<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 26, 1999.
REGISTRATION NO. 333-71173
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
AMENDMENT NO. 2 TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------------
INTERLINQ SOFTWARE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
WASHINGTON 7372 91-1187540
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
11980 N.E. 24TH STREET
BELLEVUE, WASHINGTON 98005
(425) 827-1112
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
-------------------------
JIRI M. NECHLEBA
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
INTERLINQ SOFTWARE CORPORATION
11980 N.E. 24TH STREET
BELLEVUE, WASHINGTON 98005
(425) 827-1112
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF AGENT FOR SERVICE)
-------------------------
COPIES TO:
<TABLE>
<S> <C>
LINDA A. SCHOEMAKER KENNETH L. GUERNSEY
ALEXANDER T. ALLEN JAMES R. JONES
PERKINS COIE LLP COOLEY GODWARD LLP
1201 THIRD AVENUE, 40TH FLOOR ONE MARITIME PLAZA, 20TH FLOOR
SEATTLE, WASHINGTON 98101-3099 SAN FRANCISCO, CALIFORNIA 94111-3580
(206) 583-8888 (415) 693-2000
</TABLE>
Approximate date of commencement of proposed sale to the public: AS SOON AS
PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If the securities being registered on this Form are being 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(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ---------------
-------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
PRELIMINARY PROXY MATERIALS
INTERLINQ SOFTWARE CORPORATION
11980 N.E. 24TH STREET
BELLEVUE, WASHINGTON 98005
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD MAY , 1999
On May , 1999, we will hold a special meeting of shareholders at our
headquarters, 11980 N.E. 24th Street, Bellevue, Washington 98005. The special
meeting will begin at 10 a.m. local time.
Only shareholders who owned Interlinq common stock at the close of business
on March 31, 1999 can vote at this special meeting or any adjournments or
postponements that may take place. On that date there were 5,129,148 shares
outstanding. At the special meeting you will be asked to:
1. Vote upon a proposal to approve the merger agreement, dated
December 29, 1998, that we have entered into with Terlin, Inc.
2. Vote upon proposals to amend our articles of incorporation as
follows:
- an amendment eliminating the classification of directors in
staggered terms;
- an amendment eliminating our ability to issue preferred stock in
the future;
- an amendment providing for shareholder action to be taken by less
than unanimous written consent if we are no longer a public
company; and
- an amendment reducing, from two-thirds to a simple majority, the
number of outstanding shares required to approve future amendments
to our articles.
3. Vote upon proposals to amend our bylaws as follows:
- an amendment reducing to not less than 10 days the amount of time
required to provide you with advance notice of a stockholder
meeting;
- amendments relating to our board that would eliminate the
classification of directors in staggered terms, reduce a
director's term to one year, allow vacancies on the board to be
filled by the board or a majority vote of our shareholders and
allow a director to be removed by a majority vote of our
shareholders; and
- an amendment providing for future amendments of our bylaws to be
authorized by the board or a majority vote of our shareholders.
4. Vote upon a proposal authorizing a reverse split of our common
stock following the merger.
5. Transact any other business that may properly come before the
special meeting or any adjournments or postponements of the special
meeting.
The affirmative vote of a majority of our outstanding shares is required to
approve each of the proposals described in paragraphs 1 through 4 above. You are
entitled to exercise dissenters' rights in connection with the merger and the
reverse stock split.
<PAGE> 3
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE,
SIGN AND DATE THE ENCLOSED PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED
POSTAGE-PREPAID ENVELOPE. YOUR STOCK WILL BE VOTED IN ACCORDANCE WITH THE
INSTRUCTIONS YOU GIVE IN YOUR PROXY. YOU MAY REVOKE YOUR PROXY AT ANY TIME
BEFORE THE VOTE IS TAKEN AT THE SPECIAL MEETING BY SIGNING AND RETURNING A
LATER-DATED PROXY WITH RESPECT TO THE SAME SHARES, BY FILING WITH OUR CORPORATE
SECRETARY A WRITTEN REVOCATION BEARING A LATER DATE OR BY ATTENDING AND VOTING
IN PERSON AT THE SPECIAL MEETING.
By Order of the Board of Directors
Stephen A. Yount
Corporate Secretary
Bellevue, Washington
April , 1999
<PAGE> 4
PRELIMINARY PROXY MATERIALS
INTERLINQ SOFTWARE CORPORATION
11980 N.E. 24TH STREET
BELLEVUE, WASHINGTON 98005
-------------------------
PROXY STATEMENT/PROSPECTUS
-------------------------
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON
MAY , 1999 AT 10 A.M.
We have entered into a merger agreement with Terlin, Inc., which is
controlled by W.R. Hambrecht + Co. Terlin and its affiliates and associates own
approximately 7.3% of our shares. You may tell us whether you prefer to retain
your shares following the merger or receive cash of $9.25 per share. However,
because the number of Interlinq shares retained by our existing shareholders in
the merger must total exactly 1,250,000 shares, you may not receive all of the
cash or shares you would like to receive.
As shown in the following table, if our shareholders collectively elect to
retain less than 1,250,000 shares, then shares will be allocated proportionally
to all shareholders who otherwise would receive cash. If, on the other hand,
shareholders elect to retain more than 1,250,000 shares, then a pro rata portion
of shares that would otherwise be retained will instead be exchanged for $9.25
per share. Because our shareholders are not required to submit their elections
until the day prior to the special meeting, at the time of the special meeting
the number of retained shares and the amount of cash each shareholder will
receive will not be known.
<TABLE>
<CAPTION>
SHAREHOLDER ELECTS CASH FOR SHAREHOLDER ELECTS TO RETAIN
1,000 SHARES 1,000 SHARES
PERCENT OF ---------------------------------- -----------------------------------
TOTAL SHARES NUMBER OF NUMBER OF
THAT ELECT TO NUMBER OF SHARES EXCHANGED SHARES EXCHANGED NUMBER OF
RECEIVE CASH RETAINED SHARES FOR CASH FOR CASH RETAINED SHARES
- ------------- --------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
100% 244 756 0 1,000
50% 0 1,000 256 744
0% 0 1,000 756 244
</TABLE>
THE MERGER CANNOT BE COMPLETED UNLESS OUR SHAREHOLDERS APPROVE THE MERGER
AGREEMENT AND AMENDMENTS TO OUR ARTICLES OF INCORPORATION AND BYLAWS. Our board
is soliciting proxies for use at the special meeting to vote on the merger
agreement, the proposals to amend our articles of incorporation and bylaws and
the proposal regarding a reverse split of our common stock. If effected, the
reverse split would result in some shareholders being cashed out at $9.25 per
share, and information about our business and financial condition may no longer
be publicly available.
In addition to the 1,250,000 Interlinq shares that will remain outstanding
following the merger, each of the approximately 2,150,000 shares of Terlin stock
that will be outstanding immediately before the merger will be converted into
one Interlinq share in the merger. Accordingly, we will have approximately
3,400,000 shares of common stock outstanding after the merger. Affiliates of
Terlin, including W.R. Hambrecht/INLQ, expect to own beneficially at least 63.3%
of our common stock immediately following the merger.
SHAREHOLDERS WHO WISH TO RETAIN SOME OR ALL OF THEIR SHARES AND CONTINUE TO
OWN THEM FOLLOWING THE MERGER MUST SUBMIT THOSE SHARES AND A COMPLETED ELECTION
FORM NO LATER THAN THE CLOSE OF BUSINESS ON THE DAY PRIOR TO THE SPECIAL
MEETING. SHAREHOLDERS WHO WISH TO RECEIVE THE CASH PAYMENT OF $9.25 PER SHARE IN
EXCHANGE FOR SOME OR ALL OF THEIR SHARES DO NOT NEED TO SUBMIT THOSE SHARES
UNTIL AFTER THE SPECIAL MEETING.
Our common stock trades on the Nasdaq National Market under the symbol
"INLQ." As a result of the transactions contemplated by the merger agreement, we
may become a private company and our common stock potentially would no longer
trade publicly on the Nasdaq National Market.
-------------------------
PLEASE READ THE INFORMATION SET FORTH UNDER "RISK FACTORS" BEGINNING ON
PAGE 8 OF THIS PROXY STATEMENT/ PROSPECTUS.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR
DISAPPROVED OF THIS TRANSACTION OR THESE SECURITIES, PASSED UPON THE FAIRNESS OR
MERITS OF THIS TRANSACTION, OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS
PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
-------------------------
This proxy statement/prospectus is dated April , 1999.
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE
MERGER AND REVERSE STOCK SPLIT..... 1
SUMMARY.............................. 2
The Companies...................... 2
The Merger......................... 2
Reasons for the Merger............. 4
Amendments to Article of
Incorporation and Bylaws........ 5
Reverse Stock Split................ 5
Recommendation to Shareholders..... 5
Tax Consequences................... 6
Debt Financing..................... 6
Risk Factors....................... 6
RISK FACTORS......................... 8
Risks Associated With the Merger... 8
Risks Associated With Our
Business........................ 11
SPECIAL FACTORS...................... 15
Recommendation of the Interlinq
Board........................... 15
Background of the Merger........... 15
Fairness of the Merger............. 21
Purpose and Structure of the
Merger.......................... 27
Merger Consideration; Stock
Election........................ 27
Broadview's Fairness Opinion....... 28
KPMG LLP's Purchase Price
Allocation Report............... 37
Plans for Interlinq After the
Merger.......................... 38
Management Following the Merger.... 38
Risk That Merger Will Not Be
Consummated..................... 39
Anticipated Accounting Treatment... 39
Nasdaq Delisting................... 39
Dissenters' Rights................. 39
Some Effects of the Merger......... 39
Interests of Persons in the Merger;
Conflicts of Interest........... 40
Sources and Uses of Funds.......... 43
STOCK PRICE AND DIVIDEND
INFORMATION........................ 45
SELECTED FINANCIAL INFORMATION....... 46
UNAUDITED PRO FORMA FINANCIAL
INFORMATION........................ 47
THE COMPANIES........................ 56
Interlinq.......................... 56
Terlin............................. 56
THE SPECIAL MEETING.................. 57
General............................ 57
Matters to Be Considered at the
Special Meeting; Dissenter's
Rights.......................... 57
Recommendation of Interlinq
Board........................... 58
Record Date; Shares Entitled to
Vote; Vote Required............. 58
Proxies; Adjournments; Proxy
Solicitation.................... 58
ELECTION PROCEDURES.................. 59
Form of Election................... 59
Exchange of Certificates........... 60
THE MERGER AGREEMENT................. 61
The Merger......................... 61
Closing and Effective Time......... 61
Conversion of Shares............... 62
Exchange of Common Stock
Certificates.................... 63
Effect of the Merger on Stock
Options......................... 65
Operation of Interlinq's Business
Prior to the Merger............. 65
No Solicitation.................... 67
Financing.......................... 68
Representations and Warranties..... 69
Conditions to Closing.............. 69
Termination........................ 71
Fees and Expenses.................. 72
Amendment of the Merger
Agreement....................... 74
Indemnification of Directors and
Officers Under the Merger
Agreement....................... 74
DEBT FINANCING....................... 74
Senior Secured Credit Facilities... 74
Structure.......................... 75
Availability....................... 75
Security........................... 76
Guaranty........................... 76
Interest........................... 76
Fees............................... 77
Covenants.......................... 77
Events of Default.................. 78
EQUITY FINANCING OF TERLIN........... 78
W.R. Hambrecht/INLQ, LLC Operating
Agreement....................... 79
W.R. Hambrecht/INLQ Guarantors, LLC
Operating Agreement............. 79
W.R. Hambrecht/INLQ Management, LLC
Operating Agreement............. 80
GOING PRIVATE TRANSACTION............ 80
REVERSE STOCK SPLIT.................. 81
Vote Needed for Approval........... 81
Effects of the Reverse Stock
Split........................... 81
Reasons for the Reverse Stock
Split........................... 82
</TABLE>
<PAGE> 6
<TABLE>
<S> <C>
Exchange of Stock Certificates and Payment for
Fractional Shares.......................... 83
Dissenter's Rights............................ 84
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
AND THE REVERSE STOCK SPLIT................... 84
Treatment of the Merger and the Reverse Stock
Split as Combined Versus Separate
Transactions............................... 85
Tax Impact if the Merger and the Reverse Stock
Split are Treated Separately for Tax
Purposes................................... 85
Merger..................................... 85
Reverse Stock Split........................ 87
Tax Impact if the Merger and the Reverse Stock
Split Are Aggregated for Tax Purposes...... 88
Alternative Minimum Tax....................... 88
Withholding................................... 89
DIRECTOR AND EXECUTIVE OFFICER INFORMATION...... 89
Directors..................................... 89
Committees and Meetings of the Board of
Directors.................................. 90
Directors' Fees............................... 91
Executive Officers............................ 92
Compensation of Executive Officers............ 92
Employment Contracts, Termination of
Employment and Change in Control
Arrangements............................... 94
Compensation Committee Report on Executive
Compensation............................... 95
STOCK OPTION PLANS.............................. 97
Description of the Plans...................... 97
New Plan Benefits............................. 99
Federal Income Tax Consequences of the Stock
Option Plans............................... 99
PRINCIPAL HOLDERS OF OUR VOTING SECURITIES...... 100
Security Ownership of Beneficial Owners....... 100
Security Ownership of Management.............. 102
Transactions by Persons in Interlinq Common
Stock...................................... 103
DESCRIPTION OF INTERLINQ CAPITAL STOCK.......... 103
Interlinq Common Stock........................ 104
Interlinq Preferred Stock..................... 104
Washington Anti-takeover Statute.............. 104
Capital Stock of Interlinq following the
Merger and Reverse Stock Split............. 105
AMENDMENTS TO ARTICLES OF INCORPORATION AND
BYLAWS........................................ 105
General.................................... 105
Amendments to Articles of Incorporation.... 105
Amendments to Bylaws....................... 106
STATUTORY ANTITAKEOVER PROTECTION............... 107
RIGHTS OF DISSENTING INTERLINQ SHAREHOLDERS..... 107
EXPERTS......................................... 110
LEGAL MATTERS................................... 110
INDEPENDENT AUDITORS............................ 110
FORWARD-LOOKING STATEMENTS...................... 110
WHERE YOU CAN FIND MORE INFORMATION............. 111
INCORPORATION OF DOCUMENTS BY REFERENCE......... 111
OTHER INFORMATION AND SHAREHOLDER PROPOSALS..... 112
</TABLE>
Appendix A Agreement and Plan of Merger
Appendix B Opinion of Broadview International LLC
Appendix C Amendment to Articles of Incorporation for Reverse Stock Split
Appendix D Post-Merger Articles of Incorporation
Appendix E Post-Merger Bylaws
Appendix F Chapter 23B.13 of the Washington Business Corporation Act
<PAGE> 7
QUESTIONS AND ANSWERS ABOUT THE MERGER
AND REVERSE STOCK SPLIT
Q. WHAT DO I NEED TO DO NOW?
A. After carefully reading and considering the information contained in this
document, please fill out, date and sign your proxy card. Then mail your
signed proxy card in the enclosed postage-prepaid return envelope as soon as
possible so that your shares may be represented at the special meeting. IN
ADDITION, IF YOU WISH TO RETAIN ALL OR PART OF YOUR SHARES, YOU MUST SUBMIT
YOUR STOCK CERTIFICATES AND FORM OF ELECTION PRIOR TO THE CLOSE OF BUSINESS
ON THE DAY BEFORE THE SPECIAL MEETING. See "-- Should I send in my stock
certificates now?"
Q. IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
A. Your broker will vote your shares only if you instruct your broker on how to
vote. You should follow the directions provided by your broker regarding how
to instruct your broker to vote your shares.
Q. CAN I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD OR CONSENT
FORM?
A. You can change your vote at any time before your proxy is voted at the
special meeting in one of three ways. First, you can send a written notice
stating that you would like to revoke your proxy. Second, you can complete
and submit a new proxy card. If you choose either of these two methods, you
must submit your notice of revocation or your new proxy card to our
corporate secretary. Third, you can attend the special meeting and vote in
person. Simply attending the special meeting, however, will not revoke your
proxy. If you have instructed a broker to vote your shares, you must follow
directions received from your broker to change your vote.
Q. SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A. If you want to retain all or part of your shares, you must deliver your
stock certificates representing the shares you wish to retain, duly endorsed
by you on the back, together with your signed form of election, to
ChaseMellon Shareholder Services LLC at 520 Pike Street #1220 Seattle, WA
98101 by 5:00 p.m. Seattle time on May , 1999. This is the last business
day before the special meeting. To the extent you receive the cash payment
of $9.25 per share in the merger, we will send you written instructions on
how to exchange your stock certificates after the merger is completed.
Q. WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A. We are working toward completing the merger as quickly as possible after the
special meeting, possibly on or around May , 1999.
WHO CAN HELP ANSWER MY QUESTIONS?
If you have more questions about the merger, you should contact:
Allen Nelson & Co. Incorporated
P.O. Box 16157
Seattle, WA 98116
Phone (206) 938-5783
Fax (206) 938-2072
This proxy statement/prospectus incorporates important business and
financial information about Interlinq that is not included or delivered with
this document. Such information is available without charge to Interlinq
shareholders upon written or oral request. Contact Interlinq Investor Relations
at 11980 N.E. 24th Street, Bellevue, Washington 98005. Interlinq's telephone
number is (425) 827-1112.
TO OBTAIN TIMELY DELIVERY OF THE REQUESTED DOCUMENTS PRIOR TO THE SPECIAL
MEETING, YOU MUST REQUEST THEM NO LATER THAN MAY , 1999, WHICH IS FIVE
BUSINESS DAYS PRIOR TO THE DATE OF THE SPECIAL MEETING.
1
<PAGE> 8
SUMMARY
This summary highlights selected information from this proxy
statement/prospectus and does not contain all of the information that is
important to you. To understand the merger fully and for a more complete
description of the legal terms of the merger and the reverse stock split, you
should read carefully this entire document and the documents to which we have
referred you. See "Where You Can Find More Information."
THE COMPANIES
INTERLINQ SOFTWARE CORPORATION. We are a leading provider of personal
computer-based business solutions for the residential mortgage and construction
lending industry. We have two business divisions. Our Mortgage Technology
Division provides business solutions to approximately 2,000 banks, savings
institutions, mortgage banks, mortgage brokers and credit unions. Our new
Enterprise Technology Division provides process-centered, enterprise application
integration solutions both directly and through third-party application
developers, original equipment manufacturers and system integrators. We are a
Washington corporation founded in 1982.
TERLIN, INC. Terlin is a Washington corporation that was incorporated on
December 16, 1998. It has not carried on any activities to date other than those
incident to its formation and the transactions contemplated by the merger
agreement. All of the outstanding capital stock of Terlin will be owned by W.R.
Hambrecht/ INLQ, which will be controlled by W.R. Hambrecht + Co. All references
in this proxy statement/prospectus to W.R. Hambrecht + Co. are references to
W.R. Hambrecht + Co., LLC, a limited liability company, and all references to
W.R. Hambrecht/INLQ are references to W.R. Hambrecht/INLQ, LLC, a limited
liability company.
THE MERGER
STRUCTURE OF THE MERGER. In the merger, 1,250,000 shares of our currently
outstanding common stock will remain outstanding. All other outstanding shares
of our common stock will be converted into the right to receive a cash payment
of $9.25 per share, except for any shares held by shareholders who have properly
exercised dissenters' rights. In addition, each of the approximately 2,150,000
shares of Terlin stock that will be outstanding immediately prior to the merger
will be converted into one share of our common stock in the merger.
You will be able to elect to retain all or a portion of your shares and
continue to own them after the merger. However, because the number of shares to
be retained by our existing shareholders must total exactly 1,250,000 shares,
your right to retain shares or receive the $9.25 per share cash payment is
subject to proration. If holders of more than 1,250,000 shares of our common
stock elect to retain their shares, shareholders making that election will
retain shares pro rata based on the number of shares they requested to retain,
and will receive the $9.25 per share cash payment for their remaining shares. If
holders of fewer than 1,250,000 shares elect to retain their shares,
shareholders who would otherwise receive the $9.25 per share cash payment for
all of their shares will instead be required to retain a pro rata portion of
their Interlinq shares.
Since 1,250,000 shares is 24.4% of Interlinq's outstanding shares, if
holders of more than 24.4% of Interlinq's shares elect to retain those shares,
they will be required to receive the cash payment for a portion of those shares.
Conversely, if holders of more than 75.6% of Interlinq's shares want to receive
cash, they will be required to retain a portion of their shares. Interlinq
shares held by affiliates of Terlin will be treated the same as all other
Interlinq shares and will be subject to proration.
BOARD AND MANAGEMENT FOLLOWING THE MERGER. The current officers and
directors of Interlinq will remain officers and directors after
2
<PAGE> 9
the merger, with the addition of John D. Delafield, a partner of W. R. Hambrecht
+ Co., who will serve as a director on our board of directors after the merger.
INTEREST OF EXECUTIVE OFFICERS AND DIRECTORS IN THE MERGER. Our executive
officers, who are Jiri M. Nechleba, Stephen A. Yount and Patricia Graham, and
our non-employee directors may be deemed to have interests in the merger that
are in addition to their interests as our shareholders generally. For example,
our executive officers will receive a cash payment in exchange for their
agreement to allow their options to terminate unexercised in an amount totaling,
in the aggregate, approximately $2,512,000. These options include, in the
aggregate, 296,750 options which are currently unvested and whose vesting is
being accelerated in connection with the merger, and 301,750 options which are
currently vested. In addition, these persons will receive new options to
acquire, in the aggregate, approximately 511,600 Interlinq shares after the
merger. See "Special Factors -- Interests of Certain Persons in the Merger;
Conflicts of Interest."
SOURCES AND USES OF FUNDS IN THE MERGER. The merger will be funded through
approximately $13,850,000 in equity contributed by Terlin, up to $8,100,000 of
our cash and approximately $22,500,000 in senior debt. The funds will be used to
make the aggregate cash payments to shareholders and option holders as well as
to pay expenses resulting from the merger.
CONDITIONS TO THE MERGER. The completion of the merger depends upon meeting
or waiving a number of conditions, including:
- - We shall have completed financing arrangements for up to approximately $25
million in senior debt or shall have otherwise received sufficient funds to
pay the aggregate cash payments for our shares and to meet our working capital
requirements;
- - The merger agreement and the amendments to our articles and bylaws shall have
been duly approved by the required vote of our shareholders;
- - The representations and warranties of the parties shall have been materially
accurate as of the date of the merger agreement, and shall be accurate in all
respects as of the closing date of the merger as if made at that date, with
certain qualifications;
- - The covenants and obligations of the parties shall have been complied with and
performed in all material respects as of the closing date of the merger; and
- - No material adverse change in our business, financial condition, operations or
operating results shall have occurred, and no event shall have occurred or
circumstance shall exist that could reasonably be expected to have a material
adverse effect on our business, operating results, financial condition or
operations.
The approval of the amendments to our articles and bylaws is a condition to
completing the merger. However, Terlin may elect to waive this condition at any
time. The approval of the reverse stock split is not a condition to completing
the merger.
TERMINATION OF THE MERGER AGREEMENT. We and Terlin can agree to terminate
the merger agreement at any time, even if you and the other shareholders have
approved the merger. Also, either of us can decide, without the consent of the
other, to terminate the merger agreement if:
- - The merger has not been completed on or before May 31, 1999;
- - The other party materially fails to perform under the merger agreement;
- - A judgment, injunction, order, decree or action by a governmental entity
preventing the merger has become final and nonappealable; or
- - Another proposal to merge with us or acquire us is publicly announced that
qualifies as an "Acquisition Proposal" under the merger agreement and we take
certain actions described in the merger agreement.
See "The Merger Agreement -- Termination."
3
<PAGE> 10
TERMINATION FEES. Under certain circumstances, depending on the reason for
the termination of the merger agreement, we may be obligated to either reimburse
Terlin for all its reasonable out-of-pocket expenses and fees, pay Terlin
$625,000 plus reimbursements for all its reasonable out-of-pocket expenses and
fees, or pay Terlin $1,250,000 plus reimbursements for all its reasonable
out-of-pocket expenses and fees. See "The Merger Agreement -- Fees and
Expenses."
ACCOUNTING TREATMENT. We expect that the merger will be accounted for as a
leveraged recapitalization. Accordingly, the historical basis of our assets and
liabilities would not be affected by the merger. See "Special Factors --
Anticipated Accounting Treatment."
OPINION OF INTERLINQ'S FINANCIAL ADVISOR. Broadview International LLC has
delivered its written opinion, dated December 29, 1998, to our board of
directors to the effect that the merger is fair, from a financial point of view,
to the holders of Interlinq common stock, other than Terlin and its affiliates.
The full text of the Broadview opinion, which sets forth the assumptions made,
matters considered and limitations of the review undertaken, is attached as
Appendix B to this proxy statement/prospectus.
DISSENTERS' RIGHTS. You have the right to dissent from the proposed merger
and the reverse stock split and to receive payment of the "fair value" of your
shares of Interlinq common stock, as provided in Sections 23B.13.101 through
23B.13.310 of the Washington Business Corporation Act. See "Rights of Dissenting
Interlinq Shareholders."
REASONS FOR THE MERGER
In determining that the merger is fair to our shareholders, our board of
directors considered, among others, the following factors:
- - The $9.25 per share cash payment represents a significant premium to our
historical trading prices;
- - The structure of the merger enables you to receive the $9.25 per share cash
payment or to elect to retain your shares, subject to proration; and
- - The opinion, analysis and presentation of our financial advisor, Broadview, as
to the fairness of the transaction,
In deciding to recommend the merger, our board of directors also considered
the following potential benefits and detriments of the merger.
BENEFITS:
- - You may elect to receive $9.25 per share in cash or elect to retain your
shares, subject to proration;
- - We will maintain our current management and strategic focus; and
- - We may realize savings of expenses and management time and attention if we
become a private company.
DETRIMENTS:
- - We will incur substantial indebtedness;
- - It is possible that our common stock will not trade publicly after the merger;
If you elect to or are required to retain all or some of your shares, you
will have less liquidity;
- - Information about our business and financial condition may no longer be
publicly available; and
- - Due to the proration requirements of the merger agreement, you may not receive
exactly the type of consideration you specified in your election. If you want
to receive all cash, you may be required to retain up to 24.4% of your shares,
and if you want to retain all your shares, you may instead be required to
receive cash for up to 75.6% of your shares.
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AMENDMENTS TO ARTICLES OF INCORPORATION AND BYLAWS.
Pursuant to the merger agreement, amendments to our articles of
incorporation and bylaws are required to be effected in connection with the
merger. Although these matters do not require separate shareholder approval
under applicable corporate law, they are being presented for a separate vote by
our shareholders in accordance with requirements of the SEC. The proposed
amendments to our articles of incorporation would:
- eliminate the classification of directors in staggered terms;
- eliminate our ability to issue preferred stock in the future; and
- provide for shareholder action to be taken by less than unanimous written
consent if we are no longer a public company; and
- reduce from two-thirds to a simple majority, the number of outstanding
shares required to approve future amendments to our articles.
The proposed amendments to our bylaws would:
- reduce to not less than 10 days the amount of time required to provide
you with advance notice of a shareholder meeting;
- eliminate the classification of directors in staggered terms, reduce a
director's term to one year, allow vacancies in the board to be filled by
the board or a majority vote of our shareholders, and allow a director to
be removed by a majority vote of our shareholders; and
- provide for future amendments of our bylaws to be authorized by the board
or a majority vote of our shareholders.
REVERSE STOCK SPLIT
HOW THE REVERSE STOCK SPLIT WILL WORK. If approved by our shareholders, and
if requested by Terlin before the merger is completed, our board of directors
will effect a reverse stock split after the merger. The reverse stock split will
cause us to have fewer than 300 but not less than 275 holders of record. The
ratio of the reverse stock split will depend on the number of shareholders
electing to retain shares after the merger. Fractional shares will not be
issued, but rather shareholders entitled to a fractional share as a result of
the reverse stock split will receive a cash payment based on the pre-split price
of $9.25 per share.
If the merger is not completed, the reverse stock split will not be
effected even if the reverse stock split is approved by our shareholders.
REASONS FOR THE REVERSE STOCK SPLIT. If Terlin requests the reverse stock
split, it will relieve us of the administrative burden, cost, and competitive
disadvantages associated with filing reports and otherwise complying with the
requirements of Exchange Act registration.
RECOMMENDATION TO SHAREHOLDERS
OUR BOARD OF DIRECTORS BELIEVES THAT THE MERGER IS FAIR TO YOU AND IN YOUR
BEST INTERESTS AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THE PROPOSAL TO
APPROVE THE MERGER AGREEMENT, "FOR" THE PROPOSALS TO AMEND OUR ARTICLES OF
INCORPORATION, "FOR" THE PROPOSALS TO AMEND OUR BYLAWS AND "FOR" THE PROPOSAL TO
APPROVE THE REVERSE STOCK SPLIT.
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TAX CONSEQUENCES
The merger and the reverse stock split will be taxable transactions with
respect to any cash received. The merger and the reverse stock split will be tax
free to shareholders who do not receive cash in the merger or the reverse stock
split. It is unclear whether the merger and the reverse stock split will be
treated as separate transactions or parts of a single integrated transaction. If
the transactions are viewed together, tax may be imposed on all of the cash
received even if it exceeds the gain inherent in the shares exchanged for cash
and the income may be ordinary income rather than capital gain with respect to
the cash received. To review the tax consequences to Interlinq shareholders in
greater detail, see "Federal Income Tax Consequences of the Merger and the
Reverse Stock Split."
DEBT FINANCING
We expect that when the articles of merger are filed, up to approximately
$25 million of bank financing will be available to us pursuant to senior secured
credit facilities as follows:
- $12 million under a term loan facility;
- $5 million under a revolving credit facility; and
- $8 million under a guaranteed loan facility.
The senior secured credit facilities will be obtained from Silicon Valley Bank
and U.S. Bank in accordance with a commitment we have received from them.
Approximately $8 million of the senior secured credit facilities will be
guaranteed by William R. Hambrecht, related persons and/or other persons and the
obligations of the guarantors under such guaranties will be partially secured by
a pledge of $2.5 million cash security by Interlinq.
RISK FACTORS
In connection with your consideration of the merger, you should carefully
consider the following factors related to retaining your shares, which are
described in more detail beginning on page 8. Some risks that relate to the
merger and the reverse stock split include:
- - our directors and officers may appear to have a conflict-of-interest in terms
of recommending the merger;
- - there will be a substantial decrease in the liquidity of our common stock
following the merger;
- - you may receive consideration that is different from the consideration you
specified in your respective elections as a result of the merger agreement's
proration procedures;
- - as depicted in the following diagrams, W.R. Hambrecht + Co. will control us
following the merger and will have the ability to elect all of our directors;
- - if you receive cash in the merger or the reverse stock split in exchange for
some but not all of your Interlinq common stock, all of the cash you receive
may be subject to tax even though the amount of cash exceeds the gain realized
with respect to the shares surrendered for cash; and
- - we expect the terms of the merger financing to subject us to significant
operating and financial restrictions and to increase substantially our
indebtedness.
In addition, our business faces risks relating to the intense competition in our
markets, mortgage lending regulations governing our industry, the cyclical
nature of our product markets, our intellectual property and other proprietary
rights, uncertainties surrounding the "Year 2000" computer problem and other
factors. See "Risk Factors."
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COMPARISON OF OWNERSHIP STRUCTURE PRIOR TO AND AFTER THE MERGER. The
following diagrams show the approximate current ownership of our outstanding
shares, and what the approximate ownership of our outstanding shares would be
following the merger. Percentages of stock ownership after the merger are
presented for W.R. Hambrecht + Co. and affiliates and associates assuming they
elect to cash out all their currently outstanding shares. Percentages of stock
ownership after the merger are presented for the pre-merger Interlinq directors
and executive officers assuming they elect to retain all their currently
outstanding shares.
PRIOR TO THE MERGER
[CHART 1]
AFTER THE MERGER
[CHART 2]
If the percentages shown in the diagrams above were calculated on a fully
diluted basis assuming exercise of all outstanding options and warrants, then
W.R. Hambrecht + Co. and its affiliates and associates would own approximately
6.0% of Interlinq before the merger and approximately 53.4% after, while our
pre-merger directors and executive officers would own approximately 9.6% of
Interlinq before the merger and approximately 10.7% after. The percentage owned
by all other shareholders, including our employees other than executive
officers, would decline from approximately 84.4% before the merger to
approximately 35.7% after.
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RISK FACTORS
RISKS ASSOCIATED WITH THE MERGER
Our Directors and Executive Officers Have the Appearance of a
Conflict-of-Interest in Terms of Recommending the Merger and Your Interests May
Therefore Differ. By virtue of the fact that some of our directors and executive
officers will receive substantial cash payments for their options to acquire
shares of Interlinq common stock, and will receive new options after the merger,
some of our directors and executive officers have the appearance of a
conflict-of-interest in terms of recommending that shareholders approve the
merger.
Our Common Stock May Be Delisted, Resulting in a Loss of Your
Liquidity. Our common stock is listed on Nasdaq. If we are delisted our shares
would trade less frequently relative to the trading volume of our shares prior
to the merger and you may experience difficulty selling your Interlinq common
stock or obtaining prices that reflect its value. In order to be eligible for
inclusion on Nasdaq a company must, among other things, have at least 500,000
publicly held shares and 300 shareholders. As a result of the merger, we may no
longer meet these or other listing requirements and may be delisted from Nasdaq.
Even if we meet the listing requirements following the merger, our board may
nonetheless effect the reverse stock split if it is approved by you, which could
result in a delisting.
Our Registration Under the Exchange Act May Be Terminated and Consequently
You May Be Entitled to Receive Less Information About Us. The termination of the
registration of our common stock under the Exchange Act would substantially
reduce the information we are required to furnish to our shareholders and to the
SEC. Our common stock is currently registered under the Exchange Act. We could
terminate our registration if our common stock is not listed on a national
securities exchange or registered national securities association and there are
fewer than 300 shareholders of record. The termination of our registration would
make certain provisions of the Exchange Act inapplicable to us, such as the
short-swing profit recovery provisions of Section 16(b), the requirement of
furnishing a proxy statement in connection with shareholders meetings, the
requirements of Rule 13e-3 under the Exchange Act with respect to "going
private" transactions, periodic reporting requirements and beneficial ownership
reporting requirements. The termination of our registration likely would also
make trading our common stock more difficult than it would be if we were
delisted from Nasdaq but maintained our registration.
Your Election to Receive Cash or to Retain Shares Is Subject to
Proration. Your election to retain shares of our common stock or to receive cash
in the amount of $9.25 per share in the merger is subject to the proration
procedures of the merger agreement. If you want to receive all cash, you may be
required to retain up to 24.4% of your shares, and if you want to retain all
your shares, you may instead be required to receive cash for up to 75.6% of your
shares. Therefore, if the merger is consummated, you may not necessarily receive
the type of consideration you prefer.
We Will Be Controlled by W.R. Hambrecht + Co. Whose Interests May Differ
Significantly From Your Interests. W.R. Hambrecht + Co. will control us
following the merger as a result of its control of W.R. Hambrecht/INLQ, which
will own approximately 63.3% of the outstanding shares of our common stock
following the merger. W.R. Hambrecht + Co. is controlled by William R.
Hambrecht. The interests of W.R. Hambrecht + Co. may be different from the
interests of other shareholders,
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including a majority of the other shareholders. Controlling shareholders like
W.R. Hambrecht/INLQ can make it more difficult for a third party to acquire, or
can discourage a third party from seeking to acquire, a majority of the
outstanding shares of our common stock. A third party would be required to
negotiate any such transaction with W.R. Hambrecht + Co., and W.R. Hambrecht +
Co. would be able to control any future transactions even if all other
shareholders were opposed to the transactions. It will have the power to elect
all of our directors and approve any action requiring the approval of our
shareholders, including the adoption of amendments to our articles of
incorporation and approval of mergers or sales of all or substantially all of
our assets. Any directors elected by W.R. Hambrecht + Co. will have the
authority to effect decisions affecting our capital structure, including the
issuance of additional capital stock, the implementation of stock repurchase
programs and the declaration of dividends.
We Will Issue Warrants Which Will Dilute Your Ownership. In connection with
the merger, we will issue warrants to purchase Interlinq common stock which will
dilute all Interlinq shareholders and holders of options to purchase Interlinq
common stock after the merger. Specifically, warrants to purchase 300,000 shares
of Interlinq common stock will be issued to the guarantors of a portion of the
indebtedness incurred by us in connection with the merger. Additionally,
warrants to purchase 47,789 shares of Interlinq common stock will be issued to
each of Perkins Coie LLP and Cooley Godward LLP, counsel to us and to W.R.
Hambrecht + Co., respectively, in lieu of a portion of their legal fees in
connection with the merger and the financing. In addition, a warrant to acquire
95,578 shares of common stock will be issued to W.R. Hambrecht + Co. as a
success fee if the merger is consummated.
You May Be Subject to Tax Risks Resulting From the Merger and the Reverse
Stock Split. It is unclear whether for tax purposes the Internal Revenue Service
will treat the merger and the reverse stock split as separate transactions or
instead aggregate them. If the Internal Revenue Service aggregates the merger
and reverse stock split, and if you receive some cash and some stock in the
reverse stock split, the Internal Revenue Service will require you to pay tax on
the entire amount of cash you receive up to the amount of gain inherent in your
stock that you exchange for cash and stock and you may not be entitled to
capital gains treatment with respect to the cash received. No shareholder can
recognize a loss in connection with the reverse stock split.
We Will Have Substantial Debt Service That Will Make Our Ability to
Continue as an Ongoing Concern Riskier and Therefore Your Investment in Us Will
Become Riskier. We will have significant debt service obligations as a result of
the substantial indebtedness in connection with the merger. Increased debt
service obligations could negatively affect our ability to continue as an
ongoing concern. We may also incur additional indebtedness in the future,
subject to limitations contained in agreements with our lenders which would
further increase our debt service obligations. Our higher debt service
obligations could have important consequences to our shareholders, including the
following:
- during certain periods, a substantial portion of our cash flow available
from operations will be dedicated to the payment of principal and
interest on our indebtedness, reducing the funds that would otherwise be
available to us for other business purposes, such as research and
development, acquisitions and future business opportunities;
- our ability to obtain additional financing in the future may be limited;
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- some of our borrowings will be at variable rates of interest, which will
cause us to be even more vulnerable to increases in interest rates;
- our flexibility in planning for, or reacting to, changes in our business
and our industry may be limited;
- higher leverage will make us relatively more vulnerable to economic
downturns and competitive pressures; and
- a substantial decrease in our net operating cash flows or an increase in
our expenses could make it difficult for us to meet our debt service
obligations or force us to modify our operations.
Our business may not continue to generate sufficient cash flow from
operations in the future to service our debt and make necessary capital
expenditures after satisfying other liabilities arising in the ordinary course
of business. If unable to do so, we may be required to refinance all or a
portion of our existing debt, to sell assets or to obtain additional financing.
Refinancing may be unavailable to us and sales of assets or additional financing
may not be possible.
On an historical basis, Interlinq did not incur significant interest
expense for the fiscal year ended June 30, 1998. Pro forma interest expense for
the fiscal year ended June 30, 1998 would have been $2.1 million. However,
because we are still in the process of negotiating the final terms and
conditions of the indebtedness, the debt service requirements or interests rates
assumed in calculating the pro forma financial statements may vary from the
final service requirements and interest rates.
You May Have to Repay Any Cash You Receive in the Merger in the Unlikely
Event That a Court Determines the Cash Payment Is a Fraudulent Conveyance. You
may have to repay any cash you receive in the merger if a court determines that
the payment constituted a fraudulent conveyance. A fraudulent conveyance occurs
when a court finds that a cash payment is made to shareholders:
- with fraudulent intent by the corporation, or
- for less than a reasonably equivalent value in return when the
corporation is insolvent, unable to pay its debts when they become due,
or has unreasonably small assets, property or capital in relation to its
ongoing business.
If a court determines, in a suit brought against us by a creditor, that the
cash payments in the merger constitute a fraudulent conveyance, the court could:
- void the distribution of the cash payment to our shareholders and require
them to return the payments to us or to a fund for the benefit of our
creditors.
- void the merger and require that our assets be placed in a fund for the
benefit of our creditors, or
- void or modify the rights and obligations with respect to the financing
of the merger.
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The measure of insolvency for determining fraudulent conveyance will vary
depending upon the law of the jurisdiction which is being applied.
RISKS ASSOCIATED WITH OUR BUSINESS
Your Investment May Decline in Value If We Fail to Compete Successfully in
a Rapidly Changing Industry. The value of your investment may decline if we are
unable to compete successfully against our current and future competitors. Our
two business divisions -- the Mortgage Technology Division and the Enterprise
Technology Division -- each face intense competition at many levels. The
competitive pressures we face may materially adversely affect our business,
operating results and financial condition.
Some of our competitors' products cost significantly less than our
software, and price-sensitive buyers tend to choose these products. Many
competitors market competing products on mainframe, mini-computer and personal
computer platforms with a wide array of pricing. In addition, some of our
competitors offer complementary financial services products that we do not
offer. Many have significantly greater financial, technical, marketing and sales
resources than we do. As a result, they may be able to respond more quickly to
new or emerging technologies and changes in customer requirements, or to devote
greater resources to developing, promoting and selling their products than we
can. Further, increased competition may force us to reduce our prices, which
would in turn reduce our gross margins and materially adversely affect our
business, operating results and financial condition.
A Loss of Current Customers Could Result in Reduced Revenues, Which Could
Negatively Impact the Value of Your Investment. We could lose current customers
if they fail to comply with governmental regulations relating to our industry
and as a result are unable to continue purchasing our products or cease doing
business. The residential mortgage lending industry, including our customers, is
subject to a variety of governmental regulations and our products must include
appropriate regulatory compliance features. A lender's failure to comply with
these laws and regulations could lead to its loss of approved status,
termination of its servicing contracts without compensation, demands for
indemnification or loan repurchase, class action lawsuits and administrative
enforcement actions.
We Could Be Held Liable For Customers' Violations of Governmental
Regulations, Which Could Negatively Impact the Value of Your Investment. The
value of your investment could be negatively impacted if any loan production
processes or documentation using our products results in a customer's violation
of any laws or regulations. The customer or the governmental authority might
claim that we are responsible, which could materially adversely affect our
results of operations and our reputation in the mortgage lending industry.
Our Internal Systems, Suppliers, Products or Customers May Not Be Year
2000-Ready, Which May Reduce Our Revenues and Negatively Impact the Value of
Your Investment. We may not have been successful in making our products and
internal systems Year 2000-ready which could materially adversely affect our
business, operating results and financial condition and negatively impact the
value of your investment. Even if we were successful, the fears and
uncertainties in the general public and business community over the Year 2000
issue may result in similar effects. We believe that significant record-keeping
and operational deficiencies could occur if our internal products are not made
Year 2000 ready. We have no contingency plans in place should this occur. This
could have a material adverse effect on our business, operating results and
financial condition.
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We have not calculated, separately from our product development costs, the
costs of making our products Year 2000-ready. We believe that any incremental
Year 2000-related expense has been less than $75,000. Although we believe our
products are now Year 2000-ready, undetected errors may remain that could result
in material additional costs or liabilities. In addition, we believe that the
purchasing patterns of customers and potential customers may be affected by Year
2000 issues in a variety of ways. Some may defer purchasing our products because
they are diverting resources to address other Year 2000 issues or, having
attained Year-2000 readiness, defer system acquisitions or modifications until
after January 1, 2000. Others may accelerate their decisions to purchase our
products to replace non-Year-2000-ready applications.
We have identified third-party vendors that we rely upon significantly, and
we plan to ascertain their readiness for Year 2000 during the 1999 fiscal year.
We cannot accurately predict the impact to us if certain customers or vendors
are not Year 2000-ready. Significant disruption in the businesses of our
customers and third-party vendors may have material adverse effects on our
business, operating results and financial condition.
The Year 2000 problem arose because many existing computer programs use
only the last two digits to refer to a year. Therefore, these computer programs
do not properly recognize a year that begins with "20" instead of "19" and, for
instance, would read the year 2014 as 1914. If not corrected, many computer
applications could fail or create erroneous results as we enter the next
century.
Our New Enterprise Technology Division May Be Unable to Establish a
Significant Customer Base or Product Line, Which Could Negatively Impact Our
Future Revenues and Decrease the Value of Your Investment. The value of your
investment and our future revenues could decrease if our new Enterprise
Technology Division is unsuccessful. As a new entrant into this market, we may
fail to attract new customers, and our existing customers may not purchase these
products and support services. In addition, we may not be able to release
FlowMan 4.0(TM) in a timely fashion or, if and when it is released, FlowMan
4.0(TM) may not be well received by our target market. Each of these events
could materially adversely affect our revenues, operating results and financial
condition. We recently entered into the enterprise applications integration
market in June 1998.
If Our New Enterprise Technology Division Fails to Adapt to a Rapidly
Changing Environment, Our Future Revenues May Be Negatively Impacted and the
Value of Your Investment May Be Diminished. The value of your investment and our
future revenues will be negatively impacted if we are unable, for technological
or other reasons, to develop and introduce new products or enhancements of
existing products in a timely manner in response to changing market conditions
or customer requirements. The enterprise applications integration market is
characterized by rapid technological change, frequent new product introductions
and evolving industry standards. The introduction of products embodying new
technologies and the emergence of new industry standards can render our products
obsolete and unmarketable. To expand our operations in the enterprise
applications integration market we will need to spend significant amounts of
money and it could strain our management, financial and operational resources.
We may experience difficulties that could delay or prevent the successful
development, introduction and marketing of these products, or our new products
and product enhancements may not adequately meet the requirements of the
marketplace and achieve market acceptance. Our experience and leadership in the
mortgage-related software market may not benefit us as we enter new markets, and
gross margins attributable to new business areas may be lower
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than those associated with our existing business activities. In addition, we may
not be able to expand our operations in a cost-effective or timely manner.
If We Fail to Develop Indirect Sales Channels, Our Future Revenues May Be
Negatively Impacted and the Value of Your Investment May Be Diminished. Your
investment and our future revenue maybe diminished if we fail to develop
relationships with other experts in the field who have either specific software
and hardware expertise in the enterprise applications integration market and/or
specialized industry knowledge in particular vertical markets. We may be unable
to develop partnerships with key software and solution providers to jointly
offer enterprise applications integration software or
integrated/workflow-enabled products. We may be unable to attract partners that
will market our products effectively or who will provide timely and
cost-effective customer support and service. Any of these events may materially
adversely affect our business, operating results and financial condition.
Our Relationships With Indirect Sales Partners Will Be Nonexclusive, Which
May Negatively Impact Our Revenues and Reduce the Value of Your Investment. Our
indirect sales partners may not be dependable in representing our products, and
our inability to recruit, or the loss of, important partners could reduce the
value of your investment by adversely affecting our operating results and
causing lower gross margins. We anticipate that our agreements with original
equipment manufacturers, system integrators and third-party application
providers will not be exclusive and that many of these partners may carry
competing product lines. If we are successful in selling products through these
channels, we expect that any material increase in our indirect sales as a
percentage of total revenues will adversely affect our average selling prices
and gross margins of our enterprise applications integration products due to the
lower unit prices that we receive when selling through indirect channels.
Interest Rate Fluctuations May Negatively Impact Our Revenues and Reduce
the Value of Your Investment. The value of your investment may decrease due to
any future increase in interest rates which would likely reduce the volume of
residential mortgage lending activity, which in turn would materially adversely
affect our business, operating results and financial condition The residential
mortgage industry is sensitive to interest rate fluctuations. In general, an
increase in interest rates leads to reduced activity in the mortgage origination
and refinancing markets and reduced revenues for our customers.
Our Product Markets Are Cyclical and a Downturn May Negatively Impact the
Value of Your Investment. The value of your investment may decline due to a
downturn in the software and residential mortgage lending market. Due to the
nature of software markets in general and the cyclical and volatile nature of
the residential mortgage lending market in particular, we cannot accurately
estimate unit sales of our loan origination software products, including
MortgageWare Loan Management System and MortgageWare TC. We do not anticipate
that our loan servicing software products, FlowMan product or enterprise
application integration products will be directly affected by the cyclical
nature of the residential mortgage lending market.
Our Intellectual Property and Other Proprietary Rights May Be Disputed
Which May Negatively Impact the Value of Your Investment. Disputes involving our
software and other intellectual property could materially adversely affect our
business, operating results and financial condition and could result in a
decline in the value of your investment. This intellectual property is
proprietary and essential to our business. We rely primarily on a combination of
copyright, trademark and trade secret laws, employee and third-party
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nondisclosure agreements, license agreements and other methods to protect our
proprietary technology. Prosecuting or defending intellectual property claims
could be time-consuming, result in costly litigation, cause diversion of
management's attention, cause product release delays, require us to redesign our
products or require us to enter into royalty or licensing agreements with
others. These royalty or licensing agreements, if required, may not be available
to us, or may be available only on unacceptable terms.
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SPECIAL FACTORS
RECOMMENDATION OF THE INTERLINQ BOARD
At its meeting of December 29, 1998, the Interlinq board, including the
special committee, by unanimous vote determined the merger agreement and the
merger and, if necessary, the reverse stock split, to be fair to and in the best
interests of Interlinq and the Interlinq shareholders. The Interlinq board
recommends that Interlinq shareholders vote "FOR" the approval of the merger
agreement, "FOR" the proposals to amend the articles of incorporation, "FOR" the
proposals to amend the bylaws, and "FOR" the reverse stock split.
BACKGROUND OF THE MERGER
On October 14, 1998, John D. Delafield, a partner at W.R. Hambrecht + Co.,
contacted Steve Yount, Interlinq's chief financial officer, by telephone. Mr.
Delafield was going to be in the Seattle area on other business the next day and
requested an introductory meeting with Mr. Yount at Interlinq's offices in order
to describe his role with W.R. Hambrecht + Co. and the general nature of
services that it was providing as a relatively new investment bank. Mr.
Delafield contacted Mr. Yount at the request of the Director of Research at W.R.
Hambrecht + Co.
On October 15, 1998, Mr. Yount, in his capacity as chief financial officer
and as the officer responsible for investor relations, met with Mr. Delafield at
Interlinq's offices. During their brief meeting, Mr. Delafield and Mr. Yount
discussed generally the challenges that companies with smaller market
capitalizations face in the United States equity markets, including lack of
analyst research coverage and difficulties in obtaining financing. Mr. Delafield
and Mr. Yount also generally discussed forms of financing that can sometimes be
made available to companies with smaller market capitalizations and whether
Interlinq had any interest in further exploring any particular forms of
financing. Mr. Yount asked Mr. Delafield to call him in a few days after Mr.
Yount had an opportunity to discuss their conversations further with Jiri
Nechleba, Interlinq's chief executive officer.
Mr. Delafield subsequently had a brief telephone conversation with Mr.
Yount. Mr. Delafield asked whether Interlinq would consider a possible
recapitalization or purchase transaction. At the time, Mr. Delafield did not
have any specific proposal in mind, but was only inquiring as to whether it was
a type of transaction that Interlinq might be willing to consider. Mr. Yount
said he would discuss the possibility further with Mr. Nechleba.
At Interlinq's board meeting on October 27, 1998, Mr. Nechleba informed the
board that he had been contacted by Mr. Delafield on behalf of W.R. Hambrecht +
Co., and that Mr. Delafield was interested in exploring opportunities for
Interlinq to increase shareholder value through increased equity research
coverage, mergers and acquisitions or other strategic alternatives, including a
possible recapitalization or purchase. The Interlinq board authorized
Interlinq's officers to proceed with preliminary discussions with W.R. Hambrecht
+ Co. and to explore and evaluate possible transactions.
On November 4, 1998, members of Interlinq management, Mr. Delafield and
William R. Hambrecht met at Interlinq's offices for another brief meeting. Mr.
Hambrecht shared his general observations with Interlinq management regarding
the performance of
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Interlinq, its progress as a company and the importance of continued retention
of its employee and management resources. Mr. Hambrecht also discussed in
general terms his analysis of software companies generally and as part of that
discussion compared the challenges faced by software companies with small versus
large market capitalizations.
On November 11, 1998, Interlinq and W.R. Hambrecht + Co. entered into a
confidentiality agreement, providing for the confidential treatment of
information about Interlinq provided to W.R. Hambrecht + Co. The confidentiality
agreement also contained an agreement by W.R. Hambrecht + Co. that it would not
acquire any additional shares of Interlinq common stock or take certain other
actions for a specified period of time. Numerous discussions ensued between
Interlinq management and W.R. Hambrecht + Co. regarding the potential structure
and terms of a possible transaction that could result in W.R. Hambrecht + Co.
substantially increasing its equity position in Interlinq and in Interlinq
ceasing to be a public company. The material aspects of those discussions are
described below.
On November 12, 1998, Interlinq's management held discussions with W.R.
Hambrecht + Co. regarding Interlinq's products, strategy and plans for the
future. These included Interlinq's general expectations that revenues from loan
servicing and enterprise application integration products and services will
comprise an increasing portion of total revenues in future years. However,
Interlinq and W. R. Hambrecht + Co. did not discuss any specific strategies in
detail. Additionally, management provided initial feedback to a financial model
for Interlinq created by W.R. Hambrecht + Co. The feedback provided by Interlinq
management consisted of general guidance regarding the reasonableness of the
assumptions reflected in the model. No financial projections were provided by
Interlinq management to W.R. Hambrecht + Co. At that time, Interlinq management
also brought to W.R. Hambrecht + Co.'s attention that any change of control
transaction would result in an acceleration of all options under Interlinq's
current stock option plans. Recognizing that the cashout of all options held by
management would result in a large cash expense in any potential transaction
involving a change of control, Interlinq management indicated they would be
willing to consider a cash out of less than 100% of their options in any
proposed transaction so long as the equity interest reserved for management
subsequent to any proposed transactions would be appropriately adjusted.
A telephonic board meeting was held on November 14, 1998. All members of
the board participated in the meeting, as well as Mr. Yount and a representative
of Perkins Coie LLP, Interlinq's legal counsel. At the meeting, Mr. Nechleba
briefly summarized for the board the discussions that had taken place with W.R.
Hambrecht + Co. on November 11 and 12, which are described above. Mr. Nechleba
informed the board that the discussions with W.R. Hambrecht + Co. were
preliminary and general in nature, and that no proposal had been made by W.R.
Hambrecht + Co. After answering questions from the Interlinq board, Mr. Nechleba
and Mr. Yount excused themselves from the meeting. Legal counsel reviewed with
the Interlinq board special considerations relating to "going private"
transactions, and the Interlinq board's fiduciary duties to Interlinq and the
Interlinq shareholders in considering such a transaction if it were proposed to
them.
In the following days, Interlinq's management and W.R. Hambrecht + Co. had
numerous discussions regarding Interlinq's financial condition and projected
performance.
On November 30, 1998, at a regular Interlinq board meeting, Interlinq's
management advised the Interlinq board of the status of discussions with W.R.
Hambrecht + Co. John D. Delafield participated telephonically in a portion of
the meeting. He presented to the
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Interlinq board the fact that W.R. Hambrecht + Co. was interested in pursuing a
transaction with Interlinq, and the reasons why W.R. Hambrecht + Co. believed
such a transaction would be in the best interests of Interlinq shareholders. The
Interlinq board then formed the special committee, consisting of all three
non-employee members of the Interlinq board, Theodore M. Wight, Robert W. O'Rear
and Robert J. Gallagher, to consider any proposal that might be made by W.R.
Hambrecht + Co. to Interlinq. Mr. Wight was appointed as the chairman of the
special committee. Legal counsel discussed with the special committee the
desirability of retaining a financial advisor to assist the board in evaluating
any proposal, and to provide a fairness opinion if the board ultimately
determined to proceed with a transaction.
Following the November 30 meeting, the special committee commenced its
efforts to retain a financial advisor. The special committee identified several
financial advisors it believed would be qualified to provide assistance to the
special committee in connection with the potential transaction between Interlinq
and W.R. Hambrecht + Co. Mr. Wight contacted these financial advisors to discuss
their experience and other qualifications, their level of interest in providing
services to the special committee, and the fees that the financial advisor would
charge for providing these services. After communicating these discussions to
the other members of the special committee, the special committee authorized Mr.
Wight to proceed with the engagement of Broadview International LLC. The special
committee believed Broadview was qualified to act as its financial advisor
because of Broadview's reputation and experience in the information technology,
communication and media sector and the computer software industry in particular.
Interlinq's management did not participate in any way in the special committee's
selection or retention of Broadview, and were not informed of which financial
advisor the special committee was considering retaining until after an
engagement letter with Broadview was signed.
On December 3, 1998, Interlinq's management, legal counsel to Interlinq,
representatives of W.R. Hambrecht + Co. and its legal counsel met to discuss
certain considerations that would be important in establishing the structure of
any transaction between Interlinq and W.R. Hambrecht + Co. In particular, they
discussed the desirability of structuring the transaction so as to qualify for
leveraged recapitalization accounting treatment. While neither party viewed
qualifying for leveraged recapitalization accounting treatment as a requirement
for any transaction, both parties agreed it was desirable to structure the
transaction to qualify for leveraged recapitalization accounting treatment if
possible to allow Interlinq to avoid establishing a new accounting basis for its
assets and liabilities. The financial statements of Interlinq would continue to
reflect the historical basis of its assets and liabilities. If leveraged
recapitalization accounting treatment was not available, establishing a new
accounting basis for its assets and liabilities would likely result in the
recognition of a significant amount of goodwill, which would be amortized as a
charge to operating results over several years and would reduce Interlinq's
earnings. At the December 3 meeting, the parties also discussed ways in which
the transaction could be structured so as to minimize or eliminate any tax
consequences for Interlinq and its shareholders. They acknowledged that, under
any structure, to the extent shareholders received cash in exchange for
Interlinq shares, the transaction would be a taxable event to them.
Also on December 3, 1998, William R. Hambrecht and Ironstone Group, Inc.,
filed a Schedule 13D with the SEC disclosing that W.R. Hambrecht + Co. had
initiated discussions with Interlinq regarding an extraordinary transaction that
would result in a
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substantial majority of Interlinq's outstanding shares being exchanged for cash,
and in W.R. Hambrecht + Co. becoming a majority owner of Interlinq. The Schedule
13D stated that W.R. Hambrecht + Co. had been considering a cash price per share
of approximately $8.50. Interlinq then issued a press release acknowledging the
information contained in the filing made by W.R. Hambrecht + Co.
In the following days, numerous discussions regarding the structure of a
potential transaction and related legal, accounting and tax issues ensued among
Interlinq's management, W.R. Hambrecht + Co., and their respective legal
counsels. In particular, legal counsel discussed and analyzed the potential
applicability of Washington antitakeover law. If applicable, that law would have
prevented the merger from taking place for five years. However, because W.R.
Hambrecht + Co. did not own in excess of 10% of Interlinq's shares as that
ownership is calculated in accordance with the law, the antitakeover law was not
applicable and did not affect the parties' negotiation of the merger agreement.
On December 11, 1998, the special committee signed an engagement letter
with Broadview as their financial advisor. Also on that day, W.R. Hambrecht +
Co. presented a letter to the Interlinq Board outlining a proposed transaction
between W.R. Hambrecht + Co. and Interlinq. This initial proposal contemplated a
merger between an affiliate of W.R. Hambrecht + Co. and Interlinq in which the
substantial majority of Interlinq shareholders would receive $8.50 cash per
share, and from 525,000 to 1,540,000 shares of outstanding Interlinq common
stock would remain outstanding. W.R. Hambrecht + Co.'s legal counsel provided a
draft merger agreement to Interlinq's management and legal counsel that
reflected the terms contained in the proposal. The December 11, 1998 letter and
the accompanying draft merger agreement were the first proposal from W.R.
Hambrecht + Co. concerning material terms such as the price per share to be paid
to Interlinq shareholders, the number of Interlinq shares to be left in the
hands of the public, the equity interest to be reserved for management and the
potential termination fees of $1,250,000 payable by Interlinq in the event the
proposed transaction was never consummated. The initial proposal contemplated a
100% reload of Interlinq management's options subsequent to the consummation of
the transaction.
On December 14, 1998, Interlinq management met with Broadview to discuss
Interlinq's financial statements, business strategy, financial projections
prepared by Interlinq, and other related matters. The financial projections
provided to Broadview were very similar to the projections contained in W.R.
Hambrecht + Co.'s financial model.
Also on December 14, 1998, Interlinq and William R. Hambrecht and Ironstone
Group, Inc. filed a Form 8-K and a Form 13D/A, respectively, with the SEC
announcing the December 11 proposal and publicly filing a copy of the proposal.
From December 15 to December 20, 1998, Interlinq management had numerous
conversations with Broadview regarding the proposed deal structure, accounting
treatment and financial projections.
On December 16 and 17, 1998 Interlinq's management, the chairman of the
special committee, legal counsel to Interlinq, representatives of W.R. Hambrecht
+ Co. and its legal counsel met to negotiate the proposed merger agreement and
related documents. Negotiations focused on structural issues, representations
and warranties, conditions to closing, equity interests of management following
the merger, provisions containing restrictions on Interlinq's ability to
entertain alternative proposals, and fees and expenses
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that would be payable in the event of a termination of the agreement. The
negotiations regarding the structure of the transaction included discussions
relating to the Interlinq board's desire to allow all existing Interlinq
shareholders to select whether to retain their Interlinq shares or receive the
cash out payment in exchange for their shares. While Terlin was willing to
accommodate as many retained Interlinq shares as was practical, Terlin was not
interested in pursuing a transaction in which it would not be a majority owner
of Interlinq following the transaction. In addition, both Interlinq and Terlin
were cognizant that:
- the amount of financing needed to complete the transaction would depend
on how many shareholders received the cash out amount,
- a transaction structure that made it difficult to accurately predict the
amount of financing necessary would make it more challenging to obtain
that financing, and
- if the transaction was to qualify for leveraged recapitalization
accounting treatment, following the transaction no more than 95% of
shares may be held by Terlin and other shareholders who were part of a
collaborative group with Terlin for purposes of controlling Interlinq.
The 95% threshold follows guidance provided by the SEC in Staff
Accounting Bulletin No. 54 and other informal presentations.
During the negotiations on December 16th and 17th, some of the
counter-proposals by the chairman of the special committee to the
representatives of W.R. Hambrecht + Co. included:
- the price to be paid to Interlinq shareholders who receive cash in the
transaction should be increased from the initial $8.50 proposed;
- the termination fees potentially payable to W.R. Hambrecht + Co. should
be paid in full only in limited circumstances and reduced to half the
amount in others;
- W.R. Hambrecht + Co. may not be reimbursed for fees and expenses in all
instances where the transaction fails to be consummated.
Mr. Delafield indicated a willingness to consider an increase in the cash
price paid to shareholders up to $9.00 per share. The amount of equity to be
retained by management was increased from 100% to 125% of the number of options
to purchase Interlinq common stock then held by Interlinq management in
recognition of management's earlier agreement to accept a cash payment for only
75% of their options rather than 100% of their options, as they would otherwise
be entitled to under the terms of the option plan. The parties also agreed in
general that the amount and payment of W.R. Hambrecht + Co.'s termination fee
would depend upon the reason why the merger agreement was terminated, but
detailed agreement on this issue was not reached.
A draft merger agreement and related materials were circulated to the
Interlinq board. The Interlinq board scheduled a special board meeting for
December 22, 1998 to consider the merger agreement. However, several unresolved
issues remained on December 22. Those issues were structural concerns affecting
the ability of the transaction to qualify for leveraged recapitalization
accounting treatment, as described in the following paragraphs, the price to be
paid to Interlinq shareholders who receive cash in the transaction, and
circumstances under which fees and expenses would be payable if the transaction
were not consummated. At the time of the December 22 special committee meeting,
Terlin had indicated its willingness to consider a cash payment of $9.25 per
share instead of $9.00 per share, but had not agreed to that amount. The special
committee's position was that the
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amount of the cash amount should be $9.25. With respect to fees and expenses,
the special committee believed that Interlinq should not be required to pay a
breakup fee or reimburse Terlin for its expenses if the transaction was not
completed due to the inability of Interlinq to obtain financing or if the
transaction was not approved by Interlinq's shareholders. Terlin's position was
that the merger agreement should provide for a breakup fee and reimbursement of
expenses under both of those situations.
Although the Interlinq board wanted to structure the transaction so that
Interlinq shareholders would, to the greatest extent possible, have the ability
to elect whether to receive a cash payment or to retain their interest as an
Interlinq shareholder, the Interlinq board also felt that qualification for
leveraged recapitalization accounting treatment would be an important benefit to
Interlinq and the Interlinq shareholders who retained their shares. To qualify
for leveraged recapitalization accounting treatment, the potential transaction
had to satisfy several conditions. The primary condition is that the
shareholders of Terlin, along with any other shareholders who have relationships
with Terlin that together constitute a collaborative group for purposes of
controlling Interlinq, must own less than 95% of the outstanding common stock of
Interlinq after the merger. Other conditions relate to the manner in which
Terlin is capitalized and the order of occurrence of the transactions to effect
the merger. These conditions require that Terlin be capitalized with a
determinate number of shares prior to the merger and that the merger of Terlin
into Interlinq occur immediately prior to the buyback of Interlinq common stock.
The initial proposal made by W.R. Hambrecht + Co. to recapitalize Interlinq
involved retention of a varying percentage of Interlinq common stock, depending
upon the elections made by Interlinq shareholders. However, the proposal
contemplated determining the capitalization of Terlin based on a formula after
the elections of Interlinq shareholders had been finalized. In order to qualify
for leveraged recapitalization accounting treatment, the proposal had to be
altered to fix the percentage of Interlinq common stock that would remain
outstanding after the merger and determine the capitalization of Terlin prior to
the merger. Accordingly, at the December 22 special committee meeting the
Interlinq special committee deferred any vote on the merger agreement until such
issues were resolved and the affected portions of the merger agreement were
revised.
At the December 22 meeting, legal counsel reviewed for the special
committee the key terms of the proposed merger agreement and summarized the
unresolved issues. In addition, representatives of Broadview presented to the
special committee their analysis and preliminary conclusions regarding the
fairness of the transaction that they had undertaken based on the structure and
terms of the transaction that had been contemplated as of that date.
Negotiation of the remaining open items ensued over the next several days.
Through the negotiations Terlin and Interlinq agreed to set the number of shares
that would be retained at 1,250,000, approximately 24.4% of the outstanding
shares of Interlinq common stock. The number of shares to be retained exceeded
5%, the minimum number required to qualify for leveraged recapitalization
accounting treatment, for several reasons. First, since all Interlinq
shareholders, including W.R. Hambrecht + Co. and its affiliates and associates,
who would be considered proponents of the transaction under the accounting
literature, have the right to elect to retain their shares or receive the cash
payment of $9.25 per share, it was necessary to provide for the retention of
more than 5% of the shares so that at least 5% of non-proponent shares would be
retained. In addition, the special committee thought it was likely that holders
of more than 5% of Interlinq's shares would want to retain their shares and
therefore they wanted to provide for more than the
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minimum to be retained. Finally, the number was established by the parties in
recognition of the maximum amount of financing that they believed Interlinq
would be able to obtain to pay the cash out amount and other costs and expenses
relating to the transaction.
A special telephonic meeting of the Interlinq special committee and board
was held on December 29, 1998. At that meeting, Interlinq's legal counsel
reviewed the resolution of the issues that had been discussed at the December 22
special committee meeting, including the parties' agreement on the cash payment
of $9.25 per share for Interlinq shareholders who do not retain their shares and
their agreement that 1,250,000 shares would be retained by existing Interlinq
shareholders, as described above. With respect to payment of fees and expenses,
the parties agreed that Interlinq would be obligated to reimburse Terlin for its
fees and expenses if the merger agreement is not approved by Interlinq's
shareholders. In that situation, though, no breakup fee would be payable unless
there had been an alternative proposal made and the Interlinq board withdrew,
amended or modified its support of the merger agreement, in which case a fee of
$625,000 would be payable. If the alternative transaction closed within one
year, an additional fee of $625,000 would be payable. The parties also agreed
that in the event the transaction did not close due to the inability to complete
the financing, Terlin would not be entitled to any breakup fee, and it would not
be reimbursed for its expenses. Representatives of Broadview reviewed for the
Interlinq board their analysis of the fairness of the transaction and presented
to the special committee their written opinion as to the fairness of the
transaction, from a financial point of view, to the Interlinq shareholders.
After discussion, the special committee unanimously voted to recommend to the
Interlinq board approval of the merger agreement. The board then unanimously
voted to approve the merger agreement and the transactions contemplated by that
agreement, and authorized Interlinq's officers to execute and deliver the merger
agreement. Following the meeting, Terlin and Interlinq executed the merger
agreement.
FAIRNESS OF THE MERGER
Factors Considered in the Interlinq Board's Fairness Determination
In light of the Interlinq board's consideration of various strategic
alternatives and its review of Interlinq's competitive position and recent
operating results, the Interlinq board has determined that the merger is fair
to, and in the best interests of, Interlinq and its shareholders. In making this
determination and in approving the merger agreement, the Interlinq board
considered the factors described below. The Interlinq board believes that these
factors operate both individually and in combination to support their
determination that the merger is fair to, and in the best interests of,
Interlinq and its shareholders. These factors include:
- The Interlinq board's assessment of Interlinq's prospects based on its
historical performance and on the board's knowledge of the mortgage
technology and enterprise application integration industries generally.
In particular, the board considered the challenges Interlinq would face
in pursuing its business strategy. While the Interlinq board believed the
prospects for Interlinq's future growth, through both its mortgage
software and enterprise application integration software divisions was
very good, they also acknowledged achievement of these prospects was
subject to significant risks. This combination of potential strong future
growth, offset by significant risks, contributed to the board's
conclusion that the merger was fair because the Interlinq board believed
that the amount of $9.25 per share that would be received by some
Interlinq shareholders in the merger appropriately reflected
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these prospects and risks. Further, if shareholders disagreed with the
conclusion, the structure of the merger enabled them to express their
preference for retaining their shares or receiving cash in the merger;
- The history of the negotiations with respect to the amount of cash to be
paid to shareholders that, among other things, led to an increase in
Terlin's offer from $8.50 per share of Interlinq common stock to $9.25
per share, and the belief of the Interlinq board that $9.25 per share of
Interlinq common stock was the highest price that Terlin would agree to
pay;
- The trading price of Interlinq common stock over the past five years;
- The fact that the amount of $9.25 per share to be paid in the merger
represents a premium of approximately 21% over the $7.63 closing sale
price per share on Nasdaq on December 3, 1998, the last trading day prior
to the announcement that W.R. Hambrecht + Co. was considering making a
proposal to Interlinq, and a premium of approximately 64% over the
average closing trading price per share of $5.65 during the twelve months
preceding that announcement;
- The fact that since January 1, 1998 and until the announcement of the
execution of the merger agreement, the closing price of Interlinq common
stock ranged from $3.875 to $8.375 per share compared to the $9.25 per
share to paid in the merger;
- Evaluation analyses prepared by Broadview;
- The absence of significant volume in the public trading market for the
shares since Interlinq's initial public offering in April 1993, and the
absence of interest in Interlinq by equity research analysts in light of
Interlinq's relatively low trading volume and small market
capitalization;
- The merger's structure, which enables Interlinq shareholders to express
their preference to receive $9.25 per share or to retain their equity
interest in Interlinq. The Interlinq board recognized that, depending on
the preferences expressed by Interlinq's shareholders, those shareholders
who wanted cash might be required to retain a portion of their shares,
and shareholders who wanted to retain shares might be required to take
cash for a portion of their shares. Although shareholder preferences
would not be able to be fully satisfied, the Interlinq board nonetheless
believed the merger structure contributed to the fairness of the
transaction because this structure enabled at least some shareholder
choice, as compared to a structure that offered shareholders only cash or
only stock, or required all shareholders to receive a fixed proportion of
cash and stock. In addition, with respect to those shareholders, if any,
who wanted to retain shares but were required to take cash for a portion
of their shares, the Interlinq board believed that the price of $9.25 per
share was fair. With respect to those shareholders, if any, who wanted
only cash but were required to retain a portion of their shares, the
board believed that those shareholders would have an opportunity to
liquidate those shares following the transaction. The board believed this
liquidation opportunity would exist because the merger agreement provides
that if shares are allocated to shareholders who wanted only cash,
Interlinq cannot voluntarily delist from the Nasdaq National Market for
six months following the transaction. And, even if Interlinq is
involuntarily delisted, the Interlinq board believed that liquidity would
be available to shareholders in the over the counter market;
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- The Interlinq board's conclusion that it was not likely that any party
other than Terlin would propose a transaction that was more favorable
than the merger to Interlinq and its shareholders. The Interlinq board
arrived at this conclusion because Interlinq had not received any
acquisition proposal from any other party in recent years, and because
W.R. Hambrecht + Co.'s interest in proposing a transaction to Interlinq
was publicly known for almost a full month prior to execution of the
merger agreement. During that period of time, any potential bidder could
have approached Interlinq with an alternative offer with the knowledge
that Interlinq had not entered into any agreement with Terlin and that,
therefore, there were no restrictions on Interlinq's ability to consider
an alternative proposal and terminate discussions with W.R. Hambrecht +
Co without incurring any termination fees or other similar costs. In
addition, the terms of the merger agreement permit Interlinq to abandon
the merger if a superior transaction is proposed:
- The opinion of Broadview that, as of the date of its opinion, the total
consideration to be received by Interlinq shareholders other than W.R.
Hambrecht + Co. and affiliated entities in the merger is fair, from a
financial point of view, to such shareholders. The full text of
Broadview's opinion, which sets forth the assumptions made, the matters
considered and limitations on the review undertaken by Broadview, is
attached as Appendix B to this proxy statement/prospectus; and
- The terms and conditions of the merger agreement, including:
(1) The amount and form of consideration,
(2) The provision permitting the Interlinq board under some
circumstances to furnish information to, and negotiate with, a third
party making an unsolicited bona fide acquisition proposal,
(3) the provision permitting the Interlinq board under some
circumstances to terminate the merger agreement in order to accept
an acquisition proposal from a third party. Termination for this
reason would require prior written notice to Terlin and a payment to
Terlin of a fee of up to $1.25 million, which amount would not, in
the Interlinq board's view, preclude the possibility of an
acquisition proposal from a third party. However, it might deter
some potential acquisition proposals and/or reduce the price per
share of Interlinq common stock payable by a third party in an
acquisition proposal, and
(4) The limited conditions to completing the merger.
The foregoing discussion of the information and factors discussed by the
board is not meant to be exhaustive, but includes all material factors
considered by the board. In making its fairness determination, the board did not
consider the KPMG LLP purchase price allocation report relating to Interlinq's
acquisition of Logical Software Solutions Corporation because it did not believe
it was relevant. The board did not assign relative weights to the above factors
or determine that any factor was of particular importance. Rather, the board
viewed its position and recommendations as being based on the totality
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of the information presented to and considered by it. However, particular
consideration was placed on:
- the opinion of Broadview that, as of the date of its opinion, the
consideration to be received by Interlinq shareholders other than W. R.
Hambrecht + Co. and affiliated entities in the merger was fair to such
shareholders from a financial point of view;
- the active arm's-length bargaining that had occurred between the special
committee and Terlin that resulted in the $9.25 per share cash payment
price, which the members of the board believed was the highest price that
Terlin would agree to pay;
- the ability of Interlinq shareholders to elect whether to receive $9.25
per share or remain a shareholder, subject to proration; and
- the fact that the terms of the merger agreement permit Interlinq to
terminate it if a superior transaction is proposed.
Alternatives Considered by Interlinq's Board.
Interlinq's board considered two alternative strategies for maximizing
shareholder value. One strategy considered was raising the trading price of the
common stock in the near term by increasing exposure to the public markets
through equity analyst coverage. Based on management's ongoing contacts with
equity analysts, however, the Interlinq board determined that increased coverage
by research analysts was unlikely because Interlinq's relatively small market
capitalization, as well as its unique mix of products and services, served as a
disincentive to equity analysts to devote time to covering Interlinq's business.
The board also considered whether it would be possible to increase
shareholder value through an acquisition of Interlinq by a third party. Despite
the low trading price for Interlinq common stock and ample opportunity for a
bidder to appear, Interlinq's board was not approached by a third party other
than W.R. Hambrecht + Co. The board did not actively seek out alternate
acquirors because the board believed that the proposed structure for the
acquisition of Interlinq, which would allow Interlinq to continue as an ongoing
concern without changing its management or strategic focus, would result in the
most value to the shareholders.
Other Considerations by the Interlinq Board
The Interlinq board recognized that, as a result of the proposed merger,
shareholders other than those who retain Interlinq common stock would cease to
have an interest in an ongoing corporation with the potential for future growth,
and the board therefore gave consideration to Interlinq's operating results and
current forecasts of future revenues and earnings in reaching its determination
to approve the merger agreement. The board also recognized that Interlinq's
shareholders following the merger would have an opportunity, subject to the
risks of Interlinq's business, to benefit from any increases in the value of
Interlinq following the merger. The board recognized that this, together with
the acceleration of vesting and cash out of outstanding options to purchase
Interlinq common stock, represented a potential conflict between the interests
of Interlinq's management and employees, and Interlinq's other shareholders.
However, the board recognized that Terlin was willing to enter into the merger
agreement only if satisfactory arrangements for the
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retention of management and employees could be put in place. See "-- Interests
of Certain Persons in the Merger; Conflicts of Interest."
In considering the fairness of the merger to Interlinq and its
shareholders, the special committee considered the benefits to Interlinq of
being a public company, which would likely be eliminated as a result of the
merger, against the advantages of being a private company. The board concluded
that the overall benefits of the transaction to Interlinq and its shareholders,
including those that would result from being a private company, were not
significantly offset by the loss of the benefits of being a public company.
Therefore, the likely result of Interlinq becoming a private company as a result
of the transaction did not affect the board's determination that the merger is
fair to Interlinq's shareholders. The frequently cited benefits of being a
public company include having the ability to use the company's stock as
consideration in acquisitions of other companies, having a ready market for
additional equity offerings, and having access to equity analyst coverage that
promotes the company and its stock. The Interlinq board did not believe that any
acquisitions of other companies by Interlinq were likely in the foreseeable
future, because Interlinq intended to focus on the integration and development
of its recently acquired enterprise application integration software division,
rather than on identifying and pursuing any new acquisition targets. Further,
because of Interlinq's low stock price, any further acquisitions using stock
would likely be overly dilutive to existing shareholders. In addition, because
of Interlinq's available cash and low trading price, there was no foreseeable
reason to sell additional equity in the market.
In contrast, the ongoing costs of being a public company are relatively
high. Interlinq estimates that it costs approximately $240,000 a year to comply
with the registration and disclosure requirements imposed by the SEC and the
NASD, and Interlinq's board and executive officers devoted a significant number
of hours to compliance with these requirements at the expense of focusing on
Interlinq's growth and development. In addition, equity analysts focus on public
companies' quarterly performance, which encourages the management of these
companies to also focus on relatively short-term performance, rather than on
long-term performance that may ultimately result in much greater shareholder
value.
The Interlinq board also considered that if Interlinq becomes a private
company, its shareholders would no longer have access to information about
Interlinq contained in its periodic reports and other filings with the SEC,
since those filing requirements would be terminated at the end of Interlinq's
current fiscal year. Although Interlinq shareholders who remain as shareholders
after Interlinq is no longer public would receive annual audited financial
statements from Interlinq upon their request, they would not receive as much
quarterly information, or as much narrative information about Interlinq's
business and its financial condition and results of operations as is currently
available to them through Interlinq's SEC filings. The Interlinq board did not
believe that this reduction in information materially detracted from the
fairness of the transaction.
Procedural Fairness Considerations by the Interlinq Board
The Interlinq board believes that the merger is procedurally fair because:
- the special committee consisted of independent nonemployee directors
appointed to represent the interests of Interlinq shareholders other than
W. R. Hambrecht + Co. and affiliated entities;
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- the cash payment of $9.25 per share and the other terms and conditions of
the merger agreement resulted from active and lengthy arm's-length
bargaining between the special committee and Terlin;
- the special committee retained and was advised by Broadview; and
- Broadview rendered an opinion concerning the fairness, from a financial
point of view, of the consideration to be received by the shareholders,
other than W. R. Hambrecht + Co. and affiliated entities, in the merger.
Because the number of shares held by persons or entities affiliated, as
that term is defined in Rule 13e-3 of the Exchange Act, with Interlinq is
negligible, the Interlinq board did not require that the merger agreement be
approved by a majority of the outstanding unaffiliated shares.
Factors Considered by Jiri M. Nechleba.
In addition to considering the fairness of the merger to the independent
shareholders in his capacity as a director, Mr. Nechleba also considered the
fairness of the merger in his personal capacity as an affiliate. Mr. Nechleba
considered the same factors in his personal capacity that were considered by the
entire board and adopted the same conclusions with regard to the fairness of the
merger as were adopted by the entire board.
Factors Considered by William R. Hambrecht and W.R. Hambrecht + Co.
William R. Hambrecht and W.R. Hambrecht + Co. believe that the merger is
fair to the unaffiliated shareholders of Interlinq for the following reasons:
- The merger was approved by the special committee, consisting of three
independent members of the Interlinq board of directors.
- The Interlinq board of directors unanimously found the merger to be fair.
- Under Delaware law, if another person had made an offer to acquire
Interlinq after the signing of the merger agreement, the Interlinq board
of directors would have been obligated to consider the offer. The merger
agreement provides that the Interlinq board of directors may terminate
the merger agreement if an alternative offer is superior to the terms of
the merger agreement. To William R. Hambrecht's and W.R. Hambrecht +
Co.'s knowledge, since the signing of the merger agreement, Interlinq has
not been contacted regarding any alternative offers to acquire Interlinq.
William R. Hambrecht and W.R. Hambrecht + Co. considered the first two of
these factors to be the most important in reaching their determinations of
fairness. William R. Hambrecht and W.R. Hambrecht + Co. have not independently
evaluated whether the consideration offered unaffiliated shareholders of
Interlinq constitutes fair value in relation to the current or historical market
prices of Interlinq or its net book value, going concern value, or liquidation
value, but instead are relying upon the conclusions of the Interlinq board of
directors.
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<PAGE> 33
PURPOSE AND STRUCTURE OF THE MERGER
The purpose of the merger is for Terlin and its affiliates to acquire a
majority of Interlinq common stock and thus control of Interlinq and,
potentially, for Interlinq to become a private company. Following the merger,
the total number of outstanding shares of Interlinq common stock will decrease
from approximately 5,130,000 shares to approximately 3,400,000. Shares held by
W. R. Hambrecht + Co. and related entities will increase from approximately 7.3%
of Interlinq before the merger to at least 63.3% after the merger, while shares
held by all other Interlinq shareholders will decrease from approximately 92.7%
before the merger to no more than 36.7% after the merger.
The Interlinq board believes that Interlinq may be better served by
becoming a private company because of cost savings and because it will enable
Interlinq's management to focus on long-term growth rather than expend time on
compliance with the disclosure requirements and satisfy short-term market
performance expectations. In addition, the Interlinq board believes that
Interlinq's stock has been undervalued by the public market, largely because
Interlinq suffers from a lack of equity analyst coverage and the board and
management believe that the equity markets do not fully understand Interlinq's
mix of mortgage software and enterprise integration software products. Given
Interlinq's relatively small market capitalization and unique mix of products
and services the board did not believe that equity analysts would not be
inclined to dedicate the time necessary to understand the company or to initiate
coverage of the company.
The merger is structured as a leveraged recapitalization. Interlinq will
incur substantial indebtedness to make the $9.25 per share cash payment and the
payment of transaction costs and fees. Interlinq will incur approximately
$22,500,000 in senior debt, and issue warrants in connection with this debt.
Interlinq will also spend from its cash reserves an amount not to exceed
$6,900,000, however, if approved by the board this may be increased to
$8,100,000. In addition, Terlin is expected to be capitalized with approximately
$13,850,000 in equity prior to the merger, and that amount will be used to pay a
portion of the aggregate payment to shareholders.
If the merger is consummated, Interlinq shareholders who only receive cash
for their Interlinq common stock and do not retain any shares will no longer
have an equity interest in Interlinq and will therefore not share in its future
earnings and growth. The merger is not structured so that approval of a majority
of the shares of Interlinq common stock held by the Interlinq shareholders
unaffiliated with Interlinq or Terlin is required, but instead requires approval
of a majority of shares of Interlinq common stock held by all Interlinq
shareholders.
MERGER CONSIDERATION; STOCK ELECTION
In the merger, 1,250,000 shares of Interlinq common stock excluding any
shares held by shareholders who have properly exercised dissenters' rights, will
remain outstanding. All other outstanding shares of Interlinq common stock will
be converted into the right to receive the cash payment of $9.25 per share. An
Interlinq shareholder will be able to elect, as to all or a part of his or her
shares of Interlinq common stock, to retain such shares and continue to own them
after the merger. If holders of more than 1,250,000 shares of Interlinq common
stock elect to retain their shares, such holders will retain shares pro rata
based on the number of shares they initially requested to retain, and will
receive the cash payment of $9.25 per share for their remaining shares. If
holders of fewer than 1,250,000 shares elect to retain their shares,
shareholders who would otherwise receive the cash
27
<PAGE> 34
payment of $9.25 per share for all their shares will instead retain a pro rata
portion of their shares.
Possible Effects of Proration.
The following table sets forth the per share cash amount that a holder of
1,000 shares of Interlinq common stock would receive assuming that the holder of
the shares elects to either receive cash for all 1,000 shares or to retain all
1,000 shares held and that varying percentages of the total shares of Interlinq
common stock elect to receive cash in exchange for those shares. This table is
based on approximately 5,130,000 Interlinq shares being outstanding before the
merger. This table expands upon information previously presented in summary
format on the cover page of this proxy statement/prospectus.
<TABLE>
<CAPTION>
SHAREHOLDER ELECTS CASH FOR SHAREHOLDER ELECTS TO RETAIN
ALL 1,000 SHARES ALL 1,000 SHARES
PERCENT OF ---------------------------------- ----------------------------------
TOTAL SHARES NUMBER OF NUMBER OF
THAT ELECT TO NUMBER OF SHARES EXCHANGED SHARES EXCHANGED NUMBER OF
RECEIVE CASH RETAINED SHARES FOR CASH FOR CASH RETAINED SHARES
- ------------- --------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
100% 244 756 0 1,000
90% 160 849 0 1,000
80% 55 945 0 1,000
70% 0 1,000 56 944
60% 0 1,000 156 844
50% 0 1,000 256 744
40% 0 1,000 356 644
30% 0 1,000 456 544
20% 0 1,000 556 444
10% 0 1,000 656 344
0% 0 1,000 756 244
</TABLE>
BROADVIEW'S FAIRNESS OPINION
Pursuant to a letter agreement dated as of December 11, 1998, Broadview was
engaged to render an opinion to Interlinq's board regarding the fairness, from a
financial point of view, of the consideration to be received in the merger by
the Interlinq shareholders. Broadview was selected by Interlinq's board based on
Broadview's reputation and experience in the information technology,
communication and media sector and the computer software industry in particular.
At the meeting of Interlinq's board on December 29, 1998, Broadview rendered its
opinion that, as of December 29, 1998, based upon and subject to the various
factors and assumptions described in its opinion, the consideration was fair,
from a financial point of view, to Interlinq shareholders other than Terlin and
its affiliates. In addition, at the meeting of the special committee on December
22, 1998, Broadview presented its methodology for valuing Interlinq under
scenarios assuming (1) consummation of the merger, or (2) that Interlinq remains
a stand-alone entity.
The Broadview opinion, which describes the assumptions made, matters
considered, and limitations on the review undertaken by Broadview, is attached
as Appendix B to this proxy statement/prospectus. Interlinq shareholders are
urged to, and should, read the Broadview opinion carefully and in its entirety.
Broadview's opinion is directed to Interlinq's board and addresses only the
fairness, from a financial point of view, of the
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<PAGE> 35
proposed consideration to be received by the holders of Interlinq common stock
(other than Terlin and its affiliates) as of the date of the opinion.
Broadview's opinion does not address any other aspect of the merger and does not
constitute a recommendation to any Interlinq stockholder as to how to vote with
respect to the merger or any related transaction or as to whether any
stockholder should elect to receive cash or retain shares in the surviving
corporation. The summary of Broadview's opinion included in this proxy
statement/prospectus, although materially complete, is qualified by reference to
the full text of Broadview's opinion.
In connection with rendering its opinion, Broadview, among other things:
- reviewed the terms of the draft merger agreement;
- reviewed Interlinq's Form 10-K for the fiscal year ended June 30, 1998
and Interlinq's Form 10-Q for the fiscal quarter ended September 30,
1998;
- reviewed internal financial and operating information relating to
Interlinq prepared by Interlinq management, including financial
projections through June 30, 2004 for Interlinq (which assumed the merger
does not occur) as well as certain pro forma effects on Interlinq's
capital structure after giving effect to the merger;
- participated in discussions with Interlinq management concerning the
operations, business strategy, current financial performance and
prospects for Interlinq;
- discussed with Interlinq management its view of the strategic rationale
for the merger;
- discussed with Terlin management its view of the strategic rationale for
the merger;
- discussed with Terlin management the pro forma capital structure for
Interlinq;
- analyzed the anticipated effect of the merger on the future financial
performance of Interlinq;
- reviewed the recent reported closing prices and trading activity for
Interlinq common stock;
- reviewed recent equity analyst reports covering Interlinq; and
- conducted other financial studies, analyses and investigations as
Broadview deemed appropriate for purposes of Broadview's opinion.
In rendering its opinion, Broadview relied, without independent
verification, on
- the accuracy and completeness of all the financial and other information
that was publicly available or furnished to Broadview by Interlinq for
purposes of the opinion,
- the assessment by the management of Interlinq and Terlin of the strategic
and other benefits expected to result from the merger, and
- information provided by Terlin management regarding the pro forma
capitalization and related terms of the proposed capital structure of
Interlinq assuming consummation of the merger. Broadview also assumed
that neither Interlinq nor Terlin was involved in any material
transaction as of the date of the opinion other
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<PAGE> 36
than the merger and those activities undertaken in the ordinary course of
conducting their respective businesses.
In conducting its analyses based on the future performance of Interlinq,
Broadview utilized financial projections provided by Interlinq management and,
in certain analyses, projections based on equity research analyst reports. Among
other things, Interlinq management projects revenues derived from loan
origination-related products and services to decrease from 86.3% of total
revenues for Interlinq's fiscal year ended June 30, 1998 to 49.2% of total
revenues for Interlinq's fiscal year ending June 30, 2001. Interlinq management
expects revenues from loan servicing and enterprise application integration
products and services to comprise an increasing portion of total revenues
throughout the periods for which Interlinq management provided projections. With
respect to the financial projections provided by Interlinq management, Broadview
assumed (1) that they were reasonably prepared and reflected the best available
estimates and good faith judgments of the management of Interlinq as to the
future performance of Interlinq, including the pro forma operating financial
impact of the merger on Interlinq, and (2) based on representations from
Interlinq management and conversations with Terlin management, that they were
identical, in all material respects, to the projections provided to Terlin
management.
In reviewing these financial projections, Broadview considered the
prospects for FlowMan, Interlinq's enterprise application integration product,
and peripheral opportunities attributable to the FlowMan product line.
Interlinq's projections included no significant revenues resulting from the
FlowMan product line until the year ending June 30, 2001 and, given the nascence
of the enterprise application integration market and the early stage of
Interlinq's FlowMan product development efforts, Broadview did not consider
Interlinq's projections unreasonable. In addition, due to Interlinq's minimal
financial history associated with the FlowMan product line and due to the risks
inherent in the enterprise application software market, Broadview did not
attribute any additional premium value to the FlowMan product line incremental
to its other valuation analyses.
In performing its analyses, Broadview considered the potential relative
increase in Interlinq's more stable revenue streams as a percentage of
Interlinq's total revenues. The projected relative increases in more stable
revenues was considered in the context of selecting the Interlinq Comparable
Index described below.
Broadview did not make or obtain any independent appraisal or valuation of
any of Interlinq's assets. Broadview did not review any internal financial
projections prepared by Terlin management, as such projections were not made
available to Broadview. Broadview's opinion does not address the relative merits
of the merger as compared to other potential business strategies which Interlinq
could pursue. Broadview's opinion is necessarily based upon market, economic,
financial and other conditions as they existed and could be evaluated at
December 29, 1998, and any change in those conditions since that date may impact
Broadview's opinion. Broadview's opinion did not express any opinion as to the
price at which Interlinq common stock or the common stock of the surviving
corporation of the merger will trade at any time.
The following is a brief summary of some of the sources of information and
valuation methodologies employed by Broadview in rendering its opinion. These
analyses were presented to the Interlinq board at its meeting on December 29,
1998. This summary includes the financial analyses used by Broadview and deemed
to be material, but does not purport to be a complete description of analyses
performed by Broadview in arriving at its
30
<PAGE> 37
opinion. This summary of financial analyses includes information presented in
tabular format. In order fully to understand the financial analyses used by
Broadview, the tables must be read together with the text of each summary. The
tables alone do not constitute a complete description of the financial analyses.
Interlinq Stock Performance Analysis. Broadview reviewed the stock
performance of Interlinq from December 12, 1997 to December 28, 1998 and
compared the stock performance of Interlinq to that of the following indices
during the same period:
- The S&P 500; and
- The Interlinq Comparable Index, consisting of the following companies:
- Sanchez Computer Associates, Inc;
- Advent Software, Inc;
- SS&C Technologies, Inc;
- FDP Corporation;
- Carreker-Antinori, Inc; and
- CFI ProServices, Inc.
This index is comprised of public companies Broadview deemed comparable to
Interlinq. Broadview selected companies competing in the enterprise applications
software industry providing software solutions for financial institutions, with
the following financial operating characteristics:
- positive net margins over the last twelve months;
- revenue between $10 million and $100 million over the last twelve months;
- revenue growth greater than 10% over the last twelve months; and
- projected revenue growth between 10% and 50% for the calendar year ending
December 31, 1999.
Broadview compared the aggregate per share consideration to be received by
Interlinq shareholders to Interlinq's stock performance, and Interlinq's stock
performance to the performances of the Interlinq Comparable Index and the S&P
500 Index. Broadview concluded that the aggregate per share consideration to be
received by Interlinq shareholders represented a reasonable premium to
Interlinq's current share price, Interlinq's weekly high closing price during
this period, and Interlinq's weekly average share price during this period. In
addition, based on Interlinq outperforming these indices during the period,
Broadview concluded that a premium implied by the aggregate per share
consideration could be reasonably assessed in relation to Interlinq's recent
trading history.
Public Company Comparables Analysis. Broadview considered ratios of share
price and market capitalization, adjusted for cash and debt when appropriate, to
selected historical and projected operating results in order to derive values
placed on a company in a particular market segment. In order to perform this
analysis, Broadview compared financial information of Interlinq with publicly
available information for companies comprising the Interlinq Comparable Index.
For this analysis, as well as other analyses, Broadview examined publicly
available information, as well as a range of estimates based on securities
research analyst reports and financial projections prepared by Interlinq
management.
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<PAGE> 38
The following table presents, as of December 28, 1998, the median multiples
and the range of multiples for the Interlinq Comparable Index of total market
capitalization (defined as equity market capitalization plus total debt minus
cash and equivalents), equity market capitalization and share price divided by
selected operating results:
<TABLE>
<CAPTION>
MEDIAN RANGE OF
MULTIPLE MULTIPLES
-------- -------------
<S> <C> <C>
Total Market Capitalization to Last Twelve Months
Revenue......................................... 1.6 0.7 - 6.2
Total Market Capitalization to Last Quarter
Annualized Revenue.............................. 1.4 0.6 - 5.1
Total Market Capitalization to Earnings Before
Interest and Taxes.............................. 18.8 6.3 - 31.9
Price to Last Twelve Months Earnings Per Share.... 21.6 11.6 - 46.9
Total Market Capitalization to Projected Calendar
Year 1999 Revenue............................... 1.1 0.6 - 4.0
Price to Projected Calendar Year 1999 Earnings Per
Share........................................... 14.8 9.4 - 30.4
Price to Growth Adjusted Projected Calendar Year
1999 Earnings Per Share......................... 0.52 0.38 - 0.83
</TABLE>
The following table presents, as of December 28, 1998, the median implied
value and the range of implied values of Interlinq's stock price assuming the
merger does not occur, calculated using the multiples shown above and the
appropriate Interlinq operating results:
<TABLE>
<CAPTION>
MEDIAN RANGE OF
IMPLIED VALUE IMPLIED VALUES
------------- --------------
<S> <C> <C>
Total Market Capitalization to Last Twelve
Months Revenue............................... $ 7.48 $4.45 - $24.04
Total Market Capitalization to Last Quarter
Annualized Revenue........................... $ 7.40 $4.46 - $22.61
Total Market Capitalization to Earnings Before
Interest and Taxes........................... $11.60 $5.14 - $18.42
Price to Last Twelve Months Earnings Per
Share........................................ $ 8.73 $4.70 - $19.02
Total Market Capitalization to Projected
Calendar Year 1999 Revenue................... $ 7.37 $4.72 - $21.26
Price to Projected Calendar Year 1999 Earnings
Per Share.................................... $ 9.16 $5.79 - $18.75
Price to Growth Adjusted Projected Calendar
Year 1999 Earnings Per Share................. $ 9.04 $6.61 - $14.37
</TABLE>
No company utilized in the public company comparables analysis as a
comparison is identical to Interlinq. In evaluating the comparables, Broadview
made numerous assumptions with respect to enterprise applications software
industry performance and general economic conditions, many of which are beyond
Interlinq's control. Mathematical analyses, such as determining the median,
average or range, is not in itself a meaningful method of using comparable
company data.
Transaction Comparables Analysis. Broadview considered ratios of equity
purchase price, adjusted for the seller's cash and debt when appropriate, to
selected historical operating results in order to indicate values strategic and
financial acquirers have been willing to pay for companies in a particular
market segment. In order to perform this analysis, Broadview reviewed a number
of transactions it considered similar to the merger.
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<PAGE> 39
Broadview selected these transactions by choosing recent transactions involving
sellers in the enterprise applications software industry, providing software
solutions for financial institutions, with revenues between $10 million and $100
million in the last reported twelve months before their acquisition. For this
analysis, as well as other analyses, Broadview examined publicly available
information, as well as information from Broadview's proprietary database of
published and confidential merger and acquisition transactions in the
information technology, communication and media industries. These transactions
consisted of the acquisition of:
- Infinity Financial Technology, Inc by Sungard Data Systems Inc;
- Servantis Systems Holdings, Inc by Checkfree Corporation;
- The Frustrum Group, Inc by Misys plc;
- Checkfree Corporation (Mortgage Products Division) by London Bridge
Software Holdings plc;
- C*ATS Software Inc by Misys plc (pending);
- National Computer Systems, Inc (NCS Financial Systems, Inc subsidiary) by
Sungard Data Systems Inc;
- CUSA Technologies, Inc by Fiserv, Inc; and
- Confidential by Confidential.
The following table presents, as of December 28, 1998, the median multiple
and the range of multiples of adjusted price (defined equity price plus total
debt minus cash and cash equivalents) divided by the seller's revenue in the
last reported twelve months prior to acquisition for the transactions listed
above:
<TABLE>
<CAPTION>
MEDIAN RANGE OF
MULTIPLE MULTIPLES
-------- ---------
<S> <C> <C>
Adjusted Price to Last Reported Twelve Months
Revenue........................................... 1.9x 0.7x - 5.0x
</TABLE>
The following table presents, as of December 28, 1998, the median implied
value and the range of implied values of Interlinq's stock, calculated using the
multiples shown above and Interlinq's revenues for the twelve months ended
September 30, 1998:
<TABLE>
<CAPTION>
MEDIAN RANGE OF
IMPLIED VALUE IMPLIED VALUES
------------- --------------
<S> <C> <C>
Adjusted Price to Last Reported Twelve
Months Revenue............................. $8.47 $4.36 - $19.80
</TABLE>
No transaction utilized as a comparable in the transaction comparables
analysis is identical to the merger. In evaluating the comparables, Broadview
made numerous assumptions with respect to enterprise applications software
industry performance and general economic conditions, many of which are beyond
the control of Interlinq or Terlin. Mathematical analysis, such as determining
the average, median or range, is not in itself a meaningful method of using
comparable transaction data.
Transaction Premiums Paid Analysis. Broadview considered the premiums paid
above a seller's share price in order to determine the additional value
strategic and financial acquirers, when compared to public shareholders, are
willing to pay for companies
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<PAGE> 40
in a particular market segment. In order to perform this analysis, Broadview
reviewed 25 transactions involving publicly-held software companies. Broadview
selected these transactions from its proprietary database by choosing recent
transactions with an equity purchase price between $20 million and $100 million.
The following table presents, as of December 28, 1998, the median premium
and the range of premiums for these transactions calculated by dividing
(1) the offer price per share minus the closing share price of the seller's
common stock twenty trading days or one trading day prior to the public
announcement of the transaction, by
(2) the closing share price of the seller's common stock twenty trading
days or one trading day prior to the public announcement of the
transaction:
<TABLE>
<CAPTION>
MEDIAN RANGE OF
PREMIUM PREMIUMS
------- ---------------
<S> <C> <C>
Premium Paid to Seller's Share Price 20 Trading
Days Prior to Announcement...................... 55.6% (26.3)% - 326.6%
Premium Paid to Seller's Share Price 1 Trading Day
Prior to Announcement........................... 21.1% (31.7)% - 186.7%
</TABLE>
The following table presents the median implied value and the range of
implied values of Interlinq's stock, calculated by using the premiums shown
above and Interlinq's share price 20 trading days and one trading day prior to
December 3, 1998, the date Broadview assumed public announcement of the merger
was made:
<TABLE>
<CAPTION>
MEDIAN RANGE OF
IMPLIED VALUE IMPLIED VALUES
------------- --------------
<S> <C> <C>
Premium Paid to Seller's Share Price 20 Trading
Days Prior to Announcement................... $10.11 $4.79 - $27.73
Premium Paid to Seller's Share Price 1 Trading
Day Prior to Announcement.................... $ 9.16 $5.17 - $21.68
</TABLE>
No transaction utilized as a comparable in the transaction comparables
analysis is identical to the merger. In evaluating the comparables, Broadview
made numerous assumptions with respect to enterprise applications software
industry performance and general economic conditions, many of which are beyond
the control of Interlinq or Terlin. Mathematical analysis, such as determining
the average, median or range, is not in itself a meaningful method of using
comparable transaction data.
Present Value of Projected Share Price Analysis. Based on selected median
trading multiples of companies in the Interlinq Comparable Index and Interlinq's
own trading multiples, Broadview calculated the per share present values of
Interlinq shares assuming Interlinq were to remain a stand-alone entity. This
analysis was performed based on both Interlinq management projections and equity
research analyst projections for Interlinq for the year ending December 31,
1999. Broadview calculated the implied share prices at discount rates ranging
from 10.0% to 20.0% determined by the Capital Asset Pricing Model with the risk
implied by the past stock performance of the Interlinq Comparable Index.
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<PAGE> 41
The following table presents the range of implied values of Interlinq
shares based on the median multiples of the Interlinq Comparable Index and using
Interlinq management's financial projections:
<TABLE>
<CAPTION>
RANGE OF
IMPLIED VALUES
----------------
<S> <C> <C>
Total Market Capitalization to Last Twelve Months
Revenue................................................ $ 8.64 $ 9.50
Total Market Capitalization to Earnings Before Interest
and Taxes.............................................. $17.14 $18.84
Price to Last Twelve Months Earnings Per Share........... $12.12 $13.32
</TABLE>
The following table presents the implied values of Interlinq shares based
on the median multiples of the Interlinq Comparable Index and using equity
research analyst projections:
<TABLE>
<CAPTION>
RANGE OF
IMPLIED VALUES
----------------
<S> <C> <C>
Total Market Capitalization to Last Twelve Months
Revenue................................................ $ 8.36 $ 9.20
Total Market Capitalization to Earnings Before Interest
and Taxes.............................................. $16.82 $18.49
Price to Last Twelve Months Earnings Per Share........... $12.64 $13.90
</TABLE>
The following table presents the implied values of Interlinq shares based
on Interlinq's own multiples and using Interlinq management's financial
projections:
<TABLE>
<CAPTION>
RANGE OF
IMPLIED VALUES
----------------
<S> <C> <C>
Total Market Capitalization to Last Twelve Months
Revenue................................................ $ 7.73 $ 8.50
Total Market Capitalization to Earnings Before Interest
and Taxes.............................................. $ 9.45 $10.39
Price to Last Twelve Months Earnings Per Share........... $10.19 $11.20
</TABLE>
The following table presents the implied values of Interlinq shares based
on Interlinq's own multiples and using equity research analyst projections:
<TABLE>
<CAPTION>
RANGE OF
IMPLIED VALUES
----------------
<S> <C> <C>
Total Market Capitalization to Last Twelve Months
Revenue................................................ $ 7.49 $ 8.23
Total Market Capitalization to Earnings Before Interest
and Taxes.............................................. $ 9.28 $10.21
Price to Last Twelve Months Earnings Per Share........... $10.63 $11.68
</TABLE>
Broadview noted that several of the implied values resulting from this
analysis exceeded the aggregate implied per share value of the consideration to
be received by Interlinq shareholders. In arriving at its opinion, Broadview
considered the results of all of its analyses as a whole, including this
analysis, and did not attribute any particular weight to this analysis or factor
considered by it. Furthermore, Broadview believes that selecting any portion of
its analyses, without considering all analyses, would create an incomplete view
of the process underlying its opinion. In addition, Broadview noted that several
assumptions which affect the results of the Present Value of Projected Share
Price Analysis could result in an overstatement or understatement of the actual
present value of Interlinq's future share price, including, but not limited to:
Interlinq's ability to meet its internal projections and those of equity
research analysts; metrics implied by Interlinq's public company comparables,
which are likely to fluctuate and are not necessarily the
35
<PAGE> 42
multiples that shareholders will attribute to Interlinq; and the weighted
average cost of capital used to discount the implied projected Interlinq share
prices.
Consideration of the Discounted Cash Flows Valuation Methodology. Broadview
did not employ a discounted cash flows analysis for the purposes of this
opinion. For a growing company such as Interlinq, a preponderance of the value
in a valuation based on discounted cash flow will be in the terminal value of
the entity, which represents the value of cash flows in perpetuity, which is
extremely sensitive to assumptions about the sustainable long-term growth rate
of the company. Given the uncertainty in estimating both the future cash flows
and sustainable long-term growth rate for Interlinq, Broadview considered a
discounted cash flows analysis inappropriate for valuing Interlinq.
Evaluation of Consideration. Broadview assumed that all shareholders would
make identical elections and that the aggregate cash and shares to be retained
would be allocated pro rata in accordance with the merger agreement. Broadview
then assessed a range of combined values of cash and shares to be retained in
the surviving corporation by Interlinq shareholders after giving effects to
Interlinq's pro forma capital structure assuming consummation of the merger. To
evaluate the aggregate consideration to be received, Broadview:
- performed an analysis of cash consideration to be received, for which
Broadview calculated $7.22 per share; and
- performed a leveraged recapitalization analysis for the surviving
corporation to value Interlinq shareholders' ownership in the surviving
corporation.
To perform the leveraged recapitalization analysis, Broadview used
Interlinq management's financial projections for the fiscal years ending
December 31, 1999 through 2002 and Terlin management's proposed capital
structure for the surviving corporation, and considered additional dilution to
Interlinq shareholders resulting from the merger. Assumptions used in performing
the analysis included:
- $22.5 million in total debt consisting of:
- $12.5 million of senior debt bearing a 10.0% annual interest rate and
due seven years from the merger; and
- $10.0 million of subordinated debt bearing a rate of 200 basis points in
excess of the prime rate (Broadview assumed a rate on subordinated debt
of 9.8%) due seven years from the merger; and
- additional securities that would be issued to Interlinq directors,
management, employees, attorneys, and providers of subordinated debt
facilities as a result of the merger that would dilute Interlinq
shareholders' ownership in the surviving corporation upon consummation of
the merger by up to 23.7% (on a fully diluted basis).
Broadview performed a pre-money valuation on a hypothetical liquidity event
occurring between 18 and 30 months from December 31, 1998, based on discussions
with Terlin management regarding their intent for the surviving corporation.
This analysis was based on (1) the median ratio of total market capitalization
to earnings before interest and taxes for the latest twelve months for the
Interlinq Comparable Index, (2) Interlinq management's financial projections for
the fiscal years ending December 31, 2000 and 2001, and (3) assumptions for the
capital structure for the surviving corporation provided
36
<PAGE> 43
by Terlin management. Broadview discounted equity values implied by the analysis
by a cost of equity discount rate of 22.2% to December 29, 1998. This discount
rate was implied by the proposed capital structure for the surviving corporation
and using Capital Asset Pricing Model with risk implied by the past stock
performance of the Interlinq Comparable Index. Using this methodology, Broadview
calculated a per share range of present values of the surviving corporation of
$3.00 to $3.81.
In connection with the review of the merger by the Interlinq board,
Broadview performed a variety of financial and comparative analyses. The summary
set forth above does not purport to be a complete description of the analyses
performed by Broadview in connection with the merger.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. In arriving
at its opinion, Broadview considered the results of all of its analyses as a
whole and did not attribute any particular weight to any analysis or factor
considered by it. Furthermore, Broadview believes that selecting any portion of
its analyses, without considering all analyses, would create an incomplete view
of the process underlying its opinion.
In performing its analyses, Broadview made numerous assumptions with
respect to industry performance and general business and economic conditions and
other matters, many of which are beyond the control of Interlinq or Terlin. The
analyses performed by Broadview are not necessarily indicative of actual values
or actual future results, which may be significantly more or less favorable than
suggested by such analyses. The consideration to be received by Interlinq
shareholders pursuant to the merger agreement and other terms of the merger
agreement were determined through arm's length negotiations between Interlinq
and Terlin, and were approved by Interlinq's board. Broadview provided advice to
Interlinq's board during these negotiations; however, Broadview did not
recommend any specific consideration to Interlinq's board or that any specific
consideration constituted the only appropriate consideration for the merger.
Broadview's opinion and presentation to Interlinq's board was one of many
factors taken into consideration by Interlinq's board in making its decision to
approve the merger. Consequently, the Broadview analyses as described above
should not be viewed as determinative of the opinion of Interlinq's board with
respect to the value of Interlinq or of whether Interlinq's board would have
been willing to agree to a different consideration.
Pursuant to the terms of an engagement letter between Interlinq and
Broadview, Broadview was engaged to render an opinion to the Interlinq Board
regarding the fairness, from a financial point of view, of the consideration to
be received in the merger by the Interlinq shareholders. Interlinq has paid
Broadview a fairness opinion fee of $300,000. In addition, Interlinq has agreed
to reimburse Broadview for its reasonable expenses, including fees and
disbursements of its counsel, and to indemnify Broadview and its affiliates
against certain liabilities and expenses related to their engagement, including
liabilities under the federal securities laws. The terms of the fee arrangement
with Broadview, which Interlinq and Broadview believe are customary in
transactions of this nature, were negotiated at arm's length between Interlinq
and Broadview, and the Interlinq board was aware of the nature of the fee
arrangement.
KPMG LLP'S PURCHASE PRICE ALLOCATION REPORT
KPMG LLP was retained by Interlinq to assist Interlinq in preparing its
purchase price allocation in connection with Interlinq's acquisition of Logical
Software Solutions
37
<PAGE> 44
Corporation on June 30, 1998. Interlinq retained KPMG LLP based on their
expertise in accounting and auditing and because of Interlinq's established
relationship with KPMG LLP, who has served as Interlinq's independent auditor
since 1986. KPMG LLP was engaged to assist with the purchase price allocation
after the purchase price had been established by the parties. KPMG LLP's report,
therefore, was not used to establish or determine the fairness of the purchase
price for the acquisition of Logical Software Solutions Corporation. During the
past two years, Interlinq has paid KPMG LLP fees totaling $365,000 for auditing
and accounting services provided by KPMG LLP to Interlinq, including the
preparation of the purchase price allocation report. A copy of the report has
been filed as an exhibit to the registration statement on Form S-4 filed by
Interlinq with the SEC relating to this proxy statement/prospectus.
The purchase price allocation report utilized assumptions provided by
Interlinq and analyzed each asset acquired, and applied the valuation
methodologies thought to be most appropriate for each asset. Each of three
generally accepted approaches to valuation were considered in the analysis. The
three generally accepted valuation approaches are the income, the cost and the
market approaches. The income approach uses a discounted cash flow analysis, in
which the fair value of an asset is equivalent to the present value of all
estimated future cash flows it is expected to generate. Additional adjustments
may be made to reflect special circumstances that would affect value. The market
approach examines publicly traded companies and transactions in the marketplace
in order to relate the value of similar companies and assets and recent
transactions to the companies and assets being valued. The cost approach is a
replacement cost approach, under which the fair value of an asset is equal to
the cost to replace the functionality of that asset.
The total purchase consideration paid by Interlinq in the Logical Software
Solutions Corporation transaction was approximately $5.4 million, consisting of
$3.6 million in cash, $1.4 million in stock and $0.4 million of direct
acquisition costs. Of the total consideration paid, $4.0 million was allocated
to goodwill and other intangible assets, $1.3 million was allocated to acquired
in-process research and development, and the remainder was allocated to other
current and noncurrent long-term assets and liabilities.
PLANS FOR INTERLINQ AFTER THE MERGER
It is expected that after the merger Interlinq's business and operations
will, except as set forth in this proxy statement/prospectus, continue to be
conducted substantially as they are now. Except for the merger or as
contemplated in the merger agreement, neither Interlinq nor Terlin has any
present plans relating to or resulting in an extraordinary corporate transaction
such as a merger, reorganization or liquidation involving Interlinq or a sale or
other transfer of a material amount of Interlinq's assets or any changes in
Interlinq's corporate structure or business. Interlinq and Terlin, however, will
continue to evaluate the business and operations of Interlinq after the merger
and make such changes as they deem appropriate.
MANAGEMENT FOLLOWING THE MERGER
Interlinq's current officers and directors will remain its officers and
directors after the merger, with the addition of John D. Delafield, who will
serve as a director. For more information regarding Interlinq's officers and
directors, see "Director and Executive Officer Information."
38
<PAGE> 45
RISK THAT MERGER WILL NOT BE CONSUMMATED
Consummation of the merger is subject to a number of conditions, including,
without limitation:
- approval by Interlinq shareholders at the special meeting;
- the absence of an injunction or other order restraining consummation of
the merger;
- the absence of any material adverse effect on Interlinq's business,
operating results and financial condition; and
- the receipt of the required financing to complete the merger and meet
working capital requirements.
We expect that if the merger agreement and the merger are not approved by
Interlinq shareholders, or if the merger is not consummated for any other
reason, Interlinq's current management, under the direction of the Interlinq
board, will continue to manage Interlinq as an on-going business. We are not
considering any other transaction as an alternative to the merger.
ANTICIPATED ACCOUNTING TREATMENT
For financial reporting purposes, we expect that the merger and all
transactions contemplated by the merger agreement will be accounted for as a
leveraged recapitalization. This means that the transaction is structured to
transfer the controlling interest of an operating entity to a new investor
without a change in accounting basis of the assets and liabilities presented in
the separate stand-alone financial statements of the operating entity.
NASDAQ DELISTING
Following the consummation of the merger, we may seek to have our common
stock delisted from the Nasdaq. Under the merger agreement, however, if
proration is required because holders of our common stock elect to retain less
than 1,250,000 shares, we will not voluntarily delist our common stock for at
least six months after the merger.
DISSENTERS' RIGHTS
Our shareholders have the right to dissent from the proposed merger and,
subject to some conditions, to receive payment of the "fair value" of their
shares of common stock, as provided in Sections 23B.13.101 through 23B.13.310 of
the Washington Business Corporation Act. See "Rights of Dissenting Interlinq
Shareholders."
SOME EFFECTS OF THE MERGER
Following the merger, the total number of outstanding shares of Interlinq
common stock will decrease from approximately 5,130,000 to approximately
3,400,000. Shares held by W.R. Hambrecht + Co. and related entities will
increase from approximately 7.3% of Interlinq before the merger to at least
63.3% after the merger, while shares held by all other Interlinq shareholders
will decrease from approximately 92.7% before the merger to no more than 36.7%
after the merger.
39
<PAGE> 46
If the merger is consummated, Interlinq shareholders who only receive the
cash payment of $9.25 per share for their Interlinq common stock and do not
retain any shares will no longer have an equity interest in Interlinq and will
not share in its future earnings and growth, if any. Interlinq shareholders who
retain shares will be subject to dilution upon the grant of options to purchase
shares of Interlinq common stock to management, directors and employees
following the merger and when warrants in connection with the merger are issued.
Fewer shares of Interlinq common stock will be outstanding after the
merger, than before the merger. For that reason, each retained share of
Interlinq common stock will represent a greater equity interest in Interlinq
than that share represented prior to the merger. After the merger, however,
Interlinq will have greater leverage, and shares of Interlinq common stock may
become less liquid.
INTERESTS OF PERSONS IN THE MERGER; CONFLICTS OF INTEREST
W.R. Hambrecht + Co. As a result of W.R. Hambrecht/INLQ's ownership of a
majority of the shares of our outstanding common stock following the merger,
W.R. Hambrecht + Co., which controls W.R. Hambrecht/INLQ, will control
Interlinq. W.R. Hambrecht + Co. will be able to elect all of Interlinq's
directors and approve any action requiring the approval of Interlinq
shareholders, including adopting amendments to Interlinq's articles of
incorporation and approving mergers or sales of all or substantially all of
Interlinq's assets. The directors elected by W.R. Hambrecht + Co. and related
entities will have the authority to effect decisions affecting Interlinq's
capital structure, including issuing additional capital stock and debt,
implementing of stock repurchase programs and declaring dividends. W.R.
Hambrecht + Co. is controlled by William R. Hambrecht.
In addition, pursuant to a letter agreement between Terlin and
W.R. Hambrecht + Co., which will become a binding obligation of Interlinq upon
consummation of the merger, W.R. Hambrecht + Co. will receive as a success fee a
warrant to purchase 95,578 shares of common stock of Interlinq. The warrant will
have an exercise price of $6.44 per share.
William R. Hambrecht. William R. Hambrecht will effectively control
Interlinq following the merger. He is the chairman and chief executive officer
of W.R. Hambrecht + Co. and controls W.R. Hambrecht + Co. From 1968 until
December 1997 when he founded W.R. Hambrecht + Co., William R. Hambrecht was
co-founder, president, chief executive officer and director of Hambrecht & Quist
Group. Mr. Hambrecht also served as chairman of the board of directors of
Hambrecht & Quist Group from July 1995 until December 1997.
Affiliates' Interest in Net Book Value and Net Earnings. The following
tables set forth the interests of Jiri M. Nechleba and the aggregated interests
of William R. Hambrecht and W.R. Hambrecht + Co. in the net book value and net
earnings of Interlinq, both before and after the merger, by virtue of their
status as optionholder and shareholders, respectively. Their interests before
the merger are based upon the historical financial statements of Interlinq as of
and for the six-months ended December 31, 1998. Their interests after the merger
are based upon the pro-forma financial information of
40
<PAGE> 47
Interlinq as of and for the six months ended December 31, 1998. The tables
reflect their interests on both a shares outstanding and fully diluted basis.
NET BOOK VALUE AS OF DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
SHARES OUTSTANDING FULLY DILUTED
------------------------- -------------------------
AFFILIATE PRE-MERGER POST-MERGER PRE-MERGER POST-MERGER
--------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
William R. Hambrecht and
W. R. Hambrecht + Co. .......... $1,214 $(5,858) $ 996 $(4,178)
Jiri M. Nechleba.................. -- -- 1,070 (662)
</TABLE>
NET INCOME (LOSS)
FOR THE SIX MONTHS
ENDED DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
SHARES OUTSTANDING FULLY DILUTED
------------------------- -------------------------
AFFILIATE PRE-MERGER POST-MERGER PRE-MERGER POST-MERGER
--------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
William R. Hambrecht and
W.R. Hambrecht + Co............. $ 58 $ (106) $ 47 $ (75)
Jiri M. Nechleba.................. -- -- 51 (12)
</TABLE>
Voting Agreement and Proxies. Each member of the Interlinq board and each
executive officer of Interlinq has agreed, among other things, to vote in favor
of the merger agreement and the merger and to waive dissenters' rights, and has
delivered irrevocable proxies appointing representatives of Terlin to vote their
Interlinq common stock at a future meeting of Interlinq shareholders, including
the special meeting. As previously stated, each member of the Interlinq board
has recommended a vote in favor of the merger agreement and the merger.
Stock Options. In accordance with Interlinq's 1993 Stock Option Plan, 1985
Restated Stock Option Plan and Stock Option Plan for Non-Employee Directors, the
vesting of all outstanding options to purchase Interlinq common stock will
accelerate immediately prior to the merger. Options granted under the 1993 Plan
vest in annual installments over four years. Options granted under the
Non-Employee Directed Plan vest six months from the date of grant. All options
granted under the 1985 Plan have vested. The options may then be exercised. If
they are not exercised, the options will terminate immediately prior to the
filing of the articles of merger. In accordance with the stock option plans, the
shares subject to terminated options will be available for issuance upon
exercise of additional options generated under the plans.
Immediately prior to the merger, Interlinq will agree to make a cash
payment to all holders of outstanding options. This includes members of the
Interlinq board, as well as executive officers and employees who agree not to
exercise their options and instead let them terminate in the merger. For all
option holders other than Mr. Nechleba, Mr. Yount and Ms. Graham, the cash
payment will be equal to the difference between $9.25 per share and the exercise
price for each option as granted. As a result of negotiations with W.R.
Hambrecht + Co. and in order to reduce the amount of the cash payment to
management that would otherwise be payable under the formula for the other
options holders, Mr. Nechleba, Mr. Yount and Ms. Graham have agreed that they
will receive the cash payment for only the 75% of their options with the lowest
exercise prices, and Mr. Nechleba has also agreed to receive the difference
between $9.00 per share and the option exercise price for each option, instead
of the difference between the exercise price and $9.25 per share.
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<PAGE> 48
The following table sets forth, for each of Interlinq's executive officers
and directors, the number of vested and unvested options held, the exercise
price of the options, and cash payment to be received for the options. The cash
payments to Mr. Nechleba, Mr. Yount and Ms. Graham have been calculated using
the 75% of their options with the lowest exercise price as agreed upon by those
individuals when they offered to forego 25% of their options.
<TABLE>
<CAPTION>
UNEXERCISED
OPTIONS EXERCISE DATE OF CASH
NAME (SHARES) PRICE GRANT VESTED UNVESTED PAYMENT
---- ----------- -------- -------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Jiri M. Nechleba....... 142,855 $3.50 9/11/95 85,713 57,142 $ 785,703
107,145 3.50 9/11/95 64,287 42,858 589,298
6,250 5.84 1/22/97 0 6,250 19,727
12,500 4.53 1/20/98 0 12,500 55,859
18,750 5.84 1/22/97 12,500 6,250 59,180
12,500 4.53 1/20/98 6,250 6,250 55,859
17,441 6.13 11/10/98 0 17,441 --
82,559 6.13 11/10/98 0 82,559 --
------- ------- ------- ----------
400,000 168,750 231,250 $1,565,625
Stephen A. Yount....... 28,500 $0.50 2/3/92 28,500 0 $ 249,375
6,000 2.50 5/27/92 6,000 0 40,500
1,000 7.00 8/5/93 1,000 0 --
1,000 4.38 7/21/94 1,000 0 4,875
25,000 3.31 4/24/95 18,750 6,250 148,438
12,000 3.44 1/19/96 9,000 3,000 69,750
15,000 5.84 1/22/97 7,500 7,500 --
17,500 4.53 1/20/98 4,375 13,125 33,031
------- ------- ------- ----------
94,500 76,125 18,375 $ 545,969
Patricia Graham........ 60,000 $3.31 3/22/96 45,000 15,000 $ 356,250
15,000 5.84 1/22/97 7,500 7,500 --
17,500 4.53 1/20/98 13,125 4,375 44,238
------- ------- ------- ----------
92,500 56,875 35,625 $ 400,488
Robert W. O'Rear....... 3,000 $5.00 11/7/94 3,000 0 $ 12,750
3,000 3.25 11/6/95 3,000 0 18,000
10,000 3.44 1/19/96 10,000 0 58,125
3,000 4.03 11/6/96 3,000 0 15,656
7,500 3.97 11/5/97 7,500 0 39,609
7,500 6.13 11/10/98 0 7,500 23,438
------- ------- ------- ----------
34,000 26,500 7,500 $ 167,578
Robert J. Gallagher.... 3,000 $7.00 5/9/94 3,000 0 $ 6,750
3,000 5.00 11/7/94 3,000 0 12,750
3,000 3.28 11/6/95 3,000 0 18,000
10,000 3.44 1/19/96 10,000 0 58,125
3,000 4.03 11/6/96 3,000 0 15,656
7,500 3.97 11/5/97 7,500 0 39,609
7,500 6.13 11/10/98 0 7,500 23,438
------- ------- ------- ----------
37,000 29,500 7,500 $ 174,328
Theodore M. Wight...... 3,000 $5.00 11/7/94 3,000 0 $ 12,750
3,000 3.25 11/6/95 3,000 0 18,000
10,000 3.44 1/19/96 10,000 0 58,125
3,000 4.03 11/6/96 3,000 0 15,656
7,500 3.97 11/5/97 7,500 0 39,609
7,500 6.13 11/10/98 0 7,500 23,438
------- ------- ------- ----------
34,000 26,500 7,500 $ 167,578
</TABLE>
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<PAGE> 49
After the merger, the Interlinq board will grant to former optionholders
new options to purchase shares of Interlinq common stock. For option grants to
persons other than Mr. Nechleba, Mr. Yount and Ms. Graham, the number of options
granted by Interlinq to each optionholder will be at the discretion of the
Interlinq board and senior management. It is expected that Interlinq will
determine a formula for granting new options based on a director's or employee's
position in, and contribution to, Interlinq. Although there will be some
flexibility, Interlinq expects that the total new option grants will approximate
the aggregate percentage interest in Interlinq represented by the Interlinq
common stock subject to the options held by these optionees immediately prior to
the merger. In accordance with the merger agreement, after the merger Mr.
Nechleba, Mr. Yount and Ms. Graham will be granted options to purchase shares of
Interlinq common stock such that his or her percentage interest in Interlinq
following the merger represented by Interlinq common stock subject to such
options will be 25% greater than it was immediately prior to the merger. The new
option grants will have exercise prices per share equal to the fair market value
of a share of Interlinq common stock at the time of grant.
Indemnification. Under the merger agreement, Interlinq has agreed that all
rights to indemnification of Interlinq's present directors and officers for acts
and omissions occurring prior to the merger will survive for six years after the
merger. Interlinq has also agreed that, subject to specified limitations, it
will maintain its existing policy of directors' and officers' liability
insurance for six years after the articles of merger are filed.
Severance. Interlinq expects to enter into severance agreements with Mr.
Nechleba, Mr. Yount and Ms. Graham to provide for severance payments of one year
of such executive officer's salary in the event his or her employment is
terminated following the merger, unless it is terminated by Interlinq for cause.
SOURCES AND USES OF FUNDS
A total of approximately $42,400,000 will be required to pay the
shareholders entitled to receive cash payments, to cash out stock options, and
to pay the transaction costs and fees. In addition, the terms of the financing
require Interlinq to make a pledge of $2,500,000 in cash for security.
Interlinq will incur approximately $22,500,000 of indebtedness, will pledge
$2,500,000 in cash for security, and will spend from its cash reserves an amount
not to exceed $6,900,000. However, with the consent of the Interlinq board this
amount could be increased up to $8,100,000. In addition, Terlin expects to be
capitalized with approximately $13,850,000 in equity prior to the merger. These
funds will be invested in Terlin by W.R. Hambrecht/INLQ. The investors in W.R.
Hambrecht/INLQ are expected to include individuals and institutional investors,
among them William R. Hambrecht and/or related persons. In addition to William
R. Hambrecht, some shareholders of Interlinq or persons related to shareholders
may be investors in W.R. Hambrecht/INLQ. In particular, a member of the Walden
Group, related to George Sarlo, may be an investor in W.R. Hambrecht/INLQ. None
of the current directors or executive officers of Interlinq will be an investor
in W.R. Hambrecht/INLQ. W.R. Hambrecht + Co. has received a commitment from
Silicon Valley Bank and U.S. Bank relating to the financing. The terms and form
of such financing are as provided in the section titled "Debt Financing."
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<PAGE> 50
Fees and Expenses. Interlinq and Terlin estimate they will incur the
following cash fees and expenses:
<TABLE>
<S> <C>
Cash-out of Interlinq Options...................... $5,061,000
Financing Fees..................................... 200,000
Investment Banking and Financial Advising.......... 300,000
Legal and Accounting............................... 750,000
Printing and Distributing.......................... 120,000
SEC Filings........................................ 9,000
Miscellaneous...................................... 71,000
----------
Total............................................ $6,511,000
==========
</TABLE>
To the extent not paid prior to the filing of articles of merger by
Interlinq or Terlin, all such fees and expenses will be paid by Interlinq as the
surviving corporation if the merger is consummated. If the merger is not
consummated, each party will bear its respective fees and expenses, except as
otherwise provided under "The Merger Agreement -- Fees and Expenses."
In addition to fees and expenses payable in cash, Interlinq expects to
issue warrants to purchase a total of 95,578 shares of common stock, or
approximately 2% of the fully diluted outstanding Interlinq common stock after
the merger, to Perkins Coie LLP and Cooley Godward LLP, legal counsel for
Interlinq and W.R. Hambrecht + Co., respectively, in lieu of a portion of the
legal fees which would otherwise be payable. Interlinq also expects to issue a
warrant to purchase 95,578 shares of common stock to W.R. Hambrecht + Co. as a
success fee. The issuance of the warrants will dilute all shareholders of
Interlinq.
44
<PAGE> 51
STOCK PRICE AND DIVIDEND INFORMATION
Interlinq common stock has traded under the symbol "INLQ" on the Nasdaq
National Market since April 27, 1993. The following table sets forth, for the
periods indicated, the high and low closing sales prices for Interlinq common
stock as reported by Nasdaq.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
FISCAL YEAR ENDED JUNE 30, 1997
First Quarter............................................... $4.50 $ 3.38
Second Quarter.............................................. 5.50 3.50
Third Quarter............................................... 6.00 3.75
Fourth Quarter.............................................. 4.13 3.63
FISCAL YEAR ENDED JUNE 30, 1998
First Quarter............................................... $4.63 $ 3.50
Second Quarter.............................................. 4.75 3.75
Third Quarter............................................... 5.50 3.88
Fourth Quarter.............................................. 7.50 4.50
FISCAL YEAR ENDING JUNE 30, 1999
First Quarter............................................... $7.75 $ 4.69
Second Quarter.............................................. 9.00 5.00
Third Quarter............................................... 8.56 7.38
</TABLE>
On December 28, 1998, the last trading day prior to announcement of the
execution of the merger agreement, the closing price per share of Interlinq
common stock as reported by Nasdaq was $7.56. On March 31, 1999, the reported
closing price per share of Interlinq common stock on Nasdaq was $7.69. There
were approximately 1,850 holders of Interlinq common stock on that date.
Interlinq has never paid cash dividends on shares of Interlinq common
stock. The merger agreement prohibits Interlinq from paying cash dividends prior
to closing of the merger. Neither Interlinq nor Terlin anticipates that
Interlinq will pay any cash dividends in the foreseeable future.
45
<PAGE> 52
SELECTED FINANCIAL INFORMATION
The selected historical financial information set forth below for Interlinq
as of June 30, 1998 and 1997 and for each of the years in the three-year period
ended June 30, 1998 is derived from the audited financial statements of
Interlinq that are incorporated in this proxy statement/prospectus by reference.
The selected historical financial information set forth below for Interlinq as
of June 30, 1996, 1995 and 1994 and for each of the years in the two-year period
ended June 30, 1995 is derived from the audited financial statements of
Interlinq not included elsewhere in this proxy statement/prospectus. The
selected historical financial information as of December 31, 1998 and for the
six months ended December 31, 1998 and 1997 is derived from the unaudited
financial statements of Interlinq that are incorporated in this proxy
statement/prospectus by reference.
The unaudited pro forma financial information of Interlinq set forth below
is derived from the unaudited pro forma financial information of Interlinq that
is included elsewhere in this proxy statement/prospectus and is based on
historical financial statements of Interlinq as adjusted to give effect to the
merger. The pro forma statements of operations for the six months ended December
31, 1998 and for the year ended June 30, 1998 give effect to the merger as if it
had occurred as of July 1, 1997. The pro forma balance sheet gives effect to the
merger as if it had occurred at December 31, 1998. See "Unaudited Pro Forma
Financial Information". This table should be read in conjunction with, and is
qualified in its entirety by, the historical financial statements, including the
accompanying notes, of Interlinq incorporated in this proxy statement/
prospectus by reference. The unaudited pro forma financial information is not
indicative of the results that actually would have occurred had the merger been
consummated on the dates indicated, or which may be attained in the future.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
------------------------------------------------------------ -----------------------------
RESTATED PRO FORMA RESTATED PRO FORMA
1994 1995 1996 1997 1998(1) 1998 1997 1998(1) 1998
------- ------- ------- ------- -------- --------- ------ -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
INFORMATION:
Total net revenues................ $18,489 $10,993 $13,093 $14,367 $18,346 $18,346 $8,010 $11,614 $11,614
Total cost of revenues............ 4,320 3,854 3,920 4,039 5,082 5,082 2,394 2,965 2,965
Gross profit...................... 14,169 7,139 9,173 10,328 13,264 13,264 5,617 8,649 8,649
Total operating expenses.......... 9,970 9,723 9,300 9,310 12,388 12,388 5,069 7,678 7,678
Operating income (loss)........... 4,199 (2,584) (127) 1,018 876 876 548 971 971
Net interest and other income
(expense)....................... 322 676 811 719 745 2,308 375 291 (1,236)
Net income (loss)................. 2,880 (1,128) 433 1,110 1,005 (918) 566 795 (167)
Net income (loss) per
share -- basic.................. $ .51 $ (.19) $ .07 $ .19 $ .19 $ (.27) $ .11 $ .15 $ (.05)
Shares used to calculate net
income (loss) per
share -- basic.................. 5,635 5,831 5,965 5,707 5,213 3,405 5,215 5,217 3,405
Net income (loss) per
share -- diluted................ $ .45 $ (.19) $ .07 $ .19 $ .19 $ (.27) $ .11 $ .14 $ (.05)
Shares used to calculate net
income (loss) per
share -- diluted................ 6,471 5,831 6,171 5,842 5,376 3,405 5,328 5,498 3,405
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
------------------------------------------------ --------------------
RESTATED RESTATED PRO FORMA
1994 1995 1996 1997 1998 1998(1) 1998
------- ------- ------- ------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET INFORMATION:
Cash, cash equivalents, and investments......... $14,585 $14,373 $14,218 $13,831 $13,908 $ 9,410 $ 896
Working capital (deficit)....................... 13,753 13,638 12,823 11,623 8,525 7,553 (961)
Total assets.................................... 23,838 21,609 22,321 21,067 26,770 23,694 20,212
Long-term debt.................................. -- -- -- -- -- -- 22,500
Shareholders' equity (deficit).................. 18,703 17,338 17,771 16,050 17,155 16,717 (9,265)
Book value per share............................ 2.91 2.94 2.96 3.21 3.26 (2.72)
</TABLE>
- ---------------
(1) In March 1999, Interlinq restated its historical financial statements as of
and for the year ended June 30, 1998, and as of and for the six months ended
December 31, 1998 to reduce the charge for in-process research and
development acquired in the acquisition of Logical Software Solutions
Corporation and the related tax effects.
46
<PAGE> 53
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information of Interlinq is
based on historical financial statements of Interlinq and gives effect to the
merger. The unaudited pro forma statements of operations for the six months
ended December 31, 1998 and year ended June 30, 1998 give effect to the merger
as if it had occurred on July 1, 1997. The unaudited pro forma balance sheet
gives effect to the merger as if it had occurred on December 31, 1998. The pro
forma adjustments are based upon available information and upon assumptions that
management believes are reasonable under the circumstances. The following
unaudited pro forma financial information and accompanying notes should be read
in conjunction with the historical financial statements of Interlinq, including
the accompanying notes, and other financial information pertaining to Interlinq.
The pro forma financial information does not purport to represent what
Interlinq's actual operating results of operations or actual financial position
would have been if the merger had occurred on such dates or to project
Interlinq's results of operations or financial position for any future period or
date.
In connection with the proposed merger, Interlinq will incur various
one-time costs currently estimated at $7.7 million. The portion of these total
costs that will be paid in cash are as follows:
<TABLE>
<S> <C>
Cash-out of Interlinq Options...................... $5,061,000
Financing Fees..................................... 200,000
Investment Banking and Financial Advising.......... 300,000
Legal and Accounting............................... 750,000
Printing and Distributing.......................... 120,000
SEC Filings........................................ 9,000
Miscellaneous...................................... 71,000
----------
Total............................................ $6,511,000
==========
</TABLE>
In addition to the transaction costs to be paid in cash, these costs include the
estimated fair value of the warrants to purchase common stock to be issued to
Perkins Coie LLP and Cooley Godward LLP, the law firms representing the parties
to the merger, in lieu of a portion of legal fees that would otherwise be
payable, and to W.R. Hambrecht + Co., as a success fee if the merger is
consummated. Each law firm will receive warrants to purchase 47,789 shares of
Interlinq common stock, each warrant representing approximately 1% of the fully
diluted outstanding shares of Interlinq common stock after the merger. W.R.
Hambrecht + Co. will receive warrants to purchase 95,578 shares of Interlinq
common stock. These warrants will be fully exercisable at an exercise price of
$6.44 per share. The aggregate estimated fair value of these warrants of
$1,181,000 was estimated using a Black-Scholes pricing model with the following
assumptions -- fair value of the underlying stock at date of issuance of $9.25
per share, contractual life of five years, expected volatility of 65% and a
risk-free interest rate of 5.0%. While the exact timing, nature and amount of
these costs are subject to change, Interlinq will incur a special pre-tax charge
of approximately $5.7 million in the quarter in which the merger is consummated.
This special charge includes payments, upon cancellation of stock options,
aggregating $5.1 million and the success fee payable to W.R. Hambrecht + Co. in
the form of warrants. The remaining transaction costs aggregating approximately
$2.0 million will be charged to operations as incurred or upon consummation of
the merger. As a result of all of these transaction costs, Interlinq expects to
incur a net loss in the quarter in which the merger is consummated.
47
<PAGE> 54
The pro forma adjustments were applied to the historical financial
statements of Interlinq to reflect and account for the merger as a
recapitalization; accordingly, the historical basis of Interlinq's assets and
liabilities has not been impacted by the pro forma adjustments.
48
<PAGE> 55
INTERLINQ SOFTWARE CORPORATION
PRO FORMA BALANCE SHEET (UNAUDITED)
DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............... $ 2,707 $ (1,811)(a) $ 896
Short-term investments.................. 6,703 (6,703)(a) --
Accounts receivable, net................ 3,797 -- 3,797
Inventory, prepaid expenses and other
current assets....................... 1,212 -- 1,212
------- -------- --------
Total current assets............ 14,419 (8,514) 5,905
Property and equipment, at cost........... 7,818 -- 7,818
Less accumulated depreciation and
amortization......................... 5,907 -- 5,907
------- -------- --------
Net property and equipment...... 1,911 -- 1,911
------- -------- --------
Capitalized software costs, net........... 4,434 -- 4,434
Deferred loan costs....................... -- 2,532(c) 2,532
Restricted cash........................... -- 2,500(d) 2,500
Goodwill and other intangible assets,
net..................................... 2,814 -- 2,814
Other assets.............................. 116 116
------- -------- --------
$23,694 $ (3,482) $ 20,212
======= ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)
CURRENT LIABILITIES:
Accounts payable........................ $ 847 $ -- $ 847
Accrued compensation and benefits....... 1,052 -- 1,052
Other accrued liabilities............... 228 -- 228
Customer deposits....................... 534 -- 534
Deferred software support fees.......... 4,205 -- 4,205
------- -------- --------
Total current liabilities....... 6,866 -- 6,866
------- -------- --------
NONCURRENT LIABILITIES:
Long-term debt.......................... -- 22,500(b) 22,500
Other noncurrent liabilities............ 111 -- 111
------- -------- --------
Total noncurrent liabilities.... 111 22,500 22,611
------- -------- --------
SHAREHOLDERS' EQUITY (DEFICIT)............ 16,717 (25,982)(e) (9,265)
------- -------- --------
$23,694 $ (3,482) $ 20,212
======= ======== ========
</TABLE>
See Notes to Unaudited Pro Forma Financial Information.
49
<PAGE> 56
INTERLINQ SOFTWARE CORPORATION
PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
NET REVENUES:
Software license fees..................... $6,506 $ -- $6,506
Software support fees..................... 4,068 -- 4,068
Other..................................... 1,040 -- 1,040
------ ------- ------
Total net revenues................ 11,614 -- 11,614
COST OF REVENUES:
Software license fees..................... 1,152 -- 1,152
Software support fees..................... 1,270 -- 1,270
Other..................................... 543 -- 543
------ ------- ------
Total cost of revenues............ 2,965 -- 2,965
------ ------- ------
Gross profit...................... 8,649 -- 8,649
------ ------- ------
OPERATING EXPENSES:
Product development....................... 1,602 -- 1,602
Sales and marketing....................... 2,869 -- 2,869
General and administrative................ 2,778 -- 2,778
Amortization of goodwill and other
intangible assets...................... 430 -- 430
------ ------- ------
Total operating expenses.......... 7,678 -- 7,678
------ ------- ------
Operating income.................. 971 -- 971
Net interest and other income (expense)..... 291 (1,527)(f) (1,236)
------ ------- ------
Income (loss) before income tax expense
(benefit).............................. 1,262 (1,527) (265)
Income tax expense (benefit)................ 467 (565)(g) (98)
------ ------- ------
Net income (loss)......................... $ 795 $ (962) $ (167)
====== ======= ======
Net income (loss) per share -- basic........ $ .15 $ (.05)(h)
Net income (loss) per share -- diluted...... $ .14 $ (.05)(h)
Shares used to calculate net income (loss)
per share -- basic........................ 5,217 3,405
Shares used to calculate net income (loss)
per share -- diluted...................... 5,498 3,405
</TABLE>
See Notes to Unaudited Pro Forma Financial Information.
50
<PAGE> 57
INTERLINQ SOFTWARE CORPORATION
PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE YEAR ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
NET REVENUES:
Software license fees..................... $ 9,647 -- 9,647
Software support fees..................... 6,976 -- 6,976
Other..................................... 1,723 -- 1,723
------- ------- -------
Total net revenues................ 18,346 -- 18,346
COST OF REVENUES:
Software license fees..................... 1,778 -- 1,778
Software support fees..................... 2,445 -- 2,445
Other..................................... 859 -- 859
------- ------- -------
Total cost of revenues............ 5,082 -- 5,082
------- ------- -------
Gross profit...................... 13,264 -- 13,264
------- ------- -------
OPERATING EXPENSES:
Product development....................... 1,609 -- 1,609
Sales and marketing....................... 5,675 -- 5,675
General and administrative................ 3,754 -- 3,754
Purchase of in-process research and
development............................ 1,350 -- 1,350
------- ------- -------
Total operating expenses.......... 12,388 -- 12,388
------- ------- -------
Operating income.................. 876 -- 876
Net interest and other income (expense)..... 745 (3,053)(f) (2,308)
------- ------- -------
Income (loss) before income tax expense
(benefit).............................. 1,621 (3,053) (1,432)
Income tax expense (benefit).............. 616 (1,130)(g) (514)
------- ------- -------
Net loss income (loss).................... $ 1,005 $(1,923) $ (918)
------- ------- -------
Net income (loss) per share -- basic &
diluted................................... $ .19 $ (.27)(h)
Shares used to calculate net income (loss)
per share -- basic........................ 5,213 3,405
Shares used to calculate net income (loss)
per share -- diluted...................... 5,376 3,405
</TABLE>
See Notes to Unaudited Pro Forma Financial Information.
51
<PAGE> 58
NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(a) Represents the use of cash after application of the proceeds from the
merger and the long term debt incurred to fund the repurchase of Interlinq
common stock, buyout of stock options and related fees and expenses due on
consummation of the merger.
<TABLE>
<CAPTION>
DECEMBER 31,
1998
-------------
<S> <C>
Proceeds from merger.................................... $13,850
Proceeds from long-term debt incurred................... 22,500
Repurchase of Interlinq common stock.................... (35,853)
Buyout of stock options................................. (5,061)
Restricted cash to secure long-term debt................ (2,500)
Debt issuance costs..................................... (200)
Transaction costs to be paid in cash.................... (1,250)
-------
Cash used or reserved in the merger.................. $(8,514)
=======
</TABLE>
Included in the buyout of stock options is $2,511,738 associated with the
buyout of stock options from certain members of Interlinq management. In
connection with the merger, these individuals have agreed to forfeit 25% of
their stock options for no compensation. Accordingly, no adjustment has
been recorded in the pro forma financial information for the forfeiture.
In connection with the issuance of Interlinq common stock in exchange for
Terlin common stock and the repurchase of Interlinq common stock, the
following table reconciles the pre-merger outstanding shares of Interlinq
common stock to the pro forma Interlinq common stock issued and
outstanding.
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
Pre-merger shares outstanding........................... 5,129
Issuance of Interlinq common stock in exchange for
Terlin common stock.................................. 2,155
Repurchase of Interlinq common stock.................... (3,879)
------
Pro forma issued and outstanding shares of Interlinq
common stock......................................... 3,405
======
</TABLE>
52
<PAGE> 59
NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
In addition to the pro forma issued and outstanding shares of Interlinq
common stock, options to purchase approximately 883,000 shares of Interlinq
common stock are expected to be granted to executive officers, directors
and other employees following the merger as described in the following
table.
<TABLE>
<CAPTION>
PRE-MERGER PRE-MERGER POST-MERGER POST-MERGER
NAME OPTIONS % OWNERSHIP(1) % OWNERSHIP(2) OPTIONS
---- ---------- -------------- -------------- -----------
<S> <C> <C> <C> <C>
Jiri M. Nechleba............ 400,000 6.4 7.2 341,915
Stephen A. Yount............ 106,000 1.7 1.9 90,607
Patricia Graham............. 92,500 1.5 1.7 79,068
Robert W. O'Rear............ 37,000 0.6 0.6 26,535
Robert J. Gallagher......... 37,000 0.6 0.6 26,535
Theodore M. Wight........... 34,000 0.5 0.5 24,383
Non-Executive Officer
Employees................. 409,759 6.6 6.2 293,865
--------- --- --- -------
1,116,259 882,908
--------- -------
</TABLE>
- ---------------
(1) On a fully-diluted basis.
(2) In return for foregoing the cash payment for 25% of their options, Mr.
Nechleba, Mr. Yount and Ms. Graham's post-merger percentage ownership,
before consideration of the issuance of warrants, will be increased by 25%.
All other option holders will maintain their approximate percentage
ownership, before consideration of the issuance of warrants, after the
merger. The post-merger ownership is computed on a fully-diluted basis,
after consideration of the issuance of warrants to W.R. Hambrecht + Co.,
Perkins Coie LLP, Cooley Godward LLP and loan guarantors.
The exercise price of these options is expected to be the fair market value
of Interlinq common stock as of the time of grant. The options will
generally vest in equal annual installments over four years in accordance
with Interlinq's current stock option plans. As the exercise price is
expected to be the same as the fair market value at the date of grant, no
compensation expense will be recorded in connection with these employee
stock option grants.
(b) Represents the gross proceeds of $22,500 to Interlinq from long-term debt
incurred. Interlinq expects to enter into a credit arrangement that will
provide a $12,000 senior secured term loan facility bearing interest at
prime plus 2.25%, an $8,000 secured and guaranteed loan facility bearing
interest at prime, and a $5,000 secured revolving credit facility bearing
interest at prime plus 2%, of which $2,500 is expected to be drawn to fund
the transactions contemplated at the time of the merger. The $8,000 secured
and guaranteed loan facility will be guaranteed by certain shareholders of
Terlin. As compensation for providing the guarantee, Interlinq will issue
the guarantors warrants to purchase 300,000 shares of Interlinq common stock
that are fully exercisable at an exercise price of $2.31 per share.
53
<PAGE> 60
NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(c) Represents costs incurred in connection with the issuance of long-term debt
as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------
<S> <C>
Warrants issued to guarantors......................... $2,332
Loan fee paid to banks................................ 200
------
$2,532
======
</TABLE>
The warrants issued to guarantors consist of warrants to purchase 300,000
shares of Interlinq common stock that are fully exercisable at an exercise
price of $2.31. The fair value of these warrants of $2,332 was estimated
using a Black-Scholes pricing model with the following assumptions -- fair
value of underlying stock at date of issuance of $9.25 per share,
contractual life of five years, expected volatility of 65% and a risk-free
interest rate of 5.0%. The loan fee paid to banks is expected to be a fixed
fee of $200. These costs will be amortized over the term of the debt. The
costs related to warrants issued to guarantors represent a non-cash charge
to operations.
(d) Represents establishment of a $2,500 pledged account in connection with
issuance of the $8,000 secured and guaranteed credit facility. The funds in
the pledged account will remain on deposit for the benefit of the guarantors
as long as the guarantee is in place.
(e) Represents the following transactions:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
Issuance of Interlinq common stock in exchange for
Terlin common stock................................. $ 13,850
Issuance of warrants to loan guarantors............... 2,332
Repurchase of Interlinq common stock.................. (35,853)
Buyout of stock options............................... (5,061)
Transaction costs to be paid in cash.................. (1,250)
------------
$ (25,982)
------------
</TABLE>
The buyout of stock options and transaction costs to be paid in cash will
be recorded in the statement of operations upon consummation of the merger,
or as incurred if they are incurred prior to consummation of the merger. In
addition to the transaction costs to be paid in cash, Interlinq will issue
warrants to purchase 47,789 shares of common stock each to Perkins Coie LLP
and Cooley Godward LLP, each warrant representing the right to purchase
approximately 1% of the fully diluted outstanding common stock of Interlinq
after the merger. Interlinq will issue a warrant to purchase 95,578 shares
of common stock to W.R. Hambrecht + Co. as a success fee. The aggregate
fair value of these warrants of $1,181 would be recorded as transaction
costs upon consummation of the merger. Because these costs are
non-recurring, they have been excluded from the pro forma statements of
operations for the six months ended December 31, 1998 and the year ended
June 30, 1998.
54
<PAGE> 61
NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(f) Represents the interest expense on long-term debt expected to be incurred
at annual interest rates of prime to prime plus 2.25% amortization of
deferred loan costs over an assumed term of five years, and a decrease in
interest income resulting from the use of cash in the merger at an average
annual yield of 5.5%, as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
DECEMBER 31, JUNE 30,
1998 1998
------------ ----------
<S> <C> <C>
Interest expense................................ $1,032 $2,064
Amortization of deferred loan costs............. 261 521
Decrease in interest income..................... 234 468
------ ------
$1,527 $3,053
====== ======
</TABLE>
The interest rates applicable to the long term debt is expected to be as
follows:
- secured term loan facility -- lender's published prime rate plus 2.25%
- revolving credit facility -- lender's published prime rate plus 2.00%
- secured and guaranteed credit facility -- lender's published prime rate
A change of 0.5% in the assumed interest rate would result in a change of
$56 and $113 in interest expense on long term debt for the six months ended
December 31, 1998 and the year ended June 30, 1998, respectively.
(g) Represents the income tax benefit related to the pro forma adjustments, at
Interlinq's federal and state incremental tax rate of 37%.
(h) In the event the reverse stock split is effected, net income (loss) per
share will change in proportion to the ratio of the reverse stock split. The
reverse stock split will decrease the number of shares of common stock
outstanding, therefore, net income (loss) per share would increase.
Determination of the ultimate ratio to be used to effect the reverse stock
is dependent upon numerous factors which cannot be estimated at this time.
As an illustration of the impact on net income (loss) per share, if the
ratio was 1:100, pro forma net income (loss) per share would be as follows:
<TABLE>
<S> <C>
Year ended June 30, 1998.................................... $(26.98)
Six months ended December 31, 1998.......................... (4.91)
</TABLE>
55
<PAGE> 62
THE COMPANIES
INTERLINQ
Established in 1982, we are a leading provider of technology that helps
organizations effectively manage complex information-intensive business
transactions. Our Mortgage Technology Division provides business solutions to
approximately 2,000 banks, savings institutions, mortgage banks, mortgage
brokers and credit unions. Our new Enterprise Technology Division provides
process-centered enterprise applications integration solutions both directly and
through third-party application developers, original equipment manufacturers and
system integrators.
Through our Mortgage Technology Division, we work closely with clients to
provide comprehensive software applications and business solutions for the
residential mortgage and construction lending industry. Our Mortgage Technology
Division offers a suite of products, called MortgageWare Enterprise, that
manages the entire life cycle of a mortgage loan. MortgageWare Enterprise is
designed to provide greater operational efficiency, real-time access to data,
and a cost-effective means for managing and integrating information. It is
designed to allow mortgage lenders to improve business processes and practices,
thereby improving profitability. MortgageWare Enterprise creates an integrated
system of reliable information for business analysis; data is entered only once,
managed from a central point and accessible from every desktop licensed to
utilize MortgageWare Enterprise. MortgageWare Enterprise can perform a wide
variety of mission-critical enterprise tasks, including matching loan programs
for lenders and borrowers, originating and servicing mortgage loans and
analyzing the risk of all loans within an organization.
Through our Enterprise Technology Division, we intend to enter the
enterprise applications integration software market by marketing FlowMan through
original equipment manufacturers, system integrators and third-party application
developers. FlowMan is an award-winning technology that integrates disparate
systems and applications to facilitate ongoing process knowledge management by
applying its business process and rules technology across an entire enterprise.
FlowMan is designed to coordinate the execution and timing of all tasks, events
and decisions for key business processes across legacy systems, enterprise
applications, client-server systems and Internet technologies.
TERLIN
Terlin, a Washington corporation, was incorporated on December 16, 1998 and
has not carried on any activities to date other than those incident to its
formation and the transactions contemplated by the merger agreement. All of the
outstanding capital stock of Terlin will be owned by W.R. Hambrecht/INLQ, a
limited liability company controlled by W.R. Hambrecht + Co.
56
<PAGE> 63
THE SPECIAL MEETING
GENERAL
The special meeting will be held on May , 1999, at Interlinq's
headquarters at 11980 N.E. 24th Street, Bellevue, Washington 98005, commencing
at 10 a.m. local time. Interlinq shareholders of record as of the close of
business on March 31, 1999 will be entitled to notice of, and to vote at, the
special meeting, and at any adjournments or postponements of the special
meeting.
This proxy statement/prospectus and the accompanying form of proxy are
first being mailed to shareholders of Interlinq on or about April , 1999.
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING; DISSENTER'S RIGHTS
At the special meeting, Interlinq shareholders will consider and vote upon
the following proposals:
1. A proposal to approve the merger agreement between Interlinq and
Terlin;
2. Proposals to amend Interlinq's articles of incorporation as
follows:
- an amendment eliminating the classification of directors in
staggered terms;
- an amendment eliminating our ability to issue preferred stock in
the future;
- an amendment providing for shareholder action to be taken by less
than unanimous written consent if we are no longer a public
company; and
- an amendment reducing, from two-thirds to a simple majority, the
number of outstanding shares required to approve future amendments
to our articles.
3. Proposals to amend Interlinq's bylaws as follows:
- an amendment reducing to not less than 10 days the amount of time
required to provide you with advance notice of a stockholder
meeting;
- amendments eliminating the classification of directors in
staggered terms, reducing a director's term to one year, allowing
vacancies in the board to be filled by the board or a majority
vote of our shareholders, and allowing a director to be removed by
a majority vote of our shareholders; and
- an amendment providing for future amendments of our bylaws to be
authorized by the board or a majority vote of our shareholders.
4. A proposal authorizing a reverse split of Interlinq's common stock
following the merger.
Interlinq shareholders will be entitled to exercise dissenters' rights as a
result of the merger and the reverse stock split. See "Rights of Dissenting
Interlinq Shareholders."
57
<PAGE> 64
RECOMMENDATION OF INTERLINQ BOARD
At its meeting of December 29, 1998, the Interlinq board, including a
special committee, by unanimous vote determined the merger agreement and, if
necessary, the reverse stock split to be fair to and in the best interests of
Interlinq and Interlinq shareholders. The Interlinq board recommends that
Interlinq shareholders vote "FOR" the approval of the merger agreement, "FOR"
the proposals to amend the articles of incorporation, "FOR" the proposals to
amend the bylaws and "FOR" approval of the reverse stock split.
RECORD DATE; SHARES ENTITLED TO VOTE; VOTE REQUIRED
The close of business on March 31, 1999 has been fixed as the record date
for determining the holders of shares of Interlinq common stock who are entitled
to notice of and to vote at the special meeting. As of the record date, there
were 5,129,148 shares of Interlinq common stock outstanding and entitled to
vote. These holders are entitled to one vote per share of Interlinq common
stock. The presence in person or by proxy of the holders of shares representing
a majority of the voting power of the shares of Interlinq common stock entitled
to vote on the proposals is necessary to constitute a quorum for action at the
special meeting.
A majority of the outstanding Interlinq common stock, whether in person or
by proxy, at the special meeting must vote for the proposals if they are to be
approved. As of the record date, directors and executive officers of Interlinq
and their affiliates may be deemed to be beneficial owners of approximately 1.2%
of the outstanding shares of Interlinq common stock. Each of the directors and
executive officers of Interlinq executed a voting agreement and delivered
proxies in which they have agreed to vote all of their shares of Interlinq
common stock in favor of the merger agreement and the merger, and the reverse
stock split. In addition, as of the record date W.R. Hambrecht + Co., William R.
Hambrecht and Ironstone Group, Inc. beneficially owned approximately 7.3% of the
outstanding shares of Interlinq common stock. W.R. Hambrecht + Co., William R.
Hambrecht and Ironstone Group, Inc. have told Interlinq that they intend to vote
all of their shares in favor of each of the proposals.
Abstaining from voting or not properly instructing your broker to vote on
your behalf will have the same effect as a "NO" vote on each of the proposals,
since they will not have been voted in favor of the proposals.
PROXIES; ADJOURNMENTS; PROXY SOLICITATION
Shares of Interlinq common stock represented by properly executed proxies
received at or prior to the special meeting that have not been revoked will be
voted at the special meeting as instructed by the shareholder. Shares of
Interlinq common stock represented by properly executed proxies for which no
instructions are given will be voted "FOR" each of the proposals. Interlinq
shareholders are requested to complete, sign, date and return promptly the
enclosed proxy card in the postage-prepaid envelope provided for this purpose to
ensure that their shares are voted. A shareholder may revoke a proxy by:
- submitting at any time prior to the vote on the proposals a later-dated
proxy with respect to the same shares,
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- delivering written notice of revocation to the Secretary of Interlinq at
any time prior to the vote, or
- attending the special meeting and voting in person.
Just attending the special meeting will not in and of itself revoke a
proxy.
The special meeting may be adjourned for the purpose of obtaining
additional proxies or votes or for any other purpose. In the event a motion to
adjourn the special meeting is presented, the persons named as proxies will vote
on the motion in accordance with their best judgment. In the event insufficient
proxies are received by the date of the special meeting to approve the merger,
the persons named as proxies intend to vote the shares subject to proxies to
adjourn the special meeting to a later date in order to seek additional proxies.
If the special meeting is postponed or adjourned for any reason, at any
subsequent reconvening of the special meeting all proxies will be voted in the
same manner as they would have been voted at the original convening of the
special meeting, except for any proxies that have effectively been revoked or
withdrawn.
Interlinq will bear the cost of soliciting proxies from Interlinq
shareholders. Interlinq expects to retain Allen Nelson & Co. Incorporated as
proxy solicitor, and expects to pay approximately $15,000 for such services. In
addition to soliciting by mail, Interlinq's directors, officers and employees
may solicit proxies by telephone or otherwise. Such directors, officers and
employees will not be additionally compensated for such solicitation, but may be
reimbursed for out-of-pocket expenses incurred in connection with the
solicitation. Brokerage firms, fiduciaries and other custodians who forward
soliciting material to the beneficial owners of shares of Interlinq common stock
held of record by them will be reimbursed for their reasonable expenses incurred
in forwarding such material.
ELECTION PROCEDURES
FORM OF ELECTION
A form of election is being mailed with this proxy statement/prospectus.
The form of election allows Interlinq shareholders to designate the number of
shares they want to retain after the merger in lieu of receiving the cash
payment of $9.25 per share.
For the form of election to be effective, the following must occur:
- An Interlinq shareholder must properly complete and send the form of
election, together with the certificates representing the shares of
Interlinq common stock the shareholder decides to retain, duly endorsed
in blank or otherwise in a form acceptable for transfer to ChaseMellon
Shareholder Services LLC, as the exchange agent, at the address listed on
the form of election; and
- the form of election and the certificates must be received by the
exchange agent and not have been revoked by 5:00 p.m., Seattle time on
the election date, which is May , 1999, the last business day before
the special meeting.
A shareholder's failure to make an election as to any shares of Interlinq
common stock held by the shareholder will be treated as an election, for any
unelected shares, to receive the cash payment of $9.25 per share. In addition,
failure to return the form of
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election will be treated as an election to receive the cash payment of $9.25 per
share for all shares held by the shareholder.
Only holders of record of Interlinq common stock who elect to retain any of
their shares are required to send stock certificates with their form of election
by the election date. IN NO EVENT SHOULD SHAREHOLDERS SEND STOCK CERTIFICATES
WITH THEIR PROXY CARDS.
The form of election may be revoked in either of the following ways:
- by the shareholder of record by written notice received by the exchange
agent prior to 5:00 p.m., Seattle time, on the election date. However,
Interlinq and Terlin may determine not less than two business days prior
to the election date that the closing of the merger is not likely to
occur within five business days following the date of the special
meeting. In such a case any form of election will remain revocable until
a later date; or
- by Interlinq and Terlin jointly by written notice to the exchange agent
that the merger has been abandoned.
If a form of election is revoked, the certificate or guarantee of delivery,
as appropriate, for the shares of Interlinq common stock to which such form of
election relates shall be promptly returned by the exchange agent to the
Interlinq shareholder.
The exchange agent's determination as to whether or not elections to retain
shares have been properly made or revoked and when elections and revocations
were received by the exchange agent shall be binding. If the exchange agent
determines that any election to retain shares was not properly made, those
shares will be treated by the exchange agent as unelected shares and, subject to
proration, they will be exchanged in the merger for the cash payment of $9.25
per share.
EXCHANGE OF CERTIFICATES
As soon as practicable after the merger, Interlinq, as the surviving
corporation, shall deposit with the exchange agent cash sufficient to make
payments of $9.25 per share for all shares that are not retained and cash in
lieu of fractional shares following the reverse stock split, if applicable.
As soon as possible after the merger, the exchange agent will mail to the
Interlinq shareholders of record a letter of transmittal and instructions for
surrendering of Interlinq common stock certificates. Once Interlinq stock
certificates are surrendered to the exchange agent, together with an executed
letter of transmittal and any other necessary documents, the surrendering
shareholder will be entitled to receive a certificate for the number of shares
to be retained by the shareholder and a cash payment of $9.25 per share after
giving effect to the reverse stock split, if applicable. Until surrendered, each
Interlinq common stock certificate shall, after the merger, represent only the
right to receive upon surrender the cash payment of $9.25 per share, as adjusted
by the reverse stock split, if applicable. No interest will be paid or will
accrue on any cash payable as consideration. Interlinq may require the owner of
any lost, stolen or destroyed Interlinq common stock certificate to provide an
appropriate affidavit and to deliver a bond in the amount Interlinq may
reasonably direct as indemnity against any claim that may be made against the
exchange agent, Interlinq or Terlin with respect to the Interlinq common stock
certificate.
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No dividends or other distributions with respect to retained Interlinq
common stock with a record date after the merger shall be paid to the holder of
any unsurrendered stock certificate until the certificate is surrendered of such
certificate. Once the certificate is surrendered, the holder of any retained
whole shares issued in connection with the surrender shall be paid, without
interest:
- at the time of such surrender, the amount of any cash payable in lieu of
a fractional share of retained Interlinq common stock to which such
holder is entitled and the proportionate amount of any dividends or other
distributions with a record date after the merger paid with respect to
such whole shares of retained Interlinq common stock, and
- at the appropriate payment date, the proportionate amount of any
dividends or other distributions with a record date after the merger but
prior to such surrender and a payment date subsequent to such surrender
payable with respect to such whole shares of retained Interlinq common
stock.
THE MERGER AGREEMENT
The description of the merger agreement set forth below does not purport to
be complete and is qualified in its entirety by reference to the Agreement and
Plan of Merger, a copy of which is attached to this proxy statement/prospectus
as Appendix A and is incorporated by reference into this proxy
statement/prospectus.
THE MERGER
Under the terms of the merger agreement:
- Terlin will merge with and into Interlinq;
- Terlin will cease to exist as a corporation;
- Interlinq will remain as the surviving corporation;
- Assuming approval of the proposals to amend Interlinq's articles of
incorporation and bylaws, Interlinq will amend its articles of
incorporation and bylaws so that the articles of incorporation and bylaws
of the surviving corporation will be as attached to this proxy
statement/prospectus as Appendix D and Appendix E, respectively. See
"Comparison of Certain Rights of Interlinq Shareholders"; and
- The current officers and directors of Interlinq will remain the officers
and directors of Interlinq, with the addition of John D. Delafield, as a
director.
CLOSING AND EFFECTIVE TIME
The closing of the merger will take place on a date mutually agreed upon by
Interlinq and Terlin. This date will be no later than the fifth business day
after the satisfaction or waiver of the conditions to the merger. See
"-- Conditions to Closing." After the closing, the merger will become effective
when the articles of merger are filed with the Secretary of state of Washington.
This filing will occur contemporaneously with or as promptly as practicable
after the closing.
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CONVERSION OF SHARES
Immediately after the articles of merger are filed and without any further
action on the part of Interlinq, Terlin or any shareholders of either company:
- Each share of Terlin common stock issued and outstanding will be
converted into one share of Interlinq common stock following the merger.
- Each share of Interlinq common stock that was owned by Terlin prior to
the merger will automatically be canceled and no consideration will be
paid by Interlinq in exchange for the cancellation.
- Each issued and outstanding share of Interlinq common stock (other than
the shares owned by Terlin and the shares held by shareholders who
perfect dissenters' rights in accordance with Chapter 23B.13 of the
Washington Business Corporation Act) will be converted, at the
shareholder's election, into either (1) the right to retain one fully
paid and nonassessable share of Interlinq common stock or (2) the right
to receive from Interlinq cash in the amount of $9.25 for each share of
Interlinq common stock.
All shares of Interlinq common stock (other than shares held by
shareholders who have elected to retain their shares or who have perfected
dissenters' rights) issued and outstanding immediately prior to the filing of
the articles of merger will be canceled automatically. Each holder of a
certificate representing any cancelled shares of Interlinq common stock will
cease to have any rights with respect to those shares, but will retain the right
to receive cash upon surrender to Interlinq of the certificate representing the
cancelled shares.
Interlinq shareholders may make and revoke elections to retain shares in
accordance with the procedures described above under "Election Procedures."
The aggregate number of shares of Interlinq common stock to be converted
into the right to retain Interlinq common stock at the effective time will be
1,250,000. If shareholders elect to retain more than 1,250,000 shares, then the
retained shares shall be automatically converted into the right to retain a
portion of those shares and to receive cash for the remaining unretained shares
according to the following formula:
(1) A proration factor will be determined by dividing 1,250,000 by the
total number of shares that shareholders have elected to retain.
(2) The number of shares required to be retained will be determined by
multiplying the proration factor by the total number of shares
originally elected by shareholders to be retained and rounding the
result of such multiplication to the nearest whole number.
(3) All remaining shares (the denominator in (1) less the product in (2)),
will be converted into cash in the amount of $9.25 per share on a
consistent basis among shareholders who made the election to retain
shares, pro rata to the number of shares as to which they made such
election as if they had not elected to retain these shares.
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If the shareholders elect to retain less than 1,250,000 shares, then:
(4) The shareholders will retain all shares they have elected to retain.
(5) In addition, shareholders who elected to receive the cash payment for
some or all of their shares will be required to retain additional
shares. The total number of additional shares to be retained will be
determined by subtracting the number of shares elected to be retained
from 1,250,000. A proration factor will be determined by dividing the
difference between the total shares elected to be retained and
1,250,000 by the total number of shares for which shareholders elected
to receive the cash payment. This proration factor will be applied to
each shareholder's shares for which the shareholder elected to receive
cash.
(6) Shares elected to receive the cash payment shall be required to be
retained on a consistent basis among shareholders who held shares of
Interlinq common stock as to which they elected to receive the cash
payment, pro rata to the number of shares as to which they elected to
receive the cash payment, but rounding the result from such conversion
to the nearest whole number.
If, prior to filing the articles of merger, the outstanding shares of
Interlinq common stock are changed into a different number or class of shares by
means of any stock split, stock dividend, reverse stock split, recapitalization
or other similar transaction, then the cash payment amount of $9.25 shall be
appropriately adjusted. However, no adjustment will be made if the number of
outstanding shares of Interlinq common stock increases as a result of the
exercise of Interlinq stock options.
The exchange agent will make all allocation and proration computations, and
its computation shall be conclusive and binding on the shareholders of
Interlinq.
EXCHANGE OF COMMON STOCK CERTIFICATES
As soon as practicable after filing the articles of merger, Interlinq, as
the surviving corporation, shall deposit with the exchange agent cash sufficient
to make cash payments to those shareholders electing to receive $9.25 per share.
The exchange agent will then mail to the record holders of certificates of
Interlinq common stock
- The letter of transmittal included in this mailing and
- Instructions for surrender of Interlinq common stock certificates.
Upon surrender and acceptance of an Interlinq common stock certificate to the
exchange agent, and a letter of transmittal, the holder of that Interlinq common
stock certificate shall, be entitled to a certificate representing the number of
full shares of Interlinq common stock to be retained by the holder and the cash
amount into which the Interlinq common stock shall have been converted. The
exchange agent will give effect to the reverse stock split, if applicable. Until
surrendered, each Interlinq common stock certificate shall be deemed at any time
after filing the articles of merger to represent only the right either to
receive upon surrender a cash payment or to return such shares, as adjusted by
the reverse stock split, if applicable. No interest will be paid or will accrue
on any cash payable for surrendered shares. If any Interlinq common stock
certificate has been lost, stolen or destroyed, Interlinq may require the owner
of the lost, stolen or destroyed certificate to provide an appropriate affidavit
and to deliver a bond as indemnity against
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any claim that may be made against the exchange agent, Interlinq or Terlin with
respect to the certificate. The bond will be in such sum as Interlinq may
reasonably direct.
Interlinq will not pay any dividends or other distributions with respect to
retained Interlinq common stock with a record date after the filing of the
articles of merger to the holder of any shares of retained Interlinq common
stock represented by any unsurrendered Interlinq common stock certificates until
the surrender of those certificates. Subject to the effect of applicable laws,
following surrender of the unsurrendered certificate, Interlinq will pay to the
holder of the unsurrendered certificate(s) representing whole shares of retained
Interlinq common stock, without interest:
- at the time of the surrender, the amount of any cash payable in lieu of a
fractional share of retained Interlinq common stock to which the holder
is entitled
- at the time of surrender the proportionate amount of any dividends or
other distributions with a record date after the filing of the articles
of merger paid with respect to any whole shares of retained Interlinq
common stock; and
- at the appropriate payment date, the proportionate amount of any
dividends or other distributions, with a record date after the filing of
the articles of merger but before the surrender, and a payment date after
the surrender, payable with respect to any whole shares of retained
Interlinq common stock.
All cash paid in exchange for the surrender of certificates representing
shares of Interlinq common stock shall be in full satisfaction of all rights
pertaining to the shares of Interlinq common stock represented by the
surrendered certificates.
No certificates or scrip representing fractional shares of retained
Interlinq common stock will be issued in connection with the merger or the
reverse stock split. Any fractional share interests will not entitle the owner
of those interests to any rights of a shareholder of Interlinq after the merger
or the reverse stock split. Each holder of shares of Interlinq common stock
exchanged pursuant to the merger or the reverse stock split who would otherwise
have been entitled to receive a fractional share of retained Interlinq common
stock (after taking into account all shares of Interlinq common stock delivered
by such holder) will receive, in lieu of the fractional share, a cash payment in
the dollar amount determined by multiplying the fraction by $9.25. This cash
payment shall be without interest and rounded to the nearest whole cent.
Any portion of the cash deposited by Interlinq with the exchange agent that
remains undistributed to holders of Interlinq common stock certificates 180 days
after the filing of the articles of merger shall be delivered to Interlinq upon
demand. Any holders of Interlinq common stock certificates who have not by then
surrendered their Interlinq common stock certificates may look only to
Interlinq, as the surviving corporation, after the 180-day period has lapsed for
satisfaction of their claims for the cash payment.
The exchange agent, Interlinq and Terlin will each be entitled to deduct
and withhold from any consideration payable to any holder or former holder of
Interlinq common stock any amounts that may be required to be deducted or
withheld under any provision of federal, state, local or foreign tax law or any
other applicable law.
None of Interlinq, Terlin or the exchange agent shall be liable to any
individual, entity or governmental body for any shares of or dividends or
distributions relating to retained Interlinq common stock or cash from the
exchange agent delivered to a public official in accordance with to any
applicable abandoned property, escheat or similar law. If any
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certificates representing shares of Interlinq common stock are not surrendered
prior to one year after the filing of the articles of merger (or immediately
prior to the earlier date on which cash, cash in lieu of fractional shares of
retained Interlinq common stock or dividends or distributions with respect to
retained Interlinq common stock would otherwise escheat to or become the
property of any governmental body), any such cash, dividends or distributions
will, to the extent permitted by applicable law, become the property of
Interlinq, free and clear of all claims or interest of any person.
EFFECT OF THE MERGER ON STOCK OPTIONS
In accordance with Interlinq's 1993 Stock Option Plan, 1985 Restated Stock
Option Plan and Stock Option Plan for Non-Employee Directors, the vesting of all
outstanding options to purchase Interlinq common stock will accelerate
immediately prior to the merger. The options may then be exercised. If they are
not exercised, the options will terminate immediately prior to the filing of the
articles of merger. In accordance with the stock option plans, the shares
subject to terminated options will be available for issuance upon exercise of
additional options generated under the plans.
Immediately prior to the merger, Interlinq will agree to make a cash
payment to all holders of outstanding options, including members of the
Interlinq board, Interlinq executive officers and Interlinq employees who agree
not to exercise their options and instead let them terminate in the merger. For
all option holders other than Mr. Nechleba, Mr. Yount and Ms. Graham, the cash
payment will be equal to the difference between $9.25 per share and the exercise
price for each option. Mr. Nechleba, Mr. Yount and Ms. Graham have agreed that
they will receive the cash payment for only the 75% of their options with the
lowest exercise prices, and Mr. Nechleba has also agreed to receive the
difference between $9.00 per share and the option exercise price for each
option, instead of the difference between the exercise price and $9.25 per
share.
After the merger, the Interlinq board will grant to the former
optionholders new options to purchase shares of Interlinq common stock. For
option grants to persons other than Mr. Nechleba, Mr. Yount and Ms. Graham, the
number of options granted by Interlinq to each optionholder will be at the
discretion of the Interlinq board and senior management. It is expected that
Interlinq will determine a formula for granting new options based on a
director's or employee's position in, and contribution to, Interlinq. Although
there will be some flexibility, Interlinq expects that the total new option
grants will approximate the aggregate percentage interest in Interlinq
represented by the Interlinq common stock subject to the options held by these
optionees immediately prior to the merger. In accordance with the merger
agreement, after the merger Mr. Nechleba, Mr. Yount and Ms. Graham will be
granted options to purchase shares of Interlinq common stock such that his or
her percentage interest in Interlinq following the merger represented by
Interlinq common stock subject to such options will equal the sum of his or her
percentage interest in Interlinq represented by the Interlinq common stock
previously subject to options held immediately prior to the merger, plus 25%.
The new option grants will have exercise prices per share equal to the fair
market value of a share of Interlinq common stock at the time of grant.
OPERATION OF INTERLINQ'S BUSINESS PRIOR TO THE MERGER
Interlinq has agreed in the merger agreement to continue to conduct its
business in substantially the same manner as conducted prior to the date of the
merger agreement.
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Interlinq has also agreed to use all reasonable efforts to ensure that it
preserves its current business organization, employees and maintains its
relations and goodwill with all individuals and entities having business
relationships with it. Interlinq has agreed to keep in full force or renew all
insurance policies referred to in the merger agreement.
Among other things, Interlinq has agreed not to take any of the following
actions without the prior written consent of Terlin from the date of the merger
agreement to the filing of the articles of merger:
- declare or pay any dividend or make any other distribution to holders of
any shares of its capital stock;
- repurchase, redeem or otherwise reacquire any shares of its capital stock
or other securities;
- sell, issue or authorize the issuance of any capital stock or other
security, option, call, warrant or right to acquire any capital stock or
other security, other than option grants to new hires in accordance with
prior practice with an exercise price at fair market value and in an
aggregate amount not to exceed 50,000 shares;
- issue any instrument convertible into or exchangeable for any capital
stock or other security, except that Interlinq may issue shares of common
stock upon the valid exercise of stock options outstanding as of December
29, 1998;
- except as contemplated by the merger agreement, amend or waive any of its
rights under, or accelerate the vesting under, any provision of any of
its stock option plans, any agreement evidencing any outstanding stock
option or any restricted stock purchase agreement, or otherwise modify
any of the terms of any outstanding option, warrant or other security or
any related contract;
- amend or permit the adoption of an amendment to its articles of
incorporation, bylaws or other charter or organizational documents;
- effect or become a party to any merger, consolidation, amalgamation,
share exchange, business combination, recapitalization, reclassification
of shares, stock split, division or subdivision of shares, reverse stock
split, consolidation of shares or similar transaction;
- form any subsidiary or acquire any equity interest or other interest in
any other entity;
- make any capital expenditures except as in the ordinary course of
business that, when added to all other capital expenditures made by
Interlinq prior to closing, do not exceed $250,000 in the aggregate;
- enter into or become bound by, or permit any of the assets owned or used
by it to become bound by, any contract that involves payment or delivery
of cash or other consideration in an amount in excess of $250,000;
- terminate or amend any contract, or waive any material right or remedy
under any contract involving payment or delivery of cash or other
consideration in an amount in excess of $250,000;
- lend money to any person or entity, or incur or guarantee any
indebtedness except for routine borrowings, in the ordinary course of
business under its current line of
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credit or, in the ordinary course of business, advances to employees for
valid business purposes;
- except for routine, reasonable salary increases in connection with
Interlinq's customary employee review process, and customary bonuses in
accordance with existing bonus plans, establish, adopt or amend any
employee benefit plan, pay any bonus or make any profit-sharing or
similar payment, grant any severance or termination pay, increase the
amount of the wages, salary, commissions, fringe benefits or other
compensation or remuneration on behalf of any of its directors, officers
of employees, or hire any new employee whose aggregate annual
compensation is expected to exceed $125,000;
- change any of its methods of accounting or accounting practices in any
respect;
- make any tax election adverse to Interlinq;
- settle any material legal proceeding;
- acquire the business of any entity;
- transfer or license to any individual or entity or amend or modify in any
material adverse respect any rights, including distribution rights, to
any patent, patent application, trademark, trademark application, trade
name, fictitious business name, service mark, service mark application,
copyright, copyright application, maskwork, maskwork application, trade
secret, know-how, franchise, system, computer software, invention,
design, blueprint, proprietary product, proprietary right or other
intellectual property right or intangible asset of Interlinq, or enter
into assignments of future patent rights, other than non-exclusive
licenses and distribution rights in the ordinary course of business;
- enter into any agreement requiring the consent or approval of any third
party with respect to the merger; or
- agree or commit to take any of the actions described above.
NO SOLICITATION
Under the terms of the merger agreement, Interlinq has agreed not to, and
has agreed not to authorize or permit any of its representatives to, with
respect to anyone other than affiliates of Terlin:
- solicit, initiate, encourage or induce the making, submission or
announcement of any offer, proposal or inquiry contemplating any merger,
consolidation, amalgamation, share exchange, business combination,
issuance of securities, acquisition of securities, tender offer, exchange
offer or other similar transaction in which Interlinq is a constituent
company, involving the acquisition of more than 20% of Interlinq's
business, assets or securities or the liquidation or dissolution of
Interlinq;
- furnish any non-public information regarding Interlinq to any individual
or entity in connection with an acquisition proposal;
- provide access to the properties of Interlinq, to any individual or
entity in connection with an acquisition proposal;
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- engage in discussions or negotiations with any individual or entity with
respect to any acquisition proposal;
- approve, endorse or recommend any acquisition proposal; or
- enter into any letter of intent, similar document or any contract
relating to any acquisition transaction, excluding a confidentiality
agreement as contemplated below or contracts with advisors or consultants
to Interlinq. Prior to the adoption and approval of the merger agreement
by the shareholders, however, Interlinq is not prohibited from furnishing
nonpublic information to, or providing access to, or entering into
discussions or negotiations with, the individuals or entities described
above, if its actions do not violate any of the restrictions set forth in
the merger agreement regarding solicitation, and the actions are required
under applicable law. Interlinq must provide Terlin notice of these
actions along with any nonpublic information to be given to the third
party prior to being given to the third party. In addition, Interlinq is
required to receive a confidentiality agreement from the third party.
Interlinq has agreed to notify Terlin promptly of any acquisition proposal,
the identity of the individual or entity making or submitting the acquisition
proposal and its terms; if the proposal is made or submitted by any individual
or entity prior to closing the merger. In addition, Interlinq has agreed to keep
Terlin fully informed with respect to the status of any acquisition proposal and
any modification or proposed modification to the proposal.
FINANCING
Interlinq has agreed to provide all necessary cooperation in connection
with the arrangement of any financing to be consummated contemporaneously with,
at or after the closing in respect of the merger agreement, including
participation in meetings and due diligence sessions and the execution and
delivery of any commitment letters, loan agreements, pledge and security
documents, other definitive financing documents, or other requested certificates
or documents.
Terlin has agreed to use its reasonable best efforts to assist Interlinq in
arranging the financing in respect of the merger agreement, including using its
reasonable best efforts to assist Interlinq in the negotiation of definitive
agreements. Terlin will keep Interlinq informed of its efforts to assist
Interlinq in arranging financing. Terlin and Interlinq have agreed to notify the
other within 24 hours of receiving notice that required financing will not be
available on terms satisfactory to Terlin.
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REPRESENTATIONS AND WARRANTIES
The merger agreement contains a number of representations and warranties by
Interlinq and Terlin. If these representations are inaccurate, a condition to
the closing of the merger may not be fulfilled.
CONDITIONS TO CLOSING
CONDITIONS TO THE OBLIGATIONS OF TERLIN. Terlin's obligations to consummate
the transactions contemplated by the merger agreement are subject to the
satisfaction, at or prior to the closing, of several conditions, including:
- The representations of Interlinq contained in the merger agreement must
have been accurate in all material respects as of the date of the merger
agreement, and shall be accurate in all respects as of the closing as if
made at the closing. However, any representation that specifically refers
to December 29, 1998 or any other date other than the closing speaks as
of that date. Any inaccuracies in the representations as of the closing
will be disregarded if the circumstances giving rise to those
inaccuracies considered individually and collectively, do not constitute,
and could not reasonably be expected to result in a material adverse
effect on Interlinq. A "material adverse effect" is any change, event,
circumstance or effect that is or could reasonably be expected to be
materially adverse to the properties, business, results of operations or
condition, financial or otherwise, of Interlinq, other than any change,
event, circumstance or effect arising out of general economic conditions
generally affecting the mortgage software or enterprise application
integration market or that does or could reasonably be expected to impair
the ability of Interlinq to consummate the merger agreement.
- Interlinq will have complied with each covenant and performed each
obligation under the merger agreement at or prior to the closing.
- The merger agreement shall have been duly adopted and approved.
- The merger shall have been duly approved, by the required vote of
Interlinq shareholders.
- The aggregate of all shares held by shareholders perfecting dissenters'
rights represent no more than 5% of the number of shares of Interlinq
common stock outstanding immediately prior to the filing of the articles
of merger.
- The consents required to be obtained in connection with the merger shall
have been obtained and shall be in full force and effect.
- Since December 29, 1998, there shall have been no material adverse change
in the business, financial condition, operations or results of operations
of Interlinq and no event shall have occurred and no circumstance shall
exist that could reasonably be expected to have a material adverse effect
on the business, financial condition, operations, results of operations
of Interlinq.
- Terlin and Interlinq shall have received sufficient funds to consummate
the merger and to meet the working capital requirements of Interlinq, as
the surviving corporation, pursuant to financing arrangements and
definitive financing agreements completed to the reasonable satisfaction
of Terlin.
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- Terlin shall have received an opinion letter regarding certain corporate
matters relating to the merger from Perkins Coie LLP, dated as of the
closing,
- Interlinq shall have received a letter from KPMG LLP, dated as of the
closing, to the effect that, after reasonable investigation KPMG LLP is
not aware of any fact that could preclude the transactions contemplated
in the merger agreement from being accounted for as a leveraged
recapitalization for financial reporting purposes.
- Terlin shall have received such other documents as Terlin may request in
good faith for those purposes set forth in the merger agreement.
- No temporary restraining order, preliminary or permanent injunction or
other order preventing the consummation of the merger will have been
issued by any court of competent jurisdiction and remain in effect.
- There shall not be any legal requirement applicable to the merger that
makes consummation of the merger illegal.
CONDITIONS TO THE OBLIGATIONS OF INTERLINQ. Interlinq's obligations to
effect the merger are subject to the satisfaction, at or prior to the closing,
of several conditions, including:
- The representations of Terlin contained in the merger agreement must have
been accurate in all material respects as of December 29, 1998, and shall
be accurate in all respects as of the closing as if made at the closing.
However, any representation or warranty of Terlin that specifically
refers to any date other than the closing speaks as of that date. Any
inaccuracies in Terlin's representations as of the closing will be
disregarded if the circumstances giving rise to those inaccuracies,
considered individually and collectively, do not constitute, and could
not reasonably be expected to result in a material adverse effect on
Terlin.
- Terlin will have complied with each covenant and performed each
obligation under the merger agreement at or prior to the closing.
- The merger agreement shall have been duly adopted and approved.
- The merger shall have been duly approved, by the required vote of
Interlinq shareholders.
- No temporary restraining order, preliminary or permanent injunction or
other order preventing the consummation of the merger shall have been
issued by any court of competent jurisdiction and remain in effect, and
there shall not be any legal requirement applicable to the merger that
makes consummation of the merger illegal.
- Interlinq shall have received an opinion letter regarding certain
corporate matters relating to the merger from Cooley Godward LLP, dated
as of the closing.
- Interlinq shall have received a letter from KPMG LLP, dated as of the
closing, reasonably satisfactory in form and substance to Interlinq, to
the effect that, after reasonable investigation KPMG LLP is not aware of
any fact that could preclude the transactions contemplated in the merger
agreement from being accounted for as a leveraged recapitalization for
financial reporting purposes.
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TERMINATION
Even if shareholder approval is obtained, the merger agreement may be
terminated and the merger abandoned by either Interlinq or Terlin prior to the
filing of the articles of merger:
- by mutual written consent;
- if the merger is not consummated by May 31, 1999, subject to certain
exceptions;
- if a governmental body takes any action having the effect of permanently
enjoining or otherwise prohibiting the merger; and
- if the merger agreement and the merger are not approved by the required
vote of Interlinq shareholders. However, Interlinq is not be permitted to
terminate the merger agreement unless Interlinq has paid to Terlin
certain fees and expenses.
Even if shareholder approval is obtained, Interlinq may terminate the
merger agreement and abandon the merger prior to the filing of the articles of
merger:
- if the Interlinq board has withdrawn, amended or modified its
recommendation in favor of the merger agreement and the merger. However,
Interlinq is not permitted to terminate the merger agreement unless it
has paid to Terlin certain fees and expenses; and
- if any of Terlin's representations shall have been materially inaccurate
as of December 29, 1998 or shall have become materially inaccurate as of
any subsequent date, or if any of Terlin's covenants shall have been
materially breached and not cured within 15 business days' notice of the
breach by Interlinq. However, Interlinq may not terminate the merger
agreement if the inaccuracy or breach considered with all other
inaccuracies or breaches, would not result in a failure of the conditions
to Interlinq's obligations to effect the merger relating to the accuracy
of Interlinq's representations.
Even if shareholder approval is obtained, Terlin may terminate the merger
agreement and abandon the merger prior to filing the articles of merger prior to
the approval of the merger agreement and the merger by Interlinq shareholders if
any of the following triggering events have occurred:
- any of Interlinq's representations and warranties shall have been
materially inaccurate as of the date of the merger agreement, or if any
of Interlinq's covenants shall have been materially breached and has not
been cured within 15 business days' notice by Terlin. However, when
Terlin may not terminate the merger agreement if the inaccuracy or breach
when considered with all other inaccuracies of breaches would not result
in a failure of the conditions to Terlin's obligations to effect the
merger relating to the accuracy of Interlinq's representations and
warranties; or
- the Interlinq board fails to recommend, or for any reason withdraws,
amends or modifies in a manner adverse to Terlin its unanimous
recommendation in favor of the merger or approval of the merger
agreement;
- the Interlinq board fails to unanimously reaffirm its recommendation in
favor of approval of the merger agreement and the merger within five
business days after Terlin requests in writing that the board's
recommendation be reaffirmed;
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- the Interlinq board approves, endorses or recommends any acquisition
proposal or enters into any letter of intent or similar document or any
contract relating to any acquisition proposal (other than certain
agreements);
- Interlinq fails to hold the special meeting promptly and in any event to
commence such meeting within 45 days and end such meeting within 60 days
after this proxy statement/prospectus is mailed to shareholders;
- a tender or exchange offer relating to securities of Interlinq commences
and Interlinq does not send to Interlinq shareholders, within ten
business days after the commencement of the tender or exchange offer, a
statement that Interlinq recommends rejection of the tender or exchange
offer; or
- an acquisition proposal is publicly announced, and Interlinq fails to
issue a press release announcing its opposition to the acquisition
proposal within five business days or prior to the special meeting after
the acquisition proposal is announced or otherwise fails to oppose
actively the acquisition proposal.
If the merger agreement is terminated pursuant to any of the provisions set
forth above, all further obligations of the parties under the merger agreement
will terminate and the merger agreement will be of no further force or effect.
However:
- no party will be relieved of any obligation or other liability arising
from any material breach by that party of any provision of the merger
agreement;
- the parties shall, in all events, remain bound by and continue to be
subject to the provisions relating to expenses and termination and
certain other provisions; and
- the termination will have no effect on the confidentiality agreement
dated November 11, 1998 between Interlinq and W.R. Hambrecht + Co.
FEES AND EXPENSES
Except as provided otherwise, all fees and expenses incurred in connection
with the merger agreement are paid by the party incurring those expenses,
whether or not the merger is consummated.
If the merger agreement is terminated by Terlin because a triggering event
occurred prior to the approval of the merger agreement by the required vote of
Interlinq shareholders or the merger agreement is terminated by Interlinq
because the Interlinq board withdrew, amended or modified its recommendation in
favor of the merger agreement, then Interlinq is required to pay to Terlin in
cash a nonrefundable fee in the amount of $625,000 and reimbursements for all
reasonable out-of-pocket expenses and fees whether incurred prior to or after
the date of the merger agreement, in connection with the merger agreement, the
merger, the transactions contemplated by the merger agreement or any actual or
proposed financing in connection with the merger transaction.
Interlinq is required to pay to Terlin, in cash, reimbursements for its
reasonable out-of-pocket expenses and fees if the merger agreement is
terminated:
- by Interlinq or Terlin because the merger was not consummated by May 31,
1999 (excluding a termination of the merger agreement following a refusal
by Terlin to close solely by virtue of a failure to satisfy the condition
to closing in the merger agreement relating to financing);
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- by Interlinq or Terlin because a court of competent jurisdiction or other
governmental body issued a final and nonappealable order, decree or
ruling, or took any other action, having the effect of permanently
enjoining or otherwise prohibiting the merger;
- by Interlinq or Terlin because the merger agreement and the merger were
not approved by the required vote of Interlinq shareholders (excluding a
termination of the merger agreement following a refusal by Terlin to
close solely by virtue of a failure to satisfy the condition to closing
in the merger agreement relating to financing); or
- by Terlin because Interlinq's representations in the merger agreement
were materially inaccurate as of December 29, 1998; or
- by Terlin because Interlinq's covenants in the merger agreement were
breached in a material respect and not cured within 15 business days'
notice by Terlin of the breach.
If the merger agreement is terminated by Interlinq or Terlin because
Interlinq shareholders did not approve the merger agreement by the required vote
and at or prior to the time of such termination an acquisition proposal has been
disclosed, announced, commenced, submitted or made and shall not have been
publicly, absolutely and unconditionally withdrawn and abandoned prior to the
special meeting, in the event of the closing, completion or consummation within
one year after the date of termination of the merger agreement of an acquisition
transaction other than with Terlin or its affiliates, a fee of $1,250,000 is
payable by Interlinq to Terlin immediately after the closing, completion or
consummation of the other acquisition transaction.
In addition to the other amounts payable, if the merger agreement is,
terminated by Terlin because a triggering event occurred prior to the merger
agreement approval by the required vote of Interlinq shareholders, or the merger
agreement is terminated by Interlinq because the Interlinq board withdrew,
amended or modified its recommendation in favor of the merger agreement, in the
event of the closing, completion or consummation within one year after the date
of termination of the merger agreement of an acquisition transaction other than
with Terlin or its affiliates, an additional fee of $625,000 shall be paid by
Interlinq to Terlin immediately after the closing, completion or consummation of
the other acquisition transaction.
Pursuant to a letter agreement dated December 29, 1998, by and among W.R.
Hambecht + Co., Terlin and Interlinq, W.R. Hambecht + Co. agreed to invest a
sufficient amounts of funds in Terlin common stock to provide that a minimum of
$625,000 will be available to satisfy any claims of Interlinq against Terlin if
Interlinq terminates the merger agreement because Terlin's representations in
the merger agreement were materially inaccurate as of December 29, 1998 or shall
have become materially inaccurate as of any subsequent date (as if made on such
subsequent date) or Terlin's covenants in the merger agreement were breached in
any material respect and not cured within 15 business days of notice by
Interlinq of the breach.
The termination rights described above are not an exclusive remedy under
the merger agreement.
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AMENDMENT OF THE MERGER AGREEMENT
The merger agreement may be amended with the approval of the Interlinq
board and the Terlin board of directors at any time (whether before or after the
approval of the merger agreement by the Interlinq shareholders). However, after
the merger agreement is approved by Interlinq shareholders, no amendment can be
made which by law requires further approval of Interlinq shareholders without
first obtaining that approval. The merger agreement may not be amended except in
writing, signed on behalf of each of the parties to the merger agreement.
INDEMNIFICATION OF DIRECTORS AND OFFICERS UNDER TO THE MERGER AGREEMENT
All rights to indemnification existing in favor of the directors and
officers of Interlinq as of December 29, 1998 for acts and omissions occurring
prior to the filing of the articles of merger provided in Interlinq's bylaws and
in the indemnification agreements between Interlinq and the directors and
officers will survive the merger and will be observed by Interlinq, as the
surviving corporation, to the fullest extent available under Washington law for
a period of six years from the filing of the articles of merger.
Until the sixth anniversary of the filing of the articles of merger,
Interlinq must maintain in effect, for the benefit of the indemnified directors
and officers, the existing policy of directors' and officers' liability
insurance maintained by Interlinq as of December 29, 1998. However, Interlinq
may substitute a policy or policies of comparable coverage for the existing
policy, and Interlinq will not be required to pay an annual premium for the
existing policy or any substitute policies in excess of 150% of the current
annual premium. In the event any future annual premium for the existing policy
or any substitute policies exceeds 150% of the current annual premium, Interlinq
will be entitled to reduce the amount of coverage of the existing policy or any
substitute policies to the amount of coverage that can be obtained for a premium
equal to 150% of the current annual premium.
DEBT FINANCING
SENIOR SECURED CREDIT FACILITIES
Interlinq expects to enter into a credit agreement in connection with the
merger that will provide for aggregate maximum borrowings by Interlinq as
follows: (1) a $12 million secured term loan facility; (2) a $5 million secured
revolving credit facility; and (3) an $8 million secured and guaranteed loan
facility.
Pursuant to a commitment letter dated March 23, 1999, Silicon Valley Bank
and U.S. Bank have committed to provide, or arrange for a syndicate of lenders
to provide, to Interlinq the senior secured credit facilities in an aggregate
principal amount not to exceed $25 million. The lenders will provide funds to
Interlinq under the senior secured credit facilities subject to the terms and
conditions contained in the commitment letter. Upon consummation of the merger,
Interlinq expects to borrow:
- $12 million under the term loan facility;
- approximately $2.5 million under the revolving credit facility; and
- $8 million under the guaranteed loan facility.
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Subsequent to the merger, undrawn amounts under the revolving credit facility
will be available to Interlinq on a revolving credit basis for general corporate
purposes of Interlinq.
STRUCTURE
Interlinq expects that the senior secured credit facilities will consist of
three loan facilities:
- the term loan facility will provide for term loans to Interlinq in an
aggregate principal amount of $12 million;
- the revolving credit facility will provide for revolving loans to
Interlinq including a letter of credit subfacility in the amount of $1
million at any time not to exceed $5 million; and
- the guaranteed loan facility will provide for term loans to Interlinq in
an aggregate principal amount not to exceed $8 million.
AVAILABILITY
Availability of the senior secured credit facilities will be subject to
various conditions precedent including:
- the consummation of the merger;
- repayment of Interlinq's other outstanding debt, other than intercompany
debt and other debt exceptions to be determined, and discharge of all
liens securing such debt; and
- other conditions precedent typical of bank loans.
Silicon Valley Bank's and U.S. Bank's commitment to provide, or arrange for a
syndicate of lenders to provide, the senior secured credit facilities is also
subject to, among other things:
- the completion of their financial and legal review of Interlinq and the
merger;
- the receipt of all government and third party consents and approvals;
- the absence of any pending or threatened litigation or proceeding against
Interlinq or Terlin; and
- the absence of any material adverse change with respect to Interlinq in
particular or the financial, banking or capital markets in general.
The lenders will require Interlinq to borrow the full amount of the term
loan facility and the guarantied loan facility at the effective time of the
merger. The Company expects that the lenders will advance loans under the
revolving credit facility based upon 70% of the value of eligible accounts
receivable.
Interlinq expects that (1) the term loan facility will mature in 2004; (2)
the guarantied loan facility will mature in 2004; and (3) the revolving credit
facility will mature in 2001, but will be automatically renewable for additional
one-year periods. Interlinq also expects that its working capital needs will
require it to obtain new revolving credit facilities at the time the revolving
credit facility matures, whether by extending, renewing, replacing or otherwise
refinancing the revolving credit facility. Interlinq cannot assure you that it
can obtain any such extension, renewal, replacement or refinancing nor
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can Interlinq assure you that if obtained, such an extension, renewal,
replacement or refinancing will be on terms favorable to Interlinq.
Interlinq expects amortization of the principal amount of the term loan
facility to be on an installment schedule. Interlinq also expects that the term
loan facility will be subject to mandatory prepayment and reduction in an amount
equal to, subject to specified exceptions, the following: all of the net
proceeds of certain debt offerings and asset sales and casualty insurance
payments and other recoveries, and 50% of Interlinq's excess operating cash flow
for any fiscal year.
SECURITY
Interlinq's obligations under the senior secured credit facilities will be
secured by security interests in, pledges of or liens on substantially all the
material tangible and intangible assets of Interlinq, including intellectual
property.
GUARANTY
Interlinq expects William R. Hambrecht, related persons and/or other
persons will unconditionally and irrevocably guarantee Interlinq's residual
obligations under the guarantied loan facility following liquidation of the
security for the credit facility. Interlinq expects to pledge $2.5 million of
its cash assets to the guarantors to partially secure the obligations of the
guarantors under their guaranties. In addition Interlinq expects that other
persons may unconditionally and irrevocably guarantee a portion of the
obligations of William R. Hambrecht and other primary guarantors under their
guaranties. In particular, a member of the Walden Group, related to George
Sarlo, may guarantee the primary guaranties. None of the current directors or
executive officers of Interlinq will be a guarantor. Terlin expects William R.
Hambrecht, the other primary guarantors and any persons guaranteeing the
guaranties of the primary guarantors will enter into a contribution agreement.
If entered into, Terlin expects this contribution agreement will allocate the
risks and liabilities under the guarantee obligations. Interlinq also expects to
grant warrants to purchase shares of Interlinq common stock to guarantors as
consideration for their guaranties.
INTEREST
The interest rates per annum applicable to the loans under the senior
secured credit facilities will be fluctuating rate of interest measured by
reference to Silicon Valley Bank's published prime rate plus a borrowing margin.
Interlinq expects that the borrowing margin applicable to the loans under the
term loan facility will be 2.25%. The Company expects that the borrowing margin
applicable to the loans under the revolving credit facility will be 2.0%. It
expects that there will be no borrowing margin applicable to the loans under the
guaranteed loan facility. Amounts under the senior secured credit facilities not
paid when due will bear interest at a default rate greater than the rate then
being charged for such borrowings.
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FEES
Upon consummation of the merger, the lenders will require Interlinq to pay
certain fees with respect to the senior secured credit facilities, including:
- upfront fees of 1.25% of the maximum amount of the term loan facility and
1.00% of the maximum amount of the revolving credit facility;
- fees on the unused commitments of the lenders, which fees will initially
accrue at a rate of 0.50% on the unused portion of the revolving credit
facility;
- prepayment fees of 2.00% of the revolving credit facility if prepaid
during the first year and 1.00% if prepaid during the second year of the
loan;
- a prepayment fee of $500,000 if the guaranteed loan facility is prepaid
prior to the final repayment of the term loan facility;
- letter of credit fees on the aggregate face amount of outstanding letters
of credit at a rate to be determined by the lenders and Interlinq
immediately prior to the consummation of the merger plus a fee for the
letter of credit issuing bank at a rate to be determined by the lenders
and Interlinq;
- annual administrative fees; and
- agent, arrangement and other similar fees.
COVENANTS
Interlinq expects that the senior secured credit facilities will contain a
number of covenants that, among other things, would limit or restrict the
ability of Interlinq to:
- dispose of assets,
- incur additional indebtedness,
- incur guarantee obligations,
- prepay other indebtedness,
- grant liens,
- make licenses,
- make equity or debt investments,
- make acquisitions,
- engage in certain mergers or consolidations,
- change the business conducted by Interlinq,
- make capital expenditures,
- enter into leases, or
- engage in certain transactions with affiliates.
In addition, under the senior secured credit facilities, Interlinq expects
that it will be required to comply with the following financial ratios and
tests:
- maintenance of operating profitability,
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- maintenance of a debt coverage ratio of 1.50 to 1.00. Interlinq expects
the lenders to compute its debt coverage ratio by calculating the ratio
of its: (a) net income, interest expense, provisions for taxes,
depreciation and amortization, minus its capitalized software costs, to
(b) the current margin of long term debt and interest payments, and
- maintenance of a minimum quick ratio of 1.00 to 1.00. Interlinq expects
the lenders to compute its quick ratio by calculating the ratio of its:
(a) cash, cash equivalents and accounts receivable to (b) current
liabilities.
Interlinq also expects that it will be required to subordinate any payments
of amounts due to officers, directors and shareholders to the prior satisfaction
of the senior secured credit facilities. Interlinq expects that it will be
required to make periodic financial reports to the lenders.
EVENTS OF DEFAULT
Interlinq expects that the senior secured credit facilities will contain
customary events of default. Some of such events of default would include:
- Interlinq's failure to pay principal, interest or fees;
- Interlinq's failure to perform any covenants;
- material inaccuracy of Interlinq's representations or warranties;
- default by Interlinq on certain other indebtedness;
- the lenders' loss of lien perfection or priority;
- entry of a material judgment against Interlinq or its subsidiaries; and
- a change in the ownership or control of Interlinq.
EQUITY FINANCING OF TERLIN
W.R. Hambrecht/INLQ will own 63.3% of the outstanding capital stock of
Interlinq following the merger. W.R. Hambrecht/INLQ is a limited liability
company that was formed for the primary purpose of owning and holding Interlinq
common stock upon consummation of the merger. Prior to the merger, W.R.
Hambrecht/INLQ will hold 100% of the outstanding shares of Terlin. In the
merger, these shares will convert into shares of Interlinq common stock. Members
of W.R. Hambrecht/INLQ will pay approximately $13,800,000 for their interests in
W.R. Hambrecht/INLQ, and these funds will be used to acquire shares of Terlin
common stock. In the merger, the funds will become the property of Interlinq and
Interlinq will use the funds to pay for Interlinq shares converted into cash in
the merger.
W.R. Hambrecht/INLQ Management, LLC will be created to manage and will
control W.R. Hambrecht/INLQ as its sole managing member. In addition, W.R.
Hambrecht/INLQ Management will also manage and control W.R. Hambrecht/INLQ
Guarantors, LLC as its sole managing member. W.R. Hambrecht/INLQ Guarantors will
be created for the purpose of holding warrants to purchase 300,000 shares of
Interlinq common stock issued to William R. Hambrecht and other guarantors of $8
million of
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indebtedness incurred by Interlinq as a result of the merger. W.R. Hambrecht +
Co. will control W.R. Hambrecht/INLQ Management as its sole managing member.
William R. Hambrecht is chairman and chief executive officer of W.R. Hambrecht +
Co. and controls W.R. Hambrecht + Co. The following is a description of the
operating agreements that will govern the operations of W.R. Hambrecht/INLQ,
W.R. Hambrecht/INLQ Guarantors and W.R. Hambrecht/INLQ Management.
W.R. Hambrecht/INLQ, LLC Operating Agreement
Under the operating agreement of W.R. Hambrecht/INLQ, W.R. Hambrecht/INLQ
Management, LLC, will have the sole power and authority to manage W.R.
Hambrecht/ INLQ's business. W.R. Hambrecht/INLQ Management will act as manager
of W.R. Hambrecht/INLQ until it resigns or is terminated for reasonable cause by
a vote of a majority in interest of W.R. Hambrecht/INLQ's members. In order for
the members to terminate W.R. Hambrecht/INLQ Management for reasonable cause, it
must have acted in a grossly negligent, reckless or intentionally wrongful
manner in the conduct of W.R. Hambrecht/INLQ's business. Members other than W.R.
Hambrecht/INLQ Management will have no ability to cause W.R. Hambrecht/INLQ to
act, unless W.R. Hambrecht/ INLQ Management resigns or is removed.
Generally, 20% of W.R. Hambrecht/INLQ's net profits will be allocated to
W.R. Hambrecht/INLQ Management and the remaining 80% will be allocated to all
members in accordance with their equity interests in W.R. Hambrecht/INLQ. The
operating agreement provides that net losses are generally allocated among the
members in accordance with their equity interests. Except for certain mandatory
"tax distributions", W.R. Hambrecht/INLQ Management determines when any
distributions of cash or assets of the company will be made. If distributions
are made (other than "tax distributions"), W.R. Hambrecht/INLQ must first make
cumulative distributions of cash or assets to members equal to their original
capital contributions. It must pay 80% of any subsequent distributions to the
members in proportion to their respective equity interests in W.R.
Hambrecht/INLQ and the remaining 20% of any subsequent distributions to W.R.
Hambrecht/INLQ Management. W.R. Hambrecht/INLQ Management is entitled to
reallocate all or a portion of such distributions (and related allocations) as
between itself and other members as agreed to by those members. Membership
interests in W.R. Hambrecht/INLQ are generally non-transferable except with the
consent of W.R. Hambrecht/INLQ Management.
W.R. Hambrecht/INLQ Guarantors, LLC Operating Agreement.
Under the operating agreement of W.R. Hambrecht/INLQ Guarantors, W.R.
Hambrecht/INLQ Management, LLC, will have the sole power and authority to manage
W.R. Hambrecht/INLQ Guarantors' business. W.R. Hambrecht/INLQ Management will
act as manager of W.R. Hambrecht/INLQ Guarantors until it resigns or is
terminated for reasonable cause by a vote of a majority in interest of W.R.
Hambrecht/INLQ Guarantors' members. In order for the members to terminate W.R.
Hambrecht/INLQ Management for reasonable cause, it must have acted in a grossly
negligent, reckless or intentionally wrongful manner in the conduct of W.R.
Hambrecht/INLQ Guarantors' business. Members other than W.R. Hambrecht/INLQ
Management will have no ability to cause W.R. Hambrecht/INLQ Guarantors to act,
unless W.R. Hambrecht/INLQ Management resigns or is removed.
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Generally, 100% of W.R. Hambrecht/INLQ Guarantors' net profits will be
allocated to W.R. Hambrecht/INLQ Management up to 25% of the value of the
Interlinq warrants at the time the warrants were contributed to W.R.
Hambrecht/INLQ Guarantors. After that initial allocation to W.R. Hambrecht/INLQ
Management, remaining net profits will be allocated 80% to all members in
accordance with their equity interests in W.R. Hambrecht/INLQ Guarantors and 20%
to W.R. Hambrecht/INLQ Management. The operating agreement provides that net
losses are generally allocated among the members in accordance with their equity
interests. Except for certain mandatory tax distributions, W.R. Hambrecht/INLQ
Management determines when any distributions of cash or assets of the company
will be made. If distributions are made other than tax distributions, W.R.
Hambrecht/INLQ Guarantors must first make cumulative distributions of cash or
assets to members equal to their capital contributions. One hundred percent of
subsequent distributions, up to 25% of the value of the warrants at the time the
warrants were contributed to W.R. Hambrecht/INLQ Guarantors, must then be paid
to W.R. Hambrecht/INLQ Management. After those distributions have been made, 80%
of any other subsequent distributions will be paid to the members in proportion
to their respective equity interests in W.R. Hambrecht/INLQ Guarantors. The
remaining 20% of any subsequent distributions will be paid to W.R.
Hambrecht/INLQ Management. W.R. Hambrecht/INLQ Management is entitled to
reallocate all or a portion of such distributions and related allocations as
between itself and other members as agreed to by those members. Membership
interests in W.R. Hambrecht/INLQ Guarantors are generally non-transferable
except with the consent of W.R. Hambrecht/INLQ Management.
W.R. Hambrecht/INLQ Management, LLC Operating Agreement.
Under the operating agreement of W.R. Hambrecht/INLQ Management, W.R.
Hambrecht + Co. will have the power and authority to manage W.R. Hambrecht/INLQ
Management's business as its sole managing member. W.R. Hambrecht + Co. will act
as manager of W.R. Hambrecht/INLQ Management until it resigns or is dissolved.
Members other than W.R. Hambrecht + Co. will have no ability to cause W.R.
Hambrecht/INLQ Management to act without the consent and approval of W.R.
Hambrecht + Co.
Generally, W.R. Hambrecht/INLQ Management's net profits and losses will be
allocated to the members of W.R. Hambrecht/INLQ Management in proportion to
their respective equity interests. W.R. Hambrecht + Co. determines when any
distributions of cash or assets of the company will be made. If distributions
are made, they will be paid to the members in proportion to their respective
equity interests in W.R. Hambrecht/INLQ Management. Membership interests in W.R.
Hambrecht/INLQ Management are generally non-transferable except with the consent
of W.R. Hambrecht + Co.
GOING PRIVATE TRANSACTION
The SEC has adopted Rule 13e-3 under the Exchange Act which is applicable
to certain "going private" transactions. Interlinq recognizes that Rule 13e-3 is
applicable to the merger. Rule 13e-3 requires, among other things, that certain
financial information concerning Interlinq and certain information relating to
the fairness of the merger and the consideration offered to nonaffiliated
shareholders in that transaction be filed with the SEC and distributed to
nonaffiliated shareholders before the consummation of the merger. All
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information required by Rule 13e-3 to be distributed to nonaffiliated
shareholders is included in this proxy statement/prospectus.
REVERSE STOCK SPLIT
The merger agreement provides that the Interlinq board will effect a
reverse stock split following the merger if requested by Terlin prior to filing
the articles of merger. Under the terms of the merger agreement, the reverse
stock split would be in the ratio required to cause Interlinq to have fewer than
300 but not less than 275 holders of record after the reverse stock split.
Because the reverse stock split ratio will depend on the number of shareholders
of Interlinq following the merger and the number of shares held by each of those
shareholders, it is not currently possible for Interlinq to estimate what the
reverse split ratio would be.
At the special meeting, the Interlinq shareholders will consider and vote
upon a proposal authorizing the Interlinq board to effect the reverse stock
split if it is requested by Terlin prior to filing of the articles of merger.
The reverse stock split will only occur if the Interlinq shareholders approve
the merger and the reverse stock split.
At its meeting of December 29, 1998, the Interlinq board, including the
special committee of directors, by unanimous vote of all of the independent
directors, adopted a resolution approving the reverse stock split and determined
that the reverse stock split, if effected in connection with the merger, would
be fair to and in the best interests of Interlinq and the Interlinq
shareholders. The Interlinq board recommends that Interlinq shareholders vote
"FOR" the approval of the reverse stock split.
VOTE NEEDED FOR APPROVAL
The affirmative vote of a majority of the outstanding shares of Interlinq
common stock entitled to vote at the special meeting is required to approve the
reverse stock split and the related amendment to Interlinq's articles of
incorporation.
EFFECTS OF THE REVERSE STOCK SPLIT
The reverse stock split would be effected by amending Interlinq's articles
of incorporation as set forth in Appendix C to this proxy statement/prospectus.
The amendment would become effective upon its filing with the Secretary of State
of Washington. When the amendment is filed, each share of Interlinq common stock
will be converted into a fraction of a share of Interlinq common stock as
determined by a reverse stock split ratio. Fractional shares of Interlinq common
stock would not be issued as a result of the reverse stock split. After
aggregating all shares held by each holder of record of Interlinq common stock,
shareholders entitled to receive a fractional share of Interlinq common stock as
a consequence of the reverse stock split would receive a cash payment instead of
receiving a fractional share. See "-- Exchange of Stock Certificates and Payment
of Fractional Shares." The interest of Interlinq shareholders with only
fractional shares would be terminated by the reverse split and cash payment for
the shareholders' fractional shares. Interlinq shareholders who own one or more
shares of Interlinq common stock after the application of the reverse stock
split ratio would continue to own shares of Interlinq common stock and would
share in the assets and potential future growth of Interlinq.
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Adoption of the reverse stock split proposal as of the end of Interlinq's
most recent fiscal year, June 30, 1998, would not have had an effect on net
income for the year ended June 30, 1998. However, net earnings per share would
have been proportionally increased, in an amount which is dependent upon the
reverse stock split ratio. No adjustment has been made in the pro forma
financial statements for the reduction in the number of shares of Interlinq
common stock resulting from the payment of cash for fractional shares because it
is impossible at this time to estimate what the reverse stock split ratio will
be, if a reverse split is effected.
Because all outstanding options to purchase Interlinq common stock will
terminate immediately prior to the merger, the reverse stock split, if effected,
will have no effect on outstanding stock options. However, the number of shares
available for issuance under Interlinq's stock option plans will be
appropriately reduced in proportion to the reverse stock split ratio.
If implemented, the reverse stock split would likely result in some
shareholders owning "odd-lots" of less than 100 shares of Interlinq common
stock. Because brokerage commissions and other costs of transactions in odd-lots
are generally higher than the costs of transactions on "round-lots" of even
multiples of 100 shares, Interlinq shareholders who elect to retain some or all
of their shares may incur additional brokerage commissions and other costs if
they attempt to sell their shares through a broker.
If the reverse stock split is effected and Interlinq terminates the
registration of its common stock under the Exchange Act, as of the end of its
current fiscal year Interlinq would no longer be subject to the periodic
reporting requirements and the proxy rules of the Exchange Act. As a result,
Interlinq shareholders who remain as shareholders after the reverse stock split
will experience a decrease in access to information. Although Interlinq would
send audited financial statements to its remaining shareholders upon their
request, less information would be available than if Interlinq continued to be
an Exchange Act reporting company. In addition, following the reverse stock
split, Interlinq would no longer meet the requirements for listing on Nasdaq and
would delist the Interlinq common stock. If shares of Interlinq common stock are
allocated to holders of Interlinq common stock who did not elect to retain
shares (because holders of fewer than 1,250,000 shares elected to retain their
shares in the merger), then Interlinq may not voluntarily delist its common
stock from Nasdaq for six months. However, because Interlinq will not satisfy
the listing requirements, Nasdaq could delist the Interlinq common stock at any
time. The termination of Interlinq's Exchange Act registration and its delisting
from Nasdaq would cause the trading market for Interlinq's common stock to
disappear except for possible trading in the "pink sheets" or other informal
markets and shareholders will experience a decrease in liquidity.
REASONS FOR THE REVERSE STOCK SPLIT
Implementation of the reverse stock split would relieve Interlinq of the
administrative burden, cost and competitive disadvantages associated with filing
reports and otherwise complying with the requirements of Exchange Act
registration. The Interlinq board believes that Interlinq derives limited
benefit from the continued registration of Interlinq common stock under the
Exchange Act. It also believes that the monetary expense and burden to
management of continued registration outweighs the material benefit to Interlinq
or its shareholders as a result of such registration.
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The reverse stock split would reduce the number of shareholders of record
to less than 300 shareholders and would enable Interlinq common stock to cease
to be registered under the Exchange Act at the end of the fiscal year ending
June 30, 1999 and to be delisted from the Nasdaq. The Interlinq board has no
present intention to raise capital through sales of securities in a public
offering in the foreseeable future or to acquire other business entities using
stock as the consideration for any such acquisition. Accordingly, Interlinq is
not likely to make use of any advantage, such as for raising capital, effecting
acquisitions or other purposes, that Interlinq's status as a reporting company
may offer. In addition, certain of Interlinq's competitors are not publicly
held. Interlinq may suffer a competitive disadvantage from being required to
disclose certain information that privately held companies are not required to
disclose.
EXCHANGE OF STOCK CERTIFICATES AND PAYMENT FOR FRACTIONAL SHARES
The exchange of shares of Interlinq common stock would occur on the date
the reverse stock split amendment to the articles of incorporation is filed with
the state of Washington without any action on the part of Interlinq shareholders
and without regard to the date certificates representing pre-split shares of
Interlinq common stock are physically surrendered for certificates representing
post-split shares of Interlinq common stock. The exchange agent would exchange
the certificates. In the event that the number of shares of post-split Interlinq
common stock includes a fractional number of shares, Interlinq would pay to the
shareholder, instead of the issuance of fractional shares of Interlinq, a cash
payment (without interest) in the dollar amount (rounded to the nearest whole
cent) determined by multiplying the number of pre-split Interlinq shares that
are not converted into whole shares in the reverse stock split by $9.25.
If the reverse stock split is effected and there has been a pro rata
reduction in the number of shares that electing Interlinq shareholders are able
to retain (because holders of more than 1,250,000 shares elected to retain their
shares), then the exchange agent will apply the reverse stock split to all
shares that the shareholders would otherwise be entitled to retain before
redistributing those shares to the appropriate shareholders. Any payment that is
made instead of issuing a fractional share in the reverse stock split will be
made approximately concurrently with the distribution of the certificates
representing the retained shares and the cash payment for shares that were not
able to be retained as a result of proration.
If the reverse stock split is effected and shares of Interlinq common stock
have been allocated to shareholders who did not elect to retain their shares
(because holders of fewer than 1,250,000 shares elected to retain their shares),
then when shareholders submit their shares for payment of the cash out amount as
described in "Election Procedures -- Exchange of Certificates," the exchange
agent will apply the reverse stock split to the shares of Interlinq common stock
that would otherwise be issued to each shareholder. In this case, each
certificate representing pre-split shares of Interlinq common stock, will, until
surrendered to the exchange agent, represent the right to receive:
- the cash out amount in exchange for the appropriate number of shares,
- the appropriate whole number of post-split shares, and
- if applicable, a payment instead of a fractional share.
No holder of unexchanged certificates would be entitled to receive any
dividends or other distributions payable by Interlinq after the reverse stock
split until the certificates representing pre-split shares of Interlinq common
stock have been surrendered. Such
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dividends and distributions, if any, would be accumulated, and at the time of
the surrender of the certificates would be paid without interest.
DISSENTERS' RIGHTS
Interlinq shareholders have the right to dissent from the reverse stock
split and, subject to certain conditions, to receive payment of the "fair value"
of their shares of Interlinq common stock, as provided in Sections 23B.13.101
through 23B.13.310 of the Washington Business Corporation Act. See "Rights of
Dissenting Interlinq Shareholders."
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER AND THE REVERSE STOCK SPLIT
Perkins Coie LLP, Interlinq's counsel, has opined that the following
summarizes the material United States federal income tax consequences of the
merger and the reverse stock split for holders of Interlinq common stock.
However, as discussed below, it is unclear as to whether the merger and the
reverse stock split will be treated for federal income tax purposes as separate
transactions or parts of a single integrated transaction. The tax consequences
can differ significantly depending on whether the transactions are viewed
separately or together. The tax opinion of Perkins Coie LLP only addresses the
fact that the description of this uncertainty is materially accurate -- it is
not an opinion as to whether or not the transactions would be viewed separately
or together for federal income tax purposes.
The following discussion is for your general information only and does not
consider all aspects of federal income taxation that may be material to you
based on your particular tax circumstances. The discussion is based on current
provisions of the Internal Revenue Code of 1986, as amended, existing, proposed
and temporary regulations promulgated under the tax code, and administrative and
judicial interpretations of the tax code, all of which could change. The
discussion applies only to shareholders who hold the shares as capital assets
within the meaning of Section 1221 of the tax code, and may not apply to shares
received pursuant to the exercise of employee stock options or otherwise as
compensation, or to certain types of shareholders, such as:
- insurance companies,
- tax-exempt organizations,
- pension funds,
- banks,
- shareholders that hold their shares as part of a hedging, straddle,
conversion or other risk reduction transaction, and
- broker-dealers,
who may be subject to special rules. This discussion does not cover the federal
income tax consequences to a shareholder who, for United States federal income
tax purposes, is a nonresident alien individual, a foreign corporation, a
foreign partnership, or a foreign estate or trust. It also does not consider the
effect of any state, local or foreign income or other tax laws.
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BECAUSE INDIVIDUAL CIRCUMSTANCES MAY DIFFER, YOU SHOULD CONSULT YOUR OWN
TAX ADVISOR TO DETERMINE HOW THE RULES DISCUSSED BELOW APPLY TO YOU AND HOW THE
MERGER AND THE REVERSE STOCK SPLIT WILL AFFECT YOU, INCLUDING THE APPLICATION
AND EFFECT OF STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS.
TREATMENT OF THE MERGER AND THE REVERSE STOCK SPLIT AS COMBINED VERSUS SEPARATE
TRANSACTIONS
It is unclear whether the merger and the reverse stock split will be
treated for federal income tax purposes as separate transactions or parts of a
single integrated transaction. The tax law often requires related transactions
that occur within the same time frame to be treated as if they were actually
steps in a single transaction.
One way to determine if two separate transactions will be treated as a
single combined transaction is to determine if the first transaction would have
occurred if the second transaction never occurred. In this case, there are
separate votes for the merger and the reverse stock split and the reverse stock
split is not a condition to the merger. Thus, there is a reasonable argument
that the two transactions should not be combined. See Rev. Rul. 75-406, 1975-2
C.B. 125 and Rev. Rul. 96-30, 1996-1 C.B. 36, which were both made obsolete by
Rev. Rul. 98-27, 1998-22 I.R.B. 4 for a change in the tax code that is not
relevant here. However, because the transactions have related objectives and
occur at approximately the same time, there is a fairly significant risk that
the merger and the reverse stock split will be combined. See Rev. Rul. 98-27,
1998-22 I.R.B. 4. Neither the courts nor the Internal Revenue Service have ruled
in a case such as this. Because there is no direct authority on this point,
Perkins Coie LLP cannot render an opinion as to which result is more likely.
As described below, the most significant tax consequence if the merger and
reverse stock split are treated as a combined transaction is that a shareholder
receiving some cash and retaining some stock could be taxed on the full amount
of the cash up to the amount of the gain inherent in all stock held by the
shareholder before these transactions. If the transactions are treated
separately, cash would be taxable only up to the amount of gain inherent in the
shares surrendered for cash.
The discussion immediately below describes the general federal income tax
consequences if the transactions are treated as separate transactions. For a
discussion of the general federal income tax consequences of the transactions if
they are aggregated, see "Tax Impact if the Merger and the Reverse Stock Split
are Aggregated for Tax Purposes." As indicated below, the tax consequences can
differ significantly depending on whether the transactions are viewed separately
or together.
TAX IMPACT IF THE MERGER AND THE REVERSE STOCK SPLIT ARE TREATED SEPARATELY FOR
TAX PURPOSES
MERGER
NO GAIN OR LOSS ON RETAINED SHARES
A shareholder will not recognize gain or loss if he or she retains
Interlinq common stock in the merger. Moreover, the shareholder's basis and
holding period in the retained stock will not change.
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GAIN OR LOSS RECOGNIZED UPON RECEIPT OF CASH FOR ALL SHARES
The receipt of a cash payment as a result of the merger, including any cash
payment received by a dissenting shareholder upon the exercise of his or her
rights of appraisal, that terminates the interest of the shareholder in
Interlinq will be a taxable transaction for federal income tax purposes.
Amount of Gain or Loss. If the merger is treated as a separate transaction,
a shareholder who surrenders all of his or her Interlinq common stock in the
merger will, after applying the constructive ownership rules under Section 318
of the tax code, generally recognize gain or loss as if he or she had sold all
of his or her shares for cash. Such gain or loss will equal the difference
between the shareholder's adjusted tax basis in the shares and the amount of
cash received. Gain or loss must be determined separately for each block of
shares (for example, shares acquired at the same cost in a single transaction).
Character of Gain or Loss. If the merger is treated as a separate
transaction, gain or loss recognized on cash received in the merger by a
shareholder who surrenders all of his or her Interlinq common stock in the
merger will be a capital gain or loss. The gain or loss will be a long-term
capital gain or loss if the holder has held the shares for more than one year as
of the filing of the articles of merger. Long-term capital gain of individuals
and other noncorporate taxpayers currently is taxed at a maximum rate of 20% for
federal income tax purposes.
GAIN OR LOSS RECOGNIZED WHERE SHAREHOLDER RECEIVES SOME CASH AND RETAINS
SOME STOCK
Amount of Gain Recognized. A shareholder who elects to receive cash for
some but not all of his or her shares will generally be treated as if he or she
had sold the surrendered shares to Interlinq for cash. If the merger is treated
as a separate transaction, the shareholder will recognize gain or loss equal to
the difference between the shareholder's adjusted tax basis in the shares
surrendered and the amount of cash received. Gain or loss must be determined
separately for each block of shares (for example, shares acquired at the same
cost in a single transaction).
Character of Recognized Gain. If the merger is treated as a separate
transaction, any recognized gain will be capital gain unless the cash received
is considered a distribution of a dividend within the meaning of Section 302 of
the tax code. If this occurs, the cash payment will be taxable as ordinary
income to the extent of the shareholder's share of Interlinq's earnings and
profits. If the cash payment exceeds such holder's share of earnings and
profits, the excess will be treated first as a basis-reducing, tax-free return
of capital to the extent of the holder's basis in each retained share of
Interlinq common stock and then as a capital gain.
A distribution to a shareholder will not be considered to have the effect
of the distribution of a dividend if it is "substantially disproportionate" with
respect to the shareholder or if it is "not essentially equivalent to a
dividend" to the shareholder.
A distribution will be "substantially disproportionate" if the
shareholder's proportionate interest in the Interlinq common stock he or she
actually holds after the merger is (1) less than 50% of the total of all
outstanding Interlinq common stock after the merger and (2) less than 80% of
what the shareholder's proportionate interest was before the merger. In applying
this test, the constructive ownership rules of Section 318 of the tax code shall
apply. Under the constructive ownership rules, a shareholder is treated
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as holding not only his or her own shares but also shares held by certain
related persons and entities.
Even though a distribution does not satisfy the substantially
disproportionate test discussed above, it still may be "not essentially
equivalent to a dividend" depending upon the shareholder's particular facts and
circumstances. The United States Supreme Court in Davis v. United States, 397
U.S. 301, 313 (1970), concluded that a distribution will be considered not
essentially equivalent to a dividend if there is a "meaningful reduction of the
shareholder's proportionate interest." Although the question is highly factual,
the Internal Revenue Service has ruled that small reductions in the voting
interest of minority shareholders in public companies not involved in management
mean that the distribution is not essentially equivalent to a redemption. Rev.
Rul. 76-385, 1976-2 C.B. 92 (3.3% reduction in holdings of minority
shareholder). A shareholder who increases his or her proportionate interest in
Interlinq as a result of the merger will not meaningfully reduce his or her
proportionate interest in the Interlinq common stock. As a result, the
shareholder will be treated as having received a distribution of cash
essentially equivalent to a dividend.
Basis and Holding Period. A shareholder who retains some Interlinq common
stock and receives some cash will retain the same basis in such stock as before
the merger. The holding period of the retained stock will not change.
REVERSE STOCK SPLIT
EXCHANGE OF INTERLINQ COMMON STOCK SOLELY FOR CASH
If only cash is received in the reverse stock split in exchange for all of
a shareholder's Interlinq common stock, the cash will be treated as a
distribution in redemption of the shareholder's Interlinq common stock. If the
distribution results in a complete termination of the shareholder's direct and
indirect interest in Interlinq, capital gain or loss will be recognized by the
shareholder in an amount equal to the difference between the amount of cash
received in the redemption and the adjusted basis of the Interlinq common stock
surrendered. The gain or loss will be long-term capital gain or loss if the
shareholder will have held, or be deemed to have held, the Interlinq common
stock for more than one year as of the time of the reverse stock split.
EXCHANGE OF INTERLINQ COMMON STOCK SOLELY FOR NEW INTERLINQ COMMON STOCK
A shareholder who receives solely shares of new Interlinq common stock
pursuant to the reverse stock split will recognize no gain or loss under Section
354 of the tax code as a result of the characterization of the reverse stock
split as a recapitalization within the meaning of Section 368(a)(1)(E) of the
tax code. The aggregate basis of the shares of new Interlinq common stock
received by such shareholder pursuant to the reverse stock split will be the
same as the aggregate tax basis of the stock surrendered in exchange. The
holding period of the new Interlinq common stock received by the shareholder
will include the holding period of the currently outstanding Interlinq common
stock surrendered in the exchange.
EXCHANGE OF INTERLINQ COMMON STOCK FOR CASH AND NEW INTERLINQ COMMON STOCK
Amount of Gain Recognized. A shareholder who receives a combination of
Interlinq common stock and cash pursuant to the reverse stock split will
generally recognize gain, if any (but not loss), realized with respect to all
Interlinq common stock exchanged, whether
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for new Interlinq common stock or cash, but in an amount that does not exceed
the cash received. This rule taxes gain inherent in all of the Interlinq common
stock exchanged for cash or new Interlinq common stock. Consequently, a
shareholder might be subject to gain in an amount that exceeds the gain inherent
in the shares surrendered for cash.
Character of Recognized Gain. Any recognized gain will be capital gain
unless the receipt of cash has the effect of a distribution of a dividend. The
same dividend equivalency test described above for the merger applies, except
that the test is applied to ownership of Interlinq before and after the reverse
stock split. If the cash is considered a dividend, it will be taxable as
ordinary income to the extent of the shareholder's share of Interlinq's earnings
and profits. If the cash exceeds such share, the excess will be treated first as
a basis-reducing, tax-free return of capital to the extent of the holder's basis
in each retained share of Interlinq common stock and then as a capital gain.
Basis and Holding Period. A shareholder who receives new Interlinq common
stock and cash will receive a basis in such new Interlinq common stock that will
be the same as the basis of the Interlinq common stock surrendered in the
exchange, decreased by the amount of any cash received, and increased by the
amount of any gain recognized on the exchange. The holding period of such new
Interlinq common stock will include the holding period of the surrendered
Interlinq common stock.
TAX IMPACT IF THE MERGER AND THE REVERSE STOCK SPLIT ARE AGGREGATED FOR TAX
PURPOSES
If the merger and reverse stock split are aggregated for tax purposes, the
tax consequences for a shareholder generally will be the same except as
described below.
Amount of Gain or Loss Recognized. If the merger and reverse stock split
were treated as a combined transaction, a shareholder receiving some cash and
retaining some stock could be taxed on the full amount of the cash up to the
amount of the gain inherent in all stock held by the shareholder before these
transactions. As discussed below, if the transactions are treated separately,
cash would be taxable only up to the amount of gain inherent in the shares
surrendered for cash.
Character of Gain or Loss. If the merger and the reverse stock split are
treated as part of a single transaction, the reduction in a shareholder's
proportionate interest effected by the merger and by the reverse stock split
will be combined to determine whether the merger and the reverse stock split
together effected a "substantially disproportionate" distribution. Moreover, the
shares surrendered in the merger will be combined with the shares surrendered in
the reverse stock split to determine whether a particular shareholder effected a
"meaningful reduction" of the shareholder's proportionate interest for dividend
equivalency purposes.
ALTERNATIVE MINIMUM TAX
Capital gain and dividends are also included in alternative minimum taxable
income that may be subject to a special minimum tax at a 26% or 28% rate,
depending on the taxpayer's alternative minimum taxable income, to the extent
the minimum tax exceeds regular tax liabilities. Alternative minimum taxable
income is reduced by various exemption amounts, which are phased out above
certain levels.
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WITHHOLDING
Payments made in connection with the merger and the reverse stock split may
be subject to "backup withholding" at a rate of 31%, unless the shareholder (1)
is a corporation or comes within certain exempt categories and, when required,
demonstrates this fact or (2) provides a correct tax identification number to
the payor, certifies as to no loss of exemption from backup withholding and
complies with applicable requirements of the backup withholding rules. A holder
who does not provide a correct tax identification number may be subject to
penalties imposed by the Internal Revenue Service. Any amount paid as backup
withholding is not considered an additional tax and will be credited against the
holder's federal income tax liability. You should consult with your tax advisor
as to your qualification for exemption from backup withholding and the procedure
for obtaining such exemption. You may prevent backup withholding by completing a
Substitute Form W-9 or, if you are a foreign holder, a Form W-8, and sending it
to the paying agent along with the letter of transmittal.
You should consult your own tax advisor for more specific and definitive
advice as to the federal income tax consequences that will result from the
transaction, especially if you acquired your Interlinq stock in a
compensation-related transaction, as well as for advice as to the application
and effect of state, local and foreign income and other tax laws.
DIRECTOR AND EXECUTIVE OFFICER INFORMATION
DIRECTORS
Our board of directors currently consists of four directors and one vacancy
and is divided into two classes, with each director serving for a two-year term,
with approximately one-half of the directors, and all the directors in one
class, standing for election each year. Two directors presently serve in Class I
and two directors presently serve in Class II, with one vacancy in Class II.
Following the merger, assuming the proposals to amend the articles of
incorporation and bylaws relating to the elimination of the classified board are
approved, the classes will be combined into one class of directors serving for
one year terms and the vacancy will be filled by Mr. Delafield.
Unless otherwise indicated, the directors have been engaged in the same
principal occupation for the past five years and their ages are as of March 1,
1999.
CLASS I DIRECTORS TERMS EXPIRING IN 2000
<TABLE>
<S> <C>
ROBERT W. O'REAR Mr. O'Rear has served as one of our directors
Age 55 since 1994. Since 1991, he has been president of
O'Rear Cattle, Inc., a beef cattle company. From
1978 through 1993, Mr. O'Rear served as the
manager of subsidiary development for Microsoft
Corporation.
ROBERT J. GALLAGHER Mr. Gallagher has served as one of our directors
Age 42 since 1994. Since 1997, Mr. Gallagher has been
an independent consultant. From 1987 through
1997, Mr. Gallagher served as an executive
officer with North American Mortgage Company, a
California mortgage banking company, in various
roles, including senior vice president and chief
financial officer and executive vice president
and chief administrative officer.
</TABLE>
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CLASS II DIRECTORS TERMS EXPIRING IN 1999
<TABLE>
<S> <C>
JIRI M. NECHLEBA Mr. Nechleba has served as our president and
Age 41 chief executive officer since September 11, 1995
and as chairman of the board since November 6,
1995. From 1993 to 1995, he served as senior
vice president and general manager of
SolutionWare, a division of A.C. Nielsen, a Dun
& Bradstreet subsidiary, and a provider of
information solutions to the consumer packaged
goods industry. From 1985 to 1993, Mr. Nechleba
was an independent management consultant to a
variety of industries.
THEODORE M. WIGHT Mr. Wight has served as one of our directors
Age 55 since 1985. Since 1994, Mr. Wight has been
general partner of the general partner of
Pacific Northwest Partners SBIC, L.P., a venture
capital firm. Mr. Wight has also served as a
general partner of the general partner of Walden
Investors since 1983. Mr. Wight is a member of
the board of directors of RehabCare Corp. and
Eagle Hardware & Garden, Inc.
</TABLE>
NEW DIRECTOR AFTER THE MERGER
<TABLE>
<S> <C>
JOHN D. DELAFIELD Mr. Delafield is currently a partner of W.R.
Age 33 Hambrecht+ Co. Prior to joining W.R. Hambrecht +
Co. in 1998, Mr. Delafield was from 1995 to 1998
an associate in the Investment Banking Division
of Morgan Stanley Dean Witter in both New York
and Singapore. From 1989 to 1993, he was the
chief representative for northern China at
Coca-Cola, Inc. Mr. Delafield earned a B.A. from
Princeton University in 1989 and an M.B.A. from
Harvard Business School in 1995.
</TABLE>
COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS
During fiscal year 1998, there were nine meetings of our board of
directors. The standing committees of the board include an audit committee and a
compensation committee, but do not include a nominating committee. The full
board selects nominees for election as directors. All of the incumbent directors
attended at least 85% of the meetings of the board and its committees held
during the fiscal year.
The audit committee consists of Theodore M. Wight and Robert J. Gallagher.
Four meetings of the audit committee were held during the last fiscal year. The
audit committee's responsibilities include:
- reviewing the plan, scope and results of the independent audit and
reporting to the full board whether financial information is fairly
presented and whether generally accepted accounting principles are
followed;
- monitoring our internal accounting and financial functions to assure
quality of staff and proper internal controls; and
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- investigating conflicts of interest, ethics and compliance with laws and
regulations.
The compensation committee consists of Theodore M. Wight, Robert J.
Gallagher and Robert W. O'Rear. Six meetings of the compensation committee were
held during the last fiscal year. The compensation committee establishes base
salaries and incentive compensation for all of our executive officers. The
committee also administers the 1985 Restated Stock Option Plan and the 1993
Stock Option Plan.
DIRECTORS' FEES
We pay each director $1,000 in cash compensation for attendance at board
meetings and reimburse directors for their out-of-pocket expenses incurred for
personal attendance at board meetings.
Our Stock Option Plan for Non-Employee Directors provides for the automatic
grant of options to non-employee directors up to an aggregate of 215,000 shares
of our common stock. As of April 20, 1999, 105,000 shares of common stock were
subject to options outstanding under this plan. The plan provides for automatic
grants of nonqualified stock options at an exercise price that is not less than
fair market value per share on the date of grant. Each non-employee director
elected or appointed other than at an annual meeting of shareholders receives an
initial grant of 10,000 shares upon becoming a director. Each continuing
director receives an annual grant of 7,500 shares effective as of the date of
our annual shareholder's meeting. Options granted under this plan vest six
months from the date of grant. Options granted under this plan expire five years
from the date of grant or, if earlier, three months after the optionee's
termination of service with us or one year after the optionee's death or
disability.
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EXECUTIVE OFFICERS
Biographical Information for Non-director executive officers.
Stephen A. Yount has been executive vice president -- Enterprise Technology
Division, chief financial officer and secretary of Interlinq since July 1, 1998.
Prior to this position he was the vice president -- finance, chief financial
officer and secretary since October 1991. Additionally, upon the resignation of
Interlinq's president and chief executive officer, Robert M. Delf in January,
1995, Mr. Yount was appointed interim president by the board of directors. He
continued in this capacity until the hiring of Jiri Nechleba as president and
chief executive officer on September 11, 1995. During 1991, Mr. Yount held a
temporary position with PF Industries & Acrotech, Inc., an aerospace company,
where he served as chief financial officer. From 1989 to 1991, Mr. Yount was the
president and chief financial officer of PacSoft Incorporated, a civil
engineering software firm. Mr. Yount earned a CPA certificate in 1982 and holds
a BA in Business Administration from the University of Washington. Mr. Yount is
a citizen of the United States.
Patricia R. Graham has been executive vice president -- Mortgage Technology
Division since July 1, 1998. Prior to her promotion, Ms. Graham was vice
president -- Sales and Marketing since March 25, 1996. From 1990 to 1995, she
served in various capacities with A.C. Nielsen Co., a subsidiary of Dun &
Bradstreet, including executive vice president. From 1981 to 1990 she was
employed by Information Resources, Inc. and departed holding the position of
Senior Vice President. Ms. Graham holds a Masters degree in Political Science
from Rutgers University. Ms. Graham is a citizen of the United States.
COMPENSATION OF EXECUTIVE OFFICERS
Compensation Summary.
The following table shows, for the chief executive officer and other
executive officers during the fiscal year ended June 30, 1998, information
concerning compensation paid or accrued for services to us in all capacities for
that fiscal year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
----------------------------- ------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) COMPENSATION($)
--------------------------- ---- ---------- --------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
Jiri M. Nechleba(1)............... 1998 175,112 94,951 25,000 --
Chairman of the Board, President 1997 175,000 17,500 25,000 --
and Chief Executive Officer 1996 141,908 -- 250,000 11,610(2)
- ----------------------------------------------------------------------------------------------------
Stephen A. Yount(3)............... 1998 120,077 64,900 17,500 --
Executive Vice President -- 1997 119,039 12,100 15,000 --
Enterprise, Technology Division, 1996 108,900 12,600 12,000 --
CFO & Secretary
- ----------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 99
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
----------------------------- ------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) COMPENSATION($)
--------------------------- ---- ---------- --------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
David A. Sperline................. 1998 120,077 64,900 10,000 --
Vice President -- Customer 1997 117,138 12,100 15,000 --
Service
1996 97,101 12,600 12,000 --
- ----------------------------------------------------------------------------------------------------
Patricia R. Graham(4)............. 1998 120,077 139,042(5) 17,500 --
Executive Vice President -- 1997 120,000 49,154(6) 15,000 --
Mortgage Technology Division 1996 32,769 -- 60,000 7,000(7)
</TABLE>
- -------------------------
(1) Mr. Nechleba joined us as president and CEO on September 11, 1995. He was
elected as chairman of the board on November 6, 1995.
(2) Represents reimbursement to Mr. Nechleba for his moving expenses associated
with his relocation upon joining us as president and CEO.
(3) Mr. Yount was promoted to the position of executive vice
president -- Enterprise Technology Division on June 30, 1998.
(4) Ms. Graham joined us as vice president -- Sales and Marketing on March 22,
1996, and was promoted to executive vice president -- Mortgage Technology
Division on June 30, 1998.
(5) Includes commission income of $74,055 for fiscal 1998 based upon a
percentage of net software license fees and other revenues.
(6) Includes commission income of $37,054 for fiscal 1997 based upon a
percentage of net software license fees and other revenues.
(7) From February 26, 1996 to March 22, 1996, Ms. Graham served as a consultant
for us. Amount represents consulting fees received during this period.
Option Grants
Shown below is certain information concerning options granted to our
executive officers during the fiscal year ended June 30, 1998.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------------------------------------------------------------
POTENTIAL
REALIZABLE VALUE AT
ASSUMED ANNUAL
NUMBER OF % OF TOTAL RATES OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(2)
OPTIONS EMPLOYEES IN PRICE EXPIRATION --------------------
NAME GRANTED (#) FISCAL YEAR ($/SHARE)(1) DATE 5% 10%
---- ----------- ------------ ------------ ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Jiri M. Nechleba............ 25,000(3) 14.1% 4.53125 1/20/08 $71,242 $180,541
Stephen A. Yount............ 17,500(3) 9.8% 4.53125 1/20/08 49,869 126,379
David A. Sperline........... 10,000(3) 5.6% 4.53125 1/20/08 28,497 72,216
Patricia R. Graham.......... 17,500(3) 9.8% 4.53125 1/20/08 49,869 126,379
</TABLE>
- -------------------------
(1) The option exercise price as determined by our board, is equal to the fair
market value of the underlying stock on the date of grant.
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<PAGE> 100
(2) The dollar amounts under these columns are the result of calculations at the
5% and 10% rates required by applicable regulations of the SEC and
therefore, are not intended to forecast possible future appreciation, if
any, of the stock price. The calculations assume that all of the options are
exercised at the end of their respective ten-year terms. Actual gains, if
any, on the stock option exercises depend on the future performance of stock
and overall market conditions, as well as the holder's continued employment
through the vesting period. The amounts reflected in this table may not be
achieved.
(3) The options granted are incentive stock options that vest in yearly
increments over a four-year period, becoming fully vested on January 22,
2002. Options not already exercisable generally become fully vested and
exercisable upon mergers or reorganizations pursuant to our 1993 option
plan. Each option has a term of ten years.
Option Exercises and Fiscal Year-End Values
Shown below is information with respect to the exercise of options to
purchase our stock granted in fiscal 1998 and prior years under our 1993 and
1985 option plans to our executive officers and stock options held by them as of
June 30, 1998.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE TABLE
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS HELD AT IN-THE-MONEY OPTIONS AT
JUNE 30, 1998(#) JUNE 30, 1998($)
--------------------------- ---------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE(1) UNEXERCISABLE(1)
---- ----------- ------------- -------------- ----------------
<S> <C> <C> <C> <C>
Jiri M. Nechleba......... 106,250 193,750 $370,508 $632,617
Stephen A. Yount......... 64,750 41,250 317,164 106,445
David A. Sperline........ 71,250 33,750 360,227 86,992
Patricia R. Graham....... 33,750 58,750 119,180 174,180
</TABLE>
- -------------------------
(1) This amount represents the aggregate of the number of in-the-money options
multiplied by the difference between the closing price of our stock on the
Nasdaq National Market on June 30, 1998 ($7.125) and the exercise prices for
the relevant options.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS
Termination of Employment
If Mr. Nechleba is terminated prior to September 11, 1999 for any reason
other than cause, he will receive severance payments equal to one year of his
base salary.
Our 1993 and 1985 Option Plans
Our 1993 and 1985 Option Plans both provide that, upon the occurrence of
specified transactions, including mergers or business combinations, outstanding
options will become fully vested and exercisable. These options, if not
exercised, will then terminate upon consummation of the transaction. In the
alternative, at our discretion and the discretion of
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<PAGE> 101
other participants in the transaction, the options may be assumed by the
acquiring or surviving business.
Stock Option Plan for Non-Employee Directors
Our Stock Option Plan for Non-Employee Directors provides that upon the
occurrence of specified events, including mergers or business combinations,
outstanding options will become fully vested and exercisable for a period of
twenty days prior to the consummation of the transaction. If not exercised prior
to the completion of the transaction, the options will terminate unless
converted in a stock-for-stock exchange.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The compensation committee for fiscal year 1998 consisted of three members
of our board, all of whom are non-employee directors. This committee is
responsible for reviewing and approving the following:
- base salaries for all executive officers,
- the level of participation in the executive bonus program,
- the company-wide profit sharing plan, and
- any changes to the design of these plans.
This committee also administers our 1993 and 1985 Option Plans. Committee
decisions relating to compensation of executive officers are reviewed by the
entire board.
Executive Compensation Policies and Performance Measures
Our executive compensation policies have been developed to meet the
following objectives:
- Attract and retain key executives critical to our long-term success;
- Reward key executives for their contributions to the executive team in
the development and successful execution of product, marketing, sales and
business strategies; and
- Motivate key executives to make decisions and take actions which increase
the value of our stock over the long term.
This committee uses a combination of cash- and equity-based programs to
compensate key executives.
Cash-Based Compensation
The committee reviews base salaries for all executive officers annually. In
evaluating executive salaries, the committee used various salary surveys of
compensation paid at companies of similar size in the software industry.
Salaries are based upon a review of the officer's contribution to the team in
accomplishing our short- and long-term objectives. Short-term objectives include
sales growth from new and existing products and financial performance measures
which include gross margin, operating margin, net income and earnings per share.
Long-term objectives include the timely development of new products,
95
<PAGE> 102
enhancements to existing products, identification of new markets, development
and execution of plans to address identified market opportunities, and share
price appreciation. The committee does not place any specific weighting on these
individual factors in determining executive officer salary levels, but instead
evaluates the overall impact of achieving these short- and long-term objectives
on the return on shareholders' equity. Based upon the above ongoing review for
each executive officer, this committee targets its base salaries for all of its
executive officers by referencing the various salary surveys for comparable
positions.
We provide executive officers with incentive compensation in the form of
our executive bonus plan. This plan was designed to ensure that a high
percentage of each executive officer's total potential cash compensation is
based on a quantitative evaluation of our financial performance. The plan's
payout formula provides for payouts on a sliding scale based upon achieving a
target level of profitability before payment of executive bonuses, employee
profit sharing and income taxes. No payout will be made, however, if we fail to
achieve a minimum pre-determined level of profitability. Because we achieved
profit targets for the fiscal year ended June 30, 1998, we paid the executive
bonuses.
Equity-Based Compensation
We provide our executive officers with long-term incentives through our
1993 Option Plan. The primary objective of this plan is to provide an incentive
for the executives to make decisions and take actions which maximize long-term
shareholder value. The plan design promotes this long-term focus using vesting
periods. Options currently vest in either four or five equal annual installments
beginning one year from date of grant. Our compensation committee reviews and
approves all grants made under the plan and generally grants executive officers
options upon hire, and additional grants are reviewed annually. The number of
new grants each year for both the executive officers and the rest of our
employees is based primarily on relative salary levels. The committee reviews
the number of grants already awarded each executive officer before approval of
additional grants.
Chief Executive Officer Compensation
Cash-Based Compensation
In assembling the compensation package of the chief executive officer, our
compensation committee pursues the same objectives which apply for our other
executive officers. The committee applies a combination of qualitative and
quantitative performance measures in developing our CEO's base salary. As
mentioned previously in this report, these include short-term objectives of
sales growth from new and existing products and financial performance measures
which include gross margin, operating margin, net income and earnings per share.
Long-term objectives include the timely development of new products,
enhancements to existing products, identification of new markets, development
and execution of plans to address identified market opportunities, and share
price appreciation. The committee does not place any specific weighting on these
individual factors in determining our CEO's salary level, but instead evaluates
the overall impact of achieving these short- and long-term objectives on the
return on shareholders' equity.
In order to promote long-term shareholder value, our CEO's total potential
compensation generally includes a relatively high proportion in the form of its
executive bonus plan. This plan is based on a quantitative evaluation of our
financial performance.
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<PAGE> 103
The plan's payout formula provides for payouts on a sliding scale based upon
achieving a target level of profitability before payment of executive bonuses,
employee profit sharing and income taxes. No payout will be made, however, if we
fail to achieve a minimum pre-determined level of profitability. Because we
achieved profit targets for the fiscal year ended June 30, 1998, we paid our CEO
a bonus.
Equity-Based Compensation
We provide our CEO with long-term incentives through our 1993 Option Plan.
The primary objective of this plan is to provide an incentive for our CEO to
make decisions and take actions which maximize long-term shareholder value. The
plan design promotes this long-term focus using vesting periods. For the fiscal
year 1998, our compensation committee granted our CEO 25,000 incentive stock
options. The number of new options granted each year to our CEO, the other
executive officers, and the rest of our employees is based primarily on relative
salary levels.
Compensation Committee
Robert W. O'Rear
Robert J. Gallagher
Theodore M. Wight
STOCK OPTION PLANS
DESCRIPTION OF THE PLANS
The 1993 Option Plan
The 1993 Option Plan was adopted by the board of directors on February 17,
1993 and approved by the shareholders on March 12, 1993. The 1993 Option Plan
permits the issuance of options to selected employees, directors, officers,
agents, consultants, advisors and independent contractors of Interlinq. The 1993
Option Plan is administered by the compensation committee, which has the
authority to select individuals who are to receive options and to specify the
terms and conditions of each option so granted, including the number of shares
covered by the option, the type of option (incentive or nonqualified), the
exercise price (which in no event may be less than the fair market value per
share at the day of grant), the vesting provisions, and the term of the option.
Unless otherwise provided by the committee, the options granted under the 1993
Option Plan vest in annual installments over four years, beginning on the date
of grant. Unless otherwise provided by the compensation committee, any option
granted under the 1993 Option Plan expires 10 years from the date of grant or,
if earlier, three months after the optionee's termination of service with
Interlinq (other than for cause) or 12 months after the optionee's death or
disability. There are 1,150,000 shares of common stock are reserved for issuance
under the 1993 plan.
As of March 31, 1999, options to purchase an aggregate of 925,098 shares
were outstanding with exercise prices ranging from $3.13 to $8.38. As of March
31, 1999, options for 17,470 shares have been exercised. On March 31, 1999, the
fair market value of the common stock was $7.59.
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<PAGE> 104
Options will terminate under the 1993 Option Plan upon the occurrence of
specified events, including a merger, consolidation or other reorganization or
recapitalization. Immediately before any of these events, option vesting will
accelerate and optionees will have the right to exercise their options in whole
or part. Options granted under the 1993 Option Plan shall terminate, but the
optionee will have the right immediately prior to any such merger,
consolidation, acquisition of property or stock, separation, reorganization or
liquidation to exercise such optionee's option in whole or in part whether or
not the vesting requirements set forth in the option agreement have been
satisfied.
The Non-Employee Directors' Plan
Under the Non-Employee Directors' Plan, options to purchase an aggregate of
75,000 shares of common stock may be granted to directors who are not employees
of Interlinq. The Non-Employee Directors Plan was originally adopted by the
board of directors on February 17, 1993 and approved by the shareholders on
March 12, 1993. The Non-Employee Directors' Plan provides for automatic grants
of nonqualified stock options at an exercise price that is equal to the fair
market value per share at the date of grant. Under the Non-Employee Directors'
Plan, each non-employee director elected or appointed other than at the annual
meeting of shareholders will receive an initial grant of 10,000 shares upon
becoming a director. Each continuing director will receive an annual grant of
7,500 shares effective as of the date of Interlinq's annual meeting of
shareholders. Options granted under the Non-Employee Directors' Plan vest six
months from the date of grant. Options granted under the Non-Employee Directors'
Plan expire upon the earliest of five years from the date of grant, three months
after the optionee's termination of service with Interlinq or one year after the
optionee's death or disability. 215,000 shares of common stock are reserved for
issuance under the Non-Employee Directors' plan.
As of March 31, 1999, options to purchase an aggregate of 108,000 shares
were outstanding with exercise prices ranging from $3.25 to $7.00. As of March
31, 1999, options for 81,000 shares have been exercised. On March 31, 1999, the
fair market value of the common stock was $7.59.
Upon the occurrence of specified corporate transactions, the exercisability
of each option outstanding under the Non-Employee Directors' Plan will be
automatically accelerated so that each such option will, immediately prior to
the specified effective date for any such corporate transaction, become fully
exercisable with respect to the total number of shares purchasable under such
option and may be exercised for all of any portion of such shares. If the option
is not exercised, it will terminate, except that, in the event of such a
corporate transaction in which shareholders of Interlinq receive capital stock
of another corporation in exchange for their shares of common stock, such
unexercised option will be assumed or an equivalent option will be substituted
by such successor corporation or a parent or subsidiary of such successor
corporation. Any assumed or equivalent options will be fully exercisable with
respect to the total number of shares purchasable under such option. Upon a
merger of Interlinq in which the holders of common stock immediately prior to
the merger have the same proportionate ownership of common stock in the
surviving corporation immediately after the merger or the creation of a holding
company, each option outstanding under the Plan will be assumed or an equivalent
option will be substituted by the successor corporation or a parent or
subsidiary of such corporation and the vesting schedule for the option will
continue to apply to the assumed or equivalent option.
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<PAGE> 105
NEW PLAN BENEFITS
The following table illustrates the number and value of options the
executive officers, directors and non-executive officer employees will receive
after the merger.
<TABLE>
<CAPTION>
NUMBER OF
OPTIONS AFTER
NAME AND POSITION DOLLAR VALUE($) THE MERGER
----------------- --------------- ---------------
<S> <C> <C>
Jiri M. Nechleba, Chief Executive Officer......... 341,915
Stephen A. Yount, Executive Vice President, Chief
Financial Officer............................... 90,607
Patricia Graham, Executive Vice President......... 79,068
David A. Sperline, Vice President................. 71,787
Executive Group (4 persons)....................... 583,377
Non-Executive Officer Director Group (3
persons)........................................ 77,453
Non-Executive Officer Employee Group (
persons)........................................ 293,865
</TABLE>
Future option grants under the 1993 Option Plan is discretionary.
FEDERAL INCOME TAX CONSEQUENCES OF THE STOCK OPTION PLANS
The federal income tax consequences to Interlinq and any person granted an
option under the Plans under the existing applicable provisions of the tax code
and the regulations are substantially as follows.
Under present law and the Treasury regulations, a participant will not
recognize income upon the grant of incentive or nonqualified stock options.
Nonqualified Stock Options
When an optionee exercises a nonqualified stock option, the difference
between the option price and the fair market value of the shares on the date of
exercise is ordinary income and is subject to payroll taxes and tax withholding.
Upon a later sale of those shares, the optionee will have short-term or
long-term capital gain or loss, depending on how long the shares have been held,
in an amount equal to the difference between the amount realized on such sale
and the tax basis of the shares sold. If the option price is paid entirely in
cash, the tax basis of the shares will be equal to their fair market value on
the exercise date, but it will not be less than the option price. The shares'
holding period will begin on the day after the exercise date.
If the optionee uses already-owned shares to exercise an option in whole or
in part, the transaction will not be considered to be a taxable disposition of
the already-owned shares. The optionee's tax basis and holding period of the
already-owned shares will be carried over to the equivalent number of shares
received upon exercise. The tax basis of the additional shares received upon
exercise will be the fair market value of the shares on the exercise date but it
will not be less than the amount of cash, if any, used in payment. The holding
period for such additional shares will begin on the day after the exercise date.
The same rules apply to an incentive stock option that is exercised more
than three months after the optionee's termination of employment, or more than
12 months thereafter in the case of permanent and total disability, as defined
in the code.
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<PAGE> 106
Incentive Stock Options
Upon the exercise of an incentive stock option during employment or within
three months after the optionee's termination of employment (12 months in the
case of permanent and total disability), the optionee will recognize no ordinary
income at the time of exercise, although the optionee will have income for
alternative minimum income tax purposes at that time as if the option were a
nonqualified stock option. No deduction will be allowed to Interlinq for federal
income tax purposes in connection with the grant or exercise of the option. If
the acquired shares are sold or exchanged after the later of (a) one year from
the date of exercise of the option and (b) two years from the date of grant of
the option, the difference between the amount realized by the optionee on that
sale or exchange and the option price will be taxed to the optionee as a
long-term capital gain or loss. If the shares are disposed of before these
holding period requirements are satisfied, then the optionee will recognize
taxable ordinary income in the year of disposition in an amount equal to the
excess of the fair market value of the shares received at the time the incentive
stock option is exercised over the option price paid or, if less, the excess of
the amount realized on the sale of shares over the option price. The optionee
will have capital gain or loss, long-term or short-term, as the case may be, in
an amount equal to the difference between (a) the amount realized by the
optionee upon that disposition of the shares and (b) the option price paid by
the optionee increased by the amount of ordinary income, if any, so recognized
by the optionee.
PRINCIPAL HOLDERS OF OUR VOTING SECURITIES
The following tables show the persons, including any group deemed a
"person" under Section 13(d)(3) of the Exchange Act, known to Interlinq who
beneficially own more than 5% of Interlinq common stock as of April 21, 1999.
The tables also show beneficial ownership as of March 15, 1999 for each
director, for each executive officer and for all executive officers and
directors as a group.
SECURITY OWNERSHIP OF BENEFICIAL OWNERS
The following table shows the beneficial owners known to Interlinq who own
more than 5% of the Interlinq common stock. To Interlinq's knowledge, except as
stated in the footnotes to the table, each of the named persons has sole voting
and investment power with respect to the shares shown.
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENT OF PERCENT OF
NAME AND ADDRESS OF OF BENEFICIAL CLASS OWNED CLASS OWNED
BENEFICIAL OWNER OWNERSHIP BEFORE MERGER AFTER MERGER(1)
------------------- ----------------- ------------- ---------------
<S> <C> <C> <C>
Hambrecht & Quist Group............ 435,150(2) 8.5% 12.8%
One Bush Street
San Francisco, CA 94104
William R. Hambrecht............... 372,492(3) 7.3% 10.9%(4)
550 Fifteenth Street
San Francisco, California 94103
J. Carlo Cannell................... 359,500(5) 7.0% 10.6%
d/b/a Cannell Capital Management
600 California Street, Floor 14
San Francisco, CA 94108
</TABLE>
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<PAGE> 107
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENT OF PERCENT OF
NAME AND ADDRESS OF OF BENEFICIAL CLASS OWNED CLASS OWNED
BENEFICIAL OWNER OWNERSHIP BEFORE MERGER AFTER MERGER(1)
------------------- ----------------- ------------- ---------------
<S> <C> <C> <C>
George S. Sarlo.................... 357,599(6) 7.0% 10.5%
The Walden Group
750 Battery Street, 7th Floor
San Francisco, California 94111
ROI Capital Management, Inc. ...... 289,100(7) 5.6% 8.5%
17 E. Sir Francis Drake Blvd.,
Suite 225
Larkspur, CA 94939
Dimensional Fund Advisors Inc...... 261,300 5.1% 7.7%
1299 Ocean Ave., 11th Floor
Santa Monica, CA 90401
</TABLE>
- -------------------------
(1) Assumes that the beneficial owner listed elects to retain all of his or its
shares in the merger, and that the number of shares the beneficial owner is
able to retain is not reduced as a result of proration. Interlinq has not
received any indication whether any person or entity listed in the table
will elect to retain their respective shares.
(2) Includes shares beneficially owned by: Hambrecht & Quist California, a
California corporation and wholly owned subsidiary of Hambrecht & Quist
Group; Hambrecht & Quist LLC, a subsidiary of Hambrecht & Quist California;
Hambrecht & Quist Venture Partners, a California limited partnership, one of
whose general partners is Hambrecht & Quist California; H&Q Ventures IV, a
California limited partnership whose general partner is Hambrecht & Quist
Venture Partners; Venture Associates (BVI) Limited, a British Virgin Islands
corporation whose investment manager is Hambrecht & Quist Venture Partners;
Hamquist, a California limited partnership whose general partner is
Hambrecht & Quist California; and William D. Easterbrook, a United Kingdom
citizen and the advisory director of Hambrecht & Quist California. As
disclosed in Hambrecht & Quist Group's definitive proxy materials filed
January 7, 1999, the following individuals are either named executive
officers, directors or beneficial owners of more than 5% of the outstanding
voting stock of Hambrecht & Quist Group: Daniel H. Case III; David G.
Golden; Paul L. Hallingby; David M. McAuliffe; Christina M. Morgan; Howard
B. Hillman; William R. Mayer; William J. Perry; Edmund H. Shea, Jr.; William
R. Timken; and William R. Hambrecht.
(3) Includes 263,200 shares beneficially owned by Ironstone Group, Inc. but
attributable to Mr. Hambrecht by virtue of Rule 13d-5(b)(1) of the Exchange
Act. The remaining 109,292 shares beneficially owned by Mr. Hambrecht are
attributable to Ironstone Group, Inc. by virtue of Rule 13d-5(b)(1) of the
Exchange Act, and include 47,942 shares held by the Hambrecht 1980 Revocable
Trust and 61,800 shares held by W. R. Hambrecht + Co. Mr. Hambrecht is not
affiliated with Hambrecht & Quist Group or any other person or entity listed
in footnote 2. While a director of Ironstone Group, Inc. is also a director
of Hambrecht & Quist Group, Ironstone Group, Inc. is not affiliated with
Hambrecht & Quist Group or any other person or entity listed in footnote 2.
The 263,200 shares beneficially owned by Ironstone Group, Inc. are
attributed to each of William R. Hambrecht and Hambrecht & Quist Group, Inc.
These shares are attributable to Hambrecht & Quist Group because of its
indirect 50% ownership of the Ironstone Group. These same shares are also
attributable to William R. Hambrecht by virtue of Rule 13d-5(b)(1) of the
Exchange
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<PAGE> 108
Act. There are no oral or written agreements between Hambrecht & Quist Group
and William R. Hambrecht regarding the Interlinq transaction.
(4) Does not include shares of Interlinq common stock that will be issued to the
shareholder of Terlin in the merger. Mr. Hambrecht and Ironstone Group, Inc.
may be deemed to have beneficial ownership of some of those shares.
(5) With respect to the 359,500 shares, sole voting power for 169,700 shares is
held by Tonga Partners, LP; sole voting power for 73,100 shares is held by
Pleiades Investment Partners, LP; sole voting power for 116,700 shares is
held by The Cuttyhunk Fund Limited.
(6) With respect to 297,259 of the shares, sole voting power for 234,295 shares
is held by the George S. Sarlo Revocable Trust, DTD 12-23-91, sole voting
power for 7,033 shares is held by the George S. Sarlo SEPIRA, DTD 12-5-97,
sole voting power for 3,000 shares is held by the George S. Sarlo IRA
Rollover, DTD 4-25-85, and sole voting power for 52,931 shares held by the
Walden Management Corporation Pension FBO George S. Sarlo DTD 1-8-80. In
addition, voting power for 60,340 shares is shared by three general partners
of Walden Partners II, LP.
(7) These shares are attributable to Mark T. Boyer and Mitchell J. Soboleski by
virtue of their ownership interest in ROI Capital Management, Inc.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth as of April 19, 1999 the number of shares of
Interlinq common stock owned by each Interlinq director, each of Interlinq's
executive officers, and all directors and executive officers as a group. Each of
the named persons and members of the group has sole voting and investment power
with respect to the shares shown, except as stated in the footnotes to the
table.
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENT OF PERCENT OF
OF BENEFICIAL CLASS BEFORE CLASS AFTER
NAME OF BENEFICIAL OWNER OWNERSHIP MERGER(1) MERGER(2)
------------------------ ----------------- ------------ -----------
<S> <C> <C> <C>
Theodore M. Wight....................... 73,000(3) 1.4% 1.1%
Robert W. O'Rear........................ 44,000(3) * *
Robert J. Gallagher..................... 54,895(3) * *
Jiri M. Nechleba........................ 400,000(4) 7.2% --
Stephen A. Yount........................ 106,000(4)(5) 2.0% --
David A. Sperline....................... 105,000(4) 2.0% --
Patricia R. Graham...................... 92,500(4) 1.8% --
All directors and executive officers as
a group (7 persons)................... 875,395 14.7% 1.8%
</TABLE>
- -------------------------
* Less than 1% of the outstanding shares of Interlinq common stock.
(1) Shares of Interlinq common stock subject to options that are currently
exercisable or will be exercisable immediately prior to the merger, are
deemed outstanding for computing the percentage ownership of the person
holding such options, but are not deemed outstanding for computing the
percentage ownership of any other person.
(2) Assumes that the beneficial owner listed elects to retain all of his or her
shares in the merger, and that the number of shares the beneficial owner is
able to retain is not reduced as a result of proration. Options held by the
beneficial owner listed will
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automatically accelerate and be terminated in the merger and therefore will
not result in equity ownership after the merger.
(3) Includes options to purchase 37,000 shares of Interlinq common stock that
are currently exercisable or will be exercisable immediately prior to the
merger.
(4) Represents options to purchase shares of Interlinq common stock that are
currently exercisable or will be exercisable immediately prior to the
merger.
(5) Does not include 14,221 shares held by the Interlinq 401(k) Plan. Mr. Yount
shares voting power with respect to these shares with the 40l(k) Plan
trustees. Mr. Yount disclaims beneficial ownership with respect to the
shares held by the Interlinq 401(k) Plan.
TRANSACTIONS BY CERTAIN PERSONS IN INTERLINQ COMMON STOCK
No transactions in Interlinq common stock were effected by any member of
the special committee or any executive officer of Interlinq during the 60-day
period preceding the date of this proxy statement/prospectus.
As indicated in the table below, Interlinq has engaged in repurchases of
its common stock in open market and negotiated block transactions from
time-to-time. Interlinq has not made any repurchases since September 30, 1998.
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF RANGE OF AVERAGE
SHARES REPURCHASED PURCHASE PRICE PURCHASE PRICE
--------------------- -------------- --------------
<S> <C> <C> <C>
Fiscal Year Ended June 30, 1997
First Quarter.................. 40,000 $3.63 - $3.75 $3.65
Second Quarter................. 527,000 $4.13 - $4.75 $4.58
Third Quarter.................. 0 -- --
Fourth Quarter................. 75,000 $3.94 - $4.00 $3.98
Fiscal Year Ended June 30, 1998
First Quarter.................. 134,500 $4.00 - $4.63 $4.37
Second Quarter................. 162,000 $4.19 $4.19
Third Quarter.................. 10,900 $4.63 $4.63
Fourth Quarter................. 0 -- --
Fiscal Year Ended June 30, 1999
First Quarter.................. 250,000 $4.75 - $6.00 $5.01
</TABLE>
DESCRIPTION OF INTERLINQ CAPITAL STOCK
The authorized capital stock of Interlinq consists of 5,000,000 shares of
preferred stock, par value $.01 per share. 2,500,000 shares of preferred stock
have been designated "Series A Preferred Stock" and no shares of preferred stock
are issued or outstanding as of the date of this proxy statement/prospectus.
30,000,000 shares have been designated common stock, par value $.01 per share.
5,129,148 shares of common stock are issued and outstanding as of March 31, 1999
and held of record by shareholders. Interlinq has 1,141,522 shares of
Interlinq common stock subject to issuance upon exercise of options outstanding
pursuant to its stock option plans. The following description of the capital
stock of Interlinq and certain provisions of Interlinq's articles of
incorporation and bylaws is a summary and is qualified by the provisions of
Interlinq's articles of incorporation and bylaws, a copy of each of which is on
file with the SEC.
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INTERLINQ COMMON STOCK
Holders of Interlinq common stock are entitled to one vote per share on all
matters submitted to a vote of shareholders, including the election of
directors, and are entitled to receive ratably such dividends, if any, as may be
declared from time to time by the Interlinq Board out of funds legally
available. In the event of a liquidation, dissolution or winding up of
Interlinq, holders of Interlinq common stock are entitled to share ratably in
all assets remaining after payment of Interlinq's liabilities and the
liquidation preference, if any, of any outstanding shares of Interlinq preferred
stock. Holders of Interlinq common stock have no preemptive or other
subscription rights and no rights to convert their Interlinq common stock into
other securities, and there are no redemptive provisions with respect to such
shares. All of the outstanding shares of Interlinq common stock are, and the
shares of Interlinq common stock following the merger will be, fully paid and
non-assessable. The rights, preferences and privileges of holders of Interlinq
common stock are subject to, and may be adversely affected by, the rights of
holders of shares of any series of Interlinq preferred stock, if any, which
Interlinq may designate and issue in the future.
INTERLINQ PREFERRED STOCK
The Interlinq board has the authority, without further vote or action by
the shareholders, to provide for the issuance of up to 5,000,000 shares of
Interlinq preferred stock from time to time in one or more series, to establish
the number of shares to be included in each such series, to fix the
designations, preferences, limitations and relative, participating, optional or
other special rights and qualifications or restrictions of the shares of each
series, and to determine the voting powers, if any, of such shares. The issuance
of Interlinq preferred stock, while providing flexibility in connection with
possible acquisitions and other corporate purposes, could adversely effect,
among other things, the rights of existing Interlinq shareholders or could have
the effect of delaying, deferring, or preventing a "change in control" of
Interlinq without further action by Interlinq shareholders. In addition, the
issuance of Interlinq preferred stock could decrease the amount of earnings and
assets available for distribution to holders on Interlinq common stock. The
Interlinq board has no current plans to issue any Interlinq preferred stock and
has agreed, pursuant to the terms of the merger agreement, not to issue any such
shares.
WASHINGTON ANTITAKEOVER STATUTE
Washington law contains certain provisions that may have the effect of
delaying, deterring or preventing a takeover or change in control of a
"reporting company," which is a company with a class of securities registered
under Sections 12 or 15 of the Exchange Act. Interlinq is currently a reporting
company. Chapter 23B.19 of the Washington Business Corporation Act prohibits a
reporting company, with certain exceptions, from engaging in certain significant
business transactions with an "acquiring person," defined as a person who
acquires 10% or more of that reporting company's voting securities without the
prior approval of that reporting company's board of directors, for a period of
five years after such acquisition. The prohibited transactions include, among
others, a merger with, disposition of assets to, or issuance or redemption of
stock to or from, the acquiring person, or otherwise allowing the acquiring
person to receive any disproportionate benefit as a shareholder. After the
five-year period, that reporting company may engage in otherwise proscribed
transactions, so long as the transaction complies with certain fair price
provisions of the statute or is approved by a majority of disinterested
shareholders within
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each voting group entitled to vote separately. A reporting company may not
exempt itself from coverage of this statute.
CAPITAL STOCK OF INTERLINQ FOLLOWING THE MERGER AND REVERSE STOCK SPLIT
If the merger agreement and merger are approved by the requisite vote of
the Interlinq shareholders at the special meeting, which consequently results in
amendment articles of incorporation and bylaws in connection with the merger,
the articles of incorporation will be amended to read as set forth in Appendix D
of incorporation and the bylaws will be amended to read as set forth in Appendix
E. As amended, the post-merger articles and the post-merger bylaws will be the
articles of incorporation and bylaws of Interlinq following the merger, until
such time as they are amended again. After the merger, Interlinq will have the
same authorized common stock as it did prior to the merger, but no authorized
preferred stock.
AMENDMENTS TO ARTICLES OF INCORPORATION AND BYLAWS
General
Both prior to and following the merger, Interlinq will be a Washington
corporation subject to the provisions of the Washington Business Corporation
Act. Currently, an Interlinq shareholder's rights are governed by Interlinq's
articles of incorporation, its bylaws and the Washington Business Corporation
Act. If the proposed amendments to the articles and bylaws are approved, the
rights of those persons and entities who remain as Interlinq shareholders
following the merger will be determined by the post-merger articles of
incorporation, the post-merger bylaws and the Washington Business Corporation
Act.
The following is a summary of the material differences in the rights of
Interlinq shareholders prior to and following the merger if the merger agreement
and the amendments to the articles and bylaws are approved at the special
meeting and the merger is consummated. The following discussion is not a
complete discussion of shareholder rights. Each shareholder should carefully
review the governing laws, Interlinq's articles of incorporation, its bylaws,
its post-merger articles of incorporation and its post-merger bylaws.
Approval of the amendments to Interlinq's articles and bylaws is a
condition to completing the merger. However, Terlin may elect to waive this
condition at any time.
Amendments to Articles of Incorporation
Elimination of Classified Board. Currently, Interlinq's articles provide
for classes of directors whose terms, ranging from one to three years, are
staggered. The Interlinq board presently consists of four directors, divided
into two classes of two directors each, who serve two year terms. Following the
merger, the post-merger articles would eliminate classes of directors and limit
a director's term to one year, with all directors' terms expiring at the next
annual meeting following the election of the directors.
Elimination of Preferred Stock. Currently, Interlinq's articles of
incorporation authorize 5,000,000 shares of Interlinq preferred stock. Following
the merger, the post-merger articles of incorporation would eliminate
Interlinq's preferred stock so that the only authorized shares of Interlinq
would be 30,000,000 shares of Interlinq common stock.
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Action by Shareholders Without a Meeting or Vote. Currently, Interlinq's
articles provide that no actions can be taken by the written consent of
shareholders. Following the merger, the post-merger Articles would allow action
that could be taken at a meeting of the shareholders to be taken without a
meeting or a vote if either (1) the action is taken by all shareholders entitled
to vote on the action or (2) if Interlinq is not a public company, the action is
taken by the number of shareholders necessary to authorize or take such action
at a meeting at which all shares entitled to vote on the action were present and
voted.
Reduction in Voting Threshold. Currently, Interlinq's articles of
incorporation require the affirmative vote of two-thirds of the outstanding
shares to approve the amendment of specified provisions of the articles of
incorporation. Following the merger, the post-merger articles of incorporation
will require the affirmative vote of a majority of the outstanding shares to
approve the amendment of any provision of the post-merger articles of
incorporation requiring shareholder approval.
Amendments to Bylaws
Notice of Shareholders' Meetings. Currently, Interlinq's bylaws require
that notice of a shareholder meeting be sent to shareholders not less than 30 or
more than 60 days before the meeting. Following the merger, the post-merger
bylaws would require notice to be sent to shareholders not less than 10 or more
than 60 days before the meeting, except that notice of a meeting to act on an
amendment to the post-merger articles of incorporation, a plan of merger of
share exchange, the sale, lease, exchange or other disposition of all or
substantially all of Interlinq's assets other than in the regular course of
business or the dissolution of Interlinq must be given not less than 20 or more
than 60 days before the meeting.
Amendments Relating to Board
- Elimination of Classified Board. Currently, Interlinq's bylaws provide
for classes of directors whose terms, ranging from one to three years, are
staggered. The Interlinq board presently consists of four directors, divided
into two classes of two directors each, who serve two year terms. Following the
merger, the post-merger bylaws would eliminate classes of directors and limit a
director's term to one year, with all directors' terms expiring at the next
annual meeting following the election of the directors.
- Filling Vacancies on the Interlinq Board. Currently, Interlinq's bylaws
require that a vacancy created by the removal of a director for cause may be
filled only by a vote of the holders of two-thirds of the shares who would
otherwise be entitled to elect the removed director. Following the merger, the
post-merger bylaws would allow the vacancy to be filled by a vote of all holders
entitled to vote, the Interlinq board or, if the directors in office constitute
fewer than a quorum, by the affirmative vote of a majority of the remaining
directors.
- Removal of Directors. Currently, Interlinq's bylaws state that a director
may only be removed for cause. That removal requires the vote of at least
two-thirds of the holders of the shares entitled to elect the director whose
removal is sought. Following the merger, the post-merger bylaws would allow the
removal of a director, with or without cause, upon a majority vote of the
holders of the shares entitled to elect the director whose removal is sought.
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<PAGE> 113
Future Amendments to Bylaws. Currently, Interlinq's bylaws provide that the
Interlinq board has the power to adopt, amend or repeal the bylaws subject to
approval by a majority of the Continuing Directors (as that term is defined in
Interlinq's articles of incorporation). In addition, the bylaws allow Interlinq
shareholders to adopt, amend or repeal the bylaws by a vote of at least
two-thirds of the outstanding shares. Following the merger, the term "Continuing
Directors" would be replaced by "directors," and would reduce the shareholder
vote needed to adopt, amend or repeal Interlinq's post-merger bylaws to a
majority of the outstanding shares.
STATUTORY ANTITAKEOVER PROTECTION
As previously discussed, Interlinq is subject to a Washington law that may
have the effect of delaying, discouraging or preventing a takeover or change in
control of a reporting company, which is a company with a class of securities
registered under Sections 12 or 15 of the Exchange Act. As a result of the
merger and the reverse stock split, Interlinq may no longer be a reporting
company and thus would not be subject to the Washington law providing
antitakeover protection. After ending its reporting requirements under the
Exchange Act, Interlinq would become subject to the antitakeover provisions only
if its board of directors and shareholders approve an amendment to its articles
of incorporation providing that Interlinq is subject to Washington's
antitakeover statute.
RIGHTS OF DISSENTING INTERLINQ SHAREHOLDERS
The following summary of the availability of dissenters' rights for
Interlinq shareholders in connection with the merger and the reverse stock split
does not claim to be complete and is qualified by reference to Chapter 23B.13 of
the Washington Business Corporation Act, a copy of which is attached to this
proxy statement/prospectus as Appendix F. Any shareholder contemplating the
exercise of dissenters' rights is urged to review the full text of Chapter
23B.13 of the Washington Business Corporation Act. The procedures set forth in
that chapter must be followed exactly or dissenters' rights may be lost.
An Interlinq shareholder who properly follows the procedures for dissenting
and demanding payment for his or her Interlinq common stock according to Chapter
23B.13 (as summarized below) may be entitled to receive in cash the "fair value"
of his or her Interlinq common stock instead of the consideration provided in
the merger agreement and/or the reverse stock split. The "fair value" of a
dissenting Interlinq shareholder's shares will be the value of such shares
immediately before the effective time, excluding any appreciation or
depreciation in anticipation of the merger, unless exclusion would be
inequitable. The "fair value" could be more than, equal to or less than the
value of the consideration the shareholder would have received pursuant to the
merger agreement or the reverse stock split if the shareholder had not
dissented. If the dissenting shareholder and the corporation cannot agree on the
"fair value" of the dissenter's Interlinq common stock, a court may determine
the "fair value" in an appraisal proceeding.
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To properly exercise dissenters' rights with respect to the merger or the
reverse stock split and to be entitled to payment under Chapter 23B.13 of the
Washington Business Corporation Act, a holder of Interlinq common stock must,
among other things,
- before the special meeting, deliver to Interlinq written notice of the
shareholder's intent to demand payment for his or her shares if the
merger or the reverse stock split happens;
- not vote his or her shares in favor of the merger or the reverse stock
split; and
- upon receiving a dissenter's notice from Interlinq (as described below),
timely deliver a demand for payment, certifying whether the shareholder
acquired beneficial ownership before the date of the first announcement
to the news media or to shareholders of the terms of the merger or the
reverse stock split, and deposit the shareholder's Interlinq certificates
in accordance with the terms of the dissenter's notice.
Thus, any holder of Interlinq common stock who wishes to dissent from the merger
or the reverse stock split, or both, and who executes and returns a proxy on the
accompanying form, must specify either that the dissenting holder's shares are
to be voted against the merger or the reverse stock split, or that the proxy
holder should abstain from voting his or her shares in favor of the merger or
the reverse stock split. If the shareholder returns a proxy without voting
instructions, his or her shares will automatically be voted in favor of the
merger and the reverse stock split, and the shareholder will lose any
dissenters' rights. Similarly, if the shareholder returns a proxy with
instructions to vote in favor of the merger and/or the reverse stock split, the
shareholder will lose any dissenter's rights in connection with the proposal for
which the shareholder voted in favor.
Within 10 days after the effective time, Interlinq will send a written
dissenter's notice to each holder of Interlinq common stock who satisfied the
first two bullet-pointed requirements above, that says where the payment demand
must be sent and where and when Interlinq share certificates must be deposited.
This notice will include a form of payment demand with the date of the first
announcement to the news media or to shareholders of the terms of the merger,
which requires the person asserting dissenters' rights to certify whether or not
such person acquired beneficial ownership of the shares before that date, and
which will set the date by which Interlinq must receive the payment demand. This
date may not be less than 30 or more than 60 days after the dissenter's notice
is delivered. Shareholders who fail to file timely written intent to demand
payment or who vote in favor of the merger or the reverse stock split will not
be entitled to receive the dissenter's notice and will be bound by the terms of
the merger agreement. Written objections to the merger by holders of Interlinq
common stock should be addressed to the Secretary of Interlinq at its
headquarters at 11980 N.E. 24th Street, Bellevue, Washington 98005. These
objections must be received by Interlinq before the special meeting.
A beneficial shareholder may assert dissenters' rights for shares held on
the beneficial shareholder's behalf only if:
- the beneficial shareholder submits to Interlinq the record shareholder's
written consent to dissent not later than the time the beneficial
shareholder asserts dissenters' rights; and
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- the beneficial shareholder does so with respect to all shares of which
such shareholder is the beneficial shareholder or over which such
shareholder has power to direct the vote.
Within 30 days after the effective time of the merger or the reverse stock
split or the date the payment demand is received, whichever is later, Interlinq
will pay each dissenter who complied with the above conditions the amount that
Interlinq estimates to be the fair value of the shareholder's shares, plus
accrued interest. The payment must be accompanied by, among other things:
- Interlinq's balance sheet as of the end of a fiscal year ended not more
than 16 months before the date of payment, an income statement for that
year, a statement of changes in shareholders' equity for that year, and
the latest available interim financial statements, if any; and
- an explanation of how Interlinq estimated the fair value of the shares
and how the interest was calculated.
However, for shares acquired after the date of the first announcement to the
news media or to shareholders of the terms of the merger or the reverse stock
split, Interlinq may choose to withhold payment of the fair value of the
dissenter's shares plus accrued interest. If this happens, Interlinq will
estimate after the effective time the fair value of the shares, plus accrued
interest, and will offer to pay this amount to each dissenter who agrees to
accept it in full satisfaction of the dissenter's demand.
A dissenter may notify Interlinq in writing of the dissenter's own estimate
of the fair value of the dissenter's shares and the amount of interest due and
demand payment of the dissenter's estimate, less any payment made, or, for
shares acquired after the first announcement of the terms of the merger for
which Interlinq chose to withhold payment, reject Interlinq's offer of the fair
value determined for such shares and demand payment of the dissenter's estimate
of the fair value of the dissenter's shares and interest due, if:
- The dissenter believes that the amount paid or offered is less than the
fair value of the dissenter's shares or that the interest due is
incorrectly calculated;
- Interlinq fails to make payment within 60 days after the date set for
demanding payment; or
- The merger does not take place, and Interlinq does not return the
deposited Interlinq certificates or release the transfer restrictions
imposed on uncertificated shares within 60 days after the date set for
demanding payment.
A dissenter will be deemed to have waived the right to demand payment
unless the dissenter notifies Interlinq of his or her demand in writing within
30 days after Interlinq makes or offers payment for the dissenter's shares.
If a demand for payment remains unsettled, Interlinq will start a
proceeding in the Superior Court of King County, Washington within 60 days after
receiving the payment demand and petition the court to determine the fair value
of the shares and accrued interest. If Interlinq does not start such proceeding
within the 60-day period, it shall pay the amount demanded by each dissenter
whose demand remains unsettled. Interlinq will make all dissenters, whether or
not residents of Washington State, whose demands remain unsettled parties to the
proceeding as in an action against their shares, and all parties must be served
with a copy of the petition. Interlinq may join as a party to the proceeding any
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shareholder who claims to be a dissenter but who has not, in Interlinq's
opinion, complied with the provisions of Chapter 23B.13. If the court determines
that such shareholder has not complied with the provisions of Chapter 23B.13,
the shareholder shall be dismissed as a party. Each dissenter made a party to
the proceeding will be entitled to judgment for the amount, if any, by which the
court finds the fair value of the shares, plus interest, exceeds the amount paid
by Interlinq or for the fair value, plus accrued interest, of the dissenter's
shares that were acquired after the first announcement of the terms of the
merger for which Interlinq chose to withhold payment.
EXPERTS
The financial statements and schedule of Interlinq as of June 30, 1998 and
1997, and for each of the years in the three-year period ended June 30, 1998,
have been incorporated by reference in this proxy statement/prospectus in
reliance upon the report of KPMG LLP, independent auditors, and on the authority
of this firm as experts in accounting and auditing.
The financial statements of Logical Software Solutions Corporation as of
and for the year ended December 31, 1997, have been incorporated by reference in
this proxy statement/prospectus in reliance on the report of KPMG LLP,
independent auditors, and on the authority of this firm as experts in accounting
and auditing.
LEGAL MATTERS
Perkins Coie LLP has issued an opinion to Interlinq regarding the validity
of Interlinq common stock registered pursuant to the Registration Statement on
Form S-4 of which this proxy statement/prospectus is a part. In addition,
Perkins Coie LLP has issued an opinion to Interlinq and the Interlinq
shareholders as to the federal income tax consequences of the merger and the
reverse stock split. Cooley Godward LLP will pass upon certain legal matters
relating to the merger for Terlin.
INDEPENDENT AUDITORS
Representatives of KPMG LLP are expected to attend the special meeting and
will have an opportunity to make a statement and to answer appropriate questions
from Interlinq shareholders.
------------------------
FORWARD-LOOKING STATEMENTS
This proxy statement/prospectus contains forward-looking statements. These
statements relate to future events or the future financial performance of
Interlinq. In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "plans," "believes," "anticipates,"
"expects" and "intends," or the negative of such terms, and similar terminology.
Forward-looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those projected. You are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date of this proxy statement/prospectus. We are not
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obligated to publicly release the results of any revisions to these
forward-looking statements that may be made to reflect events or circumstances
after the date of this proxy statement/prospectus or to reflect the occurrence
of anticipated events. You should read the information in this proxy
statement/prospectus in conjunction with "Risk Factors" beginning on page 8.
WHERE YOU CAN FIND MORE INFORMATION
Interlinq is subject to the informational requirements of the Securities
Exchange Act of 1934 and files reports, proxy statements and other information
with the SEC. These reports, proxy statements and other information can be
obtained upon payment of prescribed fees at the public reference facilities
maintained by the SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549. In addition, these reports, proxy statements and other information can be
inspected at the SEC's public reference facilities described above, and at the
following regional offices of the SEC: 7 World Trade Center, Suite 1300, New
York, New York 10048; and 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. The public may obtain information on the operation of the SEC's public
reference facilities by calling the SEC at 1-800-SEC-0330. The SEC maintains a
web site at http://www.sec.gov that contains reports, proxy statements and other
information regarding the companies, including Interlinq, that file
electronically with the SEC.
This proxy statement/prospectus is filed with the SEC as part of a
Registration Statement in Form S-4. The Registration Statement registers the
approximately 3,400,000 shares of Interlinq common stock that will be
outstanding after the merger, including the 1,250,000 shares that will be
retained by Interlinq shareholders.
In addition, any shareholder or person the shareholder may designate in
writing as their representative may inspect and copy the board book regarding
the merger prepared by Broadview International, LLC or the purchase price
allocation report prepared by KPMG LLP at our principal offices during regular
business hours. The board book and purchase price allocation report are also
filed as exhibits to the Registration Statement on Form S-4.
INCORPORATION OF DOCUMENTS BY REFERENCE
Interlinq incorporates in this proxy statement/prospectus by reference the
documents listed below, filed by Interlinq with the SEC:
a. Interlinq's annual report on Form 10-K for the fiscal year ended June
30, 1998 and the amendment filed March 10, 1999;
b. Interlinq's quarterly report on Form 10-Q for the quarter ended
September 30, 1998 and the amendment filed March 10, 1999;
c. Interlinq's quarterly report on Form 10-Q for the quarter ended
December 31, 1998 and the amendment filed March 10, 1999;
d. Interlinq's current reports on Form 8-K dated December 11, 1998 and
December 29, 1998;
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e. The description of Interlinq common stock, contained in Interlinq's
Registration Statement on Form 8-A, dated March 15, 1993, and any
amendment or report filed for the purpose of updating such
description.
Copies of the annual report on Form 10-K and the quarterly reports on Form
10-Q described above, including the amendments to those reports, are being
distributed to Interlinq shareholders together with this proxy
statement/prospectus.
OTHER INFORMATION AND SHAREHOLDER PROPOSALS
Interlinq knows of no other matters that may properly be, or which are
likely to be, brought before the special meeting.
Proposals of shareholders to be considered for inclusion in the proxy
statement and proxy card for the 1999 annual meeting of shareholders must be
received by the corporate secretary of Interlinq by June 11, 1999.
In addition, Interlinq's bylaws include advance notice provisions that
require shareholders desiring to bring nominations or other business before an
annual shareholders meeting to do so in accordance with the terms of the advance
notice provisions. These advance notice provisions require that, among other
things, shareholders give timely written notice to the corporate secretary of
Interlinq regarding such nominations or other business. To be timely, a notice
must be delivered to the corporate secretary at Interlinq's principal executive
offices not more than 90 or less than 60 days prior to the date of the annual
meeting as determined under Interlinq's bylaws.
Accordingly, a shareholder who intends to present a proposal at the 1999
annual meeting of shareholders without inclusion of the proposal in Interlinq's
proxy materials must provide written notice of the nominations or other business
they wish to propose to the corporate secretary no earlier than August 12, 1999
and no later than September 11, 1999. Interlinq reserves the right to reject,
rule out of order, or take other appropriate action with respect to any proposal
that does not comply with these and other applicable requirements.
By Order of the Board of Directors
Stephen A. Yount
Corporate Secretary
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APPENDIX A
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
BETWEEN:
INTERLINQ SOFTWARE CORPORATION,
A WASHINGTON CORPORATION;
AND
TERLIN, INC.,
A WASHINGTON CORPORATION
DATED AS OF DECEMBER 29, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 120
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
SECTION 1. DESCRIPTION OF THE TRANSACTION........................... A-1
1.1 Merger of MergerCo into the Company...................... A-1
1.2 Effect of the Merger..................................... A-1
1.3 Closing; Effective Time.................................. A-1
1.4 Articles of Incorporation and Bylaws; Directors and
Officers................................................. A-2
1.5 Conversion of Shares..................................... A-2
1.6 Closing of the Company's Transfer Books.................. A-5
1.7 Exchange of Certificates................................. A-6
1.8 Dissenter's Rights....................................... A-8
1.9 Accounting Consequences.................................. A-8
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY............ A-8
2.1 Due Organization; Subsidiaries; Etc...................... A-8
2.2 Articles of Incorporation and Bylaws; Records............ A-9
2.3 Capitalization, Etc...................................... A-9
2.4 SEC Filings; Financial Statements........................ A-10
2.5 Absence of Changes....................................... A-11
2.6 Title to Assets.......................................... A-12
2.7 Receivables; Major Customers............................. A-12
2.8 Leasehold; Equipment..................................... A-13
2.9 Proprietary Assets....................................... A-13
2.10 Contracts................................................ A-15
2.11 Liabilities.............................................. A-16
2.12 Compliance With Legal Requirements....................... A-16
2.13 Governmental Authorizations.............................. A-16
2.14 Tax Matters.............................................. A-17
2.15 Employee and Labor Matters............................... A-17
2.16 Benefit Plans; ERISA..................................... A-18
2.17 Environmental Matters.................................... A-19
2.18 Sale of Products; Performance of Services................ A-19
2.19 Insurance................................................ A-20
2.20 Related Party Transactions............................... A-20
2.21 Proceedings; Orders...................................... A-20
2.22 Authority; Binding Nature of Agreements.................. A-21
2.23 Non-Contravention; Consents.............................. A-21
2.24 No Existing Discussions.................................. A-22
2.25 Vote Required............................................ A-22
2.26 Fairness Opinion......................................... A-22
2.27 Brokers.................................................. A-22
2.28 Full Disclosure.......................................... A-22
2.29 State Takeover Statutes.................................. A-22
SECTION 3. REPRESENTATIONS AND WARRANTIES OF MERGERCO............... A-22
3.1 Organization, Standing and Power......................... A-22
3.2 Authority; Binding Nature of Agreements.................. A-23
3.3 Non-Contravention; Consents.............................. A-23
3.4 Capitalization and Assets................................ A-24
</TABLE>
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<TABLE>
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3.5 Brokers.................................................. A-24
3.6 Liabilities.............................................. A-24
3.7 Compliance With Legal Requirements....................... A-24
3.8 Governmental Authorizations.............................. A-24
3.9 Proceedings; Orders...................................... A-25
3.10 Acquiring Person......................................... A-25
SECTION 4. CERTAIN COVENANTS OF THE COMPANY......................... A-25
4.1 Access and Investigation................................. A-25
4.2 Operation of Business.................................... A-25
4.3 No Solicitation.......................................... A-28
SECTION 5. ADDITIONAL COVENANTS OF THE PARTIES...................... A-29
5.1 Proxy Statement.......................................... A-29
5.2 Company Shareholders' Meeting............................ A-29
5.3 Regulatory Approvals..................................... A-30
5.4 Stock Options............................................ A-31
5.5 Indemnification of Officers and Directors................ A-32
5.6 Company Board of Directors............................... A-32
5.7 Recapitalization Accounting Treatment.................... A-32
5.8 All Reasonable Efforts................................... A-33
5.9 Disclosure............................................... A-33
5.10 Nasdaq Delisting......................................... A-33
5.11 Additional Securities Filings............................ A-33
5.12 Effecting Reverse Stock Split............................ A-33
5.13 Financing................................................ A-34
SECTION 6. CONDITIONS PRECEDENT TO MERGERCO'S OBLIGATION TO CLOSE... A-34
6.1 Accuracy of Representations.............................. A-34
6.2 Performance of Obligations............................... A-34
6.3 Shareholder Approval; Dissenting Shares.................. A-35
6.4 Consents................................................. A-35
6.5 No Material Adverse Change............................... A-35
6.6 Financing................................................ A-35
6.7 Additional Documents..................................... A-35
6.8 No Prohibition........................................... A-35
SECTION 7. CONDITIONS PRECEDENT TO THE COMPANY'S OBLIGATION TO
CLOSE.................................................... A-36
7.1 Accuracy of Representations.............................. A-36
7.2 Performance of Obligations............................... A-36
7.3 Shareholder Approval..................................... A-36
7.4 No Prohibition........................................... A-36
7.5 Additional Documents..................................... A-36
SECTION 8. TERMINATION.............................................. A-37
8.1 Termination Events....................................... A-37
8.2 Termination Procedures................................... A-38
8.3 Effect of Termination.................................... A-38
8.4 Expenses; Termination Fees............................... A-38
8.5 Nonexclusivity of Termination Rights..................... A-39
</TABLE>
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SECTION 9. MISCELLANEOUS PROVISIONS................................. A-39
9.1 No Survival of Representations and Warranties............ A-39
9.2 Attorneys' Fees.......................................... A-39
9.3 Assignability............................................ A-39
9.4 Notices.................................................. A-40
9.5 Cooperation.............................................. A-40
9.6 Headings................................................. A-40
9.7 Counterparts............................................. A-40
9.8 Governing Law; Venue..................................... A-40
9.9 Waiver................................................... A-41
9.10 Amendments............................................... A-41
9.11 Severability............................................. A-41
9.12 Entire Agreement......................................... A-41
9.13 Construction............................................. A-42
</TABLE>
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AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the "AGREEMENT") is entered into as of
December 29, 1998, by and among INTERLINQ SOFTWARE CORPORATION, a Washington
corporation (the "COMPANY"), and TERLIN, INC., a Washington corporation
("MERGERCO"). The Company and MergerCo are referred to collectively herein as
the "PARTIES". Certain capitalized terms used in this Agreement are defined in
Exhibit A to this Agreement.
RECITALS
A. The Company and MergerCo intend to effect a merger of MergerCo with and
into the Company in accordance with this Agreement and the Washington Business
Corporation Act (the "WBCA") with the Company as the surviving corporation (the
"SURVIVING CORPORATION") in the merger (the "MERGER").
B. It is intended that the Merger and all other transactions contemplated
by this Agreement be recorded as a Leveraged Recapitalization for financial
reporting purposes.
C. The respective boards of directors of the Company and MergerCo have
approved (i) this Agreement; (ii) the Articles of Merger (as defined in Section
1.3); and (iii) the Merger.
D. In order to induce MergerCo to enter into this Agreement and to
consummate the Merger, certain shareholders of the Company are entering into
Voting Agreements pursuant to which they are agreeing to vote in favor of the
adoption and approval of this Agreement and the approval of the Merger.
AGREEMENT
The Parties, intending to be legally bound, agree as follows:
SECTION 1. Description of the Transaction
1.1 Merger of Mergerco into the Company. Upon the terms and subject to the
conditions set forth in this Agreement, at the Effective Time (as defined in
Section 1.3), MergerCo shall be merged with and into the Company, and the
separate existence of MergerCo shall cease. The Company will continue as the
Surviving Corporation in the Merger.
1.2 Effect of the Merger. The Merger shall have the effects set forth in
this Agreement and in the applicable provisions of the WBCA.
1.3 Closing; Effective Time. The consummation of the transactions
contemplated by this Agreement (the "CLOSING") shall take place at the offices
of Cooley Godward LLP, located at 4205 Carillon Point, Kirkland, Washington, at
10:00 a.m. on a date to be mutually agreed by MergerCo and the Company (the
"CLOSING DATE"), which shall be no later than the fifth business day after the
satisfaction or waiver of the conditions set forth in Sections 6 and 7.
Contemporaneously with or as promptly as practicable after the Closing, the
parties hereto shall cause properly executed articles of merger in the form
attached hereto as Exhibit B (the "ARTICLES OF MERGER") to be filed with the
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Secretary of State of the State of Washington. The Merger shall take effect at
the time the Articles of Merger are filed with the Secretary of State of the
State of Washington (the "EFFECTIVE TIME").
1.4 Articles of Incorporation and Bylaws; Directors and Officers
(a) The Articles of Incorporation of the Surviving Corporation shall be
amended and restated as of the Effective Time to conform to Exhibit C.
(b) The Bylaws of the Surviving Corporation shall be the Bylaws of the
Company as in effect immediately prior to the Effective Time (except that
certain sections shall be amended in their entirety to read as set forth on
Exhibit D; and
(c) The directors and officers of the Surviving Corporation immediately
after the Effective Time shall be respective individuals who are directors and
officers of the Company immediately prior to the Effective Time, with the
addition of J. D. Delafield, who shall serve as a director.
1.5 Conversion of Shares
(a) Effect on Capital Stock. As of the Effective Time, by virtue of the
Merger and without any action on the part of the Company, MergerCo or any holder
of any shares of Company Common Stock or any shares of common stock of MergerCo:
(i) Each share of common stock of MergerCo issued and outstanding
immediately prior to the Effective Time shall be converted into one share
of Company Common Stock following the Merger.
(ii) Each share of Company Common Stock that is owned by MergerCo
shall automatically be canceled and retired and shall cease to exist, and
no cash, Company Common Stock or other consideration shall be delivered or
deliverable in exchange therefor.
(iii) Except as otherwise provided herein and subject to Section
1.5(c), each issued and outstanding share of Company Common Stock (other
than shares canceled pursuant to Section 1.5(a)(ii) and Dissenting Shares)
shall be converted into the following (the "MERGER CONSIDERATION"):
(1) for each such share of Company Common Stock with respect to
which an election to retain Company Common Stock has been effectively
made and not revoked or lost, pursuant to Sections 1.5(b)(iii), (iv) and
(v) ("ELECTING SHARES"), the right to retain one fully paid and
nonassessable share of Company Common Stock (a "NON-CASH ELECTION
SHARE"); and
(2) for each such share of Company Common Stock (other than
Electing Shares), the right to receive in cash from the Company
following the Merger an amount equal to $9.25 (the "CASH ELECTION
PRICE").
(iv) As of the Effective Time, all shares of Company Common Stock
(other than shares referred to in Section 1.5(a)(iii)(1) and Section 1.8)
issued and outstanding immediately prior to the Effective Time, shall no
longer be outstanding and shall automatically be canceled and retired and
shall cease to exist, and each holder of a certificate representing any
such shares of Company Common Stock shall, to the extent such certificate
represents such shares, cease to have any rights with
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respect thereto, except the right to receive cash to be paid in
consideration therefor upon surrender of such certificate in accordance
with Section 1.7.
(b) Company Common Stock Elections
(i) Each person who, on or prior to the Election Date (as defined in
Section 1.5(b)(iii)) is a record holder of shares of Company Common Stock
will be entitled, with respect to all or any portion of his or her shares,
to make an unconditional election (a "NON-CASH ELECTION") on or prior to
such Election Date to retain Non-Cash Election Shares, on the basis
hereinafter set forth.
(ii) Prior to the mailing of the Proxy Statement, MergerCo shall
appoint Chase Mellon Shareholder Services LLC to act as exchange agent (the
"EXCHANGE Agent") for the payment of the Merger Consideration.
(iii) The Company shall prepare a form of election, which form shall
be subject to the reasonable approval of MergerCo (the "FORM OF ELECTION"),
to be mailed by the Company with the Proxy Statement to the record holders
of Company Common Stock as of the record date for the Company's
Shareholders Meeting (as defined in Section 5.2), which Form of Election
shall be used by each record holder of shares of Company Common Stock who
wishes to elect to retain Non-Cash Election Shares for any or all shares of
Company Common Stock held, subject to the provisions of Section 1.5(c)
hereof, by such holder. The Company will use its reasonable best efforts to
make the Form of Election and the Proxy Statement available to all persons
who become holders of Company Common Stock during the period between such
record date and the Election Date referred to below. Any such holder's
election to retain Non-Cash Election Shares shall have been properly made
only if the Exchange Agent shall have received at its designated office, by
5:00 p.m., Eastern Standard time on the business day next preceding the
date of the Shareholders Meeting (the "ELECTION DATE"), a Form of Election
properly completed and signed and accompanied by certificates representing
the shares of Company Common Stock to which such Form of Election relates,
duly endorsed in blank or otherwise in form acceptable for transfer on the
books of the Company (or by an appropriate guarantee of delivery of such
certificates as set forth in such Form of Election from a firm which is a
member of a registered national securities exchange or of the NASD or a
commercial bank or trust company having an office or correspondent in the
United States, provided such certificates are in fact delivered to the
Exchange Agent within five (5) Nasdaq National Market trading days after
the date of execution of such guarantee of delivery).
(iv) Any Form of Election may be revoked by the holder by written
notice received by the Exchange Agent prior to 5:00 p.m., Eastern Standard
time on the Election Date (unless MergerCo and the Company determine not
less than two (2) business days prior to the Election Date that the Closing
Date is not likely to occur within five (5) business days following the
date of the Shareholders Meeting (which they may do or not do in their sole
and absolute discretion), in which case any Form of Election will remain
revocable until a subsequent date which shall be a date prior to the
Closing Date determined by MergerCo and the Company). In addition, all
Forms of Election shall automatically be revoked if the Exchange Agent is
notified in writing by MergerCo and the Company that the Merger has been
abandoned. If a Form of Election is revoked, the certificate or
certificates (or guarantees of delivery, as appropriate) for the shares of
Company Common Stock to
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which such Form of Election relates shall be promptly returned by the
Exchange Agent to the shareholder submitting the same.
(v) The determination of the Exchange Agent shall be binding whether
or not elections to retain Non-Cash Election Shares have been properly made
or revoked pursuant to this Section 1.5(b) with respect to shares of
Company Common Stock and when elections and revocations were received by
it. If the Exchange Agent reasonably determines in good faith that any
election to retain Non-Cash Election Shares was not properly made with
respect to shares of Company Common Stock, such shares shall be treated by
the Exchange Agent as shares which were not Electing Shares at the
Effective Time, and such shares shall be exchanged in the Merger for cash
pursuant to Section 1.5(a)(iii)(2). The Exchange Agent shall also make all
computations as to the allocation and the proration contemplated by Section
1.5(c), and any such computation shall be conclusive and binding on the
holders of shares of Company Common Stock. The Exchange Agent may, with the
mutual written agreement of MergerCo and the Company, make such rules as
are consistent with this Section 1.5(b) for the implementation of the
elections provided for herein as shall be necessary or desirable fully to
effect such elections.
(c) Proration
(i) Notwithstanding anything in this Agreement to the contrary, the
aggregate number of shares of Company Common Stock to be converted into the
right to retain Company Common Stock at the Effective Time (the "NON-CASH
ELECTION NUMBER") shall be 1,250,000.
(ii) If the number of Electing Shares exceeds the Non-Cash Election
Number, then each Electing Share shall be converted into the right to
retain Non-Cash Election Shares and receive cash in accordance with the
terms of Section 1.5(a)(iii) in the following manner:
(1) A proration factor (the "NON-CASH PRORATION FACTOR") shall be
determined by dividing the Non-Cash Election Number by the total number
of Electing Shares.
(2) The number of Electing Shares covered by each Non-Cash Election
to be converted into the right to retain Non-Cash Election Shares shall
be determined by multiplying the Non-Cash Proration Factor by the total
number of Electing Shares covered by such Non-Cash Election and rounding
the result of such multiplication to the nearest whole number.
(3) All Electing Shares, other than those shares converted into the
right to receive Non-Cash Election Shares in accordance with Section
1.5(c)(ii)(2), shall be converted into cash on a consistent basis among
shareholders who made the election referred to in Section 1.5(a)(ii)(1),
pro rata to the number of shares as to which they made such election as
if such shares were not Electing Shares in accordance with the terms of
Section 1.5(a)(iii)(2).
(iii) If the number of Electing Shares is less than the Non-Cash
Election Number, then:
(1) all Electing Shares shall be converted into the right to retain
Company Common Stock in accordance with the terms of Section
1.5(a)(iii)(1);
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(2) in addition, shares of Company Common Stock other than Electing
Shares and Dissenting Shares ("NON-ELECTING SHARES") shall be converted
into the right to retain Non-Cash Election Shares in accordance with the
terms of Section 1.5(a)(iii) in the following manner:
a. the number of shares of Company Common Stock in addition to
Electing Shares to be converted into the right to retain Non-Cash
Election Shares shall be determined by subtracting the number of
Electing Shares from the Non-Cash Election Number; and
b. a proration factor (the "CASH PRORATION FACTOR") shall be
determined by dividing (x) the difference between the Non-Cash
Election Number and the number of Electing Shares, by (y) the total
number of outstanding shares of Company Common Stock other than
Electing Shares and Dissenting Shares.
(3) Non-Electing Shares shall be converted into the right to retain
Non-Cash Election Shares in accordance with Section 1.5(a)(iii)(1) (on a
consistent basis among shareholders who held shares of Company Common
Stock as to which they did not make the election referred to in Section
1.5(a)(iii)(1) or otherwise dissent in accordance with Section 1.8, pro
rata to the number of shares as to which they did not make such election
or otherwise dissent in accordance with Section 1.8 but rounding the
result from such conversion to the nearest whole number).
(d) Changes in Capitalization. If, between the date of this Agreement and
the Effective Time, the outstanding shares of Company Common Stock are changed
into a different number or class of shares by means of any stock split, division
or subdivision of shares, stock dividend, reverse stock split, consolidation of
shares, reclassification, recapitalization or other similar transaction, then
the Merger Consideration shall be appropriately adjusted (provided that no
adjustment shall be made under this Section 1.5(d) if the number of outstanding
shares of Company Common Stock increases as a result of the exercise of Company
stock options).
1.6 Closing of the Company's Transfer Books. At the Effective Time: (a)
all shares of Company Common Stock outstanding immediately prior to the
Effective Time (other than Non-Cash Election Shares) shall automatically be
canceled and retired and shall cease to exist, and all holders of certificates
representing such shares of Company Common Stock (other than Non-Cash Election
Shares) that were outstanding immediately prior to the Effective Time shall
cease to have any rights as shareholders of the Company; and (b) the stock
transfer books of the Company shall be closed with respect to all shares of the
Company Common Stock outstanding immediately prior to the Effective Time (other
than Non-Cash Election Shares). No further transfer of any such shares of
Company Common Stock (other than Non-Cash Election Shares) shall be made on such
stock transfer books after the Effective Time. If, after the Effective Time, a
valid certificate previously representing any shares of Company Common Stock (a
"COMPANY SHARE CERTIFICATE") is presented to the Exchange Agent (as defined in
Section 1.7) or to the Surviving Corporation, such Company Share Certificate
shall be canceled and shall be exchanged as provided in Section 1.7.
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1.7 Exchange of Certificates
(a) Deposit of Exchange Funds. As soon as practicable after the Effective
Time, the Surviving Corporation shall deposit with the Exchange Agent cash
sufficient to make cash payments of Merger Consideration in accordance with
Section 1.5. The cash so deposited with the Exchange Agent is referred to as the
"EXCHANGE FUND."
(b) Exchange Procedures. As soon as reasonably practicable after the
Effective Time, the Exchange Agent will mail to the record holders of Company
Share Certificates (i) a letter of transmittal in customary form and containing
such provisions as MergerCo and the Company shall have agreed upon before the
Effective Time (including a provision confirming that delivery of Company Share
Certificates shall be effected, and risk of loss and title to Company Share
Certificates shall pass, only upon delivery of such Company Share Certificates
to the Exchange Agent); and (ii) instructions for use in effecting the surrender
of Company Share Certificates in exchange for the Merger Consideration. Upon
surrender of Company Share Certificates to the Exchange Agent for exchange,
together with a duly executed letter of transmittal and such other documents as
may be reasonably required by the Exchange Agent or the Surviving Corporation,
the holder of such Company Share Certificate shall, upon acceptance of the
Company Share Certificate by the Exchange Agent, be entitled to a certificate
representing the number of full shares of Company Common Stock, if any, to be
retained by the holder thereof pursuant to this Agreement and the amount of
cash, if any, into which the number of shares of Company Common Stock previously
represented by such Company Share Certificate surrendered shall have been
converted pursuant to this Agreement, including after giving effect to the
Reverse Stock Split, if applicable. If any certificate for such retained Company
Common Stock is to be issued in, or if cash is to be remitted to, a name other
than that in which the Company Share Certificate is registered, it shall be a
condition of such exchange that the Company Share Certificate shall be
accompanied by all documents required by the Exchange Agent or Surviving
Corporation to evidence and effect such transfer and that the person requesting
such exchange shall pay to the Company or its transfer agent any transfer or
other taxes required by reason of the issuance of certificates for such retained
Company Common Stock in a name other than that of the registered holder of the
certificate surrendered, or establish to the satisfaction of the Company or its
transfer agent that such tax has been paid or is not applicable. Until
surrendered as contemplated by this Section 1.7(b), each certificate for shares
of Company Common Stock shall be deemed at any time after the Effective Time to
represent only the right to receive upon such surrender the Merger Consideration
as contemplated by Section 1.5(a)(iii), as adjusted by the Reverse Stock Split,
if applicable. No interest will be paid or will accrue on any cash payable as
Merger Consideration. If any Company Share Certificate shall have been lost,
stolen or destroyed, the Surviving Corporation may, in its discretion and as a
condition precedent to any issuance or payment, require the owner of such lost,
stolen or destroyed Company Share Certificate to provide an appropriate
affidavit and to deliver a bond (in such sum as the Surviving Corporation may
reasonably direct) as indemnity against any claim that may be made against the
Exchange Agent, the Company, MergerCo or the Surviving Corporation with respect
to such Company Share Certificate.
(c) Distributions with Respect to Unexchanged Shares. No dividends or other
distributions with respect to retained Company Common Stock with a record date
after the Effective Time shall be paid to the holder of any unsurrendered
Company Stock Certificate with respect to the shares of retained Company Common
Stock represented thereby until the surrender of such certificate in accordance
with this Section 1.7. Subject
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to the effect of applicable laws, following surrender of any such certificate,
there shall be paid to the holder of the certificate representing whole shares
of retained Company Common Stock issued in connection therewith, without
interest, (i) at the time of such surrender, the amount of any cash payable in
lieu of a fractional share of retained Company Common Stock to which such holder
is entitled pursuant to Section 1.7(e) and the proportionate amount of any
dividends or other distributions with a record date after the Effective Time
theretofore paid with respect to such whole shares of retained Company Common
Stock, and (ii) at the appropriate payment date, the proportionate amount of any
dividends or other distributions with a record date after the Effective Time but
prior to such surrender and a payment date subsequent to such surrender payable
with respect to such whole shares of retained Company Common Stock.
(d) No Further Ownership Rights in Company Common Stock Exchanged for Cash.
All cash paid upon the surrender for exchange of certificates representing
shares of Company Common Stock in accordance with the terms of this Section 1
(including any cash paid pursuant to Section 1.7(e)) shall be deemed to have
been issued (and paid) in full satisfaction of all rights pertaining to the
shares of Company Common Stock exchanged for cash theretofore represented by
such certificates.
(e) No Fractional Shares. No certificates or scrip representing fractional
shares of retained Company Common Stock shall be issued in connection with the
Merger or the Reverse Stock Split, and such fractional share interests will not
entitle the owner thereof to vote or to any rights of a shareholder of the
Company after the Merger or the Reverse Stock Split. Notwithstanding any other
provision of this Agreement, each holder of shares of Company Common Stock
exchanged pursuant to the Merger or split through the Reverse Stock Split who
would otherwise have been entitled to receive a fraction of a share of retained
Company Common Stock (after taking into account all shares of Company Common
Stock delivered by such holder) shall receive, in lieu thereof, a cash payment
(without interest) in the dollar amount (rounded to the nearest whole cent)
determined by multiplying such fraction by the Cash Election Price.
(f) Termination of Exchange Fund. Any portion of the Exchange Fund that
remains undistributed to holders of Company Share Certificates as of the date
180 days after the date on which the Merger becomes effective shall be delivered
to the Surviving Corporation upon demand, and any holders of Company Share
Certificates who have not theretofore surrendered their Company Share
Certificates in accordance with this Section 1.7 shall thereafter look only to
the Surviving Corporation for satisfaction of their claims for Merger
Consideration.
(g) Withholding. Each of the Exchange Agent, the Company, MergerCo and the
Surviving Corporation shall be entitled to deduct and withhold from any
consideration payable pursuant to this Agreement to any holder or former holder
of Company Common Stock such amounts as may be required to be deducted or
withheld therefrom under the Code, or any provision of state, local or foreign
tax law or under any other applicable Legal Requirement. To the extent such
amounts are so deducted or withheld, such amounts shall be treated for all
purposes under this Agreement as having been paid to the Person to whom such
amounts would otherwise have been paid.
(h) No Liability. None of MergerCo or the Company or the Exchange Agent
shall be liable to any Person in respect of any shares of retained Company
Common Stock (or dividends or distributions with respect thereto) or cash from
the Exchange Fund delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law.
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If any certificates representing shares of Company Common Stock shall not have
been surrendered prior to one year after the Effective Time (or immediately
prior to such earlier date on which any cash, if any, any cash in lieu of
fractional shares of retained Company Common Stock or any dividends or
distributions with respect to retained Company Common Stock in respect of such
certificate would otherwise escheat to or become the property of any
Governmental Body), any such cash, dividends or distributions in respect of such
certificate shall, to the extent permitted by applicable law, become the
property of the Company, free and clear of all claims or interest of any person
previously entitled thereto.
1.8 Dissenter's Rights. Any Dissenting Shareholder shall not be entitled
to the Merger Consideration as set forth in Section 1.5 in respect of his or her
Dissenting Shares unless and until such Dissenting Shareholder shall have failed
to perfect or shall have effectively withdrawn or lost such Dissenting
Shareholder's right to dissent from the Merger under the WBCA and shall be
entitled to receive only the payment provided for by Chapter 23B.13 of the WBCA
with respect to such Dissenting Shares. Upon the payment by the Surviving
Corporation of the "fair value" of any Dissenting Shares in accordance with
Chapter 23B.13 of the WBCA, such Dissenting Shares shall be canceled and retired
and shall cease to exist, and no exchange or further payment shall be made with
respect thereto. If any Dissenting Shareholder shall fail to perfect or shall
have effectively withdrawn or lost such right to dissent, the Dissenting Shares
held by such Dissenting Shareholder shall thereupon be treated as though such
Dissenting Shares had been converted into the right to receive the Merger
Consideration as set forth in the applicable provision of Section 1.5.
1.9 Accounting Consequences. The Merger and all other transactions
contemplated by this Agreement are intended to be accounted for as a Leveraged
Recapitalization for financial reporting purposes.
SECTION 2. Representations and Warranties of the Company
The Company represents and warrants, to and for the benefit of MergerCo, as
follows:
2.1 Due Organization; Subsidiaries; Etc.
(a) The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of Washington and has all necessary
power and authority:
(i) to conduct its business in the manner in which its business is
currently being conducted;
(ii) to own and use its assets in the manner in which its assets are
currently owned and used; and
(iii) to perform its obligations under all Company Contracts.
(b) The Company is not conducting any business under or otherwise using,
for any purpose or in any jurisdiction, any fictitious name, assumed name, trade
name or other name, other than the names listed on Part 2.1 of the Company
Disclosure Schedule.
(c) Except where the failure to be so qualified or in good standing would
not have a Material Adverse Effect on the Company, the Company is not required
to be qualified, authorized, registered or licensed to do business as a foreign
corporation in any jurisdiction
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other than the jurisdictions identified in Part 2.1 of the Company Disclosure
Schedule, and the Company is in good standing as a foreign corporation in each
of the jurisdictions identified in Part 2.1 of the Company Disclosure Schedule.
(d) Part 2.1 of the Company Disclosure Schedule sets forth as of the date
hereof (i) the names of the members of the board of directors of the Company,
(ii) the names of the members of each committee of the board of directors of the
Company, and (iii) the names and titles of the officers of the Company.
(e) The Company has never approved, or commenced any proceeding or made any
election contemplating, its dissolution or liquidation or the winding up or
cessation of its business or affairs, except for any such approvals, proceedings
and elections that have no continuing validity or effect.
(f) The Company has no Subsidiaries, and the Company does not own,
beneficially or otherwise, any shares or other securities of, or any direct or
indirect interest of any nature in, any Entity. The Company is not a general
partner of, and is not otherwise liable for any of the debts or obligations of,
any general partnership, limited partnership or any other Entity.
2.2 Articles of Incorporation and Bylaws; Records
(a) The Company has delivered to MergerCo accurate and complete copies of:
(i) the articles of incorporation and bylaws, including all amendments
thereto, of the Company;
(ii) the stock records of the Company; and
(iii) the minutes and other records of the meetings and other
proceedings (including any actions taken by written consent or otherwise
without a meeting) of the shareholders of the Company, the board of
directors of the Company and all committees of the board of directors of
the Company.
(b) There has not been any material violation of any of the provisions of
the articles of incorporation or bylaws of the Company or of any resolution
adopted by any of the shareholders, boards of directors or any committee of such
boards of directors of the Company; and no event has occurred, and no condition
or circumstance exists, that might (with or without notice or lapse of time)
constitute or result in such a violation, in any such case where such violation
would have a Material Adverse Effect on the Company.
(c) The books of account, stock records, minute books and other records of
the Company are accurate, up-to-date and complete in all material respects. The
Company has in place, and since April 23, 1993 has had in place, an adequate and
appropriate system of internal controls.
2.3 Capitalization, Etc.
(a) The authorized capital stock of the Company consists of: (i) 5,000,000
shares of Company Preferred Stock, 2,500,000 of which have been designated
"Series A Preferred Stock" and none of which is issued or outstanding as of the
date of this Agreement; and (ii) 30,000,000 shares of Company Common Stock, of
which 5,126,190 are issued and outstanding as of the date of this Agreement. All
of the outstanding shares of Company Common Stock have been duly authorized and
validly issued, and are fully paid and nonassessable. Except as set forth in
Part 2.3(a) of the Company Disclosure
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Schedule: (i) none of the outstanding shares of Company Common Stock is entitled
or subject to any preemptive right, right of participation, right of maintenance
or any similar right created by the Company or imposed under applicable law with
respect to capital stock of the Company; (ii) none of the outstanding shares of
Company Common Stock is subject to any right of first refusal in favor of the
Company; and (iii) there is no Company Contract relating to the voting or
registration of, or restricting any Person from purchasing, selling, pledging or
otherwise disposing of any shares of Company Common Stock. The Company is not
under any obligation, or bound by any Contract pursuant to which it may become
obligated, to repurchase, redeem or otherwise acquire any outstanding shares of
Company Common Stock.
(b) As of the date of this Agreement, 1,141,522 shares of Company Common
Stock are subject to issuance pursuant to outstanding options to purchase shares
of Company Common Stock. Part 2.3(b) of the Company Disclosure Schedule sets
forth the following information with respect to each outstanding stock option
granted by the Company pursuant to the Company's stock option plans (the
"COMPANY OPTIONS"): (i) the plan under which the Company Option is granted; (ii)
the name of the optionee; (iii) the number of shares of Company Common Stock
subject to the option; (iv) the exercise price of the Company Option; (v) the
date on which the Company Option was granted; (vi) the applicable vesting
schedules; and (vii) the date on which the Company Option expires. The Company
has delivered to MergerCo accurate and complete copies of all stock option plans
pursuant to which the Company has granted outstanding stock options and the
forms of all stock option agreements evidencing such outstanding options.
(c) Except as set forth in Part 2.3 of the Company Disclosure Schedule,
there is no:
(i) outstanding subscription, option, call, warrant or right (whether
or not currently exercisable) to acquire any shares of the capital stock or
other securities of the Company issued by the Company;
(ii) outstanding security, instrument or obligation that is or may
become convertible into or exchangeable for any shares of the capital stock
or other securities of the Company issued by the Company; or
(iii) Contract under which the Company is or may become obligated to
sell or otherwise issue any shares of its capital stock or any other
securities.
(d) Except as set forth in Part 2.3(d) of the Company Disclosure Schedule,
since June 30, 1996, the Company has not repurchased, redeemed or otherwise
reacquired any shares of capital stock or other securities. All securities so
reacquired were reacquired in full compliance with applicable Legal
Requirements.
2.4 SEC Filings; Financial Statements
(a) Since June 30, 1996, all documents required to have been filed by the
Company with the SEC have been so filed. As of the time it was filed with the
SEC (or, if amended or superseded by a filing prior to the date of this
Agreement, then on the date of such filing) and except as set forth in Part 2.4
of the Company Disclosure Schedule; (i) each of the Company SEC Documents
complied in all material respects with the applicable requirements of the
Securities Act or the Exchange Act (as the case may be); and (ii) none of the
Company SEC Documents contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary in
order
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to make the statements therein, in the light of the circumstances under which
they were made, not misleading.
(b) The financial statements (including any related notes) contained in the
Company SEC Documents: (i) complied as to form in all material respects with the
published rules and regulations of the SEC applicable thereto; (ii) were
prepared in accordance with generally accepted accounting principles applied on
a consistent basis throughout the periods covered (except as may be indicated in
the notes to such financial statements or, in the case of unaudited statements,
as permitted by Form 10-Q of the SEC, and except that the unaudited financial
statements may not contain footnotes and are subject to normal and recurring
year-end adjustments which will not, individually or in the aggregate, be
material in amount), and (iii) fairly present the financial position of the
Company as of the respective dates thereof and the results of operations and
cash flows of the Company for the periods covered thereby.
2.5 Absence of Changes. Except as set forth in Part 2.5 of the Company
Disclosure Schedule, since September 30, 1998:
(a) the Company has conducted its business in the Ordinary Course of
Business;
(b) there has not been any Material Adverse Effect on the Company;
(c) there has not been any material loss, damage or destruction to, or
any interruption in the use of, any of the assets of the Company (whether
or not covered by insurance);
(d) the Company has not (i) declared, accrued, set aside or paid any
dividend or made any other distribution in respect of any shares of capital
stock, or (ii) repurchased, redeemed or otherwise reacquired any shares of
capital stock or other securities;
(e) the Company has not sold, issued or granted, or authorized the
issuance of, (i) any capital stock or other security (except for Company
Common Stock issued upon exercise of outstanding Company Options), (ii) any
option, warrant or right to acquire any capital stock or any other security
(except for Company Options described in Part 2.3 of the Company Disclosure
Schedule), or (iii) any instrument convertible into or exchangeable for any
capital stock or other security;
(f) the Company has not amended its articles of incorporation or
bylaws or other organizational documents, and has not effected or been a
party to any Acquisition Transaction, recapitalization, reclassification of
shares, stock split, reverse stock split or similar transaction;
(g) the Company has not made any capital expenditure which, when added
to all other capital expenditures made on behalf of the Company since
September 30, 1998, exceeds $500,000 in the aggregate;
(h) the Company has not made any pledge of any of its assets with a
fair market value of greater than $10,000 or otherwise permitted any of
such assets to become subject to any material Encumbrance, except for: (i)
any liens for current Taxes not yet due and payable; (ii) liens that have
arisen in the Ordinary Course of Business and that do not (in any case or
in the aggregate) materially detract from the value of any such asset or
materially impair the operations of the Company; and (iii) liens described
in Part 2.6 of the Company Disclosure Schedule;
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(i) the Company has not (i) lent money to any Person; or (ii) incurred
or guaranteed any indebtedness for borrowed money (except for (A) routine
borrowings, in the Ordinary Course of Business and consistent with past
practices under its current line of credit, or (B) in the Ordinary Course
of Business and consistent with past practices, advances to employees for
valid business purposes);
(j) the Company has not (i) established or adopted any Employee
Benefit Plan; or (ii) paid any bonus or made any profit-sharing or similar
payment to, or increased the amount of the wages, salary, commissions,
fringe benefits or other compensation or remuneration payable to, any of
its directors, officers or employees (except that the Company may have in
the Ordinary Course of Business (A) made routine, reasonable salary
increases in connection with the Company's customary employee review
process; or (B) paid customary bonuses in accordance with existing bonus
plans disclosed in Part 2.16 of the Company Disclosure Schedule and
consistent with past practice);
(k) the Company has not commenced or settled any Legal Proceeding;
(l) the Company has not made any material Tax election;
(m) no Material Contract has been amended or terminated by agreement
or after acceleration of any right of termination;
(n) the Company has not incurred, assumed or otherwise become subject
to any material Liability, other than accounts payable (of the type
required to be reflected as current Liabilities in the "liabilities" column
of a balance sheet prepared in accordance with GAAP) incurred in the
Ordinary Course of Business and Liabilities incurred in connection with the
transactions contemplated hereby;
(o) the Company has not changed any of its methods of accounting or
accounting practices in any material respect; and
(p) the Company has not agreed or committed (in writing or otherwise)
to take any of the actions referred to in clauses "(c)" through "(p)"
above.
2.6 Title to Assets. The Company owns, and has good, valid and marketable
title to, each asset with a fair market value of greater than $10,000 reflected
on the Unaudited Interim Balance Sheet (except for inventory sold or otherwise
disposed of in the Ordinary Course of Business since the date of the Unaudited
Interim Balance Sheet). All of said assets are owned by the Company free and
clear of any Encumbrances, except for: (i) any liens for current Taxes not yet
due and payable; (ii) liens that have arisen in the Ordinary Course of Business
and that do not (in any case or in the aggregate) materially detract from the
value of any such asset, or materially impair the operations of the Company; and
(iii) liens described in Part 2.6 of the Company Disclosure Schedule.
2.7 Receivables; Major Customers
(a) Part 2.7 of the Company Disclosure Schedule provides an accurate and
complete breakdown and aging of all accounts receivable, notes receivable and
other receivables of the Company as of September 30, 1998.
(b) Except as set forth in Part 2.7 of the Company Disclosure Schedule, all
existing accounts receivable of the Company (including those accounts receivable
reflected on the
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Unaudited Interim Balance Sheet that have not yet been collected and those
accounts receivable that have arisen since September 30, 1998 and have not yet
been collected):
(i) represent valid obligations of customers of the Company arising
from bona fide transactions entered into in the Ordinary Course of
Business; and
(ii) are, to the Company's Knowledge, collectible in the Ordinary
Course of Business.
(c) Part 2.7 of the Company Disclosure Schedule accurately identifies and
states the revenues received from, each customer or other Person that accounted
for (i) more than $500,000 of the gross revenues of the Company in fiscal 1997
or 1998; (ii) more than $125,000 of the gross revenues of the Company in the
first quarter of fiscal 1999. The Company has not received any notice or other
communication (in writing or otherwise), and has not received any other
information, indicating that any customer or other Person identified in Part 2.7
of the Company Disclosure Schedule may cease dealing with the Company or may
otherwise reduce the volume of business transacted by such Person with the
Company below historical levels.
2.8 Leasehold; Equipment. The Company does not own any real property or
any interest in real property, except for the leaseholds created under the real
property leases identified in Part 2.8 of the Company Disclosure Schedule. All
such real property is being leased pursuant to lease agreements that 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) that would result in a Material Adverse Effect on the
Company. All material items of equipment and other tangible assets owned by or
leased to the Company are adequate for the uses to which they are being put, are
in good condition and repair (ordinary wear and tear excepted) and are adequate
for the conduct of the business of the Company in the manner in which such
business is currently being conducted.
2.9 Proprietary Assets
(a) Part 2.9(a) of the Company Disclosure Schedule sets forth, with respect
to each Proprietary Asset owned by the Company and registered with any
Governmental Body or for which an application has been registered or filed with
any Governmental Body, (i) a brief description of such Proprietary Asset, and
(ii) the names of the jurisdictions covered by the applicable registration or
application. Part 2.9(a) of the Company Disclosure Schedule identifies Contracts
that grant to the Company rights to Proprietary Assets that are incorporated
into the Company's present or planned products. The Company has good, valid and
marketable title to all of the Proprietary Assets owned by the Company and a
good, valid and enforceable license to all the Proprietary Assets licensed by
the Company, free and clear of all Encumbrances, except for (A) any lien for
current taxes not yet due and payable, (B) any Encumbrances that have arisen in
the Ordinary Course of Business and that do not (individually or in the
aggregate) materially detract from the value of the assets subject thereto or
materially impair the operations of the Company, (C) any Contract to which the
Company is a party and pursuant to which the Company has licensed or transferred
any right (whether or not currently exercisable) to use, license or otherwise
exploit any Company Proprietary Asset to any Person and (D) any Contract to
which the Company is a party and pursuant to which the Company has inlicensed
any Proprietary Asset. The Company has a valid right to use, license and
otherwise exploit all
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Proprietary Assets to the extent necessary to the conduct of the business of the
Company as currently conducted. Part 2.9(a) of the Company Disclosure Schedule
sets forth a list of each Contract providing for the joint development of any
Company Proprietary Asset.
(b) The Company has taken reasonable measures and precautions to protect
and maintain the confidentiality and secrecy of all material Company Proprietary
Assets (except Company Proprietary Assets whose value would be unimpaired in any
material respect by disclosure). Without limiting the generality of the
foregoing, (i) to the Company's Knowledge, all current employees of the Company
who are or were involved in, or who have contributed to, the creation or
development of any material Company Proprietary Asset have executed and
delivered to the Company an agreement that at the time of execution was in the
form of the Company's then existing confidential information and invention
assignment agreement, and (ii) all current consultants and independent
contractors to the Company who are or were involved in, or who have contributed
to, the creation or development of any material Company Proprietary Asset have
executed and delivered to the Company an agreement that at the time of execution
was in the form of the Company's then existing consultant confidential
information and invention assignment agreement. The Company has made available
to MergerCo the current forms of the Company's confidential information and
inventions agreements for employees and consultants. No current or former
employee, officer, director, shareholder, consultant or independent contractor
has any right, claim or interest, including, without limitation, any moral
rights, in or with respect to any Company Proprietary Asset.
(c) Except as set forth in Part 2.9 (c) of the Company Disclosure Schedule,
to the Knowledge of the Company: (i) all patents, trademarks, trade names,
service marks, maskwork rights and copyrights held by the Company are valid,
enforceable and subsisting; (ii) none of the Company Proprietary Assets and no
Proprietary Asset that is currently being developed by the Company (either by
itself or with any other Person) infringes, misappropriates or conflicts with
any Proprietary Asset owned or used by any other Person; (iii) none of the
products that are or have been designed, created, developed, assembled,
manufactured or sold by the Company is infringing, misappropriating or making
any unlawful or unauthorized use of any Proprietary Asset owned or used by any
other Person, and none of such products has at any time infringed,
misappropriated or made any unlawful or unauthorized use of, and neither the
Company nor any of its Representatives has received any notice or other
communication (in writing or otherwise) of any actual, alleged, possible or
potential infringement, misappropriation or unlawful or unauthorized use of, any
Proprietary Asset owned or used by any other Person; and (iv) no other Person is
infringing, misappropriating or making any unlawful or unauthorized use of, and
no Proprietary Asset owned or used by any other Person infringes or conflicts
with, any material Company Proprietary Asset.
(d) The Company Proprietary Assets constitute all the Proprietary Assets
necessary to enable the Company to conduct its business in the manner in which
such business has been and is being conducted. Except as set forth in Part
2.9(d) of the Company Disclosure Schedule, the Company has not (i) licensed any
of the Company Proprietary Assets to any Person on an exclusive basis, (ii)
entered into any covenant not to compete or (iii) entered into any Contract
limiting its ability to transact business in any market or geographical area or
with any Person.
(e) No event has occurred, and no circumstance or condition exists, that
(with or without notice or lapse of time) will, or would reasonably be expected
to, result in the required disclosure or delivery by the Company or any of its
escrow agents to any Person
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of the source code, or any portion or aspect of the source code, or any
proprietary information or algorithm contained in any source code, of any
Company Proprietary Asset. Neither the execution of this Agreement nor the
consummation of any of the transactions contemplated hereby would reasonably be
expected to result in the required release or disclosure by the Company or any
of its escrow agents of the source code, or any portion or aspect of the source
code, or any proprietary information or algorithm contained in or relating to
any source code, of any Company Proprietary Asset.
(f) Except as disclosed in Part 2.9(f) of the Company Disclosure Schedule,
all software and related Company Proprietary Assets that are being sold,
licensed or transferred by the Company to any Person ("PRODUCTS") are designed
to be used prior to, during and after the year 2000 ("YEAR 2000"), and are Year
2000 Compliant (as defined below). The Company has taken adequate steps to
ensure that all software and related Proprietary Assets used in its operations
are Year 2000 Compliant (as defined below). For purposes of this Agreement,
"YEAR 2000 COMPLIANT" shall mean that the Products can individually continue to
be used normally and to operate successfully (both in functionality and
performance in all material respects) over the transition into the twenty first
century when used in accordance with the documentation relating to the Products,
including being able to, before, on and after January 1, 2000 substantially
conform to the following: (i) use logic pertaining to dates which allow users to
identify and/or use the century portion of any date fields without special
processing; and (ii) respond to all date elements and date input so as to
resolve any ambiguity as to century in a disclosed, defined and pre-determined
manner and provide date information in ways which are unambiguous as to century,
either by permitting or requiring the century to be specified or where the data
element is represented without a century, the correct century is unambiguous for
all manipulations involving that element.
2.10 Contracts.
(a) Part 2.10(a) of the Company Disclosure Schedule identifies each Company
Contract that as of the date hereof is a Material Contract.
(b) Except as set forth in Part 2.10 of the Company Disclosure Schedule:
(i) The Company has not and, to the Company's Knowledge, no other
Person has materially violated or breached, or declared or committed any
material default under, any Material Contract.
(ii) To the Company's Knowledge, no event has occurred, and no
circumstance or condition exists, that has or could be reasonably expected
to (with or without notice or lapse of time): (A) result in a material
violation or breach of any of the provisions of any Material Contract; (B)
give any Person the right to declare a default or exercise any remedy under
any Material Contract; (C) give any Person the right to accelerate the
maturity or performance of any Material Contract; or (D) give any Person
the right to cancel, terminate or modify any Material Contract.
(iii) The Company has not received any notice or other communication
(in writing or otherwise) regarding any actual, alleged, possible or
potential material violation or breach of, or material default under, any
Material Contract.
(iv) The Company has not waived any of its rights under any Material
Contract.
(v) Each Material Contract is valid and in full force and effect, and
is enforceable by the Company in accordance with its terms, subject to: (i)
laws of
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general application relating to bankruptcy, insolvency and the relief of
debtors; and (ii) rules of law governing specific performance, injunctive
relief and other equitable remedies.
(vi) No Person is renegotiating, or has the right to renegotiate, any
amount paid or payable to the Company under any Material Contract or any
other term or provision of any Material Contract.
(vii) The Company does not have any Material Contract with any
Governmental Body for the delivery of products or the performance of
services.
2.11 Liabilities. The Company has no Liabilities of any nature, except
for: (a) Liabilities identified as such in the "liabilities" column of the
Unaudited Interim Balance Sheet; and (b) Liabilities that have been incurred by
the Company since September 30, 1998 in the Ordinary Course of Business; and (c)
Liabilities incurred in connection with the transactions contemplated hereby.
2.12 Compliance With Legal Requirements
(a) The Company is, and has at all times since June 30, 1996, been, in
material compliance with all material applicable Legal Requirements.
(b) The Company has not received, since June 30, 1996, any notice or other
communication (in writing or otherwise) from any Governmental Body or any other
Person regarding any actual, alleged, possible or potential violation of, or
failure to comply with, any Legal Requirement.
2.13 Governmental Authorizations. Except as set forth in Part 2.13 of the
Company Disclosure Schedule:
(a) the Company and to its Knowledge its employees are, and since June
30, 1996 have been, in compliance in all material respects with all of the
terms and requirements of each Governmental Authorization that is held, or
is required to be held, by the Company;
(b) since June 30, 1996, the Company has not received, and, to the
Knowledge of the Company, no employee of the Company has received, any
notice or other communication (in writing or otherwise) from any
Governmental Body or any other Person regarding (A) any actual, alleged,
possible or potential violation of or failure to comply with any term or
requirement of any Governmental Authorization, or (B) any actual, proposed,
possible or potential revocation, withdrawal, suspension, cancellation,
termination or modification of any Governmental Authorization;
(c) all applications required to have been filed for the renewal of
the Governmental Authorizations held by the Company have been duly filed on
a timely basis with the appropriate Governmental Bodies, and each other
notice or filing required to have been given or made with respect to such
Governmental Authorizations has been duly given or made on a timely basis
with the appropriate Governmental Body; and
(d) The Company holds all of the Governmental Authorizations necessary
(i) to enable the Company to conduct its business in the manner in which
such business is currently being conducted; and (ii) to permit the Company
to own and use its assets in the manner in which they are currently owned.
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2.14 Tax Matters
(a) All Tax Returns required to be filed by or on behalf of the Company
with any Governmental Body with respect to any taxable period ending on or
before the Closing Date (the "COMPANY RETURNS") (i) have been or will be filed
on or before the applicable due date (including any extensions of such due
date), and (ii) have been, or will be when filed, prepared in all material
respects in compliance with all applicable Legal Requirements. All amounts shown
on the Company Returns to be due on or before the Closing Date have been or will
be paid on or before the Closing Date.
(b) The financial statements referenced in Section 2.4(b) fully accrue all
Liabilities for Taxes with respect to all periods through the dates thereof in
accordance with generally accepted accounting principles. The Company will
establish reserves reasonably adequate for all Liabilities for all Taxes for the
period from September 30, 1998 through the Closing Date.
(c) No claim or Legal Proceeding is pending or, to the Knowledge of the
Company, has been threatened against or with respect to the Company in respect
of any material Tax. There are no unsatisfied Liabilities for material Taxes
(including Liabilities for interest, additions to tax and penalties thereon and
related expenses) with respect to any notice of deficiency or similar document
which are being contested in good faith by the Company for which adequate
reserves for payment have not been established. The Company has not entered into
or become bound by any agreement or consent pursuant to Section 341(f) of the
Code. The Company has not been, and will not be, required to include any
adjustment in taxable income for any tax period (or portion thereof) pursuant to
Section 481 or 263A of the Code or any comparable provision under state or
foreign Tax laws as a result of transactions or events occurring, or accounting
methods employed, prior to the Closing.
(d) There is no agreement, plan, arrangement or other Contract covering any
employee or independent contractor or former employee or independent contractor
of the Company that, considered individually or considered collectively with any
other such Contracts, will, or could reasonably be expected to, in connection
with the Merger give rise directly or indirectly to the payment of any amount
that would not be deductible pursuant to Section 280G or Section 162 of the
Code. The Company has provided to MergerCo a copy of any tax indemnity
agreement, tax sharing agreement, tax allocation agreement or similar Contract
to which the Company is a party or by which it is otherwise bound.
2.15 Employee and Labor Matters
(a) Part 2.15 of the Company Disclosure Schedule accurately lists all
employees of the Company as of November 30, 1998, including the title and salary
for each such employee.
(b) There are no former employees of the Company who are receiving or are
scheduled to receive (or whose spouse or other dependent is receiving or is
scheduled to receive) any material benefits from the Company relating to such
former employee's employment with the Company, other than exercise of options in
accordance with post-termination exercise provisions; and Part 2.15 of the
Company Disclosure Schedule accurately describes such benefits.
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(c) Except as set forth in Part 2.15 of the Disclosure Schedule or the
Company SEC Documents, the Company is not a party to or bound by any employment
agreement or any union contract, collective bargaining agreement or similar
Contract.
(d) The employment of the employees of the Company is terminable by the
Company at will.
(e) To the Knowledge of the Company, no officer, manager or key developer
or programmer of the Company intends to terminate his employment with the
Company;
(f) The Company is in compliance in all material respects with all
applicable Legal Requirements and Contracts relating to employment, employment
practices, wages, bonuses and terms and conditions of employment, including
employee compensation matters. There is not now pending, and to the Knowledge of
the Company, no Person has threatened to commence, any such slowdown, work
stoppage, labor dispute or union organizing activity or any similar activity or
dispute.
2.16 Benefit Plans; ERISA
(a) Part 2.16 of the Company Disclosure Schedule identifies each Current
Benefit Plan.
(b) Except as set forth in Part 2.16 of the Disclosure Schedule, none of
the Company Plans provides for continuing welfare benefits or coverage for any
participant or any beneficiary of a participant following termination of
employment, except as may be required by law, including, but not limited to,
Section 498B of the Code, Sections 601 to 609 of ERISA and COBRA, or except at
the expense of the participant or the participant's beneficiary.
(c) No Current Benefit Plan or Past Benefit Plan:
(i) provides or provided any benefit guaranteed by the Pension Benefit
Guaranty Corporation;
(ii) is or was a "multi-employer plan" as defined in Section
4001(a)(3) of ERISA; or
(iii) is or was subject to the minimum funding standards of Section
412 of the Code or Section 302 of ERISA.
There is no Person that (by reason of common control or otherwise) is or
has at any time been treated together with the Company as a single employer
within the meaning of Section 414 of the Code.
(d) Each Current Benefit Plan complies and is being operated and
administered in compliance in all material respects with, and each Company Plan
has at all times complied and been operated and administered in compliance in
all material respects with, the provisions thereof and all applicable reporting,
disclosure and other requirements of ERISA and the Code and all other applicable
Legal Requirements. Each contribution or other payment that is required to have
been accrued or made under or with respect to any Company Plan has been duly
accrued and made on a timely basis. To the Knowledge of the Company, (1) the
Company has never incurred any Liability to the Internal Revenue Service or any
other Governmental Body with respect to any Company Plan; and (2) no event has
occurred and no condition or circumstance exists, that might (with or without
notice or lapse of time) give rise directly or indirectly to any such Liability.
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(e) Each Company Plan intended to qualify under Section 401 of the Code has
been determined by the Internal Revenue Service to be so qualified, and no event
has occurred and no condition exists with respect to the form or operation of
such Company Plan that would cause the loss of such qualification or the
imposition of any material Liability, penalty or tax under ERISA or the Code,
other than amendments to such Company Plan and changes in applicable law for
which the remedial amendment period has not yet expired.
(f) Except as set forth in Part 2.16 of the Company Disclosure Schedule,
the Company has not advised any of its employees (in writing or otherwise) that
it intends or expects to establish or sponsor any Employee Benefit Plan or to
provide or make available any fringe benefit or other benefit of any nature in
the future.
(g) Except as contemplated by Section 5.4, no benefit under any Company
Plan will be materially increased and no vesting of any benefit under any
Company Plan will be materially accelerated by the occurrence of the Merger or
any of the other transactions contemplated by and ancillary to this Agreement,
nor will the value of any benefit under any Company Plan be calculated on the
basis of any such transactions.
2.17 Environmental Matters. The Company is in compliance in all material
respects with all applicable Environmental Laws, which compliance includes the
possession by the Company of all permits and other Governmental Authorizations
required under applicable Environmental Laws, and compliance with the terms and
conditions thereof. The Company has not received any written notice whether from
a Governmental Body, citizens group, employee or otherwise, that alleges that
the Company is not in compliance with any Environmental Law, and, to the
Knowledge of the Company, there are no circumstances that will prevent or
interfere with the compliance by the Company with any Environmental Law in the
future. To the Knowledge of the Company, no current or prior owner of any
property leased or controlled by the Company has received any written notice
whether from a Government Body, citizens group, employee or otherwise, that
alleges that such current or prior owner or the Company is not in compliance
with any Environmental Law. To the Knowledge of the Company, all property that
is leased to, controlled by or used by the Company, and all surface water,
groundwater and soil associated with or adjacent to such property is free of any
material illegal environmental contamination. (For purposes of this Section
2.17: (i) "ENVIRONMENTAL LAW" means any federal, state, local or foreign Legal
Requirement relating to pollution or protection of human health or the
environment (including ambient air, surface water, ground water, land surface or
subsurface strata), including any law or regulation relating to emissions,
discharges, releases or threatened releases of Materials of Environmental
Concern, or otherwise relating to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport or handling of Materials of
Environmental Concern; and (ii) "MATERIALS OF ENVIRONMENTAL CONCERN" include
chemicals, pollutants, contaminants, wastes, toxic substances, petroleum and
petroleum products and any other substance that is now or hereafter regulated by
any Environmental Law or that is otherwise a danger to health, reproduction or
the environment.)
2.18 Sale of Products; Performance of Services
(a) Excluding Liabilities under an express written warranty issued in the
sale by the Company of a product, the Company is not, and prior to the Closing
Date will not incur or otherwise become subject to, any Liability arising
directly or indirectly from any product
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manufactured or sold by, or any maintenance services or other services performed
by, the Company.
(b) Except in the Ordinary Course of Business and in aggregate amounts
consistent with the historical warranty expenses recorded by the Company during
fiscal 1997 and 1998, no customer or other Person has ever asserted or, to the
Knowledge of the Company, threatened to assert any claim against the Company (i)
under or based upon any warranty provided by or on behalf of the Company, or
(ii) under or based upon any other warranty relating to any product sold by the
Company or any services performed by the Company.
(c) The Company has in place, and since June 30, 1996 has had in place,
adequate and appropriate quality control processes and methodologies relating to
its products and services.
2.19 Insurance. The Company maintains insurance against such risks and in
such amounts as the Company reasonably believes is necessary to conduct its
business. The Company has made copies of its insurance policies available to
MergerCo. The Company is not in material default with respect to any provisions
or requirements of any such policy, nor has it failed to give notice or present
any material claim thereunder in a due and timely fashion. The Company has not
received any notice or communication of actual or possible cancellation,
termination, refusal of coverage or rejection of claim in respect of any of its
insurance policies.
2.20 Related Party Transactions. Except as set forth in the Company SEC
Reports and except for any transaction contemplated by this Agreement, since the
date of the Company's last proxy statement filed with the SEC, no event has
occurred that would be required to be reported by the Company in a filing with
the SEC pursuant to Item 404 of Regulation S-K promulgated by the SEC.
2.21 Proceedings; Orders
(a) Except as set forth in Part 2.21 of the Company Disclosure Schedule,
there is no pending Proceeding, and, to the Knowledge of the Company, no Person
has threatened to commence any Proceeding:
(i) that involves the Company or any of the assets owned or used by
it; or
(ii) that challenges, or that may have the effect of preventing,
delaying, making illegal or otherwise interfering with, any of the
transactions contemplated herein.
Except as set forth in Part 2.21 of the Company Disclosure Schedule, to the
Knowledge of the Company, no event has occurred, and no claim, dispute or other
condition or circumstance exists, that is reasonably likely to give rise to the
commencement of any such Proceeding.
(b) The Company has delivered to MergerCo accurate and complete copies of
all material pleadings, correspondence and other written materials to which the
Company has access that relate to the Proceedings identified in Part 2.21 of the
Company Disclosure Schedule.
(c) There is no Order to which the Company, or any of the assets owned or
used by the Company, is subject.
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(d) To the Knowledge of the Company, no officer or employee of the Company
is subject to any Order that prohibits such officer or employee from engaging in
or continuing any conduct, activity or practice relating to the business of the
Company.
2.22 Authority; Binding Nature of Agreements. The Company has the absolute
and unrestricted right, power and authority to enter into and to perform its
obligations under this Agreement. The Board of Directors of the Company (at a
meeting duly called and held) has (a) unanimously determined that the Merger is
advisable and fair and in the best interests of the Company and its
shareholders; (b) unanimously authorized and approved the execution, delivery
and performance of this Agreement and the Articles of Merger by the Company and
unanimously approved the Merger; and (c) unanimously recommended the adoption
and approval of this Agreement and the approval of the Merger and the Reverse
Stock Split by the holders of Company Common Stock and directed that this
Agreement, the Merger and the Reverse Stock Split be submitted for consideration
by the Company's shareholders at the Company Shareholders' Meeting. This
Agreement constitutes the legal, valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms, subject to (i)
laws of general application relating to bankruptcy, insolvency and the relief of
debtors, and (ii) rules of law governing specific performance, injunctive relief
and other equitable remedies.
2.23 Non-Contravention; Consents. Except as set forth in Part 2.23 of the
Company Disclosure Schedule, neither the execution and delivery of any of this
Agreement, nor the consummation or performance of any of the transactions
contemplated herein, will directly or indirectly (with or without notice or
lapse of time):
(a) contravene, conflict with or result in a violation of (i) any of
the provisions of the articles of incorporation or bylaws of the Company;
or (ii) any resolution adopted by the shareholders, boards of directors or
any committee of such boards of directors of the Company;
(b) contravene, conflict with or result in a violation of, or give any
Governmental Body or other Person the right to challenge any of the
transactions contemplated herein or to exercise any remedy or obtain any
relief under, any Legal Requirement or any Order to which the Company, or
any of the assets owned or used by the Company, is subject;
(c) contravene, conflict with or result in a violation of any of the
terms or requirements of, or give any Governmental Body the right to
revoke, withdraw, suspend, cancel, terminate or modify, any material
Governmental Authorization that is held by the Company or that otherwise
relates to any of the assets owned or used by the Company;
(d) contravene, conflict with or result in a material violation or
breach of, or result in a material default under, any provision of any
Material Contract;
(e) give any Person the right to (i) declare a default or exercise any
remedy under any Material Contract; (ii) accelerate the maturity or
performance of any Material Contract, or (iii) cancel, terminate or modify
any Material Contract; or
(f) result in the imposition or creation of any material Encumbrance
upon or with respect to any material asset owned or used by the Company.
Except for shareholder approval, the filing of Articles of Merger as
required by the laws of the State of Washington, and as set forth in Part 2.23
of the Company Disclosure
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Schedule, the Company is not and will not be required to make any filing with or
give any notice to, or to obtain any Consent from, any Person in connection with
the execution and delivery of this Agreement or the consummation or performance
of any of the transactions contemplated herein.
2.24 No Existing Discussions. As of the date of this Agreement, neither
the Company nor any Representative of the Company, is engaged, directly or
indirectly, in any discussions or negotiations with any other Person relating to
any Acquisition Proposal.
2.25 Vote Required. The affirmative vote of the holders of a majority of
the shares of Company Common Stock outstanding on the record date for the
Company Shareholders' Meeting (the "REQUIRED COMPANY SHAREHOLDER VOTE") is the
only vote of the holders of any class or series of the Company's capital stock
necessary to adopt and approve this Agreement and approve the Merger and the
Reverse Stock Split.
2.26 Fairness Opinion. The Company's board of directors has received the
written opinion of Broadview International LLC ("Broadview"), financial advisor
to the Company, dated as of the date of this Agreement, to the effect that the
consideration to be received by the shareholders of the Company in the Merger is
fair to the shareholders of the Company from a financial point of view. The
Company has furnished an accurate and complete copy of said written opinion to
MergerCo.
2.27 Brokers. Except for $300,000 to be paid to Broadview, the Company has
not agreed or become obligated to pay, or has taken any action that might result
in any Person claiming to be entitled to receive, any brokerage commission,
finder's fee or similar commission or fee in connection with any of the
transactions contemplated herein.
2.28 Full Disclosure. This Agreement and the Company Disclosure Schedule
do not and will not, (i) contain any representation, warranty or information
that is false or misleading with respect to any material fact, or (ii) omit to
state any material fact necessary in order to make the representations,
warranties and information contained and to be contained herein and therein (in
light of the circumstances under which such representations, warranties and
information are being or will be made or provided) not false or misleading.
2.29 State Takeover Statutes. The action of the Board of Directors of the
Company in approving the Merger, this Agreement and the transactions
contemplated by this Agreement (including the voting agreements referenced in
Recital D) constitutes approval under Chapter 23B.19.040(1)(a) of the WBCA and,
assuming the accuracy of the representation made by MergerCo in Section 3.10, is
sufficient to render inapplicable to the Merger and this Agreement and such
voting agreements the provisions of Chapter 23B.19 of the WBCA.
SECTION 3. Representations and Warranties of MergerCo
MergerCo represents and warrants, to and for the benefit of the Company, as
follows:
3.1 Organization, Standing and Power. MergerCo is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Washington and has all necessary power and authority: (a) to conduct its
business in the manner in which its business is currently being conducted; (b)
to own and use its assets in the manner in which its assets are currently owned
and used; and (c) to perform its obligations under all Contracts by which it is
bound. MergerCo was organized for the transactions contemplated
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by this Agreement, has not had operations except in connection therewith and has
never employed any Person.
3.2 Authority; Binding Nature of Agreements. MergerCo has the absolute and
unrestricted right, power and authority to enter into and to perform its
obligations under this Agreement. The Board of Directors of MergerCo has (a)
unanimously determined that the Merger is advisable and fair and in the best
interests of MergerCo and its shareholders, (b) unanimously authorized and
approved the execution, delivery and performance of this Agreement and the
Articles of Merger by MergerCo and unanimously approved the Merger, and (c)
unanimously recommended the adoption and approval of this Agreement and the
Articles of Merger and the approval of the Merger. This Agreement constitutes
the legal, valid and binding obligation of MergerCo, enforceable against
MergerCo in accordance with its terms, subject to (i) laws of general
application relating to bankruptcy, insolvency and the relief of debtors, and
(ii) rules of law governing specific performance, injunctive relief and other
equitable remedies.
3.3 Non-Contravention; Consents. Neither the execution and delivery of any
of this Agreement, nor the consummation or performance of any of the
transactions contemplated herein, will directly or indirectly (with or without
notice or lapse of time):
(a) contravene, conflict with or result in a violation of (i) any of
the provisions of the articles of incorporation or bylaws of MergerCo, or
(ii) any resolution adopted by the shareholders, boards of directors or any
committee of such boards of directors of MergerCo;
(b) contravene, conflict with or result in a violation of, or give any
Governmental Body or other Person the right to challenge any of the
transactions contemplated herein or to exercise any remedy or obtain any
relief under, any Legal Requirement or any Order to which MergerCo, or any
of the assets owned or used by MergerCo, is subject;
(c) contravene, conflict with or result in a violation of any of the
terms or requirements of, or give any Governmental Body the right to
revoke, withdraw, suspend, cancel, terminate or modify, any Governmental
Authorization that is held by MergerCo;
(d) contravene, conflict with or result in a violation or breach of,
or result in a default under, any provision of any material Contract to
which MergerCo is a party;
(e) give any Person the right to (i) declare a default or exercise any
remedy under any material Contract by which MergerCo is bound, (ii)
accelerate the maturity or performance of any such material Contract or
(iii) cancel, terminate or modify any such material Contract;
(f) result in the imposition or creation of any Encumbrance upon or
with respect to any material asset owned or used by MergerCo;
Except for the filing of Articles of Merger as required by the laws of the
State of Washington and other than shareholder approval (which will occur prior
to Closing), MergerCo is not and will not be required to make any filing with or
give any notice to, or to obtain any Consent from, any Person in connection with
the execution and delivery of this Agreement or the consummation or performance
of any of the transactions contemplated herein.
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3.4 Capitalization and Assets. Subject to and based upon the Company's
representations set forth in Article 2 regarding the number of outstanding
shares of Company Common Stock, the number of shares subject to Options, the
exercise price of Options and subject to and based upon the contemplated funds
to be borrowed by the Company and used from the Company's cash resources,
2,153,439 shares of common stock of MergerCo will be outstanding immediately
prior to the Effective Time, subject to adjustment in respect of rounding errors
(without giving effect to any warrants that may be issued by MergerCo or the
Company in connection with the satisfaction of obligations to pay or reimburse
Transaction Expenses (as hereinafter defined) or in connection with the
borrowing of funds by the Company). Immediately prior to the Effective Time,
subject to the availability of the contemplated funds to be borrowed by the
Company and used from the Company's cash resources, MergerCo's cash balances
shall be at least $11,100,000 and in any event sufficient to consummate the
Merger in a manner permitted under this Agreement when combined with the
contemplated funds to be borrowed by the Company and used from the Company's
cash resources. The amount to be used from the Company's cash resources will not
exceed $6,900,000 unless otherwise approved by the Board of Directors of the
Company and in any event will not exceed $8,100,000. The foregoing
representation assumes no outstanding options of the Company are exercised or
granted after the date hereof; MergerCo and the Company shall agree on
appropriate adjustments in the event of option exercises or grants.
3.5 Brokers. Except pursuant to a letter agreement between MergerCo and
W.R. Hambrecht + Co., LLC dated December 29, 1998, MergerCo has not agreed or
become obligated to pay, and has not taken any action that might result in any
Person claiming to be entitled to receive, any brokerage commission, finder's
fee or similar commission or fee in connection with any of the transactions
contemplated herein.
3.6 Liabilities. Other than pursuant to a letter agreement between
MergerCo and W.R. Hambrecht + Co., LLC dated December 29, 1998, MergerCo. has no
material Liabilities.
3.7 Compliance with Legal Requirements
(a) MergerCo is, and has at all times since its incorporation been, in
material compliance with all applicable Legal Requirements.
(b) MergerCo has not received, at any time, any notice or other
communication (in writing or otherwise) from any Governmental Body or any other
Person regarding any actual, alleged, possible or potential violation of, or
failure to comply with, any Legal Requirement.
3.8 Governmental Authorizations
(a) MergerCo is, and has at all times been, in compliance in all material
respects with all of the terms and requirements of each Governmental
Authorization that is held, or is required to be held, by it;
(b) since its formation, MergerCo has never received, any notice or other
communication (in writing or otherwise) from any Governmental Body or any other
Person regarding (A) any actual, alleged, possible or potential violation of or
failure to comply with any term or requirement of any Governmental
Authorization, or (B) any actual, proposed, possible or potential revocation,
withdrawal, suspension, cancellation, termination or modification of any
Governmental Authorization;
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(c) all applications required to have been filed for the renewal of the
Governmental Authorizations held by MergerCo have been duly filed on a timely
basis with the appropriate Governmental Bodies, and each other notice or filing
required to have been given or made with respect to such Governmental
Authorizations has been duly given or made on a timely basis with the
appropriate Governmental Body; and
(d) other than the filing of the Articles of Merger as required by the laws
of the state of Washington, MergerCo has obtained all Governmental
Authorizations necessary to consummate the transactions as contemplated by this
Agreement.
3.9 Proceedings; Orders
(a) There is no pending Proceeding, and, to the Knowledge of MergerCo, no
Person has threatened to commence any Proceeding:
(i) that involves MergerCo or any of the assets owned or used by it;
or
(ii) that challenges, or that may have the effect of preventing,
delaying, making illegal or otherwise interfering with, any of the
transactions contemplated herein.
To the Knowledge of MergerCo, no event has occurred, and no claim, dispute
or other condition or circumstance exists, that is reasonably likely to give
rise to or serve as a basis for the commencement of any such Proceeding.
(b) There is no Order to which MergerCo, or any of the assets owned or used
by the MergerCo, is subject.
(c) To the Knowledge of MergerCo, no officer of MergerCo is subject to any
Order that prohibits such officer from engaging in or continuing any conduct,
activity or practice relating to the business of MergerCo.
3.10 Acquiring Person. Subject to the accuracy and completeness of
information provided by the Company regarding the number of shares of
outstanding Company Common Stock and without giving effect to the transactions
contemplated by the Agreement, MergerCo is not, individually or as part of a
group including W.R. Hambrecht + Co., LLC, an "acquiring person," as such term
is defined in Washington Revised Code Section 23B.19.020(1).
SECTION 4. Certain Covenants of the Company
4.1 Access and Investigation. During the period from the date of this
Agreement through the Effective Time (the "PRE-CLOSING PERIOD"), the Company
shall, and shall cause its Representatives to: (a) provide MergerCo and
MergerCo's Representatives with reasonable access to the Company's
Representatives, personnel and assets and to all existing books, records, Tax
Returns, work papers and other documents and information relating to the
Company; and (b) provide MergerCo and MergerCo's Representatives with such
copies of the existing books, records, Tax Returns, work papers and other
documents and information relating to the Company, and with such additional
financial, operating and other data and information regarding the Company, as
MergerCo may reasonably request.
4.2 Operation of Business. During the Pre-Closing Period:
(a) the Company shall conduct its business and operations (i) only in
the ordinary course and in substantially the same manner as such business
and operations
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have been conducted prior to the date of this Agreement; (ii) the Company
shall use all reasonable efforts to ensure that the Company preserves
intact its current business organization, keeps available the services of
its current officers and other employees and maintains its relations and
goodwill with all suppliers, customers, landlords, creditors, licensors,
licensees, employees and other Persons having business relationships with
the Company; and (iii) the Company shall keep in full force or renew all
insurance policies referred to in Section 2.19.
(b) During the Pre-Closing Period, the Company shall not (without the
prior written consent of MergerCo):
(i) declare, accrue, set aside or pay any dividend or make any
other distribution in respect of any shares of capital stock, and shall
not repurchase, redeem or otherwise reacquire any shares of capital
stock or other securities;
(ii) sell, issue or authorize the issuance of (A) any capital stock
or other security, (B) other than option grants to new hires in
accordance with prior practice with an exercise price at fair market
value and in an aggregate amount not to exceed 50,000 shares, any
option, call, warrant or right to acquire any capital stock or other
security, or (C) any instrument convertible into or exchangeable for any
capital stock or other security (except that the Company may issue
shares of Company Common Stock upon the valid exercise of Company
Options outstanding as of the date of this Agreement) and;
(iii) except as contemplated by this Agreement, amend or waive any
of its rights under, or accelerate the vesting under, any provision of
any of the Company's stock option plans, any provision of any agreement
evidencing any outstanding stock option or any restricted stock purchase
agreement, or otherwise modify any of the terms of any outstanding
option, warrant or other security or any related Contract;
(iv) amend or permit the adoption or amendment to its articles of
incorporation or bylaws or other charter or organizational documents, or
effect or become a party to any merger, consolidation, amalgamation,
share exchange, business combination, recapitalization, reclassification
of shares, stock split, division or subdivision of shares, reverse stock
split, consolidation of shares or similar transaction;
(v) form any Subsidiary or acquire any equity interest or other
interest in any other Entity;
(vi) make any capital expenditure (except that the Company may make
capital expenditures in the Ordinary Course of Business that when added
to all other capital expenditures made on behalf of the Company during
the Pre-Closing Period, do not exceed $250,000 in the aggregate);
(vii) enter into or become bound by, or permit any of the assets
owned or used by it to become bound by, or amend or terminate, or waive
any material right or remedy under, any Contract that contemplates or
involves payment or delivery of cash or other consideration in an amount
or having a value in excess of $250,000;
(viii) lend money to any Person, or incur or guarantee any
indebtedness (except that the Company may (A) make routine borrowings,
in the Ordinary
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Course of Business under its current line of credit, or (B) in the
Ordinary Course of Business, make advances to employees for valid
business purposes);
(ix) establish, adopt or amend any employee benefit plan, pay any
bonus or make any profit-sharing or similar payment to, grant any
severance or termination pay to, or increase the amount of the wages,
salary, commissions, fringe benefits or other compensation or
remuneration payable to, any of its directors, officers of employees, or
hire any new employee whose aggregate annual compensation is expected to
exceed $125,000 (except that the Company may in the Ordinary Course of
Business (A) make routine, reasonable salary increases in connection
with the Company's customary employee review process, and (B) pay
customary bonuses in accordance with existing bonus plans);
(x) change any of its methods of accounting or accounting practices
in any respect;
(xi) make any Tax election adverse to the Company;
(xii) settle any material Legal Proceeding;
(xiii) acquire the business of any Entity;
(xiv) transfer or license to any Person or amend or modify in any
material adverse respect any rights (including without limitation
distribution rights) to the Proprietary Assets of the Company, or enter
into assignments of future patent rights, other than non-exclusive
licenses and distribution rights in the Ordinary Course of Business;
(xv) enter into any agreement requiring the consent or approval of
any third party with respect to the Merger; or
(xvi) agree or commit to take any of the actions described in
clauses "(i)" through "(xv)" of this Section 4.2(b).
(c) During the Pre-Closing Period, the Company shall promptly notify
MergerCo in writing of:
(i) the discovery by the Company of any event, condition, fact or
circumstance that occurred or existed on or prior to the date of this
Agreement and that caused or constitutes a material inaccuracy in any
representation or warranty made by the Company in this Agreement;
(ii) any event, condition, fact or circumstance that occurs, arises
or exists after the date of this Agreement and that would cause or
constitute a material inaccuracy in any representation or warranty made
by the Company in this Agreement (excluding any representation or
warranty that speaks as of a specific date) if such representation or
warranty had been made as of the time of the occurrence, existence or
discovery of such event, condition, fact or circumstance;
(iii) any material breach of any covenant or obligation of the
Company; and
(iv) any event, condition, fact or circumstance that would make the
timely satisfaction of any of the conditions set forth in Section 6 or
Section 7 impossible or unlikely or that has had or could reasonably be
expected to have a Material Adverse Effect on the Company. Without
limiting the generality of the foregoing,
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the Company shall promptly advise MergerCo in writing of any Legal
Proceeding or material claim threatened, commenced or asserted against
or with respect to the Company. No notification given to MergerCo
pursuant to this Section 4.2(c) shall limit or otherwise affect any of
the representations, warranties, covenants or obligations of the Company
contained in this Agreement.
4.3 No Solicitation
(a) The Company shall not, and shall not authorize or permit any of its
Representatives, to (i) solicit, initiate, encourage or induce the making,
submission or announcement of any Acquisition Proposal, (ii) furnish any
non-public information regarding the Company to any Person in connection with an
Acquisition Proposal, or provide access to the properties of the Company, to any
Person in connection with an Acquisition Proposal, (iii) engage in discussions
or negotiations with any Person with respect to any Acquisition Proposal, (iv)
approve, endorse or recommend any Acquisition Proposal or (v) enter into any
letter of intent or similar document or any Contract relating to any Acquisition
Transaction (other than a confidentiality agreement as contemplated below or
Contracts with advisors or consultants to the Company); provided, however, that
prior to the adoption and approval of this Agreement by the Required Company
Shareholder Vote, the Company shall not be prohibited by this Section 4.3(a)
from taking the actions described in clauses (ii) and (iii), if (A) neither the
Company nor any of its Representatives shall have violated any of the
restrictions set forth in this Section 4.3, (B) the board of directors of the
Company concludes in good faith, based upon the advice of its outside legal
counsel, that such action is required in order for the board of directors of the
Company to comply with its fiduciary obligations to the Company's shareholders
under applicable law, (C) prior to furnishing any such non-public information
to, or providing such access to, or entering into discussions or negotiations
with, such Person, the Company gives MergerCo written notice of the identity of
such Person and of the Company's intention to furnish non-public information to,
provide access to, or enter into discussions or negotiations with, such Person,
and the Company receives from such Person an executed confidentiality agreement
containing customary limitations on the use and disclosure of all nonpublic
written and oral information furnished to such Person by or on behalf of the
Company, and (D) prior to furnishing any such nonpublic information to or
providing any such access to such Person, the Company furnishes such nonpublic
information to MergerCo (to the extent such nonpublic information has not been
previously furnished by the Company to MergerCo). Without limiting the
generality of the foregoing, the Company acknowledges and agrees that any
violation of any of the restrictions set forth in the preceding sentence by any
Representatives of the Company, whether or not such Representative is purporting
to act on behalf of the Company, shall be deemed to constitute a breach of this
Section 4.3 by the Company.
(b) The Company shall promptly advise MergerCo orally and in writing of any
Acquisition Proposal (including the identity of the Person making or submitting
such Acquisition Proposal and the terms thereof) that is made or submitted by
any Person during the Pre-Closing Period. The Company shall keep MergerCo fully
informed with respect to the status of any such Acquisition Proposal and any
modification or proposed modification thereto.
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SECTION 5. Additional Covenants of the Parties
5.1 Proxy Statement.
(a) As promptly as practicable after the date of this Agreement, the
Company shall prepare and cause to be filed with the SEC the Proxy Statement and
any other documents required by the Securities Act, the Exchange Act or any
other Federal, foreign or Blue Sky or related laws in connection with the Merger
and the transactions contemplated by this Agreement ("OTHER FILINGS"). The
Company shall use all reasonable efforts to cause the Proxy Statement and any
Other Filings to comply with the rules and regulations promulgated by the SEC,
to respond promptly to any comments of the SEC or its staff and to cause the
Proxy Statement to be mailed to the Company's shareholders, as promptly as
practicable after the SEC indicates that it has no further comments. The Company
shall promptly furnish all information concerning the Company and the Company's
shareholders that may be required or reasonably requested in connection with any
action contemplated by this Section 5.1. The Company shall notify MergerCo
promptly of the receipt of any comments from the SEC or its staff and of any
request by the SEC or its staff for any amendment or supplement to the Proxy
Statement or for any other information and shall supply MergerCo with copies of
all correspondence between the Company and the SEC or its staff or other
governmental officials with respect to the Proxy Statement and the other
filings.
(b) The information supplied by or on behalf of each of MergerCo and the
Company for inclusion in the Proxy Statement shall not (i) at the time Proxy
Statement is filed with the SEC, (ii) at the time the Proxy Statement is first
mailed to the shareholders of the Company, (iii) at the time of the Company
Shareholder's Meeting, and (iv) 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 were made, not misleading. If MergerCo or the
Company becomes aware of any information that should be disclosed in an
amendment or supplement to the Proxy Statement, then MergerCo or the Company, as
the case may be, shall promptly inform the Company or MergerCo thereof and shall
cooperate with the other in filing such amendment or supplement with the SEC
and, if appropriate, in mailing such amendment or supplement to the shareholders
of the Company and MergerCo.
(c) The Company shall use all reasonable efforts to ensure that the Proxy
Statement will comply as to form in all material respects with the provisions of
the Exchange Act and the rules and regulations promulgated by the SEC
thereunder, except that no representation or warranty is made by the Company
with respect to statements made or incorporated by reference therein based on
information supplied by MergerCo for inclusion or incorporation by reference in
the Proxy Statement.
5.2 Company Shareholders' Meeting
(a) The Company shall take all action necessary under all applicable Legal
Requirements to call, give notice of, convene and hold a meeting of the holders
of Company Common Stock (the "COMPANY SHAREHOLDERS' MEETING") to consider, act
upon and vote upon the adoption and approval of this Agreement and approval of
the Merger and the approval of a reverse stock split of the Company Common
Stock, to be implemented following the Effective Time, in such ratio as shall be
determined by the Company in order to cause the Company to have fewer than 300
but
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not less than 275 holders of record after such reverse stock split (the "REVERSE
STOCK SPLIT"). The Company Shareholders' Meeting will be held as promptly as
practicable and in any event commence within 45 days and end no more than 60
days after the Proxy Statement may first be mailed in compliance with the rules
and regulations promulgated by the SEC. The Company shall ensure that the
Company Shareholders' Meeting is called, noticed, convened, held and conducted,
and that all proxies solicited in connection with the Company Shareholders'
Meeting are solicited, in compliance with all applicable Legal Requirements. The
Company's obligation to call, give notice of, convene and hold the Company
Shareholders' Meeting in accordance with this Section 5.2(a) shall not be
limited or otherwise affected by the commencement, disclosure, announcement or
submission of any Superior Offer or other Acquisition Proposal, or by any
withdrawal, amendment or modification of the recommendation of the board of
directors of the Company with respect to the Merger.
(b) Subject to Section 5.2(c): (i) the board of directors of the Company
shall unanimously recommend that the Company shareholders vote in favor of and
adopt and approve this Agreement and approve the Merger at the Company
Shareholders' Meeting; (ii) the Proxy Statement shall include a statement to the
effect that the board of directors of the Company has unanimously recommended
that the Company's shareholders vote in favor of and adopt and approve this
Agreement and approve the Merger and the Reverse Stock Split at the Company
Shareholders' Meeting; and (iii) neither the board of directors of the Company
nor any committee thereof shall withdraw, amend or modify, or propose or resolve
to withdraw, amend or modify, the unanimous recommendation of the board of
directors of the Company that the Company's shareholders vote in favor of and
adopt and approve this Agreement and approve the Merger and the Reverse Stock
Split.
(c) Nothing in Section 5.2(b) shall prevent the board of directors of the
Company from withdrawing, amending or modifying its unanimous recommendation in
favor of the Merger (and so informing its shareholders in the Proxy Statement or
supplement thereto or otherwise) at any time prior to the adoption and approval
of this Agreement by the Required Company Shareholder Vote if (i) a Superior
Offer is made to the Company and is not withdrawn, (ii) neither the Company nor
any of its Representative shall have violated any of the restrictions set forth
in Section 4.3, (iii) the board of directors of the Company concludes in good
faith, based upon advice of its outside counsel, that, in light of such Superior
Offer, the withdrawal, amendment or modification of such recommendation is
required in order for the board of directors of the Company to comply with its
fiduciary obligations to the Company's shareholders under applicable law, and
(iv) the Company's board of directors does not withdraw, amend or modify its
unanimous recommendation in favor of the Merger for at least 96 hours after the
Company provides MergerCo with the name of the Person making such Superior Offer
and advises MergerCo of the terms of such Superior Offer; provided, however,
that this clause (iv) shall not apply within the 96 hours prior to the
commencement of the Company Shareholders' Meeting. Nothing contained in this
Section 5.2 shall limit the Company's obligation to call, give notice of,
convene and hold the Company Shareholders' Meeting (regardless of whether the
unanimous recommendation of the board of directors of the Company has been
withdrawn, amended or modified).
5.3 Regulatory Approvals. Each party shall use all reasonable efforts to
file, as promptly as practicable after the date of this Agreement, all notices,
reports and other documents required to be filed by such party with any
Governmental Body with respect to the Merger and the other transactions
contemplated by this Agreement, and to submit
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promptly any additional information requested by any such Governmental Body. The
Company and MergerCo shall respond as promptly as practicable to (a) any
inquiries or requests received from the Federal Trade Commission or the
Department of Justice for information or documentation and (b) any inquiries or
requests received from any state attorney general or other Governmental Body in
connection with antitrust or related matters. Each of the Company and MergerCo
shall (i) give the other party prompt notice of the commencement of any material
Legal Proceeding by or before any court or other Governmental Body with respect
to the Merger or any of the other transactions contemplated by this Agreement,
(ii) keep the other party informed as to the status of any such Legal Proceeding
and (iii) except as may be prohibited by any Governmental Body or by any Legal
Requirement, permit the other party to be present at each meeting or conference
relating to any such Legal Proceeding and to have access to and be consulted in
connection with any document filed with or provided to any Governmental Body in
connection with any such Legal Proceeding.
5.4 Stock Options
(a) The Company's board of directors shall take all actions necessary or
appropriate to cause all options to purchase Company Common Stock (individually,
a "COMPANY STOCK OPTION" and collectively, the "COMPANY STOCK OPTIONS") granted
to any current or former employee or director of the Company under any of the
Company's 1993 Stock Option Plan, 1985 Restated Stock Option Plan or Stock
Option Plan for Non-Employee Directors, as amended, prior to the date hereof or
in accordance with Section 4.2 (collectively, the "COMPANY STOCK PLANS") and
that are outstanding immediately prior to the Effective Time, whether or not
then exercisable or vested, to terminate prior to the Effective Time. In lieu of
the exercise of any such Company Stock Option, the Company may, upon receipt of
the written acceptance of such terms by a holder of a Company Stock Option, pay
to any such holder of a Company Stock Option, an amount in respect thereof equal
to the product of (i) the excess, if any, of the (A) Cash Election Price over
(B) the exercise price of each such Company Stock Option and (ii) the number of
shares of Company Common Stock previously subject to such Company Stock Option
immediately prior to its cancellation (such payment to be net of withholding
taxes).
(b) Notwithstanding the provisions of Section 5.4(a), the Company shall use
all reasonable best efforts to obtain the agreement of each of Jiri M. Nechleba,
Stephen A. Yount and Patricia R. Graham (i) not, in the aggregate, to exercise
Company Stock Options for twenty-five percent (25%) of the shares of Company
Common Stock subject thereto, (ii) to the extent not exercised, to cancel such
Company Stock Options and release any and all rights such holder had or may have
had in respect of such Company Stock Options and (iii) for Jiri M. Nechleba
only, in respect of clause (i)(A) of Section 5.4(a), to substitute $9.00 per
share for the Cash Election Price.
(c) Promptly following the Effective Time, the Company's board of directors
shall take all actions necessary or appropriate to cause to be granted to the
Company's optionees (other than the Company's executive officers) options to
purchase that number of shares of Company Common Stock following the Merger (the
"Reload Options") such that the percentage interest in the Company following the
Merger represented by the Company Common Stock subject to the Reload Options
equals the percentage interest in the Company currently represented by the
Company Common Stock subject to the Company Stock Options. This Section 5.4(c)
is intended to establish the aggregate number of Reload Options only, and the
determination of the individuals who will receive Reload Options, and
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the number of options they will receive, will be determined by the Company and
MergerCo and will not necessarily be equal to the number of options such
individuals held prior to the Merger. The Reload Options shall be granted with
an exercise price per share equal to the fair market value of a share of Company
Common Stock at the time of grant.
(d) Promptly following the Effective Time, the Company's board of directors
shall take all actions necessary or appropriate to cause to be granted to each
of the Company's executive officers options to purchase that number of shares of
Company Common Stock following the Merger (a "Management Reload Option") such
that such management optionholder's percentage interest in the Company following
the Merger represented by the Company Common Stock subject to such Management
Reload Option equals the sum of the management optionholder's percentage
interest in the Company represented by the Company Common Stock previously
subject to the Company Stock Option immediately prior to the Effective Time (the
"Pre-Merger Option Interest") plus twenty-five percent (25%) of the Pre-Merger
Option Interest. The Management Reload Options shall be granted with an exercise
price per share equal to the fair market value of a share of Company Common
Stock at the time of grant.
5.5 Indemnification of Officers and Directors
(a) All rights to indemnification existing in favor of those Persons who
are directors and officers of the Company as of the date of this Agreement (the
"INDEMNIFIED PERSONS") for acts and omissions occurring prior to the Effective
Time as provided in the Company's bylaws (as in effect as of the date of this
Agreement) and as provided in the indemnification agreements between the Company
and said Indemnified Persons (as in effect as of the date of this Agreement),
shall survive the Merger and shall be observed by the Surviving Corporation to
the fullest extent available under Washington law for a period of six (6) years
from the Effective Time.
(b) From the Effective Time until the sixth (6th) anniversary of the
Effective Time, the Surviving Corporation shall maintain in effect, for the
benefit of the Indemnified Persons with respect to acts or omissions occurring
prior to the Effective Time, the existing policy of directors' and officers'
liability insurance maintained by the Company as of the date of this Agreement
(the "EXISTING POLICY"); provided, however, that (i) the Surviving Corporation
may substitute for the Existing Policy a policy or policies of comparable
coverage, and (ii) the Surviving Corporation shall not be required to pay an
annual premium for the Existing Policy (or for any substitute policies) in
excess of one hundred and fifty percent (150%) of the current annual premium. In
the event any future annual premium for the Existing Policy (or any substitute
policies) exceeds one hundred fifty percent (150%) of the current annual
premium, the Surviving Corporation shall be entitled to reduce the amount of
coverage of the Existing Policy (or any substitute policies) to the amount of
coverage that can be obtained for a premium equal to one hundred and fifty
percent (150%) of the current annual premium.
5.6 Company Board of Directors. The Company shall use all reasonable best
efforts to cause J.D. Delafield or such other nominee designated by MergerCo and
reasonably acceptable to the Company to be appointed to the Company's board of
directors effective as of the Effective Time to serve until the next annual
meeting of shareholders or until his or her successor shall be duly elected and
qualified.
5.7 Recapitalization Accounting Treatment. The Company and MergerCo agree
to use their reasonable best efforts not to take any action during the
Pre-Closing Period that
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would adversely affect the ability of the Surviving Corporation to account for
the Merger and all other transactions contemplated by this Agreement as a
Leveraged Recapitalization for financial reporting purposes. The Company shall
cooperate with any reasonable requests of MergerCo or the SEC related to the
recording of the Merger as a Leveraged Recapitalization for financial reporting
purposes, including, without limitation, to assist MergerCo with any
presentation to the SEC with respect to such recording.
5.8 All Reasonable Efforts. The Company and MergerCo shall use all
reasonable efforts to take, or cause to be taken, all actions necessary to
effectuate the Merger and make effective the other transactions contemplated by
this Agreement. Without limiting the generality of the foregoing, each Party (a)
shall make all filings (if any) and give all notices (if any) required to be
made and given by such party in connection with the Merger and the other
transactions contemplated by this Agreement, and (ii) shall use all reasonable
efforts to obtain each Consent (if any) required to be obtained (pursuant to any
applicable Legal Requirement or Contract or otherwise) by such party in
connection with the Merger or any of the other transactions contemplated by this
Agreement, and (iii) shall use all reasonable efforts to lift any restraint,
injunction or other legal bar to the Merger.
5.9 Disclosure. MergerCo and the Company shall consult with each other
before issuing any press release or otherwise making any public statement with
respect to the Merger or any of the other transactions contemplated by this
Agreement. Without limiting the generality of the foregoing the Company shall
not, and shall not permit any of its Representatives to, make any disclosure
regarding the Merger or any of the transactions contemplated by this Agreement
unless (a) MergerCo shall have approved such disclosure (which approval will not
be unreasonably withheld), or (b) the Company shall been advised by its outside
legal counsel that such disclosure is required by applicable law.
5.10 Nasdaq Delisting. At MergerCo's request, the Company shall cooperate
with MergerCo in taking, or causing to be taken, all actions necessary to delist
the Company Common Stock from the Nasdaq National Market, providing that such
delisting shall not be effective until after the Effective Time and provided
further that if pro rations were made under Section 1.5(c)(iii), then the
Company shall not voluntarily delist the Company Common Stock from the Nasdaq
National Market for a period of six months following the Effective Time.
5.11 Additional Securities Filings. If, in the opinion of counsel to
MergerCo, the filing with the SEC of a Transaction Statement on Schedule 13E-3
(the "SCHEDULE 13E-3") in connection with the Merger is required by Rule 13e-3
under the Exchange Act, the Company will file the Schedule 13E-3 with the SEC at
the time of filing of the Proxy Statement. If, in the opinion of counsel to
MergerCo, the filing with the SEC of an S-4 Registration Statement in connection
with the Merger is required under the Securities Act, the Company will file the
S-4 Registration Statement with the SEC at the time of filing of the Proxy
Statement. If either or both of the Schedule 13E-3 or the S-4 Registration
Statement is filed, at the time of any amendment to the Proxy Statement, the
parties will cause to be filed with the SEC an appropriate amendment to the
Schedule 13E3 and/or the S-4 Registration Statement.
5.12 Effecting Reverse Stock Split. The Surviving Corporation shall
promptly after the Effective Time amend its articles of incorporation to effect
the Reverse Stock Split only if, prior to the Merger, MergerCo requests the
Company to effect the Reverse Stock Split. The Reverse Stock Split, if effected,
shall be applicable to all shares of Company
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Common Stock outstanding following the Merger, including those shares issued to
MergerCo pursuant to Section 1.5(a)(i).
5.13 Financing
(a) The Company agrees to provide, and will cause its officers, employees
and advisors to provide, all necessary cooperation in connection with the
arrangement of any financing to be consummated contemporaneous with or at or
after the Closing in respect of the transactions contemplated by this Agreement,
including, (i) participation in meetings and due diligence sessions, and (ii)
the execution and delivery of any commitment letters, loan agreements, pledge
and security documents, other definitive financing documents, or other requested
certificates or documents, including a certificate of the chief financial
officer of the Company with respect to solvency matters, comfort letters of
accountants and legal opinions as may be requested by MergerCo; provided,
however, that the terms of any such letter, documents, certificate, agreements
or instruments shall be reasonable and consistent with the amount of funding
necessary to consummate the Merger and the other transactions contemplated
hereby; and
(b) MergerCo hereby agrees to use its reasonable best efforts to assist the
Company in arranging the financing in respect of the transactions contemplated
by this Agreement, including using its reasonable best efforts to assist the
Company in the negotiation of definitive agreements with respect thereto.
MergerCo will keep the Company informed of its efforts to assist the Company in
arranging such financing. Each of MergerCo and the Company shall notify the
other within 24 hours of receiving notice that such financing will not be
available on terms satisfactory to MergerCo.
SECTION 6. Conditions Precedent to Mergerco's Obligation to Close
MergerCo's obligations to effect the Merger and otherwise consummate the
transactions contemplated by this Agreement are subject to the satisfaction, at
or prior to the Closing, of each of the following conditions (any of which may
be waived by MergerCo, in whole or in part):
6.1 Accuracy of Representations. The representations and warranties of the
Company contained in this Agreement shall have been accurate in all material
respects as of the date of this Agreement, and shall be accurate in all respects
as of the Closing Date as if made at the Closing Date (except that any
representation or warranty that specifically refers to "the date of this
Agreement," "the date hereof" or any other date other than the Closing Date
speaks as of such date), and except that any inaccuracies in such
representations and warranties as of the Closing Date will be disregarded if the
circumstances giving rise to such inaccuracies (considered individually and
collectively) do not constitute, and could not reasonably be expected to result
in a Material Adverse Effect on the Company, it being understood that, for
purposes of determining the accuracy of such representations and warranties, (i)
all materiality qualifications contained in such representations and warranties
shall be disregarded, and (ii) any update of or modification to the Company
Disclosure Schedule made or purported to have been made after the date of this
Agreement shall be disregarded.
6.2 Performance of Obligations. Each covenant or obligation that the
Company is required to comply with or perform at or prior to the Closing shall
have been complied with and performed in all material respects.
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6.3 Shareholder Approval; Dissenting Shares. This Agreement shall have
been duly adopted and approved, and the Merger shall have been duly approved, by
the Required Company Shareholder Vote, and the aggregate of all "Dissenting
Shares" shall represent no more than five percent (5%) of the number of shares
of Company Common Stock outstanding immediately prior to the Effective Time.
6.4 Consents. The Consents set forth in Part 2.23 of the Company
Disclosure Schedule and all other Consents required to be obtained in connection
with the Merger and the other transactions contemplated by this Agreement shall
have been obtained and shall be in full force and effect.
6.5 No Material Adverse Change. Since the date of this Agreement, there
shall have been no material adverse change in the business, financial condition,
operations or results of operations of the Company and no event shall have
occurred and no circumstance shall exist that could reasonably be expected to
have a Material Adverse Effect on the business, financial condition, operations,
results of operations of the Company.
6.6 Financing. MergerCo and the Company shall have received sufficient
funds to pay the Merger Consideration and otherwise enable MergerCo to
consummate the transactions contemplated hereby and to meet the working capital
requirements of the Surviving Corporation pursuant to financing arrangements and
definitive financing agreements completed to the reasonable satisfaction of
MergerCo.
6.7 Additional Documents. MergerCo shall have received the following
documents:
(a) an opinion letter from Perkins Coie, LLP, dated the Closing Date,
in the form of Exhibit E;
(b) a letter from KPMG Peat Marwick LLP, dated as of the Closing Date
and addressed to the Company, reasonably satisfactory in form and substance
to MergerCo, to the effect that, after reasonable investigation KPMG Peat
Marwick LLP is not aware of any fact that could preclude the transactions
contemplated in this Agreement from being accounted for as a Leveraged
Recapitalization for financial reporting purposes; and
(c) such other documents as MergerCo may request in good faith for the
purpose of (i) evidencing the accuracy of any representation or warranty
made by the Company, (ii) evidencing the compliance by the Company with, or
the performance by the Company of, any covenant or obligation set forth in
this Agreement, (iii) evidencing the satisfaction of any condition set
forth in this Section 6, or (iv) otherwise facilitating the consummation or
performance of any of the Transactions, including, but not limited to, a
certificate executed on behalf of the Company by its Chief Executive
Officer confirming that the conditions set forth in Sections 6.1, 6.2, 6.3,
6.4 and 6.5 have been duly satisfied.
6.8 No Prohibition. No temporary restraining order, preliminary or
permanent injunction or other order preventing the consummation of the Merger
shall have been issued by any court of competent jurisdiction and remain in
effect, and there shall not be any Legal Requirement enacted or deemed
applicable to the Merger that makes consummation of the Merger illegal.
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SECTION 7. Conditions Precedent to the Company's Obligation to Close
The Company's obligations to effect the Merger and otherwise consummate the
transactions contemplated by this Agreement are subject to the satisfaction, at
or prior to the Closing, of each of the following conditions (any of which may
be waived by the Company, in whole or in part):
7.1 Accuracy of Representations. The representations and warranties of
MergerCo contained in this Agreement shall have been accurate in all material
respects as of the date of this Agreement, and shall be accurate in all respects
as of the Closing Date as if made at the Closing Date (except that any
representation or warranty that specifically refers to "the date of this
Agreement," "the date hereof" or any other date other than the Closing Date
speaks as of such date), and except that any inaccuracies in such
representations and warranties as of the Closing Date will be disregarded if the
circumstances giving rise to such inaccuracies (considered individually and
collectively) do not constitute, and could not reasonably be expected to result
in a Material Adverse Effect on MergerCo, it being understood that, for purposes
of determining the accuracy of such representations and warranties, (i) all
materiality qualifications contained in such representations and warranties
shall be disregarded, and (ii) any update of or modification to the MergerCo
Disclosure Schedule made or purported to have been made after the date of this
Agreement shall be disregarded.
7.2 Performance of Obligations. Each covenant or obligation that MergerCo
is required to comply with or perform at or prior to the Closing shall have been
complied with and performed in all material respects.
7.3 Shareholder Approval. This Agreement shall have been duly adopted and
approved, and the Merger shall have been duly approved, by the Required Company
Shareholder Vote.
7.4 No Prohibition. No temporary restraining order, preliminary or
permanent injunction or other order preventing the consummation of the Merger
shall have been issued by any court of competent jurisdiction and remain in
effect, and there shall not be any Legal Requirement enacted or deemed
applicable to the Merger that makes consummation of the Merger illegal.
7.5 Additional Documents. The Company shall have received the following
documents:
(a) an opinion letter from Cooley Godward, LLP, dated the Closing
Date, in the form of Exhibit F; and
(b) a letter from KPMG Peat Marwick LLP, dated as of the Closing Date
and addressed to the Company, reasonably satisfactory in form and substance
to the Company, to the effect that, after reasonable investigation KPMG
Peat Marwick LLP is not aware of any fact that could preclude the
transactions contemplated in this Agreement from being accounted for as a
Leveraged Recapitalization for financial reporting purposes.
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SECTION 8. Termination
8.1 Termination Events. This Agreement may be terminated prior to the
Effective Time:
(a) by mutual written consent of the Company and MergerCo;
(b) by either the Company or MergerCo if the Merger shall not have
been consummated by May 31, 1999 (unless the failure to consummate the
Merger is attributable to a failure on the part of the party seeking to
terminate this Agreement to perform any material obligation required to be
performed by such party at or prior to the Effective Time);
(c) by either the Company or MergerCo if a court of competent
jurisdiction or other Governmental Body shall have issued a final and
nonappealable order, decree or ruling, or shall have taken any other
action, having the effect of permanently restraining, enjoining or
otherwise prohibiting the Merger;
(d) by either the Company or MergerCo if (i) the Company Shareholders'
Meeting shall have been held and (ii) this Agreement and the Merger shall
not have been approved at such meeting by the Required Company Shareholder
Vote; provided, however, that the Company shall not be permitted to
terminate this Agreement pursuant to this Section 8.1(d) unless the Company
shall have paid to MergerCo the fees and expenses required to be paid to
MergerCo pursuant to Section 8.4(b), if any;
(e) by MergerCo (at any time prior to the adoption and approval of
this Agreement and the Merger by the Required Company Shareholder Vote) if
a Triggering Event shall have occurred;
(f) by the Company, if the Board of Directors of the Company has
withdrawn, amended or modified its recommendation referred to in Section
5.2(c) in compliance with Section 5.2(c); provided, however, that the
Company shall not be permitted to terminate this Agreement pursuant to this
Section 8.1(f) unless the Company shall have paid to MergerCo any fee and
expenses required to be paid to MergerCo pursuant to Section 8.4(b);
(g) by MergerCo if any of the Company's representations and warranties
contained in this Agreement shall have been materially inaccurate as of the
date of this Agreement, or if any of the Company's covenants contained in
this Agreement shall have been breached in any material respect and has not
been cured within 15 business days of notice by MergerCo thereof; provided,
however, that MergerCo may not terminate this Agreement under this Section
8.1(g) if such inaccuracy or breach (considered in the aggregate with all
other inaccuracies of breaches) would not result in a failure of the
conditions set forth in Section 6.1 hereof; or
(h) by the Company if any of MergerCo's representations and warranties
contained in this Agreement shall have been materially inaccurate as of the
date of this Agreement or shall have become materially inaccurate as of any
subsequent date (as if made on such subsequent date), or if any of
MergerCo's covenants contained in this Agreement shall have been breached
in any material respect and has not been cured within 15 business days of
notice by MergerCo thereof; provided, however, that the Company may not
terminate this Agreement under this Section 8.1(h) if such inaccuracy or
breach (considered in the aggregate with all other inaccuracies or
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breaches) would not result in a failure of the conditions set forth in
Section 7.1 hereof.
8.2 Termination Procedures. If MergerCo wishes to terminate this Agreement
pursuant to Sections 8.1(b), 8.1(c), 8.1(d), 8.1(e) or 8.1(g), MergerCo shall
deliver to the Company a written notice stating that MergerCo is terminating
this Agreement and setting forth a brief description of the basis on which
MergerCo is terminating this Agreement. If the Company wishes to terminate this
Agreement pursuant to Sections 8.1(b), 8.1(c), 8.1(d), 8.1(f) or 8.1(h), the
Company shall deliver to MergerCo a written notice stating that the Company is
terminating this Agreement and setting forth a brief description of the basis on
which the Company is terminating this Agreement.
8.3 Effect of Termination. If this Agreement is terminated pursuant to
Section 8.1, all further obligations of the parties under this Agreement shall
terminate and this Agreement shall be of no further force or effect; provided,
however, that:
(a) no party shall be relieved of any obligation or other Liability
arising from any material breach by such party of any provision of this
Agreement;
(b) the parties shall, in all events, remain bound by and continue to
be subject to the provisions set forth in Sections 8.4 and 9; and
(c) such termination shall have no effect on the Confidentiality
Agreement dated November 11, 1998 between the Company and W.R. Hambrecht +
Co., LLC.
8.4 Expenses; Termination Fees
(a) Except as set forth in this Section 8.4, all fees and expenses incurred
in connection with this Agreement and the transactions contemplated by this
Agreement shall be paid by the party incurring such expenses, whether or not the
Merger is consummated.
(b) If (i) this Agreement is terminated by MergerCo pursuant to Section
8.1(e), or (ii) this Agreement is terminated by the Company pursuant to Section
8.1(f), then, in either such case, the Company shall pay to MergerCo in cash at
the times specified herein (A) a nonrefundable fee in the amount of $625,000
(the "TERMINATION FEE") and (B) reimbursements for all reasonable out-of-pocket
expenses and fees (including fees and expenses payable to all banks and other
financial institutions, and their respective Agents and counsel, and all fees
and expenses of counsel, accountants, financial printers, experts and
consultants to MergerCo and its affiliates (including W.R. Hambrecht + Co., LLC)
and all fees and expenses payable to any Governmental Body), whether incurred
prior to or after the date hereof, in connection with this Agreement, the
Merger, the transactions contemplated by this Agreement or any actual or
proposed financing (whether in the form of equity or debt) in connection with
any such transaction ("TRANSACTION EXPENSES"). If (1) this Agreement is
terminated by the Company or MergerCo pursuant to Section 8.1(b) (excluding a
termination of this Agreement following a refusal by MergerCo to close solely by
virtue of a failure to satisfy the condition to Closing set forth in Section
6.6), 8.1(c) or 8.1(d) or (2) this Agreement is terminated by MergerCo pursuant
to Section 8.1(g), then, in any such case, the Company shall pay to MergerCo in
cash at the times specified herein reimbursements for its Transaction Expenses.
In the case of termination of this Agreement by MergerCo pursuant to Section
8.1(e), the Termination Fee shall be paid by the Company within two (2) business
days after such termination. In the case of termination of this Agreement by the
Company pursuant to Section 8.1(f), the Termination Fee shall be paid by the
Company prior to such
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termination. If this Agreement is terminated by the Company or MergerCo pursuant
to Section 8.1(d) and at or prior to the time of such termination an Acquisition
Proposal shall have been disclosed, announced, commenced, submitted or made (and
shall not have been publicly, absolutely and unconditionally withdrawn and
abandoned prior to the Company Shareholders' Meeting) (a "PENDING PROPOSAL"), in
the event of the closing, completion or consummation within one year after the
date of termination of this Agreement of an Acquisition Transaction relating to
a Pending Proposal (regardless of any amendments, modifications or alterations
that occur after the termination of this Agreement), a fee of $1,250,000 (the
"TOTAL FEE") shall be paid by the Company to MergerCo immediately after such
closing, completion or consummation. In addition to the other amounts payable
under this Section 8.4(b), if this Agreement is terminated by MergerCo pursuant
to Section 8.1(e) or by the Company pursuant to Section 8.1(f), in the event of
the closing, completion or consummation within one year after the date of
termination of this Agreement of an Acquisition Transaction relating to a
Pending Proposal (regardless of any amendments, modifications or alterations
that occur after the termination of this Agreement), an additional fee of
$625,000 (the "TOPPING FEE") shall be paid by the Company to MergerCo
immediately after such closing, completion or consummation. Reimbursements for
Transaction Expenses (which may occur on one or more occasions) shall be paid
within two (2) business days after delivery to the Company of a written request
therefor, including reasonable evidence of the expenses incurred. The
Termination Fee, Topping Fee, Total Fee and reimbursements for Transaction
Expenses shall be paid by the wire transfer of same day funds.
8.5 Nonexclusivity of Termination Rights. The termination rights provided
in Section 8.1 shall not be deemed to be exclusive. Accordingly, the exercise by
any party of its right to terminate this Agreement pursuant to Section 8.1 shall
not be deemed to be an election of remedies and shall not be deemed to
prejudice, or to constitute or operate as a waiver of, any other right or remedy
that such party may be entitled to exercise (whether under this Agreement, under
any other Contract, under any statute, rule or other Legal Requirement, at
common law, in equity or otherwise).
SECTION 9. Miscellaneous Provisions
9.1 No Survival of Representations and Warranties. None of the
representations and warranties contained in this Agreement or in any certificate
delivered pursuant to this Agreement shall survive the Merger.
9.2 Attorneys' Fees. In any action at law or suit in equity to enforce
this Agreement or the rights of any of the parties hereunder, the prevailing
party in such action or suit shall be entitled to receive a reasonable sum for
its attorneys' fees and all other reasonable costs and expenses incurred in such
action or suit.
9.3 Assignability. This Agreement shall be binding upon, and shall be
enforceable by and inure solely to the benefit of, the parties hereto and their
respective successors and assigns; provided, however, that neither this
Agreement nor any of the Company's rights hereunder may be assigned by the
Company without the prior written consent of MergerCo, and any attempted
assignment of this Agreement or any of such rights by the Company without such
consent shall be void and of no effect. Nothing in this Agreement, express or
implied, is intended to or shall confer upon any Person any right, benefit or
remedy of any nature whatsoever under or by reason of this Agreement.
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9.4 Notices. Any notice or other communication required or permitted to be
delivered to any party under this Agreement shall be in writing and shall be
deemed properly delivered, given and received when delivered (by hand, by
registered mail, by courier or express delivery service or by telecopier) to the
address or telecopier number set forth beneath the name of such party below (or
to such other address or telecopier number as such party shall have specified in
a written notice given to the other parties hereto):
if to the Company: Interlinq Software Company
11980 N.E. 24th Street
Bellevue, WA 98005
Attention: Jiri Nechleba
Telecopier: (425) 250-2001
and
Attention: Steve Yount
Telecopier: (425) 250-2101
with a copy to: Perkins Coie, LLP
1201 Third Avenue, 40th Floor
Seattle, WA 98101-3099
Attention: Linda A. Schoemaker, Esq.
Telecopier: (206) 583-8500
if to MergerCo: W.R. Hambrecht + Co., LLC
550 - 15th Street
San Francisco, CA 94103
Attention: J. D. Delafield
Telecopier: (415) 551-8686
with a copy to: Cooley Godward LLP
One Maritime Plaza, 20th Floor
San Francisco, CA 94111-3580
Attention: Kenneth L. Guernsey, Esq.
Telecopier: (415) 951-3699
9.5 Cooperation. The Company and MergerCo agree to cooperate fully with
each other and to execute and deliver such further documents, certificates,
agreements and instruments and to take such other actions as may be reasonably
requested by the other to evidence or reflect the transactions contemplated by
this Agreement and to carry out the intent and purposes of this Agreement.
9.6 Headings. The underlined headings contained in this Agreement are for
convenience of reference only, shall not be deemed to be a part of this
Agreement and shall not be referred to in connection with the construction or
interpretation of this Agreement.
9.7 Counterparts. This Agreement may be executed in several counterparts,
each of which shall constitute an original and all of which, when taken
together, shall constitute one agreement.
9.8 Governing Law; Venue. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Washington, regardless of
the laws that might otherwise govern under applicable principles of conflicts of
laws thereof. In any action between the parties arising out of or relating to
this Agreement or any of the transactions
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contemplated by this Agreement: (a) each of the parties irrevocably and
unconditionally consents and submits to the exclusive jurisdiction and venue of
the state and federal courts located in the City of Seattle, King County, State
of Washington; (b) if any such action is commenced in a state court, then,
subject to applicable law, no party shall object to the removal of such action
to any federal court located in the Western District of Washington; (c) each of
the parties irrevocably waives the right to trial by jury; and (d) each of the
parties irrevocably consents to service of process by first class certified
mail, return receipt requested, postage prepaid to the address at which such
party is to receive notice in accordance with Section 9.4.
9.9 Waiver
(a) No failure on the part of any Person to exercise any power, right,
privilege or remedy under this Agreement, and no delay on the part of any Person
in exercising any power, right, privilege or remedy under this Agreement, shall
operate as a waiver of such power, right, privilege or remedy; and no single or
partial exercise of any such power, right, privilege or remedy shall preclude
any other or further exercise thereof or of any other power, right, privilege or
remedy.
(b) No Person shall be deemed to have waived any claim arising out of this
Agreement, or any power, right, privilege or remedy under this Agreement, unless
the waiver of such claim, power, right, privilege or remedy is expressly set
forth in a written instrument duly executed and delivered on behalf of such
Person; and any such waiver shall not be applicable or have any effect except in
the specific instance in which it is given.
9.10 Amendments. This Agreement may be amended with the approval of the
respective boards of directors of the Company and MergerCo at any time (whether
before or after the adoption and approval of this Agreement and the Articles of
Merger and the approval of the Merger by the shareholders of the Company);
provided, however, that after any such adoption and approval of this Agreement
and approval of the Merger by the Company's shareholders, no amendment shall be
made which by law requires further approval of the shareholders of the Company
without the further approval of the shareholders. This Agreement may not be
amended except by an instrument in writing signed on behalf of each of the
parties hereto.
9.11 Severability. In the event that any provision of this Agreement, or
the application of any such provision to any Person or set of circumstances,
shall be determined to be invalid, unlawful, void or unenforceable to any
extent, the remainder of this Agreement, and the application of such provision
to Persons or circumstances other than those as to which it is determined to be
invalid, unlawful, void or unenforceable, shall not be impaired or otherwise
affected and shall continue to be valid and enforceable to the fullest extent
permitted by law.
9.12 Entire Agreement. This Agreement, the other agreements referred to
herein and that certain letter agreement dated as of November 11, 1998, set
forth the entire understanding of the parties relating to the subject matter
hereof and thereof and supersede all prior agreements and understandings among
or between any of the parties relating to the subject matter hereof and thereof.
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9.13 Construction
(a) For purposes of this Agreement, whenever the context requires: the
singular number shall include the plural, and vice versa; the masculine gender
shall include the feminine and neuter genders; the feminine gender shall include
the masculine and neuter genders; and the neuter gender shall include the
masculine and feminine genders.
(b) The parties hereto agree that any rule of construction to the effect
that ambiguities are to be resolved against the drafting party shall not be
applied in the construction or interpretation of this Agreement.
(c) As used in this Agreement, the words "include" and "including," and
variations thereof, shall not be deemed to be terms of limitation, but rather
shall be deemed to be followed by the words "without limitation."
(d) Except as otherwise indicated, all references in this Agreement to
"Sections" and "Exhibits" are intended to refer to Sections of this Agreement
and Exhibits to this Agreement.
The parties hereto have caused this Agreement to be executed and delivered
as of the date set forth above.
"Mergerco"
TERLIN, INC.,
a Washington corporation
By: /s/ JOHN D. DELAFIELD
-----------------------------------
Name: John D. Delafield
Title: President and Chief Executive
Officer
"THE COMPANY"
INTERLINQ SOFTWARE CORPORATION,
a Washington corporation
By: /s/ JIRI NECHLEBA
-----------------------------------
Name: Jiri Nechleba
Title: President and Chief Executive
Officer
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EXHIBIT A
CERTAIN DEFINITIONS
For purposes of the Agreement (including this Exhibit A):
Acquisition Proposal. "Acquisition Proposal" shall mean any offer,
proposal or inquiry (other than an offer or proposal by MergerCo) contemplating
or otherwise relating to any Acquisition Transaction.
Acquisition Transaction. "Acquisition Transaction" shall mean any
transaction involving:
(a) any merger, consolidation, amalgamation, share exchange, business
combination, issuance of securities, acquisition of securities, tender
offer, exchange offer or other similar transaction (i) in which the Company
is a constituent company, (ii) in which a Person or "group" (as defined in
the Exchange Act and the rules promulgated thereunder) of Persons directly
or indirectly acquires the Company or more than 20% of the Company's
business or directly or indirectly acquires beneficial or record ownership
of securities representing, or exchangeable for or convertible into, more
than 20% of the outstanding securities of any class of voting securities of
the Company, or (iii) in which the Company issues securities representing
more than 20% of the outstanding securities of any class of voting
securities of the Company;
(b) any sale, lease, exchange, transfer, license, acquisition or
disposition of more than 20% of the assets of the Company; or
(c) any liquidation or dissolution of the Company.
Cercla. "CERCLA" shall mean the Comprehensive Environmental Response,
Compensation and Liability Act.
Closing. "Closing" shall have the meaning specified in Section 1.3 of the
Agreement.
Closing Date. "Closing Date" shall have the meaning specified in Section
1.3 of the Agreement.
Cobra. "COBRA" shall mean the Consolidated Omnibus Budget Reconciliation
Act of 1985, as amended.
Code. "Code" shall mean the Internal Revenue Code of 1986, as amended.
Company. The "Company" shall mean Interlinq Software Corporation, a
Washington corporation.
Company Common Stock. "Company Common Stock" shall mean shares of the
common stock of the Company, $0.01 par value per share.
Company Contract. "Company Contract" shall mean any Contract:
(a) to which the Company is a party;
(b) by which the Company or any of its assets is or may become bound
or under which the Company has, or may become subject to, any obligation;
or
(c) under which the Company has or may acquire any right or interest.
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Company Disclosure Schedule. "Company Disclosure Schedule" shall mean the
schedule (dated as of the date of the Agreement) delivered to MergerCo on behalf
of the Company and signed by an officer of the Company.
Company Plan. "Company Plan" shall mean any Current Benefit Plan or Past
Benefit Plan.
Company Preferred Stock. "Company Preferred Stock" shall mean shares of
convertible preferred stock of the Company, $0.01 par value per share.
Company Proprietary Assets. "Company Proprietary Assets" shall mean all of
the Proprietary Assets owned by or licensed to the Company.
Company SEC Documents. "Company SEC Documents" shall mean all documents
filed by the Company with the SEC since June 30, 1996, and all amendments
thereto.
Company Share Certificate. "Company Share Certificate" shall mean a valid
certificate representing ownership of shares of Company Common Stock.
Company Shareholders' Meeting. "Company Shareholders' Meeting" shall mean
the meeting of the holders of Company Common Stock to consider and vote upon the
adoption and approval of the Agreement, the approval of the Merger and the
approval of the Reverse Stock Split.
Consent. "Consent" shall mean any approval, consent, ratification,
permission, waiver or authorization (including any Governmental Authorization).
Contract. "Contract" shall mean any written, oral, implied or other
agreement, contract, understanding, arrangement, instrument, note, guaranty,
indemnity, representation, warranty, deed, assignment, power of attorney,
certificate, purchase order, work order, insurance policy, benefit plan,
commitment, covenant, assurance or undertaking of any nature.
Current Benefit Plan. "Current Benefit Plan" shall mean any Employee
Benefit Plan that is currently in effect and:
(a) that was established or adopted by the Company or any ERISA
Affiliate;
(b) in which the Company participates;
(c) with respect to which the Company or any ERISA Affiliate is or may
be required or permitted to make any contribution; or
(d) with respect to which the Company or any ERISA Affiliate is or may
become subject to any Liability.
Damages. "Damages" shall include any loss, damage, injury, decline in
value, lost opportunity, Liability, claim, demand, settlement, judgment, award,
fine, penalty, Tax, fee (including any legal fee, expert fee, accounting fee or
advisory fee), charge, cost (including any cost of investigation) or expense of
any nature.
Dissenting Shares. "Dissenting Shares" means shares of Company Common Stock
with respect to which the holder or holders thereof perfect their rights to
dissent under Chapter 23B.13 of the WBCA.
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Dissenting Shareholders. "Dissenting Shareholders" means holders of shares
of Company Common Stock who perfect their rights to dissent under Chapter 23B.13
of the WBCA.
Employee Benefit Plan. "Employee Benefit Plan" shall mean all "employee
pension benefit plans" as defined in Section 3(2) of ERISA; all "welfare benefit
plans" as defined in Section 3(1) of ERISA; and all stock bonus, stock option,
restricted stock, stock appreciation right, stock purchase, bonus, incentive,
deferred compensation, severance, holiday, or vacation plans, or any other
employee benefit plan, program, policy or arrangement, whether or not subject to
ERISA and whether or not in writing.
Encumbrance. "Encumbrance" shall mean any lien, pledge, hypothecation,
charge, mortgage, security interest, encumbrance, equity, trust, equitable
interest, claim, preference, right of possession, lease, tenancy, license,
encroachment, covenant, infringement, interference, Order, proxy, option, right
of first refusal, preemptive right, community property interest, legend, defect,
impediment, exception, reservation, limitation, impairment, imperfection of
title, condition or restriction of any nature (including any restriction on the
voting of any security, any restriction on the transfer of any security or other
asset, any restriction on the receipt of any income derived from any asset, any
restriction on the use of any asset and any restriction on the possession,
exercise or transfer of any other attribute of ownership of any asset).
Entity. "Entity" shall mean any corporation (including any non-profit
corporation), general partnership, limited partnership, limited liability
partnership, joint venture, estate, trust, cooperative, foundation, society,
political party, union, company (including any limited liability company or
joint stock company), firm or other enterprise, association, organization or
entity.
ERISA. "ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended.
ERISA Affiliate. "ERISA Affiliate" shall mean any Person that is, was or
would be treated as a single employer with the Company under Section 414 of the
Code.
Exchange Agent. "Exchange Agent" shall mean Chase Mellon Shareholder
Services LLC or such other reputable bank or trust company selected by MergerCo
and approved by the Company prior to the Closing Date.
GAAP. "GAAP" shall mean generally accepted accounting principles, applied
on a basis consistent with the basis on which the Company Financial Statements
were prepared.
Governmental Authorization. "Governmental Authorization" shall mean any
permit, license, certificate, franchise, concession, approval, consent,
ratification, permission, clearance, confirmation, endorsement, waiver,
certification, designation, rating, registration, qualification or authorization
that is, has been or may in the future be issued, granted, given or otherwise
made available by or under the authority of any Governmental Body or pursuant to
any Legal Requirement.
Governmental Body. "Governmental Body" shall mean any:
(a) nation, principality, state, commonwealth, province, territory,
county, municipality, district or other jurisdiction of any nature;
(b) federal, state, local, municipal, foreign or other government;
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(c) governmental or quasi-governmental authority of any nature
(including any governmental division, subdivision, department, agency,
bureau, branch, office, commission, council, board, instrumentality,
officer, official, representative, organization, unit, body or Entity and
any court or other tribunal);
(d) multi-national organization or body; or
(e) individual, Entity or body exercising, or entitled to exercise,
any executive, legislative, judicial, administrative, regulatory, police,
military or taxing authority or power of any nature.
Hazardous Material. "Hazardous Material" shall include:
(a) any petroleum, waste oil, crude oil, asbestos, urea formaldehyde
or polychlorinated biphenyl;
(b) any waste, gas or other substance or material that is explosive or
radioactive;
(c) any "hazardous substance," "pollutant," "contaminant," "hazardous
waste," "regulated substance," "hazardous chemical" or "toxic chemical" as
designated, listed or defined (whether expressly or by reference) in any
statute, regulation or other Legal Requirement (including CERCLA, any other
so-called "superfund" or "superlien" law, the Resource Conservation
Recovery Act, the Federal Water Pollution Control Act, the Toxic Substances
Control Act, the Emergency Planning and Community Right-to-Know Act and the
respective regulations promulgated thereunder);
(d) any other substance or material (regardless of physical form) or
form of energy that is subject to any Legal Requirement which regulates or
establishes standards of conduct in connection with, or which otherwise
relates to, the protection of human health, plant life, animal life,
natural resources, property or the enjoyment of life or property from the
presence in the environment of any solid, liquid, gas, odor, noise or form
of energy; and
(e) any compound, mixture, solution, product or other substance or
material that contains any substance or material referred to in clause
"(a)," "(b)," "(c)" or "(d)" above.
Knowledge. An Entity shall be deemed to have the "Knowledge" of its
officers and directors. An individual shall be deemed to have "Knowledge" of a
particular fact or other matter if such individual is actually aware of such
fact or other matter.
Legal Requirement. "Legal Requirement" shall mean any federal, state,
local, municipal, foreign or other law, statute, legislation, constitution,
principle of common law, resolution, ordinance, code, edict, decree,
proclamation, treaty, convention, rule, regulation, ruling, directive,
pronouncement, requirement, specification, determination, decision, opinion or
interpretation that is, has been or may in the future be issued, enacted,
adopted, passed, approved, promulgated, made, implemented or otherwise put into
effect by or under the authority of any Governmental Body.
Leveraged Recapitalization. "Leveraged Recapitalization" shall mean a
transaction structured to transfer the controlling interest of an operating
entity to a new investor without a change in accounting basis of the assets and
liabilities presented in the separate stand-alone financial statements of the
operating entity.
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Liability. "Liability" shall mean any debt, obligation, duty or liability
of any nature (including any unknown, undisclosed, unmatured, unaccrued,
unasserted, contingent, indirect, conditional, implied, vicarious, derivative,
joint, several or secondary liability), regardless of whether such debt,
obligation, duty or liability would be required to be disclosed on a balance
sheet prepared in accordance with generally accepted accounting principles and
regardless of whether such debt, obligation, duty or liability is immediately
due and payable.
Material Adverse Effect. "Material Adverse Effect," when used in
connection with the Company, means any change, event, circumstance or effect (i)
that is or could reasonably be expected to be materially adverse to the
properties, business, results of operations or condition (financial or
otherwise) of the Company, other than any change, event, circumstance or effect
arising out of general economic conditions generally affecting the mortgage
software or enterprise application integration market or (ii) that does or could
reasonably be expected to impair the ability of the Company to consummate the
transactions contemplated hereby.
"Material Adverse Effect," when used in connection with MergerCo, means any
change, event, circumstance or effect (i) that is or could reasonably be
expected to be materially adverse to the properties, business, results of
operations or condition (financial or otherwise) of MergerCo, other than any
change, event, circumstance or effect arising out of general economic conditions
generally affecting the financial markets or (ii) that does or could reasonably
be expected to impair the ability of MergerCo to consummate the transactions
contemplated hereby.
Material Contract. "Material Contract" shall mean any of the following:
(a) any Contract relating to the employment of, or the performance of
services by, any employee or consultant involving compensation in excess of
$100,000 per annum, and any Contract pursuant to which the Company is or
may become obligated to make any severance, termination or similar payment
(other than payments of salary) in excess of $75,000, to any current or
former employee or director;
(b) any Contract (i) with any customer of the Company involving future
payments to the Company in excess of $100,000 and (ii) with respect to the
distribution or marketing of any product of the Company involving future
payments to or from the Company in excess of $100,000;
(c) any Contract which provides for indemnification of any officer,
director, employee or agent;
(d) any Contract imposing any restriction on the right or ability of
the Company (i) to compete with any other Person; (ii) to acquire any
product or other asset or any services from any other Person, to sell any
product or other asset to or perform any services for any other Person or
to transact business or deal in any other manner with any other Person; or
(iii) develop or distribute any product, except in each case where such
restriction is not material to the business of the Company;
(e) any Contract (i) relating to the acquisition, issuance, voting,
registration, sale or transfer of any securities; (ii) providing any Person
with any preemptive right, right of participation, right of maintenance or
any similar right with respect to any securities; or (iii) providing the
Company with any right of first refusal with respect to, or right to
repurchase or redeem, any securities;
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(f) any joint venture agreement, partnership agreement, profit-sharing
agreement, cost-sharing agreement, loss-sharing agreement or similar
Contract, or any Contract that creates or grants to any Person any stock
appreciation right, phantom stock right or similar right or interest;
(g) any Contract requiring that the Company give any notice or provide
any information to any Person prior to accepting any Acquisition Proposal;
and
(h) any Contract that contemplates or involves the payment or delivery
of cash or other consideration in an amount or having a value in excess of
$100,000 in the aggregate, or contemplates or involves the delivery of
products or performance of services having a value in excess of $100,000 in
the aggregate.
Merger Consideration. "Merger Consideration" shall have the meaning set
forth in Section 1.5(a)(iii).
MergerCo. "MergerCo" shall mean Terlin, Inc., a Washington corporation.
NASD. "NASD" shall mean the National Association of Securities Dealers,
Inc.
Order. "Order" shall mean any:
(a) order, judgment, injunction, edict, decree, ruling, pronouncement,
determination, decision, opinion, verdict, sentence, subpoena, writ or
award that is, has been or may in the future be issued, made, entered,
rendered or otherwise put into effect by or under the authority of any
court, administrative agency or other Governmental Body or any arbitrator
or arbitration panel; or
(b) Contract with any Governmental Body that is, has been or may in
the future be entered into in connection with any Proceeding.
Ordinary Course of Business. An action taken by or on behalf of the
Company shall not be deemed to have been taken in the "Ordinary Course of
Business" unless:
(a) such action is recurring in nature, is consistent with the
Company's past practices and is taken in the ordinary course of the
Company's normal day-to-day operations; and
(b) such action is not required to be authorized by the Company's
shareholders, board of directors or any committee of such board of
directors and does not require any other separate or special authorization
of any nature, it being understood that approval by the Company's board of
directors in and of itself shall not be indicative that an action by or on
behalf of the Company was not in the "Ordinary Course of Business."
Past Benefit Plan. "Past Benefit Plan" shall mean any Employee Benefit
Plan (other than a Current Benefit Plan):
(a) of which the Company or any ERISA Affiliate has ever been a "plan
sponsor" (as defined in Section 3(16)(B) of ERISA) or that otherwise has at
any time been established, adopted, maintained or sponsored by the Company
or by any ERISA Affiliate;
(b) in which the Company or any ERISA Affiliate has ever participated;
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(c) with respect to which the Company or any ERISA Affiliate has ever
made, or has ever been required or permitted to make, any contribution; or
(d) with respect to which the Company or any ERISA Affiliate has ever
been subject to any Liability.
Person. "Person" shall mean any individual, Entity or Governmental Body.
Pre-Closing Period. "Pre-Closing Period" shall mean the period commencing
as of the date of the Agreement and ending on the Effective Time.
Proceeding. "Proceeding" shall mean any action, suit, litigation,
arbitration, proceeding (including any civil, criminal, administrative,
investigative or appellate proceeding and any informal proceeding), prosecution,
contest, hearing, inquiry, inquest, audit, examination or investigation that is,
has been or may in the future be commenced, brought, conducted or heard by or
before, or that otherwise has involved or may involve, any Governmental Body or
any arbitrator or arbitration panel.
Proprietary Asset. "Proprietary Asset" shall mean any patent, patent
application, trademark (whether registered or unregistered and whether or not
relating to a published work), trademark application, trade name, fictitious
business name, service mark (whether registered or unregistered), service mark
application, copyright (whether registered or unregistered), copyright
application, maskwork, maskwork application, trade secret, know-how, franchise,
system, computer software, invention, design, blueprint, proprietary product,
technology, proprietary right or other intellectual property right or intangible
asset.
Proxy Statement. "Proxy Statement" shall mean the proxy statement filed
with the SEC and to be sent to the Company's shareholders in connection with the
Company Shareholders' Meeting.
Representatives. "Representatives" shall mean officers, directors,
employees, agents, attorneys, accountants, advisors and representatives.
Required Company Shareholder Vote. "Required Company Shareholder Vote"
shall have the meaning set forth in Section 2.26.
Reverse Stock Split. "Reverse Stock Split" shall have a meaning set forth
in Section 5.2.
S-4 Registration Statement. "S-4 Registration Statement" shall mean the
registration statement on Form S-4 to be filed with the SEC by the Company in
connection with an issuance of Company Common Stock in the Merger if necessary
in the opinion of counsel to MergerCo.
Securities Act. "Securities Act" shall mean the Securities Act of 1933, as
amended.
Subsidiary. An entity shall be deemed to be a "Subsidiary" of another
Person if such Person directly or indirectly owns, beneficially or of record, an
amount of voting securities or other interests in such Entity that is sufficient
to enable such Person to elect at least a majority of the members of such
Entity's board of directors or other governing body.
Superior Offer. "Superior Offer" shall mean an unsolicited, bona fide
written offer made by a third party to acquire (by means of merger,
consolidation, share exchange, tender offer, exchange offer or otherwise) more
than 50% of the outstanding equity or
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voting securities of the Company or substantially all of the assets of the
Company on terms that the board of directors of the Company determines, in its
good faith judgment, based upon the written advice of its financial adviser, to
be more favorable to the Company's shareholders than the terms of the Merger;
provided, however, that any such offer shall not be deemed to be a "Superior
Offer" unless any financing required to consummate the transaction contemplated
by such offer is either committed or is reasonably capable of being obtained by
such third party.
Tax. "Tax" shall mean any tax (including any income tax, franchise tax,
capital gains tax, estimated tax, gross receipts tax, value-added tax, surtax,
excise tax, ad valorem tax, transfer tax, stamp tax, sales tax, use tax,
property tax, business tax, occupation tax, inventory tax, occupancy tax,
withholding tax or payroll tax), levy, assessment, tariff, impost, imposition,
toll, duty (including any customs duty), deficiency or fee, and any related
charge or amount (including any fine, penalty or interest), that is, has been or
may in the future be (a) imposed, assessed or collected by or under the
authority of any Governmental Body, or (b) payable pursuant to any tax-sharing
agreement or similar Contract.
Tax Return. "Tax Return" shall mean any return (including any information
return), report, statement, declaration, estimate, schedule, notice,
notification, form, election, certificate or other document or information that
is, has been or may in the future be filed with or submitted to, or required to
be filed with or submitted to, any Governmental Body in connection with the
determination, assessment, collection or payment of any Tax or in connection
with the administration, implementation or enforcement of or compliance with any
Legal Requirement relating to any Tax.
Triggering Event. A "Triggering Event" shall be deemed to have occurred
if: (i) the board of directors of the Company shall have failed to recommend, or
shall for any reason have withdrawn or shall have amended or modified in a
manner adverse to MergerCo its unanimous recommendation in favor of, the Merger
or approval of the Agreement; (ii) the Company shall have failed to include in
the Proxy Statement the unanimous recommendation of the board of directors of
the Company in favor of the approval of the Agreement and the Merger; (iii) the
board of directors of the Company fails to unanimously reaffirm its
recommendation in favor of approval of the Agreement and the Merger within five
(5) business days after MergerCo requests in writing that such recommendation be
reaffirmed; (iv) the board of directors of the Company shall have approved,
endorsed or recommended any Acquisition Proposal; (v) the Company shall have
entered into any letter of intent or similar document or any Contract relating
to any Acquisition Proposal (other than a confidentiality agreement as
contemplated in Section 4.3 of this Agreement or Contracts with advisors or
consultants to the Company); (vi) the Company shall have failed to hold the
Company Shareholders' Meeting as promptly as practicable and in any event to
commence such meeting within 45 days and end such meeting within 60 days after
the Proxy Statement is mailed to the Company's Shareholders; (vii) a tender or
exchange offer relating to securities of the Company shall have been commenced
and the Company shall not have sent to its security holders, within ten (10)
business days after the commencement of such tender or exchange offer, a
statement that the Company recommends rejection of such tender or exchange
offer, or (viii) an Acquisition Proposal is publicly announced, and the Company
(A) fails to issue a press release announcing its opposition to such Acquisition
Proposal within five (5) business days (but in any event prior to the Company
Shareholders' Meeting) after such Acquisition Proposal is announced or (B)
otherwise fails to actively oppose such Acquisition Proposal.
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Unaudited Interim Balance Sheet. "Unaudited Interim Balance Sheet" shall
mean the unaudited balance sheet of the Company and its subsidiaries as of
September 30, 1998 included in the Company's Form 10-Q for the quarter then
ended.
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APPENDIX B
December 29, 1998
CONFIDENTIAL
Board of Directors
Interlinq Software Corporation
11980 NE 24th Street
Bellevue, WA 98005
Dear Members of the Board:
We understand that Interlinq Software Corporation, a Washington corporation
("Interlinq" or the "Company"), and Terlin, Inc. ("Terlin" or "MergerCo"), a
Washington corporation, propose to enter into an Agreement and Plan of Merger
(the "Agreement"), pursuant to which MergerCo will be merged (the "Merger") with
and into the Company (the Company, following the Merger, is referred to herein
as the "Surviving Corporation"). Pursuant to the Merger, each outstanding share
of common stock of the Company ("Common Stock") will be converted, at the option
of the holder thereof, into the right either to receive $9.25 cash or to retain
one share of Common Stock (in the form of common stock of the Surviving
Corporation); provided, however, that such elections by Interlinq shareholders
to receive cash or retain Surviving Corporation common stock shall be adjusted
on a pro-rata basis in accordance with the Agreement to provide for the
retention by Interlinq shareholders of 1.25 million shares of Surviving
Corporation common stock in the aggregate, representing approximately 36.7% of
the common stock of the Surviving Corporation outstanding immediately subsequent
to the Merger. The aggregate amount of cash to be received, and Surviving
Corporation common stock to be retained, by Interlinq shareholders in the Merger
is collectively referred to herein as the "Consideration." Based on our
discussions with Terlin management, we also understand that, in connection with
the Merger, options and warrants to purchase Surviving Corporation common stock
may be issued which, if and when exercised, would reduce Interlinq shareholders'
percentage ownership of Surviving Corporation common stock by approximately
23.7% (on a fully diluted basis).
The common stock of the Surviving Corporation may not be listed on the
Nasdaq National Market or on any stock exchange following the Merger. The Merger
is intended to be accounted for as a Leveraged Recapitalization under Generally
Accepted Accounting Principles. The terms and conditions of the above described
Merger are more fully detailed in the Agreement.
You have requested our opinion as to whether the Consideration to be
received by Interlinq shareholders in the Merger is fair, from a financial point
of view, to Interlinq shareholders (other than Terlin and its affiliates).
Broadview International LLC focuses on providing merger and acquisition
advisory services to information technology ("IT") companies. In this capacity,
we are continually engaged in valuing such businesses, and we maintain an
extensive database of IT mergers and acquisitions for comparative purposes. We
have been engaged for the purpose of rendering an opinion in connection with the
Merger and will receive a fee upon the delivery of this opinion. We have not,
however, in the course of our representation of the Company, been asked to
consider, and this opinion does not address, the relative merits of
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the Merger as compared to other potential business strategies which the Company
could pursue.
In rendering our opinion, we have, among other things:
(1) reviewed the terms of the draft Agreement furnished to us by Terlin's
legal counsel on December 23, 1998, which, for the purposes of this
opinion, we have assumed, with your permission, to be identical in all
material respects to the agreement to be executed except for the cash
offer price. We have assumed, with your permission (and this opinion
is being rendered based on this assumption), a cash offer price of
$9.25;
(2) reviewed Interlinq's Form 10-K for the fiscal year ended June 30,
1998, including the audited financial statements included therein, and
Interlinq's Form 10-Q for its quarterly period ended September 30,
1998, including the unaudited financial statements included therein;
(3) reviewed certain internal financial and operating information relating
to Interlinq prepared and provided to us by Interlinq management,
including financial projections through June 30, 2004 for Interlinq
(which assume the Merger does not occur) as well as certain pro forma
effects on the Company's capital structure after giving effect to the
Merger;
(4) participated in discussions with Interlinq management concerning the
operations, business strategy, current financial performance and
prospects for Interlinq;
(5) discussed with Interlinq management its view of the strategic
rationale for the Merger;
(6) discussed with Terlin management its view of the strategic rationale
for the Merger;
(7) discussed with Terlin management the pro forma capital structure for
the Company;
(8) analyzed the anticipated effect of the Merger on the future financial
performance of the Company;
(9) reviewed the recent reported closing prices and trading activity for
Interlinq Common Stock;
(10) compared certain aspects of the financial performance of Interlinq
with public companies we deemed comparable;
(11) analyzed available information, both public and private, concerning
other mergers and acquisitions we believe to be comparable in whole or
in part to the Merger;
(12) reviewed recent equity research analyst reports covering Interlinq;
(13) conducted other financial studies, analyses and investigations as we
deemed appropriate for purposes of this opinion.
In rendering our opinion, we have relied, without independent verification,
on the accuracy and completeness of all the financial and other information
(including without limitation the representations and warranties contained in
the Agreement) that was
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publicly available or otherwise disclosed to us. With respect to the financial
projections examined by us, we have assumed that they were reasonably prepared
and reflected the best available estimates and good faith judgments of the
management of Interlinq as to the future performance of Interlinq, including the
pro forma financial impact of the Merger on the Company. We have also relied on
information provided by Terlin management regarding the pro forma capitalization
of the Company assuming consummation of the Merger. We have neither made nor
obtained an independent appraisal or valuation of any of Interlinq's assets.
Based upon and subject to the foregoing, we are of the opinion that the
Consideration to be received by Interlinq shareholders in the Merger is fair,
from a financial point of view, to Interlinq shareholders (other than Terlin and
its affiliates).
The foregoing opinion relates to the aggregate consideration to be received
by Interlinq shareholders in the Merger, and no opinion is rendered herein with
respect to the allocation of the Consideration among Interlinq shareholders.
Such allocation is to be determined by elections made by Interlinq shareholders
as to whether to receive cash consideration or to retain Surviving Corporation
common stock, subject to adjustment in accordance with the terms of the
Agreement.
For purposes of this opinion, we have assumed that Interlinq is not
currently involved in any material transaction other than the Merger and those
activities undertaken in the ordinary course of conducting its business. Our
opinion is necessarily based upon market, economic, financial and other
conditions as they exist and can be evaluated as of the date of this opinion,
and any change in such conditions may impact this opinion. We express no opinion
as to the price at which Interlinq Common Stock or common stock of the Surviving
Corporation will trade at any time.
This opinion speaks only as of the date hereof. It is understood that this
opinion is for the information of the Board of Directors of Interlinq in
connection with its consideration of the Merger and does not constitute a
recommendation to any Interlinq shareholder as to how such shareholder should
vote on the proposed Merger or as to whether any shareholder should elect to
retain shares in the Surviving Corporation. This opinion may not be published or
referred to, in whole or part, without our prior written permission, which shall
not be unreasonably withheld. Broadview International LLC hereby consents to
references to and the inclusion of this opinion in its entirety in the Proxy
Statement/Prospectus to be distributed to Interlinq shareholders in connection
with the Merger.
Sincerely,
Broadview International LLC
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APPENDIX C
ARTICLES OF AMENDMENT
OF
INTERLINQ SOFTWARE CORPORATION
The following Articles of Amendment are executed by the undersigned, a
Washington corporation:
1. The name of the corporation is INTERLINQ Software Corporation.
2. Article 2 of the Articles of Incorporation of the corporation is
amended to add the following paragraph:
"Effective upon filing of the Articles of Amendment with the
Secretary of State of the state of Washington, every
shares of issued and outstanding Common Stock, par value $.01 per share,
of the corporation, shall be changed and reclassified into
shares of Common Stock, par value $.01 per share, of the
corporation, thereby giving effect to a for
reverse stock split. The total authorized stock of the
corporation set forth in the first sentence of this Article 2 sets forth
the total authorized stock of the corporation after giving effect to
this - for- reverse stock split."
3. The date of the adoption of the amendment by the shareholder of
the corporation is , 1999.
4. The amendment was duly approved by the shareholder of the
corporation in accordance with the provisions of RCW 23B.10.030 and RCW
23B.10.040.
These Articles of Amendment are executed by the corporation by its duly
authorized officer.
Dated: , 1999
INTERLINQ SOFTWARE CORPORATION
By
----------------------------------
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APPENDIX D
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
INTERLINQ SOFTWARE CORPORATION
Interlinq Software Corporation, a Washington corporation, by its President
and Chief Executive Officer, hereby submits the following Amended and Restated
Articles of Incorporation of such corporation, pursuant to the provisions of RCW
23B.10.070. These Amended and Restated Articles of Incorporation supercede the
original Articles of Incorporation and all amendments thereto as of the date of
their adoption set forth on the last page hereof.
ARTICLE 1. NAME
The name of this corporation is Interlinq Software Corporation.
ARTICLE 2. SHARES
The total number of shares which the corporation is authorized to issue is
30,000,000, consisting of 30,000,000 shares of Common Stock having a par value
of $0.01 per shares.
ARTICLE 3. REGISTERED OFFICE AND AGENT
The name of the current registered agent of this corporation and the
address of its registered office are as follows:
Lawco of Washington, Inc.
1201 Third Avenue, 40th Floor
Seattle, Washington 98101-3099
ARTICLE 4. PREEMPTIVE RIGHTS
No preemptive rights shall exist with respect to shares of stock or
securities convertible into shares of stock of this corporation.
ARTICLE 5. CUMULATIVE VOTING
The right to cumulate votes in the election of Directors shall not exist
with respect to shares of stock of this corporation.
ARTICLE 6. DIRECTORS
The number of Directors of this corporation shall be determined in the
manner provided by the Bylaws and may be increased or decreased from time to
time in the manner provided therein. The Directors of this corporation may be
removed with or without cause in the manner provided by the Bylaws.
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ARTICLE 7. BYLAWS
The Board of Directors shall have the power to adopt, amend or repeal the
Bylaws of this corporation subject to approval by a majority of the Board of
Directors and by the affirmative vote of the holders of not less than a majority
of the outstanding shares; provided, however, the Board of Directors may not
repeal or amend any bylaw that the shareholders have expressly provided may not
be amended or repealed by the Board of Directors. The shareholders shall also
have the power to adopt, amend or repeal the Bylaws of this corporation by the
affirmative vote of the holders of not less than a majority of the outstanding
shares.
ARTICLE 8. AMENDMENTS TO ARTICLES OF INCORPORATION
In the case of any matter submitted to a vote of the shareholders of this
corporation for which the Washington Business Corporation Act requires (unless
the Articles of Incorporation provide otherwise) the approval of two-thirds of
the votes in each voting group entitled to be cast thereon in or for such matter
to be approved, pursuant to authority contained in the Washington Business
Corporation Act, the approval of a majority, rather than two-thirds, of the
votes in each voting group entitled to be cast on such matter shall be
sufficient for such matter to be approved. Without limiting the generality of
the foregoing, such matters are intended to include, to the extent not
inconsistent with the Washington Business Corporation Act, amendments to these
Restated Articles of Incorporation, mergers and share exchanges, sale of assets
other than in the ordinary course of business, and dissolution.
ARTICLE 9. LIMITATION OF DIRECTOR LIABILITY
To the full extent that the Washington Business Corporation Act, as it
exits on the date hereof or may hereafter be amended, permits the limitation or
elimination of the liability of Directors, a Director of this corporation shall
not be liable to this corporation or its shareholders for monetary damages for
conduct as a Director. Any amendments to or repeal of this Article 9 shall not
adversely affect any right or protection of a Director of this corporation for
or with respect to any acts or omissions of such Director occurring prior to
such amendment or repeal.
ARTICLE 10. SHAREHOLDER ACTIONS
Any action required or permitted to be taken at a shareholders' meeting may
be taken without a meeting or a vote if either:
(i) the action is taken by all shareholders entitled to vote on the
action; or
(ii) So long as this corporation is not a public company, the action
is taken by shareholders holding of record, or otherwise entitled to vote,
in the aggregate 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 on the action were present and voted.
To the extent the Washington Business Corporation Act requires prior notice
of any such action to be given to nonconsenting or nonvoting shareholders, such
notice shall be
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made prior to the date on which the action becomes effective, as required by the
Washington Business Corporation Act. The form of the notice shall be sufficient
to apprise the nonconsenting or nonvoting shareholder of the nature of the
action to be effected, in a manner approved by the directors of this corporation
or by the committee or officers to whom the board has delegated that
responsibility.
Dated:
--------------------------------------
Jiri Nechleba
President and Chief Executive Officer
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APPENDIX E
RESTATED BYLAWS
OF
INTERLINQ SOFTWARE CORPORATION
<PAGE> 182
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
SECTION 1 OFFICES..................................................... E-1
SECTION 2 SHAREHOLDERS................................................ E-1
2.1 Annual Meeting.............................................. E-1
2.2 Special Meetings............................................ E-1
2.3 Meetings by Communication Equipment......................... E-1
2.4 Date, Time and Place of Meeting............................. E-1
2.5 Notice of Meeting........................................... E-2
2.6 Business for Shareholders' Meetings......................... E-2
2.6.1 Business at Annual Meetings................................. E-2
2.6.2 Business at Special Meetings................................ E-2
2.6.3 Notice to Corporation....................................... E-2
2.7 Waiver of Notice............................................ E-3
2.8 Fixing of Record Date for Determining Shareholders.......... E-3
2.9 Voting Record............................................... E-3
2.10 Quorum...................................................... E-3
2.11 Manner of Acting............................................ E-4
2.12 Proxies..................................................... E-4
2.13 Voting of Shares............................................ E-4
2.14 Voting for Directors........................................ E-4
2.15 Action by Shareholders Without a Meeting.................... E-4
SECTION 3 BOARD OF DIRECTORS.......................................... E-5
3.1 General Powers.............................................. E-5
3.2 Number and Tenure........................................... E-5
3.3 [INTENTIONALLY OMITTED]..................................... E-5
3.4 Annual and Regular Meetings................................. E-5
3.5 Special Meetings............................................ E-5
3.6 Meetings by Communications Equipment........................ E-5
3.7 Notice of Special Meetings.................................. E-6
3.7.1 Personal Delivery........................................... E-6
3.7.2 Delivery by Mail............................................ E-6
3.7.3 Delivery by Private Carrier................................. E-6
3.7.4 Facsimile Notice............................................ E-6
3.7.5 Delivery by Telegraph....................................... E-6
3.7.6 Oral Notice................................................. E-6
3.8 Waiver of Notice............................................ E-7
3.8.1 In Writing.................................................. E-7
3.8.2 By Attendance............................................... E-7
3.9 Quorum...................................................... E-7
3.10 Manner of Acting............................................ E-7
3.11 Presumption of Assent....................................... E-7
3.12 Action by Board or Committees Without a Meeting............. E-7
3.13 Resignation................................................. E-8
3.14 Removal..................................................... E-8
3.15 Vacancies................................................... E-8
3.16 Executive and Other Committees.............................. E-8
3.16.1 Creation of Committees...................................... E-8
3.16.2 Authority of Committees..................................... E-8
</TABLE>
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TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
3.16.3 Audit Committee............................................. E-9
3.16.4 Quorum and Manner of Acting................................. E-9
3.16.5 Minutes of Meetings......................................... E-9
3.16.6 Resignation................................................. E-9
3.16.7 Removal..................................................... E-9
3.16.8 Compensation Committee...................................... E-10
3.17 Compensation................................................ E-10
SECTION 4 OFFICERS.................................................... E-10
4.1 Appointment and Term........................................ E-10
4.2 Resignation................................................. E-10
4.3 Removal..................................................... E-11
4.4 Contract Rights of Officers................................. E-11
4.5 Chairman of the Board....................................... E-11
4.6 President................................................... E-11
4.7 Vice President.............................................. E-11
4.8 Secretary................................................... E-11
4.9 Treasurer................................................... E-12
4.10 Salaries.................................................... E-12
SECTION 5 CONTRACTS, LOANS, CHECKS AND DEPOSITS....................... E-12
5.1 Contracts................................................... E-12
5.2 Loans to the Corporation.................................... E-12
5.3 Checks, Drafts, Etc......................................... E-12
5.4 Deposits.................................................... E-12
SECTION 6 CERTIFICATES FOR SHARES AND THEIR TRANSFER.................. E-13
6.1 Issuance of Shares.......................................... E-13
6.2 Certificates for Shares..................................... E-13
6.3 Stock Records............................................... E-13
6.4 Restriction on Transfer..................................... E-13
6.5 Transfer of Shares.......................................... E-14
6.6 Lost or Destroyed Certificates.............................. E-14
SECTION 7 BOOKS AND RECORDS........................................... E-14
SECTION 8 ACCOUNTING YEAR............................................. E-15
SECTION 9 SEAL........................................................ E-15
SECTION 10 INDEMNIFICATION............................................. E-15
10.1 Right to Indemnification.................................... E-15
10.2 Restrictions on Indemnification............................. E-16
10.3 Advancement of Expenses..................................... E-16
10.4 Right of Indemnitee to Bring Suit........................... E-16
10.5 Procedures Exclusive........................................ E-16
10.6 Nonexclusivity of Rights.................................... E-16
10.7 Insurance, Contracts and Funding............................ E-17
Indemnification of Employees and Agents of the
10.8 Corporation................................................. E-17
10.9 Persons Serving Other Entities.............................. E-17
SECTION 11 AMENDMENTS.................................................. E-17
</TABLE>
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RESTATED BYLAWS
OF
INTERLINQ SOFTWARE CORPORATION
SECTION 1
OFFICES
The principal office of the corporation shall be located at the principal
place of business or such other place as the Board of Directors (the "Board")
may designate. The corporation may have such other offices, either within or
without the State of Washington, as the Board may designate or as the business
of the corporation may require from time to time.
SECTION 2
SHAREHOLDERS
2.1 ANNUAL MEETING
The annual meeting of the shareholders shall be held each year, for the
purpose of electing Directors and transacting such other business as may
properly come before the meeting, on such date between the 90th day and the
180th day after the close of the corporation's fiscal year and at such place and
time as the Board shall by resolution determine. If the day fixed for the annual
meeting is a legal holiday at the place of the meeting, the meeting shall be
held on the next succeeding business day. If the annual meeting is not held on
the date designated therefor, the Board shall cause the meeting to be held as
soon thereafter as may be convenient.
2.2 SPECIAL MEETINGS
The Chairman of the Board, the President or the Board may call special
meetings of the shareholders for any purpose. Further, a special meeting of the
shareholders shall be held if the holders of not less than 25% of all the votes
entitled to be cast on any issue proposed to be considered at such special
meeting have dated, signed and delivered to the Secretary one or more written
demands for such meeting, describing the purpose or purposes for which it is to
be held; provided, however, that upon qualification of the corporation as a
"public company" under Section 23B.01.400 of the Washington Business Corporation
Act the percentage of votes required to call a special meeting shall be 30.
2.3 MEETINGS BY COMMUNICATION EQUIPMENT
Shareholders may participate in any meeting of the shareholders by any
means of communication by which all persons participating in the meeting can
hear each other during the meeting. Participation by such means shall constitute
presence in person at a meeting.
2.4 DATE, TIME AND PLACE OF MEETING
Except as otherwise provided herein, all meetings of shareholders,
including those held pursuant to demand by shareholders as provided herein,
shall be held on such date and at
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such time and place, within or without the State of Washington, designated by or
at the direction of the Board.
2.5 NOTICE OF MEETING
Written notice stating the place, day and hour of the meeting and, in the
case of a special meeting, the purpose or purposes for which the meeting is
called shall be given by or at the direction of the Board, the Chairman of the
Board, the President or the Secretary to each shareholder entitled to notice of
or to vote at the meeting not less than 10 nor more than 60 days before the
meeting, except that notice of a meeting to act on an amendment to the Articles
of Incorporation, a plan of merger or share exchange, the sale, lease, exchange
or other disposition of all or substantially all of the corporation's assets
other than in the regular course of business or the dissolution of the
corporation shall be given not less than 20 or more than 60 days before such
meeting. If an annual or special shareholders' meeting is adjourned to a
different date, time or place, no notice of the new date, time or place is
required if they are announced at the meeting before adjournment. If a new
record date for the adjourned meeting is or must be fixed, notice of the
adjourned meeting must be given to shareholders entitled to notice of or to vote
as of the new record date.
Such notice may be transmitted by mail, private carrier, personal delivery,
telegraph, teletype or communications equipment that transmits a facsimile of
the notice. If these forms of written notice are impractical in the view of the
Board, the Chairman of the Board, the President or the Secretary, written notice
may be transmitted by an advertisement in a newspaper of general circulation in
the area of the corporation's principal office. If such notice is mailed, it is
effective when deposited in the official government mail, first-class postage
prepaid, properly addressed to the shareholder at such shareholder's address as
it appears in the corporation's current record of shareholders. Notice given in
any other manner is effective when dispatched to the shareholder's address,
telephone number or other number appearing on the records of the corporation.
Any notice given by publication is effective five days after first publication.
2.6 BUSINESS FOR SHAREHOLDERS' MEETINGS
2.6.1 BUSINESS AT ANNUAL MEETINGS
In addition to the election of directors, any proper business may be
transacted at an annual meeting of shareholders.
2.6.2 BUSINESS AT SPECIAL MEETINGS
At any special meeting of the shareholders, only such business as is
specified in the notice of such special meeting given by or at the direction of
the person or persons calling such meeting, in accordance with Section 2.5
hereof, shall come before such meeting.
2.6.3 NOTICE TO CORPORATION
Any written notice required to be delivered by a shareholder to the
corporation pursuant to Section 2.2 or subsection 2.6.2 hereof must be given,
either by personal delivery or by registered or certified mail, postage prepaid,
to the Secretary at the corporation's principal office.
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2.7 WAIVER OF NOTICE
Whenever any notice is required to be given to any shareholder under the
provisions of these Bylaws, the Restated Articles of Incorporation or the
Washington Business Corporation Act, a waiver thereof in writing, signed by the
person or persons entitled to such notice and delivered to the corporation,
whether before or after the date and time of the meeting, shall be deemed
equivalent to the giving of such notice. Further, notice of the time, place and
purpose of any meeting will be deemed to be waived by any shareholder by
attendance thereat in person or by proxy, unless such shareholder at the
beginning of the meeting objects to holding the meeting or transacting business
at the meeting.
2.8 FIXING OF RECORD DATE FOR DETERMINING SHAREHOLDERS
For the purpose of determining shareholders entitled (a) to notice of or to
vote at any meeting of shareholders or any adjournment thereof, (b) to demand a
special meeting, or (c) to receive payment of any dividend, or in order to make
a determination of shareholders for any other purpose, the Board may fix a
future date as the record date for any such determination. Such record date
shall be not more than 70 days, and, in the case or a meeting of shareholders,
not less than 10 days, prior to the date on which the particular action
requiring such determination is to be taken. If no record date is fixed for the
determination of shareholders entitled to notice of or to vote at a meeting, the
record date shall be the day immediately preceding the date on which notice of
the meeting is first given to shareholders. Such a determination shall apply to
any adjournment of the meeting unless the Board fixes a new record date, which
it shall do if the meeting is adjourned to a date more than 120 days after the
date fixed for the original meeting. If no record date is set for the
determination of shareholders entitled to receive payment of any stock dividend
or distribution (other than one involving a purchase, redemption or other
acquisition of the corporation's shares) the record date shall be the date the
Board authorizes the stock dividend or distribution.
2.9 VOTING RECORD
At least ten days before each meeting of shareholders, an alphabetical list
of the shareholders entitled to notice of such meeting shall be made, arranged
by voting group and by each class or series of shares therein, with the address
of and number of shares held by each shareholder. This record shall be kept at
the principal office of the corporation for ten days prior to such meeting, and
shall be kept open at such meeting, for the inspection of any shareholder or any
shareholder's agent.
2.10 QUORUM
A majority of the votes entitled to be cast on a matter by the holders of
shares that, pursuant to the Restated Articles of Incorporation or the
Washington Business Corporation Act, are entitled to vote and be counted
collectively upon such matter, represented in person or by proxy shall
constitute a quorum of such shares at a meeting of shareholders. If less than a
majority of such votes are represented at a meeting, the holders of a majority
of the votes so represented may adjourn the meeting from time to time without
further notice tithe new date, time or place is announced at the meeting before
adjournment. Any business may be transacted at a reconvened meeting that might
have been transacted at the meeting as originally called, provided a quorum is
present or represented thereat. Once a share is represented for any purpose at a
meeting other than solely to object to holding
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the meeting or transacting business thereat, it is deemed present for quorum
purposes for the remainder of the meeting and any adjournment thereof (unless a
new record date is or must be set for the adjourned meeting) notwithstanding the
withdrawal of enough shareholders to leave less than a quorum.
2.11 MANNER OF ACTING
If a quorum is present, action on a matter other than the election of
Directors shall be approved if the votes cast in favor of the action by the
shares entitled to vote and be counted collectively upon such matter exceed the
votes cast against such action by the shares entitled to vote and be counted
collectively thereon, unless the Restated Articles of Incorporation or the
Washington Business Corporation Act requires a greater number of affirmative
votes.
2.12 PROXIES
A shareholder may vote by proxy executed in writing by the shareholder or
by his or her attorney-in-fact or agent. Such proxy shall be effective when
received by the Secretary or other officer or agent authorized to tabulate
votes. A proxy shall become invalid 11 months after the date of its execution,
unless otherwise provided in the proxy. A proxy with respect to a specified
meeting shall entitle the holder thereof to vote at any reconvened meeting
following adjournment of such meeting but shall not be valid after the final
adjournment thereof.
2.13 VOTING OF SHARES
Except as provided in the Restated Articles of Incorporation or in Section
2.14 hereof, each outstanding share entitled to vote with respect to a matter
submitted to a meeting of shareholders shall be entitled to one vote upon such
matter.
2.14 VOTING FOR DIRECTORS
Each shareholder entitled to vote at an election of Directors may vote, in
person or by proxy, the number of shares owned by such shareholder for as many
persons as there are Directors to be elected and for whose election such
shareholder has a right to vote. Unless otherwise provided in the Restated
Articles of Incorporation, the candidates elected shall be those receiving the
largest number of votes cast, up to the number of Directors to be elected.
2.15 ACTION BY SHAREHOLDERS WITHOUT A MEETING
Any action which could be taken at a meeting of the shareholders may be
taken without a meeting if one or more written consents setting forth the action
so taken are signed by all shareholders entitled to vote on the action and are
delivered to the corporation. If not otherwise fixed by the Board, the record
date for determining shareholders entitled to take action without a meeting is
the date the first shareholder signs the consent. A shareholder may withdraw a
consent only by delivering a written notice of withdrawal to the corporation
prior to the time that all consents are in the possession of the corporation.
Action taken by written consent of shareholders without a meeting is effective
when all consents are in the possession of the corporation, unless the consent
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specifies a later effective date. Any such consent shall be inserted in the
minute book as if it were the minutes of a meeting of the shareholders.
SECTION 3
BOARD OF DIRECTORS
3.1 GENERAL POWERS
All corporate powers shall be exercised by or under the authority of, and
the business and affairs of the corporation shall be managed under the direction
of, the Board, except as may be otherwise provided in these Bylaws, the Restated
Articles of Incorporation or the Washington Business Corporation Act.
3.2 NUMBER AND TENURE
The Board shall be composed of not less than three nor more than nine
Directors, the specific number to be set by resolution of the Board. The number
of Directors may be changed from time to time by amendment to these Bylaws, but
no decrease in the number of Directors shall have the effect of shortening the
term of any incumbent Director. Directors need not be shareholders of the
corporation or residents of the State of Washington and need not meet any other
qualifications.
Unless a Director dies, resigns or is removed, his or her term of office
shall expire at the next annual meeting of shareholders; provided, however,that
a Director shall serve until his or her successor is elected and qualified or
until there is a decrease in the authorized number of Directors.
3.3 [INTENTIONALLY OMITTED]
3.4 ANNUAL AND REGULAR MEETINGS
An annual Board meeting shall be held without notice immediately after and
at the same place as the annual meeting of shareholders. By resolution the
Board, or any, committee thereof, may specify the time and place either within
or without the State of Washington for holding regular meetings thereof without
notice other than such resolution.
3.5 SPECIAL MEETINGS
Special meetings of the Board or any committee designated by the Board may
be called by or at the request of the Chairman of the Board, the President, the
Secretary or, in the case of special Board meetings, any Director and, in the
case of any special meeting of any committee designated by the Board, by any
Director who is a member of such committee. The person or persons authorized to
call special meetings may fix any place either within or without the State of
Washington as the place for holding any special Board or committee meeting
called by them.
3.6 MEETINGS BY COMMUNICATIONS EQUIPMENT
Members of the Board or any committee designated by the Board may
participate in a meeting of such Board or committee by, or conduct the meeting
through the use of, any
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means of communication by which all Directors participating in the meeting can
hear each other during the meeting. Participation by such means shall constitute
presence in person at a meeting.
3.7 NOTICE OF SPECIAL MEETINGS
Notice of a special Board or committee meeting stating the place, day and
hour of the meeting shall be given to a Director in writing or orally. Neither
the business to be transacted at, nor the purpose of, any special meeting need
be specified in the notice of such meeting.
3.7.1 PERSONAL DELIVERY
If notice is given by personal delivery, the notice shall be effective if
delivered to a Director at least two days before the meeting.
3.7.2 DELIVERY BY MAIL
If notice is delivered by mail, the notice shall be deemed effective if
deposited in the official government mail at least five days before the meeting,
properly addressed to a Director at his or her address shown on the records of
the corporation, with postage thereon prepaid.
3.7.3 DELIVERY BY PRIVATE CARRIER
If notice is given by private carrier, the notice shall be deemed effective
when dispatched to a Director at his or her address shown on the records of the
corporation at least three days before the meeting.
3.7.4 FACSIMILE NOTICE
If notice is delivered by wire or wireless equipment which transmits a
facsimile of the notice, the notice shall be deemed effective when dispatched at
least two days before the meeting to a Director at his or her telephone number
or other number appearing on the records of the corporation.
3.7.5 DELIVERY BY TELEGRAPH
If notice is delivered by telegraph, the notice shall be deemed effective
if the content thereof is delivered to the telegraph company for delivery to a
Director at his or her address shown on the records of the corporation at least
three days before the meeting.
3.7.6 ORAL NOTICE
If notice is delivered orally, by telephone or in person, the notice shall
be deemed effective if personally given to the Director at least two days before
the meeting.
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3.8 WAIVER OF NOTICE
3.8.1 IN WRITING
Whenever any notice is required to be given to any Director under the
provisions of these Bylaws, the Restated Articles of Incorporation or the
Washington Business Corporation Act, a waiver thereof in writing, signed by the
person or persons entitled to such notice and delivered to the corporation,
whether before or after the date and time of the meeting, shall be deemed
equivalent to the giving of such notice. Neither the business to be transacted
at, nor the purpose of. any regular or special meeting of the Board or any
committee designated by the Board need be specified in the waiver of notice of
such meeting.
3.8.2 BY ATTENDANCE
A Director's attendance at or participation in a Board or committee meeting
shall constitute a waiver of notice of such meeting, unless the Director at the
beginning of the meeting, or promptly upon his or her arrival, objects to
holding the meeting or transacting business thereat and does not thereafter vote
for or assent to action token at the meeting.
3.9 QUORUM
A majority of the number of Directors fixed by or in the manner provided in
these Bylaws shall constitute a quorum for the transaction of business at any
Board meeting but, if less than a majority are present at a meeting, a majority
of the Directors present may adjourn the meeting from time to time without
further notice.
3.10 MANNER OF ACTING
If a quorum is present when the vote is taken, the act of the majority of
the Directors present at a Board meeting shall be the act of the Board, unless
the vote of a greater number is required by these Bylaws, the Restated Articles
of Incorporation or the Washington Business Corporation Act.
3.11 PRESUMPTION OF ASSENT
A Director of the corporation who is present at a Board or committee
meeting at which any action is taken shall be deemed to have assented to the
action taken unless (a) the Director objects at the beginning of the meeting, or
promptly upon the Director's arrival, to holding the meeting or transacting any
business thereat, (b) the Director's dissent or abstention from the action taken
is entered in the minutes of the meeting, or (c) the Director delivers written
notice of the Director's dissent or abstention to the presiding officer of the
meeting before its adjournment or to the corporation within a reasonable time
after adjournment of the meeting. The right of dissent or abstention is not
available to a Director who votes in favor of the action taken.
3.12 ACTION BY BOARD OR COMMITTEES WITHOUT A MEETING
Any action which could be taken at a meeting of the Board or of any
committee created by the Board may be taken without a meeting if one or more
written consents setting forth the action so taken are signed by each of the
Directors or by each committee
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member either before or after the action is taken and delivered to the
corporation. Action taken by written consent of Directors without a meeting is
effective when the last Director signs the consent, unless the consent specifies
a later effective date. Any such written consent shall be inserted in the minute
book as if it were the minutes of a Board or a committee meeting.
3.13 RESIGNATION
Any Director may resign at any time by delivering written notice to the
Chairman of the Board, the President, the Secretary or the Board. Any such
resignation is effective upon delivery thereof unless the notice of resignation
specifies a later effective date and, unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective.
3.14 REMOVAL
At any meeting of shareholders called expressly for that purpose, one or
more members of the Board, including the entire Board, may be removed with or
without cause (unless the Restated Articles of Incorporation permit removal for
cause only) by the holders of the shares entitled to elect the Director or
Directors whose removal is sought if the number of votes cast to remove the
Director exceeds the number of votes cast not to remove the Director.
3.15 VACANCIES
Unless the Restated Articles of Incorporation provide otherwise, any
vacancy occurring on the Board may be filled by the shareholders, the Board or,
if the Directors in office constitute fewer than a quorum, by the affirmative
vote of a majority of the remaining Directors. A Director elected to fill a
vacancy shall serve only until the next election of Directors by the
shareholders.
3.16 EXECUTIVE AND OTHER COMMITTEES
3.16.1 CREATION OF COMMITTEES
The Board, by resolution adopted by the greater of (i) a majority of the
Directors then in office and (ii) the number of Directors required to take
action in accordance with these Bylaws, may create standing or temporary
committees, including an Executive Committee, and appoint members thereto from
its own number and invest such committees with such powers as it may see fit,
subject to such conditions as may be prescribed by the Board, these Bylaws and
applicable law. Each committee must have two or more members, who shall serve at
the pleasure of the Board.
3.16.2 AUTHORITY OF COMMITTEES
Each committee shall have and may exercise all of the authority of the
Board to the extent provided in the resolution of the Board creating the
committee and any subsequent resolutions pertaining thereto and adopted in like
manner, except that no such committee shall have the authority to: (a) authorize
or approve a distribution except according to a general formula or method
prescribed by the Board, (b) approve or propose to shareholders actions or
proposals required by the Washington Business Corporation Act to
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be approved by shareholders, (c) fill vacancies on the Board or any committee
thereof, (d) adopt, amend or repeal Bylaws, (e) amend the Restated Articles of
Incorporation pursuant to Section 23B.10.020 of the Washington Business
Corporation Act, (f) approve a plan of merger not requiring shareholder
approval, or (g) authorize or approve the issuance or sale or contract for sale
of shares, or determine the designation and relative rights, preferences and
limitations of a class or series of shares, except that the Board may authorize
a committee or a senior executive officer of the corporation to do so within
limits specifically prescribed by the Board.
3.16.3 AUDIT COMMITTEE
In addition to any committees appointed pursuant to this Section 3.16,
there shall be an Audit Committee, appointed annually by the Board, consisting
of at least two Directors who are not members of management of the corporation.
It shall be the responsibility of the Audit Committee to review the scope and
results of the annual independent audit of books and records of the corporation,
to review compliance with all corporate policies which have been approved by the
Board and to discharge such other responsibilities as may from time to time be
assigned to it by the Board. The Audit Committee shall meet at such times and
places as the members deem advisable, and shall make such recommendations to the
Board as they consider appropriate.
3.16.4 QUORUM AND MANNER OF ACTING
A majority of the number of Directors comprising any committee of the
Board, as established and fixed by resolution of the Board, shall constitute a
quorum for the transaction of business at any meeting of such committee but, if
less than a majority are present at a meeting, a majority of such Directors
present may adjourn the meeting from time to time without further notice. Except
as may be otherwise provided in the Washington Business Corporation Act, if a
quorum is present when the vote is taken the act of a majority of the members
present shall be the act of the committee.
3.16.5 MINUTES OF MEETINGS
All committees shall keep regular minutes of their meetings and shall cause
them to be recorded in books kept for that purpose.
3.16.6 RESIGNATION
Any member of any committee may resign at any time by delivering written
notice thereof to the Chairman of the Board, the President, the Secretary or the
Board. Any such resignation is effective upon delivery thereof, unless the
notice of resignation specifies a later effective date, and the acceptance of
such resignation shall not be necessary to make it effective.
3.16.7 REMOVAL
The Board may remove any member of any committee elected or appointed by it
but only by the affirmative vote of the greater of a majority of the Directors
then in office and the number of Directors required to take action in accordance
with these Bylaws.
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3.16.8 COMPENSATION COMMITTEE
The Board may, in its discretion, designate a Compensation Committee
consisting of not less than two Directors as it may from time to time determine.
The duties of the Compensation Committee shall consist of the following: (a) to
establish and review periodically, but not less than annually, the compensation
of the officers of the corporation and to make recommendations concerning such
compensation to the Board; (b) to consider incentive compensation plans for the
employees of the corporation; (c) to carry out the duties assigned to the
Compensation Committee under any stock option plan or other plan approved by the
corporation; (d) to consult with the President concerning any compensation
matters deemed appropriate by the President or the Compensation Committee; and
(e) such other duties as shall be assigned to the Compensation Committee by the
Board.
3.17 COMPENSATION
By Board resolution, Directors and committee members may be paid their
expenses, if any, of attendance at each Board or committee meeting, or a fixed
sum for attendance at each Board or committee meeting, or a stated salary as
Director or a committee member, or a combination of the foregoing. No such
payment shall preclude any Director or committee member from serving the
corporation in any other capacity and receiving compensation therefor.
SECTION 4
OFFICERS
4.1 APPOINTMENT AND TERM
The officers of the corporation shall be those officers appointed from time
to time by the Board or by any other officer empowered to do so. The Board shall
have sole power and authority to appoint executive officers. As used herein, the
term "executive officer" shall mean the Chairman of the Board, the President,
any Vice President in charge of a principal business unit, division or function
or any other officer who performs a policy-making function. The Board or the
President may appoint such other officers and assistant officers to hold office
for such period, have such authority and perform such duties as may be
prescribed. The Board may delegate to any other officer the power to appoint any
subordinate officers and to prescribe their respective terms of office,
authority and duties. Any two or more offices may be held by the same person.
Unless an officer dies, resigns or is removed from office, he or she shall hold
office until his or her successor is appointed.
4.2 RESIGNATION
Any officer may resign at any time by delivering written notice thereof to
the corporation. Any such resignation is effective upon delivery thereof, unless
the notice of resignation specifies a later effective date, and, unless
otherwise specified therein, the acceptance of such resignation shall not be
necessary to make it effective.
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4.3 REMOVAL
Any officer may be removed by the Board at any time, with or without cause.
An officer or assistant officer, if appointed by another officer, may be removed
by any officer authorized to appoint officers or assistant officers.
4.4 CONTRACT RIGHTS OF OFFICERS
The appointment of an officer does not itself create contract rights.
4.5 CHAIRMAN OF THE BOARD
If appointed, the Chairman of the Board shall perform such duties as shall
be assigned to him or her by the Board from time to time and shall preside over
meetings of the Board and shareholders unless another officer is appointed or
designated by the Board as Chairman of such meetings.
4.6 PRESIDENT
If appointed, the President shall be the chief executive officer of the
corporation unless some other officer is so designated by the Board, shall
preside over meetings of the Board and shareholders in the absence of a Chairman
of the Board, and, subject to the Board's control, shall supervise and control
all of the assets, business and affairs of the corporation. In general, the
President shall perform all duties incident to the office of President and such
other duties as are prescribed by the Board from time to time. If no Secretary
has been appointed, the President shall have responsibility for the preparation
of minutes of meetings of the Board and shareholders and for authentication of
the records of the corporation.
4.7 VICE PRESIDENT
In the event of the death of the President or his or her inability to act,
the Vice President (or if there is more than one Vice President, the Vice
President who was designated by the Board as the successor to the President, or
if no Vice President is so designated, the Vice President first elected to such
office) shall perform the duties of the President, except as may be limited by
resolution of the Board, with all the powers of and subject to all the
restrictions upon the President. Vice Presidents shall perform such other duties
as from time to time may be assigned to them by the President or by or at the
direction of the Board.
4.8 SECRETARY
If appointed, the Secretary shall be responsible for preparation of minutes
of the meetings of the Board and shareholders, maintenance of the corporation
records and stock registers, and authentication of the corporation's records and
shall in general perform all duties incident to the office of Secretary and such
other duties as from time to time may be assigned to him or her by the President
or by or at the direction of the Board. In the absence of the Secretary, an
Assistant Secretary may perform the duties of the Secretary.
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4.9 TREASURER
If appointed, the Treasurer shall have charge and custody of and be
responsible for all funds and securities of the corporation, receive and give
receipts for moneys due and payable to the corporation from any source
whatsoever, and deposit all such moneys in the name of the corporation in banks,
trust companies or other depositories selected in accordance with the provisions
of these Bylaws, and in general perform all of the duties incident to the office
of Treasurer and such other duties as from time to time may be assigned to him
or her by the President or by or at the direction of the Board. In the absence
of the Treasurer, an Assistant Treasurer may perform the duties of the
Treasurer. If required by the Board, the Treasurer or any Assistant Treasurer
shall give a bond for the faithful discharge of his or her duties in such amount
and with such surety or sureties as the Board shall determine.
4.10 SALARIES
The salaries of the officers shall be fixed from time to time by the Board
or by any person or persons to whom the Board has delegated such authority. No
officer shall be prevented from receiving such salary by reason of the fact that
he or she is also a Director of the corporation.
SECTION 5
CONTRACTS, LOANS, CHECKS AND DEPOSITS
5.1 CONTRACTS
The Board may authorize any officer or officers, or agent or agents, to
enter into any contract or execute and deliver any instrument in the name of and
on behalf of the corporation. Such authority may be general or confined to
specific instances.
5.2 LOANS TO THE CORPORATION
No loans shall be contracted on behalf of the corporation and no evidences
of indebtedness shall be issued in its name unless authorized by a resolution of
the Board. Such authority may be general or confined to specific instances.
5.3 CHECKS, DRAFTS, ETC.
All checks, drafts or other orders for the payment of money, notes or other
evidences of indebtedness issued in the name of the corporation shall be signed
by such officer or officers, or agent or agents, of the corporation and in such
manner as is from time to time determined by resolution of the Board.
5.4 DEPOSITS
All funds of the corporation not otherwise employed shall be deposited from
time to time to the credit of the corporation in such banks, trust companies or
other depositories as the Board may select.
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SECTION 6
CERTIFICATES FOR SHARES AND THEIR TRANSFER
6.1 ISSUANCE OF SHARES
No shares of the corporation shall be issued unless authorized by the Board
or by a committee designated by the Board to the extent such committee is
empowered to do so.
6.2 CERTIFICATES FOR SHARES
Certificates representing shares of the corporation shall be signed, either
manually or in facsimile, by the Chairman of the Board, the President or any
Vice President and by the Treasurer or any Assistant Treasurer or the Secretary
or any Assistant Secretary and shall include on their face written notice of any
restrictions which may be imposed on the transferability of such shares. All
certificates shall be consecutively numbered or otherwise identified.
6.3 STOCK RECORDS
The stock transfer books shall be kept at the principal office of the
corporation or at the office of the corporation's transfer agent or registrar.
The name and address of each person to whom certificates for shares are issued,
together with the class and number of shares represented by each such
certificate and the date of issue thereof, shall be entered on the stock
transfer books of the corporation. The person in whose name shares stand on the
books of the corporation shall be deemed by the corporation to be the owner
thereof for all purposes.
6.4 RESTRICTION ON TRANSFER
Except to the extent that the corporation has obtained an opinion of
counsel acceptable to the corporation that transfer restrictions are not
required under applicable securities laws, or has otherwise satisfied itself
that such transfer restrictions are not required, all certificates representing
shares of the corporation shall bear a legend on the face of the certificate, or
on the reverse of the certificate if a reference to the legend is contained on
the face, which reads substantially as follows:
"The securities evidenced by this certificate have not been registered
under the Securities Act of 1933, as amended, or any applicable state law,
and no interest therein may be sold, distributed, assigned, offered,
pledged or otherwise transferred unless (a) there is an effective
registration statement under such Act and applicable state securities laws
covering any such transaction involving said securities or (b) this
corporation receives an opinion of legal counsel for the holder of these
securities (concurred in by legal counsel for this corporation) stating
that such transaction is exempt from registration or this corporation
otherwise satisfies itself that such transaction is exempt from
registration. Neither the offering of the securities nor any offering
materials have been reviewed by any administrator under the Securities Act
of 1933, as amended, or any applicable state law."
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6.5 TRANSFER OF SHARES
The transfer of shares of the corporation shall be made only on the stock
transfer books of the corporation pursuant to authorization or document of
transfer made by the holder of record thereof or by his or her legal
representative, who shall furnish proper evidence of authority to transfer, or
by his or her attorney-in-fact authorized by power of attorney duly executed and
filed with the Secretary of the corporation. All certificates surrendered to the
corporation for transfer shall be cancelled and no new certificate shall be
issued until the former certificates for a like number of shares shall have been
surrendered and cancelled.
6.6 LOST OR DESTROYED CERTIFICATES
In the case of a lost, destroyed or mutilated certificate, a new
certificate may be issued therefor upon such terms and indemnity to the
corporation as the Board may prescribe.
SECTION 7
BOOKS AND RECORDS
The corporation shall:
(a) Keep as permanent records minutes of all meetings of its shareholders
and the Board, a record of all actions taken by the shareholders or the Board
without a meeting, and a record of all actions taken by a committee of the Board
exercising the authority of the Board on behalf of the corporation;
(b) Maintain appropriate accounting records;
(c) Maintain a record of its shareholders, in a form that permits
preparation of a list of the names and addresses of all shareholders, in
alphabetical order by class of shares showing the number and class of shares
held by each; provided, however, such record may be maintained by an agent of
the corporation;
(d) Maintain its records in written form or in another form capable of
conversion into written form within a reasonable time; and
(e) Keep a copy of the following records at its principal office:
(1) the Restated Articles of Incorporation and all amendments thereto
as currently in effect;
(2) the Bylaws and all amendments thereto as currently in effect;
(3) the minutes of all meetings of shareholders and records of all
action taken by shareholders without a meeting, for the past three years;
(4) the financial statements described in Section 23B. 16.200(1) of
the Washington Business Corporation Act, for the past three years;
(5) all written communications to shareholders generally within the
past three years;
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(6) a list of the names and business addresses of the current
Directors and officers; and
(7) the most recent annual report delivered to the Washington
Secretary of State.
SECTION 8
ACCOUNTING YEAR
The accounting year of the corporation shall be the twelve months ending
June 30 each year, provided that if a different accounting year is at any time
selected by the Board for purposes of federal income taxes, or any other
purpose, the accounting year shall be the year so selected.
SECTION 9
SEAL
The Board may provide for a corporate seal which shall consist of the name
of the corporation, the state of its incorporation and the year of its
incorporation.
SECTION 10
INDEMNIFICATION
10.1 RIGHT TO INDEMNIFICATION
Each person who was, is or is threatened to be made a named party to or is
otherwise involved (including, without limitation, as a witness) in any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative and whether formal or informal
(hereinafter a "proceeding"), by reason of the fact that he or she is or was a
Director or officer of the corporation or, that being or having been such a
Director or officer or an employee of the corporation, he or she is or was
serving at the request of the corporation as a Director, officer, partner,
trustee, employee or agent of another corporation or of a partnership, joint
venture, trust, employee benefit plan or other enterprise (hereinafter an
"indemnitee"), whether the basis or a proceeding is alleged action in an
official capacity as such a Director, officer, partner, trustee, employee or
agent or in any other capacity while serving as such a Director, officer,
partner, trustee, employee or agent, shall be indemnified and held harmless by
the corporation against all expense, liability and loss (including counsel fees,
judgments, fines, ERISA excise taxes or penalties and amounts to be paid in
settlement) actually and reasonably incurred or suffered by such indemnitee in
connection therewith, and such indemnification shall continue as to an
indemnitee who has ceased to be a Director, officer, partner, trustee, employee
or agent and shall inure to the benefit of the indemnitee's heirs, executors and
administrators. Except as provided in Section 10.2 hereof with respect to
proceedings seeking to enforce rights to indemnification, the corporation shall
indemnify any such indemnitee in connection with a proceeding (or pan thereof)
initiated by such indemnitee only if a proceeding (or pan thereof) was
authorized or ratified by the Board. The right to indemnification conferred in
this Section 10 shall be a contract right.
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10.2 RESTRICTIONS ON INDEMNIFICATION
No indemnification shall be provided to any such indemnitee for acts or
omissions of the indemnitee finally adjudged to be intentional misconduct or a
knowing violation of law, for conduct of the indemnitee finally adjudged to be
in violation of Section 23B.08.310 of the Washington Business Corporation Act,
for any transaction with respect to which it was finally adjudged that such
indemnitee personally received a benefit in money, property or services to which
the indemnitee was not legally entitled or if the corporation is otherwise
prohibited by applicable law from paying such indemnification, except that if
Section 23B.08.560 or any successor provision of the Washington Business
Corporation Act is hereafter amended, the restrictions on indemnification set
forth in this Section 10.2 shall be as set forth in such amended statutory
provision.
10.3 ADVANCEMENT OF EXPENSES
The right to indemnification conferred in this Section I0 shall include the
right to be paid by the corporation the expenses incurred in defending any
proceeding in advance of its final disposition (hereinafter an "advancement of
expenses"). An advancement of expenses shall be made upon delivery to the
corporation of an undertaking (hereinafter an "undertaking"), by or on behalf of
such indemnitee, to repay all amounts so advanced if it shall ultimately be
determined by final judicial decision from which there is no further right to
appeal that such indemnitee is not entitled to be indemnified for such expenses
under this Section 10.3.
10.4 RIGHT OF INDEMNITEE TO BRING SUIT
If a claim under Section 10.1 or 10.3 hereof this Section is not paid in
full by the corporation within 60 days after a written claim has been received
by the corporation, except in the case of a claim for an advancement of
expenses, in which case the applicable period shall be 20 days, the indemnitee
may at any time thereafter bring suit against the corporation to recover the
unpaid amount of the claim, If successful in whole or in part, in any such suit
or in a suit brought by the corporation to recover an advancement of expenses
pursuant to the terms of an undertaking, the indemnitee shall be entitled to be
paid also the expense of prosecuting or defending such suit. The indemnitee
shall be presumed to be entitled to indemnification under this Section 10 upon
submission of a written claim (and, in an action brought to enforce a claim for
an advancement of expenses, where the required undertaking has been tendered to
the corporation) and thereafter the corporation shall have the burden of proof
to overcome the presumption that the indemnitee is so entitled.
10.5 PROCEDURES EXCLUSIVE
Pursuant to Section 23B.08.560(2) or any successor provision of the
Washington Business Corporation Act, the procedures for indemnification and
advancement of expenses set forth in this Section 10 are in lieu of the
procedures required by Section 23B.08.550 or any successor provision of the
Washington Business Corporation Act.
10.6 NONEXCLUSIVITY OF RIGHTS
The right to indemnification and the advancement of expenses conferred in
this Section 10 shall not be exclusive of any other right which any person may
have or
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hereafter acquire under any statute, provision of the Restated Articles of
Incorporation or Bylaws of the corporation, general or specific action of the
Board, contract or otherwise.
10.7 INSURANCE, CONTRACTS AND FUNDING
The corporation may maintain insurance, at its expense, to protect itself
and any Director, officer, partner, trustee, employee or agent of the
corporation or another corporation, partnership, joint venture, trust or other
enterprise against any expense, liability or loss, whether or not the
corporation would have the power to indemnify such person against such expense,
liability or loss under the Washington Business Corporation Act. The corporation
may enter into contracts with any Director, officer, partner, trustee, employee
or agent of the corporation in furtherance of the provisions of this Section 10
and may create a trust fund, grant a security interest or use other means
(including, without limitation, a letter of credit) to ensure the payment of
such amounts as may be necessary to effect indemnification as provided in this
Section 10.
10.8 INDEMNIFICATION OF EMPLOYEES AND AGENTS OF THE CORPORATION
The corporation may, by action of the Board, grant rights to
indemnification and advancement of expenses to employees and agents or any class
or group of employees and agents of the corporation (i) with the same scope and
effect as the provisions of this Section 10 with respect to the indemnification
and advancement of expenses of Directors and officers of the corporation; (ii)
pursuant to rights granted pursuant to, or provided by, the Washington Business
Corporation Act; or (iii) as are otherwise consistent with law.
10.9 PERSONS SERVING OTHER ENTITIES
Any person who, while a Director, officer or employee of the corporation,
is or was serving as a Director or officer of another foreign or domestic
corporation of which a majority of the shares entitled to vote in the election
of its Directors is held by the corporation shall be deemed to be so serving at
the request of the corporation and entitled to indemnification and advancement
of expenses under Sections 10.1 and 10.3 hereof.
SECTION 11
AMENDMENTS
The Board of Directors shall have the power to adopt, amend or repeal the
Bylaws of this corporation subject to approval by a majority of the Board of
Directors and by the affirmative vote of the holders of not less than a majority
of the outstanding shares; provided, however, the Board of Directors may not
repeal or amend any bylaw that the shareholders have expressly provided may not
be amended or repealed by the Board of Directors. The shareholders shall also
have the power to adopt, amend or repeal the Bylaws of this corporation by the
affirmative vote of the holders of not less than a majority of the outstanding
shares and, to the extent, if any, provided by resolution adopted by the Board
of Directors authorizing the issuance of a class or series of Common Stock or
Preferred Stock, by the affirmative vote of the holders of not less than a
majority of the outstanding shares of such class or series, voting as a separate
voting group.
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APPENDIX F
CHAPTER 23B.13 OF THE WASHINGTON BUSINESS CORPORATION ACT
(DISSENTERS' RIGHTS)
23B.13.010 DEFINITIONS
As used in this chapter:
(1) "Corporation" means the issuer of the shares held by a dissenter
before the corporate action, or the surviving or acquiring corporation by
merger or share exchange of that issuer.
(2) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under RCW 23B.13.020 and who exercises that right when and
in the manner required by RCW 23B.13.200 through 23B.13.280.
(3) "Fair value," with respect to a dissenter's shares, means the
value of the shares immediately before the effective date of the corporate
action to which the dissenter objects, excluding any appreciation or
depreciation in anticipation of the corporate action unless exclusion would
be inequitable.
(4) "Interest" means interest from the effective date of the
corporate action until the date of payment, at the average rate currently
paid by the corporation on its principal bank loans or, if none, at a rate
that is fair and equitable under all the circumstances.
(5) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of
shares to the extent of the rights granted by a nominee certificate on file
with a corporation.
(6) "Beneficial shareholder" means the person who is a beneficial
owner of shares held in a voting trust or by a nominee as the record
shareholder.
(7) "Shareholder" means the record shareholder or the beneficial
shareholder.
23B.13.020 RIGHT TO DISSENT
(1) A shareholder is entitled to dissent from, and obtain payment of the
fair value of the shareholder's shares in the event of, any of the following
corporate actions:
(a) Consummation of a plan of merger to which the corporation is a
party (i) if shareholder approval is required for the merger by RCW
23B.11.030, 23B.11.080, or the articles of incorporation and the
shareholder is entitled to vote on the merger, or (ii) if the corporation
is a subsidiary that is merged with its parent under RCW 23B.11.040;
(b) Consummation of a plan of share exchange to which the corporation
is a party as the corporation whose shares will be acquired, if the
shareholder is entitled to vote on the plan;
(c) Consummation of a sale or exchange of all, or substantially all,
of the property of the corporation other than in the usual and regular
course of business, if the shareholder is entitled to vote on the sale or
exchange, including a sale in
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dissolution, but not including a sale pursuant to court order or a sale for
cash pursuant to a plan by which all or substantially all of the net
proceeds of the sale will be distributed to the shareholders within one
year after the date of sale;
(d) An amendment of the articles of incorporation that materially
reduces the number of shares owned by the shareholder to a fraction of a
share if the fractional share so created is to be acquired for cash under
RCW 23B.06.040; or
(e) Any corporate action taken pursuant to a shareholder vote to the
extent the articles of incorporation, bylaws, or a resolution of the board
of directors provides that voting or nonvoting shareholders are entitled to
dissent and obtain payment for their shares.
(2) A shareholder entitled to dissent and obtain payment for the
shareholder's shares under this chapter may not challenge the corporate action
creating the shareholder's entitlement unless the action fails to comply with
the procedural requirements imposed by this title, RCW 25.10.900 through
25.10.955, the articles of incorporation, or the bylaws, or is fraudulent with
respect to the shareholder or the corporation.
(3) The right of a dissenting shareholder to obtain payment of the fair
value of the shareholder's shares shall terminate upon the occurrence of any one
of the following events:
(a) The proposed corporate action is abandoned or rescinded;
(b) A court having jurisdiction permanently enjoins or sets aside the
corporate action; or
(c) The shareholder's demand for payment is withdrawn with the written
consent of the corporation.
23B.13.030 DISSENT BY NOMINEES AND BENEFICIAL OWNERS
(1) A record shareholder may assert dissenters' rights as to fewer than all
shares registered in the shareholder's name only if the shareholder dissents
with respect to all shares beneficially owned by any one person and notifies the
corporation in writing of the name and address of each person on whose behalf
the shareholder asserts dissenters' rights. The rights of a partial dissenter
under this subsection are determined as if the shares as to which the dissenter
dissents and the dissenter's other shares were registered in the names of
different shareholders.
(2) A beneficial shareholder may assert dissenters' rights as to shares
held on the beneficial shareholder's behalf only if:
(a) The beneficial shareholder submits to the corporation the record
shareholder's written consent to the dissent not later than the time the
beneficial shareholder asserts dissenters' rights; and
(b) The beneficial shareholder does so with respect to all shares of
which such shareholder is the beneficial shareholder or over which such
shareholder has power to direct the vote.
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<PAGE> 203
23B.13.200 NOTICE OF DISSENTERS' RIGHTS
(1) If proposed corporate action creating dissenters' rights under RCW
23B.13.020 is submitted to a vote at a shareholders' meeting, the meeting notice
must state that shareholders are or may be entitled to assert dissenters' rights
under this chapter and be accompanied by a copy of this chapter.
(2) If corporate action creating dissenters' rights under RCW 23B.13.020 is
taken without a vote of shareholders, the corporation, within ten days after
effective date of such corporate action, shall notify in writing all
shareholders entitled to assert dissenters' rights that the action was taken and
send them the dissenters' notice described in RCW 23B.13.220.
23B.13.210 NOTICE OF INTENT TO DEMAND PAYMENT
(1) If proposed corporate action creating dissenters' rights under RCW
23B.13.020 is submitted to a vote at a shareholders' meeting, a shareholder who
wishes to assert dissenters' rights must (a) deliver to the corporation before
the vote is taken written notice of the shareholder's intent to demand payment
for the shareholder's shares if the proposed action is effected, and (b) not
vote such shares in favor of the proposed action.
(2) A shareholder who does not satisfy the requirements of subsection (1)
of this section is not entitled to payment for the shareholder's shares under
this chapter.
23B.13.220 DISSENTERS' NOTICE
(1) If proposed corporate action creating dissenters' rights under RCW
23B.13.020 is authorized at a shareholders' meeting, the corporation shall
deliver a written dissenters' notice to all shareholders who satisfied the
requirements of RCW 23B.13.210.
(2) The dissenters' notice must be sent within ten days after the effective
date of the corporate action, and must:
(a) State where the payment demand must be sent and where and when
certificates for certificated shares must be deposited;
(b) Inform holders of uncertificated shares to what extent transfer of
the shares will be restricted after the payment demand is received;
(c) Supply a form for demanding payment that includes the date of the
first announcement to news media or to shareholders of the terms of the
proposed corporate action and requires that the person asserting
dissenters' rights certify whether or not the person acquired beneficial
ownership of the shares before that date;
(d) Set a date by which the corporation must receive the payment
demand, which date may not be fewer than thirty nor more than sixty days
after the date the notice in subsection (1) of this section is delivered;
and
(e) Be accompanied by a copy of this chapter.
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23B.13.230 DUTY TO DEMAND PAYMENT
(1) A shareholder sent a dissenters' notice described in RCW 23B.13.220
must demand payment, certify whether the shareholder acquired beneficial
ownership of the shares before the date required to be set forth in the
dissenters' notice pursuant to RCW 23B.13.220(2)(c), and deposit the
shareholder's certificates in accordance with the terms of the notice.
(2) The shareholder who demands payment and deposits the shareholder's
share certificates under subsection (1) of this section retains all other rights
of a shareholder until the proposed corporate action is effected.
(3) A shareholder who does not demand payment or deposit the shareholder's
share certificates where required, each by the date set in the dissenters'
notice, is not entitled to payment for the shareholder's shares under this
chapter.
23B.13.240 SHARE RESTRICTIONS
(1) The corporation may restrict the transfer of uncertificated shares from
the date the demand for their payment is received until the proposed corporate
action is effected or the restriction is released under RCW 23B.13.260.
(2) The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder until the
effective date of the proposed corporate action.
23B.13.250 PAYMENT
(1) Except as provided in RCW 23B.13.270, within thirty days of the later
of the effective date of the proposed corporate action, or the date the payment
demand is received, the corporation shall pay each dissenter who complied with
RCW 23B.13.230 the amount the corporation estimates to be the fair value of the
shareholder's shares, plus accrued interest.
(2) The payment must be accompanied by:
(a) The corporation's balance sheet as of the end of a fiscal year
ending not more than sixteen months before the date of payment, an income
statement for that year, a statement of changes in shareholders' equity for
that year, and the latest available interim financial statements, if any;
(b) An explanation of how the corporation estimated the fair value of
the shares;
(c) An explanation of how the interest was calculated;
(d) A statement of the dissenter's right to demand payment under RCW
23B.13.280; and
(e) A copy of this chapter.
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<PAGE> 205
23B.13.260 FAILURE TO TAKE ACTION
(1) If the corporation does not effect the proposed action within sixty
days after the date set for demanding payment and depositing share certificates,
the corporation shall return the deposited certificates and release any transfer
restrictions imposed on uncertificated shares.
(2) If after returning deposited certificates and releasing transfer
restrictions, the corporation wishes to undertake the proposed action, it must
send a new dissenters' notice under RCW 23B.13.220 and repeat the payment demand
procedure.
23B.13.270 AFTER-ACQUIRED SHARES
(1) A corporation may elect to withhold payment required by RCW 23B.13.250
from a dissenter unless the dissenter was the beneficial owner of the shares
before the date set forth in the dissenters' notice as the date of the first
announcement to news media or to shareholders of the terms of the proposed
corporate action.
(2) To the extent the corporation elects to withhold payment under
subsection (1) of this section, after taking the proposed corporate action, it
shall estimate the fair value of the shares, plus accrued interest, and shall
pay this amount to each dissenter who agrees to accept it in full satisfaction
of the dissenter's demand. The corporation shall send with its offer an
explanation of how it estimated the fair value of the shares, an explanation of
how the interest was calculated, and a statement of the dissenter's right to
demand payment under RCW 23B.13.280.
23B.13.280 PROCEDURE IF SHAREHOLDER DISSATISFIED WITH PAYMENT OR OFFER
(1) A dissenter may notify the corporation in writing of the dissenter's
own estimate of the fair value of the dissenter's shares and amount of interest
due, and demand payment of the dissenter's estimate, less any payment under RCW
23B.13.250, or reject the corporation's offer under RCW 23B.13.270 and demand
payment of the dissenter's estimate of the fair value of the dissenter's shares
and interest due, if:
(a) The dissenter believes that the amount paid under RCW 23B.13.250
or offered under RCW 23B.13.270 is less than the fair value of the
dissenter's shares or that the interest due is incorrectly calculated;
(b) The corporation fails to make payment under RCW 23B.13.250 within
sixty days after the date set for demanding payment; or
(c) The corporation does not effect the proposed action and does not
return the deposited certificates or release the transfer restrictions
imposed on uncertificated shares within sixty days after the date set for
demanding payment.
(2) A dissenter waives the right to demand payment under this section
unless the dissenter notifies the corporation of the dissenter's demand in
writing under subsection (1) of this section within thirty days after the
corporation made or offered payment for the dissenter's shares.
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23B. 13.300 COURT ACTION
(1) If a demand for payment under RCW 23B.13.280 remains unsettled, the
corporation shall commence a proceeding within sixty days after receiving the
payment demand and petition the court to determine the fair value of the shares
and accrued interest. If the corporation does not commence the proceeding within
the sixty-day period, it shall pay each dissenter whose demand remains unsettled
the amount demanded.
(2) The corporation shall commence the proceeding in the superior court of
the county where a corporation's principal office, or, if none in this state,
its registered office, is located. If the corporation is a foreign corporation
without a registered office in this state, it shall commence the proceeding in
the county in this state where the registered office of the domestic corporation
merged with or whose shares were acquired by the foreign corporation was
located.
(3) The corporation shall make all dissenters, whether or not residents of
this state, whose demands remain unsettled, parties to the proceeding as in an
action against their shares and all parties must be served with a copy of the
petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.
(4) The corporation may join as a party to the proceeding any shareholder
who claims to be a dissenter but who has not, in the opinion of the corporation,
complied with the provisions of this chapter. If the court determines that such
shareholder has not complied with the provisions of this chapter, the
shareholder shall be dismissed as a party.
(5) The jurisdiction of the court in which the proceeding is commenced
under subsection (2) of this section is plenary and exclusive. The court may
appoint one or more persons as appraisers to receive evidence and recommend
decision on the question of fair value. The appraisers have the powers described
in the order appointing them, or in any amendment to it. The dissenters are
entitled to the same discovery rights as parties in other civil proceedings.
(6) Each dissenter made a party to the proceeding is entitled to judgment
(a) for the amount, if any, by which the court finds the fair value of the
dissenter's shares, plus interest, exceeds the amount paid by the corporation,
or (b) for the fair value, plus accrued interest, of the dissenter's
after-acquired shares for which the corporation elected to withhold payment
under RCW 23B.13.270.
23B.13.310 COURT COSTS AND COUNSEL FEES
(1) The court in a proceeding commenced under RCW 23B.13.300 shall
determine all costs of the proceeding, including the reasonable compensation and
expenses of appraisers appointed by the court. The court shall assess the costs
against the corporation, except that the court may assess the costs against all
or some of the dissenters, in amounts the court finds equitable, to the extent
the court finds the dissenters acted arbitrarily, vexatiously, or not in good
faith in demanding payment under RCW 23B.13.280.
(2) The court may also assess the fees and expenses of counsel and experts
for the respective parties, in amounts the court finds equitable:
(a) Against the corporation and in favor of any or all dissenters if
the court finds the corporation did not substantially comply with the
requirements of RCW 23B.13.200 through 23B.13.280; or
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(b) Against either the corporation or a dissenter, in favor of any
other party, if the court finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously, or not in good faith
with respect to the rights provided by chapter 23B.13 RCW.
(3) If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against the corporation, the court may
award to these counsel reasonable fees to be paid out of the amounts awarded the
dissenters who were benefited.
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PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 23B.08.500 through 23B.08.600 of the Washington Business
Corporation Act authorize a court to award, or a corporation's board of
directors to grant, indemnification to directors and officers on terms
sufficiently broad to permit indemnification under certain circumstances for
liabilities arising under the Securities Act of 1933, as amended. Section 10 of
the registrant's bylaws provides for indemnification of the registrant's
directors, officers, employees and agents to the maximum extent permitted by
Washington law.
Section 23B.08.320 of the Washington Business Corporation Act authorizes a
corporation to eliminate or limit a director's personal liability to the
corporation or its shareholders for monetary damages for conduct as a director,
except in certain circumstances involving acts or omissions, intentional
misconduct by a director or knowing violations of law by a director or
distributions illegal under Washington law, or any transaction from which the
director will personally receive a benefit in money, property or services to
which the director is not legally entitled. Article 8 of the registrant's
articles of incorporation contains provisions implementing, to the fullest
extent permitted by Washington law, such limitations on a director's liability
to the registrant and its shareholders.
The above discussion of Washington law and the registrant's bylaws and
articles of Incorporation is not intended to be exhaustive and is qualified in
its entirety by reference to such statute, the bylaws and articles of
incorporation.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
2.1 Agreement and Plan of Merger, dated December 29, 1998,
between INTERLINQ Software Corporation and Terlin, Inc.
(attached as Appendix A to the proxy statement/prospectus).
3.1 Articles of Incorporation of INTERLINQ Software Corporation
(incorporated by reference to Exhibit 3.1 to the
registrant's registration statement on Form S-1, as amended
(Registration No. 33-59502), filed with the SEC on March 15,
1993)
3.2 Reverse Stock Split Amendment to Articles of Incorporation
(attached as Appendix C to the proxy statement/prospectus)
3.3 Post-Merger Articles of Incorporation (attached as Appendix
D to the proxy statement/prospectus)
3.4 Bylaws of INTERLINQ Software Corporation (incorporated by
reference to Exhibit 3.2 to the registrant's registration
statement on Form S-1, as amended (Registration No.
33-59502), filed with the SEC on March 15, 1993)
3.5 Post-Merger Bylaws (attached as Appendix E to the proxy
statement/ prospectus)
5.1 Opinion of Perkins Coie LLP as to legality of securities
being registered*
</TABLE>
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<PAGE> 209
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
8.1 Opinion of Perkins Coie LLP regarding tax matters*
10.1 Form of Voting Agreement*
10.2 Letter Agreement, dated December 29, 1998, by and among W.R.
Hambrecht + Co., LLC, Terlin, Inc. and INTERLINQ Software
Corporation*
10.3 Commitment Letter dated March 23, 1999, by and among Silicon
Valley Bank, U.S. Bank and W.R. Hambrecht + Co.*
23.1 Consent of Perkins Coie LLP (contained in opinions filed as
Exhibits 5.1 and 8.1)*
23.2 Consent of KPMG LLP
23.3 Consent of KPMG LLP
24.1 Power of Attorney (contained on signature page to the
registrant's registration statement on Form S-4
(Registration No. 333-71173) filed with the SEC on January
26, 1999)
99.1 Form of Proxy
99.2 Form of Election*
99.3 Consent of J.D. Delafield*
99.4 Opinion of Broadview International LLC (attached as Appendix
B to the proxy statement/prospectus)
99.5 Board book prepared by Broadview International LLC
99.6 Purchase price allocation for the acquisition of Logical
Software Solutions Corporation report prepared by KPMG LLP,
dated March 10, 1999.
99.7 Operating Agreement of W.R. Hambrecht/INLQ, LLC dated as of
April , 1999.
99.8 Operating Agreement of W.R. Hambrecht/INLQ Guarantors, LLC
dated as of April , 1999.
99.9 Operating Agreement of W.R. Hambrecht/INLQ Management, LLC
dated as of April , 1999.
</TABLE>
- -------------------------
* Previously filed.
(b) FINANCIAL STATEMENT SCHEDULES
All schedules have either been incorporated by reference or have been
omitted as not applicable or not required under the rules of Regulation S-X.
(c) REPORTS, OPINIONS AND APPRAISALS OF OUTSIDE PARTIES
The opinion of Broadview International, LLC is included as Appendix B to
the proxy statement/prospectus. The report prepared by Broadview International
LLC for Interlinq's board of directors is included as Exhibit 99.5.
ITEM 22. UNDERTAKINGS
(a) 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
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<PAGE> 210
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
(b) The registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (a) 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.
(c) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(d) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of this Form S-4, within one business day of receipt of
such request, and to send the incorporated documents by first-class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(e) 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> 211
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 2 to its Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Seattle, State of Washington, on the 23rd day of April, 1999.
INTERLINQ SOFTWARE CORPORATION
By /s/ JIRI M. NECHLEBA
------------------------------------
Jiri M. Nechleba
President, Chief Executive Officer
and Chairman
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 2 to the registrant's Registration Statement has been signed
by the following persons in the capacities indicated below on the 23rd day of
April, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ JIRI M. NECHLEBA President, Chief Executive Officer and
- -------------------------------------- Chairman of the Board (Principal
Jiri M. Nechleba Executive Officer)
/s/ STEPHEN A. YOUNT* Chief Financial Officer and Executive
- -------------------------------------- Vice President, Enterprise Technology
Stephen A. Yount Division (Principal Financial Officer
and Principal Accounting Officer)
/s/ ROBERT J. GALLAGHER* Director
- --------------------------------------
Robert J. Gallagher
/s/ ROBERT W. O'REAR* Director
- --------------------------------------
Robert W. O'Rear
/s/ THEODORE M. WIGHT* Director
- --------------------------------------
Theodore M. Wight
</TABLE>
*By: /s/ JIRI M. NECHLEBA
-------------------------------
Jiri M. Nechleba
Attorney-in-fact
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<PAGE> 212
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
2.1 Agreement and Plan of Merger, dated December 29, 1998,
between INTERLINQ Software Corporation and Terlin, Inc.
(attached as Appendix A to the proxy statement/prospectus).
3.1 Articles of Incorporation of INTERLINQ Software Corporation
(incorporated by reference to Exhibit 3.1 to the
registrant's registration statement on Form S-1, as amended
(Registration No. 33-59502), filed with the SEC on March 15,
1993)
3.2 Reverse Stock Split Amendment to Articles of Incorporation
(attached as Appendix C to the proxy statement/prospectus)
3.3 Post-Merger Articles of Incorporation (attached as Appendix
D to the proxy statement/prospectus)
3.4 Bylaws of INTERLINQ Software Corporation (incorporated by
reference to Exhibit 3.2 to the registrant's registration
statement on Form S-1, as amended (Registration No.
33-59502), filed with the SEC on March 15, 1993)
3.5 Post-Merger Bylaws (attached as Appendix E to the proxy
statement/ prospectus)
5.1 Opinion of Perkins Coie LLP as to legality of securities
being registered
8.1 Opinion of Perkins Coie LLP regarding tax matters
10.1 Form of Voting Agreement*
10.2 Letter Agreement, dated December 29, 1998, by and among W.R.
Hambrecht + Co., LLC, Terlin, Inc. and INTERLINQ Software
Corporation*
10.3 Commitment Letter dated March 23, 1999, by and among Silicon
Valley Bank, U.S. Bank and W.R. Hambrecht + Co.*
23.1 Consent of Perkins Coie LLP (contained in opinions filed as
Exhibits 5.1 and 8.1)*
23.2 Consent of KPMG LLP
23.3 Consent of KPMG LLP
24.1 Power of Attorney (contained on signature page to the
registrant's registration statement on Form S-4
(Registration No. 333-71173) filed with the SEC on January
26, 1999)
99.1 Form of Proxy
99.2 Form of Election*
99.3 Consent of J.D. Delafield*
99.4 Opinion of Broadview International LLC (attached as Appendix
B to the proxy statement/prospectus)
99.5 Board book prepared by Broadview International LLC
99.6 Purchase price allocation for the acquisition of Logical
Software Solutions Corporation report prepared by KPMG LLP,
dated March 10, 1999.
99.7 Operating Agreement of W.R. Hambrecht/INLQ, LLC dated as of
April , 1999.
99.8 Operating Agreement of W.R. Hambrecht/INLQ Guarantors, LLC
dated as of April , 1999.
99.9 Operating Agreement of W.R. Hambrecht/INLQ Management, LLC
dated as of April , 1999.
</TABLE>
- -------------------------
* Previously filed.
<PAGE> 1
EXHIBIT 5.1
March 26, 1999
INTERLINQ Software Corporation
11980 N.E. 24th Street
Bellevue, Washington 98005
RE: REGISTRATION STATEMENT ON FORM S-4
Dear Gentlemen and Ladies:
We have acted as counsel to INTERLINQ Software Corporation, a Washington
corporation (the "Company"), in connection with the preparation of a
Registration Statement on Form S-4 (the "Registration Statement") under the
Securities Act of 1933, as amended (the "Act"), which you are filing with the
Securities and Exchange Commission relating to the up to 3,403,439 shares of
common stock, $.01 par value per share, of the Company (the "Common Stock").
These shares consist of 2,153,439 shares of common stock to be issued as a
result of the conversion of shares of common stock of Terlin, Inc. (the "Terlin
Shares"), pursuant to the Agreement and Plan of Merger, dated December 28, 1998,
between the Company and Terlin, Inc. (the "Merger Agreement"), and 1,250,000
shares of Common Stock to be retained by the existing shareholders of the
Company (the "Retained Shares") pursuant to the Merger Agreement. We have
examined the Registration Statement and such documents and records of the
Company and other documents as we have deemed necessary for the purpose of this
opinion.
Based on and subject to the foregoing, we are of the opinion that, upon
the effectiveness of the Registration Statement and the approval of the Merger
Agreement by the shareholders of the Company, (a) the issuance of the Terlin
Shares and the retention of the Retained Shares in accordance with the terms of
the Merger Agreement will have been duly authorized; (b) when the Terlin Shares
are issued in accordance with the terms of the Merger Agreement and the
Registration Statement, the Terlin Shares will be validly issued, fully paid
and nonassessable; and (c) the transactions contemplated by the Merger Agreement
will not adversely affect the status of the Retained Shares as validly issued,
fully paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our name under "Legal Matters".
In giving such consent, we do not admit that we are in the category of persons
whose consent is required under Section 7 of the Act.
Very truly yours,
Perkins Coie LLP
<PAGE> 1
EXHIBIT 8.1
March 25, 1999
Interlinq Software Corporation
11980 N.E. 24th Street
Bellevue, WA 98005
RE: MERGER AND REVERSE STOCK SPLIT
Ladies and Gentlemen:
We have acted as counsel to Interlinq Software Corporation, a Washington
corporation (the "Company"), in connection with a merger (the "Merger") of
Terlin, Inc. with and into the Company pursuant to that Agreement and Plan of
Merger between Terlin, Inc. and the Company dated as of December 29, 1998 (the
"Merger Statement") and a reverse stock split following the Merger (the "Reverse
Stock Split"). The terms of the Merger and the Reverse Stock Split are described
in the Registration Statement of the Company on Form S-4, as filed with the
Securities and Exchange Commission on January 26, 1999 (together with the
Prospectus contained therein and the amendments thereto, the "Registration
Statement"). All capitalized terms used but not defined herein shall have the
respective meanings given to them in the Registration Statement.
In connection with this opinion, we have examined the Merger Agreement
and the Registration Statement and such other documents as we have deemed
necessary. We have also examined originals or copies, certified or otherwise
identified to our satisfaction, of such other documents, certificates, and
records as we have deemed necessary or appropriate as a basis for the opinion
set forth herein.
In rendering our opinion, we have participated in the preparation of the
Registration Statement. Our opinion is conditioned on, among other things, the
initial and continuing accuracy of the facts, information, covenants, and
representations set forth in the documents referred to above and the statements
and representations made by officers of the Company and others. In our
examination, we have assumed the genuineness of all signatures, the legal
capacity of natural persons, the authenticity of all documents submitted to us
as originals, the conformity to original documents of all
<PAGE> 2
March 25, 1999
Page 2
documents submitted to us as certified or photostatic copies and that the
transactions related to the Merger and Reverse Stock Split will be consummated
in the manner contemplated by the Registration Statement.
In rendering our opinion, we have considered the provisions of the
Internal Revenue Code of 1986, as amended, Treasury Regulations promulgated
thereunder, judicial decisions, and Internal Revenue Service rulings, all as in
effect on the date hereof and all of which are subject to change, which changes
may be retroactively applied. A change in the authorities upon which our opinion
is based could affect our conclusions.
Based upon and subject to the foregoing, and subject to the discussion
and limitations set forth in the Registration Statement under the heading
"CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER AND REVERSE STOCK SPLIT,"
we are of the opinion that, although the discussion set forth in the
Registration Statement under the heading "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES OF THE MERGER AND REVERSE STOCK SPLIT" does not purport to discuss
all possible United States federal income tax consequences of the Merger and
Reverse Stock Split and the transactions contemplated thereby, such discussion
constitutes a fair and accurate summary of the material United States federal
income tax consequences (other than consequences that are material to a
shareholder based on such shareholder's particular tax situation) of the Merger
and Reverse Stock Split. As indicated in that discussion, we cannot give an
opinion as to whether the Merger and Reverse Stock Split will be treated as part
of a single transaction or instead treated as separate transactions for federal
income tax purposes because of the lack of authority dealing with this type of
question.
Except as set forth above, we express no opinion to any party as to the
tax consequences, whether federal, state, local or foreign, of the Merger and
Reverse Stock Split. We hereby consent to the filing of this opinion as an
exhibit to the Registration Statement. In giving such consent, we do not thereby
admit that we are in the category of person whose consent is required under
section 7 of the Securities Act of 1933, as amended. We disclaim any undertaking
to advise you of subsequent changes of the facts as assumed herein or any
subsequent changes in applicable law.
<PAGE> 3
March 25, 1999
Page 3
Very truly yours,
Perkins Coie LLP
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
INTERLINQ Software Corporation:
We consent to the incorporation by reference herein of our report dated July
30, 1998, except for notes 1(q), 3 and 5, which are as of March 8, 1999,
with respect to the balance sheets of Interlinq Software Corporation as of
June 30, 1998 and 1997, and the related statements of operations,
shareholders' equity and cash flows for each of the years in the three-year
period ended June 30, 1998, and the related schedule, which report appears in
the June 30, 1998 annual report on Form 10-K/A of INTERLINQ Software
Corporation and to the reference to our firm under the heading "Experts" in
the Proxy Statement/Prospectus.
/S/KPMG LLP
Seattle, Washington
April 23, 1999
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Logical Software Solutions Corporation:
We consent to the incorporation by reference herein of our report dated June
30, 1998, with respect to the balance sheet of Logical Software Solutions
Corporation as of December 31, 1997, and the related statements of operations,
stockholders' equity, and cash flows for the year then ended, which report
appears in the June 30, 1998, current report on Form 8-K/A of INTERLINQ
Software Corporation and to the reference to our firm under the heading
"Experts" in the Proxy Statement/Prospectus.
/S/KPMG LLP
Seattle, Washington
April 23, 1999
<PAGE> 1
EXHIBIT 99.1
PRELIMINARY PROXY
INTERLINQ SOFTWARE CORPORATION
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS FOR
THE SPECIAL MEETING OF SHAREHOLDERS ON MAY __, 1999
The undersigned hereby appoint(s) Jiri M. Nechleba and Stephen A. Yount and each
of them as proxies, with full power of substitution, to represent and vote as
designated all shares of common stock of INTERLINQ Software Corporation held of
record by the undersigned on March 31, 1999 at the special meeting of
shareholders of Interlinq to be held at Interlinq's principal offices at 11980
N.E. 24th Street, Bellevue, Washington, at 10 a.m. local time on May __, 1999,
or any adjournment or postponement of the special meeting, with authority to
vote upon the matters listed on the other side of this proxy card and with
discretionary authority as to any other matters that may properly come before
the meeting.
IMPORTANT - PLEASE DATE AND SIGN ON THE OTHER SIDE
- --------------------------------------------------------------------------------
FOLD AND DETACH HERE
<PAGE> 2
Please mark
your votes as
indicated on [X]
this example
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" EACH OF THE PROPOSALS.
(1) PROPOSAL TO APPROVE THE AGREEMENT FOR AGAINST ABSTAIN
AND PLAN OF MERGER DATED DECEMBER 29, [ ] [ ] [ ]
1998 BETWEEN THE COMPANY AND TERLIN,
INC.
PROXY CARD:
(2) PROPOSAL TO APPROVE AMENDMENTS TO
OUR ARTICLES OF INCORPORATION AS
FOLLOWS:
(a) An amendment to eliminate our
ability to issue preferred stock
in the future; and FOR AGAINST ABSTAIN
[ ] [ ] [ ]
(b) An amendment to reduce, from
two-thirds to a simple majority,
the number of outstanding shares
required to approve future
amendments to our articles. FOR AGAINST ABSTAIN
[ ] [ ] [ ]
(3) PROPOSAL TO APPROVE AMENDMENTS TO
OUR BYLAWS AS FOLLOWS:
(a) An amendment providing for
shareholder action to be taken by
written consent if it is signed by
enough shareholders to approve the
action once we are no longer a
public company. FOR AGAINST ABSTAIN
[ ] [ ] [ ]
(b) An amendment reducing to not less
than 10 days the amount of time
required to provide you with advance
notice of a meeting. FOR AGAINST ABSTAIN
[ ] [ ] [ ]
(c) An amendment eliminating the
classification of directors in
staggered terms, reducing a director's
term to one year, allowing vacancies
in the board to be filled by the board
or a majority vote of the shareholders,
and allowing a director to be removed
by a majority vote of the
shareholders. FOR AGAINST ABSTAIN
[ ] [ ] [ ]
(d) An amendment providing for future
amendments of the bylaws to be
authorized by the board or a majority
vote of the shareholders. FOR AGAINST ABSTAIN
[ ] [ ] [ ]
(4) PROPOSAL TO APPROVE THE REVERSE STOCK FOR AGAINST ABSTAIN
SPLIT AS CONTEMPLATED BY THE MERGER [ ] [ ] [ ]
AGREEMENT.
SHARES REPRESENTED BY THIS PROXY WILL BE
VOTED AS DIRECTED BY THE SHAREHOLDER IN
THE SPACE PROVIDED. IF NO DIRECTION IS
GIVEN, THIS PROXY WILL BE VOTED "FOR"
EACH OF THE PROPOSALS.
Signatures(s): ___________________________________________ Date: _______________
Please sign your name exactly as it appears hereon. Attorneys, trustees,
executors and other fiduciaries acting in a representative capacity should sign
their names and give their titles. An authorized person should sign on behalf
of corporations, partnerships, associations, etc., and give his or her title.
If your shares are held by two or more persons, each person must sign. Receipt
of the notice of meeting and proxy statements is hereby acknowledged.
- --------------------------------------------------------------------------------
*FOLD AND DETACH HERE*
<PAGE> 1
INTERLINQ SOFTWARE CORPORATION
FAIRNESS OPINION DOCUMENTATION
DECEMBER 29, 1998
BROADVIEW INT'L LLC
Tokyo Silicon Valley New York Boston London
<PAGE> 2
INTERLINQ SOFTWARE CORPORATION
FAIRNESS OPINION DOCUMENTATION
Table of Contents
<TABLE>
<CAPTION>
TAB
---
<S> <C>
Fairness Opinion Letter 1
Valuation Considerations 2
Summary Explanation of Valuation Methodology 3
Valuation Analysis 4
</TABLE>
<PAGE> 3
[LETTERHEAD FOR BROADVIEW]
December 29, 1998
CONFIDENTIAL
Board of Directors
Interlinq Software Corporation
11980 NE 24th Street
Bellevue, WA 98005
Dear Members of the Board:
We understand that Interlinq Software Corporation, a Washington corporation
("Interlinq" or the "Company"), and Terlin, Inc. ("Terlin" or "MergerCo"), a
Washington corporation, propose to enter into an Agreement and Plan of Merger
(the "Agreement"), pursuant to which MergerCo will be merged (the "Merger") with
and into the Company (the Company, following the Merger, is referred to herein
as the "Surviving Corporation"). Pursuant to the Merger, each outstanding share
of common stock of the Company ("Common Stock") will be converted, at the option
of the holder thereof, into the right either to receive $9.25 cash or to retain
one share of Common Stock (in the form of common stock of the Surviving
Corporation); provided, however, that such elections by Interlinq shareholders
to receive cash or retain Surviving Corporation common stock shall be adjusted
on a pro-rata basis in accordance with the Agreement to provide for the
retention by Interlinq shareholders of 1.25 million shares of Surviving
Corporation common stock in the aggregate, representing approximately 36.7% of
the common stock of the Surviving Corporation outstanding immediately subsequent
to the Merger. The aggregate amount of cash to be received, and Surviving
Corporation common stock to be retained, by Interlinq shareholders in the Merger
is collectively referred to herein as the "Consideration." Based on our
discussions with Terlin management, we also understand that, in connection with
the Merger, options and warrants to purchase Surviving Corporation common stock
may be issued which, if and when exercised, would reduce Interlinq shareholders'
percentage ownership of Surviving Corporation common stock by approximately
23.7% (on a fully diluted basis).
The common stock of the Surviving Corporation may not be listed on the Nasdaq
National Market or on any stock exchange following the Merger. The Merger is
intended to be accounted for as a Leveraged Recapitalization under Generally
<PAGE> 4
BROADVIEW
Accepted Accounting Principles. The terms and conditions of the above described
Merger are more fully detailed in the Agreement.
You have requested our opinion as to whether the Consideration to be received by
Interlinq shareholders in the Merger is fair, from a financial point of view, to
Interlinq shareholders (other than Terlin and its affiliates).
Broadview International LLC focuses on providing merger and acquisition advisory
services to information technology ("IT") companies. In this capacity, we are
continually engaged in valuing such businesses, and we maintain an extensive
database of IT mergers and acquisitions for comparative purposes. We have been
engaged for the purpose of rendering an opinion in connection with the Merger
and will receive a fee upon the delivery of this opinion. We have not, however,
in the course of our representation of the Company, been asked to consider, and
this opinion does not address, the relative merits of the Merger as compared to
other potential business strategies which the Company could pursue.
In rendering our opinion, we have, among other things:
1.) reviewed the terms of the draft Agreement furnished to us by Terlin's
legal counsel on December 23, 1998, which, for the purposes of this
opinion, we have assumed, with your permission, to be identical in all
material respects to the agreement to be executed except for the cash
offer price. We have assumed, with your permission (and this opinion is
being rendered based on this assumption), a cash offer price of $9.25;
2.) reviewed Interlinq's Form 10-K for the fiscal year ended June 30, 1998,
including the audited financial statements included therein, and
Interlinq's Form 10-Q for its quarterly period ended September 30, 1998,
including the unaudited financial statements included therein;
3.) reviewed certain internal financial and operating information relating to
Interlinq prepared and provided to us by Interlinq management, including
financial projections through June 30, 2004 for Interlinq (which assume
the Merger does not occur) as well as certain pro forma effects on the
Company's capital structure after giving effect to the Merger;
4.) participated in discussions with Interlinq management concerning the
operations, business strategy, current financial performance and prospects
for Interlinq;
<PAGE> 5
BROADVIEW
5.) discussed with Interlinq management its view of the strategic rationale
for the Merger;
6.) discussed with Terlin management its view of the strategic rationale for
the Merger;
7.) discussed with Terlin management the pro forma capital structure for the
Company;
8.) analyzed the anticipated effect of the Merger on the future financial
performance of the Company;
9.) reviewed the recent reported closing prices and trading activity for
Interlinq Common Stock;
10.) compared certain aspects of the financial performance of Interlinq with
public companies we deemed comparable;
11.) analyzed available information, both public and private, concerning other
mergers and acquisitions we believe to be comparable in whole or in part
to the Merger;
12.) reviewed recent equity research analyst reports covering Interlinq;
13.) conducted other financial studies, analyses and investigations as we
deemed appropriate for purposes of this opinion.
In rendering our opinion, we have relied, without independent verification, on
the accuracy and completeness of all the financial and other information
(including without limitation the representations and warranties contained in
the Agreement) that was publicly available or otherwise disclosed to us. With
respect to the financial projections examined by us, we have assumed that they
were reasonably prepared and reflected the best available estimates and good
faith judgments of the management of Interlinq as to the future performance of
Interlinq, including the pro forma financial impact of the Merger on the
Company. We have also relied on information provided by Terlin management
regarding the pro forma capitalization of the Company assuming consummation of
the Merger. We have neither made nor obtained an independent appraisal or
valuation of any of Interlinq's assets.
<PAGE> 6
BROADVIEW
Based upon and subject to the foregoing, we are of the opinion that the
Consideration to be received by Interlinq shareholders in the Merger is fair,
from a financial point of view, to Interlinq shareholders (other than Terlin and
its affiliates).
The foregoing opinion relates to the aggregate consideration to be received by
Interlinq shareholders in the Merger, and no opinion is rendered herein with
respect to the allocation of the Consideration among Interlinq shareholders.
Such allocation is to be determined by elections made by Interlinq shareholders
as to whether to receive cash consideration or to retain Surviving Corporation
common stock, subject to adjustment in accordance with the terms of the
Agreement.
For purposes of this opinion, we have assumed that Interlinq is not currently
involved in any material transaction other than the Merger and those activities
undertaken in the ordinary course of conducting its business. Our opinion is
necessarily based upon market, economic, financial and other conditions as they
exist and can be evaluated as of the date of this opinion, and any change in
such conditions may impact this opinion. We express no opinion as to the price
at which Interlinq Common Stock or common stock of the Surviving Corporation
will trade at any time.
This opinion speaks only as of the date hereof. It is understood that this
opinion is for the information of the Board of Directors of Interlinq in
connection with its consideration of the Merger and does not constitute a
recommendation to any Interlinq shareholder as to how such shareholder should
vote on the proposed Merger or as to whether any shareholder should elect to
retain shares in the Surviving Corporation. This opinion may not be published or
referred to, in whole or part, without our prior written permission, which shall
not be unreasonably withheld. Broadview International LLC hereby consents to
references to and the inclusion of this opinion in its entirety in the Proxy
Statement/Prospectus to be distributed to Interlinq shareholders in connection
with the Merger.
Sincerely,
/s/ BROADVIEW INTERNATIONAL LLC
Broadview International LLC
<PAGE> 7
CONFIDENTIAL
INTERLINQ SOFTWARE CORPORATION FAIRNESS OPINION
VALUATION CONSIDERATIONS
In reviewing the business of Interlinq Software Corporation ("Interlinq" or the
"Company"), along with the current activity within the Information Technology
("IT") industry, we have identified the following factors, which, among others,
may have a material impact on valuation.
FACTORS POSITIVELY AFFECTING THE VALUE OF INTERLINQ
ESTABLISHED POSITION IN THE MORTGAGE LOAN PRODUCTION SYSTEM MARKET - Founded in
1982, Interlinq is a leading developer, marketer, and supporter of PC-based
software products for the mortgage lending industry. The Company's primary
offering, the MortgageWare Enterprise suite of products, enables lending
institutions to manage the entire life cycle of a mortgage loan. An October 1998
SSP/RES Research survey of lending institutions shows that the Company has
claimed a market leading 22% share of the mortgage loan production system
market, with the next closest competitor claiming a 11% share.
SIZABLE CUSTOMER BASE - Interlinq's customers are geographically diverse and
comprise a wide range of sizes and types of financial institutions. According to
management, the Company's MortgageWare installed base includes approximately
2,000 institutions with 7,000 sites in 50 states plus Puerto Rico, Guam, and the
U.S. Virgin Islands. Further, the installed base is comprised of approximately
750 mortgage brokers and bankers, 650 banks, 500 credit unions, and 100 savings
institutions.
STABLE SOFTWARE SUPPORT REVENUE STREAM - For fiscal 1998, approximately 38% of
Interlinq's total revenue was generated from software support fees. Due in part
to periodic changes in government regulations applicable to documentation
required for residential mortgage lending, the vast majority of the Company's
customers purchase annual software support agreements. As such, software support
revenues are recurring and are a generally stable component of Interlinq's total
revenue. Software support revenues grew 5% in fiscal 1997 and 15% in fiscal
1998, and management believes that due to an increase in license revenues and
higher support prices, revenue from support fees will continue to increase in
fiscal 1999.
DIVERSIFICATION OF REVENUE SOURCES - Historically the Company's revenues have
been dependent upon the sale of the MortgageWare products. Going forward,
however, management expects to continue to diversify Interlinq's total revenue
composition with growth in sales of its loan servicing and FlowMan product
offerings, thereby increasing
BROADVIEW INT'L LLC
1
<PAGE> 8
CONFIDENTIAL
the predictability of the Company's revenues and reducing its exposure to
fluctuations in mortgage interest rates.
FACTORS NEGATIVELY AFFECTING THE VALUE OF INTERLINQ
HISTORICALLY VOLATILE BUSINESS RESULTS - The Company's ability to sell
MortgageWare software licenses has historically been exposed to the condition of
the mortgage-lending environment. According to management, as interest rates
rise, mortgage origination and re-finance volumes decline, resulting in a
decrease in software license expenditures by lending institutions. In 1994
residential mortgage interest rates rose substantially, and, management
believes, as a result the Company experienced a decrease in net revenue,
operating income, and net income from Q4 1994 through most of fiscal 1995 --
revenue declined from approximately $18.5 million in fiscal 1994 to
approximately $11.0 million in fiscal 1995. Of this decline, approximately $7.1
million, or 95%, was due to a decrease in license revenues. For fiscal 1998,
approximately 49% of Interlinq's total revenue was derived from the sale of
MortgageWare software licenses. Accordingly, considerable risk remains that a
rise in interest rates could negatively impact the Company's ability to achieve
its revenue and profitability targets going forward.
DEPENDENCE ON A SINGLE PRODUCT LINE - Revenue from the licensing, service and
maintenance of the MortgageWare suite of products has historically represented a
substantial majority of Interlinq's total revenues (approximately 95% in fiscal
year 1998). Future growth will be driven in part by the Company's ability to
generate revenue from new and generally unproven offerings. These include loan
servicing products and services (approximately 5% of revenue in fiscal 1998) and
the FlowMan Enterprise Application Integration (EAI) product (0% of revenue in
fiscal 1998). Interlinq expects to launch FlowMan in 1999; however, management
does not anticipate that FlowMan will materially contribute to the Company's
total revenues until 2001.
COMPETITIVE ENVIRONMENT - Interlinq competes with companies such as Alltel and
Fiserv that provide a broad range of software and services to financial
institutions. In addition, many of the Company's competitors have financial,
marketing, and technological resources significantly greater than those of
Interlinq. These established and larger competitors may reduce the likelihood of
the Company achieving its targeted revenue growth and profitability.
SECURITIES AND EXCHANGE COMMISSION INQUIRY - On November 18, 1998 Interlinq
management was presented with a request from the Securities and Exchange
Commission for information pertaining to the accounting treatment of the
Company's June 1998 acquisition of Logical Software Solutions Corporation. This
inquiry, which primarily investigates the amount of the acquisition purchase
price allocated to acquired in-process research and development, could result in
a restatement of the Company's financials that would negatively impact the
Company's future earnings.
BROADVIEW INT'L LLC
2
<PAGE> 9
CONFIDENTIAL
INTERLINQ SOFTWARE CORPORATION
FAIRNESS OPINION
SUMMARY EXPLANATION OF
VALUATION METHODOLOGY
The following is a summary explanation of the various sources of information and
valuation methodologies employed by Broadview International LLC ("Broadview") in
valuing Interlinq Software Corporation ("Interlinq" or the "Company") in
conjunction with rendering its fairness opinion regarding the proposed
transaction with Terlin, Inc ("Terlin" or "MergerCo"). Broadview employed
analyses based on: (1) public company comparables, (2) transaction comparables,
(3) transaction premiums paid, (4) stock performance, and (5) present value of
projected share prices to determine the fairness of the transaction.
In addition, Broadview assessed the potential implications of various scenarios
that could affect the value of the aggregate consideration to be received by
Interlinq shareholders in the Merger. In performing such analyses, Broadview
considered a range of potential values of consideration to be received in the
forms of cash and shares to be retained in the Surviving Corporation after
giving effects to the Company's pro forma capital structure assuming
consummation of the Merger. Broadview's assessment of the value of the Surviving
Corporation necessitated numerous assumptions regarding the performance and
capital structure of the Surviving Corporation that were provided by or
corroborated by Interlinq management or Terlin management or that Broadview
deemed reasonable or conservative. In assessing the value of the aggregate
consideration to be received by Interlinq shareholders in the Merger, Broadview
assumed that all Interlinq shareholders participate pro rata, based on their
relative ownership of Interlinq, in the allocation of the aggregate
consideration to be received by Interlinq shareholders in the Merger.
BROADVIEW INT'L LLC
1
<PAGE> 10
CONFIDENTIAL
PUBLIC COMPANY COMPARABLES ANALYSIS - Total Market Capitalization/Revenue(1)
("TMC/R"), Total Market Capitalization/Last Quarter Annualized Revenue ("TMC/LQA
Revenue"), Total Market Capitalization/EBIT ("TMC/EBIT"), Price/Earnings
("P/E"), Total Market Capitalization/Forward Revenue ("Forward TMC/R"),
Price/Forward Earnings ("Forward P/E"), and Price/Forward Growth Adjusted EPS
("Forward PEG") multiples indicate the value public markets place on companies
in a particular market segment. Several public companies are comparable to both
Interlinq and the Surviving Corporation based on products offered, business
model, market focus, and financial profile. Broadview reviewed six public
company comparables in the enterprise applications software segment of the
Information Technology ("IT") market providing software solutions for financial
institutions, with positive TTM net margins, TTM revenue between $10 million and
$100 million, TTM revenue growth greater than 10%, and Forward Calendar Year
1999 revenue growth between 10% and 50% from a financial point of view including
each company's: TTM Revenue; TTM Revenue Growth; Forward CY 1999 Revenue Growth;
TTM EBIT Margin; TTM Net Margin; Five Year Earnings Per Share Compound Annual
Growth Rate (5 Year EPS CAGR), Equity Market Capitalization; TTM TMC/R ratio;
TTM TMC/LQA Revenue ratio; TTM TMC/EBIT ratio; TTM P/E ratio; Forward CY 1999
TMC/R ratio; Forward CY 1999 P/E ratio; and Forward CY 1999 PEG. The public
company comparables were selected from the Broadview Barometer, a proprietary
database of publicly-traded IT companies maintained by Broadview and categorized
by industry segment.
In order of descending TTM TMC/R, the public company comparables for Interlinq
and the Surviving Corporation consist of:
1) Sanchez Computer Associates, Inc;
2) Advent Software, Inc;
3) SS&C Technologies, Inc;
4) FDP Corporation;
5) Carreker-Antinori, Inc; and
6) CFI ProServices, Inc.
- --------
(1) We have employed a TMC/R ratio in this analysis because it enables two
critical balance sheet items, cash and debt, to be factored directly into
the valuation. The formula for the TMC/R ratio is as follows:
((market value of equity) + (short term debt + long term debt) - (cash and
equivalents))/revenue.
To determine value using this approach, the first step is to calculate the
appropriate TMC/R ratio. Next, the revenue of the company is multiplied by the
appropriate TMC/R ratio determined in step 1. This provides a total "entity"
value which represents the company's value based on its operating performance,
i.e., excluding the effects of capitalization. The final step is to subtract all
short term and long term debt from the total entity value and then add back cash
and equivalents. The result is one measure of the fair market value of a
company's equity.
BROADVIEW INT'L LLC
2
<PAGE> 11
CONFIDENTIAL
These comparables have a TTM TMC/R ratio range of 0.7 to 6.2 with a median of
1.6, a TMC/LQA Revenue ratio range of 0.6 to 5.1 with a median of 1.4, a TTM
TMC/EBIT ratio range of 6.3 to 31.9 with a median of 18.8, a TTM P/E ratio range
of 11.6 to 46.9 with a median of 21.6, a Forward CY 1999 TMC/R ratio range of
0.6 to 4.0 with a median of 1.1, a Forward CY 1999 P/E ratio range of 9.4 to
30.4 with a median of 14.8, and a Forward CY 1999 PEG ratio range of 0.38 to
0.83 with a median of 0.52.
Based on historical financial results and financial projections for Interlinq
provided by Interlinq management (assuming the Merger does not occur), the per
share valuation range of Interlinq implied by the TTM TMC/R multiples is $4.45
to $24.04 with a median implied value of $7.48. The per share valuation range
implied by the TMC/LQA Revenue multiples is $4.46 to $22.61 with a median
implied value of $7.40. The per share valuation range of Interlinq implied by
the TTM TMC/EBIT multiples is $5.14 to $18.42 with a median implied value of
$11.60. The per share valuation range of Interlinq implied by the TTM P/E
multiples is $4.70 to $19.02 with a median implied value of $8.73. The per share
valuation range of Interlinq implied by the Forward CY 1999 TMC/R multiples is
$4.72 to $21.26 with a median implied value of $7.37. The per share valuation
range of Interlinq implied by the Forward CY 1999 P/E multiples is $5.79 to
$18.75 with a median implied value of $9.16. The per share valuation range of
Interlinq implied by the Forward CY 1999 PEG multiples is $6.61 to $14.37 with a
median implied value of $9.04. To calculate Interlinq's five year growth rate
used in the Forward CY 1999 PEG analysis, Broadview calendarized Interlinq
management's projections for EPS from Fiscal Year 1999 through Fiscal Year 2004
on a pro rata basis.
TRANSACTION COMPARABLES ANALYSIS - Valuation statistics from transaction
comparables indicate the Adjusted Price/Revenue ("P/R") acquirers have paid for
comparable companies in a particular market segment. Broadview reviewed eight
comparable public and private company merger and acquisition ("M&A")
transactions from January 1, 1996 through December 28, 1998 that involved
sellers sharing many characteristics with Interlinq including products offered,
business model, market focus, and financial profile. Transactions were selected
from Broadview's proprietary database of published and confidential M&A
transactions in the IT industry. These transactions represent eight sellers in
the enterprise applications software segment of the IT market providing software
solutions for financial institutions, with TTM Revenue between $10 million and
$100 million on the date the transaction was announced.
In order of descending P/R multiple, the seller transactions used are the
acquisition of:
1) Infinity Financial Technology, Inc by Sungard Data Systems Inc;
2) Servantis Systems Holdings, Inc by Checkfree Corporation;
3) The Frustrum Group, Inc by Misys plc;
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4) Checkfree Corporation (Mortgage Products Division) by London Bridge
Software Holdings plc;
5) C*ATS Software Inc by Misys plc (pending);
6) National Computer Systems, Inc (NCS Financial Systems, Inc
subsidiary) by Sungard Data Systems Inc;
7) CUSA Technologies, Inc by Fiserv, Inc; and
8) Confidential by Confidential.
The P/R multiples of the eight transactions range from 0.7 to 5.0 with a median
of 1.9. The per share valuation range implied by the P/R multiples is $4.36 to
$19.80 with a median implied value of $8.47.
TRANSACTION PREMIUMS PAID ANALYSIS - Premiums paid in comparable public seller
transactions indicate the amount of consideration acquirers are willing to pay
above the seller's equity market capitalization. In this analysis, the value of
consideration paid in transactions involving stock is computed using the buyer's
stock price immediately prior to announcement (closing price as quoted on the
appropriate exchange the day prior to announcement), while the seller's equity
market capitalization is measured one trading day prior and 20 trading days
prior to announcement. Broadview reviewed 25 comparable M&A transactions
involving North American software vendors from January 1, 1997 to the present
with total consideration between $20 million and $100 million. Transactions were
selected from Broadview's proprietary database of published and confidential M&A
transactions in the IT industry. In order of descending premium paid to seller's
equity market capitalization 20 trading days prior to announce date, the
software transactions used were the acquisition of:
1) FullTime Software, Inc by Legato Systems, Inc (pending);
2) Sulcus Hospitality Technologies Corporation by Eltrax Systems, Inc
(pending);
3) Consilium, Inc by Applied Materials, Inc (pending);
4) Concentra Corporation by Oracle Corporation (pending);
5) Accugraph Corporation by Architel Systems Corporation;
6) CUSA Technologies, Inc by Fiserv, Inc;
7) Promis Systems Corporation Ltd by PRI Automation, Inc (pending):
8) TeleBackup Systems, Inc by VERITAS Software Corporation (pending);
9) National Health Enhancement Systems, Inc by HBO & Company;
10) C*ATS Software Inc by Misys plc (pending);
11) Interactive Group by DataWorks Corporation;
12) Prism Solutions by Ardent Software (pending);
13) Kurzweil Applied Intelligence, Inc by Lernout & Hauspie Speech
Products NV;
14) Globalink Inc by Lernout & Hauspie Speech Products NV;
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15) Learmonth & Burchett Management Systems, Inc by PLATINUM technology,
Inc;
16) IQ Software Corporation by Information Advantage Software, Inc;
17) Andyne Computing Ltd by Hummingbird Communications Ltd;
18) Quarterdeck Corporation by Symantec Corporation (pending);
19) Innovative Technologies Systems, Inc by Peregrine Systems, Inc;
20) DataWorks Corporation by Platinum Software Corporation (pending);
21) Compurad, Inc by Lumisys, Inc;
22) Red Brick Systems, Inc by Informix Corporation (pending);
23) Orcad, Inc by Summit Design (pending);
24) Fulcrum Technologies, Inc by PC DOCS Group International, Inc; and
25) FTP Software, Inc by NetManage, Inc.
Based upon Broadview's analysis of premiums paid in comparable software
transactions, Broadview found that premiums (or discounts) paid to the sellers'
equity market capitalizations one day prior to announcement ranged from (31.7%)
to 186.7% with a median of 21.1%. The premiums paid to the sellers' equity
market capitalizations 20 days prior to announcement ranged from (26.3%) to
326.6% with a median of 55.6%.
To calculate the per share value for Interlinq based on analyses of transaction
premiums paid, Broadview considered the announcement date of the potential
Merger to be December 3, 1998, the date that an affiliate of Terlin filed a Form
13D with the Securities Exchange Commission announcing the affiliate's
contemplation of a transaction with the Company. The per share valuation range
implied by the premiums paid to the share price one day prior to the
announcement is $5.17 to $21.68 with a median implied value of $9.16. The per
share valuation range implied by the premiums paid to the share price 20 days
prior to the announcement is $4.79 to $27.73 with a median implied value of
$10.11.
STOCK PERFORMANCE ANALYSIS - For comparative purposes, Broadview examined the
trading history of:
1) Interlinq Common Stock from December 12, 1997 to December 28, 1998;
2) An index of the aggregate set of public company comparables vs.
Interlinq and the S&P500 from December 12, 1997 to December 28,
1998.
PRESENT VALUE OF PROJECTED SHARE PRICE ANALYSIS - Based on selected median TTM
multiples of Interlinq's public company comparables as well as Interlinq's own
TTM multiples, Broadview calculated the per share present values of Interlinq
shares assuming Interlinq were to remain a stand-alone entity. This analysis was
performed
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based on both Interlinq management projections and equity research analyst
projections for Interlinq for Calendar Year 1999. For the equity research
analyst projections for Interlinq, Broadview calendarized the projections for
Fiscal Year 1999 and Fiscal Year 2000 on a pro rata basis. Broadview calculated
the implied share prices discounted from January 30, 2000 (assuming Calendar
Year 1999 financial results are publicly announced thirty days subsequent to the
Calendar Year End) to December 29, 1998 at discount rates, ranging from 10.0% to
20.0%, implied by the Company's capital structure assuming the Merger is not
consummated and using CAPM and the median capital-structure adjusted beta of
Interlinq's public company comparables.
The potential future share price based on Calendar 1999 financial results was
calculated based upon estimated Calendar 1999 Revenue, EBIT, and Earnings. Based
on the medians of Interlinq's public company comparables and using management's
estimates, Broadview calculated present values of potential future share prices
based on TTM TMC/R ratios ranging from $8.64 to $9.50, present values of
potential future share prices based on TTM TMC/EBIT ratios ranging from $17.14
to $18.84, and present values of potential future share prices based on TTM P/E
ratios ranging from $12.12 to $13.32. Using the same discount rates and medians
of Interlinq's public company comparables and using equity research analyst
estimates, Broadview calculated present values of potential future share prices
based on TTM TMC/R ratios ranging from $8.36 to $9.20, present values of
potential future share prices based on TTM TMC/EBIT ratios ranging from $16.82
to $18.49, and present values of potential future share prices based on TTM P/E
ratios ranging from $12.64 to $13.90.
Based on Interlinq's own TTM TMC/R, TTM TMC/EBIT, and TTM P/E multiples and
using management's estimates, Broadview calculated present values of potential
future share prices based on TTM TMC/R ratios ranging from $7.73 to $8.50,
present values of potential future share prices based on TTM TMC/EBIT ratios
ranging from $9.45 to $10.39, and present values of potential future share
prices based on TTM P/E ratios ranging from $10.19 to $11.20. Using the same
discount rates, Interlinq's own respective multiples, and equity research
analyst estimates, Broadview calculated present values of potential future share
prices based on TTM TMC/R ranging from $7.49 to $8.23, present values of
potential future share prices based on TTM TMC/EBIT ratios ranging from $9.28 to
$10.21, and present values of potential future share prices based on TTM P/E
ratios ranging from $10.63 to $11.68.
CONSIDERATION OF THE DISCOUNTED CASH FLOWS VALUATION METHODOLOGY - While
discounted cash flows analysis is a commonly used valuation methodology,
Broadview did not employ such an analysis for the purposes of this opinion.
Discounted cash flows analysis is most appropriate for companies which exhibit
relatively steady or somewhat predictable streams of future cash flows. Given
the uncertainty in estimating Interlinq's future cash flows and sustainable
long-term growth rate, Broadview considered a discounted cash flows analysis
inappropriate for valuing Interlinq.
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EVALUATION OF CONSIDERATION
Broadview assumed that all shareholders would elect identically such that the
aggregate cash and shares to be retained would be allocated pro rata in
accordance with the Agreement. Broadview then assessed a range of combined
values of cash and shares to be retained in the Surviving Corporation by Company
shareholders after giving effects to the Company's pro forma capital structure
assuming consummation of the Merger.
ANALYSIS OF CASH CONSIDERATION - Broadview calculated $7.22 per share of cash
consideration to be received.
LEVERAGED RECAPITALIZATION ANALYSIS - To calculate the potential value of shares
to be retained by Interlinq shareholders, Broadview performed a leveraged
recapitalization analysis for the Surviving Corporation using Interlinq
shareholders' ownership in the Surviving Corporation per the Agreement,
Interlinq management's financial projections for the Fiscal Years 1999 through
2002 and Terlin management's proposed capital structure for the Surviving
Corporation, including additional dilution to Interlinq shareholders resulting
from the Merger. Included in these assumptions was a capital structure
consisting of $22.5 million in total debt, consisting of $12.5 million of Senior
debt bearing a 10.0% annual interest rate and due seven years from the Merger
and $10.0 million of Subordinated debt bearing a rate of 200 basis points in
excess of the prime rate (Broadview assumed a rate on Subordinated debt of 9.8%)
due seven years from the Merger. Broadview also assumed, based on discussions
with Terlin management, that additional securities would be issued to Interlinq
directors, management and employees, attorneys, and providers of Subordinated
debt facilities as a result of the Merger, that would dilute Interlinq
shareholders' ownership in the Surviving Corporation upon consummation of the
Merger by up to 23.7% (on a fully diluted basis). Broadview also performed a
pre-money valuation on a hypothetical liquidity event occurring between 18 and
30 months from Calendar 1998 Year End, based on discussions with Terlin
management regarding their intent for the Surviving Corporation. This analysis
was based on the median TTM TMC/EBIT multiple of Interlinq's public company
comparables described above, Interlinq management's financial projections for
Fiscal Years 2000 and 2001, and assumptions for the capital structure for the
Surviving Corporation provided by Terlin management. Broadview discounted equity
values implied by the analysis by a cost of equity discount rate of 22.2 % to
December 29, 1998. This discount rate was implied by the proposed capital
structure for the Surviving Corporation using CAPM and the median
capital-structure adjusted beta of Interlinq's public company comparables.
Broadview calculated a per share range of present values of the Surviving
Corporation of $3.00 to $3.81.
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SUMMARY OF VALUATION ANALYSES - Taken together, the information and analyses
employed by Broadview lead to Broadview's overall opinion that the Consideration
to be paid in the Merger is fair to Interlinq shareholders (other than Terlin
and its affiliates) from a financial point of view.
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INTERLINQ SOFTWARE CORPORATION
FAIRNESS OPINION
VALUATION ANALYSIS
Prepared For:
Interlinq Software Corporation
Board of Directors
Prepared By: Broadview Int'l LLC
December 29, 1998
<PAGE> 18
Interlinq Software Corporation Fairness Opinion
VALUATION ANALYSIS
Table of Contents
<TABLE>
<CAPTION>
Tab Page
<S> <C> <C>
Transaction Summary A
Transaction Description 1
Consideration Value 2
Valuation Analysis 3
Graphical Valuation Summary 4
Public Company Comparables Analyses B
Public Company Comparables Summary 5
Public Company Comparables Descriptions 6
Public Company Comparables Financials 7
M&A Transactions Analyses C
M&A Transaction Comparables 8
Premiums Paid Analysis 9
Interlinq Stock Performance D
Interlinq Trading History 14
Index of Public Company Comparables vs. 15
Interlinq and the S&P 500
Present Value of Projected Share Price Analysis E
Sensitivity Analyses 16
</TABLE>
<PAGE> 19
Interlinq Software Corporation Fairness Opinion
VALUATION ANALYSIS
Table of Contents (Continued)
<TABLE>
<S> <C> <C>
Evaluation of Consideration F
Sources and Uses of Funds 17
Implied Equity Value of Surviving Corporation 18
Equity Capitalization Analysis 19
Surviving Corporation Exit Valuation Analysis 20
Appendix
Surviving Corporation Summary Pro Forma Financial Statements 21
Standalone Financial Statements 26
Discount Rate Calculations 28
Interlinq Pre-Merger Capitalization 30
</TABLE>
<PAGE> 20
CONFIDENTIAL
TRANSACTION DESCRIPTION
We understand that Interlinq Software Corporation, a Washington corporation
("Interlinq" or the "Company"), and Terlin, Inc. ("Terlin" or "MergerCo"), a
Washington corporation, propose to enter into an Agreement and Plan of Merger
(the "Agreement"), pursuant to which MergerCo will be merged (the "Merger") with
and into the Company (the Company, following the Merger, is referred to herein
as the "Surviving Corporation"). Pursuant to the Merger, each outstanding share
of common stock of the Company ("Common Stock") will be converted, at the option
of the holder thereof, into the right either to receive $9.25 cash or to retain
one share of Common Stock (in the form of common stock of the Surviving
Corporation); provided, however, that such elections by Interlinq shareholders
to receive cash or retain Surviving Corporation common stock shall be adjusted
on a pro-rata basis in accordance with the Agreement to provide for the
retention of 1.25 million shares of Surviving Corporation common stock in the
aggregate, representing approximately 36.7% of the common stock of the Surviving
Corporation outstanding immediately subsequent to the Merger. The aggregate
amount of cash to be received, and Surviving Corporation common stock to be
retained, by Interlinq shareholders in the Merger is collectively referred to
herein as the "Consideration." Based on our discussions with Terlin management,
we also understand that, in connection with the Merger, options and warrants to
purchase Surviving Corporation common stock may be issued which, if and when
exercised, would reduce Interlinq shareholders' percentage ownership of
Surviving Corporation common stock by approximately 23.7% (on a fully diluted
basis).
The common stock of the Surviving Corporation may not be listed on the Nasdaq
National Market or on any stock exchange following the Merger. The Merger is
intended to be accounted for as a Leveraged Recapitalization under Generally
Accepted Accounting Principles. The terms and conditions of the above described
Merger are more fully detailed in the Agreement.
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SUMMARY OF CONSIDERATION VALUE
<TABLE>
<CAPTION>
VALUATION RANGE
-----------------------------
LOW HIGH
----------- -----------
<S> <C> <C>
CASH CONSIDERATION:
Interlinq Pre-Merger Diluted Shares(1) 5,693,849 5,693,849
Less: Shares to be Retained by Interlinq Shareholders(2) 1,250,000 1,250,000
----------- -----------
Equals: Shares to be Purchased 4,443,849 4,443,849
Total Cash to be Received @ $9.25 per Share $41,105,602 $41,105,602
Divided by: Total Pre-Merger Diluted Shares 5,693,849 5,693,849
----------- -----------
PER SHARE PRO-RATA CASH CONSIDERATION $ 7.22 $ 7.22
----------- -----------
EQUITY CONSIDERATION:
Range of Present Values of Surviving Corporation(3) $61,012,721 $77,387,877
Times: Interlinq Diluted Ownership of Surviving Corporation(4) 28.0% 28.0%
----------- -----------
Equals: Range of Values of Interlinq Ownership of Surviving Corporation $17,083,752 $21,668,846
Divided by: Total Pre-Merger Diluted Shares(1) 5,693,849 5,693,849
----------- -----------
RANGE OF PER SHARE VALUES OF INTERLINQ PRO-
RATA OWNERSHIP OF SURVIVING CORPORATION $ 3.00 $ 3.81
----------- -----------
RANGE OF PER SHARE VALUES OF TOTAL CONSIDERATION $ 10.22 $ 11.02
=========== ===========
</TABLE>
NOTES:
(1) Pre-Merger 5,126,200 Common Shares per management as of 12/28/98; Diluted
share calculation based on Treasury Method (at $9.25 per share) less
management options to be cancelled per the Agreement.
(2) Per the Agreement.
(3) Per "Surviving Corporation Exit Valuation Analysis".
(4) Per "Surviving Corporation Equity Capitalization Analysis".
Page 2
<PAGE> 22
CONFIDENTIAL
INTERLINQ VALUATION ANALYSIS
($Thousands Except Per Share Data)
<TABLE>
<CAPTION>
INTERLINQ
RELEVANT MARKET
INTERLINQ ADJUSTED
METHODOLOGY RANGE MEDIAN FIGURE SHARE PRICE(1)(2)
- ---------------------------------------------------------------------- --------------- ------ --------- -----------------
<S> <C> <C> <C> <C>
Public Market Comparables Analyses
1) Multiple of Trailing Twelve Months Revenue 0.7 - 6.2 1.6 20,512.6 $ 7.48
2) Multiple of Last Quarter Revenue Annualized 0.6 - 5.1 1.4 23,232.3 $ 7.40
3) Multiple of Trailing Twelve Months EBIT 6.3 - 31.9 18.8 2,985.3 $11.60
4) Multiple of Trailing Twelve Months Earnings 11.6 - 46.9 21.6 2,328.3 $ 8.73
5) Multiple of Forward CY 1999 Revenue 0.6 - 4.0 1.1 27,844.2 $ 7.37
6) Multiple of Forward CY 1999 Earnings 9.4 - 30.4 14.8 3,551.0 $ 9.16
7) Multiple of Forward CY 1999 Growth Adjusted EPS 0.38 - 0.83 0.52 17.36 $ 9.04
Comparable Transaction Analyses
8) Multiple of Revenue for Comparable Public and Private Companies 0.7 - 5.0 1.9 20,512.6 $ 8.47
9) Premium to Market Value 1 Day Prior to Announce(3) -31.7% - 186.7% 21.1% $7.56 $ 9.16
10) Premium to Market Value 20 Day Prior to Announce(3) -26.3% - 326.6% 55.6% $6.50 $10.11
</TABLE>
NOTES:
(1) Interlinq market adjusted share price based on 5.748 million Interlinq
diluted shares to be acquired at $9.25 per share.
(2) Revenue and EBIT adjusted prices include balance sheet adjustment of
$10,558 Cash and Equivalents and zero Debt based on 9/30/98 balance sheet.
(3) Announce date for Interlinq considered December 3, 1998 (date of W.R.
Hambrecht+Co 13-D filing).
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VALUATION ANALYSIS GRAPH
[GRAPH SOURCE DATA NOT SUPPLIED]
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CONFIDENTIAL
PUBLIC COMPANY COMPARABLES ANALYSIS
Selected Providers of Enterprise Applications Software Solutions for Financial
Institutions, with Positive TTM Net Margins, TTM Revenue between $10MM and
$100MM, TTM Revenue Growth Greater than 10%, and Forward CY 1999 Revenue Growth
between 10% and 50%
($Thousands Except Per Share Data)
<TABLE>
<CAPTION>
OPERATING STATISTICS(1)(2)
---------------------------------------------------------------------
FORWARD NET
TTM CY 1999 TTM 5 YEAR CASH
TTM REVENUE REVENUE EBIT TTM NET EPS (CASH -
COMPANY REVENUE GROWTH GROWTH(3) MARGIN MARGIN CAGR DEBT)
- --------------------------------------- ------- ------- --------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Sanchez Computer Associates, Inc [SCAI] $40,020 60.0% 39.6% 19.5% 14.8% 50.0% $18,118
Advent Software, Inc [ADVS] 63,763 42.3% 31.2% 19.6% 14.2% 36.7% 44,950
SS&C Technologies, Inc [SSNC] 61,797 50.1% 31.9% 6.7% 10.7% 40.0% 44,041
FDP Corporation [FDPC] 38,508 24.6% 20.0% 11.6% 9.5% 24.0% 20,318
Carreker-Antinori, Inc [CANI] 49,084 48.2% 38.5% 13.9% 9.4% 30.0% 31,404
CFI ProServices, Inc [PROI] 82,113 18.9% 16.3% 11.6% 6.1% 20.2% -3,543
Mean $55,881 40.7% 29.6% 13.8% 10.8% 33.5% $25,881
High 82,113 60.0% 39.6% 19.6% 14.8% 50.0% 44,950
MEDIAN 55,441 45.2% 31.5% 12.7% 10.1% 33.3% 25,861
Low 38,508 18.9% 16.3% 6.7% 6.1% 20.2% -3,543
INTERLINQ(6) 20,513 42.2% 25.9% 14.6% 11.4% 25.3%(7) 10,558
</TABLE>
<TABLE>
<CAPTION>
VALUATION METRICS
-----------------------------------------------------------------------------------------
SHARE
PRICE EQUITY TMC(4) TTM FORWARD FORWARD FORWARD
AS OF MARKET TTM LQA TMC(4)/ TTM CY 1999 CY 1999 CY 1999
COMPANY 12/28/98 CAPITALIZATION TMC(4)/R REVENUE EBIT P/E TMC(3)(4)/R P/E(5) PEG(5)
- --------------------------------------- -------- -------------- -------- ------- ------- ---- ----------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sanchez Computer Associates, Inc [SCAI] $22.81 $267,142 6.2 5.1 31.9 46.9 4.0 28.9 0.58
Advent Software, Inc [ADVS] 46.75 382,249 5.3 4.5 27.1 44.1 3.7 30.4 0.83
SS&C Technologies, Inc [SSNC] 11.13 162,699 1.9 1.6 28.8 23.7 1.3 15.2 0.38
FDP Corporation [FDPC] 11.25 67,348 1.2 1.1 10.5 18.0 1.0 14.4 0.60
Carreker-Antinori, Inc [CANI] 5.56 92,523 1.2 1.1 9.0 19.4 0.9 13.2 0.44
CFI ProServices, Inc [PROI] 11.25 56,617 0.7 0.6 6.3 11.6 0.6 9.4 0.46
Mean $171,429 2.8 2.4 18.9 27.3 1.9 18.6 0.55
High 382,249 6.2 5.1 31.9 46.9 4.0 30.4 0.83
MEDIAN 127,611 1.6 1.4 18.8 21.6 1.1 14.8 0.52
Low 56,617 0.7 0.6 6.3 11.6 0.6 9.4 0.38
INTERLINQ(6) $7.56 38,767 1.4 1.2 9.4 18.1 1.0 11.0 0.44
</TABLE>
NOTES:
(1) Trailing Twelve Months (TTM) as of September 30, 1998 or the most recently
reported fiscal period.
(2) Excludes non-recurring charges and gains.
(3) Forward CY 1999 Revenues based on selected equity analyst projections.
(4) Total Market Cap (TMC) equals Equity Market Cap less Cash & Equivalents
plus Total Debt.
(5) Earnings CAGR and Forward CY 1999 Earnings based on Zacks Corporate
Earnings Estimates.
(6) Interlinq projected standalone financials based on management estimates.
(7) Broadview calculated Interlinq's 5 Year EPS CAGR by calendarizing
Interlinq management's projections for EPS from Fiscal Year 1999 through
Fiscal Year 2004 on a pro rata basis.
Page 5 BROADVIEW INT'L LLC
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CONFIDENTIAL
DESCRIPTIONS OF PUBLIC COMPANY COMPARABLES
- --------------------------------------------------------------------------------
Selected Providers of Enterprise Applications Software Solutions for Financial
Institutions, with Positive TTM Net Margins, TTM Revenue between $10MM and
$100MM, TTM Revenue Growth Greater than 10%, and Forward CY 1999 Revenue Growth
between 10% and 50%
<TABLE>
<CAPTION>
COMPANY DESCRIPTION
- ------- -----------
<S> <C>
Sanchez Computer Designs, develops, markets, and supports comprehensive
Associates, Inc banking software for financial service firms worldwide
targeting the emerging banking and direct banking markets.
Advent Software, Inc Provides stand alone and client/server software
products, data interfaces, and related services that
automate and integrate certain mission-critical
functions of investment management organizations.
SS&C Technologies, Inc Provides client/server-based financial software
solutions and related consulting services for
financial institutions. Products perform investment
management, accounting and reporting functions.
FDP Corporation Develops, markets, and supports applications and
software systems used by life insurance companies
and employee benefit administrators to market and
administer life insurance products and employee
benefit plans.
Carreker-Antinori, Inc Provides integrated software, consulting, and
hardware solutions, offering yield management,
payment systems, and enabling technology solutions
to banks.
CFI ProServices, Inc Provides software solutions to the financial
services industry that automate customer service and
support pertaining to lending, operations,
electronic delivery and connectivity functions.
</TABLE>
Page 6 BROADVIEW INT'L LLC
<PAGE> 26
CONFIDENTIAL
FINANCIAL STATISTICS(1)(2) OF PUBLIC COMPANY COMPARABLES
Selected Providers of Enterprise Applications Software Solutions for Financial
Institutions, with Positive TTM Net Margins, TTM Revenue between $10MM and
$100MM, TTM Revenue Growth Greater than 10%, and Forward CY 1999 Revenue Growth
between 10% and 50%
($Thousands Except Per Share Data)
<TABLE>
<CAPTION>
SCAI ADVS SSNC FDPC CANI PROI
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INCOME STATISTICS
Revenue $ 40,020 $ 63,763 $ 61,797 $ 38,508 $ 49,084 $ 82,113
Revenue Growth 60.0% 42.3% 50.1% 24.6% 48.2% 18.9%
EBIT 7,798 12,467 4,114 4,459 6,799 9,550
EBIT Margin 19.5% 19.6% 6.7% 11.6% 13.9% 11.6%
Net Income 5,907 9,033 6,640 3,674 4,618 5,001
Net Margin 14.8% 14.2% 10.7% 9.5% 9.4% 6.1%
EPS $ 0.49 $ 1.06 $ 0.47 $ 0.63 $ 0.29 $ 0.97
Forward 12/31/99 Revenue 62,101 91,300 91,165 47,814 67,974 100,986
Projected 12/31/99 EPS 0.79 1.54 0.73 0.78 0.42 1.20
EPS Growth (5-Year CAGR) 50.0% 36.7% 40.0% 24.0% 30.0% 20.2%
BALANCE SHEET STATISTICS
Cash & Equivalents $ 18,509 $ 44,950 $ 44,818 $ 20,318 $ 31,404 $ 2,475
Total Debt 391 0 777 0 0 6,018
VALUATION STATISTICS
Share Price as of 12/28/98 $ 22.81 $ 46.75 $ 11.13 $ 11.25 $ 5.56 $ 11.25
Common Shares Outstanding 11,710 8,176 14,625 5,986 16,633 5,033
Market Capitalization $267,142 $382,249 $162,699 $ 67,348 $ 92,523 $ 56,617
Total Market Capitalization 249,024 337,299 118,658 47,030 61,119 60,160
-------- -------- -------- -------- -------- --------
Trailing TMC/R 6.2 5.3 1.9 1.2 1.2 0.7
TMC/LQA Revenue 5.1 4.5 1.6 1.1 1.1 0.6
Trailing TMC/EBIT 31.9 27.1 28.8 10.5 9.0 6.3
Trailing P/E 46.9 44.1 23.7 18.0 19.4 11.6
Forward 12/31/99 TMC/R 4.0 3.7 1.3 1.0 0.9 0.6
Forward 12/31/99 P/E 28.9 30.4 15.2 14.4 13.2 9.4
Forward 12/31/99 PEG 0.58 0.83 0.38 0.60 0.44 0.46
-------- -------- -------- -------- -------- --------
</TABLE>
NOTES:
(1) Excludes non-recurring charges and gains.
(2) Trailing Twelve Months (TTM) as of 9/30/98 or most recently reported
fiscal period.
BROADVIEW INT'L LLC
Page 7
<PAGE> 27
CONFIDENTIAL
SELECTED M&A TRANSACTION COMPARABLES
Sellers Providing Enterprise Applications Software Solutions for Financial
Institutions, with TTM Revenue between $10MM and $100MM, January 1, 1996 to
Present
($Millions)
<TABLE>
<CAPTION>
Adjusted
Announce Adjusted Seller Price/
Date Buyer Seller Seller Description Price(1) Revenue Revenue
- -------- ------------ ------------------- ---------------------------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
10/17/97 Sungard Data Infinity Develops, markets, and 298.0 59.2 5.0
Systems Inc Financial supports enterprise
Technology, Inc software solutions for
financial trading and risk
management
1/15/96 Checkfree Servantis Systems Provides electronic 161.1 61.0 2.6
Corporation Holdings, Inc commerce software for
corporate banking, back
office automation,
reconciliation, and remote
banking functions and
credit systems
11/12/96 Misys plc The Frustrum Provides an integrated 41.2 18.1 2.3
Group, Inc front and back office
software system for
treasury management
7/1/98 London Bridge Checkfree Develops, markets, 21.1 11.2 1.9
Software Corporation installs, supports and
Holdings plc (Mortgage Products services software programs
Division) to financial institutions
that assist in originating,
servicing, monitoring and
collecting mortgage loans
12/14/98 Misys plc C*ATS Software Inc Develops and markets 36.5 19.9 1.8
client/server software for
financial risk management
5/31/96 Sungard Data National Computer Provides turnkey trust 95.0 58.1 1.6
Systems Inc Systems, Inc accounting and corporate
(NCS Financial trust systems to banks and
Systems, Inc other financial institutions
subsidiary)
11/4/97 Fiserv, Inc CUSA Provides software 20.6 27.8 0.7
Technologies, Inc management systems and
support for credit unions
xx/xx/xx Confidential Confidential Develops profitability 16.7 23.6 0.7
measurement, management
accounting, and executive
information systems used by
financial institutions
</TABLE>
<TABLE>
<S> <C>
Mean 2.1
High 5.0
- -------------------------------------------------------------------------------------------------------------
MEDIAN 1.9
- -------------------------------------------------------------------------------------------------------------
Low 0.7
</TABLE>
NOTES:
(1) Prices paid have been adjusted for cash and debt on the seller's balance
sheet at the time of acquisition if known.
BROADVIEW INT'L LLC
Page 8
<PAGE> 28
CONFIDENTIAL
PREMIUMS PAID DISTRIBUTION ANALYSIS
Premium Over Seller's Share Price 1 Trading Day Prior to Announcement for Public
Software Companies in Transactions with Total Consideration between
$20 MM and $100 MM Since January 1, 1997
[GRAPH]
BROADVIEW INT'L LLC
Page 9
<PAGE> 29
CONFIDENTIAL
PREMIUMS PAID DISTRIBUTION ANALYSIS
Premium Over Seller's Share Price 20 Trading Days Prior to Announcement for
Public Software Companies in Transactions with Total Consideration between
$20 MM and $100 MM Since January 1, 1997
[GRAPH]
BROADVIEW INT'L LLC
Page 10
<PAGE> 30
CONFIDENTIAL
TRANSACTIONS INVOLVING PUBLIC SOFTWARE SELLERS
Transactions with Equity Consideration between $20MM and $100MM at Announcement
Since January 1, 1997(1)
($Millions)
<TABLE>
<CAPTION>
PREMIUM PREMIUM
OVER SHARE OVER SHARE
PRICE PRICE
1 TRADING 20 TRADING
ANNOUNCE EQUITY DAY PRIOR TO DAYS PRIOR TO
DATE BUYER SELLER SELLER DESCRIPTION CONSIDERATION ANNOUNCEMENT ANNOUNCEMENT
- -------- -------------- ------------------- -------------------------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
10/26/98 Legato Systems, FullTime Software, Designs, develops and markets 69.4 186.7% 326.6%
Inc. Inc. high availability, backup and
recovery management and security
auditing software for the Unix
and Windows NT environment
11/12/98 Eltrax Systems, Sulcus Hospitality Develops, installs, and markets 66.0 128.8% 217.8%
Inc. Technologies Corp. computer systems designed to
automate the handling, storage,
and retrieval of information and
documents; primarily services
the hospitality and real estate
markets
10/12/98 Applied Consilium, Inc. Develops integrated 50.3 169.2% 129.6%
Materials, Inc. semiconductor and electronics
manufacturing execution systems
(MES) software and services
11/10/98 Oracle Corp. Concentra Corp. Develops, markets, and supports 43.0 96.5% 128.6%
software products that automate
the processes that underlie
selling customizable products,
services and systems
4/13/98 Architel Accugraph Corp. Provides network inventory and 26.0 99.9% 122.1%
Systems Corp. provisioning products and
services
11/4/97 Fiserv Inc. CUSA Technologies, Develops credit union software 20.6 80.0% 116.0%
Inc. management systems and support,
training, statement processing
and network services
11/25/98 PRI Automation, Promis Systems Leading developer of 45.8 35.5% 110.7%
Inc. Corporation Ltd. manufacturing execution systems
(MES) for semiconductor and
precision electronics
manufacturers and automation
software
9/1/98 VERITAS TeleBackup Systems Data backup, archiving, 76.3 39.9% 100.0%
Software Corp Inc. retrieval and backup solutions
to the remote desktop
</TABLE>
BROADVIEW INT'L LLC
Page 11
<PAGE> 31
CONFIDENTIAL
TRANSACTIONS INVOLVING PUBLIC SOFTWARE SELLERS
Transactions with Equity Consideration between $20MM and $100MM at Announcement
Since January 1, 1997(1)
($Millions)
<TABLE>
<CAPTION>
PREMIUM PREMIUM
OVER SHARE OVER SHARE
PRICE PRICE
1 TRADING 20 TRADING
ANNOUNCE EQUITY DAY PRIOR TO DAYS PRIOR TO
DATE BUYER SELLER SELLER DESCRIPTION CONSIDERATION ANNOUNCEMENT ANNOUNCEMENT
- -------- -------------- ------------------- -------------------------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
10/3/97 HBO & Company National Health Medical software systems that 86.1 2.9% 95.8%
Enhancement Systems, manage demand and specialized
Inc. health information
12/14/98 Misys plc C*ATS Software Inc C*ATS Software provides 56.9 60.0% 93.5%
specialist risk management
products for financial
institutions worldwide. C*ATS'
CARMA product provides risk
management functions which
enable financial institutions to
measure and predict firm-wide
exposure to market, credit and
liquidity risk
7/31/97 DataWorks Corp. Interactive Group Business information systems 53.0 54.4% 71.5%
that enable discreet
manufacturers to manage their
enterprise
11/19/98 Ardent Software Prism Solutions Develops, markets and supports 41.9 -31.7% 57.5%
data warehouse management
software that provides solutions
for delivering business
intelligence applications
4/15/97 Lernout & Kurzweil Applied Automated speech recognition 50.9 75.0% 55.6%
Hauspie Speech Intelligence, Inc. software used to create
Products NV documents and interact with
customers by voice
7/21/98 Lernout & Globalink Inc. Language translation software 71.0 21.1% 40.0%
Hauspie Speech products. Also provides
Products NV professional language services
for its customers
1/5/98 PLATINUM Learmonth & Burchett Process management software tools 82.0 37.0% 37.0%
Technology, Inc. Management Systems,
Inc.
6/29/98 Information IQ Software Corp. Client/server tools for data 65.0 9.2% 31.1%
Advantage access and report writing
Software Inc.
10/15/97 Hummingbird Andyne Computing Ltd. Integrated decision and business 60.0 18.2% 30.2%
Communications support software
Ltd.
</TABLE>
BROADVIEW INT'L LLC
Page 12
<PAGE> 32
CONFIDENTIAL
TRANSACTIONS INVOLVING PUBLIC SOFTWARE SELLERS
Transactions with Equity Consideration between $20MM and $100MM at Announcement
Since January 1, 1997(1)
($Millions)
<TABLE>
<CAPTION>
PREMIUM PREMIUM
OVER SHARE OVER SHARE
PRICE PRICE
1 TRADING 20 TRADING
ANNOUNCE EQUITY DAY PRIOR TO DAYS PRIOR TO
DATE BUYER SELLER SELLER DESCRIPTION CONSIDERATION ANNOUNCEMENT ANNOUNCEMENT
- -------- -------------- ------------------- -------------------------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
10/15/98 Symantec Corp. Quarterdeck Corp Develops and markets desktop 47.3 18.9% 28.0%
systems software and
productivity applications that
increase internet, intranet, and
standalone systems functionality
and performance
5/7/98 Peregrine Innovative Tech Develops SPAM*FM facility & 60.7 12.7% 27.9%
Systems, Inc. Systems, Inc. technology management software
and remote data collection
systems
10/13/98 Platinum DataWorks Corp Develops client/Server-based 92.9 20.0% 18.6%
Software Corp enterprise resource planning
software for mid-sized
manufacturing companies
9/29/97 Lumisys, Inc. Compurad, Inc. Provides teleradiology and PACS 24.4 1.3% 1.3%
software products
10/7/98 Informix Corp. Red Brick Systems, Provides relational database 35.0 9.7% 1.1%
Inc. products and services for data
warehouse applications
9/20/98 Summit Design Orcad Inc. Windows EDA software and 71.1 -2.0% -8.1%
services to electronics companies
12/23/97 PC DOCS Group Fulcrum Develops indexing and text 21.0 3.2% -17.0%
International Technologies, Inc. retrieval S/W used in a variety
Inc. of document formats and in
various computing environments,
including multiple operating
systems, networks and GUIs
6/15/98 NetManage Inc. FTP Software Inc. Network software products that 77.4 14.1% -26.3%
provide TCP/IP network transport
functionality
High 186.7% 326.6%
----- -----
MEDIAN 21.1% 55.6%
----- -----
Low -31.7% -26.3%
===== =====
</TABLE>
NOTES:
(1) Selected deals excluded because consideration consists of illiquid
securities.
BROADVIEW INT'L LLC
Page 13
<PAGE> 33
CONFIDENTIAL
INTERLINQ SOFTWARE CORP HISTORICAL SHARE PRICE AND VOLUME PERFORMANCE
From 12/12/97 To 12/28/98
Range of Values Implied by Terlin Offer: $10.22-$11.02
<TABLE>
<CAPTION>
Historical
---------------------
Price Volume
----- -------
<S> <C> <C>
Avg $5.77 165,849
High $9.13 934,600
Low $3.88 17,700
</TABLE>
[GRAPH SOURCE DATA NOT SUPPLIED]
BROADVIEW INT'L LLC
Page 14
<PAGE> 34
CONFIDENTIAL
NORMALIZED INTERLINQ STOCK PERFORMANCE VS.
COMPANY-WEIGHTED INDEX OF PUBLIC COMPARABLES AND S&P 500
From 12/12/97 to 12/28/98
[GRAPH SOURCE DATA NOT SUPPLIED]
BROADVIEW INT'L LLC
Page 15
<PAGE> 35
CONFIDENTIAL
PRESENT VALUE OF PROJECTED INTERLINQ SHARE PRICE
($Thousands except per share data)
<TABLE>
<S> <C>
52 Week High $9.13
Current Share Price as of 12/28/98 $7.56
52 Week Low $3.88
</TABLE>
<TABLE>
<CAPTION>
Interlinq TTM Interlinq TTM
Operating 9/30/98 9/30/98
Statistic Figure(1) Metric Multiple
---------- ------------- --------- -------------
<S> <C> <C> <C>
Revenue $20,513 TMC/R 1.4
EBIT $2,985 TMC/EBIT 9.4
Net Income $2,328 P/E 18.1
</TABLE>
ANALYSIS BASED ON MEDIAN MULTIPLES OF INTERLINQ PUBLIC COMPANY COMPARABLES
<TABLE>
<CAPTION>
RANGE OF PRESENT VALUES
1999 CAPITALIZED RESULTS: AT VARIOUS DISCOUNT RATES(2)
- --------------------------------------------- ---------------------------------
MEDIAN APPLICABLE IMPLIED
MULTIPLE OF INTERLINQ FUTURE SHARE
METRIC COMPARABLES(3) FIGURE PRICE(4)(5)(6) 10.0% 14.0% 20.0%
- ------------- -------------- ----------- -------------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
PRESENT VALUE OF PROJECTED SHARE PRICE BASED ON MANAGEMENT FORECASTS
TMC/R 1.6 x $27,844 $10.55 $ 9.50 $ 9.14 $ 8.64
TMC/EBIT 18.8 x $ 5,199 $20.91 $18.84 $18.13 $17.14
P/E 21.6 x $ 3,551 $14.78 $13.32 $12.82 $12.12
PRESENT VALUE OF PROJECTED SHARE PRICE BASED ON ANALYST FORECASTS(7)
TMC/R 1.6 x $26,729 $10.20 $9.20 $8.85 $8.36
TMC/EBIT 18.8 x $ 5,092 $20.52 $18.49 $17.79 $16.82
P/E 21.6 x $ 3,704 $15.42 $13.90 $13.37 $12.64
------------------------------------------------------------------------------------------------------
RANGE OF VALUES BASED ON MEDIAN MULTIPLES OF COMPARABLES $ 8.36 - $18.84
------------------------------------------------------------------------------------------------------
</TABLE>
ANALYSIS BASED ON INTERLINQ CURRENT MULTIPLES
<TABLE>
<CAPTION>
APPLICABLE IMPLIED
INTERLINQ INTERLINQ FUTURE SHARE
METRIC MULTIPLE FIGURE PRICE(4)(5)(6) 10.0% 14.0% 20.0%
- ------------- --------- ---------- -------------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
PRESENT VALUE OF PROJECTED SHARE PRICE BASED ON MANAGEMENT FORECASTS
TMC/R 1.4 x $27,844 $ 9.43 $ 8.50 $ 8.18 $ 7.73
TMC/EBIT 9.4 x $ 5,199 $11.52 $10.39 $ 9.99 $ 9.45
P/E 18.1 x $ 3,551 $12.43 $11.20 $10.78 $10.19
PRESENT VALUE OF PROJECTED SHARE PRICE BASED ON ANALYST FORECASTS(7)
TMC/R 1.4 x $26,729 $ 9.13 $8.23 $7.92 $7.49
TMC/EBIT 9.4 x $ 5,092 $11.33 $10.21 $9.82 $9.28
P/E 18.1 x $ 3,704 $12.96 $11.68 $11.24 $10.63
----------------------------------------------------------------------------------------------------
RANGE OF VALUES BASED ON INTERLINQ MULTIPLES $ 7.49 - $11.68
----------------------------------------------------------------------------------------------------
</TABLE>
NOTES:
(1) Excludes non-recurring charges and gains.
(2) Based on CAPM and the median beta of the aggregate set of Public Company
Comparables.
(3) Multiple of aggregate set of Public Company Comparables.
(4) Assumes that results are reported thirty days after fiscal year close.
(5) Implied Future Share Price based on TTM TMC/R and TTM TMC/EBIT analyses
assume 9/30/98 balances of $10.6MM Cash & Equivalents and zero Debt.
(6) Assumes 5.180MM diluted shares outstanding for 1999 (based on management's
standalone estimates).
(7) Analyst projections based on The Red Chip Review report dated November 23,
1998 (FY 98 and FY 99 results allocated pro-rata by Broadview to
calendarize for CY 1999).
Page 16 BROADVIEW INT'L LLC
<PAGE> 36
CONFIDENTIAL
TRANSACTION SOURCES AND USES OF FUNDS
(Thousands Except Per Share Data)
<TABLE>
<CAPTION>
PROPOSED VALUES(1)
-----------------------
<S> <C> <C>
SOURCES OF CASH
Existing Cash(1) $ 6,900
Third Party Debt(2) 22,500
Terlin Equity(2) 13,906
-------
Total Sources of Cash 43,306
USES OF CASH
Purchase of Existing Equity:
Common Shares Outstanding and
Common Share Equivalents to be Acquired(3) 4,444
Price/Share $ 9.25
------
Total Cash Paid to Existing Holders
of Interlinq Shares and Options 41,106
Transaction Fees(4) 2,200
-------
Total Uses of Cash 43,306
</TABLE>
NOTES:
(1) Per the Agreement.
(2) Based on discussions with Terlin management, analysis assumes that debt
facilities are fixed.
(3) Excludes management options cancelled per the Agreement.
(4) Estimate provided by Terlin management and corroborated by Interlinq
management.
Page 17 BROADVIEW INT'L LLC
<PAGE> 37
CONFIDENTIAL
IMPLIED EQUITY VALUE OF SURVIVING CORPORATION
<TABLE>
<S> <C> <C>
Implied Equity Value of Interlinq(1)
Pre-Merger Interlinq Common Shares Outstanding(2) 5,126
Pre-Merger Interlinq CSEs (at $9.25 per share)(3) 568
------
5,694
Price Per Share $ 9.25
------
Value Attributable to Shareholders $52,668
Plus: Transaction Fees(4) $ 2,200
-------
IMPLIED EQUITY VALUE OF INTERLINQ, PRE-ADJUSTED $54,868
-------
Adjustments for Capital Structure Resulting from the Merger
Less: Existing Interlinq Cash to be Used in the Merger(5) $ 6,900
Less: Third Party Debt(6) $22,500
-------
IMPLIED EQUITY VALUE OF INTERLINQ
RESULTING FROM THE MERGER $25,468
-------
</TABLE>
NOTES:
(1) Computed value as if Terlin were purchasing 100% of the Company.
(2) Common Shares Outstanding as of December 28, 1998 per management.
(3) CSEs (Common Share Equivalents); Option data provided by Interlinq
management on December 15, 1998 excludes cancelled management options
per the Agreement.
(4) Estimate provided by Terlin management and corroborated by Interlinq
management.
(5) Per the Agreement.
(6) Estimate provided by Terlin management and corroborated by Interlinq
management.
Page 18 BROADVIEW INT'L LLC
<PAGE> 38
CONFIDENTIAL
SURVIVING CORPORATION EQUITY CAPITALIZATION ANALYSIS
($Thousands Except Per Share Data)
<TABLE>
<CAPTION>
PROPOSED
CAPITALIZATION(1)
-----------------
<S> <C>
COMMON SHARES:
Shares to be Retained by Interlinq Existing Owners 1,250
Shares to be Owned by Terlin 2,153
-------
Total Surviving Corporation Shares (Equals Shares to be Retained
by Existing Owners Plus Shares to be Owned by Terlin) 3,403
-------
Existing Interlinq Shareholders' Ownership
of Surviving Corporation Common Shares 36.7%
Implied Equity Value of Interlinq Resulting from the Merger $25,468
Implied Per Share Value of Common Stock of Surviving Corporation
upon Merger(2) $ 7.48
POTENTIAL ADDITIONAL DILUTION:(3)
Management & Employee Options(4) 857
Warrants(5) 204
-------
Fully Diluted Shares 4,464
=======
Existing Interlinq Shareholders' Ownership on Fully Diluted Basis 28.0%
</TABLE>
NOTES:
(1) Per the Agreement.
(2) Implied value assumed equal to fair market value (for purposes of assuming
strike price for additional dilutive securities).
(3) Note: It is possible that additional dilutive securities not associated
with the Merger could be issued pursuant to ongoing incentive plans or
other transactions in which the management of the surviving corporation
may engage subsequent to the Merger.
(4) Per the Agreement; Post-Merger options derived by assuming issuance
yielding the same percentage of common stock before and after the Merger,
except management options which, post-Merger, increase to 125% of the
pre-Merger quantity relative to common.
(5) Based on discussions with Terlin management, as a result of the Merger,
Interlinq may issue warrants to Terlin's legal counsel in an amount equal
to 1.0% of the Common Stock Outstanding upon consummation of the Merger,
and may issue additional warrants to providers of subordinated debt
facilities in an amount ranging from 2.5% to 5.0% of the Common Stock
Outstanding upon consummation of the Merger (analysis assumes maximum of
5.0%).
Page 19 BROADVIEW INT'L LLC
<PAGE> 39
CONFIDENTIAL
SURVIVING CORPORATION EXIT VALUATION ANALYSIS
TTM EBIT Valuation
Analysis Based on Pre-Money IPO or Sale of the Company Scenarios(1)
(Thousands Except Per Share Data)
<TABLE>
<CAPTION>
PROJECTED YEAR
ENDING JUNE 30,
-----------------------
2000 2001
-------- --------
<S> <C> <C>
TTM EBIT(2) $ 5,604 $ 8,204
TTM TMC/EBIT Multiple(3) 18.8 18.8
-------- --------
Entity Value, Pre-Discount $105,361 $154,247
Private Company Discount(4) 15.0% 15.0%
Entity Value, Post-Discount $ 89,556 $131,110
Less: Debt 16,738 11,808
Plus: Cash (Working Capital)(5) 3,660 3,660
Plus: Cash (Dilutive Options and Warrants)(6) 7,942 7,942
-------- --------
Implied Equity Value $ 84,421 $130,904
Cost of Equity(7) 22.2% 22.2%
-------- --------
Present Value of Equity of Surviving Corporation $ 61,013 $ 77,388
======== ========
</TABLE>
NOTES:
(1) Based on discussions with Terlin management, a liquidity event is intended
within 18 to 30 months from consumation of the Merger. Assumes exit 30
days subsequent to the fiscal year end.
(2) Based on Interlinq management projections; Excludes effects of transaction
expenses.
(3) Median TTM TMC/EBIT multiple of Interlinq's Public Company Comparables.
(4) Represents the illiquidity of a private company's shares and is applicable
both in M&A and IPO scenarios.
(5) Cash available for working capital based on analysis of sources and uses
of cash in the Merger, based on 9/30/98 balance sheet.
(6) Cash from options and warrants issued resulting from the Merger exercised
at implied per share equity value upon consummation of Merger.
(7) Cost of Equity based on CAPM, median levered beta of Interlinq's Public
Company Comparables, and expected capital structure resulting from the
Merger.
BROADVIEW INT'L LLC
Page 20
<PAGE> 40
CONFIDENTIAL
INTERLINQ SUMMARY FINANCIAL STATEMENTS
Surviving Corporation Notes and Assumptions:
- Operating, Tax Rate, and Cash Flow Projections provided by Interlinq
management on December 16, 1998.
- Capital structure and resulting effects on the surviving corporation
assumming consummation of the Merger prepared by Broadview based on
assumptions provided by Terlin management, including: $22.5 million of
total debt, with 1) $12.5 million in senior debt financed at prime
interest rate plus 2.0% (prime rate equal to 7.75% per Citibank on
December 18, 1998), with the balance due seven years from the Merger,
and 2) $10.0 million in subordinated debt financed at 10.0%, with the
balance due seven years from the Merger.
- Free Cash Flow from operations is used to pay off debt balance
carrying highest interest rate.
- Cash retained for working capital is equal to $3.7 million, based on
proposed sources and uses of cash and existing balance of Cash &
Equivalents at September 30, 1998. Cash balances earn interest at an
annual rate of 5.0%.
- Transaction closing date of March 31, 1999.
BROADVIEW INT'L LLC
Page 21
<PAGE> 41
CONFIDENTIAL
INTERLINQ SUMMARY FINANCIAL STATEMENTS
Surviving Corporation Pro Forma Income Statements
(Thousands Except Per Share Data)
<TABLE>
<CAPTION>
ACTUAL PROJECTIONS FOR FISCAL YEARS ENDING JUNE 30,
JUNE 30 -------------------------------------------------------------------------
1998 1999 2000 2001 2002 2003 2004
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue
SOFTWARE LICENSE FEES
Loan Origination $ 9,044 $ 10,337 $ 9,614 $ 10,191 $ 10,955 $ 11,612 $ 12,193
% Software License Fees 93.8% 76.0% 59.2% 50.3% 42.6% 35.8% 30.6%
% Growth 19.6% 14.3% -7.0% 6.0% 7.5% 6.0% 5.0%
Loan Servicing 603 2,472 4,945 7,417 10,755 15,056 19,573
% Software License Fees 6.3% 18.2% 30.5% 36.6% 41.8% 46.4% 49.1%
% Growth na 310.0% 100.0% 50.0% 45.0% 40.0% 30.0%
FlowMan/ETD 0 795 1,670 2,671 4,007 5,810 8,134
% Software License Fees 0.0% 5.8% 10.3% 13.2% 15.6% 17.9% 20.4%
% Growth na na 110.0% 60.0% 50.0% 45.0% 40.0%
-------- -------- -------- -------- -------- -------- --------
Total Software License Fees 9,647 13,605 16,228 20,279 25,716 32,478 39,900
-------- -------- -------- -------- -------- -------- --------
% Total Revenues 52.6% 54.5% 52.0% 51.3% 50.3% 49.2% 47.9%
SOFTWARE SUPPORT FEES
Loan Origination 6,795 7,674 8,395 9,261 10,192 11,179 12,216
% Growth 11.9% 12.9% 9.4% 10.3% 10.1% 9.7% 9.3%
Loan Servicing 181 923 2,406 4,631 7,857 12,374 18,246
% Growth na 410.0% 160.8% 92.5% 69.7% 57.5% 47.5%
FlowMan/ETD 0 68 209 437 777 1,271 1,962
% Growth na na 210.0% 108.4% 78.0% 63.5% 54.4%
-------- -------- -------- -------- -------- -------- --------
Total Software Support Fees 6,976 8,664 11,010 14,329 18,827 24,824 32,424
-------- -------- -------- -------- -------- -------- --------
% Total Revenues 38.0% 34.7% 35.3% 36.2% 36.8% 37.6% 38.9%
-------- -------- -------- -------- -------- -------- --------
OTHER REVENUE 1,724 2,693 3,952 4,922 6,554 8,643 11,033
-------- -------- -------- -------- -------- -------- --------
% Total Revenues 9.4% 10.8% 12.7% 12.5% 12.8% 13.1% 13.2%
-------- -------- -------- -------- -------- -------- --------
TOTAL REVENUES 18,347 24,962 31,190 39,529 51,097 65,946 83,357
-------- -------- -------- -------- -------- -------- --------
% Growth 36.1% 25.0% 26.7% 29.3% 29.1% 26.4%
</TABLE>
See Notes and Assumptions
BROADVIEW INT'L LLC
Page 22
<PAGE> 42
CONFIDENTIAL
INTERLINQ SUMMARY FINANCIAL STATEMENTS
Surviving Corporation Pro Forma Income Statements (Continued)
(Thousands Except Per Share Data)
<TABLE>
<CAPTION>
ACTUAL PROJECTIONS FOR FISCAL YEARS ENDING JUNE 30,
JUNE 30 -----------------------------------------------------------------------------
1998(1) 1999 2000 2001 2002 2003 2004
-------- -------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
COST OF REVENUE
Software License Fees 1,778 2,127 2,405 2,606 2,815 2,910 2,994
Software Support Fees 2,445 3,032 3,854 5,015 6,589 8,689 11,348
Cost of Other Revenue 859 1,379 2,060 2,595 3,478 4,612 5,923
-------- -------- -------- -------- -------- -------- -------
TOTAL COST OF REVENUES 5,082 6,538 8,318 10,216 12,882 16,211 20,265
-------- -------- -------- -------- -------- -------- -------
GROSS PROFIT $ 13,264 $ 18,424 $ 22,873 $ 29,314 $ 38,215 $ 49,735 $63,091
-------- -------- -------- -------- -------- -------- -------
% of Sales 72.3% 73.8% 73.3% 74.2% 74.8% 75.4% 75.7%
OPERATING EXPENSES
PRODUCT DEVELOPMENT 1,609 3,249 3,233 3,717 4,321 5,314 5,851
-------- -------- -------- -------
% of Sales 8.8% 13.0% 10.4% 9.4% 8.5% 8.1% 7.0%
SALES & MARKETING 5,674 6,240 8,421 10,673 13,796 17,805 22,506
% of Sales 30.9% 25.0% 27.0% 27.0% 27.0% 27.0% 27.0%
GENERAL & ADMINISTRATIVE 3,754 4,493 5,614 6,720 8,687 10,551 13,337
% of Sales 20.5% 18.0% 18.0% 17.0% 17.0% 16.0% 16.0%
-------- -------- -------- -------- -------- -------- -------
TOTAL OPERATING EXPENSES 11,038 13,983 17,269 21,110 26,804 33,671 41,695
-------- -------- -------- -------- -------- -------- -------
OPERATING INCOME - EBIT $ 2,226 $ 4,441 $ 5,604 $ 8,204 $ 11,411 $ 16,064 $21,397
-------- -------- -------- -------- -------- -------- -------
% of Sales 12.1% 17.8% 18.0% 20.8% 22.3% 24.4% 25.7%
% Growth 26.7% 23.5% 22.2% 27.0% 25.6% 23.8%
OTHER INCOME (EXPENSE)
Interest Expense (21) (523) (1,809) (1,397) (774) (198) 0
Interest Income 766 183 183 183 183 578 1,386
-------- -------- -------- -------- -------- -------- -------
Earnings Before Taxes $ 2,971 $ 4,101 $ 3,978 $ 6,990 $ 10,820 $ 16,444 $22,783
Tax Provision 907 1,394 1,352 2,377 3,679 5,591 7,746
Effective Tax Rate 30.5% 34.0% 34.0% 34.0% 34.0% 34.0% 34.0%
-------- -------- -------- -------- -------- -------- -------
NET INCOME $ 2,065 $ 2,707 $ 2,625 $ 4,614 $ 7,141 $ 10,853 $15,037
======== ======== ======== ======== ======== ======== =======
% of Sales 11.3% 10.8% 8.4% 11.7% 14.0% 16.5% 18.0%
</TABLE>
NOTES:
See Notes and Assumptions
(1) Excludes effects of non-recurring charge for acquired in-process R&D.
BROADVIEW INT'L LLC
Page 23
<PAGE> 43
CONFIDENTIAL
INTERLINQ SUMMARY FINANCIAL STATEMENTS
Surviving Corporation Pro Forma Cash Flow Statements
(Thousands Except Per Share Data)
<TABLE>
<CAPTION>
ACTUAL PROJECTIONS FOR FISCAL YEARS ENDING JUNE 30,
JUNE 30 -------------------------------------------------------------------------
1998 1999 2000 2001 2002 2003 2004
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
NET INCOME $ 2,065 $ 2,707 $ 2,625 $ 4,614 $ 7,141 $ 10,853 $ 15,037
Depreciation 1,095 1,153 1,002 1,055 1,045 1,123 1,279
Amortiz. of Caplzd Software Costs 1,559 2,127 2,405 2,606 2,815 2,910 2,994
% of Cap Software Costs 84.5% 84.6% 89.3% 87.1% 82.9% 94.6% 92.7%
Write-Offs 0 0 0 0 0 0 0
Deferred Income Tax Benefit (39) 0 0 0 0 0 0
Tax Benefit from Xrcise of Options 14 0 0 0 0 0 0
Changes in Non-Cash Work Capital 398 251 623 834 1,157 1,485 1,741
% of change in Sales -2.2% -3.8% -10.0% -10.0% -10.0% -10.0% -10.0%
Capital Expenditures (572) (1,300) (624) (1,186) (1,022) (1,319) (1,667)
% of Sales 3.1% 5.2% 2.0% 3.0% 2.0% 2.0% 2.0%
Capitalized Software Costs (1,846) (2,514) (2,693) (2,993) (3,397) (3,078) (3,229)
% of Sales 10.1% 10.1% 8.6% 7.6% 6.6% 4.7% 3.9%
-------- -------- -------- -------- -------- -------- --------
CF AVAILABLE FOR PRINCIPAL DEBT SERVICE $ 2,674 $ 2,425 $ 3,338 $ 4,929 $ 7,740 $ 11,975 $ 16,155
======== ======== ======== ======== ======== ======== ========
% of Sales 14.6% 9.7% 10.7% 12.5% 15.1% 18.2% 19.4%
</TABLE>
See Notes and Assumptions
BROADVIEW INT'L LLC
Page 24
<PAGE> 44
CONFIDENTIAL
INTERLINQ SUMMARY FINANCIAL STATEMENTS
Surviving Corporation Pro Forma Capital Structure
(Thousands Except Per Share Data)
<TABLE>
<CAPTION>
Projections for Fiscal Years ending June 30,
-------------------------------------------------------------------------------
1999 2000 2001 2002 2003 2004
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
SUBORDINATED DEBT
Beginning Balance 10,000.0 7,575.4 4,237.5 0.0 0.0 0.0
Mandatory Retirements 0.0 0.0 0.0 0.0 0.0 0.0
Cash Sweep (2,424.6) (3,337.9) (4,237.5) 0.0 0.0 0.0
--------- --------- --------- --------- --------- ---------
Ending Balance 7,575.4 4,237.5 0.0 0.0 0.0 0.0
SENIOR DEBT
Beginning Balance 12,500.0 12,500.0 12,500.0 11,808.3 4,068.2 0.0
Mandatory Retirements 0.0 0.0 0.0 0.0 0.0 0.0
Cash Sweep 0.0 (0.0) (691.7) (7,740.1) (4,068.2) 0.0
--------- --------- --------- --------- --------- ---------
Ending Balance 12,500.0 12,500.0 11,808.3 4,068.2 0.0 0.0
INTEREST EXPENSE
Sub Debt 10.0% 219.1 590.6 211.9 0.0 0.0 0.0
Senior Debt 9.8% 303.9 1,218.8 1,185.0 774.0 198.3 0.0
--------- --------- --------- --------- --------- ---------
TOTAL INTEREST EXPENSE $ 522.9 $ 1,809.4 $ 1,396.9 $ 774.0 $ 198.3 $ 0.0
========= ========= ========= ========= ========= =========
TOTAL DEBT $ 0.0 $20,075.4 $16,737.5 $11,808.3 $ 4,068.2 $ 0.0 $ 0.0
========== ========= ========= ========= ========= ========= =========
CASH & EQUIVALENTS
AND INVESTMENTS $ 13,907.7 $ 3,660.0 $ 3,660.0 $ 3,660.0 $ 3,660.0 $11,566.7 $27,721.4
========== ========= ========= ========= ========= ========= =========
</TABLE>
See Notes and Assumptions
BROADVIEW INT'L LLC
Page 25
<PAGE> 45
CONFIDENTIAL
INTERLINQ CORPORATION
Quarterly Standalone Income Statements
($000, Except Per Share Data)
<TABLE>
<CAPTION>
Quarter Ending
------------------------
9/30/97(A) 12/31/97(A) 3/31/98(A) 6/30/98(A) 9/30/98(A)
---------- ----------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Software License Revenues $ 1,546.2 $ 2,153.4 $ 2,616.4 $ 3,330.9 $ 3,347.1
Software Support Revenues $ 1,693.6 $ 1,734.4 $ 1,753.1 $ 1,794.9 $ 1,981.3
Other Revenues $ 402.1 $ 480.8 $ 417.5 $ 423.2 $ 479.7
--------- --------- --------- --------- ---------
TOTAL REVENUES $ 3,641.8 $ 4,368.6 $ 4,787.0 $ 5,549.0 $ 5,808.1
Software License Costs $ 416.9 $ 398.3 $ 460.5 $ 502.5 $ 539.8
Software Support Costs $ 522.6 $ 604.5 $ 661.8 $ 656.1 $ 638.8
Other Costs $ 243.6 $ 207.9 $ 209.3 $ 198.5 $ 262.3
--------- --------- --------- --------- ---------
Cost of Sales $ 1,183.0 $ 1,210.7 $ 1,331.7 $ 1,357.1 $ 1,440.9
GROSS PROFIT $ 2,458.8 $ 3,157.9 $ 3,455.3 $ 4,191.9 $ 4,367.2
Gross Margin 67.5% 72.3% 72.2% 75.5% 75.2%
Operating Expenses
Product Development $ 323.5 $ 450.7 $ 387.7 $ 447.0 $ 839.0
Sales and Marketing $ 1,201.1 $ 1,377.1 $ 1,440.2 $ 1,656.2 $ 1,448.6
General and Administrative $ 769.0 $ 947.8 $ 979.6 $ 1,057.9 $ 1,155.2
--------- --------- --------- --------- ---------
TOTAL OPERATING EXPENSES $ 2,293.5 $ 2,775.6 $ 2,807.4 $ 3,161.0 $ 3,442.9
OPERATING INCOME $ 165.3 $ 382.3 $ 647.9 $ 1,030.8 $ 924.3
Operating Margin 4.5% 8.8% 13.5% 18.6% 15.9%
Net Interest and Other Income $ 191.8 $ 183.7 $ 176.4 $ 193.0 $ 154.5
Pretax Income $ 357.1 $ 566.0 $ 824.3 $ 1,223.8 $ 1,078.8
Pretax Margin 9.8% 13.0% 17.2% 22.1% 18.6%
Taxes $ 147.9 $ 209.4 $ 304.0 $ 479.0 $ 372.2
Effective Tax Rate 41.4% 37.0% 36.9% 39.1% 32.0%
Net Income $ 209.2 $ 356.6 $ 520.3 $ 744.7 $ 706.6
========= ========= ========= ========= =========
Net Margin 5.7% 8.2% 10.9% 13.4% 12.2%
Diluted Shares Outstanding 5,494.7 5,345.3 5,287.9 5,375.0 5,564.7
Earnings Per Share $ 0.04 $ 0.07 $ 0.10 $ 0.14 $ 0.13
--------- --------- --------- --------- ---------
Software License Revenue/Total Revenue 42.5% 49.3% 54.7% 60.0% 57.6%
Software Support Revenue/Total Revenue 46.5% 39.7% 36.6% 32.3% 34.1%
Other Revenue/Total Revenue 11.0% 11.0% 8.7% 7.6% 8.3%
Total Cost of Sales/Revenue 32.5% 27.7% 27.8% 24.5% 24.8%
Software License Cost of Sales/Total Revenue 11.4% 9.1% 9.6% 9.1% 9.3%
Software Support Cost of Sales/Total Revenue 14.3% 13.8% 13.8% 11.8% 11.0%
Other Cost of Sales/Total Revenue 6.7% 4.8% 4.4% 3.6% 4.5%
R&D/Revenue 8.9% 10.3% 8.1% 8.1% 14.4%
S&M/Revenue 33.0% 31.5% 30.1% 29.8% 24.9%
G&A/Revenue 21.1% 21.7% 20.5% 19.1% 19.9%
--------- --------- --------- --------- ---------
<CAPTION>
TTM Total
9/30/1998(A) 12/31/98(P) 3/31/99(P) 6/30/99(P) 9/30/99(P)
------------ ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Software License Revenues $ 11,447.8 $ 3,494.3 $ 3,348.3 $ 3,415.3 $3,732.44
Software Support Revenues $ 7,263.6 $ 1,993.5 $ 2,344.6 $ 2,344.6 $2,532.30
Other Revenues $ 1,801.2 $ 481.2 $ 866.1 $ 866.1 $ 908.96
---------- --------- --------- --------- ---------
TOTAL REVENUES $ 20,512.6 $5,969.00 6,559.0 6,625.9 $7,173.70
Software License Costs $ 1,901.2 $ 546.8 $ 515.0 $ 525.3 $ 553.15
Software Support Costs $ 2,561.3 $ 741.2 $ 826.0 $ 826.0 $ 886.42
Other Costs $ 878.0 $ 265.7 $ 425.5 $ 425.5 $ 473.80
---------- --------- --------- --------- ---------
Cost of Sales $ 5,340.4 $ 1,553.7 1,766.6 1,776.9 $ 1,913.4
GROSS PROFIT $ 15,172.2 $ 4,415.3 $ 4,792.4 $ 4,849.1 $ 5,260.3
Gross Margin 74.0% 74.0% 73.1% 73.2% 73.3%
Operating Expenses
Product Development $ 2,124.4 $ 825.2 $ 784.5 $ 800.2 $ 743.59
Sales and Marketing $ 5,922.0 $ 1,465.7 $ 1,662.8 $ 1,662.8 $1,936.83
General and Administrative $ 4,140.5 $ 1,172.4 $ 1,082.7 $ 1,082.7 $1,291.22
---------- --------- --------- --------- ---------
TOTAL OPERATING EXPENSES $ 12,186.9 $ 3,463.3 $ 3,530.1 $ 3,545.8 $ 3,971.6
OPERATING INCOME $ 2,985.3 $ 952.0 $ 1,262.4 $ 1,303.3 $ 1,288.7
Operating Margin 14.6% 15.9% 19.2% 19.7% 18.0%
Net Interest and Other Income $ 707.6 $ 31.83 $ 31.8 $ 31.8 $ 57.50
Pretax Income $ 3,692.9 $ 983.8 $ 1,294.2 $ 1,335.2 $ 1,346.2
Pretax Margin 18.0% 16.5% 19.7% 20.2% 18.8%
Taxes $ 1,364.6 $ 334.50 $ 440.02 $ 453.95 $ 457.70
Effective Tax Rate 37.0% 34.0% 34.0% 34.0% 34.0%
Net Income $ 2,328.3 $ 649.3 $ 854.2 $ 881.2 $ 888.5
========== ========= ========= ========= =========
Net Margin 11.4% 10.9% 13.0% 13.3% 12.4%
Diluted Shares Outstanding 5,564.7 5,430.0 5,330.0 5,230.0 5,130.0
Earnings Per Share $ 0.42 $ 0.12 $ 0.16 $ 0.17 $ 0.17
---------- --------- --------- --------- ---------
Software License Revenue/Total Revenue 55.8% 58.5% 51.0% 51.5% 52.0%
Software Support Revenue/Total Revenue 35.4% 33.4% 35.7% 35.4% 35.3%
Other Revenue/Total Revenue 8.8% 8.1% 13.2% 13.1% 12.7%
Total Cost of Sales/Revenue 26.0% 26.0% 26.9% 26.8% 26.7%
Software License Cost of Sales/Total Revenue 9.3% 9.2% 7.9% 7.9% 7.7%
Software Support Cost of Sales/Total Revenue 12.5% 12.4% 12.6% 12.5% 12.4%
Other Cost of Sales/Total Revenue 4.3% 4.5% 6.5% 6.4% 6.6%
R&D/Revenue 10.4% 13.8% 12.0% 12.1% 10.4%
S&M/Revenue 28.9% 24.6% 25.4% 25.1% 27.0%
G&A/Revenue 20.2% 19.6% 16.5% 16.3% 18.0%
---------- --------- --------- --------- ---------
<CAPTION>
12/31/99(P) 3/31/00(P) 6/30/00(P)
---------- --------- ---------
<S> <C> <C> <C>
Software License Revenues $3,894.72 $4,219.28 $4,381.56
Software Support Revenues $2,642.40 $2,862.60 $2,972.70
Other Revenues $ 948.48 $1,027.52 $1,067.04
--------- --------- ---------
TOTAL REVENUES $7,485.60 $8,109.40 $8,421.30
Software License Costs $ 577.20 $ 625.30 $ 649.35
Software Support Costs $ 924.96 $1,002.04 $1,040.58
Other Costs $ 494.40 $ 535.60 $ 556.20
--------- --------- ---------
Cost of Sales $ 1,996.6 $ 2,162.9 $ 2,246.1
GROSS PROFIT $ 5,489.0 $ 5,946.5 $ 6,175.2
Gross Margin 73.3% 73.3% 73.3%
Operating Expenses
Product Development $ 775.92 $ 840.58 $ 872.91
Sales and Marketing $2,021.04 $2,189.46 $2,273.67
General and Administrative $1,347.36 $1,459.64 $1,515.78
--------- --------- ---------
TOTAL OPERATING EXPENSES $ 4,144.3 $ 4,489.7 $ 4,662.4
OPERATING INCOME $ 1,344.7 $ 1,456.8 $ 1,512.8
Operating Margin 18.0% 18.0% 18.0%
Net Interest and Other Income $ 60.00 $ 65.00 $ 67.50
Pretax Income $ 1,404.7 $ 1,521.8 $ 1,580.3
Pretax Margin 18.8% 18.8% 18.8%
Taxes $ 477.60 $ 517.41 $ 537.31
Effective Tax Rate 34.0% 34.0% 34.0%
Net Income $ 927.1 $ 1,004.4 $ 1,043.0
========= ========= =========
Net Margin 12.4% 12.4% 12.4%
Diluted Shares Outstanding 5,030.0 4,930.0 4,955.0
Earnings Per Share $ 0.18 $ 0.20 $ 0.21
--------- --------- ---------
Software License Revenue/Total Revenue 52.0% 52.0% 52.0%
Software Support Revenue/Total Revenue 35.3% 35.3% 35.3%
Other Revenue/Total Revenue 12.7% 12.7% 12.7%
Total Cost of Sales/Revenue 26.7% 26.7% 26.7%
Software License Cost of Sales/Total Revenue 7.7% 7.7% 7.7%
Software Support Cost of Sales/Total Revenue 12.4% 12.4% 12.4%
Other Cost of Sales/Total Revenue 6.6% 6.6% 6.6%
R&D/Revenue 10.4% 10.4% 10.4%
S&M/Revenue 27.0% 27.0% 27.0%
G&A/Revenue 18.0% 18.0% 18.0%
--------- --------- ---------
</TABLE>
NOTES:
Excludes non-recurring charges and gains.
Projections per Interlinq management.
BROADVIEW INT'L LLC
Page 26
<PAGE> 46
CONFIDENTIAL
INTERLINQ CORPORATION
Annual Standalone Income Statements
($ 000, Except Per Share Data)
<TABLE>
<CAPTION>
FY Total FY Total FY Total FY Total CY Total CY Total
6/30/1997(A) 1998(A) 1999(P) 2000(P) 1998(P) 1999(P)
------------ ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Software License Revenues $ 7,055.5 $ 9,646.8 $ 13,605.0 $ 16,228.0 $ 12,788.7 $ 14,390.8
Software Support Revenues $ 6,072.5 $ 6,976.0 $ 8,664.0 $ 11,010.0 $ 7,522.8 $ 9,863.9
Other Revenues $ 1,239.0 $ 1,723.6 $ 2,693.0 $ 3,952.0 $ 1,801.6 $ 3,589.6
---------- ---------- ---------- ---------- ---------- ----------
TOTAL REVENUES $ 14,367.0 $ 18,346.4 $ 24,962.0 $ 31,190.0 $ 22,113.0 $ 27,844.2
Software License Costs $ 1,499.6 $ 1,778.3 $ 2,127.0 $ 2,405.0 $ 2,049.7 $ 2,170.7
Software Support Costs $ 1,856.5 $ 2,445.0 $ 3,032.0 $ 3,854.0 $ 2,697.9 $ 3,463.4
Other Costs $ 682.7 $ 859.3 $ 1,379.0 $ 2,060.0 $ 935.8 $ 1,819.2
---------- ---------- ---------- ---------- ---------- ----------
Cost of Sales $ 4,038.8 $ 5,082.6 $ 6,538.0 $ 8,319.0 $ 5,683.4 $ 7,453.3
Gross Profit $ 10,328.2 $ 13,263.8 $ 18,424.0 $ 22,871.0 $ 16,429.6 $ 20,390.9
Gross Margin 71.9% 72.3% 73.8% 73.3% 74.3% 73.2%
Operating Expenses
Product Development $ 2,147.5 $ 1,608.8 $ 3,249.0 $ 3,233.0 $ 2,498.9 $ 3,104.3
Sales and Marketing $ 4,011.4 $ 5,674.5 $ 6,240.0 $ 8,421.0 $ 6,010.6 $ 7,283.5
General and Administrative $ 3,151.8 $ 3,754.2 $ 4,493.0 $ 5,614.0 $ 4,365.1 $ 4,804.0
---------- ---------- ---------- ---------- ---------- ----------
TOTAL OPERATING EXPENSES $ 9,310.7 $ 11,037.5 $ 13,982.0 $ 17,268.0 $ 12,874.6 $ 15,191.8
Operating Income $ 1,017.5 $ 2,226.3 $ 4,442.0 $ 5,603.0 $ 3,555.1 $ 5,199.1
Operating Margin 7.1% 12.1% 17.8% 18.0% 16.1% 18.7%
Net Interest and Other Income $ 719.3 $ 744.9 $ 250.0 $ 250.0 $ 555.7 $ 181.2
Pretax Income $ 1,736.8 $ 2,971.2 $ 4,692.0 $ 5,853.0 $ 4,110.8 $ 5,380.3
Pretax Margin 12.1% 16.2% 18.8% 18.8% 18.6% 19.3%
Taxes $ 626.9 $ 1,140.3 $ 1,595.0 $ 1,990.0 $ 1,397.66 $ 1,829.29
Effective Tax Rate 36.1% 38.4% 34.0% 34.0% 34.0% 34.0%
Net Income $ 1,109.9 $ 1,830.9 $ 3,097.0 $ 3,863.0 $ 2,713.1 $ 3,551.0
========== ========== ========== ========== ========== ==========
Net Margin 7.7% 10.0% 12.4% 12.4% 12.3% 12.8%
Diluted Shares Outstanding 5,841.8 5,375.7 5,388.7 5,011.3 5,414.4 5,180.0
Earnings Per Share $ 0.19 $ 0.34 $ 0.57 $ 0.77 $ 0.50 $ 0.69
---------- ---------- ---------- ---------- ---------- ----------
Y/Y Revenue Growth 9.7% 27.7% 36.1% 24.9% 25.9%
Software License Revenue/Total Revenue 49.1% 52.6% 54.5% 52.0% 57.8% 51.7%
Software Support Revenue/Total Revenue 42.3% 38.0% 34.7% 35.3% 34.0% 35.4%
Other Revenue/Total Revenue 8.6% 9.4% 10.8% 12.7% 8.1% 12.9%
Total Cost of Sales/Revenue 28.1% 27.7% 26.2% 26.7% 25.7% 26.8%
Software License Cost of Sales/Total
Revenue 10.4% 9.7% 8.5% 7.7% 9.3% 7.8%
Software Support Cost of Sales/Total
Revenue 12.9% 13.3% 12.1% 12.4% 12.2% 12.4%
Other Cost of Sales/Total Revenue 4.8% 4.7% 5.5% 6.6% 4.2% 6.5%
R&D/Revenue 14.9% 8.8% 13.0% 10.4% 11.3% 11.1%
S&M/Revenue 27.9% 30.9% 25.0% 27.0% 27.2% 26.2%
G&A/Revenue 21.9% 20.5% 18.0% 18.0% 19.7% 17.3%
</TABLE>
NOTES:
Excludes non-recurring charges and gains.
Projections per Interlinq management.
Diluted shares outstanding estimates per management.
BROADVIEW INT'L LLC
Page 27
<PAGE> 47
CONFIDENTIAL
DISCOUNT RATE CALCULATION
Cost of Equity Assuming Consummation of Merger
($ Thousands Except Per Share Data)
<TABLE>
<CAPTION>
EQUITY
LEVERED MARKET TOTAL DEBT/ UNLEVERED
PUBLIC COMPANY COMPARABLES BETA(1) CAPITALIZATION DEBT VALUE BETA(2)
- --------------------------------------- ------- -------------- ------ ----- ---------
<S> <C> <C> <C> <C> <C>
Sanchez Computer Associates, Inc [SCAI] 1.690 $267,142 $ 391 0.1% 1.688
Advent Software, Inc [ADVS] 1.380 382,249 $ 0 0.0% 1.380
SS&C Technologies, Inc [SSNC] 1.120 162,699 $ 777 0.5% 1.115
FDP Corporation [FDPC] 0.640 67,348 $ 0 0.0% 0.640
Carreker-Antinori, Inc [CANI] 2.320 92,523 $ 0 0.0% 2.320
CFI ProServices, Inc [PROI] 0.340 56,617 $6,018 9.6% 0.307
Mean 1.248 1.242
High 2.320 2.320
----- -----
MEDIAN 1.250 1.247
----- -----
Low 0.340 0.307
===== =====
</TABLE>
<TABLE>
<CAPTION>
UNLEVERED EQUITY TOTAL DEBT/ LEVERED
TARGET COMPANY BETA(2) VALUE(3) DEBT(4) VALUE BETA(2)
- ------------------- --------- -------- ------- ----- -------
<S> <C> <C> <C> <C> <C>
Interlinq 1.247 $25,468 $22,500 46.9% 2.349
</TABLE>
<TABLE>
<S> <C>
Market Risk Premium(5): 7.50%
Risk Free Rate(6): 4.63%
Cost of Equity: (Risk Free Rate + (Levered Beta * Market Risk Premium))
-----
INTERLINQ COST OF EQUITY 22.25%
-----
</TABLE>
NOTES
(1) Levered Beta from Zachs Research.
(2) Unlevered Beta = Levered Beta * (Equity Market Capitalization/(Debt +
Equity Market Capitalization)).
(3) Equity value implied by $9.25 per share offer and proposed terms and
structure.
(4) Total Debt implied by target capitalization structure.
(5) Source: Ibbotson Associates, Inc., Stocks, Bonds, Bills, and Inflation
1997 Yearbook, Ibbotson and Associates, Chicago, 1997.
(6) Yield on 10 Year U.S. Treasury Bond.
BROADVIEW INT'L LLC
Page 28
<PAGE> 48
CONFIDENTIAL
DISCOUNT RATE CALCULATION
Weighted Average Cost of Capital (WACC) Used for Stand-Alone Present Value of
Future Share Price Analysis
($ Thousands Except Per Share Data)
<TABLE>
<CAPTION>
UNLEVERED EQUITY TOTAL DEBT/ LEVERED
TARGET COMPANY BETA(1) VALUE(2) DEBT VALUE BETA(1)
- -------------- --------- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C>
Interlinq 1.247 $53,173 $0 0.0% 1.247
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
Market Risk Premium(3): 7.50%
Risk Free Rate(4): 4.63%
Cost of Equity: (Risk Free Rate + (Levered Beta * Market Risk Premium))
-----
INTERLINQ COST OF EQUITY 13.99%
-----
</TABLE>
<TABLE>
<S> <C>
WACC: [Debt/(Debt + Equity)*Cost of Debt*(1-Tax Rate)]+[(Equity/(Debt+Equity)*Cost of Equity]
-----
INTERLINQ WACC 13.99%
-----
</TABLE>
NOTES:
(1) Unlevered Beta = Levered Beta * (Equity Market Capitalization/(Debt +
Equity Market Capitalization)), based on Interlinq's Public Company
Comparables.
(2) Equity Value equals $53.2 MM (value implied by $9.25 per share offer).
(3) Source: Ibbotson Associates, Inc., Stocks, Bonds, Bills, and Inflation
1997 Yearbook, Ibbotson and Associates, Chicago, 1997.
(4) Yield on 10 Year U.S. Treasury Bond.
BROADVIEW INT'L LLC
Page 29
<PAGE> 49
CONFIDENTIAL
INTERLINQ PRE-MERGER CAPITALIZATION
Aggregate Option Data
(Thousands, Except Per Share Data)
SUMMARY
<TABLE>
<S> <C>
Purchase Price Per Share: $ 9.25
Common Shares Outstanding as of 12/22/98(1): 5,126
Common Equivalents: 622
Total Shares to be Acquired: 5,748
</TABLE>
OPTION TABLE(2)
<TABLE>
<CAPTION>
Cash Paid
Strike Number of By Option Shares Shares Net
Price Options Holders Issued Repurchased Dilution
------ --------- ---------- ------- ----------- --------
<S> <C> <C> <C> <C> <C>
$7.500 3.5 26.3 3.5 2.8 0.7
$7.380 1.0 7.3 1.0 0.8 0.2
$7.000 14.2 99.1 14.2 10.7 3.4
$6.940 9.3 64.2 9.3 6.9 2.3
$6.560 5.0 32.8 5.0 3.5 1.5
$6.130 122.5 750.9 122.5 81.2 41.3
$5.840 156.0 910.9 156.0 98.5 57.5
$5.810 11.3 65.7 11.3 7.1 4.2
$5.750 1.0 5.8 1.0 0.6 0.4
$5.060 3.0 15.2 3.0 1.6 1.4
$5.000 9.0 45.0 9.0 4.9 4.1
$4.970 1.5 7.5 1.5 0.8 0.7
$4.630 2.1 9.5 2.1 1.0 1.0
$4.530 168.3 762.2 168.3 82.4 85.9
$4.380 17.1 74.9 17.1 8.1 9.0
$4.030 9.0 36.3 9.0 3.9 5.1
$3.970 28.5 113.1 28.5 12.2 16.3
$3.880 0.4 1.4 0.4 0.1 0.2
$3.560 31.0 110.4 31.0 11.9 19.1
$3.500 250.0 875.0 250.0 94.6 155.4
$3.440 91.2 313.7 91.2 33.9 57.3
$3.310 110.0 364.1 110.0 39.4 70.6
$3.250 9.0 29.3 9.0 3.2 5.8
$3.130 1.5 4.7 1.5 0.5 1.0
$2.500 17.0 42.5 17.0 4.6 12.4
$0.500 64.1 32.1 64.1 3.5 60.6
$0.150 4.1 0.6 4.1 0.1 4.1
$0.100 0.8 0.1 0.8 0.0 0.7
------- ------- ------- ----- -----
1,141.5 4,803.9 1,141.5 519.3 622.2
-----
NET DILUTION FROM ALL OPTIONS 622.2
=====
</TABLE>
NOTES:
(1) Common Shares Outstanding as December 28, 1998 per management figures.
(2) Option data provided by Interlinq management on December 15, 1998; Options
cancelled per management figures.
BROADVIEW INT'L LLC
Page 30
<PAGE> 50
CONFIDENTIAL
INTERLINQ PRE-MERGER CAPITALIZATION
Option Data Less Management Options Cancelled(1)
(Thousands, Except Per Share Data)
SUMMARY
<TABLE>
<S> <C>
Purchase Price Per Share: $ 9.25
Common Shares Outstanding as of 12/22/98(2): 5,126
Common Equivalents: 568
Total Shares to be Acquired: 5,694
</TABLE>
OPTION TABLE(3)
<TABLE>
<CAPTION>
Number Cash Paid
Strike of By Option Shares Shares Net
Price Options Holders Issued Repurchased Dilution
------ ------- --------- ------ ----------- --------
<S> <C> <C> <C> <C> <C>
$8.380 0.5 3.8 0.5 0.4 0.0
$7.500 3.5 26.3 3.5 2.8 0.7
$7.380 1.0 7.3 1.0 0.8 0.2
$7.000 13.2 92.1 13.2 10.0 3.2
$6.940 9.3 64.2 9.3 6.9 2.3
$6.560 5.0 32.8 5.0 3.5 1.5
$6.130 22.5 137.9 22.5 14.9 7.6
$5.840 126.0 735.7 126.0 79.5 46.4
$5.810 11.3 65.7 11.3 7.1 4.2
$5.750 1.0 5.8 1.0 0.6 0.4
$5.060 3.0 15.2 3.0 1.6 1.4
$5.000 9.0 45.0 9.0 4.9 4.1
$4.970 1.5 7.5 1.5 0.8 0.7
$4.630 2.1 9.5 2.1 1.0 1.0
$4.530 149.6 677.8 149.6 73.3 76.3
$4.380 17.1 74.9 17.1 8.1 9.0
$4.030 9.0 36.3 9.0 3.9 5.1
$3.970 28.5 113.1 28.5 12.2 16.3
$3.880 0.4 1.4 0.4 0.1 0.2
$3.560 31.0 110.4 31.0 11.9 19.1
$3.500 250.0 875.0 250.0 94.6 155.4
$3.440 91.2 313.7 91.2 33.9 57.3
$3.310 110.0 364.1 110.0 39.4 70.6
$3.250 9.0 29.3 9.0 3.2 5.8
$3.130 1.5 4.7 1.5 0.5 1.0
$2.500 17.0 42.5 17.0 4.6 12.4
$0.500 64.1 32.1 64.1 3.5 60.6
$0.150 4.1 0.6 4.1 0.1 4.1
$0.100 0.8 0.1 0.8 0.0 0.7
----- ------- ----- ----- -----
991.9 3,924.3 991.9 424.2 567.6
-----
NET DILUTION FROM ALL OPTIONS 567.6
=====
</TABLE>
NOTES:
(1) Per management as of December 28, 1998.
(2) Common Shares Outstanding as December 28, 1998 per management figures.
(3) Option data provided by Interlinq management on December 15, 1998.
BROADVIEW INT'L LLC
Page 31
<PAGE> 1
EXHIBIT 99.6
March 10, 1999
PRIVATE & CONFIDENTIAL
Mr. Alan Pickerill
Interlinq Software Corporation
11255 Kirkland Way
Kirkland, WA 98033
Dear Mr. Pickerill:
PURCHASE PRICE ALLOCATION FOR ACQUISITION OF LOGICAL SOFTWARE SOLUTIONS
CORPORATION.
KPMG LLP ("KPMG") completed its report on the purchase price allocation in
connection with the acquisition of Logical Software Solutions ("LSS") by
Interlinq Software Corporation ("Interlinq" or the "Company"). This allocation
was performed as of June 30, 1998, the closing date of the transaction. We
understand that this report will be used by Interlinq for financial reporting
purposes.
The purchase price allocation reflects recent guidance from the SEC on
approaches and procedures to be followed in developing allocations to in-process
research and development ("IPR&D"). While we believe that the procedures
followed were in accordance with this guidance, there is no guarantee that these
results will not be challenged by the SEC. We note that the SEC may clarify
and/or change the procedures required for allocation to IPR&D and that such
changes may be retroactive.
<PAGE> 2
FINDINGS
The allocation of the purchase price paid by Interlinq is as follows:
<TABLE>
<CAPTION>
=================================================================================
ACQUIRED ASSETS/EXPENSE CALCULATED VALUE
- ---------------------------------------------------------------------------------
<S> <C> <C>
Gross Current Assets $292,158
Gross Long Term Assets 50,703
Workforce-In-Place 142,149
Customer List 171,691
Tradename 213,632
Non-Compete/Employment Agreement 263,172
Current Products 776,841
Other Goodwill(1) 2,406,624
---------------------------
3,974,109
Total Goodwill
In-Process Research & Development Expense 1,349,615
Assumed Short-Term Liabilities (272,370)
- ---------------------------------------------------------------------------------
NET ASSETS AND EXPENSES ACQUIRED ($000s) $5,394,215
=================================================================================
</TABLE>
(1) Includes the value of goodwill not separately identifiable.
<PAGE> 3
STATEMENT OF QUALIFICATIONS AND DISINTEREST
This report was prepared under the direction of Ms. Carolyn J. Worth,
Transaction Services Practice Partner. KPMG has no present or contemplated
future interest in the tangible and intangible assets and expenses whose value
we have determined, or any other interest that might prevent us from performing
an unbiased valuation.
We have enjoyed working with Interlinq and thank the staff for their time and
assistance.
Very truly yours,
KPMG LLP
<PAGE> 4
APPENDIX A - SUMMARY OF ALLOCATION
- --------------------------------------------------------------------------------
VALUATION AND ALLOCATION APPROACHES
We considered each of the three generally accepted approaches to valuation in
our analysis of the value of each asset. The three generally accepted valuation
approaches are the income, the cost and the market approaches.
The Discounted Cash Flow ("DCF") Method is one method often utilized in the
Income Approach to value. In DCF analysis, fair value is equivalent to the
present value of all estimated future cash flows generated by a particular
asset. Additional adjustments may be made to reflect special circumstances that
would affect the value.
The Market Approach examines publicly traded companies and transactions in the
marketplace in order to relate the value of similar companies/assets and recent
transactions to the companies/assets being valued. In this analysis, valuation
multiples are derived from the operating data of similar publicly traded
companies and adjustments are applied to compensate for differences between them
and the subject company being valued, if necessary. Once evaluated, these
valuation multiples are applied to the operating data of the subject company to
arrive at an indication of fair market value.
An application of the Cost Approach is the replacement cost approach. Under this
approach, the fair value of an asset is equal to the cost to replace the
functionality of the asset. For example, in the case of tradenames, the
replacement cost of the assets is equal to the royalty that would have to be
paid for the right to use the tradename if it were not owned.
We selected the method or methods that were most appropriate for each asset
analyzed.
DESCRIPTION OF ACQUIRED ASSETS AND EXPENSES
The items acquired by Interlinq include specific assets and liabilities, a
workforce, customer list, employment/non-compete agreements, trademark,
developed technology and other intangible assets not separately identifiable,
but associated with the acquired business. In addition, the Company also
incurred in-process research & development ("IPR&D") expenses as a result of
this acquisition. The acquired assets and expenses are described below.
SPECIFIC ASSETS AND LIABILITIES
As part of the acquisition, Interlinq purchased the trade receivables and fixed
assets of LSS. The fixed assets primarily included furniture, office equipment
and computer hardware. In addition, the Company assumed the accounts payable and
accrued vacation liabilities of LSS.
i
<PAGE> 5
APPENDIX A - SUMMARY OF ALLOCATION
- --------------------------------------------------------------------------------
KPMG relied upon management's representation as to the fair value of the current
and tangible assets as of the acquisition date.
WORKFORCE IN-PLACE
As part of the acquisition, Interlinq acquired a portion of the LSS workforce.
Because Interlinq was able to avoid the cost of assembling such a workforce on
its own, the workforce is considered a distinct intangible asset.
KPMG utilized an avoided cost approach in valuing the workforce.
CUSTOMER LIST
Interlinq acquired a list of customers with whom LSS currently has contact.
Because Interlinq has the potential to sell Interlinq and LSS products to some
of these customers in the future, the list possesses value and represents a
distinct intangible asset.
KPMG utilized a cost approach in valuing the customer list.
TRADENAME
As Interlinq plans to sell the existing FlowMan product for a period during
1998, the current product tradename possesses value and represents a distinct
intangible asset. Additionally, Interlinq intends to continue to utilize the
FlowMan name upon completion of the in-process project.
KPMG utilized an avoided cost approach in valuing the tradename.
EMPLOYMENT/NON-COMPETE AGREEMENTS
As part of the acquisition, certain LSS employees signed employment and
non-compete agreements that limit the ability of each employee to depart and
compete against Interlinq. Because these employees are deemed to be integral to
the success of the in-process project, the agreements possess value and
represent a distinct intangible asset.
KPMG utilized an income approach in valuing the employment/non-compete
agreements.
DEVELOPED TECHNOLOGY
At the time of the acquisition, LSS was selling its FlowMan 3.2 product. It is
anticipated that sales of this product will continue until January, 1999. It is
expected that the in-process FlowMan 4.0 will be ready for commercial release in
January, 1999 and sales of
ii
<PAGE> 6
APPENDIX A - SUMMARY OF ALLOCATION
- --------------------------------------------------------------------------------
FlowMan 3.2 will cease. Though sales of FlowMan 3.2 cease, there is a continuing
value contribution from the core technology (engine logic) that carries over to
FlowMan 4.0.
KPMG utilized an income approach in valuing the developed technology.
IN-PROCESS RESEARCH & DEVELOPMENT
FlowMan version 4.0 is targeted for commercial release during January, 1999.
Management has indicated that version 4.0 will be significantly different than
version 3.2. The major changes, as well as the tasks remaining to complete the
in-process project as of the acquisition date, are summarized below.
o Version 4.0 will offer three-tier architecture for expanded scalability,
o The product architecture will be completely redesigned.
This involves tasks such as evaluating the existing
logic and splitting the client tier into presentation
and middle tier. Most of the engine logic is carried
through to 4.0, however with increased functionality.
o Design specifications need to be developed.
o Existing source code will need to be re-written.
o New source code will need to be written.
o Quality assurance testing needs to be developed. As much
of the source code being developed is new to Interlinq
and LSS, existing quality assurance tests may not be
adequate, and new tests may need to be developed to
fully test and examine the technology. Tests must be
performed in order to examine reliability, compatibility
and performance.
o In light of any deficiencies noted during quality
assurance testing, various re-work will need to be
completed. This re-work includes re-writing existing LSS
source code, re-writing newly developed source code,
replacing "bad" or incompatible source code, etc.
o New documentation and "help systems" need to be modified
and/or replaced.
o Version 4.0 will incorporate Component Object Model (COM) technology to
enable reuse of modules in other software,
o The product architecture will be completely redesigned.
o Design specifications need to be developed.
o Existing source code needs to be re-written in new
language/technology.
o New modules for communication, including DCOM, need to
be re-written.
o Quality assurance testing needs to be developed. As much
of the source code being developed is new to Interlinq
and LSS, existing quality assurance tests may not be
adequate, and new tests may need to be developed to
fully test and examine the technology. Tests must be
performed in order to examine reliability, compatibility
and performance.
iii
<PAGE> 7
APPENDIX A - SUMMARY OF ALLOCATION
- --------------------------------------------------------------------------------
o In light of any deficiencies noted during quality
assurance testing, various re-work will need to be
completed. This re-work includes re-writing existing LSS
source code, re-writing newly developed source code,
replacing "bad" or incompatible source code, etc.
o New documentation and "help systems" need to be modified
and/or replaced.
o Version 4.0 will incorporate object-oriented methodology and ActiveX
controls to integrate Internet-based applications with internal business
processes,
o The product architecture will be completely redesigned.
o Design specifications need to be developed.
o Existing source code needs to be re-written in new
language/technology.
o New modules for customer integration methods need to be
re-written, and client and remote computing functions
need to be simplified.
o Quality assurance testing needs to be developed. As much
of the source code being developed is new to Interlinq
and LSS, existing quality assurance tests may not be
adequate, and new tests may need to be developed to
fully test and examine the technology. Tests must be
performed in order to examine reliability, compatibility
and performance.
o In light of any deficiencies noted during quality
assurance testing, various re-work will need to be
completed. This re-work includes re-writing existing LSS
source code, re-writing newly developed source code,
replacing "bad" or incompatible source code, etc.
o New documentation and "help systems" need to be modified
and/or replaced.
o Version 4.0 will possess the ability to be deployed across distributed
network environments.
o The product architecture will be completely redesigned.
This involves placing services on multiple servers
o Design specifications need to be developed.
o Existing source code needs to be re-written in new
language/technology.
o New source code for system manageability needs to be
written.
o Quality assurance testing needs to be developed. As much
of the source code being developed is new to Interlinq
and LSS, existing quality assurance tests may not be
adequate, and new tests may need to be developed to
fully test and examine the technology. Tests must be
performed in order to examine reliability, compatibility
and performance.
o In light of any deficiencies noted during quality
assurance testing, various re-work will need to be
completed. This re-work includes re-writing existing LSS
source code, re-writing newly developed source code,
replacing "bad" or incompatible source code, etc.
o New documentation and "help systems" need to be modified
and/or replaced.
iv
<PAGE> 8
APPENDIX A - SUMMARY OF ALLOCATION
- --------------------------------------------------------------------------------
In order to commercially release the FlowMan 4.0 product, management estimates
that approximately five professionals will be needed on a full-time basis over
five to six months. The estimated cost of this work is approximately
$175,000-200,000. At the time of the acquisition, management estimates that
progress toward full completion of the FlowMan 4.0 project is 40 percent.
At the valuation date, none of these products had demonstrated their
technological or commercial feasibility. Significant risk exists because
Interlinq is unsure of the obstacles it will encounter in the form of time and
cost necessary to produce technologically feasible products. Should these
proposed products fail to become viable, it is unlikely that Interlinq would be
able to realize any value from the sale of the technology to another party.
The in-process technology has no alternative use in the event that the proposed
products do not prove to be feasible. These development efforts fall within the
definition of In-Process Research and Development (IPR&D) contained in Statement
of Financial Accounting Standards (SFAS) No. 2.
KPMG utilized a modified income approach in allocating consideration to the
IPR&D. This approach is based on the standard income approach earlier, modified
to include guidance provided by the Securities and Exchange Commission regarding
the valuation of IPR&D. Specific factors considered in the modified approach
include:
- - analysis of the stage of completion of the in-process projects;
- - exclusion of value related to R&D yet-to-be completed as part of the ongoing
IPR&D projects; and
- - contribution of existing products/technologies.
v
<PAGE> 9
APPENDIX B - STATEMENT OF CONDITIONS AND LIMITATIONS
- --------------------------------------------------------------------------------
1. REPORT DISTRIBUTION - This report has been prepared solely for the
purpose stated and should not be used for any other purpose. Except as
specifically stated in the report, neither our report not its contents
is to be referred to or quoted, in whole or in part, in any registration
statement, prospectus, public filing, loan agreement, or other agreement
or document without our prior written approval. In addition, except as
set forth in the report, our analysis and report presentation are not
intended for general circulation or publication, nor are they to be
reproduced nor distributed to other third parties without our prior
written consent.
2. SCOPE OF ANALYSIS - The appraisal of any financial instrument or
business is a matter of informed judgment. The accompanying appraisal
has been prepared on the basis of information and assumptions set forth
in the attached report, associated appendices, or underlying work
papers, and these Limiting Conditions and Assumptions.
3. NATURE OF OPINION - Neither our opinion nor our report are to be
construed as a fairness opinion as to the fairness of an actual or
proposed transaction, a solvency opinion, or an investment
recommendation, but, instead, are the expression of our determination of
the fair value of the Subject Interest(s) between a hypothetical willing
buyer and a hypothetical willing seller in an assumed transaction on an
assumed valuation date. For various reasons, the price at which the
Subject Interest(s) might be sold in a specific transaction between
specific parties on a specific date might be significantly different
from the fair value as expressed in our report.
4. GOING CONCERN ASSUMPTION, NO UNDISCLOSED CONTINGENCIES - Our analysis:
(i) assumes that as of the Valuation Date the Company and its assets
will continue to operate as configured as a going concern; (ii) is based
on the past and present financial condition of the Company and its asset
as of the Valuation date; and (iii) assumes that the Company had no
undisclosed real or contingent assets or liabilities, no unusual
obligations or substantial commitments, other than in the ordinary
course of business, nor had any litigation pending or threatened that
would have a material effect on our analyses.
5. LACK OF VERIFICATION OF INFORMATION PROVIDED - We have relied on
information supplied by the Company without audit or verification. We
have assumed that all information furnished is complete, accurate and
reflects management's good faith efforts to describe the status and
prospects of the Company at the Valuation Date from an operating and a
financial point of view. As part of this engagement we have relied upon
publicly available data from recognized sources of financial information
which have not been verified in all cases.
6. RELIANCE ON FORECASTED DATA - Any use of management's projections or
forecasts in our analysis does not constitute an examination or
compilation of prospective financial statements in accordance with
standards established by the American Institute of Certified Public
Accountants ("AICPA"). We do not express an opinion or any other form of
assurance on the reasonableness of the underlying assumptions or whether
any of the prospective financial statements, if used, are presented in
conformity with AICPA presentation guidelines. Further, there will
usually be differences between prospective and
Page i
<PAGE> 10
APPENDIX B - STATEMENT OF CONDITIONS AND LIMITATIONS
- --------------------------------------------------------------------------------
actual results because events and circumstances frequently do not occur
as expected and these differences may be material.
7. SUBSEQUENT EVENTS - The terms of our engagement are such that we have no
obligation to update this report or to revise the valuation because of
events and transactions occurring subsequent to the Valuation Date.
8. LEGAL MATTERS - We assume no responsibility legal matters including
interpretations of either the law or contracts. We have made no
investigation of legal title and have assumed that owner(s) claim(s) to
property are valid. We have given no consideration to liens or
encumbrances except as specifically stated. We assumed that all required
licenses, permits, etc. are in full force and effect. We assume no
responsibility for the acceptability of the valuation approaches used in
our report as legal evidence in any particular court or jurisdiction.
The suitability of our report and opinion for any legal forum is a
matter for the client and the client's legal advisor to determine.
9. TESTIMONY - Neither KPMG Peat Marwick LLP nor any individual signing or
associated with this report shall be required to give testimony or
appear in court or other legal proceedings unless specific arrangements
have been made in advance.
10. USPAP - Unless otherwise stated in our opinion, our engagement is not
required to be conducted pursuant to the Uniform Standards of
Professional Practice.
ii
<PAGE> 11
INTERLINQ EXHIBIT 1.0
Acquisition of Logical Software
Solutions Corporation Purchase Consideration
Allocation Date: June 30, 1998 FINAL
<TABLE>
<CAPTION>
PURCHASE CONSIDERATION
===================================================================================================
ITEM FAIR VALUE
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash $ 3,600,001
Stock @ Fair Value 1,415,314
Capitalizable Direct Transaction Expenses 378,900
- ---------------------------------------------------------------------------------------------------
TOTAL PURCHASE CONSIDERATION $ 5,394,215
===================================================================================================
PREMIUM ABOVE ASSETS
- ---------------------------------------------------------------------------------------------------
Total Purchase Consideration $ 5,394,215
Less: Net Current Assets $ 19,788
Less: Net Long Term Assets 50,703
- ---------------------------------------------------------------------------------------------------
Sub-total $ 70,491
- ---------------------------------------------------------------------------------------------------
PREMIUM ABOVE ASSETS $ 5,323,724
===================================================================================================
INVESTED CAPITAL
- ---------------------------------------------------------------------------------------------------
Consideration $ 5,394,215
Assumed Interest Bearing Debt - Current $ --
Assumed Interest Bearing Debt - Long Term --
- ---------------------------------------------------------------------------------------------------
Sub-Total Financial Liabilities $ --
- ---------------------------------------------------------------------------------------------------
INVESTED CAPITAL $ 5,394,215
===================================================================================================
</TABLE>
<PAGE> 12
INTERLINQ EXHIBIT 2.0
Acquisition of Logical Software
Solutions Corporation Allocation of Purchase Consideration
Allocation Date: June 30, 1998 FINAL
ALLOCATION OF PURCHASE CONSIDERATION
<TABLE>
<CAPTION>
==========================================================================================================
ASSETS FAIR
VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
BALANCE SHEET ITEMS
Gross Current Operating Assets 292,158
Furniture 1,175
Office Equipment 646
Computer Hardware 47,509
Other (Leasehold Improvements, Software) 1,373
- ----------------------------------------------------------------------------------------------------------
Subtotal 342,861
NON-BALANCE SHEET ITEMS/INTANGIBLES @ FAIR VALUE
Workforce in Place $ 142,149
Customer List 171,691
Non-Compete Agreement 263,172
FlowMan Tradename 213,632
- ----------------------------------------------------------------------------------------------------------
Subtotal 790,644
CURRENT PRODUCTS/TECHNOLOGIES
FlowMan3.2 $ 49,128
Core Technology 727,714
- ----------------------------------------------------------------------------------------------------------
Sub-Total Current Product(s)/Technology $ 776,841
CALCULATED VALUES
Incremental Interlinq Products $ 303,112
FlowMan 4.0 1,046,504
- ----------------------------------------------------------------------------------------------------------
Sub-Total Calculated Values $ 1,349,615
Goodwill $ 2,406,624
Assumed Operating Liabilities $ (272,370)
Assumed Financial Liabilities $ --
- ----------------------------------------------------------------------------------------------------------
TOTAL CONSIDERATION: $ 5,394,215
==========================================================================================================
</TABLE>
<PAGE> 13
INTERLINQ EXHIBIT 3.0
Acquisition of Logical Software
Solutions Corporation Closing Balance Sheet
Allocation Date: June 30, 1998 FINAL
<TABLE>
<CAPTION>
========================================================================================================================
ADJUSTMENTS
B/S AS OF --------------- CLOSING
JUNE 30, 1998 DEBIT CREDIT FAIR VALUE NOTES
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS
Trade Receivables 308,718 -- 16,560 292,158
- ------------------------------------------------------------------------------------------------------------------------
Total Current Assets $308,718 $292,158
LONG-TERM ASSETS
Furniture 13,827 -- 12,652 1,175
Office Equipment 7,821 -- 7,175 646
Computer Hardware 141,853 -- 94,344 47,509
Other (Leasehold Improvements, Software) 37,731 -- 36,358 1,373
- ------------------------------------------------------------------------------------------------------------------------
Total Long-Term Assets $201,232 $ 50,703
- ------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $509,950 $342,861
========================================================================================================================
CURRENT LIABILITIES
Accounts Payable 187,151 -- 55,185 242,336
Accrued Vacation 26,977 -- 3,057 30,034
- ------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities $214,128 $272,370
LONG-TERM LIABILITIES
Interest Bearing Long Term Debt $ -- $ -- $ -- $ --
- ------------------------------------------------------------------------------------------------------------------------
Total Long-Term Liabilities $ -- $ --
- ------------------------------------------------------------------------------------------------------------------------
Total Liabilities $214,128 $272,370
- ------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES & EQUITY $214,128 $272,370
========================================================================================================================
</TABLE>
<PAGE> 14
INTERLINQ EXHIBIT 4.0
Acquisition of Logical Software
Solutions Corporation Fair Value of Workforce-In-Place
Allocation Date: June 30, 1998 FINAL
<TABLE>
<CAPTION>
AVOIDED RECRUITING & TRAINING COSTS
- ----------------------------------------------------------------------------------------------------------------
NUMBER OF AVERAGE RECRUITING ESTIMATED ESTIMATED AVOIDED RECRUIT/
POSITION/CATEGORY EMPLOYEES BASE SALARY COST % RECRUITING COST TRAINING COST TRAIN COST (1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
VP Technology 1 $90,000 40% $36,000 -- $36,000
VP Sales & Marketing 1 $90,000 40% $36,000 -- $36,000
President 1 $90,000 40% $36,000 -- $36,000
Sr. Systems Analyst 1 $72,000 20% $14,400 5,000 $19,400
Public Relations 1 $68,640 20% $13,728 - $13,728
Programmer/Analyst 1 $55,000 15% $8,250 5,000 $13,250
Programmer/Analyst 1 $55,000 15% $8,250 5,000 $13,250
Programmer/Analyst 1 $42,996 15% $6,449 5,000 $11,449
QA/Network Admin 1 $30,000 10% $3,000 -- $3,000
Admin Assistant 1 $14,500 10% $1,450 -- $1,450
- ----------------------------------------------------------------------------------------------------------------
Total 10 $183,527
Less: Income Tax Deduction Benefit @ 37% ($67,905)
-----------------------------------------------------------------------------------
After-Tax Cost of Recruiting & Training: $ 115,622
</TABLE>
<TABLE>
<CAPTION>
AVOIDED LOSS OF PRODUCTIVITY COSTS
- ----------------------------------------------------------------------------------------------
NUMBER OF BENEFIT STARTING TIME TO FULL AVOIDED PRODUCTIVITY
Position/Category EMPLOYEES LOAD EFFICIENCY PRODUCTIVITY COST (2)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
VP Technology 1 20% 90% 2 $900
VP Sales & Marketing 1 20% 90% 2 $900
President 1 20% 90% 2 $900
Sr. Systems Analyst 1 20% 85% 2 $1,080
Public Relations 1 20% 90% 2 $686
Programmer/Analyst 1 20% 85% 2 $825
Programmer/Analyst 1 20% 85% 2 $825
Programmer/Analyst 1 20% 85% 2 $645
QA/Network Admin 1 20% 90% 2 $300
Admin Assistant 1 20% 90% 2 $145
- ----------------------------------------------------------------------------------------------
Total 10 $7,206
Less: Income Tax Deduction Benefit @ 37% ($2,666)
--------------------------------------------------------------------
After Tax Avoided Cost of Lost Productivity $4,540
--------------------------------------------------------------------
Total of Avoided Cost $120,162
Add: Section 197 Tax Amortization Benefit 21,987
--------------------------------------------------------------------
FAIR VALUE OF WORKFORCE $142,149
=====================================================================
</TABLE>
NOTES:
(1) Avoided Recruiting/Training Cost=[(Ave. Salary x Recruiting Cost%)+Training
Cost] x Number of Employees
(2) Productivity Cost=[(Ave. Salary x (1+Benefit Load)) x (1-Starting Eff.) x
(Time/12) x 1/2] x Number of Employees
<PAGE> 15
INTERLINQ SOFTWARE CORPORATION EXHIBIT 5.0
Acquisition of Logical Software
Solutions Corporation Customer List
Allocation Date: June 30, 1998 FINAL
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Estimated Estimated
Average Cost Total Costs
Number of to Develop to Develop
Category Clients Relationship(1) Relationships
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tier 1 Customers 8 $ 2,500 $ 20,000
Tier 2 Customers 7 5,000 35,000
Tier 1 Dealers, Distributors 4 7,500 30,000
Tier 3 Customers 2 10,000 20,000
Tier 2 Dealers, Distributors 2 12,500 25,000
Tier 1 OEMs 1 20,000 20,000
- ---------------------------------- ------ ---------
TOTAL COST TO DEVELOP RELATIONSHIPS $ 150,000
Section 197 Benefit 21,691
- -----------------------------------------------------------------------------------
FAIR VALUE OF CUSTOMER LIST $ 171,691
===================================================================================
</TABLE>
<PAGE> 16
INTERLINQ SOFTWARE CORPORATION EXHIBIT 6.0
Acquisition of Logical Software
Solutions Corporation Employment and Non-Compete Agreements
Allocation Date: June 30, 1998 FINAL
<TABLE>
<CAPTION>
==================================================================================================
FORECAST
-------------------------------------
1999 2000 2001
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues from In-Process Projects 1,981,393 7,663,063 13,701,200
Cost of Sales for In-Process Projects 648,675 1,856,750 3,064,500
- --------------------------------------------------------------------------------------------------
Gross Margin for In-Process Projects 1,332,718 5,806,313 10,636,700
Employee 1
Contribution to Projected Profits 2.5% 2.0% 0.0%
Estimated Lost Profits 33,318 116,126 -
Probability of Employee Departing and Competing with
Interlinq 25.0% 25.0% 0.0%
- --------------------------------------------------------------------------------------------------
Projected Probable Lost Profits 8,329 29,032 -
Employee 2 0.05 0.05
- ----------
Contribution to Projected Profits 5.0% 5.0% 5.0%
Estimated Lost Profits 66,636 290,316 531,835
Probability of Employee Departing and Competing with
Interlinq 25.0% 25.0% 25.0%
- --------------------------------------------------------------------------------------------------
Projected Probable Lost Profits 16,659 72,579 132,959
Employee 3
Contribution to Projected Profits 2.5% 2.5% 2.0%
Estimated Lost Profits 33,318 145,158 212,734
Probability of Employee Departing and Competing with
Interlinq 25.0% 25.0% 25.0%
- --------------------------------------------------------------------------------------------------
Projected Probable Lost Profits 8,329 36,289 53,184
Total Projected Probable Lost Profits 33,318 137,900 186,142
Discount Period (Years) 0.50 1.50 2.50
Discount Rate/Factor 25% 89% 72% 57%
- --------------------------------------------------------------------------------------------------
Present Value of Free Cash Flows $ 29,810 $ 98,734 $ 106,619
Sum of Present Value of Adj. Operating Income $235,162
Section 197 Tax Benefit 28,010
- ----------------------------------------------------------------------
FAIR VALUE OF PROJECT $263,172
======================================================================
</TABLE>
<PAGE> 17
INTERLINQ EXHIBIT 7.0
Acquisition of Logical Software
Solutions Corporation Royalty Asset Worksheet
Allocation Date: June 30, 1998 FINAL
<TABLE>
<CAPTION>
CUMULATIVE AFTER TAX ROYALTIES
- ---------------------------------------------------------------------------------------------------------------------------
PRE-TAX REQUIRED AFTER TAX TOTAL ROYALTIES
ROYALTY ASSET AFTER-TAX --------------------------------------------------------------------
ASSET RATE LIFE RETURN 1999 2000 2001 2002 2003 2004 2005
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FLOWMAN TRADENAME 1.00% 5 20% 16,935 48,277 86,318 129,229 25,846 -- --
TRADENAME 2 0.00% 0 0% -- -- -- -- -- -- --
ROYALTY ASSET 3 0.00% 0 0% -- -- -- -- -- -- --
ROYALTY ASSET 4 0.00% 0 0% -- -- -- -- -- -- --
ROYALTY ASSET 5 0.00% 0 0% -- -- -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CUMULATIVE AFTER TAX ROYALTIES
- ----------------------------------------------
AFTER TAX TOTAL ROYALTIES
--------------------------
ASSET 2006 2007 2008
- ----------------------------------------------
<S> <C> <C> <C>
FLOWMAN TRADENAME -- -- --
TRADENAME 2 -- -- --
ROYALTY ASSET 3 -- -- --
ROYALTY ASSET 4 -- -- --
ROYALTY ASSET 5 -- -- --
- ----------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FLOWMAN TRADENAME
- ----------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
1999 2000 2001 2002 2003 2004 2005 2006
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
After-Tax Royalty Cash Flows 16,935 48,277 86,318 129,229 25,846 -- -- --
Discount Period 0.50 1.50 2.50 3.50 4.50 5.50 6.50 7.50
Discount Rate/Factor (%) 20.00% 91% 76% 63% 53% 44% 37% 31% 25%
- ----------------------------------------------------------------------------------------------------------------------------------
Present Value of Cash Flow 15,464 36,744 54,747 68,304 11,384 -- -- --
Sum of Present Values of Cash Flows 186,643 87%
Present Value of Residual Period -- 0%
Section 197 Tax Benefit 26,989 13%
- -------------------------------------------------------
FAIR VALUE OF CASH FLOWS $213,632
- -------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FLOWMAN TRADENAME
- -----------------------------------------------------------------
------------------
2007 2008
- --------------------------------------------------------------
<S> <C> <C> <C>
After-Tax Royalty Cash Flows -- --
Discount Period 8.50 9.50
Discount Rate/Factor (%) 20.00% 21% 18%
- ------------------------------------------------------------------
Present Value of Cash Flow -- --
Sum of Present Values of Cash Flows
Present Value of Residual Period
Section 197 Tax Benefit
- -----------------------------------------------
FAIR VALUE OF CASH FLOWS
- -----------------------------------------------
</TABLE>
<PAGE> 18
INTERLINQ EXHIBIT 8.1
Acquisition of Logical Software
Solutions Corporation Current Product: FlowMan3.2
Allocation Date: June 30, 1998 FINAL
<TABLE>
<CAPTION>
FLOWMAN3.2
- ----------------------------------------------------------------------------------------------------------------------------
Use Cost: 3 FORECAST
HISTORICAL FULL ----------------------------------------------------
1998 1999 2000 2001 2002 2003 2004
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUE $ 706,759 $ -- $ -- $ -- $ -- $ --
Revenue Growth
COST OF SALES
COS1 233,230 -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
Total Cost of Sales $ 233,230 $ -- $ -- $ -- $ -- $ --
- ----------------------------------------------------------------------------------------------------------------------------
Gross Profit $ 473,529 $ -- $ -- $ -- $ -- $ --
Profit (%) 67%
OPERATING EXPENSES
Product Development 8,236 -- -- -- -- --
Sales & Marketing 127,659 -- -- -- -- --
General & Administrative 182,110 -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses $ 318,005 $ -- $ -- $ -- $ -- $ --
- ----------------------------------------------------------------------------------------------------------------------------
Operating Income $ 155,524 $ -- $ -- $ -- $ -- $ --
Income (%) 22%
Income Tax 37% 57,544 -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
Adjusted Operating Income $ 97,980 $ -- $ -- $ -- $ -- $ --
CONTRIBUTORY ASSET CHARGES
Capital Asset Charge 44,462 -- -- -- -- --
FlowMan Tradename Y 0.63% 4,453 -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
Total Capital Charges $ 48,915 $ -- $ -- $ -- $ -- $ --
- ----------------------------------------------------------------------------------------------------------------------------
Incremental Adjusted Operating Income $ 49,065 $ -- $ -- $ -- $ -- $ --
--
Discount Period (Years) 0.50 1.50 2.50 3.50 4.50 5.50
Discount Rate/Factor 25% 89% 72% 57% 46% 37% 29%
- ----------------------------------------------------------------------------------------------------------------------------
Present Value of Free Cash Flows $ 43,899 $ -- $ -- $ -- $ -- $ --
Sum of Present Value of Adj. Operating Income $ 43,899
Section 197 Tax Benefit 5,229
- --------------------------------------------------------------------
FAIR VALUE OF PROJECT $ 49,128
====================================================================
</TABLE>
<TABLE>
<CAPTION>
FLOWMAN3.2
- ------------------------------------------------------------------------------------------
Use Cost 3
HISTORICAL --------------------------------------
1998 2005 2006 2007 2008
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUE $ -- $ -- $ -- $ --
Revenue Growth
COST OF SALES
COS1 -- -- -- --
- ------------------------------------------------------------------------------------------
Total Cost of Sales $ -- $ -- $ -- $ --
- ------------------------------------------------------------------------------------------
Gross Profit $ -- $ -- $ -- $ --
Profit (%)
OPERATING EXPENSES
Product Development -- -- -- --
Sales & Marketing -- -- -- --
General & Administrative -- -- -- --
- ------------------------------------------------------------------------------------------
Total Operating Expenses $ -- $ -- $ -- $ --
- ------------------------------------------------------------------------------------------
Operating Income $ -- $ -- $ -- $ --
Income (%)
Income Tax 37% -- -- -- --
- ------------------------------------------------------------------------------------------
Adjusted Operating Income $ -- $ -- $ -- $ --
CONTRIBUTORY ASSET CHARGES
Capital Asset Charge -- -- -- --
FlowMan Tradename Y 0.63% -- -- -- --
- ------------------------------------------------------------------------------------------
Total Capital Charges $ -- $ -- $ -- $ --
- ------------------------------------------------------------------------------------------
Incremental Adjusted Operating Income $ -- $ -- $ -- $ --
-- -- -- --
Discount Period (Years) 6.50 7.50 8.50 9.50
Discount Rate/Factor 25% 23% 19% 15% 12%
- ------------------------------------------------------------------------------------------
Present Value of Free Cash Flows $ -- $ -- $ -- $ --
Sum of Present Value of Adj. Operating Income
Section 197 Tax Benefit
- ----------------------------------------------------
FAIR VALUE OF PROJECT
====================================================
</TABLE>
<PAGE> 19
INTERLINQ EXHIBIT 8.2
Acquisition of Logical Software
Solutions Corporation Current Product: Core Technology
Allocation Date: June 30, 1998 FINAL
<TABLE>
<CAPTION>
CORE TECHNOLOGY
- -----------------------------------------------------------------------------------------------------------------------------------
Use Cost Structure: 3 FORECAST
HISTORICAL FULL --------------------------------------------------
1998 1999 2000 2001 2002
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CHARGEBACK FROM FLOWMAN 4.0 (49,535) (191,577) (342,530) (512,814)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Capital Charges $ (49,535) $ (191,577) $ (342,530) $ (512,814)
- -----------------------------------------------------------------------------------------------------------------------------------
Incremental Adjusted Operating Income $ 49,535 $ 191,577 $ 342,530 $ 512,814
Discount Period (Years) 0.50 1.50 2.50 3.50
Discount 25% 89% 72% 57% 46%
- -----------------------------------------------------------------------------------------------------------------------------------
Present Value of Free Cash Flows $ 44,319 $ 137,165 $ 196,196 $ 234,985
Sum of Present Value of Adj. Operating Income $ 650,262
Section 197 Tax Benefit 77,452
- ---------------------------------------------------------------------------
FAIR VALUE OF PROJECT $ 727,714
- ---------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CORE TECHNOLOGY
- --------------------------------------------------------------------------------------------------------------------------------
Use Cost Structure: 3 FORECAST
HISTORICAL ----------------------------------------------------------------------
1998 2003 2004 2005 2006 2007 2008
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
CHARGEBACK FROM FLOWMAN 4.0 (102,563) -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Total Capital Charges $ (102,563) $ -- $ -- $ -- $ -- $ --
- --------------------------------------------------------------------------------------------------------------------------------
Incremental Adjusted Operating Income $ 102,563 $ -- $ -- $ -- $ -- $ --
-- -- -- -- --
Discount Period (Years) 4.50 5.50 6.50 7.50 8.50 9.50
Discount 25% 37% 29% 23% 19% 15% 12%
- --------------------------------------------------------------------------------------------------------------------------------
Present Value of Free Cash Flows $ 37,598 $ -- $ -- $ -- $ -- $ --
Sum of Present Value of Adj. Operating Income
Section 197 Tax Benefit
- ---------------------------------------------------------
FAIR VALUE OF PROJECT
- ---------------------------------------------------------
</TABLE>
<PAGE> 20
INTERLINQ EXHIBIT 9.1
Acquisition of Logical Software
Solutions Corporation In-Process Project: Incremental
Allocation Date: June 30, 1998 Interlinq Products
FINAL
<TABLE>
<CAPTION>
INCREMENTAL INTERLINQ PRODUCTS
- --------------------------------------------------------------------------------------------------------------------------------
Use Cost Structure: 2 FORECAST
HISTORICAL FULL ----------------------------------------------
1998 1999 2000 2001 2002
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUE $ 567,875 $ 2,369,063 $ 3,813,900 $ 3,755,788
Revenue Growth 317% 61% -2%
COST OF SALES
Cost of Revenues 200,914 838,174 1,349,358 1,328,798
- --------------------------------------------------------------------------------------------------------------------------------
Total Cost of Sales $ 200,914 $ 838,174 $ 1,349,358 $ 1,328,798
- --------------------------------------------------------------------------------------------------------------------------------
Gross Profit $ 366,961 $ 1,530,889 $ 2,464,542 $ 2,426,990
Gross Profit (%) 65% 65% 65% 65%
OPERATING EXPENSES
Product Development -- -- -- --
Sales & Marketing 255,424 787,770 872,742 723,688
General & Administrative -- 23,000 34,500 23,000
Maint R&D 76,140 98,412 106,601 82,357
- --------------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses $ 331,564 $ 909,182 $ 1,013,843 $ 829,044
- --------------------------------------------------------------------------------------------------------------------------------
Operating Income $ 35,397 $ 621,707 $ 1,450,700 $ 1,597,946
Operating Income (%) 37% 6% 26% 38% 43%
Income Tax @ 37% 13,097 230,031 536,759 591,240
- --------------------------------------------------------------------------------------------------------------------------------
Net Operating Income $ 22,300 $ 391,675 $ 913,941 $ 1,006,706
Net Income (%) 4% 17% 24% 27%
CONTRIBUTORY ASSET CHARGES
Capital Asset Charge 35,725 123,822 203,829 204,922
FlowMan Tradename Y 0.63% 3,578 14,925 24,028 23,661
CORE TECHNOLOGY -- FLOWMAN 3.2 2.50% 14,197 59,227 95,348 93,895
- --------------------------------------------------------------------------------------------------------------------------------
Total Capital Charges $ 53,499 $ 197,974 $ 323,204 $ 322,478
- --------------------------------------------------------------------------------------------------------------------------------
Net Operating Income -- Technology $ (31,199) $ 193,701 $ 590,737 $ 684,228
Attribution Factor 43% 43% 43% 43%
- --------------------------------------------------------------------------------------------------------------------------------
Attributed Operating Income (13,416) 83,292 254,017 294,218
Discount Period (Years) 0.50 1.50 2.50 3.50
Discount Rate/Factor 33% 87% 65% 49% 37%
- --------------------------------------------------------------------------------------------------------------------------------
Present Value of Free Cash Flows (11,637) 54,345 124,616 108,525
Present Value of Attributed
Operating Income $ 277,345
Section 197 Tax Benefit 25,767
- -----------------------------------------------------------------------------
CALCULATED VALUE $ 303,112
=============================================================================
</TABLE>
<TABLE>
<CAPTION>
INCREMENTAL INTERLINQ PRODUCTS
- -------------------------------------------------------------------------------------------------------------------------------
Use Cost Structure: 2 FORECAST
--------------------------------------------------------------
2003 2004 2005 2006 2007 2008
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUE $ 375,579 $ -- $ -- $ -- $ --
Revenue Growth -90%
COST OF SALES
Cost of Revenues 132,880 -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Total Cost of Sales $ 132,880 $ -- $ -- $ -- $ -- $ --
- -------------------------------------------------------------------------------------------------------------------------------
Gross Profit $ 242,699 $ -- $ -- $ -- $ -- $ --
Gross Profit (%) 65%
OPERATING EXPENSES
Product Development --
Sales & Marketing 72,772 -- -- -- -- --
General & Administrative 2,050 -- -- -- -- --
Maint R&D 8,302 -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses $ 83,125 $ -- $ -- $ -- $ -- $ --
- -------------------------------------------------------------------------------------------------------------------------------
Operating Income $ 159,575 $ -- $ -- $ -- $ -- $ --
Operating Income (%) 42%
Income Tax @ 37% 59,043 -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Net Operating Income $ 100,532 $ -- $ -- $ -- $ -- $ --
Net Income (%) 27%
CONTRIBUTORY ASSET CHARGES
Capital Asset Charge 76,226 -- -- -- -- --
FlowMan Tradename 2,366 -- -- -- -- --
CORE TECHNOLOGY -- FLOWMAN 3.2 9,389 -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Total Capital Charges $ 87,981 $ -- $ -- $ -- $ -- $ --
- -------------------------------------------------------------------------------------------------------------------------------
Net Operating Income -- Technology $ 12,551 $ -- $ -- $ -- $ -- $ --
-- -- -- -- --
Attribution Factor 43% 43% 43% 43% 43% 43%
- -------------------------------------------------------------------------------------------------------------------------------
Attributed Operating Income 5,397 -- -- -- -- --
Discount Period (Years) 4.50 5.50 6.50 7.50 8.50 9.50
Discount Rate/Factor 28% 21% 16% 12% 9% 7%
- -------------------------------------------------------------------------------------------------------------------------------
Present Value of Free Cash Flows 1,497 -- -- -- -- --
Present Value of Attributed
Operating Income
Section 197 Tax Benefit
- -----------------------------------------------------------------
CALCULATED VALUE
=================================================================
</TABLE>
<PAGE> 21
INTERLINQ EXHIBIT 9.2
Acquisition of Logical Software
Solutions Corporation In-Process Project: FlowMan 4.0
Allocation Date: June 30, 1998 FINAL
<TABLE>
<CAPTION>
FLOWMAN 4.0
- ----------------------------------------------------------------------------------------------------------------------------------
Use Cost Structure: 4 FORECAST
HISTORICAL FULL --------------------------------------------
1998 1999 2000 2001 2002
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUE $ 1,413,518 $ 5,294,000 $ 6,462,000 $ 6,500,500
Revenue Growth 275% 22% 1%
COST OF SALES
COS1 243,408 911,627 1,112,756 1,119,386
- ----------------------------------------------------------------------------------------------------------------------------------
Total Cost of Sales $ 243,408 $ 911,627 $ 1,112,756 $ 1,119,386
- ----------------------------------------------------------------------------------------------------------------------------------
Gross Profit $ 1,170,110 $ 4,382,373 $ 5,349,244 $ 5,381,114
Gross Profit (%) 83% 83% 83% 83%
OPERATING EXPENSES
Cost-to-Complete -- --
Sales & Marketing 509,833 1,203,250 1,301,025 1,073,613
General & Administrative 207,467 434,200 409,219 347,525
Maint R&D 135,120 294,630 280,969 241,410
- ----------------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses $ 852,420 $ 1,932,080 $ 1,991,213 $ 1,662,548
- ----------------------------------------------------------------------------------------------------------------------------------
Operating Income $ 317,690 $ 2,450,293 $ 3,358,031 $ 3,718,567
Operating Income (%) 22% 46% 52% 57%
Income Tax @ 37% 117,545 906,608 1,242,472 1,375,870
- ----------------------------------------------------------------------------------------------------------------------------------
Net Operating Income $ 200,145 $ 1,543,685 $ 2,115,560 $ 2,342,697
Net Income (%) 14% 29% 33% 36%
CONTRIBUTORY ASSET CHARGES
Capital Asset Charge 88,924 276,698 345,353 354,677
FlowMan Tradename Y 0.63% 8,905 33,352 40,711 40,953
CORE TECHNOLOGY -- FLOWMAN 3.2 2.50% 35,338 132,350 161,550 162,513
- ----------------------------------------------------------------------------------------------------------------------------------
Total Capital Charges $ 133,167 $ 442,400 $ 547,614 $ 558,143
- ----------------------------------------------------------------------------------------------------------------------------------
Net Operating Income -- Technology $ 66,977 $ 1,101,285 $ 1,567,946 $ 1,784,554
Attribution Factor 43% 43% 43% 43%
- ----------------------------------------------------------------------------------------------------------------------------------
Attributed Operating Income 28,800 473,552 674,217 767,358
Discount Period (Years) 0.50 1.50 2.50 3.50
Discount Rate/Factor 33% 87% 65% 49% 37%
- ----------------------------------------------------------------------------------------------------------------------------------
Present Value of Free Cash Flows 24,983 308,980 330,758 283,046
Present Value of Attributed Operating Income $ 957,544
Section 197 Tax Benefit 88,960
- ----------------------------------------------------------------------------------
CALCULATED VALUE $ 1,046,504
==================================================================================
</TABLE>
<TABLE>
<CAPTION>
FLOWMAN 4.0
- -----------------------------------------------------------------------------------------------------------------------------------
Use Cost Structure: 4 FORECAST
HISTORICAL ----------------------------------------------------------------
1998 2003 2004 2005 2006 2007 2008
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUE $ 650,050 $ -- $ -- $ -- $ -- $ --
Revenue Growth --90%
COST OF SALES
COS1 111,939 -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total Cost of Sales $ 111,939 $ -- $ -- $ -- $ -- $ --
- -----------------------------------------------------------------------------------------------------------------------------------
Gross Profit $ 538,111 $ -- $ -- $ -- $ -- $ --
Gross Profit (%) 83%
OPERATING EXPENSES
Cost--to--Complete -- -- -- -- -- --
Sales & Marketing 107,361 -- -- -- -- --
General & Administrative 34,753 -- -- -- -- --
Maint R&D 24,141 -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses $ 166,255 $ -- $ -- $ -- $ -- $ --
- -----------------------------------------------------------------------------------------------------------------------------------
Operating Income $ 371,856 $ -- $ -- $ -- $ -- $ --
Operating Income (%) 57%
Income Tax @ 37% 137,587 -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net Operating Income $ 234,269 $ -- $ -- $ -- $ -- $ --
Net Income (%) 36%
CONTRIBUTORY ASSET CHARGES
Capital Asset Charge 131,931 -- -- -- -- --
FlowMan Tradename Y 0.63% 4,095 -- -- -- -- --
CORE TECHNOLOGY -- FLOWMAN 3.2 2.50% 16,251 -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total Capital Charges $ 152,278 $ -- $ -- $ -- $ -- $ --
- -----------------------------------------------------------------------------------------------------------------------------------
Net Operating Income -- Technology $ 81,992 $ -- $ -- $ -- $ -- $ --
-- -- -- -- --
Attribution Factor 43% 43% 43% 43% 43% 43%
- -----------------------------------------------------------------------------------------------------------------------------------
Attributed Operating Income 35,256 -- -- -- -- --
Discount Period (Years) 4.50 5.50 6.50 7.50 8.50 9.50
Discount Rate/Factor 33% 28% 21% 16% 12% 9% 7%
- -----------------------------------------------------------------------------------------------------------------------------------
Present Value of Free Cash Flows 9,778 -- -- -- -- --
Present Value of Attributed Operating Income
Section 197 Tax Benefit
- -------------------------------------------------------------------
CALCULATED VALUE
===================================================================
</TABLE>
<PAGE> 1
EXHIBIT 99.7
OPERATING AGREEMENT
OF
W.R. HAMBRECHT/INLQ, LLC
DATED AS OF
APRIL 30, 1999
<PAGE> 2
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
<S> <C>
ARTICLE I DEFINITIONS................................................................1
ARTICLE II ORGANIZATION...............................................................3
2.1 Formation; Name...............................................................3
2.2 Purpose.......................................................................3
2.3 Principal Place of Business...................................................3
2.4 Registered Agent..............................................................3
2.5 Term..........................................................................3
2.6 Members.......................................................................3
ARTICLE III CAPITAL INTERESTS AND CONTRIBUTIONS OF THE MEMBERS.........................3
3.1 Capital Accounts..............................................................3
3.2 Capital Contributions and Issuance of Units...................................3
3.3 No Interest on Capital Contributions..........................................4
3.4 Return of Capital to Members..................................................4
3.5 Loans.........................................................................4
ARTICLE IV MANAGEMENT.................................................................4
4.1 Management....................................................................4
4.2 Restrictions on Other Activities or Investments...............................4
4.3 Indemnification...............................................................5
4.4 Tax Matters Partner...........................................................5
ARTICLE V PROFITS AND LOSSES.........................................................5
5.1 General Allocations...........................................................5
5.2 Overriding Allocations........................................................6
5.3 Intention Regarding Allocations...............................................6
ARTICLE VI DISTRIBUTIONS..............................................................6
6.1 Distributions.................................................................6
ARTICLE VII BOOKS, RECORDS AND ACCOUNTING..............................................7
7.1 Books and Records.............................................................7
7.2 Location of Books and Records.................................................7
7.3 Accounting Methods............................................................7
</TABLE>
i.
<PAGE> 3
<TABLE>
<CAPTION>
TABLE OF CONTENTS
(CONTINUED)
PAGE
<S> <C>
7.4 Fiscal Year...................................................................7
7.5 Financial Statements; Tax Return Information..................................7
ARTICLE VIII RESTRICTIONS ON TRANSFER OF UNITS OR ECONOMIC INTEREST.....................7
8.1 Prohibition on Transfers......................................................7
8.2 Permitted Transfers...........................................................8
8.3 Pledge........................................................................8
8.4 Void Transfers................................................................8
8.5 Legend on Shares..............................................................8
8.6 Withdrawal Prohibited.........................................................9
ARTICLE IX DISSOLUTION AND WINDING-UP.................................................9
9.1 Events Causing Dissolution....................................................9
9.2 Winding Up of the Company.....................................................9
ARTICLE X MISCELLANEOUS..............................................................9
10.1 Amendment; Entire Agreement...................................................9
10.2 Notices......................................................................10
10.3 Binding Effect; Successors and Assigns.......................................10
10.4 Specific Enforcement.........................................................10
10.5 Governing Law................................................................10
10.6 Section Headings.............................................................10
10.7 Miscellaneous Terms and Usage................................................10
10.8 Jurisdiction and Venue.......................................................10
10.9 Arbitration..................................................................10
10.10 Attorney Fees................................................................11
10.11 Further Assurances...........................................................12
10.12 Counterparts and Execution...................................................12
10.13 Confidentiality..............................................................12
</TABLE>
ii.
<PAGE> 4
OPERATING AGREEMENT OF
W.R. HAMBRECHT/INLQ, LLC
THIS LIMITED LIABILITY COMPANY OPERATING AGREEMENT of W.R.
HAMBRECHT/INLQ, LLC (this "Agreement") is made and entered into as of this 30th
day of April, 1999, by and among the Persons listed on Exhibit A attached hereto
(the "Members").
RECITALS
The Members have agreed to form a limited liability company in
accordance with the Beverly-Killea Limited Liability Company Act under the name
"W.R. Hambrecht/INLQ, LLC". The Members desire to enter into this Agreement in
order to set forth their understanding with respect to the management, operation
and ownership of the Company.
NOW, THEREFORE, the Members hereby agree as follows:
ARTICLE I
DEFINITIONS
When used in this Agreement, the following terms have the meanings set
forth below:
"ACT" means the Beverly-Killea Limited Liability Company Act as the same
may be amended from time to time.
"AFFILIATE" means, with respect to any Person, any other Person which
directly or indirectly controls, is controlled by, or is under common control
with such Person.
"ARTICLES" means the Articles of Organization for the Company originally
filed with the California Secretary of State, as amended from time to time.
"CAPITAL ACCOUNT" The Capital Account of each Member shall consist of
its original capital contribution (i) increased by any additional capital
contributions, its share of income or gain that is allocated to it pursuant to
this Agreement, and the amount of any Company liabilities that are assumed by it
or that are secured by any Company property distributed to it, and (ii)
decreased by the amount of any distributions to or withdrawals by it, its share
of expense or loss that is allocated to it pursuant to this Agreement, and the
amount of any of its liabilities that are assumed by the Company or that are
secured by any property contributed by it to the Company. The foregoing
provision and the other provisions of this Agreement relating to the maintenance
of Capital Accounts are intended to comply with Treasury Regulation Section
1.704-1(b)(2)(iv), and shall be interpreted and applied in a manner consistent
with such Regulations. In the event the Managers determine that it is prudent to
modify the manner in which the Capital Accounts, or any debits or credits
thereto, are computed in order to comply with such Treasury Regulations, the
Company may make such modification as deemed prudent by the Managers, provided
that it is not likely to have more than an insignificant effect on the total
amounts distributable to any Member pursuant to Article 7 and Article 9.
1.
<PAGE> 5
"CODE" means the Internal Revenue Code of 1986, as amended from time to
time, the provisions of succeeding law, and to the extent applicable, the
Treasury Regulations.
"COMPANY" means W.R. Hambrecht/INLQ, LLC.
"ECONOMIC INTEREST" means the interest held by a Transferee of a Member
or Economic Interest Holder who has not been admitted as a Member.
"ECONOMIC INTEREST HOLDER" means any Person owning an Economic Interest.
"INITIAL MEMBER" shall mean the Members originally listed on Exhibit A
hereto prior to any amendment thereto and prior to a transfer of any interest
herein from an original Member to any other Person.
"INTERLINQ" shall mean Interlinq Software Corporation, a Washington
corporation.
"MAJORITY IN INTEREST OF THE MEMBERS" means the vote of those Members
holding a majority of then outstanding Units.
"MANAGER" means W.R. Hambrecht/INLQ Management, LLC or any successor
appointed pursuant to Section 4.1 hereof.
"MEMBER MINIMUM GAIN" means "partner nonrecourse debt minimum gain"
determined in accordance with Section 1.704-2(i)(3) of the Treasury Regulations.
"MINIMUM GAIN" has the meaning given to "partnership minimum gain" in
Section 1.704-2(d) of the Treasury Regulations.
"NET PROFITS" and "NET LOSS" mean the income, gain, loss, deductions,
and credits of the Company in the aggregate or separately stated, as
appropriate, determined under the method of accounting employed by the Company.
"OVERDISTRIBUTION" shall mean an amount of money equal to the excess, if
any, of (A) the amount of cash and the fair market value of other property
actually distributed to the Manager over (B) the amount of cash and fair market
value of other property which would have been distributed to the Manager but for
the portion of Section 6.1 hereof requiring the Tax Distribution.
"PERSON" means an individual, general partnership, limited partnership,
limited liability company, corporation, trust, estate, real estate investment
trust association, or any other entity.
"TRANSFER" and "TRANSFEREE" shall have the meanings set forth in Section
8.1 hereof.
"TREASURY REGULATIONS" means the regulations from time to time in force
as final or temporary that have been issued by the U.S. Department of Treasury
pursuant to its authority under the Code.
2.
<PAGE> 6
"UNITS" means a Member's entire interest in the Company including the
Member's right to share in Net Profits and Net Loss and distributions of cash
and other assets of the Company. Each Member's number of Units shall initially
be as set forth on Exhibit A.
"W.R. HAMBRECHT + CO." means W.R. Hambrecht + Co., LLC, a California
Limited Liability Company.
ARTICLE II
ORGANIZATION
2.1 FORMATION; NAME. The Members have caused the Company to be formed
as a California limited liability company by filing the Articles in accordance
with the Act. The name of the Company is "W.R. Hambrecht/INLQ, LLC." The Company
may operate its business under one or more assumed names.
2.2 PURPOSE. The purpose of the Company is to purchase one hundred
percent (100%) of the common stock of Terlin, Inc. ("Terlin"), an affiliate of
W.R. Hambrecht + Co., to cause Terlin to merge with and into Interlinq in order
to effect a leveraged recapitalization of Interlinq, to own, hold for investment
and ultimately sell or transfer shares of Interlinq and to engage in any other
activities necessary or appropriate thereto.
2.3 PRINCIPAL PLACE OF BUSINESS. The principal place of business of
the Company is San Francisco, California, or such other place as the Manager may
designate from time to time. The Company may have such other offices as the
Manager may designate from time to time.
2.4 REGISTERED AGENT. The name and address of the Company's
registered agent for service of process in the State of California is as set
forth in the Articles. The Manager may from time to time change the registered
agent or its address through appropriate filings with the California Secretary
of State.
2.5 TERM. The Company shall continue in existence until December 31,
2048, unless the Company is dissolved sooner and its affairs wound up in
accordance with this Agreement and the Act.
2.6 MEMBERS. The name, present mailing address and taxpayer
identification number of each Member are set forth in Exhibit A.
ARTICLE III
CAPITAL INTERESTS AND CONTRIBUTIONS OF THE MEMBERS
3.1 CAPITAL ACCOUNTS. The Company shall maintain Capital Accounts in
accordance with the requirements of the Treasury Regulations.
3.2 CAPITAL CONTRIBUTIONS AND ISSUANCE OF UNITS. Upon the signing of
this Agreement, each Member shall contribute the amount of money set forth on
Exhibit A to the Company's capital. Each Unit shall represent a capital
contribution of Six Dollars and Forty-
3.
<PAGE> 7
Four Cents ($6.44). No further capital contributions shall be required of the
Members, provided, however, that at the final liquidation and winding up of the
Company, the Manager shall contribute to the Company's capital the amount, if
any, of the Overdistribution.
3.3 NO INTEREST ON CAPITAL CONTRIBUTIONS. No interest shall be paid by
the Company to any Member on any capital contribution.
3.4 RETURN OF CAPITAL TO MEMBERS. Except as may be specifically
provided in this Agreement, no Member shall have the right to withdraw from the
Company all or any part of its capital contribution. Except as provided in this
Agreement, no Member shall be entitled to a return of any cash or property
contributed to the Company until the full and complete winding-up and
liquidation of the business and affairs of the Company.
3.5 LOANS. No Member shall be obligated to lend money to the Company.
A Member may make a loan to the Company if the terms of such loan are agreed to
by the Manager.
ARTICLE IV
MANAGEMENT
4.1 MANAGEMENT. The Company shall be managed by the Manager, as
hereinafter provided. The Manager shall serve until it resigns, dies or is
terminated. The Manager may be terminated upon Reasonable Cause by a vote of a
Majority in Interest of the Members. "Reasonable Cause" shall mean grossly
negligent or reckless or intentionally wrongful conduct in the conduct of the
Company's business. No other Person shall become a Manager unless such Person is
explicitly named as such in a duly approved amendment to this Agreement. The
Manager shall have full power and authority to manage the Company's business,
and the other Members shall have no right or power to vote on or otherwise
control any aspect of the Company's business including but not limited to the
sale or encumbrance of any or all of the Company's assets. Except to the extent
specifically provided herein, the Manager shall receive no compensation for its
services to the Company, but it shall entitled to reimbursement of actual out of
pocket expenses incurred in the course of the Company's business. The Manager
shall devote such time and attention to the Company's business as is reasonably
necessary.
4.2 RESTRICTIONS ON OTHER ACTIVITIES OR INVESTMENTS. The Manager or
any Member may engage or invest in, independently or with others, any business
activity of any type or description, including those that might be the same as
or similar to the Company's business and that might be in direct or indirect
competition with the Company. Except as specifically set forth herein, the
Members shall not be obligated to present any investment opportunity or
prospective economic advantage to the Company, even if the opportunity is of the
character that, if presented to the Company, could be taken by the Company. The
Members shall have the right to hold any such investment opportunity or
prospective economic advantage for its own account or to recommend such
opportunity to Persons other than the Company.
4.
<PAGE> 8
4.3 INDEMNIFICATION.
(a) No Member or Manager, or any officer, director, employee,
partner, member, manager or Affiliate of either (each, an "Indemnified Person")
shall be liable, responsible, or accountable, in damages or otherwise, to any
Member or to the Company for any loss, cost, claim, expense, or liability
attributable to any act or omission by the Indemnified Person with respect to
Company matters, unless such act or omission constitutes grossly negligent or
reckless conduct, intentional misconduct, or a knowing violation of law.
(b) The Company shall indemnify each Indemnified Person for any
loss, cost, claim, expense, or liability attributable to any act or omission by
the Indemnified Person with respect to Company matters, unless such act or
omission constitutes grossly negligent or reckless conduct, intentional
misconduct, or a knowing violation of law. Expenses incurred by any Indemnified
Person in defending a claim or proceeding covered by this paragraph may be paid
by the Company in advance of the final disposition of such claim or proceeding,
provided the Indemnified Person undertakes to repay such amount if it is
ultimately determined that such person was not entitled to be indemnified.
4.4 TAX MATTERS PARTNER. The Manager is hereby designated as the "tax
matters partner" of the Company for purposes of Section 6231(a)(7)(A) of the
Code.
ARTICLE V
PROFITS AND LOSSES
5.1 GENERAL ALLOCATIONS. Except as otherwise provided in this Agreement
or required by the Treasury Regulations:
(a) NET LOSSES.
(i) Net Losses shall be allocated among the Members in
accordance with the relative Capital Account balances of each;
(ii) provided, however, that any Net Losses recognized
prior to the date on which Members have received aggregate distributions equal
to their capital contributions shall first be allocated to the Manager until it
has received allocation of Net Losses pursuant to this clause equal to any prior
allocations of Net Profit in excess of those made on account of its Units, but
on no account shall the Manager be allocated any Net Losses on account of this
paragraph (ii) which would cause its Capital Account balance to become negative
(or increase such a negative Capital Account balance).
(b) NET PROFITS. Allocations of Net Profits shall first be made
to reverse all prior allocations of Net Losses made pursuant to paragraph (a)(i)
above. Net Profits shall thereafter be made eighty percent (80%) to the Members
in accordance with their respective number of Units and twenty percent (20%) to
the Manager. To the extent the Manager re-allocates any amount pursuant to
Section 6.1, an appropriate amount of Net Profit shall be allocated to the
Member(s) receiving such re-allocation.
5.
<PAGE> 9
5.2 OVERRIDING ALLOCATIONS. The following provisions shall supersede
the general allocation of Net Profits and Net Loss set forth in Section 5.1:
(a) The Manager shall cause the Company to adopt one of the
three alternative methods set forth in Section 1.704-3 of the Treasury
Regulations with respect to property whose book value (net of liabilities)
differs from its tax basis.
(b) The Company shall comply with the minimum gain chargeback
requirement of Section 1.704-2(f) of the Treasury Regulations.
(c) The Company shall comply with the member minimum gain
chargeback requirement of Section 1.704-2(i)(4) of the Treasury Regulations.
(d) This Agreement hereby incorporates a qualified income offset
provision, as described in Section 1.704-1(b)(2)(ii)(d)(3) of the Treasury
Regulations.
(e) All Net Loss and all Company deductions attributable to
Company indebtedness as to which one or more Members bears an economic risk of
loss shall be allocated to such Members, and shall be apportioned among them in
accordance with the amount of loss to be borne by each.
5.3 INTENTION REGARDING ALLOCATIONS. It is the intention of the
Members that the allocation provisions of this Agreement facilitate the economic
agreements of the parties hereof as set forth in Article VI hereof, and such
allocation provisions shall be interpreted so as to be construed with such
intention.
ARTICLE VI
DISTRIBUTIONS
6.1 DISTRIBUTIONS. Except as otherwise provided in Section 9.2(a),
distributions of cash or Company assets shall be made at the time determined by
the Manager, and shall be allocated between the Members in accordance with their
respective number of Units until all Members have received cumulative
distributions of cash or assets equal to their original capital contributions,
valuing any assets distributed as of the date of their distribution by the
Company. After the Members have received aggregate distributions equal to their
capital contributions, eighty percent (80%) of subsequent distributions shall be
made to Members in proportion to their respective number of Units and the
remaining twenty percent (20%) of such distributions shall be made to the
Manager. The Manager shall be entitled to re-allocate all or any portion of such
distribution as between the Manger and one or more other Members, as agreed to
by such Members. Notwithstanding the prior portion of this Section 6.1, the
Company shall distribute cash (the "Tax Distribution") equal to at least thirty
percent (30%) of the Net Profit to each Member for each year allocated to such
Member, no later than one hundred twenty (120) days after the end of the
corresponding fiscal year, unless the Manager and a Majority in Interest of the
Members agree in writing to a lower percentage for a given fiscal year. Such Tax
Distribution shall be adjusted in good faith by the Manager in the event of an
increase in any applicable federal long term tax rates. The Manager shall have
the right, but not the obligation, to distribute any assets of the Company in
kind. No Member shall have the right to demand a
6.
<PAGE> 10
distribution of assets in kind. The Manager shall determine the value of any
assets distributed in kind in its sole discretion.
ARTICLE VII
BOOKS, RECORDS AND ACCOUNTING
7.1 BOOKS AND RECORDS. The Company shall maintain complete and
accurate books and records of the Company's business including, but not limited
to, the following:
(a) A current list of the full name and last known business or
residence address of each Member, together with the capital contribution and
number of Units of each Member.
(b) A copy of the Articles and any and all amendments thereto.
(c) Copies of the Company's federal, state and local income tax
or information returns and reports, if any, for the six (6) most recent taxable
years.
(d) A copy of this Agreement and any and all amendments hereto.
(e) Copies of the financial statements of the Company, if any,
for the six (6) most recent fiscal years, which need not be audited.
7.2 LOCATION OF BOOKS AND RECORDS. The Company's books of account and
other records shall be maintained at the Company's principal place of business
or another place designated by the Manager.
7.3 ACCOUNTING METHODS. For book and tax purposes, the Company shall
adopt such method of accounting that is permissible under the Code as the
Manager selects.
7.4 FISCAL YEAR. The annual accounting period of the Company shall be
the calendar year.
7.5 FINANCIAL STATEMENTS; TAX RETURN INFORMATION. As soon as
practicable and, in any event within one hundred twenty (120) days after the end
of each fiscal year, the Company's unaudited financial statements for such
fiscal year and any information from the Company necessary for the preparation
of the Members' tax returns shall be made available to each Member at the
Company's principal office. Appropriate Schedule K-1 documents shall be sent to
the Members as required by law.
ARTICLE VIII
RESTRICTIONS ON TRANSFER OF UNITS OR ECONOMIC INTEREST
8.1 PROHIBITION ON TRANSFERS. Except as otherwise specifically
provided herein, no Member or Economic Interest Holder may sell, assign,
transfer, pledge, encumber or otherwise dispose of (any of which is a
"Transfer") his or her Units or Economic Interest, in whole or in
7.
<PAGE> 11
part, or enter into any agreement or grant any options or rights with respect
thereto, whether by action of such Member (or Economic Interest Holder) or by
operation of law or otherwise, without the prior consent of the Manager. The
Manager may withhold its consent to such a Transfer in its sole and absolute
discretion.
The Manager may consent to a Transfer without consenting to the
admission of the transferee under such approved Transfer (a "Transferee") as a
Member of the Company. A Transferee may only be admitted as a Member of the
Company if and when (i) the Transferee becomes a party to this Agreement by
agreeing in writing to be bound by the terms and provisions hereof and (ii) the
Manager consents to such admission, which consent may be withheld in his sole
and absolute discretion. Any Transferee shall execute and acknowledge such other
instruments as the Manager may deem necessary or desirable to effectuate the
admission of the Transferee as a Member of the Company. Any Transferee not
admitted as a Member of the Company shall be an Economic Interest Holder only,
entitled to the Net Profits, Net Loss, and distributions of cash and other
assets allocable to the assigned Units, but not entitled to vote on Company
matters or to exercise or enjoy any of the other rights of a Member of the
Company, unless and until such Transferee is admitted as a Member of the
Company. Each Transferee or any subsequent Transferee of Units or Economic
Interests, or any partial interests thereof, shall hold such Units or Economic
Interests subject to all the provisions hereof and shall make no transfers
except as permitted hereby. Any purported transfer in violation of any provision
hereof shall be void ab initio and shall not operate to transfer any right,
title or interest to the purported transferee.
8.2 PERMITTED TRANSFERS. Notwithstanding Section 8.1, a Member or
Economic Interest Holder shall be entitled to Transfer his Units or his Economic
Interest, as the case may be, to any Permitted Transferee. "Permitted
Transferee" shall mean (i) any Initial Member, (ii) any trust, established by an
Initial Member (A) following the death of an Initial Member who is a natural
person or (B) for the exclusive benefit of an Initial Member, his or her spouse
and/or the descendants of either of them.
8.3 PLEDGE. A Member or Economic Interest Holder may pledge his or
her Units or Economic Interest as collateral security to one or more financial
institutions or nonoperating companies, but only if the secured party has agreed
in writing that, prior to selling any or all of such collateral in satisfaction
of the Member's Economic Interest Holder's obligations, such collateral shall
first be offered for sale to Members.
8.4 VOID TRANSFERS. Any attempted Transfer of any Units or an
Economic Interest other than in compliance with this Article VIII is void and
ineffective.
8.5 LEGEND ON SHARES. Each Member shall have placed on certificates,
if any, representing its Units in the Company the following words:
SALE, TRANSFER, HYPOTHECATION, ENCUMBRANCE, OR DISPOSITION OF THE UNITS
REPRESENTED BY THIS CERTIFICATE IS RESTRICTED BY THE PROVISIONS OF THE
OPERATING AGREEMENT OF W.R. HAMBRECHT/INLQ, LLC. ALL RESTRICTIONS
CONTAINED IN SUCH AGREEMENT ARE INCORPORATED BY REFERENCE IN THIS
CERTIFICATE. A COPY OF THE
8.
<PAGE> 12
AGREEMENT MAY BE INSPECTED AT THE PRINCIPAL OFFICE OF W.R.
HAMBRECT/INLQ, LLC. AT 550 FIFTEENTH STREET, SAN FRANCISCO, CALIFORNIA,
94103.
8.6 WITHDRAWAL PROHIBITED. Except as otherwise specifically provided
herein, no Member may withdraw or resign from the Company until there has been a
dissolution and a full and complete winding up of the Company in accordance with
this Agreement and the Act.
ARTICLE IX
DISSOLUTION AND WINDING-UP
9.1 EVENTS CAUSING DISSOLUTION. The Company shall be dissolved and its
affairs wound up in accordance with the Act and this Agreement upon occurrence
of any of the following (each an "Event of Dissolution"):
(a) the sale of all or substantially all of the assets of the
Company.
(b) the vote to dissolve of the Manager and a Majority in
Interest of the Members.
9.2 WINDING UP OF THE COMPANY.
(a) Upon the dissolution of the Company, the Manager shall
proceed with the winding up of the affairs of the Company. The assets shall be
liquidated as promptly as is consistent with obtaining a fair market value
therefor, and the proceeds therefrom, to the extent available, shall be applied
and distributed by the Manager to the Members in accordance with the Members'
closing Capital Account balances.
(b) Upon the completion of the winding up and liquidation of the
Company, a final statement with respect thereto shall be prepared by the Manager
or its designee and submitted to each Member. Upon completion of the
liquidation, the Company shall be deemed completely dissolved and terminated and
Articles of Dissolution of the Company shall be filed with the California
Secretary of State in accordance with the Act.
ARTICLE X
MISCELLANEOUS
10.1 AMENDMENT; ENTIRE AGREEMENT. This Agreement may be amended or
modified from time to time only by a written instrument signed by the Manager
and a Majority in Interest of the Members. This Agreement represents the sole
and entire agreement among the Members relative to the Company and supersedes
all prior agreements and understandings with respect to the subject matter
hereof, provided that to the extent any provision hereof is ineffective or
prohibited under the Act, this Agreement shall be deemed amended only to the
degree necessary to make such provision effective or to eliminate the
prohibition under the Act.
9.
<PAGE> 13
10.2 NOTICES. All notices, consents, demands and other communications
provided for herein (any of which is a "Notice") shall be in writing and shall
be sent by United States mail, first class postage prepaid, facsimile
transmission or recognized courier service directed to a Member at the address
or facsimile number as set forth in the Company's records. Any such Notice shall
be deemed given, in the case of delivery by United States mail, first class
postage prepaid, on the third business day after the day mailed; in the case of
courier service, on the business day received; and in the case of facsimile
transmission, upon confirmation of receipt. Another address may be designated by
a Member from time to time by Notice given in accordance with the provisions of
this Section 10.2.
10.3 BINDING EFFECT; SUCCESSORS AND ASSIGNS. Except as otherwise
herein provided, this Agreement shall be binding upon, and inure to the benefit
of the Members and their successors. Nothing in this Agreement is intended to
confer upon any party, other than the Members and their respective successors,
any rights remedies, obligations or liabilities under or by reason of this
Agreement.
10.4 SPECIFIC ENFORCEMENT. This Agreement, and each of the provisions
hereof, shall be specifically enforceable. Appropriate injunctive relief may be
applied for and granted in conjunction therewith. Any remedy provided for in
this Agreement shall be cumulative and not exclusive and shall be available in
addition to any other remedies which any party may have under this Agreement or
otherwise.
10.5 GOVERNING LAW. This Agreement shall be governed in all respects
by the laws of the State of California as such laws are applied to agreements
between California residents entered into and performed entirely within the
state of California.
10.6 SECTION HEADINGS. The Article and Section headings used in this
Agreement are for reference purposes only, and should not be used in construing
this Agreement.
10.7 MISCELLANEOUS TERMS AND USAGE. The term "shall" is mandatory; the
term "may" is permissive. The term "including" is by way of example and not
limitation. All pronouns used herein shall be deemed to refer to the masculine,
feminine or neuter gender or singular or plural, as the context requires. All
terms defined herein shall be equally applicable to both the singular and plural
forms. Any agreement referred to herein (including this Agreement) shall mean
such agreement as amended, supplemented and modified from time to time to the
extent permitted by the applicable provisions thereof and by this Agreement. The
term "herein" means this Agreement, including the Exhibits hereto. The term
"business day" means any day, other than Saturday, Sunday or a federal legal
holiday.
10.8 JURISDICTION AND VENUE. Any suit involving any dispute or matter
arising under this Agreement may only be brought in the appropriate United
States District Court in California or any California State Court having
jurisdiction over the subject matter of the dispute or matter. The Members
hereby consent to the exercise of personal jurisdiction by any such court with
respect to any such proceeding.
10.9 ARBITRATION. Any dispute, claim or controversy of whatever nature
arising out of or relating to this Agreement, including, without limitation, any
action or claim based on tort,
10.
<PAGE> 14
contract, or statute, or concerning the interpretation, effect, termination,
validity, performance and/or breach of this Agreement, shall be resolved by
final and binding arbitration (except to the extent that final and binding
arbitration of disputes involving the payment of fees is prohibited by
California law) before a single arbitrator selected from and administered by the
San Francisco office of JAMS/Endispute ("JAMS"), in accordance with JAMS's then
existing Rules of Practice and Procedure. The arbitration hearing shall be held
in San Francisco, California, and shall commence no later than 9 months
following the service of a Demand For Arbitration. The provisions of California
Code of Civil Procedure section 1283.05 or its successor section(s) are
incorporated in and made a part of this agreement to arbitrate. Depositions may
be taken and full discovery may be obtained in any arbitration commenced under
this provision.
The Arbitrator shall, within fifteen (15) calendar days after the conclusion of
the Arbitration hearing, issue a written award and a written statement of
decision describing the reasons for the award, including the calculation of any
damages awarded. The Arbitrator shall be empowered to award compensatory or
actual damages in the amount established by the preponderance of the evidence,
but shall NOT have the authority (i) to award non-economic damages, such as for
emotional distress, pain and suffering or loss of consortium, (ii) to award
punitive damages, or (iii) to reform, modify or materially change this Agreement
or other agreements entered into between the parties. The parties shall bear
equally the costs and fees of JAMS and the arbitrator; however, the arbitrator,
in his or her sole discretion, shall be authorized to determine whether a party
is the prevailing party and, if so, to award to that prevailing party
reimbursement for its reasonable attorneys' fees, disbursements (including, for
example, expert witness fees and expenses, photocopy charges, travel expenses,
etc.), and costs arising from the arbitration. The Arbitrator, and not a court,
shall also be authorized to determine whether the provisions of this section
apply to a dispute, controversy or claim sought to be resolved in accordance
with these arbitration procedures.
Absent the filing of an application to correct or vacate the arbitration
award under California Code of Civil Procedure section 1285 et seq., each party
shall fully perform and satisfy the terms of the arbitration award within 15
days of the service of the award. BY AGREEING TO THIS BINDING ARBITRATION
PROVISION, THE PARTIES UNDERSTAND THAT THEY ARE WAIVING CERTAIN SUBSTANTIAL
RIGHTS AND PROTECTIONS WHICH MAY OTHERWISE BE AVAILABLE IF A DISPUTE BETWEEN THE
PARTIES WERE DETERMINED BY LITIGATION IN COURT, INCLUDING, WITHOUT LIMITATION,
THE RIGHT TO SEEK OR OBTAIN ITEMS REFERENCED IN CLAUSES (i) THROUGH (iii) ABOVE,
THE RIGHT TO A JURY TRIAL AND CERTAIN RIGHTS OF APPEAL.
10.10 ATTORNEY FEES. In any litigation, arbitration, or other proceeding
by which a Member either seeks to enforce its rights under this Agreement
(whether in contract, tort, or both) or seeks a declaration of any rights or
obligations under this Agreement against any other Member, the prevailing party,
unless specifically provided otherwise herein, shall be awarded reasonable
attorney fees, together with any costs and expenses, incurred to resolve the
dispute and to enforce the final judgment. The prevailing party shall be
determined based upon an assessment of which party's major arguments made or
positions taken in the proceedings fairly could be said to have prevailed over
the other party's major arguments or positions (with reference to the amounts of
damages awarded, if any) on the major disputed issues in the decision.
11.
<PAGE> 15
10.11 FURTHER ASSURANCES. The Members shall execute and deliver such
further documents and instruments and shall take such other actions as may be
reasonably required or appropriate to evidence or carry out the intent and
purposes of this Agreement.
10.12 COUNTERPARTS AND EXECUTION. This Agreement may be executed in
multiple counterparts, each of which shall be deemed an original Agreement, and
all of which taken together shall constitute one Agreement. Delivery of an
executed counterpart of a signature page to this Agreement by facsimile shall be
effective as hand delivery of a manually executed counterpart of this Agreement.
10.13 CONFIDENTIALITY. No Member shall divulge the terms, conditions,
underlying business objectives of the Company, or the any identifying
information concerning any of the other Members to any third party without the
express written consent of the Manager or without being compelled by law. This
provision shall survive for three (3) years after the termination of this
Agreement. The non-disclosure provisions hereof shall not prohibit disclosure to
a Member's attorneys, accountants, or other professional advisors when those
advisors are themselves bound not to disclose the secrets of their clients.
12.
<PAGE> 16
INTENDING TO BE LEGALLY BOUND, the parties hereto have executed and
delivered this document as of the date first above written.
MEMBERS
W.R. HAMBRECHT/INLQ MANAGEMENT, LLC
By:
---------------------------------------
J.D. Delafield, Manager
13.
<PAGE> 17
INTENDING TO BE LEGALLY BOUND, the parties hereto have executed and
delivered this document as of the date first above written.
-----------------------------------
(PRINT NAME OF INVESTOR)
-----------------------------------
(SIGNATURE)
14.
<PAGE> 1
EXHIBIT 99.8
OPERATING AGREEMENT
OF
W.R. HAMBRECHT/INLQ GUARANTORS, LLC
DATED AS OF
_______, 1999
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I DEFINITIONS............................................................... 1
ARTICLE II ORGANIZATION.............................................................. 3
2.1 Formation; Name.............................................................. 3
2.2 Purpose...................................................................... 3
2.3 Principal Place of Business.................................................. 3
2.4 Registered Agent............................................................. 3
2.5 Term......................................................................... 3
2.6 Members...................................................................... 3
ARTICLE III Capital Interests And Contributions Of The Members........................ 3
3.1 Capital Accounts............................................................. 3
3.2 Capital Contributions and Issuance of Units.................................. 3
3.3 No Interest on Capital Contributions......................................... 4
3.4 Return of Capital to Members................................................. 4
3.5 Loans........................................................................ 4
ARTICLE IV MANAGEMENT................................................................ 4
4.1 Management................................................................... 4
4.2 Restrictions on Other Activities or Investments.............................. 4
4.3 Indemnification.............................................................. 5
4.4 Tax Matters Partner.......................................................... 5
ARTICLE V PROFITS AND LOSSES........................................................ 5
5.1 General Allocations.......................................................... 5
5.2 Overriding Allocations....................................................... 6
5.3 Intention Regarding Allocations.............................................. 6
ARTICLE VI DISTRIBUTIONS............................................................. 6
6.1 Distributions................................................................ 6
ARTICLE VII BOOKS, RECORDS AND ACCOUNTING............................................. 7
7.1 Books and Records............................................................ 7
7.2 Location of Books and Records................................................ 7
7.3 Accounting Methods .......................................................... 7
</TABLE>
i.
<PAGE> 3
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
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<S> <C>
7.4 Fiscal Year.................................................................. 7
7.5 Financial Statements; Tax Return Information................................. 7
ARTICLE VIII RESTRICTIONS ON TRANSFER OF UNITS OR ECONOMIC INTEREST.................... 7
8.1 Prohibition on Transfers..................................................... 7
8.2 Permitted Transfers.......................................................... 8
8.3 Pledge....................................................................... 8
8.4 Void Transfers............................................................... 8
8.5 Legend on Shares............................................................. 8
8.6 Withdrawal Prohibited........................................................ 9
ARTICLE IX DISSOLUTION AND WINDING-UP................................................ 9
9.1 Events Causing Dissolution................................................... 9
9.2 Winding Up of the Company.................................................... 9
ARTICLE X MISCELLANEOUS............................................................. 9
10.1 Amendment; Entire Agreement.................................................. 9
10.2 Notices...................................................................... 10
10.3 Binding Effect; Successors and Assigns....................................... 10
10.4 Specific Enforcement......................................................... 10
10.5 Governing Law................................................................ 10
10.6 Section Headings............................................................. 10
10.7 Miscellaneous Terms and Usage................................................ 10
10.8 Jurisdiction and Venue....................................................... 10
10.9 Arbitration.................................................................. 10
10.10 Attorney Fees................................................................ 11
10.11 Further Assurances........................................................... 12
10.12 Counterparts and Execution................................................... 12
10.13 Confidentiality.............................................................. 12
</TABLE>
ii.
<PAGE> 4
OPERATING AGREEMENT OF
W.R. HAMBRECHT/INLQ GUARANTORS, LLC
THIS LIMITED LIABILITY COMPANY OPERATING AGREEMENT of W.R.
HAMBRECHT/INLQ GUARANTORS, LLC (this "Agreement") is made and entered into as of
this ___ day of _______, 1999, by and among the Persons listed on Exhibit A
attached hereto (the "Members").
RECITALS
The Members have agreed to form a limited liability company in
accordance with the Beverly-Killea Limited Liability Company Act under the name
"W.R. Hambrecht/INLQ Guarantors, LLC". The Members desire to enter into this
Agreement in order to set forth their understanding with respect to the
management, operation and ownership of the Company.
NOW, THEREFORE, the Members hereby agree as follows:
ARTICLE I
DEFINITIONS
When used in this Agreement, the following terms have the meanings set
forth below:
"ACT" means the Beverly-Killea Limited Liability Company Act as the same
may be amended from time to time.
"AFFILIATE" means, with respect to any Person, any other Person which
directly or indirectly controls, is controlled by, or is under common control
with such Person.
"ARTICLES" means the Articles of Organization for the Company originally
filed with the California Secretary of State, as amended from time to time.
"CAPITAL ACCOUNT" The Capital Account of each Member shall consist of
its original capital contribution (i) increased by any additional capital
contributions, its share of income or gain that is allocated to it pursuant to
this Agreement, and the amount of any Company liabilities that are assumed by it
or that are secured by any Company property distributed to it, and (ii)
decreased by the amount of any distributions to or withdrawals by it, its share
of expense or loss that is allocated to it pursuant to this Agreement, and the
amount of any of its liabilities that are assumed by the Company or that are
secured by any property contributed by it to the Company. The foregoing
provision and the other provisions of this Agreement relating to the maintenance
of Capital Accounts are intended to comply with Treasury Regulation Section
1.704-1(b)(2)(iv), and shall be interpreted and applied in a manner consistent
with such Regulations. In the event the Managers determine that it is prudent to
modify the manner in which the Capital Accounts, or any debits or credits
thereto, are computed in order to comply with such Treasury Regulations, the
Company may make such modification as deemed prudent by the Managers, provided
that it
1.
<PAGE> 5
is not likely to have more than an insignificant effect on the total amounts
distributable to any Member pursuant to Article 7 and Article 9.
"CODE" means the Internal Revenue Code of 1986, as amended from time to
time, the provisions of succeeding law, and to the extent applicable, the
Treasury Regulations.
"COMPANY" means W.R. Hambrecht/INLQ Guarantors, LLC.
"ECONOMIC INTEREST" means the interest held by a Transferee of a Member
or Economic Interest Holder who has not been admitted as a Member.
"ECONOMIC INTEREST HOLDER" means any Person owning an Economic Interest.
"INITIAL MEMBER" shall mean the Members originally listed on Exhibit A
hereto prior to any amendment thereto and prior to a transfer of any interest
herein from an original Member to any other Person.
"INTERLINQ" shall mean Interlinq Software Corporation, a Washington
corporation.
"MAJORITY IN INTEREST OF THE MEMBERS" means the vote of those Members
holding a majority of then outstanding Units.
"MANAGER" means W.R. Hambrecht/INLQ Management, LLC or any successor
appointed pursuant to Section 4.1 hereof.
"MEMBER MINIMUM GAIN" means "partner nonrecourse debt minimum gain"
determined in accordance with Section 1.704-2(i)(3) of the Treasury Regulations.
"MINIMUM GAIN" has the meaning given to "partnership minimum gain" in
Section 1.704-2(d) of the Treasury Regulations.
"NET PROFITS" and "NET LOSS" mean the income, gain, loss, deductions,
and credits of the Company in the aggregate or separately stated, as
appropriate, determined under the method of accounting employed by the Company.
"OVERDISTRIBUTION" shall mean an amount of money equal to the excess, if
any, of (A) the amount of cash and the fair market value of other property
actually distributed to the Manager over (B) the amount of cash and fair market
value of other property which would have been distributed to the Manager but for
the portion of Section 6.1 hereof requiring the Tax Distribution.
"PERSON" means an individual, general partnership, limited partnership,
limited liability company, corporation, trust, estate, real estate investment
trust association, or any other entity.
"TRANSFER" and "TRANSFEREE" shall have the meanings set forth in Section
8.1 hereof.
2.
<PAGE> 6
"TREASURY REGULATIONS" means the regulations from time to time in force
as final or temporary that have been issued by the U.S. Department of Treasury
pursuant to its authority under the Code.
"UNITS" means a Member's entire interest in the Company including the
Member's right to share in Net Profits and Net Loss and distributions of cash
and other assets of the Company. Each Member's number of Units shall initially
be as set forth on Exhibit A.
"WARRANTS" mean those certain warrants to purchase common stock of
Interlinq initially issued to the guarantors of that certain guaranteed loan
made to Interlinq by Silicon Valley Bank and U.S. Bank in the amount of eight
million dollars ($8,000,000).
"W.R. HAMBRECHT + CO." means W.R. Hambrecht + Co., LLC, a California
Limited Liability Company.
ARTICLE II
ORGANIZATION
2.1 FORMATION; NAME. The Members have caused the Company to be formed as
a California limited liability company by filing the Articles in accordance with
the Act. The name of the Company is "W.R. Hambrecht/INLQ Guarantors, LLC." The
Company may operate its business under one or more assumed names.
2.2 PURPOSE. The purpose of the Company is to acquire, by contribution
from the Members, one hundred percent (100%) of the Warrants, to own, hold for
investment and ultimately sell, transfer or exercise the Warrants and/or to sell
or transfer any shares of Interlinq acquired upon exercise of the Warrants and
to engage in any other activities necessary or appropriate thereto.
2.3 PRINCIPAL PLACE OF BUSINESS. The principal place of business of the
Company is San Francisco, California, or such other place as the Manager may
designate from time to time. The Company may have such other offices as the
Manager may designate from time to time.
2.4 REGISTERED AGENT. The name and address of the Company's registered
agent for service of process in the State of California is as set forth in the
Articles. The Manager may from time to time change the registered agent or its
address through appropriate filings with the California Secretary of State.
2.5 TERM. The Company shall continue in existence until December 31,
2048, unless the Company is dissolved sooner and its affairs wound up in
accordance with this Agreement and the Act.
2.6 MEMBERS. The name, present mailing address and taxpayer
identification number of each Member are set forth in Exhibit A.
3.
<PAGE> 7
ARTICLE III
CAPITAL INTERESTS AND CONTRIBUTIONS OF THE MEMBERS
3.1 CAPITAL ACCOUNTS. The Company shall maintain Capital Accounts in
accordance with the requirements of the Treasury Regulations.
3.2 CAPITAL CONTRIBUTIONS AND ISSUANCE OF UNITS. Upon the signing of
this Agreement, each Member shall contribute the amount of money or number of
Warrants set forth on Exhibit A to the Company's capital. Each Unit shall
represent a capital contribution of One Dollar ($1.00) and the Warrant
contributions shall be valued at the amount of taxable income recognized by the
contributing Members upon receipt of such Warrants. No further capital
contributions shall be required of the Members, provided, however, that (i) in
the event that the Manager determines that the Warrants should be exercised in a
manner that requires the payment of a cash exercise price, each Member that
contributed Warrants shall contribute, upon ten (10) days' advance written
notice, cash to the Company in an amount necessary to fund the exercise price of
the Warrants contributed by that Member and (ii) at the final liquidation and
winding up of the Company, the Manager shall contribute to the Company's capital
the amount, if any, of the Overdistribution.
3.3 NO INTEREST ON CAPITAL CONTRIBUTIONS. No interest shall be paid by
the Company to any Member on any capital contribution.
3.4 RETURN OF CAPITAL TO MEMBERS. Except as may be specifically provided
in this Agreement, no Member shall have the right to withdraw from the Company
all or any part of its capital contribution. Except as provided in this
Agreement, no Member shall be entitled to a return of any cash or property
contributed to the Company until the full and complete winding-up and
liquidation of the business and affairs of the Company.
3.5 LOANS. No Member shall be obligated to lend money to the Company. A
Member may make a loan to the Company if the terms of such loan are agreed to by
the Manager.
ARTICLE IV
MANAGEMENT
4.1 MANAGEMENT. The Company shall be managed by the Manager, as
hereinafter provided. The Manager shall serve until it resigns, dies or is
terminated. The Manager may be terminated upon Reasonable Cause by a vote of a
Majority in Interest of the Members. "Reasonable Cause" shall mean grossly
negligent or reckless or intentionally wrongful conduct in the conduct of the
Company's business. No other Person shall become a Manager unless such Person is
explicitly named as such in a duly approved amendment to this Agreement. The
Manager shall have full power and authority to manage the Company's business,
and the other Members shall have no right or power to vote on or otherwise
control any aspect of the Company's business including but not limited to the
sale or encumbrance of any or all of the Company's assets. Except to the extent
specifically provided herein, the Manager shall receive
4.
<PAGE> 8
no compensation for its services to the Company, but it shall entitled to
reimbursement of actual out of pocket expenses incurred in the course of the
Company's business. The Manager shall devote such time and attention to the
Company's business as is reasonably necessary.
4.2 RESTRICTIONS ON OTHER ACTIVITIES OR INVESTMENTS. The Manager or any
Member may engage or invest in, independently or with others, any business
activity of any type or description, including those that might be the same as
or similar to the Company's business and that might be in direct or indirect
competition with the Company. Except as specifically set forth herein, the
Members shall not be obligated to present any investment opportunity or
prospective economic advantage to the Company, even if the opportunity is of the
character that, if presented to the Company, could be taken by the Company. The
Members shall have the right to hold any such investment opportunity or
prospective economic advantage for its own account or to recommend such
opportunity to Persons other than the Company.
4.3 INDEMNIFICATION.
(a) No Member or Manager, or any officer, director, employee,
partner, member, manager or Affiliate of either (each, an "Indemnified Person")
shall be liable, responsible, or accountable, in damages or otherwise, to any
Member or to the Company for any loss, cost, claim, expense, or liability
attributable to any act or omission by the Indemnified Person with respect to
Company matters, unless such act or omission constitutes grossly negligent or
reckless conduct, intentional misconduct, or a knowing violation of law.
(b) The Company shall indemnify each Indemnified Person for any
loss, cost, claim, expense, or liability attributable to any act or omission by
the Indemnified Person with respect to Company matters, unless such act or
omission constitutes grossly negligent or reckless conduct, intentional
misconduct, or a knowing violation of law. Expenses incurred by any Indemnified
Person in defending a claim or proceeding covered by this paragraph may be paid
by the Company in advance of the final disposition of such claim or proceeding,
provided the Indemnified Person undertakes to repay such amount if it is
ultimately determined that such person was not entitled to be indemnified.
4.4 TAX MATTERS PARTNER. The Manager is hereby designated as the "tax
matters partner" of the Company for purposes of Section 6231(a)(7)(A) of the
Code.
ARTICLE V
PROFITS AND LOSSES
5.1 GENERAL ALLOCATIONS. Except as otherwise provided in this Agreement
or required by the Treasury Regulations:
(a) NET LOSSES.
(i) Net Losses shall be allocated among the Members in
accordance with the relative Capital Account balances of each;
5.
<PAGE> 9
(ii) provided, however, that any Net Losses recognized
prior to the date on which Members have received aggregate distributions equal
to their capital contributions shall first be allocated to the Manager until it
has received allocation of Net Losses pursuant to this clause equal to any prior
allocations of Net Profit in excess of those made on account of its Units, but
on no account shall the Manager be allocated any Net Losses on account of this
paragraph (ii) which would cause its Capital Account balance to become negative
(or increase such a negative Capital Account balance).
(b) NET PROFITS. Allocations of Net Profits shall first be made
to reverse all prior allocations of Net Losses made pursuant to paragraph (a)(i)
above. allocations of Net Profits shall thereafter be made (i) one hundred
percent (100%) to the Manager until such time as the Manager has been allocated
aggregate Net Profits, as reduced by any allocation of Net Losses pursuant to
paragraph (a)(ii) above, equal to twenty-five percent (25%) of the value of the
Warrants at the time the Warrants were contributed to the Company, and (ii)
thereafter, eighty percent (80%) to the Members in accordance with their
respective number of Units and twenty percent (20%) to the Manager. To the
extent the Manager re-allocates any amount pursuant to Section 6.1, an
appropriate amount of Net Profit shall be allocated to the Member(s) receiving
such re-allocation.
5.2 OVERRIDING ALLOCATIONS. The following provisions shall supersede the
general allocation of Net Profits and Net Loss set forth in Section 5.1:
(a) The Manager shall cause the Company to adopt one of the three
alternative methods set forth in Section 1.704-3 of the Treasury Regulations
with respect to property whose book value (net of liabilities) differs from its
tax basis.
(b) The Company shall comply with the minimum gain chargeback
requirement of Section 1.704-2(f) of the Treasury Regulations.
(c) The Company shall comply with the member minimum gain
chargeback requirement of Section 1.704-2(i)(4) of the Treasury Regulations.
(d) This Agreement hereby incorporates a qualified income offset
provision, as described in Section 1.704-1(b)(2)(ii)(d)(3) of the Treasury
Regulations.
(e) All Net Loss and all Company deductions attributable to
Company indebtedness as to which one or more Members bears an economic risk of
loss shall be allocated to such Members, and shall be apportioned among them in
accordance with the amount of loss to be borne by each.
5.3 INTENTION REGARDING ALLOCATIONS. It is the intention of the Members
that the allocation provisions of this Agreement facilitate the economic
agreements of the parties hereof as set forth in Article VI hereof, and such
allocation provisions shall be interpreted so as to be construed with such
intention.
ARTICLE VI
DISTRIBUTIONS
6.
<PAGE> 10
6.1 DISTRIBUTIONS. Except as otherwise provided in Section 9.2(a),
distributions of cash or Company assets shall be made at the time determined by
the Manager, and shall be allocated between the Members in accordance with their
respective number of Units until all Members have received cumulative
distributions of cash or assets equal to their capital contributions, valuing
any assets distributed as of the date of their distribution by the Company.
After the Members have received aggregate distributions equal to their capital
contributions, (i) one hundred percent (100%) of subsequent distributions shall
be made to the Manager until the Manager has received aggregate distributions
pursuant to this clause (i) equal to twenty-five percent (25%) of the value of
the Warrants at the time the Warrants were contributed to the Company, and (ii)
thereafter, eighty percent (80%) of subsequent distributions shall be made to
Members in proportion to their respective number of Units and the remaining
twenty percent (20%) of such distributions shall be made to the Manager. The
Manager shall be entitled to re-allocate all or any portion of such distribution
as between the Manger and one or more other Members, as agreed to by such
Members. Notwithstanding the prior portion of this Section 6.1, the Company
shall distribute cash (the "Tax Distribution") equal to at least thirty percent
(30%) of the Net Profit to each Member for each year allocated to such Member,
no later than one hundred twenty (120) days after the end of the corresponding
fiscal year, unless the Manager and a Majority in Interest of the Members agree
in writing to a lower percentage for a given fiscal year. Such Tax Distribution
shall be adjusted in good faith by the Manager in the event of an increase in
any applicable federal long-term tax rates. The Manager shall have the right,
but not the obligation, to distribute any assets of the Company in kind. No
Member shall have the right to demand a distribution of assets in kind. The
Manager shall determine the value of any assets distributed in kind in its sole
discretion.
ARTICLE VII
BOOKS, RECORDS AND ACCOUNTING
7.1 BOOKS AND RECORDS. The Company shall maintain complete and accurate
books and records of the Company's business including, but not limited to, the
following:
(a) A current list of the full name and last known business or
residence address of each Member, together with the capital contribution and
number of Units of each Member.
(b) A copy of the Articles and any and all amendments thereto.
(c) Copies of the Company's federal, state and local income tax
or information returns and reports, if any, for the six (6) most recent taxable
years.
(d) A copy of this Agreement and any and all amendments hereto.
(e) Copies of the financial statements of the Company, if any,
for the six (6) most recent fiscal years, which need not be audited.
7.2 LOCATION OF BOOKS AND RECORDS. The Company's books of account and
other records shall be maintained at the Company's principal place of business
or another place designated by the Manager.
7.
<PAGE> 11
7.3 ACCOUNTING METHODS. For book and tax purposes, the Company shall
adopt such method of accounting that is permissible under the Code as the
Manager selects.
7.4 FISCAL YEAR. The annual accounting period of the Company shall be
the calendar year.
7.5 FINANCIAL STATEMENTS; TAX RETURN INFORMATION. As soon as practicable
and, in any event within one hundred twenty (120) days after the end of each
fiscal year, the Company's unaudited financial statements for such fiscal year
and any information from the Company necessary for the preparation of the
Members' tax returns shall be made available to each Member at the Company's
principal office. Appropriate Schedule K-1 documents shall be sent to the
Members as required by law.
ARTICLE VIII
RESTRICTIONS ON TRANSFER OF UNITS OR ECONOMIC INTEREST
8.1 PROHIBITION ON TRANSFERS. Except as otherwise specifically provided
herein, no Member or Economic Interest Holder may sell, assign, transfer,
pledge, encumber or otherwise dispose of (any of which is a "Transfer") his or
her Units or Economic Interest, in whole or in part, or enter into any agreement
or grant any options or rights with respect thereto, whether by action of such
Member (or Economic Interest Holder) or by operation of law or otherwise,
without the prior consent of the Manager. The Manager may withhold its consent
to such a Transfer in its sole and absolute discretion.
The Manager may consent to a Transfer without consenting to the
admission of the transferee under such approved Transfer (a "Transferee") as a
Member of the Company. A Transferee may only be admitted as a Member of the
Company if and when (i) the Transferee becomes a party to this Agreement by
agreeing in writing to be bound by the terms and provisions hereof and (ii) the
Manager consents to such admission, which consent may be withheld in his sole
and absolute discretion. Any Transferee shall execute and acknowledge such other
instruments as the Manager may deem necessary or desirable to effectuate the
admission of the Transferee as a Member of the Company. Any Transferee not
admitted as a Member of the Company shall be an Economic Interest Holder only,
entitled to the Net Profits, Net Loss, and distributions of cash and other
assets allocable to the assigned Units, but not entitled to vote on Company
matters or to exercise or enjoy any of the other rights of a Member of the
Company, unless and until such Transferee is admitted as a Member of the
Company. Each Transferee or any subsequent Transferee of Units or Economic
Interests, or any partial interests thereof, shall hold such Units or Economic
Interests subject to all the provisions hereof and shall make no transfers
except as permitted hereby. Any purported transfer in violation of any provision
hereof shall be void ab initio and shall not operate to transfer any right,
title or interest to the purported transferee.
8.2 PERMITTED TRANSFERS. Notwithstanding Section 8.1, a Member or
Economic Interest Holder shall be entitled to Transfer his Units or his Economic
Interest, as the case may be, to any Permitted Transferee. "Permitted
Transferee" shall mean (i) any Initial Member, (ii) any trust, established by an
Initial Member (A) following the death of an Initial Member who
8.
<PAGE> 12
is a natural person or (B) for the exclusive benefit of an Initial Member, his
or her spouse and/or the descendants of either of them.
8.3 PLEDGE. A Member or Economic Interest Holder may pledge his or her
Units or Economic Interest as collateral security to one or more financial
institutions or nonoperating companies, but only if the secured party has agreed
in writing that, prior to selling any or all of such collateral in satisfaction
of the Member's Economic Interest Holder's obligations, such collateral shall
first be offered for sale to Members.
8.4 VOID TRANSFERS. Any attempted Transfer of any Units or an Economic
Interest other than in compliance with this Article VIII is void and
ineffective.
8.5 LEGEND ON SHARES. Each Member shall have placed on certificates, if
any, representing its Units in the Company the following words:
SALE, TRANSFER, HYPOTHECATION, ENCUMBRANCE, OR DISPOSITION OF THE UNITS
REPRESENTED BY THIS CERTIFICATE IS RESTRICTED BY THE PROVISIONS OF THE
OPERATING AGREEMENT OF W.R. HAMBRECHT/INLQ GUARANTORS, LLC. ALL
RESTRICTIONS CONTAINED IN SUCH AGREEMENT ARE INCORPORATED BY REFERENCE
IN THIS CERTIFICATE. A COPY OF THE AGREEMENT MAY BE INSPECTED AT THE
PRINCIPAL OFFICE OF W.R. HAMBRECT/INLQ, LLC. AT 550 FIFTEENTH STREET,
SAN FRANCISCO, CALIFORNIA, 94103.
8.6 WITHDRAWAL PROHIBITED. Except as otherwise specifically provided
herein, no Member may withdraw or resign from the Company until there has been a
dissolution and a full and complete winding up of the Company in accordance with
this Agreement and the Act.
ARTICLE IX
DISSOLUTION AND WINDING-UP
9.1 EVENTS CAUSING DISSOLUTION. The Company shall be dissolved and its
affairs wound up in accordance with the Act and this Agreement upon occurrence
of any of the following (each an "Event of Dissolution"):
(a) the sale of all or substantially all of the assets of the
Company.
(b) the vote to dissolve of the Manager and a Majority in
Interest of the Members.
9.2 WINDING UP OF THE COMPANY.
(a) Upon the dissolution of the Company, the Manager shall
proceed with the winding up of the affairs of the Company. The assets shall be
liquidated as promptly as is consistent with obtaining a fair market value
therefor, and the proceeds therefrom, to the extent available, shall be applied
and distributed by the Manager to the Members in accordance with the Members'
closing Capital Account balances.
9.
<PAGE> 13
(b) Upon the completion of the winding up and liquidation of the
Company, a final statement with respect thereto shall be prepared by the Manager
or its designee and submitted to each Member. Upon completion of the
liquidation, the Company shall be deemed completely dissolved and terminated and
Articles of Dissolution of the Company shall be filed with the California
Secretary of State in accordance with the Act.
ARTICLE X
MISCELLANEOUS
10.1 AMENDMENT; ENTIRE AGREEMENT. This Agreement may be amended or
modified from time to time only by a written instrument signed by the Manager
and a Majority in Interest of the Members. This Agreement represents the sole
and entire agreement among the Members relative to the Company and supersedes
all prior agreements and understandings with respect to the subject matter
hereof, provided that to the extent any provision hereof is ineffective or
prohibited under the Act, this Agreement shall be deemed amended only to the
degree necessary to make such provision effective or to eliminate the
prohibition under the Act.
10.2 NOTICES. All notices, consents, demands and other communications
provided for herein (any of which is a "Notice") shall be in writing and shall
be sent by United States mail, first class postage prepaid, facsimile
transmission or recognized courier service directed to a Member at the address
or facsimile number as set forth in the Company's records. Any such Notice shall
be deemed given, in the case of delivery by United States mail, first class
postage prepaid, on the third business day after the day mailed; in the case of
courier service, on the business day received; and in the case of facsimile
transmission, upon confirmation of receipt. Another address may be designated by
a Member from time to time by Notice given in accordance with the provisions of
this Section 10.2.
10.3 BINDING EFFECT; SUCCESSORS AND ASSIGNS. Except as otherwise herein
provided, this Agreement shall be binding upon, and inure to the benefit of the
Members and their successors. Nothing in this Agreement is intended to confer
upon any party, other than the Members and their respective successors, any
rights remedies, obligations or liabilities under or by reason of this
Agreement.
10.4 SPECIFIC ENFORCEMENT. This Agreement, and each of the provisions
hereof, shall be specifically enforceable. Appropriate injunctive relief may be
applied for and granted in conjunction therewith. Any remedy provided for in
this Agreement shall be cumulative and not exclusive and shall be available in
addition to any other remedies which any party may have under this Agreement or
otherwise.
10.5 GOVERNING LAW. This Agreement shall be governed in all respects by
the laws of the State of California as such laws are applied to agreements
between California residents entered into and performed entirely within the
state of California.
10.6 SECTION HEADINGS. The Article and Section headings used in this
Agreement are for reference purposes only, and should not be used in construing
this Agreement.
10.
<PAGE> 14
10.7 MISCELLANEOUS TERMS AND USAGE. The term "shall" is mandatory; the
term "may" is permissive. The term "including" is by way of example and not
limitation. All pronouns used herein shall be deemed to refer to the masculine,
feminine or neuter gender or singular or plural, as the context requires. All
terms defined herein shall be equally applicable to both the singular and plural
forms. Any agreement referred to herein (including this Agreement) shall mean
such agreement as amended, supplemented and modified from time to time to the
extent permitted by the applicable provisions thereof and by this Agreement. The
term "herein" means this Agreement, including the Exhibits hereto. The term
"business day" means any day, other than Saturday, Sunday or a federal legal
holiday.
10.8 JURISDICTION AND VENUE. Any suit involving any dispute or matter
arising under this Agreement may only be brought in the appropriate United
States District Court in California or any California State Court having
jurisdiction over the subject matter of the dispute or matter. The Members
hereby consent to the exercise of personal jurisdiction by any such court with
respect to any such proceeding.
10.9 ARBITRATION. Any dispute, claim or controversy of whatever nature
arising out of or relating to this Agreement, including, without limitation, any
action or claim based on tort, contract, or statute, or concerning the
interpretation, effect, termination, validity, performance and/or breach of this
Agreement, shall be resolved by final and binding arbitration (except to the
extent that final and binding arbitration of disputes involving the payment of
fees is prohibited by California law) before a single arbitrator selected from
and administered by the San Francisco office of JAMS/Endispute ("JAMS"), in
accordance with JAMS's then existing Rules of Practice and Procedure. The
arbitration hearing shall be held in San Francisco, California, and shall
commence no later than 9 months following the service of a Demand For
Arbitration. The provisions of California Code of Civil Procedure section
1283.05 or its successor section(s) are incorporated in and made a part of this
agreement to arbitrate. Depositions may be taken and full discovery may be
obtained in any arbitration commenced under this provision.
The Arbitrator shall, within fifteen (15) calendar days after the conclusion of
the Arbitration hearing, issue a written award and a written statement of
decision describing the reasons for the award, including the calculation of any
damages awarded. The Arbitrator shall be empowered to award compensatory or
actual damages in the amount established by the preponderance of the evidence,
but shall NOT have the authority (i) to award non-economic damages, such as for
emotional distress, pain and suffering or loss of consortium, (ii) to award
punitive damages, or (iii) to reform, modify or materially change this Agreement
or other agreements entered into between the parties. The parties shall bear
equally the costs and fees of JAMS and the arbitrator; however, the arbitrator,
in his or her sole discretion, shall be authorized to determine whether a party
is the prevailing party and, if so, to award to that prevailing party
reimbursement for its reasonable attorneys' fees, disbursements (including, for
example, expert witness fees and expenses, photocopy charges, travel expenses,
etc.), and costs arising from the arbitration. The Arbitrator, and not a court,
shall also be authorized to determine whether the provisions of this section
apply to a dispute, controversy or claim sought to be resolved in accordance
with these arbitration procedures.
Absent the filing of an application to correct or vacate the arbitration
award under California Code of Civil Procedure section 1285 et seq., each party
shall fully perform and
11.
<PAGE> 15
satisfy the terms of the arbitration award within 15 days of the service of the
award. BY AGREEING TO THIS BINDING ARBITRATION PROVISION, THE PARTIES UNDERSTAND
THAT THEY ARE WAIVING CERTAIN SUBSTANTIAL RIGHTS AND PROTECTIONS WHICH MAY
OTHERWISE BE AVAILABLE IF A DISPUTE BETWEEN THE PARTIES WERE DETERMINED BY
LITIGATION IN COURT, INCLUDING, WITHOUT LIMITATION, THE RIGHT TO SEEK OR OBTAIN
ITEMS REFERENCED IN CLAUSES (I) THROUGH (III) ABOVE, THE RIGHT TO A JURY TRIAL
AND CERTAIN RIGHTS OF APPEAL.
10.10 ATTORNEY FEES. In any litigation, arbitration, or other proceeding
by which a Member either seeks to enforce its rights under this Agreement
(whether in contract, tort, or both) or seeks a declaration of any rights or
obligations under this Agreement against any other Member, the prevailing party,
unless specifically provided otherwise herein, shall be awarded reasonable
attorney fees, together with any costs and expenses, incurred to resolve the
dispute and to enforce the final judgment. The prevailing party shall be
determined based upon an assessment of which party's major arguments made or
positions taken in the proceedings fairly could be said to have prevailed over
the other party's major arguments or positions (with reference to the amounts of
damages awarded, if any) on the major disputed issues in the decision.
10.11 FURTHER ASSURANCES. The Members shall execute and deliver such
further documents and instruments and shall take such other actions as may be
reasonably required or appropriate to evidence or carry out the intent and
purposes of this Agreement.
10.12 COUNTERPARTS AND EXECUTION. This Agreement may be executed in
multiple counterparts, each of which shall be deemed an original Agreement, and
all of which taken together shall constitute one Agreement. Delivery of an
executed counterpart of a signature page to this Agreement by facsimile shall be
effective as hand delivery of a manually executed counterpart of this Agreement.
10.13 CONFIDENTIALITY. No Member shall divulge the terms, conditions,
underlying business objectives of the Company, or the any identifying
information concerning any of the other Members to any third party without the
express written consent of the Manager or without being compelled by law. This
provision shall survive for three (3) years after the termination of this
Agreement. The non-disclosure provisions hereof shall not prohibit disclosure to
a Member's attorneys, accountants, or other professional advisors when those
advisors are themselves bound not to disclose the secrets of their clients.
12.
<PAGE> 16
INTENDING TO BE LEGALLY BOUND, the parties hereto have executed and
delivered this document as of the date first above written.
MEMBERS
W.R. HAMBRECHT/INLQ MANAGEMENT, LLC
By:
-------------------------------
J.D. Delafield, Manager
[ATTACH COUNTERPART SIGNATURE PAGES]
13.
<PAGE> 1
EXHIBIT 99.9
OPERATING AGREEMENT
OF
W.R. HAMBRECHT/INLQ MANAGEMENT, LLC
DATED AS OF
APRIL 30, 1999
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I DEFINITIONS............................................................... 1
ARTICLE II ORGANIZATION.............................................................. 3
2.1 Formation; Name.............................................................. 3
2.2 Purpose...................................................................... 3
2.3 Principal Place of Business.................................................. 3
2.4 Registered Agent............................................................. 3
2.5 Term......................................................................... 3
2.6 Members...................................................................... 4
ARTICLE III CAPITAL INTERESTS AND CONTRIBUTIONS OF THE MEMBERS........................ 4
3.1 Capital Accounts............................................................. 4
3.2 Capital Contributions........................................................ 4
3.3 Loans........................................................................ 4
ARTICLE IV MANAGEMENT................................................................ 4
4.1 Management................................................................... 4
4.2 Restrictions on Other Activities or Investments.............................. 4
4.3 Indemnification.............................................................. 4
4.4 Termination of a Member...................................................... 5
4.5 Tax Matters Partner.......................................................... 5
ARTICLE V PROFITS AND LOSSES........................................................ 5
5.1 General Allocations.......................................................... 5
5.2 Overriding Allocations....................................................... 5
ARTICLE VI DISTRIBUTIONS............................................................. 6
6.1 Distributions................................................................ 6
ARTICLE VII BOOKS, RECORDS AND ACCOUNTING............................................. 6
7.1 Books and Records............................................................ 6
7.2 Location of Books and Records................................................ 6
7.3 Accounting Methods........................................................... 6
7.4 Fiscal Year.................................................................. 7
7.5 Financial Statements; Tax Return Information ................................ 7
</TABLE>
i.
<PAGE> 3
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE VIII RESTRICTIONS ON TRANSFER OF PERCENTAGE INTEREST OR ECONOMIC INTEREST...... 7
8.1 Prohibition on Transfers..................................................... 7
8.2 Void Transfers............................................................... 7
8.3 Withdrawal Prohibited........................................................ 7
8.4 Option....................................................................... 7
ARTICLE IX DISSOLUTION AND WINDING-UP................................................ 8
9.1 Events Causing Dissolution................................................... 8
9.2 Winding Up of the Company.................................................... 8
ARTICLE X MISCELLANEOUS............................................................. 8
10.1 Amendment; Entire Agreement.................................................. 8
10.2 Notices...................................................................... 8
10.3 Binding Effect; Successors and Assigns....................................... 9
10.4 Specific Enforcement......................................................... 9
10.5 Governing Law................................................................ 9
10.6 Section Headings............................................................. 9
10.7 Miscellaneous Terms and Usage................................................ 9
10.8 Jurisdiction and Venue....................................................... 9
10.9 Arbitration.................................................................. 9
10.10 Attorney Fees................................................................ 10
10.11 Further Assurances........................................................... 11
10.12 Counterparts and Execution................................................... 11
</TABLE>
ii.
<PAGE> 4
OPERATING AGREEMENT OF
W.R. HAMBRECHT/INLQ MANAGEMENT, LLC
THIS LIMITED LIABILITY COMPANY OPERATING AGREEMENT of W.R.
HAMBRECHT/INLQ MANAGEMENT, LLC (this "Agreement") is made and entered into as of
this 30th day of April, 1999, by and between W.R. HAMBRECHT + CO., LLC, a
California limited liability company ("Hambrecht"), J. D. DELAFIELD, an
individual ("Delafield") and JESSICA D. PORTEN, an individual ("Porten" and,
together with Hambrecht, Delafield and any subsequently admitted members, the
"Members").
RECITALS
The Members have agreed to form a limited liability company in
accordance with the Beverly-Killea Limited Liability Company Act under the name
"W.R. Hambrecht/INLQ Management, LLC." The Members desire to enter into this
Agreement in order to set forth their understanding with respect to the
management, operation and ownership of the Company.
NOW, THEREFORE, the Members hereby agree as follows:
ARTICLE I
DEFINITIONS
When used in this Agreement, the following terms have the meanings set
forth below:
"ACT" means the Beverly-Killea Limited Liability Company Act, as the
same may be amended from time to time.
"AFFILIATE" means, with respect to any Person, any other Person which
directly or indirectly controls, is controlled by, or is under common control
with such Person.
"ARTICLES" means the Articles of Organization for the Company originally
filed with the California Secretary of State, as amended from time to time.
"CAPITAL ACCOUNT." The Capital Account of each Member shall consist of
its original capital contribution (i) increased by any additional capital
contributions, its share of income or gain that is allocated to it pursuant to
this Agreement, and the amount of any Company liabilities that are assumed by it
or that are secured by any Company property distributed to it, and (ii)
decreased by the amount of any distributions to or withdrawals by it, its share
of expense or loss that is allocated to it pursuant to this Agreement, and the
amount of any of its liabilities that are assumed by the Company or that are
secured by any property contributed by it to the Company. The foregoing
provision and the other provisions of this Agreement relating to the maintenance
of Capital Accounts are intended to comply with Treasury Regulation Section
1.704-1(b)(2)(iv), and shall be interpreted and applied in a manner consistent
with such Regulations. In the event the Manager determines that it is prudent to
modify the manner in which the Capital Accounts, or any debits or credits
thereto, are computed in order to comply with such Treasury Regulations,
1.
<PAGE> 5
the Company may make such modification as deemed prudent by the Manager,
provided that it is not likely to have more than an insignificant effect on the
total amounts distributable to any Member pursuant to Article 7 and Article 9.
"CHANGE IN CONTROL" shall mean (i) any consolidation or merger of a
Person with or into any other corporation or other entity or Person, or any
other corporate reorganization, in which the shareholders or other equity owners
of such Person immediately prior to such consolidation, merger or
reorganization, own less than 50% of such Person's equity interests immediately
after such consolidation, merger or reorganization, or any transaction or series
of related transactions to which such Person is a party in which in excess of
fifty percent (50%) of such Person's equity interests is transferred; (ii) a
sale, lease or other disposition or all or substantially all of the assets of a
Person.
"CODE" means the Internal Revenue Code of 1986, as amended from time to
time, the provisions of succeeding law, and to the extent applicable, the
Treasury Regulations.
"COMPANY" means W.R. Hambrecht/INLQ Management, LLC.
"ECONOMIC INTEREST" means the interest held by a Transferee of a Member
or Economic Interest Holder who has not been admitted as a Member or an interest
held by a former Member who has suffered a Triggering Event.
"ECONOMIC INTEREST HOLDER" means any Person owning an Economic Interest.
"MANAGER" means Hambrecht.
"MEMBER MINIMUM GAIN" means "partner nonrecourse debt minimum gain"
determined in accordance with Section 1.704-2(i)(3) of the Treasury Regulations.
"MINIMUM GAIN" has the meaning given to "partnership minimum gain" in
Section 1.704-2(d) of the Treasury Regulations.
"NET PROFITS" and "NET LOSS" mean the income, gain, loss, deductions,
and credits of the Company in the aggregate or separately stated, as
appropriate, determined under the method of accounting employed by the Company.
"OPTION" shall have the meaning as set forth in Section 8.4 hereof.
"PERCENTAGE INTEREST" shall mean a Member's entire interest in the
Company, including a Member's share of Net Profits and Net Loss, distributions,
capital, the right to vote, and the right to receive information concerning the
business and affairs of the Company.
"PERSON" means an individual, general partnership, limited partnership,
limited liability company, corporation, trust, estate, real estate investment
trust association, or any other entity.
"TRANSFER" and "TRANSFEREE" shall have the meanings set forth in Section
8.1 hereof.
2.
<PAGE> 6
"TREASURY REGULATIONS" means the regulations currently in force as final
or temporary that have been issued by the U.S. Department of Treasury pursuant
to its authority under the Code.
"TRIGGERING EVENT" shall mean, with respect to any Member other than
Hambrecht, any of (A) such Member's termination pursuant to Section 4.4 hereof,
or (B) the cessation for any reason of such Member's employment by Hambrecht or
any successor thereto.
"UNVESTED PORTION" shall mean, with respect to each Member other than
Hambrecht, a percentage of such Member's Percentage Interest equal to (A) until
the first anniversary hereof, one hundred percent (100%) and (B) from and after
the first anniversary hereof, eighty percent (80%) less the product of (I) one
and 67/100 percent (1.67%) times (II) the number of whole months elapsed after
the first anniversary hereof. A month shall be deemed to have elapsed on the
last day of each calendar month. Notwithstanding the foregoing, the Unvested
Portion shall equal zero, (A) if Interlinq shall (i) become private and
subsequently engage in a public offering of equity securities or (ii) be the
subject of any transaction, whether or not it is directly involved in such
transaction, which effects a Change in Control of such corporation, (B) if
Hambrecht shall be the subject of any transaction, whether or not it is directly
involved in such transaction, which effects a Change in Control of Hambrecht, or
(C) with respect to the affected stock of Interlinq, if the Company (i)
distributes stock of Interlinq to the Members or (ii) sells stock of Interlinq
and distributes the cash proceeds thereof to its Members.
ARTICLE II
ORGANIZATION
2.1 FORMATION; NAME. The Members have caused the Company to be formed as
a California limited liability company by filing the Articles in accordance with
the Act. The name of the Company is "W.R. Hambrecht/INLQ Management, LLC". The
Company may operate its business under one or more assumed names.
2.2 PURPOSE. The purpose of the Company is to serve as the manager of
W.R. Hambrecht/INLQ, LLC and of W.R. Hambrecht/INLQ Guarantors, LLC, each a
California limited liability company, and to engage in any other activities
necessary or appropriate thereto.
2.3 PRINCIPAL PLACE OF BUSINESS. The principal place of business of the
Company is San Francisco, California, or such other place as the Manager may
designate from time to time. The Company may have such other offices as the
Manager may designate from time to time.
2.4 REGISTERED AGENT. The name and address of the Company's registered
agent for service of process in the State of California is as set forth in the
Articles. The Manager may from time to time change the registered agent or its
address through appropriate filings with the California Secretary of State.
2.5 TERM. The Company shall continue in existence until December 31,
2048, unless the Company is dissolved sooner and its affairs wound up in
accordance with this Agreement and the Act.
3.
<PAGE> 7
2.6 MEMBERS. The name, present mailing address and taxpayer
identification number of each Member are set forth in Exhibit A.
ARTICLE III
CAPITAL INTERESTS AND CONTRIBUTIONS OF THE MEMBERS
3.1 CAPITAL ACCOUNTS. The Company shall maintain Capital Accounts in
accordance with the requirements of the Treasury Regulations.
3.2 CAPITAL CONTRIBUTIONS. No capital contributions shall be required of
the Members. Hambrecht shall advance, as a loan, whatever capital is required
for the Company's operation. Such loan shall be repaid, together with interest
at seven percent (7%) compounded annually, from the Company's income.
3.3 LOANS. Except as otherwise provided in Section 3.2 hereof, no Member
shall be obligated to lend money to the Company. A Member may make a loan to the
Company if the terms of such loan are agreed to by the Manager.
ARTICLE IV
MANAGEMENT
4.1 MANAGEMENT. The Company shall be managed by the Manager, as
hereinafter provided. Hambrecht's status as a Manager may not be terminated
other than by Hambrecht's voluntary resignation or final dissolution. No other
Person shall become a Manager unless such Person is explicitly named as such in
a duly approved amendment to this Agreement. Each Manager shall have full power
and authority to manage the ordinary affairs of the Company; provided, however,
that if there is more than one (1) Manager, no Manager will take any action on
behalf of the Company unless such action is approved by Managers holding at
least a majority of the Percentage Interests held by the Managers. Except to the
extent specifically provided herein, no Manager shall receive compensation for
his, her or its services to the Company, but shall be entitled to reimbursement
of actual out of pocket expenses incurred in the course of the Company's
business.
4.2 RESTRICTIONS ON OTHER ACTIVITIES OR INVESTMENTS. Any Member may
engage or invest in, independently or with others, any business activity of any
type or description, including those that might be the same as or similar to the
Company's business and that might be in direct or indirect competition with the
Company. Except as specifically set forth herein, the Members shall not be
obligated to present any investment opportunity or prospective economic
advantage to the Company, even if the opportunity is of the character that, if
presented to the Company, could be taken by the Company. The Members shall have
the right to hold any such investment opportunity or prospective economic
advantage for its own account or to recommend such opportunity to Persons other
than the Company.
4.3 INDEMNIFICATION.
4.
<PAGE> 8
(a) No Member or Manager, (or any officer, director, employee,
partner, member, manager or Affiliate of either, each, an "Indemnified Person")
shall be liable, responsible, or accountable, in damages or otherwise, to any
Member or to the Company for any loss, cost, claim, expense, or liability
attributable to any act or omission by the Indemnified Person with respect to
Company matters, unless such act or omission constitutes grossly negligent or
reckless conduct, intentional misconduct, or a knowing violation of law.
(b) The Company shall indemnify each Indemnified Person for any
loss, cost, claim, expense, or liability attributable to any act or omission by
the Indemnified Person with respect to Company matters, unless such act or
omission constitutes grossly negligent or reckless conduct, intentional
misconduct, or a knowing violation of law. Expenses incurred by any Indemnified
Person in defending a claim or proceeding covered by this paragraph may be paid
by the Company in advance of the final disposition of such claim or proceeding,
provided the Indemnified Person undertakes to repay such amount if it is
ultimately determined that such person was not entitled to be indemnified.
4.4 TERMINATION OF A MEMBER. A Member, other than Hambrecht, may be
terminated as a Member upon the determination, in its sole discretion, by the
Manager, that such Member is no longer contributing to the success of the
Company.
4.5 TAX MATTERS PARTNER. Hambrecht is hereby designated as the "tax
matters partner" of the Company for purposes of Section 6231(a)(7)(A) of the
Code.
ARTICLE V
PROFITS AND LOSSES
5.1 GENERAL ALLOCATIONS. Except as otherwise provided in this Agreement
or required by the Treasury Regulations:
(a) NET LOSSES. Net Losses shall be allocated among the Members
in accordance with the relative Capital Account balances of each.
(b) NET PROFITS. Allocations of Net Profits shall first be made
in such a manner as to reverse all prior allocations of Net Losses made pursuant
to paragraph (a)(i) above in accordance with the relative aggregate amounts of
such prior allocations and thereafter in accordance with the Members respective
Percentage Interests.
5.2 OVERRIDING ALLOCATIONS. The following provisions shall supersede the
general allocation of Net Profits and Net Loss set forth in Section 5.1:
(a) The Manager shall cause the Company to adopt one of the three
alternative methods set forth in Section 1.704-3 of the Treasury Regulations
with respect to property whose book value (net of liabilities) differs from its
tax basis.
(b) The Company shall comply with the minimum gain chargeback
requirement of Section 1.704-2(f) of the Treasury Regulations.
5.
<PAGE> 9
(c) The Company shall comply with the member minimum gain
chargeback requirement of Section 1.704-2(i)(4) of the Treasury Regulations.
(d) This Agreement hereby incorporates a qualified income offset
provision, as described in Section 1.704-1(b)(2)(ii)(d)(3) of the Treasury
Regulations.
(e) All Net Loss and all Company deductions attributable to
Company indebtedness as to which one or more Members bears an economic risk of
loss shall be allocated to such Members, and shall be apportioned among them in
accordance with the amount of loss to be borne by each.
ARTICLE VI
DISTRIBUTIONS
6.1 DISTRIBUTIONS. Except as otherwise provided in Section 9.2(a),
distributions shall be made at the time determined by the Manager. Distributions
shall be in accordance with the existing Percentage Interests. The Manager shall
have the right, but not the obligation, to distribute any assets of the Company
in kind. No Member shall have the right to demand a distribution of assets in
kind.
ARTICLE VII
BOOKS, RECORDS AND ACCOUNTING
7.1 BOOKS AND RECORDS. The Company shall maintain complete and accurate
books and records of the Company's business including, but not limited to, the
following:
(a) A current list of the full name and last known business or
residence address of each Member, together with the capital contribution and
Percentage Interest of each Member.
(b) A copy of the Articles and any and all amendments thereto.
(c) Copies of the Company's federal, state and local income tax
or information returns and reports, if any, for the six (6) most recent taxable
years.
(d) A copy of this Agreement and any and all amendments hereto.
(e) Copies of the financial statements of the Company, if any,
for the six (6) most recent fiscal years, which need not be audited.
7.2 LOCATION OF BOOKS AND RECORDS. The Company's books of account and
other records shall be maintained at the Company's principal place of business
or another place designated by the Manager.
7.3 ACCOUNTING METHODS. For book and tax purposes, the Company shall
adopt such method of accounting that is permissible under the Code as the
Manager selects.
6.
<PAGE> 10
7.4 FISCAL YEAR. The annual accounting period of the Company shall be
the calendar year.
7.5 FINANCIAL STATEMENTS; TAX RETURN INFORMATION. As soon as practicable
and, in any event within one hundred twenty (120) days after the end of each
fiscal year, the Company's unaudited financial statements for such fiscal year
and any information from the Company necessary for the preparation of the
Members' tax returns shall be made available to each Member at the Company's
principal office. . Appropriate Schedule K-1 documents shall be sent to the
Members as required by law.
ARTICLE VIII
RESTRICTIONS ON TRANSFER OF PERCENTAGE INTEREST
OR ECONOMIC INTEREST
8.1 PROHIBITION ON TRANSFERS. Except as otherwise specifically provided
herein, no Member or Economic Interest Holder may sell, assign, transfer,
pledge, encumber or otherwise dispose of (any of which is a "Transfer") his or
its Percentage or Economic Interest, in whole or in part, or enter into any
agreement or grant any options or rights with respect thereto, whether by action
of such Member (or Economic Interest Holder) or by operation of law or
otherwise, without the prior consent of the Manager. The Manager may withhold
its consent to such a Transfer in its sole and absolute discretion.
The Manager may consent to a Transfer without consenting to the
admission of the transferee under such approved Transfer (a "Transferee") as a
member of the Company. A Transferee may only be admitted as a member of the
Company if and when (i) the Transferee becomes a party to this Agreement by
agreeing in writing to be bound by the terms and provisions hereof and (ii) the
Manager consents to such admission, which consent may be withheld in its sole
and absolute discretion. Any Transferee shall execute and acknowledge such other
instruments as the Manager may deem necessary or desirable to effectuate the
admission of the Transferee as a member of the Company. Any Transferee not
admitted as a member of the Company shall be an Economic Interest Holder only,
entitled to the Net Profits, Net Loss, and distributions of cash and other
assets allocable to the assigned Percentage Interest, but not entitled to vote
on Company matters or to exercise or enjoy any of the other rights of a Member
of the Company, unless and until such Transferee is admitted as a Member of the
Company.
8.2 VOID TRANSFERS. Any attempted Transfer of any Units or an Economic
Interest other than in compliance with this Article VIII is void and
ineffective.
8.3 WITHDRAWAL PROHIBITED. Except as otherwise specifically provided
herein, no Member may withdraw or resign from the Company until there has been a
dissolution and a full and complete winding up of the Company in accordance with
this Agreement and the Act.
8.4 OPTION. Upon the occurrence of a Triggering Event with respect to a
Member (excluding Hambrecht), the Company shall have the Option (the "Option"),
for a period of ninety (90) days following such Triggering Event to purchase the
Unvested Portion of such Member's Percentage Interest for a purchase price equal
to the pro rata portion of such Manager's Capital
7.
<PAGE> 11
Account attributable to such Unvested Portion. The Option shall be exercised, if
at all, by written notice to the affected Member together with a check in the
amount of the purchase price. In addition, upon the occurrence of a Triggering
Event with respect to a Member (excluding Hambrecht), such Member shall become
an Economic Interest Holder only, entitled to the Net Profits, Net Loss, and
distributions of cash and other assets allocable to such Member's remaining
Percentage Interest, but not entitled to vote on Company matters or to exercise
or enjoy any of the other rights of a Member of the Company.
ARTICLE IX
DISSOLUTION AND WINDING-UP
9.1 EVENTS CAUSING DISSOLUTION. The Company shall be dissolved and its
affairs wound up in accordance with the Act and this Agreement upon occurrence
of any of the following (each an "Event of Dissolution"):
(a) the sale of all or substantially all of the assets of the
Company.
(b) the election to dissolve by the Manager.
9.2 WINDING UP OF THE COMPANY.
(a) Upon the dissolution of the Company, the Manager shall
proceed with the winding up of the affairs of the Company. The assets shall be
liquidated as promptly as is consistent with obtaining a fair market value
therefor, and the proceeds therefrom, to the extent available, shall be applied
and distributed by the Manager to the Members in accordance with the Members'
closing Capital Account balances.
(b) Upon the completion of the winding up and liquidation of the
Company, a final statement with respect thereto shall be prepared by the Manager
or its designee and submitted to each Member. Upon completion of the
liquidation, the Company shall be deemed completely dissolved and terminated and
Articles of Dissolution of the Company shall be filed with the California
Secretary of State in accordance with the Act.
ARTICLE X
MISCELLANEOUS
10.1 AMENDMENT; ENTIRE AGREEMENT. This Agreement may be amended or
modified from time to time only by a written instrument signed by Members
holding at least two-thirds of all Percentage Interests. This Agreement
represents the sole and entire agreement among the Members relative to the
Company and supersedes all prior agreements and understandings with respect to
the subject matter hereof, provided that to the extent any provision hereof is
ineffective or prohibited under the Act, this Agreement shall be deemed amended
only to the degree necessary to make such provision effective or to eliminate
the prohibition under the Act.
10.2 NOTICES. All notices, consents, demands and other communications
provided for herein (any of which is a "Notice") shall be in writing and shall
be sent by United States mail,
8.
<PAGE> 12
first class postage prepaid, facsimile transmission or recognized courier
service directed to a Member at the address or facsimile number as set forth in
the Company's records. Any such Notice shall be deemed given, in the case of
delivery by United States mail, first class postage prepaid, on the third
business day after the day mailed; in the case of courier service, on the
business day received; and in the case of facsimile transmission, upon
confirmation of receipt. Another address may be designated by a Member from time
to time by Notice given in accordance with the provisions of this Section 10.2.
10.3 BINDING EFFECT; SUCCESSORS AND ASSIGNS. Except as otherwise herein
provided, this Agreement shall be binding upon, and inure to the benefit of the
Members and their successors. Nothing in this Agreement is intended to confer
upon any party, other than the Members and their respective successors, any
rights remedies, obligations or liabilities under or by reason of this
Agreement.
10.4 SPECIFIC ENFORCEMENT. This Agreement, and each of the provisions
hereof, shall be specifically enforceable. Appropriate injunctive relief may be
applied for and granted in conjunction therewith. Such remedy provided for in
this Agreement shall be cumulative and not exclusive and shall be available in
addition to any other remedies which any party may have under this Agreement or
otherwise.
10.5 GOVERNING LAW. This Agreement shall be governed in all respects by
the laws of the State of California as such laws are applied to agreements
between California residents entered into and performed entirely within the
State of California.
10.6 SECTION HEADINGS. The Article and Section headings used in this
Agreement are for reference purposes only, and should not be used in construing
this Agreement.
10.7 MISCELLANEOUS TERMS AND USAGE. The term "shall" is mandatory; the
term "may" is permissive. The term "including" is by way of example and not
limitation. All pronouns used herein shall be deemed to refer to the masculine,
feminine or neuter gender or singular or plural, as the context requires. All
terms defined herein shall be equally applicable to both the singular and plural
forms. Any agreement referred to herein (including this Agreement) shall mean
such agreement as amended, supplemented and modified from time to time to the
extent permitted by the applicable provisions thereof and by this Agreement. The
term "herein" means this Agreement, including the Exhibits hereto. The term
"business day" means any day, other than Saturday, Sunday or a federal legal
holiday.
10.8 JURISDICTION AND VENUE. Any suit involving any dispute or matter
arising under this Agreement may only be brought in the appropriate United
States District Court in California or any California State Court having
jurisdiction over the subject matter of the dispute or matter. The Members
hereby consent to the exercise of personal jurisdiction by any such court with
respect to any such proceeding.
10.9 ARBITRATION. Any dispute, claim or controversy of whatever nature
arising out of or relating to this Agreement, including, without limitation, any
action or claim based on tort, contract, or statute, or concerning the
interpretation, effect, termination, validity, performance and/or breach of this
Agreement, shall be resolved by final and binding arbitration (except to the
9.
<PAGE> 13
extent that final and binding arbitration of disputes involving the payment of
fees is prohibited by California law) before a single arbitrator selected from
and administered by the San Francisco office of JAMS/Endispute ("JAMS"), in
accordance with JAMS's then existing Rules of Practice and Procedure. The
arbitration hearing shall be held in San Francisco, California, and shall
commence no later than nine (9) months following the service of a Demand For
Arbitration. The provisions of California Code of Civil Procedure section
1283.05 or its successor section(s) are incorporated in and made a part of this
agreement to arbitrate. Depositions may be taken and full discovery may be
obtained in any arbitration commenced under this provision.
The Arbitrator shall, within fifteen (15) calendar days after the conclusion of
the Arbitration hearing, issue a written award and a written statement of
decision describing the reasons for the award, including the calculation of any
damages awarded. The Arbitrator shall be empowered to award compensatory or
actual damages in the amount established by the preponderance of the evidence,
but shall NOT have the authority (i) to award non-economic damages, such as for
emotional distress, pain and suffering or loss of consortium, (ii) to award
punitive damages, or (iii) to reform, modify or materially change this Agreement
or other agreements entered into between the parties. The parties shall bear
equally the costs and fees of JAMS and the arbitrator; however, the arbitrator,
in his or her sole discretion, shall be authorized to determine whether a party
is the prevailing party and, if so, to award to that prevailing party
reimbursement for its reasonable attorneys' fees, disbursements (including, for
example, expert witness fees and expenses, photocopy charges, travel expenses,
etc.), and costs arising from the arbitration. The Arbitrator, and not a court,
shall also be authorized to determine whether the provisions of this section
apply to a dispute, controversy or claim sought to be resolved in accordance
with these arbitration procedures.
Absent the filing of an application to correct or vacate the arbitration
award under California Code of Civil Procedure section 1285 et seq., each party
shall fully perform and satisfy the terms of the arbitration award within
fifteen (15) days of the service of the award. BY AGREEING TO THIS BINDING
ARBITRATION PROVISION, THE PARTIES UNDERSTAND THAT THEY ARE WAIVING CERTAIN
SUBSTANTIAL RIGHTS AND PROTECTIONS WHICH MAY OTHERWISE BE AVAILABLE IF A DISPUTE
BETWEEN THE PARTIES WERE DETERMINED BY LITIGATION IN COURT, INCLUDING, WITHOUT
LIMITATION, THE RIGHT TO SEEK OR OBTAIN ITEMS REFERENCED IN CLAUSES (I) THROUGH
(III) ABOVE, THE RIGHT TO A JURY TRIAL AND CERTAIN RIGHTS OF APPEAL.
10.10 ATTORNEY FEES. In any litigation, arbitration, or other proceeding
by which a Member either seeks to enforce its rights under this Agreement
(whether in contract, tort, or both) or seeks a declaration of any rights or
obligations under this Agreement against any other Member, the prevailing party,
unless specifically provided otherwise herein, shall be awarded reasonable
attorney fees, together with any costs and expenses, incurred to resolve the
dispute and to enforce the final judgment. The prevailing party shall be
determined based upon an assessment of which party's major arguments made or
positions taken in the proceedings fairly could be said to have prevailed over
the other party's major arguments or positions (with reference to the amounts of
damages awarded, if any) on the major disputed issues in the decision.
10.
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10.11 FURTHER ASSURANCES. The Members shall execute and deliver such
further documents and instruments and shall take such other actions as may be
reasonably required or appropriate to evidence or carry out the intent and
purposes of this Agreement.
10.12 COUNTERPARTS AND EXECUTION. This Agreement may be executed in
multiple counterparts, each of which shall be deemed an original Agreement, and
all of which taken together shall constitute one Agreement. Delivery of an
executed counterpart of a signature page to this Agreement by facsimile shall be
effective as hand delivery of a manually executed counterpart of this Agreement.
11.
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INTENDING TO BE LEGALLY BOUND, the parties hereto have executed and
delivered this document as of the date first above written.
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J. D. DELAFIELD
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JESSICA D. PORTEN
W.R. HAMBRECHT + CO., LLC
By:
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Its: Manager
12.
