<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 8, 1996
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
DATAWORKS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
CALIFORNIA 33-0209937
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
5910 PACIFIC CENTER BOULEVARD, SUITE 300
SAN DIEGO, CA 92121
(619) 546-9600
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
STUART W. CLIFTON
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
DATAWORKS CORPORATION
5910 PACIFIC CENTER BOULEVARD, SUITE 300
SAN DIEGO, CA 92121
(619) 546-9600
(NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
AGENT FOR SERVICE)
------------------------
COPIES TO:
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<S> <C>
FREDERICK T. MUTO, ESQ. CATHRYN S. CHINN
THOMAS A. COLL, ESQ. GLEN R. VAN LIGTEN
COOLEY GODWARD LLP VENTURE LAW GROUP,
4365 EXECUTIVE DRIVE, SUITE 1100 A PROFESSIONAL CORPORATION
SAN DIEGO, CA 92121 2800 SAND HILL ROAD
TELEPHONE: (619) 550-6000 MENLO PARK, CA 94025
TELEPHONE: (415) 854-4488
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
------------------------
If any of the securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
=====================================================================================================
AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE
=====================================================================================================
<S> <C> <C> <C> <C>
Common Stock, no par value....... 2,300,000 shares $23.50 $54,050,000 $16,379
=====================================================================================================
</TABLE>
(1) Includes 300,000 shares that the Underwriters have the option to purchase
solely to cover over-allotments, if any.
(2) Estimated in accordance with Rule 457(c) solely for the purpose of computing
the amount of the registration fee based on the average of the high and low
prices of the Registrant's Common Stock as reported on the Nasdaq National
Market on November 5, 1996, three days prior to the date this Registration
Statement was originally filed.
------------------------
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
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 NOVEMBER 8, 1996
2,000,000 SHARES
[LOGO]
COMMON STOCK
All of the 2,000,000 shares of Common Stock offered hereby are being sold
by DataWorks Corporation ("DataWorks" or the "Company"). The Company's Common
Stock is quoted on the Nasdaq National Market under the symbol "DWRX." On
November 7, 1996, the last reported sale price for the Common Stock was $23.50
per share. See "Price Range of Common Stock."
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
------------------------
THESE SECURITIES 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. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
Price to Underwriting Proceeds to
Public Discount(1) Company(2)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share...................... $ $ $
Total(3)....................... $ $ $
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
</TABLE>
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting offering expenses payable by the Company, estimated at
$300,000.
(3) The Company and certain shareholders of the Company (the "Selling
Shareholders") have granted to the Underwriters a 30-day option to purchase
up to 81,314 and 218,686 additional shares, respectively, of Common Stock,
solely to cover over-allotments, if any. If the Underwriters exercise this
option in full, the Price to Public will total $ , the
Underwriting Discount will total $ , the Proceeds to Company will
total $ and the proceeds to the Selling Shareholders will total
$ . See "Underwriting."
The shares of Common Stock are offered by the several Underwriters named
herein, subject to receipt and acceptance by them and to their right to reject
any order in whole or in part. It is expected that delivery of the certificates
representing such shares will be made against payment therefor at the office of
Montgomery Securities on or about , 1996.
------------------------
MONTGOMERY SECURITIES
FURMAN SELZ
SOUNDVIEW FINANCIAL GROUP, INC.
, 1996
<PAGE> 3
MULTIPLE ERP SOLUTIONS. ONE VISION.
<TABLE>
<S> <C> <C>
Upper Tier Enterprise The transition to a new or enhanced
Client Server(1) enterprise resource planning (ERP) software
[Picture of one solution is one of the most costly and
skyscraper.] troublesome challenges faced by growing
mid-range discrete manufacturing companies.
DataWorks addresses this challenge with a
family of ERP solutions that offers these
growing companies a product migration path.
Mid-Tier Data Flo DataWorks' technologically advanced,
Man Fact II easy-to-use solutions offer the flexibility
[Picture of two large required by mid-range discrete manufacturing
buildings.] companies. The Company's ERP solutions
utilize certain complementary core
technologies, enabling customers to make a
cost-effective transition among the Company's
ERP solutions. Customers can also benefit
from the advantages of a long-term
relationship with a single software vendor.
Lower Tier [Picture of two small DataWorks' ERP solutions are targeted to the
buildings.] diverse information requirements of mid-range
manufacturing organizations. DataWorks
develops markets, implements and supports ERP
solutions for mid-range discrete
manufacturing companies with annual revenues
between $3 million and $1 billion.
(1) Under development
[Picture of a diagonal arrow pointing upward, with the
word "Migration" diagonally alongside.]
</TABLE>
DATAWORKS (LOGO)(@)
A POWERFUL WAY OF WORKING TOGETHER
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE IN ACCORDANCE WITH RULE 10B-6A UNDER THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SEE "UNDERWRITING."
2
<PAGE> 4
<TABLE>
<CAPTION>
A FAMILY OF ERP SOLUTIONS
--------------------------------------------------------------------------------
VISTA VANTAGE
<S> <C> <C>
OVERVIEW Vista is an easy-to-use, Windows- Vantage is an easy-to-use, Windows-
based ERP software package that based ERP software package with
provides a cost-effective solution for flexible order-handling capabilities to
job shops with up to $5 million in support a mix of custom and standard
revenues. Vista fully integrates 13 part orders and multilevel assemblies.
core business functions and features Vantage is designed for the rapid
single or multi-level bill of material deployment, minimal support and
capabilities. The Design Ware feature price/performance requirements of
permits users to define their own custom and mixed-mode manufacturers
screens, add fields, change colors, with revenues typically in the $3
hide fields, change grid sizes, and million to $25 million range.
drag choices from menus to the desk-
top.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PRODUCTIVITY HIGHLIGHTS + Drag-and-drop, "what-if" graphical + Drag-and-drop, "what-if" production
scheduling scheduling
+ Paperless control of order, job and + Order/job linking for blanket orders;
part tracking multiple customer to multiple order
+ VistaTouch touch-screen data linking
collection + VantagePoint touch-screen data
collection
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
EASE OF USE HIGHLIGHTS + Point-and-click navigation + Knowledge-based "web" navigation
+ User-defined menus, screens and + On-line help and tutorial
reports + Easy import and export supporting
+ Cut, copy and paste with Windows and many file types
non-Windows applications
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
IS INFRASTRUCTURE Minimal Minimal
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
PRICE RANGE $10,000 to $30,000 $25,000 to $100,000
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
DEPLOYMENT PERIOD 1 to 3 months 1 to 3 months
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
SALES CYCLE 1 to 3 months 1 to 3 months
-------------------------------------------------------------------------------
</TABLE>
[ This is the first page of a two-page foldout. The text in the overview row
above is set over a picture of two workmen.]
<PAGE> 5
FOR MID-RANGE MANUFACTURERS
<TABLE>
<CAPTION>
Enterprise
ManFact II DataFlo Client Server
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ManFact II is an open systems, DataFlo is an open systems, ECS is an object-oriented advanced
client/server based ERP system for client/server based ERP system for client/server solution that is currently
project-oriented job shops and high volume repetitive and discrete under development. ECS is designed to
make-to-order manufacturers with manufacturers with revenues typical- support "best of breed" application
revenues typically in the $25 million ly in the $25 million to $200 million integration, advanced multitier
to $200 million range. ManFact II range. DataFlo offers 34 sophisticat- client/server technology, a graphical
features robust functionality, facili- ed modules and includes the special development environment and applica-
tates rapid deployment and results in functionality required by mixed- tions logic that is fully integrated to the
low customer IS maintenance mode manufacturers, such as repeti- workflow manager for custom transac-
requirements. tive manufacturing of subassemblies tion routing, security, messaging and
and configure-to-order assembly of escalation. ECS is designed for manu-
finished products. facturers with revenues typically in the
$200 million to $1 billion range.
- -----------------------------------------------------------------------------------------------------------------------------------
+ Complete ERP solution for large + A comprehensive ERP solution for + Multi-tier client/server architecture
job shop manufacturers operating repetitive/just in time + Object oriented
in a project-oriented environment manufacturers + Real-time, distributed applications
+ Seamless integration with desktop + Seamless integration with desktop + Database independence
PC and Macintosh productivity PC and Macintosh productivity + High performance manufacturing,
tools tools logistics, distribution and financial
+ Integrated, user-friendly tools meet + Integrated, user-friendly tools meet applications
specific customer requirements specific customer requirements
- -----------------------------------------------------------------------------------------------------------------------------------
+ Graphical user interface + Graphical user interface + Graphical client interface
+ User-oriented tools for creation of + User-oriented tools for creation of + User-definable navigation
custom screens, menus, reports custom screens, menus, reports + Customizable workflow and security
and alerts and alerts + Windows and HTML-enabled help
+ On-line documentation, CAD + On-line documentation, CAD with wizards
drawings, photographs and video drawings, photographs and video
- -----------------------------------------------------------------------------------------------------------------------------------
Limited Limited Significant
- -----------------------------------------------------------------------------------------------------------------------------------
$125,000 to $750,000 $125,000 to $750,000 $500,000 to $3 million(1)
- -----------------------------------------------------------------------------------------------------------------------------------
3 to 9 months 3 to 9 months (1)
- -----------------------------------------------------------------------------------------------------------------------------------
3 to 9 months 3 to months (1)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- -----------------------
(1) The Company's ECS system is currently under development and, although the
Company intends to commence customer shipments of the product in late 1997,
there can be no assurances that the Company will commence such shipments on
a timely basis, or at all, or if timely shipped, that the ECS system will
achieve market acceptance. As ECS is currently under development, data on
average deployment period and sales cycle is unavailable and the indicated
price range is estimated.
[This is the second page of a two-page foldout. The text in the overview row
above is set over a picture of two workmen.]
<PAGE> 6
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, contained
elsewhere in this Prospectus or incorporated herein by reference. Except as
otherwise noted, all information in this Prospectus assumes no exercise of the
Underwriters' over-allotment option. See "Underwriting."
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company'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," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," as well as those discussed elsewhere in
this Prospectus or incorporated herein by reference.
THE COMPANY
DataWorks Corporation ("DataWorks" or the "Company") develops, markets,
implements and supports open systems, client/server-based Enterprise Resource
Planning ("ERP") software for mid-range discrete manufacturing companies with
annual revenues between $3 million and $1 billion. The Company's products and
services facilitate enterprise-wide management of resources and information and
allow mid-range manufacturers to reduce order fulfillment cycle times, improve
operating efficiencies and measure critical company performance against defined
plan objectives. DataWorks' products enable its customers 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. The Company's products also help customers adapt to growth,
changing levels of operations, and business process re-engineering, which is
becoming commonplace among manufacturing concerns.
The business needs and resource requirements of mid-range manufacturers
tend to be considerably different than those of larger companies. Companies in
this market typically have small information systems departments, budget
constraints and limited experience with the advanced technologies inherent in
ERP systems. DataWorks segments the mid-range manufacturing market into three
distinct sectors: the lower tier segment (companies with annual revenues of $3
million to $25 million), the mid-tier segment ($25 million to $200 million) and
the upper tier segment ($200 million to $1 billion). The Company's family of ERP
solutions is designed to provide a product migration path to address the
changing needs of growing companies in the mid-range manufacturing market. The
Company's principal products have been DataFlo and ManFact II, open systems
client/server-based products that are targeted at mid-tier manufacturers and
which accounted for 73.4% of the Company's revenues in the first nine months of
1996. The Company has broadened its product line to serve the lower tier segment
of the mid-range market with Vista and Vantage. Vista and Vantage are
easy-to-use, Windows-based products that the Company acquired through its recent
acquisition of DCD Corporation ("DCD"). The Company also has under development
its Enterprise Client Server ("ECS") system, an object oriented, multi-tier
client/server-based product that is designed for the upper tier segment of the
mid-range market. The Company intends to commence customer shipments of ECS in
late 1997.
The Company 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 rapidly deployed. The Company's products are comprised of
modules that provide and integrate feature-rich applications and that can be
configured to comprehensively support a customer's business. DataWorks provides
turnkey solutions by integrating its application software products with third
party hardware, operating systems, and database and other software products. The
Company offers a suite of development tools and a full complement of services to
help its customers maximize the benefits of the Company's software products and
efficiently implement the Company's ERP solutions. These services include
initial system implementation, consultation, customer support desk and
maintenance activities, technical and programming services, and periodic
enhancement releases of software products.
3
<PAGE> 7
The Company's objective is to be the leading provider of business
information solutions and related products and services to mid-range
manufacturers within selected markets. To accomplish this objective, the Company
intends to: (i) continue to develop new modules and incorporate new
functionality into its products such as Internet integration, business objects,
decision support, manufacturing execution systems support and Object EDI (a
cross-product universal transaction processing protocol); (ii) continue to focus
on achieving high levels of customer satisfaction; (iii) offer its DCD and ECS
products to its targeted market segments; and (iv) leverage its sophisticated
sales and marketing system to increase DataWorks' presence in the lower tier and
international markets.
The Company principally focuses on six discrete, dynamic industries within
its target market: industrial equipment; computer/office equipment; consumer
electronics; instrumentation and controls; medical/dental products; and
transportation/aerospace products. Companies in these "highly engineered
product" industries are typically characterized by complex bills of material,
sophisticated manufacturing processes and a greater need for post-sales
monitoring and tracking. The Company utilizes a sophisticated, multi-phased
sales and marketing approach to enable account representatives to qualify and
track prospective clients, monitor sales efforts and provide valuable management
information, all of which enhances the Company's new customer success rate. The
Company sells its products in the United States primarily through a direct sales
force. The Company currently has 14 offices across the United States, and to
date has derived substantially all of its revenues from its domestic sales
efforts. The Company also has a wholly owned subsidiary in the United Kingdom,
and plans to expand its international sales and service operations. As of
September 30, 1996, DataWorks products were licensed to more than 3,000
customers.
The Company was incorporated in California in 1986. The Company's executive
offices are located at 5910 Pacific Center Boulevard, Suite 300, San Diego,
California 92121, and its telephone number is (619) 546-9600.
THE DCD ACQUISITION
In September 1996, the Company acquired DCD in a stock-for-stock
transaction accounted for as a pooling-of-interests. Accordingly, the financial
results of DCD have been consolidated with the financial results of the Company
included in this Prospectus. In connection with the acquisition, the
shareholders of DCD received approximately 1.8 million shares of the Common
Stock of the Company, which constituted approximately 22.6% of the outstanding
Common Stock immediately after the acquisition.
DCD designs, develops, markets and supports software for use by lower tier
mid-range manufacturers in the make-to-order manufacturing industry. The
principal products acquired by DataWorks in the transaction were Vista and
Vantage. The Company believes that this acquisition allows it to achieve several
important strategic objectives, including both the addition of complementary
products to better serve various markets and a significant expansion of the
Company's customer and revenue base.
THE OFFERING
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<S> <C>
Common Stock offered by the Company................... 2,000,000 shares
Common Stock to be outstanding after this offering.... 9,816,764 shares (1)
Use of proceeds....................................... For working capital, general
corporate purposes and possible
acquisitions and joint ventures
Nasdaq National Market symbol......................... DWRX
</TABLE>
- ---------------
(1) Based upon shares of Common Stock outstanding as of September 30, 1996.
Excludes (i) 810,610 shares of Common Stock issuable upon exercise of
outstanding stock options under the Company's stock option plans and an
aggregate of 632,220 shares available for future issuance thereunder, (ii)
an aggregate of 70,608 shares available for issuance under the Company's
Employee Stock Purchase Plan and (iii) 36,314 shares of Common Stock
issuable upon exercise of outstanding warrants.
4
<PAGE> 8
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- -----------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues................................... $15,522 $23,081 $43,011 $29,229 $42,285
Gross profit............................... 9,029 14,242 27,240 18,605 27,309
Income from operations..................... 1,219 686 6,491 3,916 2,614(1)
Income (loss) before extraordinary item.... 719 (191) 3,374 1,690 1,479
Net income (loss).......................... $ 719 $ (348) $ 2,357 $ 1,063 $ 1,479
======= ======= ======= ======= =======
Net income, as adjusted.................... $ 4,017(2)
=======
PER SHARE INFORMATION:
Income (loss) before extraordinary item.... $ .19 $ (.05) $ .61 $ .31 $ .18
Extraordinary item......................... -- (.04) (.18) (.11) --
------- ------- ------- ------- -------
Net income (loss).......................... $ .19 $ (.09) $ .43 $ .20 $ .18
======= ======= ======= ======= =======
Net income, as adjusted.................... $ .49(2)
=======
Shares used in per share computations(3)... 3,844 4,021 5,523 5,384 8,179
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
------------------------
ACTUAL AS ADJUSTED(4)
------- --------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents......................................... $ 8,866 $ 52,981
Working capital................................................... 15,142 59,257
Total assets...................................................... 44,566 88,681
Total shareholders' equity........................................ 25,259 69,374
</TABLE>
- ---------------
(1) After deducting costs associated with the acquisition of DCD of $3,656,000.
(2) Excluding costs and related tax effects associated with the acquisition of
DCD, net income and earnings per share for the nine months ended September
30, 1996 would have been $4.0 million and $.49 per share, respectively.
(3) See Note 1 of Notes to Consolidated Financial Statements describing the
determination of the number of shares used in computing per share
information.
(4) As adjusted to give effect to the sale by the Company of shares of Common
Stock offered hereby (assuming a public offering price of $23.50 per share)
and the application of the estimated net proceeds therefrom. See "Use of
Proceeds" and "Capitalization."
5
<PAGE> 9
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following risk factors should be considered carefully before purchasing the
Common Stock offered hereby.
Fluctuations in Quarterly Operating Results. The Company has experienced
significant fluctuations in its revenues and operating results from quarter to
quarter and anticipates that it will continue to experience such quarterly
fluctuations. The Company's revenues and operating results have generally been
higher in the fourth quarter than in any preceding quarter of the year. The
Company believes that fourth quarter revenues are positively impacted by
year-end capital purchases by some large corporate customers, as well as by the
Company's sales compensation plans. Seasonal factors, which the Company believes
are common in the computer software industry, are likely to increase as the
Company focuses 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, the Company's revenues
occur predominantly in the third month of each quarter and tend to be
concentrated in the latter half of that third month. Accordingly, the Company's
quarterly results of operations are difficult to predict, and delays in product
delivery or in closings of sales near the end of a 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 the Company to
recognize revenues; the timing of introduction of products or product
enhancements by the Company, the Company's competitors or other providers of
hardware, software and components for the Company's market; competition and
pricing in the software industry; market acceptance of new products; 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 Company strategy; changes in Company operating expenses;
personnel changes; fluctuations in foreign currency exchange rates; changes in
the mix of products sold; conditions or events in the manufacturing industry;
and general economic conditions.
The Company's sales figures for DataFlo and ManFact II, the Company's
principal products, generally reflect a relatively high amount of revenues per
order. The loss or delay of individual orders for these products, therefore,
could have a more significant impact on the revenues and quarterly results of
the Company than on those of companies with higher sales volumes and lower
revenues per order. The Company's software products generally are shipped as
orders are received, and revenues are recognized upon delivery of the products,
provided no significant vendor obligations exist 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 license revenues derived from sales of the Company's
DataFlo and ManFact II products is difficult to predict because of the length of
the sales cycle for these products, which is typically three to nine months from
the initial contact. Because the Company's operating expenses are based on
anticipated revenue trends and because a high percentage of the Company'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, the Company's operating results would be materially adversely
affected. In addition, the achievement of anticipated revenues is substantially
dependent on the ability of the Company to attract, on a timely basis, and
retain skilled personnel, especially sales, service and implementation
personnel. See "-- Ability to Recruit Sales, Service and Implementation
Personnel" and "-- Dependence on Key Employees." As a result of these factors,
revenues for any quarter are subject to significant variation, and the Company
believes that period-to-period comparisons of its results of operations are not
necessarily meaningful and should not be relied upon as indications of future
performance. Fluctuations in operating results may also result in volatility in
the price of the Company's Common Stock. See "-- Possible Volatility of Stock
Price" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Quarterly Results."
Integration of DataWorks and DCD Operations. The Company acquired DCD in
September 1996. The process of rationalizing management services, administrative
organizations, facilities, management informa-
6
<PAGE> 10
tion systems and other aspects of operations, while managing a larger and
geographically expanded entity, presents a significant challenge to the
management of DataWorks. 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 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.
Integrating the two companies has caused the Company to incur certain additional
expenses, and there can be no assurance that there will not continue to 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 earnings of the Company. The Company incurred acquisition
and related costs totaling $3.7 million in the third quarter of 1996. 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
acquisition.
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 the Company's products, which are directed at the market for ERP
systems. Many of the Company'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 the Company. In addition, potential
customers that have a large installed base of legacy systems may resist
committing the time and resources necessary to convert to an open systems-based
client/server software product. The Company has no proprietary barriers to entry
which would limit competitors from developing similar products or selling
competing products in the Company's markets. Accordingly, there can be no
assurance that such competitors will not offer or develop products that are
superior to the Company's products or that achieve greater market acceptance. In
addition, suppliers of relational database management systems ("RDBMS") or
companies that develop management information software applications for large
multinational manufacturers are beginning to market to the upper tier of the
mid-range market targeted by the Company or otherwise develop applications that
compete effectively in the Company's markets. Furthermore, the Company intends
increasingly to focus its marketing and product development efforts toward the
upper end of its target market, which could result in increased competition. As
a result, competition (including price competition) is likely to increase
substantially, which may result in price reductions and loss of market share. In
addition, potential customers may increasingly demand that ERP systems
incorporate certain popular RDBMS software not currently integrated into certain
of DataWorks' product offerings that are offered by its competitors. As the
client/server computing market expands, a large number of companies, some with
significantly greater resources than the Company, may enter the market or
increase their market share by acquiring or entering into alliances with
competitors of the Company. There can be no assurance that the Company will be
able to compete successfully against its competitors or that the competitive
pressures faced by the Company will not adversely affect its financial
performance.
The Company has a large number of competitors that vary in size, primary
computer platforms and overall product scope. Within its market, the primary
competition comes from independent software vendors in four distinct groups
including (i) large multinational system developers in the upper tier of the
Company's mid-range market, including Baan Company, Oracle Corporation
("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) lower priced PC network-based offerings from
companies such as Fourth Shift Corporation, Lilly Software Associates and Macola
Software, Inc. There is also a large number of regional manufacturing software
suppliers that leverage as competitive advantages their concentrated local
support, reputation and, typically, lower price.
The Company's principal market is highly fragmented and consists of a few
large multinational suppliers and a much larger number of small regional
competitors. The Company believes that its industry will experience
consolidation as business information systems become more complex and as more
manufacturers adopt sophisticated business information systems, forcing smaller
companies in the industry to specialize or
7
<PAGE> 11
merge with their competitors. In order to compete effectively in the broad
markets which the Company presently targets, the 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 to a variety of manufacturing industries worldwide. No
assurance can be given that the Company will be able to grow sufficiently to
enable it to compete effectively. The Company 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
the Company's targeted market. There can be no assurance that such companies
will not develop products that are superior to the Company's products or that
achieve greater market acceptance. See "Business -- Competition."
Ability to Recruit Sales, Service and Implementation Personnel. The ability
to achieve anticipated revenues is substantially dependent on the ability of the
Company to attract on a timely basis and retain skilled personnel, especially
sales, service and implementation personnel. In addition, the Company believes
that its future success 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 the Company
competes in the market for such personnel against numerous companies, including
larger, more established companies with significantly greater financial
resources than the
Company. There can be no assurance that the Company will be successful in
attracting and retaining skilled personnel. The Company's inability to attract
and retain qualified employees could have a material adverse effect on the
Company's business and operations. See "-- Dependence on Key Employees" and
"-- Rapid Technological Change and New Products."
Introduction of ECS System. The Company currently anticipates commencing
customer shipments of its ECS system in late 1997. However, there can be no
assurance that the Company will commence such shipments in 1997, or at all.
Furthermore, the Company has limited experience in selling products to customers
in the upper tier of the mid-range manufacturing market and anticipates that
selling products to such customers will result in a longer sales cycle and will
require a different strategy than that employed by the Company in selling
products to customers in the mid-tier market. For example, as part of its upper
tier marketing strategy, the Company is exploring potential relationships with
third party integrators to facilitate implementation of the ECS system. There
can be no assurance that any such relationships will be formed or, if formed,
will prove beneficial to the Company. Accordingly, even if customer shipments of
the ECS system are timely commenced, there can be no assurance that the Company
will be successful in effectively marketing the ECS system or that the ECS
system will achieve market acceptance. See "-- Rapid Technological Change and
New Products" and "Business -- Products -- Upper Tier: Enterprise Client
Server."
Management of Growth. The Company's business has grown rapidly, both
internally and through acquisitions, with total revenues increasing to $42.3
million for the nine months ended September 30, 1996 from $29.2 million in the
nine months ended September 30, 1995. There can be no assurance that the Company
will be able to manage its recent growth and assimilate its new employees and
products successfully. To manage its growth effectively, the Company will be
required to expand, train and manage its employee base, enhance its operating
and financial systems, and effectively expand its product line. If the Company
continues to grow, there can be no assurance that the management skills and
systems currently in place will be adequate or that the Company will be able to
manage any additional growth effectively. See "-- Integration of DataWorks and
DCD Operations."
Dependence on Key Employees. The Company's continued success depends to a
significant extent upon its ability to retain certain key employees, including
Stuart W. Clifton, Norman R. Farquhar, Mark S. Howlett and Robert W. Brandel.
The loss of certain key employees or the Company's inability to attract and
retain other qualified employees could have a material adverse effect on the
Company's business and operations. See "-- Ability to Recruit Sales, Service and
Implementation Personnel," "-- Rapid Technological Change and New Products,"
"Business -- Employees" and "Management -- Directors and Executive Officers."
8
<PAGE> 12
Rapid Technological Change and New Products. The market for the Company's
software products is characterized by rapid technological advances, evolving
industry standards, changes in end-user requirements and frequent new product
introductions and enhancements. The introduction of products embodying new
technologies, such as the planned introduction of the ECS system, and the
emergence of new industry standards, could render the Company's existing
products and products currently under development obsolete and unmarketable.
Accordingly, the Company's future success will depend upon its ability to
enhance its 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 the Company to anticipate or respond
adequately to technological developments or end-user requirements, or any
significant delays in product development or introduction, could damage the
Company's competitive position and have an adverse effect on revenues. There can
be no assurance that the Company will be successful in developing and marketing
new products, including the ECS system, or product enhancements on a timely
basis or that the Company will not experience significant delays in the future,
which could have a material adverse effect on the Company's business and
operations. In addition, there can be no assurance that new products or product
enhancements developed by the Company will achieve market acceptance. The
Company may need to increase the size of its product development staff in the
near term to meet these challenges. There can be no assurance that the Company
will be successful in hiring and training an adequate number of qualified
product development personnel to meet its needs. See "-- Introduction of ECS
System," "-- Dependence on Key Employees" and "Business -- Product Development."
Software programs as complex as those offered by the Company may contain
undetected errors or "bugs" when first introduced or as new versions are
released that, despite testing by the Company, 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 the 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 the Company's products
could have a material adverse effect on the Company's business and operations.
Dependence on Manufacturing Industry. The Company's business depends
substantially upon the capital expenditures of mid-range discrete manufacturers,
which in part depend upon the demand for such manufacturers' products. A
recession or other adverse events affecting the manufacturing industry in the
United States or other markets served by the Company could affect such demand,
forcing manufacturers in the 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 the Company's business and operations.
Dependence on Third Party Software and Hardware. Most of the Company's
products incorporate and use software products and computer hardware and
equipment developed by other entities. The relational database management
systems currently used in the Company's products are those which the Company
believes are best suited for the particular applications required by the
mid-range discrete manufacturers. These RDBMS have been developed by UniData,
Inc. ("UniData"), VMark Software, Inc. ("VMark"), Progress Software Corporation
and Microsoft Corporation ("Microsoft"). The operating systems on which the
Company's products can function (UNIX, SCO-UNIX, UnixWare, VMS and Microsoft NT)
have been developed or are owned by Novell Corporation ("Novell"), Digital
Equipment Corporation ("DEC") and Microsoft. The computer hardware and related
equipment sold as part of the Company's turnkey systems are manufactured by
Hewlett-Packard Company ("Hewlett-Packard"), International Business Machines
Corporation ("IBM"), DEC and others. 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 the Company. If any of these
entities ceases to do business or abandons or fails to enhance a particular
product line, the Company may need to seek other suppliers. This could have a
material adverse effect on the Company's business and operations. In addition,
there can be no assurance that the Company's current suppliers will not
significantly alter their pricing in a manner adverse to the Company. See
"Business -- Products."
9
<PAGE> 13
Intellectual Property and Proprietary Rights. The Company 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 the Company's products or
obtain and use information that the Company regards as proprietary. The Company
provides the source code for its application software under licenses to its
customers to enable them to customize the software to meet particular
requirements. Although the Company's source code license contains
confidentiality and nondisclosure provisions, there can be no assurance that
such customers will take adequate precautions to protect the Company's source
code or other confidential information. In addition, the laws of some foreign
countries do not protect the Company'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 the Company to protect its software will be adequate or that the
Company's competitors will not independently develop software products that are
substantially equivalent or superior to the Company's software products.
The Company has and may from time to time receive notices from third
parties claiming that the Company's products infringe upon third party
proprietary rights. The Company 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
the Company to enter into royalty or licensing arrangements. Such royalty or
license arrangements, if required, may not be available, if at all, on terms
acceptable to the Company. See "Business -- Intellectual Property."
Product Liability. Because the Company markets and sells its software
products on a turnkey basis, which includes rendering professional consulting
services, the Company incurs significant risks of professional and other
liability. No assurance can be given that the limitations of liability set forth
in the Company's license agreements or other contracts would be enforceable or
would otherwise protect the Company from liability for damages to a customer
resulting from a defect in one of the Company's products or arising as a result
of professional services rendered by the Company. Such a claim, if successful
and of sufficient magnitude, could have a material adverse effect on the
Company's business and operations.
Influence of Existing Shareholders. Following this offering, the Company's
executive officers, directors and their affiliates will, in the aggregate,
beneficially own approximately 26.9% of the Company's outstanding shares of
Common Stock. As a result, these shareholders, if acting together, would be able
to influence matters requiring approval by the shareholders of the 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 the Company. The Company 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 the
Company. See "Management" and "Principal Shareholders."
Possible Volatility of Stock Price. The market price of the Company's
Common Stock has fluctuated since its initial public offering in October 1995.
The price of the Company's stock may be subject to significant fluctuations in
the future in response to variations in quarterly operating results of the
Company, announcements of new products by the Company 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.
Also, the Company's revenues or operating results in future quarters may be
below the expectations of public market securities analysts and investors, which
could cause the price of the Company's stock to decline, perhaps substantially.
Such stock price and market fluctuations could adversely affect the Company.
Further, there can be no assurance that the market price of the Company's Common
Stock will not decline below the public offering price set forth on the cover
page of this Prospectus.
Effect of Certain Charter Provisions. The Company's 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
10
<PAGE> 14
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 the Company. The Company has no present plan to issue any shares of
Preferred Stock.
Shares Eligible for Future Sale; Registration Rights. Sales of substantial
numbers of shares of Common Stock in the public market following this offering
could adversely affect the market price for the Common Stock. Upon completion of
this offering, the Company will have outstanding an aggregate of 9,816,764
shares of Common Stock, assuming no exercise of the Underwriters' over-allotment
option and no exercise of outstanding options, based upon the number of shares
outstanding as of September 30, 1996. Upon completion of this offering, in
addition to the 2,000,000 shares sold in this offering, 3,741,901 shares will be
freely tradable without restriction or further registration under the Securities
Act of 1933, as amended (the "Securities Act"). Beginning on the date of public
announcement of the Company's financial results for the year ended December 31,
1996, 26,304 shares issued in connection with the Company's acquisition of DCD
will be eligible for sale. Beginning 90 days after the date of this Prospectus,
3,979,075 shares held by certain officers, directors and shareholders, who have
agreed not to sell, contract to sell or otherwise dispose of any shares of
Common Stock without the consent of Montgomery Securities, will be eligible for
sale subject, in the case of "affiliates" of the Company, as that term is
defined in Rule 144 under the Securities Act, to the volume and other
limitations of Rule 144. The remaining 69,484 shares of Common Stock held by
existing shareholders are subject to the volume and other limitations of Rule
144. The holders of outstanding warrants to purchase 36,314 shares and holders
of approximately 1,824,293 shares of the Company's Common Stock are entitled to
certain demand and piggyback registration rights. If such holders, by exercising
their demand and piggyback registration rights, cause a large number of shares
to be registered and sold in the public market, such sales may have an adverse
effect on the market price for the Common Stock.
11
<PAGE> 15
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock offered by the Company hereby are estimated to be $44,115,000
($50,777,250 if the Underwriters' over-allotment option is exercised in full),
assuming a public offering price of $23.50 per share and after deducting
estimated underwriting discounts and commissions and offering expenses. The
Company will not receive any of the proceeds from the sale of shares of Common
Stock, if any, by the Selling Shareholders pursuant to the Underwriters'
over-allotment option. See "Principal Shareholders -- Selling
Shareholders -- Exercise of Over-Allotment Option."
The Company intends to use the net proceeds of this offering primarily for
additional working capital, general corporate purposes, including expansion of
general sales and marketing and customer support activities, international
expansion and possible acquisitions and joint ventures. The amounts actually
expended by the Company for working capital purposes will vary significantly
depending upon a number of factors, including future revenue growth, if any, the
amount of cash generated by the Company's operations and the progress of the
Company's product development efforts. Hence, the Company's management will
retain broad discretion in the allocation of the net proceeds from this
offering. In addition, the Company may make one or more acquisitions of, or
joint ventures with, complementary technologies, products or businesses which
broaden or enhance the Company's current product offerings. However, the Company
has no specific plans, agreements or commitments, oral or written, and is not
currently engaged in any negotiations for any such acquisition or joint venture.
Pending the uses described above, the net proceeds will be invested in interest-
bearing, investment-grade securities.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has traded on the Nasdaq National Market under
the symbol "DWRX" since October 27, 1995. The following table sets forth for the
periods indicated the high and low sales prices for the Common Stock:
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1996
Fourth Quarter (through November 7).................. $34.25 $21.25
Third Quarter........................................ 28.00 15.75
Second Quarter....................................... 19.50 11.50
First Quarter........................................ 14.50 10.25
1995
Fourth Quarter (from October 27)..................... $15.00 $10.75
</TABLE>
As of September 30, 1996, there were 69 holders of record of the Common
Stock. On November 7, 1996, the closing sales price of the Company's Common
Stock was $23.50 per share.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
Stock. DCD, in 1994 and 1995 (prior to its acquisition by DataWorks), paid
dividends of approximately $393,000 and $649,000, respectively, to its employee
stock ownership plan. The Company's banking facilities contain certain
restrictions and limitations, including the prohibition against payment of
dividends. The Company currently intends to retain any future earnings for use
in its business and does not anticipate paying any cash dividends in the
foreseeable future.
12
<PAGE> 16
CAPITALIZATION
The following table sets forth the capitalization of the Company at
September 30, 1996 and as adjusted to give effect to the receipt by the Company
of the net proceeds from the sale of the 2,000,000 shares of Common Stock
offered hereby at an assumed price of $23.50 per share.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
Shareholders' equity:
Preferred Stock, no par value:
5,000,000 shares authorized; no shares issued and outstanding,
actual and as adjusted............................................ -- --
Common Stock, no par value:
25,000,000 shares authorized; 7,816,764 shares issued and
outstanding, actual; 9,816,764 shares issued and outstanding, as
adjusted(1)....................................................... $26,894 $71,009
Accumulated deficit.................................................. (1,635) (1,635)
------- -------
Total shareholders' equity................................... 25,259 69,374
------- -------
Total capitalization......................................... $25,259 $69,374
======= =======
</TABLE>
- ---------------
(1) Excludes, as of September 30, 1996, (i) 810,610 shares of Common Stock
issuable upon exercise of outstanding stock options under the Company's
stock option plans and an aggregate of 632,220 shares available for future
issuance thereunder, (ii) an aggregate of 70,608 shares available for
issuance under the Company's Employee Stock Purchase Plan and (iii) 36,314
shares of Common Stock issuable upon exercise of outstanding warrants. See
Note 9 of Notes to Consolidated Financial Statements.
13
<PAGE> 17
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and notes
thereto included elsewhere in this Prospectus. The consolidated statement of
operations data for the years ended December 31, 1993, 1994 and 1995 and the
consolidated balance sheet data at December 31, 1994 and 1995 are derived from,
and are qualified by reference to, the audited consolidated financial statements
and notes thereto included elsewhere in this Prospectus. The consolidated
statement of operations data for the nine month periods ended September 30, 1995
and 1996 and the consolidated balance sheet data at September 30, 1996 are
derived from unaudited consolidated financial statements included elsewhere in
this Prospectus. The consolidated statement of operations data for the years
ended December 31, 1991 and 1992 and the consolidated balance sheet data at
December 31, 1991, 1992 and 1993 are derived from unaudited consolidated
financial statements. In the opinion of management, the unaudited consolidated
financial statements have been prepared on the same basis as the audited
consolidated financial statements and contain all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation of the
Company's results of operations and financial position for such periods. The
results of operations for the nine months ended September 30, 1996 are not
necessarily indicative of the results to be expected for the full year or future
periods.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------- -------------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Software licenses............................. $ 4,126 $ 4,580 $ 6,692 $11,627 $22,874 $15,952 $24,459
Hardware...................................... 2,274 1,843 4,089 3,765 6,743 4,189 3,718
Maintenance and other services................ 3,335 3,525 4,741 7,689 13,394 9,088 14,108
------- ------- ------- ------- ------- ------- -------
Total revenues............................ 9,735 9,948 15,522 23,081 43,011 29,229 42,285
Cost of revenues:
Software licenses............................. 142 190 272 1,192 2,153 1,513 1,912
Hardware...................................... 1,587 1,381 2,474 2,930 5,288 3,291 2,745
Maintenance and other services................ 2,458 3,448 3,747 4,717 8,330 5,820 10,319
------- ------- ------- ------- ------- ------- -------
Total cost of revenues.................... 4,187 5,019 6,493 8,839 15,771 10,624 14,976
------- ------- ------- ------- ------- ------- -------
Gross profit.................................... 5,548 4,929 9,029 14,242 27,240 18,605 27,309
Operating expenses:
Sales and marketing........................... 2,349 2,760 3,843 7,404 12,057 8,328 12,738
Research and development...................... 989 1,065 1,230 2,521 3,214 2,309 3,137
General and administrative.................... 2,076 2,586 2,350 3,202 5,032 3,718 5,164
Acquisition and related costs................. -- -- -- -- -- -- 3,656
ESOP contribution............................. 100 199 387 429 446 334 --
------- ------- ------- ------- ------- ------- -------
Total operating expenses.................. 5,514 6,610 7,810 13,556 20,749 14,689 24,695
------- ------- ------- ------- ------- ------- -------
Income (loss) from operations................... 34 (1,681) 1,219 686 6,491 3,916 2,614
Other income (expense), net..................... (187) (224) (500) (1,141) (1,337) (1,313) 315
------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes and
extraordinary item............................ (153) (1,905) 719 (455) 5,154 2,603 2,929
Credit (provision) for income taxes............. -- -- -- 264 (1,780) (913) (1,450)
------- ------- ------- ------- ------- ------- -------
Income (loss) before extraordinary item......... (153) (1,905) 719 (191) 3,374 1,690 1,479
Extraordinary item, net of income taxes......... -- -- -- 157 1,017 627 --
------- ------- ------- ------- ------- ------- -------
Net income (loss)............................... $ (153) $(1,905) $ 719 $ (348) $ 2,357 $ 1,063 $ 1,479(1)
======= ======= ======= ======= ======= ======= =======
Per share information:
Income (loss) before extraordinary item....... $ (.06) $ (.71) $ .19 $ (.05) $ .61 $ .31 $ .18
Extraordinary item............................ -- -- -- (.04) (.18) (.11) --
------- ------- ------- ------- ------- ------- -------
Net income (loss)............................. $ (.06) $ (.71) $ .19 $ (.09) $ .43 $ .20 $ .18(1)
======= ======= ======= ======= ======= ======= =======
Shares used in per share computations(2)........ 2,691 2,691 3,844 4,021 5,523 5,384 8,179
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------- SEPTEMBER 30,
1991 1992 1993 1994 1995 1996
------- ------- ------- ------- ------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents......................... $ 570 $ 491 $ 636 $ 1,458 $13,005 $ 8,866
Working capital (deficit)......................... (2,417) (5,068) (5,211) (3,882) 15,985 15,142
Total assets...................................... 3,700 2,315 4,212 15,139 38,153 44,566
Long-term debt, less current portion.............. 73 2,476 1,501 7,832 -- --
Total shareholders' equity (deficit).............. (1,485) (6,883) (5,650) (5,357) 22,892 25,259
</TABLE>
- ---------------
(1) Excluding costs and related tax effects associated with the acquisition of
DCD, net income and earnings per share for the nine months ended September
30, 1996 would have been $4.0 million and $.49 per share, respectively.
(2) See Note 1 of Notes to Consolidated Financial Statements describing the
determination of the number of shares used in computing per share
information.
14
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed in this report. Factors that could cause or contribute to such
differences include, without limitation, those discussed in the sections
entitled "Risk Factors" and "Business," as well as those discussed elsewhere in
this Prospectus or incorporated herein by reference.
OVERVIEW
DataWorks was incorporated in 1986 and develops, markets, implements and
supports open systems, client/server-based ERP software for mid-range discrete
manufacturing companies with annual revenues between $3 million and $1 billion.
In May 1994, DataWorks acquired Madic-Compufact Corporation ("MCC") principally
for cash in a transaction accounted for as a purchase. 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 has had a significant effect on
DataWorks' subsequent financial results.
In September 1996, the Company acquired DCD Corporation ("DCD") in a
stock-for-stock transaction that was accounted for as a pooling-of-interests.
The financial results of DCD have been included in the financial results of the
Company included in this Prospectus. DataWorks believes that its acquisition of
DCD allowed it to achieve several important strategic objectives, including the
ability to better serve the lower tier of mid-range manufacturers, within and
outside the six "highly engineered product" industries on which the Company has
focused historically. The acquisition also allowed the Company to expand
geographically and to increase its customer and revenue base. The DCD
acquisition had a significant effect on DataWorks' financial results.
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, the Company has experienced
declining hardware revenues as a percentage of each system it sells and
declining profit margins with respect to such hardware revenues. Recently, gross
profit from hardware sales has not been a significant part of the Company's
total gross profit, and the Company believes this trend will continue.
The Company believes that its success has been due in part to its strategy
of focusing marketing and development resources on six "highly engineered
product" industries within the mid-range discrete manufacturing market sector.
The Company is unaware that any of its competitors is specifically targeting the
same group of industries. There can be no assurance that competitors with
significantly greater financial, technical and marketing resources than the
Company will not target these particular industries.
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.
15
<PAGE> 19
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>
NINE MONTHS
YEARS ENDED DECEMBER ENDED
31, SEPTEMBER 30,
----------------------- --------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA
Revenues:
Software licenses.................................... 43.2% 50.4% 53.2% 54.6% 57.8%
Hardware............................................. 26.3 16.3 15.7 14.3 8.8
Maintenance and other services....................... 30.5 33.3 31.1 31.1 33.4
----- ----- ----- ----- -----
Total revenues.................................. 100.0 100.0 100.0 100.0 100.0
Cost of revenues:
Software licenses.................................... 1.8 5.2 5.0 5.2 4.5
Hardware............................................. 15.9 12.7 12.3 11.3 6.5
Maintenance and other services....................... 24.1 20.4 19.4 19.9 24.4
----- ----- ----- ----- -----
Total cost of revenues.......................... 41.8 38.3 36.7 36.4 35.4
----- ----- ----- ----- -----
Gross profit........................................... 58.2 61.7 63.3 63.6 64.6
Operating expenses:
Sales and marketing.................................. 24.8 32.1 28.0 28.5 30.1
Research and development............................. 7.9 10.9 7.5 7.9 7.5
General and administrative........................... 15.1 13.9 11.7 12.7 12.2
Acquisition and related costs........................ -- -- -- -- 8.6
ESOP contribution.................................... 2.5 1.8 1.0 1.2 --
----- ----- ----- ----- -----
Total operating expenses........................ 50.3 58.7 48.2 50.3 58.4
----- ----- ----- ----- -----
Income from operations................................. 7.9 3.0 15.1 13.3 6.2
Other income (expense), net............................ (3.3) (4.9) (3.1) (4.5) 0.7
----- ----- ----- ----- -----
Income (loss) before income taxes and extraordinary
item................................................. 4.6 (1.9) 12.0 8.8 6.9
Credit (provision) for income taxes.................... -- 1.1 (4.1) (3.1) (3.4)
Extraordinary item, net of income taxes................ -- (0.7) (2.4) (2.1) --
----- ----- ----- ----- -----
Net income (loss)...................................... 4.6% (1.5)% 5.5% 3.6% 3.5%
===== ===== ===== ===== =====
</TABLE>
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995,
AND YEARS ENDED DECEMBER 31, 1995 AND 1994
Total Revenues. DataWorks' principal sources of revenues 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 for the nine months ended September 30, 1996 increased 44.7%
to $42.3 million from $29.2 million for the same period in 1995. This increase
in revenues was primarily due to an increase in sales of software licenses to
new accounts and an overall increase in maintenance and other service revenues.
Total revenues increased 86.3% to $43.0 million in 1995 from $23.0 million in
1994 . This increase was due primarily to significant growth in software license
fees and related service fees resulting from the expansion of DataWorks'
customer base and the availability of the Vista and Vantage products, which were
released in mid-1994.
Software License Revenues. Revenues from DataWorks' 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. DataWorks' Vista product line, which represented
approximately 14% and 12% of software license revenues for the nine months ended
September 30, 1996 and 1995, respectively, and approximately 15% and 8% of
software license revenues in 1995 and 1994, respectively, carries a 30-day
16
<PAGE> 20
money back guarantee. DataWorks books this revenue upon shipment and believes
that it maintains adequate reserves to cover typical returns, which average
approximately 12%.
Software license revenues for the nine months ended September 30, 1996
increased 53.3% to $24.5 million from $16.0 million for the same period in 1995.
This growth was attributable to increased marketing efforts, expansion of the
sales force and increased functionality in both the Vista and Vantage products.
Software license revenues increased 96.7% to $22.9 million in 1995 from $11.6
million in 1994. This increase resulted from a combination of factors,
including, (i) the continued effects of regionalization and expansion of the
sales force and the increase in marketing activities, (ii) the expansion of
DataWorks' product offerings, including the addition of new software application
modules, (iii) the added product functionality of existing software application
modules and (iv) the increased customer base from the acquisition of MCC in May
1994.
Cost of Software License Revenues. The cost of software license revenues
consists primarily of the cost of software products and firmware security
devices provided by third party suppliers and sold with DataWorks' systems. The
cost of software license revenues for the nine months ended September 30, 1996
increased 26.4% to $1.9 million from $1.5 million for the same period in 1995
and 80.6% to $2.2 million in 1995 from $1.2 million in 1994. These increases
were directly related to the increase in software license revenues. The cost of
software license revenues represented approximately 8% and 9% of software
license revenues for the nine months ended September 30, 1996 and 1995,
respectively, and 9% and 10% of software license revenues for 1995 and 1994,
respectively. This decrease in software license cost, as a percentage of
software license revenues, was due primarily to reductions in database costs on
a per user basis.
Hardware Revenues. Hardware revenues include computers (primarily servers),
data collection equipment, peripherals and related network and communications
products purchased from third party vendors and sold through DataWorks to its
customers.
Hardware revenues for the nine months ended September 30, 1996 declined
11.2% to $3.7 million from $4.2 million for the same period in 1995. This
represented approximately 9% of total revenues for the nine months ended
September 30, 1996, as compared to approximately 14% of total revenues for the
same period in 1995, reflecting an increasing tendency for new customers, who
purchase smaller systems, to purchase hardware directly from third party
vendors. Hardware revenues increased 79.1% to $6.7 million in 1995 from $3.8
million in 1994, representing approximately 16% of total revenues for both 1994
and 1995. This increase in hardware revenues was due, in part, to the
acquisition of MCC and its existing customer base as well as the overall
increase in sales transactions. Due to intense competition in the computer
hardware market and an increasing tendency for new customers to purchase
hardware directly from third party vendors, DataWorks has experienced declining
hardware revenues as a percentage of new account systems.
Cost of Hardware Revenues. The cost of hardware revenues consists primarily
of the cost of the computers (primarily servers), data collection equipment,
peripherals and related network and communications products purchased from third
party vendors.
The Company attempts to maintain a 20% gross profit on hardware sales.
Recently, gross profit from hardware sales has not been a significant part of
DataWorks' total gross profit, and DataWorks believes this trend will continue.
Maintenance and Other Service Revenues. Maintenance and other service
revenues include fees primarily from software maintenance, consulting, education
and custom programming services. Software maintenance revenues are generally
prepaid and recognized ratably over the period of the maintenance agreement.
Consulting, education and custom programming revenues are generally paid and
recognized as the services are performed.
Maintenance and other service revenues for the nine months ended September
30, 1996 increased 55.2% to $14.1 million from $9.1 million for the same period
in 1995. This growth was due primarily to the increase in new customers, and
increased capacity created by the growth in DataWorks' service organization.
Maintenance and other service revenues increased 74.2% to $13.4 million in 1995
from $7.7 million in 1994.
17
<PAGE> 21
This increase was the result of the increased number of new accounts recorded
during this period and increased activity within DataWorks' existing account
base, including the addition of MCC customers.
Cost of Maintenance and Other Service Revenues. DataWorks provides its
software maintenance, consulting and custom programming services through a
professional in-house staff. The cost of these services is primarily based on
salaries and a portion of DataWorks' overhead cost. Cost of maintenance and
other service revenues for the nine months ended September 30, 1996 increased
77.3% to $10.3 million from $5.8 million for the same period in 1995. This
increase was primarily due to the continued expansion of the DataWorks'
professional service organization required to support growth in new customer
accounts. Gross profit, as a percentage of maintenance and other service
revenues, decreased to 26.9% for the nine months ended September 30, 1996 from
36.0% for the same period in 1995 due primarily 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 76.6% to
$8.3 million in 1995 from $4.7 million in 1994. This increase 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.
Gross Profit. Gross profit increased 46.8% to $27.3 million from $18.6
million and increased to 64.6% from 63.6% as a percentage of total revenues for
the nine months ended September 30, 1996 as compared to the same period in 1995.
Gross profit increased 91.3% to $27.2 million from $14.2 million and increased
to 63.3% from 61.7% as a percentage of total revenues in 1995 as compared to
1994. These increases were due primarily to an increase in gross profit in
software sales and an increase in software revenues as a percentage of total
revenues.
Sales and Marketing Expenses. Sales and marketing expenses for the nine
months ended September 30, 1996 increased 53.0% to $12.7 million from $8.3
million for the same period in 1995, and increased as a percentage of revenues
to 30.1% from 28.5% for the same periods. These increases were attributable to
DataWorks' expansion of its direct sales force, increased marketing efforts,
travel, commissions and other expenses related directly to the increased sales
activity. Sales and marketing expenses increased 62.8% to $12.1 million in 1995
from $7.4 million in 1994. This increase reflected the expansion of DataWorks'
sales and marketing staff, additional marketing required for the introduction of
Vista and Vantage and increased sales activity in this period. As a percentage
of total revenues, sales and marketing expenses decreased to 28.0% in 1995 from
32.1% in 1994, due primarily to the increase in total revenues during 1995.
DataWorks expects sales and marketing expenses will continue to increase in
absolute dollars as it continues to expand its sales and marketing programs.
Research and Development Expenses. Research and development expenses are
comprised primarily of salaries and a portion of DataWorks' overhead for its
in-house staff and amounts paid to outside consultants, as appropriate, to
supplement the product development efforts of its in-house staff. Research and
development expenses are charged to operations as incurred. Certain software
production costs related to DataWorks' 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 late 1997. DataWorks does
not capitalize development software costs for any product other than ECS. As of
September 30, 1996, the amount capitalized for ECS was approximately $3.7
million.
Gross research and development expenditures for the nine months ended
September 30, 1996 increased 52.0% to $5.0 million from $3.3 million for the
same period in 1995, representing approximately 11.8% and 11.3%, respectively,
of total revenues. Gross research and development expenditures in such periods
included amounts for capitalized software totaling $1.9 million and $970,000,
respectively. The increase in gross expenditures was due primarily to the
employment of additional development personnel and reflects DataWorks' belief
that investments in research and development are necessary to maintain a
competitive position in its targeted market. Gross research and development
expenditures increased 50.0% to $4.5 million in 1995 from $3.0 million in 1994.
Gross research and development expenditures in such periods included
18
<PAGE> 22
amounts for capitalized software totaling $1.3 million and $475,000,
respectively. The increase in gross expenditures resulted primarily from the
inclusion of MCC expenditures in 1995 that were not included in the first five
months of 1994. 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
for the nine months ended September 30, 1996 increased 38.9% to $5.2 million
from $3.7 million as compared to the same period in 1995. This increase was due
primarily to the increase in administrative staff and the related facility costs
necessary to support the growth of DataWorks. General and administrative
expenses increased 57.2% to $5.0 million in 1995 from $3.2 million in 1994. This
increase was due primarily to the expansion of DataWorks' administrative staff
arising, in part, from the increase in business activity following the MCC
acquisition, and the amortization of certain intangibles in connection with that
acquisition.
Acquisition and Related Costs. Acquisition and related costs of $3.7
million represent the transaction costs incurred in connection with the
acquisition of DCD. These costs included investment banking fees, legal and
accounting fees and expenses necessary to integrate and combine the operations
of the two companies. There can be no assurance that the Company will not incur
additional charges in future periods to reflect costs associated with the
acquisition and the integration of the two companies.
ESOP Contributions and Dividends. DCD established the ESOP in 1992 for the
benefit of all of its employees meeting certain eligibility requirements. The
ESOP was assumed by DataWorks in connection with its acquisition of DCD. In
1992, DCD obtained financing from a commercial bank and advanced proceeds to the
ESOP in order to purchase certain shares from a selling shareholder. See Note 4
of Notes to Consolidated Financial Statements.
Other Income and Expense. Interest expense relates primarily to long-term
debt, the amortization of debt discount and issue costs with respect to prior
financings and debt associated with the ESOP. DataWorks reported net interest
income of approximately $315,000 for the nine months ended September 30, 1996,
as compared to net interest expense of approximately $1.3 million for the same
period in 1995. The net interest income for the first nine months of 1996
relates primarily to the income from the investment of a portion of the net
proceeds from DataWorks' initial public offering in October 1995. The interest
expense recorded for the same period in 1995 relates primarily to long-term
debt, the amortization of debt discount and issue costs with respect to prior
financings, and the ESOP obligation. With the exception of the ESOP obligation,
all long-term debt was retired with a portion of the proceeds from the initial
public offering. Interest expense increased 17.2% to $1.3 million in 1995 from
$1.1 million in 1994. This increase was due primarily to debt financing obtained
in connection with the MCC acquisition. In 1995, 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 $1.0 million, net of income tax benefit, arising from
the write-off of the unamortized debt issue cost, debt discount and the other
related fees. See Note 5 of Notes to Consolidated Financial Statements. In 1995,
DataWorks repaid in full the ESOP obligation through cash flows from operations.
Income Taxes. For the nine months ended September 30, 1996, DataWorks'
effective tax rate was 49.5%, due primarily to the non-deductibility of certain
of the DCD acquisition and related costs. The effective tax rate for such period
without the acquisition and related costs would have been approximately 40%.
DataWorks' effective tax rate for the nine months ended September 30, 1995 was
35%. DataWorks realized tax benefits in 1994 and 1995 from the deduction of
certain tax credits and from contributions and dividends paid on Common Stock
held by the ESOP used to make ESOP debt service payments, which have reduced
DataWorks' effective tax rate in those periods. See Note 6 of Notes to
Consolidated Financial Statements.
19
<PAGE> 23
QUARTERLY RESULTS
The following tables set forth certain unaudited financial information of
the Company for the seven quarters ended September 30, 1996. This quarterly
information has been prepared on the same basis as the audited consolidated
financial statements and, in the opinion of management, includes all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the information for the periods presented. The operating
results for any quarter are not necessarily indicative of results for any future
period.
<TABLE>
<CAPTION>
QUARTERS ENDED
----------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1995 1995 1995 1995 1996 1996 1996
-------- -------- --------- -------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Software licenses....................... $3,740 $5,569 $ 6,643 $6,922 $6,758 $9,077 $ 8,624
Hardware................................ 1,072 1,579 1,538 2,554 1,247 1,441 1,030
Maintenance and other services.......... 2,654 3,044 3,390 4,306 4,145 4,810 5,153
------ ------ ------ ------ ------ ------ ------
Total revenues........................ 7,466 10,192 11,571 13,782 12,150 15,328 14,807
Cost of revenues:
Software licenses....................... 382 442 689 640 566 809 537
Hardware................................ 902 1,185 1,204 1,997 928 1,065 752
Maintenance and other services.......... 1,714 1,912 2,194 2,510 2,965 3,694 3,660
------ ------ ------ ------ ------ ------ ------
Total cost of revenues................ 2,998 3,539 4,087 5,147 4,459 5,568 4,949
------ ------ ------ ------ ------ ------ ------
Gross Profit.............................. 4,468 6,653 7,484 8,635 7,691 9,760 9,858
Operating expenses:
Sales and marketing..................... 2,326 2,905 3,097 3,729 3,499 4,529 4,710
Research and development................ 737 764 808 905 929 1,014 1,194
General and administrative.............. 1,048 1,354 1,316 1,314 1,543 1,891 1,730
Acquisition and related costs........... -- -- -- -- -- -- 3,656
ESOP contribution....................... 111 112 111 112 -- -- --
------ ------ ------ ------ ------ ------ ------
Total operating expenses.............. 4,222 5,135 5,332 6,060 5,971 7,434 11,290
------ ------ ------ ------ ------ ------ ------
Income (loss) from operations............. 246 1,518 2,152 2,575 1,720 2,326 (1,432)
Other income (expense), net............... (449) (461) (403) (24) 130 108 77
------ ------ ------ ------ ------ ------ ------
Income (loss) before income taxes and
extraordinary item...................... (203) 1,057 1,749 2,551 1,850 2,434 (1,355)
Credit (provision) for income taxes....... 89 (376) (626) (867) (916) (1,205) 671
------ ------ ------ ------ ------ ------ ------
Income (loss) before extraordinary item... (114) 681 1,123 1,684 934 1,229 (684)
Extraordinary item, net of income taxes... -- -- 627 390 -- -- --
------ ------ ------ ------ ------ ------ ------
Net income (loss)......................... $ (114) $ 681 $ 496 $1,294 $ 934 $1,229 $ (684)(1)
====== ====== ====== ====== ====== ====== ======
</TABLE>
- ---------------
(1) Excluding costs and related tax effects associated with the acquisition of
DCD, net income for the quarter ended September 30, 1996 would have been
$1.4 million.
20
<PAGE> 24
<TABLE>
<CAPTION>
AS A PERCENTAGE OF TOTAL REVENUE
FOR THE QUARTERS ENDED
----------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1995 1995 1995 1995 1996 1996 1996
-------- -------- --------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Software licenses....................... 50.1% 54.6% 57.4% 50.2% 55.6% 59.2% 58.2%
Hardware................................ 14.4 15.5 13.3 18.5 10.3 9.4 7.0
Maintenance and other services.......... 35.5 29.9 29.3 31.3 34.1 31.4 34.8
------ ------ ------ ------ ------ ------ ------
Total revenues........................ 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenues:
Software licenses....................... 5.1 4.3 6.0 4.6 4.7 5.3 3.6
Hardware................................ 12.1 11.6 10.4 14.5 7.6 6.9 5.1
Maintenance and other services.......... 23.0 18.8 19.0 18.2 24.4 24.1 24.7
------ ------ ------ ------ ------ ------ ------
Total cost of revenues................ 40.2 34.7 35.3 37.3 36.7 36.3 33.4
------ ------ ------ ------ ------ ------ ------
Gross Profit.............................. 59.8 65.3 64.7 62.7 63.3 63.7 66.6
Operating expenses:
Sales and marketing..................... 31.2 28.5 26.8 27.0 28.8 29.5 31.8
Research and development................ 9.9 7.5 7.0 6.6 7.6 6.6 8.1
General and administrative.............. 14.0 13.3 11.3 9.6 12.7 12.4 11.6
Acquisition and related costs........... -- -- -- -- -- -- 24.7
ESOP contribution....................... 1.4 1.1 1.0 0.8 -- -- --
------ ------ ------ ------ ------ ------ ------
Total operating expenses.............. 56.5 50.4 46.1 44.0 49.1 48.5 76.2
------ ------ ------ ------ ------ ------ ------
Income (loss) from operations............. 3.3 14.9 18.6 18.7 14.2 15.2 (9.6)
Other income (expense), net............... (6.0) (4.5) (3.5) (0.2) 1.0 0.7 0.5
------ ------ ------ ------ ------ ------ ------
Income (loss) before income taxes and
extraordinary item...................... (2.7) 10.4 15.1 18.5 15.2 15.9 (9.1)
Credit (provision) for income taxes....... 1.2 (3.7) (5.4) (6.3) (7.5) (7.9) 4.5
------ ------ ------ ------ ------ ------ ------
Income (loss) before extraordinary item... (1.5) 6.7 9.7 12.2 7.7 8.0 (4.6)
Extraordinary item, net of income taxes... -- -- (5.4) (2.8) -- -- --
------ ------ ------ ------ ------ ------ ------
Net income (loss)......................... (1.5)% 6.7% 4.3% 9.4% 7.7% 8.0% (4.6)%(1)
====== ====== ====== ====== ====== ====== ======
</TABLE>
- ---------------
(1) Excluding costs and related tax effects associated with the acquisition of
DCD, net income as a percentage of total revenues for the quarter ended
September 30, 1996 would have been 9.5%.
DataWorks' 1996 quarterly results reflect significant increases in total
revenues and a greater proportion of software license revenues to total
revenues, in each quarter of 1996 as compared to the corresponding quarters of
1995. As a result, gross profit percentages increased in 1996. Software license
revenues for the quarter ended June 30, 1996 reflect the inclusion of three new
customers, each with significant software content and contract values in excess
of $1 million. Quarterly hardware revenues have varied directly with software
sales, with relatively minor variations as a percentage of revenues, other than
in the fourth quarter of 1995, when the anomalous result was attributable to the
product mix of transactions in that quarter. Hardware revenues as a percentage
of total revenues continued to decline on a quarterly basis as more new
customers, who purchase smaller systems, purchased hardware directly from third
party vendors. Service revenues increased in each quarter of 1996 as compared to
the same periods in 1995. Gross profit on services in the 1996 quarters was
adversely affected, primarily from 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.
Operating expenses generally increased as DataWorks expanded and continued
to invest in its infrastructure to support its growth. These costs are primarily
fixed in nature and cannot be adjusted on a quarterly basis to align with the
potential volatility of DataWorks' revenues. Sales and marketing expenses
generally have increased in absolute dollars and, since the third quarter of
1995, as a percentage of revenues on a sequential quarter basis, due primarily
to the continued expansion of the sales force and the increase in marketing
activities, travel, commissions and other expenses related directly to the
increased sales activity. These
21
<PAGE> 25
expenses tend to be higher in the fourth quarter as compared to the first
quarter due to variable expenses and commissions related to revenues. The
increase in general and administrative expenses in the first quarter of 1996
from the fourth quarter of 1995 reflected the increase in administrative
personnel and the related expenses necessary to manage the growth of DataWorks.
Research and development expenses have increased in absolute dollars in
each quarter of 1995 and 1996, due primarily to the employment of additional
development personnel, reflecting DataWorks' belief that investments in research
and development are necessary to maintain a competitive position in its targeted
markets. DataWorks continues to capitalize the production costs related to the
ECS product.
Acquisition and related costs of $3.7 million incurred in the third quarter
of 1996 represent transaction costs incurred in connection with the acquisition
of DCD in September 1996. These costs included investment banking fees, legal
and accounting fees and expenses necessary to integrate and combine the
operations of the two companies. Excluding these costs and related tax effects,
net income for the quarter would have been approximately $1.4 million, compared
to $496,000 for the same quarter of 1995. In the third and fourth quarters of
1995, the Company recorded extraordinary charges of $627,000 and $390,000,
respectively, in connection with prepayments of certain debt obligations.
The Company has experienced significant fluctuations in its revenues and
operating results from quarter to quarter and anticipates that it will continue
to experience such quarterly fluctuations. The Company's revenues and operating
results have generally been higher in the fourth quarter than in any preceding
quarter of the year. The Company believes that fourth quarter revenues are
positively impacted by year-end capital purchases by some large corporate
customers, as well as by the Company's sales compensation plans. Seasonal
factors, which the Company believes are common in the computer software
industry, are likely to increase as the Company focuses 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, the Company's revenues occur predominantly in the third
month of each quarter and tend to be concentrated in the latter half of that
third month. Accordingly, the Company's quarterly results of operations are
difficult to predict, and delays in product delivery or in closings of sales
near the end of a 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 the Company to recognize revenues;
the timing of introduction of products or product enhancements by the Company,
the Company's competitors or other providers of hardware, software and
components for the Company's market; competition and pricing in the software
industry; market acceptance of new products; 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 Company
strategy; changes in Company operating expenses; personnel changes; fluctuations
in foreign currency exchange rates; changes in the mix of products sold;
conditions or events in the manufacturing industry; and general economic
conditions.
The Company's sales figures for DataFlo and ManFact II, the Company's
principal products, generally reflect a relatively high amount of revenues per
order. The loss or delay of individual orders for these products, therefore,
could have a more significant impact on the revenues and quarterly results of
the Company than on those of companies with higher sales volumes and lower
revenues per order. The Company's software products generally are shipped as
orders are received, and revenues are recognized upon delivery of the products,
provided no significant vendor obligations exist 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 license revenues derived from sales of the Company's
DataFlo and ManFact II products is difficult to predict because of the length of
the sales cycle for these products, which is typically three to nine months from
the initial contact. Because the Company's operating expenses are based on
anticipated revenue trends and because a high percentage of the Company'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
22
<PAGE> 26
precede, or are not subsequently followed by, increased revenues, the Company's
operating results would be materially adversely affected. In addition, the
achievement of anticipated revenues is substantially dependent on the ability of
the 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 the
Company believes that period-to-period comparisons of its results of operations
are not necessarily meaningful and should not be relied upon as indications of
future performance. Fluctuations in operating results may also result in
volatility in the price of the Company's Common Stock.
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, bank lines of
credit directly tied to DataWorks' available accounts receivable and the sale of
Series A Preferred Stock. In September 1995, DataWorks also established a
banking facility (up to a maximum of $6.0 million, secured by substantially all
of the Company's assets, at the bank's prime rate) expiring in June 1997. As of
September 30, 1996, there were no borrowings outstanding under this facility.
DCD also has a $1 million line of credit secured by substantially all of the
assets of DCD, expiring in July 1997.
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 $9.2 million. The remaining proceeds were used for
general corporate purposes and to increase working capital.
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 integrated into the Company's DataFlo
product.
For the nine months ended September 30, 1996, operating activities required
cash of approximately $499,000, 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 $2.2 million, the funding of DataWorks' ECS product of
approximately $1.8 million and the purchase of certain software products from
Arrowkey of $450,000. The increase in capital equipment was due, in part, to
increases in personnel and the relocation of the Company's Orange County,
California facility. Financing activities from the exercise of stock options and
from stock purchased by employees through the DataWorks' Employee Stock Purchase
Plan provided cash of approximately $888,000 during the nine months ended
September 30, 1996.
As of September 30, 1996, DataWorks had cash and cash equivalents totaling
approximately $8.9 million. DataWorks' principal commitments as of September 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 net proceeds from this offering,
current cash reserves and cash flow from operations are sufficient to fund its
operations at least through 1997. However, during this period or thereafter the
Company may require additional financing. There can be no assurance that such
additional financing will be available on terms favorable to the Company, or at
all.
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<PAGE> 27
BUSINESS
DataWorks develops, markets, implements and supports open systems,
client/server-based Enterprise Resource Planning ("ERP") software for mid-range
discrete manufacturing companies with annual revenues between $3 million and $1
billion. The Company's products and services facilitate enterprise-wide
management of resources and information and allow mid-range manufacturers to
reduce order fulfillment cycle times, improve operating efficiencies and measure
critical company performance against defined plan objectives. DataWorks'
products enable its customers 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. The
Company's products also help customers adapt to growth, changing levels of
operations, and business process re-engineering, which is becoming commonplace
among manufacturing concerns.
The business needs and resource requirements of mid-range manufacturers
tend to be considerably different than those of larger companies. Companies in
this market typically have small information systems ("IS") departments, budget
constraints and limited experience with the advanced technologies inherent in
ERP systems. DataWorks segments the mid-range manufacturing market into three
distinct sectors: the lower tier segment (companies with annual revenues of $3
million to $25 million), the mid-tier segment ($25 million to $200 million) and
the upper tier segment ($200 million to $1 billion). The Company's family of ERP
solutions is designed to provide a product migration path to address the
changing needs of growing companies in the mid-range manufacturing market. The
Company's principal products have been DataFlo and ManFact II, open systems
client/server-based products that are targeted at mid-tier manufacturers and
which accounted for 73.4% of the Company's revenues in the first nine months of
1996. The Company has broadened its product line to serve the lower tier segment
of the mid-range market with Vista and Vantage. Vista and Vantage are
easy-to-use Windows-based products, which the Company acquired through its
recent acquisition of DCD Corporation ("DCD"). The Company also has under
development its Enterprise Client Server ("ECS") system, an object oriented,
multi-tier client/server-based product that is designed for the upper tier
segment of the mid-range market. The Company intends to commence customer
shipments of ECS in late 1997.
The Company 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 rapidly deployed. The Company's products are comprised of
modules that provide and integrate feature-rich applications and that can be
configured to comprehensively support a customer's business. DataWorks provides
turnkey solutions by integrating its application software products with third
party hardware, operating systems, and database and other software products. The
Company offers a suite of development tools and a full complement of services to
help its customers maximize the benefits of the Company's software products and
efficiently implement the Company's ERP solutions. These services include
initial system implementation, consultation, customer support desk and
maintenance activities, technical and programming services, and periodic
enhancement releases of software products.
INDUSTRY 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, 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 IS that offers 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
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<PAGE> 28
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-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 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. 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. Effectively 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 solutions
have not historically been readily available to manufacturers in the mid-range
sector. There are several key contributing factors that have traditionally
precluded mid-size 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 a 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-size firm.
In order to achieve their business process re-engineering ("BPR")
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.
Multi-billion dollar manufacturing enterprises increasingly are seeking the
efficiencies and competitive advantages of electronically tying together in a
supply chain sources of raw materials, component products, and certain
outsourced manufacturing processes. Many of the "feeder" suppliers of these
products and services to the multi-billion dollar manufacturing enterprise are
companies in the mid-range manufacturing market. These companies require systems
to address their market diversity, scalability, and localized information
systems requirements, along with the committed ERP vendor development resources
to electronically link these systems into a wide area network for electronic
supply chain management.
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<PAGE> 29
THE 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. The Company's current and planned products are designed
to meet the ERP needs of all tiers of mid-range manufacturing companies. As
companies in the lower and mid-tier grow, their enterprise-wide management
requirements change, and DataWorks provides an efficient migration path to more
complex ERP solutions. The Company believes that mid-sized manufacturers in its
targeted industry segments represent a significantly higher growth sector than
the general manufacturing community at large. The principal elements of the
Company's ERP solutions are as follows:
- OPEN SYSTEMS AND ADVANCED RDBMS ARCHITECTURE
The Company's 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 and operating systems, including Microsoft NT and UNIX, wide area
networks ("WANs"), local area networks ("LANs") and prominent user interfaces,
including Microsoft Windows, Apple Macintosh and ASCII. The Company uses
advanced relational database management systems ("RDBMS") that are best suited
for the particular application required by mid-range manufacturers, including
Microsoft Foxpro, Progress, UniData and VMark uniVerse.
- BREADTH AND DEPTH OF PRODUCTS AND APPLICATIONS
The Company's products are intended to address the application needs of
customers throughout the mid-range market. By utilizing certain core
technologies throughout its product line, the Company enables a customer to
migrate from product to product to address the changing needs of the customer's
enterprise. The Company's products are comprised of modules that 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, the Company's development and implementation
support tools provide an interface to an increasing number of third party
application products that can be seamlessly integrated into the Company's ERP
products through application programming interface ("API") technology.
- RAPID DEPLOYMENT
By offering rapid product deployment and migration among its product lines,
the Company seeks to minimize the business interruption to companies that
typically results from the introduction of a new or expanded ERP system, thereby
enabling such companies to more quickly realize the benefits of a new or
expanded ERP system. Dataworks utilizes a highly responsive implementation
planning process and focused consulting and training services to design ERP
solutions that are "right sized" to satisfy the functionality and rapid
deployment needs of diverse customers while remaining within the varied but
generally limited budgets of such customers. For example, by utilizing these
deployment tools and procedures, the Company is able to complete the
enterprise-wide deployment of DataFlo and ManFact II in three to nine months.
Vista, the Company's least expensive ERP system, is virtually self-installable
through system level training techniques familiar to most personal computer
users, and Vantage can be deployed within one to three months. The Company
anticipates deployment of the ECS system will take significantly longer than
that of DataFlo and ManFact II, but will be tailored so that it can be
effectively accomplished without significantly disrupting the customer's
operations.
- FLEXIBILITY/ADAPTABILITY/SCALABILITY
A critical element to achieving initial user acceptance of a new system and
facilitating rapid implementation is the ability to adapt the Company's standard
software to conform more closely to the particular needs of users. The Company's
products permit ready adaptation of the DataWorks systems to meet initial needs
26
<PAGE> 30
during the implementation phase and respond to a customer's unique system
refinements and ongoing changes in production and operational processes once the
system is fully in service. The Company's customers can start with a small
number of local concurrent users and expand to many hundreds of concurrent users
across LANs and WANs over several years utilizing the same ERP solution from the
Company. In addition to accommodating new modules and potential significant
growth of users without sacrificing performance, the scalability of the
Company's ERP solutions and the ability to migrate within the Company's product
family allow mid-range manufacturers to change levels of operations and expand
application functionality to accommodate growth.
- SUPERIOR PRICE/PERFORMANCE
The Company seeks to achieve superior price and performance by providing
its mid-range manufacturing customers with the "right sized" system and
associated functionality to meet their ERP needs while satisfying their
budgetary constraints. The Company's ERP systems emphasize standard application
modules that require minimum customization, advanced yet cost-effective RDBMS
and other technologies and highly user-oriented fourth generation language
("4GL") development environments. Furthermore, the Company has standardized the
implementation process and supported it with the Company's proprietary software
tools, resulting in cost effective and rapid initial deployment of its ERP
products.
THE DATAWORKS STRATEGY
The Company's objective is to be the leading provider of business
information solutions and related products and services to mid-range
manufacturers within selected markets. The Company's strategy to achieve this
objective incorporates the following elements:
- PROVIDE COMPLETE SOLUTIONS AND PRODUCT MIGRATION PATH
The Company offers products in each tier of the mid-range manufacturing
market to address a broad range of customer needs and provide a product
migration path to address the changing needs of growing companies. The Company
offers products for both make-to-order and repetitive manufacturers, and seeks
to support new manufacturing processes such as demand-flow production and agile
manufacturing. The Company complements its product offerings with a full suite
of implementation and consulting services, education, training and software
tools to assist customers in deriving the maximum benefit from the Company's
products. By providing comprehensive solutions, the Company is able to work more
closely with customers, sell additional modules or products, and provide
additional services in an ongoing course of business.
- FOCUSED MARKET STRATEGY
The Company targets mid-range manufacturing companies with annual revenues
between $3 million and $1 billion and historically has focused its efforts on
discrete, rather than process, manufacturers. In the mid-tier of the mid-range
market, sales of the Company's DataFlo and ManFact II product solutions have
targeted six primary "highly engineered product" manufacturing sectors:
industrial equipment; computer/office equipment; consumer electronics;
instrumentation and controls; medical/dental products; and
transportation/aerospace products. This approach has enabled DataWorks to better
understand the needs of its customers and to use that knowledge to tailor
products and services to those needs. The Company plans to continue to rely on
its experience and reputation in these select markets to enhance its competitive
position. The Company intends to leverage its expertise in these six sectors to
market and sell its ECS system currently under development to customers in the
upper tier of the mid-range market. The Company further plans to leverage its
expertise to enhance sales of its Vista and Vantage products, which are
currently focused on a wide range of manufacturers in the lower tier, to
emerging growth oriented discrete manufacturers in those six primary
manufacturing sectors.
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<PAGE> 31
- MAINTAIN TECHNOLOGY LEADERSHIP
DataWorks believes it is a technology leader in the mid-range manufacturing
market, as it was one of the first companies to offer ERP client/server
solutions for mid-range manufacturers and to introduce full ERP solutions on
Microsoft NT. The Company's products are designed to utilize the most effective
open systems technologies such as client/server architectures, RDBMS, GUIs and
operating systems for the mid-range market. The Company incorporates common
technology across its product line in order to leverage its development
resources and ensure compatibility among products. The Company seeks to develop
new modules and incorporate new functionality into its products such as Internet
integration, business objects, decision support, manufacturing execution systems
("MES") support, and Object EDI, a cross-product universal transaction
processing protocol.
- ACHIEVE HIGH LEVELS OF CUSTOMER SATISFACTION
DataWorks is committed to consistently achieving high levels of customer
satisfaction with the Company's ERP systems. The Company focuses on delivering
high-quality products that address specific application needs, are easy to
implement and enable increased productivity. The Company also designs its
applications and development tools to permit end-users to easily customize
systems to fit their specific needs, which enhances end-user productivity and
overall satisfaction with the DataWorks products and services.
- COMPREHENSIVE SALES AND MARKETING PROCESS
The Company has developed a sophisticated sales and marketing system to
enhance its new customer success rate. The Company utilizes a multi-phased sales
approach consisting of telemarketing sales for initial qualification, account
representatives, systems engineers and the active involvement of senior
management. The Company's prospecting system enables account representatives to
appropriately qualify prospective customers and track active prospects in
significant detail through three stages of sales cycle management, and provides
valuable management information to measure performance of its sales force and
monitor ongoing sales efforts. The Company intends to leverage its sophisticated
sales and marketing system to increase DataWorks' presence in the lower tier and
international markets in an effort to enhance sales and increase new customer
success rates. The Company believes its sales processes and prospect management
system provide it with a significant competitive advantage.
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<PAGE> 32
PRODUCTS
The business needs and resource requirements of mid-sized manufacturers
tend to be considerably different than those of larger companies. 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 Company has products or is developing products with features
intended to address the particular needs of each of the lower tier, mid-tier and
upper tier of the mid-range market.
The following chart describes the Company's principal existing and planned
ERP solutions and typical customer profiles relating to each of them:
<TABLE>
<CAPTION>
LOWER TIER SEGMENT MID-TIER SEGMENT UPPER TIER SEGMENT
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Products Vista DataFlo ECS(1)
Vantage ManFact II
- --------------------------------------------------------------------------------------------------------------------------------
Customer $3-$25 million $25-$200 million $200 million-$1 billion
Revenues
- --------------------------------------------------------------------------------------------------------------------------------
Type of - Entry level - Repetitive/Just- - Multi-plant/Global supply
Manufacturing - Simple job shop/MTO in-time chain/Distributed systems
Operations
- Large, project-
oriented job shop
- --------------------------------------------------------------------------------------------------------------------------------
IS Infrastructure Minimal Limited Significant
- --------------------------------------------------------------------------------------------------------------------------------
Price Range $10,000-$100,000 $125,000-$750,000 $500,000-$3 million(1)
- --------------------------------------------------------------------------------------------------------------------------------
Deployment 1-3 months 3-9 months (1)
Period
- --------------------------------------------------------------------------------------------------------------------------------
Sales Cycle 1-3 months 3-9 months (1)
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) ECS is currently under development and, although the Company intends to
commence customer shipments of the product in late 1997, there can be no
assurance that the Company will commence such shipments on a timely basis,
or at all, or if timely shipped, that the ECS system will achieve market
acceptance. As ECS is currently under development, data on average
deployment period and sales cycle is unavailable and the indicated price
range is estimated. See "Upper Tier: Enterprise Client Server."
LOWER TIER: VISTA AND VANTAGE
DataWorks, through DCD, offers Vista and Vantage for its customers with
annual revenues typically between $3 million and $25 million. These products are
better suited for the lower tier segment of mid-range manufacturers who, as
compared to customers who use DataFlo or ManFact II, have less developed IS
infrastructures and lower IS budgets, require shorter deployment periods, and
often seek established, user-friendly products.
Vista is an easy-to-use, Windows-based ERP software package that provides a
cost-effective solution for job shops with up to $5 million in revenues. Vista
fully integrates 13 core business modules and features single or multilevel
bills of material capabilities. The DesignWare feature permits users to, among
other things,
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<PAGE> 33
define their own screens, add fields, change colors, hide fields, change grid
sizes and drag choices from menus to the desktop.
Vantage is an easy-to-use, Windows-based ERP software package with flexible
order-handling capabilities to support a mix of custom and standard part orders
and multilevel assemblies and comprises 15 fully integrated business modules.
Vantage is optimized for the rapid deployment, minimal support and
price/performance requirements of custom and mixed-mode manufacturers in the $5
million to $25 million revenue range.
Vista and Vantage, like DataFlo and ManFact II, are comprised of groups of
modules that can be differently configured and comprehensively support a
customer's business processes. The following chart describes the Vista and
Vantage modules, and the discussion below points out certain key characteristics
of the Vista and Vantage modules:
VISTA AND VANTAGE APPLICATION MODULE GROUPS
<TABLE>
<CAPTION>
BUSINESS PLANNING SALES DISTRIBUTION PRODUCTION AND MATERIAL FINANCE AND
AND ENGINEERING AND CUSTOMER SERVICE OPERATIONS ADMINISTRATION
- ----------------- -------------------- ----------------------- --------------
<S> <C> <C> <C>
- - Bills of Material - Estimating - Inventory Management - Accounts Payable
- - Scheduling - Order Entry - Job Control - Accounts Receivable
- - Shop Vision - Quoting - Purchasing/Receiving - General Ledger
- Shop Floor Data - Payroll
Collection - Report Writer
</TABLE>
Business Planning and Engineering Group. In Vista and Vantage, Business
Planning and Engineering allows the production manager to control the sales and
shop priorities through a visual scheduling manager. Indented bills of material
support provide the ability to retain product information for repeat orders, and
"what if" scheduling provides the ability to simulate the impact of new orders
and schedule changes.
Sales, Distribution and Customer Service Group. Estimating, quoting and
sales order processing is tightly integrated in the products, supporting the
requirement for rapid cost estimating and order commitment. Order-to-job linking
provides rapid access to production status and delivery information.
Production and Material Operations Group. Priorities established in
scheduling are realized in manufacturing job processing. These controls present
real-time status reporting based on data collection inputs and provide
just-in-time material purchasing and availability. Visual job "wizards" allow
paperless management and instant review of job history, job status and
inventory.
Finance and Administration Group. Vista's and Vantage's Finance and
Administration Group enables associated product costs and revenues to be
recorded to the General Ledger module as subsidiary ledgers of the Accounts
Payable, Accounts Receivable, Payroll and Shop Floor Data Collection modules.
Prices of Vista and Vantage applications are based on the specific product
line, the modules purchased and the number of concurrent users. The average
sales prices of Vista and Vantage are $12,000 and $60,000, respectively. As of
September 30, 1996, these two products, cumulatively, were licensed to
approximately 970 customers.
MID-TIER: DATAFLO AND MANFACT II
DataWorks historically has focused its marketing, product development and
services resources on "highly engineered product" companies with annual revenues
typically between $25 million and $200 million in six principal industries:
industrial equipment; computer/office equipment; consumer electronics;
instrumentation and controls; medical/dental products; and
transportation/aerospace products. DataWorks has two principal
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<PAGE> 34
application software products that address the needs of its customers in this
mid-tier. DataFlo is directed toward manufacturers generally making high-volume
products, often utilizing repetitive/just-in-time techniques, that are either
make-to-stock or configure-to-order, and which may have some smaller
make-to-order requirements. DataFlo also supports customers who have mixed-mode
manufacturing techniques. ManFact II is oriented toward make-to-order ("MTO") 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. DataFlo was developed by DataWorks, and ManFact II was acquired in
connection with the purchase of MCC in June 1994.
The DataFlo and ManFact II systems are comprised of groups of modules that
comprehensively support a manufacturing company's business process. These
modules 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 ManFact II are highly modular in nature and can
be scaled from small to large configurations on a variety of platforms
supporting the Microsoft NT and UNIX 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-based configurations.
The following chart describes the DataFlo and ManFact II modules, and the
discussion below points out certain key characteristics of the DataFlo and
ManFact II modules:
<TABLE>
<CAPTION>
DATAFLO AND MANFACT II APPLICATION MODULE GROUPS
- -------------------------------------------------------------------------------------------------------
BUSINESS PLANNING SALES, DISTRIBUTION PRODUCTION AND MATERIAL FINANCE AND
AND ENGINEERING AND CUSTOMER SERVICE OPERATIONS ADMINISTRATION
- ----------------- -------------------- ----------------------- ---------------------
<S> <C> <C> <C>
- - Capacity - Customer Service - Inventory Management - Accounts Payable
Requirements - Electronic Data - Lot/Serial Control - Accounts Receivable
Planning Interchange - MES - Budgeting
- - Engineering - Estimating - Multi-Plant Control - Cost Accounting
Change - Field Service - Production Activity - Currency and VAT
Control - Quoting Management - Executive
- - Forecasting - Sales Order - Project Management Information Systems
- - Master - Shipping/Returned - Purchasing/Receiving - Fixed Assets
Production Material - Quality Control - General Ledger
Scheduling - Repetitive - Payroll
- - Material Manufacturing - Personnel
Requirements - Shop Floor Data
Planning Collection
- - Product - Work Order Control
Configuration
- - Product
Definition
</TABLE>
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, as
well as capacity models that flow into final and sub-assembly manufacturing,
scheduling and purchase plans. Engineering and configuration management define
material and routing structures to planning and production and provide
visibility to anticipate and coordinate product changes.
Sales, Distribution and Customer Service Group. The Sales, Distribution and
Customer Service Group allows a manufacturer to estimate, quote and take orders
for standard, configured and custom, "one-of-a-kind"
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<PAGE> 35
products. The sales made are integrated with the Business Planning and
Engineering modules and provides actual versus plan reporting. Shipments, order
status and invoicing can be transmitted directly to the customer via EDI. Return
material, field service and Help Desk applications are available on line to
customer service providing detail service analysis and call tracking.
Production and Material Operations Group. The Production and Material
Operations Group provides a means to record, track and measure production,
material, labor, quality and cost flows throughout the manufacturing and
purchasing processes. Inventory tracking is provided by company, plant,
warehouse and location with full traceability. Traditional work order, as well
as rate and cell-based JIT production is supported and fully integrated with
detailed shop floor and quality control reporting. Blanket and contract orders,
electronic data interchange ("EDI") and detailed supplier analysis reporting is
provided in the purchasing application.
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. The costing systems support both actual and standard
cost methodologies with additional capabilities for unlimited cost simulation,
modeling and reporting. The Financial modules support both distributed and
consolidated processing in a multi-company environment and provide complete
foreign currency and tax capabilities.
The average price of DataWorks' DataFlo and ManFact II ERP systems
(exclusive of hardware) sold to new customer sites in DataWorks' target market
increased to approximately $268,000 in the first nine months of 1996 from
approximately $197,000 in 1995. As of September 30, 1996, these two products,
cumulatively, were licensed to over 450 customers at more than 650 customer
sites.
UPPER TIER: ENTERPRISE CLIENT SERVER
The Company has under development the ECS system, which has been designed
to address the ERP needs of the upper tier of the mid-range manufacturing
market. This upper tier consists of companies with annual revenues ranging from
$200 million to $1 billion. 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.
DataWorks believes its ECS system will provide valuable depth to its
product family and will enable the Company to provide a product for the upper
tier that is complementary to its mid-tier products, DataFlo and ManFact II.
Generally, DataWorks believes that products currently offered by ERP vendors
serving Fortune 1000 firms that might potentially compete with the Company in
the upper tier of the mid-range manufacturing market are complex and expensive,
and usually require a multi-year "custom implementation" process. The Company
believes the ECS system can be competitive with the products currently offered
by large ERP system vendors by offering technology superiority, a more open
solution, competitive pricing and shorter, less costly deployment periods. The
Company intends that the ECS system, in addition to providing DataWorks with a
product solution for the upper tier of the mid-range market, will also provide a
migration path for the Company's current customers using DataFlo or ManFact II
that may outgrow those ERP systems and require the features of the ECS system.
The ECS system is a second generation client/server application for
manufacturing, planning, inventory, engineering, distribution, service and
finance. While the DataFlo and ManFact 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, IBM, Oracle
and Sybase, to promote flexibility and technology independence. The Company
believes that the flexible and independent ECS system architecture can be
managed with the significant IS resources of typical upper tier manufacturers.
ECS employs an object oriented, three-tier client/server architecture, in which
the business logic, database and presentation layers can
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<PAGE> 36
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.
DataWorks' ECS system has been designed to be database independent, initially
supporting the Oracle, Sybase and Microsoft SQL Server databases.
The Company currently anticipates commencing customer shipments of its ECS
system in late 1997. However, there can be no assurance that the Company will
commence such shipments in 1997, or at all. Furthermore, the Company has limited
experience in selling products to customers in the upper tier of the mid-range
manufacturing market and anticipates that selling products to such customers
will result in a longer sales cycle and will require a different strategy than
that employed by the Company in selling products to customers in the mid-tier
market. For example, as part of its upper tier marketing strategy, the Company
is exploring potential relationships with third party integrators to facilitate
implementation of the ECS system. There can be no assurance that any such
relationships will be formed or, if formed, will prove beneficial to the
Company. Accordingly, even if customer shipments of the ECS system are timely
commenced, there can be no assurance that the Company will be successful in
effectively marketing the ECS system or that the ECS system will achieve market
acceptance.
CORE FEATURES AND TECHNOLOGIES
The Company provides certain core technologies for the mid-range market
across its entire product line, and offers certain development and
implementation support tools to facilitate customization and deployment of the
Company's products.
PORTABILITY AND SCALABILITY
DataWorks provides its products on all major versions of Microsoft NT and
UNIX operating systems. These environments enable the Company's products to have
extensive portability and scalability.
DEVELOPMENT TOOLS
DataWorks has enabled each of its products with a sophisticated 4GL
development environment that allows the Company's software to be tailored to the
unique needs of users while ensuring the integrity of the database and
applications. DataWorks' products support a Windows-based GUI providing
consistent, familiar desktop interfaces and connectivity to a wide variety of
third party products. Traditional screens and reports are managed as templates
and forms to provide flexible user views into the database.
The database and development environments of products designed for the
lower tier of the mid-range market are tightly integrated to minimize cost and
support requirements. Vista provides VB Forms, a powerful form design tool that
supports user definable screen generation. Vantage is written in the Progress
4GL and database, which provides a powerful, graphical development tool set. To
serve the mid-tier, DataWorks' Object Preview is an object based development
tool based on the Borland Delphi graphical development environment. Through
Object Preview, DataWorks is able to support products across multiple operating
systems from a single object code library. The ECS system, designed for the
upper tier, supports Powersoft's Powerbuilder 5.0 and Optima enterprise
development suite as the foundation of the Company's client/server
infrastructure ("CSI") development tool product. CSI's "object libraries" are
designed to support the complex development and deployment requirements of a
global enterprise, and are intended to ensure a consistent look and feel to all
functions of the ECS system.
RDBMS
DataWorks' products are designed to run on databases that are best suited
for the particular applications required by customers, including Microsoft
Foxpro and SQL Server, Progress, UniData, VMark uniVerse, Oracle and Sybase.
SQL, ODBC and sophisticated file transfer capabilities provide immediate access
to foreign databases and other host applications. DataWorks has chosen these
relational databases in order to maximize the throughput of its customers'
transactions, to provide realistic models of business data and to maximize price
and performance under the budget constraints of its customers in each tier of
the mid-range market.
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SMARTLINKS
DataWorks' SmartLinks interface to third party applications provides a
standard parameterized interface mechanism between DataFlo and ManFact II
products 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 AutoCad, for computer aided
design, scanned images, database graphics, word processing, spreadsheets,
multimedia, sales contact management, forecasting and project planning. The
Company plans to expand the SmartLinks capabilities to its other products.
DEPLOYMENT TOOLS
DataWorks' SmartTools data conversion system is a means for new customers,
implementation consultants or existing customers to convert data from either
legacy systems or third party applications, and process that data through the
business rules of the Company's ERP systems. SmartTools can greatly shorten the
time needed to build conversion routines and significantly increases 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.
THIRD PARTY PRODUCTS
DATABASES
DataWorks separately licenses database products to its customers. Microsoft
Foxpro and Progress support the Vista and Vantage product lines, respectively,
and the UniData and VMark uniVerse databases support the Dataflo and ManFact II
products. ECS has been designed as a database independent application, and
initially will support the Oracle, Sybase and Microsoft SQL Server RDBMS.
CLIENT TOOLS
The Company's products support PC-based GUIs that manage application
presentation, desktop tools and network communications, and facilitate the
client workstation. DataWorks incorporates client GUI and development tools such
as Microsoft Foxpro, Progress, Borland Delphi and Sybase Powerbuilder.
HARDWARE
As part of its turnkey solutions, at the request of a customer DataWorks
can provide complete third party computer hardware systems and related computer
peripherals. In such situations hardware is either shipped directly from the
third party vendor or DataWorks resells the products. The Company does not
typically carry hardware inventory in either case. DataWorks implements its ERP
systems on a number of hardware platforms, including Hewlett-Packard, IBM, Data
General, DEC and Intel Pentium and other x86-based systems. Configurations may
be host-based, server-oriented, or full client/server with highly networked
solutions, in which DataWorks may participate in providing network hardware
solutions. Additionally, DataWorks offers peripherals, factory data-collection
equipment and communications equipment for resale to its customers.
NETWORKS
DataWorks supports a wide variety of network communication protocols as
part of its turnkey product support. DataWorks has support agreements with
regional and national communications suppliers 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 typically included in the price of its software.
Maintenance support is billed annually in advance, while implementation,
consulting and programming services are billed monthly as incurred.
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<PAGE> 38
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 certain of 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 for
more complex businesses 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 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.
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 that are tailored to the complexity of each of the Company's
ERP systems. The implementation of Vista typically requires an on-site
consulting service, while the implementation of Vantage typically only requires
such services on a limited basis. Each new 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 an assigned team are responsible for
guiding the new customer from initial installation through successful operation
of the system in a live environment. The Account Manager is also the initial
point of contact to introduce other DataWorks resources to the customer.
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PROFESSIONAL PROGRAMMING SERVICES
DataWorks provides professional programming services, including custom
applications analysis, design, development, training and deployment for most of
its ERP solutions. 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 ManFact II allow testing, deployment and
management of new enhancements without affecting current software releases. All
software enhancements of DataFlo and ManFact II, regardless of scope, are
created using the Object Preview development environment 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 ECS system. See "-- Products -- Upper
Tier: Enterprise Client Server." At September 30, 1996, DataWorks had
approximately 114 full-time employees in product development.
DataWorks plans to continue to enhance its Vista, Vantage, DataFlo, ManFact
II and ECS 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.
In addition to applications development, DataWorks will seek to improve and
expand Object Preview, its object development environment, 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. Internet/Intranet enabled applications will continue to
be a focus of development throughout the entire product line. The DataWorks Open
Integration Environment will expand traditional supply chain EDI communication
protocols with Object EDI and encapsulated "business objects." DataWorks expects
to continue to enhance the capabilities of its MES and factory data collection
applications to address the increasing focus on real time, wireless data
collection and acquisition. The Company also expects to enhance its strategic
planning and decision support capabilities through offerings in the area of
third party report writers, data warehousing and data mining products. DataWorks
plans to continue to expand its API and object frameworks across all products
thereby enhancing each systems ability to access the global supply chain.
SALES AND MARKETING
DOMESTIC
The Company sells its products in the United States primarily through a
direct sales force. As of September 30, 1996, the Company has 114 full-time and
40 part-time employees in its domestic sales organization, including sales
representatives, pre-sale consultants, telemarketers and sales management
personnel.
The key components of DataWorks' domestic sales strategy include
sophisticated prospect development and sales cycle management processes.
DataWorks uses a combination of electronic prospective client databases,
computer aided telemarketing and field sales methodologies to identify potential
candidates for its ERP systems from within its targeted markets who are in the
early stages of searching for a new business management system. This process
accounts for a large percentage of the Company's new accounts and lessens the
need for the sales force to engage in territory prospecting activities of its
own. Prospective DataWorks customers are monitored through a comprehensive
prospect management system that breaks the sales cycle into several phases, each
with multiple measurement points, to properly assess the prospective client
base.
The Company's domestic sales strategy also emphasizes a "regionalization"
concept. DataWorks believes a strong local presence is an important factor in
addressing the needs of mid-range manufacturers and establishing mutually
beneficial long-term relationships. Under the Company's regionalization
approach, the
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<PAGE> 40
Company has decentralized much of its client development activity, customer
services and customer account responsibilities. DataWorks has regional centers
in Irvine, California; San Jose, California; Chicago, Illinois; Boston,
Massachusetts; and Atlanta, Georgia. In addition, DataWorks has local offices in
10 other locations across the United States. DataWorks intends to open two
additional full-service regional centers by late 1997.
INTERNATIONAL
DataWorks currently addresses the international market with direct sales
efforts through its wholly-owned subsidiary in the United Kingdom, and through
product-specific distributor agreements in Australia and Canada. To date, the
Company has not generated a material amount of revenue through these distributor
agreements. DataWorks plans to increase its international sales efforts through
expanded direct sales and additional distribution arrangements, each to be
supported by the Company's domestically developed prospect development and sales
cycle management processes.
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 the Company's
products, which are directed at the market for ERP systems. Many of the
Company'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 the Company. In addition, customers who have a large
installed base of legacy systems may resist committing the time and resources
necessary to convert to an open systems-based client/server software product.
The Company has no proprietary barriers to entry which would limit competitors
from developing similar products or selling competing products in the Company's
markets. Accordingly, there can be no assurance that such competitors will not
offer or develop products that are superior to the Company's products or that
achieve greater market acceptance. In addition, suppliers of RDBMS or companies
that develop management information software applications for large
multinational manufacturers are beginning to market to the upper tier of the
mid-range market targeted by the Company or otherwise develop applications that
compete effectively in the Company's markets. Furthermore, the Company intends
to expand its marketing and product development efforts toward the upper end of
its target market, which could result in increased competition. As a result,
competition (including price competition) is likely to increase substantially,
which may result in price reductions and loss of market share. In addition,
potential customers may increasingly demand that ERP systems incorporate certain
popular RDBMS software not currently integrated into certain of DataWorks'
product offerings that are offered by its competitors. As the client/server
computing market expands, a large number of companies, some with significantly
greater resources than the Company, may enter the market or increase their
market share by acquiring or entering into alliances with competitors of the
Company. There can be no assurance that the Company will be able to compete
successfully against its competitors or that the competitive pressures faced by
the Company will not adversely affect its financial performance.
The Company has a large number of competitors that vary in size, primary
computer platforms and overall product scope. Within its market, the primary
competition comes from independent software vendors in four distinct groups
including (i) large multinational system developers in the upper tier of the
Company's 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 the Company's market, lower priced PC network-based
offerings from companies such as Fourth Shift Corporation, Lilly Software
Associates and Macola Software, Inc. There is also a large number of regional
manufacturing software suppliers who leverage as competitive advantages their
concentrated local support, reputation and, typically, lower price.
The Company's principal market is highly fragmented and consists of a few
large multinational suppliers and a much larger number of small, regional
competitors. The Company believes that its industry will experience
consolidation as business information systems become more complex and as more
manufacturers
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adopt sophisticated business 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 the Company presently targets, the
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 to a variety of
manufacturing industries worldwide. No assurance can be given that the Company
will be able to grow sufficiently to enable it to compete effectively.
The Company believes its use of open systems technologies is an important
competitive factor. The Company also believes that the number of competitors
offering open systems solutions will grow significantly over the next several
years. Additionally, the Company believes that the typical mid-range customer
desires an easy-to-use, highly functional 4GL environment, fully integrated
throughout the ERP system, which the Company has provided through its internally
produced development tool set. The Company 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 the Company's
targeted market. There can be no assurance that such companies will not develop
products that are superior to the 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. In
order to be successful in the future, the Company 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, the Company must continue to
invest in enhancing its current products and, when necessary, introduce new
products to remain competitive. There can be no assurance that the Company will
be able to continue to invest in such enhancements or new products, or introduce
such enhancements or new products in a timely fashion or at all.
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.
DataWorks licenses 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 products 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 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 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.
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None of DataWorks' software is patented. DCD has one patent application
pending, but there can be no assurances that a patent will be issued or that, if
a patent is issued, it will provide the Company with competitive advantages or
will not be challenged by others. 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 September 30, 1996, DataWorks had 464 full-time employees, including 124
in sales and marketing, 114 in product development, 189 in support services and
37 in finance and administration. DataWorks also has 53 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 38,000 square feet of office space for its
corporate headquarters in San Diego, California, under a lease expiring in 1999.
DataWorks leases approximately 25,000 square feet of office space for its Los
Angeles/Orange County division in Irvine, California, under a lease expiring in
2001. The Company also leases approximately 23,000 square feet of office space
in Minneapolis, Minnesota for DCD, under a lease expiring in March 1997. The
Company has been provided with the option to extend the term of its lease in
Minnesota until March 2002.
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 for its United Kingdom subsidiary.
LEGAL PROCEEDINGS
DataWorks is not a party to any material legal proceedings.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information as of September 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
Robert W. Brandel 46 Vice President, General Manager of DCD
Rick E. Russo 45 Vice President, Finance and Secretary
Nathan W. Bell 36 Director
Finis F. Conner 53 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.
Robert W. Brandel has served as Vice President, General Manager of DCD and
an executive officer of the Company since the Company's acquisition of DCD in
September 1996. From 1992 to September 1996, he served as President and a
director of DCD. From 1988 to 1992, Mr. Brandel was the President and Chief
Executive Officer of Network Communications Corporation, a networking
diagnostics company.
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. Mr. Bell currently serves as a director and is the Chief
Executive Officer of Kleer Vu Plastics Corporation, a manufacturer of photograph
albums. 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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PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the ownership
of DataWorks' Common Stock as of September 30, 1996, and as adjusted to reflect
the sale by the Company of the shares offered hereby, by: (i) each director;
(ii) each of the executive officers; (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>
PERCENTAGE
BENEFICIALLY
OWNED(1)
SHARES ---------------------
BENEFICIALLY BEFORE AFTER
DIRECTOR, OFFICERS AND 5% SHAREHOLDERS OWNED(1) OFFERING OFFERING
- --------------------------------------------------------------- ---------- -------- --------
<S> <C> <C> <C>
Stuart W. Clifton(2)(3)........................................ 1,076,882 13.8% 11.0%
Nathan W. Bell(4).............................................. 324,652 4.2% 3.3%
Mark S. Howlett(5)............................................. 317,123 4.1% 3.2%
Ronald S. Parker(6)............................................ 198,096 2.5% 2.0%
Finis F. Conner(7)............................................. 26,155 * *
Norman R. Farquhar(3)(8)....................................... 41,762 * *
Rick E. Russo(9)............................................... 17,069 * *
Robert W. Brandel (3).......................................... 667,188 8.5% 6.8%
Employee Stock Ownership Plan.................................. 899,491 11.5% 9.2%
All executive officers and directors as a group (8
persons)(10)................................................. 2,668,924 33.7% 26.9%
</TABLE>
- ---------------
* Less than one percent.
(1) This table is based upon information supplied by officers, directors and
principal shareholders, and upon Schedules 13D and 13G filed with the
Securities and Exchange Commission. 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
7,816,764 shares outstanding on September 30, 1996 and assume the sale of
2,000,000 shares offered hereby (excluding the Underwriters'
over-allotment) upon the completion of this offering.
(2) Includes 10,833 shares subject to options exercisable within 60 days of
September 30, 1996.
(3) Excludes 899,491 shares beneficially owned by the ESOP for which Messrs.
Clifton, Farquhar and Brandel serve as trustees. Each of such trustees
disclaims beneficial ownership of the ESOP shares.
(4) 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, 1,298 shares
held by PPC and 313,097 shares held by PMF. Mr. Bell is a general partner
of PPC, which is the general partner of PMF. He disclaims beneficial
ownership of securities held by PMF, except to the extent of his pro rata
interest therein. Includes 624 shares subject to options exercisable within
60 days of September 30, 1996.
(5) Includes 7,222 shares subject to options exercisable within 60 days of
September 30, 1996.
(6) Includes 85,504 shares held by PMA, of which Mr. Parker is Chairman of the
Board and a majority shareholder, 93,387 shares held by DataWorks Partners
IV, L.P., of which PMA is a general partner, and warrants to purchase up to
8,197 shares of Common Stock. Includes 624 shares subject to options
exercisable within 60 days of September 30, 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 18,893
shares subject to options exercisable within 60 days of September 30, 1996.
(8) Includes 41,762 shares subject to options exercisable within 60 days of
September 30, 1996.
(9) Includes 10,873 shares subject to options exercisable within 60 days of
September 30, 1996.
(10) Includes 491,988 shares held by entities affiliated with directors of
DataWorks, 90,831 shares subject to options held by officers and directors
exercisable within 60 days of September 30, 1996 and 12,069 shares issuable
upon exercise of warrants held by directors and entities affiliated with
directors. See notes (2), (4), (5), (6), (7), (8) and (9).
SELLING SHAREHOLDERS -- EXERCISE OF OVER-ALLOTMENT OPTION
If the Underwriters' over-allotment option is exercised in full, the
Company and certain shareholders of the Company will sell an aggregate of 81,314
and 218,686 shares, respectively, of Common Stock in this offering. In such
instance, the percentage of outstanding shares beneficially owned after this
offering by the following individuals and entities will be as follows: 10.9% for
Mr. Clifton; 3.3% for Mr. Bell; 3.2% for Mr. Howlett; 2.0% for Mr. Parker; less
than one percent for Messrs. Conner, Farquhar and Russo; 6.7% for Mr. Brandel;
9.1% for the ESOP; and 26.7% for all executive officers and directors as a
group. See "Underwriting" for a description of the Underwriters' over-allotment
option.
41
<PAGE> 45
UNDERWRITING
The Underwriters named below (the "Underwriters"), represented by
Montgomery Securities, Furman Selz LLC and SoundView Financial Group, Inc. (the
"Representatives"), have severally agreed, subject to the terms and conditions
contained in the Underwriting Agreement, to purchase from the Company the number
of shares of Common Stock indicated below opposite their respective names, at
the public offering price less the underwriting discount set forth on the cover
page of this Prospectus. The Underwriting Agreement provides that the
obligations of the Underwriters are subject to certain conditions precedent and
that the Underwriters are committed to purchase all of such shares, if any are
purchased.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
---------------------------------------------------------- -----------------
<S> <C>
Montgomery Securities.....................................
Furman Selz LLC...........................................
SoundView Financial Group, Inc............................
-----------------
Total................................................... 2,000,000
================
</TABLE>
The Representatives have advised the Company that the Underwriters propose
initially to offer the shares of Common Stock to the public on the terms set
forth on the cover page of this Prospectus. The Underwriters may allow to
selected dealers a concession of not more than $ per share; and the
Underwriters may allow, and such dealers may reallow, a concession of not more
than $ per share to certain other dealers. After the shares of Common
Stock are released for sale to the public, the offering price and other selling
terms may be changed by the Representatives. The Common Stock is offered subject
to receipt and acceptance by the Underwriters and to certain other conditions,
including the right to reject orders in whole or in part.
The Company and the Selling Shareholders have granted an option to the
Underwriters, exercisable during the 30-day period after the date of this
Prospectus, to purchase up to a maximum of 300,000 additional shares of Common
Stock to cover over-allotments, if any, at the same price per share as the
initial 2,000,000 shares to be purchased by the Underwriters. To the extent that
the Underwriters exercise this option, the Underwriters will be committed,
subject to certain conditions, to purchase such additional shares in
approximately the same proportion as set forth in the above table. The
Underwriters may purchase such shares only to cover over-allotments made in
connection with this offering.
The Underwriting Agreement provides that the Company and the Selling
Shareholders will indemnify the Underwriters against certain liabilities,
including civil liabilities under the Securities Act, or will contribute to
payments the Underwriter may be required to make in respect thereof.
The holders of approximately 3,979,075 shares of Common Stock prior to this
offering, including the Company's officers and directors, have agreed, subject
to certain limited exceptions, for a period of 90 days from the date of this
Prospectus that they will not offer, sell or otherwise dispose the shares of
Common Stock held by them, any options to purchase shares of Common Stock or any
securities convertible into or exchangeable for any shares of Common Stock
without the prior written consent of Montgomery Securities or each of the
Representatives. In addition, the Company has agreed for a period of 90 days
after the date of this Prospectus without the prior written consent of
Montgomery Securities or each of the Representatives, issue, offer, sell, grant
options to purchase or otherwise dispose of any equity securities or securities
convertible into or exchangeable for equity securities, except under the
Company's 1987 Stock Option Plan, 1995 Equity Incentive Plan, 1995 Non-Employee
Directors' Stock Option Plan and Employee Stock Purchase Plan.
The Representatives have informed the Company and the Selling Shareholders
that the Underwriters will not confirm sales to any accounts over which they
exercise discretionary authority in excess of 5% of the shares of Common Stock
offered hereby.
In connection with the acquisition of DCD, DataWorks retained Furman Selz
LLC to act as its financial advisor and paid customary fees to Furman Selz LLC
for its advisory services, including the rendering of an opinion regarding the
fairness of the consideration paid to the shareholders of DCD, from a financial
point of view, to DataWorks.
42
<PAGE> 46
In connection with this offering, the Underwriters and selling group
members (if any) may engage in passive market making transactions in the Common
Stock on Nasdaq immediately prior to the commencement of sales in this offering,
in accordance with Rule 10b-6A under the Securities Exchange Act of 1934, as
amended ("Exchange Act"). Passive market making consists of displaying bids on
Nasdaq that are limited by the bid prices of independent market makers and
completing purchases in response to order flow at prices limited by such bids.
Net purchases by a passive market maker on each day are limited to a specified
percentage of the passive market maker's average daily trading volume in the
Common Stock during a specified prior period. Purchases by the passive market
maker must be discontinued for any day on which such limit is reached. Passive
market making may stabilize the market price of the Common Stock at a level
above that which might otherwise prevail and, if commenced, may be discontinued
at any time.
The public offering price of the Common Stock will be determined by
negotiations among the Representatives and the Company, and will be based
largely upon the market price for the Common Stock as reported on the Nasdaq
National Market.
LEGAL MATTERS
The validity of the issuance of the Common Stock will be passed upon for
the Company and the Selling Shareholders by Cooley Godward LLP, San Diego,
California ("Cooley Godward"). GC&H Investments, a general partnership formed by
the partners of Cooley Godward for investment purposes, owns 1,923 shares of
Common Stock of the Company. Certain legal matters will be passed upon for the
Underwriters by Venture Law Group, A Professional Corporation, Menlo Park,
California.
EXPERTS
The consolidated financial statements of DataWorks Corporation at December
31, 1994 and 1995 and for each of the three years in the period ended December
31, 1995, appearing in this Prospectus and Registration Statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
thereon appearing elsewhere herein which, as to each of the three years in the
period ended December 31, 1995, is based in part on the report of Price
Waterhouse LLP, independent accountants. The financial statements referred to
above are included in reliance upon such reports given upon the authority of
such firms as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company 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"). Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and at the Commission's
following Regional Offices: Chicago Regional Office, Suite 1400, Northwest
Atrium Center, 500 West Madison Street, Chicago, Illinois 60661; and New York
Regional Office, Seven World Trade Center, Suite 1300, New York, New York 10048.
Copies of such material can be obtained at prescribed rates from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Judiciary Plaza,
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 the Company. The address for such site is
http://www.sec.gov.
Additional information regarding the Company and the shares offered hereby
is contained in the Registration Statement on Form S-3 and the exhibits thereto
filed with the Commission under the Securities Act of 1933, as amended (the
"Securities Act"). For further information pertaining to the Company and the
shares, reference is made to the Registration Statement and the exhibits
thereto, which may be inspected without charge at, and copies thereof may be
obtained at prescribed rates from, the office of the Commission at 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549.
43
<PAGE> 47
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1995, the Company's Quarterly Reports on Form 10-Q for the quarters ended
March 31, June 30 and September 30, 1996, the Company's Proxy Statement for the
1996 Annual Meeting of Shareholders filed pursuant to Rule 14a-6 of the Exchange
Act, the Company's Prospectus/Joint Proxy Statement dated September 13, 1996,
the Company's Registration Statement on Form S-4 (No. 333-11741) filed on
September 11, 1996, the Company's Form 8-K filed by the Company on October 8,
1996, and the description of the Common Stock contained in the Company's
Registration Statement on Form 8-A filed on September 20, 1995, each as filed by
the Company with the Commission, are hereby incorporated by reference in this
Prospectus except as superseded or modified herein. All documents filed by the
Company with the Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Exchange Act after the date of this Prospectus and prior to the termination of
the offering of the shares offered hereby shall be deemed to be incorporated by
reference into this Prospectus and to be a part hereof from the date of filing
of such documents. Any statement contained in any document incorporated or
deemed to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any other subsequently filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as modified or superseded, to constitute a part of this Prospectus. The
Company will provide without charge to each person, including any beneficial
owner to whom this Prospectus is delivered, upon written or oral request of such
person, a copy of any and all of the documents that have been or may be
incorporated by reference herein (other than exhibits to such documents which
are not specifically incorporated by reference into such documents). Such
requests should be directed to the Chief Financial Officer at the Company's
principal executive offices at 5910 Pacific Center Boulevard, Suite 300, San
Diego, California 92121 (telephone (619) 546-9600).
44
<PAGE> 48
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors................................... F-2
Report of Price Waterhouse LLP, Independent Accountants............................. F-3
Consolidated Balance Sheets as of December 31, 1994 and 1995 and September 30, 1996
(unaudited)....................................................................... F-4
Consolidated Statements of Operations for the Years Ended December 31, 1993, 1994
and 1995 and the Nine Months Ended September 30, 1995 and 1996 (unaudited)........ F-5
Consolidated Statements of Shareholders' Equity (Deficit) for the Years Ended
December 31, 1993, 1994 and 1995 and Nine Months Ended September 30, 1996
(unaudited)....................................................................... F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 1993, 1994
and 1995 and the Nine Months Ended September 30, 1995 and 1996 (unaudited)........ F-7
Notes to Consolidated Financial Statements.......................................... F-8
</TABLE>
F-1
<PAGE> 49
REPORT OF ERNST & YOUNG LLP, 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
did not audit the financial statements of DCD Corporation, a company acquired
during 1996 in a transaction accounted for as a pooling-of-interests, which
statements reflect total assets of $2,719,940 and $6,628,433 as of December 31,
1994 and 1995, respectively, and total revenues of $4,582,470, $6,322,925 and
$11,482,867 for the years ended December 31, 1993, 1994 and 1995, respectively.
Those statements were audited by other auditors whose report has been furnished
to us, and our opinion, insofar as it relates to data included for DCD
Corporation, is based solely on the report of the other auditors.
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 and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, 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> 50
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
DCD Corporation
In our opinion, the balance sheet and the related statements of operations,
of stockholders' equity (deficit) and of cash flows (not presented separately
herein) 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. We have not audited the financial statements of DCD Corporation for any
period subsequent to December 31, 1995.
PRICE WATERHOUSE LLP
Minneapolis, Minnesota
April 5, 1996
F-3
<PAGE> 51
DATAWORKS CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- SEPTEMBER 30,
1994 1995 1996
----------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 1,457,933 $13,004,609 $ 8,865,647
Accounts receivable, net of allowance for doubtful
accounts of $227,734, $712,835 and $633,650 in
1994, 1995 and 1996, respectively.............. 5,546,572 12,759,059 18,247,601
Deferred income taxes............................. 527,351 2,011,072 2,011,072
Other current assets.............................. 439,236 1,381,229 3,327,516
----------- ----------- -----------
Total current assets........................... 7,971,092 29,155,969 32,451,836
Equipment, furniture and fixtures, net.............. 752,062 2,196,790 3,666,912
Receivable from officer............................. 91,000 206,000 155,300
Capitalized software costs, net..................... 517,641 1,852,115 4,091,967
Intangible assets, net.............................. 4,959,487 4,617,417 4,029,449
Other assets........................................ 847,313 125,045 170,858
----------- ----------- -----------
$15,138,595 $38,153,336 $ 44,566,322
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.................................. $ 2,317,139 $ 3,072,961 $ 6,562,878
Accrued compensation.............................. 1,136,744 1,891,946 2,221,168
Other accrued liabilities......................... 925,506 2,352,246 2,122,485
Deferred revenue.................................. 3,862,809 5,853,941 6,403,010
Obligations under line of credit.................. 2,750,991 -- --
Notes payable and current portion of long-term
debt........................................... 445,999 -- --
Payables to shareholder........................... 50,000 -- --
Current portion of ESOP notes payable............. 364,284 -- --
----------- ----------- -----------
Total current liabilities...................... 11,853,472 13,171,094 17,309,541
Long-term debt...................................... 7,108,578 -- --
Deferred rent....................................... 137,506 160,822 133,587
Deferred income taxes............................... 673,200 1,929,189 1,864,128
ESOP note payable, less current portion............. 723,219 -- --
Commitments
Shareholders' equity (deficit):
Common stock, no stated par value:
Authorized shares -- 25,000,000
Issued and outstanding shares -- 3,883,571,
7,425,128 and 7,816,764 in 1994, 1995 and
1996, respectively........................... 551,932 26,006,540 26,894,466
Accumulated deficit............................... (4,821,809) (3,114,309) (1,635,400)
Receivable from ESOP.............................. (1,087,503) -- --
----------- ----------- -----------
Total shareholders' equity (deficit)........... (5,357,380) 22,892,231 25,259,066
----------- ----------- -----------
$15,138,595 $38,153,336 $ 44,566,322
=========== =========== ===========
</TABLE>
See accompanying notes
F-4
<PAGE> 52
DATAWORKS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- -------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Software licenses............. $ 6,691,705 $11,627,367 $22,873,643 $15,951,600 $24,459,317
Hardware...................... 4,089,287 3,765,089 6,742,935 4,189,409 3,717,717
Maintenance and other
services................... 4,740,985 7,688,992 13,394,128 9,087,903 14,108,228
---------- ----------- ----------- ----------- -----------
Total revenues........ 15,521,977 23,081,448 43,010,706 29,228,912 42,285,262
Cost of revenues:
Software licenses............. 271,658 1,191,573 2,153,428 1,513,512 1,911,787
Hardware...................... 2,473,963 2,930,223 5,288,369 3,290,912 2,745,190
Maintenance and other
services................... 3,747,076 4,716,972 8,329,510 5,819,556 10,318,815
---------- ----------- ----------- ----------- -----------
Total cost of
revenues............ 6,492,697 8,838,768 15,771,307 10,623,980 14,975,792
---------- ----------- ----------- ----------- -----------
Gross profit.................... 9,029,280 14,242,680 27,239,399 18,604,932 27,309,470
Operating expenses:
Selling and marketing......... 3,842,986 7,404,052 12,056,969 8,328,288 12,738,206
Research and development...... 1,230,249 2,520,802 3,214,040 2,309,219 3,137,032
General and administrative.... 2,349,646 3,201,965 5,031,440 3,717,715 5,164,143
Acquisition and related
costs...................... -- -- -- -- 3,656,112
ESOP contribution............. 387,363 429,397 445,550 334,162 --
---------- ----------- ----------- ----------- -----------
Total operating
expenses............ 7,810,244 13,556,216 20,747,999 14,689,384 24,695,493
---------- ----------- ----------- ----------- -----------
Income from operations.......... 1,219,036 686,464 6,491,400 3,915,548 2,613,977
Interest income (expense),
net........................... (500,235) (1,141,054) (1,337,287) (1,312,228) 314,555
---------- ----------- ----------- ----------- -----------
Income (loss) before income
taxes and extraordinary
item.......................... 718,801 (454,590) 5,154,113 2,603,320 2,928,532
Credit (provision) for income
taxes......................... -- 263,874 (1,780,433) (913,476) (1,449,623)
---------- ----------- ----------- ----------- -----------
Income (loss) before
extraordinary item............ 718,801 (190,716) 3,373,680 1,689,844 1,478,909
Extraordinary item, net of
income taxes.................. -- (157,229) (1,017,154) (627,170) --
---------- ----------- ----------- ----------- -----------
Net income (loss)............... $ 718,801 $ (347,945) $ 2,356,526 $ 1,062,674 $ 1,478,909
========== =========== =========== =========== ===========
Per share information:
Income (loss) before
extraordinary item......... $ .19 $ (.05) $ .61 $ .31 $ .18
Extraordinary item............ -- (.04) (.18) (.11) --
---------- ----------- ----------- ----------- -----------
Net income (loss)............. $ .19 $ (.09) $ .43 $ .20 $ .18
========== =========== =========== =========== ===========
Shares used in per share
computations.................. 3,844,000 4,021,000 5,523,000 5,384,000 8,179,000
========== =========== =========== =========== ===========
</TABLE>
See accompanying notes
F-5
<PAGE> 53
DATAWORKS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 AND
NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
TOTAL
PREFERRED STOCK COMMON STOCK SHAREHOLDERS'
---------------------- ----------------------- ACCUMULATED RECEIVABLE EQUITY
SHARES AMOUNT SHARES AMOUNT DEFICIT FROM ESOP (DEFICIT)
-------- ----------- --------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992..... -- $ -- 3,725,996 $ 372,835 $(4,705,156) $(2,550,000) $(6,882,321)
Dividends declared on common
stock........................ -- -- -- -- (94,376 ) -- (94,376)
Repayment of ESOP receivable... -- -- -- -- -- 607,142 607,142
Net income..................... -- -- -- -- 718,801 -- 718,801
-------- ----------- --------- ----------- ----------- ----------- -----------
Balance at December 31, 1993..... -- -- 3,725,996 372,835 (4,080,731 ) (1,942,858 ) (5,650,754)
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
Dividends declared on common
stock........................ -- -- -- -- (393,133 ) -- (393,133)
Repayments of ESOP
receivable................... -- -- -- -- -- 855,355 855,355
Net loss....................... -- -- -- -- (347,945 ) -- (347,945)
-------- ----------- --------- ----------- ----------- ----------- -----------
Balance at December 31, 1994..... -- -- 3,883,571 551,932 (4,821,809 ) (1,087,503 ) (5,357,380)
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 9,144 -- -- 9,144
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
Dividends declared on common
stock........................ -- -- -- -- (649,026 ) -- (649,026)
Repayments of ESOP
receivable................... -- -- -- -- -- 1,087,503 1,087,503
Net income..................... -- -- -- -- 2,356,526 -- 2,356,526
-------- ----------- --------- ----------- ----------- ----------- -----------
Balance at December 31, 1995..... -- -- 7,425,128 26,006,540 (3,114,309 ) -- 22,892,231
Issuance of common stock upon
exercise of stock options
(unaudited).................. -- -- 312,244 66,656 -- -- 66,656
Issuance of common stock under
Employee Stock Purchase
Plan (unaudited)............. -- -- 79,392 821,270 -- -- 821,270
Net income (unaudited)......... -- -- -- -- 1,478,909 -- 1,478,909
-------- ----------- --------- ----------- ----------- ----------- -----------
Balance at September 30, 1996
(unaudited).................... -- $ -- 7,816,764 $26,894,466 $(1,635,400) $ -- $25,259,066
======== =========== ========= =========== =========== =========== ===========
</TABLE>
See accompanying notes
F-6
<PAGE> 54
DATAWORKS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- -------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
OPERATING ACTIVITIES
Net income (loss)................................. $ 718,801 $ (347,945) $ 2,356,526 $ 1,062,674 $ 1,478,909
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Provision for doubtful accounts and returns..... 80,496 415,963 900,483 526,713 923,128
Depreciation and amortization of intangible
assets........................................ 275,566 801,204 1,226,796 1,108,346 1,410,620
Amortization of debt discount and debt issue
costs......................................... -- 255,251 213,702 195,590 --
Reduction of advances to officers charged to
operating expenses............................ -- 199,701 108,500 108,500 --
Notes payable issued for professional
services...................................... 244,661 314,087 -- -- --
Deferred rent expense........................... (10,732) (18,595) 23,316 27,831 (27,235)
Deferred income taxes........................... -- (416,051) (227,732) (326,094) (65,061)
Extraordinary item, non-cash portion............ -- 157,229 886,020 225,033 --
Changes in operating assets and liabilities, net
of effects from purchase of Madic-Compufact
Corporation:
Accounts receivable........................... (1,451,098) (2,664,823) (8,112,970) (6,504,771) (6,411,670)
Deferred revenue.............................. 315,265 1,880,802 1,991,133 1,955,974 549,069
Other current assets.......................... 31,566 (105,720) (885,681) (745,072) (1,946,287)
Accounts payable.............................. 212,883 34,779 755,823 887,527 3,489,917
Accrued compensation.......................... (404,411) 291,133 533,490 (808,325) 329,222
Other accrued liabilities..................... (261,766) 68,763 1,220,855 2,815,204 (229,761)
Accrued ESOP contribution..................... (128,021) (38,221) -- -- --
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) operating
activities...................................... (376,790) 827,557 990,261 529,130 (499,149)
INVESTING ACTIVITIES
Purchases of equipment, furniture and fixtures.... (145,502) (506,999) (1,562,936) (1,212,376) (2,232,775)
Additions to capitalized software costs........... -- (474,887) (1,334,474) (971,573) (2,299,851)
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) (124,993) --
Advances to officers.............................. (128,290) (91,000) (223,500) (143,000) 50,700
Other assets...................................... (24,347) 54,233 (114,860) (385,738) (45,813)
----------- ----------- ----------- ----------- -----------
Net cash used in investing activities............. (373,777) (6,131,901) (3,545,770) (2,837,680) (4,527,739)
FINANCING ACTIVITIES
Net increase (decrease) in obligations under lines
of credit....................................... -- 2,750,991 (2,750,991) 498,770 --
Proceeds from notes payable....................... 7,199,456 7,095,336 1,250,000 1,250,000 --
Repayments of notes payable....................... (5,635,906) (1,920,099) (6,409,160) (2,038,623) --
Deferred debt issue costs......................... (315,943) (975,325) (164,249) (104,902) --
Repayment of payables to shareholder.............. (258,013) (431,000) (50,000) (50,000) --
Issuance of common stock, net..................... -- 300 18,188,048 -- 887,926
Issuance of Series A preferred stock, net......... -- -- 4,687,563 4,711,320 --
Dividend paid on common stock..................... (94,376) (393,133) (649,026) (273,213) --
----------- ----------- ----------- ----------- -----------
Net cash provided by financing activities......... 895,218 6,127,070 14,102,185 3,993,352 887,926
----------- ----------- ----------- ----------- -----------
Net increase in cash and cash equivalents......... 144,651 822,726 11,546,676 1,684,802 (4,138,962)
Cash and cash equivalents at beginning of
period.......................................... 490,556 635,207 1,457,933 1,457,933 13,004,609
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of period........ $ 635,207 $ 1,457,933 $13,004,609 $ 3,142,735 $ 8,865,647
=========== =========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for interest.......... $ 511,848 $ 866,129 $ 1,308,715 $ 1,052,711 $ 40,616
=========== =========== =========== =========== ===========
Cash paid during the period for income taxes...... $ 27,436 $ 19,677 $ 473,790 $ 376,134 $ 1,677,659
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes
F-7
<PAGE> 55
DATAWORKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1995 AND PERTAINING TO SEPTEMBER 30,
1996
AND THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
DataWorks Corporation ("DataWorks") is a California corporation which
develops, markets, implements and supports open systems, client/server-based
Enterprise Resource Planning software for mid-range discrete manufacturing
companies.
As described more fully in Note 2, on September 27, 1996, the Company
acquired DCD Corporation (DCD). The acquisition was accounted for as a
pooling-of-interests and, accordingly, the consolidated financial statements
reflect the combined financial position and operating results for the Company
and DCD for all periods presented. In addition, the consolidated financial
statements include the accounts of DataWorks and its wholly-owned subsidiaries
Madic-Compufact Corporation ("Madic") from May 27, 1994 (Note 2) and DataWorks
(Europe) Ltd. Significant intercompany accounts and transactions have been
eliminated in consolidation.
Interim Financial Information (Unaudited)
The financial statements at September 30, 1996 and for the nine-month
periods ended September 30, 1995 and 1996 are unaudited, but include all
adjustments (consisting only of normal recurring adjustments) which management
considers necessary for a fair presentation of the financial position at such
date and the operating results and cash flows for those periods. Results for
interim periods are not necessarily indicative of results for the entire year or
any future periods.
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.
F-8
<PAGE> 56
DATAWORKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1995 AND PERTAINING TO SEPTEMBER 30,
1996
AND THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
Included in cash and cash equivalents at December 31, 1995 and September
30, 1996 were approximately $11.1 million and $4.3 million, respectively,
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 and September 30, 1996, 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.
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 primarily 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, net of estimated future returns. Maintenance contract revenue is
recognized ratably over the period the service is provided. Revenue from
F-9
<PAGE> 57
DATAWORKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1995 AND PERTAINING TO SEPTEMBER 30,
1996
AND THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
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.
Stock Options
Effective January 1, 1996, DataWorks adopted Statement of Financial
Accounting Standards No. 123 ("FAS 123"), "Accounting and Disclosure of
Stock-Based Compensation." As allowed under FAS 123, 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. The
adoption of FAS 123 had no effect on DataWorks' financial position or results of
operations.
Accounting Standard on Impairment of Long-Lived Assets
Effective January 1, 1996, DataWorks 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 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 up-front cash deposit. 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
F-10
<PAGE> 58
DATAWORKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1995 AND PERTAINING TO SEPTEMBER 30,
1996
AND THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
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.
For net income (loss) per share purposes, only those common shares held by
the Employee Stock Ownership Plan ("ESOP") which are allocated to participants
and committed to be released are considered to be outstanding.
2. BUSINESS COMBINATIONS
On September 27, 1996, the Company acquired DCD, a Minnesota corporation,
which designs, develops, markets and supports management software for use by
lower tier mid-range manufacturers in the make to order manufacturing industry.
The acquisition has been accounted for under the pooling-of-interests method of
accounting. Accordingly, the historical financial statements for periods prior
to the consummation of the combination have been restated as though the
companies had been combined.
Total revenues and net income (loss) of DataWorks and DCD for the periods
preceding the acquisition were:
<TABLE>
<CAPTION>
DATAWORKS DCD COMBINED
----------- ----------- -----------
<S> <C> <C> <C>
Year ended December 31, 1993
Total revenues................................. $10,939,507 $ 4,582,470 $15,521,977
Net income..................................... 624,425 94,376 718,801
Year ended December 31, 1994
Total revenues................................. 16,758,523 6,322,925 23,081,448
Net income (loss).............................. (903,389) 555,444 (347,945)
Year ended December 31, 1995
Total revenues................................. 31,527,839 11,482,867 43,010,706
Net income..................................... 575,474 1,781,052 2,356,526
Nine months ended September 30, 1995
Total revenues................................. 21,729,782 7,499,130 29,228,912
Net income..................................... 15,963 1,046,711 1,062,674
Nine months ended September 30, 1996
Total revenues................................. 31,055,299 11,229,963 42,285,262
Net income..................................... 1,187,103 291,806 1,478,909
</TABLE>
In January 1996, DataWorks purchased 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. The owner of Arrowkey is an employee of DataWorks.
Effective May 27, 1994, DataWorks completed the acquisition of the
outstanding stock of Madic, a company which was 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 146,038 shares of common stock. 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-11
<PAGE> 59
DATAWORKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1995 AND PERTAINING TO SEPTEMBER 30,
1996
AND THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
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, 1993 and 1994 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,
---------------------------
1993 1994
----------- -----------
<S> <C> <C>
Revenues.................................................. $23,589,000 $26,816,000
Operating income.......................................... 1,291,000 1,082,000
Loss before extraordinary item............................ (167,000) (206,000)
Net loss.................................................. (384,000) (422,000)
Loss per share:
Loss before extraordinary item.......................... (.04) (.05)
Net loss................................................ (.10) (.10)
</TABLE>
3. FINANCIAL STATEMENT INFORMATION
Equipment, Furniture and Fixtures
Equipment, furniture and fixtures consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- SEPTEMBER 30,
1994 1995 1996
----------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment.......................... $ 1,101,859 $ 2,237,581 $ 3,262,764
Office furniture, fixtures and equipment.... 799,039 1,606,442 2,814,035
----------- ----------- -----------
1,900,898 3,844,023 6,076,799
Less accumulated depreciation............... (1,148,836) (1,647,233) (2,409,887)
----------- ----------- -----------
$ 752,062 $ 2,196,790 $ 3,666,912
=========== =========== ===========
</TABLE>
F-12
<PAGE> 60
DATAWORKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1995 AND PERTAINING TO SEPTEMBER 30,
1996
AND THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
Intangible Assets
Intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- SEPTEMBER 30,
1994 1995 1996
----------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Customer list............................... $3,300,000 $ 3,300,000 $ 3,300,000
Goodwill.................................... 1,530,643 1,530,643 1,530,643
Covenant not to compete..................... 500,000 810,000 810,000
Other....................................... 22,319 51,243 --
---------- ----------- -----------
5,352,962 5,691,886 5,640,643
Less accumulated amortization............... (393,475) (1,074,469) (1,611,194)
---------- ----------- -----------
$4,959,487 $ 4,617,417 $ 4,029,449
========== =========== ===========
</TABLE>
Other Accrued Liabilities
Other accrued liabilities consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER 30,
1994 1995 1996
-------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Income taxes payable........................... $132,500 $1,010,722 $ 654,310
Other.......................................... 793,006 1,341,524 1,468,175
-------- ---------- ----------
$925,506 $2,352,246 $ 2,122,485
======== ========== ==========
</TABLE>
4. EMPLOYEE STOCK OWNERSHIP PLAN AND RECAPITALIZATION
DCD established an ESOP in 1992 for the benefit of all employees meeting
certain eligibility requirements. On November 13, 1992, DCD obtained financing
of $2,550,000 from a commercial bank and advanced the proceeds to the ESOP which
purchased 899,640 shares of common stock from a DCD shareholder.
DCD recorded the funds advanced to the ESOP as a "Receivable from ESOP"
which was a reduction of shareholders' equity. As DCD made discretionary
contributions and dividends to the ESOP, these amounts were used to repay the
"Receivable from ESOP" and the related ESOP note payable. As the principal
amount of the loan was repaid, the "Receivable from ESOP" was 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
the assets of DCD and a $500,000 personal guarantee of the selling shareholder.
The note was subject to various loan covenants. DCD was in compliance with these
covenants at December 31, 1994 or had obtained the necessary waivers.
During 1993, DCD paid $111,576 of interest expenses, contributed $384,745
to the ESOP and incurred $2,618 of other ESOP related expenses. During 1994, DCD
paid $95,138 of interest expense, contributed $424,001 to the ESOP and incurred
$5,396 of other ESOP-related expenses. During 1995, DCD paid $56,408
F-13
<PAGE> 61
DATAWORKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1995 AND PERTAINING TO SEPTEMBER 30,
1996
AND THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
of interest expense, contributed $438,477 to the ESOP and incurred $7,073 of
other ESOP-related expenses. During 1993, 1994 and 1995, DCD also paid dividends
of $94,376, $393,133 and $649,026, respectively, on common stock owned by the
ESOP. At December 31, 1993, 1994 and 1995, the ESOP had released and allocated
227,680, 529,573 and 899,640 shares, respectively.
5. 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 and September 30, 1996, 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 agreement also contains covenants which require DataWorks to
maintain certain levels of liquidity (as defined), net worth, profitability and
debt service coverage.
At December 31, 1995, DCD had a line of credit agreement with a bank which
provides for borrowings up to $225,000 at 1.50% over the bank's base rate, which
was 9.5% at December 31, 1995. Borrowings under the line of credit were secured
by the Company's accounts receivable. No amounts were outstanding under the line
of credit at December 31, 1994 or 1995. The agreement was subject to various
loan covenants. The Company was in compliance with these covenants at December
31, 1995 or had obtained the necessary waivers. The line of credit agreement
expired on June 30, 1996.
In July 1996, DCD secured a line of credit agreement with a bank which
provides for borrowings up to $1,000,000 at 1% over the bank's base rate.
Borrowings under the line are secured by DCD's accounts receivable, inventory,
equipment and intangible assets. The agreement is subject to various loan
covenants. The line of credit expires on July 31, 1997 and no borrowings were
outstanding at September 30, 1996.
Long-term Debt
Long-term debt obligations of DataWorks consisted 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.
F-14
<PAGE> 62
DATAWORKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1995 AND PERTAINING TO SEPTEMBER 30,
1996
AND THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
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 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 NINE
31, MONTHS
----------------------- ENDED
1994 1995 SEPTEMBER
-------- ---------- 30,
1995
------------
(UNAUDITED)
<S> <C> <C> <C>
Write-off of unamortized debt issue costs and debt
discount.............................................. $248,229 $ 886,020 $ 225,033
Cash prepayment penalty and other cash charges.......... -- 837,967 837,967
-------- ---------- ----------
248,229 1,723,987 1,063,000
Income tax effect....................................... (91,000) (706,833) (435,830)
-------- ---------- ----------
$157,229 $1,017,154 $ 627,170
======== ========== ==========
</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, $54,597 and $6,050 for the years ended December 31, 1995, 1994 and
1993, and for the nine months ended September 30, 1995, respectively. Related
accrued interest was $59,535 at December 31, 1994.
6. INCOME TAXES
The (provision) credit for income taxes consists of:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1993 1994 1995
--------- --------- -----------
<S> <C> <C> <C>
Current
Federal.............................. $ -- $(119,729) $ (981,956)
State................................ -- (32,448) (269,284)
--------- --------- -----------
-- (152,177) (1,251,240)
Deferred
Federal.............................. -- 392,210 (474,248)
State................................ -- 23,841 (54,945)
--------- --------- -----------
-- 416,051 (529,193)
--------- --------- -----------
$ -- $ 263,874 $(1,780,433)
========= ========= ==========
</TABLE>
F-15
<PAGE> 63
DATAWORKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1995 AND PERTAINING TO SEPTEMBER 30,
1996
AND THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
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................................... 143,635 471,342
Allowance for doubtful accounts and product returns............. 27,157 182,772
Vacation accrual................................................ -- 20,767
Commission accrual.............................................. 6,559 27,411
----------- -----------
Total deferred tax assets......................................... 1,333,551 1,960,892
----------- -----------
Net deferred tax liabilities...................................... $ (145,849) $ 81,883
=========== ===========
</TABLE>
The effective income tax rate varied from the statutory federal rate as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1993 1994 1995
--------- -------- -----------
<S> <C> <C> <C>
Income tax benefit (provision) at statutory rate........ $(244,392) $154,604 $(1,752,405)
State income tax benefit (provision), net of federal
benefits.............................................. (43,129) (9,915) (244,024)
Benefit of tax credits and carryforwards................ 249,771 -- 104,766
ESOP dividend tax benefit............................... 37,750 158,826 256,365
Permanent differences and other......................... -- (39,641) (145,135)
--------- -------- ----------
$ -- $263,874 $(1,780,433)
========= ======== ===========
</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 loss carryforwards 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 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 places 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.
For the nine month periods ended September 30, 1995 and 1996, income taxes
have been provided based on the estimated annual effective tax rate applied to
pretax income for the interim period. For the nine months ended September 30,
1996, the effective tax rate was 49.5% due primarily to the non-deductibility of
certain of the DCD acquisition costs.
F-16
<PAGE> 64
DATAWORKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1995 AND PERTAINING TO SEPTEMBER 30,
1996
AND THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
7. RECEIVABLE FROM OFFICER
At December 31, 1994 and 1995 and September 30, 1996, the receivable from
officer is from one of DataWorks' principal officers and shareholders and
consists of net advances totaling $91,000, $206,000, and $155,300, respectively.
The advances will be repaid or offset against any future performance bonuses
earned and approved by the Board of Directors.
8. LEASE COMMITMENTS
DataWorks leases its corporate and regional office facilities under
noncancellable operating leases that expire from 1996 to 2001. Two 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............................................................. $ 962,045
1997............................................................. 609,764
1998............................................................. 488,523
1999............................................................. 300,852
2000 and thereafter.............................................. 74,039
----------
$2,435,223
==========
</TABLE>
During 1996, DataWorks entered into new facilities lease agreements,
increasing the annual rental obligations included above by approximately
$300,000 per year for five years.
Rent expense for the years ended December 31, 1993, 1994 and 1995 was
$374,508, $478,892 and $931,153, respectively, and $681,210 and $831,175 for the
nine months ended September 30, 1995 and 1996, respectively.
9. 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.
DataWorks is authorized to issue 5,000,000 shares of preferred stock; no
shares are outstanding.
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.
F-17
<PAGE> 65
DATAWORKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1995 AND PERTAINING TO SEPTEMBER 30,
1996
AND THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
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 and
September 30, 1996, 0 and 15,000 shares, respectively, were granted under the
Directors' Plan.
In addition, DataWorks has outstanding options to purchase an additional
53,845 shares of common stock which were issued 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> <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
Granted (unaudited)............................ 325,252 $11.06 to $25.75 $ 13.59
Cancelled (unaudited).......................... (3,719) $ 2.86 to $11.50 $ 5.32
Exercised (unaudited).......................... (312,244) $ .16 to $ 5.20 $ .35
---------
Outstanding at September 30, 1996 (unaudited).... 810,610 $ .16 to $25.75 $ 8.26
=========
</TABLE>
As of December 31, 1995 and September 30, 1996, 352,721 and 221,807,
respectively, of the options are vested and exercisable.
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. 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
F-18
<PAGE> 66
DATAWORKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1995 AND PERTAINING TO SEPTEMBER 30,
1996
AND THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
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 and September 30, 1996, 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 shares of common stock are reserved for future issuance:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
Stock options:
Granted and outstanding.................................. 801,321 810,610
Reserved for future grants............................... 977,524 632,220
--------- ---------
1,778,845 1,442,830
Warrants................................................... 36,314 36,314
Employee stock purchase plan............................... 150,000 70,608
--------- ---------
1,965,159 1,549,752
========= =========
</TABLE>
10. EMPLOYEE RETIREMENT PLANS AND PROFIT SHARING 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.
In addition, DCD 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.
Effective July 1996, DCD established a 401(k) defined contribution
retirement plan (the "DCD plan") covering all employees of DCD. The DCD plan
provides for voluntary employee contributions from 1% to 15% of annual
compensation (as defined). DCD may match these contributions at 50% on the first
6% of employee contributions. For the nine months ended September 30, 1996, DCD
contributions to the plan totaled $22,500.
F-19
<PAGE> 67
- ------------------------------------------------------
- ------------------------------------------------------
No dealer or any other person has been authorized to give any information or
to make any representations other than those contained in this Prospectus, and,
if given or made, such information or representations must not be relied upon as
having been authorized by the Company or by the Underwriters. This Prospectus
does not constitute an offer to sell or a solicitation of an offer to buy any
securities other than the Common Stock to which it relates in any jurisdiction
where such an offer or solicitation would be unlawful. Neither the delivery of
this Prospectus nor any sale made hereunder shall under any circumstances create
any implication that there has been no change in the affairs of the Company or
that the information contained herein is correct as of any time subsequent to
the date hereof.
----------------------------
TABLE OF CONTENTS
----------------------------
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Prospectus Summary..................... 3
Risk Factors........................... 6
Use of Proceeds........................ 12
Price Range of Common Stock............ 12
Dividend Policy........................ 12
Capitalization......................... 13
Selected Consolidated Financial Data... 14
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 15
Business............................... 24
Management............................. 40
Principal Shareholders................. 41
Underwriting........................... 42
Legal Matters.......................... 43
Experts................................ 43
Available Information.................. 43
Incorporation of Certain Documents by
Reference............................ 44
Index to Financial Statements.......... F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
2,000,000 SHARES
LOGO
COMMON STOCK
----------------------------
PROSPECTUS
----------------------------
MONTGOMERY SECURITIES
FURMAN SELZ
SOUNDVIEW FINANCIAL
GROUP, INC.
, 1996
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 68
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all expenses payable by the Registrant in
connection with the sale of the Common Stock being registered, none of which
will be borne by the Selling Shareholders. All the amounts shown are estimates
except for the SEC registration fee.
<TABLE>
<S> <C>
SEC Registration fee............................................ $ 16,379
NASD filing fee................................................. $ 5,905
Nasdaq National Market Listing Application Fee.................. $ 17,500
Blue sky qualification fees and expenses........................ $ 10,000
Printing and engraving expenses................................. $ 80,000
Legal fees and expenses......................................... $ 100,000
Accounting fees and expenses.................................... $ 60,000
Miscellaneous................................................... $ 10,216
-------
Total...................................................... $ 300,000
=======
</TABLE>
ITEM 15. INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Registrant's Amended and Restated 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 General Corporation Law of
California (the "California Law"). In addition, the Registrant's Bylaws include
provisions that require the Registrant 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 the Registrant 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, so long as they had no reasonable cause to
believe their conduct was unlawful. The Registrant 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 the Registrant or its shareholders, for acts or
omissions 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 the Company 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 the Company or its shareholders when the
director was aware or should have been aware of a risk of serious injury to the
Company 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
the Company 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.
The Registrant has entered into agreements with its directors and executive
officers that require the Registrant 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 person may be made a party by
reason of the fact that such person is or was a director or officer of the
Registrant or any of its affiliated enterprises, provided such person acted in
good faith and in a manner such person reasonably believed to be in or not
opposed to the best interests of the Registrant and, with respect to any
criminal proceeding, had no reasonable cause to
II-1
<PAGE> 69
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.
The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters of the Registrant and
its officers and directors for certain liabilities arising under the Securities
Act or otherwise.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ ----------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement
4.1 Amended and Restated Articles of Incorporation(1)
4.2 Bylaws(1)
4.3 Amended and Restated Registration Rights Agreement dated August 24, 1995(1)
4.4 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(2)
5.1 Opinion of Cooley Godward LLP
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2 Consent of Price Waterhouse LLP, Independent Accountants
23.3 Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1
24.1 Power of Attorney. Reference is made to page II-3
</TABLE>
- ---------------
(1) Filed as an exhibit to the Registration Statement on Form SB-2 (No.
33-97022-LA) or amendments thereto and incorporated herein by reference.
(2) Filed as an exhibit to the Registration Statement on Form S-4 (No.
333-11741) and incorporated herein by reference.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to provisions described in Item 15 or otherwise, the
registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes:
(1) That, for purposes of determining any liability under the
Securities Act, each filing of the registrant's annual report pursuant to
Section 13(a) or 15(d) of the Exchange Act (and, where applicable, each
filing of an employee benefit plan's annual report pursuant to Section
15(d) of the Exchange Act) 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.
(2) That, for purposes of determining any liability under the
Securities Act, the information omitted from the form of prospectus filed
as part of this Registration Statement in reliance upon
II-2
<PAGE> 70
Rule 430A and contained in a form of prospectus filed by the registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall
be deemed to be part of this Registration Statement as of the time it was
declared effective.
(3) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 71
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of San Diego, State of California, on November 8, 1996.
DATAWORKS CORPORATION
By: /s/ Stuart W. Clifton
----------------------------------
Stuart W. Clifton
Chief Executive Officer, President
and
Chairman of the Board
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 any
subsequent registration statement filed by the Registrant pursuant to Rule
462(b) of the Securities Act of 1933, as amended, which relates 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 Executive November 8, 1996
--------------------------------------- Officer, Chairman of the Board
Stuart W. Clifton and Director
(Principal Executive Officer)
/s/ NORMAN R. FARQUHAR Executive Vice President, November 8, 1996
--------------------------------------- Chief Financial Officer
Norman R. Farquhar and Director
(Principal Financial Officer)
/s/ RICK E. RUSSO Vice President, Finance and November 8, 1996
--------------------------------------- Secretary (Principal
Rick E. Russo Accounting Officer)
--------------------------------------- Director November , 1996
Nathan W. Bell
/s/ FINIS F. CONNER Director November 8, 1996
---------------------------------------
Finis F. Conner
/s/ RONALD S. PARKER Director November 8, 1996
---------------------------------------
Ronald S. Parker
</TABLE>
II-4
<PAGE> 72
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ------ ------------------------------------------------------------------- ----------
<C> <S> <C>
1.1 Form of Underwriting Agreement
4.1 Amended and Restated Articles of Incorporation(1) --
4.2 Bylaws(1) --
4.3 Amended and Restated Registration Rights Agreement dated August 24,
1995(1)
4.4 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(2)
5.1 Opinion of Cooley Godward LLP
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2 Consent of Price Waterhouse LLP, Independent Accountants
23.3 Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1 --
24.1 Power of Attorney. Reference is made to page II-3. --
</TABLE>
- ---------------
(1) Filed as an exhibit to the Registration Statement on Form SB-2 (No.
33-97022-LA) or amendments thereto and incorporated herein by reference.
(2) Filed as an exhibit to the Registration Statement on Form S-4 (No.
333-11741) and incorporated herein by reference.
<PAGE> 1
EXHIBIT 1.1
2,300,000 SHARES [TO BE NEGOTIATED]
DATAWORKS CORPORATION
COMMON STOCK
UNDERWRITING AGREEMENT
December __, 1996
MONTGOMERY SECURITIES
FURMAN SELZ INCORPORATED
SOUNDVIEW FINANCIAL GROUP, INC.
As Representatives of the several Underwriters
c/o MONTGOMERY SECURITIES
600 Montgomery Street
San Francisco, California 94111
Dear Sirs:
SECTION 1. Introductory. DataWorks Corporation, a California
corporation (the "Company"), proposes to issue and sell 2,000,000 shares of its
authorized but unissued Common Stock (the "Common Stock") to the several
underwriters named in Schedule A annexed hereto (the "Underwriters"), for whom
you are acting as Representatives. Said aggregate of 2,000,000 shares are
hereinafter called the "Firm Common Shares." In addition, the Company proposes
to grant to the Underwriters an option to purchase up to 81,314 additional
shares of Common Stock and the certain shareholders of the Company named in
Schedule B annexed hereto (the "Selling Shareholders") propose to grant to the
Underwriters an option to purchase an aggregate of up to 218,686 shares of
Common Stock (collectively, the "Optional Common Shares"), as provided in
Section 5 hereof. The Firm Common Shares and, to the extent such option is
exercised, the Optional Common Shares are hereinafter collectively referred to
as the "Common Shares."
You have advised the Company and the Selling Shareholders that
the Underwriters propose to make a public offering of their respective portions
of the Common Shares on the effective date of the registration statement
hereinafter referred to, or as soon thereafter as in your judgment is advisable.
<PAGE> 2
The Company and each of the Selling Shareholders hereby
confirms their respective agreements with respect to the purchase of the Common
Shares by the Underwriters as follows:
SECTION 2. Representations and Warranties of the Company. The
Company represents and warrants to the several Underwriters that:
(a) A registration statement on Form S-3 (File No. 333-___)
with respect to the Common Shares has been prepared by the Company in
conformity with the requirements of the Securities Act of 1933, as
amended (the "Act"), and the rules and regulations (the "Rules and
Regulations") of the Securities and Exchange Commission (the
"Commission") thereunder, and has been filed with the Commission. The
Company has prepared and has filed or proposes to file prior to the
effective date of such registration statement an amendment or
amendments to such registration statement, which amendment or
amendments have been or will be similarly prepared. There have been
delivered to you two signed copies of such registration statement and
amendments, together with two copies of each exhibit filed therewith.
Conformed copies of such registration statement and amendments (but
without exhibits) and of the related preliminary prospectus have been
delivered to you in such reasonable quantities as you have requested
for each of the Underwriters. The Company will next file with the
Commission one of the following: (i) prior to effectiveness of such
registration statement, a further amendment thereto, including the form
of final prospectus, (ii) a final prospectus in accordance with Rules
430A and 424(b) of the Rules and Regulations or (iii) a term sheet (the
"Term Sheet") as described in and in accordance with Rules 434 and
424(b) of the Rules and Regulations. As filed, the final prospectus. if
one is used, or the Term Sheet and Preliminary Prospectus, if a final
prospectus is not used, shall include all Rule 430A Information and,
except to the extent that you shall agree in writing to a modification,
shall be in all substantive respects in the form furnished to you prior
to the date and time that this Agreement was executed and delivered by
the parties hereto, or, to the extent not completed at such date and
time, shall contain only such specific additional information and other
changes (beyond that contained in the latest Preliminary Prospectus) as
the Company shall have previously advised you in writing would be
included or made therein.
The term "Registration Statement" as used in this Agreement shall mean
such registration statement at the time such registration statement
becomes effective and, in the event any post-effective amendment
thereto becomes effective prior to the First Closing Date (as
hereinafter defined), shall also mean such registration statement as so
amended; provided, however, that such term shall also include (i) all
Rule 430A Information deemed to be included in such registration
statement at the time such registration statement becomes effective as
provided by Rule 430A of the Rules and Regulations and (ii) any
registration statement filed pursuant to 462(b) of the Rules and
Regulations relating to the Common Shares. The term "Preliminary
Prospectus" shall mean any preliminary prospectus referred to in the
preceding paragraph and any preliminary prospectus included in the
Registration Statement at the time it becomes effective that omits Rule
430A Information. The term "Prospectus" as used in this Agreement shall
mean either (i) the prospectus relating to the Common Shares in the
form in which it is first filed with the Commission pursuant to Rule
424(b) of the Rules and Regulations or, (ii) if a Term Sheet is not
used and no filing pursuant to Rule 424(b) of the Rules and Regulations
is required, shall mean the form of final prospectus
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included in the Registration Statement at the time such registration
statement becomes effective or (iii) if a Term Sheet is used, the Term
Sheet in the form in which it is first filed with the Commission
pursuant to Rule 424(b) of the Rules and Regulations, together with the
Preliminary Prospectus included in the Registration Statement at the
time it becomes effective. The term "Rule 430A Information" means
information with respect to the Common Shares and the offering thereof
permitted to be omitted from the Registration Statement when it becomes
effective pursuant to Rule 430A of the Rules and Regulations. Any
reference herein to any Preliminary Prospectus or the Prospectus shall
be deemed to refer to and include the documents incorporated by
reference therein pursuant to Form S-3 under the Act, as of the date of
such Preliminary Prospectus or Prospectus, as the case may be.
(b) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus, and each Preliminary
Prospectus has conformed in all material respects to the requirements
of the Act and the Rules and Regulations and, as of its date, has not
included any untrue statement of a material fact or omitted to state a
material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading; and at
the time the Registration Statement becomes effective, and at all times
subsequent thereto up to and including each Closing Date hereinafter
mentioned, the Registration Statement and the Prospectus, and any
amendments or supplements thereto, will contain all material statements
and information required to be included therein by the Act and the
Rules and Regulations and will in all material respects conform to the
requirements of the Act and the Rules and Regulations, and neither the
Registration Statement nor the Prospectus, nor any amendment or
supplement thereto, will include 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 misleading; provided,
however, no representation or warranty contained in this subsection
2(b) shall be applicable to information contained in or omitted from
any Preliminary Prospectus, the Registration Statement, the Prospectus
or any such amendment or supplement in reliance upon and in conformity
with written information furnished to the Company by or on behalf of
any Underwriter, directly or through the Representatives, specifically
for use in the preparation thereof. The documents incorporated by
reference in the Prospectus, when they were filed with the Commission,
conformed in all material respects to the requirements of the Exchange
Act and the rules and regulations of the Commission thereunder, and
none of such documents contained an untrue statement of a material fact
or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading.
(c) The Company does not own or control, directly or
indirectly, any corporation, association or other entity other than the
subsidiaries listed in Exhibit 22 to the Registration Statement or the
Company's Annual Report on Form 10-K for the Company's most recent
fiscal year. The Company and each of its subsidiaries have been duly
incorporated and are validly existing as corporations in good standing
under the laws of their respective jurisdictions of incorporation, with
full power and authority (corporate and other) to own and lease their
properties and conduct their respective businesses as described in the
Prospectus; the Company owns all of the outstanding capital stock of
its subsidiaries free and clear of all claims, liens, charges and
encumbrances; the Company and each of its subsidiaries are in
possession of and operating in compliance with all authorizations,
licenses, permits, consents, certificates and orders material to the
conduct of their respective businesses, all of which are valid
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<PAGE> 4
and in full force and effect; the Company and each of its subsidiaries
are duly qualified to do business and in good standing as foreign
corporations in each jurisdiction in which the ownership or leasing of
properties or the conduct of their respective businesses requires such
qualification, except for jurisdictions in which the failure to so
qualify would not have a material adverse effect upon the Company or
the subsidiary; and no proceeding has been instituted in any such
jurisdiction, revoking, limiting or curtailing, or seeking to revoke,
limit or curtail, such power and authority or qualification.
(d) The Company has an authorized and outstanding capital
stock as set forth under the heading "Capitalization" in the
Prospectus; the issued and outstanding shares of Common Stock have been
duly authorized and validly issued, are fully paid and nonassessable,
are duly listed on the Nasdaq National Market, have been issued in
compliance with all federal and state securities laws, were not issued
in violation of or subject to any preemptive rights or other rights to
subscribe for or purchase securities, and conform to the description
thereof contained in the Prospectus. All issued and outstanding shares
of capital stock of each subsidiary of the Company have been duly
authorized and validly issued and are fully paid and nonassessable.
Except as disclosed in or contemplated by the Prospectus and the
financial statements of the Company, and the related notes thereto,
included in the Prospectus, neither the Company nor any subsidiary has
outstanding any options to purchase, or any preemptive rights or other
rights to subscribe for or to purchase, any securities or obligations
convertible into, or any contracts or commitments to issue or sell,
shares of its capital stock or any such options, rights, convertible
securities or obligations. The description of the Company's stock
option, stock bonus and other stock plans or arrangements, and the
options or other rights granted and exercised thereunder, set forth in
the Prospectus accurately and fairly presents the information required
to be shown with respect to such plans, arrangements, options and
rights.
(e) The Common Shares to be sold by the Company have been duly
authorized and, when issued, delivered and paid for in the manner set
forth in this Agreement, will be duly authorized, validly issued, fully
paid and nonassessable, and will conform to the description thereof
contained in the Prospectus. No preemptive rights or other rights to
subscribe for or purchase exist with respect to the issuance and sale
of the Common Shares by the Company pursuant to this Agreement. No
shareholder of the Company has any right which has not been waived to
require the Company to register the sale of any shares owned by such
shareholder under the Act in the public offering contemplated by this
Agreement. No further approval or authority of the shareholders or the
Board of Directors of the Company will be required for the transfer and
sale of the Common Shares to be sold by the Selling Shareholders or the
issuance and sale of the Common Shares to be sold by the Company as
contemplated herein.
(f) The Company has full legal right, power and authority to
enter into this Agreement and perform the transactions contemplated
hereby. This Agreement has been duly authorized, executed and delivered
by the Company and constitutes a valid and binding obligation of the
Company in accordance with its terms. The making and performance of
this Agreement by the Company and the consummation of the transactions
herein contemplated will not violate any provisions of the articles or
certificate of incorporation or bylaws, or other organizational
documents, of the Company or any of its subsidiaries, and will not
conflict with, result in the breach or violation of, or constitute,
either by itself or upon notice or the passage of time or both, a
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<PAGE> 5
default under any agreement, mortgage, deed of trust, lease, franchise,
license, indenture, permit or other instrument to which the Company or
any of its subsidiaries is a party or by which the Company or any of
its subsidiaries or any of its respective properties may be bound or
affected, any statute or any authorization, judgment, decree, order,
rule or regulation of any court or any regulatory body, administrative
agency or other governmental body applicable to the Company or any of
its subsidiaries or any of its respective properties. No consent,
approval, authorization or other order of any court, regulatory body,
administrative agency or other governmental body is required for the
execution and delivery of this Agreement or the consummation of the
transactions contemplated by this Agreement, except for compliance with
the Act, the Blue Sky laws applicable to the public offering of the
Common Shares by the several Underwriters and the clearance of such
offering with the National Association of Securities Dealers, Inc.
(the "NASD").
(g) Ernst & Young LLP and Price Waterhouse LLP, each of which
have expressed their opinion with respect to the financial statements
and schedules filed with the Commission as a part of the Registration
Statement and included in the Prospectus and in the Registration
Statement, are independent accountants as required by the Act and the
Rules and Regulations.
(h) The financial statements and schedules of the Company and
DCD Corporation ("DCD"), and the related notes thereto, included in the
Registration Statement and the Prospectus present fairly the financial
position of the Company and DCD as of the respective dates of such
financial statements and schedules, and the results of operations and
changes in financial position of the Company and DCD for the respective
periods covered thereby. Such statements, schedules and related notes
have been prepared in accordance with generally accepted accounting
principles applied on a consistent basis as certified by the
independent accountants named in subsection 2(g). No other financial
statements or schedules are required to be included in the Registration
Statement. The selected financial data set forth in the Prospectus
under the captions "Capitalization" and "Selected Financial Data"
fairly present the information set forth therein on the basis stated in
the Registration Statement.
(i) Except as disclosed in the Prospectus, and except as to
defaults which individually or in the aggregate would not be material
to the Company, neither the Company nor any of its subsidiaries is in
violation or default of any provision of its articles or certificate of
incorporation or bylaws, or other organizational documents, or is in
breach of or default with respect to any provision of any agreement,
judgment, decree, order, mortgage, deed of trust, lease, franchise,
license, indenture, permit or other instrument to which it is a party
or by which it or any of its properties are bound; and there does not
exist any state of facts which constitutes an event of default on the
part of the Company or any such subsidiary as defined in such documents
or which, with notice or lapse of time or both, would constitute such
an event of default.
(j) There are no contracts or other documents required to be
described in the Registration Statement or to be filed as exhibits to
the Registration Statement by the Act or by the Rules and Regulations
or to documents incorporated by reference into the Prospectus which
have not been described or filed as required. The contracts so
described in the Prospectus are accurate and complete; all such
contracts are in full force and effect on the date hereof; and neither
the Company nor any of its subsidiaries, nor to
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<PAGE> 6
the best of the Company's knowledge, any other party is in breach of or
default under any of such contracts.
(k) There are no legal or governmental actions, suits or
proceedings pending or, to the best of the Company's knowledge,
threatened to which the Company or any of its subsidiaries is or may be
a party or of which property owned or leased by the Company or any of
its subsidiaries is or may be the subject, or related to environmental
or discrimination matters, which actions, suits or proceedings might,
individually or in the aggregate, prevent or adversely affect the
transactions contemplated by this Agreement or result in a material
adverse change in the condition (financial or otherwise), properties,
business, results of operations or prospects of the Company and its
subsidiaries; and no labor disturbance by the employees of the Company
or any of its subsidiaries exists or is imminent which might be
expected to affect adversely such condition, properties, business,
results of operations or prospects. Neither the Company nor any of its
subsidiaries is a party or subject to the provisions of any material
injunction, judgment, decree or order of any court, regulatory body,
administrative agency or other governmental body.
(l) The Company or the applicable subsidiary has good and
marketable title to all the properties and assets reflected as owned in
the financial statements hereinabove described (or elsewhere in the
Prospectus), subject to no lien, mortgage, pledge, charge or
encumbrance of any kind except (i) those, if any, reflected in such
financial statements (or elsewhere in the Prospectus), or (ii) those
which are not material in amount and do not adversely affect the use
made and proposed to be made of such property by the Company and its
subsidiaries. The Company or the applicable subsidiary holds its leased
properties under valid and binding leases, with such exceptions as are
not materially significant in relation to the business of the Company.
Except as disclosed in the Prospectus, the Company owns or leases all
such properties as are necessary to its operations as now conducted or
as proposed to be conducted.
(m) Since the respective dates as of which information is
given in the Registration Statement and Prospectus, and except as
described in or specifically contemplated by the Prospectus: (i) the
Company and its subsidiaries have not incurred any material liabilities
or obligations, indirect, direct or contingent, or entered into any
material verbal or written agreement or other transaction which is not
in the ordinary course of business or which could result in a material
reduction in the future earnings of the Company and its subsidiaries;
(ii) the Company and its subsidiaries have not sustained any material
loss or interference with their respective businesses or properties
from fire, flood, windstorm, accident or other calamity, whether or not
covered by insurance; (iii) the Company has not paid or declared any
dividends or other distributions with respect to its capital stock and
the Company and its subsidiaries are not in default in the payment of
principal or interest on any outstanding debt obligations; (iv) there
has not been any change in the capital stock (other than upon the sale
of the Common Shares hereunder and upon the exercise of options and
warrants described in the Registration Statement) or indebtedness
material to the Company and its subsidiaries (other than in the
ordinary course of business); and (v) there has not been any material
adverse change in the condition (financial or otherwise), business,
properties, results of operations or prospects of the Company and its
subsidiaries.
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<PAGE> 7
(n) Except as disclosed in or specifically contemplated by the
Prospectus, the Company and its subsidiaries have sufficient
trademarks, trade names, patent rights, mask works, copyrights,
licenses, approvals and governmental authorizations to conduct their
businesses as now conducted; the expiration of any trademarks, trade
names, patent rights, mask works, copyrights, licenses, approvals or
governmental authorizations would not have a material adverse effect on
the condition (financial or otherwise), business, results of operations
or prospects of the Company or its subsidiaries; and the Company has no
knowledge of any material infringement by it or its subsidiaries of
trademark, trade name rights, patent rights, mask works, copyrights,
licenses, trade secret or other similar rights of others, and there is
no claim being made against the Company or its subsidiaries regarding
trademark, trade name, patent, mask work, copyright, license, trade
secret or other infringement which could have a material adverse effect
on the condition (financial or otherwise), business, results of
operations or prospects of the Company and its subsidiaries.
(o) The Company has not been advised, and has no reason to
believe, that either it or any of its subsidiaries is not conducting
business in compliance with all applicable laws, rules and regulations
of the jurisdictions in which it is conducting business, including,
without limitation, all applicable local, state and federal
environmental laws and regulations; except where failure to be so in
compliance would not materially adversely affect the condition
(financial or otherwise), business, results of operations or prospects
of the Company and its subsidiaries.
(p) The Company and its subsidiaries have filed all necessary
federal, state and foreign income and franchise tax returns and have
paid all taxes shown as due thereon; and the Company has no knowledge
of any tax deficiency which has been or might be asserted or threatened
against the Company or its subsidiaries which could materially and
adversely affect the business, operations or properties of the Company
and its subsidiaries.
(q) The Company is not an "investment company" within the
meaning of the Investment Company Act of 1940, as amended.
(r) The Company has not distributed and will not distribute
prior to the First Closing Date any offering material in connection
with the offering and sale of the Common Shares other than the
Prospectus, the Registration Statement and the other materials
permitted by the Act.
(s) Each of the Company and its subsidiaries maintain
insurance of the types and in the amounts generally deemed adequate for
its business, including, but not limited to, insurance covering real
and personal property owned or leased by the Company and its
subsidiaries against theft, damage, destruction, acts of vandalism and
all other risks customarily insured against, all of which insurance is
in full force and effect.
(t) Neither the Company nor any of its subsidiaries has at any
time during the last five years (i) made any unlawful contribution to
any candidate for foreign office, or failed to disclose fully any
contribution in violation of law, or (ii) made any payment to any
federal or state governmental officer or official, or other person
charged with similar public or quasi-public duties, other than payments
required or permitted by the laws of the United States or any
jurisdiction thereof.
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<PAGE> 8
(u) The Company has not taken and will not take, directly or
indirectly, any action designed to or that might be reasonably expected
to cause or result in stabilization or manipulation of the price of the
Common Stock to facilitate the sale or resale of the Common Shares.
SECTION 3. Representations, Warranties and Covenants of the
Selling Shareholders.
(a) Each of the Selling Shareholders represents and warrants
to, and agrees with, the several Underwriters that:
(i) Such Selling Shareholder has, and on the First
Closing Date and the Second Closing Date (each of which terms
is hereinafter defined below) hereinafter mentioned will have,
good and marketable title to the Common Shares proposed to be
sold by such Selling Shareholder hereunder on such Closing
Date and full right, power and authority to enter into this
Agreement and to sell, assign, transfer and deliver such
Common Shares hereunder, free and clear of all voting trust
arrangements, liens, encumbrances, equities, security
interests, restrictions and claims whatsoever; and upon
delivery of and payment for such Common Shares hereunder, the
Underwriters will acquire good and marketable title thereto,
free and clear of all liens, encumbrances, equities, claims,
restrictions, security interests, voting trusts or other
defects of title whatsoever.
(ii) Such Selling Shareholder has executed and
delivered a Power of Attorney and caused to be executed and
delivered on his behalf a Custody Agreement (hereinafter
collectively referred to as the "Shareholders Agreement") and
in connection herewith such Selling Shareholder further
represents, warrants and agrees that such Selling Shareholder
has deposited in custody, under the Shareholders Agreement,
with the agent named therein (the "Agent") as custodian,
certificates in negotiable form for the Common Shares to be
sold hereunder by such Selling Shareholder, for the purpose of
further delivery pursuant to this Agreement. Such Selling
Shareholder agrees that the Common Shares to be sold by such
Selling Shareholder on deposit with the Agent are subject to
the interests of the Company and the Underwriters, that the
arrangements made for such custody are to that extent
irrevocable, and that the obligations of such Selling
Shareholder hereunder shall not be terminated, except as
provided in this Agreement or in the Shareholders Agreement,
by any act of such Selling Shareholder, by operation of law,
by the death or incapacity of such Selling Shareholder or by
the occurrence of any other event. If the Selling Shareholder
should die or become incapacitated, or if any other event
should occur, before the delivery of the Common Shares
hereunder, the documents evidencing Common Shares then on
deposit with the Agent shall be delivered by the Agent in
accordance with the terms and conditions of this Agreement as
if such death, incapacity or other event had not occurred,
regardless of whether or not the Agent shall have received
notice thereof. This Agreement and the Shareholders Agreement
have been duly executed and delivered by or on behalf of such
Selling Shareholder and the form of such Shareholders
Agreement has been delivered to you.
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<PAGE> 9
(iii) The performance of this Agreement and the
Shareholders Agreement and the consummation of the
transactions contemplated hereby and by the Shareholders
Agreement will not result in a breach or violation by such
Selling Shareholder of any of the terms or provisions of, or
constitute a default by such Selling Shareholder under, any
indenture, mortgage, deed of trust, trust (constructive or
other), loan agreement, lease, franchise, license or other
agreement or instrument to which such Selling Shareholder is a
party or by which such Selling Shareholder or any of its
properties is bound, any statute, or any judgment, decree,
order, rule or regulation of any court or governmental agency
or body applicable to such Selling Shareholder or any of its
properties.
(iv) Such Selling Shareholder has not taken and will
not take, directly or indirectly, any action designed to or
which has constituted or which might reasonably be expected to
cause or result in stabilization or manipulation of the price
of any security of the Company to facilitate the sale or
resale of the Common Shares.
(v) Each Preliminary Prospectus and the Prospectus,
insofar as it has related to such Selling Shareholder has
conformed in all material respects to the requirements of the
Act and the Rules and Regulations and has not included any
untrue statement of a material fact or omitted to state a
material fact necessary to make the statements therein not
misleading in light of the circumstances under which they were
made; and neither the Registration Statement nor the
Prospectus, nor any amendment or supplement thereto, as it
relates to such Selling Shareholder, will include any untrue
statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the
statements therein not misleading.
(vi) Such Selling Shareholder is not aware that any
of the representations or warranties set forth in Section 2
above is untrue or inaccurate in any material respect.
(b) Each of the Selling Shareholders agrees with the Company
and the Underwriters not to offer to sell, sell or contract to sell or
otherwise dispose of any shares of Common Stock or securities
convertible into or exchangeable for any shares of Common Stock, for a
period of 90 days after the first date that any of the Common Shares
are released by you for sale to the public, without the prior written
consent of either Montgomery Securities or each of the Representatives,
which consent may be witheld at the sole discretion of Montgomery or
each of the Representatives, as the case may be.
SECTION 4. Representations and Warranties of the Underwriters. The
Representatives, on behalf of the several Underwriters, represent and warrant to
the Company and to the Selling Shareholders that the information set forth (i)
on the cover page of the Prospectus with respect to price, underwriting
discounts and commissions and terms of offering and (ii) under "Underwriting" in
the Prospectus was furnished to the Company by and on behalf of the Underwriters
for use in connection with the preparation of the Registration Statement and the
Prospectus and is correct in all material respects. The Representatives
represents and warrants that they have been authorized by each of the other
Underwriters as the Representatives to enter into this Agreement on its behalf
and to act for it in the manner herein provided.
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<PAGE> 10
SECTION 5. Purchase, Sale and Delivery of Common Shares. On the basis
of the representations, warranties and agreements herein contained, but subject
to the terms and conditions herein set forth, the Company agrees to issue and
sell to the Underwriters the Firm Common Shares. The Underwriters agree,
severally and not jointly, to purchase from the Company the number of Firm
Common Shares described below. The purchase price per share to be paid by the
several Underwriters to the Company shall be $___ per share.
The obligation of each Underwriter to the Company shall be to purchase from the
Company that number of full shares which (as nearly as practicable, as
determined by you) bears to 2,00,000 the same proportion as the number of shares
set forth opposite the name of such Underwriter in Schedule A hereto bears to
the total number of Firm Common Shares.
Delivery of certificates for the Firm Common Shares to be purchased by the
Underwriters and payment therefor shall be made at the offices of Montgomery
Securities, 600 Montgomery Street, San Francisco, California (or such other
place as may be agreed upon by the Company and the Representatives) at such time
and date, not later than the third (or, if the Firm Common Shares are priced, as
contemplated by Rule 15c6-1(c) under the Securities Exchange Act of 1934, after
4:30 P.M. Washington D.C. time, the fourth) full business day following the
first date that any of the Common Shares are released by you for sale to the
public, as you shall designate by at least 48 hours prior notice to the Company
(or at such other time and date, not later than one week after such third or
fourth, as the case may be, full business day as may be agreed upon by the
Company and the Representatives) (the "First Closing Date"); provided, however,
that if the Prospectus is at any time prior to the First Closing Date
recirculated to the public, the First Closing Date shall occur upon the later of
the third or fourth, as the case may be, full business day following the first
date that any of the Common Shares are released by you for sale to the public or
the date that is 48 hours after the date that the Prospectus has been so
recirculated.
Delivery of certificates for the Firm Common Shares shall be made by or on
behalf of the Company to you, for the respective accounts of the Underwriters
against payment by you, for the accounts of the several Underwriters, of the
purchase price therefor by a wire transfer of immediately available funds to an
account designated by the Company. The certificates for the Firm Common Shares
shall be registered in such names and denominations as you shall have requested
at least two full business days prior to the First Closing Date, and shall be
made available for checking and packaging on the business day preceding the
First Closing Date at a location in New York, New York, as may be designated by
you. Time shall be of the essence, and delivery at the time and place specified
in this Agreement is a further condition to the obligations of the Underwriters.
In addition, on the basis of the representations, warranties and agreements
herein contained, but subject to the terms and conditions herein set forth, the
Company and the Selling Shareholders hereby grants an option to the several
Underwriters to purchase, severally and not jointly, up to an aggregate of
300,000 Optional Common Shares at the purchase price per share to be paid for
the Firm Common Shares, for use solely in covering any over-allotments made by
you for the account of the Underwriters in the sale and distribution of the Firm
Common Shares. The option granted hereunder may be exercised at any time (but
not more than once) within 30 days after the first date that any of the Common
Shares are released by you for sale to the public, upon notice by you to the
Company and the Selling Shareholders setting forth the aggregate number of
Optional Common Shares as to which the Underwriters are exercising the option,
the names and denominations in which the certificates for such shares are to be
registered and the time and
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<PAGE> 11
place at which such certificates will be delivered. Such time of delivery (which
may not be earlier than the First Closing Date), being herein referred to as the
"Second Closing Date," shall be determined by you, but if at any time other than
the First Closing Date shall not be earlier than three nor later than five full
business days after delivery of such notice of exercise. The number of Optional
Common Shares to be purchased by each Underwriter shall be determined by
multiplying the number of Optional Common Shares to be sold by the Company and
the Selling Shareholders pursuant to such notice of exercise by a fraction, the
numerator of which is the number of Firm Common Shares to be purchased by such
Underwriter as set forth opposite its name in Schedule A and the denominator of
which is 2,000,000 (subject to such adjustments to eliminate any fractional
share purchases as you in your discretion may make). Certificates for the
Optional Common Shares will be made available for checking and packaging on the
business day preceding the Second Closing Date at a location in New York, New
York, as may be designated by you. The manner of payment for and delivery of the
Optional Common Shares shall be the same as for the Firm Common Shares purchased
from the Company as specified in the two preceding paragraphs. At any time
before lapse of the option, you may cancel such option by giving written notice
of such cancellation to the Company and the Selling Shareholders. If the option
is canceled or expires unexercised in whole or in part, the Company will
deregister under the Act the number of Option Shares as to which the option has
not been exercised.
You have advised the Company and the Selling Shareholders that each Underwriter
has authorized you to accept delivery of its Common Shares, to make payment and
to receipt therefor. You, individually and not as the Representatives of the
Underwriters, may (but shall not be obligated to) make payment for any Common
Shares to be purchased by any Underwriter whose funds shall not have been
received by you by the First Closing Date or the Second Closing Date, as the
case may be, for the account of such Underwriter, but any such payment shall not
relieve such Underwriter from any of its obligations under this Agreement.
Subject to the terms and conditions hereof, the Underwriters propose to make a
public offering of their respective portions of the Common Shares as soon after
the effective date of the Registration Statement as in the judgment of the
Representatives is advisable and at the public offering price set forth on the
cover page of and on the terms set forth in the final prospectus, if one is
used, or on the first page of the Term Sheet, if one is used.
On or prior to 4:00 p.m. San Francisco time on the day after the date of this
Agreement, the Company shall deliver to the Underwriters copies of the
Prospectus at such places and in such quantities that they shall have requested.
SECTION 6. Covenants of the Company. The Company covenants and agrees
that:
(a) The Company will use its best efforts to cause the
Registration Statement and any amendment thereof, if not effective at
the time and date that this Agreement is executed and delivered by the
parties hereto, to become effective. If the Registration Statement has
become or becomes effective pursuant to Rule 430A of the Rules and
Regulations, or the filing of the Prospectus is otherwise required
under Rule 424(b) of the Rules and Regulations, the Company will file
the Prospectus, properly completed, pursuant to the applicable
paragraph of Rule 424(b) of the Rules and Regulations within the time
period prescribed and will provide evidence satisfactory to you of such
timely filing. The Company will promptly advise you in writing (i) of
the receipt of any comments of the Commission, (ii) of any request of
the Commission for amendment of
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<PAGE> 12
or supplement to the Registration Statement (either before or after it
becomes effective), any Preliminary Prospectus or the Prospectus or for
additional information, (iii) when the Registration Statement shall
have become effective, and (iv) of the issuance by the Commission of
any stop order suspending the effectiveness of the Registration
Statement or of the institution of any proceedings for that purpose. If
the Commission shall enter any such stop order at any time, the Company
will use its best efforts to obtain the lifting of such order at the
earliest possible moment. The Company will not file any amendment or
supplement to the Registration Statement (either before or after it
becomes effective), any Preliminary Prospectus or the Prospectus of
which you have not been furnished with a copy a reasonable time prior
to such filing or to which you reasonably object or which is not in
compliance with the Act and the Rules and Regulations.
(b) The Company will prepare and file with the Commission,
promptly upon your request, any amendments or supplements to the
Registration Statement or the Prospectus which in your judgment may be
necessary or advisable to enable the several Underwriters to continue
the distribution of the Common Shares and will use its best efforts to
cause the same to become effective as promptly as possible. The Company
will fully and completely comply with the provisions of Rule 430A of
the Rules and Regulations with respect to information omitted from the
Registration Statement in reliance upon such Rule.
(c) If at any time within the nine-month period referred to in
Section 10(a)(3) of the Act during which a prospectus relating to the
Common Shares is required to be delivered under the Act any event
occurs, as a result of which the Prospectus, including any amendments
or supplements, would include an untrue statement of a material fact,
or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading, or if it is
necessary at any time to amend the Prospectus, including any amendments
or supplements, to comply with the Act or the Rules and Regulations,
the Company will promptly advise you thereof and will promptly prepare
and file with the Commission, at its own expense, an amendment or
supplement which will correct such statement or omission or an
amendment or supplement which will effect such compliance and will use
its best efforts to cause the same to become effective as soon as
possible; and, in case any Underwriter is required to deliver a
prospectus after such nine-month period, the Company upon request, but
at the expense of such Underwriter, will promptly prepare such
amendment or amendments to the Registration Statement and such
Prospectus or Prospectuses as may be necessary to permit compliance
with the requirements of Section 10(a)(3) of the Act.
(d) As soon as practicable, but not later than 45 days after
the end of the first quarter ending after one year following the
"effective date of the Registration Statement" (as defined in Rule
158(c) of the Rules and Regulations), the Company will make generally
available to its security holders an earnings statement (which need not
be audited) covering a period of 12 consecutive months beginning after
the effective date of the Registration Statement which will satisfy the
provisions of the last paragraph of Section 11(a) of the Act.
(e) During such period as a prospectus is required by law to
be delivered in connection with sales by an Underwriter or dealer, the
Company, at its expense, but only for the nine-month period referred to
in Section 10(a)(3) of the Act, will furnish to you
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<PAGE> 13
and the Selling Shareholders or mail to your order copies of the
Registration Statement, the Prospectus, the Preliminary Prospectus and
all amendments and supplements to any such documents in each case as
soon as available and in such quantities as you and the Selling
Shareholders may request, for the purposes contemplated by the Act.
(f) The Company shall cooperate with you and your counsel in
order to qualify or register the Common Shares for sale under (or
obtain exemptions from the application of) the Blue Sky laws of such
jurisdictions as you designate, will comply with such laws and will
continue such qualifications, registrations and exemptions in effect so
long as reasonably required for the distribution of the Common Shares.
The Company shall not be required to qualify as a foreign corporation
or to file a general consent to service of process in any such
jurisdiction where it is not presently qualified or where it would be
subject to taxation as a foreign corporation. The Company will advise
you promptly of the suspension of the qualification or registration of
(or any such exemption relating to) the Common Shares for offering,
sale or trading in any jurisdiction or any initiation or threat of any
proceeding for any such purpose, and in the event of the issuance of
any order suspending such qualification, registration or exemption, the
Company, with your cooperation, will use its best efforts to obtain the
withdrawal thereof.
(g) During the period of five years hereafter, the Company
will furnish to the Representatives and, upon request of the
Representatives, to each of the other Underwriters: (i) as soon as
practicable after the end of each fiscal year, copies of the Annual
Report of the Company containing the balance sheet of the Company as of
the close of such fiscal year and statements of income, shareholders'
equity and cash flows for the year then ended and the opinion thereon
of the Company's independent public accountants; (ii) as soon as
practicable after the filing thereof, copies of each proxy statement,
Annual Report on Form 10-K, Quarterly Report on Form 10-Q, Report on
Form 8-K or other report filed by the Company with the Commission, the
NASD or any securities exchange; and (iii) as soon as available, copies
of any report or communication of the Company mailed generally to
holders of its Common Stock.
(h) During the period of 90 days after the first date that any
of the Common Shares are released by you for sale to the public,
without the prior written consent of either Montgomery Securities or
each of the Representatives (which consent may be witheld at the sole
discretion of Montgomery Securities or each of the Representatives, as
the case may be), the Company will not other than pursuant to
outstanding stock options and warrants disclosed in the Prospectus
issue, offer, sell, grant options to purchase or otherwise dispose of
any of the Company's equity securities or any other securities
convertible into or exchangeable with its Common Stock or other equity
security.
(i) The Company will apply the net proceeds of the sale of the
Common Shares sold by it substantially in accordance with its
statements under the caption "Use of Proceeds" in the Prospectus.
(j) The Company will use its best efforts to qualify or
register its Common Stock for sale in non-issuer transactions under (or
obtain exemptions from the application of) the Blue Sky laws of the
State of California (and thereby permit market making transactions and
secondary trading in the Company's Common Stock in
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<PAGE> 14
California), will comply with such Blue Sky laws and will continue such
qualifications, registrations and exemptions in effect for a period of
five years after the date hereof.
(k) The Company will use its best efforts to designate the
Common Shares to be issued and sold by the Company for quotation as a
national market security on the NASD Automated Quotation System.
You, on behalf of the Underwriters, may, in your sole
discretion, waive in writing the performance by the Company of any one or more
of the foregoing covenants or extend the time for their performance.
SECTION 7. Payment of Expenses. Whether or not the transactions
contemplated hereunder are consummated or this Agreement becomes effective or is
terminated, the Company and, unless otherwise paid by the Company, the Selling
Shareholders agree in such proportions as they may agree upon among themselves
to pay all costs, fees and expenses incurred in connection with the Company's
performance of its obligations hereunder and in connection with the transactions
contemplated hereby, including without limiting the generality of the foregoing,
(i) all expenses incident to the issuance and delivery of the Common Shares
(including all printing and engraving costs), (ii) all fees and expenses of the
registrar and transfer agent of the Common Stock, (iii) all necessary issue,
transfer and other stamp taxes in connection with the issuance and sale of the
Common Shares to the Underwriters, (iv) all fees and expenses of the Company's
counsel and the Company's independent accountants, including, without
limitation, the independent accountants of any of the Company's Subsidiaries,
(v) all costs and expenses incurred in connection with the preparation,
printing, filing, shipping and distribution of the Registration Statement, each
Preliminary Prospectus and the Prospectus (including all exhibits and financial
statements) and all amendments and supplements provided for herein, this
Agreement, the Agreement Among Underwriters, the Selected Dealers Agreement, the
Underwriters' Questionnaire, the Underwriters' Power of Attorney and the Blue
Sky memorandum, (vi) all filing fees, attorneys' fees and expenses incurred by
the Company or the Underwriters in connection with qualifying or registering (or
obtaining exemptions from the qualification or registration of) all or any part
of the Common Shares for offer and sale under the Blue Sky laws, (vii) the
filing fee of the National Association of Securities Dealers, Inc., and (viii)
all other fees, costs and expenses referred to in Item 14 of the Registration
Statement. The Underwriters may deem the Company to be the primary obligor with
respect to all costs, fees and expenses to be paid by the Company and by the
Selling Shareholders. Except as provided in this Section 7, Section 9 and
Section 11 hereof, the Underwriters shall pay all of their own expenses,
including the fees and disbursements of their counsel (excluding those relating
to qualification, registration or exemption under the Blue Sky laws and the Blue
Sky memorandum referred to above).
The Selling Shareholders will pay (directly or by reimbursement) all fees and
expenses incident to the performance of their obligations under this Agreement
which are not otherwise specifically provided for herein, including but not
limited to (i) any fees and expenses of counsel for such Selling Shareholders;
(ii) any fees and expenses of the Agent; and (iii) all expenses and taxes
incident to the sale and delivery of the Common Shares to be sold by such
Selling Shareholders to the Underwriters hereunder.
SECTION 8. Conditions of the Obligations of the Underwriters. The
obligations of the several Underwriters to purchase and pay for the Firm Common
Shares on the First Closing Date and the Optional Common Shares on the Second
Closing Date shall be subject to the accuracy of
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<PAGE> 15
the representations and warranties on the part of the Company and the Selling
Shareholders herein set forth as of the date hereof and as of the First Closing
Date or the Second Closing Date, as the case may be, to the accuracy of the
statements of Company officers and the Selling Shareholders made pursuant to the
provisions hereof, to the performance by the Company and the Selling
Shareholders of their respective obligations hereunder, and to the following
additional conditions:
(a) The Registration Statement shall have become effective not
later than 5:00 P.M. (or, in the case of a registration statement filed
pursuant to Rule 462(b) of the Rules and Regulations relating to the
Common Shares, not later than 10 P.M.), Washington, D.C. Time, on the
date of this Agreement, or at such later time as shall have been
consented to by you; if the filing of the Prospectus, or any supplement
thereto, is required pursuant to Rule 424(b) of the Rules and
Regulations, the Prospectus shall have been filed in the manner and
within the time period required by Rule 424(b) of the Rules and
Regulations; and prior to such Closing Date, no stop order suspending
the effectiveness of the Registration Statement shall have been issued
and no proceedings for that purpose shall have been instituted or shall
be pending or, to the knowledge of the Company, the Selling
Shareholders or you, shall be contemplated by the Commission; and any
request of the Commission for inclusion of additional information in
the Registration Statement, or otherwise, shall have been complied with
to your satisfaction.
(b) You shall be satisfied that since the respective dates as
of which information is given in the Registration Statement and
Prospectus, (i) there shall not have been any change in the capital
stock other than pursuant to the exercise of outstanding options and
warrants disclosed in the Prospectus of the Company or any of its
subsidiaries or any material change in the indebtedness (other than in
the ordinary course of business) of the Company or any of its
subsidiaries, (ii) except as set forth or contemplated by the
Registration Statement or the Prospectus, no material verbal or written
agreement or other transaction shall have been entered into by the
Company or any of its subsidiaries, which is not in the ordinary course
of business or which could result in a material reduction in the future
earnings of the Company and its subsidiaries, (iii) no loss or damage
(whether or not insured) to the property of the Company or any of its
subsidiaries shall have been sustained which materially and adversely
affects the condition (financial or otherwise), business, results of
operations or prospects of the Company and its subsidiaries, (iv) no
legal or governmental action, suit or proceeding affecting the Company
or any of its subsidiaries which is material to the Company and its
subsidiaries or which affects or may affect the transactions
contemplated by this Agreement shall have been instituted or
threatened, and (v) there shall not have been any material change in
the condition (financial or otherwise), business, management, results
of operations or prospects of the Company and its subsidiaries which
makes it impractical or inadvisable in the judgment of the
Representatives to proceed with the public offering or purchase the
Common Shares as contemplated hereby.
(c) There shall have been furnished to you, as Representatives
of the Underwriters, on each Closing Date, in form and substance
satisfactory to you, except as otherwise expressly provided below:
(i) An opinion of Cooley Godward LLP, counsel for the
Company and the Selling Shareholders, addressed to the
Underwriters and dated the First Closing Date, or the Second
Closing Date, as the case may be, to the effect that:
[TO BE NEGOTIATED]
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<PAGE> 16
(1) Each of the Company and its subsidiaries
has been duly incorporated and is validly existing as
a corporation in good standing under the laws of its
jurisdiction of incorporation, is duly qualified to
do business as a foreign corporation and is in good
standing in all other jurisdictions where the
ownership or leasing of properties or the conduct of
its business requires such qualification, except for
jurisdictions in which the failure to so qualify
would not have a material adverse effect on the
Company and its subsidiaries, and has full corporate
power and authority to own its properties and conduct
its business as described in the Registration
Statement;
(2) The authorized, issued and outstanding
capital stock of the Company is as set forth under
the caption "Capitalization" in the Prospectus; all
necessary and proper corporate proceedings have been
taken in order to authorize validly such authorized
Common Stock; all outstanding shares of Common Stock
(including the Firm Common Shares and any Optional
Common Shares) have been duly and validly issued, are
fully paid and nonassessable, have been issued in
compliance with federal and state securities laws,
were not issued in violation of or subject to any
preemptive rights or other rights to subscribe for or
purchase any securities and conform to the
description thereof contained in the Prospectus;
without limiting the foregoing, there are no
preemptive or other rights to subscribe for or
purchase any of the Common Shares to be sold by the
Company hereunder;
(3) All of the issued and outstanding shares
of the Company's subsidiaries have been duly and
validly authorized and issued, are fully paid and
nonassessable and are owned beneficially by the
Company free and clear of all liens, encumbrances,
equities, claims, security interests, voting trusts
or other defects of title whatsoever;
(4) The certificates evidencing the Common
Shares to be delivered hereunder are in due and
proper form under California law, and when duly
countersigned by the Company's transfer agent and
registrar, and delivered to you or upon your order
against payment of the agreed consideration therefor
in accordance with the provisions of this Agreement,
the Common Shares represented thereby will be duly
authorized and validly issued, fully paid and
nonassessable, will not have been issued in violation
of or subject to any preemptive rights or other
rights to subscribe for or purchase securities and
will conform in all respects to the description
thereof contained in the Prospectus;
(5) Except as disclosed in or specifically
contemplated by the Prospectus, to the best of such
counsel's knowledge, there are no outstanding
options, warrants or other rights calling for the
issuance of, and no commitments, plans or
arrangements to issue, any shares of capital stock of
the Company or any security convertible into or
exchangeable for capital stock of the Company;
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<PAGE> 17
(6) (a) The Registration Statement has
become effective under the Act, and, to the best of
such counsel's knowledge, no stop order suspending
the effectiveness of the Registration Statement or
preventing the use of the Prospectus has been issued
and no proceedings for that purpose have been
instituted or are pending or contemplated by the
Commission; any required filing of the Prospectus and
any supplement thereto pursuant to Rule 424(b) of the
Rules and Regulations has been made in the manner and
within the time period required by such Rule 424(b);
(b) The Registration Statement, the
Prospectus and each amendment or supplement
thereto (except for the financial statements
and schedules included therein as to which
such counsel need express no opinion) comply
as to form in all material respects with the
requirements of the Act and the Rules and
Regulations;
(c) To the best of such counsel's
knowledge, there are no franchises, leases,
contracts, agreements or documents of a
character required to be disclosed in the
Registration Statement or Prospectus or to
be filed as exhibits to the Registration
Statement or to any documents incorporated
by reference in the Prospectus which are not
disclosed or filed, as required;
(d) To the best of such counsel's
knowledge, there are no legal or
governmental actions, suits or proceedings
pending or threatened against the Company
which are required to be described in the
Prospectus which are not described as
required; and
(e) The documents incorporated by
reference in the Prospectus (except for any
financial statements and schedules included
in such documents as to which such counsel
need express no opinion), when they were
filed with the Commission, complied as to
form in all material respects with the
requirements of the Exchange Act and the
rules and regulations of the Commission
thereunder; and such counsel has no reason
to believe that any of such documents
(except for any financial statements and
schedules included in such documents as to
which such counsel need express no opinion),
when they were so filed, contained an untrue
statement of a material fact or omitted to
state a material fact necessary in order to
make the statements therein, in the light of
the circumstances under which they were made
when such documents were so filed, not
misleading.
(7) The Company has full right, power and
authority to enter into this Agreement and to sell
and deliver the Common Shares to be sold by it to the
several Underwriters; this Agreement has been duly
and validly authorized by all necessary corporate
action by the Company,
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<PAGE> 18
has been duly and validly executed and delivered by
and on behalf of the Company, and is a valid and
binding agreement of the Company in accordance with
its terms, except as enforceability may be limited by
general equitable principles, bankruptcy, insolvency,
reorganization, moratorium or other laws affecting
creditors' rights generally and except as to those
provisions relating to indemnity or contribution for
liabilities arising under the Act as to which no
opinion need be expressed; and no approval,
authorization, order, consent, registration, filing,
qualification, license or permit of or with any
court, regulatory, administrative or other
governmental body is required for the execution and
delivery of this Agreement by the Company or the
consummation of the transactions contemplated by this
Agreement, except such as have been obtained and are
in full force and effect under the Act and such as
may be required under applicable Blue Sky laws in
connection with the purchase and distribution of the
Common Shares by the Underwriters and the clearance
of such offering with the NASD;
(8) The execution and performance of this
Agreement and the consummation of the transactions
herein contemplated will not conflict with, result in
the breach of, or constitute, either by itself or
upon notice or the passage of time or both, a default
under, any agreement, mortgage, deed of trust, lease,
franchise, license, indenture, permit or other
instrument known to such counsel to which the Company
or any of its subsidiaries is a party or by which the
Company or any of its subsidiaries or any of its or
their property may be bound or affected which is
material to the Company and its subsidiaries, or
violate any of the provisions of the articles or
certificate of incorporation or bylaws, or other
organizational documents, of the Company or any of
its subsidiaries or, so far as is known to such
counsel, violate any statute, judgment, decree,
order, rule or regulation of any court or
governmental body having jurisdiction over the
Company or any of its subsidiaries or any of its or
their property;
(9) Neither the Company nor any subsidiary
is in violation of its articles or certificate of
incorporation or bylaws, or other organizational
documents, or to the best of such counsel's
knowledge, in breach of or default with respect to
any provision of any agreement, mortgage, deed of
trust, lease, franchise, license, indenture, permit
or other instrument known to such counsel to which
the Company or any such subsidiary is a party or by
which it or any of its properties may be bound or
affected, except where such default would not
materially adversely affect the Company and its
subsidiaries; and, to the best of such counsel's
knowledge, the Company and its subsidiaries are in
compliance with all laws, rules, regulations,
judgments, decrees, orders and statutes of any court
or jurisdiction to which they are subject, except
where noncompliance would not materially adversely
affect the Company and its subsidiaries;
(10) To the best of such counsel's
knowledge, no holders of securities of the Company
have rights which have not been waived to
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<PAGE> 19
the registration of shares of Common Stock or other
securities, because of the filing of the Registration
Statement by the Company or the offering contemplated
hereby;
(11) To the best of such counsel's
knowledge, this Agreement and the Shareholders
Agreement have been duly authorized, executed and
delivered by or on behalf of each of the Selling
Shareholders; the Agent has been duly and validly
authorized to act as the custodian of the Common
Shares to be sold by each such Selling Shareholder;
and the performance of this Agreement and the
Shareholders Agreement and the consummation of the
transactions herein contemplated by the Selling
Shareholders will not result in a breach of, or
constitute a default under, any indenture, mortgage,
deed of trust, trust (constructive or other), loan
agreement, lease, franchise, license or other
agreement or instrument to which any of the Selling
Shareholders is a party or by which any of the
Selling Shareholders or any of their properties may
be bound, or violate any statute, judgment, decree,
order, rule or regulation known to such counsel of
any court or governmental body having jurisdiction
over any of the Selling Shareholders or any of their
properties; and to the best of such counsel's
knowledge, no approval, authorization, order or
consent of any court, regulatory body, administrative
agency or other governmental body is required for the
execution and delivery of this Agreement or the
Shareholders Agreement or the consummation by the
Selling Shareholders of the transactions contemplated
by this Agreement, except such as have been obtained
and are in full force and effect under the Act and
such as may be required under the rules of the NASD
and applicable Blue Sky laws;
(12) To the best of such counsel's
knowledge, the Selling Shareholders have full right,
power and authority to enter into this Agreement and
the Shareholders Agreement and to sell, transfer and
deliver the Common Shares to be sold on such Closing
Date by such Selling Shareholders hereunder and good
and marketable title to such Common Shares so sold,
free and clear of all liens, encumbrances, equities,
claims, restrictions, security interests, voting
trusts, or other defects of title whatsoever, has
been transferred to the Underwriters (whom counsel
may assume to be bona fide purchasers) who have
purchased such Common Shares hereunder; and
(13) To the best of such counsel's
knowledge, this Agreement and the Shareholders
Agreement are valid and binding agreements of each of
the Selling Shareholders in accordance with their
terms except as enforceability may be limited by
general equitable principles, bankruptcy, insolvency,
reorganization, moratorium or other laws affecting
creditors' rights generally and except with respect
to those provisions relating to indemnities or
contributions for liabilities under the Act, as to
which no opinion need be expressed.
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<PAGE> 20
(14) No transfer taxes are required to be
paid in connection with the sale and delivery of the
Common Shares to the Underwriters hereunder.
In rendering such opinion, such counsel may rely as to the matters set
forth in paragraphs (11) (12), (13) and (14), on opinions of other
counsel retained by the Selling Shareholders, as to matters of local
law, on opinions of local counsel, and as to matters of fact, on
certificates of the Selling Shareholders and of officers of the Company
and of governmental officials, in which case their opinion is to state
that they are so doing and that the Underwriters are justified in
relying on such opinions or certificates and copies of said opinions or
certificates are to be attached to the opinion. Such counsel shall also
include a statement to the effect that nothing has come to such
counsel's attention that would lead such counsel to believe that either
at the effective date of the Registration Statement or at the
applicable Closing Date the Registration Statement or the Prospectus,
or any such amendment or supplement, contains any untrue statement of a
material fact or omits to state a material fact required to be stated
therein or necessary to make the statements therein not misleading;
(ii) Such opinion or opinions of Venture Law Group, A
Professional Corporation, counsel for the Underwriters dated
the First Closing Date or the Second Closing Date, as the case
may be, with respect to the incorporation of the Company, the
sufficiency of all corporate proceedings and other legal
matters relating to this Agreement, the validity of the Common
Shares, the Registration Statement and the Prospectus and
other related matters as you may reasonably require, and the
Company and the Selling Shareholders shall have furnished to
such counsel such documents and shall have exhibited to them
such papers and records as they may reasonably request for the
purpose of enabling them to pass upon such matters. In
connection with such opinions, such counsel may rely on
representations or certificates of officers of the Company and
governmental officials.
(iii) A certificate of the Company executed by the
Chairman of the Board or President and the chief financial or
accounting officer of the Company, dated the First Closing
Date or the Second Closing Date, as the case may be, to the
effect that:
(1) The representations and warranties of
the Company set forth in Section 2 of this Agreement
are true and correct as of the date of this Agreement
and as of the First Closing Date or the Second
Closing Date, as the case may be, and the Company has
complied with all the agreements and satisfied all
the conditions on its part to be performed or
satisfied on or prior to such Closing Date;
(2) The Commission has not issued any order
preventing or suspending the use of the Prospectus or
any Preliminary Prospectus filed as a part of the
Registration Statement or any amendment thereto; no
stop order suspending the effectiveness of the
Registration Statement has been issued; and to the
best of the knowledge of the respective signers, no
proceedings for that purpose have been instituted or
are pending or contemplated under the Act;
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<PAGE> 21
(3) Each of the respective signers of the
certificate has carefully examined the Registration
Statement and the Prospectus; in his opinion and to
the best of his knowledge, the Registration Statement
and the Prospectus and any amendments or supplements
thereto contain all statements required to be stated
therein regarding the Company and its subsidiaries;
and neither the Registration Statement nor the
Prospectus nor any amendment or supplement thereto
includes any untrue statement of a material fact or
omits to state any material fact required to be
stated therein or necessary to make the statements
therein not misleading;
(4) Since the initial date on which the
Registration Statement was filed, no agreement,
written or oral, transaction or event has occurred
which should have been set forth in an amendment to
the Registration Statement or in a supplement to or
amendment of any prospectus which has not been
disclosed in such a supplement or amendment;
(5) Since the respective dates as of which
information is given in the Registration Statement
and the Prospectus, and except as disclosed in or
contemplated by the Prospectus, there has not been
any material adverse change or a development
involving a material adverse change in the condition
(financial or otherwise), business, properties,
results of operations, management or prospects of the
Company and its subsidiaries; and no legal or
governmental action, suit or proceeding is pending or
threatened against the Company or any of its
subsidiaries which is material to the Company and its
subsidiaries, whether or not arising from
transactions in the ordinary course of business, or
which may adversely affect the transactions
contemplated by this Agreement; since such dates and
except as so disclosed, neither the Company nor any
of its subsidiaries has entered into any verbal or
written agreement or other transaction which is not
in the ordinary course of business or which could
result in a material reduction in the future earnings
of the Company or incurred any material liability or
obligation, direct, contingent or indirect, made any
change in its capital stock, made any material change
in its short-term debt or funded debt or repurchased
or otherwise acquired any of the Company's capital
stock; and the Company has not declared or paid any
dividend, or made any other distribution, upon its
outstanding capital stock payable to shareholders of
record on a date prior to the First Closing Date or
Second Closing Date; and
(6) Since the respective dates as of which
information is given in the Registration Statement
and the Prospectus and except as disclosed in or
contemplated by the Prospectus, the Company and its
subsidiaries have not sustained a material loss or
damage by strike, fire, flood, windstorm, accident or
other calamity (whether or not insured).
(iv) On the First Closing Date or the Second Closing
Date, as the case may be, a certificate, dated such Closing
Date and addressed to you, signed by or
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<PAGE> 22
on behalf of each of the Selling Shareholders to the effect
that the representations and warranties of such Selling
Shareholder in this Agreement are true and correct, as if made
at and as of the First Closing Date or the Second Closing
Date, as the case may be, and such Selling Shareholder has
complied with all the agreements and satisfied all the
conditions on his part to be performed or satisfied prior to
the First Closing Date or the Second Closing Date, as the case
may be.
(v) On the date before this Agreement is executed and
also on the First Closing Date and the Second Closing Date a
letter addressed to you, as Representatives of the
Underwriters, from Ernst & Young LLP, independent accountants,
the first one to be dated the day before the date of this
Agreement, the second one to be dated the First Closing Date
and the third one (in the event of a Second Closing) to be
dated the Second Closing Date, in form and substance
satisfactory to you.
(vi) On or before the First Closing Date, letters
from each of the Selling Shareholders, each holder of 0.25
percent or more of the Company's Common Stock and each
director and officer of the Company, in form and substance
satisfactory to you, confirming that for a period of 90 days
after the first date that any of the Common Shares are
released by you for sale to the public, such person will not
directly or indirectly sell or offer to sell or otherwise
dispose of any shares of Common Stock or any right to acquire
such shares without the prior written consent of either
Montgomery Securities or each of the Representatives, which
consent may be withheld at the sole discretion of Montgomery
Securities or each of the Representatives, as the case may be.
All such opinions, certificates, letters and documents shall be in compliance
with the provisions hereof only if they are satisfactory to you and to Venture
Law Group, A Professional Corporation, counsel for the Underwriters. The Company
shall furnish you with such manually signed or conformed copies of such
opinions, certificates, letters and documents as you request. Any certificate
signed by any officer of the Company and delivered to the Representatives or to
counsel for the Underwriters shall be deemed to be a representation and warranty
by the Company to the Underwriters as to the statements made therein.
If any condition to the Underwriters' obligations hereunder to be satisfied
prior to or at the First Closing Date is not so satisfied, this Agreement at
your election will terminate upon notification by you as Representatives to the
Company and the Selling Shareholders without liability on the part of any
Underwriter or the Company , the Company or the Selling Shareholders except for
the expenses to be paid or reimbursed by the Company and by the Selling
Shareholders pursuant to Sections 7 and 9 hereof and except to the extent
provided in Section 11 hereof.
SECTION 9. Reimbursement of Underwriters' Expenses. Notwithstanding any
other provisions hereof, if this Agreement shall be terminated by you pursuant
to Section 8, or if the sale to the Underwriters of the Common Shares at the
First Closing is not consummated because of any refusal, inability or failure on
the part of the Company or the Selling Shareholders to perform any agreement
herein or to comply with any provision hereof, the Company agrees to reimburse
you and the other Underwriters upon demand for all out-of-pocket expenses that
shall have been reasonably incurred by you and them in connection with the
proposed purchase and the sale of the Common Shares, including but not limited
to fees and disbursements of counsel,
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<PAGE> 23
printing expenses, travel expenses, postage, telegraph charges and telephone
charges relating directly to the offering contemplated by the Prospectus. Any
such termination shall be without liability of any party to any other party
except that the provisions of this Section , Section 7 and Section 11 shall at
all times be effective and shall apply.
SECTION 10. Effectiveness of Registration Statement. You, the Company
and the Selling Shareholders will use your and its and their best efforts to
cause the Registration Statement to become effective, to prevent the issuance of
any stop order suspending the effectiveness of the Registration Statement and,
if such stop order be issued, to obtain as soon as possible the lifting thereof.
SECTION 11. Indemnification.
(a) The Company and each of the Selling Shareholders, jointly
and severally, agrees to indemnify and hold harmless each Underwriter and each
person, if any, who controls any Underwriter within the meaning of the Act
against any losses, claims, damages, liabilities or expenses, joint or several,
to which such Underwriter or such controlling person may become subject, under
the Act, the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
or other federal or state statutory law or regulation, or at common law or
otherwise (including in settlement of any litigation, if such settlement is
effected with the written consent of the Company), insofar as such losses,
claims, damages, liabilities or expenses (or actions in respect thereof as
contemplated below) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state in any of them a material fact required to be stated therein
or necessary to make the statements in any of them not misleading, or arise out
of or are based in whole or in part on any inaccuracy in the representations and
warranties of the Company or the Selling Shareholders contained herein or any
failure of the Company or the Selling Shareholders to perform their respective
obligations hereunder or under law; and will reimburse each Underwriter and each
such controlling person for any legal and other expenses as such expenses are
reasonably incurred by such Underwriter or such controlling person in connection
with investigating, defending, settling, compromising or paying any such loss,
claim, damage, liability, expense or action; provided, however, that neither the
Company nor the Selling Shareholders will be liable in any such case to the
extent that any such loss, claim, damage, liability or expense arises out of or
is based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in the Registration Statement, any Preliminary Prospectus,
the Prospectus or any amendment or supplement thereto in reliance upon and in
conformity with the information furnished to the Company pursuant to Section 4
hereof and provided, further, that the indemnification liability of a Selling
Shareholder under this Section 11(a) shall not exceed the product of the number
of Common Shares sold by such Selling Shareholder multiplied by the Price to
Public of the Common Shares as set forth on the cover of the Prospectus. In
addition to its other obligations under this Section 11(a), the Company and the
Selling Shareholders agree that, as an interim measure during the pendency of
any claim, action, investigation, inquiry or other proceeding arising out of or
based upon any statement or omission, or any alleged statement or omission, or
any inaccuracy in the representations and warranties of the Company or the
Selling Shareholders herein or failure to perform its obligations hereunder, all
as described in this Section 11(a), it will reimburse each Underwriter on a
quarterly basis for all reasonable legal or other expenses incurred in
connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of
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<PAGE> 24
the Company's or the Selling Shareholders' obligation to reimburse each
Underwriter for such expenses and the possibility that such payments might later
be held to have been improper by a court of competent jurisdiction. To the
extent that any such interim reimbursement payment is so held to have been
improper, each Underwriter shall promptly return it to the Company together with
interest, compounded daily, determined on the basis of the prime rate (or other
commercial lending rate for borrowers of the highest credit standing) announced
from time to time by Bank of America NT&SA, San Francisco, California (the
"Prime Rate"). Any such interim reimbursement payments which are not made to an
Underwriter within 30 days of a request for reimbursement, shall bear interest
at the Prime Rate from the date of such request. This indemnity agreement will
be in addition to any liability which the Company or the Selling Shareholders
may otherwise have.
(b) Each Underwriter will severally indemnify and hold
harmless the Company, each of its directors, each of its officers who
signed the Registration Statement, the Selling Shareholders and each
person, if any, who controls the Company or any Selling Shareholder
within the meaning of the Act, against any losses, claims, damages,
liabilities or expenses to which the Company, or any such director,
officer, Selling Shareholder or controlling person may become subject,
under the Act, the Exchange Act, or other federal or state statutory
law or regulation, or at common law or otherwise (including in
settlement of any litigation, if such settlement is effected with the
written consent of such Underwriter), insofar as such losses, claims,
damages, liabilities or expenses (or actions in respect thereof as
contemplated below) arise out of or are based upon any untrue or
alleged untrue statement of any material fact contained in the
Registration Statement, any Preliminary Prospectus, the Prospectus, or
any amendment or supplement thereto, or arise out of or are based upon
the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein not misleading, in each case to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or
omission or alleged omission was made in the Registration Statement,
any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto, in reliance upon and in conformity with the
information furnished to the Company pursuant to Section 4 hereof; and
will reimburse the Company, or any such director, officer, Selling
Shareholder or controlling person for any legal and other expense
reasonably incurred by the Company, or any such director, officer,
Selling Shareholder or controlling person in connection with
investigating, defending, settling, compromising or paying any such
loss, claim, damage, liability, expense or action. In addition to its
other obligations under this Section 11(b), each Underwriter severally
agrees that, as an interim measure during the pendency of any claim,
action, investigation, inquiry or other proceeding arising out of or
based upon any statement or omission, or any alleged statement or
omission, described in this Section 11(b) which relates to information
furnished to the Company pursuant to Section 4 hereof, it will
reimburse the Company (and, to the extent applicable, each officer,
director, controlling person or Selling Shareholder) on a quarterly
basis for all reasonable legal or other expenses incurred in connection
with investigating or defending any such claim, action, investigation,
inquiry or other proceeding, notwithstanding the absence of a judicial
determination as to the propriety and enforceability of the
Underwriters' obligation to reimburse the Company (and, to the
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<PAGE> 25
extent applicable, each officer, director, controlling person or
Selling Shareholder) for such expenses and the possibility that such
payments might later be held to have been improper by a court of
competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the Company
(and, to the extent applicable, each officer, director, controlling
person or Selling Shareholder) shall promptly return it to the
Underwriters together with interest, compounded daily, determined on
the basis of the Prime Rate. Any such interim reimbursement payments
which are not made to the Company within 30 days of a request for
reimbursement, shall bear interest at the Prime Rate from the date of
such request. This indemnity agreement will be in addition to any
liability which such Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under this
Section of notice of the commencement of any action, such indemnified
party will, if a claim in respect thereof is to be made against an
indemnifying party under this Section , notify the indemnifying party
in writing of the commencement thereof; but the omission so to notify
the indemnifying party will not relieve it from any liability which it
may have to any indemnified party for contribution or otherwise than
under the indemnity agreement contained in this Section or to the
extent it is not prejudiced as a proximate result of such failure. In
case any such action is brought against any indemnified party and such
indemnified party seeks or intends to seek indemnity from an
indemnifying party, the indemnifying party will be entitled to
participate in, and, to the extent that it may wish, jointly with all
other indemnifying parties similarly notified, to assume the defense
thereof with counsel reasonably satisfactory to such indemnified party;
provided, however, if the defendants in any such action include both
the indemnified party and the indemnifying party and the indemnified
party shall have reasonably concluded that there may be a conflict
between the positions of the indemnifying party and the indemnified
party in conducting the defense of any such action or that there may be
legal defenses available to it and/or other indemnified parties which
are different from or additional to those available to the indemnifying
party, the indemnified party or parties shall have the right to select
separate counsel to assume such legal defenses and to otherwise
participate in the defense of such action on behalf of such indemnified
party or parties. Upon receipt of notice from the indemnifying party to
such indemnified party of its election so to assume the defense of such
action and approval by the indemnified party of counsel, the
indemnifying party will not be liable to such indemnified party under
this Section for any legal or other expenses subsequently incurred by
such indemnified party in connection with the defense thereof unless
(i) the indemnified party shall have employed such counsel in
connection with the assumption of legal defenses in accordance with the
proviso to the next preceding sentence (it being understood, however,
that the indemnifying party shall not be liable for the expenses of
more than one separate counsel, approved by the Representatives in the
case of paragraph (a), representing the indemnified parties who are
parties to such action) or (ii) the indemnifying party shall not have
employed counsel reasonably satisfactory to the indemnified party to
represent the indemnified party within a reasonable time after notice
of commencement of the action, in each of which cases the fees and
expenses of counsel shall be at the expense of the indemnifying party.
(d) If the indemnification provided for in this Section 11 is
required by its terms but is for any reason held to be unavailable to
or otherwise insufficient to hold harmless an indemnified party under
paragraphs (a), (b) or (c) in respect of any losses, claims, damages,
liabilities or expenses referred to herein, then each applicable
indemnifying party shall contribute to the amount paid or payable by
such indemnified party as a result of any losses, claims, damages,
liabilities or expenses referred to herein (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company,
the Selling Shareholders and the Underwriters from the offering of the
Common Shares or
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<PAGE> 26
(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 the Company, the Selling Shareholders and the
Underwriters in connection with the statements or omissions or
inaccuracies in the representations and warranties herein which
resulted in such losses, claims, damages, liabilities or expenses, as
well as any other relevant equitable considerations. The respective
relative benefits received by the Company, the Selling Shareholders and
the Underwriters shall be deemed to be in the same proportion, in the
case of the Company and the Selling Shareholders as the total price
paid to the Company and to the Selling Shareholders, respectively, for
the Common Shares sold by them to the Underwriters (net of underwriting
commissions but before deducting expenses), and in the case of the
Underwriters as the underwriting commissions received by them bears to
the total price to public set forth on the cover of the Prospectus. The
relative fault of the Company, the Selling Shareholders and the
Underwriters shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or
the omission or alleged omission to state a material fact or the
inaccurate or the alleged inaccurate representation and/or warranty
relates to information supplied by the Company, the Selling
Shareholders or the Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent
such statement or omission. The amount paid or payable by a party as a
result of the losses, claims, damages, liabilities and expenses
referred to above shall be deemed to include, subject to the
limitations set forth in subparagraph (c) of this Section 11, any legal
or other fees or expenses reasonably incurred by such party in
connection with investigating or defending any action or claim. The
provisions set forth in subparagraph (c) of this Section 11 with
respect to notice of commencement of any action shall apply if a claim
for contribution is to be made under this subparagraph (d); provided,
however, that no additional notice shall be required with respect to
any action for which notice has been given under subparagraph (c) for
purposes of indemnification. The Company, the Selling Shareholders and
the Underwriters agree that it would not be just and equitable if
contribution pursuant to this Section 11 were determined solely by pro
rata allocation (even if the Underwriters were treated as one entity
for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to in the
immediately preceding paragraph. Notwithstanding the provisions of this
Section 11, no Underwriter shall be required to contribute any amount
in excess of the amount of the total underwriting commissions received
by such Underwriter in connection with the Common Shares underwritten
by it and distributed to the public, and no Selling Shareholder shall
be required to contribute any amount in excess of the product of the
number of Common Shares sold by such Selling Shareholder multiplied by
the Price to Public of the Common Shares as set forth on the cover page
of the Prospectus. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute pursuant
to this Section 11 are several in proportion to their respective
underwriting commitments and not joint.
(e) It is agreed that any controversy arising out of the
operation of the interim reimbursement arrangements set forth in
Sections 11(a) and 11(b) hereof, including the amounts of any requested
reimbursement payments and the method of determining such amounts,
shall be settled by arbitration conducted under the provisions of the
Constitution and Rules of the Board of Governors of the New York Stock
Exchange, Inc.
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<PAGE> 27
or pursuant to the Code of Arbitration Procedure of the NASD. Any such
arbitration must be commenced by service of a written demand for
arbitration or written notice of intention to arbitrate, therein
electing the arbitration tribunal. In the event the party demanding
arbitration does not make such designation of an arbitration tribunal
in such demand or notice, then the party responding to said demand or
notice is authorized to do so. Such an arbitration would be limited to
the operation of the interim reimbursement provisions contained in
Sections 11(a) and 11(b) hereof and would not resolve the ultimate
propriety or enforceability of the obligation to reimburse expenses
which is created by the provisions of such Sections 11(a) and 11(b)
hereof.
SECTION 12. Default of Underwriters. It shall be a condition to this
Agreement and the obligation of the Company and the Selling Shareholders to sell
and deliver the Common Shares hereunder, and of each Underwriter to purchase the
Common Shares in the manner as described herein, that, except as hereinafter in
this paragraph provided, each of the Underwriters shall purchase and pay for all
the Common Shares agreed to be purchased by such Underwriter hereunder upon
tender to the Representatives of all such shares in accordance with the terms
hereof. If any Underwriter or Underwriters default in their obligations to
purchase Common Shares hereunder on either the First or Second Closing Date and
the aggregate number of Common Shares which such defaulting Underwriter or
Underwriters agreed but failed to purchase on such Closing Date does not exceed
10% of the total number of Common Shares which the Underwriters are obligated to
purchase on such Closing Date, the non-defaulting Underwriters shall be
obligated severally, in proportion to their respective commitments hereunder, to
purchase the Common Shares which such defaulting Underwriters agreed but failed
to purchase on such Closing Date. If any Underwriter or Underwriters so default
and the aggregate number of Common Shares with respect to which such default
occurs is more than the above percentage and arrangements satisfactory to the
Representatives and the Company for the purchase of such Common Shares by other
persons are not made within 48 hours after such default, this Agreement will
terminate without liability on the part of any non-defaulting Underwriter or the
Company or the Selling Shareholders except for the expenses to be paid by the
Company and the Selling Shareholders pursuant to Section 7 hereof and except to
the extent provided in Section 11 hereof.
In the event that Common Shares to which a default relates are to be purchased
by the non-defaulting Underwriters or by another party or parties, the
Representatives or the Company shall have the right to postpone the First or
Second Closing Date, as the case may be, for not more than five business days in
order that the necessary changes in the Registration Statement, Prospectus and
any other documents, as well as any other arrangements, may be effected. As used
in this Agreement, the term "Underwriter" includes any person substituted for an
Underwriter under this Section . Nothing herein will relieve a defaulting
Underwriter from liability for its default.
SECTION 13. Effective Date. This Agreement shall become effective
immediately as to Sections 7, 9, 11, 14 and 16 and, as to all other provisions,
(i) if at the time of execution of this Agreement the Registration Statement has
not become effective, at 2:00 P.M., California time, on the first full business
day following the effectiveness of the Registration Statement, or (ii) if at the
time of execution of this Agreement the Registration Statement has been declared
effective, at 2:00 P.M., California time, on the first full business day
following the date of execution of this Agreement; but this Agreement shall
nevertheless become effective at such earlier time after the Registration
Statement becomes effective as you may determine on and by notice to the Company
or by release of any of the Common Shares for sale to the public. For the
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<PAGE> 28
purposes of this Section 13, the Common Shares shall be deemed to have been so
released upon the release for publication of any newspaper advertisement
relating to the Common Shares or upon the release by you of telegrams (i)
advising Underwriters that the Common Shares are released for public offering,
or (ii) offering the Common Shares for sale to securities dealers, whichever may
occur first.
SECTION 14. Termination. Without limiting the right to terminate this
Agreement pursuant to any other provision hereof:
(a) This Agreement may be terminated by the Company by notice
to you and the Selling Shareholders or by you by notice to the Company
and the Selling Shareholders at any time prior to the time this
Agreement shall become effective as to all its provisions, and any such
termination shall be without liability on the part of the Company or
the Selling Shareholders to any Underwriter (except for the expenses to
be paid or reimbursed by the Company and the Selling Shareholders
pursuant to Sections 7 and 9 hereof and except to the extent provided
in Section 11 hereof) or of any Underwriter to the Company or the
Selling Shareholders (except to the extent provided in Section 11
hereof).
(b) This Agreement may also be terminated by you prior to the
First Closing Date by notice to the Company (i) if additional material
governmental restrictions, not in force and effect on the date hereof,
shall have been imposed upon trading in securities generally or minimum
or maximum prices shall have been generally established on the New York
Stock Exchange or on the American Stock Exchange or in the over the
counter market by the NASD, or trading in securities generally shall
have been suspended on either such Exchange or in the over the counter
market by the NASD, or a general banking moratorium shall have been
established by federal, New York or California authorities, (ii) if an
outbreak of major hostilities or other national or international
calamity or any substantial change in political, financial or economic
conditions shall have occurred or shall have accelerated or escalated
to such an extent, as, in the judgment of the Representatives, to
affect adversely the marketability of the Common Shares, (iii) if any
adverse event shall have occurred or shall exist which makes untrue or
incorrect in any material respect any statement or information
contained in the Registration Statement or Prospectus or which is not
reflected in the Registration Statement or Prospectus but should be
reflected therein in order to make the statements or information
contained therein not misleading in any material respect, or (iv) if
there shall be any action, suit or proceeding pending or threatened, or
there shall have been any development or prospective development
involving particularly the business or properties or securities of the
Company or any of its subsidiaries or the transactions contemplated by
this Agreement, which, in the reasonable judgment of the
Representatives, may materially and adversely affect the Company's
business or earnings and makes it impracticable or inadvisable to offer
or sell the Common Shares. Any termination pursuant to this subsection
(b) shall without liability on the part of any Underwriter to the
Company or the Selling Shareholders or on the part of the Company or
the Selling Shareholders to any Underwriter (except for expenses to be
paid or reimbursed by the Company and the Selling Shareholders pursuant
to Sections 7 and 9 hereof and except to the extent provided in Section
11 hereof.
SECTION 15. Failure of the Selling Shareholders to Sell and Deliver. If
one or more of the Selling Shareholders shall fail to sell and deliver to the
Underwriters the Common Shares to
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<PAGE> 29
be sold and delivered by such Selling Shareholders at the First Closing Date or
the Second Closing Date, as the case may be, under the terms of this Agreement,
then the Underwriters may at their option, by written notice from you to the
Company and the Selling Shareholders, either (i) terminate this Agreement
without any liability on the part of any Underwriter or, except as provided in
Sections 7, 9 and 11 hereof, the Company or the Selling Shareholders, or (ii)
purchase the shares which the Company and other Selling Shareholders have agreed
to sell and deliver in accordance with the terms hereof. In the event of a
failure by one or more of the Selling Shareholders to sell and deliver as
referred to in this Section , either you or the Company shall have the right to
postpone the Closing Date for a period not exceeding seven business days in
order that the necessary changes in the Registration Statement, Prospectus and
any other documents, as well as any other arrangements, may be effected.
SECTION 16. Representations and Indemnities to Survive Delivery. The
respective indemnities, agreements, representations, warranties and other
statements of the Company, of its officers, of the Selling Shareholders and of
the several Underwriters set forth in or made pursuant to this Agreement will
remain in full force and effect, regardless of any investigation made by or on
behalf of any Underwriter or the Company or any of its or their partners,
officers or directors or any controlling person, or the Selling Shareholders, as
the case may be, and will survive delivery of and payment for the Common Shares
sold hereunder and any termination of this Agreement.
SECTION 17. Notices. All communications hereunder shall be in writing
and, if sent to the Representatives shall be mailed, delivered or telegraphed
and confirmed to you at 600 Montgomery Street, San Francisco, California 94111,
Attention: Rex Sherry, with a copy to Venture Law Group, A Professional
Corporation, 2800 Sand Hill Road, Menlo Park, California 94025, Attention:
Cathryn S. Chinn, and if sent to the Company or the Selling Shareholders shall
be mailed, delivered or telegraphed and confirmed to the Company at 5910 Pacific
Center Boulevard, Suite 300, San Diego, California 92121, Attention: Norman R.
Farquhar, with a copy to Cooley Godward LLP, 4365 Executive Drive, Suite 1100,
San Diego, California 92121, Attention: Frederick T. Muto, Esq. The Company, the
Selling Shareholders or you may change the address for receipt of communications
hereunder by giving notice to the others.
SECTION 18. Successors. This Agreement will inure to the benefit of and
be binding upon the parties hereto, including any substitute Underwriters
pursuant to Section 12 hereof, and to the benefit of the officers and directors
and controlling persons referred to in Section 11, and in each case their
respective successors, personal representatives and assigns, and no other person
will have any right or obligation hereunder. No such assignment shall relieve
any party of its obligations hereunder. The term "successors" shall not include
any purchaser of the Common Shares as such from any of the Underwriters merely
by reason of such purchase.
SECTION 19. Representation of Underwriters. You will act as
Representatives for the several Underwriters in connection with all dealings
hereunder, and any action under or in respect of this Agreement taken by you
jointly or by Montgomery Securities, as Representatives, will be binding upon
all the Underwriters.
SECTION 20. Partial Unenforceability. The invalidity or
unenforceability of any Section , paragraph or provision of this Agreement shall
not affect the validity or enforceability of any other Section , paragraph or
provision hereof. If any Section , paragraph or provision of this Agreement is
for any reason determined to be invalid or unenforceable, there shall be
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<PAGE> 30
deemed to be made such minor changes (and only such minor changes) as are
necessary to make it valid and enforceable.
SECTION 21. Applicable Law. This Agreement shall be governed by and
construed in accordance with the internal laws (and not the laws pertaining to
conflicts of laws) of the State of California.
SECTION 22. General. This Agreement constitutes the entire agreement of
the parties to this Agreement and supersedes all prior written or oral and all
contemporaneous oral agreements, understandings and negotiations with respect to
the subject matter hereof. This Agreement may be executed in several
counterparts, each one of which shall be an original, and all of which shall
constitute one and the same document.
In this Agreement, the masculine, feminine and neuter genders and the singular
and the plural include one another. The section headings in this Agreement are
for the convenience of the parties only and will not affect the construction or
interpretation of this Agreement. This Agreement may be amended or modified, and
the observance of any term of this Agreement may be waived, only by a writing
signed by the Company, the Selling Shareholders and you.
Any person executing and delivering this Agreement as Attorney-in-fact for the
Selling Shareholders represents by so doing that he has been duly appointed as
Attorney-in-fact by such Selling Shareholders pursuant to a validly existing and
binding Power of Attorney which authorizes such Attorney-in-fact to take such
action. Any action taken under this Agreement by any of the Attorneys-in-fact
will be binding on all the Selling Shareholders.
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<PAGE> 31
If the foregoing is in accordance with your understanding of our agreement,
kindly sign and return to us the enclosed copies hereof, whereupon it will
become a binding agreement between among the Company , the Selling Shareholders
and the several Underwriters including you, all in accordance with its terms.
Very truly yours,
DATAWORKS CORPORATION
By:__________________________
President
SELLING SHAREHOLDERS
By:__________________________
(Attorney-in-fact)
By:__________________________
(Attorney-in-fact)
The foregoing Underwriting Agreement
is hereby confirmed and accepted by
us in San Francisco, California as of
the date first above written.
MONTGOMERY SECURITIES
FURMAN SELZ INCORPORATED
SOUNDVIEW FINANCIAL GROUP, INC.
Acting as Representatives of the
several Underwriters named in
the attached Schedule A.
By: MONTGOMERY SECURITIES
By:______________________________
Partner
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<PAGE> 32
SCHEDULE A
<TABLE>
<CAPTION>
Number of Firm
Common Shares
Name of Underwriter to be Purchased
- ------------------- ---------------
<S> <C>
Montgomery Securities .....................
Furman Selz Incorporated ..................
Soundview Financial Group, Inc.............
---------
TOTAL ...................
=========
</TABLE>
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<PAGE> 33
SCHEDULE B
<TABLE>
<CAPTION>
Number of Optional
Common Shares to
be Sold by Selling
Name of Selling Shareholder Shareholders
- --------------------------- ------------
<S> <C>
---------
TOTAL ........................
========
</TABLE>
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<PAGE> 1
EXHIBIT 5.1
[COOLEY GODWARD LLP LETTERHEAD]
November 8, 1996
DataWorks Corporation
5910 Pacific Center Boulevard
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-3 (the "Registration Statement") with the Securities and
Exchange Commission, including a related prospectus filed with the Registration
Statement (the "Prospectus"), and the public offering of up to 2,300,000
shares of the Company's common stock, including 300,000 shares issuable upon
exercise of an over-allotment option by the underwriters of which up to 218,686
shares may be sold by certain selling shareholders (collectively, 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 to be sold by the selling shareholders are validly issued,
fully paid and non-assessable and that the Shares to be sold by the Company,
when sold and issued in accordance with the Registration Statement and related
Prospectus, will be validly issued, fully paid, and nonassessable.
We consent to the reference to our firm under the caption "Legal Matters" in the
Prospectus included in the Registration Statement and to the filing of this
opinion as an exhibit to the Registration Statement.
Very truly yours,
COOLEY GODWARD LLP
By: /s/ Frederick T. Muto
----------------------------
Frederick T. Muto
<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, in the Registration Statement
(Form S-3) and related Prospectus of DataWorks Corporation for the registration
of 2,300,000 shares of its common stock.
ERNST & YOUNG LLP
San Diego, California
November 7, 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-3 of DataWorks Corporation of our report dated
April 5, 1996 relating to the financial statements of DCD Corporation, which
appears on page F-3 of such Prospectus. We also consent to the incorporation by
reference in the Prospectus constituting part of this Registration Statement on
Form S-3 of our report dated April 5, 1996 relating to the financial statements
of DCD Corporation appearing on page F-21 of the DataWorks Corporation Form S-4
(No. 333-11741). We also consent to the reference to us under the heading
"Experts" in such Prospectus.
Price Waterhouse LLP
Minneapolis, Minnesota
November 7, 1996
