<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 16, 1999
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
INTRAWARE, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 3375 68-0389976
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of Industrial Identification Number)
incorporation or organization) Classification Code Number)
</TABLE>
25 ORINDA WAY ORINDA,
CALIFORNIA 94563
(925) 253-4500
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
--------------------------
PETER H. JACKSON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
INTRAWARE, INC.
25 ORINDA WAY
ORINDA, CALIFORNIA 94563
(925) 253-4500
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------------------
COPIES TO:
<TABLE>
<S> <C>
DAVID J. SEGRE, ESQ. ROBERT D. COCHRAN, ESQ.
WILSON SONSINI GOODRICH & ROSATI LAW OFFICE OF
PROFESSIONAL CORPORATION ROBERT D. COCHRAN
650 PAGE MILL ROAD 2105 WOODSIDE ROAD
PALO ALTO, CA 94304 WOODSIDE, CA 94062
(650) 493-9300 (650) 298-9901
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable following the effectiveness of this registration statement and the
satisfaction of the conditions as proposed in the merger agreement.
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. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(b)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED PRICE(1) REGISTRATION FEE
<S> <C> <C>
Common stock, $0.0001 par Value............................. $36,550,000 $10,161
</TABLE>
(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(o).
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE SEC, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INTERNET IMAGE, INC.
39560 STEVENSON PLACE, SUITE 119
FREMONT, CALIFORNIA 94539
To the shareholders of Internet Image, Inc.:
The Board of Directors of Internet Image, Inc. has unanimously approved and
is recommending that the Internet Image shareholders approve the acquisition of
Internet Image by Intraware, Inc. The Board believes that this merger will be
good for our customers, for our employees and for you, our shareholders. The
merger represents a unique opportunity for Internet Image.
The holders of common stock, Internet Image Series A preferred stock,
Internet Image Series B preferred stock and Internet Image Series C preferred
stock are being asked to approve and adopt the Agreement and Plan of
Reorganization, dated as of October 1, 1999, as amended, among, Tango
Acquisition Corp., a wholly owned subsidiary of Intraware, Internet Image, Chao
Ping Wang, Lung C. Tsai, Lung Chin Tsai and Ling Chin Tsi as Trustees of the
TSAI FAMILY TRUST and U.S. Bank Trust N.A., to approve the merger of Tango
Acquisition Corp. with and into Internet Image, and to approve the transactions
contemplated thereby, by which Internet Image would become a wholly owned
subsidiary of Intraware. All shareholders of record on - , 1999 will be
entitled to vote on these proposals.
The merger cannot be completed without the approval of our shareholders. We
have scheduled a special meeting of the shareholders of Internet Image for this
vote. The date, time and place of the special meeting are:
- , 1999
11:00 A.M., local time
39560 Stevenson Place, Suite 119
Fremont, California
Your vote is very important. Whether or not you plan to attend the special
meeting, please take the time to vote by completing and returning the enclosed
proxy card by facsimile and by overnight courier. If you attend the special
meeting, you may vote in person if you wish, even though you have previously
returned your proxy card.
Please complete and return the enclosed proxy card. Proxy cards should be
returned in the enclosed postage-paid envelope addressed to the offices of
Internet Image, Inc., Attention: , 39560 Stevenson Place,
Suite 119, Fremont, California 94539. If you have any questions regarding the
enclosed materials, please contact at ( ) - .
The accompanying Proxy Statement/Prospectus provides additional detailed
information about the proposed transaction, including information about the
business of Internet Image and Intraware. You are urged to read it carefully.
At various meetings of the Board of Directors of Internet Image, the Board
has carefully considered the terms and conditions of the proposed merger and
merger agreement and believes that the merger and merger agreement is in the
best interests of Internet Image and its shareholders. ACCORDINGLY, THE BOARD OF
DIRECTORS OF INTERNET IMAGE UNANIMOUSLY RECOMMENDS THAT YOU VOTE TO APPROVE AND
ADOPT THE MERGER AND MERGER AGREEMENT.
Very truly yours,
Lung C. Tsai
DIRECTOR AND CHIEF EXECUTIVE OFFICER
Fremont, California
, 1999
<PAGE>
[LOGO]
INTERNET IMAGE, INC.
----------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD - , 1999
------------------------
To the Shareholders of INTERNET IMAGE, INC.:
NOTICE IS HEREBY GIVEN that a special meeting of the shareholders of
Internet Image, Inc., a California corporation, will be held at 11:00 a.m. local
time, on - , 1999, at the offices of Internet Image, Inc., 39560 Stevenson
Place, Suite 119, Fremont, California 94539, to consider and vote upon the
following proposals:
1. To adopt a merger agreement and approve a merger whereby Internet Image
will be acquired by Intraware, Inc. by means of a merger with a
wholly-owned subsidiary of Intraware, Inc.
2. To transact such other business as may properly come before the special
meeting or at any postponements or adjournments of the special meeting.
ALL SHAREHOLDERS ARE CORDIALLY INVITED TO ATTEND THE SPECIAL MEETING. TO
ENSURE YOUR REPRESENTATION AT THE SPECIAL MEETING, HOWEVER, YOU ARE URGED TO
COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE. A
POSTAGE-PAID ENVELOPE IS ENCLOSED FOR THAT PURPOSE. ANY SHAREHOLDER ATTENDING
THE SPECIAL MEETING MAY VOTE IN PERSON EVEN IF THAT SHAREHOLDER HAS RETURNED A
PROXY.
The aggregate number of shares of Intraware common stock issuable in the
merger will equal $36.55 million divided by the average of the closing price of
Intraware Common Stock for the ten (10) trading days ending three (3) business
days prior to the closing date of the merger, subject to certain limitations and
adjustments. Consummation of the proposed merger is subject to a number of
business and legal conditions, including, among other things, the receipt of
required Internet Image shareholder approval.
The merger and related transactions are more fully described in the Proxy
Statement/Prospectus and the annexes thereto, including the Merger Agreement,
accompanying this notice; PLEASE READ THESE MATERIALS CAREFULLY.
Any action may be taken on any of the foregoing proposals at the Special
Meeting on the date specified above or on any date to which the Special Meeting
may properly be adjourned. ONLY shareholders of record at the close of business
on - , 1999 are entitled to notice of and to vote at the special meeting or
any adjournment thereof.
By Order of the Board of Directors,
[SIG]
Robert D. Cochran
SECRETARY
Fremont, California
- , 1999
<PAGE>
SUBJECT TO COMPLETION, DATED NOVEMBER 16, 1999
THE INFORMATION IN THIS PROXY STATEMENT/PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. INTRAWARE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROXY STATEMENT/PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS
NOT SOLICITING AN OFFER TO BUY THOSE SECURITIES IN ANY STATE WHERE THE OFFER OR
SALE IS NOT PERMITTED.
<PAGE>
<TABLE>
<S> <C>
PROXY STATEMENT PROSPECTUS
OF OF
INTERNET IMAGE, INC. INTRAWARE, INC.
------------------- ------------------
</TABLE>
The boards of directors of Intraware, Inc. and Internet Image, Inc. have agreed
that Internet Image will be acquired by Intraware by means of a merger with a
wholly-owned subsidiary of Intraware. After the merger, Internet Image will be a
wholly-owned subsidiary of Intraware. Under the terms of the merger, Intraware
will issue $36.55 million worth of its common stock, in exchange for all
outstanding shares of capital stock of Internet Image and all outstanding
options to purchase shares of capital stock of Internet Image, whether or not
vested. Each share of common stock, Series A preferred stock, Series B preferred
stock and Series C preferred stock of Internet Image will be converted into
shares of common stock of Intraware and each option of Internet Image will be
converted into an option of Intraware in accordance with the merger agreement
and the Articles of Incorporation of Internet Image.
We have scheduled a special meeting for the Internet Image shareholders to vote
on the matters described in this document. At the special meeting, Internet
Image shareholders will be asked to adopt the merger agreement and approve the
merger. YOUR VOTE IS VERY IMPORTANT.
Whether or not you plan to attend the special meeting, please take the time to
vote by completing and mailing the enclosed proxy card to us. If you sign, date
and mail your proxy card without indicating how you want to vote, your proxy
will count as a vote in favor of the proposals. You may vote at the special
meeting if you own shares of Internet Image stock as of the close of business on
- , 1999. The date, time and place of the special meeting is as follows:
- , 1999 11:00 am, local time
Internet Image, Inc.
39560 Stevenson Place, Suite 119
Fremont, CA 94539
Intraware common stock trades on the Nasdaq Stock Market under the symbol
"ITRA."
This proxy statement/prospectus and the accompanying form of proxy card are
first being mailed to the shareholders of Internet Image on or about
- , 1999.
WE STRONGLY URGE YOU TO READ AND CONSIDER CAREFULLY THIS PROXY
STATEMENT/PROSPECTUS IN ITS ENTIRETY, INCLUDING THE MATTERS REFERRED TO UNDER
"RISK FACTORS" BEGINNING ON PAGE 15.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE INTRAWARE COMMON STOCK TO BE ISSUED
IN THE MERGER OR DETERMINED IF THIS PROXY STATEMENT/PROSPECTUS IS ACCURATE OR
ADEQUATE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this proxy statement/prospectus is - , 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
WHERE YOU CAN FIND MORE INFORMATION......................... 1
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE............. 1
TRADEMARKS.................................................. 2
QUESTIONS AND ANSWERS ABOUT THE INTRAWARE/INTERNET IMAGE
MERGER.................................................... 3
PROSPECTUS SUMMARY.......................................... 6
SELECTED HISTORICAL CONDENSED FINANCIAL INFORMATION......... 10
COMPARATIVE PER SHARE DATA.................................. 13
MARKET PRICE INFORMATION.................................... 14
RISK FACTORS................................................ 15
Risks Related to the Combined Companies and the Merger.... 15
Risks Related to Internet Image........................... 16
Risks Related to Intraware................................ 19
INTERNET IMAGE SPECIAL SHAREHOLDERS MEETING................. 28
THE MERGER AND RELATED TRANSACTIONS......................... 30
Background of the Merger.................................. 30
Joint Reasons for the Merger.............................. 33
Intraware's Reasons for the Merger........................ 33
Recommendation of Internet Image's Board of Directors and
Reasons for the Merger.................................. 34
Interests of Certain Persons in the Merger................ 36
Certain Federal Income Tax Considerations................. 36
Accounting treatment...................................... 37
Listing on the Nasdaq National Market..................... 37
TERMS OF THE MERGER......................................... 38
The Merger................................................ 38
Merger Consideration...................................... 38
Directors and Officers of Internet Image After the
Merger.................................................. 38
Articles of Incorporation and Bylaws of Internet Image
After the Merger........................................ 38
Conversion of Internet Image Capital Stock as a Result of
the Merger.............................................. 38
Procedure for Converting Internet Image Capital Stock..... 40
Form S-8 Filing........................................... 41
Representations and Warranties............................ 41
Conduct of Business of Internet Image Pending the
Merger.................................................. 42
No Solicitation by Internet Image of Other Offers......... 42
Conditions to the Merger.................................. 43
Termination of the Merger Agreement....................... 44
Escrow Fund and Indemnification........................... 45
Fees and Expenses......................................... 46
OTHER AGREEMENTS............................................ 47
Non-Competition Agreements................................ 47
Internet Image Affiliate Agreements....................... 47
Intraware Affiliate Agreements............................ 47
Voting Agreements......................................... 47
Intraware Loan to Internet Image.......................... 48
SELECTED UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL
INFORMATION............................................... 49
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
INTRAWARE MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 55
INTRAWARE BUSINESS.......................................... 61
INTRAWARE MANAGEMENT........................................ 69
Executive Officers and Directors.......................... 69
Executive Compensation.................................... 72
Option Grants During Last Fiscal Year..................... 73
Aggregate Option Exercises During Last Fiscal Year and
Fiscal Year End Option Values........................... 73
SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS
OF INTRAWARE.............................................. 75
CERTAIN TRANSACTIONS........................................ 77
INTERNET IMAGE SELECTED FINANCIAL DATA...................... 78
INTERNET IMAGE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS............. 79
INTERNET IMAGE BUSINESS..................................... 84
INTERNET IMAGE MANAGEMENT................................... 88
Executive Officers and Directors.......................... 88
SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL SHAREHOLDERS
OF INTERNET IMAGE......................................... 90
DISSENTERS' RIGHTS.......................................... 92
COMPARISON OF CAPITAL STOCK................................. 93
Description of Intraware Capital Stock.................... 93
Description of Internet Image Capital Stock............... 94
Comparison of Capital Stock of Intraware and Internet
Image................................................... 96
LEGAL MATTERS............................................... 105
EXPERTS..................................................... 106
INDEX TO FINANCIAL STATEMENTS............................... F-23
</TABLE>
<TABLE>
<S> <C> <C>
ANNEX A Agreement and Plan of Reorganization........................ A-1
ANNEX B Voting Agreement............................................ B-1
ANNEX C Noncompetition Agreement.................................... C-1
</TABLE>
ii
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN AS CONTAINED HEREIN IN CONNECTION WITH THESE MATTERS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY INTRAWARE OR INTERNET IMAGE. NEITHER THE
DELIVERY HEREOF NOR ANY DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
FACTS HEREIN SET FORTH SINCE THE DATE HEREOF. THIS PROXY STATEMENT/PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE
SECURITIES OFFERED BY THIS PROXY STATEMENT/PROSPECTUS WHERE, OR TO ANY PERSON TO
WHOM, IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION.
Intraware is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and, in accordance therewith, files reports,
proxy statements and other information with the Securities and Exchange
Commission. Such reports, proxy statements and other information filed by
Intraware can be inspected and copied at the public reference facilities of the
SEC located at:
<TABLE>
<S> <C> <C>
Judiciary Plaza Citicorp Center
Room 1024 500 West Madison Street Seven World Trade Center
450 Fifty Street, N.W. Suite 1400 13(th) Floor
Washington, D.C. 20549 Chicago, IL 60661 New York, New York 10048
</TABLE>
Copies of such material can also be obtained from the SEC Public Reference
Section at the address noted above at prescribed rates. Information regarding
the operation of the Public Reference Room may be obtained by calling the SEC at
1-800-SEC-0330. The SEC maintains a World Wide Web site that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the SEC. The address of the World Wide Web site is
http://www.sec.gov.
Intraware's common stock is quoted for trading on the Nasdaq Stock Market's
National Market, and, accordingly, reports, proxy statements and other
information concerning Intraware may be inspected at:
The Nasdaq Stock Market
Nasdaq Regulatory Filings
1735 K Street, N.W.
Washington, DC 20006
Intraware has filed with the SEC a registration statement on Form S-4 under
the Securities Act with respect to the common stock offered hereby. This
prospectus does not contain all of the information set forth in the registration
statement and the exhibits and schedules thereto. For further information with
respect to Intraware, reference is made to the registration statement and the
exhibits and schedules filed therewith. Statements contained in this prospectus
as to the contents of any contract or any other document referred to are not
necessarily complete, and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the registration statement,
each such statement being qualified in all respects by such reference. A copy of
the registration statement may be inspected without charge at the offices of the
SEC Public Reference Room at the address noted above.
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE
This document, may contain "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. These statements relate
to expectations concerning matters that are not historical facts. Although
Intraware believes that the expectations reflected in such forward-looking
statements are reasonable, Intraware cannot give any assurance that such
expectations will prove to have been correct. Important factors that could cause
actual results to differ materially
1
<PAGE>
from such expectations are disclosed herein, including, without limitation, in
conjunction with the forward-looking statements included under "Risk Factors."
All forward-looking statements attributable to Intraware are expressly qualified
in their entirety by this cautionary statement.
TRADEMARKS
This proxy statement/prospectus contains trademarks and service marks of
Intraware and Internet Image and may contain trademarks of others. Intraware's
service marks and trademarks include without limitation "Intraware," "IT
Knowledge Center," "Compariscope," "SubscribNet"' "Netinsights," and
"intraware.shop." Internet Image's trademarks include without limitation
"Internet Image," "TargetLink," "TargetLink Exp," and "Beyond Push." Internet
Image currently is in the process of registering the trademark "Udeploy."
2
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE INTRAWARE/INTERNET IMAGE MERGER
<TABLE>
<S> <C>
Q: WHY ARE THE TWO COMPANIES PROPOSING TO
MERGE?
A: We believe that the acquisition of
Internet Image by Intraware will create
a combined company that will be able
to:
- Offer a more complete and compelling
end-to-end solution to information
technology professionals for
researching, evaluating procuring,
deploying and updating software
throughout an enterprise
- Respond more quickly and effectively
to technological change, increased
competition and market demands in an
industry experiencing rapid
innovation and change
- More effectively market its services
and products
- Increase market penetration by
selling Internet Image's services and
products through Intraware's original
equipment manufacturer channels
- Provide more efficient support
coverage to its customers
- Increase revenue opportunities,
including from the cross-selling of
Intraware and Internet Image services
and products
Q: WHEN IS THE SHAREHOLDERS' MEETING
RELATING TO THE MERGER AND WHAT
SPECIFIC PROPOSALS WILL I BE ASKED TO
CONSIDER?
A: The Internet Image special meeting will
take place on -, 1999. At the Internet
Image special meeting, Internet Image
shareholders will be asked to adopt a
merger agreement and approve the merger
whereby Internet Image would be
acquired by Intraware. The Internet
Image Board of Directors unanimously
recommends voting in favor of this
proposal.
Q: What is the vote required to approve
the merger?
A: Under Califonia law and Internet
Image's Articles of Incorporation, the
affirmative vote of a majority of the
shares of common stock and a majority
of the shares of preferred stock is
required. In addition, the Merger
Agreement requires that ninety-five
percent (95%) of the shares of Internet
Image's common stock and preferred
stock, voting together as a single
class, approve the merger. If this
ninety-five percent (95%) vote is not
obtained, Intraware has the right not
to close the merger.
THEREFORE, YOUR VOTE IS VERY IMPORTANT
AND THE INTERNET IMAGE BOARD OF
DIRECTORS STRONGLY URGES YOU TO VOTE
YES, IN FAVOR OF THE MERGER.
Q: IF I AM NOT GOING TO ATTEND THE
SHAREHOLDER MEETING, SHOULD I RETURN MY
PROXY CARD INSTEAD?
A: Yes. Please fill out and sign your
proxy card and return it in the
enclosed envelope as soon as possible.
Returning your proxy card ensures that
your shares will be represented at your
special meeting.
Q: WHAT DO I DO IF I WANT TO CHANGE MY
VOTE?
A: Send in a later-dated, signed proxy
card to Internet Image's Secretary
before the special meeting or attend
the special meeting in person and vote.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES
NOW?
A: No. After the merger is completed,
Intraware will send Internet Image
shareholders written instructions for
exchanging their stock certificates.
Intraware stockholders should keep
their current certificates.
Q: DO I HAVE DISSENTERS' RIGHTS IN
CONNECTION WITH THE MERGER?
A: Yes. Shareholders of Internet Image are
entitled to dissenters' rights in
connection with the merger. These
rights are described
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
under "Dissenters' Rights" on page of
this proxy statement/prospectus.
Q: WHAT ARE THE TAX CONSEQUENCES TO
SHAREHOLDERS OF THE MERGER?
A: The merger is intended to be treated as
a tax-free reorganization for federal
income tax purposes. Internet Image
shareholders should not recognize gain
or loss on the exchange of their stock.
Intraware stockholders will not
recognize any gain or loss in
connection with the merger. Tax
matters, however, are very complicated
and the tax consequences of the merger
to you will depend on the facts of your
particular situation. We encourage you
to contact your tax advisors to
determine the tax consequences of the
merger to you. To review the tax
consequences to Intraware and Internet
Image shareholders in greater detail,
see the section entitled "Certain
Federal Income Tax Considerations"
starting on page - of this proxy
statement/ prospectus.
Q: WHAT DO I NEED TO DO NOW?
A: Please mail your signed proxy card in
the enclosed return envelope as soon as
possible, so that your shares may be
represented at the special meeting. In
addition, you may attend the special
meeting in person, rather than signing
and mailing your proxy card.
Q: HOW MANY SHARES OF INTRAWARE WILL BE
ISSUED IN THE MERGER?
A: Intraware will issue $36.55 million
worth of its common stock for all of
Internet Image's outstanding shares of
common stock, preferred stock and
shares underlying options, whether or
not vested. The per share value of
Intraware's common stock will not be
determinable until the closing because
it will be valued at the average
closing sales price of Intraware's
common stock for the ten (10) trading
days ending three (3) business days
prior to closing. This value is
referred to as the trading price.
However, regardless of the trading
price, in no event shall Intraware
issue fewer than 1,250,000 shares or
more than 2,000,000 shares of its
common stock in the merger.
Q: WHAT WILL HOLDERS OF INTERNET IMAGE
COMMON STOCK RECEIVE AS A RESULT OF THE
MERGER?
A: If the merger is completed and, for
example only, assuming the trading
price of Intraware common stock is
$25.875, holders of Internet Image
common stock will have the right to
receive 0.1205 shares of Intraware
common stock in exchange for each share
of Internet Image common stock they
own. The ratio of the shares of
Intraware common stock issuable for
each share of Internet Image common
stock is referred to as the exchange
ratio. Please note that the holders of
Internet Image's preferred stock will
receive this consideration for their
shares in addition to the preferential
payments to which they are entitled
under Internet Image's Articles of
Incorporation. These preferences are
described in the following Q & A.
EXAMPLE:
APPLYING THE TRADING PRICE ASSUMPTION
ABOVE, IF YOU CURRENTLY OWN 10,000
SHARES OF INTERNET IMAGE COMMON STOCK,
THEN AFTER THE MERGER YOU WILL RECEIVE
1,205 SHARES OF INTRAWARE COMMON
STOCK. THE ACTUAL AMOUNT OF INTRAWARE
COMMON STOCK THAT YOU WILL RECEIVE
DEPENDS ON THE PRICE OF INTRAWARE
COMMON STOCK IMMEDIATELY BEFORE THE
MERGER.
Q: WHAT WILL HOLDERS OF INTERNET IMAGE
PREFERRED STOCK RECEIVE AS A RESULT OF
THE MERGER?
A: The holders of Internet Image's
preferred stock will receive their
liquidation preferences prior to and in
addition to the shares of Intraware
they will receive on an as converted
into common stock basis. Therefore,
each share of Series A preferred stock
will be converted into the right to
receive $0.25 more of Intraware common
stock than a holder of Internet Image
common stock, $1.50 per share of
Series B more and $2.25 per share of
Series C more. These preferences will
be payable in the form of shares of
Intraware based on the trading price.
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
Q: DOES INTRAWARE PAY DIVIDENDS?
A: Like Internet Image, Intraware does not
pay dividends. After the merger,
however, Intraware's Board of Directors
may change that policy based on
business conditions, Intraware's
financial condition and earnings and
other factors.
Q: WHEN DO YOU EXPECT THE MERGER TO BE
COMPLETED?
A: We are working toward completing the
merger as quickly as possible. We hope
to complete the merger immediately
after the Internet Image special
meeting.
Q: WHAT IF I ALSO OWN SHARES OF INTRAWARE
COMMON STOCK?
A: Intraware common stock will not be
affected by the merger. If you
currently own shares of Intraware
common stock, you will continue to own
those shares after the merger.
Q: HOW MANY SHARES OF INTRAWARE COMMON
STOCK WILL INTERNET IMAGE'S
SHAREHOLDERS OWN AFTER THE MERGER?
A: After the merger, assuming a trading
price of $25.875 per share,
shareholders of Internet Image will own
approximately 1,412,560 shares of
Intraware common stock. These shares
will represent approximately 5.45% of
Intraware's total common stock
outstanding.
ADDITIONAL QUESTIONS AND ANSWERS ABOUT THE
MERGER FOR INTERNET IMAGE EMPLOYEES:
Q: WHAT WILL HAPPEN TO EMPLOYEE STOCK
OPTIONS HELD BY INTERNET IMAGE
EMPLOYEES?
A: Each outstanding Internet Image option
to purchase shares of Internet Image
common stock, whether or not
exercisable, will be assumed by
Intraware. Each option will be subject
to the same terms and conditions except
that the number of Intraware common
shares into which each outstanding
Internet Image option will be
exercisable and the exercise price will
be appropriately adjusted to reflect
the exchange ratio.
Q: WHOM SHOULD I CALL WITH QUESTIONS?
A: If you have any questions about the
merger, please call Mark Long, Vice
President of Strategic Development at
Intraware at (925) 253-6533, Lung Tsai
or Yeong Juang at Internet Image at
510-739-2030, or Robert D. Cochran,
Esq. (ext. 188) or Jill Osato (ext.
178) at the Law Office of Robert D.
Cochran, counsel to Internet Image at
650-298-9901.
Q: MAY I EXERCISE STOCK OPTIONS BETWEEN
NOW AND THE COMPLETION OF THE MERGER?
A: Yes.
</TABLE>
5
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING CONTAINS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE
IN THIS PROXY STATEMENT/ PROSPECTUS. THIS SUMMARY DOES NOT CONTAIN A COMPLETE
STATEMENT OF ALL MATERIAL ELEMENTS OF THE PROPOSALS TO BE VOTED ON AND IS
QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION APPEARING ELSEWHERE
IN THIS PROXY STATEMENT/PROSPECTUS AND IN THE INFORMATION AND DOCUMENTS ANNEXED
HERETO.
THE COMPANIES
INTRAWARE, INC. Intraware is an Information Technology, or IT,
e-marketplace for web-based software and services. Intraware enables IT
professionals worldwide to efficiently and cost-effectively research, evaluate,
purchase, download and update business-class software online. As a
business-to-business e-commerce company, Intraware provides an online purchasing
service through intraware.shop, comprehensive IT information and interactive
research services through IT Knowledge Center and software update management
services through SubscribNet. Intraware generates software product revenue from
the sale of third party software and related maintenance products. Intraware is
a Delaware corporation. Intraware's principal executive offices are located at
25 Orinda Way, Orinda, California 94563, and its telephone number is
(925) 253-4500.
INTERNET IMAGE, INC. Internet Image was incorporated in California in July
1996. Internet Image's principal executive offices are located at
39560 Stevenson Place, Suite 119, Fremont, California 94539, and its telephone
number is (510) 739-2030.
TANGO ACQUISITION CORP. Tango Acquisition Corp. is a California corporation
recently organized for the sole purpose of effecting the merger. Tango
Acquisition Corp., referred to as merger sub, has no material assets and has not
engaged in any activities except in connection with the merger. The principal
executive offices of merger sub are located at 25 Orinda Way, Orinda, California
94563 and its telephone number is (925) 253-4500.
SPECIAL MEETING OF SHAREHOLDERS OF INTERNET IMAGE TO APPROVE THE MERGER
DATE, TIME, PLACE AND PURPOSE. The special meeting will be held at Internet
Image's offices at 39560 Stevenson Place, Suite 119, Fremont, California 94539,
on - , 1999, at 11:00 a.m., local time. At the special meeting, holders of
Internet Image stock will consider and vote upon a proposal to approve the
merger and adopt the Agreement and Plan of Reorganization dated as of
October 1, 1999, referred to as the merger agreement, pursuant to which an
agreement of merger will be filed with the California Secretary of State to
effect the merger. Holders of Internet Image stock may also consider and vote
upon such other matters as may be properly brought before the special meeting.
RECORD DATE AND VOTE REQUIRED. Only Internet Image shareholders of record
at the close of business on - , 1999, the record date, are entitled to notice
of and to vote at the special meeting. Under California law and the charter
documents of Internet Image, as applicable, approval of the merger and the
merger agreement requires the affirmative vote of holders of a majority of the
outstanding shares of common stock and a majority of the outstanding shares of
preferred stock. Certain executive officers and shareholders of Internet Image,
who beneficially own approximately 61.47% of the Internet Image common stock and
18.19% of the Internet Image preferred stock entitled to vote at the special
meeting, have agreed to vote all shares over which they exercise voting control
for the approval of the merger. Under Califonia law and Internet Image's
Articles of Incorporation, the affirmative vote of a majority of the shares of
common stock and a majority of the shares of preferred stock is required. In
addition, the merger agreement requires that ninety-five percent (95%) of the
shares of Internet Image's common stock and preferred stock, voting together as
a single class, approve the merger. If this ninety-five percent (95%) vote is
not obtained, Intraware has the right not to close the merger.
THEREFORE, YOUR VOTE IS VERY IMPORTANT AND THE INTERNET IMAGE
6
<PAGE>
BOARD OF DIRECTORS STRONGLY URGES YOU TO VOTE YES, IN FAVOR OF THE MERGER. See
"The Internet Image Special Shareholders Meeting--Vote Required; Quorum"
starting on page - of this proxy statement/prospectus.
As of the record date, there were (a) - shareholders of record of
Internet Image common stock and - shares of Internet Image common stock
outstanding, (b) - shareholders of record of Internet Image Series A
preferred stock and - shares of Internet Image Series A preferred stock
outstanding, (c) - shareholders of record of Internet Image Series B
preferred stock and - shares of Internet Image Series B preferred stock
outstanding, and (d) - shareholders of record of Internet Image Series C
preferred stock and - shares of Internet Image Series C preferred stock
outstanding.
No approval by shareholders of Intraware is required to effect the merger.
Intraware, as the sole shareholder of merger sub must approve the merger and the
merger agreement.
RECOMMENDATIONS OF THE INTERNET IMAGE BOARD OF DIRECTORS
The board of directors of Internet Image has unanimously approved the merger
agreement and believes that the merger is fair to, and in the best interests of,
Internet Image and its shareholders. The Internet Image Board, therefore,
unanimously recommends that holders of Internet Image stock vote FOR adoption of
the merger agreement and approval of the merger. See "Approval of the merger and
Related Transactions--Internet Image's Reasons for the merger" starting on
page - of this proxy statement/prospectus.
THE MERGER AND RELATED TRANSACTIONS
REASONS FOR THE MERGER. The boards of directors of Internet Image and
Intraware, in voting to approve the merger, identified a number of benefits that
may allow the combined company to:
- - Respond more quickly and effectively to technological change, increased
competition and market demands in an industry experiencing rapid innovation
and change;
- - More effectively market its products;
- - Increase market penetration by selling Internet Image's products through
Intraware's channels;
- - Provide more efficient support coverage to its customers; and
- - Increase revenue opportunities, including from the cross-selling of
Intraware's and Internet Image's products.
INTERESTS OF CERTAIN PERSONS IN THE MERGER.
Shareholders of Internet Image should be aware that certain members of the
Internet Image board and management have certain interests in the merger that
are in addition to the interests of Internet Image's shareholders generally.
These include employment interests and stock option ownership, among other
things. See "The Merger and Related Transactions--Interests of Certain Persons
in the Merger on page - of this proxy statement/prospectus.
EFFECTIVE TIME OF THE MERGER. The merger will become effective upon the
effectiveness of the filing of an agreement of merger with the Secretary of
State of California. Assuming all conditions to the merger are met or waived
prior thereto, it is anticipated that the closing of the merger will occur
immediately following the special meeting of the shareholders of Internet Image.
EFFECT OF THE MERGER. At the closing of the merger, merger sub will be
merged with and into Internet Image, the separate corporate existence of merger
sub will cease and Internet Image will continue as the surviving corporation and
as a wholly-owned subsidiary of Intraware.
Subject to the terms and conditions of the merger agreement, as of the
closing of the merger, by virtue of the merger the following will occur:
CONVERSION OF INTERNET IMAGE STOCK. Under the terms of the merger, between
1,250,000 and 2,000,000 shares of Intraware common stock will
7
<PAGE>
be exchanged for shares of Internet Image common stock and preferred stock
outstanding and all shares subject to options, warrants and other rights to
acquire Internet Image stock, whether or not vested. The common stock and each
series of preferred stock of Internet Image will be exchanged for Intraware
common stock in differing ratios to account for the payment of the various
liquidation preferences to which they are entitled under Internet Image's
Articles of Incorporation.
MARKET PRICE DATA. Intraware common stock has been traded on the Nasdaq
Stock Market under the symbol "ITRA" since Intraware's initial public offering
in February 1999. On October 1, 1999, the last trading day before the
announcement of the signed merger agreement, the closing price of Intraware
common stock as reported on the Nasdaq Stock Market's National Market was
$25.875 per share. Following the merger, Intraware common stock will continue to
be traded on the Nasdaq Stock Market's National Market under the symbol "ITRA".
On the record date, the closing price of Intraware common stock as reported on
Nasdaq Stock Market was $ - . There can be no assurance as to the actual price
of Intraware common stock prior to, at or at any time following the closing of
the merger.
No established trading market exists for Internet Image stock.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS. The merger is intended to qualify
as a reorganization under Section 368(a) of the Code. If the merger so
qualifies, no gain or loss will generally be recognized by the holders of shares
of Internet Image stock on the exchange of their shares of Internet Image stock
for shares of Intraware common stock, except to the extent of cash received for
fractional shares. All Internet Image shareholders should read carefully the
discussion under "Certain Federal Income Tax Considerations" on page of this
proxy statement/prospectus. HOWEVER, ALL INTERNET IMAGE SHAREHOLDERS ARE URGED
TO CONSULT THEIR OWN TAX ADVISORS.
ACCOUNTING TREATMENT. Intraware intends to account for the merger as a
pooling of interests for financial reporting purposes in accordance with
generally accepted accounting principles. See "Accounting Treatment" on page 37
of this proxy statement/prospectus.
DISSENTERS' RIGHTS. Holders of Internet Image stock who do not vote in
favor of the merger may, under certain circumstances and by following procedures
prescribed by the California Corporations Code, exercise dissenters' rights and
receive cash for their shares of Internet Image stock. A dissenting shareholder
of Internet Image must follow the appropriate procedures under California law or
suffer the termination or waiver of such rights. See "Dissenters' Rights" on
page 92 of this proxy statement/prospectus.
CONDUCT OF THE COMBINED COMPANIES FOLLOWING THE MERGER. Intraware currently
plans to integrate the various operations of Internet Image into corresponding
operating units of Intraware.
THE MERGER AGREEMENT
CONDITIONS TO THE MERGER. Consummation of the merger is subject to the
satisfaction of various conditions, including:
- - approval of the merger by the requisite vote of the Internet Image
shareholders;
- - adoption of the agreement of merger and approval of the merger holders of 95%
of the shares of Internet Image; or
- - SEC declaration of effectiveness of the registration statement.
In addition, the obligations of Internet Image and Intraware to consummate
the merger are further subject to a number of conditions including no material
adverse change in Internet Image's or Intraware's condition.
TERMINATION. The merger agreement may be terminated under certain
circumstances, including:
- - by mutual written consent of Intraware and Internet Image;
- - by either Intraware or Internet Image if the other party commits certain
breaches of any
8
<PAGE>
representation, warranty or covenant contained in the merger agreement; or
- - if the merger is not consummated on or before February 29, 2000. See "Terms of
the Merger--Termination of the Merger Agreement" starting on page 44 of this
proxy statement/ prospectus.
ESCROW FUND. In connection with the merger, ten percent (10%) of the number
of shares of Intraware common stock issuable in respect of the Internet Image
stock at the closing of the merger will be placed in escrow with U.S. Bank
Trust, N.A. Each shareholder of Internet Image will be deemed to have
contributed into the escrow fund in proportion to the aggregate number of shares
of Intraware common stock that a shareholder would otherwise have been entitled
under the merger agreement. The escrow fund will be available to compensate
Intraware for any losses as a result of any inaccuracy or breach of a
representation or warranty of Internet Image contained in the merger agreement
or any failure to comply with any covenant contained in the merger agreement.
Intraware may not receive any shares from the escrow fund for a breach of
representation or warranty or covenant unless and until Intraware suffers
cumulative losses in excess of $100,000. Except for any unresolved claims, the
escrow fund will terminate on the date of the auditor's report for the audit of
Intraware's fiscal year ending February 29, 2000. See "Terms of the
Merger--Escrow Fund and Indemnification" on page 45 of this proxy
statement/prospectus.
VOTING AGREEMENTS. Certain shareholders who are affiliates of Internet
Image have entered into voting agreements with Intraware and Internet Image.
Under the voting agreements, such persons have agreed to vote in favor of
approval of the merger agreement, the merger and other matters relating to the
merger.
AFFILIATE AGREEMENTS. Certain affiliates and affiliated entities of
Internet Image have entered into affiliate agreements with Intraware restricting
the sale, transfer or other disposition of the shares of Intraware common stock
issued to such affiliate in connection with the merger or otherwise held by such
affiliate other than in compliance with the requirements of the federal
securities laws.
9
<PAGE>
SELECTED HISTORICAL CONDENSED FINANCIAL INFORMATION
The following selected historical consolidated financial information of
Intraware and Internet Image has been derived from their respective historical
consolidated financial statements, and should be read in conjunction with such
consolidated financial statements and the notes thereto, included elsewhere in
this Registration Statement. The selected pro forma unaudited combined condensed
financial information of Intraware and Internet Image is derived from the pro
forma combined condensed financial statements and should be read in conjunction
with such pro forma statements and the notes thereto, which are included
elsewhere in this Registration Statement. The pro forma unaudited combined
condensed balance sheet presents the combined financial position of Intraware as
of August 31, 1999 and Internet Image as of September 30, 1999 assuming that the
proposed Merger had occurred as of August 31, 1999. The pro forma unaudited
combined condensed statements of operations give effect to the proposed Merger
by combining the results of operations of Intraware for the fiscal years ended
February 28, 1999 and 1998 and from inception to February 28, 1997 and for the
six months ended August 31, 1999 and 1998, with the results of operations of
Internet Image for the year from April 1, 1998 to March 31, 1999, for the fiscal
year ended June 30, 1998 and from inception to June 30, 1997 and for the six
months ended September 30, 1999 and 1998, on a pooling of interests basis.
The pro forma information is presented for illustrative purposes only and is
not necessarily indicative of the operating results or financial position that
would have occurred if the Merger had been consummated, nor is it necessarily
indicative of future operating results or financial position. See "Unaudited Pro
Forma Combined Condensed Financial Statements."
10
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FROM
SIX MONTHS ENDED YEARS ENDED INCEPTION TO
AUGUST 31 FEBRUARY 28 FEBRUARY 28
-------------------- ------------------- ------------
1999 1998 1999 1998 1997
--------- -------- -------- -------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS--INTRAWARE
Net revenues.............................. $35,616 $13,264 $ 38,417 $10,387 $ 6
Product development....................... 2,280 786 2,031 951 253
Loss from operations...................... (9,785) (4,027) (12,046) (3,967) (952)
Net loss.................................. (8,395) (4,025) (12,033) (4,049) (944)
Basic and diluted net loss per share...... $ (0.38) $ (1.16) $ (3.00) $ (2.05) $(1.36)
======= ======= ======== ======= ======
Shares used in computing basic and diluted
net loss per share...................... 22,385 3,469 4,007 1,972 694
======= ======= ======== ======= ======
</TABLE>
<TABLE>
<CAPTION>
AUGUST 31, FEBRUARY 28,
----------- -------------------
1999 1999 1998
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET--INTRAWARE
Working capital (deficit)................................... $19,793 $(1,177) $ (220)
Total assets................................................ 89,729 35,006 15,384
Long term obligations....................................... 1,037 168 105
Total stockholders' equity.................................. 58,683 969 770
</TABLE>
<TABLE>
<CAPTION>
FROM
THREE MONTHS ENDED YEARS INCEPTION
SEPTEMBER 30, ENDED JUNE 30, TO JUNE 30,
---------------------- ------------------- ------------
1999 1998 1999 1998 1997
----------- -------- -------- -------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS--INTERNET IMAGE
Net revenues.................................. $ 160 $ 28 $ 151 $ 57 $ --
Product development........................... 363 306 1,262 1,163 336
Loss from operations.......................... (784) (701) (3,026) (2,086) (582)
Net loss...................................... (775) (692) (2,991) (1,984) (563)
Basic and diluted net loss per share.......... $(0.23) $(0.25) $ (0.85) $ (0.69) $(0.28)
====== ====== ======= ======= ======
Shares used in computing basic and diluted net
loss per share.............................. 3,331 2,738 3,512 2,880 1,997
====== ====== ======= ======= ======
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER
30, JUNE 30,
----------- -------------------
1999 1999 1998
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET--INTERNET IMAGE
Working Capital (deficit)................................... $(147) $ 531 $ 705
Total Assets................................................ 865 1,627 1,194
Total stockholders' equity.................................. 78 699 893
</TABLE>
11
<PAGE>
SUMMARY PRO FORMA UNAUDITED
COMBINED CONDENSED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
FROM
SIX MONTHS ENDED YEARS ENDED FEBRUARY INCEPTION TO
AUGUST 31 28 FEBRUARY 28
-------------------- --------------------- ------------
1999 1998 1999 1998 1997
--------- -------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
Net revenues.............................. $ 35,841 $13,314 $ 38,525 $10,444 $ 6
Product development....................... 2,998 1,404 3,249 2,114 589
Loss from operations...................... (11,499) (5,301) (14,715) (6,053) (1,534)
Net loss.................................. (10,088) (5,272) (14,661) (6,033) (1,507)
Basic and diluted net loss per share...... (0.42) (1.08) (2.70) (1.78) (1.03)
======== ======= ======== ======= =======
Shares used in computing basic and diluted
net loss per share...................... 23,798 4,882 5,420 3,385 1,459
======== ======= ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
AUGUST 31,
----------
1999
----------
<S> <C>
BALANCE SHEET
Working capital............................................. $19,646
Total assets................................................ 90,595
Long term obligations....................................... 1,037
Total stockholders' equity.................................. 57,762
</TABLE>
See Note 1 of Notes to the Financial Statements of Intraware and Note 1 of
Notes to the Financial Statements of Internet Image for explanations of the
determination of the number of shares in computing per share data.
See the Pro Forma Unaudited Combined Condensed Financial Information for an
explanation for the basis of combination and the determination of the number of
shares in computing per share data.
12
<PAGE>
COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data of
Intraware and Internet Image and combined per share data on an unaudited pro
forma basis after giving effect to the Merger on a pooling-of-interests basis
assuming that 1,413,000 shares of Intraware Common Stock is issued in exchange
for each share of Internet Image Common Stock, Preferred Stock and stock
underlying options. This data should be read in conjunction with the selected
historical consolidated financial information, the pro forma unaudited combined
condensed financial information and the separate historical consolidated
financial statements of Intraware and historical financial statements of
Internet Image and notes thereto, included elsewhere in this Joint Proxy
Statement/Prospectus. The pro forma unaudited combined condensed financial
information is not necessarily indicative of the operating results that would
have been achieved had the transaction been in effect as of the beginning of the
periods presented and should not be construed as representative of future
operating results.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED AUGUST 14, 1996
AUGUST 31, FEBRUARY 28, (INCEPTION)
------------------- ------------------- THROUGH
1999 1998 1999 1998 FEBRUARY 28, 1997
-------- -------- -------- -------- -----------------
<S> <C> <C> <C> <C> <C>
HISTORICAL--INTRAWARE
Net loss per share................................... $(0.38) $(1.16) $(3.00) $(2.05) $(1.36)
Book value per share................................. $ 2.44 (a) $ 0.04 (a) (a)
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED JULY 24, 1996
SEPTEMBER 30, JUNE 30, (INCEPTION)
------------------- ------------------------- THROUGH
1999 1998 1999 1998 JUNE 30, 1997
-------- -------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C>
HISTORICAL--INTERNET IMAGE
Net loss per share............................. $(0.23) $(0.25) $(0.85) $(0.69) $(0.28)
Book value per share(b)........................ $ 0.01 (a) $ 0.05 (a) (a)
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
AUGUST 31, FEBRUARY 28, INCEPTION
------------------- ------------------- THROUGH
1999 1998 1999 1998 FEBRUARY 28, 1997
-------- -------- -------- -------- -----------------
<S> <C> <C> <C> <C> <C>
PRO FORMA AND EQUIVALENT
COMBINED PER INTRAWARE SHARE:
Net loss............................................. $(0.42) $(1.08) $(2.70) $(1.78) $(1.03)
Book value........................................... $ 2.26 (a) $ 0.10 (a) (a)
EQUIVALENT PRO FORMA PER
INTERNET IMAGE SHARE(c)
Net loss............................................. (0.06) (0.16) (0.39) (0.26) (0.15)
Book value........................................... $ 0.33 (a) $ 0.01 (a) (a)
</TABLE>
(a) Not required to be presented
(b) Book value per share for Internet Image assumes the conversion of
outstanding shares of Preferred Stock into approximately 4,309,000 shares of
common stock at September 30, 1999 and June 30, 1999.
(c) Equivalent Pro Forma Per Internet Image share has been calculated assuming
that 0.14358 of a share of Interware Common Stock is issued in exchange for
each share of Internet Image Common Stock, Preferred Stock and stock
underlying options. The exchange ratio was calculated using the following
factors: $36.55 million worth of Intraware Common Stock to be issued, the
closing price of Intraware Common Stock on October 1, 1999 of $25.88 per
share and total Internet Image Common Stock, Preferred stock and stock
underlying options totaling approximately 9,838,000 common stock
equivalents.
13
<PAGE>
MARKET PRICE INFORMATION
Intraware Common Stock is quoted on The Nasdaq National Market under the
symbols "ITRA."
The table below sets forth, for the fiscal quarters indicated, the reported
high and low closing sale prices of Intraware Common Stock as reported on The
Nasdaq National Market. Intraware Common Stock began trading on The Nasdaq
National Market on February 26, 1999.
<TABLE>
<CAPTION>
INTRAWARE
COMMON STOCK
-------------------
FISCAL YEAR HIGH LOW
- ----------- -------- --------
<S> <C> <C>
1999
Fourth Quarter............................................ $18.88 $18.88
2000
First Quarter............................................. $48.38 $16.06
Second Quarter............................................ $26.75 $15.94
</TABLE>
The following table sets forth the closing sales prices per share of
Intraware Common Stock as reported on The Nasdaq National Market on October 1,
1999, the last full trading day prior to the public announcement of the signing
of the Merger Agreement, and on the last practicable trading day for which
information is available before the printing of this Joint Proxy
Statement/Prospectus.
<TABLE>
<CAPTION>
INTRAWARE
COMMON STOCK
------------
<S> <C>
October 1, 1999............................................. $ 25.875
</TABLE>
INTRAWARE STOCKHOLDERS AND INTERNET IMAGE STOCKHOLDERS ARE ADVISED TO OBTAIN
CURRENT MARKET QUOTATIONS FOR INTRAWARE COMMON STOCK. No assurance can be given
as to the market prices of Intraware Common Stock at any time before the
Effective Time or at any time thereafter. In the event the market price for
Intraware Common Stock decreases or increases prior to the Effective Time, the
value at the Effective Time of the Intraware Common Stock to be received in the
Merger in exchange for Internet Image Common Stock, Preferred Stock and stock
underlying options would correspondingly decrease or increase.
Following the Merger, all Internet Image Common Stock, Preferred Stock and
stock underlying options will be owned by Intraware.
Neither Intraware nor Internet Image has paid any cash dividends on its
Common Stock during or after its last five completed fiscal years. Following the
Merger, Intraware intends to retain any future earnings for use in its business
and does not anticipate paying cash dividends in the foreseeable future.
14
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE MAKING YOUR
DECISION TO ADOPT THE MERGER AGREEMENT AND APPROVE THE MERGER. THE RISKS AND
UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES FACING INTRAWARE AND
INTERNET IMAGE. ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US OR
THAT WE DO NOT CURRENTLY BELIEVE ARE IMPORTANT TO AN INVESTOR MAY ALSO HARM OUR
BUSINESS OPERATIONS.
IF ANY OF THE EVENTS, CONTINGENCIES, CIRCUMSTANCES OR CONDITIONS DESCRIBED
IN THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION OR OUR
RESULTS OF OPERATIONS COULD BE SERIOUSLY HARMED. IF THAT OCCURS, THE TRADING
PRICE OF INTRAWARE COMMON STOCK COULD DECLINE, AND YOU MAY LOSE PART OR ALL OF
YOUR INVESTMENT.
RISKS RELATED TO THE COMBINED COMPANIES AND THE MERGER
IF THE CONDITIONS TO THE MERGER ARE NOT MET, THE MERGER WILL NOT OCCUR
Several conditions must be satisfied or waived to complete the merger. The
conditions are described under "Terms of the Merger--Conditions to the Merger"
and in detail in the merger agreement. Intraware and Internet Image cannot
assure you that each of the conditions, including Internet Image shareholder
approval, will be satisfied. If the conditions are not satisfied or waived, the
merger will not occur or will be delayed, and Intraware and Internet Image each
may lose some or all of the intended benefits of the merger.
DECREASES IN INTRAWARE'S TRADING PRICE WILL REDUCE THE VALUE OF WHAT INTERNET
IMAGE SHAREHOLDERS RECEIVE IN THE MERGER
Any decrease in the market price of Intraware after the date of this proxy
statement/prospectus will reduce the dollar value received by Internet Image
shareholders. The number of shares of Intraware's common stock to be exchanged
for Internet Image's capital stock depends upon the average of the closing price
of Intraware's common stock as reported on the Nasdaq Stock Market for the ten
(10) consecutive trading days ending three (3) business days prior to the
closing date of the merger. Internet Image shareholders are strongly encouraged
to obtain the current market price of Intraware common stock before delivering
their proxy.
For a description of how Intraware's market price has fluctuated greatly in
the past and may continue to fluctuate in the future, refer to "--Risks Related
to Intraware--Intraware's Stock Price Will Fluctuate."
IF INTRAWARE AND INTERNET IMAGE BUSINESS ANALYSES PROVE WRONG, THE MERGER MAY
NOT BE BENEFICIAL TO INTRAWARE OR INTERNET IMAGE SHAREHOLDERS
Neither Internet Image nor Intraware has received an opinion of an outside
financial advisor on the fairness of the transaction from a financial point of
view. Instead, Intraware and Internet Image conducted their own analyses of the
value of the shares offered by Intraware and the value of Internet Image in the
merger. If Intraware or Internet Image's analyses prove wrong, the merger may
not be beneficial to either Intraware or Internet Image shareholders, or both.
Analysis of the value of private or public Internet companies involves making
numerous assumptions about the future. Intraware and Internet Image cannot
assure you that they have correctly assessed these values at the time they
signed the merger agreement. See "--Decreases in Intraware's Trading Price Will
Reduce the Value of What Internet Image Shareholders Receive in the Merger."
IF INTRAWARE AND INTERNET IMAGE DO NOT INTEGRATE THEIR TECHNOLOGY AND OPERATIONS
QUICKLY AND EFFECTIVELY, ALL OF THE POTENTIAL BENEFITS OF THE MERGER MAY NOT
OCCUR
Intraware and Internet Image cannot assure you that they will be able to
integrate their technology and operations quickly and smoothly. In order to
obtain the benefits of the merger, the companies
15
<PAGE>
must make Internet Image's technology and services operate together with
Intraware's technology, products and services. Intraware and Internet Image may
need to replace or convert some of Internet Image's management information
systems in order to work with Intraware's systems. Intraware may be required to
spend additional time or money on integration which would otherwise be spent on
developing its business and services or other matters. If Intraware and Internet
Image do not integrate their operations and technology smoothly or if management
spends too much time on integration issues, it could harm the combined
companies' business, financial condition and prospects.
THE MERGER MAY RESULT IN LOSS OF INTERNET IMAGE EMPLOYEES
Despite Intraware's efforts to hire and retain quality employees, Intraware
might lose some of Internet Image's key employees following the merger.
Competition for qualified management, engineering and technical employees in the
Internet industry is intense. Intraware and Internet Image have different
corporate cultures, and, in connection with the merger, Internet Image expects
to move certain of its operations and employees from Fremont, California to one
or more other locations in the San Francisco Bay Area, California. Internet
Image employees may be unwilling to commute to such other locations or may not
want to work for a larger, publicly-traded company instead of a smaller, private
company. In addition, competitors may recruit Internet Image employees prior to
the merger and during integration, as is common in high-technology mergers. As a
result, employees of Internet Image or the combined companies could leave with
little or no prior notice. Intraware and Internet Image cannot assure you that
the combined companies will be able to attract, retain and integrate employees
to develop and use the Internet Image technology following the merger.
As a condition to the merger, certain key employees of Internet Image are
required to sign non-competition agreements which will restrict their ability to
compete with Intraware if they leave Intraware under some circumstances.
Intraware and Internet Image cannot assure you of the enforceability of these
noncompetition agreements.
RISKS RELATED TO INTERNET IMAGE
INTERNET IMAGE IS AN EARLY STAGE COMPANY AND MAY NOT BE PROFITABLE IN THE NEAR
FUTURE
Internet Image is an early stage company and its prospects must be
considered in light of the risks, costs and difficulties frequently encountered
by such companies, particularly by companies in the new and rapidly evolving
Internet market. Although Internet Image has achieved revenue growth from 1997
through 1998, Internet Image cannot assure you that this growth will continue or
that Internet Image will become profitable. Internet Image has increased its
operating expenses in connection with its growth in revenues. Unless Internet
Image is able to increase revenues while controlling expenses, it will not
become profitable. Internet Image has limited operating history. This limited
operating history makes it difficult to budget or predict future results.
Internet Image has incurred significant net losses since it began business and
expects it will continue to have net losses in the forseeable future. As of
June 30, 1999, Internet Image had an accumulated deficit of $5.5 million. In
addition, Internet Image incurred a net loss of $775,000 for the quarter ended
September 30, 1999.
INTERNET IMAGE NEEDS ADDITIONAL CAPITAL TO CONTINUE OPERATIONS
Internet Image has very little cash or other liquid assets. Internet Image's
independent accountants have included in their audit report an explanatory
paragraph which states that Internet Image's recurring losses from operations
raise substantial doubt about its ability to continue as a going concern.
Additional financing may not be available on satisfactory terms, if at all.
If the merger does not occur and Internet Image cannot raise enough funds,
Internet Image's business, results of operations, financial condition and
prospects could be seriously harmed and Internet Image may be unable to continue
as a going concern. See "Internet Image Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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IF INTERNET IMAGE IS UNABLE TO ADEQUATELY PROTECT ITS INTELLECTUAL PROPERTY, ITS
BUSINESS COULD SUFFER
Internet Image's success depends in part on its ability to protect its
exclusive technology. Internet Image cannot assure you it will be able to
protect the features of its technology from use by competitors. To protect its
software, service features, and technology, Internet Image relies on a
combination of:
- copyright, trademark and service mark laws,
- trade secret laws,
- confidentiality procedures, and
- contractual provisions.
These methods of protection may not be adequate to protect against others
using Internet Image's technology.
Internet Image has not yet filed any patent applications for its
technologies, but may do so in the future. Internet Image has federal trademark
registrations for the name Internet Image and the marks "Beyond Push," "Target
Link," and "Target Link Exp," and claims trademark rights in other marks.
Internet Image will also evaluate registering for additional service marks and
trademarks as appropriate. Despite these measures, Internet Image may not be
able to protect its intellectual property. Internet Image may not be able to
protect its technology because:
- Patent applications and trademark registrations may not be allowed.
- Even if issued, new patents and trademarks may be challenged, invalidated
or designed around.
- Internet Image's new products and technologies may not be protected by
existing laws.
- Time-consuming and costly litigation may be necessary to protect Internet
Image's proprietary technologies.
- Policing unauthorized use of Internet Image's intellectual property is
difficult and expensive.
Further, the application of copyright and trademark laws to the Internet and
other digital media is very uncertain. If Internet Image fails to protect its
intellectual property, it could suffer serious harm to its business, results of
operations, or prospects.
THIRD PARTIES MAY PREVENT INTERNET IMAGE FROM DEVELOPING ITS INTELLECTUAL
PROPERTY
Internet Image may not be able to use its intellectual property to further
develop its business because third parties may:
- bring claims of intellectual property infringement against Internet Image,
- obtain patents or other intellectual property rights which may limit
Internet Image's ability to do business, require Internet Image to
redesign products or require Internet Image to obtain a license,
- claim Internet Image has misappropriated their creative ideas or formats
or otherwise infringed upon their proprietary rights,
- bring costly, time consuming lawsuits, or
- prevent or delay Internet Image from using important technologies.
Any claims of infringement, whether successful or not, could seriously harm
Internet Image's business, results of operations or prospects.
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IF INTERNET IMAGE LOSES THE SERVICES OF CERTAIN KEY EMPLOYEES, ITS BUSINESS WILL
BE HARMED
Internet Image's ability to generate revenues and profits depends heavily on
its key employees, in particular Andy Lee, its President and Chief Technical
Officer, Bill Li, its Director of Engineering, Zdenko Parlov, Senior Software
Engineer, Howard Tong, Software Engineer, Dave Xie, Senior Software Engineer and
Waley Zhang, its Director of Web Services, for research and development of
Internet Image's services. Internet Image also depends on other employees for
engineering and marketing ability. Loss of any of these employees could
seriously harm Internet Image's business, results of operations, financial
condition and prospects. Competition for employees, particularly in the Internet
area, is intense. Although Internet Image believes it offers competitive
compensation to hire and retain qualified employees, these officers or other key
employees may leave at any time.
INTERNET IMAGE FACES INTENSE COMPETITION AND MAY NOT BE ABLE TO COMPETE
EFFECTIVELY
The market for Internet products and services, including Application
Deployment and Management, or ADM solutions, is highly competitive.
Internet Image believes the competition for ADM solutions specifically and in
the Internet market generally is increasing and will continue to intensify.
Internet Image cannot assure you that it will be able to compete successfully or
that these competitive pressures will not cause serious harm to
Internet Image's business, financial condition, results of operations or
prospects. Internet Image's competitors companies may have greater resources or
the ability to integrate robot technology into their other services. In
addition, the market for outsourced Internet services, and in particular robot
services, has only recently begun to develop. The market is rapidly evolving and
has an increasing number of new entrants. Many of Internet Image's customers
have only limited experience with the products Internet Image offers and have
not devoted a large portion of their budgets to outsourced robot sources. See
"Internet Image Business."
INTERNET IMAGE MAY NOT DEVELOP PRODUCTS IN TIME TO MEET CHANGING TECHNOLOGIES
Internet Image cannot assure you that its existing products will be accepted
by the market, that it will improve its services, or that it will be able to
bring its services to market in advance of competitors. The market for ADM
solutions is new and rapidly changing. Many companies have recently introduced
ADM solutions and other companies are expected to introduce ADM solutions in the
future.
To be successful, Internet Image must continue to develop its ADM solutions
and add new features and functions to improve its service offerings. This
development could be expensive and time-consuming. If Internet Image does not
continue to offer services that are satisfactory to its customers and end users,
it could suffer serious harm to its business, financial results or prospects.
In order to succeed, Internet Image must:
- quickly complete products currently in development,
- design and use new technologies,
- keep pace with changes in external technology and standards on which
Internet Image depends, and
- develop and install enough features to serve its customers.
If Internet Image fails to do any of these, Internet Image may suffer
serious harm to its business, financial condition or prospects.
INTERNET IMAGE MAY NOT BE PREPARED FOR YEAR 2000 COMPUTER PROBLEMS
Certain businesses face issues relating to the inability of some computer
systems to correctly recognize dates starting January 1, 2000. Internet Image
has evaluated its products and believes they will function in the year 2000.
Although Internet Image management does not expect year 2000 compliance to have
a material impact on its business or future results of operations, Internet
Image
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cannot assure you that there will not be interruptions of operations or other
limitations of system functionality or that Internet Image will not incur
significant costs to avoid such interruptions or limitations. In addition,
Internet Image does not currently have information about the year 2000
compliance status of its suppliers and customers. In the event that any of
Internet Image's significant suppliers or customers do not successfully and
timely achieve year 2000 compliance, Internet Image's business or operations
could be adversely affected. See "Internet Image Management's Discussion and
Analysis of Financial Condition and Results of Operations--Year 2000
Compliance."
RISKS RELATED TO INTRAWARE
WE HAVE A HISTORY OF LOSSES, WE EXPECT FUTURE LOSSES AND WE MAY NOT EVER BECOME
PROFITABLE.
We have not achieved profitability, expect to incur net losses in the
foreseeable future and may not ever become profitable in the future. The Company
incurred net losses of $8.4 million for the six-months ended August 31, 1999,
$12 million for the year ended February 28, 1999, $4.0 million for the year
ended February 28, 1998 and $944 thousand for the period from August 14, 1996
through February 28, 1997. As of August 31, 1999, the Company had an accumulated
deficit of $25.4 million. Net losses have increased for each of our quarters
since inception and we cannot assure you this trend will not continue. We expect
to continue to increase our sales and marketing, product development and
administrative expenses. As a result we will need to generate significant
additional revenues to achieve and maintain profitability.
We were founded in August 1996, and are an early stage company. We have a
limited operating history that makes it difficult to forecast our future
operating results. Although our revenues have grown in recent quarters, we
cannot be certain that such growth will continue or that we will achieve
sufficient revenues for profitability. If we do achieve profitability in any
period, we cannot be certain that we will sustain or increase such profitability
on a quarterly or annual basis. For more detailed information regarding our
operating results and financial condition, please see "Selected Financial Data"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
WE ARE SUBSTANTIALLY DEPENDENT ON NETSCAPE COMMUNICATIONS CORPORATION, A WHOLLY
OWNED SUBSIDIARY OF AMERICA ONLINE, INC., AND THE NETSCAPE-SUN
MICROSYSTEMS, INC. ALLIANCE AND THE TERMINATION OF THIS RELATIONSHIP WOULD
HAVE A SUBSTANTIAL, IMMEDIATE ADVERSE EFFECT ON OUR BUSINESS.
For the year ended February 28, 1999, we generated over 90% of our software
product revenues from the sale of Netscape software, and 92% of our online
service revenues from the outsourcing of Intraware SubscribNet services to
Netscape. As a result, transactions with Netscape and the sale of Netscape
products accounted for over 90% of our total net revenues in the year ended
February 28, 1999. In the quarter ended August 31, 1999, Netscape product
revenue was 82% of total product revenue. We cannot assure you that Netscape
will continue to sell its software through us and if Netscape limited or
discontinued selling its software through us, our business would be adversely
affected.
We provide online software update and license management services to
Netscape customers through our SubscribNet service under an agreement with
Netscape entered into effective October 1, 1998. As of July 1, 1999, the
contract was rewritten with Sun Microsystems, Inc., to reflect the Sun-Netscape
Alliance. The contract runs through September 30, 2000. Sun has the right,
however, to terminate this agreement upon 180 days notice. We cannot assure you
that Sun will not terminate this agreement. Substantially all of our SubscribNet
revenues to date have been generated through the Netscape contract and this
Sun-Netscape Alliance contract that superceded it, and our failure to renew this
Sun-Netscape Alliance contract at the end of its term, or Sun's termination of
this contract before September, 2000, could have a material adverse effect on
our SubscribNet revenues and on our business as a whole.
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THE LOSS OF ONE OR MORE OF OUR KEY CUSTOMERS WOULD ADVERSELY AFFECT OUR
REVENUES.
We believe that a substantial amount of revenue from software product sales
in any given future period may come from a relatively small number of customers.
If one or more major customers were to substantially cut back software purchases
or stop using our products or services, our operating results would be
materially adversely affected. We do not have long-term contractual
relationships with any of these customers because our customers purchase
software on a transaction by transaction basis. As a result, we cannot assure
you that any of our customers who purchase software through us will purchase
from us in future periods.
OUR QUARTERLY FINANCIAL RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS BECAUSE
OF MANY FACTORS AND ANY OF THESE COULD ADVERSELY AFFECT OUR STOCK PRICE.
We believe that quarter-to-quarter comparisons of our operating results are
not a good indication of our future performance. It is likely that in some
future quarter our operating results may be below the expectations of public
market analysts and investors and as a result, the price of our common stock may
fall. Our operating results have varied widely in the past, and we expect that
they will continue to vary significantly from quarter to quarter due to a number
of risk factors, including:
- demand for our online services and the products of our software vendors;
- the timing of sales of our online services and the products of our
software vendors;
- loss of strategic relationships with major software vendors;
- the mix of our proprietary online services vs. software products sold;
- delays in introducing our online services or our vendors' software
products according to planned release schedules;
- our ability to retain existing customers and attract new customers;
- changes in our pricing policies or the pricing policies of our software
vendors;
- changes in the growth rate of Internet usage and acceptance by customers
of electronic software delivery for large software purchases, particularly
for international customers;
- technical difficulties, system failures or Internet downtime;
- the mix of domestic and international sales;
- certain government regulations;
- our ability to upgrade and develop our information technology systems and
infrastructure;
- costs related to acquisitions of technology or businesses; and
- general economic conditions as well as those specific to the Internet and
related industries.
We have experienced declining gross margins on revenues derived from
software product sales and anticipate that such declines may continue. Also, as
we broaden our sales and marketing efforts to support our recently introduced
online services, such as SubscribNet and Compariscope, we may experience one or
more quarters of reduced software product sales. Any shortfall in our revenues
would directly adversely affect our operating income or loss, and these
fluctuations could affect the market price of our common stock.
We plan to significantly increase our operating expenses to expand our sales
and marketing operations, broaden our customer support capabilities, and fund
greater levels of product development. Our operating expenses, which include
sales and marketing, product development and general and administrative
expenses, are based on our expectations of future revenues and are relatively
fixed in the short term. If revenues fall below our expectations and we are not
able to quickly reduce our spending in response, our operating results would be
adversely affected.
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OUR NEWLY INTRODUCED ONLINE SERVICES MAY NOT BE ABLE TO GENERATE ANTICIPATED
REVENUES.
We have only recently started selling a number of online services such as
SubscribNet and Compariscope. We cannot assure you that these online services
will result in additional customers and customer loyalty, significant additional
revenues or improved operating margins in future periods. Additionally, we
cannot assure you software vendors will continue to find it strategically or
economically justifiable for us to deliver these services, particularly
SubscribNet, to their customers.
We had no significant online services revenues until the quarter ended
November 30, 1998, and for the year ended February 28, 1999, revenues from these
online services totaled only $3.7 million, which constituted 9.6% of our total
revenues for that period. For the six months end August 31, 1999 online service
revenue was $5.3 million, which constituted 15% of total revenue for that
period. Although this constitutes a slight increase, we do not expect these
online services to constitute a significant portion of our total revenues in any
given quarter until at least the first half of calendar 2000. This projection,
however, is a forward-looking statement and our actual results could differ
materially from those anticipated as a result of a number of factors, including
demand for our online services and the competitive service offerings of others.
These online services are not only important to improving our operating results
but also to continuing to attract and retain both our software vendor and
corporate information technology professional customers, and in differentiating
our online service offerings from those of our competitors.
OUR INDUSTRY IS HIGHLY COMPETITIVE AND WE CANNOT ASSURE YOU THAT WE WILL BE ABLE
TO EFFECTIVELY COMPETE.
The market for selling software products and related online services is
highly competitive. We expect competition to intensify as current competitors
expand their product offerings and new competitors enter the market. We have
recently experienced, and expect to continue to experience, price competition on
our software sales, particularly on large sales transactions. We cannot assure
you that we will be able to compete successfully against current or future
competitors, or that competitive pressures faced by us will not adversely affect
our business and results of operations.
Our current competitors include a number of companies offering one or more
solutions for the evaluation, purchase, deployment and maintenance of business
software. Because there are relatively low barriers to entry in the software and
Internet services markets, we expect additional competition from other
established and emerging companies. Increased competition is likely to result in
price reductions, reduced gross margins and loss of market share, any of which
could have a significant adverse effect on our business and results of
operations.
Many of our current and potential competitors have longer operating
histories, significantly greater financial, technical, marketing and other
resources, better name recognition, and a larger installed base of customers
than we do. Many of our competitors may also have well-established relationships
with our existing and prospective customers.
Our current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to increase the
ability of their products to address customer needs and compete with our
products. We also expect that the competition will increase as a result of
software industry consolidations. As a result, we may not be able to effectively
compete for customers.
WE ARE DEPENDENT ON MARKET ACCEPTANCE OF ELECTRONIC SOFTWARE DELIVERY, AND IF IT
DOES NOT ACHIEVE WIDESPREAD ACCEPTANCE, OUR BUSINESS WILL BE ADVERSELY
AFFECTED.
Our success will depend in large part on acceptance by information
technology professionals of electronic software delivery as a method of buying
business software. If electronic software delivery does not achieve widespread
market acceptance, our business will be adversely affected. Electronic software
delivery is a relatively new method of selling software products and the growth
and market
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acceptance of electronic software delivery is highly uncertain and subject to a
number of risk factors. These factors include:
- the potential for state and local authorities to levy taxes on Internet
transactions;
- the availability of sufficient network bandwidth to enable purchasers to
rapidly download software;
- the number of software packages that are available for purchase through
electronic software delivery as compared to those available through
traditional delivery methods;
- the level of customer confidence in the process of downloading software;
and
- the relative ease of such a process and concerns about transaction
security.
Even if electronic software delivery achieves widespread acceptance, we
cannot be sure that we will overcome the substantial technical challenges
associated with electronically delivering software reliably and consistently on
a long-term basis. Furthermore, the proliferation of software viruses poses a
risk to market acceptance of electronic software delivery. Any well-publicized
transmission of a computer virus by us or another company using electronic
software delivery could deter information technology professionals from
utilizing electronic software delivery technology and our business could be
adversely affected.
CONTINUED ADOPTION OF THE INTERNET AS A METHOD OF CONDUCTING BUSINESS IS
NECESSARY FOR OUR FUTURE GROWTH.
The widespread acceptance and adoption of the Internet by traditional
businesses for conducting business and exchanging information is likely only in
the event that the Internet provides these businesses with greater efficiencies
and improvements. The failure of the Internet to continue to develop as a
commercial or business medium would adversely affect our business.
FAILURE TO EXPAND INTERNET INFRASTRUCTURE COULD LIMIT OUR FUTURE GROWTH.
The recent growth in Internet traffic has caused frequent periods of
decreased performance, and if Internet usage continues to grow rapidly, its
infrastructure may not be able to support these demands and its performance and
reliability may decline. If outages or delays on the Internet occur frequently
or increase in frequency, overall Web usage including usage of our Web site in
particular could grow more slowly or decline. Our ability to increase the speed
and scope of our services to customers is ultimately limited by and dependent
upon the speed and reliability of both the Internet and our customers' internal
networks. Consequently, the emergence and growth of the market for our services
is dependent on improvements being made to the entire Internet as well as to our
individual customers' networking infrastructures to alleviate overloading and
congestion.
INCREASED SECURITY RISKS OF ONLINE COMMERCE MAY DETER FUTURE USE OF OUR
SERVICES.
Concerns over the security of transactions conducted on the Internet and the
privacy of users may also inhibit the growth of the Internet and other online
services generally, and online commerce in particular. Our failure to prevent
security breaches could significantly harm our business and results of
operations. We cannot be certain that advances in computer capabilities, new
discoveries in the field of cryptography, or other developments will not result
in a compromise or breach of the algorithms we use to protect our customers'
transaction data or our software vendors' products. Anyone who is able to
circumvent our security measures could misappropriate proprietary information or
cause interruptions in our operations. We may be required to incur significant
costs to protect against security breaches or to alleviate problems caused by
breaches. Any well-publicized compromise of security could deter people from
using the Web to conduct transactions that involve transmitting confidential
information or downloading sensitive materials.
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WE HAVE EXPERIENCED SIGNIFICANT GROWTH IN OUR BUSINESS IN RECENT PERIODS AND OUR
ABILITY TO MANAGE THIS GROWTH WILL AFFECT OUR BUSINESS.
Our ability to successfully offer products and services and implement our
business plan in a rapidly evolving market requires an effective planning and
management process. We have increased, and plan to continue to increase, the
scope of our operations domestically and internationally. These expansion
efforts could be expensive and put a strain on management, and if we do not
manage growth properly, it could adversely affect our business. Our headcount
has grown and will continue to grow substantially. In particular, we will need
to expand our technology infrastructure, which will include making certain key
employee hires in product development. These hires historically have been
difficult and we can not assure you that we will be able to successfully attract
and retain a sufficient number of qualified personnel.
WE NEED TO EXPAND OUR MANAGEMENT SYSTEMS AND CONTROLS IN ORDER TO SUPPORT OUR
ANTICIPATED GROWTH.
Our growth has placed, and our anticipated future growth will continue to
place a significant strain on our management systems and controls. We cannot
assure you that we will be able to adequately expand our technology resources to
support our anticipated growth. We expect that we will need to continue to
improve our financial and managerial controls and reporting systems and
procedures. Furthermore, we expect that we will be required to manage multiple
relationships with various software vendors, customers and other third parties.
WE MAY NOT BE ABLE TO HIRE AND RETAIN SUFFICIENT SALES, MARKETING AND SUPPORT
PERSONNEL THAT WE NEED TO SUCCEED.
If we fail to hire and retain sufficient numbers of sales, marketing and
support personnel, our business and results of operations would be adversely
affected. Competition for qualified sales and marketing and support personnel is
intense, and we might not be able to hire and retain sufficient numbers of
qualified sales and marketing and support personnel. We need to substantially
expand our sales operations and marketing efforts, both domestically and
internationally, in order to increase market awareness and sales of the products
and services we offer. These products and services require a sophisticated sales
effort targeted at several people within the information technology departments
of our prospective customers. We have recently expanded our direct sales force
and plan to hire additional sales personnel.
We currently have a small customer service and support organization and will
need to increase our staff to support new customers and the expanding needs of
existing customers. Hiring customer service and support personnel is very
competitive in our industry due to the limited number of people available with
the necessary technical skills and understanding of the Internet. We cannot
assure you that we will be able to hire and retain sufficient numbers of
qualified customer service and support personnel.
OUR EXECUTIVE OFFICERS AND CERTAIN KEY PERSONNEL ARE CRITICAL TO OUR BUSINESS
AND THESE OFFICERS AND KEY PERSONNEL MAY NOT REMAIN WITH US IN THE FUTURE.
Our future success depends upon the continued service of our executive
officers and other key technology, sales, marketing and support personnel and
none of our officers or key employees is bound by an employment agreement for
any specific term. If we lost the services of one or more of our key employees,
or if one or more of our executive officers or employees decided to join a
competitor or otherwise compete directly or indirectly with us, this could have
a significant adverse effect on our business. In particular, the services of
Peter Jackson, Chief Executive Officer, and Paul Martinelli, Chief Technology
Officer, would be difficult to replace.
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WE INTEND TO EXPAND INTERNATIONAL OPERATIONS AND UNCERTAINTY OF INTERNATIONAL
SALES EFFORTS COULD ADVERSELY AFFECT OUR BUSINESS.
We may not be able to successfully market, sell, deliver and support our
services and our vendors' software products internationally. Our planned
international expansion will require significant management attention and
financial resources. If we are unable to expand our international operations
successfully and in a timely manner, our business and operating results could be
adversely affected.
To date, we have not had substantial revenues from sales to international
customers. We intend to expand the scope of sales to international customers in
future periods. In calendar 1999, we intend to open international offices and
hire international sales personnel, including the establishment of at least one
European office. We have only limited experience in marketing, selling and
supporting our services and our vendors' software products overseas.
Additionally, we do not have any experience in developing foreign language
versions of our services. This may be more difficult or take longer than we
anticipate especially due to international problems, such as language barriers
or currency exchange, and the fact that the Internet infrastructure in such
foreign countries may be less advanced than the domestic Internet infrastructure
and may result in longer response time and less accurate or consistent
electronic software delivery.
In addition, our contracts with the Netscape-Sun Alliance currently do not
allow us to market or sell Netscape products, other than in connection with our
SubscribNet service, in Europe. Revenues from European customers may not be able
to grow as planned unless we can obtain the rights to market Netscape-Sun
Alliance products in Europe.
OUR ACQUISITIONS COULD BE DIFFICULT TO INTEGRATE, DISRUPT OUR BUSINESS, DILUTE
STOCKHOLDER VALUE AND ADVERSELY AFFECT OUR OPERATING RESULTS.
We have recently made, and currently intend to continue working, investments
in complementary companies, services and technologies. These acquisitions and
investments could disrupt our ongoing business, distract our management and
employees and increase our expenses. Our acquisition of BITSource, Inc. and
pending acquisition of Internet Image and other future acquisitions could cause
us to face difficulties in assimilating those companies' personnel and
operations. In addition, the key personnel of the acquired companies may decide
not to work for us. Acquisitions of additional services or technologies also
involve risks of incompatibility and the need for integration into our existing
services and marketing, sales and support efforts. Also, if we finance the
acquisitions by incurring debt or issuing equity securities, this could dilute
our existing stockholders. Any amortization of goodwill or other assets, or
other charges resulting from the costs of such acquisitions, could adversely
affect our operating results.
WE FACE RISKS OF CLAIMS FROM THIRD PARTIES FOR INTELLECTUAL PROPERTY
INFRINGEMENT THAT COULD ADVERSELY AFFECT OUR BUSINESS.
Our services operate in part by making software products and other content
available to our customers. This creates the potential for claims to be made
against us, either directly or through contractual indemnification provisions
with vendors. Any claims could result in costly litigation and be time-consuming
to defend, divert management's attention and resources, cause delays in
releasing new or upgrading existing services or require us to enter into royalty
or licensing agreements. These claims could be made for defamation, negligence,
patent, copyright or trademark infringement, personal injury, invasion of
privacy or other legal theories based on the nature, content or copying of these
materials.
Litigation regarding intellectual property rights is common in the Internet
and software industries. We expect that Internet technologies and software
products and services may be increasingly subject to third-party infringement
claims as the number of competitors in our industry segment grows and the
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functionality of products in different industry segments overlaps. There can be
no assurance that our services do not infringe on the intellectual property
rights of third parties.
In addition, we may be involved in litigation involving the software of
third party vendors that we electronically distribute. Royalty or licensing
agreements, if required, may not be available on acceptable terms, if at all. A
successful claim of infringement against us and our failure or inability to
license the infringed or similar technology could adversely affect our business.
Although we carry general liability insurance, our insurance may not cover all
potential claims or may not be adequate to protect us from all liability that
may be imposed.
Our success and ability to compete are substantially dependent upon our
internally developed technology, which we protect through a combination of
copyright, trade secret and trademark law. We have no patents issued or applied
for to date on our technology. We are aware that certain other companies are
using or may have plans to use the name "Intraware" as a company name or as a
trademark or service mark. While we have received no notice of any claims of
trademark infringement from any of those companies we cannot assure you that
certain of these companies may not claim superior rights to "Intraware" or to
other marks we use. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy or otherwise obtain and use our
services or technology and we cannot be certain that the steps we have taken
will prevent misappropriation of our technology.
POTENTIAL YEAR 2000 PROBLEMS WITH OUR INTERNAL OPERATING SYSTEMS OR THE SOFTWARE
PRODUCTS THAT WE RESELL COULD ADVERSELY AFFECT OUR BUSINESS.
We cannot assure you that we will not experience unanticipated negative
consequences from year 2000 problems, including material costs caused by
undetected errors or defects in the technology used in our internal systems.
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. Beginning in the year
2000, these code fields will need to accept four digit entries to distinguish
21st century dates from 20th century dates. As a result, computer systems and/or
software products used by many companies may need to be upgraded to solve this
problem.
Our online services, including IT Knowledge Center, Compariscope,
intraware.shop, VirtualExpress, SubscribNet and their associated and supporting
tools, Web sites, and infrastructure were designed and developed to be year 2000
compliant. Our internal systems, including those used to deliver our services,
utilize third-party hardware and software. We have contacted these
infrastructure products' vendors in order to gauge their year 2000 compliance.
Based on our vendors' representations, we believe that the third-party hardware
and software we use is year 2000 compliant.
If it comes to our attention that certain of our services need modification,
or certain of our third-party hardware and software is not year 2000 compliant,
then we will try to make modifications to our services and systems on a timely
basis. We do not believe that the cost of such modifications will materially
affect our operating results. Yet, we cannot assure you that we will be able to
modify such products, services and systems in a timely and successful manner and
the failure to do so could have a material adverse effect on our operating
results.
Also, even though we typically receive warranties and indemnities from our
software vendors with respect to year 2000 compliance of the software products
we resell, we have not independently verified the year 2000 compliance of these
products. If these software products nevertheless require modification to be
year 2000 compliant, demand for them could decline precipitously if
modifications are not timely made by the software vendors. As a result, these
modifications could adversely affect our business and results of operations. In
addition, if software products we resell are not year 2000 compliant and are
installed at customer sites, we cannot assure you that the indemnities we
receive from our vendors would protect us from customer claims. Any claims could
divert significant
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management, financial and other resources and our commercial insurance coverages
may not be adequate to cover such claims.
We have no contingency plan to address the effect of year 2000 noncompliance
of software products we resell. In the normal course of our business we seek to
identify additional software products that are year 2000 compliant and to enter
into arrangements to resell these products. We cannot assure you that these
efforts will timely address any revenue shortfalls that could result from
software products of one or more of our software vendors being noncompliant.
SPENDING BY OUR CUSTOMERS TO EVALUATE AND ADDRESS YEAR 2000 COMPLIANCE COULD
RESULT IN LOWER DEMAND FOR OUR PRODUCTS AND SERVICES.
Year 2000 compliance issues also could cause a significant number of
companies, including our current customers, to reevaluate their current system
needs and, as a result, consider switching to other systems and suppliers. This
could result in a material adverse effect on our business, operating results and
financial condition. Also, during the next several months there is likely to be
an increased customer focus on addressing year 2000 compliance issues, creating
the risk that customers may reallocate capital expenditures to fix year 2000
problems of existing systems. Although we have not experienced these effects to
date, if customers defer purchases of business software and related services
because of such a reallocation, it would adversely affect our operating results.
OUR MARKET MAY UNDERGO RAPID TECHNOLOGICAL CHANGE AND OUR FUTURE SUCCESS WILL
DEPEND ON OUR ABILITY TO MEET THE CHANGING NEEDS OF OUR INDUSTRY.
Our market is characterized by rapidly changing technology, evolving
industry standards and frequent new product announcements. To be successful, we
must adapt to our rapidly changing market by continually improving the
performance, features and reliability of our services. We could incur
substantial costs to modify our services or infrastructure in order to adapt to
these changes. Our business could be adversely affected if we incur significant
costs without adequate results, or find ourselves unable to adapt rapidly to
these changes.
WE DO NOT HAVE A DISASTER RECOVERY PLAN OR BACK UP SYSTEMS AND A DISASTER COULD
SEVERELY DAMAGE OUR OPERATIONS.
We currently do not have a disaster recovery plan in effect and do not have
fully redundant systems for our service at an alternate site. A disaster could
severely damage our business and results of operations because our service could
be interrupted for an indeterminate length of time. Our operations depend upon
our ability to maintain and protect our computer systems, all of which are
located in our principal headquarters in Orinda, California and at an offsite
location managed by a third party in Santa Clara, California. Orinda and Santa
Clara exist on or near known earthquake fault zones. Although the outside
facility, which hosts our primary Web and database servers, is designed to be
fault tolerant, the system is vulnerable to damage from fire, floods,
earthquakes, power loss, telecommunications failures, and similar events.
Although we maintain insurance against fires, floods, earthquakes and general
business interruptions, there can be no assurance that the amount of coverage
will be adequate in any particular case.
ADDITIONAL GOVERNMENT REGULATIONS MAY INCREASE OUR COSTS OF DOING BUSINESS.
The law governing Internet transactions remains largely unsettled, even in
areas where there has been some legislative action. The adoption or modification
of laws or regulations relating to the Internet could adversely affect our
business by increasing our costs and administrative burdens. It may take years
to determine whether and how existing laws such as those governing intellectual
property, privacy, libel and taxation apply to the Internet.
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Laws and regulations directly applicable to communications or commerce over
the Internet are becoming more prevalent. The most recent session of the United
States Congress resulted in Internet laws regarding children's privacy,
copyrights and taxation. The European Union has enacted its own data protection
and privacy directive, which required all 15 European Union Member States to
implement laws relating to the processing and transmission of personal data by
October 25, 1998. We must comply with these new regulations in both Europe and
the United States, as well as any other regulations adopted by other countries
where we may do business. The growth and development of the market for online
commerce may prompt calls for more stringent consumer protection laws, both in
the United States and abroad. Compliance with any newly adopted laws may prove
difficult for us and may negatively affect our business.
YOU SHOULD NOT RELY ON FORWARD-LOOKING STATEMENTS BECAUSE THEY ARE INHERENTLY
UNCERTAIN.
You should not rely on forward-looking statements in this prospectus. This
prospectus also contains forward-looking statements that involve risks and
uncertainties. We use words such as "anticipates," "believes," "plans,"
"expects," "future," "intends" and similar expressions to identify such forward-
looking statements. This prospectus also contains forward-looking statements
attributed to certain third parties relating to their estimates regarding the
growth of certain electronic-commerce, electronic software delivery, software
and related service markets and spending. You should not place undue reliance on
these forward-looking statements, which apply only as of the date of this
prospectus. Our actual results could differ materially from those anticipated in
these forward-looking statements for many reasons, including the risks faced by
us described below and elsewhere in this prospectus.
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INTERNET IMAGE SPECIAL SHAREHOLDERS MEETING
DATE, TIME AND PLACE OF MEETING
The special meeting of the shareholders of Internet Image will be held at
the offices of Internet Image located at 39650 Stevenson Place, Suite 119,
Fremont, California 94539, on - , 1999, at 11:00 a.m., local time.
PURPOSE OF THE SPECIAL MEETING
At the special meeting, Internet Image shareholders will consider and vote
upon a proposal to adopt the merger agreement and approve the merger. Internet
Image shareholders will also be asked to consider and vote upon such other
matters as may be properly submitted at the special meeting. Additionally,
Internet Image shareholders may be asked to vote upon a proposal to adjourn or
postpone the special meeting. Such adjournment or postponement could be used for
the purpose of allowing additional time for the soliciting of additional votes
to approve the merger agreement.
THE INTERNET IMAGE BOARD HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT,
BELIEVES THAT THE TERMS OF THE MERGER AGREEMENT ARE FAIR TO, AND IN THE BEST
INTERESTS OF, INTERNET IMAGE AND ITS SHAREHOLDERS, AND UNANIMOUSLY RECOMMENDS
THAT HOLDERS OF SHARES OF INTERNET IMAGE STOCK VOTE "FOR" ADOPTION AND APPROVAL
OF THE MERGER AND THE MERGER AGREEMENT.
RECORD DATE; VOTING RIGHTS; PROXIES
Only holders of Internet Image capital stock at the close of business on
- , 1999, the record date, are entitled to notice of and to vote at the
special meeting.
As of the record date, there were - shares of Internet Image common stock
issued and outstanding, - shares of preferred stock issued and outstanding,
each entitled to one vote.
The accompanying form of proxy is for use at the special meeting if a
shareholder will be unable to attend the special meeting. All shares of Internet
Image common and preferred stock represented by properly executed proxies will,
unless such proxies have been previously revoked, be voted in accordance with
the instructions indicated in such proxies. IF NO INSTRUCTIONS ARE INDICATED,
SUCH SHARES OF INTERNET IMAGE COMMON AND PREFERRED STOCK REPRESENTED BY SUCH
PROXIES WILL BE VOTED "FOR" ADOPTION AND APPROVAL OF THE MERGER AND THE MERGER
AGREEMENT. Internet Image does not know of any matters other than as described
in the Notice of special meeting of Shareholders that are to come before the
special meeting. If any other matter is properly presented for action at the
special meeting, the persons named in the enclosed form of proxy will have the
discretion to vote on such matters in accordance with their best judgment. A
shareholder who has given a proxy may revoke it at any time prior to its
exercise by giving written notice to the Secretary of Internet Image, by signing
and returning a later dated proxy, or by voting in person at the special
meeting. However, attendance at the special meeting will not in and of itself
have the effect of revoking the proxy. Votes cast by proxy or in person at the
special meeting will be tabulated by the inspector of election appointed for the
special meeting.
SOLICITATION OF PROXIES
Proxies are being solicited by and on behalf of the Internet Image Board.
Internet Image will bear all expenses in connection with such solicitation. In
addition to solicitation by use of the mails, proxies may be solicited by
directors, officers and employees of Internet Image in person or by telephone,
e-mail or other means of communication. Such directors, officers and employees
will not be additionally compensated for, but may be reimbursed by Internet
Image for out-of-pocket expenses incurred in connection with, such solicitation.
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QUORUM
The presence in person or by properly executed proxy of holders of a
majority of all the issued and outstanding shares of Internet Image common and
preferred stock entitled to vote is necessary to constitute a quorum at the
special meeting. For purposes of determining whether a quorum is present, the
inspector of election will include shares that are present or represented by
proxy, even if the holders of such shares abstain from voting on any particular
matter.
REQUIRED VOTE
Adoption of the merger agreement and approval of the merger requires the
affirmative vote of the holders of a majority of the outstanding shares of
Internet Image common stock and a majority of outstanding shares of Internet
Image preferred stock. In addition, the merger agreement requires that
ninety-five percent (95%) of the shares of Internet Image's common stock and
preferred stock voting together as a single class, approve the merger. If this
ninety-five percent (95%) vote is not obtained, Intraware has the right not to
close the merger.
THEREFORE, YOUR VOTE IS VERY IMPORTANT AND THE INTERNET IMAGE BOARD OF
DIRECTORS STRONGLY URGES YOU TO VOTE YES, IN FAVOR OF THE MERGER.
For purposes of determining whether the merger and the merger agreement has
been adopted and approved, the inspector of election will include abstentions as
a portion of the number of shares deemed to have voted on such matter at the
special meeting. Accordingly, abstentions will have the effect of a NO vote on
the proposal to adopt and approve the merger agreement.
As of November 1, 1999, directors and executive officers of Internet Image
and their affiliates were beneficial owners of an aggregate of 2,648,746 shares
of Internet Image common stock, or approximately 73% of the 3,606,603 shares of
Internet Image common stock that were issued and outstanding as of such date and
1,491,115 shares of Internet Image preferred stock, or approximately 28% of the
5,308,341 shares of Internet Image preferred stock that were issued and
outstanding as of such date. Some of the directors and executive officers of
Internet Image have entered into an agreement to vote all shares of Internet
Image common stock beneficially owned by them in favor of adoption and approval
of the merger agreement. See also "Voting Agreements" on page 47 of this proxy
statement/prospectus.
THE MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING ARE OF GREAT IMPORTANCE
TO THE SHAREHOLDERS OF INTERNET IMAGE. ACCORDINGLY, SHAREHOLDERS ARE URGED TO
READ AND CAREFULLY CONSIDER THE INFORMATION PRESENTED IN THE PROXY
STATEMENT/PROSPECTUS, AND TO COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE
ENCLOSED PROXY IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
SHAREHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES WITH THEIR PROXY CARDS.
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THE MERGER AND RELATED TRANSACTIONS
THE FOLLOWING DISCUSSION SUMMARIZES THE PROPOSED MERGER AND RELATED
TRANSACTIONS. THE DISCUSSION IS NOT, HOWEVER, A COMPLETE STATEMENT OF ALL
PROVISIONS OF THE MERGER AGREEMENT AND RELATED AGREEMENTS. DETAILED TERMS OF AND
CONDITIONS TO THE MERGER AND CERTAIN RELATED TRANSACTIONS ARE CONTAINED IN THE
MERGER AGREEMENT, A COPY OF WHICH IS ATTACHED TO THIS PROXY STATEMENT/PROSPECTUS
AS ANNEX A. STATEMENTS MADE IN THIS PROXY STATEMENT/PROSPECTUS WITH RESPECT TO
THE TERMS OF THE MERGER AND SUCH RELATED TRANSACTIONS ARE QUALIFIED IN THEIR
RESPECTIVE ENTIRETIES BY REFERENCE TO, AND HOLDERS OF INTERNET IMAGE STOCK ARE
URGED TO READ THE MORE DETAILED INFORMATION SET FORTH IN THE MERGER AGREEMENT
AND THE OTHER DOCUMENTS ANNEXED HERETO.
BACKGROUND OF THE MERGER
On June 4, 1999, Thomas Lieu, Director of Sales of Internet Image,
telephoned Frost Prioleau, Vice President of Intraware's E-Services division,
requesting that Internet Image and Intraware meet to explore a technology
relationship between the two companies.
On June 14, 1999, Mr. Lieu, along with William Almon, Chairman of Internet
Image and Lung Tsai, Chief Executive Officer of Internet Image met at Intraware
with Peter Jackson, President and CEO of Intraware, Donald Freed, Intraware's
Executive Vice President and Chief Technology Officer, Mark Long, Intraware's
Vice President of Strategic Development and Mr. Prioleau. At the meeting, the
Internet Image representatives presented to Intraware an overview of Internet
Image's business and strategy to facilitate Intraware's evaluation of a
technology relationship with Internet Image. Based upon this meeting, the
parties entered into a mutual non-disclosure agreement to allow for a detailed
investigation by Intraware of Internet Image's technology which, if satisfactory
to Intraware, would lead to negotiations related to a technology relationship.
On June 22, 1999, Mr. Lieu, Andy Lee, Internet Image's President and Bill
Li, Internet Image's Senior Engineer met at Internet Image with Mr. Prioleau and
Paul Martinelli, Intraware's Chief Technology Officer. At this meeting, the
attendees discussed Internet Image's business in further detail.
On June 23, 1999, Mr. Lieu met with Mr. Prioleau to discuss the terms of a
potential original equipment manufacturer (OEM) relationship between the two
companies. Mr. Liu presented Mr. Prioleau with a proposal outlining the terms of
such an arrangement. Intraware then held an internal meeting to discuss progress
on the potential OEM relationship with Internet Image.
On June 24, 1999, Mr. Prioleau contacted Mr. Liu to discuss the terms of the
proposed OEM relationship. Based on that discussion, Mr. Prioleau indicated that
perhaps a combination of the two companies should be explored further.
On June 28, 1999, Mr. Tsai and Mr. Long met to discuss the potential
combination of the two companies. The two executives discussed the advantages of
combining Internet Images technology and engineering resources with the
resources of Intraware and the management issues associated with such a
potential combination. Mr. Tsai also provided a more detailed explanation of the
Internet Image business and strategy.
On July 2, 1999, at a telephonic meeting of Intraware's Board of Directors,
Mr. Long and Mr. Prioleau presented an overview of the emerging web-based
application deployment and management services market as an opportunity for
Intraware and discussed Intraware's interest in acquiring the technology and
engineering resources of Internet Image to enter that market. In addition,
Mr. Long and Mr. Prioleau discussed the advantages and disadvantages of the
proposed combination with Internet Image as well as other alternatives. The
Board of Directors of Intraware authorized Intraware's senior management to
negotiate and execute a memorandum of understanding for the proposed combination
of Intraware with Internet Image.
On July 5, 1999, Mr. Long and Mr. Tsai met to discuss terms for the
potential combination of the two companies. Mr. Long proposed a transaction
whereby Intraware would acquire all of the
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outstanding shares of Internet Image common stock in a stock-for-stock merger to
be treated as a pooling-of-interests for accounting purposes under U.S.
generally accepted accounting principles. Mr. Long also presented transaction
valuation ranges at which Intraware would be willing to pursue a strategic
combination with Internet Image. Mr. Long indicated that in order for Intraware
to proceed with the negotiation of the proposed combination it would require
voting agreements from management and the key stockholders. Mr. Long further
indicated that Intraware would be willing to pursue further discussions with
Internet Image regarding the proposed strategic combination, increase its due
diligence of Internet Image or provide a draft merger agreement if Internet
Image entered into a limited-duration exclusivity agreement with Intraware.
On July 7, 1999, Mr. Long delivered a memorandum of understanding via
facsimile to Mr. Tsai outlining proposed terms of a combination of the two
companies through a merger. On July 8, 1999 Mr. Almon and Mr. Tsai met at
Intraware with Mr. Freed and Mr. Long to discuss the terms of a potential
combination of the two companies, including valuation parameters for such a
combination. Mr. Tsai and Mr. Long subsequently met to discuss further the terms
of a potential combination of the two companies.
During the week of July 25, executives at Intraware and Internet Image
exchanged comments and revisions to the memorandum of understanding. On
August 3, 1999, Mr. Long delivered a revised memorandum of understanding
executed by Intraware which would become effective upon execution and delivery
by Internet Image. On August 6, 1999, Internet Image indicated that it had
entered into discussions with another company and would not continue negotiating
the memorandum of understanding.
On August 5, 1999, the Board of Directors of Internet Image met in person
and by teleconference to discuss the potential business combination with
Intraware and Intraware's request for an exclusivity agreement. Mr. Robert
Cochran, counsel to Internet Image, also attended the meeting. At the meeting,
representatives from Internet Image's management described the status of the
proposed transaction with Intraware. The board of directors engaged in a
discussion of the board's fiduciary duties in pursuing a strategic combination
with Intraware including executing the memorandum of understanding with the
exclusivity agreement. The Internet Image board of directors asked questions and
discussed the strategy underlying the proposed transaction, the risks inherent
in the proposed transaction, and the implications of the proposed transaction on
Internet Image stockholder value. The Internet Image board of directors also
discussed Intraware's proposal that Internet Image enter into a limited-duration
exclusivity agreement before Intraware would consider further exploration of a
strategic combination of the companies. Following significant discussion and
review and the advice of Mr. Cochran, Internet Image's board of directors
authorized management to continue its discussions regarding the proposed
strategic combination and negotiate a mutually acceptable exclusivity agreement
with Intraware.
On August 28, 1999, Mr. Liu contacted Mr. Prioleau to indicate that the
discussions with the other company had ended and indicated that Internet Image
desired to continue negotiations of the memorandum of understanding for the
potential combination of Intraware and Internet Image.
On August 30, 1999, Intraware held an internal meeting to discuss the
potential combination with Internet Image.
During the week of August 30, 1999, in consultation with counsel, executives
at Intraware and Internet Image continued to negotiate the memorandum of
understanding.
On September 1, 1999 Internet Image and Intraware executed the memorandum of
understanding. The terms of the memorandum of understanding were intended to
serve as the basis for the negotiations of definitive legal documents, including
the Merger Agreement and related ancillary agreements, and was intended to be
non-binding on either party, except for certain provisions regarding
confidentiality and further discussions with other potential acquirers. The
memorandum of terms would expire by its terms on September 27, 1999, unless
earlier terminated in writing by both parties.
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During the month of September 1999, management of Intraware and Internet
Image, together with their respective legal advisors, held extensive
negotiations regarding the terms and conditions of the definitive agreements
relating to the proposed transaction. Also during this period, Intraware's
management, together with its legal and financial advisors, conducted due
diligence of Internet Image's products, technology, business and finances. This
due diligence was based primarily on documents and other materials provided by
Internet Image.
On September 23, 1999, the Internet Image board of directors held a meeting.
At the meeting, members of Internet Image's management and Mr. Cochran discussed
with the Internet Image board of directors, and responded to numerous questions
from the Internet Image board of directors concerning:
- the status of the ongoing negotiations with Intraware;
- the strategic rationale for the transaction, potential synergies and
benefits to Internet Image and the competitive landscape facing Internet
Image on a stand-alone basis;
- the then-currently proposed principal terms of the merger agreement,
including the nonsolicitation provisions, the termination rights relating
to the transaction, and the representations, warranties and covenants to
be made; and
- the results of the business and financial due diligence conducted on
Intraware.
Mr. Cochran discussed the Internet Image board of directors' fiduciary
duties in considering the strategic combination and Mr. Tsai discussed the
results of the financial due diligence of Intraware. After careful
consideration, the Internet Image board of directors determined that, because
of, among other things, the proposed valuation ranges and the perceived
strategic advantages of the proposed strategic combination, management of
Internet Image should continue to pursue the strategic combination with
Intraware. Legal counsel reviewed the terms of the various agreements,
particularly the proposed definitive merger agreement, answered questions posed
by Internet Image's board of directors and discussed the Internet Image board of
directors' fiduciary duties in reviewing and approving the business combination.
At the conclusion to these discussions the Internet Image board of directors
unanimously voted to approve the merger agreement and related transaction
documents.
On September 29, 1999, Intraware's board of directors held a special meeting
to discuss the proposed transaction. Mr. Long, Mr. Prioleau and other members of
management reviewed the status of the transaction, including the following:
- the details related to the proposed merger that still required resolution;
- a financial review of the proposed transaction;
- a review of Internet Image's business operations; and
- the results of Intraware's due diligence review.
Mr. Long and Mr. Prioleau presented to Intraware's board of directors a
summary of their analysis of the financial and strategic aspects of the proposed
transaction. In addition, a representative of Wilson Sonsini Goodrich & Rosati,
PC, Intraware's legal advisors, outlined the terms of the proposed merger and
the directors' legal duties and responsibilities. At the conclusion of the
meeting, Intraware's board of directors unanimously approved the principal terms
of the proposed business combination, approved the merger agreement in the form
presented and authorized management to finalize the details of the merger
agreement.
Internet Image, together with certain stockholders of Internet Image, and
Intraware entered into the merger agreement as of October 1, 1999 after the
close of the Nasdaq Stock Market. On October 4, 1999, Intraware and Internet
Image each issued a press release announcing the proposed business combination.
Subsequently, certain stockholders of Internet Image entered into voting
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agreements with Intraware, and each of the members of Intraware's and Internet
Image's boards of directors and certain officers of Internet Image and Intraware
entered into affiliate agreements in connection with the proposed merger.
JOINT REASONS FOR THE MERGER
The board of directors of Intraware and Internet Image approved the merger
and the board of directors of Internet Image recommends approval of the merger
by the Internet Image shareholders. The boards of directors of both companies
have identified a number of potential benefits which they believe will
contribute to the success of the combined companies, including:
- Creation of a more complete and compelling solution to information
technology professionals for researching, evaluating, procuring, deploying
and updating software throughout the enterprise.
- Enabling the combined company to respond more quickly and effectively to
technological change, increased competition and market demands in an
industry experiencing rapid innovation and change.
- Enabling the combined company to more effectively sell and market its
services and products.
- Enabling the combined company to increase market penetration by selling
Internet Image's products and services through Intraware's dedicated
services sales force and original equipment manufacturer channels.
- Enabling the combined company to provide more efficient support coverage
to its customers.
- Increased revenue opportunities, including from the cross-selling of
Intraware and Internet Image services and products.
INTRAWARE'S REASONS FOR THE MERGER
The Intraware Board has approved the merger and has identified several
potential benefits of the merger that it believes will contribute to the success
of the combined entity following the merger. The Intraware Board believes that
Internet Image possesses technology that will be valuable to Intraware's
products and services. In the process of approving the merger, the Intraware
Board considered a number of factors, including:
- The opportunity to enhance Intraware's technology platform for an expanded
offering of Web-based e-services, including:
- Delivery of software to the customer's desktop computers
- Installation of software on the customer's desktop computers
- On-demand access by customers to data on their desktop and server
computer inventories
- The opportunity to expand information technology resources to accelerate
the development of additional e-services.
- The opportunity to add service revenue streams.
- The possibility of integrating Internet Image's technology with possible
future Intraware e-service offerings, such as Internet-based software
license fulfillment or electronic license compliance services.
In the course of its deliberations, the Intraware Board reviewed a number of
additional factors relevant to the merger. These factors included:
- information concerning the respective businesses, prospects, historical
financial performances and conditions, operations, technologies,
management, products, customers and future development plans of Intraware
and Internet Image;
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- the terms of the merger agreement;
- the likelihood of realizing superior benefits through alternative
strategies;
- information concerning Internet Image's business, historical performance
and operations, and competitive position;
- the value of Internet Image as a part of Intraware's operations;
- the compatibility of management and businesses of Intraware and Internet
Image;
- results from Intraware's management of the findings from their due
diligence investigation of Internet Image; and
- the fact that the merger is expected to qualify as a tax-free
reorganization.
The Intraware Board also considered a variety of potentially negative
factors in its deliberations concerning the merger. These factors include:
- the potential loss of revenues from Intraware business following the
merger as a result of confusion in the marketplace and the possible
exploitation of such confusion by competitors of Intraware;
- the possibility of management disruption associated with the merger;
- the risk that benefits sought to be achieved by merger might not be
realized; and
- the risks described above under "Risk Factors--Risks of the Combined
Company."
Additionally, in evaluating the proposed merger, the Intraware Board
considered the pro forma contribution of Internet Image to net income both
historically and in the near term. Although based on such analyses the Intraware
Board concluded that the merger would not be accretive in the near term, for the
strategic reasons set forth above, the board determined that the merger
agreement and the merger were in the best interests of Intraware and its
shareholders and that Intraware should proceed with the merger agreement and
the merger.
RECOMMENDATION OF INTERNET IMAGE'S BOARD OF DIRECTORS AND REASONS FOR THE MERGER
The Internet Image Board has unanimously approved the merger agreement and
determined that the merger is fair to, and in the best interests of, Internet
Image and its shareholders. The Internet Image Board, therefore, unanimously
recommends that holders of Internet Image's Capital Stock vote FOR approval of
the merger, the merger agreement and the transactions contemplated thereby. In
reaching its determination, the Internet Image Board consulted with Internet
Image's management, as well as its legal counsel and accountants, and gave
significant consideration to a number of factors bearing on its decision.
Among other things, the Internet Image Board considered the following
strategic factors:
- The merger would reduce competitive risks to Internet Image compared to
continuing as a stand-alone entity. In particular, the Internet Image
Board considered that competition in the application deployment and
management market is expected to increase significantly from
well-capitalized computer, software, Internet and enterprise application
companies, such as Microsoft, IBM, Computer Associate International, Inc.
Marimba, Inc. and Novadigm, Inc. that could make it more difficult for
Internet Image to compete on a stand-alone basis. In addition, the
Internet Image Board considered that, by continuing on a stand-alone
basis, Internet Image would have to explore entering alternative markets,
such as Internet system management service with a number of attendant
risks and uncertainties.
- The merger would immediately create a larger audience using Intraware's
sales and marketing resources by, among other things, generating
additional enterprise licenses and increasing Internet Image's transaction
volume.
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- The merger would create the opportunity to generate significant savings in
sales, marketing, general and administrative expenses by enabling Internet
Image to use Intraware's sales, marketing and administrative
infrastructure.
- The merger would allow Internet Image's shareholders to reduce exposure to
the risks inherent in Internet Image's reliance on products in a limited
market segment. In addition, the merger would offer Internet Image the
opportunity to use the resources of Intraware to develop additional
products and provide additional and more comprehensive levels of service.
- The merger would potentially allow greater access to both human and
financial resources available through association with a larger
corporation.
- The merger would provide liquidity for Internet Image's shareholders
through their ownership of Intraware Common Stock.
In the course of its deliberations, the Internet Image Board reviewed a
number of additional factors relevant to the merger. These factors included:
- information concerning the respective businesses, prospects, historical
financial performances and conditions, operations, technologies,
management, products, customers and future development plans of Internet
Image and Intraware;
- the historical market prices, volatility and trading information with
respect to the Intraware Common Stock;
- the value of the Intraware Common Stock to be received in the merger in
exchange for outstanding Internet Image Capital Stock and to become
issuable upon exercise of Internet Image Stock Options to be assumed by
Intraware;
- the terms of the merger agreement;
- the compatibility of the management and businesses of Internet Image and
Intraware;
- results from Internet Image's management of the results of their due
diligence investigation of Intraware; and
- the fact that the merger is expected to qualify as a tax-free
reorganization.
The Internet Image Board also considered a variety of potentially negative
factors in its deliberations concerning the merger. These factors include:
- the potential loss of revenues from Internet Image business following the
merger as a result of confusion in the marketplace and the possible
exploitation of such confusion by competitors of Internet Image;
- the possibility of management disruption associated with merger;
- the risk that benefits sought to be achieved by merger might not be
realized; and
- the risks described above under "Risk Factors."
The foregoing discussion of the information and factors considered by the
Internet Image Board is not intended to be exhaustive but is believed to include
all material factors considered by the Internet Image Board. In view of the
variety of factors considered in connection with its evaluation of the merger,
the Internet Image Board did not find it practicable to and did not quantify or
otherwise assign relative weights to the specific factors considered in reaching
its determination. In addition, individual members of the Internet Image Board
may have given different weights to different factors. In the course of its
deliberations, the Internet Image Board did not establish a range of values for
Internet Image Capital Stock; however, based on the factors outlined above
Internet Image Board determined that the terms of the merger agreement are fair
to, and that the merger is in the best interests of, Internet Image and its
shareholders.
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INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Internet Image Board with respect
to the merger and merger agreement, Internet Image's shareholders should be
aware that certain members of the Internet Image Board and management have
certain interests in the merger that are in addition to the interests of
Internet Image's shareholders generally. The Internet Image's Board was aware of
these interests and considered them, among other factors, in approving the
merger agreement. These interests are as follows:
- By its original terms, the vesting on the option to purchase 400,000
shares of Common Stock of the Company held by William Almon, a director of
Internet Image, will accelerate in full, upon consummation of the merger.
As of November 15, 1999 200,000 shares of Mr. Almon's options for 400,000
shares were unvested. Mr. Almon's options vest at a rate of 1/24 of the
shares per month See "Security Ownership of Management and Principal
Shareholders of Internet Image".
- In accordance with the Merger Agreement, certain employees of Internet
Image, including certain Internet Image executive officers and directors,
will have the opportunity to receive options to purchase Intraware Common
Stock exercisable in the aggregate for 200,000 shares of Intraware Common
Stock.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the material federal income tax
consequences of the exchange of shares of Internet Image stock for Intraware
common stock pursuant to the merger. 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 Intraware, Internet Image or the Internet Image shareholders
as described herein.
Internet Image shareholders should be aware that this discussion does not
address all federal income tax considerations that may be relevant to particular
shareholders of Internet Image in light of their particular circumstances, such
as shareholders who are banks, insurance companies, tax-exempt organizations,
dealers in securities, or foreign persons, shareholders who do not hold their
Internet Image stock as capital assets, shareholders who acquired their shares
in connection with stock option or stock purchase plans or in other compensatory
transactions who hold Internet Image capital stock as part of an integrated
investment, including a straddle, comprised of shares of Internet Image capital
stock and one or more other positions, or who have previously entered into a
constructive sale of Internet Image capital stock. 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 or subsequent to or concurrently with the merger whether or not such
transactions are in connection with the merger, including, without limitation,
transactions in which Internet Image stock is acquired or Intraware common
stock, including the escrow shares, is disposed of. ACCORDINGLY, INTERNET IMAGE
SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX
CONSEQUENCES OF THE MERGER, INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL AND
FOREIGN TAX CONSEQUENCES TO THEM OF THE MERGER IN THEIR PARTICULAR
CIRCUMSTANCES.
It is anticipated that the merger will be treated as a "reorganization"
within the meaning of Section 368(a) of the Code (a "Reorganization"). Assuming
the merger is a Reorganization based upon the truth and accuracy of certain
factual representations of Intraware, Tango Acquisition Corp. and Internet
Image, then, subject to the assumptions, limitations and qualifications referred
to herein, the merger should result in the following federal income tax
consequences:
- No gain or loss will be recognized by holders of Internet Image stock upon
their receipt of Intraware common stock solely in exchange for Internet
Image stock in the merger (except to the extent of cash received in lieu
of a fractional share of the common stock of Intraware).
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- The aggregate tax basis of the Intraware common stock received by Internet
Image shareholders in the merger (including the escrow shares and any
fractional share of Intraware common stock not actually received) will be
the same as the aggregate tax basis of Internet Image stock surrendered in
exchange therefor less the tax basis, if any, allocated to fractional
share interests.
- The holding period of the Intraware common stock (including the escrow
shares) received in the merger will include the period for which the
Internet Image stock surrendered in exchange therefor was held provided
that the Internet Image stock so surrendered is held as a capital asset at
the time of the merger.
- A shareholder who exercises dissenters' rights with respect to a share of
Internet Image stock and who receives payment for such stock in cash will
generally recognize capital gain or loss measured by the difference
between the shareholder's tax basis in such share and the amount of cash
received, provided that such payment is neither essentially equivalent to
a dividend nor has the effect of a distribution of a dividend.
- Neither Intraware, Tango Acquisition Corp. nor Internet Image will
recognize material amounts of gain solely as a result of the merger.
- A recipient of shares of Intraware common stock could recognize gain to
the extent that such shares were considered to be received in exchange for
services or property (other than solely Internet Image stock). All or a
portion of such gain may be taxable as ordinary income. Gain could also
have to be recognized to the extent that an Internet Image shareholder was
treated as receiving (directly or indirectly) consideration other than the
common stock of Intraware in exchange for such stockholder's Internet
Image stock.
No ruling has been or necessarily will be obtained from the Internal Revenue
Service (the "IRS") in connection with the merger. Internet Image shareholders
should be aware that the IRS is not precluded from successfully asserting an
opinion that the merger does not qualify as a Reorganization.
A successful IRS challenge to the Reorganization status of the merger would
result in Internet Image shareholders recognizing taxable capital gain or loss
with respect to each share of Internet Image stock surrendered equal to the
difference between the shareholder's tax basis in such share and the fair market
value, as of the closing of the merger, of the Intraware common stock received
in exchange therefor. In such event, a shareholder's aggregate basis in the
Intraware common stock so received would equal its fair market value as of the
closing of the merger and the holding period for such stock would begin the day
after the closing of the merger.
ACCOUNTING TREATMENT
Intraware intends that the merger be accounted for under the pooling method
of accounting in accordance with generally accepted accounting principles.
LISTING ON THE NASDAQ NATIONAL MARKET
Intraware anticipates that the shares of Intraware common stock to be issued
in the merger will be approved for listing on the Nasdaq National Market.
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TERMS OF THE MERGER
THE FOLLOWING IS A SUMMARY OF THE MATERIAL TERMS OF THE MERGER AGREEMENT. A
COPY OF THE MERGER AGREEMENT IS ATTACHED AS ANNEX A TO THIS PROXY
STATEMENT/PROSPECTUS AND IS INCORPORATED HEREIN BY REFERENCE. THE FOLLOWING IS
NOT A COMPLETE STATEMENT OF ALL THE TERMS OF THE MERGER AGREEMENT. STATEMENTS
MADE IN THIS PROXY STATEMENT/PROSPECTUS ARE QUALIFIED BY REFERENCE TO THE MORE
DETAILED INFORMATION SET FORTH IN THE MERGER AGREEMENT. YOU ARE ENCOURAGED TO
READ THE ENTIRE MERGER AGREEMENT.
THE MERGER
Intraware and Internet Image will accomplish the merger by having Tango
Acquisition Corp. merge with Internet Image and Internet Image becomes a
wholly-owned subsidiary of Intraware. The closing of the merger will take place
no later than five business days following the approval of the merger by
Internet Image shareholders and the satisfaction or waiver of the conditions set
forth in the merger agreement unless the parties agree otherwise.
MERGER CONSIDERATION
The merger consideration, that is, the total number of shares of Intraware
common stock to be issued in the merger to Internet Image shareholders and
optionholders, will be calculated by dividing the $36.55 million purchase price,
less any adjustments, as described below, by the deemed trading price of
Intraware common stock for the ten trading days ending three business days prior
to the merger. However, regardless of the trading price, in no event will merger
consideration be less than 1,250,000 shares or more than 2,000,000 shares of
Intraware common stock.
The $36.55 million purchase price for Internet Image may be adjusted by reducing
from it:
- the dollar amount by which the net assets of Internet Image are estimated
to be less than $250,000 at the time of closing; and
- the dollar amount by which certain third party expenses related to the
merger incurred by Internet Image exceed $200,000.
DIRECTORS AND OFFICERS OF INTERNET IMAGE AFTER THE MERGER
Upon the merger, the current sole director and officer of Merger Sub, who is
the current Executive Vice President, Finance and Chief Financial Officer, will
become the sole director and officer of Internet Image. As a result, the current
directors and officers of Internet Image will not be directors of officers of
Internet Image after the merger.
ARTICLES OF INCORPORATION AND BYLAWS OF INTERNET IMAGE AFTER THE MERGER
The current articles of incorporation and bylaws of Merger Sub will become
the articles of incorporation and bylaws of Internet Image upon the merger.
CONVERSION OF INTERNET IMAGE CAPITAL STOCK AS A RESULT OF THE MERGER
Under the terms of the merger agreement, each share of Internet Image
capital stock issued and outstanding immediately prior to the merger, except
those entitled to dissenter's rights, will be cancelled and extinguished and be
converted automatically into the right to receive a number of shares of
Intraware common stock. No fractional shares of Intraware common stock will be
issued in the merger. Instead, any fractional shares of Intraware common stock
to which a holder of Internet Image capital stock is entitled, after aggregating
all shares of Intraware common stock to which such holder is entitled, shall be
rounded up to the nearest whole share of Intraware common stock. The number of
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shares of Intraware common stock to be received by Internet Image shareholders
is discussed in "--Merger Consideration" and in the merger agreement.
CONVERSION OF INTERNET IMAGE SERIES A PREFERRED STOCK
Holders of Internet Image Series A preferred stock will be entitled to
receive, for each share of Internet Image Series A preferred stock they hold,
the number of shares of Intraware common stock equal to the quotient of $0.25
divided by the deemed trading price of Intraware common stock. In addition,
after payment is made as described here and in "Conversion of Internet Image
Series B preferred stock" and "Conversion of Internet Image Series C preferred
stock," holders of Internet Image Series A preferred stock will be entitled to
receive, for each share of Internet Image Series A preferred stock they hold,
the number of shares of Intraware common stock equal to the exchange ratio, as
defined below in "Conversion of Internet Image Common Stock and Preferred
Stock."
CONVERSION OF INTERNET IMAGE SERIES B PREFERRED STOCK
Holders of Internet Image Series B preferred stock will be entitled to
receive, for each share of Internet Image Series B preferred stock they hold,
the number of shares of Intraware common stock equal to the quotient of $1.50
divided by the deemed trading price of Intraware common stock. In addition,
after payment is made as described here and in "Conversion of Internet Image
Series A preferred stock" and "Conversion of Internet Image Series C preferred
stock," holders of Internet Image Series B preferred stock will be entitled to
receive, for each share of Internet Image Series B preferred stock they hold,
the number of shares of Intraware common stock equal to the exchange ratio, as
defined below in "Conversion of Internet Image Common Stock and Preferred
Stock."
CONVERSION OF INTERNET IMAGE SERIES C PREFERRED STOCK
Holders of Internet Image Series C preferred stock will be entitled to
receive, for each share of Internet Image Series C preferred stock they hold,
the number of shares of Intraware common stock equal to the quotient of $2.25
divided by the deemed trading price of Intraware common stock. In addition,
after payment is made as described here and in "Conversion of Internet Image
Series A preferred stock" and "Conversion of Internet Image Series B preferred
stock," holders of Internet Image Series C preferred stock will be entitled to
receive, for each share of Internet Image Series C preferred stock they hold,
the number of shares of Intraware common stock equal to the exchange ratio, as
defined below in "Conversion of Internet Image Common Stock and Preferred
Stock."
CALCULATION OF EXCHANGE RATIO
Since the merger consideration payable by Intraware is to be in exchange for
all outstanding capital stock and options to purchase capital stock, the
exchange ratio shall equal to the quotient obtained by dividing the remaining
merger consideration after payment of the Internet Image preferred stock
preferences, by the sum of:
- the outstanding shares of Internet Image common stock,
- the shares of Internet Image common stock issuable upon exercise or
conversion of outstanding options, warrants or other rights, whether or
not vested, and
- the shares of Internet Image common stock issuable upon the conversion of
outstanding Series A preferred stock, Series B preferred stock and
Series C preferred stock.
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CONVERSION OF INTERNET IMAGE COMMON STOCK AND PREFERRED STOCK
After Intraware pays the preferential amounts described above, the remaining
merger consideration shall be distributed to the holders of Internet Image
common stock, Series A preferred stock, Series B preferred stock and Series C
preferred stock, as follows:
- Each holder of Internet Image common stock shall be entitled to receive,
for each share of Internet Image common stock they hold, the number of
shares of Intraware common stock equal to the exchange ratio, and each
holder of an option to purchase shares of Internet Image common stock will
receive an option as described below.
- Each holder of Series A preferred stock, Series B preferred stock and
Series C preferred stock shall be entitled to receive, for each share of
common stock which such preferred stock would be convertible into prior to
the merger, the number of shares of Intraware common stock equal to the
exchange ratio.
INTERNET IMAGE STOCK OPTIONS
In the merger, Intraware will assume each outstanding option or right to
purchase shares of Internet Image common stock, whether or not vested, and each
such option or right remain outstanding. However, each Internet Image option
will be exercisable for Intraware common stock. The number of shares of
Intraware common stock issuable upon exercise of an Internet Image option and
the exercise price of an Internet Image option will be adjusted to reflect the
exchange ratio of Intraware common stock for Internet Image common stock in the
merger.
PROCEDURE FOR CONVERTING INTERNET IMAGE CAPITAL STOCK
Promptly after the closing date, Internet Image shareholders will receive a
letter of transmittal requesting surrender certificates representing Internet
Image capital stock, along with other customary documents. Upon receipt of the
certificates and other documents, Intraware will issue to the Internet Image
shareholders certificates for Intraware common stock representing their portion
of the merger consideration, subject to the escrow provisions of the merger
agreement described under the section entitled "Terms of the Merger--Escrow Fund
and Indemnification" on page 45 of this proxy statement/ prospectus.
EXCHANGE AGENT
The merger agreement requires Intraware, as soon as practicable after the
merger, to deposit with U.S. Bank Trust, N.A. or such other institution as it
may select (the "Exchange Agent"), for the benefit of the holders of shares of
Internet Image capital stock, certificates representing the shares of Intraware
common stock to be issued in the merger. However, a portion of these shares will
be subject to the escrow provisions of the merger agreement. See "--Escrow Fund
and Indemnification."
EXCHANGE PROCEDURES
Promptly after the closing date, Intraware will mail to each Internet Image
shareholder a letter of transmittal. Once an Internet Image shareholder has
returned his or her Internet Image stock certificate to the Exchange Agent,
together with an executed letter of transmittal and such other documents as may
reasonably be required by the Exchange Agent, the Internet Image shareholder
will receive his or her Intraware stock certificates, less the ten percent
portion placed in the escrow fund. See "--Escrow Fund and Indemnification."
INTERNET IMAGE SHAREHOLDERS SHOULD NOT FORWARD INTERNET IMAGE STOCK
CERTIFICATES TO THE EXCHANGE AGENT UNTIL THEY HAVE RECEIVED A TRANSMITTAL
LETTER. INTERNET IMAGE SHAREHOLDERS SHOULD NOT RETURN INTERNET IMAGE STOCK
CERTIFICATES WITH THEIR PROXY OR CONSENT.
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FORM S-8 FILING
Intraware has agreed to file with the Securities and Exchange Commission,
within 90 days after the merger, a registration statement on Form S-8 to
register shares of Intraware common stock issuable as a result of the exercise
of Internet Image options assumed in the merger.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains customary representations and warranties made
by Internet Image and the following founders and principal shareholders of
Internet Image: Andy Lee; Chao Ping Wang; Lung Chin Tsai and Ling Chu Tsai as
Trustees of the TSAI FAMILY TRUST U/D/T dated May 20, 1998; and Lung Chin Tsai
individually. These representations and warranties relate to various aspects of
Internet Image's business, including:
- Organization and good standing as a corporation
- Ownership of subsidiaries
- Capital structure
- Authorization, execution, delivery and enforceability of the merger
agreement and related agreements
- Absence of conflict with, default under or violation of agreements and
laws
- Absence of need for waivers or consents from any governmental entity or
third party
- Accuracy of financial statements
- Absence of undisclosed liabilities
- Absence of certain changes in the business
- Tax matters
- Absence of restrictions on business activities
- Title to property
- Ownership of intellectual property
- Absence of certain types of agreements, contracts and commitments
- Absence of certain types of transactions with related parties
- Governmental authorizations related to the business
- Litigation matters
- Accounts receivable and inventory of the business
- Full disclosure of the business' minute books
- Compliance with environmental matters
- Absence of any finder's fees for the merger
- Employee benefit plans
- Disclosure of all insurance policies in effect
- Compliance with laws
- Absence of warranties and indemnities related to products or services of
the business
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- Delivery of complete documents related to the business
- Accuracy and completeness of portions of this proxy statement/prospectus
- Pooling of interests
- Completeness of representations made
The representations and warranties of Internet Image and the Principal
Shareholders terminate three years from the closing date. Internet Image and the
Principal Shareholders have an indemnification obligation to Intraware for
breaches of the representations and warranties. See "Terms of the Merger--Escrow
Fund and Indemnification" on Page 45 of this proxy statement/prospectus.
The merger agreement also contains customary representations and warranties
made by Intraware and Merger Sub. These representations and warranties relate to
certain aspects of Intraware's business, including:
- Organization and good standing as a corporation
- Authorization, execution, delivery and enforceability of the merger
agreement and related agreements
- Absence of conflict with, default under or violation of agreements and
laws
- Absence of need for waivers or consents from any governmental entity or
third party
- Capital structure
- Absence of any finder's fees for the merger
- Accuracy and completeness of portions of this proxy statement/prospectus
- Pooling of interests
The representations and warranties of Intraware and Merger Sub terminate at
the date of the merger.
CONDUCT OF BUSINESS OF INTERNET IMAGE PENDING THE MERGER
Internet Image has agreed in the merger agreement to carry on its business
in its usual customary manner during the period from the date of the merger
agreement and continuing until the earlier of the termination of the merger
agreement or the date of the merger. Internet Image has committed to use its
reasonable best efforts consistent with past practices and policies:
- To preserve intact the present business organization of Internet Image
- To keep available the services of their present officers and key employees
- To preserve its relationships with customers, suppliers, distributors,
licensors, licensees and others
Internet Image has also agreed to refrain from taking a variety of actions
that could affect Internet Image's business prior to the closing without
Intraware's prior consent. A complete list of these actions is set out at
Section 4.1 of the merger agreement, which is included as Annex A to this proxy
statement/ prospectus.
NO SOLICITATION BY INTERNET IMAGE OF OTHER OFFERS
Internet Image has agreed that it shall not solicit or initiate any other
offer or proposal to acquire or invest in Internet Image until the earlier of
any termination of the merger agreement or the date of the merger. Internet
Image has further agreed that it will not provide information about itself to
any
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other party or enter into any agreements with any party in connection with a
proposal to acquire or invest in Internet Image.
If Internet Image receives an unsolicited acquisition proposal, Internet
Image has agreed to immediately notify Intraware and disclose the identity of
the offeror and the terms of such proposal.
CONDITIONS TO THE MERGER
There are numerous conditions that have to be satisfied or waived before the
merger can be completed. These conditions are divided into three categories, and
are summarized below.
THE OBLIGATIONS OF EACH PARTY TO EFFECT THE MERGER AGREEMENT ARE SUBJECT TO THE
FOLLOWING CONDITIONS:
- The merger and merger agreement must have been approved by the requisite
vote of the Internet Image shareholders.
- The registration statement, of which this proxy statement/prospectus is a
part, must have been declared effective by the Securities and Exchange
Commission.
- No court order or other legal restraint or prohibition preventing the
consummation of the merger shall be in effect.
- The shares of Intraware common stock to be issued or reserved for issuance
in connection with the merger shall be authorized for listing on the
Nasdaq National Market.
THE OBLIGATIONS OF INTRAWARE AND MERGER SUB TO EFFECT THE MERGER ARE SUBJECT TO
THE FOLLOWING CONDITIONS:
- The representations and warranties of Internet Image and the Principal
Shareholders in the merger agreement shall be true and correct in all
material respects and not cause a material adverse effect on Internet
Image after the date of the merger agreement.
- The representations and warranties of Internet Image and the Principal
Shareholders relative to Internet Image's intellectual property in the
merger agreement shall be true and correct.
- Internet Image and the Principal Shareholders shall have performed and
complied in all material respects with all covenants and obligations of
the merger agreement required to be performed by them.
- No court order or other legal restraint or prohibition preventing the
consummation of the merger shall be in effect.
- There shall not have occurred any claims which may materially and
adversely affect the consummation of the transactions contemplated by the
merger agreement or may have a material adverse effect on Internet Image.
- Any and all consents, waivers, assignments and approvals required to
consummate the merger shall have been obtained.
- Intraware shall have received a legal opinion from legal counsel to
Internet Image.
- Certain key employees of Internet Image shall have entered into employment
agreements and noncompetition agreements with Intraware.
- Each key employee shall be an employee of Internet Image on the Closing
Date.
- Except as disclosed in the merger agreement, there shall not have occurred
any material adverse change in the business, assets, results of
operations, liabilities or financial condition of Internet Image since the
date of the merger agreement.
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- Internet Image shall deliver to Intraware at least three days prior to the
closing date a certified closing balance sheet.
- Shareholders holding at least 95% of the Internet Image capital stock have
approved the merger and merger agreement.
- Affiliates of Internet Image shall have entered into an affiliate
agreement with Intraware.
- Intraware shall have received a letter from PricewaterhouseCoopers stating
its concurrence with management's conclusion as to the appropriateness of
pooling of interest accounting treatment for the merger.
- Intraware shall have received from Internet Image and the Principal
Shareholders a certificate as to the satisfaction of certain conditions
described above.
Any of the above conditions may be waived by Intraware.
THE OBLIGATIONS OF INTERNET IMAGE AND THE PRINCIPAL SHAREHOLDERS TO EFFECT THE
MERGER ARE SUBJECT TO THE FOLLOWING CONDITIONS:
- The representations and warranties of Intraware and Merger Sub in the
merger agreement shall be true and correct in all material respects and
not cause a material adverse effect on Intraware after the date of the
merger agreement.
- No court order or other legal restraint or prohibition preventing the
consummation of the merger shall be in effect.
- There shall not have occurred any event causing a material adverse effect
on Intraware after the date of the merger agreement.
- Internet Image shall have received from Intraware a certificate to the
effect that, as of the date of the merger, the representations and
warranties of Intraware and Merger Sub in the merger agreement shall be
true and correct in all material respects and has not caused a material
adverse effect on the business of Intraware.
Any of the above conditions may be waived by Internet Image.
TERMINATION OF THE MERGER AGREEMENT
The merger agreement may be terminated and the merger abandoned at any time
prior to the merger in certain circumstances which are described below:
- By Internet Image and Intraware, if they mutually agree,
- By Intraware or Internet Image if:
- The merger has not occurred by February 29, 2000, unless the party
seeking to terminate the merger agreement had acted or failed to act in
such a manner to be the 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, or
- There is a final nonappealable order of a federal or state court in
effect preventing the merger, or
- There is any statute, rule or order issued or deemed applicable to the
merger by any governmental entity which would make consummation of the
merger illegal.
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- By Intraware if:
- Any governmental entity has prohibited Intraware's or Merger Sub's
ownership or operation of any portion of the business of Internet
Image, or required Intraware or Internet Image to dispose of or hold
separate all or a portion of the business or assets of Internet Image
or Intraware as a result of the merger, or
- Intraware is not in material breach of its obligations under the merger
agreement and there has been a material breach of any representation,
warranty, covenant or agreement contained in the merger agreement on
the part of Internet Image and such breach has not been cured within
ten days after written notice to Internet Image, or
- An event having a material adverse effect on Internet Image shall have
occurred after the date of the merger agreement.
- By Internet Image if:
- Neither Internet Image nor the Principal Shareholders are in material
breach of its obligations under the merger agreement and there has been
a material breach in any representation, warranty, covenant or
agreement contained in the merger agreement on the part of Intraware or
Merger Sub and such breach has not been cured within ten days after
written notice to Intraware, or
- An event having a material adverse effect on Intraware shall have
occurred after the date of the merger agreement.
ESCROW FUND AND INDEMNIFICATION
The escrow shares will automatically be contributed to the escrow fund on
behalf of each holder of Internet Image capital stock at the time of the merger
in proportion to the aggregate number of shares of Intraware common stock that
such holder would otherwise be entitled under the merger agreement. The escrow
fund will be available to compensate Intraware, Merger Sub and their officers,
directors and affiliates for:
- Any losses incurred by Intraware or for which Intraware would otherwise be
liable as a result of any inaccuracy or breach of a representation or
warranty of Internet Image or the Principal Shareholders contained in the
merger agreement,
- Any failure by Internet Image or the Principal Shareholders to perform or
comply with any covenant relating to unresolved contingencies existing at
the time of the merger,
- If not previously deducted from the purchase price, the amount that total
liabilities minus total assets of Internet Image at the time of the
closing exceeds $250,000,
- If not previously deducted from the purchase price, the actual third party
expenses related to the merger that exceed the greater of estimated third
party expenses or $200,000.
For purposes of compensating Intraware for its losses, the escrow shares
will be valued at the average closing sales price of Intraware common stock for
the ten (10) consecutive trading days ending three (3) business days prior to
the closing date. In addition to the escrow fund, if certain losses have not
been satisfied by the escrow fund, each of the Principal Shareholders shall
severally indemnify the Indemnified Parties up to an amount equal to their
respective portions of the merger consideration for losses incurred.
Shareholders will have voting rights with respect to the escrow shares while
in escrow, and will receive dividends, if any, attributable to the escrow
shares.
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Subject to resolution of unsatisfied claims by Intraware, the escrow fund
and the indemnity will terminate on the date of the issuance by Intraware's
independent auditors of a signed report in respect of Intraware's audited
financial statements for the fiscal year ending February 29, 2000, which is
anticipated to occur on or about April 15, 2000. After the merger, the escrow
shares and the indemnity will be the exclusive remedy of the Indemnified Parties
to recover for any losses they suffer by reason of the breach of any
representation, warranty or covenant of Internet Image or the Principal
Shareholders. However, the Indemnified Party's remedy will not be so limited in
the case of fraud by Internet Image or the Principal Shareholders.
BY APPROVING THE MERGER AGREEMENT, INTERNET IMAGE SHAREHOLDERS WILL HAVE
CONSENTED TO THE APPOINTMENT OF LUNG CHIN TSAI, CHIEF EXECUTIVE OFFICER OF
INTERNET IMAGE, TO ACT AS THE SHAREHOLDER REPRESENTATIVE ON BEHALF OF INTERNET
IMAGE SHAREHOLDERS, TO AUTHORIZE DELIVERY OF ESCROW SHARES TO THE INDEMNIFIED
PARTIES IN SATISFACTION OF CLAIMS BROUGHT BY THE INDEMNIFIED PARTIES, TO OBJECT
TO SUCH DELIVERIES, TO AGREE TO, TO NEGOTIATE AND TO ENTER INTO SETTLEMENTS AND
COMPROMISES WITH RESPECT TO SUCH CLAIMS, AND TO TAKE CERTAIN OTHER ACTION ON
BEHALF OF INTERNET IMAGE SHAREHOLDERS, ALL AS MORE FULLY DESCRIBED IN
ARTICLE VII OF THE MERGER AGREEMENT. INTERNET IMAGE SHAREHOLDERS ARE ENCOURAGED
TO READ ARTICLE VII OF THE MERGER AGREEMENT FOR A MORE DETAILED EXPLANATION OF
THE ESCROW FUND AND RIGHTS WITH RESPECT THERETO.
FEES AND EXPENSES
Regardless of whether the merger is consummated, all fees and expenses
incurred by a party in connection with the merger agreement and the transactions
contemplated thereby shall be the obligation of the respective party incurring
such fees and expenses. If the merger is consummated, then Intraware will pay
certain third party expenses incurred by Internet Image. Intraware shall have
full recourse to the escrow fund for payment of all third party expenses
incurred by Internet Image, other than those expenses that Intraware has agreed
to pay, exceeding $200,000.
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OTHER AGREEMENTS
NON-COMPETITION AGREEMENTS
The following is a brief summary of certain provisions of the noncompetition
agreement, the form of which is attached hereto as Annex III:
Concurrent with the execution of the merger agreement and effective as of
the merger, some shareholders of Internet Image entered into noncompetition
agreements with Intraware that provide, among other things, that, beginning on
the closing date of the merger and ending on the second anniversary of the
merger, such shareholders shall not, without the consent of Intraware, engage in
certain competitive business activities directly or indirectly relating to
Intraware or Internet Image's line of business in any country, province, state,
city or other political subdivision of the world in which Intraware or Internet
Image engages in business or otherwise distributes, licenses or sells its
products. The noncompetition agreements executed by the shareholders also
provide that they will not directly or indirectly solicit, encourage or induce
any employee of Intraware or Internet Image to terminate such employee's
employment with Intraware or Internet Image.
INTERNET IMAGE AFFILIATE AGREEMENTS
All affiliates of Internet Image will enter into affiliate agreements with
Intraware and Internet Image. Internet Image's affiliates include all of
Internet Image's directors and officers and any shareholder that owns 10% or
more of Internet Image's outstanding capital stock. The affiliate agreements
provide, among other things, that Internet Image affiliates will not sell,
transfer or otherwise dispose of the shares of Intraware issued to such
affiliate in connection with the merger other than in compliance with Rule 145
of the Securities Act unless an affiliate delivers to Intraware a written
opinion from counsel, reasonably acceptable to Intraware, that such sale,
transfer or disposition is exempt from registration under the Securities Act.
Additionally, the affiliate agreements provide that Intraware shall place
legends on the stock certificates and give stop transfer orders to its transfer
agent to ensure compliance with Rule 145.
INTRAWARE AFFILIATE AGREEMENTS
All affiliates of Intraware will enter into affiliate agreements with
Intraware. Intraware's affiliates include all of Intraware's directors and
officers and any shareholder that owns 10% or more of Internet Image's
outstanding capital stock. The affiliate agreements provide, among other things,
that Intraware affiliates will not during the period beginning November 1, 1999
and ending two trading days after Intraware publicly announces financial results
covering at least 30 days of combined operations of Intraware and the Internet
Image, sell, exchange, transfer, pledge, distribute, make any gift or otherwise
dispose of or grant any option, establish any "short" or put-equivalent position
with respect to or enter into any similar transaction through derivatives or
otherwise intended or having the effect, directly or indirectly, to reduce so
the affiliate's risk relative to any shares of Intraware common stock or any
shares of Internet Image capital stock, unless Intraware has advised the
affiliate in writing that such sale, exchange, transfer, pledge, distribution,
gift or other disposition or transaction would not preclude pooling of interests
accounting treatment for the merger.
VOTING AGREEMENTS
The following is a brief summary of certain provisions of the voting
agreement, the form of which is attached hereto as Annex II:
On October 1, 1999, Intraware and Internet Image entered into voting
agreements with Lung C. Tsai, TSAI FAMILY TRUST, Andy Lee, Austin Jieh, William
J. Almon, Tai Yuen Venture Capital Investment Corporation and the Pac-Link Fund,
each of which is either a director or executive officer
47
<PAGE>
of Internet Image or an affiliate of either a director or officer. Together, the
voting agreement parties held on October 1, 1999, 2,217,080 shares of Internet
Image Common Stock and 965,558 shares of Internet Image preferred stock
accounting for approximately 62.1% of the outstanding shares of Internet Image
Common Stock and 18.2% of the Internet Image preferred stock. Based on
beneficial holdings of the voting agreement parties as of October 1, 1999, the
vote in accordance with the voting agreements of the shares of Internet Image
stock subject thereto will not be sufficient to obtain the required shareholder
approval of the merger agreement, the merger and related matters. Pursuant to
the terms of the voting agreement, each voting agreement party has agreed to
vote or cause to be voted at the special meeting or in any other circumstances
upon which a vote, consent or other approval with respect to the merger and the
merger agreement is sought his, her or its shares of Internet Image stock now or
hereafter owned in favor of approval and adoption of the merger and the merger
agreement and each of the other transactions contemplated thereby.
INTRAWARE LOAN TO INTERNET IMAGE
In the event that the merger has not closed before January 1, 2000 and the
Agreement and Plan of Reorganization is still in effect, Intraware has agreed to
provide Internet Image with a credit facility for up to an aggregate of $250,000
per month thereafter, up to a cumulative maximum of $500,000. This credit
facility will be secured by all of the intellectual property of Internet Image.
48
<PAGE>
SELECTED UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
The following pro forma unaudited combined condensed financial statements
give effect to the proposed Merger of Internet Image and a wholly-owned
subsidiary of Intraware, to be accounted for as a pooling of interests. The pro
forma unaudited combined condensed balance sheet presents the combined financial
position of Intraware as of August 31, 1999 and Internet Image as of
September 30, 1999 assuming that the proposed Merger had occurred as of
August 31, 1999. Such pro forma information is based upon the historical balance
sheet data of Intraware as of August 31, 1999 and Internet Image as of
September 30, 1999. The pro forma unaudited combined condensed statements of
operations give effect to the proposed Merger by combining the results of
operations of Intraware for the fiscal years ended February 28,1999 and 1998 and
from inception to February 28,1997 and for the six months ended August 31, 1999
and 1998, with the results of operations of Internet Image for the year from
April 1, 1998 to March 31, 1999, for the fiscal year ended June 30, 1998 and
from inception to June 30, 1997 and for the six months ended September 30, 1999
and 1998, on a pooling of interests basis. These unaudited pro forma combined
condensed financial statements should be read in conjunction with the historical
consolidated financial statements and notes thereto of Intraware and Internet
Image included elsewhere in this Registration Statement.
The pro forma information is presented for illustrative purposes only and is
not necessarily indicative of the operating results or financial position that
would have occurred if the Merger had been consummated, nor is it necessarily
indicative of future operating results or financial position.
49
<PAGE>
PRO FORMA UNAUDITED COMBINED CONDENSED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
INTRAWARE, INC.
BALANCE SHEET INTERNET IMAGE
AUGUST 31, BALANCE SHEET PRO FORMA
1999 SEPTEMBER 30, 1999 ADJUSTMENTS COMBINED
--------------- ------------------ ----------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............ $ 8,436 $ 566 $ 9,002
Short term investments............... 12,148 12,148
Accounts receivable, net............. 18,205 37 18,242
Prepaid licenses and services........ 8,845 8,845
Other current assets................. 2,168 37 2,205
------- ------ -------
Total current assets................. 49,802 $ 640 50,442
Long term investments.................. 34,812 34,812
Property and equipment, net............ 4,215 113 4,328
Other assets........................... 900 113 1,013
------- ------ -------
Total assets......................... $89,729 $ 866 $90,595
======= ====== =======
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................... 11,832 84 11,916
Accrued expenses..................... 2,830 159 1,000(3) 3,989
Deferred revenue..................... 14,660 544 15,204
Other current liabilities............ 687 687
------- ------ -------- -------
Total current liabilities............ 30,009 787 1,000 $31,796
Long term obligations.................. 1,037 1,037
------- ------ -------- -------
31,046 787 1,000 32,833
Shareholders' equity................... 58,683 79 (1,000)(3) $57,762
------- ------ -------- -------
Total liabilities and shareholders'
equity............................... $89,729 $ 866 $ -- $90,595
======= ====== ======== =======
</TABLE>
See Accompanying Notes to Pro Forma Unaudited Combined Condensed Financial
Statements.
50
<PAGE>
PRO FORMA UNAUDITED COMBINED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED INCEPTION
ENDED AUGUST 31, FEBRUARY 28, TO FEBRUARY 28,
------------------- ------------------- ---------------
1999 1998 1999 1998 1997
-------- -------- -------- -------- ---------------
<S> <C> <C> <C> <C> <C>
Net revenues........................... $ 35,841 $13,314 $ 38,525 $10,444 $ 6
Cost of revenues....................... 27,034 10,963 30,455 8,359 5
-------- ------- -------- ------- -------
Gross profit........................... 8,807 2,351 8,070 2,085 1
Operating expenses:
Sales and marketing.................... 12,466 4,527 14,457 4,218 332
Product development.................... 2,998 1,404 3,249 2,114 589
General and administrative............. 3,078 1,345 3,308 1,739 614
Stock option compensation.............. 1,764 376 1,771 67 --
-------- ------- -------- ------- -------
Total operating expenses........... 20,306 7,652 22,785 8,138 1,535
-------- ------- -------- ------- -------
Loss from operations................... (11,499) (5,301) (14,715) (6,053) (1,534)
Interest income, net................... 1,411 29 54 20 27
-------- ------- -------- ------- -------
Net Loss............................... $(10,088) $(5,272) $(14,661) $(6,033) $(1,507)
======== ======= ======== ======= =======
Basic and Diluted:
Net loss per share..................... $ (.42) $ (1.08) $ (2.70) $ (1.78) $ (1.03)
======== ======= ======== ======= =======
Weighted average shares................ 23,798 4,882 5,420 3,385 1,459
======== ======= ======== ======= =======
</TABLE>
See Accompanying Notes to Pro Forma Unaudited Combined Condensed Financial
Statements.
51
<PAGE>
NOTES TO PRO FORMA UNAUDITED COMBINED CONDENSED FINANCIAL STATEMENTS
1. The pro forma unaudited combined condensed financial statements reflect
the issuance of approximately 1,400,000 million shares of Intraware Common Stock
(based on the $25.88 closing price of the common stock on October 1, 1999) for
an aggregate of approximately 9.8 million shares of Internet Image Capital Stock
(based on shares of Internet Image Capital Stock and common stock options
outstanding as of September 30, 1999) in connection with the Merger based on an
Exchange Ratio of 0.14358 of a share of Intraware Common Stock for each share of
Internet Image Capital Stock. The actual number of shares of Intraware Common
Stock to be issued will be determined at the Effective Time based on average
closing sales price of Intraware's Common Stock for the ten trading days ending
three business days prior to closing ("average closing price"). The number of
Intraware Common Stock will be determined by dividing $36.55 million by the
average closing price. However, in no event shall Intraware issue less than
1,250,000 million shares or more than 2,000,000 million shares of Common Stock.
The pro forma unaudited combined condensed balance sheet presents the
combined financial position of Intraware as of August 31, 1999 and Internet
Image as of September 30, 1999 assuming that the proposed Merger had occurred as
of August 31, 1999. Such pro forma information is based upon the historical
consolidated balance sheet data of Intraware as of August 31, 1999 and Internet
Image as of September 30, 1999. The pro forma unaudited combined condensed
statements of operations give effect to the proposed Merger by combining the
results of operations of Intraware for the fiscal years ended February 28,1999
and 1998 and from inception to February 28,1997 and for the six months ended
August 31, 1999 and 1998, with the results of operations of Internet Image for
the year from April 1, 1998 to March 31, 1999, for the fiscal year ended
June 30, 1998 and from inception to June 30,1997 and for the six months ended
September 30, 1999 and 1998, on a pooling of interests basis.
2. There were no material transactions between Intraware and Internet Image
during any period presented.
3. Intraware and Internet Image will incur aggregate transaction costs of
approximately $1 million associated with the Merger. The pro forma combined
balance sheet as of August 31, 1999 has been adjusted by $1 million to reflect
the aforementioned costs. The estimated charge is not reflected in the pro forma
unaudited combined condensed statements of operations data. The amount of this
charge is a preliminary estimate and therefore is subject to change.
4. There were no pro forma adjustments required to prepare the pro forma
unaudited combined condensed statements of operations. The tables below sets
forth the composition of the unaudited pro forma combined net revenues and net
loss for each of the periods shown had the Merger taken place at the beginning
of the periods shown. Intraware's fiscal year end is February 28 and Internet
Ware's fiscal year end is June 30.
For the six months ended August 31, 1999 and 1998, Intraware's statement of
operations for the six months ended August 31, 1999 and 1998 were combined with
Internet Image's statement of operations for the three months ended
September 30, 1999 and 1998 and for the three months ended June 30, 1999 and
1998, respectively, on a pooling of interest basis, as follows:
<TABLE>
<CAPTION>
INTRAWARE INTERNET IMAGE INTERNET IMAGE
6 MONTHS ENDED 3 MONTHS ENDED 3 MONTHS ENDED
FOR THE 6 MONTHS ENDED AUGUST 31, 1999 AUGUST 31, 1999 SEPTEMBER 30, 1999 JUNE 30, 1999 COMBINED
- -------------------------------------- --------------- ------------------ -------------- --------
<S> <C> <C> <C> <C>
Net Revenues........................... $35,616 $ 160 $ 65 $ 35,841
Net Loss............................... $(8,395) $(775) $(918) $(10,088)
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
INTRAWARE INTERNET IMAGE INTERNET IMAGE
6 MONTHS ENDED 3 MONTHS ENDED 3 MONTHS ENDED
FOR THE 6 MONTHS ENDED AUGUST 31, 1998 AUGUST 31, 1998 SEPTEMBER 30, 1998 JUNE 30, 1998 COMBINED
- -------------------------------------- --------------- -------------------- -------------- --------
<S> <C> <C> <C> <C>
Net Revenues........................... $13,264 $ 28 $ 22 $13,314
Net Loss............................... $(4,025) $(692) $(555) $(5,272)
</TABLE>
For the year ended February 28, 1999, Intraware's statement of operations
for the year ended February 28, 1999 was combined with Internet Image's
statement of operations for a period from April 1, 1998 to March 31, 1999 on a
pooling of interest basis. The Internet Image period from April 1, 1998 to
March 31, 1999 was created by excluding the three months period ended June 30,
1999 and including the three months period ended June 30, 1998 from the fiscal
year ended June 30, 1999. The combination is detailed below:
<TABLE>
<CAPTION>
INTRAWARE INTERNET IMAGE INTERNET IMAGE INTERNET IMAGE
12 MONTHS ENDED 12 MONTHS ENDED 3 MONTHS ENDED 3 MONTHS ENDED
FOR THE YEAR ENDED FEBRUARY 28, 1999 FEBRUARY 28, 1999 JUNE 30, 1999 JUNE 30, 1999 JUNE 30, 1998 COMBINED
- ------------------------------------ ----------------- --------------- -------------- -------------- --------
<S> <C> <C> <C> <C> <C>
Net Revenues..................... $ 38,417 $ 151 $ 65 $ 22 $ 38,525
Net Loss......................... $(12,033) $(2,991) $(918) $(555) $(14,661)
</TABLE>
For the year ended February 28, 1998, Intraware's statement of operations
for the year ended February 28, 1998 was combined with Internet Image's
statement of operations for the year ended June 30, 1998 on a pooling of
interest basis as follows:
<TABLE>
<CAPTION>
INTRAWARE INTERNET IMAGE
12 MONTHS ENDED 12 MONTHS ENDED
FOR THE YEAR ENDED FEBRUARY 28, 1998 FEBRUARY 28, 1998 JUNE 30, 1998 COMBINED
- ------------------------------------ ----------------- --------------- --------
<S> <C> <C> <C>
Net Revenues......................................... $10,387 $ 57 $10,444
Net Loss............................................. $(4,049) $(1,984) $(6,033)
</TABLE>
For the period from inception to February 28, 1997, Intraware's statement of
operations for the period from inception to February 28, 1997 was combined with
Internet Image's statement of operations for the period from inception to
June 30, 1997 on a pooling of interest basis as follows:
<TABLE>
<CAPTION>
INTRAWARE INTERNET IMAGE
FROM INCEPTION TO FROM INCEPTION TO
FOR THE PERIOD FROM INCEPTION TO FEBRUARY 28, 1997 FEBRUARY 28, 1997 JUNE 30, 1997 COMBINED
- -------------------------------------------------- ----------------- ----------------- --------
<S> <C> <C> <C>
Net Revenues........................................ $ 6 $ 0 $ 6
Net Loss............................................ $(944) $(563) $(1,507)
</TABLE>
5. The pro forma unaudited combined basic and diluted net income (loss) per
share is based on the weighted average number of shares of common stock shares
outstanding of Intraware and approximately 1,413,000 shares of Intraware common
stock assumed to be issued as if issuance had taken place at the beginning of
the periods presented.
53
<PAGE>
INTRAWARE SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected historical financial data of Intraware as of and for
the years ended February 28, 1999 and 1998 and for the period from Inception
(August 14, 1996) to February 28, 1997 have been derived from the financial
statements of Intraware, which have been audited by PricewaterhouseCoopers LLP,
independent certified public accountants. The selected historical financial data
as of August 31, 1999 and for the six months ended August 31, 1999 and 1998 have
been derived from the unaudited financial statements of Intraware, which have
been prepared on the same basis as the audited financial statements of
Intraware. The selected historical financial data should not be considered to be
indicative of future results and should be read in conjunction with Intraware's
financial statements, the related notes thereto and "Intraware Management's
Discussion and Analysis of Financial Condition and Results of Operations".
<TABLE>
<CAPTION>
FROM
INCEPTION TO
SIX MONTHS ENDED YEARS ENDED FEBRUARY
AUGUST 31, FEBRUARY 28, 28,
------------------------- ------------------- ------------
1999 1998 1999 1998 1997
----------- ----------- -------- -------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues........................... $35,616 $13,264 $ 38,417 $10,387 $ 6
Cost of net revenues................... 27,014 10,948 30,412 8,348 5
------- ------- -------- ------- ------
Gross profit......................... 8,602 2,316 8,005 2,039 1
------- ------- -------- ------- ------
Operating expenses:
Sales and marketing.................... 11,799 4,066 13,507 3,496 233
Product development.................... 2,280 786 2,031 951 253
General and administrative............. 2,797 1,188 2,961 1,492 467
Stock option compensation.............. 1,511 303 1,552 67 --
------- ------- -------- ------- ------
Total operating expenses............. 18,387 6,343 20,051 6,006 953
------- ------- -------- ------- ------
Loss from operations..................... (9,785) (4,027) (12,046) (3,967) (952)
Interest and other income (expense),
net.................................... 1,390 2 13 (82) 8
------- ------- -------- ------- ------
Net loss................................. $(8,395) $(4,025) $(12,033) $(4,049) $ (944)
------- ------- -------- ------- ------
Basic and diluted net loss per share..... $ (0.38) $ (1.16) $ (3.00) $ (2.05) $(1.36)
======= ======= ======== ======= ======
Shares used in computing basic and
diluted net loss per share............. 22,385 3,469 4,007 1,972 694
======= ======= ======== ======= ======
</TABLE>
<TABLE>
<CAPTION>
FEBRUARY 28,
AUGUST 31, -------------------
1999 1999 1998
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)................................... $19,793 $(1,177) $ (220)
Total assets................................................ 89,729 35,006 15,384
Long term obligations....................................... 1,037 168 105
Total stockholders' equity.................................. 58,683 969 770
</TABLE>
54
<PAGE>
INTRAWARE MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THIS INTRAWARE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS SUBJECT TO RISKS
AND UNCERTAINTIES. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED
IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF THE FACTORS SET FORTH IN "RISK
FACTORS" BEGINNING ON PAGE OF THIS PROXY STATEMENT/PROSPECTUS.
INTRAWARE OVERVIEW
Intraware is the leading IT e-marketplace for web-based software and
services. Intraware enables IT professionals worldwide to efficiently and
cost-effectively research, evaluate, purchase, download and update
business-class software online. As a business-to-business company, Intraware
provides an online purchasing service through ECOMMERCE, comprehensive IT
information and interactive research services through EKNOWLEDGE and software
update management services through ESERVICES.
Intraware was incorporated in August 1996, and, from inception until
February 1997, Intraware's operations consisted primarily of various start-up
activities, including development of technologies central to its business,
recruiting personnel and raising capital. In February 1997, Intraware began
providing online software distribution ECOMMERCE services, later branded as
INTRAWARE.SHOP, and online software update and license management ESERVICES
branded as SUBSCRIBNET. In April 1998, Intraware introduced the COMPARISCOPE
service to provide information technology professionals with comprehensive,
objective online analysis of various types of software. In September 1998,
Intraware added EKNOWLEDGE to its online service offerings, providing corporate
information technology professionals with proprietary content, aggregated
technical information and related resources. Intraware generates revenue from
sales of third-party software vendors' products through ECOMMERCE, and from
sales of its online ESERVICES and EKNOWLEDGE products including SUBSCRIBNET,
COMPARISCOPE and GOLD/SILVER MEMBERSHIPS. Historically, Intraware has derived
the majority of its revenue from software product sales and did not recognize
material online service revenue until the quarter ended November 30, 1998.
Intraware first recognized revenue from software product sales in
February 1997. Software product sales revenue constituted 100% of net revenue
for the period from inception through the year ended February 28, 1997, 100% of
net revenue for the year ended February 28, 1998 and 90% of net revenue for the
year ended February 28, 1999. Software product sales constituted 85% of
Intraware's total net revenue for the six months ended August 31, 1999.
Intraware expects that software product sales will continue to represent the
substantial majority of its total net revenue for the foreseeable future.
Intraware generates software product revenue from the sale of third party
software and related maintenance products. Of this revenue, sale of software
licenses is recognized when there is evidence of an arrangement for a fixed and
determinable fee that is probable of collection and the software is available
for customer download through the ECOMMERCE intraware.shop. Related maintenance
revenue is recognized ratably over the terms of the underlying service
contracts. Online ESERVICE revenue is derived primarily from delivery of
SUBSCRIBNET and other fee-based information services. Online service revenue is
recognized ratably over the terms of the underlying service contracts.
Intraware has a limited operating history upon which investors may evaluate
its business and prospects. Since inception, Intraware has incurred significant
losses, and, as of August 31, 1999, had an accumulated deficit of approximately
$25.4 million. Intraware intends to expend significant financial and management
resources on the development of additional services, sales and marketing,
technology and operations to support larger-scale operations and greater service
offerings. As a result, Intraware expects to incur additional losses and
continued negative cash flow from operations for the foreseeable future. Such
losses are anticipated to increase significantly from current levels. There can
be no assurance that the Intraware's sales will increase or continue at their
current level. There also can be no assurances that Intraware will achieve or
maintain profitability or generate cash from operations in
55
<PAGE>
future periods. Intraware's future must be considered in light of the risks
frequently encountered by companies in their early stage of development,
particularly companies in new and rapidly evolving markets such as e-commerce.
To address these risks, Intraware must, among other things, maintain existing
and develop new relationships with software publishers, continue to improve
existing and develop new services, implement and successfully execute its
business and marketing strategy, continue to develop and upgrade its technology
and transaction-processing systems, provide superior customer service, respond
to competitive developments and attract, retain and motivate qualified
personnel. There can be no assurance that Intraware will be successful in
addressing such risks and the failure to do so would have a material adverse
effect on the Intraware's business, financial condition and results of
operations. Intraware's current and future expense levels are based largely on
its planned operations and estimates of future sales. Sales and operating
results generally depend on the volume and timing of orders received, which are
difficult to forecast. Intraware may be unable to adjust spending in a timely
manner to compensate for any unexpected revenue shortfall. Accordingly, any
significant shortfall in sales would have an immediate adverse effect on
Intraware's business, financial condition and results of operations. In view of
the rapidly evolving nature of Intraware's business and its limited operating
history, Intraware is unable to accurately forecast its sales and believes that
period-to-period comparisons of its operating results are not necessarily
meaningful and should not be relied upon as an indication of future performance.
INTRAWARE RESULTS OF OPERATIONS
FOR THE SIX MONTHS ENDED AUGUST 31, 1999 AND 1998, THE YEARS ENDED
FEBRUARY 28, 1999 AND 1998 AND THE PERIOD FROM AUGUST 14, 1996 (INCEPTION)
THROUGH FEBRUARY 28, 1997:
TOTAL REVENUE
Revenue for the periods listed above were: (in thousands):
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
AUGUST 31, FOR THE YEAR ENDED FEBRUARY 28,
-------------------------------------------- --------------------------------------------
1999 1998 1999 1998
------------------- ------------------- ------------------- -------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues:
Software product sales..... $30,275 85% $13,185 99% $34,741 90% $10,383 100%
Online services............ 5,341 15% 79 1% 3,676 10% 4 --
------- --- ------- --- ------- --- ------- ---
Total net revenues....... $35,616 100% $13,264 100% $38,417 100% $10,387 100%
======= === ======= === ======= === ======= ===
<CAPTION>
AUGUST 14, 1996
(INCEPTION)
THROUGH
FEBRUARY 28, 1997
-------------------
<S> <C> <C>
Net revenues:
Software product sales..... $6 100%
Online services............ -- --
-- ---
Total net revenues....... $6 100%
== ===
</TABLE>
The increase in revenue, for all periods, was due to a focus on increased
sales. Product revenue accounted for the largest part of the increase in all
periods.
TOTAL COST OF REVENUE
Cost of revenue for the periods listed above were (in thousands):
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED FOR THE YEAR ENDED AUGUST 14, 1996
AUGUST 31, FEBRUARY 28, (INCEPTION)
------------------------- --------------------- THROUGH
1999 1998 1999 1998 FEBRUARY 28, 1997
----------- ----------- --------- --------- -----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cost of net revenues:
Software product sales....................... $26,371 $10,771 $29,665 $8,348 $ 5
Online services.............................. 643 177 747 -- --
------- ------- ------- ------ -----
Total cost of net revenues................. 27,014 10,948 30,412 8,348 5
------- ------- ------- ------ -----
Gross profit............................. $ 8,602 $ 2,316 $ 8,005 $2,039 $ 1
======= ======= ======= ====== =====
Margin percent......................... 24.2% 17.5% 20.8% 19.6% 16.7%
======= ======= ======= ====== =====
</TABLE>
56
<PAGE>
Costs of revenue consists primarily of the cost of third-party products
sold, content development and acquisition, Internet connectivity and allocated
overhead charges. Intraware purchases third-party products at a discount to the
third-party's established list prices according to standard reseller terms. The
increase in the cost of revenue dollars, for all periods, was primarily due to
higher sales. The margin percentage increase primarily reflects stronger margins
on product sales.
SALES AND MARKETING
Sales and marketing costs for the periods listed above were (in thousands):
<TABLE>
<CAPTION>
AUGUST 14, 1996
FOR THE SIX MONTHS ENDED AUGUST 31, FOR THE YEAR ENDED FEBRUARY 28, (INCEPTION)
- ---------------------------------------- ----------------------------------------- THROUGH
1999 1998 1999 1998 FEBRUARY 28, 1997
- ------------------ ------------------- ------------------- ------------------- -------------------
(UNAUDITED) (UNAUDITED)
AMOUNT % OF REV AMOUNT % OF REV AMOUNT % OF REV AMOUNT % OF REV AMOUNT % OF REV
- ------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$11,799 33.1% $4,066 30.7% $13,507 35.2% $3,496 33.7% $233 --
======= ==== ====== ==== ======= ==== ====== ==== ==== ========
</TABLE>
Sales and marketing expenses primarily consist of compensation of sales and
marketing personnel, advertising, promotional expenses, training and other
marketing related costs. The increase, in all periods, is primarily the result
of additional advertising and marketing expenditures as well as the addition of
personnel and external sales offices throughout the United States. Intraware
plans to make significant investments in sales and marketing to expand the
direct sales force, increase marketing expenditures, continue to develop
strategic relationships to drive traffic to Intraware's web-site and generate
leads for products and services.
PRODUCT DEVELOPMENT
Product development costs for the periods listed above were (in thousands):
<TABLE>
<CAPTION>
AUGUST 14, 1996
FOR THE SIX MONTHS ENDED AUGUST 31, FOR THE YEAR ENDED FEBRUARY 28, (INCEPTION)
- --------------------------------------- ----------------------------------------- THROUGH
1999 1998 1999 1998 FEBRUARY 28, 1997
- ----------------- ------------------- ------------------- ------------------- -------------------
(UNAUDITED) (UNAUDITED)
AMOUNT % OF REV AMOUNT % OF REV AMOUNT % OF REV AMOUNT % OF REV AMOUNT % OF REV
- ------ -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$2,280 6.4% $786 5.9% $2,031 5.3% $951 9.2% $253 --
====== ==== ==== ==== ====== ==== ==== ==== ==== ========
</TABLE>
Product development expenses primarily consist of personnel costs,
consulting and equipment depreciation. Costs related to research, design and
development of products and services have also been charged to product
development expense as incurred. The increase, for all periods, was primarily
due to an increase in the number of product development personnel employed to
support expansion of the SUBSCRIBNET online service and other online service
offerings. Intraware believes significant investments in product development is
essential to its future success and expects that product development expense
will increase in future periods.
GENERAL AND ADMINISTRATIVE
General and administrative costs were (in thousands):
<TABLE>
<CAPTION>
AUGUST 14, 1996
FOR THE SIX MONTHS ENDED AUGUST 31, FOR THE YEAR ENDED FEBRUARY 28, (INCEPTION)
- --------------------------------------- ----------------------------------------- THROUGH
1999 1998 1999 1998 FEBRUARY 28, 1997
- ----------------- ------------------- ------------------- ------------------- -------------------
(UNAUDITED) (UNAUDITED)
AMOUNT % OF REV AMOUNT % OF REV AMOUNT % OF REV AMOUNT % OF REV AMOUNT % OF REV
- ------ -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$2,797 7.9% $1,188 9.0% $2,961 7.7% $1,492 14.4% $467 --
====== ==== ====== ==== ====== ==== ====== ==== ==== ========
</TABLE>
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General and administrative expenses consist primarily of compensation for
administrative and executive personnel, facility costs and fees for professional
services. The increase, in all periods, is primarily due to the use of outside
professional consulting services, including the ongoing implementation of Sales
Force Automation and Accounting software. In addition, Intraware increased
expenditures in accounting and legal for strategic partnering arrangements and
compliance with reporting obligations as a public company. Management expects
general and administrative expense to increase in future periods.
STOCK OPTION COMPENSATION
Stock compensation expense for the periods listed above was (in thousands):
<TABLE>
<CAPTION>
AUGUST 14, 1996
FOR THE SIX MONTHS ENDED AUGUST 31, FOR THE YEAR ENDED FEBRUARY 28, (INCEPTION)
- --------------------------------------- ----------------------------------------- THROUGH
1999 1998 1999 1998 FEBRUARY 28, 1997
- ----------------- ------------------- ------------------- ------------------- -------------------
(UNAUDITED) (UNAUDITED)
AMOUNT % OF REV AMOUNT % OF REV AMOUNT % OF REV AMOUNT % OF REV AMOUNT % OF REV
- ------ -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$1,511 4.2% $303 2.3% $1,552 4.0% $67 0.6% $-- --
====== ==== ==== ==== ====== ==== === ==== === ========
</TABLE>
Stock option compensation expense is an ongoing charge through August 2002
that is related to employee stock options granted while the Company was not
publicly held.
INTEREST EXPENSE
Interest expense for the periods listed above was (in thousands):
<TABLE>
<CAPTION>
AUGUST 14, 1996
FOR THE SIX MONTHS ENDED AUGUST 31, FOR THE YEAR ENDED FEBRUARY 28, (INCEPTION)
- --------------------------------------- ----------------------------------------- THROUGH
1999 1998 1999 1998 FEBRUARY 28, 1997
- ----------------- ------------------- ------------------- ------------------- -------------------
(UNAUDITED) (UNAUDITED)
AMOUNT % OF REV AMOUNT % OF REV AMOUNT % OF REV AMOUNT % OF REV AMOUNT % OF REV
- ------ -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$58 0.2% $109 0.8% $198 0.5% $103 1.0% $12 --
=== ==== ==== ==== ==== ==== ==== ==== === ========
</TABLE>
Interest expense relates to obligations under capital leases and borrowings
under a bank line. The reduction in interest expense for the six months ended
August 31, 1999 is primarily the result of funds received from the initial
public offering.
INTEREST INCOME
Interest income for the periods listed above was (in thousands):
<TABLE>
<CAPTION>
AUGUST 14, 1996
FOR THE SIX MONTHS ENDED AUGUST 31, FOR THE YEAR ENDED FEBRUARY 28, (INCEPTION)
- --------------------------------------- ----------------------------------------- THROUGH
1999 1998 1999 1998 FEBRUARY 28, 1997
- ----------------- ------------------- ------------------- ------------------- -------------------
(UNAUDITED) (UNAUDITED)
AMOUNT % OF REV AMOUNT % OF REV AMOUNT % OF REV AMOUNT % OF REV AMOUNT % OF REV
- ------ -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$1,448 4.1% $111 0.8% $211 0.5% $21 0.2% $20 --
====== ==== ==== ==== ==== ==== === ==== === ========
</TABLE>
The increase in interest income for the six months ended August 31, 1999 is
primarily the result of funds received in the initial public offering.
INCOME TAXES
Due to Intraware's loss position, there was no provision for income taxes
for any of the periods presented. At February 28, 1999, the Company had federal
and state net operating loss carry forwards
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of approximately $13.2 million and $7.0 million, respectively. The federal net
operating loss carry forwards will expire in varying amounts beginning in 2012
if not utilized, and the state net operating loss carry forwards will expire in
the year 2005.
STOCK-BASED COMPENSATION
In the year ended February 28, 1998 and February 28, 1999 and the six month
period ended August 31, 1999, Intraware recorded aggregate unearned compensation
totaling $12.0 million in connection with certain stock option grants. The
unearned compensation is being amortized over the four-year vesting period of
the related options. During the six months ended August 31, 1999 and August 31,
1998, amortization of unearned compensation totaled $1.5 million and $300,000,
respectively. During the year ended February 28, 1999 amortization of unearned
compensation totaled $1.6 million.
INTRAWARE LIQUIDITY AND CAPITAL RESOURCES
Intraware has satisfied its current cash requirements through the initial
public offering, which was effective on February 25, 1999. As of August 31,
1999, Intraware had approximately $8.4 million of cash and cash equivalents and
$47.0 million in short and long-term investments. Intraware's principal
commitments consisted of obligations outstanding under bank credit lines and
capital and operating leases. Although Intraware has no material commitments for
capital expenditures, it anticipates an increase in the rate of capital
expenditures consistent with its anticipated growth in operations,
infrastructure and personnel.
Intraware believes that it has sufficient cash, short and long term
investments and availability from its bank line of credit to meet its
anticipated liquidity needs for working capital and expenditures for at least
the next twelve months. Thereafter, Intraware's future liquidity and capital
requirements will depend upon numerous factors. The pace of expansion of
Intraware's operations will affect these requirements. Intraware may also have
increased capital requirements in order to respond to competitive pressures.
Also, Intraware may need additional capital to fund acquisitions of
complementary businesses and technologies. Intraware's forecast of the period of
time through which its financial resources will be adequate to support its
operations is a forward-looking statement that involves risks and uncertainties.
Actual results could vary materially as a result of the factors described above.
If additional capital resources are required, Intraware may seek to sell
additional equity, debt securities or increase its bank line of credit. The sale
of additional equity or convertible debt securities could result in additional
dilution to Intraware's stockholders. There can be no assurance that any
financing arrangements will be available in amounts or on terms acceptable to
Intraware.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. Beginning in the year
2000, these code fields will need to accept four digit entries to distinguish
21st century dates from 20th century dates. As a result, computer systems and
software products used by many companies may need to be upgraded to comply with
these year 2000 requirements. Intraware's services, including SUBSCRIBNET,
INTRAWARE.SHOP, COMPARISCOPE, IT KNOWLEDGE CENTER, VIRTUAL EXPRESS and their
associated and supporting tools, web-sites and infrastructure were designed and
developed to be year 2000 compliant. Intraware's internal systems used to
deliver its services, however, utilize third-party hardware and software. The
Company has contacted these infrastructure products' vendors in order to gauge
their year 2000 compliance. Based on these vendors' representations, Intraware
believes that the third-party hardware and software it uses are year 2000
compliant. There can be no assurance, however, that Intraware will not
experience unanticipated negative consequences, including material costs caused
by undetected errors or defects in the technology used in its internal systems.
If, in the future, it comes to Intraware's attention that certain of its
services need modification or certain of its third-party hardware and software
are not year 2000
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compliant, Intraware will seek to make modifications to its systems. In such
case, Intraware expects such modifications to be made on a timely basis and does
not believe that the cost of such modifications will have a material effect on
its operating results. There can be no assurance, however, that Intraware will
be able to modify such products, services and systems in a timely and successful
manner to comply with the year 2000 requirements, which could have a material
adverse effect on its business and operating results.
Further, while Intraware typically has received warranties and indemnities
from its software vendors with respect to year 2000 compliance of the software
products resold, independent verification for year 2000 compliance of these
products is not performed. If such software products nevertheless require
modification to be year 2000 compliant, demand for such products could decline
if such modifications are not timely made by the software vendors. This, in
turn, could adversely affect Intraware's business and results of operations.
Intraware has no contingency plan to address the effect of year 2000
noncompliance of the software products it resells. However, Intraware, in the
normal course of its business, seeks to identify additional software products
that are year 2000 compliant and to enter into arrangements to resell these
products. There can be no assurance that Intraware's efforts to identify and
resell additional software products would address, in a timely manner, revenue
shortfalls that could result from software products of one or more of its
vendors being noncompliant.
Year 2000 issues also could cause a significant number of companies,
including current customers, to reevaluate their current system needs and, as a
result, consider switching to other systems and suppliers. Any of these events
could result in a material adverse effect on Intraware's business, operating
results and financial condition.
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INTRAWARE BUSINESS
THE DISCUSSION IN THIS PROXY STATEMENT/PROSPECTUS CONTAINS FORWARD-LOOKING
STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. INTRAWARE'S ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, WITHOUT
LIMITATION, THOSE DISCUSSED IN THIS SECTION AND THE SECTIONS ENTITLED "RISK
FACTORS," AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS PROXY
STATEMENT/PROSPECTUS.
Intraware, Inc. is a leading provider of business to business
e-commerce-based services for the corporate IT community. Intraware enables IT
professionals worldwide to efficiently and cost-effectively research, evaluate,
purchase, download, and update business-class software online. As a
business-to-business e-commerce company, Intraware provides software through its
premier online purchasing service, INTRAWARE.SHOP, comprehensive IT information
and interactive research services through the INTRAWARE IT KNOWLEDGE CENTER, and
software update management services through Intraware SUBSCRIBNET. INTRAWARE IT
KNOWLEDGE CENTER is a dynamic Web site that provides IT professionals with
technical information, resources, interactive services, and third party content
to help them assess the wide array of business software solutions available in
the marketplace. The IT KNOWLEDGE CENTER is a place that IT professionals can go
to evaluate their business software options, and there are a number of services
that make this evaluation possible. Two of the primary services in the IT
KNOWLEDGE CENTER include Intraware RADARSCOPE and Intraware COMPARISCOPE. The
RADARSCOPE service provides a centralized listing of thousands of business
software applications available in the market, while COMPARISCOPE is a Web-based
software tool that provides comprehensive objective data and detailed analysis
of these applications. The INTRAWARE IT KNOWLEDGE CENTER is also available on
the Computing & Internet Channel of Netscape's Netcenter portal.
The INTRAWARE.SHOP service is an online purchase and delivery service
tailored exclusively for corporate business software buyers. intraware.shop
delivers all applications directly to customers through a sophisticated
electronic software distribution, or ESD, engine that includes multi-platform
encryption, compression and multi-server deployment capabilities optimized to
meet corporate IT requirements. Intraware's Internet-based software delivery
replaces costly physical distribution and provides rapid deployment to multiple
sites which simplifies much of the complexity inherent in the enterprise
software lifecycle.
Intraware SUBSCRIBNET is an online service which enables IT professionals to
keep their software updated and manage their software licenses. SUBSCRIBNET
provides corporate IT subscribers with highly specific information that is
relevant only to their specific account profile, licensed software, and
enterprise computing platforms. We also offer our SUBSCRIBNET update and license
management capabilities as an outsourcing solution to business software vendors.
We have entered into an agreement with Netscape to provide the Intraware
SUBSCRIBNET service to Netscape customers worldwide. We also have entered into
an agreement with PeopleSoft, Inc. to provide the Intraware SUBSCRIBNET service
to customers of PeopleSoft's entire product line.
We have a broad base of members and customers in the information technology
departments of medium to large corporations. As of August 31, 1999, we had over
149,000 registered members. In addition, Intraware's NETINSIGHTS digest of news,
information and opinions for the information technology professional community
was e-mailed to approximately 63,000 subscribers on a weekly basis as of
August 31, 1999. Included among our approximately 3,300 customers as of
August 31, 1999 are the following companies: 3Com Corporation, AT&T Corporation,
Boeing Corporation, Charles Schwab & Co., Inc., Daimler Chrysler AG Corporation,
GTE Corporation, Knight Ridder, Inc., Lycos, Inc. and Reuters Group PLC. We have
also established relationships with leading business software vendors, including
primarily The Sun-Netscape Alliance, as well as Informix Corporation,
RealNetworks, Inc., and NetDynamics, a wholly-owned subsidiary of Sun
Microsystems, Inc.
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SERVICES
Intraware's service offerings are designed to address all stages of the
business software lifecycle, from evaluation and purchase, to deployment and
online maintenance management.
INFORMATION SERVICES: IT KNOWLEDGE CENTER
The IT KNOWLEDGE CENTER is a dynamic Web site containing software-focused
content for IT professionals. It includes featured articles, career information,
online library and tutorials. The individual services and features of the IT
KNOWLEDGE CENTER are described below:
RADARSCOPE is an interactive service providing information on thousands of
business software products. RADARSCOPE allows customers to efficiently search
for business software products by vendor, product, or keyword. Intraware does
not currently charge for the use of RADARSCOPE.
COMPARISCOPE is an online research service that permits customers to perform
objective, in-depth, technical evaluations of over twenty categories of business
software. The analysis can be tailored to match individual requirements by
enabling IT professionals to rank the importance of and compare various software
product features. COMPARISCOPE is available for a fee.
PREMIER CONTENT is a collection of tools, models, templates and other
resources available to facilitate the evaluation and selection of software
products. PREMIER CONTENT is available for a fee.
"ASK JAMES" is an online service designed to provide personalized answers to
customers' information technology-related concerns or questions. This service
also provides an archive of previously answered questions. "ASK JAMES" is free
for all registered members, but to receive expedited service, in which a
customer's question will be answered within 24 hours of receipt, a customer must
pay a fee.
IT BOOK CENTER provides feature articles, book reviews, selected chapters of
text, interviews with authors and technical books for IT professionals. Access
to this service is free.
IT TRAINING CENTER provides online classes and computer and web based
training courses from leading publishers. Access to this service is free.
NETINSIGHTS is an email based weekly digest of news, information, and
opinions focused on Internet technology. NETINSIGHTS is currently available free
of charge.
PURCHASE AND DELIVERY SERVICES: INTRAWARE.SHOP
The INTRAWARE.SHOP service is an online service designed to simplify the
purchase and delivery of business software for corporations. This service
provides in-depth product information, simplifies complex bundling and pricing
options, accepts online purchase orders and credit evaluations, enables the
electronic delivery of large software products, and supports deployment to
multiple servers and locations. The INTRAWARE.SHOP service also offers customers
online self-service quotations, evaluations, live interactive software
demonstrations and several financing options. Customers can use INTRAWARE.SHOP
for the purchase of new software packages, as well as additional licenses,
renewals and add-on products.
Currently, Intraware does not charge its information technology professional
customers for access to INTRAWARE.SHOP, but does typically charge software
vendors for the inclusion of their products in INTRAWARE.SHOP. The individual
services and features of INTRAWARE.SHOP are described below:
PRODUCT CATALOG is an online software catalog focused on software from
leading Internet technology vendors. Currently Intraware's software product
selection includes more than 1,000 products over 30 software vendors, including
the Sun-Netscape Alliance, Informix and NetDynamics, a wholly owned subsidiary
of Sun Microsystems. PRODUCT CATALOG contains a simple format for searching,
browsing and researching, and gives customers precise information concerning
software products offered by Intraware.
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DEMO CENTER provides potential customers an interactive experience through
either screen shots or online demonstrations. DEMO CENTER is a method for
software purchasers to determine the user and administrative features of
selected software products.
TRY AND BUY allows potential customers to download the evaluation version of
a software product and use that version in their own information technology
environment before making a final purchasing decision. Potential customers can
interact with systems engineers and sales consultants to enhance the TRY AND BUY
service.
VIRTUALEXPRESS SOFTWARE DELIVERY is a software delivery engine through which
a customer purchases software online. VIRTUALEXPRESS is also used to deliver
subsequent updates and upgrades. VIRTUALEXPRESScontains features such as
encryption, compression and multi-location deployment. Customer service
representatives work with customers to assist in the download process.
VIRTUALEXPRESS streamlines the software delivery and distribution process to
multiple servers and locations. Intraware is able to track the type and version
of software products licensed to customers.
MAINTENANCE SERVICES: SUBSCRIBNET AND UPDATEWATCH
SUBSCRIBNET is a multivendor online software update and license management
service. This Web based service provides end-users with proactive, customized
email notification of software updates with on-demand access to software
downloads. SUBSCRIBNET can help alleviate the burden of tracking and retrieving
the software to which a corporate customer is entitled.
For information technology professionals, SUBSCRIBNET provides proactive
notification, on-demand downloads, and a central repository for software
licenses, subscriptions and product release archiving. SUBSCRIBNET automatically
notifies appropriate information technology professionals within 24 hours of any
product update, including corrections of minor application errors and other
major and minor releases. These notifications are personalized to the user's
product, version and platform. IT professionals can then download these product
updates electronically through the use of VIRTUALEXPRESS. SUBSCRIBNET contains a
personalized release archive containing all versions entitled to each user,
including enhancements and bug and security patches. Account history, such as
asset reports, quotes, order status, and purchase history, and account activity,
such as download and notification logs, enable Intraware to monitor purchasing
activity and software upgrade downloads. In addition to servicing end users,
SUBSCRIBNET is targeted at software vendors. For software vendors, SUBSCRIBNET
is a vehicle through which they can provide their customers with a higher level
of service, while also facilitating and improving the flow and quality of
customer data available to them.
By outsourcing subscription services to Intraware, software vendors can do
all of the following:
- off-load some of the costs and burdens associated with physical
distribution of updates;
- minimize technical support resources devoted to updates and patches;
- increase the productivity of their own information technology and sales
departments by reducing after sales management efforts;
- gain better information on their customers; and
- improve customer satisfaction thereby increasing renewal rates.
The SUBSCRIBNET update and license management service supports all of the
software products sold by Intraware. SUBSCRIBNET may be purchased with any
software product offered by Intraware for an additional fee. Additionally,
Intraware is seeking contracts with software vendors whose products Intraware
does not sell in order to achieve broader and more comprehensive coverage.
UPDATEWATCH is a web-based service that provides information about updates
and patches for business software. By tracking several different sources,
UPDATEWATCH helps IT professionals stay informed of the latest software
versions. Intraware currently does not charge for UPDATEWATCH service
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UPDATEWATCH allows users to:
- Find the latest version of a product through a variety of search tools;
- Create a personal watch list; and
- Check the latest releases on our daily updated list.
SALES
Intraware sells its services into two major customer constituencies:
information technology professionals and software vendors. The sales approach to
each customer constituency differs due to the nature of the respective sales
processes. Sales of business software and Intraware's online knowledge services
are characterized by reasonably short sales cycles and are targeted at IT
professionals. Sales of software vendor outsourcing services, such as
SUBSCRIBNET, tend to be characterized by longer sales cycles and are targeted at
marketing, sales, customer satisfaction, operations and general management
professionals at the executive level.
SALES TO INFORMATION TECHNOLOGY PROFESSIONALS
Intraware has a direct sales force that includes telemarketing, inside
sales, and field sales. Of these, the telemarketing and inside sales personnel
are primarily focused on building initial relationships with corporate
customers, selling annual subscriptions to INTRAWARE'S IT KNOWLEDGE CENTER, and
generating software product sales opportunities for Intraware's field sales
force. Intraware's field sales professionals interact directly with information
technology decision-makers at large corporations to promote both Intraware's
services and its software vendors' products.
Intraware's regional sales teams consist of field and inside sales
professionals and dedicated systems engineers who provide a high level of
strategic technical support to their customers. In addition to its principal
sales office in Orinda, California, Intraware has established sales offices in
ten major cities in the United States, including Boston, Chicago, Cleveland,
Dallas, Detroit, Los Angeles, New York, Salt Lake City, Seattle, and Washington,
D.C. Intraware's sales to information technology professional customers have
grown as a result of its coordinated sales effort, combining the benefits of
online sales opportunities with a direct sales force.
SALES TO SOFTWARE VENDORS
Intraware manages sales of its SUBSCRIBNET outsourcing update and license
management services through its product marketing and business development
group. The process of having vendors outsource their update and license
management functions to Intraware is lengthy, as many of the features of the
services need to be tailored to the specific requirements of Intraware's
software vendor partners.
JOINT MARKETING RELATIONSHIPS
Partnerships are an integral part of Intraware's sales strategy. Intraware
has established relationships with each of the vendors whose products are
offered through INTRAWARE.SHOP. Intraware's product marketing group continues to
target additional software vendors to expand the number of software products
offered through INTRAWARE.SHOP.
In addition, Intraware has an established relationship with the Sun-Netscape
Alliance to prominently display its IT KNOWLEDGE CENTER service on the
Computing & Internet Channel of Netscape's Netcenter portal. This relationship
provides additional opportunities to reach a broad audience of information
technology professionals. Intraware intends to develop additional partnerships
with Internet traffic aggregators to offer its services to a large, targeted
group of information technology professionals.
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Intraware also intends to develop relationships with information technology
content providers who are of interest to Intraware's targeted user base, so as
to enhance the value of Intraware's IT KNOWLEDGE CENTER service offerings.
Intraware's partnership with EarthWeb, Inc. allows IT KNOWLEDGE CENTER
subscribers access to EarthWeb's content through Intraware's Web site.
Intraware has established a relationship with O'Reilly & Associates which
will provide access to abstracts and selected chapters of O'Reilly's library of
technical books. In addition, book reviews and O'Reilly trade show and seminar
schedules are posted on INTRAWARE'S IT KNOWLEDGE CENTER website. Links to the
O'Reilly website will also enable site visitors to purchase hard copy books
online.
Intraware launched its IT TRAINING CENTER through partnerships with CBT
Systems, a provider of technology-enabled technical training, and with Digital
Education Systems/O'Reilly, providers of web-based training. Through these
partnerships, Intraware is able to deliver a broad range of authoritative and
recognized training courseware to its customers electronically.
Intraware has an agreement with Zona Research, a wholly owned subsidiary of
IntelliQuest Information Group, Inc. that will provide selected weekly news
summaries and analyses of the most significant Internet-related market
activities.
Intraware has partnered with GartnerGroup to provide selected research from
GartnerGroup's Datapro that will include Datapro's extensive library of standard
reports, including product and technology overviews, product reports, comparison
columns, user ratings surveys, and operational management and vendor reports.
Customers can purchase and receive these reports online, regardless of whether
they are Gartner subscribers or not.
Intraware has entered into a joint agreement with Cambridge Information
Network to exchange value-added IT content that is available on each company's
web site in order to provide their respective members with an expanded range of
strategic information geared to the decision-making needs of senior-level IT
professionals. Cambridge Information Network has notified Intraware that it
intends to assign this agreement to Earthweb, Inc. as part of a pending sale of
Cambridge Information Network to Earthweb, Inc. Intraware has consented to the
assignment, but it is uncertain whether or how the sale will affect Intraware's
relationship with Cambridge Information Network.
Intraware has also established a relationship with Informix Software, Inc.
whereby Intraware manages Informix's online store. Several of Informix's
products and promotional programs have generated a large interest among
information technology professionals which has contributed to additional
Intraware membership registrations.
MARKETING
Intraware employs a broad range of marketing activities to promote its
brands, develop name recognition and visibility, and drive traffic to its Web
site, in an effort to build its membership base and expand its community appeal.
Intraware has an active public relations program in place, and also utilizes
print and online advertising, trade shows, seminars, direct mail, online
promotions, and regional marketing development in an attempt to further
penetrate the information technology professional community in mid-to-large
corporations and governmental agencies. Intraware also distributes NETINSIGHTS,
its weekly Web technology news and product information email subscription
newsletter, to over 58,000 information technology professionals and other
interested members. Intraware markets its SUBSCRIBNET service both to corporate
software decision makers and to business software developers.
The marketing department supports both domestic and international marketing
efforts. Domestically and internationally, efforts are focused on stimulating
demand for Intraware's Web-based services and generating sales leads for its
direct sales force. Intraware promotes its products and outsourcing services
through a variety of fixed and variable fee programs. Intraware promotes its IT
KNOWLEDGE CENTER services in part through its membership programs. By bundling
many of its free services with paid services, Intraware has been able to
integrate and aggregate its comprehensive mix of
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interactive services and dynamic content into a format of interest and value to
individual information technology professionals within corporate and
governmental information technology departments.
Intraware markets its membership programs through a number of vehicles
including its own Web site, the Netcenter IT KNOWLEDGE CENTER site, traditional
direct mail, online advertising and Internet-based direct marketing.
Intraware's sales force and systems engineers provide ongoing customer
service to Intraware customers. The customer service group responds to inquiries
regarding product downloads, product installation, and order processing.
Customer service professionals post frequently asked questions, reference
documents, and links to useful information on relevant parts of Intraware's Web
sites.
STRATEGIC RELATIONSHIP WITH THE SUN-NETSCAPE ALLIANCE
Intraware plans to pursue strategic relationships to expand Intraware's
product and service offerings, increase access to customers, and build brand
recognition. To date, Intraware has established a strategic relationship with
the Sun-Netscape Alliance as described below:
Intraware and Netscape entered into an agreement effective September 1998
under which Intraware provides its IT KNOWLEDGE CENTER services as a co-branded
site within the Computing & Internet Channel of the Netcenter portal. Intraware
receives significant exposure across Netcenter in the form of banner advertising
and text links. Furthermore, the IT KNOWLEDGE CENTER site hosts aggregated
content and links to Intraware's interactive services. Intraware has
additionally made a $1.0 million payment to Netscape in exchange for the right
to maintain the IT KNOWLEDGE CENTER on the Computing & Internet Channel of
Netscape's Netcenter portal. Intraware generates direct revenue from this site
in the form of banner advertisement revenue sharing. Revenues generated from
banner advertising will be recorded as earned. This agreement has a one year
term, subject to a one year renewal option on terms to be mutually agreed upon.
SUBSCRIBNET
Effective October 1998 and amended on March 1, 1999, Intraware entered into
an agreement with Netscape to provide SUBSCRIBNET software update and license
management services and other maintenance services, to Netscape's customers
worldwide for the entire Netscape product line. As of July 1, 1999, the contract
was rewritten with Sun Microsystems, Inc. to reflect the Sun-Netscape Alliance.
This agreement runs through September 2000. This agreement is terminable by Sun
upon 180 days prior notice. Netscape and Sun serve as key customer references
for the Intraware SUBSCRIBNET service.
IT KNOWLEDGE CENTER
Under the terms of Intraware's IT KNOWLEDGE CENTER agreement with Netscape
entered into in September 1998, Intraware provides all of the public IT
KNOWLEDGE CENTER content, within the framework of Netscape's Netcenter
Computing & Internet Channel. This agreement calls for the site to be co-branded
with Intraware's content surrounded by Netscape's Netcenter frame, and provides
for Intraware to be the premier sponsor of the IT KNOWLEDGE CENTER. In the event
the agreement is terminated after the one year term, Netscape may build a
substantially similar service.
COMPETITION
The online commerce market is new, rapidly evolving and intensely
competitive, and Intraware expects competition to intensify in the future,
particularly in the area of electronic sale and distribution of software
products. Barriers to entry are minimal, and current and new competitors can
launch new Web sites at a relatively low cost. Intraware believes that it
competes effectively as a result of Intraware's centralized, information
technology-focused, Internet-enabled solution coupled with its
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commitment to providing high-quality solutions that yield a rapid return on
investment for its corporate information technology professional customers.
Intraware's current and potential competitors in the market include
generally the following three categories of persons:
- information providers to information technology professionals;
- online distributors, resellers and value-added resellers; and
- software update and license management services and technology providers.
Intraware's competitors may operate in one or more of these areas.
With respect to information providers, Intraware competes with research
firms as well as other content and software vendor companies who have particular
sections of their Web sites directed at certain segments of the information
technology professional community. Intraware believes the competitive factors in
this marketplace include four main aspects. First, Intraware believes it is
important to demonstrate objectivity rather than demonstrating bias towards any
particular product or service. Second, Intraware believes that up to date and
comprehensive information is critical to customers. Third, Intraware believes
that information technology professionals will be more interested in products
tailored for them. Fourth, Intraware believes that any competitor must have
expertise in Internet based technologies in order to effectively compete.
Intraware is building competitive advantages by providing not only relevant,
high end content, but also by making its site functional with interactive
services and useful tools.
In addition, the software reselling industry is intensely competitive.
Intraware believes the competitive factors in this market segment include
product selection, additional service offerings, price, customer service and
technical support. With respect to selling software, Intraware currently
competes primarily with traditional software resellers, other online software
resellers and other vendors. In the online market, Intraware competes with
companies that sell and distribute software products through the Internet as
well as vendors that maintain commercial Web sites that sell their software
products directly online. In addition, there is indirect competition with other
transaction processing providers and enablers and indirect competition with
other providers of electronic commerce solutions. Although Intraware believes it
is well positioned given its services, there can be no assurance that consumer-
focused online resellers and retail enablers will not decide to move more
aggressively into the corporate market and corporate resellers could implement
more robust online commerce efforts, each of which could adversely affect
Intraware's business and operating results.
In the update and license management market, Intraware primarily competes
with software vendors that do not outsource these services. Principal
competitive factors in this market include:
- the existing relationships software vendors have with their customers;
- the comprehensiveness of the services offered; and
- price.
Intraware believes it competes effectively in this market on the basis of
its comprehensive service offerings, although it faces significant competition
due to its less established customer relationships.
Many of Intraware's competitors have already established supplier
relationships with divisions of Intraware's current or potential customers.
These competitors may be able to leverage their existing relationships to
discourage these customers from purchasing additional Intraware products or
persuade them to replace Intraware products with their products. Many of
Intraware's competitors have longer operating histories, significantly greater
resources and name recognition and a larger installed base of customers than
Intraware. As a result, these competitors may have greater credibility with
Intraware's existing and potential customers. They also may be able to devote
greater resources to the development, promotion and sale of their products than
Intraware can to its, which would allow them
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to respond more quickly than Intraware could to new or emerging technologies and
changes in customer requirements.
INTELLECTUAL PROPERTY, PROPRIETARY RIGHTS AND LICENSES
Intraware's ability to compete and continue to provide technological
innovation is substantially dependent upon internally developed technology.
Internally developed applications include the following externally branded
services and extranet content administration tools: SUBSCRIBNET, VIRTUALEXPRESS,
COMPARISCOPE, ESD Engine, INTRAWARE.SHOP, IT KNOWLEDGE CENTER, RADARSCOPE,
ADMINISCOPE, ITEM MAGIC, QUOTETOOL, and REPORTMART. While Intraware relies on
copyright, trade secret and trademark law to protect its technology, Intraware
believes that factors such as the technological and creative skills of its
personnel, new product developments, frequent product enhancements and reliable
product maintenance are more essential to establishing and maintaining a
technology leadership position. Intraware has no patents issued or applied for
to date on its technology. There can be no assurance that others will not
develop technologies that are similar or superior to Intraware's technology.
Intraware is aware that certain other companies are using or may have plans to
use in the future the name "Intraware" as a company name or as a trademark or
service mark. While Intraware does not believe it has infringed any rights, and
it has received no notice of any claims of infringement from any of these
companies, Intraware can make no assurance that certain of these companies may
not claim superior rights to "Intraware" or other marks used in Intraware's
business.
Intraware generally enters into confidentiality or license agreements with
its employees, consultants and corporate partners, and generally controls access
to and distribution of its software, documentation and other proprietary
information. Despite Intraware's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy or otherwise obtain and use Intraware's
products or technology. Policing unauthorized use of Intraware's products is
difficult, and there can be no assurance that the steps taken by Intraware will
prevent misappropriation of its technology, particularly in foreign countries
where the laws may not protect Intraware's proprietary rights as fully as do the
laws of the United States.
Substantial litigation regarding intellectual property rights exists in the
software industry, and Intraware expects that software products may be
increasingly subject to third-party infringement claims as the number of
competitors in Intraware's industry segments grows and the functionality of
products in different industry segments overlaps. Any such claims could be
time-consuming to defend, result in costly litigation, divert management's
attention and resources, cause product and service delays or require Intraware
to enter into royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to Intraware,
if at all. A successful claim of infringement against Intraware and failure or
inability of Intraware to license the infringed or similar technology could have
a material adverse effect on Intraware's business, financial condition and
results of operations.
In addition, Intraware sells certain high encryption software domestically.
Federal regulations prohibit the exportation of these types of encryption
software to certain countries. Intraware has established internal procedures to
ensure that the high encryption software is sold only to domestic customers.
However, if these procedures are not followed by Intraware's personnel, or are
otherwise circumvented, resulting in the sale by Intraware of high encryption
software to a prohibited foreign customer, then Intraware could be at risk for
violating these federal export regulations.
EMPLOYEES
As of October 31, 1999, Intraware had 253 full-time employees, Intraware's
future success depends, in part, on its continuing ability to attract, train and
retain highly qualified technical, sales and managerial personnel. Competition
for such personnel is intense, and there can be no assurance that Intraware will
be able to recruit and retain sufficient numbers of qualified personnel. None of
Intraware's employees is represented by a labor union. Intraware has not
experienced any work stoppages and considers its relations with its employees to
be good.
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INTRAWARE MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning Intraware's
current executive officers and directors.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- ------------------------------------------
<S> <C> <C>
Peter H. Jackson.......................... 41 Founder, President, Chief Executive
Officer and Director
Paul A. Martinelli........................ 35 Founder, Senior Vice President and Chief
Technology Officer
Donald M. Freed........................... 48 Founder, Executive Vice President and
Chief Financial Officer
Terence J. Healey......................... 35 Senior Vice President of Marketing
Norman A. Pensky.......................... 49 Vice President of Sales
Cynthia H. Mascheroni..................... 39 Vice President of Customer Services
Anita A. Youmans-Trone.................... 49 Vice President of Finance
Manfred J. Krikke......................... 30 Vice President of Intraware International
James A. Brentano......................... 40 Vice President of Knowledge Services
David L. Dunlap........................... 32 Vice President of Operations
Frost R. R. Prioleau...................... 38 Vice President of ESERVICES
Mark Long................................. 32 Vice President of Strategic Development
Catherine Keim............................ 29 Vice President of ECOMMERCE
Mark B. Hoffman (1)....................... 53 Director, Chairman of the Board
Charles G. Davis, Jr. (2)................. 65 Director
Laurence M. Baer.......................... 42 Director
John V. Balen (2)......................... 39 Director
Mary Ann Byrnes (1)....................... 43 Director
Ronald E. F. Codd......................... 44 Director
</TABLE>
- ------------------------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
PETER H. JACKSON co-founded Intraware in August 1996 and has served as
President and Chief Executive Officer since its inception. From May 1996 to
August 1996, Mr. Jackson served as a Vice President of Vanstar Corporation, a
computer hardware and services company. From May 1994 to May 1996, Mr. Jackson
served as President and COO of Dataflex Corporation, a value-added reseller of
computer hardware and services. From January 1986 to May 1994, Mr. Jackson
served as Founder and President of Granite Computer Products, Inc., a corporate
computer hardware reseller and services provider. Mr. Jackson holds an A.B. in
History from the University of California, Berkeley. Mr. Jackson currently
serves as a director of ONSALE, Inc., a public Internet company.
PAUL A. MARTINELLI co-founded Intraware in August 1996 and has served as
Senior Vice President and Chief Technology Officer since its inception. From
May 1994 to May 1996, Mr. Martinelli served as Vice President of Information
Systems for Dataflex Corporation, a value-added reseller of computer hardware
and services. From February 1991 to May 1994, Mr. Martinelli served as Director
of Information Systems for Granite Computer Products, Inc., a corporate computer
hardware reseller and services provider. Mr. Martinelli holds a B.A. in Computer
Science from the University of California, San Diego.
DONALD M. FREED co-founded Intraware in August 1996 and has served as
Executive Vice President and Chief Financial Officer since its inception. From
May 1996 to August 1996, Mr. Freed served as a
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<PAGE>
business development director for Vanstar Corporation, a computer hardware and
services company. From May 1994 to May 1996, Mr. Freed served as Senior Vice
President of Business Development for Dataflex Corporation, a value-added
reseller of computer hardware and services. From May 1989 to May 1994,
Mr. Freed served as CFO of Granite Computer Products, Inc., a corporate computer
hardware reseller and services provider. Mr. Freed is a certified public
accountant and holds a B.S. in Accounting and a B.A. in Journalism from San
Francisco State University.
TERENCE J. HEALEY has served as Senior Vice President of Marketing of
Intraware since its inception in August 1996. From May 1994 to August 1996,
Mr. Healey served as Regional Vice President of Marketing, and later National
Vice President of Marketing for Dataflex Corporation, a value-added reseller of
computer hardware and services. From August 1990 to May 1994, Mr. Healey served
successively as a product manager, marketing manager and Director of Marketing
for Granite Computer Products, Inc., a corporate computer hardware reseller and
services provider. Mr. Healey holds a B.A. in Political Science from the
University of California, Berkeley.
NORMAN A. PENSKY joined Intraware as Vice President of Sales in
December 1996. From July 1991 to November 1996, Mr. Pensky served as Senior
Director of Strategic Accounts for Macromedia, Inc., an Internet publishing
company. Mr. Pensky holds an M.B.A. from Golden Gate University and a B.S. in
Business from the University of Southern California.
CYNTHIA H. MASCHERONI joined Intraware as Director of Marketing in
February 1997 and as Vice President of Business Development in April 1997. From
February 1993 to February 1997, Ms. Mascheroni served as Director of Business
Development and Director of Marketing for Graphix Zone, a computer and data
processing company. Ms. Mascheroni holds an M.B.A. from Northwestern University
and a B.A. in Psychology from the University of California, Los Angeles.
ANITA A. YOUMANS-TRONE joined Intraware as the Vice President of Finance in
November 1996. From May 1996 to November 1996, Ms. Youmans-Trone served as
Regional Vice President of Finance of Vanstar Corporation, a computer hardware
and services company. From May 1994 to May 1996, Ms. Youmans-Trone served
successively as Director--Process Planning and Development--Information Systems
and Regional Vice President of Finance for Dataflex Corporation, a value-added
reseller of computer hardware and services. From January 1988 to May 1994,
Ms. Youmans-Trone served as Controller for Granite Computer Products, Inc., a
corporate computer hardware reseller and services provider.
MANFRED J. KRIKKE joined Intraware as Vice President of Intraware
International in August 1998. From December 1997 to February 1998, Mr. Krikke
served as Vice President, Software and Internet Investment Banking for
NationsBanc Montgomery Securities, a national investment banking firm. From
August 1994 to December 1997, Mr. Krikke served first as an Analyst and then as
an Associate for Montgomery Securities, a national investment banking firm. In
1994, Mr. Krikke received a Doctorandus Degree in Business Economics from the
Vrije University, Amsterdam, The Netherlands.
JAMES A. BRENTANO joined Intraware as Director of Systems Engineering in
June 1997 and as Vice President of Knowledge Services in June 1998. From
January 1996 to June 1997, Mr. Brentano served as Director of LAN Services for
Pacific Bell. From March 1991 to December 1995, Mr. Brentano served as an
Information Technology Strategic Architect for Pacific Gas & Electric, a
regional natural gas and electric power utility. Mr. Brentano holds an M.S. in
Computer Science from the University of California, Davis and an A.B. in Letters
and Sciences from the University of California, Berkeley.
DAVID L. DUNLAP joined Intraware as the Director of Product Lines in
September 1997 and as Vice President of Operations in May 1998. From
September 1996 to September 1997, Mr. Dunlap served as a Financial Systems
Project Manager for PeopleSoft, Inc., a software development company. From
May 1996 to September 1996, Mr. Dunlap served as Director of Purchasing for
Vanstar Corporation, a computer hardware and services company. From May 1994 to
May 1996, Mr. Dunlap served as Vice
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<PAGE>
President of National Operations for Dataflex Corporation, a value-added
reseller of computer hardware and services. From September 1986 to May 1994,
Mr. Dunlap served as Vice President of Operations for Granite Computer
Products, Inc., a corporate computer hardware reseller and services provider.
Mr. Dunlap holds a B.A. in Government from Cornell University.
FROST R. R. PRIOLEAU joined Intraware as the Vice President of SUBSCRIBNET
in December 1998. From March 1989 to October 1998, Mr. Prioleau served
successively as Vice President and President and Chief Executive Officer of P2
Holdings Corporation, a rapid prototyping and services provider. P2 Holdings
Corporation filed for bankruptcy under Chapter 7 of the U.S. Bankruptcy Code in
December 1998. Mr. Prioleau holds a B.S.E. in Engineering Management Systems
from Princeton University.
MARK LONG joined Intraware as the Vice President of Strategic Development in
February 1999. From July 1998 to February 1999, Mr. Long was an investment
banker with Credit Suisse First Boston in its Technology Group, focusing
primarily on initial public offerings and mergers and acquisitions for companies
in the Internet sector. From April 1998 to July 1998, Mr. Long was an investment
banker with Deutsche Bank Securities. From August 1995 to April 1998, Mr. Long
was an attorney with Gunderson Dettmer Stough Hachigian & Villenueve, LLP, where
he specialized in representing emerging growth technology companies and venture
capitalists. Mr. Long holds a J.D. and an M.B.A. from the University of Michigan
and a B.A. in Philosophy from the University of Arizona.
CATHERINE KEIM joined Intraware as Product Manager in September 1997 and as
Vice President of Intraware.shop in March 1999. From June 1996 to
September 1996, Ms. Keim worked at Microsoft Corporation in product marketing in
the Desktop Applications group. Ms. Keim holds an M.B.A. from Northwestern
University and a B.A. in History from the University of Virginia.
MARK B. HOFFMAN has served as Chairman of the Board of Directors of
Intraware since August 1996. Since September 1996, Mr. Hoffman has served as
President of Commerce One, an e-commerce procurement and supplier-management
solutions company. In 1984, Mr. Hoffman co-founded Sybase, Inc., a database
software company, and served as President until July 1996. Mr. Hoffman holds an
M.B.A. from the University of Arizona and a B.S. in Engineering from the U.S.
Military Academy. Mr. Hoffman serves on the board of directors of several
privately held companies.
CHARLES G. DAVIS, JR. has served as Vice Chairman of the Board of Directors
of Intraware since September 1996. Since 1992 Mr. Davis has served as President
and Chief Executive Officer of the Montclair Group, an advisory group
specializing in energy and technology companies. Mr. Davis received a B.S. in
Geology from Stanford University. Mr. Davis serves on the board of directors of
several privately held companies.
LAURENCE M. BAER has served as a Director of Intraware since January 1998.
Mr. Baer has served as the Executive Vice President and Chief Operating Officer
of the San Francisco Giants professional baseball team since December 1992.
Mr. Baer holds an M.B.A. from Harvard University and an A.B. in Political
Science from the University of California, Berkeley.
JOHN V. BALEN has served as a Director of Intraware since April 1998. Since
September 1995 Mr. Balen has served as a Principal at Canaan Partners, a
nationally focused, private venture capital firm. From June 1985 to June 1995,
Mr. Balen served as an Associate and a Managing Director of Horsley Bridge
Partners, a private equity investment management firm. Mr. Balen has an M.B.A.
and a B.S. in Electrical Engineering from Cornell University. Mr. Balen serves
on the board of directors of several privately held companies.
MARY ANN BYRNES has served as a Director of Intraware since January 1998.
Ms. Byrnes founded Corsair Communications, a provider of system solutions for
the wireless industry, in December 1994, and has served as its President and
Chief Executive Officer since its inception. From June 1987 to November 1994,
Ms. Byrnes served as Vice President of Sales and Marketing and Vice President of
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<PAGE>
Operations for Cellular One, a regional mobile phone and communications company.
Ms. Byrnes holds an M.B.A. from Harvard Business School and a B.A. in Economics
from Wellesley College. Ms. Byrnes serves on the board of directors of Corsair
Communications.
RONALD E. F. CODD has served as a Director of Intraware since January 1999.
Mr. Codd has served as the President and Chief Executive Officer of Momentum
Business Applications, Inc., a public company engaged in software application
development activities, since January 1999. Prior to that, Mr. Codd served as
Senior Vice President of Finance and Administration of PeopleSoft, Inc., a
developer and marketer of enterprise application software, from 1994 until
December 1998 and as Vice President and Chief Financial Officer from
September 1991 to 1994. Mr. Codd holds a Masters Degree in Management from the
J.L. Kellogg Graduate School of Management at Northwestern University and a B.S.
in Business from the University of California, Berkeley.
EXECUTIVE COMPENSATION
The following summary compensation table sets forth certain information
concerning the compensation earned for services rendered to Intraware in all
capacities for the fiscal years ended February 28, 1997, 1998 and 1999 by
Intraware's Chief Executive Officer and Intraware's next most highly compensated
executive officers who earned more than $100,000 during the fiscal year ended
February 28, 1999. The fiscal year 1997 compensation figures are for the
seven-month period beginning August 13, 1996 and ending February 28, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
SECURITIES
UNDERLYING
FISCAL OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITIONS YEAR SALARY ($) BONUS ($) (#) COMPENSATION
---------------------------- -------- ---------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Peter H. Jackson .......................... 1999 $263,990 $40,000 50,000 --
President and Chief Executive Officer 1998 230,833 60,000 100,000 --
1997 103,125 -- -- --
Donald M. Freed ........................... 1999 130,000 20,000 30,000 --
Executive Vice President and 1998 115,417 5,000 60,000 --
Chief Financial Officer 1997 56,250 -- -- --
James Brentano ............................ 1999 127,427 -- 60,000 --
Vice President Knowledge Services 1998 101,250 5,000 40,000 --
1997 -- -- -- --
Manfred Krikke ............................ 1999 62,200 -- 240,000 $63,500(1)
Vice President of Intraware International 1998 -- -- -- --
1997 -- -- -- --
Norman A. Pensky .......................... 1999 181,317 -- -- --
Vice President of Sales 1998 125,000 37,500 30,000 --
1997 31,250 12,500 220,000 --
</TABLE>
- ------------------------
(1) Represents a one-time signing bonus.
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<PAGE>
OPTION GRANTS DURING LAST FISCAL YEAR
The following table sets forth certain information with respect to stock
options granted to Intraware's Chief Executive Officer and the four other most
highly compensated executive officers in the fiscal year ended February 28,
1999, including the potential realizable value over the ten-year term of the
options, based on assumed rates of stock appreciation of 5% and 10%, compounded
annually. These assumed rates of appreciation comply with the rules of the
Securities and Exchange Commission and do not represent Intraware's estimate of
future stock price. Actual gains, if any, on stock option exercises will be
dependent on the future performance of Intraware's Common Stock.
In fiscal 1999, Intraware granted options to purchase up to an aggregate of
1,902,769 shares to employees, directors and consultants. All options were
granted under Intraware's 1996 Stock Option Plan at exercise prices at or above
the fair market value of Intraware's Common Stock on the date of grant, as
determined in good faith by the Board of Directors. All options have a term of
ten years. Optionees may pay the exercise price by cash, check, promissory note
or delivery of already-owned shares of Intraware's Common Stock. All options are
immediately exercisable upon grant; however, any unvested shares are subject to
repurchase by Intraware at their cost in the event of the optionee's termination
of employment. All new hire option shares vest over four years, with 25% of the
option shares vesting one year after the option grant date, and the remaining
option shares vesting ratably each month thereafter.
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES OF
NUMBER OF OPTIONS STOCK PRICE
SECURITIES GRANTED TO APPRECIATION FOR
UNDERLYING EMPLOYEES IN EXERCISE OPTION TERM
OPTIONS LAST FISCAL PRICE EXPIRATION ---------------------
NAME GRANTED (#) YEAR ($/SHARE) DATE 5% ($) 10% ($)
- ---- ----------- ------------ --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Peter H. Jackson................. 50,000 2.6 $1.00 09/23/08 $31,444 $79,687
Donald M. Freed.................. 30,000 1.6 1.00 09/23/08 $18,866 $47,812
James Brentano................... 20,000 1.1 0.40 05/27/08 $ 5,031 $12,749
40,000 3.2 1.00 09/23/08 $25,155 $63,749
Manfred Krikke................... 240,000 12.8 0.15 07/27/08 $22,640 $57,347
Norman A. Pensky................. -- -- -- -- $ -- $ --
</TABLE>
AGGREGATE OPTION EXERCISES DURING LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
The following table sets forth information with respect to the Named
Executive Officers concerning option exercises for the fiscal year ended
February 28, 1999, and exercisable and unexercisable options held as of
February 28, 1999. No options were exercised by the Named Executive Officers
during the fiscal year ended February 28, 1999.
The "Value of Unexercised In-the-Money Options at February 28, 1999" is
based on a value of $18.875 per share, the fair market value of Intraware's
Common Stock as of February 28, 1999, less the per share exercise price of
$1.00, multiplied by the number of shares issued upon exercise of the option.
All options were granted under Intraware's 1996 Stock Option Plan. All options
are immediately exercisable; however, as a condition of exercise, the optionee
must enter into a stock restriction agreement granting Intraware the right to
repurchase the shares issuable by such exercise at their cost in the event of
the optionee's termination of employment. The shares vest over four years,
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<PAGE>
with 25% of the shares vesting one year after the grant date and the remaining
shares vesting ratably each month thereafter.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
NUMBER OF SECURITIES ASSUMED ANNUAL RATES OF
UNDERLYING UNEXERCISED STOCK PRICE APPRECIATION FOR
OPTIONS AT FISCAL YEAR END OPTION TERM (4)
------------------------------ -------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Peter H. Jackson......................... 50,000 -- $ 893,750 --
Donald M. Freed.......................... 30,000 -- $ 536,250 --
James Brentano........................... 60,000 -- $1,084,500 --
Manfred Krikke........................... 150,000 -- $2,808,750 --
Norman A. Pensky......................... -- -- $ -- --
</TABLE>
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<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT AND
PRINCIPAL STOCKHOLDERS OF INTRAWARE
The following table sets forth certain information regarding beneficial
ownership of Intraware Common Stock as of October 31, 1999 (except as otherwise
noted) by
- each director of Intraware,
- Intraware's Chief Executive Officer and each of the four other most highly
compensated executive officers of Intraware during the fiscal year ended
February 28, 1999,
- all directors and executive officers of Intraware as a group, and
- all those known by Intraware to be beneficial owners of more than five
percent of outstanding shares of Intraware Common Stock. This table is
based on information provided to Intraware or filed with the Securities
and Exchange Commission by Intraware's directors, executive officers and
principal stockholders. Unless otherwise indicated in the footnotes below,
and subject to community property laws were applicable, each of the named
persons has sole voting and investment power with respect to the shares
shown as beneficially owned.
Unless otherwise indicated, the address for each stockholder listed in the
following table is c/o Intraware, Inc., 25 Orinda Way, Orinda California 94563.
Except as otherwise indicated, and subject to applicable community property
laws, the persons named in the table have sole voting and investment power with
respect to all shares of Common Stock held by them. Applicable percentage
ownership in the following table is based on 24,518,976 shares of Common Stock
outstanding as of October 31, 1999.
<TABLE>
<CAPTION>
PERCENTAGE OF
PERCENTAGE OF OUTSTANDING
NUMBER OF OUTSTANDING INTRAWARE
SHARES COMMON STOCK COMMON STOCK
BENEFICIALLY OWNED PRIOR TO OWNED AFTER
NAME AND ADDRESS OWNED MERGER MERGER
- ---------------- ------------------ -------------- -------------
<S> <C> <C> <C>
Peter H. Jackson(1) .................................. 3,439,800 14.0
Mark B. Hoffman(2) ................................... 1,881,250 7.7
Charles G. Davis, Jr.(3) ............................. 1,155,000 4.7
Donald M. Freed(4) ................................... 568,346 2.3
James Brentano(5) .................................... 117,000 *
Manfred Krikke(6) .................................... 219,738 1.0
Norman A. Pensky(7) .................................. 225,000 1.0
Laurence M. Baer(8) .................................. 45,000 *
Mary Ann Byrnes(9) ................................... 43,000 *
Ronald E. F. Codd(10) ................................ 45,000 *
John V. Balen(11) .................................... 15,000 *
All directors and officers as a group 1,347,754 31.6
(19 persons)(12) ...................................
</TABLE>
- ------------------------
* Less than 1% of the outstanding shares of Common Stock.
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<PAGE>
(1) Includes 50,000 shares issuable upon exercise of stock options exercisable
within 60 days of October 31, 1999. Also includes 50,000 shares held from
the exercise of stock options which were unvested and subject to
Intraware's repurchase option as of October 31, 1999, should Mr. Jackson's
employment with Intraware terminate. Mr. Jackson is Intraware's President,
Chief Executive Officer and a member of the Board of Directors.
(2) Includes 40,000 shares issuable upon exercise of stock options exercisable
within 60 days of October 31, 1999. Includes 1,826,250 shares held by
Mark B. Hoffman, trustee of the Hoffman Family Trust. Excludes 40,000
shares held by the Annie Eleanor Hoffman 1993 Revocable Trust of which
Mr. Hoffman disclaims beneficial ownership. Excludes 40,000 shares held by
the Andrew Mark Hoffman 1993 Revocable Trust of which Mr. Hoffman disclaims
beneficial ownership. Also includes 15,000 shares issuable upon exercise of
stock options exercisable in installments cumulatively with respect to
twenty-five percent of the optioned stock six months after the date of
grant, and as to 1/24(th) of the shares each month thereafter. Mr. Hoffman
is a member of the Board of Directors of Intraware.
(3) Includes 300,000 shares held by Charles G. Davis, Jr. Trustee of the
Charles G. Davis, Jr. Trust Agreement dated 1/90 and 600,000 shares held by
the Davis Family-54447-LLC. Also includes 15,000 shares issuable upon
exercise of stock options exercisable in installments cumulatively with
respect to twenty-five percent of the optioned stock six months after the
date of grant, and as to 1/24(th) of the shares each month thereafter.
Mr. Davis is Vice Chairman of the Board of Directors of Intraware.
(4) Includes 30,000 shares issuable upon exercise of stock options exercisable
within 60 days of October 31, 1999. Also includes 30,000 shares held from
the exercise of stock options which were unvested and subject to
Intraware's repurchase option as of October 31, 1999, should Mr. Freed's
employment with Intraware terminate. Mr. Freed is Intraware's Executive
Vice President and Chief Financial Officer.
(5) Includes 63,750 shares issuable upon exercise of stock options exercisable
within 60 days of October 31, 1999. Also includes 16,667 shares held from
the exercise of stock options which were unvested and subject to
Intraware's repurchase option as of October 31, 1999, should
Mr. Brentano's employment with Intraware terminate. Mr. Brentano is
Intraware's Vice President of Knowledge Services.
(6) Includes 60,000 shares issuable upon exercise of stock options exercisable
within 60 days of October 31, 1999. Mr. Krikke is Intraware's Vice
President of Intraware International.
(7) Includes 79,167 shares held from the exercise of stock options which were
unvested and subject to Intraware's repurchase option as of October 31,
1999, should Mr. Pensky's employment with Intraware terminate. Mr. Pensky
is Intraware's Vice President of Sales.
(8) Includes 30,000 shares issuable upon exercise of stock options exercisable
within 60 days of October 31, 1999. Also includes 15,000 shares issuable
upon exercise of stock options exercisable in installments cumulatively
with respect to twenty-five percent of the optioned stock six months after
the date of grant, and as to 1/24(th) of the shares each month thereafter.
Mr. Baer is a member of Intraware's Board of Directors.
(9) Includes 30,000 shares issuable upon exercise of stock options exercisable
within 60 days of October 31, 1999. Also includes 15,000 shares issuable
upon exercise of stock options exercisable in installments cumulatively
with respect to twenty-five percent of the optioned stock six months after
the date of grant, and as to 1/24(th) of the shares each month thereafter.
Ms. Byrnes is a member of Intraware's Board of Directors.
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(10) Includes 30,000 shares issuable upon exercise of stock options exercisable
within 60 days of October 31, 1999. Also includes 15,000 shares issuable
upon exercise of stock options exercisable in installments cumulatively
with respect to twenty-five percent of the optioned stock six months after
the date of grant, and as to 1/24(th) of the shares each month thereafter.
Mr. Codd is a member of Intraware's Board of Directors.
(11) Includes 15,000 shares issuable upon exercise of stock options exercisable
in installments cumulatively with respect to twenty-five percent of the
optioned stock six months after the date of grant, and as to 1/24(th) of
the shares each month thereafter. Mr. Balen did not hold any shares of
Intraware's capital stock as of October 31, 1999. Mr. Balen is a principal
of Canaan Equity Partners, L.L.C. the general partner of Canaan
Equity, L.P. Mr. Balen disclaims beneficial ownership of the 732,496
shares held by Canaan Equity L.P., except to the extent of his pecuniary
interest arising from his interest as a principal of Canaan Equity
Partners, L.L.C., the general partner of Canaan Equity Partners, L.P.
Mr. Balen is a member of the Board of Directors of Intraware.
(12) Includes an aggregate of 333,750 shares exercisable within 60 days of
October 31, 1999. Certain of these shares are subject to repurchase at
cost, which right of repurchase lapses at the rate of 1/4(th) at the end
of one year from the date of grant and 1/48(th) of each month thereafter.
CERTAIN TRANSACTIONS
In April 1998, Intraware issued an aggregate of 4,379,046 shares of
Series D Preferred Stock to various investors at a purchase price of $2.68 per
share. Attractor Ventures LLC purchased 1,121,496 shares, Canaan Equity
Partners, L.L.C. purchased 1,121,496 shares, Kleiner Perkins Caufield & Byers
purchased 186,916 shares and Technology Crossover Management II, L.L.C.
purchased 1,121,496 shares. Mr. Balen, a partner of Canaan, is a member of
Intraware's Board of Directors. Kleiner Perkins Caufield & Byers beneficially
owned more than 5% of Intraware's outstanding capital stock at the time of this
financing while each of Attractor, Canaan and Technology Crossover Management
became beneficial owners of more than 5% of Intraware's outstanding capital
stock as a result of this transaction. These shares of preferred stock were
converted into common stock upon the closing of Intraware's initial public
offering in March 1999.
In July 1998, Intraware loaned to Mr. Jackson $300,000 at an annual interest
rate of 8% secured, in part, by the pledge of 3,489,800 shares of Intraware
common stock held by Mr. Jackson. Mr. Jackson is President, Chief Executive
Officer and a director of Intraware. In March 1999, Mr. Jackson repaid both the
principal and accrued interest of the loan.
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INTERNET IMAGE SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
The following selected historical financial data of Internet Image as of and
for the years ended June 30, 1999 and 1998 and for the period from inception
(July 24, 1996) to June 30, 1997 have been derived from the financial statements
of Internet Image, which have been audited by PricewaterhouseCoopers LLP,
independent accountants. The selected historical financial data as of
September 30, 1999 and for the three months ended September 30, 1999 and 1998
have been derived from the unaudited financial statements of Internet Image,
which have been prepared on the same basis as the audited financial statements
of Internet Image. The selected historical financial data should not be
considered to be indicative of future results and should be read in conjunction
with Internet Image's financial statements, the related notes thereto and
"Internet Image Management's Discussion and Analysis of Financial Condition and
Results of Operations".
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED JUNE 30, FROM INCEPTION
------------------------- --------------------- TO JUNE 30,
1999 1998 1999 1998 1997
----------- ----------- --------- --------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues...................... $ 160 $ 28 $ 151 $ 57 $ --
Cost of net revenues.............. 11 5 42 11 --
------ ------ ------- ------- ------
Gross profit.................... 149 23 109 46 --
------ ------ ------- ------- ------
Operating expenses:
Research and development.......... 363 306 1,262 1,163 336
Sales and marketing............... 262 255 1,149 722 99
General and administrative........ 180 90 381 247 147
Stock option compensation......... 128 73 343 -- --
------ ------ ------- ------- ------
Total operating expenses........ 933 724 3,135 2,132 582
------ ------ ------- ------- ------
Loss from operations................ (784) (701) (3,026) (2,086) (582)
Interest and other income(expense),
net............................... 9 9 35 102 19
------ ------ ------- ------- ------
Net loss............................ $ (775) $ (692) $(2,991) $(1,984) $ (563)
------ ------ ------- ------- ------
Basic and diluted net loss per
share............................. $(0.23) $(0.25) $ (0.85) $ (0.69) $(0.28)
====== ====== ======= ======= ======
Shares used in computing basic and
diluted net loss per share........ 3,331 2,738 3,512 2,880 1,997
====== ====== ======= ======= ======
</TABLE>
<TABLE>
<CAPTION>
JUNE 30
SEPTEMBER 30, -------------------
1999 1999 1998
-------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)................................... $(147) $ 531 $ 705
Total assets................................................ 866 1,627 1,194
Total stockholders' equity.................................. 79 699 893
</TABLE>
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INTERNET IMAGE MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Internet
Image Consolidated Financial Statements and the Notes thereto and the other
information included elsewhere in this Proxy Statement/ Prospectus. Certain
statements in this "Internet Image's Management's Discussion and Analysis of
Financial Condition and Results of Operations" are forward looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended. The
forward looking statements contained herein are based on current expectations
and entail various risks and uncertainties that could cause actual results to
differ materially from those expressed in such forward looking statements. For a
more detailed discussion of these risks and other business risks, see "Risk
Factors--Risks Related to Internet Image."
OVERVIEW
Internet Image was incorporated in July 1996 and designs, develops and
markets application deployment and management software products ("ADM") for
network application software. To date, all of Internet Image's revenues have
been derived from licenses of its products and related support and consulting
services. Internet Image began shipping Targetlink 1.0, a ADM solution, in
April 1998, Targetlink 3.0, in February 1999, Targetlink 4.0 in November 1999.
Udeploy 1.0, a web ADM product was ready to ship in April 1999; Udeploy 2.0 a
web ADM service platform was ready for subscriptions in August 1999. Internet
Image currently expects that revenues from Targetlink and related support and
consulting services will account for substantially all of its revenues for the
remainder of 1999. Internet Image currently expects a portion of its revenue in
2000 to come from subscriptions of the Udeploy service. As a result, factors
adversely affecting the pricing of or demand for ADM product or service would
have a material adverse effect on Internet Image's business, operating results
and financial condition. See "Risk Factors--Risks Related to Internet
Image--Internet Image Faces Intense Competition and May Not Be Able to Compete
Effectively" and "--Internet Image May Not Develop Products in Time to Meet
Changing Technologies."
Although Internet Image's revenues have increased since inception, it has
incurred net losses in each quarter since inception through the year ended
June 30, 1999 and had an accumulated deficit of $5.5 million as of June 30,
1999. In addition, Internet Image incurred net loss of $775,000 for the quarter
ended September 30, 1999. Internet Image's limited operating history makes the
prediction of future operating results as a stand-alone company difficult.
Accordingly, there can be no assurance that Internet Image's revenues as a
stand-alone company would continue to grow or that it would ever be able to
achieve profitability on a quarterly basis, or at all. See "Risk Factors--Risks
Related to Internet Image--Internet Image is an Early Stage Company and May Not
be Profitable in the Near Future."
Internet Image licenses its software products through its direct sales
force, OEMs, systems integrators, ISVs, VARs, and alliance partners. Revenues
from its direct sales force accounted for 38% and 92% of Internet Image's total
revenues for 1998 and 1999, respectively. Internet Image's ability to achieve
significant revenue growth in the future as a stand-alone company would depend
in large part on its success in recruiting and training sufficient direct sales
personnel and in establishing and maintaining relationships with third party
distribution channels.
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INTERNET IMAGE RESULTS OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1997, 1998 AND 1999
TOTAL REVENUES
Internet Image's revenues are derived from software license sales and
support and consulting services. Annual support services are charged separately
from software licenses.
Revenue from license fees is recognized when persuasive evidence of an
agreement exists, delivery of the product has occurred, no significant Company
obligations with regard to implementation or integration exist, the fee is fixed
and determinable and collectibility is probable. Provisions for sales returns
are provided at the time of revenue recognition based upon estimated returns.
Annual support revenues consist of ongoing support and product updates and
are recognized ratably over the term of the related contract. Payments received
in advance of revenue recognition are recorded as deferred revenue. Training and
consulting service revenue is recognized as the services are performed.
In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position No. 97-2 ("SOP 97-2"), "Software Revenue
Recognition," which Internet Image has adopted for transactions entered into
during the fiscal year beginning July 1, 1997. SOP 97-2 generally requires
revenue earned on software licenses involving multiple elements to be allocated
to each element based on the relative fair values of the elements using
vendor-specific objective evidence of such value. The revenue allocated to
software licenses generally is recognized upon delivery of the products. The
revenue allocated to support is recognized ratably over the term of the support
and revenue allocated to service elements is recognized as the services are
performed. In connection with the adoption of SOP 97-2, Internet Image analyzed
all of the elements included in Internet Image's multiple-element arrangements
and determined that Internet Image does not have sufficient evidence to allocate
revenue to the license and support components of its existing licenses. As a
result, Internet Image ratably recognizes its license revenue under
multiple-element arrangements over the term of the service period. As of
June 30, 1999 total license and service fee of $732,000 was deferred due to
adoption of SOP 97-2.
Internet Image's license and service revenues increased from $57,000 in 1998
to $151,000 in 1999. License and service revenues increased primarily as a
result of an increase in the number of licenses sold, reflecting increased
market awareness and acceptance of Internet Image's enterprise network
application software and expansion of its direct sales organization.
Export revenues include all revenues from sales outside the United States
and accounted for 94%, and 29% of total revenues in 1998 and 1999 respectively.
Internet Image does not expect that international license and related service
revenues as a stand-alone company would continue to account for a significant
portion of its total revenues in the future. Internet Image believes that in
order to increase sales opportunities, it will be required to expand its
international operations. There can be no assurance, however, that Internet
Image will be able to maintain or increase international market demand for its
software products and services.
Internet Image's license agreements typically require the payment of a
nonrefundable, one-time license fee for a license of specified term, which may
be perpetual. Customers can terminate the license at any time but do not have a
right of refund for the fees for licenses. Internet Image can terminate the
license agreement only upon a material breach by the other party, provided that
the breach is not cured within a specified period.
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COST OF REVENUES
Cost of license revenues consist primarily of royalties paid to third party
vendors, product packaging, documentation and production. Cost of service
revenues consist primarily of personnel-related and facilities costs incurred in
providing customer support, training and consulting services. Cost of license
and service revenues increased 282% from $11,000 in 1998 to $42,000 in 1999.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of salaries and benefits for Internet Image's engineering and
development personnel and fees paid to consultants. To date all research and
development expenses have been expensed as incurred. Research and development
expenses increased 257% from $336,000 in 1997 to $1.2 million in 1998 and
increased an additional 8% from $1.2 million in 1998 to $1.3 million in 1999.
The increase was primarily related to increased headcount associated with
product development. Internet Image expects that research and development
expenses as a stand-alone company would continue to increase in absolute dollars
through additional investments in developing enterprise network application
software.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
salaries and commissions earned by sales and marketing personnel, field office
expenses, travel and entertainment and promotional expenses. Sales and marketing
expenses increased significantly from $99,000 in 1997 to $722,000 in 1998 and by
an additional 52% from $722,000 in 1998 to $1.1 million in 1999. The increase in
sales and marketing expenses resulted primarily from the expansion of Internet
Image's direct sales force through the addition of sales and marketing personnel
and the expansion of direct marketing programs.
GENERAL AND ADMINISTRATIVE. Internet Image's general and administrative
expenses consist primarily of salaries and benefits for Internet Image's general
management and administrative personnel as well as fees paid for professional
services. These expenses increased by 68% from $147,000 in 1997 to $247,000 in
1998 and increased by an additional 54% from $247,000 in 1998 to $381,000 in
1999. The increase in general and administrative expenses resulted primarily
from the need for additional general and administrative personnel to support
expansion of Internet Image's operations.
STOCK COMPENSATION
Stock compensation expense was $0, $0 and $343,000 in 1997, 1998 and 1999,
respectively.
Stock compensation expense is an ongoing charge through April 2002 that is
related to employee stock options granted in 1998 and 1999.
FOR THE QUARTER ENDED SEPTEMBER 30, 1998 AND 1999
TOTAL REVENUES
License and service revenues increased by 471% from $28,000 for the quarter
ended September 30, 1998 to $160,000 for the quarter ended September 30, 1999.
License and service revenues increased primarily as a result of an increase in
the number of licenses sold, reflecting increased market awareness and
acceptance of Internet Image's enterprise network application software and
expansion of its direct sales force.
COST OF REVENUES
Cost of license and service revenues increased by 120% from $5,000 for the
quarter ended September 30, 1998 to $11,000 for the quarter ended September 30,
1999. Cost of license and service revenues increased primarily as a result of an
increase in the number of licenses sold.
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OPERATING EXPENSES
RESEARCH AND DEVELOPMENT
Research and development expenses increased by 19% from $306,000 in the
quarter ended September 30, 1998 to $363,000 for the quarter ended
September 30, 1999. The increase was primarily related to increased headcount
associated with product development.
SALES AND MARKETING
Sales and marketing expenses increased by 3% from $255,000 for the quarter
ended September 30, 1998 to $262,000 for the quarter ended September 30, 1999.
The increase in sales and marketing expenses resulted primarily from the
addition of sales personnel and the offset from decrease of advertising cost
from $32,000 for the quarter ended September 30, 1998 to $8,000 for the quarter
ended September 30, 1999.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased by 100% from $90,000 in the
quarter ended September 30, 1998 to $180,000 in the quarter ended September 30,
1999. The increase in general and administrative expenses resulted primarily
from the legal fees and audit fees related to the merger.
STOCK COMPENSATION
Stock compensation expense was $73,000, and $128,000 in the quarter ended
September 30, 1998 and 1999, respectively.
Stock compensation expense is an ongoing charge through April 2002 that is
related to employee stock options granted in 1998 and 1999.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, Internet Image has funded its operations primarily through
the private sale of equity securities, which totaled $5.8 million (net of
issuance costs) as of June 30, 1999.
Net cash used in operating activities was $533,000, $1.7 million,
$2.3 million and $420,000 in 1997, 1998, 1999 and the quarter ended
September 30, 1999, respectively. For such periods, net cash used in operating
activities resulted primarily from net losses and increases in accounts
receivable associated with increased revenue, partially offset by increases in
accounts payable, accrued liabilities and deferred revenue. Cash flows used in
investing activities was $89,000, $116,000, $50,000 and $79,000 for 1997, 1998,
1999 and the quarter ended September 30, 1999, respectively. Internet Image's
investing activities consisted primarily of purchases of property and equipment
as well as software. Net cash provided by financing activities was
$2.2 million, $1.2 million, $2.4 million and $25,000 for 1997, 1998, 1999 and
the quarter ended September 30, 1999, respectively. Cash flows from financing
activities consisted primarily of proceeds from the private sale of equity
securities and employees' exercise of stock options.
Internet Image estimates that the proceeds from customers' payments together
with existing cash and cash equivalents will be sufficient to fund its liquidity
requirements through December 1999.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. Failure to accept four digit entries could result in system
failures or miscalculations causing disruptions of operations including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business
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activities. As a result, many companies' software and computer systems may need
to be upgraded or replaced in order to comply with such "Year 2000"
requirements. Internet Image has not commenced an audit of its internal
operating systems to determine whether they are Year 2000 compliant. However,
Internet Image does not believe it will incur significant incremental costs, if
any, in order to bring its internal operating systems into Year 2000 compliance.
Based upon Internet Image's design and testing of its software products,
Internet Image believes that its software products are Year 2000 compliant.
However, there can be no assurance that this is the case or that Internet Image
products will integrate with the products in the Year 2000 in a compliant manner
and failure of Internet Image's software products to operate properly with
regard to Year 2000 compliance could require Internet Image to incur significant
unanticipated expenses to remedy any problems and could have a material adverse
effect on Internet Image's business, financial condition and results of
operations.
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INTERNET IMAGE BUSINESS
The discussion in this Proxy Statement/Prospectus contains forward-looking
statements which involve risks and uncertainties. Internet Image's actual
results could differ materially from those discussed in the forward-looking
statements. Factors that could cause or contribute to such differences include,
without limitation, those discussed in this section and the sections entitled
"Risk Factors," as well as those discussed elsewhere in this Proxy
Statement/Prospectus.
Internet Image, Inc. designs, develops and markets Internet and intranet
intelligent Application Deployment and Management (ADM) solutions. The
management and updating of software applications over the intranet and Internet
has become more and more obvious to managers of corporate IT systems. A key
benefit of Internet Image's solutions is that they allow corporate IT
professionals to deploy, manage and maintain software and digital information
over the intranet or the Internet. Moreover, Internet Image realized the demand
of individual users and small and medium sized companies for Management
Information System (MIS) services similar to those services provided by a large
corporation's MIS department. Internet Image's Udeploy solution is designed to
be the virtual MIS department for Internet or Web communities.
BACKGROUND
Companies today have significant investments in software applications that
automate discrete business processes. These software applications are frequently
updated and upgraded and require system administrators to manage and deploy the
updated versions of the software applications over the intranet and Internet to
the users, either employees or customers. Companies are seeking to accomplish
the deployment of these update or upgrade functions in an accurate, fast and low
cost manner. Internet Image's ADM products are designed to address this need.
PRODUCTS
Internet Image has developed two products intended to allow organizations to
deploy and manage network-based applications.
TARGETLINK: TargetLink is an enterprise application deployment and
management software product coded in Java which is designed to allow for cross
platform application.
UDEPLOY: Udeploy is the virtual ADM platform for deploying and managing
software applications for entire Internet or Web communities.
STRATEGY
Internet Image's objective is to be the leading provider of ADM platform for
deployment and management of software applications for the intranet and
Internet. Internet Image's strategy to achieve this objective, includes the
following elements:
DELIVER TARGETLINK PRODUCT BASED ON CROSS-PLATFORM ENVIRONMENTS: Internet
Image's goal is to continue to introduce TargetLink on Unix and Mac standards.
Internet Image believes that support of open platforms will enable Internet
Image to penetrate markets such as financial services, education, insurance and
telecommunications which rely on multiple computer platforms.
PROVIDE UDEPLOY SERVICE FOR SMALL AND MEDIUM SIZED COMPANIES: Internet
Image's Udeploy web site will provide ADM services to companies which cannot
justify having a complete MIS department to manage and deploy software
applications, for fees based on utilization of the services.
DEVELOP KEY TECHNOLOGY AND MARKETING RELATIONSHIPS: Internet Image has
entered into and intends to continue to develop strategic technology and
marketing relationships that will accelerate market
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penetration and acceptance of Internet Image's products. Technical relationships
enable Internet Image to rapidly integrate new product features and penetrate
technical target markets such as Unix and Mac platforms. Marketing relationships
provide access to a customer prospect base and joint marketing activities in
target markets.
IMPLEMENT COMPREHENSIVE DISTRIBUTION STRATEGY: Internet Image has a
worldwide distribution strategy which relies on both direct and indirect
channels. It plans to continue to expand its direct sales, support and service
organizations to focus on strategic accounts. Internet Image plans to expand its
presence through indirect channels by establishing new relationships and
leveraging its existing relationships with systems integrators, distributors,
OEMs, VARs and ISVs.
SERVICES AND SUPPORT
Internet Image believes that a high level of customer service, support and
education programs are important to successfully develop and market its products
and strengthen relationships with leading customers. Internet Image offers three
types of services: maintenance, training, and consulting. Substantially all of
Internet Image direct sales to customers include maintenance contracts, which
are typically for twelve months and entitle customers to upgrades, if and when
available, and technical support.
Internet Image's training and consulting services are designed to educate
its existing and potential customers and support its customers and resellers in
implementing Internet Image's software solutions. Internet Image believes its
services play a significant role in teaching its customers, resellers and
training partners how to deliver Internet Image's solutions. Internet Image
recently began offering on-site and custom training services.
STRATEGIC RELATIONSHIPS
Internet Image has built some strategic alliances to aid in accelerating the
adoption of its products. These alliances are designed to enable it to focus on
development. Internet Image seeks to establish close engineering and marketing
relationships with strategic partners such as hardware vendors, database
software vendors, Internet e-commerce vendors and applications service
providers. Internet Image has also established alliance agreements with certain
systems integrators and with ISVs. The objective of these alliances is to
provide Internet Image's customers with complete business solutions and to
establish many trained experts in Internet Image's products.
SALES AND MARKETING
Internet Image's objective is to achieve the broadest market penetration by
employing multiple distribution channels, including direct sales, OEMs, systems
integrators, ISVs and VARs. Internet Image's direct sales force focuses on large
strategic accounts and leverages strategic relationships to access target
accounts in vertical markets such as DHL Airways, Inc. and Forte Software, Inc.
Internet Image seeks to establish and maintain strategic relationships with
hardware vendors, application service providers and database vendors for the
purpose of providing Internet Image with access to a large installed base of
potential customers. Internet Image also engages in joint marketing programs and
targeted industry events with these vendors.
Internet Image's marketing efforts are designed to promote general awareness
of its products and services and support its direct and indirect sales channels.
Internet Image engages in a number of marketing activities, including public
relations and direct marketing, and participates in major industry trade shows.
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CUSTOMERS
Internet Image's products are used by major organizations and ISVs. Major
customers include Lucent Technologies, DHL Airways, Inc., Teradyne, Inc., Forte
Software, Inc. (a subsidiary of Sun Microsystems, Inc.) and CCD Online Systems.
See Note 1 of Notes to Internet Image's Consolidated Financial Statements for
information with respect to significant customers.
RESEARCH AND DEVELOPMENT
Internet Image believes that its future success depends in large part on its
ability to enhance its product line, develop new products and services, maintain
technological leadership, and satisfy continually changing customer requirements
for application software deployment and management. Its product management and
engineering groups are responsible for product architecture, functionality, and
quality assurance as well as for new product definition and development.
Internet Image has made substantial investment in product development and
technology integration. Its product line has been developed primarily by an
internal development staff.
COMPETITION
The market for application software deployment and management is intensely
competitive and characterized by rapid changes in Internet technology, frequent
new product introductions and rapidly changing customer requirements. Internet
Image's ADM function can in some cases also be implemented using a web download
with minimum or no control of the deployment status. As such, Internet Image
effectively experiences some competition from potential customers' decisions to
pursue this type of approach as opposed to utilizing an ADM platform such as
Internet Image's products. As a result, Internet Image must continuously educate
existing and prospective customers as to the advantages of Internet Image's
products. There can be no assurance that these customers or potential customers
will perceive sufficient value in Internet Image's products to justify
purchasing them.
Internet Image has experienced and expects to continue to experience
increased competition from current and future competitors, many of whom have
significantly greater financial, technical, marketing and other resources than
Internet Image. Internet Image's competitors may be able to embed ADM technology
in broader software platforms, respond more quickly to new or emerging
technologies and changes in customer requirements or devote greater resources to
the development, promotion and sale of their products than Internet Image. Also,
many current and potential competitors have greater name recognition and more
extensive customer bases that could be leveraged, thereby gaining market share
to Internet Image's detriment. Increased competition could result in price
reductions, fewer customer orders, reduced gross margins and loss of market
share, any of which could materially adversely affect Internet Image's business,
operating results and financial condition. There can be no assurance that
Internet Image will be able to compete successfully against current and future
competitors, and the failure to do so would have a material adverse effect upon
Internet Image's business, operating results and financial condition.
PROPRIETARY TECHNOLOGY
Internet Image relies primarily on a combination of copyright and trademark
laws, trade secrets, confidentiality procedures and contractual provisions to
protect its proprietary rights. Internet Image also believes that factors such
as the technological and creative skills of its personnel, new product
developments, frequent product enhancements, name recognition and reliable
product maintenance are essential to establishing and maintaining a technology
leadership position. See "Risk Factors--Risks Related to Internet Image--If
Internet Image is Unable to Adequately Protect its Intellectual Property, Its
Business Could Suffer."
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EMPLOYEES
As of September 30, 1999, Internet Image had a total of 29 employees, not
including consultants, of which 8 were engaged in sales, marketing, and alliance
management, 15 in research and development, 2 in technical support, and 4 in
general and administration.
FACILITIES
Internet Image leases a total of approximately 4,200 square feet of office
space in Fremont, California under a 3-year lease agreement which commenced in
July 1997.
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INTERNET IMAGE MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning Internet
Image's current executive officers and directors.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- ---------------------------------------------------------
<S> <C> <C>
Lung C. Tsai..................... 51 Founder, Chief Executive Officer and Director
Andy Lee......................... 36 Founder, President, Chief Technology Officer and Director
William J. Almon................. 66 Chairman and Director
Austin Jieh...................... 50 Director
Luke Lien........................ 48 Director
Masaharu Shinya.................. 56 Director
</TABLE>
LUNG C. TSAI co-founded Internet Image in July 1996 and has served as a
director since inception. He served as Chairman from inception to December 1998,
and Chief Executive Officer since February 1997. From June 1987 to March 1993,
Mr. Tsai was co-founder of and served as a Vice President of Operations and Vice
President of International Sales and Marketing for Destiny Technology Corp., a
laser printer controller firmware development company. Before 1987, Mr. Tsai
served as Vice President of System Developments for Mellon Bank and Bank of
America. Mr. Tsai currently serves as a director of Orbon Corporation, a
pharmaceutical research and development start-up company. Mr. Tsai holds a M.S.
in Management and Information Science from the University of Texas and a M.S.
from Texas Tech University.
ANDY LEE co-founded Internet Image in July 1996 and has served as a director
and Chief Technology Officer since its inception. He served as Vice President of
Engineering from inception through August 1998 and has since served as
President. From May 1994 to July 1996, Dr. Lee worked as the Senior Development
Engineer in HP Internet Server Lab, responsible for the system design of network
server series. From May 1990 to May 1994, Dr. Lee worked as the senior member of
the technical staff at the Digital Sound and Sight division of Silicon Graphics,
Inc. From May, 1988 to May 1990, Dr. Lee worked at LSI and Amdahl as a
development engineer. Dr. Lee received his Ph.D. from Stanford University and
holds a honorary Ph.D. degree from Southeastern University in China. Dr. Lee is
also a guest professor at Southeastern University and a visiting professor at
Tsinghua University.
WILLIAM J. ALMON has been a director and Chairman of Internet Image since
January 1999. Mr. Almon spent 30 years with IBM holding executive positions in
both software and hardware management. After IBM, he served as President of
Conner Peripherals, Inc. and founded StorMedia Inc. Mr. Almon received his B.S.
degree from the United States Military Academy at West Point, and pursued
graduate studies at the Georgetown University School of Economics. He serves as
a Director of Read Rite Corporation, Sigma Designs, Inc., Netfish and HDI.
AUSTIN JIEH has been a director of Internet Image since July 1996. Since
1995, Mr. Jieh has served as President and CEO of InterPac, a venture investment
and consulting company. In 1995 Mr. Jieh was the President and CEO of W.I.
Harper Group. From 1992 to 1995 Mr. Jieh served as the President of Lion America
Corp. and from 1987 to 1992 Mr. Jieh was General Manager of U.S. Sertek Inc., a
division of Acer Sertek Incorporated. Mr. Jieh has an MBA degree from Santa
Clara University.
LUKE LIEN has been a director of Internet Image since February 1999.
Dr. Lien is a general partner of PacLink Management Corporation. Prior to his
venture fund management career, Dr. Lien worked for IBM as a research staff
member at IBM Watson Research Center for 17 years. At IBM, Dr. Lien served as a
manager and senior manager, and eventually became a director of the IBM Global
Network Division. As an international assignee from IBM, he spent 5 years at IBM
Japan to establish a multimedia laboratory for IBM Tokyo Research Lab and 1 year
in Beijing to set up IBM Beijing
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Research Lab. Since 1993, Dr. Lien has served as Science & Technology consultant
for the Taiwan Government (Executive Yuen). Dr. Lien received his Ph.D. in
Computer Science from the University of Texas at Austin.
MASAHARU SHINYA has served as a director of Internet Image since June 1997.
Mr. Shinya served as President of Kanematsu Semiconductor Corporation from July
1990 through March 1999 and continues to serve as an advisor to Kanematsu.
Mr. Shinya also serves as the Chairman and Chief Executive Officer of Global
Alliance, Inc. and Universe Electron Corporation, and as the Chairman of
Programmable Silicon Solutions. In addition, Mr. Shinya is a director of Altigen
Communications Inc., Capella Microsystems, Inc. and Impala Linear Corporation.
Mr. Shinya received a Bachelors degree in Economics from Waseda University in
Japan.
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SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL SHAREHOLDERS OF
INTERNET IMAGE
The following table sets forth the beneficial ownership of Internet Image
Capital Stock as of October 31, 1999, as to
- each person who is known by Internet Image to own beneficially more than
5% of the outstanding shares of Internet Image Common Stock or more than
5% of Internet Image Preferred Stock, on an as-converted basis,
- each director of Internet Image,
- the Chief Executive Officer of Internet Image,
- all directors and executive officers as a group.
<TABLE>
<CAPTION>
NUMBER OF
SHARES PERCENT
BENEFICIALLY CLASS OF BENEFICIALLY
SHAREHOLDERS OWNED(1) SECURITIES OWNED(1)(2)
- ------------ -------- ---------- -----------
<S> <C> <C> <C>
Chao Ping Wang.............................. 887,080 Common and 9.95%
4F, 82 Liu-Chou Street Preferred Stock
Taipei, Taiwan, R.O.C.
Austin Jieh................................. 493,540 Common and 5.54%
10 Mulberry Court, #6 Preferred Stock
Belmont, CA 94002
Andy Lee.................................... 1,000,000 Common Stock 11.22%
340 Ohlones Street
Fremont, CA 94539
Lung Tsai(3)................................ 866,874 Common and 9.72%
7050 Foothill Boulevard Preferred Stock
Pleasanton, CA 94566
William J. Almon(4)......................... 455,556 Common and 5.11%
10570 Blandor Way Preferred Stock
Los Altos Hills, CA 94024
Masaharu Shinya(5).......................... 510,000 Common and 5.72%
1-6-1-3601 Harumi, Chuo-ku Preferred Stock
Tokyo, 104-0053, Japan
Apex Venture Capital Corporation............ 333,334 Preferred Stock 3.74%
5th Fl., No. 143, Sec. 2, Min-Sheng E.
Road
Taipei, Taiwan, R.O.C.
Pac-Link Fund and Tai Yuen Venture.......... 671,668 Common and 7.53%
Capital Investment Corporation(6) Preferred Stock
14Fl., No. 2, Tun Hwa S. Road, Sec. 2
Taipei, Taiwan, R.O.C.
Luke Lien(7)................................ 813,891 Common and 9.13%
14Fl., No. 2, Tun Hwa S. Road, Sec. 2 Preferred Stock
Taipei, Taiwan, R.O.C.
Steve Tsai.................................. 207,050 Common Stock 2.32%
2583 Hill Park Drive
San Jose, CA 95124
All directors and executive officers as a 4,139,861 Common and 46.44%
group (6 persons)(8)...................... Preferred Stock
</TABLE>
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- ------------------------
(1) Except as indicated and subject to applicable community property laws, the
persons named in the table have sole voting and investment power with
respect to all of the shares of Internet Image Capital Stock shown as
beneficially owned by them. The number of shares of Internet Image Preferred
Stock beneficially owned is presented as the number of shares of Internet
Image Common Stock issuable upon conversion of such preferred stock. Each
share of Internet Image Series A, Series B and Series C Preferred Stock is
convertible into one (1) share of Internet Image Common Stock.
(2) Percentage ownership is based on 3,606,603 shares of Internet Image Common
Stock, and 5,308,341 shares of Preferred Stock on an as-converted basis,
outstanding on October 31, 1999. The number of shares of Internet Image
Common Stock and Preferred Stock beneficially owned includes the shares
issuable pursuant to stock options and warrants that are exercisable within
60 days of October 31, 1999 (including options that will accelerate at the
Effective Time). Shares issuable pursuant to stock options or warrants are
deemed outstanding for computing the percentage owned by the person holding
such options or warrants but are not deemed outstanding for computing the
percentage of any other person.
(3) Includes 603,540 shares of Common Stock held in the name of the Tsai Family
Trust U/D/T dated May 20, 1998, of which Mr. Tsai is a Trustee.
(4) Includes an option to purchase 300,000 shares that will accelerate at the
Effective Time.
(5) Includes 115,000 shares of Common Stock held by Sachiko Shinya, the wife of
Mr. Shinya and 50,000 shares of Series B Preferred Stock held by Masami
Shinya, the daughter of Mr. Shinya. Also includes 166,667 shares of Series B
Preferred Stock held directly by Mr. Shinya and options to purchase 11,666
shares of Common Stock that are exercisable within 60 days of October 31,
1999. In addition, includes 166,667 shares of Series B Preferred Stock held
by Kanematsu Semiconductor Corporation, of which Mr. Shinya was a President
through March 1999 and currently serves as an advisor. Mr. Shinya disclaims
beneficial ownership of the shares held by Kanematsu Semiconductor
Corporation, except to the extent of his pecuniary interest therein.
(6) Includes 333,334 shares held by Pac-Link Fund and 333,334 shares held by Tai
Yuen Venture Capital Investment Corporation, both of which are managed by
Pac-Link Management Inc., of which Mr. Lien is a general partner. Also
includes an option to purchase 5,000 shares of Common Stock that is
immediately exercisable held by Pac-Link Management Inc.
(7) Includes an option to purchase 5,000 shares of Common Stock that is
immediately exercisable held by Pac-Link Management Inc., of which Mr. Lien
is a general partner. Also includes 333,334 shares held by Pac-Link Fund and
333,334 shares held by Tai Yuen Venture Capital Investment Corporation, both
of which are managed by Pac-Link Management Inc. Additionally includes
142,223 shares held by Win & Win Management Inc., of which Mr. Lien is
Chairman, an advisor and an investor. Mr. Lien disclaims beneficial
ownership of the shares held by Pac-Link Management Inc, Pac-Link Fund, Tai
Yuen Venture Capital Corporation and Win & Win Management Inc., except to
the extent of his pecuniary interest therein.
(8) Includes options to purchase 311,666 shares of Common Stock that are
exercisable within 60 days of October 31, 1999 (See notes (4) and (5)) and
options to purchase 5,000 shares of Common Stock which are immediately
exercisable (See notes (6) and (7)).
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DISSENTERS' RIGHTS
If the merger agreement is approved by the required vote of Internet Image
shareholders and is not abandoned or terminated, holders of Internet Image
capital stock who did not vote in favor of the merger may, by complying with
Sections 1300 through 1312 of the California Corporations Code, be entitled to
dissenters' rights as described therein. The record holders of the shares of
Internet Image capital stock that are eligible to, and do, exercise their
dissenters' rights with respect to the merger are referred to herein as
"Dissenting Shareholders," and the shares of stock with respect to which they
exercise dissenters' rights are referred to herein as "Dissenting Shares."
CALIFORNIA DISSENTERS' RIGHTS
The following discussion is not a complete statement of California law
relating to dissenters' rights. The following discussion is qualified in its
entirety by reference to Sections 1300 through 1312 of the California
Corporations Code attached to this Joint proxy statement/prospectus as Annex VI
and incorporated herein by reference. This discussion and Sections 1300 through
1312 of the California Corporations Code should be reviewed carefully by any
holder who wishes to exercise statutory dissenters' rights or wishes to preserve
the right to do so, since failure to comply with the required procedures will
result in the loss of such rights.
ANNEX VI SHOULD BE REVIEWED CAREFULLY BY ANY INTERNET IMAGE SHAREHOLDER WHO
WISHES TO EXERCISE DISSENTERS' RIGHTS OR WHO WISHES TO PRESERVE THE RIGHT TO DO
SO, SINCE FAILURE TO COMPLY WITH THE PROCEDURES OF THE STATUTE WILL RESULT IN
THE LOSS OF DISSENTERS' RIGHTS.
Shares of Internet Image stock must satisfy each of the following
requirements to qualify as Dissenting Shares under California law:
- the shares of Internet Image capital stock must have been outstanding on
the Internet Image Record Date;
- the shares of Internet Image stock must not have been voted in favor of
the merger;
- the holder of such shares of Internet Image stock must make a written
demand that Internet Image repurchase such shares of Internet Image
capital stock at fair market value (as described below); and
- the holder of such shares of Internet Image capital stock must submit
certificates for endorsement (as described below).
A vote by proxy or in person against the merger does not in and of itself
constitute a demand for appraisal under California law.
Pursuant to Sections 1300 through 1312 of the California Corporations Code,
holders of Dissenting Shares may require Internet Image to repurchase their
Dissenting Shares at a price equal to the fair market value of such shares
determined as of the day before the first announcement of the terms of the
merger, excluding any appreciation or depreciation as a consequence of the
proposed merger, but adjusted for any stock split, reverse stock split or stock
dividend that becomes effective thereafter.
Within ten days following approval of the merger by Internet Image
shareholders, Internet Image is required to mail to deliver a dissenters' notice
to each person who did to vote in favor of the merger. The dissenters' notice
must contain the following:
- A notice of the approval of the merger,
- A statement of the price determined by Internet Image to represent the
fair market value of Dissenting Shares (which shall constitute an offer by
Internet Image to purchase such Dissenting Shares at such stated price),
and
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- A brief description of the procedures for such holders to exercise their
rights as Dissenting Shareholders.
Within 30 days after the date on which the notice of the approval of the
merger by the outstanding shares is mailed to Dissenting Shareholders, a
Dissenting Shareholder must:
- Demand that Internet Image repurchase such shareholder's Dissenting
Shares.
- The demand shall set forth the number and class of Dissenting Shares
held of record by such Dissenting Shareholder that the Dissenting
Shareholder demands that Internet Image purchase, and
- The demand shall include a statement of what such Dissenting
Shareholder claims to be the fair market value of the Dissenting Shares
as of the day before the announcement of the proposed merger. The
statement of fair market value constitutes an offer by the Dissenting
Shareholder to sell the Dissenting Shares at such price within such
30-day period.
- Submit to Internet Image or its transfer agent certificates representing
any Dissenting Shares that the Dissenting Shareholder demands Internet
Image purchase, so that such Dissenting Shares may either be stamped or
endorsed with the statement that the shares are not Dissenting Shares or
exchanged for certificates of appropriate denomination so stamped or
endorsed.
If upon the Dissenting Shareholder's surrender of the certificates
representing the Dissenting Shares Internet Image and a Dissenting Shareholder
agree upon the price to be paid for the Dissenting Shares and agree that such
shares are Dissenting Shares, then the agreed price is required by law to be
paid to the Dissenting Shareholder within the later of 30 days after the date of
such agreement or 30 days after any statutory or contractual conditions to the
consummation of the merger are satisfied or waived.
If Internet Image and a Dissenting Shareholder disagree as to the price for
such Dissenting Shares or disagree as to whether such shares are entitled to be
classified as Dissenting Shares, such holder has the right to bring an action in
California Superior Court, within six months after the date on which the notice
of the shareholders' approval of the merger is mailed, to resolve such dispute.
In such action, the court will determine whether the shares of Internet Image
common stock held by such shareholder are Dissenting Shares, the fair market
value of such shares of Internet Image common stock, or both. California law
provides, among other things, that a Dissenting Shareholder may not withdraw the
demand for payment of the fair market value of Dissenting Shares unless Internet
Image consents to such request for withdrawal.
COMPARISON OF CAPITAL STOCK
DESCRIPTION OF INTRAWARE CAPITAL STOCK
The authorized capital stock of Intraware consists of 260,000,000 shares of
capital stock, of which 250,000,000 shares are designated as common stock and
10,000,000 shares are designated as preferred stock.
INTRAWARE COMMON STOCK
As of October 31, 1999, 24,518,976 shares of Intraware common stock were
outstanding. After giving effect to the transactions contemplated by the merger
agreement, and assuming there were no other issuances of common stock after
October 31, 1999, there would be approximately 25,931,536 shares of Intraware
common stock outstanding. There have been issuances of Intraware common stock
after October 31, 1999. The holders of Intraware common stock are entitled to
one vote per share on all matters to be voted upon by the stockholders.
Stockholders may not cumulate votes in connection with the election of
directors. The holders of Intraware common stock are entitled to receive ratably
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such dividends, if any, as may be declared from time to time by the Board of
Directors out of funds legally available therefor. In the event of a
liquidation, dissolution or winding up of Intraware, the holders of Intraware
common stock are entitled to share ratably in all assets remaining after payment
of liabilities and payment of liquidation preferences to holders of Intraware
preferred stock, if any. Intraware common stock has no preemptive or conversion
rights or other subscription rights. There are no redemption or sinking fund
provisions applicable to Intraware common stock. All outstanding shares of
Intraware common stock are fully paid and non-assessable, and the shares of
Intraware common stock to be outstanding upon completion of the merger will be
fully paid and non-assessable.
INTRAWARE PREFERRED STOCK
Intraware has 10,000,000 shares of Intraware preferred stock authorized, of
which, as of , 1999, no shares were outstanding. The Intraware Board of
Directors has the authority to issue these shares of Intraware preferred stock
in one or more series, to fix the rights, preferences, privileges and
restrictions, qualifications and limitations granted to or imposed upon any
unissued and undesignated shares of Intraware preferred stock and to fix the
number of shares constituting any series and the designations of such series,
without any further vote or action by the stockholders (subject to applicable
stock exchange rules). The Intraware Board of Directors, without stockholder
approval (subject to applicable stock exchange rules), may issue Intraware
preferred stock with voting and conversion rights which could adversely affect
the voting power or other rights of the holders of Intraware common stock, and
the issuance of Intraware preferred stock may have the effect of delaying,
deferring or preventing a change in control of Intraware.
TRANSFER AGENT AND REGISTRAR
Harris Trust Company of California, serves as the transfer agent and
registrar of Intraware common stock.
DESCRIPTION OF INTERNET IMAGE CAPITAL STOCK
The authorized capital stock of Internet Image will consist, prior to the
closing of the merger, of 28,637,781 shares of capital stock, of which
20,000,000 shares are common stock with no par value, and 8,637,781 shares are
preferred stock with no par value.
INTERNET IMAGE COMMON STOCK
As of November 1, 1999, 3,606,603 shares of Internet Image common stock were
outstanding. The holders of Internet Image common stock are entitled to one vote
per share on all matters to be voted upon by the shareholders. Shareholders may
cumulate votes in connection with the election of directors. Subject to the
preferential rights of the Internet Image preferred stock, the holders of shares
of Internet Image common stock are entitled to receive dividends payable either
in cash, property of shares of capital stock, when and if declared by Internet
Image's Board of Directors out of funds legally available therefor.
Internet Image common stock has no preemptive or conversion rights or other
subscription rights. There are no redemption or sinking fund provisions
available to Internet Image common shareholders. All outstanding shares of
Internet Image common stock are fully paid and non-assessable.
In the event of any dissolution, liquidation, or winding up of the affairs
of Internet Image, after distribution in full of the preferential amounts, if
any, to be distributed to the holders of shares of the Internet Image preferred
stock, holders of Internet Image common stock and preferred stock are entitled,
unless otherwise required by law, to receive all of the remaining assets of
Internet Image of whatever kind available for distribution to shareholders
ratably in proportion to the number of shares of Internet Image common stock
held by them assuming conversion of all such preferred stock.
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INTERNET IMAGE PREFERRED STOCK
As of November 1, 1999, 5,308,341 shares of Internet Image preferred stock
were outstanding of which 2,330,000 shares are Series A preferred stock,
1,863,337 shares are Series B preferred stock and 1,115,004 shares are Series C
preferred stock, referred to as the "convertible preferred stock". No dividend
shall be paid on or declared and set apart for the shares of Common Stock until
dividends are first paid on or declared and set apart on the convertible
preferred stock in the following amounts: $0.015 per share of Series A preferred
stock; $0.09 per share of Series B preferred stock; and $0.135 per share of
Series C preferred stock. Such dividends and preference amounts are not
cumulative and dividends shall be paid only when and if declared by the Board of
Directors. No dividend shall be paid on or declared and set apart for the shares
of any series of convertible preferred stock for any dividend period unless at
the same time a like proportionate dividend for the same dividend period,
ratably in proportion to the respective annual dividend preference of such
series, shall be paid on or declared and set apart for the shares of all other
such series of convertible preferred stock. In the event of any liquidation,
dissolution or winding up of Internet Image, holders of each share of
convertible preferred stock shall be entitled to be paid first out of the assets
of Internet Image available for distribution to holders of Internet Image
capital stock before any sums shall be paid or any assets distributed among the
holders of Internet Image common stock, an amount equal to the greater of:
- $0.25 per share of Series A preferred stock, $1.50 per share of Series B
preferred stock and $2.25 per share of Series C preferred stock plus an
amount equal to all accrued and unpaid dividends thereon, or
- after the distributions described in the paragraph above have been paid in
full, the remaining assets of the corporation available for distribution
to shareholders shall be distributed among the holders of Preferred Stock
and Common Stock pro rata based on the number of shares of Common Stock
held by each, assuming conversion of all preferred stock into common
stock.
Each holder of convertible preferred stock has the right, at his or her
option, to convert his or her shares into shares of Internet Image common stock.
Each share of convertible preferred stock is convertible into one share of
Internet Image common stock at the option of the holder thereof. All shares of
convertible preferred stock are automatically converted into Internet Image
common stock upon the closing of certain underwritten public offerings in which
the aggregate proceeds to Internet Image exceed $10,000,000.
REGISTRATION RIGHTS
The holders of the Internet Image convertible preferred stock, or their
permitted transferees are entitled to certain rights with respect to
registration of such shares under the Securities Act. These rights are provided
under the terms of an agreement between Internet Image and the holders of
registrable securities dated February 1, 1999. Holders of these securities may
require on two separate occasions that Internet Image register their shares for
public resale on Form S-3 or similar short-form registration, provided Internet
Image is eligible to use form S-3 or similar short-form registration and
provided further that the value of the securities to be registered is at least
$1,000,000. All S-3 registration expenses and other expenses of registered
offerings shall be borne pro rata among the selling shareholders.
In the event Internet Image elects to register any of its shares of common
stock for purposes of effecting any public offering, the holders of registrable
securities are entitled to include their shares of common stock in the
registration ("Piggyback Registration"), subject however to the right of
Internet Image to reduce the number of shares proposed to be registered in view
of market conditions. All expenses in connection with any Piggyback Registration
other than underwriting discounts and commissions will be borne by Internet
Image.
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In addition, the holders of the convertible preferred stock have demand
registration rights with respect to their outstanding shares. Under these
registration rights, holders of at least 650,000 shares of such securities may
require on two occasions, commencing on April 1, 2001, or six months after the
effective date of Internet Image's initial public offering, that Internet Image
register not less than 50% of such shares, or any lesser number of shares if the
anticipated aggregate offering price, net of underwriting discounts and
commissions, would exceed $5,000,000, for public resale.
TRANSFER AGENT AND REGISTRAR
The Law Office of Robert D. Cochran currently acts as the transfer agent and
registrar of Internet Image capital stock.
COMPARISON OF CAPITAL STOCK OF INTRAWARE AND INTERNET IMAGE
Intraware is incorporated in the State of Delaware and Internet Image is
incorporated in the State of California. Following the merger, Internet Image
will continue to be governed by the California Corporations Code and Intraware
will continue to be governed by the Delaware General Corporation Law.
Shareholders of Internet Image, however, will hold Intraware common stock rather
than Internet Image common stock. Therefore, the rights of such shareholders
will be governed by Delaware law, and the provision of the Intraware amended and
restated certificate of incorporation and the Intraware bylaws, rather than the
Internet Image articles of incorporation and the Internet Image bylaws. The
following is a summary of the comparison of some provisions of California law
and Delaware law and the charters and bylaws of the respective corporations.
This summary does not purport to be complete and is qualified in its entirety by
reference to the corporate statutes of those states and the corporate charter
and bylaws of Intraware and Internet Image.
AMENDMENT OF BYLAWS
Under Delaware law, bylaws may be amended by shareholders 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 shareholders of their power to amend the bylaws. Intraware's Amended
and Restated Certificate of Incorporation states that Intraware's bylaws may be
amended by the Intraware Board, and the Intraware bylaws state that the
Intraware bylaws may be amended by the Intraware Board or, except as otherwise
required by law, by the affirmative vote of the holders of the shares entitled
to vote on such matter. Under California law and the Internet Image bylaws, the
Internet Image bylaws may be amended or repealed either by the Internet Image
Board or by the holders of a majority in interest of the outstanding shares of
Internet Image, except that a change in the authorized number of directors may
only be effected by a vote of the majority of the outstanding stock entitled to
vote thereon; however, under California law, an amendment reducing the minimum
number of directors to less than five cannot be adopted if votes cast against
its adoption are equal to or more than 16 2/3% of the outstanding shares
entitled to vote thereon.
AMENDMENT OF INTRAWARE CERTIFICATE AND INTERNET IMAGE ARTICLES
Delaware law provides that approval of a majority of the outstanding stock
entitled to vote thereon is required to amend a certificate of incorporation.
Intraware's certificate of incorporation provides for amendment in compliance
with the provisions of Delaware law. Under California law, a corporation's
articles of incorporation may be amended by the approval of a majority of the
outstanding shares.
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SPECIAL MEETINGS OF STOCKHOLDERS AND SHAREHOLDERS
Under Delaware law, a special meeting of shareholders 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. Intraware's bylaws permit a special meeting to
be called for any purpose or purposes by
- the board of directors,
- the chairman of the board of directors, or
- Intraware's president.
Under California law and the Internet Image bylaws, a special meeting of
shareholders may be called by the board of directors, the chairman of the board
of directors, the president, or by one or more of the holders of shares entitled
to cast not less than 10% of the votes of such meetings.
ACTIONS BY WRITTEN CONSENT OF SHAREHOLDERS OR SHAREHOLDERS
Under Delaware law, unless otherwise provided in Intraware's certificate of
incorporation, 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 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. Intraware's certificate eliminates the ability of
stockholders to vote by written consent.
Under California law, shareholders may execute an action by written consent
in lieu of a shareholder meeting. The Internet Image 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.
SIZE OF THE BOARD OF DIRECTORS
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. Intraware's certificate states that
the number of directors shall be fixed by the Intraware bylaws. The number of
directors may be changed by an amendment to the Intraware bylaws approved by the
Board of Directors or by the affirmative vote of a majority of all the
outstanding stock entitled to vote thereon. The number of directors of Intraware
is currently fixed at seven.
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. 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 Internet
Image bylaws currently provide that the number of directors shall be between
three and five, and is currently fixed at three.
CLASSIFICATION OF BOARD OF DIRECTORS
A classified board is one with respect to which a certain number of
directors, but not necessarily all, are elected on a rotating basis each year.
Section 141 of the Delaware General Corporation Law permits, but does not
require, a classified board of directors, pursuant to which the directors can be
divided into as many as three classes with staggered terms of office, with only
one class of directors
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standing for election each year. Intraware's certificate and bylaws provides for
a classified board of directors of three classes.
Section 301.5 of the California Corporations Code 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 California
law as one which
- is listed on the NYSE or American Stock Exchange or
- with a class of securities designated for trading as a national market
system security on 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, 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. Internet Image's articles of incorporation and bylaws do
not provide for a classified board.
CUMULATIVE VOTING
Under Delaware law, cumulative voting in the election of directors is not
available unless specifically provided for in the certificate of incorporation.
Intraware's certificate of incorporation does not provide for cumulative voting.
Under California law, cumulative voting in the election of directors is
mandatory upon notice given by a shareholder at a shareholders' meeting at which
directors are to be elected. To cumulate votes, a shareholder must give notice
at the meeting, prior to the voting, of the shareholder's intention to vote
cumulatively. If any one shareholder gives such a notice, all shareholders may
cumulate their votes. California law permits a company, by amending its articles
of incorporation or bylaws, to eliminate cumulative voting when such company is
listed. The Internet Image 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 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. Since
Intraware has a classified board of directors, a member of the board can only be
removed for cause.
Under 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 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.
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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
Intraware bylaws provide that any vacancies on the Intraware Board resulting
from any cause other than the removal of a director by the vote of the
stockholders or by court order, may be filled by the affirmative vote of the
majority of the directors then in office, even though less than a quorum of the
Board of Directors.
Under 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:
- any holder of more than 5% of the corporation's voting stock may call a
special meeting of shareholders, or
- 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 Internet Image 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.
PAYMENT OF DIVIDENDS
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, 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
Intraware bylaws provide for the declaration and payment of dividends in
accordance with Delaware law. Under California law, any dividends or other
distributions to shareholders, such as redemptions, are limited to the greater
of
- retained earnings or
- an amount which would leave the corporation with assets equal to at least
125% of its liabilities and current assets equal to at least 100%, or, in
certain circumstances, 125%, of its current liabilities.
DISSENTERS' RIGHTS
Under both Delaware law and California law, a shareholder of a corporation
participating in certain major corporate transactions may, under varying
circumstances, be entitled to appraisal (or
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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
Delaware law, such rights are not available
- with respect to the sale, lease or exchange of all or substantially all of
the assets of a corporation,
- 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 shareholders 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
- to shareholders of a corporation surviving a merger if no vote of the
shareholders 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.
In connection with the merger, holders of Internet Image common stock and
Internet Image preferred stock may, by complying with Sections 1300 through 1312
of the California Corporations Code, be entitled to dissenters' rights as set
forth therein, and the shares of Internet Image common stock and/or Internet
Image preferred stock held by such persons will be deemed to be dissenting
shares. A copy of Sections 1300 through 1312 of the California Corporations Code
is attached as Annex VI to this proxy statement/prospectus. For a more complete
description of such rights, see "Dissenters' Rights."
INSPECTION OF BOOKS AND RECORDS
Delaware law allows any shareholder, upon written demand under oath stating
the purpose thereof, to inspect the shareholder list, and its other books and
records, for a purpose reasonably related to such person's interest as a
shareholder. Delaware law also provided for inspection rights as to a list of
stockholders entitled to vote at a meeting within a ten day period preceding a
stockholders' meeting for any purpose germane to the meeting.
California law allows any shareholder, upon written demand, to inspect the
accounting books and records and minutes of proceedings of the shareholders and
the board and committees of the board for a purpose reasonably related to the
shareholders interest as a shareholder. In addition, under California law, a
shareholder or shareholders holding at least 5% in aggregate of the outstanding
voting shares of a corporation or who hold at least 1% of those voting shares
and have filed a Schedule 14A with the Exchange Commission, shall have the
absolute right to do either or both of the following:
- inspect and copy the record of shareholders' names and addresses and
shareholdings during usual business hours upon five days' prior written
demand upon the corporation, or
- 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.
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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 Delaware law, Intraware
may not eliminate or limit director monetary liability for
- breaches of the director's duty of loyalty to the corporation or its
shareholders;
- acts or omissions not in good faith or involving intentional misconduct or
a knowing violation of law;
- unlawful dividends, stock repurchases or redemptions; or
- 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 Intraware Certificate eliminates the liability of the
Intraware Board to the fullest extent permissible under Delaware law.
California law does not permit the elimination of monetary liability where
such liability is based on:
- intentional misconduct or knowing and culpable violation of law;
- 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;
- receipt of any improper personal benefit;
- 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;
- 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;
- interested transactions between the corporation and a director, in which a
director has a material financial interest; or
- liability for improper distributions, loans or guarantees.
INDEMNIFICATION
Section 145 of the Delaware General Corporation 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
shareholders, that the person seeking indemnification acted in good faith and in
a manner reasonably believed to be in or (in contrast to 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. Delaware law requires indemnification of expenses when the
individual being indemnified has successfully defended the action on the merits
or otherwise. The Intraware bylaws provide that Intraware will indemnify its
directors and executive officers and may indemnify other offices to the extent
permitted by law. Under the Intraware bylaws, indemnified parties are entitled
to indemnification to the extent
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permitted by law for actions made in good faith and in a manner such person
reasonably believes to be in or not opposed to the best interests of Intraware.
The Intraware bylaws also require Intraware to advance litigation expenses in
the case of stockholder derivative actions or other actions, against an
undertaking by the indemnified party to repay such advances if it is ultimately
determined that the indemnified party is not entitled to indemnification.
Intraware also has indemnification agreements with its officers and directors.
In addition, under the merger agreement, Intraware has agreed that, from and
after the consummation of the merger, it will fulfill and honor in all material
respects the obligations of Internet Image pursuant to
- its standard indemnification agreement in effect at such time between
Internet Image and each person who is or was a director or officer of
Internet Image at or prior to the closing of the merger and
- any indemnification provisions under Internet Image's Articles of
Incorporation or Internet Image bylaws, as in effect on the date of the
merger agreement.
Section 317 of the California Corporations Code permits indemnification of
expenses incurred in derivative or third-party actions, except that with respect
to derivative actions
- 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
- 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.
Indemnification is permitted by California law only for acts taken by the
person seeking indemnification in good faith and in a manner the person
reasonably 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 the conduct of the person 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. 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 Internet Image bylaws include a provision that provides
Internet Image with the authority to indemnify its agents to the fullest extent
permitted by California law.
STOCKHOLDER APPROVAL OF CERTAIN BUSINESS COMBINATIONS
Section 203 of the Delaware General Corporation Law generally 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.
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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
stockholder (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:
- 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;
- the interested stockholder owns 85% of the corporation's voting stock upon
consummation of the transaction which made him or her an interested
stockholder (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
- 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 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
- 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;
- 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
- is 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).
Under California law, there is no equivalent provision to Section 203 of the
Delaware General Corporation Law. 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. 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.
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STOCKHOLDER VOTING ON MERGERS AND SIMILAR TRANSACTIONS
The laws of both California and Delaware generally require that a majority
of the shareholders of both acquiring and target corporations approve statutory
mergers. Delaware law does not require a stockholder vote of the surviving
corporation in a merger (unless the corporation provides otherwise in its
certificate of incorporation) if
- the merger agreement does not amend the existing certificate of
incorporation,
- each share of stock of the surviving corporation outstanding before the
merger is an identical outstanding or treasury share after the merger, and
- 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. 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, California law also requires that mergers,
reorganizations, and similar transactions be approved by a majority vote of each
class of shares outstanding. In contrast, 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
Section 143 of the Delaware General Corporation Law permits Intraware 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 Intraware. Under Section 315 of the California
Corporations Code, 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, California law provides that if Internet Image has 100 or
more shareholders of record and has adopted a bylaw allowing the Internet Image
Board to do so, the Internet Image 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 Internet Image Board determines that any such loan, guaranty
or plan may reasonably be expected to benefit the corporation. Internet Image's
bylaws allow for approval of loans to officers upon the approval of the board of
directors alone, if the above statutory conditions are satisfied.
INTERESTED DIRECTOR TRANSACTIONS
Under the laws of both Section 310 of the California Corporations Code and
Section 144 of the Delaware General Corporation Law, 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
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of good faith and full disclosure, are met. With certain exceptions, the
conditions are similar under California law and Delaware law. Under California
law and Delaware law, either
- 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,
California law requires that the contract or transaction must also be
"just and reasonable" to the corporation), or
- 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. California law explicitly
places the burden of proof of the just and reasonable nature of the
contract or transaction on the interested director.
Under 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 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 Section 327 of the Delaware General Corporation 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.
Section 800 of the California Corporations Code 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. 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 Section 275 of the Delaware General Corporation 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 shareholders entitled to vote thereon. Under Section 1900 of the California
Corporations Code, 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
- an order for relief under Chapter 7 of the Federal bankruptcy law has been
entered,
- no shares have been issued or
- 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.
LEGAL MATTERS
The validity of the Intraware common stock issuable pursuant to the merger
will be passed on by Wilson Sonsini Goodrich & Rosati, Professional Corporation,
Palo Alto, California. The Law Office of Robert D. Cochran is acting as counsel
for Internet Image in connection with certain legal matters
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relating to the merger and the transactions contemplated thereby. Robert
Cochran, Esq. is the holder of 79,000 shares of the Common Stock of Internet
Image; Jill Osato, an employee of the Law Office of Robert D. Cochran, is the
holder of 1,000 shares of the Common Stock of Internet Image.
EXPERTS
The financial statements of Intraware, Inc. as of February 28, 1999 and 1998
and for the years ended February 28, 1999 and 1998 and the period from
August 14, 1996 (Inception) through February 28, 1997 included in this proxy
statement/prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The financial statements of Internet Image, Inc. as of June 30, 1999 and
1998 and for the years ended June 30, 1999 and 1998 and the period from
July 24, 1996 (Inception) through June 30, 1997 included in this proxy
statement/prospectus have been so included in reliance on the report (which
contains an explanatory paragraph relating to Internet Image's ability to
continue as a going concern as described in Note 1 to the financial statements)
of PricewaterhouseCoopers LLP, independent accountants, given on the authority
of said firm as experts in auditing and accounting.
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INTRAWARE, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of Independent Accountants........................... F-2
Balance Sheet............................................... F-3
Statement of Operations..................................... F-4
Statements of Stockholders' Equity.......................... F-5
Statement of Cash Flows..................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Intraware, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, stockholders' equity and cash flows present fairly, in all
material respects, the financial position of Intraware, Inc. (the "Company") at
February 28, 1999 and 1998 and the results of its operations and its cash flows
for the years ended February 28, 1999 and 1998 and the period from August 14,
1996 (Inception) through February 28, 1997 in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
March 24, 1999, except Note 11,
which is as of October 15, 1999
F-2
<PAGE>
INTRAWARE, INC.
BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FEBRUARY 28,
-------------------
AUGUST 31, 1999 1999 1998
--------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 8,436 $ 1,792 $ 612
Short term investments................................. 12,148 -- --
Accounts receivable, net............................... 18,205 11,422 3,126
Prepaid licenses and services.......................... 8,845 16,864 10,354
Other current assets................................... 2,168 2,614 197
-------- -------- --------
Total current assets................................. 49,802 32,692 14,289
Long term investments.................................... 34,812 -- --
Long term cost of deferred revenue....................... 798 -- --
Property and equipment, net.............................. 4,215 1,962 1,078
Other assets............................................. 102 352 17
-------- -------- --------
Total assets....................................... $ 89,729 $ 35,006 $ 15,384
======== ======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Bank borrowings........................................ $ 500 $ 1,371 $ 1,754
Accounts payable....................................... 11,832 17,667 9,440
Accrued expenses....................................... 2,830 1,400 781
Deferred revenue....................................... 14,660 13,218 2,450
Short-term obligations................................. 187 213 84
-------- -------- --------
Total current liabilities............................ 30,009 33,869 14,509
Long term deferred revenue............................... 919
Other long term obligations.............................. 118 168 105
-------- -------- --------
31,046 34,037 14,614
-------- -------- --------
Shareholders' equity:
Preferred stock; issuable in series, $0.0001 par value;
no shares authorized, no shares outstanding
(unaudited); 10,000 shares authorized, no shares
issued and outstanding; 8,000 shares authorized,
3,834 shares issued and outstanding.................. -- -- --
Common stock; $0.0001 par value; 250,000 shares
authorized, 24,090 issued and outstanding
(unaudited); 250,000 shares authorized, 23,756 shares
outstanding; 40,000 shares authorized, 5,376 shares
issued and outstanding............................... 2 2 1
Additional paid-in-capital............................... 93,065 87,912 6,981
Unearned compensation.................................... (8,948) (10,399) (1,219)
Accumulated other comprehensive loss..................... (16) -- --
Initial public offering proceeds receivable.............. -- (59,520) --
Accumulated deficit...................................... (25,420) (17,026) (4,993)
-------- -------- --------
Total shareholders' equity........................... 58,683 969 770
-------- -------- --------
Total liabilities and shareholders' equity......... $ 89,729 $ 35,006 $ 15,384
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-3
<PAGE>
INTRAWARE, INC.
STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED AUGUST 14, 1996
AUGUST 31, FEBRUARY 28, (INCEPTION)
--------------------- ------------------- THROUGH
1999 1998 1999 1998 FEBRUARY 28, 1997
--------- --------- -------- -------- -----------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues:
Software product sales............. $30,275 $13,185 $ 34,741 $10,383 $ 6
Online services.................... 5,341 79 3,676 4 --
------- ------- -------- ------- ------
Total net revenues............... 35,616 13,264 38,417 10,387 6
------- ------- -------- ------- ------
Cost of net revenues:
Software product sales............. 26,371 10,771 29,665 8,348 5
Online services.................... 643 177 747 -- --
------- ------- -------- ------- ------
Total cost of net revenues....... 27,014 10,948 30,412 8,348 5
------- ------- -------- ------- ------
Gross profit................... 8,602 2,316 8,005 2,039 1
------- ------- -------- ------- ------
Operating expenses:
Sales and marketing................ 11,799 4,066 13,507 3,496 233
Product development................ 2,280 786 2,031 951 253
General and administrative......... 2,797 1,188 2,961 1,492 467
Stock option compensation.......... 1,511 303 1,552 67 --
------- ------- -------- ------- ------
Total operating expenses......... 18,387 6,343 20,051 6,006 953
------- ------- -------- ------- ------
Loss from operations................. (9,785) (4,027) (12,046) (3,967) (952)
Interest expense..................... (58) (107) (198) (103) (12)
Interest and other income, net....... 1,448 109 211 21 20
------- ------- -------- ------- ------
Net loss............................. $(8,395) $(4,025) $(12,033) $(4,049) $ (944)
======= ======= ======== ======= ======
Basic and diluted net loss per
share.............................. $ (0.38) $ (1.16) $ (3.00) $ (2.05) $(1.36)
======= ======= ======== ======= ======
Shares used in computing basic and
diluted net loss per share......... 22,385 3,469 4,007 1,972 694
======= ======= ======== ======= ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
INTRAWARE, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE INITIAL PUBLIC ACCUMULATED
PREFERED STOCK COMMON STOCK ADDITIONAL OFFERING OTHER
------------------- ------------------- PAID-IN PROCEEDS COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE LOSS
-------- -------- -------- -------- ---------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock to
founders......................... -- $ -- 5,250 $ 1 $ 25 $ -- $ --
Issuance of Series A convertible
preferred stock.................. 1,500 -- -- -- 1,500 -- --
Net loss........................... -- -- -- -- -- -- --
------- ------- ------- ------ ------- -------- -------
Other comprehensive income.........
Balance at February 28, 1997....... 1,500 -- 5,250 1 1,525 -- --
Issuance of Series B convertible
preferred stock.................. 1,651 -- -- -- 2,642 -- --
Issuance of Series C convertible
preferred stock.................. 667 -- -- -- 1,500 -- --
Exercise of Series B warrant....... 16 -- -- -- 25 -- --
Exercise of stock options.......... -- -- 126 -- 3 -- --
Unearned compensations............. -- -- -- -- 1,286 -- --
Amortization of unearned
compensation..................... -- -- -- -- -- -- --
Net Loss........................... -- -- -- -- -- -- --
------- ------- ------- ------ ------- -------- -------
Other comprehensive income.........
Balance at February 28, 1998....... 3,834 -- 5,376 1 6,981 -- --
Issuance of Series D convertible
preferred stock.................. 2,189 1 -- -- 11,713 -- --
Conversion of Series A, B, C and D
preferred stock in conjunction
with initial public offering..... (6,023) (1) 12,046 1 -- -- --
Exercise of stock options.......... -- -- 2,334 -- 301 -- --
Issuance of Common Stock in initial
public offering, net............. -- -- 4,000 -- 58,185 (59,520) --
Unearned compensation.............. -- -- -- -- 10,732 -- --
Amortization of Unearned
conpensation..................... -- -- -- -- -- -- --
Net Loss........................... -- -- -- -- -- -- --
------- ------- ------- ------ ------- -------- -------
Other comprehensive income.........
Balance at February 28, 1999....... -- -- 23,756 2 87,912 (59,520) --
Exercise of stock options
(unaudited)...................... -- -- 55 -- 11 -- --
Repurchase of stock (unaudited).... -- -- (71) -- (14) -- --
Issuance of Common Stock, net
(unaudited)...................... -- -- 350 -- 5,096 -- --
Cash received from IPO
(unaudited)...................... -- -- -- -- -- 59,520 --
Unearned compensation
(unaudited)...................... -- -- -- -- 60 -- --
Amortization of unearned comp.
(unaudited)...................... -- -- -- -- -- -- --
Net loss (unaudited)............... -- -- -- -- -- -- --
Investment unrealized gain/loss
(unaudited)...................... -- -- -- -- -- -- (16)
------- ------- ------- ------ ------- -------- -------
Other comprehensive income
(unaudited)......................
Balance at August 31, 1999
(unaudited)...................... -- $ -- 24,090 $ 2 $93,065 $ -- $ (16)
======= ======= ======= ====== ======= ======== =======
<CAPTION>
COMPREHENSIVE
UNEARNED ACCUMULATED STOCKHOLDERS' INCOME
COMPENSATION DEFICIT EQUITY (LOSS)
------------ ----------- ------------- -------------
<S> <C> <C> <C> <C>
Issuance of common stock to
founders......................... $ -- $ -- $ 26
Issuance of Series A convertible
preferred stock.................. -- -- 1,500
Net loss........................... -- (944) (944) $ (944)
-------- -------- -------- --------
Other comprehensive income......... (944)
--------
Balance at February 28, 1997....... -- (944) 582
Issuance of Series B convertible
preferred stock.................. -- -- 2,642
Issuance of Series C convertible
preferred stock.................. -- -- 1,500
Exercise of Series B warrant....... -- -- 25
Exercise of stock options.......... -- -- 3
Unearned compensations............. (1,286) -- --
Amortization of unearned
compensation..................... 67 -- 67
Net Loss........................... -- (4,049) (4,049) (4,049)
-------- -------- -------- --------
Other comprehensive income......... (4,993)
--------
Balance at February 28, 1998....... (1,219) (4,993) 770
Issuance of Series D convertible
preferred stock.................. -- -- 11,714
Conversion of Series A, B, C and D
preferred stock in conjunction
with initial public offering..... -- -- --
Exercise of stock options.......... -- -- 301
Issuance of Common Stock in initial
public offering, net............. -- -- (1,335)
Unearned compensation.............. (10,732) -- --
Amortization of Unearned
conpensation..................... 1,552 -- 1,552
Net Loss........................... -- (12,033) (12,033) (12,033)
-------- -------- -------- --------
Other comprehensive income......... (17,076)
--------
Balance at February 28, 1999....... (10,399) (17,026) 969
Exercise of stock options
(unaudited)...................... -- -- 11
Repurchase of stock (unaudited).... -- -- (14)
Issuance of Common Stock, net
(unaudited)...................... -- -- 5,096
Cash received from IPO
(unaudited)...................... -- -- 59,520
Unearned compensation
(unaudited)...................... (60) -- --
Amortization of unearned comp.
(unaudited)...................... 1,511 -- 1,511
Net loss (unaudited)............... -- (8,394) (8,394) (8,394)
Investment unrealized gain/loss
(unaudited)...................... -- -- (16) (16)
-------- -------- -------- --------
Other comprehensive income
(unaudited)...................... $(25,436)
========
Balance at August 31, 1999
(unaudited)...................... $ (8,948) $(25,420) $ 58,683
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
INTRAWARE, INC.
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED AUGUST 14, 1996
AUGUST 31, FEBRUARY 28, (INCEPTION)
--------------------- ------------------- THROUGH
1999 1998 1999 1998 FEBRUARY 28, 1997
--------- --------- -------- -------- ------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss................................ $ (8,395) $(4,025) $(12,033) $ (4,049) $ (944)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization......... 632 236 559 270 42
Amortization of unearned
compensation........................ 1,451 (1,515) 1,552 67 --
Provision for doubtful accounts....... 70 4 133 32 --
Changes in assets and liabilities:
Accounts receivable................. (6,853) (1,414) (8,429) (3,156) (2)
Prepaid licenses and services....... 7,221 261 (6,510) (10,349) (5)
Other current assets................ 447 (464) (2,417) (166) (31)
Other assets........................ 250 (308) (335) 6 (23)
Accounts payable.................... (5,835) (801) 6,892 9,360 80
Accrued expenses.................... 1,431 631 619 677 104
Deferred revenue.................... 2,360 3,044 10,768 2,450 --
-------- ------- -------- -------- ------
Net cash used in operating activities..... (7,221) (4,351) (9,201) (4,858) (779)
-------- ------- -------- -------- ------
Cash flows from investing activities:
Purchase of property and equipment...... (2,885) (541) (1,443) (686) (428)
Purchase of investments, net............ (46,976) -- -- -- --
-------- ------- -------- -------- ------
Net cash used in investment activities.... (49,861) (541) (1,443) (686) (428)
-------- ------- -------- -------- ------
Cash flows from financing activities:
Proceeds from bank borrowing............ 500 2,359 2,559 5,660 --
Payments on bank borrowing.............. (1,371) (2,942) (2,942) (3,906) --
Proceeds from IPO receivable............ 59,520 -- -- -- --
Proceeds from preferred stock, net...... -- 11,714 11,714 4,142 1,500
Proceeds from common stock, net......... 5,153 1,820 301 28 26
Proceeds (principal payments) on capital
lease obligation...................... (76) 109 192 (71) (16)
-------- ------- -------- -------- ------
Net cash provided by financing
activities.............................. 63,726 13,068 11,824 5,853 1,510
-------- ------- -------- -------- ------
Net increase in cash and cash
equivalents............................. 6,644 8,176 1,180 309 303
Cash and cash equivalents at beginning of
period.................................. 1,792 612 612 303 --
-------- ------- -------- -------- ------
Cash and cash equivalents at end of
period.................................. $ 8,436 $ 8,788 $ 1,792 $ 612 $ 303
======== ======= ======== ======== ======
Supplemental disclosures of cash flow
information:
Cash paid for interest.................. $ 58 $ 107 $ 184 $ 87 $ 12
Non-cash investing activities:
Property and equipment leases........... $ -- $ 368 $ 368 $ -- $ 276
</TABLE>
The accompanying notes are an integral part of these financial statement.
F-6
<PAGE>
INTRAWARE, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES:
INTRAWARE
Intraware, Inc. (the Company) was incorporated in Delaware on August 14,
1996. The Company is a leading provider of business to business eCommerce-based
services for the corporate information technology ("IT") community. The Company
enables IT professionals to research, evaluate, purchase, download, and update
business-class software online. As a business-to-business eCommerce company, the
Company provides software through its online purchasing service, comprehensive
IT information and interactive research services and software update management
services.
On February 25, 1999, the Company completed its initial public offering
("IPO") of 4,000,000 shares of its Common Stock at $16.00 per share, which
aggregated approximately $58.2 million, net of offering costs. At the closing of
the offering, all issued and outstanding shares of the Company's Convertible
Preferred Stock were converted into an aggregate of 12,046,000 shares of Common
Stock. Upon the completion of the IPO on February 25, 1999, the Company recorded
a receivable of $59.5 million that was subsequently collected on March 3, 1999.
UNAUDITED INTERIM RESULTS
The interim financial statements as of August 31, 1999 and for the six
months ended August 31, 1999 and 1998 are unaudited. In the opinion of
management, interim financial statements have been prepared on the same basis as
the audited financial statements and reflect all adjustments, consisting only of
normal recurring adjustments, necessary of the fair presentation of the results
of interim periods. The financial data and other information disclosed in these
notes to the financial statements for the related periods are unaudited. The
results of operations for the interim period are not necessarily indicative of
the results to be expected for any future periods.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. Cash equivalents are
composed primarily of short-term certificates of deposit.
INVESTMENTS
The Company considers all investments with maturities of less than one year
as of August 31, 1999 to be short-term investments and all investments with
maturities greater than one year to be long-term investments. In accordance with
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," the Company has categorized its
marketable securities as "available for sale" securities. Realized gains or
losses are determined based on the specific identification method and are
reflected in other income.
F-7
<PAGE>
INTRAWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
The portfolio of short and long-term investments (including cash and cash
equivalents) consisted of the following:
<TABLE>
<CAPTION>
AUGUST 31, 1999
(UNAUDITED)
----------------
<S> <C>
Money funds................................................. $14,920
Agency debt instruments..................................... 4,251
Corporate debt securities................................... 36,225
-------
Total..................................................... $55,396
=======
</TABLE>
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash, cash equivalents and accounts
receivable. Cash and cash equivalents are deposited with high credit quality
financial institutions. The Company's accounts receivable is derived from
revenue earned from customers located primarily in the U.S. The Company performs
ongoing credit evaluations of its customers' financial condition and, generally,
requires no collateral from its customers. The Company maintains an allowance
for doubtful accounts receivable based upon its historical experience and the
expected collectibility of all accounts receivable.
For the six months ended August 31, 1999 and 1998, two and three customers
accounted for greater than 10% of total net revenue, respectively (unaudited).
During the years ended February 28, 1999 and 1998, the period from August 14,
1996 (inception) to February 28, 1997 and no customers accounted for greater
than 10% of total net revenue.
As of August 31, 1999 and August 31, 1998, three and one customers accounted
for greater than 10% of the Company's accounts receivable, respectively
(unaudited). As of February 28, 1999, 1998 and 1997, three, four and no
customers accounted for greater than 10% of the Company's accounts receivable,
respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable, debt, and capital lease obligations, are
carried at cost, which approximates their fair value because of the short-term
maturity of these instruments.
PROPERTY AND EQUIPMENT
Property, equipment and leasehold improvements are stated at historical
cost. Depreciation and amortization is computed using the straight-line method
over the estimated useful lives of the assets, generally three to five years or
the lease term of the respective assets, if shorter.
REVENUE RECOGNITION
Software product sales revenue results from the sale of third party software
products to corporate customers and is recognized when there is evidence of an
arrangement for a fixed and determinable fee that is probable of collection and
the software is available for customer download through ECOMMERCE.
F-8
<PAGE>
INTRAWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Software maintenance revenue results from the sale of third-party software
maintenance agreements and is recognized ratably over the service period.
Online services revenue results from software maintenance outsourcing
arrangements with third-party software vendors delivered through ESERVICE
(SUBSCRIBNET) and from various fee-base EKNOWLEDGE subscription research
services. Such revenues are recognized ratably over the service period.
DEFERRED REVENUE
Deferred revenue consists primarily of billings or payments received in
advance of revenue recognition from the sale of maintenance, ESERVICES,
EKNOWLEDGE and is recognized as revenue ratably over the service period.
PREPAID LICENSES AND SERVICES
Prepaid license and service consists primarily of orders for license and
subscription services in advance of resell and is expensed when the related
revenue is recognized. In addition to these orders, prepaid services consist of
third party maintenance that has been deferred, such maintenance costs will be
recognized over the service period.
PRODUCT DEVELOPMENT COSTS
Product development costs include expenses incurred by the Company to
develop, enhance, manage, monitor and operate the Company's website and delivery
services. Product development costs are expensed as incurred.
ADVERTISING EXPENSE
The Company utilizes print and online advertising, trade shows, seminars,
direct mail, online promotions and regional marketing development to expand
brand and product awareness in the information technology professional
community. Costs incurred for presence on third-party web sites are recognized
ratably over the term of the arrangements. Costs incurred for Internet page
impressions are recognized as such impressions are delivered. All other
advertising costs are expensed as incurred.
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," ("APB No. 25") and complies with the
disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." Under APB No. 25, compensation expense is based on the
difference, if any, on the date of the grant between the fair value of the
Company's stock and the exercise price.
INCOME TAXES
Income taxes are accounted for using an asset and liability approach, which
requires the recognition of taxes payable or refundable for the current year and
deferred tax liabilities and assets for the future tax consequences of events
that have been recognized in the Company's financial statements or tax returns.
The measurement of current and deferred tax liabilities and assets are based on
F-9
<PAGE>
INTRAWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
provisions of the enacted tax law; the effects of future changes in tax laws or
rates are not anticipated. The measurement of deferred tax assets is reduced, if
necessary, by the amount of any tax benefits that, based on available evidence,
are not expected to be realized.
NET LOSS PER SHARE
The Company computes net loss per share in accordance with Statement of
Financial Accounting Standards No. 128 (SFAS 128), "Earnings per Share" and SEC
Staff Accounting Bulletin No. 98 (SAB 98). Under the provisions of SFAS 128 and
SAB 98, basic and diluted net loss per share is computed by dividing the net
loss available to common stockholders for the period by the weighted average
number of shares of common stock outstanding during the period. The calculation
of diluted net loss per share excludes potential common shares if the effect is
antidilutive. Potential common shares are composed of common stock subject to
repurchase rights and incremental shares of common stock issuable upon the
exercise of stock options and warrants and upon conversion of Series A,
Series B, Series C, and Series D convertible preferred stock.
The following table sets forth the computation of basic and dilutive net
loss per share for the periods indicated (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED AUGUST 14, 1996
AUGUST 31, FEBRUARY 28, (INCEPTION)
------------------- ------------------- THROUGH
1999 1998 1999 1998 FEBRUARY 28, 1997
-------- -------- -------- -------- -----------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator:
Net loss..................................... $(8,395) $(4,025) $(12,033) $(4,049) $ (944)
------- ------- -------- ------- -------
Denominator:
Weighted average shares...................... 23,935 5,404 6,456 5,274 4,512
Weighted average unvested shares subject to
repurchase................................. (1,550) (1,935) (2,449) (3,302) (3,818)
------- ------- -------- ------- -------
Denominator for basic and diluted
calculation................................ 22,385 3,469 4,007 1,972 694
------- ------- -------- ------- -------
Net loss per share............................. $ (0.38) $ (1.16) $ (3.00) $ (2.05) $ (1.36)
======= ======= ======== ======= =======
</TABLE>
F-10
<PAGE>
INTRAWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
The following table sets forth common stock equivalents that are not
included in the diluted net income per share calculation above because to do so
would be antidilutive for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED AUGUST 14, 1996
AUGUST 31, FEBRUARY 28, (INCEPTION)
------------------- ------------------- THROUGH
1999 1998 1999 1998 FEBRUARY 28, 1997
-------- -------- -------- -------- -----------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Weighted average effect of common stock equivalents:
Series A preferred stock............................ -- 1,500 1,488 1,500 1,271
Series B preferred stock............................ -- 1,651 1,637 1,235 --
Series C preferred stock............................ -- 667 661 161 --
Series D preferred stock............................ -- 1,635 1,892 -- --
Preferred stock warrants............................ -- 64 64 43 17
Unvested common shares subject to repurchase........ 1,550 1,935 2,449 3,302 3,818
Employee stock options.............................. 1,316 2,321 2,072 1,640 305
----- ----- ------ ----- -----
2,866 9,773 10,263 7,881 5,411
===== ===== ====== ===== =====
</TABLE>
COMPREHENSIVE INCOME
Effective March 1, 1998, the Company adopted the provisions of SFAS
No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards
for reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity (net assets)
during a period from non-owner sources.
SEGMENT INFORMATION
Effective January 1, 1998, the Company adopted the provisions of SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information."
The Company identifies its operating segments based on business activities,
management responsibility and geographical location. During the six months ended
August 31, 1999 (unaudited), the years ended February 28, 1999 and 1998 and the
period from August 14, 1996 (inception) through February 28, 1997, the Company
operated in a single business segment providing online purchasing and delivery
services for business software, primarily in the United States. From Inception
through August 31, 1999, online service operations have not been significant in
either revenue or investment in long lived assets.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
is effective for financial statements for years beginning after December 15,
1998. SOP 98-1 provides guidance over accounting for computer software developed
or obtained for internal use including the requirement to capitalize specified
costs and amortization of
F-11
<PAGE>
INTRAWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
such costs. The Company has adopted the provisions of SOP 98-1 in its fiscal
year ending February 28, 2000, and does not expect such adoption to have a
material effect on the Company's financial statements.
In March 1998, AIPCA issued Statement of Position 98-4, "Deferral of the
Effective Date of a provision of SOP 97-2 ("SOP 98-4"). SOP 98-4 defers for one
year the application of certain provisions of Statement of Position 97-2
"Software Revenue Recognition" ("SOP 97-2"). Different informal and
non-authoritative interpretations of certain provisions of SOP 97-2 have arisen
and, as a result, the AICPA issued SOP 98-9 in December 1998 which is effective
for periods beginning after March 15, 1999. SOP 98-9 extends the effective date
of SOP 98-4 and provides additional interpretive guidance. The adoption of SOP
97-2, SOP 98-4 and SOP 98-9 have not had and are not expected to have a material
impact on the Company's results of operations, financial position or cash flows.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133.
"Accounting for Derivatives and Hedging Activities" ("SFAS 133"). SFAS 133 is
effective for all fiscal quarters beginning with the quarter ending June 30,
1999. SFAS 133 establishes accounting and reporting standards of derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. In July 1999, the Financial Accounting
Standards Board issued SFAS No. 137 "Accounting for Derivative Instruments and
Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133"
("SFAS 137") SFAS 137 deferred the effective date until the first fiscal quarter
ending June 30, 2000. The Company will adopt SFAS 133 in its quarter ending
August 31, 2000 and does not expect such adoption to have an impact on the
Company's results of operations, financial position or cash flows.
NOTE 2--NETSCAPE COMMUNICATIONS CORP.
ELECTRONIC DISTRIBUTION LICENSE AGREEMENT
Under an Electronic Distribution License Agreement ("Distribution
Agreement"), as amended on March 1, 1999, the Company is authorized to
reproduce, use and electronically distribute Netscape products to end user
customers in the United States and Canada. The Company purchases Netscape
products under standard reseller terms on both a prepaid and per unit basis. The
Distribution Agreement has an initial term through October 2000 and may be
renewed by mutual agreement of the parties for an additional one-year period.
In March 1999, America Online, Inc. acquired Netscape. America Online, Inc.
later formed an alliance with Sun Microsystems to manage Netscape's product
division. On July 1, 1999, the Company signed a 60 day interim Electronic
Distribution License Agreement ("Distribution Agreement") with the Sun Alliance
which authorized reproduction, use and electronic distribution of the Sun
Alliance product line which includes all Netscape and some Sun products in the
United States and Canada.
On August 31, 1999 (unaudited), the Company signed a Sun Channel Agreement
which authorized reproduction, use and electronic distribution of the Sun
Alliance product line which includes all Netscape and some Sun products in the
United States and Canada. This agreement has an initial term through
September 2000.
F-12
<PAGE>
INTRAWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--NETSCAPE COMMUNICATIONS CORP. (CONTINUED)
NETCENTER SERVICES AGREEMENT
Under a Netcenter Services Agreement ("Netcenter Agreement") effective
September 3, 1998, the Company obtained the right to maintain a content channel
within the Netcenter area of Netscape's Web site targeted at the information
technology professional community.
In exchange for the content channel right, the Company paid Netscape
$1.0 million, which is being recognized ratably over the one-year term of the
arrangement. In addition, in exchange for a $4.0 million payment, Netscape
agreed to deliver a minimum cumulative number of impressions or page views
promoting the content channel within Netcenter. The $4.0 million payment is
being recognized as advertising expense over the one year term of the
arrangement as such impressions or page views are delivered. At February 28,
1999, the prepaid advertising amount included in other current assets was
$2.2 million. At August 31, 1999, the prepaid advertising amount included in
other current assets was $200,000 (unaudited).
The above mentioned agreement expired in September 1999 and was not renewed
(unaudited).
SUBSCRIBNET SERVICES AGREEMENT
Under a Services Agreement effective October 1, 1998, the Company agreed to
provide software update and management services through SUBSCRIBNET to
Netscape's worldwide non-consumer customer base. In consideration for the
services to be performed by the Company, Netscape agreed to pay $8 million,
which is being recognized ratably over the one-year term of the arrangement. On
March 1, 1999 the Service Agreement was amended to extend the term for one
additional year for $4 million. At February 28, 1999, deferred revenue under
this agreement totaled $4.7 million. At August 31, 1999, deferred revenue under
this agreement totaled $0.7 million (unaudited).
In March 1999, America Online, Inc. acquired Netscape. America Online, Inc.
later formed an alliance with Sun to manage Netscape's product division. As of
July 1, 1999, the contract was rewritten with the Sun Alliance. The contract
runs through September 30, 2000. Sun has the right to terminate the agreement
upon 180 days notice. At August 31, 1999, deferred revenue under this agreement
totaled $3.5 million (unaudited).
F-13
<PAGE>
INTRAWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
FEBRUARY 28,
-------------------
AUGUST 31, 1999 1999 1998
--------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
(IN THOUSANDS)
Accounts receivable, net:
Accounts receivable....................................... $18,440 $11,587 $3,158
Allowance for doubtful accounts........................... (235) (165) (32)
------- ------- ------
$18,205 $11,422 $3,126
======= ======= ======
Property and equipment, net:
Computer equipment and software........................... $ 3,730 $ 1,645 $1,064
Furniture and office equipment............................ 1,061 1,036 261
Leasehold improvements.................................... 348 149 --
Construction-in-progress.................................. 579 2 65
------- ------- ------
5,718 2,832 1,390
------- ------- ------
Less: Accumulated depreciation and amortization........... (1,503) (870) (312)
------- ------- ------
$ 4,215 $ 1,962 $1,078
======= ======= ======
Accrued Expenses:
Accrued compensation and benefits......................... $ 2,256 $ 1,177 $ 474
Other..................................................... 574 223 307
------- ------- ------
$ 2,830 $ 1,400 $ 781
======= ======= ======
</TABLE>
Property and equipment includes $680,000 (unaudited), $644,000 and $276,000
of furniture, computer equipment and internal-use software under capital leases
at August 31, 1999, February 28, 1999 and 1998, respectively. Accumulated
amortization of assets under capital leases totaled $266,000 (unaudited),
$196,000 and $74,000 at August 31, 1999, February 28, 1999 and 1998,
respectively.
NOTE 4--INCOME TAXES:
At February 28, 1999, the Company had approximately $13,173,000 of federal
and $7,003,000 of state net operating loss carryforwards available to offset
future taxable income which expire in varying amounts beginning in 2012 and
2005, respectively. Under the Tax Reform Act of 1986, the amounts of and
benefits from net operating loss carryforwards may be impaired or limited in
certain circumstances. Events which cause limitations in the amount of net
operating losses that the Company may utilize in any one year include, but are
not limited to, a cumulative ownership change of more than 50%, as defined, over
a three year period. Due to cumulative ownership changes, at February 28, 1999
the Company may utilize approximately $1,100,000 of federal net operating losses
annually to offset future taxable income.
F-14
<PAGE>
INTRAWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--INCOME TAXES: (CONTINUED)
Net deferred tax assets are composed of the following (in thousands):
<TABLE>
<CAPTION>
FEBRUARY 28,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Net operating loss carryforwards............................ $ 5,227 $ 882
Research and experimentation credit carryforwards........... 291 --
Cumulative temporary differences............................ 298 1,040
Valuation allowance......................................... (5,816) (1,922)
Net deferred tax asset...................................... $ -- $ --
</TABLE>
Based upon the Company's limited operating history and losses incurred to
date management does not believe that the realization of the related deferred
tax asset meets the recognition criteria required by generally accepted
accounting principles and, accordingly, a full valuation allowance has been
recorded.
NOTE 5--BORROWINGS:
REVOLVING LOAN AGREEMENT
At August 31, 1999, February 28, 1999 and 1998, the Company had $500,000
(unaudited) $1,317,000 and $1,754,000, respectively, of outstanding borrowings
under a bank revolving loan agreement. Borrowings under the revolving loan bear
interest of 1% per annum in excess of the bank's prime rate and are secured by
the Company's tangible personal property. The agreement provides for borrowings
of up to $5,000,000 through July 1999. Under the agreement, the Company is
required to maintain compliance with certain negative and financial covenants.
At August 31, 1999 (unaudited) and February 28, 1999, the Company was in
compliance with all such covenants.
The above loan agreement matured on July 29, 1999. The maturity date was
extended to September 30, 1999 pursuant to the terms of a certain letter
agreement dated August 4, 1999. As of August 31, 1999, the Company was in
compliance with all covenants (unaudited).
On October 31, 1999, the Company signed a "Fourth Amendment to Loan
Agreement" with Imperial Bank. The rate of interest decreased to three-quarters
of one percent (0.75%) per annum in excess of the bank's prime rate and is
secured by the Company's tangible personal property. The agreement continues to
provide for borrowings of up to $5,000,000 through September 30, 2000. Under the
agreement, the Company is required to maintain compliance with certain negative
and financial covenants (unaudited).
NOTE 6--COMMITMENTS:
The Company leases its office facilities and certain equipment under
noncancelable operating lease agreements that expire at various dates through
2003. The terms of the facility lease provide for rental payments on a graduated
scale. The Company recognizes rent expense on a straight-line basis over the
lease period, and has accrued for rent expense incurred but not paid. The lease
requires that the Company pay all costs of maintenance, utilities, insurance and
taxes. Rent expense for the six months ended August 31, 1999 and 1998 were
$396,000 and $250,000, respectively (unaudited). Rent expense under these leases
totaled $567,000, $180,000 and $53,000 during the years ended February 28, 1999
and 1998 and the period from August 14, 1996 (inception) through February 28,
1997, respectively.
F-15
<PAGE>
INTRAWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--COMMITMENTS: (CONTINUED)
In October 1996, the Company entered into a lease financing agreement that
provides for the lease of computers and office equipment up to $300,000. In
July 1998, the Company entered into a second lease financing arrangement with
the same lessor for an amount up to $350,000. At August 31, 1999, purchases of
computers and office equipment under this agreement totaled $644,000.
In June 1999, the Company entered into a lease financing arrangement that
provides for the lease of computer and office equipment of $15,000. At
August 31, 1999, purchases under this agreement totaled $15,000 (unaudited).
In August 1999, the Company entered into a lease financing agreement that
provides for the lease of computer equipment of $303,000. In September 1999, the
Company entered into another lease financing arrangement with the same lessor
for an amount of $116,000. At August 31, 1999, purchases under these agreements
totaled $419,000 (unaudited).
Equipment financed under these agreements is subject to repayment over a
three-year period.
Future minimum lease payments under all noncancelable operating and capital
leases at August 31, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING CAPITAL OPERATING
FEBRUARY 28, LEASES LEASES
- ------------ -------- ---------
<S> <C> <C>
2000....................................................... $ 218 $ 559
2001....................................................... 289 1,043
2002....................................................... 113 425
2003....................................................... 62 215
----- ------
Total minimum lease payments............................... 682 $2,242
======
Less: amount representing interest......................... (78)
-----
Present value of minimum lease payments.................... 604
Less: Current portion...................................... (240)
-----
Long-term lease obiligation................................ $ 364
=====
</TABLE>
NOTE 7--CONVERTIBLE PREFERRED STOCK:
PREFERRED STOCK
The Company is authorized, subject to limitations prescribed by Delaware
law, to provide for the issuance of Preferred Stock in one or more series, to
establish from time to time the number of shares included within each series, to
fix the rights, preferences and privileges of the shares of each wholly unissued
series and any qualifications, limitations or restrictions thereon, and to
increase or decrease the number of shares of any such series (but not below the
number of shares of such series then outstanding) without any further vote or
action by the stockholders. At August 31, 1999 (unaudited) and February 28,
1999, there were 10,000,000 shares of Preferred Stock authorized for issuance
and no shares issued or outstanding.
F-16
<PAGE>
INTRAWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--CONVERTIBLE PREFERRED STOCK: (CONTINUED)
CONVERTIBLE PREFERRED STOCK
Convertible Preferred Stock (prior to the initial public offering) at
February 25, 1999 was composed of the following, (in thousands):
<TABLE>
<CAPTION>
SHARES
------------------------
AUTHORIZED OUTSTANDING LIQUIDATION AMOUNT NET PROCEEDS
---------- ----------- ------------------ ------------
<S> <C> <C> <C> <C>
Series A.................................. 1,524 1,500 $ 1,500 $ 1,500
Series B.................................. 1,698 1,667 2,667 2,642
Series C.................................. 667 667 1,500 1,500
Series D.................................. 2,205 2,189 11,714 11,714
Undesignated.............................. 1,906 -- -- --
----- ----- ------- -------
8,000 6,023 $17,381 $17,356
</TABLE>
On February 25, 1999, the Company completed its initial public offering of
Common Stock. At that time, all issued and outstanding shares of the Company's
Series A, B, C and Series D Convertible Preferred Stock were converted into an
aggregate of 12,046,000 shares of Common Stock.
PREFERRED STOCK WARRANTS
In October 1996, the Company issued a warrant to purchase 24,000 shares of
Series A preferred stock to a creditor in consideration for equipment lease
commitments up to $300,000. The warrant has an exercise price of $1.00 per share
and expires in October 2006. The Company has determined that the warrant had a
nominal fair value at the date of issuance. These warrants were exercised in
February 1999.
In July 1997, in connection with a credit facility, the Company issued the
bank a warrant to purchase up to 31,250 shares of Series B preferred stock at an
exercise price of $1.60 per share that expire in July 2007. The Company has
determined that the warrants had a nominal fair value at the date of issuance.
These warrants were exercised in February 1999.
In November 1997, a director exercised a warrant granted in July 1997 in
connection with the Company's Series B financing to purchase 15,625 shares of
Series B preferred stock at a purchase price of $1.60. The Company has
determined that the warrants had a nominal fair value at the date of issuance.
In July 1998, the Company issued a warrant to purchase 3,671 shares of
Series D preferred stock to a creditor in consideration for equipment lease
commitments up to $350,000. The warrant has an exercise price of $5.35 per share
and expires in July 2008. The Company has determined that the warrant had a
nominal fair value at the date of issuance. These warrants were exercised in
February 1999.
In September 1998, in connection with an operating lease agreement, the
Company issued the lessor a warrant to purchase shares of Series D preferred
stock. The number of shares and price per share is based on a defined formula,
initially 5,607 shares with an exercise price of $5.35 per share. The warrant
expires in September 2008 or five years from the effective date of the Company's
initial public offering, whichever is shorter. The Company has determined that
the warrant had a nominal fair value on the initial measurement date. These
warrants were exercised in September 1999 (unaudited).
F-17
<PAGE>
INTRAWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--COMMON STOCK:
The Company's Articles of Incorporation, as amended, authorize the Company
to issue 250,000,000 shares of $0.0001 par value common stock. In
December 1998, the Company's board of directors authorized a two-for-one split
of the outstanding shares of common stock to be effective immediately prior to
the effectiveness of its initial public offering. This stock split resulted in a
corresponding change in the conversion rate for all outstanding shares of
preferred stock to a ratio of two shares of common stock for each share of
preferred stock.
As of August 31, 1999, approximately 305,000 shares of outstanding founder's
common stock were subject to repurchase by the Company at the original purchase
price in the event of voluntary or involuntary termination of employment of the
shareholder (unaudited). As of February 28, 1999, approximately 924,000 shares
of outstanding founder's common stock were subject to repurchase by the Company
at the original purchase price in the event of voluntary or involuntary
termination of employment of the shareholder. The Company's repurchase right
lapses generally over three years. Under certain events of involuntary
termination, an additional one-third of shares may lapse immediately. In the
event of a merger or substantial sale of assets, all remaining shares would
immediately lapse. In the event the repurchase right has lapsed, and in the
event of the termination of the shareholder, the Company has the right to
purchase such shares at the fair market value of the shares as determined by the
board of directors.
As of August 31, 1999 and February 28, 1999, approximately 1,031,000 shares
(unaudited) and 1,547,000 shares of outstanding common stock, respectively, were
subject to repurchase by the Company in the event of voluntary or involuntary
termination of employment of the shareholder on stock that was unvested under
the 1996 Stock Option Plan. These shares are in addition to the outstanding
founder's common stock subject to repurchase as discussed above.
At August 31, 1999 (unaudited) and February 28, 1999, the Company had
reserved 40,000,000 shares of Common Stock for future issuance for the exercise
of options under the stock option plans.
NOTE 9--EMPLOYEE BENEFIT PLANS:
401(K) SAVINGS PLAN
The Company has a savings plan (the "Savings Plan") that qualifies as a
defined contribution arrangement under Section 401(a), 401(k) and 501(a) of the
Internal Revenue Code. Under the Savings Plan, participating employees may defer
a percentage (not to exceed 25%) of their eligible pretax earnings up to the
Internal Revenue Service's annual contribution limit. All employees on the
United States payroll of the Company are eligible to participate in the Plan.
The Company will determine its contributions, if any, based on its current
profits and/or retained earnings, however, no contributions have been made since
the inception of the Savings Plan.
STOCK OPTION PLANS
In October 1996, the Company adopted the 1996 Stock Option Plan (the
"Plan"). The Plan provides for the granting of stock options to employees and
consultants of the Company. Options granted under the Plan may be either
incentive stock options or nonqualified stock options. Incentive stock options
("ISO") may be granted only to the Company employees (including officers and
directors who are also employees). Nonqualified stock options ("NSO") may be
granted to the Company employees and consultants. The Company has reserved
6,200,000 shares of common stock for issuance
F-18
<PAGE>
INTRAWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--EMPLOYEE BENEFIT PLANS: (CONTINUED)
under the Plan, plus annual increases equal to the lesser of (a) 750,000 shares
(b) 2% of the outstanding shares on such date or (c) a lesser amount determined
by the board.
The Plan provides that the options shall be exercisable over a period not to
exceed ten years from the date of the grant; however, in the case of an ISO
granted to a person owning more than 10% of the combined voting power of all
classes of the stock of the Company, the term of the option will be five years
from the date of the grant. Options granted by the Company to date generally
vest 25% one year after the date of grant and the remaining options thereafter
generally vest in equal monthly installments over the following 36 months.
In accordance with the Plan, the stated exercise price shall not be less
than 85% of the estimated fair value of the shares on the date of grant as
determined by the board of directors, provided, however, that (a) the exercise
price of an ISO and NSO shall not be less than 100% and 85% of the estimated
fair value of the shares on the date of grant, respectively, and (b) the
exercise price of an ISO and NSO granted to a 10% shareholder shall not be less
than 110% of the estimated fair value of the shares on the date of grant,
respectively.
The following table summarizes stock option activity under the Plan (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------------
OPTIONS WEIGHTED
AVAILABLE AVERAGE
FOR NUMBER OF EXERCISE
GRANT OPTIONS PRICE
--------- --------- --------
<S> <C> <C> <C>
Shares authorized........................................... 3,000 -- $ --
Options granted............................................. (846) 846 0.05
Options exercised........................................... -- -- --
Options canceled............................................ -- -- --
------ ------ ------
BALANCE AT FEBRUARY 28, 1997................................ 2,154 846 0.05
Shares authorized........................................... 800 -- --
Options granted at fair value............................... (629) 629 0.07
Options granted below fair value............................ (1,281) 1,281 0.13
Options exercised........................................... -- (126) 0.05
Options canceled............................................ 50 (50) 0.13
------ ------ ------
BALANCE AT FEBRUARY 28, 1998................................ 1,094 2,580 0.10
Shares authorized........................................... 2,400 -- --
Options granted at fair value............................... (500) 500 12.52
Options granted below fair value............................ (1,500) 1,500 1.31
Options exercised........................................... -- (2,334) 0.13
Options canceled............................................ 175 (175) 0.16
------ ------ ------
BALANCE AT FEBRUARY 28, 1999................................ 1,669 2,071 3.92
Options granted at fair value (unaudited)................... (730) 731 20.15
Options exercised (unaudited)............................... -- (55) 0.19
Options canceled (unaudited)................................ -- (118) 5.63
------ ------ ------
BALANCE AT AUGUST 31, 1999 (UNAUDITED)...................... 939 2,629 $ 8.26
====== ======
</TABLE>
F-19
<PAGE>
INTRAWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--EMPLOYEE BENEFIT PLANS: (CONTINUED)
The minimum value of options granted during the six month period ended
August 31, 1999 was approximately $12.53 per share (unaudited). The minimum
value of options granted during the period from the years ended February 28,
1999 and 1998 and the period from August 14, 1996 (inception) to February 28,
1997 was approximately $4.42, $0.02 and $0.02 per share, respectively.
The following table summarizes the information about stock options
outstanding and exercisable as of August 31, 1999 (in thousands, except per
share amounts) (unaudited):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AT AUGUST 31, 1999
------------------------------------------- OPTIONS EXERCISABLE AT
WEIGHTED AUGUST 31, 1999
AVERAGE ----------------------------
REMAINING WEIGHTED WEIGHTED
NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE EXERCISE PRICE OUTSTANDING EXERCISE PRICE
- ------------------------ ----------- ------------ -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.05-$0.40....................... 633 8.34 years $ 0.19 633 $ 0.19
$1.00-$4.00....................... 816 9.16 years 2.02 696 1.68
$9.00-$16.25...................... 505 9.47 years 12.50 497 12.43
$16.56-$24.00..................... 613 9.83 years 18.85 10 18.50
$24.50-$34.38..................... 43 9.74 years 27.71 -- --
$39.19-$48.38..................... 19 9.61 years 46.03 -- --
----- -----
2,629 1,836
===== =====
</TABLE>
The following table summarizes the information about stock options
outstanding and exercisable as of February 28, 1999 (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AT FEBRUARY 28, 1999
------------------------------------------- OPTIONS EXERCISABLE AT
WEIGHTED FEBRUARY 28, 1999
AVERAGE ----------------------------
REMAINING WEIGHTED WEIGHTED
NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE EXERCISE PRICE OUTSTANDING EXERCISE PRICE
- ------------------------ ----------- ------------ -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.05-$0.40....................... 693 8.90 years $ 0.20 693 $0.20
1.00-1.50........................ 538 9.60 years 1.06 538 1.06
2.50-4.00........................ 340 9.80 years 3.41 263 3.09
9.00-13.00....................... 500 9.98 years 12.52 500 12.45
----- -----
2,071... 1,997
===== =====
</TABLE>
F-20
<PAGE>
INTRAWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--EMPLOYEE BENEFIT PLANS: (CONTINUED)
Prior to the Company's initial public offering, the fair value of each
option grant was determined using the minimum value method. Subsequent to the
offering, the fair value was determined using the Black-Scholes model.
<TABLE>
<CAPTION>
AUGUST 14, 1996
(INCEPTION)
SIX MONTHS ENDED AUGUST 31, YEAR ENDED FEBRUARY 28, THROUGH
----------------------------- --------------------------- FEBRUARY 28,
1999 1998 1999 1998 1997
------------- ------------- ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Risk-free interest
rates................ 5.06%-5.81% 5.40%-5.62% 4.33%-5.53% 5.40%-6.70% 5.80%-6.64%
Expected lives (in
years)............... 4 4 4 4 4
Dividend yield......... 0% 0% 0% 0% 0%
Expected volatility.... 70% 0% 0% 0% 0%
</TABLE>
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations in accounting for the stock option plans
(the "Plan") described above. Accordingly, no fair value compensation cost has
been recognized for the Plan. If compensation cost for the Plan had been
determined consistent with FAS No. 123, "Accounting for Stock-Based
Compensation," the Company's net loss and loss per share would have been as
follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED AUGUST 14, 1996
AUGUST 31, FEBRUARY 28, (INCEPTION)
--------------------------------- ------------------- THROUGH
1999 1998 1999 1998 FEBRUARY 28, 1997
-------- ---------------------- -------- -------- ------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net loss
As reported............................ $(8,395) $ (4,025) $(12,033) $(4,049) $ (944)
------- ---------------------- -------- ------- ------
Pro forma.............................. $(8,991) $ (4,022) $(12,011) $(4,052) $ (944)
------- ---------------------- -------- ------- ------
Net loss per share--basic and diluted
As reported............................ $ (0.38) $ (1.16) $ (3.00) $ (2.05) $(1.36)
------- ---------------------- -------- ------- ------
Pro forma.............................. $ (0.40) $ (1.16) $ (3.00) $ (2.05) $(1.36)
</TABLE>
1998 DIRECTOR OPTION PLAN
In December 1998, the board adopted the Director Plan which became effective
February 1999. The Director Plan reserves a total of 150,000 shares of the
Company's common stock for issuance thereunder. Members of the board who are not
employees of the Company, are eligible to participate in the Director Plan. The
option grants under the Directors Plan are automatic and nondiscretionary, and
the exercise price of the options must be 100% of the fair market value of the
common stock on the date of grant. Each eligible director who first becomes a
member of the board is granted an option to purchase 15,000 shares ("First
Option") on the date such director first becomes a director. Immediately
following each annual meeting of the Company, each eligible director is
automatically granted an additional option to purchase 7,500 shares ("Subsequent
Option") if such director has served continuously as a member of the board for
at least the preceding six months. The term of such options is ten years,
provided that they will terminate 3 months following the date the director
ceases
F-21
<PAGE>
INTRAWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--EMPLOYEE BENEFIT PLANS: (CONTINUED)
to be a director or a consultant of the Company (twelve months if the
termination is due to death or disability). First Options granted under the
Directors Plan vest as to 12.5% of the shares on the six month anniversary of
the date of grant and as to 2.08% of the shares each month thereafter, provided
the optionee continues as a member of the board or as a consultant to the
Company.
EMPLOYEE STOCK PURCHASE PLAN
In December 1998, the board adopted the 1998 Employee Stock Purchase Plan
(the "Purchase Plan") which became effective February 1999. The Purchase Plan
reserves 600,000 shares of common stock for issuance thereunder. On each
March 1 beginning in 2000, the aggregate number of shares reserved for issuance
under the Purchase Plan will be increased automatically to the lessor of 400,000
shares, 1% of the outstanding shares on such date or a lessor amount determined
by the board of directors. The aggregate number of shares reserved for issuance
under the Purchase Plan shall not exceed 600,000 shares. Employees generally are
eligible to participate in the Purchase Plan if they are customarily employed by
the Company for more than 20 hours per week and more than five months in a
calendar year and are not (and would not become as a result of being granted an
option under the Purchase Plan) 5% stockholders of the Company. Under the
Purchase Plan, eligible employees select a rate of payroll deduction up to 15%
of their W-2 cash compensation subject to certain maximum purchase limitations.
Each offering period has a maximum duration of two years and consists of four
six-month Purchase Periods. The first Offering Period is 2/26/99 the first
business day on which price quotations for the Company's common stock was
available on The Nasdaq National Market. Depending on the effective date, the
first Purchase Period is more or less than six months long. Offering Periods and
Purchase Periods thereafter will begin on April 15 and October 15. The price at
which the common stock is purchased under the Purchase Plan is 85% of the lesser
of the fair market value of the Company's common stock on the first day of the
applicable offering period or on the last day of that purchase period.
UNEARNED STOCK-BASED COMPENSATION
In connection with certain stock option grants during the years ended
February 28, 1999 and 1998, the Company recognized unearned compensation
totaling $10.7 million and $1.3 million, respectively. This unearned
compensation is being amortized over the four-year vesting periods of the
related options. During the six months ended August 31, 1999 and 1998
amortization expense totaled $1.5 million and $300,000, respectively.
Amortization expense recognized during the years ended February 28, 1999 and
1998 totaled approximately $1.6 million and $67,000, respectively.
NOTE 10--RELATED PARTY TRANSACTIONS:
At February 28, 1999, the Company held a note receivable from an officer of
the Company totaling $300,000. The note is full recourse, is secured by common
stock and bears simple interest at 8% per annum. Principal and interest is due
and payable upon certain events, including completion of a Registration
Statement on Form S-1. The note was repaid in full March 1999.
At May 5, 1999, the Company held a note receivable from an officer of the
Company totaling $50,000 (unaudited).
F-22
<PAGE>
INTRAWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--SUBSEQUENT EVENTS
On October 4, 1999, the Company announced that it had signed a definitive
agreement to acquire all outstanding shares of Internet Image, Inc. The closing
of this transaction is contingent upon customary closing conditions. The Company
intends to account for this transaction using the pooling-of-interest method of
accounting. The estimated purchase price is $36.55 million.
On October 14, 1999, the Company acquired all outstanding shares of
BITSource, Inc. The Company intends to account for this transaction using the
purchase method of accounting and, accordingly, the purchase price will be
allocated to the tangible and intangible assets acquired on the basis of their
respective fair values on the date of acquisition. The purchase price is
$11 million.
F-23
<PAGE>
INTERNET IMAGE INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of Independent Accountants........................... F-24
Balance Sheet............................................... F-25
Statement of Operations..................................... F-26
Statement of Shareholders' Equity........................... F-27
Statement of Cash Flows..................................... F-28
Notes to Financial Statements............................... F-29
</TABLE>
F-23
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Internet Image, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, of shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of Internet Image, Inc. (the
"Company") at June 30, 1999 and 1998, and the results of its operations and its
cash flows for the years ended June 30, 1999 and 1998 and the period from
July 24, 1996 (Inception) through June 30, 1997, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
PricewaterhouseCoopers LLP
October 5, 1999
San Jose, California
F-24
<PAGE>
INTERNET IMAGE, INC.
BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30,
SEPTEMBER 30, -------------------
1999 1999 1998
------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 566 $ 1,040 $ 956
Accounts receivable....................................... 37 385 15
Prepaid expenses and other current assets................. 37 34 35
------- ------- -------
Total current assets.................................... 640 1,459 1,006
Property and equipment, net................................. 112 127 147
Restricted cash (Note 4).................................... 20 20 20
Other assets................................................ 93 21 21
------- ------- -------
Total assets.......................................... $ 865 $ 1,627 $ 1,194
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 84 $ 77 $ 57
Accrued expenses.......................................... 159 119 64
Deferred revenue.......................................... 544 732 180
------- ------- -------
Total current liabilities............................... 787 928 301
Shareholders' Equity:
Convertible Preferred Stock: No par value;
8,638, 8,638 and 4,193 shares authorized; 5,308, 5,308
and 4,193 shares issued and outstanding respectively.... 5,777 5,777 3,362
Common Stock: No par value, 20,000 shares authorized,
3,602, 3,436 and 3,401 shares issued and outstanding,
respectively............................................ 210 185 169
Additional paid-in capital................................ 1,295 1,338 --
Notes receivable from shareholders........................ (85) (85) (91)
Deferred stock-based compensation......................... (807) (979) --
Accumulated deficit....................................... (6,312) (5,537) (2,547)
------- ------- -------
Total shareholders' equity.............................. 78 699 893
------- ------- -------
Total liabilities and shareholder's equity.............. $ 865 $ 1,627 $ 1,194
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE>
INTERNET IMAGE, INC.
STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS JULY 24, 1996
ENDED (INCEPTION)
SEPTEMBER 30, YEAR ENDED JUNE 30, THROUGH
------------------- ------------------- JUNE 30,
1999 1998 1999 1998 1997
-------- -------- -------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues................................... $ 160 $ 28 $ 151 $ 57 $ --
Cost of revenue................................ 11 5 42 11 --
Gross profit................................... 149 23 109 46 --
Operating expenses:
Research and development..................... 363 306 1,262 1,163 336
Sales and marketing.......................... 262 255 1,149 722 99
General and administrative................... 180 90 381 247 147
Amortization of deferred stock-based
compensation............................... 128 73 343 -- --
------ ------ ------- ------- ------
Total operating expenses................... 933 724 3,135 2,132 582
====== ====== ======= ======= ======
Loss from operations........................... (784) (701) (3,026) (2,086) (582)
Interest and other income (expense), net....... 9 9 35 102 19
------ ------ ------- ------- ------
Net loss....................................... $ (775) $ (692) $(2,991) $(1,984) $ (563)
====== ====== ======= ======= ======
Basic and diluted net loss per share........... $(0.23) $(0.25) $ (0.85) $ (0.69) $(0.28)
====== ====== ======= ======= ======
Shares used in computing basic and diluted net
loss per share............................... 3,331 2,738 3,512 2,880 1,997
====== ====== ======= ======= ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE>
INTERNET IMAGE, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES A PREFERRED SERIES B SERIES C
STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK
-------------------- -------------------- -------------------- --------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-------- --------- -------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at Inception................ -- $ -- -- $ -- -- $ -- -- $ --
Issuance of Common Shares for
cash.............................. -- -- -- -- -- -- 814 40
Issuance of Series A Preference
Shares............................ 2,120 530 -- -- -- -- -- --
Issuance of Series B Preference
Shares............................ -- -- 1,017 1,524 -- -- -- --
Issuance of Common Shares for notes
receivable........................ -- -- -- -- -- -- 1,832 91
Issuance of Common Share on exercise
of warrants....................... -- -- -- -- -- -- 480 25
Issuance of Preference Shares on
exercise of warrants.............. 210 53 -- -- -- -- -- --
Issuance of Common Share on exercise
of stock options.................. -- -- -- -- -- -- 269 13
Net loss............................ -- -- -- -- -- -- -- --
----- ---- ----- ------ ----- ------ ----- ----
Balance at June 30, 1997............ 2,330 583 1,017 1,524 -- -- 3,395 169
Issuance of Series B Preference
Shares net of issuance cost of
$15,373........................... -- -- 847 1,255 -- -- -- --
Issuance of Common Share for notes
receivable........................ -- -- -- -- -- -- 2 --
Issuance of Common Share on exercise
of stock options.................. -- -- -- -- -- -- 3 --
Net loss............................ -- -- -- -- -- -- -- --
----- ---- ----- ------ ----- ------ ----- ----
Balance at June 30, 1998............ 2,330 583 1,864 2,779 -- -- 3,400 169
Note repayment...................... -- -- -- -- -- -- -- --
Repurchase of Common Shares......... -- -- -- -- -- -- (108) (6)
Issuance of Series C Preference
Shares for cash net of issuance
cost of $56,025................... -- -- -- -- 1,115 2415 -- --
Issuance of Common Share on exercise
of stock options.................. -- -- -- -- -- -- 144 22
Deferred stock-based compensation... -- -- -- -- -- -- -- --
Amortization of stock-based
compensation...................... -- -- -- -- -- -- -- --
Issuance of Common Stock options to
consultants....................... -- -- -- -- -- -- -- --
Net loss............................ -- -- -- -- -- -- -- --
----- ---- ----- ------ ----- ------ ----- ----
Balance at June 30, 1999............ 2,330 $583 1,864 $2,779 1,115 $2,415 3,436 $185
Issuance of Common Share on exercise
of stock options (unaudited)...... -- -- -- -- -- -- 166 25
Deferred stock-based compensation
for options forfeited
(unaudited)....................... -- -- -- -- -- -- -- --
Amortization of stock-based
compensation (unaudited).......... -- -- -- -- -- -- -- --
Net loss (unaudited)................ -- -- -- -- -- -- -- --
----- ---- ----- ------ ----- ------ ----- ----
Balance at September 30, 1999
(unaudited)....................... 2,330 $583 1,864 $2,779 1,115 $2,415 3,602 $210
===== ==== ===== ====== ===== ====== ===== ====
<CAPTION>
NOTE
ADDITIONAL RECEIVABLE DEFERRED
PAID-IN FROM STOCK-BASED ACCUMULATED
CAPITAL SHAREHOLDERS COMPENSATION DEFICIT TOTAL
----------- -------------- --------------- -------------- --------
<S> <C> <C> <C> <C> <C>
Balance at Inception................ $ -- $ -- $ -- $ -- $ --
Issuance of Common Shares for
cash.............................. -- -- -- -- 40
Issuance of Series A Preference
Shares............................ -- -- -- -- 530
Issuance of Series B Preference
Shares............................ -- -- -- -- 1,524
Issuance of Common Shares for notes
receivable........................ -- (91) -- -- --
Issuance of Common Share on exercise
of warrants....................... -- -- -- -- 25
Issuance of Preference Shares on
exercise of warrants.............. -- -- -- -- 53
Issuance of Common Share on exercise
of stock options.................. -- -- -- -- 13
Net loss............................ -- -- -- (563) (563)
------ ---- ------- ------- -------
Balance at June 30, 1997............ -- (91) -- (563) 1,622
Issuance of Series B Preference
Shares net of issuance cost of
$15,373........................... -- -- -- -- 1,255
Issuance of Common Share for notes
receivable........................ -- -- -- -- --
Issuance of Common Share on exercise
of stock options.................. -- -- -- -- --
Net loss............................ -- -- -- (1,984) (1,984)
------ ---- ------- ------- -------
Balance at June 30, 1998............ -- (91) -- (2,547) 893
Note repayment...................... -- -- -- -- --
Repurchase of Common Shares......... -- 6 -- -- --
Issuance of Series C Preference
Shares for cash net of issuance
cost of $56,025................... -- -- -- -- 2,415
Issuance of Common Share on exercise
of stock options.................. -- -- -- -- 22
Deferred stock-based compensation... 1,322 -- (1,322) -- --
Amortization of stock-based
compensation...................... -- -- 343 -- 343
Issuance of Common Stock options to
consultants....................... 16 -- -- -- 16
Net loss............................ -- -- -- (2,990) (2,990)
------ ---- ------- ------- -------
Balance at June 30, 1999............ $1,338 $(85) $ (979) $(5,537) $ 699
Issuance of Common Share on exercise
of stock options (unaudited)...... -- -- -- -- 25
Deferred stock-based compensation
for options forfeited
(unaudited)....................... (43) -- 40 -- (3)
Amortization of stock-based
compensation (unaudited).......... -- -- 132 -- 132
Net loss (unaudited)................ -- -- -- (775) (775)
------ ---- ------- ------- -------
Balance at September 30, 1999
(unaudited)....................... $1,295 $(85) $ (807) $(6,312) $ 78
====== ==== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE>
INTERNET IMAGE, INC.
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JULY 24, 1996
THREE MONTHS ENDED (INCEPTION)
SEPTEMBER 30, YEAR ENDED JUNE 30, THROUGH
---------------------- ------------------- JUNE 30,
1999 1998 1999 1998 1997
-------- -------- -------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................... $ (775) $(692) $(2,991) $(1,984) $ (563)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization............ 22 16 69 47 10
Allowance for doubtful accounts.......... 60 -- -- -- --
Amortization of unearned compensation.... 132 73 343 -- --
Deferred stock-based compensation for
options forfeited...................... (3) -- -- -- --
Common stock issued for services......... -- 3 16 -- --
Changes in assets and liabilities:
Accounts receivable.................... 288 (44) (370) (15) --
Prepaid expenses and other current
assets............................... (3) (69) 1 (23) (11)
Restricted cash........................ -- -- -- (20) --
Security deposit....................... -- -- -- (6) (15)
Accounts payable....................... 7 23 20 38 19
Accrued expenses....................... 40 12 55 37 27
Deferred revenue....................... (188) 35 552 180 --
------ ----- ------- ------- ------
Net cash used in operating
activities........................... (420) (643) (2,305) (1,746) (533)
------ ----- ------- ------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment......... (79) (10) (50) (116) (89)
------ ----- ------- ------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Series A Convertible
Preferred Stock, net..................... -- -- -- -- 582
Proceeds from Series B Convertible
Preferred Stock, net..................... -- -- -- 1,255 1,525
Proceeds from Series C Convertible
Preferred Stock, net..................... -- -- 2,416 -- --
Proceeds from issuance of Common Stock..... 25 5 23 -- 78
Repurchase of Common Stock................. -- -- -- -- --
Proceeds from the acceptance of debt and
leases................................... -- -- -- -- 16
Principal payments on debt and leases...... -- -- -- (16) --
------ ----- ------- ------- ------
Net cash provided by financing
activities............................. 25 5 2,439 1,239 2,201
------ ----- ------- ------- ------
Increase (decrease) in cash and cash
equivalents................................ (474) (648) 84 (623) 1,579
Cash and cash equivalents at beginning of
period..................................... 1,040 956 956 1,579 --
------ ----- ------- ------- ------
Cash and cash equivalents at end of period... $ 566 $ 308 $ 1,040 $ 956 $1,579
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for income taxes................. $ -- $ -- $ 1 $ 13 $ 1
Cash paid for interest..................... $ -- $ -- $ -- $ -- $ 1
SUPPLEMENTAL NON-CASH ACTIVITY:
Issuance of common stock for services...... $ -- $ 3 $ 16 $ -- $ --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE>
INTERNET IMAGE, INC.
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Internet Image, Inc. ("the Company") was incorporated in California on
July 24, 1996, and develops and markets Internet and web-based deployment
solutions. The Company's products enable the automated deployment of software
and data to desktops and network devices. The Company operates in one business
segment.
LIQUIDITY AND CAPITAL RESOURCES
The Company recorded net losses of $775,000, $2,991,000, $1,984,000 and
$563,000 for the three months ended September 30, 1999 and for the years ended
June 30, 1999 and 1998 and the period from July 24, 1996 (inception) through
June 30, 1997, respectively, and had an accumulated deficit of $6,312,000 as of
September 30, 1999. Additionally, the Company has historically experienced
negative cash flows from operations as well as a negative working capital
position. Based on the Company's existing resources and current financial
position, management believes that the available liquidity at September 30, 1999
is not sufficient to support the Company's continued operations through
June 30, 2000 and that it will be necessary for the Company to obtain additional
sources of equity and/or debt financing or a strategic partner in order to
sustain operations. In this regard, management continues to seek additional
financing and/or a strategic partner; however, there can be no assurance that
such financing or a strategic partner can be obtained or obtained on terms that
are acceptable to the Company. The factors described above raise substantial
doubt regarding the ability of the Company to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
UNAUDITED INTERIM RESULTS
The interim financial statements as of September 30, 1999 and for the three
months ended September 30, 1999 and 1998 are unaudited. In the opinion of
management, interim financial statements have been prepared on the same basis as
the audited financial statements and reflect all adjustments, consisting only of
normal recurring adjustments, necessary for the fair presentation of the results
of interim periods. The financial data and other information disclosed in these
notes to financial statements related for periods are unaudited. The results of
operations for the interim periods are not necessarily indicative of the results
to be expected for any future periods.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company's revenues are derived from licenses for its software and
related services, which include technical support, training and consulting.
Revenue is recognized for the various contract elements based upon
vendor-specific objective evidence of fair value of each element.
Revenue from license fees is recognized when persuasive evidence of an
agreement exists, delivery of the product has occurred, no significant Company
obligations with regard to implementation or integration exist, the fee is fixed
and determinable and collectibility is probable. Provisions for sales returns
are provided at the time of revenue recognition based upon estimated returns.
F-29
<PAGE>
INTERNET IMAGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Services revenue is primarily comprised of revenue from consulting fees,
maintenance contracts and training. Services revenue from consulting and
training is recognized as the service is performed. Maintenance contracts
include the right to unspecified upgrades and ongoing support. Maintenance
revenue is deferred and recognized on a straight-line basis as services revenue
over the life of the related contract, which generally is one year.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less at the date of acquisition to be cash
equivalents. Cash equivalents consist principally of certificate of deposits and
money-market accounts that are stated at cost, which approximates fair value.
RESTRICTED CASH
On May 28, 1998 Company entered into a line of credit agreement with Bank of
America. The line of credit is collateralized by a $20,000 certificate of
deposit which is included in current assets.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to a
concentration of credit risk, consist primarily of cash and cash equivalents and
accounts receivable. The Company limits its exposure to credit loss by placing
its cash and cash equivalents with major financial institutions. The Company's
accounts receivable are derived from revenue earned from customers located in
the U.S. and Asia and are denominated in U.S. dollars. The Company performs
ongoing credit evaluations of its customers' financial condition and, generally,
requires no collateral from its customers. The Company maintains an allowance
for doubtful accounts receivable based upon expected collectibility of accounts
receivable.
The following table summarizes the revenue from customers in excess of 10%
of the total revenue.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SEPTEMBER 30, YEAR ENDED JUNE 30,
------------------------ ------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Company A................................................... --% 42% --% 62%
Company B................................................... 44% --% 48% --%
Company C................................................... --% 28% 21% 32%
Company D................................................... --% 10% --% --%
Company E................................................... 25% --% --% --%
Company F................................................... 21% --% --% --%
</TABLE>
F-30
<PAGE>
INTERNET IMAGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table summarizes receivables from customers in excess of 10%
of total accounts receivable:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SEPTEMBER 30, YEAR ENDED JUNE 30,
------------------------ ------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Company B................................................... --% 15% --% --%
Company E................................................... --% --% 32% --%
Company F................................................... --% --% 38% --%
Company G................................................... 62% --% 16% 77%
Company H................................................... --% --% --% 23%
Company I................................................... 22% --% --% --%
Company J................................................... 10% --% --% --%
Company K................................................... --% 85% --% --%
</TABLE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments including cash and cash equivalents,
accounts receivable, and accounts payable are carried at cost, which
approximates fair value because of the short-term maturity of these instruments.
SOFTWARE DEVELOPMENT COSTS
Software development costs incurred in the research and development of new
products and enhancements to existing products are charged to expense as
incurred. Software development costs are capitalized after technological
feasibility has been established. The period between achievement of
technological feasibility, which the Company defines as the establishment of a
working model, until the general availability of such software to customers, has
been short and software development costs qualifying for capitalization have
been insignificant. Accordingly, the Company has not capitalized any software
development costs since its inception.
CAPITALIZATION OF INTERNAL-USE SOFTWARE COSTS
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 is effective
for financial statements for years beginning after December 15, 1998 and
provides guidance for the accounting of computer software developed or obtained
for internal use including the requirement to capitalize specified costs and
amortization of such costs. The Company adopted the provisions of SOP 98-1 in
its fiscal year beginning July 1, 1998.
PROPERTY AND EQUIPMENT
Property and equipment are stated at historical cost less accumulated
depreciation. Depreciation and amortization is computed using the straight-line
method over the useful lives of the assets generally five years or less, or the
shorter of the lease term, if applicable.
ADVERTISING COSTS
The Company accounts for advertising costs as expense in the period in which
they are incurred. Advertising expense for the three months ended September 30,
1999 and 1998 were $8,000 and $32,000,
F-31
<PAGE>
INTERNET IMAGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
respectively. Advertising expense for the years ended June 30, 1999, 1998 and
1997 were $44,000, $2,000 and $0, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the recoverability of its long-lived assets in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to
be Disposed of." SFAS 121 requires recognition of impairment of long-lived
assets in the event the net book value of such assets exceeds the future
undiscounted cash flows attributed to such assets.
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and complies with the
disclosure provisions of Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation." Under APB 25, compensation
expense is based on the difference, if any on the date of grant between fair
value of the Company's stock and the exercise price. The Company accounts for
stock issued to non-employees in accordance with the provisions of SFAS No. 123
and the Emerging Issues Task Force Consensus on Issue No. 96-18.
INCOME TAXES
Income taxes are accounted for using an asset and liability approach which
requires the recognition of taxes payable or refundable for the current year and
deferred tax liabilities and assets for the future tax consequences of events
that have been recognized in the Company's financial statements or tax returns.
The measurement of current and deferred tax liabilities and assets are based on
provisions of the enacted tax law; the effects of future changes in tax laws or
rates are not anticipated. The measurement of deferred tax assets is reduced, if
necessary, by the amount of any tax benefits that, based on available evidence,
are not expected to be realized.
NET LOSS PER SHARE
The Company computes net loss per share in accordance with SFAS No. 128,
"Earnings per Share" and SEC Staff Accounting Bulletin No. 98 ("SAB 98"). Under
the provisions of SFAS No. 128 and SAB 98, basic net loss per share is computed
by dividing the net loss for the period by the weighted average number of common
shares outstanding during the period excluding shares of common stock subject to
repurchase. Diluted net loss per share does not differ from basic net loss per
share since potential shares of common stock from conversion of preferred stock,
stock options and warrants and outstanding shares of common stock subject to
repurchase are anti-dilutive for all periods presented.
F-32
<PAGE>
INTERNET IMAGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table sets forth the computation of basic and diluted net loss
per share for the periods indicated:
<TABLE>
<CAPTION>
JULY 24,
THREE MONTHS ENDED 1996
(INCEPTION)
SEPTEMBER 30, YEAR ENDED JUNE 30, THROUGH
-------------------- -------------------- JUNE 30,
1999 1998 1999 1998 1997
--------- --------- --------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator:
Net loss................................................... $ (775) $ (692) $ (2,991) $ (1,984) $ (563)
--------- --------- --------- --------- ---------
Denominator:
Weighted average shares.................................... 3,488 3,350 3,736 3,701 3,696
Weighted average unvested shares of common stock subject to
repurchase............................................... (157) (612) (224) (821) (1,699)
--------- --------- --------- --------- ---------
Denominator for basic and diluted calculation................ 3,331 2,738 3,512 2,880 1,997
--------- --------- --------- --------- ---------
Net loss per share:
Basic and diluted.......................................... $ (0.23) $ (0.25) $ (0.85) $ (0.69) $ (0.28)
========= ========= ========= ========= =========
</TABLE>
The following table sets forth potential shares of common stock that are not
included in the diluted net loss per share calculation above because to do so
would be anti-dilutive for the periods indicated:
<TABLE>
<CAPTION>
JULY 24,
THREE MONTHS ENDED 1996
(INCEPTION)
SEPTEMBER 30, YEAR ENDED JUNE 30, THROUGH
-------------------- -------------------- JUNE 30,
1999 1998 1999 1998 1997
--------- --------- --------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Weighted average effect of common stock equivalents
Series A preferred shares.................................. 2,330 2,310 2,317 2,093 768
Series B preferred shares.................................. 1,863 1,863 1,863 1,863 61
Series C preferred shares.................................. 1,115 -- 465 -- --
Shares of common stock subject to repurchase............... 157 612 224 821 1,699
Common stock options....................................... 572 578 407 281 --
--------- --------- --------- --------- ---------
6,037 5,363 5,276 5,058 2,528
========= ========= ========= ========= =========
</TABLE>
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted the provisions of SFAS
No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards
for reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity (net assets)
during a period from non-owner sources. During the three months ended
September 30, 1999 and 1998 (unaudited) and each of the three years ended
June 30, 1999 the Company did not have any transactions that are required to be
reported in comprehensive income.
F-33
<PAGE>
INTERNET IMAGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SEGMENT INFORMATION
Effective January 1, 1998, the Company adopted the provisions of SFAS
No. 131, "Disclosure About Segments of an Enterprise and Related Information."
The Company identifies its operating segment based on business activities,
management responsibility and geographic location. During all periods presented,
the Company operated in a single business segment.
2. RELATED PARTY TRANSACTIONS
The following sales to shareholders occurred:
<TABLE>
<CAPTION>
DATE OF
RELATED PARTY TRANSACTION SALE AMOUNT
- ------------------------------------------------------------ ------------------ -----------
<S> <C> <C>
Kanematsu Semiconductor..................................... August 1997 $150,000
Million Enterprise Co....................................... September 1997 $43,200
Mitsuba..................................................... June 1997 $10,920
</TABLE>
3. BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
JUNE 30,
SEPTEMBER 30, --------------------
1999 1999 1998
(IN THOUSANDS) --------------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
PROPERTY AND EQUIPMENT, NET:
Computer equipment and purchased software.................... $ 225 $ 220 $ 171
Furniture and fixtures....................................... 6 6 6
Leasehold improvements....................................... 3 3 3
Motor vehicle................................................ 24 24 24
--------- --------- ---------
258 253 204
Less: Accumulated depreciation and amortization.............. (146) (126) (57)
--------- --------- ---------
$ 112 $ 127 $ 147
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
SEPTEMBER 30, ------------------------
1999 1999 1998
--------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ACCRUED EXPENSES:
Payroll and related expenses................................ $ 49 $ 64 $ 29
Other....................................................... 110 55 35
--------- --------- ---------
$ 159 $ 119 $ 64
========= ========= =========
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
The Company leases its office space under a noncancelable operating lease
with an expiration date of July 31, 2000. Rent expense for the three months
ended September 30, 1999 and 1998 and for the years ended June 30, 1999, 1998,
1997 totaled $20,000 (unaudited), $19,000 (unaudited), $77,000, $74,000 and
$15,000, respectively.
F-34
<PAGE>
INTERNET IMAGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Future minimum lease payments under noncancelable operating leases,
including any lease commitments entered into subsequent to June 30, 1999, are as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
- ----------------------------------------------------------------------------------------
<S> <C>
2000.................................................................................... $ 79
2001.................................................................................... 7
---------
Total minimum lease payments............................................................ $ 86
=========
</TABLE>
5. INCOME TAXES
The components of the net deferred tax assets as of June 30, 1999, and 1998
are (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
DEFERRED TAX ASSETS:
Net operating loss carryforwards......................................... $ 1,995 $ 949
Research and development credit.......................................... 188 99
Capitalized start-up costs............................................... 6 14
Cumulative temporary differences......................................... 141 2
DEFERRED TAX LIABILITIES:
Cumulative temporary differences......................................... -- --
2,330 1,064
Less: valuation allowance.................................................. (2,330) (1,064)
Net deferred tax assets.................................................... $ -- $ --
</TABLE>
The Company has established a valuation allowance against its deferred tax
assets due to the uncertainty surrounding the realization of such assets.
As of June 30, 1999, the Company has approximately $5,018,000 in federal and
$4,955,000 in state net operating loss carryforwards to reduce future taxable
income. These carryforwards will expire between 2001 and 2019, if not utilized.
The U.S. federal income tax rules may restrict the utilization of the
operating loss and tax credit carryforwards in the case of an "ownership change"
of a corporation.
6. CONVERTIBLE PREFERRED STOCK
Convertible Preferred Stock at June 30, 1999 consists of the following (in
thousands):
<TABLE>
<CAPTION>
PROCEEDS NET
SHARES SHARES LIQUIDATION OF ISSUANCE
SERIES AUTHORIZED OUTSTANDING AMOUNT COSTS
- ---------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
A....................................... 2,330 2,330 $ 582 $ 582
B....................................... 1,863 1,863 2,795 2,780
C....................................... 4,445 1,115 2,509 2,415
--------- --------- --------- ---------
8,638 5,308 $ 5,886 $ 5,777
========= ========= ========= =========
</TABLE>
F-35
<PAGE>
INTERNET IMAGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. CONVERTIBLE PREFERRED STOCK (CONTINUED)
The holders of Series A, B, and C preferred stock have certain rights and
privileges as follows:
VOTING
Each share of Series A, B, and C has voting rights equal to one share of
Common Stock on an "as if" converted basis.
Consent of the holders of at least a majority of the Series A, B and C,
voting together as a single class, shall be required to (i) alter or change the
rights, preferences or privileges of the Preferred Stock materially and
adversely, (ii) create any new class of shares having preference over or being
on a parity with the Preferred Stock, (iii) engage in a merger, acquisition or
sale of all or substantially all assets of the Company, if such transaction
involves a change of control or (iv) liquidate or dissolve the Company.
Consent of the holders of at least a majority of the Series B, voting as a
separate series, shall be required for any action which (i) alters or changes
the rights, preferences or privileges of the Series B Preferred materially and
adversely or (ii) creates any new class of shares having preference over the
Series B Preferred.
Consent of the holders of at least a majority of the Series C, voting as a
separate series, shall be required for any action which (i) alters or changes
the rights, preferences or privileges of the Series C Preferred materially and
adversely or (ii) creates any new class of shares having preference over the
Series C Preferred.
The holders of Series C, voting together as a single series, shall be
entitled to elect one (1) member of the Company's Board of Directors.
DIVIDENDS
Holders of Series A, B, and C are entitled to receive non-cumulative annual
dividends of $0.015, $0.09, and $0.135 per share, respectively, when and if
declared by the Company's Board of Directors. Dividends on the Preferred Stock
shall be payable in preference and prior to any payment of any dividend on the
Common Stock. No dividends have been declared from inception through the year
ended September 30, 1999 (unaudited).
LIQUIDATION
In the event of any liquidation, dissolution, winding of the Company, the
holders of the Series A, B, and C shall be entitled to receive, prior and in
preference to any distribution to the holders of the Common Stock, an amount
equal to the $0.25, $1.50, and $2.25 per share, respectively, plus any declared
but unpaid dividends. Any amounts remaining after such distribution shall be
distributed among the holders of Series A, B, and C, and Common Stock on an "as
if" converted basis. A merger, sale of substantially all assets, or
reorganization of the Company shall be deemed to be a liquidation or winding up
for purposes of the liquidation preference.
ADJUSTMENT
The conversion price of the Series B, and C shall be subject to adjustments,
on a broad-based weighted-average basis, in the event that the Company issues
additional shares (other than shares issued to founders, employees, consultants
and directors pursuant to plans and arrangements approved by the Board) at a
purchase price less than $1.50 per share of Series B and $2.25 per share of
Series C (subject to adjustments for stock splits and the like).
F-36
<PAGE>
INTERNET IMAGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. CONVERTIBLE PREFERRED STOCK (CONTINUED)
REDEMPTION
The Preferred Stock is not redeemable.
CONVERSION
Each share of Series A, B, and C is convertible at any time at the option of
the holder thereof into one share of Common Stock, subject to adjustment for
antidilution. Each share of Series A, B, and C will be automatically converted
upon an initial public offering of the Company's Common Stock with aggregate
proceeds in excess of $10,000,000 and a price per share of not less than $5.00.
The Company has reserved sufficient shares of Common Stock for issuance upon
conversion of the Series A, B, and C.
7. COMMON STOCK
In July 1996, the Company sold approximately 814,000 shares of Common Stock
to certain investors, including one of its founders in exchange for $41,000 in
cash. In September 1996, the Company sold and issued an aggregate of
approximately 1,200,000 shares of Common Stock to two of its founders for full
recourse notes in the aggregate principal amount of $60,000. Such shares were
subject to a right of repurchase in favor of the Company if the founders'
relationship with the Company terminated before the third anniversary of the
respective vesting commencement date (which shares are now completely vested in
such founders).
The Company had reserved shares of Common Stock for issuance as follows (in
thousands):
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30,
1999
-------------
(UNAUDITED)
<S> <C>
Convertible preferred stock:
Series A..................................................................... 2,330
Series B..................................................................... 1,863
Series C..................................................................... 4,444
Exercise of options under stock option plans................................... 1,442
---------
10,079
=========
</TABLE>
NOTES RECEIVABLE FROM SHAREHOLDERS
At June 30, 1999 the Company held four notes receivable from two Officers,
one director, and one ex-officer of the Company totaling $85,000. The notes bear
interest at 8% and are due the earlier of the employee's termination, or three
years. In September 1999, the due date for two notes totaling $60,000 held by
one officer and one director has been extended for three months, ending
December 15, 1999. The full recourse notes are collateralized by the underlying
shares of stock.
8. EMPLOYEE STOCK OPTION PLAN
In April 1997, the Company adopted the 1997 Stock Plan (the "1997 Plan") and
reserved 1,442,000 shares of Common Stock for issuance thereunder. In
December 1998, the Company adopted the NSO Plan (the "NSO Plan" and collectively
with the 1997 Plan, the "Plans") and reserved 400,000 shares of Common Stock for
issuance thereunder. The Plans provide for the granting of stock options to
employees and consultants of the Company. Options granted under the Plans may be
either incentive
F-37
<PAGE>
INTERNET IMAGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. EMPLOYEE STOCK OPTION PLAN (CONTINUED)
stock options or nonqualified stock options. Incentive stock options ("ISO") may
be granted only to employees (including officers and directors who are also
employees) of the Company. Nonqualified stock options may be granted to
employees and consultants of the Company.
Options under the Plans may be granted for periods of up to ten years and at
prices no less than 85% of the estimated fair value of the shares on the date of
grant as determined by the Board of Directors, provided, however, that (i) the
exercise price of an ISO shall not be less than 100% of the estimated fair value
of the shares on the date of grant and (ii) the exercise price of an ISO granted
to a 10% shareholder shall not be less than 110% of the estimated fair value of
the shares on the date of grant and are for periods not to exceed five years.
Options become exercisable at such times and under such conditions as determined
by the Board of Directors. Options generally vest over three years.
The following table summarizes the activity of the plans for the three
months ended September 30, 1999 (unaudited) years ended June 30, 1999 and 1998
(in thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------------------
THREE MONTHS ENDED
SEPTEMBER 30, 1999
1999 1998
------------------------ ------------------------ ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
----------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year............ 1,075 $ 0.15 698 $ 0.15 5 $ 0.05
Granted................................... 42 $ 2.49 682 $ 0.15 744 $ 0.15
Canceled.................................. (24) $ 0.15 (162) $ 0.15 (46) $ 0.15
Exercised................................. (166) $ 0.15 (143) $ 0.15 (5) $ 0.05
--------- --------- ---------
Outstanding at end of year.................. 927 $ 0.26 1,075 $ 0.15 698 $ 0.15
--------- --------- ---------
Options exercisable at end of year.......... 538 473 239
Weighted average fair value of options
granted during the year................... $ 0.39 $ 1.98 $ 0.02
========= ========= =========
</TABLE>
The following table summarizes information about stock options outstanding
and exercisable at September 30, 1999 (unaudited, in thousands, except per share
amounts):
<TABLE>
<CAPTION>
OPTIONS EXERCISABLE AT
OPTIONS OUTSTANDING AT SEPTEMBER 30, 1999
--------------------------------------------- SEPTEMBER 30, 1999
WEIGHTED ----------------------------
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
- ----------- --------------- --------------- ----------- --------------- -----------
<S> <C> <C> <C> <C> <C>
0$.15...... 885 8.85 $ 0.15 496 $ 0.15
2$.49...... 42 9.93 $ 2.49 42 $ 2.49
</TABLE>
F-38
<PAGE>
INTERNET IMAGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. EMPLOYEE STOCK OPTION PLAN (CONTINUED)
The following table summarizes information about stock options outstanding
and exercisable at June 30, 1999 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AT JUNE 30, 1999 OPTIONS EXERCISABLE AT
------------------------------------------- JUNE 30, 1999
WEIGHTED ----------------------------
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
- ----------- ------------- --------------- ----------- --------------- -----------
<S> <C> <C> <C> <C> <C>
0$.15...... 1,075 9.09 $ 0.15 473 $ 0.15
</TABLE>
FAIR VALUE DISCLOSURES
The Company calculated the minimum fair value of each option grant on the
date of grant using the Black-Scholes option-pricing model as prescribed by SFAS
No. 123 using the following assumptions:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JUNE 30,
SEPTEMBER 30, JUNE 30,
---------------------- --------------------
1999 1998 1999 1998
--------- ----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Risk-free interest rates........................................ 5.74% 0% 4.82% 5.70%
Expected lives (in years)....................................... 3.0 3.0 3.0 3.0
Dividend yield.................................................. 0% 0% 0% 0%
Expected volatility............................................. 0% 0% 0% 0%
</TABLE>
Had the Company recorded compensation cost associated with the Company's
stock-based compensation plans, determined using the minimum value prescribed by
SFAS No. 123, the result would have been an immaterial difference from the
reported amounts of net income for the three months ended September 30, 1999 and
1998 and for the years ended June 30, 1998 and 1997. Had compensation expense
for the Company's stock-based compensation plans been determined for the year
ended June 30, 1999, net loss and net loss per share would have been as follows
(in thousands, except per share amounts):
<TABLE>
<S> <C>
Net loss:
As reported....................................................... $ 2,991
Pro forma......................................................... $ 3,032
Diluted net loss per share:
As reported....................................................... $ (0.85)
Pro forma......................................................... $ (0.86)
</TABLE>
UNEARNED STOCK-BASED COMPENSATION
In connection with certain stock option grants during the three months ended
September 30, 1999 (unaudited) and the year ended June 30 1999, the Company
recognized unearned stock compensation totaling $1.3 million, which is being
being amortized over the vesting periods of the applicable options. Amortization
expense recognized during the three months ended September 30, 1999 (unaudited)
and the year ended June 30, 1999 totaled $128,000 and $343,000, respectively.
There was no unearned stock-based compensation or amortization in the years
ended June 30, 1998 and 1997.
9. SUBSEQUENT EVENTS
Effective October 1, 1999, the Company entered into a merger and acquisition
agreement with Intraware, Inc., pursuant to which Intraware, Inc. will acquire
all outstanding shares of the Company for consideration of approximately
$36.55 million in stock of Intraware, Inc.
F-39
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
INTRAWARE, INC.,
TANGO ACQUISITION CORP.,
INTERNET IMAGE, INC.
AND
THE SHAREHOLDERS NAMED HEREIN
DATED AS OF OCTOBER 1, 1999
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (the "AGREEMENT") is made and
entered into as of October 1, 1999 among Intraware, Inc., a Delaware corporation
("PARENT"), Tango Acquisition Corp., a California corporation and a wholly-owned
subsidiary of Parent ("SUB"), Internet Image, Inc., a California corporation
(the "COMPANY"), and Andy Lee; Chao Ping Wang; Lung Chin Tsai and Ling Chu Tsai,
Trustees of the TSAI FAMILY TRUST U/D/T dated May 20, 1998; and Lung Chin Tsai
as an individual (collectively the "PRINCIPAL SHAREHOLDERS").
RECITALS
A. The Boards of Directors of each of the Company, Parent and Sub believe it
is in the best interests of each company and their respective Shareholders that
Parent acquire the Company through the statutory merger of Sub with and into the
Company (the "Merger") and, in furtherance thereof, have approved the Merger.
B. Pursuant to the Merger, among other things, all of the issued and
outstanding securities of the Company shall be converted into the right to
receive Parent Common Stock (as defined herein). Parent will assume all
outstanding stock options of the Company, and all outstanding warrants of the
Company that are not exercised on or prior to the Closing Date shall be
terminated.
C. The Company and the Principal Shareholders, on the one hand, and Parent
and Sub, on the other hand, desire to make certain representations, warranties,
covenants and other agreements in connection with the Merger.
D. The parties intend, by executing this Agreement, to adopt a plan of
reorganization within the meaning of Section 368 of the Internal Revenue Code of
1986, as amended.
E. Concurrent with the execution of this Agreement, as a material
inducement to Parent and Sub to enter into this Agreement, the Principal
Shareholders (except for Chao Ping Wang) as well as Austin Jieh, William J.
Almon, Pac-Link Fund, and Tai Yuen Venture Capital Investment Corporation
(together, the "INVESTORS") are entering into Voting Agreements in the form of
EXHIBIT A hereto with Parent (the "VOTING AGREEMENTS"), Andy Lee and Lung Tsai
are entering into agreements not to compete with Parent (the "NONCOMPETITION
AGREEMENTS") in the form of EXHIBIT F hereto.
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable consideration,
the parties agree as follows:
ARTICLE I
THE MERGER
1.1 THE MERGER. At the Effective Time (as defined in Section 1.2) and
subject to and upon the terms and conditions of this Agreement and the
applicable provisions of the California Corporations Code ("California Law"),
Sub shall be merged with and into the Company, the separate corporate existence
of Sub shall cease and the Company shall continue as the surviving corporation
and as a wholly-owned subsidiary of Parent. The surviving corporation after the
Merger is hereinafter sometimes referred to as the "Surviving Corporation."
1.2 EFFECTIVE TIME. Unless this Agreement is earlier terminated pursuant
to Section 8.1, the closing of the Merger (the "CLOSING") will take place as
promptly as practicable, but no later than five (5) business days following
satisfaction or waiver of the conditions set forth in Article VI, at the offices
of Wilson Sonsini Goodrich & Rosati, Professional Corporation, 650 Page Mill
Road, Palo Alto, California, unless another place or time is agreed to in
writing by Parent and the Company. The date upon which the Closing actually
occurs is herein referred to as the "CLOSING DATE." On the Closing Date, the
parties hereto shall cause the Merger to be consummated by filing an Agreement
of Merger
A-1
<PAGE>
(or like instrument) in the form attached hereto as EXHIBIT B with the Secretary
of State of the State of California (the "MERGER AGREEMENT"), in accordance with
the applicable provisions of California Law (the time of acceptance by the
Secretary of State of the State of California of such filing being referred to
herein as the "EFFECTIVE TIME").
1.3 EFFECT OF THE MERGER. At the Effective Time, the effect of the Merger
shall be as provided in the applicable provisions of California Law. Without
limiting the generality of the foregoing, and subject thereto, at the Effective
Time, all the property, rights, privileges, powers and franchises of the Company
and Sub shall vest in the Surviving Corporation, and all debts, liabilities and
duties of the Company and Sub shall become the debts, liabilities and duties of
the Surviving Corporation.
1.4 ARTICLES OF INCORPORATION; BYLAWS.
(a) Unless otherwise determined by Parent prior to the Effective Time,
at the Effective Time, the Articles of Incorporation of Sub shall be the
Articles of Incorporation of the Surviving Corporation until thereafter
amended as provided by law and such Articles of Incorporation; PROVIDED,
HOWEVER, that Section I of the Articles of Incorporation of the Surviving
Corporation shall be amended to read as follows: "The name of the
corporation is Internet Image, Inc."
(b) The Bylaws of Sub, as in effect immediately prior to the Effective
Time, shall be the Bylaws of the Surviving Corporation until thereafter
amended.
1.5 DIRECTORS AND OFFICERS. The directors of the Surviving Corporation
immediately after the Effective Time shall be the directors of Sub immediately
prior to the Effective Time, each to hold the office of director of the
Surviving Corporation in accordance with the provisions of California Law and
the Articles of Incorporation and Bylaws of the Surviving Corporation until
their successors are duly qualified and elected. The officers of the Surviving
Corporation immediately after the Effective Time shall be the officers of Sub
immediately prior to the Effective Time, each to hold office in accordance with
the provisions of the Bylaws of the Surviving Corporation.
1.6 EFFECT OF MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT CORPORATIONS
(a) CERTAIN DEFINITIONS. For all purposes of this Agreement, the
following terms shall have the following meanings:
"COMPANY CAPITAL STOCK" shall mean shares of Company Common Stock,
Company Series A Preferred, Company Series B Preferred, Company Series C
Preferred and shares of any other capital stock of the Company.
"COMPANY COMMON STOCK" shall mean shares of common stock of the Company.
"COMPANY PREFERRED STOCK" shall mean, collectively, shares of Company
Series A Preferred, Company Series B Preferred and Company Series C
Preferred.
"COMPANY SERIES A PREFERRED" shall mean shares of Series A Preferred
Stock of the Company.
"COMPANY SERIES B PREFERRED" shall mean shares of Series B Preferred
Stock of the Company.
"COMPANY SERIES C PREFERRED" shall mean shares of Series C Preferred
Stock of the Company.
"ESTIMATED BALANCE SHEET" shall mean the estimated unaudited balance
sheet of the Company dated the Closing Date, but delivered to Parent not
fewer than three (3) business days prior to the Closing pursuant to
Section 5.17, which shall be (i) prepared in accordance with GAAP (except
that such unaudited balance sheet does not contain the footnotes required
by GAAP) and prepared in good faith and based on reasonable assumptions
and (ii) approved by Parent, which approval shall not be withheld
unreasonably.
A-2
<PAGE>
"ESTIMATED NET ASSETS" shall mean the amount by which total assets of the
Company as determined in accordance with GAAP ("TOTAL ASSETS") exceeds
total liabilities of the Company as determined in accordance with GAAP
("TOTAL LIABILITIES"), each as reflected in the Estimated Balance Sheet.
"ESTIMATED THIRD PARTY EXPENSES" shall mean Third Party Expenses (as
defined in Section 5.4) of the Company on the Closing Date as estimated
by the Company and the Principal Shareholders in good faith and based on
reasonable assumptions (including any Third Party Expenses previously
paid by the Company) as set forth in a letter delivered to Parent
concurrently with the Estimated Balance Sheet (the "ESTIMATED THIRD PARTY
EXPENSES LETTER")
"EXCHANGE RATIO" shall mean a number equal to the quotient obtained by
dividing (i) the number of shares of Participating Stock Consideration by
(ii) the number of Total Participating Shares.
"GAAP" shall mean U.S. generally accepted accounting principles
consistent with the reporting practices and principles used by Parent
from time to time for preparing its public filings under the Securities
and Exchange Act of 1934, as amended (the "EXCHANGE ACT").
"KEY EMPLOYEES" shall mean those employees of the Company listed on
Exhibit C hereto.
"KNOWLEDGE" shall mean what would be within the actual knowledge of a
prudent person after reasonable investigation.
"MERGER SHARES" shall mean that number of shares of Parent Common Stock
equal to the quotient obtained by dividing the Total Consideration by the
Trading Price; provided however, that the number of shares shall neither
be greater than 2,000,000 shares nor less than 1,250,000 shares.
"NET ASSETS" shall mean the amount equal to Total Assets of the Company
minus Total Liabilities of the Company.
"PARENT COMMON STOCK" shall mean shares of the common stock, par value
$.0001, of Parent.
"PARTICIPATING STOCK CONSIDERATION" shall mean the total number of Merger
Shares minus the number of shares of Preferred Stock Consideration.
"SHAREHOLDER" shall mean each holder of any Company Capital Stock
immediately prior to the Effective Time.
"TOTAL CONSIDERATION" shall mean an amount equal to $36.55 million minus:
(i) the dollar amount by which Estimated Net Assets (irrespective of
Estimated Third Party Expenses) are less than $250,000 and (ii) the
dollar amount by which Estimated Third Party Expenses exceed $200,000.
"TOTAL OUTSTANDING SHARES" shall mean the aggregate number of shares of
Company Common Stock outstanding immediately prior to the Effective Time
plus the aggregate number of shares of Company Common Stock issuable,
with or without the passage of time or satisfaction of other conditions,
upon exercise or conversion of all options, warrants and other rights
(other than the Company Preferred Stock) to acquire or receive shares of
Company Common Stock outstanding immediately prior to the Effective Time.
"TOTAL PARTICIPATING SHARES" shall mean the number equal to the Total
Outstanding Shares plus the total number of shares of Company Common
Stock issuable upon conversion of the shares of Company Series A
Preferred, Company Series B Preferred and Company Series C Preferred
issued and outstanding immediately prior to the Effective Time pursuant
to the Articles of Incorporation of the Company as then in effect.
A-3
<PAGE>
"TRADING PRICE" shall mean the average closing sales price of the Parent
Common Stock as reported on the Nasdaq National Market for the ten
(10) consecutive trading days ending three (3) business days prior to the
Closing Date.
(b) EFFECT ON CAPITAL STOCK. At the Effective Time, by virtue of the
Merger and without any action on the part of Sub, the Company or the holders
of any shares of the Company Capital Stock, each share of Company Common
Stock, Company Series A Preferred, Company Series B Preferred and Company
Series C Preferred issued and outstanding immediately prior to the Effective
Time (other than any Dissenting Shares, as defined in Article 1.7) will be
canceled and extinguished and be converted automatically into, the right to
receive upon surrender of the certificate representing such share of Company
Common Stock, Company Series A Preferred, Company Series B Preferred or
Company Series C Preferred and upon the terms and subject to conditions set
forth below and throughout this Agreement, including, without limitation,
the escrow provisions set forth in Article VII and/or described in
Section 1.8(b) hereof, the following:
(i) Preferred Stock Consideration. Prior and in preference to any
delivery of Parent Common Stock to holders of Company Common Stock, the
holders of Company Series A Preferred, Company Series B Preferred and
Company Series C Preferred will be entitled to receive the following;
PROVIDED that, if the Total Consideration is insufficient to permit the
receipt of such Merger Shares, then holders of Company Series A
Preferred, Company Series B Preferred and Company Series C Preferred will
be entitled to their pro rata share of the Merger Shares available in
proportion to the respective amounts which would be received by them if
the respective amounts were paid in full:
(A) Each share of Company Series C Preferred issued and
outstanding immediately prior to the Effective Time, shall be
converted into the right to receive that number of shares of Parent
Common Stock equal to $2.25 divided by the Trading Price. Such number
($2.25 divided by the Trading Price) multiplied by the number of
shares of Company Series C Preferred issued and outstanding
immediately prior to the Effective Time is herein referred to as the
"SERIES C CONSIDERATION".
(B) Each share of Company Series B Preferred issued and
outstanding immediately prior to the Effective Time, shall be
converted into the right to receive that number of Shares of Parent
Common Stock equal to $1.50 divided by the Trading Price. Such number
($1.50 divided by the Trading Price) multiplied by the number of
shares of Company Series B Preferred issued and outstanding
immediately prior to the Effective Time is herein referred to as the
"SERIES B CONSIDERATION".
(C) Each share of Company Series A Preferred issued and
outstanding immediately prior to the Effective Time, shall be
converted into the right to receive that number of Shares of Parent
Common Stock equal to $0.25 divided by the Trading Price. Such number
($0.25 divided by the Trading Price) multiplied by the number of
shares of Company Series A Preferred issued and outstanding
immediately prior to the Effective Time is herein referred to as
"SERIES A CONSIDERATION," and collectively with the Series B
Consideration and the Series C Consideration, the "PREFERRED STOCK
CONSIDERATION."
(ii) PARTICIPATING CONSIDERATION. After payment of amounts pursuant
to Section 1.6(b)(i), the Participating Stock Consideration, if any,
shall be distributed as follows:
(A) Each share of Company Common Stock, issued and outstanding
immediately prior to the Effective Time, shall be converted into the
right to receive the number of shares of Parent Common Stock equal to
the Exchange Ratio.
(B) Each share of Company Series A Preferred, Company Series B
Preferred and Company Series C Preferred issued and outstanding
immediately prior to the Effective
A-4
<PAGE>
Time shall be converted into the right to receive the number of
shares of Parent Common Stock equal to the Exchange Ratio multiplied
by the number of shares of Company Common Stock issuable upon
conversion of such respective share of Company Series A Preferred,
Company Series B Preferred and Company Series C Preferred immediately
prior to the Effective Time pursuant to the Articles of Incorporation
of the Company as then in effect.
(c) COMPANY STOCK OPTIONS AND WARRANTS TO PURCHASE COMPANY CAPITAL
STOCK.
(i) At the Effective Time, each outstanding option or warrant to
purchase shares of Company Common Stock issued pursuant to the Company's
1997 Stock Option Plan and the Company's NSO Stock Option Plan (each, a
"STOCK OPTION PLAN") or otherwise (each a "COMPANY OPTION"), whether or
not exercisable, will be assumed by Parent. Each Company Option so
assumed by Parent under this Agreement will continue to have, and be
subject to, the same terms and conditions governing such Company Option
immediately prior to the Effective Time (including, without limitation,
any vesting schedule or repurchase rights), except that (i) each Company
Option will be exercisable (or will become exercisable in accordance with
its terms) for that number of whole shares of Parent Common Stock equal
to the product of the number of shares of Company Common Stock that were
issuable upon exercise of such Company Option immediately prior to the
Effective Time multiplied by the Exchange Ratio, rounded down to the
nearest whole number of shares of Parent Common Stock, and (ii) the per
share exercise price for the shares of Parent Common Stock issuable upon
exercise of such assumed Company Option will be equal to the quotient
determined by dividing the exercise price per share of Company Common
Stock at which such Company Option was exercisable immediately prior to
the Effective Time by the Exchange Ratio, rounded up to the nearest whole
cent. After the Effective Time, Parent will issue to each holder of an
outstanding Company Option a notice describing the foregoing assumption
of such Company Options by Parent.
(ii) Prior to the Effective Time, the Company shall take all action
necessary to effect the transactions anticipated by this Section 1.6(c)
under all Company Option agreements and any outstanding warrants and any
other plan or arrangement of the Company.
(d) CAPITAL STOCK OF SUB. Each share of common stock of Sub issued and
outstanding immediately prior to the Effective Time shall be converted into
and exchanged for one validly issued, fully paid and nonassessable share of
common stock of the Surviving Corporation. Each stock certificate of Sub
evidencing ownership of any such shares shall continue to evidence ownership
of such shares of capital stock of the Surviving Corporation.
(e) FRACTIONAL SHARES. No fraction of a share of Parent Common Stock
will be issued, but in lieu thereof, each holder of shares of Company
Capital Stock (including Company Capital Stock issuable upon exercise of
outstanding Company Options at the Effective Time) who would otherwise be
entitled to a fraction of a share of Parent Common Stock (after aggregating
all fractional shares of Parent Common Stock to be received by such holder)
shall receive one whole share of Parent Common Stock.
1.7 DISSENTING SHARES.
(a) Notwithstanding any provision of this Agreement to the contrary, any
shares of Company Capital Stock held by a holder who has exercised and
perfected appraisal rights for such shares in accordance with California Law
and who, as of the Effective Time, has not effectively withdrawn or lost
such appraisal rights ("DISSENTING SHARES"), shall not be converted into or
represent a right to receive the consideration for Company Capital Stock
pursuant to Section 1.6, but the holder thereof shall only be entitled to
such rights as are granted by California Law.
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(b) Notwithstanding the provisions of subsection (a), if any holder of
Dissenting Shares shall effectively withdraw or lose (through failure to
perfect or otherwise) his or her appraisal rights, then, as of the later of
Effective Time and the occurrence of such event, such holder's shares shall
automatically be converted into and represent only the right to receive the
consideration for Company Capital Stock as provided in Section 1.6, without
interest thereon, upon surrender of the certificate representing such
shares.
(c) The Company shall give Parent (i) prompt notice of any written
demand for appraisal received by the Company pursuant to the applicable
provisions of California Law and (ii) the opportunity to participate in all
negotiations and proceedings with respect to such demands. The Company shall
not, except with the prior written consent of Parent, voluntarily make any
payment with respect to any such demands or offer to settle or settle any
such demands. To the extent that Parent or the Company makes any payment or
payments in respect of any Dissenting Shares, Parent shall be entitled to
recover under the terms of Article VII hereof the aggregate amount by which
such payment or payments exceed the aggregate consideration that otherwise
would have been payable in respect of such shares.
1.8 SURRENDER OF CERTIFICATES.
(a) EXCHANGE AGENT. The Corporate Secretary of Parent or an
institution selected by Parent and reasonably satisfactory to the Company
shall serve as exchange agent (the "EXCHANGE AGENT") in the Merger.
(b) PARENT TO PROVIDE SHARES. Promptly after the Effective Time,
Parent shall make available to the Exchange Agent for exchange in accordance
with this Article I, Certificates representing the shares of Parent Common
Stock and any dividends or distributions to which Shareholder may be
entitled pursuant to Section 1.8(d) in exchange for all of the outstanding
shares of Company Capital Stock PROVIDED, HOWEVER, that on behalf of the
Shareholders, pursuant to Section 7.3 hereof, Parent shall deposit into an
escrow account ten percent (10%) of the Merger Shares issued to the Escrow
Agent pursuant to Section 1.6(b) on behalf of the Shareholders (the "ESCROW
AMOUNT"). The portion of the Escrow Amount contributed on behalf of each
Shareholder shall be in proportion to the aggregate number of Merger Shares
which such Shareholder would otherwise be entitled to receive in the Merger
by virtue of ownership of outstanding shares of Company Capital Stock.
(c) EXCHANGE PROCEDURES. Promptly after the Effective Time, Parent
shall cause the Exchange Agent to mail to each holder of record (as of the
Effective Time) of a certificate or certificates (the "CERTIFICATES") which
immediately prior to the Effective Time represented outstanding shares of
Company Capital Stock whose shares were converted into the right to receive
shares of Parent Common Stock pursuant to Section 1.6 and any dividends or
other distributions payable pursuant to Section 1.8(d), (i) a letter of
transmittal (which shall specify that delivery shall be effected, and risk
of loss and title to the Certificates shall pass, only upon delivery of the
Certificates to the Exchange Agent and shall be in such form and have such
other provisions as Parent may reasonably specify) and (ii) instructions for
use in effecting the surrender of the Certificates in exchange for
certificates representing shares of Parent Common Stock and any dividends or
other distributions payable pursuant to Section 1.8(d). Upon surrender of
Certificates for cancellation to the Exchange Agent or to such other agent
or agents as may be appointed by Parent, together with such letter of
transmittal, duly completed and validly executed in accordance with the
instructions thereto, the holders of such Certificates shall be entitled to
receive in exchange therefor certificates representing the number of whole
shares of Parent Common Stock and any dividends or distributions payable
pursuant to Section 1.8(d), and the Certificates so surrendered shall
forthwith be canceled. Until so surrendered, outstanding Certificates will
be deemed from and after the Effective Time, for all corporate purposes,
subject
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to Section 1.8(d) as to the payment of dividends, to evidence the ownership
of the number of full shares of Parent Common Stock into which such shares
of Company Capital Stock shall have been so converted and any dividends or
distributions payable pursuant to Section 1.8(d).
(d) DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED SHARES. No dividends or
other distributions declared or made after the date of this Agreement with
respect to Parent Common Stock with a record date after the Effective Time
will be paid to the holders of any unsurrendered Certificates with respect
to the shares of Parent Common Stock represented thereby until the holders
of record of such Certificates shall surrender such Certificates. Subject to
applicable law, following surrender of any such Certificates, the Exchange
Agent shall deliver to the record holders thereof, without interest,
certificates representing whole shares of Parent Common Stock issued in
exchange therefor and the amount of any such dividends or other
distributions with a record date after the Effective Time payable with
respect to such whole shares of Parent Common Stock.
(e) TRANSFERS OF OWNERSHIP. If certificates for shares of Parent
Common Stock are to be issued in a name other than that in which the
Certificates surrendered in exchange therefor are registered, it will be a
condition of the issuance thereof that the Certificates so surrendered will
be properly endorsed and otherwise in proper form for transfer and that the
persons requesting such exchange will have paid to Parent or any agent
designated by it any transfer or other taxes required by reason of the
issuance of certificates for shares of Parent Common Stock in any name other
than that of the registered holder of the Certificates surrendered, or
established to the satisfaction of Parent or any agent designated by it that
such tax has been paid or is not payable.
(f) NO LIABILITY. Notwithstanding anything to the contrary in this
Section 1.8, none of the Exchange Agent, the Surviving Corporation or any
party hereto shall be liable to a holder of shares of Company Capital Stock
for any amount properly paid to a public official pursuant to any applicable
abandoned property, escheat or similar law.
1.9 NO FURTHER OWNERSHIP RIGHTS IN COMPANY CAPITAL STOCK. All
consideration paid in respect of the surrender for exchange of shares of Company
Capital Stock in accordance with the terms hereof, shall be deemed to be full
satisfaction of all rights pertaining to such shares of Company Capital Stock,
and there shall be no further registration of transfers on the records of the
Surviving Corporation of shares of Company Capital Stock which were outstanding
immediately prior to the Effective Time. If, after the Effective Time,
Certificates are presented to the Surviving Corporation for any reason, they
shall be canceled and exchanged as provided in this Article I.
1.10 LOST, STOLEN OR DESTROYED CERTIFICATES. In the event any Certificates
evidencing shares of Company Capital Stock shall have been lost, stolen or
destroyed, the Exchange Agent shall issue in exchange for such lost, stolen or
destroyed certificates, upon the making of an affidavit of that fact by the
holder thereof, such shares of Parent Common Stock and other amounts, if any, as
may be required pursuant to Section 1.8(d); PROVIDED, HOWEVER, that Parent may,
in its discretion and as a condition precedent to the issuance thereof, require
the owner of such lost, stolen or destroyed certificates to deliver a bond in
such sum as it may reasonably direct against any claim that may be made against
Parent or the Exchange Agent with respect to the certificates alleged to have
been lost, stolen or destroyed.
1.11 TAKING OF NECESSARY ACTION; FURTHER ACTION. If, at any time after the
Effective Time, any further action is necessary or desirable to carry out the
purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges, powers
and franchises of the Company, Parent and Sub, the officers and directors of the
Company, Parent and Sub are fully authorized in the name of their respective
corporations or otherwise to take, and will take, all such lawful and necessary
action.
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1.12 TAX AND ACCOUNTING CONSEQUENCES. It is intended by the parties hereto
that the Merger shall constitute a reorganization within the meaning of
Section 368 of the Internal Revenue Code of 1986, as amended (the "CODE"). It is
intended by the parties hereto that the Merger be treated as a pooling of
interests for financial accounting purposes.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
AND THE PRINCIPAL SHAREHOLDERS
Each of the Company and the Principal Shareholders hereby, severally and not
jointly, represents and warrants to Parent and Sub, subject to such exceptions
as are specifically disclosed in the disclosure schedule (referencing the
appropriate Section and paragraph numbers) supplied by the Company and the
Principal Shareholders to Parent and attached hereto as EXHIBIT D-1 (the
"DISCLOSURE SCHEDULE"), that on the date hereof and as of the Effective Time as
though made at the Effective Time as follows:
2.1 ORGANIZATION OF THE COMPANY. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
California. The Company has the corporate power to own its properties and to
carry on its business as now being conducted. The Company is duly qualified to
do business and in good standing as a foreign corporation in each jurisdiction
in which the failure to be so qualified could have a Company Material Adverse
Effect. For all purposes of this Agreement, the term "COMPANY MATERIAL ADVERSE
EFFECT" means any change, event or effect that is materially adverse to the
business, assets (including intangible assets), condition (financial or
otherwise), results of operations of the Company taken as a whole. The Company
has delivered a true and correct copy of its Articles of Incorporation and
Bylaws, each as amended to date, to Parent. Section 2.1 of the Disclosure
Schedule lists the directors and officers of the Company. The operations now
being conducted by the Company have not been conducted under any other name.
2.2 SUBSIDIARIES. The Company does not have, and has never had, any
subsidiaries or affiliated companies and does not otherwise own, and has not
otherwise owned, any shares in the capital of or any interest in, or control,
directly or indirectly, any corporation, partnership, association, joint venture
or other business entity.
2.3 COMPANY CAPITAL STRUCTURE.
(a) The authorized Company Capital Stock consists of Twenty Million,
(20,000,000) shares of authorized Company Common Stock, no par value, of
which 3,602,270 shares are issued and outstanding as of the date hereof, and
Eight Million, Six Hundred Thirty-Seven Thousand, Seven Hundred Eighty-One
(8,637,781) shares of Preferred Stock, no par value, of which 2,330,000
shares are designated Series A Preferred Stock, of which 2,330,000 shares
are issued and outstanding as of the date hereof, 1,863,337 shares are
designated Series B Preferred Stock, 1,863,337 shares of which are issued
and outstanding as of the date hereof, and 4,444,444 shares are designated
Series C Preferred Stock, of which 1,115,004 shares are issued and
outstanding as of the date hereof. The Company Capital Stock is held by the
persons, with the record addresses and in the amounts set forth in
Section 2.3(a) of the Disclosure Schedule. All outstanding shares of Company
Capital Stock are duly authorized, validly issued, fully paid and
non-assessable and not subject to preemptive rights created by statute, the
Articles of Incorporation or Bylaws of the Company or any agreement to which
the Company is a party or by which it is bound and have been issued in
compliance with federal and state securities laws. There are no declared or
accrued unpaid dividends with respect to any shares of the Company's Capital
Stock. The Company has no other capital stock authorized, issued or
outstanding.
(b) Except for the Stock Option Plan, the Company has never adopted or
maintained any stock option plan or other plan providing for equity
compensation of any person. The Company
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has reserved 1,442,000 shares of Company Common Stock for issuance to
employees and consultants pursuant to the 1997 Stock Option Plan, 634,294
shares of which are subject to outstanding unexercised options as of the
date hereof and 400,000 shares of Company Common Stock for issuance to a
consultant pursuant to the NSO Stock Option Plan, 300,000 shares of which
are subject to outstanding unexercised options as of the date hereof. Except
as set forth on Section 2.3(b) of the Disclosure Schedule, there is no
outstanding Company Capital Stock which is subject to vesting.
Section 2.3(b) of the Disclosure Schedule sets forth for each outstanding
Company Option, the name and the domicile address of the holder, the number
of shares of Company Common Stock subject to such Company Option, the
exercise price of such Company Option, the vesting schedule of such Company
Option including the extent to which such Company Option has vested to the
date hereof and whether the vesting of such Company Option will be
accelerated by reason of the transactions contemplated by this Agreement,
and whether such Company Option is intended to qualify as an incentive stock
option within the meaning of Section 422 of the Code. Section 2.3(b) of the
Disclosure Schedule also sets forth the name of the holder of any Company
Capital Stock subject to vesting, the number of shares of Company Capital
Stock subject to vesting and the vesting schedule for such Company Capital
Stock, including the extent vested to date. Except as set forth on
Section 2.3(b) of the Disclosure Schedule, there are no options, warrants,
calls, rights, commitments or agreements of any character, written or oral,
to which the Company is a party or by which it is bound obligating the
Company to issue, deliver, sell, repurchase or redeem, or cause to be
issued, delivered, sold, repurchased or redeemed, any shares of the capital
stock of the Company or obligating the Company to grant, extend, accelerate
the vesting of, change the price of, otherwise amend or enter into any such
option, warrant, call, right, commitment or agreement. There are no
outstanding or authorized stock appreciation, phantom stock, profit
participation, or other similar rights with respect to the Company. There
are no voting trusts, proxies, or other agreements or understandings with
respect to the voting stock of the Company. As a result of the Merger,
Parent will be the sole record and beneficial owner of all outstanding
Company Capital Stock and all rights to acquire or receive any Company
Capital Stock, whether or not such Company Capital Stock is outstanding.
2.4 AUTHORITY. Each of the Company and the Principal Shareholders has all
requisite power and authority to enter into this Agreement and any Related
Agreements (as defined below) to which it is a party and to consummate the
transactions contemplated hereby and thereby. The execution and delivery of this
Agreement and any Related Agreements to which it is a party and the consummation
of the transactions contemplated hereby and thereby have been duly authorized by
all necessary corporate action on the part of the Company, and no further action
is required on the part of the Company or the Principal Shareholders to
authorize the Agreement, any Related Agreements to which it is a party and the
transactions contemplated hereby and thereby, subject only to the approval of
this Agreement by the Shareholders. This Agreement and the Merger have been
unanimously approved by the Board of Directors of the Company. This Agreement
and any Related Agreements to which the Company or the Principal Shareholders is
a party have been duly executed and delivered by the Company or the Principal
Shareholders, as the case may be, and, assuming the due authorization, execution
and delivery by the other parties hereto and thereto, constitute the valid and
binding obligation of the Company and the Principal Shareholders, as the case
may be, enforceable in accordance with their respective terms, subject to the
laws of general application relating to bankruptcy, insolvency and the relief of
debtors and to rules of law governing specific performance, injunctive relief or
other equitable remedies. The "RELATED AGREEMENTS" shall mean all such ancillary
agreements required in this Agreement to be executed and delivered in connection
with the transactions contemplated hereby, including the Noncompetition
Agreements, the Rule 145 Affiliate Agreements (as defined in Section 5.13) and
the Voting Agreements.
2.5 NO CONFLICT. The execution and delivery of this Agreement and any
Related Agreements to which the Company or the Principal Shareholders are a
party by either the Company or the Principal
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Shareholders do not, and, the consummation of the transactions contemplated
hereby and thereby will not, conflict with, or result in any violation of, or
default under (with or without notice or lapse of time, or both), or give rise
to a right of termination, cancellation, modification or acceleration of any
obligation or loss of any benefit under (any such event, a "CONFLICT") (i) any
provision of the Articles of Incorporation and Bylaws of the Company, (ii) any
mortgage, indenture, lease, contract or other agreement or instrument, permit,
concession, franchise or license to which the Company or the Principal
Shareholders or any of their respective properties or assets (including
intangible assets) are subject, or (iii) any judgment, order, decree, statute,
law, ordinance, rule or regulation applicable to the Company or the Principal
Shareholders or their respective properties or assets.
2.6 CONSENTS. Except as set forth on Schedule 2. 6, no consent, waiver,
approval, order or authorization of, or registration, declaration or filing
with, any court, administrative agency or commission or other federal, state,
county, local or other foreign governmental authority, instrumentality, agency
or commission ("GOVERNMENTAL ENTITY") or any third party, including a party to
any agreement with the Company (so as not to trigger any Conflict), is required
by or with respect to the Company or the Principal Shareholders in connection
with the execution and delivery of this Agreement and any Related Agreements to
which the Company or the Principal Shareholders is a party or the consummation
of the transactions contemplated hereby and thereby, except for (i) such
consents, waivers, approvals, orders, authorizations, registrations,
declarations and filings as may be required under applicable securities laws and
(ii) the filing of the Merger Agreement with the Secretary of State of the State
of California.
2.7 COMPANY FINANCIAL STATEMENTS. Schedule 2. 7 of the Disclosure Schedule
sets forth the Company's unaudited balance sheets as of June 30, 1999 and
June 30, 1998 and the related unaudited statements of income and cash flow for
the twelve-month periods ended June 30, 1999, June 30, 1998 and June 30, 1997
(the "YEAR-END FINANCIALS") and the Company's unaudited balance sheets as of
August 31, 1999, and the related unaudited statements of income and cash flow
for the two months then ended (the "INTERIM FINANCIALS"). The Year-End
Financials and the Interim Financials are correct in all material respects and
have been prepared in accordance with GAAP applied on a basis consistent
throughout the periods indicated and consistent with each other except for the
absence of footnotes thereto. The Year-End Financials and Interim Financials
present fairly the financial condition and consolidated operating results of the
Company as of the dates and during the periods indicated therein, subject in the
case of the Interim Financials, to normal year-end adjustments, which will not
be material in amount or significance. The Company's unaudited Balance Sheet as
of August 31, 1999 shall be hereinafter referred to as the "CURRENT BALANCE
SHEET." On the Closing Date, the Company's Net Assets will be greater than the
lesser of (A) $250,000, or (B) Estimated Net Assets (each exclusive of $200,000
of Third Party Expenses (as defined in Section 5.4)).
2.8 NO UNDISCLOSED LIABILITIES. The Company has no liability,
indebtedness, obligation, expense, claim, deficiency, guaranty or endorsement of
any type, whether accrued, absolute, contingent, matured, unmatured or other
(whether or not required to be reflected in financial statements in accordance
with GAAP), which individually or in the aggregate (i) has not been reflected in
the Current Balance Sheet, or (ii) has not arisen in the ordinary course of
business consistent with past practices since August 31, 1999, none of which is
material to the business, results of operations or condition (financial or
otherwise) of the Company.
2.9 NO CHANGES. Since August 31, 1999, there has not been, occurred or
arisen any:
(a) amendments or changes to the Articles of Incorporation or Bylaws of
the Company;
(b) capital expenditure or commitment by the Company, exceeding $25,000
individually or $100,000 in the aggregate;
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(c) destruction of, damage to or loss of any material assets, business
or customer of the Company (whether or not covered by insurance);
(d) labor trouble or claim of wrongful discharge or other unlawful labor
practice or action;
(e) change in accounting methods or practices (including any change in
depreciation or amortization policies or rates) by the Company;
(f) revaluation by the Company of any of its assets;
(g) declaration, setting aside or payment of a dividend or other
distribution with respect to the capital stock of the Company or any direct
or indirect redemption, purchase or other acquisition by the Company of its
capital stock;
(h) increase in the salary or other compensation payable or to become
payable by the Company to any of its officers, directors, employees or
advisors, or the declaration, payment or commitment or obligation of any
kind for the payment, by the Company of a bonus or other additional salary
or compensation to any such person;
(i) except in the ordinary course of business in accordance with past
custom and practice any agreement, contract, covenant, instrument, lease,
license or commitment to which the Company is a party or by which they or
any of its assets (including intangible assets) are bound or any
termination, extension, amendment or modification the terms of any
agreement, contract, covenant, instrument, lease, license or commitment to
which the Company is a party or by which it or any of its assets are bound;
(j) except as set forth on Schedule 2.9(j), sale, lease, license or
other disposition of any of the assets or properties of the Company or any
creation of any security interest in such assets or properties;
(k) loan by the Company to any person or entity, incurring by the
Company of any indebtedness, guaranteeing by the Company of any
indebtedness, issuance or sale of any debt securities of the Company or
guaranteeing of any debt securities of others, except for advances to
employees for travel and business expenses in the ordinary course of
business, consistent with past practice;
(l) except in the ordinary course of business in accordance with past
custom and practice waiver or release of any right or claim of the Company
including any write-off or other compromise of any account receivable of the
Company;
(m) the commencement or notice or threat or reasonable basis therefor of
any lawsuit or, to the Company's or the Principal Shareholders' Knowledge,
proceeding or investigation against the Company or its affairs;
(n) Knowledge of any claim or potential claim of ownership by any person
other than the Company of the Company Intellectual Property (as defined in
Section 2.13) or of infringement by the Company, of any other person's
Intellectual Property (as defined in Section 2.13);
(o) issuance or sale, or contract to issue or sell, by the Company of
any shares of its capital stock or securities exchangeable, convertible or
exercisable therefor, or any securities, warrants, options or rights to
purchase any of the foregoing, except pursuant to the Company's Stock Option
Plans;
(p) except commercial licenses in the ordinary course of business in
accordance with past custom and practice (i) sale or license of any Company
Intellectual Property or entering into of any agreement with respect to the
Company Intellectual Property with any person or entity or with respect to
the Intellectual Property of any person or entity or (ii) purchase or
license of any
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Intellectual Property or entering into of any agreement with respect to the
Intellectual Property of any person or entity or (iii) change in pricing or
royalties set or charged by the Company to its customers or licensees or in
pricing or royalties set or charged by persons who have licensed
Intellectual Property to the Company;
(q) any event or condition of any character that has had or is
reasonably likely to have a Company Material Adverse Effect;
(r) any transaction by the Company except in the ordinary course of
business as conducted on that date and consistent with past practices; or
(s) negotiation or agreement by the Company or any officer or employee
thereof to do any of the things described in the preceding clauses (a)
through (r) (other than negotiations with Parent and its representatives
regarding the transactions contemplated by this Agreement).
2.10 TAX MATTERS.
(a) DEFINITION OF TAXES. For the purposes of this Agreement, "TAX" or,
collectively, "TAXES", means (i) any and all federal, state, local and
foreign taxes, assessments and other governmental charges, duties,
impositions and liabilities, including taxes based upon or measured by gross
receipts, income, profits, sales, use and occupation, and value added, ad
valorem, transfer, franchise, withholding, payroll, recapture, employment,
excise and property taxes, together with all interest, penalties and
additions imposed with respect to such amounts; (ii) any liability for the
payment of any amounts of the type described in clause (i) as a result of
being a member of an affiliated, consolidated, combined or unitary group for
any period; and (iii) any liability for the payment of any amounts of the
type described in clause (i) or (ii) as a result of any express or implied
obligation to indemnify any other person or as a result of any obligations
under any agreements or arrangements with any other person with respect to
such amounts and including any liability for taxes of a predecessor entity.
(b) TAX RETURNS AND AUDITS.
(i) As of the Effective Time, each of the Company will have prepared
and timely filed all required federal, state, local and foreign returns,
estimates, information statements and reports ("RETURNS") relating to any
and all Taxes concerning or attributable to the Company or its operations
and such Returns are true and correct and have been completed in
accordance with applicable law.
(ii) As of the Effective Time, each of the Company (A) will have paid
all Taxes it is required to pay and will have withheld with respect to
its employees all federal and state income taxes, FICA, FUTA and other
Taxes required to be withheld and have timely paid over to the proper
governmental authorities all amounts required to be withheld and paid
over under all applicable laws, and (B) will have accrued on the Current
Balance Sheet all Taxes attributable to the periods covered by the
Current Balance Sheet and will not have incurred any liability for Taxes
for the period prior to the Effective Time other than in the ordinary
course of business.
(iii) The Company has not been delinquent in the payment of any Tax
nor is there any Tax deficiency outstanding, assessed or proposed against
the Company nor has the Company executed any waiver of any statute of
limitations on or extending the period for the assessment or collection
of any Tax.
(iv) No audit or other examination of any Return of the Company is
presently in progress, nor has the Company been notified of any request
for such an audit or other examination.
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(v) The Company has no liabilities for unpaid federal, state, local
and foreign Taxes which have not been accrued or reserved against on the
Current Balance Sheet, whether asserted or unasserted, contingent or
otherwise.
(vi) The Company has made available to Parent or its legal counsel,
copies of all foreign, federal and state income and all state sales and
use Returns for the Company filed for all periods since its inception.
(vii) There are (and immediately following the Effective Time there
will be) no liens, pledges, charges, claims, restrictions on transfer,
mortgages, security interests or other encumbrances of any sort
(collectively, "LIENS") on the assets of the Company relating to or
attributable to Taxes other than Liens for Taxes not yet due and payable.
(viii) Neither the Company nor the Principal Shareholders has Knowledge
of any basis for the assertion of any claim relating or attributable to
Taxes which, if adversely determined, would result in any Lien on the
assets of the Company.
(ix) None of the Company's assets are treated as "tax-exempt use
property", within the meaning of Section 168(h) of the Code.
(x) As of the Effective Time, there will not be any contract,
agreement, plan or arrangement, including but not limited to the
provisions of this Agreement, covering any employee or former employee of
the Company that, individually or collectively, could give rise to the
payment of any amount that would not be deductible as an expense under
applicable law.
(xi) The Company has not filed any consent agreement under
Section 341(f) of the Code or agreed to have Section 341(f)(4) of the
Code apply to any disposition of a subsection (f) asset (as defined in
Section 341(f)(4) of the Code) owned by the Company.
(xii) The Company (A) has never been a member of an affiliated group
filing a consolidated federal income Tax Return (other than a
consolidated group the common parent of which is the Company), (B) has
never been a party to any Tax sharing or Tax allocation agreement,
arrangement or understanding and does not owe any amount under any such
agreement, other than this Agreement, (C) is not liable for the Taxes of
any other person under Treasury Regulation Section 1.1502-6 (or any
similar provision of state, local or foreign law), as a transferee or
successor, by contract or otherwise, and (D) has never been a party to
any joint venture, partnership or other arrangement that could be treated
as a partnership for income Tax purposes.
(xiii) The Company's tax basis in its assets for purposes of
determining its future amortization, depreciation and other federal
income tax deductions is accurately reflected on the Company's tax books
and records.
(xiv) The Company is not and has not been at any time, a "United
States Real Property Holding Corporation" within the meaning of
Section 897(c)(2) of the Code.
(xv) No adjustment relating to any Return filed by the Company and no
claim by a tax authority in a jurisdiction in which the Company does not
file returns that the Company may be subject to taxation by such
jurisdiction has been proposed formally or, to the knowledge of the
Company or the Principal Shareholders, informally by any tax authority to
the Company or any representative thereof.
(xvi) The Company has never constituted either a "distributing
corporation" or a "controlled corporation" in a distribution of stock
qualifying for tax-free treatment under Section 355 of the Code (A) in
the two years prior to the date of this Agreement or (B) in a
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distribution which could otherwise constitute part of a "plan" or "series
of related transactions" (within the meaning of Section 355(e) of the
Code) in conjunction with the Merger.
(c) EXECUTIVE COMPENSATION TAX. There is no contract, agreement, plan or
arrangement to which the Company is a party as of the date of this
Agreement, including but not limited to the provisions of this Agreement,
covering any employee or former employee of Company, individually or
collectively, that could give rise to the payment of any amount that would
not be deductible pursuant to Sections 280G, 404 or 162(m) of the Code.
2.11 RESTRICTIONS ON BUSINESS ACTIVITIES. There is no agreement
(noncompete or otherwise), commitment, judgment, injunction, order or decree to
which the Company is a party or otherwise binding upon the Company which has or
may have the effect of prohibiting or impairing any business practice of the
Company any acquisition of property (tangible or intangible) by the Company or
the conduct of business by the Company. Without limiting the foregoing, the
Company has not entered into any agreement under which it is restricted from
selling, licensing or otherwise distributing any of its technology or products
to or providing services to, customers or potential customers or any class of
customers, in any geographic area, during any period of time or in any segment
of the market.
2.12 TITLE OF PROPERTIES; ABSENCE OF LIENS AND ENCUMBRANCES; CONDITION OF
EQUIPMENT.
(a) The Company does not own any real property, nor has either ever
owned any real property. Section 2.12(a) of the Disclosure Schedule sets
forth a list of all real property currently leased by the Company, the name
of the lessor, the date of the lease and each amendment thereto and, with
respect to any current lease, the aggregate annual rental and/or other fees
payable under any such lease. All such current leases are in full force and
effect, are valid and effective in accordance with their respective terms,
and there is not, under any of such leases, any existing default or event of
default (or event which with notice or lapse of time, or both, would
constitute a default).
(b) The Company has good and valid title to, or, in the case of leased
properties and assets, valid leasehold interests in, all of their respective
tangible properties and assets, real, personal and mixed, used or held for
use in its business, free and clear of any Liens, except as reflected in the
Current Balance Sheet and except for Liens for Taxes not yet due and payable
and such imperfections of title and encumbrances, if any, which are not
material in character, amount or extent, and which do not detract from the
value, or interfere with the present use, of the property subject thereto or
affected thereby.
(c) Section 2.12(c) of the Disclosure Schedule lists all material items
of equipment (the "EQUIPMENT") owned or leased by the Company and such
Equipment is, (i) adequate for the conduct of the business of the Company as
currently conducted and (ii) in good operating condition, regularly and
properly maintained, subject to normal wear and tear.
(d) The Company has sole and exclusive ownership, free and clear of any
Liens, of all customer files and other customer information relating to
customers of the Company's current and former customers (the "CUSTOMER
INFORMATION"). No person other than the Company possesses any claims or
rights with respect to use of the Customer Information.
2.13 INTELLECTUAL PROPERTY.
(a) For the purposes of this Agreement, the following terms have the
following definitions:
"INTELLECTUAL PROPERTY" shall mean any or all of the following
(i) works of authorship including, without limitation, computer programs,
source code and executable code, whether embodied in software, firmware
or otherwise, documentation, designs, files, records, data and mask
works, (ii) inventions (whether or not patentable), improvements, and
technology,
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(iii) proprietary and confidential information, trade secrets and know
how, (iv) databases, data compilations and collections and technical
data, (v) logos, trade names, trade dress, trademarks and service marks,
(vi) domain names, web addresses and sites, (vii) tools, methods and
processes, and (viii) all media in which any of the foregoing is
embodied.
"INTELLECTUAL PROPERTY RIGHTS" shall mean worldwide common law and
statutory rights associated with (i) patents and patent applications,
(ii) copyrights, copyrights registrations and copyrights applications and
"moral" rights, (iii) the protection of trade and industrial secrets and
confidential information, (iv) other proprietary rights relating to
intangible intellectual property, (v) trademarks, trade names and service
marks, (vi) analogous rights to those set forth above, and
(vii) divisions, continuations, renewals, reissuances and extensions of
the foregoing (as applicable) now existing or hereafter filed, issued or
acquired.
"COMPANY INTELLECTUAL PROPERTY" shall mean any Intellectual Property
and Intellectual Property Rights that are owned by or exclusively
licensed to the Company.
"REGISTERED INTELLECTUAL PROPERTY RIGHTS" shall mean Intellectual
Property Rights that have been registered, filed, certified or otherwise
perfected by recordation with any state, government or other public legal
authority.
(b) Section 2.13(b) of the Disclosure Schedule lists all Registered
Intellectual Property owned by, or filed in the name of, the Company (the
"COMPANY REGISTERED INTELLECTUAL PROPERTY") and lists any proceedings or
actions before any court, tribunal (including the United States Patent and
Trademark Office (the "PTO") or equivalent authority anywhere in the world)
related to any of the Company Registered Intellectual Property Rights.
(c) Each item of Company Intellectual Property, including all Company
Registered Intellectual Property listed in Section 2.13(b) of the Disclosure
Schedule and all Intellectual Property licensed to the Company, is free and
clear of any Liens or other encumbrances. The Company is the exclusive owner
of all Company Intellectual Property.
(d) To the extent that any Intellectual Property has been developed or
created independently or jointly by any person other than the Company for
which the Company has, directly or indirectly, paid, the Company has a
written agreement with such person with respect thereto, and the Company
thereby has obtained ownership of, and is the exclusive owner of, all such
Intellectual Property and associated Intellectual Property Rights by
operation of law or by valid assignment.
(e) The Company has not transferred ownership of or granted any license,
other than as listed in Section 2.13(g) of the Disclosure Schedules of or
right to use or authorized the retention of any rights to use any
Intellectual Property or Intellectual Property Rights that is or was Company
Intellectual Property, to any other person.
(f) The Company Intellectual Property constitutes all the Intellectual
Property and Intellectual Property Rights used in and/or necessary to the
conduct of the business of the Company as it currently is conducted, planned
or is reasonably contemplated to be conducted, including, without
limitation, the design, development, manufacture, use, import and sale of
products, technology and services (including products, technology or
services currently under development); provided, however, that this
representation shall not be construed to be a representation or warranty
about the success or timeliness of any product development proposed to be
conducted.
(g) Other than "shrink-wrap" and similar widely available commercial
end-user licenses, the contracts, licenses and agreements listed in
Section 2.13(g) of the Disclosure Schedule include all contracts, licenses
and agreements to which the Company is a party with respect to any
Intellectual Property and Intellectual Property Rights. No person who has
licensed Intellectual Property or
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Intellectual Property Rights to the Company has ownership rights or license
rights to improvements made by the Company in such Intellectual Property
which has been licensed to the Company.
(h) Section 2.13(h) of the Disclosure Schedule lists all contracts,
licenses and agreements between the Company and any other person wherein or
whereby the Company has agreed to, or assumed, any obligation or duty to
warrant, indemnify, reimburse, hold harmless, guaranty or otherwise assume
or incur any obligation or liability or provide a right of rescission with
respect to the infringement or misappropriation by the Company or such other
person of the Intellectual Property Rights of any person other than the
Company.
(i) The operation of the business of the Company as it currently is
conducted or is reasonably contemplated to be conducted, including but not
limited to the design, development, use, import, manufacture and sale of the
products, technology or services (including products, technology or services
currently under development) of the Company does not infringe or
misappropriate the Intellectual Property Rights of any person, violate the
rights of any person (including rights to privacy or publicity), or
constitute unfair competition or trade practices under the laws of any
jurisdiction, and the Company has not received notice from any person
claiming that such operation or any act, product, technology or service
(including products, technology or services currently under development) of
the Company infringes or misappropriates the Intellectual Property Rights of
any person or constitutes unfair competition or trade practices under the
laws of any jurisdiction (nor is the Company or the Principal Shareholders
aware of any basis therefor).
(j) Each item of Company Registered Intellectual Property is valid and
subsisting, and all necessary registration, maintenance and renewal fees in
connection with such Company Registered Intellectual Property have been paid
and all necessary documents and certificates in connection with such Company
Registered Intellectual Property have been filed with the relevant patent,
copyright, trademark or other authorities in the United States or foreign
jurisdictions, as the case may be, for the purposes of maintaining such
Registered Intellectual Property. There are no actions that must be taken by
the Company within sixty (60) days of the Closing Date, including the
payment of any registration, maintenance or renewal fees or the filing of
any documents, applications or certificates for the purposes of maintaining,
perfecting or preserving or renewing any Registered Intellectual Property.
For each product, technology or service of the Company that constitutes or
includes a copyrightable work, the Company has registered the copyright in
the latest version of such work with the U.S. Copyright Office. In each case
in which the Company has acquired any Intellectual Property rights from any
person, the Company as obtained a valid and enforceable assignment
sufficient to irrevocably transfer all rights in such Intellectual Property
and the associated Intellectual Property Rights (including the right to seek
past and future damages with respect thereto) to the Company and, to the
maximum extent provided for by, and in accordance with, applicable laws and
regulations, the Company has recorded each such assignment with the relevant
governmental authorities, including the PTO, the U.S. Copyright Office, or
their respective equivalents in any relevant foreign jurisdiction, as the
case may be.
(k) To the Knowledge of the Company and the Principal Shareholders, no
person is infringing or misappropriating any Company Intellectual Property.
(l) No Company Intellectual Property, Intellectual Property Rights or
service of the Company is subject to any proceeding or outstanding decree,
order, judgement, agreement or stipulation that restricts in any manner the
use, transfer or licensing thereof by the Company or may affect the
validity, use or enforceability of such Company Intellectual Property.
(m) All of the Company's products (including products currently under
development) will record, store, process, calculate and present calendar
dates falling on and after (and if applicable, spans of time including)
January 1, 2000, and will calculate any information dependent on or
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relating to such dates in the same manner, and with the same functionality,
data integrity and performance, as the products record, store, process,
calculate and present calendar dates on or before December 31, 1999, or
calculate any information dependent on or relating to such dates
(collectively, "YEAR 2000 COMPLIANT"). All of the Company's products
(i) will lose no functionality with respect to the introduction of records
containing dates falling on or after January 1, 2000 and (ii) will be
interoperable with other products used and distributed by Parent that may
deliver records to the Company's products or receive records from the
Company's products, or interact with the Company's products, including but
not limited to back-up and archived data.
(n) There are no contracts, licenses or agreements between the Company
and any other person with respect to Company Intellectual Property under
which there is any dispute known to the Company or the Principal
Shareholders regarding the scope of such agreement, or performance under
such agreement including with respect to any payments to be made or received
by the Company thereunder.
(o) Each of the Company has taken all steps that are reasonably required
to protect the Company's rights in confidential information and trade
secrets of the Company or provided by any other person to the Company.
Without limiting the foregoing, each of the Company has, and enforces, a
policy requiring each employee, consultant and contractor to execute
proprietary information, confidentiality and assignment agreements
substantially in the Company's standard forms, and all current and former
employees, consultants and contractors of the Company have executed such an
agreement.
(p) No (i) product, technology, service or publication of the Company,
(ii) material published or distributed by the Company or (iii) conduct or
statement of Company constitutes obscene material, a defamatory statement or
material, false advertising or otherwise, to the Company's knowledge
violates any law or regulation.
2.14 AGREEMENTS, CONTRACTS AND COMMITMENTS.
(a) Except as set forth in Sections 2.13(g), 2.13(h), 2.14(a) or 2.22(b)
of the Disclosure Schedule, the Company is not a party to nor is either
bound by:
(i) any employment or consulting agreement, contract or commitment
with an employee or individual consultant or salesperson or consulting or
sales agreement, contract or commitment with a firm or other
organization,
(ii) any agreement or plan, including, without limitation, any stock
option plan, stock appreciation rights plan or stock purchase plan, any
of the benefits of which will be increased, or the vesting of benefits of
which will be accelerated, by the occurrence of any of the transactions
contemplated by this Agreement or the value of any of the benefits of
which will be calculated on the basis of any of the transactions
contemplated by this Agreement,
(iii) any fidelity or surety bond or completion bond,
(iv) any lease of personal property having a value individually in
excess of $25,000 or $100,000 in the aggregate,
(v) any agreement, contract or commitment containing any covenant
limiting the freedom of the Company to engage in any line of business or
to compete with any person,
(vi) any agreement, contract or commitment relating to capital
expenditures and involving future payments in excess of $25,000
individually or $100,000 in the aggregate,
(vii) any agreement, contract or commitment relating to the
disposition or acquisition of assets or any interest in any business
enterprise outside the ordinary course of the Company's business,
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(viii) any mortgages, indentures, loans or credit agreements, security
agreements or other agreements or instruments relating to the borrowing
of money or extension of credit,
(ix) any purchase order or contract for the purchase of materials
involving in excess of $25,000 individually or $100,000 in the aggregate,
(x) any construction contracts,
(xi) any dealer, distribution, joint marketing or development
agreement,
(xii) any sales representative, original equipment manufacturer, value
added, remarketer, reseller or independent software vendor or other
agreement for use or distribution of the Company's products, technology
or services, or
(xiii) any other agreement, contract or commitment that involves
$25,000 individually or $100,000 in the aggregate or more or is not
cancelable without penalty within thirty (30) days.
(b) The Company is in compliance with and has not breached, violated or
defaulted under, or received notice that it has breached, violated or
defaulted under, any of the terms or conditions of any agreement, contract,
covenant, instrument, lease, license or commitment to which it is not a
party or by which either of them is bound (collectively a "CONTRACT"), nor
is the Company or the Principal Shareholders aware of any event that would
constitute such a breach, violation or default with the lapse of time,
giving of notice or both. Each Contract is in full force and effect and is
not subject to any default thereunder by any party obligated to the Company
pursuant thereto. The Company has obtained, or will obtain prior to the
Closing Date, all necessary consents, waivers and approvals of parties to
any Contract as are required thereunder in connection with the Merger or for
such Contracts to remain in effect without modification after the Closing.
Following the Effective Time, each of the Company will be permitted to
exercise all of their rights under the Contracts without the payment of any
additional amounts or consideration other than ongoing fees, royalties or
payments which the Company would otherwise be required to pay had the
transactions contemplated by this Agreement not occurred.
2.15 INTERESTED PARTY TRANSACTIONS. No officer, director or Shareholder
(nor any ancestor, sibling, descendant or spouse of any of such persons, or any
trust, partnership or corporation in which any of such persons has or has had an
interest), has or has had, directly or indirectly, (i) an interest in any entity
which furnished or sold, or furnishes or sells, services, products or technology
that the Company furnishes or sells, or proposes to furnish or sell, or
(ii) any interest in any entity that purchases from or sells or furnishes to the
Company any goods or services or (iii) a beneficial interest in any Contract;
PROVIDED, that ownership of no more than one percent (1%) of the outstanding
voting stock of a publicly traded corporation shall not be deemed an "interest
in any entity" for purposes of this Section 2.15.
2.16 GOVERNMENTAL AUTHORIZATION. Section 2.16 of the Disclosure Schedule
accurately lists each consent, license, permit, grant or other authorization
issued to the Company by a Governmental Entity (i) pursuant to which the Company
currently operates or holds any interest in any of their properties or
(ii) which is required for the operation of its business or the holding of any
such interest (herein collectively called "COMPANY AUTHORIZATIONS"). The Company
Authorizations are in full force and effect and constitute all Company
Authorizations required to permit the Company to operate or conduct its business
or hold any interest in its properties or assets.
2.17 LITIGATION. There is no action, suit, claim or proceeding of any
nature pending, or, to the Company's or the Principal Shareholders' Knowledge,
threatened, against the Company, or its properties (tangible or intangible) or
any of its officers or directors, nor, to the Knowledge of the Company or the
Principal Shareholders, is there any reasonable basis therefor. To the Company's
or the Principal Shareholders' Knowledge, there is no investigation pending or
threatened against the Company, its properties or any of its officers or
directors (nor, to the best Knowledge of the Company
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or the Principal Shareholders, is there any reasonable basis therefor) by or
before any Governmental Entity. No Governmental Entity has at any time
challenged or questioned the legal right of the Company to conduct its
operations as presently or previously conducted.
2.18 ACCOUNTS RECEIVABLE; INVENTORY.
(a) The Company has made available to Parent a list of all accounts
receivable of the Company as of August 31, 1999 along with a range of days
elapsed since invoice.
(b) All accounts receivable arose in the ordinary course of business,
are carried at values determined in accordance with GAAP consistently
applied and are collectible except to the extent of reserves therefor set
forth in the Current Balance Sheet. No person has any Lien on any of such
Accounts Receivable and no request or agreement for deduction or discount
has been made with respect to any of such Accounts Receivable.
(c) All of the inventories of the Company reflected on the Company
Financials and the Company's books and records were purchased, acquired or
produced in the ordinary and regular course of business and in a manner
consistent with the Company's regular inventory practices and are set forth
on the Company's books and records in accordance with the practices and
principles of the Company consistent with the method of treating said items
in prior periods. None of the inventory of the Company reflected on the
Company Financials or on the Company's books and records (in either case net
of the reserve therefor) is obsolete, defective or in excess of the needs of
the business of the Company reasonably anticipated for the normal operation
of the business consistent with past practices and outstanding customer
contracts. The presentation of inventory on the Company Financials conforms
to GAAP and such inventory is stated at the lower of cost (determined using
the first-in, first-out method) or net realizable value.
2.19 MINUTE BOOKS. The minutes of the Company made available to counsel
for Parent are the only minutes of the Company and contain a reasonably accurate
summary of all meetings of the Board of Directors (or committees thereof) of the
Company and its respective shareholders or actions by written consent since the
time of incorporation of the Company.
2.20 ENVIRONMENTAL MATTERS.
(a) HAZARDOUS MATERIAL. The Company has not: (i) operated any
underground storage tanks at any property that the Company has at any time
owned, operated, occupied or leased; or (ii) illegally released any material
amount of any substance that has been designated by any Governmental Entity
or by applicable federal, state or local law to be radioactive, toxic,
hazardous or otherwise a danger to health or the environment, including,
without limitation, PCBs, asbestos, petroleum, and urea-formaldehyde and all
substances listed as hazardous substances pursuant to the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, as amended,
or defined as a hazardous waste pursuant to the United States Resource
Conservation and Recovery Act of 1976, as amended, and the regulations
promulgated pursuant to said laws (a "HAZARDOUS MATERIAL"), but excluding
office and janitorial supplies properly and safely maintained. No Hazardous
Materials are present as a result of the deliberate actions of the Company
or, to the Company's or the Principal Shareholders' Knowledge, as a result
of any actions of any other person or otherwise, in, on or under any
property, including the land and the improvements, ground water and surface
water thereof, that the Company has at any time owned, operated, occupied or
leased.
(b) HAZARDOUS MATERIALS ACTIVITIES. The Company has not transported,
stored, used, manufactured, disposed of, released or exposed its employees
or others to Hazardous Materials in violation of any law in effect on or
before the Effective Time, nor has either of them disposed of, transported,
sold, or manufactured any product containing a Hazardous Material (any or
all of the foregoing being collectively referred to as "HAZARDOUS MATERIALS
ACTIVITIES") in violation of any rule,
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regulation, treaty or statute promulgated by any Governmental Entity in
effect prior to or as of the date hereof to prohibit, regulate or control
Hazardous Materials or any Hazardous Material Activity.
(c) PERMITS. The Company currently holds all environmental approvals,
permits, licenses, clearances and consents (the "ENVIRONMENTAL PERMITS")
necessary for the conduct of the Company's Hazardous Material Activities,
respectively, and other businesses of the Company as such activities and
businesses are currently being conducted.
(d) ENVIRONMENTAL LIABILITIES. No action, proceeding, revocation
proceeding, amendment procedure, writ, injunction or claim is pending, or to
the Company's or the Principal Shareholders' Knowledge, threatened
concerning any Environmental Permit, Hazardous Material or any Hazardous
Materials Activity of the Company. Neither the Company nor the Principal
Shareholders is aware of any fact or circumstance which could involve the
Company in any environmental litigation or impose upon the Company any
environmental liability.
2.21 BROKERS' AND FINDERS' FEES; THIRD PARTY EXPENSES. The Company has not
incurred, nor will it incur, directly or indirectly, any liability for brokerage
or finders' fees or agents' commissions or any similar charges in connection
with the Agreement or any transaction contemplated hereby. Section 2.21 of the
Disclosure Schedule sets forth the Company's current reasonable estimate of all
Estimated Third Party Expenses. The Company's Third Party Expenses shall not
exceed the greater of $200,000 or Estimated Third Party Expenses.
2.22 EMPLOYEE BENEFIT PLANS AND COMPENSATION.
(a) The following terms shall have the meanings set forth below:
(i) "AFFILIATE" shall mean any other person or entity under common
control with the Company within the meaning of Section 414(b), (c),
(m) or (o) of the Code and the regulations issued thereunder;
(ii) "EMPLOYEE PLAN" shall mean any plan, program, policy, practice,
contract, agreement or other arrangement providing for compensation,
severance, termination pay, deferred compensation, performance awards,
stock or stock-related awards, fringe benefits or other employee benefits
or remuneration of any kind, whether written, unwritten or otherwise,
funded or unfunded, including without limitation, each "employee benefit
plan," within the meaning of Section 3(3) of ERISA which is or has been
maintained, contributed to, or required to be contributed to, by the
Company or any Affiliate for the benefit of any Employee, or with respect
to which the Company or any Affiliate has or may have any liability or
obligation;
(iii) "COBRA" SHALL MEAN THE CONSOLIDATED OMNIBUS BUDGET
RECONCILIATION ACT OF 1985, AS AMENDED;
(IV) "DOL" shall mean the Department of Labor;
(v) "EMPLOYEE" shall mean any current or former employee, consultant
or director of the Company or any Affiliate;
(vi) "EMPLOYEE AGREEMENT" shall mean each management, employment,
severance, consulting, relocation, repatriation, expatriation, visa, work
permit or other agreement, contract or understanding between the Company
or any Affiliate and any Employee;
(vii) "ERISA" shall mean the Employee Retirement Income Security Act
of 1974, as amended;
(viii) "FMLA" shall mean the Family Medical Leave Act of 1993, as
amended;
(ix) "IRS" shall mean the Internal Revenue Service;
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(x) "PBGC" shall mean the Pension Benefit Guaranty Corporation; and
(xi) "PENSION PLAN" shall mean each Employee Plan which is an
"employee pension benefit plan," within the meaning of Section 3(2) of
ERISA.
(b) SCHEDULE. Schedule 2.22(b) contains an accurate and complete list
of each Employee Plan and each Employee Agreement under each Employee Plan
or Employee Agreement. The Company has no plan or commitment to establish
any new Employee Plan or Employee Agreement, to modify any Employee Plan or
Employee Agreement (except to the extent required by law or to conform any
such Employee Plan or Employee Agreement to the requirements of any
applicable law, in each case as previously disclosed to Parent in writing,
or as required by this Agreement), or to enter into any Employee Plan or
Employee Agreement.
(c) DOCUMENTS. The Company has provided to Parent: (i) correct and
complete copies of all documents embodying each Employee Plan and each
Employee Agreement including (without limitation) all amendments thereto and
all related trust documents; (ii) the three (3) most recent annual reports
(Form Series 5500 and all schedules and financial statements attached
thereto), if any, required under ERISA or the Code in connection with each
Employee Plan; (iii) if the Employee Plan is funded, the most recent annual
and periodic accounting of Employee Plan assets; (iv) the most recent
summary plan description together with the summary(ies) of material
modifications thereto, if any, required under ERISA with respect to each
Employee Plan; (v) all material written agreements and contracts relating to
each Employee Plan, including, but not limited to, administrative service
agreements and group insurance contracts; (vi) all communications material
to any Employee or Employees relating to any Employee Plan and any proposed
Employee Plans, in each case, relating to any amendments, terminations,
establishments, increases or decreases in benefits, acceleration of payments
or vesting schedules or other events which would result in any liability to
the Company; (vii) all correspondence to or from any governmental agency
relating to any Employee Plan; (viii) all COBRA forms and related notices;
(ix) all policies pertaining to fiduciary liability insurance covering the
fiduciaries for each Employee Plan; (x) all discrimination tests for each
Employee Plan for the most recent plan year; and (xi) all registration
statements, annual reports (Form 11-K and all attachments thereto) and
prospectuses prepared in connection with each Employee Plan.
(d) EMPLOYEE PLAN COMPLIANCE. (i) The Company has performed all
obligations required to be performed by it under, is not in default or
violation of, and has no knowledge of any default or violation by any other
party to each Employee Plan, and each Employee Plan has been established and
maintained in accordance with its terms and in compliance with all
applicable laws, statutes, orders, rules and regulations, including but not
limited to ERISA or the Code; (ii) no "prohibited transaction," within the
meaning of Section 4975 of the Code or Sections 406 and 407 of ERISA, and
not otherwise exempt under Section 408 of ERISA, has occurred with respect
to any Employee Plan; (iii) there are no actions, suits or claims pending,
or, to the knowledge of the Company or the Principal Shareholders,
threatened or reasonably anticipated (other than routine claims for
benefits) against any Employee Plan or against the assets of any Employee
Plan; (iv) each Employee Plan can be amended, terminated or otherwise
discontinued after the Effective Time in accordance with its terms, without
liability to Parent, the Company or any Affiliate (other than ordinary
administration expenses); (v) there are no audits, inquiries or proceedings
pending or, to the knowledge of the Company or the Principal Shareholders or
any Affiliates, threatened by the IRS or DOL with respect to any Employee
Plan; and (vi) neither the Company nor any Affiliate is subject to any
penalty or tax with respect to any Employee Plan under Section 502(i) of
ERISA or Sections 4975 through 4980 of the Code.
(e) NO PENSION PLANS. Neither the Company nor any Affiliate has ever
maintained, established, sponsored, participated in, or contributed to, any
Pension Plan.
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(f) NO POST-EMPLOYMENT OBLIGATIONS. No Employee Plan provides, or
reflects or represents any liability to provide, retiree life insurance,
retiree health or other retiree employee welfare benefits to any person for
any reason, except as may be required by COBRA or other applicable statute,
and the Company has never represented, promised or contracted (whether in
oral or written form) to any Employee (either individually or to Employees
as a group) or any other person that such Employee(s) or other person would
be provided with retiree life insurance, retiree health or other retiree
employee welfare benefit, except to the extent required by statute.
(g) COBRA. Neither the Company nor any Affiliate has, prior to the
Effective Time, violated any of the health care continuation requirements of
COBRA, the requirements of FMLA or any similar provisions of state law
applicable to its Employees.
(h) EFFECT OF TRANSACTION. The execution of this Agreement and the
consummation of the transactions contemplated hereby will not (either alone
or upon the occurrence of any additional or subsequent events) constitute an
event under any Employee Plan, Employee Agreement, trust or loan that will
or may result in any payment (whether of severance pay or otherwise),
acceleration, forgiveness of indebtedness, vesting, distribution, increase
in benefits or obligation to fund benefits with respect to any Employee.
(i) EMPLOYMENT MATTERS. The Company: (i) is in compliance with all
applicable foreign, federal, state and local laws, rules and regulations
respecting employment, employment practices, terms and conditions of
employment and wages and hours, in each case, with respect to Employees;
(ii) has withheld and reported all amounts required by law or by agreement
to be withheld and reported with respect to wages, salaries and other
payments to Employees; (iii) is not liable for any arrears of wages or any
taxes or any penalty for failure to comply with any of the foregoing; and
(iv) is not liable for any payment to any trust or other fund governed by or
maintained by or on behalf of any governmental authority, with respect to
unemployment compensation benefits, social security or other benefits or
obligations for Employees (other than routine payments to be made in the
normal course of business and consistent with past practice). There are no
pending or, to the knowledge of the Company or the Principal Shareholders,
threatened or reasonably anticipated claims or actions against the Company
under any worker's compensation policy or long-term disability policy.
(j) LABOR. No work stoppage or labor strike against the Company is
pending, or to the knowledge of the Company or the Principal Shareholders,
threatened or reasonably anticipated. The Company does not know of any
activities or proceedings of any labor union to organize any Employees.
There are no actions, suits, claims, labor disputes or grievances pending,
or, to the knowledge of the Company or the Principal Shareholders,
threatened or reasonably anticipated relating to any labor, safety or
discrimination matters involving any Employee, including, without
limitation, charges of unfair labor practices or discrimination complaints.
The Company has not engaged in any unfair labor practices within the meaning
of the National Labor Relations Act. The Company is not presently, nor has
either been in the past, a party to, or bound by, any collective bargaining
agreement or union contract with respect to Employees and no collective
bargaining agreement is being negotiated by the Company.
(k) NO INTERFERENCE OR CONFLICT. To the knowledge of the Company and
the Principal Shareholders, no shareholder, officer, employee or consultant
of the Company is obligated under any contract or agreement subject to any
judgment, decree or order of any court or administrative agency that would
interfere with such person's efforts to promote the interests of the Company
or that would interfere with the Company's business. Neither the execution
nor delivery of this Agreement, nor the carrying on of the Company's
business as presently conducted or presently proposed to be conducted nor
any activity of such officers, directors, employees or consultants in
connection with the carrying on of the Company's business as presently
conducted or currently proposed to be conducted, will, to the Company's and
the Principal Shareholders' knowledge,
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conflict with or result in a breach of the terms, conditions or provisions
of, or constitute a default under, any contract or agreement under which any
of such officers, directors, employees or consultants is now bound.
2.23 INSURANCE. Section 2.23 of the Disclosure Schedule lists all
insurance policies and fidelity bonds covering the assets, business, equipment,
properties, operations, employees, officers and directors of the Company. There
is no claim by the Company pending under any of such policies or bonds as to
which coverage has been questioned, denied or disputed by the underwriters of
such policies or bonds. All premiums due and payable under all such policies and
bonds have been paid, and the Company is otherwise in compliance with the terms
of such policies and bonds (or other policies and bonds providing substantially
similar insurance coverage). Neither the Company nor the Principal Shareholders
has Knowledge of any threatened termination of, or premium increase with respect
to, any of such policies.
2.24 COMPLIANCE WITH LAWS. The Company has complied with, is not in
violation of, and has not received any notices of violation with respect to, any
material foreign, federal, state or local statute, law or regulation.
2.25 WARRANTIES; INDEMNITIES. Except for the warranties and indemnities
contained in (i) those contracts and agreements set forth in Section 2.13(g) of
the Disclosure Schedule and (ii) the Company's shrink wrap license agreements
substantially in the form set forth in Section 2.13(d) of the Disclosure
Schedule, the Company has not given any warranties or indemnities relating to
products or technology sold or licensed or services rendered by the Company.
2.26 COMPLETE COPIES OF MATERIALS. The Company has delivered or made
available true and complete copies of each document (or summaries of same) that
has been requested by Parent or its counsel.
2.27 STATEMENTS; PROXY STATEMENT. The information supplied by the Company
for inclusion in the Registration Statement (as defined in Section 5.1(a)) shall
not at the time the Registration Statement is filed with the SEC and at the time
it becomes effective under the Securities Act of 1933, as amended (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 not misleading. The information supplied by the
Company for inclusion in the Proxy Statement (as defined in Section 5.1(a)) to
be sent to the Shareholders shall not, on the date the Proxy Statement is first
mailed to the Shareholders and at the Effective Time, 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 light of
the circumstances under which they are made, not false or misleading; or omit to
state any material fact necessary to correct any statement in any earlier
communication with respect to the solicitation of proxies or consents for
approval of the this Agreement which has become false or misleading. If at any
time prior to the Effective Time, any event relating to the Company or any of
its affiliates, officers or directors should be discovered by the Company which
should be set forth in an amendment to the Registration Statement or a
supplement to the Proxy Statement, the Company shall promptly inform Parent.
Notwithstanding the foregoing, the Company makes no representation or warranty
with respect to any information supplied by Parent or Merger Sub which is
contained in any of the foregoing documents.
2.28 POOLING OF INTERESTS. To the knowledge of the Company and the
Principal Shareholders, based on consultation with the Company's independent
accountants, neither the Company nor any of its directors, officers or
affiliates has taken any action which would interfere with (i) Parent's ability
to account for the Merger as a pooling of interests for financial accounting
purposes or (ii) Parent's, Surviving Corporation's or the Company's ability to
continue to account for as a pooling of interests any past acquisition by the
Company currently accounted for as a pooling of interests.
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2.29 REPRESENTATIONS COMPLETE. None of the representations or warranties
made by the Company or the Principal Shareholders (as modified by the Disclosure
Schedule), nor any statement made in any Schedule or certificate furnished by
the Company or the Principal Shareholders pursuant to this Agreement or
furnished in or in connection with documents mailed or delivered to the
Shareholders for use in soliciting their consent to this Agreement and the
Merger contains or will contain at the Effective Time, any untrue statement of a
material fact, or omits or will omit at the Effective Time to state any material
fact necessary in order to make the statements contained herein or therein, in
the light of the circumstances under which made, not misleading.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB
Parent and Merger Sub represent and warrant to the Company that on the date
hereof, and as of the Effective Time as though made on the date hereof, except
as otherwise disclosed on the Parent Disclosure Schedules attached hereto as
EXHIBIT D-2 as follows:
3.1 ORGANIZATION, STANDING AND POWER. Parent is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. Sub is a corporation duly organized, validly existing and in good
standing under the laws of the State of California. Each of Parent and Sub 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 Sub to consummate the transactions
contemplated hereby. Parent has made available a true and correct copy of the
Certificate of Incorporation and Bylaws of Parent and the Articles of
Incorporation and Bylaws of Sub, as amended to date, to counsel for the Company.
For all purposes of this Agreement, the term "PARENT MATERIAL ADVERSE EFFECT"
means any change, event or effect that is materially adverse to the business,
assets (including intangible assets), financial condition, or results of
operations of Parent and its subsidiaries taken as a whole.
3.2 AUTHORITY. Each of Parent and Sub has all requisite corporate power
and authority to enter into this Agreement and any Related Agreements to which
it is a party and to consummate the transactions contemplated hereby and
thereby. The execution and delivery of this Agreement and any Related Agreements
to which it is a party and the consummation of the transactions contemplated
hereby and thereby have been duly authorized by all necessary corporate action
on the part of Parent and Sub. This Agreement and any Related Agreements to
which Parent and Sub are parties have been duly executed and delivered by Parent
and Sub and constitutes the valid and binding obligations of Parent and Sub,
enforceable in accordance with their terms, except as such enforceability may be
limited by principles of public policy and subject to the laws of general
application relating to bankruptcy, insolvency and the relief of debtors and
rules of law governing specific performance, injunctive relief or other
equitable remedies.
3.3 NO CONFLICT. The execution and delivery of this Agreement and any
Related Agreements to which it is a party do not, and, the consummation of the
transactions contemplated hereby will not, and the consummation of the
transactions contemplated hereby and thereby will not, conflict with, or result
in any violation of, or default under (with or without notice or lapse of time,
or both), or give rise to a Conflict under (i) any provision of the Certificate
of Incorporation, as amended, and Bylaws of Parent or Sub, (ii) any mortgage,
indenture, lease, contract or other agreement or instrument, permit, concession,
franchise or license to which Parent or any of its respective properties or
assets are subject and which has been filed as an exhibit to Parent's filings
under the Securities Act or the Exchange Act or (iii) any judgment, order,
decree, statute, law, ordinance, rule or regulation applicable to Parent or Sub
or its properties or assets, except where such Conflict will not have a Parent
Material Adverse Effect.
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3.4 CONSENTS. No consent, waiver, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Entity, or any third
party is required by or with respect to Parent or Sub in connection with the
execution and delivery of this Agreement and any Related Agreements to which it
is a party or the consummation of the transactions contemplated hereby and
thereby, except for such consents, waivers, approvals, orders, authorizations,
registrations, declarations and filings as may be required under applicable
securities laws and such consents, waivers, approvals, orders, authorizations,
registrations, declarations and filings which, if not obtained or made, would
not have a Parent Material Adverse Effect.
3.5 CAPITAL STRUCTURE.
(a) The authorized stock of Parent consists of 250,000,000 shares of
Common Stock, $.0001 par value, of which 24,310,821 shares were issued and
outstanding as of September 29, 1999, and 10,000,000 shares of undesignated
Preferred Stock, $.0001 par value. No shares of Preferred Stock are issued
or outstanding. The authorized capital stock of Sub consists of 1,000 shares
of Common Stock, $.001 par value, 1,000 shares of which, as of the date
hereof, are issued and outstanding and are held by Parent. All such shares
of Parent and Sub have been duly authorized, and all such issued and
outstanding shares have been validly issued, are fully paid and
nonassessable and are free of any liens or encumbrances other than any liens
or encumbrances created by or imposed upon the holders thereof. Parent has
also reserved 6,903,144 shares of Common Stock for issuance pursuant to its
employee and director stock and option and stock purchase plans. Except as
set forth in Section 3.5 of the Parent Disclosure Schedule, there are no
other options, warrants, calls, rights, commitments or agreements of any
character to which Parent is a party or by which it is bound obligating
Parent to issue, deliver, sell, repurchase or redeem, or cause to be issued,
delivered, sold, repurchased or redeemed, any shares of the capital stock of
Parent or obligating Parent to grant, extend or enter into any such option,
warrant, call, right, commitment or agreement.
(b) The shares of Parent Common Stock to be issued pursuant to the
Merger will be duly authorized, validly issued, fully paid, non-assessable,
free of any liens or encumbrances and not subject to any preemptive rights
or rights of first refusal created by statute or the Articles of
Incorporation or Bylaws of Parent or Sub or any agreement to which Parent or
Sub is a party or is bound.
3.6 BROKERS' AND FINDERS' FEES. The Parent has not incurred, nor will it
incur, directly or indirectly, any liability for brokerage or finders' fees or
agents' commissions or any similar charges in connection with this Agreement or
any transaction contemplated hereby.
3.7 STATEMENTS; PROXY STATEMENT. The information supplied by Parent for
inclusion in the Registration Statement (as defined in Section 5. 1(a)) shall
not at the time the Registration Statement is filed with the SEC and at the time
it 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 not misleading. The
information supplied by Parent for inclusion in the Proxy Statement (as defined
in Section 5.1(a)) to be sent to the Shareholders shall not, on the date the
Proxy Statement is first mailed to the Shareholders and at the Effective Time,
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 light of the circumstances under which they are made, not false or
misleading; or omit to state any material fact necessary to correct any
statement in any earlier communication with respect to the solicitation of
proxies or consents for approval of the this Agreement which has become false or
misleading. If at any time prior to the Effective Time, any event relating to
Parent or any of its affiliates, officers or directors should be discovered by
Parent which should be set forth in an amendment to the Registration Statement
or a supplement to the Proxy Statement, Parent shall promptly inform the
Company. Notwithstanding the
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foregoing, Parent makes no representation or warranty with respect to any
information supplied by the Company which is contained in any of the foregoing
documents.
3.8 POOLING OF INTERESTS. To its knowledge, based on consultation with its
independent accountants, neither Parent nor any of its directors, officers or
affiliates has taken any action which would interfere with Parent's ability to
account for the Merger as a pooling of interests for financial accounting
purposes.
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1 CONDUCT OF BUSINESS OF THE COMPANY. During the period from the date of
this Agreement and continuing until the earlier of the termination of this
Agreement or the Effective Time, each of the Company and the Principal
Shareholders agree (except to the extent that Parent shall otherwise consent in
writing), to carry on the Company's business in the usual, regular and ordinary
course in substantially the same manner as heretofore conducted, to pay the
debts and Taxes of the Company when due, to pay or perform other obligations
when due, and, to the extent consistent with such business, use their reasonable
best efforts consistent with past practice and policies to preserve intact the
Company's present business organizations, keep available the services of the
Company's present officers and key employees and preserve the Company's
relationships with customers, suppliers, distributors, licensors, licensees, and
others having business dealings with it, all with the goal of preserving
unimpaired the Company's goodwill and ongoing businesses at the Effective Time.
The Company shall promptly notify Parent of any event or occurrence or emergency
not in the ordinary course of business of the Company and any material event
involving the Company. Except as expressly contemplated by this Agreement as set
forth in Section 4.1 of the Disclosure Schedule, the Company shall not, without
the prior written consent of Parent:
(a) Make any expenditures or enter into any commitment or transaction
exceeding $25,000 individually or $100,000 in the aggregate or any
commitment or transaction of the type described in Section 2.9 hereof;
(b) Sell any Company Intellectual Property or enter into any agreement
with respect to the Company Intellectual Property with any person or entity
or with respect to the Intellectual Property of any person or entity,
(ii) buy any Intellectual Property or enter into any agreement with respect
to the Intellectual Property of any person or entity, (iii) enter into any
agreement with respect to development of any Intellectual Property with a
third party;
(c) Sell or enter into any license agreement with respect to the Company
Intellectual Property with any person or entity or buy or enter into any
license agreement with respect to the Intellectual Property of any person or
entity;
(d) Transfer to any person or entity any rights to the Company
Intellectual Property;
(e) Enter into or amend any Contract pursuant to which any other party
is granted marketing, distribution, development or similar rights of any
type or scope with respect to any products or technology of the Company;
(f) Amend or otherwise modify (or agree to do so), except in the
ordinary course of business, or violate the terms of, any of the Contracts
set forth or described in the Disclosure Schedule;
(g) Commence or settle any litigation;
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(h) Declare, set aside or pay any dividends on or make any other
distributions (whether in cash, stock or property) in respect of any of its
capital stock, or split, combine or reclassify any of its capital stock or
issue or authorize the issuance of any other securities in respect of, in
lieu of or in substitution for shares of capital stock of the Company, or
repurchase, redeem or otherwise acquire, directly or indirectly, any shares
of the capital stock of the Company (or options, warrants or other rights
exercisable therefor);
(i) Issue, grant, deliver or sell or authorize or propose the issuance,
grant, delivery or sale of, or purchase or propose the purchase of, any
shares of its capital stock or securities convertible into, or
subscriptions, rights, warrants or options to acquire, or other agreements
or commitments of any character obligating it to issue or purchase any such
shares or other convertible securities.
(j) Cause or permit any amendments to its Articles of Incorporation or
Bylaws;
(k) Acquire or agree to acquire by merging or consolidating with, or by
purchasing any assets or equity securities of, or by any other manner, any
business or any corporation, partnership, association or other business
organization or division thereof, or otherwise acquire or agree to acquire
any assets which are material, individually or in the aggregate, to the
Company's business;
(l) Sell, lease, license or otherwise dispose of any of its properties
or assets, except properties or assets which are not Intellectual Property
in the ordinary course of business and consistent with past practices;
(m) Incur any indebtedness for borrowed money or guarantee any such
indebtedness or issue or sell any debt securities or guarantee any debt
securities of others;
(n) Grant any loans to others or purchase debt securities of others or
amend the terms of any outstanding loan agreement;
(o) Grant any severance or termination pay (i) to any director or
officer or (ii) to any other employee except payments made pursuant to
standard written agreements outstanding on the date hereof and disclosed in
the Disclosure Schedule;
(p) Adopt any employee benefit plan, or enter into any employment
contract, pay or agree to pay any special bonus or special remuneration to
any director or employee, or increase the salaries or wage rates of its
employees;
(q) Revalue any of its assets, including without limitation writing down
the value of inventory or writing off notes or accounts receivable other
than in the ordinary course of business;
(r) Pay, discharge or satisfy, in an amount in excess of $25,000 in any
one case or $100,000 in the aggregate, any claim, liability or obligation
(absolute, accrued, asserted or unasserted, contingent or otherwise), other
than the payment, discharge or satisfaction in the ordinary course of
business of liabilities reflected or reserved against in the Current Balance
Sheet;
(s) Make or change any material election in respect of Taxes, adopt or
change any accounting method in respect of Taxes, enter into any closing
agreement, settle any claim or assessment in respect of Taxes, or consent to
any extension or waiver of the limitation period applicable to any claim or
assessment in respect of Taxes;
(t) Enter into any strategic alliance or joint marketing arrangement or
agreement;
(u) Other than as specifically requested in writing by Parent,
accelerate the vesting schedule of any of the outstanding Company Options or
Company Capital Stock;
(v) Hire or terminate employees or encourage employees to resign; or
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(w) Take, or agree in writing or otherwise to take, any of the actions
described in Sections 4.1(a) through (v) above, or any other action that
would prevent the Company from performing or cause the Company not to
perform its covenants hereunder.
4.2 NO SOLICITATION. Until the earlier of the Effective Time or the date
of termination of this Agreement pursuant to the provisions of Section 8.1
hereof, neither the Company nor any of the Principal Shareholders (nor will the
Company nor any of the Principal Shareholders permit any of their respective
officers, directors, agents, representatives or affiliates, as applicable, to)
directly or indirectly, take any of the following actions with any party other
than Parent and its designees: (a) solicit, encourage, initiate or participate
in any negotiations or discussions with respect to, any offer or proposal to
acquire all, substantially all or a significant portion of the Company's
business, properties or technologies or any portion of the Company's capital
stock (whether or not outstanding) whether by merger, purchase of assets, tender
offer or otherwise, or effect any such transaction, (b) disclose any information
not customarily disclosed to any person concerning the Company's business,
technologies or properties or afford to any person or entity access to its
properties, technologies, books or records, (c) assist or cooperate with any
person to make any proposal to purchase all or any part of the Company's capital
stock or assets, or (d) enter into any agreement with any person providing for
the acquisition of all or any significant portion of the Company (whether by way
of merger, purchase of assets, tender offer or otherwise). In addition to the
foregoing, if the Company or any of the Principal Shareholders receives, prior
to the Effective Time or the termination of this Agreement, any offer, proposal,
or request relating to any of the above, the Company or the Principal
Shareholders, as applicable, shall immediately notify Parent thereof, including
information as to the identity of the offer or the party making any such offer
or proposal and the specific terms of such offer or proposal, as the case may
be, and such other information related thereto as Parent may reasonably request.
The parties hereto agree that irreparable damage would occur in the event that
the provisions of this Section 4.2 were not performed in accordance with their
specific terms or were otherwise breached. It is accordingly agreed by the
parties that Parent shall be entitled to seek an injunction or injunctions to
prevent breaches of the provisions of this Section 4.2 and to enforce
specifically the terms and provisions hereof in any court of the United States
or any state having jurisdiction, this being in addition to any other remedy to
which Parent may be entitled at law or in equity.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 REGISTRATION STATEMENT; SHAREHOLDER APPROVAL.
(a) As promptly as practicable after the execution of this Agreement,
the Company shall prepare, with the cooperation of Parent, a proxy statement
(the "PROXY STATEMENT"), and Parent will prepare and file with the SEC a
registration statement on Form S-4 (the "REGISTRATION STATEMENT") in which
the Proxy Statement will be included as a prospectus. Each of Parent and the
Company shall provide promptly to the other such information concerning its
business and financial statements and affairs as, in the reasonable judgment
of the providing party or its counsel, may be required or appropriate for
inclusion in the Proxy Statement and the Registration Statement, or in any
amendments or supplements thereto, and to cause its counsel and auditors to
cooperate with the other's counsel and auditors in the preparation of the
Proxy Statement and the Registration Statement. Each of the Company and
Parent shall use its respective reasonable best efforts to respond to any
comments of the SEC and have the Registration Statement declared effective
under the Securities Act as promptly as practicable after such filing. The
Company will cause the Proxy Statement to be mailed to the Shareholders, at
the earliest practicable time and in no event later than 10 days after the
Registration Statement is declared effective by the SEC, subject to Parent
approval. As promptly as practicable after the date of this Agreement, the
Company and Parent will prepare and file any other filings required under
the Exchange Act, the Securities Act
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or any other Federal, foreign or Blue Sky laws relating to the Merger and
the transactions contemplated by this Agreement (the "OTHER FILINGS"). Each
of the Company and Parent will notify the other promptly upon the receipt of
any comments from the SEC or its staff and of any request by the SEC or its
staff or any other government officials for amendments or supplements to the
Registration Statement, the Proxy Statement or any Other Filing or for
additional information and will supply the other with copies of all
correspondence between such party or any of its representatives, on the one
hand, and the SEC, or its staff or any other government officials, on the
other hand, with respect to the Registration Statement, the Proxy Statement,
the Merger or any Other Filing. The Proxy Statement, the Registration
Statement and the Other Filings will comply in all material respects with
all applicable requirements of law and the rules and regulations promulgated
thereunder. Whenever any event occurs which is required to be set forth in
an amendment or supplement to the Proxy Statement, the Registration
Statement or any Other Filing, the Company or Parent, as the case may be,
will promptly inform the other of such occurrence and cooperate in filing
with the SEC or its staff or any other government officials, and/or mailing
to the Shareholders, such amendment or supplement.
(b) The Company shall promptly submit this Agreement and the
transactions contemplated hereby to its Shareholders for approval and
adoption as provided by California Law, its Articles of Incorporation and
Bylaws. The Company shall use its best efforts to obtain the consent of its
Shareholders sufficient to approve the Merger and this Agreement and to
enable the Closing to occur as soon as possible. The materials submitted to
the Company's Shareholders shall have been subject to review and approval by
Parent and include information regarding the Company, the terms of the
Merger and this Agreement and the unanimous recommendation of the Board of
Directors of the Company in favor of the Merger and this Agreement.
5.2 ACCESS TO INFORMATION. The Company shall afford Parent and its
accountants, counsel and other representatives, reasonable access during normal
business hours during the period prior to the Effective Time to (a) all of the
Company's properties, books, contracts, commitments and records, (b) all other
information concerning the business, properties and personnel (subject to
restrictions imposed by applicable law) of the Company as Parent may reasonably
request and (c) all key employees of the Company as identified by Parent. The
Company agrees to provide to Parent and its accountants, counsel and other
representatives copies of internal financial statements (including by returns
and supporting documentation) promptly upon request. Parent shall provide the
Company with copies of such publicly available information about Parent as the
Company may request. No information or knowledge obtained in any investigation
pursuant to this Section 5.2 shall affect or be deemed to modify any
representation or warranty contained herein or the conditions to the obligations
of the parties to consummate the Merger.
5.3 CONFIDENTIALITY. Each of the parties hereto hereby agrees that the
information obtained in any investigation pursuant to Section 5.2, or pursuant
to the negotiation and execution of this Agreement or the effectuation of the
transaction contemplated hereby shall be governed by the terms of the
Confidential Disclosure Agreement effective dated June 8, 1999, as amended
June 16, 1999, between the Company and Parent.
5.4 EXPENSES.
(a) Except as set forth in Section 5.4(b), whether or not the Merger is
consummated, all fees and expenses incurred in connection with the Merger
including, without limitation, all legal, accounting, financial advisory,
consulting and all other fees and expenses of third parties ("THIRD PARTY
EXPENSES") incurred by a party in connection with the negotiation and
effectuation of the terms and conditions of this Agreement and the
transactions contemplated hereby, shall be the obligation of the respective
party incurring such fees and expenses.
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(b) In the event that the Merger is consummated, Parent agrees to bear
$200,000 of those Third Party Expenses incurred by the Company (which
$200,000 limitation shall include any Third Party Expenses paid by the
Company prior to the Effective Time), and the Company and the Principal
Shareholders agree that Parent shall have full recourse to the Escrow Fund
(as defined herein) for of all Third Party Expenses of the Company that
exceed the greater of Estimated Third Party Expenses or $200,000.
(c) The Company shall deliver the Estimated Third Party Expenses Letter
to Parent concurrently with the Estimated Closing Balance Sheet.
5.5 PUBLIC DISCLOSURE. Unless otherwise required by law, prior to the
Effective Time, no disclosure (whether or not in response to an inquiry) of the
subject matter of this Agreement shall be made by any party hereto unless
approved by Parent regarding the subject matter of this Agreement prior to
release. Any public announcement by Parent regarding the subject matter of this
Agreement shall be delivered to the Company prior to release.
5.6 CONSENTS. The Company shall use its best efforts to obtain the
consents, waivers, assignments and approvals under any of the Contracts as may
be required in connection with the Merger (all of such consents, waivers and
approvals are set forth in the Disclosure Schedule) so as to preserve all rights
of, and benefits to, the Company thereunder.
5.7 FIRPTA COMPLIANCE. On the Closing Date, the Company shall deliver to
Parent a properly executed statement in a form reasonably acceptable to Parent
for purposes of satisfying Parent's obligations under Treasury Regulation
Section 1. 1445-2(c)(3).
5.8 REASONABLE EFFORTS. Subject to the terms and conditions provided in
this Agreement, each of the parties hereto shall use commercially reasonable
efforts to take promptly, or cause to be taken, all actions, and to do promptly,
or cause to be done, all things necessary, proper or advisable under applicable
laws and regulations to consummate and make effective the transactions
contemplated hereby, to obtain all necessary waivers, consents and approvals and
to effect all necessary registrations and filings and to remove any injunctions
or other impediments or delays, legal or otherwise, in order to consummate and
make effective the transactions contemplated by this Agreement for the purpose
of securing to the parties hereto the benefits contemplated by this Agreement;
provided that Parent shall not be required to agree to any divestiture by Parent
or the Company or any of Parent's subsidiaries or affiliates of shares of
capital stock or of any business, assets or property of Parent or its
subsidiaries or affiliates or of the Company, its affiliates, or the imposition
of any material limitation on the ability of any of them to conduct their
businesses or to own or exercise control of such assets, properties and stock.
5.9 NOTIFICATION OF CERTAIN MATTERS. The Company and the Principal
Shareholders shall give prompt notice to Parent of (i) the occurrence or
non-occurrence of any event, the occurrence or non-occurrence of which is likely
to cause any representation or warranty of the Company or the Principal
Shareholders, respectively, contained in this Agreement to be untrue or
inaccurate at or prior to the Effective Time and (ii) any failure of the Company
or the Principal Shareholders, as the case may be, to comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied by it
hereunder; provided, however, that the delivery of any notice pursuant to this
Section 5.9 shall not limit or otherwise affect any remedies available to the
party receiving such notice. No disclosure by the Company or the Principal
Shareholders pursuant to this Section 5.9, however, shall be deemed to amend or
supplement the Disclosure Schedule or prevent or cure any misrepresentations,
breach of warranty or breach of covenant.
5.10 ADDITIONAL DOCUMENTS AND FURTHER ASSURANCES. Each party hereto, at
the request of another party hereto, shall execute and deliver such other
instruments and do and perform such other acts and
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things as may be necessary or desirable for effecting completely the
consummation of this Agreement and the transactions contemplated hereby.
5.11 EMPLOYEE PLANS. The Company and Parent shall use good faith efforts
to determine which Employee Plans of Company shall be terminated prior to
Closing Date.
5.12 EMPLOYEE BENEFITS. Each employee of the Company who remains an
employee of Parent after the Effective Time shall be eligible, upon completion
of Parent's standard employee background and reference check, upon proof of
appropriate employment authorization from the U.S. Immigration and
Naturalization Service or the U.S. Department of State reflecting a right to
work in the United States, to receive salary and benefits (such as medical
benefits, bonuses, 401(k) and stock options) consistent with Parent's standard
human resource policies.
5.13 RULE 145 AFFILIATE AGREEMENTS. Schedule 5.13 sets forth those persons
who, in the Company's reasonable judgment, are or may be "affiliates" of the
Company within the meaning of Rule 145 (each such person a "RULE 145 AFFILIATE")
promulgated under the Securities Act ("RULE 145"). The Company shall provide
Parent such information and documents as Parent shall reasonably request for
purposes of reviewing such list. The Company shall deliver or cause to be
delivered to Parent, concurrently with the execution of this Agreement (and in
any case prior to the Effective Time) from each of the Rule 145 Affiliates of
the Company, an executed agreement ("RULE 145 AFFILIATE AGREEMENT") in the form
attached hereto as Exhibit G. Parent and Sub shall be entitled to place
appropriate legends on the certificates evidencing any Parent Common Stock to be
received by such Rule 145 Affiliates pursuant to the terms of this Agreement,
and to issue appropriate stop transfer instructions to the transfer agent for
Parent Common Stock, consistent with the terms of such Rule 145 Affiliate
Agreements.
5.14 NO ACTIONS INCONSISTENT WITH TAX-FREE REORGANIZATION. The Company,
Parent and Merger Sub shall (and, following the Effective Time, Parent shall
cause the Company to) take no action with respect to the Capital Stock, assets
or liabilities of the Company that would cause the Merger to fail to qualify as
a "reorganization" within the meaning of Section 368(a) of the Code.
5.15 NASDAQ LISTING. Parent agrees to authorize for listing on the Nasdaq
National Market the shares of Parent Common Stock issuable, and those required
to be reserved for issuance, in connection with the Merger, upon official notice
of issuance.
5.16 FORM S-8. Parent shall file a registration statement on Form S-8 to
register shares of Parent Common Stock issuable upon exercise of assumed Company
Options (other than Company Options in the form of warrants or other investments
issued pursuant to arrangements that are not eligible for registration on
Form S-8) within 90 days after the Closing Date.
5.17 ESTIMATED BALANCE SHEET AND CLOSING BALANCE SHEET. Not fewer than
three days prior to the Closing, the Company shall deliver to Parent the
Estimated Balance Sheet. Not more than 10 business days after the Effective
Time, Parent shall prepare, in good faith, a balance sheet of the Company dated
as of the closing (the "Closing Balance Sheet"). To the extent that (A) the
dollar amount of the Net Assets in the Closing Balance Sheet is less than the
Estimated Net Assets and therefore were not deducted from the Total
Consideration, or (B) there are Third Party Expenses that exceed the greater of
(A) $200,000 or (B) Estimated Third Party Expenses, Parent shall be entitled to
recover the amount of such difference in dollar amount from the Escrow Fund as a
Loss in accordance with the procedures set from in Section 7.3, without regard
to the Basket Amount (as defined in Section 7.3).
5.18 ISSUANCE OF OPTIONS. Parent agrees that it shall issue options to
purchase an aggregated of not fewer than 200,000 shares of Parent Common Stock,
pursuant to option agreements in the Parent's standard form (the "Options") upon
or promptly after the Effective Date to certain Company employees who commence
employment with Parent after the Effective Date. The Options shall have an
exercise price equal to the fair market value of the date of grant, and be
subject to Parent's customary vesting schedule with a vesting commencement date
not later than the Effective Date.
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5.19 CREDIT FACILITY. In the event that (i) this Agreement is still in
full force and effect, and (ii) the Closing has not occurred on or before
December 31, 1999, then Parent shall provide the Company with a secured credit
facility, on arms-length commercial terms, for up to an aggregate of $250,000
per month thereafter, up to a cumulative aggregate of $500,000. If this
Agreement terminates in accordance with its terms, then any principal and
interest owed to the Parent shall be repaid to the Parent in full not later than
180 days after the date of such termination, provided, however, that the Company
may prepay at any time without penalty.
5.20 TERMINATION, WAIVER AND RELEASE OF EMPLOYMENT AGREEMENTS. The Company
shall use its best efforts to provide that its employees listed on
Schedule 5.20 enter into Parent offer letter agreements as provided by Parent to
the Company not more than 10 business days after the date hereof (the "Parent
Offer Letter Agreements").
ARTICLE VI
CONDITIONS TO THE MERGER
6.1 CONDITIONS TO OBLIGATIONS OF EACH PARTY TO EFFECT THE MERGER. The
respective obligations of the Company and Parent to effect the Merger shall be
subject to the satisfaction at or prior to the Effective Time of the following
conditions:
(a) COMPANY SHAREHOLDER APPROVAL. This Agreement shall have been
approved and adopted, and the Merger shall have been duly approved, by the
requisite vote under applicable law, by the Shareholders of Company.
(b) REGISTRATION STATEMENT EFFECTIVE; PROXY STATEMENT. The SEC shall
have declared the Registration Statement effective. 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 the Proxy Statement, shall have been initiated or
threatened in writing by the SEC.
(c) NO ORDER. No Governmental Entity shall have enacted, issued,
promulgated, enforced or entered any statute, rule, regulation, executive
order, decree, injunction or other order (whether temporary, preliminary or
permanent) which is in effect and which has the effect of making the Merger
illegal or otherwise prohibiting consummation of the Merger.
(d) NASDAQ LISTING. The shares of Parent Common Stock issuable to the
Shareholders of Company pursuant to this Agreement and such other shares
required to be reserved for issuance in connection with the Merger shall
have been authorized for listing on Nasdaq upon official notice of issuance.
6.2 CONDITIONS TO OBLIGATIONS OF COMPANY AND THE PRINCIPAL
SHAREHOLDERS. The obligations of the Company and the Principal Shareholders to
consummate and effect this Agreement and the transactions contemplated hereby
shall be subject to the satisfaction at or prior to the Effective Time of each
of the following conditions, any of which may be waived, in writing, exclusively
by the Company:
(a) REPRESENTATIONS, WARRANTIES AND COVENANTS. The representations and
warranties of Parent and Sub in this Agreement shall be true and correct in
all material respects on and as of the Effective Time as though such
representations and warranties were made on and as of such time; provided
however that the failure to satisfy this condition shall only be met if the
cumulative failure of such representations and warranties being true and
correct shall constitute a Parent Material Adverse Effect, and each of
Parent and Sub shall have performed and complied in all material respects
with all covenants and obligations of this Agreement required to be
performed and complied with by it as of the Effective Time.
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(b) NO INJUNCTIONS OR RESTRAINTS; ILLEGALITY. No temporary restraining
order, preliminary or permanent injunction or other order issued by any
court of competent jurisdiction or other legal restraint or prohibition
preventing the consummation of the Merger shall be in effect, nor shall any
proceeding brought by an administrative agency or commission or other
governmental authority or instrumentality, domestic or foreign, seeking any
of the foregoing be pending; nor shall there be any action taken, or any
statute, rule, regulation or order enacted, entered, enforced or deemed
applicable to the Merger, which makes the consummation of the Merger
illegal.
(c) NO MATERIAL ADVERSE CHANGE. There shall not have occurred any
Parent Material Adverse Effect since the date of this Agreement.
(d) CERTIFICATE OF THE PARENT. Company shall have been provided with a
certificate executed on behalf of Parent by an Executive Vice President to
the effect that, as of the Effective Time the conditions set forth in
Section 6.2(a) are true and have been satisfied.
6.3 CONDITIONS TO THE OBLIGATIONS OF PARENT AND SUB. The obligations of
Parent and Sub to consummate and effect this Agreement and the transactions
contemplated hereby shall be subject to the satisfaction at or prior to the
Effective Time of each of the following conditions, any of which may be waived,
in writing, exclusively by Parent:
(a) REPRESENTATIONS, WARRANTIES AND COVENANTS. The representations and
warranties of the Company and the Principal Shareholders in this Agreement
shall be true and correct on and as of the Effective Time as though such
representations and warranties were made on and as of the Effective Time;
provided however that the failure to satisfy this condition shall only be
met if the cumulative failure of such representations and warranties being
true and correct shall constitute a Company Material Adverse Effect;
provided further, however, that any failure of Section B 2.13(a)-(m) of
Section (Intellectual Property) to be true and correct shall automatically
be deemed to be a Company Material Adverse Effect for purposes of this
Section 6.3(a), and the Company and the Principal Shareholders shall have
performed and complied in all material respects with all covenants and
obligations of this Agreement required to be performed and complied with by
them as of the Effective Time.
(b) NO INJUNCTIONS OR RESTRAINTS; ILLEGALITY. No temporary restraining
order, preliminary or permanent injunction or other order issued by any
court of competent jurisdiction or other legal restraint or prohibition
preventing the consummation of the Merger shall be in effect, nor shall any
proceeding brought by an administrative agency or commission or other
governmental authority or instrumentality, domestic or foreign, seeking any
of the foregoing be pending; nor shall there be any action taken, or any
statute, rule, regulation or order enacted, entered, enforced or deemed
applicable to the Merger, which makes the consummation of the Merger
illegal.
(c) CLAIMS. There shall not have occurred any claims (whether or not
asserted in litigation) which may materially and adversely affect the
consummation of the transactions contemplated hereby or may have a Company
Material Adverse Effect. There shall be no BONA FIDE action, suit, claim or
proceeding of any nature pending, or overtly threatened, against the Parent,
Sub or the Company, their respective properties or any of their officers or
directors, arising out of, or in any way connected with, the Merger or the
other transactions contemplated by the terms of this Agreement.
(d) THIRD PARTY CONSENTS. Any and all consents, waivers, assignments
and approvals listed in Section 2.6 of the Disclosure Schedule shall have
been obtained.
(e) LEGAL OPINION. Parent shall have received a legal opinion from Law
Office of Robert D. Cochran, legal counsel to the Company, substantially in
the form of EXHIBIT E hereto.
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(f) NONCOMPETITION AGREEMENTS; AT-WILL EMPLOYMENT; TERMINATION, WAIVER
AND RELEASE OF EMPLOYMENT AGREEMENTS. Andy Lee and Lung Tsai shall have
executed and delivered to Parent a Noncompetition Agreement substantially in
the form attached hereto as EXHIBIT F and both of such Noncompetition
Agreements shall be in full force and effect. In addition Andy Lee and Lung
Tsai and each of the Key Employees shall have entered into "at-will"
employment arrangements reasonably satisfactory to Parent, upon proof of
appropriate employment authorization from the U.S. Immigration and
Naturalization Service or the U.S. Department of State reflecting a right to
work in the United States, and subject to and in compliance with Parent's
standard human resources policies and procedures.
(g) NO MATERIAL ADVERSE CHANGES. There shall not have occurred any
event or condition of any character that has had or is reasonably likely to
have a Company Material Adverse Effect since the date of this Agreement.
(h) ESTIMATED BALANCE SHEET. Parent shall have received from the
Company at least three business days prior to the Closing Date a balance
sheet of the Company as of the Closing Date certified as to correctness by
the Company and the Principal Shareholders.
(i) SHAREHOLDER APPROVAL; DISSENTERS. Shareholders holding at least
ninety-five percent (95%) of the Company's Capital Stock shall have approved
this Agreement, the Merger and the transactions contemplated hereby and
thereby (i.e., no shareholder shall have exercised appraisal rights under
California law). Shareholders shall have approved by the requisite vote any
amounts of the Total Consideration received or to be received in exchange
for Company Capital Stock that may be deemed to constitute "parachute
payments" pursuant to Section 280G of the Code, such that all such payments,
sales and purchases resulting from the transactions contemplated hereby
shall not be deemed to be "parachute payments" pursuant to Section 280G of
the Code or shall be exempt from such treatment under such Section of the
Code.
(j) AFFILIATE AGREEMENTS. Each Rule 145 Affiliate of the Company shall
have entered into a Rule 145 Affiliate Agreement and each of such agreements
will be in full force and effect as of the Effective Time.
(k) OPINIONS OF ACCOUNTANTS. Parent shall have received (i) from
PricewaterhouseCoopers LLP, independent auditors for the Company, a copy of
a letter addressed to the Company dated as of the Closing Date in substance
reasonably satisfactory to Parent (which may contain customary
qualifications and assumptions) to the effect that PricewaterhouseCoopers
LLP concurs with Company management's conclusion that no conditions exist
related to the Company that would preclude Parent from accounting for the
Merger as a "pooling-of-interests" and (ii) from PricewaterhouseCoopers LLP,
independent accountants for Parent, a letter dated as of the Closing Date in
substance reasonably satisfactory to Parent (which may contain customary
qualifications and assumptions) to the effect that PricewaterhouseCoopers
LLP concurs with Parent management's conclusion that no conditions exist
related to Parent that would preclude Parent from accounting for the Merger
as a "pooling-of-interests."
(l) CERTIFICATE OF THE COMPANY AND PRINCIPAL SHAREHOLDERS. Parent shall
have been provided with a certificate executed by the Principal Shareholders
and executed on behalf of the Company by its Chief Executive Officer to the
effect that, as of the Effective Time the conditions set forth in
Section 6.3(a), (c), (d) and (i) are true and have been satisfied.
ARTICLE VII
SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION
7.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The Company's and the
Principal Shareholders' representations and warranties in this Agreement or in
any instrument delivered pursuant to this
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Agreement shall terminate on the third anniversary of the Closing Date;
provided, however, that the representations and warranties set forth in
Section 2.3 shall survive the Closing and continue in perpetuity and the
representations and warranties relating or pertaining to any Tax or Returns
related to such Tax set forth in Section 2.10 hereof, shall survive until
30 days following the expiration of all applicable statutes of limitations, or
extensions thereof, governing each Tax or Returns related to such Tax. All of
the Parent's and Sub's representations and warranties contained herein or in any
instrument delivered pursuant to this Agreement shall terminate at the Effective
Time.
7.2 INDEMNIFICATION. The Company and the Principal Shareholders agree
severally, and not jointly, and with respect to the Principal Shareholders, in
pro rata proportion relative to the aggregate consideration received by the
Principal Stockholders, to indemnify and hold Parent and its officers, directors
and affiliates harmless against all claims, losses, liabilities, damages,
deficiencies, costs and expenses, including reasonable attorneys' fees and
expenses of investigation and defense (hereinafter individually a "LOSS" and
collectively "LOSSES") incurred by Parent, its officers, directors, or
affiliates (including the Surviving Corporation) directly or indirectly as a
result of (i) any inaccuracy or breach of a representation or warranty of the
Company or the Principal Shareholders contained in this Agreement or (ii) any
failure by the Company or the Principal Shareholders to perform or comply with
any covenant contained in this Agreement. The Shareholders shall not have any
right of contribution from the Company with respect to any Loss claimed by an
indemnified party after the Effective Time, however, in no event shall any
Principal Shareholder be liable for an amount in excess of the value of the
consideration which such Principal Shareholder received in connection with the
Merger.
7.3 ESCROW ARRANGEMENTS.
(A) ESCROW FUND. As security for the indemnity provided for in
Section 7.2 hereof and by virtue of this Agreement and the Merger Agreement,
the Company and the Shareholders will be deemed to have received and
deposited with the Escrow Agent (as defined below) the Escrow Amount (as
defined below) (plus any additional shares as may be issued upon any stock
split, stock dividend or recapitalization effected by Parent after the
Effective Time with respect to the Escrow Amount) without any act of the
Company or any Shareholders. As soon as practicable after the Effective
Time, the Escrow Amount, without any act of any Shareholders, will be
deposited with U.S. Bank Trust, N.A. (or other institution acceptable to
Parent and the Securityholder Agent (as defined in Section 7.3(g) below)) as
Escrow Agent (the "ESCROW AGENT"), such deposit to constitute an escrow fund
(the "ESCROW FUND") to be governed by the terms set forth herein. The Escrow
Agent may execute this Agreement following the date hereof and prior to the
Effective Time, and such latter execution shall not affect the binding
nature of this Agreement as of the date hereof among the signatories hereto.
Nothing herein shall limit the liability of the Company for any breach of
any representation, warranty, or covenant contained in this Agreement if the
Merger does not close. Parent may not receive any shares from the Escrow
Fund unless and until Officer's Certificates (as defined in
paragraph (d)(i) below) identifying Losses, in excess of $100,000 (the
"Basket Amount") have been delivered to the Escrow Agent as provided in
paragraph (d) below, in which case Parent shall be entitled to recover all
Losses including the Basket Amount; PROVIDED, HOWEVER, with respect to each
of: (i) Third Party Expenses in excess of the greater of (A) Estimated Third
Party Expenses or (B) $200,000, and (ii) Net Assets as of the Closing Date
less than the lesser of (A) Estimated Net Assets or (B) $250,000, each as
determined from the Closing Balance Sheet and therefore not previously
deducted from the Total Consideration, the aforementioned $100,000 Basket
Amount shall not be applicable for purposes of claims of Losses against the
Escrow Amount.
(b) ESCROW PERIOD; DISTRIBUTION UPON TERMINATION OF ESCROW
PERIODS. Subject to the following requirements, the Escrow Fund shall be in
existence immediately following the Effective Time and shall terminate at
5:00 p.m., P.S.T., on the date of the issuance by Parent's independent
auditors of a signed report in respect of Parent's audited financial
statements for the fiscal year ending
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February 29, 2000 (the "ESCROW PERIOD"); provided that the Escrow Period
shall not terminate with respect to such remaining portion of the Escrow
Fund (or some portion thereof) that in the reasonable judgement of Parent,
subject to the objection of the Securityholder Agent (as defined below) and
the subsequent arbitration of the matter in the manner provided in
Section 7.3(f) hereof, is necessary to satisfy (x) any then pending
unsatisfied claims specified in any Officer's Certificate delivered to the
Escrow Agent prior to the termination of the Escrow Period and (y) any
unsatisfied claims specified in any Officer's Certificate delivered to the
Escrow Agent prior to termination of the Escrow Period with respect to facts
and circumstances existing prior to the termination of such Escrow Period.
As soon as all such claims have been resolved and all Third Party Expenses
and Net Liabilities have been paid pursuant to Section 5.4 and Section 5.17
hereof, the Escrow Agent shall deliver to the Shareholders the remaining
portion of the Escrow Fund not required to satisfy such claims and Third
Party Expenses and any shortfall of Net Assets. Deliveries of Escrow Amounts
to the Shareholders pursuant to this Section 7.3(b) shall be made in
proportion to their respective original contributions to the Escrow Fund.
(c) PROTECTION OF ESCROW FUND.
(i) The Escrow Agent shall hold and safeguard the Escrow Fund during
the Escrow Period, shall treat such fund as a trust fund in accordance
with the terms of this Agreement and not as the property of Parent and
shall hold and dispose of the Escrow Fund only in accordance with the
terms hereof.
(ii) Any shares of Parent Common Stock or other equity securities
issued or distributed by Parent (including shares issued upon a stock
split) ("NEW SHARES") in respect of Parent Common Stock in the Escrow
Fund which have not been released from the Escrow Fund shall be added to
the Escrow Fund and become a part thereof. New Shares issued in respect
of shares of Parent Common Stock which have been released from the Escrow
Fund shall not be added to the Escrow Fund but shall be distributed to
the record holders thereof. Cash dividends on Parent Common Stock, if
any, shall not be added to the Escrow Fund but shall be distributed to
the record holders thereof.
(iii) Each Shareholder shall have voting rights and the right to
distributions of dividends with respect to the shares of Parent Common
Stock contributed to the Escrow Fund by such Shareholders (and on any
voting securities added to the Escrow Fund in respect of such shares of
Parent Common Stock). As the record holder of such shares, the Escrow
Agent shall vote such shares in accordance with the instructions of the
Shareholders having the beneficial interest therein and shall promptly
deliver copies of all proxy solicitation materials to such Shareholders.
Parent shall show the Parent Common Stock contributed to the Escrow Fund
as issued and outstanding on its balance sheet.
(d) CLAIMS UPON ESCROW FUND.
(i) Upon receipt by the Escrow Agent at any time on or before the
last day of the Escrow Period of a certificate signed by any officer of
Parent (an "OFFICER'S CERTIFICATE"): (A) stating that Parent has paid or
properly accrued or reasonably anticipates that it will have to pay or
accrue Losses, and (B) specifying in reasonable detail the individual
items of Losses included in the amount so stated, the date each such item
was paid or properly accrued, or the basis for such anticipated
liability, and the nature of the misrepresentations, breach of warranty
or covenant to which such items is related, the Escrow Agent shall,
subject to the provisions of Section 7.3(e), deliver to Parent out of the
Escrow Fund as promptly as practicable, shares of Parent Common Stock
held in the Escrow Fund in an amount equal to such Losses.
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(ii) For the purposes of determining the number of shares of Parent
Common Stock to be delivered to Parent out of the Escrow Fund as
indemnity pursuant to Section 7.3(b) and 7.3(d)(i) hereof, the shares of
Parent Common Stock shall be valued at the Trading Price.
(e) OBJECTIONS TO CLAIMS. At the time of delivery of any Officer's
Certificate to the Escrow Agent, a duplicate copy of such certificate shall
be delivered to the Securityholder Agent and for a period of thirty
(30) days after such delivery, the Escrow Agent shall make no delivery to
Parent of any Escrow Amounts pursuant to Section 7.3(d) hereof unless the
Escrow Agent shall have received written authorization from the
Securityholder Agent to make such delivery. After the expiration of such
thirty (30) day period, the Escrow Agent shall make delivery of shares of
Parent Common Stock from the Escrow Fund in accordance with Section 7.3(d)
hereof, provided that no such payment or delivery may be made if the
Securityholder Agent shall object in a written statement to the claim made
in the Officer's Certificate, and such statement shall have been delivered
to the Escrow Agent prior to the expiration of such thirty (30) day period.
(f) RESOLUTION OF CONFLICTS; ARBITRATION.
(i) In case the Securityholder Agent shall so object in writing to
any claim or claims made in any Officer's Certificate, the Securityholder
Agent and Parent shall attempt in good faith to agree upon the rights of
the respective parties with respect to each of such claims. If the
Securityholder Agent and Parent should so agree, a memorandum setting
forth such agreement shall be prepared and signed by both parties and
shall be furnished to the Escrow Agent. The Escrow Agent shall be
entitled to rely on any such memorandum and distribute shares of Parent
Common Stock from the Escrow Fund in accordance with the terms thereof.
(ii) If no such agreement can be reached after good faith
negotiation, either Parent or the Securityholder Agent may demand
arbitration of the matter unless the amount of the damage or loss is at
issue in pending litigation with a third party, in which event
arbitration shall not be commenced until such amount is ascertained or
both parties agree to arbitration; and in either such event the matter
shall be settled by arbitration conducted by one arbitrator mutually
agreeable to Parent and the Securityholder Agent. In the event that
within forty-five (45) days after submission of any dispute to
arbitration, Parent and the Securityholder Agent cannot mutually agree on
one arbitrator, Parent and the Securityholder Agent shall each select one
arbitrator, and the two arbitrators so selected shall select a third
arbitrator. The arbitrator or arbitrators, as the case may be, shall set
a limited time period and establish procedures designed to reduce the
cost and time for discovery while allowing the parties an opportunity,
adequate in the sole judgement of the arbitrator or majority of the three
arbitrators, as the case may be, to discover relevant information from
the opposing parties about the subject matter of the dispute. The
arbitrator or a majority of the three arbitrators, as the case may be,
shall rule upon motions to compel or limit discovery and shall have the
authority to impose sanctions, including attorneys' fees and costs, to
the extent as a court of competent law or equity, should the arbitrator
or a majority of the three arbitrators, as the case may be, determine
that discovery was sought without substantial justification or that
discovery was refused or objected to without substantial justification.
The decision of a the arbitrator or a majority of the three arbitrators,
as the case may be, as to the validity and amount of any claim in such
Officer's Certificate shall be binding and conclusive upon the parties to
this Agreement, and notwithstanding anything in Section 7.3(e) hereof,
the Escrow Agent shall be entitled to act in accordance with such
decision and make or withhold payments out of the Escrow Fund in
accordance therewith. Such decision shall be written and shall be
supported by written findings of fact and conclusions which shall set
forth the award, judgment, decree or order awarded by the arbitrator(s).
(iii) Judgment upon any award rendered by the arbitrator(s) may be
entered in any court having jurisdiction. Any such arbitration shall be
held in Contra Costa County, California
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under the rules then in effect of the American Arbitration Association.
The arbitrator(s) shall determine how all expenses relating to the
arbitration shall be paid, including without limitation, the respective
expenses of each party, the fees of each arbitrator and the
administrative fee of the American Arbitration Association.
(g) SECURITYHOLDER AGENT OF THE SHAREHOLDERS; POWER OF ATTORNEY.
(i) In the event that the Merger is approved, effective upon such
vote, and without further act of any Shareholders, Lung Chin Tsai shall
be appointed as agent and attorney-in-fact (the "SECURITYHOLDER AGENT")
for each Shareholder of the Company, for and on behalf of Shareholders,
to give and receive notices and communications, to authorize delivery to
Parent of shares of Parent Common Stock from the Escrow Fund in
satisfaction of claims by Parent, to object to such deliveries, to agree
to, negotiate, enter into settlements and compromises of, and demand
arbitration and comply with orders of courts and awards of arbitrators
with respect to such claims, and to take all actions necessary or
appropriate in the judgment of Securityholder Agent for the
accomplishment of the foregoing. Such agency may be changed by the
Shareholders from time to time upon not less than thirty (30) days prior
written notice to Parent; provided that the Securityholder Agent may not
be removed unless holders of a majority interest of the Escrow Fund agree
to such removal and to the identity of the substituted agent. No bond
shall be required of the Securityholder Agent, and the Securityholder
Agent shall not receive compensation for his or her services. Notices or
communications to or from the Securityholder Agent shall constitute
notice to or from each of the Shareholders.
(ii) The Securityholder Agent shall not be liable for any act done or
omitted hereunder as Securityholder Agent while acting in good faith and
in the exercise of reasonable judgment. The Shareholders on whose behalf
the Escrow Amount was contributed to the Escrow Fund shall severally
indemnify the Securityholder Agent and hold the Securityholder Agent
harmless against any loss, liability or expense incurred without
negligence or bad faith on the part of the Securityholder Agent and
arising out of or in connection with the acceptance or administration of
the Securityholder Agent's duties hereunder, including the reasonable
fees and expenses of any legal counsel retained by the Securityholder
Agent.
(h) ACTIONS OF THE SECURITYHOLDER AGENT. A decision, act, consent or
instruction of the Securityholder Agent shall constitute a decision of all
the Shareholders for whom a portion of the Escrow Amount otherwise issuable
to them are deposited in the Escrow Fund and shall be final, binding and
conclusive upon each of such Shareholders, and the Escrow Agent and Parent
may rely upon any such decision, act, consent or instruction of the
Securityholder Agent as being the decision, act, consent or instruction of
each and every such Shareholder. The Escrow Agent and Parent are hereby
relieved from any liability to any person for any acts done by them in
accordance with such decision, act, consent or instruction of the
Securityholder Agent.
(i) THIRD-PARTY CLAIMS. In the event Parent becomes aware of a
third-party claim which Parent believes may result in a demand against the
Escrow Fund, Parent shall notify the Securityholder Agent of such claim, and
the Securityholder Agent and the Shareholders of the Company shall be
entitled, at their expense, to participate in any defense of such claim.
Parent shall have the right in its sole discretion to settle any such claim;
provided, however, that except with the consent of the Securityholder Agent,
no settlement of any such claim with third-party claimants shall be
determinative of the amount of any claim against the Escrow Fund. In the
event that the Securityholder Agent has consented to any such settlement,
the Securityholder Agent shall have no power or authority to object under
any provision of this Article VII to the amount of any claim by Parent
against the Escrow Fund with respect to such settlement.
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(j) ESCROW AGENT'S DUTIES.
(i) The Escrow Agent shall be obligated only for the performance of
such duties as are specifically set forth herein, and as set forth in any
additional written escrow instructions which the Escrow Agent may receive
after the date of this Agreement which are signed by an officer of Parent
and the Securityholder Agent, and may rely and shall be protected in
relying or refraining from acting on any instrument reasonably believed
to be genuine and to have been signed or presented by the proper party or
parties. The Escrow Agent shall not be liable for any act done or omitted
hereunder as Escrow Agent while acting in good faith and in the exercise
of reasonable judgment, and any act done or omitted pursuant to the
advice of counsel shall be conclusive evidence of such good faith.
(ii) The Escrow Agent is hereby expressly authorized to disregard any
and all warnings given by any of the parties hereto or by any other
person, excepting only orders or process of courts of law, and is hereby
expressly authorized to comply with and obey orders, judgments or decrees
of any court. In case the Escrow Agent obeys or complies with any such
order, judgment or decree of any court, the Escrow Agent shall not be
liable to any of the parties hereto or to any other person by reason of
such compliance, notwithstanding any such order, judgment or decree being
subsequently reversed, modified, annulled, set aside, vacated or found to
have been entered without jurisdiction.
(iii) The Escrow Agent shall not be liable in any respect on account
of the identity, authority or rights of the parties executing or
delivering or purporting to execute or deliver this Agreement or any
documents or papers deposited or called for hereunder.
(iv) The Escrow Agent shall not be liable for the expiration of any
rights under any statute of limitations with respect to this Agreement or
any documents deposited with the Escrow Agent.
(v) In performing any duties under the Agreement, the Escrow Agent
shall not be liable to any party for damages, losses, or expenses, except
for negligence or willful misconduct on the part of the Escrow Agent. The
Escrow Agent shall not incur any such liability for (A) any act or
failure to act made or omitted in good faith, or (B) any action taken or
omitted in reliance upon any instrument, including any written statement
of affidavit provided for in this Agreement that the Escrow Agent shall
in good faith believe to be genuine, nor will the Escrow Agent be liable
or responsible for forgeries, fraud, impersonations, or determining the
scope of any representative authority. In addition, the Escrow Agent may
consult with the legal counsel in connection with Escrow Agent's duties
under this Agreement and shall be fully protected in any act taken,
suffered, or permitted by him/her in good faith in accordance with the
advice of counsel. The Escrow Agent is not responsible for determining
and verifying the authority of any person acting or purporting to act on
behalf of any party to this Agreement.
(vi) If any controversy arises between the parties to this Agreement,
or with any other party, concerning the subject matter of this Agreement,
its terms or conditions, the Escrow Agent will not be required to
determine the controversy or to take any action regarding it. The Escrow
Agent may hold all documents and shares of Parent Common Stock and may
wait for settlement of any such controversy by final appropriate legal
proceedings or other means as, in the Escrow Agent's discretion, the
Escrow Agent may be required, despite what may be set forth elsewhere in
this Agreement. In such event, the Escrow Agent will not be liable for
damages. Furthermore, the Escrow Agent may at its option, file an action
of interpleader requiring the parties to answer and litigate any claims
and rights among themselves. The Escrow Agent is authorized to deposit
with the clerk of the court all documents and shares of Parent Common
Stock held in escrow, except all cost, expenses, charges and reasonable
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<PAGE>
attorney fees incurred by the Escrow Agent due to the interpleader action
and which the parties jointly and severally agree to pay. Upon initiating
such action, the Escrow Agent shall be fully released and discharged of
and from all obligations and liability imposed by the terms of this
Agreement.
(vii) The parties and their respective successors and assigns agree
jointly and severally to indemnify and hold Escrow Agent harmless against
any and all losses, claims, damages, liabilities, and expenses, including
reasonable costs of investigation, counsel fees, including allocated
costs of in-house counsel and disbursements that may be imposed on Escrow
Agent or incurred by Escrow Agent in connection with the performance of
his/her duties under this Agreement, including but not limited to any
litigation arising from this Agreement or involving its subject matter
other than arising out of its negligence or willful misconduct.
(viii) The Escrow Agent may resign at any time upon giving at least
thirty (30) days written notice to Parent and the Securityholder Agent;
provided, however, that no such resignation shall become effective until
the appointment of a successor escrow agent which shall be accomplished
as follows: the parties shall use their best efforts to mutually agree on
a successor escrow agent within thirty (30) days after receiving such
notice. If the parties fail to agree upon a successor escrow agent within
such time, the Escrow Agent shall have the right to appoint a successor
escrow agent authorized to do business in the state of California. The
successor escrow agent shall execute and deliver an instrument accepting
such appointment and it shall, without further acts, be vested with all
the estates, properties, rights, powers, and duties of the predecessor
escrow agent as if originally named as escrow agent. Upon appointment of
a successor escrow agent, the Escrow Agent shall be discharged from any
further duties and liability under this Agreement.
(k) FEES. All fees of the Escrow Agent for performance of its duties
hereunder shall be paid by Parent in accordance with the standard fee
schedule of the Escrow Agent. It is understood that the fees and usual
charges agreed upon for services of the Escrow Agent shall be considered
compensation for ordinary services as contemplated by this Agreement. In the
event that the conditions of this Agreement are not promptly fulfilled, or
if the Escrow Agent renders any service not provided for in this Agreement,
or if the parties request a substantial modification of its terms, or if any
controversy arises, or if the Escrow Agent is made a party to, or intervenes
in, any litigation pertaining to the Escrow Fund or its subject matter, the
Escrow Agent shall be reasonably compensated for such extraordinary services
and reimbursed for all costs, attorney's fees, including allocated costs of
in-house counsel, and expenses occasioned by such default, delay,
controversy or litigation. The Parent promises to pay these sums upon
demand.
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
8.1 TERMINATION. Except as provided in Section 8. 2, this Agreement may be
terminated and the Merger abandoned at any time prior to the Effective Time:
(a) by mutual consent of the Company and Parent;
(b) by Parent or the Company if: (i) the Effective Time has not occurred
by February 29, 2000, PROVIDED, HOWEVER, that the right to terminate this
Agreement under this Section 8.1(b)(i) shall not be available to any party
whose action or 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 this Agreement; (ii) there shall be a
final nonappealable order of a federal or state court in effect preventing
consummation of the Merger; or (iii) there shall be any statute, rule,
regulation or order enacted, promulgated or issued or
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<PAGE>
deemed applicable to the Merger by any Governmental Entity that would make
consummation of the Merger illegal;
(c) by Parent if there shall be any action taken, or any statute, rule,
regulation or order enacted, promulgated or issued or deemed applicable to
the Merger by any Governmental Entity, which would: (i) prohibit Parent's or
Sub's ownership or operation of any portion of the business of the Company
or (ii) compel Parent or the Company to dispose of or hold separate all or a
portion of the business or assets of the Company or Parent as a result of
the Merger;
(d) by Parent if it is not in material breach of its obligations under
this Agreement and there has been a material breach of any representation,
warranty, covenant or agreement contained in this Agreement on the part of
the Company or the Principal Shareholders and such breach has not been cured
within ten (10) calendar days after written notice to the Company; PROVIDED,
HOWEVER, that, no cure period shall be required for a breach which by its
nature cannot be cured; PROVIDED FURTHER, HOWEVER, that a breach or breaches
of representations or warranties must constitute a Company Material Adverse
Effect for this termination right to arise;
(e) by the Company if neither it nor any Principal Shareholder nor any
Key Employee is in material breach of their respective obligations under
this Agreement and there has been a material breach of any representation,
warranty, covenant or agreement contained in this Agreement on the part of
Parent or Sub and such breach has not been cured within ten (10) calendar
days after written notice to Parent; PROVIDED, HOWEVER, that no cure period
shall be required for a breach which by its nature cannot be cured; PROVIDED
FURTHER, HOWEVER, that a breach or breaches of representations and
warranties must constitute a Parent Material Adverse Effect for this
termination right to arise;
(f) by Parent or Sub if an event having a Company Material Adverse
Effect shall have occurred after the date of this Agreement; or
(g) by Company if an event having a Parent Material Adverse Effect shall
have occurred after the date of this Agreement.
8.2 EFFECT OF TERMINATION. In the event of termination of this Agreement
as provided in Section 8.1, this Agreement shall forthwith become void and there
shall be no liability or obligation on the part of Parent, Sub or the Company,
or their respective officers, directors or Shareholders, provided that each
party shall remain liable for any breaches of this Agreement prior to its
termination; provided further that, the provisions of Sections 5.3, 5.4(a) and
5.5, Article IX and this Section 8.2 shall remain in full force and effect and
survive any termination of this Agreement.
8.3 AMENDMENT. This Agreement may be amended by the parties hereto at any
time by execution of an instrument in writing signed on behalf of Parent, Sub,
the Company and the Principal Shareholders.
8.4 EXTENSION; WAIVER. At any time prior to the Effective Time, Parent and
Sub, on the one hand, and the Company and the Principal Shareholders, on the
other hand, may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations of the other party hereto, (ii) waive any
inaccuracies in the representations and warranties made to such party contained
herein or in any document delivered pursuant hereto, and (iii) waive compliance
with any of the agreements or conditions for the benefit of such party contained
herein. Any agreement on the part of a party hereto to any such extension or
waiver shall be valid only if set forth in an instrument in writing signed on
behalf of such party.
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<PAGE>
ARTICLE IX
GENERAL PROVISIONS
9.1 NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or by commercial
messenger or courier service, or mailed by registered or certified mail (return
receipt requested) or sent via facsimile (with acknowledgment of complete
transmission) to the parties at the following addresses (or at such other
address for a party as shall be specified by like notice), PROVIDED, HOWEVER,
that notices sent by mail will not be deemed given until received:
(a) if to Parent or Sub, to:
Intraware, Inc.
25 Orinda Way, Suite 101
Orinda, CA 94563
Attn: Donald M. Freed, Executive Vice President and Chief Financial
Officer
Mark Long, Vice President, Strategic Development
Telephone No.: (925) 253-4500
Facsimile No.: (925) 253-6590
with a copy to:
Wilson Sonsini Goodrich & Rosati
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304
Attention: David J. Segre, Esq.
Adam R. Dolinko, Esq.
Telephone No.: (650) 493-9300
Facsimile No.: (650) 493-6811
(b) if to the Company, to
Internet Image, Inc.
39560 Stevenson Place, Suite 119
Fremont, CA 94539
Attn: Lung Tsai
Telephone No.: (510) 739-2030
Facsimile No.: (510) 739-0703
with a copy to:
Law Office of Robert D. Cochran
2105 Woodside Road
Woodside, CA 94062
Attention: Robert D. Cochran, Esq.
Telephone No.: (650) 298-9901
Facsimile No.: (650) 298-9902
(c) if to the Principal Shareholders, to:
Andy Lee
340 Ohlones Street
Fremont, CA 94539
Telephone No.:
Facsimile No.:
A-42
<PAGE>
TSAI FAMILY TRUST U/D/T dated May 20, 1998
Attn: Lung Chin Tsai and Ling Chu Tsai
7050 Foothill Road
Pleasanton, CA 94566
Telephone No.:
Facsimile No.:
Lung Chin Tsai
7050 Foothill Road
Pleasanton, CA 94566
Telephone No.:
Facsimile No.:
Chao Pin Wang
4f, 82 Liu-Chou Street
Taipei, Taiwan, R.O.C.
C/o 7050 Foothill Road
Pleasanton, CA 94566
Telephone No.:
Facsimile No.:
(d) If to the Escrow Agent, to:
U.S. Bank Trust, N.A.
One California Street, 4th Floor
San Francisco, CA 94111
Attention: Ann Gadsby
Telephone No.: (415) 273-4532
Facsimile No.: (415) 273-4593
(e) If to the Securityholder Agent, to:
Lung Chin Tsai
7050 Foothill Road
Pleasanton, CA 94566
Telephone No.:
Facsimile No.:
9.2 INTERPRETATION. The words "include," "includes" and "including" when
used herein shall be deemed in each case to be followed by the words "without
limitation." The table of contents and headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
9.3 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party, it being understood that all
parties need not sign the same counterpart.
9.4 ENTIRE AGREEMENT; ASSIGNMENT. This Agreement, the Exhibits hereto, the
Confidential Disclosure Agreement between the Company and Parent and the
documents and instruments and other agreements among the parties hereto
referenced herein: (a) constitute the entire agreement among the parties with
respect to the subject matter hereof and supersede all prior agreements and
understandings both written and oral, among the parties with respect to the
subject matter hereof; (b) are not intended to confer upon any other person any
rights or remedies hereunder; and (c) shall not be assigned (other than by
operation of law), except that Parent and Sub may assign their respective rights
and delegate their respective obligations hereunder to their respective
affiliates.
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<PAGE>
9.5 SEVERABILITY. In the event that any provision of this Agreement or the
application thereof, becomes or is declared by a court of competent jurisdiction
to be illegal, void or unenforceable, the remainder of this Agreement will
continue in full force and effect and the application of such provision to other
persons or circumstances will be interpreted so as reasonably to effect the
intent of the parties hereto. The parties further agree to replace such void or
unenforceable provision of this Agreement with a valid and enforceable provision
that will achieve, to the extent possible, the economic, business and other
purposes of such void or unenforceable provision.
9.6 OTHER REMEDIES; SPECIFIC PERFORMANCE. Any and all remedies herein
expressly conferred upon a party will be deemed cumulative with and not
exclusive of any other remedy conferred hereby, or by law or equity upon such
party, and the exercise by a party of any one remedy will not preclude the
exercise of any other remedy. The parties hereto agree that irreparable damage
would occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached. It
is accordingly agreed that the parties shall be entitled to seek an injunction
or injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions hereof in any court of the United States or any state
having jurisdiction, this being in addition to any other remedy to which they
are entitled at law or in equity.
9.7 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of California, regardless of the laws that
might otherwise govern under applicable principles of conflicts of laws thereof.
Each of the parties hereto irrevocably consents to the exclusive jurisdiction
and venue of any court within Contra Costa County, State of California, in
connection with any matter based upon or arising out of this Agreement or the
matters contemplated herein, agrees that process may be served upon them in any
manner authorized by the laws of the State of California for such persons and
waives and covenants not to assert or plead any objection which they might
otherwise have to such jurisdiction, venue and such process. Each of parent,
company and merger sub hereby irrevocably waives all right to trial by jury in
any action, proceeding or counterclaim (whether based on contract, tort or
otherwise) arising out of or relating to this agreement or the actions of
parent, company or merger sub in the negotiation, administration, performance
and enforcement hereof.
9.8 RULES OF CONSTRUCTION. The parties hereto agree that they have been
represented by counsel during the negotiation and execution of this Agreement
and, therefor, waive the application of any law, regulation, holding or rule of
construction providing that ambiguities in an agreement or other document will
be construed against the party drafting such agreement or document.
9.9 ATTORNEYS FEES. If any action or other proceeding relating to the
enforcement of any provision of this Agreement is brought by any party hereto,
the prevailing party shall be entitled to recover reasonable attorneys' fees,
costs and disbursements (in addition to any other relief to which the prevailing
party may be entitled).
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<PAGE>
IN WITNESS WHEREOF, Parent, Sub, the Company and the Principal Shareholders
have caused this Agreement to be signed, all as of the date first written above.
<TABLE>
<S> <C> <C>
INTRAWARE, INC. INTERNET IMAGE, INC.
By: /s/ PETER H. JACKSON By: /s/ ANDY LEE /s/ LUNG C. TSAI
- -------------------------------------- -------------------- Lung C. Tasi
Name: Peter H. Jackson Name: Andy Lee CEO
Title: CEO Title: President &
CTO
TANGO ACQUISITION CORP. PRINCIPAL SHAREHOLDERS
By: /s/ DONALD M. FREED By: /s/ CHAO PING WANG
------------------------------------- -----------------------------------------------
Donald M. Freed Chao Ping Wang
President, Chief Executive Officer, /s/ LUNG TSAI
Chief Financial Officer and Secretary ------------------------------------------------
ESCROW AGENT: Lung Tsai
By: /s/ LUNG CHIU TSAI
------------------------------------- ------------------------------------------------
Name: Lung Chiu Tsai and Ling Chu Tsai, Trustees
Title: of the TSAI FAMILY TRUST U/D/T
SECURITYHOLDER AGENT: dated May 20, 1998
By: /s/ LUNG TSAI
- -------------------------------------
Name: Lung Tsai
</TABLE>
A-45
<PAGE>
ANNEX B
VOTING AGREEMENT
THIS VOTING AGREEMENT (this "AGREEMENT") is made and entered into as of
October 1, 1999, among Intraware, Inc., a Delaware corporation ("PARENT"), and
the undersigned Shareholder and/or option holder (the "SHAREHOLDER") of Internet
Image, Inc., a California corporation (the "COMPANY").
RECITALS
A. The Company, Merger Sub (as defined below) and Parent have entered into
an Agreement and Plan of Reorganization (the "REORGANIZATION AGREEMENT"), which
provides for the merger (the "MERGER") of a wholly-owned subsidiary of Parent
("MERGER SUB") with and into the Company. Pursuant to the Merger, all
outstanding capital stock of the Company shall be converted into the right to
receive common stock of Parent, as set forth in the Reorganization Agreement;
B. Shareholder is the beneficial owner (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT")) of such number
of shares of the outstanding capital stock of the Company and shares subject to
outstanding options and warrants as is indicated on the signature page of this
Agreement; and
C. In consideration of the execution of the Reorganization Agreement by
Parent, Shareholder (in his or her capacity as such) agrees to vote the Shares
(as defined below) and other such shares of capital stock of the Company over
which Shareholder has voting power so as to facilitate consummation of the
Merger.
NOW, THEREFORE, intending to be legally bound, the parties hereto agree as
follows:
1. CERTAIN DEFINITIONS. Capitalized terms not defined herein shall have
the meanings ascribed to them in the Reorganization Agreement. For purposes of
this Agreement:
(a) "EXPIRATION DATE" shall mean the earlier to occur of (i) such date
and time as the Reorganization Agreement shall have been terminated pursuant
to Article VIII thereof, or (ii) such date and time as the Merger shall
become effective in accordance with the terms and provisions of the
Reorganization Agreement.
(b) "PERSON" shall mean any (i) individual, (ii) corporation, limited
liability company, partnership or other entity, or (iii) governmental
authority.
(c) "SHARES" shall mean: (i) all securities of the Company (including
all shares of Company Common Stock or Preferred Stock and all options,
warrants and other rights to acquire shares of Company Common Stock or
Preferred Stock) owned by Shareholder as of the date of this Agreement; and
(ii) all additional securities of the Company (including all additional
shares of Company Common Stock or Preferred Stock and all additional
options, warrants and other rights to acquire shares of Company Common Stock
or Preferred Stock) of which Shareholder acquires ownership during the
period from the date of this Agreement through the Expiration Date.
(d) TRANSFER. A Person shall be deemed to have effected a "TRANSFER" of
a security if such person directly or indirectly: (i) sells, pledges,
encumbers, grants an option with respect to, transfers or disposes of such
security or any interest in such security; or (ii) enters into an agreement
or commitment providing for the sale of, pledge of, encumbrance of, grant of
an option with respect to, transfer of or disposition of such security or
any interest therein.
2. TRANSFER OF SHARES.
(a) TRANSFEREE OF SHARES TO BE BOUND BY THIS AGREEMENT. Shareholder
agrees that, during the period from the date of this Agreement through the
Expiration Date, Shareholder shall not cause
B-1
<PAGE>
or permit any Transfer of any of the Shares to be effected unless such
Transfer is in accordance with any affiliate agreement between Shareholder
and Parent contemplated by the Reorganization Agreement and each Person to
which any of such Shares, or any interest in any of such Shares, is or may
be transferred shall have: (a) executed a counterpart of this Agreement and
a proxy in the form attached hereto as EXHIBIT A (with such modifications as
Parent may reasonably request); and (b) agreed in writing to hold such
Shares (or interest in such Shares) subject to all of the terms and
provisions of this Agreement.
(b) TRANSFER OF VOTING RIGHTS. Shareholder agrees that, during the
period from the date of this Agreement through the Expiration Date,
Shareholder shall not deposit (or permit the deposit of) any Shares in a
voting trust or grant any proxy or enter into any voting agreement or
similar agreement in contravention of the obligations of Shareholder under
this Agreement with respect to any of the Shares.
3. AGREEMENT TO VOTE SHARES. At every meeting of the Shareholders of the
Company called, and at every adjournment thereof, and on every action or
approval by written consent of the Shareholders of the Company, Shareholder (in
his or her capacity as such) shall cause the Shares to be voted in favor of
approval of the Reorganization Agreement and the Merger and in favor of any
matter that could reasonably be expected to facilitate the Merger.
4. IRREVOCABLE PROXY. Concurrently with the execution of this Agreement,
Shareholder agrees to deliver to Parent a proxy in the form attached hereto as
EXHIBIT A (the "PROXY"), which shall be irrevocable to the fullest extent
permissible by law, with respect to the Shares.
5. REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDER. Shareholder (i) is
the beneficial owner of the shares of Company Common Stock, Preferred Stock of
the Company and the options and warrants to purchase shares of Common Stock of
the Company indicated on the final page of this Agreement, free and clear of any
liens, claims, options, rights of first refusal, co-sale rights, charges or
other encumbrances; (ii) does not beneficially own any securities of the Company
other than the shares of Company Common Stock, Preferred Stock of the Company
and options and warrants to purchase shares of Common Stock of the Company
indicated on the final page of this Agreement; and (iii) has full power and
authority to make, enter into and carry out the terms of this Agreement and the
Proxy.
6. ADDITIONAL DOCUMENTS. Shareholder (in his or her capacity as such)
hereby covenants and agrees to execute and deliver any additional documents
necessary or desirable, in the reasonable opinion of Parent, to carry out the
intent of this Agreement.
7. CONSENT AND WAIVER. Shareholder (not in his capacity as a director or
officer of the Company) hereby gives any consents or waivers that are reasonably
required for the consummation of the Merger under the terms of any agreements to
which Shareholder is a party or pursuant to any rights Shareholder may have.
8. LEGENDING OF SHARES. If so requested by Parent, Shareholder agrees that
the Shares shall bear a legend stating that they are subject to this Agreement
and to an irrevocable proxy. Subject to the terms of Section 2 hereof,
Shareholder agrees that Shareholder shall not Transfer the Shares without first
having the aforementioned legend affixed to the certificates representing the
Shares.
9. TERMINATION. This Agreement shall terminate and shall have no further
force or effect as of the Expiration Date.
10. MISCELLANEOUS.
(a) SEVERABILITY. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction to be invalid,
void or unenforceable, then the remainder of the terms, provisions,
covenants and restrictions of this Agreement shall remain in full force and
effect and shall in no way be affected, impaired or invalidated.
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<PAGE>
(b) BINDING EFFECT AND ASSIGNMENT. This Agreement and all of the
provisions hereof shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and permitted assigns, but,
except as otherwise specifically provided herein, neither this Agreement nor
any of the rights, interests or obligations of the parties hereto may be
assigned by either of the parties without prior written consent of the
other.
(c) AMENDMENTS AND MODIFICATION. This Agreement may not be modified,
amended, altered or supplemented except upon the execution and delivery of a
written agreement executed by the parties hereto.
(d) SPECIFIC PERFORMANCE; INJUNCTIVE RELIEF. The parties hereto
acknowledge that Parent shall be irreparably harmed and that there shall be
no adequate remedy at law for a violation of any of the covenants or
agreements of Shareholder set forth herein. Therefore, it is agreed that, in
addition to any other remedies that may be available to Parent upon any such
violation, Parent shall have the right to enforce such covenants and
agreements by specific performance, injunctive relief or by any other means
available to Parent at law or in equity.
(e) NOTICES. All notices and other communications pursuant to this
Agreement shall be in writing and deemed to be sufficient if contained in a
written instrument and shall be deemed given if delivered personally,
telecopied, sent by nationally-recognized overnight courier or mailed by
registered or certified mail (return receipt requested), postage prepaid, to
the parties at the following address (or at such other address for a party
as shall be specified by like notice):
<TABLE>
<CAPTION>
<S> <C>
If to Parent: Intraware, Inc.
25 Orinda Way
Orinda, CA 94563
Attention: Secretary
Telephone: (925) 253-4500
Facsimile: (925) 253-6590
With a copy to: Wilson Sonsini Goodrich & Rosati
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304
Attention: David J. Segre, Esq.
Adam R. Dolinko, Esq.
Telephone: (650) 493-9300
Facsimile: (650) 493-6811
If to Shareholder: To the address for notice set forth on the signature page
hereof.
With a copy to: Law Offices of Robert D. Cochran
2105 Woodside Road
Woodside, California 94062
Attention: Robert D. Cochran, Esq.
Telephone: (650) 298-9901
Facsimile: (650) 298-9902
</TABLE>
(f) GOVERNING LAW. This Agreement shall be governed by the laws of the
State of Delaware, without reference to rules of conflicts of law.
(g) ENTIRE AGREEMENT. This Agreement and the Proxy contain the entire
understanding of the parties in respect of the subject matter hereof, and
supersede all prior negotiations and understandings between the parties with
respect to such subject matter.
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<PAGE>
(h) EFFECT OF HEADINGS. The section headings are for convenience only
and shall not affect the construction or interpretation of this Agreement.
(i) COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be an original, but all of which together
shall constitute one and the same agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed on the day and year first above written.
<TABLE>
<CAPTION>
<S> <C>
INTRAWARE, INC. SHAREHOLDER
a Delaware corporation
By: By:
Signature of Authorized Signatory Signature
Name: Name:
Title: Title:
Print Address
Telephone
Facsimile No.
Shares beneficially owned:
shares of Company Common Stock
shares of Series A Preferred Stock
shares of Series B Preferred Stock
shares of Series C Preferred Stock
shares of Company Common Stock or Preferred
Stock issuable upon exercise of outstanding
options or warrants
</TABLE>
B-4
<PAGE>
EXHIBIT A
IRREVOCABLE PROXY
The undersigned Shareholder of Internet Image, Inc., a California
corporation (the "COMPANY"), hereby irrevocably (to the fullest extent permitted
by law) appoints Donald M. Freed and the directors on the Board of Directors of
Intraware, Inc., a Delaware corporation ("PARENT"), and each of them, as the
sole and exclusive attorneys and proxies of the undersigned, with full power of
substitution and resubstitution, to vote and exercise all voting and related
rights (to the full extent that the undersigned is entitled to do so) with
respect to all of the shares of capital stock of the Company that now are or
hereafter may be beneficially owned by the undersigned, and any and all other
shares or securities of the Company issued or issuable in respect thereof on or
after the date hereof (collectively, the "SHARES") in accordance with the terms
of this Proxy. The Shares beneficially owned by the undersigned Shareholder of
the Company as of the date of this Proxy are listed on the final page of this
Proxy. Upon the undersigned's execution of this Proxy, any and all prior proxies
given by the undersigned with respect to any Shares are hereby revoked and the
undersigned agrees not to grant any subsequent proxies with respect to the
Shares until after the Expiration Date (as defined below).
This Proxy is irrevocable (to the fullest extent permitted by law), is
coupled with an interest and is granted pursuant to that certain Voting
Agreement of even date herewith by and among Parent and the undersigned
Shareholder (the "VOTING AGREEMENT"), and is granted in consideration of Parent
entering into that certain Agreement and Plan of Reorganization (the
"REORGANIZATION AGREEMENT"), among Parent, Internet Image, a California
corporation and a wholly-owned subsidiary of Parent ("MERGER SUB"), and the
Company. The Reorganization Agreement provides for the merger of Merger Sub with
and into the Company in accordance with its terms (the "MERGER"). As used
herein, the term "EXPIRATION DATE" shall mean the earlier to occur of (i) such
date and time as the Reorganization Agreement shall have been validly terminated
pursuant to Article VIII thereof or (ii) such date and time as the Merger shall
become effective in accordance with the terms and provisions of the
Reorganization Agreement.
The attorneys and proxies named above, and each of them, are hereby
authorized and empowered by the undersigned, at any time prior to the Expiration
Date, to act as the undersigned's attorney and proxy to vote the Shares, and to
exercise all voting, consent and similar rights of the undersigned with respect
to the Shares (including, without limitation, the power to execute and deliver
written consents) at every annual, special or adjourned meeting of Shareholders
of the Company and in every written consent in lieu of such meeting in favor of
approval of the Merger, the execution and delivery by the Company of the
Reorganization Agreement and the adoption and approval of the terms thereof and
in favor of each of the other actions contemplated by the Reorganization
Agreement and any action required in furtherance hereof and thereof.
The attorneys and proxies named above may not exercise this Proxy on any
other matter except as provided above. The undersigned Shareholder may vote the
Shares on all other matters.
Any obligation of the undersigned hereunder shall be binding upon the
successors and assigns of the undersigned.
B-5
<PAGE>
This Proxy is irrevocable (to the fullest extent permitted by law). This
Proxy shall terminate, and be of no further force and effect, automatically upon
the Expiration Date.
Dated: October , 1999
Signature of Shareholder: ____________
Print Name of Shareholder: ___________
Shares beneficially owned:
_______ shares of the Company Common
Stock
_______ shares of Series A Preferred
Stock
_______ shares of Series B Preferred
Stock
_______ shares of Series C Preferred
Stock
_______ shares of the Company Common
Stock or Preferred Stock issuable upon
exercise of outstanding options or
warrants
B-6
<PAGE>
ANNEX C
NON-COMPETITION AGREEMENT
THIS NON-COMPETITION AGREEMENT (the "AGREEMENT") is made as of the Effective
Date (as defined below) by and among Intraware, Inc., a Delaware corporation
("PARENT"), and the undersigned shareholder ("SHAREHOLDER") of Internet
Image, Inc., a California corporation (the "COMPANY").
WHEREAS, concurrently with the execution of this Agreement, Parent, Tango
Acquisition Corp., a California corporation and a wholly-owned subsidiary of
Parent ("MERGER SUB"), and the Company have entered into an Agreement and Plan
of Reorganization dated as of October 1, 1999 (the "MERGER AGREEMENT") pursuant
to which Merger Sub shall merge (the "MERGER") with and into the Company, with
the Company being the surviving corporation. The Closing Date (as defined in the
Merger Agreement) shall be the "EFFECTIVE DATE" of this Agreement.
WHEREAS, the Company will become a subsidiary of Parent upon consummation of
the Merger.
WHEREAS, as a condition to the Merger, and to preserve the value of the
business being acquired by Parent after the Merger, the Merger Agreement
contemplates, among other things, that Shareholder shall enter into this
Agreement and that this Agreement shall become effective on the Effective Date.
WHEREAS, Shareholder's primary place of employment with the Company is in
California.
NOW, THEREFORE, in consideration of the mutual promises made herein, Parent
and the Shareholder hereby agree as follows:
1. COVENANT NOT TO COMPETE OR SOLICIT.
(a) Beginning on the Effective Date and ending twenty-four
(24) calendar months after the Effective Date (the "NON-COMPETITION
PERIOD"), Shareholder shall not directly or indirectly (other than on behalf
of Parent or the Company), without the prior written consent of Parent,
engage in a Competitive Business Activity (as defined below) anywhere in the
Restricted Territory (as defined below). For all purposes hereof, the term
"COMPETITIVE BUSINESS ACTIVITY" shall mean: (i) engaging in, or managing or
directing persons engaged in any business with products and services similar
to those products or services offered by the Company during the
Non-Competition Period including, Internet electronic software distribution,
Internet application deployment and management, Internet software deployment
and related technical support service and self healing software product,
Internet software asset management, Internet software inventorying, and
Internet remote network and hardware monitoring; (ii) acquiring or having an
ownership interest in any entity which derives revenues from any Competitive
Business Activity (except for ownership of one percent (1%) or less of any
entity whose securities have been registered under the Securities Act of
1933, as amended, or Section 12 of the Securities Exchange Act of 1934, as
amended); or (iii) participating in the financing, operation, management or
control of any firm, partnership, corporation, entity or business described
in clause (ii) of this sentence. For all purposes hereof, the term
"RESTRICTED TERRITORY" shall mean each and every country, province, state,
city or other political subdivision of the world in which the Company or
Parent is currently engaged in business or otherwise distributes, licenses
or sells its products.
(b) During the Non-Competition Period, Shareholder shall not directly or
indirectly solicit, encourage or take any other action which is intended to
induce or encourage, or has the effect of inducing of encouraging, any
employee of the Parent, the Company or any of their subsidiaries to
terminate his or her employment with such company.
C-1
<PAGE>
(c) The covenants contained in Section 1(a) hereof shall be construed as
a series of separate covenants, one for each country, province, state, city
or other political subdivision of the Restricted Territory. Except for
geographic coverage, each such separate covenant shall be deemed identical
in terms to the covenant contained in Section 1(a) hereof. If, in any
judicial proceeding, a court refuses to enforce any of such separate
covenants (or any part thereof), then such unenforceable covenant (or such
part) shall be eliminated from this Agreement to the extent necessary to
permit the remaining separate covenants (or portions thereof) to be
enforced. In the event that the provisions of this Section 1 are deemed to
exceed the time, geographic or scope limitations permitted by applicable
law, then such provisions shall be reformed to the maximum time, geographic
or scope limitations, as the case may be, permitted by applicable laws.
(d) Shareholder acknowledges that (i) the goodwill associated with the
existing business, customers and assets of the Company prior to the Merger
are an integral component of the value of the Company to Parent, and
(ii) Shareholder's agreement as set forth herein is necessary to preserve
the value of the Company for Parent following the Merger. Shareholder also
acknowledges that the limitations of time, geography and scope of activity
agreed to in this Agreement are reasonable because, among other things,
(A) the Company and Parent are engaged in a highly competitive industry,
(B) Shareholder has unique access to, and will continue to have access to,
the trade secrets and know-how of the Company and Parent, including, without
limitation, the plans and strategy (and, in particular, the competitive
strategy) of the Company, and (C) in the event Shareholder's employment with
Parent or the Company ended, Shareholder would be able to obtain suitable
and satisfactory employment without violation of this Agreement.
(e) Shareholder's obligations under this Agreement shall remain in
effect if Shareholder's employment with Parent or the Company is terminated
for any reason.
2. ARBITRATION.
(a) The parties agree that any dispute or controversy arising out of,
relating to, or in connection with this Agreement, or the interpretation,
validity, construction, performance, breach, or termination thereof, shall
be settled by binding arbitration to be held in Santa Clara County,
California in accordance with the American Arbitration Association
Commercial Arbitration Rules, and Supplemental Procedures for Large Complex
Disputes (together, the "RULES"). Such dispute or controversy shall be
settled by arbitration conducted by one arbitrator mutually agreeable to
Parent and Shareholder. In the event that, within forty-five (45) days after
submission of any dispute to arbitration, Parent and Shareholder cannot
mutually agree on one arbitrator, Parent and Shareholder shall each select
one arbitrator, and the two arbitrators so selected shall select a third
arbitrator. The decision of the arbitrator or a majority of the three
arbitrators, as the case may be, shall be final, binding and conclusive upon
the parties to the arbitration. Judgment may be entered on the
arbitrator(s)' decision in any court having jurisdiction.
(b) At the request of either party, the arbitrator(s) will enter an
appropriate protective order to maintain the confidentiality of information
produced or exchanged in the course of the arbitration proceedings.
(c) The arbitrator(s) shall apply California law to the merits of any
dispute or claim, without reference to rules of conflicts of law.
(d) The parties agree that it would be impossible or inadequate to
measure and calculate the other party's damages from any breach of the
covenants set forth in this Agreement. Accordingly, each party agrees that
if it breaches any provision of this Agreement, the other party will have
available, in addition to any other right or remedy otherwise available, the
right to injunctive relief restraining such breach or threatened breach and
to specific performance of any such provision of this Agreement.
C-2
<PAGE>
(e) Either party may apply to any court of competent jurisdiction for a
temporary restraining order, preliminary injunction or other interim or
conservatory relief, as necessary, without breach of this arbitration
agreement and without any abridgment of the powers of the arbitrator(s).
(f) SHAREHOLDER HAS READ AND UNDERSTANDS THIS SECTION 2, WHICH DISCUSSES
ARBITRATION. SHAREHOLDER UNDERSTANDS THAT BY SIGNING THIS AGREEMENT,
SHAREHOLDER AGREES, EXCEPT AS SET FORTH IN SECTION 2(d) AND SECTION 2(e)
ABOVE, TO SUBMIT ANY CLAIMS ARISING OUT OF, RELATING TO, OR IN CONNECTION
WITH THIS AGREEMENT, OR THE INTERPRETATION, VALIDITY, CONSTRUCTION,
PERFORMANCE, BREACH OR TERMINATION THEREOF TO BINDING ARBITRATION, AND THAT
THIS ARBITRATION CLAUSE CONSTITUTES A WAIVER OF SHAREHOLDER'S RIGHT TO A
JURY TRIAL AND RELATES TO THE RESOLUTION OF ALL DISPUTES ARISING OUT OF,
RELATING TO OR IN CONNECTION WITH THIS AGREEMENT.
3. MISCELLANEOUS.
(a) GOVERNING LAW; CONSENT TO PERSONAL JURISDICTION. This Agreement
shall be governed by the laws of the State of California without reference
to rules of conflicts of law. Shareholder hereby consents to the personal
jurisdiction of the state and federal courts located in California for any
action or proceeding arising from or relating to this Agreement or relating
to any arbitration in which the parties are participants.
(b) SEVERABILITY. If any portion of this Agreement is held by an
arbitrator or a court of competent jurisdiction to conflict with any
federal, state or local law, or to be otherwise invalid or unenforceable,
such portion of this Agreement shall be of no force or effect and this
Agreement shall otherwise remain in full force and effect and be construed
as if such portion had not been included in this Agreement.
(c) NO ASSIGNMENT. Because the nature of the Agreement is specific to
the actions of Shareholder, Shareholder may not assign this Agreement. This
Agreement shall inure to the benefit of Parent and its successors and
assigns.
(d) NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or by commercial
messenger or courier service, or mailed by registered or certified mail
(return receipt requested) or sent via facsimile (with acknowledgment of
complete transmission) to the parties at the following addresses (or at such
other address for a party as shall be specified by like notice); PROVIDED,
HOWEVER, that notices sent by mail will not be deemed given until received:
(i) if to Parent or the Company, to:
Intraware, Inc.
25 Orinda Way
Orinda, California 94563
Attn: Donald M. Freed, Executive
Vice President and Chief
Financial Officer
Mark Long, Vice President,
Strategic Development
Telephone No.: (925) 253-4500
Facsimile No.: (925) 253-6590
C-3
<PAGE>
with a copy to:
Wilson Sonsini Goodrich & Rosati
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304
Attn: David J. Segre
Adam R. Dolinko
Telephone No.:
(650) 493-9300
Facsimile No.:
(650) 493-6811
(ii) if to Shareholder, at the
address set forth on the
signature page hereto.
(e) ENTIRE AGREEMENT. This Agreement contains the entire agreement and
understanding of the parties and supersedes all prior discussions,
agreements and understandings relating to the subject matter hereof. This
Agreement may not be changed or modified, except by an agreement in writing
executed by Parent and Shareholder.
(f) WAIVER OF BREACH. The waiver of a breach of any term or provision of
this Agreement, which must be in writing, shall not operate as or be
construed to be a waiver of any other previous or subsequent breach of this
Agreement.
(g) HEADINGS. All captions and section headings used in this Agreement
are for convenience only and do not form a part of this Agreement.
(h) COUNTERPARTS. This Agreement may be executed in counterparts, and
each counterpart shall have the same force and effect as an original and
shall constitute an effective, binding agreement on the part of each of the
undersigned.
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.)
C-4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the Effective Date.
INTRAWARE, INC.
By: __________________________________
Title: _______________________________
SHAREHOLDER:
Print Name: __________________________
Signature: ___________________________
Address: _____________________________
______________________________________
______________________________________
C-5
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
CERTIFICATE OF INCORPORATION
Article 11 of Intraware's certificate of incorporation provides that, to the
fullest extent permitted by Delaware law, as the same now exists or may
hereafter be amended, a director shall not be personally liable to the
corporation or its shareholders for monetary damages for breach of fiduciary
duty as a director. Delaware law provides that directors of a corporation will
not be personally liable for monetary damages for breach of their fiduciary
duties as directors, except for liability:
- for any breach of their duty of loyalty to the corporation or its
shareholders,
- for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law,
- for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General Corporation
Law, or
- for any transaction from which the director derived an improper personal
benefit.
BYLAWS
Article VI of Intraware's bylaws provides that Intraware: (1) will indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, other than an action by or in the
right of the corporation, by reason of the fact that he is or was a director or
officer of the corporation, or is or was serving at the request of the
corporation as a director or officer of another corporation, partnership, joint
venture, trust or other enterprise, and (2) may indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
contemplated action, suit or proceeding, whether civil, criminal,
administrative or investigative, other than an action by or in the right of the
corporation by reason of the fact that he
- is or was an employee or agent of the corporation, or
- is or was serving at the request of the corporation as an employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise,
against expenses, including attorneys' fees, judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
The bylaws provide that the termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which he reasonably believed to be in or
not opposed to the best interest of the corporation, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that his conduct
was unlawful.
Article VI of Intraware's bylaws also provides that Intraware: (1) will
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he is
or was a director or officer of the corporation, or is or was serving at the
request of the corporation as a director or officer of another corporation,
partnership, joint venture, trust or other
II-1
<PAGE>
enterprise, and (2) may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor:
- by reason of the fact that he is or was an employee or agent of the
corporation, or
- is or was serving at the request of the corporation as an employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise
against expenses, including attorneys' fees, actually and reasonably incurred by
him in connection with the defense or settlement of such action or suit, if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation.
However, no indemnification will be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be liable to the
corporation unless and only to the extent that the Delaware Court of Chancery or
the court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability, but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Delaware Court of Chancery or such other
court shall deem proper.
The bylaws further provide that, to the extent that a director or officer of
the corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to above, or in defense of any claim, issue
or matter therein, he shall be indemnified against expenses, including
attorneys' fees, actually and reasonably incurred by him in connection therewith
and to the extent that an employee or agent of the corporation has been
successful on the merits or otherwise in defense of any action, suit or
proceeding referred to above, or in defense of any claim, issue or matter
therein, he may be indemnified against expenses, including attorneys' fees,
actually and reasonably incurred by him in connection therewith.
Intraware's bylaws also permit Intraware to secure insurance on behalf of
any officer, director, employee or other agent for any liability arising out of
his or her actions in such capacity, regardless of whether the bylaws would
permit indemnification. Intraware currently maintain liability insurance for
Intraware's officers and directors.
Intraware has entered into agreements to indemnify its directors and
officers, in addition to the indemnification provided for in Intraware's
certificate of incorporation and bylaws. These agreements, among other things,
indemnify Intraware's directors and officers for certain expenses, including
attorney's fees, judgments, fines and settlement amounts incurred by any such
person in any action or proceeding, including any action by or in the right of
Intraware, arising out of such person's services as a director or officer of
Intraware, any subsidiary of Intraware or any other company or enterprise to
which the person provides services at the request of Intraware.
II-2
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- ------------------------------------------------------------
<C> <S>
2.1 Agreement and Plan of merger dated as of October 1, 1999,
among the Registrant, Tango Acquisition Corp. and Internet
Image, Inc. (included as Annex A to the proxy statement/
prospectus which is a part of this registration statement on
Form S-4).
2.2 Form of voting agreement dated as of October 1, 1999 among
the Registrant and certain affiliated shareholders of
Internet Image (included as Annex B to the proxy statement/
prospectus which is a part of this registration statement on
Form S-4).
2.3 Form of noncompetition agreement dated as of October 1, 1999
among the Registrant and certain affiliated shareholders of
Internet Image (included as Annex C to the proxy statement/
prospectus which is a part of this registration statement on
Form S-4).
3.1* Restated Certificate of Incorporation, as amended which
became effective on February 25, 1999.
3.2* Bylaws, as amended which became effective on February 25,
1999.
5.1 Legal Opinion of Wilson, Sonsini, Goodrich & Rosati,
Professional Corporation, counsel to the registrant.
10.1* Form of Indemnification Agreement between the Registrant and
each of its directors and officers.
10.2* 1996 Stock Option Plan (as amended on December 17, 1998) and
form of agreements thereunder.
10.3* 1998 Employee Stock Purchase Plan and form of agreements
thereunder.
10.4* 1998 Director Option Plan and form of agreements thereunder.
10.5* Form of Registration and Information Rights Agreement.
10.6* Loan Agreement entered into as of July 29, 1998 between the
Registrant and Imperial Bank and related General Security
Agreement and Collateral Assignment as Collateral, Patent
Mortgage and Security Agreement.
10.7* Sleepy Hollow Investment Company Office Lease made August
23, 1996 between Sleepy Hollow Investment Company and
Intraware, Inc.
10.8* First Amendment to the Lease for Intraware, Inc. entered
into as of May 5, 1997 by and between the Registrant and
Sleepy Hollow Investment Company I.
10.9* Second Amendment to the Lease for Intraware, Inc. entered
into as of March 31, 1998 by and between the Registrant and
Sleepy Hollow Investment Company I.
10.10* Master Lease Agreement dated September 9, 1998 between
Comdisco, Inc. and Intraware, Inc.
10.11* Addendum and Equipment Schedules to the Master Lease
Agreement dated as of September 9, 1998 between Intraware,
Inc., as Lessee and Comdisco, Inc. as Lessor.
10.12* Services Agreement between Netscape Communications
Corporation and Intraware, Inc. entered into as of October
1, 1998.
10.13* Netcenter Services Agreement between Netscape Communications
Corporation and Intraware, Inc. entered into as of September
3, 1998.
10.14* Amended and Restated Electronic Distribution License
Agreement between Netscape Communications Corporation and
Intraware, Inc. entered into as of March 6, 1997.
10.15* Amendment to Netcenter Services Agreement of October 1, 1998
between Netscape Communications Corporation and Intraware,
Inc. dated March 1, 1999.
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of PricewaterhouseCoopers LLP
23.3 Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (included in Exhibit 5.1).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- ------------------------------------------------------------
<C> <S>
23.4 Consent of The Law Office of Robert D. Cochran
24.1 Power of Attorney (included on the signature page of this
registration statement).
99.1 Form of Proxy for special meeting of Shareholders of
Internet Image.
99.2 Notice of Special Meeting of Shareholders of Internet Image,
dated , 1999 (included between the front page and the
cover page of the Proxy Statement/Prospectus of this
Form S-4)
</TABLE>
* Incorporated by reference to Intraware, Inc.'s Registration Statement on
Form S-1 (Registration No. 333-69261) declared effective by the Securities
and Exchange Commission on February 25, 1999.
(b) Financial Statement Schedules
None.
ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the Securities
Act;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the SEC pursuant to Rule 424(b) (Section 230.424(b) of this
chapter) if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the Securities Act,
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) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of
the offering.
(4) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Exchange Act (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to section 15(d) of the Exchange Act) that is
incorporated by reference in the registration statement shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-4
<PAGE>
(5) The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent
or given, the latest annual report to security holders that is incorporated
by reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Exchange Act; and, where
interim financial information required to be presented by Article 3 of
Regulation S-X are not set forth in the prospectus, to deliver, or cause to
be delivered to each person to whom the prospectus is sent or given, the
latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
(6) The undersigned 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 issuer 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.
(7) The registrant undertakes that every prospectus (i) that is filed pursuant
to paragraph (6) immediately preceding, or (ii) that purports to meet the
requirements of section 10(a)(3) of the Securities Act and is used in
connection with an offering of securities subject to Rule 415, will be filed
as a part of an amendment to the registration statement and will not be used
until such amendment is effective, and that, for purposes of determining any
liability under the Securities Act, 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.
(8) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospective pursuant
to Items 4, 10(b), 11, or 13 of this Form, 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.
(9) The undersigned 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.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this registration statement on Form S-4 to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of San Jose,
State of California, on the 16th day of November, 1999.
<TABLE>
<S> <C> <C>
INTRAWARE, INC.
By: /s/ PETER H. JACKSON
-----------------------------------------
Peter H. Jackson
PRESIDENT AND CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
</TABLE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints, jointly and severally, Peter H. Jackson
and Donald M. Freed, and each of them acting individually, as his
attorney-in-fact, each with full power of substitution, for him in any and all
capacities, to sign any and all amendments to this registration statement on
Form S-4 (including any post-effective amendments), and to file the same, with
all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, each acting alone, or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
registration statement on Form S-4 has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
President, Chief Executive
/s/ PETER H. JACKSON Officer and Director
------------------------------------------- (Principal Executive November 16, 1999
Peter H. Jackson Officer)
Executive Vice President
/s/ DONALD M. FREED and Chief Financial
------------------------------------------- Officer (Principal November 16, 1999
Donald M. Freed Financial and Accounting
Officer)
/s/ MARK B. HOFFMAN
------------------------------------------- Chairman of the Board of November 16, 1999
Mark B. Hoffman Directors
/s/ CHARLES G. DAVIS, JR.
------------------------------------------- Vice Chairman of the Board November 16, 1999
Charles G. Davis, Jr. of Directors
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ LAURENCE M. BAER
------------------------------------------- Director November 16, 1999
Laurence M. Baer
/s/ JOHN V. BALEN
------------------------------------------- Director November 16, 1999
John V. Balen
------------------------------------------- Director , 1999
Mary Ann Byrnes
------------------------------------------- Director , 1999
Ronald E.F. Codd
</TABLE>
II-7
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- ------------------------------------------------------------
<C> <S>
2.1 Agreement and Plan of merger dated as of October 1, 1999,
among the Registrant, Tango Acquisition Corp. and Internet
Image, Inc. (included as Annex A to the proxy statement/
prospectus which is a part of this registration statement on
Form S-4).
2.2 Form of voting agreement dated as of October 1, 1999 among
the Registrant and certain affiliated shareholders of
Internet Image (included as Annex B to the proxy statement/
prospectus which is a part of this registration statement on
Form S-4).
2.3 Form of noncompetition agreement dated as of October 1, 1999
among the Registrant and certain affiliated shareholders of
Internet Image (included as Annex C to the proxy statement/
prospectus which is a part of this registration statement on
Form S-4).
3.1* Restated Certificate of Incorporation, as amended which
became effective on February 25, 1999.
3.2* Bylaws, as amended which became effective on February 25,
1999.
5.1 Legal Opinion of Wilson, Sonsini, Goodrich & Rosati,
Professional Corporation, counsel to the registrant.
10.1* Form of Indemnification Agreement between the Registrant and
each of its directors and officers.
10.2* 1996 Stock Option Plan (as amended on December 17, 1998) and
form of agreements thereunder.
10.3* 1998 Employee Stock Purchase Plan and form of agreements
thereunder.
10.4* 1998 Director Option Plan and form of agreements thereunder.
10.5* Form of Registration and Information Rights Agreement.
10.6* Loan Agreement entered into as of July 29, 1998 between the
Registrant and Imperial Bank and related General Security
Agreement and Collateral Assignment as Collateral, Patent
Mortgage and Security Agreement.
10.7* Sleepy Hollow Investment Company Office Lease made August
23, 1996 between Sleepy Hollow Investment Company and
Intraware, Inc.
10.8* First Amendment to the Lease for Intraware, Inc. entered
into as of May 5, 1997 by and between the Registrant and
Sleepy Hollow Investment Company I.
10.9* Second Amendment to the Lease for Intraware, Inc. entered
into as of March 31, 1998 by and between the Registrant and
Sleepy Hollow Investment Company I.
10.10* Master Lease Agreement dated September 9, 1998 between
Comdisco, Inc. and Intraware, Inc.
10.11* Addendum and Equipment Schedules to the Master Lease
Agreement dated as of September 9, 1998 between Intraware,
Inc., as Lessee and Comdisco, Inc. as Lessor.
10.12* Services Agreement between Netscape Communications
Corporation and Intraware, Inc. entered into as of October
1, 1998.
10.13* Netcenter Services Agreement between Netscape Communications
Corporation and Intraware, Inc. entered into as of September
3, 1998.
10.14* Amended and Restated Electronic Distribution License
Agreement between Netscape Communications Corporation and
Intraware, Inc. entered into as of March 6, 1997.
10.15* Amendment to Netcenter Services Agreement of October 1, 1998
between Netscape Communications Corporation and Intraware,
Inc. dated March 1, 1999.
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of PricewaterhouseCoopers LLP
23.3 Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (included in Exhibit 5.1).
23.4 Consent of The Law Office of Robert D. Cochran
24.1 Power of Attorney (included on the signature page of this
registration statement).
99.1 Form of Proxy for special meeting of Shareholders of
Internet Image.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- ------------------------------------------------------------
<C> <S>
99.2 Notice of Special Meeting of Shareholders of Internet Image,
dated , 1999 (included between the front page and the
cover page of the Proxy Statement/Prospectus of this
Form S-4)
</TABLE>
* Incorporated by reference to Intraware, Inc.'s Registration Statement on
Form S-1 (Registration No. 333-69261) declared effective by the Securities
and Exchange Commission on February 25, 1999.
<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF WILSON SONSINI GOODRICH & ROSATI]
NOVEMBER 16, 1999
INTRAWARE, INC.
25 ORINDA WAY
ORINDA, CA 94563
RE: REGISTRATION STATEMENT ON S-4
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-4, which will be filed
by you with the Securities and Exchange Commission (the "Commission") on
November 16, 1999 (as amended, the "Registration Statement") in connection with
the registration under the Securities Act of 1933, as amended, (the "Act") of
the shares of your Common Stock to be issued to the shareholders of Internet
Image, Inc., a California corporation, as described in the Registration
Statement (the "Shares"). As your counsel in connection with this transaction,
we have examined the proceedings taken and are familiar with the proceedings
proposed to be taken by you in connection with the sales and issuance of the
Shares.
It is our opinion that upon conclusion of the proceedings being taken or
contemplated by us, as your counsel, to be taken prior to the issuance of the
Shares, and upon completion of the proceedings being taken in order to permit
such transactions to be carried out in accordance with the securities laws of
the various states where required, the Shares, when issued and sold in the
manner described in the Registration Statement, will be validly issued, fully
paid and non-assessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement, and further consent to the use of our name wherever appearing in the
Registration Statement, including the proxy statement/prospectus constituting a
part thereof, and any amendment thereto. In giving such consent, we are not
acknowledging that we are in the category of persons whose consent is required
under Section 7 of the Act or the Rules and Regulations of the Securities and
Exchange Commission.
Sincerely,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
/s/ WILSON SONSINI GOODRICH & ROSATI
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-4 of
Intraware, Inc. of our report dated March 24, 1999, except Note 11, which is as
of October 15, 1999, relating to the financial statements of Intraware, Inc.,
which appears in such Registration Statement. We also consent to the references
to us under the headings "Experts" and "Intraware Selected Financial Data" in
such Registration Statement.
/s/ PricewaterhouseCoopers LLP
- ----------------------------
PricewaterhouseCoopers LLP
San Jose, California
November 16, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-4 of
Intraware, Inc. of our report dated October 5, 1999 relating to the financial
statements of Internet Image, Inc., which appears in such Registration
Statement. We also consent to the references to us under the headings "Experts"
and "Internet Image Selected Financial Data" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
- ----------------------------
PricewaterhouseCoopers LLP
San Jose, California
November 16, 1999
<PAGE>
EXHIBIT 23.4
LAW OFFICE
OF
ROBERT D. COCHRAN
[LETTERHEAD]
November 15, 1999
Re: CONSENT
The Law Office of Robert D. Cochran hereby consents to being named in the
Registration Statement of Intraware, Inc. on Form S-4.
Sincerely yours,
[SIGNATURE]
Robert D. Cochran
RDC:mt
<PAGE>
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
INTERNET IMAGE, INC.
PROXY
SPECIAL MEETING OF SHAREHOLDERS
The undersigned shareholder of Internet Image, Inc. ("Internet Image"), a
California corporation, hereby acknowledges receipt of the Notice of special
meeting of Shareholders and proxy statement, each dated [ ],
1999, and hereby appoints and , and each
of them, with full power to each of substitution, as proxies and
attorneys-in-fact, on behalf and in the name of the undersigned, to represent
the undersigned at the special meeting of Shareholders of Internet Image, to be
held on [ ], 1999, at 11:00 a.m., local time, at 39560 Stevenson
Place, Suite 119, Fremont, California 94539, and at any adjournment or
postponement thereof, and to vote all shares of common stock which the
undersigned would be entitled to vote if then and there personally present, on
the matters set forth on the reverse side.
This Proxy will be voted as directed or, if no contrary direction is
indicated, will be voted FOR the proposal to approve the merger and adopt the
Agreement and Plan of Reorganization, dated as of October 1, 1999, by and among
Intraware, Inc., Tango Acquisition Corp. ("Tango Acquisition") and Internet
Image, and to approve the merger of Tango Acquisition with and into Internet
Image pursuant to the Agreement and Plan of Reorganization.
CONTINUED AND TO BE SIGNED ON REVERSE SIDE SEE REVERSE SIDE
- --------------------------------------------------------------------------------
Z FOLD AND DETACH HERE Z
<PAGE>
PLEASE MARK VOTES AS IN THIS EXAMPLE /X/
<TABLE>
<S> <C>
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE / / FOR / / AGAINST / / ABSTAIN
MANNER DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER(S).
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE
PROPOSAL.
To approve the proposal to approve the merger and adopt
the Agreement and Plan of Reorganization, dated October 1,
1999, by and among Intraware Inc., Tango Acquisition Corp.
("Tango Acquisition"), and Internet Image, and to approve
the merger of Tango Acquisition with and into Internet Image
pursuant to the Agreement and Plan of Reorganization.
and, in their discretion, the proxies are authorized to vote
on such other business as may properly come before the
meeting or any adjournment thereof.
MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY
CARD USING THE ENCLOSED ENVELOPE. PLEASE SIGN
EXACTLY AS NAME APPEARS HEREON. WHERE SHARES
ARE HELD BY JOINT TENANTS, BOTH SHOULD SIGN.
WHEN SIGNING AS ATTORNEY, EXECUTOR,
ADMINISTRATOR, TRUSTEE, OR GUARDIAN, PLEASE
GIVE FULL TITLE AS SUCH. IF A CORPORATION,
PLEASE SIGN IN FULL CORPORATE NAME BY
PRESIDENT OR OTHER AUTHORIZED OFFICER. IF A
PARTNERSHIP, PLEASE SIGN IN PARTNERSHIP BY
AUTHORIZED PERSON.
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
SIGNATURE ---------------------------- DATE -------------- SIGNATURE ---------------------------- DATE --------------
</TABLE>
- --------------------------------------------------------------------------------
Z FOLD AND DETACH HERE Z
