<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
------------------------
<TABLE>
<S> <C>
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
- --- OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED APRIL 30, 1998
OR
- --- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________.
</TABLE>
COMMISSION FILE NUMBER: 0-15188
------------------------
INTERSOLV, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 52-0990382
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
9420 KEY WEST AVE.
ROCKVILLE, MARYLAND 20850
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(301) 838-5000
(REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE)
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.01 PAR VALUE
(TITLE OF CLASS)
PREFERRED STOCK PURCHASE RIGHTS
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes _X_ No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the average of the high and low price of the Common
Stock on June 15, 1998 as quoted by NASDAQ was $306,000,000.
The number of shares outstanding of the registrant's Common Stock $0.01 par
value on June 15, 1998 was 22,666,732 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the 1998 Annual Meeting of
Stockholders, which will be filed with the Securities and Exchange within 120
days after April 30, 1998 (items 10 through 13, Part III).
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ITEM 1. BUSINESS
GENERAL
INTERSOLV, Inc. (the "Company" or "INTERSOLV") was incorporated under the
laws of the State of Delaware in 1985, successor to the business begun in 1982.
INTERSOLV develops, markets and supports a broad line of software solutions that
facilitate the development, delivery and deployment of business information
systems. The Company strategy is to offer customers a broad family of software
development tools and services that are independent of rapidly changing
hardware, operating systems and database management technology.
The Company's principal executive offices are located at 9420 Key West
Avenue, Rockville, MD 20850, and its telephone number at that address is (301)
838-5000. The Company's common stock is traded over the counter on the National
Market under the NASDAQ symbol "ISLI".
COMPANY OVERVIEW
INTERSOLV's mission is to accelerate the delivery of information systems.
The Company accomplishes this by providing best-in-class software solutions that
focus on the entire application enablement process to deliver enterprise-wide
applications across client/server, Internet and intranet environments. INTERSOLV
offers software products and services in three major solution areas: automated
software quality, data connectivity and enterprise application renewal. The
Company's strategy is to emphasize technology independence. INTERSOLV's software
solutions are database independent and work across a variety of operating
systems and platforms. The Company's open architecture ensures interoperability
with existing systems and tools to enable organizations to protect existing
legacy investments, while introducing new technology in a controlled fashion.
The Company's objective is to deliver products that provide high productivity on
simple projects and yet are powerful enough to handle the scalability
requirements of production-grade information systems without retooling.
INTERSOLV's three key businesses are:
AUTOMATED SOFTWARE QUALITY (ASQ) -- INTERSOLV's ASQ solution helps
ensure quality throughout the application development process - from
version control through application testing and delivery. It consists of
the Company's PVCS series which includes software configuration management
(SCM), process automation, issue management and automated software testing
(AST). The Company's ASQ offering leverages team development on the local
area network (LAN) or the Web while supporting multi-operating systems and
multi-tool environments.
DATA CONNECTIVITY -- INTERSOLV's data connectivity solution provides
management and database access for client, server and Web applications -
scaleable from small projects to the enterprise level. It supports proven
standards, including ODBC, JDBC and OLE DB, and major operating systems and
data sources. Offerings include solutions to deploy cross-platform
applications accessing multiple data sources.
ENTERPRISE APPLICATION RENEWAL -- INTERSOLV's enterprise application
renewal solutions are a flexible suite of customizable solutions designed
to meet the full spectrum of an organization's Year 2000 renewal effort,
Euro currency conversion and other mass change initiatives affecting global
organizations today. It integrates the Company's proven, industry-leading
processes, technology and services to provide comprehensive research and
impact analysis, automated version control, project tracking, configuration
building and change synchronization. The offerings include a comprehensive
software configuration management approach to Year 2000 and Euro currency
conversions, a highly efficient, technology-based assembly line approach
for complete system renewal, and a unique management method for the renewal
process to ensure reliable analysis, updating and testing of target
applications.
The Company markets and distributes its products on a worldwide basis
through multiple channels. Sales are made directly, using a combination of
field, telesales, third party distribution channels and the Internet. The
Company's direct sales effort is augmented with a network of independent
software vendors, dealers, distributors, original equipment manufacturers and
value added resellers in 40 countries around the world.
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PRODUCTS
INTERSOLV offers a variety of open solutions to accelerate the delivery of
information systems. The Company's three key businesses are discussed in more
detail below.
Automated Software Quality
INTERSOLV's automated software quality (ASQ) tools and services help ensure
quality throughout the application development process - from version control
through application testing and delivery.
INTERSOLV PVCS SERIES is a comprehensive family of products that enable
software developers to manage software changes in a team development
environment, such as on the LAN, or the Internet and the World Wide Web. The
PVCS family includes tools for software configuration management, process
automation, issue management, and automated software testing. The PVCS products
provide an audit trail of activity, file revision histories, support for
parallel development, process definition and control, and exact image rebuilds
and support for quality assurance. PVCS provides control over the configuration
and testing of any application software and/or documentation, whether it is
client/server development or Internet/intranet development. PVCS allows users to
manage and resolve problems and changes which threaten software quality and
production schedules. The PVCS products operate on multiple platforms and
operating systems. PVCS supports development in C, C++, COBOL code, Java(R) and
any type of web source file such as HTML, GIF, etc. It also works with most
commonly used development workbenches such as Borland Delphi, Sybase/PowerSoft
PowerBuilder and Microsoft Visual Basic. The products that make up the series
include:
PVCS Version Manager -- automates code control, manages object
development and enables parallel development without maintenance problems.
PVCS Tracker -- manages problems and change requests that threaten
software quality and production schedules.
PVCS SiteSync -- provides a bi-directional LAN to mainframe, or LAN to
LAN configuration management link that ensures development is synchronized
to mainframe production or remote LAN versions.
PVCS Configuration Builder -- automates and provides consistency to
all tasks associated with producing executable applications of any type.
PVCS Process Manager -- defines and automates complex development
processes. This product was added with the acquisition of SQL Software,
Ltd., as further described in Note 3 of the Consolidated Financial
Statements.
PVCS TrueTest -- assists in managing the testing process and enables
the rapid development of functional, GUI, regression, system and unit tests
from the desktop. The Company has partnered with Segue Software to resell
the QualityWorks(TM) Series. The main products that make up the PVCS
TrueTest series include:
QualityWorks(TM) products:
QA Partner(R) -- provides comprehensive distributed systems
testing.
QA Partner Blue(TM) -- provides the ability to test legacy
applications for Year 2000 or ongoing maintenance.
QA Organizer(TM) -- provides test management, planning, and
reporting for the entire QualityWorks(TM) family.
QA Performer(TM) -- provides real-time, multi-platform load
testing to ensure the performance of distributed applications.
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Data Connectivity
INTERSOLV DATADIRECT SERIES simplifies data access in complex environments
by providing high performance, standards-based data connectivity for the client,
server and Web-scalable from small projects to the enterprise level.
Organizations achieve improved flexibility in solving current and future data
connectivity issues with DataDirect's comprehensive support for industry
standards such as ODBC, JDBC and OLE DB; robust implementations across all
platforms and operating systems; and unparalleled access to a wide range of
databases from local files to large enterprise databases. The products that make
up the series are:
DataDirect Connect ODBC drivers -- the industry's most comprehensive
range of open database connectivity (ODBC) technology, allow software
developers to build and deploy software for multiple databases from one
application programming interface (API).
DataDirect SequeLink ODBC Edition -- server-based, data access
middleware that provides a single connection to heterogeneous data sources
and servers and supports large user populations.
DataDirect SequeLink Java(R) Edition -- server-based data access
middleware consisting of a single, universal standards-based Java database
connectivity (JDBC(R)) client and DBMS-server interface components.
DataDirect Connect OLE DB -- expands connectivity options with
standards-based access to previously unavailable data sources such as Lotus
Notes and leading electronic mail packages.
Enterprise Application Renewal
INTERSOLV'S ENTERPRISE APPLICATION RENEWAL FACTORY combines
industry-leading technology and expert services to help companies tackle the
Year 2000 renewal effort, Euro currency conversion and other mass change
initiatives. The Factory is focused on helping organizations define a repeatable
process for managing change. By creating an underlying open framework,
organizations can leverage their existing technology investment for gaining
control over renewal efforts and establishing effective change management
processes beyond the Year 2000. Enterprise Application Renewal Factory tools
comprise integrated, client/server technology for comprehensive research and
impact analysis, automated version control, project tracking, configuration
building and change synchronization. INTERSOLV consulting programs range from
mentoring and basic technology transfer to software configuration management
assistance and turnkey renewal effort outsourcing. The Enterprise Application
Renewal Factory offering includes the following:
Year 2000 Millennium Bug Solutions
SCM2000 -- combines INTERSOLV PVCS and consultants to create a
software configuration management infrastructure to support all
application maintenance.
SOLV2000 -- provides a complete end-to-end solution for Year 2000
projects. It employs Year 2000 expertise, processes, INTERSOLV tools and
integrated third-party tools.
SWAT2000 -- provides a la carte solutions that can be applied to
specific Year 2000 tactical objectives. It mobilizes Year 2000 experts
to evaluate, execute and verify Year 2000 projects.
TrueTest2000 -- provides a solid testing infrastructure to address
Year 2000 while laying a testing foundation for the future.
Euro Currency Compliance -- provides a complete end-to-end solution
for Euro currency conversion projects employing consulting expertise,
processes, INTERSOLV tools and integrated third-party tools.
Application Renewal Consulting -- leveraging consulting expertise,
this solution extends enterprise systems life and transforms legacy
applications to more modern platforms and environments.
OTHER SOLUTION AREAS
INTERSOLV APPMASTER BUILDER SERIES is focused on providing legacy
environment developers with an evolutionary path to client/server architecture,
while leveraging existing assets. INTERSOLV AppMaster
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Builder (formerly called APS) is an application development system enabling the
reduction of development time and minimizing the cost of building applications
software. AppMaster Builder can be used to generate new applications or to
enhance existing applications. It can be used to build simple to complex
production-grade applications for a wide range of DBMS and production
environments.
SERVICES
INTERSOLV offers a wide variety of support services which are intended to
help customers quickly gain benefits from the suite of product solutions that
are available. The range of services offered is described below.
Maintenance Services
INTERSOLV offers its customers the opportunity to purchase maintenance
services for its products. The services consist primarily of enhancements and
updates to the products, as well as, telephone support concerning their
operation.
Training and Consulting Services
INTERSOLV also offers highly focused fee-paid consulting and training
services to assist customers in using INTERSOLV products. Consulting services
are focused on helping the customer exploit INTERSOLV technology through
short-term, highly focused projects or through long-term projects which
integrate the Company's products with the customer's development environment.
Educational offerings include both on-site training and training at an INTERSOLV
training center and are focused on the use of INTERSOLV technology.
MARKETING, CUSTOMERS AND SALES
The Company markets its products to end-users, line-of-business developers,
traditional information system departments, project managers and application
development executives within businesses and independent software vendors
worldwide. None of the Company's customers account for 10% or more of annual
revenues. Additionally, the Company's business does not concentrate on any
specific industry. (See further discussion regarding the segment information and
significant customers in Note 4 of Notes to the Consolidated Financial
Statements on page 28 of this Form 10-K.)
The Company has a multi-channel approach to sales and marketing. The
products are marketed and sold through telesales, field sales (face-to-face),
third-parties and the Internet.
Telesales
Telesales representatives concentrate on sales at the project level and to
smaller accounts, selling to individual developers and project managers.
Telesales representatives concentrate their efforts on one solution area. Orders
range from $100 for a single license to over $50,000 for multiple licenses for a
fully configured project team. Telesales are supported by mailings to lists of
prospective customers and advertising in selected trade magazines. The Company
also offers special promotions and incentive offers from time to time aimed at
introducing the Company's products to new users.
Field Sales
The Company's field sales personnel are located in Australia, Belgium,
Canada, France, Germany, Japan, Netherlands, United Kingdom and several major
metropolitan areas in the U.S., offering local sales and technical support to
customers and prospects. Field sales personnel also concentrate their efforts on
one solution area within a defined geographical region. Field Sales builds
long-term relationships with the Company's largest customers and prospects.
Field sales personnel assist prospective and current customers in evaluating
needs and solutions and guide them in the evaluation and use of INTERSOLV
products. Field sales personnel focus their efforts primarily on large corporate
prospects and customers. Transactions through
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the field sales organization generally range from $25,000 to over $1,000,000,
depending on the number of products licensed and the number of developers
authorized to use the product(s).
Third Parties
In addition to the Company's own field sales and telesales organizations,
the Company markets its technologies and products through a global network of
other independent software vendors ("ISVs"), value-added resellers ("VARs"),
original equipment manufacturers ("OEMs") and dealers and distributors. Through
third party alliances, the Company enables selected ISVs and OEMs to embed and
sell certain INTERSOLV technologies in their own products. Alliances with other
ISVs include joint development and marketing arrangements. INTERSOLV also has
arrangements with VARs, dealers and distributors to resell the Company's
products in markets which the Company cannot cost effectively reach on a direct
basis.
Internet
The Company also uses the Internet as a marketing and sales channel
vehicle. The Company promotes its products and services, offers demo versions of
products on a trial basis and conducts prospect identification and lead
generation programs over the Web. The Company will continue to embrace Internet
technology to develop and deliver new products and to provide better and faster
service to customers.
COMPETITION
The market for software development tools is highly competitive and
characterized by rapid changes in technology and customer requirements for
complete end-to-end solutions. The Company encounters competition from numerous
competitors that are consolidating and developing partnerships with other
vendors in order to offer complete solutions. INTERSOLV believes that the
principal competitive factor in the industry is the ability to offer
best-in-class, open, end-to-end solutions that operate across multiple platforms
and development environments. Other factors affecting competition are product
performance and functionality, ease of use, price and quality of customer
support, documentation and services. The Company anticipates that it will
continue to experience competition from the consolidation of current vendors.
The Company's service fee revenues have grown substantially over the last
three fiscal years. Continued growth of service revenues is dependent upon
acceptance of the Company's products within the market and the Company's ability
to recruit, train and retain sufficiently skilled personnel to deliver the
services. The demand for personnel with information technology skills is very
strong; accordingly the Company must compete with numerous other companies when
recruiting and retaining personnel.
PRODUCT PROTECTION
The Company relies on a combination of trade secret, copyright and
trademark laws, license agreements and technical measures to protect its rights
in its software products. Like many software companies, the Company has no
patents.
INTERSOLV products are generally licensed to end users pursuant to a
license agreement that restricts the use of the products to a designated number
of authorized developers. The Company also relies on copyright laws and embedded
technology to protect the proprietary rights in its products and to help ensure
they are used in accordance with their license terms. The degree and scope of
legal protection available for the Company's software products may vary in
certain foreign countries. The Company licenses the majority of its products
through "shrink wrap" licenses that are included as part of the product's
packaging.
The Company protects the source code version of its products as a trade
secret and as an unpublished copyrighted work. The Company has made portions of
the source code available to its customers only under very limited circumstances
and for restricted uses. The Company has been and may be required from time to
time to enter into source code escrow agreements with certain customers and
distributors. The agreements require release of source code to the customer or
distributor in the event the Company breaches its support and maintenance
obligations to the customer. If source code is released to a customer or
distributor, the
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customer or distributor is required to maintain its confidentiality and, in
general, to use the source code solely for internal maintenance purposes.
EMPLOYEES
As of April 30, 1998, the Company employed 1,073 persons including 365 in
sales and marketing, 406 in consulting, training and technical support, 163 in
product development and 139 in general and administration. None of the Company's
employees are represented by a labor union. The Company has experienced no work
stoppages and believes that its employee relations are good.
ITEM 2. PROPERTIES
The Company leases all of its office space for its corporate headquarters,
sales, distribution and development offices. Major facility leases include the
following:
<TABLE>
<CAPTION>
LOCATION PURPOSE FACILITY SIZE
-------- ------- -------------
<S> <C> <C>
Rockville, MD Corporate Headquarters 74,000 sq. ft.
Beaverton, OR Sales/Development 48,000 sq. ft.
Morrisville, NC Sales/Development 39,000 sq. ft.
St. Albans, UK European Headquarters 20,000 sq. ft.
Gaithersburg, MD Distribution Center 13,000 sq. ft.
</TABLE>
The aggregate rental payments for all facilities for fiscal 1998 was
approximately $11.6 million, and all leases are subject to renewal clauses and
rent increase provisions, which are typical of similar leases in the relevant
geographic areas.
ITEM 3. LEGAL PROCEEDINGS
The Company is not presently a party to any material pending or threatened
legal proceedings except as further described below.
Prior to April, 1986, certain revenues associated with discontinued
operations were generated under cost-plus-fee contracts with the U.S. government
and are subject to adjustments upon audit by the Defense Contract Audit Agency.
Audits through January 31, 1986 have been completed. On December 3, 1990,
INTERSOLV received a notice questioning certain charges aggregating
approximately $2.4 million made by the Company's discontinued operations in
fiscal 1985 and 1986. The Company filed a response in April, 1991 which provided
additional information regarding the issues raised in the notice. The amount of
the liability, if any, cannot be ascertained.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on the NASDAQ National Market. There
have been no dividends paid on INTERSOLV common stock since the Company's
initial public offering in 1986. See the market price information in Note 12 of
Notes to the Consolidated Financial Statements on page 38 on this Form 10-K. The
market price information represents "last sale" quotations and does not include
markups, markdowns or commissions.
The number of holders of record of the Company's common stock was
approximately 198 at May 31, 1998. The Company believes, however, that
approximately 3,000 shareholders hold their shares in street name accounts.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FISCAL YEAR ENDED APRIL 30,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(AMOUNT IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues.................................. $196,480 $160,413 $145,313 $134,517 $ 99,568
Income (loss) before income taxes......... 8,232 (18,405) (383) 16,083 (28,738)
Net income (loss)......................... 5,515 (21,166) (3,711) 10,974 (29,045)
Diluted net income (loss) per share....... $ 0.25 $ (1.05) $ (0.19) $ 0.54 $ (1.90)
Total assets.................... 132,866 96,017 110,917 104,808 84,313
Long-term liabilities (including current
portion)................................ 6,829 7,882 8,387 3,226 2,368
</TABLE>
NOTES:
Fiscal 1998 operating results include charges totaling $17.5 million (after tax
effect of $0.52 per share) resulting from an adjustment that is primarily
non-cash to acquire SQL Software, Ltd. and to record the cost of exiting
non-strategic businesses. (See Note 3 of the Consolidated Financial Statements
for additional detail).
Fiscal 1997 operating results include pretax charges totaling $28.9 million
(after-tax effect of $1.41 per share) resulting from an adjustment that is
primarily non-cash to reduce capitalized and purchased software costs, along
with related intangible assets, to net realizable value. (See Note 3 for
additional detail).
Fiscal 1996 operating results include pretax charges totaling $13.6 million
(after-tax effect of $0.67 per share) resulting from the acquisitions of
TechGnosis International, Inc. ("TechGnosis") and PC Strategies and Solutions,
Inc. ("PCS"). Prior year data has been restated to include TechGnosis and PCS
acquisitions, accounted for using the "pooling-of-interest" method. (See Note 3
for additional detail).
Fiscal 1994 operating results include pretax charges totaling $40.7 million
(after-tax effect of $2.47 per share) resulting from the acquisition of Q+E
Software, Inc.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The following table sets forth, for the periods indicated, the percentages
which selected items in the Consolidated Statements of Operations are to total
Revenues:
<TABLE>
<CAPTION>
YEAR TO YEAR
SELECTED ITEMS AS A PERCENTAGE
PERCENTAGE OF REVENUES INCREASE (DECREASE)
------------------------ -------------------------
YEAR ENDED APRIL 30 1998 1997
------------------------ COMPARED TO COMPARED TO
1998 1997 1996 1997 1996
----- ----- ----- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
License fees............................. 47.9% 56.9% 61.3% 3% 2%
Service fees............................. 52.1 43.1 38.7 48 23
----- ----- ----- --- ---
Total............................... 100.0 100.0 100.0 22 10
----- ----- ----- --- ---
Cost and expenses:
Cost of products......................... 2.6 7.7 10.8 (58) (21)
Cost of services......................... 28.7 21.9 17.9 61 34
Sales and marketing...................... 36.9 45.6 44.0 (1) 14
Research and development................. 12.3 10.9 10.1 38 20
General and administrative............... 6.2 7.3 8.8 5 (9)
Non-recurring charges.................... 8.9 18.0 9.4 N/M N/M
----- ----- ----- --- ---
Total............................... 95.6 111.4 101.0 5 22
----- ----- ----- --- ---
Operating income (loss)....................... 4.4 (11.4) (1.0) N/M N/M
Other income (expense), net................... (0.2) (0.1) 0.7 N/M N/M
----- ----- ----- --- ---
Income (loss) before income taxes............. 4.2 (11.5) (0.3) N/M N/M
Provision (benefit) for income taxes.......... 1.4 1.7 2.3 (2) (17)
----- ----- ----- --- ---
Net income (loss)............................. 2.8% (13.2)% (2.6)% N/M N/M
===== ===== ===== === ===
</TABLE>
- ---------------
N/M -- Changes not meaningful
RESULTS OF OPERATIONS
Revenues
The Company's products are generally licensed to end users pursuant to a
license agreement that restricts the use of the product to a designated number
of developers. The Company also offers its customers a broad range of services,
including maintenance, support, training and consulting. Maintenance services
consist primarily of enhancements and upgrades to products as well as telephone
support concerning the use of the Company's products. Training and consulting
services are focused on assisting customers in using the Company's products.
The Company's product and service offerings are focused in three primary
solution areas: Automated Software Quality (or "ASQ", which includes PVCS
series), Data Connectivity (which includes DataDirect series) and Enterprise
Application Renewal (or "EAR", which includes Year 2000 and Euro currency
renewal projects). These three solution areas are collectively referred to as
the Company's key products or solution areas. The Company also markets legacy
application development tools (AppMaster Builder) for Application Generation,
primarily to existing customers.
Early in fiscal 1998, the Company announced plans to divest or exit certain
non-strategic technologies. In fiscal 1998, the Company sold its technologies in
analysis and design (Excelerator product line) and business intelligence tools
(Explorer product line). The Company also exited the Allegris component-based
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development product area in fiscal 1998 and sold certain service offerings that
did not align with the key solution areas.
During the last three fiscal years, the Company has completed several
acquisitions. In the fourth quarter of fiscal 1998, the Company added process
automation tools to its PVCS series when it acquired SQL Software, Ltd. (or
"SQL"), accounted for using the purchase method. The Company also acquired
TechGnosis International Inc. ("TechGnosis") in October 1995 and PC Strategies
and Solutions, Inc. ("PCS") in May 1995 in transactions accounted for using the
"pooling-of-interests" method.
Revenue by Solution Area
Revenue by solution area in millions of dollars is as follows:
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
1998 CHANGE 1997 CHANGE 1996
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Key Solution Areas:
Automated Software Quality ("ASQ")......... $109.9 36% $ 81.0 27% $ 64.0
Data Connectivity.......................... 44.0 (2)% 45.0 21% 37.0
Enterprise Application Renewal ("EAR")..... 26.2 4X 6.6 New --
------ ------ ------
180.1 36% 132.6 31% 101.0
Application Generation....................... 10.0 (23)% 13.0 (12)% 14.8
------ ------ ------
Continuing Product Lines................... 190.1 31% 145.6 26% 115.8
Discontinued Product Lines................... 6.4 (57)% 14.8 (50)% 29.5
------ ------ ------
Total Revenue...................... $196.5 22% $160.4 10% $145.3
====== ====== ======
</TABLE>
Total revenue for fiscal 1998 was $196.5 million, which is a 22% increase
over fiscal 1997. This growth was driven by increased revenues for ASQ and EAR,
which grew 36% and 4X, respectively. ASQ revenues grew due to increased license
and service fee revenues, reflecting continuing increased demand for these
products, as well as $3.2 million resulting from the new SQL products. EAR
revenue growth accelerated as a result of the increased demand for products and
services to support Year 2000 renewal projects. Data Connectivity declined 2%,
as decreased revenue in the Asia-Pacific area caused by a downturn in the
general business climate offset revenue increases in other geographic areas. Key
solution areas totaled $180 million in fiscal 1998 and grew 36% over the prior
year. Revenue for Application Generation declined 23% due to lower license fees
resulting from a decreased sales effort focused on attracting new customers.
Total revenue for fiscal 1997 was $160.4 million, which is a 10% increase
over fiscal 1996. Growth was driven by increased revenues for ASQ and Data
Connectivity, which grew 27% and 21%, respectively. Revenues for these solution
areas grew due to increased license and service fee revenues, reflecting
increased demand for these products. EAR revenue, contributed over $6 million to
fiscal 1997 with the introduction of the Company's Year 2000 offerings. Key
solution areas grew 31% overall in fiscal 1997.
License Fee Revenue ("LFR")
Fiscal 1998 LFR was $94.1 million, or a 3% increase over fiscal 1997.
Fiscal 1997 LFR was $91.3 million, or 2% greater than the prior year. Growth of
18% in new license sales for ASQ products was the primary reasons for the
increase in fiscal 1998. LFR growth in ASQ was offset by a decline in new
license sales for AppMaster Builder and discontinued product lines. Data
Connectivity LFR was down slightly, because of decreased LFR in Asia-Pacific.
Service Fee Revenue ("SFR")
Fiscal 1998 SFR was $102.4 million, which is a 48% increase over fiscal
1997. Fiscal 1997 SFR was $69.1 million, or 23% more than fiscal 1996. Increased
demand for consulting and training services, in both the ASQ and EAR business
units, combined with growth in the installed customer base and renewal of
existing maintenance contracts for all key products led to the growth during the
three year period.
9
<PAGE> 11
North American Revenue
In fiscal 1998, North American revenue grew 29% to $144.3 million. In
fiscal 1997 North American revenue increased 15% to $111.5 million. In fiscal
1998 and 1997, the Company had growth in all key solution areas. The key
businesses in North America grew 43% in fiscal 1998.
International Revenue
In fiscal 1998, International revenue was $52.1 million or 7% greater than
last year. Changes in currency exchange rates decreased fiscal 1998 revenues by
$2.6 million when compared to the prior fiscal year. In fiscal 1998, European
revenue increased 31% while Asia-Pacific revenue declined 37%. The key solution
areas grew 48% overall in Europe, with growth in all key product areas.
Asia-Pacific ASQ revenue increased 39% in fiscal 1998, while Data Connectivity
revenue decreased by 48%.
In fiscal 1997, International revenue was $48.9 million or 1% greater than
last year. Changes in currency exchange rates decreased fiscal 1997 revenues by
$2 million when compared to the prior year. In fiscal 1997, Europe decreased 1%
while Asia-Pacific grew 10%. Both Europe and Asia-Pacific had growth in the ASQ
and Data Connectivity product lines, which were offset somewhat by declines in
revenue for non-strategic product lines.
Cost of Products
Cost of products includes costs of software media, freight, royalties and
amortization of capitalized software development costs and purchased technology
costs. In fiscal year 1998, cost of products decreased 58% to $5.2 million. In
fiscal 1997, cost of products decreased 21% to $12.4 million. Cost of products
as a percentage of revenues was 2.6%, 7.7% and 10.8% in fiscal 1998, 1997 and
1996, respectively. Amortization expense is the largest component of cost of
products. In the fourth quarter of fiscal 1997, the Company wrote down a
substantial portion of its capitalized and purchased software to their net
realizable value; accordingly, the level of amortization expense dropped. This
led to the overall decrease in cost of products for fiscal 1998 and 1997.
Cost of Services
Cost of services includes personnel and related overhead costs to provide
training, consulting and telephone support to customers who are deploying the
Company's products. Cost of services for fiscal 1998 increased 61% to $56.4
million. Cost of services for fiscal 1997 increased 34% to $35.1 million. Cost
of services as a percentage of service fee revenues was 55%, 51% and 46% in
fiscal 1998, 1997 and 1996, respectively. The increases in amount and as a
percentage of revenues during this three year period was primarily the result of
increased investment in personnel needed to support the increased demand for
consulting and training services. The Company has experienced increased demand
for consulting services for its ASQ products, as well as an increase in
consulting staff levels needed to support the Company's EAR projects. Personnel
were also added to the telephone support functions, to support the growing
customer base.
Sales and Marketing
In fiscal 1998, sales and marketing expenses were $72.5 million, or a 1%
decrease over fiscal 1997. Sales and marketing expenses for fiscal 1997 were
$73.1 million, which is a 14% increase when compared to the fiscal 1996 level of
$64 million. Sales and marketing expenses as a percentage of revenues were 37%,
46% and 44% in fiscal 1998, 1997 and 1996, respectively. The decrease in fiscal
1998 was the result of the Company's ability to effectively focus its sales and
marketing efforts on its three main solution areas. The increased investment in
sales and marketing programs directed towards key product areas was more than
offset by savings realized in non-strategic product lines. The increase in
fiscal 1997 reflected increased investment in the field and telesales channels,
as well as higher levels of marketing programs.
10
<PAGE> 12
Research and Development
Research and Development costs includes personnel and related overhead
costs incurred to develop the Company's products, less amounts capitalized in
accordance with FASB 86. Research and development expenses, before
capitalization of certain internal software development costs, were $26.3
million, $27 million, $25.9 million for the fiscal years ended April 30, 1998,
1997, and 1996. Fiscal 1998 research and development expenses were $24.2
million, up 38% over fiscal 1997. Fiscal 1997 research and development costs
were $17.6 million or 20% higher than fiscal 1996. As a percentage of revenues,
research and development expenses were 12% in fiscal 1998 and 11% in 1997 and
10% in 1996. The increase in fiscal 1998 was due to additional costs needed to
bring products to technological feasibility. In fiscal 1997, the Company
increased its level of investments in the PVCS and DataDirect product lines, in
addition to the costs incurred to develop the Allegris product. The level of
costs qualifying for capitalization decreased in fiscal 1997, which combined
with the increase in costs as previously noted led to the overall increase in
costs for fiscal 1997.
General and Administrative
General and administrative expenses for fiscal 1998 were $12.2 million or
5% higher than fiscal 1997. General and administrative expenses for fiscal 1997
were $11.6 million or 9% lower than fiscal 1996. General and administrative
expenses as a percentage of revenues were 6%, 7% and 9% for fiscal years 1998,
1997 and 1996, respectively. The fiscal 1998 increase of $.5 million was due to
normal wage increases given to G&A personnel. The fiscal 1997 decreases were due
to elimination of duplicative administrative functions of TechGnosis, which were
reflected in fiscal 1996 results up through its acquisition in October 1995.
Non-Recurring Charges and Purchased Research and Development
SQL Acquisition and Other Non-Recurring Charges
In the fourth quarter of fiscal 1998, the Company acquired SQL Software,
Ltd. ("SQL"), by exchanging 1,251,450 shares of common stock for all the
outstanding shares of SQL. The purchase price, including transaction costs of
$1.5 million and assumed liabilities of $2.4 million, was determined to be $19.2
million. Of that amount, $15.7 million was allocated to purchased research and
development and was written off in fiscal 1998 since no technological
feasibility or alternative future use could be demonstrated. Additionally, $1.1
million was allocated to capitalized software and $2.4 million was allocated to
goodwill and other intangibles.
The Company also recognized $1.7 million in non-recurring expenses in
fiscal 1998 which were primarily associated with discontinued product lines.
During fiscal 1998, the Company exited the Allegris product line at a total cost
of $2.4 million. Offsetting this amount were gains on the sale of the
Excelerator product ($250,000) and non-strategic consulting services ($170,000)
and a net reduction in restructuring accruals established in fiscal 1997
($247,000).
Writedown of Software and Intangible Assets
In the fourth quarter of fiscal 1997, the Company completed a comprehensive
business strategy review of its primary market opportunities, which led the
Company to record a charge of $28.9 million to writedown capitalized and
purchased software, along with certain related intangible assets, to their net
realizable values. The Company determined the nature and amount of this charge
after identifying which product lines will be primary solution areas for future
fiscal years. Based upon future expected net revenues for the primary solution
areas, the Company determined that certain capitalized and purchased software
assets should be written down to their expected net realizable values. This
consisted of $19.1 million to write down various capitalized and purchased
software balances, $3.4 million to writedown intangible assets that were related
to obsolete or discontinued products, $3.3 million to cover the costs of
disposing or discontinuing certain products, $1.6 million of inventory related
to products that were discontinued or disposed of and $1.5 million for losses on
settlement of certain customer receivables related to discontinued products.
11
<PAGE> 13
TechGnosis Acquisition Charges
In October 1995, the Company incurred $11.6 million of non-recurring
charges related to the acquisition of TechGnosis. This includes $3.3 million to
restructure certain distributor agreements, $2.5 million for consolidation of
offices and equipment, $2.2 million for severance and related costs, $2 million
to write-off overlapping technologies and $1.6 million of direct transaction and
other transition expenses. As of April 30, 1997, the remaining liability of $0.7
million relates to amounts to be disbursed for continuing office lease
obligations.
PCS and C++ Views Product Line Acquisition Charges
In May 1995, the Company incurred $2 million of non-recurring charges
related to the acquisition of PCS and the C++/Views product line from Liant
Software, Inc. Acquisition charges included a $0.7 million charge for purchased
research and development related to the C++/Views transaction. The remaining
$1.3 million charge was for direct transaction expenses, severance and costs to
consolidate operations. All charges were disbursed by April 30, 1996.
Operating Income (Loss)
Prior to non-recurring charges, the Company reported operating income of
$26 million, $10.6 million and $12.2 million in fiscal 1998, 1997, and 1996,
respectively. As a percentage of revenues, this would be 13.2%, 6.6% and 8.4%,
respectively. In fiscal 1998, operating income more than doubled as a result of
the Company's ability to more effectively utilize its sales and marketing
resources by focusing on three key solution areas. In fiscal 1997, operating
income prior to non-recurring charges dropped as the Company increased its
investment in its costs at a rate greater than the revenue increase. After
non-recurring charges, the Company reported operating income (loss) of $8.5
million, ($18.3) million and ($1.4) million in fiscal 1998, 1997, and 1996,
respectively.
Other Income (Expense)
Other income (expense), which is primarily net investment income (expense),
for fiscal 1998 was ($312,000), as compared to fiscal 1997 and 1996 levels of
($75,000) and $1.0 million, respectively. Other income (expense) varied during
the three year period primarily as a result of changes in the amount of cash
available for investment, the level of subordinated debt and bank debt
outstanding during each of the three years.
Taxes
The Company's effective tax rates were 33%, 15% and 870% for fiscal 1998,
1997 and 1996, respectively. In fiscal 1997, the variance from the statutory
rate is due to the increase in the valuation allowance for deferred tax assets
and liability for tax exposures. In fiscal 1996, the variance from the statutory
rate is because the Company did not recognize the benefit of net operating
losses resulting primarily from acquisition charges, particularly from its
foreign operations.
Subsequent Event
On June 17, 1998, the Company signed a definitive agreement to merge with
Micro Focus Group, plc. Micro Focus is a UK company headquartered in Mountain
View, California. Under the terms of the agreement, each share of the Company's
common stock will be exchanged for .55 shares of Micro Focus American Depositary
Shares. Micro Focus shares are listed both on the London Stock Exchange and on
the NASDAQ National Market System. The transaction is subject to regulatory
approval in the US and the UK as well as to the approval of each company's
shareholders. Should all approvals be granted, the Company's shareholders would
control 44% of the shares of the combined entity. As of the announcement date,
the transaction was valued at $534 million.
12
<PAGE> 14
Factors That May Affect Future Results
This annual report on Form 10-K may contain forward-looking information
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities and Exchange Act of 1934, and is subject to the safe harbor
created by those sections. The Company assumes no obligation to update the
information contained in the following section or any other portion of this Form
10-K.
The software development tools market is characterized by rapid changes in
technology and user needs. Compatibility of the Company's products with
customers' preferred operating systems and database management systems are
important to future results of the Company. The current market trend appears to
be weighted towards building client/server and cooperative applications using a
changing mix of operating systems. In addition, the development tools must
function within the Internet and Intranet environments. The Company has
introduced new products, such as PVCS Dimensions in late fiscal 1998 and the
TrueTest in late fiscal 1997. The Company has also discontinued marketing
selected products across its different product lines, such as Allegris and
AppMaster Designer. In fiscal 1998, revenue growth from the Company's primary
solution areas more than offset revenue declines from non-strategic businesses.
Because of the rapidly changing market, there can be no assurance that this
substantial growth from the primary solution areas will continue. Future
operating results could be affected by the market's acceptance of the Company's
existing and new products in this rapidly changing market.
Competition in the software development tools market is very intense. New
and established companies continue to develop and market competitive products.
Principal factors affecting competition are product performance and
functionality, compatibility with the customer's operating environment, ease of
use, price and quality of customer support, documentation and services. The
Company anticipates that it will continue to experience competition from current
vendors and new firms entering the market.
The Company's service fee revenues have continued to grow in fiscal 1998.
Continued growth of service revenues is dependent upon acceptance of the
Company's products within the market and the Company's ability to recruit, train
and retain sufficiently skilled personnel to deliver the services. The demand
for personnel with information technology skills is very strong; accordingly,
the Company must compete with numerous other companies when recruiting
personnel.
The Company has received and anticipates receiving additional contracts as
part of its Year 2000 renewal solution offerings. Certain contracts may be
large, multi-year service contracts with staged payment terms. A delay in
receiving these contracts, as compared to the Company's expected date, could
adversely impact the results for a quarter. There is also the risk of
successfully managing a large project and the risk of a material impact on
results because of unanticipated problems or delays, suspensions, renegotiations
or cancellations of large projects, which could adversely impact the expected
profitability of the contract(s).
Certain of the Company's products and services are designed for, and
marketed towards, the remediation of other organization's Year 2000-related
software code problems. Notwithstanding its efforts to offer high quality Year
2000 products and services, the Company may experience future uncertainties and
problems regarding its Year 2000 product and service offerings, including but
not limited to technical problems, customer claims and/or litigation. There can
be no assurance that such uncertainties, problems and/or disputes may not result
in increased expenses negatively affecting future operating results.
The Company markets and sells its products directly through its own
operations in the United States, United Kingdom, Germany, France, Belgium, Japan
and Australia and through a network of dealer/distributors in 30 other
countries. Consequently, the Company's results are affected by changes in the
global economies and foreign currency exchange rates.
Although the Company does not believe that its business is subject to
seasonal variations, sales historically tend to be strongest during the fourth
quarter of a fiscal year. As a result, the Company typically experiences lower
revenues for the first quarter of a fiscal year than in the fourth quarter of
the prior fiscal year. The Company's experience has also been that a major
portion of its revenue is recognized during the last month of a fiscal quarter
and that fluctuations in revenue and earnings may occur due to the timing of
orders.
13
<PAGE> 15
Quarterly results therefore can vary to the extent that sales for a quarter are
delayed, particularly since a large portion of the Company's expenses do not
vary with revenues.
Inflation has not had a material effect on the past results of the Company,
however, there can be no assurance that the results of operations will not be
affected in the future.
The Company recently announced the execution of a definitive agreement to
merge with Micro Focus Group, plc. During the period prior to the anticipated
September 1998 closing of this transaction, substantial Company resources will
be devoted to transition planning and other merger-related activities. Such
activities will include, but not be limited to, planning for integration of the
product offerings of the companies, the coordination of their respective
management, sales and marketing and research and development efforts and
obtaining the regulatory and stockholder approvals required to effect the
merger. The diversion of Company management's attention from day-to-day
operations and any difficulties encountered in the transition process could have
a material adverse effect on the Company's business, financial condition and
results of operations. Disruption of the Company's business may result from
employee uncertainty or lack of focus, as well as from customer or supplier
confusion, related to the merger announcement. After the closing of the
transaction, the above risks may still apply to the combined companies'
operations. Additionally, the process of combining the operations of the two
organizations could cause the interruption of, or a loss of momentum in, the
activities of the combined companies' businesses, which could have a material
adverse effect on their combined operations. (See Subsequent Event)
Year 2000
The Company is aware of the issues associated with the programming code in
existing computer systems as the millennium (year 2000) approaches. The "Year
2000" problem is pervasive, and extremely complex; virtually every Company and
non-Company computer operation, wherever located, will be affected to some
degree by the rollover of the two digit year value of 00. The technical issue is
whether computer systems will properly recognize data sensitive information when
the year changes from 1999 to 2000. Systems that do not properly recognize such
information could generate erroneous data and/or cause systems to fail. The fact
that most computers presently operate in interconnected, networked systems
environments further complicates the problem.
The Company is utilizing both internal and external resources to attempt to
identify, correct or reprogram, and test its internal systems for Year 2000
compliance. To date, confirmations have been received from the Company's primary
software information systems vendors that their respective products, used by the
Company, are Year 2000 compliant. The Company is in the process of taking
additional measures to attempt to reduce or eliminate the potential effects of
an internal or external Year 2000 related systems failure. Management has not
presently assessed the expenses associated with Year 2000 compliance and related
potential effects on the Company's earnings.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
In 1998, operating activities generated $13.0 million in cash. Investing
activities used $2.7 million, as the Company invested $1.0 million in
capitalized and purchased software and $4.5 million in fixed assets. This was
offset by sale proceeds of $1.2 million and payments net of cash acquired from
SQL of $1.6 million. Financing activities in the form of stock option exercises
and purchases under the employee stock purchase plan generated $7.4 million
which offset the $3.7 million net repayment of various debt obligations. Overall
cash increased $13.9 million.
In 1997, operating activities generated $3.8 million in cash, after
spending $3.2 million for various acquisition costs. Investing activities used
$17.4 million, as the Company invested $9.5 million in capitalized and purchased
software and $7.7 million in fixed assets. Financing activities in the form of
stock option exercises and purchases under the employee stock purchase plan and
net proceeds from various debt
14
<PAGE> 16
obligations generated $4.6 million and $4.9 million, respectively, which offset
the $3.4 million spent to repurchase the Company's common stock. Overall cash
decreased $8 million.
In fiscal 1996, operating activities generated $18.2 million in cash, after
spending $8.3 million for various acquisition costs. Investing activities used
$17.7 million, as the Company invested $12.9 million in capitalized and
purchased software and $4.9 million, net, in fixed assets. Financing activities
in the form of stock option exercises and purchases under the employee stock
purchase plans generated $8.7 million. The Company also spent $4.8 million to
acquire common stock from TechGnosis International shareholders and $1.1 million
to repay various debt obligations and $1.1 million associated with the Q+E
acquisition. Overall cash increased $1.6 million.
Current Financial Position
At April 30, 1998 the Company had cash and cash equivalents of $34.1
million. The Company also has a $15 million revolving unsecured credit facility,
of which $3 million was outstanding at April 30, 1998. The credit facility,
which is due to expire in September 1998, carries an interest rate based upon
the LIBOR rate plus 1.5% or prime, at the Company's option. The commitment fee
is 3/8% per annum on the unused portion of the credit line. The Credit Agreement
has various covenants which limit the Company's ability to dispose of assets,
purchase its own stock, pay dividends and purchase other significant businesses
or technologies. The Company is also required to maintain certain financial
ratios. The Company was in violation of one covenant in fiscal 1998, which was
waived by the banks.
The Company also had $38,000 in subordinated convertible debt, which is due
in September 1999. The Company's ratio of current assets to current liabilities,
or current ratio, was 1.5 to 1, compared with 1.3 to 1 at the beginning of the
fiscal year.
Future Liquidity and Capital Requirements
Subject to any changes that may take place in connection with the Micro
Focus merger, in fiscal 1999, the Company expects to invest about $8 million in
fixed assets, such as computer equipment. The Company believes that the existing
cash balances, together with cash generated by operating activities and
available borrowings, will be adequate to meet the Company's liquidity and
capital needs for the foreseeable future.
Subject to any changes that may take place in connection with the Micro
Focus merger, the Company will also continue to evaluate the acquisition of
technologies or product lines which are consistent with its current strategy.
The Company expects to fund these transactions using cash on-hand and cash
provided from operations. If necessary or desirable, the Company may fund these
transactions using debt, equity or other sources.
15
<PAGE> 17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGES
--------
<S> <C>
Report of Independent Accountants........................... 17
Financial Statements:
Consolidated Statements of Operations for the fiscal years
ended April 30, 1998, 1997,and 1996.................... 18
Consolidated Balance Sheets as of April 30, 1998 and
1997.................................................... 19-20
Consolidated Statements of Cash Flows for the fiscal years
ended April 30, 1998, 1997, and 1996................... 21
Consolidated Statements of Changes in Stockholders' Equity
for the fiscal years ended April 30, 1998, 1997, and
1996................................................... 22
Notes to Consolidated Financial Statements................... 23-35
</TABLE>
16
<PAGE> 18
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
INTERSOLV, Inc.
In our opinion, the consolidated financial statements listed in Item
14(a)(1) and (2) of this Form 10-K present fairly, in all material respects, the
financial position of INTERSOLV, Inc and its subsidiaries at April 30, 1998 and
1997, and the results of their operations and their cash flows for each of the
three years in the period ended April 30, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 13, INTERSOLV, Inc. signed an agreement to merge with
Micro Focus Group, plc. subsequent to year end.
PricewaterhouseCoopers LLP
McLean, Virginia
June 17, 1998
17
<PAGE> 19
INTERSOLV, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED APRIL 30,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues:
License fees........................................... $ 94,122 $ 91,324 $ 89,147
Service fees........................................... 102,358 69,089 56,166
-------- -------- --------
Total revenues.................................... 196,480 160,413 145,313
-------- -------- --------
Costs and expenses:
Cost of products....................................... 5,193 12,429 15,649
Cost of services....................................... 56,409 35,077 26,091
Sales and marketing.................................... 72,457 73,123 64,026
Research and development............................... 24,231 17,555 14,626
General and administrative............................. 12,178 11,626 12,744
Non-recurring charges.................................. 17,468 28,933 13,600
-------- -------- --------
Total costs and expenses.......................... 187,936 178,743 146,736
-------- -------- --------
Operating income (loss)..................................... 8,544 (18,330) (1,423)
Other income (expense), net................................. (312) (75) 1,040
-------- -------- --------
Income (loss) before income taxes........................... 8,232 (18,405) (383)
Provision for income taxes.................................. 2,717 2,761 3,328
-------- -------- --------
Net income (loss)........................................... $ 5,515 $(21,166) $ (3,711)
======== ======== ========
Shares used in computing basic net income (loss) per
share..................................................... 21,315 20,119 19,348
-------- -------- --------
Basic net income (loss) per share........................... $ 0.26 $ (1.05) $ (0.19)
======== ======== ========
Shares used in computing diluted net income (loss) per
share..................................................... 22,433 20,119 19,348
======== ======== ========
Diluted net income (loss) per share......................... $ 0.25 $ (1.05) $ (0.19)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
18
<PAGE> 20
INTERSOLV INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF APRIL 30,
-------------------
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 34,082 $ 20,180
Accounts receivable, net of allowance for doubtful
accounts of $2,901 and $4,129......................... 62,962 50,338
Prepaid expenses and other current assets.............. 7,663 6,156
-------- --------
Total current assets.............................. 104,707 76,674
-------- --------
Software, at cost........................................... 8,340 6,235
Accumulated amortization............................... (4,156) (1,957)
-------- --------
Total software, net............................... 4,184 4,278
-------- --------
Property and equipment:
Furniture and equipment................................ 22,894 18,405
Leasehold improvements................................. 5,069 5,507
Accumulated depreciation and amortization.............. (15,975) (12,346)
-------- --------
Total property and equipment, net................. 11,988 11,566
-------- --------
Notes receivable and other assets........................... 11,987 3,499
-------- --------
Total assets...................................... $132,866 $ 96,017
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
19
<PAGE> 21
INTERSOLV, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
AS OF APRIL 30,
-------------------
1998 1997
-------- --------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term notes payable and current portion of
long-term debt........................................ $ 3,707 $ 6,621
Accounts payable....................................... 8,824 9,576
Accrued acquisition costs.............................. 4,376 706
Accrued compensation and employee benefits............. 18,292 13,831
Other accrued expenses................................. 5,608 6,452
Deferred revenue....................................... 26,269 20,471
Income taxes payable................................... 2,657 970
-------- --------
Total current liabilities......................... 69,733 58,627
-------- --------
Long-term liabilities :
Deferred taxes......................................... 5,264 5,264
Long-term debt, less current portion................... 592 1,290
-------- --------
Total long-term liabilities....................... 5,856 6,554
-------- --------
Total liabilities................................. 75,589 65,181
-------- --------
Subordinated convertible notes.............................. 38 87
-------- --------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value; 50,000,000 shares
authorized; 22,665,000 and 20,578,000 issued and
outstanding........................................... 226 208
Paid-in capital........................................ 120,346 99,179
Treasury stock, at cost................................ -- (1,523)
Accumulated deficit.................................... (56,969) (62,484)
Cumulative currency translation adjustment............. (6,364) (4,631)
-------- --------
Stockholders' equity........................................ 57,239 30,749
-------- --------
Total liabilities and stockholders' equity........ $132,866 $ 96,017
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
20
<PAGE> 22
INTERSOLV, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED APRIL 30,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
CASH INFLOWS (OUTFLOWS)
Operating activities:
Net income (loss)...................................... $ 5,515 $(21,166) $ (3,711)
Non-cash items:
Depreciation and amortization..................... 6,770 13,446 14,923
Deferred income taxes............................. -- 158 2,735
Write-down of software and intangible assets...... -- 22,535 2,386
Gain on sale of discontinued product lines........ 423 -- --
Write-down of purchased research and
development..................................... 15,739 -- --
Payment of restructuring/acquisition charges........... (496) (3,247) (8,278)
Changes in assets and liabilities, net of effect of
acquisition and divestitures:
Accounts receivable............................... (15,781) (12,813) 924
Refundable income taxes........................... -- -- 580
Prepaid expenses and other current assets......... (4,144) 1,081 (2,380)
Accounts payable and accrued expenses............. 1,385 2,103 7,795
Deferred revenue.................................. 3,524 1,672 3,253
-------- -------- --------
Net cash provided by operating activities................... 12,935 3,769 18,227
-------- -------- --------
Investing activities:
Additions to software.................................. (964) (9,478) (12,951)
Additions to property and equipment.................... (4,487) (7,697) (5,721)
Sale/leaseback of equipment............................ -- -- 776
Proceeds from sale of discontinued product lines....... 1,200 -- --
Payments for SQL, net of $2,433 cash acquired.......... 1,589 -- --
Other.................................................. -- (209) 161
-------- -------- --------
Net cash used in investing activities....................... (2,662) (17,384) (17,735)
-------- -------- --------
Financing activities:
Purchase of common stock for treasury.................. -- (3,445) (264)
Purchase of common stock from TechGnosis
shareholders......................................... -- -- (4,800)
Proceeds from sale of common stock, including tax
benefits............................................. 7,440 4,555 8,678
Payment of Q+E installment liabilities................. -- -- (1,107)
Net proceeds (repayment) of debt obligations........... (3,661) 4,922 (1,062)
-------- -------- --------
Net cash provided by financing activities................... 3,779 6,032 1,445
-------- -------- --------
Effect of exchange rate changes on cash..................... (150) (452) (383)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents........ 13,902 (8,035) 1,554
Cash and cash equivalents, beginning of year................ 20,180 28,215 26,661
-------- -------- --------
Cash and cash equivalents, end of year...................... $ 34,082 $ 20,180 $ 28,215
======== ======== ========
SUPPLEMENTAL DATA
Cash paid for interest...................................... $ 889 $ 717 $ 615
======== ======== ========
Cash paid for income taxes.................................. $ 647 $ 269 $ 802
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
21
<PAGE> 23
INTERSOLV, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK CUMULATIVE
--------------- PAID-IN ---------------- ACCUMULATED TRANSLATION
SHARES AMOUNT CAPITAL SHARES AMOUNT DEFICIT ADJUSTMENT TOTAL
------ ------ -------- ------ ------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, April 30, 1995........... 19,133 $191 $ 91,673 566 $(2,637) $(37,607) $ (583) $ 51,037
Sale of common stock under stock
option and stock purchase
plans........................... 879 8 4,608 (145) 2,079 -- -- 6,695
Net repurchases (re-issuances) of
common shares................... (25) -- 1,160 (320) 563 -- -- 1,723
Retire treasury shares............ (101) -- -- (101) (5) -- -- (5)
Translation adjustment............ -- -- -- -- -- -- (1,430) (1,430)
Purchase of common stock from
TechGnosis shareholders......... (239) (2) (4,798) -- -- -- -- (4,800)
Conversion of subordinated
convertible notes............... 86 1 324 -- -- -- -- 325
Net loss.......................... -- -- -- -- -- (3,711) -- (3,711)
------ ---- -------- ---- ------- -------- ------- --------
Balance, April 30, 1996........... 19,733 198 92,967 -- -- (41,318) (2,013) 49,834
Sale of common stock under stock
option and stock purchase plans,
including tax benefit........... 278 1 2,632 (203) 1,922 -- -- 4,555
Repurchase of common stock........ (381) -- -- 381 (3,445) -- -- (3,445)
Translation adjustment............ -- -- -- -- -- -- (2,618) (2,618)
Conversion of subordinated
convertible notes............... 948 9 3,580 -- -- -- -- 3,589
Net loss.......................... -- -- -- -- -- (21,166) -- (21,166)
------ ---- -------- ---- ------- -------- ------- --------
Balance, April 30, 1997........... 20,578 208 99,179 178 (1,523) (62,484) (4,631) 30,749
Sale of common stock under stock
option and stock purchase plans,
including tax benefit........... 823 6 5,864 (178) 1,523 -- -- 7,393
Issuance for SQL Acquisition...... 1,251 12 15,255 -- -- -- -- 15,267
Translation adjustment............ -- -- -- -- -- -- (1,733) (1,733)
Conversion of subordinated
convertible notes............... 13 -- 48 -- -- -- -- 48
Net Income........................ -- -- -- -- -- 5,515 -- 5,515
------ ---- -------- ---- ------- -------- ------- --------
Balance, April 30, 1998........... 22,665 $226 $120,346 -- $ -- $(56,969) $(6,364) $ 57,239
====== ==== ======== ==== ======= ======== ======= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
22
<PAGE> 24
INTERSOLV, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
INTERSOLV, Inc. (the "Company" or "INTERSOLV"), is engaged in the
development, marketing and support of computer software products and services in
three major solution areas: automated software quality, data connectivity and
enterprise application renewal. The Company's objective is to build products
that deliver high productivity on simple projects and are powerful enough to
handle scalability requirements of production-grade information systems without
retooling.
Consolidation
The consolidated financial statements include the accounts of INTERSOLV and
its wholly-owned subsidiaries. Intercompany accounts, transactions and profits
have been eliminated in the consolidated financial statements.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the reported
periods. Actual results could differ from those estimates.
Revenue Recognition
The Company's revenues consist primarily of license and service fees, which
include fee-paid consulting and training services and maintenance services.
Software license fees are recognized upon initial shipment of the product and
acceptance by the customer, assuming collection of the receivable is probable.
Training and consulting fees are recognized upon delivery of the services.
Maintenance fees for support are recorded as deferred revenue and recognized
ratably over the period of the maintenance contract, typically twelve months.
Transactions which include extended payment terms are discounted using the
Company's line of credit interest rate.
Cash and Cash Equivalents
Cash and cash equivalents consist of time and demand deposits and highly
liquid investments purchased with a maturity of three months or less. The
Company maintains its time and demand deposits in bank deposit accounts which,
at times, may exceed federally insured limits. The Company has not experienced
any losses in such accounts.
Concentrations of Credit Risk
Financial instruments which potentially expose the Company to
concentrations of credit risk, as defined by Statement of Financial Accounting
Standards No. 105, consist primarily of trade accounts receivable. The Company's
customer base is primarily Fortune 1000 companies or branches thereof, which
minimizes potential concentrations of credit risk. The Company does not require
collateral upon delivery of its products. In fiscal 1998, one customer
represented 11% of the Company's revenues. No single customer represented more
than 10% of the Company's revenues in fiscal 1997 or 1996.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosures
About Fair Value of Financial Information" requires disclosure of the fair value
of certain financial instruments where it is practicable to estimate that value.
The carrying amount of cash equivalents approximated fair value as of
23
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
April 30, 1998 and 1997 because of the relatively short maturity of these
instruments. The carrying amount of notes receivable, short-term debt and
long-term debt approximates fair value as the Company believes these instruments
carry terms which are comparable to similar instruments.
Sale of Receivables
The Company has implemented Statement of Financial Accounting Standards No.
125 -- "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities" ("FAS 125") in fiscal 1997. There was no
adjustment in the accompanying financial statements due to the implementation of
FAS 125. In fiscal 1998 and 1997, the Company entered into agreements to sell
approximately $2.5 million and $5.1 million, respectively, in accounts
receivable at a net discount of approximately 7.25%, which has been charged to
operating expenses in the accompanying consolidated statement of operations.
Approximately $2.5 million and $2.6 million, respectively, of these accounts
receivable were sold on a recourse basis, for which the Company remains liable
in the event of default.
Income Taxes
Deferred tax assets and liabilities are recognized for the expected future
tax consequences of events that have been included in the financial statements
or tax returns. They are determined annually based on the differences between
financial statement and tax bases using enacted tax laws and rates in effect for
the year in which the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. The provision for income taxes is
the tax payable for the year plus the change in the deferred tax assets and
liabilities during the year.
Currency Translation
Assets and liabilities of the Company's foreign operations are translated
into U.S. dollars at the exchange rate in effect at the balance sheet date and
revenues and expenses are translated at average rates in effect during the
period. The unrealized currency translation adjustment is reflected as a
separate component of stockholders' equity on the balance sheet.
Net Income (Loss) Per Share
The Company has adopted SFAS No. 128, "Earnings per Share". Basic earnings
per common share have been computed by dividing net income by the
weighted-average number of common shares outstanding during the period. Diluted
earnings per common share have been computed by dividing net income by the
weighted-average number of common shares outstanding plus an assumed increase in
common shares outstanding for dilutive securities. Since a net loss was reported
in fiscal years 1997 and 1996, the basic share counts are used in calculating
diluted earnings per share. Earnings per share for all periods presented herein
have been restated to conform to SFAS No. 128.
The following table reconciles the weighted-average number of common shares
outstanding during each period for basic earnings per share with the comparable
amount for diluted earnings per share.
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
------------------------
1998 1997 1996
------ ------ ------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Weighted average shares outstanding -- basic................ 21,315 20,119 19,348
Stock Option equivalent shares.............................. 1,098 N/A N/A
Subordinated Convertible Note equivalent shares............. 20 N/A N/A
------ ------ ------
Weighted average shares outstanding -- diluted.............. 22,433 20,119 19,348
====== ====== ======
</TABLE>
24
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Statement of Cash Flows
The consolidated statements of cash flows are intended to reflect only cash
receipt and cash payment activity and does not reflect non-cash investing and
financing activity. In fiscal 1998 and 1997, the Company recognized a tax
benefit of approximately $0.9 million and $2.8 million, respectively, related to
the exercise of stock options, which is reflected in the accompanying
consolidated statements of cash flows. Non-cash activity for each of the three
one-year periods ended April 30, 1998, 1997, and 1996 was not significant except
for the acquisition of SQL Software, Ltd. in March, 1998, as more fully
discussed in Note 2, and the conversion of subordinated convertible notes into
common stock, as shown in the accompanying consolidated statement of changes in
stockholders' equity.
Accounting for Stock-based Compensation
Under SFAS No. 123, "Accounting for Stock-based Compensation", companies
can either elect to recognize compensation expense based upon the estimated fair
value of employee stock options and other equity instruments issued to employees
at the date the instruments are granted or they can elect to continue to follow
the guidance under APB Opinion 25 -- Accounting for Stock Issued to Employees
("APB 25"), and disclose in the footnotes the pro forma net income and earnings
per share as if FAS 123 had been applied. The Company will continue to follow
the guidance of APB 25. (See Note 8)
Property and Equipment and Other Long-Lived Assets
Property and equipment are stated at cost and depreciated on a
straight-line basis over their estimated useful lives. Furniture and equipment
are generally depreciated over terms of three to five years, leasehold
improvements are amortized over the shorter of the assets' useful lives or the
term of the related lease period. Computer software purchased for internal use
is amortized over terms not exceeding five years. Repairs and maintenance are
charged to operations as incurred. Major improvements and betterments are
capitalized. Goodwill and acquired intangible assets are amortized over their
useful lives which are estimated to be five years.
In accordance with Statement of Accounting Standards No. 121 -- "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of" ("FAS 121"), all non current assets that are to be held and used are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of the asset in question may not be recoverable. The
Company estimates the future cash flows expected from using the asset(s) in
question and their eventual disposition. When this amount is less than the
carrying amount, an impairment loss is recorded. Assets to be disposed of, with
certain exceptions, are reported at the lower of cost or fair value less the
cost to sell the asset. In fiscal 1997, the Company recorded a charge for
impairment of certain long-lived assets, as more fully described in Note 3.
Research and Development
Research and development expense, before the capitalization of certain
internal software development costs, amounted to $26.3 million, $27.0 million
and $25.9 million for the fiscal years ended April 30, 1998, 1997 and 1996,
respectively.
Capitalized Software
Certain internal software development costs are capitalized subsequent to
the establishment of technological feasibility for the product as evidenced by a
working model. Capitalized internal software development costs amounted to $2.1
million, $9.5 million, and $11.3 million for the fiscal years ended April 30,
1998, 1997 and 1996, respectively. Capitalization ceases when the product is
available for general release to customers, at which time amortization of the
capitalized costs begins. The Company also purchases selected technologies from
time to time to supplement or expand its product lines. The Company amortizes
capitalized software development costs for new products based upon the greater
of the amount computed using (i) the ratio of
25
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
current gross revenues to current and future anticipated gross revenues or (ii)
the straight line method, over a three year life or the products' economic life,
if shorter. Purchased software is amortized over useful lives of three to five
years on a straight-line basis. Amortization of capitalized and purchased
software costs was $2.2 million, $8.7 million, and $10.6 million during fiscal
1998, 1997, and 1996, respectively, and is included in cost of products.
The Company continually compares the unamortized costs of capitalized
software development costs and purchased software costs to the expected future
revenues for those products. If the unamortized costs exceed the expected future
net realizable value, the excess amount is written off. (See Note 3)
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income", and SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information". Both SFAS No. 130 and SFAS
No. 131 are required to be adopted for fiscal years beginning after December 15,
1997. Upon the effective date of each of the new statements, the Company will
make the necessary changes to comply with the provisions of each statement and
restate all prior periods presented. The Company does not expect the adoption of
these statements to have a material impact on its financial condition or results
of operations.
The American Institute of Certified Public Accountants has issued Statement
of Position ("SOP") 97-2, Software Revenue Recognition. SOP 97-2 is effective
for transactions entered into in fiscal years beginning after December 15, 1997,
and provides guidance on applying generally accepted accounting principles in
recognizing revenue on software transactions. The Company does not expect the
application of the SOP to have a material impact on its financial condition or
results of operations.
Reclassifications
Certain amounts previously reported have been reclassified to conform with
current year presentation.
(2) ACQUISITIONS
SQL Software, Ltd.
In the fourth quarter of fiscal 1998, the Company acquired SQL Software,
Ltd. ("SQL"), by exchanging 1,251,450 shares of common stock for all the
outstanding shares of SQL. The acquisition was accounted for under the purchase
method. The purchase price, including transaction costs of $1.5 million and
assumed liabilities of $2.4 million, was determined to be $19.2 million. Of that
amount, $15.7 million was allocated to purchased research and development and
was written off in fiscal 1998 since no technological feasibility or alternative
future use could be demonstrated. Additionally, $1.1 million was allocated to
capitalized software and $2.4 million was allocated to goodwill and other
intangibles. The amounts allocated to goodwill and other intangibles will be
amortized over their useful lives which are estimated to be five years.
The unaudited pro forma combined historical results, as if SQL had been
acquired at the beginning of fiscal 1998 and fiscal 1997, are estimated to be
(in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Revenue..................................................... $206,083 $166,816
Net Income.................................................. $ 6,601 $(20,846)
Diluted earnings per share.................................. $ 0.28 $ (0.97)
</TABLE>
26
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TechGnosis International, Inc.
In October 1995, INTERSOLV acquired all of the outstanding common and
preferred stock of TechGnosis International, Inc. ("TechGnosis") for 2.5 million
shares of INTERSOLV common stock and $4.8 million in cash. In addition,
INTERSOLV also assumed TechGnosis' obligations under its $3.9 million of 8.4%
Subordinated Convertible Notes ("Notes") due in 1999. The notes are convertible
into 1,020,756 shares of INTERSOLV common stock. Total value of the transaction
was approximately $80 million. TechGnosis, which is headquartered in Belgium,
provides cross-platform data access technology for client/server environments.
The transaction was accounted for using the "pooling-of-interests" method.
PC Strategies & Solutions, Inc.
In May 1995, INTERSOLV acquired all of the outstanding common stock of PC
Strategies & Solutions, Inc. ("PCS") for 675,000 shares of INTERSOLV common
stock (valued at $9.3 million). The transaction was accounted for using the
"pooling-of-interest" method; accordingly the historical financial statements of
INTERSOLV have been restated to include the financial position and results of
operations of PCS. PCS provides consulting and training services focusing on the
implementation of object-oriented client/server technology.
C++/Views Product Line
In May 1995, INTERSOLV acquired the rights to the C++/Views product line
owned by Liant Inc. for $1.2 million. INTERSOLV did not acquire any of the
common stock of Liant Inc. As discussed in Note 3, $0.7 million was allocated to
in-process software development efforts which had not reached technological
feasibility. This amount was charged to operations in fiscal 1996.
(3) NON-RECURRING CHARGES
Write-Off of SQL Purchased R&D
In fiscal 1998, purchased research and development arising from the SQL
acquisition in the amount of $15.7 million was written off. The Company also
recognized $1.7 million in non-recurring expenses which were primarily
associated with discontinued businesses. During fiscal 1998, the Company exited
the Allegris product line at a total cost of $2.4 million. Offsetting this
amount were gains on the sale of the Excelerator product ($250 thousand) and
non-strategic consulting services ($170 thousand) and a net reduction in
restructuring accruals established in fiscal 1997 ($247 thousand). As of April
30, 1998, the remaining liabilities of $3.3 million and $.9 million relate to
the SQL acquisition and to Allegris, respectively.
Writedown of Software and Intangible assets
In the fourth quarter of fiscal 1997, the Company completed a comprehensive
business strategy review of its primary market opportunities, which led the
Company to record a charge of $28.9 million to writedown capitalized and
purchased software along with certain related intangible assets, to their net
realizable values. The Company determined the nature and amount of this charge
after identifying which product lines will be primary solution areas for future
fiscal years. Based upon future expected net revenues for the primary solution
areas, the Company determined that certain capitalized and purchased software
assets should be written down to their expected net realizable values. This
consisted of $19.1 million to write down various capitalized and purchased
software balances, $3.4 million to writedown intangible assets that were related
to obsolete or discontinued products, $3.3 million to cover the costs of
disposing or discontinuing certain products, $1.6 million of inventory related
to products that were discontinued or disposed of and $1.5 million for losses on
settlement of certain customer receivables related to discontinued products.
27
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TechGnosis Acquisition Charges
In October 1995, the Company incurred $11.6 million of non-recurring
charges related to the acquisition of TechGnosis. This includes $3.3 million to
restructure distributor agreements, $2.5 million for consolidation of offices
and equipment, $2.2 million for severance and related costs, $2 million to
write-off overlapping technologies and $1.6 million of direct transaction and
other transition expenses. As of April 30, 1998 and 1997, the remaining
liabilities of $.2 million and $.7 million relate to amounts to be disbursed for
continuing office lease obligations, respectively.
PCS and C++/Views Acquisition Charges
In May 1995, the Company incurred $2 million of non-recurring charges
related to the acquisition of PCS and the C++/Views Product line. Acquisition
charges included a $0.7 million charge for purchased research and development
related to the C++/Views transaction. The remaining $1.3 million charge was for
direct transaction expenses, severance and costs to consolidate operations,
which were all disbursed by April 30, 1996.
(4) BUSINESS SEGMENT AND GEOGRAPHIC AREA INFORMATION
The Company operates in one industry segment, the development and marketing
of computer software programs and related services. The Company markets its
products worldwide and operations can be grouped into three main geographic
areas. Pertinent financial data by major geographic area is summarized below.
(Amounts in thousands)
<TABLE>
<CAPTION>
NORTH EUROPE ASIA/
AMERICA & OTHER PACIFIC CONSOLIDATED
-------- -------- -------- ------------
<S> <C> <C> <C> <C>
FISCAL 1998:
Revenues:
Customers....................................... $144,334 $41,230 $10,916 $196,480
Intercompany.................................... 2,788 (626) (2,162) --
-------- ------- ------- --------
TOTAL...................................... $147,122 $40,604 $ 8,754 $196,480
======== ======= ======= ========
Income (loss) from operations........................ $ 4,387 $ 4,446 $ (289) $ 8,544
======== ======= ======= ========
Identifiable assets.................................. $107,799 $22,163 $ 2,904 $132,866
======== ======= ======= ========
FISCAL 1997:
Revenues:
Customers....................................... $111,541 $31,509 $17,363 $160,413
Intercompany.................................... (330) 3,920 (3,590) --
-------- ------- ------- --------
Total...................................... $111,211 $35,429 $13,773 $160,413
======== ======= ======= ========
Income (loss) from operations........................ $(21,878) $ (505) $ 4,053 $(18,330)
======== ======= ======= ========
Identifiable assets.................................. $ 72,167 $15,163 $ 8,687 $ 96,017
======== ======= ======= ========
FISCAL 1996:
Revenues:
Customers....................................... $ 96,883 $32,420 $16,010 $145,313
Intercompany.................................... 5,311 (4,711) (600) --
-------- ------- ------- --------
TOTAL...................................... $102,194 $27,709 $15,410 $145,313
======== ======= ======= ========
Income (loss) from operations........................ $ (1,798) $(4,215) $ 4,590 $ (1,423)
======== ======= ======= ========
Identifiable assets.................................. $ 83,361 $19,096 $ 8,460 $110,917
======== ======= ======= ========
</TABLE>
28
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Intercompany revenues between geographic areas are accounted for as
transfer fees representative of transactions with unaffiliated third parties.
These fees are intended to cover primarily software development expense and cost
of goods. Identifiable assets are those assets that are identifiable with
operations in each geographic area. General corporate assets in North America
include cash and cash equivalents and capitalized software costs. One customer
accounted for 11% of revenues in fiscal 1998. No customer accounted for 10% or
more of total revenue during the fiscal years ended April 30, 1997 and 1996.
Included in Europe and Other revenues is $5.3 million, $4.8 million and $7.3
million of export revenues to countries where the Company has no foreign owned
operations. Approximately 95% of the North American revenues is to customers
based in the United States and the remainder is to customers in Canada and
Mexico.
(5) DEBT
Lines of Credit and Short-Term Notes Payable
The Company has an unsecured credit arrangement with two banks (the "Credit
Agreement"). The Credit Agreement provides for borrowings not to exceed $15
million. The Credit Agreement was renewed in October 1996 and is due to expire
in September 1998. Interest on borrowings would be at the LIBOR rate plus 1.5%
or prime, at the Company's option. The commitment fee is 3/8% per annum on the
unused portion of the credit line. The weighted average rate during fiscal 1998
and the rate as of April 30, 1998 was 8.50%. The Credit Agreement has various
covenants which limit the Company's ability to dispose of assets, purchase its
own stock, pay dividends and purchase other significant businesses or
technologies. The Company is also required to maintain certain financial ratios.
The Company was in violation of the debt service coverage covenant for fiscal
1998. This violation was waived by the two banks. As of April 30, 1998 and 1997,
there was $3 million and $6 million outstanding, respectively. No amounts were
outstanding during the year ended April 30, 1996.
TechGnosis had $1,083,000 of short-term debt outstanding under foreign
lines of credit and other borrowing arrangements during fiscal 1996. Interest on
the short-term debt ranged from 3.5% to 10% with varying maturity dates through
December 1995. Foreign lines of credit and other borrowing arrangements were
generally restricted for working capital purposes. The borrowings are primarily
collateralized by certain assets of the Company's foreign operations. All
amounts were repaid by April 30, 1996.
Long-term Debt
Long-term debt consists of the following at April 30:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Notes payable to two companies with interest at 5.47%;
payable in monthly principal and interest installments
through February 1999..................................... $ 190 $ 406
Non-interest bearing accrued liabilities payable to four
individuals, payable in monthly installments.............. 1,375 2,009
------ -------
Total debt............................................. 1,565 2,415
Less current portion........................................ (973) (1,170)
------ -------
Long-term debt excluding current portion............... $ 592 $ 1,245
====== =======
</TABLE>
The maturities of long-term debt are as follows (in thousands):
<TABLE>
<S> <C>
1999........................................................ $ 973
2000........................................................ 592
------
$1,565
======
</TABLE>
29
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) COMMITMENTS AND CONTINGENCIES
Legal Proceedings
The Company is subject to legal proceedings and claims that arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially effect the
financial position or results of operations of the Company.
Operating Lease Obligations
The Company leases office space and equipment under non-cancelable
operating leases expiring through 2017. In addition, the Company leases office
equipment on a month-to-month basis, which can be terminated at any time at the
Company's option. None of the agreements contain unusual renewal or purchase
options. Total rent expense in fiscal 1998, 1997 and 1996 was $11.6 million,
$10.5 million, and $7 million, respectively.
Future minimum lease payments under the non-cancelable operating lease
agreements as of April 30, 1998, are as follows:
YEARS ENDING APRIL 30,
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 THEREAFTER TOTAL
- ------ ------ ------ ------ ------ ---------- -------
<S> <C> <C> <C> <C> <C> <C>
$7,280 $4,703 $3,680 $3,127 $3,002 $11,976 $33,768
</TABLE>
Sales and Income Taxes
The Company sells its products in various states through different
distribution channels, including telesales and direct sales. On certain sales,
the Company must collect and remit sales tax to the respective states. These
sales taxes are subject to adjustment upon audit by the respective states.
Liabilities may result from this process; however, management believes the
reserves provided for these liabilities are sufficient.
The Company's income tax returns are subject to audit by Federal, state and
foreign tax authorities. Adjustments to increase or decrease taxable income or
losses may result from the audits. Management believes the impact of these
adjustments, if any, would not have a material impact on the Company's financial
statements taken as a whole.
(7) SUBORDINATED CONVERTIBLE NOTES
As a result of the acquisition of TechGnosis in October 1995, the Company
incurred an obligation for $3,865,000 of 8.4% subordinated convertible notes
which are due in September 1999. Interest is payable quarterly. As of April 30,
1998, there was $38,330 of principal amount outstanding, which can be converted
into INTERSOLV common stock at the option of the holder at any time prior to
maturity. The conversion price per share is $3.7864, which would be adjusted for
certain dilutive events. The Company may prepay the notes at any time prior to
maturity. Upon prepayment, the note holder will receive a warrant to purchase
the number of shares of INTERSOLV common stock determined by dividing the
prepayment amount by the conversion price. The warrants shall be exercisable
until 1999. The Company has not prepaid any of the notes or issued any warrants.
(8) CAPITAL STOCK
Stock Option Plans
The Company has two active stock option plans, the 1992 Stock Option Plan
(the "1992 Plan"), which provides for the granting of incentive and nonqualified
stock options to purchase up to 4,000,000 shares of
30
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
common stock and the 1997 Employee Stock Option Plan (the "1997 Plan") which
provides for the granting of nonqualified stock options to purchase up to
700,000 shares of common stock. The option price must be equal to or greater
than fair market value at the date of grant. Options are granted for terms of up
to ten years and most are exercisable in cumulative annual increments of 25%
each year, commencing one year after the date of grant. These plans expire in
2002 and 2007, respectively. The Company applies APB Opinion 25 and related
interpretations in accounting for this plan. Accordingly, no compensation
expense has been recorded in the accompanying financial statements for this
plan.
The Company has 272,658 options outstanding under the 1982 Stock Option
Plan (the "1982 Plan"), which has expired. In addition, the Company has 3,511
shares and 31,018 shares outstanding under option plans that were assumed from
Q+E and TechGnosis, respectively, as a result of the acquisition of those
companies. The average price of the outstanding options is $10.30, $10.38, and
$1.66 under the 1982, Q+E and TechGnosis plans, respectively. No further options
will be granted under those plans.
Information regarding the Company's 1992 Plan is summarized below:
<TABLE>
<CAPTION>
WEIGHTED- FAIR VALUE OF
AVERAGE OPTIONS OPTIONS
SHARES EXERCISE PRICE EXERCISABLE GRANTED
--------- -------------- ----------- -------------
<S> <C> <C> <C> <C>
April 30, 1995 options outstanding............ 1,122,065 $ 9.19 152,207
Granted.................................. 1,274,998 13.22 $10,554,706
Exercised................................ (196,591) 8.13
Canceled................................. (379,762) 14.77
April 30, 1996 options outstanding............ 1,820,710 10.78 293,871
Granted.................................. 883,574 8.19 $ 4,881,907
Exercised................................ (2,500) 7.25
Canceled................................. (249,814) 11.16
April 30, 1997 options outstanding............ 2,451,970 9.82 748,683
Granted.................................. 1,068,400 11.08 $ 3,096,526
Exercised................................ (379,630) 9.85
Canceled................................. (201,643) 10.41
---------
April 30, 1998 options outstanding............ 2,939,097 $10.23 977,061
=========
</TABLE>
As of April 30, 1998, there were 2,939,097 options outstanding and 977,061
option exercisable under the 1992 Plan. Exercise prices of options outstanding
and options exercisable as of April 30, 1998 are as follows:
<TABLE>
<CAPTION>
OPTIONS OPTIONS WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING EXERCISABLE LIFE (YEARS)
------------------------ ----------- ----------- ----------------
<S> <C> <C> <C>
$ 6.50 -- $14.00................................ 2,771,606 917,396 7.7
$14.00 -- $21.00................................ 167,491 59,665 9.0
--------- ------- ---
2,939,097 977,061 7.8
========= ======= ===
</TABLE>
Information regarding the Company's 1997 Plan is summarized below:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE OPTIONS FAIR VALUE OF
SHARES EXERCISE PRICE EXERCISABLE OPTIONS GRANTED
------- -------------- ----------- ---------------
<S> <C> <C> <C> <C>
April 30, 1997, options outstanding.... --
Granted........................... 427,770 $15.78 -- $1,239,798
Exercised......................... -- --
Canceled.......................... 13,030 16.00
-------
April 30, 1998, options outstanding.... 414,740 $14.77 --
=======
</TABLE>
31
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of April 30, 1998, the 414,740 options outstanding under the 1997 Plan
have exercise prices between $13.00 and $16.00 and a weighted-average remaining
contractual life of 9.7 years.
If the Company had recorded compensation for the 1992 Plan and the 1997
Plan based upon the fair value at the grant dates of options issued in fiscal
1997 and 1998 and for the Employee Stock Purchase Plan at the dates of purchase,
consistent with the method of FASB Statement 123, the Company's net income and
earnings per share would have been adjusted to the amounts shown below:
<TABLE>
<CAPTION>
FISCAL 1997 FISCAL 1998
----------- -----------
<S> <C> <C> <C>
Net Income (Loss) As reported $(21,166) $5,515
Pro forma $(24,065) $1,487
Basic Earnings Per Share As reported $ (1.05) $ 0.26
Pro forma $ (1.20) $ 0.07
Diluted Earnings Per Share As reported $ (1.05) $ 0.25
Pro forma $ (1.20) $ 0.07
</TABLE>
The fair value of each stock option is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions: an expected life of six years, expected volatility of 69%, a
dividend yield of 0% and a risk-free interest rate of 6.25 % in fiscal 1997 and
5.5% in fiscal 1998.
Employee Stock Purchase Plan
The Company has an Employee Stock Purchase Plan, which is authorized to
grant rights to purchase an aggregate maximum of 1,200,000 shares of common
stock. Employees of the Company with three months of continuous service are
eligible to participate.
Rights are granted twice yearly and are exercisable effective the
succeeding June 30 or December 31. Eligible employees may purchase shares of
common stock through payroll deductions at a purchase price which is 85% of fair
market value at the beginning or the end of each six-month offering period,
whichever is lower. During fiscal 1998, 1997, and 1996, respectively, 286,356,
203,076, and 102,958 shares of common stock were purchased under this plan.
Shareholder Rights Plan
The Company has a Shareholder Rights Plan (the "Rights Plan"), which is
designed to deter coercive takeover tactics and to prevent an acquirer from
gaining control of the Company without offering a fair price to all of the
Company's shareholders. Under the Rights Plan, each common stockholder receives
one right (a "Right") for each share of common stock which entitles its holder
to buy one one-hundredth of a share of Series A Junior Participating Preferred
Stock ("Series A") at a purchase price of $40.00. The Rights will not be
exercisable or separable from the common stock until a specified period after a
person or group has acquired or has the right to acquire 20% of the Company's
common stock or has commenced a tender offer resulting in the ownership of 30%
or more of the Company's common stock.
If the Company is acquired in a merger or other business combination
transaction, each Right will entitle the holder to receive, upon exercise,
common stock of either the Company or the acquiring company having a market
value equal to twice the exercise price of the Right. Each Right is nonvoting
and expires on August 31, 1999. The Company may generally redeem the Rights at
the Company's option prior to such Right becoming exercisable at a redemption
price of $.01 per Right.
In connection with entering into the MicroFocus merger agreement, the
Company amended the Rights Plan to exclude transactions in connection with the
merger.
32
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Warrants
In fiscal 1997, the Company issued warrants to purchase 140,000 shares of
the Company's common stock at an exercise price of $10.375. As of April 30,
1998, 108,734 shares were exercisable, with the balance becoming exercisable in
increments of 31,267 shares on an annual basis through February 1999. The
warrants expire in 2006.
(9) EMPLOYEE BENEFIT PLAN
401(k) Plan
The Company has a savings and investment plan (the "Plan") which covers
employees of the Company and that qualifies under section 401(k) of the Internal
Revenue Code. All full-time employees who are at least 21 years old and have
worked a minimum of three months at the Company are eligible to participate.
Contributions up to 10% of eligible employees' salaries, as defined, may be made
by employees and the Company can make matching contributions. The Company
contributed $447,000, $346,000 and $303,000 in fiscal 1998, 1997 and 1996,
respectively.
(10) INCOME TAXES
The U.S. and foreign components of income (loss) before provision for
income taxes were as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
United States............................................ $4,075 $(21,672) $ 2,951
Foreign.................................................. 4,167 3,267 (3,334)
------ -------- -------
$8,242 $(18,405) $ (383)
====== ======== =======
</TABLE>
The provision for income taxes consist of the following (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Current provision:
U.S. federal........................................... $1,637 $1,547 $ --
Foreign................................................ 620 904 --
State.................................................. 460 151 593
------ ------ ------
2,717 2,602 593
====== ====== ======
Deferred provision (benefit)
U.S. federal........................................... -- 159 2,735
Foreign................................................ -- -- --
State.................................................. -- -- --
------ ------ ------
-- 159 2,735
------ ------ ------
$2,717 $2,761 $3,328
====== ====== ======
</TABLE>
33
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision for income taxes result in effective tax rates which differ
from the U.S. Federal statutory income tax rate as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- ------
<S> <C> <C> <C>
Statutory U.S. Federal income tax rate...................... 35.0% (35.0)% (35.0)%
State income taxes, net of federal benefit.................. 3.7 1.0 77.7
Foreign taxes impact........................................ (5.3) (4.7) (143.2)
Changes in valuation allowance and liability for tax
exposures................................................. (71.1) 52.5 909.1
Nondeductible purchased research and development............ 66.8 1.2 60.3
Other....................................................... 3.9 -- --
----- ----- ------
33.0% 15.0% 868.9%
===== ===== ======
</TABLE>
The tax effects of the components of the deferred tax assets and
liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
APRIL 30, APRIL 30,
1998 1997
--------- ---------
<S> <C> <C>
Net operating loss carryforwards....................... $ 2,786 $ 7,849
Research and experimental tax credits.................. 800 1,809
Property and equipment................................. 669 301
Allowance for doubtful accounts........................ 984 971
Other accruals......................................... 1,535 2,934
Valuation allowance.................................... (6,774) (13,864)
------- --------
Total deferred tax assets......................... -- --
======= ========
Deferred tax liabilities:
Liability for tax exposures............................ (3,633) (4,027)
Capitalized software, net.............................. (1,631) (1,237)
------- --------
Total deferred tax liabilities.................... (5,264) (5,264)
------- --------
Net deferred tax liabilities...................... $(5,264) $ (5,264)
======= ========
</TABLE>
The Company provided a full valuation allowance on the total amount of its
deferred tax assets at April 30,1998 since management does not believe that it
is more likely than not that these assets will be realized. Net operating loss
carryforwards for U.S. and foreign tax purposes are $5.5 million and $1.2
million, respectively, which expire through 2012.
(11) OTHER INCOME (EXPENSE)
Other income (expense) includes interest income of $559,000, $501,000, and
$1,083,000 in fiscal 1998, 1997, and 1996, respectively, and interest expense of
$871,000, $578,000, and $615,000 in fiscal 1998, 1997, and 1996, respectively.
34
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(12) QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
QUARTERS FIRST SECOND THIRD FOURTH
-------- --------- --------- --------- ---------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1998
Revenues............................................... $41,330 $47,767 $49,014 $ 58,369
Costs and Expenses..................................... 40,725 44,429 43,594 62,217
Net Income (loss)...................................... 605 3,338 5,420 (3,848)
Basic net income (loss) per share...................... $ 0.03 $ 0.16 $ 0.26 $ (0.17)
Diluted net income (loss) per share.................... $ 0.03 $ .15 $ 0.24 $ (0.17)
Stock Price:
High.............................................. $ 14.63 $ 18.50 $ 21.25 $ 20.50
Low............................................... $ 7.13 $ 11.25 $ 12.00 $ 13.88
1997
Revenues............................................... $32,747 $37,665 $42,083 $ 47,918
Costs and Expenses..................................... 32,830 35,615 37,062 73,236
Net income (loss)...................................... 36 1,396 3,369 (25,967)
Basic net income (loss) per share...................... 0.00 $ 0.07 $ 0.17 $ (1.26)
Diluted net income (loss) per share.................... 0.00 $ 0.07 $ 0.16 $ (1.26)
Stock Price:
High.............................................. $ 12.00 $ 9.87 $ 11.12 $ 10.12
Low............................................... $ 8.37 $ 7.50 $ 7.50 $ 6.25
</TABLE>
The fourth quarter of fiscal 1998 includes a non-recurring charge of $15.7
million which represents the write off of research and development costs
purchased as part of the SQL acquisition. A charge of $1.7 million was also
recorded in connection with the disposition of non-strategic products. The
fourth quarter of fiscal 1997 includes a non-recurring charge of $28.9 million
related to the writedown of certain software and intangible asset balances.
These charges are more fully discussed in Note 3.
(13) SUBSEQUENT EVENT
On June 17, 1998, the Company signed a definitive agreement to merge with
Micro Focus Group, plc. Micro Focus is a UK company with principal offices in
Newbury, England and Mountain View, California. Under the terms of the
agreement, each share of the Company's common stock will be exchanged for .55
shares of Micro Focus American Depositary Shares and each INTERSOLV option will
be exchanged for an equivalent Micro Focus option. Micro Focus shares are listed
both on the London Stock Exchange and on the NASDAQ National Market System. The
transaction is subject to regulatory approval in the US and the UK as well as to
the approval of each company's shareholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
35
<PAGE> 37
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Except as set forth below in this Item 10, the information required by this
Item 10 is incorporated herein by reference to the Company's definitive proxy
statement to be filed within 120 days after the end of the Company's fiscal year
ended April 30, 1998.
EXECUTIVE OFFICERS
The following table indicates the names, ages and positions of the
Company's executive officers. There is no family relationship between any of the
officers or directors.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Kevin J. Burns............................ 49 Chairman of the Board
Gary G. Greenfield........................ 43 President and Chief Executive Officer
Kenneth A. Sexton......................... 44 Senior Vice President, Finance & Administration and
Chief Financial Officer
Panos Anastassiadis....................... 48 Senior Vice President, Data Connectivity
John J. Cimral............................ 45 Senior Vice President, Automated Software Quality
Gary M. Wright............................ 53 Senior Vice President, Enterprise Application
Renewal
</TABLE>
Mr. Burns was Chief Executive Officer of the Company from 1986 to 1996. He
was elected Chairman of the Board in 1990. From 1986 to 1995, Mr. Burns also
served as President of the Company. From 1984 to 1986, he was Executive Vice
President and Chief Operating Officer, and from 1982 to 1984, Executive Vice
President of the Company. He has also been a Director of the Company since 1986.
In October 1997, Mr. Burns became a non-employee Chairman of the Company.
Mr. Greenfield was elected Chief Executive Officer of the Company in 1996.
From 1995 to 1996, he was President and Chief Operating Officer. From 1992 to
1995, he was Executive Vice President, Chief Operating Officer. From 1989 to
1992, he was Executive Vice President, Product Operations. From April 1991 to
October 1991 he was also the Chief Financial Officer of the Company. He served
as Senior Vice President, Product Services and Operations from 1988 to 1989. He
served as Vice President, Marketing from 1987 to 1988.
Mr. Sexton was elected Senior Vice President, Finance & Administration and
Chief Financial Officer of the Company in 1996. From 1991 to 1996, he was Vice
President, Finance & Administration and Chief Financial Officer of the Company.
From 1984 to 1991, he was Controller and Chief Accounting Officer of Life
Technologies, Inc., a biotechnology company.
In May 1998, Mr. Anastassiadis was appointed Senior Vice President and
General Manager of the Company's Data Connectivity business unit. In 1996 and
1997, Mr. Anastassiadis was Senior Vice President, Worldwide Distribution. From
1993 to 1996, he was Senior Vice President, International Operations. From 1991
to 1993, he was country manager of the Company's Southern European operations
and prior to that he held senior sales positions with Legent Corporation.
In May 1998, Mr. Cimral was appointed Senior Vice President and General
Manager of the Company's Automated Software Quality business unit. In 1997 and
1996, Mr. Cimral was Vice President of the PVCS product line. Prior to joining
INTERSOLV, he held executive positions at Symantic's Peter Norton product group,
Datalogix International and Bachman Information Systems.
In May 1998, Mr. Wright was appointed Senior Vice President and General
Manager of the Company's Enterprise Application Renewal business unit. In 1997,
Mr. Wright was Senior Vice President, Worldwide Services. From 1995 to 1997, he
was Vice President, Worldwide Services. From 1992 to 1995, he was a principal
with Insource Technology Corporation, a technology services company, and from
1990 to 1992, he
36
<PAGE> 38
was President and Chief Executive Officer of Information Technology Associates,
Inc., a management consulting company.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is hereby incorporated by
reference to the Company's definitive proxy statement to be filed within 120
days after the end of the Company's fiscal year ended April 30, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is hereby incorporated by
reference to the Company's definitive proxy statement to be filed within 120
days after the end of the Company's fiscal year ended April 30, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is hereby incorporated by
reference to the Company's definitive proxy statement to be filed within 120
days after the end of the Company's fiscal year ended April 30, 1998.
37
<PAGE> 39
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS A PART OF THIS FORM 10-K:
1. FINANCIAL STATEMENTS. The following consolidated financial statements
of INTERSOLV, Inc. and Subsidiaries and Report of Independent Accountants
relating thereto are filed as Item 8 of this report.
Description
Report of Independent Accountants
Consolidated Balance Sheets as of April 30, 1998 and 1997
Consolidated Statements of Operations for the fiscal years ended April
30, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the fiscal years ended April
30, 1998, 1997 and 1996
Consolidated Statements of Changes in Stockholders' Equity for the
fiscal years ended April 30, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES.
The following consolidated financial statement schedule of INTERSOLV,
Inc. and Subsidiaries are filed as a schedule to this Report:
Schedule II -- Valuation and Qualifying Accounts and Reserves
Report of Independent Accountants on this schedule is included in the
Report of Independent Accountants covering the consolidated financial
statements, which is included herein.
Schedules omitted are not present because (i) such schedules are not
applicable or required or, (ii) the information required has been
presented in the financial statements or notes thereto.
3. EXHIBITS. The following Exhibits (listed according to the number
assigned in the table in Item 601 of Regulation S-K) are filed with this Report
or incorporated by reference as set forth below:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
<C> <S>
Articles of Incorporation and By-laws
3.1 Second Restated Certificate of Incorporation, as amended, of
the Company (incorporated herein by reference to Exhibit
3(a) to the Company's Registration Statement on Form S-4
(Registration No. 33-38937)).
3.2 By-Laws, as amended (incorporated herein by reference to
Exhibit 3.2 to the Company's Annual Report on Form 10-K for
the fiscal year ended 1991).
Instruments Defining the Rights of Security Holders, Including Indentures
4.0 Specimen Common Stock Certificate (incorporated herein by
reference to Exhibit 4.0 to the Company's Annual Report on
Form 10-K for the fiscal year ended 1992).
4.1 Rights Agreement, dated August 29, 1989 between the Company
and Sovran Bank, N.A. (incorporated herein by reference to
Exhibits 4.1 to the Company's Current Report on Form 8-K
dated September 21, 1989). First National Bank of Boston is
currently the Company's transfer agent and has assumed
Sovran Bank's obligations under this agreement.
4.2 First Amendment to Rights Agreement
</TABLE>
38
<PAGE> 40
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
<C> <S>
Certain Management Contracts, Compensation Plans, Contracts or Arrangements
10.1 The Company's 1982 Stock Option Plan, as amended
(incorporated herein by reference to Exhibit 10.1 to the
Company's Annual Report on Form 10-K for the fiscal year
ended April 30, 1990).
10.2 The Company's Amended and Restated 1992 Stock Option Plan.
10.4 Amendment to the Company's 1992 Stock Option Plan, dated
June 16, 1994 (incorporated herein by reference to Exhibit
10.6 of the Company's Annual Report on Form 10-K for the
fiscal year ended April 30, 1994).
10.6 The Company's 1992 Employee Stock Purchase Plan
(incorporated by reference to Exhibit 4(a) to the Company's
Registration Statement of Form S-8 (Registration No.
33-56166)).
10.7 Amendment to the Company's 1992 Employee Stock Purchase
Plan, dated June 16, 1993 (incorporated herein by reference
to Exhibit 10.9 to the Company's Annual Report on Form 10-K
for the fiscal year ended April 30, 1993).
10.8 Amendment to the Company's 1992 Employee Stock Purchase
Plan, dated July 1, 1996 (incorporated by reference to
Exhibit 4(b) to the Company's Registration Statement on Form
S-8 (Registration No. 333-07351)).
10.9 Employment Agreement between the Company and Kevin J. Burns,
Chairman, dated October 1, 1996.
10.10 Employment Agreement between the Company and Gary G.
Greenfield, President and Chief Executive Officer, dated
August 1, 1996 (incorporated herein by reference to Exhibit
10.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended July 31, 1996).
10.11 Employment Agreement between the Company and Kenneth A.
Sexton, Senior Vice President and Chief Financial Officer,
dated August 1, 1996 (incorporated herein by reference to
Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q
for the quarter ended July 31, 1996).
Material Contracts in Ordinary of Business
10.12 Financing Agreement dated July 27, 1992 between the Company
as the borrower and Maryland National Bank and First
National Bank of Boston as lenders (incorporated by
reference to Exhibit 10.25 to the Company's Annual Report on
Form 10-K for the fiscal year ended April 30, 1992).
10.13 Amendment to the Financing Agreement dated July 19, 1993,
between the Company as borrower and Maryland National Bank
and First National Bank of Boston as lenders (incorporated
herein by reference to Exhibit 10.27 to the Company's Annual
Report on Form 10-K for the fiscal year ended April 30,
1993).
10.14 Amendment to the Financing Agreement dated August 11, 1994,
between the Company as borrower and Nations Bank (successor
to Maryland National Bank) and First National Bank of Boston
as lenders (incorporated herein by reference to Exhibit
10.10 to the Company's Annual Report on From 10-K for the
fiscal year ended April 30, 1994).
10.15 Amendment to the Financing Agreement dated October 30, 1996,
between the Company as borrower and NationsBank, N.A.
(successor to Maryland National Bank) and First National
Bank of Boston as lenders.
Other Contracts
10.17 Form of Indemnification Agreement between the Company and
its directors, officers and certain employees (incorporated
herein by reference to Exhibit 10.13 to the Company's Annual
Report on Form 10-K for the fiscal year ended April 30,
1994).
10.18 Stock Exchange Agreement by and among INTERSOLV, Inc., PC
Strategies & Solutions, Inc. and Michael Goldman dated May
1, 1995 (incorporated herein by reference to the Company's
Current report on Form 8-K as filed on May 11, 1995).
10.19 Registration Rights Agreement between INTERSOLV, Inc. and
Michael Goldman dated May 1, 1995 (incorporated herein by
reference to the Company's current report on Form 8-K as
filed on May 11, 1995).
</TABLE>
39
<PAGE> 41
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
<C> <S>
10.20 Agreement of Merger dated October 22, 1995 by and among
INTERSOLV, TechGnosis International, Inc., INTERSOLV Perkins
Corporation and certain stockholders of TechGnosis
International, Inc. (incorporated herein by reference to
Exhibit 2 of the Company's Current Report on Form 8-K as
filed on November 7, 1995).
10.21 Registration Rights Agreement between INTERSOLV, Inc. and
certain stockholders of TechGnosis International, Inc.
(incorporated herein by reference to Exhibit 3 of the
Company's Current Report on Form 8-K as filed on November 7,
1995).
10.22 Agreement and Plan of Reorganization Among Micro Focus
Group, plc, Tower Merger Sub, Inc. and Intersolv, Inc. dated
June 17, 1998.
Other Exhibits
4.2 First Amendment to Rights Agreement
10.2 Amended and Restated 1992 Stock Option Plan
10.22 Agreement and Plan of Reorganization
21.1 Subsidiaries of the Company.
23.1 Consent of PricewaterhouseCoopers LLP
27 Financial Data Schedule (EDGAR version only)
</TABLE>
(B) REPORTS ON FORM 8-K:
Current Report on Form 8-K dated March 17, 1998 regarding the acquisition
of SQL Software, Ltd.
(C) EXHIBIT
The list of exhibits required by Item 601 of Regulation S-K is included in
Item (a)3 above.
(D) FINANCIAL STATEMENT SCHEDULES
See Item (a)2 above.
40
<PAGE> 42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: July 9, 1998
INTERSOLV, INC.
By /s/ KENNETH A. SEXTON
------------------------------------
Kenneth A. Sexton
Senior Vice President, Finance &
Administration and Chief Financial
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities indicated on July 9, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ KEVIN J. BURNS Chairman of the Board of Directors
- ---------------------------------------------
Kevin J. Burns
/s/ GARY G. GREENFIELD Director and Chief Executive Officer
- --------------------------------------------- (Principal Executive Officer)
Gary G. Greenfield
/s/ KENNETH A. SEXTON Senior Vice President, Finance &
- --------------------------------------------- Administration and Chief Financial Officer
Kenneth A. Sexton (Principal Financial and Accounting Officer)
/s/ RICHARD A. CARPENTER Director
- ---------------------------------------------
Richard A. Carpenter
/s/ C. THOMAS FAULDERS Director
- ---------------------------------------------
C. Thomas Faulders
/s/ ROBERT N. GOLDMAN Director
- ---------------------------------------------
Robert N. Goldman
/s/ RUSSELL E. PLANITZER Director
- ---------------------------------------------
Russell E. Planitzer
/s/ FRANK A. SOLA Director
- ---------------------------------------------
Frank A. Sola
/s/ R. CRAIG ROOS Director
- ---------------------------------------------
R. Craig Roos
/s/ MICHEL BERTY Director
- ---------------------------------------------
Michel Berty
</TABLE>
41
<PAGE> 43
INTERSOLV, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO
BEGINNING COSTS AND OTHER DEDUCTIONS BALANCE AT
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS WRITE-OFFS END OF PERIOD
----------- ---------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
1998
Allowance for doubtful accounts......... $(4,129) $(2,480) $ -- $3,708 $(2,901)
======= ======= ==== ====== =======
1997
Allowance for doubtful accounts......... $(3,136) $(3,863) $ -- $2,870 $(4,129)
======= ======= ==== ====== =======
1996
Allowance for doubtful accounts......... $(1,960) $(2,515) $ -- $1,339 $(3,136)
======= ======= ==== ====== =======
</TABLE>
42
<PAGE> 44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date:
INTERSOLV, INC.
By
------------------------------------
Kenneth A. Sexton
Senior Vice President, Finance &
Administration and Chief Financial
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities indicated on June 30, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
Chairman of the Board of Directors
- ---------------------------------------------
Kevin J. Burns
Director and Chief Executive Officer
- --------------------------------------------- (Principal Executive Officer)
Gary G. Greenfield
Senior Vice President, Finance &
- --------------------------------------------- Administration and Chief Financial Officer
Kenneth A. Sexton (Principal Financial and Accounting Officer)
Director
- ---------------------------------------------
Richard A. Carpenter
Director
- ---------------------------------------------
C. Thomas Faulders
Director
- ---------------------------------------------
Robert N. Goldman
Director
- ---------------------------------------------
Russell E. Planitzer
Director
- ---------------------------------------------
Frank A. Sola
Director
- ---------------------------------------------
R. Craig Roos
Director
- ---------------------------------------------
Michel Berty
</TABLE>
43
<PAGE> 1
EXHIBIT 4.2
FIRST AMENDMENT TO
RIGHTS AGREEMENT
THIS AMENDMENT, dated as of June 17, 1998 (the "Amendment"), is between
Intersolv, Inc., a Delaware corporation previously called "Sage Software,
Inc." (the "Company"), and BankBoston, N.A., as successor Rights Agent (the
"Rights Agent").
RECITALS
R-1. The Company (then called Sage Software, Inc.) and Sovran Bank,
N.A., as the prior Rights Agent, entered into a Rights Agreement dated as of
August 29, 1989 (the "Rights Agreement").
R-2. Micro Focus Group PLC., a public limited company organized under
the laws of England and Wales ("Parent"), and the Company have entered into an
Agreement and Plan of Reorganization dated as of June 17, 1998 (the
"Reorganization Agreement"), pursuant to which a wholly owned subsidiary of
Parent ("Newco") will merge with and into the Company (the "Merger"), with the
Company surviving the Merger as a wholly owned subsidiary of Parent.
R-3. The Board of Directors of the Company has approved the Merger and
believes that the completion of the Merger is in the best interest of the
Company and its stockholders.
R-4. The Company desires to amend the Rights Agreement in order to
facilitate the completion of the Merger.
R-5. Pursuant to Section 27 of the Rights Agreement, the Company and
the Rights Agent, at the direction of the Company and without the approval of
any holders of the Company's common stock, may supplement or amend the Rights
Agreement.
R-6. Defined terms used in this Amendment, not defined herein, shall
have the meanings set forth in the Rights Agreement.
NOW THEREFORE, in consideration of the foregoing and of the mutual
covenants herein set forth, the parties hereto agree as follows:
1. RIGHTS AGENT. The Company and BankBoston, N.A. hereby agree and
confirm that BankBoston, N.A. has been appointed the successor Rights Agent
under the Rights Agreement. Section 21 of the Rights Agreement is hereby
amended to specifically provide that the 30 day notice provided for by Section
21 upon the substitution of Rights Agent shall not apply to the foregoing
appointment.
<PAGE> 2
2. AMENDMENTS.
(a) Section 1(d) of the Rights Agreement is amended to add the
following:
Notwithstanding anything in this definition of
Beneficial Ownership to the contrary, neither
Parent nor Newco will be deemed to be a Beneficial
Owner of Common Stock as a result of (i) entering
into the Reorganization Agreement or (ii)
consummating the Merger contemplated by the
Reorganization Agreement.
(b) Section 2 of the Rights Agreement is amended by adding at
the end of Section 2, after the word "desirable," the
following:
, upon ten (10) days' prior written notice to the Rights
Agent. The Rights Agent shall have no duty to supervise, and
in no event be liable for, the acts or omissions of any such
co-Rights Agent.
(c) Section 13(d) of the Rights Agreement is amended as follows:
(i) by inserting after the words "of Section 13(a) if" in
the third line of Section 13(d), the word "(A)"
(ii) by inserting after the words "pursuant to such tender
offer or exchange offer" at the end of the first sentence of
Section 13(d), the following words:
or (B) such transaction is consummated with Parent or Newco
pursuant to that certain Agreement and Plan of
Reorganization dated as of June 17, 1998 by and among the
Company, Parent and Newco, as such Agreement may be amended
from time to time.
(d) Section 18(a) of the Rights Agreement is amended by
inserting after the word "without" in the tenth line of
Section 18(a), the word "gross."
(e) Section 20(c) of the Rights Agreement is amended by
inserting after the words "its own" in the second line of
Section 20(c), the word "gross."
(f) Clause "(a)" of Section 21 of the Rights Agreement is
amended and restated to read as follows:
-2-
<PAGE> 3
(a) a corporation or national banking association organized
and doing business under the laws of the United States or
any state of the United States in good standing, which is
authorized under such laws to exercise corporate trust or
stock transfer powers and is subject to the supervision or
examination by federal or state authority and which has at
the time of its appointment as Rights Agent a combined
capital and surplus of at least $50,000,000 or
(g) Section 26 of the Rights Agreement is amended to change the
Company's address for notice to:
Intersolv, Inc.
9420 Key West Avenue
Rockville, MD 20850
Attention: Worth D. MacMurray, General Counsel
and to change the Right's Agent's address for notice to:
Bank Boston, N.A.
c/o Boston Equiserve
150 Royall Street
Canton, MA 02021
Attention: Client Administration
3. RATIFICATION AND CONFIRMATION OF RIGHTS AGREEMENT. Except as
hereby expressly supplemented or amended, the Rights Agreement shall remain in
full force and effect; and the Rights Agreement, as supplemented and amended
hereby, is ratified and confirmed.
4. BINDING EFFECT. This Amendment to the Rights Agreement shall inure
to the benefit of and shall be binding upon the Company, the Rights Agent and
their respective successors and assigns.
5. EXECUTION OF COUNTERPARTS; EFFECTIVE DATE. This Amendment to the
Rights Agreement may be executed in several counterparts, each of which shall
be an original and all of which shall constitute but one and the same
instrument; and this Amendment shall become effective when at least one
counterpart hereof has been executed by each of the parties hereto.
6. GOVERNING LAW. This Amendment is governed by and shall be
construed in accordance with the laws of the State of Delaware, without regard
to principles of conflicts of law.
-3-
<PAGE> 4
7. SEVERABILITY. If any provision, term or restriction of this
Amendment, or the application thereof, is for any reason held to any extent to
be invalid, void or unenforceable, the remainder of this Amendment (including
all remaining terms, conditions, covenants and provisions) shall remain in full
force and effect and shall in no way be affected, impaired or invalidated.
IN WITNESS WHEREOF, the parties have duly executed this Amendment as of
the day and year first above written.
INTERSOLV, INC.
By: /s/ WORTH D. MACMURRAY
---------------------------------
BANKBOSTON, N.A.
By: [sig]
---------------------------------
-4-
<PAGE> 1
EXHIBIT 10.2
INTERSOLV, INC.
AMENDED AND RESTATED
1992 STOCK OPTION PLAN
[AS AMENDED THROUGH AUGUST 1997]
1. PURPOSE
The purpose of the plan (the "Plan") is to secure for INTERSOLV, Inc.
(the "Company") and its shareholders the benefits arising from capital stock
ownership by employees (as defined in paragraph (a) of Section 10), officers,
directors and consultants of the Company and its parent and subsidiary
corporations who are expected to contribute to the Company's future growth
and success.
2. TYPE OF OPTIONS AND ADMINISTRATION
(a) Types of Options. Options granted pursuant to the Plan shall be
authorized by action of the Board of Directors of the Company (the "Board")
(or a Committee designated by the Board) and may be either incentive stock
options ("Incentive Stock Options") meeting the requirements of Section 422
of the Internal Revenue Code of 1986, as amended (the "Code") or
non-statutory options ("non-statutory options") which are not intended to
meet the requirements of Section 422. Notwithstanding anything herein to the
contrary, Incentive Stock Options may be granted only to employees of the
Company or any Parent Corporation or Subsidiary (as defined in Section 19)
and those officers, directors and consultants of the Company or any Parent
Corporation or Subsidiary who are also employees of the Company or any Parent
Corporation or Subsidiary.
(b) Administration. The Plan will be administered by the Board,
whose construction and interpretation of the terms and provisions of the Plan
shall be final and conclusive. Subject to paragraph (c) of this Section 2,
the Board may in its sole discretion grant options to purchase shares of the
Company's Common Stock and issue shares upon exercise of such options as
provided in the Plan. The Board shall have authority, subject to the express
provisions of the Plan, to construe the respective option agreements and the
Plan, to prescribe, amend and rescind rules and regulations relating to the
Plan, to determine the terms and provisions of the respective option
agreements, which need not be identical, and to make all other determinations
in the judgement of the Board necessary or desirable for the administration
of the Plan. The Board may correct any defect or supply any omission or
reconcile any inconsistency in the Plan or in any option agreement in the
manner and to the extent it shall deem expedient to carry the Plan into
effect and it shall be the sole and final judge of such expediency. No
director shall be liable for any action, inaction or determination made in
good faith. The Board may, to the full extent permitted by law, delegate any
or all of its powers under the Plan to a committee of not less than three (3)
members of the Board (the "Committee") appointed by the Board and if the
Committee is so appointed all references to the Board in the Plan shall mean
and relate to such Committee. All of the members of such committee shall be
"disinterested persons" (as hereinafter defined).
<PAGE> 2
(c) Grant of Options to Directors.
(i) With respect to the participation of any director in the
Plan other than pursuant to clause (ii) of this paragraph (c), his or
her selection as a participant and the number of option shares to be
allocated to such director shall be determined either (A) by the Board,
of which, shall be a "disinterested person" (as hereinafter defined) or
(B) by, or only in accordance with, the recommendations of a committee
of three or more persons having full authority to act in the matter, of
which all members shall be disinterested persons. For the purpose of
the Plan, a director or member of such committee shall be deemed to be
"disinterested" only if such person qualifies as a "disinterested
person" within the meaning of paragraph (d)(3) of Rule 16b-3 of the
Securities and Exchange Commission and the interpretations thereto.
Any director to whom an option is awarded shall be ineligible to vote
upon his or her option.
(ii) (A) Each non-employee director shall be granted a
non-statutory stock option to purchase 5,000 shares of Common Stock of
the Company at the first meeting of directors following each election
or appointment of the director, and at each subsequent first meeting
of directors following each Annual Meeting of stockholders during such
director's term. Each option granted pursuant to this clause (ii)(A)
shall vest immediately upon its being granted. The exercise price for
such options granted to the directors pursuant to this clause (ii)(A)
shall be no less than the then fair market value and the term shall be
ten years plus thirty days from the date on which the option was
granted, subject to earlier termination as provided in the Plan.
(B) Each non-employee director shall be granted a
non-statutory stock option to purchase 15,000 shares of Common Stock of
the Company (a) upon him or her initially being elected or appointed to
the Board and (b) upon each occasion of him or her being elected to two
additional consecutive full terms on the Board. Each option granted
pursuant to this clause (ii)(B) shall vest in equal annual installments
over three years. The exercise price for such options granted to
directors pursuant to this clause (ii)(B) shall be no less than the
then fair market value and the term shall be ten years plus thirty days
from the date on which the option was granted, subject to earlier
termination as provided in the Plan.
(C) At the first meeting of the Board following the
approval of this clause (ii)(C), each non-employee director who is not
eligible to receive the grant described in clause (ii)(B) above shall
receive a one-time transition grant of 10,000 non-statutory options.
The exercise price for such options granted to directors pursuant to
this clause (ii)(C) shall be no less than the then fair market value
and the term shall be ten years plus thirty days from the date on which
the option was granted, subject to earlier termination as provided in
the Plan.
- 2 -
<PAGE> 3
(iii) Notwithstanding anything herein to the contrary, directors
of the Company shall not be eligible to participate under the Plan (in
their capacity as directors) except pursuant to clause (ii) of
paragraph (c) of this Section 2 or pursuant to option grants ratified
or approved by the shareholders of the Company.
3. ELIGIBILITY
(a) Subject to paragraphs (b) and (c) of Section 2 and paragraphs (b)
and (c) of this Section 3, options may be granted to persons who are, at the
time of grant, employees (including officers and directors who are employees)
of the Company or of any Parent Corporation or Subsidiary, officers and
directors of the Company or of any Parent Corporation or Subsidiary who are
not employees of the Company or of any Parent Corporation or Subsidiary, and
consultants of the Company or any Parent Corporation or Subsidiary who are
not employees of the Company or any Parent Corporation or Subsidiary.
(b) No person shall be granted any Incentive Stock Option under the
Plan who, at the time such option is granted, owns, directly or indirectly,
Common Stock of the Company possessing more than 10% of the total combined
voting power of all classes of stock of the Company or of any Parent
Corporation or Subsidiary, unless the requirements of paragraph (b) of
Section 11 are satisfied. The attribution of stock ownership provisions of
Section 424(d) of the Code, and any successor provisions thereto, shall be
applied in determining the shares of stock owned by a person for purposes of
applying the foregoing percentage limitation. A person who has been granted
an option may, if he or she is otherwise eligible, be granted an additional
option or options if the Board shall so determine.
(c) Incentive Stock Options shall be granted only to persons who are,
at the time of grant, employees (including officers and directors who are
employees) of the Company or of any Parent Corporation or Subsidiary.
4. STOCK SUBJECT TO PLAN
Subject to adjustment as provided in Section 15 below, the maximum
number of shares of Common Stock of the Company which may be issued and sold
under the Plan is 4,000,000 shares. Such shares may be authorized and
unissued shares or may be shares issued and thereafter acquired by the
Company. If an option granted under the Plan shall expire or terminate for
any reason without having been exercised in full, the unpurchased shares
subject to such option shall again be available for subsequent option grants
under the Plan.
- 3 -
<PAGE> 4
5. FORMS OF OPTION AGREEMENTS
As a condition to the grant of an option under the Plan, each recipient
of an option shall execute an option agreement in such form not inconsistent
with the Plan as may be from time to time specified by the Board.
6. PURCHASE PRICE
(a) General. The purchase price per share of stock deliverable upon
the exercise of an option shall be determined by the Board, provided,
however, that (i) in the case of an Incentive Stock Option, the exercise
price shall not be less than 100% of the fair market value of such stock, as
determined by the Board at the time of grant of such option, or less than
110% of such fair market value in the case of options described in paragraph
(b) of Section 11 and (ii) in the case of a non-statutory option, the
exercise price shall not be less than 100% of the fair market value of such
stock, as determined by the Board, at the time of grant of such option.
(b) Payment of Purchase Price. Options granted under the Plan may
provide, in the sole discretion of the Board, for the payment of the exercise
price (i) by delivery of cash or a check to the order of the Company in an
amount equal to the exercise price of such options; (ii) by delivery to the
Company of a promissory note or other evidence of indebtedness, to the extent
permitted by law; such promissory note or other evidence of indebtedness
being to the Company and subject to such terms and conditions, and with such
interest, as my be prescribed by the Board; (iii) by delivery to the Company
of shares of Common Stock of the Company already owned by the optionee having
a fair market value equal in amount to the exercise price of the options
being exercised; or (iv) by any combination of the allowable methods of
payment. The fair market value of any shares of the Company's Common Stock
which may be delivered upon exercise of an option shall be determined by the
Board.
7. OPTION PERIOD
Each option and all rights thereunder shall expire on such date as the
Board shall determine, but, in the case of Incentive Stock Options, in no
event after the expiration of ten (10) years from the day on which the option
is granted (or five (5) years in the case of options described in paragraph
(b) of Section 11) and, in the case of non-statutory options, in no event
after the expiration of ten years plus thirty (30) days from the day on which
the option is granted, and in either case, shall be subject to earlier
termination as provided in the Plan.
- 4 -
<PAGE> 5
8. EXERCISE OF OPTIONS
Each option granted under the Plan shall be exercisable either in full
or in installments at such time or times and during such period as shall be
set forth in the agreement evidencing such option, subject to the provisions
of Section 7 above. To the extent that an option to purchase shares is not
exercised by an optionee when it becomes initially exercisable, it shall not
expire but shall be carried forward and shall be exercisable, on a cumulative
basis, until the expiration of the exercise period.
9. NONTRANSFERABILITY OF OPTIONS
No option granted under the Plan shall be assignable or transferable by
the person to whom it is granted, either voluntarily or by operation of law,
except by will or the laws of descent and distribution or pursuant to a
qualified domestic relations order as defined by the Code or Title I of ERISA
or the rules thereunder. During the life of the optionee, the option shall
be exercisable only by such person.
10. EFFECT OF TERMINATION OF EMPLOYMENT
(a) No Incentive Stock Option may be exercised unless, at the time of
such exercise, the optionee is, and has been continuously since the date of
grant of his or her option, employed by one or more of the Company, a Parent
Corporation or a Subsidiary, except that if and to the extent the option
agreement or instrument so provides:
(i) The Incentive Stock Option may be exercised within the
period of three (3) months after the date the optionee ceases to be
employed by any of the foregoing entities (or within such lesser period
as may be specified in the option agreement or instrument);
(ii) If the optionee dies while in the employ of the Company, a
Parent Corporation or a Subsidiary or within three (3) months after the
optionee ceases to be so employed, the Incentive Stock Option may be
exercised by the person to whom it is transferred by will or the laws
of descent and distribution within the period of one (1) year after the
date of death (or within such lesser period as may be specified in the
option agreement or instrument); or
(iii) If the optionee becomes disabled (within the meaning
of Section 22(e)(3) of the Code or any successor provisions thereto)
while employed by the Company, a Parent Corporation or a Subsidiary,
the option may be exercised within the period of one (1) year after the
date the optionee ceases to be employed by any of the foregoing
entities because of such disability (or within such lesser period as
may be specified in the option agreement or instrument); provided,
however, that in no event may any Incentive Stock
- 5 -
<PAGE> 6
Option be exercised after the expiration date of the Incentive Stock
Option. For purposes of the Plan and any option granted hereunder,
"employment" shall be defined in accordance with the provisions of Section
1.421-7(h) of the Income Tax Regulations (or any successor regulations)
(the "Regulations").
(b) No non-statutory option may be exercised unless, at the time of
such exercise, the optionee is, and has been continuously since the date of
grant of his or her option, either employed by one or more of the Company, a
Parent Corporation or a Subsidiary or rendering services to one or more of
the Company, a Parent Corporation or a Subsidiary as an officer, director or
consultant, except that if and to extent the option agreement or instrument
so provides;
(i) The non-statutory option may be exercised within the period
of three (3) months after the date the optionee ceases to be employed
by or ceases to render services to any of the foregoing entities (or
within such lesser period as may be specified in the option agreement
or instrument);
(ii) If the optionee dies while in the employ of or during the
period the optionee is rendering services to the Company, a Parent
Corporation or a Subsidiary or within three (3) months after the
optionee ceases to be so employed or ceases to render services, the
option may be exercised by the persons to whom it is transferred by
will or the laws of descent and distribution within the period of one
(1) year after the date of death (or within such lesser period as may
be specified in the option agreement or instrument); or
(iii) If the optionee becomes disabled (within the meaning
of Section 22(e)(3) of the Code or any successor provision thereto)
while employed by or during the period the optionee is rendering
services to the Company, a Parent Corporation or a Subsidiary, the
option may be exercised within the period of one (1) year after the
date the optionee ceases to be employed by or ceases to render services
to any of the foregoing entities because of such disability (or within
such lesser period as may be specified in the option agreement or
instrument); provided, however, that in no event may any non-statutory
option be exercised after the expiration date of the option. For
purposes of the Plan and any non-statutory option granted hereunder,
"employment" shall be defined in accordance with the provisions of
Section 1.421-7(h) of the Regulations and an optionee shall be
considered to render services to one or more of the Company, a Parent
Corporation or a Subsidiary if the Board determines that the optionee
is rendering substantial services as an officer, director or consultant
to one or more of the Company, a Parent Corporation or a Subsidiary.
- 6 -
<PAGE> 7
11. INCENTIVE STOCK OPTIONS
Options granted under the Plan which are intended to be Incentive Stock
Options shall be specifically designated as Incentive Stock Options and shall
be subject to the following additional terms and conditions:
(a) Dollar Limitation. Incentive Stock Options granted to any
employee under the Plan (and under any other incentive stock option plans of
the Company, and any Parent Corporation and Subsidiary) may not, in the
aggregate, be first exercisable during any one calendar year to the extent
that the aggregate fair market value of the stock (determined at the time the
options are granted) exceeds $100,000.
(b) 10% Shareholder. If any employee to whom an Incentive Stock
Option is to be granted under the Plan is, at the time of the grant of such
option, the owner of stock possessing more than 10% of the total combined
voting power of all classes of stock of the Company or of any Parent
Corporation or any Subsidiary (after taking into account the attribution of
stock ownership rules of Section 424(d) of the Code), then the following
special provisions shall be applicable to the Incentive Stock Options granted
to such individual:
(i) The purchase price per share of the Common Stock subject to
such Incentive Stock Option shall not be less than 110% of the fair
market value of one share of Common Stock at the time of grant; and
(ii) The option exercise period shall not exceed five (5) years
from the date of grant.
Except as modified by the preceding provisions of this Section 11, all
the provisions of the Plan shall be applicable to Incentive Stock Options
granted hereunder.
12. ADDITIONAL PROVISIONS
(a) Additional Option Provisions. The Board may, in its sole
discretion, include additional provisions in any option granted under the
Plan, including without limitation restrictions on transfer, repurchase
rights, commitments to pay cash bonuses, make loans or transfer other
property to optionees upon exercise of options, or such other provisions as
shall be determined by the Board; provided that such additional provisions
shall not be inconsistent with any other term or condition of the Plan and
such additional provisions shall not cause any Incentive Stock Option granted
under the Plan to fail to qualify as an Incentive Stock Option within the
meaning of Section 422 of the Code.
(b) Acceleration. The Board may, in its sole discretion, accelerate
the date on which all or any particular option or options granted under the
Plan may be exercised.
- 7 -
<PAGE> 8
13. GENERAL RESTRICTIONS
(a) Investment Representations. The Company may require any person
to whom an option is granted, as a condition of exercising such option, to
give written assurances in substance and form satisfactory to the Company to
the effect that such person is acquiring the Common Stock subject to the
option for his or her own account for investment and not with any present
intention of selling or otherwise distributing the same, and to such other
effects as the Company deems necessary or appropriate in order to comply with
federal and applicable state securities laws.
(b) Compliance With Securities Laws. Each option shall be subject to
the requirement that if, at any time, counsel to the Company shall determine
that the listing, registration or qualification of the shares subject to such
option upon any securities exchange or any state or federal law, or the
consent or approval of any governmental or regulatory body, is necessary as a
condition of, or in connection with, the issuance or purchase of shares
thereunder, such option may not be exercised, in whole or in part, unless
such listing, registration, qualification, consent or approval shall have
been effected or obtained on conditions acceptable to the Board. Nothing
herein shall be deemed to require the Company to apply for or to obtain such
listing, registration or qualification.
14. RIGHTS AS A SHAREHOLDER
The holder of an option shall have no rights as a shareholder with
respect to any shares covered by the option until the date of issue of a
stock certificate to him or her for such shares. No adjustment shall be made
for dividends or other rights for which the record date is prior to the date
such stock certificate is issued.
15. RECAPITALIZATION
In the event that the outstanding shares of Common Stock of the Company
are changed into or exchanged for a different number or kind of shares or
other securities of the Company by reason of any recapitalization,
reclassification, stock split, stock dividend, combination or subdivision,
appropriate adjustment shall be made in the number and kind of shares
available under the Plan and under any options granted under the Plan. Such
adjustment to outstanding options shall be made without change in the total
price applicable to the unexercised portion of such options and a
corresponding adjustment in the applicable option price per share shall be
made. No such adjustment shall be made which would, within the meaning of
any applicable provisions of the Code, constitute a modification, extension
or renewal of any option or a grant of additional benefits to the holder of
an option.
16. REORGANIZATION
- 8 -
<PAGE> 9
In case the Company is merged or consolidated with another corporation
and the Company is not the surviving corporation, or in case all or
substantially all of the assets or more than 50% of the outstanding voting
stock of the Company is acquired by any other corporation, or in case of a
dissolution of liquidation of the Company (collectively, a ?Reorganization?),
each outstanding option shall not terminate, and except as specified below,
each optionee shall have the right upon the closing of such Reorganization to
exercise his option in whole or in part without regard to any installment
provisions contained in the option agreement applicable to such option.
Regardless of whether the Company shall survive a Reorganization, any
Reorganization shall provide for either (1) the continuance of the Plan
and/or the assumption of all outstanding options by the successor company or
(2) the substitution for all outstanding options covering stock of a
successor company, with adjustments in the number, kind and prices of shares,
and in other terms and conditions, as may be appropriate to ensure that such
substituted options are substantially equivalent in value and other benefits
to the outstanding options for which they are substituted. In the event of
either number (1) or (2) in the preceding sentence, each optionee shall
nonetheless have the accelerated exercise rights described above.
Notwithstanding anything to the contrary above, the Board or the
Committee shall have the authority to include in any option agreement a
provision specifying that the ability to exercise any unvested option may
only be accelerated partially, or not at all, upon a Reorganization. Unless
an option agreement states specifically to the contrary, all outstanding and
unexercised options shall become vested and exercisable upon a Reorganization
in accordance with the first paragraph of this Section 16.
17. NO SPECIAL EMPLOYMENT RIGHTS
Nothing contained in the Plan or in any option shall confer upon any
optionee any right with respect to the continuation of his or her employment
by or other relationship with the Company (or any Parent Corporation or
Subsidiary) or interfere in any way with the right of the Company (or any
Parent Corporation or Subsidiary), subject to the terms of any separate
employment agreement to the contrary, at any time to terminate such
employment or other relationship or to increase or decrease the compensation
of the optionee. Whether an authorized leave of absence, or absence in
military or government service, shall constitute termination of employment or
of such other relationship shall determined by the Board at the time.
18. OTHER EMPLOYEE BENEFITS
The amount of any compensation deemed to be received by an employee,
officer, director or consultant as a result of the exercise of an option or
the sale of shares received upon such exercise will not constitute
compensation with respect to which any other employee benefits of such
employee, officer, director or consultant are determined, including, without
limitation, benefits under any bonus, pension, profit-sharing, life insurance
or salary continuation plan.
- 9 -
<PAGE> 10
19. DEFINITION OF SUBSIDIARY AND PARENT CORPORATION
(a) Subsidiary. The term "Subsidiary" as used in the Plan shall mean
any corporation (other than the Company) in an unbroken chain of corporations
beginning with the Company if, at the time of the granting of an option, each
of the corporations other than the last corporation in the unbroken chain
owns stock possessing 50% or more of the total combined voting power of all
classes of stock in one of the other corporation in such chain.
(b) Parent Corporation. The term "Parent Corporation" as used in the
Plan shall mean any corporation (other than the Company) in an unbroken chain
of corporations ending with the Company if, at the time of the granting of an
option, each of the corporation other than the Company owns stock possessing
50% or more of the combined voting power of all classes of stock in one of
the other corporation in such chain.
20. AMENDMENT OF THE PLAN
The Board may at any time, and from time to time, modify or amend the
Plan in any respect, except that without the approval of the shareholders of
the Company the Board may not (a) materially increase the benefits accruing
to individuals who participate in the Plan, (b) increase the maximum number
of shares which may be issued under the Plan (except for adjustments
specifically provided in the Plan), or (c) materially modify the requirements
as to eligibility for participation in the Plan. The termination or any
modification or amendment of the Plan shall not, without the consent of an
optionee, affect his or her rights under an option previously granted to him
or her. With the consent of the optionee affected, the Board may amend
outstanding option agreements in a manner not inconsistent with the Plan.
The Board shall have the right to amend or modify the terms and provisions of
the Plan and of any outstanding Incentive Stock Options granted under the
Plan to the extent necessary to qualify any or all such options for such
favorable federal income tax treatment (including deferral of taxation upon
exercise) as may be afforded incentive stock options under Section 422 of the
Code.
21. WITHHOLDING
The Company's obligation to deliver shares upon the exercise of any
option granted under the Plan shall be subject to the optionee's satisfaction
of all applicable federal, state and local income and employment tax
withholding requirements.
22. EFFECTIVE DATE AND DURATION OF THE PLAN
(a) Effective Date. The Plan shall become effective when adopted by
the Board, but no option granted under the Plan shall become exercisable
unless and until the Plan shall have been approved by the Company's
shareholders. If such shareholder approval is not obtained within twelve
(12) months after the date of the Board's adoption of the Plan, any options
- 10 -
<PAGE> 11
previously granted under the Plan shall terminate and no further options
shall be granted. Amendments to the Plan not requiring shareholder approval
shall become effective when adopted by the Board; amendments requiring
shareholder approval (as provided in Section 20) shall become effective when
adopted by the Board, but no option issued after the date of such amendment
shall become exercisable (to the extent that such amendment to the Plan was
required to enable the Company to grant such option to a particular optionee)
unless and until such amendment shall have been approved by the Company's
shareholders. If such shareholder approval is not obtained within twelve
(12) months of the Board's adoption of such amendment, any options granted on
or after the date of such amendment shall terminate to the extent that such
amendment to the Plan was required to enable the Company to grant such option
to a particular optionee. Subject to this limitation, options may be granted
under the Plan at any time after the effective date and before the date fixed
for termination of Plan.
(b) Termination. Unless sooner terminated, the Plan shall terminate
upon the earlier of (i) the close of business on the date next preceding the
tenth (10th) anniversary of the date of its adoption by the Board, or (ii)
the date on which all shares available for issuance under the Plan shall have
been issued pursuant to the exercise or cancellation of options granted under
the Plan. If the date of termination is determined under (i) above, then
options outstanding on such date shall continue to have force and effect in
accordance with the provisions of the instruments evidencing such options.
- 11 -
<PAGE> 1
EXHIBIT 10.22
Agreement And Plan Of Reorganization
among
Micro Focus Group PLC,
Tower Merger Sub Inc.
and
Intersolv, Inc.
June 17, 1998
<PAGE> 2
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
I. Plan of Reorganization 1
1.1 The Merger 1
1.2 Fractional Shares 2
1.3 Stock Options; Warrants 2
1.4 Effects of the Merger 4
1.5 Further Assurances 4
1.6 Tax-Free Reorganization 4
1.7 Accounting Treatment 4
II. Representations and Warranties of the Company
4
2.1 Organization and Good Standing; Title 5
2.2 Power, Authorization and Validity 5
2.3 Capitalization 6
2.4 Subsidiaries 7
2.5 No Conflicts 7
2.6 Litigation 7
2.7 SEC Documents; Financial Statements 7
2.8 Taxes 8
2.9 Title to Properties 9
2.10 Absence of Certain Changes 9
2.11 Agreements and Commitments 10
2.12 Intellectual Property 11
2.13 Compliance with Laws 12
2.14 Certain Transactions and Agreements 12
2.15 Employees 12
2.16 Corporate Documents 14
2.17 No Brokers 14
2.18 Restrictions on Business Activities 14
2.19 F-4; Prospectus/Proxy Statement 15
2.20 Books and Records 15
2.21 Insurance 15
2.22 Environmental Matters 16
2.23 Customers and Suppliers 16
2.24 Accounts Receivable 17
2.25 Predecessor Entity 17
2.26 Board Approval; State Takeover Statutes;
Charter; Rights Agreement 17
2.27 Accounting Treatment 18
2.28 Opinion of Financial Advisor 18
2.29 Representations Complete 18
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
III. Representations and Warranties of Parent and Newco 18
3.1 Organization; Title 18
3.2 Power, Authorization and Validity 18
3.3 Capitalization 19
3.4 Subsidiaries 20
3.5 No Conflicts 20
3.6 Litigation 20
3.7 SEC Documents; Financial Statements 21
3.8 Title to Properties 21
3.9 Absence of Certain Changes 22
3.10 Agreements and Commitments 22
3.11 Intellectual Property 23
3.12 Compliance with Laws 23
3.13 Certain Transactions and Agreements 24
3.14 Corporate Documents 24
3.15 No Brokers 24
3.16 Restrictions on Business Activities 24
3.17 F-4; Prospectus/Proxy Statement 24
3.18 Books and Records 25
3.19 Insurance 25
3.20 Environmental Matters 25
3.21 Customers and Suppliers 26
3.22 Board Approval 26
3.23 Accounting Treatment 26
3.24 Opinion of Financial Advisor 26
3.25 Taxes 26
3.26 Accounts Receivable 26
3.27 Representations Complete 27
IV. Conduct Prior to the Effective Time 27
4.1 Conduct of Business 27
4.2 No Other Negotiations 29
4.3 Parent Dividends Restricted 30
V. Additional Agreements 30
5.1 Registration on FormF-4.... 30
5.2 Stockholders Meetings; Parent Approvals 31
5.3 Access to Information 31
5.4 Satisfaction of Conditions Precedent; Further Assurances 32
5.5 Regulatory Approvals; Consents 32
5.6 Pooling Accounting 33
5.7 Business Acquisitions and Dispositions 33
5.8 Auditors Letters 33
5.9 Stock Exchange Listings 34
5.10 Board of Directors 34
5.11 Nasdaq Quotation 34
</TABLE>
<PAGE> 4
<TABLE>
<S> <C>
5.12 Employee Matters 34
5.13 Takeover Statutes; Rights Agreement 34
5.14 Public Announcement 34
5.15 Confidentiality 35
5.16 Directors' and Officers' Insurance 36
VI. Closing; Exchange of Certificates 36
6.1 The Closing 36
6.2 Exchange Fund 36
6.3 Exchange Procedures 36
6.4 Distributions with Respect to Unexchanged Shares 37
6.5 No Further Ownership Rights in Company Common Stock 37
6.6 Termination of Exchange Fund 38
6.7 No Liability 38
6.8 Investment of Exchange Fund 38
6.9 Lost Certificates 38
6.10 Withholding Rights 38
6.11 Stock Transfer Books 38
VII. Conditions Precedent 39
7.1 Conditions to Obligations of Each Party 39
7.2 Conditions to Obligations of the Company 40
7.3 Conditions to Obligations of Parent and Newco 41
VIII. Termination 42
8.1 Termination 42
8.2 Effect of Termination 43
8.3 Expenses and Termination Fees 43
IX. General Provisions 44
9.1 Non-Survival 44
9.2 Governing Law 44
9.3 Assignment; Successors and Assigns 44
9.4 Severability 44
9.5 Counterparts 45
9.6 Other Remedies 45
9.7 Amendment and Waivers 45
9.8 No Waiver 45
9.9 Notices 45
9.10 Interpretation of Agreement 46
9.11 No Joint Venture 46
9.12 Further Assurances 46
9.13 Absence of Third Party Beneficiary Rights 46
9.14 Entire Agreement 46
9.15 Submission to Jurisdiction 47
</TABLE>
<PAGE> 5
Exhibits
<TABLE>
<S> <C>
Exhibit A Form of Certificate of Merger
Exhibit B Form of Officer Certificates
Exhibit C Form of Affiliate Agreements
Exhibit D Form of Opinions of Counsel to Parent
Exhibit E Form of Opinion of Counsel to the Company
</TABLE>
<PAGE> 6
Agreement and Plan of Reorganization
This Agreement and Plan of Reorganization (the "Agreement") is entered
into as of June 17, 1998, by and among Micro Focus Group PLC, a public limited
company organized under the laws of England and Wales ("Parent"), Tower Merger
Sub Inc., a Delaware corporation ("Newco") and wholly-owned subsidiary of
Parent, and Intersolv, Inc., a Delaware corporation (the "Company").
Recitals
A. The parties intend that, subject to the terms and conditions
hereinafter set forth, Newco will merge with and into the Company in a reverse
triangular merger (the "Merger"), with the Company to be the surviving
corporation of the Merger, all pursuant to the terms and conditions of this
Agreement, a Certificate of Merger substantially in the form of Exhibit A (the
"Certificate of Merger") and the provisions of applicable law. Upon the
effectiveness of the Merger, all of the outstanding common stock of the
Company, par value $0.01 per share ("Company Common Stock"), will be converted
into the right to receive ordinary shares of Parent represented by American
Depositary Shares of Parent ("Parent ADSs") each representing five Parent
ordinary shares of 2p each ("Ordinary Shares") and evidenced by American
Depositary Receipts ("Parent ADRs") and cash, in the manner and on the basis
determined herein and as provided in the Certificate of Merger.
B. The Merger is intended to be treated as a tax-free reorganization
pursuant to the provisions of Section 368(a)(1)(A) of the Internal Revenue Code
of 1986, as amended (the "Code"), by virtue of the provisions of Section
368(a)(2)(E) of the Code. The Merger is intended to be treated as a "pooling
of interests" for accounting purposes.
C. Prior to the execution and delivery of this Agreement, the Boards of
Directors of Parent and the Company each have approved, and believe it is in
the best interests of their respective companies and the stockholders of their
respective companies to approve, the Merger, this Agreement, the Certificate of
Merger and the transactions provided for herein and therein.
In consideration of the foregoing and the representations, warranties,
covenants and agreements set forth in this Agreement, the parties hereto agree
as follows:
I. Plan Of Reorganization
1.1 The Merger. The Certificate of Merger will be filed with the
Secretary of State of the State of Delaware as soon as practicable after the
closing of the transactions contemplated by this Agreement (the "Closing").
The effective time of the Merger as specified in the Certificate of Merger (the
"Effective Time") will occur upon filing of the Certificate of Merger, or on
such other date upon which the parties hereto may mutually agree. Subject to
the terms and conditions of this Agreement and the Certificate of Merger, at
the Effective Time, Newco will be merged with and into the Company in a
statutory merger pursuant to the Certificate of Merger and in accordance with
applicable
<PAGE> 7
provisions of the General Corporation Law of the State of Delaware (the
"Delaware Law") as follows:
1.1.1 Conversion of Company Shares. Subject to Section
1.1.2, each share of Company Common Stock (and the associated Rights (as
defined in Section 2.3)) that is issued and outstanding immediately prior to
the Effective Time will, by virtue of the Merger and at the Effective Time, and
without further action on the part of any holder thereof, be converted into
that number of fully paid and nonassessable Parent ADSs obtained by multiplying
each such share of Company Common Stock by 0.55 (the "Exchange Ratio").
1.1.2 Adjustments for Capital Changes. If prior to the
Effective Time, Parent (i) recapitalizes either through a split-up of its
outstanding Ordinary Shares and/or Parent ADSs into a greater number, or
through a combination of its outstanding Ordinary Shares and/or Parent ADSs
into a lesser number, (ii) reorganizes, reclassifies or otherwise changes its
outstanding Ordinary Shares and/or Parent ADSs into the same or a different
number of shares of other classes (other than through a split-up or combination
of shares provided for in the previous clause), or (iii) declares a dividend on
its outstanding Ordinary Shares and/or Parent ADSs payable in Ordinary Shares
and/or Parent ADSs or securities convertible into Ordinary Shares and/or Parent
ADSs, the calculation of the Exchange Ratio shall be appropriately adjusted in
order to fairly and equitably preserve, as far as practicable, the rights and
ownership of the Ordinary Shares and/or Parent ADSs of the holders of Company
Common Stock hereunder as if the Effective Time had occurred immediately prior
to such extraordinary action.
1.1.3 Cancellation of Company Shares held by Parent and the
Company. Each share of Company Common Stock held by the Company as treasury
stock, if any, and each share of Company Common Stock held by Parent, Newco or
any subsidiary of either of them immediately prior to the Effective Time will,
by virtue of the Merger and at the Effective Time, and without further action
on the part of any holder thereof, be canceled and extinguished without any
conversion thereof.
1.1.4 Conversion of Newco Shares. Each share of Newco
common stock, par value $0.01 per share ("Newco Common Stock"), that is issued
and outstanding immediately prior to the Effective Time will, by virtue of the
Merger and without further action on the part of the sole stockholder of Newco,
be converted into and become one share of Company Common Stock that is issued
and outstanding immediately after the Effective Time, and the shares of Company
Common Stock into which the share of Newco Common Stock are so converted shall
be the only shares of Company Common Stock that are issued and outstanding
immediately after the Effective Time. Such share of Company Common Stock shall
be issued to Parent in exchange for the Parent ADSs issued in the Merger.
1.2 Fractional Shares. No fractional Parent ADSs will be issued
in connection with the Merger, but in lieu thereof, the holder of any shares of
Company Common Stock (aggregating all of such holder's shares of Company Common
Stock) who would otherwise be entitled to receive a fraction of a Parent ADS
will receive from Parent, promptly after the Effective Time, an amount of cash
equal to the average closing sale price
<PAGE> 8
of a Parent ADS for the twenty trading days ending with and including the third
trading day immediately preceding the Effective Time, as reported on the Nasdaq
National Market (the "Closing Price"), multiplied by the fraction of a Parent
ADS to which such holder would otherwise be entitled.
1.3 Stock Options; Warrants. (a) At the Effective Time, each of
the then outstanding Company Options shall, by virtue of the Merger and the
provisions hereinafter set forth in this Section 1.3, and without any further
action on the part of any holder thereof, be converted into an option to
purchase that number of Parent ADSs (a "Parent Option") obtained by multiplying
the number of shares of Company Common Stock issuable upon exercise of each
such Company Option by the Exchange Ratio, and Parent will assume all of the
obligations of the Company and its subsidiaries under the Stock Plans. If the
foregoing calculation results in a Parent Option being exercisable for a
fraction of a Parent ADS, then the number of Parent ADSs subject to such option
shall be rounded down to the nearest whole number of Parent ADSs. The exercise
price of each Parent Option shall be equal to the exercise price of the Company
Option from which such Parent Option was converted divided by the Exchange
Ratio, rounded to the nearest whole cent. The term and vesting schedule,
status as an "incentive stock option" under Section 422 of the Code, if
applicable, and all other terms and conditions of Company Options will, to the
extent permitted by law and the pooling rules, be unchanged. An optionholder's
continuous employment with the Company shall be credited as employment with
Parent for purposes of vesting of the Parent Options. The Company and Parent
will take, or cause to be taken, all actions which are necessary, proper or
advisable under the Stock Plans to make effective the transactions contemplated
by this Section 1.3.
"Company Option" means any option or right granted, and not exercised or
expired, to a current or former employee, director or independent contractor of
the Company or any of its subsidiaries or any predecessor thereof to purchase
Company Common Stock pursuant to any stock option, stock bonus, stock award or
stock purchase plan, program or arrangement of the Company or any of its
subsidiaries or any predecessor thereof or any other contract or agreement
entered into by the Company or any of its subsidiaries (collectively, the
"Stock Plans").
(b) Parent shall take all corporate action necessary to reserve
for issuance a sufficient number of Ordinary Shares such that there are a
sufficient number of Parent ADSs for delivery pursuant to the terms set forth
in this Section 1.3. Parent shall promptly cause the Parent ADSs issuable upon
exercise of the Parent Options to be registered, or to be issued pursuant to a
then effective registration statement on Form S-8 promulgated by the United
States Securities and Exchange Commission ("SEC") and shall use its reasonable
best efforts to maintain the effectiveness of such registration statement or
registration statements for so long as such Parent Options remain outstanding,
and so long as the Ordinary Shares of Parent are listed on the London Stock
Exchange ("LSE"), Parent will ensure that the Ordinary Shares will be admitted
to and maintained on the Official List of the LSE.
(c) At the Effective Time, each of the then outstanding warrants,
<PAGE> 9
exchangeable or convertible securities or other rights or agreements to
purchase or otherwise acquire any Company Common Stock ("Company Warrants")
shall by virtue of the Merger, and without any further action on the part of
any holder thereof, be assumed by Parent and converted into a warrant or like
security or agreement ("Parent Warrants") to purchase that number of Parent
ADSs obtained by multiplying the number of shares of Company Common Stock
underlying each such Company Warrant by the Exchange Ratio, and Parent shall
assume all of the obligations of the Company under such Company Warrants. If
the foregoing calculation results in a Parent Warrant being exercisable for a
fraction of a Parent ADS, then the number of Parent ADSs subject to such
warrant shall be rounded down to the nearest whole number of Parent ADSs. The
exercise price of each Parent Warrant shall be equal to the exercise price of
the Company Warrant from which such Parent Warrant was converted divided by the
Exchange Ratio, rounded to the nearest whole cent. The exercisability period
and other terms and conditions of Company Warrants will be unchanged.
1.4 Effects of the Merger. At the Effective Time: (a) the
separate existence of Newco will cease and Newco will be merged with and into
the Company and the Company will be the surviving corporation pursuant to the
terms of the Certificate of Merger; (b) the Certificate of Incorporation and
Bylaws of the Company will become the Certificate of Incorporation and Bylaws
of the surviving corporation; (c) each share of Company Common Stock
outstanding immediately prior to the Effective Time will be converted as
provided in this Article I; (d) each share of Newco Common Stock outstanding
immediately prior to the Effective Time will be converted as provided in this
Article I; (e) Kevin J. Burns will become a director of the Company and the
other directors will be appointed by Parent, and the officers of Newco
immediately prior to the Effective Time will become the officers of the
Company; and (f) the Merger will, at and after the Effective Time, have all of
the effects provided by applicable law.
1.5 Further Assurances. The Company agrees that if, at any time
after the Effective Time, Parent considers or is advised that any further
deeds, assignments or assurances are reasonably necessary or desirable to vest,
perfect or confirm Parent's rights as provided herein, Parent and any of its
officers are hereby authorized by the Company to execute and deliver all such
proper deeds, assignments and assurances and do all other things necessary or
desirable to carry out the purposes of this Agreement.
1.6 Tax-Free Reorganization. The parties intend to adopt this
Agreement as a tax-free plan of reorganization and to consummate the Merger in
accordance with the provisions of Section 368(a)(1)(A) of the Code, by virtue
of the provisions of Section 368(a)(2)(E) of the Code. The Parent ADSs issued
in the Merger will be issued solely in exchange for the issued and outstanding
shares of Company Common Stock pursuant to this Agreement, and no other
transaction other than the Merger represents, provides for or is intended to be
an adjustment to the consideration paid for Company Common Stock. Except for
cash paid in lieu of fractional shares, no consideration that could constitute
"other property" within the meaning of Section 356 of the Code will be paid by
Parent for shares of Company Common Stock in the Merger. The representations
and warranties of Parent and Newco, and the Company set forth in Exhibits
<PAGE> 10
B-1 and B-2, respectively, are incorporated in this Agreement as if fully set
forth herein.
1.7 Accounting Treatment. The parties intend that the Merger be
treated as a "pooling of interests" for accounting purposes under United States
generally accepted accounting principles ("US GAAP"). The parties intend that
the Merger be treated as a "merger" for accounting purposes under United
Kingdom generally accepted accounting principles ("UK GAAP").
II. Representations and Warranties of the Company
In this Agreement, any reference to a "Material Adverse Effect" with
respect to an entity or group of entities, means any event, change or effect
that is materially adverse to the condition (financial or otherwise),
properties, agreements, assets (including intangible assets), liabilities,
business, employee base, operations or results of operations of such entity and
its subsidiaries, taken as a whole; provided, that a "Material Adverse Effect"
shall not include (i) any adverse effect following the date of this Agreement
that is directly caused by adverse reaction by customers of such entity to the
announcement of the execution of this Agreement and the transactions
contemplated by this Agreement, (ii) any adverse effect that is caused by a
general economic downturn in the industries in which such entity operates or a
national economic downturn, or (iii) a decline in the market value of any
publicly traded securities of such entity. In any litigation or arbitration
regarding the foregoing definition, the party claiming that one of the
exclusions set forth in the proviso therein is applicable shall bear the burden
of proving that such exclusion is applicable. When used in this Agreement,
"Knowledge" means, with respect to representations and warranties made by a
party hereto, conscious awareness of the relevant facts or information upon
which such representations and warranties are based, after the exercise of
reasonable care in the ascertainment of such facts or information.
The Company has heretofore delivered to Parent a disclosure letter
(the "Company Disclosure Letter"). The Company hereby represents and warrants
to Parent and Newco, except as is set forth on the Company Disclosure Letter,
that:
2.1 Organization and Good Standing; Title. The Company is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware, has the requisite corporate power and authority
to own, operate and lease its properties and to carry on its business as now
conducted and is duly qualified or licensed as a foreign corporation in each
jurisdiction in which the nature of its business or the ownership or leasing of
its properties makes such qualification or licensing necessary. Each
subsidiary of the Company is a corporation or similar entity duly organized,
validly existing and in good standing under the laws of the jurisdiction in
which it was organized, has the requisite power and authority to own, operate
and lease its properties and to carry on its business as now conducted and is
duly qualified or licensed in each jurisdiction in which the nature of its
business or the ownership or leasing of its properties makes such qualification
or licensing necessary. The Company has delivered to Parent true and complete
copies of its Certificate of Incorporation and Bylaws and the equivalent
charter
<PAGE> 11
documents of each of its subsidiaries as currently in effect.
2.2 Power, Authorization and Validity.
2.2.1 The Company has the corporate right, power and
authority to enter into and perform its obligations under this Agreement. The
execution and delivery of this Agreement has been duly and validly authorized
by all necessary corporate action on the part of the Company, subject only to
the approval of the Merger by the Company's stockholders.
2.2.2 No consent, filing, authorization or approval,
governmental or otherwise, is required by or with respect to the Company or any
of its subsidiaries in connection with the execution and delivery of this
Agreement, or the consummation of the transactions contemplated hereby or
thereby, except for (a) the filing of the Certificate of Merger and any other
documents required to effectuate the Merger under Delaware Law and the filing
of appropriate documents with the relevant authorities of the states in which
the Company is qualified to do business, (b) such filings as may be required to
comply with federal and applicable state securities laws and the securities
laws of any foreign country, (c) filings required under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, and the rules and regulations
thereunder (the "HSR Act") and the antitrust and competition laws of the
European Union and other jurisdictions, and (d) such other consents, filings,
authorizations or approvals which, if not obtained or made, would not have a
Material Adverse Effect on the Company or any of its subsidiaries and would not
prevent, or materially alter or delay any of the transactions contemplated by
this Agreement.
2.2.3 This Agreement has been duly executed and delivered
by the Company and constitute valid and binding obligations of the Company
enforceable against the Company in accordance with their respective terms,
except as to the effect, if any, of (a) applicable bankruptcy and other similar
laws affecting the rights of creditors generally and (b) rules of law governing
specific performance, injunctive relief and other equitable remedies.
2.3 Capitalization. The authorized capital stock of the Company
consists of 50,000,000 shares of Company Common Stock and 3,000,000 shares of
preferred stock, par value $0.10 per share (the "Preferred Stock"). As of the
close of trading on the day prior to the date of this Agreement, (i) 22,708,134
shares of Company Common Stock were issued and outstanding, including
associated Preferred Stock Purchase Rights (the "Rights") issued pursuant to
the Rights Agreement, dated as of August 29, 1989 (the "Rights Agreement")
between the Company and Sovran Bank, N.A., as Rights Agent (the "Rights
Agent"), (ii) no shares of Preferred Stock were issued or outstanding, and
(iii) no shares of Company Common Stock were held by the Company in its
treasury; and the same number of shares of Company Common Stock and Company
Preferred Stock shall be outstanding and held in the Company's treasury on the
date of this Agreement (except for additional shares of Company Common Stock
issued in connection with the exercise of Company Options and Company Warrants
outstanding as of the close of trading on the day prior to
<PAGE> 12
the date of this Agreement). All issued and outstanding shares of the capital
stock of the Company are, and all shares which may be issued pursuant to the
Stock Plans will be, when issued, duly authorized, validly issued, fully paid
and nonassessable, not subject to any preemptive rights or rights of
rescission, and have been offered, issued, sold and delivered by the Company in
compliance with all registration or qualification requirements (or applicable
exemptions therefrom) of applicable federal, state and foreign securities laws.
As of the close of trading on the day prior to the date of this Agreement, the
Company had reserved 4,853,738 shares of Company Common Stock pursuant to Stock
Plans, of which (i) 4,125,598 shares were subject to issued and outstanding
unexercised Company Options and (ii) 193,705 shares were reserved for future
grants of Company Options; and the same number of shares shall be subject to
outstanding unexercised Company Options and reserved for future grants of
Company Options on the date of this Agreement (except for shares of Company
Common Stock issued in connection with the exercise of Company Options
outstanding as of the close of trading on the day prior to the date of this
Agreement). None of the Company Options or Company Warrants are subject to any
reload or similar provision or treatment. Item 2.3 of the Company Disclosure
Letter sets forth, for each Stock Plan of the Company, the name of each holder
of Company Options under each such Stock Plan, the exercise price of such
holder's Company Options, and the number of shares of Company Common Stock
underlying such holder's Company Options which are currently vested, and
contains all information required for the calculation of (i) such holder's
Company Options which will vest in connection with the Merger, (ii) such
holder's Company Options which will be unvested immediately following the
Closing, and (iii) the vesting schedule for such holder's unvested Company
Options. Company Warrants in respect of 140,000 shares of Company Common Stock
are issued and outstanding as of the date of this Agreement. The Company has
provided to Parent true and complete copies of all Stock Plans. Other than as
set forth in this Section, there are no other stock appreciation rights,
options, warrants, exchangeable or convertible securities, conversion
privileges or preemptive or other rights or agreements outstanding to purchase
or otherwise acquire any of the Company's authorized but unissued capital
stock; there is no liability for dividends or distributions declared or accrued
but unpaid; and, there are no voting agreements, registration rights, rights of
redemption or repurchase, rights of first refusal or other restrictions (other
than normal restrictions on transfer under applicable federal and state
securities laws) applicable to any of the Company's outstanding securities.
Other than the Company Options which shall become vested and exercisable
pursuant to acceleration provisions not entered into in contemplation of the
Merger, no Company Options or Company Warrants shall become vested or
exercisable solely as a result of the Merger. There are no bonds, debentures,
notes or other indebtedness of the Company having the right to vote (or
convertible into, or exchangeable for, securities having the right to vote) on
any matters as to which shareholders of the Company may vote.
2.4 Subsidiaries. Item 2.4 of the Company Disclosure Letter is a
true, correct and complete list of each subsidiary of the Company and its
respective jurisdiction of organization. All of the issued and outstanding
shares of capital stock of each such subsidiary have been duly authorized and
validly issued, are fully paid and nonassessable and are owned by the Company,
free and clear of all pledges, claims, liens, leases, licenses, charges,
encumbrances and security interests of any kind or nature whatsoever
<PAGE> 13
("Liens") and free of any other limitation or restriction (including any
restriction on the right to vote, sell or otherwise dispose of such capital
stock). Except for the capital stock of its subsidiaries, the Company does not
own, directly or indirectly, any equity interest in any corporation,
partnership, joint venture or other business entity.
2.5 No Conflicts. Neither the execution and delivery of this
Agreement, nor the consummation of the transactions provided for herein, will
conflict with, or (with or without notice or lapse of time, or both) result in
a termination, acceleration, breach, impairment or violation of, (i) any
provision of the Certificate of Incorporation, Bylaws or similar charter
documents of the Company or any of its subsidiaries as currently in effect,
(ii) any note, bond, lease, mortgage, indenture, lease, license, franchise,
permit, agreement or other instrument or obligation applicable to the Company
or any of its subsidiaries or their respective properties or assets (iii) any
federal, state, local or foreign judgment, writ, decree, order, statute, rule
or regulation applicable to the Company or any of its subsidiaries or of their
respective properties or assets, other than, in the case of clause (ii) or
(iii), any such conflicts, breaches, impairments or violations that
individually or in the aggregate would not (A) have a Material Adverse Effect,
(B) impair the ability of the Company to perform its obligations under this
Agreement or (C) prevent or materially delay consummation of any of the
transactions contemplated by this Agreement. The consummation of the Merger
will not require the consent of any third party and will not adversely affect
any of the rights, licenses, franchises, leases or agreements of the Company or
any of its subsidiaries pursuant to their terms, other than where the failure
to obtain such consents or where such adverse effects would not constitute,
individually or in the aggregate, a Material Adverse Effect.
2.6 Litigation. There is no suit, action, proceeding or
investigation pending or, to the Knowledge of the Company or any of its
subsidiaries, threatened against the Company or any of its subsidiaries before
any court or administrative agency, foreign or domestic, that, individually or
in the aggregate, would (i) have a Material Adverse Effect, (ii) impair the
ability of the Company to perform its obligations under this Agreement or (iii)
prevent or materially delay the Merger or the consummation of the transactions
contemplated by this Agreement, nor is there any judgment, injunction, decree,
writ, rule or order of any governmental entity or arbitrator outstanding
against the Company or any of its subsidiaries having or which would have, any
such effect. Item 2.6 of the Company Disclosure Letter sets forth, with
respect to any suit, action, proceeding or investigation to which the Company
or any of its subsidiaries is a party and which involves claims which if
adversely determined would exceed $100,000, the forum, the parties thereto, the
subject matter and current status thereof and the amount of damages claimed.
2.7 SEC Documents; Financial Statements. The Company has filed
all required reports, schedules, forms, statements and other documents with the
SEC since July 1, 1995 (the "Company SEC Documents"). As of their respective
dates, the Company SEC Documents complied in all material respects with the
requirements of the Securities Act of 1933, as amended (the "Securities Act")
or the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as the
case may be, applicable to such SEC Documents, and none of the Company SEC
Documents contained any untrue statement of a material fact
<PAGE> 14
or omitted to state a 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. The financial statements of the Company
included in (i) the Company SEC Documents (the "Company Financial Statements")
and (ii) the preliminary financial statements of the Company for the fiscal
year ended April 30, 1998 (the "Preliminary Financial Statements" with April
30, 1998 being the "Balance Sheet Date") previously delivered by the Company to
Parent comply as to form in all material respects with applicable accounting
requirements and the published rules and regulations of the SEC with respect
thereto, have been prepared according to US GAAP (except (x) in the case of
unaudited statements, as permitted by Form 10-Q under the Exchange Act and (y)
in the case of the Preliminary Financial Statements, there are no footnotes or
statement of cash flows) applied on a basis consistent throughout the periods
indicated and consistent with each other (except as may be indicated in the
notes thereto) and fairly present the consolidated financial position of the
Company and its consolidated subsidiaries as of the dates thereof and the
consolidated results of their operations and cash flows for the periods then
ended (subject, in the case of unaudited statements, to normal year-end
adjustments). There has been no material change in the Company's accounting
policies except as described in the notes to the Company Financial Statements.
For the purposes of this Agreement, all financial statements referred to in
this paragraph shall include any notes or schedules to such financial
statements. Except as set forth in the Company Financial Statements or the
Preliminary Financial Statements, neither the Company nor any of its
subsidiaries has any material debt, liability or obligation of any nature,
whether accrued, absolute, contingent or otherwise, and whether due or to
become due (other than matters that would ordinarily be included in notes to
audited financial statements, which notes will not be materially different from
comparable notes to the Company Financial Statements), and there is no existing
condition, situation or set of circumstances which are required by US GAAP to
be set forth on a consolidated balance sheet of the Company and its
consolidated subsidiaries or in the notes thereto (other than matters that
would ordinarily be included in notes to audited financial statements, which
notes will not be materially different from comparable notes to the Company
Financial Statements), except as incurred in the ordinary course of business
since the Balance Sheet Date..
2.8 Taxes. For the purposes of this Agreement, the terms "tax"
and "taxes" include all federal, state, local and foreign income, gains,
franchise, excise, property, sales, use, employment, license, payroll,
occupation, recording, value added or transfer taxes, governmental charges,
fees, levies or assessments (whether payable directly or by withholding), and,
with respect to such taxes, any estimated tax, interest and penalties or
additions to tax and interest on such penalties and additions to tax. The
Company and each of its subsidiaries have filed all federal, state, local and
foreign tax and information returns and reports required to be filed, and have
paid all taxes required to be paid in respect of all periods for which such
returns have been filed, have made all necessary estimated tax payments, and
have no liability for such taxes materially in excess of the amount paid,
except to the extent adequate reserves have been established in the Company
Financial Statements. All such returns and reports filed by the Company and
each of its subsidiaries were true, correct and complete in all material
respects. True, correct and complete copies of all such tax and information
returns for the fiscal years ended April 30,
<PAGE> 15
1993, 1994, 1995, 1996, 1997 and all other years for which the applicable
statute of limitations period has not expired have been provided by the Company
to Parent. There are no material Liens on any assets of the Company or any of
its subsidiaries that arose in connection with any failure (or alleged failure)
to pay any tax. Neither the Company nor any of its subsidiaries is delinquent
in the payment of any tax or in the filing of any tax returns, and no
deficiencies for any tax have been threatened, claimed, proposed or assessed
which have not been settled or paid. No tax return of the Company or any of
its subsidiaries has been or is being audited or examined by the Internal
Revenue Service or any state or other national taxing agency or authority,
neither the Company nor any of its subsidiaries has Knowledge of, or has
received notice that, any such authority intends to assess any additional taxes
against the Company or any of its subsidiaries for any period for which tax
returns have been filed, and no material dispute or claim concerning any tax
liability of the Company or any of its subsidiaries has been proposed or
claimed by any such authority. Neither the Company nor any of its subsidiaries
has waived any statute of limitations or similar statute or right in respect of
taxes or agreed to any extension of time with respect to a tax assessment or
deficiency. Neither the Company nor any of its subsidiaries has filed a
consent pursuant to Section 341(f) of the Code. Neither the Company nor any of
its subsidiaries is a party to any tax indemnity, tax allocation, tax sharing
agreement, or similar agreement, arrangement or practice with respect to taxes,
nor does the Company or any of its subsidiaries owe any amount under any such
agreement or arrangement. Neither the Company nor any of its subsidiaries is a
party to any agreement, contract or arrangement that, individually or
collectively, could give rise to the payment of any amount that would not be
deductible by reason of Sections 280G or 404 of the Code.
2.9 Title to Properties. The Company and its subsidiaries have
good and marketable title to, or a valid leasehold interest in, as applicable,
all of the assets reflected on the Preliminary Financial Statements as of the
Balance Sheet Date, free and clear of all Liens, except (i) Liens for current
taxes not yet due and payable and (ii) Liens reflected on the Company Financial
Statements not in excess of $100,000 and which do not materially detract from
or interfere with the use of the properties subject thereto or affected thereby
or otherwise impair the business operations conducted thereon. The Company's
and its subsidiaries' assets (A) are in all material respects in good operating
condition and repair, normal wear and tear excepted, and (B) constitute all of
the properties, interests, assets and rights held for use or used in connection
with the business of the Company and constitute all those necessary to continue
to operate the business of the Company consistent with current practice. All
leases of real or personal property to which the Company or any of its
subsidiaries is a party are fully effective and afford the Company or such
subsidiary peaceful and undisturbed possession of the subject matter of the
lease. Item 2.9 of the Company Disclosure Letter sets forth a list and brief
description of all real property leased by the Company or any of its
subsidiaries. Neither the Company nor any of its subsidiaries owns any real
property. To the Company's and its subsidiaries' Knowledge, neither the
Company nor any of its subsidiaries is in violation of any material zoning,
building, safety or environmental ordinance, regulation or requirement or other
law or regulation applicable to the operation of owned or leased properties,
and neither the Company nor any of its subsidiaries has received any notice of
such violation with which it has not complied or had waived.
<PAGE> 16
2.10 Absence of Certain Changes. Since the Balance Sheet Date, the
Company has carried on its business in the ordinary course consistent with past
practice and there has not been with respect to the Company or any of its
subsidiaries: (i) any change, event or condition (whether or not covered by
insurance) that would result in a Material Adverse Effect; (ii) any
declaration, setting aside or payment of any dividend on, or the making of any
other distribution in respect of, the capital stock of the Company or any of
its subsidiaries, any split, stock dividend, combination or recapitalization of
the capital stock of the Company or any of its subsidiaries or any direct or
indirect redemption, purchase or other acquisition by the Company or any of its
subsidiaries of the capital stock of the Company or any of its subsidiaries;
(iii) any purchase or sale or other disposition, or any agreement or other
arrangement for the purchase, sale or other disposition, of any material
properties or assets other than in the ordinary course of business consistent
with past practice, but in no event representing properties, assets or
commitments or arrangements in excess of $250,000 in any one transaction or
$500,000 in the aggregate; (iv) any contingent liability incurred as guarantor
or surety with respect to the obligations of others; (v) any Lien placed on any
of its properties or assets other than in the ordinary course of business
consistent with past practice but in no event more than $250,000 in any one
transaction or $500,000 in the aggregate; (vi) any material obligation or
liability (whether absolute, accrued, contingent or otherwise, and whether due
or to become due) incurred other than in the ordinary course of business
consistent with past practice (including obligations under customer contracts
and current obligations); (vii) any damage, destruction or loss, whether or not
covered by insurance, materially affecting its properties, assets or business;
(viii) any labor dispute or claim of material unfair labor practices, any
change in the compensation payable or to become payable to any of the Company's
or any of its subsidiaries' officers, employees or agents, or any bonus payment
or arrangement made to or with any of such officers, employees or agents
(except as previously disclosed in writing to and approved in writing by
Parent) other than normal annual raises in accordance with past practice, or
any bonus payment or arrangement made to or with any of such officers,
employees or agents other than normal bonuses or compensation increases or
other arrangements made in accordance with past practices; (ix) any material
change with respect to its management, supervisory, development or other key
personnel; (x) any payment or discharge of a material Lien or liability which
was not either (A) shown on the balance sheet as of the Balance Sheet Date
included in the Preliminary Financial Statements or (B) incurred in the
ordinary course of business consistent with past practice after the Balance
Sheet Date; (xi) any obligation or liability incurred by the Company or any of
its subsidiaries to any of its officers, directors or shareholders, or any
loans or advances made to any of its officers, directors, shareholders or
affiliates, except normal compensation and expense allowances payable to
officers; (xii) any cancellation of any debts or claims or any amendment,
termination or waiver of any rights of value to the Company or any of its
subsidiaries in excess of $250,000 in any one transaction or $500,000 in the
aggregate; (xiii) any payment, discharge or satisfaction of any material claim
or obligation, except in the ordinary course of business consistent with past
practice but in no event more than $250,000 in any one transaction or $500,000
in the aggregate; (xiv) any agreement or action not otherwise referred to in
items (i) through (xiii) above entered into or taken that is material to the
Company and its subsidiaries, taken as a whole; or (xv) any agreement,
<PAGE> 17
whether in writing or otherwise, to take any of the actions specified in the
foregoing items (i) through (xiv).
2.11 Agreements and Commitments. Neither the Company nor any of
its subsidiaries is a party or subject to:
(i) Any agreement, obligation or commitment (other than
those identified with respect to clauses (ii) through (viii) of this Section
2.11) providing for future payments by or to the Company or any of its
subsidiaries in an aggregate amount of $500,000 or more, within three years of
the date of this Agreement;
(ii) Any agreement, obligation or commitment to encumber,
license, transfer or sell rights in or with respect to any the
Company's Intellectual Property (as defined in Section 2.12)
other than in the ordinary course of business consistent with
past practice;
(iii) Any agreement for the sale or lease of real or
personal property (other than equipment leases in the ordinary course of
business consistent with past practice) involving more than $100,000 in any
year or per year;
(iv) Any joint venture or partnership agreement or
arrangement or any other agreement that involves a sharing of profits with
other persons or the payment of royalties to any other person;
(v) Any instrument evidencing indebtedness for borrowed
money by way of direct loan, sale of debt securities, purchase money
obligation, conditional sale, guarantee or otherwise, except for trade
indebtedness or any advance to any employee of the Company or any of its
subsidiaries incurred or made in the ordinary course of business consistent
with past practice;
(vi) Any agreement, obligation or commitment containing
covenants purporting to limit or which effectively limit the Company's or any
of its subsidiaries' freedom to compete in any line of business or in any
geographic area or which would so limit the Company or any of its subsidiaries
after the Effective Time;
(vii) Any union contract, or any employment, consulting,
severance, termination or indemnification agreement, written or oral, providing
for future payments to any current or former director, officer, employee,
consultant or other agent of the Company or any of its subsidiaries which
exceed $150,000 per annum or requires total payments over the life of such
agreement in excess of $150,000;
(viii) Any agreement, obligation or commitment entered
into other than in the ordinary course of business that is otherwise material
to the Company and its subsidiaries, taken as a whole.
The Company has provided Parent with true and correct copies of
<PAGE> 18
each of the agreements set forth in Item 2.11 of the Company Disclosure Letter
(collectively, the "Company Agreements"). All Company Agreements are valid,
binding and enforceable against the parties thereto and are in full force and
effect in all material respects. Neither the Company nor, to the Knowledge of
the Company or its subsidiaries, any other party, is in breach of or default
under any material term of any such Company Agreement.
2.12 Intellectual Property.
2.12.1 The Company and its subsidiaries own all right, title
and interest in, or have the right to use, all patent
applications, patents, trademark applications, trademarks,
service marks, trade names, copyright applications,
copyrights, trade secrets, know-how, technology and other
intellectual property and proprietary rights ("Intellectual
Property") used in or necessary to the conduct of the
Company's business as presently conducted, except to the
extent that the failure to have such rights has not had and
would not have a Material Adverse Effect. The Company has
taken all reasonable measures to protect all of the Company's
Intellectual Property, and, to the Company's Knowledge, no
other person is infringing or violating any of the Company's
Intellectual Property. Item 2.12.1 of the Company Disclosure
Letter is a true and complete list of all copyright, mask work
and trademark registrations and applications and all patents
and patent applications for the Company's Intellectual
Property owned by the Company or any of its subsidiaries. To
the Company's Knowledge, there has been no material loss,
cancellation, termination or expiration of any such
registration or patent or application. Neither the Company
nor any of its subsidiaries is, or as a result of the
execution, delivery or performance of this Agreement will be,
in material violation of any license, sublicense or other
agreement relating to, or lose any material rights in respect
of, the Intellectual Property of the Company or any third
party.
2.12.2 The business of the Company as conducted as of the date
hereof does not cause the Company or any of its subsidiaries
to infringe or violate any of the patents, trademarks, service
marks, trade names, mask works, copyrights, trade secrets,
proprietary rights or other intellectual property of any other
person, and none of the Company or its subsidiaries has
received any written or oral claim or notice of infringement
or potential infringement of the intellectual property of any
other person. The Company has the unrestricted right to
reproduce, manufacture, sell, license and distribute all of
its products ("Products"), offer and sell its services, and
the right to use all of its registered user lists, and is not
using any confidential information or trade secrets of any
former employer of any past or present employees in the
countries in which its Products are currently sold, and, to
the Knowledge of the Company and its subsidiaries, in any
other country.
<PAGE> 19
2.12.3 The Company possesses copies of the source code for
each of the Products and none of such source code has been
provided to any third party, other than to an escrow agent
pursuant to customary source code escrow agreements, copies of
which have been provided to Parent. None of the Products
contains any significant defect (including, without
limitation, in connection with processing data containing
dates in leap years or in the year 2000 and any preceding or
following years) or a material difference between the
functionality of such Product and its current end-user
documentation or warranties.
2.13 Compliance with Laws. The Company and each of its
subsidiaries has complied and is in compliance with, is not in violation of,
and has not received any notices of violation with respect to, any laws,
ordinances, regulations and rules, and all orders, writs, injunctions, awards,
judgments and decrees, applicable to the Company or such subsidiary or to its
assets, properties and business, except for such violations or failures to
comply as would not have a Material Adverse Effect. The Company and each of
its subsidiaries has received all licenses, permits and approvals from, and has
made all filings with, third parties, including government agencies and
authorities, necessary to conduct its business as presently conducted, except
where the failure to obtain such licenses or make such filings would not have a
Material Adverse Effect.
2.14 Certain Transactions and Agreements. No person who is an
officer, director, employee or agent of the Company or any of its subsidiaries
has any direct or indirect interest in any agreement or informal arrangement
with the Company or any of its subsidiaries, including, without limitation, any
loan arrangements, except for compensation for services as an officer, director
or employee of the Company and except for the normal rights of a shareholder.
None of such officers, directors, employees or agents has any direct or
indirect interest in any property, real or personal, tangible or intangible,
including, without limitation, Intellectual Property, used in the business of
the Company or its subsidiaries, and there have been with respect to such
persons no transactions of the type required to be disclosed under the Exchange
Act or similar law or regulation.
2.15 Employees.
2.15.1 Neither the Company nor any of its subsidiaries has
any employment contract or consulting agreement currently in effect that is not
terminable at will without penalty or payment of compensation by the Company or
such subsidiary (except to the extent that applicable foreign laws may require
the payment of severance compensation), and each officer, employee, agent or
consultant of the Company and each of its subsidiaries has executed the
Company's standard form of noncompetition, nondisclosure of proprietary
information and assignment of copyright and other intellectual property rights
to the Company, copies of which have been provided to Parent. The Company has
delivered to Parent a list of all employees, officers and development
consultants of the Company and its subsidiaries and their current compensation
and benefits as of the date of this Agreement.
<PAGE> 20
2.15.2 Neither the Company nor any of its subsidiaries (i)
has, to the Knowledge of the Company and its subsidiaries, ever been or is now
subject to a union organizing effort, (ii) is subject to any collective
bargaining agreement with respect to any of its employees, (iii) is subject to
any other contract, written or oral, with any trade or labor union, employees'
association or similar organization, and (iv) has any current labor dispute,
except for disputes with individual employees arising in the ordinary course of
business consistent with past practice. The Company and each of its
subsidiaries has good labor relations, and neither the Company nor its
subsidiaries has Knowledge of any facts indicating that the consummation of the
transactions provided for herein (i) will have an adverse effect on its labor
relations, or (ii) that any of its key employees intends to leave its employ.
2.15.3 Item 2.15.3 of the Company Disclosure Letter contains
a list of all pension, retirement, disability, medical, dental or other health
plans, life insurance or other death benefit plans, profit sharing, deferred
compensation agreements, stock, option, bonus or other incentive plans or
policies, vacation, sick, holiday or other paid leave plans, severance plans or
other similar employee benefit plans or policies maintained by the Company and
each of its subsidiaries (the "Employee Plans"), including, without limitation,
all "employee benefit plans" as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"). The Company has
delivered true and complete copies or descriptions of all the Employee Plans to
Parent. Each of the Employee Plans, and its operation and administration, is,
in all material respects, in compliance with all applicable, federal, state,
local and other governmental laws and ordinances, orders, rules and
regulations, including the requirements of ERISA and the Code, as well as the
terms of such Employee Plans. All such Employee Plans that are "employee
pension benefit plans" (as defined in Section 3(2) of ERISA) which are intended
to qualify under Section 401(a) of the Code have received favorable
determination letters that such plans satisfy the qualification requirements of
the Tax Reform Act of 1986. The Company has delivered a true and complete copy
of the most recent determination letter issued with respect to each Employee
Plan intended to qualify under Section 401 (a) of the Code. No Employee Plan
is subject to Title IV of ERISA. The Company and its subsidiaries have no
unfunded liability under Section 412 of the Code. All contributions due from
the Company and its subsidiaries with respect to any of the Employee Plans have
been made or accrued on the Company Financial Statements. Neither the Company
nor any of its subsidiaries has ever been a participant in any "prohibited
transaction" within the meaning of Section 406 of ERISA with respect to any
employee pension benefit plan (as defined in Section 3(2) of ERISA) which the
Company or such subsidiary sponsors as employer or in which the Company or such
subsidiary participates as an employer, which was not otherwise exempt pursuant
to Section 408 of ERISA (including any individual exemption granted under
Section 408(a) of ERISA), or which could result in an excise tax under the
Code. The group health plans, as defined in Section 4980B(g) of the Code, that
benefit employees of the Company and its subsidiaries are in compliance with
the continuation coverage requirements of Section 4980B of the Code. There are
no outstanding violations of Section 4980B of the Code with respect to any
Employee Plan, covered employees or qualified beneficiaries.
<PAGE> 21
2.15.4 To the Company's Knowledge, no employee of the Company
or any of its subsidiaries is in material violation of any term of any
employment contract, patent disclosure agreement or noncompetition agreement or
any other contract or agreement, or any restrictive covenant, relating to the
right of any such employee to be employed by the Company or such subsidiary or
to use trade secrets or proprietary information of others, and the employment
of any employee of the Company or any of its subsidiaries does not subject the
Company or such subsidiary to any liability to any third party.
2.15.5 Neither the Company nor any of its subsidiaries is a
party to any (a) agreement or commitment with any executive officer or other
key employee (i) the benefits of which are contingent, or the terms of which
are materially altered, upon the occurrence of a transaction involving the
Company in the nature of any of the transactions contemplated by this
Agreement, (ii) providing any term of employment or compensation guarantee or
(iii) providing severance benefits or other benefits after the termination of
employment of such employee regardless of the reason for such termination of
employment, or (b) agreement, commitment or plan, including, without
limitation, any Stock Plan, any of the benefits of which will be materially
increased, or the vesting of benefits of which will be materially accelerated,
by the occurrence of any of the transactions contemplated by this Agreement or
the value of any of the benefits of which will be calculated on the basis of
any of the transactions contemplated by this Agreement. The Company is not
obligated to make any excess parachute payment, as defined in Section
280G(b)(1) of the Code, nor will any excess parachute payment be deemed to have
occurred as a result of or arising out of the Merger.
2.16 Corporate Documents. The Company has made available to Parent
for examination all documents and information listed in the Company Disclosure
Letter or other exhibits called for by this Agreement or which have been
requested by Parent, including, without limitation, the following: (a) copies
of the Company's and each of its subsidiaries' Certificate of Incorporation and
Bylaws or similar charter documents as currently in effect; (b) the Company's
and each of its subsidiaries' minute book containing all records of all
proceedings, consents, actions and meetings of its directors and shareholders;
(c) each of the Company's subsidiaries' stock ledger, journal and other records
reflecting all stock issuances and transfers; (d) the May 1998 Carson Group
analysis of the Company's shareholders; and (e) all currently effective
permits, orders and consents issued by any regulatory agency with respect to
the Company and each of its subsidiaries, or any securities of the Company and
each of its subsidiaries, and all applications for such permits, orders and
consents.
2.17 No Brokers. Other than Hambrecht & Quist, whose fees and
expenses will be paid by the Company (and a copy of whose engagement letter and
a calculation of the fees that would be due thereunder has been provided to
Parent), the Company is not obligated for the payment of fees or expenses of
any investment banker, financial advisor, broker or finder in connection with
the origin, negotiation or execution of this Agreement or in connection with
any transaction provided for herein. Assuming
<PAGE> 22
consummation of the Merger, no such engagement letter obligates the Company to
continue to use such person's services or pay fees or expenses in connection
with any future transaction.
2.18 Restrictions on Business Activities. There is no material
agreement, judgment, injunction, order or decree binding upon the Company or
any of its subsidiaries which has the effect of prohibiting or materially
impairing any current or future business practice of the Company or any of its
subsidiaries, any acquisition of property or right by the Company or any of its
subsidiaries or the conduct of business by the Company or any of its
subsidiaries as currently conducted by the Company or any of its subsidiaries.
2.19 F-4; Prospectus/Proxy Statement.
2.19.1 The information supplied and to be supplied by the
Company that is included in the Form F-4 Registration
Statement to be submitted to the SEC in connection with the
issuance of Parent ADSs in the Merger (the "Form F-4") shall
not at the time the Form F-4 (including any amendments or
supplements thereto) is declared effective by the SEC contain
any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements
contained therein, in light of the circumstances under which
such statements were made, not misleading. The information
supplied and to be supplied by the Company that is included in
the prospectus/proxy statement (the "Prospectus/Proxy
Statement") included in the Form F-4 related to the meeting of
the Company's stockholders to consider the Merger (the
"Company Stockholders Meeting") shall not on the date such
Prospectus/Proxy Statement is first mailed to the Company's
stockholders, and, together with any amendments or supplements
thereto, at the time of the Company Stockholders Meeting and
at the Effective Time, contain any untrue statement, which, at
such time, is false or misleading with respect to any material
fact or omit to state any material fact necessary in order to
make the statements contained therein, in light of the
circumstances under which such statements were made, not
misleading; or omit to state any material fact necessary to
correct any statement in any earlier communication with
respect to the solicitation of proxies for the Company
Stockholders Meeting which has become false or misleading.
2.19.2 The information supplied and to be supplied by the
Company that is included in the Super Class 1 Shareholder
Circular (comprising listing particulars under Part IV of the
Financial Services Act 1986 of the United Kingdom, as amended
(the "FSA")) (the "Parent Disclosure Document") will, on the
date the Parent Disclosure Document is first mailed to
shareholders of Parent and, together with any supplementary
listing particulars published under
<PAGE> 23
Part IV of the FSA, at the time of the meeting of the holders
of Ordinary Shares for the purpose of voting on the
transactions contemplated by this Agreement (the "Parent
Shareholders Meeting") and at the Effective Time, include all
such information within the Knowledge of each of the directors
of the Company (or which it would be reasonable for them to
obtain by making inquiries) as investors and their
professional advisors reasonably require and expect to find,
for the purpose of making an informed assessment of the assets
and liabilities, financial position, profits and losses and
prospects of Parent and of the rights attaching to the
securities to which the Parent Disclosure Document relates.
2.19.3 Notwithstanding the foregoing, the Company makes no
representation, warranty or covenant with respect to any
information supplied by Parent or Newco which is contained in
any of the foregoing documents.
2.20 Books and Records. The books, records and accounts of the
Company (a) are in all material respects true and complete, (b) have been
maintained in accordance with reasonable and proper business and corporate
governance practices on a basis consistent with prior years, (c) are stated in
reasonable detail and accurately and fairly reflect the transactions and
dispositions of the assets of the Company and (d) accurately and fairly reflect
the basis for the Company Financial Statements.
2.21 Insurance. The Company and each of its subsidiaries have
policies of insurance and bonds of the type and in amounts customarily carried
by persons conducting business or owing assets similar to those of the Company
and its subsidiaries. There is no material claim pending under any of such
policies or bonds as to which coverage has been questioned, denied or disputed
by the underwriters of such policies or bonds. All premiums due and payable
under all such policies have been paid and the Company and its subsidiaries are
otherwise in compliance in all material respects with the terms of such
policies and bonds. Neither the Company nor its subsidiaries has any Knowledge
of any threatened termination of, or material premium increase with respect to,
any of such policies.
2.22 Environmental Matters.
2.22.1 During the period that the Company and its
subsidiaries have leased the premises currently occupied by them and those
premises occupied by them since the date of their respective organizations,
there have been no disposals, releases or threatened releases of Hazardous
Materials (as defined below) on any such premises in violation of law. Neither
the Company nor its subsidiaries has any Knowledge of any presence, disposals,
releases or threatened releases of Hazardous Materials on or from any of such
premises, which may have occurred prior to the Company or any of its
subsidiaries having taken possession of any of such premises, in violation of
law. For purposes of this Agreement, the terms "disposal," "release," and
"threatened release" have the definitions
<PAGE> 24
assigned thereto by the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, 42 U.S.C. Section 9601 et seq., as amended ("CERCLA")
and "Hazardous Materials" means any hazardous or toxic substance, material or
waste which is or becomes prior to the Closing Date regulated under, or defined
as a "hazardous substance," "pollutant," "contaminant," "toxic chemical,"
"hazardous material," "toxic substance" or "hazardous chemical" under (i)
CERCLA; (ii) the Emergency Planning and Community Right-to-Know Act, 42 U.S.C.
Section 11001 et seq.; (iii) the Hazardous Materials Transportation Act, 49
U.S.C. Section 1801, et seq.; (iv) the Toxic Substances Control Act, 15 U.S.C.
Section 2601 et seq.; (v) the Occupational Safety and Health Act of 1970, 29
U.S.C. Section 651 et seq.; (vi) regulations promulgated under any of the above
statutes; or (vii) any applicable state or local statute, ordinance, rule or
regulation that has a scope or purpose similar to those identified above.
2.22.2 During the time that the Company or its subsidiaries
have leased such premises, none of the premises currently leased by the Company
or its subsidiaries or any premises previously occupied by the Company or its
subsidiaries is in violation of any federal, state or local law, ordinance,
regulation or order relating to industrial hygiene or to the environmental
conditions in such premises.
2.22.3 During the time that the Company and its subsidiaries
have leased the premises currently or previously occupied by them, (i) neither
the Company, its subsidiaries nor, to the Company's or any subsidiaries'
Knowledge, any third party, has used, generated, manufactured or stored in such
premises or transported to or from such premises any Hazardous Materials in
violation of law, (ii) there has been no litigation, proceeding or
administrative action brought or threatened in writing against the Company or
any of its subsidiaries, or any settlement reached by the Company or any of its
subsidiaries with, any party or parties alleging the presence, disposal,
release or threatened release of any Hazardous Materials on, from or under any
of such premises, and (iii) no Hazardous Materials have been transported from
such premises to any site or facility now listed or proposed for listing on the
National Priorities List, at 40 C.F.R. Part 300, or any list with a similar
scope or purpose published by any state authority.
2.23 Customers and Suppliers. As of the date of this Agreement, no
customer which individually accounted for more than $1,000,000 of the Company's
gross revenues during the twelve months preceding the date of this Agreement
has indicated to the Company that it will stop, or materially decrease the rate
of, buying products or services from the Company, or has since April 30, 1997
materially decreased its usage of the Company's products or services. As of
the date of this Agreement, no material supplier of the Company has indicated
that it will stop, or materially decrease the rate of supplying materials,
products or services to the Company.
2.24 Accounts Receivable. The unpaid accounts and notes receivable
owing to the Company and its subsidiaries on the balance sheet included in the
Preliminary Financial Statements (after taking into account reserves which are
reflected therein) are, and all receivables generated from the date of the
Preliminary Financial Statements through the Closing Date shall be, collectible
in the ordinary course of business consistent with past practice, except for
such accounts and notes receivable, the failure of which to be
<PAGE> 25
collectible, would not cause a Material Adverse Effect. No such account has
been assigned or pledged to any other person, firm or corporation and no
defense or setoff to any such account has been asserted by the account obligor,
except for such assignments, pledges, defenses or setoffs which would not cause
a Material Adverse Effect.
2.25 Predecessor Entity. To the Company's or any of its
subsidiaries' Knowledge, none of the representations or warranties made herein
with respect to the Company is materially untrue or incorrect with respect to
any predecessor of the Company, the effect of which would subject the Company
to material obligation or liability.
2.26 Board Approval; State Takeover Statutes; Charter; Rights
Agreement.
2.26.1 The Board of Directors of the Company has (i) approved the
Merger and this Agreement, (ii) determined that the Merger is in the best
interests of the stockholders of the Company and is on terms that are fair to
such stockholders and (iii) determined to recommend that the stockholders of
the Company approve this Agreement and the consummation of the Merger, and such
approval is sufficient to render inapplicable to the Merger, this Agreement and
the other transactions contemplated hereby and thereby, the provisions of
Section 203 of the Delaware Law. No other "fair price," "moratorium," "control
share acquisition," or other anti-takeover statute or similar statute or
regulation applies or purports to apply to the Merger, this Agreement or any of
the other transactions contemplated hereby or thereby.
2.26.2 A majority of the "Disinterested Directors" (as such term is
defined in the Company's Certificate of Incorporation) have approved the Merger
and this Agreement, and such approval is sufficient to render inapplicable to
the Merger, this Agreement and the other transactions contemplated hereby and
thereby, the provisions of Article Eighth of the Company's Certificate of
Incorporation. The affirmative vote of the holders of a majority of the shares
of Company Common Stock outstanding on the record date set for the Company
Stockholders Meeting is the only vote of the holders of any of the Company's
capital stock necessary to approve the Merger, this Agreement, or any of the
other transactions contemplated hereby.
2.26.3 The Company has taken, and as soon as possible after the date
of this Agreement (but in no event later than two business days after the date
of this Agreement), the Rights Agent will take, all actions necessary or
appropriate to amend the Rights Agreement to ensure that the execution and
delivery of this Agreement, the Merger and the other transactions contemplated
by this Agreement will not cause Parent, Newco or any of their affiliates to be
considered an "Acquiring Person," the occurrence of a "Distribution Date," a
"Stock Acquisition Date," or a "Triggering Event" (as each such term is defined
in the Rights Agreement) or the separation of the Rights from the underlying
shares of Company Common Stock, and will not give the holders thereof the right
to acquire securities of any party to this Agreement.
2.27 Accounting Treatment. Neither the Company nor its
subsidiaries, nor, to the Knowledge of the Company or its subsidiaries, any of
their respective directors, officers, stockholders or "affiliates" (within the
meaning of the Securities Act), has taken any action that would prevent Parent
from accounting for the Merger as a pooling of interests pursuant to US GAAP.
2.28 Opinion of Financial Advisor. The Company has been advised in
writing by its financial advisor, Hambrecht & Quist, that in such
advisor's opinion,
<PAGE> 26
as of the date of this agreement, the consideration to be received in the
Merger is fair to the stockholders of the Company, from a financial point
of view.
2.29 Representations Complete. None of the representations or
warranties made by the Company in this Agreement, its exhibits and
schedules, and any of the certificates or documents to be delivered
by the Company to Parent under this Agreement, taken together,
contains or will contain at the Effective Time any untrue statement
of a material fact or omits or will omit at the Effective Time to
state a material fact necessary in order to make the statements
contained herein and therein, in light of the circumstances under
which such statements were made, not misleading.
III. Representations and Warranties of Parent and Newco
Parent has heretofore delivered to the Company a disclosure letter
(the "Parent Disclosure Letter").
Parent and Newco hereby represent and warrant to the Company,
except as is set forth on Parent Disclosure Letter, that:
3.1 Organization; Title. Parent is a public limited company
duly organized and validly existing under the laws of England and Wales, has
the requisite corporate power and authority to own, operate and lease its
properties and to carry on its business as now conducted and is duly qualified
or licensed as a foreign corporation in each jurisdiction in which the nature
of its business or the ownership or leasing of its properties makes such
qualification or licensing necessary. Parent has delivered to the Company true
and complete copies of its Memorandum of Association and Articles of
Association as currently in effect. Newco is a corporation duly organized,
validly existing and in good standing under the laws of Delaware, has the
requisite corporate power and authority to own, operate and lease its
properties and to carry on its business as now conducted. Newco has delivered
to the Company true and complete copies of its Certificate of Incorporation and
Bylaws as currently in effect. Parent owns all of the issued and outstanding
capital stock of Newco.
3.2 Power, Authorization and Validity.
3.2.1 Each of Parent and Newco has the corporate right,
power and authority to enter into and perform their obligations under this
Agreement. The execution and delivery of this Agreement have been duly and
validly authorized by all necessary corporate action on the part of Parent and
Newco, subject only to the approval of Parent's shareholders of (i) the
Merger, (ii) the granting of authority to allot securities of Parent pursuant
to Section 80 Companies Act 1985 of the United Kingdom (the "Companies Act"),
(iii) an increase in the share capital of Parent, and (iv) an increase in the
number of Ordinary Shares available to satisfy Parent's obligations under
Section 1.3 of this Agreement.
3.2.2 No consent, filing, authorization or approval,
governmental or otherwise, is required by or with respect to Parent or Newco in
connection with the
<PAGE> 27
execution and delivery of this Agreement, or the consummation of the
transactions contemplated hereby or thereby, except for (a) the filing of the
Certificate of Merger and any other documents required to effectuate the Merger
under Delaware Law and the filing of appropriate documents with the relevant
authorities of the states in which the Company is qualified to do business, (b)
such filings as may be required to comply with federal and applicable state
securities laws and the securities laws of any foreign country, (c) filings
required under the HSR Act and the antitrust and competition laws of the
European Union and other jurisdictions, (d) appropriate filings with, and
approvals of, the London Stock Exchange Limited ("LSE") and the Nasdaq National
Market, (e) filings required under the Companies Act and the FSA, (f) the
consent of H.M. Treasury pursuant to Section 765(1)(C) of the Income and
Corporation Taxes Act 1988, and (g) such other consents, filings,
authorizations or approvals which, if not obtained or made, would not have a
Material Adverse Effect on Parent and would not prevent, or materially alter or
delay any of the transactions contemplated by this Agreement.
3.2.3 This Agreement has been duly executed and delivered by
Parent and constitute valid and binding obligations of Parent enforceable
against Parent in accordance with their respective terms, except as to the
effect, if any, of (a) applicable bankruptcy and other similar laws affecting
the rights of creditors generally and (b) rules of law governing specific
performance, injunctive relief and other equitable remedies. This Agreement
has been duly executed and delivered by Newco and constitutes a valid and
binding obligation of Newco enforceable against Newco in accordance with its
terms, except as to the effect, if any, of (a) applicable bankruptcy and other
similar laws affecting the rights of creditors generally and (b) rules of law
governing specific performance, injunctive relief and other equitable remedies.
3.3 Capitalization.
3.3.1 The authorized share capital of Parent consists of
112,500,000 Ordinary Shares. As of the close of trading on
the day prior to the date of this Agreement, 80,171,795 of
those Ordinary Shares were issued and the balance were
unissued; and the same number of Ordinary Shares shall be
outstanding on the date of this Agreement (except for
additional Ordinary Shares which are issued in connection with
exercises of options and conversion of convertible securities
outstanding as of close of trading on the day prior to this
Agreement). All issued shares in the capital of Parent are,
and all shares which may be issued in the Merger or pursuant
to any stock option, stock bonus, stock award or stock
purchase plan, program or arrangement of Parent ("Parent Stock
Plans") will be, when issued, duly authorized, validly issued
and fully paid and not subject to any preemptive rights
(except as provided by Section 89 Companies Act), and have
been or will be offered, issued, sold and delivered by Parent
in compliance with all registration or qualification
requirements (or applicable exemptions therefrom) of
applicable securities laws. As of the close of trading on the
day prior to date of this Agreement, 10,666,157 Ordinary
Shares were subject to issued and outstanding unexercised
grants of options pursuant to Parent Stock Plans; and the same
number of Ordinary Shares shall be subject to issued and
outstanding unexercised grants of options pursuant to Parent
Stock Plans on the date of this Agreement (except for Ordinary
Shares issued in connection with exercises of options pursuant
to Parent Stock Plans outstanding as of the close of trading
on the day prior to the date of
<PAGE> 28
this Agreement). Parent has provided to the Company true and
complete copies of all Parent Stock Plans. Other than as set
forth in this Section, there are no other stock appreciation
rights, options, warrants, exchangeable or convertible
securities, conversion privileges or preemptive or other
rights or agreements outstanding to purchase or otherwise
acquire any of Parent's authorized but unissued share capital;
there is no liability for dividends accrued but unpaid; and
there are no voting agreements, registration rights, rights of
redemption or repurchase, rights of first refusal or other
restrictions (other than normal restrictions on transfer under
applicable securities laws) applicable to any of Parent's
outstanding securities. There are no bonds, debentures, notes
or other indebtedness of Parent having the right to vote (or
convertible into, or exchangeable for, securities having the
right to vote) on any matters which shareholders of Parent may
vote.
3.3.2 Each Parent ADS represents five Ordinary Shares
deposited with The Bank of New York, Parent's United States
depositary (the "ADR Depositary") pursuant to the Deposit
Agreement, as amended and restated as of March 16, 1998 (the
"Deposit Agreement"), among Parent, the ADR Depositary and the
owners and holders of Parent ADRs, a copy of which has been
previously provided to the Company. Each Parent ADR is, and
each Parent ADR issued in connection with the Merger will be,
issued pursuant to the Deposit Agreement and represent one
Parent ADS. The Deposit Agreement is valid, binding and
enforceable against the parties thereto and is in full force
and effect.
3.3.3 The authorized capital stock of Newco consists of 100
shares of Newco Common Stock, all of which are issued and
outstanding, have been duly authorized and validly issued, are
fully paid and nonassessable and are owned by Parent, free and
clear of all Liens.
3.4 Subsidiaries. All of the issued and outstanding shares of
capital stock of each subsidiary of Parent have been duly authorized and
validly issued, are fully paid and nonassessable and are owned by Parent, free
and clear of all Liens and free of any other limitation or restriction
(including any restriction on the right to vote, sell or otherwise dispose of
such capital stock). Except for the capital stock of its subsidiaries, Parent
does not own, directly or indirectly, any equity interest in any corporation,
<PAGE> 29
partnership, joint venture or other business entity.
3.5 No Conflicts. Neither the execution and delivery of this
Agreement, nor the consummation by Parent and Newco of the transactions
provided for herein or therein, will conflict with, or (with or without notice
or lapse of time, or both) result in a termination, acceleration, breach,
impairment or violation of, (i) any provision of the Memorandum of Association
or Articles of Association of Parent as currently in effect, (ii) any note,
bond, lease, mortgage, indenture, lease, license, franchise, permit, agreement
or other instrument or obligation applicable to Parent or any of its
subsidiaries or their respective properties or assets (iii) any federal, state,
local or foreign judgment, writ, decree, order, statute, rule or regulation
applicable to Parent or any of its subsidiaries or of their respective
properties or assets, other than, in the case of clause (ii) or (iii), any such
conflicts, breaches, impairments or violations that individually or in the
aggregate would not have (A) a Material Adverse Effect, (B) impair the ability
of Parent to perform its obligations under this Agreement or (C) prevent or
materially delay consummation of any of the transactions contemplated by this
Agreement. The consummation of the Merger will not require the consent of any
third party and will not adversely affect any of the rights, licenses,
franchises, leases or agreements of Parent or any of its subsidiaries pursuant
to their terms, other than where the failure to obtain such consents or where
such adverse effects would not constitute, individually or in the aggregate, a
Material Adverse Effect.
3.6 Litigation. There is no suit, action, proceeding or
investigation pending or, to the Knowledge of Parent or any of its
subsidiaries, threatened against Parent or any of its subsidiaries before any
court or administrative agency, foreign or domestic, that, individually or in
the aggregate, would (i) have a Material Adverse Effect, (ii) impair the
ability of Parent or Newco to perform its obligations under this Agreement or
(iii) prevent or materially delay the Merger or the consummation of the
transactions contemplated by this Agreement, nor is there any judgment,
injunction, decree, writ, rule or order of any governmental entity or
arbitrator outstanding against Parent or any of its subsidiaries having or
which would have, any such effect. Item 3.6 of the Parent Disclosure Schedule
sets forth, with respect to any suit, action, proceeding or investigation to
which Parent or any of its subsidiaries is a party and which involves claims
which if adversely determined would exceed $100,000, the forum, the parties
thereto, the subject matter and current status thereof and the amount of
damages claimed.
3.7 SEC Documents; Financial Statements. Parent has filed all
required reports, schedules, forms, statements and other documents with the SEC
since July 1, 1995 (the "Parent SEC Documents"). As of their respective dates,
the Parent SEC Documents complied in all material respects with the
requirements of the Securities Act or the Exchange Act, as the case may be,
applicable to such SEC Documents, and none of the Parent SEC Documents
contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The financial statements of Parent included in the Parent SEC
Documents (the "Parent Financial Statements") comply as to form in all material
respects with applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto, have
<PAGE> 30
been prepared according to US GAAP or UK GAAP, as the case may be, applied on a
basis consistent throughout the periods indicated and consistent with each
other (except as may be indicated in the notes thereto) and fairly present the
consolidated financial position of Parent and its consolidated subsidiaries as
of the dates thereof and the consolidated results of their operations and cash
flows for the periods then ended (subject, in the case of unaudited statements,
to normal year-end adjustments). There has been no material change in Parent's
accounting policies except as described in the notes to the Parent Financial
Statements. For the purposes of this Agreement, all financial statements
referred to in this paragraph shall include any notes or schedules to such
financial statements. Except as set forth in Parent Financial Statements or
Parent's balance sheet dated April 30, 1998, neither Parent nor any of its
subsidiaries has any material debt, liability or obligation of any nature,
whether accrued, absolute, contingent or otherwise, and whether due or to
become due, and there is no existing condition, situation or set of
circumstances which are required by US GAAP or UK GAAP, as the case may be, to
be set forth on a consolidated balance sheet of Parent and its consolidated
subsidiaries or in the notes thereto (other than matters that would ordinarily
be included in notes to audited financial statements, which notes will not be
materially different from comparable notes to Parent Financial Statements),
except as incurred in the normal course of business since April 30, 1998.
3.8 Title to Properties. Parent and its subsidiaries have good
and marketable title to, or a valid leasehold interest in, as applicable, all
of the assets reflected on Parent's audited balance sheet as of January 31,
1998, free and clear of all Liens, except (i) Liens for current taxes not yet
due and payable and (ii) Liens reflected on the Parent Financial Statements not
in excess of $100,000 and which do not materially detract from or interfere
with the use of the properties subject thereto or affected thereby or otherwise
impair the business operations conducted thereon. Parent's and its
subsidiaries' assets (A) are in all material respects in good operating
condition and repair, normal wear and tear excepted, and (B) constitute all of
the properties, interests, assets and rights held for use or used in connection
with the business of Parent and constitute all those necessary to continue to
operate the business of Parent consistent with current practice. All leases of
real or personal property to which Parent or any of its subsidiaries is a party
are fully effective and afford Parent or such subsidiary peaceful and
undisturbed possession of the subject matter of the lease.
3.9 Absence of Certain Changes. Since April 30, 1998, Parent
has carried on its business in the ordinary course consistent with
past practice and there has not been with respect to Parent or any of
its subsidiaries: (i) any change, event or condition (whether or not
covered by insurance) that would result in a Material Adverse Effect;
(ii) any declaration, setting aside or payment of any dividend on, or
the making of any other distribution in respect of, the capital stock
of Parent or any of its subsidiaries, any split, stock dividend,
combination or recapitalization of the capital stock of Parent or any
of its subsidiaries or any direct or indirect redemption, purchase or
other acquisition by Parent or any of its subsidiaries of the capital
stock of Parent or any of its subsidiaries; (iii) any purchase or
sale or other disposition, or any agreement or other arrangement for
the purchase, sale or
<PAGE> 31
other disposition, of any material properties or assets other than in
the ordinary course of business consistent with past practice, but in
no event representing properties, assets or commitments or
arrangements in excess of $250,000 in any one transaction or $500,000
in the aggregate; (iv) any contingent liability incurred as guarantor
or surety with respect to the obligations of others; (v) any Lien
placed on any of its properties or assets other than in the ordinary
course of business consistent with past practice but in no event more
than $250,000 in any one transaction or $500,000 in the aggregate;
(vi) any material obligation or liability (whether absolute, accrued,
contingent or otherwise, and whether due or to become due) incurred
other than in the ordinary course of business consistent with past
practice (including obligations under customer contracts and current
obligations); (vii) any damage, destruction or loss, whether or not
covered by insurance, materially affecting its properties, assets or
business; (viii) any labor dispute or claim of material unfair labor
practices, any change in the compensation payable or to become
payable to any of Parent's or any of its subsidiaries' officers,
employees or agents, or any bonus payment or arrangement made to or
with any of such officers, employees or agents other than normal
annual raises in accordance with past practice, or any bonus payment
or arrangement made to or with any of such officers, employees or
agents other than normal bonuses or compensation increases or other
arrangements made in accordance with past practices; (ix) any
material adverse change with respect to its management, supervisory,
development or other key personnel; (x) any payment or discharge of a
material Lien or liability which was not either (A) shown on Parent's
balance sheet as of April 30, 1998 or (B) incurred in the ordinary
course of business consistent with past practice after April 30,
1998; (xi) any obligation or liability incurred by Parent or any of
its subsidiaries to any of its officers, directors or shareholders,
or any loans or advances made to any of its officers, directors,
shareholders or affiliates, except normal compensation and expense
allowances payable to officers; (xii) any cancellation of any debts
or claims or any amendment, termination or waiver of any rights of
value to Parent or any of its subsidiaries in excess of $250,000 in
any one transaction or $500,000 in the aggregate; (xiii) any payment,
discharge or satisfaction of any material claim or obligation, except
in the ordinary course of business consistent with past practice but
in no event more than $250,000 in any one transaction or $500,000 in
the aggregate; (xiv) any agreement or action not otherwise referred
to in items (i) through (xiii) above entered into or taken that is
material to Parent and its subsidiaries, taken as a whole; or (xv)
any agreement, whether in writing or otherwise, to take any of the
actions specified in the foregoing items (i) through (xiv).
3.10 Agreements and Commitments. Neither Parent nor any of its
subsidiaries is a party or subject to:
<PAGE> 32
(i) Any agreement, obligation or commitment (other than
those identified with respect to clauses (ii) through (vi) of this Section 3.10
or in the ordinary course of the Company's business consistent with past
practice) providing for future payments by or to Parent or any of its
subsidiaries in an aggregate amount of $500,000 or more, within three years of
the date of this Agreement;
(ii) Any agreement, obligation or commitment to encumber,
license, transfer or sell rights in or with respect to any of
Parent's Intellectual Property (as defined in Section 3.11)
other than in the ordinary course of business consistent with
past practice;
(iii) Any joint venture or partnership agreement;
(iv) Any agreement, obligation or commitment containing
covenants purporting to limit or which effectively limit Parent's or any of its
subsidiaries' freedom to compete in any line of business or in any geographic
area or which would so limit Parent or any of its subsidiaries after the
Effective Time;
(v) Any union contract, or any employment, consulting,
severance, termination or indemnification agreement which will require Parent
or any of its subsidiaries to make any excess parachute payment, as defined in
Section 280G(b)(1) of the Code, as a result of the Merger; or
(vi) Any agreement, obligation or commitment entered into
other than in the ordinary course of business consistent with
past practice that is otherwise material to Parent and its
subsidiaries, taken as a whole.
Parent has provided the Company with true and correct copies
of each of the agreements set forth in Item 3.10 of the Parent Disclosure
Letter (collectively, the "Parent Agreements"). All Parent Agreements are
valid, binding and enforceable against the parties thereto and are in full
force and effect in all material respects. Neither the Parent nor, to the
Knowledge of Parent or its subsidiaries, any other party, is in breach of or
default under any material term of any such Parent Agreement.
3.11 Intellectual Property.
3.11.1 Parent and its subsidiaries own all right, title and
interest in, or have the right to use, all Intellectual
Property used in or necessary to the conduct of Parent's
business as presently conducted, except to the extent that the
failure to have such rights have not and would not have a
Material Adverse Effect. The business of Parent as conducted
as of the date hereof does not cause Parent or any of its
subsidiaries to infringe or violate any of the patents,
trademarks, service marks, trade names, mask works,
copyrights, trade secrets, proprietary rights or other
intellectual property of any other person.
3.11.2 Parent possesses copies of the source code for each of
its
<PAGE> 33
products and none of such source code has been provided to any
third party, other than to an escrow agent pursuant to
customary source code escrow agreements, copies of which have
been provided to the Company. None of the Parent's products
contains any significant defect (including, without
limitation, in connection with processing data containing
dates in leap years or in the year 2000 and any preceding or
following years) or a material difference between the
functionality of such Product and its current end-user
documentation or warranties.
3.12 Compliance with Laws. Parent and each of its
subsidiaries have complied and is in compliance with, are not
in violation of, and have not received any notices of
violation with respect to, any laws, ordinances, regulations
and rules, and all orders, writs, injunctions, awards,
judgments and decrees, applicable to Parent or such subsidiary
or to their assets, properties and business, except for such
violations or failures to comply as would not have a Material
Adverse Effect. Parent and each of its subsidiaries has
received all licenses, permits and approvals from, and has
made all filings with, third parties, including government
agencies and authorities, necessary to conduct its business as
presently conducted, except where the failure to obtain such
licenses or make such filings would not have a Material
Adverse Effect.
3.13 Certain Transactions and Agreements. No person who is
an officer, director, employee or agent of Parent or any of its subsidiaries
has any direct or indirect interest in any agreement or informal arrangement
with Parent or any of its subsidiaries, including, without limitation, any loan
arrangements, except for compensation for services as an officer, director or
employee of Parent, of the type required to be disclosed under the Exchange Act
or similar law or regulation. None of such officers, directors, employees or
agents has any direct or indirect interest in any property, real or personal,
tangible or intangible, including, without limitation, Intellectual Property,
used in the business of Parent or its subsidiaries, and there have been with
respect to such persons no transactions of the type required to be disclosed
under the Exchange Act or similar law or regulation.
3.14 Corporate Documents. Parent has made available to the
Company for examination all documents and information listed in the Parent
Disclosure Letter or other exhibits called for by this Agreement or which have
been requested by the Company, including, without limitation, the following:
(a) copies of the Parent's Memorandum of Association and Articles of
Association as currently in effect; and (b) Parent's minute book containing all
records of all proceedings, consents, actions and meetings of its directors and
shareholders.
3.15 No Brokers. Other than Donaldson, Lufkin & Jenrette
Securities Corporation and SBC Warburg Dillon Read, whose fees and expenses
will be paid by Parent, Parent is not obligated for the payment of fees or
expenses of any investment banker, financial advisor, broker or finder in
connection with the origin, negotiation or execution of this Agreement or in
connection with any transaction provided for herein.
<PAGE> 34
3.16 Restrictions on Business Activities. There is no
material agreement, judgment, injunction, order or decree binding upon Parent
or any of its subsidiaries which has the effect of prohibiting or materially
impairing any current or future business practice of Parent or any of its
subsidiaries, any acquisition of property or right by Parent or any of its
subsidiaries or the conduct of business by Parent or any of its subsidiaries as
currently conducted by Parent or any of its subsidiaries.
3.17 F-4; Prospectus/Proxy Statement.
3.17.1 The information supplied and to be supplied by
Parent that is included in the Form F-4 shall not at
the time the Form F-4 (including any amendments or
supplements thereto) is declared effective by the SEC
contain any untrue statement of a material fact or
omit to state a material fact necessary in order to
make the statements contained therein, in light of the
circumstances under which such statements were made,
not misleading. The information supplied and to be
supplied by Parent that is included in the
Prospectus/Proxy Statement shall not on the date such
Prospectus/Proxy statement is first mailed to the
Company's stockholders, and, together with any
amendments or supplements thereto, at the time of the
Company Stockholders Meeting and at the Effective
Time, contain any untrue statement, which, at such
time, is false or misleading with respect to any
material fact or omit to state any material fact
necessary in order to make the statements contained
therein, in light of the circumstances under which
such statements were made, not misleading; or omit to
state any material fact necessary to correct any
statement in any earlier communication with respect to
the solicitation of proxies for the Company
Stockholders Meeting which has become false or
misleading.
3.17.2 The information supplied and to be supplied by
Parent for inclusion in the Parent Disclosure Document
will, on the date the Parent Disclosure Document is
first mailed to shareholders of Parent and, together
with any amendments or supplements thereto, at the
time of the Parent Shareholders Meeting and at the
Effective Time, comply with the provisions of Section
146 of the FSA and of the Listing Rules of the LSE.
3.17.3 Notwithstanding the foregoing, Parent makes no
representation, warranty or covenant with respect to
any information supplied by the Company which is
contained in any of the foregoing documents.
3.18 Books and Records. The books, records and accounts of
Parent (a) are in all material respects true and complete, (b) have been
maintained in accordance with
<PAGE> 35
reasonable and proper business and corporate governance practices on a basis
consistent with prior years, (c) are stated in reasonable detail and accurately
and fairly reflect the transactions and dispositions of the assets of Parent
and (d) accurately and fairly reflect the basis for the Parent Financial
Statements.
3.19 Insurance. Parent and each of its subsidiaries have
policies of insurance and bonds of the type and in amounts customarily carried
by persons conducting business or owing assets similar to those of Parent and
its subsidiaries. There is no material claim pending under any of such
policies or bonds as to which coverage has been questioned, denied or disputed
by the underwriters of such policies or bonds.
3.20 Environmental Matters.
3.20.1 During the period that Parent and its
subsidiaries have leased the premises currently occupied by them and those
premises occupied by them since the date of their respective organizations,
there have been no disposals, releases or threatened releases of Hazardous
Materials on any such premises in violation of law. Neither Parent nor its
subsidiaries has any Knowledge of any presence, disposals, releases or
threatened releases of Hazardous Materials on or from any of such premises,
which may have occurred prior to Parent or any of its subsidiaries having taken
possession of any of such premises.
3.20.2 During the time that Parent or its
subsidiaries have leased such premises, none of the premises currently leased
by Parent or its subsidiaries or any premises previously occupied by Parent or
its subsidiaries is in violation of any federal, state or local law, ordinance,
regulation or order relating to industrial hygiene or to the environmental
conditions in such premises.
3.20.3 During the time that Parent and its
subsidiaries have leased the premises currently or previously occupied by them,
(i) neither Parent, its subsidiaries nor, to the Parent's or any subsidiaries'
Knowledge, any third party, has used, generated, manufactured or stored in such
premises or transported to or from such premises any Hazardous Materials in
violation of law, (ii) there has been no litigation, proceeding or
administrative action brought or threatened in writing against Parent or any of
its subsidiaries, or any settlement reached by Parent or any of its
subsidiaries with, any party or parties alleging the presence, disposal,
release or threatened release of any Hazardous Materials on, from or under any
of such premises in violation of law, and (iii) no Hazardous Materials have
been transported from such premises to any site or facility now listed or
proposed for listing on the National Priorities List, at 40 C.F.R. Part 300, or
any list with a similar scope or purpose published by any state authority.
3.21 Customers and Suppliers. As of the date of this
Agreement, no customer which individually accounted for more than $1,000,000 of
Parent's gross revenues during the twelve months preceding the date of this
Agreement has indicated to Parent that it will stop, or materially decrease the
rate of, buying products or services from Parent, or has since April 30, 1997
materially decreased its usage of the Parent's products
<PAGE> 36
or services. As of the date of this Agreement, no material supplier of Parent
has indicated that it will stop, or materially decrease the rate of supplying
materials, products or services to Parent.
3.22 Board Approval. The Board of Directors of Parent has
(i) approved the Merger, and this Agreement, (ii) determined
that the Merger is in the best interests of the shareholders
of Parent and is on terms that are fair to such shareholders
and (iii) determined to recommend that the shareholders of
Parent approve the transactions contemplated by this Agreement
which require the approval of Parent's shareholders. The
affirmative vote of a majority of those shareholders of Parent
present and voting at the Parent Shareholders Meeting are the
only votes of the holders of any of Parent's share capital
necessary to approve the transactions contemplated by this
Agreement.
3.23 Accounting Treatment. Neither Parent nor its
subsidiaries, nor, to the Knowledge of Parent or its subsidiaries, any of their
respective directors, officers, stockholders or "affiliates" (within the
meaning of the Securities Act), has taken any action that would prevent Parent
from accounting for the Merger as a pooling of interests pursuant to US GAAP.
3.24 Opinion of Financial Advisor. Parent has been
advised in writing by Donaldson, Lufkin & Jenrette Securities Corporation, that
in such advisor's opinion, as of the date of this agreement, the consideration
to be paid in the Merger is fair to the stockholders of Parent, from a
financial point of view.
3.25 Taxes. Parent and each of its subsidiaries have
filed all income tax and related information returns and
reports required to be filed, and have paid all taxes required
to be paid in respect of all periods for which such returns
have been filed, have made all necessary estimated tax
payments, and have no liability for such taxes materially in
excess of the amount paid, except to the extent adequate
reserves have been established in the Parent Financial
Statements. All such returns and reports filed by Parent and
each of its subsidiaries were true, correct and complete in
all material respects. No tax return of Parent or any of its
subsidiaries has been or is being audited or examined by the
Internal Revenue Service or the U.K. Inland Revenue.
3.26 Accounts Receivable. The unpaid accounts and notes
receivable owing to Parent and its subsidiaries on the most
recent balance sheet included in the Parent Financial
Statements (after taking into account appropriate reserves
which are reflected therein) are, and all receivables
generated from the date of such balance sheet through the
Closing Date shall be, collectible in the ordinary course of
business consistent with past practice, except for such
accounts and notes receivable, the failure of which to be
collectible, would not cause a Material Adverse Effect. No
such account has been assigned or pledged to any other person,
firm or corporation and no defense or setoff to any such
account has been asserted by the account obligor, except for
such assignments, pledges, defenses or
<PAGE> 37
setoffs which would not cause a Material Adverse Effect. 3.27
Representations Complete. None of the representations or
warranties made by Parent in this Agreement, its exhibits and
schedules, and any of the certificates or documents to be
delivered by Parent to the Company under this Agreement, taken
together, contains or will contain at the Effective Time any
untrue statement of a material fact or omits or will omit at
the Effective Time to state a material fact necessary in order
to make the statements contained herein and therein, in light
of the circumstances under which such statements were made,
not misleading.
IV. Conduct Prior to the Effective Time
4.1 Conduct of Business. During the period from the date
of this Agreement and continuing until the earlier of the
Effective Time or the termination of this Agreement according
to its terms, the Company agrees (except to the extent
expressly contemplated by this Agreement or as consented to in
writing by Parent), to carry on its and its subsidiaries'
business in the usual, regular and ordinary course of business
consistent with past practice, to pay and cause its
subsidiaries to pay debts and taxes when due, to pay and
perform other obligations when due, and to use all reasonable
efforts to preserve intact its and its subsidiaries' present
business organizations, use its reasonable efforts to keep
available the services of its and its subsidiaries' present
officers and key employees and use its reasonable efforts to
preserve its and its subsidiaries' relationships with
customers, suppliers, distributors, licensors, licensees and
others having business dealings with it or its subsidiaries,
to the end that its and its subsidiaries' goodwill and ongoing
businesses shall be unimpaired at the Effective Time. The
Company agrees to promptly notify Parent of any event or
occurrence not in the ordinary course of its or its
subsidiaries' business consistent with past practice, and of
any event which could reasonably be expected to have a
Material Adverse Effect on the Company. Without limiting the
foregoing, except as expressly contemplated by this Agreement
or as set forth in Item 4.1 of Company Disclosure Letter,
neither the Company nor any of its subsidiaries shall do,
cause or permit any of the following, without the prior
written consent of Parent:
(a) borrow any money, other than in the ordinary
course of business consistent with past practice;
(b) enter into any transaction not in the
ordinary course of business consistent with past practice or enter into any
transaction or make any commitment involving an expense or capital expenditure
in excess of $250,000;
(c) except for the Merger, merge, consolidate or
reorganize with, or acquire any entity;
(d) dispose of any of its material assets except
in the ordinary course of business consistent with past practice;
(e) enter into any material lease or contract for
the purchase or sale of any property, real or personal, tangible or intangible,
or enter into any agreement of the types described in Section 2.11, except in
the ordinary course of business consistent
<PAGE> 38
with past practice;
(f) terminate the employment of any employee who
(i) is in a management position and who has an annual salary equal to or more
than $80,000, (ii) has an annual salary equal to or more than $100,000, or
(iii) is a software developer (or occupies a similar position/role) on whom any
material project (including any software, product or service) is substantially
dependent.
(g) pay any bonus (except for customary and
reasonable sales-related SPIF programs), royalty, increased salary (except for
reasonable salary increases in connection with annual reviews consistent with
past practices) or special remuneration to any officer, employee or consultant
(except pursuant to existing arrangements heretofore disclosed in writing to
Parent) or enter into any new employment or consulting agreement with any such
person, or enter into any new agreement or plan of the type described in
Section 2.15.3;
(h) change accounting methods;
(i) declare, set aside or pay any cash or stock
dividend or other distribution in respect of capital stock, or redeem or
otherwise acquire any of its capital stock;
(j) amend or terminate any contract, agreement or
license to which it is a party except those amended or terminated in the
ordinary course of business, consistent with past practice, and which are not
material in amount or effect;
(k) lend any amount to any person or entity,
other than advances for travel and expenses which are incurred in the ordinary
course of business consistent with past practice, not material in amount, which
travel and expenses shall be documented by receipts for the claimed amounts;
(l) guarantee or act as a surety for any
obligation except for the endorsement of checks and other negotiable
instruments in the ordinary course of business, consistent with past practice;
(m) waive or release any material right or claim
except in the ordinary course of business, consistent with past practice;
(n) issue or sell any shares of its capital stock
of any class or any other of its securities (except pursuant to Company
Options, Company Warrants or Stock Plans outstanding on the date hereof), or
issue or create any warrants, obligations, subscriptions, options, convertible
securities, stock appreciation rights or other commitments to issue shares of
capital stock, or accelerate the vesting of any outstanding option or other
security (except pursuant to the terms and conditions of Company Options,
Company Warrants or Stock Plans as in effect on the date hereof);
(o) split or combine the outstanding shares of
its capital stock of any class or enter into any recapitalization affecting the
number of outstanding shares of its capital stock of any class or affecting any
other of its securities;
(p) amend its Certificate of Incorporation or
Bylaws or other charter documents;
(q) agree to any material audit assessment by any
tax authority;
(r) license any of the Company's technology or
any of the Company's Intellectual Property, except in the ordinary course of
business consistent with past practice, or take any action which could have the
effect of placing any of the Company's Intellectual Property in the public
domain;
<PAGE> 39
(s) materially change any insurance coverage; or
(t) agree to do any of the things described in
the preceding clauses 4.1(a) through 4.1(s).
4.2 No Other Negotiations.
(a) From the date hereof until the earlier of the
Effective Time or the termination of this Agreement
according to its terms, the Company will not, and
will not authorize or permit any officer, director,
employee, agent or affiliate of the Company, or any
other person, directly or indirectly, to (i) solicit,
initiate, encourage, approve or accept any
Acquisition Proposal (as defined below), or (ii)
except as required by the fiduciary duties of the
Board of Directors of the Company under applicable
law, as advised in writing by Arent Fox Kintner
Plotkin & Kahn, PLLC, counsel to the Company, engage
in negotiations with, or disclose any nonpublic
information relating to the Company or any of its
subsidiaries or afford access to the properties,
books or records of the Company or any of its
subsidiaries to, any person that has advised the
Company or otherwise publicized the fact that such
person may be considering making, or that has made,
an Acquisition Proposal; provided, nothing herein
shall prohibit the Company's Board of Directors from
taking or disclosing to the Company's stockholders a
position with respect to a tender offer pursuant to
Rules 14d-9 and 14e-2 promulgated under the Exchange
Act. The Company will promptly notify Parent after
receipt of any Acquisition Proposal or any notice
that any person is considering making an Acquisition
Proposal with respect to the Company or any request
for nonpublic information relating to the Company or
any of its subsidiaries or for access to the
properties, books or records of the Company or any of
its subsidiaries by any person that has advised the
Company or otherwise publicized the fact that such
person may be considering making, or that has made,
an Acquisition Proposal and will keep Parent informed
of the status and details of any such Acquisition
Proposal, indication or request.
(b) From the date hereof until the earlier of the
Effective Time or the termination of this Agreement
in accordance with its terms, Parent will not, and
will not authorize or permit any officer, director,
employee, agent or affiliate of Parent, or any other
person, directly or indirectly, to, solicit or
initiate any Acquisition Proposal (as defined below).
Parent will promptly notify the Company after receipt
of any Acquisition Proposal or any notice that any
person is considering making an Acquisition Proposal
with respect to Parent or any request for nonpublic
information relating to Parent or for access to the
properties, books or records of Parent by any person
<PAGE> 40
that has advised Parent or otherwise publicized the
fact that such person may be considering making, or
that has made, an Acquisition Proposal and will keep
the Company informed of the status and details of any
such Acquisition Proposal, indication or request.
Notwithstanding anything to the contrary in this
Section 4.2(b), Parent shall be free to respond in
any manner it determines appropriate to any
Acquisition Proposal which is not initiated or
solicited by Parent.
(c) For the purposes of this Agreement with
respect to the Company, "Acquisition Proposal" means
any offer, inquiry or proposal received from any
party other than Parent, concerning the possible
disposition of all or any significant portion of the
Company's or any of its subsidiaries' business,
assets or capital stock by merger, sale or any other
means or any other transaction that would involve a
change in control of the Company or any of its
subsidiaries (other than the Merger and the other
transactions contemplated by this Agreement).
(d) For purposes of this Agreement with respect
to Parent, "Acquisition Proposal" means any offer,
inquiry or proposal received from any party other
than the Company concerning the possible disposition
of all or substantially all of the Parent's business,
assets or capital stock by merger, sale or any other
means, or any other transaction that would involve a
change in control of the Parent.
4.3 Parent Dividends Restricted. During the period from
the date of this Agreement and continuing until the earlier of the Effective
Time or the termination of this Agreement according to its terms, Parent agrees
(except as consented to in writing by the Company) that it shall not declare,
set aside or pay any cash or stock dividend or other distribution in respect of
capital stock, or redeem or otherwise acquire any of its capital stock.
V. Additional Agreements
5.1 Registration on Form F-4. As promptly as practicable
after the execution of this Agreement, the Company shall, in cooperation with
Parent, prepare and submit to the SEC on a confidential basis the
Prospectus/Proxy Statement and Parent shall, in cooperation with the Company
prepare and submit to the SEC on a confidential basis the Form F-4, in which
the Prospectus/Proxy Statement will be included as Parent's prospectus,
together with any other documents required by the Securities Act or the
Securities Exchange Act in connection with the Merger. Each of Parent and the
Company will notify the other promptly upon the receipt of any comments by the
SEC or its staff and of any request by the SEC or its staff or any other
governmental officials for amendments or supplements to the Form F-4 or the
Prospectus/Proxy Statement or for additional information, and will promptly
supply the other with copies of all correspondence between
<PAGE> 41
such party or any of its representatives, on the one hand, and the SEC, its
staff or such other governmental officials, on the other hand, with respect to
the Form F-4, the Prospectus/Proxy Statement or the Merger. Subject to the
provisions of Section 5.2.2 regarding the fiduciary duties of the Board of
Directors of the Company, the Prospectus/Proxy Statement shall include the
recommendation of the Board of Directors of the Company in favor of the Merger.
Parent and the Company each shall use all reasonable efforts to have the Form
F-4 declared effective under the Securities Act as promptly as practicable;
provided, that Parent shall have no obligation to agree to account for the
Merger as a "purchase" in order to cause the Form F-4 to be declared effective.
The Company shall mail the Prospectus/Proxy Statement to the Company's
stockholders as promptly as practicable after the Form F-4 is declared
effective under the Securities Act and, if necessary, after the
Prospectus/Proxy Statement shall have been so mailed, promptly circulate
amended, supplemental or supplemented proxy material, and, if required in
connection therewith, resolicit proxies. Parent shall also, as promptly as
practicable, use all reasonable efforts to cause the ADR Depositary to file
with the SEC a registration statement on Form F-6 (the "Form F-6") with respect
to the Parent ADRs to be issued in connection with the Merger under the
Securities Act and use all reasonable efforts to have the Form F-6 declared
effective as soon as practicable after such filing. Parent shall also take any
action required to be taken under any applicable state securities laws in
connection with the issuance of the Parent ADSs in the Merger. The Company and
Parent shall each furnish the other with all information as may be reasonably
requested in connection with any action contemplated by this Section 5.1 or
Section 5.2. If at any time prior to the Effective Time any event or
information should be discovered by either the Company or Parent which should
be set forth in an amendment to the F-4 or a supplement to the Prospectus/Proxy
Statement, the discovering party shall promptly inform the other party.
5.2 Stockholders Meetings; Parent Approvals. The Company
shall, as soon as practicable following the date of this Agreement and the
effectiveness of the Form F-4, duly call, give notice of, convene and hold the
Company Stockholders Meeting.
5.2.1 Subject to the provisions of Section 5.2.2
regarding the fiduciary duties of the Board of
Directors of the Company, the Board of Directors of
the Company shall recommend adoption of this
Agreement and approval of the Merger by the Company's
stockholders and take all lawful action to solicit
such adoption and approval. Parent shall, as soon as
practicable following the date of this Agreement
(subject to coordination with the date of the Company
Stockholders Meeting), convene and hold the Parent
Shareholders Meeting. Subject to the provisions of
Section 5.2.2 regarding the fiduciary duties of the
Board of Directors of Parent, the Board of Directors
of Parent shall recommend approval of the
transactions contemplated by this Agreement and take
all lawful action to solicit such approval. To the
extent required by applicable law, Parent shall, as
soon as practicable after the date of this Agreement
and in accordance with the listing rules of the LSE,
in cooperation with the Company prepare and submit to
the LSE for approval the Parent Disclosure Document,
Parent shall notify the
<PAGE> 42
Company reasonably promptly upon receipt of any
material comments from the LSE and shall keep the
Company informed of all material stages of the
preparation of the Parent Disclosure Document.
Parent shall use all reasonable efforts to have the
Parent Disclosure Document formally approved by the
LSE and shall thereafter publish the Parent
Disclosure Document, file it with the Registrar of
Companies in England and mail the same to its
shareholders in compliance with all legal
requirements applicable to the Parent Shareholders
Meeting and the listing rules of the LSE and, if
necessary, after the Parent Disclosure Document has
been so posted, promptly circulate amended,
supplemental or supplemented materials and, if
required in connection therewith, resolicit votes.
If at any time prior to the Effective Time any event
or information should be discovered by either the
Company or Parent which should be set forth in a
supplement to the Parent Disclosure Document, the
discovering party shall promptly inform the other
party.
5.2.2 The Board of Directors of Monument or Tower,
as the case may be, may withhold, withdraw or modify
its recommendation that its shareholders approve the
transactions contemplated by this Agreement only if,
after receiving advice from its legal counsel and
financial adviser, the Board of Directors concludes
in good faith that its fiduciary duties require such
withholding, withdrawal or modification. In the
event of any dispute concerning such withholding,
withdrawal or modification, the party whose Board of
Directors withheld, withdrew or modified its
recommendation shall have the burden of proof of
compliance with the standard set forth in the
preceding sentence.
5.3 Access to Information. During the period from the
date of this Agreement and continuing until the earlier of the Effective Time
or the termination of this Agreement according to its terms, the Company agrees
to provide Parent and its agents with reasonable access to the files, books,
records and offices of the Company, including, without limitation, any and all
information relating to the Company's taxes, commitments, contracts, leases,
licenses, real, personal and intangible property, and financial condition. The
Company will use its best efforts to cause its accountants to cooperate with
Parent and its agents in making available all financial information reasonably
requested, including, without limitation, the right to examine all working
papers pertaining to all financial statements prepared or audited by such
accountants. During the period from the date of this Agreement and continuing
until the earlier of the Effective Time or the termination of this Agreement
according to its terms, Parent agrees to provide the Company and its agents
with reasonable access to the files, books, records and offices of Parent,
including, without limitation, any and all information relating to Parent's
taxes, commitments, contracts, leases, licenses, real, personal and intangible
property, and financial condition. Parent will use its best efforts to cause
its accountants to cooperate with the Company and its agents in making
available all financial information reasonably requested, including, without
<PAGE> 43
limitation, the right to examine all working papers pertaining to all financial
statements prepared or audited by such accountants.
5.4 Satisfaction of Conditions Precedent; Further
Assurances. Each of Parent and the Company will use their respective reasonable
best efforts to satisfy or cause to be satisfied promptly all the conditions
precedent to this Agreement, and each of Parent and the Company will use their
respective reasonable best efforts to cause the transactions provided for in
this Agreement to be consummated, and, without limiting the generality of the
foregoing, to obtain all consents and authorizations of third parties, to make
all filings, give all notices, execute and deliver such documents and
instruments and perform such other acts and things that may be necessary or
reasonably required on its part in order to effect the Merger, this Agreement
and the transactions provided for hereby and thereby.
5.5 Regulatory Approvals; Consents.
5.5.1 Each of Parent and the Company shall
promptly apply for or otherwise seek, and use all
reasonable efforts to obtain, all consents and
approvals required to be obtained by it for the
consummation of the Merger, including those required
under HSR, and shall use all reasonable efforts to
obtain all necessary consents, waivers and approvals
under any of its material contracts in connection
with the Merger for the assignment thereof or
otherwise, except where the failure to obtain such
consents under material contracts would not have a
Material Adverse Effect on the Company or Parent. The
parties hereto will consult and cooperate with one
another, and consider in good faith the views of one
another, in connection with any analyses,
appearances, presentations, memoranda, briefs,
arguments, opinions and proposals made or submitted
by or on behalf of any party hereto in connection
with proceedings under or relating to HSR or any
other federal, state or foreign antitrust or fair
trade law.
5.5.2 Each of Parent and the Company shall use all
reasonable efforts to resolve such objections, if
any, as may be asserted by any government entity with
respect to the transactions contemplated by this
Agreement under HSR, the Sherman Act, as amended, the
Clayton Act, as amended, the Federal Trade Commission
Act, as amended, and any other federal, national,
state, European Union or foreign statutes, rules,
regulations, orders or decrees that are designed to
prohibit, restrict or regulate actions having the
purpose or effect of monopolization or restraint of
trade (collectively, "Antitrust Laws"). In
connection therewith, if any administrative or
judicial action or proceeding is instituted (or
threatened to be instituted) challenging any
transaction contemplated by this Agreement as
violative of any Antitrust Law, each of Parent and
the Company shall cooperate and use all reasonable
efforts vigorously to contest and resist any such
action or proceeding and to have vacated, lifted,
reversed, or overturned any decree, judgment,
injunction or other order, whether temporary,
preliminary or permanent (each an "Order"), that is
in effect and that prohibits, prevents, or restricts
<PAGE> 44
consummation of the Merger or any such other
transactions, unless by mutual agreement Parent and
the Company decide that litigation is not in their
respective best interests. Notwithstanding the
provisions of the immediately preceding sentence, it
is expressly understood and agreed that neither the
Company nor Parent shall have any obligation to
litigate or contest any administrative or judicial
action or proceeding or any Order beyond the date of
a ruling preliminarily enjoining the Merger issued by
a court of competent jurisdiction. Each of Parent
and the Company shall use all reasonable efforts to
take such action as may be required to cause the
expiration of the notice periods under the HSR or
other Antitrust Laws with respect to such
transactions as promptly as possible after the
execution of this Agreement. 5.5.3 Notwithstanding
anything to the contrary in Section 5.5.1 or 5.5.2,
(i) neither Parent nor any of it subsidiaries shall
be required to divest any of their respective
businesses, product lines or assets, or to take or
agree to take any other action or agree to any
limitation, that could reasonably be expected to have
a Material Adverse Effect on Parent or on Parent
combined with the Company after the Effective Time
and (ii) neither the Company nor its subsidiaries
shall be required to divest any of their respective
businesses, product lines or assets, or to take or
agree to take any other action or agree to any
limitation, that could reasonably be expected to have
a Material Adverse Effect on the Company or on the
Company combined with Parent after the Effective
Time.
5.6 Pooling Accounting.
5.6.1 Each of Parent and the Company shall use their
reasonable best efforts to cause the Merger to be
accounted for as a pooling of interests. Each of
Parent and the Company shall use their reasonable
best efforts to have each person who is an
"Affiliate" within the meaning of Rule 145
promulgated under the Securities Act ("Rule 145") not
to take any action that would prevent Parent from
accounting for the Merger as a pooling of interests.
5.6.2 Schedule 5.6.2 sets forth those persons who
may be deemed "Affiliates" of the Company within the
meaning of Rule 145. The Company shall provide
Parent with such information as Parent shall
reasonably request for purposes of reviewing such
list. The Company shall use its best efforts to
deliver or cause to be delivered to Parent,
concurrently with the execution of this Agreement
(and in each case at least thirty days prior to the
Effective Time) from each of the Affiliates of the
Company, an executed Affiliate Agreement in the form
attached hereto as Exhibit C-1. Parent shall be
entitled to place, or cause to be placed, legends (as
specified in such Affiliate Agreements) on the
certificates evidencing Parent ADRs to be received by
such Affiliates of the Company and to issue stop
transfer orders to the transfer agent for Parent ADRs
consistent with the
<PAGE> 45
terms of such Affiliate Agreements.
5.6.3 Schedule
5.6.3 sets forth those persons who may be deemed
"Affiliates" of Parent within the meaning of Rule
145. Parent shall provide the Company with such
information as the Company shall reasonably request
for purposes of reviewing such list. Parent shall use
its best efforts to deliver or cause to be delivered
to Parent, concurrently with the execution of this
Agreement (and in each case at least thirty days
prior to the Effective Time) from each of the
Affiliates of Parent, an executed Affiliate Agreement
in the form attached hereto as Exhibit C-2.
5.7 Business Acquisitions and Dispositions. Parent
agrees that it will advise and consult with the Company prior
to entering into any agreement for the acquisition of a
business or the disposition of a significant portion of
Parent's business that would prevent the Merger from being
consummated on or before September 30, 1998.
5.8 Auditors Letters. Each of Parent and the Company
shall use all reasonable efforts to cause to be delivered to
the other party and such party's directors a letter of its
independent auditors, dated the date on which the Form F-4
shall become effective, in form and substance customary for
"comfort" letters delivered by independent public accountants
in connection with registration statements similar to the Form
F-4.
5.9 Stock Exchange Listings. Parent shall prepare and
submit to the LSE a listing application covering the Ordinary Shares to be
represented by the Parent ADSs to be issued in the Merger, and shall use all
reasonable efforts to obtain, prior to the Effective Time, agreement by the LSE
for the admission of such Ordinary Shares to the Official List of the LSE, and
the Company shall cooperate with Parent with respect to such listing. Parent
shall submit to the Nasdaq National Market a listing application covering the
Parent ADSs to be issued in the Merger, and shall use all reasonable efforts to
obtain, prior to the Effective Time, approval for the listing of such Parent
ADSs, subject to official notice of issuance, and the Company shall cooperate
with Parent with respect to such listing.
5.10 Board of Directors. Promptly after the Effective
Time, Parent shall take such actions as are necessary to (i) set the number of
directors of Parent at seven, (ii) appoint two directors of Parent nominated by
the Company after consulting in good faith with Parent, (iii) appoint or retain
two directors of Parent who are neither members of the management of Parent nor
of the Company, after seeking the recommendation of the Company with respect to
one such director, and after consulting in good faith with the Company with
respect to both such directors, and (iv) appoint or retain three directors of
Parent selected in the sole discretion of Parent. From and after the Effective
Time, Parent shall take such actions as are necessary to appoint Kevin J. Burns
as a director of the Company.
5.11 Nasdaq Quotation. Parent and the Company agree to
continue the quotation of Parent ADSs and Company Common Stock, respectively,
on the Nasdaq National Market during the term of this Agreement in order that
appraisal rights will not be available to the Company's stockholders under
Section 262 of the Delaware Law.
5.12 Employee Matters. Parent will provide employees of
the Company
<PAGE> 46
retained by Parent following the Closing with employee benefits in the
aggregate no less favorable than those benefits provided to similarly situated
employees of Parent; provided, that Parent shall be under no obligation to
retain any employee or group of employees of the Company or to continue any
existing program or plan for any employee or group of employees. The Company
will promptly notify Parent if any of the Company's officers becomes aware that
any of the Company's or any of its subsidiaries' key employees intends to leave
its employ. To the extent permitted by terms of the Company's 1992 Employee
Stock Purchase Plan ("Purchase Plan") and the pooling rules, the Company shall
use reasonable best efforts to terminate the Purchase Plan prior to or as of
the Effective Time, or take such other action with respect to the Purchase Plan
as may be agreed.
5.13 Takeover Statutes; Rights Agreement. If any "fair
price," "moratorium," "control share acquisition," or other anti-takeover
statute or similar statute or regulation, or any provision of the Company's
Certificate of Incorporation, Bylaws or other constitutive documents shall
become applicable to the Merger, this Agreement or any of the other
transactions contemplated hereby or thereby, the Company and its Board of
Directors shall take all action necessary to ensure that the Merger, this
Agreement and the other transactions contemplated hereby and thereby may be
consummated as promptly as practicable and otherwise to minimize the effect of
such statute, regulation or provision on the Merger, this Agreement and the
other transactions contemplated hereby and thereby. Except as otherwise
provided in Section 2.26.3, the Company shall not redeem the Rights or amend or
terminate the Rights Agreement prior to the Effective Time unless required to
do so by a court of competent jurisdiction.
5.14 Public Announcement. Parent and the Company will
issue a press release approved by both parties announcing the Merger as soon as
practicable following the execution of this Agreement. Each party shall
consult with the other before issuing any press release or otherwise making any
other public or non-confidential disclosure regarding the terms of this
Agreement and the transactions contemplated hereby, and neither shall issue any
such press release or make any such statement or disclosure without the prior
approval of the other (which approval shall not be unreasonably withheld),
except as may be required by law, court process, securities exchange listing
agreement or the rules of the LSE or the National Association of Securities
Dealers ("NASD"). Each party will take all reasonable precautions to prevent
any trading in the securities of the other by officers, directors, employees
and agents of such party having knowledge of any material information regarding
the other party provided hereunder until the information in question has been
publicly disclosed.
5.15 Confidentiality. Except as expressly authorized by
Parent in writing, the Company will not directly or indirectly divulge to any
person or entity or use any Parent Confidential Information, except as required
for the performance of its duties under this Agreement. Except as expressly
authorized by the Company in writing, Parent will not directly or indirectly
divulge to any person or entity or use any Company Confidential Information,
except as required for the performance of its duties under this Agreement. As
used herein, "Parent Confidential Information" consists of (a) any information
designated by Parent as confidential whether developed by Parent or disclosed
to Parent by a third party, (b) the source code to any Parent software and any
trade secrets relating to any of the foregoing, (c) any information relating to
Parent's product plans, product designs, product costs, product prices, product
names, finances, marketing plans,
<PAGE> 47
business opportunities, personnel, research development or know-how, (d) any
information contained in Parent's HSR Act filing in connection herewith and (e)
items and matters set forth in any disclosure letter by Parent in connection
herewith. As used herein, "Company Confidential Information" consists of (v)
any information designated by the Company as confidential whether developed by
the Company or disclosed to the Company by a third party, (w) the source code
to any the Company software, and any trade secrets related to any of the
foregoing, and (x) any information relating to the Company's product plans,
product designs, product costs, product prices, product names, finances,
marketing plan, business opportunities, personnel, research, development or
know-how, (y) any information contained in the Company's HSR Act filing in
connection herewith and (z) items and matters set forth in the Company
Disclosure Letter. "Parent Confidential Information" and "Company Confidential
Information" also include the terms and conditions of this Agreement, except as
disclosed in accordance with Section 5.14. The foregoing restrictions will not
apply to information that (i) has become publicly known through no wrongful act
of the receiving party, (ii) has been rightfully received from a third party
authorized by the party which is the owner, creator or compiler to make such
disclosure without restriction, (iii) has been approved or released by written
authorization of the party which is the owner, creator or compiler, (iv) is
being or has theretofore been disclosed pursuant to a valid law, court process,
securities exchange listing agreement or the rules of the LSE or NASD after a
reasonable attempt has been made to notify the party which is the owner,
creator or compiler, or (v) is already in the possession of the receiving
party, without restriction, or is independently developed by the receiving
party, in each case, not in violation of this Agreement. Each party hereto
agrees that the disclosure of Parent Confidential Information or Company
Confidential Information to the other shall not impair the right of the other
to make, procure or market products or services now or in the future which may
be competitive with those offered by the other party. Each party shall be free
to use the information which may be retained in intangible form in the minds of
those employees of such party who have had access to the Parent Confidential
Information or Company Confidential Information, as the case may be, for any
purpose, including their use in the development, manufacture, marketing and
maintenance of such receiving party's products and services; provided, however,
that this sentence shall not be deemed to permit the receiving party to
infringe any of the disclosing party's trade secrets or disclose any Parent
Confidential Information or Company Confidential Information, as the case may
be, to third parties in breach of this Section 5.15. This Section 5.15 shall
survive termination of this Agreement for a period of two years from the date
of such termination. This Section 5.15 supersedes, replaces and terminates the
Mutual Non-Disclosure Agreement, dated as of April 10, 1998, between Parent and
the Company.
5.16 Directors' and Officers' Insurance.
(a) Parent shall not modify or terminate the
policy of directors' and officers' liability
insurance that is currently maintained by the Company
until earlier of (i) the expiration of the current
term for such insurance, or (ii) three years from the
date hereof. (b) Parent shall not cause, or permit,
any changes in the Company's Certificate of
Incorporation or Bylaws with respect to the
indemnification of its former or their present
directors, officers, employees or agents, or any
indemnification obligations of the
<PAGE> 48
Company given pursuant to such Certificate of
Incorporation or Bylaws, and Parent hereby guarantees
the obligations of the Company pursuant to such
indemnification provisions following the Effective
Time.
VI. Closing; Exchange of Certificates
6.1 The Closing. Subject to termination of this
Agreement as provided in Article VIII below, the Closing will take place at the
offices of Fenwick & West, Two Palo Alto Square, Palo Alto, California as soon
as practicable after the satisfaction or waiver of each of the conditions set
forth in Articles VII or at such other time as the parties hereto may agree
(the "Closing Date"). Prior to or concurrently with the Closing, the
Certificate of Merger and such officers' certificates or other documents as may
be required to effectuate the Merger will be filed in the office of the
Secretary of State of the State of Delaware. Accordingly, the Merger will
become effective at the Effective Time.
6.2 Exchange Fund. At the Effective Time, (i) Parent
shall issue to and deposit with the ADR Depositary, for the
benefit of the holders of shares of Company Common Stock
converted in accordance with Article I, Ordinary Shares in an
amount sufficient to permit the ADR Depositary to issue Parent
ADRs representing the number of Parent ADSs issuable pursuant
to Section 1.1 and (ii) Parent shall deposit with such bank or
trust company as may be designated by Parent and be reasonably
acceptable to Company (the "Exchange Agent") cash in lieu of
fractional Parent ADSs. Parent shall cause the ADR Depositary
to issue upon the instructions of the Exchange Agent, for the
benefit of the holders of shares of Company Common Stock
converted in accordance with Article I, through the Exchange
Agent, Parent ADRs representing the number of Parent ADSs
issuable pursuant to Section 1.1, as soon as practicable after
the Effective Time, and the Exchange Agent shall deliver cash
in lieu of fractional Parent ADSs pursuant to Section 1.2
(such cash and Parent ADRs representing Parent ADSs, together
with any dividends or distributions with respect thereto,
being hereinafter referred to as the "Exchange Fund") in
exchange for outstanding shares of Company Common Stock.
Parent shall pay any stamp duties in connection with the
transfer of shares of Company Common Stock to the ADR
Depositary.
6.3 Exchange Procedures. As soon as reasonably
practicable after the Effective Time, the Exchange Agent shall
mail to each holder of record of a certificate or certificates
which immediately prior to the Effective Time represented
outstanding shares of Company Common Stock (and the associated
Rights) (the "Certificates") that were converted into the
right to receive Parent ADSs pursuant to Section 1.1, (i) a
letter of transmittal (which shall specify that delivery shall
be effected, and risk of loss and title to the Certificates
shall pass, only upon delivery of the Certificates to the
Exchange Agent, and which shall be in such form and have such
other provisions as Parent may reasonably specify) and (ii)
instructions for use in effecting the surrender of the
Certificates in exchange for Parent ADRs. Upon surrender of a
Certificate for cancellation to the Exchange Agent together
with such letter of transmittal, duly executed and completed
in accordance with the instructions thereto, and such other
documents as may
<PAGE> 49
reasonably be required by the Exchange Agent, the holder of
such Certificate shall be entitled to receive in exchange
therefor (A) one or more Parent ADRs representing, in the
aggregate, the whole number of Parent ADSs that such holder
has the right to receive pursuant to the provisions of Article
I (after taking into account all shares of Company Common
Stock then held by such holder) and (B) a check in the amount
equal to the cash that such holder has the right to receive in
lieu of any fractional Parent ADSs pursuant to Section 1.2,
and the Certificate so surrendered shall forthwith be
canceled. In the event of a transfer of ownership of Company
Common Stock that is not registered in the transfer records of
the Company, one or more Parent ADRs evidencing, in the
aggregate, the proper number of Parent ADSs may be issued, a
check in the proper amount of cash in lieu of any fractional
Parent ADSs and any dividends or other distributions to which
such holder is entitled pursuant to Section 6.4 may be paid to
a person other than the person in whose name the Certificate
so surrendered is registered if the Certificate representing
such Company Common Stock is presented to the Exchange Agent,
accompanied by all documents required to evidence and effect
such transfer and evidence that any applicable stock transfer
taxes have been paid. Until surrendered as contemplated by
this Article VI, each Certificate shall be deemed at any time
after the Effective Time to represent only the right to
receive upon surrender the Merger consideration with respect
to the shares of Company Common Stock formerly represented
thereby to which such holder is entitled pursuant to Section
1.1, cash in lieu of any fractional Parent ADSs to which such
holder is entitled pursuant to Section 1.2 and any dividends
or other distributions to which such holder is entitled
pursuant to Section 6.4. No interest will be paid or will
accrue on any cash payable in lieu of any traditional Parent
ADSs payable pursuant to Section 1.2 or any dividends or other
distributions payable pursuant to Section 6.4.
6.4 Distributions with Respect to Unexchanged Shares. No
dividends or other distributions declared or made with respect
to Ordinary Shares with a record date after the Effective Time
shall be paid to the holder of any unsurrendered Certificate
with respect to the Parent ADSs that such holder would be
entitled to receive upon surrender of such Certificate and no
cash payment in lieu of fractional Parent ADSs shall be paid
to any such holder pursuant to Section 1.2 until such holder
shall surrender such Certificate in accordance with Section
6.3. Subject to the effect of applicable laws, following
surrender of any such Certificate, there shall be paid to the
holder of Parent ADSs issued in exchange therefor, without
interest, (a) promptly after the time of such surrender, the
amount of any cash payable in lieu of fractional Parent ADSs
to which such holder is entitled pursuant to Section 1.2 and
the amount of dividends or other distributions with a record
date after the Effective Time theretofore paid with respect to
such whole Parent ADSs, and (b) at the appropriate payment
date, the amount of 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
<PAGE> 50
with respect to such Parent ADSs.
6.5 No Further Ownership Rights in Company Common Stock.
All Parent ADRs (and the Parent ADSs represented by such
Parent ADRs) issued and cash paid upon conversion of shares of
Company Common Stock in accordance with the terms of Article I
and this Article VI (including any cash paid pursuant to
Sections 1.2 or 6.4) shall be deemed to have been issued or
paid in full satisfaction of all rights pertaining to the
shares of Company Common Stock (and the Rights associated
therewith).
6.6 Termination of Exchange Fund. Any portion of the
Exchange Fund which remains undistributed to the holders of
Certificates for twelve months after the Effective Time shall
be delivered to Parent or otherwise on the instruction of the
Parent, and any holders of the Certificates who have not
theretofore complied with this Article VI shall thereafter
look only to Parent for the Merger consideration with respect
to the shares of Company Common Stock formerly represented
thereby to which such holders are entitled pursuant to Section
6.3, any cash in lieu of fractional Parent ADSs to which such
holders are entitled pursuant to Section 1.2 and any dividends
or distributions with respect to Parent ADSs to which such
holders are entitled pursuant to Section 6.4. Any such former
portion of the Exchange Fund remaining unclaimed by holders of
shares of Company Common Stock five years after the Effective
Time (or such earlier date immediately prior to such time as
such amounts would otherwise escheat to or become property of
any governmental entity) shall, to the extent permitted by
applicable law, become the property of Parent free and clear
of any claims or interest of any person previously entitled
thereto.
6.7 No Liability. None of Parent, Newco, the Company,
the ADR Depositary or the Exchange Agent shall be liable to
any person in respect of any Parent ADSs (or dividends or
distributions with respect to Parent ADSs) or cash from the
Exchange Fund delivered to a public official pursuant to any
applicable abandoned property, escheat or similar law.
6.8 Investment of Exchange Fund. The Exchange Agent
shall invest any cash included in the Exchange Fund as
directed by Parent on a daily basis. Any interest and other
income resulting from such investments shall promptly be paid
to Parent.
6.9 Lost Certificates. If any Certificate shall have
been lost, stolen or destroyed, upon the making of an
affidavit of that fact by the person claiming such Certificate
to be lost, stolen or destroyed and, if required by Parent,
the posting by such person of a bond in such reasonable amount
as Parent may direct as indemnity against any claim that may
be made against it with respect to such Certificate, the
Exchange Agent will deliver in exchange for such lost, stolen
or destroyed Certificate the applicable consideration with
respect to the shares of Company Common Stock formerly
represented thereby, pursuant to this Agreement.
6.10 Withholding Rights. Parent shall be entitled to
deduct and withhold from the consideration otherwise payable
pursuant to this Agreement to any holder of shares of Company
Common Stock such amounts as it is required
<PAGE> 51
to deduct and withhold with respect to the making of such
payment under the Code, or any provision of state, local or
foreign tax law, including the tax laws of the United Kingdom.
To the extent that amounts are so withheld by Parent, such
withheld amounts shall be treated for all purposes of this
Agreement as having been paid to the holder of the shares of
Company Common Stock in respect of which such deduction and
withholding was made by Parent.
6.11 Stock Transfer Books. At the close of business on
the day the Effective Time occurs, the stock transfer books of
Company shall be closed and there shall be no further
registration of transfers of shares of Company Common Stock
thereafter on the records of Company. From and after the
Effective Time, the holders of Certificates shall cease to
have any rights with respect to such shares of Company Common
Stock formerly represented thereby, except as otherwise
provided herein or by law. On or after the Effective Time,
any Certificates presented to the Exchange Agent or Parent for
any reason shall be converted into Parent ADSs with respect to
the shares of Company Common Stock formerly represented
thereby, any cash in lieu of fractional Parent ADSs to which
the holders thereof are entitled pursuant to Section 1.2 and
any dividends or other distributions to which the holders
thereof are entitled pursuant to Section 6.4.
VII. Conditions Precedent
7.1 Conditions to Obligations of Each Party. The
respective obligations of each party under this Agreement to consummate and
effect this Agreement and the transactions contemplated hereby shall be subject
to the fulfillment or satisfaction, on and as of the Closing, of each of the
following conditions, any one or more of which may be waived, in writing, by
agreement of all of the parties hereto:
(a) Stockholder Approvals. (i) The Company shall have
obtained all approvals of holders of shares of capital stock of the Company
necessary to approve this Agreement and the transactions contemplated hereby,
and (ii) Parent shall have obtained all approvals of holders of share capital
of Parent necessary to approve this Agreement and the transactions contemplated
hereby.
(b) Registration Statements. The SEC shall have declared
each of the Form F-4 and the Form F-6 effective. No stop order suspending the
effectiveness of the Form F-4 or the Form F-6 shall have been issued and no
proceeding for that purpose, and no similar proceeding in respect of the
Prospectus/Proxy Statement, shall have been initiated or threatened by the SEC.
(c) Government Consents. All material consents, orders,
permits or authorizations of, or declarations or filings with, or expiration of
waiting periods (including under the HSR Act) imposed by, any governmental
entity necessary for the consummation of the Merger and the other transactions
contemplated by this Agreement shall have been filed, expired or been obtained,
other than those, that, individually or in the aggregate, the failure to be
filed, expired or obtained would not, in the reasonable opinion of Parent and
the Company, have a Material Adverse Effect on Parent or the Company. Each of
Parent and the Company shall be reasonably satisfied that (a) neither the
Merger nor any matter arising therefrom shall be referred to the U.K.
Monopolies and Mergers Commission, and
<PAGE> 52
that (b) the European Union Mergers Commission will not either initiate
proceeding under Article 6(1)(c) of Council Regulation (EEC) 4064/89, as
amended, or make a referral to a competent authority of the U.K. under Article
9(1) of that regulation.
(d) No Injunctions; Illegality. No temporary restraining
order, preliminary or permanent injunction or other order issued by a court or
other governmental entity of competent jurisdiction shall be in effect and have
the effect of (i) making the Merger illegal or otherwise prohibiting
consummation of the Merger, or (ii) limiting or restricting Parent's conduct or
operation of the business of the Company and its subsidiaries. In the event an
injunction or other order shall have been issued, each party agrees to use its
reasonable efforts to have such injunction or other order lifted.
(e) Tax Opinions. Parent and the Company shall have
received substantially identical opinions of Fenwick & West LLP, counsel to
Parent, and Arent Fox Kintner Plotkin & Kahn, PLLC, counsel to the Company,
respectively, in form and substance reasonably satisfactory to them, to the
effect that the Merger will constitute a reorganization within the meaning of
Section 368(a) of the Code. In rendering such opinions, counsel shall be
entitled to rely upon, among other things, reasonable assumptions as well as
representations of Parent, Newco and the Company.
(f) Pooling Letters. The Parent shall have received a
letter from Ernst & Young LLP, independent auditors, confirming concurrence
with Parent's Management's conclusion that the Merger qualifies for pooling of
interests accounting treatment under APB Opinion No. 16 if consummated in
accordance with this Agreement, such letters in forms reasonably satisfactory
to the Parent and customary in scope and substance for letters delivered by
independent public accountants in connection with transactions of this type.
The Company shall have received a letter from Coopers & Lybrand LLP,
independent auditors, confirming that they concur with the conclusions of
Company's management that no conditions exist with respect to Company which
would preclude Company from being a party to a merger accounted for as a
pooling of interests, such letter in a form reasonably satisfactory to the
Parent and customary in scope and substance for letters delivered by
independent public accountants in connection with transactions of this type.
(g) Listing of Shares. The LSE shall have agreed to
admit to the Official List (subject to allotment) the Ordinary Shares to be
issued in connection with the Merger and such agreement shall not have been
withdrawn, and the Parent ADSs to be issued in the Merger shall have been
authorized for listing on the Nasdaq National Market.
(h) U.K. Treasury Consent. H.M. Treasury shall have
consented pursuant to Section 765(1)(C) of the Income and Corporation Taxes Act
1988, or H.M. Treasury shall have confirmed that no such consent is required,
in connection with the transactions contemplated hereby.
7.2 Conditions to Obligations of the Company. The
Company's obligations under this Agreement to consummate and effect this
Agreement and the transactions contemplated hereby shall be subject to the
fulfillment or satisfaction, on and as of the Closing, of each of the following
conditions, any one or more of which may be waived, in writing, by the Company:
(a) Representations and Warranties. The representations
and warranties of Parent and Newco set forth in this Agreement shall be true
and correct on and as of the date hereof and as of the Effective Time as if
made on and as of the Effective Time, except for such inaccuracies as
individually or in the aggregate that would not have a Material
<PAGE> 53
Adverse Effect on Parent, and the Company shall have received a certificate to
such effect executed on behalf of Parent by its Chief Financial Officer.
(b) Covenants. Parent and Newco shall have performed and
complied in all material respects with all covenants, obligations, conditions
and agreements required by this Agreement to be performed or complied with by
them on or prior to the Effective Time, and the Company shall have received a
certificate to such effect executed on behalf of Parent by its Chief Financial
Officer.
(c) No Material Adverse Effect. There shall not have
occurred any Material Adverse Effect with respect to Parent.
(d) Opinion of Parent's Counsel. The Company shall have
received from Memery Crystal & Co., UK counsel to Parent, and Fenwick & West
LLP, US counsel to Parent, opinions as to the matters set forth in Exhibit D,
which opinion shall be reasonably acceptable to the Company and its counsel.
(e) Consents. The Company shall have received all
written consents, assignments, waivers, authorizations or other certificates
contemplated by this Agreement or the Parent Disclosure Letter or reasonably
deemed necessary by the Company's legal counsel to provide for the continuation
in full force and effect of any and all material contracts and leases of Parent
and for the Company to consummate the transactions contemplated hereby, each in
form and substance satisfactory to the Company, except where the failure to
obtain such consents, assignments, waivers, authorizations or other certificate
would not have a Material Adverse Effect on Parent.
(f) Officer's Certificate. The Chief Financial Officer
of Parent shall have executed and delivered a certificate in substantially the
form of Exhibit B-1.
7.3 Conditions to Obligations of Parent and Newco. The
obligations of Parent and Newco under this Agreement to consummate and effect
this Agreement and the transactions contemplated hereby shall be subject to the
fulfillment or satisfaction, on and as of the Closing, of each of the following
conditions, any one or more of which may be waived, in writing, by Parent:
(a) Representations and Warranties. The representations
and warranties of the Company set forth in this Agreement shall be true and
correct on and as of the date hereof and as of the Effective Time as if made on
and as of the Effective Time, except for such inaccuracies as individually or
in the aggregate that would not have a Material Adverse Effect on the Company,
and Parent shall have received a certificate to such effect executed on behalf
of the Company by its President.
(b) Covenants. The Company shall have performed and
complied in all material respects with all covenants, obligations, conditions
and agreements required by this Agreement to be performed or complied with by
them on or prior to the Effective Time, and Parent shall have received a
certificate to such effect executed on behalf of the Company by its President.
(c) No Material Adverse Effect. There shall not have
occurred any Material Adverse Effect with respect to the Company.
(d) Opinion of the Company's Counsel. Parent shall have
received from Arent Fox Kintner Plotkin & Kahn, PLLC, counsel to the Company,
an opinion as to the matters set forth in Exhibit E, which opinion shall be
reasonably acceptable to the Company and its counsel.
(e) Consents. Parent shall have received all written
consents,
<PAGE> 54
assignments, waivers, authorizations or other certificates contemplated by this
Agreement or the Company Disclosure Letter or reasonably deemed necessary by
Parent's legal counsel to provide for the continuation in full force and effect
of any and all material contracts and leases of the Company and for Parent to
consummate the transactions contemplated hereby, each in form and substance
satisfactory to Parent, except where the failure to obtain such consents,
assignments, waivers, authorizations or other certificate would not have a
Material Adverse Effect on the Company.
(f) Officer's Certificate. The Chief Executive Officer
or Chief Financial Officer of the Company shall have executed and delivered a
certificate in substantially the form of B-2.
(g) Affiliate Agreements. Parent shall have received
from each Affiliate of the Company under Rule 145 a duly executed Affiliate
Agreement in the form of Exhibit E.
(i) Resignations. Parent shall have received the
resignations of each of the directors, other than Kevin J. Burns, and each of
the officers, of the Company.
VIII. Termination
8.1 Termination. This Agreement may be terminated at any
time prior to the Effective Time, whether before or after approval of
the matters presented in connection with the Merger by the
stockholders of the Company or the shareholders of Parent:
(a) by the mutual written agreement authorized by
the Board of Directors of each of Parent and the Company;
(b) at any time after January 31, 1999, by either
Parent or the Company if the Closing shall not have occurred on or
before such date and such failure to consummate is not caused by a
breach of this Agreement by the party seeking to terminate this
Agreement;
(c) by Parent or the Company, if a permanent
injunction or other order by any federal, state or foreign court of
competent jurisdiction which would make illegal or otherwise restrain
or prohibit the consummation of the Merger will have been issued and
will have become final and nonappealable.
(d) by the Company, if there has been a breach by
Parent of any representation, warranty, covenant or agreement set
forth in this Agreement on the part of Parent, or if any
representation of Parent shall have become untrue, in either case
which has or can reasonably be expected to have a Material Adverse
Effect on Parent and which Parent fails to cure within a reasonable
time, not to exceed 20 days, after written notice thereof;
(e) by Parent, if there has been a breach by the
Company of any representation, warranty, covenant or agreement set
forth in this Agreement on the part of the Company, or if any
representation of the Company will have become untrue, in either case
which has or can reasonably be expected to have a Material Adverse
Effect on the Company and which the Company fails to cure within a
reasonable time, not to exceed 20 days, after written notice thereof;
(f) by Parent or the Company, if the required
approval of the shareholders of Parent of the transactions
contemplated by this Agreement is not obtained at a duly held meeting
of such shareholders or at any adjournment thereof;
<PAGE> 55
(g) by Parent or the Company, if the required
approval of the stockholders of the Company of the transactions
contemplated by this Agreement is not obtained at a duly held meeting
of such stockholders or at any adjournment thereof;
(h) by Parent, if the Board of Directors of the
Company shall have, other than in connection with the occurrence of a
Trigger Event or an Acquisition Proposal pursuant to Section 8.1(j),
withheld, withdrawn or modified in a manner adverse to Parent its
recommendation of this Agreement or the Merger, or shall have resolved
to do any of the foregoing, as permitted by Section 5.2.2;
(i) by the Company, if the Board of Directors of
Parent shall have withheld, withdrawn or modified in a manner adverse
to the Company its recommendation of this Agreement and the
transactions contemplated hereby, or shall have resolved to do any of
the foregoing, as permitted by Section 5.2.2; or
(j) by Parent or the Company, if a Trigger Event
or Acquisition Proposal shall have occurred and the Board of Directors
of the Company in connection therewith, after receiving the written
advice of its legal counsel and its financial advisors, withholds,
withdraws or modifies its approval and recommendation of this
Agreement and the Merger, determining in good faith that to cause the
Company to proceed with the transactions contemplated by this
Agreement would not be consistent with the fiduciary duty of the Board
of Directors to the stockholders of the Company. A "Trigger Event"
shall occur if any person acquires securities representing 20% or
more, or commences a tender or exchange offer following the successful
consummation of which the offeror and its affiliates would
beneficially own securities representing 20% or more, of the voting
power of the Company.
Any termination of this Agreement under this Section 8.1 will
be effective by the delivery of written notice of the terminating
party to the other party hereto.
8.2 Effect of Termination. If this Agreement is validly
terminated pursuant to Section 8.1, such termination shall be without liability
or obligation of either party (or any shareholder, director, officer, employee,
agent, consultant or representative of such party) to the other party to this
Agreement, except to the extent provided in Section 8.3. The provisions of
Section 5.15, 8.2, 8.3, 9.2 and 9.15 shall survive any termination of this
Agreement.
8.3 Expenses and Termination Fees.
8.3.1 Except as otherwise provided in this Section
8.3, all costs and expenses incurred in connection with this
Agreement shall be paid by the party incurring such cost or
expense.
8.3.2 The Company agrees to pay to Parent $1
million in immediately available funds, promptly, but in no
event later than two business days after the termination of
this Agreement pursuant to Section 8.1(e) for breach by the
Company, which payment is intended to reimburse Parent for its
expenses incurred in connection with the transactions
contemplated by this Agreement but shall not be deemed to be
liquidated damages and shall not limit Parent's remedies or
recovery against the Company for willful breach of this
Agreement. In no event, however, shall the Company's total
liability to Parent for breach of this Agreement exceed a
<PAGE> 56
total of $20 million, inclusive of all amounts payable under
this Section 8.3.
8.3.3 Parent agrees to pay to the Company $1
million in immediately available funds, promptly, but in no
event later than two business after the termination of this
Agreement pursuant to Section 8.1(d) for breach by Parent,
which payment is intended to reimburse the Company for its
expenses incurred in connection with the transactions
contemplated by this Agreement but shall not be deemed to be
liquidated damages and shall not limit the Company's remedies
or recovery against Parent for willful breach of this
Agreement. In no event, however, shall Parent's total
liability to the Company for breach of this Agreement exceed a
total of $20 million, inclusive of all amounts payable under
this Section 8.3.
8.3.4 The Company agrees to pay to Parent a fee of
$15 million in immediately available funds, promptly,
but in no event later than two business days, after
the termination of this Agreement pursuant to Section
8.1(j).
8.3.5 Parent agrees to pay the Company a fee of $1
million in immediately available funds, promptly, but
in no event later than two business days after the
termination of this Agreement pursuant to Section
8.1(f) or (i). Such payment is intended to reimburse
the Company for its expenses incurred in connection
with the transactions contemplated by this Agreement
and shall be the Company's exclusive remedy for the
matters giving rise to such termination.
8.3.6 The Company agrees to pay to Parent a fee of
$1 million in immediately available funds, promptly, but in no
event later than two business days, after the termination of
this Agreement pursuant to Section 8.1(g) or (h). Such
payment is intended to reimburse Parent for its expenses
incurred in connection with the transactions contemplated by
this Agreement and shall be Parent's exclusive remedy for the
matters giving rise to such termination, except as provided in
Section 8.3.7 below.
8.3.7 If, during the 12 month period commencing on
the date on which this Agreement is terminated
pursuant to Section 8.1(e), (g), (h) or (j), the
Company shall have entered into a binding agreement
with respect to an Acquisition Proposal with any
third party with whom the Company had any discussions
concerning an Acquisition Proposal within 6 months of
the date on which this Agreement is terminated, upon
consummation of the transaction contemplated by such
Acquisition Proposal (whether or not such
consummation shall occur with such 12 month period),
the Company agrees to pay to Parent an additional fee
equal to $20 million less the total of all other
amounts theretofore paid by the Company to Parent
under this Section 8.3, in immediately available
funds, promptly, but in no event later than two
business days, after the date of such consummation;
provided, however, that the additional fee shall
equal $5 million less the total of all amounts
theretofore paid by the
<PAGE> 57
Company to Parent under this Section 8.3 in the case
of a disposition of any portion of the Company's
business that represented less than 25% of the
Company's total revenues for the fiscal year ended
April 30, 1998. In the case of any termination
pursuant to Section 8.1(g) or (h), no additional fee
will be payable under this Section 8.3.7 with respect
to any transaction that constitutes a spinoff of
assets or securities by dividend or other
distribution to the stockholders of the Company and
is not followed by a transaction contemplated by an
Acquisition Proposal with respect to such assets or
securities for which a binding agreement is entered
into within the time frame specified above in this
Section 8.3.7.
IX. General Provisions
9.1 Non-Survival. None of the representations or
warranties in this Agreement or in any certificate, document
or instrument delivered pursuant hereto shall survive the
Effective Time. This Section 9.1 shall not limit any covenant
or agreement of the parties which by its terms contemplates
performance after the Effective Time.
9.2 Governing Law. This Agreement shall be governed by,
and construed in accordance with, the laws of the State of
Delaware, without regard to conflicts of laws principles.
9.3 Assignment; Successors and Assigns. No party hereto
may assign any of its rights or obligations hereunder without the prior written
consent of the other parties hereto. Any purported assignment not permitted by
this Section shall be void. This Agreement will be binding upon and inure to
the benefit of the parties hereto and their respective successors and permitted
assigns.
9.4 Severability. If any provision of this Agreement, or
the application thereof, is for any reason held to any extent to be invalid or
unenforceable, the remainder of this Agreement and application of such
provision to other persons or circumstances will be interpreted so as
reasonably to effect the intent of the parties hereto. The parties further
agree to replace such unenforceable provision of this Agreement with a valid
and enforceable provision that will achieve, to the extent possible, the
economic, business and other purposes of the void or unenforceable provision.
9.5 Counterparts. This Agreement may be executed in
counterparts, each of which will be an original as regards any party whose name
appears thereon and all of which together will constitute one and the same
instrument. This Agreement will become binding when one or more counterparts
hereof, individually or taken together, bear the signatures of all parties
reflected hereon as signatories.
9.6 Other Remedies. Except as otherwise provided herein,
any and all remedies herein expressly conferred upon a party will be deemed
cumulative with and not exclusive of any other remedy conferred hereby or by
law on such party, and the exercise of any one remedy will not preclude the
exercise of any other.
9.7 Amendment and Waivers. Any term or provision of this
Agreement may be amended only by a writing signed by Parent, Newco and the
Company. This
<PAGE> 58
Agreement may be amended by the parties hereto at any time before or after
approval of the shareholders of Parent and/or the stockholders of the Company;
provided, that following any such approval, no amendment shall be made which by
law or in accordance with the rules of any relevant stock exchange requires
further approval by such shareholders or stockholders without such further
approval. The observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only by a writing signed by the party to be bound thereby. The
waiver by a party of any breach hereof or default in the performance hereof
will not be deemed to constitute a waiver of any other default or any
succeeding breach or default.
9.8 No Waiver. The failure of any party to enforce any
of the provisions hereof will not be construed to be a waiver of the right of
such party thereafter to enforce such provisions. The waiver by any party of
the right to enforce any of the provisions hereof on any occasion will not be
construed to be a waiver of the right of such party to enforce such provision
on any other occasion.
9.9 Notices. Any notice or other communication required
or permitted to be given under this Agreement will be in writing, will be
delivered personally, by mail or express delivery, postage prepaid, or telecopy
(confirmed in writing) and will be deemed given upon actual delivery or, if
mailed by registered or certified mail, on the third business day following
deposit in the mails, addressed as follows:
(i) If to Parent or Newco:
Micro Focus Group PLC
701 E. Middlefield Road
Mountain View, California 94043
Attention: President
Fax: (650) 404-7459
with a copy to:
Fenwick & West LLP
Two Palo Alto Square
Palo Alto, California 94306
Attention: Gordon K. Davidson
Fax: 415-494-1417
(ii) If to the Company:
Intersolv, Inc.
9420 Key West Avenue
Rockville, Maryland 20850
Attention: General Counsel
Fax: (310) 315-7022
or to such other address as the party in question may have furnished to the
other party by written notice given in accordance with this Section 9.9.
9.10 Interpretation of Agreement. The language hereof
will not be construed for or against either party. A reference to an article,
section or exhibit will mean an article or section in, or an exhibit to, this
Agreement, unless otherwise explicitly set
<PAGE> 59
forth. The titles and headings in this Agreement are for reference purposes
only and will not in any manner limit the interpretation of this Agreement.
For the purposes of such interpretation, this Agreement will be considered as a
whole.
9.11 No Joint Venture. Nothing contained in this
Agreement will be deemed or construed as creating a joint venture or
partnership between the parties hereto. No party is by virtue of this
Agreement authorized as an agent, employee or legal representative of any other
party. No party will have the power to control the activities and operations
of any other, and the parties' status is, and at all times, will continue to
be, that of independent contractors with respect to each other. No party will
have any power or authority to bind or commit any other. No party will hold
itself out as having any authority or relationship in contravention of this
Section.
9.12 Further Assurances. Each party agrees to cooperate
fully with the other parties and to execute such further instruments, documents
and agreements and to give such further written assurances as may be reasonably
requested by the other parties to evidence and reflect the transactions
provided for herein and to carry into effect the intent of this Agreement.
9.13 Absence of Third Party Beneficiary Rights. No
provisions of this Agreement are intended, nor will be interpreted, to provide
or create any third party beneficiary rights or any other rights of any kind in
any client, customer, affiliate, partner or employee of any party hereto or any
other person or entity, unless specifically provided otherwise herein, and,
except as so provided, all provisions hereof will be personal solely among the
parties to this Agreement.
9.14 Entire Agreement. This Agreement and the exhibits
and schedules hereto constitute the entire understanding and agreement of the
parties hereto with respect to the subject matter hereof and supersede all
prior and contemporaneous agreements or understandings, inducements or
conditions, express or implied, written or oral, between the parties with
respect to the subject matter hereof. The express terms hereof control and
supersede any course of performance or usage of trade inconsistent with any of
the terms hereof.
9.15 Submission to Jurisdiction. Each of Parent, Newco
and the Company irrevocably agrees that any legal action or proceeding with
respect to this Agreement or any of the transactions contemplated hereby or
thereby, or for recognition or enforcement of any judgment in respect hereof or
thereof may be brought and determined in any federal or state court sitting in
Wilmington, Delaware, and irrevocably accepts for itself and in respect of its
property, generally and unconditionally, the jurisdiction of said courts. Each
party irrevocably waives any objection that such party may now or hereafter
have to the laying of venue of any such proceeding in any such court and any
claim that such proceeding brought in any such court has been brought in an
inconvenient forum.
In witness whereof, the parties hereto have executed this
Agreement as of the date first above written.
Micro Focus Group PLC
By:
----------------------------------
<PAGE> 60
Name:
Title:
Tower Merger Sub Inc.
By:
----------------------------------
Name:
Title:
Intersolv, Inc.
By:
----------------------------------
Name:
Title:
[Signature Page to the Agreement and Plan of Reorganization]
<PAGE> 1
EXHIBIT 21.1
EXHIBIT 21.1 - SUBSIDIARIES OF THE COMPANY
- - INTERSOLV, Inc. (Delaware)
- INTERSOLV Technology Holdings Corporation (Delaware)
- INTERSOLV KK (Japan)
- INTERSOLV International Holdings Corp. (Delaware)
- INTERSOLV plc (United Kingdom)
- INTERSOLV Pty Ltd (Australia)
- Salgin Pty Ltd (Australia)
- INTERSOLV Gmbh (Germany)
- INTERSOLV France SA (France)
- INTERSOLV Foreign Sales Corporation (Barbados)
- INTERSOLV Distributors Inc. (Delaware)
- TechGnosis France SA (France)
- TechGnosis (Middleware) Ltd. (United Kingdom)
- TechGnosis GmbH (Germany)
- INTERSOLV NV (Belgium)
- TechGnosis International NV (Belgium)
- INTERSOLV BV (Netherlands)
- INTERSOLV-Canada Inc. (Ontario, Canada)
- Q&E Software Ltd. (United Kingdom)
- Q&E Software Deutscheland (Germany)
- Q&E Software Benelux (Netherlands)
- SQL Holdings plc (United Kingdom)
- SQL Limited (United Kingdom)
- SQL Software Inc. (Delaware)
- SQL GmbH (Germany)
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Intersolv, Inc. on Form S-8 (File Nos. 333-34289, 33-56220, 33-86590, 33-64643,
33-83794 and 33-37110) of our report, dated June 17, 1998, on our audits of the
financial statements of Intersolv, Inc., which report is included in this
annual report on Form 10-K.
PricewaterhouseCoopers LLP
McLean, Virginia
July 8, 1998
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<ARTICLE> 5
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<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-END> APR-30-1998
<CASH> 34,082
<SECURITIES> 0
<RECEIVABLES> 65,863
<ALLOWANCES> (2,901)
<INVENTORY> 0
<CURRENT-ASSETS> 104,707
<PP&E> 27,963
<DEPRECIATION> (15,975)
<TOTAL-ASSETS> 132,866
<CURRENT-LIABILITIES> 69,733
<BONDS> 0
0
0
<COMMON> 226
<OTHER-SE> 57,013
<TOTAL-LIABILITY-AND-EQUITY> 132,866
<SALES> 196,480
<TOTAL-REVENUES> 196,480
<CGS> 61,602
<TOTAL-COSTS> 187,936
<OTHER-EXPENSES> 0
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