the
outstanding debt associated with the DCD ESOP in the amounts of $607,142,
$855,355, and $1,087,503, respectively.
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DCD BUSINESS
The following discussion contains forward-looking statements that involve
risks and uncertainties. DCD's and the combined entity's actual results could
differ materially from those discussed here. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in the sections entitled "Risk Factors" and "DCD Management's Discussion and
Analysis of Financial Condition and Results of Operations," as well as those
discussed elsewhere in this Prospectus/Joint Proxy Statement.
COMPANY OVERVIEW
DCD designs, develops, markets and supports business management software
for use by small and mid-sized manufacturers in the make-to-order (MTO)
manufacturing industry. Make-to-order manufacturers are often referred to as
custom manufacturers, contract manufacturers or job shops. DCD's products and
services are employed by manufacturers to enhance their overall business
performance. This is accomplished by providing the information facilities
necessary to reduce manufacturing lead time, minimize material inventory,
improve operating efficiencies and improve the communication of information
necessary for tactical management.
Since its inception in 1974, DCD has designed and delivered software
products to address the unique needs of the MTO industry by providing
manufacturers with the tools to monitor and control their manufacturing and
business operations. DCD was the first software provider to deliver business
solutions focused exclusively on the MTO manufacturing industry and DCD believes
it currently has the largest installed base of any MTO software vendor.
Moreover. the recent emphasis in the marketplace on Just-In-Time ("JIT")
manufacturing, which closely resembles the MTO business operations model, is
continuing to expand DCD's available market to encompass more traditional low
volume discrete manufacturers.
DCD's software products include Vantage, Vista and Classic. Vantage,
released in May 1994, is a Windows-based client/server application designed for
small and medium-sized MTO manufacturers and MTO manufacturers with some
standard product content to their business offering. Vantage is scaleable and
capable of providing software solutions for manufacturers of 20 to 500 employees
per site. Vantage is written in Progress, a fourth-generation software
development language ("4GL"). Over 180 systems have been sold.
Vista, released in April 1994, is designed to manage virtually every phase
of smaller manufacturing businesses, which generally employ fewer than 50
people. Vista runs on the Windows platform in either stand-alone or networked
configurations including Netware and Windows NT. Vista is written in Microsoft's
FoxPro language and database and was recently re-released in the 32-bit Visual
FoxPro architecture. Over 580 systems have been sold.
Classic is a comprehensive, integrated series of application modules
designed for small to mid-sized MTO manufacturers. It utilizes a character-based
user interface and operates on personal computer networks, the IBM AS/400, the
IBM S/36 and the IBM R/S 6000. Classic has a current installed customer base
exceeding 1000 of which over 500 continue to subscribe to annual maintenance
support contracts. The product provides significant ongoing revenue from
maintenance services and has revenue potential for upgrades to DCD's Vantage
product line.
DCD's software prices range from $4,000 to $250,000 and are based on the
specific product line, the modules purchased and the number of concurrent users.
The average sales price of Vantage, Vista and Classic is $60,000, $12,000 and
$22,000 respectively. Relatively few new Classic licenses are currently being
sold or promoted, as virtually all new customers prefer a graphical user
interface as opposed to a character based interface. DCD expects the average
sales price of Vantage will increase in the future as additional modules are
released and functionality expands. Vista is expected to maintain its
competitive pricing posture even with expanded functionality to be added. The
purchase price for newly purchased software includes twelve months of telephone
support and maintenance updates. Ongoing telephone support, technical services,
education and training, installation and implementation services are provided
for additional fees.
DCD primarily utilizes two domestic sales channels. Vantage is sold through
a ten member direct sales force located throughout the United States. Vista is
sold through an in-house eight member telesales force
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located in the Minneapolis headquarters. Direct mail, trade journal advertising,
nationwide seminars and telemarketing are used to increase market awareness and
build a solid prospect base for sales activity.
DCD has customers in virtually every state and Canada. Customers include
machine shops, sheet metal fabricators, metal stamping operations, screw machine
shops, tool and die facilities, machine builders, mold makers and many other
small to mid-size manufacturers that are suppliers to many of the country's
largest manufacturers in numerous capital equipment-related industries.
SALES AND MARKETING
DCD's market analysis efforts balance the growing requirements of current
customers with those needed to expand both horizontal and vertical market
coverage to establish priorities in the allocation of development, sales and
marketing resources. DCD focuses on the MTO manufacturing sector by 4-digit SIC
code. Market analysis identifies the specific requirements of each market niche
to arrive at a product that accommodates the requirements of several specific
market niches while simultaneously providing the broad functionality for a
highly versatile product. DCD intends to maintain its niche-based focus on
product functionality as a key factor in expanding market share and building on
its leadership position.
The business formula being employed in the sales process utilizes
telemarketing in sales lead qualification, telesales for Vista sales and direct
sales for Vantage. Business success is very dependent on presence in the sales
process, and DCD's ability to grow relies on continued growth in the capability
and capacity of its sales channels. In addition, efforts are underway to
continue to explore and leverage alternate third party sales channels such as
value-added resellers and consultants in "lead finder" roles.
DCD has and will continue to work closely with large manufacturers who want
to ensure that their suppliers have adequate software business systems in place
to insure continuity in material availability. DCD has demonstrated that their
software products can improve their suppliers' delivery performance, decrease
costs, improve material flow and thereby improve the entire manufacturing supply
chain.
CUSTOMER SUPPORT SERVICES
DCD considers its customer support to be far above the level of service
provided by competitors and maintains a high level of customer satisfaction as
measured by ongoing surveys. Over ninety percent of customers renew their
support agreements annually. DCD's support services include telephone
application support, software updates and maintenance updates, implementation
programs, technical services, installation services, education and training,
consulting and custom programming. Telephone support and maintenance updates are
provided as part of an annual service maintenance contract fee. All other
services are purchased separately. DCD also supplies its customers with a
variety of forms and supplies, such as invoices, checks, quote forms, W-2 forms
and time cards for use in their businesses. On an annual basis, a National User
Conference is held attracting hundreds of current customers and addressing such
issues as development priorities, new releases of the products, current
manufacturing trends, product training and education. In addition, regional user
groups are formed to allow users on a local basis to share ideas on product use,
product enhancement needs and product utilization.
PRODUCT DEVELOPMENT
The costs associated with product development are expensed as incurred, as
such costs primarily represent the cost of establishing technological
feasibility of a development project. The flow of development provides for an
insignificant time span between when technological feasibility is attained and
general release occurs. As a result, DCD has not capitalized any software
development. With the primary elements of both Vista and Vantage products
effectively completed, the majority of development effort and investment in the
first half of 1996 was focused on providing expanded product functionality for
horizontal and vertical market expansion and is evidenced in increased cost of
service revenues. For DCD to continue to build its technology position in the
marketplace, research and development expenses are expected to increase both in
absolute dollars and as a percentage of sales revenue.
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COMPETITION
Approximately 200 companies sell some form of software targeted at the
manufacturing industry with no significant majority marketshare player. They all
compete for a portion of the discretionary capital dollars available for
software. DCD's principal market is highly fragmented and consists primarily of
smaller competitors operating on a national, regional or local level. All DCD's
competitors are primarily domestic companies, with only three companies
competing on a regular basis for the same customers -- Symix Systems, Inc.,
JobBoss Software, and Lilly Software Associates, Inc. DCD believes it has
competed favorably against these three on the basis of product functionality,
price, ongoing customer support and new customer acquisition and retention.
Several factors contribute to total product differentiation in the
industry, including price, functionality, ease-of-use, user interface,
documentation, quality, speed and responsiveness of support services, speed of
operation, niche feature focus, openness of database and several others. DCD
believes that there are far more barriers to market entry than there are to
market exit. Current market demand for products like DCD's, which utilize the
latest in technology to provide an easy-to-use graphical interface and open
database, require that all competitors in the industry update their products to
operate effectively in a Windows environment. The investment to accommodate this
redesign is not trivial and the limited resources available to some software
providers will not allow them to accomplish this task in a timeframe acceptable
to their current customers and prospects.
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DCD MANAGEMENT
ROBERT W. BRANDEL
The only current executive officer of DCD who will serve as an executive
officer of DataWorks is Robert W. Brandel, who will serve as a Vice President of
DataWorks. Mr. Brandel has served as President and as a director of DCD since
1992. From 1988 to 1992, Mr. Brandel was the President and Chief Executive
Officer of Network Communications Corporation.
During the year ended December 31, 1995, Mr. Brandel's total annual salary
did not exceed $100,000. Mr. Brandel does not hold any options to purchase
shares of DCD common stock. Upon consummation of the Merger, Mr. Brandel will
receive the Applicable Multiple for his 198,600 shares of DCD Common Stock.
CERTAIN TRANSACTIONS
In July 1996, DCD President Robert W. Brandel exercised an option with DCD
Chief Executive Officer and Director Dwayne E. Borg, acquiring 37.8% of DCD's
common stock. The tax impact to Mr. Brandel included approximately $105,000 in
FICA taxes to be paid by Mr. Brandel. This amount was initially paid by DCD but
repaid to DCD by Mr. Brandel in August 1996.
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DCD PRINCIPAL SHAREHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of DCD's Common Stock as of July 31, 1996, by: (i) each
person known by DCD to beneficially own 5% or more of the outstanding shares of
DCD Common Stock, (ii) each of DCD's directors, (iii) each of DCD's executive
officers and (iv) all executive officers and directors of DCD as a group.
<TABLE>
<CAPTION>
SHARES OF
DATAWORKS
SHARES OF DCD PERCENT OF DCD COMMON STOCK
COMMON STOCK STOCK OUTSTANDING BENEFICIALLY
BENEFICIALLY PRIOR TO THE OWNED AFTER
NAME OWNED(1) MERGER THE MERGER(2)
- ------------------------------------------- ------------------- ----------------- -------------
<S> <C> <C> <C>
Employee Stock Ownership Plan.............. 267,750(3) 51.0% 918,007
Robert W. Brandel.......................... 198,600(4)(5) 37.8% 680,920
Richard D. Borg............................ 23,775(4)(5)(6) 4.5% 81,515
William J. Borg............................ 23,775(4)(7) 4.5% 81,515
Dwayne E. Borg............................. 8,700(4)(5) 1.7% 29,829
All Officers and Directors
as a group (6 persons)..................... 254,850(4)(5)(6)(7) 48.5% 873,779
</TABLE>
- ---------------
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, and includes generally sole voting and
investment power with respect to securities.
(2) Calculated on the basis of an assumed Applicable Multiple of 3.4286.
(3) Class A Common Stock.
(4) Class B Common Stock
(5) Excludes 267,750 shares held by the DCD ESOP for which Robert W. Brandel,
Richard D. Borg and Dwayne E. Borg serve as trustees. Each of such trustees
disclaims beneficial ownership of the DCD ESOP shares.
(6) Includes 400 shares held by Mr. Borg's wife, Kathleen D. Borg.
(7) Includes 400 shares held by Mr. Borg's wife, Karen M. Borg.
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DESCRIPTION OF DATAWORKS CAPITAL STOCK
The authorized capital stock of DataWorks consists of 25,000,000 shares of
DataWorks Common Stock, no par value, and 5,000,000 shares of Preferred Stock.
COMMON STOCK
As of the Record Date, there were 6,052,060 shares of DataWorks Common
Stock outstanding.
The holders of DataWorks Common Stock are entitled to one vote for each
share held of record on all matters submitted to a vote of the shareholders. The
holders of DataWorks Common Stock are entitled to cumulative voting rights with
respect to the election of directors, and as a consequence, minority
shareholders are able to elect directors on the basis of their votes alone.
Subject to preferences that may be applicable to any shares of Preferred Stock
issued in the future, holders of DataWorks Common Stock are entitled to receive
ratably such dividends as may be declared by the DataWorks Board out of funds
legally available for such purpose. DataWorks' banking facility restricts
DataWorks' ability to pay dividends or to distribute assets. See "DataWorks
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." In the event of a liquidation,
dissolution or winding up of DataWorks, holders of DataWorks Common Stock are
entitled to share ratably in all assets remaining after payment of liabilities
and the liquidation preference of any then outstanding Preferred Stock. Holders
of DataWorks Common Stock have no preemptive rights and no right to convert
their DataWorks Common Stock into any other securities. There are no redemption
or sinking fund provisions applicable to DataWorks Common Stock. All outstanding
shares of DataWorks Common Stock are fully paid and nonassessable. The rights,
preferences and privileges of holders of DataWorks Common Stock are subject to,
and may be adversely affected by, the rights of the holders of shares of any
series of Preferred Stock that DataWorks may designate and issue in the future.
PREFERRED STOCK
The DataWorks Board has the authority to issue up to 5,000,000 shares of
Preferred Stock and to determine the price, rights, preferences and privileges
of those shares without any further vote or action by the shareholders. The
rights of the holders of DataWorks Common Stock will be subject to, and may be
adversely affected by, the rights of the holders of any Preferred Stock that may
be issued in the future. The issuance of Preferred Stock, while providing
flexibility in connection with possible acquisitions and other corporate
purposes, could have the effect of making it more difficult for a third party to
acquire a majority of the outstanding voting stock of DataWorks. DataWorks has
no present plan to issue any shares of Preferred Stock.
WARRANTS
As of June 30, 1996, DataWorks' outstanding warrants (the "Warrants")
entitled the holders thereof to purchase an aggregate of 36,314 shares of Common
Stock. The holders of the Warrants have the right to convert, pursuant to a
specified formula, the value of all or a portion of such holder's Warrants into
shares of Common Stock without payment of any exercise price or other
consideration. Pursuant to the formula, the aggregate number of shares of Common
Stock issuable upon exercise is less than the aggregate number of shares that
would be issuable upon exercise of the Warrants by payment of the exercise price
in cash. The holders of the Warrants are entitled to certain registration
rights. See "-- Registration Rights."
REGISTRATION RIGHTS
Pursuant to the Amended and Restated Registration Rights Agreement dated as
of August 24, 1995 (the "Registration Rights Agreement"), the holders (the
"Holders") of (i) Warrants to purchase an aggregate of 36,314 shares of
DataWorks Common Stock and (ii) 1,413,113 shares of DataWorks Common Stock
(collectively, the "Registrable Securities") are entitled to certain rights with
respect to the registration of such shares under the Securities Act, subject to
the terms and conditions of such Registration Rights Agreement. Whenever
DataWorks proposes to register any of its securities under the Securities Act,
either for its own account or the account of other securityholders, the Holders
are entitled, subject to certain conditions, to
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notice of such registration and to include their Registrable Securities therein
at DataWorks' expense, provided that, among other conditions, the underwriters
of any offering have the right to limit the number of shares included in such
registration. In addition, certain Holders may request that DataWorks file a
registration statement under the Securities Act at DataWorks' expense to
register such Holders' Registrable Securities, subject to certain conditions and
limitations.
The Merger Agreement contemplates that certain holders of the shares of
DataWorks Common Stock to be issued in the Merger will also be entitled to
certain demand and piggyback registration rights. See "The Merger and Related
Transactions -- Merger Agreement -- Registration Rights."
TRANSFER AGENT AND REGISTRAR
ChaseMellon Shareholder Services is the transfer agent and registrar for
DataWorks Common Stock.
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COMPARISON OF RIGHTS OF DATAWORKS SHAREHOLDERS
AND DCD SHAREHOLDERS
The rights of DataWorks shareholders are governed by its Articles of
Incorporation (the "DataWorks Articles"), its Bylaws (the "DataWorks Bylaws")
and the California Law. The rights of DCD shareholders are currently governed by
its Restated Articles of Incorporation, as amended (the "DCD Articles"), its
Bylaws, as amended (the "DCD Bylaws"), and the Minnesota Law. In addition,
certain restrictions on rights of transfer by DCD shareholders will be governed
by the Affiliate Agreements. Upon consummation of the Merger, DCD shareholders
will become shareholders of DataWorks with their rights as shareholders governed
by the California Law, the DataWorks Articles and the DataWorks Bylaws.
The following is a summary of certain similarities and differences between
the rights of DataWorks shareholders and DCD shareholders under the foregoing
governing documents and applicable law. This summary does not purport to be a
complete statement of such similarities and differences. The identification of
specific similarities and differences is not meant to indicate that other
equally or more significant similarities and differences do not exist. Such
similarities and differences can be examined in full by reference to the
California Law, the Minnesota Law and the respective corporate documents of DCD
and DataWorks.
Capital Stock. The authorized capital stock of DataWorks consists of
25,000,000 shares of DataWorks Common Stock, no par value, of which
shares were issued and outstanding on September 23, 1996, and 5,000,000
shares of Preferred Stock (the "DataWorks Preferred Stock"), issuable in such
series and with such rights, powers and privileges as the DataWorks Board shall
determine. DataWorks has designated 2,250,000 shares as Series A Preferred Stock
but currently has no shares of Preferred Stock outstanding and has no present
plan to issue any shares of DataWorks Preferred Stock. The authorized capital
stock of DCD consists of 10,000,000 shares of DCD Class A Common Stock, no par
value, of which 267,750 shares were issued and outstanding on September 23,
1996, and 10,000,000 shares of DCD Class B Common Stock, no par value, of which
257,250 shares were issued and outstanding on September 23, 1996. See "The DCD
Meeting -- Vote Required." Under both the DataWorks Articles and the DCD
Articles, holders of DataWorks Common Stock and DCD Common Stock are entitled to
one vote per share on all matters to be voted on by DataWorks shareholders or
DCD shareholders.
Amendment of Bylaws. The Minnesota Law and the DCD Bylaws provide that the
power to adopt, amend or repeal the bylaws shall be vested in the board, except
that the board shall not adopt, amend or repeal a bylaw fixing a quorum for
meetings of shareholders, prescribing procedures for removing directors or
filling vacancies in the board or fixing the number of directors or their
classifications, qualifications or terms of office, but may adopt or amend a
bylaw to increase the number of directors. Notwithstanding the foregoing, under
the Minnesota Law, a shareholder or shareholders holding 3% or more of the
voting shares entitled to vote may propose a resolution to amend or repeal
bylaws adopted, amended or repealed by the board, in which event such resolution
must be approved pursuant to the procedures for amending the articles of
incorporation.
Under the California Law, the bylaws may be amended or repealed either by
the board or by the holders of a majority in interest of the outstanding stock
of the company, except that a change in the authorized number of directors may
only be effected by a vote of the majority of the outstanding shares entitled to
vote; however, an amendment reducing the minimum number of directors to less
than five cannot be adopted if votes cast against its adoption are equal to or
more than 16% of the outstanding shares entitled to vote.
Amendment of DataWorks Articles and DCD Articles. The Minnesota Law
provides that an amendment to a corporation's articles must be by resolution
approved by the affirmative vote of a majority of the directors present or
proposed by a shareholder or shareholders holding 3% or more of the shares
entitled to vote thereon. Under the Minnesota Law and the DCD Articles, any such
amendment must be approved by the affirmative vote of a majority of the
shareholders entitled to vote thereon. Under the California Law, a corporation's
articles may be amended by the approval of a majority of the members of the
board of directors and by a majority of the outstanding shares.
Special Meetings of Shareholders. Under the Minnesota Law and the DCD
Bylaws, the Chief Executive Officer, the Chief Financial Officer, any two
directors or one or more shareholders holding ten
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percent (10%) or more of the shares entitled to vote at such meeting may call a
special meeting. However, if the meeting involves a business combination,
including an action to affect the composition of the board of directors, then at
least 25% of the shares entitled to vote at such meeting are required to call
the meeting. The DCD Bylaws also provide that notice of each shareholder meeting
must be mailed at least five days prior to the meeting. Under the Minnesota Law,
if the meeting is demanded by shareholders, the meeting, on notice, must occur
between 30 and 90 days after receipt of the demand.
Under the California Law, a special meeting of shareholders may be called
by the board of directors, the Chairman of the Board of Directors, the President
or the holders of shares entitled to cast not less than ten percent (10%) of the
votes at such meeting and such persons as are authorized by the articles of
incorporation or bylaws. The DataWorks Bylaws further provide that upon written
request to the Chairman of the Board, the President, any vice president or the
Secretary of DataWorks by any person or persons (other than the DataWorks Board)
entitled to call a special meeting of shareholders, such officer forthwith shall
cause notice to be given to the shareholders entitled to vote, that a meeting
will be held at a time requested by the person or persons calling the meeting,
such time to be not less than 35 nor more than 60 days after receipt of such
request. If such notice is not given within 20 days after receipt of such
request, the person or persons calling the meeting may give notice thereof in
the manner provided by the California Law or in the DataWorks Bylaws. Except as
otherwise may be required by law, written notice of each meeting of DataWorks
shareholders shall be given to each DataWorks shareholder entitled to vote at
that meeting, by the Secretary, assistant secretary or other person charged with
that duty, not less than 10 (or, if sent by third class mail, 30) nor more than
60 days before such meeting.
Actions by Written Consent of Shareholders. Under both the Minnesota Law
and the California Law, shareholders may execute an action by written consent in
lieu of a shareholder meeting. The DCD Bylaws provide that any action which may
be taken by the shareholders at a meeting of shareholders may be taken without a
meeting if authorized by a writing or writings signed by all of the shareholders
who would be entitled to vote at such meeting, and such action shall be
effective on the date on which the last signature is placed on such writing or
writings, or such earlier effective date as is set forth therein. The DataWorks
Bylaws provide that any action which may be taken at a meeting of shareholders
may be taken without a meeting and without prior notice if written consents
setting forth the action so taken are signed by the holders of outstanding
shares having not less than the minimum number of votes that would be necessary
to authorize or take such action at a meeting at which all shares entitled to
vote thereon were present and voted. The DataWorks Bylaws provide further that
directors may not be elected by written consent except by unanimous written
consent of all shares entitled to vote for the election of directors; provided,
however, that any vacancy on the DataWorks Board (other than a vacancy created
by removal) which has not been filled by the DataWorks Board may be filled by
written consent of a majority of the outstanding shares entitled to vote for the
election of directors.
Size of the Board of Directors. The Minnesota Law provides that the board
of directors of a Minnesota corporation shall consist of one or more directors
as fixed by the articles of incorporation or bylaws. Under the DCD Bylaws, the
DCD Board is to consist of not less than three, nor more than seven, directors,
and the number of directors presently is three. Each member of the DCD Board is
to be elected for a one-year term at the annual meeting of shareholders. The
California Law allows the number of persons constituting the board of directors
to be fixed by the bylaws or the articles of incorporation, or permits the
bylaws to provide that the number of directors may vary within a specified
range, the exact number to be determined by the board of directors. The
California Law further provides that, in the case of a variable board, the
maximum number of directors may not exceed two times the minimum number minus
one. The California Law also requires that any change in a fixed number of
directors and any change in the range of a variable board of directors specified
in the bylaws must be approved by a majority of the outstanding shares entitled
to vote; provided that a change reducing the minimum number of directors to less
than five cannot be adopted if votes cast against its adoption are equal to more
than 16% of the outstanding shares entitled to vote. The DataWorks Bylaws
provide that the authorized number of directors of DataWorks shall not be less
than a minimum of 4 nor more than a maximum of 7, and the number of directors
presently authorized is 6.
Classification of Board of Directors. Neither the DCD Articles nor the DCD
Bylaws provide for classification of directors. The California Law generally
requires that directors be elected annually but does
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permit a "classified" board of directors if (i) a corporation is listed on a
national stock exchange or (ii) the corporation's shares are traded on the
Nasdaq National Market and are held by at least 800 equity security holders. The
California Law also allows the election of one or more directors by the holders
of a particular class or series of shares. The DataWorks Bylaws do not provide
for a classified board.
Cumulative Voting. The DCD Articles deny cumulative voting rights. Under
the California Law, cumulative voting in the election of directors is mandatory
upon notice given by a shareholder at a shareholders' meeting at which directors
are to be elected. To cumulate votes, a shareholder must give notice at the
meeting, prior to the voting, of the shareholder's intention to vote
cumulatively. If any one shareholder gives such a notice, all shareholders may
cumulate their votes. However, the California Law permits a company, by amending
its articles of incorporation or bylaws, to eliminate cumulative voting when
such company's shares are listed on a national stock exchange or traded on the
Nasdaq National Market and held by at least 800 security holders. The DataWorks
Bylaws permit any person entitled to vote at an election for directors to
cumulate the votes to which such person is entitled; provided, however, that no
shareholder shall be entitled to cumulate such shareholder's votes unless the
candidates for which such shareholder is voting have been placed in nomination
prior to the voting and a shareholder has given notice at the meeting, prior to
the vote, of an intention to cumulate votes.
Removal of Directors. The Minnesota Law provides that, unless modified by
the articles or bylaws of the corporation or by shareholder agreement, the
directors may be removed with or without cause by the affirmative vote of that
proportion or number of the voting power of the shares of the classes or series
the director represents which would be sufficient to elect such director. Under
the DCD Bylaws, removal of a director requires the affirmative vote of
shareholders holding a majority of the shares entitled to vote for directors;
provided, however, that unless the entire board is removed simultaneously, no
individual director may be removed from the board if there are cast against
removal of the director the votes of a proportion of the voting power sufficient
to elect the director at an election of the entire board under cumulative
voting. Under the California Law, a director may be removed without cause by the
affirmative vote of a majority of the outstanding shares, provided that the
shares voted against removal would not be sufficient to elect the director by
cumulative voting.
Filling Vacancies in the Board of Directors. The DCD Bylaws provide that
if the office of any member of the DCD Board becomes vacant for any reason, a
majority of the remaining members of the DCD Board, although less than a quorum,
may choose a successor who shall hold office until the next annual meeting of
shareholders and until his successor has been elected and has accepted. Newly
created directorships resulting from an increase in the authorized number of
members of the DCD Board by action of the DCD Board may be filled by a
two-thirds ( 2/3) vote of the members of the DCD Board serving at the time of
such increase and each person so elected shall hold office until the next annual
meeting of shareholders and until his successor has been elected and has
accepted.
Under the California Law, if, after the filling of any vacancy by the
directors of a corporation, the directors then in office who have been elected
by the corporation's shareholders constitute less than a majority of the
directors then in office, then: (i) any holder of more than 5% of the
corporation's voting stock may call a special meeting of shareholders, or (ii)
the superior court of the appropriate county may order a special meeting of the
shareholders to elect the entire board of directors of the corporation. The
DataWorks Bylaws provide that any vacancy on the DataWorks Board may be filled
by a majority of the remaining directors, though less than a quorum, or by a
sole remaining director. The DataWorks Bylaws provide further that the
shareholders may elect a director at any time to fill any vacancy not filled by
the directors. Any such election by written consent, other than to fill a
vacancy created by removal, requires the consent of a majority of the
outstanding shares entitled to vote. Any such election by written consent to
fill a vacancy created by removal requires the consent of all of the outstanding
shares entitled to vote. If, after the filling of any vacancy by the directors,
the directors then in office who have been elected by the shareholders
constitute less than a majority of the directors then in office, any holder or
holders of an aggregate of 5% or more of the shares outstanding at that time and
having the right to vote for such directors may call a special meeting of
shareholders to be held to elect the entire DataWorks Board.
96
<PAGE> 107
Payment of Dividends. The Minnesota Law allows payment of dividends if the
board of directors determines that the corporation will be able to pay its debts
in the ordinary course of business after paying the dividend. The Minnesota Law
prohibits the payment of dividends, however, if such payment would reduce the
remaining net assets of the corporation below the aggregate preferential amount
payable in the event of liquidation to the holders of preferred stock. Under the
DCD Articles, holders of each class of DCD Common Stock are entitled to
dividends as and when declared by the DCD Board out of funds legally available
for the payment of dividends; provided, however, that if dividends are declared
with respect to only one class of stock, the dividends must be declared with
respect to shares of Class A Common Stock.
Under the California Law, any dividends or other distributions to
shareholders, such as redemptions, are limited to the greater of (i) retained
earnings or (ii) an amount which would leave the corporation with assets
(excluding certain intangible assets) equal to at least 125% of its liabilities
(excluding certain deferred items) and current assets equal to at least 100%
(or, in certain circumstances, 125%) of its current liabilities. DataWorks'
banking facility restricts DataWorks' ability to pay dividends or to distribute
assets.
Appraisal Rights. Under the Minnesota Law, shareholders of a Minnesota
corporation are entitled to dissent from, and obtain payment of the "fair value"
of their shares in the event of, certain corporate actions, including an
amendment to the articles of incorporation materially and adversely affecting
the rights or preferences of shares held by the dissenting shareholder, a
disposition of all or substantially all of the corporation's property and assets
not in the usual course of business, a plan of merger on which the shareholder
may vote, and a plan of exchange involving the acquisition of the corporation's
shares if the shareholder is entitled to vote on the plan. See "The Merger and
Related Transactions -- Dissenters' Rights."
Under the California Law, a shareholder of a corporation participating in
certain mergers and reorganizations may be entitled to receive cash in the
amount of the "fair market value" of its shares, as determined by a court, in
lieu of the consideration it would otherwise receive in the transaction.
Shareholders of a California corporation (or shareholders of a foreign
corporation subject to Section 2115 of the California Law), the shares of which
are listed on a national securities exchange or on the OTC margin stock list,
generally do not have appraisal rights unless the holders of at least 5% of the
class of outstanding shares assert the appraisal right. In any reorganization in
which a corporation or the shareholders of one corporation own more than 5/6 of
the voting power of the surviving or acquiring corporation, shareholders are
denied appraisal rights under the California Law. As this would not be the case
upon consummation of the Merger, appraisal rights will be available to
shareholders in connection with the Merger. It is a condition to DataWorks'
obligation to consummate the Merger, however, that no DataWorks shareholders be
entitled to exercise appraisal rights. See "The Merger and Related
Transactions -- Dissenters' Rights."
Inspection of Books and Records. Under the Minnesota Law and the DCD
Bylaws, every shareholder of DCD and every holder of a voting trust certificate
of DCD has the right, upon written demand, to examine and copy in person or by
authorized agent or attorney records of shareholder proceedings for the prior
three years, records of board proceedings for the prior three years, the DCD
Articles and DCD Bylaws, financial statements required to be kept by DCD,
reports made to shareholders generally in the prior three years, a statement of
the names and usual business addresses of the directors and principal officers,
voting trust agreements, shareholder control agreements and any agreements
fixing the relative rights and preferences of a class or series of capital
stock.
Under the California Law, a shareholder or shareholders holding at least 5%
in aggregate of the outstanding voting shares of a corporation or who hold at
least 1% of those voting shares and have filed a Schedule 14A with the
Commission, shall have the absolute right to do either or both of the following:
(i) inspect and copy the record of shareholders' names and addresses and
shareholdings during usual business hours upon 5 days' prior written demand upon
the corporation, or (ii) obtain from the transfer agent for the corporation,
upon written demand and upon tender of its usual charges for such a list, a list
of shareholders' names and addresses, who are entitled to vote for election of
directors and their shareholdings, as of the most recent record date for which
it has been compiled or as of a date specified by the shareholder subsequent to
the date of demand. The record of shareholders shall also be open to inspection
and copying by any shareholder or holder of a voting trust certificate at any
time during usual business hours upon written demand on the
97
<PAGE> 108
corporation for a purpose reasonably related to such holder's interests as a
shareholder or holder of such voting trust certificate. The accounting books and
records and minutes of proceedings of shareholders and the board and committees
of the board of a California corporation shall be open to inspection upon the
written demand on the corporation of any shareholder or holder of a voting trust
certificate at any reasonable time during usual business hours, for a purpose
reasonably related to such holder's interests as a shareholder or as the holder
of such voting trust certificate.
Limitation of Liability of Directors. The DCD Articles provide that a
director shall not be personally liable to DCD or its shareholders for monetary
damages relating to breach of fiduciary duty as a director, unless the liability
relates to a breach of the duty of loyalty, acts or omissions involving a lack
of good faith or an intentional or knowing violation of law, liability for
illegal distributions and unlawful sales of DCD securities, transactions from
which the director derived an improper personal benefit, or acts or omissions
occurring prior to the date on which the liability limitation provision of the
DCD Articles became effective (November 12, 1992). The DCD Articles provide that
any amendment to the Minnesota Law that authorizes further elimination or
limitation of director liability shall result in the further elimination or
limitation of liability of directors of DCD to the fullest extent permitted by
the Minnesota Law, as so amended.
The California Law permits a corporation to limit the personal liability of
a director to the corporation or its shareholders for monetary damages for
breach of certain duties as a director and adopts a self-governance approach by
enabling a corporation to take advantage of these provisions only if an
amendment to the articles limiting such liability is approved by a majority of
the outstanding shares or such language is included in the original articles.
The DataWorks Articles eliminate the liability of directors to the fullest
extent permissible under the California Law. The California Law does not permit
the elimination of monetary liability where such liability is based on: (i) acts
or omissions that involve intentional misconduct or knowing and culpable
violation of law; (ii) acts or omissions that a director believes to be contrary
to the best interests of the corporation or its shareholders, or that involve
the absence of good faith on the part of the director; (iii) a transaction from
which a director derived an improper personal benefit; (iv) acts or omissions
that show reckless disregard for the director's duty to the corporation or its
shareholders, where the director in the ordinary course of performing a
director's duties should be aware of a risk of serious injury to the corporation
or its shareholders; (v) acts or omissions that constitute an unexcused pattern
of inattention that amounts to an abdication of the director's duty to the
corporation and its shareholders; (vi) interested transactions between the
corporation and a director in which a director has material financial interest;
and (vii) liability for improper distributions, loans or guarantees.
Indemnification. Pursuant to the Minnesota Law, unless limited in the
corporation's articles or bylaws, a corporation shall indemnify a person made or
threatened to be made a party to a proceeding by reason of the former or present
official capacity of the person, provided that certain standards of conduct are
met, including acting in good faith and not receiving improper personal benefit.
In addition, the Minnesota Law requires the corporation to report the
indemnification payments to its shareholders not later than the next meeting of
shareholders. The DCD Bylaws provide for the indemnification of all directors,
officers, employees and agents of DCD and any person serving at the request of
DCD as a director, officer, employee or agent of another corporation or
enterprise to the fullest extent to which officers and directors may be
indemnified under the Minnesota Law.
The DataWorks Bylaws include provisions that require DataWorks to indemnify
its directors and executive officers to the fullest extent permitted by the
California Law. The DataWorks Bylaws also provide DataWorks with the authority
to indemnify its other officers, employees and other agents as set forth in the
California Law. Pursuant to the California Law, a corporation generally has the
power to indemnify its present and former directors, officers, employees and
agents against expenses incurred by them in connection with any suit to which
they are, or are threatened to be made, a party by reason of their serving in
such positions so long as they acted in good faith and in a manner they
reasonably believed to be in the best interests of the corporation, and with
respect to any criminal action, they had no reasonable cause to believe their
conduct was unlawful.
98
<PAGE> 109
Stockholder Approval of Certain Corporate Transactions. The Minnesota Law
provides that a resolution containing a plan of merger or exchange must be
approved by the affirmative vote of a majority of the directors and submitted to
the shareholders and approved by the affirmative vote of a majority of the
shareholders of all shares entitled to vote. The Minnesota Law also requires
that any class of shares of a Minnesota corporation must approve the plan if it
contains a provision which, if contained in a proposed amendment to the
corporation's articles, would entitle such class to vote as a class.
With certain exceptions, the California Law requires that mergers,
reorganizations, certain sales of assets and similar transactions be approved by
a majority vote of each class of shares outstanding.
Business Combinations. As a privately held corporation, DCD is not subject
to the business combination and control share acquisition statutes under the
Minnesota Law.
The California Law requires that holders of a California corporation's
common stock receive nonredeemable common stock in a merger of the corporation
with the holder (or an affiliate of the holder) of more than 50% but less than
90% of its common stock, unless all of the holders of its common stock consent
to the merger or the merger has been approved by the California Commissioner of
Corporations at a "fairness" hearing. This provision of the California Law may
have the effect of making a cash "freezeout" merger by a majority shareholder
more difficult to accomplish. A cash freezeout merger is a transaction whereby a
minority shareholder is forced to relinquish his share ownership in a
corporation in exchange for cash, subject in certain instances to dissenters'
rights.
Preemptive Rights. The DCD Articles deny preemptive voting rights. Under
the California Law, a corporation's articles may grant to shareholders
preemptive rights to subscribe to any or all issues of shares or securities. The
DataWorks Articles contain no such provision.
Loans to Directors, Officers and Employees. Under the DCD Bylaws, DCD may
not lend any of its assets to any director, officer or shareholder of DCD. If
any such loan is made, the DCD officers and directors who make such loans, or
assent thereto, shall be jointly and severally liable for repayment or return
thereof. The California Law provides that any loan or guaranty (other than loans
to permit the purchase of shares under certain stock purchase plans) for the
benefit of any officer or director, or any employee benefit plan authorizing
such loan or guaranty (except certain employee stock purchase plans), must be
approved by the shareholders of a California corporation. The DataWorks Bylaws
provide that DataWorks shall have the power to make loans permitted by the
California Law. The DataWorks Bylaws also provide that, if DataWorks has
outstanding shares held of record by 100 or more persons on the date of approval
by the DataWorks Board, DataWorks may make loans of money or property to, or
guarantee the obligations of, any officer of DataWorks or its parent or any
subsidiary, or adopt an employee benefit plan or plans authorizing such loans or
guarantees, upon the approval of the DataWorks Board alone, by a vote sufficient
without counting the vote of any interested director or directors, if the
DataWorks Board determines that such a loan or guaranty or plan may reasonably
be expected to benefit DataWorks.
99
<PAGE> 110
EXPERTS
The consolidated financial statements of DataWorks at December 31, 1994 and
1995, and for each of the three years in the period ended December 31, 1995,
included in this Prospectus/Joint Proxy Statement have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
The financial statements of DCD as of December 31, 1994 and 1995 and for
each of the three years in the period ended December 31, 1995 included in this
Prospectus/Joint Proxy Statement have been so included in reliance on the report
of Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for DataWorks by Cooley Godward Castro Huddleson & Tatum, San Diego,
California.
100
<PAGE> 111
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DATAWORKS CORPORATION
AUDITED FINANCIAL STATEMENTS
Report of Independent Auditors................................................... F-2
Consolidated Balance Sheets as of December 31, 1995 and 1994..................... F-3
Consolidated Statements of Operations for the Years Ended December 31, 1995, 1994
and 1993........................................................................ F-4
Consolidated Statements of Shareholders' Equity (Deficit) for the Years Ended
December 31, 1995, 1994 and 1993................................................ F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1994
and 1993........................................................................ F-6
Notes to Consolidated Financial Statements....................................... F-7
UNAUDITED FINANCIAL STATEMENTS
Unaudited Consolidated Balance Sheet as of June 30, 1996......................... F-16
Unaudited Consolidated Statements of Operations for the Six Months Ended June 30,
1995 and 1996................................................................... F-17
Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30,
1995 and 1996................................................................... F-18
Notes to Unaudited Consolidated Financial Statements............................. F-19
DCD CORPORATION
Report of Independent Accountants................................................ F-21
Balance Sheet as of December 31, 1994 and 1995 and June 30, 1996 (unaudited)..... F-22
Statement of Operations for the Years Ended December 31, 1993, 1994 and 1995 and
for the Six Months Ended June 30, 1995 and 1996 (unaudited)..................... F-23
Statement of Stockholders' Equity (Deficit) for the Years Ended December 31,
1993, 1994 and 1995 and for the Six Months Ended June 30, 1996 (unaudited)...... F-24
Statement of Cash Flows for the Years Ended December 31, 1993, 1994 and 1995 and
for the Six Months Ended June 30, 1995 and 1996 (unaudited)..................... F-25
Notes to Financial Statements.................................................... F-26
</TABLE>
F-1
<PAGE> 112
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
DataWorks Corporation
We have audited the accompanying consolidated balance sheets of DataWorks
Corporation as of December 31, 1994 and 1995, and the related consolidated
statements of operations, shareholders' equity (deficit) and cash flows for each
of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of DataWorks' management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of DataWorks
Corporation at December 31, 1994 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995 in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
San Diego, California
February 1, 1996
F-2
<PAGE> 113
DATAWORKS CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1994 1995
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 618,332 $10,726,636
Accounts receivable, less allowance for doubtful accounts of
$250,000 and $160,289 in 1995 and 1994, respectively......... 4,165,908 9,951,922
Deferred income taxes........................................... 505,600 1,515,780
Other current assets............................................ 222,667 983,368
----------- -----------
Total current assets.............................................. 5,512,507 23,177,706
Equipment, furniture and fixtures, net............................ 510,705 1,589,760
Receivable from officer........................................... 91,000 206,000
Capitalized software costs, net................................... 517,641 1,852,115
Intangible assets, net............................................ 4,939,489 4,574,277
Other assets...................................................... 847,313 125,045
----------- -----------
$12,418,655 $31,524,903
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................................ $ 2,181,230 $ 2,742,380
Accrued compensation............................................ 816,601 1,350,091
Other accrued liabilities....................................... 623,624 912,019
Deferred revenue................................................ 2,501,913 3,281,665
Obligations under line of credit................................ 2,750,991 --
Notes payable and current portion of long-term debt............. 445,999 --
Payables to shareholder......................................... 50,000 --
----------- -----------
Total current liabilities......................................... 9,370,358 8,286,155
Long-term debt.................................................... 7,108,578 --
Deferred rent..................................................... 120,183 133,266
Deferred income taxes............................................. 673,200 1,929,189
Commitments
Shareholders' equity (deficit):
Common stock, no stated par value:
Authorized shares -- 25,000,000
Issued and outstanding shares -- 5,661,436 and 2,119,879 in
1995 and 1994, respectively................................. 551,057 26,005,540
Accumulated deficit.......................................... (5,404,721) (4,829,247)
----------- -----------
Total shareholders' equity (deficit).............................. (4,853,664) 21,176,293
----------- -----------
$12,418,655 $31,524,903
=========== ===========
</TABLE>
See accompanying notes
F-3
<PAGE> 114
DATAWORKS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Software licenses................................. $ 4,637,381 $ 8,140,773 $15,993,286
Hardware.......................................... 3,684,831 3,453,210 6,497,008
Maintenance and other services.................... 2,617,295 5,164,540 9,037,545
----------- ----------- -----------
Total revenues...................................... 10,939,507 16,758,523 31,527,839
Cost of revenues:
Software licenses................................. 252,476 963,452 1,509,056
Hardware.......................................... 2,196,113 2,712,604 5,108,784
Maintenance and other services.................... 2,356,041 3,430,855 6,371,128
----------- ----------- -----------
Total cost of revenues.............................. 4,804,630 7,106,911 12,988,968
----------- ----------- -----------
Gross profit........................................ 6,134,877 9,651,612 18,538,871
Operating expenses:
Selling and marketing............................. 2,500,100 5,475,453 8,189,698
Research and development.......................... 891,041 2,001,443 2,511,808
General and administrative........................ 1,704,018 2,226,257 3,866,728
----------- ----------- -----------
Total operating expenses............................ 5,095,159 9,703,153 14,568,234
----------- ----------- -----------
Income (loss) from operations....................... 1,039,718 (51,541) 3,970,637
Interest expense, net............................... (415,293) (1,088,919) (1,359,775)
----------- ----------- -----------
Income (loss) before income taxes and extraordinary
item.............................................. 624,425 (1,140,460) 2,610,862
Credit (provision) for income taxes................. -- 394,300 (1,018,234)
----------- ----------- -----------
Income (loss) before extraordinary item............. 624,425 (746,160) 1,592,628
Extraordinary item, net of income taxes............. -- (157,229) (1,017,154)
----------- ----------- -----------
Net income (loss)................................... $ 624,425 $ (903,389) $ 575,474
========== ========== ==========
Per share information:
Income (loss) before extraordinary item........... $ .22 $ (.27) $ .40
Extraordinary item................................ -- (.05) (.26)
----------- ----------- -----------
Net income (loss)................................. $ .22 $ (.32) $ .14
========== ========== ==========
Shares used in per share computations............... 2,790,000 2,783,000 4,005,000
========== ========== ==========
</TABLE>
See accompanying notes
F-4
<PAGE> 115
DATAWORKS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
PREFERRED SHARES COMMON SHARES SHAREHOLDERS'
--------------------- ----------------------- ACCUMULATED EQUITY
SHARES AMOUNT SHARES AMOUNT DEFICIT (DEFICIT)
-------- ---------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992....... -- $ -- 1,962,304 $ 371,960 $(5,125,757) $(4,753,797)
Net income....................... -- -- -- -- 624,425 624,425
-------- ---------- --------- ----------- ----------- -----------
Balance at December 31, 1993....... -- -- 1,962,304 371,960 (4,501,332) (4,129,372)
Issuance of common stock upon
exercise of warrants........... -- -- 11,537 300 -- 300
Issuance of common stock in
connection with the acquisition
of Madic-Compufact............. -- -- 146,038 3,797 -- 3,797
Issuance of warrants to purchase
shares of common stock......... -- -- -- 175,000 -- 175,000
Net loss......................... -- -- -- -- (903,389) (903,389)
-------- ---------- --------- ----------- ----------- -----------
Balance at December 31, 1994....... -- -- 2,119,879 551,057 (5,404,721) (4,853,664)
Issuance of common stock to
comply with certain
antidilution provisions........ -- -- 2,246 -- -- --
Issuance of warrants to purchase
shares of common stock......... -- -- -- 29,000 -- 29,000
Issuance of Series A preferred
stock, net..................... 864,696 5,937,563 -- -- -- 5,937,563
Issuance of common stock upon
exercise of warrants........... -- -- 1,050,843 1,475,436 -- 1,475,436
Issuance of common stock upon
exercise of stock options...... -- -- 23,772 9,019 -- 9,019
Conversion of Series A preferred
stock upon initial public
offering....................... (864,696) (5,937,563) 864,696 5,937,563 -- --
Issuance of common stock upon
initial public offering, net... -- -- 1,600,000 18,003,465 -- 18,003,465
Net income....................... -- -- -- -- 575,474 575,474
-------- ---------- --------- ----------- ----------- -----------
Balance at December 31, 1995....... -- $ -- 5,661,436 $26,005,540 $(4,829,247) $21,176,293
======== ========== ========= =========== =========== ===========
</TABLE>
See accompanying notes
F-5
<PAGE> 116
DATAWORKS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................................... $ 624,425 $ (903,389) $ 575,474
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:...............
Depreciation.............................................. 188,294 242,316 440,270
Amortization of intangible assets......................... -- 441,343 675,212
Amortization of debt discount and debt issue costs........ -- 255,251 213,702
Reduction of advances to officers charged to operating
expenses............................................... -- 199,701 108,500
Notes payable issued for professional services............ 244,661 314,087 --
Deferred rent expense..................................... 14,609 8,561 13,083
Deferred income taxes..................................... -- (394,300) 245,809
Extraordinary item, non-cash portion...................... -- 157,229 886,020
Changes in operating assets and liabilities, net of
effects from purchase of Madic-Compufact Corporation
Accounts payable....................................... 159,813 (9,512) 561,150
Accrued compensation................................... (404,411) 291,133 533,490
Other accrued liabilities.............................. (261,941) (296,888) (139,200)
Deferred revenue....................................... 181,695 1,162,037 779,752
Accounts receivable.................................... (1,396,814) (1,428,089) (5,786,014)
Other current assets................................... 20,943 47,503 (704,389)
----------- ----------- -----------
Net cash provided by (used in) operating activities......... (628,726) 86,983 (1,597,141)
INVESTING ACTIVITIES
Purchases of equipment, furniture and fixtures.............. (45,311) (372,706) (1,091,730)
Additions to capitalized software costs..................... -- (474,887) (1,334,474)
Payment for purchase of Madic-Compufact Corporation, net of
cash acquired of $155,445................................. (75,638) (5,113,248) --
Increase in intangible assets............................... -- -- (310,000)
Advances to officers........................................ (128,290) (91,000) (223,500)
Other assets................................................ (36,029) (12,613) (85,937)
----------- ----------- -----------
Net cash used in investing activities....................... (285,268) (6,064,454) (3,045,641)
FINANCING ACTIVITIES
Net increase (decrease) in obligations under lines of
credit.................................................... -- 2,750,991 (2,750,991)
Proceeds from notes payable................................. 7,199,456 7,095,336 1,250,000
Repayments of notes payable................................. (5,635,906) (1,920,099) (6,409,160)
Deferred debt issue costs................................... (315,943) (975,325) (164,249)
Repayment of payables to shareholder........................ (258,013) (431,000) (50,000)
Issuance of common stock, net............................... -- 300 18,187,923
Issuance of Series A preferred stock, net................... -- -- 4,687,563
----------- ----------- -----------
Net cash provided by financing activities................... 989,594 6,520,203 14,751,086
----------- ----------- -----------
Net increase in cash and cash equivalents................... 75,600 542,732 10,108,304
Cash and cash equivalents at beginning of year.............. -- 75,600 618,332
----------- ----------- -----------
Cash and cash equivalents at end of year.................... $ 75,600 $ 618,332 $10,726,636
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for interest...................... $ 393,514 $ 765,181 $ 1,246,707
=========== =========== ===========
Cash paid during the year for income taxes.................. $ -- $ -- $ 40,717
=========== =========== ===========
</TABLE>
See accompanying notes
F-6
<PAGE> 117
DATAWORKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
DataWorks Corporation ("DataWorks") is a California corporation which
develops, markets, implements and supports open systems, client/server-based
Enterprise Resource Planning software for mid-sized manufacturing companies.
Basis of Presentation
The consolidated financial statements include the accounts of DataWorks and
its wholly-owned subsidiaries Madic-Compufact Corporation ("Madic") and
DataWorks (Europe) Ltd. Significant intercompany accounts and transactions have
been eliminated in consolidation.
Reclassifications
Certain amounts in the prior year financial statements have been
reclassified to conform with the current year classifications.
Use of Estimates in the Preparation of Financial Statements
The preparation of 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 financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly liquid investments
with remaining maturities, when acquired, of three months or less. DataWorks
evaluates the financial strength of institutions at which significant
investments are made and believes the related credit risk is limited to an
acceptable level.
DataWorks has adopted Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," and has
classified its investments as available-for-sale in accordance with that
standard.
Available-for-sale securities are carried at amounts which approximate fair
value, with unrealized gains and losses, net of tax, reported in a separate
component of shareholders' equity. Realized gains and losses and declines in
value judged to be other-than-temporary, if any, in available-for-sale
securities are included in investment income. The cost of securities sold is
based on the specific identification method.
Included in cash and cash equivalents at December 31, 1995 was
approximately $11.1 million invested in a mutual fund classified as
available-for-sale. The mutual fund invests in U.S. Treasury securities and
obligations of U.S. government agencies. As of December 31, 1995, the difference
between amortized cost and the estimated fair value of the investment was not
material.
Equipment, Furniture and Fixtures
Equipment, furniture and fixtures are recorded at cost. DataWorks provides
for depreciation on equipment, furniture and fixtures using the straight-line
method over the estimated useful lives of the assets, generally three to five
years.
F-7
<PAGE> 118
DATAWORKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Capitalized Software Costs
In accordance with Statement of Financial Accounting Standards No. 86
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed", costs incurred in the research and development of new software
products and significant enhancements to existing software products are charged
against operations as incurred until the technological feasibility of the
product has been established. After technological feasibility has been
established, direct production costs, including programming and testing, are
capitalized. Amortization of these costs will begin when the product becomes
available for sale.
Capitalized software costs are amortized using the greater of the amount
computed using the ratio of current product revenues to estimated total product
revenues or the straight-line method over the estimated economic lives of the
products. It is possible that estimated total product revenues, the estimated
economic life of the product, or both will be reduced in the future. As a
result, the carrying amount of capitalized software costs may be reduced in the
future, which could result in material charges to the results of operations in
future periods.
Intangible Assets
Intangible assets arose from the acquisition of Madic (see Note 2). The
excess of cost over the fair value of the net assets purchased (goodwill) is
being amortized over 10 years. The customer list and non-compete agreement are
being amortized over 10 and 3 years, respectively. Periodically, management
assesses whether there has been a permanent impairment in the value of
intangible assets and the amount of such impairment by comparing anticipated
undiscounted future cash flows from operating activities with the carrying value
of intangible assets. Management also considers other factors such as current
operating results, as well as the effects of obsolescence, demand, competition
and other economic conditions.
Debt Issuance Costs
Costs incurred to obtain financing were capitalized (included in other
assets at December 31, 1994) and were amortized over the life of the related
debt using the interest method.
Revenue Recognition
Revenue is derived from licensing software, the sale of hardware,
maintenance, implementation and installation, consulting and custom programming
charges. Contract revenue related to software licenses and hardware sales is
recognized upon delivery of the products, provided that no significant vendor
obligations remain and the collection of the related receivable is deemed
probable. Maintenance contract revenue is recognized ratably over the period the
service is provided. Revenue from implementation and installation, consulting
and custom programming is billed and recognized as the services are provided.
Amounts billed but not recognized are deferred in the accompanying consolidated
balance sheets. DataWorks' policy is in compliance with the provisions of the
American Institute of Certified Public Accountants Statement of Position 91-1,
"Software Revenue Recognition."
Research and Development
Costs associated with research and development are expensed as incurred.
Interest Expense
Interest expense includes amounts due under DataWorks' various loan
agreements, amortization of debt issue costs and amortization of debt discount.
F-8
<PAGE> 119
DATAWORKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock Options
DataWorks has elected to follow Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" (APB 25) and related interpretations
in accounting for its employee stock options. Under APB 25, because the exercise
price of DataWorks' employee stock options has not been less than the market
price of the underlying stock on the date of grant, no compensation expense has
been recognized.
Accounting Standard on Impairment of Long-Lived Assets
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 "Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" ("FAS 121") regarding the
impairment of the long-lived assets, identifiable intangibles and goodwill
related to those assets. FAS 121 is effective for financial statements for
fiscal years beginning after December 15, 1995. DataWorks does not anticipate
the adoption of this standard will have a material effect on DataWorks'
financial statements.
Concentration of Credit Risk
DataWorks sells its products primarily to manufacturing companies located
throughout the United States. Credit is extended based on an evaluation of the
customer's financial condition and terms of DataWorks' sales normally require a
significant cash deposit up front. DataWorks estimates its potential losses on
trade receivables on an ongoing basis and provides for anticipated losses in the
period in which the revenues are recognized. Actual losses may differ from
DataWorks' estimates, which could have a material impact on DataWorks' results
of operations in future periods.
Income Taxes
DataWorks accounts for income taxes using the liability method as
prescribed by Statement of Financial Accounting Standards No. 109.
Net Income (Loss) Per Share
For periods subsequent to the completion of the initial public offering
(the "IPO") in October 1995, income per share information is computed using the
weighted average number of common shares outstanding plus common share
equivalents arising from outstanding stock options and warrants using the
treasury stock method.
Prior to the IPO, net income (loss) per share is computed pursuant to the
requirements of the Securities and Exchange Commission ("SEC"), which require
that common stock and convertible preferred shares issued by DataWorks during
the twelve months immediately preceding the IPO, plus the number of common
equivalent shares which were granted during the same period pursuant to the
grant of stock options and warrants, be included in the calculation of the
shares used in computing net income (loss) per share as if these shares were
outstanding for all periods presented using the treasury stock method.
2. BUSINESS COMBINATION
Effective May 27, 1994, DataWorks completed the acquisition of the
outstanding stock of Madic, a company which is dedicated to developing,
marketing and licensing integrated manufacturing and financial software
applications. The purchase price was $5,348,128, including acquisition costs of
$203,753 and 4% of DataWorks' then outstanding common stock, or 146,038 shares.
The transaction was accounted for as a purchase and DataWorks' statements of
operations include the results of operations of Madic from the date of
acquisition.
F-9
<PAGE> 120
DATAWORKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The purchase price, including related acquisition costs, has been allocated
to the tangible and intangible assets acquired and liabilities assumed based on
their respective fair value on the date of acquisition as follows:
<TABLE>
<S> <C> <C>
Cash....................................................... $ 155,445
Trade accounts receivable, net............................. 1,713,721
Equipment, furniture and fixtures.......................... 174,470
Intangibles:
Customer list............................................ $3,300,000
Goodwill................................................. 1,530,643
Non-compete agreement.................................... 500,000 5,330,643
----------
Other...................................................... 96,043
-----------
Total assets............................................. 7,470,322
Liabilities assumed........................................ (2,122,194)
-----------
Net assets acquired...................................... $ 5,348,128
===========
</TABLE>
The following unaudited pro forma combined results of operations of
DataWorks and Madic for the years ended December 31, 1994 and 1993 have been
prepared assuming that the acquisition of Madic had occurred at the beginning of
the periods presented. This pro forma information is not necessarily indicative
of the results that would have occurred nor is it indicative of future results.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1994 1993
----------- -----------
<S> <C> <C>
Revenues.......................................... $20,493,000 $19,007,000
Operating income.................................. 344,000 1,112,000
Loss before extraordinary item.................... (761,000) (261,000)
Net loss.......................................... (977,000) (478,000)
Loss per share:
Loss before extraordinary item.................. (.27) (.09)
Net loss........................................ (.34) (.17)
</TABLE>
3. FINANCIAL STATEMENT INFORMATION
Equipment, Furniture and Fixtures
Equipment, furniture and fixtures consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1994 1995
---------- ----------
<S> <C> <C>
Computer equipment.......................................... $ 892,974 $1,823,871
Office furniture, fixtures and equipment.................... 294,180 864,976
--------- ---------
1,187,154 2,688,847
Less accumulated depreciation............................... (676,449) (1,099,087)
--------- ---------
$ 510,705 $1,589,760
========= =========
</TABLE>
F-10
<PAGE> 121
DATAWORKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Intangible Assets
Intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1994 1995
---------- -----------
<S> <C> <C>
Customer list.............................................. $3,300,000 $ 3,300,000
Goodwill................................................... 1,530,643 1,530,643
Covenant not to compete.................................... 500,000 810,000
----------- ----------
5,330,643 5,640,643
Less accumulated amortization.............................. (391,154) (1,066,366)
----------- ----------
$4,939,489 $ 4,574,277
=========== ==========
</TABLE>
4. FINANCING
Line of Credit
In September 1995, DataWorks secured a new banking facility which provides
for borrowings up to a maximum of $6,000,000 to finance eligible receivables (as
defined). The facility bears interest at the bank's prime rate (8.5% at December
31, 1995) and has an expiration date of June 30, 1997. Substantially all of the
assets of DataWorks are collateral for the borrowings under the facility. At
December 31, 1995, DataWorks had no borrowings outstanding under the banking
facility.
The agreement for the banking facility contains certain restrictions and
limitations on DataWorks' operations, including restrictions on capital
expenditures, advances to certain officers, sale of assets, mergers or other
forms of business combinations, as well as the prohibition against payment of
dividends. The agreements also contain covenants which require DataWorks to
maintain certain levels of liquidity (as defined), net worth, profitability and
debt service coverage.
Long-term Debt
Long-term debt obligations of DataWorks consist of the following at
December 31, 1994:
<TABLE>
<S> <C>
Senior term note payable; repaid in September 1995....................... $2,000,000
Subordinated notes payable to shareholders, net of unamortized discount
of $154,583 at December 31, 1994; settled in August and November,
1995................................................................... 5,322,417
Other notes payable...................................................... 232,160
----------
7,554,577
Less current portion..................................................... (445,999)
----------
$7,108,578
==========
</TABLE>
In November 1995, upon completion of the initial public offering, the
subordinated notes payable were settled for a cash payment of $4,177,000 and
outstanding warrants (with an exercise price of $4.24 per share) were exercised
by exchanging the remaining principal of the note ($1,300,000) for 306,373
shares of common stock.
Effective April 19, 1995, DataWorks modified its subordinated loan
agreement to provide for additional cash financing of $1,250,000. In August
1995, $1,250,000 of subordinated notes payable were converted into Series A
preferred stock.
In connection with the payment of the note payable in May 1994 for
$1,340,000, the repayment of the senior term note payable in September 1995, and
settlement of the subordinated notes payable in August and
F-11
<PAGE> 122
DATAWORKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
November 1995, the related unamortized debt issue costs and debt discount were
written off. In addition, DataWorks also incurred prepayment and other cash
charges related to the payment of the senior term note. In accordance with
generally accepted accounting principles, these write-offs and cash charges, net
of the related income tax benefits, have been reported as extraordinary items in
the accompanying consolidated statements of operations. The composition of the
extraordinary items are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------
1994 1995
-------- ----------
<S> <C> <C>
Write-off of unamortized debt issue costs and debt
discount................................................... $248,229 $ 886,020
Cash prepayment penalty and other cash charges............... -- 837,967
-------- ----------
248,229 1,723,987
Income tax effect............................................ (91,000) (706,833)
-------- ----------
$157,229 $1,017,154
======== =========
</TABLE>
PAYABLES TO SHAREHOLDER
At December 31, 1994 DataWorks had payables to DataWorks' President and
principal shareholder for $50,000 at an interest rate of 15%. The loan was
repaid in September 1995.
Interest expense incurred on amounts due to shareholders totaled $6,050,
$171,628 and $54,597, for the years ended December 31, 1995, 1994 and 1993,
respectively. Related accrued interest was $59,535 at December 31, 1994.
5. INCOME TAXES
The (provision) credit for income taxes for 1995 and 1994 primarily
consists of deferred taxes and results from the reduction of deferred tax
credits by the benefit of net operating loss and tax credit carryforwards. The
provision for income taxes in 1993 is entirely offset by the benefit of net
operating loss carryforwards.
Deferred income taxes are provided for temporary differences in recognizing
certain income and expense items for financial reporting and tax reporting
purposes. Significant components of deferred tax assets and liabilities are:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1994 1995
----------- -----------
<S> <C> <C>
Deferred tax liabilities:
Difference in tax basis of acquired intangibles......... $(1,404,100) $(1,155,309)
Capitalized software costs.............................. -- (723,700)
Other................................................... (75,300) --
----------- -----------
Total deferred tax liabilities............................ (1,479,400) (1,879,009)
Deferred tax assets:
Net operating loss and credit carryforwards............. 1,156,200 1,258,600
Deferred revenue and expenses........................... 155,600 207,000
----------- -----------
Total deferred tax assets................................. 1,311,800 1,465,600
----------- -----------
Net deferred tax liabilities.............................. $ (167,600) $ (413,409)
=========== ===========
</TABLE>
F-12
<PAGE> 123
DATAWORKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The effective income tax rate varied from the statutory federal rate as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1994 1995
-------- -----------
<S> <C> <C>
Income tax benefit (provision) at statutory rate............ $387,800 $ (887,700)
State income tax benefit (provision), net of federal
benefits.................................................. 34,200 (104,400)
Benefit of tax credits...................................... -- 104,766
Permanent differences and other............................. (27,700) (130,900)
-------- -----------
$394,300 $(1,018,234)
======== ===========
</TABLE>
At December 31, 1995, DataWorks has net operating loss carryforwards of
approximately $2,328,000 for federal income tax purposes which will begin to
expire in 2005 if not utilized to offset taxable income. DataWorks also has
California income tax net operating losses of approximately $379,000 which will
also begin to expire in 1998 if not utilized to offset taxable income. In
addition, DataWorks has research and development credit carryforwards of
approximately $300,000 for federal purposes and approximately $138,000 for state
purposes which begin to expire at the same time as the federal net operating
loss carryforwards. In accordance with Sections 382 and 383 of the Internal
Revenue Code, a change in ownership of greater than fifty percent of a
corporation within a three-year period will place an annual limitation on the
corporation's ability to utilize its existing carryforwards. Upon the closing of
DataWorks' initial public offering an ownership change occurred; however, the
limitation will not have a material effect on DataWorks' ability to utilize its
carryforwards.
6. RECEIVABLE FROM OFFICER
At December 31, 1995 and 1994, the receivable from officer is from one of
DataWorks' principal officers and shareholders and consists of net advances
totaling $206,000 and $91,000, respectively. The advances will be repaid or will
be offset against any future performance bonuses earned and approved by the
Board of Directors. At December 31, 1995, DataWorks has accrued the estimated
amount of bonuses expected to be approved.
7. LEASE COMMITMENTS
DataWorks leases its corporate and regional office facilities under
noncancellable operating leases that expire from 1996 to 2000. One of DataWorks'
corporate office lease agreements provides for deferred payment terms. For
financial reporting purposes, rent expense is recorded on the straight-line
basis over the term of the lease. Accordingly, deferred rent in the accompanying
consolidated balance sheets represents the difference between rent expense
accrued and amounts paid under the lease agreement.
Annual future minimum payments for the years ending December 31, are as
follows:
<TABLE>
<S> <C>
1996............................................................. $ 606,871
1997............................................................. 522,208
1998............................................................. 488,523
1999............................................................. 300,852
2000 and thereafter.............................................. 74,039
----------
$1,992,493
==========
</TABLE>
Rent expense for the years ended December 31, 1995, 1994 and 1993 was
$649,153, $395,892 and $293,508, respectively.
F-13
<PAGE> 124
DATAWORKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. SHAREHOLDERS' EQUITY
SERIES A PREFERRED STOCK
In August 1995, DataWorks received an aggregate of $6,250,000 through the
sale of Series A preferred stock of which $1,250,000 was obtained through the
conversion of subordinated notes payable. The Series A preferred stock was
issued at $7.23 per share and was automatically converted into 864,696 shares of
common stock upon closing of DataWorks' initial public offering.
As of December 31, 1995, DataWorks is authorized to issue 5,000,000 shares
of preferred stock. No shares were outstanding at December 31, 1995 and 1994.
STOCK OPTION PLANS
DataWorks has an Equity Incentive Plan (the "Plan") under which 1,650,000
shares of common stock are reserved for issuance to eligible employees,
directors and consultants of DataWorks. The Plan provides for awards in the form
of options, stock bonuses, restricted shares or stock appreciation rights
("SARs"). The terms of any stock awards under the Plan, including vesting
requirements, are determined by the Board of Directors, subject to the
provisions of the Plan. Options under the Plan are either incentive stock
options ("ISOs") or nonstatutory stock options ("NSOs"). The exercise price of
the ISOs is not less than the fair market value on the date of grant and the
exercise price of the NSOs is determined by the Board of Directors. Options
granted under the Plan generally become exercisable over a period of four years
and the maximum term of options granted is ten years.
On September 13, 1995, DataWorks adopted the Non-Employee Directors' Stock
Option Plan (the "Directors' Plan") under which 75,000 shares of common stock
are reserved for issuance upon exercise of options granted by DataWorks to
non-employee members of the board of directors. The exercise price of the
options will be at the fair market value of the stock on the date of grant.
Options granted under the Directors' Plan will become exercisable over four
years and expire ten years from the date of grant. As of December 31, 1995, no
shares were granted under the Directors' Plan.
In addition, DataWorks has outstanding options to purchase an additional
53,845 shares of common stock outside of the plans.
A summary of stock option transactions, including those outside the plans,
is as follows:
<TABLE>
<CAPTION>
AVERAGE PRICE
SHARES OPTION PRICE PER SHARE
-------- -------------- -------------
<S> <C> <C> <C>
Outstanding at December 31, 1992............. 256,716 $.16 to $ .26 $ .18
Granted.................................... 137,500 $ .26 $ .26
--------
Outstanding at December 31, 1993............. 394,216 $.16 to $ .26 $ .21
Granted.................................... 76,923 $ .39 $ .39
--------
Outstanding at December 31, 1994............. 471,139 $.16 to $ .39 $ .23
Granted.................................... 392,415 $.65 to $11.50 $5.58
Cancelled.................................. (38,461) $ .39 $ .39
Exercised.................................. (23,772) $.16 to $ .39 $ .38
--------
Outstanding at December 31, 1995............. 801,321 $.16 to $11.50 $2.96
========
</TABLE>
As of December 31, 1995, 352,721 of the options are vested and exercisable.
F-14
<PAGE> 125
DATAWORKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EMPLOYEE STOCK PURCHASE PLAN
On September 13, 1995, DataWorks adopted an Employee Stock Purchase Plan
(the "Purchase Plan") under which 150,000 shares of common stock are reserved
for sale to employees under the Purchase Plan. DataWorks' Board of Directors may
grant eligible employees the right to purchase a fixed number of shares of
common stock (up to but not exceeding 15% of each employee's earnings) over a
fixed offering period (not to exceed 27 months) at the lesser of 85% of the fair
market value of the stock on the grant date or 85% of the fair market value on
the purchase date or dates specified on the date of grant.
WARRANTS
In connection with various financing arrangements, DataWorks issued
warrants to purchase 1,382,183 shares of DataWorks' common stock at prices
ranging from $0.026 to $8.68 per share. In connection with the completion of the
initial public offering in November 1995, 1,345,869 warrants were converted to
1,050,843 shares of common stock for cash proceeds of $175,439 and the
settlement of $1,300,000 of subordinated notes payable.
At December 31, 1995, warrants to purchase 36,314 shares of common stock at
$8.68 per share remain outstanding. The warrants expire in August, 2000.
SHARES RESERVED FOR FUTURE ISSUANCE
The following common stock is reserved for future issuance at December 31,
1995:
<TABLE>
<S> <C>
Stock options:
Granted and outstanding............................................... 801,321
Reserved for future grants............................................ 977,524
---------
1,778,845
Warrants................................................................ 36,314
Employee stock purchase plan.......................................... 150,000
---------
1,965,159
=========
</TABLE>
9. EMPLOYEE RETIREMENT PLAN
Effective July 1, 1994, DataWorks established a 401(k) defined contribution
retirement plan (the "Retirement Plan") covering all employees. The Retirement
Plan provides for voluntary employee contributions from 1% to 15% of annual
compensation (as defined). DataWorks may contribute such amounts as determined
by the Board of Directors. Participants vest in employer contributions over five
years at a rate of 20% for each year of service. There were no employer
contributions to the Retirement Plan during the years ended December 31, 1995 or
1994.
10. SUBSEQUENT EVENT
In January 1996, DataWorks agreed to purchase certain assets of Arrowkey
Systems ("Arrowkey") for $450,000. In addition, DataWorks may be required to pay
up to $75,000 annually through 1998 if certain sales levels of Arrowkey software
products are achieved (as defined). The owner of Arrowkey is an employee of
DataWorks.
F-15
<PAGE> 126
DATAWORKS CORPORATION
UNAUDITED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30,
1996
-----------
<S> <C>
Current assets:
Cash and cash equivalents..................................................... $ 8,253,376
Accounts receivable, less allowance for doubtful accounts of $335,500......... 13,298,651
Deferred income taxes......................................................... 1,515,780
Other current assets.......................................................... 2,646,193
-----------
Total current assets.................................................. 25,714,000
Equipment, furniture and fixtures, net.......................................... 2,105,429
Receivable from officer......................................................... 155,300
Acquired and developed software costs, net...................................... 3,370,712
Intangible assets, net.......................................................... 4,211,058
Other assets.................................................................... 121,885
-----------
$35,678,384
===========
Current liabilities:
Accounts payable.............................................................. $ 3,355,788
Accrued compensation.......................................................... 1,584,347
Other accrued liabilities..................................................... 2,605,381
Deferred revenue.............................................................. 3,070,357
-----------
Total current liabilities............................................. 10,615,873
Deferred rent................................................................... 126,264
Deferred income taxes........................................................... 1,885,815
Commitments
Shareholders' equity:
Common stock, no stated par value:
Authorized shares -- 25,000,000
Issued and outstanding shares -- 5,955,416................................. 26,344,390
Accumulated deficit........................................................ (3,293,958)
-----------
Total shareholders' equity............................................ 23,050,432
-----------
$35,678,384
===========
</TABLE>
See notes to unaudited consolidated financial statements
F-16
<PAGE> 127
DATAWORKS CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS ENDED
JUNE 30,
--------------------------
1995 1996
---------- -----------
<S> <C> <C>
REVENUES:
Software licenses................................................ $6,742,663 $11,339,028
Hardware......................................................... 2,530,664 2,601,206
Maintenance and other services................................... 3,894,324 6,215,146
---------- -----------
Total revenues..................................................... 13,167,651 20,155,380
COST OF REVENUES:
Software licenses................................................ 581,572 922,945
Hardware......................................................... 1,984,323 1,943,602
Maintenance and other services................................... 2,737,098 4,911,588
---------- -----------
Total cost of revenues............................................. 5,302,993 7,778,135
---------- -----------
Gross profit....................................................... 7,864,658 12,377,245
OPERATING EXPENSES:
Sales & marketing................................................ 3,640,026 5,603,844
Research & development........................................... 1,180,223 1,891,504
General & administrative......................................... 1,863,786 2,543,737
---------- -----------
Total operating expenses........................................... 6,684,035 10,039,085
---------- -----------
Income from operations............................................. 1,180,623 2,338,160
Other income (expense), net........................................ (913,946) 178,707
---------- -----------
Income before income taxes......................................... 266,677 2,516,867
Provision for income taxes......................................... 112,004 981,578
---------- -----------
Net income......................................................... $ 154,673 $ 1,535,289
========== ===========
PER SHARE INFORMATION:
Net income....................................................... $ 0.05 $ 0.24
========== ===========
Shares used in per share computations.............................. 3,321,000 6,357,000
========== ===========
</TABLE>
See notes to unaudited consolidated financial statements
F-17
<PAGE> 128
DATAWORKS CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS ENDED
JUNE 30,
---------------------------
1995 1996
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income........................................................ $ 154,671 $ 1,535,289
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation.................................................... 178,971 410,590
Amortization of intangible assets............................... 328,089 400,721
Amortization of debt discount and debt issue costs.............. 149,593 --
Reduction of advances to officers charged to operating
expenses..................................................... 77,000 --
Deferred rent expense........................................... 10,775 (7,002)
Deferred income taxes........................................... (79,372) (43,374)
Changes in operating assets and liabilities:
Accounts payable............................................. 1,105,700 613,408
Accrued compensation......................................... 89,460 234,256
Other accrued liabilities.................................... (107,228) 1,693,362
Deferred revenue............................................. 1,520,488 (211,308)
Accounts receivable.......................................... (3,882,565) (3,346,729)
Other current assets......................................... (373,668) (1,662,825)
----------- -----------
Net cash used in operating activities............................. (828,086) (383,612)
INVESTING ACTIVITIES
Purchases of equipment, furniture and fixtures.................... (309,565) (926,259)
Additions to acquired and developed software costs................ (606,908) (1,556,099)
Advances to officers.............................................. (99,500) 50,700
Other assets...................................................... (11,516) 3,160
----------- -----------
Net cash used in investing activities............................. (1,027,489) (2,428,498)
FINANCING ACTIVITIES
Net increase in obligations under lines of credit................. 626,553 --
Proceeds from notes payable....................................... 1,250,000 --
Repayments of notes payable....................................... (134,828) --
Deferred debt issue costs......................................... (113,338) --
Issuance of common stock, net..................................... -- 338,850
----------- -----------
Net cash provided by financing activities......................... 1,628,387 338,850
----------- -----------
Net decrease in cash and cash equivalents......................... (227,188) (2,473,260)
Cash and cash equivalents at beginning of period.................. 618,332 10,726,636
----------- -----------
Cash and cash equivalents at end of period........................ $ 391,144 $ 8,253,376
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for interest........................ $ 617,517 $ 27,518
=========== ===========
Cash paid during the period for income taxes.................... $ 351,818 $ 38,743
=========== ===========
</TABLE>
See notes to unaudited consolidated financial statements
F-18
<PAGE> 129
DATAWORKS CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The interim consolidated financial statements included herein have been
prepared by DataWorks Corporation ("DataWorks") without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission (the "SEC").
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
These consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto for the year ended December
31, 1995 included in DataWorks' Form 10-K. In the opinion of management all
adjustments, consisting of normal recurring adjustments, considered necessary
for a fair presentation of the consolidated financial position of DataWorks as
of June 30, 1996 and the results of operations, and changes in cash flows for
the six-month periods ended June 30, 1996 and 1995 have been included. The
results of operations for the interim period ended June 30, 1996 are not
necessarily indicative of the results which may be reported for any other
interim period or for the year ended December 31, 1996.
2. ACCOUNTING POLICIES
Effective January 1, 1996, DataWorks adopted Statement of Financial
Accounting Standard No. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of" (SFAS 121). The adoption of the new
standard had no effect on the financial statements.
Effective January 1, 1996, DataWorks adopted Statement of Financial
Accounting Standard No. 123 "Accounting and Disclosure of Stock-Based
Compensation" (SFAS 123). As allowed under SFAS 123, DataWorks has elected to
continue to account for stock option grants in accordance with Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" (APB
25) and related interpretations. The adoption of the new standard had no effect
on the financial statements.
3. NET INCOME PER SHARE
For periods subsequent to the completion of DataWorks' initial public
offering (the "IPO") in October 1995, income per share information is computed
using the weighted average number of common shares outstanding plus common share
equivalents arising from outstanding stock options and warrants using the
treasury stock method. Prior to the IPO, net income per share is computed
pursuant to the requirements of the SEC, which require that common stock and
convertible preferred shares issued by DataWorks during the twelve months
immediately preceding the IPO, plus the number of common equivalent shares which
were granted during the same period pursuant to the grant of stock options and
warrants, be included in the calculation of the shares used in computing net
income per share as if these shares were outstanding for all periods presented
using the treasury stock method.
4. ACQUISITION
Effective January 1996, DataWorks purchased software assets of Arrowkey
Systems for $450,000. These assets facilitate the integration of shop floor data
collection systems into DataWorks' current software products. In addition,
DataWorks may be required to pay up to $75,000 annually through 1998 if certain
sales levels of Arrowkey software products are achieved, as defined. These
assets have been included on the Consolidated Balance Sheet as "Acquired and
developed software costs, net" and will be amortized over their estimated useful
life of five years.
5. SUBSEQUENT EVENT
On July 22, 1996 DataWorks announced it had signed a letter of intent to
acquire, through a merger, DCD Corporation ("DCD"). DataWorks plans to issue up
to 1.8 million shares of its common stock, subject to certain reductions, and
will account for this acquisition as a pooling of interests. Consummation of
this
F-19
<PAGE> 130
transaction is contingent upon approval of the Company's shareholders, execution
of a definitive acquisition agreement and satisfactory due diligence reviews by
each party. DCD develops, markets and supports business management software for
the make-to-order manufacturing segment, primarily job shops and custom
manufacturers. DataWorks believes that DCD's Windows- and NT-based products are
complementary to its current existing products.
F-20
<PAGE> 131
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
DCD Corporation
In our opinion, the accompanying balance sheet and the related statements
of operations, of stockholders' equity (deficit) and of cash flows present
fairly, in all material respects, the financial position of DCD Corporation at
December 31, 1994 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Minneapolis, Minnesota
April 5, 1996
F-21
<PAGE> 132
DCD CORPORATION
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- JUNE 30,
1994 1995 1996
----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 839,601 $2,277,973 $ 2,057,930
Accounts receivable, net............................ 1,380,664 2,807,137 2,964,642
Other current assets................................ 238,320 893,153 710,027
----------- ---------- ----------
Total current assets........................ 2,458,585 5,978,263 5,732,599
----------- ---------- ----------
Property and equipment, net........................... 241,357 607,030 759,997
Intangible assets, net................................ 19,998 43,140 50,542
----------- ---------- ----------
Total assets................................ $ 2,719,940 $6,628,433 $ 6,543,138
=========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.................................... $ 135,908 $ 330,581 $ 137,144
Accrued expenses.................................... 571,031 1,933,602 655,579
Deferred service revenue............................ 1,360,896 2,572,277 2,879,705
Customer deposits................................... 68,318 76,035 132,617
Current portion of ESOP note payable................ 364,284
----------- ---------- ----------
Total current liabilities................... 2,500,437 4,912,495 3,805,045
----------- ---------- ----------
ESOP note payable, less current portion............... 723,219
----------- ---------- ----------
Total liabilities..................................... 3,223,656 4,912,495 3,805,045
----------- ---------- ----------
Commitments
Stockholders' equity (deficit):
Class A common stock; no par value; 10,000,000
shares authorized; 267,750 shares issued and
outstanding...................................... 446 446 446
Class B common stock; no par value; 10,000,000
shares authorized; 257,250 shares issued and
outstanding...................................... 429 429 429
Additional paid-in capital.......................... 125 125
Retained earnings................................... 582,912 1,714,938 2,737,093
----------- ---------- ----------
583,787 1,715,938 2,738,093
Less: Receivable from ESOP............................ (1,087,503)
----------- ---------- ----------
Total stockholders' equity (deficit)........ (503,716) 1,715,938 2,738,093
----------- ---------- ----------
Total liabilities and stockholders' equity
(deficit)................................. $ 2,719,940 $6,628,433 $ 6,543,138
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE> 133
DCD CORPORATION
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FOR THE YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------ -----------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Software and related products...... $3,015,935 $4,329,477 $7,685,404 $2,947,793 $4,941,669
Services........................... 1,566,535 1,993,448 3,797,463 1,543,841 2,368,900
---------- ---------- ---------- ---------- ----------
Total revenues............. 4,582,470 6,322,925 11,482,867 4,491,634 7,310,569
---------- ---------- ---------- ---------- ----------
Cost of revenues:
Software and related products...... 557,459 651,523 1,061,333 449,682 681,499
Services........................... 1,130,608 1,080,334 1,721,006 785,695 1,322,387
---------- ---------- ---------- ---------- ----------
Total cost of revenues..... 1,688,067 1,731,857 2,782,339 1,235,377 2,003,886
---------- ---------- ---------- ---------- ----------
Gross profit......................... 2,894,403 4,591,068 8,700,528 3,256,257 5,306,683
---------- ---------- ---------- ---------- ----------
Operating expenses:
Sales and marketing................ 1,298,596 1,886,454 3,819,925 1,568,665 2,278,092
Research and development........... 339,208 519,359 505,338 240,968 153,528
General and administrative......... 689,918 1,017,853 1,408,952 640,694 1,180,244
ESOP contribution.................. 387,363 429,397 445,550 222,774
---------- ---------- ---------- ---------- ----------
Total operating expenses... 2,715,085 3,853,063 6,179,765 2,673,101 3,611,864
---------- ---------- ---------- ---------- ----------
Income from operations............... 179,318 738,005 2,520,763 583,156 1,694,819
---------- ---------- ---------- ---------- ----------
Other income (expense):
Interest income.................... 13,037 19,039 44,746 16,913 38,151
Interest expense................... (118,334) (100,948) (62,008) (39,925)
Other, net......................... 20,355 29,774 39,750 27,879 33,387
---------- ---------- ---------- ---------- ----------
Total other income
(expense)................ (84,942) (52,135) 22,488 4,867 71,538
---------- ---------- ---------- ---------- ----------
Income before income taxes........... 94,376 685,870 2,543,251 588,023 1,766,357
Provision for income taxes........... 130,426 762,199 176,019 744,202
---------- ---------- ---------- ---------- ----------
Net income........................... $ 94,376 $ 555,444 $1,781,052 $ 412,004 $1,022,155
========= ========= ========= ========= =========
Net income per common share.......... $ .30 $ 1.51 $ 3.94 $ .97 $ 1.95
========= ========= ========= ========= =========
Weighted average common shares....... 313,829 368,469 451,805 425,156 525,000
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE> 134
DCD CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON STOCK COMMON STOCK
------------------ ------------------ ADDITIONAL RECEIVABLE TOTAL
NUMBER NUMBER PAID-IN RETAINED FROM STOCKHOLDERS'
OF SHARES AMOUNT OF SHARES AMOUNT CAPITAL EARNINGS ESOP EQUITY (DEFICIT)
--------- ------ --------- ------ ---------- ---------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1992....... 267,750 $446 257,250 $429 $ 420,601 $(2,550,000) $ (2,128,524)
Net income.............. 94,376 94,376
Dividends declared on
Class A common
stock................. (94,376) (94,376)
Repayments of ESOP
receivable............ 607,142 607,142
------- ---- ------- ---- ---- ---------- ----------- -----------
Balance at
December 31, 1993....... 267,750 446 257,250 429 420,601 (1,942,858) (1,521,382)
Net income.............. 555,444 555,444
Dividends declared on
Class A common
stock................. (393,133) (393,133)
Repayments of ESOP
receivable............ 855,355 855,355
------- ---- ------- ---- ---- ---------- ----------- -----------
Balance at
December 31, 1994....... 267,750 446 257,250 429 582,912 (1,087,503) (503,716)
Contribution of
capital............... $125 125
Net income.............. 1,781,052 1,781,052
Dividends declared on
Class A common
stock................. (649,026) (649,026)
Repayments of ESOP
receivable............ 1,087,503 1,087,503
------- ---- ------- ---- ---- ---------- ----------- -----------
Balance at
December 31, 1995....... 267,750 446 257,250 429 125 1,714,938 0 1,715,938
Net income
(unaudited)........... 1,022,155 1,022,155
------- ---- ------- ---- ---- ---------- ----------- -----------
Balance at June 30, 1996
(unaudited)............. 267,750 $446 257,250 $429 $125 $2,737,093 $ 0 $ 2,738,093
======= ==== ======= ==== ==== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE> 135
DCD CORPORATION
STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
FOR THE YEARS ENDED DECEMBER 31, 30,
----------------------------------- -----------------------
1993 1994 1995 1995 1996
--------- --------- ----------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income............................. $ 94,376 $ 555,444 $ 1,781,052 $ 425,156 $ 1,022,155
Adjustments to reconcile net income to
net cash provided by operating
activities:
Provision for doubtful accounts and
returns........................... 11,496 78,421 591,119 205,347 471,628
Depreciation and amortization....... 87,272 117,545 111,314 68,340 140,536
Loss (gain) on sales of property and
equipment......................... (3,345) 16,827 10,751
Deferred income taxes............... (21,751) (473,541)
Changes in current assets and
liabilities:
Accounts receivable............... 14,716 (899,192) (2,017,592) (731,573) (629,133)
Other current assets.............. 10,623 (153,223) (181,292) (32,704) 183,126
Accounts payable.................. 53,070 44,291 194,673 25,631 (193,437)
Accrued expenses.................. (24,944) 327,087 1,362,571 45,741 (1,278,023)
Accrued ESOP contribution......... (128,021) (38,221)
Deferred service revenue.......... 133,570 718,765 1,211,381 436,788 307,428
Customer deposits................. (222) 11,408 7,717 (18,374) 56,582
---------- ---------- ------------ ---------- ------------
Net cash provided by operating
activities................... 248,591 757,401 2,598,153 424,352 80,862
---------- ---------- ------------ ---------- ------------
Cash flows from investing activities:
Proceeds from sales of property and
equipment........................... 32,613 27,779 96,466
Additions to property and equipment.... (129,459) (178,899) (578,423) (262,606) (288,707)
(Increase) decrease in other assets.... 11,682 66,846 (28,923) (10,209) (12,198)
---------- ---------- ------------ ---------- ------------
Net cash used investing
activities................... (85,164) (84,274) (510,880) (272,815) (300,905)
---------- ---------- ------------ ---------- ------------
Cash flows from financing activities:
Contribution of capital................ 125
Dividends paid on Class A common
stock............................... (94,376) (393,133) (649,026)
---------- ---------- ------------ ---------- ------------
Net cash used by financing
activities................... (94,376) (393,133) (648,901)
---------- ---------- ------------ ---------- ------------
Net increase (decrease) in cash and cash
equivalents............................ 69,051 279,994 1,438,372 151,537 (220,043)
Cash and cash equivalents at beginning of
period................................. 490,556 559,607 839,601 839,601 2,277,973
---------- ---------- ------------ ---------- ------------
Cash and cash equivalents at end of
period................................. $ 559,607 $ 839,601 $ 2,277,973 $ 991,138 $ 2,057,930
========== ========== ============ ========== ============
Supplemental disclosures of cash flow
information:
Cash paid during the period for
interest............................ $ 118,334 $ 100,948 $ 62,008 $ 39,925 $ 0
Cash paid during the period for income
taxes............................... $ 27,436 $ 19,677 $ 433,073 $ 214,000 $ 1,559,200
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE> 136
DCD CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION
DCD Corporation ("DCD" or the "Company") designs, develops, markets and
supports business management software for "make to order" manufacturing
companies, primarily job shops and custom manufacturers. DCD markets its
specialized software through its sales organization and licensed sales
representatives throughout the United States.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments with original
maturities of three months or less and are readily convertible to cash. DCD has
adopted Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting
for Certain Investments in Debt and Equity Securities," and has classified its
investments as available-for-sale in accordance with that standard.
Fair Value of Financial Instruments
Cash and cash equivalents are valued at their carrying amounts, which are
reasonable estimates of fair value. The fair value of all other financial
instruments approximates cost as stated.
Concentration of Credit Risk
Financial instruments which potentially subject DCD to credit risk consist
primarily of accounts receivable. DCD grants credit to customers in the ordinary
course of business. No single customer, industry or region represents a
significant concentration of credit risk.
Revenue Recognition
Software license and hardware sales are recognized upon delivery if there
are no significant post-delivery obligations net a reserve for estimated future
returns. The related installation, training and consulting fees are recognized
upon performance of the services. Amounts billed but not recognized for
demonstration units or future services are deferred until acceptance of the
product or completion of the services. Revenues derived from maintenance
contracts and for unbundled first year maintenance are deferred and recognized
ratably over the period the service is provided.
The aggregate allowance for doubtful accounts and product returns at
December 31, 1994 and 1995 was $67,445 and $462,835, respectively.
Property and Equipment
DCD's property and equipment are stated at cost. Depreciation is calculated
using straight-line and accelerated methods over the estimated lives of the
assets, which generally range from 5 to 7 years. Leasehold improvements are
amortized over the term of the lease. Significant additions or improvements
extending asset lives are capitalized while repairs and maintenance are charged
to expense as incurred.
F-26
<PAGE> 137
DCD CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Intangible Assets
Costs incurred to obtain and secure trademarks are capitalized and
amortized using the straight-line method over five to seven years. Amortization
expense for 1994 and 1995 was $2,321 and $5,781, respectively. Accumulated
amortization at December 31, 1994 and 1995 was $2,321 and $8,103, respectively.
Periodically, management assesses whether there has been a permanent impairment
in the value of intangible assets.
Research and Development
Expenditures for research and development costs are expensed as incurred.
Such costs are required to be expensed as incurred until the point that
technological feasibility and proven marketability of the product are
established. Costs otherwise capitalizable after technological feasibility is
achieved have also been expensed because they have been insignificant.
Income Taxes
Income taxes are accounted for on the liability method under the provisions
of SFAS No. 109, "Accounting for Income Taxes." DCD realizes tax benefits from
the deduction of dividends paid on common stock held by the ESOP used to make
ESOP debt service payments.
Unaudited Interim Financial Statements
In the opinion of management, DCD has made all adjustments, consisting only
of normal recurring accruals, necessary for a fair presentation of the financial
condition of DCD as of June 30, 1996 and the results of operations and cash
flows for the six-month periods ended June 30, 1995 and 1996, as presented in
the accompanying unaudited financial statements.
Net Income Per Share
Net income per share is computed based on the weighted average shares
outstanding for the period. For net income per share purposes, all Class B
common shares and only Class A common shares which are allocated to participants
and committed to be released are considered to be outstanding.
Recently Issued Accounting Standard
Effective January 1, 1996, DCD adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of." The
adoption in 1996 had no material effect on DCD's financial statements.
NOTE 3 -- FINANCIAL STATEMENT COMPONENTS
Other current assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30,
1994 1995 1996
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Prepaids and other current assets................. $216,569 $397,861 $ 214,735
Deferred income taxes............................. 21,751 495,292 495,292
--------- ---------- ----------
$238,320 $893,153 $ 710,027
--------- ---------- ----------
</TABLE>
F-27
<PAGE> 138
DCD CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ JUNE 30,
1994 1995 1996
--------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Office equipment............................... $ 707,785 $1,152,912 $ 1,438,449
Leasehold improvements......................... 5,959 2,264 5,434
--------- ---------- ----------
713,744 1,155,176 1,443,883
Less: Accumulated depreciation and
amortization................................. (472,387) (548,146) (683,886)
--------- ---------- ----------
$ 241,357 $ 607,030 $ 759,997
========= ========== ==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1994 1995 1996
-------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Accrued expenses consist of the following:
Accrued income taxes............................ $132,500 $ 936,499 $ 121,501
Accrued wages and benefits...................... 359,969 703,130 376,051
Other accrued expenses.......................... 78,562 293,973 158,027
--------- ---------- ----------
$571,031 $1,933,602 $ 655,579
========= ========== ==========
</TABLE>
NOTE 4 -- EMPLOYEE STOCK OWNERSHIP PLAN AND RECAPITALIZATION
The Company established an Employee Stock Ownership Plan (ESOP) in 1992 for
the benefit of all employees meeting certain eligibility requirements. In
November 1992, all outstanding common stock was exchanged for shares of Class B
common stock at the ratio of 600 shares for each share of common stock. On
November 13, 1992, the Company obtained financing of $2,550,000 from a
commercial bank and advanced the proceeds to the ESOP which purchased 267,750
shares of Class B common stock from the selling stockholder of the Company. The
ESOP's shares were immediately converted to Class A common stock. Class A and
Class B common stock have identical voting and liquidation rights. If dividends
are declared to only one class of stock, the dividends must be declared to the
shares of Class A common stock.
The Company recorded the funds advanced to the ESOP as a "Receivable from
ESOP" which is a reduction of stockholders' equity. As the Company makes
discretionary contributions and dividends to the ESOP, these amounts are used to
repay the "Receivable from ESOP" and the related ESOP note payable. As the
principal amount of the loan is repaid, the "Receivable from ESOP" is reduced
accordingly. The amount of the repayments during 1993, 1994 and 1995 were
$607,142, $855,355 and $1,087,503, respectively.
During 1995, the ESOP note payable and "Receivable from ESOP" were paid in
full. At December 31, 1994, the ESOP note payable was due in quarterly principal
payments of $91,000 plus interest paid monthly at 90% of the commercial bank's
prime rate (7.65% at December 31, 1994). The ESOP note payable was secured by
Company assets and a $500,000 personal guarantee of the selling stockholder. The
note was subject to various loan covenants. The Company was in compliance with
these covenants at December 31, 1994 or had obtained the necessary waivers.
During 1993, the Company paid $111,576 of interest expense, contributed
$384,745 to the ESOP and incurred $2,618 of other ESOP related expenses. During
1994, the Company paid $95,138 of interest expense, contributed $424,001 to the
ESOP and incurred $5,396 of other ESOP related expenses. During 1995, the
Company paid $56,408 of interest expense, contributed $438,477 to the ESOP and
incurred $7,073 of other ESOP related expenses. During 1993, 1994 and 1995, the
Company also paid dividends of $94,376, $393,133
F-28
<PAGE> 139
DCD CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
and $649,026, respectively, on the Class A common stock owned by the ESOP. At
December 31, 1993, 1994 and 1995, the ESOP had released and allocated 67,762,
157,611 and 267,750, shares, respectively.
NOTE 5 -- STOCKHOLDERS' EQUITY
Stock Option Grant by Stockholders
In December 1992, the Class B common stockholders granted to an
officer/director of the Company an option to purchase 257,250 shares of Class B
common stock directly from them at an exercise price of $7.58 per share. The
options vest and may be exercised on January 1, 1997 or earlier in the event
that the ESOP note payable is paid in full. The options expire on January 2,
1997.
Additional Paid-in Capital
During 1995, in order to meet minimum capitalization requirements in
certain states, the stockholders of the Company contributed an additional $125
of paid-in capital.
NOTE 6 -- INCOME TAXES
The Company's provision for income taxes for the years ended December 31,
1994 and 1995 consists of the following:
<TABLE>
<CAPTION>
1994 1995
-------- ----------
<S> <C> <C>
Current:
U.S. federal............................................... $119,729 $ 975,456
State...................................................... 32,448 260,284
-------- ----------
Total current...................................... 152,177 1,235,740
Deferred:
U.S. federal............................................... (16,508) (408,147)
State...................................................... (5,243) (65,394)
-------- ----------
Total deferred..................................... (21,751) (473,541)
-------- ----------
Total income tax expense........................... $130,426 $ 762,199
======== ==========
</TABLE>
The Company had no income tax liability or expense in 1993.
The Company's effective tax rates differed from the federal statutory tax
rate as follows:
<TABLE>
<CAPTION>
1993 1994 1995
-------- --------- ---------
<S> <C> <C> <C>
Expected tax expense at federal statutory
rate......................................... $ 32,088 $ 233,196 $ 864,705
State income taxes, net of federal tax
benefit...................................... 5,663 44,115 139,624
ESOP dividend tax benefit...................... (37,751) (158,826) (256,365)
Other, net..................................... 11,941 14,235
-------- --------- ---------
$ 0 $ 130,426 $ 762,199
======== ========= =========
</TABLE>
At December 31, 1994 and 1995, the Company has deferred tax assets which
consist primarily of basis differences of certain assets and liabilities for
financial reporting and income tax purposes. The realization of such assets is
reasonably assured by future profitability and the carryback of any future
losses.
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<PAGE> 140
DCD CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets (liabilities) consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
-------- --------
<S> <C> <C>
Allowance for doubtful accounts and product returns.......... $ 27,157 $182,772
Deferred revenue............................................. 265,569
Vacation accrual............................................. 20,767
Commission accrual........................................... 6,559 27,411
Other........................................................ (11,965) (1,227)
-------- --------
Total deferred tax asset........................... $ 21,751 $495,292
======== ========
</TABLE>
NOTE 7 -- LEASE COMMITMENTS
The Company leases certain office space under noncancellable operating
lease agreements. Rental expense under these operating leases for the years
ended December 31, 1993, 1994 and 1995 was approximately $81,000, $83,000 and
$282,000, respectively.
At December 31, 1995, future minimum lease payments under these operating
leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
------------------------ --------
<S> <C>
1996........................................................... $355,174
1997........................................................... 87,556
--------
Total minimum payments required........................ $442,730
========
</TABLE>
NOTE 8 -- LINE OF CREDIT
The Company has a line of credit with a bank which provides for borrowings
up to $225,000 at 1.50% over the bank's base rate which was 8.5% and 9.5% at
December 31, 1994 and 1995, respectively. Borrowings under the line of credit
are secured by the Company's accounts receivable. No amounts were outstanding on
the line of credit at December 31, 1994 and 1995. The agreement is subject to
various loan covenants. The Company was in compliance with these covenants at
December 31, 1994 and 1995 or had obtained the necessary waivers. The line of
credit agreement expires on June 30, 1996.
NOTE 9 -- PROFIT SHARING PLAN
The Company has a profit sharing plan which provides for an annual
contribution not to exceed the maximum allowed as a deduction under the Internal
Revenue Code. The plan covers substantially all employees after specified
periods of service and the attainment of minimum age requirements. Each year's
contribution is determined by the Board of Directors. No Company contributions
to the plan were declared or made during 1993, 1994 or 1995.
NOTE 10 -- SUBSEQUENT EVENT (UNAUDITED)
In July 1996, an officer exercised an option and acquired 37% of the
Company's Class B common shares in accordance with the terms of the option
described in Note 5. For tax purposes, the exercise of the option is
compensatory. Accordingly, the Company expects to realize a significant future
tax benefit.
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<PAGE> 141
APPENDIX A
AGREEMENT AND PLAN
OF MERGER AND REORGANIZATION
THIS AGREEMENT AND PLAN OF MERGER AND REORGANIZATION ("Agreement") is made
and entered into as of August 16, 1996, among: DATAWORKS CORPORATION, a
California corporation ("Parent"); DATAWORKS ACQUISITION SUB., Inc., a Minnesota
corporation and a wholly owned subsidiary of Parent ("Merger Sub"); DCD
CORPORATION, a Minnesota corporation (the "Company"); and those shareholders of
the Company listed as Designated Shareholders on the signature page hereof (the
"Designated Shareholders"). Certain capitalized terms used in this Agreement are
defined in Exhibit A.
RECITALS
A. Parent, Merger Sub and the Company intend to effect a merger of Merger
Sub into the Company in accordance with this Agreement and the relevant laws of
the State of Minnesota (the "Merger"). Upon consummation of the Merger, Merger
Sub will cease to exist, and the Company will become a wholly owned subsidiary
of Parent.
B. It is intended that the Merger qualify as a tax-free reorganization
within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code"). For accounting purposes, it is intended that the Merger be
treated as a "pooling of interests."
C. This Agreement has been adopted and approved by the respective boards of
directors of Parent, Merger Sub and the Company.
AGREEMENT
The parties to this Agreement agree as follows:
SECTION 1. DESCRIPTION OF TRANSACTION
1.1 Merger of Merger Sub into the Company. Upon the terms and subject to
the conditions set forth in this Agreement, at the Effective Time (as defined in
Section 1.3), (i) Merger Sub shall be merged with and into the Company, (ii) the
separate existence of Merger Sub shall cease, and (iii) the shareholders of the
Company (the "Shareholders") shall receive up to an aggregate 1,800,000 shares
(reduced as described in Section 1.5) of Parent Common Stock (defined in Section
1.5(a)(i)), provided that 10% of such shares will be held in escrow as security
for the obligations of the Company and the Designated Shareholders hereunder
pursuant to an Escrow and Indemnity Agreement in the form attached hereto as
Exhibit B ("Escrow Agreement"), to be entered into by and among Parent, the
Company, the Designated Shareholders and the escrow agent named therein (the
"Escrow Agent"). The Company will continue as the surviving corporation in the
Merger (the "Surviving Corporation").
1.2 Effect of the Merger. The Merger shall have the effects set forth in
this Agreement and in the applicable provisions of the Minnesota Statutes.
1.3 Closing; Effective Time. The consummation of the transactions
contemplated by this Agreement (the "Closing") shall take place at the offices
of Cooley Godward Castro Huddleson & Tatum, 4365 Executive Drive, Suite 1100,
San Diego, California, at such time within two (2) business days after the
Parent Shareholders' Meeting (defined in Section 5.3(b)) as Parent may designate
from time to time upon prior notice to the Company. (For purposes of this
Agreement, "Scheduled Closing Time" shall mean the time and date as of which the
Closing is required to take place pursuant to this Section 1.3; and "Closing
Date" shall mean the time and date as of which the Closing actually takes
place.) Contemporaneously with or as promptly as practicable after the Closing,
properly executed articles of merger conforming to the requirements of the
Minnesota Statutes (the "Articles of Merger") shall be filed with the Secretary
of State of the State of
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Minnesota. The Merger shall take effect at the time the Articles of Merger are
filed with the Secretary of State of the State of Minnesota (the "Effective
Time").
1.4 Articles of Incorporation and Bylaws; Directors and Officers.
(a) The Articles of Incorporation of the Surviving Corporation shall be
amended and restated as of the Effective Time to conform to Exhibit C.
(b) The Bylaws of the Surviving Corporation shall be amended and restated
as of the Effective Time to conform to the Bylaws of Merger Sub as in effect
immediately prior to the Effective Time.
(c) The directors and officers of the Surviving Corporation immediately
after the Effective Time shall be the individuals identified on Exhibit D.
1.5 Conversion of Shares.
(a) Subject to Sections 1.7 and 1.8, at the Effective Time, by virtue of
the Merger and without any further action on the part of Parent, Merger Sub, the
Company or any Shareholder:
(i) each share of the Company's Class A Common Stock and Class B
Common Stock (collectively, the "Company Common Stock") outstanding
immediately prior to the Effective Time (other than dissenters' shares, if
any) shall be converted into the right to receive up to the "Applicable
Multiple" (as defined in Section 1.5(b)(i)) of a share of the common stock
of Parent ("Parent Common Stock"), subject to the provisions of Section
1.7; and
(ii) each share of the common stock of Merger Sub outstanding
immediately prior to the Effective Time shall be converted into one share
of common stock of the Surviving Corporation.
(b) For purposes of this Agreement:
(i) the "Applicable Multiple" shall be the number determined by
dividing (x) 1,800,000 reduced by the Deduction (defined in the following
paragraph) (as reduced, the "Shares"), by (y) the aggregate number of
shares of Company Common Stock outstanding immediately prior to the
Effective Time;
(ii) (A) the "Deemed Price Per Parent Common Share" shall be the
average of the last quoted sale prices of Parent Common Stock as traded on
the NASDAQ National Market for the twenty (20) market trading days
immediately preceding the date of the Parent Shareholders' Meeting (defined
in Section 5.3); and (B) the "Deduction" shall be the number of whole
shares of Parent Common Stock that could be purchased at the Deemed Price
Per Parent Common Share with the sum of (a) the aggregate amount of fees
and expenses of the Company's investment banking advisors incurred in
connection with the Merger (including without limitation fees and expenses
payable to Wessels, Arnold & Henderson, L.L.C.), and (b) the amount by
which the fees and expenses of the Company's legal and accounting advisors
incurred after July 17, 1996, in connection with the Merger exceed
$100,000; and
(iii) the Company shall provide a certificate (the "Expense Estimate
Certificate") executed and delivered at the Closing which shall set forth
their collective good faith best estimate of the Deduction, and such
estimate shall be used for purposes of determining the Applicable Multiple;
provided, however, that in the event the Expense Estimate Certificate
underestimates such fees and expenses (as determined by the Parent's audit
of the Company's records to be completed prior to the issuance of Parent's
earnings release covering the calendar year 1996), the Parent shall be
entitled to recover the amount of the underestimation pursuant to the
Escrow Agreement.
(c) Subject to any required acceleration of vesting resulting from any
termination by Parent of the DCD ESOP, if any shares of Company Common Stock
outstanding immediately prior to the Effective Time are unvested or are subject
to a repurchase option, risk of forfeiture or other condition under any
applicable restricted stock purchase agreement or other agreement with the
Company, then the shares of Parent Common Stock issued in exchange for such
shares of Company Common Stock will also be unvested and subject to the same
repurchase option, risk of forfeiture or other condition, and the certificates
representing such shares of Parent Common Stock may accordingly be marked with
appropriate legends.
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<PAGE> 143
1.6 Closing of the Company's Transfer Books. At the Effective Time,
holders of certificates representing shares of Company Common Stock that were
outstanding immediately prior to the Effective Time shall cease to have any
rights as shareholders of the Company (except as expressly provided herein or
under Sections 302A.471 and 302A.473 of the Minnesota Statutes), and the stock
transfer books of the Company shall be closed with respect to all such shares of
Company Common Stock outstanding immediately prior to the Effective Time. No
further transfer of any such shares of the Company's capital stock shall be made
on such stock transfer books after the Effective Time. If, after the Effective
Time, a valid certificate previously representing any of such shares of Company
Common Stock (a "Company Stock Certificate") is presented to the Surviving
Corporation or Parent, such Company Stock Certificate shall be canceled and
shall be exchanged as provided in Section 1.7.
1.7 Exchange of Certificates.
(a) At the Closing, each Shareholder will surrender his, her or its
respective Company Stock Certificates representing all shares of Company Common
Stock owned by such Person (other than dissenters' shares), in exchange for
certificates representing Parent Common Stock. Subject to Sections 1.7(b) and
1.7(c), upon surrender of a Company Stock Certificate to Parent for exchange,
together with such other documents as may be reasonably required by Parent
consistent with this Agreement, (1) the holder of such Company Stock Certificate
shall be entitled to receive in exchange therefor a certificate representing the
number of shares of Parent Common Stock that such holder has the right to
receive pursuant to the provisions of Section 1.5(a)(i), and (2) the Company
Stock Certificate so surrendered shall be canceled. Until surrendered as
contemplated by this Section 1.7, each Company Stock Certificate shall be
deemed, from and after the Effective Time, to represent only the right to
receive shares of Parent Common Stock (and cash in lieu of any fractional share
of Parent Common Stock) as contemplated by this Section 1.7. If any Company
Stock Certificate shall have been lost, stolen or destroyed, Parent may, in its
discretion and as a condition precedent to the issuance of any certificate
representing Parent Common Stock, require the owner of such lost, stolen or
destroyed Company Stock Certificate to provide an appropriate affidavit and to
deliver a bond (in such sum as Parent may reasonably direct) as indemnity
against any claim that may be made against Parent or the Surviving Corporation
with respect to such Company Stock Certificate.
(b) Notwithstanding any other provision of this Agreement, at the Closing
an aggregate of 10% of the Shares (the "Escrow Shares") shall be delivered to
the Escrow Agent to be held pursuant to the terms of the Escrow Agreement, and
the number of shares of Parent Common Stock issuable to each Shareholder at the
Closing shall be reduced by the number determined by multiplying the number of
Escrow Shares by such Shareholder's percentage ownership of all outstanding
shares of Company Common Stock immediately prior to the Closing.
(c) No fractional shares of Parent Common Stock shall be issued in
connection with the Merger, and no certificates for any such fractional shares
shall be issued. In lieu of such fractional shares, any holder of Company Common
Stock who would otherwise be entitled to receive a fraction of a share of Parent
Common Stock (after aggregating all fractional shares of Parent Common Stock
issuable to such holder) shall, upon surrender of such holder's Company Stock
Certificate(s), be paid in cash the dollar amount (rounded to the nearest whole
cent), without interest, determined by multiplying such fraction by the Deemed
Price Per Parent Common Share.
(d) Neither Parent nor the Surviving Corporation shall be liable to any
holder or former holder of Company Common Stock for any shares of Parent Common
Stock (or dividends or distributions with respect thereto), or for any cash
amounts, delivered to any public official pursuant to any applicable abandoned
property, escheat or similar law.
1.8 Dissenting Shares.
(a) Notwithstanding anything to the contrary contained in this Agreement,
any shares of capital stock of the Company that, as of the Effective Time, are
held by a Person who has properly complied with provisions regarding dissenters'
rights set forth in Minnesota Statutes Sections 302A.471 and 302A.473 shall not
be converted into or represent the right to receive Parent Common Stock in
accordance with Section 1.5 (or cash
A-3
<PAGE> 144
in lieu of fractional shares in accordance with Section 1.7(c)), and the holder
or holders of such shares shall be entitled only to such rights as may be
granted to such holder or holders in said sections; provided, however, that any
of such shares shall automatically be converted into and shall represent only
the right to receive (upon the surrender of the certificate or certificates
representing such shares) Parent Common Stock in accordance with Section 1.5
(and cash in lieu of fractional shares in accordance with Section 1.7(c)), if
the holder of such shares fails to comply with the relevant requirements for
perfecting such holder's dissenter's rights. Notwithstanding any other provision
of this Agreement, to the extent any Person has properly exercised and perfected
the dissenters' rights set forth above, such Person shall not be a "Shareholder"
for purposes of this Agreement.
(b) The Company shall give Parent (i) prompt notice of any objection to the
Merger prior to the Effective Time and of any other demand, notice or instrument
delivered to the Company prior to the Effective Time pursuant to the Minnesota
Statutes and (ii) the opportunity to participate in all negotiations and
proceedings with respect to any such objection, demand, notice or instrument.
The Company shall not make any payment or settlement offer prior to the
Effective Time with respect to any such objection or demand unless Parent shall
have consented in writing to such payment or settlement offer.
1.9 Tax Consequences. For federal income tax purposes, the Merger is
intended to constitute a reorganization within the meaning of Section 368 of the
Code. The parties to this Agreement hereby adopt this Agreement as a "plan of
reorganization" within the meaning of Sections 1.368-2(g) and 1.368-3(a) of the
United States Treasury Regulations.
1.10 Accounting Treatment. For financial reporting purposes, the Merger is
intended to be accounted for as a "pooling of interests."
1.11 Further Action. If, at any time after the Effective Time, any further
action is determined by Parent to be necessary or desirable to carry out the
purposes of this Agreement or to vest the Surviving Corporation or Parent with
full right, title and possession of and to all rights and property of Merger Sub
and the Company, the officers and directors of the Surviving Corporation and
Parent shall be fully authorized (in the name of Merger Sub, in the name of the
Company and otherwise) to take such action.
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to and for the benefit of the Parent
and the other Indemnitees, as follows:
2.1 Due Organization; No Subsidiaries; Etc.
(a) The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of Minnesota and has all necessary
corporate power and authority: (i) to conduct its business in the manner in
which its business is currently being conducted; (ii) to own and use its assets
in the manner in which its assets are currently owned and used; and (iii) to
perform its obligations under all Contracts by which it is bound.
(b) Except as set forth in Part 2.1(b) of the Disclosure Schedule, the
Company has not conducted any business under or otherwise used, for any purpose
or in any jurisdiction, any fictitious name, assumed name, trade name or other
name.
(c) Part 2.1(c) of the Disclosure Schedule sets forth a list of each
jurisdiction in which the Company has registered or been licensed to do business
as a foreign corporation. Except for such jurisdictions, the Company is not, and
has not been, required to be qualified, authorized, registered or licensed to do
business as a foreign corporation in any jurisdiction, except where the failure
to be so qualified, authorized, registered or licensed has not had and will not
have a Material Adverse Effect on the Company.
(d) Part 2.1(d) of the Disclosure Schedule accurately sets forth (i) the
names of the members of the Company's board of directors, and (ii) the names and
titles of the Company's officers. The Company's board of directors has never
established any committees.
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<PAGE> 145
(e) The Company has no subsidiaries and, except as set forth in Part 2.1(e)
of the Disclosure Schedule, does not now and has never owned, beneficially or
otherwise, any shares or other securities of, or any direct or indirect interest
of any nature in, any other Entity.
2.2 Articles of Incorporation and Bylaws. The Company has delivered to
Parent accurate and complete copies of: (1) the Company's articles of
incorporation and bylaws, including all amendments thereto; (2) the stock
records of the Company; and (3) the minutes and other records of the meetings
and other proceedings (including any actions taken by written consent or
otherwise without a meeting) of the shareholders of the Company and the board of
directors of the Company. There have been no meetings or other proceedings or
actions of the shareholders of the Company or the board of directors of the
Company that are not properly reflected in such minutes or other records. There
has not been any violation of any of the provisions of the Company's articles of
incorporation or any material violation of the Company's bylaws or of any
resolution adopted by the Company's shareholders or the Company's board of
directors.
2.3 Capitalization, Etc.
(a) The authorized capital stock of the Company consists of 20,000,000
shares of Company Common Stock (10,000,000 Class A Common Stock and 10,000,000
Class B Common Stock), of which 525,000 shares (267,750 shares of Class A Common
Stock and 257,250 shares of Class B Common Stock) have been issued and are
outstanding. There are no other outstanding shares of capital stock of the
Company, and there are no shares of capital stock held in the Company's
treasury. Part 2.3(a) of the Disclosure Schedule sets forth the names of each of
the Shareholders and the number of shares of Company Common Stock owned of
record by each of such Shareholders. All of the outstanding shares of Company
Common Stock have been duly authorized and validly issued, and are fully paid
and nonassessable, and none of such shares is subject to any repurchase option
or restriction on transfer (other than restrictions on transfer imposed by
virtue of applicable federal and state securities laws).
(b) The Company's Class A Common Stock has been issued to and is held by
the Company's Employee Stock Ownership Plan and Trust (the "DCD ESOP").
(c) There is no: (A) outstanding subscription, option, call, warrant or
right (whether or not currently exercisable) to acquire any shares of the
capital stock or other securities of the Company; (B) outstanding security,
instrument or obligation that is or may become convertible into or exchangeable
for any shares of the capital stock or other securities of the Company; (C)
Contract under which the Company is or may become obligated to sell or otherwise
issue any shares of its capital stock or any other securities; or (D) condition
or circumstance that may give rise to or provide a basis for the assertion of a
claim by any Person to the effect that such Person is entitled to acquire or
receive any shares of capital stock or other securities of the Company.
(d) All outstanding shares of Company Common Stock have been issued in
compliance with (i) all applicable securities laws and other applicable Legal
Requirements, and (ii) all requirements set forth in applicable Contracts.
(e) The Company has not, within the last five years, repurchased, redeemed
or otherwise reacquired any shares of capital stock or other securities of the
Company. All securities so reacquired by the Company, if any, were reacquired in
compliance with (i) the applicable provisions of Minnesota law and all other
applicable Legal Requirements, and (ii) all requirements set forth in applicable
restricted stock purchase agreements and other applicable Contracts.
2.4 Financial Statements; Books and Records.
(a) The Company has delivered to Parent the following financial statements
and notes (collectively, the "Company Financial Statements"):
(i) the audited balance sheets of the Company as of December 31, 1993,
1994 and 1995, and the related audited statements of income, statements of
shareholders' equity and statements of cash flows of the Company for the
years then ended, together with the notes thereto and the unqualified
report and opinion of Price Waterhouse relating thereto; and
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<PAGE> 146
(ii) the unaudited balance sheets of the Company as of June 30, 1996
and 1995 (collectively, the "Unaudited Interim Balance Sheet"), and the
related unaudited statements of income of the Company for the six month
periods then ended.
(b) The Company Financial Statements are accurate and complete in all
material respects and present fairly the financial position of the Company as of
the respective dates thereof and the results of operations and (in the case of
the financial statements referred to in Section 2.4(a)(i)) cash flows of the
Company for the periods covered thereby. The Company Financial Statements have
been prepared in accordance with generally accepted accounting principles
applied on a consistent basis throughout the periods covered (except that the
financial statements referred to in Section 2.4(a)(ii) do not contain footnotes
and are subject to normal and recurring adjustments, which management considers
necessary for a fair presentation of the Company's financial position as of June
30, 1996 and 1995, and the results of operations for the six month periods then
ended).
(c) The books of account, minute books, stock record books, and other
records of the Company, all of which have been made available to Parent, are
complete and correct and have been maintained in accordance with sound business
practices and the requirements of Section 13(b)(2) of the Exchange Act
(regardless of whether or not the Company is subject to that Section), including
the maintenance of an adequate system of internal controls. The minute books of
the Company contain accurate records of all meetings held of, and corporate
action taken by, the shareholders and the board of directors of the Company, and
no meeting of any such shareholders or board of directors has been held for
which minutes have not been prepared and are not contained in such minute books.
At the Closing, all of those books and records will be in the possession of the
Company.
2.5 Absence of Changes. Except as set forth in Part 2.5 of the Disclosure
Schedule with respect solely to paragraphs (b) through (r) below, since December
31, 1995:
(a) there has not been any material adverse change in the Company's
business, financial condition, assets, liabilities, results of operations
or prospective customers;
(b) there has not been any material loss, damage or destruction to, or
any material interruption in the use of, any of the Company's assets
(whether or not covered by insurance);
(c) the Company has not declared, accrued, set aside or paid any
dividend or made any other distribution in respect of any shares of capital
stock, and has not repurchased, redeemed or otherwise reacquired any shares
of capital stock or other securities;
(d) the Company has not sold, issued or authorized the issuance of (i)
any capital stock or other security, (ii) any option or right to acquire
any capital stock or any other security, or (iii) any instrument
convertible into or exchangeable for any capital stock or other security;
(e) there has been no amendment to the Company's articles of
incorporation or bylaws, and the Company has not effected or been a party
to any Acquisition Transaction, recapitalization, reclassification of
shares, stock split, reverse stock split or similar transaction;
(f) the Company has not formed any subsidiary or acquired any equity
interest or other interest in any other Entity;
(g) the Company has not made any capital expenditure which, when added
to all other capital expenditures made by the Company since December 31,
1995, exceeds $410,000 in the aggregate;
(h) the Company has not (i) entered into or permitted any of the
assets owned or used by it to become bound by any Material Contract (as
defined in Section 2.10(a)), or (ii) amended or prematurely terminated, or
waived any material right or remedy under, any Material Contract;
(i) except in the ordinary course of business and consistent with past
practices, the Company has not (i) acquired, leased or licensed any right
or other asset from any other Person, (ii) sold or otherwise disposed of,
or leased or licensed, any right or other asset to any other Person, or
(iii) waived or relinquished any right;
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<PAGE> 147
(j) the Company has not written off as uncollectible (except against
reserves consistent with past practices not extraordinary in amount), or
established any extraordinary reserve with respect to, any account
receivable or other indebtedness;
(k) the Company has not made any pledge of any of its assets or
otherwise permitted any of its assets to become subject to any Encumbrance,
except for pledges of immaterial assets made in the ordinary course of
business and consistent with the Company's past practices;
(l) except for immaterial travel and other advances in the ordinary
course of business, the Company has not (i) lent money to any Person, or
(ii) incurred or guaranteed any indebtedness for borrowed money;
(m) the Company has not (i) established or adopted any Employee
Benefit Plan, (ii) except in the ordinary course of business paid any bonus
or made any profit-sharing or similar payment to, or increased the amount
of the wages, salary, commissions, fringe benefits or other compensation or
remuneration payable to, any of its directors, officers or employees other
than as consistent with the Company's recent practice with respect thereto,
or (iii) except in the ordinary course of business hired any new employee;
(n) the Company has not changed any of its methods of accounting or
accounting practices in any respect which would require disclosure in
audited financial statements in accordance with generally accepted
accounting principles;
(o) the Company has not made any Tax election;
(p) the Company has not commenced or settled any Legal Proceeding;
(q) the Company has not entered into any material transaction or taken
any other material action outside the ordinary course of business or
inconsistent with its past practices; and
(r) the Company has not agreed or committed to take any of the actions
referred to in clauses "(c)" through "(q)" above.
2.6 Title to Assets.
(a) Except as set forth in Part 2.6(a) of the Disclosure Schedule, the
Company owns all assets purported to be owned by it, including: (i) all assets
reflected on the Unaudited Interim Balance Sheet; (ii) all assets referred to in
Parts 2.7(b), 2.8 and 2.9 of the Disclosure Schedule; and (iii) all other assets
reflected in the Company's books and records as being owned by the Company.
Except as set forth in Part 2.6(a) of the Disclosure Schedule, all of said
assets are owned by the Company free and clear of any liens or other
Encumbrances, except for (i) any lien for current taxes not yet due and payable,
and (ii) minor liens that have arisen in the ordinary course of business and
that do not (in any case or in the aggregate) materially detract from the value
of the assets subject thereto or materially impair the operations of the
Company.
(b) Part 2.6 of the Disclosure Schedule identifies all assets that are
material to the business of the Company and that are being leased or licensed to
the Company.
2.7 Bank Accounts; Receivables; Customers.
(a) Part 2.7(a) of the Disclosure Schedule provides accurate and complete
information with respect to each account maintained by or for the benefit of the
Company at any bank or other financial institution.
(b) Part 2.7(b) of the Disclosure Schedule provides an accurate and
complete breakdown and aging of all accounts receivable, notes receivable and
other receivables of the Company as of June 30, 1996. Except as set forth in
Part 2.7(b) of the Disclosure Schedule, all existing accounts receivable of the
Company (including those accounts receivable reflected on the Unaudited Interim
Balance Sheet that have not yet been collected and those accounts receivable
that have arisen since June 30, 1996 and have not yet been collected) represent
valid obligations of customers of the Company arising from bona fide
transactions entered into in the ordinary course of business and are current.
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(c) Part 2.7(c) of the Disclosure Schedule identifies each customer that is
obligated to make payments to the Company in an aggregate amount exceeding
$20,000 per year. The Company has not received any notice or other communication
indicating that any customer or other Person identified in Part 2.7(c) of the
Disclosure Schedule intends or expects to cease dealing with the Company or to
effect a material reduction in the volume of business transacted by such Person
with the Company below historical levels.
(d) Part 2.7(d) of the Disclosure Schedule provides an accurate and
complete breakdown of all pending and unfilled orders, if any, received by the
Company for products, systems and services.
2.8 Equipment; Inventory; Leasehold(s).
(a) Part 2.8 of the Disclosure Schedule provides accurate and complete
information with respect to all material items of equipment, fixtures, leasehold
improvements and other tangible assets owned by or leased to the Company. The
assets identified in Part 2.8 of the Disclosure Schedule are adequate for the
uses to which they are being put, are in good condition and repair (ordinary
wear and tear excepted), and except as set forth in Part 2.8 of the Disclosure
Schedule are adequate for the conduct of the Company's business in the manner in
which such business is currently being conducted.
(b) All inventory of the Company consists of a quality and quantity usable
and salable in the ordinary course of business, except for obsolete items and
items of below-standard quality, all of which have been written off or written
down to net realizable value or otherwise reserved for.
(c) The Company does not own any real property or any interest in real
property, except for the leasehold(s) created under the real property lease(s)
identified in Part 2.10(a) of the Disclosure Schedule.
2.9 Proprietary Assets.
(a) Part 2.9(a)(1) of the Disclosure Schedule sets forth, with respect to
each Company Proprietary Asset that has been registered, recorded or filed by
the Company (or assigned to the Company) with the U.S. Patent and Trademark
Office, the U.S. Copyright Office or any similar office in a foreign
jurisdiction or with respect to which an application has been filed with the
U.S. Patent and Trademark Office, the U.S. Copyright Office or any similar
office in a foreign jurisdiction, (i) a brief description of such Company
Proprietary Asset, and (ii) the names of the jurisdictions covered by the
applicable registration, recordation, filing or application. Part 2.9(a)(2) of
the Disclosure Schedule identifies and provides a brief description of all other
Company Proprietary Assets owned by the Company that are material to the
Company's business. Part 2.9(a)(3) of the Disclosure Schedule identifies and
provides a brief description of each Company Proprietary Asset that is owned by
any other Person and that is licensed to or used by the Company in a material
way (except for any Company Proprietary Asset that is licensed to the Company
under any third party software license that (1) is generally available to the
public at a cost of less than $20,000, and (2) imposes no future monetary
obligation on the Company) and identifies the license agreement or other
agreement under which such Company Proprietary Asset is being licensed to or
used by the Company. Except as set forth in Part 2.9(a)(4) of the Disclosure
Schedule, the Company owns good title to all of the Proprietary Assets
identified in Parts 2.9(a)(1) and 2.9(a)(2) of the Disclosure Schedule, free and
clear of all liens and other Encumbrances, and has a valid right to use all
Proprietary Assets identified in Part 2.9(a)(3) of the Disclosure Schedule.
Except as set forth in Part 2.9(a)(5) of the Disclosure Schedule, the Company is
not obligated to make any material payment to any Person for the use of any
Company Proprietary Asset.
(b) The Company has taken reasonable measures to protect and maintain the
secrecy of those Company Proprietary Assets whose value is substantially
dependent on such secrecy, and otherwise to maintain and protect the value of
all Company Proprietary Assets. Except as set forth in Part 2.9(b) of the
Disclosure Schedule, the Company has not (other than pursuant to license
agreements identified in Part 2.10 of the Disclosure Schedule) disclosed or
delivered to any Person, or permitted the disclosure or delivery to any Person
of, (i) the source code, or any material portion or aspect of the source code,
of any Company Proprietary Asset, or (ii) the object code, or any material
portion or aspect of the object code, of any Company Proprietary Asset.
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(c) To the knowledge of the Company, except as set forth in Part 2.9(c) of
the Disclosure Schedule, no current use of the Company Proprietary Assets
infringes or violates the Company's rights with respect to any Proprietary Asset
owned or exclusively licensed by any other Person. To the knowledge of the
Company, except as set forth in Part 2.9(c) of the Disclosure Schedule, the
Company is not infringing, misappropriating or making any unlawful use of, and
the Company has not at any time infringed, misappropriated or made any unlawful
use of, or received any notice or other communication of any actual, alleged,
possible or potential infringement, misappropriation or unlawful use of, any
Proprietary Asset owned or exclusively licensed by any other Person. To the
knowledge of the Company, except as set forth in Part 2.9(c) of the Disclosure
Schedule, no other Person is infringing, misappropriating or making any unlawful
use of, and no Proprietary Asset owned or used by any other Person infringes or
violates the Company's rights with respect to any Company Proprietary Asset.
(d) Except as set forth in Part 2.9(d) of the Disclosure Schedule: (i) each
Company Proprietary Asset referred to in Parts 2.9(a)(1)-(3) of the Disclosure
Schedule conforms in all material respects with the current specification,
documentation, performance standard, representation or statement (if any) made
or provided with respect thereto by or with authorization of the Company; and
(ii) there has not been any claim by any customer or other Person alleging that
any Company Proprietary Asset referred to in Parts 2.9(a)(1)-(3) of the
Disclosure Schedule (including each version of computer software that has been
licensed or otherwise made available by the Company to any Person since January
1, 1992) does not conform in all material respects with any specification,
documentation, performance standard, representation or statement made or
provided by or on behalf of the Company, and, to the knowledge of the Company,
there is no basis for any such claim, where such claim would have or could
reasonably be expected to have a Material Adverse Effect on the Company.
(e) To the knowledge of the Company, except as set forth in Part 2.9(c) of
the Disclosure Schedule, the Company Proprietary Assets constitute all the
Proprietary Assets necessary to enable the Company to conduct its business in
the manner in which such business has been conducted. Except as set forth in
Part 2.9(e) of the Disclosure Schedule, (i) the Company has not licensed any of
the Company Proprietary Assets to any Person on an exclusive basis, and (ii) the
Company has not entered into any covenant not to compete or Contract limiting
its ability to exploit in all material respects any of its Proprietary Assets or
to transact business in any market or geographical area or with any Person.
(f) Except as set forth in Part 2.9(f) of the Disclosure Schedule, all
current and former employees of the Company, and all current and former
consultants and independent contractors to the Company, have executed and
delivered to the Company written agreements (containing no material exceptions
to or exclusions from the scope of their coverage) including material terms that
are substantially identical to the form(s) of agreement(s) referenced in Part
2.9(f) of the Disclosure Schedule, which form(s) of agreement(s) is/are attached
to the Disclosure Schedule as an appendix.
(g) Except as set forth in Part 2.9(g) of the Disclosure Schedule, the
Company has not entered into and is not bound by any Contract under which any
Person has the right to distribute or license, on a commercial basis, any
Company Proprietary Asset referred to in Parts 2.9(a)(1)-(3) of the Disclosure
Schedule, including source code, object code, or any versions, modifications or
derivative works of source code or object code in any Company Proprietary Asset.
2.10 Contracts.
(a) Part 2.10(a) of the Disclosure Schedule identifies each Company
Contract that constitutes a "Material Contract." For purposes of this Agreement,
each of the following shall be deemed to constitute a "Material Contract":
(i) any Contract relating to the employment or engagement of, or the
performance of services by, any employee, consultant or independent
contractor;
(ii) except for customer Contracts in substantially the form attached
as an exhibit to Part 2.10(a) of the Disclosure Schedule, entered into in
the ordinary course of business, any Contract relating to the acquisition,
transfer, use, development, sharing or license of any Proprietary Asset;
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(iii) any Contract imposing any restriction on the Company's right or
ability (A) to compete with any other Person, (B) to acquire any product or
other asset or any services from any other Person, to sell any product or
other asset to or perform any services for any other Person or to transact
business or deal in any other manner with any other Person, or (C) to
develop or distribute any technology;
(iv) any Contract creating or involving any agency relationship,
distribution arrangement or franchise relationship;
(v) any Contract relating to the acquisition, issuance or transfer of
any securities;
(vi) any Contract creating or relating to the creation of any
Encumbrance with respect to any asset owned or used by the Company;
(vii) any Contract involving or incorporating any guaranty, any
pledge, any performance or completion bond, any indemnity, any right of
contribution or any surety arrangement;
(viii) any Contract creating or relating to any partnership or joint
venture or any sharing of revenues, profits, losses, costs or liabilities;
(ix) any Contract relating to the purchase or sale of any product or
other asset by or to, or the performance of any services by or for, any
Related Party (as defined in Section 2.19);
(x) any Contract to which any Governmental Body is a party or under
which any Governmental Body has any rights or obligations, or involving or
directly or indirectly benefiting any Governmental Body (including any
subcontract or other Contract between the Company and any contractor or
subcontractor to any Governmental Body);
(xi) any Contract entered into outside the ordinary course of business
or inconsistent with the Company's past practices;
(xii) except for customer Contracts in substantially the form attached
as an exhibit to Part 2.10(a) of the Disclosure Schedule, entered into in
the ordinary course of business, any Contract that has a term of more than
60 days and that may not be terminated by the Company (without penalty)
within 60 days after the delivery of a termination notice by the Company;
and
(xiii) any Contract (not otherwise identified in clauses "(i)" through
"(xii)" of this sentence) that contemplates or involves (A) the payment or
delivery of cash or other consideration in an amount or having a value in
excess of $20,000, or (B) the performance of services having a value in
excess of $30,000.
(b) The Company has delivered to Parent accurate and complete copies of all
Contracts identified in Part 2.10(a) of the Disclosure Schedule, including all
amendments thereto. Each Contract identified in Part 2.10(a) of the Disclosure
Schedule is valid and in full force and effect, and is enforceable by the
Company in accordance with its terms, subject to (i) laws of general application
relating to bankruptcy, insolvency and the relief of debtors, and (ii) rules of
law governing specific performance, injunctive relief and other equitable
remedies.
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(c) Except as set forth in Part 2.10(c) of the Disclosure Schedule:
(i) the Company has not violated or breached, or committed any default
under, any Material Contract in any material way, and, to the knowledge of
the Company, no other Person has violated or breached, or committed any
default under, any Material Contract in any material way;
(ii) to the knowledge of the Company, no event has occurred, and no
circumstance or condition exists, that (with or without notice or lapse of
time) will, or could reasonably be expected to, (A) result in a violation
or breach of any of the provisions of any Material Contract, (B) give any
Person the right to declare a default or exercise any remedy under any
Material Contract, (C) give any Person the right to accelerate the maturity
or performance of any Material Contract, or (D) give any Person the right
to cancel, terminate or modify any Material Contract;
(iii) the Company has not received any notice or other communication
regarding (i) any actual or possible violation or breach of, or default
under, any Material Contract, or (ii) any actual or possible termination of
any Material Contract; and
(iv) the Company has not waived any of its material rights under any
Material Contract.
(d) Except as set forth in Part 2.10(d) of the Disclosure Schedule, no
Person is renegotiating, or has been authorized by the Company to renegotiate,
any amount paid or payable to the Company under any Material Contract or any
other term or provision of any Material Contract.
(e) The Company has all Contracts necessary to enable the Company to
conduct its business substantially in the manner in which its business is
currently being conducted.
(f) The Company has not made any unexpired offer or proposal (to any
customer, prospective customer or other Person), except in the ordinary course
of business.
(g) The Company has no backlog under Company Contracts.
2.11 Liabilities.
(a) The Company has no liabilities of any nature required to be shown on
the face of the Company's financial statements or the notes thereto according to
generally accepted accounting principles except for: (i) liabilities identified
as such in the "liabilities" column of the Unaudited Interim Balance Sheet; (ii)
accounts payable or accrued salaries that have been incurred by the Company
since June 30, 1996 in the ordinary course of business and consistent with the
Company's past practices; and (iii) the liabilities identified in Part 2.11(a)
of the Disclosure Schedule.
(b) Part 2.11(b) of the Disclosure Schedule provides an accurate and
complete breakdown of (i) all accounts payable of the Company as of June 30,
1996, and (ii) all notes payable of the Company and all indebtedness of the
Company for borrowed money.
2.12 Compliance with Legal Requirements. The Company is, and at all times
since June 30, 1991, has been, in compliance with all applicable Legal
Requirements, except where the failure to comply with such Legal Requirements
has not had and will not have a Material Adverse Effect on the Company and
except as set forth on Part 2.12 of the Disclosure Schedule. Except as set forth
in Part 2.12 of the Disclosure Schedule, since June 30, 1991, the Company has
not received any notice or other communication from any Governmental Body
regarding any actual or possible violation of, or failure to comply with, any
material Legal Requirement.
2.13 Governmental Authorizations. Part 2.13 of the Disclosure Schedule
identifies each material Governmental Authorization held by the Company, and the
Company has delivered to Parent accurate and complete copies of all Governmental
Authorizations identified in Part 2.13 of the Disclosure Schedule. The
Governmental Authorizations identified in Part 2.13 of the Disclosure Schedule
are valid and in full force and effect, and collectively constitute all
Governmental Authorizations necessary to enable the Company to conduct its
business in the manner in which its business is currently being conducted. The
Company is, and at all times since June 30, 1991, has been, in compliance with
the material terms and requirements of the
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respective Governmental Authorizations identified in Part 2.13 of the Disclosure
Schedule. Since June 30, 1991, the Company has not received any notice or other
communication from any Governmental Body regarding (a) any actual or possible
violation of or failure to comply with any term or requirement of any
Governmental Authorization, or (b) any actual or possible revocation,
withdrawal, suspension, cancellation, termination or modification of any
Governmental Authorization.
2.14 Tax Matters.
(a) Except as set forth in Part 2.14(a) of the Disclosure Schedule, all Tax
Returns required to be filed by or on behalf of the Company with any
Governmental Body (the "Company Returns") (i) have been filed when due, and (ii)
have been accurately and completely prepared, in compliance with all applicable
Legal Requirements, except with respect to state or local sales tax Company
Returns required to be filed in the ordinary course of the Company's business
("Sales Tax Returns") where the failure to so file or be accurately or
completely prepared will not have and could not reasonably be expected to have a
Material Adverse Effect on the Company. Except as set forth in Part 2.14(a) of
the Disclosure Schedule, all amounts shown on the Company Returns to be due on
or before the Closing Date have been or will be paid on or before the Closing
Date. The Company has delivered to Parent accurate and complete copies of all
Company income Tax Returns (relating to income tax) filed since January 1, 1992.
(b) Except as set forth on Part 2.14(b) of the Disclosure Schedule, no
Company Return has ever been examined or audited by any Governmental Body, and
no such examination or audit has been proposed or scheduled by any Governmental
Body. Except as set forth in Part 2.14(b) of the Disclosure Schedule, no
extension or waiver of the limitation period applicable to any of the Company
Returns has been granted (by the Company or any other Person), and no such
extension or waiver has been requested from the Company.
(c) Except as set forth in Part 2.14(c) of the Disclosure Schedule, no
claim or Legal Proceeding is pending or has been threatened against or with
respect to the Company in respect of any Tax, and except with respect to Sales
Tax Returns where any such claim or Legal Proceeding will not have and cannot
reasonably be expected to have a Material Adverse Effect on the Company, nor
does any basis exist therefor. Except as set forth in Part 2.14(c) of the
Disclosure Schedule, there are no unsatisfied liabilities for Taxes (including
liabilities for interest, additions to tax and penalties thereon and related
expenses) with respect to any notice of deficiency or similar document received
by the Company. There are no liens for Taxes upon any of the assets of the
Company, except liens for current Taxes not yet due and payable. The Company has
not entered into or become bound by any agreement or consent pursuant to Section
341(f) of the Code. The Company has not been, and the Company will not be,
required to include any adjustment in taxable income for any tax period (or
portion thereof) pursuant to Section 481 or 263A of the Code or any comparable
provision under state or foreign Tax laws as a result of transactions or events
occurring, or accounting methods employed, prior to the Closing.
(d) There is no Contract covering any employee or independent contractor or
former employee or independent contractor of the Company (excluding any
agreement to be entered into in connection with this Agreement) that, considered
individually or considered collectively with any other such Contracts, will, or
could reasonably be expected to, give rise directly or indirectly to the payment
of any amount that would not be deductible pursuant to Section 280G or Section
162 of the Code. The Company is not, and has never been, a party to or bound by
any tax indemnity agreement, tax sharing agreement, tax allocation agreement or
similar Contract.
2.15 Employee and Labor Matters; Benefit Plans.
(a) Part 2.15(a) of the Disclosure Schedule identifies each salary, bonus,
vacation, deferred compensation, incentive compensation, stock purchase, stock
option, severance pay, termination pay, death or disability benefits,
hospitalization, medical, insurance, flexible benefits, supplemental
unemployment benefits, profit-sharing, stock bonus, employee stock ownership,
pension or retirement plan, program or agreement and each other employee benefit
plan or arrangement (individually referred to as a "Plan" and collectively
referred to as the "Plans") sponsored, maintained, contributed to or required to
be contributed to by the Company for the benefit of any current or former
employee of the Company.
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(b) The Company does not maintain, sponsor or contribute to, and has not at
any time in the past maintained, sponsored or contributed to, any employee
pension benefit plan (as defined in Section 3(2) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), whether or not excluded from
coverage under specific Titles or Subtitles of ERISA) for the benefit of
employees or former employees of the Company (a "Pension Plan") except for those
Pension Plans described in Part 2.15(a) of the Disclosure Schedule, none of
which is a multi-employer plan (within the meaning of Section 3(37) of ERISA),
and none of which is subject to Section 412 of the Code, Part 3 of Subtitle B of
Title I of ERISA or Title IV of ERISA.
(c) The Company does not maintain, sponsor or contribute to any employee
welfare benefit plan (as defined in Section 3(1) of ERISA, whether or not
excluded from coverage under specific Titles or Subtitles of ERISA) for the
benefit of employees or former employees of the Company (a "Welfare Plan")
except for those Welfare Plans described in Part 2.15(a) of the Disclosure
Schedule, none of which is a multiemployer plan (within the meaning of Section
3(37) of ERISA).
(d) With respect to each Plan (including the DCD ESOP), the Company has
delivered to Parent: (i) an accurate and complete copy of such Plan
(including all amendments thereto);
(ii) an accurate and complete copy of the annual report (if required
under ERISA) with respect to such Plan for 1995, 1994 and 1993;
(iii) an accurate and complete copy of (A) the most recent summary
plan description, together with each summary of material modifications (if
required under ERISA) with respect to such Plan, and (B) each material
general employee communication relating to such Plan;
(iv) if such Plan is funded through a trust or any third party funding
vehicle, an accurate and complete copy of the trust or other funding
agreement (including all amendments thereto) and accurate and complete
copies of the most recent financial statements thereof;
(v) accurate and complete copies of all Contracts relating to such
Plan, including service provider agreements, trust agreements, insurance
contracts, minimum premium contracts, stop-loss agreements, investment
management agreements, subscription and participation agreements and
recordkeeping agreements; and
(vi) an accurate and complete copy of the most recent determination
letter received from the Internal Revenue Service (the "IRS") with respect
to such Plan (if such Plan is intended to be qualified under Section 401(a)
of the Code).
(e) The Company is not required to be, and has never been required to be,
treated as a single employer with any other Person under Section 4001(b)(1) of
ERISA or Section 414(b), (c), (m) or (o) of the Code. The Company has never been
a member of an "affiliated service group" within the meaning of Section 414(m)
of the Code. The Company has never made a complete or partial withdrawal from a
"multiemployer plan" (as defined in Section 3(37) of ERISA) resulting in
"withdrawal liability" (as defined in Section 4201 of ERISA), without regard to
subsequent reduction or waiver of such liability under either Section 4207 or
4208 of ERISA.
(f) The Company does not have any plan or commitment to create any
additional Welfare Plan or Pension Plan, or to modify or change any existing
Welfare Plan or Pension Plan (other than to comply with applicable law or in
accordance with this Agreement).
(g) No Welfare Plan provides death, medical or health benefits (whether or
not insured) with respect to any current or former employee of the Company after
any such employee's termination of service (other than benefit coverage mandated
by applicable law, including coverage provided pursuant to Section 4980B of the
Code).
(h) With respect to each of the Welfare Plans constituting a group health
plan within the meaning of Section 4980B(g)(2) of the Code, the provisions of
Section 4980B of the Code ("COBRA") have been complied with in all material
respects.
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(i) Except as set forth on Part 2.15(i) of the Disclosure Schedule, each of
the Plans (including the DCD ESOP) has been operated and administered in all
material respects in accordance with applicable Legal Requirements, including
ERISA and the Code, and no prohibited transaction, within the meaning of Section
406 of ERISA or Section 4975(c) of the Code, has occurred with respect to any
Pension Plan or Welfare Plan that would result in any liability to the Company.
(j) Each of the Plans intended to be qualified under Section 401(a) of the
Code has received a favorable determination as to its qualification from the
IRS, and, except as set forth on Part 2.15(i) of the Disclosure Schedule,
nothing has occurred that would adversely affect such qualification.
(k) Except as set forth in Part 2.15(k) of the Disclosure Schedule, and
except as contemplated by certain Exhibits to this Agreement, neither the
execution, delivery or performance of this Agreement, nor the consummation of
the Merger or any of the other transactions contemplated by this Agreement, nor
any subsequent termination of employment will result in any bonus payment,
golden parachute payment, severance payment or other payment to any current or
former employee or director of the Company (whether or not under any Plan), or
materially increase the benefits payable under the Plan, or result in any
acceleration of the time of payment or vesting of any such benefits.
(l) The Company is in compliance in all material respects with all
applicable Legal Requirements and Contracts relating to employment, employment
practices, employee compensation, wages, bonuses and terms and conditions of
employment.
(m) The Company has good labor relations, and, except as set forth in Part
2.15(m) of the Disclosure Schedule, the Company has no knowledge of any facts
indicating that (i) the consummation of the Merger or any of the other
transactions contemplated by this Agreement will have a material adverse effect
on the Company's labor relations or (ii) any of the Company's key employees
intends to terminate his or her employment with the Company.
2.16 Environmental Matters. The Company is and has at all times been in
compliance, in all material respects, with all applicable Environmental Laws.
The Company possesses all material permits and other Governmental Authorizations
required under applicable Environmental Laws, and the Company is and has at all
times been in material compliance with the terms and requirements of all such
Governmental Authorizations. The Company has not received any written notice or
other written communication (whether from a Governmental Body, citizens group,
employee or otherwise) that alleges that the Company is not in compliance with
any Environmental Law. To the knowledge of the Company, no current or prior
owner of any property leased or controlled by the Company has received any
notice or other communication (whether from a Governmental Body, citizens group,
employee or otherwise) that alleges that such current or prior owner or the
Company is not or was not in compliance with any Environmental Law. All
Governmental Authorizations currently held by the Company pursuant to
Environmental Laws are identified in Part 2.16 of the Disclosure Schedule. (For
purposes of this Section 2.16: (i) "Environmental Law" means any federal, state,
local or foreign Legal Requirement relating to pollution of the environment, or
protection of human health associated with the environment, or the environment
(including ambient air, surface water, ground water, land surface or subsurface
strata), including any law or regulation relating to emissions, discharges,
releases or threatened releases of Materials of Environmental Concern, or
otherwise relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of Materials of Environmental Concern;
and (ii) "Materials of Environmental Concern" include chemicals, pollutants,
contaminants, wastes, toxic substances, petroleum and petroleum products
regulated by Environmental Law and any other substance that is now regulated by
any Environmental Law.
2.17 Sale of Products; Performance of Services.
(a) Other than its obligations to perform under the Material Contracts, the
Company has not incurred or become subject to any material liability arising
from (i) any product, system, program, Proprietary Asset or other asset
designed, developed, manufactured, assembled, sold, supplied, installed,
repaired, licensed or made available by the Company, or (ii) any consulting
services, installation services, programming services, repair services,
maintenance services, training services, support services or other services
performed by the Company.
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(b) Except as set forth in Part 2.17(b) of the Disclosure Schedule, no
customer or other Person has, at any time since January 1, 1995, asserted or
threatened to assert any claim against the Company (other than claims that have
been resolved satisfactorily at no material cost to the Company) under or based
upon (i) any warranty provided by or on behalf of the Company, or (ii) any
services performed by the Company, nor does any basis for any such claim exist
to the knowledge of the Company.
2.18 Insurance. Part 2.18 of the Disclosure Schedule provides accurate and
complete information with respect to each insurance policy maintained by, at the
expense of or for the benefit of the Company and with respect to any claims made
thereunder. The Company has delivered to Parent accurate and complete copies of
the insurance policies identified in Part 2.18 of the Disclosure Schedule. Each
of the insurance policies identified in Part 2.18 of the Disclosure Schedule is
in full force and effect. The Company has not received any notice or other
communication regarding any actual or possible (a) cancellation or invalidation
of any insurance policy, (b) refusal of any coverage or rejection of any claim
under any insurance policy, or (c) extraordinary adjustment in the amount of the
premiums payable with respect to any insurance policy.
2.19 Related Party Transactions. Except as set forth in Part 2.19 of the
Disclosure Schedule: (a) no Related Party has any direct or indirect interest in
any material asset used in or otherwise relating to the business of the Company;
(b) except for immaterial travel and similar advances, no Related Party is
indebted to the Company; (c) no Related Party has entered into, or has had any
direct or indirect financial interest in, any material Contract, transaction or
business dealing involving the Company; (d) no Related Party is competing, or
has at any time competed, directly or indirectly, with the Company; and (e) no
Related Party has any claim or right against the Company (other than rights to
receive compensation for services performed as an employee of the Company). (For
purposes of this Section 2.19, each of the following shall be deemed to be a
"Related Party": (i) each of the Shareholders; (ii) each individual who is, or
who has at any time been, an officer or director of the Company; (iii) each
individual who is, or who at any time has been, a member of the immediate family
of any of the individuals referred to in clauses "(i)" and "(ii)" above; and
(iv) any trust or other Entity (other than the Company) in which any one of the
individuals referred to in clauses "(i)", "(ii)" and "(iii)" above holds (or in
which more than one of such individuals collectively hold), beneficially or
otherwise, a material voting, proprietary or equity interest.)
2.20 Legal Proceedings; Orders.
(a) Except as set forth in Part 2.20(a) of the Disclosure Schedule, there
is no pending Legal Proceeding, and (to the knowledge of the Company) no Person
has threatened to commence any Legal Proceeding: (i) that involves the Company,
its capital stock or any of the assets owned or used by the Company; or (ii)
that challenges, or that may have the effect of preventing, delaying, making
illegal or otherwise interfering with, the Merger or any of the other
transactions contemplated by this Agreement. To the knowledge of the Company,
except as set forth in Part 2.20(a) of the Disclosure Schedule, no event has
occurred, and no claim, dispute or other condition or circumstance exists, that
will, or that could reasonably be expected to, with or without notice or the
passage of time, give rise to or serve as a basis for the commencement of any
material Legal Proceeding.
(b) Except as set forth in Part 2.20(b) of the Disclosure Schedule, since
January 1, 1993, no Legal Proceeding has ever been commenced by, and no Legal
Proceeding has ever been pending against, the Company.
(c) There is no order, writ, injunction, judgment or decree to which the
Company, or any of the assets owned or used by the Company, is subject. None of
the Shareholders is subject to any order, writ, injunction, judgment or decree
that relates to the Company's business, its capital stock or to any of the
assets owned or used by the Company. To the knowledge of the Company, no officer
or other employee of the Company is subject to any order, writ, injunction,
judgment or decree that prohibits such officer or other employee from engaging
in or continuing any conduct, activity or practice relating to the Company's
business.
2.21 Authority; Binding Nature of Agreement. The Company has the corporate
power and authority to enter into and, subject to shareholder approval, to
perform its obligations under this Agreement; and the execution, delivery and,
subject to shareholder approval, performance by the Company of this Agreement
have
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been duly authorized by all necessary action on the part of the Company and its
board of directors. This Agreement constitutes the legal, valid and binding
obligation of the Company, enforceable against the Company in accordance with
its terms, subject to (i) laws of general application relating to bankruptcy,
insolvency and the relief of debtors, and (ii) rules of law governing specific
performance, injunctive relief and other equitable remedies.
2.22 Non-Contravention; Consents. Except as set forth in Part 2.22 of the
Disclosure Schedule, neither (1) the execution, delivery or performance of this
Agreement, nor (2) the consummation of the Merger or any of the other
transactions contemplated by this Agreement, will directly or indirectly (with
or without notice or lapse of time):
(a) contravene, conflict with or result in a violation of (i) any of
the provisions of the Company's articles of incorporation or bylaws, or
(ii) any resolution adopted by the Company's shareholders or the Company's
board of directors;
(b) contravene, conflict with or result in a violation of, or give any
Governmental Body or other Person the right to challenge any of the
transactions contemplated by this Agreement or to exercise any remedy or
obtain any relief under, any Legal Requirement or any order, writ,
injunction, judgment or decree to which the Company, or any of the assets
owned or used by the Company, is subject;
(c) contravene, conflict with or result in a violation of any of the
terms or requirements of, or give any Governmental Body the right to
revoke, withdraw, suspend, cancel, terminate or modify, any Governmental
Authorization that is held by the Company or that otherwise relates to the
Company's business or to any of the assets owned or used by the Company;
(d) contravene, conflict with or result in a violation or breach of,
or result in a default under, any provision of any Material Contract, or
give any Person the right to (i) declare a default or exercise any remedy
under any Material Contract, (ii) accelerate the maturity or performance of
any Material Contract, or (iii) cancel, terminate or modify any Material
Contract; or
(e) result in the imposition or creation of any lien or other
Encumbrance upon or with respect to any asset owned or used by the Company
(except for minor liens that will not, in any case or in the aggregate,
materially detract from the value of the assets subject thereto or
materially impair the operations of the Company).
Except as set forth in Part 2.22 of the Disclosure Schedule and except for
shareholder approval of the Merger, the Company is not and will not be required
to make any filing with or give any notice to, or to obtain any Consent from,
any Person in connection with (x) the execution, delivery or performance of this
Agreement or any of the other agreements referred to in this Agreement, or (y)
the consummation of the Merger or any of the other transactions contemplated by
this Agreement.
2.23 Full Disclosure. This Agreement (including the Disclosure Schedule)
does not, and the Company Closing Certificate (defined in Section 6.6(l)) will
not, (i) contain any representation, warranty or information that is false or
misleading or (ii) omit to state any material fact necessary in order to make
any representation, warranty or information contained herein or therein, as so
stated, not false or misleading.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Parent and Merger Sub represent and warrant to the Company and the
Designated Shareholders as follows:
3.1 Due Organization. The Parent is a corporation duly organized, validly
existing and in good standing under the laws of the State of California, and
Merger Sub is a corporation duly organized, validly existing and in good
standing under the laws of the State of Minnesota. Each of the corporations is
duly qualified to do business and is in good standing in all jurisdictions where
its ownership or leasing of property or the conduct of its business requires it
to be so qualified and failure to be so qualified would have a Material Adverse
Effect on Parent and its subsidiaries taken as a whole; and each has all
necessary corporate power and authority: (i) to conduct its business in the
manner in which its business is currently being conducted; (ii) to own and use
its
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assets in the manner in which its assets are currently owned and used; and (iii)
to perform its obligations under all Contracts by which it is bound.
3.2 Subsidiaries. Parent's only subsidiaries are Madic-Compufact
Corporation, DataWorks (Europe) Ltd. and Merger Sub (collectively, the
"DataWorks Subsidiaries"), and all shares of the outstanding capital stock of
each of them are owned directly or indirectly by Parent. All of such shares so
owned by Parent are fully paid and nonassessable and are owned by it free and
clear of any lien, claim, charge, option, encumbrance or agreement with respect
thereto. Each DataWorks Subsidiary is a corporation duly organized, validly
existing, and in good standing under the laws of its jurisdiction of
incorporation, and has corporate power and authority to own or lease its
properties and assets and to carry on its business as it is now being conducted.
3.3 Capitalization. The authorized capital stock of Parent consists of
25,000,000 shares of Parent Common Stock, of which approximately 5,955,416
shares have been issued and are outstanding as of July 31, 1996. All of the
outstanding shares of capital stock of Parent have been duly and validly
authorized and issued and are fully paid and nonassessable.
3.4 Parent Financial Statements. The consolidated balance sheets of Parent
as of December 31, 1995 and 1994 and related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1995, together with the notes thereto, audited by
Ernst & Young LLP and included in Parent's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995 as filed with the SEC, and the unaudited
consolidated balance sheet of Parent as of June 30, 1996 and the related
unaudited consolidated statements of operations and cash flows for the six
months then ended contained in Parent's Quarterly Report or Form 10-Q filed for
the six months ended June 30, 1996 have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis and
present fairly (except that financial statements for interim periods may not
contain certain footnotes and are subject to normal and recurring adjustments,
which management considers necessary for a fair presentation of Parent's
consolidated financial position and results of operations at the end of and for
such periods) the consolidated financial position of Parent at the dates and the
results of operations, changes in financial position and cash flows of Parent
for the periods stated therein.
3.5 SEC Filings.
(a) Parent has delivered to the Company accurate and complete copies
(excluding copies of exhibits) of each report, registration statement (on a form
other than Form S-8) and definitive proxy statement filed by Parent with the SEC
between January 1, 1996 and the date of this Agreement (the "Parent SEC
Documents"). As of the time it was filed with the SEC (or, if amended or
superseded by a filing prior to the date of this Agreement, then on the date of
such filing): (i) each of the Parent SEC Documents complied in all material
respects with the applicable requirements of the Securities Act or the Exchange
Act (as the case may be); and (ii) none of the Parent SEC Documents contained
any untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.
(b) The consolidated financial statements contained in the Parent SEC
Documents: (i) complied as to form in all material respects with the published
rules and regulations of the SEC applicable thereto; (ii) were prepared in
accordance with generally accepted accounting principles applied on a consistent
basis throughout the periods covered, except as may be indicated in the notes to
such financial statements and (in the case of unaudited statements) as permitted
by Form 10-Q of the SEC, and except that unaudited financial statements may not
contain footnotes and are subject to normal and recurring year-end audit
adjustments (which will not, individually or in the aggregate, be material in
magnitude); and (iii) fairly present the consolidated financial position of
Parent and its subsidiaries as of the respective dates thereof and the
consolidated results of operations of Parent and its subsidiaries for the
periods covered thereby.
3.6 Absence of Certain Changes. Since December 31, 1995, there has not
been any material adverse change in the business, financial condition, assets,
liabilities, results of operations or prospective customers of Parent and any
DataWorks Subsidiary, taken as a whole.
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3.7 Compliance with Law. Each of Parent and each DataWorks Subsidiary has
all permits, licenses, authorizations, orders and approvals of, and has made all
filings, applications and registrations with, federal, state, local or foreign
governmental or regulatory bodies that are required in order to permit it to own
or lease its properties or assets and to carry on its business as presently
conducted and that are material to the business of Parent or such subsidiary;
all such permits, licenses, certificates of authority, orders and approval are
in full force and effect and, to the knowledge of Parent and Merger Sub, no
suspension or cancellation of any of them is threatened; and all such filings,
applications and registrations are current. The conduct by each of Parent and
each DataWorks Subsidiary of its business and the condition and use of its
properties do not violate or infringe, in any respect material to any such
business, any applicable domestic (federal, state or local) or foreign law,
statute, ordinance, license or regulation. Neither Parent nor any DataWorks
Subsidiary is in default under any order, license, regulation or demand of any
federal, state, municipal or other governmental agency or with respect to any
order, writ, injunction or decree of any court. Except for statutory or
regulatory restrictions of general application, no federal, state, municipal or
other governmental authority has placed any restrictions on the business or
properties of Parent or any DataWorks Subsidiary which reasonably could be
expected to have a Material Adverse Effect on Parent and its subsidiaries taken
as a whole.
3.8 Parent Benefit Plans.
(a) As of July 31, 1996, the only "employee benefit plans" within the
meaning of Section 3(3) or ERISA for which Parent or any DataWorks Subsidiary
acts as plan sponsor as defined in ERISA Section 3(16)(B) with respect to which
any liability under ERISA or otherwise exists or may be incurred by Parent or
any DataWorks Subsidiary are those listed in Schedule 3.8 attached hereto (the
"Parent Plans"). No Parent Plan is a "multi-employer plan" within the meaning of
Section 3(37) of ERISA.
(b) Each Parent Plan is and has been in all material respects operated and
administered in accordance with its provisions and applicable law, except where
the failure to do so would not have a material adverse affect on Parent and its
subsidiaries taken as a whole; and Parent or the relevant DataWorks Subsidiary,
as applicable, has received favorable determination letters from the Internal
Revenue Service under the provisions of TEFRA, DEFRA, REA and TRA 1986 for each
of the Parent Plans to which the qualification requirement of Section 401(a) of
the Code apply. Parent knows of no reason that any Parent Plan which is subject
to the qualification provisions of Section 401(a) of the Code is not "qualified"
within the meaning of Section 40l(a) of the Code and that each related trust is
not exempt from taxation under Section 501(a) of the Code.
(c) The present value of all benefits vested and all benefits accrued under
each Parent Plan which is subject to Title IV of ERISA did not, in each case, as
determined for purposes of reporting on Schedule B to the Annual Report on Form
5500 of each such Parent Plan as of the end of the most recent Plan year, exceed
the value of the assets of the Parent Plans allocable to such vested or accrued
benefits.
(d) To the knowledge of Parent, no Parent Plan or any trust created
thereunder, nor any trustee, fiduciary or administrator thereof, has engaged in
a "prohibited transaction", as such term is defined in Section 4975 of the Code
or Section 406 of ERISA or violated fiduciary standards under Part 4 of Title I
of ERISA, which could, to the knowledge of Parent, subject Parent or such Parent
Plan or trust to the tax or penalty on prohibited transactions imposed by said
Section 4975 or would result in material liability to Parent and its
subsidiaries taken as a whole.
(e) No Parent Plan which is subject to Title IV of ERISA or any trust
created thereunder has been terminated, nor have there been any "reportable
events" as that term is defined in Section 4043 of ERISA with respect to any
Parent Plan, other than those events which may result from the transactions
contemplated by this Agreement.
(f) No Parent Plan or any trust created thereunder has incurred any
"accumulated funding deficiency", as such term is defined in Section 412 of the
Code (whether or not waived), during the last five Parent Plan years which would
result in a material liability.
(g) Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will (i) result in any
material payment (including, without limitation, severance,
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unemployment compensation, golden parachute or otherwise) becoming due to any
director or employee or former employee of Parent under any Parent Plan or
otherwise, (ii) materially increase any benefits otherwise payable under any
Parent Plan or (iii) result in the acceleration of the time of payment or
vesting of any such benefits to any material extent.
3.9 Litigation and Other Proceedings. Neither Parent nor any DataWorks
Subsidiary is a party to any pending or, to the knowledge of Parent and Merger
Sub, threatened, claim, action, suit, investigation or proceeding, or is subject
to any order, judgment or decree, except for matters which, in the aggregate,
will not have, or cannot reasonably be expected to have, a Material Adverse
Effect on the Parent and its subsidiaries taken as a whole.
3.10 Authority; Binding Nature of Agreement. Subject to approval by the
shareholders of Parent, Parent and Merger Sub each has the corporate power and
authority to enter into and to perform its obligations under this Agreement; and
subject to shareholder approval the execution, delivery and performance by the
Parent and Merger Sub of this Agreement have been duly authorized by all
necessary action on the part of the Parent, Merger Sub and their respective
boards of directors. This Agreement constitutes the legal, valid and binding
obligation of the Parent and Merger Sub, enforceable against each of them in
accordance with its terms, subject to (i) laws of general application relating
to bankruptcy, insolvency and the relief of debtors, and (ii) rules of law
governing specific performance, injunctive relief and other equitable remedies.
Neither the execution, delivery and performance by Parent and Merger Sub of
this Agreement nor the consummation of the transactions contemplated hereby, nor
compliance by Parent and Merger Sub with any of the provisions hereof, will (i)
violate, conflict with, or result in a breach of any provision of, or constitute
a default (or an event which, with notice or lapse of time or both, would
constitute a default) under, or result in the termination of, or accelerate the
performance required by, or result in a right of termination or acceleration of,
or result in the creation of, any lien, security interest, charge or encumbrance
upon any of the properties or assets of Parent or any DataWorks Subsidiary under
any of the terms, conditions or provisions of (x) any of their respective
articles of incorporation or bylaws or (y) any material note, bond, mortgage,
indenture, deed of trust, license, lease, agreement or other instrument or
obligation to which Parent or any DataWorks Subsidiary is a party or by which
any of such parties may be bound, or to which Parent or any DataWorks Subsidiary
or any of the properties or assets of any of them may be subject, or (ii)
subject to compliance with the statutes and regulations referred to in the next
paragraph, to the knowledge of Parent and Merger Sub, violate any judgment,
ruling, order, writ, injunction, decree, statute, rule or regulation applicable
to Parent or any DataWorks Subsidiary or any of their respective properties or
assets.
Other than in connection with or in compliance with the provisions of the
Securities Act of 1933, as amended, and the rules and regulations thereunder
(the "Securities Act"), the securities or blue sky laws of the various states or
filings, no notice to, filing with, exemption or review by, or authorization,
consent or approval of, any public body or authority is necessary for the
consummation by Parent and Merger Sub of the transactions contemplated by this
Agreement, except for the filing of the Articles of Merger.
3.11 Brokers and Finders. Neither Parent nor Merger Sub nor any of their
respective officers, directors or employees has employed any broker or finder or
incurred liability for any financial advisory fees, brokerage fees, commissions
or finder's fees, and no broker or finder has acted directly or indirectly for
Parent or Merger Sub in connection with this Agreement or the transactions
contemplated hereby, except with respect to Furman Selz.
3.12 Valid Issuance. Subject to Section 1.5(c), the Parent Common Stock to
be issued in the Merger will, when issued in accordance with the provisions of
this Agreement, be validly issued, fully paid and nonassessable.
SECTION 4. CERTAIN COVENANTS
4.1 Access and Investigation.
(a) During the period from the date of this Agreement through the Effective
Time (the "Pre-Closing Period"), the Company shall, and shall cause its
Representatives to: (i) provide Parent and Parent's
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Representatives with reasonable access to the Company's Representatives,
personnel and assets and to all books, records, Tax Returns, work papers and
other documents and information relating to the Company and the DCD ESOP; and
(ii) provide Parent and Parent's Representatives with such copies of the books,
records, Tax Returns, work papers and other documents and information relating
to the Company and the DCD ESOP, and with such additional financial, operating
and other data and information regarding the Company and the DCD ESOP, as Parent
may reasonably request.
(b) During the Pre-Closing Period, the Parent shall, and shall cause its
Representatives to provide the Designated Shareholders with reasonable access to
documents and information previously publicly filed or disclosed, and supporting
documentation reasonably related to such previously disclosed information (and
in that regard the Parent shall make its executive officers available to Company
representatives at reasonable times on reasonable notice to answer questions
relating to the Company's business which are consistent with the foregoing).
4.2 Operation of the Company's Business. Unless otherwise permitted by
Parent by means of a prior written consent, during the Pre-Closing Period:
(a) the Company shall, and the Designated Shareholders shall cause the
Company to, conduct its business and operations in the ordinary course and
in substantially the same manner as such business and operations have been
conducted prior to the date of this Agreement;
(b) the Company shall, and the Designated Shareholders shall cause the
Company to, use commercially reasonable efforts to preserve intact its
current business organization, keep available the services of its current
officers and employees and maintain its relations and goodwill with all
suppliers, customers, landlords, creditors, employees and other Persons
having business relationships with the Company;
(c) the Company shall, and the Designated Shareholders shall cause the
Company to, keep in full force (and renew) all insurance policies
identified in Part 2.18 of the Disclosure Schedule;
(d) the Company shall, and the Designated Shareholders shall cause the
Company to (to the extent requested by Parent) cause its officers to report
regularly (but in no event more frequently than weekly) to Parent
concerning the status of the Company's business;
(e) the Company shall not, and the Designated Shareholders shall cause
the Company not to, declare, accrue, set aside or pay any dividend or make
any other distribution in respect of any shares of capital stock, nor
repurchase, redeem or otherwise reacquire any shares of capital stock or
other securities;
(f) the Company shall not, and the Designated Shareholders shall cause
the Company not to, sell, issue or authorize the issuance of (i) any
capital stock or other security, (ii) any option, call, warrant or right to
acquire, or relating to, any capital stock or other security, or (iii) any
instrument convertible into or exchangeable for any capital stock or other
security;
(g) neither the Company nor any of the Designated Shareholders shall
amend or permit the adoption of any amendment to the Company's articles of
incorporation or bylaws, or effect or permit the Company to become a party
to any Acquisition Transaction, recapitalization, reclassification of
shares, stock split, reverse stock split or similar transaction;
(h) the Company shall not, and the Designated Shareholders shall cause
the Company not to, form any subsidiary or acquire any equity interest or
other interest in any other Entity;
(i) the Company shall not, and the Designated Shareholders shall cause
the Company not to, make any capital expenditure, except for capital
expenditures that, when added to all other capital expenditures made on
behalf of the Company during the Pre-Closing Period, do not exceed $100,000
in the aggregate;
(j) the Company shall not, and the Designated Shareholders shall cause
the Company not to, (i) enter into or become bound by, or permit any of the
assets owned or used by it to become bound by, any
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material Contract (except in the ordinary course of business), or (ii)
amend or prematurely terminate, or waive any material right or remedy
under, any material Contract;
(k) the Company shall not, and the Designated Shareholders shall cause
the Company not to, (i) acquire, lease or license any right or other asset
from any other Person, (ii) sell or otherwise dispose of, or lease or
license, any right or other asset to any other Person, except licenses and
sales of the Company's software products in the ordinary course of
business, or (iii) waive or relinquish any right, except for immaterial
assets acquired, leased, licensed or disposed of by the Company pursuant to
Contracts that are not Material Contracts;
(l) the Company shall not, and the Designated Shareholders shall cause
the Company not to, (i) lend money to any Person, or (ii) incur or
guarantee any indebtedness, or (iii) repay any indebtedness to any of its
shareholders or Representatives;
(m) the Company shall not, and the Designated Shareholders shall cause
the Company not to, (i) establish, adopt or amend any Employee Benefit
Plan, including any 401(k) plan not in existence as of July 17, 1996, or
terminate any Pension Plan (including the DCD ESOP) or Welfare Plan except
in accordance with Section 5.11 below; (ii) pay any bonus or make any
profit-sharing or similar payment to, or increase the amount of the wages,
salary, commissions, fringe benefits or other compensation or remuneration
payable to, any of its directors, officers or employees, other than
payments or increases solely with respect to non-officer employees which
are consistent with the Company's recent practice or made pursuant to an
existing bonus plan disclosed on Part 2.5(m) of the Disclosure Schedule;
(iii) enter into any employment agreement or modify any existing employment
agreement, except as may be set forth in this Agreement; (iv) hire more
than a net of 10 new employees; or (v) hire any new employee whose
aggregate annual compensation is expected to exceed $75,000.
(n) the Company shall not, and the Designated Shareholders shall cause
the Company not to, change any of its methods of accounting or accounting
practices in any respect;
(o) the Company shall not, and the Designated Shareholders shall cause
the Company not to, make any Tax election;
(p) the Company shall not, and the Designated Shareholders shall cause
the Company not to, commence or settle any Legal Proceeding;
(q) the Company shall not, and the Designated Shareholders shall cause
the Company not to, enter into any material transaction or take any other
material action outside the ordinary course of business or inconsistent
with its past practices; and
(r) the Company shall not, and the Designated Shareholders shall cause
the Company not to, agree or commit to take any of the actions described in
clauses "(e)" through "(q)" of this Section 4.2.
4.3 Notification by the Company; Updates to Disclosure Schedule by the
Company.
(a) During the Pre-Closing Period, the Company shall promptly notify Parent
in writing of:
(i) the discovery by the Company of any event, condition, fact or
circumstance that occurred or existed on or prior to the date of this
Agreement and that caused or constitutes a material inaccuracy in or breach
of any representation or warranty made by the Company in this Agreement;
(ii) the discovery by the Company of any event, condition, fact or
circumstance that occurs, arises or exists after the date of this Agreement
and that would cause or constitute a material inaccuracy in or breach of
any representation or warranty made by the Company in this Agreement if (A)
such representation or warranty had been made as of the time of the
occurrence, existence or discovery of such event, condition, fact or
circumstance, or (B) such event, condition, fact or circumstance had
occurred, arisen or existed on or prior to the date of this Agreement;
(iii) any material breach of any covenant or obligation of the Company
or any of the Designated Shareholders; and
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(iv) the discovery by the Company of any event, condition, fact or
circumstance that would make the timely satisfaction of any of the
conditions set forth in Section 6 impossible or unlikely.
(b) If any event, condition, fact or circumstance that is required to be
disclosed pursuant to Section 4.3(a) requires any change in the Disclosure
Schedule, or if any such event, condition, fact or circumstance would require
such a change assuming the Disclosure Schedule were dated as of the date of the
occurrence, existence or discovery of such event, condition, fact or
circumstance, then the Company shall promptly deliver to Parent an update to the
Disclosure Schedule specifying such change. No such update shall be deemed to
supplement or amend the Disclosure Schedule for the purpose of (i) determining
the accuracy of any of the representations and warranties made by the Company in
this Agreement, or (ii) determining whether any of the conditions set forth in
Section 6 has been satisfied.
4.4 No-Shop. During the Pre-Closing Period, neither the Company nor any of
the Designated Shareholders shall, directly or indirectly (and the Company and
the Designated Shareholders shall cause their respective affiliates not to):
(a) solicit, initiate, encourage the submission of, or consider any
inquiry, proposal or offer from any Person (other than Parent) relating to
a possible Acquisition Transaction;
(b) participate in any discussions or negotiations or enter into any
agreement with, or provide any information to, or otherwise cooperate in
any way with or encourage any Person (other than Parent), or facilitate any
efforts by any such Person, relating to or in connection with a possible
Acquisition Transaction; or
(c) consider, entertain or accept any proposal or offer from any
Person (other than Parent) relating to a possible Acquisition Transaction.
The Company shall promptly notify Parent in writing (in reasonable detail)
of any inquiry, proposal or offer relating to a possible Acquisition
Transaction that is received by the Company or any of the Designated
Shareholders during the Pre-Closing Period.
4.5 Notification by Parent; Updates to Schedules by Parent.
(a) During the Pre-Closing Period, Parent shall promptly notify the Company
in writing of:
(i) the discovery by Parent of any event, condition, fact or
circumstance that occurred or existed on or prior to the date of this
Agreement and that caused or constitutes a material inaccuracy in or breach
of any representation or warranty made by Parent or Merger Sub in this
Agreement;
(ii) the discovery by Parent of any event, condition, fact or
circumstance that occurs, arises or exists after the date of this Agreement
and that would cause or constitute a material inaccuracy in or breach of
any representation or warranty made by Parent or Merger Sub in this
Agreement if (A) such representation or warranty had been made as of the
time of the occurrence, existence or discovery of such event, condition,
fact or circumstance, or (B) such event, condition, fact or circumstance
had occurred, arisen or existed on or prior to the date of this Agreement;
(iii) any material breach of any covenant or obligation of Parent or
Merger Sub; and
(iv) the discovery by Parent of any event, condition, fact or
circumstance that would make the timely satisfaction of any of the
conditions set forth in Section 7 impossible or unlikely.
(b) If any event, condition, fact or circumstance that is required to be
disclosed pursuant to Section 4.5(a) requires any change in any schedule
provided by Parent to the Company, or if any such event, condition, fact or
circumstance would require such a change assuming such schedule were dated as of
the date of the occurrence, existence or discovery of such event, condition,
fact or circumstance, then Parent shall promptly deliver to the Company an
update to such schedule specifying such change. No such update shall be deemed
to supplement or amend such schedule for the purpose of (i) determining the
accuracy of any of the representations and warranties made by Parent or Merger
Sub in this Agreement, or (ii) determining whether any of the conditions set
forth in Section 7 has been satisfied.
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SECTION 5. ADDITIONAL COVENANTS OF THE PARTIES
5.1 Filings and Consents. As promptly as practicable after the execution
of this Agreement, each party to this Agreement (a) shall make all filings (if
any) and give all notices (if any) required to be made and given by such party
in connection with the Merger and the other transactions contemplated by this
Agreement, and (b) shall use his, her or its commercially reasonable efforts to
obtain each Consent (if any) required to be obtained (pursuant to any applicable
Legal Requirement or Contract, or otherwise) by such party in connection with
the Merger or any of the other transactions contemplated by this Agreement. Each
party shall promptly deliver to the other a copy of each such filing made, each
such notice given and each such Consent obtained by it during the Pre-Closing
Period. Each party will furnish to the other all the information concerning such
party required for inclusion in any statement or application made by such other
party to any Governmental Body in connection with the transactions contemplated
by this Agreement.
5.2 Proxy Statement. Parent will use its commercially reasonable efforts
to file, as soon as practicable after the date of this Agreement, with the SEC a
Registration Statement on Form S-4 (the "Registration Statement") under the
Securities Act, relating to the shares of Parent Common Stock to be delivered to
the Shareholders pursuant to this Agreement, and will use commercially
reasonable efforts to cause the Registration Statement to become effective. At
the time the Registration Statement becomes effective, the Registration
Statement will comply in all material respects with the provisions of the
Securities Act and the published rules and regulations thereunder, and will not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
false or misleading, and at the time of mailing thereof to the Shareholders, at
the time of the Company Shareholders' Meeting and the Effective Time, the
prospectus included as part of the Registration Statement, as amended or
supplemented by any amendment or supplement filed by parent (hereinafter the
"Prospectus"), will not contain any untrue statement of a material fact or omit
to state any material fact necessary to make the statements therein not false or
misleading; provided, however, that none of the provisions of this paragraph
shall apply to statements in or omissions from the Registration Statement or the
Prospectus made in reliance upon and in conformity with information furnished by
the Company and/or the Shareholders for use in the Registration Statement or the
Prospectus. Parent will file all documents required to be filed to list the
Parent Common Stock to be issued pursuant to this Agreement on Nasdaq and use
commercially reasonable efforts to effect said listing. Parent will file all
documents required to obtain, prior to the Effective Time of the Merger, all
necessary Blue Sky permits and approvals, if any, required to carry out the
transactions contemplated by this Agreement, will pay all expenses incident
thereto and will use commercially reasonable efforts to obtain such permits and
approvals. The Company and Designated Stockholders shall provide Parent with all
information and assistance as is reasonably requested by Parent in connection
with this Section 5.2
5.3 Shareholders' Meetings.
(a) The Company shall, in accordance with its articles of incorporation and
bylaws and the applicable requirements of the Minnesota Statutes, call and hold
a special meeting of the Shareholders as promptly as legally permissible after
the effectiveness of the Registration Statement for the purpose of permitting
them to consider and to vote upon and approve the Merger and this Agreement (the
"Company Shareholders' Meeting"). The Company shall cause a copy of a complete
and accurate proxy statement relating to the Merger and this Agreement jointly
prepared by the Company and Parent (the "Proxy Statement") to be delivered to
each Shareholder who is entitled to vote at the Company Shareholders' Meeting.
As promptly as practicable after the delivery of copies of the Proxy Statement
to all Shareholders entitled to vote at the Company Shareholders' Meeting, the
Company shall use reasonable commercial efforts to solicit from each of such
Shareholders a proxy in favor of the approval of the Merger and this Agreement.
Each Designated Shareholder shall cause all shares of the capital stock of the
Company that are owned, beneficially or of record, by such Designated
Shareholder on the record date for the Company Shareholders' Meeting to be voted
in favor of the Merger and this Agreement at such meeting.
(b) The Parent shall, in accordance with its articles of incorporation and
bylaws and the applicable requirements of the California Corporations Code, call
and hold a special meeting of its shareholders as
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promptly as practicable for the purpose of permitting them to consider and to
vote upon and approve the Merger and this Agreement (the "Parent Shareholders'
Meeting"). The Parent shall cause a copy of the Proxy Statement to be delivered
to each shareholder of the Parent who is entitled to vote at the Parent
Shareholders' Meeting. As promptly as practicable after the delivery of copies
of the Proxy Statement to all shareholders entitled to vote at the Parent
Shareholders' Meeting, Parent shall use reasonable commercial efforts to solicit
from each of such shareholders a proxy in favor of the approval of the Merger
and this Agreement.
5.4 Public Announcements. During the Pre-Closing Period, neither the
Company nor any of the Designated Shareholders shall (and neither the Company
nor any Designated Shareholder shall permit any of its affiliates or
Representatives to) issue any press release or make any public statement
regarding this Agreement or the Merger, or regarding any of the other
transactions contemplated by this Agreement, without Parent's prior written
consent.
5.5 Pooling of Interests. During the Pre-Closing Period, neither the
Company nor any Designated Shareholder shall take any action that could have an
adverse effect on the ability of Parent to account for the Merger as a "pooling
of interests," and the Company represents and warrants to Parent that to its
knowledge, no Shareholder has taken or intends to take any action that will have
or could reasonably be expected to have such an effect. Parent covenants that it
shall, following the Closing (provided it occurs prior to November 30, 1996) and
prior to January 31, 1997, issue a press release reporting its consolidated
earnings for 1996.
5.6 Affiliate Agreements. Each Designated Shareholder shall execute and
deliver to Parent, and the Company and the Designated Shareholders shall use
reasonable commercial efforts to cause the other Shareholders listed on Part 5.6
of the Disclosure Schedule (which the Company hereby represents and warrants to
Parent consists of all persons who are "affiliates" of the Company for purposes
of the Securities Act) to execute and deliver to Parent, as promptly as
practicable after the execution of this Agreement, an Affiliate Agreement in the
form of Exhibit E.
5.7 Commercially Reasonable Efforts; Disclosure and Accuracy of
Information.
(a) During the Pre-Closing Period, (i) the Company and the Designated
Shareholders shall use commercially reasonable efforts to cause the conditions
set forth in Section 6 to be satisfied on a timely basis, and (ii) Parent and
Merger Sub shall use commercially reasonable efforts to cause the conditions set
forth in Section 7 to be satisfied on a timely basis.
(b) Subject to the provisions of Section 4.1, during the Pre-Closing
Period, each of the Parent on the one hand and the Company and the Designated
Shareholders on the other shall furnish all information to the other parties as
the other parties may reasonably request for inclusion in the Proxy Statement,
which information shall be true and accurate to the best of its knowledge, and
otherwise cooperate with the others in the preparation and filing of such
document and related documents.
(c) The Company covenants that at the time the Registration Statement
becomes effective, the Registration Statement will not contain any untrue
statement of a material fact pertaining to the Company or omit to state a
material fact pertaining to the Company required to be stated therein or
necessary to make the statements therein not false or misleading, and at the
time of mailing thereof to the Shareholders, at the time of the Company
Shareholders' Meeting and at the Effective Time, the Prospectus will not contain
any untrue statement of a material fact pertaining to the Company or omit to
state any material fact pertaining to the Company necessary to make the
statements therein not false or misleading.
5.8 Tax Matters. At or prior to the Closing, (a) the Company shall execute
and deliver to Cooley Godward Castro Huddleson & Tatum and to Dorsey & Whitney
LLP a tax representation letter in substantially the form of Exhibit F-1 (which
will be used in connection with the legal opinions contemplated by Sections
6.5(j) and 7.5(b)), (b) Parent and Merger Sub shall execute and deliver to
Cooley Godward Castro Huddleson & Tatum and to Dorsey & Whitney LLP a tax
representation letter in substantially the form of Exhibit F-2 (which will be
used in connection with the legal opinions contemplated by Sections 6.5(j) and
7.5(b)), and (c) each of the Designated Shareholders shall execute and deliver
to Parent a Continuity of Interest Certificate in the form of Exhibit H.
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5.9 Agreements With Certain Individuals. At the Closing, (a) each of
Richard D. Borg, William J. Borg and Robert W. Brandel shall execute and deliver
to the Company an employment letter in the form of Exhibit H; (b) the Company
shall encourage Marde S. Olson to enter into a Separation and Consulting
Agreement in the form of Exhibit I; and (c) Dwayne E. Borg shall execute and
deliver to the Company a Separation, Consulting and Noncompetition Agreement in
the form of Exhibit J.
5.10 Acknowledgment and Release. At the Closing, the Company shall
encourage each Shareholder which is the holder of record of one percent (1%) or
greater of the Company Common Stock either as of the date hereof or immediately
prior to Closing other than the DCD ESOP to execute and deliver to the Company
and Parent an Acknowledgment and Release in the form of Exhibit K.
5.11 Termination of Employee Plans. Except as prohibited by applicable
law, at the Closing, the Company shall terminate all bonus plans and other
benefit plans under which any of its employees or former employees may have any
rights (subject to accrued rights), and except for accrued rights shall ensure
that no employee or former employee of the Company has any rights thereunder and
that any liabilities of the Company thereunder (including any such liabilities
relating to services performed prior to the Closing) are fully extinguished at
no cost to the Company. Notwithstanding the foregoing, the Company shall not
terminate any Pension Plan (including the DCD ESOP) or Welfare Plan unless
Parent has consented to or requested such termination, provided that the Company
shall take such action as is necessary to terminate, effective prior to the
Closing, any Pension Plan or Welfare Plan that Parent within fifteen (15) days
prior to Closing requests be so terminated.
5.12 FIRPTA Matters. At the Closing, (a) the Company shall deliver to
Parent a statement (in such form as may be reasonably requested by counsel to
Parent) conforming to the requirements of Section 1.897 -- 2(h)(1)(i) of the
United States Treasury Regulations, and (b) the Company shall deliver to the
Internal Revenue Service the notification required under Section
1.897 -- 2(h)(2) of the United States Treasury Regulations.
5.13 ESOP Matters.
(a) Except as set forth in Part 5.13(a) of the Disclosure Schedule, the
Company represents, warrants and covenants, to and for the benefit of Parent and
the other Indemnitees, as follows:
(i) The DCD ESOP is duly organized and existing under applicable law,
is a stock bonus plan qualified under Section 401(a) of the Code and is an
"employee stock ownership plan" as defined in Section 4975(e)(7) of the
Code. The DCD ESOP was formed and is, and at all times has been, maintained
primarily for the benefit of the DCD ESOP participants and beneficiaries,
within the meaning of Section 4975(d)(3)(A) of the Code, Treasury
Regulations Section 54.4975-7 and Section 408(b)(3) of ERISA. The shares of
the Company's stock held by the DCD ESOP (the "ESOP Shares") constitute
"employer securities" within the meaning of Section 409(l) of the Code. The
Company has heretofore delivered to Parent accurate and complete copies of
all documents (and all amendments, modifications and supplements thereto)
material to the creation of the DCD ESOP and ESOP Trust and the ESOP
Transactions, including, but not limited to, (a) the DCD ESOP plan document
and trust agreement and the ESOP Transaction Documents, and (b) each
request heretofore filed with the IRS requesting the issuance of a
favorable determination letter with respect to the qualified status or
continuing qualified status of the DCD ESOP, including all supporting
documentation filed therewith.
(ii) None of the ESOP Transactions was, or has resulted in, or will
result in a prohibited transaction under Section 4975(c) of the Code,
Sections 406 or 407 of ERISA, or the regulations thereunder. Each of the
ESOP Loans and any related guarantees constitutes an "exempt loan" under
Treasury Regulation Section 54.4975-7(b)(1)(iii). The use of the proceeds
of the ESOP Loans by the Company and the DCD ESOP, respectively, and the
pledge of the ESOP Shares as security for the ESOP Loans, did not and does
not constitute or result in a violation of the provisions of the Code or
ERISA or any regulations thereunder.
(iii) The ESOP Loans have been fully paid, and no further amounts are
due thereunder. Neither the Company nor the DCD ESOP is or has been in
breach or violation of any of the ESOP Transaction
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Documents, there are no remaining unperformed obligations of the Company or
the DCD ESOP under any of the ESOP Transaction Documents, and there are no
amounts as to which the Company or the DCD ESOP are or may be liable under
the ESOP Transaction Documents.
(iv) All Legal Requirements applicable to the Company and/or to the
ESOP Trustee requiring prudence of fiduciaries, including, without
limitation, as to valuation matters and other similar matters relating to
discretionary judgments not involving legal judgments, have been complied
with, and the Company is not and shall not be subject to any liability as a
fiduciary or co-fiduciary under ERISA with respect to matters arising prior
to and through the Closing Date in connection with the ESOP. Neither the
execution and delivery of this Agreement nor the consummation of the
transactions described herein or in the Escrow Agreement, or any other
agreement between or among the parties to this Agreement, or the
performance of the terms hereof or thereof, will conflict with, violate, or
result in a breach of the DCD ESOP plan document, the ESOP Transaction
Documents or any agreement or other instrument by which the Company, the
DCD ESOP, the ESOP Trustee or the ESOP Trust may be bound, and will not
constitute a breach by any Person acting as a fiduciary, within the meaning
of ERISA, with respect to the DCD ESOP of any fiduciary responsibility or
similar duty or obligation owed by such Person to the participants of the
DCD ESOP under ERISA or otherwise.
(b) The Company and the Designated Shareholders shall take such action as
is necessary to ensure that the requirements of Section 409(e) of the Code and
the fiduciary provisions of ERISA are satisfied in connection with the voting of
the ESOP Shares upon the Merger at the Company Shareholders' Meeting.
(c) The Company agrees to take, during the Pre-Closing Period and
thereafter, such actions as Parent deems reasonably necessary in Parent's
discretion to obtain assurances satisfactory to Parent as to (i) the
qualification of the DCD ESOP under Sections 401(a) and 4975(e)(7) of the Code
and (ii) the compliance by the Company, the DCD ESOP and the ESOP Trust with
applicable Legal Requirements, including ERISA and the Code, in connection with
the establishment, operation and maintenance of the DCD ESOP and the
availability of the intended benefits and consequences associated with the DCD
ESOP and the ESOP Transactions. Prior to the Closing, such actions shall not
include, without the Company's consent, applying to the IRS for a determination
letter, engaging in IRS voluntary compliance resolution procedures, entering
into a closing agreement with the IRS or seeking from the Department of Labor an
advisory opinion or prohibited transaction exemption. The Surviving Corporation
may take any of such actions in its discretion following the Effective Time. No
such actions taken by Parent or the Company shall in any way limit or diminish
the rights of any Indemnitees under this Agreement or the Escrow Agreement to
recover or be indemnified for Indemnitee Damages, as defined in the Escrow
Agreement.
SECTION 6. CONDITIONS PRECEDENT TO OBLIGATIONS OF PARENT AND MERGER SUB
The obligations of Parent and Merger Sub to effect the Merger and otherwise
consummate the transactions contemplated by this Agreement are subject to the
satisfaction, at or prior to the Closing, of each of the following conditions:
6.1 Accuracy of Representations. The representations and warranties made
by the Company in this Agreement and the other agreements and instruments
delivered to Parent in connection with the transactions contemplated by this
Agreement shall have been accurate in all material respects as of the date of
this Agreement, individually and taken as a whole, and shall be accurate as of
the Closing as if made at the Closing (without giving effect to any update to
the Disclosure Schedule), except for any inaccuracies which, individually and
taken as a whole, have not had a Material Adverse Effect on the Company;
provided, however, that with respect to any representation identifying any
Contract in the Disclosure Schedule, for purposes of this Section 6.1 such
representation shall not be deemed materially inaccurate as of the Closing by
reason of the Company entering into additional Contracts to be identified on the
Disclosure Schedule between the date hereof and the Closing Date.
6.2 Performance of Covenants. Each covenant or obligation that the Company
or any of the Designated Shareholders is required to comply with or to perform
at or prior to the Closing shall have been complied with and performed in all
material respects.
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6.3 Shareholder Approval; Dissenters. The terms of the Merger and this
Agreement shall have been duly approved by the affirmative vote of the shares of
Company Common Stock entitled to vote with respect thereto at the Company
Shareholders' Meeting; holders of not more than two percent (2%) of the
Company's Common Stock then outstanding, and no holders of shares of capital
stock of the Parent, shall be, or shall have the right to become, entitled to
exercise dissenters' rights pursuant to, respectively, Chapter 302A of the
Minnesota Statutes and Chapter 13 of the California Corporations Code; and the
terms of the Merger and this Agreement shall have been duly approved by the
affirmative vote of the Parent's shareholders at the Parent Shareholders'
Meeting.
6.4 Consents. All material Consents required to be obtained in connection
with the Merger and the other transactions contemplated by this Agreement
(including the Consents identified in Part 2.22 of the Disclosure Schedule)
shall have been obtained and shall be in full force and effect; and the Company
shall have paid no material consideration to any third party or consented to any
conditions materially adverse to the Company in connection with obtaining any
such Consent.
6.5 Agreements and Documents. Parent and the Company shall have received
the following agreements and documents, each of which shall be executed and
delivered and in full force and effect:
(a) The Escrow Agreement, as described in Section 1.1;
(b) Affiliate Agreements in the form of Exhibit E, executed by the
"affiliates" of the Company for purposes of the Securities Act listed on
Part 5.6 of the Disclosure Schedule;
(c) Continuity of Interest Certificates in the form of Exhibit G,
executed by the Shareholders holding beneficially or of record (including
but not limited to beneficiaries of the DCD ESOP), one percent (1%) or
greater of the Company's Common Stock either as of the date hereof or
immediately prior to Closing;
(d) an Employment Agreement in the form of Exhibit H executed by each
of Richard D. Borg, William Borg and Robert W. Brandel, as described in
Section 5.9;
(e) a Separation and Consulting Agreement in the form of Exhibit I,
executed by Marde S. Olson, as described in Section 5.9;
(f) a Separation, Consulting and Noncompetition Agreement in the form
of Exhibit J, executed by Dwayne E. Borg, as described in Section 5.9;
(g) an Acknowledgment and Release in the form of Exhibit K, executed
by each of the Shareholders holding one percent (1%) or greater of the
Company Common Stock either as of the date hereof or immediately prior to
Closing;
(h) the statement referred to in Section 5.12(a), executed by the
Company; (i) a legal opinion of Dorsey & Whitney LLP dated as of the
Closing Date, in the form of Exhibit L;
(j) a legal opinion of Dorsey & Whitney LLP dated as of the Closing
Date, in form reasonably satisfactory to Parent, to the effect that the
Merger will constitute a reorganization within the meaning of Section 368
of the Code (it being understood that, in rendering such opinion, Dorsey &
Whitney LLP may rely upon the tax representation letters and Continuity of
Interest Certificates referred to in Section 5.8);
(k) letters from Price Waterhouse LLP and Ernst & Young LLP dated as
of the Closing Date, in form satisfactory to Parent, confirming the
appropriateness of "pooling of interests" for the Merger under Accounting
Principles Board Opinion No. 16 if the Merger is closed and consummated in
accordance with the Agreement;
(l) a certificate executed by the President of the Company and
containing the representation and warranty of the Company that each of the
conditions set forth in this Section 6 have been duly satisfied (the
"Company Closing Certificate"); and
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(m) written resignations of all directors of the Company, effective as
of the Effective Time, and of each DCD ESOP and 401(k) plan trustee,
effective in each case upon acceptance of such resignation by the Surviving
Corporation and appointment of a successor trustee.
6.6 Termination of Employee Plans. The Company shall have provided Parent
with evidence, satisfactory to Parent, as to the termination of the plans
referred to in Section 5.11, including each Pension Plan or Welfare Plan that is
to be terminated prior to the Closing in accordance with Section 5.11.
6.7 FIRPTA Compliance. The Company shall have filed with the Internal
Revenue Service the notification referred to in Section 5.12(b).
6.8 State Securities Law Requirements. The shares of Parent Common Stock
to be issued in connection with the Merger shall have been issued in
transactions qualified or exempt from registration under the securities or "blue
sky" laws of every relevant jurisdiction.
6.9 No Restraints. No temporary restraining order, preliminary or
permanent injunction or other order preventing the consummation of the Merger
shall have been issued by any court of competent jurisdiction and remain in
effect, and there shall not be any Legal Requirement enacted or deemed
applicable to the Merger that makes consummation of the Merger illegal.
SECTION 7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY
The obligations of the Company to effect the Merger and otherwise
consummate the transactions contemplated by this Agreement are subject to the
satisfaction, at or prior to the Closing, of the following conditions:
7.1 Accuracy of Representations. The representations and warranties made
by Parent and Merger Sub in this Agreement shall have been accurate in all
material respects as of the date of this Agreement, individually and taken as a
whole, and shall be accurate as of the Closing, as if made at the Closing
(without giving effect to any update in any schedule provided by Parent pursuant
hereto); except for any inaccuracies which, individually and taken as a whole,
have not had a Material Adverse Effect on the Parent and its subsidiaries, taken
as a whole; provided, however, that in no event shall the representations and
warranties set forth in Section 3.6 be deemed inaccurate at the Closing solely
by reason of one or more of the following:
(i) Fluctuations of Parent's earnings primarily attributable to timing
differences in revenue recognition of customer Contracts;
(ii) Changes in Parent's stock price as traded on the Nasdaq Stock
Market;
(iii) Changes in general economic conditions or in Parent's industry
in particular, or events affecting general economic conditions or Parent's
industry;
(iv) Changes in the stock market or technology stocks generally or
financial indicators; and/or
(v) Analyst reports or recommendations.
7.2 Performance of Covenants. Each covenant or obligation that Parent and
Merger Sub are required to comply with or to perform at or prior to the Closing
shall have been complied with and performed in all material respects.
7.3 Shareholder Approval; Dissenters. The terms of the Merger and this
Agreement shall have been duly approved by the affirmative vote of the shares of
Company Common Stock entitled to vote with respect thereto at the Company
Shareholders' Meeting; holders of not more than 2% of the Company's Common Stock
then outstanding, and no holders of shares of capital stock of the Parent, shall
be, or shall have the right to become, entitled to exercise dissenters' rights
pursuant to, respectively, Chapter 302A of the Minnesota Statutes and Chapter 13
of the California Corporations Code; and the terms of the Merger and this
Agreement shall have been duly approved by the affirmative vote of the Parent's
shareholders at the Parent Shareholders' Meeting.
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7.4 Consents. All material Consents required to be obtained in connection
with the Merger and the other transactions contemplated by this Agreement
(including the Consents identified in Part 2.22 of the Disclosure Schedule)
shall have been obtained and shall be in full force and effect; and the Company
shall have paid no material consideration to any third party or consented to any
conditions materially adverse to the Company in connection with obtaining any
such Consent.
7.5 Documents. The Company shall have received the following legal
opinions and certificate:
(a) a legal opinion of Cooley Godward Castro Huddleson & Tatum, dated
as of the Closing Date, in the form of Exhibit M;
(b) a legal opinion of Cooley Godward Castro Huddleson & Tatum, dated
as of the Closing Date, in form reasonably satisfactory to the Company, to
the effect that the Merger will constitute a reorganization within the
meaning of Section 368 of the Code (it being understood that, in rendering
such opinion, Cooley Godward Castro Huddleson & Tatum may rely upon the tax
representation letters and the Continuity of Interest Certificates referred
to in Section 5.8).
(c) a certificate executed by the President of Parent and containing
the representation and warranty of Parent that each of the conditions set
forth in this Section 7 have been duly satisfied (the "Parent Closing
Certificate").
7.6 No Restraints. No temporary restraining order, preliminary or
permanent injunction or other order preventing the consummation of the Merger
shall have been issued by any court of competent jurisdiction and remain in
effect, and there shall not be any Legal Requirement enacted or deemed
applicable to the Merger that makes consummation of the Merger illegal.
7.7 Execution and Delivery of Agreements. The agreements referenced in
Section 6.5(d), (e) and (f) shall have been executed and delivered by Parent
shall be in full force and effect.
SECTION 8. TERMINATION
8.1 Termination Events. This Agreement may be terminated prior to the
Closing:
(a) by Parent if Parent reasonably determines that the timely
satisfaction of any condition set forth in Section 6 has become impossible
(other than as a result of any failure on the part of Parent or Merger Sub
to comply with or perform any covenant or obligation of Parent or Merger
Sub set forth in this Agreement);
(b) by the Company if the Company reasonably determines that the
timely satisfaction of any condition set forth in Section 7 has become
impossible (other than as a result of any failure on the part of the
Company or any of the Designated Shareholders to comply with or perform any
covenant or obligation set forth in this Agreement);
(c) by Parent at or after the Scheduled Closing Time if any condition
set forth in Section 6 has not been satisfied by the earlier of November
30, 1996 or the Scheduled Closing Time;
(d) by the Company at or after the Scheduled Closing Time if any
condition set forth in Section 7 has not been satisfied by the earlier of
November 30, 1996 or the Scheduled Closing Time;
(e) by mutual consent of all the parties;
(f) by Parent if (i) there has been a material breach by the Company
or any Designated Shareholder of any covenant, representation or warranty
contained in this Agreement, (ii) Parent has notified the Company in
writing of the existence of such breach, and (iii) the Company as such
Designated Shareholder, as applicable, has failed to cure such breach
within ten days after receiving such notice;
(g) by the Company if (i) there has been a material breach by Parent
of any covenant, representation or warranty contained in this Agreement,
(ii) the Company has notified Parent in writing
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of the existence of such breach, and (iii) Parent has failed to cure such
breach within ten days after receiving such notice; or
(h) by either Parent or the Company if (i) there shall be a
non-appealable order of a federal or state court in effect preventing
consummation of the Merger, (ii) there shall be any action taken, or any
statute, rule, regulations or order enacted, promulgated, issued or deemed
applicable to the Merger, by any governmental entity that would make
consummation of the Merger illegal, or (iii) upon a vote at a duly held
meeting of shareholders or any adjournment thereof, any required approval
of the holders of Parent Common Stock or Company Common Stock shall not
have been obtained.
8.2 Extension of Time; Waivers. At any time prior to the Closing Date:
(a) Parent and Merger Sub may (i) extend the time for the performance
of any of the obligations or other acts of the Company and/or the
Designated Shareholders, and (ii) waive compliance with any of the
agreements or conditions contained herein to be performed by the Company
and/or the Designated Shareholders. Any agreement on the part of Parent and
Merger Sub to any such extension or waiver shall be valid only if set forth
in an instrument in writing signed on behalf of Parent and Merger Sub; and
(b) The Company may (i) extend the time for the performance of any of
the obligations or other acts of Parent and/or Merger Sub, and (ii) waive
compliance with any of the agreements or conditions contained herein to be
performed by Parent and/or Merger Sub. Any agreement on the part of the
Company to any such extension or waiver shall be valid only if set forth in
an instrument in writing signed on behalf of the Company.
SECTION 9. REGISTRATION OF SHARES
9.1 Certain Definitions. As used in this Section 9, the following terms
shall have the following respective meanings:
"Holder" shall mean each of the Designated Shareholders, Robert W.
Brandel and any person holding Registrable Securities to whom the rights
under this Section 9 have been transferred in accordance with Section 9.8
hereof.
"Initiating Holders" shall mean any Holders who in the aggregate are
Holders of greater than 50% of the then outstanding Registrable Securities.
"Prior Registration Rights Agreement" shall mean the Amended and
Restated Registration Rights Agreement dated August 24, 1995, by and among
Parent and the shareholders who are signatories thereto.
"Publication Date" shall mean the date on which Parent publishes
financial results covering at least 30 days of post-Merger combined
operations;
"Registrable Securities" means the Parent Common Stock issued to the
Holders in the Merger and any Parent Common Stock issued or issuable in
respect of the Parent Common Stock issued to the Holders in the Merger upon
any stock split, stock dividend, recapitalization, merger, consolidation or
similar event; provided, however, that shares of Common Stock or other
securities shall no longer be treated as Registrable Securities if they
have been transferred other than pursuant to Section 9.8 hereof.
The terms "register," "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement.
"Registration Expenses" shall mean all expenses, except Selling
Expenses as defined below, incurred by Parent in complying with Sections
9.2 and 9.3 hereof, including, without limitation, all registration,
qualification and filing fees, printing expenses, escrow fees, fees and
disbursements of counsel for Parent, Blue Sky fees and expenses, and the
expense of any special audits incident to or required by any such
registration (but excluding the compensation of regular employees of
Parent, which shall be paid in any event by Parent).
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"Selling Expenses" shall mean all underwriting discounts, selling
commissions and stock transfer taxes applicable to the securities
registered by the Holders, and, except as set forth in Registration
Expenses above, all reasonable fees and disbursements of counsel for any
Holder (if such counsel is different from counsel to the Parent).
9.2 Requested Registration. If Parent shall receive from Initiating
Holders a written request that Parent file a registration statement on Form S-3
(or any successor form to Form S-3) for a public offering of shares of the
Registrable Securities and Parent is a registrant entitled to use Form S-3 to
register the Registrable Securities for such an offering, Parent shall:
(a) promptly give written notice of the proposed registration to all
other Holders; and
(b) as soon as practicable, use its best lawful efforts to effect such
registration (including, without limitation, appropriate qualification
under applicable Blue Sky or other state securities laws and appropriate
compliance with applicable regulations issued under the Securities Act and
any other governmental requirements or regulations) as may be so requested
and as would permit or facilitate the sale and distribution of all or such
portion of such Registrable Securities as are specified in such request,
together with all or such portion of the Registrable Securities of any
Holders joining in such request as are specified in a written request
received by Parent within 20 days after the written notice specified in
clause (i) above has been given; and
(c) use its best lawful efforts to keep such registration effective
(subject to Section 9.9) for the purpose of resales of Registrable
Securities by the Holders from time to time, including, but not limited to,
the filing of all necessary requests, consents and Exchange Act reports and
amendments to registrations;
provided, however, that notwithstanding any other provision of this Section 9,
Parent shall have no obligation to register shares or keep any registration
statement effective pursuant to this Section 9.2 to the extent that the
Registrable Securities with respect to which Parent would otherwise (but for
this proviso) be required to file and/or keep effective a registration statement
pursuant to this Section 9.2 have been included in a registration statement
filed by Parent referred to in Section 9.3(a); and provided further, however,
Parent shall not be obligated to take any action to effect any registration
pursuant to this Section 9.2:
(i) in any particular jurisdiction in which Parent would be required
to execute a general consent to service of process in effecting such
registration unless Parent is already subject to service in such
jurisdiction and except as may be required by the Securities Act; or
(ii) unless with respect to the resale of Registrable Securities Rules
145(c) and (d) are not available to all Holders, prior to the Publication
Date; or
(iii) prior to February 1, 1997, and then only with respect to a
maximum of 225,000 shares of Registrable Securities, which number shall
increase by an additional 225,000 shares at the expiration of each six (6)
month period following February 1, 1997, not to exceed the total number of
Registrable Securities issued in the Merger; provided, however, that each
such lot of a maximum of 225,000 shares shall be increased to a maximum of
400,000 shares if with respect to the resale of Registrable Securities
Rules 145(c) and (d) are not available to all Holders; or
(iv) during the period starting with the date 30 days prior to
Parent's good faith estimated date of filing of, and ending on the date
three months immediately following, the effective date of any registration
statement pertaining to securities of Parent (other than a registration of
securities in a shelf registration pursuant to Rule 415 (or any similar
successor rule promulgated by the SEC), in a Rule 145 (or any similar
successor rule promulgated by the SEC) transaction, for the resale of
securities solely by selling shareholders, or with respect to an employee
benefit plan), provided that Parent is actively employing in good faith all
reasonable efforts to cause such registration statement to become
effective; or
(v) if Parent shall furnish to such Holder a certificate signed by the
President of Parent stating that in the good faith judgment of the Board of
Directors it would be seriously detrimental to Parent or its
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shareholders for a registration statement to be filed in the near future,
provided that pursuant to this clause (v) Parent cannot delay
implementation of such request for registration for more than 60 days; or
(vi) if Parent has effected an aggregate of three registrations
pursuant to Section 9.2 and such registrations have become effective. For
purposes of the foregoing, a registration from which the Holders have
withdrawn all Registrable Securities prior to the effectiveness of such
registration (or with respect to which Holders of a majority of Registrable
Securities have requested that all Registrable Securities be withdrawn)
shall not count as one of the three registrations permitted to the Holders.
Notwithstanding the foregoing, each Holder acknowledges that there may
occasionally be times when the Parent, in the good faith judgment of one or more
of its executive officers or its Board of Directors, determines it must suspend
such Holder's ability to sell Registrable Securities pursuant to any
registration statement filed pursuant to this Section 9.2 until such time as an
amendment to the registration statement has been filed by Parent and declared
effective by the SEC, or until such time as Parent has filed an appropriate
report with the SEC pursuant to the Securities Exchange Act of 1934, as amended.
Such suspensions shall be permitted for a period of up to thirty (30) days each.
During any such suspension no Holder may sell any securities of Parent pursuant
to a registration statement filed pursuant to this Section 9.2 unless otherwise
permitted in writing by Parent.
9.3 Company Registration.
(a) If at any time or from time to time Parent shall determine to register
any of its securities, either for its own account or the account of a security
holder or holders, in connection with a public offering of such securities
solely for cash on a form that would also permit the registration of Registrable
Securities, Parent will:
(i) promptly give to each Holder written notice thereof; and
(ii) include in such registration (and any related qualification under
Blue Sky laws or other compliance), and in any underwriting involved
therein, all the Registrable Securities specified in a written request or
requests, made within 20 days after the written notice specified in clause
(i) above has been given. provided, however, Parent shall not be obligated
to take any action to effect any registration pursuant to this Section 9.3
(A) prior to the Publication Date or (B) if the Holders of a majority of
the Registrable Securities then outstanding give written notice to Parent
prior to the effectiveness of such registration that all of the Registrable
Securities are to be withdrawn from such registration.
(b) If the registration of which Parent gives notice is for a registered
public offering involving an underwriting, Parent shall so advise the Holders as
a part of the written notice given pursuant to Section 9.3(a)(i). In such event,
the right of any Holder to registration pursuant to this Section 9.3 shall be
conditioned upon such Holder's participation in such underwriting and the
inclusion of Registrable Securities in the underwriting to the extent provided
herein. All Holders proposing to distribute their securities through such
underwriting shall (together with Parent and the other holders distributing
their securities through such underwriting) enter into an underwriting agreement
in customary form with the managing underwriter selected for such underwriting
by Parent. Notwithstanding any other provision of this Section 9.3, if the
managing underwriter determines that marketing factors require a limitation of
the number of shares to be underwritten, the managing underwriter may limit the
Registrable Securities to be included in such registration. If the managing
underwriter so limits the number of Registrable Securities to be registered and
underwritten, Parent shall so advise all selling shareholders of Parent,
including the Holders, and the number of shares of Registrable Securities that
may be included in the registration and underwriting shall be allocated among
the Holders, in proportion, as nearly as practicable, to the respective amounts
of Registrable Securities held by such Holders at the time of filing the
registration statement; provided, however, that with respect to any registration
resulting from any demand registration rights (the "Prior Demand Rights")
pursuant to the Prior Registration Rights Agreement, Registrable Securities
shall be included in such registration only if all of the securities requested
to be registered pursuant to the Prior Demand Rights have been included in such
registration. To facilitate the allocation of shares in accordance with the
above provisions, Parent may round the number of shares allocated to any Holder
or holder to the nearest multiple of 100 shares.
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If any selling Holder disapproves of the terms of any such underwriting,
including any limitation on the number of Registrable Securities that such
Holder may include in such underwriting, such person may elect to withdraw
therefrom by written notice to Parent and the managing underwriter.
(c) Parent shall have the right to terminate or withdraw any registration
initiated by it under this Section 9.3 prior to the effectiveness of such
registration whether or not any Holder has elected to include securities in such
registration.
9.4 Expenses of Registration. All Registration Expenses incurred in
connection with any registration of Registrable Securities pursuant to Sections
9.2 and 9.3 shall be borne by Parent. All Selling Expenses relating to
Registrable Securities registered on behalf of the Holders shall be borne by the
Holders of such Registrable Securities pro rata on the basis of the number of
shares so registered; provided that each Holder is solely responsible for the
fees and disbursements of its separate individual counsel, if any.
9.5 Registration Procedures. In the case of each registration,
qualification or compliance effected by Parent pursuant to Section 9.2, Parent
will keep each Holder advised in writing as to the initiation of each
registration, qualification and compliance and as to the completion thereof. At
its expense, Parent will:
(a) prepare and file with the SEC a registration statement with
respect to such securities and use its best efforts to cause such
registration statement to become and remain effective until the earlier of
(A) the date the distribution described in the registration statement has
been completed; or (B) the date that the Holders participating in such
registration may sell all remaining Registrable Securities held by such
holders on any one day pursuant to Rule 145(d) (or any similar successor
rule promulgated by the SEC); and
(b) furnish to the Holders participating in such registration and to
the underwriters of the securities being registered such reasonable number
of copies of the registration statement, preliminary prospectus, final
prospectus and such other documents as such underwriters may reasonably
request in order to facilitate the public offering of such securities.
9.6 Indemnification.
(a) Parent will indemnify each Holder, each of its officers and directors
and partners, and each person controlling such Holder within the meaning of
Section 15 of the Securities Act, with respect to which registration,
qualification or compliance has been effected pursuant to this Section 9, and
each underwriter, if any, and each person who controls any underwriter within
the meaning of Section 15 of the Securities Act, against all expenses, claims,
losses, damages or liabilities (or actions in respect thereof), including any of
the foregoing incurred in settlement of any litigation, commenced or threatened,
arising out of or based on any untrue statement (or alleged untrue statement) of
a material fact contained in any registration statement, prospectus, offering
circular or other document, or any amendment or supplement thereto, incident to
any such registration, qualification or compliance, or based on any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances in
which they were made, not misleading, or any violation by Parent of the
Securities Act or the Exchange Act or any rule or regulation promulgated under
the Securities Act or the Exchange Act applicable to Parent in connection with
any such registration, qualification or compliance, and Parent will reimburse
each such Holder, each of its officers and directors, and each person
controlling such Holder, each such underwriter and each person who controls any
such underwriter, for any legal and any other expenses reasonably incurred in
connection with investigating, preparing or defending any such claim, loss,
damage, liability or action, provided that Parent will not be liable in any such
case to the extent that any such claim, loss, damage, liability or expense
arises out of or is based on any untrue statement or omission or alleged untrue
statement or omission, made in reliance upon and in conformity with written
information furnished to Parent by such Holder, controlling person or
underwriter and specifically for use therein. Notwithstanding the foregoing, as
far as the foregoing indemnity relates to any untrue statement (or alleged
untrue statement) or omission (or alleged omission) made in the preliminary
prospectus but eliminated or remedied in the amended prospectus on file with the
SEC at the time the registration statement becomes effective or in the final
prospectus filed with the SEC pursuant to Rule 424(b), the indemnity agreement
herein shall not inure to the benefit of any
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underwriter or, if there is no underwriter, any Holder if a copy of the final
prospectus filed pursuant to Rule 424(b) was not furnished to the person or
entity asserting the loss, liability, claim or damage at or prior to the time
such furnishing is required by the Securities Act.
(b) Each Holder will, if Registrable Securities held by such Holder are
included in the securities as to which such registration, qualification or
compliance is being effected, indemnify Parent, each of its directors and
officers, each underwriter, if any, of Parent's securities covered by such
registration, qualification or compliance, each person who controls Parent or
such underwriter within the meaning of Section 15 of the Securities Act, and
each other such Holder including Registrable Securities in such registration,
each of its officers and directors and each person controlling such other Holder
within the meaning of Section 15 of the Securities Act, against all claims,
losses, damages and liabilities (or actions in respect thereof) arising out of
or based on any untrue statement (or alleged untrue statement) of a material
fact contained in any such registration statement, prospectus, offering circular
or other document, or any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse Parent, such other Holders, or such
directors, officers, persons, underwriters or control persons for any legal or
any other expenses reasonably incurred in connection with investigating or
defending any such claim, loss, damage, liability or action, in each case to the
extent, but only to the extent, that such untrue statement (or alleged untrue
statement) or omission (or alleged omission) is made in such registration
statement, prospectus, offering circular or other document in reliance upon and
in conformity with written information furnished to Parent by such Holder
specifically for use therein. Notwithstanding the foregoing, the liability of
each Holder under this subsection (b) shall be limited to an amount equal to the
initial public offering price of the shares sold by such Holder, unless such
liability arises out of or is based on willful conduct by such Holder.
Notwithstanding the foregoing, as far as the foregoing indemnity relates to any
untrue statement (or alleged untrue statement) or omission (or alleged omission)
made in the preliminary prospectus but eliminated or remedied in the amended
prospectus on file with the SEC at the time the registration statement becomes
effective or in the final prospectus filed pursuant to Rule 424(b), the
indemnity agreement herein shall not inure to the benefit of Parent, any
underwriter or any other Holder if a copy of the final prospectus filed pursuant
to Rule 424(b) was not furnished to the person or entity asserting the loss,
liability, claim or damage at or prior to the time such furnishing is required
by the Securities Act, unless delivery of such final prospectus was the
responsibility of the Indemnifying Party (as hereinafter defined) hereunder.
(c) Each party entitled to indemnification under this Section 9.6 (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not unreasonably be
withheld), and the Indemnified Party may participate in such defense at such
party's expense. The failure of any Indemnified Party to give notice as provided
herein shall not relieve the Indemnifying Party of its obligations under this
Section 9 unless the failure to give such notice is materially prejudicial to an
Indemnifying Party's ability to defend such action. The Indemnifying Party shall
not assume the defense for matters as to which there is a conflict of interest
or separate and different defenses. No Indemnifying Party, in the defense of any
such claim or litigation, shall, except with the consent of each Indemnified
Party, consent to entry of any judgment or enter into any settlement which does
not include as an unconditional term thereof the giving by the claimant or
plaintiff to such Indemnified Party of a release from all liability in respect
to such claim or litigation. No Indemnified Party shall consent to entry of any
judgment or enter into any settlement without the consent of each Indemnifying
Party.
(d) If the indemnification provided for in this Section 9.6 is unavailable
to an Indemnified Party in respect of any losses, claims, damages or liabilities
referred to therein, then each Indemnifying Party, in lieu of indemnifying such
Indemnified Party, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such losses, claims, damages or liabilities (i)
in such proportion as is appropriate to reflect the relative benefits received
by Parent, all shareholders offering securities in the offering (the "Selling
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Shareholders") and the underwriters of the offering (the "Underwriters") from
the offering of Parent securities, or (ii) if the allocation provided by clause
(i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of Parent, the Selling Shareholders and the
Underwriters in connection with the statements or omissions which resulted in
such losses, claims, damages or liabilities, as well as any other relevant
equitable considerations. The relative benefits received by Parent, the Selling
Shareholders and the Underwriters shall be deemed to be in the same proportion
as the net proceeds from the offering (before deducting expenses) received by
Parent and the Selling Shareholders, respectively, and the underwriting
discounts and commissions received by the Underwriters bear to the aggregate
price of the offering to the public. The relative fault of Parent, the Selling
Shareholders and the Underwriters shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of material fact or
the omission or alleged omission to state a material fact relates to information
supplied by Parent, the Selling Shareholders or the Underwriters and the
parties' relevant intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. It is agreed that it would not be
just and equitable if contribution pursuant to this Section 9.6(d) were based
solely upon the number of entities from whom contribution was requested or by
any other method of allocation which does not take into account the equitable
considerations referred to above in this Section 9.6(d). The amount paid or
payable by an Indemnified Party as a result of the losses, claims, damages and
liabilities referred to above in this Section 9.6(d) shall be deemed to include
any legal or other expenses reasonably incurred by such Indemnified Party in
connection with investigating, preparing or defending any such action or claim,
subject to the provisions of Section 9.6(c) hereof. Notwithstanding the
provisions of this Section 9.6(d), no Selling Shareholder shall be required to
contribute any amount or make any other payments under this Section 9.6 which in
the aggregate exceed the proceeds received by such Selling Shareholder. No
person guilty of fraudulent misrepresentation (within the meaning of Section 11
of the Securities Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation.
9.7 Information by Holder. Each Holder holding Registrable Securities
included in any registration shall furnish to Parent such information regarding
such Holder, the Registrable Securities held by such Holder and the distribution
proposed by such Holder as Parent may request in writing and as shall be
required in connection with any registration, qualification or compliance
referred to in this Section 9.
9.8 Transfer of Registration Rights. The rights of Holders under this
Section 9 are not transferable except in connection with (a) a transfer by will
or intestacy; and (b) transfers consisting of bona fide gifts, provided,
however, (i) the gift transferor shall, within ten (10) days after such gift,
furnish to Parent written notice of the name and address of such transferee and
the securities with respect to which such registration rights are being assigned
and (ii) such transferee shall agree to be bound by the provisions herein.
9.9 Termination of Registration Rights. The right of any Holder to request
registration or inclusion in any registration pursuant to Section 9.2 or 9.3
shall terminate on such date as all shares of Registrable Securities then held
by such Holder may be sold under Rule 144 or Rule 145 during any 90-day period.
SECTION 10. MISCELLANEOUS PROVISIONS
10.1 Survival of Representations and Warranties. All representations,
warranties, covenants and obligations made by the Company under this Agreement
in connection with the transactions contemplated hereby or in the Disclosure
Schedule or any exhibit, certificate, schedule, list or other instrument
delivered pursuant hereto (the "Transaction Documents") shall expire as of the
Closing; provided, however, that the Parent shall be entitled to indemnification
out of the Escrow Fund following the Closing as set forth in the Escrow
Agreement, and the representations, warranties, covenants and obligations of the
Company shall be deemed to survive the Closing solely for such purpose. All
representations, warranties, covenants and obligations made by the Designated
Shareholders under this Agreement in connection with the transactions
contemplated hereby or in the Transaction Documents shall survive the Closing
indefinitely. All representations, warranties, covenants and obligations made by
the Parent and Merger Sub, respectively, under this Agreement in connection with
the transactions contemplated hereby or in the Transaction Documents shall
survive the Closing but shall expire as of six (6) months following the Closing
(other than covenants and
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obligations which pursuant to their terms are to be performed subsequent to the
Closing, which covenants and obligations shall survive the Closing
indefinitely).
10.2 Further Assurances. Each party hereto shall execute and cause to be
delivered to each other party hereto such instruments and other documents, and
shall take such other actions, as such other party may reasonably request (prior
to, at or after the Closing) for the purpose of carrying out or evidencing any
of the transactions contemplated by this Agreement.
10.3 Fees and Expenses. Except as set forth in Section 1.5, each party to
this Agreement shall bear and pay all fees, costs and expenses (including legal
fees and accounting fees) incurred by such party in connection with the
negotiation, preparation and review of this Agreement (including the Disclosure
Schedule) and all agreements, certificates, opinions and other instruments and
documents delivered or to be delivered in connection with the transactions
contemplated by this Agreement, and the consummation of the Merger.
10.4 Attorneys' Fees. If any action or proceeding relating to this
Agreement or the enforcement of any provision of this Agreement is brought
against any party hereto, the prevailing party shall be entitled to recover
reasonable attorneys' fees, costs and disbursements (in addition to any other
relief to which the prevailing party may be entitled).
10.5 Notices. Any notice or other communication required or permitted to
be delivered to any party under this Agreement shall be in writing and shall be
deemed properly delivered, given and received when delivered (by hand, by
registered mail, by courier or express delivery service or by facsimile) to the
address or facsimile telephone number set forth beneath the name of such party
below (or to such other address or facsimile telephone number as such party
shall have specified in a written notice given to the other parties hereto):
if to Parent or Merger Sub:
DataWorks Corporation
5910 Pacific Center Boulevard, Suite 300
San Diego, CA 92121
Attn: Norman Farquhar
Facsimile: (619) 546-0682
with a copy to:
Thomas A. Coll, Esq.
Cooley Godward Castro Huddleson & Tatum
4365 Executive Drive, Suite 1100
San Diego, CA 92121
Facsimile: (619) 453-3555
if to the Company:
DCD Corporation
2000 Interchange Tower
600 Highway 169
Minneapolis, MN 55426
Attention: President
Facsimile: (612) 544-6825
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with a copy to:
William B. Payne, Esq.
Dorsey & Whitney LLP
Pillsbury Center South
220 South Sixth Street
Minneapolis, MN 55402
Facsimile: (612) 378-8738
if to any of the Designated Shareholders:
Dwayne E. Borg
5215 Larada Lane
Edina, MN 55436
10.6 Time of the Essence. Time is of the essence of this Agreement.
10.7 Headings. The bold-faced section headings contained in this Agreement
are for convenience of reference only, shall not be deemed to be a part of this
Agreement and shall not be referred to in connection with the construction or
interpretation of this Agreement.
10.8 Counterparts. This Agreement may be executed in several counterparts,
each of which shall constitute an original and all of which, when taken
together, shall constitute one agreement.
10.9 Governing Law; Venue.
(a) Except to the extent the laws of the State of Minnesota shall
necessarily apply, this Agreement shall be construed in accordance with, and
governed in all respects by, the internal laws of the State of California
(without giving effect to principles of conflicts of laws).
(b) Subject to the provisions of the Escrow Agreement, any legal action or
other legal proceeding relating to this Agreement or the enforcement of any
provision of this Agreement may be brought or otherwise commenced in any state
or federal court located in the State of California, and each party to this
Agreement:
(i) expressly and irrevocably consents and submits to the jurisdiction
of each state and federal court located in the State of California (and
each appellate court located in the State of California) in connection with
any such legal proceeding;
(ii) agrees that each state and federal court located in the state of
California shall be deemed to be a convenient forum; and
(iii) agrees not to assert (by way of motion, as a defense or
otherwise), in any such legal proceeding commenced in any state or federal
court located in California, any claim that such party is not subject
personally to the jurisdiction of such court, that such legal proceeding
has been brought in an inconvenient forum, that the venue of such
proceeding is improper or that this Agreement or the subject matter of this
Agreement may not be enforced in or by such court.
(c) Subject to the provisions of the Escrow Agreement, nothing contained in
Section 10.9(b) shall be deemed to limit or otherwise affect the right of any
party to commence any legal proceeding or otherwise proceed against any other
party in any other forum or jurisdiction.
(d) The Designated Shareholders irrevocably constitute and appoint Dwayne
E. Borg as their agent to receive service of process in connection with any
legal proceeding relating to this Agreement or the enforcement of any provision
of this Agreement.
10.10 Successors and Assigns. This Agreement shall be binding upon: the
Company and its successors and assigns (if any); the Designated Shareholders and
their respective personal representatives, executors, administrators, estates,
heirs, successors and assigns (if any); Parent and its successors and assigns
(if any); and Merger Sub and its successors and assigns (if any). This Agreement
shall inure to the benefit of: the
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Company; the Designated Shareholders; Parent; and the respective successors and
assigns (if any) of the foregoing. Parent may freely assign any or all of its
rights under this Agreement, in whole or in part, to any other Person without
obtaining the consent or approval of any other party hereto or of any other
Person.
10.11 Remedies Cumulative; Specific Performance. The rights and remedies
of the parties hereto shall be cumulative (and not alternative). The parties to
this Agreement agree that, in the event of any breach or threatened breach by
any party to this Agreement of any covenant, obligation or other provision set
forth in this Agreement for the benefit of any other party to this Agreement,
such other party shall be entitled (in addition to any other remedy that may be
available to it) to (a) a decree or order of specific performance or mandamus to
enforce the observance and performance of such covenant, obligation or other
provision, and (b) an injunction restraining such breach or threatened breach.
10.12 Waiver.
(a) No failure on the part of any Person to exercise any power, right,
privilege or remedy under this Agreement, and no delay on the part of any Person
in exercising any power, right, privilege or remedy under this Agreement, shall
operate as a waiver of such power, right, privilege or remedy; and no single or
partial exercise of any such power, right, privilege or remedy shall preclude
any other or further exercise thereof or of any other power, right, privilege or
remedy.
(b) No Person shall be deemed to have waived any claim arising out of this
Agreement, or any power, right, privilege or remedy under this Agreement, unless
the waiver of such claim, power, right, privilege or remedy is expressly set
forth in a written instrument duly executed and delivered on behalf of such
Person; and any such waiver shall not be applicable or have any effect except in
the specific instance in which it is given.
10.13 Amendments. This Agreement may not be amended, modified, altered or
supplemented other than by means of a written instrument duly executed and
delivered on behalf of Parent, the Company and a majority of interest of the
Designated Shareholders.
10.14 Severability. In the event that any provision of this Agreement, or
the application of any such provision to any Person or set of circumstances,
shall be determined to be invalid, unlawful, void or unenforceable to any
extent, the remainder of this Agreement, and the application of such provision
to Persons or circumstances other than those as to which it is determined to be
invalid, unlawful, void or unenforceable, shall not be impaired or otherwise
affected and shall continue to be valid and enforceable to the fullest extent
permitted by law.
10.15 Parties in Interest. None of the provisions of this Agreement is
intended to provide any rights or remedies to any Person other than the parties
hereto and their respective successors and assigns (if any).
10.16 Entire Agreement. This Agreement and the other agreements referred
to herein set forth the entire understanding of the parties hereto relating to
the subject matter hereof and thereof and supersede all prior agreements and
understandings among or between any of the parties relating to the subject
matter hereof and thereof.
10.17 Construction.
(a) For purposes of this Agreement, whenever the context requires: the
singular number shall include the plural, and vice versa; the masculine gender
shall include the feminine and neuter genders; the feminine gender shall include
the masculine and neuter genders; and the neuter gender shall include the
masculine and feminine genders.
(b) The parties hereto agree that any rule of construction to the effect
that ambiguities are to be resolved against the drafting party shall not be
applied in the construction or interpretation of this Agreement.
(c) As used in this Agreement, the words "include" and "including," and
variations thereof, shall not be deemed to be terms of limitation, but rather
shall be deemed to be followed by the words "without limitation."
(d) Except as otherwise indicated, all references in this Agreement to
"Sections" and "Exhibits" are intended to refer to Sections of this Agreement
and Exhibits to this Agreement.
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The parties hereto have caused this Agreement to be executed and delivered
as of August 16, 1996.
DATAWORKS CORPORATION
a California corporation
By: __________________________________
Norman R. Farquhar, Executive Vice
President and Chief Financial
Officer
DATAWORKS ACQUISITION SUB., INC.,
a Minnesota corporation
By: __________________________________
______________________________________
[Print Name and Title]
DCD CORPORATION,
a Minnesota corporation
By: __________________________________
Robert W. Brandel, President
DESIGNATED SHAREHOLDERS:
--------------------------------------
Dwayne E. Borg
--------------------------------------
Richard D. Borg
--------------------------------------
William J. Borg
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EXHIBIT A TO APPENDIX A
CERTAIN DEFINITIONS
For purposes of the Agreement (including this Exhibit A):
Acquisition Transaction. "Acquisition Transaction" shall mean any
transaction involving:
(a) the sale, license, disposition or acquisition of all or a material
portion of the Company's business or assets;
(b) the issuance, disposition or acquisition of (i) any capital stock
or other equity security of the Company, (ii) any option, call, warrant or
right (whether or not immediately exercisable) to acquire, or otherwise
relating to, any capital stock or other equity security of the Company, or
(iii) any security, instrument or obligation that is or may become
convertible into or exchangeable for any capital stock or other equity
security of the Company; or
(c) any merger, consolidation, business combination, share exchange,
reorganization or similar transaction involving the Company.
Agreement. "Agreement" shall mean the Agreement and Plan of Merger and
Reorganization to which this Exhibit A is attached (including the Disclosure
Schedule), as it may be amended from time to time.
Company Contract. "Company Contract" shall mean any Contract: (a) to which
the Company is a party; (b) by which the Company or any of its assets is or may
become bound or under which the Company has become subject to any obligation; or
(c) under which the Company has any right or interest.
Company Proprietary Asset. "Company Proprietary Asset" shall mean any
Proprietary Asset owned by or licensed to the Company or otherwise used by the
Company.
Consent. "Consent" shall mean any approval, consent, ratification,
permission, waiver or authorization (including any Governmental Authorization).
Contract. "Contract" shall mean any written, oral or other agreement,
contract, subcontract, lease, understanding, arrangement, instrument, note,
warranty, insurance policy, benefit plan, or legally binding commitment or
undertaking of any nature that is currently or hereafter in effect.
Damages. "Damages" shall include any loss, damage, injury, decline in
value, lost opportunity, liability, claim, demand, settlement, judgment, award,
fine, penalty, Tax, fee (including reasonable attorneys' fees), charge, cost
(including costs of investigation) or expense of any nature.
Disclosure Schedule. "Disclosure Schedule" shall mean the schedule (dated
as of the date of the Agreement) delivered to Parent on behalf of the Company
and the Designated Shareholders, including all exhibits and attachments thereto.
Employee Benefit Plan. "Employee Benefit Plan" shall have the meaning
specified in Section 3(3) of ERISA.
Encumbrance. "Encumbrance" shall mean any lien, pledge, hypothecation,
charge, mortgage, security interest, encumbrance, claim, infringement,
interference, option, right of first refusal, preemptive right, community
property interest or restriction of any nature (including any restriction on the
voting of any security, any restriction on the transfer of any security or other
asset, any restriction on the receipt of any income derived from any asset, any
restriction on the use of any asset and any restriction on the possession,
exercise or transfer of any other attribute of ownership of any asset).
Entity. "Entity" shall mean any corporation (including any non-profit
corporation), general partnership, limited partnership, limited liability
partnership, joint venture, estate, trust, company (including any limited
liability company or joint stock company), firm or other enterprise,
association, organization or entity.
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ESOP Lender. "ESOP Lender" shall mean Norwest Bank Minnesota, National
Association, in its capacity as lender pursuant to that certain Loan Agreement
dated November 12, 1992, by and between the Company and the ESOP Lender (the
"ESOP Outside Loan Agreement").
ESOP Loans. "ESOP Loans" shall mean the loan from the ESOP Lender to the
Company pursuant to the ESOP Outside Loan Agreement and the loan from the
Company to the DCD ESOP pursuant to that certain ESOP Loan Agreement dated
November 12, 1992, by and between the Company and the DCD ESOP (the "ESOP Inside
Loan Agreement").
ESOP Selling Shareholder. "ESOP Selling Shareholder" shall mean Dwayne E.
Borg in his capacity as seller of the ESOP Shares to the DCD ESOP pursuant to
the ESOP Stock Purchase Agreement.
ESOP Stock Purchase Agreement. "ESOP Stock Purchase Agreement" shall mean
that certain Agreement of Purchase and Sale of Stock dated November 12, 1992, by
and between the ESOP Selling Shareholder, the ESOP Trustee and the Company,
relating to the ESOP Shares.
ESOP Transaction Documents. "ESOP Transaction Documents" shall mean the
ESOP Stock Purchase Agreement, the ESOP Outside Loan Agreement, the ESOP Inside
Loan Agreement and such other agreements entered into in connection with the
transactions contemplated thereby or the consummation thereof or performance
thereunder, and all amendments, modifications and supplements thereto.
ESOP Transactions. "ESOP Transactions" shall mean the transactions
contemplated by the ESOP Transaction Documents and such other transactions
entered into in connection with the consummation thereof or performance
thereunder.
ESOP Trust. "ESOP Trust" shall mean the trust established pursuant to the
DCD ESOP to hold the assets of the DCD ESOP.
ESOP Trustee. "ESOP Trustee" shall mean Dwayne E. Borg, Robert W. Brandel,
and Richard D. Borg as trustees of the ESOP Trust pursuant to the DCD ESOP.
Exchange Act. "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
Governmental Authorization. "Governmental Authorization" shall mean any:
permit, license, certificate, franchise, permission, clearance, registration,
qualification or authorization issued, granted, given or otherwise made
available by or under the authority of any Governmental Body or pursuant to any
Legal Requirement.
Governmental Body. "Governmental Body" shall mean any: (a) nation, state,
commonwealth, province, territory, county, municipality, district or other
jurisdiction of any nature; (b) federal, state, local, municipal, foreign or
other government; or (c) governmental or quasi-governmental authority of any
nature (including any governmental division, department, agency, commission,
instrumentality, official, organization, unit, body or Entity and any court or
other tribunal).
Indemnitees. "Indemnitees" shall mean the following Persons, each of whom
shall be entitled to indemnification as provided in the Escrow Agreement: (a)
Parent; (b) Parent's current and future affiliates (including the Surviving
Corporation); (c) the respective Representatives of the Persons referred to in
clauses "(a)" and "(b)" above; and (d) the respective successors and assigns of
the Persons referred to in clauses "(a)", "(b)" and "(c)" above; provided,
however, that the Designated Shareholders shall not be deemed to be
"Indemnitees."
Knowledge. An individual shall be deemed to have "knowledge" of a
particular fact or other matter if such individual is actually aware of such
fact or other matter or if a prudent individual could be expected to be aware
thereof after making reasonable inquiry thereof. An entity shall be deemed to
have "knowledge" of a particular fact or other matter if any officer or partner
of such entity is actually aware of such fact or other matter or would have
knowledge of such fact or other matter after making reasonable inquiry thereof.
Legal Proceeding. "Legal Proceeding" shall mean any action, suit,
litigation, arbitration, proceeding (including any civil, criminal,
administrative, investigative or appellate proceeding), hearing, inquiry, audit,
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examination or investigation commenced, brought, conducted or heard by or
before, or otherwise involving, any court or other Governmental Body or any
arbitrator or arbitration panel.
Legal Requirement. "Legal Requirement" shall mean any federal, state,
local, municipal, foreign or other law, statute, constitution, principle of
common law, resolution, ordinance, code, edict, decree, rule, regulation, ruling
or requirement issued, enacted, adopted, promulgated, implemented or otherwise
put into effect by or under the authority of any Governmental Body.
Material Adverse Effect. A violation or other matter will be deemed to
have a "Material Adverse Effect" on a party if such violation or other matter
(considered together with all other matters that would constitute exceptions to
the representations and warranties set forth in the Agreement or in the Company
Closing Certificate or the Parent Closing Certificate, as applicable, but for
the presence of "Material Adverse Effect" or other materiality qualifications,
or any similar qualification, in such representations and warranties) would have
a material adverse effect on such party's business, financial condition, assets,
liabilities, results of operations or prospective customers.
Person. "Person" shall mean any individual, Entity or Governmental Body.
Proprietary Asset. "Proprietary Asset" shall mean any: (a) patent, patent
application, trademark (whether registered or unregistered), trademark
application, trade name, fictitious business name, service mark (whether
registered or unregistered), service mark application, copyright (whether
registered or unregistered), copyright application, maskwork, maskwork
application, trade secret, know-how, customer list, computer software, source
code, computer program, invention, design, blueprint, engineering drawing,
proprietary product, technology or proprietary right; or (b) right to use or
exploit any of the foregoing.
Representatives. "Representatives" shall mean officers, directors,
employees, agents, attorneys, accountants, advisors and representatives.
SEC. "SEC" shall mean the United States Securities and Exchange
Commission.
Securities Act. "Securities Act" shall mean the Securities Act of 1933, as
amended.
Tax. "Tax" shall mean any tax (including any income tax, franchise tax,
capital gains tax, gross receipts tax, value-added tax, surtax, excise tax, ad
valorem tax, transfer tax, stamp tax, sales tax, use tax, property tax, business
tax, withholding tax or payroll tax), levy, assessment, tariff, duty (including
any customs duty), deficiency or fee, and any related charge or amount
(including any fine, penalty or interest), imposed, assessed or collected by or
under the authority of any Governmental Body.
Tax Return. "Tax Return" shall mean any return (including any information
return), report, statement, declaration, estimate, schedule, notice,
notification, form, election, certificate or other document or information filed
with or submitted to, or required to be filed with or submitted to, any
Governmental Body in connection with the determination, assessment, collection
or payment of any Tax or in connection with the administration, implementation
or enforcement of or compliance with any Legal Requirement relating to any Tax.
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EXHIBIT B TO APPENDIX A
ESCROW AND INDEMNITY AGREEMENT
THIS ESCROW AND INDEMNITY AGREEMENT ("Escrow Agreement") is entered into as
of August 16, 1996, by and among DATAWORKS CORPORATION, a California corporation
("Parent"), certain shareholders of DCD CORPORATION, a Minnesota corporation
(the "Company"), who have executed this Escrow Agreement below (the "Designated
Shareholders"), Robert W. Brandel as representative of the shareholders of the
Company (the "Shareholder Representative") and the party identified as the
Escrow Agent on the signature page below (the "Escrow Agent").
RECITALS
A. Parent, DataWorks Acquisition Sub., Inc., a Minnesota corporation and a
wholly-owned subsidiary of Parent ("Merger Sub"), the Company and the Designated
Shareholders have entered into an Agreement and Plan of Merger and
Reorganization, dated as of August 16, 1996 (the "Merger Agreement"), which
provides, among other things, that Merger Sub will be merged with and into the
Company (the "Merger"), with the Company being the surviving corporation, on the
terms and conditions set forth therein. Capitalized terms used herein and not
otherwise defined shall have the meanings given them in the Merger Agreement.
B. The Merger Agreement contemplates that the Parent will have certain
rights to indemnification, and further contemplates the establishment of an
escrow arrangement to secure such indemnification rights.
AGREEMENT
Now, therefore, in consideration of the foregoing premises and the mutual
covenants and conditions contained herein, the parties to this Escrow Agreement,
intending to be legally bound, agree as follows:
SECTION 1. INDEMNIFICATION, ETC.
1.1 Indemnification.
(a) Indemnification Rights of Indemnitees. Notwithstanding any
investigation of the business, condition, assets, liabilities, operations or
prospects of the Company by or on behalf of Parent, or any knowledge acquired
(or capable of being acquired) at any time, whether before or after the
execution and delivery of the Merger Agreement or the Closing Date, subject to
the terms of this Escrow Agreement, each of the Indemnitees shall be
indemnified, defended and held harmless pursuant to the terms hereof out of the
Escrow Fund (described in Section 2.1 below) from and against, and each
Indemnitee shall be compensated, reimbursed and paid out of the Escrow Fund on
demand, the full amount of any Damages suffered or incurred by any of the
Indemnitees or to which any of the Indemnitees may otherwise become subject
(regardless of whether or not such Damages relate to any third-party claim),
arising out of or relating to any of the following:
(i) any inaccuracy in or breach of any representation or warranty of
the Company in the Merger Agreement (without giving effect to any
supplement to the Disclosure Schedule), the Disclosure Schedule, or any
certificate or document delivered by the Company or any Designated
Shareholder pursuant to the Merger Agreement;
(ii) any breach or failure to perform of any covenant or obligation of
the Company set forth in the Merger Agreement or the Disclosure Schedule;
(iii) the formation, operation, administration, compliance or
non-compliance of the DCD ESOP prior to the Closing Date, any other action
taken prior to the Closing Date relating to the DCD ESOP, and any
corrective or remedial action or investigation taken prior to, on or after
the Closing Date relating to the DCD ESOP, including but not limited to any
of the actions contemplated in Section 5.13(c) of the Merger Agreement;
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(iv) any right or claim against the Company by any Person for
brokerage, finder's fees, commissions and/or similar payments (and related
expenses) arising out of or relating to the Merger; including but not
limited to fees and expenses payable to Wessels, Arnold & Henderson,
L.L.C., but excluding the amount of fees and expenses described in Section
1.5(b)(ii)(B)(a) of the Agreement used to calculate the Deduction as set
forth in the Expense Estimate Certificate; and
(v) the amount by which the fees and expenses of the Company legal and
accounting advisors incurred in connection with the Merger exceed $100,000,
but excluding the amount of fees and expenses described in Section
1.5(b)(ii)(B)(b) of the Agreement used to calculate the Deduction as set
forth in the Expense Estimate Certificate.
The Damages for which indemnity may be obtained pursuant to this Section
1.1 are hereinafter collectively referred to as the "Indemnitee Damages."
(b) Indemnification by Parent. Notwithstanding any investigation of the
business, condition, assets, liabilities, operations or prospects of the Parent
by or on behalf of any Shareholder, or any knowledge acquired (or capable of
being acquired) at any time, whether before or after the execution and delivery
of the Merger Agreement or the Closing Date, subject to the terms of this Escrow
Agreement, Parent shall indemnify, defend and hold harmless each of the
Shareholders pursuant to the terms hereof from and against, and shall
compensate, reimburse and pay to each Shareholder on demand, the full amount of
any Damages suffered or incurred by such Shareholder or to which such
Shareholder may otherwise become subject (regardless of whether or not such
Damages relate to any third-party claim), arising out of or relating to any of
the following:
(i) any inaccuracy in or breach of any representation or warranty of
the Parent or Merger Sub in the Merger Agreement (without giving effect to
any updated schedule) or any schedule, certificate or document delivered by
the Parent or Merger Sub pursuant to the Merger Agreement; and
(ii) any breach or failure to perform of any covenant or obligation of
the Parent or Merger Sub set forth in the Merger Agreement or any
certificate or document delivered by the Parent or Merger Sub pursuant to
the Merger Agreement.
The Damages for which indemnity may be obtained pursuant to this Section
1.1(b) are hereinafter collectively referred to as the "Shareholder Damages."
Notwithstanding any contrary provision of this Escrow Agreement, Parent shall
have the right to satisfy any indemnification obligations under this Section
1.1(b) by delivering shares of Parent's Common Stock valued at the Stipulated
Value per share to the extent Parent reasonably determines such manner of
payment to be necessary so that the Merger may appropriately be accounted for as
a "pooling of interests" for financial accounting purposes under generally
accepted accounting principles.
1.2 Limitations. The following limitations shall apply to the respective
indemnification obligations of the parties pursuant to Section 1.1:
(a) Basket for Certain Claims. Following the Effective Time, the
Escrow Fund shall not have any liability under Sections 1.1(a)(i) or (ii)
until and except to the extent that the aggregate amount of such liability
exceeds $400,000; provided that in no event shall any such limitation apply
to Sections 1.1(a)(iii), (iv), or (v). Following the Effective Time,
neither Parent nor Merger Sub shall have any liability under Section 1.1(b)
until and except to the extent the aggregate amount of such liability
exceeds $400,000.
(b) Cap on Parent Indemnity. Following the Effective Time, Parent's
and Merger Sub's indemnity obligations under this Agreement shall not
exceed the Stipulated Value multiplied by the Escrow Shares.
(c) Exclusivity. Following the Effective Time, as set forth in this
Agreement, the Escrow Fund shall be the Indemnitees' sole recourse for
indemnification, payment of Damages or any other remedies against the
Company with respect to the matters provided for under Section 1.1;
provided, however, that in no event shall the foregoing limit any remedies
(i) against any Designated Shareholder for any breach of such Designated
Shareholder's obligations under the Merger Agreement or (ii) against any
other party
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for breaches of such party's obligations under agreements or certificates
in substantially the form of Exhibits E, G, H, I, J or K to the Merger
Agreement. Following the Effective Time, the Shareholders' rights to
indemnification, payment of Shareholder Damages or any other remedies for
the matters provided for under Section 1.1(b) shall be exclusively as
specified in this Escrow Agreement.
(d) Limitations on Liability. Notwithstanding anything to the
contrary contained in the Merger Agreement or this Escrow Agreement (or any
related agreement or instrument described above), upon the Effective Time
and thereafter, the Company shall have no liability thereunder or hereunder
with respect to any representation, warranty or covenant; provided,
however, that following the Effective Time the Escrow Fund shall remain
liable for such representations, warranties and covenants of the Company as
provided herein. It is acknowledged and agreed that, if the Surviving
Corporation suffers or otherwise becomes subject to any Indemnitee Damages,
then (without limiting any of the rights of the Surviving Corporation as an
Indemnitee) Parent shall also be deemed, by virtue of its ownership of the
stock of the Surviving Corporation, to have suffered Indemnitee Damages.
For purposes of the Merger Agreement and this Escrow Agreement, each
statement or other item of information set forth in the Disclosure Schedule
or in any update to the Disclosure Schedule shall be deemed to be a
representation and warranty made by the Company in the Merger Agreement.
Notwithstanding anything to the contrary contained in the Merger Agreement
or this Escrow Agreement (or any related agreement or instrument described
above), (i) prior to the Effective Time, the Company shall be liable for
breaches of its representations, warranties and covenants; (ii) the
Designated Shareholders shall remain liable at all times (before and after
the Closing) for breaches of their representations, warranties and
covenants; and (iii) neither Parent nor Merger Sub shall have any liability
following the date that is six (6) months after the Closing for
indemnification under this Escrow agreement or otherwise for breaches of
representations, warranties or covenants under the Merger Agreement, except
with respect to covenants which pursuant to their terms are to be performed
subsequent to the date that is six (6) months after the Closing.
1.3 No Contribution; Etc. No party shall have or shall exercise or
assert (or attempt to exercise or assert), any right of contribution, right
of indemnity or other similar right or remedy against the Surviving
Corporation in connection with any actual or alleged inaccuracy in or
breach of any representation, warranty, covenant or obligation set forth in
the Merger Agreement, the Company Closing Certificate or any related
agreement or instrument (including without limitation this Escrow
Agreement).
1.4 Defense of Third Party Claims.
(a) Notice of Third Party Claim. In the event of the assertion or
commencement by any Person of any claim or Legal Proceeding (whether against the
Surviving Corporation, against Parent or against any other Person) with respect
to which any Indemnitee may have indemnification rights pursuant to Section
1.1(a), Parent shall promptly notify the Shareholder Representative thereof in
writing, but the failure to so notify the Shareholder Representative will not
limit any Indemnitee's rights to indemnification hereunder, except to the extent
the Shareholder Representative demonstrates that the defense of such action is
prejudiced by the failure to so give such notice.
(b) Procedure. The Shareholder Representative will have the right to
defend Parent against such claim or Legal Proceeding, unless such claim or Legal
Proceeding involves Taxes or any of the matters referred to in Section
1.1(a)(iii), with counsel of its choice reasonably satisfactory to Parent, so
long as the Shareholder Representative notifies Parent in writing within 10 days
after Parent has given notice of such claim or Legal Proceeding that the
Shareholder Representative will indemnify Parent from and against such claim or
Legal Proceeding and the Shareholder Representative conducts the defense of the
claim or Legal Proceeding actively and diligently. Claims and Legal Proceedings
involving Taxes or any of the matters referred to in Section 1.1(a)(iii) shall
be controlled by Parent; provided that if prior to the Initial Release Date
(defined below) the fees and expenses of Parent's or the Company's legal and
accounting advisors incurred in connection with Taxes or the matters referred to
in Section 1.1(a)(iii) exceed $200,000, then any such claims and Legal
Proceedings shall thereafter be controlled by the Shareholder Representative
unless Parent confirms to the Shareholder Representative in writing that any
additional such legal and accounting fees and
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expenses in excess of $200,000 incurred prior to the Initial Release Date in
connection with Taxes or the matters referred to in Section 1.1(a)(iii) shall
not be indemnifiable Damages hereunder.
(c) Conduct by Shareholder Representative. So long as the Shareholder
Representative is conducting the defense of the claim or Legal Proceeding in
accordance with Section 1.4(b), (A) Parent may retain separate co-counsel at its
sole cost and expense and participate in the defense of the claim or Legal
Proceeding, (B) Parent will not consent to the entry of any judgment or enter
into any settlement with respect to the claim or Legal Proceeding without the
prior written consent of the Shareholder Representative (not to be withheld
unreasonably), and (C) the Shareholder Representative will not consent to the
entry of any judgment or enter into any settlement with respect to the claim or
Legal Proceeding without the prior written consent of Parent (not to be withheld
unreasonably). Notwithstanding the foregoing, if Parent determines in good faith
that there is a reasonable probability that any claim or Legal Proceeding will
adversely affect it or any Indemnitee other than as a result of monetary damages
which would be indemnifiable under this Agreement, Parent may, by notice to the
Shareholder Representative, assume the exclusive right to defend, compromise or
settle such claim or Legal Proceeding and the provisions of Sections 1.4(d)(B)
and (C) shall apply, but the Parent will not consent to the entry of any
judgment or enter into any settlement with respect to such claim or Legal
Proceeding without the prior written consent of the Shareholder Representative
(not to be withheld unreasonably).
(d) Conduct by Parent. In the event any of the conditions in Section
1.4(b) is or becomes unsatisfied, (A) Parent may defend against, and consent to
the entry of any judgment or enter into any settlement with respect to, the
claim or Legal Proceeding in any manner it reasonably may deem appropriate, (B)
the Escrow Fund will reimburse Parent promptly and periodically for the costs of
defending against the claim or Legal Proceeding (including reasonable attorneys'
fees and expenses), and (C) the Escrow Fund will remain responsible for the
claim or Legal Proceeding to the fullest extent of the indemnification rights
pursuant to this Section 1.
1.5 Exercise of Remedies by Indemnitees Other Than Parent. No Indemnitee
(other than Parent or any successor thereto or assign thereof) shall be
permitted to assert any indemnification claim or exercise any other remedy under
this Escrow Agreement unless Parent (or any successor thereto or assign thereof)
shall have consented to the assertion of such indemnification claim or the
exercise of such other remedy.
SECTION 2. ESCROW
2.1 Shares to be Placed in Escrow. On the Closing Date, Parent shall
deliver to the Escrow Agent a certificate representing the Escrow Shares,
registered in the name of Escrow Agent, to be held in escrow in accordance with
this Escrow Agreement. The value of the Escrow Shares held in escrow hereunder
shall be determined pursuant to Section 6 herein and such value shall constitute
an indemnity fund (the "Escrow Fund"). The Escrow Shares shall be held as a
trust fund and shall not be subject to any setoff, lien, attachment, trustee
process or any other judicial process of any creditor of any party hereto. The
Escrow Agent agrees to accept delivery of the Escrow Shares and to hold the
Escrow Shares in escrow (the "Escrow"), subject to and in accordance with the
terms and conditions of this Escrow Agreement.
2.2 Security for Indemnification. The Escrow Fund shall be security for
the Indemnitees' indemnity rights described above, subject to the limitations
and in the manner provided in this Escrow Agreement.
2.3 Voting of Shares. On any matter brought before the Parent shareholders
for a vote following the Closing, the Escrow Agent shall vote the Escrow Shares
which are then in Escrow as directed by the Shareholders.
2.4 Dividends, Etc. Any distributions of cash, securities or other
property in respect of or in exchange for any of the Escrow Shares following the
Closing, shall be payable and distributed directly into Escrow and shall be held
as part of the Escrow Fund pursuant to this Agreement. At the time any of the
Escrow Shares are required to be released from the Escrow to any person pursuant
to this Escrow Agreement, any such distributions previously made in respect of
such released Escrow Shares and held in the Escrow shall be released from the
Escrow to such person.
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2.5 Transferability. The interests of the Shareholders in the Escrow and
in the Escrow Shares held in the Escrow shall not be assignable or transferable,
other than by operation of law. No transfer of any of such interests by
operation of law shall be recognized or given effect until Parent shall have
received written notice of such transfer.
2.6 Fractional Shares. No fractional shares of Parent Common Stock shall
be retained in or released from the Escrow pursuant to this Escrow Agreement. In
connection with any release of shares from the Escrow, the Escrow Agent shall be
permitted to "round down" or to follow such other rounding procedures as the
Escrow Agent reasonably determines to be appropriate in order to avoid (i)
retaining any fractional share in the Escrow or (ii) releasing any fractional
share from the Escrow.
SECTION 3. CLAIM PROCEDURES
3.1 Claim Notice. If Parent determines that it or any other Indemnitee is
entitled to indemnification hereunder, then Parent may, in its sole and absolute
discretion, without limitation of any other rights or remedies available at law
or in equity, deliver to the Shareholder Representative and the Escrow Agent a
written notice thereof (a "Claim Notice") setting forth (i) a brief description
of the circumstances supporting Parent's belief that such entitlement to
indemnification exists and (ii) to the extent possible, a non-binding,
preliminary estimate of the aggregate dollar amount of all Damages that have
arisen or may arise therefrom or are otherwise associated therewith (such
aggregate amount being referred to as the "Claim Amount").
3.2 Response Notice. Within thirty (30) days after the delivery of a Claim
Notice to the Shareholder Representative, the Shareholder Representative shall
deliver to Parent, with a copy to the Escrow Agent, a written notice (the
"Response Notice") containing: (i) instructions to the effect that shares of
Parent Common Stock having a Stipulated Value (as defined in Section 6 of this
Escrow Agreement) equal to the entire Claim Amount set forth in such Claim
Notice are to be released from the Escrow to Parent; or (ii) instructions to the
effect that shares of Parent Common Stock having a Stipulated Value equal to a
specified portion (but not the entire amount) of the Claim Amount set forth in
such Claim Notice are to be released from the Escrow to Parent, together with a
statement that the remaining portion of such Claim Amount is being disputed; or
(iii) a statement that the entire Claim Amount set forth in such Claim Notice is
being disputed. The Shareholder Representative may contest the release of any
part of the Escrow Fund only based upon a good faith belief that such portion of
the Claim Amount does not constitute an amount for which any Indemnitee is
entitled to seek indemnification under this Agreement. If no Response Notice is
received by Parent from the Shareholder Representative within thirty (30) days
after the delivery of a Claim Notice to the Shareholder Representative, then the
Shareholder Representative shall be deemed to have given instructions that
shares of Parent Common Stock having a Stipulated Value equal to the entire
Claim Amount set forth in such Claim Notice are to be released to Parent from
the Escrow. Notwithstanding any other provision of this Agreement, in no event
shall the Shareholders be entitled to or shall there occur any setoff or
deduction from the Escrow Fund or any Claim Amount with regard to actual or
alleged Shareholder Damages.
3.3 Release of Shares to Parent.
(a) Agreed Claims. If the Shareholder Representative gives (or is deemed
to have given) instructions that shares of Parent Common Stock having a
Stipulated Value equal to the entire Claim Amount set forth in a Claim Notice
are to be released from the Escrow to Parent, then the Escrow Agent shall
promptly transfer, deliver and assign to Parent such number of Escrow Shares
held in the Escrow as have a Stipulated Value equal to the Claim Amount (or such
lesser amount of the Escrow Fund as is then held in the Escrow).
(b) Partially Contested Claims. If a Response Notice delivered by the
Shareholder Representative in response to a Claim Notice contains instructions
to the effect that shares of Parent Common Stock having a Stipulated Value equal
to a specified portion (but not the entire amount) of the Claim Amount set forth
in such Claim Notice are to be released from the Escrow to Parent, then (i) the
Escrow Agent shall promptly transfer, deliver and assign to Parent such number
of Escrow Shares held in the Escrow as have a Stipulated Value equal to such
specified portion of such Claim Amount, and (ii) the procedures set forth in
Sections 3.3(c) and (d) of this Escrow Agreement, as applicable, shall be
followed with respect to the remaining portion of such Claim Amount.
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(c) Contested Amounts. In the event that any Response Notice indicates
that there is a dispute as to all or any portion of a Claim Amount (a "Contested
Amount"), the Shareholder Representative and Parent shall for a period of not
more than thirty (30) days attempt in good faith to resolve such Contested
Amount.
(d) Arbitration. If no such resolution can be reached within such thirty
(30) day period, either Parent or the Shareholder Representative may demand
arbitration of the matter through binding and nonappealable arbitration
administered by the Judicial Arbitration & Mediation Services, Inc. ("JAMS") in
San Diego County, California. Any such arbitration shall be conducted before a
single arbitrator to be appointed by the parties from JAMS' roster. If the
parties fail to agree as to the identity of the single arbitrator, JAMS shall
have the right to make such appointment. The conduct of the arbitration hearing
and discovery prior thereto shall be in accordance with the California Code of
Civil Procedure, California Rules of Court, and California Rules of Evidence.
There shall be limited discovery prior to the arbitration hearing, subject to
the discretion of the arbitrator, as follows: (a) exchange of witness lists and
copies of documentary evidence and documents related to or arising out of the
issues to be arbitrated, (b) depositions of all party witnesses, and (c) such
other depositions as may be allowed by the arbitrator upon a showing of good
cause. Parent and the Shareholder Representative shall bear equally the fees and
expenses of the arbitrator. The arbitrator shall decide the matter to be
arbitrated pursuant hereto within sixty (60) days after the appointment of the
arbitrator.
The arbitrator's decision shall relate solely to whether Parent is entitled
to receive the number of Escrow Shares equal in value to the Contested Amount
(or a portion thereof) pursuant to the applicable terms of the Merger Agreement
and this Agreement. The final decision of the arbitrator shall be furnished to
Parent and the Shareholder Representative in writing and shall constitute a
conclusive determination of the issue in question, binding upon Parent, the
Shareholders, the Shareholder Representative and the Escrow Fund, and shall not
be contested by any of them. Such decision may be used in a court of law only
for the purpose of seeking enforcement of the arbitrator's award.
After delivery of a Response Notice that the Claim Amount is contested,
Escrow Shares equal in value to the Contested Amount shall continue to be held
in the Escrow Fund, notwithstanding the occurrence of a Release Date (defined
below), until (i) delivery of a copy of a settlement agreement executed by
Parent and the Shareholder Representative setting forth instructions as to the
release of Escrow Shares from the Escrow Fund, if any, that shall be made with
respect to the Contested Amount or (ii) delivery of a copy of the final award of
the arbitrator setting forth instructions as to the release of Escrow Shares
from the Escrow Account, if any, that shall be made with respect to the
Contested Amount. In no event shall Parent have any liability for any decline in
value of the Escrow Shares while such Shares are being held in Escrow pursuant
to this Agreement.
SECTION 4. SHAREHOLDER REPRESENTATIVE
4.1 Shareholder Representative.
(a) Initial Representative; Authority. The Shareholders shall be
represented hereunder by Robert W. Brandel as the Shareholder Representative.
The Shareholder Representative is hereby empowered by each Shareholder to give
and receive notices and communications, to authorize delivery to Parent of
Parent Common Stock or other property placed in Escrow in satisfaction of claims
by any Indemnitee, to object to such deliveries, to agree to, negotiate, enter
into settlements and compromises of, demand arbitration of and comply with
awards of arbitrators with respect to such claims and to take any and all
actions necessary or appropriate in the judgment of the Shareholder
Representative for the accomplishment of the foregoing.
(b) Successor Representative. In the event the Shareholder Representative
shall die or resign or otherwise terminate his status as such, a successor shall
be appointed by the Shareholders. The Shareholder Representative shall receive
no compensation for his services.
(c) Limitation of Liability. The Shareholder Representative shall not be
liable to the Shareholders for any act done or omitted hereunder while acting in
good faith and in the exercise of reasonable judgment. The Escrow Fund shall
indemnify and hold the Shareholder Representative harmless against any loss,
liability, or expenses incurred by him in his capacity as such, except to the
extent such loss, liability or expense is due to
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bad faith or negligent conduct. The Shareholder Representative shall be entitled
to reimbursement by the Escrow Fund, for attorneys fees and other out-of-pocket
expenses incurred by him in accordance with this Escrow Agreement.
(d) Reliance on Representative. A decision by the Shareholder
Representative shall constitute a decision of all of the Shareholders, and shall
be final, binding and conclusive upon each of them. Parent, Merger Sub, the
Company, any other Indemnitee and the Escrow Agent may rely upon any act,
decision, consent or instruction of the Shareholder Representative as being the
act, decision, consent or instruction of each and all of the Shareholders; and
Parent, Merger Sub, the Company, any other Indemnitee and the Escrow Agent are
hereby relieved from any liability to any Person for any acts done by them in
accordance with any act, decision, consent or instruction of the Shareholder
Representative.
SECTION 5. RELEASE OF SHARES TO SHAREHOLDERS
5.1 Shares to be Released.
(a) Initial Release. Subject to Section 3 of this Escrow Agreement, on the
date that is one (1) year following the Closing Date (the "Initial Release
Date"), the Initial Release Shares (defined below) shall be released from Escrow
and transferred, delivered and assigned by the Escrow Agent to the Shareholders
pursuant to Section 5.2. Any Escrow Shares subject to any Claim Notices prior to
the Initial Release Date shall be promptly distributed following satisfaction of
any Claims specified therein to the extent of the excess of the Escrow Shares
actually used in satisfaction of such Claims.
(b) Subsequent Release. Subject to Section 3 of this Escrow Agreement, on
the Subsequent Release Date (defined below), all Escrow Shares then held in
Escrow, less the number of Escrow Shares subject to any and all Claim Notices
delivered to the Shareholder Representative prior to the Subsequent Release
Date, shall be released from Escrow and transferred, delivered and assigned by
the Escrow Agent to the Shareholders pursuant Section 5.2. The Initial Release
Date and the Subsequent Release Date are hereinafter referred to collectively as
the "Release Date." Any Escrow Shares subject to any Claim Notices prior to the
Subsequent Release Date shall be promptly distributed following satisfaction of
any Claims specified therein to the extent of the excess of the Escrow Shares
actually used in satisfaction of such Claims.
(c) Limitation. Notwithstanding any other provision of this Escrow
Agreement, the following shall apply:
(i) Except for claims pursuant to Section 1.1(a)(iii) related to any
allocation or purported allocation under the DCD ESOP, in no event may any
claim for indemnification pursuant to this Escrow Agreement be made on or
after Initial Release Date; and
(ii) In no event may any claim for indemnification pursuant to Section
1.1(a)(iii) related to any allocation or purported allocation under the DCD
ESOP, be made on or after the Subsequent Release Date.
(d) Definitions. For purposes of this Escrow Agreement, the following
definitions shall apply:
(i) "Initial Release Shares" shall mean the number of Escrow Shares
equal to the difference, if any (but not less than zero), between (A) the
total number of Escrow Shares deposited into Escrow on the Closing Date
less (B) the sum of (I) Escrow Shares having a Stipulated Value equal to
the ESOP Reserve Amount (defined below) and (II) the number of Escrow
Shares subject to Claim Notices delivered to the Shareholder Representative
prior to the Initial Release Date.
(ii) "ESOP Reserve Amount" shall mean (A) $750,000 prior to such date,
if ever, following the Closing as of which (I) the national office of the
Internal Revenue Service ("IRS") has delivered to Parent or the Company,
pursuant to the IRS's voluntary compliance resolution program, a compliance
letter with respect to the reallocation of contributions to the DCD ESOP in
order to comply with Section 409(n) of the Internal Revenue Code (the
"Compliance Letter") and (II) the Company has received a favorable
determination letter from the appropriate key district of the IRS as to the
qualification of the DCD ESOP under Sections 401(a) and 4975(e)(7) of the
Code (provided that the Company has
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applied for such a determination letter within four (4) months after the
Closing) and (B) $500,000 subsequent to the delivery of such Compliance
Letter and receipt of such determination letter (if applied for within such
four (4) months).
If the Compliance Letter is delivered to Parent or the Company and
such determination letter (if applied for within such four (4) months) is
received by the Company after the Initial Release Date but prior to the
Subsequent Release Date, then as promptly as practicable after the delivery
of the Compliance Letter, the Escrow Agent shall release such number of
additional Escrow Shares so that the shares actually released on the
Subsequent Release Date plus such number of additional Escrow Shares equals
the number of Escrow Shares that would have been released if the Compliance
Letter had been received prior to the Subsequent Release Date.
(iii) "Subsequent Release Date" shall mean the earliest of (A) the
date as of which all applicable statutes of limitations for the assessment
of income tax and any related fines and penalties for 1994 and all prior
years (including extensions of any such statute of limitations by reason of
the filing of any amended tax returns or otherwise) has expired, (B) three
(3) years after the Closing or (C) the settlement of any and all Company
liability related to any allocation or purported allocation under DCD ESOP.
5.2 Procedures for Releasing Shares. Any distribution of all or a portion
of the Escrow Shares to the Shareholders shall be made in accordance with the
terms of the Merger Agreement and in proportion to the number of shares of
Parent Common Stock received by each Shareholder pursuant to the Merger.
SECTION 6. VALUATION OF SHARES HELD IN ESCROW
For purposes of this Escrow Agreement, the "Stipulated Value" of the Escrow
Shares shall be equal to the number of Escrow Shares then held in the Escrow
Fund multiplied by the average of the last quoted sales prices per share of
Buyer's Common Stock as traded on the NASDAQ National Market for the twenty (20)
market trading days immediately preceding the Closing Date (the "Average
Price"). The number of Escrow Shares to be released from the Escrow Fund to
satisfy any claim for Damages hereunder shall be determined by dividing the
Claim Amount, or the agreed portion of the Claim Amount, if only part of the
Claim Amount is disputed, by the Average Price.
SECTION 7. FEES AND EXPENSES
7.1 Escrow Fees. The Escrow Agent will be entitled to reimbursement for
ordinary fees and expenses of the Escrow Agent, and for extraordinary expenses,
incurred in performance of its duties hereunder. Each of (i) Parent and (ii) the
Escrow Fund shall be liable for one-half (1/2) of such amounts; and Parent
shall make all such payments in full and shall be entitled to reimbursement from
the Escrow Shares of one-half of all such fees and expenses, to the extent the
Escrow Fund's share is paid by Parent.
7.2 Other Fees. Except as may otherwise be provided herein, all expenses
(including attorneys' fees) incurred by any Shareholder in connection with this
Escrow Agreement shall be borne by such Shareholder.
7.3 Reimbursement of Certain Costs. Upon a notice in writing delivered to
the Escrow Agent by Parent in respect of Section 7.1 or Section 8.3, the Escrow
Agent shall transfer, deliver and assign to Parent, in reimbursement of fees and
expenses pursuant to the last sentence of Section 7.1 or the second sentence of
Section 8.3, such number of Escrow Shares held in the Escrow which have a
Stipulated Value equal to the amount to be reimbursed.
SECTION 8. DUTIES OF THE ESCROW AGENT; LIMITATION OF ESCROW AGENT'S LIABILITY.
8.1 Duties. The sole duty of the Escrow Agent, other than as herein
specified, shall be to receive and hold the Escrow Shares, subject to
disbursement in accordance with this Escrow Agreement, and the Escrow Agent
shall be under no duty to determine whether Parent, the Shareholder
Representative or the Designated Shareholders are complying with the
requirements of this Escrow Agreement or any other agreement. The
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Escrow Agent shall not be liable for losses due to acts of God, war, loss of
electrical power or the failure of communication devices.
8.2 Limitation of Liability. The Escrow Agent shall incur no liability
with respect to any action taken or suffered by it in reliance upon any notice,
direction, instruction, consent, statement or other documents believed by it to
be genuine and duly authorized, nor for other action or inaction except its own
willful misconduct or negligence. The Escrow Agent shall not be responsible for
the validity or sufficiency of this Escrow Agreement. In all questions arising
under this Escrow Agreement, the Escrow Agent may rely on the advice of counsel,
and for anything done, omitted or suffered in good faith by the Escrow Agent
based on such advice the Escrow Agent shall not be liable to anyone. The Escrow
Agent shall not be required to take any action hereunder involving any expense
unless the payment of such expense is made or provided for in a manner
reasonably satisfactory to it.
8.3 Indemnity. Parent and the Escrow Fund, jointly and severally, shall
indemnify the Escrow Agent for, and hold it harmless against, any loss,
liability or expense incurred without negligence or willful misconduct on the
part of Escrow Agent, arising out of or in connection with its carrying out of
its duties hereunder. As among themselves, each of Parent and the Escrow Fund
shall be liable for one-half (1/2) of such amounts and Parent shall be entitled
to elect reimbursement from the Escrow Shares of all or part of the Escrow
Fund's share of any such loss, liability or expense, if any of such share is
paid by Parent.
SECTION 9. GENERAL
9.1 Other Agreements. Nothing in this Escrow Agreement is intended to
limit any of Parent's or the Shareholders' rights, or any obligation of any
Designated Shareholder or of Parent under the Merger Agreement (or any agreement
entered into in connection with the transactions contemplated by the Merger
Agreement), except as expressly provided herein.
9.2 Governing Law. This Escrow Agreement shall be governed by and
construed in accordance with the laws of the State of California, without giving
effect to the conflict of laws provisions thereunder.
9.3 Assignment; Binding Upon Successors and Assigns. None of the
Shareholders may assign any of his, her or its rights or obligations hereunder
without the prior written consent of the Parent. This Escrow Agreement will be
binding upon and inure to the benefit of the parties hereto, the Shareholders
and their respective successors and permitted assigns.
9.4 Severability. If any provision of this Escrow Agreement, or the
application thereof, is for any reason and to any extent invalid or
unenforceable, the remainder of this Escrow Agreement and application of such
provision to other persons or circumstances will be interpreted so as reasonably
to effect the intent of the parties hereto. The parties further agree to replace
such void or unenforceable provision of this Escrow Agreement with a valid and
enforceable provision that will achieve, to the greatest extent possible, the
economic, business and other purposes of the void or unenforceable provision.
9.5 Counterparts. This Escrow Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original and all of which
shall constitute one and the same instrument. This Escrow Agreement will become
binding when one or more counterparts hereof, individually or taken together,
bear the signatures of all the parties reflected hereon as signatories.
9.6 Amendment and Waivers. Any term or provision of this Escrow Agreement
may be amended, and the observance of any term of this Escrow Agreement may be
waived (either generally or in a particular instance and either retroactively or
prospectively) only by a writing signed by the party to be bound thereby;
provided that this Escrow Agreement may be amended on behalf of all of the
Shareholders by either (i) the Shareholder Representative or (ii) a majority in
interest (of the Parent Common Stock received by such Persons in connection with
the Merger) of the Designated Shareholders. Notwithstanding any rights that may
be created in any third party under the terms of this Escrow Agreement, no such
amendment or waiver will require the consent of such third party to be
effective. The waiver by a party of any breach hereof or default in the
performance hereof will not be deemed to constitute a waiver of any other
default or any succeeding breach or default.
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9.7 Notices. All notices and other communications pursuant to this Escrow
Agreement shall be in writing and deemed to be sufficient if contained in a
written instrument and shall be deemed given if delivered personally,
telecopied, sent by nationally-recognized overnight courier or mailed by
registered or certified mail (return receipt requested), postage prepaid, to the
parties at the following address (or at such other address for a party as shall
be specified by like notice):
<TABLE>
<S> <C>
If to Parent to: DATAWORKS CORPORATION
5910 Pacific Center Boulevard, Suite 300
San Diego, CA 92121
Attn: Norman Farquhar
Telephone: (619) 546-9600
Fax: (619) 546-9777
With a copy to: Cooley Godward Castro Huddleson & Tatum
4365 Executive Drive, Suite 1100
San Diego, CA 92121
Attention: Thomas A. Coll, Esq.
Telephone: (619) 550-6000
Fax: (619) 455-3555
If to the Shareholder
Representative: Robert W. Brandel
DCD Corporation
2000 Interchange Tower
600 Highway 169
Minneapolis, MN 55426
Telephone: (612) 544-6825
Fax: (612) 544-7077
If to Escrow Agent to: ChaseMellon Shareholder Services
------------------------------------------
------------------------------------------
Attn: Michael Dzieciolowski
Telephone: (818) 971-4751
Fax: (818) 971-4775
</TABLE>
All such notices and other communications shall be deemed to have been
received (a) in the case of personal delivery, on the date of such delivery, (b)
in the case of a telecopy, when the party receiving such copy shall have
confirmed receipt of the communication, (c) in the case of delivery by
nationally-recognized overnight courier, on the business day following dispatch,
and (d) in the case of mailing, on the third business day following such
mailing.
9.8 Construction of Agreement. This Escrow Agreement has been negotiated
by the respective parties hereto and their attorneys and the language hereof
will not be construed for or against either party. A reference to a Section or
an attachment will mean a Section in, or attachment to, this Escrow Agreement
unless otherwise explicitly set forth. The titles and headings herein are for
reference purposes only and will not in any manner limit the construction of
this Escrow Agreement, which will be considered as a whole.
9.9 Further Assurances. Each party agrees to cooperate fully with the
other parties and to execute such further instruments, documents and agreements
and to give such further written assurances as may be reasonably requested by
any other party to evidence and reflect the transactions described herein and
contemplated hereby and to carry into effect the intents and purposes of this
Escrow Agreement.
9.10 Absence of Third Party Beneficiary Rights. No provisions of this
Escrow Agreement are intended, nor will be interpreted, to provide or create any
third party beneficiary rights or any other rights of any kind in any client,
customer, affiliate, shareholder (including the Shareholders), partner or any
party hereto or any
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other person or entity unless specifically provided otherwise herein, and,
except as so provided, all provisions hereof will be personal solely between the
parties to this Escrow Agreement.
9.11 Entire Agreement. This Escrow Agreement and the Merger Agreement and
the attachments hereto and thereto constitute the entire understanding and
agreement of the parties hereto with respect to the subject matter hereof and
supersede all prior and contemporaneous agreements or understandings,
inducements or conditions, express or implied, written or oral, between the
parties with respect hereto. The express terms hereof control and supersede any
course of performance or usage of the trade inconsistent with any of the terms
hereof.
9.12 Resignation or Replacement of Escrow Agent. Parent may substitute a
successor Escrow Agent which shall be a bank with assets at least as great as
the initial Escrow Agent or else shall be an institution approved by the
Shareholder Representative, such approval not to be unreasonably withheld, for
the Escrow Agent upon thirty days advance written notice to the Shareholder
Representative and the Escrow Agent. Escrow Agent may resign upon 30 days
advance written notice to Parent and the Shareholder Representative. Within such
30 day period, Parent shall appoint a successor Escrow Agent in accordance with
this Section 9.12. If Parent has not appointed a successor Escrow Agent within
such period, the Escrow Agent may petition any court of competent jurisdiction
to name a successor escrow agent.
IN WITNESS WHEREOF, the parties have executed this Escrow Agreement as of
August 16, 1996.
DATAWORKS CORPORATION
a California corporation
By:
--------------------------------------
Stuart W. Clifton, President and
Chief Executive Officer
--------------------------------------
Dwayne E. Borg
--------------------------------------
Richard D. Borg
--------------------------------------
William J. Borg
--------------------------------------
Robert W. Brandel
--------------------------------------
CHASEMELLON SHAREHOLDER SERVICES,
L.L.C.
By:
--------------------------------------
Michael Dzieciolowski
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APPENDIX B
[LETTERHEAD OF FURMAN SELZ LLC]
August 16, 1996
Board of Directors
DataWorks Corporation
5910 Pacific Center Boulevard, Suite 300
San Diego, CA 92121
Ladies and Gentlemen:
We understand that DataWorks Corporation (the "Company") is considering
entering into an Agreement and Plan of Merger and Reorganization (the "Merger
Agreement") dated August 16, 1996 which has been furnished to us whereby, among
other things, (i) Acquisition Sub., Inc. ("Merger Sub"), a wholly owned
subsidiary of the Company, shall be merged with and into DCD Corporation
("DCD"), (ii) the separate existence of Merger Sub shall cease, and (iii) the
shareholders of DCD shall receive up to an aggregate 1,800,000 shares (the
"Merger Consideration") of the Company's Common Stock (the "Proposed
Transaction"), provided that 10% of such shares will be held in escrow as
security for certain obligations pursuant to an Escrow and Indemnity Agreement.
The terms and conditions of the Proposed Transactions are set forth in more
detail in the Merger Agreement dated August 16, 1996.
We have been asked by the Board of Directors of the Company to render our
opinion with respect to the fairness, from a financial point of view, to the
Company, of the consideration to be paid in the Proposed Transaction.
In conducting our analysis and arriving at our opinion as expressed herein,
we have reviewed and analyzed, among other things, the following:
<TABLE>
<S> <C>
(i) the Merger Agreement dated August 16, 1996 and the specific terms of the Proposed
Transaction;
(ii) DCD's financial and operating information for the three year period ended December
31, 1995 and the six month period ended June 30, 1996;
(iii) certain financial and operating information regarding the business, operations and
prospects of DCD, including forecasts and projections, provided to us by the
managements of DCD and the Company;
(iv) the Company's Annual Reports to shareholders and Form 10-Ks for the fiscal years
ended December 31, 1992 through 1995 and the Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996;
(v) certain financial and operating information regarding the business, operations and
prospects of the Company, including forecasts and projections, provided to us by
the management of the Company;
(vi) the trading history of the Company's Common Stock from its initial public offering
on October 27, 1995 through August 5, 1996 and a comparison of that trading
history with those of other companies that we deemed relevant;
(vii) a comparison of the historical and projected financial results and financial
condition of DCD with those of other companies and businesses that we deemed
relevant;
(viii) a comparison of the historical and projected financial results and financial
condition of the Company with those of other companies and businesses that we
deemed relevant; and
(ix) a comparison of the financial terms of the Proposed Transaction with the financial
terms of certain other recent transactions that we deemed relevant.
</TABLE>
In addition, in arriving at our opinion, we have held discussions with
DCD's and the Company's managements concerning their businesses, operations,
assets, financial conditions and prospects, including the
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prospects of the Company after the Proposed Transaction has been consummated. We
also undertook such other studies, analyses and investigations as we deemed
appropriate.
In arriving at our opinion, although we have visited certain properties and
facilities of the Company and DCD, we have not made, obtained or assumed any
responsibility for any independent evaluation or appraisal of such properties
and facilities or of the assets and liabilities (contingent or otherwise) of the
Company or DCD. We have assumed and relied upon the accuracy and completeness of
the financial and other information supplied to or otherwise used by us in
arriving at our opinion and have not attempted independently to verify, or
undertaken any obligation to verify, such information. We have further relied
upon the assurances of the managements of DCD and the Company that they were not
aware of any facts that would make such information inaccurate or misleading. In
addition, we have assumed that the forecasts and projections provided to Furman
Selz by DCD and the Company represent the best currently available estimates and
judgment of DCD's and the Company's managements as to the future financial
condition and results of operations of DCD and the Company, and have assumed
that such forecasts and projections have been reasonably prepared based on such
currently available estimates and judgments. We assume no responsibility for and
express no view as to such forecasts and projections or the assumptions on which
they are based. We further have assumed the Proposed Transaction will qualify as
a tax free reorganization within the meaning of Section 368(a) of the Internal
Revenue Code, as amended, and that for accounting purposes, the Merger is
intended to be accounted for as a pooling-of-interests.
We have also taken into account our assessment of general economic, market
and financial conditions and our experience in similar transactions, as well as
our experience in securities valuation in general. Our opinion is necessarily
based upon conditions as they exist and can be evaluated on the date hereof.
We do not express any view as to what the value of the Company's stock will
be when issued to DCD stockholders pursuant to the Proposed Transaction, or the
price at which the Company's stock will trade prior to or subsequent to the
closing of the Proposed Transaction. This letter is for the benefit and use of
the Board of Directors of the Company in its consideration of the Proposed
Transaction. This letter does not constitute a recommendation of the Proposed
Transaction over any other alternative transactions which may be available to
the Company and does not address the underlying business decision of the Board
of Directors of the Company to proceed with or effect the Proposed Transaction.
Furthermore, this letter does not constitute a recommendation by our firm to any
stockholder to vote in favor of the Proposed Transaction.
As you are aware, we have acted as financial advisor to the Company in
connection with the Proposed Transaction and will receive a fee for our services
which is contingent upon the consummation of the Proposed Transaction. We have
previously served as the managing underwriter in the Company's initial public
offering of 2,500,000 shares of Common Stock on October 27, 1995. We also, from
time to time, may in the future perform certain other financial advisory
services for the Company for which we may receive a fee. In the ordinary course
of our business, we may trade in the equity securities of the Company for our
own account and for the accounts of our customers and, accordingly, may at any
time hold a long or short position in such securities. The Company has agreed to
indemnify us for certain liabilities that may arise out of the rendering of this
opinion.
Based upon the subject to the foregoing, it is our opinion as investment
bankers that, as of the date hereof, the Merger Consolidation to be paid by the
Company in the Proposed Transaction is fair, from a financial point of view, to
the Company.
Very truly yours,
Furman Selz LLC
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APPENDIX C
CALIFORNIA GENERAL CORPORATION LAW
CHAPTER 13. DISSENTERS' RIGHTS
1300. [SHORT FORM MERGER; PURCHASE OF SHARES AT FAIR MARKET VALUE;
"DISSENTING SHARES" AND DISSENTING SHAREHOLDER]. -- (a) If the approval of the
outstanding shares (Section 152) of a corporation is required for a
reorganization under subdivisions (a) and (b) or subdivision (e) or (f) of
Section 1201, each shareholder of the corporation entitled to vote on the
transaction and each shareholder of a subsidiary corporation in a short-form
merger may, by complying with this chapter, require the corporation in which the
shareholder holds shares to purchase for cash at their fair market value the
shares owned by the shareholder which are dissenting shares as defined in
subdivision (b). The fair market value shall be determined as of the day before
the first announcement of the terms of the proposed reorganization or short-form
merger, excluding any appreciation or depreciation in consequence of the
proposed action, but adjusted for any stock split, reverse stock split, or share
dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or
short-form merger either (A) listed on any national securities exchange
certified by the Commissioner of Corporations under subdivision (o) of
Section 25100 or (B) listed on the list of OTC margin stocks issued by the
Board of Governors of the Federal Reserve System, and the notice of meeting
of shareholders to act upon the reorganization summarizes this section and
Sections 1301, 1302, 1303 and 1304; provided, however, that this provision
does not apply to any shares with respect to which there exists any
restriction on transfer imposed by the corporation or by any law or
regulation; and provided, further, that this provision does not apply to
any class of shares described in 3 subparagraph (A) or (B) if demands for
payment are filed with respect to 5 percent or more of the outstanding
shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted
in favor of the reorganization or, (B) if described in subparagraph (A) or
(B) or paragraph (1) (without regard to the provisos in that paragraph),
were voted against the reorganization, or which were held of record on the
effective date of a short-form merger; provided, however, that subparagraph
(A) rather than subparagraph (B) of this paragraph applies in any case were
the approval required by Section 1201 is sought by written consent rather
than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the
recordholder of dissenting shares and includes a transferee of record.
1301. [DISSENTER'S RIGHTS; DEMAND ON CORPORATION FOR PURCHASE OF
SHARES]. -- (a) If, in the case of a reorganization, any shareholders of a
corporation have a right under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivisions (b) thereof, to require the corporation
to purchase their shares for cash, such corporation shall mail to each such
shareholder a notice of the approval of the reorganization by its outstanding
shares (Section 152) within 10 days after the date of such approval, accompanied
by a copy of Sections 1300, 1302, 1303, 1304 and this section, a statement of
the price determined by the corporation to represent the fair market value of
the dissenting shares, and a brief description of the procedure to be followed
if the shareholder desires to exercise the shareholder's right under such
sections. The statement of price constitutes an offer by the corporation to
purchase at the price stated any
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dissenting shares as defined in subdivisions (b) of Section 1300, unless they
lose their status as dissenting shares under Section 1309.
(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares describe in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of
record by the shareholder which the shareholder demands that the corporation
purchase and shall contain a statement of what such shareholder claims to be the
fair market value of those shares as of the day before the announcement of the
proposed reorganization or shortform merger. The statement of fair market value
constitutes an offer by the shareholder to sell the shares at such price.
1302. [DISSENTING SHARES, STAMPING OR ENDORSING]. -- Within 30 days after
the date on which notice of the approval by the outstanding shares or the notice
pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, the
shareholder shall submit to the corporation at its principal office or at the
office of any transfer agent thereof, (a) if the shares are certificated
securities, the shareholder's certificates representing any shares which the
shareholder demands that the corporation purchase, to be stamped or endorsed
with a statement that the shares are dissenting shares or to be exchanged for
certificates of appropriate denomination so stamped or endorsed or (b) if the
shares are uncertificated securities, written notice of the number of shares
which the shareholder demands that the corporation purchase. Upon subsequent
transfers of the dissenting shares on the books of the corporation the new
certificates, initial transaction statement, and other written statements issued
therefor shall bear a like statement, together with the name of the original
dissenting holder of the shares.
1303. [DISSENTING SHAREHOLDER ENTITLED TO AGREED PRICE WITH INTEREST; TIME
OF PAYMENT]. -- (a) If the corporation and the shareholder agree that the shares
are dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the fair
market value of any dissenting shares as between the corporation and the holders
thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount thereof
has been agreed or within 30 days after any statutory or contractual conditions
to reorganization are satisfied, whichever is later, and in the case of
certificated securities, subject to surrender of the certificates therefor,
unless provided otherwise by agreement.
1304. [DISSENTERS ACTIONS; JOINDER; CONSOLIDATION; APPOINTMENT OF
APPRAISERS]. -- (a) If the corporation denies that the shares are dissenting
shares, or the corporation and the shareholder fail to agree upon the fair
market values of the shares, then the shareholder demanding purchase of such
shares as dissenting shares or any interested corporation, within six months
after the date on which notice of the approval by the outstanding shares
(Section 152) or notice pursuant to subdivision (i) of Section 1110 was mailed
to the shareholder, but not thereafter, may file a complaint in the superior
court of the proper county praying the court to determine whether the shares are
dissenting shares or the fair market value of the dissenting shares or both or
may intervene in any action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
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(c) On the trial of the action, the court shall determine the issues. If
the status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
1305. [APPRAISERS DUTY AND REPORT; COURT JUDGMENT; PAYMENT; APPEAL; COSTS
OF ACTION]. -- (a) If the court appoints an appraiser or appraisers, they shall
proceed forthwith to determine the fair market value per share. Within the time
fixed by the court, the appraisers, or a majority of them, shall make and file a
report in the office of the clerk of the court. Thereupon, on the motion of any
party, the report shall be submitted to the court and considered on such
evidence as the court considers relevant. If the court finds the report
reasonable, the court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a
report within 10 days from the date of their appointment or within such further
time as may be allowed by the court or the report is not confirmed by the court,
the court shall determine the fair market vale of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market value
of each dissenting share multiplied by the number of dissenting shares which any
dissenting shareholder who is a party, or who has intervened, is entitled to
require the corporation to purchase, with interest thereon at the legal rate
from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
undercertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for the
shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Section 1300,
1301 and 1302 if the value awarded by the court for the shares is more than 125
percent of the price offered by the corporation under subdivision (a) of Section
1301).
1306. [DISSENTING SHAREHOLDERS; EFFECT OF PREVENTION OF PAYMENT OF
FAIRMARKET VALUE]. -- To the extent that the provisions of Chapter 5 prevent the
payment to any holders of dissenting shares of their fair market value, they
shall become creditors of the corporation for the amount thereof together with
interest at the legal rate on judgments until the date of payment, but
subordinate to all other creditors in any liquidation proceeding, such debt to
be payable when permissible under the provisions of Chapter 5.
1307. [DISSENTING SHARES, DISPOSITION OF DIVIDENDS]. -- Cash dividends
declared and paid by the corporation upon the dissenting shares after the date
of approval of the reorganization by the outstanding shares (Section 152) and
prior to payment for the shares by the corporation shall be credited against the
total amount to be paid by the corporation therefor.
1308. [DISSENTING SHARES, RIGHTS AND PRIVILEGES]. -- Except as expressly
limited in this chapter, holders of dissenting shares continue to have all the
rights and privileges incident to their shares, until the fair market value of
their shares is agreed upon or determined. A dissenting shareholder may not
withdraw a demand for payment unless the corporation consents thereto.
1309. [DISSENTING SHARES, LOSS OF STATUS]. -- Dissenting shares lose their
status as dissenting shares and the holders thereof cease to be dissenting
shareholders and cease to be entitled to require the corporation to purchase
their shares upon the happening of any of the following:
(a) The corporation abandons the reorganization. Upon abandonment of
the reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter
all necessary expenses incurred in such proceedings and reasonable
attorneys' fees.
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(b) The shares are transferred prior to their submission for
endorsement in accordance with Section 1302 or are surrendered for
conversion into shares of another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon
the status of the shares as dissenting shares or upon the purchase price of
the shares, and neither files a complaint or intervenes in a pending action
as provided in Section 1304, within six months after the date on which
notice of the approval by the outstanding shares or notice pursuant to
subdivisions (i) of Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
1310. [SUSPENSION OF CERTAIN PROCEEDINGS WHILE LITIGATION IS
PENDING]. -- If litigation is instituted to test the sufficiency of regularity
of the votes of the shareholder in authorizing a reorganization, any proceedings
under Section 1304 and 1305 shall be suspended until final determination of such
litigation.
1311. [CHAPTER INAPPLICABLE TO CERTAIN CLASSES OF SHARES]. -- This chapter,
except Section 1312, does not apply to classes of shares whose terms and
provisions specifically set forth the amount to be paid in respect to such
shares in the event of a reorganization or merger.
1312. [VALIDITY OF REORGANIZATION OR SHORT FORM MERGER, ATTACK ON;
SHAREHOLDERS' RIGHTS; BURDEN OF PROOF]. -- (a) No shareholder of a corporation
who has a right under this chapter to demand payment of cash for the shares held
by the shareholder shall have any right or law or in equity to attack the
validity of the reorganization or short-form merger, or to have the
reorganization or short-form merger set aside or rescinded, except in an action
to test whether the number of shares required to authorize or approve the
reorganization have been legally voted in favor thereof; but any holder of
shares of a class whose terms and provisions specifically set forth the amount
to be paid in respect to them in the event of a reorganization or short-form
merger is entitled to payment in accordance with those terms and provisions or,
if the principal terms of the reorganization are approved pursuant to
subdivision(b) of Section 1202, is entitled to payment in accordance with the
terms and provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash for
such shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or short-form
merger or to have the reorganization or short-form merger set aside or
rescinded, the shareholder shall not thereafter have any right to demand payment
of cash for the shareholder's shares pursuant to this chapter. The court in any
action attacking the validity of the reorganization or short-form merger or to
have the reorganization or short-form merger set aside or rescinded shall not
restrain or enjoin the consummation of the transaction except upon 10 days,
prior notice to the corporation and upon a determination by the court that
clearly no other remedy will adequately protect the complaining shareholder or
the class of shareholders of which such shareholder is a member.
(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable as
to the shareholders of any party so controlled.
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APPENDIX D
MINNESOTA BUSINESS CORPORATION ACT
302A.471 RIGHTS OF DISSENTING SHAREHOLDERS. SUBDIVISION 1. -- ACTIONS
CREATING RIGHTS. A shareholder of a corporation may dissent from, and obtain
payment for the fair value of the shareholder's shares in the event of, any of
the following corporate actions:
(a) An amendment of the articles that materially and adversely affects
the rights or preferences of the shares of the dissenting shareholder in
that it:
(1) alters or abolishes a preferential right of the shares;
(2) creates, alters, or abolishes a right in respect of the
redemption of the shares, including a provision respecting a sinking
fund for the redemption or repurchase of the shares;
(3) alters or abolishes a preemptive right of the holder of the
shares to acquire shares, securities other than shares, or rights to
purchase shares or securities other than shares;
(4) excludes or limits the right of a shareholder to vote on a
matter, or to cumulate votes, except as the right may be excluded or
limited through the authorization or issuance of securities of an
existing or new class or series with similar or different voting rights;
except that an amendment to the articles of an issuing public
corporation that provides that section 302A.671 does not apply to a
control share acquisition does not give rise to the right to obtain
payment under this section;
(b) A sale, lease, transfer, or other disposition of all or
substantially all of the property and assets of the corporation not made in
the usual or regular course of its business, but not including a
disposition in dissolution described in section 302A.725, subdivision 2, or
a disposition pursuant to an order of a court, or a disposition for cash on
terms requiring that all or substantially all of the net proceeds of
disposition be distributed to the shareholders in accordance with their
respective interests within one year after the date of disposition;
(c) A plan of merger, whether under this chapter or under chapter
322B, to which the corporation is a party, except as provided in
subdivision 3;
(d) A plan of exchange, whether under this chapter or under chapter
322B, to which the corporation is a party as the corporation whose shares
will be acquired by the acquiring corporation, if the shares of the
shareholder are entitled to be voted on the plan; or
(e) Any other corporate action taken pursuant to a shareholder vote
with respect to which the articles, the bylaws, or a resolution approved by
the board directs that dissenting shareholders may obtain payment for their
shares.
SUBD. 2. BENEFICIAL OWNERS. (a) A shareholder shall not assert
dissenters' rights as to less than all of the shares registered in the name of
the shareholder, unless the shareholder dissents with respect to all the shares
that are beneficially owned by another person but registered in the name of the
shareholder and discloses the name and address of each beneficial owner on whose
behalf the shareholder dissents. In that event, the rights of the dissenter
shall be determined as if the shares as to which the shareholder has dissented
and the other shares were registered in the names of different shareholders.
(b) A beneficial owner of shares who is not the shareholder may assert
dissenters' rights with respect to shares held on behalf of the beneficial
owner, and shall be treated as a dissenting shareholder under the terms of this
section and section 302A.473, if the beneficial owner submits to the corporation
at the time of or before the assertion of the rights a written consent of the
shareholder.
SUBD. 3. RIGHTS NOT TO APPLY. Unless the articles, the bylaws, or a
resolution approved by the board otherwise provide, the right to obtain payment
under this section does not apply to a shareholder of the surviving corporation
in a merger, if the shares of the shareholder are not entitled to be voted on
the merger.
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SUBD. 4. OTHER RIGHTS. The shareholders of a corporation who have a right
under this section to obtain payment for their shares do not have a right at law
or in equity to have a corporate action described in subdivision 1 set aside or
rescinded, except when the corporate action is fraudulent with regard to the
complaining shareholder or the corporation.
302A.473 PROCEDURES FOR ASSERTING DISSENTERS' RIGHTS. -- SUBDIVISION 1.
DEFINITIONS. (a) For purposes of this section, the terms defined in this
subdivision have the meanings given them.
(b) "Corporation" means the issuer of the shares held by a dissenter before
the corporate action referred to in section 302A.471, subdivision 1 or the
successor by merger of that issuer.
(c) "Fair value of the shares" means the value of the shares of a
corporation immediately before the effective date of the corporate action
referred to in section 302A.471, subdivision 1.
(d) "Interest" means interest commencing five days after the effective date
of the corporate action referred to in section 302A.471, subdivision 1 up to and
including the date of payment, calculated at the rate provided in section 549.09
for interest on verdicts and judgments.
SUBD. 2. NOTICE OF ACTION. If a corporation calls a shareholder meeting
at which any action described in section 302A.471, subdivision 1 is to be voted
upon, the notice of the meeting shall inform each shareholder of the right to
dissent and shall include a copy of section 302A.471 and this section and a
brief description of the procedure to be followed under these sections.
SUBD. 3. NOTICE OF DISSENT. If a proposed action must be approved by the
shareholders, a shareholder who wishes to exercise dissenters' rights must file
with the corporation before the vote on the proposed action a written notice of
intent to demand the fair value of the shares owned by the shareholder and must
not vote the shares in the favor of the proposed action.
SUBD. 4. NOTICE OF PROCEDURE; DEPOSIT OF SHARES. (a) After the proposed
action has been approved by the board and, if necessary, the shareholders, the
corporation shall send to all shareholders who have complied with subdivision 3
and to all shareholders entitled to dissent if no shareholder vote was required,
a notice that contains:
(1) The address to which a demand for payment and certificates of
certificated shares must be sent in order to obtain payment and the date by
which they must be received;
(2) Any restrictions on transfer of uncertificated shares that will
apply after the demand for payment is received;
(3) A form to be used to certify the date on which the shareholder, or
the beneficial owner on whose behalf the shareholder dissents, acquired the
shares or an interest in them and to demand payment; and
(4) A copy of section 302A.471 and this section and a brief
description of the procedures to be followed under these sections.
(b) In order to receive the fair value of the shares, a dissenting
shareholder must demand payment and deposit certificated shares or comply with
any restrictions on transfer of uncertificated shares within 30 days after the
notice was given, but the dissenter retains all other rights of a shareholder
until the proposed action takes effect.
SUBD. 5. PAYMENT; RETURN OF SHARES. (a) After the corporate action takes
effect, or after the corporation receives a valid demand for payment, whichever
is later, the corporation shall remit to each dissenting shareholder who has
complied with subdivisions 3 and 4 the amount the corporation estimates to be
the fair value of the shares, plus interest, accompanied by:
(1) the corporation's closing balance sheet and statement of income
for a fiscal year ending not more than 16 months before the effective date
of the corporate action, together with the latest available interim
financial statements;
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(2) an estimate by the corporation of the fair value of the shares and
a brief description of the method used to reach the estimate; and
(3) a copy of section 302A.471 and this section, and a brief
description of the procedure to be followed in demanding supplemental
payment.
(b) The corporation may withhold the remittance described in paragraph (a)
from a person who was not a shareholder on the date the action dissented from
was first announced to the public or who is dissenting on behalf of a person who
was not a beneficial owner on that date. If the dissenter has complied with
subdivisions 3 and 4, the corporation shall forward to the dissenter the
materials described in paragraph (a), a statement of the reason for withholding
the remittance, and an offer to pay to the dissenter the amount listed in the
materials if the dissenter agrees to accept that amount in full satisfaction.
The dissenter may decline the offer and demand payment under subdivision 6.
Failure to do so entitles the dissenter only to the amount offered. If the
dissenter makes demand, subdivisions 7 and 8 apply.
(c) If the corporation fails to remit payment within 60 days of the deposit
of certificates or the imposition of transfer restrictions on uncertificated
shares, it shall return all deposited certificates and cancel all transfer
restrictions. However, the corporation may again give notice under subdivision 4
and require deposit or restrict transfer at a later time.
SUBD. 6. SUPPLEMENTAL PAYMENT; DEMAND. If a dissenter believes that the
amount remitted under subdivision 5 is less than the fair value of the shares
plus interest, the dissenter may give written notice to the corporation of the
dissenter's own estimate of the fair value of the shares, plus interest, within
30 days after the corporation mails the remittance under subdivision 5, and
demand payment of the difference. Otherwise, a dissenter is entitled only to the
amount remitted by the corporation.
SUBD. 7. PETITION; DETERMINATION. If the corporation receives a demand
under subdivision 6, it shall, within 60 days after receiving the demand, either
pay to the dissenter the amount demanded or agreed to by the dissenter after
discussion with the corporation or file in court a petition requesting that the
court determine the fair value of the shares, plus interest. The petition shall
be filed in the county in which the registered office of the corporation is
located, except that a surviving foreign corporation that receives a demand
relating to the shares of a constituent domestic corporation shall file the
petition in the county in this state in which the last registered office of the
constituent corporation was located. The petition shall name as parties all
dissenters who have demanded payment under subdivision 6 and who have not
reached agreement with the corporation. The corporation shall, after filing the
petition, serve all parties with a summons and copy of the petition under the
rules of civil procedure. Nonresidents of this state may be served by registered
or certified mail or by publication as provided by law. Except as otherwise
provided, the rules of civil procedure apply to this proceeding. The
jurisdiction of the court is plenary and exclusive. The court may appoint
appraisers, with powers and authorities the court deems proper, to receive
evidence on and recommend the amount of the fair value of the shares. The court
shall determine whether the shareholder or shareholders in question have fully
complied with the requirements of this section, and shall determine the fair
value of the shares, taking into account any and all factors the court finds
relevant, computed by any method of combination of methods that the court, in
its discretion, sees fit to use, whether or not used by the corporation or by a
dissenter. The fair value of the shares as determined by the court is binding on
all shareholders, wherever located. A dissenter is entitled to judgment in cash
for the amount by which the fair value of the shares as determined by the court,
plus interest, exceeds the amount, if any, remitted under subdivision 5, but
shall not be liable to the corporation for the amount, if any, by which the
amount, if any, remitted to the dissenter under subdivision 5 exceeds the fair
value of the shares as determined by the court, plus interest.
SUBD. 8. COSTS; FEES; EXPENSES. (a) The court shall determine the costs
and expenses of a proceeding under subdivision 7, including the reasonable
expenses and compensation of any appraisers appointed by the court, and shall
assess those costs and expenses against the corporation, except that the court
may assess part or all of those costs and expenses against a dissenter whose
action in demanding payment under subdivision 6 is found to be arbitrary,
vexatious, or not in good faith.
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(b) If the court finds that the corporation has failed to comply
substantially with this section, the court may assess all fees and expenses of
any experts or attorneys as the court deems equitable. These fees and expenses
may also be assessed against a person who has acted arbitrarily, vexatiously, or
not in good faith in bringing the proceeding, and may be awarded to a party
injured by those actions.
(c) The court may award, in its discretion, fees and expenses to an
attorney for the dissenters out of the amount awarded to the dissenters, if any.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
DataWorks' Articles of Incorporation include provisions to eliminate the
personal liability of its directors to the fullest extent permitted by Section
204(a)(10) under the California Law. In addition, DataWorks' Bylaws include
provisions that require DataWorks to indemnify its directors and executive
officers to the fullest extent permitted by Section 317 of the California Law,
including circumstances in which indemnification is otherwise discretionary. The
Bylaws also provide DataWorks with the authority to indemnify its other
officers, employees and other agents as set forth in the California Law.
Pursuant to Section 317 of the California Law, a corporation generally has the
power to indemnify its present and former directors, officers, employees and
agents against expenses incurred by them in connection with any suit to which
they are, or are threatened to be made, a party by reason of their serving in
such positions so long as they acted in good faith and in a manner they
reasonably believed to be in the best interests of a corporation, and with
respect to any criminal action, they had no reasonable cause to believe their
conduct was unlawful. DataWorks believes that these provisions are necessary to
attract and retain qualified persons as directors and officers. These provisions
do not eliminate liability for breach of the director's duty of loyalty to
DataWorks or its shareholders, for acts or omission involving intentional
misconduct or knowing and culpable violations of law, for acts or omissions that
the director believes to be contrary to the best interests of DataWorks or its
shareholders or that involve the absence of good faith on the part of the
director, for any transaction from which the director derived an improper
personal benefit, for acts or omissions involving a reckless disregard for the
director's duty to DataWorks or its shareholders when the director was aware or
should have been aware of a risk of serious injury to DataWorks or its
shareholders, for acts or omissions that constitute an unexcused pattern of
inattention that amounts to an abdication of the director's duty to DataWorks or
its shareholders, for improper distributions to shareholders and loans to
directors and officers, or for acts or omissions by the director as an officer.
DataWorks has entered into agreements with its directors and executive
officers that require DataWorks to indemnify such persons against expenses,
judgments, fines, settlements and other amounts actually and reasonably incurred
(including expenses of a derivative action) in connection with any proceeding,
whether actual or threatened, to which any such persons may be made a party by
reason of the fact that such person is or was a director or officer of DataWorks
or any of its affiliated enterprises, provided such persons acted in good faith
and in a manner such person reasonably believed to be in or not opposed to the
best interests of DataWorks and, with respect to any criminal proceeding, had no
reasonable cause to believe his or her conduct was unlawful. The indemnification
agreements also set forth certain procedures that will apply in the event of a
claim for indemnification thereunder.
At present, there is no pending litigation or proceeding involving a
director of officer of DataWorks as to which indemnification is being sought,
nor is DataWorks aware of any threatened litigation that may result in claims
for indemnification by any officer or director.
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ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- ----------------------------------------------------------------------------------
<S> <C>
2.1 Agreement and Plan of Merger and Reorganization by and among the Registrant,
DataWorks Acquisition Sub., Inc., DCD Corporation and certain shareholders of DCD
Corporation, dated as of August 16, 1996.*
3.1 Amended and Restated Articles of Incorporation of DataWorks.(1)
3.2 Bylaws of DataWorks.(1)
3.3 Articles of Incorporation of DataWorks Acquisition Sub., Inc. ("DataWorks Sub").
3.4 Bylaws of DataWorks Sub.
4.4 Specimen Stock Certificate.(1).
5.1 Opinion of Cooley Godward Castro Huddleson & Tatum.
8.1 Tax Opinion of Dorsey & Whitney.
8.2 Tax Opinion of Cooley Godward Castro Huddleson & Tatum.
10.1 Form of Indemnity Agreement entered into between the Registrant and its directors
and officers, with related schedule.(1)
10.2 Registrant's 1995 Equity Incentive Plan (the "Equity Plan").(2)(4)
10.3 Forms of Incentive Stock Option and Nonstatutory Stock Option under the Equity
Plan.(4)
10.4 Form of Stock Option outside the Equity Plan.(1)(4)
10.5 Registrant's 1995 Non-Employee Directors' Stock Option Plan.(1)(4)
10.6 Registrant's 1995 Employee Stock Purchase Plan and form of Employee Stock Purchase
Plan Offering, as amended.(1)(4)
10.7 Executive Employment Agreement entered into between the Registrant and Stuart W.
Clifton.(1)(4)
10.8 Executive Employment Agreement entered into between the Registrant and Mark S.
Howlett.(1)(4)
10.9 Termination Agreement, dated as of September 25, 1995, between the Registrant and
Alfred R. Alteslane.(1)(4)
10.10 Offer Letter, dated as of January 17, 1996, entered into between the Registrant
and Norman R. Farquhar.(4)
10.11 Amended and Restated Agreement and Plan of Reorganization dated April 1, 1994 by
and among the Registrant, DW Acquisition, Inc., Madic-Compufact Corporation
("MCC") and the stockholders of MCC (the "Restated Agreement").(1)
10.12 Amended and Restated First Amendment to the Restated Agreement dated May 31, 1994
by and among the Registrant, DW Acquisition, Inc., MCC and the stockholders of
MCC.(1)
10.13 Loan Agreement dated September 6, 1995 between the Registrant and First Interstate
Bank of California.(1)
10.14 Sublease Agreement dated November 22, 1991 between the Registrant and the Titan
Corporation (the "Sublease").(1)
10.15 First Amendment to Sublease dated December 1, 1994.(1)
10.16 Lease Agreement dated September 1, 1991 between MCC and Pactel Properties.(1)
10.17 Value Added Reseller Agreement dated December 27, 1995 between the Registrant and
VMARK Software, Inc.(5)
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- ----------------------------------------------------------------------------------
<S> <C>
10.18 Value Added Reseller Agreement dated December 27, 1995 between the Registrant and
Sybase, Inc.(1)(3)
10.19 Value Added Reseller Agreement dated December 27, 1995 between the Registrant and
UniData, Inc.(1)(3)
22.1 Subsidiaries of Registrant.(1)
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Price Waterhouse LLP.
24.1 Power of Attorney. Reference is made to page .
</TABLE>
- ---------------
* Schedules omitted pursuant to Regulation S-K, Item 601(b)(2) of the
Commission. Registrant undertakes to furnish such schedules to the
Commission supplementally upon request.
(1) Incorporated by reference to Registrant's Registration Statement on Form
SB-2 (No. 33-97022) or an amendment thereto and incorporated herein by
reference.
(2) Filed as an exhibit to the Registrant's Registration Statement on Form S-8
(No. 33-99586) and incorporated herein by reference.
(3) Certain confidential portions deleted pursuant to Order Granting Application
Under the Securities Act of 1933, as amended, and Rule 406 thereunder
respecting Confidential Treatment dated October 26, 1995.
(4) Indicates management or compensatory plan or arrangement required to be
identified pursuant to Item 14(c).
(5) Confidential treatment requested.
ITEM 22. UNDERTAKINGS.
(1) The Registrant hereby undertakes as follows: that prior to any public
reoffering of the securities registered hereunder through use of a prospectus
which is a part of this Registration Statement, by any person or party who is
deemed to be an underwriter within the meaning of Rule 145(c), the Registrant
undertakes that such reoffering prospectus will contain the information called
for by the applicable registration form with respect to reofferings by persons
who may be deemed underwriters, in addition to the information called for by the
other Items of the applicable form.
(2) The Registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (1) immediately preceding or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Securities Act of 1933 ("the Act")
and is used in connection with an offering of securities subject to Rule 415,
will be filed as a part of an amendment to the Registration Statement and will
not be used until such amendment is effective, and that, for purposes of
determining any liability under the Securities Act of 1933, each such post-
effective amendment 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.
(3) The Registrant hereby undertakes to respond to requests for information
that is incorporated by reference into the Prospectus/Joint Proxy Statement
pursuant to Items 4, 10(b), 11 or 13 of Form S-4, within one business day of
receipt of such request and to send the incorporated documents by first class
mail or other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the Registration Statement
through the date of responding to the request.
(4) The Registrant hereby undertakes to supply by means of a post-effective
amendment all information concerning a transaction, and the company being
acquired involved therein, that was not the subject of and included in the
Registration Statement when it became effective.
(5) Insofar as indemnification for liabilities arising under the Act, as
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the Certificate of Incorporation and the Bylaws of
II-3
<PAGE> 207
the Registrant and the Delaware General Corporation Law, 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 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 a 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
question 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 Act, and will be governed by the
final adjudication of such issue.
(6) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (that is incorporated by reference in the
Registration Statement) 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-4
<PAGE> 208
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
DataWorks Corporation has duly caused this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of San
Diego, County of San Diego, State of California, on the 11th day of September,
1996.
DATAWORKS CORPORATION
By: /s/ STUART W. CLIFTON
Stuart W. Clifton
Chairman of the Board, Chief
Executive Officer and President
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Stuart W. Clifton and Norman R. Farquhar,
and each or any one of them, his true and lawful attorney-in-fact and agent,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, or their or his substitutes or substitute, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------------------- ------------------------- -------------------
<S> <C> <C>
/s/ STUART W. CLIFTON President, Chief September 11, 1996
------------------------ Executive Officer,
Stuart W. Clifton Chairman of the Board and
Director (Principal
Executive Officer)
/s/ NORMAN R. FARQUHAR Executive Vice President, September 11, 1996
------------------------- Chief Financial Officer
Norman R. Farquhar and Director
(Principal Financial
Officer)
/s/ MARK S. HOWLETT Executive Vice President September 11, 1996
---------------------- and Director
Mark S. Howlett
/s/ RICK E. RUSSO Vice President, Finance September 11, 1996
-------------------- and Secretary (Principal
Rick E. Russo Accounting Officer)
/s/ NATHAN W. BELL Director September 11, 1996
---------------------
Nathan W. Bell
</TABLE>
II-5
<PAGE> 209
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------------------- ------------------------- -------------------
<S> <C> <C>
/s/ FINIS F. CONNER Director September 11, 1996
----------------------
Finis F. Conner
/s/ RONALD S. PARKER Director September 11, 1996
-----------------------
Ronald S. Parker
</TABLE>
II-6
<PAGE> 210
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT PAGE NO.
- ------- ---------------------------------------------------------------------------- --------
<S> <C> <C>
2.1 Agreement and Plan of Merger and Reorganization by and among the Registrant,
DataWorks Acquisition Sub., Inc. DCD Corporation and certain shareholders of
DCD Corporation, dated as of August 16, 1996*...............................
3.1 Amended and Restated Articles of Incorporation of DataWorks (1).............
3.2 Bylaws of DataWorks (1).....................................................
3.3 Articles of Incorporation of DataWorks Acquisition Sub., Inc. ("DataWorks
Sub").......................................................................
3.4 Bylaws of DataWorks Sub.....................................................
4.4 Specimen Stock Certificate (1)..............................................
5.1 Opinion of Cooley Godward Castro Huddleson & Tatum..........................
8.1 Tax Opinion of Dorsey & Whitney.............................................
8.2 Tax Opinion of Cooley Godward Castro Huddleson & Tatum......................
10.1 Form of Indemnity Agreement entered into between the Registrant and its
directors and officers, with related schedule (1)...........................
10.2 Registrant's 1995 Equity Incentive Plan (the "Equity Plan") (2)(4)..........
10.3 Forms of Incentive Stock Option and Nonstatutory Stock Option under the
Equity Plan (4).............................................................
10.4 Form of Stock Option outside the Equity Plan (1)(4).........................
10.5 Registrant's 1995 Non-Employee Directors' Stock Option Plan (1)(4)..........
10.6 Registrant's 1995 Employee Stock Purchase Plan and form of Employee Stock
Purchase Plan Offering, as amended (1)(4)...................................
10.7 Executive Employment Agreement entered into between the Registrant and
Stuart W. Clifton (1)(4)....................................................
10.8 Executive Employment Agreement entered into between the Registrant and
Mark S. Howlett (1)(4)......................................................
10.9 Termination Agreement, dated as of September 25, 1995, between the
Registrant and Alfred R. Alteslane (1)(4)...................................
10.10 Offer Letter, dated as of January 17, 1996, entered into between the
Registrant and Norman R. Farquhar (4).......................................
10.11 Amended and Restated Agreement and Plan of Reorganization dated April 1,
1994 by and among the Registrant, DW Acquisition, Inc., Madic-Compufact
Corporation ("MCC") and the stockholders of MCC (the "Restated Agreement")
(1).........................................................................
10.12 Amended and Restated First Amendment to the Restated Agreement dated
May 31, 1994 by and among the Registrant, DW Acquisition, Inc., MCC and the
stockholders of MCC (1).....................................................
10.13 Loan Agreement dated September 6, 1995 between the Registrant and First
Interstate Bank of California (1)...........................................
10.14 Sublease Agreement dated November 22, 1991 between the Registrant and
the Titan Corporation (the "Sublease") (1)..................................
10.15 First Amendment to Sublease dated December 1, 1994 (1)......................
10.16 Lease Agreement dated September 1, 1991 between MCC and Pactel Properties
(1).........................................................................
10.17 Value Added Reseller Agreement dated December 27, 1995 between the
Registrant and VMARK Software, Inc. (5).....................................
10.18 Value Added Reseller Agreement dated December 27, 1995 between the
Registrant and Sybase, Inc. (1)(3)..........................................
10.19 Value Added Reseller Agreement dated December 27, 1995 between the
Registrant and UniData, Inc. (1)(3).........................................
22.1 Subsidiaries of Registrant..................................................
23.1 Consent of Ernst & Young LLP................................................
23.2 Consent of Price Waterhouse LLP.............................................
24.1 Power of Attorney. Reference is made to page .............................
</TABLE>
<PAGE> 211
- ---------------
* Schedules omitted pursuant to Regulation S-K, Item 601(b)(2) of the
Commission. Registrant undertakes to furnish such schedules to the
Commission supplementally upon request.
(1) Incorporated by reference to Registrant's Registration Statement on Form
SB-2 (No. 33-97022) or an amendment thereto and incorporated herein by
reference.
(2) Filed as an exhibit to the Registrant's Registration Statement on Form S-8
(No. 33-99586) and incorporated herein by reference.
(3) Certain confidential portions deleted pursuant to Order Granting Application
Under the Securities Act of 1933, as amended, and Rule 406 thereunder
respecting Confidential Treatment dated October 26, 1995.
(4) Indicates management or compensatory plan or arrangement required to be
identified pursuant to Item 14(c).
(5) Confidential treatment requested.
<PAGE> 1
EXHIBIT 2.1
AGREEMENT AND PLAN
OF MERGER AND REORGANIZATION
THIS AGREEMENT AND PLAN OF MERGER AND REORGANIZATION ("Agreement") is made
and entered into as of August 16, 1996, among: DATAWORKS CORPORATION, a
California corporation ("Parent"); DATAWORKS ACQUISITION SUB., Inc., a Minnesota
corporation and a wholly owned subsidiary of Parent ("Merger Sub"); DCD
CORPORATION, a Minnesota corporation (the "Company"); and those shareholders of
the Company listed as Designated Shareholders on the signature page hereof (the
"Designated Shareholders"). Certain capitalized terms used in this Agreement are
defined in Exhibit A.
RECITALS
A. Parent, Merger Sub and the Company intend to effect a merger of Merger
Sub into the Company in accordance with this Agreement and the relevant laws of
the State of Minnesota (the "Merger"). Upon consummation of the Merger, Merger
Sub will cease to exist, and the Company will become a wholly owned subsidiary
of Parent.
B. It is intended that the Merger qualify as a tax-free reorganization
within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code"). For accounting purposes, it is intended that the Merger be
treated as a "pooling of interests."
C. This Agreement has been adopted and approved by the respective boards of
directors of Parent, Merger Sub and the Company.
AGREEMENT
The parties to this Agreement agree as follows:
SECTION 1. DESCRIPTION OF TRANSACTION
1.1 Merger of Merger Sub into the Company. Upon the terms and subject to
the conditions set forth in this Agreement, at the Effective Time (as defined in
Section 1.3), (i) Merger Sub shall be merged with and into the Company, (ii) the
separate existence of Merger Sub shall cease, and (iii) the shareholders of the
Company (the "Shareholders") shall receive up to an aggregate 1,800,000 shares
(reduced as described in Section 1.5) of Parent Common Stock (defined in Section
1.5(a)(i)), provided that 10% of such shares will be held in escrow as security
for the obligations of the Company and the Designated Shareholders hereunder
pursuant to an Escrow and Indemnity Agreement in the form attached hereto as
Exhibit B ("Escrow Agreement"), to be entered into by and among Parent, the
Company, the Designated Shareholders and the escrow agent named therein (the
"Escrow Agent"). The Company will continue as the surviving corporation in the
Merger (the "Surviving Corporation").
1.2 Effect of the Merger. The Merger shall have the effects set forth in
this Agreement and in the applicable provisions of the Minnesota Statutes.
1.3 Closing; Effective Time. The consummation of the transactions
contemplated by this Agreement (the "Closing") shall take place at the offices
of Cooley Godward Castro Huddleson & Tatum, 4365 Executive Drive, Suite 1100,
San Diego, California, at such time within two (2) business days after the
Parent Shareholders' Meeting (defined in Section 5.3(b)) as Parent may designate
from time to time upon prior notice to the Company. (For purposes of this
Agreement, "Scheduled Closing Time" shall mean the time and date as of which the
Closing is required to take place pursuant to this Section 1.3; and "Closing
Date" shall mean the time and date as of which the Closing actually takes
place.) Contemporaneously with or as promptly as practicable after the Closing,
properly executed articles of merger conforming to the requirements of the
Minnesota Statutes (the "Articles of Merger") shall be filed with the Secretary
of State of the State of
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<PAGE> 2
Minnesota. The Merger shall take effect at the time the Articles of Merger are
filed with the Secretary of State of the State of Minnesota (the "Effective
Time").
1.4 Articles of Incorporation and Bylaws; Directors and Officers.
(a) The Articles of Incorporation of the Surviving Corporation shall be
amended and restated as of the Effective Time to conform to Exhibit C.
(b) The Bylaws of the Surviving Corporation shall be amended and restated
as of the Effective Time to conform to the Bylaws of Merger Sub as in effect
immediately prior to the Effective Time.
(c) The directors and officers of the Surviving Corporation immediately
after the Effective Time shall be the individuals identified on Exhibit D.
1.5 Conversion of Shares.
(a) Subject to Sections 1.7 and 1.8, at the Effective Time, by virtue of
the Merger and without any further action on the part of Parent, Merger Sub, the
Company or any Shareholder:
(i) each share of the Company's Class A Common Stock and Class B
Common Stock (collectively, the "Company Common Stock") outstanding
immediately prior to the Effective Time (other than dissenters' shares, if
any) shall be converted into the right to receive up to the "Applicable
Multiple" (as defined in Section 1.5(b)(i)) of a share of the common stock
of Parent ("Parent Common Stock"), subject to the provisions of Section
1.7; and
(ii) each share of the common stock of Merger Sub outstanding
immediately prior to the Effective Time shall be converted into one share
of common stock of the Surviving Corporation.
(b) For purposes of this Agreement:
(i) the "Applicable Multiple" shall be the number determined by
dividing (x) 1,800,000 reduced by the Deduction (defined in the following
paragraph) (as reduced, the "Shares"), by (y) the aggregate number of
shares of Company Common Stock outstanding immediately prior to the
Effective Time;
(ii) (A) the "Deemed Price Per Parent Common Share" shall be the
average of the last quoted sale prices of Parent Common Stock as traded on
the NASDAQ National Market for the twenty (20) market trading days
immediately preceding the date of the Parent Shareholders' Meeting (defined
in Section 5.3); and (B) the "Deduction" shall be the number of whole
shares of Parent Common Stock that could be purchased at the Deemed Price
Per Parent Common Share with the sum of (a) the aggregate amount of fees
and expenses of the Company's investment banking advisors incurred in
connection with the Merger (including without limitation fees and expenses
payable to Wessels, Arnold & Henderson, L.L.C.), and (b) the amount by
which the fees and expenses of the Company's legal and accounting advisors
incurred after July 17, 1996, in connection with the Merger exceed
$100,000; and
(iii) the Company shall provide a certificate (the "Expense Estimate
Certificate") executed and delivered at the Closing which shall set forth
their collective good faith best estimate of the Deduction, and such
estimate shall be used for purposes of determining the Applicable Multiple;
provided, however, that in the event the Expense Estimate Certificate
underestimates such fees and expenses (as determined by the Parent's audit
of the Company's records to be completed prior to the issuance of Parent's
earnings release covering the calendar year 1996), the Parent shall be
entitled to recover the amount of the underestimation pursuant to the
Escrow Agreement.
(c) Subject to any required acceleration of vesting resulting from any
termination by Parent of the DCD ESOP, if any shares of Company Common Stock
outstanding immediately prior to the Effective Time are unvested or are subject
to a repurchase option, risk of forfeiture or other condition under any
applicable restricted stock purchase agreement or other agreement with the
Company, then the shares of Parent Common Stock issued in exchange for such
shares of Company Common Stock will also be unvested and subject to the same
repurchase option, risk of forfeiture or other condition, and the certificates
representing such shares of Parent Common Stock may accordingly be marked with
appropriate legends.
2
<PAGE> 3
1.6 Closing of the Company's Transfer Books. At the Effective Time,
holders of certificates representing shares of Company Common Stock that were
outstanding immediately prior to the Effective Time shall cease to have any
rights as shareholders of the Company (except as expressly provided herein or
under Sections 302A.471 and 302A.473 of the Minnesota Statutes), and the stock
transfer books of the Company shall be closed with respect to all such shares of
Company Common Stock outstanding immediately prior to the Effective Time. No
further transfer of any such shares of the Company's capital stock shall be made
on such stock transfer books after the Effective Time. If, after the Effective
Time, a valid certificate previously representing any of such shares of Company
Common Stock (a "Company Stock Certificate") is presented to the Surviving
Corporation or Parent, such Company Stock Certificate shall be canceled and
shall be exchanged as provided in Section 1.7.
1.7 Exchange of Certificates.
(a) At the Closing, each Shareholder will surrender his, her or its
respective Company Stock Certificates representing all shares of Company Common
Stock owned by such Person (other than dissenters' shares), in exchange for
certificates representing Parent Common Stock. Subject to Sections 1.7(b) and
1.7(c), upon surrender of a Company Stock Certificate to Parent for exchange,
together with such other documents as may be reasonably required by Parent
consistent with this Agreement, (1) the holder of such Company Stock Certificate
shall be entitled to receive in exchange therefor a certificate representing the
number of shares of Parent Common Stock that such holder has the right to
receive pursuant to the provisions of Section 1.5(a)(i), and (2) the Company
Stock Certificate so surrendered shall be canceled. Until surrendered as
contemplated by this Section 1.7, each Company Stock Certificate shall be
deemed, from and after the Effective Time, to represent only the right to
receive shares of Parent Common Stock (and cash in lieu of any fractional share
of Parent Common Stock) as contemplated by this Section 1.7. If any Company
Stock Certificate shall have been lost, stolen or destroyed, Parent may, in its
discretion and as a condition precedent to the issuance of any certificate
representing Parent Common Stock, require the owner of such lost, stolen or
destroyed Company Stock Certificate to provide an appropriate affidavit and to
deliver a bond (in such sum as Parent may reasonably direct) as indemnity
against any claim that may be made against Parent or the Surviving Corporation
with respect to such Company Stock Certificate.
(b) Notwithstanding any other provision of this Agreement, at the Closing
an aggregate of 10% of the Shares (the "Escrow Shares") shall be delivered to
the Escrow Agent to be held pursuant to the terms of the Escrow Agreement, and
the number of shares of Parent Common Stock issuable to each Shareholder at the
Closing shall be reduced by the number determined by multiplying the number of
Escrow Shares by such Shareholder's percentage ownership of all outstanding
shares of Company Common Stock immediately prior to the Closing.
(c) No fractional shares of Parent Common Stock shall be issued in
connection with the Merger, and no certificates for any such fractional shares
shall be issued. In lieu of such fractional shares, any holder of Company Common
Stock who would otherwise be entitled to receive a fraction of a share of Parent
Common Stock (after aggregating all fractional shares of Parent Common Stock
issuable to such holder) shall, upon surrender of such holder's Company Stock
Certificate(s), be paid in cash the dollar amount (rounded to the nearest whole
cent), without interest, determined by multiplying such fraction by the Deemed
Price Per Parent Common Share.
(d) Neither Parent nor the Surviving Corporation shall be liable to any
holder or former holder of Company Common Stock for any shares of Parent Common
Stock (or dividends or distributions with respect thereto), or for any cash
amounts, delivered to any public official pursuant to any applicable abandoned
property, escheat or similar law.
1.8 Dissenting Shares.
(a) Notwithstanding anything to the contrary contained in this Agreement,
any shares of capital stock of the Company that, as of the Effective Time, are
held by a Person who has properly complied with provisions regarding dissenters'
rights set forth in Minnesota Statutes Sections 302A.471 and 302A.473 shall not
be converted into or represent the right to receive Parent Common Stock in
accordance with Section 1.5 (or cash
3
<PAGE> 4
in lieu of fractional shares in accordance with Section 1.7(c)), and the holder
or holders of such shares shall be entitled only to such rights as may be
granted to such holder or holders in said sections; provided, however, that any
of such shares shall automatically be converted into and shall represent only
the right to receive (upon the surrender of the certificate or certificates
representing such shares) Parent Common Stock in accordance with Section 1.5
(and cash in lieu of fractional shares in accordance with Section 1.7(c)), if
the holder of such shares fails to comply with the relevant requirements for
perfecting such holder's dissenter's rights. Notwithstanding any other provision
of this Agreement, to the extent any Person has properly exercised and perfected
the dissenters' rights set forth above, such Person shall not be a "Shareholder"
for purposes of this Agreement.
(b) The Company shall give Parent (i) prompt notice of any objection to the
Merger prior to the Effective Time and of any other demand, notice or instrument
delivered to the Company prior to the Effective Time pursuant to the Minnesota
Statutes and (ii) the opportunity to participate in all negotiations and
proceedings with respect to any such objection, demand, notice or instrument.
The Company shall not make any payment or settlement offer prior to the
Effective Time with respect to any such objection or demand unless Parent shall
have consented in writing to such payment or settlement offer.
1.9 Tax Consequences. For federal income tax purposes, the Merger is
intended to constitute a reorganization within the meaning of Section 368 of the
Code. The parties to this Agreement hereby adopt this Agreement as a "plan of
reorganization" within the meaning of Sections 1.368-2(g) and 1.368-3(a) of the
United States Treasury Regulations.
1.10 Accounting Treatment. For financial reporting purposes, the Merger is
intended to be accounted for as a "pooling of interests."
1.11 Further Action. If, at any time after the Effective Time, any further
action is determined by Parent to be necessary or desirable to carry out the
purposes of this Agreement or to vest the Surviving Corporation or Parent with
full right, title and possession of and to all rights and property of Merger Sub
and the Company, the officers and directors of the Surviving Corporation and
Parent shall be fully authorized (in the name of Merger Sub, in the name of the
Company and otherwise) to take such action.
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to and for the benefit of the Parent
and the other Indemnitees, as follows:
2.1 Due Organization; No Subsidiaries; Etc.
(a) The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of Minnesota and has all necessary
corporate power and authority: (i) to conduct its business in the manner in
which its business is currently being conducted; (ii) to own and use its assets
in the manner in which its assets are currently owned and used; and (iii) to
perform its obligations under all Contracts by which it is bound.
(b) Except as set forth in Part 2.1(b) of the Disclosure Schedule, the
Company has not conducted any business under or otherwise used, for any purpose
or in any jurisdiction, any fictitious name, assumed name, trade name or other
name.
(c) Part 2.1(c) of the Disclosure Schedule sets forth a list of each
jurisdiction in which the Company has registered or been licensed to do business
as a foreign corporation. Except for such jurisdictions, the Company is not, and
has not been, required to be qualified, authorized, registered or licensed to do
business as a foreign corporation in any jurisdiction, except where the failure
to be so qualified, authorized, registered or licensed has not had and will not
have a Material Adverse Effect on the Company.
(d) Part 2.1(d) of the Disclosure Schedule accurately sets forth (i) the
names of the members of the Company's board of directors, and (ii) the names and
titles of the Company's officers. The Company's board of directors has never
established any committees.
4
<PAGE> 5
(e) The Company has no subsidiaries and, except as set forth in Part 2.1(e)
of the Disclosure Schedule, does not now and has never owned, beneficially or
otherwise, any shares or other securities of, or any direct or indirect interest
of any nature in, any other Entity.
2.2 Articles of Incorporation and Bylaws. The Company has delivered to
Parent accurate and complete copies of: (1) the Company's articles of
incorporation and bylaws, including all amendments thereto; (2) the stock
records of the Company; and (3) the minutes and other records of the meetings
and other proceedings (including any actions taken by written consent or
otherwise without a meeting) of the shareholders of the Company and the board of
directors of the Company. There have been no meetings or other proceedings or
actions of the shareholders of the Company or the board of directors of the
Company that are not properly reflected in such minutes or other records. There
has not been any violation of any of the provisions of the Company's articles of
incorporation or any material violation of the Company's bylaws or of any
resolution adopted by the Company's shareholders or the Company's board of
directors.
2.3 Capitalization, Etc.
(a) The authorized capital stock of the Company consists of 20,000,000
shares of Company Common Stock (10,000,000 Class A Common Stock and 10,000,000
Class B Common Stock), of which 525,000 shares (267,750 shares of Class A Common
Stock and 257,250 shares of Class B Common Stock) have been issued and are
outstanding. There are no other outstanding shares of capital stock of the
Company, and there are no shares of capital stock held in the Company's
treasury. Part 2.3(a) of the Disclosure Schedule sets forth the names of each of
the Shareholders and the number of shares of Company Common Stock owned of
record by each of such Shareholders. All of the outstanding shares of Company
Common Stock have been duly authorized and validly issued, and are fully paid
and nonassessable, and none of such shares is subject to any repurchase option
or restriction on transfer (other than restrictions on transfer imposed by
virtue of applicable federal and state securities laws).
(b) The Company's Class A Common Stock has been issued to and is held by
the Company's Employee Stock Ownership Plan and Trust (the "DCD ESOP").
(c) There is no: (A) outstanding subscription, option, call, warrant or
right (whether or not currently exercisable) to acquire any shares of the
capital stock or other securities of the Company; (B) outstanding security,
instrument or obligation that is or may become convertible into or exchangeable
for any shares of the capital stock or other securities of the Company; (C)
Contract under which the Company is or may become obligated to sell or otherwise
issue any shares of its capital stock or any other securities; or (D) condition
or circumstance that may give rise to or provide a basis for the assertion of a
claim by any Person to the effect that such Person is entitled to acquire or
receive any shares of capital stock or other securities of the Company.
(d) All outstanding shares of Company Common Stock have been issued in
compliance with (i) all applicable securities laws and other applicable Legal
Requirements, and (ii) all requirements set forth in applicable Contracts.
(e) The Company has not, within the last five years, repurchased, redeemed
or otherwise reacquired any shares of capital stock or other securities of the
Company. All securities so reacquired by the Company, if any, were reacquired in
compliance with (i) the applicable provisions of Minnesota law and all other
applicable Legal Requirements, and (ii) all requirements set forth in applicable
restricted stock purchase agreements and other applicable Contracts.
2.4 Financial Statements; Books and Records.
(a) The Company has delivered to Parent the following financial statements
and notes (collectively, the "Company Financial Statements"):
(i) the audited balance sheets of the Company as of December 31, 1993,
1994 and 1995, and the related audited statements of income, statements of
shareholders' equity and statements of cash flows of the Company for the
years then ended, together with the notes thereto and the unqualified
report and opinion of Price Waterhouse relating thereto; and
5
<PAGE> 6
(ii) the unaudited balance sheets of the Company as of June 30, 1996
and 1995 (collectively, the "Unaudited Interim Balance Sheet"), and the
related unaudited statements of income of the Company for the six month
periods then ended.
(b) The Company Financial Statements are accurate and complete in all
material respects and present fairly the financial position of the Company as of
the respective dates thereof and the results of operations and (in the case of
the financial statements referred to in Section 2.4(a)(i)) cash flows of the
Company for the periods covered thereby. The Company Financial Statements have
been prepared in accordance with generally accepted accounting principles
applied on a consistent basis throughout the periods covered (except that the
financial statements referred to in Section 2.4(a)(ii) do not contain footnotes
and are subject to normal and recurring adjustments, which management considers
necessary for a fair presentation of the Company's financial position as of June
30, 1996 and 1995, and the results of operations for the six month periods then
ended).
(c) The books of account, minute books, stock record books, and other
records of the Company, all of which have been made available to Parent, are
complete and correct and have been maintained in accordance with sound business
practices and the requirements of Section 13(b)(2) of the Exchange Act
(regardless of whether or not the Company is subject to that Section), including
the maintenance of an adequate system of internal controls. The minute books of
the Company contain accurate records of all meetings held of, and corporate
action taken by, the shareholders and the board of directors of the Company, and
no meeting of any such shareholders or board of directors has been held for
which minutes have not been prepared and are not contained in such minute books.
At the Closing, all of those books and records will be in the possession of the
Company.
2.5 Absence of Changes. Except as set forth in Part 2.5 of the Disclosure
Schedule with respect solely to paragraphs (b) through (r) below, since December
31, 1995:
(a) there has not been any material adverse change in the Company's
business, financial condition, assets, liabilities, results of operations
or prospective customers;
(b) there has not been any material loss, damage or destruction to, or
any material interruption in the use of, any of the Company's assets
(whether or not covered by insurance);
(c) the Company has not declared, accrued, set aside or paid any
dividend or made any other distribution in respect of any shares of capital
stock, and has not repurchased, redeemed or otherwise reacquired any shares
of capital stock or other securities;
(d) the Company has not sold, issued or authorized the issuance of (i)
any capital stock or other security, (ii) any option or right to acquire
any capital stock or any other security, or (iii) any instrument
convertible into or exchangeable for any capital stock or other security;
(e) there has been no amendment to the Company's articles of
incorporation or bylaws, and the Company has not effected or been a party
to any Acquisition Transaction, recapitalization, reclassification of
shares, stock split, reverse stock split or similar transaction;
(f) the Company has not formed any subsidiary or acquired any equity
interest or other interest in any other Entity;
(g) the Company has not made any capital expenditure which, when added
to all other capital expenditures made by the Company since December 31,
1995, exceeds $410,000 in the aggregate;
(h) the Company has not (i) entered into or permitted any of the
assets owned or used by it to become bound by any Material Contract (as
defined in Section 2.10(a)), or (ii) amended or prematurely terminated, or
waived any material right or remedy under, any Material Contract;
(i) except in the ordinary course of business and consistent with past
practices, the Company has not (i) acquired, leased or licensed any right
or other asset from any other Person, (ii) sold or otherwise disposed of,
or leased or licensed, any right or other asset to any other Person, or
(iii) waived or relinquished any right;
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(j) the Company has not written off as uncollectible (except against
reserves consistent with past practices not extraordinary in amount), or
established any extraordinary reserve with respect to, any account
receivable or other indebtedness;
(k) the Company has not made any pledge of any of its assets or
otherwise permitted any of its assets to become subject to any Encumbrance,
except for pledges of immaterial assets made in the ordinary course of
business and consistent with the Company's past practices;
(l) except for immaterial travel and other advances in the ordinary
course of business, the Company has not (i) lent money to any Person, or
(ii) incurred or guaranteed any indebtedness for borrowed money;
(m) the Company has not (i) established or adopted any Employee
Benefit Plan, (ii) except in the ordinary course of business paid any bonus
or made any profit-sharing or similar payment to, or increased the amount
of the wages, salary, commissions, fringe benefits or other compensation or
remuneration payable to, any of its directors, officers or employees other
than as consistent with the Company's recent practice with respect thereto,
or (iii) except in the ordinary course of business hired any new employee;
(n) the Company has not changed any of its methods of accounting or
accounting practices in any respect which would require disclosure in
audited financial statements in accordance with generally accepted
accounting principles;
(o) the Company has not made any Tax election;
(p) the Company has not commenced or settled any Legal Proceeding;
(q) the Company has not entered into any material transaction or taken
any other material action outside the ordinary course of business or
inconsistent with its past practices; and
(r) the Company has not agreed or committed to take any of the actions
referred to in clauses "(c)" through "(q)" above.
2.6 Title to Assets.
(a) Except as set forth in Part 2.6(a) of the Disclosure Schedule, the
Company owns all assets purported to be owned by it, including: (i) all assets
reflected on the Unaudited Interim Balance Sheet; (ii) all assets referred to in
Parts 2.7(b), 2.8 and 2.9 of the Disclosure Schedule; and (iii) all other assets
reflected in the Company's books and records as being owned by the Company.
Except as set forth in Part 2.6(a) of the Disclosure Schedule, all of said
assets are owned by the Company free and clear of any liens or other
Encumbrances, except for (i) any lien for current taxes not yet due and payable,
and (ii) minor liens that have arisen in the ordinary course of business and
that do not (in any case or in the aggregate) materially detract from the value
of the assets subject thereto or materially impair the operations of the
Company.
(b) Part 2.6 of the Disclosure Schedule identifies all assets that are
material to the business of the Company and that are being leased or licensed to
the Company.
2.7 Bank Accounts; Receivables; Customers.
(a) Part 2.7(a) of the Disclosure Schedule provides accurate and complete
information with respect to each account maintained by or for the benefit of the
Company at any bank or other financial institution.
(b) Part 2.7(b) of the Disclosure Schedule provides an accurate and
complete breakdown and aging of all accounts receivable, notes receivable and
other receivables of the Company as of June 30, 1996. Except as set forth in
Part 2.7(b) of the Disclosure Schedule, all existing accounts receivable of the
Company (including those accounts receivable reflected on the Unaudited Interim
Balance Sheet that have not yet been collected and those accounts receivable
that have arisen since June 30, 1996 and have not yet been collected) represent
valid obligations of customers of the Company arising from bona fide
transactions entered into in the ordinary course of business and are current.
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(c) Part 2.7(c) of the Disclosure Schedule identifies each customer that is
obligated to make payments to the Company in an aggregate amount exceeding
$20,000 per year. The Company has not received any notice or other communication
indicating that any customer or other Person identified in Part 2.7(c) of the
Disclosure Schedule intends or expects to cease dealing with the Company or to
effect a material reduction in the volume of business transacted by such Person
with the Company below historical levels.
(d) Part 2.7(d) of the Disclosure Schedule provides an accurate and
complete breakdown of all pending and unfilled orders, if any, received by the
Company for products, systems and services.
2.8 Equipment; Inventory; Leasehold(s).
(a) Part 2.8 of the Disclosure Schedule provides accurate and complete
information with respect to all material items of equipment, fixtures, leasehold
improvements and other tangible assets owned by or leased to the Company. The
assets identified in Part 2.8 of the Disclosure Schedule are adequate for the
uses to which they are being put, are in good condition and repair (ordinary
wear and tear excepted), and except as set forth in Part 2.8 of the Disclosure
Schedule are adequate for the conduct of the Company's business in the manner in
which such business is currently being conducted.
(b) All inventory of the Company consists of a quality and quantity usable
and salable in the ordinary course of business, except for obsolete items and
items of below-standard quality, all of which have been written off or written
down to net realizable value or otherwise reserved for.
(c) The Company does not own any real property or any interest in real
property, except for the leasehold(s) created under the real property lease(s)
identified in Part 2.10(a) of the Disclosure Schedule.
2.9 Proprietary Assets.
(a) Part 2.9(a)(1) of the Disclosure Schedule sets forth, with respect to
each Company Proprietary Asset that has been registered, recorded or filed by
the Company (or assigned to the Company) with the U.S. Patent and Trademark
Office, the U.S. Copyright Office or any similar office in a foreign
jurisdiction or with respect to which an application has been filed with the
U.S. Patent and Trademark Office, the U.S. Copyright Office or any similar
office in a foreign jurisdiction, (i) a brief description of such Company
Proprietary Asset, and (ii) the names of the jurisdictions covered by the
applicable registration, recordation, filing or application. Part 2.9(a)(2) of
the Disclosure Schedule identifies and provides a brief description of all other
Company Proprietary Assets owned by the Company that are material to the
Company's business. Part 2.9(a)(3) of the Disclosure Schedule identifies and
provides a brief description of each Company Proprietary Asset that is owned by
any other Person and that is licensed to or used by the Company in a material
way (except for any Company Proprietary Asset that is licensed to the Company
under any third party software license that (1) is generally available to the
public at a cost of less than $20,000, and (2) imposes no future monetary
obligation on the Company) and identifies the license agreement or other
agreement under which such Company Proprietary Asset is being licensed to or
used by the Company. Except as set forth in Part 2.9(a)(4) of the Disclosure
Schedule, the Company owns good title to all of the Proprietary Assets
identified in Parts 2.9(a)(1) and 2.9(a)(2) of the Disclosure Schedule, free and
clear of all liens and other Encumbrances, and has a valid right to use all
Proprietary Assets identified in Part 2.9(a)(3) of the Disclosure Schedule.
Except as set forth in Part 2.9(a)(5) of the Disclosure Schedule, the Company is
not obligated to make any material payment to any Person for the use of any
Company Proprietary Asset.
(b) The Company has taken reasonable measures to protect and maintain the
secrecy of those Company Proprietary Assets whose value is substantially
dependent on such secrecy, and otherwise to maintain and protect the value of
all Company Proprietary Assets. Except as set forth in Part 2.9(b) of the
Disclosure Schedule, the Company has not (other than pursuant to license
agreements identified in Part 2.10 of the Disclosure Schedule) disclosed or
delivered to any Person, or permitted the disclosure or delivery to any Person
of, (i) the source code, or any material portion or aspect of the source code,
of any Company Proprietary Asset, or (ii) the object code, or any material
portion or aspect of the object code, of any Company Proprietary Asset.
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(c) To the knowledge of the Company, except as set forth in Part 2.9(c) of
the Disclosure Schedule, no current use of the Company Proprietary Assets
infringes or violates the Company's rights with respect to any Proprietary Asset
owned or exclusively licensed by any other Person. To the knowledge of the
Company, except as set forth in Part 2.9(c) of the Disclosure Schedule, the
Company is not infringing, misappropriating or making any unlawful use of, and
the Company has not at any time infringed, misappropriated or made any unlawful
use of, or received any notice or other communication of any actual, alleged,
possible or potential infringement, misappropriation or unlawful use of, any
Proprietary Asset owned or exclusively licensed by any other Person. To the
knowledge of the Company, except as set forth in Part 2.9(c) of the Disclosure
Schedule, no other Person is infringing, misappropriating or making any unlawful
use of, and no Proprietary Asset owned or used by any other Person infringes or
violates the Company's rights with respect to any Company Proprietary Asset.
(d) Except as set forth in Part 2.9(d) of the Disclosure Schedule: (i) each
Company Proprietary Asset referred to in Parts 2.9(a)(1)-(3) of the Disclosure
Schedule conforms in all material respects with the current specification,
documentation, performance standard, representation or statement (if any) made
or provided with respect thereto by or with authorization of the Company; and
(ii) there has not been any claim by any customer or other Person alleging that
any Company Proprietary Asset referred to in Parts 2.9(a)(1)-(3) of the
Disclosure Schedule (including each version of computer software that has been
licensed or otherwise made available by the Company to any Person since January
1, 1992) does not conform in all material respects with any specification,
documentation, performance standard, representation or statement made or
provided by or on behalf of the Company, and, to the knowledge of the Company,
there is no basis for any such claim, where such claim would have or could
reasonably be expected to have a Material Adverse Effect on the Company.
(e) To the knowledge of the Company, except as set forth in Part 2.9(c) of
the Disclosure Schedule, the Company Proprietary Assets constitute all the
Proprietary Assets necessary to enable the Company to conduct its business in
the manner in which such business has been conducted. Except as set forth in
Part 2.9(e) of the Disclosure Schedule, (i) the Company has not licensed any of
the Company Proprietary Assets to any Person on an exclusive basis, and (ii) the
Company has not entered into any covenant not to compete or Contract limiting
its ability to exploit in all material respects any of its Proprietary Assets or
to transact business in any market or geographical area or with any Person.
(f) Except as set forth in Part 2.9(f) of the Disclosure Schedule, all
current and former employees of the Company, and all current and former
consultants and independent contractors to the Company, have executed and
delivered to the Company written agreements (containing no material exceptions
to or exclusions from the scope of their coverage) including material terms that
are substantially identical to the form(s) of agreement(s) referenced in Part
2.9(f) of the Disclosure Schedule, which form(s) of agreement(s) is/are attached
to the Disclosure Schedule as an appendix.
(g) Except as set forth in Part 2.9(g) of the Disclosure Schedule, the
Company has not entered into and is not bound by any Contract under which any
Person has the right to distribute or license, on a commercial basis, any
Company Proprietary Asset referred to in Parts 2.9(a)(1)-(3) of the Disclosure
Schedule, including source code, object code, or any versions, modifications or
derivative works of source code or object code in any Company Proprietary Asset.
2.10 Contracts.
(a) Part 2.10(a) of the Disclosure Schedule identifies each Company
Contract that constitutes a "Material Contract." For purposes of this Agreement,
each of the following shall be deemed to constitute a "Material Contract":
(i) any Contract relating to the employment or engagement of, or the
performance of services by, any employee, consultant or independent
contractor;
(ii) except for customer Contracts in substantially the form attached
as an exhibit to Part 2.10(a) of the Disclosure Schedule, entered into in
the ordinary course of business, any Contract relating to the acquisition,
transfer, use, development, sharing or license of any Proprietary Asset;
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(iii) any Contract imposing any restriction on the Company's right or
ability (A) to compete with any other Person, (B) to acquire any product or
other asset or any services from any other Person, to sell any product or
other asset to or perform any services for any other Person or to transact
business or deal in any other manner with any other Person, or (C) to
develop or distribute any technology;
(iv) any Contract creating or involving any agency relationship,
distribution arrangement or franchise relationship;
(v) any Contract relating to the acquisition, issuance or transfer of
any securities;
(vi) any Contract creating or relating to the creation of any
Encumbrance with respect to any asset owned or used by the Company;
(vii) any Contract involving or incorporating any guaranty, any
pledge, any performance or completion bond, any indemnity, any right of
contribution or any surety arrangement;
(viii) any Contract creating or relating to any partnership or joint
venture or any sharing of revenues, profits, losses, costs or liabilities;
(ix) any Contract relating to the purchase or sale of any product or
other asset by or to, or the performance of any services by or for, any
Related Party (as defined in Section 2.19);
(x) any Contract to which any Governmental Body is a party or under
which any Governmental Body has any rights or obligations, or involving or
directly or indirectly benefiting any Governmental Body (including any
subcontract or other Contract between the Company and any contractor or
subcontractor to any Governmental Body);
(xi) any Contract entered into outside the ordinary course of business
or inconsistent with the Company's past practices;
(xii) except for customer Contracts in substantially the form attached
as an exhibit to Part 2.10(a) of the Disclosure Schedule, entered into in
the ordinary course of business, any Contract that has a term of more than
60 days and that may not be terminated by the Company (without penalty)
within 60 days after the delivery of a termination notice by the Company;
and
(xiii) any Contract (not otherwise identified in clauses "(i)" through
"(xii)" of this sentence) that contemplates or involves (A) the payment or
delivery of cash or other consideration in an amount or having a value in
excess of $20,000, or (B) the performance of services having a value in
excess of $30,000.
(b) The Company has delivered to Parent accurate and complete copies of all
Contracts identified in Part 2.10(a) of the Disclosure Schedule, including all
amendments thereto. Each Contract identified in Part 2.10(a) of the Disclosure
Schedule is valid and in full force and effect, and is enforceable by the
Company in accordance with its terms, subject to (i) laws of general application
relating to bankruptcy, insolvency and the relief of debtors, and (ii) rules of
law governing specific performance, injunctive relief and other equitable
remedies.
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(c) Except as set forth in Part 2.10(c) of the Disclosure Schedule:
(i) the Company has not violated or breached, or committed any default
under, any Material Contract in any material way, and, to the knowledge of
the Company, no other Person has violated or breached, or committed any
default under, any Material Contract in any material way;
(ii) to the knowledge of the Company, no event has occurred, and no
circumstance or condition exists, that (with or without notice or lapse of
time) will, or could reasonably be expected to, (A) result in a violation
or breach of any of the provisions of any Material Contract, (B) give any
Person the right to declare a default or exercise any remedy under any
Material Contract, (C) give any Person the right to accelerate the maturity
or performance of any Material Contract, or (D) give any Person the right
to cancel, terminate or modify any Material Contract;
(iii) the Company has not received any notice or other communication
regarding (i) any actual or possible violation or breach of, or default
under, any Material Contract, or (ii) any actual or possible termination of
any Material Contract; and
(iv) the Company has not waived any of its material rights under any
Material Contract.
(d) Except as set forth in Part 2.10(d) of the Disclosure Schedule, no
Person is renegotiating, or has been authorized by the Company to renegotiate,
any amount paid or payable to the Company under any Material Contract or any
other term or provision of any Material Contract.
(e) The Company has all Contracts necessary to enable the Company to
conduct its business substantially in the manner in which its business is
currently being conducted.
(f) The Company has not made any unexpired offer or proposal (to any
customer, prospective customer or other Person), except in the ordinary course
of business.
(g) The Company has no backlog under Company Contracts.
2.11 Liabilities.
(a) The Company has no liabilities of any nature required to be shown on
the face of the Company's financial statements or the notes thereto according to
generally accepted accounting principles except for: (i) liabilities identified
as such in the "liabilities" column of the Unaudited Interim Balance Sheet; (ii)
accounts payable or accrued salaries that have been incurred by the Company
since June 30, 1996 in the ordinary course of business and consistent with the
Company's past practices; and (iii) the liabilities identified in Part 2.11(a)
of the Disclosure Schedule.
(b) Part 2.11(b) of the Disclosure Schedule provides an accurate and
complete breakdown of (i) all accounts payable of the Company as of June 30,
1996, and (ii) all notes payable of the Company and all indebtedness of the
Company for borrowed money.
2.12 Compliance with Legal Requirements. The Company is, and at all times
since June 30, 1991, has been, in compliance with all applicable Legal
Requirements, except where the failure to comply with such Legal Requirements
has not had and will not have a Material Adverse Effect on the Company and
except as set forth on Part 2.12 of the Disclosure Schedule. Except as set forth
in Part 2.12 of the Disclosure Schedule, since June 30, 1991, the Company has
not received any notice or other communication from any Governmental Body
regarding any actual or possible violation of, or failure to comply with, any
material Legal Requirement.
2.13 Governmental Authorizations. Part 2.13 of the Disclosure Schedule
identifies each material Governmental Authorization held by the Company, and the
Company has delivered to Parent accurate and complete copies of all Governmental
Authorizations identified in Part 2.13 of the Disclosure Schedule. The
Governmental Authorizations identified in Part 2.13 of the Disclosure Schedule
are valid and in full force and effect, and collectively constitute all
Governmental Authorizations necessary to enable the Company to conduct its
business in the manner in which its business is currently being conducted. The
Company is, and at all times since June 30, 1991, has been, in compliance with
the material terms and requirements of the
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respective Governmental Authorizations identified in Part 2.13 of the Disclosure
Schedule. Since June 30, 1991, the Company has not received any notice or other
communication from any Governmental Body regarding (a) any actual or possible
violation of or failure to comply with any term or requirement of any
Governmental Authorization, or (b) any actual or possible revocation,
withdrawal, suspension, cancellation, termination or modification of any
Governmental Authorization.
2.14 Tax Matters.
(a) Except as set forth in Part 2.14(a) of the Disclosure Schedule, all Tax
Returns required to be filed by or on behalf of the Company with any
Governmental Body (the "Company Returns") (i) have been filed when due, and (ii)
have been accurately and completely prepared, in compliance with all applicable
Legal Requirements, except with respect to state or local sales tax Company
Returns required to be filed in the ordinary course of the Company's business
("Sales Tax Returns") where the failure to so file or be accurately or
completely prepared will not have and could not reasonably be expected to have a
Material Adverse Effect on the Company. Except as set forth in Part 2.14(a) of
the Disclosure Schedule, all amounts shown on the Company Returns to be due on
or before the Closing Date have been or will be paid on or before the Closing
Date. The Company has delivered to Parent accurate and complete copies of all
Company income Tax Returns (relating to income tax) filed since January 1, 1992.
(b) Except as set forth on Part 2.14(b) of the Disclosure Schedule, no
Company Return has ever been examined or audited by any Governmental Body, and
no such examination or audit has been proposed or scheduled by any Governmental
Body. Except as set forth in Part 2.14(b) of the Disclosure Schedule, no
extension or waiver of the limitation period applicable to any of the Company
Returns has been granted (by the Company or any other Person), and no such
extension or waiver has been requested from the Company.
(c) Except as set forth in Part 2.14(c) of the Disclosure Schedule, no
claim or Legal Proceeding is pending or has been threatened against or with
respect to the Company in respect of any Tax, and except with respect to Sales
Tax Returns where any such claim or Legal Proceeding will not have and cannot
reasonably be expected to have a Material Adverse Effect on the Company, nor
does any basis exist therefor. Except as set forth in Part 2.14(c) of the
Disclosure Schedule, there are no unsatisfied liabilities for Taxes (including
liabilities for interest, additions to tax and penalties thereon and related
expenses) with respect to any notice of deficiency or similar document received
by the Company. There are no liens for Taxes upon any of the assets of the
Company, except liens for current Taxes not yet due and payable. The Company has
not entered into or become bound by any agreement or consent pursuant to Section
341(f) of the Code. The Company has not been, and the Company will not be,
required to include any adjustment in taxable income for any tax period (or
portion thereof) pursuant to Section 481 or 263A of the Code or any comparable
provision under state or foreign Tax laws as a result of transactions or events
occurring, or accounting methods employed, prior to the Closing.
(d) There is no Contract covering any employee or independent contractor or
former employee or independent contractor of the Company (excluding any
agreement to be entered into in connection with this Agreement) that, considered
individually or considered collectively with any other such Contracts, will, or
could reasonably be expected to, give rise directly or indirectly to the payment
of any amount that would not be deductible pursuant to Section 280G or Section
162 of the Code. The Company is not, and has never been, a party to or bound by
any tax indemnity agreement, tax sharing agreement, tax allocation agreement or
similar Contract.
2.15 Employee and Labor Matters; Benefit Plans.
(a) Part 2.15(a) of the Disclosure Schedule identifies each salary, bonus,
vacation, deferred compensation, incentive compensation, stock purchase, stock
option, severance pay, termination pay, death or disability benefits,
hospitalization, medical, insurance, flexible benefits, supplemental
unemployment benefits, profit-sharing, stock bonus, employee stock ownership,
pension or retirement plan, program or agreement and each other employee benefit
plan or arrangement (individually referred to as a "Plan" and collectively
referred to as the "Plans") sponsored, maintained, contributed to or required to
be contributed to by the Company for the benefit of any current or former
employee of the Company.
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(b) The Company does not maintain, sponsor or contribute to, and has not at
any time in the past maintained, sponsored or contributed to, any employee
pension benefit plan (as defined in Section 3(2) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), whether or not excluded from
coverage under specific Titles or Subtitles of ERISA) for the benefit of
employees or former employees of the Company (a "Pension Plan") except for those
Pension Plans described in Part 2.15(a) of the Disclosure Schedule, none of
which is a multi-employer plan (within the meaning of Section 3(37) of ERISA),
and none of which is subject to Section 412 of the Code, Part 3 of Subtitle B of
Title I of ERISA or Title IV of ERISA.
(c) The Company does not maintain, sponsor or contribute to any employee
welfare benefit plan (as defined in Section 3(1) of ERISA, whether or not
excluded from coverage under specific Titles or Subtitles of ERISA) for the
benefit of employees or former employees of the Company (a "Welfare Plan")
except for those Welfare Plans described in Part 2.15(a) of the Disclosure
Schedule, none of which is a multiemployer plan (within the meaning of Section
3(37) of ERISA).
(d) With respect to each Plan (including the DCD ESOP), the Company has
delivered to Parent: (i) an accurate and complete copy of such Plan
(including all amendments thereto);
(ii) an accurate and complete copy of the annual report (if required
under ERISA) with respect to such Plan for 1995, 1994 and 1993;
(iii) an accurate and complete copy of (A) the most recent summary
plan description, together with each summary of material modifications (if
required under ERISA) with respect to such Plan, and (B) each material
general employee communication relating to such Plan;
(iv) if such Plan is funded through a trust or any third party funding
vehicle, an accurate and complete copy of the trust or other funding
agreement (including all amendments thereto) and accurate and complete
copies of the most recent financial statements thereof;
(v) accurate and complete copies of all Contracts relating to such
Plan, including service provider agreements, trust agreements, insurance
contracts, minimum premium contracts, stop-loss agreements, investment
management agreements, subscription and participation agreements and
recordkeeping agreements; and
(vi) an accurate and complete copy of the most recent determination
letter received from the Internal Revenue Service (the "IRS") with respect
to such Plan (if such Plan is intended to be qualified under Section 401(a)
of the Code).
(e) The Company is not required to be, and has never been required to be,
treated as a single employer with any other Person under Section 4001(b)(1) of
ERISA or Section 414(b), (c), (m) or (o) of the Code. The Company has never been
a member of an "affiliated service group" within the meaning of Section 414(m)
of the Code. The Company has never made a complete or partial withdrawal from a
"multiemployer plan" (as defined in Section 3(37) of ERISA) resulting in
"withdrawal liability" (as defined in Section 4201 of ERISA), without regard to
subsequent reduction or waiver of such liability under either Section 4207 or
4208 of ERISA.
(f) The Company does not have any plan or commitment to create any
additional Welfare Plan or Pension Plan, or to modify or change any existing
Welfare Plan or Pension Plan (other than to comply with applicable law or in
accordance with this Agreement).
(g) No Welfare Plan provides death, medical or health benefits (whether or
not insured) with respect to any current or former employee of the Company after
any such employee's termination of service (other than benefit coverage mandated
by applicable law, including coverage provided pursuant to Section 4980B of the
Code).
(h) With respect to each of the Welfare Plans constituting a group health
plan within the meaning of Section 4980B(g)(2) of the Code, the provisions of
Section 4980B of the Code ("COBRA") have been complied with in all material
respects.
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(i) Except as set forth on Part 2.15(i) of the Disclosure Schedule, each of
the Plans (including the DCD ESOP) has been operated and administered in all
material respects in accordance with applicable Legal Requirements, including
ERISA and the Code, and no prohibited transaction, within the meaning of Section
406 of ERISA or Section 4975(c) of the Code, has occurred with respect to any
Pension Plan or Welfare Plan that would result in any liability to the Company.
(j) Each of the Plans intended to be qualified under Section 401(a) of the
Code has received a favorable determination as to its qualification from the
IRS, and, except as set forth on Part 2.15(i) of the Disclosure Schedule,
nothing has occurred that would adversely affect such qualification.
(k) Except as set forth in Part 2.15(k) of the Disclosure Schedule, and
except as contemplated by certain Exhibits to this Agreement, neither the
execution, delivery or performance of this Agreement, nor the consummation of
the Merger or any of the other transactions contemplated by this Agreement, nor
any subsequent termination of employment will result in any bonus payment,
golden parachute payment, severance payment or other payment to any current or
former employee or director of the Company (whether or not under any Plan), or
materially increase the benefits payable under the Plan, or result in any
acceleration of the time of payment or vesting of any such benefits.
(l) The Company is in compliance in all material respects with all
applicable Legal Requirements and Contracts relating to employment, employment
practices, employee compensation, wages, bonuses and terms and conditions of
employment.
(m) The Company has good labor relations, and, except as set forth in Part
2.15(m) of the Disclosure Schedule, the Company has no knowledge of any facts
indicating that (i) the consummation of the Merger or any of the other
transactions contemplated by this Agreement will have a material adverse effect
on the Company's labor relations or (ii) any of the Company's key employees
intends to terminate his or her employment with the Company.
2.16 Environmental Matters. The Company is and has at all times been in
compliance, in all material respects, with all applicable Environmental Laws.
The Company possesses all material permits and other Governmental Authorizations
required under applicable Environmental Laws, and the Company is and has at all
times been in material compliance with the terms and requirements of all such
Governmental Authorizations. The Company has not received any written notice or
other written communication (whether from a Governmental Body, citizens group,
employee or otherwise) that alleges that the Company is not in compliance with
any Environmental Law. To the knowledge of the Company, no current or prior
owner of any property leased or controlled by the Company has received any
notice or other communication (whether from a Governmental Body, citizens group,
employee or otherwise) that alleges that such current or prior owner or the
Company is not or was not in compliance with any Environmental Law. All
Governmental Authorizations currently held by the Company pursuant to
Environmental Laws are identified in Part 2.16 of the Disclosure Schedule. (For
purposes of this Section 2.16: (i) "Environmental Law" means any federal, state,
local or foreign Legal Requirement relating to pollution of the environment, or
protection of human health associated with the environment, or the environment
(including ambient air, surface water, ground water, land surface or subsurface
strata), including any law or regulation relating to emissions, discharges,
releases or threatened releases of Materials of Environmental Concern, or
otherwise relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of Materials of Environmental Concern;
and (ii) "Materials of Environmental Concern" include chemicals, pollutants,
contaminants, wastes, toxic substances, petroleum and petroleum products
regulated by Environmental Law and any other substance that is now regulated by
any Environmental Law.
2.17 Sale of Products; Performance of Services.
(a) Other than its obligations to perform under the Material Contracts, the
Company has not incurred or become subject to any material liability arising
from (i) any product, system, program, Proprietary Asset or other asset
designed, developed, manufactured, assembled, sold, supplied, installed,
repaired, licensed or made available by the Company, or (ii) any consulting
services, installation services, programming services, repair services,
maintenance services, training services, support services or other services
performed by the Company.
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(b) Except as set forth in Part 2.17(b) of the Disclosure Schedule, no
customer or other Person has, at any time since January 1, 1995, asserted or
threatened to assert any claim against the Company (other than claims that have
been resolved satisfactorily at no material cost to the Company) under or based
upon (i) any warranty provided by or on behalf of the Company, or (ii) any
services performed by the Company, nor does any basis for any such claim exist
to the knowledge of the Company.
2.18 Insurance. Part 2.18 of the Disclosure Schedule provides accurate and
complete information with respect to each insurance policy maintained by, at the
expense of or for the benefit of the Company and with respect to any claims made
thereunder. The Company has delivered to Parent accurate and complete copies of
the insurance policies identified in Part 2.18 of the Disclosure Schedule. Each
of the insurance policies identified in Part 2.18 of the Disclosure Schedule is
in full force and effect. The Company has not received any notice or other
communication regarding any actual or possible (a) cancellation or invalidation
of any insurance policy, (b) refusal of any coverage or rejection of any claim
under any insurance policy, or (c) extraordinary adjustment in the amount of the
premiums payable with respect to any insurance policy.
2.19 Related Party Transactions. Except as set forth in Part 2.19 of the
Disclosure Schedule: (a) no Related Party has any direct or indirect interest in
any material asset used in or otherwise relating to the business of the Company;
(b) except for immaterial travel and similar advances, no Related Party is
indebted to the Company; (c) no Related Party has entered into, or has had any
direct or indirect financial interest in, any material Contract, transaction or
business dealing involving the Company; (d) no Related Party is competing, or
has at any time competed, directly or indirectly, with the Company; and (e) no
Related Party has any claim or right against the Company (other than rights to
receive compensation for services performed as an employee of the Company). (For
purposes of this Section 2.19, each of the following shall be deemed to be a
"Related Party": (i) each of the Shareholders; (ii) each individual who is, or
who has at any time been, an officer or director of the Company; (iii) each
individual who is, or who at any time has been, a member of the immediate family
of any of the individuals referred to in clauses "(i)" and "(ii)" above; and
(iv) any trust or other Entity (other than the Company) in which any one of the
individuals referred to in clauses "(i)", "(ii)" and "(iii)" above holds (or in
which more than one of such individuals collectively hold), beneficially or
otherwise, a material voting, proprietary or equity interest.)
2.20 Legal Proceedings; Orders.
(a) Except as set forth in Part 2.20(a) of the Disclosure Schedule, there
is no pending Legal Proceeding, and (to the knowledge of the Company) no Person
has threatened to commence any Legal Proceeding: (i) that involves the Company,
its capital stock or any of the assets owned or used by the Company; or (ii)
that challenges, or that may have the effect of preventing, delaying, making
illegal or otherwise interfering with, the Merger or any of the other
transactions contemplated by this Agreement. To the knowledge of the Company,
except as set forth in Part 2.20(a) of the Disclosure Schedule, no event has
occurred, and no claim, dispute or other condition or circumstance exists, that
will, or that could reasonably be expected to, with or without notice or the
passage of time, give rise to or serve as a basis for the commencement of any
material Legal Proceeding.
(b) Except as set forth in Part 2.20(b) of the Disclosure Schedule, since
January 1, 1993, no Legal Proceeding has ever been commenced by, and no Legal
Proceeding has ever been pending against, the Company.
(c) There is no order, writ, injunction, judgment or decree to which the
Company, or any of the assets owned or used by the Company, is subject. None of
the Shareholders is subject to any order, writ, injunction, judgment or decree
that relates to the Company's business, its capital stock or to any of the
assets owned or used by the Company. To the knowledge of the Company, no officer
or other employee of the Company is subject to any order, writ, injunction,
judgment or decree that prohibits such officer or other employee from engaging
in or continuing any conduct, activity or practice relating to the Company's
business.
2.21 Authority; Binding Nature of Agreement. The Company has the corporate
power and authority to enter into and, subject to shareholder approval, to
perform its obligations under this Agreement; and the execution, delivery and,
subject to shareholder approval, performance by the Company of this Agreement
have
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been duly authorized by all necessary action on the part of the Company and its
board of directors. This Agreement constitutes the legal, valid and binding
obligation of the Company, enforceable against the Company in accordance with
its terms, subject to (i) laws of general application relating to bankruptcy,
insolvency and the relief of debtors, and (ii) rules of law governing specific
performance, injunctive relief and other equitable remedies.
2.22 Non-Contravention; Consents. Except as set forth in Part 2.22 of the
Disclosure Schedule, neither (1) the execution, delivery or performance of this
Agreement, nor (2) the consummation of the Merger or any of the other
transactions contemplated by this Agreement, will directly or indirectly (with
or without notice or lapse of time):
(a) contravene, conflict with or result in a violation of (i) any of
the provisions of the Company's articles of incorporation or bylaws, or
(ii) any resolution adopted by the Company's shareholders or the Company's
board of directors;
(b) contravene, conflict with or result in a violation of, or give any
Governmental Body or other Person the right to challenge any of the
transactions contemplated by this Agreement or to exercise any remedy or
obtain any relief under, any Legal Requirement or any order, writ,
injunction, judgment or decree to which the Company, or any of the assets
owned or used by the Company, is subject;
(c) contravene, conflict with or result in a violation of any of the
terms or requirements of, or give any Governmental Body the right to
revoke, withdraw, suspend, cancel, terminate or modify, any Governmental
Authorization that is held by the Company or that otherwise relates to the
Company's business or to any of the assets owned or used by the Company;
(d) contravene, conflict with or result in a violation or breach of,
or result in a default under, any provision of any Material Contract, or
give any Person the right to (i) declare a default or exercise any remedy
under any Material Contract, (ii) accelerate the maturity or performance of
any Material Contract, or (iii) cancel, terminate or modify any Material
Contract; or
(e) result in the imposition or creation of any lien or other
Encumbrance upon or with respect to any asset owned or used by the Company
(except for minor liens that will not, in any case or in the aggregate,
materially detract from the value of the assets subject thereto or
materially impair the operations of the Company).
Except as set forth in Part 2.22 of the Disclosure Schedule and except for
shareholder approval of the Merger, the Company is not and will not be required
to make any filing with or give any notice to, or to obtain any Consent from,
any Person in connection with (x) the execution, delivery or performance of this
Agreement or any of the other agreements referred to in this Agreement, or (y)
the consummation of the Merger or any of the other transactions contemplated by
this Agreement.
2.23 Full Disclosure. This Agreement (including the Disclosure Schedule)
does not, and the Company Closing Certificate (defined in Section 6.6(l)) will
not, (i) contain any representation, warranty or information that is false or
misleading or (ii) omit to state any material fact necessary in order to make
any representation, warranty or information contained herein or therein, as so
stated, not false or misleading.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Parent and Merger Sub represent and warrant to the Company and the
Designated Shareholders as follows:
3.1 Due Organization. The Parent is a corporation duly organized, validly
existing and in good standing under the laws of the State of California, and
Merger Sub is a corporation duly organized, validly existing and in good
standing under the laws of the State of Minnesota. Each of the corporations is
duly qualified to do business and is in good standing in all jurisdictions where
its ownership or leasing of property or the conduct of its business requires it
to be so qualified and failure to be so qualified would have a Material Adverse
Effect on Parent and its subsidiaries taken as a whole; and each has all
necessary corporate power and authority: (i) to conduct its business in the
manner in which its business is currently being conducted; (ii) to own and use
its
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assets in the manner in which its assets are currently owned and used; and (iii)
to perform its obligations under all Contracts by which it is bound.
3.2 Subsidiaries. Parent's only subsidiaries are Madic-Compufact
Corporation, DataWorks (Europe) Ltd. and Merger Sub (collectively, the
"DataWorks Subsidiaries"), and all shares of the outstanding capital stock of
each of them are owned directly or indirectly by Parent. All of such shares so
owned by Parent are fully paid and nonassessable and are owned by it free and
clear of any lien, claim, charge, option, encumbrance or agreement with respect
thereto. Each DataWorks Subsidiary is a corporation duly organized, validly
existing, and in good standing under the laws of its jurisdiction of
incorporation, and has corporate power and authority to own or lease its
properties and assets and to carry on its business as it is now being conducted.
3.3 Capitalization. The authorized capital stock of Parent consists of
25,000,000 shares of Parent Common Stock, of which approximately 5,955,416
shares have been issued and are outstanding as of July 31, 1996. All of the
outstanding shares of capital stock of Parent have been duly and validly
authorized and issued and are fully paid and nonassessable.
3.4 Parent Financial Statements. The consolidated balance sheets of Parent
as of December 31, 1995 and 1994 and related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1995, together with the notes thereto, audited by
Ernst & Young LLP and included in Parent's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995 as filed with the SEC, and the unaudited
consolidated balance sheet of Parent as of June 30, 1996 and the related
unaudited consolidated statements of operations and cash flows for the six
months then ended contained in Parent's Quarterly Report or Form 10-Q filed for
the six months ended June 30, 1996 have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis and
present fairly (except that financial statements for interim periods may not
contain certain footnotes and are subject to normal and recurring adjustments,
which management considers necessary for a fair presentation of Parent's
consolidated financial position and results of operations at the end of and for
such periods) the consolidated financial position of Parent at the dates and the
results of operations, changes in financial position and cash flows of Parent
for the periods stated therein.
3.5 SEC Filings.
(a) Parent has delivered to the Company accurate and complete copies
(excluding copies of exhibits) of each report, registration statement (on a form
other than Form S-8) and definitive proxy statement filed by Parent with the SEC
between January 1, 1996 and the date of this Agreement (the "Parent SEC
Documents"). As of the time it was filed with the SEC (or, if amended or
superseded by a filing prior to the date of this Agreement, then on the date of
such filing): (i) each of the Parent SEC Documents complied in all material
respects with the applicable requirements of the Securities Act or the Exchange
Act (as the case may be); and (ii) none of the Parent SEC Documents contained
any untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.
(b) The consolidated financial statements contained in the Parent SEC
Documents: (i) complied as to form in all material respects with the published
rules and regulations of the SEC applicable thereto; (ii) were prepared in
accordance with generally accepted accounting principles applied on a consistent
basis throughout the periods covered, except as may be indicated in the notes to
such financial statements and (in the case of unaudited statements) as permitted
by Form 10-Q of the SEC, and except that unaudited financial statements may not
contain footnotes and are subject to normal and recurring year-end audit
adjustments (which will not, individually or in the aggregate, be material in
magnitude); and (iii) fairly present the consolidated financial position of
Parent and its subsidiaries as of the respective dates thereof and the
consolidated results of operations of Parent and its subsidiaries for the
periods covered thereby.
3.6 Absence of Certain Changes. Since December 31, 1995, there has not
been any material adverse change in the business, financial condition, assets,
liabilities, results of operations or prospective customers of Parent and any
DataWorks Subsidiary, taken as a whole.
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3.7 Compliance with Law. Each of Parent and each DataWorks Subsidiary has
all permits, licenses, authorizations, orders and approvals of, and has made all
filings, applications and registrations with, federal, state, local or foreign
governmental or regulatory bodies that are required in order to permit it to own
or lease its properties or assets and to carry on its business as presently
conducted and that are material to the business of Parent or such subsidiary;
all such permits, licenses, certificates of authority, orders and approval are
in full force and effect and, to the knowledge of Parent and Merger Sub, no
suspension or cancellation of any of them is threatened; and all such filings,
applications and registrations are current. The conduct by each of Parent and
each DataWorks Subsidiary of its business and the condition and use of its
properties do not violate or infringe, in any respect material to any such
business, any applicable domestic (federal, state or local) or foreign law,
statute, ordinance, license or regulation. Neither Parent nor any DataWorks
Subsidiary is in default under any order, license, regulation or demand of any
federal, state, municipal or other governmental agency or with respect to any
order, writ, injunction or decree of any court. Except for statutory or
regulatory restrictions of general application, no federal, state, municipal or
other governmental authority has placed any restrictions on the business or
properties of Parent or any DataWorks Subsidiary which reasonably could be
expected to have a Material Adverse Effect on Parent and its subsidiaries taken
as a whole.
3.8 Parent Benefit Plans.
(a) As of July 31, 1996, the only "employee benefit plans" within the
meaning of Section 3(3) or ERISA for which Parent or any DataWorks Subsidiary
acts as plan sponsor as defined in ERISA Section 3(16)(B) with respect to which
any liability under ERISA or otherwise exists or may be incurred by Parent or
any DataWorks Subsidiary are those listed in Schedule 3.8 attached hereto (the
"Parent Plans"). No Parent Plan is a "multi-employer plan" within the meaning of
Section 3(37) of ERISA.
(b) Each Parent Plan is and has been in all material respects operated and
administered in accordance with its provisions and applicable law, except where
the failure to do so would not have a material adverse affect on Parent and its
subsidiaries taken as a whole; and Parent or the relevant DataWorks Subsidiary,
as applicable, has received favorable determination letters from the Internal
Revenue Service under the provisions of TEFRA, DEFRA, REA and TRA 1986 for each
of the Parent Plans to which the qualification requirement of Section 401(a) of
the Code apply. Parent knows of no reason that any Parent Plan which is subject
to the qualification provisions of Section 401(a) of the Code is not "qualified"
within the meaning of Section 40l(a) of the Code and that each related trust is
not exempt from taxation under Section 501(a) of the Code.
(c) The present value of all benefits vested and all benefits accrued under
each Parent Plan which is subject to Title IV of ERISA did not, in each case, as
determined for purposes of reporting on Schedule B to the Annual Report on Form
5500 of each such Parent Plan as of the end of the most recent Plan year, exceed
the value of the assets of the Parent Plans allocable to such vested or accrued
benefits.
(d) To the knowledge of Parent, no Parent Plan or any trust created
thereunder, nor any trustee, fiduciary or administrator thereof, has engaged in
a "prohibited transaction", as such term is defined in Section 4975 of the Code
or Section 406 of ERISA or violated fiduciary standards under Part 4 of Title I
of ERISA, which could, to the knowledge of Parent, subject Parent or such Parent
Plan or trust to the tax or penalty on prohibited transactions imposed by said
Section 4975 or would result in material liability to Parent and its
subsidiaries taken as a whole.
(e) No Parent Plan which is subject to Title IV of ERISA or any trust
created thereunder has been terminated, nor have there been any "reportable
events" as that term is defined in Section 4043 of ERISA with respect to any
Parent Plan, other than those events which may result from the transactions
contemplated by this Agreement.
(f) No Parent Plan or any trust created thereunder has incurred any
"accumulated funding deficiency", as such term is defined in Section 412 of the
Code (whether or not waived), during the last five Parent Plan years which would
result in a material liability.
(g) Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will (i) result in any
material payment (including, without limitation, severance,
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unemployment compensation, golden parachute or otherwise) becoming due to any
director or employee or former employee of Parent under any Parent Plan or
otherwise, (ii) materially increase any benefits otherwise payable under any
Parent Plan or (iii) result in the acceleration of the time of payment or
vesting of any such benefits to any material extent.
3.9 Litigation and Other Proceedings. Neither Parent nor any DataWorks
Subsidiary is a party to any pending or, to the knowledge of Parent and Merger
Sub, threatened, claim, action, suit, investigation or proceeding, or is subject
to any order, judgment or decree, except for matters which, in the aggregate,
will not have, or cannot reasonably be expected to have, a Material Adverse
Effect on the Parent and its subsidiaries taken as a whole.
3.10 Authority; Binding Nature of Agreement. Subject to approval by the
shareholders of Parent, Parent and Merger Sub each has the corporate power and
authority to enter into and to perform its obligations under this Agreement; and
subject to shareholder approval the execution, delivery and performance by the
Parent and Merger Sub of this Agreement have been duly authorized by all
necessary action on the part of the Parent, Merger Sub and their respective
boards of directors. This Agreement constitutes the legal, valid and binding
obligation of the Parent and Merger Sub, enforceable against each of them in
accordance with its terms, subject to (i) laws of general application relating
to bankruptcy, insolvency and the relief of debtors, and (ii) rules of law
governing specific performance, injunctive relief and other equitable remedies.
Neither the execution, delivery and performance by Parent and Merger Sub of
this Agreement nor the consummation of the transactions contemplated hereby, nor
compliance by Parent and Merger Sub with any of the provisions hereof, will (i)
violate, conflict with, or result in a breach of any provision of, or constitute
a default (or an event which, with notice or lapse of time or both, would
constitute a default) under, or result in the termination of, or accelerate the
performance required by, or result in a right of termination or acceleration of,
or result in the creation of, any lien, security interest, charge or encumbrance
upon any of the properties or assets of Parent or any DataWorks Subsidiary under
any of the terms, conditions or provisions of (x) any of their respective
articles of incorporation or bylaws or (y) any material note, bond, mortgage,
indenture, deed of trust, license, lease, agreement or other instrument or
obligation to which Parent or any DataWorks Subsidiary is a party or by which
any of such parties may be bound, or to which Parent or any DataWorks Subsidiary
or any of the properties or assets of any of them may be subject, or (ii)
subject to compliance with the statutes and regulations referred to in the next
paragraph, to the knowledge of Parent and Merger Sub, violate any judgment,
ruling, order, writ, injunction, decree, statute, rule or regulation applicable
to Parent or any DataWorks Subsidiary or any of their respective properties or
assets.
Other than in connection with or in compliance with the provisions of the
Securities Act of 1933, as amended, and the rules and regulations thereunder
(the "Securities Act"), the securities or blue sky laws of the various states or
filings, no notice to, filing with, exemption or review by, or authorization,
consent or approval of, any public body or authority is necessary for the
consummation by Parent and Merger Sub of the transactions contemplated by this
Agreement, except for the filing of the Articles of Merger.
3.11 Brokers and Finders. Neither Parent nor Merger Sub nor any of their
respective officers, directors or employees has employed any broker or finder or
incurred liability for any financial advisory fees, brokerage fees, commissions
or finder's fees, and no broker or finder has acted directly or indirectly for
Parent or Merger Sub in connection with this Agreement or the transactions
contemplated hereby, except with respect to Furman Selz.
3.12 Valid Issuance. Subject to Section 1.5(c), the Parent Common Stock to
be issued in the Merger will, when issued in accordance with the provisions of
this Agreement, be validly issued, fully paid and nonassessable.
SECTION 4. CERTAIN COVENANTS
4.1 Access and Investigation.
(a) During the period from the date of this Agreement through the Effective
Time (the "Pre-Closing Period"), the Company shall, and shall cause its
Representatives to: (i) provide Parent and Parent's
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Representatives with reasonable access to the Company's Representatives,
personnel and assets and to all books, records, Tax Returns, work papers and
other documents and information relating to the Company and the DCD ESOP; and
(ii) provide Parent and Parent's Representatives with such copies of the books,
records, Tax Returns, work papers and other documents and information relating
to the Company and the DCD ESOP, and with such additional financial, operating
and other data and information regarding the Company and the DCD ESOP, as Parent
may reasonably request.
(b) During the Pre-Closing Period, the Parent shall, and shall cause its
Representatives to provide the Designated Shareholders with reasonable access to
documents and information previously publicly filed or disclosed, and supporting
documentation reasonably related to such previously disclosed information (and
in that regard the Parent shall make its executive officers available to Company
representatives at reasonable times on reasonable notice to answer questions
relating to the Company's business which are consistent with the foregoing).
4.2 Operation of the Company's Business. Unless otherwise permitted by
Parent by means of a prior written consent, during the Pre-Closing Period:
(a) the Company shall, and the Designated Shareholders shall cause the
Company to, conduct its business and operations in the ordinary course and
in substantially the same manner as such business and operations have been
conducted prior to the date of this Agreement;
(b) the Company shall, and the Designated Shareholders shall cause the
Company to, use commercially reasonable efforts to preserve intact its
current business organization, keep available the services of its current
officers and employees and maintain its relations and goodwill with all
suppliers, customers, landlords, creditors, employees and other Persons
having business relationships with the Company;
(c) the Company shall, and the Designated Shareholders shall cause the
Company to, keep in full force (and renew) all insurance policies
identified in Part 2.18 of the Disclosure Schedule;
(d) the Company shall, and the Designated Shareholders shall cause the
Company to (to the extent requested by Parent) cause its officers to report
regularly (but in no event more frequently than weekly) to Parent
concerning the status of the Company's business;
(e) the Company shall not, and the Designated Shareholders shall cause
the Company not to, declare, accrue, set aside or pay any dividend or make
any other distribution in respect of any shares of capital stock, nor
repurchase, redeem or otherwise reacquire any shares of capital stock or
other securities;
(f) the Company shall not, and the Designated Shareholders shall cause
the Company not to, sell, issue or authorize the issuance of (i) any
capital stock or other security, (ii) any option, call, warrant or right to
acquire, or relating to, any capital stock or other security, or (iii) any
instrument convertible into or exchangeable for any capital stock or other
security;
(g) neither the Company nor any of the Designated Shareholders shall
amend or permit the adoption of any amendment to the Company's articles of
incorporation or bylaws, or effect or permit the Company to become a party
to any Acquisition Transaction, recapitalization, reclassification of
shares, stock split, reverse stock split or similar transaction;
(h) the Company shall not, and the Designated Shareholders shall cause
the Company not to, form any subsidiary or acquire any equity interest or
other interest in any other Entity;
(i) the Company shall not, and the Designated Shareholders shall cause
the Company not to, make any capital expenditure, except for capital
expenditures that, when added to all other capital expenditures made on
behalf of the Company during the Pre-Closing Period, do not exceed $100,000
in the aggregate;
(j) the Company shall not, and the Designated Shareholders shall cause
the Company not to, (i) enter into or become bound by, or permit any of the
assets owned or used by it to become bound by, any
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material Contract (except in the ordinary course of business), or (ii)
amend or prematurely terminate, or waive any material right or remedy
under, any material Contract;
(k) the Company shall not, and the Designated Shareholders shall cause
the Company not to, (i) acquire, lease or license any right or other asset
from any other Person, (ii) sell or otherwise dispose of, or lease or
license, any right or other asset to any other Person, except licenses and
sales of the Company's software products in the ordinary course of
business, or (iii) waive or relinquish any right, except for immaterial
assets acquired, leased, licensed or disposed of by the Company pursuant to
Contracts that are not Material Contracts;
(l) the Company shall not, and the Designated Shareholders shall cause
the Company not to, (i) lend money to any Person, or (ii) incur or
guarantee any indebtedness, or (iii) repay any indebtedness to any of its
shareholders or Representatives;
(m) the Company shall not, and the Designated Shareholders shall cause
the Company not to, (i) establish, adopt or amend any Employee Benefit
Plan, including any 401(k) plan not in existence as of July 17, 1996, or
terminate any Pension Plan (including the DCD ESOP) or Welfare Plan except
in accordance with Section 5.11 below; (ii) pay any bonus or make any
profit-sharing or similar payment to, or increase the amount of the wages,
salary, commissions, fringe benefits or other compensation or remuneration
payable to, any of its directors, officers or employees, other than
payments or increases solely with respect to non-officer employees which
are consistent with the Company's recent practice or made pursuant to an
existing bonus plan disclosed on Part 2.5(m) of the Disclosure Schedule;
(iii) enter into any employment agreement or modify any existing employment
agreement, except as may be set forth in this Agreement; (iv) hire more
than a net of 10 new employees; or (v) hire any new employee whose
aggregate annual compensation is expected to exceed $75,000.
(n) the Company shall not, and the Designated Shareholders shall cause
the Company not to, change any of its methods of accounting or accounting
practices in any respect;
(o) the Company shall not, and the Designated Shareholders shall cause
the Company not to, make any Tax election;
(p) the Company shall not, and the Designated Shareholders shall cause
the Company not to, commence or settle any Legal Proceeding;
(q) the Company shall not, and the Designated Shareholders shall cause
the Company not to, enter into any material transaction or take any other
material action outside the ordinary course of business or inconsistent
with its past practices; and
(r) the Company shall not, and the Designated Shareholders shall cause
the Company not to, agree or commit to take any of the actions described in
clauses "(e)" through "(q)" of this Section 4.2.
4.3 Notification by the Company; Updates to Disclosure Schedule by the
Company.
(a) During the Pre-Closing Period, the Company shall promptly notify Parent
in writing of:
(i) the discovery by the Company of any event, condition, fact or
circumstance that occurred or existed on or prior to the date of this
Agreement and that caused or constitutes a material inaccuracy in or breach
of any representation or warranty made by the Company in this Agreement;
(ii) the discovery by the Company of any event, condition, fact or
circumstance that occurs, arises or exists after the date of this Agreement
and that would cause or constitute a material inaccuracy in or breach of
any representation or warranty made by the Company in this Agreement if (A)
such representation or warranty had been made as of the time of the
occurrence, existence or discovery of such event, condition, fact or
circumstance, or (B) such event, condition, fact or circumstance had
occurred, arisen or existed on or prior to the date of this Agreement;
(iii) any material breach of any covenant or obligation of the Company
or any of the Designated Shareholders; and
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(iv) the discovery by the Company of any event, condition, fact or
circumstance that would make the timely satisfaction of any of the
conditions set forth in Section 6 impossible or unlikely.
(b) If any event, condition, fact or circumstance that is required to be
disclosed pursuant to Section 4.3(a) requires any change in the Disclosure
Schedule, or if any such event, condition, fact or circumstance would require
such a change assuming the Disclosure Schedule were dated as of the date of the
occurrence, existence or discovery of such event, condition, fact or
circumstance, then the Company shall promptly deliver to Parent an update to the
Disclosure Schedule specifying such change. No such update shall be deemed to
supplement or amend the Disclosure Schedule for the purpose of (i) determining
the accuracy of any of the representations and warranties made by the Company in
this Agreement, or (ii) determining whether any of the conditions set forth in
Section 6 has been satisfied.
4.4 No-Shop. During the Pre-Closing Period, neither the Company nor any of
the Designated Shareholders shall, directly or indirectly (and the Company and
the Designated Shareholders shall cause their respective affiliates not to):
(a) solicit, initiate, encourage the submission of, or consider any
inquiry, proposal or offer from any Person (other than Parent) relating to
a possible Acquisition Transaction;
(b) participate in any discussions or negotiations or enter into any
agreement with, or provide any information to, or otherwise cooperate in
any way with or encourage any Person (other than Parent), or facilitate any
efforts by any such Person, relating to or in connection with a possible
Acquisition Transaction; or
(c) consider, entertain or accept any proposal or offer from any
Person (other than Parent) relating to a possible Acquisition Transaction.
The Company shall promptly notify Parent in writing (in reasonable detail)
of any inquiry, proposal or offer relating to a possible Acquisition
Transaction that is received by the Company or any of the Designated
Shareholders during the Pre-Closing Period.
4.5 Notification by Parent; Updates to Schedules by Parent.
(a) During the Pre-Closing Period, Parent shall promptly notify the Company
in writing of:
(i) the discovery by Parent of any event, condition, fact or
circumstance that occurred or existed on or prior to the date of this
Agreement and that caused or constitutes a material inaccuracy in or breach
of any representation or warranty made by Parent or Merger Sub in this
Agreement;
(ii) the discovery by Parent of any event, condition, fact or
circumstance that occurs, arises or exists after the date of this Agreement
and that would cause or constitute a material inaccuracy in or breach of
any representation or warranty made by Parent or Merger Sub in this
Agreement if (A) such representation or warranty had been made as of the
time of the occurrence, existence or discovery of such event, condition,
fact or circumstance, or (B) such event, condition, fact or circumstance
had occurred, arisen or existed on or prior to the date of this Agreement;
(iii) any material breach of any covenant or obligation of Parent or
Merger Sub; and
(iv) the discovery by Parent of any event, condition, fact or
circumstance that would make the timely satisfaction of any of the
conditions set forth in Section 7 impossible or unlikely.
(b) If any event, condition, fact or circumstance that is required to be
disclosed pursuant to Section 4.5(a) requires any change in any schedule
provided by Parent to the Company, or if any such event, condition, fact or
circumstance would require such a change assuming such schedule were dated as of
the date of the occurrence, existence or discovery of such event, condition,
fact or circumstance, then Parent shall promptly deliver to the Company an
update to such schedule specifying such change. No such update shall be deemed
to supplement or amend such schedule for the purpose of (i) determining the
accuracy of any of the representations and warranties made by Parent or Merger
Sub in this Agreement, or (ii) determining whether any of the conditions set
forth in Section 7 has been satisfied.
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SECTION 5. ADDITIONAL COVENANTS OF THE PARTIES
5.1 Filings and Consents. As promptly as practicable after the execution
of this Agreement, each party to this Agreement (a) shall make all filings (if
any) and give all notices (if any) required to be made and given by such party
in connection with the Merger and the other transactions contemplated by this
Agreement, and (b) shall use his, her or its commercially reasonable efforts to
obtain each Consent (if any) required to be obtained (pursuant to any applicable
Legal Requirement or Contract, or otherwise) by such party in connection with
the Merger or any of the other transactions contemplated by this Agreement. Each
party shall promptly deliver to the other a copy of each such filing made, each
such notice given and each such Consent obtained by it during the Pre-Closing
Period. Each party will furnish to the other all the information concerning such
party required for inclusion in any statement or application made by such other
party to any Governmental Body in connection with the transactions contemplated
by this Agreement.
5.2 Proxy Statement. Parent will use its commercially reasonable efforts
to file, as soon as practicable after the date of this Agreement, with the SEC a
Registration Statement on Form S-4 (the "Registration Statement") under the
Securities Act, relating to the shares of Parent Common Stock to be delivered to
the Shareholders pursuant to this Agreement, and will use commercially
reasonable efforts to cause the Registration Statement to become effective. At
the time the Registration Statement becomes effective, the Registration
Statement will comply in all material respects with the provisions of the
Securities Act and the published rules and regulations thereunder, and will not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
false or misleading, and at the time of mailing thereof to the Shareholders, at
the time of the Company Shareholders' Meeting and the Effective Time, the
prospectus included as part of the Registration Statement, as amended or
supplemented by any amendment or supplement filed by parent (hereinafter the
"Prospectus"), will not contain any untrue statement of a material fact or omit
to state any material fact necessary to make the statements therein not false or
misleading; provided, however, that none of the provisions of this paragraph
shall apply to statements in or omissions from the Registration Statement or the
Prospectus made in reliance upon and in conformity with information furnished by
the Company and/or the Shareholders for use in the Registration Statement or the
Prospectus. Parent will file all documents required to be filed to list the
Parent Common Stock to be issued pursuant to this Agreement on Nasdaq and use
commercially reasonable efforts to effect said listing. Parent will file all
documents required to obtain, prior to the Effective Time of the Merger, all
necessary Blue Sky permits and approvals, if any, required to carry out the
transactions contemplated by this Agreement, will pay all expenses incident
thereto and will use commercially reasonable efforts to obtain such permits and
approvals. The Company and Designated Stockholders shall provide Parent with all
information and assistance as is reasonably requested by Parent in connection
with this Section 5.2
5.3 Shareholders' Meetings.
(a) The Company shall, in accordance with its articles of incorporation and
bylaws and the applicable requirements of the Minnesota Statutes, call and hold
a special meeting of the Shareholders as promptly as legally permissible after
the effectiveness of the Registration Statement for the purpose of permitting
them to consider and to vote upon and approve the Merger and this Agreement (the
"Company Shareholders' Meeting"). The Company shall cause a copy of a complete
and accurate proxy statement relating to the Merger and this Agreement jointly
prepared by the Company and Parent (the "Proxy Statement") to be delivered to
each Shareholder who is entitled to vote at the Company Shareholders' Meeting.
As promptly as practicable after the delivery of copies of the Proxy Statement
to all Shareholders entitled to vote at the Company Shareholders' Meeting, the
Company shall use reasonable commercial efforts to solicit from each of such
Shareholders a proxy in favor of the approval of the Merger and this Agreement.
Each Designated Shareholder shall cause all shares of the capital stock of the
Company that are owned, beneficially or of record, by such Designated
Shareholder on the record date for the Company Shareholders' Meeting to be voted
in favor of the Merger and this Agreement at such meeting.
(b) The Parent shall, in accordance with its articles of incorporation and
bylaws and the applicable requirements of the California Corporations Code, call
and hold a special meeting of its shareholders as
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promptly as practicable for the purpose of permitting them to consider and to
vote upon and approve the Merger and this Agreement (the "Parent Shareholders'
Meeting"). The Parent shall cause a copy of the Proxy Statement to be delivered
to each shareholder of the Parent who is entitled to vote at the Parent
Shareholders' Meeting. As promptly as practicable after the delivery of copies
of the Proxy Statement to all shareholders entitled to vote at the Parent
Shareholders' Meeting, Parent shall use reasonable commercial efforts to solicit
from each of such shareholders a proxy in favor of the approval of the Merger
and this Agreement.
5.4 Public Announcements. During the Pre-Closing Period, neither the
Company nor any of the Designated Shareholders shall (and neither the Company
nor any Designated Shareholder shall permit any of its affiliates or
Representatives to) issue any press release or make any public statement
regarding this Agreement or the Merger, or regarding any of the other
transactions contemplated by this Agreement, without Parent's prior written
consent.
5.5 Pooling of Interests. During the Pre-Closing Period, neither the
Company nor any Designated Shareholder shall take any action that could have an
adverse effect on the ability of Parent to account for the Merger as a "pooling
of interests," and the Company represents and warrants to Parent that to its
knowledge, no Shareholder has taken or intends to take any action that will have
or could reasonably be expected to have such an effect. Parent covenants that it
shall, following the Closing (provided it occurs prior to November 30, 1996) and
prior to January 31, 1997, issue a press release reporting its consolidated
earnings for 1996.
5.6 Affiliate Agreements. Each Designated Shareholder shall execute and
deliver to Parent, and the Company and the Designated Shareholders shall use
reasonable commercial efforts to cause the other Shareholders listed on Part 5.6
of the Disclosure Schedule (which the Company hereby represents and warrants to
Parent consists of all persons who are "affiliates" of the Company for purposes
of the Securities Act) to execute and deliver to Parent, as promptly as
practicable after the execution of this Agreement, an Affiliate Agreement in the
form of Exhibit E.
5.7 Commercially Reasonable Efforts; Disclosure and Accuracy of
Information.
(a) During the Pre-Closing Period, (i) the Company and the Designated
Shareholders shall use commercially reasonable efforts to cause the conditions
set forth in Section 6 to be satisfied on a timely basis, and (ii) Parent and
Merger Sub shall use commercially reasonable efforts to cause the conditions set
forth in Section 7 to be satisfied on a timely basis.
(b) Subject to the provisions of Section 4.1, during the Pre-Closing
Period, each of the Parent on the one hand and the Company and the Designated
Shareholders on the other shall furnish all information to the other parties as
the other parties may reasonably request for inclusion in the Proxy Statement,
which information shall be true and accurate to the best of its knowledge, and
otherwise cooperate with the others in the preparation and filing of such
document and related documents.
(c) The Company covenants that at the time the Registration Statement
becomes effective, the Registration Statement will not contain any untrue
statement of a material fact pertaining to the Company or omit to state a
material fact pertaining to the Company required to be stated therein or
necessary to make the statements therein not false or misleading, and at the
time of mailing thereof to the Shareholders, at the time of the Company
Shareholders' Meeting and at the Effective Time, the Prospectus will not contain
any untrue statement of a material fact pertaining to the Company or omit to
state any material fact pertaining to the Company necessary to make the
statements therein not false or misleading.
5.8 Tax Matters. At or prior to the Closing, (a) the Company shall execute
and deliver to Cooley Godward Castro Huddleson & Tatum and to Dorsey & Whitney
LLP a tax representation letter in substantially the form of Exhibit F-1 (which
will be used in connection with the legal opinions contemplated by Sections
6.5(j) and 7.5(b)), (b) Parent and Merger Sub shall execute and deliver to
Cooley Godward Castro Huddleson & Tatum and to Dorsey & Whitney LLP a tax
representation letter in substantially the form of Exhibit F-2 (which will be
used in connection with the legal opinions contemplated by Sections 6.5(j) and
7.5(b)), and (c) each of the Designated Shareholders shall execute and deliver
to Parent a Continuity of Interest Certificate in the form of Exhibit H.
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5.9 Agreements With Certain Individuals. At the Closing, (a) each of
Richard D. Borg, William J. Borg and Robert W. Brandel shall execute and deliver
to the Company an employment letter in the form of Exhibit H; (b) the Company
shall encourage Marde S. Olson to enter into a Separation and Consulting
Agreement in the form of Exhibit I; and (c) Dwayne E. Borg shall execute and
deliver to the Company a Separation, Consulting and Noncompetition Agreement in
the form of Exhibit J.
5.10 Acknowledgment and Release. At the Closing, the Company shall
encourage each Shareholder which is the holder of record of one percent (1%) or
greater of the Company Common Stock either as of the date hereof or immediately
prior to Closing other than the DCD ESOP to execute and deliver to the Company
and Parent an Acknowledgment and Release in the form of Exhibit K.
5.11 Termination of Employee Plans. Except as prohibited by applicable
law, at the Closing, the Company shall terminate all bonus plans and other
benefit plans under which any of its employees or former employees may have any
rights (subject to accrued rights), and except for accrued rights shall ensure
that no employee or former employee of the Company has any rights thereunder and
that any liabilities of the Company thereunder (including any such liabilities
relating to services performed prior to the Closing) are fully extinguished at
no cost to the Company. Notwithstanding the foregoing, the Company shall not
terminate any Pension Plan (including the DCD ESOP) or Welfare Plan unless
Parent has consented to or requested such termination, provided that the Company
shall take such action as is necessary to terminate, effective prior to the
Closing, any Pension Plan or Welfare Plan that Parent within fifteen (15) days
prior to Closing requests be so terminated.
5.12 FIRPTA Matters. At the Closing, (a) the Company shall deliver to
Parent a statement (in such form as may be reasonably requested by counsel to
Parent) conforming to the requirements of Section 1.897 -- 2(h)(1)(i) of the
United States Treasury Regulations, and (b) the Company shall deliver to the
Internal Revenue Service the notification required under Section
1.897 -- 2(h)(2) of the United States Treasury Regulations.
5.13 ESOP Matters.
(a) Except as set forth in Part 5.13(a) of the Disclosure Schedule, the
Company represents, warrants and covenants, to and for the benefit of Parent and
the other Indemnitees, as follows:
(i) The DCD ESOP is duly organized and existing under applicable law,
is a stock bonus plan qualified under Section 401(a) of the Code and is an
"employee stock ownership plan" as defined in Section 4975(e)(7) of the
Code. The DCD ESOP was formed and is, and at all times has been, maintained
primarily for the benefit of the DCD ESOP participants and beneficiaries,
within the meaning of Section 4975(d)(3)(A) of the Code, Treasury
Regulations Section 54.4975-7 and Section 408(b)(3) of ERISA. The shares of
the Company's stock held by the DCD ESOP (the "ESOP Shares") constitute
"employer securities" within the meaning of Section 409(l) of the Code. The
Company has heretofore delivered to Parent accurate and complete copies of
all documents (and all amendments, modifications and supplements thereto)
material to the creation of the DCD ESOP and ESOP Trust and the ESOP
Transactions, including, but not limited to, (a) the DCD ESOP plan document
and trust agreement and the ESOP Transaction Documents, and (b) each
request heretofore filed with the IRS requesting the issuance of a
favorable determination letter with respect to the qualified status or
continuing qualified status of the DCD ESOP, including all supporting
documentation filed therewith.
(ii) None of the ESOP Transactions was, or has resulted in, or will
result in a prohibited transaction under Section 4975(c) of the Code,
Sections 406 or 407 of ERISA, or the regulations thereunder. Each of the
ESOP Loans and any related guarantees constitutes an "exempt loan" under
Treasury Regulation Section 54.4975-7(b)(1)(iii). The use of the proceeds
of the ESOP Loans by the Company and the DCD ESOP, respectively, and the
pledge of the ESOP Shares as security for the ESOP Loans, did not and does
not constitute or result in a violation of the provisions of the Code or
ERISA or any regulations thereunder.
(iii) The ESOP Loans have been fully paid, and no further amounts are
due thereunder. Neither the Company nor the DCD ESOP is or has been in
breach or violation of any of the ESOP Transaction
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Documents, there are no remaining unperformed obligations of the Company or
the DCD ESOP under any of the ESOP Transaction Documents, and there are no
amounts as to which the Company or the DCD ESOP are or may be liable under
the ESOP Transaction Documents.
(iv) All Legal Requirements applicable to the Company and/or to the
ESOP Trustee requiring prudence of fiduciaries, including, without
limitation, as to valuation matters and other similar matters relating to
discretionary judgments not involving legal judgments, have been complied
with, and the Company is not and shall not be subject to any liability as a
fiduciary or co-fiduciary under ERISA with respect to matters arising prior
to and through the Closing Date in connection with the ESOP. Neither the
execution and delivery of this Agreement nor the consummation of the
transactions described herein or in the Escrow Agreement, or any other
agreement between or among the parties to this Agreement, or the
performance of the terms hereof or thereof, will conflict with, violate, or
result in a breach of the DCD ESOP plan document, the ESOP Transaction
Documents or any agreement or other instrument by which the Company, the
DCD ESOP, the ESOP Trustee or the ESOP Trust may be bound, and will not
constitute a breach by any Person acting as a fiduciary, within the meaning
of ERISA, with respect to the DCD ESOP of any fiduciary responsibility or
similar duty or obligation owed by such Person to the participants of the
DCD ESOP under ERISA or otherwise.
(b) The Company and the Designated Shareholders shall take such action as
is necessary to ensure that the requirements of Section 409(e) of the Code and
the fiduciary provisions of ERISA are satisfied in connection with the voting of
the ESOP Shares upon the Merger at the Company Shareholders' Meeting.
(c) The Company agrees to take, during the Pre-Closing Period and
thereafter, such actions as Parent deems reasonably necessary in Parent's
discretion to obtain assurances satisfactory to Parent as to (i) the
qualification of the DCD ESOP under Sections 401(a) and 4975(e)(7) of the Code
and (ii) the compliance by the Company, the DCD ESOP and the ESOP Trust with
applicable Legal Requirements, including ERISA and the Code, in connection with
the establishment, operation and maintenance of the DCD ESOP and the
availability of the intended benefits and consequences associated with the DCD
ESOP and the ESOP Transactions. Prior to the Closing, such actions shall not
include, without the Company's consent, applying to the IRS for a determination
letter, engaging in IRS voluntary compliance resolution procedures, entering
into a closing agreement with the IRS or seeking from the Department of Labor an
advisory opinion or prohibited transaction exemption. The Surviving Corporation
may take any of such actions in its discretion following the Effective Time. No
such actions taken by Parent or the Company shall in any way limit or diminish
the rights of any Indemnitees under this Agreement or the Escrow Agreement to
recover or be indemnified for Indemnitee Damages, as defined in the Escrow
Agreement.
SECTION 6. CONDITIONS PRECEDENT TO OBLIGATIONS OF PARENT AND MERGER SUB
The obligations of Parent and Merger Sub to effect the Merger and otherwise
consummate the transactions contemplated by this Agreement are subject to the
satisfaction, at or prior to the Closing, of each of the following conditions:
6.1 Accuracy of Representations. The representations and warranties made
by the Company in this Agreement and the other agreements and instruments
delivered to Parent in connection with the transactions contemplated by this
Agreement shall have been accurate in all material respects as of the date of
this Agreement, individually and taken as a whole, and shall be accurate as of
the Closing as if made at the Closing (without giving effect to any update to
the Disclosure Schedule), except for any inaccuracies which, individually and
taken as a whole, have not had a Material Adverse Effect on the Company;
provided, however, that with respect to any representation identifying any
Contract in the Disclosure Schedule, for purposes of this Section 6.1 such
representation shall not be deemed materially inaccurate as of the Closing by
reason of the Company entering into additional Contracts to be identified on the
Disclosure Schedule between the date hereof and the Closing Date.
6.2 Performance of Covenants. Each covenant or obligation that the Company
or any of the Designated Shareholders is required to comply with or to perform
at or prior to the Closing shall have been complied with and performed in all
material respects.
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6.3 Shareholder Approval; Dissenters. The terms of the Merger and this
Agreement shall have been duly approved by the affirmative vote of the shares of
Company Common Stock entitled to vote with respect thereto at the Company
Shareholders' Meeting; holders of not more than two percent (2%) of the
Company's Common Stock then outstanding, and no holders of shares of capital
stock of the Parent, shall be, or shall have the right to become, entitled to
exercise dissenters' rights pursuant to, respectively, Chapter 302A of the
Minnesota Statutes and Chapter 13 of the California Corporations Code; and the
terms of the Merger and this Agreement shall have been duly approved by the
affirmative vote of the Parent's shareholders at the Parent Shareholders'
Meeting.
6.4 Consents. All material Consents required to be obtained in connection
with the Merger and the other transactions contemplated by this Agreement
(including the Consents identified in Part 2.22 of the Disclosure Schedule)
shall have been obtained and shall be in full force and effect; and the Company
shall have paid no material consideration to any third party or consented to any
conditions materially adverse to the Company in connection with obtaining any
such Consent.
6.5 Agreements and Documents. Parent and the Company shall have received
the following agreements and documents, each of which shall be executed and
delivered and in full force and effect:
(a) The Escrow Agreement, as described in Section 1.1;
(b) Affiliate Agreements in the form of Exhibit E, executed by the
"affiliates" of the Company for purposes of the Securities Act listed on
Part 5.6 of the Disclosure Schedule;
(c) Continuity of Interest Certificates in the form of Exhibit G,
executed by the Shareholders holding beneficially or of record (including
but not limited to beneficiaries of the DCD ESOP), one percent (1%) or
greater of the Company's Common Stock either as of the date hereof or
immediately prior to Closing;
(d) an Employment Agreement in the form of Exhibit H executed by each
of Richard D. Borg, William Borg and Robert W. Brandel, as described in
Section 5.9;
(e) a Separation and Consulting Agreement in the form of Exhibit I,
executed by Marde S. Olson, as described in Section 5.9;
(f) a Separation, Consulting and Noncompetition Agreement in the form
of Exhibit J, executed by Dwayne E. Borg, as described in Section 5.9;
(g) an Acknowledgment and Release in the form of Exhibit K, executed
by each of the Shareholders holding one percent (1%) or greater of the
Company Common Stock either as of the date hereof or immediately prior to
Closing;
(h) the statement referred to in Section 5.12(a), executed by the
Company; (i) a legal opinion of Dorsey & Whitney LLP dated as of the
Closing Date, in the form of Exhibit L;
(j) a legal opinion of Dorsey & Whitney LLP dated as of the Closing
Date, in form reasonably satisfactory to Parent, to the effect that the
Merger will constitute a reorganization within the meaning of Section 368
of the Code (it being understood that, in rendering such opinion, Dorsey &
Whitney LLP may rely upon the tax representation letters and Continuity of
Interest Certificates referred to in Section 5.8);
(k) letters from Price Waterhouse LLP and Ernst & Young LLP dated as
of the Closing Date, in form satisfactory to Parent, confirming the
appropriateness of "pooling of interests" for the Merger under Accounting
Principles Board Opinion No. 16 if the Merger is closed and consummated in
accordance with the Agreement;
(l) a certificate executed by the President of the Company and
containing the representation and warranty of the Company that each of the
conditions set forth in this Section 6 have been duly satisfied (the
"Company Closing Certificate"); and
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(m) written resignations of all directors of the Company, effective as
of the Effective Time, and of each DCD ESOP and 401(k) plan trustee,
effective in each case upon acceptance of such resignation by the Surviving
Corporation and appointment of a successor trustee.
6.6 Termination of Employee Plans. The Company shall have provided Parent
with evidence, satisfactory to Parent, as to the termination of the plans
referred to in Section 5.11, including each Pension Plan or Welfare Plan that is
to be terminated prior to the Closing in accordance with Section 5.11.
6.7 FIRPTA Compliance. The Company shall have filed with the Internal
Revenue Service the notification referred to in Section 5.12(b).
6.8 State Securities Law Requirements. The shares of Parent Common Stock
to be issued in connection with the Merger shall have been issued in
transactions qualified or exempt from registration under the securities or "blue
sky" laws of every relevant jurisdiction.
6.9 No Restraints. No temporary restraining order, preliminary or
permanent injunction or other order preventing the consummation of the Merger
shall have been issued by any court of competent jurisdiction and remain in
effect, and there shall not be any Legal Requirement enacted or deemed
applicable to the Merger that makes consummation of the Merger illegal.
SECTION 7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY
The obligations of the Company to effect the Merger and otherwise
consummate the transactions contemplated by this Agreement are subject to the
satisfaction, at or prior to the Closing, of the following conditions:
7.1 Accuracy of Representations. The representations and warranties made
by Parent and Merger Sub in this Agreement shall have been accurate in all
material respects as of the date of this Agreement, individually and taken as a
whole, and shall be accurate as of the Closing, as if made at the Closing
(without giving effect to any update in any schedule provided by Parent pursuant
hereto); except for any inaccuracies which, individually and taken as a whole,
have not had a Material Adverse Effect on the Parent and its subsidiaries, taken
as a whole; provided, however, that in no event shall the representations and
warranties set forth in Section 3.6 be deemed inaccurate at the Closing solely
by reason of one or more of the following:
(i) Fluctuations of Parent's earnings primarily attributable to timing
differences in revenue recognition of customer Contracts;
(ii) Changes in Parent's stock price as traded on the Nasdaq Stock
Market;
(iii) Changes in general economic conditions or in Parent's industry
in particular, or events affecting general economic conditions or Parent's
industry;
(iv) Changes in the stock market or technology stocks generally or
financial indicators; and/or
(v) Analyst reports or recommendations.
7.2 Performance of Covenants. Each covenant or obligation that Parent and
Merger Sub are required to comply with or to perform at or prior to the Closing
shall have been complied with and performed in all material respects.
7.3 Shareholder Approval; Dissenters. The terms of the Merger and this
Agreement shall have been duly approved by the affirmative vote of the shares of
Company Common Stock entitled to vote with respect thereto at the Company
Shareholders' Meeting; holders of not more than 2% of the Company's Common Stock
then outstanding, and no holders of shares of capital stock of the Parent, shall
be, or shall have the right to become, entitled to exercise dissenters' rights
pursuant to, respectively, Chapter 302A of the Minnesota Statutes and Chapter 13
of the California Corporations Code; and the terms of the Merger and this
Agreement shall have been duly approved by the affirmative vote of the Parent's
shareholders at the Parent Shareholders' Meeting.
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7.4 Consents. All material Consents required to be obtained in connection
with the Merger and the other transactions contemplated by this Agreement
(including the Consents identified in Part 2.22 of the Disclosure Schedule)
shall have been obtained and shall be in full force and effect; and the Company
shall have paid no material consideration to any third party or consented to any
conditions materially adverse to the Company in connection with obtaining any
such Consent.
7.5 Documents. The Company shall have received the following legal
opinions and certificate:
(a) a legal opinion of Cooley Godward Castro Huddleson & Tatum, dated
as of the Closing Date, in the form of Exhibit M;
(b) a legal opinion of Cooley Godward Castro Huddleson & Tatum, dated
as of the Closing Date, in form reasonably satisfactory to the Company, to
the effect that the Merger will constitute a reorganization within the
meaning of Section 368 of the Code (it being understood that, in rendering
such opinion, Cooley Godward Castro Huddleson & Tatum may rely upon the tax
representation letters and the Continuity of Interest Certificates referred
to in Section 5.8).
(c) a certificate executed by the President of Parent and containing
the representation and warranty of Parent that each of the conditions set
forth in this Section 7 have been duly satisfied (the "Parent Closing
Certificate").
7.6 No Restraints. No temporary restraining order, preliminary or
permanent injunction or other order preventing the consummation of the Merger
shall have been issued by any court of competent jurisdiction and remain in
effect, and there shall not be any Legal Requirement enacted or deemed
applicable to the Merger that makes consummation of the Merger illegal.
7.7 Execution and Delivery of Agreements. The agreements referenced in
Section 6.5(d), (e) and (f) shall have been executed and delivered by Parent
shall be in full force and effect.
SECTION 8. TERMINATION
8.1 Termination Events. This Agreement may be terminated prior to the
Closing:
(a) by Parent if Parent reasonably determines that the timely
satisfaction of any condition set forth in Section 6 has become impossible
(other than as a result of any failure on the part of Parent or Merger Sub
to comply with or perform any covenant or obligation of Parent or Merger
Sub set forth in this Agreement);
(b) by the Company if the Company reasonably determines that the
timely satisfaction of any condition set forth in Section 7 has become
impossible (other than as a result of any failure on the part of the
Company or any of the Designated Shareholders to comply with or perform any
covenant or obligation set forth in this Agreement);
(c) by Parent at or after the Scheduled Closing Time if any condition
set forth in Section 6 has not been satisfied by the earlier of November
30, 1996 or the Scheduled Closing Time;
(d) by the Company at or after the Scheduled Closing Time if any
condition set forth in Section 7 has not been satisfied by the earlier of
November 30, 1996 or the Scheduled Closing Time;
(e) by mutual consent of all the parties;
(f) by Parent if (i) there has been a material breach by the Company
or any Designated Shareholder of any covenant, representation or warranty
contained in this Agreement, (ii) Parent has notified the Company in
writing of the existence of such breach, and (iii) the Company as such
Designated Shareholder, as applicable, has failed to cure such breach
within ten days after receiving such notice;
(g) by the Company if (i) there has been a material breach by Parent
of any covenant, representation or warranty contained in this Agreement,
(ii) the Company has notified Parent in writing
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of the existence of such breach, and (iii) Parent has failed to cure such
breach within ten days after receiving such notice; or
(h) by either Parent or the Company if (i) there shall be a
non-appealable order of a federal or state court in effect preventing
consummation of the Merger, (ii) there shall be any action taken, or any
statute, rule, regulations or order enacted, promulgated, issued or deemed
applicable to the Merger, by any governmental entity that would make
consummation of the Merger illegal, or (iii) upon a vote at a duly held
meeting of shareholders or any adjournment thereof, any required approval
of the holders of Parent Common Stock or Company Common Stock shall not
have been obtained.
8.2 Extension of Time; Waivers. At any time prior to the Closing Date:
(a) Parent and Merger Sub may (i) extend the time for the performance
of any of the obligations or other acts of the Company and/or the
Designated Shareholders, and (ii) waive compliance with any of the
agreements or conditions contained herein to be performed by the Company
and/or the Designated Shareholders. Any agreement on the part of Parent and
Merger Sub to any such extension or waiver shall be valid only if set forth
in an instrument in writing signed on behalf of Parent and Merger Sub; and
(b) The Company may (i) extend the time for the performance of any of
the obligations or other acts of Parent and/or Merger Sub, and (ii) waive
compliance with any of the agreements or conditions contained herein to be
performed by Parent and/or Merger Sub. Any agreement on the part of the
Company to any such extension or waiver shall be valid only if set forth in
an instrument in writing signed on behalf of the Company.
SECTION 9. REGISTRATION OF SHARES
9.1 Certain Definitions. As used in this Section 9, the following terms
shall have the following respective meanings:
"Holder" shall mean each of the Designated Shareholders, Robert W.
Brandel and any person holding Registrable Securities to whom the rights
under this Section 9 have been transferred in accordance with Section 9.8
hereof.
"Initiating Holders" shall mean any Holders who in the aggregate are
Holders of greater than 50% of the then outstanding Registrable Securities.
"Prior Registration Rights Agreement" shall mean the Amended and
Restated Registration Rights Agreement dated August 24, 1995, by and among
Parent and the shareholders who are signatories thereto.
"Publication Date" shall mean the date on which Parent publishes
financial results covering at least 30 days of post-Merger combined
operations;
"Registrable Securities" means the Parent Common Stock issued to the
Holders in the Merger and any Parent Common Stock issued or issuable in
respect of the Parent Common Stock issued to the Holders in the Merger upon
any stock split, stock dividend, recapitalization, merger, consolidation or
similar event; provided, however, that shares of Common Stock or other
securities shall no longer be treated as Registrable Securities if they
have been transferred other than pursuant to Section 9.8 hereof.
The terms "register," "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement.
"Registration Expenses" shall mean all expenses, except Selling
Expenses as defined below, incurred by Parent in complying with Sections
9.2 and 9.3 hereof, including, without limitation, all registration,
qualification and filing fees, printing expenses, escrow fees, fees and
disbursements of counsel for Parent, Blue Sky fees and expenses, and the
expense of any special audits incident to or required by any such
registration (but excluding the compensation of regular employees of
Parent, which shall be paid in any event by Parent).
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"Selling Expenses" shall mean all underwriting discounts, selling
commissions and stock transfer taxes applicable to the securities
registered by the Holders, and, except as set forth in Registration
Expenses above, all reasonable fees and disbursements of counsel for any
Holder (if such counsel is different from counsel to the Parent).
9.2 Requested Registration. If Parent shall receive from Initiating
Holders a written request that Parent file a registration statement on Form S-3
(or any successor form to Form S-3) for a public offering of shares of the
Registrable Securities and Parent is a registrant entitled to use Form S-3 to
register the Registrable Securities for such an offering, Parent shall:
(a) promptly give written notice of the proposed registration to all
other Holders; and
(b) as soon as practicable, use its best lawful efforts to effect such
registration (including, without limitation, appropriate qualification
under applicable Blue Sky or other state securities laws and appropriate
compliance with applicable regulations issued under the Securities Act and
any other governmental requirements or regulations) as may be so requested
and as would permit or facilitate the sale and distribution of all or such
portion of such Registrable Securities as are specified in such request,
together with all or such portion of the Registrable Securities of any
Holders joining in such request as are specified in a written request
received by Parent within 20 days after the written notice specified in
clause (i) above has been given; and
(c) use its best lawful efforts to keep such registration effective
(subject to Section 9.9) for the purpose of resales of Registrable
Securities by the Holders from time to time, including, but not limited to,
the filing of all necessary requests, consents and Exchange Act reports and
amendments to registrations;
provided, however, that notwithstanding any other provision of this Section 9,
Parent shall have no obligation to register shares or keep any registration
statement effective pursuant to this Section 9.2 to the extent that the
Registrable Securities with respect to which Parent would otherwise (but for
this proviso) be required to file and/or keep effective a registration statement
pursuant to this Section 9.2 have been included in a registration statement
filed by Parent referred to in Section 9.3(a); and provided further, however,
Parent shall not be obligated to take any action to effect any registration
pursuant to this Section 9.2:
(i) in any particular jurisdiction in which Parent would be required
to execute a general consent to service of process in effecting such
registration unless Parent is already subject to service in such
jurisdiction and except as may be required by the Securities Act; or
(ii) unless with respect to the resale of Registrable Securities Rules
145(c) and (d) are not available to all Holders, prior to the Publication
Date; or
(iii) prior to February 1, 1997, and then only with respect to a
maximum of 225,000 shares of Registrable Securities, which number shall
increase by an additional 225,000 shares at the expiration of each six (6)
month period following February 1, 1997, not to exceed the total number of
Registrable Securities issued in the Merger; provided, however, that each
such lot of a maximum of 225,000 shares shall be increased to a maximum of
400,000 shares if with respect to the resale of Registrable Securities
Rules 145(c) and (d) are not available to all Holders; or
(iv) during the period starting with the date 30 days prior to
Parent's good faith estimated date of filing of, and ending on the date
three months immediately following, the effective date of any registration
statement pertaining to securities of Parent (other than a registration of
securities in a shelf registration pursuant to Rule 415 (or any similar
successor rule promulgated by the SEC), in a Rule 145 (or any similar
successor rule promulgated by the SEC) transaction, for the resale of
securities solely by selling shareholders, or with respect to an employee
benefit plan), provided that Parent is actively employing in good faith all
reasonable efforts to cause such registration statement to become
effective; or
(v) if Parent shall furnish to such Holder a certificate signed by the
President of Parent stating that in the good faith judgment of the Board of
Directors it would be seriously detrimental to Parent or its
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shareholders for a registration statement to be filed in the near future,
provided that pursuant to this clause (v) Parent cannot delay
implementation of such request for registration for more than 60 days; or
(vi) if Parent has effected an aggregate of three registrations
pursuant to Section 9.2 and such registrations have become effective. For
purposes of the foregoing, a registration from which the Holders have
withdrawn all Registrable Securities prior to the effectiveness of such
registration (or with respect to which Holders of a majority of Registrable
Securities have requested that all Registrable Securities be withdrawn)
shall not count as one of the three registrations permitted to the Holders.
Notwithstanding the foregoing, each Holder acknowledges that there may
occasionally be times when the Parent, in the good faith judgment of one or more
of its executive officers or its Board of Directors, determines it must suspend
such Holder's ability to sell Registrable Securities pursuant to any
registration statement filed pursuant to this Section 9.2 until such time as an
amendment to the registration statement has been filed by Parent and declared
effective by the SEC, or until such time as Parent has filed an appropriate
report with the SEC pursuant to the Securities Exchange Act of 1934, as amended.
Such suspensions shall be permitted for a period of up to thirty (30) days each.
During any such suspension no Holder may sell any securities of Parent pursuant
to a registration statement filed pursuant to this Section 9.2 unless otherwise
permitted in writing by Parent.
9.3 Company Registration.
(a) If at any time or from time to time Parent shall determine to register
any of its securities, either for its own account or the account of a security
holder or holders, in connection with a public offering of such securities
solely for cash on a form that would also permit the registration of Registrable
Securities, Parent will:
(i) promptly give to each Holder written notice thereof; and
(ii) include in such registration (and any related qualification under
Blue Sky laws or other compliance), and in any underwriting involved
therein, all the Registrable Securities specified in a written request or
requests, made within 20 days after the written notice specified in clause
(i) above has been given. provided, however, Parent shall not be obligated
to take any action to effect any registration pursuant to this Section 9.3
(A) prior to the Publication Date or (B) if the Holders of a majority of
the Registrable Securities then outstanding give written notice to Parent
prior to the effectiveness of such registration that all of the Registrable
Securities are to be withdrawn from such registration.
(b) If the registration of which Parent gives notice is for a registered
public offering involving an underwriting, Parent shall so advise the Holders as
a part of the written notice given pursuant to Section 9.3(a)(i). In such event,
the right of any Holder to registration pursuant to this Section 9.3 shall be
conditioned upon such Holder's participation in such underwriting and the
inclusion of Registrable Securities in the underwriting to the extent provided
herein. All Holders proposing to distribute their securities through such
underwriting shall (together with Parent and the other holders distributing
their securities through such underwriting) enter into an underwriting agreement
in customary form with the managing underwriter selected for such underwriting
by Parent. Notwithstanding any other provision of this Section 9.3, if the
managing underwriter determines that marketing factors require a limitation of
the number of shares to be underwritten, the managing underwriter may limit the
Registrable Securities to be included in such registration. If the managing
underwriter so limits the number of Registrable Securities to be registered and
underwritten, Parent shall so advise all selling shareholders of Parent,
including the Holders, and the number of shares of Registrable Securities that
may be included in the registration and underwriting shall be allocated among
the Holders, in proportion, as nearly as practicable, to the respective amounts
of Registrable Securities held by such Holders at the time of filing the
registration statement; provided, however, that with respect to any registration
resulting from any demand registration rights (the "Prior Demand Rights")
pursuant to the Prior Registration Rights Agreement, Registrable Securities
shall be included in such registration only if all of the securities requested
to be registered pursuant to the Prior Demand Rights have been included in such
registration. To facilitate the allocation of shares in accordance with the
above provisions, Parent may round the number of shares allocated to any Holder
or holder to the nearest multiple of 100 shares.
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If any selling Holder disapproves of the terms of any such underwriting,
including any limitation on the number of Registrable Securities that such
Holder may include in such underwriting, such person may elect to withdraw
therefrom by written notice to Parent and the managing underwriter.
(c) Parent shall have the right to terminate or withdraw any registration
initiated by it under this Section 9.3 prior to the effectiveness of such
registration whether or not any Holder has elected to include securities in such
registration.
9.4 Expenses of Registration. All Registration Expenses incurred in
connection with any registration of Registrable Securities pursuant to Sections
9.2 and 9.3 shall be borne by Parent. All Selling Expenses relating to
Registrable Securities registered on behalf of the Holders shall be borne by the
Holders of such Registrable Securities pro rata on the basis of the number of
shares so registered; provided that each Holder is solely responsible for the
fees and disbursements of its separate individual counsel, if any.
9.5 Registration Procedures. In the case of each registration,
qualification or compliance effected by Parent pursuant to Section 9.2, Parent
will keep each Holder advised in writing as to the initiation of each
registration, qualification and compliance and as to the completion thereof. At
its expense, Parent will:
(a) prepare and file with the SEC a registration statement with
respect to such securities and use its best efforts to cause such
registration statement to become and remain effective until the earlier of
(A) the date the distribution described in the registration statement has
been completed; or (B) the date that the Holders participating in such
registration may sell all remaining Registrable Securities held by such
holders on any one day pursuant to Rule 145(d) (or any similar successor
rule promulgated by the SEC); and
(b) furnish to the Holders participating in such registration and to
the underwriters of the securities being registered such reasonable number
of copies of the registration statement, preliminary prospectus, final
prospectus and such other documents as such underwriters may reasonably
request in order to facilitate the public offering of such securities.
9.6 Indemnification.
(a) Parent will indemnify each Holder, each of its officers and directors
and partners, and each person controlling such Holder within the meaning of
Section 15 of the Securities Act, with respect to which registration,
qualification or compliance has been effected pursuant to this Section 9, and
each underwriter, if any, and each person who controls any underwriter within
the meaning of Section 15 of the Securities Act, against all expenses, claims,
losses, damages or liabilities (or actions in respect thereof), including any of
the foregoing incurred in settlement of any litigation, commenced or threatened,
arising out of or based on any untrue statement (or alleged untrue statement) of
a material fact contained in any registration statement, prospectus, offering
circular or other document, or any amendment or supplement thereto, incident to
any such registration, qualification or compliance, or based on any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances in
which they were made, not misleading, or any violation by Parent of the
Securities Act or the Exchange Act or any rule or regulation promulgated under
the Securities Act or the Exchange Act applicable to Parent in connection with
any such registration, qualification or compliance, and Parent will reimburse
each such Holder, each of its officers and directors, and each person
controlling such Holder, each such underwriter and each person who controls any
such underwriter, for any legal and any other expenses reasonably incurred in
connection with investigating, preparing or defending any such claim, loss,
damage, liability or action, provided that Parent will not be liable in any such
case to the extent that any such claim, loss, damage, liability or expense
arises out of or is based on any untrue statement or omission or alleged untrue
statement or omission, made in reliance upon and in conformity with written
information furnished to Parent by such Holder, controlling person or
underwriter and specifically for use therein. Notwithstanding the foregoing, as
far as the foregoing indemnity relates to any untrue statement (or alleged
untrue statement) or omission (or alleged omission) made in the preliminary
prospectus but eliminated or remedied in the amended prospectus on file with the
SEC at the time the registration statement becomes effective or in the final
prospectus filed with the SEC pursuant to Rule 424(b), the indemnity agreement
herein shall not inure to the benefit of any
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underwriter or, if there is no underwriter, any Holder if a copy of the final
prospectus filed pursuant to Rule 424(b) was not furnished to the person or
entity asserting the loss, liability, claim or damage at or prior to the time
such furnishing is required by the Securities Act.
(b) Each Holder will, if Registrable Securities held by such Holder are
included in the securities as to which such registration, qualification or
compliance is being effected, indemnify Parent, each of its directors and
officers, each underwriter, if any, of Parent's securities covered by such
registration, qualification or compliance, each person who controls Parent or
such underwriter within the meaning of Section 15 of the Securities Act, and
each other such Holder including Registrable Securities in such registration,
each of its officers and directors and each person controlling such other Holder
within the meaning of Section 15 of the Securities Act, against all claims,
losses, damages and liabilities (or actions in respect thereof) arising out of
or based on any untrue statement (or alleged untrue statement) of a material
fact contained in any such registration statement, prospectus, offering circular
or other document, or any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse Parent, such other Holders, or such
directors, officers, persons, underwriters or control persons for any legal or
any other expenses reasonably incurred in connection with investigating or
defending any such claim, loss, damage, liability or action, in each case to the
extent, but only to the extent, that such untrue statement (or alleged untrue
statement) or omission (or alleged omission) is made in such registration
statement, prospectus, offering circular or other document in reliance upon and
in conformity with written information furnished to Parent by such Holder
specifically for use therein. Notwithstanding the foregoing, the liability of
each Holder under this subsection (b) shall be limited to an amount equal to the
initial public offering price of the shares sold by such Holder, unless such
liability arises out of or is based on willful conduct by such Holder.
Notwithstanding the foregoing, as far as the foregoing indemnity relates to any
untrue statement (or alleged untrue statement) or omission (or alleged omission)
made in the preliminary prospectus but eliminated or remedied in the amended
prospectus on file with the SEC at the time the registration statement becomes
effective or in the final prospectus filed pursuant to Rule 424(b), the
indemnity agreement herein shall not inure to the benefit of Parent, any
underwriter or any other Holder if a copy of the final prospectus filed pursuant
to Rule 424(b) was not furnished to the person or entity asserting the loss,
liability, claim or damage at or prior to the time such furnishing is required
by the Securities Act, unless delivery of such final prospectus was the
responsibility of the Indemnifying Party (as hereinafter defined) hereunder.
(c) Each party entitled to indemnification under this Section 9.6 (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not unreasonably be
withheld), and the Indemnified Party may participate in such defense at such
party's expense. The failure of any Indemnified Party to give notice as provided
herein shall not relieve the Indemnifying Party of its obligations under this
Section 9 unless the failure to give such notice is materially prejudicial to an
Indemnifying Party's ability to defend such action. The Indemnifying Party shall
not assume the defense for matters as to which there is a conflict of interest
or separate and different defenses. No Indemnifying Party, in the defense of any
such claim or litigation, shall, except with the consent of each Indemnified
Party, consent to entry of any judgment or enter into any settlement which does
not include as an unconditional term thereof the giving by the claimant or
plaintiff to such Indemnified Party of a release from all liability in respect
to such claim or litigation. No Indemnified Party shall consent to entry of any
judgment or enter into any settlement without the consent of each Indemnifying
Party.
(d) If the indemnification provided for in this Section 9.6 is unavailable
to an Indemnified Party in respect of any losses, claims, damages or liabilities
referred to therein, then each Indemnifying Party, in lieu of indemnifying such
Indemnified Party, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such losses, claims, damages or liabilities (i)
in such proportion as is appropriate to reflect the relative benefits received
by Parent, all shareholders offering securities in the offering (the "Selling
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Shareholders") and the underwriters of the offering (the "Underwriters") from
the offering of Parent securities, or (ii) if the allocation provided by clause
(i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of Parent, the Selling Shareholders and the
Underwriters in connection with the statements or omissions which resulted in
such losses, claims, damages or liabilities, as well as any other relevant
equitable considerations. The relative benefits received by Parent, the Selling
Shareholders and the Underwriters shall be deemed to be in the same proportion
as the net proceeds from the offering (before deducting expenses) received by
Parent and the Selling Shareholders, respectively, and the underwriting
discounts and commissions received by the Underwriters bear to the aggregate
price of the offering to the public. The relative fault of Parent, the Selling
Shareholders and the Underwriters shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of material fact or
the omission or alleged omission to state a material fact relates to information
supplied by Parent, the Selling Shareholders or the Underwriters and the
parties' relevant intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. It is agreed that it would not be
just and equitable if contribution pursuant to this Section 9.6(d) were based
solely upon the number of entities from whom contribution was requested or by
any other method of allocation which does not take into account the equitable
considerations referred to above in this Section 9.6(d). The amount paid or
payable by an Indemnified Party as a result of the losses, claims, damages and
liabilities referred to above in this Section 9.6(d) shall be deemed to include
any legal or other expenses reasonably incurred by such Indemnified Party in
connection with investigating, preparing or defending any such action or claim,
subject to the provisions of Section 9.6(c) hereof. Notwithstanding the
provisions of this Section 9.6(d), no Selling Shareholder shall be required to
contribute any amount or make any other payments under this Section 9.6 which in
the aggregate exceed the proceeds received by such Selling Shareholder. No
person guilty of fraudulent misrepresentation (within the meaning of Section 11
of the Securities Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation.
9.7 Information by Holder. Each Holder holding Registrable Securities
included in any registration shall furnish to Parent such information regarding
such Holder, the Registrable Securities held by such Holder and the distribution
proposed by such Holder as Parent may request in writing and as shall be
required in connection with any registration, qualification or compliance
referred to in this Section 9.
9.8 Transfer of Registration Rights. The rights of Holders under this
Section 9 are not transferable except in connection with (a) a transfer by will
or intestacy; and (b) transfers consisting of bona fide gifts, provided,
however, (i) the gift transferor shall, within ten (10) days after such gift,
furnish to Parent written notice of the name and address of such transferee and
the securities with respect to which such registration rights are being assigned
and (ii) such transferee shall agree to be bound by the provisions herein.
9.9 Termination of Registration Rights. The right of any Holder to request
registration or inclusion in any registration pursuant to Section 9.2 or 9.3
shall terminate on such date as all shares of Registrable Securities then held
by such Holder may be sold under Rule 144 or Rule 145 during any 90-day period.
SECTION 10. MISCELLANEOUS PROVISIONS
10.1 Survival of Representations and Warranties. All representations,
warranties, covenants and obligations made by the Company under this Agreement
in connection with the transactions contemplated hereby or in the Disclosure
Schedule or any exhibit, certificate, schedule, list or other instrument
delivered pursuant hereto (the "Transaction Documents") shall expire as of the
Closing; provided, however, that the Parent shall be entitled to indemnification
out of the Escrow Fund following the Closing as set forth in the Escrow
Agreement, and the representations, warranties, covenants and obligations of the
Company shall be deemed to survive the Closing solely for such purpose. All
representations, warranties, covenants and obligations made by the Designated
Shareholders under this Agreement in connection with the transactions
contemplated hereby or in the Transaction Documents shall survive the Closing
indefinitely. All representations, warranties, covenants and obligations made by
the Parent and Merger Sub, respectively, under this Agreement in connection with
the transactions contemplated hereby or in the Transaction Documents shall
survive the Closing but shall expire as of six (6) months following the Closing
(other than covenants and
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obligations which pursuant to their terms are to be performed subsequent to the
Closing, which covenants and obligations shall survive the Closing
indefinitely).
10.2 Further Assurances. Each party hereto shall execute and cause to be
delivered to each other party hereto such instruments and other documents, and
shall take such other actions, as such other party may reasonably request (prior
to, at or after the Closing) for the purpose of carrying out or evidencing any
of the transactions contemplated by this Agreement.
10.3 Fees and Expenses. Except as set forth in Section 1.5, each party to
this Agreement shall bear and pay all fees, costs and expenses (including legal
fees and accounting fees) incurred by such party in connection with the
negotiation, preparation and review of this Agreement (including the Disclosure
Schedule) and all agreements, certificates, opinions and other instruments and
documents delivered or to be delivered in connection with the transactions
contemplated by this Agreement, and the consummation of the Merger.
10.4 Attorneys' Fees. If any action or proceeding relating to this
Agreement or the enforcement of any provision of this Agreement is brought
against any party hereto, the prevailing party shall be entitled to recover
reasonable attorneys' fees, costs and disbursements (in addition to any other
relief to which the prevailing party may be entitled).
10.5 Notices. Any notice or other communication required or permitted to
be delivered to any party under this Agreement shall be in writing and shall be
deemed properly delivered, given and received when delivered (by hand, by
registered mail, by courier or express delivery service or by facsimile) to the
address or facsimile telephone number set forth beneath the name of such party
below (or to such other address or facsimile telephone number as such party
shall have specified in a written notice given to the other parties hereto):
if to Parent or Merger Sub:
DataWorks Corporation
5910 Pacific Center Boulevard, Suite 300
San Diego, CA 92121
Attn: Norman Farquhar
Facsimile: (619) 546-0682
with a copy to:
Thomas A. Coll, Esq.
Cooley Godward Castro Huddleson & Tatum
4365 Executive Drive, Suite 1100
San Diego, CA 92121
Facsimile: (619) 453-3555
if to the Company:
DCD Corporation
2000 Interchange Tower
600 Highway 169
Minneapolis, MN 55426
Attention: President
Facsimile: (612) 544-6825
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with a copy to:
William B. Payne, Esq.
Dorsey & Whitney LLP
Pillsbury Center South
220 South Sixth Street
Minneapolis, MN 55402
Facsimile: (612) 378-8738
if to any of the Designated Shareholders:
Dwayne E. Borg
5215 Larada Lane
Edina, MN 55436
10.6 Time of the Essence. Time is of the essence of this Agreement.
10.7 Headings. The bold-faced section headings contained in this Agreement
are for convenience of reference only, shall not be deemed to be a part of this
Agreement and shall not be referred to in connection with the construction or
interpretation of this Agreement.
10.8 Counterparts. This Agreement may be executed in several counterparts,
each of which shall constitute an original and all of which, when taken
together, shall constitute one agreement.
10.9 Governing Law; Venue.
(a) Except to the extent the laws of the State of Minnesota shall
necessarily apply, this Agreement shall be construed in accordance with, and
governed in all respects by, the internal laws of the State of California
(without giving effect to principles of conflicts of laws).
(b) Subject to the provisions of the Escrow Agreement, any legal action or
other legal proceeding relating to this Agreement or the enforcement of any
provision of this Agreement may be brought or otherwise commenced in any state
or federal court located in the State of California, and each party to this
Agreement:
(i) expressly and irrevocably consents and submits to the jurisdiction
of each state and federal court located in the State of California (and
each appellate court located in the State of California) in connection with
any such legal proceeding;
(ii) agrees that each state and federal court located in the state of
California shall be deemed to be a convenient forum; and
(iii) agrees not to assert (by way of motion, as a defense or
otherwise), in any such legal proceeding commenced in any state or federal
court located in California, any claim that such party is not subject
personally to the jurisdiction of such court, that such legal proceeding
has been brought in an inconvenient forum, that the venue of such
proceeding is improper or that this Agreement or the subject matter of this
Agreement may not be enforced in or by such court.
(c) Subject to the provisions of the Escrow Agreement, nothing contained in
Section 10.9(b) shall be deemed to limit or otherwise affect the right of any
party to commence any legal proceeding or otherwise proceed against any other
party in any other forum or jurisdiction.
(d) The Designated Shareholders irrevocably constitute and appoint Dwayne
E. Borg as their agent to receive service of process in connection with any
legal proceeding relating to this Agreement or the enforcement of any provision
of this Agreement.
10.10 Successors and Assigns. This Agreement shall be binding upon: the
Company and its successors and assigns (if any); the Designated Shareholders and
their respective personal representatives, executors, administrators, estates,
heirs, successors and assigns (if any); Parent and its successors and assigns
(if any); and Merger Sub and its successors and assigns (if any). This Agreement
shall inure to the benefit of: the
37
<PAGE> 38
Company; the Designated Shareholders; Parent; and the respective successors and
assigns (if any) of the foregoing. Parent may freely assign any or all of its
rights under this Agreement, in whole or in part, to any other Person without
obtaining the consent or approval of any other party hereto or of any other
Person.
10.11 Remedies Cumulative; Specific Performance. The rights and remedies
of the parties hereto shall be cumulative (and not alternative). The parties to
this Agreement agree that, in the event of any breach or threatened breach by
any party to this Agreement of any covenant, obligation or other provision set
forth in this Agreement for the benefit of any other party to this Agreement,
such other party shall be entitled (in addition to any other remedy that may be
available to it) to (a) a decree or order of specific performance or mandamus to
enforce the observance and performance of such covenant, obligation or other
provision, and (b) an injunction restraining such breach or threatened breach.
10.12 Waiver.
(a) No failure on the part of any Person to exercise any power, right,
privilege or remedy under this Agreement, and no delay on the part of any Person
in exercising any power, right, privilege or remedy under this Agreement, shall
operate as a waiver of such power, right, privilege or remedy; and no single or
partial exercise of any such power, right, privilege or remedy shall preclude
any other or further exercise thereof or of any other power, right, privilege or
remedy.
(b) No Person shall be deemed to have waived any claim arising out of this
Agreement, or any power, right, privilege or remedy under this Agreement, unless
the waiver of such claim, power, right, privilege or remedy is expressly set
forth in a written instrument duly executed and delivered on behalf of such
Person; and any such waiver shall not be applicable or have any effect except in
the specific instance in which it is given.
10.13 Amendments. This Agreement may not be amended, modified, altered or
supplemented other than by means of a written instrument duly executed and
delivered on behalf of Parent, the Company and a majority of interest of the
Designated Shareholders.
10.14 Severability. In the event that any provision of this Agreement, or
the application of any such provision to any Person or set of circumstances,
shall be determined to be invalid, unlawful, void or unenforceable to any
extent, the remainder of this Agreement, and the application of such provision
to Persons or circumstances other than those as to which it is determined to be
invalid, unlawful, void or unenforceable, shall not be impaired or otherwise
affected and shall continue to be valid and enforceable to the fullest extent
permitted by law.
10.15 Parties in Interest. None of the provisions of this Agreement is
intended to provide any rights or remedies to any Person other than the parties
hereto and their respective successors and assigns (if any).
10.16 Entire Agreement. This Agreement and the other agreements referred
to herein set forth the entire understanding of the parties hereto relating to
the subject matter hereof and thereof and supersede all prior agreements and
understandings among or between any of the parties relating to the subject
matter hereof and thereof.
10.17 Construction.
(a) For purposes of this Agreement, whenever the context requires: the
singular number shall include the plural, and vice versa; the masculine gender
shall include the feminine and neuter genders; the feminine gender shall include
the masculine and neuter genders; and the neuter gender shall include the
masculine and feminine genders.
(b) The parties hereto agree that any rule of construction to the effect
that ambiguities are to be resolved against the drafting party shall not be
applied in the construction or interpretation of this Agreement.
(c) As used in this Agreement, the words "include" and "including," and
variations thereof, shall not be deemed to be terms of limitation, but rather
shall be deemed to be followed by the words "without limitation."
(d) Except as otherwise indicated, all references in this Agreement to
"Sections" and "Exhibits" are intended to refer to Sections of this Agreement
and Exhibits to this Agreement.
38
<PAGE> 39
The parties hereto have caused this Agreement to be executed and delivered
as of August 16, 1996.
DATAWORKS CORPORATION
a California corporation
By: /s/ NORMAN R. FARQUHAR
----------------------------------
Norman R. Farquhar, Executive Vice
President and Chief Financial
Officer
DATAWORKS ACQUISITION SUB., INC.,
a Minnesota corporation
By: /s/ NORMAN R. FARQUHAR
----------------------------------
Norman R. Farquhar, Executive Vice
President and Chief Financial
Officer
--------------------------------------
[Print Name and Title]
DCD CORPORATION,
a Minnesota corporation
By: /s/ ROBERT W. BRANDEL
---------------------------------
Robert W. Brandel, President
DESIGNATED SHAREHOLDERS:
/s/ DWAYNE E. BORG
--------------------------------------
Dwayne E. Borg
/s/ Richard D. Borg
--------------------------------------
Richard D. Borg
/s/ WILLIAM J. BORG
--------------------------------------
William J. Borg
39
<PAGE> 1
EXHIBIT 3.3
ARTICLES OF INCORPORATION
OF
DATAWORKS ACQUISITION SUB., INC.
The undersigned is an individual eighteen years of age or older and
adopts the following Articles of Incorporation to form a For-Profit Corporation
(hereinafter called the "corporation") under Chapter 302A, Minnesota Statutes:
I.
The name of this corporation is DATAWORKS ACQUISITION SUB., INC.
II.
The address of the registered office of the corporation in the State
of Minnesota is 1295 Bandana Blvd. N., Suite 300, St. Paul, MN 55108, and the
name of the registered agent of the corporation in the State of Minnesota at
such address is National Registered Agents, Inc.
III.
The purposes for which the corporation is organized shall be to
transact any and all lawful business for which corporations may be incorporated
pursuant to the provisions of Chapter 302A, Minnesota Statutes.
IV.
The corporation is authorized to issue a total of ten thousand
(10,000) shares, all of which are of a par value of $.01 each and classified as
Common shares.
V.
Any action required or permitted to be taken at a meeting of the Board
of Directors of the corporation, other than an action requiring shareholder
approval, may be taken by written action signed by the number of directors that
would be required to take the same action at a meeting of the Board of
Directors at which all directors were present.
1.
<PAGE> 2
VI.
The corporation shall, to the fullest extent legally permissible under
the provisions of Chapter 302 of the Minnesota Statutes, as the same may be
amended and supplemented, shall indemnify and hold harmless any and all persons
whom it shall have power to indemnify under said provisions from and against
any and all liabilities (including expenses) imposed upon or reasonably
incurred by him in connection with any action, suit or other proceeding in
which he may be involved or with which he may be threatened, or other matters
referred to in or covered by said provisions both as to action in his official
capacity and as to action in another capacity while holding such office, and
shall continue as to a person who has ceased to be a director or officer of the
corporation. Such indemnification provided shall not be deemed exclusive of
any other rights to which those indemnified may be entitled under any Bylaw,
Agreement or Resolution adopted by the shareholders entitled to vote thereon
after notice.
VII.
The personal liability of all of the directors of the corporation is
hereby eliminated to the fullest extent allowed as provided by the Minnesota
Business Corporation Act as the same may be supplemented and amended.
VIII.
The corporation reserves the right to adopt, repeal, rescind or amend
in any respect any provision contained in these Articles of Incorporation, in
the manner now or hereafter prescribed by statute, and all rights conferred
upon the shareholders herein are granted subject to this reservation.
IX.
The name and the mailing address of the Sole Incorporator is as
follows:
NAME MAILING ADDRESS
Jane K. Adams Cooley Godward Castro
Huddleson & Tatum
4365 Executive Drive, Suite 1100
San Diego, California 92121
2.
<PAGE> 3
Dated this 8th day of August, 1996.
I, the undersigned incorporator, certify that I am authorized to execute these
Articles and that the information in these Articles is true and correct. I
also understand that if any of this information is intentionally or knowingly
mistated that criminal penalties will apply as if I had signed these Articles
under oath.
/s/ Jane K. Adams
------------------------------------
Jane K. Adams
Sole Incorporator
3.
<PAGE> 1
EXHIBIT 3.4
BY-LAWS
OF
DATAWORKS ACQUISITION SUB., INC.
ARTICLE 1
SHAREHOLDERS
SECTION 1.1 PLACE OF MEETINGS. Each meeting of the shareholders
shall be held at the principal executive office of the Corporation or at such
other place as may be designated by the Board of Directors or the Chief
Executive Officer; provided, however, that any meeting called by or at the
demand of a shareholder or shareholders shall be held in the county where the
principal executive office of the Corporation is located.
SECTION 1.2 REGULAR MEETINGS. Regular meetings of the
shareholders may be held on an annual or other less frequent basis as
determined by the Board of Directors; provided, however, that if a regular
meeting has not been held during the immediately preceding 15 months, a
shareholder or shareholders holding three percent or more of the voting power
of all shares entitled to vote may demand a regular meeting of shareholders by
written demand given to the Chief Executive Officer or Chief Financial Officer
of the Corporation. At each regular meeting the shareholders shall elect
qualified successors for directors who serve for an indefinite term or whose
terms have expired or are due to expire within six months after the date of the
meeting and may transact any other business, provided, however, that no
business with respect to which special notice is required by law shall be
transacted unless such notice shall have been given.
SECTION 1.3 SPECIAL MEETING. A special meeting of the
shareholders may be called for any purpose or purposes at any time by the Chief
Executive Officer, by the Chief Financial Officer, by the Board of Directors or
any two or more members thereof; or by one or more shareholder holding not less
than ten percent of the voting power of all shares of the Corporation entitled
to vote (except that a special meeting for the purpose of considering any
action to directly or indirectly facilitate or effect a business combination,
including any action to change or otherwise affect the composition of the Board
for that purpose, must be called by shareholder holding not less than 25
percent of the voting power of all shares of the Corporation entitled to vote),
who shall demand such special meeting by written notice given to the Chief
Executive Officer or the Chief Financial Officer of the Corporation specifying
the purposes of such meeting.
1.
<PAGE> 2
SECTION 1.4 MEETING HELD UPON SHAREHOLDER DEMAND. Within 30 days
after receipt of a demand by the Chief Executive Officer or the Chief Financial
Officer from any shareholder or shareholder entitled to call a meeting of the
shareholders, it shall be the duty of the Board of Directors of the Corporation
to cause a special or regular meeting of shareholders, as the case may be, to
be duly called and held on notice no later than 90 days after receipt of such
demand. If the Board fails to cause such a meeting to be called and held as
required by this Section, the shareholder or shareholders making the demand may
call the meeting by giving notice as provided in Section 1.6 hereof at the
expense of the Corporation.
SECTION 1.5 ADJOURNMENTS. Any meeting of the shareholders may be
adjourned from time to time to another date, time and place. If any meeting of
the shareholders is so adjourned, no notice as to such adjourned meeting need
be given if the adjourned meeting is to be held not more than 120 days after
the date fixed for the original meeting and the date, time and place at which
the meeting will be reconvened are announced at the time of adjournment.
SECTION 1.6 NOTICE OF MEETINGS. Unless otherwise required by
law, written notice of each meeting of the shareholders, stating the date, time
and place and, in the case of a special meeting, the purpose or purposes, shall
be given at least ten days and not more than 60 days prior to the meeting to
every holder of shares entitled to vote at such meeting except as specified in
Section 1.5 or as otherwise permitted by law. The business transacted at a
special meeting of shareholders is limited to the purposes stated in the notice
of the meeting.
SECTION 1.7 WAIVER OF NOTICE. A shareholder may waive notice of
the date, time, place and purpose or purposes of a meeting of shareholders. A
waiver of notice by a shareholder entitled to notice is effective whether given
before, at or after the meeting, and whether given in writing, orally or by
attendance. Attendance by a shareholder at a meeting is a waiver of notice of
that meeting, unless the shareholder objects at the beginning of the meeting to
the transaction of business because the meeting is not lawfully called or
convened, or objects before a vote on an item of business because the item may
not lawfully be considered at that meeting and does not participate in the
consideration of the item at that meeting.
SECTION 1.8 VOTING RIGHTS. Subdivision 1. A shareholder shall
have one vote for each share held which is entitled to vote. Except as
otherwise required by law, a holder of shares entitled to vote may vote any
portion of the shares in any way the shareholder chooses. If a shareholder
votes without designating the proportion or number of shares voted in a
particular way, the shareholder is deemed to have voted all of the shares in
that way.
2.
<PAGE> 3
Subdivision 2. The Board of Directors may fix a date not more than 60
days before the date of a meeting of shareholders as the date for the
determination of the holders of shares entitled to notice of and entitled to
vote at the meeting. When a date is so fixed, only shareholders on that date
are entitled to notice of and permitted to vote at that meeting of
shareholders.
SECTION 1.9 PROXIES. A shareholder may cast or authorize the
casting of a vote by filing a written appointment of a proxy with an officer of
the Corporation at or before the meeting at which the appointment is to be
effective. The shareholder may sign or authorize the written appointment by
telegram, cablegram or other means of electronic transmission, provided that
the Corporation has no reason to believe that the telegram, cablegram or other
electronic transmission was not authorized by the shareholder. Any copy,
facsimile, telecommunication or other reproduction of the original of either
the writing or transmissions may be used in lieu of the original, provided that
it is a complete and legible reproduction of the entire original.
SECTION 1.10 QUORUM. The holders of a majority of the voting
power of the shares entitled to vote at a shareholders meeting are a quorum for
the transaction of business. If a quorum is present when a duly called or held
meeting is convened, the shareholders present may continue to transact business
until adjournment, even though the withdrawal of a number of the shareholders
originally present leaves less than the proposition or number otherwise
required for a quorum.
SECTION 1.11 ACTS OF SHAREHOLDERS. Subdivision 1. Except as
otherwise required by law or specified in the Articles of Incorporation of the
Corporation, the shareholders shall take action by the affirmative vote of the
holders of the greater of (a) a majority of the voting power of the shares
present and entitled to vote on that item of business or (b) a majority of the
voting power of the minimum number of shares entitled to vote that would
constitute a quorum for the transaction of business at a duly held meeting of
shareholders.
Subdivision 2. A shareholder voting by proxy authorized to vote on
less than all items of business considered at the meeting shall be considered
to be present and entitled to vote only with respect to those items of business
for which the proxy has authority to vote. A proxy who is given authority by a
shareholder who abstains with respect to an item of business shall be
considered to have authority to vote on that item of business.
SECTION 1.12 ACTION WITHOUT A MEETING. Any action required or
permitted to be taken at a meeting of the shareholders of the Corporation may
be taken without a meeting by written action signed by all of the shareholders
entitled to vote on that action. The written action is effective when it has
been signed by all of those shareholders, unless a different effective time is
provided in the written action.
3.
<PAGE> 4
ARTICLE 2
DIRECTORS
SECTION 2.1 NUMBER, QUALIFICATIONS. Except as authorized by the
shareholders pursuant to a shareholder control agreement or unanimous
affirmative vote, the business and affairs of the Corporation shall be managed
by or under the direction of a Board of one or more directors. Directors shall
be natural persons. The shareholders at each regular meeting shall determine
the number of directors to constitute the Board, provided that thereafter the
authorized number of directors may be increased by the shareholders or the
Board and decreased by the shareholders. Directors need not be shareholders.
SECTION 2.2 TERM. Each directors shall serve for an indefinite
term that expires at the next regular meeting of the shareholders. A director
shall hold office until a successor is elected and has qualified or until the
earlier death, resignation, removal or disqualification of the director.
SECTION 2.3 VACANCIES. Vacancies on the Board of Directors
resulting from the death, resignation, removal or disqualification of a
director may be filled by the affirmative vote of a majority of the remaining
members of the Board, through less than a quorum. Vacancies on the Board
resulting from newly created directorships may be filled by the affirmative
vote of a majority of the directors serving at the time such directorships are
created. Each person elected to fill a vacancy shall hold office until a
qualified successor is elected by the shareholders at the next regular meeting
or at any special meeting duly called for that purpose.
SECTION 2.4 PLACE OF MEETING. Each meeting of the Board of
Directors shall be held at the principal executive office of the Corporation or
at such other place as may be designated from time to time by a majority of the
members of the Board or by the Chief Executive Officer. A meeting may be held
by conference among the directors using any means of communication through
which the directors may simultaneously hear each other during the conference.
SECTION 2.5 REGULAR MEETINGS. Regular meetings of the Board of
Directors for the election of officers and the transaction of any other
business shall be held without notice at the place of and immediately after
each regular meeting of the shareholders.
SECTION 2.6 SPECIAL MEETINGS. A special meeting of the Board of
Directors may be called for any purpose or purpose at any time by any member of
the Board by giving not less that two days' notice to all directors of the
date, time and place of the meeting, provided that when notice is mailed, at
least four days' notice shall be given. The notice need not state the purpose
of the meeting.
4.
<PAGE> 5
SECTION 2.7 WAIVER OF NOTICE; PREVIOUSLY SCHEDULED MEETINGS.
Subdivision 1. A director of the Corporation may waive notice of the date,
time and place of a meeting of the Board. A waiver of notice by a director
entitled to notice is effective whether given before, at or after the meeting,
and whether given in writing, orally or by attendance. Attendance by a
director at a meeting is a waiver of notice of that meeting, unless the
director objects at the beginning of the meeting to the transaction of business
because the meeting is not lawfully called or convened and thereafter does not
participate in the meeting.
Subdivision 2. If the day or date, time and place of a Board meeting
have been provided herein or announced at a previous meeting of the Board, no
notice is required. Notice of an adjourned meeting need not be given other
than by announcement at the meeting at which adjournment is taken of the date,
time and place at which the meeting will be reconvened.
SECTION 2.8 QUORUM. The presence in person of a majority of the
directors currently holding office shall be necessary to constitute a quorum
for the transaction of business. In the absence of a quorum, a majority of the
directors present may adjourn a meeting from time to time without further
notice until a quorum is present. If a quorum is present when a duly called or
held meeting is convened, the directors present may continue to transact
business until adjournment, even though the withdrawal of a number of the
directors originally present leaves less than the proportion or number
otherwise required for a quorum.
SECTION 2.9 ACTS OF BOARD. Except as otherwise required by law
or specified in the Articles of Incorporation of the Corporation, the Board
shall take action by the affirmative vote of the greater of (a) a majority of
the directors present at a duly held meeting at the time the action is taken or
(b) a majority of the minimum proportion or number of directors that would
constitute a quorum for the transaction of business at the meeting.
SECTION 2.10 PARTICIPATION BY ELECTRONIC COMMUNICATIONS. A
director may participate in a Board meeting by any means of communications
through which the director, other directors so participating and all directors
physically present at the meeting may simultaneously hear each other during the
meeting. A director so participating shall be deemed present in person at the
meeting.
SECTION 2.11 ABSENT DIRECTORS. A director of the Corporation may
give advance written consent or opposition to a proposal to be acted on at a
Board meeting. If the director is not present at the meeting, consent or
opposition to a proposal does not constitute presence for purposes of
determining the existence of a quorum, but consent or opposition shall be
counted as the vote of a director present at the meeting in favor of or against
the proposal and shall be entered in the minutes or other record of action at
the
5.
<PAGE> 6
meeting, if the proposal acted on at the meeting is substantially the same or
has substantially the same effect as the proposal to which the director has
consented or objected.
SECTION 2.12 ACTION WITHOUT A MEETING. An action required or
permitted to be taken at a Board meeting may be taken without a meeting by
written action signed by all of the directors. Any action, other than an
action requiring shareholder approval, if the Articles of Incorporation so
provide, may be taken by written action signed by the number of directors that
would be required to take the same action at a meeting of the Board at which
all directors were present. The written action is effective when signed by the
required number of directors, unless a different effective time is provided in
the written action. When written action is permitted to be taken by less than
all directors, all directors shall be notified immediately of its text and
effective date.
SECTION 2.13 COMMITTEES. Subdivision 1. A resolution approved by
the affirmative vote of a majority of the Board may establish committees having
the authority of the Board in the management of the business of the Corporation
only to the extent provided in the resolution. Committees shall be subject at
all times to the direction and control of the Board, except as provided in
Section 2.14 or otherwise provided by law.
Subdivision 2. A committee shall consist of one or more natural
persons, who need not be directors, appointed by affirmative vote of a majority
of the directors present at a duly held Board meeting.
Subdivision 3. Section 2.04 and Sections 2.06 to 2.12 hereof shall
apply to committees and members of committees to the same extent as those
sections apply to the Board and directors.
Subdivision 4. Minutes, if any, of committee meetings shall be made
available upon requests to members of the committee and to any director.
SECTION 2.14 SPECIAL LITIGATION COMMITTEE. Pursuant to the
procedure set forth in Section 2.13, the Board may establish a committee
composed of one or more independent directors or other independent persons to
determine whether it is in the best interests of the Corporation to consider
legal rights or remedies of the Corporation and whether those rights and
remedies should be pursued. The committee, once established, is not subject to
the direction or control of, or (unless required by law) termination by, the
Board. To the extent permitted by law, a vacancy on the committee may be
filled by a majority vote of the remaining committee members. The good faith
determinations of the committee are binding upon the Corporation and its
directors, officers and shareholders to the extent permitted by law. The
committee terminates when it issues a written report of its determinations to
the Board.
6.
<PAGE> 7
SECTION 2.15 COMPENSATION. The Board may fix the compensation, if
any, of directors.
ARTICLE 3
OFFICERS
SECTION 3.1 NUMBER AND DESIGNATION. The Corporation shall have
one or more natural persons exercising the functions of the offices of Chief
Executive Officer and Chief Financial Officer. The Board of Directors may
elect, or appoint such other officers or agents as it deems necessary for the
operation and management of the Corporation, with such powers, rights, duties
and responsibilities as may be determined by the Board, including, without
limitation, a President, one or more Vice Presidents, a Secretary and a
Treasurer, each of whom shall have the powers, rights, duties and
responsibilities set forth in these By-Laws unless otherwise determined by the
Board. Any of the offices or functions of those offices may be held by the
same person.
SECTION 3.2 CHIEF EXECUTIVE OFFICERS. Unless provided otherwise
by a resolution adopted by the Board of Directors, the Chief Executive Officer
(a) shall have general active management of the business of the Corporation;
(b) shall, when present, preside at all meetings of the shareholders and Board;
(c) shall see that all orders and resolutions of the Board are carried into
effect; (d) may maintain records of and certify proceedings of the Board and
shareholders; and (e) shall perform such other duties as may from time to time
be assigned by the Board.
SECTION 3.3 CHIEF FINANCIAL OFFICER. Unless provided otherwise
by a resolution adopted by the Board of Directors, the Chief Financial Officer
(a) shall keep accurate financial records of the Corporation; (b) shall deposit
all monies, drafts and checks in the name of and to the credit of the
Corporation in such banks and depositories as the Board shall designate from
time to time; (c) shall endorse for deposit all notes, checks and drafts
received by the Corporation as ordered by the Board, making proper vouchers
therefor, (d) shall disburse corporate funds and issue checks and drafts in the
name of the Corporation, as ordered by the Board; (e) shall render to the Chief
Executive Officer and the Board, whenever requested, an account of all of such
officer's transactions as Chief Financial Officer and of the financial
condition of the Corporation; and (f) shall perform such other duties as may be
prescribed by the Board or the Chief Executive Officer from time to time.
SECTION 3.4 PRESIDENT. Unless otherwise determined by the Board
of Directors, the President shall be the Chief Executive Officer of the
Corporation. If an officer other than the President is designated Chief
Executive Officer, the President shall perform such duties as may from time to
time be assigned by the Board.
7.
<PAGE> 8
SECTION 3.5 VICE PRESIDENTS. Any one or more Vice Presidents, if
any, may be designated by the Board of Directors as Executive Vice Presidents
or Senior Vice Presidents. During the absence or disability of the President,
it shall be the duty of the highest ranking Executive Vice President, and, in
the absence of any such Vice President, it shall be the duty of the highest
ranking Senior Vice President or other Vice President, who shall be present at
the time and able to act, to perform the duties of the President. The
determination of who is the highest ranking of two or more persons holding the
same office shall, in the absence of specific designation of order of rank by
the Board, be made on the basis of the earliest date of appointment or
election, or, in the event of simultaneous appointment or election, on the
basis of the longest continuous employment by the Corporation.
SECTION 3.6 SECRETARY. The Secretary, unless otherwise
determined by the Board of Directors, shall attend all meetings of the
shareholders and all meeting of the Board, shall record or cause to be recorded
all proceedings thereof in a book to be kept for that purpose, and may certify
such proceedings. Except as otherwise required or permitted by law or by these
By-Laws, the Secretary shall give or cause to be given notice of all meetings
of the shareholders and all meetings of the Board.
SECTION 3.7 TREASURER. Unless otherwise determined by the Board
of Directors, the Treasurer shall be the Chief Financial Officer of the
Corporation. If an officer other than the Treasurer is designated Chief
Financial Officer, the Treasurer shall perform such duties as may from time to
time be assigned by the Board.
SECTION 3.8 AUTHORITY AND DUTIES. In addition to the foregoing
authority and duties, all officers of the Corporation shall respectively have
such authority and perform such duties in the management of the business of the
Corporation as may be designated from time to time by the Board of Directors.
Unless prohibited by a resolution approved by the affirmative vote of a
majority of the directors present, an officer elected or appointed by the Board
may, without the approval of the Board, delegate some or all of the duties and
powers of an office to other persons.
SECTION 3.9 TERM. Subdivision 1. All officers of the
Corporation shall hold office until their respective successors are chosen and
have qualified or until their earlier death, resignation or removal.
Subdivision 2. An officer may resign at any time by giving written
notice to the Corporation. The resignation is effective without acceptance
when the notice is given to the Corporation, unless a later effective date is
specified in the notice.
Subdivision 3. An officer may be removed at any time, with or without
cause, by a resolution approved by the affirmative vote of a majority of the
directors present at a duly held Board meeting.
8.
<PAGE> 9
Subdivision 4. A vacancy in an office because of death, resignation,
removal, disqualification or other cause may, or in the case of a vacancy in
the office of Chief Executive Officer or Chief Financial Officer shall, be
filled for the unexpired portion of the term by the Board.
SECTION 3.10 SALARIES. The salaries of all officers of the
Corporation shall be fixed by the Board of Directors or by the Chief Executive
Officer if authorized by the Board.
ARTICLE 4
INDEMNIFICATION
SECTION 4.1 INDEMNIFICATION. The Corporation shall indemnify its
officers and directors for such expenses and liabilities, in such manner, under
such circumstances, and to such extent, as required or permitted by Minnesota
Statutes, Section 302.A.521, as amended from time to time, or as required or
permitted by other provisions of law.
SECTION 4.2 INSURANCE. The Corporation may purchase and maintain
insurance on behalf of any person in such person's official capacity against
any liability asserted against and incurred by such person in or arising from
that capacity, whether or not the Corporation would otherwise be required to
indemnity the person against the liability.
ARTICLE 5
SHARES
SECTION 5.1 CERTIFICATED AND UNCERTIFICATED SHARES. Subdivision
1. The shares of the Corporation shall be either certificated shares or
uncertificated shares. Each holder of duly issued certificated shares is
entitled to a certificate of shares.
Subdivision 2. Each certificate of shares of the Corporation shall
bear the corporate seal, if any, and shall be signed by the Chief Executive
Officer, or the President or any Vice President, and the Chief Financial
Officer, or the Secretary or any Assistant Secretary, but when a certificate is
signed by a transfer agent or a registrar, the signature of any such officer
and the corporate seal upon such certificate may be facsimiles, engraved or
printed. If a person signs or has a facsimile signature placed upon a
certificate while an officer, transfer agent or registrar of the Corporation,
the certificate may be issued by the Corporation, even if the person has ceased
to serve in that capacity before the certificate is issued, with the same
effect as if the person had that capacity at the date of its issue.
Subdivision 3. A certificate representing shares issued by the
Corporation shall, if the Corporation is authorized to issue shares of more
than one class or series, set forth
9.
<PAGE> 10
upon the face or back of the certificate, or shall state that the Corporation
will furnish to any shareholder upon request and without charge, a full
statement of the designations, preferences, limitations and relative rights of
the shares of each class or series authorized to be issued, so far as they have
been determined, and the authority of the Board to determine the relative
rights and preferences of subsequent classes or series.
Subdivision 4. A resolution approved by the affirmative vote of a
majority of the directors present at a duly held meeting of the Board may
provide that some or all of any or all classes and series of the shares of the
Corporation will be uncertificated shares. Any such resolution shall not apply
to shares represented by a certificate until the certificate is surrendered to
the Corporation.
SECTION 5.2 DECLARATION OF DIVIDENDS AND OTHER DISTRIBUTIONS.
The Board of Directors shall have the authority to declare dividends and other
distributions upon the shares of the Corporation to the extent permitted by
law.
SECTION 5.3 TRANSFER OF SHARES. Shares of the Corporation may be
transferred only on the books of the Corporation by the holder thereof, in
person or by such person's attorney. In the case of certificated shares,
shares shall be transferred only upon surrender and cancellation of
certificates for a like number of shares. The Board of Directors, however, may
appoint one or more transfer agents and registrars to maintain the share
records of the Corporation and to effect transfers of shares.
SECTION 5.4 RECORD DATE. The Board of Directors may fix a time,
not exceeding 60 days preceding the date fixed for the payment of any dividend
or other distribution, as a record date for the determination of the
shareholders entitled to receive payment of such dividend or other
distribution, and in such case only shareholders of record on the date so fixed
shall be entitled to receive payment of such dividend or other distribution,
notwithstanding any transfer of any shares on the books of the Corporation
after any record date so fixed.
ARTICLE 6
MISCELLANEOUS
SECTION 6.1 EXECUTION OF INSTRUMENTS. Subdivision 1. All deeds,
mortgages, bonds, checks, contracts and other instruments pertaining to the
business and affairs of the Corporation shall be signed on behalf of the
Corporation by the Chief Executive Officer, or the President, or any Vice
President, or by such other person or persons as may be designated from time to
time by the Board of Directors.
Subdivision 2. If a document must be executed by persons holding
different offices or functions and one person holds such offices or exercises
such functions, that
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person may execute the document in more than one capacity if the document
indicates each such capacity.
SECTION 6.2 ADVANCES. The Corporation may, without a vote of the
directors, advance money to its directors, officers or employees to cover
expenses that can reasonably be anticipated to be incurred by them in the
performance of their duties and for which they would be entitled to
reimbursement in the absence of an advance.
SECTION 6.3 CORPORATE SEAL. The seal of the Corporation, if any,
shall be a circular embossed seal having inscribed thereon the name of the
Corporation and the following words:
"CORPORATE SEAL MINNESOTA"
SECTION 6.4 FISCAL YEAR. The fiscal year of the Corporation
shall be determined by the Board of Directors.
SECTION 6.5 AMENDMENTS. The Board of Directors shall have the
power to adopt, amend or repeal the By-Laws of the Corporation, subject to the
power of the shareholders to change or repeal the same, provided, however, that
the Board shall not adopt, amend or repeal any Bylaw fixing a quorum for
meetings of shareholders, prescribing procedures for removing directors or
filing vacancies in the Board, or fixing the number of directors or their
classifications, qualifications or terms of office, but may adopt or amend a
Bylaw that increases the number of directors.
11.
<PAGE> 1
EXHBIT 5.1
[LETTERHEAD OF COOLEY GODWARD CASTRO HUDDLESON & TATUM]
September 11, 1996
DataWorks Corporation
5910 Pacific Center Boulevard, Suite 300
San Diego, CA 92121
Ladies and Gentlemen:
You have requested our opinion with respect to certain matters in connection
with the filing by DataWorks Corporation (the "Company") of a Registration
Statement on Form S-4 (the "Registration Statement") with the Securities and
Exchange Commission covering the offering of up to 1,800,000 shares of the
Company's Common Stock, no par value (the "Shares").
In connection with this opinion, we have examined the Registration Statement
and related Prospectus, your Articles of Incorporation and By- laws, as
amended, and such other documents, records, certificates, memoranda and other
instruments as we deem necessary as a basis for this opinion. We have assumed
the genuineness and authenticity of all documents submitted to us as originals,
the conformity to originals of all documents submitted to us as copies thereof
and the due execution and delivery of all documents where due execution and
delivery are a prerequisite to the effectiveness thereof.
On the basis of the foregoing, and in reliance thereon, we are of the opinion
that the Shares, when issued in accordance with the Registration Statement and
related Prospectus, will be validly issued, fully paid and nonassessable.
We consent to the filing of this opinion as an exhibit to the Registration
Statement.
Sincerely,
COOLEY GODWARD CASTRO
HUDDLESON & TATUM
By: /s/ Frederick T. Muto
----------------------------------
Frederick T. Muto
<PAGE> 1
EXHIBIT 8.1
[LETTERHEAD OF DORSEY & WHITNEY LLP]
September 10, 1996
DCD Corporation
600 Highway 169
2000 Interchange Tower
Minneapolis, MN 55426
Reference is made to the Registration Statement on Form S-4 of
DataWorks Corporation ("DataWorks") filed on September 11, 1996 (the
"Registration Statement") with the Securities and Exchange Commission under the
Securities Act of 1933, as amended (the "Securities Act"), relating to the
proposed merger of DataWorks Acquisition Sub., Inc., a wholly owned subsidiary
of DataWorks ("DataWorks Sub"), into DCD Corporation ("DCD") pursuant to that
certain Agreement and Plan of Merger and Reorganization entered into August 16,
1996, by and between DataWorks, DataWorks Sub, DCD and certain shareholders of
DCD.
We hereby confirm that the discussions in the Prospectus/Joint Proxy
Statement contained in the Registration Statement under "SUMMARY - - Other
Matters Related to the Merger -- Certain Federal Income Tax Consequences" and
"THE MERGER AND RELATED TRANSACTIONS -- Certain Federal Income Tax
Consequences" are a fair and accurate summary of the matters addressed therein.
We hereby consent to the filing of this option as Exhibit 8.1 to the
Registration Statement and to the use of our name under "THE MERGER AND RELATED
TRANSACTIONS -- Certain Federal Income Tax Consequences" in the
Prospectus/Joint Proxy Statement. In giving this consent, we do not thereby
admit that we are in the category of persons whose consent is required under
Section 7 of the Securities Act.
Very truly yours,
/s/ Dorsey & Whitney LLP
<PAGE> 1
EXHIBIT 8.2
[LETTERHEAD OF COOLEY GODWARD]
September 10, 1996
Dataworks Corporation
5910 Pacific Center Blvd., Suite 300
San Diego, CA 92121
Dear Sir or Madam:
We have acted as counsel to Dataworks Corporation, a California corporation
("Dataworks") in connection with the Agreement and Plan of Merger and
Reorganization dated August 16, 1996 by and among DCD Corporation, a Minnesota
corporation ("DCD"), Dataworks Sub., Inc., a Minnesota corporation and a
wholly-owned subsidiary of Dataworks ("Sub"), Dataworks and certain stockholders
of DCD providing for the merger of Sub with and into Dataworks (the "Merger").
You have asked us to review the discussion of federal income tax issues
contained in Datawork's Form S-4 Registration Statement filed in connection with
the Merger (the "Registration Statement"). We have reviewed the discussion
entitled "Certain Federal Income Tax Matters" contained in the Registration
Statement and are of the opinion that, subject to the qualifications and
limitations contained therein, such information fairly presents the current
federal income tax law applicable to the Merger and the material federal tax
consequences to Dataworks, Sub, DCD, the DCD stockholders and the Dataworks
stockholders as a result of the Merger and insofar as it relates to statements
of law or legal conclusions is correct in all material respects.
We consent to the reference to our firm under the caption "Certain Federal
Income Tax Matters" included in the Registration Statement and to the filing of
this opinion as an exhibit to the Registration Statement.
Very truly yours,
COOLEY GODWARD CASTRO
HUDDLESON & TATUM
By: /s/ Susan Cooper Philpot
-------------------------------
Susan Cooper Philpot
<PAGE> 1
EXHIBIT 22.1
SUBSIDIARIES OF DATAWORKS CORPORATION
1. Madic-Compufact Corporation, a Delaware corporation
2. DataWorks (Europe) Limited, a United Kingdom limited corporation.
3. DataWorks Acquisition Sub., Inc., a Minnesota corporation.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated February 1, 1996 included in the Proxy Statement of
DataWorks Corporation that is made a part of the Registration Statement (Form
S-4) and Prospectus of DataWorks Corporation for the registration of 1,800,000
shares of its common stock.
ERNST & YOUNG LLP
San Diego, California
September 9, 1996
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 of Data Works Corporation of our report
dated April 5, 1996 relating to the financial statements of DCD Corporation,
which appears in such Prospectus. We also consent to the references to us under
the headings "Experts" and "Selected Financial Data" in such Prospectus.
However, it should be noted that Price Waterhouse LLP has not prepared or
certified such "Selected Financial Data".
/s/ Price Waterhouse LLP
- -------------------------
Price Waterhouse LLP
Minneapolis, Minnesota
September 10, 1996
