<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 19, 1997
REGISTRATION NO. 333-33451
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
DATAWORKS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
CALIFORNIA 7373 33-0209937
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) NUMBER)
</TABLE>
------------------------
DATAWORKS CORPORATION
5910 PACIFIC CENTER BOULEVARD, SUITE 300
SAN DIEGO, CALIFORNIA 92121
TELEPHONE: (619) 546-9600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
STUART W. CLIFTON
CHIEF EXECUTIVE OFFICER, PRESIDENT AND CHAIRMAN OF THE BOARD
DATAWORKS CORPORATION
5910 PACIFIC CENTER BOULEVARD, SUITE 300
SAN DIEGO, CALIFORNIA 92121
TELEPHONE: (619) 546-9600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
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FREDERICK T. MUTO, ESQ. T. MICHAEL HIRD, ESQ.
THOMAS A. COLL, ESQ. PILLSBURY MADISON & SUTRO LLP
COOLEY GODWARD LLP 101 WEST BROADWAY, SUITE 1800
4365 EXECUTIVE DRIVE, SUITE 1100 SAN DIEGO, CALIFORNIA 92101-8219
SAN DIEGO, CALIFORNIA 92121 TELEPHONE: (619) 544-3176
TELEPHONE: (619) 550-6000
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
------------------------
As promptly as practicable after this Registration Statement becomes
effective and after the effective time of the proposed Merger described in this
Registration Statement.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
DATAWORKS CORPORATION
5910 PACIFIC CENTER BOULEVARD, SUITE 300
SAN DIEGO, CALIFORNIA 92121
AUGUST 22, 1997
Dear Fellow Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders (the
"Special Meeting") of DataWorks Corporation, a California corporation
("DataWorks"), which will be held on September 29, 1997 at 9:00 o'clock a.m.,
local time, at DataWorks' offices at 5910 Pacific Center Boulevard, Suite 300,
San Diego, California.
At the Special Meeting, you will be asked to consider and vote upon a
proposal to (i) approve and adopt an Agreement and Plan of Merger and
Reorganization, dated July 31, 1997 (the "Merger Agreement"), among DataWorks,
DataWorks Acquisition Sub, Inc., a newly formed, wholly owned Delaware
subsidiary of DataWorks ("DataWorks Sub"), and Interactive Group, Inc., a
Delaware corporation ("Interactive"), (ii) approve the merger (the "Merger") of
DataWorks Sub with and into Interactive, pursuant to which, among other things,
DataWorks Sub will cease to exist and Interactive will survive as a wholly owned
subsidiary of DataWorks (collectively, the "Merger Proposal") and (iii) approve
an amendment to the Bylaws of DataWorks to provide that the authorized number of
directors be at least five and no more than nine (the "Bylaw Amendment"). As a
result of the Merger, each outstanding share of Interactive Common Stock (other
than any shares of Interactive Common Stock owned by DataWorks, Interactive,
DataWorks Sub or any direct or indirect wholly owned subsidiary of DataWorks or
Interactive) will be converted into the right to receive 0.8054 of a share of
DataWorks Common Stock (the "Exchange Ratio"). In addition, options and warrants
to acquire Interactive Common Stock will be converted as a result of the Merger
into equivalent options and warrants for DataWorks Common Stock, based upon the
Exchange Ratio. If the requisite approval of the shareholders of DataWorks and
the stockholders of Interactive is received and other conditions to the Merger
are satisfied or waived, the Merger is expected to be consummated on or promptly
after September 29, 1997.
In the material accompanying this letter, you will find a Notice of Special
Meeting of Shareholders and a Prospectus/Joint Proxy Statement relating to the
actions to be taken by DataWorks shareholders at the Special Meeting. The
Prospectus/Joint Proxy Statement more fully describes the proposed Merger and
the other proposals submitted hereby and includes information about DataWorks
and Interactive. I urge you to read the Prospectus/Joint Proxy Statement
carefully.
After careful consideration, your Board of Directors has unanimously
approved the Merger Agreement and the transactions provided for therein and has
concluded that these proposals are in the best interests of DataWorks and its
shareholders. In addition, in connection with its approval of the proposed
Merger, the Board of Directors has received a written opinion from its financial
advisor, Lehman Brothers Inc. ("Lehman Brothers"), to the effect that the
Exchange Ratio is fair, from a financial point of view, to DataWorks. A copy of
Lehman Brothers' written opinion, which sets forth a description of the
assumptions made, matters considered and limits of Lehman Brothers' review, is
attached to the accompanying Prospectus/Joint Proxy Statement as Appendix B, and
DataWorks shareholders are urged to read carefully the opinion in its entirety.
Your Board of Directors has unanimously recommended that the shareholders of
DataWorks approve the Merger Proposal and the Bylaw Amendment.
Approval of the Merger Agreement, the Merger and the Bylaw Amendment
requires the affirmative vote of the holders of a majority of the outstanding
shares of DataWorks Common Stock. Certain executive officers and directors of
DataWorks owning in the aggregate approximately 20% of the outstanding DataWorks
Common Stock have each agreed to vote or direct the vote of all DataWorks Common
Stock over which they have voting power or control in favor of the Merger
Agreement and the Merger.
<PAGE> 3
I urge you to vote FOR approval of the Merger Proposal and the Bylaw
Amendment. On behalf of your Board of Directors, thank you for your support.
Sincerely,
Stuart W. Clifton
Chairman of the Board, President
and Chief Executive Officer
<PAGE> 4
DATAWORKS CORPORATION
5910 PACIFIC CENTER BOULEVARD, SUITE 300
SAN DIEGO, CALIFORNIA 92121
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON SEPTEMBER 29, 1997
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders (the "Special
Meeting") of DataWorks Corporation, a California corporation ("DataWorks"), will
be held on September 29, 1997 at 9:00 o'clock a.m., local time, at DataWorks'
offices at 5910 Pacific Center Drive, Suite 300, San Diego, California.
The special meeting is for the following purposes:
1. To consider and vote upon a proposal to (i) approve and adopt an
Agreement and Plan of Merger and Reorganization, dated July 31, 1997,
among DataWorks, DataWorks Acquisition Sub, Inc., a newly formed, wholly
owned Delaware subsidiary of DataWorks ("DataWorks Sub"), and
Interactive Group, Inc., a Delaware corporation ("Interactive"), (ii)
approve the merger of DataWorks Sub with and into Interactive, pursuant
to which, among other things, DataWorks Sub will cease to exist and
Interactive will survive as a wholly owned subsidiary of DataWorks (the
"Merger") and (iii) approve an amendment to the Bylaws of DataWorks to
provide that the authorized number of directors be at least five and no
more than nine. As a result of the Merger, each outstanding share of
Interactive Common Stock (other than any shares of Interactive Common
Stock owned by DataWorks, Interactive, DataWorks Sub or any direct or
indirect wholly owned subsidiary of DataWorks or Interactive) will be
converted into the right to receive 0.8054 of a share of DataWorks
Common Stock. In addition, options and warrants to acquire Interactive
Common Stock will be converted as a result of the Merger into equivalent
options and warrants for DataWorks Common Stock, based upon the Exchange
Ratio.
2. To transact such other business as may properly come before the Special
Meeting or any adjournment or postponement thereof.
The foregoing items of business are more fully described in the
Prospectus/Joint Proxy Statement accompanying this Notice.
Holders of DataWorks Common Stock may be entitled to dissenters' rights
with respect to the proposed Merger by complying with Chapter 13 of the
California General Corporation Law (the "California Law"). See "Approval of the
Merger and Related Transactions--Dissenters' Rights of DataWorks Shareholders"
and Appendix D to this Prospectus/Joint Proxy Statement which sets forth Chapter
13 of the California Law.
THE BOARD OF DIRECTORS OF DATAWORKS UNANIMOUSLY RECOMMENDS THAT YOU VOTE
FOR ALL OF THE PROPOSALS DESCRIBED ABOVE.
Only holders of record of DataWorks Common Stock at the close of business
on August 20, 1997 are entitled to notice of, and will be entitled to vote at,
the Special Meeting or any adjournment or postponement thereof.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ RICK E. RUSSO
----------------------------
Rick E. Russo
Secretary
San Diego, California
August 22, 1997
<PAGE> 5
INTERACTIVE GROUP, INC.
5095 MURPHY CANYON ROAD
SAN DIEGO, CALIFORNIA 92123
AUGUST 22, 1997
Dear Fellow Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders (the
"Special Meeting") of Interactive Group, Inc., a Delaware corporation
("Interactive"), which will be held on September 29, 1997 at 9:00 o'clock a.m.,
local time, at Interactive's offices at 5095 Murphy Canyon Road, San Diego,
California.
At the Special Meeting, you will be asked to consider and vote upon a
proposal to (i) approve and adopt an Agreement and Plan of Merger and
Reorganization, dated July 31, 1997 (the "Merger Agreement"), among Interactive,
DataWorks Corporation, a California corporation ("DataWorks"), and DataWorks
Acquisition Sub, Inc., a newly formed, wholly owned Delaware subsidiary of
DataWorks ("DataWorks Sub"), and (ii) approve the merger (the "Merger") of
DataWorks Sub with and into Interactive, pursuant to which, among other things,
DataWorks Sub will cease to exist and Interactive will survive as a wholly owned
subsidiary of DataWorks (collectively, the "Merger Proposal"). As a result of
the Merger, each outstanding share of Interactive Common Stock (other than any
shares of Interactive Common Stock owned by DataWorks, Interactive, DataWorks
Sub or any direct or indirect wholly owned subsidiary of DataWorks or
Interactive) will be converted into the right to receive 0.8054 of a share of
DataWorks Common Stock (the "Exchange Ratio"). In addition, options and warrants
to acquire Interactive Common Stock will be converted as a result of the Merger
into equivalent options and warrants for DataWorks Common Stock, based upon the
Exchange Ratio. If the requisite approval of the shareholders of DataWorks and
the stockholders of Interactive is received and other conditions to the Merger
are satisfied or waived, the Merger is expected to be consummated on or promptly
after September 29, 1997.
ADDITIONAL INFORMATION REGARDING THE MERGER AND THE MERGER AGREEMENT IS SET
FORTH IN THE ACCOMPANYING PROSPECTUS/JOINT PROXY STATEMENT AND THE APPENDICES
THERETO, WHICH YOU ARE URGED TO READ CAREFULLY IN THEIR ENTIRETY.
The Board of Directors of Interactive has carefully considered the terms
and conditions of the proposed Merger. In addition, in connection with its
approval of the proposed Merger, the Board of Directors of Interactive has
received a written opinion dated July 31, 1997, from its financial advisor, UBS
Securities LLC ("UBS Securities"), to the effect that, as of such date, the
Exchange Ratio was fair, from a financial point of view, to the holders of
Interactive Common Stock. A copy of the written opinion of UBS Securities, which
sets forth a description of the assumptions made, matters considered and limits
of the review by UBS Securities, is attached to the accompanying
Prospectus/Joint Proxy Statement as Appendix C, and Interactive stockholders are
urged to read carefully this opinion in its entirety.
YOUR BOARD OF DIRECTORS HAS DETERMINED THAT THE TERMS OF THE MERGER
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY ARE FAIR TO, AND IN THE BEST
INTERESTS OF, INTERACTIVE AND THE INTERACTIVE STOCKHOLDERS. ACCORDINGLY, THE
BOARD RECOMMENDS THAT INTERACTIVE STOCKHOLDERS VOTE FOR THE APPROVAL AND
ADOPTION OF THE MERGER AGREEMENT.
Approval of the Merger Agreement and the Merger requires the affirmative
vote of the holders of a majority of the outstanding shares of Interactive
Common Stock. Certain executive officers and directors of Interactive owning in
the aggregate approximately 39% of the outstanding Interactive Common Stock have
each agreed to vote or direct the vote of all Interactive Common Stock over
which they have voting power or control in favor of the Merger Agreement and the
Merger.
<PAGE> 6
In view of the importance of the action to be taken at this Special Meeting
of Interactive stockholders, we urge you to review carefully the accompanying
Notice of Special Meeting of Stockholders and the Prospectus/Joint Proxy
Statement, including the appendices thereto, which also include information on
DataWorks and Interactive. Whether or not you expect to attend the Special
Meeting, please complete, sign and date the enclosed proxy and return it as
promptly as possible.
Sincerely,
/s/ ROBERT C. VERNON
--------------------------------
Robert C. Vernon
Chairman of the Board, Chief
Executive Officer and Secretary
<PAGE> 7
INTERACTIVE GROUP, INC.
5095 MURPHY CANYON ROAD
SAN DIEGO, CALIFORNIA 92123
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON SEPTEMBER 29, 1997
NOTICE IS HEREBY GIVEN that a special meeting of the stockholders (the
"Special Meeting") of Interactive Group, Inc., a Delaware corporation
("Interactive"), will be held on September 29, 1997, at 9:00 o'clock a.m., local
time, at Interactive's offices at 5095 Murphy Canyon Road, San Diego,
California.
The Special Meeting is for the following purposes:
1. To consider and vote upon a proposal to (i) approve and adopt an
Agreement and Plan of Merger and Reorganization dated July 31, 1997 (the
"Merger Agreement"), among Interactive, DataWorks Corporation, a
California corporation ("DataWorks"), and DataWorks Acquisition Sub,
Inc., a newly formed, wholly owned Delaware subsidiary of DataWorks
("DataWorks Sub"), and (ii) approve the merger of DataWorks Sub with and
into Interactive (the "Merger"), pursuant to which, among other things,
DataWorks Sub will cease to exist and Interactive will survive as a
wholly owned subsidiary of DataWorks. As a result of the Merger, each
outstanding share of Interactive Common Stock (other than shares of
Interactive Common Stock owned by DataWorks, Interactive, DataWorks Sub
or any direct or indirect wholly owned subsidiary of DataWorks or
Interactive) will be converted into the right to receive 0.8054 of a
share of DataWorks Common Stock. In addition, options and warrants to
acquire Interactive Common Stock will be converted as a result of the
Merger into equivalent options and warrants for DataWorks Common Stock,
based upon the Exchange Ratio.
2. To transact such other business as may properly come before the Special
Meeting or any adjournment or postponement thereof.
The foregoing items of business are more fully described in the
Prospectus/Joint Proxy Statement accompanying this Notice.
THE BOARD OF DIRECTORS OF INTERACTIVE UNANIMOUSLY RECOMMENDS THAT YOU VOTE
FOR ALL OF THE PROPOSALS DESCRIBED ABOVE.
Only the holders of record of Interactive Common Stock at the close of
business on August 20, 1997 are entitled to notice of, and will be entitled to
vote at, the Special Meeting or at any adjournment or postponement thereof.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ ROBERT C. VERNON
----------------------------------
Robert C. Vernon
Chairman of the Board, Chief
Executive Officer and Secretary
San Diego, California
August 22, 1997
<PAGE> 8
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 AUGUST 19, 1997
PROSPECTUS
DATAWORKS CORPORATION
PROSPECTUS
------------------------
DATAWORKS CORPORATION
AND
INTERACTIVE GROUP, INC.
JOINT PROXY STATEMENT
This Prospectus/Joint Proxy Statement is being furnished to the
shareholders of DataWorks Corporation, a California Corporation ("DataWorks"),
on behalf of the DataWorks Board of Directors (the "DataWorks Board") for use at
the Special Meeting of Shareholders of DataWorks to be held on September 29,
1997 at 9:00 o'clock a.m. , local time, at DataWorks' offices at 5910 Pacific
Center Boulevard, Suite 300, San Diego, California, and at any adjournments or
postponements thereof (the "DataWorks Meeting").
This Prospectus/Joint Proxy Statement is also being furnished to the
stockholders of Interactive Group, Inc., a Delaware corporation ("Interactive"),
on behalf of the Interactive Board of Directors (the "Interactive Board") for
use at the Special Meeting of Stockholders of Interactive to be held on
September 29, 1997 at 9:00 o'clock a.m., local time, at Interactive's offices at
5095 Murphy Canyon Road, San Diego, California, and at any adjournments or
postponements thereof (the "Interactive Meeting").
The DataWorks Meeting and the Interactive Meeting are being called in
connection with the proposed merger of DataWorks Acquisition Sub, Inc., a newly
formed, wholly owned Delaware subsidiary of DataWorks ("DataWorks Sub"), with
and into Interactive (the "Merger"), pursuant to an Agreement and Plan of Merger
and Reorganization (the "Merger Agreement"), dated July 31, 1997, among
DataWorks, DataWorks Sub and Interactive. The Merger will be consummated on the
terms and subject to the conditions set forth in the Merger Agreement, as a
result of which (i) DataWorks Sub will cease to exist and Interactive will
survive as a wholly owned subsidiary of DataWorks, and (ii) each outstanding
share of Interactive Common Stock (other than any shares of Interactive Common
Stock owned by DataWorks, Interactive, DataWorks Sub or any direct or indirect
wholly owned subsidiary of DataWorks or Interactive) will be converted into the
right to receive 0.8054 of a share of DataWorks Common Stock (the "Exchange
Ratio"). In addition, options and warrants to acquire Interactive Common Stock
will be converted as a result of the Merger into equivalent options and warrants
for DataWorks Common Stock, based upon the Exchange Ratio.
------------------------
NO PERSON HAS BEEN AUTHORIZED BY DATAWORKS OR INTERACTIVE TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS/JOINT PROXY STATEMENT IN CONNECTION WITH THE SOLICITATION OF PROXIES
OR THE OFFERING OF SECURITIES MADE HEREBY, AND, IF GIVEN OR MADE, ANY SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY DATAWORKS, INTERACTIVE OR ANY OTHER PERSON. THIS PROSPECTUS/JOINT PROXY
STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITIES OR THE SOLICITATION OF A PROXY IN ANY JURISDICTION WHERE, OR
TO ANY PERSON TO WHOM, IT WOULD BE UNLAWFUL TO MAKE SUCH AN OFFER OR
SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS/JOINT PROXY STATEMENT NOR ANY
DISTRIBUTION OF THE SECURITIES TO WHICH THIS PROSPECTUS/JOINT PROXY STATEMENT
RELATES SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE INFORMATION CONTAINED HEREIN SINCE THE DATE
HEREOF. (Continued on next page)
------------------------
THE DATE OF THIS PROSPECTUS/JOINT PROXY STATEMENT IS AUGUST 19, 1997.
<PAGE> 9
DataWorks Common Stock and Interactive Common Stock are listed on the
Nasdaq National Market under the symbols "DWRX" and "INTE," respectively. It is
a condition of the obligations of DataWorks and Interactive to consummation of
the Merger that the shares of DataWorks Common Stock to be issued in the Merger
be approved for listing on the Nasdaq National Market. Following consummation of
the Merger, Interactive Common Stock will be removed from registration under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and will no
longer be listed on the Nasdaq National Market (as DataWorks will be the sole
holder thereof).
Because the Exchange Ratio is fixed, changes in the market price of
DataWorks Common Stock will affect the dollar value of DataWorks Common Stock to
be received by stockholders of Interactive in the Merger. Shareholders of
DataWorks and stockholders of Interactive are encouraged to obtain current
market quotations for DataWorks Common Stock and Interactive Common Stock prior
to the Interactive Meeting.
This Prospectus/Joint Proxy Statement also constitutes the Prospectus of
DataWorks with respect to the shares of DataWorks Common Stock to be issued in
the Merger in exchange for outstanding shares of Interactive Common Stock. Based
upon the capitalization of Interactive as of the close of business on the Record
Date, an aggregate of approximately 3,700,000 shares of DataWorks Common Stock
(the "Merger Consideration") will be issued in the Merger, and DataWorks will
assume all outstanding Interactive options and warrants which will be converted
into options and warrants to acquire approximately 536,000 additional shares of
DataWorks Common Stock.
Holders of DataWorks Common Stock may be entitled to dissenters' rights
with respect to the proposed Merger by complying with Chapter 13 of the
California General Corporation Law (the "California Law"). See "Approval of the
Merger and Related Transactions--Dissenters' Rights of DataWorks Shareholders"
and Appendix D to this Prospectus/Joint Proxy Statement which sets forth Chapter
13 of the California Law.
If the requisite approvals of the shareholders of DataWorks and the
stockholders of Interactive are received and other conditions to the Merger are
satisfied or waived, the Merger is expected to be consummated on or promptly
after September 29, 1997 (the "Closing").
All information contained or incorporated by reference in this
Prospectus/Joint Proxy Statement relating to DataWorks or DataWorks Sub has been
supplied by DataWorks, and all information contained in this Prospecuts/Joint
Proxy Statement relating to Interactive has been supplied by Interactive.
This Prospectus/Joint Proxy Statement is first being mailed to shareholders
of DataWorks and stockholders of Interactive on or about August 22, 1997.
THE ABOVE MATTERS ARE DISCUSSED IN DETAIL IN THIS PROSPECTUS/JOINT PROXY
STATEMENT. THE PROPOSED MERGER IS A COMPLEX TRANSACTION. SHAREHOLDERS OF
DATAWORKS AND STOCKHOLDERS OF INTERACTIVE ARE STRONGLY URGED TO READ AND
CONSIDER CAREFULLY THIS PROSPECTUS/JOINT PROXY STATEMENT IN ITS ENTIRETY,
PARTICULARLY THE MATTERS REFERRED TO UNDER "RISK FACTORS," BEGINNING ON PAGE 19.
------------------------
THE SHARES OF DATAWORKS COMMON STOCK TO BE ISSUED IN THE MERGER HAVE NOT
BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS/JOINT PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE> 10
TABLE OF CONTENTS
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PAGE
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AVAILABLE INFORMATION................................................................. 2
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE....................................... 2
SUMMARY............................................................................... 4
RISK FACTORS.......................................................................... 19
Integration of Operations........................................................... 19
Fluctuations in Quarterly Operating Results......................................... 19
Competition......................................................................... 20
Ability to Recruit Sales, Service and Implementation Personnel...................... 21
Introduction of ECS System.......................................................... 21
Integration of DataWorks and DCD Corporation Operations............................. 22
Integration of Interactive and Just-In-Time Enterprise Systems, Inc. ("JIT")
Operations....................................................................... 22
Management of Growth................................................................ 22
Dependence on Key Employees......................................................... 22
Dependence on Principal Products.................................................... 23
Rapid Technological Change and New Products......................................... 23
Dependence on Manufacturing Industry................................................ 23
Dependence on Third Party Software and Hardware..................................... 24
International Operations and Risk of International Sales............................ 24
Intellectual Property and Proprietary Rights........................................ 24
Product Liability................................................................... 25
Influence of Existing Shareholders.................................................. 25
Possible Volatility of Stock Price.................................................. 25
Effect of Certain Charter Provisions................................................ 25
Additional Shares to be Issued by DataWorks; Shares Eligible for Future Sale........ 25
THE DATAWORKS MEETING................................................................. 27
THE INTERACTIVE MEETING............................................................... 29
APPROVAL OF THE MERGER AND RELATED TRANSACTIONS....................................... 31
Background of the Merger............................................................ 31
DataWorks' Reasons for the Merger................................................... 35
DataWorks Board Recommendation...................................................... 35
Interactive's Reasons for the Merger................................................ 36
Interactive Board Recommendation.................................................... 36
Opinion of Lehman Brothers Inc...................................................... 36
Opinion of UBS Securities LLC....................................................... 41
Amendment of DataWorks Bylaws....................................................... 46
Interests of Certain Persons in the Merger.......................................... 47
Regulatory Matters.................................................................. 47
Certain Federal Income Tax Matters.................................................. 47
Accounting Treatment................................................................ 50
Dissenters' Rights of DataWorks Shareholders........................................ 50
No Appraisal Rights of Interactive Stockholders..................................... 51
TERMS OF THE MERGER................................................................... 53
Effective Date...................................................................... 53
Manner and Basis for Converting Shares.............................................. 53
Effect of the Merger................................................................ 54
Treatment of Employee Equity Benefit Plans and Warrants............................. 55
</TABLE>
i
<PAGE> 11
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Stock Ownership Following the Merger................................................ 55
Representations and Warranties...................................................... 55
Covenants........................................................................... 56
No Solicitation..................................................................... 57
Conditions to the Merger............................................................ 58
Termination of the Merger Agreement................................................. 59
Effect of Termination............................................................... 60
Break-Up Fees....................................................................... 60
Indemnification and Insurance....................................................... 60
Merger Expenses and Fees and Other Costs............................................ 60
Related Agreements.................................................................. 61
Affiliates' Restrictions on Sale of DataWorks Common Stock.......................... 63
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION.......................... 64
INTERACTIVE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.......................................................................... 68
INTERACTIVE BUSINESS.................................................................. 76
INTERACTIVE MANAGEMENT................................................................ 87
INTERACTIVE PRINCIPAL STOCKHOLDERS.................................................... 89
COMPARISON OF RIGHTS OF DATAWORKS SHAREHOLDERS AND INTERACTIVE STOCKHOLDERS........... 90
EXPERTS............................................................................... 97
LEGAL MATTERS......................................................................... 98
INDEX TO FINANCIAL STATEMENTS......................................................... F-1
</TABLE>
THE FOLLOWING APPENDICES ALSO CONSTITUTE PART OF THIS PROSPECTUS/JOINT PROXY
STATEMENT:
<TABLE>
<S> <C>
A -- Agreement and Plan of Merger and Reorganization
B -- Opinion of Lehman Brothers Inc.
C -- Opinion of UBS Securities LLC
D -- Chapter 13 of the California General Corporation Law
E -- Proposed Amendment to Bylaws of DataWorks Corporation
</TABLE>
ii
<PAGE> 12
AVAILABLE INFORMATION
DataWorks and Interactive are subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, file reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional
offices at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511 and 7 World Trade Center, Suite 1300, New York, New York
10048. Copies of such materials may also be obtained from the Commission at
prescribed rates by writing to the Public Reference Section of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission
also maintains a Web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission at the address http://www.sec.gov.
Under the rules and regulations of the Commission, the solicitation of
proxies from stockholders of Interactive to approve the Merger Proposal
constitutes an offering of the DataWorks Common Stock to be issued in connection
with the Merger. Accordingly, DataWorks has filed with the Commission a
Registration Statement on Form S-4 under the Securities Act of 1933, as amended
(the "Securities Act"), with respect to such offering (as amended from time to
time, the "Registration Statement"). This Prospectus/Joint Proxy Statement
constitutes the prospectus of DataWorks that is filed as part of the
Registration Statement. Other parts of the Registration Statement are omitted
from this Prospectus/Joint Proxy Statement in accordance with the rules and
regulations of the Commission. Copies of the Registration Statement, including
the exhibits to the Registration Statement and other material that is not
included herein, may be inspected, without charge, at the regional offices of
the Commission referred to above, or obtained at prescribed rates from the
Public Reference Section of the Commission at the address set forth above.
Statements made in this Prospectus/Joint Proxy Statement concerning the
contents of any contract, agreement or other document accurately describe the
material provisions of such contract, agreement or other document but are not
necessarily complete. With respect to each contract or other document filed as
an exhibit to the Registration Statement or attached as an appendix to the
Prospectus/Joint Proxy Statement or otherwise filed with the Commission,
reference is hereby made to that exhibit or appendix for a more complete
description of the matter involved, and each such statement is hereby qualified
in its entirety by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed with the Commission by DataWorks
pursuant to the Exchange Act (File No. 0-26814) are incorporated by reference in
this Prospectus/Joint Proxy Statement:
1. DataWorks' Current Report on Form 8-K dated July 31, 1997;
2. DataWorks' Quarterly Report on Form 10-Q for the quarter ended June
30, 1997;
3. DataWorks' Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997;
4. DataWorks' Annual Report on Form 10-K for the fiscal year ended
December 31, 1996;
5. DataWorks' Proxy Statement for the 1997 Annual Meeting of
Shareholders filed pursuant to Rule 14a-6 of the Exchange Act; and
6. The description of DataWorks Common Stock contained in DataWorks'
Registration Statement on Form 8-A filed with the Commission on September
20, 1995.
All documents and reports filed by DataWorks pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act between the date of this Prospectus/Joint
Proxy Statement and the date of the DataWorks Meeting and the Interactive
Meeting shall be deemed to be incorporated by reference in this Prospectus/Joint
Proxy Statement and to be part hereof from the dates of filing of such documents
and reports.
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Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes hereof to the extent that a statement contained herein (or in any
other subsequently filed document that is or is deemed to be incorporated by
reference herein) modifies or supersedes such previous statement. Any statement
so modified or superseded shall not be deemed to constitute a part hereof except
as so modified and superseded.
THIS PROSPECTUS/JOINT PROXY STATEMENT INCORPORATES DOCUMENTS BY REFERENCE
THAT ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS (OTHER THAN
EXHIBITS TO SUCH DOCUMENTS, UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED
BY REFERENCE HEREIN) ARE AVAILABLE, WITHOUT CHARGE, UPON ORAL OR WRITTEN REQUEST
BY ANY PERSON TO WHOM THIS PROSPECTUS/JOINT PROXY STATEMENT HAS BEEN DELIVERED
FROM DATAWORKS CORPORATION, 5910 PACIFIC CENTER BOULEVARD, SUITE 300, SAN DIEGO,
CALIFORNIA 92121, ATTENTION: CHIEF FINANCIAL OFFICER; TELEPHONE NUMBER: (619)
546-9600. IN ORDER TO ASSURE TIMELY DELIVERY OF THE DOCUMENTS PRIOR TO THE
INTERACTIVE MEETING AND THE DATAWORKS MEETING, ANY SUCH REQUEST SHOULD BE MADE
BY SEPTEMBER 19, 1997.
------------------------
This Prospectus/Joint Proxy Statement contains trademarks and registered
trademarks of DataWorks, Interactive and other companies.
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<PAGE> 14
SUMMARY
The following is a summary of certain information contained elsewhere in
this Prospectus/Joint Proxy Statement. The summary does not contain a complete
description of the terms of the Merger and is qualified in its entirety by
reference to the full text of this Prospectus/Joint Proxy Statement and the
Appendices hereto. Shareholders of DataWorks and stockholders of Interactive are
urged to read this Prospectus/Joint Proxy Statement and the Appendices in their
entirety.
Except for the historical information contained herein, the discussion in
this Prospectus/Joint Proxy Statement contains forward-looking statements that
involve risks and uncertainties. DataWorks', Interactive's and the combined
entity's actual results could differ materially from those discussed here.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed in the section entitled "Risk Factors" and elsewhere
in this Prospectus/Joint Proxy Statement and in the information and documents
annexed hereto or incorporated herein by reference.
GENERAL
This Prospectus/Joint Proxy Statement is being provided to shareholders of
DataWorks and stockholders of Interactive in connection with the proposed Merger
of DataWorks Sub with and into Interactive, pursuant to which DataWorks Sub will
cease to exist and Interactive will survive the Merger as a wholly owned
subsidiary of DataWorks. The Merger will be effected pursuant to the Merger
Agreement, a copy of which is attached hereto as Appendix A.
THE PARTIES
DataWorks
DataWorks develops, markets, implements and supports open systems,
client/server-based Enterprise Resource Planning ("ERP") software for mid-sized
discrete manufacturing companies with annual revenues between $3 million and $1
billion. DataWorks' 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. DataWorks' products also help
customers adapt to growth, changing levels of operations and business process
re-engineering, which is becoming commonplace among manufacturing concerns.
DataWorks was incorporated in California in 1986. Unless otherwise indicated,
"DataWorks" refers to DataWorks Corporation, a California corporation, and its
subsidiaries. DataWorks' executive offices are located at 5910 Pacific Center
Boulevard, Suite 300, San Diego, California 92121. Its telephone number is (619)
546-9600.
See "Risk Factors" for a discussion of the risks associated with the
ownership of DataWorks Common Stock, including risks related to the Merger.
DataWorks Sub
DataWorks Sub was incorporated in Delaware in July 1997 for the sole
purpose of effecting the Merger. It is a wholly owned subsidiary of DataWorks
and has no material assets or liabilities and has not engaged in any activities
except in connection with the proposed Merger. DataWorks Sub's executive offices
are located at 5910 Pacific Center Boulevard, Suite 300, San Diego, California
92121. Its telephone number is (619) 546-9600.
Interactive
Interactive develops, markets, implements and supports integrated business
information systems that enable discrete manufacturers to manage their
enterprise-wide information requirements. Interactive's executive offices are
located at 5095 Murphy Canyon Road, San Diego, California 92123. Its telephone
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<PAGE> 15
number is (619) 560-8525. See "Interactive Business" for a more detailed
description of Interactive's business.
MEETINGS OF DATAWORKS SHAREHOLDERS AND INTERACTIVE STOCKHOLDERS
Date, Time and Place
The DataWorks Meeting will be held on September 29, 1997 at 9:00 o'clock
a.m., local time, at DataWorks' offices at 5910 Pacific Center Boulevard, Suite
300, San Diego, California.
The Interactive Meeting will be held on September 29, 1997 at 9:00 o'clock
a.m., local time, at Interactive's offices at 5095 Murphy Canyon Road, San
Diego, California.
Purposes of the Meetings
DataWorks Meeting. At the DataWorks Meeting, shareholders of DataWorks will
be asked to consider and vote upon proposals to (i) approve and adopt the Merger
Agreement, a copy of which is attached hereto as Appendix A, (ii) approve the
Merger (collectively referred to herein as the "Merger Proposal") and (iii)
approve an amendment to the Bylaws of DataWorks (the "DataWorks Bylaws") to
provide that the authorized number of directors be at least five and no more
than nine (the "Bylaw Amendment").
Interactive Meeting. At the Interactive Meeting, stockholders of
Interactive will be asked to consider and vote upon the Merger Proposal.
Record Date; Shares Entitled to Vote
DataWorks. Only holders of record of DataWorks Common Stock at the close of
business on August 20, 1997 (the "Record Date") are entitled to notice of and to
vote at the DataWorks Meeting. At the close of business on the Record Date,
there were outstanding and entitled to vote shares of DataWorks Common
Stock, each of which will be entitled to one vote on each matter to be acted
upon at the DataWorks Meeting.
Interactive. Only holders of record of Interactive Common Stock at the
close of business on the Record Date are entitled to notice of and to vote at
the Interactive Meeting. At the close of business on the Record Date, there were
outstanding and entitled to vote shares of Interactive Common Stock,
each of which will be entitled to one vote on each matter to be acted upon at
the Interactive Meeting.
Vote Required
DataWorks. Approval of the Merger Proposal and the Bylaw Amendment requires
the affirmative vote of the holders of a majority of the shares of DataWorks
Common Stock outstanding on the Record Date and entitled to vote on the Merger
Proposal and the Bylaw Amendment. As a group, all executive officers and
directors of DataWorks and their respective affiliates beneficially owned
shares, or approximately %, of the DataWorks Common Stock
outstanding as of the Record Date. Certain executive officers and directors of
DataWorks owning in the aggregate approximately 20% of the outstanding DataWorks
Common Stock have each agreed to vote or direct the vote of all DataWorks Common
Stock over which they have voting power or control in favor of the Merger
Proposal. See "Terms of the Merger -- Related Agreements -- Voting Agreements."
Interactive. Approval of the Merger Proposal requires the affirmative vote
of the holders of a majority of the shares of Interactive Common Stock
outstanding on the Record Date and entitled to vote on the Merger Proposal. As a
group, all executive officers and directors of Interactive and their respective
affiliates beneficially owned shares, or approximately %, of the
Interactive Common Stock outstanding as of the Record Date. Certain executive
officers and directors of Interactive owning in the aggregate approximately 39%
of the outstanding Interactive Common Stock have each agreed to vote or direct
the vote of all Interactive Common Stock over which they have voting power or
control in favor of the Merger Agreement and the Merger.
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RECOMMENDATIONS OF BOARDS OF DIRECTORS
The DataWorks Board. The DataWorks Board has approved the Merger Agreement,
the Merger and the Bylaw Amendment and has determined that the Merger is in the
best interests of DataWorks and its shareholders. The DataWorks Board has
unanimously recommended approval of the Merger Proposal and the Bylaw Amendment
by the DataWorks shareholders. The primary factors considered and relied upon by
the DataWorks Board in reaching its recommendation are described below under
"Approval of the Merger and Related Transactions -- DataWorks' Reasons for the
Merger."
The Interactive Board. The Interactive Board has approved the Merger
Agreement and the Merger and has determined that the Merger is in the best
interests of Interactive and its stockholders. The Interactive Board has
unanimously recommended approval of the Merger Proposal by the Interactive
stockholders. The primary factors considered and relied upon by the Interactive
Board in reaching its recommendation are described below under "Approval of the
Merger and Related Transactions -- Interactive's Reasons for the Merger."
RISK FACTORS
See "Risk Factors" for a discussion of certain factors pertaining to the
Merger and the businesses of DataWorks and Interactive.
OPINION OF DATAWORKS' FINANCIAL ADVISOR
Lehman Brothers Inc. ("Lehman Brothers") has acted as financial advisor to
DataWorks in connection with the Merger. As part of its role as financial
advisor to DataWorks, Lehman Brothers was engaged to render its opinion as to
the fairness, from a financial point of view, to DataWorks of the Exchange
Ratio. The full text of the opinion of Lehman Brothers, which sets forth the
assumptions made, matters considered and limitations on the review undertaken by
Lehman Brothers, is attached as Appendix B to this Prospectus/Joint Proxy
Statement. DataWorks shareholders are urged to read the opinion in its entirety.
See "Approval of the Merger and Related Transactions -- Opinion of Lehman
Brothers Inc."
OPINION OF INTERACTIVE'S FINANCIAL ADVISOR
UBS Securities LLC ("UBS Securities"), Interactive's financial advisor, has
delivered to Interactive its written opinion, dated July 31, 1997, to the effect
that, as of such date, the Exchange Ratio (as defined below) was fair, from a
financial point of view, to Interactive stockholders. The full text of the
opinion of UBS Securities, which sets forth the assumptions made, matters
considered and limitations on the review undertaken by UBS Securities, is
attached as Appendix C to this Prospectus/Joint Proxy Statement. Interactive
stockholders are urged to read this opinion in its entirety. See "Approval of
the Merger and Related Transactions -- Opinion of UBS Securities LLC."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Interactive Board with respect to
the Merger Proposal, holders of Interactive Common Stock should be aware that
members of the Interactive Board and the executive officers of Interactive have
certain interests in the Merger that are in addition to the interests of the
holders of Interactive Common Stock generally. In particular, certain employees
of Interactive will enter into employment agreements and noncompetition
agreements with DataWorks, and the directors and executive officers of
Interactive will receive certain indemnification and liability insurance
benefits from DataWorks following the Effective Date. In addition, subject to
DataWorks shareholder approval of the Bylaw Amendment, promptly following
consummation of the Merger Robert C. Vernon will be elected a director of
DataWorks. The members of the Interactive Board, including the outside
directors, were aware of these interests and took such interests into account in
approving the Merger Agreement and the transactions contemplated thereby. See
"Approval of the Merger and Related Transactions -- Interests of Certain Persons
in the Merger," "-- Background of the Merger," "Terms of the Merger -- Related
Agreements -- Employment and Noncompetition Agreements" and "-- Indemnification
and Insurance."
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REGULATORY MATTERS
Other than compliance with the federal securities laws and applicable
securities and "blue sky" laws of the various states, DataWorks and Interactive
are not aware of any governmental or regulatory approvals required for
consummation of the Merger.
CERTAIN FEDERAL INCOME TAX MATTERS
The Merger is expected to be a tax-free reorganization for federal income
tax purposes under Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code"), so that no gain or loss will be recognized by the
Interactive stockholders on the exchange of Interactive Common Stock for
DataWorks Common Stock or by the DataWorks shareholders, except to the extent
that Interactive stockholders receive cash in lieu of fractional shares and
except to the extent that DataWorks shareholders receive cash for dissenting
shares. Neither Interactive nor DataWorks will obtain a ruling from the Internal
Revenue Service as to the tax consequences of the Merger. As a condition to each
of DataWorks' and Interactive's obligations to consummate the Merger, DataWorks
and Interactive will receive an opinion at the Effective Date from their
respective legal counsel to the effect that the Merger will be treated as a
tax-free reorganization for federal income tax purposes; provided, however, that
if the counsel to Interactive does not render such opinion, this condition shall
nonetheless be deemed to be satisfied with respect to Interactive if counsel to
DataWorks renders such opinion to Interactive. Interactive stockholders and
DataWorks shareholders are urged to consult their own tax advisors regarding the
tax consequences of the Merger. See "Approval of the Merger and Related
Transactions -- Certain Federal Income Tax Matters."
ACCOUNTING TREATMENT
The Merger is intended to be treated as a pooling of interests for
financial reporting purposes in accordance with generally accepted accounting
principles. Consummation of the Merger is conditioned upon (i) receipt by
DataWorks and Interactive of a letter from DataWorks' independent accountants
dated the date of the closing of the Merger to the effect that such accountants
concur with DataWorks management's conclusion that pooling-of-interests
accounting for the Merger is appropriate and (ii) receipt by DataWorks and
Interactive of a letter from Interactive's independent accountants dated the
date of the closing of the Merger to the effect that such accountants concur
with DataWorks management's conclusion that no conditions exist relating to
Interactive that would preclude DataWorks from accounting for the Merger as a
pooling of interests. See "Approval of the Merger and Related
Transactions -- Accounting Treatment" and "Terms of the Merger -- Conditions to
the Merger."
DISSENTERS' RIGHTS OF DATAWORKS SHAREHOLDERS
If the Merger Agreement is approved by the required vote of DataWorks
shareholders and is not abandoned or terminated, the holders of DataWorks Common
Stock may be entitled to exercise dissenters' rights, pursuant to Chapter 13 of
the California Law, a copy of which is attached hereto as Appendix D, with
respect to shares voted in opposition to the Merger, provided that five percent
or more of the shares of DataWorks Common Stock are voted against the Merger and
seek to exercise dissenters' rights. IF DEMANDS FOR PAYMENT ARE MADE WITH
RESPECT TO FIVE PERCENT (5%) OR MORE OF THE OUTSTANDING SHARES OF DATAWORKS
COMMON STOCK, AND, AS A CONSEQUENCE DISSENTING SHAREHOLDERS OF DATAWORKS BECOME
ENTITLED TO EXERCISE DISSENTERS' RIGHTS, THEN EITHER DATAWORKS OR INTERACTIVE
MAY TERMINATE THE MERGER AGREEMENT, FOLLOWING WHICH THE PARTIES WILL NOT BE
OBLIGATED TO CONSUMMATE THE MERGER. See "Approval of the Merger and Related
Transactions -- Dissenters' Rights of DataWorks Shareholders" and "Terms of the
Merger."
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NO APPRAISAL RIGHTS OF INTERACTIVE STOCKHOLDERS
The stockholders of Interactive are not entitled to appraisal rights in
connection with the Merger under the Delaware General Corporation Law (the
"DGCL"). See "Approval of the Merger and Related Transactions--No Appraisal
Rights of Interactive Stockholders."
AMENDMENT OF DATAWORKS BYLAWS
At the DataWorks Meeting, in addition to considering the Merger Proposal,
the DataWorks shareholders will be asked to consider and vote upon the Bylaw
Amendment. The full text of the Bylaw Amendment is attached as Appendix E to
this Prospectus/Joint Proxy Statement. DataWorks shareholders are urged to read
the Bylaw Amendment in its entirety. Upon DataWorks shareholder approval of the
Bylaw Amendment, the DataWorks Board will fix the number of authorized directors
at eight (8) and, following consummation of the Merger, elect Robert C. Vernon
to fill the vacancy of the DataWorks Board created thereby. See "Approval of the
Merger and Related Transactions -- Amendment to DataWorks Bylaws."
THE MERGER
Terms of the Merger; Exchange Ratio. As a result of the Merger, Interactive
will become a wholly owned subsidiary of DataWorks and each outstanding share of
Interactive Common Stock (other than any shares of Interactive Common Stock
owned by DataWorks, Interactive, DataWorks Sub or any direct or indirect wholly
owned subsidiary of DataWorks or Interactive) will be converted into the right
to receive 0.8054 (the "Exchange Ratio") of a share of DataWorks Common Stock.
Cash will be paid in lieu of issuing fractional shares. Based upon the
capitalization of Interactive as of the close of business on the Record Date, an
aggregate of approximately 3,700,000 shares of DataWorks Common Stock (the
"Merger Consideration") will be issued in the Merger, and DataWorks will assume
all outstanding Interactive options and warrants which will be converted into
options and warrants to acquire approximately 536,000 additional shares of
DataWorks Common Stock. See "Terms of the Merger -- Manner and Basis for
Converting Shares."
Other Effects of the Merger. The Merger will be consummated promptly after
the approval by the DataWorks shareholders and the Interactive stockholders of
the Merger Proposal and the satisfaction or waiver of the other conditions to
consummation of the Merger (the "Closing Date"). The Merger will become
effective on the date that a certificate of merger is duly filed with the
Delaware Secretary of State (the "Effective Date"). On the Effective Date,
DataWorks Sub will merge with and into Interactive, with the result that
Interactive will be the surviving corporation in the Merger and a wholly owned
subsidiary of DataWorks (the "Surviving Subsidiary"). The stockholders of
Interactive will become shareholders of DataWorks (as described below), and
their rights will be governed by DataWorks' Articles of Incorporation, as
amended (the "DataWorks Articles"), the Bylaws of DataWorks (the "DataWorks
Bylaws") and the California Law. See "Terms of the Merger -- Effect of the
Merger" and "Comparison of Rights of Shareholders of DataWorks and Stockholders
of Interactive."
Exchange of Interactive Stock Certificates. Promptly after the Effective
Date, DataWorks, acting through ChaseMellon Shareholder Services LLC as its
exchange agent (the "Exchange Agent"), will deliver to each holder of record, as
of the Effective Date, of a certificate or certificates which immediately prior
to the Effective Date represented outstanding shares of Interactive Common Stock
a letter of transmittal with instructions to be used by such holder in
surrendering such certificates in exchange for certificates representing shares
of DataWorks Common Stock. CERTIFICATES SHOULD NOT BE SURRENDERED BY THE HOLDERS
OF INTERACTIVE COMMON STOCK UNTIL SUCH HOLDERS RECEIVE THE LETTER OF TRANSMITTAL
FROM THE EXCHANGE AGENT, AND THEN ONLY IN ACCORDANCE WITH THE TERMS OF SUCH
LETTER OF TRANSMITTAL. See "Terms of the Merger -- Manner and Basis for
Converting Shares."
Interactive Options; Stock Purchase Plan. On the Effective Date, each
unexpired and unexercised option under stock option plans in effect on the date
of the Merger Agreement which has been granted to current or former directors,
officers, employees, consultants or independent contractors of Interactive by
Interactive (each, an "Interactive Option") will be assumed by DataWorks and
will be automatically converted into an
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option (a "DataWorks Exchange Option") to purchase that number of shares of
DataWorks Common Stock equal to the number of shares of Interactive Common Stock
issuable immediately prior to the Effective Date upon exercise of the
Interactive Option (without regard to actual restrictions on exercisability)
multiplied by the Exchange Ratio, with an exercise price per share equal to the
exercise price per share which existed under the corresponding Interactive
Option divided by the Exchange Ratio, and with other terms and conditions (such
as vesting) that are the same as the terms and conditions of such Interactive
Option immediately before the Effective Date. As of the Record Date,
shares of Interactive Common Stock were issuable upon the exercise of
outstanding Interactive Options, which options will be assumed by DataWorks and
will be converted into DataWorks Exchange Options to acquire approximately
shares of DataWorks Common Stock at the Effective Date. The weighted
average exercise price per share of all Interactive Options outstanding as of
the Record Date is approximately $ per share. Following the Merger the
weighted average exercise price per share of all DataWorks Exchange Options will
be approximately $ per share. The unvested portion of each Interactive
Option will continue to vest as a DataWorks Exchange Option upon the same
schedule as the corresponding Interactive Option. To the extent any Interactive
Options are exercised from the date of the Merger Agreement to the Effective
Date, the issued Interactive Common Stock will be converted at the Exchange
Ratio.
Immediately prior to the Effective Date, Interactive will terminate the
Interactive Employee Stock Purchase Plan. All amounts that have been withheld
but not yet applied to purchase shares of Interactive Common Stock pursuant to
such plan as of its termination date will be applied to purchase the number of
shares available under the Employee Stock Purchase Plan, and the Interactive
Common Stock to be received by the participating employees pursuant to the terms
of such plan will be converted at the Exchange Ratio into shares of DataWorks
Common Stock.
Promptly following the Effective Date, DataWorks will file on Form S-8 a
post-effective amendment to the Registration Statement to register shares of
DataWorks Common Stock issuable as a result of the exercise of DataWorks
Exchange Options. See "Terms of the Merger -- Treatment of Employee Equity Plans
and Warrants."
Stock Ownership Following the Merger. Based upon the capitalization of
Interactive as of the close of business on the Record Date, an aggregate of
approximately 3,700,000 shares of DataWorks Common Stock will be issued to
Interactive stockholders in the Merger and DataWorks will assume all outstanding
Interactive options and warrants which will be converted into options and
warrants to acquire up to approximately 536,000 additional shares of DataWorks
Common Stock. Based upon the number of shares of DataWorks Common Stock issued
and outstanding as of the Record Date, and after giving effect to the issuance
of DataWorks Common Stock as described in the previous sentence and the exercise
of all options and warrants to purchase Interactive Common Stock assumed by
DataWorks, the former holders of Interactive Common Stock and options and
warrants to purchase Interactive Common Stock would hold, and have voting power
with respect to, approximately % of DataWorks' total issued and outstanding
shares on a fully diluted basis. The foregoing numbers of shares and percentages
are subject to change to reflect any changes in the capitalization of either
DataWorks or Interactive subsequent to the dates indicated and prior to the
Effective Date, and there can be no assurance as to the actual capitalization of
DataWorks or Interactive as of the Effective Date or of DataWorks at any time
following the Effective Date. See "Terms of the Merger -- Stock Ownership
Following the Merger."
Board of Directors; Management Following the Merger. There will be no
change in the current DataWorks Board and officers of DataWorks as a result of
the Merger, except that Robert C. Vernon, the current Chairman of the Board and
Chief Executive Officer of Interactive, will become President, International
Operations and, subject to DataWorks shareholder approval of the Bylaw
Amendment, a director of DataWorks, and Mark Hellinger, the current President
and Chief Operating Officer -- North American Operations and a director of
Interactive, will become President, Mid-Tier Division of DataWorks, effective
immediately following the Closing. In addition, Robert W. Brandel, currently an
Executive Vice President and the Chief Operating Officer of DataWorks, will
become President, Lower-Tier Division of DataWorks. On the Effective Date, the
officers of Interactive (as the Surviving Subsidiary) will be Stuart W. Clifton
and
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Norman R. Farquhar, and the directors of Interactive will be Stuart W. Clifton
and Norman R. Farquhar. See "Terms of the Merger -- Effect of the Merger."
Covenants. Pursuant to the Merger Agreement, Interactive and DataWorks have
each agreed (on behalf of itself and each of its direct and indirect
majority-owned subsidiaries) that, until the earlier of the termination of the
Merger Agreement pursuant to its terms and the Effective Date, subject to
certain exceptions, and except to the extent that the other party consents in
writing, each will conduct its business and operations in the ordinary course
and in accordance with past practices and in compliance with all applicable laws
and regulations and the requirements of all applicable material contracts;
preserve intact its current business organization; keep available the services
of its current officers and employees and maintain its relations and goodwill
with all suppliers, customers, landlords, creditors, licensors, licensees,
employees and others with which it has business relationships; use all
reasonable efforts to keep in full force all of its existing insurance policies;
and provide all material notices, assurances and support required by any
material contract to which it is a party. In addition, subject to certain
exceptions, Interactive and DataWorks have agreed that, without the prior
written consent of the other, they will not perform or engage in certain
activities in the conduct of their respective businesses and the businesses of
their subsidiaries. See "Terms of the Merger -- Covenants."
No Solicitation. Pursuant to the Merger Agreement, except under certain
limited circumstances, Interactive has agreed that it will not (i) solicit any
alternate acquisition proposal, (ii) participate in any discussions or
negotiations with any other parties with respect to an alternate acquisition
proposal, or (iii) provide any non-public information concerning Interactive to
any other parties in connection with any alternate acquisition proposal. See
"Terms of the Merger -- No Solicitation."
Conditions to the Merger. Consummation of the Merger is subject to certain
conditions, including (i) declaration by the Commission of the effectiveness of
the Registration Statement, (ii) approval of the Merger Proposal by the
DataWorks shareholders and the Interactive Stockholders, (iii) absence of any
material legal proceeding relating to the Merger, (iv) receipt by DataWorks and
Interactive of legal opinions that the Merger will constitute a reorganization
within the meaning of Section 368(a) of the Code, (v) receipt by Interactive and
DataWorks of letters dated the Effective Date from their independent accountants
to the effect that such accountants concur with DataWorks management's
conclusion that no conditions exist that would preclude DataWorks from
accounting for the Merger as a pooling of interests, (vi) subject to certain
materiality thresholds, the accuracy of the representations and warranties made
by each party in the Merger Agreement, (vii) subject to certain materiality
thresholds, performance of all covenants required by the Merger Agreement, and
(viii) execution of the employment agreements and noncompetition agreements. See
"Terms of the Merger -- Conditions to the Merger."
Termination; Break-Up Fees. The Merger Agreement may be terminated by
either party under certain circumstances. DataWorks and Interactive have agreed
that, if the Merger is not consummated under certain circumstances, DataWorks or
Interactive, as the case may be, will pay to the other a sum of $1,500,000. See
"Terms of the Merger -- Termination of the Merger Agreement," "-- Effect of
Termination" and "-- Break-Up Fees."
Voting Agreements. Concurrently with the execution of the Merger Agreement,
certain executive officers and directors of Interactive owning in the aggregate
approximately 39% of the outstanding Interactive Common Stock entered into
voting agreements with DataWorks, and certain executive officers and directors
of DataWorks owning in the aggregate approximately 20% of the outstanding
DataWorks Common Stock entered into voting agreements with Interactive (each a
"Voting Agreement" and, collectively, the "Voting Agreements"). Pursuant to the
Voting Agreements, each of such persons agreed to vote or direct the vote of all
Interactive Common Stock or DataWorks Common Stock, as the case may be, over
which such person has voting power or control in favor of the Merger Agreement
and the Merger. See "Terms of the Merger -- Related Agreements -- Voting
Agreements."
Option Agreement. In connection with the Merger Agreement, DataWorks and
Interactive entered into an option agreement pursuant to which Interactive
granted to DataWorks an option to purchase up to 344,531 shares of Interactive
Common Stock at an exercise price of $7.50 per share. The option is exercisable
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upon the occurrence of certain events and provides DataWorks the right to
require Interactive to, under certain circumstances, purchase for cash the
unexercised portion of the option or, under certain other circumstances, to
issue shares of Interactive Common Stock. The option, which DataWorks required
that Interactive grant as a condition to DataWorks' entering into the Merger
Agreement, may increase the likelihood of consummation of the Merger. See "Terms
of the Merger -- Related Agreements -- Option Agreement."
Affiliate Agreements. Each of the members of the Interactive Board and
certain officers of Interactive have entered into agreements restricting sales,
dispositions or other transactions reducing their risk of investment in respect
of the shares of Interactive Common Stock held by them prior to the Merger and
the shares of DataWorks Common Stock to be received by them in the Merger so as
to comply with the requirements of applicable federal securities laws and to
help ensure that the Merger will be treated as a pooling of interests for
accounting and financial reporting purposes. Certain persons who may be deemed
affiliates of DataWorks have entered into agreements restricting sales,
dispositions or other transactions reducing their risk of investment with
respect of the shares of DataWorks Common Stock held by them so as to help
ensure that the Merger will be treated as a pooling of interests for accounting
and financial reporting purposes. See "Terms of the Merger -- Related
Agreements -- Affiliate Agreements."
Employment and Noncompetition Agreements. It is a condition to the Merger
that, on the Effective Date, each of Robert C. Vernon, Mark Hellinger and Bruce
H. Leith enter into an Employment Agreement and a Noncompetition Agreement with
DataWorks, which agreements shall become effective promptly after the
effectiveness of the Merger. See "Terms of the Merger -- Related
Agreements -- Employment and Noncompetition Agreements."
Merger Expenses and Fees and Other Costs. Except for certain limited
exceptions, all fees and expenses incurred in connection with the Merger
Agreement and the transactions contemplated by the Merger Agreement shall be
paid by the party incurring such expenses, whether or not the Merger is
consummated; provided, however, that DataWorks and Interactive shall share
equally all fees and expenses, other than attorneys' fees, incurred in
connection with the printing and filing of the S-4 Registration Statement and
this Prospectus/Joint Proxy Statement and any amendments or supplements thereto.
See "Terms of the Merger -- Merger Expenses and Fees and Other Costs."
DataWorks and Interactive estimate that they will incur direct transaction
costs of approximately $14.0 million ($9.5 million net of tax) associated with
the Merger. These nonrecurring transaction costs will be charged to operations
upon consummation of the Merger, expected in the quarter ending September 30,
1997. See "Unaudited Pro Forma Combined Condensed Financial Information" and
"Risk Factors -- Integration of Operations."
MARKET PRICE DATA
The following table sets forth, for the fiscal quarters indicated, the
range of high and low sale prices per share of DataWorks Common Stock as
reported on the Nasdaq National Market under the symbol "DWRX."
<TABLE>
<CAPTION>
QUARTERLY PERIOD HIGH LOW
---------------------------------------------------------- ------- -------
<S> <C> <C>
Fiscal year ended December 31, 1995:
4th Quarter............................................. $ 15.00 $ 10.75
Fiscal year ended December 31, 1996:
1st Quarter............................................. $ 14.25 $ 10.25
2nd Quarter............................................. 19.50 11.50
3rd Quarter............................................. 28.00 15.75
4th Quarter............................................. 34.25 20.75
Fiscal year ending December 31, 1997:
1st Quarter............................................. $ 27.25 $13.625
2nd Quarter............................................. 22.75 12.00
3rd Quarter (through August 15, 1997)................... 21.875 12.00
</TABLE>
11
<PAGE> 22
As of the Record Date, there were approximately stockholders of
record of DataWorks Common Stock, as shown on the stock records of DataWorks.
The following table sets forth, for the fiscal quarters indicated, the
range of high and low sale prices per share of Interactive Common Stock as
reported on the Nasdaq National Market under the symbol "INTE."
<TABLE>
<CAPTION>
QUARTERLY PERIOD HIGH LOW
----------------------------------------------------------- ------- ------
<S> <C> <C>
Fiscal year ended December 31, 1995:
2nd Quarter.............................................. $ 6.75 $ 6.00
3rd Quarter................................................ 8.25 5.25
4th Quarter.............................................. 8.625 5.625
Fiscal year ended December 31, 1996:
1st Quarter.............................................. $ 7.375 $4.125
2nd Quarter.............................................. 6.375 4.00
3rd Quarter.............................................. 6.75 4.375
4th Quarter.............................................. 8.75 4.625
Fiscal year ending December 31, 1997:
1st Quarter.............................................. $ 6.25 $ 4.50
2nd Quarter.............................................. 7.125 4.625
3rd Quarter (through August 15, 1997).................... 12.125 6.375
</TABLE>
As of the Record Date, there were approximately stockholders of record
of Interactive Common Stock, as shown on the stock records of Interactive.
Neither DataWorks nor Interactive has ever paid any cash dividends on its
capital stock, except that DCD Corporation, a DataWorks subsidiary, in 1994 and
1995 (prior to its merger with DataWorks) paid $393,133 and $649,026,
respectively, as dividends on the Common Stock owned by the Employee Stock
Ownership Plan established by DCD in 1992 (the "ESOP"). DataWorks anticipates
that, for the foreseeable future, it will continue to retain any earnings for
use in the operation of its business.
On July 31, 1997, the last full trading day prior to the public
announcement of the execution and delivery of the Merger Agreement, the closing
prices on Nasdaq for DataWorks Common Stock and Interactive Common Stock were
$14.375 per share and $7.50 per share, respectively. As of the Record Date, the
closing prices on Nasdaq for DataWorks Common Stock and Interactive Common Stock
were $ per share and $ per share, respectively. There can be
no assurance as to the actual prices of DataWorks Common Stock or Interactive
Common Stock prior to or at the Effective Date of the Merger or of DataWorks
Common Stock at any time following the Effective Date of the Merger. See
"-- Comparative Per Share Data" and "Risk Factors."
Because the Exchange Ratio is fixed, changes in the market price of
DataWorks Common Stock will affect the dollar value of DataWorks Common Stock to
be received by stockholders of Interactive in the Merger. Interactive
stockholders are urged to obtain current market quotations for DataWorks Common
Stock prior to the Interactive Meeting.
12
<PAGE> 23
SELECTED HISTORICAL FINANCIAL DATA
The selected historical financial data set forth below with respect to
DataWorks' consolidated statements of operations for each of the three years in
the period ended December 31, 1996, and with respect to DataWorks' consolidated
balance sheets at December 31, 1995 and 1996, are derived from the audited
consolidated financial statements of DataWorks which are incorporated by
reference into this Prospectus/Joint Proxy Statement. The selected historical
financial data set forth below with respect to DataWorks' consolidated
statements of operations for the year ended December 31, 1993 and with respect
to DataWorks' consolidated balance sheets at December 31, 1993 and 1994 are
derived from the audited consolidated financial statements of DataWorks not
incorporated by reference into this Prospectus/Joint Proxy Statement. The
selected historical financial data set forth below with respect to DataWorks'
consolidated balance sheet at December 31, 1992 and for the year then ended are
derived from the unaudited consolidated financial statements. The selected
historical financial data set forth below with respect to the consolidated
statements of operations of Interactive for each of the three years in the
period ended December 31, 1996 and with respect to Interactive's consolidated
balance sheets at December 31, 1995 and 1996 are derived from the audited
consolidated financial statements of Interactive included elsewhere in this
Prospectus/Joint Proxy Statement and are qualified by reference to such
financial statements and the notes related thereto. The selected historical
financial data set forth below with respect to the consolidated statements of
operations of Interactive for each of the two years in the period ended December
31, 1993 and with respect to Interactive's consolidated balance sheets at
December 31, 1992, 1993 and 1994 are derived from the audited consolidated
financial statements of Interactive not included in this Prospectus/Joint Proxy
Statement.
The selected historical financial data for DataWorks for the six months
ended June 30, 1996 and 1997 are derived from the unaudited consolidated
financial statements which are incorporated by reference into this
Prospectus/Joint Proxy Statement. The selected historical financial data for
Interactive for the six months ended June 30, 1996 and 1997 are derived from the
unaudited consolidated financial statements included elsewhere in this
Prospectus/Joint Proxy Statement. In each case, the unaudited consolidated
financial statements include all adjustments, consisting of normal recurring
accruals, that each company considers necessary for a fair presentation of the
financial position and results of operations for the periods presented.
Operating results for DataWorks for the six months ended June 30, 1997 and for
Interactive for the six months ended June 30, 1997 are not necessarily
indicative of the results that may be expected for the entire year or future
periods.
The data set forth below are qualified by reference to, and should be read
in conjunction with, the related consolidated financial statements and the notes
related thereto.
13
<PAGE> 24
DATAWORKS SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA(1):
Revenues:
Software licenses........................ $ 4,580 $ 6,692 $11,627 $22,874 $35,526 $15,835 $17,148
Hardware................................. 1,843 4,089 3,765 6,743 5,429 2,687 2,903
Maintenance and other services........... 3,525 4,741 7,689 13,394 19,793 8,956 13,951
------- ------- ------- ------- ------- ------- -------
Total revenues..................... 9,948 15,522 23,081 43,011 60,748 27,478 34,002
Cost of revenues:
Software licenses........................ 190 272 1,192 2,153 2,701 1,375 1,116
Hardware................................. 1,381 2,474 2,930 5,288 4,117 1,994 2,264
Maintenance and other services........... 3,448 3,747 4,717 8,330 14,203 6,658 8,998
------- ------- ------- ------- ------- ------- -------
Total cost of revenues............. 5,019 6,493 8,839 15,771 21,021 10,027 12,378
------- ------- ------- ------- ------- ------- -------
Gross profit............................... 4,929 9,029 14,242 27,240 39,727 17,451 21,624
Operating expenses:
Sales and marketing...................... 2,760 3,843 7,404 12,057 18,653 8,028 11,021
Research and development................. 1,065 1,230 2,521 3,214 4,329 1,943 3,080
General and administrative............... 2,586 2,350 3,202 5,032 7,203 3,435 3,923
Acquisition and related costs............ -- -- -- -- 3,656 -- --
ESOP contribution........................ 199 387 429 446 -- -- --
------- ------- ------- ------- ------- ------- -------
Total operating expenses........... 6,610 7,810 13,556 20,749 33,841 13,406 18,024
------- ------- ------- ------- ------- ------- -------
Income (loss) from operations.............. (1,681) 1,219 686 6,491 5,886 4,045 3,600
Other income (expense) net............... (224) (500) (1,141) (1,337) 444 238 959
------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes and
extraordinary item....................... (1,905) 719 (455) 5,154 6,330 4,283 4,559
Provision (benefit) for income taxes....... -- -- (264) 1,780 3,094 2,120 1,596
------- ------- ------- ------- ------- ------- -------
Income (loss) before extraordinary item.... (1,905) 719 (191) 3,374 3,236 2,163 2,963
Extraordinary item, net of income taxes.... -- -- (157) (1,017) -- -- --
------- ------- ------- ------- ------- ------- -------
Net income (loss).......................... $(1,905) $ 719 $ (348) $ 2,357 $ 3,236 $ 2,163 $ 2,963
======= ======= ======= ======= ======= ======= =======
Per share information(1):
Income (loss) before extraordinary
item................................... $ (.71) $ .19 $ (.05) $ .61 $ .39 $ .27 $ .28
Extraordinary item....................... -- -- (.04) (.18) -- -- --
------- ------- ------- ------- ------- ------- -------
Net income (loss).......................... $ (.71) $ .19 $ (.09) $ .43 $ .39 $ .27 $ .28
======= ======= ======= ======= ======= ======= =======
Shares used in per share computations(1)... 2,691 3,844 4,021 5,523 8,255 8,157 10,465
======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------- JUNE 30,
1992 1993 1994 1995 1996 1997
------- ------- ------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............................ $ 491 $ 636 $ 1,458 $13,005 $47,143 $54,764
Working capital (deficit)............................ (5,068) (5,211) (3,882) 15,985 61,804 63,335
Total assets......................................... 2,315 4,212 15,139 38,153 92,226 97,696
Long-term debt, less current portion................. 2,476 1,501 7,832 -- -- --
Total shareholders' equity (deficit)(2).............. (6,883) (5,650) (5,357) 22,892 71,802 75,422
</TABLE>
- ---------------
(1) See Note 1 of Notes to DataWorks' Consolidated Financial Statements
describing the determination of the number of shares used in computing per
share information.
(2) In October 1995, DataWorks completed its initial public offering resulting
in net proceeds to DataWorks of $18.0 million. The net proceeds from such
offering were used to repay outstanding indebtedness, to increase working
capital and for general corporate purposes. In December 1996, DataWorks
completed a follow-on equity offering resulting in net proceeds to DataWorks
of $41.3 million. The net proceeds were 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.
14
<PAGE> 25
INTERACTIVE SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
----------------------------------------------- -----------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Software licenses.................................... $ 4,575 $ 6,368 $10,633 $11,255 $19,643 $ 9,580 $10,959
Software support services............................ 5,833 5,855 7,078 9,680 18,629 9,352 9,068
Hardware............................................. 4,571 5,197 5,891 5,613 8,014 3,904 2,393
Maintenance contracts................................ 2,243 2,627 3,655 5,347 8,650 4,095 5,309
Other................................................ 1,989 1,685 1,368 1,098 1,255 661 713
------- ------- ------- ------- ------- ------- -------
Total revenues................................. 19,211 21,732 28,625 32,993 56,191 27,592 28,442
Cost of revenues:
Software licenses.................................... 821 1,629 2,789 2,548 3,826 2,038 2,150
Software support services............................ 3,941 3,271 4,172 5,575 13,377 6,521 6,687
Hardware............................................. 3,022 3,830 4,506 4,021 5,849 2,876 1,742
Maintenance contracts................................ 452 643 963 1,954 3,784 1,772 2,318
Other................................................ 1,577 1,196 1,167 1,133 1,494 728 656
------- ------- ------- ------- ------- ------- -------
Total cost of revenues......................... 9,813 10,569 13,597 15,231 28,330 13,935 13,553
------- ------- ------- ------- ------- ------- -------
Gross margin........................................... 9,398 11,163 15,028 17,762 27,861 13,657 14,889
Operating expenses:
Research and development............................. 900 957 1,320 1,588 4,064 2,053 1,712
Selling, general and administrative.................. 8,685 8,414 10,847 13,891 21,791 10,027 12,404
Write-off of software license........................ -- -- -- 235 -- -- --
Compensation expense associated with employee
stock bonus(1)..................................... -- -- -- 871 -- -- --
Purchased research and development(2)................ -- -- -- 3,250 -- -- --
------- ------- ------- ------- ------- ------- -------
Income (loss) from operations.......................... (187) 1,792 2,861 (2,073) 2,006 1,577 773
Other income (expense), net............................ (175) (134) (80) 87 (197) (72) (143)
Gain on litigation settlement.......................... 1,051 -- -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Income (loss) before income tax........................ 689 1,658 2,781 (1,986) 1,809 1,505 630
Provision (benefit) for income tax..................... (57) 216 972 (848) 548 610 263
------- ------- ------- ------- ------- ------- -------
Net income (loss)...................................... $ 746 $ 1,442 $ 1,809 $(1,138) $ 1,261 $ 895 $ 367
======= ======= ======= ======= ======= ======= =======
Net income (loss) per share(3)......................... $ .21 $ .40 $ .49 $ (.28) $ .28 $ .20 $ .08
======= ======= ======= ======= ======= ======= =======
Shares used in per share computations(3)............... 3,577 3,611 3,685 4,084 4,468 4,430 4,554
======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, JUNE
--------------------------------------------- 30,
1992 1993 1994 1995 1996 1997
------ ------ ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents........................................ $ 722 $1,256 $ 1,721 $ 4,467 $ 3,682 $ 3,697
Working capital (deficit)........................................ (786) 604 1,850 4,581 5,022 5,730
Total assets..................................................... 5,944 8,649 11,635 24,763 28,976 30,215
Long-term obligations, net of current portion.................... 292 359 212 2,105 1,864 1,959
Stockholders' equity (deficit)................................... (102) 1,313 3,129 8,348 10,287 11,110
</TABLE>
- ---------------
(1) Represents a non-recurring compensation expense of $871,000 associated with
the final stock grant and cash bonus pursuant to a compensation arrangement
with an officer of Interactive.
(2) Relates to acquisition of JIT. See Note 2 of Notes to Consolidated Financial
Statements of Interactive.
(3) See Note 1 of Notes to Consolidated Financial Statements of Interactive for
the basis of computing net income (loss) per common share.
15
<PAGE> 26
SELECTED PRO FORMA COMBINED CONDENSED FINANCIAL DATA
The selected pro forma combined financial data are derived from the
unaudited pro forma combined condensed financial statements, which give effect
to the Merger as a pooling of interests, and should be read in conjunction with,
and are qualified by reference to, such pro forma statements and the notes
thereto included elsewhere in this Prospectus/Joint Proxy Statement. For
purposes of the unaudited pro forma operating data, DataWorks' consolidated
financial statements for the three fiscal years ended December 31, 1996 and for
the six months ended June 30, 1996 and 1997 have been combined with the
consolidated financial statements of Interactive for the three fiscal years
ended December 31, 1996 and for the six months ended June 30, 1996 and 1997,
respectively. For purposes of the unaudited pro forma combined balance sheet
data, DataWorks' consolidated financial data at June 30, 1997 has been combined
with Interactive's consolidated financial data at June 30, 1997. No dividends
have been declared or paid on DataWorks Common Stock or Interactive Common
Stock, except that during 1994 and 1995, DCD (prior to its merger with
DataWorks) paid dividends totaling $393,133 and $649,026, respectively, on the
Common Stock owned by the ESOP.
The pro forma data is presented for illustrative purposes only and is not
necessarily indicative of the operating results or financial position that would
have been achieved if the Merger had been consummated as of the beginning of the
periods indicated, nor is it necessarily indicative of future financial position
or results of operations.
16
<PAGE> 27
SELECTED PRO FORMA COMBINED CONDENSED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------- -----------------
1994 1995 1996 1996 1997
------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
PRO FORMA COMBINED STATEMENT OF INCOME DATA:
Net revenues.................................... $51,706 $76,004 $116,939 $55,070 $62,444
Cost of revenues................................ 23,687 32,658 52,182 25,247 27,678
------- ------- -------- ------- -------
Gross profit.................................... 28,019 43,346 64,757 29,823 34,766
Operating expenses:
Sales and marketing........................... 13,412 19,817 29,632 13,238 17,545
Research and development...................... 4,126 5,163 8,918 4,222 5,074
General and administrative.................... 6,505 9,146 14,659 6,741 7,774
Acquisition and related costs................. -- -- 3,656 -- --
ESOP contribution(1).......................... 429 446 -- -- --
Write-off of software license................. -- 235 -- -- --
Compensation expense associated with employee
stock bonus(2)............................. -- 871 -- -- --
Purchased research and development(3)......... -- 3,250 -- -- --
------- ------- -------- ------- -------
Income from operations.......................... 3,547 4,418 7,892 5,622 4,373
Other income (expense), net..................... (1,221) (1,250) 247 166 816
------- ------- -------- ------- -------
Income before income taxes...................... 2,326 3,168 8,139 5,788 5,189
Provision for income taxes...................... 708 932 3,642 2,730 1,859
------- ------- -------- ------- -------
Income before extraordinary item(4)............. $ 1,618 $ 2,236 $ 4,497 $ 3,058 $ 3,330
======= ======= ======== ======= =======
Earnings per share data:
Income before extraordinary item (4).......... $ .23 $ .25 $ .38 $ .26 $ .24
======= ======= ======== ======= =======
Weighted average common and common equivalent
shares outstanding............................ 6,989 8,812 11,854 11,725 14,133
======= ======= ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
1997
---------
<S> <C>
PRO FORMA COMBINED BALANCE SHEET DATA:
Cash and cash equivalents.......................................................... $ 58,461
Working capital.................................................................... 59,586
Total assets....................................................................... 127,911
Long-term obligations, net of current portion...................................... 1,959
Shareholders' equity............................................................... 77,052
</TABLE>
- ---------------
(1) See Note 4 to the DataWorks Financial Statements for an explanation of the
ESOP. The ESOP liability was repaid during 1995 and future contributions
will not be required.
(2) Represents a non-recurring compensation expense of $871,000 associated with
the final stock grant and cash bonus pursuant to a compensation arrangement
with an officer of Interactive.
(3) Relates to the acquisition of JIT. See Note 2 of Notes to Consolidated
Financial Statements of Interactive.
(4) In 1994 and 1995, DataWorks incurred an extraordinary loss resulting from
the early repayment of certain debt obligations.
(5) Certain reclassifications have been made to conform the financial statements
of Interactive to the DataWorks presentation. Total cost of revenues
increased and operating expenses decreased by $1,251,000, $1,656,000,
$2,831,000, $1,285,000 and $1,747,000 for the years ended December 31, 1994,
1995, 1996 and the six months ended June 30, 1996 and 1997, respectively.
17
<PAGE> 28
COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data of
DataWorks and Interactive and combined per share data on an unaudited pro forma
basis after giving effect to the Merger on a pooling-of-interests basis of
accounting. This data should be read in conjunction with the selected historical
financial data, the unaudited pro forma combined condensed financial data and
the separate historical consolidated financial statements of DataWorks and
Interactive, and notes thereto. The pro forma combined financial data is not
necessarily indicative of the operating results that would have been achieved
had the Merger been consummated as of the beginning of the periods indicated nor
is such data necessarily indicative of future financial condition or results of
operations. For purposes of the comparative per share data, DataWorks' financial
data at December 31, 1994, 1995 and 1996 and June 30, 1996 and 1997 have been
combined with Interactive's financial data at December 31, 1994, 1995 and 1996
and June 30, 1996 and 1997, respectively.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------- -----------------
1994 1995 1996 1996 1997
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
HISTORICAL -- DATAWORKS:
Net income (loss) per share............... $ (.09) $ .43 $ .39 $ .27 $ .28
Book value per share(1)................... $(1.38) $ 3.08 $ 7.21 $ 3.46 $ 7.45
HISTORICAL -- INTERACTIVE:
Net income (loss) per share............... $ .49 $ (.28) $ .28 $ .20 $ .08
Book value per share(1)................... $ .92 $ 1.90 $ 2.29 $ 2.11 $ 2.42
PRO FORMA COMBINED PER DATAWORKS SHARE(2):
Net income per share...................... $ .23 $ .25 $ .38 $ .26 $ .24
Book value per share(1)................... $ (.34) $ 2.85 $ 6.05 $ 3.19 $ 5.58
EQUIVALENT PRO FORMA COMBINED PER
INTERACTIVE SHARE(2)(3):
Net income per share...................... $ .29 $ .31 $ .47 $ .32 $ .30
Book value per share(1)................... $ (.42) $ 3.54 $ 7.51 $ 3.96 $ 6.93
</TABLE>
- ---------------
(1) The historical book value per share is computed by dividing shareholders'
equity by the number of shares of Common Stock outstanding at the end of
each period. The pro forma book value per share is computed by dividing pro
forma shareholders' equity by the pro forma number of shares of DataWorks
Common Stock at the end of each period.
(2) DataWorks and Interactive estimate they will incur transaction-related costs
of approximately $14.0 million associated with the Merger, including
estimated costs associated with integrating the two companies, which will be
charged to operations upon consummation of the Merger. The Pro Forma
Combined Book Value Per Share data give effect to estimated costs of $9.5
million, net of tax, as if such costs and charge had been incurred as of
June 30, 1997. These costs and charge are not included in the pro forma
income per share data. See "Unaudited Pro Forma Condensed Combined Financial
Information" and accompanying notes thereto.
(3) The equivalent Interactive pro forma per share amounts are calculated by
dividing the DataWorks combined pro forma per share amounts by the Exchange
Ratio.
18
<PAGE> 29
RISK FACTORS
The following risk factors should be considered by holders of DataWorks and
Interactive Common Stock in evaluating whether to approve the Merger Agreement
and the Merger. These factors should be considered in conjunction with the other
information included and incorporated by reference in this Prospectus/Joint
Proxy Statement.
The discussion in this Prospectus/Joint Proxy Statement contains
forward-looking statements that involve risks and uncertainties. DataWorks',
Interactive's and the combined entity's actual results could differ materially
from those discussed here. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed below and in the
sections entitled "Interactive Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Interactive Business," as well as
those discussed elsewhere in this Prospectus/Joint Proxy Statement or
incorporated herein by reference.
INTEGRATION OF OPERATIONS
If the combined company is to realize the anticipated benefits of the
Merger, the operations of the two companies must be integrated and combined
efficiently. The process of rationalizing product lines, management services,
administrative organizations, facilities, management information systems and
other aspects of operations, while managing a larger and geographically expanded
entity, will present a significant challenge to the management of the combined
company. There can be no assurance that the integration process will be
successful or that the anticipated benefits of the business combination will be
fully realized. The dedication of management resources to such integration may
detract attention from the day-to-day business of the combined company. The
difficulties of integration may be increased by the necessity of coordinating
geographically separated organizations, integrating personnel with disparate
business backgrounds and combining different corporate cultures. There can be no
assurance that there will not be substantial costs associated with the
integration process, that such activities will not result in a decrease in
revenues or that there will not be other material adverse effects of these
integration efforts. Further, there can be no assurance that, upon learning of
the proposed Merger, customers will not defer purchasing decisions until the
closing of the Merger or thereafter. Such effects could materially reduce the
short-term earnings of the combined company. Subsequent to the Merger, DataWorks
expects to incur a charge in the third quarter of fiscal 1997, currently
estimated to be $14.0 million, to reflect the combination of the two companies,
including transaction and integration costs. This amount is a preliminary
estimate only. There can be no assurance that DataWorks will not incur
additional charges in the third quarter and subsequent quarters to reflect costs
associated with the Merger.
In addition, DataWorks acquired DCD Corporation in September 1996, and
Interactive acquired Just-In-Time Enterprise Systems, Inc. ("JIT") in December
1995 and Genie Productique/Gestion de Production in July 1997. There can be no
assurance that the integration process in connection with such acquisitions will
be successful or that the anticipated benefits thereof will be fully realized.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
DataWorks and Interactive have experienced significant fluctuations in
their respective revenues and operating results from quarter to quarter and
anticipate that they will continue to experience such quarterly fluctuations.
Both companies' revenues and operating results have generally been higher in the
fourth quarter than in any preceding quarter of the year. DataWorks and
Interactive believe that fourth quarter revenues are positively impacted by
year-end capital purchases by most customers. In addition, DataWorks believes
that fourth quarter revenues are also positively impacted by DataWorks' sales
compensation plans. Seasonal factors, which DataWorks and Interactive believe
are common in the computer software industry, are likely to increase as
DataWorks and Interactive focus on larger corporate accounts. As a result of
these seasonal factors, first quarter revenues in any year are typically lower
than revenues in the immediately preceding fourth quarter. In addition,
DataWorks' and Interactive's revenues occur predominantly in the third month of
each quarter and tend to be concentrated in the latter half of that third month.
Further, there can be no assurance that, upon learning of the proposed Merger,
customers will not defer purchasing decisions until the closing of
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the Merger or thereafter. Accordingly, quarterly results of operations of both
DataWorks and Interactive 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
quarterly operating results of DataWorks, Interactive and the combined company
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 for DataWorks and
Interactive to recognize revenues; the timing of introduction of products or
product enhancements by DataWorks, Interactive, their competitors or other
providers of hardware, software and components for DataWorks' and Interactive's
market; lengthy sales cycles; 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 DataWorks or
Interactive strategy; changes in DataWorks' or Interactive's 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.
DataWorks' sales figures for DataFlo and ManFact II, DataWorks' principal
products, as well as Interactive's sales figures for its 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 DataWorks and the combined
company than on those of companies with higher sales volumes and lower revenues
per order. DataWorks' and Interactive'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 DataWorks' DataFlo
and ManFact II products and from sales of Interactive's products is difficult to
predict because of the length of the sales cycles for these products, which are
typically three to nine months from the initial contact, in the case of
DataWorks' products, and six to twelve months from the initial contact, in the
case of Interactive's products. Because DataWorks' operating expenses are based
on anticipated revenue trends and because a high percentage of DataWorks' and
Interactive's expenses are relatively fixed, a delay in the recognition of
revenue from a limited number of license transactions could cause significant
variations in operating results from quarter to quarter and could result in
losses. To the extent such expenses precede, or are not subsequently followed
by, increased revenues, DataWorks' and the combined company's operating results
would be materially adversely affected. In addition, the achievement of
anticipated revenues is substantially dependent on the ability of DataWorks and
Interactive to attract, on a timely basis, and retain skilled personnel,
especially sales, service and implementation personnel. As a result of these
factors, revenues for any quarter are subject to significant variation, and
DataWorks and Interactive believe that period-to-period comparisons of their
results of operations are not necessarily meaningful and should not be relied
upon as indications of future performance. Fluctuations in operating results may
also result in volatility in the price of DataWorks' Common Stock.
COMPETITION
The business information systems industry is intensely competitive, rapidly
changing and significantly affected by new product offerings and other market
activities. A number of companies offer products similar to DataWorks' and
Interactive's products, which are directed at the market for ERP systems. Many
of DataWorks' and Interactive's existing competitors, as well as a number of
potential competitors, have more established and larger marketing and sales
organizations, significantly greater financial and technical resources and a
larger installed base of customers than DataWorks and Interactive. 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. DataWorks and Interactive have no
proprietary barriers to entry which would limit competitors from developing
similar products or selling competing products in DataWorks' and Interactive's
markets. Accordingly, there can be no assurance that such competitors will not
offer or develop products that are superior to DataWorks' and Interactive's
products or that achieve greater market acceptance. In addition, suppliers of
relational database management systems
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("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 DataWorks or otherwise develop applications
that compete effectively in DataWorks' and Interactive's markets. Furthermore,
DataWorks intends to focus its marketing and product development efforts
increasingly 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' and Interactive's 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 DataWorks
and Interactive, may enter the market or increase their market share by
acquiring or entering into alliances with competitors of DataWorks and
Interactive. There can be no assurance that DataWorks or the combined company
will be able to compete successfully against their competitors or that the
competitive pressures faced by DataWorks and the combined company will not
adversely affect their financial performance.
DataWorks' and Interactive's principal market is highly fragmented and
consists of a few large multinational suppliers and a much larger number of
small regional competitors. DataWorks and Interactive believe that their
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 merge with
their competitors. To compete effectively in the broad markets which DataWorks
and Interactive presently target, DataWorks and the combined company will need
to continue to grow and attain sufficient size to ensure that they 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 DataWorks and the combined
company will be able to grow sufficiently to enable it to compete effectively.
DataWorks and Interactive anticipate that a significant source of future
competition may be from larger manufacturing software companies that may tailor
their products for the mid-range market. Only a few of the larger and better
capitalized software systems companies currently compete in DataWorks' and
Interactive's targeted markets. There can be no assurance that such companies
will not develop products that are superior to DataWorks' and Interactive's
products or that achieve greater market acceptance.
ABILITY TO RECRUIT SALES, SERVICE AND IMPLEMENTATION PERSONNEL
The ability to achieve anticipated revenues is substantially dependent on
the ability of DataWorks and the combined company to attract on a timely basis
and retain skilled personnel, especially sales, service and implementation
personnel. In addition, DataWorks and Interactive believe that the future
success of DataWorks and of the combined company will depend in large part on
their ability to attract and retain highly skilled technical, managerial,
marketing and professional services personnel to ensure the quality of products
and services provided to its customers. Competition for such personnel, in
particular for product development, sales and implementation personnel, is
intense, and DataWorks and Interactive compete in the market for such personnel
against numerous companies, including larger, more established companies with
significantly greater financial resources than DataWorks and Interactive. There
can be no assurance that DataWorks or the combined company will be successful in
attracting and retaining skilled personnel. DataWorks' or the combined company's
inability to attract and retain qualified employees could have a material
adverse effect on the business and operations of DataWorks and of the combined
company.
INTRODUCTION OF ECS SYSTEM
DataWorks currently anticipates commencing beta shipments of the initial
phase of its ECS system in late 1997. However, there can be no assurance that
DataWorks will commence such shipments in 1997, or at all. Furthermore,
DataWorks has limited experience in selling products to customers in the
mid-range manufacturing market based on the advanced technologies used in the
ECS system and could result in a longer sales cycle and may require a different
strategy than that employed by DataWorks in selling its currently released
products. For example, as part of its ECS product strategy, DataWorks is
exploring
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potential relationships with third party software providers and 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
DataWorks or the combined company. Accordingly, even if customer shipments of
the ECS system are timely commenced, there can be no assurance that DataWorks or
the combined company will be successful in effectively marketing the ECS system
or that the ECS system will achieve market acceptance.
MANAGEMENT OF GROWTH
DataWorks' and Interactive's businesses have grown rapidly, both internally
and through acquisitions. There can be no assurance that DataWorks or the
combined company will be able to manage its recent growth and assimilate its new
employees and products successfully. To manage its growth effectively, DataWorks
and the combined 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 DataWorks and the combined company continue to grow,
there can be no assurance that the management skills and systems currently in
place will be adequate or that DataWorks and the combined company will be able
to manage any additional growth effectively.
DEPENDENCE ON KEY EMPLOYEES
DataWorks' and Interactive's continued success depends to a significant
extent upon their ability to retain certain key employees, including Stuart W.
Clifton, Norman R. Farquhar, Robert W. Brandel, Robert C. Vernon and Mark
Hellinger. The loss of certain key employees or DataWorks' or the combined
company's inability to attract and retain other qualified employees could have a
material adverse effect on the business and operations of DataWorks and the
combined company.
DEPENDENCE ON PRINCIPAL PRODUCTS
Substantially all of DataWorks' revenue is derived from the sale of turnkey
information systems, primarily the DataFlo and Man-Fact II systems, and related
support services, and substantially all of Interactive's revenue is derived from
the sale of manufacturing information systems, primarily the INFOFLO and JES
systems, and related support services. Accordingly, any event that adversely
affects fees derived from the sale of such systems, such as competition from
other products, significant flaws in DataWorks' or Interactive's software
products or incompatibility with third party hardware or software products,
negative publicity or evaluation, or obsolescence of the hardware platforms or
software environments in which the systems run, could have a material adverse
effect on DataWorks' and the combined company's business and operations.
DataWorks' and the combined company's future financial performance will depend,
in substantial part, on the continued development and introduction of new and
enhanced versions of DataFlo, Man-Fact II, INFOFLO and JES and other products,
and customer acceptance of such new and enhanced products.
RAPID TECHNOLOGICAL CHANGE AND NEW PRODUCTS
The market for DataWorks' and Interactive'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 initial phase of the ECS system, and the
emergence of new industry standards, could render DataWorks' and Interactive's
existing products and products currently under development obsolete and
unmarketable. Accordingly, DataWorks' and the combined company's future success
will depend upon their ability to enhance current products and develop and
introduce new products that keep pace with technological developments, satisfy
varying end-user requirements and achieve market acceptance. Any failure by
DataWorks or the combined company to anticipate or respond adequately to
technological developments or end-user requirements, or any significant delays
in product development or introduction, could damage DataWorks' and the combined
company's competitive position and have an adverse effect on revenues. There can
be no assurance that DataWorks or the combined company will be successful in
developing and marketing new products, including the ECS system, or product
enhancements on a timely basis or that DataWorks or the combined company will
not experience significant delays in the future, which could have a material
adverse
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effect on DataWorks' and the combined company's business and operations. In
addition, there can be no assurance that new products or product enhancements
developed by DataWorks or the combined company will achieve market acceptance.
DataWorks and the combined company may need to increase the size of their
product development staffs in the near term to meet these challenges. There can
be no assurance that DataWorks and the combined company will be successful in
hiring and training an adequate number of qualified product development
personnel to meet their needs.
Software programs as complex as those offered by DataWorks and Interactive
may contain undetected errors or "bugs" when first introduced or as new versions
are released that, despite testing by DataWorks and Interactive, are discovered
only after a product has been installed and used by customers. There can be no
assurance that errors will not be found in future releases of DataWorks' and the
combined company's software, or that any such errors will not impair the market
acceptance of these products and adversely affect operating results. Problems
encountered by customers installing and implementing new releases or with the
performance of DataWorks', Interactive's or the combined company's products
could have a material adverse effect on DataWorks' and the combined company's
business and operations.
DEPENDENCE ON MANUFACTURING INDUSTRY
DataWorks' and Interactive's businesses depend 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 DataWorks and Interactive could affect such demand, forcing
manufacturers in DataWorks' and Interactive's target markets to curtail or
postpone capital expenditures on business information systems. Any such change
in the amount or timing of capital expenditures in its target markets could have
a material adverse effect on DataWorks' and the combined company's business and
operations.
DEPENDENCE ON THIRD PARTY SOFTWARE AND HARDWARE
Most of DataWorks' and Interactive's products incorporate and use software
products and computer hardware and equipment developed by other entities. The
RDBMS currently used in DataWorks' products are those which DataWorks believes
are best suited for the particular applications required by the mid-range
discrete manufacturers. These RDBMS have been developed by UniData, Inc.
(previously Millsoft, Inc.) ("UniData"), VMARK Software, Inc. ("VMARK"),
Progress and Microsoft Corporation. The operating systems on which DataWorks'
products can function (UNIX, SCO-UNIX, UnixWare, VMS and Microsoft NT) have been
developed or are owned by Novell Corporation, DEC and Microsoft Corporation. The
computer hardware and related equipment sold as part of DataWorks' turnkey
systems are manufactured by Hewlett-Packard, IBM, DEC and others. INFOFLO and
JES incorporate and use software products and computer hardware and equipment
developed by other entities. The fourth generation language ("4GL") set of
development tools used by Interactive is provided by Unidata, Inc. and Oracle
Corporation. The RDBMS used in Interactive's products have been developed by
UniData, VMARK and Oracle Corporation, and the operating systems on which
Interactive's products function (UNIX and NT) have been developed or are owned
by Novell Corporation and Microsoft Corporation. A portion of the software in
Interactive's Product Configurator module is provided by Expert Application
Systems, Limited. The computer hardware and equipment sold as part of
Interactive's turnkey systems are manufactured by Hewlett-Packard Company, 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 DataWorks and the combined company. If any
of these entities ceases to do business or abandons or fails to enhance a
particular product line, DataWorks and Interactive may need to seek other
suppliers. This could have a material adverse effect on DataWorks' and the
combined company's business and operations. In addition, there can be no
assurance that DataWorks' and Interactive's current suppliers will not
significantly alter their pricing in a manner adverse to DataWorks and the
combined company.
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INTERNATIONAL OPERATIONS AND RISK OF INTERNATIONAL SALES
DataWorks and Interactive derived approximately 4% and 32%, respectively,
of their total revenues from operations outside North America in 1996. The
international business is subject to various risks common to international
activities, including exposure to currency fluctuations, political and economic
instability, the greater difficulty of administering business abroad and the
need to comply with a wide variety of foreign import and United States export
laws and regulatory requirements. Neither DataWorks nor Interactive currently
engages in foreign currency hedging transactions.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
DataWorks and Interactive rely on a combination of copyright, trademark and
trade secret laws, employee and third-party nondisclosure agreements and other
industry standard methods for protecting ownership of their proprietary
software. There can be no assurance, however, that, in spite of these
precautions, an unauthorized third party will not copy or reverse-engineer
certain portions of DataWorks' or Interactive's products or obtain and use
information that DataWorks and Interactive regard as proprietary. DataWorks and
Interactive provide the source code for their application software under
licenses to its customers to enable them to customize the software to meet
particular requirements. Although DataWorks' and Interactive's source code
licenses contain confidentiality and nondisclosure provisions, there can be no
assurance that such customers will take adequate precautions to protect
DataWorks' and Interactive's source code or other confidential information. In
addition, the laws of some foreign countries do not protect DataWorks' and
Interactive's proprietary rights to the same extent as do the laws of the United
States. There can be no assurance that the mechanisms used by DataWorks and
Interactive to protect their software will be adequate or that DataWorks' and
Interactive's competitors will not independently develop software products that
are substantially equivalent or superior to DataWorks' and Interactive's
software products.
DataWorks and Interactive have and may, from time to time receive notices
from third parties claiming that their products infringe upon third party
proprietary rights. DataWorks and Interactive expect that, as the number of
software products in the industry increases and the functionality of these
products further overlaps, software products will increasingly be subject to
such claims. Any such claim, with or without merit, could result in costly
litigation and require DataWorks or the combined company to enter into royalty
or licensing arrangements. Such royalty or license arrangements, if required,
may not be available, if at all, on terms acceptable to DataWorks or the
combined company.
PRODUCT LIABILITY
Because DataWorks and Interactive market and sell their software products
on a turnkey basis, which includes rendering professional consulting services,
DataWorks and Interactive incur significant risks of professional and other
liability. No assurance can be given that the limitations of liability set forth
in DataWorks' and Interactive's license agreements or other contracts would be
enforceable or would otherwise protect them from liability for damages to a
customer resulting from a defect in one of DataWorks' or Interactive's products
or arising as a result of professional services rendered by DataWorks or
Interactive. Such a claim, if successful and of sufficient magnitude, could have
a material adverse effect on DataWorks' and the combined company's business and
operations.
INFLUENCE OF EXISTING SHAREHOLDERS
As of the Record Date, DataWorks' executive officers, directors and their
affiliates beneficially owned approximately % of DataWorks' outstanding
shares of Common Stock. Upon consummation of the Merger, DataWorks' executive
officers, directors and their affiliates will beneficially own approximately
% of DataWorks' 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 DataWorks, including the election of a majority
of the directors. The voting power of these shareholders under certain
circumstances could have the effect of delaying or preventing a change in
control of DataWorks. DataWorks has entered into agreements
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with its executive officers and directors indemnifying them against losses they
may incur in legal proceedings arising from their service to DataWorks.
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of DataWorks' Common Stock has fluctuated since its
initial public offering in October 1995. The price of DataWorks' stock may be
subject to significant fluctuations in the future in response to variations in
quarterly operating results of DataWorks, announcements of new products by
DataWorks or by its competitors, and general trends in the software industry, as
well as fluctuations in the stock market that are unrelated to the operating
performance of particular companies. Also, DataWorks' 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 DataWorks'
stock to decline, perhaps substantially. Such stock price and market
fluctuations could adversely affect DataWorks and the combined company.
EFFECT OF CERTAIN CHARTER PROVISIONS
DataWorks' Board of Directors has the authority to issue up to 5,000,000
shares of Preferred Stock and to determine the price, rights, preferences and
privileges of those shares without any further vote or action by the
shareholders. The rights of the holders of DataWorks Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. The issuance of Preferred
Stock, while providing flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire a majority of the outstanding voting stock of
DataWorks. DataWorks has no present plan to issue any shares of Preferred Stock.
ADDITIONAL SHARES TO BE ISSUED BY DATAWORKS; SHARES ELIGIBLE FOR FUTURE SALE
Based upon the capitalization of Interactive as of the close of business on
the Record Date, an aggregate of approximately 3,700,000 shares of DataWorks
Common Stock (the "Merger Consideration") will be issued in the Merger, and
DataWorks will assume all outstanding Interactive options and warrants which
will be converted into options and warrants to acquire approximately 536,000
additional shares of DataWorks Common Stock. In general, the shares will be
eligible for sale in the public market following the Merger, subject to certain
volume and other resale limitations for affiliates of Interactive and DataWorks,
pursuant to Rules 144 and/or 145 under the Securities Act and to agreements not
to sell to the extent required to cause the Merger to be accounted for as a
pooling of interests. See "Approval of the Merger and Related
Transactions -- Affiliate Agreements" and "Terms of the Merger." An aggregate of
approximately of the shares issued in the Merger will be beneficially
owned by persons who may be deemed to be affiliates of Interactive and,
therefore, subject to such limitations. The sale of a significant number of the
foregoing shares may cause substantial fluctuations in the market price of
DataWorks Common Stock. Upon completion of the Merger, DataWorks will have
outstanding an aggregate of shares of Common Stock, assuming no
exercise of outstanding options or warrants, based upon the number of shares
outstanding as of the Record Date. Assuming 3,700,000 shares of DataWorks Common
Stock are issued as a result of the Merger, the current DataWorks shareholders'
ownership of DataWorks will be reduced to %. In addition, promptly following
the Effective Date, DataWorks expects to file on Form S-8 a post-effective
amendment to the Registration Statement registering a total of approximately
431,000 shares of DataWorks Common Stock issuable as a result of the exercise of
DataWorks Exchange Options. Shares registered on such Form S-8 will, subject to
vesting restrictions and to Rule 144 and/or Rule 145 volume limitations
applicable to affiliates, be available for sale in the open market.
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THE DATAWORKS MEETING
DATE, TIME AND PLACE OF MEETING
The DataWorks Meeting will be held on Friday, September 29, 1997 at 9:00
o'clock a.m., local time, at 5910 Pacific Center Boulevard, Suite 300, San
Diego, California. DataWorks intends to deliver this Prospectus/Joint Proxy
Statement on or about August 22, 1997, to all DataWorks shareholders entitled to
vote at the DataWorks Meeting.
RECORD DATE AND OUTSTANDING SHARES
Only holders of record of DataWorks Common Stock at the close of business
on August 20, 1997 (the "Record Date"), are entitled to notice of and to vote at
the DataWorks Meeting. As of the close of business on the Record Date, there
were shares of DataWorks Common Stock outstanding and entitled to
vote, held of record by shareholders. Each DataWorks shareholder is
entitled to one vote for each share of DataWorks Common Stock held as of the
Record Date.
VOTING OF PROXIES
The DataWorks proxy accompanying this Prospectus/Joint Proxy Statement is
solicited on behalf of the DataWorks Board for use at the DataWorks Meeting and
at any adjournment or postponement thereof. DataWorks shareholders are requested
to complete, date and sign the accompanying proxy and promptly return it in the
accompanying envelope. All proxies that are properly executed and returned, and
that are not revoked, will be voted at the DataWorks Meeting in accordance with
the instructions indicated on the proxies or, if no direction is indicated, to
approve the Merger Proposal, the Bylaw Amendment and the other proposals
submitted to the DataWorks shareholders, each as unanimously recommended by the
DataWorks Board, as indicated herein. The DataWorks Board is not currently aware
of any business to be brought before the DataWorks Meeting other than the
specific proposals referred to in this Prospectus/Joint Proxy Statement and
specified in the accompanying notice of the DataWorks Meeting. As to any other
business that may properly come before the DataWorks Meeting, however, it is
intended that proxies, in the form enclosed, will be voted in respect thereof in
accordance with the judgment of the persons voting such proxies.
REVOCABILITY OF PROXIES
A DataWorks shareholder who has given a proxy may revoke it at any time
before it is exercised at the DataWorks Meeting by (i) delivering to the
Secretary of DataWorks (by any means, including facsimile) a written notice,
bearing a date later than the date of the proxy, stating that the proxy is
revoked, (ii) signing and so delivering a proxy relating to the same shares and
bearing a later date prior to the vote at the DataWorks Meeting or (iii)
attending the DataWorks Meeting and voting in person (although attendance at the
DataWorks Meeting will not, by itself, revoke a proxy).
VOTE REQUIRED
Approval of the Merger Proposal and the Bylaw Amendment requires the
affirmative vote of the holders of a majority of the shares of DataWorks Common
Stock outstanding on the Record Date. As a group, all executive officers and
directors of DataWorks and their respective affiliates beneficially owned
shares, or approximately %, of the DataWorks Common Stock
outstanding as of the Record Date. Certain executive officers and directors of
DataWorks owning in the aggregate approximately 20% of the outstanding DataWorks
Common Stock have each agreed to vote or direct the vote of all DataWorks Common
Stock over which they have voting power or control in favor of the Merger
Agreement and the Merger.
QUORUM; ABSTENTIONS; BROKER NON-VOTES
The presence, in person or by proxy, of a majority of the shares of
DataWorks Common Stock outstanding on the Record Date is necessary to constitute
a quorum for the transaction of business at the
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DataWorks Meeting. Abstentions and broker non-votes will each be included in
determining whether a quorum is present. Abstentions will have the same effect
as a vote against a proposal. Broker non-votes will not be counted for any
purpose in determining whether any of the proposals have been approved.
SOLICITATION OF PROXIES AND EXPENSES
DataWorks will bear the entire cost of the solicitation of votes of
DataWorks shareholders, including printing, assembly and mailing of this
Prospectus/Joint Proxy Statement, the proxy and any additional information
furnished to its shareholders. DataWorks and Interactive have engaged the firm
of ChaseMellon Shareholder Services to assist them in the distribution and
solicitation of proxies and have agreed to pay ChaseMellon Shareholder Services
a fee of approximately $15,000 plus expenses for its services. Copies of the
solicitation materials will be furnished to banks, brokerage houses, fiduciaries
and custodians holding in their names shares of DataWorks Common Stock
beneficially owned by others to forward to such beneficial owners. DataWorks may
reimburse persons representing beneficial owners of DataWorks Common Stock for
their costs of forwarding solicitation materials to such beneficial owners.
Original solicitation of proxies by mail may be supplemented by telephone,
telegram, letter or personal solicitation by directors, officers or other
employees of DataWorks and by ChaseMellon Shareholder Services. No additional
compensation will be paid to directors, officers and other regular employees for
such services.
BOARD RECOMMENDATION
THE DATAWORKS BOARD BELIEVES THAT THE MERGER AND THE BYLAW AMENDMENT ARE
FAIR TO AND IN THE BEST INTERESTS OF DATAWORKS AND ITS SHAREHOLDERS AND
THEREFORE UNANIMOUSLY RECOMMENDS A VOTE FOR APPROVAL OF THE MERGER PROPOSAL AND
THE BYLAW AMENDMENT.
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THE INTERACTIVE MEETING
DATE, TIME AND PLACE OF MEETING
The Interactive Meeting will be held on September 29, 1997 at 9:00 o'clock
a.m., local time, at Interactive's offices at 5095 Murphy Canyon Road, San
Diego, California. Interactive intends to deliver this Prospectus/Joint Proxy
Statement on or about August 22, 1997, to all Interactive stockholders entitled
to vote at the Interactive Meeting.
RECORD DATE AND OUTSTANDING SHARES
Only holders of record of Interactive Common Stock at the close of business
on August 20, 1997 (the "Record Date") are entitled to notice of and to vote at
the Interactive Meeting. As of the Record Date, there were shares of
Interactive Common Stock outstanding and entitled to vote, held of record by
stockholders. The principal stockholders of Interactive are identified
below under "Interactive Principal Stockholders."
STOCKHOLDER VOTE REQUIRED
The affirmative vote of the holders of a majority of the shares of
Interactive Common Stock outstanding as of the Record Date is required to
approve the Merger Proposal. Each holder of record of Interactive Common Stock
on the Record Date will be entitled to cast one vote per share on the Merger
Proposal. As a group, the directors and executive officers of Interactive and
their respective affiliates beneficially owned shares, or
approximately %, of the Interactive Common Stock outstanding as of the
Record Date.
The presence, in person or by proxy, of at least a majority of the shares
of Interactive Common Stock outstanding on the Record Date is necessary to
constitute a quorum for the transaction of business. Abstentions will be counted
for purposes of determining a quorum. For purposes of obtaining the required
vote of a majority of the outstanding shares of Interactive Common Stock for
approval of the Merger Proposal, the effect of an abstention and the effect of a
broker non-vote will have the same effect as a vote against the proposal.
Certain executive officers and directors of Interactive (Robert C. Vernon,
Mark Hellinger and Randolph Naylor) owning in the aggregate approximately 39% of
the outstanding Interactive Common Stock have each agreed to vote or direct the
vote of all Interactive Common Stock over which they have voting power or
control in favor of the Merger Agreement and the Merger. See "Terms of the
Merger -- Related Agreements -- Voting Agreements."
PROXIES
All shares of Interactive Common Stock that are entitled to vote and are
represented at the Interactive Meeting by properly executed proxies received
prior to or at the Interactive Meeting and not duly and timely revoked will be
voted at the Interactive Meeting in accordance with the instructions indicated
on such proxies. If no such instructions are indicated, such proxies will be
voted to approve the Merger Proposal.
Execution of a proxy does not in any way affect a stockholder's right to
attend the Interactive Meeting and vote in person. An Interactive stockholder
who has given a proxy may revoke it at any time before it is exercised at the
Interactive Meeting by (i) delivering to the Secretary of Interactive (by any
means, including facsimile) a written notice, bearing a date later than the date
of the proxy, stating that the proxy is revoked, (ii) signing and so delivering
a proxy relating to the same shares and bearing a later date prior to the vote
at the Interactive Meeting or (iii) attending the Interactive Meeting and voting
in person (although attendance at the Interactive Meeting will not, by itself,
revoke a proxy).
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SOLICITATION OF PROXIES; EXPENSES
Interactive will bear the entire cost of the solicitation of votes of
Interactive stockholders, including printing, assembly and mailing of this
Prospectus/Joint Proxy Statement, the proxy and any additional information
furnished to its stockholders. Interactive and DataWorks have engaged the firm
of ChaseMellon Shareholder Services to assist them in the distribution and
solicitation of proxies and have agreed to pay ChaseMellon Shareholder Services
a fee of approximately $15,000 plus expenses for its services. Copies of the
solicitation materials will be furnished to banks, brokerage houses, fiduciaries
and custodians holding in their names shares of Interactive Common Stock
beneficially owned by others to forward to such beneficial owners. Interactive
may reimburse persons representing beneficial owners of Interactive Common Stock
for their costs of forwarding solicitation materials to such beneficial owners.
Original solicitation of proxies by mail may be supplemented by telephone,
telegram, letter or personal solicitation by directors, officers or other
employees of Interactive and by ChaseMellon Shareholder Services. No additional
compensation will be paid to directors, officers and other regular employees for
such services.
BOARD RECOMMENDATION
THE INTERACTIVE BOARD HAS DETERMINED THAT THE MERGER IS FAIR TO AND IN THE
BEST INTERESTS OF INTERACTIVE AND ITS STOCKHOLDERS AND THEREFORE HAS UNANIMOUSLY
RECOMMENDED A VOTE FOR APPROVAL OF THE MERGER PROPOSAL.
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APPROVAL OF THE MERGER AND RELATED TRANSACTIONS
Other than statements of historical fact, the statements made in this
section, including statements as to the benefits expected to result from the
Merger and as to future financial performance and the analyses performed by
DataWorks' and Interactive's respective financial advisors, are forward-looking
statements within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. Actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth in "Risk Factors" and elsewhere in this
Prospectus/Joint Proxy Statement.
BACKGROUND OF THE MERGER
Although discussed from time to time in connection with Interactive's
long-term strategic planning, following its initial public offering in May 1995
and prior to the commencement of discussions with DataWorks in the first half of
June 1997, the Interactive Board did not seek, invite or entertain proposals
from third parties regarding a strategic transaction in which the business of
Interactive would be acquired (whether by DataWorks or otherwise). Rather,
Interactive has pursued a strategy of internal growth, acquisitions and
diversification with the strategic objective of becoming a leading international
provider of enterprise-wide, customer-oriented business information systems and
related value-added implementation and support services to mid-sized, mixed mode
manufacturers.
At the beginning of June 1997, Stuart W. Clifton, Chairman of the Board,
President and Chief Executive Officer of DataWorks, contacted Robert C. Vernon,
Chairman of the Board and Chief Executive Officer of Interactive, regarding a
meeting on June 5, 1997 to discuss certain strategic considerations. At such
meeting, Messrs. Clifton and Vernon discussed, in general terms, a potential
combination of DataWorks and Interactive, including an outline presented by Mr.
Clifton of a general proposal in which DataWorks would acquire the business of
Interactive in a stock-for-stock merger.
After communicating the outlines of the DataWorks proposal to the other
Interactive directors, Mr. Vernon contacted Mr. Clifton on June 9, 1997 to
advise him that, among other things, the proposed valuation for Interactive was
inadequate from Interactive's perspective and that the outlines for any
combination proposal would have to address the strategic fit of Interactive
within the organization of the combined entity.
During the week following their June 9 conversation, Mr. Vernon and Mr.
Clifton continued discussions with respect to the outlines of a proposed
combination. Through the course of such discussions, Mr. Clifton modified the
original proposal of DataWorks. The relative valuation for Interactive was
increased and a plan was outlined for a comprehensive integration of the
businesses of Interactive and DataWorks, including a proposal for DataWorks to
make specific employment and other arrangements with three key executives of
Interactive (Robert C. Vernon, Mark Hellinger and Bruce H. Leith) to ensure the
active and substantial participation of Interactive's management in the business
of the combined entity.
On June 11, 1997, the DataWorks Board held a special meeting attended by
representatives of Cooley Godward LLP ("Cooley Godward") and Lehman Brothers. At
the meeting, Mr. Clifton and Norman R. Farquhar, Executive Vice President and
Chief Financial Officer of DataWorks, outlined for the Board the general terms
of the proposed acquisition. Further, the Lehman Brothers representatives gave a
preliminary report to the Board regarding various financial aspects of the
proposed acquisition, as well as a general description of financial and other
analyses they intended to undertake. The DataWorks Board then authorized the
officers of DataWorks to proceed with discussions with Interactive and approved
the engagement of Lehman Brothers as financial advisor of DataWorks in
connection with the proposed acquisition.
A special meeting of the Interactive Board was held on June 19, 1997,
attended by representatives from Pillsbury Madison & Sutro LLP ("Pillsbury"),
special counsel retained by Interactive in connection with a possible strategic
transaction with DataWorks, and representatives from UBS Securities. At such
meeting, the directors reviewed the basic reasons for considering a transaction
with DataWorks as well as the reasons for continuing to pursue Interactive's
strategic objectives alone. Based upon the resources offered by DataWorks,
including respected executive leadership, a well-developed sales organization,
respected products and
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technologies, and relatively significant cash resources, the Interactive
directors concluded that achievement of Interactive's strategic objectives could
be accelerated through a combination of the two companies. This conclusion was
supported by, among other things, DataWorks' proposal to make arrangements to
ensure the active and substantial participation of Interactive's management in
the business of the combined entity. In this regard, the directors noted the
proposed employment arrangements with certain Interactive executives (Robert C.
Vernon as the head of international operations of post-Merger DataWorks, Mark
Hellinger, Interactive's current President and Chief Operating Officer, as the
head of the mid-tier division of post-Merger DataWorks, and Bruce H. Leith, the
head of Interactive's European operations, as an officer of the European
operations of post-Merger DataWorks) as well as proposed payments by DataWorks
to these executives in the form of noncompetition payments and retention
bonuses. See "Terms of the Merger -- Related Agreements." Further, the
Interactive Board concluded that the expressions of interest from DataWorks were
sufficiently attractive to enter into formal discussions regarding a potential
combination. However, the Interactive Board also reaffirmed its determination
that Interactive was not "for sale" and that any business combination with a
third party such as DataWorks must be consistent with and in furtherance of
Interactive's long-term strategic objectives. Representatives from UBS
Securities then provided the directors with an overview of their firm and their
experience and capabilities in strategic combinations, as well as Interactive's
industry.
On June 20, 1997, the DataWorks Board held another special meeting,
attended by a representative of Cooley Godward. At that meeting, Mr. Clifton
updated the Board with respect to negotiations with Interactive, including the
status of discussions concerning the proposed aggregate consideration payable by
DataWorks. Mr. Clifton also discussed potential risks and benefits to DataWorks
of the proposed transaction. The DataWorks Board then authorized the officers of
DataWorks to proceed with discussions with Interactive within the parameters
discussed at the meeting, provided the final terms were subject to further Board
approval.
Another special meeting of the Interactive Board was held on June 23, 1997.
The meeting was attended by representatives from Pillsbury and UBS Securities.
At this meeting, the directors were advised of the status of discussions with
DataWorks as well as the general terms of a first draft of the Merger Agreement.
The directors were also advised by UBS Securities of preliminary financial
information and analyses concerning a combination with DataWorks, as well as
certain focal points for intended financial due diligence investigations. Based
upon the status of discussions with DataWorks, the Interactive Board authorized
management to engage UBS Securities as its financial advisor. The Interactive
Board also established a special committee of the outside directors of the
Interactive Board (comprising Messrs. Lyndol Cook and Randolph Naylor -- the
"Interactive Special Committee") to review the fairness of financial
arrangements between DataWorks and Interactive executives.
During the period from June 23, 1997 to June 26, 1997, representatives of
Interactive and DataWorks and their respective advisors conducted substantial
due diligence investigations of each other's businesses and operations and
further discussed the terms of a proposed business combination. As a result of
these discussions, DataWorks indicated that it had considerable interest in a
business combination with Interactive in a stock-for-stock transaction pursuant
to a fixed exchange ratio. Due to DataWorks' interest in a fixed exchange ratio,
the parties decided to suspend substantive discussions (as of June 26, 1997)
until such time as the financial results for the respective second quarters of
the companies could be made known to one another.
Between the period from June 26, 1997 to July 24, 1997, Messrs. Vernon and
Clifton communicated with one another from time to time regarding various
aspects of the proposed combination and preliminary information regarding the
financial results for the second fiscal quarters of Interactive and DataWorks.
On July 21, 1997, the DataWorks Board held a regular meeting, attended by a
representative of Cooley Godward. At the meeting, a report on DataWorks' second
quarter financial results was presented to the Board. Further, Mr. Clifton
informed the Board of his recent discussions with Mr. Vernon, including
preliminary information about Interactive's financial results for the second
quarter. The Board discussed and considered terms for an acquisition of
Interactive. The Board then authorized the officers of DataWorks to continue
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negotiations with Interactive within the parameters discussed at the meeting,
provided the final terms remained subject to further Board approval.
Following the respective public announcements by Interactive and DataWorks
of second quarter results on July 24, 1997, representatives of Interactive and
DataWorks continued their due diligence investigations of each other's
businesses and operations and further discussed the terms of a proposed business
combination. In the course of these discussions, representatives of DataWorks
proposed a revised Merger Agreement and related arrangements which included a
fixed exchange ratio based upon the issuance of 3.7 million shares of DataWorks
Common Stock for the issued and outstanding shares of Interactive Common Stock
(plus options and warrants to purchase shares of DataWorks Common Stock to cover
outstanding options and warrants to acquire shares of Interactive Common Stock).
A special meeting of the Interactive Board was held on July 29, 1997 to
receive a status report on Interactive's due diligence investigations of
DataWorks and the results of the continuing discussions with DataWorks. The
meeting was attended by representatives from UBS Securities and Pillsbury. At
the meeting, the Interactive Board considered the terms of the proposed
transaction with DataWorks, including the terms of a proposed stock option to
DataWorks to acquire shares of Interactive Common Stock as well as arrangements
obligating certain principal Interactive stockholders to vote in favor of the
Merger Proposal (each a condition to DataWorks' interest in entering into the
Merger Agreement). The Interactive Board also considered the preliminary
analyses of UBS Securities regarding a combination of the businesses of
Interactive and DataWorks from a financial point of view, as well as the
alternative to effecting such a transaction with DataWorks (i.e., continuing to
implement Interactive's strategy in the absence of any combination). Based upon
its review of the information presented at the meeting, the Interactive Board
authorized Interactive's representatives to continue to negotiate the terms of
documents regarding a potential business combination with DataWorks.
On July 30, 1997, the DataWorks Board held a special meeting to consider
the agreed upon terms of the Merger Agreement, the Merger and related
arrangements. Representatives from Cooley Godward and Lehman Brothers attended
the meeting. Prior to the meeting, the directors had been provided with
near-final versions of the Merger Agreement and related arrangements, as well as
a detailed written report from Lehman Brothers relating to the transaction and
its potential consequences. At the meeting, the DataWorks Board received a
detailed oral report from Lehman Brothers regarding the proposed transactions,
including its opinion that the Exchange Ratio was fair, from a financial point
of view, to the shareholders of DataWorks (and such oral opinion was
subsequently confirmed by delivery of the written opinion of Lehman Brothers).
Following a discussion, the Lehman Brothers representatives exited the meeting.
Upon further discussion among the directors, the DataWorks Board unanimously (i)
determined that the terms of the Merger Agreement and the transactions
contemplated thereby were fair to, and in the best interests of, DataWorks and
its shareholders, (ii) approved the Merger Agreement, the Merger and all related
arrangements contemplated thereby, and (iii) resolved to recommend that the
DataWorks shareholders vote for the approval of the principal terms of the
Merger at a special meeting of the DataWorks shareholders to be held for such
purpose. See "-- Reasons for the Merger; Recommendations of the Board of
Directors -- DataWorks."
Another special meeting of the Interactive Board was held on July 31, 1997
to consider the terms of the Merger Agreement, the Merger and related
arrangements. Representatives from UBS Securities and Pillsbury attended the
meeting. Prior to the meeting, the directors had been provided with near-final
versions of the Merger Agreement and related arrangements, as well as a draft of
a fairness opinion from UBS Securities and detailed background information with
respect to such opinion. At the meeting, the Interactive Board received a report
from Pillsbury summarizing the terms of the Merger Agreement and related
arrangements and noting final revisions thereto. The Interactive Board also
received a detailed report from UBS Securities regarding the fairness opinion of
UBS Securities with respect to the Exchange Ratio, background information
regarding Interactive and DataWorks, and a pro forma overview of the combined
entity. UBS Securities delivered its oral opinion that the Exchange Ratio was
fair, from a financial point of view, to the stockholders of Interactive (and
such oral opinion was subsequently confirmed by delivery of the written opinion
of UBS Securities dated July 31, 1997).
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Following the presentations by UBS Securities and Pillsbury, the
Interactive Board took a brief recess to permit the members of the Interactive
Special Committee to meet and review the fairness to the Interactive
stockholders of the proposed financial arrangements (including noncompetition
and retention payments) between DataWorks and certain Interactive executives.
After discussion, the Interactive Special Committee unanimously determined that
the proposed financial arrangements were fair to the Interactive stockholders.
Immediately following the meeting of the Interactive Special Committee, the
special meeting of the Interactive Board resumed. Following discussion among the
directors, including exchanges with representatives from UBS Securities and
Pillsbury, the Interactive Board unanimously determined that the terms of the
Merger Agreement and the transactions contemplated thereby were fair to, and in
the best interests of, Interactive and its stockholders. Accordingly, the
Interactive Board unanimously approved the Merger Agreement, the Merger, the
Option Agreement (defined below -- see "Terms of the Merger -- Related
Agreements -- Option Agreement"), the Voting Agreements in favor of DataWorks
(see "Terms of the Merger -- Related Agreements -- Voting Agreements") and all
related arrangements contemplated thereby, and resolved to recommend that the
Interactive stockholders vote for the approval and adoption of the Merger
Agreement and the Merger at a special meeting of the Interactive stockholders to
be held for such purpose. See "-- Reasons for the Merger; Recommendations of the
Board of Directors -- Interactive."
On the afternoon of Thursday, July 31, 1997, the Merger Agreement, the
Option Agreement and the Voting Agreements were executed, and the parties issued
a joint press release announcing the Merger.
DATAWORKS' REASONS FOR THE MERGER
In the course of reaching its decision to approve the Merger Agreement, the
Option Agreement, the Voting Agreements in favor of Interactive and each of the
transactions and arrangements contemplated thereby, the DataWorks Board
consulted with DataWorks' legal and financial advisors as well as with
DataWorks' management, and considered a number of factors, including the
following:
- The combined company may possess increased international opportunities
and greater sales and product line coverage, thereby enhancing its growth
potential;
- The Merger represents a strategic opportunity to diversify DataWorks'
product and services offering;
- The combined company may be able to achieve certain operating
efficiencies as a result of the Merger;
- The Merger may result in increased earnings per share for the combined
company;
- The Merger may result in additional complementary products addressing new
markets; and
- The Merger will provide significant additional international distribution
capabilities and infrastructure which may enhance sales of DataWorks'
existing products.
In the course of its deliberations, the DataWorks Board reviewed with
management a number of other factors relevant to the Merger, including, among
other things: (i) information concerning DataWorks' and Interactive's respective
businesses, prospects, financial performances, financial conditions and
operations; (ii) the presentation made by Lehman Brothers to the DataWorks Board
and its opinion rendered in connection therewith (see "-- Opinion of Lehman
Brothers Inc."); (iii) an analysis of the respective contributions to revenues,
operating profits and net profits of the combined company; (iv) the
compatibility of the managements of DataWorks and Interactive; (v) potential
synergies and alternatives for growth within the combined company; and (vi)
reports from management and legal advisors on the results of DataWorks' due
diligence investigation of Interactive.
The DataWorks Board also considered a variety of potentially negative
factors concerning the Merger, including (i) the risk that the combined company
might not achieve revenue equal to the sum of the separate companies'
anticipated revenue; (ii) the risk that the combined company might not achieve
sufficient operating efficiencies to ensure that the Merger would not have a
negative effect on DataWorks' earnings per share; (iii) the charges expected to
be incurred in connection with the Merger, including transaction costs and costs
of integrating the businesses of the companies, to be reflected in a charge of
approximately $14.0 million
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(see "Unaudited Pro Forma Combined Condensed Financial Information"); (iv) the
risk that the combined company's ability to increase or maintain revenue might
be diminished by intensified competition among providers of similar or related
software and services; (v) the risk that other benefits sought to be obtained by
the Merger would not be obtained; and (vi) other risks described above under
"Risk Factors."
Based on the factors described above, the DataWorks Board determined that
the Merger is fair to and in the best interests of DataWorks and its
shareholders, approved the Merger Agreement and the transactions contemplated by
the Merger Agreement and recommended that the shareholders of DataWorks vote for
adoption of the Merger Agreement.
The foregoing discussion of the information and factors considered is not
intended to be exhaustive but is believed to include the material factors
considered by the DataWorks Board. In reaching a determination whether to
approve the Merger, in view of the wide variety of factors considered, the
DataWorks Board did not find it practical to quantify or otherwise attempt to
assign any relative or specific weights to the foregoing factors, and individual
directors may have given differing weights to different factors.
DATAWORKS BOARD RECOMMENDATION
FOR THE REASONS DISCUSSED ABOVE, THE DATAWORKS BOARD HAS DETERMINED THAT
THE MERGER IS ADVISABLE AND IN THE BEST INTERESTS OF DATAWORKS AND ITS
SHAREHOLDERS AND HAS UNANIMOUSLY RECOMMENDED A VOTE FOR APPROVAL OF THE MERGER
PROPOSAL AND THE BYLAW AMENDMENT.
INTERACTIVE'S REASONS FOR THE MERGER
In the course of reaching its decision to approve the Merger Agreement, the
Option Agreement, the Voting Agreements in favor of DataWorks and each of the
transactions and arrangements contemplated thereby, the Interactive Board
consulted with Interactive's legal and financial advisors as well as with
Interactive's management, and considered a number of factors, including (i) the
Interactive Board's view that the Merger would constitute a strategic
combination that would accelerate the ability of Interactive to achieve its
strategic objectives, albeit as part of a combined entity, (ii) that the
combination of the two companies may enhance growth potential, (iii) the
complementary product lines of the companies, (iv) the complementary geographic
operations of the companies, with Interactive having significant international
distribution capabilities and infrastructure which can be further enhanced with
DataWorks products and DataWorks having a significant domestic presence which
could enhance sales of Interactive products, (v) the complementary management
teams, with Interactive having significant direct sales and international
management skills and DataWorks having significant financial management
capabilities, as well as little redundancy and greater overall management depth
as a result of the combination, (vi) the potential to realize certain operating
cost savings from the combination of two public companies, (vii) the terms and
conditions of the proposed Merger, including the premium to be paid relative to
recent closing prices for Interactive Common Stock, as well as the tax-free
nature of the transaction to the Interactive stockholders, (viii) information
regarding historical market prices and other information with respect to
Interactive Common Stock and DataWorks Common Stock, (ix) the prospects for
positive long-term performance of DataWorks Common Stock, balanced with the
potential for more limited volatility in such stock (reflecting the combined
companies) in comparison to Interactive Common Stock, (x) the presentation of
Interactive's financial advisor, UBS Securities, and the opinion of such firm as
to the fairness of the Exchange Ratio, from a financial point of view, as of the
date of such opinion, to the Interactive stockholders, and (xi) the Interactive
Board's assessment of Interactive's principal alternative to the Merger
(remaining an independent company).
The Interactive Board also considered a variety of potentially negative
factors concerning the Merger, including (i) the risk that the combined company
might not achieve revenues equal to the sum of the separate companies'
anticipated revenues, (ii) the risk that the combined company might not achieve
sufficient operating efficiencies to ensure that the Merger would not have a
negative effect on DataWorks' earnings per share, (iii) the risk that other
benefits sought to be obtained by the Merger would not be obtained, and (iv)
other risks described above under "Risk Factors."
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The foregoing discussion of the information and factors considered by the
Interactive Board is not intended to be exhaustive but is believed to include
the material information and factors considered by the Interactive Board. In
reaching a determination whether to approve the Merger, in view of the wide
variety of factors considered, the Interactive Board did not find it practicable
to, and did not, quantify or otherwise attempt to assign relative or specific
weights to the information and factors considered in reaching its
determinations, and individual directors may have given differing weights to
different factors.
INTERACTIVE BOARD RECOMMENDATION
FOR THE REASONS DISCUSSED ABOVE, THE BOARD OF DIRECTORS OF INTERACTIVE HAS
DETERMINED THAT THE TERMS OF THE MERGER AGREEMENT AND THE TRANSACTIONS
CONTEMPLATED THEREBY ARE FAIR TO, AND IN THE BEST INTEREST OF, INTERACTIVE AND
THE INTERACTIVE STOCKHOLDERS. ACCORDINGLY, THE INTERACTIVE BOARD OF DIRECTORS
HAS UNANIMOUSLY RECOMMENDED THAT INTERACTIVE STOCKHOLDERS VOTE FOR THE APPROVAL
AND ADOPTION OF THE MERGER AGREEMENT.
OPINION OF LEHMAN BROTHERS INC.
Lehman Brothers has acted as financial advisor to DataWorks in connection
with the Merger. As part of its role as financial advisor to DataWorks, Lehman
Brothers was engaged to render its opinion as to the fairness, from a financial
point of view, to DataWorks of the Exchange Ratio to be offered in the Merger.
THE FULL TEXT OF THE WRITTEN OPINION OF LEHMAN BROTHERS DATED JULY 31, 1997
IS ATTACHED AS APPENDIX B TO THIS PROSPECTUS/JOINT PROXY STATEMENT AND IS
INCORPORATED HEREIN BY REFERENCE. SHAREHOLDERS MAY READ SUCH OPINION FOR A
DISCUSSION OF ASSUMPTIONS MADE, FACTORS CONSIDERED AND LIMITATIONS ON THE REVIEW
UNDERTAKEN BY LEHMAN BROTHERS IN RENDERING ITS OPINION. THE SUMMARY OF LEHMAN
BROTHERS' OPINION SET FORTH IN THIS PROSPECTUS/JOINT PROXY STATEMENT IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
On July 31, 1997, in connection with the evaluation of the Merger Agreement
by the DataWorks Board, Lehman Brothers rendered its written opinion that, as of
the date of such opinion, and subject to certain assumptions, factors and
limitations set forth in such written opinion as described below, the Exchange
Ratio to be offered in the Merger is fair, from a financial point of view, to
DataWorks.
No limitations were imposed by DataWorks on the scope of Lehman Brothers'
investigation or the procedures to be followed by Lehman Brothers in rendering
its opinion. Lehman Brothers was not requested to and did not make any
recommendation to the DataWorks Board as to the form or amount of consideration
to be offered by DataWorks in the Merger, which was determined through
arm's-length negotiations between DataWorks and Interactive. In arriving at its
opinion, Lehman Brothers did not ascribe a specific range of value to DataWorks
or Interactive, but made its determination as to fairness, from a financial
point of view, to DataWorks of the Exchange Ratio to be offered, on the basis of
the financial and comparative analyses described below. Lehman Brothers' opinion
was for the use and benefit of the DataWorks Board and was rendered to the
DataWorks Board in connection with its consideration of the Merger. Lehman
Brothers' opinion is not intended to be and does not constitute a recommendation
to any shareholder of DataWorks as to how such shareholder should vote with
respect to the Merger. Lehman Brothers was not requested to opine as to, and its
opinion does not in any manner address, DataWorks' underlying business decision
to proceed with or effect the Merger.
In arriving at its opinion, Lehman Brothers reviewed and analyzed: (i) the
Merger Agreement and the specific terms of the Merger; (ii) publicly available
information concerning DataWorks and Interactive that it believed to be relevant
to its analysis, (iii) financial and operating information with respect to the
business, operations and prospects of DataWorks and Interactive furnished to it
by DataWorks and Interactive; (iv) a trading history of DataWorks' Common Stock
from October 27, 1995 (the date of DataWorks' initial public offering) to July
29, 1997 and a comparison of that trading history with those of other companies
that Lehman Brothers deemed relevant; (v) a trading history of Interactive's
common stock from May 23, 1995 (the date of Interactive's initial public
offering) to July 29, 1997 and a comparison of that trading history with those
of
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other companies that Lehman Brothers deemed relevant; (vi) a comparison of the
historical and estimated financial results and present financial condition of
DataWorks and Interactive with those of other companies that Lehman Brothers
deemed relevant, (vii) publicly available estimates of the future financial
performances of DataWorks and Interactive prepared by third party research
analysts; (viii) a comparison of the financial terms of the Merger with the
financial terms of certain other transactions that Lehman Brothers deemed
relevant; and (ix) the potential pro forma financial effects of the Merger on
DataWorks and Interactive and a comparison of the relative contributions of
DataWorks and Interactive to the combined company following consummation of the
Merger. In addition, Lehman Brothers had discussions with the management of
DataWorks and Interactive concerning their respective businesses, operations,
assets, financial conditions and prospects and the strategic benefits, operating
synergies and cost savings expected to result from the combination of the
businesses of DataWorks and Interactive, and undertook such other studies,
analyses and investigations as it deemed appropriate.
In arriving at its opinion, Lehman Brothers assumed and relied upon the
accuracy and completeness of the financial and other information used by it
without assuming any responsibility for independent verification of such
information. Lehman Brothers further relied upon the assurances of the
managements of DataWorks and Interactive that they were not aware of any facts
or circumstances that would make such information inaccurate or misleading. With
respect to the financial projections of DataWorks and Interactive, upon advice
of DataWorks and Interactive, Lehman Brothers assumed that such projections have
been reasonably prepared on a basis reflecting the best currently available
estimates and judgments of the management of DataWorks and Interactive as to the
respective future financial performance of DataWorks and Interactive (including,
without limitation, the strategic benefits, operating synergies and cost savings
expected to result from a combination of the businesses of DataWorks and
Interactive) and that DataWorks and Interactive will perform substantially in
accordance with such projections. In addition, with the consent of DataWorks,
Lehman Brothers performed certain of its analyses based upon alternative
operating scenarios for Interactive. In arriving at its opinion, Lehman Brothers
did not conduct a physical inspection of the properties and facilities of
DataWorks or Interactive, and Lehman Brothers did not make or obtain any
evaluations or appraisals of the assets or liabilities of DataWorks or
Interactive. In arriving at its opinion, upon advice of DataWorks and its legal
and accounting advisors, Lehman Brothers assumed that the Merger would qualify
(i) for pooling-of-interests accounting treatment and (ii) as a reorganization
within the meaning of the Code, and therefore as a tax-free transaction to the
shareholders of Interactive. Lehman Brothers' opinion necessarily was based upon
market, economic and other conditions as they existed on, and could be evaluated
as of, the date of its opinion.
In connection with its opinion, Lehman Brothers performed a variety of
financial and comparative analyses as summarized below. The preparation of a
fairness opinion involves various determinations as to the most appropriate and
relevant method of financial and comparative analysis and the application of
those methods to the particular circumstances, and therefore, such an opinion is
not readily susceptible to summary description. Furthermore, in arriving at its
opinion, Lehman Brothers did not attribute any particular weight to any analysis
or factor considered by it, but rather made qualitative judgments as to the
significance and relevance of each analysis and factor. Accordingly, Lehman
Brothers believes that its analyses must be considered as a whole and that
considering any portions of such analyses and factors, without considering all
analyses and factors, could create a misleading or incomplete view of the
process underlying its opinion. In its analyses, Lehman Brothers made numerous
assumptions with respect to industry performance, general business and economic
conditions and other matters, many of which are beyond the control of DataWorks
and Interactive. Any estimates contained in these analyses are not necessarily
indicative of actual values or predictive of future results or values, which may
be more or less favorable than as set forth therein. In additions, analyses
relating to the value of businesses do not purport to be appraisals or to
reflect the prices at which businesses actually may be sold.
Transaction Terms. The implied value to be received by Interactive
shareholders on a per share basis, based upon the Exchange Ratio and the $12.625
closing price of DataWorks' stock on July 29, 1997, is $10.169.
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Transaction Premium Analysis. Lehman Brothers reviewed the premiums paid in
selected acquisitions in the technology sector with transaction values greater
than $50.0 million from January 1, 1994 through July 29, 1997 (the "Technology
Transactions"). Lehman Brothers calculated the premium per share paid by the
acquiror over the share price of the target company prevailing (i) one day (the
"One Day Premium"), (ii) one week (the "One Week Premium"), and (iii) four weeks
(the "Four Weeks Premium") prior to the announcement of the transaction. Lehman
Brothers noted that (i) the One Day Premium associated with the Merger was 40.3%
versus 34.3% for the median of the Technology Transactions; (ii) the One Week
Premium associated with the Merger was 35.6% versus 40.2% for the median of the
Technology Transactions; and (iii) the Four Weeks Premium associated with the
Merger was 47.9% versus 52.7% for the median of the Technology Transactions.
However, because the reasons for and the circumstances surrounding each of
the Technology Transactions were specific to such transactions, and because of
the inherent differences among the businesses, operations and prospects of
Interactive and the selected acquired companies analyzed, Lehman Brothers
believed that it was inappropriate to, and therefore did not, rely solely on the
quantitative results of the transaction premium analysis and, accordingly, also
made qualitative judgments concerning differences between the terms and
characteristics of the Technology Transactions and the Merger that would affect
the transaction values Interactive and such acquired companies.
Comparable Transaction Analysis. Using publicly available information,
Lehman Brothers compared selected financial terms of the Merger to similar data
for selected transactions in the software and services industry (the "Comparable
Transactions"). These transactions included Platinum Software Corporation's
pending acquisition of Clientele Software Inc., The Indus Group's pending
acquisition of TSW International, Baan Company N.V.'s pending acquisition of
Aurum Software Inc., Reed Elsevier PLC's acquisition of MDL Information Systems
Inc., Open Market, Inc.'s acquisition of Folio Corporation, Gaec Computer
Corporation Limited's acquisition of Dun & Bradstreet Software Services, Inc.
(divested by Dun & Bradstreet Corporation), Computer Associates International
Inc.'s acquisition of Cheyenne Software, Inc., Oracle Corporation's acquisition
of Datalogix International, Inc., PeopleSoft, Inc.'s acquisition of Red Pepper
Software Company, DataWorks Corporation's acquisition of DCD Corporation, Pure
Software, Inc.'s acquisition of Atria Software, Inc., Security Dynamics
Technologies, Inc.'s acquisition of RSA Data Security, Inc., International
Business Machines Corporation's acquisition of Tivoli Systems, Inc., Cisco
Systems, Inc.'s acquisition of TGV Software, Inc., Informix Corporation's
acquisition of Illustra Information Technologies, Inc., Santa Cruz Operation,
Inc.'s acquisition of the UNIX Operating Systems division of Novell, Inc.,
Computer Associates International Inc.'s acquisition of Legent Corporation,
PLATINUM Technology, Inc.'s acquisition of Trinzic Corporation, Sybase Inc.'s
acquisition of Powersoft Corporation, Computer Associates International Inc.'s
acquisition of ASK Group, Inc. and CompuWare Corporation's acquisition of
Uniface Holding, B.V.
Lehman Brothers reviewed the prices paid in the Comparable Transactions in
terms of the multiple of the Transaction Value (defined as the total
consideration paid) to (i) last twelve months net income (the "LTM Net Income
Multiple"); (ii) estimated net income for the calendar year based on the First
Call and I/B/E/S (service companies used widely by the investment community to
gather earnings estimates from various research analysts) data for the acquired
entity (the "Forward Net Income Multiple"); and (iii) book value ("the Book
Value Multiple"). Lehman Brothers also reviewed the prices paid in Comparable
Transactions in terms of the multiple of the Transaction Enterprise Value
(defined as the total consideration paid including total debt assumed less cash
and cash equivalents transferred to the acquiror) to (i) last twelve months
revenue (the "LTM Revenue Multiple"); (ii) last twelve months operating income,
defined as earnings before interest and taxes (the "LTM EBIT Multiple"); (iii)
last twelve months operating cash flow, defined as earnings before interest,
taxes, depreciation and amortization (the "LTM EBITDA Multiple"); (iv) assets
minus cash (the "Non-Financial Assets Multiple"); and (v) book value (the
"Enterprise Book Value Multiple"). Lehman Brothers noted that (i) the LTM Net
Income Multiple associated with the transaction was 62.7x as compared to 53.3x
for the median of the Comparable Transactions; (ii) the Forward Net Income
Multiple associated with the transaction was 20.3x as compared to 30.2x for the
median of Comparable Transactions; (iii) the Book Value Multiple was 4.47x as
compared to 8.49x for the median of the Comparable Transactions; (iv) the LTM
Revenue Multiple was 0.91x as compared to 4.23x for the median of
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the Comparable Transactions; (v) the LTM EBIT Multiple was 43.4x as compared to
15.4x for the median of the Comparable Transactions; (vi) the LTM EBITDA
Multiple was 19.0x as compared to 16.5x for the median of the Comparable
Transactions; (vii) the Non-Financial Assets Multiple was 1.97x as compared to
8.91x for the median of the Comparable Transactions; and (viii) the Enterprise
Book Value Multiple was 4.69x as compared to 8.08x for the Comparable
Transactions.
However, because the reasons for and the circumstances surrounding each of
the Lehman Brothers Comparable Transactions were specific to such transactions,
and because of the inherent differences among the businesses, operations and
prospects of Interactive and the selected acquired companies analyzed, Lehman
Brothers believed that it was inappropriate to, and therefore did not, rely
solely on the quantitative results of the comparable transactions analysis and,
accordingly, also made qualitative judgments concerning differences between the
terms and characteristics of these transactions and the Merger that would affect
the transaction values of Interactive and such acquired companies.
Contribution Analysis. Lehman Brothers utilized publicly available
historical financial data regarding DataWorks and Interactive and managements'
estimates of future financial performance of DataWorks and Interactive to
calculate the relative contributions of DataWorks and Interactive to the pro
forma Combined Company with respect to revenues, operating income and net income
for the calendar years 1995, 1996, 1997 and 1998. In 1995, Interactive would
have contributed 43.4%, 26.0% and 31.3% of revenues, operating income and net
income, respectively, to the Combined Company. In 1996, Interactive would have
contributed 48.1%, 17.4% and 18.9% of revenues, operating income and net income,
respectively, to the Combined Company. In 1997, Interactive would contribute
44.4%, 28.7% and 23.0% of revenues, operating income and net income,
respectively, to the Combined Company. In 1998, Interactive would contribute
41.5%, 27.4% and 24.0% of revenues, operating income and net income,
respectively, to the Combined Company. Lehman Brothers compared such
contributions to the pro forma ownership of the Combined Company by
Interactive's shareholders. Such ownership would be approximately 27.2%,
assuming exercise of all outstanding DataWorks and Interactive options and
warrants.
Pro Forma Analysis. Based on the Exchange Ratio and managements' financial
projections for DataWorks and Interactive on a standalone basis, Lehman Brothers
calculated the estimated pro forma financial results for the Combined Company
for 1997 and 1998. Lehman Brothers also prepared a separate 1998 pro forma
analysis that included strategic benefits, operating synergies and cost savings
that the management of DataWorks considered reasonable. Lehman Brothers noted
that, assuming no strategic benefits, operating synergies or cost savings as a
result of the Merger and excluding extraordinary charges, the Merger would be
(i) 5.5% dilutive to DataWorks' standalone earnings per share ("EPS") in
calendar year 1997; (ii) 14.3% accretive to DataWorks' standalone EPS in the
fourth quarter of 1997; and (iii) 3.1% dilutive to DataWorks' standalone EPS in
calendar year 1998. The Merger would be 22.6% accretive to DataWorks' standalone
EPS in calendar year 1998 when the strategic benefits, operating synergies and
cost savings discussed above were taken into account. Lehman Brothers noted that
the Merger would be accretive to DataWorks' standalone EPS in calendar year 1998
with minimal impact from the operating synergies discussed above.
Stock Trading History. Lehman Brothers considered various historical data
concerning the history of the trading prices and volumes for DataWorks Common
Stock for various periods from October 27, 1995 (the date of DataWorks' initial
public offering) to July 29, 1997 and for Interactive Common Stock for various
periods from May 25, 1995 (the date of Interactive's initial public offering) to
July 29, 1997 and the relative stock price performances during these periods for
DataWorks, Interactive and selected companies engaged in businesses considered
by Lehman Brothers to be comparable to that of DataWorks and Interactive.
Specifically, Lehman Brothers included in its review certain enterprise
applications companies including Aspen Technologies, Inc., Baan Company N.V.,
Fourth Shift Corporation, Hyperion Software Corporation, i2 Technologies, Inc.,
The Indus Group, Inc., JDA Software Group Inc., Manugistics Group, Inc., Oracle
Corporation, PeopleSoft, Inc., Project Software & Development, Inc., SAP AG, and
Symix, Inc. (the "Enterprise Applications Companies"). Lehman Brothers also
reviewed certain customer information systems companies including Clarify, Inc.,
Genesys Telecommunications Laboratories, Inc., Pegasystems Inc., Remedy
Corporation, Scopus Technology, Inc., Siebel Systems, Inc., and The Vantive
Corporation (the
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"Customer Information Systems Companies"). During the period from July 26, 1996
to July 29, 1997, the closing stock price of Interactive ranged from $4.875 to
$7.250. During the period from May 23, 1995 to July 29, 1997, the closing stock
price of Interactive ranged from $6.750 to $7.250. During the period from July
26, 1996 to July 29, 1997, the closing stock price of DataWorks ranged from
$17.375 to $12.625 per share. During the period from October 27, 1995 to July
29, 1997, the closing stock price of DataWorks ranged from $14.250 to $12.625
per share. Lehman Brothers noted that the stock prices of DataWorks and
Interactive generally underperformed both the Enterprise Applications Companies
and the Customer Information Systems Companies since the date of each company's
initial public offering.
Comparable Company Analysis. Using publicly available information, Lehman
Brothers compared selected financial data of DataWorks and Interactive with
similar data of the Enterprise Applications Companies and the Customer
Information Systems Companies. For each of DataWorks, the Enterprise
Applications Companies and the Customer Information Systems Companies, Lehman
Brothers calculated the multiple of the stock price on July 29, 1997, and for
Interactive, the transaction value per share to be paid in the Merger, to (i)
the latest twelve months earnings per share (the "LTM P/E Multiple"); (ii) the
estimated 1997 earnings per share (the "1997 P/E Multiple"), based on data from
First Call; and (iii) the estimated 1998 earnings per share (the "1998 P/E
Multiple"), based on data from First Call. Lehman Brothers noted that (i) the
LTM P/E Multiple for DataWorks (based on a price of $12.625) was 19.1x as
compared to 62.7x for Interactive, 47.0x for the median of the Enterprise
Applications Companies and 63.6x for the median of the Customer Information
Systems Companies; (ii) the 1997 P/E Multiple for DataWorks (based on a price of
$12.625) was 15.9x as compared to 20.3x for Interactive, 39.1x for the median of
the Enterprise Applications Companies and 57.4x for the median of the Customer
Information Systems Companies; and (iii) the 1998 P/E Multiple for DataWorks
(based on a price of $12.625) was 11.2x as compared to 13.2x for Interactive,
28.9x for the median of the Enterprise Applications Companies and 38.0x for the
median of the Customer Information Systems Companies. In addition, Lehman
Brothers calculated the Firm Value (defined as the market value of the
respective company's common equity plus total debt less cash and cash
equivalents) as a multiple of the latest twelve months revenues (the "LTM
Revenue Multiple"). Lehman Brothers noted that, as of July 29, 1997, the LTM
Revenue Multiple for DataWorks (based on a price of $12.625) was 1.09x as
compared to 0.91 for Interactive, 6.67x for the median of the Enterprise
Application Companies and 10.64x for the median of the Customer Information
Systems Companies.
However, because of the inherent differences between the businesses,
operations and prospects of DataWorks and Interactive and the business,
operations and prospects of the companies included in the Enterprise
Applications Companies and the Customer Information Systems Companies, Lehman
Brothers believed that it was inappropriate to, and therefore did not, rely
solely on the quantitative results of the comparable company analysis, and
accordingly also made qualitative judgments concerning differences between the
financial and operating characteristics and prospects of the companies included
in the Enterprise Applications Companies and the Customer Information Systems
Companies and DataWorks and Interactive that would affect the public trading
values of each.
Engagement of Lehman Brothers. Lehman Brothers is an internationally
recognized investment banking firm and, as part of its investment banking
activities, is regularly engaged in the evaluation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, competitive bids, secondary distributions of listed and unlisted
securities, private placements, and valuations for corporate and other purposes.
Pursuant to an engagement letter between DataWorks and Lehman Brothers,
DataWorks has agreed to pay Lehman Brothers (1) a retainer of $75,000, (2) a fee
of $150,000 for rendering its opinion, against which the $75,000 retainer will
be credited and (3) a fee of $800,000 upon consummation of the Merger against
which the $150,000 retainer and opinion fee would be credited. DataWorks also
has agreed to reimburse Lehman Brothers for reasonable expenses incurred by
Lehman Brothers and to indemnify Lehman Brothers and certain related persons for
certain liabilities that may arise out of its engagement and the rendering of
this opinion.
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Lehman Brothers may actively trade in the securities of DataWorks and
Interactive for its own account and for the accounts of its customers and,
accordingly, may at any time hold a long or short position in such securities.
OPINION OF UBS SECURITIES LLC
On July 31, 1997, at the request of the Interactive Board, UBS Securities
rendered its oral opinion to the Interactive Board (subsequently confirmed by
delivery of a written opinion dated July 31, 1997) to the effect that, as of the
date of such opinion, and subject to the various assumptions and limitations set
forth in such opinion, the Exchange Ratio was fair, from a financial point of
view, to the stockholders of Interactive (other than DataWorks or any of its
affiliates).
THE FULL TEXT OF THE OPINION OF UBS SECURITIES, DATED JULY 31, 1997, WHICH
SETS FORTH, AMONG OTHER THINGS, THE ASSUMPTIONS MADE, PROCEDURES FOLLOWED,
MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN BY UBS SECURITIES,
IS ATTACHED AS APPENDIX C HERETO AND IS INCORPORATED HEREIN BY REFERENCE.
HOLDERS OF INTERACTIVE COMMON STOCK ARE URGED TO READ THIS OPINION IN ITS
ENTIRETY. THE OPINION OF UBS SECURITIES IS DIRECTED ONLY TO THE EXCHANGE RATIO
AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY HOLDER OF INTERACTIVE COMMON
STOCK AS TO HOW SUCH HOLDER SHOULD VOTE WITH RESPECT TO THE MERGER. FURTHERMORE,
UBS SECURITIES EXPRESSES NO VIEW AS TO THE PRICE OR TRADING RANGE FOR SHARES OF
DATAWORKS COMMON STOCK FOLLOWING THE CONSUMMATION OF THE MERGER. THE SUMMARY SET
FORTH HEREIN OF THE OPINION OF UBS SECURITIES IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FULL TEXT OF THE OPINION ATTACHED HERETO AS APPENDIX C.
In connection with its opinion, UBS Securities reviewed and considered such
financial and other matters as it deemed relevant, including, among other
things: (i) the Merger Agreement; (ii) the Option Agreement (as defined below);
(iii) the Voting Agreements by and between significant stockholders of
Interactive and DataWorks; (iv) certain publicly available information for
Interactive and DataWorks, including each of the annual reports of Interactive
and DataWorks filed on Form 10-K for the year ended December 31, 1996, as
amended, in the case of Interactive, and each of the quarterly reports of
Interactive and DataWorks filed on Form 10-Q for the quarter ended March 31,
1997; (v) certain internal financial analyses, financial forecasts, reports and
other information concerning Interactive and DataWorks furnished to UBS
Securities by the respective managements of Interactive and DataWorks; (vi)
discussions UBS Securities has had with certain members of the managements of
each of Interactive and DataWorks concerning the historical and current business
operations, financial conditions and prospects of Interactive and DataWorks and
such other matters UBS Securities deemed relevant; (vii) the reported price and
trading histories of the shares of Interactive Common Stock and DataWorks Common
Stock as compared to the reported price and trading histories of certain
publicly traded companies UBS Securities deemed relevant; (viii) the respective
financial conditions of Interactive and DataWorks as compared to the financial
conditions of certain other companies UBS Securities deemed relevant; (ix)
certain financial terms of the Merger as compared to the financial terms of
selected other business combinations UBS Securities deemed relevant; and (x)
such other information, financial studies, analyses and investigations and such
other factors that UBS Securities deemed relevant for the purposes of this
opinion.
In conducting its review and arriving at its opinion, UBS Securities, with
Interactive's consent, assumed and relied, without independent investigation,
upon the accuracy and completeness of all financial and other information that
was provided to UBS Securities by Interactive and DataWorks, respectively, or
publicly available, and UBS Securities did not undertake any responsibility for
the accuracy, completeness or reasonableness of, or independently to verify,
such information. UBS Securities, with Interactive's consent, assumed that the
financial forecasts which it examined were reasonably prepared by the respective
managements of Interactive and DataWorks on bases reflecting the best currently
available estimates and good faith judgments of such managements as to the
future performance of Interactive and DataWorks. UBS Securities was informed by
Interactive, and has assumed, that the Merger will be recorded as a pooling-
of-interests under generally accepted accounting principles and will qualify as
a reorganization within the meaning of Section 368(a) of the Code. UBS
Securities did not make or obtain any independent evaluations, valuations or
appraisals of the assets or liabilities of Interactive and DataWorks, nor was it
furnished with any such materials. UBS Securities' services to Interactive with
respect to the Merger were comprised solely of
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providing financial advisory services, as described in the UBS Securities
Engagement Letter (as defined below). In arriving at its opinion, UBS
Securities, with Interactive's consent, did not consider, and UBS Securities'
opinion does not reflect, the proposed payment by DataWorks of an aggregate of
$2.5 million in retention bonuses and non-competition fees to certain members of
Interactive's management in connection with the Merger. The opinion of UBS
Securities is necessarily based upon economic and market conditions and other
circumstances existing on the date thereof. Additionally, UBS Securities was not
authorized or requested to, and did not, solicit alternative offers for
Interactive or its assets, nor did UBS Securities investigate any other
alternative transactions that may be available to Interactive.
In connection with rendering its opinion to the Interactive Board, UBS
Securities performed a variety of financial analyses which are summarized below.
The following summary does not purport to be a complete description of all the
analyses performed and factors considered by UBS Securities in connection with
its opinion. UBS Securities believes that its analyses must be considered as a
whole and that selecting portions of its analyses and the factors considered by
it, without consideration of all factors and analyses, could create a misleading
view of the analysis and the processes underlying UBS Securities' opinion. UBS
Securities arrived at its ultimate opinion based on the results of all the
analyses undertaken by it and assessed as a whole, and it did not draw
conclusions from or with regard to any one method of analysis. The preparation
of a fairness opinion is a complex process involving subjective judgments and is
not necessarily susceptible to partial analyses or summary description. With
respect to the analysis of selected publicly traded companies and the analysis
of selected acquisitions summarized below, no company utilized as a comparison
is either identical or directly comparable to Interactive or DataWorks and such
analyses necessarily involve complex considerations and judgments concerning the
differences in financial and operating characteristics of the companies and
other factors that could affect the public trading or acquisition values of the
companies concerned. The estimates of future performance of Interactive and
DataWorks provided by the respective managements of Interactive and DataWorks in
or underlying UBS Securities' analyses are not necessarily indicative of future
results or values, which may be significantly more or less favorable than such
estimates. In performing its analyses, UBS Securities made numerous assumptions
with respect to industry performance, general business and economic conditions
and other matters, many of which are beyond the control of Interactive or
DataWorks. Estimates of values of companies or assets do not purport to be
appraisals or necessarily to reflect the prices at which companies or their
securities actually may be sold. None of the analyses performed by UBS
Securities was assigned a greater significance by UBS Securities than any other.
UBS Securities discussed with the respective managements of Interactive and
DataWorks internal earnings estimates for Interactive and DataWorks,
respectively, and certain other prospective information. Interactive and
DataWorks do not publicly disclose internal management estimates of the type
provided to UBS Securities in connection with its review of the financial terms
of the Merger. Such estimates were preliminary in nature, prepared solely for
internal purposes, and are subjective in many respects and are, therefore,
susceptible to interpretations and periodic revisions based on actual experience
and business developments. Such estimates were based on numerous variables and
assumptions that are inherently uncertain, including, without limitation,
factors related to general economic and competitive conditions. Accordingly,
actual results could vary significantly from those reflected in such estimates.
The following is a brief summary of the analyses performed by UBS
Securities and reviewed with the Interactive Board in connection with its
opinion.
Comparative Stock Price Performance -- UBS Securities reviewed the recent
stock market performance of Interactive Common Stock and DataWorks Common Stock
and compared such performance to that of the Nasdaq Composite Index and three
groups of selected publicly traded companies deemed relevant by UBS Securities
for the purposes of its analysis: Aspect Development, Inc., Baan Company NV, i2
Technologies, Inc., Manugistics Group, Inc., Oracle Corporation and PeopleSoft,
Inc. (collectively, the "Large-Capitalization Enterprise Application Software
Companies"); American Software, Inc., Datastream Systems, Inc., DataWorks, Indus
Group, Inc., Industri-Matematik International Corp., Marcam Corporation, Project
Software & Development, Inc., System Software Associates, Inc. and Wonderware
Corporation (collectively, the "Mid-Capitalization Enterprise Application
Software Companies"); and Catalyst International, Inc., Effective Management
Systems, Fourth Shift Corporation, Gensym Corporation, Interactive and Symix,
Inc.
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(collectively, the "Small-Capitalization Enterprise Application Software
Companies"). UBS Securities observed that over the period from October 27, 1995,
to July 25, 1997, Interactive Common Stock outperformed DataWorks Common Stock
by 24.7%, and over the period from May 23, 1995, to July 25, 1997, outperformed
equal-weighted indices of the common stocks of the Mid-Capitalization Enterprise
Application Software Companies and the Small-Capitalization Enterprise
Application Software Companies (excluding Interactive) by 29.9% and 28.5%,
respectively, and underperformed the Nasdaq Composite Index and the
equal-weighted index of the common stocks of the Large-Capitalization Enterprise
Application Software Companies by 71.0% and 168.6%, respectively. UBS Securities
also observed that over the period from October 27, 1995, to July 25, 1997,
DataWorks Common Stock outperformed the equal-weighted indices of the
Mid-Capitalization Enterprise Application Software Companies (excluding
DataWorks) and the Small-Capitalization Enterprise Application Software
Companies by 22.5% and 20.9%, respectively, and underperformed Interactive
Common Stock, the Nasdaq Composite Index and the equal-weighted index of the
common stocks of the Large-Capitalization Enterprise Application Software
Companies by 24.7%, 64.0% and 125.4%, respectively.
Analysis of Selected Publicly Traded Companies -- UBS Securities compared
certain financial information and operating statistics of Interactive with
corresponding financial information and operating statistics of each of the
Large-Capitalization Enterprise Application Software Companies, the
Mid-Capitalization Enterprise Application Software Companies and the
Small-Capitalization Enterprise Application Software Companies (excluding
Interactive), and certain financial information and operating statistics of
DataWorks with corresponding financial information and operating statistics for
each of the Large-Capitalization Enterprise Application Software Companies, the
Mid-Capitalization Enterprise Application Software Companies (excluding
DataWorks) and the Small-Capitalization Enterprise Application Software
Companies. Such financial information and operating statistics included, among
other things, certain historical profitability margins, certain historical and
projected growth rates, market values of equity, total enterprise values and
implied multiples of historical and estimated revenues and earnings per share.
Among other things, this analysis indicated that the implied multiples (i) for
the Large-Capitalization Enterprise Application Software Companies were as
follows: (a) total enterprise value as a multiple of last twelve months revenues
ranged from 15.31x to 7.02x, with a median of 13.68x and an average of 12.61x;
(b) total enterprise value as a multiple of estimated calendar 1997 revenues
ranged from 13.67x to 5.66x, with a median of 10.84x and an average of 10.44x;
(c) total enterprise value as a multiple of estimated calendar 1998 revenues
ranged from 9.24x to 4.00x, with a median of 7.47x and an average of 6.93x; (d)
market price as a multiple of last twelve months earnings per share ("EPS")
ranged from 187.0x to 49.0x, with a median of 112.9x and an average of 117.0x;
(e) market price as a multiple of estimated calendar 1997 EPS ranged from 126.3x
to 36.0x, with a median of 75.7x and an average of 77.9x; and (f) market price
as a multiple of estimated calendar 1998 EPS ranged from 74.3x to 29.0x, with a
median of 49.8x and an average of 49.0x; (ii) for the Mid-Capitalization
Enterprise Application Software Companies were as follows: (a) total enterprise
value as a multiple of last twelve months revenues ranged from 6.81x to 0.93x,
with a median of 1.57x (2.12x excluding DataWorks) and an average of 2.73x
(2.93x excluding DataWorks); (b) total enterprise value as a multiple of
estimated calendar 1997 revenues ranged from 4.78x to 0.91x (1.04x excluding
DataWorks), with a median of 1.98x (2.51x excluding DataWorks) and an average of
2.26x (2.45x excluding DataWorks); (c) total enterprise value as a multiple of
estimated calendar 1998 revenues ranged from 2.52x to 0.66x (0.88x excluding
DataWorks), with a median of 1.08x (1.60x excluding DataWorks) and an average of
1.45x (1.65x excluding DataWorks); (d) market price as a multiple of last twelve
months EPS ranged from 70.0x to 16.9x (17.8x excluding DataWorks), with a median
of 31.5x (44.8x excluding DataWorks) and an average of 38.9x (44.3x excluding
DataWorks); (e) market price as a multiple of estimated calendar 1997 EPS ranged
from 49.6x to 15.8x (17.2 excluding DataWorks), with a median of 23.9x (24.9x
excluding DataWorks) and an average of 28.1x (29.9x excluding DataWorks); and
(f) market price as a multiple of estimated calendar 1998 EPS ranged from 36.9x
to 9.4x (12.0x excluding DataWorks), with a median of 15.1x (18.1x excluding
DataWorks) and an average of 19.5x (20.8x excluding DataWorks); and (iii) for
the Small-Capitalization Enterprise Application Software Companies were as
follows: (a) total enterprise value as a multiple of last twelve months revenues
ranged from 1.50x to 0.20x, with a median of 0.74x (0.78x excluding Interactive)
and an average of 0.79x (0.82x excluding Interactive); (b) total enterprise
value as a multiple of estimated
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calendar 1997 revenues ranged from 1.17x to 0.16x, with a median of 0.61x (0.65x
excluding Interactive) and an average of 0.66x (0.68x excluding Interactive);
(c) total enterprise value as a multiple of estimated calendar 1998 revenues
ranged from 0.69x to 0.12x, with a median of 0.46x (0.52x excluding Interactive)
and an average of 0.46x; (d) market price as a multiple of last twelve months
EPS ranged from 45.3x (26.9x excluding Interactive) to 16.8x, with a median of
26.9x (21.8x excluding Interactive) and an average of 29.7x (21.8x excluding
Interactive); (e) market price as a multiple of estimated calendar 1997 EPS
ranged from 22.8x to 12.9x (13.8x excluding Interactive), with a median of 13.8x
(18.3x excluding Interactive) and an average of 16.5x (18.3x excluding
Interactive); and (f) market price as a multiple of estimated calendar 1998 EPS
ranged from 26.1x to 6.3x, with a median of 15.3x (17.1x excluding Interactive)
and an average of 14.8x (16.2x excluding Interactive). UBS Securities observed
that the implied financial multiples (i) for Interactive were as follows: (a)
total enterprise value as a multiple of last twelve months revenues of 0.65x
(0.92x based on the Exchange Ratio and a closing price for DataWorks Common
Stock of $12.69 on July 25, 1997); (b) total enterprise value as a multiple of
estimated calendar 1997 revenues of 0.57x (0.81x based on the Exchange Ratio and
a closing price for DataWorks Common Stock of $12.69 on July 25, 1997); (c)
total enterprise value as a multiple of estimated calendar 1998 revenues of
0.46x (0.66x based on the Exchange Ratio and a closing price for DataWorks
Common Stock of $12.69 on July 25, 1997); (d) market price as a multiple of last
twelve months EPS of 45.3x (63.9x based on the Exchange Ratio and a closing
price for DataWorks Common Stock of $12.69 on July 25, 1997); (e) market price
as a multiple of estimated calendar 1997 EPS of 12.9x (18.2x based on the
Exchange Ratio and a closing price for DataWorks Common Stock of $12.69 on July
25, 1997); and (f) market price as a multiple of estimated calendar 1998 EPS of
7.5x (10.6x based on the Exchange Ratio and a closing price for DataWorks Common
Stock of $12.69 on July 25, 1997); and (ii) for DataWorks were as follows: (a)
total enterprise value as a multiple of last twelve months revenues of 1.10x;
(b) total enterprise value as a multiple of estimated calendar 1997 revenues of
0.91x; (c) total enterprise value as a multiple of estimated calendar 1998
revenues of 0.66x; (d) market price as a multiple of last twelve months EPS of
16.9x; (e) market price as a multiple of estimated calendar 1997 EPS of 15.6x;
and (f) market price as a multiple of estimated calendar 1998 EPS of 9.4x. All
estimated data for each of the Large-Capitalization Enterprise Application
Software Companies, the Mid-Capitalization Enterprise Application Software
Companies (excluding DataWorks) and the Small-Capitalization Enterprise
Application Software Companies (excluding Interactive) were based on publicly
available, independent estimates of selected investment banking firms, and all
estimated data for Interactive and DataWorks were based on the estimates of the
respective managements of such companies. All implied financial multiples were
based on closing market prices on July 25, 1997.
Analysis of Selected Acquisitions -- UBS Securities reviewed 12 selected
merger and acquisition transactions involving enterprise application software
companies, all of which were announced since the beginning of 1995 (the
"Selected Acquisitions"). UBS Securities analyzed the equity purchase price,
total enterprise value, certain implied financial multiples and the premiums
over prevailing market prices based on certain public information for each of
the Selected Acquisitions. This analysis indicated that the implied financial
multiples of the Selected Acquisitions were as follows: (i) total enterprise
value as a multiple of last twelve months revenues ranged from 13.21x to 1.38x,
with a median of 2.96x and an average of 4.67x; (ii) total enterprise value as a
multiple of last twelve months operating income ranged from 33.1x to 8.6x, with
a median of 13.8x and an average of 18.5x; (iii) equity purchase price as a
multiple of last twelve months net income ranged from 92.1x to 12.9x, with a
median of 62.1x and an average of 58.0x; and (iv) equity purchase price as a
multiple of estimated net income ranged from 67.0x to 33.4x, with a median of
42.5x and an average of 47.6x. Additionally, this analysis indicated that the
premiums represented by the purchase price to the market price of the subject
company one day and four weeks prior to the announcement of the subject
transaction ranged from 44.3% to 18.5%, with a median of 33.0% and an average of
32.9%, and from 117.0% to 23.8%, with a median of 55.9% and an average of 59.4%,
respectively. UBS Securities observed that the financial multiples of
Interactive implied by the Exchange Ratio, based on a closing price for
DataWorks Common Stock of $12.69 on July 25, 1997, were: (i) total enterprise
value as a multiple of last twelve months revenues of 0.92x; (ii) total
enterprise value as a multiple of last twelve months operating income of 43.6x;
(iii) equity purchase price as a multiple of last twelve months net income of
63.9x; and (iv) equity purchase price as a multiple of estimated net income of
18.2x. Additionally, UBS Securities observed that the
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premiums to the market price of Interactive Common Stock on July 25, 1997, and
four weeks prior to July 25, 1997, implied by the Exchange Ratio, based on a
closing price for DataWorks Common Stock of $12.69 on July 25, 1997, were 41.0%
and 61.9%, respectively.
In addition, UBS Securities reviewed 46 selected merger and acquisition
transactions involving publicly traded software companies, all of which were
announced since the beginning of 1995 (the "Selected Publicly Traded Software
Company Acquisitions"), and 31 of such Selected Publicly Traded Software Company
Acquisitions which were stock-for-stock merger transactions (the "Selected
Software Stock Merger Transactions"), and analyzed the premiums over prevailing
market prices paid in such transactions. This analysis indicated that the median
and average premiums represented by the purchase price to the market price of
the subject company one day and four weeks prior to the announcement of the
subject transaction for the Selected Publicly Traded Software Company
Acquisitions were 35.2% and 36.0%, respectively, and 51.2% and 44.3%,
respectively, and for the Selected Software Stock Merger Transactions were 31.4%
and 31.8%, respectively, and 49.1% and 44.0%, respectively. UBS Securities
observed that the premiums to the market price of Interactive Common Stock on
July 25, 1997, and four weeks prior to July 25, 1997, implied by the Exchange
Ratio, based on a closing price for DataWorks Common Stock of $12.69 on July 25,
1997, were 41.0% and 61.9%, respectively.
Exchange Ratio Analysis -- UBS Securities reviewed the ratios of the market
prices of Interactive Common Stock to DataWorks Common Stock over various
periods ending July 25, 1997, and calculated the premium represented by the
Exchange Ratio to these ratios. The ratios of closing market prices of
Interactive Common Stock to DataWorks Common Stock for the various periods
ending July 25, 1997, were 0.300 for the average of the previous year, 0.366 for
the average of the previous six months, 0.384 for the average of the previous
three months, 0.403 for the average of the previous two months, 0.483 for the
average of the previous one month, 0.178 for the 52-week low, 0.620 for the
52-week high, 0.287 for the day four weeks prior to July 25, 1997 and 0.620 on
July 25, 1997. UBS Securities observed that the Exchange Ratio represented
premiums of 168.4%, 120.3%, 109.9%, 100.1%, 66.6%, 351.9%, 29.8%, 180.7% and
29.8%, respectively, to the aforementioned ratios of the market prices of
Interactive Common Stock to DataWorks Common Stock.
Contribution Analysis -- UBS Securities analyzed the pro forma contribution
of each of Interactive and DataWorks to the resultant combined company if the
Merger were to be consummated. Such analysis was based on historical information
and the estimates of the respective managements of Interactive and DataWorks.
Such analysis indicated that, on average, for the calendar year 1996, the last
twelve months period ended June 30, 1997, and the calendar years 1997 and 1998,
Interactive would contribute approximately 45.0% of the revenues of the combined
company, approximately 39.2% of the gross profit of the combined company,
approximately 21.4% of the operating income of the combined company and
approximately 18.6% of the net income of the combined company. UBS Securities
observed that the Exchange Ratio implied pro forma ownership of the outstanding
common stock of the combined company of 26.8% for holders of Interactive Common
Stock and pro forma ownership of the outstanding common stock of the combined
company, adjusted to include options and warrants outstanding for each of
Interactive and DataWorks, of 27.2% for holders of Interactive Common Stock.
Pro Forma Merger Analysis -- UBS Securities analyzed certain pro forma
financial effects resulting from the Merger, including the impact of the Merger
on DataWorks' projected earnings per share for the calendar years 1997 and 1998.
Based on the estimates of the respective managements of Interactive and
DataWorks and the Exchange Ratio, and assuming that the Merger was treated as a
pooling-of-interests for accounting purposes, the results of the pro forma
merger analysis suggested that, in the absence of any potential operating
synergies that may result from the Merger, the Merger will be dilutive to
DataWorks' earnings per share in each of the calendar years 1997 and 1998. The
actual results achieved by the combined company could vary from projected
results and the variations could be material.
Interactive and UBS Securities have entered into a letter agreement, dated
June 26, 1997 (the "UBS Securities Engagement Letter"), relating to the services
to be provided by UBS Securities to Interactive in connection with the Merger.
Pursuant to the UBS Securities Engagement Letter, Interactive has agreed to pay
UBS Securities for its services: (i) a fee of $250,000 in connection with the
delivery of the opinion of UBS
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Securities, payable upon the delivery by UBS Securities of its opinion, and (ii)
a transaction fee of $800,000, payable at the closing of the Merger, less any
amount payable pursuant to (i) above. In addition, Interactive has agreed to
reimburse UBS Securities for its expenses, including the reasonable fees and
disbursements of its counsel. Pursuant to an additional letter agreement dated
June 26, 1997, Interactive also has agreed to indemnify UBS Securities against
certain liabilities, including liabilities under the federal securities laws
arising in connection with its engagement by Interactive.
UBS Securities is an internationally recognized investment banking and
financial advisory firm. UBS Securities, as part of its investment banking
business, is continually engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, secondary distributions of listed and unlisted securities,
private placements and valuations for corporate and other purposes. In the
ordinary course of its business, UBS Securities and its affiliates actively
trade the shares of Interactive Common Stock and DataWorks Common Stock for
their own accounts and for the accounts of their customers and, accordingly, may
at any time hold a long or short position in such securities.
AMENDMENT OF DATAWORKS BYLAWS
At the DataWorks Meeting, the DataWorks shareholders will be asked to
consider and vote upon the Bylaw Amendment. The full text of the Bylaw Amendment
is attached as Appendix E to this Prospectus/Joint Proxy Statement. DataWorks
shareholders are urged to read the Bylaw Amendment in its entirety. Upon
DataWorks shareholders approval of the Bylaw Amendment, the DataWorks Board will
fix the number of authorized directors of DataWorks at eight (8) and, following
consummation of the Merger, elect Robert C. Vernon to fill the vacancy on the
DataWorks Board created thereby. If so elected, Mr. Vernon will serve as a
director of DataWorks until the next annual meeting of DataWorks shareholders
and until his successor is elected and has qualified, or until his earlier
death, resignation or removal. See "Interactive Management" for biographical
information regarding Mr. Vernon.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Interactive Board with respect to
the Merger Proposal, holders of shares of Interactive Common Stock should be
aware that certain executive officers and directors of Interactive have certain
interests in the Merger that are in addition to the interests of holders of
Interactive Common Stock generally. The Interactive Board has considered these
interests, among other matters, in approving the Merger Agreement and the
Merger.
Employment, Retention and Noncompetition Arrangements. DataWorks has agreed
to enter into employment agreements and noncompetition agreements with three of
Interactive's current officers upon consummation of the Merger. Under the terms
of their respective employment agreements, Robert C. Vernon and Mark Hellinger
(a) will serve, respectively, as the head of international operations of
post-Merger DataWorks and the head of the mid-tier division of post-Merger
DataWorks, (b) will receive cash retention bonuses of $300,000 each payable over
two years following the Merger, whether or not they remain employed by DataWorks
for such two-year period (except in the event of termination for cause), (c)
will be granted options to purchase DataWorks Common Stock (40,000 shares and
25,000 shares, respectively) pursuant to DataWorks' 1995 Equity Incentive Plan
following the Effective Date and (d) will be entitled to receive severance
payments equal to twelve months' salary upon termination of employment by
DataWorks without cause. The employment agreement to be entered into by Bruce H.
Leith, the current Vice President, European Operations of Interactive (who will
serve as an officer of the European operations of post-Merger DataWorks), does
not provide for a cash retention bonus, an option grant or severance pay. In
addition, under the terms of their respective noncompetition agreements, Mr.
Vernon, Mr. Hellinger and Mr. Leith will each receive a noncompetition payment
in cash ($1,150,000, $525,000 and $225,000, respectively) on the Effective Date.
See "Terms of the Merger -- Related Agreements -- Employment and Noncompetition
Agreements."
Election of Vernon to DataWorks Board. Subject to DataWorks shareholder
approval of the Bylaw Amendment, Mr. Vernon will be elected a director of
DataWorks following consummation of the Merger.
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Indemnification and Insurance. Pursuant to the Merger Agreement, DataWorks
agreed that after the Effective Date, it will provide, or will cause the
Surviving Subsidiary to provide, certain indemnification and liability insurance
benefits to certain indemnified parties, including directors and executive
officers of Interactive. See "Terms of the Merger -- Indemnification and
Insurance."
REGULATORY MATTERS
Other than compliance with the federal securities laws and applicable
securities and "blue sky" laws of the various states, DataWorks and Interactive
are not aware of any governmental or regulatory approvals required for
consummation of the Merger.
CERTAIN FEDERAL INCOME TAX MATTERS
The following discussion summarizes the material federal income tax
considerations of the Merger that are generally applicable to holders of
Interactive Common Stock and DataWorks Common Stock. This discussion assumes
that holders of shares of Interactive Common Stock and DataWorks Common Stock
hold such shares as capital assets. This discussion is based on currently
existing provisions of the Code, existing Treasury Regulations thereunder and
current administrative rulings and court decisions, all of which are subject to
change. Any such change, which may or may not be retroactive, could alter the
tax consequences to DataWorks, the DataWorks shareholders, Interactive or
Interactive's stockholders described herein.
Interactive stockholders and DataWorks shareholders should be aware that
this discussion does not deal with all federal income tax considerations that
may be relevant to particular Interactive stockholders or DataWorks shareholders
in light of their particular circumstances, such as shareholders who are dealers
in securities, banks, insurance companies or tax-exempt organizations, who are
subject to the alternative minimum tax provisions of the Code, who are
non-United States persons or who acquired their shares in connection with stock
option or stock purchase plans or in other compensatory transactions. In
addition, the following discussion does not address the tax consequences of the
Merger under foreign, state or local tax laws or the tax consequences of
transactions effectuated prior to or after the Merger (whether or not such
transactions are in connection with the Merger).
As of the date hereof, it is intended that the Merger will constitute a
reorganization pursuant to Section 368(a) of the Code (a "Reorganization"). The
respective obligations of the parties to consummate the Merger are conditioned
on the receipt by DataWorks of an opinion from Cooley Godward, and on the
receipt by Interactive of an opinion from Pillsbury, confirming that the Merger
will constitute a Reorganization (collectively, the "Tax Opinions"); provided,
however, that if counsel to Interactive does not render such opinion, this
condition shall nonetheless be deemed to be satisfied with respect to
Interactive if counsel to DataWorks renders such opinion to Interactive.
The opinions of Cooley Godward and Pillsbury set forth below summarize the
material federal income tax consequences of the Merger to the Interactive
stockholders and the DataWorks shareholders, assuming that the Merger will
qualify as a Reorganization. The opinions of counsel as to such federal income
tax consequences set forth below (i) are not binding on the Internal Revenue
Service (the "IRS"), (ii) are based on certain assumptions, as well as
representations received and to be received from DataWorks, Interactive,
DataWorks Sub and certain stockholders of Interactive, (iii) are based on the
assumption that the Merger will be consummated in accordance with the terms of
the Merger Agreement and (iv) are subject to the limitations discussed below.
Neither DataWorks nor Interactive has requested, or will request, a ruling from
the IRS with regard to any of the federal income tax consequences of the Merger.
- No gain or loss will be recognized for federal income tax purposes by the
holders of Interactive Common Stock upon the receipt of DataWorks Common
Stock solely in exchange for such Interactive Common Stock in the Merger
(except to the extent that cash is received in lieu of fractional
shares).
- The aggregate tax basis of the DataWorks Common Stock so received by
Interactive stockholders in the Merger (including any fractional shares
of DataWorks Common Stock not actually received) will
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be the same as the aggregate tax basis of the Interactive Common Stock
surrendered in exchange therefor.
- The holding period of the DataWorks Common Stock so received by each
Interactive stockholder in the Merger will include the holding period of
the shares of Interactive Common Stock surrendered in exchange therefor.
- Cash payments received by holders of Interactive Common Stock in lieu of
fractional shares will be treated as if such fractional shares of
DataWorks Common Stock had been issued in the Merger and then redeemed by
DataWorks. Under Section 302 of the Code, if such redemption is "not
essentially equivalent to a dividend" after giving effect to the
constructive ownership rules of the Code, the holder will generally
recognize capital gain or loss equal to the cash amount received for the
fractional share of DataWorks Common Stock reduced by the portion of the
holder's tax basis in the shares of Interactive Common Stock surrendered
that is allocable to such fractional share interest in DataWorks Common
Stock. Under these rules, a stockholder of Interactive should recognize
capital gain or loss on the receipt of cash in lieu of a fractional share
interest in DataWorks Common Stock. For non-corporate holders, such
capital gain will be taxed at a maximum federal income tax rate of 28% if
the holder's holding period in the fractional share interest is more than
12 months and not more than 18 months and at a maximum federal income tax
rate of 20% if the holder's holding period in such fractional share
interest is more than 18 months.
- A holder of DataWorks Common Stock who exercises dissenters' rights with
respect to a share of DataWorks Common Stock and receives a cash payment
for such share generally should recognize capital gain or loss measured
by the difference between the shareholder's basis in such share and the
amount of cash received, provided that such payment is not treated as a
dividend pursuant to Section 302 of the Code after giving effect to the
constructive ownership rules of the Code. A sale of shares pursuant to an
exercise of dissenters' rights generally will not be treated as a
dividend if, as a result of such exercise, the shareholder exercising
dissenters' rights owns no shares of capital stock of DataWorks, after
giving effect to the constructive ownership rules of the Code,
immediately after the Merger. For non-corporate holders, such capital
gain will be taxed at a maximum federal income tax rate of 28% if the
holder's holding period in such shares is more than 12 months and not
more than 18 months and at a maximum federal income tax rate of 20% if
the holder's holding period in such shares is more than 18 months. Any
payment in respect of an exercise of dissenters' rights may be subject to
backup withholding at 31%.
The Tax Opinions will be subject to certain assumptions and qualifications
and will be based on the truth and accuracy of certain representations of
DataWorks, Interactive, DataWorks Sub and the stockholders of Interactive,
including representations in certain certificates delivered to counsel by
certain respective managements of DataWorks, Interactive and DataWorks Sub and
the stockholders of Interactive. In addition, the Tax Opinions will be based
upon the assumption that the Merger will be consummated in accordance with the
terms of the Merger Agreement. See "The Merger and Related
Transactions -- Related Agreements -- Affiliate Agreements."
One key assumption is that the "continuity of interest" requirement will be
satisfied in the Merger. In order for this requirement to be met, stockholders
of Interactive must not, pursuant to a plan or intent existing at or prior to
the Merger, dispose of so much of (i) their Interactive Common Stock in
anticipation of the Merger, plus (ii) the DataWorks Common Stock received in the
Merger (collectively, the "Planned Dispositions") such that the Interactive
stockholders, as a group, would no longer have a "significant equity interest"
in the Interactive business being conducted by DataWorks after the Merger.
Interactive stockholders will generally be regarded as having a significant
equity interest as long as the DataWorks Common Stock received in the Merger
(after taking into account Planned Dispositions), in the aggregate, represents a
"substantial portion" of the entire consideration received by the Interactive
stockholders in the Merger. This requirement is frequently referred to as the
"continuity of interest" requirement. If the continuity of interest requirement
is not satisfied, the Merger would not be treated as a Reorganization. The law
is unclear as to what constitutes a "significant equity interest" or a
"substantial portion." The IRS ruling guidelines require
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50% continuity (although such guidelines do not purport to represent the
applicable substantive law). The case law appears to be more liberal, however,
and in one early case, the Supreme Court ruled that approximately 40% continuity
was sufficient. The Merger Agreement and the Continuity of Interest Certificates
contemplate that the 50% standard will be applied. No assurance, however, can be
made that the "continuity of interest" requirement will be satisfied, and if
such requirement is not satisfied, the Merger will not be treated as a
Reorganization.
A successful IRS challenge to the Reorganization status of the Merger would
result in significant adverse tax consequences to Interactive stockholders. An
Interactive stockholder would recognize gain or loss with respect to each share
of Interactive Common Stock surrendered equal to the difference between the
stockholder's basis in such share and the fair market value, as of the Effective
Date, of the DataWorks Common Stock received in exchange therefor. In such
event, a stockholder's aggregate basis in the DataWorks Common Stock so received
would equal its fair market value, and the stockholder's holding period for such
stock would begin the day after the Merger is consummated.
Even if the Merger qualifies as a Reorganization, a recipient of DataWorks
Common Stock would recognize income to the extent that, for example, any such
shares were determined to have been received in exchange for services, to
satisfy obligations or in consideration for anything other than the Interactive
Common Stock surrendered. In addition, to the extent that an Interactive
stockholder were treated as receiving (directly or indirectly) consideration
other than DataWorks Common Stock in exchange for such stockholder's Interactive
Common Stock, gain or loss would have to be recognized.
THE PRECEDING DISCUSSION DOES NOT PURPORT TO BE A COMPLETE ANALYSIS OR
DISCUSSION OF ALL POTENTIAL TAX EFFECTS RELEVANT TO THE MERGER. THUS, HOLDERS OF
INTERACTIVE COMMON STOCK AND DATAWORKS COMMON STOCK ARE URGED TO CONSULT THEIR
OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGER,
INCLUDING TAX RETURN REPORTING REQUIREMENTS, THE APPLICABILITY AND EFFECT OF
FEDERAL, STATE, LOCAL AND OTHER APPLICABLE TAX LAWS AND THE EFFECTS OF ANY
PROPOSED CHANGES IN THE TAX LAWS.
ACCOUNTING TREATMENT
The Merger is intended to qualify as a pooling of interests for accounting
purposes. Under this accounting treatment, the recorded assets and liabilities
and the operating results of both DataWorks and Interactive are carried forward
to the combined operations of the surviving corporation at their recorded
amounts. No recognition of goodwill in the combination is required of either
party to the Merger.
To support the treatment of the Merger as a pooling of interests, the
affiliates of Interactive will enter into agreements imposing certain resale
limitations on their stock. Each of the parties to the agreement shall have
received letters, dated as of the Effective Date, from Ernst & Young LLP
regarding the appropriateness of pooling-of-interests accounting for the Merger
under Accounting Principles Board Opinion No. 16 if closed and consummated in
accordance with this Agreement.
DISSENTERS' RIGHTS OF DATAWORKS SHAREHOLDERS
THE FOLLOWING SUMMARY OF DISSENTERS' RIGHTS UNDER CALIFORNIA LAW IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO CHAPTER 13 OF THE CALIFORNIA LAW, THE
COMPLETE TEXT OF WHICH IS ATTACHED HERETO AS APPENDIX D.
FAILURE TO STRICTLY FOLLOW THE PROCEDURES SET FORTH IN CHAPTER 13 OF THE
CALIFORNIA LAW MAY RESULT IN THE LOSS, TERMINATION OR WAIVER OF APPRAISAL
RIGHTS. A DATAWORKS SHAREHOLDER WHO FAILS TO SIGN AND RETURN A PROXY CARD
DISAPPROVING AND WITHHOLDING AUTHORIZATION FOR THE MERGER OR TO ATTEND THE
DATAWORKS MEETING AND VOTE HIS OR HER SHARES AGAINST THE MERGER WILL NOT HAVE A
RIGHT TO EXERCISE DISSENTERS' RIGHTS.
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A DATAWORKS SHAREHOLDER WHO DESIRES TO EXERCISE HIS OR HER DISSENTERS' RIGHTS
MUST ALSO SUBMIT A WRITTEN DEMAND FOR PAYMENT TO DATAWORKS BEFORE THE DATE OF
THE DATAWORKS MEETING. IN ADDITION, NO DATAWORKS SHAREHOLDER, UNDER ANY
CIRCUMSTANCES, WILL HAVE A RIGHT TO DISSENT FROM THE MERGER AGREEMENT IF LESS
THAN FIVE PERCENT (5%) OF THE OUTSTANDING SHARES OF DATAWORKS COMMON STOCK DO
NOT PERFECT THEIR RIGHT TO DISSENT AND EXERCISE THEIR DISSENTERS' RIGHTS IN
ACCORDANCE WITH CHAPTER 13 OF THE CALIFORNIA LAW.
Under Chapter 13 of the California Law, each DataWorks shareholder as of
the Record Date who votes against the Merger and who submits a written demand
for payment to DataWorks prior to the date of the DataWorks Meeting is entitled
to receive payment of the fair value of all or any portion of such holder's
shares of DataWorks Common Stock owned by such holder if the Merger is
consummated and if demands for payment are made with respect to five percent
(5%) or more of the outstanding shares of DataWorks Common Stock. The fair value
of such shares is determined as of July 31, 1997, the last day before the first
announcement of the terms of the Merger. Any DataWorks shareholder who elects to
perfect such holder's dissenters' rights and demands payment of the fair value
of such holder's shares must strictly comply with Chapter 13 of the California
Law. The following summary does not purport to be complete and is qualified in
its entirety by reference to Chapter 13 of the California Law, the text of which
is attached hereto as Appendix D and is incorporated herein by reference. Any
holder of shares of DataWorks Common Stock considering demanding dissenters'
rights is advised to consult legal counsel. Dissenters' rights will not be
available unless and until the Merger (or a similar business combination) is
consummated. To perfect the right to dissent and receive the fair value of such
holder's shares, a DataWorks shareholder must vote against the Merger.
Prior to the date set for approval of the Merger, each DataWorks
shareholder who elects to exercise his or her dissenters' rights must make a
written demand upon DataWorks for the purchase of his or her DataWorks shares.
The DataWorks shareholder's demand must state the number and class of shares
held of record by the DataWorks shareholder which the DataWorks shareholder
demands that DataWorks purchase, as well as a statement by the DataWorks
shareholder as to what such holder claims the fair market value of such shares
was as of the day prior to the announcement of the Merger. The statement of fair
market value constitutes an offer by the DataWorks shareholder to sell the
shares at such price. Voting against the Merger shall not constitute such
written demand.
If demands for payment are made with respect to five percent (5%) or more
of the outstanding shares of DataWorks Common Stock, and, as a consequence
dissenting shareholders of DataWorks become entitled to exercise dissenters'
rights, then within 10 days after the date of approval of the Merger, DataWorks
will mail to each DataWorks shareholder who filed such a demand notice (the
"DataWorks Notice") of the approval of the Merger by the DataWorks shareholders,
accompanied by a copy of Sections 1300 through 1304 of the California Law. The
DataWorks Notice shall also state the price determined by DataWorks to be the
fair market value of shares of DataWorks Common Stock with respect to which
dissenters' rights are properly exercised under the California Law ("DataWorks
Dissenting Shares") and a brief description of the procedure to be followed by a
shareholder who elects to dissent.
Within the 30-day period following the mailing of the DataWorks Notice, the
dissenting shareholder must submit to DataWorks for endorsement certificates for
any shares which the DataWorks shareholder demands that DataWorks purchase. If
DataWorks and the DataWorks shareholder agree upon the price of the DataWorks
Dissenting Shares, the dissenting DataWorks shareholder is entitled to the
agreed price with interest at the legal rate on judgments from the date of such
agreement. Payment must be made within 30 days of the later of the date of the
agreement between the DataWorks shareholder and DataWorks or the date the
contractual conditions to the Merger are satisfied or waived.
If DataWorks and the DataWorks shareholder cannot agree as to the fair
market value or as to the fact that such shares are DataWorks Dissenting Shares,
such DataWorks shareholder may file within six months of the date of mailing of
the DataWorks Notice a complaint with the California Superior Court for the
County of
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San Diego demanding judicial determination of such matters. DataWorks will then
be required to make any payments in accordance with such judicial determination.
If the complaint is not filed within the specified six-month period, the
DataWorks shareholder's rights as a dissenter are lost.
DataWorks Dissenting Shares lose their status as such if (i) DataWorks
abandons the Merger; (ii) the shares are transferred prior to submission for
endorsement or are surrendered for conversion into shares of another class in
accordance with the Articles of Incorporation; (iii) the DataWorks shareholder
and DataWorks do not agree as to the fair market value of such shares and a
complaint is not filed within six months of the date that the DataWorks Notice
was mailed; or (iv) the dissenting DataWorks shareholder withdraws, with the
consent of DataWorks, his or her demand for purchase of such shares.
IF DEMANDS FOR PAYMENT ARE MADE WITH RESPECT TO FIVE PERCENT (5%) OR MORE
OF THE OUTSTANDING SHARES OF DATAWORKS COMMON STOCK, AND, AS A CONSEQUENCE
DISSENTING SHAREHOLDERS OF DATAWORKS BECOME ENTITLED TO EXERCISE DISSENTERS'
RIGHTS, THEN EITHER DATAWORKS OR INTERACTIVE MAY TERMINATE THE MERGER AGREEMENT,
FOLLOWING WHICH THE PARTIES WILL NOT BE OBLIGATED TO CONSUMMATE THE MERGER.
Further, purchase by DataWorks of five percent (5%) or more of the outstanding
DataWorks Common Stock would prevent the Merger from being accounted for as a
pooling of interests. The receipt of letters from Ernst & Young relating to the
appropriateness of pooling of interests accounting for the Merger is a condition
to the parties' obligations to consummate the Merger. See "Terms of the Merger."
NO APPRAISAL RIGHTS OF INTERACTIVE STOCKHOLDERS
Under Section 262 of the DGCL, appraisal rights are generally available to
stockholders of a constituent Delaware corporation in connection with a merger.
However, appraisal rights are not available to the stockholders of a constituent
Delaware corporation if (i) as of the record date for the meeting of
stockholders to approve the merger, the corporation's stock is either (a) listed
on a national securities exchange or designated as a national market system
security on an interdealer quotation system by the National Association of
Securities Dealers, Inc. or (b) held of record by more than 2,000 stockholders;
and (ii) the consideration to be received by such stockholders in the merger
consists only of (a) shares of the capital stock of the corporation surviving
the merger, (b) shares of the capital stock of any other corporation provided
that such stock, as of the date on which the merger becomes effective, is either
(1) listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or (2) held of record by more than 2,000
stockholders, (c) cash in lieu of fractional shares, or (d) a combination of the
foregoing.
Since Interactive Common Stock was listed on Nasdaq as a National Market
security as of the close of business on the Record Date and since the holders of
Interactive Common Stock will receive shares of DataWorks Common Stock, which
will be listed on Nasdaq as a National Market security, the holders of
Interactive Common Stock are not entitled to appraisal rights under the DGCL in
connection with the Merger.
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TERMS OF THE MERGER
This section of the Prospectus/Joint Proxy Statement describes certain
aspects of the proposed Merger. The Merger Agreement provides for the merger of
DataWorks Sub, a newly formed, wholly owned Delaware subsidiary of DataWorks,
with and into Interactive. The discussion in this Prospectus/Joint Proxy
Statement of the Merger and the description of the principal terms of the Merger
Agreement are accurate in all material respects but do not purport to be
complete and are subject to and qualified in their entirety by reference to the
Merger Agreement, a copy of which is attached to this Prospectus/Joint Proxy
Statement as Appendix A and incorporated herein by reference. All DataWorks
shareholders and Interactive stockholders are urged to read the Merger Agreement
in its entirety.
EFFECTIVE DATE
The Merger will be consummated promptly following approval of the Merger
Proposal by the DataWorks shareholders and the Interactive stockholders and the
satisfaction or waiver of all other conditions to consummation of the Merger.
The Merger will become effective on the date the certificate of merger is duly
filed with the Delaware Secretary of State (the "Effective Date"). On the
Effective Date, DataWorks Sub will merge with and into Interactive, with the
result that Interactive will be the Surviving Subsidiary in the Merger and will
be wholly owned by DataWorks. As described below, the stockholders of
Interactive will become shareholders of DataWorks, and their rights will be
governed by the DataWorks Articles, the DataWorks Bylaws and the California Law.
See "Comparison of Rights of DataWorks Shareholders and Interactive
Stockholders."
MANNER AND BASIS FOR CONVERTING SHARES
Exchange Ratio. On the Effective Date, each outstanding share of
Interactive Common Stock (other than any shares of Interactive Common Stock
owned by DataWorks, Interactive, DataWorks Sub or any direct or indirect wholly
owned subsidiary of DataWorks or Interactive) will be converted into the right
to receive 0.8054 (the "Exchange Ratio") of a share of DataWorks Common Stock.
Each share of Interactive Common Stock owned by DataWorks, Interactive,
DataWorks Sub or any direct or indirect wholly owned subsidiary of DataWorks or
Interactive immediately prior to Effective Date will be canceled and
extinguished without any conversion thereof.
Based upon the capitalization of Interactive as of the close of business on
the Record Date, an aggregate of approximately 3,700,000 shares of DataWorks
Common Stock (the "Merger Consideration") will be issued in the Merger, and
DataWorks will assume all outstanding Interactive options and warrants which
will be converted into options and warrants to acquire approximately 536,000
additional shares of DataWorks Common Stock.
On the Effective Date, all options to purchase Interactive Common Stock
then outstanding either under Interactive's 1997 Stock Option Plan, 1995 Stock
Option Plan or 1993 Stock Option Plan (collectively, the "Interactive Option
Plans") or outside of the Interactive Option Plans (each an "Interactive Option"
and, collectively, the "Interactive Options") and all outstanding warrants to
purchase shares of Interactive Common Stock (each an "Interactive Warrant" and,
collectively, the "Interactive Warrants") will be assumed by DataWorks.
Immediately prior to the Effective Date, Interactive will terminate the
Interactive Employee Stock Purchase Plan. All amounts that have been withheld
but not yet applied to purchase shares of Interactive Common Stock pursuant to
such plan as of its termination date will be applied to purchase the number of
shares available under the Employee Stock Purchase Plan, and the Interactive
Common Stock to be received by the participating employees pursuant to the terms
of such plan will be converted at the Exchange Ratio into shares of DataWorks
Common Stock. See "-- Treatment of Employee Equity Benefit Plans and Warrants."
Each share of Common Stock, $.001 par value per share, of DataWorks Sub
issued and outstanding as of the Effective Date will be converted into one
validly issued, fully paid and nonassessable share of Common Stock, $.001 par
value per share, of the Surviving Subsidiary. Each certificate evidencing
ownership of shares
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of DataWorks Sub Common Stock will evidence ownership of such shares of capital
stock of the Surviving Subsidiary.
The Exchange Ratio will be adjusted to reflect appropriately the effect of
any stock split, reverse stock split, stock dividend (including any dividend or
distribution of securities convertible into DataWorks Common Stock or
Interactive Common Stock), reorganization, recapitalization, reclassification or
other like change with respect to DataWorks Common Stock or Interactive Common
Stock occurring or having a record date on or after the date of the Merger
Agreement and prior to the Effective Date.
Promptly after the Effective Date, DataWorks, acting through the Exchange
Agent, will deliver to each holder of record as of the Effective Date of a
certificate or certificates which immediately prior to the Effective Date
represented outstanding shares of Interactive Common Stock, a letter of
transmittal with instructions to be used by such holder in surrendering such
certificates in exchange for certificates representing shares of DataWorks
Common Stock. CERTIFICATES SHOULD NOT BE SURRENDERED BY THE HOLDERS OF
INTERACTIVE COMMON STOCK UNTIL SUCH HOLDERS RECEIVE THE LETTER OF TRANSMITTAL
FROM THE EXCHANGE AGENT, AND THEN ONLY IN ACCORDANCE WITH THE TERMS OF SUCH
LETTER OF TRANSMITTAL.
Fractional Shares. No fractional shares of DataWorks Common Stock will be
issued in the Merger. Instead, each Interactive stockholder who would otherwise
be entitled to receive a fraction of a share of DataWorks Common Stock will
receive an amount in cash (without interest) determined by multiplying such
fraction by the closing price of DataWorks Common Stock as reported on the
Nasdaq National Market on the last trading date immediately preceding the
Effective Date. DataWorks intends to use its current cash resources to fund the
payments for fractional shares.
EFFECT OF THE MERGER
Once the Merger is consummated, DataWorks Sub will cease to exist as a
corporation, and Interactive will remain as the Surviving Subsidiary.
Pursuant to the Merger Agreement, a form of Certificate of Incorporation of
DataWorks Sub attached thereto will become the Certificate of Incorporation of
the Surviving Subsidiary immediately following the Merger and the Bylaws of
DataWorks Sub immediately prior to the Effective Date will become the Bylaws of
the Surviving Subsidiary. The directors and officers of the Surviving Subsidiary
will be the respective individuals who are serving as directors and officers of
DataWorks Sub immediately prior to the Effective Date. There will be no change
in the current DataWorks Board and officers of DataWorks as a result of the
Merger, except that Robert C. Vernon, the current Chairman of the Board and
Chief Executive Officer of Interactive, will become President, International
Operations and a director of DataWorks, and Mark Hellinger, the current
President and Chief Operating Officer -- North American Operations and a
director of Interactive, will become President, Mid-Tier Division of DataWorks.
In addition, Robert W. Brandel, currently an Executive Vice President and the
Chief Operating Officer of DataWorks, will become President, Lower-Tier Division
of DataWorks.
If the combined company is to realize the anticipated benefits of the
Merger, the operations of the two companies must be integrated and combined
efficiently. The process of rationalizing management services, administrative
organizations, facilities, management information systems and other aspects of
operations, while managing a larger and geographically expanded entity, will
present a significant challenge to the management of the combined company. There
can be no assurance that the integration process will be successful or that the
anticipated benefits of the business combination will be fully realized. The
dedication of management resources to such integration may detract attention
from the day-to-day business of the combined company. The difficulties of
integration may be increased by the necessity of coordinating geographically
separated organizations, integrating personnel with disparate business
backgrounds and combining different corporate cultures. There can be no
assurance that there will not be substantial costs associated with the
integration process, that such activities will not result in a decrease in
revenues or that there will not be other material adverse effects of these
integration efforts. Such effects could materially reduce the short-term
earnings of the combined company. Subsequent to the Merger, DataWorks expects to
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incur a charge in the third quarter of fiscal 1997, currently estimated to be
$14.0 million, to reflect the combination of the two companies, including
transaction and integration costs. This amount is a preliminary estimate only.
There can be no assurance that DataWorks will not incur additional charges in
the third quarter and subsequent quarters to reflect costs associated with the
Merger.
TREATMENT OF EMPLOYEE EQUITY BENEFIT PLANS AND WARRANTS
Stock Options and Warrants. As of the Effective Date, each Interactive
Option and each Interactive Warrant, whether or not exercisable, will be assumed
by DataWorks and will continue to have, and be subject to, the same terms and
conditions set forth in the stock option plan under which it was issued (if
applicable) and the stock option agreement or warrant agreement by which it is
evidenced. From and after the Effective Date (i) each Interactive Option and
each Interactive Warrant will be or become exercisable for DataWorks Common
Stock rather than Interactive Common Stock, (ii) the number of shares of
DataWorks Common Stock subject to each Interactive Option and each Interactive
Warrant shall be equal to the number of shares of Interactive Common Stock
subject to such option or warrant immediately prior to the Effective Date
multiplied by the Exchange Ratio, rounding down to the nearest whole share (with
cash, less the applicable exercise price, being payable for any fraction of a
share), (iii) the per share exercise price under each Interactive Option and
each Interactive Warrant shall be adjusted by dividing the per share exercise
price under such option or warrant by the Exchange Ratio and rounding up to the
nearest cent and (iv) any restriction on the exercise of any such option or
warrant shall continue in full force and effect and the term, exercisability,
vesting schedule and other provisions of each such option and warrant shall
otherwise remain unchanged.
Form S-8 Filing. DataWorks has agreed to file with the Commission on Form
S-8, promptly following the Effective Date, a post-effective amendment to the
Registration Statement to register shares of DataWorks Common Stock issuable as
the result of the assumption of the Interactive Options.
Employee Stock Purchase Plan. Immediately prior to the Effective Date,
Interactive will terminate the Interactive Employee Stock Purchase Plan. All
amounts that have been withheld but not yet applied to purchase shares of
Interactive Common Stock pursuant to such plan as of its termination date will
be applied to purchase the number of shares available under the Employee Stock
Purchase Plan and the Interactive Common Stock to be received by the
participating employees pursuant to the terms of such plan will be converted at
the Exchange Ratio into shares of DataWorks Common Stock.
STOCK OWNERSHIP FOLLOWING THE MERGER
Based upon the capitalization of Interactive as of the close of business on
the Record Date, an aggregate of approximately 3,700,000 shares of DataWorks
Common Stock will be issued to Interactive stockholders in the Merger and
DataWorks will assume options and warrants to acquire up to approximately
536,000 additional shares of Interactive Common Stock. Based upon the number of
shares of DataWorks Common Stock issued and outstanding as of July 31, 1997, and
after giving effect to the issuance of DataWorks Common Stock as described in
the previous sentence and the exercise of all options to purchase Interactive
Common Stock assumed by DataWorks, the former holders of Interactive Common
Stock and options and warrants to purchase Interactive Common Stock would hold,
and have voting power with respect to, approximately 30% of DataWorks' total
issued and outstanding shares. The foregoing numbers of shares and percentages
are subject to change to reflect any changes in the capitalization of either
DataWorks or Interactive subsequent to the dates indicated and prior to the
Effective Date, and there can be no assurance as to the actual capitalization of
DataWorks or Interactive as of the Effective Date or of DataWorks at any time
following the Effective Date.
REPRESENTATIONS AND WARRANTIES
Pursuant to the Merger Agreement, each of DataWorks, Interactive and
DataWorks Sub made certain representations and warranties relating to its
respective business and various other matters. None of such representations and
warranties will survive the Merger.
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COVENANTS
Pursuant to the Merger Agreement, each of DataWorks and Interactive has
agreed (on behalf of itself and each of its direct and indirect majority-owned
subsidiaries) that, until the earlier of the termination of the Merger Agreement
pursuant to its terms and the Effective Date (the "Pre-Closing Period"), subject
to certain exceptions, and except to the extent that the other party consents in
writing, it will conduct its business and operations in the ordinary course and
in accordance with past practices and in compliance with all applicable laws and
regulations and the requirements of all applicable material contracts, preserve
intact its current business organization, keep available the services of its
current officers and employees and maintains its relations and goodwill with all
suppliers, customers, landlords, creditors, licensors, licensees, employees and
others with which it has business relationships, use all reasonable efforts to
keep in full force all of its existing insurance policies and provide all
material notices, assurances and support required by any material contract to
which it is a party.
In addition, except as permitted by the terms of the Merger Agreement, and
subject to certain exceptions, during the Pre-Closing Period, each of DataWorks
and Interactive has agreed not to do any of the following or to permit its
subsidiaries to do any of the following without the prior written consent of the
other:
(a) declare, accrue, set aside or pay any dividend or make any other
distribution in respect of any shares of capital stock, or repurchase,
redeem or otherwise reacquire any shares of capital stock or other
securities;
(b) sell, issue, grant or authorize the issuance or grant of (i) any
capital stock or other security, (ii) any option, call, warrant or right to
acquire any capital stock or other security, or (iii) any instrument
convertible into or exchangeable for any capital stock or other security;
provided, however, that Interactive may issue Interactive Common Stock upon
the valid exercise of Interactive Options or Interactive Warrants, grant
Interactive Options to new employees consistent with past practice, and
issue shares of Interactive Common Stock pursuant to the Interactive ESPP;
and DataWorks may issue DataWorks Common Stock upon the valid exercise of
outstanding options or warrants, grant options and/or warrants to employees
and consultants consistent with past practice and issue DataWorks Common
Stock pursuant to its existing option and stock plans;
(c) amend or permit the adoption of any amendment to its certificate
of incorporation or bylaws or other charter or organizational documents, or
effect or become a party to any merger, consolidation, share exchange,
business combination, recapitalization, reclassification of shares, stock
split, reverse stock split or similar transaction;
(d) form any subsidiary or acquire any equity interest or other
interest in any other entity;
(e) acquire, lease or license any material right or other material
asset from any other person or entity or sell or otherwise dispose of, or
lease or license, any material right or other material asset to any other
person or entity (except in each case for assets acquired, leased, licensed
or disposed of by DataWorks or Interactive in the ordinary course of
business and consistent with past practices) or waive or relinquish any
material right;
(f) lend money to any person or entity, or incur or guarantee any
indebtedness (except that DataWorks and Interactive may make routine
borrowings and/or advance funds to employees and officers in the ordinary
course of business and in accordance with past practices under its current
financing facilities);
(g) change any of its methods of accounting or accounting practices in
any respect;
(h) make any tax election;
(i) commence or settle any legal proceeding;
(j) enter into any material transaction or take any other material
action outside the ordinary course of business or inconsistent with past
practices; or
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(k) agree or commit to take any of the actions described in clauses
(a) through (j) above.
Interactive has further agreed that during the Pre-Closing Period it will
not (a) amend or waive any of its rights under, or accelerate the vesting under,
any provision of any of Interactive stock option plans or stock purchase plan,
any provision of any agreement evidencing any outstanding stock option or any
restricted stock purchase agreement, or otherwise modify any of the terms of any
outstanding option, warrant or other security or any related contract or (b)
establish, adopt or amend any employee benefit plan, pay any bonus or make any
profit-sharing or similar payment to, or increase the amount of the wages,
salary, commissions, fringe benefits or other compensation or remuneration
payable to, any of its directors, officers or employees (except for routine
increases for non-officers consistent with past practices).
NO SOLICITATION
Under the terms of the Merger Agreement, Interactive has agreed that,
during the Pre-Closing Period, it will not directly or indirectly, and will not
authorize or permit any subsidiary of Interactive or any of its or its
subsidiaries' officers, directors, employees, agents, attorneys, accountants,
advisors or representatives directly or indirectly to, (i) solicit, initiate,
encourage or induce the making, submission or announcement of any Acquisition
Proposal (as defined below) or take any action (excluding any press releases
issued in connection with the announcement of the Merger or action in compliance
with Interactive's required disclosure obligations under the Exchange Act) that
could reasonably be expected to lead to an Acquisition Proposal, (ii) furnish
any information regarding Interactive or any of its subsidiaries to any person
or entity in connection with or in response to an Acquisition Proposal, or (iii)
engage in discussions or negotiations with any person or entity with respect to
any Acquisition Proposal. An "Acquisition Proposal" means any offer, proposal or
inquiry (other than from DataWorks) contemplating or otherwise relating to (a)
any merger, consolidation, share exchange, business combination, issuance of
securities, acquisition of securities, tender offer, exchange offer or other
similar transaction (i) in which Interactive is a constituent corporation, (ii)
in which a person or "group" (as defined in the Exchange Act and the rules
promulgated thereunder) of persons directly or indirectly acquires Interactive
or more than 50% of Interactive's business or directly or indirectly acquires
beneficial or record ownership of securities representing more than 20% of the
outstanding securities of any class of voting securities of Interactive, or
(iii) in which Interactive issues securities representing more than 20% of the
outstanding securities of any class of voting securities of Interactive; or (b)
any sale, lease (other than in the ordinary course of business), exchange,
transfer, license (other than in the ordinary course of business), acquisition
or disposition of more than 50% of the assets of Interactive, or any liquidation
or dissolution of Interactive. Pursuant to the Merger Agreement, Interactive
further agreed to cease any and all activities, discussions or negotiations with
any parties conducted prior to the date of the Merger Agreement with respect to
any Acquisition Proposal. In addition, Interactive agreed that it will promptly
advise DataWorks orally and in writing of any Acquisition Proposal (including
the identity of the person making or submitting such Acquisition Proposal and
the terms thereof) that is made or submitted by any person during the
Pre-Closing Period and will keep DataWorks fully informed with respect to the
status of any such Acquisition Proposal and any modifications or proposed
modifications thereto.
Notwithstanding the foregoing, but subject to the restrictions on the
conduct of Interactive's business described above, prior to the Effective Date,
to the extent the Interactive Board determines, in good faith, after
consultation with outside legal counsel, that the Board's fiduciary duties under
applicable law require it to do so, Interactive may participate in discussions
or negotiations with, and furnish non-public information and afford access to
the properties, books or records of Interactive to, any person, entity or group
after such person, entity or group has delivered to Interactive in writing an
unsolicited bona fide Acquisition Proposal which the Interactive Board in its
good faith reasonable judgment determines, after consultation with its
independent financial advisors, would reasonably be likely to result in a
transaction more favorable than the Merger to the stockholders of Interactive
from a financial point of view (a "Superior Proposal"). Prior to furnishing any
such nonpublic information to, or entering into discussions with, such person,
entity or group, Interactive must give DataWorks written notice of the identity
of such person, entity or group and of Interactive's intention to furnish
nonpublic information to, or enter into discussions with, such person, entity or
group, and must obtain from such person, entity or group an executed
confidentiality agreement containing customary limitations on
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the use and disclosure of all nonpublic written and oral information furnished
to such person, entity or group by or on behalf of Interactive. In addition,
prior to furnishing any such nonpublic information to such person, entity or
group, Interactive must furnish such nonpublic information to DataWorks (to the
extent such nonpublic information has not been previously furnished by
Interactive to DataWorks).
CONDITIONS TO THE MERGER
The respective obligations of each party to the Merger Agreement to effect
the Merger are subject to the satisfaction at or prior to the Effective Date of
the following conditions: (i) the Merger Agreement shall have been approved and
adopted, and the Merger shall have been duly approved, by the requisite vote
under applicable law by the DataWorks shareholders and the Interactive
stockholders; (ii) the Commission shall have declared the Registration Statement
of which this Prospectus/Joint Proxy Statement is a part effective and no stop
order suspending the effectiveness of the Registration Statement or any part
thereof shall have been issued and no proceeding for that purpose, and no
similar proceeding in respect of this Prospectus/Joint Proxy Statement, shall
have been initiated or threatened in writing by the Commission; (iii) there
shall have been no material legal proceedings relating to the Merger or
prohibiting the consummation of the Merger or any of the other transactions
contemplated by the Merger Agreement; (iv) all waiting periods, if any, under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, relating
to the transactions contemplated hereby will have expired or terminated early;
(v) DataWorks and Interactive shall each have received written opinions from
their respective tax counsel (Cooley Godward and Pillsbury, respectively), in
form and substance reasonably satisfactory to them, to the effect that the
Merger will constitute a reorganization within the meaning of Section 368(a) of
the Code, and such opinions shall not have been withdrawn; provided, however,
that, if the counsel to Interactive does not render such opinion, this condition
shall nonetheless be deemed to be satisfied with respect to Interactive if
counsel to DataWorks renders such opinion to Interactive; (vi) the employment
agreements and noncompetition agreements shall have been executed by DataWorks
and Messrs. Vernon, Hellinger and Leith; and (vii) the shares of DataWorks
Common Stock issuable to stockholders of Interactive in the Merger and such
other shares required to be reserved for issuance in connection with the Merger
shall have been authorized for listing on the Nasdaq National Market upon
official notice of issuance.
In addition, the obligation of Interactive to consummate and effect the
Merger is subject to the satisfaction at or prior to the Effective Date of each
of the following conditions, any of which may be waived, in writing, exclusively
by Interactive: (i) subject to certain materiality thresholds, the
representations and warranties of DataWorks and DataWorks Sub contained in the
Merger Agreement shall have been true and correct on and as of the date of the
Merger Agreement and such representations and warranties shall be true and
correct on and as of the Effective Date except for changes contemplated by the
Merger Agreement and except in such cases where the failure to be so true and
correct would not have a material adverse effect on DataWorks; (ii) DataWorks
and DataWorks Sub shall have performed or complied in all material respects with
all agreements and covenants required by the Merger Agreement to be performed or
complied with by them on or prior to the Effective Date; and (iii) Interactive
shall have received from Ernst & Young LLP, independent auditors for Interactive
and DataWorks, letters dated on the Effective Date (which may contain customary
qualifications and assumptions), to the effect that Ernst & Young LLP concurs
with DataWorks management's conclusion that no conditions exist related to
Interactive or DataWorks that would preclude DataWorks from accounting for the
Merger as a pooling of interests.
Further, the obligations of DataWorks and DataWorks Sub to consummate and
effect the Merger are subject to the satisfaction at or prior to the Effective
Date of each of the following conditions, any of which may be waived, in
writing, exclusively by DataWorks: (i) subject to certain materiality
thresholds, the representations and warranties of Interactive contained in the
Merger Agreement shall have been true and correct on and as of the date of the
Merger Agreement and such representations and warranties shall be true and
correct on and as of the Effective Date except for changes contemplated by the
Merger Agreement and except in such cases where the failure to be so true and
correct would not have a material adverse effect on Interactive; (ii)
Interactive shall have performed or complied in all material respects with all
agreements and covenants required by the Merger Agreement to be performed or
complied with by it on or prior to the
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Effective Date; and (iii) DataWorks shall have received from Ernst & Young LLP,
independent auditors for Interactive and DataWorks, letters dated on the
Effective Date (which may contain customary qualifications and assumptions), to
the effect that Ernst & Young LLP concurs with DataWorks management's conclusion
that no conditions exist related to Interactive or DataWorks that would preclude
DataWorks from accounting for the Merger as a pooling of interests.
TERMINATION OF THE MERGER AGREEMENT
The Merger Agreement provides that it may be terminated at any time prior
to the Effective Date as follows:
(a) by mutual written consent of DataWorks and Interactive;
(b) by either DataWorks or Interactive, if the Merger is not
consummated by December 31, 1997 for any reason, provided that the right to
terminate the Merger Agreement as provided in this clause (b) is not
available to any party whose failure to act has been a principal cause of
or resulted in the failure of the Merger to occur on or before such date
and such action or failure to act constitutes a breach of the Merger
Agreement;
(c) by either DataWorks or Interactive, if a governmental entity
issues an order, decree or ruling or takes any other action, in any case
having the effect of permanently restraining, enjoining or otherwise
prohibiting the Merger, which order, decree, ruling or other action is
final and nonappealable;
(d) by either DataWorks or Interactive, if the required approvals of
the DataWorks shareholders or the Interactive stockholders contemplated by
the Merger Agreement shall not have been obtained by reason of the failure
to obtain the required vote at a meeting of such shareholders or
stockholders duly convened therefor as contemplated by the Merger Agreement
or at any adjournment thereof (provided that the Merger Agreement may not
be terminated by a party pursuant to this provision if the failure to
obtain such shareholder or stockholder approval was caused by the action or
failure to act of such party and such action or failure to act constitutes
a material breach by such party of the Merger Agreement);
(e) by either DataWorks or Interactive at any time prior to the
approval of the Merger by the DataWorks shareholders and the Interactive
stockholders, if (i) the Interactive Board fails to recommend, or withdraws
or modifies its unanimous recommendation in favor of, the Merger Proposal,
(ii) the Interactive Board accepts or recommends a Superior Proposal to the
Interactive stockholders, (iii) the Interactive Board approves, endorses or
recommends any Acquisition Proposal, (iv) Interactive enters into any
letter of intent or similar document or any contract relating to an
Acquisition Proposal, (v) Interactive fails to hold the Interactive Meeting
in a timely manner, (vi) a tender or exchange offer relating to securities
of Interactive has been commenced and Interactive shall not have sent to
its securityholders, within five business days after the commencement of
such tender or exchange offer, a statement disclosing that Interactive
recommends rejection of such offer, or (vii) an Acquisition Proposal is
publicly announced and Interactive fails to issue a press release
announcing its opposition to such Acquisition Proposal within five business
days after such proposal is announced or otherwise fails to actively oppose
such Acquisition Proposal (each of the foregoing circumstances in clauses
(i) through (vii) being hereinafter referred to as an "Interactive
Triggering Event");
(f) by DataWorks or Interactive, if holders of 5% or more of the
shares of DataWorks Common Stock outstanding on the Record Date vote
against the Merger Proposal and demand dissenters' rights under the
California Law;
(g) by DataWorks, upon a breach of any representation, warranty,
covenant or agreement on the part of Interactive set forth in the Merger
Agreement, or if any such representation or warranty of Interactive shall
have become inaccurate, subject to certain materiality thresholds and cure
provisions; or
(h) by Interactive, upon a breach of any representation, warranty,
covenant or agreement on the part of DataWorks set forth in the Merger
Agreement, or if any such representation or warranty of DataWorks shall
have become inaccurate, subject to certain materiality thresholds and cure
provisions.
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EFFECT OF TERMINATION
If the Merger Agreement is terminated by DataWorks or Interactive as
described above, the Merger Agreement will be of no further force or effect,
except that certain provisions contained therein, including those discussed
below relating to "break-up" fees payable by DataWorks to Interactive or by
Interactive to DataWorks under certain circumstances, will survive such
termination, and DataWorks, Interactive and DataWorks Sub will remain liable for
certain breaches of the Merger Agreement occurring prior to such termination.
BREAK-UP FEES
DataWorks has agreed that if the Merger Agreement is terminated (i) by
DataWorks as a result of holders of 5% or more of the shares of DataWorks Common
Stock outstanding on the Record Date having voted against the Merger Proposal
and demanded dissenters' rights under the California Law, or (ii) by DataWorks
or Interactive because the required approvals of the DataWorks shareholders
contemplated by the Merger Agreement shall not have been obtained by reason of
the failure to obtain the required vote at the DataWorks Meeting or at any
adjournment thereof, then DataWorks will pay to Interactive, in cash, a
nonrefundable fee in the amount of $1,500,000.
Interactive has agreed that if the Merger Agreement is terminated (i) by
Interactive as a result of holders of 5% or more of the shares of DataWorks
Common Stock outstanding on the Record Date having voted against the Merger
Proposal and demanded dissenters' rights under the California Law, (ii) by
DataWorks or Interactive because the required approvals of the Interactive
stockholders contemplated by the Merger Agreement shall not have been obtained
by reason of the failure to obtain the required vote at the Interactive Meeting
or at any adjournment thereof, or (iii) by either DataWorks or Interactive
following the occurrence of an Interactive Triggering Event, then Interactive
will pay to DataWorks, in cash, a nonrefundable fee in the amount of $1,500,000.
INDEMNIFICATION AND INSURANCE
Pursuant to the Merger Agreement, DataWorks agreed that, after the
Effective Date, it will indemnify, defend and hold harmless to the fullest
extent permitted under applicable law each person who is now or has been an
officer or director of Interactive or its direct or indirect majority-owned
subsidiaries against all losses, claims, damages, liabilities, costs or expenses
(including reasonable attorneys' fees), judgments, fines, penalties and amounts
paid in settlement in connection with any claim, action, suit, proceeding or
investigation arising out of or pertaining to acts or omissions, or alleged acts
or omissions, by them in their capacities as such, whether commenced, asserted
or claimed before or after the Effective Date. In addition, DataWorks agreed
that, promptly following the Effective Date, it will purchase and maintain or
cause the Surviving Subsidiary to purchase and maintain, for a period of six
years following the Effective Date, policies of directors' and officers'
liability insurance covering each person who was a director or officer of
Interactive at any time prior to the Effective Date with respect to claims
arising from facts or events that occurred on or prior to the Effective Date and
providing at least the same coverage and amounts and containing terms that are
no less advantageous to the insured parties as those in effect immediately prior
to the Effective Date for officers and directors of the Company; provided,
however, that in no event shall DataWorks be required to obtain coverage under
such policies beyond that coverage that may be obtained at an aggregate premium
cost for all such policies for the six-year period not exceeding $120,000.
MERGER EXPENSES AND FEES AND OTHER COSTS
Except as described above, all fees and expenses incurred in connection
with the Merger Agreement and the transactions contemplated by the Merger
Agreement shall be paid by the party incurring such expenses, whether or not the
Merger is consummated; provided, however, that DataWorks and Interactive shall
share equally all fees and expenses, other than attorneys' fees, incurred in
connection with the printing and filing of the S-4 Registration Statement and
this Prospectus/Joint Proxy Statement and any amendments or supplements thereto.
See "Terms of the Merger -- Termination."
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Pursuant to an engagement letter between DataWorks and Lehman Brothers,
DataWorks has agreed to pay Lehman Brothers (1) a retainer of $75,000, (2) a fee
of $150,000 for rendering its opinion, against which the $75,000 retainer will
be credited and (3) a fee of $800,000 upon consummation of the Merger against
which the $150,000 retainer and opinion fee would be credited. DataWorks also
has agreed to reimburse Lehman Brothers for reasonable expenses incurred by
Lehman Brothers and to indemnify Lehman Brothers and certain related persons for
certain liabilities that may arise out of its engagement and the rendering of
this opinion.
Pursuant to the UBS Securities Engagement Letter, Interactive has agreed to
pay UBS Securities for its services: (i) a fee of $250,000 in connection with
the delivery of the opinion of UBS Securities, payable upon the delivery by UBS
Securities of its opinion, and (ii) a transaction fee of $800,000, payable at
the closing of the Merger, less any amount payable pursuant to (i) above. In
addition, Interactive has agreed to reimburse UBS Securities for its expenses,
including the reasonable fees and disbursements of its counsel. Pursuant to an
additional letter agreement dated June 26, 1997, Interactive also has agreed to
indemnify UBS Securities against certain liabilities, including liabilities
under the federal securities laws arising in connection with its engagement by
Interactive.
DataWorks and Interactive estimate that they will incur direct transaction
costs of approximately $14.0 million associated with the Merger. These
nonrecurring transaction costs will be charged to operations upon consummation
of the Merger, expected in the quarter ending September 30, 1997. See "Unaudited
Pro Forma Combined Condensed Financial Information" and "Risk
Factors -- Integration of Operations."
RELATED AGREEMENTS
Voting Agreements
Concurrently with the execution of the Merger Agreement, certain
stockholders of Interactive entered into Voting Agreements with DataWorks
pursuant to which such stockholders agreed that, prior to the earlier of the
date on which the Merger Agreement is terminated or the Effective Date (the
"Expiration Date"), such stockholder:
(a) will not, directly or indirectly, (i) offer, sell, offer to sell,
contract to sell, pledge, grant any option to purchase or otherwise dispose
of or transfer (or announce any offer, sale, offer of sale, contract of
sale or grant of any option to purchase or other disposition or transfer
of) any shares of Interactive Common Stock held by such person (the
"Interactive Subject Shares") to any person other than DataWorks or
DataWorks' designee, (ii) create or permit to exist any encumbrance with
respect to any of the Interactive Subject Shares, (iii) reduce his
beneficial ownership of, interest in or risk relating to any of the
Interactive Subject Shares or (iv) commit or agree to do any of the
foregoing;
(b) will vote the Interactive Subject Shares (i) in favor of the
Merger Proposal and each of the other actions contemplated by the Merger
Agreement and (ii) against any action or agreement that would result in a
breach of any representation, warranty, covenant or obligation of
Interactive in the Merger Agreement; and
(c) will not deposit any of the Interactive Subject Shares into a
voting trust or grant another proxy (except as described below) or enter
into a voting agreement with respect to any of the Interactive Subject
Shares.
In addition, each such Interactive stockholder delivered to DataWorks an
irrevocable proxy voting the Interactive Subject Shares in favor of the Merger
Proposal and each of the other actions contemplated by the Merger Agreement and
waived any rights of appraisal and any dissenters' rights such stockholder may
otherwise have in connection with the Merger.
Concurrently with the execution of the Merger Agreement, certain
shareholders of DataWorks entered into Voting Agreements with Interactive
pursuant to which such shareholders agreed that, prior to the Expiration Date,
such shareholder:
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<PAGE> 70
(a) will not, directly or indirectly, (i) offer, sell, offer to sell,
contract to sell, pledge, grant any option to purchase or otherwise dispose
of or transfer (or announce any offer, sale, offer of sale, contract of
sale or grant of any option to purchase or other disposition or transfer
of) any shares of DataWorks Common Stock held by such person (the
"DataWorks Subject Shares") to any person other than Interactive or
Interactive's designee, (ii) create or permit to exist any encumbrance with
respect to any of the DataWorks Subject Shares, (iii) reduce his beneficial
ownership of, interest in or risk relating to any of the DataWorks Subject
Shares or (iv) commit or agree to do any of the foregoing;
(b) will vote the DataWorks Subject Shares (i) in favor of the Merger
Proposal each of the other actions contemplated by the Merger Agreement and
(ii) against any action or agreement that would result in a breach of any
representation, warranty, covenant or obligation of DataWorks in the Merger
Agreement; and
(c) will not deposit any of the DataWorks Subject Shares into a voting
trust or grant another proxy (except as described below) or enter into a
voting agreement with respect to any of the DataWorks Subject Shares.
In addition, each such DataWorks shareholder delivered to Interactive an
irrevocable proxy voting the DataWorks Subject Shares in favor of the Merger
Proposal and each of the other actions contemplated by the Merger Agreement and
waived any rights of appraisal and any dissenters' rights such shareholder may
otherwise have in connection with the Merger.
Option Agreement
In connection with the Merger Agreement, DataWorks and Interactive entered
into an option agreement (the "Option Agreement") pursuant to which Interactive
granted to DataWorks (i) an unregistered, irrevocable option (the "Stock
Option") to purchase up to 344,531 shares of Interactive Common Stock of
Interactive (the "Option Shares"), at a price of $7.50 per share, subject to
adjustment for stock dividends, stock splits, mergers (other than the Merger),
recapitalizations, combinations, exchange of shares or the like and (ii) a put
option (the "Cash Put Right") in the event the Stock Option is exercisable and a
letter of intent or definitive agreement with respect to a Superior Offer has
been entered into by Interactive (a "Cash Put Deal").
DataWorks may exercise the Stock Option with respect to any of the Option
Shares in whole or in part following the occurrence of a Purchase Event and
prior to the Termination Date. A "Purchase Event" shall be deemed to have
occurred upon a termination of the Merger Agreement pursuant to which
Interactive is required to pay DataWorks a fee of $1,500,000 as a result of the
occurrence of an Interactive Triggering Event or, in certain circumstances, the
failure of the Interactive stockholders to approve the Merger Proposal at the
Interactive Meeting (any such event, a "Termination"). The "Termination Date"
shall be 120 days after a Termination.
The exercise price for the Cash Put Option is equal to the amount by which
the Market/Offer Price (as defined below) for shares of Interactive Common Stock
(as of the date DataWorks gives notice of exercise) exceeds $7.50 multiplied by
the number of Option Shares then purchasable pursuant to the Stock Option.
"Market/Offer Price" is defined as the higher of the per share price called for
under the Cash Put Deal and the average of the closing price per share of
Interactive Common Stock for the 10 trading days immediately preceding the
notice of exercise. Delivery of payment will be in cash upon the consummation of
the Cash Put Deal or, if the Cash Put Deal is terminated prior to consummation
(and Interactive makes a public announcement thereof), then Interactive will pay
the required amount to DataWorks in shares of Interactive Common Stock within 10
business days of the public announcement of such termination.
The Option Agreement further provides that prior to the Termination Date,
if the market value of Interactive Common Stock exceeds the exercise price of
the Stock Option, then DataWorks may exercise the Stock Option without a cash
payment, and receive shares of Interactive Common Stock with a value equal to
the aggregate amount by which the market value exceeds the exercise price.
Finally, the Option Agreement grants DataWorks certain registration rights with
respect to the Option Shares for 2 years after purchase.
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<PAGE> 71
Affiliate Agreements
To help ensure that the Merger will be accounted for as a
pooling-of-interests, affiliates of DataWorks and Interactive (as defined for
purposes of Rule 145) have agreed to enter into agreements that prohibit such
persons from disposing of their shares of DataWorks Common Stock until DataWorks
publicly releases its first report of financial statements including the
combined financial results of Interactive and DataWorks for a period of at least
30 days of "combined operations," as defined by the Commission. Such affiliates
will also agree not to sell, pledge or otherwise transfer such shares except in
compliance with Rule 145 or under certain other limited circumstances.
Employment and Noncompetition Agreements
It is a condition of the Merger that DataWorks enter into employment
agreements and noncompetition agreements with three of Interactive's current
officers upon consummation of the Merger. Under the terms of their respective
employment agreements, Robert C. Vernon and Mark Hellinger (a) will serve,
respectively, as the head of international operations of post-Merger DataWorks
and the head of the mid-tier division of post-Merger DataWorks, (b) will receive
cash retention bonuses of $300,000 each payable over two years following the
Merger, whether or not they remain employed by DataWorks for such two-year
period (except in the event of termination for cause), (c) will be granted
options to purchase DataWorks Common Stock (40,000 shares and 25,000 shares,
respectively) pursuant to DataWorks' 1995 Equity Incentive Plan following the
Effective Date and (d) will be entitled to receive severance payments equal to
twelve months' salary upon termination of employment by DataWorks without cause.
The employment agreement to be entered into by Bruce H. Leith, the current Vice
President, European Operations of Interactive (who will serve as an officer of
the European operations of post-Merger DataWorks), does not provide for a cash
retention bonus, an option grant or severance pay. Under the terms of their
respective noncompetition agreements, Mr. Vernon, Mr. Hellinger and Mr. Leith
will each receive a noncompetition payment in cash ($1,150,000, $525,000 and
$225,000, respectively) on the Effective Date.
AFFILIATES' RESTRICTIONS ON SALE OF DATAWORKS COMMON STOCK
The shares of DataWorks Common Stock to be issued pursuant to the Merger
and the Merger Agreement will have been registered under the Securities Act
pursuant to the Registration Statement, thereby allowing such shares to be
traded without restriction by all former holders of Interactive Common Stock who
(i) are not deemed to be affiliates of Interactive at the time of the
Interactive Meeting (as "affiliates" is defined for purposes of Rule 145) and
(ii) who do not become affiliates of DataWorks after the Merger. The directors
of Interactive, certain officers and certain significant stockholders may be
deemed to be affiliates of Interactive at the time of the Interactive Meeting.
Robert C. Vernon will become an executive officer, a director and a possible
affiliate of DataWorks after the Merger, and Mark Hellinger will become an
executive officer and a possible affiliate of DataWorks after the Merger. See
"Interactive Management."
The directors of Interactive, certain officers and certain significant
stockholders of Interactive have entered into agreements not to make any public
sale of any DataWorks Common Stock received upon conversion of Interactive
Common Stock in the Merger prior to the date DataWorks shall have publicly
released financial results for a period that includes at least 30 days of
combined operations of Interactive and DataWorks, and thereafter not to make any
sale of DataWorks Common Stock received upon conversion of Interactive Common
Stock in the Merger, except in compliance with Rule 145 or under certain other
limited circumstances. See "Related Agreements; Interests of Certain Persons in
the Merger -- Affiliate Agreements" above. In general, Rule 145, as currently in
effect, imposes restrictions on the manner in which such affiliates may make
resales of DataWorks Common Stock and also on the number of shares of DataWorks
Common Stock that such affiliates and others (including persons with whom the
affiliates act in concert) may sell within any three-month period. Rule 145 will
not generally preclude sales by affiliates. These Rule 145 restrictions will
generally apply for a period of at least one year after the Effective Date (or
longer if the person remains or becomes an affiliate of DataWorks).
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<PAGE> 72
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
The following unaudited pro forma combined condensed financial statements
give effect to the Merger of DataWorks and Interactive under the
pooling-of-interests method of accounting. These pro forma financial statements
are presented for illustrative purposes only and therefore are not necessarily
indicative of the operating results or financial position that might have been
achieved had the Merger occurred as of an earlier date, nor are they necessarily
indicative of operating results or financial position which may occur in the
future.
A pro forma combined condensed balance sheet is provided as of June 30,
1997, giving effect to the Merger as though it had been consummated on that
date. Pro forma combined condensed statements of operations are provided for the
six-month period ended June 30, 1996 and 1997 and the fiscal years ended
December 31, 1994, 1995 and 1996, giving effect to the Merger as though it had
occurred at the beginning of the earliest period presented. For purposes of the
pro forma operating data, DataWorks' consolidated financial statements for the
three fiscal years ended December 31, 1996 and for the six months ended June 30,
1996 and 1997 have been combined with Interactive's consolidated financial
statements for the three fiscal years ended December 31, 1996 and for the six
months ended June 30, 1996 and 1997.
The pro forma combined condensed statements of operations for each of the
three years in the period ended December 31, 1996 are derived from the audited
historical consolidated financial statements of DataWorks and audited historical
consolidated financial statements of Interactive and should be read in
conjunction with historical financial statements and accompanying notes for
DataWorks and Interactive incorporated by reference or included herein. The pro
forma combined condensed financial statements as of or for the six-month periods
ended June 30, 1996 and 1997 have been prepared in accordance with generally
accepted accounting principles applicable to interim financial information and,
in the opinions of DataWorks' and Interactive's respective managements, include
all adjustments necessary for a fair presentation of financial information for
such interim periods.
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<PAGE> 73
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEETS
JUNE 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
PRO FORMA PRO FORMA
DATAWORKS INTERACTIVE ADJUSTMENTS COMBINED
--------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents..................... $54,764 $ 3,697 $ $ 58,461
Accounts receivable, net...................... 21,104 17,110 38,214
Deferred income taxes......................... 2,709 540 3,249
Other current assets.......................... 4,168 1,529 5,697
------- ------- ------- --------
Total current assets.................. 82,745 22,876 105,621
Receivable from officer......................... 97 -- 97
Equipment, furniture and fixtures, net.......... 4,502 3,133 7,635
Capitalized software costs, net................. 6,415 -- 416(1) 6,831
Intangible assets, net.......................... 3,682 2,286 5,968
Deferred income taxes........................... -- 1,152 1,152
Other assets.................................... 255 768 (416)(1) 607
------- ------- ------- --------
$97,696 $30,215 $ -- $ 127,911
======= ======= ======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................. $ 3,588 $ 5,361 $ $ 8,949
Accrued compensation.......................... 2,189 2,341 4,530
Income and value added taxes payable.......... 1,338 321 1,659
Deferred revenue.............................. 11,375 2,071 13,446
Current portion of obligations under capital
leases..................................... -- 221 221
Short-term borrowings and current portion of
long-term obligations...................... -- 3,949 3,949
Other accrued liabilities..................... 919 2,882 9,480(2) 13,281
------- ------- ------- --------
Total current liabilities............. 19,409 17,146 9,480 46,035
Deferred income taxes........................... 2,758 -- 2,758
Deferred rent................................... 107 -- 107
Obligations under capital leases, less current
portion....................................... -- 329 329
Long-term obligations, less current portion..... -- 1,630 1,630
Commitments
Shareholders' equity
Common stock.................................. 72,337 5 7,506(1) 79,848
Additional capital............................ -- 7,506 (7,506)(1) --
Retained earnings (accumulated deficit)....... 3,085 3,494 (9,480)(2) (2,901)
Cumulative foreign currency translation
adjustments................................ -- 105 105
------- ------- ------- --------
Total shareholders' equity............ 75,422 11,110 (9,480) 77,052
------- ------- ------- --------
$97,696 $30,215 $ -- $ 127,911
======= ======= ======= ========
</TABLE>
- ---------------
(1) Reclassifications to conform the presentation of the Interactive financial
data to the DataWorks financial data.
(2) Estimated charge, net of tax, for merger related costs, including costs to
integrate the operations of the two companies.
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UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------- -----------------
1994 1995 1996 1996 1997
------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Net revenues.................................... $51,706 $76,004 $116,939 $55,070 $62,444
Cost of revenues................................ 23,687 32,658 52,182 25,247 27,678
------- ------- -------- ------- -------
Gross profit.................................... 28,019 43,346 64,757 29,823 34,766
Operating expenses:
Sales and marketing........................... 13,412 19,817 29,632 13,238 17,545
Research and development...................... 4,126 5,163 8,918 4,222 5,074
General and administrative.................... 6,505 9,146 14,659 6,741 7,774
Acquisition and related costs................. -- -- 3,656 -- --
ESOP contribution(1).......................... 429 446 -- -- --
Write-off of software license................. -- 235 -- -- --
Compensation expense associated with employee
stock bonus(2)............................. -- 871 -- -- --
Purchased research and development(3)......... -- 3,250 -- -- --
------- ------- -------- ------- -------
Income from operations.......................... 3,547 4,418 7,892 5,622 4,373
Other income (expense), net..................... (1,221) (1,250) 247 166 816
------- ------- -------- ------- -------
Income before income taxes...................... 2,326 3,168 8,139 5,788 5,189
Provision for income taxes...................... 708 932 3,642 2,730 1,859
------- ------- -------- ------- -------
Income before extraordinary item(4)............. $ 1,618 $ 2,236 $ 4,497 $ 3,058 $ 3,330
======= ======= ======== ======= =======
Earnings per share data:
Income before extraordinary item(4)........... $ .23 $ .25 $ .38 $ .26 $ .24
======= ======= ======== ======= =======
Weighted average common and common equivalent
shares outstanding......................... 6,989 8,812 11,854 11,725 14,133
======= ======= ======== ======= =======
</TABLE>
- ---------------
(1) See Note 4 to the DataWorks Consolidated Financial Statements for an
explanation of the ESOP. The ESOP liability was repaid during 1995 and
future contributions will not be required.
(2) Represents a non-recurring compensation expense of $871,000 associated with
the final stock grant and cash bonus pursuant to a compensation arrangement
with an officer of Interactive.
(3) Relates to the acquisition of JIT. See Note 2 of Notes to Consolidated
Financial Statements of Interactive.
(4) In 1994 and 1995, DataWorks incurred an extraordinary loss resulting from
the early repayment of certain debt obligations.
(5) Certain reclassifications have been made to conform the financial statements
of Interactive to the DataWorks presentation. Total cost of revenues
increased and operating expenses decreased by $1,251,000, $1,656,000,
$2,831,000, $1,285,000 and $1,747,000 for the years ended December 31, 1994,
1995, 1996 and the six months ended June 30, 1996 and 1997, respectively.
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NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
1. The unaudited pro forma combined condensed financial statements of
DataWorks and Interactive give retroactive effect to the Merger using the
pooling-of-interests method of accounting, and, as a result, the unaudited pro
forma combined condensed balance sheets and statements of income are presented
as if the combining companies had been combined for all periods presented. The
unaudited pro forma combined condensed financial statements will become the
historical financial statements of DataWorks upon issuance of financial
statements for a period that includes the Merger date. The unaudited pro forma
combined condensed financial statements reflect the issuance of 3,700,000 fully
paid and nonassessable shares of DataWorks Common Stock for each share of
Interactive Common Stock to effect the Merger. The unaudited pro forma combined
condensed financial statements, including the notes thereto, should be read in
conjunction with the historical financial statements of DataWorks and
Interactive incorporated by reference or included in this Prospectus/Joint Proxy
Statement.
2. The unaudited pro forma combined condensed balance sheets combine
DataWorks' June 30, 1997 unaudited consolidated balance sheet with Interactive's
June 30, 1997 unaudited consolidated balance sheet. The adjustments related to
the estimated costs of the transaction and integration of the business are
estimated to be approximately $9.5 million, net of estimated tax benefit of
approximately $4.5 million.
3. The unaudited pro forma statements of income combine DataWorks'
historical results for each of the three years in the period ended December 31,
1996 and the unaudited six months ended June 30, 1996 and 1997 with the
Interactive historical results for each of the three years in the period ended
December 31, 1996 and the unaudited six months ended June 30, 1996 and 1997,
respectively.
4. The unaudited pro forma data are presented for informational purposes
only and do not give effect to any synergies that may occur due to the combining
of DataWorks' and Interactive's existing operations. DataWorks expects to incur
charges currently estimated to be approximately $9.5 million, net of taxes, to
reflect costs associated with integrating the operations of the two companies
and transaction fees and costs incident to the Merger. This non-recurring charge
is reflected in the unaudited pro forma combined condensed balance sheet but is
not included in the unaudited pro forma combined condensed statement of
operations.
5. The accounting policies of the separate companies are currently being
studied from a conformity perspective. The impact of conforming accounting
policies, if any, is not presently estimable.
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INTERACTIVE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements that involve
risks and uncertainties. Interactive's and the combined entity's actual results
could differ materially from those discussed here. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in the sections entitled "Risk Factors" and "Interactive Business," as well as
those discussed elsewhere in this Prospectus/ Joint Proxy Statement.
Interactive develops, markets, implements and supports integrated business
information systems that enable discrete manufacturers to manage their
enterprise-wide information requirements. Interactive's primary software
product, INFOFLO, supports make-to-order and make-to-stock manufacturers in
their business re-engineering efforts by providing customer-oriented
capabilities that allow manufacturers to reduce order fulfillment cycle times,
improve operating efficiencies and measure critical company performance against
defined plan objectives. INFOFLO contains a series of integrated software
application modules that are designed to support information processing in the
functional areas of sales and marketing, finance and accounting, manufacturing
and operations. Interactive implements its INFOFLO systems as turnkey solutions
featuring Interactive's software products integrated with computer and
networking hardware, operating system and database software and object-oriented
development tools. Interactive also offers a full complement of services to
assist customers in maximizing the benefits of Interactive's software products,
including implementation, customer support and maintenance services. Interactive
developed INFOFLO using open systems technology that allows customers to migrate
to different hardware and software technologies and upgrade to new releases of
Interactive's application software.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
of total revenues represented by certain statement of operations data:
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
------------------------- ---------------
1994 1995 1996 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues:
Software licenses................................ 37.1% 34.1% 35.0% 34.8% 38.5%
Software support services........................ 24.7 29.3 33.1 33.9 31.9
Hardware......................................... 20.6 17.0 14.3 14.1 8.4
Maintenance contracts............................ 12.8 16.2 15.4 14.8 18.7
Other............................................ 4.8 3.4 2.2 2.4 2.5
----- ----- ----- ----- -----
Total revenues........................... 100.0 100.0 100.0 100.0 100.0
Cost of revenues:
Software licenses................................ 9.7 7.7 6.8 7.5 7.6
Software support services........................ 14.6 16.9 23.8 23.6 23.5
Hardware......................................... 15.7 12.2 10.4 10.4 6.1
Maintenance contracts............................ 3.4 5.9 6.7 6.4 8.2
Other............................................ 4.1 3.5 2.7 2.6 2.3
----- ----- ----- ----- -----
Total cost of revenues................... 47.5 46.2 50.4 50.5 47.7
----- ----- ----- ----- -----
</TABLE>
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<PAGE> 77
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
1994 1995 1996 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Gross Margin....................................... 52.5 53.8 49.6 49.5 52.3
Operating expenses:
Research and development......................... 4.6 4.8 7.2 7.4 6.0
Selling, general and administrative.............. 37.9 42.1 38.8 36.3 43.6
Write-off of software license.................... -- .7 -- -- --
Compensation expense associated with employee
stock bonus................................... -- 2.6 -- -- --
Purchased research and development............... -- 9.9 -- -- --
----- ----- ----- ----- -----
Income (loss) from operations...................... 10.0 (6.3) 3.6 5.8 2.7
Other income (expense), net........................ (.3) .3 (.4) (.3) (.5)
----- ----- ----- ----- -----
Income (loss) before income tax.................... 9.7 (6.0) 3.2 5.5 2.2
Provision (benefit) for income loss................ 3.4 (2.6) 1.0 2.3 .9
----- ----- ----- ----- -----
Net income (loss).................................. 6.3% (3.4)% 2.2% 3.2% 1.3%
===== ===== ===== ===== =====
</TABLE>
Comparison of Six Months Ended June 30, 1997 and 1996
TOTAL REVENUES
Total revenues increased 3.1% to $28.4 million from $27.6 million for the
six months ended June 30, 1997 as compared to the same period in 1996, primarily
as a result of higher sales volumes in all areas except for third-party hardware
sales which Interactive has continued to de-emphasize.
Software License Revenues
Software license revenues increased 14.4% for the six months ended June 30,
1997 as compared to the same period in 1996. The increase in software license
revenues was due to an increase in system sales and system upgrades to new and
existing customers.
Software Support Services Revenues
Software support services revenues decreased 3.0% for the six months ended
June 30, 1997 as compared to the same period in 1996 primarily as a result of a
reduction in the number of JIT software implementations performed during 1997.
Revenues from software support services do not necessarily increase at the same
rate or time as increases in software license revenues due to the length of time
encountered between the delivery and implementation of software licenses.
Hardware Revenues
Hardware revenues decreased 38.7%, or $1.5 million, for the six months
ended June 30, 1997 as compared to the same period in 1996 as a result of
actions to de-emphasize third party hardware sales.
Maintenance Contracts Revenues
Revenues from maintenance contracts increased 29.6% for the six months
ended June 30, 1997 as compared to the same period in 1996. The increase in
maintenance contracts revenues was due to an increase in the number of customers
paying maintenance fees for new and upgraded systems and incremental maintenance
revenues associated with the acquisition of JIT.
Cost of Revenues
Total cost of revenues decreased 2.7% to $13.6 million from $13.9 million
for the six months ended June 30, 1997 as compared to the same period in 1996.
The fluctuations in the cost of revenues were primarily
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attributable to a reduction in third-party hardware costs as discussed above. In
addition, during the six months ended June 30, 1997, Interactive experienced
higher personnel costs related to its growth in software support services and
maintenance contracts. As a result, the reduction in hardware costs was
partially offset by the increase in personnel costs for the six months ended
June 30, 1997.
Cost of Software Licenses
The cost of software licenses consists primarily of the cost of software
products included in Interactive's systems that are provided by third-party
suppliers, including royalties, based on license revenues earned by Interactive.
The cost of software licenses increased by 5.5% to $2.2 million from $2.0
million for the six months ended June 30, 1997 as compared to the same period in
1996. The increase was primarily attributable to increases in the purchases of
software products from third party software vendors to support the increase in
system sales.
Cost of Software Support Services
The cost of software support services increased by 2.5% to $6.7 million
from $6.5 million for the six months ended June 30, 1997 as compared to the same
period in 1996 primarily due to higher personnel costs.
Cost of Hardware
The cost of hardware consists primarily of the cost of computer hardware
and related peripheral equipment purchased by Interactive from various suppliers
for resale as part of Interactive's turnkey systems. The cost of hardware
decreased by 39.4% to $1.7 million from $2.9 million for the six months ended
June 30, 1997 as compared to the same period in 1996 primarily due to the
Company's de-emphasis on selling third-party hardware.
Cost of Maintenance Contracts
The cost of maintenance contracts increased by 30.8% to $2.3 million from
$1.8 million for the six months ended June 30, 1997 as compared to the same
period in 1996 primarily due to additional costs required to support the growth
in sales of new systems and system upgrades.
Gross Margin
Gross margin increased by 9% to $14.9 million from $13.7 million for the
six months ended June 30, 1997 as compared to the same period in 1996. As a
percentage of total revenues, gross margin increased 3 basis points for the six
months ended June 30, 1997 to 52% compared to the same period in 1996. The
increase resulted primarily from Interactive's emphasis on selling software
licenses and services versus third-party hardware. Software licenses
historically have produced gross margins approximating 80% of revenues while
hardware sales historically have produced gross margins in the range of 25% to
28% of revenues. In addition, an increase in the volume of maintenance contracts
from Interactive's growing customer base contributed to the higher gross margins
while Interactive maintained consistent gross margins of approximately 57% as a
percentage of revenues.
Research and Development Expenses
Research and development expenses decreased 17% to $1.7 million from $2.1
million for the six months ended June 30, 1997 compared to the same period in
1996. The decrease was primarily a result of the termination of contractors
associated with JIT's research and development expenditures during the first
part of 1997.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 3.7% to $12.4
million from $10.0 million for the six months ended June 30, 1997 as compared to
the same period in 1996. As a percentage of total revenues,
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selling, general and administrative expenses increased to 44% for the six months
ended June 30, 1997 compared to 36% for the same period in 1996. The increase in
selling, general and administrative expenses was primarily attributable to
Interactive's continued expansion into Europe, which included the business
development and infrastructure costs for Interactive France, Nordic, Ireland and
the Netherlands, the expenses associated with developing and supporting the
Evosoft distributorship for Germany and Hungary, and the translation and
localization of its software for international markets.
Provision for Income Taxes
Interactive's estimated tax rate remained consistent at approximately
41%-42% for the six months ended June 30, 1997 and 1996, which approximates the
federal and state statutory rates.
COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1995
TOTAL REVENUES
Interactive's total revenues increased 70.3% to $56.2 million in 1996 from
$33.0 million in 1995. The increase was primarily attributable to increases in
revenues from software licenses and software support services.
Software License Revenues
Software license revenues increased 74.5% to $19.6 million in 1996 from
$11.3 million in 1995. The increase in software license revenues was due to an
increase in system sales and system upgrades to new and existing customers.
Software Support Services Revenues
Revenues from software support services increased 92.4% to $18.6 million in
1996 from $9.7 million in 1995. The increase in revenues was principally due to
incremental software support services revenues associated with the acquisition
of Just-In-Time Enterprise Systems, Inc. ("JIT"), as well as an increase in
implementation services and programming services associated with increases in
billable personnel to support the increase in software license revenues.
Revenues from software support services do not necessarily increase at the same
rate or time as increases in software license revenues due to the length of time
encountered between the delivery and implementation of software licenses.
Hardware Revenues
Hardware revenues increased 42.8% to $8.0 million in 1996 from $5.6 million
in 1995. The increase was primarily due to increased computer hardware revenue
to support the increase in system sales and upgrades to new and existing
customers.
Maintenance Contracts Revenues
Revenues from maintenance contracts increased 61.8% to $8.7 million from
$5.3 million in 1995. The increase in maintenance contracts revenues was due to
an increase in the number of customers paying maintenance fees for new and
upgraded systems and incremental maintenance revenues associated with the
acquisition of JIT.
Cost of Revenues
Total cost of revenues increased 86.0% to $28.3 million in 1996 from $15.2
million in 1995. The fluctuations in the cost of revenues were primarily
attributable to a reduction in third-party hardware costs as discussed above.
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Cost of Software Licenses
The cost of software licenses consists primarily of the cost of software
products included in Interactive's systems that are provided by third-party
suppliers, including royalties, based on license revenues earned by Interactive.
The cost of software licenses increased by 50.2% to $3.8 million in 1996
compared to $2.5 million in 1995. The increase was primarily attributable to
increases in the purchases of software products from third party software
vendors to support the increase in system sales.
Cost of Software Support Services
The cost of software support services increased 139.9% to $13.4 million in
1996 from $5.6 million in 1995 as a result of the increase in related software
support services provided by Interactive, primarily consisting of personnel and
contractor costs associated with the operations of JIT, as well as travel and
other costs associated with providing implementation, programming, education and
training, and other technical and consulting services.
Cost of Hardware
The cost of hardware consists primarily of the cost of computer hardware
and related peripheral equipment purchased by Interactive from various suppliers
for resale as part of Interactive's turnkey systems. The cost of hardware
increased 45.5% to $5.8 million in 1996 from $4.0 million in 1995 due primarily
to the increase in related hardware revenues.
Cost of Maintenance Contracts
The cost of maintenance contracts increased 93.7% to $3.8 million in 1996
from $2.0 million in 1995 as a result of an increase in personnel and contractor
costs associated with the operations of JIT, royalty costs for third party
software vendors, and other costs to support the growth in sales of new systems
and system upgrades.
Gross Margin
Gross margin increased 56.9% to $27.9 million in 1996 from $17.8 million in
1995 primarily due to the increase in total revenues from 1995 to 1996. Overall
gross margin as a percentage of total revenues decreased to 49.6% in 1996 from
53.8% in 1995, mainly as a result of a decrease in gross margin on software
support services as a result of contractor costs associated with JIT's software
support services revenue. Gross margin on Interactive's software license
revenues is significantly higher than on revenues from hardware, services and
maintenance. Gross margins on software licenses increased to 80.5% in 1996
compared to 77.4% in 1995 due primarily to an increase in Interactive's
proprietary software revenue as a percentage of product mix, price increases and
a reduction in the cost of royalties paid to third party software vendors. Gross
margins on software support services decreased significantly to 28.2% in 1996
from 42.4% in 1995. Interactive attributes this decrease to higher personnel and
contractor costs associated with JIT, increases in other costs associated with
providing implementation, programming, education and training services, and
lower utilization of billable personnel due to training required on
Interactive's new software release. Hardware gross margins decreased slightly to
27.0% in 1996 from 28.4% in 1995. Interactive, in general, expects to realize
hardware margins in the approximate range of 25%-28% under normal conditions.
Gross margins on maintenance contracts decreased to 56.3% in 1996 from 63.5% in
1995 due mainly to increases in customer support personnel, third party royalty
costs, and contractor costs associated with JIT's maintenance contracts revenue.
Research and Development Expenses
Research and development expenses, which consist largely of software
development costs, increased 155.9% to $4.1 million in 1996 from $1.6 million in
1995 primarily as a result of the incremental addition of JIT's research and
development personnel and costs to Interactive's existing research and
development organization, as well as contractor costs associated with JIT's
research and development expenditures. Research and development expenses as a
percentage of total revenues increased to 7.2% in 1996 from 4.8% in
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1995, and increased as a percentage of software license revenues to 20.7% in
1996 from 14.1% in 1995, due primarily to the expansion of Interactive's
software development resources as a result of the JIT acquisition.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 56.9% to $21.8
million in 1996 from $13.9 million in 1995. As a percentage of total revenue,
selling, general and administrative expenses decreased to 38.8% in 1996 compared
to 42.1% in 1995. The increase in absolute dollars in selling, general and
administrative expenses is primarily due to increases in selling and marketing
activities, increases in sales personnel, higher sales commissions associated
with increased revenues and margins, and increased travel and administrative
costs to support the acquisition of JIT and the general growth of Interactive.
Provision for Income Taxes
Interactive's effective tax rate decreased to 30.3% in 1996 from 42.7% in
1995, due primarily to the realization of research and development tax credits
in 1996.
COMPARISON OF YEARS ENDED DECEMBER 31, 1995 AND 1994
TOTAL REVENUES
Total revenues increased 15.3% to $33.0 million in 1995 from $28.6 million
in 1994. The increase was primarily attributable to increases in revenues from
software support services and maintenance contracts.
Software License Revenues
Software license revenues increased 5.8% to $11.3 million in 1995 from
$10.6 million in 1994. The increase in software license revenues was due to an
increase in system sales to new customers.
Software Support Services Revenues
Revenues from software support services increased 36.8% to $9.7 million in
1995 from $7.1 million in 1994. The increase in revenues was principally due to
an increase in implementation services, programming, and billable hours, as well
as an increase in billable software support services personnel and higher
utilization of software support services personnel. Revenues from software
support services do not typically increase at the same rate or time as increases
in software license revenues due to the length of time encountered between the
delivery and implementation of software licenses.
Hardware Revenues
Hardware revenues decreased 4.7% to $5.6 million in 1995 from $5.9 million
in 1994. The decrease in revenue was primarily due to vendor delays in computer
hardware shipments.
Maintenance Contracts Revenues
Revenues from maintenance contracts increased 46.3% to $5.3 million in 1995
from $3.7 million in 1994. The increase in maintenance contracts revenues was
primarily due to an increase in the number of customers paying maintenance fees
for new and upgraded systems.
Cost of Revenues
Total cost of revenues increased 12.0% to $15.2 million in 1995 from $13.6
million in 1994.
Cost of Software Licenses
The cost of software licenses consists primarily of the cost of software
products included in Interactive's systems that are provided by third-party
suppliers, including royalties, based on license revenues earned by Interactive.
The cost of software licenses decreased by 8.6% to $2.5 million in 1995 compared
to $2.8 million
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in 1994 due to an increase in Interactive's proprietary software license revenue
as a percentage of product mix and a reduction in the cost of royalties paid to
third party software vendors.
Cost of Software Support Services
The cost of software support services increased by 33.6% to $5.6 million in
1995 from $4.2 million in 1994 as a result of the increase in related software
support services provided by Interactive, primarily consisting of personnel
costs, travel, materials, and other costs associated with providing
implementation, programming, education and training, and other technical and
consulting services.
Cost of Hardware
The cost of hardware consists primarily of the cost of computer hardware
and related peripheral equipment purchased by Interactive from various suppliers
for resale as part of Interactive's turnkey systems. The cost of hardware
decreased by 10.8% to $4.0 million in 1995 from $4.5 million in 1994 due
primarily to vendor delays in computer hardware shipments of booked hardware
orders.
Cost of Maintenance Contracts
The cost of maintenance contracts doubled to $2.0 million in 1995 from $1.0
million in 1994 as a result of a significant increase in personnel, royalty
costs for third party software vendors, and other costs to support the growth in
sales of new systems and system upgrades.
Gross Margin
Gross margin increased by 18.2% to $17.8 million in 1995 from $15.0 million
in 1994 primarily due to the increase in total revenues from 1994 to 1995.
Overall gross margin as a percentage of total revenues increased to margins on
software license revenues and hardware revenue. Gross margin on Interactive's
software license revenues is significantly higher than on revenues from
hardware, services and maintenance. Gross margins on software licenses increased
by 3.6% to 77.4% in 1995 compared to 73.8% in 1994 due primarily to an increase
in Interactive's proprietary software revenue as a percentage of product mix,
price increases, and a reduction in the cost of royalties paid to third party
software vendors. Gross margins on software support services increased to 42.4%
in 1995 from 41.1% in 1994, due mainly to increased utilization of billable
implementation and programming personnel. Hardware gross margins increased to
28.4% in 1995 from 23.5% in 1994 due to the absence in 1995 of certain low
margin sales that occurred in 1994 to meet specific customer contractual
requirements. Interactive, in general, realizes hardware margins in the
approximate range of 25%-28% under normal conditions. Gross margins on
maintenance contracts decreased to 63.5% in 1995 from 73.7% in 1994 due to the
addition of a significant number of new support personnel, travel and materials,
and third party royalty costs to support the increase in new customer accounts.
Research and Development Expenses
Research and development expenses, which consist largely of software
development costs, increased 20.3% to $1.6 million in 1995 from $1.3 million in
1994 as a result of Interactive's continuing focus on product enhancements and
new product design. Research and development expenses as a percentage of total
revenues increased slightly to 4.8% in 1995 from 4.6% in 1994, and increased as
a percentage of software license revenues to 14.1% in 1995 from 12.4% in 1994.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 28.1% to $13.9
million in 1995 from $10.8 million in 1994. The increase in selling, general and
administrative expenses was largely due to increases in selling and marketing
activities, increased travel, the opening of new offices in the United States
and Europe, including offices in Atlanta, San Francisco, Cleveland and
Eindhoven, The Netherlands, increases in sales personnel, higher sales
commissions associated with increased revenues and margins, and increases in the
number of personnel and administrative expenses to support the Company's growing
operations. In addition, Interactive
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incurred increased legal, accounting, and other expenses associated with
regulatory and public reporting requirements. Interactive's selling, general and
administrative expenses increased as a percentage of total revenue to 42.1% in
1995 compared to 37.9% in 1994. Interactive increased selling, general and
administrative expenses in 1995 in order to support total revenues in the $35-36
million range, which did not occur due to the deferral of certain revenues from
the quarter ended December 31, 1995 into the first quarter of 1996.
Compensation Expense Associated with Employee Stock Bonus.
In the quarter ended March 31, 1995, Interactive recorded compensation
expense of $871,000 in connection with the grant of a stock bonus of 112,800
shares of common stock to an officer of Interactive and the related cash bonus
associated with income taxes payable as a result of the stock bonus. Such
compensation was paid to the officer pursuant to an arrangement entered into
between Interactive and the officer in January 1991. No additional compensation
will be paid to the officer or to any other employee of Interactive pursuant to
such an arrangement, and Interactive is taking this expense as a one-time charge
for the year ended December 31, 1995.
Provision for Income Taxes
Interactive's effective tax rate increased to 42.7% in 1995 from 35% in
1994, due primarily to the realization of tax credits in 1994 and the release of
the remaining valuation allowance in 1994, both of which reduced the 1994
effective rate. In addition, the effective rate for 1995 was affected by the
realization of tax credits.
LIQUIDITY AND CAPITAL RESOURCES
Interactive has financed its operations to date through cash flow from
operations, bank lines of credit, longterm equipment financing, and its initial
public offering in May 1995. Interactive has lines of credit with commercial
banks under which Interactive may borrow up to a total of $4.8 million secured
by substantially all the assets of Interactive and expiring July 15, 1998. As of
June 30, 1997, $3.0 million was outstanding under these lines. Interactive
currently invests its excess cash in money market accounts.
In 1996, operating activities provided net cash of $629,000, primarily due
to earnings from operations of $1.3 million and increases in accrued expenses
and accounts payable in the aggregate of $3.1 million. This was offset by a $3.1
million increase in accounts receivable, a $772,000 increase in prepaid expenses
and other assets, and a $1.3 million decrease in deferred revenue and customer
deposits. Interactive used net cash of $1.6 million in investing activities,
primarily for the purchase of property and equipment. Financing activities
provided net cash of $36,000, primarily from $1.2 million of proceeds from
short-term borrowings and $415,000 of proceeds from Interactive's employee stock
purchase and option plans, offset by approximately $1.6 million in payments on
short-term borrowings, long-term obligations and capital leases.
As of June 30, 1997, Interactive had approximately $3.7 million in cash and
cash equivalents and $5.7 million in working capital, compared to $3.7 million
in cash and cash equivalents and $5.0 million in working capital as of December
31, 1996.
Interactive believes that its existing cash and cash equivalents together
with its available lines of credit and cash flow from operations will be
sufficient to meet its anticipated working capital requirements for at least the
next twelve months.
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INTERACTIVE BUSINESS
The following discussion contains forward-looking statements that involve
risks and uncertainties. Interactive's and the combined entity's actual results
could differ materially from those discussed here. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in the sections entitled "Risk Factors" and "Interactive Management's Discussion
and Analysis of Financial Condition and Results of Operations," as well as those
discussed elsewhere in this Prospectus/Joint Proxy Statement.
COMPANY OVERVIEW
Interactive develops, markets, implements and supports integrated business
information systems that enable discrete manufacturers to manage their
enterprise-wide information requirements. Interactive's primary software
product, INFOFLO, supports make-to-order and make-to-stock manufacturers in
their business re-engineering efforts by providing customer-oriented
capabilities that allow manufacturers to reduce order fulfillment cycle times,
improve operating efficiencies and measure critical company performance against
defined plan objectives. INFOFLO contains a series of integrated software
application modules that are designed to support information processing in the
functional areas of sales and marketing, finance and accounting, manufacturing
and operations. Interactive implements its INFOFLO systems as turnkey solutions
featuring Interactive's software products integrated with computer and
networking hardware, operating system and database software and object-oriented
development tools. Interactive also offers a full complement of services to
assist customers in maximizing the benefits of Interactive's software products,
including implementation, customer support and maintenance services. Interactive
developed INFOFLO using open systems technology that allows customers to migrate
to different hardware and software technologies and upgrade to new releases of
Interactive's application software.
Interactive's target market for INFOFLO is primarily mid-sized,
make-to-order manufacturing companies in the United States, United Kingdom,
Canada and Europe with annual revenues between $25 and $500 million. Interactive
primarily sells directly to its customers and implements and supports its
systems through its network of offices in the United States, United Kingdom, and
Europe.
Merger with Intrepid Software, Inc.
In March 1995, Interactive completed a stock-for-stock merger with Intrepid
Software, Inc. ("ISI"), which prior to the merger sold the Intrepid application
software product. The merger was accounted for as a pooling-of-interests.
Interactive believes that the combination with ISI has allowed Interactive to
achieve several strategic objectives, including acquiring ISI's customer base,
increasing Interactive's revenues and adding ISI's skilled and experienced
personnel. Due to the functional synergy and common underlying technology of the
INFOFLO and Intrepid products, Interactive has merged the two products into a
single integrated package, INFOFLO 8.0, permitting users of both products to
migrate to a common product that contains the best functionality of both
products.
Acquisition of Just-In-Time Enterprise Systems, Inc.
On December 31, 1995, Interactive acquired all of the outstanding shares of
Just-In-Time Enterprise Systems, Inc. ("JIT"), a wholly owned subsidiary of
Fourth Shift Corporation of Minneapolis, Minnesota, a publicly traded
manufacturing software company. JIT's software product, the JIT Enterprise
System, is a native Oracle-based client/server software product for the rapidly
growing Maintenance, Repair and Overhaul ("MRO") marketplace, combined with
traditional Material Requirements Planning ("MRP") II capabilities. The
acquisition represents a strategic opportunity by providing Interactive access
to the higher-end manufacturing market segment, where Oracle's relational
database management system is the dominant database system currently in use
among manufacturers with annual revenues in excess of $100 million, and which
Interactive previously did not target with its existing products. In addition,
the acquisition provides operating synergies for Interactive, including a common
implementation methodology, a continued focus on niche markets, an installed
base of 70-80 sites with a Fortune 1000 customer presence, and a high quality,
mature product. Interactive's target market for the JIT Enterprise System is
primarily "mixed mode" MRO
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and contract manufacturers, including aerospace and defense, which require a
fully integrated enterprise-wide system that is capable of supporting multi-site
or multi-plant requirements. This market consists primarily of companies with
revenues in excess of $100 million, including Fortune 1000 companies or their
divisions or subsidiaries.
In an effort to improve efficiency, reduce costs and shorten cycle times,
manufacturers are adopting business re-engineering initiatives such as total
quality management and world class manufacturing. In response to this trend,
manufacturing software suppliers have introduced applications that are
specifically designed to address manufacturers' re-engineering needs. In the
late 1980's, Interactive recognized that most discrete manufacturing software
packages were focused on make-to-stock manufacturers and did not suit the
particular needs of make-to-order manufacturers. As a result, Interactive
embarked on a strategy to develop a make-to-order functionality in its software,
and introduced customer-oriented business information systems designed for both
make-to-order and make-to-stock manufacturers. In the mid-1990's, Interactive
recognized that there were very few Oracle-based MRO applications developed, and
that the demand for such applications from large companies would continue to
grow due to the continuing trend of downsizing from mainframe computing into
client/server technology.
STRATEGY
Interactive's mission is to be a leading international provider of
enterprise-wide, customer-oriented business information systems and related
value-added implementation and support services to mid-sized, mixed-mode
manufacturers. The acquisition of JIT expands the objectives of Interactive's
mission to include providing Oracle-based business information systems and
value-added implementation and support services. To achieve this mission,
Interactive intends to pursue the following key strategies:
Provide Software to Support Manufacturers' Business Re-Engineering
Needs. Interactive's primary strategy is to continue to enhance its application
software offerings to meet the evolving needs of mid-sized discrete
manufacturers and mid-to-large sized contract manufacturers. Interactive works
closely with its key customers and principal technology suppliers in its product
development efforts. As a result, most of Interactive's software modules have
been and will continue to be significantly influenced by its customer's needs.
Implement Software Through Turnkey Solutions. Interactive's strategy is to
provide a complete turnkey solution for its customers' business information
requirements. With the growing complexity and diversity of enterprise-wide
systems, Interactive believes manufacturers and MRO organizations are
increasingly requiring their software suppliers to assume turnkey responsibility
for system implementation and maintenance. By taking turnkey responsibility for
implementing the system, Interactive frees its customers from having to rely
completely on their own internal resources.
Commitment to Open Technologies. Interactive is committed to providing
seamless integration to industryrecognized third-party application software and
technology that support manufacturing. Interactive designs its products using
open systems technologies, including industry-standard operating systems,
relational databases, and open system computer platforms. Interactive
continually evaluates the feasibility of integrating its software products with
new technologies as they are developed and gain acceptance in the marketplace.
Interactive's products, INFOFLO and the JIT Enterprise System, have been
developed using open systems technology that allows customers to migrate to
different hardware and software technology and upgrade to new releases of
Interactive's application software.
Expand Existing International Base. Interactive intends to expand its
international distribution channels by recruiting independent, experienced
manufacturing software suppliers with local expertise to market and support
Interactive's systems through its proposed "affiliates", or business partner
program, initially in continental Europe and later in the Pacific Rim and other
international markets. Interactive intends to leverage its presence in the
United Kingdom with each of its product lines to implement and support its
proposed business partner program in Europe.
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Achieve High Levels of Customer Satisfaction. Interactive seeks to maintain
a consistently high level of customer satisfaction by delivering high quality
products, providing excellent system implementation and achieving world class
customer service. Interactive is committed to delivering a high level of
customer service and technical support for its products and, consistent with
that commitment, dedicates significant effort to recruiting and training high
quality service and support personnel.
PRODUCTS
Interactive sells and implements business information systems to
mid-to-large sized, discrete manufacturers with turnkey solutions comprised of
Interactive's INFOFLO and JIT Enterprise System application software, as well as
computer and networking hardware, operating system software, relational database
software, 4GL development tools and third-party application software.
Interactive's primary niche markets consist of the customeroriented, MRO and
contract manufacturing segments of the manufacturing industry. Interactive also
derives a significant portion of its revenues from the sale of implementation,
consulting and maintenance services to its customers. Interactive's systems have
been installed at more than 600 customer sites worldwide, predominantly in the
United States and United Kingdom. In 1996, the average selling price of
Interactive's information systems sold to new customers was approximately
$290,000.
INFOFLO Software
INFOFLO supports make-to-order and make-to-stock manufacturers in their
business re-engineering efforts by providing customer-oriented capabilities that
allow manufacturers to reduce order fulfillment cycle times, improve operating
efficiencies and measure critical company performance against defined plan
objectives. INFOFLO is designed for mixed-mode manufacturing environments that
may involve or combine elements of make-to-order and make-to-stock manufacturing
as well as other disciplines, such as focused factory and just-in-time. INFOFLO
is easily scaleable and can be implemented in multi-company, multi-plant and
multi-national solutions as well as in client/server, networked and host-based
configurations.
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INFOFLO, through a series of integrated software application modules,
provides feature-rich functionality in the areas of sales and marketing, finance
and administration, engineering, manufacturing, operations, distribution and
service. All modules adhere to a common architecture, meet a rigorous design
standard, share a common integrated nested-relational database, and while
modular, are typically licensed and implemented as part of an integrated system.
The manufacturing software application modules of INFOFLO are presented in the
table below and the related descriptions that follow:
INFOFLO MANUFACTURING SOFTWARE MODULES
<TABLE>
<S> <C> <C>
PRODUCT DATA CUSTOMER SERVICE PLANNING
Bills of Material Estimating and Quotations Master Production Scheduling
Work Centers and Routings Field Sales Material Requirements
Product Costing Customer Order Processing Planning (MRP)
Product Configurator Field Service Management Multi-Plant Planning
Return Material Tracking Capacity Requirements
Planning
Distribution Requirements
Planning
Forecast-Link
MANUFACTURING PROCUREMENT AND FINANCIAL
EXECUTION INVENTORY ACCOUNTING
Shop Floor Control Purchasing Accounts Payable
Focused Factory Management Inventory Management Accounts Receivable
Job Order Tracking General Ledger
Equipment Maintenance and Asset Management
Repair
Cost Accounting
HUMAN PERFORMANCE DECISION
RESOURCES MEASUREMENT SUPPORT
Payroll Quality Management Impromptu(R)
Human Resources Executive Information PowerPlay(R)
Time and Attendance System Workflow
(EIS)
CIM
Computer-Aided Design
(CAD)-Link
Electronic Data Interchange
(EDI)-Link
IMAGE-Link
Data Collection
Fax-Link
</TABLE>
The Product Data modules establish the foundation for a totally integrated
manufacturing system by setting up and maintaining all bills of material,
configuration master bills and rules, item master records and costing
information. Product design attributes, classifications and configuration rules
are also specified here and shared with all other INFOFLO modules. The Bills of
Material and Work Centers and Routings modules maintain product data structure
and process information including bills of material and routings. Engineering
change orders are used to track product revision history. The Product Costing
module provides functionality for full-cost collection, roll-ups and inventory
valuation based upon quoting, shop floor reporting and purchasing, establishing
unit and cumulative costs. The Product Configurator is a rules-based "expert
system" that allows the manufacturer's non-expert personnel to configure and
price custom-ordered products and report that information to other departments
throughout the enterprise. The Configurator collects the needed information
through a nested question-and-answer approach that incorporates the necessary
engineering expertise without requiring engineering support.
The Customer Service modules allow the manufacturer to enter, track and
report its sales and marketing activities and integrate seamlessly with the
other module groups. The Estimating and Quotations module provides for the
administration of the entire quotation process from initiation of a new prospect
to completion of a basic quotation, with custom features that reflect exact
customer specifications. The module permits the
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manufacturer to produce multiple alternative quotations, any of which can be
approved and automatically converted to firm sales orders. Each quotation may be
priced and costed so that the manufacturer's gross margin on a sale is
calculated on a "what-if" basis. The Field Sales module deploys the Product
Configurator as a Windows-based application for installation on a laptop
computer that allows either the manufacturer's field sales personnel or customer
to configure, quote and order products remotely. The Custom Order Processing
module processes quotations that have been converted into orders for
make-to-order items, offthe-shelf items or a combination of both. With each
make-to-order item, a corresponding custom job is automatically created in
work-in-process. The module also is integrated with the Product Configurator and
converts the generated build structure into actual bills of materials and
routings that can be changed while still part of the order.
The Field Service Management module provides comprehensive management of
service and maintenance contracts, call handling and technician dispatch,
including escalation tracking, and inventory and repair processing. This module
allows management to measure service operations as a profit center and includes
response, clearing time and service center/technician performance analyses. The
Company has integrated INFOFLO with a third-party forecasting package that
enables a manufacturer to download sales-history data for analysis and
statistical simulation and to upload a planned sales forecast into INFOFLO's
Master Production Scheduling module. The Return Material Tracking module
establishes and tracks information for product returns, product exchanges and
customer repairs and can automatically release orders to shipping.
The Planning modules are designed to support a number of manufacturing
environments, including make-to-order, make-to-stock, repetitive and
just-in-time. The Master Production Scheduling module makes critical comparisons
between actual resources on hand and planned orders and provides a
management-level perspective on anticipated demands for manufacturing resources.
The MRP module performs calculations that project purchasing and production
requirements necessary to support expected sales and production quotas, and in
its calculations considers factors such as engineering change orders and
manufacturing yields. The Multi-Plant Planning module coordinates production
requirements across multiple plants and the entire supply chain. Inter-plant
relationships can be established to form an integrated supplychain management
planning system across all sites. The Capacity Requirements Planning module
supports production resource planning by scheduling labor, machine and tool
requirements and by identifying resource bottlenecks and associated alternatives
that may be used to meet the production plan. The Distribution Requirements
Planning module handles replenishment requirements from warehouses and
distribution centers and provides procedures and the supporting documentation
for tracking physical stock transactions between warehouses. The Forecast-Link
module creates and maintains the individual item or product group forecasts used
by the Master Production Scheduling module.
The Manufacturing Execution modules enable the manufacturer to plan,
manage, measure and report on manufacturing work-in-process ("WIP"), including
WIP tracking, shop floor control, lot traceability, product rework, work-center
management and on-line scheduling. The Shop Floor Control module interfaces cost
collection and identification to financial function, updates status conditions,
provides scheduling tools for managing changing conditions on the shop floor and
aids in the management of production processes. The Focused Factory Management
module defines which products will be produced and the required materials for
each focused factory and its workcells. The Job Order Tracking module monitors
the progress and job profitability of customer orders. The Equipment Maintenance
and Repair module maintains a catalog of repair and maintenance profiles which
describe how to perform maintenance work and the resources required. The Cost
Accounting module supports standard product and actual job costing. Standard
costs are derived from the bills of material and routings, and are used to
measure variances in the production process. Job costing provides detailed
analysis of material, labor and outside processing costs and their associated
overheads.
The Procurement and Inventory modules perform a number of critical
manufacturing functions. The Purchasing module tracks purchase orders from
requisition through closure and provides the flexibility to purchase goods
either for inventory or directly for work-in-process. This module records
delivery and rejects data that allow the manufacturer to analyze supplier
performance. The Inventory Management module establishes and maintains an
inventory database that tracks and traces data (on the basis of serial or lot
numbers), activity statistics and warehouse data, and supports physical
inventory and cycle counting.
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The Financial Accounting modules supply the enterprise's financial
information and assist in the administration of manufacturing operations. The
Accounts Receivable and Accounts Payable modules track customer and supplier
obligations, support foreign currency revaluation and produce extensive
management reporting. The General Ledger module records all financial summary
data necessary to define the manufacturer's current financial position. This
module also has a number of budgeting, auditing and financial reporting
features. The Asset Management module is used to record, track and report on
fixed assets and is integrated with the General Ledger module. The Asset
Management module includes a wide range of depreciation, tracking, maintenance,
scheduling and management options.
The Human Resources modules provide management tools for personnel planning
and recruiting, salary administration, time and attendance, payroll, benefits
tracking and personnel development. The Payroll and Human Resource modules
include a comprehensive employee database for tracking wage and salary data, in
addition to job performance, education and training, and regulatory reporting.
The Payroll module provides national and local taxation support in both the
United States and United Kingdom. The Payroll module is integrated with the
General Ledger module and provides electronic filing of payroll tax information.
The Time and Attendance module is used with plant timeclocks to track employee
attendance and interfaces with the payroll module.
The Performance Measurements and Decision Support modules include the
Company's Executive Information System ("EIS") and certain third-party database
analysis tools that have been integrated with INFOFLO. The Quality Management
module collects inspection data that allow the manufacturer to track and correct
quality problems either in the manufacturing process or with its suppliers. The
module was developed to support the international ISO 9000 documentation
standards. The EIS module is an integrated and intrinsic component of the
INFOFLO software and provides timely, secure, on-line, high-level performance
analysis to departmental and executive management. In contrast to many competing
manufacturing software systems that require the manufacturer to separately
license a stand-alone EIS product, the Company's EIS module is coupled tightly
to the manufacturer's INFOFLO database and automatically presents graphical
critical performance measurements, including current status and condition
information and historical trends and warnings. The EIS module supports the
manufacturer's re-engineering efforts by providing timely feedback on whether
implemented process improvements are, in fact, resulting in order fulfillment
cycle time reductions.
The Impromptu(R) and Powerplay(R) modules are business intelligence tools
from Cognos, a third-party strategic partner, that allow the user to navigate
through and analyze large amounts of data without the need to regenerate lengthy
reports after each analysis. They permit the user to "drill down" through data
from any module in the system and allow for on-demand analysis of executive or
management information. The Workflow module is a set of advanced tools which
permit users to plan how business processes should be performed, and then manage
and control those processes.
The CIM modules are integration tools that seamlessly link the core
enterprise system to off-the-shelf third party products. The CAD-Link integrates
INFOFLO with Computer-Aided Design systems. EDI-Link provides the import and
export interfaces needed to utilize third-party EDI, enabling packages to
perform translation and transfer of EDI transactions to and from trading
partners. IMAGE-Link integrates INFOFLO with electronically "imaged" documents
to manage and streamline workflow in manufacturing companies. Data Collection
software and hardware permits production, material usage and warehouse activity
to be reported in real time using bar-coding applications. Fax-Link permits
selected INFOFLO documents and printed reports to be faxed to designated
recipients.
JIT Enterprise Systems Software
The JIT Enterprise System ("JES") is a software system consisting of
standardized modules and a family of additional integration modules. JES is
designed primarily for MRO and contract manufacturing, including a fully
integrated suite of software supporting supply chain management, repair and
overhaul, manufacturing, quality, financial and project management applications
which are designed to support an
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enterprise's business processes in an industrial company. JES is typically sold
to large organizations in need of a fully integrated enterprise-wide system that
can accommodate multiple geographic sites.
JES is a complete set of Oracle-based client/server applications which
operates in a flexible UNIX operating environment and is designed to
manufacturing, accounting and human engineering standards.
The major components of JES's architecture are (i) client/server enterprise
resource planning within an open systems UNIX platform; (ii) a three-tiered
model (Presentation Clients, Application and Database Servers); (iii) use of the
Oracle 4GL toolset and Developer/2000 which provides easy site extension,
personalization and deployment of applications on the Internet and Intranet; and
(iv) use of the Oracle version 7 database. The software application modules for
the JIT Enterprise System are presented in the table below and the related
descriptions that follow:
JIT ENTERPRISE SYSTEM SOFTWARE MODULES
SUPPLY CHAIN MANAGEMENT
Customer Order Processing
Distribution Management
Forecasting
Inspection/MRB
Inventory Applications
Model and Options
Multi-Plant Applications
Physical/Cycle Count Inventory
Purchasing Applications
FINANCIAL APPLICATIONS
Time and Attendance
Oracle Financials Interface
Travel and Expense
Accounts Payable
Accounts Receivable
Financial Statement Generator
Fixed Assets
Multi-Currency
General Ledger
OPERATIONS
Capacity Planning
Finite Scheduling
Job Costing
Labor Applications
Lot Control/Serial Tracking
Planning And Scheduling
(MRP/MPS)
Project Control
Quality Assurance
Repair and Overhaul
Repetitive Manufacturing
Rough Cut Capacity Planning
ENGINEERING
Average Costing
Bills of Material
End Item Effectivity
Engineering Change Control
Product Costing
Routings/Work Centers
SYSTEM APPLICATIONS
JIT Development Environment
JIT Toolbox
System Control
INTEGRATION
Bar Code Printing
Data Collection Interface
Data Migration
EDI Vendor Interface
EDI Customer Interface
Imaging
Logistics
Vertex Sales Tax Interface
The JES software modules can be roughly grouped into the functions of
supply chain management, operations, system applications, financial
applications, engineering and integration.
The Supply Chain Management modules coordinate activities with customers
and vendors with particular emphasis on MRO services provided to the aircraft,
automotive, rail and marine industries. From the customer's viewpoint, the
software provides forecasting, quotation/estimating, order entry, pricing,
rules-based product configuration, distribution management, shipping, returns
processing and sales analysis. From the vendor's viewpoint, the software
provides vendor quotes, requisition approval, purchase order processing and
performance measurement. The software also supports EDI for transactions with
customers and vendors, and for material movement between a firm's plants.
The Operations modules help plan and control the stripdown, disposition,
repair and rebuild activities of repair and overhaul and re-manufacturing, as
well as production activities for discrete, repetitive and project
manufacturers. The software can be used to identify potential bottlenecks via
capacity planning, optimize resource utilization via finite scheduling,
coordinate work across multiple work centers via dispatch lists, track work in
process via material/labor reporting, and highlight job costs and associated
variances. The software supports bar code printing and data collection systems.
As part of quality management, the software also provides lot/serial control,
tracking of test results, and material tracking through receiving, inspection,
rejection and disposition.
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The Financial Applications modules provide the key financial applications
of invoicing, accounts receivable, accounts payable, fixed assets and general
ledger. With integrated applications, the software can process transactions from
purchasing to payables and from shipping to receivables, and can automatically
collect information in the general ledger while providing audit trails to source
transactions. Users can easily access the common database using SQL and/or
PC-based decision support tools to perform regular and ad-hoc analyses. The
software also provides an interface between Oracle financial applications and
JES.
The Engineering modules maintain the common database of information about
items, bills of material, work centers and routings that provides the basis for
product specifications, product costing, option selection, material planning,
capacity planning, production scheduling, and shop paperwork. The software
manages engineering changes to products and processes, and supports access to
images such as CAD drawings or other graphics.
The JES software provides the foundation for a manufacturer's management
information system, with easy customization to handle unique user requirements,
changing business conditions and interfaces with legacy systems.
JES has been designed to meet changing business conditions and unique user
requirements. The standard JES modules, in combination with user-specified
configuration options, will normally meet the majority of a company's needs. In
addition, however, JES can be dynamically engineered for company-specific needs
or to respond to competitive business conditions. JES uses industry-standard 4GL
coding and report writer capabilities including extensive CASE and data model
documentation. JES's unique configuration management tool makes it easier to
upgrade customizations to the next software release.
JES has the capacity to accept additional customization that may be
dictated by user experience. Some JES applications originate as customer
prototypes for conversion to standard code, providing a real-world development
lab. Direction for future JES applications and enhancements is often influenced
by customer input which is communicated and evaluated during annual
international user group meetings and via special interest groups meeting on a
more frequent basis.
SERVICES
Interactive offers a full complement of services that allow its customers
to maximize the benefits of Interactive's software products, including project
management, consulting, implementation, education and training, custom
programming, system integration and support, maintenance and customer service.
Customers are offered a variety of project management and consulting
services to assist in effectively implementing and deploying Interactive's
business solutions. Services offered include a variety of site-specific
technical and consulting services to assist in all phases of the implementation
process, as well as assistance in integrating the software with the customer's
other automated systems and devices. As part of the implementation of its
software, Interactive offers a pilot program methodology that allows its
customers to simulate running their businesses with the new software prior to
full-scale "live" implementation of the new system. Pilot program simulations
are conducted in an integrated series of hands-on classroom exercises that
emphasize system controls and procedures, using a test database that is
representative of the customer's business. By simulating a number of relevant
business scenarios, the pilot program gives key users valuable experience with
Interactive's software, generates involvement in and commitment to the new
system, and provides a means to track the progress of the implementation and
"shake down" the system before going "live."
Education and training services provide customers with a formalized
educational program to ensure that their 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 Interactive's regional training centers. Customized
education and training programs are also available to meet customers' specific
development needs.
Interactive's national customer service program provides customers with
ongoing software maintenance, product enhancement and hotline telephone support
for its software products. Product enhancements and
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updates maintain the customers' software and documentation to the then-current
standard release level licensed and supported by Interactive. Interactive's
toll-free hotline provides telephone support during normal business hours for
questions regarding software use or perceived software "bugs." Interactive's
customer service department also offers programming and consulting services for
software modifications during and following full implementation of the system.
In addition, Interactive offers "first call" support that allows its customers
to call Interactive to manage all initial system service inquiries.
Interactive does not bundle any of its services in the price of its
software. Interactive's services are contracted for and billed separately from
software and hardware. Maintenance services are generally billed monthly in
advance, while implementation and consulting services are billed monthly as
incurred.
HARDWARE
As part of its turnkey solutions, Interactive sells complete third-party
computer hardware systems and related computer peripherals, primarily when
selling its INFOFLO product. Interactive implements its business information
systems on a number of hardware platforms, including Hewlett-Packard (with which
Interactive has a volume-reseller agreement), IBM and Digital Equipment. In
addition, Interactive has established reseller and support agreements with
peripherals and communications equipment manufacturers to facilitate the sale of
related equipment to Interactive's customers.
PRODUCT DEVELOPMENT
Interactive seeks to strengthen its position in the discrete manufacturing
marketplace by consistently developing and offering additional functionality in
its software to address customers' evolving needs. In pursuit of this goal,
Interactive actively solicits input from its customers regarding their needs and
requirements and uses such information, along with information from its
principal technology suppliers, to enhance its software products. For example,
Interactive has worked with customers to port its Quotations and Product
Configurator modules to run as a Microsoft Windows application for laptop
computers. With these modules, the manufacturer's sales representatives and its
customers are now able to process orders in the field, thereby allowing for
improved customer service and shorter order fulfillment cycle times. Interactive
also supports independent user groups that meet regularly and provide
Interactive with valuable input on desired features and functionality.
Interactive seeks to continue to enhance its enterprise-wide solutions
through a combination of internally developed and third-party software.
Interactive is currently working with some of its third-party technology
suppliers to develop foreign language versions of its software products to
support its business partner program.
SALES AND MARKETING
Interactive currently sells its products and services primarily through a
direct sales force. In 1996, approximately 68% of Interactive's revenue was
generated in North America and 32% was generated in Europe.
Interactive intends to expand its international distribution channels by
recruiting independent, experienced manufacturing software suppliers to market
and support Interactive's systems through its business partner program,
initially in continental Europe and later in the Pacific Rim and other
international markets. This program is designed to qualify and train established
software suppliers with expertise in local markets outside the United States and
United Kingdom to implement turnkey systems using Interactive's software
products and methodologies. These foreign partners will work within exclusive
territories in partnership with Interactive, using Interactive's implementation
methodology, service-oriented approach and international sales and support
resources to sell systems to local businesses in Interactive's target market.
Interactive markets its products through advertising campaigns in national
trade periodicals, direct mail and telemarketing. These efforts are supplemented
by listings in relevant directories and trade show and conference appearances.
Interactive also receives sales leads from its hardware and services suppliers,
customers and various professional service firms. Sales cycles for Interactive's
products vary substantially
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based on the degree of integration, consulting and training required, the timing
of a customer's procurement process, the application requirements of the
proposed system and the size of the customer's business. However, the sales
cycle is usually six to twelve months, and can be as long as eighteen to twenty
four months, from the time an initial sales contact is made with a qualified
prospect.
COMPETITION
The manufacturing information systems industry is intensely competitive and
rapidly changing. A number of companies offer products similar to Interactive's
products. Some of Interactive's existing competitors, as well as a number of
potential competitors, have larger technical staffs, more established and larger
marketing and sales organizations and significantly greater financial resources
than Interactive. Moreover, Interactive has no proprietary barriers to entry
that could keep its competitors from developing similar products or selling
competing products into Interactive's markets. As a result, there can be no
assurance that such competitors will not develop products that are superior to
Interactive's products or that achieve greater market acceptance.
Interactive sells in highly fragmented markets, and its competitors consist
of a few relatively large multinational suppliers and a much larger number of
mid-size, national and small, regional competitors. No single competitor has a
dominant market share in Interactive's targeted market segments, and Interactive
generally competes with a variety of competitors, depending, in each sales
opportunity, on factors such as the size of the customer, specific niche product
requirements, geographic location and anticipated investment by the customer.
Interactive believes that its industry may experience consolidation as
manufacturing information systems become more complex and as more manufacturers
adopt sophisticated information systems, forcing smaller companies in the
industry to specialize or attempt to merge with their competitors. To compete
effectively in the markets Interactive targets, Interactive will need to
continue to grow and attain sufficient size to have the resources to continue to
timely develop new products in response to evolving technology and customer
demands, and sell products to a variety of manufacturing industries worldwide.
No assurance can be given that Interactive will be able to grow sufficiently to
enable it to continue to compete effectively.
Interactive believes its use of open systems technologies in its products
is an important competitive element. Interactive also believes that the number
of competitors offering open systems solutions will grow significantly over the
next several years. Interactive anticipates that a significant source of such
future competition may be from larger manufacturing software companies that may
tailor their products for this market. Larger and better capitalized software
systems companies currently compete in Interactive's targeted markets. There can
be no assurance that such companies will not develop products that are superior
to Interactive's products or that achieve greater market acceptance.
Interactive believes that some of the most important considerations for
potential customers for its software products include product technology,
capability and flexibility; system compatibility, ease of use, and product
enhancements during the license or maintenance term; reliability and quality of
implementation and technical support, particularly project management,
documentation and education; and the size of the installed user base,
competitive pricing, and corporate reputation. Interactive believes that it
competes favorably in many of these areas.
Interactive's future success will depend significantly upon its ability to
increase its share of its target markets, to persuade existing customers to
purchase additional upgrades and user licenses, and to persuade both new and
existing customers to purchase additional consulting and other professional
services.
INTELLECTUAL PROPERTY
Interactive regards its products as proprietary trade secrets and
confidential information. Interactive relies largely upon its license agreements
with customers, dealer agreements with suppliers and technology partners, its
own security systems, and confidentiality procedures and employee agreements to
maintain the trade secrecy of its products. Interactive seeks to protect its
programs, documentation and other written materials under copyright law. There
can be no assurance that these means of protection will be effective against
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unauthorized reproduction or "pirating." Policing unauthorized use of computer
software is difficult, and software "piracy" is and can be expected to remain a
persistent problem within the software industry.
Interactive 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 the establishment of strategic
relationships in the industry are more important than patent, copyright and
other legal protections for its technology.
None of Interactive's software is patented. Interactive 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.
PROPERTIES
Interactive maintains its headquarters, along with its western regional
office, in leased facilities approximating 22,500 square feet in San Diego,
California. The leases on this space will expire in February 1998. Interactive's
eastern regional office is located in an approximately 9,000 square foot leased
facility near Boston in Burlington, Massachusetts. The lease on this space will
expire in February 2000. Interactive also leases office and training space in
metropolitan Los Angeles, San Francisco, Seattle, Las Vegas, Dallas, Denver,
Chicago, Cleveland, Atlanta, Washington, D.C., Boston and New York.
Under the terms of the JIT Purchase Agreement, Interactive subleased
approximately 12,500 square feet of space from Fourth Shift Corporation in
Minneapolis through January 31, 1997. Interactive has signed a lease for a new
location in Minneapolis for approximately 12,000 square feet effective February
1, 1997, which will expire in January 2002.
Interactive's United Kingdom headquarters is in an approximately 8,500
square foot facility leased by Interactive near London in Watford, England. The
lease on this space will expire in December 2014, with an option to terminate at
specified times over the lease term. In addition, Interactive's subsidiary
leases office space in metropolitan Birmingham, Manchester, Newcastle,
Bracknell, Edinburgh, Scotland, and Dublin, Ireland.
Interactive considers its leased real property adequate for its current
needs, and is seeking to lease additional office and training space to
accommodate future growth in personnel.
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INTERACTIVE MANAGEMENT
The executive officers of Interactive who will serve as a director or
executive officer of DataWorks are Robert C. Vernon and Mark Hellinger. See
"Approval of the Merger and Related Transactions -- Interests of Certain Persons
in the Merger" and "Terms of the Merger -- Related Agreements -- Employment and
Noncompetition Agreements." Their ages as of July 31, 1997 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------ --- -----------------------------------------------------
<S> <C> <C>
Robert C. Vernon 53 Chairman of the Board, Chief Executive Officer and
Secretary
Mark Hellinger 37 President and Chief Operating Officer -- North
American Operations
</TABLE>
Robert C. Vernon joined Interactive in 1975 and served as President, Chief
Executive Officer and a director of Interactive since 1978 and as Chairman of
the Board of Directors since 1979. From 1973 to 1975, Mr. Vernon served as
Director, Software Development for SDA Digital, a software developer for the
security industry, and from 1971 to 1973 as a Project Manager for Computer
Sciences Corporation, a software developer and integrator.
Mark Hellinger joined Interactive in 1985 and served as President and Chief
Operating Officer-North American Operations since April 1996. He served as Vice
President and General Manager since 1994, and as a director of Interactive since
October 1992. From 1990 to 1994, Mr. Hellinger served as Vice President,
Operations of Interactive. From 1985 to 1990, Mr. Hellinger served as branch
manager of Interactive's New York office.
The following table shows for the fiscal years ended December 31, 1994,
1995 and 1996, certain compensation awarded or paid to, or earned by, Messrs.
Vernon and Hellinger.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION COMPENSATION
----------------------------- AWARDS
OTHER ------------ SECURITIES ALL OTHER
ANNUAL RESTRICTED UNDERLYING COMPEN-
NAME AND PRINCIPAL FISCAL SALARY BONUS COMPEN- STOCK OPTIONS/ SATION
POSITION YEAR ($)(1) ($)(2) SATION($) AWARDS(S)($) SARS(#) ($)(3)
- -------------------------------------------- ------ -------- ------- -------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Robert C. Vernon............................ 1996 $257,369 $36,425 -- -- -- $ 2,778
Chief Executive Officer 1995 $204,998 $27,169 -- -- -- $ 1,500
1994 $169,006 $27,865 -- -- -- $ 1,500
Mark Hellinger.............................. 1996 $200,425 $31,903 -- -- -- $ 1,500
President and Chief Operating Officer -- 1995 $175,764 $27,350 $411,416(4) $451,200(5) -- $ 1,500
North American Operations 1994 $136,822 -- $ 13,592(4) $ 19,200(5) -- $ 1,408
</TABLE>
- ---------------
(1) Includes an automobile allowance on behalf of Messrs. Vernon and Hellinger
in the amounts of $12,090 and $7,488, respectively, for each of 1996, 1995
and 1994. Also includes accrued vacation elected to be paid in cash in the
amounts of $6,339 and $5,776 for Messrs. Vernon and Hellinger, respectively,
in 1995 and $6,916 and $4,334 for Messrs. Vernon and Hellinger,
respectively, in 1994.
(2) Includes non-cash bonuses paid to Mr. Vernon valued at $1,425, $2,169 and
$2,865 in 1996, 1995 and 1994, respectively. Includes non-cash bonuses paid
to Mr. Hellinger valued at $1,903 in 1996 and $2,350 in 1995.
(3) Represents Interactive's contributions under a qualified profit sharing plan
for Messrs. Vernon and Hellinger in 1996, 1995 and 1994. The amount for Mr.
Vernon includes Interactive's 401(k) matching contribution of $1,278 in
1996.
(4) Represents cash amounts granted for the payment of taxes resulting from Mr.
Hellinger's stock bonuses in 1995 and 1994, respectively.
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(5) Includes 28,200 shares of Interactive Common Stock granted to Mr. Hellinger
as a stock bonus in 1994 and 112,800 shares of Interactive Common Stock
granted to Mr. Hellinger as a stock bonus in 1995. Such shares were issued
on January 1, 1994 and January 1, 1995, respectively, and vested over a one
year period from the date of issuance. As of December 31, 1996, Mr.
Hellinger held beneficially 352,774 shares of Interactive Common Stock
valued at $1,940,257. Interactive does not anticipate paying dividends on
its Common Stock in the foreseeable future.
STOCK OPTION GRANTS AND EXERCISES
Interactive grants options to its executive officers under Interactive's
1995 Stock Option Plan, as amended (the "1995 Plan"). As of July 31, 1997,
options to purchase a total of 347,021 shares were outstanding under the 1995
Plan and 146,604 options to purchase shares remained available for grant
thereunder.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Interactive did not grant stock options or stock appreciation rights to
Messrs. Vernon and Hellinger during the year ended December 31, 1996.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR, AND FISCAL YEAR-END
OPTION/SAR VALUES
There were no option exercises by Messrs. Vernon or Hellinger during the
year ended December 31, 1996, and neither Mr. Vernon nor Mr. Hellinger held any
unexercised options as of December 31, 1996.
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INTERACTIVE PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of Interactive's Common Stock as of July 31, 1997, by: (i)
each person known by Interactive to beneficially own 5% or more of the
outstanding shares of Interactive Common Stock, (ii) each of Interactive's
directors, (iii) each of Interactive's executive officers and (iv) all executive
officers and directors of Interactive as a group.
<TABLE>
<CAPTION>
SHARES OF
SHARES OF PERCENT OF DATAWORKS
INTERACTIVE INTERACTIVE STOCK COMMON STOCK
COMMON STOCK OUTSTANDING BENEFICIALLY
BENEFICIALLY PRIOR TO THE OWNED AFTER THE
NAME OWNED(1) MERGER MERGER(2)
- ----------------------------------------------- -------------- ----------------- ---------------
<S> <C> <C> <C>
Robert S. Vernon............................... 1,053,422 22.9% 848,033
Interactive Group, Inc.
5095 Murphy Canyon Road
San Diego, CA 92123
Mark Hellinger................................. 334,774 7.3% 269,502
Interactive Group, Inc.
5095 Murphy Canyon Road
San Diego, CA 92123
Randolph S. Naylor............................. 386,725 8.4% 311.324
Interactive Group, Inc.
5095 Murphy Canyon Road
San Diego, CA 92123
Michael K. Grad................................ 9,049 * 7,284
Interactive Group, Inc.
5095 Murphy Canyon Road
San Diego, CA 92123
Jeffrey W. Scime............................... -- -- --
Interactive Group, Inc.
5095 Murphy Canyon Road
San Diego, CA 92123
Ronald H. Jones................................ 379,400 8.3% 305,427
2484 Pine Street
San Diego, CA 92103
John W. Darracq................................ 321,002 7.0% 258,415
Interactive Group, Inc.
5095 Murphy Canyon Road
San Diego, CA 92123
Craig P. Gallagher............................. 301,502 6.6% 242,717
Interactive Group, Inc.
5095 Murphy Canyon Road
San Diego, CA 92123
Lyndol L. Cook................................. 2,000 * 1,610
Interactive Group, Inc.
5095 Murphy Canyon Road
San Diego, CA 92123
All officers and directors as a group (8
persons)..................................... 1,790,428 39.0% 1,441,341
</TABLE>
- ---------------
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, and includes generally sole voting and
investment power with respect to securities.
(2) Calculated on the basis of the Exchange Ratio.
* Less than 1%.
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COMPARISON OF RIGHTS OF DATAWORKS SHAREHOLDERS
AND INTERACTIVE STOCKHOLDERS
The rights of DataWorks shareholders are governed by DataWorks' Articles of
Incorporation (the "DataWorks Articles"), its Bylaws (the "DataWorks Bylaws")
and the California Law. The rights of Interactive stockholders are currently
governed by Interactive's Certificate of Incorporation (the "Interactive
Certificate"), its Bylaws (the "Interactive Bylaws") and the Delaware Law. Upon
consummation of the Merger, Interactive stockholders will become shareholders of
DataWorks with their rights as shareholders governed by the California Law, the
DataWorks Articles and the DataWorks Bylaws.
The following is a summary of certain similarities and differences between
the rights of DataWorks shareholders and Interactive stockholders under the
foregoing governing documents and applicable law. This summary does not purport
to be a complete statement of such similarities and differences. The
identification of specific similarities and differences is not meant to indicate
that other equally or more significant similarities and differences do not
exist. Such similarities and differences can be examined in full by reference to
the California Law, the Delaware Law and the respective corporate documents of
DataWorks and Interactive.
Capital Stock. The authorized capital stock of DataWorks consists of
25,000,000 shares of DataWorks Common Stock, no par value, of which 10,118,908
shares were issued and outstanding on July 31, 1997, and 5,000,000 shares of
Preferred Stock (the "DataWorks Preferred Stock"), issuable in such series and
with such rights, powers and privileges as the DataWorks Board shall determine.
DataWorks has designated 2,250,000 shares as Series A Preferred Stock but
currently has no shares of Preferred Stock outstanding and has no present plan
to issue any shares of DataWorks Preferred Stock. The authorized capital stock
of Interactive consists of 30,000,000 shares of Common Stock, $.001 par value,
of which 4,596,120 shares were issued and outstanding on July 31, 1997, and
5,000,000 shares of Preferred Stock , $.001 par value, (the "Interactive
Preferred Stock"), issuable in such series and with such rights, powers and
privileges as the Interactive Board shall determine.
Amendment of Bylaws. Under the Delaware Law, bylaws may be amended by
stockholders entitled to vote; however, a corporation may confer the power to
amend bylaws upon the directors. The fact that such power has been so conferred
upon the directors does not divest the stockholders of their power to amend the
bylaws. The Interactive Bylaws state that they may be amended by the affirmative
vote of at least sixty-six and two-thirds percent (66 2/3%) of the outstanding
stock entitled to vote thereon or by the Interactive Board. Under the California
Law and the DataWorks Bylaws, the DataWorks Bylaws may be amended or repealed
either by the DataWorks Board or by the holders of a majority in interest of the
outstanding shares of the company, except that a change in the authorized number
of directors may only be effected by a vote of the majority of the outstanding
shares entitled to vote; however, an amendment reducing the minimum number of
directors to less than five cannot be adopted if votes cast against its adoption
are equal to or more than sixteen and two-thirds percent (16 2/3%) of the
outstanding shares entitled to vote thereon.
Amendment of DataWorks Articles and Interactive Certificate. The Delaware
Law provides that approval of a majority of the outstanding stock entitled to
vote thereon is required to amend a certificate of incorporation. The
Interactive Certificate provides that an amendment must be approved by the
affirmative vote of at least sixty-six and two-thirds percent (66 2/3%) of all
of the outstanding stock entitled to vote thereon. Under the California Law, a
corporation's articles of incorporation may be amended by the approval of a
majority of the outstanding shares.
Special Meetings of Stockholders and Shareholders. Under the Delaware Law,
a special meeting of stockholders may be called by the board of directors or by
any other person authorized to do so in the certificate of incorporation or the
bylaws. The Interactive Certificate permits a special meeting to be called for
any purpose or purposes by (i) the Chairman of the Interactive Board, (ii) the
Chief Executive Officer, (iii) the Interactive Board pursuant to a resolution
adopted by a majority of the total number of authorized directors (whether or
not there exist any vacancies in previously authorized directorships at the time
any such resolution is presented to the Interactive Board for adoption) or (iv)
by the holders of the shares entitled to cast not less than ten percent (10%) of
the votes at the meeting.
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Under the California Law and the DataWorks Bylaws, a special meeting of
shareholders may be called by the board of directors, the chairman of the board
of directors, the president or the holders of shares entitled to cast not less
than ten percent (10%) of the votes of such meetings and such persons which are
authorized by the articles of incorporation or bylaws.
Actions by Written Consent of Stockholders or Shareholders. Under the
Delaware Law, unless otherwise provided in the Interactive Certificate, any
action which may be taken at a meeting of stockholders may be taken without a
meeting and without prior notice if written consents setting forth the action so
taken are signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all stock entitled to vote thereon were present and voted.
However, the Interactive Certificate provides that following the closing of the
initial public offering of Interactive, no action shall be taken by the
stockholders by written consent.
Under the California Law, shareholders may execute an action by written
consent in lieu of a shareholder meeting. The DataWorks Bylaws provide that any
action which may be taken at a meeting of shareholders may be taken without a
meeting and without prior notice if written consents setting forth the action so
taken are signed by the holders of outstanding shares having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and
voted. The DataWorks Bylaws provide further that directors may not be elected by
written consent except by unanimous written consent of all shares entitled to
vote for the election of directors; provided, however, that any vacancy on the
DataWorks Board may be filled by written consent of a majority of the
outstanding shares entitled to vote for the election of directors.
Size of the Board of Directors. The Delaware Law provides that the board of
directors of a Delaware corporation shall consist of one or more members. The
number of directors may be fixed by, or in the manner provided in, the
corporation's bylaws unless the certificate of incorporation fixes the number of
directors. The Interactive Certificate requires that the number of directors
shall be fixed exclusively by one or more resolutions by the Board of Directors.
The number of directors of Interactive is currently fixed at five (5).
The California Law allows the number of persons constituting the board of
directors to be fixed by the bylaws or the articles of incorporation, or permits
the bylaws to provide that the number of directors may vary within a specified
range, the exact number to be determined by the board of directors. The
California Law further provides that, in the case of a variable board, the
maximum number of directors may not exceed two times the minimum number minus
one. The DataWorks Bylaws currently provide that the authorized number of
directors of DataWorks shall not be less than a minimum of four (4) nor more
than a maximum of seven (7); the number of directors presently authorized is
seven (7). Upon DataWorks shareholder approval of the Bylaw Amendment, the
DataWorks Bylaws will provide that the number of directors of DataWorks shall
not be less than a minimum of five (5) nor more than a maximum of nine (9) and
that the number of directors then authorized shall be eight (8).
Classification of Board of Directors. The Delaware Law permits, but does
not require, a classified board of directors, divided into as many as three
classes with staggered terms under which one-half or one-third of the directors
are elected for terms of two or three years, respectively. The California Law
generally requires that directors be elected annually but does permit a
"classified" board of directors if the corporation is "listed." A listed
corporation is defined under the California Law as one which (i) is listed on
the NYSE or American Stock Exchange or (ii) with a class of securities
designated as a national market system security on and by the National
Association of Securities Dealers Automatic Quotation System (or any successor
national market system) if the corporation has at least 800 holders of its
equity securities. If eligible for the classes, the California Law permits
corporations to provide for a board of directors divided into as many as three
classes by adopting an amendment to their articles of incorporation or bylaws,
which amendment must be approved by the shareholders. The size of the classes
must be as even as possible, and any change in number of classes must be
approved by the shareholders. The DataWorks Bylaws do not provide for a
classified board.
Cumulative Voting. Under the Delaware Law, cumulative voting in the
election of directors is not available unless specifically provided for in the
certificate of incorporation. There is no provision for cumulative voting in the
Interactive Certificate. However, under the California Law, cumulative voting in
the
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election of directors is mandatory upon notice given by a shareholder at a
shareholders' meeting at which directors are to be elected. To cumulate votes, a
shareholder must give notice at the meeting, prior to the voting, of the
shareholder's intention to vote cumulatively. If any one shareholder gives such
a notice, all shareholders may cumulate their votes. The California Law permits
a company, by amending its articles of incorporation or bylaws, to eliminate
cumulative voting when such company is "listed" (as defined above in the section
entitled "Classification of Board of Directors"). The DataWorks Bylaws permit
any person entitled to vote at an election for directors to cumulate the votes
to which such person is entitled; provided, however, that no shareholder shall
be entitled to cumulate such shareholder's votes unless the candidates for which
such shareholder is voting have been placed in nomination prior to the voting
and a shareholder has given notice at the meeting, prior to the vote, of an
intention to cumulate votes.
Removal of Directors. Under the Delaware Law, a director of a corporation
with a classified board of directors may be removed only for cause, unless the
certificate of incorporation otherwise provides. A director of a corporation
that does not have a classified board of directors or cumulative voting may be
removed with the approval of a majority of the outstanding shares entitled to
vote with or without cause. The Interactive Certificate provides that the Board
of Directors or any individual director may be removed from office at any time
with cause by the affirmative vote of the holders of the majority of the voting
power of all the outstanding stock entitled to vote thereon or without cause by
the affirmative vote of the holders of at least sixty-six and two-thirds percent
(66 2/3%) of the outstanding stock entitled to vote thereon. Under the
California Law, a director may be removed with or without cause by the
affirmative vote of a majority of the outstanding shares, provided that the
shares voted against removal would not be sufficient to elect the director by
cumulative voting. In addition, when, by the provisions of the articles of
incorporation, the holders of shares of a class or series, voting as a class or
series, are entitled to elect one or more directors, any director so elected may
be removed only by the applicable vote of holders of shares of that class or
series.
Filling Vacancies in the Board of Directors. Under the Delaware Law,
vacancies may be filled by a majority of the directors then in office (even
though less than a quorum) unless otherwise provided in the certificate of
incorporation or bylaws. The Delaware Law further provides that if, at the time
of filling any vacancy, the directors then in office constitute less than a
majority of the board (as constituted immediately prior of any such increase),
the Delaware Court of Chancery may, upon application of any holder or holders of
at least ten percent of the total number of the outstanding stock having the
right to vote for directors, summarily order a special election be held to fill
any such vacancy or to replace directors chosen by the board to fill such
vacancies. The Interactive Certificate holds that any vacancies on the
Interactive Board resulting from death, resignation, disqualification, removal
or other causes and any newly created directorships resulting from any increase
in the number of directors, shall, unless the Interactive Board determines the
vacancies should be filled by the stockholders, be filled only by the
affirmative vote of the majority of the directors then in office, even though
less than a quorum of the Board of Directors, and not by stockholders.
Under the California Law, any vacancy on the board of directors other than
one created by removal of a director may be filled by the board. If the number
of directors in office is less than a quorum, a vacancy may be filled by the
unanimous written consent of the directors then in office, by the affirmative
vote of a majority of the directors at a properly noticed meeting or by a sole
remaining director. A vacancy created by removal of a director may be filled by
the board only if so authorized by a corporation's articles of incorporation or
by a bylaw approved by a corporation's shareholders. Furthermore, if, after the
filling of any vacancy by the directors of a corporation, the directors then in
office who have been elected by the corporation's shareholders constitute less
than a majority of the directors then in office, then: (i) any holder of more
than 5% of the corporation's voting stock may call a special meeting of
shareholders, or (ii) the superior court of the appropriate county may order a
special meeting of the shareholders to elect the entire board of directors of
the corporation. The DataWorks Bylaws provide that the shareholders may elect a
director at any time to fill any vacancy not filled by the directors. Any such
election by written consent, other than to fill a vacancy created by removal,
requires the consent of a majority of the outstanding shares entitled to vote.
Any such election by written consent to fill a vacancy created by removal
requires the consent of all of the outstanding shares entitled to vote.
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Payment of Dividends. The Delaware Law permits a corporation to declare and
pay dividends out of statutory surplus or, if there is no surplus, out of net
profits for the fiscal year in which the dividend is declared and/or for the
preceding fiscal year as long as the amount of capital of the corporation
following the declaration and payment of the dividend is not less than the
aggregate amount of capital represented by the issued and outstanding stock of
all classes having a preference upon the distribution of assets. In addition,
the Delaware Law generally provides that a corporation may redeem or repurchase
its shares only if such redemption or repurchase would not impair the capital of
the corporation. The Interactive Bylaws provide for the declaration of dividends
in accordance with the Delaware Law. The Interactive Bylaws also provide that
the Interactive Board may set aside as a reserve any funds the Interactive Board
believes necessary prior to the payment of dividends. Under the California Law,
any dividends or other distributions to shareholders, such as redemptions, are
limited to the greater of (i) retained earnings or (ii) an amount which would
leave the corporation with assets (excluding certain intangible assets) equal to
at least 125% of its liabilities (excluding certain deferred items) and current
assets equal to at least 100% (or, in certain circumstances, 125%) of its
current liabilities. DataWorks' banking facility restricts DataWorks' ability to
pay dividends or to distribute assets.
Appraisal Rights. Under both the California Law and the Delaware Law, a
shareholder of a corporation participating in certain major corporate
transactions may, under varying circumstances, be entitled to appraisal (or
dissenters') rights pursuant to which such shareholder may receive cash in the
amount of the fair market value of his or her shares in lieu of the
consideration he or she would otherwise receive in the transaction. Under the
Delaware Law, such rights are not available (a) with respect to the sale, lease
or exchange of all or substantially all of the assets of a corporation, (b) with
respect to a merger or consolidation by a corporation, the shares of which are
either listed on a national securities exchange or designated as a national
market system security on an interdealer quotation system by the National
Association of Securities Dealers, Inc. or are held of record by more than 2,000
holders if such stockholders receive only shares of the surviving corporation or
shares of any other corporation which are either listed on a national securities
exchange or designated as a national market system security on an interdealer
quotation system by the National Association of Securities Dealers, Inc. or held
of record by more than 2,000 holders, plus cash in lieu of fractional shares, or
(c) to stockholders of a corporation surviving a merger if no vote of the
stockholders of the surviving corporation is required to approve the merger
because the merger agreement does not amend the existing certificate of
incorporation, each share of the surviving corporation outstanding prior to the
merger is an identical outstanding or treasury share after the merger, and the
number of shares to be issued in the merger does not exceed 20% of the shares of
the surviving corporation outstanding immediately prior to the merger and if
certain other conditions are met.
Shareholders of a California corporation whose shares are listed on a
national securities exchange or on a list of over-the-counter margin stocks
issued by the Board of Governors of the Federal Reserve System generally do not
have such appraisal rights unless the holders of at least 5% of the class of
outstanding shares claim the right or unless the corporation or any law
restricts the transfer of such shares. Appraisal rights are unavailable,
however, if the shareholders of a corporation or the corporation itself, or
both, immediately after the reorganization will own equity securities
constituting more than five-sixths of the voting power of the surviving or
acquiring corporation or its parent entity.
Inspection of Books and Records. Under the Delaware Law, any shareholder
may inspect, for any proper purpose, a company's stock ledger, a list of its
stockholders and any other books and records. Under the California Law and the
DataWorks Bylaws, a shareholder or shareholders holding at least 5% in aggregate
of the outstanding voting shares of a corporation or who hold at least 1% of
those voting shares and have filed a Schedule 14A with the Exchange Commission,
shall have the absolute right to do either or both of the following: (i) inspect
and copy the record of shareholders' names and addresses and shareholdings
during usual business hours upon 5 days' prior written demand upon the
corporation, or (ii) obtain from the transfer agent for the corporation, upon
written demand and upon tender of its usual charges for such a list, a list of
shareholders' names and addresses, who are entitled to vote for election of
directors and their shareholdings, as of the most recent record date for which
it has been compiled or as of a date specified by the shareholder subsequent to
the date of demand. The accounting books and records and minutes of proceedings
of
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shareholders and the DataWorks Board and committees of the DataWorks Board are
open to inspection upon the written demand on the corporation of any shareholder
or holder of a voting trust certificate at any reasonable time during usual
business hours, for a purpose reasonably related to such holder's interests as a
shareholder or as the holder of such voting trust certificate.
Limitation of Liability of Directors. The laws of both Delaware and
California permit corporations to adopt a provision in their certificate of
incorporation or articles of incorporation, respectively, eliminating, with
certain exceptions, the personal liability of a director to the corporation or
its shareholders for monetary damages for breach of the director's fiduciary
duty as a director. Under the Delaware Law, Interactive may not eliminate or
limit director monetary liability for (a) breaches of the director's duty of
loyalty to the corporation or its stockholders; (b) acts or omissions not in
good faith or involving intentional misconduct or a knowing violation of law;
(c) unlawful dividends, stock repurchases or redemptions; or (d) transactions
from which the director received an improper personal benefit. Such limitation
of liability provision also may not limit a director's liability for violation
of, or otherwise relieve directors from the necessity of complying with federal
or state securities laws, or affect the availability of nonmonetary remedies
such as injunctive relief or rescission. The Interactive Certificate eliminates
the liability of the Interactive Board to the fullest extent permissible under
the Delaware Law.
The California Law does not permit the elimination of monetary liability
where such liability is based on: (a) intentional misconduct or knowing and
culpable violation of law; (b) acts or omissions that a director believes to be
contrary to the best interests of the corporation or its shareholders, or that
involve the absence of good faith on the part of the director; (c) receipt of
any improper personal benefit; (d) acts or omissions that show reckless
disregard for the director's duty to the corporation or its shareholders, where
the director in the ordinary course of performing a director's duties should
have been aware of a risk of serious injury to the corporation or its
shareholders; (e) acts or omissions that constitute an unexcused pattern of
inattention that amounts to an abdication of the director's duty to the
corporation and its shareholders; (f) interested transactions between the
corporation and a director, in which a director has a material financial
interest; or (g) liability for improper distributions, loans or guarantees. The
DataWorks Articles eliminate the liability of the DataWorks Board to the fullest
extent permissible under California Law.
Indemnification. The Delaware Law generally permits indemnification of
expenses incurred in the defense or settlement of a derivative or third-party
action, provided there is a determination by a disinterested quorum of the
directors, by independent legal counsel or by the stockholders, that the person
seeking indemnification acted in good faith and in a manner reasonably believed
to be in or (in contrast to the California Law) not opposed to the best
interests of the corporation and, with respect to a criminal proceeding, which
such person had no reasonable cause to believe his or her conduct was unlawful.
Without court approval, however, no indemnification may be made in respect of
any derivative action in which such person is adjudged liable to the
corporation. The Delaware Law requires indemnification of expenses when the
individual being indemnified has successfully defended the action on the merits
or otherwise. The Interactive Bylaws state Interactive shall indemnify the
Interactive Board to the fullest extent provided for by the Delaware Law;
provided, however, that the corporation may modify the extent of such
indemnification by the individual contracts with its directors and executive
officers; and, provided, that the corporation shall not be required to indemnify
any director or officer in connection with any proceeding initiated by such
person unless (i) such indemnification is expressly required to be made by law,
(ii) the proceeding was authorized by the Interactive Board, (iii) such
indemnification is provided by Interactive, in its sole discretion, pursuant to
the powers vested in Interactive under the Delaware General Corporation Law, or
(iv) such indemnification is required to be made under other portions of the
Interactive Bylaws.
The California Law permits indemnification of expenses incurred in
derivative or third-party actions, except that with respect to derivative
actions (a) no indemnification may be made when a person is adjudged liable to
the corporation in the performance of that person's duty to the corporation and
its shareholders, unless a court determines such person is entitled to indemnity
for expenses, and then such indemnification may be made only to the extent that
such court shall determine, and (b) no indemnification may be made without court
approval in respect of amounts paid in settling or otherwise disposing of an
action or expenses incurred in defending an action which is settled or otherwise
disposed of without court approval.
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Indemnification is permitted by the California Law only for acts taken by
the person seeking indemnification in good faith and believed to be in the best
interests of the corporation and its shareholders and with respect to a criminal
proceeding, which such person had no reasonable cause to believe his conduct was
unlawful, as determined by a majority vote of a quorum of disinterested
directors, independent legal counsel (if a quorum of disinterested directors is
not obtainable), a majority vote of a quorum of the shareholders (excluding
shares owned by the indemnified party), or the court handling the action. The
California Law requires indemnification when the individual has successfully
defended the action on the merits. California corporations may include in their
articles of incorporation a provision which extends the scope of indemnification
through agreements, bylaws or other corporate actions beyond that specifically
authorized by law. The DataWorks Bylaws include provisions that require
DataWorks to indemnify its directors and executive officers to the fullest
extent permitted by the California Law. The DataWorks Bylaws also provide
DataWorks with the authority to indemnify its other officers, employees and
other agents as set forth in the California Law.
Stockholder and Shareholder Approval of Certain Business
Combinations. Section 203 of the Delaware Law prohibits a corporation from
engaging in a "business combination" with an "interested stockholder" for three
years following the date that such person becomes an interested stockholder.
With certain exceptions, an interested stockholder is a person or entity who or
which owns 15% or more of the corporation's outstanding voting stock (including
any rights to acquire stock pursuant to an option, warrant, agreement,
arrangement or understanding, or upon the exercise of conversion or exchange
rights, and stock with respect to which the person has voting rights only), or
is an affiliate or associate of the corporation and was the owner of 15% or more
of such voting stock at any time within the previous three years.
For purposes of Section 203, the term "business combination" is defined
broadly to include mergers of the corporation or a subsidiary with or caused by
the interested stockholder; sales or other dispositions of the interested
shareholder (except proportionately with the corporation's other shareholders)
of assets of the corporation or a subsidiary equal to ten percent or more of the
aggregate market value of the corporation's consolidated assets or its
outstanding stock; the issuance or transfer by the corporation or a subsidiary
of stock of the corporation or such subsidiary to the interested stockholder
(except for certain transfers in a conversion or exchange or a pro rata
distribution or certain other transactions, none of which increase the
interested stockholder's proportionate ownership of any class or series of the
corporation's or such subsidiary's stock); or receipt by the interested
stockholder (except proportionately as a stockholder), directly or indirectly,
of any loans, advances, guarantees, pledges or other financial benefits provided
by or through the corporation or a subsidiary.
The three-year moratorium imposed on business combinations by Section 203
does not apply if: (i) prior to the date at which such stockholder becomes an
interested stockholder the board of directors approves either the business
combination or the transaction which resulted in the person becoming an
interested shareholder; (ii) the interested stockholder owns 85% of the
corporation's voting stock upon consummation of the transaction which made him
or her an interested shareholder (excluding from the number of shares
outstanding those shares owned by directors who are also officers of the target
corporation and shares held by employee stock plans which do not permit
employees to decide confidentially whether to accept a tender or exchange
offer); or (iii) on or after the date such person becomes an interested
stockholder, the board approves the business combination and it is also approved
at a stockholder meeting by sixty-six and two-thirds percent (66 2/3%) of the
voting stock not owned by the interested stockholder. Section 203 does not apply
if the business combination is proposed prior to the consummation or abandonment
of and subsequent to the earlier of the public announcement or a 20-day notice
required under Section 203 of the proposed transaction which (i) constitutes
certain (a) mergers or consolidations, (b) sales or other transfers of assets
having an aggregate market value equal to 50% or more of the aggregate market
value of all of the assets of the corporation determined on a consolidated basis
or the aggregate market value of all the outstanding stock of the corporation,
or (c) proposed tender or exchange offer for 50% or more of the corporation's
outstanding voting stock; (ii) is with or by a person who was either not an
interested stockholder during the last three years or who became an interested
stockholder with the approval of the corporation's board of directors; and (iii)
is
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approved or not opposed by a majority of the board members elected prior to any
person becoming an interested stockholder during the previous three years (or
their chosen successors).
There is no equivalent provision to Section 203 in California. Under
Section 1203 of the California Corporations Code, certain business combinations
with certain interested shareholders are subject to specified conditions,
including a requirement that a fairness opinion must be obtained and delivered
to the corporation's shareholders. The California Law requires that holders of a
California corporation's common stock receive nonredeemable common stock in a
merger of the corporation with the holder (or an affiliate of the holder) of
more than 50% but less than 90% of its common stock, unless all of the holders
of its common stock consent to the transaction.
Stockholder and Shareholder Voting on Mergers and Similar Transactions. The
laws of both California and Delaware generally require that a majority of the
stockholders of both acquiring and target corporations approve statutory
mergers. The Delaware Law does not require a shareholder vote of the surviving
corporation in a merger (unless the corporation provides otherwise in its
certificate of incorporation) if (a) the merger agreement does not amend the
existing certificate of incorporation, (b) each share of stock of the surviving
corporation outstanding before the merger is an identical outstanding or
treasury share after the merger, and (c) the number of shares to be issued by
the surviving corporation in the merger does not exceed 20% of the shares
outstanding immediately prior to the merger. The California Law contains a
similar exception to its voting requirements for reorganization where
shareholders or the corporation itself, or both, immediately prior to the
reorganization will own immediately after the reorganization equity securities
constituting of more than five-sixths of the voting power (assuming the
conversion of convertible equity securities) of the surviving or acquiring
corporation or its parent entity.
The laws of both California and Delaware also generally require that a sale
of all or substantially all of the assets of a corporation be approved by a
majority of the voting shares of the corporation transferring such assets.
With certain exceptions, the California Law also requires that mergers,
reorganizations, and similar transactions be approved by a majority vote of each
class of shares outstanding. In contrast, the Delaware Law generally does not
require class voting, except for amendments to the certificate of incorporation
that change the number of authorized shares or the par value of shares of a
specific class or that adversely affect such class of shares.
Loans to Directors, Officers and Employees. The Delaware Law and the
Interactive Bylaws permit Interactive to make loans to, guarantee the
obligations of, or otherwise assists its officers or other employees when such
action, in the judgment of the directors, may reasonably be expected to benefit
Interactive. The Interactive Bylaws also provide that such assistance may be
with or without interest and may be unsecured, or secured in such manner as the
Interactive Board shall approve, including, without limitation, a pledge of
shares of stock of Interactive.
Under the California Law and the DataWorks Bylaws, any loan to or guaranty
for the benefit of a director or officer, including pursuant to an employee
benefit plan, of the corporation requires approval of holders of a majority of
the outstanding shares of the corporation. However, the California Law and the
DataWorks Bylaws provide that if DataWorks has 100 or more shareholders of
record, the DataWorks Board alone may approve loans to or guaranties on behalf
of an officer (whether or not such officer is a director) or adopt an employee
benefit plan authorizing such loans or guarantees, by a vote sufficient without
counting the vote of any interested director or directors, if the DataWorks
Board determines that any such loan, guaranty or plan may reasonably be expected
to benefit the corporation.
Interested Director Transactions. Under the laws of both California and
Delaware, contracts or transactions between a corporation and one or more of its
directors or between a corporation and any other entity in which one or more of
its directors are directors or have a financial interest, are not void or
voidable because of such interest or because such director is present at a
meeting of the board which authorizes or approves the contract or transaction,
provided that certain conditions, such as obtaining the required approval and
fulfilling the requirements of good faith and full disclosure, are met. With
certain exceptions, the
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conditions are similar under the California and the Delaware Law. Under the
California and the Delaware Law, either (a) the shareholders or the board of
directors must approve any such contract or transaction in good faith after full
disclosure of the material facts (and, in the case of board approval other than
for a common directorship, the California Law requires that the contract or
transaction must also be "just and reasonable" to the corporation), or (b) the
contract or transaction must have been "fair" (in Delaware) or, in the case of a
common directorship (in California), "just and reasonable" as to the corporation
at the time it was approved. The California Law explicitly places the burden of
proof of the just and reasonable nature of the contract or transaction on the
interested director.
Under the Delaware Law, if board approval is sought, the contract or
transaction must be approved by a majority of the disinterested directors (even
though less than a majority of a quorum). Under the California Law, if
shareholder approval is sought, the interested director is not entitled to vote
his or her shares at a shareholder meeting with respect to any action regarding
such contract or transaction. If board approval is sought, the contract or
transaction must be approved by a majority vote of a quorum of the directors,
without counting the vote of any interested directors (except that interested
directors may be counted for purposes of establishing a quorum).
Stockholder Derivative Suit. Under the Delaware Law, a person may only
bring a derivative action on behalf of the corporation if the person was a
stockholder of the corporation at the time of the transaction in question or his
or her stock thereafter devolved upon him or her by operation of law. The
California Law provides that a shareholder bringing a derivative action on
behalf of a corporation need not have been a shareholder at the time of the
transaction in question, provided that certain criteria are met. The California
Law also provides that the corporation or the defendant in a derivative suit
may, under certain circumstances, make a motion to the court for an order
requiring the plaintiff shareholder to furnish a security bond. Delaware does
not have a similar bonding requirement.
Dissolution. Under the Delaware Law, if the dissolution is initiated by the
board of directors it may be approved by the holders of a majority of the
corporation's shares. If the board of directors does not approve the proposal to
dissolve, it must be consented to in writing by all stockholders entitled to
vote thereon. Under the California Law, shareholders holding fifty percent
("50%") or more of the total voting power may authorize a corporation's
dissolution, with or without the approval of the corporation's board of
directors. The board may cause the corporation to dissolve if (a) an order for
relief under Chapter 7 of the Federal bankruptcy law has been entered, (b) no
shares have been issued or (c) the corporation has disposed of all of its assets
and has not conducted any business for a period of five years preceding the
adopting of a resolution to dissolve.
EXPERTS
The consolidated financial statements of DataWorks at December 31, 1995 and
1996, and for each of the three years in the period ended December 31, 1996
appearing in the DataWorks Annual Report on Form 10-K for the year ended
December 31, 1996, have been audited by Ernst & Young LLP, independent auditors,
as set forth in their report thereon included therein and incorporated by
reference herein which, as to each of the two years in the period ended December
31, 1995, is based in part on the report of Price Waterhouse LLP, independent
accountants. Such consolidated financial statements are incorporated herein by
reference in reliance upon such reports given upon the authority of such firms
as experts in accounting and auditing.
The consolidated financial statements of Interactive at December 31, 1995
and 1996, and for each of the three years in the period ended December 31, 1996,
appearing in this Prospectus/Joint Proxy Statement have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein, which, as to the year 1994, are based in part on the report of
Romito, Tomasetti & Associates, P.C., independent auditors. The consolidated
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.
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LEGAL MATTERS
The validity of the shares of Common Stock offered hereby and the federal
income tax consequences of the Merger will be passed upon for DataWorks by
Cooley Godward LLP, San Diego, California. Certain legal matters in connection
with the Merger Agreement and the federal income tax consequences of the Merger
will be passed upon for Interactive by Pillsbury Madison & Sutro LLP, San Diego,
California.
96
<PAGE> 107
INTERACTIVE GROUP, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AUDITED FINANCIAL STATEMENTS
Report of Ernst & Young LLP, Independent Auditors................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995........................ F-3
Consolidated Statements of Operations for the years ended December 31, 1996, 1995
and 1994......................................................................... F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31,
1996, 1995 and 1994.............................................................. F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995
and 1994......................................................................... F-6
Notes to Consolidated Financial Statements.......................................... F-7
UNAUDITED FINANCIAL STATEMENTS
Unaudited Condensed Consolidated Balance Sheet as of June 30, 1997.................. F-18
Unaudited Condensed Consolidated Statements of Operations for the three months ended
June 30, 1997 and the six months ended June 30, 1997............................. F-19
Unaudited Consolidated Statements of Cash Flows for the six months ended June 30,
1997............................................................................. F-20
Notes to Unaudited Financial Statements............................................. F-21
</TABLE>
F-1
<PAGE> 108
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Interactive Group, Inc.
We have audited the accompanying consolidated balance sheets of Interactive
Group, Inc. as of December 31, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits. We did not audit the combined financial statements of Intrepid Software,
Inc. and Affiliates, which statements reflect net income constituting
approximately 14% of the related consolidated statement of operations total for
the year ended December 31, 1994. The aforementioned statements were audited by
other auditors whose report has been furnished to us, and our opinion, insofar
as it relates to data included for Intrepid Software, Inc. for the
aforementioned period, is based solely on the report of 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
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Interactive Group,
Inc. at December 31, 1996 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, 1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
San Diego, California
February 19, 1997
F-2
<PAGE> 109
INTERACTIVE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................ $ 3,682 $ 4,467
Accounts receivable, net of allowance for doubtful accounts of
$547 and $399 at December 31, 1996 and 1995, respectively..... 16,064 12,977
Deferred income taxes............................................ 540 333
Prepaid expenses and other current assets........................ 1,561 1,114
------- -------
Total current assets..................................... 21,847 18,891
Property and equipment, net........................................ 3,063 2,330
Intangible assets, net............................................. 2,353 2,040
Deferred income taxes.............................................. 1,134 1,173
Deposits and other assets.......................................... 579 329
------- -------
Total assets............................................. $ 28,976 $ 24,763
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................. $ 6,770 $ 5,188
Accrued salaries and commissions................................. 2,086 1,016
Value added taxes payable........................................ 682 506
Other accrued expenses........................................... 2,766 2,450
Current portion of obligations under capital leases.............. 172 404
Short-term borrowings and current portion of long-term
obligations................................................... 2,013 1,099
Customer deposits................................................ 448 643
Deferred revenue................................................. 1,888 3,004
------- -------
Total current liabilities..................................... 16,825 14,310
Obligations under capital leases, less current portion............. 170 171
Long-term obligations, less current portion........................ 1,694 1,934
Commitments and contingencies (Note 9)
Stockholders' equity:
Preferred stock, $.001 par value:
Authorized shares -- 5,000,000
None issued and outstanding................................... -- --
Common stock, $.001 par value:
Authorized shares -- 30,000,000
Issued and outstanding shares -- 4,485,712 and 4,385,216
shares at December 31, 1996 and December 31, 1995,
respectively................................................. 4 4
Additional capital............................................... 7,019 6,461
Retained earnings................................................ 3,127 1,866
Cumulative foreign currency translation adjustments.............. 137 17
------- -------
Total stockholders' equity............................... 10,287 8,348
------- -------
Total liabilities and stockholders' equity............... $ 28,976 $ 24,763
======= =======
</TABLE>
See accompanying notes.
F-3
<PAGE> 110
INTERACTIVE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
REVENUES:
Software licenses........................................... $19,643 $11,255 $10,633
Software support services................................... 18,629 9,680 7,078
Hardware.................................................... 8,014 5,613 5,891
Maintenance contracts....................................... 8,650 5,347 3,655
Other....................................................... 1,255 1,098 1,368
------- ------- -------
Total revenues...................................... 56,191 32,993 28,625
COST OF REVENUES:
Software licenses........................................... 3,826 2,548 2,789
Software support services................................... 13,377 5,575 4,172
Hardware.................................................... 5,849 4,021 4,506
Maintenance contracts....................................... 3,784 1,954 963
Other....................................................... 1,494 1,133 1,167
------- ------- -------
Total cost of revenues.............................. 28,330 15,231 13,597
------- ------- -------
Gross Margin.................................................. 27,861 17,762 15,028
OPERATING EXPENSES:
Research and development.................................... 4,064 1,588 1,320
Selling, general and administrative......................... 21,791 13,891 10,847
Write-off of software license............................... -- 235 --
Compensation expense associated with employee stock bonus... -- 871 --
Purchased research and development.......................... -- 3,250 --
------- ------- -------
Interest income............................................. 82 167 26
Interest expense............................................ (279) (80) (106)
------- ------- -------
Total other income (expense)........................ (197) 87 (80)
------- ------- -------
Income (Loss) Before Income Taxes............................. 1,809 (1,986) 2,781
Provision (benefit) for income taxes.......................... 548 (848) 972
------- ------- -------
Net Income (Loss)............................................. $ 1,261 $(1,138) $ 1,809
======= ======= =======
Net income (loss) per common and common share equivalents
outstanding................................................. $ 0.28 $ (0.28) $ 0.49
======= ======= =======
Weighted average number of common and common share equivalents
outstanding................................................. 4,468 4,084 3,685
======= ======= =======
</TABLE>
See accompanying notes.
F-4
<PAGE> 111
INTERACTIVE GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
CUMULATIVE
FOREIGN
COMMON STOCK CURRENCY TOTAL
------------------ ADDITIONAL RETAINED TRANSLATION STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENTS EQUITY
--------- ------ ---------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1993................... 3,387,764 $3 $ 76 $ 1,195 $ 39 $ 1,313
Employee stock bonus...................... 28,200 -- 19 -- -- 19
Foreign currency translation adjustment... -- -- -- -- (12) (12)
Net income................................ -- -- -- 1,809 -- 1,809
--
--------- ------ ------- ---- -------
Balance December 31, 1994................... 3,415,964 3 95 3,004 27 3,129
Compensation relating to the granting of
stock options and stock bonus.......... 112,800 -- 466 -- -- 466
Issuance of common stock.................. 1,200,000 1 6,191 -- -- 6,192
Repurchase of common stock................ (535,800) -- (400) -- -- (400)
Exercise of warrants and stock options.... 192,252 -- 47 -- -- 47
Tax benefit related to stock options
exercised.............................. -- -- 62 -- -- 62
Foreign currency translation adjustment... -- -- -- -- (10) (10)
Net loss.................................. -- -- -- (1,138) -- (1,138)
--
--------- ------ ------- ---- -------
Balance December 31, 1995................... 4,385,216 4 6,461 1,866 17 8,348
Compensation relating to the granting of
stock options.......................... -- -- 161 -- -- 161
Issuance of common stock.................. 92,623 -- 410 -- -- 410
Repurchase of common stock................ (4,127) -- (18) -- -- (18)
Exercise of stock options................. 12,000 -- 5 -- -- 5
Foreign currency translation adjustment... -- -- -- -- 120 120
Net income................................ -- -- -- 1,261 -- 1,261
--
--------- ------ ------- ---- -------
Balance December 31, 1996................... 4,485,712 $4 $7,019 $ 3,127 $ 137 $10,287
========= == ====== ======= ==== =======
</TABLE>
See accompanying notes.
F-5
<PAGE> 112
INTERACTIVE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)........................................... $ 1,261 $(1,138) $ 1,809
Adjustments to reconcile net income (loss) to cash provided
by (used in) operating activities:
Depreciation and amortization............................ 1,414 515 368
Compensation relating to the granting of options and
stock bonus............................................ 161 466 19
Deferred income taxes.................................... (168) (1,377) 45
Purchased research and development....................... -- 3,250 --
Write-off of software license............................ -- 235 --
Other.................................................... (13) 62 (4)
Changes in operating assets and liabilities:
Accounts receivable.................................... (3,087) (2,685) (2,254)
Prepaid expenses and other assets...................... (772) (798) 49
Accounts payable....................................... 1,582 64 318
Accrued expenses....................................... 1,562 985 567
Deferred revenue and customer deposits................. (1,311) 323 469
------- ------- -------
Net cash provided by (used in) operating
activities........................................ 629 (98) 1,386
INVESTING ACTIVITIES:
Purchase of property and equipment.......................... (1,664) (936) (797)
Proceeds from sale of property and equipment................ 109 -- 40
Acquisition of businesses................................... -- (1,500) --
------- ------- -------
Net cash used in investing activities............... (1,555) (2,436) (757)
FINANCING ACTIVITIES:
Net proceeds from issuance of common stock.................. 415 6,214 --
Repurchase of common stock.................................. (18) (400) --
Proceeds from short- and long-term borrowings............... 1,200 -- 100
Payments of short- and long-term borrowings and capital
leases................................................... (1,561) (568) (337)
------- ------- -------
Net cash provided by (used in) financing
activities........................................ 36 5,246 (237)
EFFECT OF EXCHANGE RATE ON CASH............................... 105 34 73
------- ------- -------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS.......... (785) 2,746 465
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR................ 4,467 1,721 1,256
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR...................... $ 3,682 $ 4,467 $ 1,721
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period:
Interest.................................................... $ 237 $ 80 $ 68
------- ------- -------
Income taxes................................................ $ 154 $ 456 $ 696
======= ======= =======
Non-cash transactions:
Property and equipment acquired under capital lease
obligation............................................... $ 184 $ -- $ 27
======= ======= =======
Note payable for business acquisition....................... $ -- $ 2,500 $ --
======= ======= =======
Earnout payable for business acquisitions................... $ 573 $ -- $ --
======= ======= =======
</TABLE>
See accompanying notes.
F-6
<PAGE> 113
INTERACTIVE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
On March 20, 1995, Interactive, Inc. ("Interactive") completed a merger
(Note 2) with Intrepid Software, Inc. ("Intrepid"), and the combined entity
changed its name to Interactive Group, Inc. (the "Company") and reincorporated
in the state of Delaware. The consolidated financial statements are derived from
the historical consolidated financial statements of Interactive and its wholly
owned United Kingdom subsidiaries (the "United Kingdom operations"), and the
historical combined financial statements of Intrepid.
On December 31, 1995, the Company acquired all of the outstanding shares of
Just-In-Time Enterprise Systems, Inc. ("JIT") from Fourth Shift Corporation
("FSC") of Minneapolis, Minnesota, a publicly traded manufacturing software
company (Note 2). The consolidated balance sheet as of December 31, 1995
reflects the acquisition which was accounted for under the purchase method of
accounting. The results of operations of JIT are included in the consolidated
statements of operations since the date of the acquisition.
All significant intercompany accounts and transactions have been eliminated
in the consolidated financial statements.
DESCRIPTION OF BUSINESS
The Company develops, markets, implements and supports integrated business
information systems that enable discrete manufacturers to manage their
enterprise-wide information requirements. The Company primarily sells and
implements its business information systems directly to mid-to-large size
manufacturing companies in the U.S., U.K., Canada and Europe. Since 1992, the
Company has expanded its sales, implementation, and customer service
capabilities through the addition of offices as well as the establishment of
centralized customer service centers in both the United States and United
Kingdom. Substantially all of the Company's revenues are generated from the sale
of its systems, which usually consist of proprietary and third-party software
licenses, implementation and software support services, thirdparty hardware and
maintenance contracts. The Company's proprietary software licenses are sold on a
packaged or individual module basis, and the license fee is determined in part
by the number of modules and concurrent system users. Implementation and
software support services are furnished on a daily or hourly basis and billed
monthly as incurred. Maintenance fees are based on a percentage of software
license fees.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of less than ninety days to be cash equivalents.
CONCENTRATION OF CREDIT RISK
Concentration of credit risk with respect to accounts receivable is limited
due to the wide variety of customers to which the Company's products are sold,
as well as their dispersion across geographic areas. The Company sells its
products and services primarily to customers in the manufacturing industry.
Credit is extended based on an evaluation of the customer's financial condition
and collateral is generally not required. Credit losses have been minimal and
have been within management's expectations. For the three years ended December
31, 1996, the Company had no individual customer which accounted for 10% or more
of total annual revenues.
F-7
<PAGE> 114
INTERACTIVE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets
(principally three to seven years). Leasehold improvements are amortized over
the lesser of their estimated useful life or term of the lease.
INTANGIBLE ASSETS
Intangible assets primarily were acquired in the JIT acquisition, and are
comprised of the trademarks and trade names, assembled work force, customer
base, and developed technology purchased as detailed in Note 3. The intangible
assets are being amortized on a straight-line basis over estimated useful lives
ranging from 3 to 10 years. Amortization expense for the years ended December
31, 1996 and 1995 was $336,000 and $0, respectively.
In July 1995, the Company exercised its option to purchase licensing rights
to an Oracle-based manufacturing software package. As a direct result of the
acquisition of JIT in December 1995 (Note 2), the Company has taken a writeoff
of $235,000 which represents the value of the license rights and related
capitalized software costs, net of accumulated amortization of $84,000, which
were deemed by the Company to be redundant.
FOREIGN CURRENCY TRANSLATION
The Company has determined that the local currency of the United Kingdom
operations is the functional currency. Accordingly, assets and liabilities are
translated at the current exchange rate at the balance sheet date, and revenues
and expenses are translated at the average exchange rate in effect during the
period. Translation adjustments are reported as a separate component of
stockholders' equity. Realized gains and losses related to foreign currency
transactions are reported as income or expense in the period presented. Such
gains and losses were not material for any period presented.
REVENUE RECOGNITION
Revenues from software licenses are recognized upon delivery, provided that
no significant obligations remain and collection of the related receivable is
deemed probable. Software support services revenues are recognized in the period
in which the services are performed. Revenues from hardware sales are recognized
upon shipment of the product. Revenues from software maintenance contracts are
recognized ratably over the period of the contract. Revenues from turnkey
systems, which include both hardware and software, are recognized upon delivery
of the software and hardware that is considered essential to the functionality
of the system, provided that no significant obligations remain and collection of
the related receivable is deemed probable. Insignificant vendor obligations are
accounted for by deferring revenue attributable to the obligations and
recognizing it ratably as the obligations are fulfilled. Revenues on longterm
contracts are recognized on the percentage-of-completion method with
progress-to-completion measured based upon labor hours incurred. Estimates
related to all long-term contracts are reviewed periodically. The effect on
revenues or costs from any revisions to estimates is recorded in the period in
which such revisions are made.
RESEARCH AND DEVELOPMENT
Costs incurred in the research and development of new software products and
enhancements to existing software products are expensed as incurred until
technological feasibility has been established. After technological feasibility
is established, any additional costs would be capitalized in accordance with
Statement of Financial Accounting Standards No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed. Because the Company
believes that its current process for developing software
F-8
<PAGE> 115
INTERACTIVE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
is essentially completed concurrently with the establishment of technological
feasibility, no internally developed software costs are capitalized at December
31, 1996 or 1995.
RELIANCE ON ESTIMATES
The financial statements have been prepared in accordance with generally
accepted accounting principles and have required 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 period. Actual results could differ from those estimates. With the
acquisition of JIT, the Company may incur up to a total of $1.2 million of
contingent consideration due to FSC, which is payable based on a percentage of
future revenues generated from the JIT software after December 31, 1995. This
contingent payment is due on January 31, 1999 (Notes 2 and 4).
PER SHARE INFORMATION
For the periods prior to the initial public offering completed May 23,
1995, per share information was computed pursuant to the rules of the Securities
and Exchange Commission ("SEC"), which require that common stock issued by the
Company during the twelve months immediately preceding the Company's initial
public offering, plus the number of common shares issuable pursuant to the grant
of stock options during the same period, be included in the calculation of the
shares outstanding using the treasury stock method.
For the period subsequent to the closing of the initial public offering,
per share information is computed using the weighted average number of common
shares and common share equivalents outstanding which have a dilutive effect
when applying the treasury stock method. Common share equivalents result from
outstanding warrants and options to purchase common stock.
All share and per share information has been adjusted to reflect the
282-to-1 stock split completed in March 1995.
IMPAIRMENT OF LONG-LIVED ASSETS
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of ("SFAS 121"). The adoption of SFAS 121 did
not impact the financial position or results of operations of the Company in
1996.
NOTE 2. BUSINESS MERGER AND ACQUISITION
BUSINESS MERGER
Pursuant to a Plan and Agreement of Merger on March 20, 1995, the Company
issued 511,725 shares of its common stock for all of the outstanding common
stock of Intrepid. All share and per share amounts in the accompanying
consolidated financial statements and notes thereto have been retroactively
adjusted to give effect to the exchange of shares. The accompanying consolidated
financial statements of the Company have been restated to reflect the merger,
which has been accounted for as a pooling-of-interests.
The combined historical financial statements of Intrepid include the
accounts of Intrepid and its affiliate, Ultimate Business Systems, Inc. ("UBS").
In December 1994, UBS was merged into Intrepid in a tax-free statutory merger,
with Intrepid the surviving entity. Because these companies were under common
control, the merger was accounted for in a manner similar to that in
pooling-of-interests accounting.
F-9
<PAGE> 116
INTERACTIVE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
BUSINESS ACQUISITIONS
On December 31, 1995, the Company acquired all of the outstanding shares of
JIT in exchange for $1.5 million of cash, a $2.5 million note payable, and the
assumption of net liabilities of $4.3 million. These liabilities do not take
into account any potential losses associated with litigation that JIT is subject
to in the normal course of business. In the opinion of management, the
resolution of these matters will not have a material adverse effect on the
Company's results of operations or financial position.
In addition, $1.2 million of contingent consideration is payable based on a
percentage of future revenues generated from the JIT software. During the year
ended December 31, 1996, the Company accrued $415,000 under the earnout
calculation and recorded a corresponding increase to its intangible assets
related to the purchase price of JIT (Note 4).
A summary of the purchase price and the allocation of costs to the assets
acquired is as follows as of December 31, 1996 (in thousands):
<TABLE>
<S> <C>
Current assets.............................................. $2,165
Fixed assets................................................ 863
Intangible assets........................................... 2,455
In-process technology....................................... 3,250
------
$8,733
======
</TABLE>
For the year ended December 31, 1995, the Company recorded a non-recurring
expense of $3,250,000 for purchased in-process research and development relating
to the JIT acquisition.
NOTE 3. BALANCE SHEET INFORMATION
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
------ ------
<S> <C> <C>
Computers and peripheral equipment......................... $5,052 $3,832
Furniture and fixtures..................................... 1,523 1,164
Leasehold improvements and other........................... 951 679
------ ------
7,526 5,675
Less accumulated depreciation and amortization............. (4,463) (3,345)
------ ------
$3,063 $2,330
====== ======
</TABLE>
Intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
------ ------
<S> <C> <C>
Assembled workforce........................................ $ 831 $ 790
Trademarks and tradenames.................................. 457 457
Customer base.............................................. 563 440
Developed technology....................................... 770 353
Other...................................................... 68 --
------ ------
2,689 2,040
Less accumulated amortization.............................. (336) --
------ ------
$2,353 $2,040
====== ======
</TABLE>
F-10
<PAGE> 117
INTERACTIVE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
------- -------
<S> <C> <C>
8.75% note payable to Fourth Shift Corporation; principal
and interest payable in twelve equal quarterly
installments of $239,130 each, commencing on April 1,
1996 through January 1, 1999........................... $ 1,934 $ 2,500
Revolving line of credit agreement with United Kingdom
Bank (the "United Kingdom Agreement"); interest payable
monthly at the bank's prime rate plus 2% (8% at
December 31, 1996); expires May 31, 1997............... -- 533
Revolving line of credit agreement; interest payable
monthly (8.06% - 8.25% at December 31, 1996); expires
June 30, 1997.......................................... 1,200 --
Non-interest bearing earnout payable to Fourth Shift
Corporation; due January 31, 1999...................... 415 --
Other.................................................... 158 --
------- -------
3,707 3,033
Less current portion of long-term obligations............ (2,013) (1,099)
------- -------
$ 1,694 $ 1,934
======= =======
</TABLE>
Maturities of long-term obligations after 1996 are as follows: 1997,
$2,013; 1998, $1,045; 1999, $649.
The note payable to Fourth Shift Corporation is secured by a security
interest granted to Fourth Shift Corporation in all of the outstanding capital
stock of JIT, the JIT Software and the receivables of the Company related to the
JIT Software.
The United Kingdom Agreement is limited to borrowings of 800,000 British
pounds ($1.3 million at December 31, 1996) and is secured by the accounts
receivable of Interactive (U.K.) Ltd. The United Kingdom Agreement contains
restrictive covenants, including limitations on the payment of dividends. At
December 31, 1996, the Company was in compliance with all such covenants.
The Company has a revolving line of credit under an agreement (the
"Interactive Agreement") with its bank which provides for borrowings of up to $3
million through June 30, 1997. Under the Interactive Agreement, the Company may
elect to receive certain advances (the "Variable Rate Advances") in any amount,
which bear interest at the bank's reference rate per annum (8.25% at December
31, 1996). Interest on the Variable Rate Advances is payable monthly. Principal
is due upon maturity of the Interactive Agreement. The Company had $600,000 in
variable rate advances outstanding under the Interactive Agreement at December
31, 1996 and none outstanding at December 31, 1995. In addition, the Company may
elect to receive certain advances (the "Fixed Rate Advances") in the minimum
amount of $100,000, to remain outstanding for a fixed period of time, generally
30 or 60 days, which bear interest at the Eurodollar rate plus 2% per annum
(8.06% at December 31, 1996). Principal and interest on Fixed Rate Advances are
due at the end of the fixed period; however, the outstanding balance may be
renewed indefinitely through June 30, 1997. The Company had $600,000 in fixed
rate advances outstanding under the Interactive Agreement at December 31, 1996
and none outstanding at December 31, 1995. In January 1997, the Company
increased its bank line of credit for borrowings to $4 million.
The Interactive Agreement also contains a clause providing for the issuance
by the bank of standby letters of credit on behalf of the Company, not to exceed
$3 million. No such letters of credit were outstanding at December 31, 1996.
F-11
<PAGE> 118
INTERACTIVE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Advances under the Interactive Agreement are secured by substantially all
of the Company's assets. The agreement contains restrictive covenants including
the maintenance of certain financial ratios, limitations on dividend payments,
additional borrowings, loans and advances, and limitations on repurchase of the
Company's stock, except repurchases made under the Stock Purchase Agreement
referred to in Note 5. At December 31, 1996, the Company obtained a waiver from
its bank for a covenant violation relating to the purchase of certain assets and
was in compliance with all remaining covenants.
NOTE 5. STOCKHOLDERS' EQUITY
In 1990, a stockholder of the Company was issued a warrant to purchase
141,361 shares of the Company's common stock at $.18 per share. The warrant was
exercised in March 1995 by reducing the subordinated debenture payable to the
stockholder.
In January 1991, the Company entered into a stock and cash bonus
arrangement (the "Arrangement") with an officer of the Company that provides for
the issuance of common stock as a bonus for services rendered. On each January
1, 1992, 1993 and 1994, 28,200 shares of common stock were issued. In
conjunction with these stock bonuses, the officer received cash bonuses
sufficient to cover the income taxes payable as a result of such stock bonuses.
The Company has recognized as compensation expense the total of the current fair
value of the common stock at the date the bonuses were paid, as determined by an
independent valuation, and the cash bonus amount. On January 1, 1995, the
Company issued 112,800 shares of common stock and the related cash bonus under
the Arrangement. No further cash or stock bonuses have been provided for under
this Arrangement. On March 20, 1995, the Company removed the forfeiture
provisions associated with the Arrangement, and compensation expense of $871,000
related to this bonus was recorded by the Company, consisting of the then
current fair value of the common stock and the related cash bonus under the
Arrangement.
In June 1994, the Company entered into a stock purchase agreement with a
stockholder under which the Company had the option to purchase 535,800 shares
held by the stockholder for $.75 per share. On May 25, 1995, the Company
exercised its option and repurchased the shares of common stock from the
stockholder for $400,000.
On May 23, 1995, the Company completed its initial public offering of
common stock in which the Company sold 1,200,000 shares and a stockholder sold
100,000 shares. The Company received net proceeds of approximately $6.2 million
from the offering. On June 30, 1995, the Company's underwriter exercised its
over-allotment option for the purchase of 140,000 shares of common stock from
certain of the Company's stockholders. The Company did not receive any portion
of the proceeds from the sales of shares by any of the selling stockholders.
In conjunction with this offering, a warrant was granted to the underwriter
for the purchase of up to 130,000 shares of common stock at an exercise price of
$7.80 per share. The warrant expires May 23, 2000.
NOTE 6. STOCK OPTION PLANS
The Company 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 because, as
discussed below, the alternative fair value accounting provided for under the
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("SFAS 123") requires use of option valuation models that were not
developed for use in valuing employee stock options.
In July 1993, the Company adopted an incentive stock option plan and
granted options to key employees to purchase shares of the Company's common
stock. Options to purchase 4,963 shares of the Company's common stock at $.44
per share were outstanding at December 31, 1996, of which all were exercisable.
F-12
<PAGE> 119
INTERACTIVE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company's 1995 Stock Option Plan (the "Plan") provides for the grant of
stock options to employees, directors, affiliates, and consultants. As of
December 31, 1996, the Company has authorized 500,000 options to be granted
under the Plan. The Company granted options to purchase 30,000 and 243,000
shares in 1996 and 1995, respectively, to employees under the Plan which vest
over a four year period. As of December 31, 1996, 297,500 shares were
outstanding, of which 79,000 were exercisable at $6.06 per share.
In 1995, the Company granted options to purchase 57,000 shares at $5.15 per
share to other employees under the Plan which vest over a 31 month period. The
options expire ten years from the date of grant, unless otherwise provided in
the option agreements. As of December 31, 1996, 57,000 shares were outstanding,
of which 19,000 were exercisable. For the years ended December 31, 1996 and
1995, the Company recorded $91,000 and $15,000, respectively, in compensation
expense related to employee stock options granted at less than fair market value
on the date of grant.
In 1995, the Company granted options to purchase 60,000 shares at $3 per
share to a certain employee outside of the Plan. As of December 31, 1996, all
60,000 shares were outstanding, of which 20,000 were exercisable. In 1996, the
Company also granted to a consultant outside of the Plan options to purchase
35,000 shares at $4 per share, which were entirely outstanding and exercisable
as of December 31, 1996. The Company recorded $70,000 of expense related to the
estimated fair market value of the options on the date of grant.
Pro forma information regarding net income and earnings per share is
required by SFAS 123 and has been determined as if the Company had accounted for
its employee stock options under the fair value method of that Statement. The
fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1996 and 1995, respectively: risk-free interest rates of 6%;
dividend yields of 0%, volatility factors of the expected market price of the
Company's common stock of .48 and .66; and a weighted-average life of the
options of 6.75 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. The Company's
pro forma information follows (in thousands, except for earnings per share
information):
<TABLE>
<CAPTION>
1996 1995
---- -------
<S> <C> <C>
Pro forma net income (loss)................................ $849 $(1,182)
Pro forma earnings (loss) per share........................ $.19 $ (.29)
</TABLE>
F-13
<PAGE> 120
INTERACTIVE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes stock option activity for the three years
ended December 31, 1996:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF EXERCISE AVERAGE
SHARES PRICE PER SHARE PRICE PER SHARE
--------- --------------- ---------------
<S> <C> <C> <C>
Outstanding at December 31, 1993 and
1994................................ 67,853 $ 0.44 $0.44
Granted............................. 360,000 $3.00-$6.06 $5.41
Exercised........................... (50,890) $ 0.44 $0.44
------- ----------- -----
Outstanding at December 31, 1995...... 376,963 $0.44-$6.06 $5.18
Granted............................. 65,000 $4.00-$5.12 $4.50
Forfeited........................... (32,500) $ 485-$6.06 $5.88
Exercised........................... (12,000) $ 0.44 $0.44
------- ----------- -----
Outstanding at December 31, 1996.... 397,463 $0.44-$6.06 $5.15
======= =========== =====
</TABLE>
The weighted average remaining contractual life of the options outstanding
as of December 31, 1996 was 8.1 years.
NOTE 7. INCOME TAXES
Components of the Company's provision (benefit) for income taxes are as
follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1996 1995 1994
----- ------- ----
<S> <C> <C> <C>
Current:
Federal......................................... $ 138 $ 131 $523
Foreign......................................... 561 398 322
State........................................... 17 -- 82
----- ------- ----
Total current........................... 716 529 927
Deferred:
Federal......................................... (66) (1,253) 67
Foreign......................................... -- -- --
State........................................... (102) (124) (22)
----- ------- ----
Total deferred.......................... (168) (1,377) 45
----- ------- ----
$ 548 $ (848) $972
===== ======= ====
</TABLE>
F-14
<PAGE> 121
INTERACTIVE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following is a reconciliation of the actual tax provision (benefit) to
the expected tax provision (benefit) computed by applying the statutory federal
income tax rate to income before income taxes (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Income tax provision (benefit) at statutory rate... $ 632 $(675) $ 973
State income tax provision (benefit), net of
federal tax benefit.............................. 55 (81) 74
Effect of foreign rates............................ 16 (38) 32
Utilization of research tax credits and net
operating loss carryforwards..................... (228) -- (102)
Permanent differences and other.................... 73 (54) 61
Change in deferred tax asset valuation allowance... -- -- (66)
----- ----- ----
Total provision (benefit) for income taxes......... $ 548 $(848) $ 972
===== ===== ====
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred income taxes are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995
--------------------------
1996 1995 1994
------ ------ ----
<S> <C> <C> <C>
Deferred tax assets:
Purchased research and development............... $1,183 $1,267 $ --
Research tax credits............................. 211 158 75
Net operating loss carryforwards................. -- 112 29
Accrued liabilities and other.................... 439 128 95
------ ------ ----
Total deferred tax assets.......................... 1,833 1,665 199
Deferred tax liabilities:
Depreciation..................................... (49) (94) (44)
Other............................................ (110) (65) (26)
------ ------ ----
Total deferred tax liabilities..................... (159) (159) (70)
------ ------ ----
Net deferred tax assets............................ $1,674 $1,506 $129
====== ====== ====
</TABLE>
The earnings of the foreign subsidiary are considered to be indefinitely
reinvested and, accordingly, no provision for U.S. federal income taxes has been
provided. As of December 31, 1996, the Company has federal and state research
and development credit carryforwards of approximately $274,000 and $80,000,
respectively. The federal and state research credit carryforwards will begin
expiring in 2002 unless previously utilized.
NOTE 8. BENEFIT PLANS
Interactive maintains profit sharing and deferred savings plans for its
employees, which allow participants to make contributions by salary reduction
pursuant to Section 401(k) of the Internal Revenue Code. Under both plans, the
Company's contributions are discretionary, and employees vest immediately in
their contributions. The UK Subsidiary also maintains a defined contribution
pension plan for its employees. Expenses for the plans aggregated approximately
$571,000, $314,000, and $220,000 for the years ended December 31, 1996, 1995 and
1994, respectively.
The Company's Employee Stock Purchase Plan permits company employees to
purchase stock at a price equal to 85% of the lower of the fair market value of
the stock at the beginning or end of a six-month plan
F-15
<PAGE> 122
INTERACTIVE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
period. As of December 31, 1996, 92,623 shares have been sold under this plan
with a maximum of 100,000 shares available for sale.
NOTE 9. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company is obligated under various noncancellable operating leases for
equipment, vehicles and office space through 2002. The Company's headquarters
facilities lease in the United Kingdom contains a clause under which the Company
may cancel the lease in 1997 with a maximum penalty of six month's rental
payments. Accordingly, minimum lease commitments reflect only the noncancellable
portion of the total portion of the total payments due under this lease. Certain
of the leases provide that the Company pay all or a portion of taxes,
maintenance, insurance and other operating expenses, and certain of the rents
are subject to adjustment for changes as determined by certain consumer price
indices and exchange rates. The Company has also entered into various capital
leases for property and equipment. Capitalized costs related to these leases of
$539,000 and $557,000 are included in property and equipment at December 31,
1996 and 1995, respectively. Accumulated amortization of these leased assets was
$324,000 and $160,000 at December 31, 1996 and 1995, respectively. Aggregate
rent expense was approximately $2,117,000, $1,732,000, and $1,705,000 in 1996,
1995 and 1994, respectively.
Minimum lease commitments for noncancellable operating and capital leases
as of December 31, 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING OPERATING CAPITAL
DECEMBER 31, LEASES LEASES
---------------------------------------------------------- --------- -------
<S> <C> <C>
1997................................................. $ 1,833 $ 204
1998................................................. 941 128
1999................................................. 548 57
2000................................................. 334 --
2001................................................. 328 --
Thereafter........................................... 107 --
------ -----
$ 4,091 389
======
Less amount representing interest.................... (47)
-----
Present value of future minimum capital lease
payments........................................... 342
Less current portion................................. (172)
-----
Long-term portion.................................... $ 170
=====
</TABLE>
CONTINGENCIES
The Company is subject to legal proceedings and claims that arise in the
normal course of business. While the outcome of the proceedings and claims
cannot be predicted with certainty, management does not believe that the outcome
of any of these matters will have a material adverse effect on the Company's
consolidated financial position or results of operations.
F-16
<PAGE> 123
INTERACTIVE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. GEOGRAPHIC DATA
The Company's operations consist of one business segment: the development,
marketing, implementation and support of integrated business information systems
for the discrete manufacturing industry. The Company has operations in North
America and Europe. The operations and identifiable assets of the Company by
geographic area are as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Revenues from unaffiliated customers:
North America................................ $38,177 $20,404 $17,969
Europe....................................... 18,014 12,589 10,656
------- ------- -------
$56,191 $32,993 $28,625
======= ======= =======
Income before income taxes:
North America................................ $ 238 $(3,159) $ 1,933
Europe....................................... 1,571 1,173 848
------- ------- -------
$ 1,809 $(1,986) $ 2,781
======= ======= =======
Identifiable assets:
North America................................ $20,906 $18,126 $ 6,560
Europe....................................... 8,070 6,637 5,075
------- ------- -------
$28,976 $24,763 $11,635
======= ======= =======
</TABLE>
NOTE 11. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
In thousands, except per share data.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenues.................................. $13,831 $13,761 $12,869 $15,730 $56,191
Gross margin.............................. 6,795 6,862 6,084 8,120 27,861
Net income (loss)......................... 442 453 (325) 691 1,261
Net income (loss) per share............... $ .10 $ .10 $ (.07) $ .15 $ .28
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenues.................................. $ 7,529 $ 7,794 $ 7,410 $10,260 $32,993
Gross margin.............................. 3,862 4,076 3,992 5,832 17,762
Net income (loss)......................... (342)(b) 372 204 (1,372)(c) (1,138)
Net income (loss) per share(a)............ $ (.09) $ .09 $ .05 $ (.31) $ (.28)
</TABLE>
- ---------------
(a) The sum of quarterly net income per share does not equal the annual amount
due to changes in the average common and common share equivalents
outstanding.
(b) Includes a non-recurring, after-tax compensation expense of $560,000
associated with the final stock grant and cash bonus pursuant to a
compensation arrangement with an officer of the Company.
(c) Includes one-time charges in the aggregate, after-tax amount of $2,091,000
in connection with the JIT acquisition.
F-17
<PAGE> 124
INTERACTIVE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
1997
-----------
(UNAUDITED)
<S> <C>
Current assets:
Cash and cash equivalents...................................................... $ 3,697
Accounts receivable, net....................................................... 17,110
Deferred income taxes.......................................................... 540
Prepaid expenses and other current assets...................................... 1,529
-------
Total current assets................................................... 22,876
Property and equipment, net...................................................... 3,133
Intangible assets, net........................................................... 2,286
Deferred income taxes............................................................ 1,152
Deposits and other assets........................................................ 768
-------
Total assets........................................................... $30,215
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................... $ 5,361
Accrued salaries and commissions............................................... 2,341
Value added taxes payable...................................................... 321
Other accrued expenses......................................................... 2,528
Current portion of obligations under capital leases............................ 221
Short-term borrowings and current portion of long-term obligations............. 3,949
Customer deposits.............................................................. 354
Deferred revenue............................................................... 2,071
-------
Total current liabilities.............................................. 17,146
Obligations under capital leases, less current portion........................... 329
Long-term obligations, less current portion...................................... 1,630
Stockholders' equity:
Preferred stock, $.001 par value:
Authorized shares -- 5,000,000
None issued and outstanding................................................. --
Common stock, $.001 par value:
Authorized shares -- 30,000,000
Issued and outstanding shares -- 4,593,745.................................. 5
Additional capital............................................................. 7,506
Retained earnings.............................................................. 3,494
Cumulative foreign currency translation adjustments............................ 105
-------
Total stockholders' equity............................................. 11,110
-------
Total liabilities and stockholders' equity............................. $30,215
=======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-18
<PAGE> 125
INTERACTIVE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues............................................ $15,252 $13,761 $28,442 $27,592
Cost of revenues.................................... 7,109 6,899 13,553 13,935
------- ------- ------- -------
Gross margin...................................... 8,143 6,862 14,889 13,657
Operating expenses:
Research and development.......................... 891 1,117 1,712 2,053
Selling, general and administrative............... 6,437 4,951 12,404 10,027
------- ------- ------- -------
Total..................................... 7,328 6,068 14,116 12,080
Income from operations.............................. 815 794 773 1,577
Other income (expense), net......................... (78) (39) (143) (72)
------- ------- ------- -------
Income before income taxes.......................... 737 755 630 1,505
Provision for income taxes.......................... 300 302 263 610
------- ------- ------- -------
Net income.......................................... $ 437 $ 453 $ 367 $ 895
======= ======= ======= =======
Net income per common and common share equivalents
outstanding....................................... $ 0.10 $ 0.10 $ 0.08 $ 0.20
======= ======= ======= =======
Weighted average number of common and common share
equivalents outstanding........................... 4,579 4,427 4,554 4,430
======= ======= ======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-19
<PAGE> 126
INTERACTIVE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30,
-------------------
1997 1996
------- -------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income............................................................. $ 367 $ 895
Adjustments to reconcile net income to cash (used in) provided by
operating activities:
Depreciation and amortization....................................... 847 649
Compensation relating to the granting of options and stock bonus.... 46 43
Changes in operating assets and liabilities......................... (2,885) (786)
------- -------
Net cash (used in) provided by operating activities............ (1,625) 801
INVESTING ACTIVITIES:
Purchase of property and equipment..................................... (390) (958)
Acquisition of business................................................ -- (264)
------- -------
Net cash used in investing activities.......................... (390) (1,222)
FINANCING ACTIVITIES:
Proceeds from short-term borrowings.................................... 1,800 --
Principal payments on short-term borrowings............................ -- (340)
Principal payments on long-term obligations............................ (567) (184)
Proceeds from long-term borrowings..................................... 500 164
Proceeds from issuance of common stock................................. 442 279
Principal payments on capital leases................................... (113) (213)
------- -------
Net cash provided by (used in) financing activities............ 2,062 (294)
------- -------
Effect of exchange rate.................................................. (32) (177)
Net increase (decrease) in cash and cash equivalents..................... 15 (892)
Cash and cash equivalents at beginning of period......................... 3,682 4,467
------- -------
Cash and cash equivalents at end of period............................... $ 3,697 $ 3,575
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period:
Interest............................................................... $ 180 $ 138
======= =======
Income taxes........................................................... $ 8 $ 43
======= =======
Non-cash transactions:
Long-term obligation associated with business acquisitions............. $ 139 $ 193
======= =======
Property and equipment acquired under capital lease obligations........ $ 321 $ --
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-20
<PAGE> 127
INTERACTIVE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Interactive Group, Inc. (hereinafter referred to as the "Company") have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring adjustments) considered necessary for a fair
presentation of the financial position and operating results for the interim
periods presented have been included. Operating results for the three and six
month periods ended June 30, 1997 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1997. The unaudited
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto for the year ended
December 31, 1996 included in the Company's Annual Report on Form 10-K. All
intercompany accounts and transactions have been eliminated in consolidation.
2. CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with original
maturities of 90 days or less.
3. EARNINGS PER SHARE
Earnings per common share is computed using the weighted average number of
shares of common stock and the dilutive effect, if any, of common stock
equivalents outstanding during all periods presented.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings per Share ("SFAS 128"),
effective for both interim and annual periods ending after December 15, 1997. At
that time, the Company will be required to change the method currently used to
compute earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect of
stock options will be excluded. The impact of SFAS 128 on the calculations of
primary earnings per share and fully diluted earnings per share for the three
and six months ended June 30, 1997 and 1996 is not material.
4. SUBSEQUENT EVENTS
On July 31, 1997, the Company entered into a definitive agreement (the
"Merger Agreement") with DataWorks Corporation ("DataWorks"), a supplier of
software solutions for discrete and repetitive manufacturers in the mid-range
market, pursuant to which the Company will become a wholly-owned subsidiary of
DataWorks in a stock-for-stock merger (the "Merger") intended to qualify as a
tax-free reorganization within the meaning of Section 368(a) of the Internal
Revenue Code of 1986, as amended, and accounted for as a pooling-of-interests
for financial reporting purposes. Under the terms of the Merger Agreement,
stockholders of the Company will receive 0.8054 shares of DataWorks common stock
for each share of Company common stock they own at the time the Merger is
consummated. In addition, options and warrants to acquire Company common stock
will be converted as a result of the Merger into equivalent options and warrants
for DataWorks common stock, based upon the exchange ratio. In connection with
the execution of the Merger Agreement, the Company granted DataWorks an option
to purchase up to 344,531 shares of Company common stock (approximately 7.5% of
the number of shares currently outstanding), exercisable upon the occurrence of
certain events involving a termination of the Merger Agreement. The Merger is
expected to be completed this fall, subject to approval of the Merger Agreement
and the Merger by the stockholders of the Company and the shareholders of
DataWorks as well as the satisfaction or waiver of customary closing conditions.
In connection with the execution of the Merger Agreement, certain stockholders
of the Company owning approximately 39% of the outstanding shares of Company
common stock (Robert C. Vernon, Mark Hellinger and Randolph S. Naylor) and
certain shareholders of DataWorks owning approximately 20% of the outstanding
shares of
F-21
<PAGE> 128
DataWorks common stock have entered into forms of Voting Agreements pursuant to
which they have agreed to vote their shares in favor of approval of the Merger
Agreement and the Merger. The Company has filed a Current Report on Form 8-K
(date of Report: July 31, 1997) with respect to the transactions involving the
Company and DataWorks, and the foregoing description of such transactions and
the various agreements entered into in connection therewith is qualified in its
entirety by reference to the documents filed as exhibits to such Form 8-K.
On July 25, 1997, the Company acquired substantially all of the outstanding
shares of Genie Productique/Gestion de Production ("GP2"), a small provider of
ERP software solutions to the manufacturing mid-market in France, in exchange
for approximately $400,000 plus an additional $160,000 of contingent
consideration payable over three years based on a percentage of future revenues
generated primarily from GP2's installed base of customers. The transaction will
be accounted for as a purchase, and the results of operations of GP2 will be
included with the results of the Company's operations subsequent to the date of
acquisition.
F-22
<PAGE> 129
APPENDIX A
AGREEMENT AND PLAN
OF MERGER AND REORGANIZATION
THIS AGREEMENT AND PLAN OF MERGER AND REORGANIZATION ("Agreement") is made
and entered into as of July 31, 1997, by and among: DATAWORKS CORPORATION, a
California corporation ("Parent"); DATAWORKS ACQUISITION SUB, INC., a Delaware
corporation and a wholly owned subsidiary of Parent ("Merger Sub"); and
INTERACTIVE GROUP, INC., a Delaware corporation (the "Company"). Certain
capitalized terms used in this Agreement are defined in Exhibit A.
RECITALS
A. Parent, Merger Sub and the Company intend to effect a merger of Merger
Sub into the Company in accordance with this Agreement and the Delaware General
Corporation Law (the "Merger"). Upon consummation of the Merger, Merger Sub will
cease to exist, and the Company will become a wholly owned subsidiary of Parent.
B. It is intended that the Merger qualify as a tax-free reorganization
within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code"). For accounting purposes, it is intended that the Merger be
treated as a "pooling of interests."
C. The respective boards of directors of Parent, Merger Sub and the Company
have approved this Agreement and the Merger.
AGREEMENT
The parties to this Agreement, intending to be legally bound, agree as
follows:
SECTION 1. Description of Transaction
1.1 Merger of Merger Sub into the Company. Upon the terms and subject to
the conditions set forth in this Agreement, at the Effective Time (as defined in
Section 1.3), Merger Sub shall be merged with and into the Company, and the
separate existence of Merger Sub shall cease. The Company will continue as the
surviving corporation in the Merger (the "Surviving Corporation").
1.2 Effect of the Merger. The Merger shall have the effects set forth in
this Agreement and in the applicable provisions of the Delaware General
Corporation Law (the "DGCL").
1.3 Closing; Effective Time. The consummation of the transactions
contemplated by this Agreement (the "Closing") shall take place at the offices
of Cooley Godward LLP, 4365 Executive Drive, Suite 1100, San Diego, California,
at a time and on a date which shall be promptly following the satisfaction or
waiver of the conditions set forth in Sections 6 and 7 (the "Closing Date").
Contemporaneously with or as promptly as practicable after the Closing, a
properly executed certificate of merger conforming to the requirements of the
DGCL (the "Certificate of Merger") shall be filed with the Secretary of State of
the State of Delaware. The Merger shall take effect at the time the Certificate
of Merger is filed with the Secretary of State of the State of Delaware (the
"Effective Time").
1.4 Certificate of Incorporation and Bylaws; Directors and
Officers. Unless otherwise determined by Parent prior to the Effective Time:
(a) the Certificate of Incorporation of the Surviving Corporation
shall be amended and restated immediately after the Effective Time to
conform to Exhibit B;
(b) the Bylaws of the Surviving Corporation shall be amended and
restated immediately after the Effective Time to conform to the Bylaws of
Merger Sub as in effect immediately prior to the Effective Time; and
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(c) the directors and officers of the Surviving Corporation
immediately after the Effective Time shall be the respective individuals
who are directors and officers of Merger Sub immediately prior to the
Effective Time.
1.5 Conversion of Shares.
(a) Subject to Section 1.5(d), at the Effective Time, by virtue of the
Merger and without any further action on the part of Parent, Merger Sub,
the Company or any stockholder of the Company:
(i) any shares of Company Common Stock then held by the Company or
any subsidiary of the Company (or held in the Company's treasury) shall
be canceled and retired and shall cease to exist, and no consideration
shall be delivered in exchange therefor;
(ii) any shares of Company Common Stock then held by Parent, Merger
Sub or any other subsidiary of Parent shall be canceled and retired and
shall cease to exist, and no consideration shall be delivered in
exchange therefor;
(iii) except as provided in clauses "(i)" and "(ii)" above and
subject to Section 1.5(b), each share of Company Common Stock then
outstanding shall be converted into the right to receive 0.8054 of a
share of Parent Common Stock; and
(iv) each share of the common stock, par value $0.001 per share, of
Merger Sub then outstanding shall be converted into one share of common
stock of the Surviving Corporation.
(b) The fraction of a share of Parent Common Stock into which each
outstanding share of Company Common Stock is to be converted pursuant to
Section 1.5(a)(iii) (as such fraction may be adjusted in accordance with
this Section 1.5(b)) is referred to as the "Exchange Ratio." If, between
the date of this Agreement and the Effective Time, the outstanding shares
of Company Common Stock or Parent Common Stock are changed into a different
number or class of shares by reason of any stock split, stock, cash or
property dividend or distribution, reverse stock split, reclassification,
recapitalization or other similar transaction, or if there shall be any
record date with respect thereto, then the Exchange Ratio shall be
appropriately adjusted.
(c) [Reserved.]
(d) No fractional shares of Parent Common Stock shall be issued in
connection with the Merger, and no certificates for any such fractional
shares shall be issued. In lieu of such fractional shares, any holder of
Company Common Stock who would otherwise be entitled to receive a fraction
of a share of Parent Common Stock (after aggregating all fractional shares
of Parent Common Stock issuable to such holder) shall, upon surrender of
such holder's Company Stock Certificate(s) (as defined in Section 1.6), be
paid in cash the dollar amount (rounded to the nearest whole cent), without
interest, determined by multiplying such fraction by the closing sales
price of a share of Parent Common Stock on the Nasdaq National Market on
the date the Merger becomes effective.
1.6 Closing of the Company's Transfer Books. At the Effective Time: (a)
all shares of Company Common Stock outstanding immediately prior to the
Effective Time shall automatically be canceled and retired and shall cease to
exist, and all holders of certificates representing shares of Company Common
Stock that were outstanding immediately prior to the Effective Time shall cease
to have any rights as stockholders of the Company; and (b) the stock transfer
books of the Company shall be closed with respect to all shares of Company
Common Stock outstanding immediately prior to the Effective Time. No further
transfer of any such shares of Company Common Stock shall be made on such stock
transfer books after the Effective Time. If, after the Effective Time, a valid
certificate previously representing any of such shares of Company Common Stock
(a "Company Stock Certificate") is presented to the Exchange Agent (as defined
in Section 1.7) or to the Surviving Corporation or Parent, such Company Stock
Certificate shall be canceled and shall be exchanged as provided in Section 1.7.
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1.7 Exchange of Company Stock Certificates.
(a) Prior to the Closing Date, Parent shall select a reputable bank or
trust company (reasonably satisfactory to the Company) to act as exchange agent
in the Merger (the "Exchange Agent"). Promptly after the Effective Time, Parent
shall deposit with the Exchange Agent (i) certificates representing the shares
of Parent Common Stock issuable pursuant to this Section 1 and (ii) cash
sufficient to make payments in lieu of fractional shares in accordance with
Section 1.5(d). The shares of Parent Common Stock and cash amounts so deposited
with the Exchange Agent, together with any dividends or distributions received
by the Exchange Agent with respect to such shares, are referred to collectively
as the "Exchange Fund."
(b) As soon as practicable after the Effective Time, the Exchange Agent
will mail to the registered holders of Company Stock Certificates (i) a letter
of transmittal in customary form and containing such provisions as Parent may
reasonably specify (including a provision confirming that delivery of Company
Stock Certificates shall be effected, and risk of loss and title to Company
Stock Certificates shall pass, only upon delivery of such Company Stock
Certificates to the Exchange Agent), and (ii) instructions for use in effecting
the surrender of Company Stock Certificates in exchange for certificates
representing Parent Common Stock. Subject to Section 1.5(d), upon surrender of a
Company Stock Certificate to the Exchange Agent for exchange, together with a
duly executed letter of transmittal and such other documents as may be
reasonably required by the Exchange Agent or Parent, (1) the holder of such
Company Stock Certificate shall be entitled to receive immediately in exchange
therefor a certificate representing the number of shares of Parent Common Stock
that such holder has the right to receive pursuant to the provisions of Section
1.5(a)(iii), and (2) the Company Stock Certificate so surrendered shall be
marked "canceled." Until surrendered as contemplated by this Section 1.7, each
Company Stock Certificate shall be deemed, from and after the Effective Time, to
represent only the right to receive shares of Parent Common Stock (and cash in
lieu of any fractional share of Parent Common Stock) as contemplated by Section
1.6. If any Company Stock Certificate shall have been lost, stolen or destroyed,
Parent may, in its discretion and as a condition precedent to the issuance of
any certificate representing Parent Common Stock, require the owner of such
lost, stolen or destroyed Company Stock Certificate to provide an appropriate
affidavit and to deliver a bond (in such sum as Parent may reasonably direct) as
indemnity against any claim that may be made against the Exchange Agent, Parent
or the Surviving Corporation with respect to such Company Stock Certificate.
(c) No dividends or other distributions declared or made with respect to
Parent Common Stock with a record date after the Effective Time shall be paid to
the holder of any unsurrendered Company Stock Certificate with respect to the
shares of Parent Common Stock represented thereby, until such holder surrenders
such Company Stock Certificate in accordance with this Section 1.7 (at which
time such holder shall be entitled to receive all such dividends and
distributions, without interest).
(d) Any portion of the Exchange Fund that remains undistributed to holders
of Company Stock Certificates as of the date 270 days after the date on which
the Merger becomes effective shall be delivered to Parent upon demand, and any
holders of Company Stock Certificates who have not theretofore surrendered their
Company Stock Certificates in accordance with this Section 1.7 shall thereafter
look only to Parent for satisfaction of their claims for Parent Common Stock,
cash in lieu of fractional shares of Parent Common Stock and any dividends or
distributions with respect to Parent Common Stock.
(e) Each of the Exchange Agent, Parent and the Surviving Corporation shall
be entitled to deduct and withhold from any consideration payable or otherwise
deliverable pursuant to this Agreement to any holder or former holder of Company
Common Stock such amounts as may be required to be deducted or withheld
therefrom under the Code or under any provision of state, local or foreign tax
law. To the extent such amounts are so deducted or withheld, such amounts shall
be treated for all purposes under this Agreement as having been paid to the
Person to whom such amounts would otherwise have been paid.
(f) Neither Parent nor the Surviving Corporation shall be liable to any
holder or former holder of Company Common Stock with respect to any shares of
Parent Common Stock (or dividends or distributions with respect thereto), or for
any cash amounts, delivered to any public official pursuant to any applicable
abandoned property, escheat or similar law.
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1.8 Tax Consequences. For federal income tax purposes, the Merger is
intended to constitute a reorganization within the meaning of Section 368 of the
Code. The parties to this Agreement hereby adopt this Agreement as a "plan of
reorganization" within the meaning of Sections 1.368-2(g) and 1.368-3(a) of the
United States Treasury Regulations.
1.9 Accounting Consequences. For accounting purposes, the Merger is
intended to be treated as a "pooling of interests."
1.10 Further Action. If, at any time after the Effective Time, any further
action is determined by Parent to be necessary or desirable to carry out the
purposes of this Agreement or to vest the Surviving Corporation with full right,
title and possession of and to all rights and property of Merger Sub and the
Company, the officers and directors of the Surviving Corporation and Parent
shall be fully authorized (in the name of Merger Sub, in the name of the Company
and otherwise) to take such action.
Section 2. Representations and Warranties of the Company
The Company represents and warrants to Parent and Merger Sub that, except
as set forth in the Company SEC Documents (as defined in Section 2.2(a)) or in
the disclosure schedule delivered by the Company to Parent on the date of this
Agreement and signed by the President of the Company (the "Company Disclosure
Schedule"):
2.1 Organization, Standing and Power. The Company and each of its direct
and indirect majority-owned subsidiaries which are listed on Exhibit 21 of the
Company's most recent Annual Report on Form 10-K comprising a Company SEC
Document (defined below) (collectively, the "Acquired Corporations"), are
corporations duly organized, validly existing and in good standing under the
laws of their respective jurisdictions of incorporation. Each of the Acquired
Corporations has the corporate power to own its properties and to carry on its
business as now being conducted and is duly qualified to do business and is in
good standing in each jurisdiction in which the failure to be so qualified would
have a material adverse effect on the ability of the Company to consummate the
transactions contemplated hereby. Except as described in the Company Disclosure
Schedule, the Company has no equity interest in any Entity except the other
Acquired Corporations.
2.2 SEC Filings; Financial Statements.
(a) The Company has made available to Parent accurate and complete copies
(excluding copies of exhibits) of each report, registration statement and
definitive proxy statement filed by the Company with the SEC between the date of
the final amendment to the Company's Registration Statement in respect of the
Company's initial public offering (which became effective on or about May 23,
1995) and the date of this Agreement (including without limitation all exhibits
and schedules thereto, collectively, the "Company SEC Documents"). As of the
time it was filed with the SEC (or, if amended or superseded by a filing prior
to the date of this Agreement, then on the date of such filing): (i) each of the
Company SEC Documents complied in all material respects with the applicable
requirements of the Securities Act or the Exchange Act (as the case may be); and
(ii) none of the Company SEC Documents contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(b) The consolidated financial statements contained in the Company SEC
Documents: (i) complied as to form in all material respects with the published
rules and regulations of the SEC applicable thereto; (ii) were prepared in
accordance with generally accepted accounting principles applied on a consistent
basis throughout the periods covered (except as may be indicated in the notes to
such financial statements and, in the case of unaudited statements, as permitted
by Form 10-Q of the SEC, and except that unaudited financial statements may not
contain footnotes and are subject to year-end audit adjustments); and (iii)
fairly present the consolidated financial position of the Company and its
subsidiaries as of the respective dates thereof and the consolidated results of
operations of the Company and its subsidiaries for the periods covered thereby.
2.3 Disclosure. None of the information to be supplied by or on behalf of
the Company for inclusion in the S-4 Registration Statement will, at the time
the S-4 Registration Statement becomes effective under the
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Securities Act, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in the light of the circumstances under which they are
made, not misleading. None of the information to be supplied by or on behalf of
the Company for inclusion in the Joint Proxy Statement will, at the time the
Joint Proxy Statement is mailed to the stockholders of the Company or to the
shareholders of Parent, or at the time of the Company Stockholders' Meeting or
the Parent Shareholders' Meeting, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in the light of the
circumstances under which they are made, not misleading.
2.4 Absence of Certain Changes or Events. Since March 31, 1997: (i) there
has not been any event that has had or is reasonably likely to have a Material
Adverse Effect on the Acquired Corporations; and (ii) the Company has not
declared, accrued, set aside or paid any dividend or distribution.
2.5 Authority; Binding Nature of Agreement. The Company has the corporate
power and authority to perform its obligations under this Agreement. The board
of directors of the Company (at a meeting duly called and held) has unanimously
determined that the Merger is advisable and fair and in the best interests of
the Company and its stockholders; has unanimously approved the execution,
delivery and performance of this Agreement by the Company and has unanimously
approved the Merger and the transactions contemplated hereby; and has
unanimously recommended the adoption and approval of this Agreement and the
approval of the Merger by the holders of Company Common Stock and directed that
such matters be submitted for consideration by the Company's stockholders at the
Company Stockholders' Meeting (as defined in Section 5.2). The execution,
delivery and performance by the Company of this Agreement have been duly
authorized by all necessary action on the part of the board of directors of the
Company. This Agreement constitutes the legal, valid and binding obligation of
the Company, enforceable against it in accordance with its terms, subject to (i)
laws of general application relating to bankruptcy, insolvency and the relief of
debtors, and (ii) rules of law governing specific performance, injunctive relief
and other equitable remedies.
2.6 Non-Contravention; Consents. Neither the execution and delivery of
this Agreement by the Company nor the consummation by the Company of the Merger
will (a) conflict with or result in any breach of any provision of the
Certificate of Incorporation or bylaws of the Company, or (b) result in a
default by the Company under any Contract to which the Company is a party,
except for any default which has not had and will not have a Material Adverse
Effect on the Acquired Corporations, or (c) result in a violation by the Company
of any order, writ, injunction, judgment or decree to which the Company is
subject, except for any violation which has not had and will not have a Material
Adverse Effect on the Acquired Corporations. Except as may be required by the
Securities Act, the Exchange Act, state securities or "blue sky" laws, the DGCL,
the HSR Act and the NASD Bylaws, the Company is not and will not be required to
make any filing with or give any notice to, or to obtain any Consent from, any
Person in connection with the execution and delivery of this Agreement, or the
consummation of the Merger, except for any Consent the absence of which has not
had and will not have a Material Adverse Effect on the Acquired Corporations.
2.7 Accounting Matters. To the actual knowledge of the Company's executive
officers, neither the Company nor any of its affiliates (as such term is used in
Rule 145 under the Securities Act) has taken or agreed to, or plans to, take any
action that could prevent Parent from accounting for the Merger as a "pooling of
interests."
2.8 Vote Required. The affirmative vote of the holders of a majority of the
shares of Company Common Stock outstanding on the record date for the Company
Stockholders' Meeting in favor of (i) the adoption and approval of this
Agreement, and (ii) the approval of the Merger and the other transactions
contemplated by this Agreement (the "Required Company Stockholder Vote"), is the
only vote of the holders of any class or series of the Company's capital stock
necessary to adopt and approve this Agreement, the Merger and the other
transactions contemplated by this Agreement.
2.9 Capitalization, Etc.
(a) The authorized capital stock of the Company consists of: (i) 30,000,000
shares of Company Common Stock, of which 4,596,120 shares have been issued and
are outstanding as of the date of this
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Agreement; and (ii) 5,000,000 shares of Preferred Stock, $0.001 par value per
share, of which no shares are outstanding as of the date of this Agreement. All
of the outstanding shares of Company Common Stock have been duly authorized and
validly issued, and are fully paid and nonassessable. As of the date of this
Agreement, there are no shares of Company Common Stock held in treasury by the
Company or held by any subsidiary of the Company. Except as set forth in the
Company Disclosure Schedule: (i) none of the outstanding shares of Company
Common Stock is entitled or subject to any preemptive right, right of
participation, right of maintenance or any similar right; (ii) none of the
outstanding shares of Company Common Stock is subject to any right of first
refusal in favor of the Company; and (iii) there is no Acquired Corporation
Contract relating to the voting or registration of, or restricting any Person
from purchasing, selling, pledging or otherwise disposing of (or granting any
option or similar right with respect to), any shares of Company Common Stock.
The Company is under no obligation to repurchase, redeem or otherwise acquire
any outstanding shares of Company Common Stock.
(b) As of the date of this Agreement: (i) there are options to purchase
128,000 shares of Company Common Stock outstanding under the Company's 1997
Stock Option Plan; (ii) there are options to purchase 347,021 shares of Company
Common Stock outstanding under the Company's 1995 Stock Option Plan; (iii) there
are options to purchase no shares of Company Common Stock outstanding under the
Company's 1993 Stock Option Plan; (iv) there are options to purchase 60,000
shares of Company Common Stock outstanding outside all such plans (stock options
granted by the Company pursuant to the 1997 Stock Option Plan, the 1995 Stock
Option Plan, the 1993 Stock Option Plan and outside all such plans are referred
to in this Agreement as "Company Options"); (v) there are warrants to purchase
130,000 shares of Company Common Stock outstanding (each, a "Company Warrant");
and (vi) 47,434 shares of Company Common Stock are reserved for future issuance
under the Company's 1995 Employee Stock Purchase Plan (the "1995 Purchase
Plan"). The Company Disclosure Schedule sets forth the following information
with respect to each Company Option outstanding as of the date of this
Agreement: (i) the particular plan, if any, pursuant to which such Company
Option was granted; (ii) the name of the optionee; (iii) the number of shares of
Company Common Stock subject to such Company Option; (iv) the exercise price of
such Company Option; (v) the date on which such Company Option was granted; (vi)
the applicable vesting schedule(s), and the extent to which such Company Option
is vested as of the date of this Agreement; and (vii) the date on which such
Company Option expires. The Company Disclosure Schedule also sets forth the
relevant corresponding information with respect to each Company Warrant. The
Company has made available to Parent accurate and complete copies of all stock
option plans pursuant to which the Company has ever granted stock options, and
the forms of all stock option agreements evidencing such options, and accurate
and complete copies of all Company Warrants.
(c) Except as set forth in the Company Disclosure Schedule or as permitted
pursuant to Section 4.3(b), there is no: (i) outstanding subscription, option,
call, warrant or right (whether or not currently exercisable) to acquire any
shares of the capital stock or other securities of the Company; (ii) outstanding
security, instrument or obligation that is or may become convertible into or
exchangeable for any shares of the capital stock or other securities of the
Company; (iii) stockholder rights plan (or similar plan commonly referred to as
a "poison pill") or Contract under which the Company is or may become obligated
to sell or otherwise issue any shares of its capital stock or any other
securities; or (iv) to the best of the knowledge of the Company's executive
officers, condition or circumstance that may give rise to or provide a basis for
the assertion of a claim by any Person to the effect that such Person is
entitled to acquire or receive any shares of capital stock or other securities
of the Company.
(d) All outstanding shares of Company Common Stock, all outstanding Company
Options and Company Warrants, and all outstanding shares of capital stock of
each subsidiary of the Company have been issued and granted in compliance with
(i) all applicable securities laws and other applicable Legal Requirements, and
(ii) all requirements set forth in applicable Contracts.
(e) All of the outstanding shares of capital stock of each of the Acquired
Corporations other than the Company are validly issued, fully paid and
nonassessable and are owned beneficially and of record by the Company, free and
clear of any Encumbrances.
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2.10 Fairness Opinion. The Company's board of directors has received the
written opinion of UBS Securities LLC ("UBS"), financial advisor to the Company,
dated on or about the date of this Agreement, to the effect that the Exchange
Ratio is fair to the stockholders of the Company from a financial point of view.
2.11 Approval of Voting Agreements and Option Agreement. Prior to the
execution of those certain Voting Agreements between Parent and certain
stockholders of the Company, and that certain Option Agreement of even date
herewith between Parent and Company, the Board of Directors of the Company shall
have approved: (a) said Voting Agreements and the transactions contemplated
thereby; and (b) said Option Agreement and the transactions contemplated
thereby.
2.12 No Existing Discussions. None of the Acquired Corporations, and no
Representative of any of the Acquired Corporations, is engaged, directly or
indirectly, in any discussions or negotiations with any other Person relating to
any Acquisition Proposal.
2.13 Financial Advisor. Except for UBS, no broker, finder or investment
banker is entitled to any brokerage, finder's or other fee or commission in
connection with the Merger or any of the other transactions contemplated by this
Agreement based upon arrangements made by or on behalf of any of the Acquired
Corporations. A copy of the only two written agreements in effect relating to
the Company's obligations to UBS have been made available to Parent and there
are no other obligations of the Company to UBS not contemplated by such
agreements.
SECTION 3. Representations and Warranties of Parent and Merger Sub.
Parent and Merger Sub represent and warrant to the Company that, except as
set forth in the Parent SEC Documents (as defined in Section 3.2(a)) or in the
disclosure schedule delivered to the Company on the date of this Agreement and
signed by the President of Parent (the "Parent Disclosure Schedule"):
3.1 Organization, Standing and Power. Parent, Merger Sub and each of
Parent's other direct and indirect majority-owned subsidiaries which are listed
on Exhibit 21 of Parent's most recent Annual Report on Form 10-K comprising a
Parent SEC Document (collectively, the "Acquiring Corporations"), are
corporations duly organized, validly existing and in good standing under the
laws of their respective jurisdictions of incorporation. Each of the Acquiring
Corporations has the corporate power to own its properties and to carry on its
business as now being conducted and is duly qualified to do business and is in
good standing in each jurisdiction in which the failure to be so qualified would
have a material adverse effect on the ability of Parent and Merger Sub to
consummate the transactions contemplated hereby. Except as described in the
Parent Disclosure Schedule, Parent has no equity interest in any Entity except
the other Acquiring Corporations.
3.2 SEC Filings; Financial Statements.
(a) Parent has made available to the Company accurate and complete copies
(excluding copies of exhibits) of each report, registration statement and
definitive proxy statement filed by Parent with the SEC between the date of the
final amendment to the Company's Registration Statement in respect of the
Company's initial public offering (which became effective on or about October
27, 1995), and the date of this Agreement (including without limitation all
exhibits and schedules thereto, collectively, the "Parent SEC Documents"). As of
the time it was filed with the SEC (or, if amended or superseded by a filing
prior to the date of this Agreement, then on the date of such filing): (i) each
of the Parent SEC Documents complied in all material respects with the
applicable requirements of the Securities Act or the Exchange Act (as the case
may be); and (ii) none of the Parent SEC Documents contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading.
(b) The consolidated financial statements contained in the Parent SEC
Documents: (i) complied as to form in all material respects with the published
rules and regulations of the SEC applicable thereto; (ii) were prepared in
accordance with generally accepted accounting principles applied on a consistent
basis throughout the periods covered (except as may be indicated in the notes to
such financial statements and, in the case of unaudited statements, as permitted
by Form 10-Q of the SEC, and except that unaudited financial statements may not
contain footnotes and are subject to year-end audit adjustments); and (iii)
fairly present the
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consolidated financial position of Parent and its subsidiaries as of the
respective dates thereof and the consolidated results of operations of Parent
and its subsidiaries for the periods covered thereby.
3.3 Disclosure. None of the information to be supplied by or on behalf of
Parent for inclusion in the S-4 Registration Statement will, at the time the S-4
Registration Statement becomes effective under the Securities Act, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
the light of the circumstances under which they are made, not misleading. None
of the information to be supplied by or on behalf of Parent for inclusion in the
Joint Proxy Statement will, at the time the Joint Proxy Statement is mailed to
the stockholders of the Company or to the shareholders of Parent, or at the time
of the Company Stockholders' Meeting or the Parent Shareholders' Meeting,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they are made, not
misleading. The S-4 Registration Statement will comply as to form in all
material respects with the provisions of the Securities Act and the rules and
regulations promulgated by the SEC thereunder; except that no representation or
warranty is made by Parent with respect to statements made or incorporated by
reference therein based on information supplied by the Company (as supplemented
or revised) for inclusion or incorporation by reference in the Joint Proxy
Statement.
3.4 Absence of Certain Changes or Events. Since March 31, 1997: (i) there
has not been any event that has had or is reasonably likely to have a Material
Adverse Effect on the Acquiring Corporations; and (ii) Parent has not declared,
accrued, set aside or paid any dividend or distribution.
3.5 Authority; Binding Nature of Agreement. Parent and Merger Sub have the
corporate right, power and authority to perform their obligations under this
Agreement. The board of directors of Parent (at a meeting duly called and held)
has unanimously determined that the Merger is advisable and fair and in the best
interests of Parent and its shareholders; has unanimously approved the
execution, delivery and performance of this Agreement by Parent and has
unanimously approved the Merger and the transactions contemplated hereby (as the
board of directors of Parent and on behalf of Parent as the sole stockholder of
Merger Sub); and has unanimously recommended the approval of the principal terms
of the Merger by the holders of Parent Common Stock and directed that the such
matters be submitted for consideration by the Parent's shareholders at the
Parent Shareholders' Meeting (as defined in Section 5.3). The execution,
delivery and performance by Parent and Merger Sub of this Agreement have been
duly authorized by all necessary action on the part of the respective boards of
directors of Parent and Merger Sub. This Agreement constitutes the legal, valid
and binding obligation of Parent and Merger Sub, enforceable against them in
accordance with its terms, subject to (i) laws of general application relating
to bankruptcy, insolvency and the relief of debtors, and (ii) rules of law
governing specific performance, injunctive relief and other equitable remedies.
3.6 Non-Contravention; Consents. Neither the execution and delivery of
this Agreement by Parent and Merger Sub nor the consummation by Parent and
Merger Sub of the Merger will (a) conflict with or result in any breach of any
provision of the Articles or Certificate of Incorporation or the bylaws of
Parent or Merger Sub, or (b) result in a default by Parent or Merger Sub under
any Contract to which Parent or Merger Sub is a party, except for any default
which has not had and will not have a Material Adverse Effect on the Acquiring
Corporations, or (c) result in a violation by Parent or Merger Sub of any order,
writ, injunction, judgment or decree to which Parent or Merger Sub is subject,
except for any violation which has not had and will not have a Material Adverse
Effect on the Acquiring Corporations. Except as may be required by the
Securities Act, the Exchange Act, state securities or "blue sky" laws, the
California General Corporation Law, the HSR Act and the NASD Bylaws, neither
Parent nor Merger Sub is or will be required to make any filing with or give any
notice to, or to obtain any Consent from, any Person in connection with the
execution and delivery of this Agreement, or the consummation of the Merger,
except for any Consent the absence of which has not had and will not have a
Material Adverse Effect on the Acquiring Corporations.
3.7 Accounting Matters. To the actual knowledge of Parent's executive
officers, neither Parent nor any of its affiliates (as such term is used in Rule
145 under the Securities Act) has taken or agreed to, or plans to, take any
action that could prevent Parent from accounting for the Merger as a "pooling of
interests."
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3.8 Vote Required. The affirmative vote of the holders of a majority of
the shares of Parent Common Stock outstanding on the record date for the Parent
Shareholders' Meeting in favor of the approval of the principal terms of the
Merger (the "Required Parent Shareholder Vote") is the only vote of the holders
of any class or series of Parent's capital stock necessary to adopt and approve
this Agreement, the Merger and the other transactions contemplated by this
Agreement.
3.9 Capitalization, Etc.
(a) The authorized capital stock of Parent consists of: (i) 25,000,000
shares of Parent Common Stock, of which 10,118,908 shares have been issued and
are outstanding as of the date of this Agreement; and (ii) 5,000,000 shares of
Preferred Stock, no par value per share, of which no shares are outstanding as
of the date of this Agreement. All of the outstanding shares of Parent Common
Stock have been duly authorized and validly issued, and are fully paid and
nonassessable. As of the date of this Agreement, there are no shares of Parent
Common Stock held in treasury by Parent or held by any subsidiary of Parent.
Except as set forth in the Parent Disclosure Schedule: (i) none of the
outstanding shares of Parent Common Stock is entitled or subject to any
preemptive right, right of participation, right of maintenance or any similar
right; (ii) none of the outstanding shares of Parent Common Stock is subject to
any right of first refusal in favor of the Parent; and (iii) there is no
Acquiring Corporation Contract relating to the voting or registration of, or
restricting any Person from purchasing, selling, pledging or otherwise disposing
of (or granting any option or similar right with respect to), any shares of
Parent Common Stock. Parent is under no obligation to repurchase, redeem or
otherwise acquire any outstanding shares of Parent Common Stock.
(b) As of the date of this Agreement: (i) there are options to purchase
1,136,385 shares of Parent Common Stock outstanding under Parent's Equity
Incentive Plan; (ii) there are options to purchase 96,666 shares of Parent
Common Stock outstanding under Parent's Non-Employee Directors' Stock Option
Plan; and (iii) 170,555 shares of Parent Common Stock are reserved for future
issuance under Parent's Employee Stock Purchase Plan. Parent has made available
to the Company accurate and complete copies of all stock option plans pursuant
to which Parent has ever granted stock options, and the forms of all stock
option agreements evidencing such options. Parent also has outstanding warrants
to purchase 22,222 shares of Parent Common Stock, and Parent has made available
to the Company accurate and complete copies of all warrant agreements relating
thereto.
(c) Except as set forth in the Parent Disclosure Schedule or as permitted
pursuant to Section 4.4(b) there is no: (i) outstanding subscription, option,
call, warrant or right (whether or not currently exercisable) to acquire any
shares of the capital stock or other securities of Parent; (ii) outstanding
security, instrument or obligation that is or may become convertible into or
exchangeable for any shares of the capital stock or other securities of Parent;
(iii) stockholder rights plan (or similar plan commonly referred to as a "poison
pill") or Contract under which Parent is or may become obligated to sell or
otherwise issue any shares of its capital stock or any other securities; or (iv)
to the best of the knowledge of Parent's executive officers, condition or
circumstance that may give rise to or provide a basis for the assertion of a
claim by any Person to the effect that such Person is entitled to acquire or
receive any shares of capital stock or other securities of Parent.
(d) All outstanding shares of Parent Common Stock, all outstanding options
to purchase Parent Common Stock, and all outstanding shares of capital stock of
Merger Sub have been issued and granted in compliance with (i) all applicable
securities laws and other applicable Legal Requirements, and (ii) all
requirements set forth in applicable Contracts.
(e) All of the outstanding shares of capital stock of each Acquiring
Corporation other than Parent are validly issued, fully paid and nonassessable
and are owned beneficially and of record by Parent, free and clear of any
Encumbrances.
3.10 Fairness Opinion. Parent's board of directors has received the
written opinion of Lehman Brothers Inc., financial advisor to Parent, dated the
date of this Agreement, to the effect that the Exchange Ratio is fair to Parent
from a financial point of view.
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3.11 Valid Issuance. The Parent Common Stock to be issued in the Merger
will, when issued in accordance with the provisions of this Agreement, be
validly issued, fully paid and nonassessable and shall have been approved for
quotation (subject to notice of issuance) on the Nasdaq National Market.
SECTION 4. Certain Covenants of the Parties.
4.1 Parent Access and Investigation. During the period from the date of
this Agreement through the Effective Time (the "Pre-Closing Period"), the
Company shall, and shall cause the respective Representatives of the Acquired
Corporations to: (a) provide Parent and Parent's Representatives with reasonable
access to the Acquired Corporations' Representatives, personnel and assets and
to all existing books, records, Tax Returns, work papers and other documents and
information relating to the Acquired Corporations; and (b) provide Parent and
Parent's Representatives with such copies of the existing books, records, Tax
Returns, work papers and other documents and information relating to the
Acquired Corporations, and with such additional financial, operating and other
data and information regarding the Acquired Corporations, as Parent may
reasonably request.
4.2 Company Access and Investigation. During the Pre-Closing Period,
Parent shall, and shall cause the respective Representatives of its subsidiaries
to: (a) provide the Company and the Company's Representatives with reasonable
access to the Parent's and such subsidiaries' Representatives, personnel and
assets and to all existing books, records, Tax Returns, work papers and other
documents and information relating to Parent and its subsidiaries; and (b)
provide the Company and the Company's Representatives with such copies of the
existing books, records, Tax Returns, work papers and other documents and
information relating to Parent and its subsidiaries, and with such additional
financial, operating and other data and information regarding Parent and its
subsidiaries, as the Company may reasonably request.
4.3 Operation of the Company's Business.
(a) During the Pre-Closing Period the Company shall: (i) ensure that each
of the Acquired Corporations conducts its business and operations (A) in the
ordinary course and in accordance with past practices and (B) in compliance with
all applicable Legal Requirements and the requirements of all applicable
material Contracts; (ii) use all reasonable efforts to ensure that each of the
Acquired Corporations preserves intact its current business organization, keeps
available the services of its current officers and employees and maintains its
relations and goodwill with all suppliers, customers, landlords, creditors,
licensors, licensees, employees and other Persons having business relationships
with the respective Acquired Corporations; (iii) use all reasonable efforts to
keep in full force all of its existing insurance policies; and (iv) provide all
material notices, assurances and support required by any material Contract to
which an Acquired Corporation is a party.
(b) Without the prior written consent of Parent, which consent shall not be
unreasonably withheld or delayed, during the Pre-Closing Period the Company
shall not, and shall not permit any of the other Acquired Corporations to:
(i) declare, accrue, set aside or pay any dividend or make any other
distribution in respect of any shares of capital stock, or repurchase,
redeem or otherwise reacquire any shares of capital stock or other
securities;
(ii) sell, issue, grant or authorize the issuance or grant of (i) any
capital stock or other security, (ii) any option, call, warrant or right to
acquire any capital stock or other security, or (iii) any instrument
convertible into or exchangeable for any capital stock or other security
(except that the Company may (x) issue Company Common Stock upon the valid
exercise of Company Options or Company Warrants, (y) grant Company Options
to new employees consistent with past practice, and (z) issue shares of
Company Common Stock pursuant to the 1995 Purchase Plan);
(iii) amend or waive any of its rights under, or accelerate the
vesting under, any provision of any of the Company's stock option plans or
stock purchase plan, any provision of any agreement evidencing any
outstanding stock option or any restricted stock purchase agreement, or
otherwise modify any of the terms of any outstanding option, warrant or
other security or any related Contract;
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(iv) amend or permit the adoption of any amendment to its certificate
of incorporation or bylaws or other charter or organizational documents, or
effect or become a party to any merger, consolidation, share exchange,
business combination, recapitalization, reclassification of shares, stock
split, reverse stock split or similar transaction;
(v) form any subsidiary or acquire any equity interest or other
interest in any other Entity;
(vi) acquire, lease or license any material right or other material
asset from any other Person or sell or otherwise dispose of, or lease or
license, any material right or other material asset to any other Person
(except in each case for assets acquired, leased, licensed or disposed of
by the Company in the ordinary course of business and consistent with past
practices), or waive or relinquish any material right;
(vii) lend money to any Person, or incur or guarantee any indebtedness
(except that the Company may make routine borrowings and/or advance funds
to employees and officers in the ordinary course of business and in
accordance with past practices under its current financing facilities);
(viii) establish, adopt or amend any employee benefit plan, pay any
bonus or make any profit-sharing or similar payment to, or increase the
amount of the wages, salary, commissions, fringe benefits or other
compensation or remuneration payable to, any of its directors, officers or
employees (except for routine increases for non-officers consistent with
past practices);
(ix) change any of its methods of accounting or accounting practices
in any respect;
(x) make any Tax election;
(xi) commence or settle any Legal Proceeding;
(xii) enter into any material transaction or take any other material
action outside the ordinary course of business or inconsistent with past
practices; or
(xiii) agree or commit to take any of the actions described in clauses
"(i)" through "(xii)" of this Section 4.3(b).
(c) During the Pre-Closing Period, the Company shall promptly notify Parent
in writing of: (i) the discovery by the Company of any event, condition, fact or
circumstance that occurred or existed on or prior to the date of this Agreement
and that caused or constitutes a material inaccuracy in any representation or
warranty made by the Company in this Agreement; (ii) any event, condition, fact
or circumstance that occurs, arises or exists after the date of this Agreement
and that would cause or constitute a material inaccuracy in any representation
or warranty made by the Company in this Agreement if (A) such representation or
warranty had been made as of the time of the occurrence, existence or discovery
of such event, condition, fact or circumstance, or (B) such event, condition,
fact or circumstance had occurred, arisen or existed on or prior to the date of
this Agreement; (iii) any material breach of any covenant or obligation of the
Company; and (iv) any event, condition, fact or circumstance that would make the
timely satisfaction of any of the conditions set forth in Section 6 or Section 7
impossible or unlikely or that has had or could reasonably be expected to have a
Material Adverse Effect on the Acquired Corporations. No notification given to
Parent pursuant to this Section 4.3(c) shall limit or otherwise affect any of
the representations, warranties, covenants or obligations of the Company
contained in this Agreement.
4.4 Operation of Parent's Business; Merger Sub.
(a) During the Pre-Closing Period Parent shall: (i) ensure that each of the
Acquiring Corporations conducts its business and operations (A) in the ordinary
course and in accordance with past practices and (B) in compliance with all
applicable Legal Requirements and the requirements of all applicable material
Contracts; (ii) use all reasonable efforts to ensure that each of the Acquiring
Corporations preserves intact its current business organization, keeps available
the services of its current officers and employees and maintains its relations
and goodwill with all suppliers, customers, landlords, creditors, licensors,
licensees, employees and other Persons having business relationships with such
entity; (iii) use all reasonable efforts to keep in full force all of its
existing insurance policies; and (iv) provide all material notices, assurances
and support required by any material Contract to which any Acquiring Corporation
is a party.
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(b) Without the prior written consent of the Company, which consent shall
not be unreasonably withheld or delayed, during the Pre-Closing Period Parent
shall not, and shall not permit any of the Acquiring Corporations to:
(i) declare, accrue, set aside or pay any dividend or make any other
distribution in respect of any shares of capital stock, or repurchase,
redeem or otherwise reacquire any shares of capital stock or other
securities;
(ii) sell, issue, grant or authorize the issuance or grant of (i) any
capital stock or other security, (ii) any option, call, warrant or right to
acquire any capital stock or other security, or (iii) any instrument
convertible into or exchangeable for any capital stock or other security
(except that Parent may (x) issue Parent Common Stock upon the valid
exercise of outstanding options or warrants, (y) grant options and/or
warrants to employees and consultants consistent with past practice, and
(z) issue shares of Parent Common Stock pursuant to its existing option and
stock plans);
(iii) amend or permit the adoption of any amendment to its Articles of
Incorporation or bylaws or other charter or organizational documents, or
effect or become a party to any merger, consolidation, share exchange,
business combination, recapitalization, reclassification of shares, stock
split, reverse stock split or similar transaction;
(iv) form any subsidiary or acquire any equity interest or other
interest in any other Entity;
(v) acquire, lease or license any material right or other material
asset from any other Person or sell or otherwise dispose of, or lease or
license, any material right or other material asset to any other Person
(except in each case for assets acquired, leased, licensed or disposed of
by Parent in the ordinary course of business and consistent with past
practices), or waive or relinquish any material right;
(vi) lend money to any Person, or incur or guarantee any indebtedness
(except that Parent may make routine borrowings and/or advance funds to
employees and officers in the ordinary course of business and in accordance
with past practices under its current financing facilities);
(vii) change any of its methods of accounting or accounting practices
in any respect;
(viii) make any Tax election;
(ix) commence or settle any Legal Proceeding;
(x) enter into any material transaction or take any other material
action outside the ordinary course of business or inconsistent with past
practices; or
(xi) agree or commit to take any of the actions described in clauses
"(i)" through "(x)" of this Section 4.4(b).
(c) During the Pre-Closing Period, Parent shall promptly notify the Company
in writing of: (i) the discovery by Parent of any event, condition, fact or
circumstance that occurred or existed on or prior to the date of this Agreement
and that caused or constitutes a material inaccuracy in any representation or
warranty made by Parent in this Agreement; (ii) any event, condition, fact or
circumstance that occurs, arises or exists after the date of this Agreement and
that would cause or constitute a material inaccuracy in any representation or
warranty made by Parent in this Agreement if (A) such representation or warranty
had been made as of the time of the occurrence, existence or discovery of such
event, condition, fact or circumstance, or (B) such event, condition, fact or
circumstance had occurred, arisen or existed on or prior to the date of this
Agreement; (iii) any material breach of any covenant or obligation of Parent;
and (iv) any event, condition, fact or circumstance that would make the timely
satisfaction of any of the conditions set forth in Section 6 or Section 7
impossible or unlikely or that has had or could reasonably be expected to have a
Material Adverse Effect on the Acquiring Corporations. No notification given to
the Company pursuant to this Section 4.4(c) shall limit or otherwise affect any
of the representations, warranties, covenants or obligations of Parent contained
in this Agreement.
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(d) During the period from the date of this Agreement to the Effective
Time, Merger Sub shall not engage in any activities of any nature except as
provided in or contemplated by this Agreement. Parent shall take all actions
necessary to cause Merger Sub to perform its obligations under this Agreement
and to consummate the Merger on the terms and conditions set forth herein.
4.5 No Solicitation.
(a) The Company shall not directly or indirectly, and shall not authorize
or permit any subsidiary of the Company or any Representative of any of the
Acquired Corporations directly or indirectly to, (i) solicit, initiate,
encourage or induce the making, submission or announcement of any Acquisition
Proposal or take any action (excluding any press releases issued in connection
with the announcement of the Merger or action in compliance with the Company's
required disclosure obligations under the Exchange Act) that could reasonably be
expected to lead to an Acquisition Proposal, (ii) furnish any information
regarding any of the Acquired Corporations to any Person in connection with or
in response to an Acquisition Proposal, or (iii) engage in discussions or
negotiations with any Person with respect to any Acquisition Proposal; provided,
however, that the foregoing clauses (ii) and (iii) of this Section 4.5(a) shall
not apply following the Company's receipt of a Superior Offer submitted by any
Person if (1) neither the Company nor any Representative of any of the Acquired
Corporations shall have violated any of the restrictions set forth in this
Section 4.5, (2) the board of directors of the Company concludes in good faith,
based upon the advice of its outside legal counsel, that a response to any such
Superior Offer is required in order for the board of directors of the Company to
comply with its fiduciary obligations to the Company's stockholders under
applicable law, (3) prior to furnishing any such nonpublic information to, or
entering into discussions with, such Person, the Company gives Parent written
notice of the identity of such Person and of the Company's intention to furnish
nonpublic information to, or enter into discussions with, such Person, and the
Company receives from such Person an executed confidentiality agreement
containing customary limitations on the use and disclosure of all nonpublic
written and oral information furnished to such Person by or on behalf of the
Company, and (4) prior to furnishing any such nonpublic information to such
Person, the Company furnishes such nonpublic information to Parent (to the
extent such nonpublic information has not been previously furnished by the
Company to Parent). Without limiting the generality of the foregoing, the
Company acknowledges and agrees that any violation of any of the restrictions
set forth in the preceding sentence by any Representative of any of the Acquired
Corporations, whether or not such Representative is purporting to act on behalf
of any of the Acquired Corporations, shall be deemed to constitute a breach of
this Section 4.5 by the Company.
(b) The Company shall promptly advise Parent orally and in writing of any
Acquisition Proposal (including the identity of the Person making or submitting
such Acquisition Proposal and the terms thereof) that is made or submitted by
any Person during the Pre-Closing Period. The Company shall keep Parent fully
informed with respect to the status of any such Acquisition Proposal and any
modifications or proposed modifications thereto.
(c) The Company shall immediately cease and cause to be terminated any
existing discussions with any Person that relate to any Acquisition Proposal.
SECTION 5. Additional Covenants of the Parties
5.1 Registration Statement; Joint Proxy Statement.
(a) As promptly as practicable after the date of this Agreement, Parent
shall prepare and cause to be filed with the SEC a registration statement on
Form S-4 concerning the Parent Common Stock to be issued upon the Merger (the
"S-4 Registration Statement"), in which the Joint Proxy Statement will be
included as a prospectus, and any other documents required by the Securities Act
or the Exchange Act in connection with the Merger. Parent shall use all
reasonable efforts to cause the S-4 Registration Statement (including the Joint
Proxy Statement) to comply with the rules and regulations promulgated by the
SEC, to respond promptly to any comments of the SEC or its staff and to have the
S-4 Registration Statement declared effective under the Securities Act as
promptly as practicable after it is filed with the SEC. Parent will use all
reasonable efforts to cause the Joint Proxy Statement to be mailed to Parent's
shareholders, and the Company will use all reasonable efforts to cause the Joint
Proxy Statement to be mailed to the Company's stockholders,
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as promptly as practicable after the S-4 Registration Statement is declared
effective under the Securities Act. The Company shall promptly furnish to Parent
all information concerning the Acquired Corporations and the Company's
stockholders that may be required or reasonably requested in connection with any
action contemplated by this Section 5.1. If any event relating to any of the
Acquired Corporations occurs, or if the Company becomes aware of any information
that should be set forth in an amendment or supplement to the S-4 Registration
Statement or the Joint Proxy Statement, then the Company shall promptly inform
Parent thereof and shall cooperate with Parent in filing such amendment or
supplement with the SEC and, if appropriate, in mailing such amendment or
supplement to the stockholders of the Company.
(b) Prior to the Effective Time, Parent shall use reasonable efforts to
obtain all regulatory approvals needed to ensure that the Parent Common Stock to
be issued in the Merger will be registered or qualified under the securities law
of every jurisdiction of the United States in which any registered holder of
Company Common Stock has an address of record on the record date for determining
the stockholders entitled to notice of and to vote at the Company Stockholders'
Meeting.
5.2 Company Stockholders' Meeting.
(a) The Company shall take all action necessary under all applicable Legal
Requirements to call, give notice of, convene and duly hold a meeting of the
holders of Company Common Stock (the "Company Stockholders' Meeting") to
consider, act upon and vote upon the adoption and approval of this Agreement and
approval of the Merger. The Company Stockholders' Meeting will be held as
promptly as practicable and in any event within 45 days after the S-4
Registration Statement is declared effective under the Securities Act (which
45-day period shall be extended on a day-for-day basis if and for so long as any
stop order or other similar action is in place, pending or threatened by the
SEC).
(b) Subject to Section 5.2(c): (i) the board of directors of the Company
shall unanimously recommend that the Company's stockholders vote in favor of and
adopt and approve this Agreement and approve the Merger at the Company
Stockholders' Meeting; (ii) the Joint Proxy Statement shall include a statement
to the effect that the board of directors of the Company has unanimously
recommended that the Company's stockholders vote in favor of and adopt and
approve this Agreement and approve the Merger at the Company Stockholders'
Meeting; and (iii) neither the board of directors of the Company nor any
committee thereof shall withdraw, amend or modify, or propose or resolve to
withdraw, amend or modify, in a manner adverse to Parent, the unanimous
recommendation of the board of directors of the Company that the Company's
stockholders vote in favor of the adoption and approval this Agreement and the
approval of the Merger. For purposes of this Agreement, said recommendation of
the board of directors shall be deemed to have been modified in a manner adverse
to Parent if said recommendation shall no longer be unanimous.
(c) Nothing in Section 5.2(b) shall prevent the board of directors of the
Company from withdrawing, amending or modifying its unanimous recommendation in
favor of the Merger if (i) a Superior Offer is made to the Company and is not
withdrawn, (ii) neither the Company nor any of its Representatives shall have
violated any of the restrictions set forth in Section 4.5, and (iii) the board
of directors of the Company concludes in good faith, based upon the advice of
its outside counsel, that the withdrawal, amendment or modification of such
recommendation is required in order for the board of directors of the Company to
comply with its fiduciary obligations to the Company's stockholders under
applicable law.
5.3 Parent Shareholders' Meeting.
(a) Parent shall take all action necessary under all applicable Legal
Requirements to call, give notice of, convene and duly hold a meeting of the
holders of outstanding Parent Common Stock to consider and vote upon the
approval of the principal terms of the Merger (the "Parent Shareholders'
Meeting"). The Parent Shareholders' Meeting will be held as promptly as
practicable and in any event within 45 days after the S-4 Registration Statement
is declared effective under the Securities Act (which 45-day period shall be
extended on a day-for-day basis if and for so long as any stop order or other
similar action is in place, pending or threatened by the SEC).
(b) The board of directors of Parent shall unanimously recommend that
Parent's shareholders vote in favor of the approval of the principal terms of
the Merger; the Joint Proxy Statement shall include a statement
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to the effect that the board of directors of Parent has unanimously recommended
that Parent's shareholders vote in favor of the approval of the principal terms
of the Merger; and neither the board of directors of Parent nor any committee
thereof shall withdraw, amend or modify, or propose or resolve to withdraw,
amend or modify, in a manner adverse to the Company, the unanimous
recommendation of the board of directors of Parent that Parent's shareholders
vote in favor of the approval of the principal terms of the Merger. For purposes
of this Agreement, said recommendation of Parent's board of directors shall be
deemed to have been modified in a manner adverse to the Company if said
recommendation shall no longer be unanimous.
5.4 Regulatory Approvals. The Company and Parent shall use all reasonable
efforts to file, as soon as practicable after the date of this Agreement, all
notices, reports and other documents required to be filed with any Governmental
Body with respect to the Merger and the other transactions contemplated by this
Agreement, and to submit promptly any additional information requested by any
such Governmental Body. Without limiting the generality of the foregoing, the
Company and Parent shall, promptly after the date of this Agreement, prepare and
file the notifications required under the HSR Act in connection with the Merger.
The Company and Parent shall respond as promptly as practicable to (i) any
inquiries or requests received from the Federal Trade Commission or the
Department of Justice for additional information or documentation and (ii) any
inquiries or requests received from any state attorney general or other
Governmental Body in connection with antitrust or related matters. Each of the
Company and Parent shall (1) give the other party prompt notice of the
commencement of any Legal Proceeding by or before any Governmental Body with
respect to the Merger or any of the other transactions contemplated by this
Agreement, (2) keep the other party informed as to the status of any such Legal
Proceeding, and (3) promptly inform the other party of any communication to or
from the Federal Trade Commission, the Department of Justice or any other
Governmental Body regarding the Merger. The Company and Parent will consult and
cooperate with one another, and will consider in good faith the views of one
another, in connection with any analysis, appearance, presentation, memorandum,
brief, argument, opinion or proposal made or submitted in connection with any
Legal Proceeding under or relating to the HSR Act or any other federal or state
antitrust or fair trade law. In addition, except as may be prohibited by any
Governmental Body or by any Legal Requirement, in connection with any Legal
Proceeding under or relating to the HSR Act or any other federal or state
antitrust or fair trade law or any other similar Legal Proceeding, each of the
Company and Parent agrees to permit authorized Representatives of the other
party to be present at each meeting or conference relating to any such Legal
Proceeding and to have access to and be consulted in connection with any
document, opinion or proposal made or submitted to any Governmental Body in
connection with any such Legal Proceeding.
5.5 Stock Options; Warrants.
(a) At the Effective Time, all rights with respect to Company Common Stock
under each Company Option and Company Warrant then outstanding shall be
converted into and become rights with respect to Parent Common Stock, and Parent
shall assume each such Company Option and Company Warrant in accordance with the
terms (as in effect as of the date of this Agreement) of the stock option plan
under which it was issued (if applicable) and the stock option agreement or
warrant agreement by which it is evidenced. From and after the Effective Time,
(i) each Company Option and each Company Warrant assumed by Parent may be
exercised solely for shares of Parent Common Stock, (ii) the number of shares of
Parent Common Stock subject to each such Company Option and each such Company
Warrant shall be equal to the number of shares of Company Common Stock subject
to such Company Option or Company Warrant immediately prior to the Effective
Time multiplied by the Exchange Ratio, rounding down to the nearest whole share
(with cash, less the applicable exercise price, being payable for any fraction
of a share), (iii) the per share exercise price under each such Company Option
and each such Company Warrant shall be adjusted by dividing the per share
exercise price under such Company Option or Company Warrant by the Exchange
Ratio and rounding up to the nearest cent and (iv) any restriction on the
exercise of any such Company Option or Company Warrant shall continue in full
force and effect and the term, exercisability, vesting schedule and other
provisions of such Company Option and Company Warrant shall otherwise remain
unchanged; provided, however, that each Company Option and each Company Warrant
assumed by Parent in accordance with this Section 5.5(a) shall, in accordance
with its terms, be subject to further adjustment as appropriate to reflect any
stock split, stock dividend, reverse stock split, reclassification,
recapitalization, merger, consolidation, sale
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of all or substantially all assets or other similar transaction subsequent to
the Effective Time. Parent shall file with the SEC, promptly following the date
on which the Merger becomes effective, a Registration Statement on Form S-8
relating to the shares of Parent Common Stock issuable with respect to the
Company Options assumed by Parent in accordance with this Section 5.5(a).
(b) The Company shall terminate the 1995 Purchase Plan and all outstanding
rights to purchase shares thereunder prior to the Effective Time, and shall take
such actions as may be necessary to ensure that: (i) all outstanding rights to
purchase shares under the 1995 Purchase Plan terminate on the last trading day
preceding the date on which the Merger becomes effective; (ii) the price per
share of the Company Common Stock purchased pursuant to all such rights to
purchase shares is determined as if the "Purchase Date" under Section 8 of the
1995 Purchase Plan were the last trading day preceding the date on which the
Merger becomes effective; (iii) any shares of Company Common Stock purchased
pursuant to such rights are automatically converted as of the Effective Time
into the right to receive Parent Common Stock on the same basis as all other
outstanding shares of Company Common Stock; and (iv) the 1995 Purchase Plan
terminates immediately following the purchase of shares of Company Common Stock
pursuant to such rights.
5.6 Indemnification of Officers and Directors Prior and Following the
Effective Time.
(a) Effective as of the Effective Time Parent shall indemnify, defend and
hold harmless to the fullest extent permitted under applicable law each person
who is now or has been an officer or director of any Acquired Corporation
(individually, an "Indemnified Party" and collectively, the "Indemnified
Parties"), against all losses, claims, damages, liabilities, costs or expenses
(including reasonable attorneys' fees), judgments, fines, penalties and amounts
paid in settlement in connection with any claim, action, suit, proceeding or
investigation arising out of or pertaining to acts or omissions, or alleged acts
or omissions, by them in their capacities as such, whether commenced, asserted
or claimed before or after the Effective Time. In the event of any such claim,
action, suit, proceeding or investigation (an "Action"), (i) Parent shall pay
the reasonable fees and expenses of counsel selected by the Indemnified Party,
which counsel shall be reasonably acceptable to Parent, in advance of the final
disposition of any such Action to the full extent and under all circumstances
permitted by Delaware law as in effect on the date hereof, upon receipt of the
undertaking contemplated by Section 145(e) of the DGCL or required by applicable
law (the "Undertaking"), and (ii) Parent will direct the defense of any such
matter; provided, however, that Parent shall not be obligated pursuant to this
Section 5.6(a) to pay the fees and disbursements of more than one counsel for
all Indemnified Parties in any single Action, except to the extent that, in the
opinion of counsel for the Indemnified Parties, two or more of such Indemnified
Parties have materially conflicting interests (potential or actual) with respect
to issues material (potentially or actually) to the outcome of such Action. Any
Indemnified Party wishing to claim indemnification under this Section 5.6(a),
upon learning of any such Action, shall notify Parent (although the failure so
to notify Parent shall not relieve Parent from any liability which Parent may
have under this Section 5.6(a), except to the extent such failure materially
prejudices Parent), and shall deliver to Parent the Undertaking. Promptly
following the Effective Time, Parent shall purchase and maintain or cause the
Surviving Corporation to purchase and maintain, for a period of six (6) years
following the Effective Time, policies of directors' and officers' liability
insurance covering each person who was a director or officer of the Company at
any time prior to the Effective Time with respect to claims arising from facts
or events that occurred on or prior to the Effective Time and providing at least
the same coverage and amounts and containing terms that are no less advantageous
to the insured parties as those in effect immediately prior to the Effective
Time for officers and directors of the Company; provided, however, that in no
event shall Parent be required to obtain coverage under such policies beyond
that coverage that may be obtained at an aggregate premium cost for all such
policies for the six-year period not exceeding $120,000. The provisions of this
Section 5.6(a) are intended to be for the benefit of, and shall be enforceable
by, each Indemnified Party and each party entitled to insurance coverage under
the previous sentence hereof, respectively, and his or her heirs and legal
representatives, and shall be in addition to any other rights an Indemnified
Party may have under the certificate or articles of incorporation or bylaws of
the Surviving Corporation or any of its subsidiaries, under the DGCL, under any
indemnification agreement with any Acquired Corporation or otherwise.
(b) Further, in the event and for so long as current directors and officers
of the Company are directors and officers, as the case may be, of any Acquiring
Corporation or any Acquired Corporation, such Persons
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shall have the same rights to indemnification by Parent or otherwise for acts
and omissions occurring following the Effective Time as have other directors and
officers, as applicable, of any Acquiring Corporation or any Acquired
Corporation.
5.7 Pooling of Interests. Each of the Company and Parent agrees (a) not to
take any action during the Pre-Closing Period that would adversely affect the
ability of Parent to account for the Merger as a "pooling of interests," and
(b) to use all reasonable efforts to attempt to ensure that none of its
"affiliates" (as that term is used in Rule 145 under the Securities Act) takes
any action that could adversely affect the ability of Parent to account for the
Merger as a "pooling of interests."
5.8 Additional Agreements.
(a) Subject to Section 5.8(b), Parent and the Company shall use all
reasonable efforts to take, or cause to be taken, all actions necessary to
consummate the Merger and make effective the other transactions contemplated by
this Agreement. Without limiting the generality of the foregoing, but subject to
Section 5.8(b), each party to this Agreement shall (i) make all filings (if any)
and give all notices (if any) required to be made and given by such party in
connection with the Merger and the other transactions contemplated by this
Agreement, (ii) use all reasonable efforts to obtain each Consent (if any)
required to be obtained (pursuant to any applicable Legal Requirement or
Contract, or otherwise) by such party in connection with the Merger or any of
the other transactions contemplated by this Agreement, and (iii) use all
reasonable efforts to lift any restraint, injunction or other legal bar to the
Merger. Each party shall promptly deliver to the other, to the extent material,
a copy of each such filing made, each such notice given and each such Consent
obtained by such party during the Pre-Closing Period.
(b) Notwithstanding anything to the contrary contained in this Agreement,
neither Parent nor the Company shall have any obligation under this Agreement to
do any of the following (or cause the other to do any of the following): (i) to
dispose or cause any of its subsidiaries to dispose of any assets; (ii) to
discontinue or cause any of its subsidiaries to discontinue offering any
product; (iii) to license or otherwise make available, or cause any of its
subsidiaries to license or otherwise make available, to any Person, any
technology, software or other Proprietary Asset; (iv) to hold separate or cause
any of its subsidiaries to hold separate any assets or operations (either before
or after the Closing Date); or (v) to make or cause any of its subsidiaries to
make any commitment (to any Governmental Body or otherwise) regarding its future
operations.
5.9 Disclosure. Parent and the Company shall consult with each other
before issuing any press release or otherwise making any public statement with
respect to the Merger or any of the other transactions contemplated by this
Agreement. Without limiting the generality of the foregoing, each of Parent and
the Company shall not, and shall not permit any of its Representatives to, make
any disclosure regarding the Merger or any of the other transactions
contemplated by this Agreement unless (a) the Company and Parent shall have
approved such disclosure or (b) it shall have been advised in writing by its
outside legal counsel that such disclosure is required by applicable law.
5.10 Affiliate Agreements. The Company shall use all reasonable efforts to
cause each Person who could reasonably be deemed to be an "affiliate" of the
Company to execute and deliver to Parent, prior to the date of the mailing of
the Joint Proxy Statement to the Company's stockholders, an Affiliate Agreement
in the form of Exhibit C. Parent shall use all reasonable efforts to cause each
Person who could reasonably be deemed to be an "affiliate" of Parent to execute
and deliver to Company, prior to the date of the mailing of the Joint Proxy
Statement to the Parent's shareholders, an Affiliate Agreement in the form of
Exhibit D.
5.11 Tax Matters. The Company shall use all reasonable efforts to obtain
and deliver to Parent, as soon as practicable after the date of this Agreement,
Continuity of Interest Certificates substantially in the form of Exhibit E
signed by the Company's executive officers, directors and 5% stockholders as
reflected in the Company's most recent definitive Proxy Statement filed with the
SEC. At or prior to the Closing, the Company and Parent shall execute and
deliver to Cooley Godward LLP and to Pillsbury Madison & Sutro LLP tax
representation letters in the form of Exhibit F and Exhibit G, respectively.
Parent and the Company shall use all reasonable efforts to cause the Merger to
qualify as a tax free reorganization under Section 368(a) of the Code.
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5.12 Letters from Accountants.
(a) The Company shall cause to be delivered to Parent a letter of Ernst &
Young LLP, dated no more than two business days before the date on which the S-4
Registration Statement becomes effective (and reasonably satisfactory in form
and substance to Parent), that is customary in scope and substance for letters
delivered by independent public accountants in connection with registration
statements similar to the S-4 Registration Statement with respect to financial
information of the Company.
(b) Parent and the Company shall use all reasonable efforts to obtain
separate letters, dated on or before the Closing Date, and addressed to Parent
and the Company, respectively, to the effect that Ernst & Young LLP concurs with
Parent management's conclusions as to the appropriateness of "pooling of
interests" accounting treatment for the Merger assuming the Merger is
consummated in accordance with the terms of this Agreement.
5.13 Resignation of Company Officers and Directors; Management Structure
of Parent. The Company shall use all reasonable efforts to obtain and deliver to
Parent prior to the Closing the resignation of each officer and director of each
of the Acquired Corporations (to be effective at the Effective Time). Parent
shall use all reasonable efforts, subject to the fiduciary duties of Parent's
directors and officers, to ensure that as soon as practicable following the
Effective Time (a) the Board and management structure of Parent shall be as
described on Exhibit H and (b) Mr. Robert C. Vernon shall be elected as a member
of Parent's Board of Directors.
5.14 Parent Plans and Benefit Arrangements. The employee benefit plans and
benefit arrangements maintained by the Acquired Corporations that provide
non-discretionary, non-cash benefits to employees of the Acquired Corporations
and that are substantially similar to benefit plans and benefit arrangements
currently maintained by the Acquiring Corporations shall, to the extent
practicable, be maintained in effect by the Surviving Corporation and/or the
Acquired Corporations until the Continuing Employees (as defined in this Section
5.14) are allowed to participate in such similar benefit plans or benefit
arrangements maintained by the Acquiring Corporations (each, a "Plan"). Parent
shall use reasonable efforts to attempt to ensure that: (a) as soon as
practicable after the Effective Time, the benefit plans and benefit arrangements
applicable to the Continuing Employees will provide benefits to the Continuing
Employees that are comparable to the non-discretionary, non-cash benefits
provided to similarly situated employees of the Acquiring Corporations; (b) to
the extent practicable, any pre-existing condition limitations contained in such
health plans and health benefit arrangements for any Continuing Employee who
would be deemed under such health plans and health benefit arrangements to have
a disqualifying pre-existing condition are waived, to the extent such condition
was covered by a Plan immediately prior to the Effective Time (provided that, in
the case of disability and life insurance plans, such Continuing Employee is
actively at work and is not hospitalized or on disability leave as of the
Effective Time); and (c) to the extent practicable, such benefit plans and
benefit arrangements give full credit to each Continuing Employee for such
Continuing Employee's period of service with the Acquired Corporations prior to
the Effective Time for all purposes for which such service was recognized under
the Plans and arrangements of the Acquired Corporations prior to the Effective
Time. For purposes of this Section 5.14, "Continuing Employee" shall mean any
employee of any of the Acquired Corporations who continues as an employee of the
Surviving Corporation or any of the Acquiring Corporations after the Effective
Time.
SECTION 6. Conditions Precedent to Obligations of Parent and Merger Sub
The obligations of Parent and Merger Sub to effect the Merger and otherwise
consummate the transactions contemplated by this Agreement are subject to the
satisfaction, at or prior to the Closing, of each of the following conditions:
6.1 Accuracy of Representations.
(a) Subject to Section 6.1(c), the representations and warranties of the
Company contained in this Agreement shall have been accurate in all material
respects as of the date of this Agreement (it being understood that, for
purposes of determining the accuracy of such representations and warranties, all
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"Material Adverse Effect" qualifications and other materiality qualifications
contained in such representations and warranties shall be disregarded, except
with respect to Section 2.4).
(b) Subject to Section 6.1(c), the representations and warranties of the
Company contained in this Agreement shall be accurate in all respects as of the
Closing Date as if made on and as of the Closing Date, except that any
inaccuracies in such representations and warranties will be disregarded if the
circumstances giving rise to all such inaccuracies (considered collectively) do
not constitute, and could not reasonably be expected to result in, a Material
Adverse Effect on the Acquired Corporations (it being understood that, for
purposes of determining the accuracy of such representations and warranties, (i)
all "Material Adverse Effect" qualifications and other materiality
qualifications contained in such representations and warranties, except with
respect to Section 2.4, shall be disregarded and (ii) any update of or
modification to the Company Disclosure Schedule made or purported to have been
made after the date of this Agreement shall be disregarded).
(c) With respect to Section 2.4, notwithstanding any provision to the
contrary in this Section 6.1, both (i) any effect or consequence of any public
announcement by the parties relating to the Merger or this Agreement, and (ii)
any fluctuation in the market price of the Company's Common Stock, in and of
itself, shall be excluded from any assessment or determination of a Material
Adverse Effect on the Acquired Corporations.
6.2 Performance of Covenants. Each covenant or obligation that the Company
is required to comply with or to perform at or prior to the Closing shall have
been complied with and performed in all material respects.
6.3 Effectiveness of Registration Statement. The S-4 Registration
Statement shall have become effective in accordance with the provisions of the
Securities Act, and no stop order shall have been issued by the SEC with respect
to the S-4 Registration Statement.
6.4 Stockholder Approval. This Agreement shall have been duly adopted and
approved and the Merger shall have been duly approved by the Required Company
Stockholder Vote, and the principal terms of the Merger shall have been duly
approved by the Required Parent Shareholder Vote.
6.5 Agreements and Documents. Parent shall have received the following
agreements and documents, each of which shall be in full force and effect:
(a) Affiliate Agreements in the form of Exhibit C, executed by each
Person who could reasonably be deemed to be an "affiliate" of the Company
(as that term is used in Rule 145 under the Securities Act);
(b) Continuity of Interest Certificates substantially in the form of
Exhibit E, executed by the Company's executive officers, directors and 5%
stockholders as reflected in the Company's most recent definitive Proxy
Statement filed with the SEC;
(c) Employment Agreements in the form of Exhibit I, executed by the
individuals identified on Exhibit J;
(d) Noncompetition Agreements in the form of Exhibit K, executed by
the individuals identified on Exhibit J;
(e) a letter from Ernst & Young LLP, dated as of the Closing Date and
addressed to Parent, reasonably satisfactory in form and substance to
Parent, updating the letter referred to in Section 5.12(a);
(f) separate letters from Ernst & Young LLP, dated as of the Closing
Date and addressed to Parent and the Company, respectively, to the effect
that Ernst & Young LLP concurs with Parent management's conclusions as to
the appropriateness of "pooling of interests" accounting treatment for the
Merger;
(g) a legal opinion of Pillsbury Madison & Sutro LLP, dated as of the
Closing Date, in the form of Exhibit L, as well as one or more opinions of
counsel for Acquired Corporations other than the Company as may be
reasonably requested by Parent, all in a form reasonably satisfactory to
Parent;
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(h) a legal opinion of Cooley Godward LLP, dated as of the Closing
Date and addressed to Parent, to the effect that the Merger will constitute
a reorganization within the meaning of Section 368 of the Code (it being
understood that, in rendering such opinion, Cooley Godward LLP may rely
upon the Continuity of Interest Certificates and tax representation letters
referred to in Section 5.11);
(i) a certificate executed on behalf of the Company by its Chief
Executive Officer confirming that the conditions set forth in Sections 6.1,
6.2 and 6.4 (to the extent it relates to the Required Company Stockholder
Vote) have been duly satisfied; and
(j) the written resignations of all officers and directors of the
Company, effective as of the Effective Time.
6.6 HSR Act. The waiting period applicable to the consummation of the
Merger under the HSR Act shall have expired or been terminated.
6.7 Nasdaq National Market. The shares of Parent Common Stock to be issued
in the Merger shall have been approved for quotation (subject to notice of
issuance) on the Nasdaq National Market.
6.8 No Restraints. No temporary restraining order, preliminary or
permanent injunction or other order preventing the consummation of the Merger
shall have been issued by any court of competent jurisdiction and remain in
effect, and there shall not be any Legal Requirement enacted or deemed
applicable to the Merger that makes consummation of the Merger illegal.
6.9 Consents. All material Consents required to be obtained by any
Acquired Corporation in connection with the Merger and the other transactions
contemplated by this Agreement (including the Consents identified in the Company
Disclosure Schedule) shall have been obtained and shall be in full force and
effect.
6.10 Employees. None of the individuals identified on Exhibit J shall have
ceased to be employed by the Company, or shall have expressed an intention to
terminate his or her employment with the Company or to decline to accept
employment with Parent.
6.11 No Governmental Litigation. There shall not be pending or threatened
any Legal Proceeding in which a Governmental Body is or is threatened to become
a party or is otherwise involved: (a) challenging or seeking to restrain or
prohibit the consummation of the Merger or any of the other transactions
contemplated by this Agreement; (b) relating to the Merger and seeking to obtain
from Parent or any of its subsidiaries any damages that may be material to
Parent; (c) seeking to prohibit or limit in any material respect Parent's
ability to vote, receive dividends with respect to or otherwise exercise
ownership rights with respect to the stock of the Surviving Corporation; or (d)
which would materially and adversely affect the right of Parent, the Surviving
Corporation or any subsidiary of Parent to own the assets or operate the
business of the Company.
6.12 No Other Litigation. There shall not be pending any Legal Proceeding
in which there is a reasonable possibility of an outcome that would have a
Material Adverse Effect on the Acquired Corporations or on Parent: (a)
challenging or seeking to restrain or prohibit the consummation of the Merger or
any of the other transactions contemplated by this Agreement; (b) relating to
the Merger and seeking to obtain from Parent or any of its subsidiaries any
damages that may be material to Parent; (c) seeking to prohibit or limit in any
material respect Parent's ability to vote, receive dividends with respect to or
otherwise exercise ownership rights with respect to the stock of the Surviving
Corporation; or (d) which would affect adversely the right of Parent, the
Surviving Corporation or any subsidiary of Parent to own the assets or operate
the business of the Company.
6.13 No Burdensome Condition. There shall not have been any action taken,
or any Legal Requirement or order enacted, entered, enforced or deemed
applicable to the Merger by any Governmental Body which, in connection with the
grant of any Governmental Authorization, imposes any restriction, condition or
obligation upon Parent or upon the Company or the Surviving Corporation which
could have a Material Adverse Effect on the Surviving Corporation or the
economic or business benefits of the transactions contemplated by this
Agreement.
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SECTION 7. Conditions Precedent to Obligation of the Company
The obligation of the Company to effect the Merger and otherwise consummate
the transactions contemplated by this Agreement are subject to the satisfaction,
at or prior to the Closing, of the following conditions:
7.1 Accuracy of Representations.
(a) Subject to Section 7.1(c), the representations and warranties of Parent
and Merger Sub contained in this Agreement shall have been accurate in all
material respects as of the date of this Agreement (it being understood that,
for purposes of determining the accuracy of such representations and warranties,
all "Material Adverse Effect" qualifications and other materiality
qualifications contained in such representations and warranties shall be
disregarded, except with respect to Section 3.4).
(b) Subject to Section 7.1(c), the representations and warranties of Parent
and Merger Sub contained in this Agreement shall be accurate in all respects as
of the Closing Date as if made on and as of the Closing Date, except that any
inaccuracies in such representations and warranties will be disregarded if the
circumstances giving rise to all such inaccuracies (considered collectively) do
not constitute, and could not reasonably be expected to result in, a Material
Adverse Effect on the Acquiring Corporations (it being understood that, for
purposes of determining the accuracy of such representations and warranties, (i)
all "Material Adverse Effect" qualifications and other materiality
qualifications contained in such representations and warranties, except with
respect to Section 3.4, shall be disregarded and (ii) any update of or
modification to the Parent Disclosure Schedule made or purported to have been
made after the date of this Agreement shall be disregarded).
(c) With respect to Section 3.4, notwithstanding any provision to the
contrary in this Section 7.1, both (i) any effect or consequence of any public
announcement by the parties relating to the Merger or this Agreement, and (ii)
any fluctuation in the market price of Parent's Common Stock, in and of itself,
shall be excluded from any assessment or determination of a Material Adverse
Effect on the Acquiring Corporations.
7.2 Performance of Covenants. Each covenant and obligation that Parent and
Merger Sub is required to comply with or to perform at or prior to the Closing
shall have been complied with and performed in all material respects.
7.3 Effectiveness of Registration Statement. The S-4 Registration
Statement shall have become effective in accordance with the provisions of the
Securities Act, and no stop order shall have been issued by the SEC with respect
to the S-4 Registration Statement.
7.4 Stockholder Approval. This Agreement shall have been duly adopted and
approved and the Merger shall have been duly approved by the Required Company
Stockholder Vote, and the principal terms of the Merger shall have been duly
approved by the Required Parent Shareholder Vote.
7.5 Agreements and Documents. The Company shall have received the
following agreements and documents, each of which shall be in full force and
effect:
(a) Affiliate Agreements in the form of Exhibit D, executed by each
Person who could reasonably be deemed to be an "affiliate" of Parent (as
that term is used in Rule 145 under the Securities Act);
(b) Employment Agreements in the form of Exhibit I, executed by Parent
with respect to the individuals identified on Exhibit J;
(c) Noncompetition Agreements in the form of Exhibit K, executed by
Parent with respect to the individuals identified on Exhibit J;
(d) separate letters from Ernst & Young LLP, dated as of the Closing
Date and addressed to Parent and the Company, respectively, to the effect
that Ernst & Young LLP concurs with Parent management's conclusions as to
the appropriateness of "pooling of interests" accounting treatment for the
Merger;
(e) a legal opinion of Cooley Godward LLP, dated as of the Closing
Date, in the form of Exhibit M;
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(f) a legal opinion of Pillsbury Madison & Sutro LLP, dated as of the
Closing Date, to the effect that the Merger will constitute a
reorganization within the meaning of Section 368 of the Code (it being
understood that, in rendering such opinion, Pillsbury Madison & Sutro LLP
may rely upon the Continuity of Interest Certificates and tax
representation letters referred to in Section 5.11); provided, however,
that if such counsel does not render such opinion, this condition shall
nonetheless be deemed to be satisfied with respect to the Company if Cooley
Godward LLP renders such opinion to the Company; and
(g) a certificate executed on behalf of Parent by an executive officer
of Parent, confirming that the conditions set forth in Sections 7.1, 7.2
and 7.4 (to the extent it relates to the Required Parent Shareholder Vote)
have been duly satisfied.
7.6 HSR Act. The waiting period applicable to the consummation of the
Merger under the HSR Act shall have expired or been terminated.
7.7 Nasdaq National Market. The shares of Parent Common Stock to be issued
in the Merger shall have been approved for quotation (subject to notice of
issuance) on the Nasdaq National Market.
7.8 No Restraints. No temporary restraining order, preliminary or
permanent injunction or other order preventing the consummation of the Merger
shall have been issued by any court of competent jurisdiction and remain in
effect, and there shall not be any Legal Requirement enacted or deemed
applicable to the Merger that makes consummation of the Merger illegal.
7.9 Consents. All material Consents required to be obtained by any
Acquiring Corporation in connection with the Merger and the other transactions
contemplated by this Agreement (including the Consents identified in the Parent
Disclosure Schedule) shall have been obtained and shall be in full force and
effect.
7.10 No Governmental Litigation. There shall not be pending or threatened
any Legal Proceeding in which a Governmental Body is or is threatened to become
a party or is otherwise involved: (a) challenging or seeking to restrain or
prohibit the consummation of the Merger or any of the other transactions
contemplated by this Agreement; (b) relating to the Merger and seeking to obtain
from Parent or any of its subsidiaries any damages that may be material to
Parent; or (c) which would materially and adversely affect the right of Parent,
the Surviving Corporation or any subsidiary of Parent to own the assets or
operate the business of the Company.
7.11 No Other Litigation. There shall not be pending any Legal Proceeding
in which there is a reasonable possibility of an outcome that would have a
Material Adverse Effect on the Acquiring Corporations: (a) challenging or
seeking to restrain or prohibit the consummation of the Merger or any of the
other transactions contemplated by this Agreement; (b) relating to the Merger
and seeking to obtain from Parent or any of its subsidiaries any damages that
may be material to Parent; or (c) which would affect adversely the right of
Parent, the Surviving Corporation or any subsidiary of Parent to own the assets
or operate the business of the Company.
7.12 No Burdensome Condition. There shall not have been any action taken,
or any Legal Requirement or order enacted, entered, enforced or deemed
applicable to the Merger by any Governmental Body which, in connection with the
grant of any Governmental Authorization, imposes any restriction, condition or
obligation upon the Company or upon Parent or the Surviving Corporation which
could have a Material Adverse Effect on the Surviving Corporation or the
economic or business benefits of the transactions contemplated by this
Agreement.
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SECTION 8. Termination
8.1 Termination. This Agreement may be terminated prior to the Effective
Time (whether before or after adoption and approval of the Agreement and the
approval of the Merger by the Required Company Stockholder Vote and whether
before or after approval of the principal terms of the Merger by the Required
Parent Shareholder Vote):
(a) by mutual written consent of Parent and the Company;
(b) [Reserved.]
(c) [Reserved.]
(d) by either Parent or the Company if the Merger shall not have been
consummated by December 31, 1997 (unless the failure to consummate the
Merger is attributable to a failure on the part of the party seeking to
terminate this Agreement to perform any material obligation required to be
performed by such party at or prior to the Effective Time);
(e) by either Parent or the Company if a court of competent
jurisdiction or other Governmental Body shall have issued a final and
nonappealable order, decree or ruling, or shall have taken any other
action, having the effect of permanently restraining, enjoining or
otherwise prohibiting the Merger;
(f) by either Parent or the Company if (i) the Company Stockholders'
Meeting shall have been held and a final vote of the Company's stockholders
on a proposal to adopt and approve the Agreement and to approve the Merger
shall have been taken thereat and (ii) this Agreement and the Merger shall
not have been so adopted and approved at such meeting as provided herein by
the Required Company Stockholder Vote; provided, however, that the Company
shall not be permitted to terminate this Agreement pursuant to this Section
8.1(f) if the failure of the Company's stockholders to adopt and approve
this Agreement and approve the Merger at the Company Stockholders' Meeting
is attributable to a failure on the part of the Company to perform any
material obligation required to have been performed by the Company under
this Agreement; and provided, further, that the Company may so terminate
this Agreement only following its compliance with Sections 8.3(d) and
8.3(e);
(g) by either Parent or the Company if (i) the Parent Shareholders'
Meeting shall have been held and a final vote of Parent's shareholders on a
proposal to approve the principal terms of the Merger shall have been taken
thereat and (ii) the principal terms of the Merger shall not have been
approved at such meeting by the Required Parent Shareholder Vote; provided,
however, that Parent shall not be permitted to terminate this Agreement
pursuant to this Section 8.1(g) if the failure of Parent's shareholders to
approve the principal terms of the Merger at the Parent Shareholders'
Meeting is attributable to a failure on the part of Parent to perform any
material obligation required to have been performed by Parent under this
Agreement; and provided, further, that Parent may so terminate this
Agreement only following its compliance with Sections 8.3(b) and 8.3(c);
(h) by Parent or the Company at any time after the date of the Parent
Shareholders' Meeting if at the Parent Shareholders' Meeting, holders of
five percent or more of the shares of Parent Common Stock outstanding on
the date for the determination of shareholders of Parent entitled to vote
on the approval of the principal terms of the Merger shall have both voted
against such approval and demanded dissenters' rights in compliance with
Section 1301 of the California Corporations Code; provided, however, that
Parent may so terminate this Agreement only following its compliance with
Sections 8.3(b) and 8.3(c); and, provided further, that the Company may so
terminate this Agreement only following its compliance with Sections 8.3(d)
and 8.3(e);
(i) by Parent or the Company (at any time prior to the adoption and
approval of this Agreement and approval of the Merger by the Required
Company Stockholder Vote) if a Company Triggering Event shall have
occurred;
(j) [Reserved.]
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(k) by Parent if any of the Company's representations and warranties
contained in this Agreement shall be or shall have become materially
inaccurate, or if any of the Company's covenants contained in this
Agreement shall have been breached in any material respect; provided,
however, that if an inaccuracy in the Company's representations and
warranties or a breach of a covenant by the Company is curable by the
Company and the Company is continuing to exercise all reasonable efforts to
cure such inaccuracy or breach, then Parent may not terminate this
Agreement under this Section 8.1(k) on account of such inaccuracy or breach
unless the inaccuracy or breach is not cured within 30 days of notice
thereof delivered by Parent to the Company; or
(l) by the Company if any of Parent's representations and warranties
contained in this Agreement shall be or shall have become materially
inaccurate, or if any of Parent's covenants contained in this Agreement
shall have been breached in any material respect; provided, however, that
if an inaccuracy in Parent's representations and warranties or a breach of
a covenant by Parent is curable by Parent and Parent is continuing to
exercise all reasonable efforts to cure such inaccuracy or breach, then the
Company may not terminate this Agreement under this Section 8.1(l) on
account of such inaccuracy or breach unless the inaccuracy or breach is not
cured within 30 days of notice thereof delivered by the Company to Parent.
8.2 Effect of Termination. In the event of the termination of this
Agreement as provided in Section 8.1, this Agreement shall be of no further
force or effect; provided, however, that (i) this Section 8.2, Section 8.3 and
Section 9 shall survive the termination of this Agreement and shall remain in
full force and effect, and (ii) the termination of this Agreement shall not
relieve any party from any liability for any breach of any representation,
warranty or covenant contained in this Agreement.
8.3 Expenses; Termination Fees.
(a) Except as set forth in this Section 8.3, all fees and expenses incurred
in connection with this Agreement and the transactions contemplated by this
Agreement shall be paid by the party incurring such expenses, whether or not the
Merger is consummated; provided, however, that Parent and the Company shall
share equally all fees and expenses, other than attorneys' fees, incurred in
connection with (i) the printing and filing of the S-4 Registration Statement
and the Joint Proxy Statement and any amendments or supplements thereto and (ii)
the filing of the premerger notification and report forms, if necessary,
relating to the Merger under the HSR Act.
(b) If this Agreement is terminated (i) by Parent pursuant to Section
8.1(h); or (ii) by Parent or the Company pursuant to Section 8.1(g), then Parent
shall pay to the Company, in cash (at the time specified in Section 8.3(c)), a
nonrefundable fee in the amount of $1,500,000.
(c) In the case of termination of this Agreement by Parent pursuant to
Section 8.1(g) or Section 8.1(h), the fee referred to in Section 8.3(b) shall be
paid by Parent prior to such termination; and in the case of termination of this
Agreement by the Company pursuant to Section 8.1(g), the fee referred to in
Section 8.3(b) shall be paid by Parent within one business day after such
termination.
(d) If this Agreement is terminated (i) by the Company pursuant to Section
8.1(h); or (ii) by Parent or the Company pursuant to Section 8.1(f) or Section
8.1(i), then the Company shall pay to Parent, in cash (at the time specified in
Section 8.3(e)), a nonrefundable fee in the amount of $1,500,000.
(e) In the case of termination of this Agreement by the Company pursuant to
Section 8.1(f), Section 8.1(h) or Section 8.1(i), the fee referred to in Section
8.3(d) shall be paid by the Company prior to such termination; and in the case
of termination of this Agreement by Parent pursuant to Section 8.1(f) or Section
8.1(i), the fee referred to in Section 8.3(d) shall be paid by the Company
within one business day after such termination.
SECTION 9. Miscellaneous Provisions
9.1 Amendment. This Agreement may be amended with the approval of the
respective boards of directors of the Company and Parent at any time (whether
before or after adoption and approval of this
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Agreement and approval of the Merger by the stockholders of the Company; and
whether before or after approval of principal terms of the Merger by Parent's
shareholders); provided, however, that (i) after any such adoption and approval
of this Agreement and approval of the Merger by the Company's stockholders, no
amendment shall be made which by law or NASD regulation requires further
approval of the stockholders of the Company without the further approval of such
stockholders, and (ii) after any such approval of the principal terms of the
Merger by Parent's shareholders, no amendment shall be made which by law or NASD
regulation requires further approval of Parent's shareholders without the
further approval of such shareholders. This Agreement may not be amended except
by an instrument in writing signed on behalf of each of the parties hereto.
9.2 Waiver.
(a) No failure on the part of any party to exercise any power, right,
privilege or remedy under this Agreement, and no delay on the part of any party
in exercising any power, right, privilege or remedy under this Agreement, shall
operate as a waiver of such power, right, privilege or remedy; and no single or
partial exercise of any such power, right, privilege or remedy shall preclude
any other or further exercise thereof or of any other power, right, privilege or
remedy.
(b) No party shall be deemed to have waived any claim arising out of this
Agreement, or any power, right, privilege or remedy under this Agreement, unless
the waiver of such claim, power, right, privilege or remedy is expressly set
forth in a written instrument duly executed and delivered on behalf of such
party; and any such waiver shall not be applicable or have any effect except in
the specific instance in which it is given.
9.3 No Survival of Representations and Warranties. None of the
representations and warranties contained in this Agreement or in any certificate
delivered pursuant to this Agreement shall survive the Merger.
9.4 Entire Agreement; Counterparts; Applicable Law. This Agreement and the
other agreements referred to herein (and the confidentiality letters executed by
each of Parent and the Company as of June 24, 1997) constitute the entire
agreement and supersede all prior agreements and understandings, both written
and oral, among or between any of the parties with respect to the subject matter
hereof and thereof. This Agreement may be executed in several counterparts, each
of which shall be deemed an original and all of which shall constitute one and
the same instrument, and shall be governed in all respects by the laws of the
State of California as applied to contracts entered into and to be performed
entirely within California.
9.5 Attorneys' Fees. In any action at law or suit in equity to enforce
this Agreement or the rights of any of the parties hereunder, the prevailing
party in such action or suit shall be entitled to receive a reasonable sum for
its attorneys' fees and all other reasonable costs and expenses incurred in such
action or suit.
9.6 Assignability. Neither this Agreement nor any portion hereof shall be
assignable (whether by operation of law or otherwise and including, for this
purpose, a change in control as an assignment). Except as set forth in Section
1.7 with respect to the stockholders of the Company, Section 5.5 with respect to
the holders of Company Options and Company Warrants, and Section 5.6 with
respect to the persons identified therein (with each of the foregoing intended
as a third party beneficiary of the corresponding referenced Section of this
Agreement), nothing in this Agreement, express or implied, is intended to or
shall confer upon any Person any right, benefit or remedy of any nature
whatsoever under or by reason of this Agreement.
9.7 Notices. Any notice or other communication required or permitted to be
delivered to any party under this Agreement shall be in writing and shall be
deemed properly delivered, given and received when delivered (by hand, by
registered mail, by courier or express delivery service or by facsimile) to the
address or facsimile telephone number set forth beneath the name of such party
below (or to such other address or
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facsimile telephone number as such party shall have specified in a written
notice given to the other parties hereto):
IF TO PARENT:
DataWorks Corporation
5910 Pacific Center Boulevard
San Diego, CA 92121
Attn: Stuart W. Clifton
IF TO MERGER SUB:
DataWorks Acquisition Sub, Inc.
5910 Pacific Center Boulevard
San Diego, CA 92121
Attn: Stuart W. Clifton
IF TO THE COMPANY:
Interactive Group, Inc.
5095 Murphy Canyon Road
San Diego, CA 92123
Attn: Robert C. Vernon
9.8 Construction.
(a) For purposes of this Agreement, whenever the context requires: the
singular number shall include the plural, and vice versa; the masculine gender
shall include the feminine and neuter genders; the feminine gender shall include
the masculine and neuter genders; and the neuter gender shall include masculine
and feminine genders.
(b) The parties hereto agree that any rule of construction to the effect
that ambiguities are to be resolved against the drafting party shall not be
applied in the construction or interpretation of this Agreement.
(c) As used in this Agreement, the words "include" and "including," and
variations thereof, shall not be deemed to be terms of limitation, but rather
shall be deemed to be followed by the words "without limitation."
(d) Except as otherwise indicated, all references in this Agreement to
"Sections" and "Exhibits" are intended to refer to Sections of this Agreement
and Exhibits to this Agreement.
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IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
as of the date first above written.
DATAWORKS CORPORATION
By: /s/ STUART W. CLIFTON
------------------------------------
Stuart W. Clifton
President and Chief Executive
Officer
DATAWORKS ACQUISITION SUB, INC.
By: /s/ STUART W. CLIFTON
------------------------------------
Stuart W. Clifton
President and Chief Executive
Officer
INTERACTIVE GROUP, INC.
By: /s/ ROBERT C. VERNON
------------------------------------
Robert C. Vernon
Chief Executive Officer
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EXHIBIT A
CERTAIN DEFINITIONS
For purposes of the Agreement (including this Exhibit A):
Acquired Corporation Contract. "Acquired Corporation Contract" shall mean
any Contract: (a) to which any of the Acquired Corporations is a party; (b) by
which any of the Acquired Corporations or any asset of any of the Acquired
Corporations is or may become bound or under which any of the Acquired
Corporations has, or may become subject to, any obligation; or (c) under which
any of the Acquired Corporations has or may acquire any right or interest.
Acquiring Corporation Contract. "Acquiring Corporation Contract" shall mean
any Contract: (a) to which any of the Acquiring Corporations is a party; (b) by
which any of the Acquiring Corporations or any asset of any of the Acquiring
Corporations is or may become bound or under which any of the Acquiring
Corporations has, or may become subject to, any obligation; or (c) under which
any of the Acquiring Corporations has or may acquire any right or interest.
Acquisition Proposal. "Acquisition Proposal" shall mean any offer, proposal
or inquiry (other than an offer, proposal or inquiry by Parent) contemplating or
otherwise relating to any Acquisition Transaction.
Acquisition Transaction. "Acquisition Transaction" shall mean any
transaction or series of related transactions involving:
(a) any merger, consolidation, share exchange, business combination,
issuance of securities, acquisition of securities, tender offer, exchange
offer or other similar transaction (i) in which the Company is a
constituent corporation, (ii) in which a Person or "group" (as defined in
the Exchange Act and the rules promulgated thereunder) of Persons directly
or indirectly acquires the Company or more than 50% of the Company's
business or directly or indirectly acquires beneficial or record ownership
of securities representing more than 20% of the outstanding securities of
any class of voting securities of the Company, or (iii) in which the
Company issues securities representing more than 20% of the outstanding
securities of any class of voting securities of the Company; or
(b) any sale, lease (other than in the ordinary course of business),
exchange, transfer, license (other than in the ordinary course of
business), acquisition or disposition of more than 50% of the assets of the
Company, or any liquidation or dissolution of the Company.
Agreement. "Agreement" shall mean the Agreement and Plan of Merger and
Reorganization to which this Exhibit A is attached, as it may be amended from
time to time.
Company Common Stock. "Company Common Stock" shall mean the Common Stock,
$0.001 par value per share, of the Company.
Company Triggering Event. A "Company Triggering Event" shall be deemed to
have occurred if: (i) the board of directors of the Company shall have failed to
recommend, or shall for any reason have withdrawn or shall have amended or
modified in a manner adverse to Parent its unanimous recommendation in favor of,
the adoption and approval of this Agreement or the approval of the Merger; (ii)
the Company shall have failed to include in the Joint Proxy Statement the
unanimous recommendation of the board of directors of the Company in favor of
adoption and approval of this Agreement and approval of the Merger; (iii) the
board of directors of the Company shall have approved, endorsed or recommended
any Acquisition Proposal; (iv) the Company shall have entered into any letter of
intent or similar document or any Contract relating to any Acquisition Proposal;
(v) the Company shall have failed to hold the Company Stockholders' Meeting as
promptly as practicable and in any event within 45 days after the S-4
Registration Statement is declared effective under the Securities Act (which
45-day period shall be extended on a day-for-day basis if and for so long as any
stop order or other similar action is in place, pending or threatened by the
SEC); (vi) a tender or exchange offer relating to securities of the Company
shall have been commenced and the Company shall not have sent to its
securityholders, within five business days after the commencement of such tender
or exchange offer, a statement disclosing that the Company recommends rejection
of such tender or exchange offer; or
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(vii) an Acquisition Proposal is publicly announced, and the Company (A) fails
to issue a press release announcing its opposition to such Acquisition Proposal
within five business days after such Acquisition Proposal is announced or (B)
otherwise fails to actively oppose such Acquisition Proposal.
Consent. "Consent" shall mean any approval, consent, ratification,
permission, waiver or authorization (including any Governmental Authorization).
Contract. "Contract" shall mean any written, oral or other agreement,
contract, subcontract, lease, understanding, instrument, note, option, warranty,
purchase order, license, sublicense, insurance policy, benefit plan or legally
binding commitment or undertaking of any nature.
Encumbrance. "Encumbrance" shall mean any lien, pledge, hypothecation,
charge, mortgage, security interest, encumbrance, claim, infringement,
interference, option, right of first refusal, preemptive right, community
property interest or restriction of any nature (including any restriction on the
voting of any security, any restriction on the transfer of any security or other
asset, any restriction on the receipt of any income derived from any asset, any
restriction on the use of any asset and any restriction on the possession,
exercise or transfer of any other attribute of ownership of any asset).
Entity. "Entity" shall mean any corporation (including any non-profit
corporation), general partnership, limited partnership, limited liability
partnership, joint venture, estate, trust, company (including any limited
liability company or joint stock company), firm or other enterprise,
association, organization or entity.
Exchange Act. "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
Governmental Authorization. "Governmental Authorization" shall mean any:
(a) permit, license, certificate, franchise, permission, clearance,
registration, qualification or authorization issued, granted, given or otherwise
made available by or under the authority of any Governmental Body or pursuant to
any Legal Requirement; or (b) right under any Contract with any Governmental
Body.
Governmental Body. "Governmental Body" shall mean any: (a) nation, state,
commonwealth, province, territory, county, municipality, district or other
jurisdiction of any nature; (b) federal, state, local, municipal, foreign or
other government; or (c) governmental or quasi-governmental authority of any
nature (including any governmental division, department, agency, commission,
instrumentality, official, organization, unit, body or Entity and any court or
other tribunal).
HSR Act. "HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended.
Joint Proxy Statement. "Joint Proxy Statement" shall mean the joint proxy
statement/prospectus to be sent to the Company's stockholders in connection with
the Company Stockholders' Meeting and to Parent's shareholders in connection
with the Parent Shareholders' Meeting.
Legal Proceeding. "Legal Proceeding" shall mean any action, suit,
litigation, arbitration, proceeding (including any civil, criminal,
administrative, investigative or appellate proceeding), hearing, inquiry, audit,
examination or investigation commenced, brought, conducted or heard by or
before, or otherwise involving, any court or other Governmental Body or any
arbitrator or arbitration panel.
Legal Requirement. "Legal Requirement" shall mean any federal, state,
local, municipal, foreign or other law, statute, constitution, principle of
common law, resolution, ordinance, code, edict, decree, rule, regulation, ruling
or requirement issued, enacted, adopted, promulgated, implemented or otherwise
put into effect by or under the authority of any Governmental Body.
Material Adverse Effect. An event, violation, inaccuracy, circumstance or
other matter will be deemed to have a "Material Adverse Effect" on the Acquired
Corporations if such event, violation, inaccuracy, circumstance or other matter
(considered together with all other matters that would constitute exceptions to
the representations and warranties set forth in the Agreement but for the
presence of "Material Adverse Effect" or other materiality qualifications, or
any similar qualifications, in such representations and warranties) would have a
material adverse effect on the business, condition, assets, liabilities,
operations or financial performance of the Acquired Corporations taken as a
whole. An event, violation, inaccuracy, circumstance or
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other matter will be deemed to have a "Material Adverse Effect" on the Acquiring
Corporations if such event, violation, inaccuracy, circumstance or other matter
(considered together with all other matters that would constitute exceptions to
the representations and warranties set forth in the Agreement but for the
presence of "Material Adverse Effect" or other materiality qualifications, or
any similar qualifications, in such representations and warranties) would have a
material adverse effect on the business, condition, assets, liabilities,
operations or financial performance of the Acquiring Corporations taken as a
whole.
Parent Common Stock. "Parent Common Stock" shall mean the Common Stock, no
par value per share, of Parent.
Person. "Person" shall mean any individual, Entity or Governmental Body.
Proprietary Asset. "Proprietary Asset" shall mean any: (a) patent, patent
application, trademark (whether registered or unregistered), trademark
application, trade name, fictitious business name, service mark (whether
registered or unregistered), service mark application, copyright (whether
registered or unregistered), copyright application, maskwork, maskwork
application, trade secret, know-how, customer list, franchise, system, computer
software, computer program, source code, algorithm, invention, design,
blueprint, engineering drawing, proprietary product, technology, proprietary
right or other intellectual property right or intangible asset; or (b) right to
use or exploit any of the foregoing.
Representatives. "Representatives" shall mean officers, directors,
employees, agents, attorneys, accountants, advisors and representatives.
SEC. "SEC" shall mean the United States Securities and Exchange Commission.
Securities Act. "Securities Act" shall mean the Securities Act of 1933, as
amended.
Superior Offer. "Superior Offer" shall mean an unsolicited, bona fide
written offer made by a third party to purchase more than 50% of the outstanding
Company Common Stock on terms that the board of directors of the Company
determines in its reasonable judgment, based upon the written advice of its
financial advisor, to be more favorable to the Company's stockholders than the
terms of the Merger; provided, however, that if any financing is required to
consummate the transaction contemplated by such offer, then such offer shall not
be deemed to be a "Superior Offer" unless (i) such third party shall have
received a financing commitment pursuant to which another third party has
committed to provide the required financing to such third party and Parent shall
have been furnished with a copy of such financing commitment, and (ii) the
required financing is reasonably capable of being obtained by such third party.
Tax. "Tax" shall mean any tax (including any income tax, franchise tax,
capital gains tax, gross receipts tax, value-added tax, surtax, excise tax, ad
valorem tax, transfer tax, stamp tax, sales tax, use tax, property tax, business
tax, withholding tax or payroll tax), levy, assessment, tariff, duty (including
any customs duty), deficiency or fee, and any related charge or amount
(including any fine, penalty or interest), imposed, assessed or collected by or
under the authority of any Governmental Body.
Tax Return. "Tax Return" shall mean any return (including any information
return), report, statement, declaration, estimate, schedule, notice,
notification, form, election, certificate or other document or information filed
with or submitted to, or required to be filed with or submitted to, any
Governmental Body in connection with the determination, assessment, collection
or payment of any Tax or in connection with the administration, implementation
or enforcement of or compliance with any Legal Requirement relating to any Tax.
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APPENDIX B
LEHMAN BROTHERS
July 31, 1997
Board of Directors
DataWorks Corporation
5910 Pacific Center Boulevard
Suite 300
San Diego, CA 92121
Members of the Board:
We understand that the Board of Directors of DataWorks Corporation
("DataWorks" or the "Company") is considering a potential merger with
Interactive Group, Inc. ("Interactive") (the "Proposed Transaction") pursuant to
which a wholly-owned subsidiary of DataWorks will be merged with Interactive and
all outstanding shares of common stock of Interactive will be exchanged for
shares of common stock of DataWorks at an exchange ratio of 0.8054 shares of
DataWorks common stock for each share of Interactive common stock (the "Exchange
Ratio"). We further understand that all outstanding options and warrants to
purchase shares of common stock of Interactive will be exchanged for options and
warrants to purchase shares of common stock of DataWorks at the Exchange Ratio.
The terms and conditions of the Proposed Transaction are set forth in more
detail in the Agreement and Plan of Merger to be dated July 31, 1997 between
DataWorks and Interactive (the "Agreement").
We have been requested by the Board of Directors of the Company to render
our opinion with respect to the fairness, from a financial point of view, to the
Company of the Exchange Ratio to be offered in the Proposed Transaction. We have
not been requested to opine as to, and our opinion does not in any manner
address, the Company's underlying business decision to proceed with or effect
the Proposed Transaction.
In arriving at our opinion, we reviewed and analyzed: (1) the Agreement and
the specific terms of the Proposed Transaction, (2) publicly available
information concerning the Company and Interactive that we believe to be
relevant to our analysis, (3) financial and operating information with respect
to the business, operations and prospects of the Company and Interactive
furnished to us by the Company and Interactive, (4) a trading history of the
Company's common stock from October 27, 1995 (the date of DataWorks' initial
public offering) to the present and a comparison of such trading history with
those of other companies that we deemed relevant, (5) a trading history of
Interactive's common stock from May 23, 1995 (the date of Interactive's initial
public offering) to the present and a comparison of such trading history with
those of other companies that we deemed relevant, (6) a comparison of the
historical financial results and present financial condition of the Company and
Interactive with those of other companies that we deemed relevant, (7) publicly
available estimates of the future financial performances of the Company and
Interactive prepared by third party research analysts, (8) a comparison of the
financial terms of the Proposed Transaction with the financial terms of certain
other transactions that we deemed relevant, and (9) the potential pro forma
financial effects of the Proposed Transaction on the Company and Interactive and
a comparison of the relative contributions of the Company and Interactive to the
combined company following consummation of the Proposed Transaction. In
addition, we have had discussions with the managements of the Company and
Interactive concerning their respective businesses, operations, assets,
financial conditions and prospects and the potential strategic benefits,
operating synergies and cost savings of the Proposed Transaction and have
undertaken such other studies, analyses and investigations as we deemed
appropriate.
In arriving at our opinion, we have assumed and relied upon the accuracy
and completeness of the financial and other information used by us without
assuming any responsibility for independent verification of such information and
have further relied upon the assurances of the managements of the Company and
Interactive that they are not aware of any facts or circumstances that would
make such information inaccurate or misleading. With respect to the financial
projections of the Company and Interactive, upon advice of the Company and
Interactive we have assumed that such projections have been reasonably prepared
on a basis
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reflecting the best currently available estimates and judgments of the
management of DataWorks and Interactive as to the respective future financial
performance of DataWorks and Interactive (including, without limitation, the
strategic benefits, operating synergies and cost savings expected to result from
a combination of the businesses of the Company and Interactive) and that
DataWorks and Interactive will perform substantially in accordance with such
projections. In addition, with the consent of the Company, we have performed
certain of our analyses based upon alternative operating scenarios for
Interactive. We have not conducted a physical inspection of the properties and
facilities of the Company or Interactive and have not made or obtained any
evaluations or appraisals of the assets or liabilities of the Company or
Interactive. Upon advice of the Company and its legal and accounting advisors,
we have assumed that the Proposed Transaction will qualify (i) for
pooling-of-interests accounting treatment and (ii) as a reorganization within
the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended,
and therefore as a tax-free transaction to the shareholders of Interactive. Our
opinion necessarily is based upon market, economic and other conditions as they
exist on, and can be evaluated as of, the date of this letter.
Based upon and subject to the foregoing, we are of the opinion as of the
date hereof that, from a financial point of view, the Exchange Ratio to be
offered in the Proposed Transaction is fair to the Company.
We have acted as financial advisor to the Company in connection with the
Proposed Transaction and will receive a fee for our services which is contingent
upon the consummation of the Proposed Transaction. In addition, the Company has
agreed to indemnify us for certain liabilities that may arise out of the
rendering of this opinion. In the ordinary course of our business, we may
actively trade in the equity securities of the Company and Interactive for our
own account and for the accounts of our customers and, accordingly, may at any
time hold a long or short position in such securities.
This opinion is for the use and benefit of the Board of Directors of the
Company and is rendered to the Board of Directors in connection with its
consideration of the Proposed Transaction. This opinion is not intended to be
and does not constitute a recommendation to any shareholder of the Company as to
how such shareholder should vote with respect to the Proposed Transaction.
LEHMAN BROTHERS
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APPENDIX C
UBS SECURITIES LLC
July 31, 1997
Board of Directors
Interactive Group, Inc.
5095 Murphy Canyon Road
San Diego, CA 92123
Members of the Board of Directors:
You have requested our opinion as to the fairness, from a financial point
of view, to the stockholders of Interactive Group, Inc., a Delaware corporation
(the "Company"), of the Exchange Ratio (as defined below) provided for pursuant
to that certain Agreement and Plan of Merger and Reorganization, dated as of
July 31, 1997, by and among DataWorks Corporation, a California corporation
("DataWorks"), DataWorks Acquisition Sub, Inc., a Delaware corporation
("DataWorks Sub"), and the Company (together with all schedules and exhibits
thereto, the "Merger Agreement"). The Merger Agreement provides among other
things, for the merger of DataWorks Sub with and into the Company (the
"Merger"). In the Merger, each share of common stock, $.001 par value per share,
of the Company (the "Company Common Stock") outstanding at the Effective Time
(as defined in the Merger Agreement) shall be converted into the right to
receive 0.8054 (the "Exchange Ratio") of a share of common stock, no par value
per share, of DataWorks (the "DataWorks Common Stock). The terms and conditions
of the Merger are more fully set forth in the Merger Agreement.
UBS Securities LLC, as part of its investment banking business, is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, secondary
distributions of listed an unlisted securities, private placements and
valuations for corporate and other purposes. In the ordinary course of our
business, we and our affiliates actively trade the securities of the Company and
DataWorks for our own account and for the accounts of our customers and,
accordingly, may at any time hold a long or short position in such securities.
We are acting as exclusive financial advisor to the Board of Directors of the
Company in connection with the Merger and will receive a fee from the Company
for our services pursuant to the terms of our engagement letter with the
Company, dated as of June 26, 1997 (the "Engagement Letter").
In connection with our opinion, we have reviewed and considered such
financial and other matters as we have deemed relevant, including, among other
things: (i) the Merger Agreement; (ii) that certain Option Agreement, dated July
31, 1997, by and between the Company and DataWorks; (iii) those certain Voting
Agreements, dated July 31, 1997, by and between significant stockholders of the
Company and Dataworks; (iv) certain publicly available information for the
Company and Dataworks, including each of the annual reports of the Company and
DataWorks filed on Form 10-K for the year ended December 31, 1996, as amended,
in the case of the Company, and each of the quarterly reports of the Company and
DataWorks filed on Form 10-Q for the quarter ended March 31, 1997; (v) certain
internal financial analyses, financial forecasts, reports and other information
concerning the Company and DataWorks furnished to us by the respective
managements of the Company and DataWorks; (vi) discussions we have had with
certain members of the management of each of the Company and DataWorks
concerning the historical and current business operations, financial conditions
and prospects of the Company and DataWorks and such other matters we deemed
relevant; (vii) the reported price and trading histories of the shares of the
Company Common Stock and DataWorks Common Stock as compared to the reported
price and trading histories of certain publicly traded companies we deemed
relevant; (viii) the respective financial conditions of the Company and
DataWorks as compared to the financial conditions of certain other companies we
deemed relevant; (ix) certain financial terms of the merger as compared to the
financial terms of selected other business
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combinations we deemed relevant; and (x) such other information, financial
studies, analyses and investigations and such other factors that we deemed
relevant for the purposes of this opinion.
In conducting our review and arriving at our opinion, we have, with your
consent, assumed and relied, without independent investigation, upon the
accuracy and completeness of all financial and other information provided to us
by the Company and DataWorks, respectively, or publicly available, and we have
not undertaken any responsibility for the accuracy, completeness or
reasonableness of, or independently to verify, such information. We have, with
your consent, assumed that the financial forecasts which we examined were
reasonably prepared by the respective managements of the Company and DataWorks
on bases reflecting the best currently available estimates and good faith
judgments of such managements as to the future performance of the Company and
DataWorks. You have informed us, and we have assumed, that the Merger will be
recorded as a pooling-of-interests under generally accepted accounting
principles and will qualify as a reorganization within the meaning of Section
368(a) of the Internal Revenue Code of 1986, as amended. We have not made or
obtained any independent evaluations, valuations or appraisals of the assets or
liabilities of the Company or DataWorks, nor have we been furnished with such
materials. Our services to the Company in connection with the Merger have been
comprised solely of financial advisory services, as described in the Engagement
Letter. In arriving at our opinion, we have, with your consent, not considered,
and our opinion does not reflect, the proposed payment by DataWorks of an
aggregate of $2.5 million in retention bonuses and non-competition fees to
certain members of the Company's management in connection with the Merger. Our
opinion is necessarily based upon economic and market conditions and other
circumstances as they exist and can be evaluated by us on the date hereof.
Additionally, we have not been authorized or requested to, and did not, solicit
alternative offers for the Company or its assets, nor have we investigated any
other alternative transactions that may be available to the Company.
It is understood that this letter is intended for the benefit and use of
the Board of Directors of the Company in its consideration of the Merger and may
not be used for any other purpose or reproduced, disseminated, quoted or
referred to at any time, in any manner or for any purpose without our prior
written consent; provided, however, that this letter may be included or referred
to in any filing with the Securities and Exchange Commission of the Joint Proxy
Statement-Prospectus of the Company and DataWorks relating to the Merger. This
letter does not constitute a recommendation to any stockholder as to how such
stockholder should vote with respect to the Merger. Furthermore, we express no
view as to the price or trading range for DataWorks Common Stock following the
consummation of the Merger.
Based upon and subject to the foregoing, including the various assumptions
and limitations set forth herein, it is our opinion that, as of the date hereof,
the Exchange Ratio is fair, from a financial point of view, to the stockholders
of the Company (other than DataWorks or any of its affiliates).
Very truly yours,
UBS SECURITIES LLC
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APPENDIX D
CALIFORNIA GENERAL CORPORATION LAW
CHAPTER 13. DISSENTERS' RIGHTS
1300. [SHORT FORM MERGER; PURCHASE OF SHARES AT FAIR MARKET VALUE;
"DISSENTING SHARES" AND DISSENTING SHAREHOLDER]. -- (a) If the approval of the
outstanding shares (Section 152) of a corporation is required for a
reorganization under subdivisions (a) and (b) or subdivision (e) or (f) of
Section 1201, each shareholder of the corporation entitled to vote on the
transaction and each shareholder of a subsidiary corporation in a short-form
merger may, by complying with this chapter, require the corporation in which the
shareholder holds shares to purchase for cash at their fair market value the
shares owned by the shareholder which are dissenting shares as defined in
subdivision (b). The fair market value shall be determined as of the day before
the first announcement of the terms of the proposed reorganization or short-form
merger, excluding any appreciation or depreciation in consequence of the
proposed action, but adjusted for any stock split, reverse stock split, or share
dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or
short-form merger either (A) listed on any national securities exchange
certified by the Commissioner of Corporations under subdivision (o) of
Section 25100 or (B) listed on the list of OTC margin stocks issued by the
Board of Governors of the Federal Reserve System, and the notice of meeting
of shareholders to act upon the reorganization summarizes this section and
Sections 1301, 1302, 1303 and 1304; provided, however, that this provision
does not apply to any shares with respect to which there exists any
restriction on transfer imposed by the corporation or by any law or
regulation; and provided, further, that this provision does not apply to
any class of shares described in 3 subparagraph (A) or (B) if demands for
payment are filed with respect to 5 percent or more of the outstanding
shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted
in favor of the reorganization or, (B) if described in subparagraph (A) or
(B) or paragraph (1) (without regard to the provisos in that paragraph),
were voted against the reorganization, or which were held of record on the
effective date of a short-form merger; provided, however, that subparagraph
(A) rather than subparagraph (B) of this paragraph applies in any case were
the approval required by Section 1201 is sought by written consent rather
than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the
recordholder of dissenting shares and includes a transferee of record.
1301. [DISSENTER'S RIGHTS; DEMAND ON CORPORATION FOR PURCHASE OF
SHARES]. -- (a) If, in the case of a reorganization, any shareholders of a
corporation have a right under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivisions (b) thereof, to require the corporation
to purchase their shares for cash, such corporation shall mail to each such
shareholder a notice of the approval of the reorganization by its outstanding
shares (Section 152) within 10 days after the date of such approval, accompanied
by a copy of Sections 1300, 1302, 1303, 1304 and this section, a statement of
the price determined by the corporation to represent the fair market value of
the dissenting shares, and a brief description of the procedure to be followed
if the shareholder desires to exercise the shareholder's right under such
sections. The statement of price constitutes an offer by the corporation to
purchase at the price stated any
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dissenting shares as defined in subdivisions (b)of Section 1300, unless they
lose their status as dissenting shares under Section 1309.
(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares describe in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of
record by the shareholder which the shareholder demands that the corporation
purchase and shall contain a statement of what such shareholder claims to be the
fair market value of those shares as of the day before the announcement of the
proposed reorganization or shortform merger. The statement of fair market value
constitutes an offer by the shareholder to sell the shares at such price.
1302. [DISSENTING SHARES, STAMPING OR ENDORSING]. -- Within 30 days after
the date on which notice of the approval by the outstanding shares or the notice
pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, the
shareholder shall submit to the corporation at its principal office or at the
office of any transfer agent thereof, (a) if the shares are certificated
securities, the shareholder's certificates representing any shares which the
shareholder demands that the corporation purchase, to be stamped or endorsed
with a statement that the shares are dissenting shares or to be exchanged for
certificates of appropriate denomination so stamped or endorsed or (b) if the
shares are uncertificated securities, written notice of the number of shares
which the shareholder demands that the corporation purchase. Upon subsequent
transfers of the dissenting shares on the books of the corporation the new
certificates, initial transaction statement, and other written statements issued
therefor shall bear a like statement, together with the name of the original
dissenting holder of the shares.
1303. [DISSENTING SHAREHOLDER ENTITLED TO AGREED PRICE WITH INTEREST; TIME
OF PAYMENT].--(a) If the corporation and the shareholder agree that the shares
are dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the fair
market value of any dissenting shares as between the corporation and the holders
thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount thereof
has been agreed or within 30 days after any statutory or contractual conditions
to reorganization are satisfied, whichever is later, and in the case of
certificated securities, subject to surrender of the certificates therefor,
unless provided otherwise by agreement.
1304. [DISSENTERS ACTIONS; JOINDER; CONSOLIDATION; APPOINTMENT OF
APPRAISERS]. -- (a) If the corporation denies that the shares are dissenting
shares, or the corporation and the shareholder fail to agree upon the fair
market values of the shares, then the shareholder demanding purchase of such
shares as dissenting shares or any interested corporation, within six months
after the date on which notice of the approval by the outstanding shares
(Section 152) or notice pursuant to subdivision (i) of Section 1110 was mailed
to the shareholder, but not thereafter, may file a complaint in the superior
court of the proper county praying the court to determine whether the shares are
dissenting shares or the fair market value of the dissenting shares or both or
may intervene in any action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
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(c) On the trial of the action, the court shall determine the issues. If
the status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
1305. [APPRAISERS DUTY AND REPORT; COURT JUDGMENT; PAYMENT; APPEAL; COSTS
OF ACTION]. -- (a) If the court appoints an appraiser or appraisers, they shall
proceed forthwith to determine the fair market value per share. Within the time
fixed by the court, the appraisers, or a majority of them, shall make and file a
report in the office of the clerk of the court. Thereupon, on the motion of any
party, the report shall be submitted to the court and considered on such
evidence as the court considers relevant. If the court finds the report
reasonable, the court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a
report within 10 days from the date of their appointment or within such further
time as may be allowed by the court or the report is not confirmed by the court,
the court shall determine the fair market vale of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market value
of each dissenting share multiplied by the number of dissenting shares which any
dissenting shareholder who is a party, or who has intervened, is entitled to
require the corporation to purchase, with interest thereon at the legal rate
from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
undercertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for the
shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Section 1300,
1301 and 1302 if the value awarded by the court for the shares is more than 125
percent of the price offered by the corporation under subdivision (a) of Section
1301).
1306. [DISSENTING SHAREHOLDERS; EFFECT OF PREVENTION OF PAYMENT OF
FAIRMARKET VALUE]. -- To the extent that the provisions of Chapter 5 prevent the
payment to any holders of dissenting shares of their fair market value, they
shall become creditors of the corporation for the amount thereof together with
interest at the legal rate on judgments until the date of payment, but
subordinate to all other creditors in any liquidation proceeding, such debt to
be payable when permissible under the provisions of Chapter 5.
1307. [DISSENTING SHARES, DISPOSITION OF DIVIDENDS]. -- Cash dividends
declared and paid by the corporation upon the dissenting shares after the date
of approval of the reorganization by the outstanding shares (Section 152) and
prior to payment for the shares by the corporation shall be credited against the
total amount to be paid by the corporation therefor.
1308. [DISSENTING SHARES, RIGHTS AND PRIVILEGES]. -- Except as expressly
limited in this chapter, holders of dissenting shares continue to have all the
rights and privileges incident to their shares, until the fair market value of
their shares is agreed upon or determined. A dissenting shareholder may not
withdraw a demand for payment unless the corporation consents thereto.
1309. [DISSENTING SHARES, LOSS OF STATUS]. -- Dissenting shares lose their
status as dissenting shares and the holders thereof cease to be dissenting
shareholders and cease to be entitled to require the corporation to purchase
their shares upon the happening of any of the following:
(a) The corporation abandons the reorganization. Upon abandonment of the
reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter all
necessary expenses incurred in such proceedings and reasonable attorneys' fees.
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(b) The shares are transferred prior to their submission for endorsement in
accordance with Section 1302 or are surrendered for conversion into shares of
another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon the
status of the shares as dissenting shares or upon the purchase price of the
shares, and neither files a complaint or intervenes in a pending action as
provided in Section 1304, within six months after the date on which notice of
the approval by the outstanding shares or notice pursuant to subdivisions (i) of
Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
1310. [SUSPENSION OF CERTAIN PROCEEDINGS WHILE LITIGATION IS
PENDING]. -- If litigation is instituted to test the sufficiency of regularity
of the votes of the shareholder in authorizing a reorganization, any proceedings
under Section 1304 and 1305 shall be suspended until final determination of such
litigation.
1311. [CHAPTER INAPPLICABLE TO CERTAIN CLASSES OF SHARES]. -- This chapter,
except Section 1312, does not apply to classes of shares whose terms and
provisions specifically set forth the amount to be paid in respect to such
shares in the event of a reorganization or merger.
1312. [VALIDITY OF REORGANIZATION OR SHORT FORM MERGER, ATTACK ON;
SHAREHOLDERS' RIGHTS; BURDEN OF PROOF]. -- (a) No shareholder of a corporation
who has a right under this chapter to demand payment of cash for the shares held
by the shareholder shall have any right or law or in equity to attack the
validity of the reorganization or short-form merger, or to have the
reorganization or short-form merger set aside or rescinded, except in an action
to test whether the number of shares required to authorize or approve the
reorganization have been legally voted in favor thereof; but any holder of
shares of a class whose terms and provisions specifically set forth the amount
to be paid in respect to them in the event of a reorganization or short-form
merger is entitled to payment in accordance with those terms and provisions or,
if the principal terms of the reorganization are approved pursuant to
subdivision (b) of Section 1202, is entitled to payment in accordance with the
terms and provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash for
such shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or short-form
merger or to have the reorganization or short-form merger set aside or
rescinded, the shareholder shall not thereafter have any right to demand payment
of cash for the shareholder's shares pursuant to this chapter. The court in any
action attacking the validity of the reorganization or short-form merger or to
have the reorganization or short-form merger set aside or rescinded shall not
restrain or enjoin the consummation of the transaction except upon 10 days,
prior notice to the corporation and upon a determination by the court that
clearly no other remedy will adequately protect the complaining shareholder or
the class of shareholders of which such shareholder is a member.
(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable as
to the shareholders of any party so controlled.
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APPENDIX E
PROPOSED AMENDMENT TO THE BYLAWS
OF DATAWORKS CORPORATION
Subject to the approval of the shareholders of DataWorks Corporation, the
first sentence of Section 19 of Article IV will read as follows:
"SECTION 19. Number of Directors. The authorized number of directors of the
corporation shall be not less than a minimum of five (5) nor more than a maximum
of nine (9) (which maximum number in no case shall be greater than two times
said minimum, minus one) and the number of directors presently authorized is
eight (8)."
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
DataWorks' Articles of Incorporation include provisions to eliminate the
personal liability of its directors to the fullest extent permitted by Section
204(a)(10) under the California Law. In addition, DataWorks' Bylaws include
provisions that require DataWorks to indemnify its directors and executive
officers to the fullest extent permitted by Section 317 of the California Law,
including circumstances in which indemnification is otherwise discretionary. The
Bylaws also provide DataWorks with the authority to indemnify its other
officers, employees and other agents as set forth in the California Law.
Pursuant to Section 317 of the California Law, a corporation generally has the
power to indemnify its present and former directors, officers, employees and
agents against expenses incurred by them in connection with any suit to which
they are, or are threatened to be made, a party by reason of their serving in
such positions so long as they acted in good faith and in a manner they
reasonably believed to be in the best interests of a corporation, and with
respect to any criminal action, they had no reasonable cause to believe their
conduct was unlawful. DataWorks believes that these provisions are necessary to
attract and retain qualified persons as directors and officers. These provisions
do not eliminate liability for breach of the director's duty of loyalty to
DataWorks or its shareholders, for acts or 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 DataWorks or its
shareholders or that involve the absence of good faith on the part of the
director, for any transaction from which the director derived an improper
personal benefit, for acts or omissions involving a reckless disregard for the
director's duty to DataWorks or its shareholders when the director was aware or
should have been aware of a risk of serious injury to DataWorks or its
shareholders, for acts or omissions that constitute an unexcused pattern of
inattention that amounts to an abdication of the director's duty to DataWorks or
its shareholders, for improper distributions to shareholders and loans to
directors and officers, or for acts or omissions by the director as an officer.
DataWorks has entered into agreements with its directors and executive
officers that require DataWorks to indemnify such persons against expenses,
judgments, fines settlements and other amounts actually and reasonably incurred
(including expenses of a derivative action) in connection with any proceeding,
whether actual or threatened, to which any such persons may be made a party by
reason of the fact that such person is or was a director or officer of DataWorks
or any of its affiliated enterprises, provided such persons acted in good faith
and in a manner such person reasonably believed to be in or not opposed to the
best interests of DataWorks and, with respect to any criminal proceeding, had no
reasonable cause to believe his or her conduct was unlawful. The indemnification
agreements also set forth certain procedures that will apply in the event of a
claim for indemnification thereunder.
At present, there is no pending litigation or proceeding involving a
director or officer of DataWorks as to which indemnification is being sought,
nor is DataWorks aware of any threatened litigation that may result in claims
for indemnification by any officer or director.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT
FOOTNOTE NUMBER DESCRIPTION OF DOCUMENT
---------- ------ --------------------------------------------------------------------
<C> <C> <S>
(7) 2.1 Agreement and Plan of Merger and Reorganization by and among the
Registrant, DataWorks Acquisition Sub, Inc. and Interactive Group,
Inc.("Interactive"), dated as of July 31, 1997*
(1) 3.1 Registrant's Amended and Restated Articles of Incorporation
(1) 3.2 Registrant's Amended and Restated Bylaws
(1) 3.3 Amendment to Bylaws
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT EXHIBIT
FOOTNOTE NUMBER DESCRIPTION OF DOCUMENT
---------- ------ --------------------------------------------------------------------
<S> <C> <C>
(17) 3.4 Certificate of Incorporation of DataWorks Acquisition Sub, Inc.
("DataWorks Sub")
(17) 3.5 Bylaws of DataWorks Sub
(1) 4.1 Amended and Restated Registration Rights Agreement dated August 24,
1995
(1) 4.2 Specimen stock certificate
(4) 4.3 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*
(17) 5.1 Opinion of Cooley Godward LLP
8.1 Tax Opinion of Cooley Godward LLP
8.2 Tax Opinion of Pillsbury Madison & Sutro LLP
(1) 10.1 Form of Indemnity Agreement entered into between the Registrant and
its directors and officers, with related schedule
(3)(6) 10.2 Registrant's 1995 Equity Incentive Plan (the "Equity Plan"), as
amended
(1)(3) 10.3 Forms of Incentive Stock Option and Nonstatutory Stock Option under
the Equity Plan
(1)(3) 10.4 Form of Stock Option outside the Equity Plan
(3)(6) 10.5 Registrant's 1995 Non-Employee Directors' Stock Option Plan, as
amended
(3)(6) 10.6 Registrant's 1995 Employee Stock Purchase Plan and form of Employee
Stock Purchase Plan Offering, as amended
(1)(3) 10.7 Executive Employment Agreement entered into between the Registrant
and Stuart W. Clifton
(1)(3) 10.8 Executive Employment Agreement entered into between the Registrant
and Mark S. Howlett
(1)(3) 10.9 Agreement entered into between the Registrant and Rick E. Russo
(3)(5) 10.10 Offer Letter, dated as of January 17, 1996, entered into between the
Registrant and Norman R. Farquhar
(1) 10.11 Loan Agreement dated September 6, 1995 between the Registrant and
First Interstate Bank of California
(1) 10.12 Sublease Agreement dated November 22, 1991 between the Registrant
and the Titan Corporation (the "Sublease")
(1) 10.13 First Amendment to Sublease dated December 1, 1994
(1) 10.14 Lease Agreement dated September 1, 1991 between MCC and Pactel
Properties
(2)(5) 10.15 Value Added Reseller Agreement dated December 27, 1995 between the
Registrant and VMARK Software, Inc.
(1)(2) 10.16 Value Added Remarketer Agreement dated December 16, 1993 between the
Registrant and Sybase, Inc.
(1)(2) 10.17 Value Added Reseller Agreement dated March 1, 1994 between the
Registrant and UniData, Inc.
(4) 10.18 Reference is made to Exhibit 4.3.*
(6) 10.19 Lease Agreement dated January 16, 1997 between Registrant and Whiop
Real Estate Limited Partnership
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT EXHIBIT
FOOTNOTE NUMBER DESCRIPTION OF DOCUMENT
---------- ------ --------------------------------------------------------------------
<C> <C> <S>
(6) 10.20 First Amendment to Credit Agreement dated December 20, 1996 between
the Registrant and Wells Fargo Bank, National Association as
successors by merger to First Interstate Bank of California
(3)(6) 10.21 Registrant's 1996 Executive Compensation Plan, dated February 2,
1996
(3)(6) 10.22 Executive Employment Agreement dated September 27, 1996 entered into
between the Registrant and Robert W. Brandel
(3)(6) 10.23 Form of Split Dollar Insurance Agreement (Endorsement) and
underlying agreements, entered into between Registrant and certain
of its executive officers
(3)(6) 10.24 Form of Split Dollar Insurance Agreement (Collateral Assignment) and
underlying agreements, entered into between Registrant and certain
of its executive officers
(8) 10.25 Option Agreement, dated as of July 31, 1997, between the Registrant
and Interactive
(9) 10.26 Form of Voting Agreement between the Registrant and certain
stockholders of Interactive
(10) 10.27 Form of Voting Agreement between Interactive and certain
shareholders of the Registrant
(3)(7) 10.28 Form of Employment Agreement between the Registrant and Robert C.
Vernon
(3)(7) 10.29 Form of Employment Agreement between the Registrant and Mark
Hellinger
(3)(7) 10.30 Form of Noncompetition Agreement between the Registrant and Robert
C. Vernon
(3)(7) 10.31 Form of Noncompetition Agreement between the Registrant and Mark
Hellinger
(13) 10.32 1995 Stock Option Plan, as amended of Interactive (the "Interactive
Option Plan")
(11) 10.33 Form of Incentive Stock Option under the Interactive Option Plan
(11) 10.34 Form of Representative's Warrant Agreement issued by Interactive to
Cruttenden Roth Incorporated
(2)(11) 10.35 Pickedi License Agreement between Apex Systems Limited and
Interactive dated March 4, 1992
(2)(11) 10.36 Dealer Agreement between Expert Application Systems Limited and
Interactive dated January 1, 1995
(2)(11) 10.37 Letter Agreement between Smart Software, Inc. and Interactive dated
October 20, 1993
(2)(11) 10.38 SB+ Value Improvement Program/Dealer License Agreement between
Millsoft, Inc. and Interactive dated October 17, 1990
(2)(11) 10.39 SB+ Value Improvement Program/Dealer License Agreement between
Interactive (formerly Intrepid Software, Inc.) and Millsoft, Inc.
dated February 1, 1991
(2)(11) 10.40 Value Added Reseller Agreement between UniData, Inc. and Interactive
dated January 15, 1992, as amended August 17, 1993
(2)(11) 10.41 Distributorship Agreement between VMARK Software, Inc. and
Interactive dated January 1, 1993
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT EXHIBIT
FOOTNOTE NUMBER DESCRIPTION OF DOCUMENT
---------- ------ --------------------------------------------------------------------
<C> <C> <S>
(2)(11) 10.42 License agreement between Enterprise Power International, Inc. and
Interactive dated February 1, 1995
(2)(11) 10.43 Letter Agreement between System Builder and Interactive (formerly
Intrepid Software, Inc.) dated June 8, 1994
(2)(11) 10.44 EDI*Port Distribution Agreement between Userbase Systems, Inc. and
Interactive (formerly Intrepid Software, Inc.) dated October 23,
1991
(11) 10.45 Letter Agreement regarding overdraft facility entered into between
the Royal Bank of Scotland plc and Interactive (U.K.) Limited dated
June 27, 1994, including related security documents
(11) 10.46 Office Building Lease between Sunland Diversified and Interactive
dated October 1, 1994
(11) 10.47 Lease between The Standard Life Assurance Company and Interactive
dated July 13, 1990
(11) 10.48 Lease between James S. Hekimian and William G. Finard, as Trustees
of Burlington Woods Office Trust No. 11 under a Declaration of Trust
dated September 10, 1980, and Interactive (formerly Intrepid
Software, Inc.) dated September 23, 1991
(11) 10.49 Plan and Agreement of Merger between Interactive, Inc., Interepid
Software, Inc. and Randolph S. Naylor dated March 17, 1995
(12) 10.50 Office building sublease between Fourth Shift Corporation and
Interactive dated December 31, 1995
(2)(13) 10.51 License, Reseller and Maintenance Agreement between Diamond
Builders, Ltd. (as the assignee of Diamonds Workflow Management
Ltd.) and Interactive dated January 2, 1997
(13) 10.52 Term Loan Agreement between Sanwa Bank California and Interactive
dated January 15, 1997
(13) 10.53 Line of Credit Agreement between Sanwa Bank California and
Interactive dated January 15, 1997
(13) 10.54 Standard Office Lease between Appletree Ltd. and Interactive dated
September 6, 1996
(2)(13) 10.55 Distribution Agreement between evosoft Softwarevertrieb GmbH and
Interactive dated September 6, 1996
(14) 10.56 Purchase and Sale Agreement between Interactive and Fourth Shift
Corporation dated December 15, 1995
(15) 10.57 Agreement for Sale and Purchase of Stock among Interactive, Genie
Productique/Gestion de Production and Sodriv dated July 25, 1997
(16) 10.58 1997 Nonstatutory Stock Option Plan of Interactive
(15) 10.59 Line of Credit Agreement between Interactive and Sanwa Bank
California dated July 1, 1997
(6) 21.1 Subsidiaries of Registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2 Consent of Price Waterhouse LLP, Independent Accountants
23.3 Consent of Ernst & Young LLP, Independent Auditors
23.4 Consent of Romito, Tomasetti & Associates, P.C., Independent
Auditors
(17) 24.1 Power of Attorney.
</TABLE>
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- ---------------
- Schedules omitted pursuant to Regulation S-K, Item 601(b)(2) of the
Commission. Registrant undertakes to furnish such schedules to the
Commission supplementally upon request.
(1) Filed as an exhibit to the Registrant's Registration Statement on From SB-2
(No. 33-97022 LA) or amendments thereto and incorporated herein by
reference.
(2) Certain confidential portions deleted.
(3) Indicates management or compensatory plan or arrangement required to be
identified pursuant to Item 14(c).
(4) Filed as an exhibit to the Registrant's Registration Statement on Form S-4
(No. 333-11741) and incorporated herein by reference.
(5) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1995 and incorporated herein by reference.
(6) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1996 and incorporated herein by reference.
(7) Filed as Exhibit 99.1 to Interactive Group, Inc.'s Current Report on Form
8-K dated July 31, 1997, and incorporated herein by reference.
(8) Filed as Exhibit 99.2 to Interactive Group, Inc.'s Current Report on Form
8-K dated July 31, 1997, and incorporated herein by reference.
(9) Filed as Exhibit 99.3 to Interactive Group, Inc.'s Current Report on Form
8-K dated July 31, 1997, and incorporated herein by reference.
(10) Filed as Exhibit 99.4 to Interactive Group, Inc.'s Current Report on Form
8-K dated July 31, 1997, and incorporated herein by reference.
(11) Filed as an exhibit to Interactive Group, Inc.'s Registration Statement on
Form S-1 (No. 33-90816) and incorporated herein by reference.
(12) Filed as an exhibit to Interactive Group, Inc.'s Annual Report on Form 10-K
for the year ended December 31, 1995, and incorporated herein by reference.
(13) Filed as an exhibit to Interactive Group, Inc.'s Annual Report on Form 10-K
for the year ended December 31, 1996, and incorporated herein by reference.
(14) Filed as an exhibit to Interactive Group, Inc.'s Current Report on Form 8-K
dated December 29, 1995, and incorporated herein by reference.
(15) Filed as an exhibit to Interactive Group, Inc.'s Quarterly Report on Form
10-Q for the quarter ended June 30, 1997, and incorporated herein by
reference.
(16) Filed as an exhibit to Interactive Group, Inc.'s Registration Statement on
Form S-8 (No. 333-30259) and incorporated herein by reference.
(17) Previously filed.
ITEM 22. UNDERTAKINGS.
(1) The Registrant hereby undertakes as follows: that prior to any public
reoffering of the securities registered hereunder through use of a prospectus
which is a part of this Registration Statement, by any person or party who is
deemed to be an underwriter within the meaning of Rule 145(c), the Registrant
undertakes that such reoffering prospectus will contain the information called
for by the applicable registration form with respect to reofferings by persons
who may be deemed underwriters, in addition to the information called for by the
other Items of the applicable form.
(2) The Registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (1) immediately preceding or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Securities Act of 1933 ("The Act")
and is used in connection with an offering of securities subject to Rule 415,
will be filed as a part of an amendment to the Registration Statement and will
not be used until such amendment is
II-5
<PAGE> 173
effective, and that, for purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) The Registrant hereby undertakes to respond to requests for information
that is incorporated by reference to the Prospectus/Joint Proxy Statement
pursuant to Items 4, 10(b), 11 or 13 of Form S-4, within one business day of
receipt of such request and to send the incorporated documents by first class
mail or other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the Registration Statement
through the date of responding to the request.
(4) The Registrant hereby undertakes to supply by means of a post-effective
amendment all information concerning a transaction, and the company being
acquired involved therein, that was not the subject of and included in the
Registration Statement when it became effective.
(5) Insofar as indemnification for liabilities arising under the Act, as
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the Certificate of Incorporation and the Bylaws of the
Registrant and the Delaware General Corporation Law, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in a successful defense of any action, such or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
question has been settled by controlling precedent, submit to a court of
approximate jurisdiction the question of whether such indemnification by it is
against public policy, as expressed in the Act, and will be governed by the
final adjudication of such issue.
(6) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (that is incorporated by reference in the
Registration Statement) shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
II-6
<PAGE> 174
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
DataWorks Corporation has duly caused this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of San
Diego, County of San Diego, State of California, on the 19th day of August,
1997.
DATAWORKS CORPORATION
By: /s/ STUART W. CLIFTON*
------------------------------------
Stuart W. Clifton
Chairman of the Board, Chief
Executive Officer and President
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 August 19, 1997
- ----------------------------------------------- Officer, Chairman of the
Stuart W. Clifton Board and Director
(Principal Executive
Officer)
/s/ NORMAN R. FARQUHAR Executive Vice President, August 19, 1997
- ----------------------------------------------- Chief Financial Officer and
Norman R. Farquhar Director
/s/ RICK E. RUSSO* Vice President, Finance and August 19, 1997
- ----------------------------------------------- Secretary (Principal
Rick E. Russo Accounting Officer)
/s/ TONY N. DOMIT* Director August 19, 1997
- -----------------------------------------------
Tony N. Domit
/s/ ROY THIELE-SARDINA* Director August 19, 1997
- -----------------------------------------------
Roy Thiele-Sardina
/s/ NATHAN W. BELL* Director August 19, 1997
- -----------------------------------------------
Nathan W. Bell
/s/ WILLIAM FOLEY* Director August 19, 1997
- -----------------------------------------------
William Foley
/s/ RONALD S. PARKER* Director August 19, 1997
- -----------------------------------------------
Ronald S. Parker
</TABLE>
*By: /s/ NORMAN R. FARQUHAR
---------------------------------
Norman R. Farquhar
Attorney-in-fact
II-7
<PAGE> 175
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT
FOOTNOTE NUMBER DESCRIPTION OF DOCUMENT
- ---------- ------- --------------------------------------------------------------------
<S> <C> <C>
(7) 2.1 Agreement and Plan of Merger and Reorganization by and among the
Registrant, DataWorks Acquisition Sub, Inc. and Interactive Group,
Inc.("Interactive"), dated as of July 31, 1997*
(1) 3.1 Registrant's Amended and Restated Articles of Incorporation
(1) 3.2 Registrant's Amended and Restated Bylaws
(1) 3.3 Amendment to Bylaws
(17) 3.4 Certificate of Incorporation of DataWorks Acquisition Sub, Inc.
("DataWorks Sub")
(17) 3.5 Bylaws of DataWorks Sub
(1) 4.1 Amended and Restated Registration Rights Agreement dated August 24,
1995
(1) 4.2 Specimen stock certificate
(4) 4.3 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*
(17) 5.1 Opinion of Cooley Godward LLP
8.1 Tax Opinion of Cooley Godward LLP
8.2 Tax Opinion of Pillsbury Madison & Sutro LLP
(1) 10.1 Form of Indemnity Agreement entered into between the Registrant and
its directors and officers, with related schedule
(3)(6) 10.2 Registrant's 1995 Equity Incentive Plan (the "Equity Plan"), as
amended
(1)(3) 10.3 Forms of Incentive Stock Option and Nonstatutory Stock Option under
the Equity Plan
(1)(3) 10.4 Form of Stock Option outside the Equity Plan
(3)(6) 10.5 Registrant's 1995 Non-Employee Directors' Stock Option Plan, as
amended
(3)(6) 10.6 Registrant's 1995 Employee Stock Purchase Plan and form of Employee
Stock Purchase Plan Offering, as amended
(1)(3) 10.7 Executive Employment Agreement entered into between the Registrant
and Stuart W. Clifton
(1)(3) 10.8 Executive Employment Agreement entered into between the Registrant
and Mark S. Howlett
(1)(3) 10.9 Agreement entered into between the Registrant and Rick E. Russo
(3)(5) 10.10 Offer Letter, dated as of January 17, 1996, entered into between the
Registrant and Norman R. Farquhar
(1) 10.11 Loan Agreement dated September 6, 1995 between the Registrant and
First Interstate Bank of California
(1) 10.12 Sublease Agreement dated November 22, 1991 between the Registrant
and the Titan Corporation (the "Sublease")
(1) 10.13 First Amendment to Sublease dated December 1, 1994
(1) 10.14 Lease Agreement dated September 1, 1991 between MCC and Pactel
Properties
(2)(5) 10.15 Value Added Reseller Agreement dated December 27, 1995 between the
Registrant and VMARK Software, Inc.
</TABLE>
<PAGE> 176
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT
FOOTNOTE NUMBER DESCRIPTION OF DOCUMENT
- ---------- ------- --------------------------------------------------------------------
<S> <C> <C>
(1)(2) 10.16 Value Added Remarketer Agreement dated December 16, 1993 between the
Registrant and Sybase, Inc.
(1)(2) 10.17 Value Added Reseller Agreement dated March 1, 1994 between the
Registrant and UniData, Inc.
(4) 10.18 Reference is made to Exhibit 4.3.*
(6) 10.19 Lease Agreement dated January 16, 1997 between Registrant and Whiop
Real Estate Limited Partnership
(6) 10.20 First Amendment to Credit Agreement dated December 20, 1996 between
the Registrant and Wells Fargo Bank, National Association as
successors by merger to First Interstate Bank of California
(3)(6) 10.21 Registrant's 1996 Executive Compensation Plan, dated February 2,
1996
(3)(6) 10.22 Executive Employment Agreement dated September 27, 1996 entered into
between the Registrant and Robert W. Brandel
(3)(6) 10.23 Form of Split Dollar Insurance Agreement (Endorsement) and
underlying agreements, entered into between Registrant and certain
of its executive officers
(3)(6) 10.24 Form of Split Dollar Insurance Agreement (Collateral Assignment) and
underlying agreements, entered into between Registrant and certain
of its executive officers
(8) 10.25 Option Agreement, dated as of July 31, 1997, between the Registrant
and Interactive
(9) 10.26 Form of Voting Agreement between the Registrant and certain
stockholders of Interactive
(10) 10.27 Form of Voting Agreement between Interactive and certain
shareholders of the Registrant
(3)(7) 10.28 Form of Employment Agreement between the Registrant and Robert C.
Vernon
(3)(7) 10.29 Form of Employment Agreement between the Registrant and Mark
Hellinger
(3)(7) 10.30 Form of Noncompetition Agreement between the Registrant and Robert
C. Vernon
(3)(7) 10.31 Form of Noncompetition Agreement between the Registrant and Mark
Hellinger
(13) 10.32 1995 Stock Option Plan, as amended of Interactive (the "Interactive
Option Plan")
(11) 10.33 Form of Incentive Stock Option under the Interactive Option Plan
(11) 10.34 Form of Representative's Warrant Agreement issued by Interactive to
Cruttenden Roth Incorporated
(2)(11) 10.35 Pickedi License Agreement between Apex Systems Limited and
Interactive dated March 4, 1992
(2)(11) 10.36 Dealer Agreement between Expert Application Systems Limited and
Interactive dated January 1, 1995
(2)(11) 10.37 Letter Agreement between Smart Software, Inc. and Interactive dated
October 20, 1993
(2)(11) 10.38 SB+ Value Improvement Program/Dealer License Agreement between
Millsoft, Inc. and Interactive dated October 17, 1990
(2)(11) 10.39 SB+ Value Improvement Program/Dealer License Agreement between
Interactive (formerly Intrepid Software, Inc.) and Millsoft, Inc.
dated February 1, 1991
</TABLE>
<PAGE> 177
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT
FOOTNOTE NUMBER DESCRIPTION OF DOCUMENT
- ---------- ------- --------------------------------------------------------------------
<S> <C> <C> <C>
(2)(11) 10.40 Value Added Reseller Agreement between UniData, Inc. and Interactive
dated January 15, 1992, as amended August 17, 1993
(2)(11) 10.41 Distributorship Agreement between VMARK Software, Inc. and
Interactive dated January 1, 1993
(2)(11) 10.42 License Agreement between Enterprise Power International, Inc. and
Interactive dated February 1, 1995
(2)(11) 10.43 Letter Agreement between System Builder and Interactive (formerly
Intrepid Software, Inc.) dated June 8, 1994
(2)(11) 10.44 EDI*Port Distribution Agreement between Userbase Systems, Inc. and
Interactive (formerly Intrepid Software, Inc.) dated October 23,
1991
(11) 10.45 Letter Agreement regarding overdraft facility entered into between
the Royal Bank of Scotland plc and Interactive (U.K.) Limited dated
June 27, 1994, including related security documents
(11) 10.46 Office Building Lease between Sunland Diversified and Interactive
dated October 1, 1994
(11) 10.47 Lease between The Standard Life Assurance Company and Interactive
dated July 13, 1990
(11) 10.48 Lease between James S. Hekimian and William G. Finard, as Trustees
of Burlington Woods Office Trust No. 11 under a Declaration of Trust
dated September 10, 1980, and Interactive (formerly Intrepid
Software, Inc.) dated September 23, 1991
(11) 10.49 Plan and Agreement of Merger between Interactive, Inc., Interepid
Software, Inc. and Randolph S. Naylor dated March 17, 1995
(12) 10.50 Office building sublease between Fourth Shift Corporation and
Interactive dated December 31, 1995
(2)(13) 10.51 License, Reseller and Maintenance Agreement between Diamond
Builders, Ltd. (as the assignee of Diamonds Workflow Management
Ltd.) and Interactive dated January 2, 1997
(13) 10.52 Term Loan Agreement between Sanwa Bank California and Interactive
dated January 15, 1997
(13) 10.53 Line of Credit Agreement between Sanwa Bank California and
Interactive dated January 15, 1997
(13) 10.54 Standard Office Lease between Appletree Ltd. and Interactive dated
September 6, 1996
(2)(13) 10.55 Distribution Agreement between evosoft Softwarevertrieb GmbH and
Interactive dated September 6, 1996
(14) 10.56 Purchase and Sale Agreement between Interactive and Fourth Shift
Corporation dated December 15, 1995
(15) 10.57 Agreement for Sale and Purchase of Stock among Interactive, Genie
Productique/Gestion de Production and Sodriv dated July 25, 1997
(16) 10.58 1996 Nonstatutory Stock Option Plan of Interactive
(15) 10.59 Line of Credit Agreement between Interactive and Sanwa Bank
California dated July 1, 1997
(6) 21.1 Subsidiaries of Registrant
</TABLE>
<PAGE> 178
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT
FOOTNOTE NUMBER DESCRIPTION OF DOCUMENT
- ---------- ------- --------------------------------------------------------------------
<S> <C> <C>
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2 Consent of Price Waterhouse LLP, Independent Accountants
23.3 Consent of Ernst & Young LLP, Independent Auditors
23.4 Consent of Romito, Tomasetti & Associates, P.C., Independent
Auditors
(17) 24.1 Power of Attorney.
</TABLE>
- ---------------
* Schedules omitted pursuant to Regulation S-K, Item 601(b)(2) of the
Commission. Registrant undertakes to furnish such schedules to the
Commission supplementally upon request.
(1) Filed as an exhibit to the Registrant's Registration Statement on Form SB-2
(No. 33-97022 LA) or amendments thereto and incorporated herein by
reference.
(2) Certain confidential portions deleted.
(3) Indicates management or compensatory plan or arrangement required to be
identified pursuant to Item 14(c).
(4) Filed as an exhibit to the Registrant's Registration Statement on Form S-4
(No. 333-11741) and incorporated herein by reference.
(5) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1995 and incorporated herein by reference.
(6) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1996 and incorporated herein by reference.
(7) Filed as Exhibit 99.1 to Interactive Group, Inc.'s Current Report on Form
8-K dated July 31, 1997, and incorporated herein by reference.
(8) Filed as Exhibit 99.2 to Interactive Group, Inc.'s Current Report on Form
8-K dated July 31, 1997, and incorporated herein by reference.
(9) Filed as Exhibit 99.3 to Interactive Group, Inc.'s Current Report on Form
8-K dated July 31, 1997, and incorporated herein by reference.
(10) Filed as Exhibit 99.4 to Interactive Group, Inc.'s Current Report on Form
8-K dated July 31, 1997, and incorporated herein by reference.
(11) Filed as an exhibit to Interactive Group, Inc.'s Registration Statement on
Form S-1 (No. 33-90816) and incorporated herein by reference.
(12) Filed as an exhibit to Interactive Group, Inc.'s Annual Report on Form 10-K
for the year ended December 31, 1995, and incorporated herein by reference.
(13) Filed as an exhibit to Interactive Group, Inc.'s Annual Report on Form 10-K
for the year ended December 31, 1996, and incorporated herein by reference.
(14) Filed as an exhibit to Interactive Group, Inc.'s Current Report on Form 8-K
dated December 29, 1995, and incorporated herein by reference.
(15) Filed as an exhibit to Interactive Group, Inc.'s Quarterly Report on Form
10-Q for the quarter ended June 30, 1997, and incorporated herein by
reference.
(16) Filed as an exhibit to Interactive Group, Inc.'s Registration Statement on
Form S-8 (No. 333-30259) and incorporated herein by reference.
(17) Previously filed.
<PAGE> 1
EXHIBIT 8.1
[COOLEY GODWARD LLP LETTERHEAD]
August 18, 1997
DataWorks Corporation
5910 Pacific Center Blvd., Suite 300
San Diego, CA 92121
Dear Sir or Madam:
We have acted as counsel to DataWorks Corporation, a California corporation
("DataWorks") in connection with the Agreement and Plan of Merger and
Reorganization dated July 31, 1997, by and among DataWorks, DataWorks
Acquisition Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of
DataWorks ("Sub"), and Interactive Group, Inc., a Delaware corporation
("Interactive") providing for the merger of Sub with and into Interactive (the
"Merger").
You have asked us to review the discussion of federal income tax issues
contained in DataWork's Form S-4 Registration Statement filed in connection
with the Merger (the "Registration Statement"). We have reviewed the discussion
entitled "Certain Federal Income Tax Matters" contained in the Registration
Statement and are of the opinion that, subject to the qualifications and
limitations contained therein, such information fairly presents the current
federal income tax law applicable to the Merger and the material federal tax
consequences to DataWorks, Sub, Interactive, the Interactive stockholders and
the DataWorks shareholders as a result of the Merger and insofar as it relates
to statements of law or legal conclusions is correct in all material respects.
We consent to the reference to our firm under the caption "Certain Federal
Income Tax Matters" included in the Registration Statement and to the filing of
this opinion as an exhibit to the Registration Statement.
Very truly yours,
COOLEY GODWARD LLP
By: /s/ Susan Cooper Philpot
------------------------------------
SCP/wp
<PAGE> 1
EXHIBIT 8.2
[PILLSBURY MADISON & SUTRO LLP LETTERHEAD]
August 18, 1997
Interactive Group, Inc.
5095 Murphy Canyon Road
San Diego, California 92123
Ladies and Gentlemen:
With reference to the Registration Statement on Form S-4 (the
"Registration Statement") filed by DataWorks Corporation, a California
corporation ("DataWorks"), with the Securities and Exchange Commission in
connection with the registration under the Securities Act of 1933, as amended,
of shares of its common stock, no par value per share ("DataWorks Common
Stock"), to be issued in connection with the transactions contemplated by the
Agreement and Plan of Merger and Reorganization (the "Merger Agreement") dated
as of July 31, 1997 among Interactive Group, Inc., a Delaware corporation
("Interactive"), DataWorks and DataWorks Acquisition Sub, Inc., a Delaware
corporation and a wholly owned subsidiary of DataWorks, which Merger Agreement
is described therein and filed as an annex to the Registration Statement, it is
our opinion that the discussion set forth under the captions "Summary -- Certain
Federal Income Tax Matters" and "Approval of the Merger and Related Transactions
- -- Certain Federal Income Tax Matters" in the Registration Statement describes
the material federal income tax considerations relevant to the Interactive
shareholders receiving DataWorks Common Stock pursuant to the Merger Agreement.
We hereby consent to the filing of this opinion as Exhibit 8.2 to the
Registration Statement and to the use of our name in the Registration Statement
and in the Prospectus included therein.
Very truly yours,
/s/ PILLSBURY MADISON & SUTRO LLP
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference of our firm under the caption "Experts" and to the
incorporation by reference of our report dated January 31, 1997 with respect to
the consolidated financial statements of DataWorks Corporation included in the
Annual Report (Form 10-K) for the year ended December 31, 1996, in the Joint
Proxy/Prospectus of DataWorks Corporation that is made a part of Amendment No. 1
to the Registration Statement (Form S-4) for the registration of shares of its
common stock.
ERNST & YOUNG LLP
San Diego, California
August 18, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Registration Statement on Form S-4 of DataWorks
Corporation of our report dated April 5, 1996, relating to the financial
statements of DCD Corporation, appearing on page F-3 of the DataWorks
Corporation Annual Report on Form 10-K for the year ended December 31, 1996. We
also consent to the reference to us under the heading "Experts" in such
Prospectus.
Price Waterhouse LLP
Minneapolis, Minnesota
August 18, 1997
<PAGE> 1
EXHIBIT 23.3
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference of our firm under the caption "Experts" and to the
use of our report dated February 19, 1997 related to the consolidated financial
statements of Interactive Group, Inc., included in the Joint Proxy/Prospectus of
DataWorks Corporation, that is made a part of Amendment No. 1 to the
Registration Statement (Form S-4) for the registration of shares of its common
stock.
ERNST & YOUNG LLP
San Diego, California
August 18, 1997
<PAGE> 1
EXHIBIT 23.4
CONSENT OF ROMITO, TOMASETTI & ASSOCIATES, P.C.,
INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Prospectus constituting
part of this Registration Statement on the Form S-4 of DataWorks Corporation,
as amended, of our report dated March 17, 1995, with respect to the combined
financial statements of Intrepid Software, Inc., included in the financial
statements of Interactive Group, Inc. for the fiscal year ended December 31,
1996.
ROMITO, TOMASETTI & ASSOCIATES, P.C.
Burlington, Massachusetts
August 12, 1997
