-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GdFyiBrOo09mH5MaVRDuyJEGclo8qziNCtJrNJmNiVAJCng0SkEXdXjxsrqRVjMH oCf3busetdK2eG4GNfH8yw== 0000936392-98-000517.txt : 19980401 0000936392-98-000517.hdr.sgml : 19980401 ACCESSION NUMBER: 0000936392-98-000517 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 19 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: DATAWORKS CORP CENTRAL INDEX KEY: 0001000860 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 330209937 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-26814 FILM NUMBER: 98580272 BUSINESS ADDRESS: STREET 1: 5910 PACIFIC CENTER BLVD STE 300 CITY: SAN DIEGO STATE: CA ZIP: 92121 BUSINESS PHONE: 6195469600 MAIL ADDRESS: STREET 1: 5910 PACIFIC CENTER BLVD CITY: SAN DIEGO STATE: CA ZIP: 92121 10-K405 1 FORM 10-K 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NO. 0-26814 DATAWORKS CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 3-0209937 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 5910 PACIFIC CENTER BOULEVARD SUITE 300 SAN DIEGO, CALIFORNIA 92121 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (619) 546-9600 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK (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 (Section 229.405 of this chapter) 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 as of March 2, 1998 was $278,636,614.* The number of shares outstanding of the Registrant's Common Stock was 14,191,964 as of March 2, 1998. DOCUMENTS INCORPORATED BY REFERENCE Registrant's Definitive Proxy Statement to be filed with the Securities and Exchange Commission (the "Commission") pursuant to Regulation 14A in connection with the 1998 Annual Meeting of Shareholders to be held on June 18, 1998 (the "1998 Annual Meeting") is incorporated herein by reference into Part III of this Report. Certain Exhibits filed with the Registrant's Registration Statement on Form SB-2 (Registration No. 33-97022 LA), as amended, the Registrant's Registration Statement on Form S-4 (Registration No. 333-11741) and Interactive Group, Inc.'s Registration Statement on Form S-1 (No. 33-90816), as amended, are incorporated herein by reference with Part IV of this Report. - --------------- * Excludes the Common Stock held by executive officers, directors and shareholders whose beneficial ownership exceeds 5% of the Common Stock outstanding at March 2, 1998. Exclusion of such shares should not be construed to indicate that any such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the Registrant or that such person is controlled by or under common control with the Registrant. ================================================================================ 2 This Annual Report on Form 10-K contains certain forward-looking statements that involve risks and uncertainties. The actual future results for DataWorks Corporation ("DataWorks" or the "Company") may differ materially from those discussed here. Additional information concerning factors that could cause or contribute to such differences can be found in this Annual Report on Form 10-K in Part I, Item 1 under the caption "Certain Risk Factors Related to the Company's Business," Part II, Item 7 entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere throughout this Annual Report. PART I ITEM 1. BUSINESS DataWorks develops, markets, implements and supports open systems, client/server-based Enterprise Resource Planning ("ERP") software for mid-range discrete manufacturing companies with annual revenues between $3 million and $1 billion. The Company's products and services facilitate enterprise-wide management of resources and information and allow mid-range manufacturers to reduce order fulfillment cycle times, improve operating efficiencies and measure critical company performance against defined plan objectives. DataWorks' products enable its customers to manage make-to-stock and make-to-order production methods, as well as multiple hybrid or "mixed mode" production methods, within a single manufacturing site or across multiple sites. The Company's products also help customers adapt to growth, changing levels of operations, and business process re-engineering, which is becoming commonplace among manufacturing concerns. The business needs and resource requirements of mid-range manufacturers tend to be considerably different than those of larger companies. Companies in this market typically have small information systems ("IS") departments, budget constraints and limited experience with the advanced technologies inherent in ERP systems. DataWorks segments the mid-range manufacturing market into three distinct sectors: the lower tier segment (companies with annual revenues of $3 million to $25 million), the mid-tier segment ($25 million to $200 million) and the upper tier segment ($200 million to $1 billion). The Company's family of ERP solutions is designed to provide a product migration path to address the changing needs of growing companies in the mid-range manufacturing market. The Company's principal product is Avante, an open system client/server-based product family that is targeted at mid-tier manufacturers. By mid 1999, the Avante product will offer the combined functionality of the individual application suites of ManFact, DataFlo and InfoFlo (acquired through the Company's recent acquisition of Interactive Group, Inc. ["Interactive"]) in one integrated solution. The Company broadened its product line to serve the lower tier segment of the mid-range market with Vista and Vantage. Vista and Vantage are easy-to-use Windows-based products, which the Company acquired through its acquisition of DCD Corporation ("DCD"). The Company also has under development its Impresa for Backoffice system (previously referred to as ECS) , an object oriented, multi-tier client/server-based product that is designed for the upper tier segment of the mid-range market. The Company intends to commence customer shipments of the initial phase of Impresa for Backoffice in late 1998. To address primarily the unique requirements of the aerospace and defense contractors in the mid-range market, especially those with maintenance, repair and overhaul ("MRO") functionality needs, DataWorks has significantly enhanced its commitment to this sector with the availability of Impresa for MRO (previously called JIT and obtained by the Company in its acquisition of Interactive). Impresa for MRO is a product built on a total Oracle technology framework. The Company has designed its product family to be affordable and to incorporate a broad range of applications, depth of functionality, ease of use and an ability to be rapidly and economically deployed. The Company's products are comprised of modules that provide and integrate feature-rich applications and that can be configured to comprehensively support a customer's business. DataWorks provides turnkey solutions by integrating its application software products with third party hardware, operating systems, databases and other software products. The Company offers a suite of development tools and a full complement of services to help its customers maximize the benefits of the Company's software products and efficiently implement the Company's ERP solutions. These services include initial system implementation, consultation, customer 1 3 support desk and maintenance activities, technical and programming services, and periodic enhancement releases of software products. In September 1997, the Company acquired Interactive in a stock-for-stock transaction that was accounted for as a pooling-of-interests. The financial results of Interactive have been included in the financial results of the Company included in this Annual Report. The Company believes its acquisition of Interactive offers major advantages in three key areas -- significantly enhanced international operations, including international channels, six offices in Europe as well as a substantial distributor in Germany; more comprehensive mid-tier product offerings; and substantial critical mass which makes DataWorks one of the largest mid-range ERP providers in the world. INDUSTRY BACKGROUND Manufacturers worldwide are attempting to re-engineer their businesses as they react to increasing global competitive pressures, demanding vendor-customer relationships and rapidly changing market requirements. In implementing these re-engineering efforts, manufacturing companies in the mid-range sector are increasingly orienting their operations to respond to customer needs by shortening product development and delivery cycles, enhancing product quality and providing products configured to meet customer requirements. To achieve these objectives, manufacturers must increase the efficiency of their operations, within the limits of budgetary constraints, by increasing the productivity of personnel and the efficient management of assets throughout their enterprises. Manufacturing companies also require the flexibility to modify and expand operations in response to market demand. All of these factors contribute to the need for information systems that offer enterprise-wide availability and integrated use of a broad range of accurate and current information that enables manufacturers to respond more quickly to their customers and to manage their organizations more efficiently. The IS needs of manufacturers depend to some degree on the nature of their manufacturing processes, which may include make-to-stock, in which parts are assembled into finished products based on a standard bill order; make-to-order, in which parts are assembled into a finished product based on unique customer specifications; and configure-to-order, in which the final assembly of parts can be configured to create many different model and style variations based on customer orders. Firms using configure-to-order production methods are referred to as one form of mixed mode manufacturers because they assemble products using elements of both make-to-stock and make-to-order. Mixed mode manufacturing can create significant market advantages for companies embracing this latest production process approach but is extremely difficult to realize economic gains without responsive information systems. Since the early 1970s, there has been a steady evolution of manufacturing software systems available from third party software developers or developed internally by the manufacturers themselves. Initially, Material Requirements Planning ("MRP") systems were introduced to allow manufacturers to manage the flow of materials at various stages of the manufacturing process. These MRP systems were superseded in the 1980s by a more expansive Manufacturing Resource Planning ("MRP II") approach that incorporates labor and equipment capacity planning for the production process as part of a materials planning methodology. More recently, in response to the evolving needs of manufacturing companies, there has been a significant shift away from the traditional MRP II planning-oriented systems in favor of more comprehensive ERP systems that provide actual enterprise-wide management of resources, integration of more sophisticated forecasting and reporting models and the capability to measure quality levels and delivery cycle responsiveness. ERP systems based on open systems, client/server platforms offer further advantages to manufacturers by providing access to information throughout the manufacturing enterprise on a timely basis, providing a wider distribution of applications and databases and permitting the integration of a diverse array of new software components and technologies as they become available. Effectively designed ERP systems are also scalable to permit deployment of localized information systems resources within departments and individual business units or across an enterprise, as well as to provide adequate support for organizational growth. Despite its virtues, open systems, client/server-oriented ERP solutions have not historically been readily available to manufacturers in the mid-range sector. There are several key contributing factors that have traditionally precluded mid-size companies from reaping the full benefits of the new technologies which have been made available to larger manufacturing firms in recent years. In complex, diverse manufacturing 2 4 environments, many ERP systems require a significant IS staff, either internal to the organization or contracted at substantial expense from outside the company, and a high level of expertise to establish the proper design and configuration of a client/server system that meets a company's specific needs. Implementation of these systems has often been lengthy and costly. In addition, large global ERP suppliers have continued to price their products beyond the financial capabilities of the typical mid-size firm. In order to achieve their business process re-engineering ("BPR") objectives, mid-range manufacturers need the benefits of open systems, client/server ERP solutions that are affordable and can be quickly implemented with minimal disruption to business and maintained with a limited IS staff. These ERP systems must also provide sufficient depth of functionality and flexibility to enable manufacturers to respond to varying customer needs and offer scalability for growth in operations. The demand for a new generation of turnkey ERP solutions that address the needs of the mid-range manufacturing market is significant and growing. Large (multi-billion dollar) manufacturing enterprises increasingly are seeking the efficiencies and competitive advantages of electronically tying together in a supply chain sources of raw materials, component products, and certain outsourced manufacturing processes. Many of the "feeder" suppliers of these products and services to the large manufacturing enterprise are companies in the mid-range manufacturing market. These mid-range companies require systems to address their market diversity, scalability, and localized information systems requirements, along with committed ERP vendor development resources, to electronically link these systems into a wide area network for electronic supply chain management. THE DATAWORKS SOLUTION DataWorks offers open, client/server-based ERP software systems that enable discrete manufacturing companies to re-engineer their businesses to compete more effectively, while responding to the specific needs and limitations of the mid-range market. The Company's current and planned products are designed to meet the ERP needs of all tiers of mid-range manufacturing companies. As companies in the lower and mid-tiers growth, their enterprise-wide management requirements change, and DataWorks provides an efficient migration path to more complex ERP solutions. The Company believes that mid-sized manufacturers in its targeted industry segments represent a significantly higher growth sector than the general manufacturing community at large. The principal elements of the Company's ERP solutions are as follows: - OPEN SYSTEMS AND ADVANCED RDBMS ARCHITECTURE The Company's family of products addresses the dynamic environment faced by mid-sized manufacturers through a commitment to open systems architecture. DataWorks' software products operate on most major client/server hardware platforms and operating systems, including Microsoft NT and UNIX, wide area networks ("WANs"), local area networks ("LANs") and prominent user interfaces, including Microsoft Windows, Apple Macintosh and ASCII. The Company uses advanced relational database management systems ("RDBMS") that are best suited for the particular application required by mid-range manufacturers, including Ardent Software, Inc., (formerly UniData, Inc. and VMark Software, Inc.), Microsoft Foxpro and Progress Software Corporation ("Progress"). - BREADTH AND DEPTH OF PRODUCTS AND APPLICATIONS The Company's products are intended to address the application needs of customers throughout the mid-range market. By utilizing certain core technologies throughout its product line, the Company enables a customer to migrate from product to product to address the changing needs of the customer's enterprise. The Company's products are comprised of modules that provide and integrate feature-rich applications in the areas of (i) Business Planning and Engineering, (ii) Sales, Distribution and Customer Service, (iii) Production and Material Operations and (iv) Finance and Administration. New application modules are introduced periodically and are compatible with the current in-field software release. In addition, the Company's development and implementation support tools provide an interface to an increasing number of third party application products that can be seamlessly integrated into the Company's ERP products through application programming interface ("API") technology. 3 5 - RAPID DEPLOYMENT By offering rapid product deployment and migration among its product lines, the Company seeks to minimize the business interruption to companies that typically results from the introduction of a new or expanded ERP system, thereby enabling such companies to more quickly realize the benefits of a new or expanded ERP system. DataWorks utilizes a highly responsive implementation planning process and focused consulting and training services to design ERP solutions that are "right sized" to satisfy the functionality and rapid deployment needs of diverse customers while remaining within the varied but generally limited budgets of such customers. For example, by utilizing these deployment tools and procedures, the Company is able to complete the enterprise-wide deployment of Avante in three to nine months. Vista, the Company's least expensive ERP system, is virtually self-installable through self-contained tutorials and training tools familiar to most personal computer users, and Vantage can be deployed within three to six months. The Company anticipates deployment of the Impresa for Backoffice system will take significantly longer than that of Avante, but is being designed so that it can be effectively accomplished without significantly disrupting the customer's operations. - FLEXIBILITY/ADAPTABILITY/SCALABILITY A critical element to achieving initial user acceptance of a new system and facilitating rapid implementation is the ability to adapt the Company's standard software to conform more closely to the particular needs of users. The Company's products permit ready adaptation of the DataWorks systems to meet initial needs during the implementation phase and respond to a customer's unique system refinements and ongoing changes in production and operational processes once the system is fully in service. The Company's customers can start with a small number of local concurrent users and expand to many hundreds of concurrent users across LANs and WANs over several years utilizing the same ERP solution from the Company. In addition to accommodating new modules and potential significant growth of users without sacrificing performance, the scalability of the Company's ERP solutions and the ability to migrate within the Company's product family allow mid-range manufacturers to change levels of operations and expand application functionality to accommodate growth. - SUPERIOR PRICE/PERFORMANCE The Company seeks to achieve superior price and performance by providing its mid-range manufacturing customers with the "right sized" system and associated functionality to meet their ERP needs while satisfying their budgetary constraints. The Company's ERP systems emphasize standard application modules that require minimum customization, advanced yet cost-effective RDBMS and other technologies and highly user-oriented fourth generation language ("4GL") development environments. Furthermore, the Company has standardized the implementation process and supported it with the Company's proprietary software tools, resulting in cost effective and rapid initial deployment of its ERP products. THE DATAWORKS STRATEGY The Company's objective is to be the leading provider of business information solutions and related products and services to mid-range manufacturers within selected markets. The Company's strategy to achieve this objective incorporates the following elements: - PROVIDE COMPLETE SOLUTIONS AND PRODUCT MIGRATION PATH The Company offers products in each tier of the mid-range manufacturing market to address a broad range of customer needs and provide a product migration path to address the changing needs of growing companies. The Company offers products for both make-to-order and repetitive manufacturers, and seeks to support new manufacturing processes such as demand-flow production and agile manufacturing. The Company complements its product offerings with a full suite of implementation and consulting services, education, training and software tools to assist customers in deriving the maximum benefit from the Company's products. By providing comprehensive solutions, the Company is able to work more closely with 4 6 customers, sell additional modules or products, and provide additional support services in an ongoing course of business. - FOCUSED MARKET STRATEGY The Company targets mid-range manufacturing companies with annual revenues between $3 million and $1 billion and historically has focused its efforts on discrete, rather than process, manufacturers. In the mid-tier of the mid-range market, sales of the Company's Avante product solutions have targeted eight primary "highly engineered product" manufacturing sectors: industrial equipment; computer/office equipment; consumer electronics; instrumentation and controls; medical/dental products; transportation/aerospace products; capital equipment; and contract manufactures. This approach has enabled DataWorks to better understand the needs of its customers and to use that knowledge to tailor products and services to those needs. The Company plans to continue to rely on its experience and reputation in these select markets to enhance its competitive position. The Company intends to leverage its expertise in these eight sectors to market and sell its Impresa for Backoffice system currently under development to customers in the upper tier of the mid-range market. The Company further plans to leverage its expertise to enhance sales of its Vista and Vantage products, which are currently focused on a wide range of manufacturers in the lower tier, to emerging growth oriented discrete manufacturers in those eight primary manufacturing sectors. - MAINTAIN TECHNOLOGY LEADERSHIP DataWorks believes it is a technology leader in the mid-range manufacturing market, as it was one of the first companies to offer ERP client/server solutions for mid-range manufacturers and to introduce full ERP solutions on Microsoft NT. The Company's products are designed to utilize the most effective open systems technologies such as client/server architectures, RDBMS, graphical user interface's ("GUI") and Workflow tools for the mid-range market. The Company incorporates common technology across its product line in order to leverage its development resources and ensure compatibility among products. The Company seeks to develop new modules and incorporate new functionality into its products such as Internet integration, business objects, decision support, manufacturing execution systems ("MES") support, and Object EDI, a cross- product universal transaction processing protocol. - ACHIEVE HIGH LEVELS OF CUSTOMER SATISFACTION DataWorks is committed to consistently achieving high levels of customer satisfaction with the Company's ERP systems. The Company focuses on delivering high-quality products that address specific application needs, are easy to implement and enable increased productivity. The Company also designs its applications and development tools to permit end-users to easily customize systems to fit their specific needs, which enhances end-user productivity and overall satisfaction with the DataWorks products and services. - COMPREHENSIVE SALES AND MARKETING PROCESS The Company has developed a sophisticated sales and marketing system designed to enhance its new customer success rate. The Company utilizes a multi-phased sales approach consisting of telemarketing sales for initial qualification, account representatives, systems engineers and the active involvement of senior management. The Company's prospecting system enables account representatives to appropriately qualify prospective customers and track active prospects in significant detail through three stages of sales cycle management, and provides valuable management information to measure performance of its sales force and monitor ongoing sales efforts. The Company intends to leverage its sophisticated sales and marketing system to increase DataWorks' presence in the lower-tier and international markets in an effort to enhance sales and increase new customer success rates. The Company believes its sales processes and prospect management system provide it with a significant competitive advantage. 5 7 PRODUCTS The business needs and resource requirements of mid-sized manufacturers tend to be considerably different than those of larger companies. Customers in this market generally have small IS departments, budget constraints and limited experience with the advanced technologies inherent in ERP systems. DataWorks has designed its product family to be affordable and to incorporate a broad range of applications, depth of functionality, ease of use and an ability to be deployed rapidly. The Company has products or is developing products with features intended to address the particular needs of each of the lower tier, mid-tier and upper tier segments of the mid-range market. The following chart describes the Company's principal existing and planned ERP solutions and typical customer profiles relating to each of them:
LOWER TIER SEGMENT MID-TIER SEGMENT UPPER TIER SEGMENT ------------------ ------------------ ------------------------- VISTA IMPRESA FOR MRO PRODUCTS VANTAGE AVANTE IMPRESA FOR BACKOFFICE(1) -------- ------------------ ------------------ ------------------------- Customer Revenues.................. $3 -- $25 million $25 -- $200 $200 million -- $1 million billion Type of Manufacturing Operations... - Entry level - Make to order - MRO Functionality - Basic job shop/ - Mixed mode - Multi-plant/Global Make-to-order - Repetitive supply chain/ - Distributed system IS Infrastructure.................. Minimal Limited Significant Price Range........................ $10,000 -- $150,000 $125,000 -- $750,000 $500,000 -- $3 million(1) Deployment Period.................. 1 -- 4 months 3 -- 9 months (1)
- --------------- (1) Impresa for Backoffice is currently under development and, although the Company intends to commence customer shipments of the product in late 1998, there can be no assurance that the Company will commence such shipments on a timely basis, or at all, or if timely shipped, that the Impresa for Backoffice system will achieve market acceptance. As Impresa for Backoffice is currently under development, data on average deployment period and sales cycle is unavailable and the indicated price range is estimated. See "Business -- Products -- Upper Tier: Impresa for Backoffice." LOWER TIER: VISTA AND VANTAGE DataWorks offers Vista and Vantage for its customers with annual revenues typically between $3 million and $25 million. These products are better suited for the lower tier segment of mid-range manufacturers who, as compared to customers who use Avante, have less developed IS infrastructures and lower IS budgets, require shorter deployment periods, and often seek established, user-friendly products. Vista is an easy-to-use, Windows-based ERP software package that provides a cost-effective solution for job shops with up to $5 million in revenues. Vista fully integrates 15 core business modules and features single level bills of material capabilities. Vista incorporates the DesignWare feature which permits users to, among other things, define their own screens, add fields, change colors, hide fields, change grid sizes and drag choices from menus to the desktop. Vantage is an easy-to-use, Windows-based ERP software package with flexible order-handling capabilities to support a mix of custom and standard part orders and multilevel assemblies and comprises 18 fully integrated business modules. Vantage is optimized for the rapid deployment, minimal support and price/performance requirements of custom and mixed-mode manufacturers in the $5 million to $25 million revenue range. Vista and Vantage, like Avante, are comprised of groups of modules that can be differently configured to comprehensively support a customer's business processes. The following chart describes the Vista and 6 8 Vantage modules, and the discussion below points out certain key characteristics of the Vista and Vantage modules:
VISTA AND VANTAGE APPLICATION MODULE GROUPS - -------------------------------------------------------------------------------------------------------- SALES, DISTRIBUTION BUSINESS PLANNING AND CUSTOMER PRODUCTION AND MATERIAL FINANCE AND AND ENGINEERING SERVICE OPERATIONS ADMINISTRATION - ----------------------------- -------------------- ---------------------------- --------------------- - - Bills of Material - Estimating - Inventory Management - Accounts Payable - - Scheduling - Order Entry - Job Control - Accounts Receivable - - Shop Vision - Quoting - Purchasing/Receiving - General Ledger - - Global Finite Rescheduling - EDI - Shop Floor Data Collection - Payroll - Shipping/Receiving - Purchasing RFQ - Report Writer - Document Management
Business Planning and Engineering Group. In Vista and Vantage, the Business Planning and Engineering module allows the production manager to control the sales and shop priorities through a visual scheduling manager. Indented bills of material support provide the ability to retain product information for repeat orders, and "what if" scheduling provides the ability to simulate the impact of new orders and schedule changes. Sales, Distribution and Customer Service Group. Estimating, quoting and sales order processing are tightly integrated in the products, supporting the requirement for rapid cost estimating and order commitment. Order-to-job linking provides rapid access to production status and delivery information. EDI applications allow for electronic distribution of sales orders, change orders and invoices. Production and Material Operations Group. Priorities established in scheduling are realized in manufacturing job processing. These controls present real-time status reporting based on data collection inputs and provide just-in-time material purchasing and availability. Visual job "wizards" and document management allow paperless management and instant graphical review of job history, job status and inventory. Finance and Administration Group. Vista's and Vantage's Finance and Administration Group enables associated product costs and revenues to be recorded to the General Ledger module as subsidiary ledgers of the Accounts Payable, Accounts Receivable, Payroll and Shop Floor Data Collection modules. Prices of Vista and Vantage applications are based on the specific product line, the modules purchased and the number of concurrent users. The average sales prices of Vista and Vantage are $12,000 and $65,000, respectively. As of December 31, 1997, these two products, cumulatively, were licensed to more than 1,500 customers. MID-TIER: AVANTE DataWorks historically has focused its marketing, product development and services resources on "highly engineered product" companies with annual revenues typically between $25 million and $200 million in eight principal industries: industrial equipment; computer/office equipment; consumer electronics; instrumentation and controls; medical/dental products; transportation/aerospace products; capital equipment; and contract manufacturers. Avante provides three principal application software suites that address the needs of its customers in this mid-tier. One of Avante's application suites is directed toward manufacturers generally making high-volume products, often utilizing repetitive/just-in-time techniques, that are either make-to-stock or configure-to-order, and which may have some smaller make-to-order requirements. In a second application suite, Avante supports customers who have mixed-mode manufacturing techniques. Avante's third application suite is oriented toward make-to-order or engineer-to-order manufacturers that typically have diverse project management and project costing requirements, as well as a smaller element of make-to-stock requirements. Avante includes application components developed internally by DataWorks and some acquired with the acquisitions of Madic-Compufact Corporation ("MCC") in June 1994 and Interactive in September 1997. The Avante system is comprised of groups of modules that comprehensively support a manufacturing company's business process. These modules provide and integrate feature-rich applications, are built upon a common set of design and development standards and tools, and share a common database architecture. Avante is highly modular in nature and can be scaled from small to large configurations on a variety of 7 9 platforms supporting the Microsoft NT and UNIX operating systems. This enterprise-wide system can be implemented in a variety of multi-currency, multi-company and multi-plant environments networked through client and host-based configurations. The following chart describes the Avante modules, and the discussion below points out certain key characteristics of Avante modules:
AVANTE APPLICATION MODULE GROUPS - ----------------------------------------------------------------------------------------------------------- BUSINESS PLANNING AND SALES, DISTRIBUTION AND PRODUCTION AND MATERIAL FINANCE AND ENGINEERING CUSTOMER SERVICE OPERATIONS ADMINISTRATION - ----------------------- ----------------------------- ---------------------------- --------------------- - - Capacity - Customer Service - Inventory Management - Accounts Payable Requirements Planning - Electronic Data Interchange - Lot/Serial Control - Accounts Receivable - - Engineering Change - Estimating - MES - Budgeting Control - Field Service - Multi-Plant Control - Cost Accounting - - Forecasting - Quoting - Production Activity - Currency and VAT - - Master Production - Sales Order Management - Executive Scheduling - Shipping/Returned Material - Project Management Information System - - Material Requirements - Purchasing/Receiving - Fixed Assets Planning - Quality Control - General Ledger - - Product Configurator - Repetitive Manufacturing - Payroll - - Product Definition - Shop Floor Data Collection - Personnel - Work Order Control
Business Planning and Engineering Group. The Business Planning and Engineering Group enables manufacturing companies to create high-level business plans from current and historical sales, production and purchasing data. These plans are used to generate specific product and product family forecasts, as well as capacity models that flow into final and sub-assembly manufacturing, scheduling and purchase plans. Engineering and configuration management define material and routing structures to planning and production and provide visibility to anticipate and coordinate product changes. Sales, Distribution and Customer Service Group. The Sales, Distribution and Customer Service Group allows a manufacturer to estimate, quote and take orders for standard, configured and custom, "one-of-a-kind" products. The sales made are integrated with the Business Planning and Engineering modules providing actual versus plan reporting. Shipments, order status and invoicing can be transmitted directly to the customer via electronic data interchange ("EDI"). Return material, field service and Help Desk applications are available on line to customer service providing detail service analysis and call tracking. Production and Material Operations Group. The Production and Material Operations Group provides a means to record, track and measure production, material, labor, quality and cost flows throughout the manufacturing and purchasing processes. Inventory tracking is provided by company, plant, warehouse and location with full traceability. Traditional work order, as well as rate and cell-based just-in-time production is supported and fully integrated with detailed shop floor and quality control reporting. Blanket and contract orders, EDI and detailed supplier analysis reporting is provided in the purchasing application. Finance and Administration Group. The Finance and Administration Group flows from the operational modules included in the groups described above. All associated costs and revenues are captured to the General Ledger module as subsidiary ledgers of the Accounts Payable, Accounts Receivable, Payroll, Inventory Management, Shop Floor Data Collection, Shipping/Returned Material and Cost Accounting modules. The costing systems support both actual and standard cost methodologies with additional capabilities for unlimited cost simulation, modeling and reporting. The Financial modules support both distributed and consolidated processing in a multi-company environment and provide complete foreign currency and tax capabilities. The average price of DataWorks' Avante ERP system (exclusive of hardware) sold to new customer sites in DataWorks' target market increased to approximately $325,000 in 1997 from approximately $251,000 in 1996. As of December 31, 1997, the Avante product was licensed to more than 1,000 customers at more than 1,200 customer sites. UPPER TIER: IMPRESA PRODUCT FAMILY Impresa for MRO (previously called JIT and obtained by the Company in its acquisition of Interactive) is a software system consisting of standardized modules and a family of additional integration modules. 8 10 Impresa for MRO is designed primarily for MRO and contract manufacturing, including a fully integrated suite of software supporting supply chain management, repair and overhaul, manufacturing, quality, financial and project management applications which are designed to support an enterprise's business processes in an industrial company. Impresa for MRO is typically sold to large organizations in need of a fully integrated enterprise-wide system that can accommodate multiple geographic sites, including international operations. Impresa for MRO is a complete set of Oracle-based client/server applications which operates in a flexible UNIX operating environment and is designed to manufacturing, accounting and human engineering standards. The major components of Impresa for MRO's architecture are (i) client/server enterprise resource planning within an open systems UNIX platform; (ii) a three-tiered model (Presentation Clients, Application and Database Servers); (iii) use of the Oracle 4GL toolset and Developer/2000 which provides easy site extension, personalization and deployment of applications on the Internet and Intranet; and (iv) use of the Oracle version 7 database. The Impresa for MRO software application modules can be grouped into the functions of supply chain management, operations, system applications, financial applications, engineering and integration. The Impresa for Backoffice system, which the Company has under development, has been designed to address the ERP needs of the upper tier of the mid-range manufacturing market. This upper tier consists of companies with annual revenues ranging from $200 million to $1 billion. These organizations typically have substantial IS staff because supporting a variety of both standard and custom applications in a dynamic, multi-national corporation requires a significant investment in information services. These enterprises are better able to invest in the tools and technology necessary to support a complex, fully distributed client/server computing environment and to provide the depth of staff and technological expertise to maintain a more "customized" application set. DataWorks believes its Impresa for Backoffice system will provide valuable depth to its product family and will enable the Company to provide a product for the upper tier that is complementary to its mid-tier product, Avante. Generally, DataWorks believes that products currently offered by ERP vendors serving Fortune 1000 firms that might potentially compete with the Company in the upper tier of the mid-range manufacturing market are complex and expensive, and usually require a multi-year "custom implementation" process. The Company believes the Impresa for Backoffice system can be competitive with the products currently offered by large ERP system vendors by offering superior technology, a more open solution, competitive pricing and shorter, less costly deployment periods. The Company intends that the Impresa for Backoffice system, in addition to providing DataWorks with a product solution for the upper tier of the mid- range market, will also provide a migration path for the Company's current customers using Avante or an earlier derivative product that may outgrow those ERP systems and require the features of the Impresa for Backoffice system. The Impresa for Backoffice system is a second generation client/server application for manufacturing, planning, inventory, engineering, distribution, service and finance. While the Avante system provides a tightly coupled 4GL tool set and database architecture, Impresa for Backoffice is built on tools and database architectures from established market leaders, such as Microsoft, IBM, Oracle and Sybase, to promote flexibility and technology independence. The Company believes that the flexible and independent Impresa for Backoffice system architecture can be managed with the significant IS resources of typical upper tier manufacturers. Impresa for Backoffice employs an object oriented, three-tier client/server architecture, in which the business logic, database and presentation layers can be allocated independently across multiple processors (servers or clients). This distributed model allows large corporations to deploy a series of smaller, departmental or company servers to replace their existing mainframe computers. DataWorks' Impresa for Backoffice system has been designed to be database independent, initially supporting the Microsoft SQL Server and Oracle databases. The Company currently anticipates commencing customer shipments of its initial phase of Impresa for Backoffice system in late 1998. However, there can be no assurance that the Company will commence such shipments in 1998, or at all. Furthermore, the Company has limited experience in selling products to customers in the upper tier of the mid-range manufacturing market and anticipates that selling products to such customers will result in a longer sales cycle and will require a different strategy than that employed by the 9 11 Company in selling products to customers in the mid-tier market. For example, as part of its upper tier marketing strategy, the Company is exploring potential relationships with third party integrators to facilitate implementation of the Impresa for Backoffice system. There can be no assurance that any such relationships will be formed or, if formed, will prove beneficial to the Company. Accordingly, even if customer shipments of the Impresa for Backoffice system are timely commenced, there can be no assurance that the Company will be successful in effectively marketing the Impresa for Backoffice system or that the Impresa for Backoffice system will achieve market acceptance. CORE FEATURES AND TECHNOLOGIES The Company provides certain core technologies for the mid-range market across its entire product line, and offers certain development and implementation support tools to facilitate customization and deployment of the Company's products. PORTABILITY AND SCALABILITY DataWorks provides its products on all major versions of Microsoft NT and UNIX operating systems. These environments enable the Company's products to have extensive portability and scalability. DEVELOPMENT TOOLS DataWorks has enabled each of its products with a sophisticated 4GL development environment that allows the Company's software to be tailored to the unique needs of users while ensuring the integrity of the database and applications. DataWorks' products support a Windows-based GUI providing consistent, familiar desktop interfaces and connectivity to a wide variety of third party products. Traditional screens and reports are managed as templates and forms to provide flexible user views into the database. The database and development environments of products designed for the lower tier of the mid-range market are tightly integrated to minimize cost and support requirements. Vista provides VB Forms, a powerful form design tool that supports user-definable screen generation. Vantage is written in the Progress 4GL and database, which provides a powerful, graphical development tool set. To serve the mid-tier, DataWorks' Avante tools is an object based development tool utilizing a graphical development environment. Through Avante tools, DataWorks is able to support products across multiple operating systems from a single object code library. The Impresa for Backoffice system is being designed for the upper tier to support Powersoft's Powerbuilder 5.0 and Optima enterprise development suite as the foundation of the Company's client/server infrastructure ("CSI") development tool product. CSI's "object libraries" are designed to support the complex development and deployment requirements of a global enterprise, and are intended to ensure a consistent look and feel to all functions of the Impresa for Backoffice system. RDBMS DataWorks' products are designed to run on databases that are best suited for the particular applications required by customers, including Microsoft Foxpro and SQL Server, Progress, UniData, VMark uniVerse, Oracle and Sybase. SQL, ODBC and sophisticated file transfer capabilities provide immediate access to foreign databases and other host applications. DataWorks has chosen these relational databases in order to maximize the throughput of its customers' transactions, to provide realistic models of business data and to maximize price and performance under the budget constraints of its customers in each tier of the mid-range market. SMARTLINKS DataWorks' SmartLinks interface to third party applications provides a standard parameterized interface mechanism between the Avante product and associated data and modules within selected third party applications. Links have been established to a broad range of third party applications, such as Microsoft Office and Autodesk AutoCad, for computer aided design, scanned images, database graphics, word processing, 10 12 spreadsheets, multimedia, sales contact management, forecasting and project planning. The Company plans to expand the SmartLinks capabilities to its other products. DEPLOYMENT TOOLS DataWorks' SmartTools data conversion system is a means for new customers, implementation consultants or existing customers to convert data from either legacy systems or third party applications, and process that data through the business rules of the Company's ERP systems. SmartTools can greatly shorten the time needed to build conversion routines and significantly increases conversion accuracy. SmartTools electronically takes conversion data from the legacy system and simulates the data being entered through a keyboard or generated programmatically by the DataWorks system. THIRD PARTY PRODUCTS DATABASES DataWorks separately licenses database products to its customers. Microsoft Foxpro and Progress support the Vista and Vantage product lines, respectively, and the UniData and VMark uniVerse databases support the Avante product. Impresa for Backoffice has been designed as a database independent application, and initially will support the Oracle, Sybase and Microsoft SQL Server databases. CLIENT TOOLS The Company's products support PC-based GUIs that manage application presentation, desktop tools and network communications, and facilitate the client workstation. DataWorks incorporates client GUI and development tools such as Microsoft Visual Foxpro, Progress, Borland Delphi and Sybase Powerbuilder. HARDWARE As part of its turnkey solutions, at the request of a customer DataWorks can provide complete third party computer hardware systems and related computer peripherals. In such situations hardware is either shipped directly from the third party vendor or DataWorks resells the products. The Company does not typically carry hardware inventory in either case. DataWorks implements its ERP systems on a number of hardware platforms, including Hewlett-Packard Company ("Hewlett-Packard"), IBM, Data General, Digital Equipment Corporation ("DEC") and Intel Pentium and other x86-based systems. Configurations may be host- based, server-oriented, or full client/server with highly networked solutions, in which DataWorks may participate in providing network hardware solutions. Additionally, DataWorks offers peripherals, factory data collection equipment and communications equipment for resale to its customers. NETWORKS DataWorks supports a wide variety of network communication protocols as part of its turnkey product support. DataWorks has support agreements with regional and national communications suppliers and network suppliers to facilitate the design and implementation of these environments. SERVICE AND SUPPORT DataWorks offers a full complement of services that allow its customers to maximize the benefits of DataWorks' software products, including project management, consulting, implementation, education and multi-media training, professional programming, system integration and support, video conferencing, maintenance and customer service. DataWorks' services are not typically included in the price of its software. Maintenance support is billed annually in advance, while implementation, consulting and programming services are billed monthly as incurred. 11 13 IMPLEMENTATION SUPPORT PROGRAM DataWorks offers its customers an Implementation Support Program ("ISP") with their initial system order or significant upgrade to an existing system installation. ISP provides a variety of project management and consulting services to assist in rapid implementation and deployment of DataWorks' business solutions. Services offered include a variety of site-specific technical and consulting services to assist in all phases of the implementation process. DataWorks may also provide assistance in integrating its products with the customer's other software, such as automated systems and devices for factory automation and shop floor data collection. In addition, DataWorks offers "first call" support that allows customers to call DataWorks with service inquiries. As part of the implementation of its software, DataWorks employs a pilot program that allows certain of its customers to simulate running their businesses with the new software prior to full-scale "live" implementation of the new system. The entire implementation process, and specifically the pilot programs, are greatly aided by DataWorks' SmartTools product. Pilot program simulations for more complex businesses are conducted in an integrated series of hands-on classroom exercises that emphasize system controls and procedures, using a database generated by SmartTools that accurately represents the customer's business. By simulating a number of relevant business scenarios, the pilot program gives key users valuable experience with DataWorks' software, generates involvement in and commitment to the new system and provides a means to track the progress of the implementation of the system before actual full-scale use. CUSTOMER SUPPORT PROGRAM DataWorks offers its customers a Comprehensive Support Program ("CSP"). The cost of CSP is based on a percentage of list price of the DataWorks software purchased and is generally billed annually in advance. Through CSP, DataWorks provides product enhancements and updates that maintain the customers' software and documentation to the then-current standard release level licensed and supported by DataWorks. CSP also includes hotline telephone support during extended business hours for questions regarding software use. This support is available to customers up to 24 hours per day, seven days per week, as a separately priced option. EDUCATION AND TRAINING DataWorks offers education and training services that provide customers with a formalized program to ensure that applications are implemented and utilized in an efficient and cost-effective manner. Customers are also offered a variety of software installation, technical support and user training services, both on-site and in DataWorks' regional training centers. Customized education and training programs are also available to meet customers' specific development needs. PROFESSIONAL CONSULTING SERVICES DataWorks provides an array of on-site and classroom implementation and training services that are tailored to the complexity of each of the Company's ERP systems. Each new customer site is assigned an Account Manager who coordinates DataWorks' activities with the customer. These activities include project management, hardware/software installation scheduling, classroom education scheduling, on-site training, conversion planning and pilot simulation supervision. Windows-based project management software maintains a detailed project plan, resource list, and schedule of events for each phase of the implementation. Designed to meet the return on investment objectives of the customer, the project plan is the customer's key feedback and monitoring mechanism for managing the success of the implementation. The Account Manager and an assigned team are responsible for guiding the new customer from initial installation through successful operation of the system in a live environment. The Account Manager is also the initial point of contact to introduce other DataWorks resources to the customer. The implementation of Vista typically only requires such services on a limited basis. PROFESSIONAL PROGRAMMING SERVICES DataWorks provides professional programming services, including custom applications analysis, design, development, training and deployment for most of its ERP solutions. Custom software projects may range 12 14 from simple report development to designing and programming complete applications and integrating legacy systems. Throughout the project, software and design reviews are provided to the customer as defined in the project specification. Upon project completion, custom software is delivered under revision control to a test database where compliance testing is conducted by the customer. The revision control tools within Avante allow testing, deployment and management of new enhancements without affecting current software releases. All software enhancements of Avante, regardless of scope, are created using the Object Preview development environment and conform to DataWorks' published guidelines for standards and conventions. PRODUCT DEVELOPMENT DataWorks' product development efforts are focused on enhancement of its existing products and introduction of its Impresa for Backoffice system. At December 31, 1997, DataWorks had approximately 180 full-time employees in product development. Research and development expenses are comprised primarily of salaries and a portion of DataWorks' overhead for its in-house staff and amounts paid to outside consultants, as appropriate, to supplement the product development efforts of its in-house staff. Research and development expenses are charged to operations as incurred. Gross research and development expenditures totaled approximately $14.3 million in 1997 and $11.4 million in 1996. Gross research and development expenditures in such periods included amounts for capitalized software totaling $3.8 million and $2.5 million, respectively. DataWorks plans to continue to enhance its Vista, Vantage, and Avante application products and to develop its Impresa for Backoffice system to suit the evolving needs of the manufacturing market served by DataWorks. In particular, DataWorks intends to pursue improved functionality on existing application modules and the creation of new modules. In addition to applications development, DataWorks will seek to improve its object-oriented development environment, with two fundamental objectives: continued user empowerment with emphasis on ease-of-use, and increased flexibility to make changes to the base products to suit specific customer requirements. Internet/Intranet enabled applications will continue to be a focus of development throughout the entire product line. The DataWorks Open Integration Environment will expand traditional supply chain EDI communication protocols with Object EDI and encapsulated "business objects." DataWorks expects to continue to enhance the capabilities of its MES and factory data collection applications to address the increasing focus on real time, wireless data collection and acquisition. The Company also expects to enhance its strategic planning and decision support capabilities through offerings in the area of third party report writers, data warehousing and data mining products. DataWorks plans to continue to expand its API and object frameworks across all products thereby enhancing each systems ability to access the global supply chain. SALES AND MARKETING DOMESTIC The Company sells its products in the United States primarily through a direct sales force. As of December 31, 1997, the Company had 175 full-time and 48 part-time employees in its domestic sales organization, including sales representatives, pre-sale consultants, telemarketers and sales management personnel. The key components of DataWorks' domestic sales strategy include sophisticated prospect development and sales cycle management processes. DataWorks uses a combination of electronic prospective client databases, computer aided telemarketing and field sales methodologies to identify potential candidates for its ERP systems from within its targeted markets who are in the early stages of searching for a new business management system. This process accounts for a large percentage of the Company's new accounts and lessens the need for the sales force to engage in territory prospecting activities of its own. Prospective DataWorks customers are monitored through a comprehensive prospect management system that breaks the sales cycle into several phases, each with multiple measurement points, to properly assess the prospective client base. The Company's domestic sales strategy also emphasizes a "regionalization" concept. DataWorks believes a strong local presence is an important factor in addressing the needs of mid-range manufacturers and establishing mutually beneficial long-term relationships. Under the Company's regionalization approach, the 13 15 Company has decentralized much of its client development activity, customer services and customer account responsibilities. DataWorks has regional centers in Irvine, California; San Jose, California; Chicago, Illinois; Boston, Massachusetts; Dallas, Texas; Philadelphia, Pennsylvania; and Atlanta, Georgia. In addition, DataWorks has local offices in 10 other locations across the United States. DataWorks intends to open two additional full-service regional centers by late 1998. INTERNATIONAL DataWorks currently addresses the international market with direct sales efforts through its wholly-owned subsidiaries in the United Kingdom and France and through product-specific distributor agreements in Germany, Australia and Canada. To date, the Company has not generated a material amount of revenue through these distributor agreements. DataWorks plans to increase its international sales efforts through expanded direct sales and additional distribution arrangements, each to be supported by the Company's domestically developed prospect development and sales cycle management processes. COMPETITION The business information systems industry is intensely competitive, rapidly changing and significantly affected by new product offerings and other market activities. A number of companies offer products similar to the Company's products, which are directed at the market for ERP systems. Many of the Company's existing competitors, as well as a number of potential competitors, have more established and larger marketing and sales organizations, significantly greater financial and technical resources and a larger installed base of customers than the Company. In addition, customers who have a large installed base of legacy systems may resist committing the time and resources necessary to convert to an open systems, client/server-based software product. The Company has no significant proprietary barriers to entry which would limit competitors from developing similar products or selling competing products in the Company's markets. Accordingly, there can be no assurance that such competitors will not offer or develop products that are superior to the Company's products or that achieve greater market acceptance. In addition, suppliers of RDBMS or companies that develop management information software applications for large multinational manufacturers are beginning to market to the upper tier of the mid-range market targeted by the Company or otherwise develop applications that compete effectively in the Company's markets. Furthermore, the Company intends to expand its marketing and product development efforts toward the upper end of its target market, which could result in increased competition. As a result, competition (including price competition) is likely to increase substantially, which may result in price reductions and loss of market share. In addition, potential customers may increasingly demand that ERP systems incorporate certain popular RDBMS software not currently integrated into certain of DataWorks' product offerings that are offered by its competitors. As the client/server computing market expands, a large number of companies, some with significantly greater resources than the Company, may enter the market or increase their market share by acquiring or entering into alliances with competitors of the Company. There can be no assurance that the Company will be able to compete successfully against its competitors or that the competitive pressures faced by the Company will not adversely affect its financial performance. The Company has a large number of competitors that vary in size, primary computer platforms and overall product scope. Within its market, the primary competition comes from independent software vendors in four distinct groups including (i) large multinational system developers in the upper tier of the Company's mid-range market, including Baan Company, Oracle and QAD, Inc., (ii) companies offering high levels of functionality on the AS/400 platform such as System Software Associates, Inc. and J.D. Edwards Company, (iii) traditional mid-range market sector firms such as ROI Systems, Inc. and Symic Systems, Inc., and (iv) lower priced PC network-based offerings from companies such as Fourth Shift Corporation, Lilly Software Associates and Macola Software, Inc. There is also a large number of regional manufacturing software suppliers who leverage as competitive advantages their concentrated local support, reputation and, typically, lower price. 14 16 The Company's principal market is highly fragmented and consists of a few large multinational suppliers and a much larger number of small, regional competitors. The Company believes that its industry will experience consolidation as business information systems become more complex and as more manufacturers adopt sophisticated business information systems, forcing smaller companies in the industry to specialize or merge with their competitors. In order to compete effectively in the broad markets which the Company presently targets, the Company will need to continue to grow and attain sufficient size to ensure that it can develop new products on a timely basis in response to evolving technology and new customer demands and can sell such products to a variety of manufacturing industries worldwide. No assurance can be given that the Company will be able to grow sufficiently to enable it to compete effectively. The Company believes its use of open systems technologies is an important competitive factor. The Company also believes that the number of competitors offering open systems solutions will grow significantly over the next several years. Additionally, the Company believes that the typical mid-range customer desires an easy-to-use, highly functional 4GL environment, fully integrated throughout the ERP system, which the Company has provided through its internally produced development tool set. The Company anticipates that a significant source of future competition may be from larger manufacturing software companies that may tailor their products for the mid-range market. Only a few of the larger and better capitalized software systems companies currently compete in the Company's targeted market. There can be no assurance that such companies will not develop products that are superior to the Company's products or that achieve greater market acceptance. The principal elements affecting the buying decision of customers in the mid-range sector are comprehensive application functionality that addresses a wide range of business areas, rapid system deployment, ease-of-use, strong performance, quality of customer support, a fully integrated application set supported by a user-oriented 4GL development environment that allows for easy modification to applications where needed, price and customer references. It is also mandatory that the ERP system be enhanced on a regular basis throughout the license or maintenance term and that such product enhancements be properly supported by necessary revision control software provided by the vendor. In order to be successful in the future, the Company must respond effectively to customer needs and properly select and incorporate those technologies and application functionalities that will meet the challenges posed by competitors' innovations. To accomplish this critical objective, the Company must continue to invest in enhancing its current products and, when necessary, introduce new products to remain competitive. There can be no assurance that the Company will be able to continue to invest in such enhancements or new products, or introduce such enhancements or new products in a timely fashion or at all. INTELLECTUAL PROPERTY DataWorks regards its products as proprietary trade secrets and confidential information. DataWorks relies on a combination of copyright, trademark and trade secret laws, employee and third party nondisclosure agreements and other industry standard methods for protecting ownership of its proprietary software. There can be no assurance, however, that, in spite of these precautions, an unauthorized third party will not copy or reverse-engineer certain portions of DataWorks' products or obtain and use information that DataWorks regards as proprietary. In addition, the laws of some foreign countries do not protect DataWorks' proprietary rights to the same extent as do the laws of the United States. There can be no assurance that the mechanisms used by DataWorks to protect its software will be adequate or that DataWorks' competitors will not independently develop software products that are substantially equivalent or superior to DataWorks' software products. DataWorks licenses products to end users under license agreements which are generally in standard form, although each license is individually negotiated and may contain variations. The standard form agreement allows the end user to use the products solely on the end user's computer equipment for the end user's internal purposes, and the end user is generally not permitted to sublicense or transfer the products. DataWorks licenses the source code for its application software to its customers to enable them to customize the software to meet particular requirements. DataWorks' standard form agreement includes a confidentiality clause protecting the products. In the event of termination of the license agreement, the end user remains responsible 15 17 for any accrued and unpaid license fees and confidentiality obligations. However, there can be no assurance that such customers will take adequate precautions to protect DataWorks' source code or other confidential information. DataWorks' has one software patent application pending, but there can be no assurances that a patent will be issued or that, if a patent is issued, it will provide the Company with competitive advantages or will not be challenged by others. DataWorks believes that it has all necessary rights to market its products, although there can be no assurance that third parties will not assert infringement claims in the future. DataWorks may receive notices from third parties claiming that DataWorks' products infringe third party proprietary rights. DataWorks expects that, as the number of software products in the industry increases and the functionality of these products further overlaps, software products will increasingly be subject to such claims. Any such claim, with or without merit, could result in costly litigation and require DataWorks to enter into royalty or license arrangements. Such royalty or license arrangements, if required, may not be available on terms acceptable to DataWorks or at all. DataWorks believes that, due to the rapid pace of innovation within the computer industry, factors such as technological and creative skill of personnel, knowledge and experience of management, name recognition, maintenance and support of software products, the ability to develop, enhance, market and acquire software products and services, and strategic relationships in the industry are more important in establishing and maintaining a leading position within the industry than are patent, copyright and other legal protections for intellectual property. EMPLOYEES At December 31, 1997, DataWorks had 1,003 full-time employees, including 235 in sales and marketing, 179 in product development, 490 in support services and 99 in finance and administration. DataWorks also has 67 part-time employees, primarily in the telemarketing area. DataWorks' employees are not represented by any collective bargaining organization, and DataWorks has never experienced a work stoppage. DataWorks believes that its relations with its employees are good. The loss of certain key employees or DataWorks' inability to attract and retain other qualified employees could have a material adverse effect on DataWorks' business and operations. EXECUTIVE OFFICERS The executive officers of DataWorks and their ages as of March 2, 1998 are as follows:
NAME AGE POSITION - ---- --- -------- Stuart W. Clifton........ 53 Chairman of the Board, President and Chief Executive Officer Norman R. Farquhar....... 51 Executive Vice President, Chief Financial Officer and Director Robert C. Vernon......... 53 President, International and Director Mark Hellinger........... 38 President, ERP Systems Group Rick E. Russo............ 46 Vice President, Finance and Secretary
Stuart W. Clifton has served as President, Chief Executive Officer and as Chairman of the Board of Directors since January 1987, when he acquired control of the Company. Between 1971 and 1987, Mr. Clifton held various management positions at Triad Systems Corporation, a vertical distribution software company, in which he was involved from its inception, most recently as Executive Vice President and General Manager. Norman R. Farquhar has served as Executive Vice President and Chief Financial Officer of the Company since February 1996 and as a director of the Company since August 1995. From April 1993 to December 1995, Mr. Farquhar served as Senior Vice President, Chief Financial Officer and Secretary of Wonderware Corporation, a manufacturer of software for the industrial automation industry. From December 1991 to April 1993, he was Vice President of Finance and Chief Financial Officer of MTI Technology Corporation, a developer of system-managed storage solutions. 16 18 Robert C. Vernon has served as President, International Operations of the Company since September 1997. Prior to joining the Company, Mr. Vernon had been employed by Interactive since 1975, where he served as Chief Executive Officer and a director of Interactive from 1978 to September 1997 and Chairman of the Board of Directors from 1979 to September 1997. From 1978 to 1996, Mr. Vernon also served as President of Interactive. From 1973 to 1975, Mr. Vernon served as Director, Software Development for SDA Digital, a software developer for the security industry, and, from 1971 to 1973, as a Project Manager for Computer Sciences Corporation, a software developer and integrator. Mark Hellinger has served as President, ERP Systems Group of the Company since September 1997. Prior to joining the Company, Mr. Hellinger had been employed by Interactive since 1985, where he served as President and Chief Operating Officer from 1996 to September 1997, Vice President and General Manager from 1994 to 1996, and as a director from October 1992 to September 1997. From 1990 to 1994, Mr. Hellinger served as Vice President, Operations of Interactive. From 1985 to 1990, Mr. Hellinger served as branch manager of Interactive's New York office. Rick E. Russo has served as Vice President, Finance since July 1994 and as Secretary since April 1995. From February 1992 to July 1994, Mr. Russo served as Chief Financial Officer of MCC. Prior to joining the Company, Mr. Russo served from 1985 to 1991 as Vice President of Finance for Media Duplication Services Ltd., a subsidiary of Polaroid Corporation which provided software manufacturing services. Mr. Russo is a Certified Public Accountant. CERTAIN RISK FACTORS RELATED TO THE COMPANY'S BUSINESS In addition to those risks identified elsewhere in this Annual Report on Form 10-K, the Company's business and results of operations are subject to other risks, including the following risk factors: Fluctuations in Quarterly Operating Results. The Company has experienced significant fluctuations in its revenues and operating results from quarter to quarter and anticipates that it will continue to experience such quarterly fluctuations. The Company's revenues and operating results have generally been higher in the fourth quarter than in any preceding quarter of the year. The Company believes that fourth quarter revenues are positively impacted by year-end capital purchases by most customers, as well as by the Company's sales compensation plans. Seasonal factors, which the Company believes are common in the computer software industry, are likely to increase as the Company focuses on larger corporate accounts. As a result of these seasonal factors, first quarter revenues in any year are typically lower than revenues in the immediately preceding fourth quarter. In addition, the Company's revenues occur predominantly in the third month of each quarter and tend to be concentrated in the latter half of that third month. Accordingly, the Company's quarterly results of operations are difficult to predict, and delays in product delivery or in closings of sales near the end of a quarter could cause quarterly revenues and, to a greater degree, net income to fall substantially short of anticipated levels. Factors that may contribute to such fluctuations in addition to seasonal factors include: the number of new orders and product shipments; the size and timing of individual orders; the timing of shipment of hardware or database software by third party vendors necessary in order for the Company to recognize revenues; the timing of introduction of products or product enhancements by the Company, the Company's competitors or other providers of hardware, software and components for the Company's market; competition and pricing in the software industry; market acceptance of new products; reduction in demand for existing products and shortening of product life cycles as a result of new product introductions by competitors; product quality problems; customer order deferrals in anticipation of new products; changes in customer budgets; changes in Company strategy; changes in Company operating expenses; personnel changes; fluctuations in foreign currency exchange rates; changes in the mix of products sold; conditions or events in the manufacturing industry; and general economic conditions. In addition, the achievement of anticipated revenues is substantially dependent on the ability of the Company to attract, on a timely basis, and retain skilled personnel, especially sales, service and implementation personnel. As a result of these factors, revenues for any quarter are subject to significant variation, and the Company believes that period-to-period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as 17 19 indications of future performance. Fluctuations in operating results may also result in volatility in the price of the Company's Common Stock. Lengthy Sales Cycle. The Company's sales figures for Avante, the Company's principal product, generally reflect a relatively high amount of revenues per order. The loss or delay of individual orders for this product, therefore, could have a more significant impact on the revenues and quarterly results of the Company than on those of companies with higher sales volumes and lower revenues per order. The Company's software products generally are shipped as orders are received, and revenues are recognized upon delivery of the products, provided no significant vendor obligations exist and collection of the related receivable is deemed probable. As a result, software license revenues in any quarter are substantially dependent on orders booked and shipped in that quarter. The timing of license revenues derived from sales of the Company's Avante product is difficult to predict because of the length of the sales cycle for this product, which is typically three to nine months from the initial contact. Because the Company's operating expenses are based on anticipated revenue trends and because a high percentage of the Company's expenses are relatively fixed, a delay in the recognition of revenue from a limited number of license transactions could cause significant variations in operating results from quarter to quarter and could result in losses. To the extent such expenses are not offset by increased revenues, the Company's operating results would be materially adversely affected. Competition. The business information systems industry is intensely competitive, rapidly changing and significantly affected by new product offerings and other market activities. A number of companies offer products similar to the Company's products, which are directed at the market for ERP systems. Many of the Company's existing competitors, as well as a number of potential competitors, have more established and larger marketing and sales organizations, significantly greater financial and technical resources and a larger installed base of customers than the Company. In addition, potential customers that have a large installed base of legacy systems may resist committing the time and resources necessary to convert to an open systems-based client/server software product. The Company has no proprietary barriers to entry which would limit competitors from developing similar products or selling competing products in the Company's markets. Accordingly, there can be no assurance that such competitors will not offer or develop products that are superior to the Company's products or that achieve greater market acceptance. In addition, suppliers of RDBMS or companies that develop management information software applications for large multinational manufacturers are beginning to market to the upper tier of the mid-range market targeted by the Company or otherwise develop applications that compete effectively in the Company's markets. Furthermore, the Company intends to focus its marketing and product development efforts increasingly toward the upper end of its target market, which could result in increased competition. As a result, competition (including price competition) is likely to increase substantially, which may result in price reductions and loss of market share. In addition, potential customers may increasingly demand that ERP systems incorporate certain popular RDBMS software not currently integrated into certain of DataWorks' product offerings that are offered by its competitors. As the client/server computing market expands, a large number of companies, some with significantly greater resources than the Company, may enter the market or increase their market share by acquiring or entering into alliances with competitors of the Company. There can be no assurance that the Company will be able to compete successfully against its competitors or that the competitive pressures faced by the Company will not adversely affect its financial performance. The Company sells its products and services in a highly fragmented market and its competitors consist of a few large multi-national suppliers and a much larger number of small regional competitors. The Company believes that its industry will experience consolidation as business information systems become more complex and as more manufacturers adopt sophisticated business information systems, forcing smaller companies in the industry to specialize or merge with their competitors. In order to compete effectively in the broad markets which the Company presently targets, the Company will need to continue to grow and attain sufficient size to ensure that it can develop new products on a timely basis in response to evolving technology and new customer demands and can sell such products to a variety of manufacturing industries worldwide. No assurance can be given that the Company will be able to grow sufficiently to enable it to compete effectively. The Company anticipates that a significant source of future competition may be from larger manufacturing software companies that may tailor their products for the mid-range market. Only a few of the larger and better 18 20 capitalized software systems companies currently compete in the Company's targeted market. There can be no assurance that such companies will not develop products that are superior to the Company's products or that achieve greater market acceptance. Ability to Recruit Sales, Service and Implementation Personnel. The ability to achieve anticipated revenues is substantially dependent on the ability of the Company to attract on a timely basis and retain skilled personnel, especially sales, service and implementation personnel. In addition, the Company believes that its future success will depend in large part on its ability to attract and retain highly skilled technical, managerial, marketing and professional services personnel to ensure the quality of products and services provided to its customers. Competition for such personnel, in particular for product development, sales and implementation personnel, is intense, and the Company competes in the market for such personnel against numerous companies, including larger, more established companies with significantly greater financial resources than the Company. There can be no assurance that the Company will be successful in attracting and retaining skilled personnel. The Company's inability to attract and retain qualified employees could have a material adverse effect on the Company's business and operations. Introduction of Impresa for Backoffice System. The Company currently anticipates commencing customer shipments of its Impresa for Backoffice system in late 1998. Historically, however, the Company has not commenced shipment of its Impresa for Backoffice product at the anticipated time and there can be no assurance that the Company will commence such shipments in 1998, or at all. Furthermore, the Company has limited experience in selling products to customers in the upper tier of the mid-range manufacturing market and anticipates that selling products to such customers will result in a longer sales cycle and will require a different strategy than that employed by the Company in selling products to customers in the mid-tier market. For example, as part of its upper tier marketing strategy, the Company is exploring potential relationships with third party integrators to facilitate implementation of the Impresa for Backoffice system. There can be no assurance that any such relationships will be formed or, if formed, will prove beneficial to the Company. Accordingly, even if customer shipments of the Impresa for Backoffice system are timely commenced, there can be no assurance that the Company will be successful in effectively marketing the Impresa for Backoffice system or that the Impresa for Backoffice system will achieve market acceptance. Integration of DataWorks and Interactive Operations. The Company acquired Interactive in September 1997. The process of rationalizing management services, administrative organizations, facilities, management information systems and other aspects of operations, while managing a larger and geographically expanded entity, presents a significant challenge to the management of DataWorks. There can be no assurance that the integration process will be successful or that the anticipated benefits of the business combination will be fully realized. The dedication of management resources to such integration may detract attention from the day-to-day business of the Company. The difficulties of integration may be increased by the necessity of coordinating geographically separated organizations, integrating personnel with disparate business backgrounds and combining different corporate cultures. Integrating the two companies has caused the Company to incur certain additional expenses, and there can be no assurance that there will not continue to be substantial costs associated with the integration process, that such activities will not result in a decrease in revenues or that there will not be other material adverse effects of these integration efforts. Such effects could materially reduce the earnings of the Company. The Company incurred acquisition and related costs totaling $15.6 million in the third quarter of 1997. There can be no assurance that DataWorks will not incur additional charges in future quarters to reflect costs associated with the acquisition. Management of Growth. The Company's business has grown rapidly, both internally and through acquisitions, with total revenues increasing to $147.0 million for the year ended December 31, 1997 from $116.9 million for the year ended December 31, 1996. There can be no assurance that the Company will be able to manage its recent growth and assimilate its new employees and products successfully. To manage its growth effectively, the Company will be required to expand, train and manage its employee base, enhance its operating and financial systems, and effectively expand its product line. If the Company continues to grow, there can be no assurance that the management skills and systems currently in place will be adequate or that the Company will be able to manage any additional growth effectively. 19 21 Dependence on Key Employees. The Company's continued success depends to a significant extent upon its ability to retain certain key employees, including Stuart W. Clifton, Norman R. Farquhar, Robert C. Vernon and Mark Hellinger. The loss of certain key employees or the Company's inability to attract and retain other qualified employees could have a material adverse effect on the Company's business and operations. Rapid Technological Change and New Products. The market for the Company's software products is characterized by rapid technological advances, evolving industry standards, changes in end-user requirements and frequent new product introductions and enhancements. The introduction of products embodying new technologies, such as the planned introduction of the Impresa for Backoffice system, and the emergence of new industry standards, could render the Company's existing products and products currently under development obsolete and unmarketable. Accordingly, the Company's future success will depend upon its ability to enhance its current products and develop and introduce new products that keep pace with technological developments, satisfy varying end-user requirements and achieve market acceptance. Any failure by the Company to anticipate or respond adequately to technological developments or end-user requirements, or any significant delays in product development or introduction, could damage the Company's competitive position and have an adverse effect on revenues. There can be no assurance that the Company will be successful in developing and marketing new products, including the Impresa for Backoffice system, or product enhancements on a timely basis or that the Company will not experience significant delays in the future, which could have a material adverse effect on the Company's business and operations. In addition, there can be no assurance that new products or product enhancements developed by the Company will achieve market acceptance. The Company may need to increase the size of its product development staff in the near term to meet these challenges. There can be no assurance that the Company will be successful in hiring and training an adequate number of qualified product development personnel to meet its needs. Software programs as complex as those offered by the Company may contain undetected errors or "bugs" when first introduced or as new versions are released that, despite testing by the Company, are discovered only after a product has been installed and used by customers. There can be no assurance that errors will not be found in future releases of the Company's software, or that any such errors will not impair the market acceptance of these products and adversely affect operating results. Problems encountered by customers installing and implementing new releases or with the performance of the Company's products could have a material adverse effect on the Company's business and operations. Dependence on Manufacturing Industry. The Company's business depends substantially upon the capital expenditures of mid-range discrete manufacturers, which in part depend upon the demand for such manufacturers' products. A recession or other adverse events affecting the manufacturing industry in the United States or other markets served by the Company could affect such demand, forcing manufacturers in the Company's target markets to curtail or postpone capital expenditures on business information systems. Any such change in the amount or timing of capital expenditures in its target markets could have a material adverse effect on the Company's business and operations. Dependence on Principal Products. Substantially all of the Company's revenue is derived from the sale of manufacturing information systems and related support services. Accordingly, any event that adversely affects fees derived from sale of such systems, such as competition from other products, significant flaws in the Company's software products or incompatibility with third party hardware or software products, negative publicity or evaluation, or obsolescence of the hardware platforms or software environments in which the systems run, would have a material adverse effect on the Company's results of operations. The Company's future financial performance will depend, in substantial part, on the continued development and introduction of new and enhanced versions of the Avante product and customer acceptance of such new and enhanced products. Dependence on Third Party Software and Hardware. Most of the Company's products incorporate and use software products and computer hardware and equipment developed by other entities. The relational database management systems currently used in the Company's products are those which the Company believes are best suited for the particular applications required by the mid-range discrete manufacturers. These RDBMS have been developed by Ardent Software, Inc. (formerly Unidata and VMark), Progress and 20 22 Microsoft. The operating systems on which the Company's products can function (UNIX, SCO-UNIX, UnixWare, VMS and Microsoft NT) have been developed or are owned by Novell Corporation ("Novell"), DEC and Microsoft. The computer hardware and related equipment sold as part of the Company's turnkey systems are manufactured by Hewlett-Packard, IBM, DEC and others. There can be no assurance that all of these entities will remain in business, that such entities will continue to support these product lines, that their product lines will remain viable or that these products will otherwise continue to be available to the Company or available on terms satisfactory to the Company. If any of these entities ceases to do business or abandons or fails to enhance a particular product line, the Company may need to seek other suppliers. This could have a material adverse effect on the Company's business and operations. In addition, there can be no assurance that the Company's current suppliers will not significantly alter their pricing in a manner adverse to the Company. International Operations and Currency Fluctuations. The Company derived approximately 17% of its revenues from operations outside North America in 1997 and 1996. The international business is subject to various risks common to international activities, including exposure to currency fluctuations, political and economic instability, the greater difficulty of administering business abroad, and the need to comply with a wide variety of foreign import and United States export laws and regulatory requirements. The Company does not currently engage in foreign currency hedging transactions. Intellectual Property and Proprietary Rights. The Company relies on a combination of copyright, trademark and trade secret laws, employee and third-party nondisclosure agreements and other industry standard methods for protecting ownership of its proprietary software. There can be no assurance, however, that, in spite of these precautions, an unauthorized third party will not copy or reverse-engineer certain portions of the Company's products or obtain and use information that the Company regards as proprietary. The Company provides the source code for its application software under licenses to its customers to enable them to customize the software to meet particular requirements. Although the Company's source code license contains confidentiality and nondisclosure provisions, there can be no assurance that such customers will take adequate precautions to protect the Company's source code or other confidential information. In addition, the laws of some foreign countries do not protect the Company's proprietary rights to the same extent as do the laws of the United States. There can be no assurance that the mechanisms used by the Company to protect its software will be adequate or that the Company's competitors will not independently develop software products that are substantially equivalent or superior to the Company's software products. The Company has and may from time to time receive notices from third parties claiming that the Company's products infringe upon third party proprietary rights. The Company expects that, as the number of software products in the industry increases and the functionality of these products further overlaps, software products will increasingly be subject to such claims. Any such claim, with or without merit, could result in costly litigation and require the Company to enter into royalty or licensing arrangements. Such royalty or license arrangements, if required, may not be available on terms acceptable to the Company or at all. Product Liability. Because the Company markets and sells its software products on a turnkey basis, which includes rendering professional consulting services, the Company incurs significant risks of professional and other liability. No assurance can be given that the limitations of liability set forth in the Company's license agreements or other contracts would be enforceable or would otherwise protect the Company from liability for damages to a customer resulting from a defect in one of the Company's products or arising as a result of professional services rendered by the Company. Such a claim, if successful and of sufficient magnitude, could have a material adverse effect on the Company's business and operations. Year 2000 Compliance. Significant uncertainty exists in the software industry concerning the potential effects from the Year 2000 issue associated with the date codes used in computer software and hardware systems. The Company believes that all of its existing products are Year 2000 compliant and new products are being designed to be Year 2000 compliant. Although products have undergone the Company's normal quality testing procedures, there can be no assurance that the Company's software products contain all necessary date code changes. Any failure of the Company's products to perform, including system malfunctions due to the onset of the calendar year 2000, could have a material adverse effect on the Company's business, financial condition and results of operations. 21 23 The Company is also currently in the process of evaluating its information technology infrastructure for Year 2000 compliance, including reviewing what actions are required to make all software systems used internally Year 2000 compliant as well as actions needed to mitigate vulnerability to problems with suppliers and other third parties' systems. The Company is assessing the extent of the necessary modifications to its computer software, and management does not anticipate that the Company will incur significant operating expenses or be required to invest heavily in computer system improvements to be Year 2000 compliant. There can be no assurance that such measures will alleviate the Year 2000 problems which could have a material adverse effect upon the Company's business, operating results and financial condition. Influence of Existing Shareholders. As of March 2, 1998, the Company's executive officers, directors and their affiliates beneficially owned approximately 21% of the Company's outstanding shares of Common Stock. As a result, these shareholders, if acting together, would be able to influence matters requiring approval by the shareholders of the Company, including the election of a majority of the directors. The voting power of these shareholders under certain circumstances could have the effect of delaying or preventing a change in control of the Company. The Company has entered into agreements with its executive officers and directors indemnifying them against losses they may incur in legal proceedings arising from their service to the Company. Possible Volatility of Stock Price. The market price of the Company's Common Stock has fluctuated since its initial public offering in October 1995. The price of the Company's stock may be subject to significant fluctuations in the future in response to variations in quarterly operating results of the Company, announcements of new products by the Company or by its competitors, and general trends in the software industry, as well as fluctuations in the stock market that are unrelated to the operating performance of particular companies. Also, the Company's revenues or operating results in future quarters may be below the expectations of public market securities analysts and investors, which could cause the price of the Company's stock to decline, perhaps substantially. Such stock price and market fluctuations could adversely affect the Company. Effect of Certain Charter Provisions. The Company's Board of Directors has the authority to issue up to 5,000,000 shares of Preferred Stock and to determine the price, rights, preferences and privileges of those shares without any further vote or action by the shareholders. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The issuance of Preferred Stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of the Company. The Company has no present plan to issue any shares of Preferred Stock. 22 24 ITEM 2. PROPERTIES The Company leases the majority of its facilities in or near the following cities:
APPROXIMATE LEASE LOCATION SQUARE FEET EXPIRATION DATE PRINCIPAL ACTIVITIES -------- ------------ --------------- -------------------- San Diego, CA........................ 48,000 June 1999 Corporate HQ, Sales and Marketing San Diego, CA........................ 44,000 January 2000 Product Development and Customer Support San Diego, CA........................ 22,500 February 1998 Interactive's Corporate HQ Irvine, CA........................... 25,000 August 2001 Sales, Marketing and Customer Support Minneapolis, MN...................... 30,000 April 2002 DCD Operations Minneapolis, MN...................... 12,000 January 2002 Impresa for MRO Operations (formerly JIT) Boston, MA........................... 11,000 February 1999 Sales, Marketing and Customer Support London, England...................... 14,000 September 2004 Regional HQ, Sales, Marketing and Customer Support Paris, France........................ 5,000 July 1998 Sales, Marketing, Customer Support and Administration
DataWorks also has approximately 17,000 square feet of office space under lease and rental agreements in various locations across the United States and approximately 13,000 square feet of office space in the United Kingdom and Europe in support of its regional activities with expiration dates ranging from 1998 through 2004. The Company believes that its facilities are adequate for its current needs and that suitable additional or substitute space will be available as needed to accommodate expansion of the Company's operations. ITEM 3. LEGAL PROCEEDINGS The Company is engaged in legal actions arising in the ordinary course of its business and believes that the ultimate outcome of these actions will not have a material adverse effect on its financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 23 25 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Common Stock of DataWorks has traded on the Nasdaq National Market under the symbol "DWRX" since the Company's initial public offering in October 1995. The following table sets forth the high and low sales prices, as reported on the Nasdaq National Market, for each of the quarters in the past two years. Such quotations represent inter-dealer prices without retail markup, markdown or commission and may not necessarily represent actual transactions.
HIGH LOW ------ ------ 1997 Fourth Quarter............................................ $20.00 $14.25 Third Quarter............................................. 21.50 12.63 Second Quarter............................................ 22.38 13.63 First Quarter............................................. 25.25 14.00 1996 Fourth Quarter............................................ $34.25 $20.75 Third Quarter............................................. 28.00 15.75 Second Quarter............................................ 19.50 11.50 First Quarter............................................. 14.50 10.25
The Company has never declared or paid any cash dividends on its Common Stock. The Company currently intends to retain any future earnings for use in its business and does not anticipate paying any cash dividends in the foreseeable future. The Company had approximately 223 shareholders of record as of March 2, 1998. The last sales price for the Company's Common Stock, as reported by Nasdaq on March 2, 1998, was $24.31. 24 26 ITEM 6. SELECTED FINANCIAL DATA The following selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Consolidated Financial Statements of the Company and related notes thereto included elsewhere in this Annual Report on Form 10-K.
YEARS ENDED DECEMBER 31, ------------------------------------------------- 1997 1996 1995 1994 1993 -------- -------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) CONSOLIDATED STATEMENT OF OPERATIONS DATA(1): Revenues: Software licenses............................ $ 74,742 $ 55,169 $34,129 $22,260 $13,060 Maintenance and other services............... 60,868 48,327 29,519 19,790 14,908 Hardware..................................... 11,353 13,443 12,356 9,656 9,286 -------- -------- ------- ------- ------- Total revenues............................ 146,963 116,939 76,004 51,706 37,254 Cost of revenues: Software licenses............................ 9,222 6,584 4,772 3,981 1,901 Maintenance and other services............... 42,818 35,632 18,577 12,270 9,935 Hardware..................................... 8,638 9,966 9,309 7,436 6,304 -------- -------- ------- ------- ------- Total cost of revenues.................... 60,678 52,182 32,658 23,687 18,140 -------- -------- ------- ------- ------- Gross profit................................... 86,285 64,757 43,346 28,019 19,114 Operating expenses: Sales and marketing.......................... 40,456 29,632 19,817 13,412 8,091 General and administrative................... 19,346 14,659 10,017 6,505 5,193 Research and development..................... 10,505 8,918 8,648 4,126 2,432 Acquisition and related costs................ 15,565 3,656 -- -- -- ESOP contribution............................ -- -- 446 429 387 -------- -------- ------- ------- ------- Total operating expenses.................. 85,872 56,865 38,928 24,472 16,103 -------- -------- ------- ------- ------- Income from operations......................... 413 7,892 4,418 3,547 3,011 Other income (expense), net.................. 1,629 247 (1,250) (1,221) (634) -------- -------- ------- ------- ------- Income before income taxes and extraordinary item......................................... 2,042 8,139 3,168 2,326 2,377 Provision (credit) for income taxes............ 2,846 3,642 932 (708) (216) -------- -------- ------- ------- ------- Income (loss) before extraordinary item........ (804) 4,497 2,236 1,618 2,161 Extraordinary item, net of income taxes........ -- -- (1,017) (157) -- -------- -------- ------- ------- ------- Net income (loss).............................. $ (804) $ 4,497 $ 1,219 $ 1,461 $ 2,161 -------- -------- ------- ------- ------- Basic earnings (loss) per share before extraordinary item........................... $ (0.06) $ 0.39 $ 0.32 $ 0.26 $ 0.36 Extraordinary item............................. -- -- (0.15) (0.03) -- -------- -------- ------- ------- ------- Net earnings (loss) per share -- basic......... $ (0.06) $ 0.39 $ 0.17 $ 0.23 $ 0.36 ======== ======== ======= ======= ======= Diluted earnings (loss) per share before extraordinary item........................... $ (0.06) $ 0.38 $ 0.29 $ 0.24 $ 0.36 Extraordinary item............................. -- -- (0.13) (0.02) -- -------- -------- ------- ------- ------- Net earnings (loss) per share -- diluted ...... $ (0.06) $ 0.38 $ 0.16 $ 0.22 $ 0.36 ======== ======== ======= ======= ======= Common shares outstanding -- basic(1).......... 13,811 11,392 6,929 6,260 5,924 ======== ======== ======= ======= ======= Common shares outstanding -- diluted(1)........ 13,811 11,954 7,807 6,768 6,023 ======== ======== ======= ======= =======
25 27
DECEMBER 31, ------------------------------------------------- 1997 1996 1995 1994 1993 -------- -------- ------- ------- ------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents...................... $ 17,418 $ 50,825 $17,472 $ 3,179 $ 1,892 Working capital (deficit)...................... 66,656 66,700 20,566 (2,019) (4,607) Total assets................................... 131,136 121,202 62,916 27,301 12,861 Long-term debt, less current portion........... 1,493 1,864 2,105 8,073 1,860 Total shareholders' equity (deficit)(2)........ 84,066 82,089 31,240 (2,229) (4,339)
- --------------- (1) See Note 1 of Notes to Consolidated Financial Statements describing the determination of the number of shares used in computing per share information. (2) In October 1995, the Company completed its initial public offering resulting in net proceeds to the Company of $18.0 million. The net proceeds from such offering were used to repay outstanding indebtedness, to increase working capital and for general corporate purposes. In December 1996, the Company completed a follow-on equity offering resulting in net proceeds to the Company of $41.3 million. The net proceeds were for additional working capital, general corporate purposes, including expansion of general sales and marketing and customer support activities, international expansion and possible acquisitions and joint ventures. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW DataWorks was incorporated in 1986 and develops, markets, implements and supports open systems, client/server-based ERP software for mid-range, discrete manufacturing companies with annual revenues between $3 million and $1 billion. The Company's products and services facilitate enterprise-wide management of resources and information and allow mid-range manufacturers to reduce order fulfillment cycle times, improve operating efficiencies and measure critical company performance against defined plan objectives. In September 1997, the Company acquired Interactive Group, Inc. ("Interactive") in a stock-for-stock transaction that was accounted for as a pooling-of-interests. The financial results of Interactive have been included in the financial results of the Company included in this Annual Report. The Company believes its acquisition of Interactive offers major advantages in three key areas: significantly enhanced international operations, including established international channels, six offices in Europe as well as a substantial distributor in Germany; more comprehensive mid-tier product offerings; and substantial critical mass which makes DataWorks one of the largest mid-range ERP providers in the world. In September 1996, the Company acquired DCD Corporation ("DCD") in a stock-for-stock transaction that was accounted for as a pooling-of-interests. The financial results of DCD have been included in the financial results of the Company included in this Annual Report. In May 1994, DataWorks acquired Madic- Compufact Corporation ("MCC") principally for cash in a transaction accounted for as a purchase. DataWorks believes that the DCD and MCC acquisitions allowed it to achieve several important strategic objectives, including the ability to better serve the lower tier of mid-range manufacturers and the addition of complementary products to better serve the make-to-order markets. The acquisitions also allowed the Company to expand geographically and to increase its customer and revenue base. In December 1995, Interactive acquired all the outstanding shares of Just In Time Enterprise, Inc. ("JIT") for cash, a note payable and the assumption of liabilities in a transaction accounted for as a purchase. The acquisition of JIT and its Oracle-based manufacturing software may allow the Company to participate in the more lucrative high end market for relational database and software development technology. Because the acquisition of JIT was accounted for as a purchase, the financial results of JIT prior to January 1995 are not included in DataWorks' financial results. Due to intense competition in the computer hardware market and an increasing tendency for customers, particularly new accounts, to purchase hardware directly from third party vendors, the Company has 26 28 experienced declining hardware revenues as a percentage of each system it sells and declining profit margins with respect to such hardware revenues. In the past, gross profit from hardware sales has not been a significant part of the Company's total gross profit, and the Company believes this trend will continue. The Company believes its success has been due in part to its strategy of focusing marketing and development resources on eight "highly engineered product" industries within the mid-range discrete manufacturing market sector. The Company is unaware of any of its competitors specifically targeting the same group of industries. There can be no assurance that competitors with significantly greater financial, technical and marketing resources than the Company will not target these particular industries. The following discussion should be read in conjunction with the consolidated financial statements included elsewhere within this Annual Report. Fluctuations in quarterly and annual results may occur as a result of factors affecting demand for the Company's products such as the timing of the Company's and competitors' new product introductions and product enhancements. Due to such fluctuations, historical results and percentage relationships are not necessarily indicative of the operating results for any future period. The forward-looking statements contained in the following discussion involve risks and uncertainties. The Company's actual results may differ materially from those discussed here. Factors that could cause or contribute to such differences can be found in the following discussion and elsewhere throughout this Annual Report on Form 10-K. See "Risk Factors". RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentage of total revenues represented by certain condensed consolidated statement of operations data:
YEARS ENDED DECEMBER 31, -------------------- 1997 1996 1995 ---- ---- ---- CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS DATA REVENUES: Software licenses......................................... 51% 47% 45% Maintenance and other services............................ 41 41 39 Hardware.................................................. 8 12 16 --- --- --- Total revenues......................................... 100 100 100 Cost of revenues............................................ 41 45 43 --- --- --- Gross profit................................................ 59 55 57 OPERATING EXPENSES: Sales and marketing....................................... 28 25 26 General and administrative................................ 13 13 13 Research and development.................................. 7 8 11 Acquisition and related costs............................. 11 2 -- ESOP contribution......................................... -- -- 1 --- --- --- Total operating expenses............................... 59 48 51 --- --- --- Income from operations...................................... 0% 7% 6% === === ===
COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1996 Total Revenues -- Software license fees and related services, including software maintenance, consulting and custom programming, are DataWorks' principal sources of revenues. In addition, DataWorks resells third party hardware and operating systems software to provide turnkey systems solutions. Total revenues for the year ended December 31, 1997 increased $30.1 million or 26% to $147.0 million from $116.9 million in 1996. The growth in total revenues was primarily a result of increases in the sales of 27 29 software licenses and in maintenance and other service revenues offset slightly by a reduction in third party hardware sales. Revenues from the Company's international operations as a percentage of total revenues remained unchanged at 17% for both 1997 and 1996. Software License Revenues -- Revenues from DataWorks' non-cancelable software licenses are recognized upon delivery of the products, provided no significant Company obligations remain and collection of the related receivable is deemed probable. Software license fees accounted for $74.7 million or 51% of total revenues in 1997, up from $55.1 million or 47% of total revenues in 1996, an increase of $19.6 million or 35% in absolute dollars. This growth was primarily attributable to continued demand, which was strengthened by the recent acquisition of Interactive, for the Company's ERP systems from its targeted companies. In addition, the increase in system sales was indirectly a result of expansion of the domestic and international sales force and increased marketing efforts. Cost of Software License Revenues -- The cost of software license revenues consists primarily of the cost of software products and firmware security devices provided by third party suppliers and sold with DataWorks' systems. For the year 1997, the cost of software license revenues increased $2.6 million or 40% to $9.2 million compared to $6.6 million in 1996. As a percentage of software license revenues, cost of software licenses remained unchanged at 12% for 1997 and 1996. The increase in absolute dollars was directly related to the increase in software license revenues. Maintenance and Other Service Revenues -- Maintenance and other service revenues include fees primarily from software maintenance, consulting, education and custom programming services. The Company's software license agreements provide on-going maintenance, education, and installation support services. Software maintenance revenues are generally prepaid and recognized ratably over the maintenance agreement period. Consulting, education and custom programming revenues are generally paid and recognized as the services are performed. Revenues from maintenance and other services increased $12.5 million or 26% to $60.9 million in 1997 compared to $48.3 million in 1996. However, as a percentage of total revenues, it remained at a constant level of 41% for both years. The absolute dollar increase was reflective of the Company's growing installed customer base which subscribes to ongoing maintenance support and, to a greater extent, an increase in revenues from support services generated by the Company's expanding professional services staff. Cost of Maintenance and Other Service Revenues -- DataWorks provides its software maintenance, consulting and custom programming services through a professional in-house staff. The cost of these services is primarily salaries and a portion of DataWorks' overhead cost and, to a lesser extent, third party product support costs. For the year 1997, cost of maintenance and other services increased $7.2 million or 20% to $42.8 million compared to $35.6 million in 1996. As a percentage of related revenues, cost of maintenance and other services decreased to 70% in 1997 compared to 74% in the prior year. Conversely, the gross profit percentage increased to 30% in 1997 compared to 26% experienced in 1996. The increase in absolute dollars was primarily attributable to the continued expansion of the Company's professional service organization required to support growth in new customer accounts which included the addition of 56 professional staff during 1997. The increase in gross profit percentage experienced from maintenance and other service activities resulted from improved productivity of the Company's consulting staff, particularly related to a significant number of technical professionals hired and internally trained during 1996. Hardware Revenues -- Hardware revenues include computers (primarily servers), data collection equipment, peripherals and related network and communications products purchased from third party vendors and sold through DataWorks to its customers. Hardware revenues decreased $2.1 million or 16% to $11.3 million in 1997 from $13.4 million in 1996. As a percentage of total revenues, hardware revenues represented 8% in 1997 compared to 12% in the prior year. The reduction in hardware revenues reflects an increasing tendency for new customers, who purchase smaller systems, to purchase hardware directly from third party vendors. This tendency and the increased pressure on profit margins in computer hardware caused by increased competition has caused DataWorks to experience declining hardware revenues, and the Company anticipates the trend to continue in the future. 28 30 Cost of Hardware Revenues -- The cost of hardware revenues consists primarily of the cost of the computers (primarily servers), data collection equipment, peripherals and related network and communications products purchased from third party vendors. For the year 1997, the cost of hardware decreased $1.3 million or 13% to $8.6 million compared to $9.9 million in 1996. As a percentage of hardware revenues, cost of hardware increased to 76% for 1997 compared to 74% in 1996. The decrease in absolute dollars was directly related to the decrease in hardware revenues whereas the decrease in gross profit percentage was attributable to the increased competition in the computer hardware market. Recently, gross profit from hardware sales has not been a significant part of DataWorks' total gross profit, and the Company believes this trend will continue. Gross Profit. Gross profit increased $21.5 million or 33% to $86.3 million in 1997 from $64.8 million in 1996 and increased as a percentage of total revenues to 59% from 55%, respectively. These increases were due primarily to the increase in software license revenues, (which carry a higher gross profit percentage), as a percentage of total revenues, and to a lesser extent, the increase in maintenance and other services revenues experienced in 1997. Sales and Marketing Expenses -- Sales and marketing expenses consist of salaries, commissions and related overhead costs for the sales and marketing activities of the Company, including advertising, promotion, trade show participation and public relations costs. Sales and marketing expenses increased $10.8 million or 37% to $40.5 million in 1997 compared to $29.7 million in 1996 and increased as a percentage of revenues to 28% from 25% for the same period. The increases in sales and marketing expenses were attributable to the Company's direct sales force expansion and enhanced marketing efforts, travel, commissions and other expenses directly related to the increased sales activity. In conjunction with these efforts, the Company hired 47 additional sales and marketing personnel during 1997, with an emphasis on increasing its European presence. DataWorks expects sales and marketing expenses will continue to increase in absolute dollars as the Company continues to expand its sales and marketing programs. General and Administrative Expenses -- General and administrative expenses include costs of corporate services functions including accounting, human resources and legal services, as well as the corporate executive staff. General and administrative expenses increased $4.6 million or 32% to $19.3 million in 1997 compared to $14.7 million in 1996. As a percentage of total revenues, general and administrative expenses remained unchanged at 13% for 1997 and 1996. The increase in absolute dollars was attributable to the Company's continued expansion into Europe, which included the business development and infrastructure costs for regional offices in France, Nordic, Ireland and the Netherlands, and expenses associated with the development and support of the Evosoft distributorship for Germany and Hungary. Domestically, the increase was due to additional personnel required to support the growth in the Company's operations. DataWorks anticipates that these costs will continue to increase in absolute dollars. Research and Development Expenses -- Research and development expenses are comprised primarily of salaries and a portion of the Company's overhead for its in-house staff and amounts paid to outside consultants, as appropriate, to supplement the product development efforts of its in-house staff. Research and development expenses are charged to operations as incurred. Certain software production costs related to DataWorks' Impresa for Backoffice product (previously called ECS), however, are capitalized as required by Statement of Financial Accounting Standards No. 86, "Accounting for Software Cost." In addition, the Company includes in capitalized software purchases of research and development which has reached technological feasibility. In connection with the Interactive acquisition, the Company acquired certain Oracle-based products which has allowed the Company to redirect and focus its Impresa for Backoffice product to the Microsoft-centric Sequel Server-based product. As a result of the overlap in development efforts, the Company wrote-off $3.6 million of capitalized software costs related to Impresa for Backoffice as acquisition and related costs during 1997. As of December 31, 1997, the amount capitalized for Impresa for Backoffice, totaled approximately $4.3 million. Amortization of these costs will begin when the product is initially released, which is expected in late 1998. DataWorks does not capitalize internally developed software costs for any product other than Impresa for Backoffice. 29 31 Gross research and development expenditures increased $2.9 million or 25% to $14.3 million in 1997 compared to $11.4 million in 1996, which represents 10% of total revenues for each year. Gross research and development expenditures in 1997 and 1996 included amounts for capitalized software totaling $3.8 million and $2.5 million, respectively. The increase in gross expenditures was due primarily to the employment of additional development personnel and related overhead costs required to support the Company's level of investment in research and development and the translation and localization of the Company's software which it believes are necessary to maintain a competitive position in its targeted market. DataWorks anticipates continued increased expenditures on research and development for both the enhancement of current products and the addition of new products. Acquisition and Related Costs -- Acquisition and related costs of $15.6 million in 1997 represent the costs incurred in connection with the acquisition of Interactive. These costs included investment banking fees, legal and accounting fees and expenses necessary to integrate and combine the operations of the two companies. At December 31, 1997, included in other accrued liabilities were approximately $1.5 million of anticipated integration and severance costs anticipated to be paid during 1998. There can be no assurance that the Company will not incur additional charges in future periods to reflect costs associated with the integration of the two companies. For the 1996 year, acquisition and related costs of $3.7 million represent the transaction costs incurred in connection with the acquisition of DCD. Other Income (Expense), net -- Other net income (expense) consists primarily of interest income and expense. For the 1997 year, interest income, net of interest expense, increased $1.4 million to $1.6 million compared to $0.2 million in 1996. The net increase consisted primarily of additional interest and dividend income earned from the investment of the net proceeds from DataWorks' follow-on equity offering in December 1996. The increase in investment income was offset in part by interest expense associated with the Company's line of credit borrowings and other interest bearing long-term obligations. The majority of these obligations were repaid in September 1997. Income Taxes -- DataWorks' effective income tax rates for 1997 and 1996 were 139% and 45%, respectively. The effective income tax rates were higher than the statutory rates due primarily to the non-deductibility of certain Interactive and DCD acquisition and related costs incurred in 1997 and 1996, respectively, offset partially by the benefits realized from tax exempt investment income and the utilization of net operating loss carryforwards and research tax credits. The effective tax rate for such periods without the acquisition costs would have been approximately 38%. Net Income (Loss) -- The net loss of $0.8 million experienced for the 1997 year included one-time acquisition costs of $15.6 million, with an offsetting income tax benefit of approximately $3.7 million, incurred in connection with the acquisition of Interactive. Net income without such one-time costs and related tax consequences would have been approximately $11.1 million. Net income for 1996 of $4.5 million included similar one-time acquisition costs of $3.7 million, with an offsetting income tax benefit of approximately $0.8 million, incurred in connection with the acquisition of DCD. Net income without such one-time costs and related tax consequences would have been approximately $7.4 million. COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1995 Total Revenues -- Total revenues increased $40.9 million or 54% to $116.9 million in 1996 from $76.0 million in 1995. This was primarily due to an increase in software license sales to new accounts and an overall increase in maintenance and other service revenues. Software License Revenues -- Software license revenues increased $21.0 million or 62% to $55.2 million in 1996 from $34.1 million in 1995. This growth consisted of system sales and upgrades to new and existing customers and was attributable, in Management's opinion, to increased marketing efforts, expansion of the sales force and increased functionality in both the Vista and Vantage products. Cost of Software License Revenues -- The cost of software license revenues increased $1.8 million or 38% to $6.6 million in 1996 from $4.8 million in 1995. This increase was directly related to the increase in software license revenues. The cost of software license revenues represented approximately 12% and 14% of software 30 32 license revenues for 1996 and 1995, respectively. This decrease in software license cost, as a percentage of software license revenues, was due primarily to database costs reductions on a per user basis. Maintenance and Other Service Revenues -- Maintenance and other service revenues increased $18.8 million or 64% to $48.3 million in 1996 from $29.5 million in 1995. This growth was due primarily to the increase in new customers and increased capacity created by the growth in DataWorks' service organization. Cost of Maintenance and Other Service Revenues -- Cost of maintenance and other services increased $17.0 million or 91% to $35.6 million in 1996 from $18.6 million in 1995. This increase was primarily due to the continued expansion of DataWorks' professional service organization required to support growth in new customer accounts. Gross profit, as a percentage of maintenance and other service revenues, decreased to 26% in 1996 from 37% in 1995. The decrease in gross profit percentage was primarily attributable to lower utilization of revenue-generating personnel in 1996 which resulted from re-educating the existing service personnel on new releases of the Company's products and orientating an unusually large number of newly hired service personnel on the various current releases. Hardware Revenues -- Hardware revenues increased $1.0 million or 8% to $13.4 million in 1996 from $12.4 million in 1995. This represented approximately 12% of total revenues in 1996 as compared to approximately 16% of total revenues in 1995, reflecting an increasing tendency for new customers, who purchase smaller systems, to purchase hardware directly from third party vendors. This tendency and the increased pressure on profit margins in computer hardware caused by increased competition has caused DataWorks to experience declining hardware revenues as a percentage of new account systems. Cost of Hardware Revenues -- The cost of hardware revenues increased $0.7 million or 7% to $10.0 million in 1996 from $9.3 million in 1995. The increase was directly related to the additional hardware revenues realized in 1996 compared to 1995. The Company attempts to maintain a 20% gross profit on hardware sales. In the past, gross profit from hardware sales has not been a significant part of DataWorks' total gross profit, and DataWorks believes this trend will continue. Gross Profit -- Gross profit increased $21.5 million or 50% to $64.8 million in 1996 from $43.3 million in 1995 primarily due to the increase in total revenues. Gross profit as a percentage of total revenues decreased to 55% from 57% in 1996 as compared to 1995. This decrease was primarily attributable to higher personnel and related costs coupled with a lower utilization of revenue generating service personnel as mentioned above. Sales and Marketing Expenses -- Sales and marketing expenses increased $9.8 million or 50% to $29.6 million in 1996 from $19.8 million in 1995 and decreased as a percentage of revenues to 25% from 26% for the same period. The increase in absolute dollars was attributable to DataWorks' expansion of its direct sales force, increased marketing efforts, travel, commissions and other expenses related directly to the increased sales activity. General and Administrative Expenses -- General and administrative expenses increased $4.6 million or 46% to $14.7 million in 1996 from $10.1 million in 1995. This increase was largely due to the increase in administrative staff and the related facility costs necessary to support the growth of DataWorks, including the operations of JIT which was acquired in December 1995. General and administrative expenses in 1995 included $0.9 million of non-recurring compensation expense recorded in connection with a final stock grant and related cash bonus pursuant to a compensation arrangement with an officer of the Company. As a percentage of total revenues, general and administrative expenses was unchanged at 13% for 1996 and 1995. Research and Development Expenses -- Research and development expenses are comprised primarily of salaries and a portion of DataWorks' overhead for its in-house staff and amounts paid to outside consultants, as appropriate, to supplement the product development efforts of its in-house staff. Research and development expenses are charged to operations as incurred. Certain software production costs related to DataWorks' Impresa for Backoffice product, however, are capitalized as required by Statement of Financial Accounting Standards No. 86, "Accounting for Software Cost." Amortization of these costs will begin when the product is initially released. DataWorks does not capitalize internally developed software costs for any product other than Impresa for Backoffice. As of December 31, 1996, the amount capitalized for Impresa for Backoffice was approximately $4.4 million. 31 33 Gross research and development expenditures increased $1.5 million or 15% to $11.4 million in 1996 from $9.9 million in 1995, which represented 10% of total revenues in 1996 compared to 13% in 1995. Gross research and development expenditures in such periods included amounts for capitalized software totaling $2.5 million and $1.3 million, respectively. Also included in 1995 was approximately $3.3 million of research and development costs purchased, in connection with the acquisition of JIT, which had not yet reached technological feasibility. The increase in gross expenditures was due primarily to the employment of additional development personnel and reflects DataWorks' belief that investments in research and development are necessary to maintain a competitive position in its targeted market. Acquisition and Related Costs -- Acquisition and related costs of $3.7 million in 1996 represent the transaction costs incurred in connection with the acquisition of DCD. These costs included investment banking fees, legal and accounting fees and expenses necessary to integrate and combine the operations of the two companies. ESOP Contributions and Dividends -- DCD established the ESOP in 1992 for the benefit of all of its employees meeting certain eligibility requirements. The ESOP was assumed by DataWorks in connection with its acquisition of DCD. In 1992, DCD obtained financing from a commercial bank and advanced proceeds to the ESOP in order to purchase certain shares from a selling shareholder. See Note 4 of Notes to Consolidated Financial Statements. Other Income and Expense -- DataWorks reported net interest income of $0.2 million in 1996 as compared to net interest expense of $1.3 million in 1995. The net interest income for 1996 related primarily to the earnings from the investment of a portion of the net proceeds from DataWorks' initial public offering in October 1995 and its follow-on equity offering in December 1996 which was partially offset by interest expense from long-term debt incurred in connection with the JIT acquisition. For the year 1995, net interest expense consisted primarily of interest expense from long-term debt, the amortization of debt discount and issue costs, and the ESOP obligation, net of a small amount of interest income related to the investment of a portion of the net proceeds from Interactive's initial public offering in May 1995. Substantially all outstanding debt incurred in connection with prior financings was retired from the proceeds of DataWorks' Series A Preferred Stock financing and the October 1995 initial public offering. With the prepayment of such indebtedness, DataWorks recognized an extraordinary expense of $1.0 million, net of income tax benefit, arising from the write-off of unamortized debt issue cost, debt discount and other related fees. Income Taxes -- DataWorks' effective tax rate for 1996 was 45%, due primarily to the non-deductibility of certain DCD acquisition and related costs. The effective tax rate without the acquisition and related costs would have been approximately 38%. DataWorks' effective tax rate for 1995 was 29%. DataWorks realized tax benefits in 1995 from the deduction of certain tax credits and from contributions and dividends paid on Common Stock held by the ESOP used to make ESOP debt service payments, which reduced DataWorks' effective tax rate in such period. See Note 8 of Notes to Consolidated Financial Statements. Net Income (Loss) -- The net income of $4.5 million experienced for the 1996 year included one-time acquisition costs of $3.7 million, with an offsetting income tax benefit of approximately $0.8 million incurred in connection with the acquisition of DCD Corporation. Net income without such one-time costs and related tax consequences would have been approximately $7.4 million. LIQUIDITY AND CAPITAL RESOURCES The Company generated cash of $6.5 million from its operating activities for the year ended December 31, 1997. The primary source of cash was from the Company's results of operations adjusted for non-cash expenses, which included a $0.8 million net loss and $13.3 million of non-cash expenses, resulting in a net increase in cash of $12.5 million. The increase was partially offset by cash used for working capital purposes of $6.0 million. The net use of working capital was primarily attributable to an increase in accounts receivable at December 31, 1997 which was partially offset by increases in accrued compensation, deferred revenue and accounts payable. The increases in accounts receivable and deferred revenue resulted from the growth in customer licensing activity combined with increases in maintenance support and other services provided to the Company's expanding customer base, a portion of which relates to services to be provided in 1998. The 32 34 increase in accrued compensation resulted from the effects of recent growth in personnel, an increase in commissions due to higher sales activities near year end and bonuses accrued at year end. Cash used for investing activities was $39.7 million in 1997 primarily for net purchases of short-term investments of $30.5 million. Additional uses of cash included $4.9 million of capital expenditures and $3.8 million in capitalized software development costs. The Company anticipates the level of expenditures during 1998 for capital equipment to increase moderately and capitalized software development to be slightly reduced. Financing activities utilized net cash of $0.3 million in 1997. Concurrent with the acquisition of Interactive in September 1997, the Company repaid a majority of the obligations Interactive had outstanding, excluding a line of credit draw which was subsequently repaid in early 1998. The issuance of common stock under the Company's stock plans provided $2.1 million of cash in 1997. The Company has a $6.0 million uncommitted line of credit with a domestic bank. This arrangement can be withdrawn by the lender any time, at their option. The Company also has a line of credit with a United Kingdom financial institution under which it may borrow up to $1.3 million. As of December 31, 1997, the Company had $721,000 outstanding under this line of credit which was subsequently repaid in early 1998. As of December 31, 1997, DataWorks had $66.7 million in working capital including $17.4 million in cash and cash equivalents and $30.5 million in short-term investments consisting of high-quality municipal bonds, U.S. government debt securities and commercial paper and auction securities. DataWorks' principal commitments as of December 31, 1997 consist primarily of facilities and equipment leases. In addition, the Company is obligated under various software resell agreements with third party providers to render quarterly or annual minimum royalty and maintenance support payments. DataWorks' capital resources may be used to support working capital requirements, product development, capital equipment requirements and possible acquisitions of businesses, products or technologies complementary to DataWorks' current business. The Company believes that its current cash and short-term investments, available lines of credit and cash flow from operations are sufficient to fund its operations for at least the next 12 months. However, during this period or thereafter the Company may require additional financing. There can be no assurance that additional financing will be available on terms favorable to the Company, or at all. IMPACT OF INFLATION The Company believes that inflation has not had a material effect on its operations and considers the future risk to be minimal. FOREIGN CURRENCY EXPOSURES Revenues from international operations accounted for approximately 17% of the Company's total revenues in 1997. International sales are predominantly invoiced and paid in major foreign currencies which exposes the Company to the impact of fluctuation of foreign currencies versus the U.S. dollar. The operating impact of such fluctuations, however, is offset to the extent expenses of the Company's international operations are incurred and paid in the respective local currencies. Historically, foreign currency fluctuations have not had a material effect on the Company's operations and management considers the future risk to be minimal. YEAR 2000 COMPLIANCE Significant uncertainty exists in the software industry concerning the potential effects from the Year 2000 issue associated with the date codes used in computer software and hardware systems. The Company believes that all of its existing products are Year 2000 compliant, and new products are being designed to be Year 2000 compliant. Although products have undergone the Company's normal quality testing procedures, there can be no assurance that the Company's software products contain all necessary date code changes. Any failure of the 33 35 Company's products to perform, including system malfunctions due to the onset of the calendar year 2000, could have a material adverse effect on the Company's business, financial condition and results of operations. The Company is also currently in the process of evaluating its information technology infrastructure for Year 2000 compliance, including reviewing what actions are required to make all software systems used internally Year 2000 compliant as well as actions needed to mitigate vulnerability to problems with suppliers and other third parties' systems. The Company is assessing the extent of the necessary modifications to its computer software, and management does not anticipate that the Company will incur significant operating expenses or be required to invest heavily in computer system improvements to be Year 2000 compliant. There can be no assurance that such measures will alleviate the Year 2000 problems, which could have a material adverse effect upon the Company's business, operating results and financial condition. RECENT ACCOUNTING PRONOUNCEMENTS The Company has determined that the adoption of recently issued Statements of Financial Accounting Standards ("SFAS") No.129, "Disclosure of Information about Capital Structure," No. 130, "Reporting Comprehensive Income," and No. 131, "Disclosures about Segments of an Enterprise and Related Information," will not have a material impact on its financial condition or results of operations. The Company is currently evaluating the impact SOP 97-2, "Software Revenue Recognition" will have on the Company's financial condition and results of operations. SFAS No. 129 and SOP 97-2 are effective for fiscal 1998, and SFAS Nos. 130 and 131 are effective for fiscal 1999. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data of the Company required by this item are listed under item 14(a)(1) and (2). ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT See the section entitled "Executive Officers" in Part I, Item 1 hereof for information regarding executive officers. The information required by this item with respect to directors is incorporated by reference from the information under the caption of "Election of Directors," contained in the Company's Definitive Proxy Statement to be filed with the Commission pursuant to Regulation 14A in connection with the 1998 Annual Meeting (the "Proxy Statement"). ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference to the information under the caption "Executive Compensation" contained in the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference to the information under the caption "Security Ownership of Certain Beneficial Owners and Management" contained in the Proxy Statement. 34 36 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference to the information under the caption contained in "Certain Transactions" contained in the Proxy Statement. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) Index to Consolidated Financial Statements The consolidated financial statements required by this item are submitted in a separate section beginning on page F-1 of this Annual Report on Form 10-K.
PAGE NUMBER ------ Report of Ernst & Young LLP, Independent Auditors........... F-2 Report of Price Waterhouse LLP, Independent Accountants..... F-3 Consolidated Balance Sheets at December 31, 1997 and 1996... F-4 Consolidated Statements of Operations for Each of the Three Years in the Period Ended December 31, 1997............... F-5 Consolidated Statement of Shareholders' Equity (Deficit) for Each of the Three Years in the Period Ended December 31, 1997...................................................... F-6 Consolidated Statements of Cash Flows for Each of the Three Years in the Period Ended December 31, 1997............... F-7 Notes to Consolidated Financial Statements.................. F-8
(a)(2) Index to Financial Statement Schedules All schedules have been omitted since they are either not required, not applicable, or because the information required is included in the consolidated financial statements or the notes thereto. (a)(3) Index to Exhibits
EXHIBIT EXHIBIT FOOTNOTE NUMBER - -------- ------- (1) 3.1 Registrant's Amended and Restated Articles of Incorporation. 3.2 Registrant's Amended and Restated Bylaws. (1) 4.1 Amended and Restated Registration Rights Agreement dated August 24, 1995. (1) 4.2 Specimen stock certificate. (5) 4.3 Agreement and Plan of Merger and Reorganization by and among the Registrant, DataWorks Acquisition Sub., Inc., DCD Corporation and certain shareholders of DCD Corporation, dated as of August 16, 1996. (1) 10.1 Form of Indemnity Agreement entered into between the Registrant and its directors and officers, with related schedule. (3) 10.2 Registrant's 1995 Equity Incentive Plan (the "Equity Plan"), as amended. (1)(3) 10.3 Forms of Incentive Stock Option and Nonstatutory Stock Option under the Equity Plan. (1)(3) 10.4 Form of Stock Option outside the Equity Plan. (3) 10.5 Registrant's 1995 Non-Employee Directors' Stock Option Plan, as amended. (3) 10.6 Registrant's 1995 Employee Stock Purchase Plan and form of Employee Stock Purchase Plan Offering, as amended. (1)(3) 10.7 Agreement entered into between the Registrant and Rick E. Russo. (3)(5) 10.8 Offer Letter, dated as of January 17, 1996, entered into between the Registrant and Norman R. Farquhar.
35 37
EXHIBIT EXHIBIT FOOTNOTE NUMBER - -------- ------- (1) 10.9 Sublease Agreement dated November 22, 1991 between the Registrant and the Titan Corporation (the "Sublease"). (1) 10.10 First Amendment to Sublease dated December 1, 1994. (2)(5) 10.11 Value Added Reseller Agreement dated December 27, 1995 between the Registrant and VMARK Software, Inc. (1)(2) 10.12 Value Added Remarketer Agreement dated December 16, 1993 between the Registrant and Sybase, Inc. (1)(2) 10.13 Value Added Reseller Agreement dated March 1, 1994 between the Registrant and UniData, Inc. (4) 10.14 Reference is made to Exhibit 4.3.* (6) 10.15 Lease Agreement dated January 16, 1997 between Registrant and Whiop Real Estate Limited Partnership. (3)(6) 10.16 Registrant's 1996 Executive Compensation Plan, dated February 2, 1996. (3)(6) 10.17 Executive Employment Agreement dated September 27, 1996 entered into between the Registrant and Robert W. Brandel. (3)(6) 10.18 Form of Split Dollar Insurance Agreement (Endorsement) and underlying agreements, entered into between Registrant and certain of its executive officers. (3)(6) 10.19 Form of Split Dollar Insurance Agreement (Collateral Assignment) and underlying agreements, entered into between Registrant and certain of its executive officers. (3) 10.20 Employment Agreement dated September 29, 1997 between the Registrant and Robert C. Vernon. (3) 10.21 Employment Agreement dated September 29, 1997 between the Registrant and Mark Hellinger. (3) 10.22 Noncompetition Agreement dated September 29, 1997 between the Registrant and Robert C. Vernon. (3) 10.23 Noncompetition Agreement dated September 29, 1997 between the Registrant and Mark Hellinger. (3) 10.24 Executive Employment Agreement dated December 19, 1997 entered into between the Registrant and Stuart W. Clifton. (9) 10.25 1995 Stock Option Plan, as amended of Interactive (the "Interactive Option Plan"). (7) 10.26 Form of Incentive Stock Option under the Interactive Option Plan. (7) 10.27 Form of Representative's Warrant Agreement issued by Interactive to Cruttenden Roth Incorporated. 10.28 Warrant to Purchase 104,702 shares of Common Stock issued by the Registrant to Cruttenden Roth Incorporated. (2)(7) 10.29 Value Added Reseller Agreement between UniData, Inc. and Interactive dated January 15, 1992, as amended August 17, 1993. (2)(7) 10.30 Distributorship Agreement between VMARK Software, Inc. and Interactive dated January 1, 1993.
36 38
EXHIBIT EXHIBIT FOOTNOTE NUMBER - -------- ------- (2)(7) 10.31 Letter Agreement between System Builder and Interactive (formerly Intrepid Software, Inc.) dated June 8, 1994. (7) 10.32 Office Building Lease between Sunland Diversified and Interactive dated October 1, 1994. (7) 10.33 Lease between James S. Hekimian and William G. Finard, as Trustees of Burlington Woods Office Trust No. 11 under a Declaration of Trust dated September 10, 1980, and Interactive (formerly Intrepid Software, Inc.) dated September 23, 1991. (7) 10.34 Plan and Agreement of Merger between Interactive, Inc., Intrepid Software, Inc. and Randolph S. Naylor dated March 17, 1995. (9) 10.35 Standard Office Lease between Appletree Ltd. and Interactive dated September 6, 1996. (2)(9) 10.36 Distribution Agreement between evosoft Softwarevertrieb GmbH and Interactive dated September 6, 1996. (10) 10.37 Purchase and Sale Agreement between Interactive and Fourth Shift Corporation dated December 15, 1995. (11) 10.38 Agreement for Sale and Purchase of Stock among Interactive, Genie Productique/Gestion de Production and Sodriv dated July 25, 1997. (12) 10.39 1997 Nonstatutory Stock Option Plan of Interactive. (3) 10.40 Description of Compensation for Registrant's Executive Group per Board Compensation Committee approval on January 27, 1998. 21.1 Subsidiaries of Registrant. 23.1 Consent of Ernst & Young LLP, Independent Auditors 23.2 Consent of Price Waterhouse LLP, Independent Accountants 24.1 Power of Attorney. Reference is made to page 33 27 Financial Data Schedule
- --------------- * Schedules omitted pursuant to Regulation S-K, Item 601(b)(2) of the Commission. Registrant undertakes to furnish such schedules to the Commission supplementally upon request. (1) Filed as an exhibit to the Registrant's Registration Statement on From SB-2 (No. 33-97022 LA) or amendments thereto and incorporated herein by reference. (2) Certain confidential portions deleted. (3) Indicates management or compensatory plan or arrangement required to be identified pursuant to Item 14(c). (4) Filed as an exhibit to the Registrant's Registration Statement on Form S-4 (No. 333-11741) and incorporated herein by reference. (5) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated herein by reference. (6) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference. 37 39 (7) Filed as an exhibit to Interactive Group, Inc.'s Registration Statement on Form S-1 (No. 33-90816) and incorporated herein by reference. (8) Filed as an exhibit to Interactive Group, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1995, and incorporated herein by reference. (9) Filed as an exhibit to Interactive Group, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1996, and incorporated herein by reference. (10) Filed as an exhibit to Interactive Group, Inc.'s Current Report on Form 8-K dated December 29, 1995, and incorporated herein by reference. (11) Filed as an exhibit to Interactive Group, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, and incorporated herein by reference. (12) Filed as an exhibit to Interactive Group, Inc.'s Registration Statement on Form S-8 (No. 333-30259) and incorporated herein by reference. (b) Reports on Form 8-K Not applicable. (c) Exhibits The exhibits required by this item are listed under Item 14(a)(3). (d) Financial Statement Schedules The financial statement schedules required by this item are listed under Item 14(a)(2). 38 40 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. DATAWORKS CORPORATION By: /s/ STUART W. CLIFTON ------------------------------------ Stuart W. Clifton Chairman of the Board, President and Chief Executive Officer Date: March 30, 1998 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Stuart W. Clifton and Norman R. Farquhar, and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place, and stead, in any and all capacities, to sign any and all amendments to this Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming that all said attorneys-in-fact and agents, or any of them or their or his substitute or substituted, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURES TITLE DATE ---------- ----- ---- /s/ STUART W. CLIFTON Chairman of the Board, President March 30, 1998 - --------------------------------------------------- and Chief Executive Officer (Stuart W. Clifton) (Principal Executive Officer) /s/ NORMAN R. FARQUHAR Executive Vice President, Chief March 30, 1998 - --------------------------------------------------- Financial Officer and Director (Norman R. Farquhar) (Principal Financial Officer) /s/ ROBERT C. VERNON President -- International March 30, 1998 - --------------------------------------------------- Operations and Director (Robert C. Vernon) /s/ RICK E. RUSSO Vice President, Finance and March 30, 1998 - --------------------------------------------------- Secretary (Principal Accounting (Rick E. Russo) Officer) /s/ RONALD S. PARKER Director March 30, 1998 - --------------------------------------------------- (Ronald S. Parker)
39 41
SIGNATURES TITLE DATE ---------- ----- ---- /s/ WILLIAM FOLEY Director March 30, 1998 - --------------------------------------------------- (William Foley) /s/ ROY THIELE-SARDINA Director March 30, 1998 - --------------------------------------------------- (Roy Thiele-Sardina) /s/ TONY N. DOMIT Director March 30, 1998 - --------------------------------------------------- (Tony N. Domit) /s/ NATHAN W. BELL Director March 30, 1998 - --------------------------------------------------- (Nathan W. Bell)
40 42 DATAWORKS CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE NUMBER ------ Report of Ernst & Young LLP, Independent Auditors........... F-2 Report of Price Waterhouse LLP, Independent Accountants..... F-3 Consolidated Balance Sheets at December 31, 1997 and 1996... F-4 Consolidated Statements of Operations for Each of the Three Years in the Period Ended December 31, 1997............... F-5 Consolidated Statement of Shareholders' Equity for Each of the Three Years in the Period Ended December 31, 1997..... F-6 Consolidated Statements of Cash Flows for Each of the Three Years in the Period Ended December 31, 1997............... F-7 Notes to Consolidated Financial Statements.................. F-8
F-1 43 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Shareholders DataWorks Corporation We have audited the accompanying consolidated balance sheets of DataWorks Corporation as of December 31, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of DataWorks' management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of DCD Corporation, which statements reflect total revenues of $11,482,867 for the year ended December 31, 1995. Those statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to data included for DCD Corporation, is based solely on the report of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of DataWorks Corporation at December 31, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. ERNST & YOUNG LLP San Diego, California January 26, 1998 F-2 44 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of DCD Corporation In our opinion, the statements of operations, of stockholders' equity and of cash flows of DCD Corporation (not presented separately herein) present fairly, in all material respects, the results of its operations and its cash flows for the year ended December 31, 1995, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on theses financial statements based on our audit. We conducted our audit 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 audit provides a reasonable basis for the opinion expressed above. We have not audited the financial statements of DCD Corporation for any period subsequent to December 31, 1995. PRICE WATERHOUSE LLP Minneapolis, Minnesota April 5, 1996 F-3 45 DATAWORKS CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31, -------------------- 1997 1996 -------- -------- ASSETS Current assets: Cash and cash equivalents................................. $ 17,418 $ 50,825 Short-term investments, available-for-sale................ 30,503 -- Accounts receivable, net of allowance for doubtful accounts of $2,360 and $1,527 at December 31, 1997 and 1996, respectively.............................................. 53,617 40,427 Deferred income taxes..................................... 3,377 3,098 Other current assets...................................... 6,354 6,798 -------- -------- Total current assets........................................ 111,269 101,148 Equipment, furniture and fixtures, net...................... 8,184 7,070 Capitalized software costs, net............................. 4,807 5,034 Intangible assets, net...................................... 6,083 6,201 Deferred income taxes....................................... -- 1,134 Other assets................................................ 793 615 -------- -------- Total assets................................................ $131,136 $121,202 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 11,802 $ 10,178 Accrued compensation...................................... 10,476 5,069 Income taxes payable...................................... 1,732 1,387 Deferred revenue.......................................... 14,271 9,939 Short-term borrowings and current portion of long-term obligations............................................ 721 2,013 Other accrued liabilities................................. 5,611 5,862 -------- -------- Total current liabilities................................... 44,613 34,448 Deferred income taxes....................................... 964 2,801 Long-term obligations, less current portion................. 1,493 1,864 Commitments Shareholders' equity: Common shares, no stated par value: Authorized shares -- 25,000 Issued and outstanding shares -- 13,967 and 13,570 at December 31, 1997 and 1996, respectively.............. 81,458 78,703 Retained earnings......................................... 2,445 3,249 Cumulative foreign currency translation adjustments....... 163 137 -------- -------- Total shareholders' equity.................................. 84,066 82,089 -------- -------- Total liabilities and shareholders' equity.................. $131,136 $121,202 ======== ========
See accompanying notes. F-4 46 DATAWORKS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
YEARS ENDED DECEMBER 31, ------------------------------- 1997 1996 1995 -------- -------- ------- Revenues: Software licenses......................................... $ 74,742 $ 55,169 $34,129 Maintenance and other services............................ 60,868 48,327 29,519 Hardware.................................................. 11,353 13,443 12,356 -------- -------- ------- Total revenues.............................................. 146,963 116,939 76,004 Cost of revenues: Software licenses......................................... 9,222 6,584 4,772 Maintenance and other services............................ 42,818 35,632 18,577 Hardware.................................................. 8,638 9,966 9,309 -------- -------- ------- Total cost of revenues...................................... 60,678 52,182 32,658 -------- -------- ------- Gross profit................................................ 86,285 64,757 43,346 Operating expenses: Sales and marketing....................................... 40,456 29,632 19,817 General and administrative................................ 19,346 14,659 10,017 Research and development.................................. 10,505 8,918 8,648 Acquisition and related costs............................. 15,565 3,656 -- ESOP contribution......................................... -- -- 446 -------- -------- ------- Total operating expenses.................................... 85,872 56,865 38,928 -------- -------- ------- Income from operations...................................... 413 7,892 4,418 Other income (expense), net................................. 1,629 247 (1,250) -------- -------- ------- Income before income taxes and extraordinary item........... 2,042 8,139 3,168 Provision for income taxes.................................. 2,846 3,642 932 -------- -------- ------- Income (loss) before extraordinary item..................... (804) 4,497 2,236 Extraordinary item, net of income taxes..................... -- -- (1,017) -------- -------- ------- Net income (loss)........................................... $ (804) $ 4,497 $ 1,219 ======== ======== ======= Basic earnings (loss) per share before extraordinary item... $ (0.06) $ 0.39 $ 0.32 Extraordinary item.......................................... -- -- (0.15) -------- -------- ------- Net earnings (loss) per share -- basic...................... $ (0.06) $ 0.39 $ 0.17 ======== ======== ======= Diluted earnings (loss) per share before extraordinary item...................................................... $ (0.06) $ 0.38 $ 0.29 Extraordinary item.......................................... -- -- (0.13) -------- -------- ------- Net earnings (loss) per share -- diluted.................... $ (0.06) $ 0.38 $ 0.16 ======== ======== ======= Common shares outstanding -- basic.......................... 13,811 11,392 6,929 ======== ======== ======= Common shares outstanding -- diluted........................ 13,811 11,954 7,807 ======== ======== =======
See accompanying notes. F-5 47 DATAWORKS CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN THOUSANDS)
CUMULATIVE FOREIGN PREFERRED SHARES COMMON SHARES RETAINED CURRENCY SHAREHOLDERS' ---------------- ---------------- EARNINGS RECEIVABLE TRANSLATION EQUITY SHARES AMOUNT SHARES AMOUNT (DEFICIT) FROM ESOP ADJUSTMENTS (DEFICIT) ------ ------- ------ ------- --------- ---------- ----------- ------------- Balance at January 1, 1995........... -- $ -- 6,635 $ 649 $(1,818) $(1,088) $ 27 $(2,230) Issuance of common stock to comply with certain antidilution provisions....................... -- -- 2 -- -- -- -- -- Issuance of warrants to purchase shares of common stock........... -- -- -- 29 -- -- -- 29 Issuance of Series A preferred stock net........................ 865 5,938 -- -- -- -- -- 5,938 Issuance of common stock upon exercise of warrants and stock options.......................... -- -- 1,229 1,532 -- -- -- 1,532 Conversion of Series A preferred stock upon initial public offering......................... (865) (5,938) 865 5,938 -- -- -- -- Issuance of common stock upon initial public offering, net..... -- -- 2,566 24,195 -- -- -- 24,195 Dividends declared on common stock............................ -- -- -- -- (649) -- -- (649) Repayments of ESOP receivable...... -- -- -- -- -- 1,088 -- 1,088 Compensation relating to the granting of stock options and stock bonus...................... -- -- 91 466 -- -- -- 466 Repurchase of common stock......... -- -- (431) (400) -- -- -- (400) Tax benefit related to stock options exercised................ -- -- -- 62 -- -- -- 62 Foreign currency translation adjustment....................... -- -- -- -- -- -- (10) (10) Net income......................... -- -- -- -- 1,219 -- -- 1,219 ---- ------- ------ ------- ------- ------- ---- ------- Balance at December 31, 1995......... -- -- 10,957 32,471 (1,248) -- 17 31,240 Issuance of common stock upon exercise of stock options........ -- -- 335 226 -- -- -- 226 Issuance of common stock upon exercise of warrants............. -- -- 14 122 -- -- -- 122 Issuance of common stock in follow-on public offering, net... -- -- 2,113 41,330 -- -- -- 41,330 Issuance of common stock under Employee Stock Purchase Plan..... -- -- 154 1,231 -- -- -- 1,231 Tax benefit related to exercise of stock options.................... -- -- -- 3,180 -- -- -- 3,180 Compensation relating to the granting of stock options........ -- -- -- 161 -- -- -- 161 Repurchase of common stock......... -- -- (3) (18) -- -- -- (18) Foreign currency translation adjustment....................... -- -- -- -- -- -- 120 120 Net income......................... -- -- -- -- 4,497 -- -- 4,497 ---- ------- ------ ------- ------- ------- ---- ------- Balance at December 31, 1996......... -- -- 13,570 78,703 3,249 -- 137 82,089 Issuance of common stock upon exercise of stock options........ -- -- 217 458 -- -- -- 458 Issuance of common stock upon exercise of warrants -- -- 1 3 -- -- -- 3 Issuance of common stock under Employee Stock Purchase Plan..... -- -- 179 1,672 -- -- -- 1,672 Tax benefit related to exercise of stock options.................... -- -- -- 533 -- -- -- 533 Compensation relating to the granting of stock options........ -- -- -- 89 -- -- -- 89 Foreign currency translation adjustment....................... -- -- -- -- -- -- 26 26 Net loss........................... -- -- -- -- (804) -- -- (804) ---- ------- ------ ------- ------- ------- ---- ------- Balance at December 31, 1997......... -- $ -- 13,967 $81,458 $ 2,445 $ -- $163 $84,066 ==== ======= ====== ======= ======= ======= ==== =======
See accompanying notes. F-6 48 DATAWORKS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ----------------------------- 1997 1996 1995 -------- -------- ------- OPERATING ACTIVITIES Net income (loss)........................................... $ (804) $ 4,497 $ 1,219 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization of intangible assets........ 5,172 3,474 1,742 Provision for doubtful accounts........................... 1,813 1,206 1,020 Amortization of debt discount and debt issue costs........ -- -- 214 Non-cash acquisition and related costs.................... 6,641 -- -- Reduction of advances to officers charged to operating expenses................................................ -- -- 109 Compensation relating to the granting of options and stock bonus................................................... 89 161 466 Purchased research and development........................ -- -- 3,250 Write-off of software license............................. -- -- 235 Deferred income taxes..................................... (449) 774 (1,605) Extraordinary item, non-cash portion...................... -- -- 886 Other..................................................... -- (48) 85 Changes in operating assets and liabilities: Accounts receivable..................................... (16,253) (15,897) (10,917) Other current assets.................................... (1,159) (2,801) (1,684) Accounts payable........................................ 1,624 1,917 820 Accrued compensation.................................... 5,407 2,161 707 Deferred revenue........................................ 4,332 1,081 2,314 Other accrued liabilities and income taxes payable...... 94 1,737 2,032 -------- -------- ------- Net cash provided by (used in) operating activities......... 6,507 (1,738) 893 INVESTING ACTIVITIES Purchases of equipment, furniture and fixtures.............. (4,902) (4,757) (2,499) Purchases of short-term investments......................... (54,014) -- -- Sale of short-term investments.............................. 23,511 -- -- Additions to capitalized software costs..................... (3,785) (2,979) (1,334) Increase in intangible assets............................... (296) -- (310) Advances to officers........................................ -- -- (224) Acquisition of businesses................................... -- -- (1,500) Other assets................................................ (178) 8 (115) -------- -------- ------- Net cash used in investing activities....................... (39,664) (7,728) (5,982) FINANCING ACTIVITIES Net decrease in obligations under lines of credit........... (479) -- (2,751) Proceeds from notes payable................................. 908 1,200 1,250 Repayments of notes payable................................. (2,838) (1,377) (6,978) Deferred debt issue costs................................... -- -- (164) Repayment of payables to shareholder........................ -- -- (50) Repurchase of common stock.................................. -- (18) (400) Issuance of series A preferred stock, net................... -- -- 4,688 Dividend paid on class A common stock....................... -- -- (649) Issuance of common stock, net............................... 2,133 42,909 24,402 -------- -------- ------- Net cash (used in) provided by financing activities......... (276) 42,714 19,348 Effect of exchange rate on cash............................. 26 105 34 -------- -------- ------- Net (decrease) increase in cash and cash equivalents........ (33,407) 33,353 14,293 Cash and cash equivalents at beginning of year.............. 50,825 17,472 3,179 -------- -------- ------- Cash and cash equivalents at end of year.................... $ 17,418 $ 50,825 $17,472 ======== ======== ======= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for interest...................... $ 355 $ 290 $ 1,389 ======== ======== ======= Cash paid during the year for income taxes.................. $ 2,511 $ 1,875 $ 930 ======== ======== ======= NON-CASH TRANSACTIONS: Note payable for business acquisition....................... $ -- -- $ 2,500 ======== ======== ======= Earnouts payable for business acquisitions.................. $ 746 $ 573 $ -- ======== ======== =======
See accompanying notes. F-7 49 DATAWORKS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Basis of Presentation DataWorks Corporation ("DataWorks" or "the Company") is a California corporation which develops, markets, implements and supports open systems, client/server-based Enterprise Resource Planning software for mid-range discrete manufacturing companies. As described more fully in Note 2, on September 29, 1997, the Company acquired Interactive Group, Inc. ("Interactive"). The acquisition was accounted for as a pooling of interests and, accordingly, the consolidated financial statements reflect the combined financial position and operating results for the Company and Interactive for all periods presented. In addition, the consolidated financial statements include the accounts of DataWorks' wholly-owned subsidiaries DCD Corporation ("DCD") and DataWorks (Europe) Ltd. All significant intercompany accounts and transactions have been eliminated in consolidation. On December 31, 1995, Interactive acquired all of the outstanding shares of Just-In-Time Enterprise Systems, Inc. ("JIT") from Fourth Shift Corporation ("FSC") of Minneapolis, Minnesota, a publicly traded manufacturing software company (Note 2). This acquisition was accounted for under the purchase method of accounting. The results of operations of JIT are included in the consolidated statements of operations since the date of the acquisition. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents consist of cash and highly liquid investments with remaining maturities, when acquired, of three months or less. Included in cash and cash equivalents are $4,803,000 and $42,388,000 of debt and equity securities classified as available-for-sale stated at cost which approximates fair value at December 31, 1997 and 1996, respectively. DataWorks evaluates the financial strength of institutions at which significant investments are made and believes the related credit risk is limited to an acceptable level. Short-term Investments, available-for-sale Management determines the appropriate classification of its investments in marketable debt and equity securities at the time of purchase and re-evaluates such designation as of each balance sheet date. The Company has classified all securities as available-for-sale in accordance with Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities. Available-for-sale securities are carried at amounts which approximate fair value, with unrealized gains and losses reported net of related taxes as a separate component of shareholders' equity. Realized gains and losses and declines in value judged to be other-than-temporary, if any, on available-for-sale securities are included in earnings and computed using the specific identification cost method. At December 31, 1997, short-term investments include those securities with maturities less than one year from the balance sheet date. Equipment, Furniture and Fixtures Equipment, furniture and fixtures are recorded at cost. DataWorks provides for depreciation on equipment, furniture and fixtures using the straight-line method over the estimated useful lives of the assets, F-8 50 DATAWORKS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) generally three to seven years. Leasehold improvements are amortized over the lesser of their estimated useful life or term of the lease. Capitalized Software Costs In accordance with Statement of Financial Accounting Standards No. 86 Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed, costs incurred in the research and development of new software products and significant enhancements to existing software products are charged against operations as incurred until the technological feasibility of the product has been established. After technological feasibility has been established, direct production costs, including programming and testing, are capitalized. Amortization of these costs will begin when the product becomes available for sale. Capitalized software costs are amortized using the greater of the amount computed using the ratio of current product revenues to estimated total product revenues or the straight-line method over the estimated economic lives of the products. It is possible that estimated total product revenues, the estimated economic life of the product, or both will be reduced in the future. As a result, the carrying amount of capitalized software costs may be reduced in the future, which could result in material charges to the results of operations in future periods. In connection with the Interactive acquisition, the Company acquired certain Oracle-based products which has allowed the Company to redirect and focus its Impresa for Backoffice product (previously called ECS) to the Microsoft centric sequel server-based product. As a result of the overlap in development efforts, the Company wrote-off capitalized software costs related to Impresa for Backoffice totaling approximately $3.6 million and included this charge in acquisition and related costs during 1997. Intangible Assets Intangible assets arose from the acquisitions of various companies, including Madic, JIT and GP2 (see Note 2). The excess of cost over the fair value of the net assets purchased has been allocated to goodwill, customer list, non-compete agreements, trademarks and trade names, assembled work forces, and developed technology. These intangible assets are being amortized over estimated useful lives ranging from three to ten years. Periodically, management assesses whether there has been a permanent impairment in the value of intangible assets and the amount of such impairment is determined by comparing anticipated undiscounted future cash flows from operating activities with the carrying value of intangible assets. Foreign Currency Translation The Company has determined that the local currency of the United Kingdom operations is the functional currency. Accordingly, assets and liabilities are translated at the current exchange rate at the balance sheet date, and revenues and expenses are translated at the average exchange rate in effect during the period. Translation adjustments are reported as a separate component of shareholders' equity. Realized gains and losses related to foreign currency transactions are reported as income or expense in the period presented. Such gains and losses were not material for any period presented. Revenue Recognition Revenue is derived from licensing software, the sale of hardware, maintenance, implementation and installation, consulting and custom programming services. Contract revenue related to software licenses and hardware sales is recognized upon delivery of the products, provided that no significant vendor obligations remain and the collection of the related receivable is deemed probable, net of estimated future returns. Maintenance contract revenue is recognized ratably over the period the service is provided. Revenue from implementation and installation, consulting and custom programming is billed and recognized as the services F-9 51 DATAWORKS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) are provided. Amounts billed but not recognized are deferred in the accompanying consolidated balance sheets. DataWorks' policy is in compliance with the provisions of the American Institute of Certified Public Accountants Statement of Position No. 91-1, Software Revenue Recognition. Concentration of Credit Risk DataWorks sells its products primarily to manufacturing companies located throughout the United States and, to a lesser extent, Europe. Credit is extended based on an evaluation of the customer's financial condition and terms of DataWorks' sales normally require a significant up-front cash deposit. DataWorks estimates its potential losses on trade receivables on an ongoing basis and provides for anticipated losses in the period in which the revenues are recognized. Actual losses may differ from DataWorks' estimates, which could have a material impact on DataWorks' results of operations in future periods. For the three years ended December 31, 1997, the Company had no individual customer which accounted for 10% or more of total annual revenues. Earnings Per Share In 1997, the Financial Accounting Standards Board (FASB) issued Statement No. 128, Earnings Per Share (SFAS 128). SFAS 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is similar to the previously reported fully diluted earnings per share. All earnings per share amounts presented, and where appropriate, have been restated to conform to the SFAS 128 requirements. Accounting Standard on Impairment of Long-Lived Assets Effective January 1, 1996, DataWorks adopted Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of. The adoption in 1996 had no material effect on the consolidated financial statements. New Accounting Standards In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS 130), which the Company is required to adopt for 1998. This statement will require the Company to report in the financial statements, in addition to net income, comprehensive income and its components including foreign currency items and unrealized gains and losses on certain investments in debt and equity securities. Upon adoption of SFAS 130, the Company is also required to reclassify financial statements for earlier periods provided for comparative purposes. The adoption of SFAS 130 will not have a significant impact on the Company's consolidated financial statement disclosures. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information (SFAS 131), which the Company is required to adopt for its 1998 annual financial statements. This statement establishes standards for reporting information about operating segments in annual financial statements and requires selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. Under SFAS 131, operating segments are to be determined consistent with the way that management organizes and evaluates financial information internally for making operating decisions and assessing performance. The Company has not determined the impact of the adoption of this new accounting standard on its consolidated financial statement disclosures. In November 1997, the American Institute of Certified Public Accountants issued Statement of Position No. 97-2, Software Revenue Recognition (SOP 97-2), which the Company is required to adopt for F-10 52 DATAWORKS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) agreements entered into with customers beginning in 1998. This statement provides guidance for recognizing revenue related to sales by software vendors. The Company is currently evaluating the impact this statement will have on its financial condition and results of operations. Reclassifications Certain prior year balances have been reclassified to conform to the current year presentation. 2. BUSINESS COMBINATIONS On September 29, 1997, the Company acquired Interactive Group, Inc., a Delaware corporation, and its wholly-owned subsidiaries Interactive (UK) Ltd., JIT and Interactive France which develops, markets, implements and supports integrated business information systems that enable discrete manufacturers to manage their enterprise-wide information requirements. Under the terms of the acquisition agreement, stockholders of Interactive received 3,709,165 shares of common stock of the Company based on an exchange ratio of 0.8054 shares for each share of Interactive common stock they owned at the time the acquisition was consummated. In addition, options and warrants to acquire Interactive common stock were converted as a result of the acquisition into equivalent options and warrants to acquire the Company's common stock, based upon the exchange ratio. The acquisition has been accounted for under the pooling-of-interests method of accounting. Accordingly, the historical financial statements for periods prior to the consummation of the combination have been restated as though the companies had been combined for all periods presented. In connection with the acquisition of Interactive, the Company recorded one-time acquisition and related costs during the third quarter of 1997 of $15.6 million. These costs included investment banking fees, legal and accounting fees, certain capitalized software and asset write-offs and various estimated expenses associated with the integration of operations. At December 31, 1997, approximately $1.5 million of anticipated integration and severance costs are included in other accrued liabilities. On September 27, 1996, the Company acquired DCD, a Minnesota corporation, which designs, develops, markets and supports management software for use by lower tier mid-range manufacturers in the make-to-order manufacturing industry. In connection with the acquisition, the shareholders of DCD received 1,763,704 shares of common stock of the Company. The acquisition has been accounted for under the pooling-of-interests method of accounting. Accordingly, the historical financial statements for periods prior to the consummation of the combination have been restated as though the companies had been combined for all periods presented. In connection with the acquisition of DCD, the Company recorded one-time acquisition and related costs of $3.7 million which consisted of investment banking fees, legal and accounting fees and certain expenses associated with the integration of operations. F-11 53 DATAWORKS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Total revenues and net income (loss) of DataWorks and Interactive for the periods preceding the acquisition were as follows (in thousands):
DATAWORKS INTERACTIVE COMBINED --------- ----------- -------- Six months ended June 30, 1997 Total revenues................................... $34,002 $28,442 $ 62,444 Net income (loss)................................ 2,963 367 3,330 Year ended December 31, 1996 Total revenues................................... 60,748 56,191 116,939 Net income....................................... 3,236 1,261 4,497 Year ended December 31, 1995 Total revenues................................... 43,011 32,993 76,004 Extraordinary item, net of income taxes.......... (1,017) -- (1,017) Net income (loss)................................ 2,357 (1,138) 1,219
In January 1996, DataWorks purchased certain assets of Arrowkey Systems ("Arrowkey") for $450,000. In accordance with the terms of the agreement, the Company paid an additional $75,000 in January 1997 and may be required to pay up to $75,000 in January 1998 and 1999 if certain sales levels of Arrowkey software products are achieved (as defined). The owner of Arrowkey is an employee of DataWorks. On December 31, 1995, Interactive acquired all of the outstanding shares of JIT in exchange for $1.5 million of cash, a $2.5 million note payable, and the assumption of net liabilities of $4.3 million. These liabilities do not take into account any potential losses associated with litigation that JIT is subject to in the normal course of business. In the opinion of management, the resolution of these matters will not have a material adverse effect on the Company's results of operations or financial position. In addition, $1.2 million of contingent consideration is payable in two installments due January 1998 and 1999 based on a percentage of revenues generated from the JIT software. During the years ended December 31, 1997 and 1996, Interactive accrued $282,000 and $415,000, respectively, under the earnout calculation and recorded corresponding increases to its intangible assets related to the purchase price of JIT (Note 6). A summary of the purchase price and the allocation of costs to the assets acquired from JIT is as follows as of December 31, 1995 (in thousands): Current assets..................................... $ 2,165 Fixed assets....................................... 863 Intangible assets.................................. 2,455 In-process research and development................ 3,250 ------- $ 8,733 =======
During 1995, following the acquisition of JIT, Interactive wrote-off the purchased in-process research and development and this amount is included in research and development expense. On July 25, 1997, Interactive acquired substantially all of the outstanding shares of Genie Productique/ Gestion de Production ("GP2"), subsequently renamed Interactive France, a small provider of ERP software solutions to the manufacturing mid-market in France, in exchange for approximately $420,000 plus an additional $167,000 of contingent consideration payable over three years based on a percentage of revenues generated primarily from Interactive France's installed base of customers. The transaction was accounted for as a purchase and DataWorks' statements of operations include the results of operations of Interactive France from the date of acquisition. The excess of cost over the fair value of the net assets purchased has been allocated to customer base and assembled work force. F-12 54 DATAWORKS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 3. FINANCIAL STATEMENT INFORMATION Equipment, Furniture and Fixtures Equipment, furniture and fixtures consist of the following (in thousands):
DECEMBER 31, ------------------- 1997 1996 -------- ------- Computer equipment.......................................... $ 11,133 $ 9,051 Office furniture, fixtures and equipment and other.......... 7,574 5,337 -------- ------- 18,707 14,388 Less accumulated depreciation and amortization.............. (10,523) (7,318) -------- ------- $ 8,184 $ 7,070 ======== =======
Intangible Assets Intangible assets consist of the following (in thousands):
DECEMBER 31, ------------------ 1997 1996 ------- ------- Customer list............................................... $ 3,300 $ 3,300 Goodwill.................................................... 1,531 1,531 Covenant not to compete..................................... 960 810 Assembled workforce......................................... 1,013 831 Trademarks and trade names.................................. 457 457 Customer base............................................... 990 563 Developed technology........................................ 1,053 770 Other....................................................... 68 68 ------- ------- 9,372 8,330 Less accumulated amortization............................... (3,289) (2,129) ------- ------- $ 6,083 $ 6,201 ======= =======
4. SHORT-TERM INVESTMENTS At December 31, 1997, the amortized cost of short-term investments classified as available-for-sale was as follows (in thousands):
AMORTIZED COST --------- U.S. government debt securities............................. $ 2,739 Tax exempt commercial paper and auction securities.......... 1,007 Municipal bonds............................................. 26,757 ------- $30,503 =======
The amortized cost of these securities approximates fair value at December 31, 1997. No significant gains or losses were realized during the years ended December 31, 1997 and 1996. F-13 55 DATAWORKS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. EMPLOYEE STOCK OWNERSHIP PLAN AND RECAPITALIZATION DCD established an ESOP in 1992 for the benefit of all employees meeting certain eligibility requirements. In 1992, DCD obtained financing of $2,550,000 from a commercial bank and advanced the proceeds to the ESOP which purchased 899,640 shares of common stock from a DCD stockholder. The ESOP note payable was secured by the assets of DCD and a $500,000 personal guarantee of the selling stockholder. During 1995, the ESOP note payable and "Receivable from ESOP" were paid in full. DCD recorded the funds advanced to the ESOP as a "Receivable from ESOP" which was a reduction of stockholders' equity. As DCD made discretionary contributions and dividends to the ESOP, these amounts were used to repay the "Receivable from ESOP" and the related ESOP note payable. As the principal amount of the loan was repaid, the "Receivable from ESOP" was reduced accordingly. The amount of the repayments during 1995 was $1,087,503. During 1995, DCD paid $56,408 of interest expense, contributed $438,477 to the ESOP and incurred $7,073 of other ESOP related expenses. Also during 1995, DCD paid dividends of $649,026 on common stock owned by the ESOP. At December 31, 1995, the ESOP had released and allocated 899,640 shares. 6. LONG-TERM OBLIGATIONS Long-term obligations consist of the following (in thousands):
DECEMBER 31, ----------------- 1997 1996 ------ ------- 8.75% note payable to Fourth Shift Corporation; principal and interest payable in twelve equal quarterly installments of $239,130 each, commencing on April 1, 1996; paid September 30, 1997............................. $ -- $ 1,934 Revolving line of credit agreement with Royal Bank of Scotland plc (the "Royal Bank of Scotland Agreement"); interest payable monthly at the bank's prime rate, plus 2% (9.25% at December 31, 1997); expires July 31, 1998....... 721 -- Revolving line of credit agreement; interest payable monthly; repaid and cancelled September 30, 1997.......... -- 1,200 Non-interest bearing earnout payable to FSC; due in varying amounts until January 31, 1999............................ 697 415 Non-interest bearing earnout payable to GP2; due in varying amounts until July 25, 2000............................... 420 -- Other....................................................... 376 328 ------ ------- 2,214 3,877 Less current portion of long-term obligations............... (721) (2,013) ------ ------- $1,493 $ 1,864 ====== =======
Maturities of long-term obligations are as follows (in thousands):
YEARS ENDED DECEMBER 31, ------------------------ 1998................................................ $ 721 1999................................................ 1,264 2000................................................ 200 2001................................................ 26 2002 and thereafter................................. 3 ------ $2,214 ======
F-14 56 DATAWORKS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Royal Bank of Scotland Agreement is limited to borrowings of 800,000 British pounds (approximately $1.3 million at December 31, 1997) and is secured by the accounts receivable of Interactive (U.K.) Ltd. The Royal Bank of Scotland Agreement contains restrictive covenants, including limitations on the payment of dividends. At December 31, 1997, the Company was in compliance with all such covenants. In June 1997, the Company amended its banking facility agreement to be uncommitted. This facility provides for borrowings up to a maximum of $6 million and bears interest at the bank's prime rate (8.5% at December 31, 1997). This uncommitted arrangement can be withdrawn by the lender at any time, at their option. At December 31, 1997, DataWorks had no borrowings outstanding under the banking facility. 7. EXTRAORDINARY ITEM In connection with the repayment of a senior term note payable in September 1995 and the settlement of subordinated notes payable in August and November 1995, the related unamortized debt issue costs and debt discount were written off. In addition, DataWorks also incurred prepayment and other cash charges related to the payment of the senior term note. In accordance with generally accepted accounting principles, these write-offs and cash charges, net of the related income tax benefits, have been reported as extraordinary items in the accompanying consolidated statements of operations. The composition of the extraordinary items are as follows (in thousands):
YEAR ENDED DECEMBER 31, 1995 ----------------- Write-off of unamortized debt issue costs and debt discount.................................................. $ 886 Cash prepayment penalty and other cash charges.............. 838 ------ 1,724 Income tax benefit.......................................... (707) ------ $1,017 ======
8. INCOME TAXES The provision for income taxes consists of the following (in thousands):
YEARS ENDED DECEMBER 31, -------------------------- 1997 1996 1995 ------ ------ ------ Current: Federal................................................ $2,324 $1,827 $1,113 Foreign................................................ 611 561 398 State.................................................. 717 480 269 ------ ------ ------ 3,652 2,868 1,780 Deferred: Federal................................................ (622) 720 (779) Foreign................................................ -- -- -- State.................................................. (184) 54 (69) ------ ------ ------ (806) 774 (848) ------ ------ ------ $2,846 $3,642 $ 932 ====== ====== ======
F-15 57 DATAWORKS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Deferred income taxes are provided for temporary differences in recognizing certain income and expense items for financial reporting and tax reporting purposes. Significant components of deferred tax assets and liabilities are as follows (in thousands):
YEARS ENDED DECEMBER 31, ------------------ 1997 1996 ------- ------- Deferred tax liabilities: Difference in tax basis of acquired intangibles........... $ (847) $(1,066) Capitalized software costs................................ (1,665) (1,735) Depreciation.............................................. -- (49) Other..................................................... (70) (110) ------- ------- Total deferred tax liabilities.............................. (2,582) (2,960) Deferred tax assets: Net operating loss and credit carryforwards............... 323 1,205 Deferred revenue and expenses............................. 38 500 Allowance for doubtful accounts and product returns....... 889 307 Depreciation.............................................. 394 -- Purchased research and development........................ 1,155 1,183 Accrued liabilities and other............................. 2,196 1,347 ------- ------- Total deferred tax assets................................... 4,995 4,542 ------- ------- Net deferred tax assets..................................... $ 2,413 $ 1,582 ======= =======
The effective income tax rate varied from the statutory federal rate as follows:
YEARS ENDED DECEMBER 31, -------------------------- 1997 1996 1995 ------ ------ ------ Income tax provision at statutory rate................... $ 695 $2,784 $1,077 State income tax provision, net of federal benefits...... 352 410 163 Benefit of tax credits................................... (416) (278) (105) Non deductible merger expenses........................... 1,901 682 -- ESOP dividend tax benefit................................ -- -- (256) Effect of foreign rates.................................. -- 16 (38) Utilization of research tax credits and net operating loss carryforwards..................................... -- (228) -- Permanent differences.................................... (477) 73 (54) Other.................................................... 791 183 145 ------ ------ ------ $2,846 $3,642 $ 932 ====== ====== ======
At December 31, 1997, DataWorks has a consolidated federal research and development credit carryforward of approximately $312,000 which will begin to expire in 2012, unless previously utilized. In accordance with Sections 382 and 383 of the Internal Revenue Code, a change in ownership of greater than fifty percent of a corporation within a three-year period will place an annual limitation on the corporation's ability to utilize its existing carryforwards. F-16 58 DATAWORKS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 9. RECEIVABLE FROM OFFICER At December 31, 1997 and 1996, the receivable from officer is from one of DataWorks' principal officers and shareholders and consists of net advances totaling $97,000 and $155,300, respectively, and is included in other assets. The advances will be repaid or offset against any future performance bonuses earned and approved by the Board of Directors. 10. COMMITMENTS AND CONTINGENCIES The Company is obligated under various noncancellable operating leases for equipment, vehicles and office space through 2004. Certain of the leases provide that the Company pay all or a portion of taxes, maintenance, insurance and other operating expenses, and certain of the rents are subject to adjustment for changes as determined by certain consumer price indices and exchange rates. Two of DataWorks' corporate office lease agreements provide for deferred payment terms. For financial reporting purposes, rent expense is recorded on the straight-line basis over the term of the lease and the difference between rent expense accrued and amounts paid under the lease agreements are included in other liabilities in the accompanying consolidated balance sheets. Minimum lease commitments for noncancellable operating leases as of December 31, 1997 are as follows (in thousands):
YEARS ENDED DECEMBER 31, ------------------------ 1998............................................... $ 4,160 1999............................................... 3,360 2000............................................... 2,356 2001............................................... 2,187 2002 and thereafter................................ 2,231 ------- $14,294 =======
Aggregate rent expense was approximately $4,162,000, $3,437,000 and $2,663,000 in 1997, 1996 and 1995, respectively. During 1997, the Company entered into various software resell agreements with third party software providers. These resell agreements generally require certain minimum levels of renumeration during the term of the agreements in the form of quarterly or annual minimum royalty and maintenance support payments. At December 31, 1997, the Company is obligated to make minimum payments related to these resell agreements as follows (in thousands):
YEARS ENDED DECEMBER 31, ------------------------ 1998............................................. $ 1,927 1999............................................. 3,360 2000............................................. 2,261 2001............................................. 2,968 ------- $10,516 =======
Contingencies The Company is subject to legal proceedings and claims that arise in the normal course of business. While the outcome of the proceedings and claims cannot be predicted with certainty, management does not believe that the outcome of any of these matters will have a material adverse effect on the Company's consolidated financial condition or results of operations. F-17 59 DATAWORKS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 11. SHAREHOLDERS' EQUITY Common Stock In January 1991, the Company entered into a stock and cash bonus arrangement (the "Arrangement") with an officer of the Company that provided for the issuance of common stock as a bonus for services rendered. On January 1, 1995, the Company issued 90,849 shares of common stock and a related cash bonus sufficient to cover the related income tax under the Arrangement. No further cash or stock bonuses have been provided for under this Arrangement. On March 20, 1995, the Company removed the forfeiture provisions associated with the Arrangement, and compensation expense of $871,000 related to this bonus was recorded which consisted of the then current fair value of the common stock and the related cash bonus under the Arrangement. Preferred Stock As of December 31, 1997, DataWorks is authorized to issue 5,000,000 shares of preferred stock; no shares are outstanding. Warrants In connection with various financing arrangements, the Company issued warrants to purchase 1,382,183 shares of DataWorks' common stock at prices ranging from $0.26 to $8.68 per share. In connection with the completion of the initial public offering in November 1995, 1,345,869 warrants were converted to 1,050,843 shares of common stock for cash proceeds of $175,439 and the settlement of $1,300,000 of subordinated notes payable. During 1997 and 1996, warrants were exercised for the purchase of 988 and 14,092 shares of common stock, respectively, at $8.68 per share. At December 31, 1997, warrants to purchase 21,234 shares of common stock at $8.68 per share remain outstanding. The warrants expire in August, 2000. In addition, in May 1995, the Company granted a warrant to an underwriter for the purchase of up to 104,702 shares of common stock at an exercise price of $9.68 per share. The warrant expires in May, 2000. In 1990, a warrant was issued to a shareholder to purchase 113,852 shares of Company common stock at $0.22 per share. The warrant was exercised in March, 1995 by reducing the subordinated debenture payable to the shareholder. Stock Option Exercised by Officer In July 1996, an officer of DCD exercised an option to acquire 37% of DCD's common shares in accordance with the terms of the option. For tax purposes, the exercise of the option is compensatory. Accordingly, for the year ended December 31, 1996, the Company recorded a tax benefit of approximately $2.5 million as an addition to common stock. Stock Option Plans The Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related Interpretations, in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123), requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. DataWorks has an Equity Incentive Plan (the "Plan") under which 2,824,127 shares of common stock are reserved for issuance to eligible employees, directors and consultants of DataWorks. The Plan provides for F-18 60 DATAWORKS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) awards in the form of options, stock bonuses, restricted shares or stock appreciation rights ("SARs"). The terms of any stock awards under the Plan, including vesting requirements, are determined by the Board of Directors, subject to the provisions of the Plan. Options issued under the Plan are either incentive stock options ("ISOs") or nonstatutory stock options ("NSOs"). The exercise price of the ISOs is not less than the fair market value on the date of grant and the exercise price of the NSOs is determined by the Board of Directors. Options granted under the Plan generally become exercisable over a period of four years and the maximum term of options granted is ten years. For the years ended December 31, 1997, 1996 and 1995, the Company recorded $89,000, $91,000 and $15,000, respectively, in compensation expense related to employee stock options granted at less than fair market value on the date of grant. On September 13, 1995, DataWorks adopted the Non-Employee Directors' Stock Option Plan (the "Directors' Plan") under which 150,000 shares of common stock are reserved for issuance upon exercise of options granted by DataWorks to non-employee members of the board of directors. The exercise price of the options will be at the fair market value of the stock on the date of grant. Options granted under the Directors' Plan will become exercisable over three years and expire ten years from the date of grant. As of December 31, 1997, 100,000 options were granted under the Directors' Plan. In addition, at December 31, 1997, DataWorks has outstanding options to purchase an additional 102,169 shares of common stock at prices ranging from $1.30 to $5.20 per share outside of the plans, of which 47,172 were exercisable. The Company recorded $70,000 of expense related to the estimated fair market value of certain of these options on their date of grant during the year ended December 31, 1996. Pro forma information regarding net income and earnings per share is required by SFAS 123, and has been determined as if the Company has accounted for its employee stock options under the fair value method of that Statement. The fair value of these options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for 1997, 1996 and 1995, respectively: risk-free interest rates of 6.25%, 6% and 6%; dividend yield of 0%; volatility factors of the expected market price of the Company's common stock of 76.5%, 67.5% and 67.5% for 1997, 1996 and 1995, respectively, and a weighted-average life of the options of 5.15, 4.06 and 4.09 years for 1997, 1996 and 1995, respectively. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows (in thousands, except for earnings per share information):
YEARS ENDED DECEMBER 31, --------------------------- 1997 1996 1995 ------- ------ ------ Pro forma net income (loss)............................. $(2,913) $3,406 $1,147 ======= ====== ====== Pro forma basic earnings (loss) per share............... $ (0.21) $ 0.30 $ 0.17 ======= ====== ====== Pro forma diluted earnings (loss) per share............. $ (0.21) $ 0.28 $ 0.15 ======= ====== ======
The results above are not likely to be representative of the effects of applying FAS 123 on reported net income or loss for future years as these amounts reflect the expense for only one, two or three years vesting. F-19 61 DATAWORKS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A summary of the Company's stock option activity, including those issued outside of the plans, and related information for the years ended December 31 follows:
1997 1996 1995 --------------------- --------------------- --------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE --------- --------- --------- --------- --------- --------- Outstanding -- beginning of year................. 1,399,516 $11.16 1,104,927 $ 3.91 525,788 $ .26 Granted................. 877,878 15.08 662,301 17.67 682,359 6.06 Exercised............... (172,207) 1.95 (335,158) .67 (64,759) .49 Forfeited............... (125,601) 11.56 (32,554) 7.02 (38,461) .39 --------- --------- --------- Outstanding -- end of year.................... 1,979,586 $13.85 1,399,516 $11.16 1,104,927 $3.91 ========= ========= ========= Exercisable at end of year.................... 584,465 390,351 358,761 Weighted-average fair value of options granted during year............. $ 11.93 $ 9.27 $ 2.04
The weighted-average remaining contractual life of the options outstanding at December 31, 1997 is 8.45 years. The following table summarizes information about stock options outstanding at December 31, 1997:
OUTSTANDING EXERCISABLE ------------------------------------------ ---------------------------- REMAINING WEIGHTED EXERCISE PRICE RANGE OF NUMBER CONTRACTUAL AVERAGE NUMBER WEIGHTED EXERCISE PRICES OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE AVERAGE - --------------- ----------- ----------- -------------- ----------- -------------- $ 0.26 to 0.65 52,311 6.12 $ .46 37,204 $ 0.39 2.86 to 3.72 107,891 6.21 3.25 64,350 3.29 5.02 to 6.83 239,841 8.79 6.30 50,167 5.87 7.53 150,340 7.81 7.53 80,360 7.53 9.31 to 1.06 243,989 7.97 10.59 157,945 10.60 11.50 126,415 8.00 11.50 55,602 11.50 13.25 to 14.50 90,527 9.50 13.89 4,443 14.50 15.30 to 16.00 334,106 8.34 15.64 22,859 16.00 18.13 to 18.50 312,166 9.67 18.46 11,804 18.20 21.75 to 25.75 322,000 8.78 25.23 99,731 25.26
At December 31, 1997, options for 560,461 shares were available for future grant. Employee Stock Purchase Plan On September 13, 1995, DataWorks adopted an Employee Stock Purchase Plan (the "Purchase Plan") under which 440,734 shares of common stock were reserved for sale to employees. DataWorks' Board of Directors may grant eligible employees the right to purchase a fixed number of shares of common stock (up to but not exceeding 15% of each employee's earnings) over a fixed offering period (not to exceed 27 months) at the lesser of 85% of the fair market value of the stock on the grant date or 85% of the fair market value on the purchase date or dates specified on the date of grant. At December 31, 1997, 333,150 shares have been issued under the Purchase Plan. F-20 62 DATAWORKS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Shares Reserved for Future Issuance The following common stock is reserved for future issuance at December 31, 1997: Stock options: Granted and outstanding................................... 1,979,586 Reserved for future grants................................ 560,461 --------- 2,540,047 Warrants.................................................... 125,936 Employee stock purchase plan................................ 107,584 --------- 2,773,567 =========
12. EMPLOYEE RETIREMENT AND PROFIT SHARING PLANS Effective July 1, 1994, DataWorks established a 401(k) defined contribution retirement plan (the "Retirement Plan") covering all employees. The Retirement Plan provides for voluntary employee contributions from 1% to 15% of annual compensation (as defined). DataWorks may contribute such amounts as determined by the Board of Directors. Participants vest in employer contributions over five years at a rate of 20% for each year of service. There were no employer contributions to the Retirement Plan during the years ended December 31, 1997, 1996 or 1995. Interactive maintains profit sharing and deferred savings plans for its employees, which allow participants to make contributions by salary reduction pursuant to Section 401(k) of the Internal Revenue Code. Under both plans, Interactive contributions are discretionary, and employees vest immediately in their contributions. Interactive U.K. Subsidiary also maintains a defined contribution pension plan for its employees. Expenses for the plans aggregated approximately $790,000, $571,000, and $314,000 for the years ended December 31, 1997, 1996 and 1995, respectively. In addition, DCD has a profit sharing plan which provides for an annual contribution not to exceed the maximum allowed as a deduction under the Internal Revenue Code. The plan covers substantially all employees after specified periods of service and the attainment of minimum age requirements. Each year's contribution is determined by the Board of Directors. No Company contributions to the plan were declared or made during 1997, 1996 or 1995. Effective July 1996, DCD established a 401(k) defined contribution retirement plan (the "DCD plan") covering all employees of DCD. The DCD plan provides for voluntary employee contributions from 1% to 15% of annual compensation (as defined). DCD may match these contributions at 50% on the first 6% of employee contributions. For the years ended December 31, 1997 and 1996, DCD contributions to the plan totaled $0 and $87,000, respectively. 13. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share (in thousands except per share amounts):
YEARS ENDED DECEMBER 31, ---------------------------- 1997 1996 1995 ------- ------- ------ Numerator Net income (loss).................................... $ (804) $ 4,497 $1,219 ======= ======= ====== Numerator for basic and diluted earnings per share -- income (loss) available to common shareholders...................................... $ (804) $ 4,497 $1,219 ======= ======= ======
F-21 63 DATAWORKS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, ---------------------------- 1997 1996 1995 ------- ------- ------ Denominator Weighted average common shares outstanding -- shares used in computing basic earnings per share........ 13,811 11,392 6,929 Weighted average options and warrants to purchase common stock as determined by the treasury method.......................................... -- 562 878 ------- ------- ------ Shares used in computing diluted earnings per share............................................. 13,811 11,954 7,807 ======= ======= ====== Basic earnings (loss) per share........................ $ (0.06) $ 0.39 $ 0.17 ======= ======= ====== Diluted earnings (loss) per share...................... $ (0.06) $ 0.38 $ 0.16 ======= ======= ======
The earnings (loss) per share information was computed applying the requirements of recently effective Statement of Financial Accounting Standards No. 128 and SEC Staff Accounting Bulletin No. 98. 14. GEOGRAPHIC DATA The Company's operations consist of one business segment: the development, marketing, implementation, and support of integrated business information systems for the discrete manufacturing industry. The Company has operations in North America and Europe. The operations and identifiable assets of the Company by geographic area are as follows (in thousands):
YEARS ENDED DECEMBER 31, -------------------------------- 1997 1996 1995 -------- -------- ------- Revenues from unaffiliated customers: North America.................................... $121,689 $ 96,794 $62,768 Europe........................................... 25,274 20,145 13,236 -------- -------- ------- $146,963 $116,939 $76,004 ======== ======== ======= Income (loss) before income taxes: North America.................................... $ (1,402)(a) $ 6,138(b) $ 1,995 Europe........................................... 3,444 2,001 1,173 -------- -------- ------- $ 2,042 $ 8,139 $ 3,168 ======== ======== ======= Identifiable assets: North America.................................... $116,775 $111,797 $55,777 Europe........................................... 14,361 9,405 7,139 -------- -------- ------- $131,136 $121,202 $62,916 ======== ======== =======
- --------------- (a) Includes one-time charges in the aggregate, after-tax amount of $11.9 million in connection with the Interactive acquisition. (b) Includes one-time charges in the aggregate, after-tax amount of $2.1 million in connection with the DCD acquisition. F-22 EX-3.2 2 EXHIBIT 3.2 1 EXHIBIT 3.2 AMENDED AND RESTATED BYLAWS OF DATAWORKS CORPORATION (A CALIFORNIA CORPORATION) 2 BYLAWS OF DATAWORKS CORPORATION (A CALIFORNIA CORPORATION) ARTICLE I OFFICES SECTION 1. PRINCIPAL OFFICE. The principal executive office of the corporation shall be located at such place as the Board of Directors may from time to time authorize. If the principal executive office is located outside this state, and the corporation has one or more business offices in this state, the Board of Directors shall fix and designate a principal business office in the State of California. SECTION 2. OTHER OFFICES. Additional offices of the corporation shall be located at such place or places, within or outside the State of California, as the Board of Directors may from time to time authorize. ARTICLE II CORPORATE SEAL SECTION 3. CORPORATE SEAL. If the Board of Directors adopts a corporate seal such seal shall have inscribed thereon the name of the corporation and the state and date of its incorporation. If and when a seal is adopted by the Board of Directors, such seal may be engraved, lithographed, printed, stamped, impressed upon, or affixed to any contract, conveyance, certificate for shares, or other instrument executed by the corporation. ARTICLE III SHAREHOLDERS' MEETINGS AND VOTING RIGHTS SECTION 4. PLACE OF MEETINGS. Meetings of shareholders shall be held at the principal executive office of the corporation, or at any other place, within or outside the State of California, which may be fixed either by the Board of Directors or by the written consent of all persons entitled to vote at such meeting, given either before or after the meeting and filed with the Secretary of the Corporation. SECTION 5. ANNUAL MEETING. The annual meeting of the shareholders of the corporation shall be held on any date and time which may from time to time be designated by the Board of Directors. At such annual meeting, directors shall be elected and any other business may be transacted which may properly come before the meeting. 2. 3 SECTION 6. POSTPONEMENT OF ANNUAL MEETING. The Board of Directors and the President shall each have authority to hold at an earlier date and/or time, or to postpone to a later date and/or time, the annual meeting of shareholders. SECTION 7. SPECIAL MEETINGS. (a) Special meetings of the shareholders, for any purpose or purposes, may be called by the Board of Directors, the Chairman of the Board of Directors, the President, or the holders of shares entitled to cast not less than ten percent (10%) of the votes at the meeting. (b) Upon written request to the Chairman of the Board of Directors, the President, any vice president or the Secretary of the corporation by any person or persons (other than the Board of Directors) entitled to call a special meeting of the shareholders, such officer forthwith shall cause notice to be given to the shareholders entitled to vote, that a meeting will be held at a time requested by the person or persons calling the meeting, such time to be not less than thirty-five (35) nor more than sixty (60) days after receipt of such request. If such notice is not given within twenty (20) days after receipt of such request, the person or persons calling the meeting may give notice thereof in the manner provided by law or in these bylaws. Nothing contained in this Section 7 shall be construed as limiting, fixing or affecting the time or date when a meeting of shareholders called by action of the Board of Directors may be held. SECTION 8. NOTICE OF MEETINGS. Except as otherwise may be required by law and subject to subsection 7(b) above, written notice of each meeting of shareholders shall be given to each shareholder entitled to vote at that meeting (see Section 15 below), by the Secretary, assistant secretary or other person charged with that duty, not less than ten (10) (or, if sent by third class mail, thirty (30)) nor more than sixty (60) days before such meeting. Notice of any meeting of shareholders shall state the date, place and hour of the meeting and, (a) in the case of a special meeting, the general nature of the business to be transacted, and no other business may be transacted at such meeting; (b) in the case of an annual meeting, the general nature of matters which the Board of Directors, at the time the notice is given, intends to present for action by the shareholders; (c) in the case of any meeting at which directors are to be elected, the names of the nominees intended at the time of the notice to be presented by management for election; and (d) in the case of any meeting, if action is to be taken on any of the following proposals, the general nature of such proposal: 3. 4 (1) a proposal to approve a transaction within the provisions of California Corporations Code, Section 310 (relating to certain transactions in which a director has a direct or indirect financial interest); (2) a proposal to approve a transaction within the provisions of California Corporations Code, Section 902 (relating to amending the Articles of Incorporation of the corporation); (3) a proposal to approve a transaction within the provisions of California Corporations Code, Sections 181 and 1201 (relating to reorganization); (4) a proposal to approve a transaction within the provisions of California Corporations Code, Section 1900 (winding up and dissolution); (5) a proposal to approve a plan of distribution within the provisions of California Corporations Code, Section 2007 (relating to certain plans providing for distribution not in accordance with the liquidation rights of preferred shares, if any). At a special meeting, notice of which has been given in accordance with this Section, action may not be taken with respect to business, the general nature of which has not been stated in such notice. At an annual meeting, action may be taken with respect to business stated in the notice of such meeting, given in accordance with this Section, and, subject to subsection 8(d) above, with respect to any other business as may properly come before the meeting. SECTION 9. MANNER OF GIVING NOTICE. Notice of any meeting of shareholders shall be given either personally or by first-class mail, or, if the corporation has outstanding shares held of record by 500 or more persons (determined as provided in California Corporations Code Section 605) on the record date for such meeting, third-class mail, or telegraphic or other written communication, addressed to the shareholder at the address of that shareholder appearing on the books of the corporation or given by the shareholder to the corporation for the purpose of notice. If no such address appears on the corporation's books or is given, notice shall be deemed to have been given if sent to that shareholder by first-class mail or telegraphic or other written communication to the corporation's principal executive office, or if published at least once in a newspaper of general circulation in the county where that office is located. Notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by telegram or other means of written communication. If any notice addressed to a shareholder at the address of that shareholder appearing on the books of the corporation is returned to the corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice to the shareholder at that address, all future notices shall be deemed to have been duly given without further mailing if these shall be available to the shareholder on written demand by the shareholder at the principal executive office of the corporation for a period of one year from the date of the giving of the notice. 4. 5 An affidavit of mailing of any notice or report in accordance with the provisions of this Section 9, executed by the Secretary, Assistant Secretary or any transfer agent, shall be prima facie evidence of the giving of the notice. SECTION 10. QUORUM AND TRANSACTION OF BUSINESS. (a) At any meeting of the shareholders, a majority of the shares entitled to vote, represented in person or by proxy, shall constitute a quorum. If a quorum is present, the affirmative vote of the majority of shares represented at the meeting and entitled to vote on any matter shall be the act of the shareholders, unless the vote of a greater number or voting by classes is required by law or by the Articles of Incorporation, and except as provided in subsection (b) below. (b) The shareholders present at a duly called or held meeting of the shareholders at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum, provided that any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. (c) In the absence of a quorum, no business other than adjournment may be transacted, except as described in subsection (b) above. SECTION 11. ADJOURNMENT AND NOTICE OF ADJOURNED MEETINGS. Any meeting of shareholders may be adjourned from time to time, whether or not a quorum is present, by the affirmative vote of a majority of shares represented at such meeting either in person or by proxy and entitled to vote at such meeting. In the event any meeting is adjourned, it shall not be necessary to give notice of the time and place of such adjourned meeting pursuant to Sections 8 and 9 of these bylaws; provided that if any of the following three events occur, such notice must be given: (a) announcement of the adjourned meeting's time and place is not made at the original meeting which it continues or (b) such meeting is adjourned for more than forty- five (45) days from the date set for the original meeting or (c) a new record date is fixed for the adjourned meeting. At the adjourned meeting, the corporation may transact any business which might have been transacted at the original meeting. SECTION 12. WAIVER OF NOTICE, CONSENT TO MEETING OR APPROVAL OF MINUTES. (a) Subject to subsection (b) of this Section, the transactions of any meeting of shareholders, however called and noticed, and wherever held, shall be as valid as though made at a meeting duly held after regular call and notice, if a quorum is present either in person or by 5. 6 proxy, and if, either before or after the meeting, each of the persons entitled to vote but not present in person or by proxy signs a written waiver of notice or a consent to holding of the meeting or an approval of the minutes thereof. (b) A waiver of notice, consent to the holding of a meeting or approval of the minutes thereof need not specify the business to be transacted or transacted at nor the purpose of the meeting; provided that in the case of proposals described in subsection (d) of Section 8 of these bylaws, the general nature of such proposals must be described in any such waiver of notice and such proposals can only be approved by waiver of notice, not by consent to holding of the meeting or approval of the minutes. (c) All waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. (d) A person's attendance at a meeting shall constitute waiver of notice of and presence at such meeting, except when such person objects at the beginning of the meeting to transaction of any business because the meeting is not lawfully called or convened and except that attendance at a meeting is not a waiver of any right to object to the consideration of matters which are required by law or these bylaws to be in such notice (including those matters described in subsection (d) of Section 8 of these bylaws), but are not so included if such person expressly objects to consideration of such matter or matters at any time during the meeting. SECTION 13. ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Any action which may be taken at any meeting of shareholders may be taken without a meeting and without prior notice if written consents setting forth the action so taken are signed by the holders of the outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Directors may not be elected by written consent except by unanimous written consent of all shares entitled to vote for the election of directors; provided that any vacancy on the Board of Directors (other than a vacancy created by removal) which has not been filled by the board of directors may be filled by the written consent of a majority of outstanding shares entitled to vote for the election of directors. Any written consent may be revoked pursuant to California Corporations Code Section 603(c) prior to the time that written consents of the number of shares required to authorize the proposed action have been filed with the Secretary. Such revocation must be in writing and will be effective upon its receipt by the Secretary. If the consents of all shareholders entitled to vote have not been solicited in writing, and if the unanimous written consent of all such shareholders shall not have been received, the Secretary shall give prompt notice of any corporate action approved by the shareholders without a meeting to those shareholders entitled to vote on such matters who have not consented thereto in writing. This notice shall be given in the manner specified in Section 9 of these bylaws. In the case of approval of (i) a transaction 6. 7 within the provisions of California Corporations Code, Section 310 (relating to certain transactions in which a director has an interest), (ii) a transaction within the provisions of California Corporations Code, Section 317 (relating to indemnification of agents of the corporation), (iii) a transaction within the provisions of California Corporations Code, Sections 181 and 1201 (relating to reorganization), and (iv) a plan of distribution within the provisions of California Corporations Code, Section 2007 (relating to certain plans providing for distribution not in accordance with the liquidation rights of preferred shares, if any), the notice shall be given at least ten (10) days before the consummation of any action authorized by that approval. SECTION 14. VOTING. The shareholders entitled to vote at any meeting of shareholders shall be determined in accordance with the provisions of Section 15 of these bylaws, subject to the provisions of Sections 702 through 704 of the California Corporations Code (relating to voting shares held by a fiduciary, in the name of a corporation, or in joint ownership). Voting at any meeting of shareholders need not be by ballot; provided, however, that elections for directors must be by ballot if balloting is demanded by a shareholder at the meeting and before the voting begins. Every person entitled to vote at an election for directors may cumulate the votes to which such person is entitled, i.e., such person may cast a total number of votes equal to the number of directors to be elected multiplied by the number of votes to which such person's shares are entitled, and may cast said total number of votes for one or more candidates in such proportions as such person thinks fit; provided, however, no shareholder shall be entitled to so cumulate such shareholder's votes unless the candidates for which such shareholder is voting have been placed in nomination prior to the voting and a shareholder has given notice at the meeting, prior to the vote, of an intention to cumulate votes. In any election of directors, the candidates receiving the highest number of votes, up to the number of directors to be elected, are elected. Except as may be otherwise provided in the Articles of Incorporation or by law, and subject to the foregoing provisions regarding the cumulation of votes, each shareholder shall be entitled to one vote for each share held. Any shareholder may vote part of such shareholder's shares in favor of a proposal and refrain from voting the remaining shares or vote them against the proposal, other than elections to office, but, if the shareholder fails to specify the number of shares such shareholder is voting affirmatively, it will be conclusively presumed that the shareholder's approving vote is with respect to all shares such shareholder is entitled to vote. No shareholder approval, other than unanimous approval of those entitled to vote, will be valid as to proposals described in subsection 8(d) of these bylaws unless the general nature of such business was stated in the notice of meeting or in any written waiver of notice. SECTION 15. PERSONS ENTITLED TO VOTE OR CONSENT. The Board of Directors may fix a record date pursuant to Section 60 of these bylaws to determine which shareholders are entitled to notice of and to vote at a meeting or consent to corporate actions, as provided in Sections 13 and 14 of these bylaws. Only persons in whose name shares otherwise entitled to vote stand on the stock records of the corporation on such date shall be entitled to vote or consent. 7. 8 If no record date is fixed: (a) The record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the business day next preceding the day notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held; (b) The record date for determining shareholders entitled to give consent to corporate action in writing without a meeting, when no prior action by the Board of Directors has been taken, shall be the day on which the first written consent is given; (c) The record date for determining shareholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto, or the sixtieth (60th) day prior to the date of such other action, whichever is later. A determination of shareholders of record entitled to notice of or to vote at a meeting of shareholders shall apply to any adjournment of the meeting unless the Board of Directors fixes a new record date for the adjourned meeting; provided, however, that the Board of Directors shall fix a new record date if the meeting is adjourned for more than forty-five (45) days from the date set for the original meeting. Shares of the corporation held by its subsidiary or subsidiaries (as defined in California Corporations Code, Section 189(b)) are not entitled to vote in any matter. SECTION 16. PROXIES. Every person entitled to vote or execute consents may do so either in person or by one or more agents authorized to act by a written proxy executed by the person or such person's duly authorized agent and filed with the Secretary of the corporation; provided that no such proxy shall be valid after the expiration of eleven (11) months from the date of its execution unless otherwise provided in the proxy. The manner of execution, suspension, revocation, exercise and effect of proxies is governed by law. SECTION 17. INSPECTORS OF ELECTION. Before any meeting of shareholders, the Board of Directors may appoint any persons, other than nominees for office, to act as inspectors of election at the meeting or its adjournment. If no inspectors of election are so appointed, the chairman of the meeting may, and on the request of any shareholder or a shareholder's proxy shall, appoint inspectors of election at the meeting. The number of inspectors shall be either one (1) or three (3). If inspectors are appointed at a meeting on the request of one or more shareholders or proxies, the majority of shares represented in person or proxy shall determine whether one (1) or three (3) inspectors are to be appointed. If any person appointed as inspector fails to appear or fails or refuses to act, the chairman of the meeting may, and upon the request of any shareholder or a shareholder's proxy shall, appoint a person to fill that vacancy. These inspectors shall: 8. 9 (a) Determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, and the authenticity, validity, and effect of proxies; (b) Receive votes, ballots, or consents; (c) Hear and determine all challenges and questions in any way arising in connection with the right to vote; (d) Count and tabulate all votes or consents; (e) Determine when the polls shall close; (f) Determine the result; and (g) Do any other acts that may be proper to conduct the election or vote with fairness to all shareholders. ARTICLE IV BOARD OF DIRECTORS SECTION 18. POWERS. Subject to the provisions of law or any limitations in the Articles of Incorporation or these bylaws, as to action required to be approved by the shareholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised, by or under the direction of the Board of Directors. The Board of Directors may delegate the management of the day-to-day operation of the business of the corporation to a management company or other person, provided that the business and affairs of the corporation shall be managed and all corporate powers shall be exercised under the ultimate direction of the Board of Directors. SECTION 19. NUMBER OF DIRECTORS. The authorized number of directors of the corporation shall be not less than a minimum of five (5) nor more than a maximum of nine (9) (which maximum number in no case shall be greater than two times said minimum, minus one) and the number of directors presently authorized is eight (8). The exact number of directors shall be set within these limits from time to time (a) by approval of the Board of Directors, or (b) by the affirmative vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively also constitute at least a majority of the required quorum) or by the written consent of shareholders pursuant to Section 13 hereinabove. Any amendment of these bylaws changing the maximum or minimum number of directors may be adopted only by the affirmative vote of a majority of the outstanding shares entitled to vote; provided, an amendment reducing the minimum number of directors to less than five (5), cannot be adopted if votes cast against its adoption at a meeting or the shares not 9. 10 consenting to it in the case of action by written consent are equal to more than 16-2/3 percent of the outstanding shares entitled to vote. No reduction of the authorized number of directors shall remove any director prior to the expiration of such director's term of office. SECTION 20. ELECTION OF DIRECTORS, TERM, QUALIFICATIONS. The directors shall be elected at each annual meeting of shareholders to hold office until the next annual meeting. Each director, including a director elected or appointed to fill a vacancy, shall hold office either until the expiration of the term for which elected or appointed and until a successor has been elected and qualified, or until his death, resignation or removal. Directors need not be shareholders of the corporation. SECTION 21. RESIGNATIONS. Any director of the corporation may resign effective upon giving written notice to the Chairman of the Board, the President, the Secretary or the Board of Directors of the corporation, unless the notice specifies a later time for the effectiveness of such resignation. If the resignation specifies effectiveness at a future time, a successor may be elected pursuant to Section 23 of these bylaws to take office on the date that the resignation becomes effective. SECTION 22. REMOVAL. The Board of Directors may declare vacant the office of a director who has been declared of unsound mind by an order of court or who has been convicted of a felony. The entire Board of Directors or any individual director may be removed from office without cause by the affirmative vote of a majority of the outstanding shares entitled to vote on such removal; provided, however, that unless the entire Board is removed, no individual director may be removed when the votes cast against such director's removal, or not consenting in writing to such removal, would be sufficient to elect that director if voted cumulatively at an election at which the same total number of votes cast were cast (or, if such action is taken by written consent, all shares entitled to vote were voted) and the entire number of directors authorized at the time of such director's most recent election were then being elected. SECTION 23. VACANCIES. A vacancy or vacancies on the Board of Directors shall be deemed to exist in case of the death, resignation or removal of any director, or upon increase in the authorized number of directors or if shareholders fail to elect the full authorized number of directors at an annual meeting of shareholders or if, for whatever reason, there are fewer directors on the Board of Directors, than the full number authorized. Such vacancy or vacancies may be filled by a majority of the remaining directors, though less than a quorum, or by a sole remaining director. The shareholders may elect a director at any time to fill any vacancy not filled by the directors. Any such election by written consent, other than to fill a vacancy created by removal, requires the consent of a majority of the outstanding shares entitled to vote. Any such election by written consent to fill a vacancy created by removal requires the consent of all of the outstanding shares entitled to vote. If, after the filling of any vacancy by the directors, the directors then in office who have been elected by the shareholders constitute less than a majority of the directors then in office, any 10. 11 holder or holders of an aggregate of five percent (5%) or more of the shares outstanding at that time and having the right to vote for such directors may call a special meeting of shareholders to be held to elect the entire Board of Directors. The term of office of any director shall terminate upon such election of a successor. SECTION 24. REGULAR MEETINGS. Regular meetings of the Board of Directors shall be held at such times, places and dates as fixed in these bylaws or by the Board of Directors; provided, however, that if the date for such a meeting falls on a legal holiday, then the meeting shall be held at the same time on the next succeeding full business day. Regular meetings of the Board of Directors held pursuant to this Section 24 may be held without notice. SECTION 25. PARTICIPATION BY TELEPHONE. Members of the Board of Directors may participate in a meeting through use of conference telephone or similar communications equipment, so long as all members participating in such meeting can hear one another. Such participation constitutes presence in person at such meeting. SECTION 26. SPECIAL MEETINGS. Special meetings of the Board of Directors for any purpose may be called by the Chairman of the Board or the President or any vice president or the Secretary of the corporation or any two (2) directors. SECTION 27. NOTICE OF MEETINGS. Notice of the date, time and place of all meetings of the Board of Directors, other than regular meetings held pursuant to Section 24 above shall be delivered personally, orally or in writing, or by telephone or telegraph to each director, at least forty-eight (48) hours before the meeting, or sent in writing to each director by first-class mail, charges prepaid, at least four (4) days before the meeting. Such notice may be given by the Secretary of the corporation or by the person or persons who called a meeting. Such notice need not specify the purpose of the meeting. Notice of any meeting of the Board of Directors need not be given to any director who signs a waiver of notice of such meeting, or a consent to holding the meeting or an approval of the minutes thereof, either before or after the meeting, or who attends the meeting without protesting prior thereto or at its commencement such director's lack of notice. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. SECTION 28. PLACE OF MEETINGS. Meetings of the Board of Directors may be held at any place within or without the state which has been designated in the notice of the meeting or, if not stated in the notice or there is no notice, designated in the bylaws or by resolution of the Board of Directors. SECTION 29. ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Any action required or permitted to be taken by the Board of Directors may be taken without a meeting, if all members of the Board of Directors individually or collectively consent in writing to such action. Such written consent or consents shall be filed with the minutes of the proceedings of the Board of Directors. Such action by written consent shall have the same force and effect as a unanimous vote of such directors. 11. 12 SECTION 30. QUORUM AND TRANSACTION OF BUSINESS. A majority of the authorized number of directors shall constitute a quorum for the transaction of business. Every act or decision done or made by a majority of the authorized number of directors present at a meeting duly held at which a quorum is present shall be the act of the Board of Directors, unless the law, the Articles of Incorporation or these bylaws specifically require a greater number. A meeting at which a quorum is initially present may continue to transact business, notwithstanding withdrawal of directors, if any action taken is approved by at least a majority of the number of directors constituting a quorum for such meeting. In the absence of a quorum at any meeting of the Board of Directors, a majority of the directors present may adjourn the meeting, as provided in Section 31 of these bylaws. SECTION 31. ADJOURNMENT. Any meeting of the Board of Directors, whether or not a quorum is present, may be adjourned to another time and place by the affirmative vote of a majority of the directors present. If the meeting is adjourned for more than twenty-four (24) hours, notice of such adjournment to another time or place shall be given prior to the time of the adjourned meeting to the directors who were not present at the time of the adjournment. SECTION 32. ORGANIZATION. The Chairman of the Board shall preside at every meeting of the Board of Directors, if present. If there is no Chairman of the Board or if the Chairman is not present, a Chairman chosen by a majority of the directors present shall act as chairman. The Secretary of the corporation or, in the absence of the Secretary, any person appointed by the Chairman shall act as secretary of the meeting. SECTION 33. COMPENSATION. Directors and members of committees may receive such compensation, if any, for their services, and such reimbursement for expenses, as may be fixed or determined by the Board of Directors. SECTION 34. COMMITTEES. The Board of Directors may, by resolution adopted by a majority of the authorized number of directors, designate one or more committees, each consisting of two (2) or more directors, to serve at the pleasure of the Board of Directors. The Board of Directors, by a vote of the majority of authorized directors, may designate one or more directors as alternate members of any committee, to replace any absent member at any meeting of such committee. Any such committee shall have authority to act in the manner and to the extent provided in the resolution of the Board of Directors, and may have all the authority of the Board of Directors in the management of the business and affairs of the corporation, except with respect to: (a) the approval of any action for which shareholders' approval or approval of the outstanding shares also is required by the California Corporations Code; (b) the filling of vacancies on the Board of Directors or any of its committees; (c) the fixing of compensation of directors for serving on the Board of Directors or any of its committees; (d) the adoption, amendment or repeal of these bylaws; 12. 13 (e) the amendment or repeal of any resolution of the Board of Directors which by its express terms is not so amendable or repealable; (f) a distribution to shareholders, except at a rate or in a periodic amount or within a price range determined by the Board of Directors; or (g) the appointment of other committees of the Board of Directors or the members thereof. Any committee may from time to time provide by resolution for regular meetings at specified times and places. If the date of such a meeting falls on a legal holiday, then the meeting shall be held at the same time on the next succeeding full business day. No notice of such a meeting need be given. Such regular meetings need not be held if the committee shall so determine at any time before or after the time when such meeting would otherwise have taken place. Special meetings may be called at any time in the same manner and by the same persons as stated in Sections 26 and 27 of these bylaws for meetings of the Board of Directors. The provisions of Sections 25, 28, 29, 30, 31 and 32 of these bylaws shall apply to committees, committee members and committee meetings as if the words "committee" and "committee member" were substituted for the word "Board of Directors", and "director", respectively, throughout such sections. ARTICLE V OFFICERS SECTION 35. OFFICERS. The corporation shall have a Chairman of the Board or a President or both, a Secretary, a Chief Financial Officer and such other officers with such titles and duties as the Board of Directors may determine. Any two or more offices may be held by the same person. SECTION 36. APPOINTMENT. All officers shall be chosen and appointed by the Board of Directors; provided, however, the Board of Directors may empower the chief executive officer of the corporation to appoint such officers, other than Chairman of the Board, President, Secretary or Chief Financial Officer, as the business of the corporation may require. All officers shall serve at the pleasure of the Board of Directors, subject to the rights, if any, of an officer under a contract of employment. SECTION 37. INABILITY TO ACT. In the case of absence or inability to act of any officer of the corporation or of any person authorized by these bylaws to act in such officer's place, the Board of Directors may from time to time delegate the powers or duties of such officer to any other officer, or any director or other person whom it may select, for such period of time as the Board of Directors deems necessary. SECTION 38. RESIGNATIONS. Any officer may resign at any time upon written notice to the corporation, without prejudice to the rights, if any, of the corporation under any contract to which such officer is a party. Such resignation shall be effective upon its receipt by the Chairman of the Board, the President, the Secretary or the Board of Directors, unless a different time is 13. 14 specified in the notice for effectiveness of such resignation. The acceptance of any such resignation shall not be necessary to make it effective unless otherwise specified in such notice. SECTION 39. REMOVAL. Any officer may be removed from office at any time, with or without cause, but subject to the rights, if any, of such officer under any contract of employment, by the Board of Directors or by any committee to whom such power of removal has been duly delegated, or, with regard to any officer who has been appointed by the chief executive officer pursuant to Section 36 above, by the chief executive officer or any other officer upon whom such power of removal may be conferred by the Board of Directors. SECTION 40. VACANCIES. A vacancy occurring in any office for any cause may be filled by the Board of Directors, in the manner prescribed by this Article of the bylaws for initial appointment to such office. SECTION 41. CHAIRMAN OF THE BOARD. The Chairman of the Board, if there be such an officer, shall, if present, preside at all meetings of the Board of Directors and shall exercise and perform such other powers and duties as may be assigned from time to time by the Board of Directors or prescribed by these bylaws. If no President is appointed, the Chairman of the Board is the general manager and chief executive officer of the corporation, and shall exercise all powers of the President described in Section 42 below. SECTION 42. PRESIDENT. Subject to such powers, if any, as may be given by the Board of Directors to the Chairman of the Board, if there be such an officer, the President shall be the general manager and chief executive officer of the corporation and shall have general supervision, direction, and control over the business and affairs of the corporation, subject to the control of the Board of Directors. The President may sign and execute, in the name of the corporation, any instrument authorized by the Board of Directors, except when the signing and execution thereof shall have been expressly delegated by the Board of Directors or by these bylaws to some other officer or agent of the corporation. The President shall have all the general powers and duties of management usually vested in the president of a corporation, and shall have such other powers and duties as may be prescribed from time to time by the Board of Directors or these bylaws. The President shall have discretion to prescribe the duties of other officers and employees of the corporation in a manner not inconsistent with the provisions of these bylaws and the directions of the Board of Directors. SECTION 43. VICE PRESIDENTS. In the absence or disability of the President, in the event of a vacancy in the office of President, or in the event such officer refuses to act, the Vice President shall perform all the duties of the President and, when so acting, shall have all the powers of, and be subject to all the restrictions on, the President. If at any such time the corporation has more than one vice president, the duties and powers of the President shall pass to each vice president in order of such vice president's rank as fixed by the Board of Directors or, if the vice presidents are not so ranked, to the vice president designated by the Board of Directors. The vice presidents shall have such other powers and perform such other duties as may be prescribed for them from time to time by the Board of Directors or pursuant to Sections 35 and 36 of these bylaws or otherwise pursuant to these bylaws. 14. 15 SECTION 44. SECRETARY. The Secretary shall: (a) Keep, or cause to be kept, minutes of all meetings of the corporation's shareholders, Board of Directors, and committees of the Board of Directors, if any. Such minutes shall be kept in written form. (b) Keep, or cause to be kept, at the principal executive office of the corporation, or at the office of its transfer agent or registrar, if any, a record of the corporation's shareholders, showing the names and addresses of all shareholders, and the number and classes of shares held by each. Such records shall be kept in written form or any other form capable of being converted into written form. (c) Keep, or cause to be kept, at the principal executive office of the corporation, or if the principal executive office is not in California, at its principal business office in California, an original or copy of these bylaws, as amended. (d) Give, or cause to be given, notice of all meetings of shareholders, directors and committees of the Board of Directors, as required by law or by these bylaws. (e) Keep the seal of the corporation, if any, in safe custody. (f) Exercise such powers and perform such duties as are usually vested in the office of secretary of a corporation, and exercise such other powers and perform such other duties as may be prescribed from time to time by the Board of Directors or these bylaws. If any assistant secretaries are appointed, the assistant secretary, or one of the assistant secretaries in the order of their rank as fixed by the Board of Directors or, if they are not so ranked, the assistant secretary designated by the Board of Directors, in the absence or disability of the Secretary or in the event of such officer's refusal to act or if a vacancy exists in the office of Secretary, shall perform the duties and exercise the powers of the Secretary and discharge such duties as may be assigned from time to time pursuant to these bylaws or by the Board of Directors. SECTION 45. CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall: (a) Be responsible for all functions and duties of the treasurer of the corporation. (b) Keep and maintain, or cause to be kept and maintained, adequate and correct books and records of account for the corporation. (c) Receive or be responsible for receipt of all monies due and payable to the corporation from any source whatsoever; have charge and custody of, and be responsible for, all monies and other valuables of the corporation and be responsible for deposit of all such monies in the name and to the credit of the corporation with such depositaries as may be designated by the Board of Directors or a duly appointed and authorized committee of the Board of Directors. 15. 16 (d) Disburse or be responsible for the disbursement of the funds of the corporation as may be ordered by the Board of Directors or a duly appointed and authorized committee of the Board of Directors. (e) Render to the chief executive officer and the Board of Directors a statement of the financial condition of the corporation if called upon to do so. (f) Exercise such powers and perform such duties as are usually vested in the office of chief financial officer of a corporation, and exercise such other powers and perform such other duties as may be prescribed by the Board of Directors or these bylaws. If any assistant financial officer is appointed, the assistant financial officer, or one of the assistant financial officers, if there are more than one, in the order of their rank as fixed by the Board of Directors or, if they are not so ranked, the assistant financial officer designated by the Board of Directors, shall, in the absence or disability of the Chief Financial Officer or in the event of such officer's refusal to act, perform the duties and exercise the powers of the Chief Financial Officer, and shall have such powers and discharge such duties as may be assigned from time to time pursuant to these bylaws or by the Board of Directors. SECTION 46. COMPENSATION. The compensation of the officers shall be fixed from time to time by the Board of Directors, and no officer shall be prevented from receiving such compensation by reason of the fact that such officer is also a director of the corporation. ARTICLE VI CONTRACTS, LOANS, BANK ACCOUNTS, CHECKS AND DRAFTS SECTION 47. EXECUTION OF CONTRACTS AND OTHER INSTRUMENTS. Except as these bylaws may otherwise provide, the Board of Directors or its duly appointed and authorized committee may authorize any officer or officers, agent or agents, to enter into any contract or execute and deliver any instrument in the name of and on behalf of the corporation, and such authorization may be general or confined to specific instances. Except as so authorized or otherwise expressly provided in these bylaws, no officer, agent, or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or in any amount. SECTION 48. LOANS. No loans shall be contracted on behalf of the corporation and no negotiable paper shall be issued in its name, unless and except as authorized by the Board of Directors or its duly appointed and authorized committee. When so authorized by the Board of Directors or such committee, any officer or agent of the corporation may effect loans and advances at any time for the corporation from any bank, trust company, or other institution, or from any firm, corporation or individual, and for such loans and advances may make, execute and deliver promissory notes, bonds or other evidences of indebtedness of the corporation and, when authorized as aforesaid, may mortgage, pledge, hypothecate or transfer any and all stocks, securities and other property, real or personal, at any time held by the corporation, and to that end endorse, assign and deliver the same as security for the payment of any and all loans, advances, 16. 17 indebtedness, and liabilities of the corporation. Such authorization may be general or confined to specific instances. SECTION 49. BANK ACCOUNTS. The Board of Directors or its duly appointed and authorized committee from time to time may authorize the opening and keeping of general and/or special bank accounts with such banks, trust companies, or other depositaries as may be selected by the Board of Directors, its duly appointed and authorized committee or by any officer or officers, agent or agents, of the corporation to whom such power may be delegated from time to time by the Board of Directors. The Board of Directors or its duly appointed and authorized committee may make such rules and regulations with respect to said bank accounts, not inconsistent with the provisions of these bylaws, as are deemed advisable. SECTION 50. CHECKS, DRAFTS, ETC. All checks, drafts or other orders for the payment of money, notes, acceptances or other evidences of indebtedness issued in the name of the corporation shall be signed by such officer or officers, agent or agents, of the corporation, and in such manner, as shall be determined from time to time by resolution of the Board of Directors or its duly appointed and authorized committee. Endorsements for deposit to the credit of the corporation in any of its duly authorized depositaries may be made, without counter-signature, by the President or any vice president or the Chief Financial Officer or any assistant financial officer or by any other officer or agent of the corporation to whom the Board of Directors or its duly appointed and authorized committee, by resolution, shall have delegated such power or by hand-stamped impression in the name of the corporation. ARTICLE VII CERTIFICATES FOR SHARES AND THEIR TRANSFER SECTION 51. CERTIFICATE FOR SHARES. Every holder of shares in the corporation shall be entitled to have a certificate signed in the name of the corporation by the Chairman or Vice Chairman of the Board or the President or a Vice President and by the Chief Financial Officer or an assistant financial officer or by the Secretary or an assistant secretary, certifying the number of shares and the class or series of shares owned by the shareholder. Any or all of the signatures on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if such person were an officer, transfer agent or registrar at the date of issue. In the event that the corporation shall issue any shares as only partly paid, the certificate issued to represent such partly paid shares shall have stated thereon the total consideration to be paid for such shares and the amount paid thereon. SECTION 52. TRANSFER ON THE BOOKS. Upon surrender to the Secretary or transfer agent (if any) of the corporation of a certificate for shares of the corporation duly endorsed, with reasonable assurance that the endorsement is genuine and effective, or accompanied by proper evidence of succession, assignment or authority to transfer and upon compliance with applicable 17. 18 federal and state securities laws and if the corporation has no statutory duty to inquire into adverse claims or has discharged any such duty and if any applicable law relating to the collection of taxes has been complied with, it shall be the duty of the corporation, by its Secretary or transfer agent, to cancel the old certificate, to issue a new certificate to the person entitled thereto and to record the transaction on the books of the corporation. SECTION 53. LOST, DESTROYED AND STOLEN CERTIFICATES. The holder of any certificate for shares of the corporation alleged to have been lost, destroyed or stolen shall notify the corporation by making a written affidavit or affirmation of such fact. Upon receipt of said affidavit or affirmation the Board of Directors, or its duly appointed and authorized committee or any officer or officers authorized by the Board so to do, may order the issuance of a new certificate for shares in the place of any certificate previously issued by the corporation and which is alleged to have been lost, destroyed or stolen. However, the Board of Directors or such authorized committee, officer or officers may require the owner of the allegedly lost, destroyed or stolen certificate, or such owner's legal representative, to give the corporation a bond or other adequate security sufficient to indemnify the corporation and its transfer agent and/or registrar, if any, against any claim that may be made against it or them on account of such allegedly lost, destroyed or stolen certificate or the replacement thereof. Said bond or other security shall be in such amount, on such terms and conditions and, in the case of a bond, with such surety or sureties as may be acceptable to the Board of Directors or to its duly appointed and authorized committee or any officer or officers authorized by the Board of Directors to determine the sufficiency thereof. The requirement of a bond or other security may be waived in particular cases at the discretion of the Board of Directors or its duly appointed and authorized committee or any officer or officers authorized by the Board of Directors so to do. SECTION 54. ISSUANCE, TRANSFER AND REGISTRATION OF SHARES. The Board of Directors may make such rules and regulations, not inconsistent with law or with these bylaws, as it may deem advisable concerning the issuance, transfer and registration of certificates for shares of the capital stock of the corporation. The Board of Directors may appoint a transfer agent or registrar of transfers, or both, and may require all certificates for shares of the corporation to bear the signature of either or both. ARTICLE VIII INSPECTION OF CORPORATE RECORDS SECTION 55. INSPECTION BY DIRECTORS. Every director shall have the absolute right at any reasonable time to inspect and copy all books, records, and documents of every kind of the corporation and any of its subsidiaries and to inspect the physical properties of the corporation and any of its subsidiaries. Such inspection may be made by the director in person or by agent or attorney, and the right of inspection includes the right to copy and make extracts. SECTION 56. INSPECTION BY SHAREHOLDERS. (a) INSPECTION OF CORPORATE RECORDS. 18. 19 (1) A shareholder or shareholders holding at least five (5%) percent in the aggregate of the outstanding voting shares of the corporation or who hold at least one percent of such voting shares and have filed a Schedule 14B with the United States Securities and Exchange Commission relating to the election of directors of the corporation shall have an absolute right to do either or both of the following: (i) Inspect and copy the record of shareholders' names and addresses and shareholdings during usual business hours upon five (5) business days' prior written demand upon the corporation; or (ii) Obtain from the transfer agent, if any, for the corporation, upon five business days' prior written demand and upon the tender of its usual charges for such a list (the amount of which charges shall be stated to the shareholder by the transfer agent upon request), a list of the shareholders' names and addresses who are entitled to vote for the election of directors and their shareholdings, as of the most recent record date for which it has been compiled or as of a date specified by the shareholder subsequent to the date of demand. (2) The record of shareholders shall also be open to inspection and copying by any shareholder or holder of a voting trust certificate at any time during usual business hours upon written demand on the corporation, for a purpose reasonably related to such holder's interest as a shareholder or holder of a voting trust certificate. (3) The accounting books and records and minutes of proceedings of the shareholders and the Board of Directors and of any committees of the Board of Directors of the corporation and of each of its subsidiaries shall be open to inspection, copying and making extracts upon written demand on the corporation of any shareholder or holder of a voting trust certificate at any reasonable time during usual business hours, for a purpose reasonably related to such holder's interests as a shareholder or as a holder of such voting trust certificate. (4) Any inspection, copying, and making of extracts under this subsection (a) may be done in person or by agent or attorney. (b) INSPECTION OF BYLAWS. The original or a copy of these bylaws shall be kept as provided in Section 44 of these bylaws and shall be open to inspection by the shareholders at all reasonable times during office hours. If the principal executive office of the corporation is not in California, and the corporation has no principal business office in the state of California, a current copy of these bylaws shall be furnished to any shareholder upon written request. SECTION 57. WRITTEN FORM. If any record subject to inspection pursuant to Section 56 above is not maintained in written form, a request for inspection is not complied with unless and until the corporation at its expense makes such record available in written form. 19. 20 ARTICLE IX MISCELLANEOUS SECTION 58. FISCAL YEAR. Unless otherwise fixed by resolution of the Board of Directors, the fiscal year of the corporation shall end on the 31st day of December in each calendar year. SECTION 59. ANNUAL REPORT. (a) Subject to the provisions of Section 59(b) below, the Board of Directors shall cause an annual report to be sent to each shareholder of the corporation in the manner provided in Section 9 of these bylaws not later than one hundred twenty (120) days after the close of the corporation's fiscal year. Such report shall include a balance sheet as of the end of such fiscal year and an income statement and statement of changes in financial position for such fiscal year, accompanied by any report thereon of independent accountants or, if there is no such report, the certificate of an authorized officer of the corporation that such statements were prepared without audit from the books and records of the corporation. When there are more than 100 shareholders of record of the corporation's shares, as determined by Section 605 of the California Corporations Code, additional information as required by Section 1501(b) of the California Corporations Code shall also be contained in such report, provided that if the corporation has a class of securities registered under Section 12 of the United States Securities Exchange Act of 1934, that Act shall take precedence. Such report shall be sent to shareholders at least fifteen (15) (or, if sent by third-class mail, thirty-five (35)) days prior to the next annual meeting of shareholders after the end of the fiscal year to which it relates. (b) If and so long as there are fewer than 100 holders of record of the corporation's shares, the requirement of sending of an annual report to the shareholders of the corporation is hereby expressly waived. SECTION 60. RECORD DATE. The Board of Directors may fix a time in the future as a record date for the determination of the shareholders entitled to notice of or to vote at any meeting or entitled to receive payment of any dividend or other distribution or allotment of any rights or entitled to exercise any rights in respect of any change, conversion or exchange of shares or entitled to exercise any rights in respect of any other lawful action. The record date so fixed shall not be more than sixty (60) days nor less than ten (10) days prior to the date of the meeting nor more than sixty (60) days prior to any other action or event for the purpose of which it is fixed. If no record date is fixed, the provisions of Section 15 of these bylaws shall apply with respect to notice of meetings, votes, and consents and the record date for determining shareholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolutions relating thereto, or the sixtieth (60th) day prior to the date of such other action or event, whichever is later. Only shareholders of record at the close of business on the record date shall be entitled to notice and to vote or to receive the dividend, distribution or allotment of rights or to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the books of the 20. 21 corporation after the record date, except as otherwise provided in the Articles of Incorporation, by agreement or by law. SECTION 61. BYLAW AMENDMENTS. Except as otherwise provided by law or Section 19 of these bylaws, these bylaws may be amended or repealed by the Board of Directors or by the affirmative vote of a majority of the outstanding shares entitled to vote, including, if applicable, the affirmative vote of a majority of the outstanding shares of each class or series entitled by law or the Articles of Incorporation to vote as a class or series on the amendment or repeal or adoption of any bylaw or bylaws; provided, however, after issuance of shares, a bylaw specifying or changing a fixed number of directors or the maximum or minimum number or changing from a fixed to a variable board or vice versa may only be adopted by approval of the outstanding shares as provided herein. SECTION 62. CONSTRUCTION AND DEFINITION. Unless the context requires otherwise, the general provisions, rules of construction, and definitions contained in the California Corporations Code shall govern the construction of these bylaws. Without limiting the foregoing, "shall" is mandatory and "may" is permissive. ARTICLE X INDEMNIFICATION SECTION 63. INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND OTHER AGENTS. (a) DIRECTORS AND EXECUTIVE OFFICERS. The corporation shall indemnify its directors and executive officers to the fullest extent not prohibited by the California General Corporation Law; provided, however, that the corporation may limit the extent of such indemnification by individual contracts with its directors and executive officers; and, provided, further, that the corporation shall not be required to indemnify any director or executive officer in connection with any proceeding (or part thereof) initiated by such person or any proceeding by such person against the corporation or its directors, officers, employees or other agents unless (i) such indemnification is expressly required to be made by law, (ii) the proceeding was authorized by the board of directors of the corporation or (iii) such indemnification is provided by the corporation, in its sole discretion, pursuant to the powers vested in the corporation under the California General Corporation Law. (b) OTHER OFFICERS, EMPLOYEES AND OTHER AGENTS. The corporation shall have the power to indemnify its other officers, employees and other agents as set forth in the California General Corporation Law. (c) DETERMINATION BY THE CORPORATION. Promptly after receipt of a request for indemnification hereunder (and in any event within 90 days thereof) a reasonable, good faith determination as to whether indemnification of the director or executive officer is proper under the circumstances because such director or executive officer has met the applicable standard of care shall be made by: 21. 22 (1) a majority vote of a quorum consisting of directors who are not parties to such proceeding; (2) if such quorum is not obtainable, by independent legal counsel in a written opinion; or (3) approval or ratification by the affirmative vote of a majority of the shares of this corporation represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively also constitute at least a majority of the required quorum) or by written consent of a majority of the outstanding shares entitled to vote; where in each case the shares owned by the person to be indemnified shall not be considered entitled to vote thereon. (d) GOOD FAITH. (1) For purposes of any determination under this bylaw, a director or executive officer shall be deemed to have acted in good faith and in a manner he reasonably believed to be in the best interests of the corporation and its shareholders, and, with respect to any criminal action or proceeding, to have had no reasonable cause to believe that his conduct was unlawful, if his action is based on information, opinions, reports and statements, including financial statements and other financial data, in each case prepared or presented by: (i) one or more officers or employees of the corporation whom the director or executive officer believed to be reliable and competent in the matters presented; (ii) counsel, independent accountants or other persons as to matters which the director or executive officer believed to be within such person's professional competence; and (iii) with respect to a director, a committee of the Board upon which such director does not serve, as to matters within such committee's designated authority, which committee the director believes to merit confidence; so long as, in each case, the director or executive officer acts without knowledge that would cause such reliance to be unwarranted. (2) The termination of any proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in the best interests of the corporation and its shareholders or that he had reasonable cause to believe that his conduct was unlawful. (3) The provisions of this paragraph (d) shall not be deemed to be exclusive or to limit in any way the circumstances in which a person may be deemed to have met the applicable standard of conduct set forth by the California General Corporation Law. (e) EXPENSES. The corporation shall advance, prior to the final disposition of any proceeding, promptly following request therefor, all expenses incurred by any director or 22. 23 executive officer in connection with such proceeding upon receipt of an undertaking by or on behalf of such person to repay said amounts if it shall be determined ultimately that such person is not entitled to be indemnified under this bylaw or otherwise. Notwithstanding the foregoing, unless otherwise determined pursuant to paragraph (f) of this bylaw, no advance shall be made by the corporation if a determination is reasonably and promptly made by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to the proceeding (or, if no such quorum exists, by independent legal counsel in a written opinion) that the facts known to the decision making party at the time such determination is made demonstrate clearly and convincingly that such person acted in bad faith or in a manner that such person did not believe to be in the best interests of the corporation and its shareholders. (f) ENFORCEMENT. Without the necessity of entering into an express contract, all rights to indemnification and advances to directors and executive officers under this bylaw shall be deemed to be contractual rights and be effective to the same extent and as if provided for in a contract between the corporation and the director or executive officer. Any right to indemnification or advances granted by this bylaw to a director or executive officer shall be enforceable by or on behalf of the person holding such right in the forum in which the proceeding is or was pending or, if such forum is not available or a determination is made that such forum is not convenient, in any court of competent jurisdiction if (i) the claim for indemnification or advances is denied, in whole or in part, or (ii) no disposition of such claim is made within ninety (90) days of request therefor. The claimant in such enforcement action, if successful in whole or in part, shall be entitled to be paid also the expense of prosecuting his claim. The corporation shall be entitled to raise as a defense to any such action that the claimant has not met the standards of conduct that make it permissible under the California General Corporation Law for the corporation to indemnify the claimant for the amount claimed. Neither the failure of the corporation (including its board of directors, independent legal counsel or its shareholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he has met the applicable standard of conduct set forth in the California General Corporation Law, nor an actual determination by the corporation (including its board of directors, independent legal counsel or its shareholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that claimant has not met the applicable standard of conduct. (g) NON-EXCLUSIVITY OF RIGHTS. To the fullest extent permitted by the corporation's Articles of Incorporation and the California General Corporation Law, the rights conferred on any person by this bylaw shall not be exclusive of any other right which such person may have or hereafter acquire under any statute, provision of the Articles of Incorporation, bylaws, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding office. The corporation is specifically authorized to enter into individual contracts with any or all of its directors, officers, employees or agents respecting indemnification and advances, to the fullest 23. 24 extent permitted by the California General Corporation Law and the corporation's Articles of Incorporation. (h) SURVIVAL OF RIGHTS. The rights conferred on any person by this bylaw shall continue as to a person who has ceased to be a director or executive officer and shall inure to the benefit of the heirs, executors and administrators of such a person. (i) INSURANCE. The corporation, upon approval by the board of directors, may purchase insurance on behalf of any person required or permitted to be indemnified pursuant to this bylaw. (j) AMENDMENTS. Any repeal or modification of this bylaw shall only be prospective and shall not affect the rights under this bylaw in effect at the time of the alleged occurrence of any action or omission to act that is the cause of any proceeding against any agent of the corporation. (k) EMPLOYEE BENEFIT PLANS. The corporation shall indemnify the directors and officers of the corporation who serve at the request of the corporation as trustees, investment managers or other fiduciaries of employee benefit plans to the fullest extent permitted by the California General Corporation Law. (l) SAVING CLAUSE. If this bylaw or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the corporation shall nevertheless indemnify each director and executive officer to the fullest extent permitted by any applicable portion of this bylaw that shall not have been invalidated, or by any other applicable law. (m) CERTAIN DEFINITIONS. For the purposes of this bylaw, the following definitions shall apply: (1) The term "PROCEEDING" shall be broadly construed and shall include, without limitation, the investigation, preparation, prosecution, defense, settlement and appeal of any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, arbitrative or investigative. (2) The term "EXPENSES" shall be broadly construed and shall include, without limitation, court costs, attorneys' fees, witness fees, fines, amounts paid in settlement or judgment and any other costs and expenses of any nature or kind incurred in connection with any proceeding, including expenses of establishing a right to indemnification under this bylaw or any applicable law. (3) The term the "CORPORATION" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or 24. 25 agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this bylaw with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. (4) References to a "DIRECTOR," "OFFICER," "EMPLOYEE," or "AGENT" of the corporation shall include, without limitation, situations where such person is or was serving at the request of the corporation as a director, officer, employee, trustee or agent of another corporation, partnership, joint venture, trust or other enterprise. ARTICLE XI LOANS OF OFFICERS AND OTHERS SECTION 64. CERTAIN CORPORATE LOANS AND GUARANTIES. If the corporation has outstanding shares held of record by 100 or more persons on the date of approval by the Board of Directors, the corporation may make loans of money or property to, or guarantee the obligations of, any officer of the corporation or its parent or any subsidiary, whether or not a director of the corporation or its parent or any subsidiary, or adopt an employee benefit plan or plans authorizing such loans or guaranties, upon the approval of the Board of Directors alone, by a vote sufficient without counting the vote of any interested director or directors, if the Board of Directors determines that such a loan or guaranty or plan may reasonably be expected to benefit the corporation. Notwithstanding the foregoing, the corporation shall have the power to make loans permitted by the California Corporations Code. 25. EX-10.2 3 EXHIBIT 10.2 1 EXHIBIT 10.2 DATAWORKS CORPORATION 1995 EQUITY INCENTIVE PLAN ADOPTED OCTOBER 5, 1995 AS AMENDED FEBRUARY 3, 1997 INTRODUCTION This DataWorks Corporation 1995 Equity Incentive Plan is an amendment and restatement of the DataWorks Corporation 1987 Stock Option Plan. Shares reserved for issuance under the 1987 Stock Option Plan shall hereafter be reserved for issuance, and issued, under the terms of this 1995 Equity Incentive Plan, as amended and restated in the form below. 1. PURPOSES. (a) The purpose of the Plan is to provide a means by which selected Employees, Directors and Consultants to the Company, and its Affiliates, may be given an opportunity to benefit from increases in value of the stock of the Company through the granting of (i) Incentive Stock Options, (ii) Nonstatutory Stock Options, (iii) stock bonuses, (iv) rights to purchase restricted stock, and (v) stock appreciation rights, all as defined below. (b) The Company, by means of the Plan, seeks to retain the services of persons who are now Employees, Directors or Consultants of the Company or its Affiliates, to secure and retain the services of new Employees, Directors and Consultants, and to provide incentives for such persons to exert maximum efforts for the success of the Company and its Affiliates. (c) The Company intends that the Stock Awards issued under the Plan shall, in the discretion of the Board or any Committee to which responsibility for administration of the Plan has been delegated pursuant to subsection 3(c), be either (i) Options granted pursuant to Section 6 hereof, including Incentive Stock Options and Nonstatutory Stock Options, (ii) stock bonuses or rights to purchase restricted stock granted pursuant to Section 7 hereof, or (iii) stock appreciation rights granted pursuant to Section 8 hereof. All Options shall be separately designated Incentive Stock Options or Nonstatutory Stock Options at the time of grant, and in such form as issued pursuant to Section 6, and a separate certificate or certificates will be issued for shares purchased on exercise of each type of Option. 1. 2 2. DEFINITIONS. (a) "AFFILIATE" means any parent corporation or subsidiary corporation, whether now or hereafter existing, as those terms are defined in Sections 424(e) and (f) respectively, of the Code. (b) "BOARD" means the Board of Directors of the Company. (c) "CODE" means the Internal Revenue Code of 1986, as amended. (d) "COMMITTEE" means a Committee appointed by the Board in accordance with subsection 3(c) of the Plan. (e) "COMPANY" means DataWorks Corporation, a California corporation. (f) "CONCURRENT STOCK APPRECIATION RIGHT" or "CONCURRENT RIGHT" means a right granted pursuant to subsection 8(b)(2) of the Plan. (g) "CONSULTANT" means any person, including an advisor, engaged by the Company or an Affiliate to render consulting services and who is compensated for such services, provided that the term "Consultant" shall not include Directors who are paid only a director's fee by the Company or who are not compensated by the Company for their services as Directors. (h) "CONTINUOUS STATUS AS AN EMPLOYEE, DIRECTOR OR CONSULTANT" means the employment or relationship as a Director or Consultant is not interrupted or terminated. The Board, in its sole discretion, may determine whether Continuous Status as an Employee, Director or Consultant shall be considered interrupted in the case of: (i) any leave of absence approved by the Board, including sick leave, military leave, or any other personal leave; or (ii) transfers between locations of the Company or between the Company, Affiliates or their successors. (i) "DIRECTOR" means a member of the Board. (j) "EMPLOYEE" means any person employed by the Company or any Affiliate of the Company. Neither service as a Director nor payment of a director's fee by the Company shall be sufficient to constitute "employment" by the Company. (k) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (l) "FAIR MARKET VALUE" means, as of any date, the value of the common stock of the Company determined as follows: 2. 3 (i) If the common stock is listed on any established stock exchange or a national market system, including without limitation the National Market System of the National Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ") System, the Fair Market Value of a share of common stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such system or exchange (or the exchange with the greatest volume of trading in common stock) on the last market trading day prior to the day of determination, as reported in the Wall Street Journal or such other source as the Board deems reliable; (ii) If the common stock is quoted on the NASDAQ System (but not on the National Market System thereof) or is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a share of common stock shall be the mean between the bid and asked prices for the common stock on the last market trading day prior to the day of determination, as reported in the Wall Street Journal or such other source as the Board deems reliable; (iii) In the absence of an established market for the common stock, the Fair Market Value shall be determined in good faith by the Board. (m) "INCENTIVE STOCK OPTION" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder. (n) "INDEPENDENT STOCK APPRECIATION RIGHT" or "INDEPENDENT RIGHT" means a right granted pursuant to subsection 8(b)(3) of the Plan. (o) "NON-EMPLOYEE DIRECTOR" means a Director who either (i) is not a current Employee or Officer of the Company or its parent or subsidiary, does not receive compensation (directly or indirectly) from the Company or its parent or subsidiary for services rendered as a consultant or in any capacity other than as a Director (except for an amount as to which disclosure would not be required under Item 404(a) of Regulation S-K promulgated pursuant to the Securities Act ("Regulation S-K")), does not possess an interest in any other transaction as to which disclosure would be required under Item 404(a) of Regulation S-K, and is not engaged in a business relationship as to which disclosure would be required under Item 404(b) of Regulation S-K; or (ii) is otherwise considered a "non-employee director" for purposes of Rule 16b-3. (p) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify as an Incentive Stock Option. (q) "OFFICER" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. 3. 4 (r) "OPTION" means a stock option granted pursuant to the Plan. (s) "OPTION AGREEMENT" means a written agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option grant. Each Option Agreement shall be subject to the terms and conditions of the Plan. (t) "OPTIONEE" means an Employee, Director or Consultant who holds an outstanding Option. (u) "OUTSIDE DIRECTOR" means a Director who either (i) is not a current employee of the Company or an "affiliated corporation" (within the meaning of the Treasury regulations promulgated under Section 162(m) of the Code), is not a former employee of the Company or an "affiliated corporation" receiving compensation for prior services (other than benefits under a tax qualified pension plan), was not an officer of the Company or an "affiliated corporation" at any time, and is not currently receiving direct or indirect remuneration from the Company or an "affiliated corporation" for services in any capacity other than as a Director, or (ii) is otherwise considered an "outside director" for purposes of Section 162(m) of the Code. (v) "PLAN" means this DataWorks Corporation 1995 Equity Incentive Plan. (w) "RULE 16B-3" means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan. (x) "STOCK APPRECIATION RIGHT" means any of the various types of rights which may be granted under Section 8 of the Plan. (y) "STOCK AWARD" means any right granted under the Plan, including any Option, any stock bonus, any right to purchase restricted stock, and any Stock Appreciation Right. (z) "STOCK AWARD AGREEMENT" means a written agreement between the Company and a holder of a Stock Award evidencing the terms and conditions of an individual Stock Award grant. Each Stock Award Agreement shall be subject to the terms and conditions of the Plan. (aa) "TANDEM STOCK APPRECIATION RIGHT" or "TANDEM RIGHT" means a right granted pursuant to subsection 8(b)(1) of the Plan. 3. ADMINISTRATION. (a) The Plan shall be administered by the Board unless and until the Board delegates administration to a Committee, as provided in subsection 3(c). 4. 5 (b) The Board shall have the power, subject to, and within the limitations of, the express provisions of the Plan: (i) To determine from time to time which of the persons eligible under the Plan shall be granted Stock Awards; when and how each Stock Award shall be granted; whether a Stock Award will be an Incentive Stock Option, a Nonstatutory Stock Option, a stock bonus, a right to purchase restricted stock, a Stock Appreciation Right, or a combination of the foregoing; the provisions of each Stock Award granted (which need not be identical), including the time or times when a person shall be permitted to receive stock pursuant to a Stock Award; whether a person shall be permitted to receive stock upon exercise of an Independent Stock Appreciation Right; and the number of shares with respect to which a Stock Award shall be granted to each such person. (ii) To construe and interpret the Plan and Stock Awards granted under it, and to establish, amend and revoke rules and regulations for its administration. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan or in any Stock Award Agreement, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective. (iii) To amend the Plan or a Stock Award as provided in Section 14. (c) The Board may delegate administration of the Plan to a committee composed of not fewer than two (2) members of the Board (the "Committee"). One or more of these members may be Non-Employee Directors and/or Outside Directors, if required. If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board, subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan. 4. SHARES SUBJECT TO THE PLAN. (a) Subject to the provisions of Section 13 relating to adjustments upon changes in stock, the stock that may be issued pursuant to Stock Awards shall not exceed in the aggregate two million four hundred fifty thousand (2,450,000) shares of the Company's common stock. If any Stock Award shall for any reason expire or otherwise terminate, in whole or in part, without having been exercised in full, the stock not acquired under such Stock Award shall revert to and again become available for issuance under the Plan. Shares subject to Stock Appreciation Rights exercised in accordance with Section 8 of the Plan shall not be available for subsequent issuance under the Plan. (b) The stock subject to the Plan may be unissued shares or reacquired shares, bought on the market or otherwise. 5. 6 5. ELIGIBILITY. (a) Incentive Stock Options and Stock Appreciation Rights appurtenant thereto may be granted only to Employees. Stock Awards other than Incentive Stock Options and Stock Appreciation Rights appurtenant thereto may be granted only to Employees or Consultants. (b) No person shall be eligible for the grant of an Incentive Stock Option if, at the time of grant, such person owns (or is deemed to own pursuant to Section 424(d) of the Code) stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of any of its Affiliates unless the exercise price of such Incentive Stock Option is at least one hundred ten percent (110%) of the Fair Market Value of such stock at the date of grant and the Option is not exercisable after the expiration of five (5) years from the date of grant. 6. OPTION PROVISIONS. Each Option shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. The provisions of separate Options need not be identical, but each Option shall include (through incorporation of provisions hereof by reference in the Option or otherwise) the substance of each of the following provisions: (a) TERM. No Option shall be exercisable after the expiration of ten (10) years from the date it was granted. (b) PRICE. The exercise price of each Incentive Stock Option shall be not less than one hundred percent (100%) of the Fair Market Value of the stock subject to the Option on the date the Option is granted; the exercise price of each Nonstatutory Stock Option shall be determined by the Board or Committee. Notwithstanding the foregoing, an Option (whether an Incentive Stock Option or a Nonstatutory Stock Option) may be granted with an exercise price lower than that set forth in the preceding sentence if such Option is granted pursuant to an assumption or substitution for another option in a manner satisfying the provisions of Section 424(a) of the Code. (c) CONSIDERATION. The purchase price of stock acquired pursuant to an Option shall be paid, to the extent permitted by applicable statutes and regulations, either (i) in cash at the time the Option is exercised, or (ii) at the discretion of the Board or the Committee, at the time of the grant of the Option, (A) by delivery to the Company of other common stock of the Company, (B) according to a deferred payment or other arrangement (which may include, without limiting the generality of the foregoing, the use of other common stock of the Company) with the person to whom the Option is granted or to whom the Option is transferred pursuant to subsection 6(d), or (C) in any other form of legal consideration that may be acceptable to the Board. 6. 7 In the case of any deferred payment arrangement, interest shall be payable at least annually and shall be charged at the minimum rate of interest necessary to avoid the treatment as interest, under any applicable provisions of the Code, of any amounts other than amounts stated to be interest under the deferred payment arrangement. (d) TRANSFERABILITY. An Incentive Stock Option shall not be transferable except by will or by the laws of descent and distribution, and shall be exercisable during the lifetime of the person to whom the Incentive Stock Option is granted only by such person. A Nonstatutory Stock Option shall not be transferable except by will or by the laws of descent and distribution or pursuant to a domestic relations order satisfying the requirements of Rule 16a-12 and any administrative interpretations or pronouncements thereunder (a "DRO"), and shall be exercisable during the lifetime of the person to whom the Option is granted only by such person or any transferee pursuant to a DRO. Notwithstanding the foregoing, the person to whom the Option is granted may, by delivering written notice to the Company, in a form satisfactory to the Company, designate a third party who, in the event of the death of the Optionee, shall thereafter be entitled to exercise the Option. (e) VESTING. The total number of shares of stock subject to an Option may, but need not, be allotted in periodic installments (which may, but need not, be equal). The Option Agreement may provide that from time to time during each of such installment periods, the Option may become exercisable ("vest") with respect to some or all of the shares allotted to that period, and may be exercised with respect to some or all of the shares allotted to such period and/or any prior period as to which the Option became vested but was not fully exercised. The Option may be subject to such other terms and conditions on the time or times when it may be exercised (which may be based on performance or other criteria) as the Board may deem appropriate. The provisions of this subsection 6(e) are subject to any Option provisions governing the minimum number of shares as to which an Option may be exercised. (f) TERMINATION OF EMPLOYMENT OR RELATIONSHIP AS A DIRECTOR OR CONSULTANT. In the event an Optionee's Continuous Status as an Employee, Director or Consultant terminates (other than upon the Optionee's death or disability), the Optionee may exercise his or her Option (to the extent that the Optionee was entitled to exercise it at the date of termination) but only within such period of time ending on the earlier of (i) the date three (3) months after the termination of the Optionee's Continuous Status as an Employee, Director or Consultant (or such longer or shorter period specified in the Option Agreement) if the Optionee is an Employee at the time of such termination, (ii) the date six (6) months after the termination of the Optionee's Continuous Status as an Employee, Director or Consultant (or such longer or shorter period specified in the Option Agreement) if the Optionee is a Director or Consultant, but not an Employee, at the time of such termination, or (iii) the expiration of the term of the Option as set forth in 7. 8 the Option Agreement. If, after termination, the Optionee does not exercise his or her Option within the time specified in the Option Agreement, the Option shall terminate, and the shares covered by such Option shall revert to and again become available for issuance under the Plan. An Optionee's Option Agreement may also provide that if the exercise of the Option following the termination of the Optionee's Continuous Status as an Employee, Director, or Consultant (other than upon the Optionee's death or disability) would result in liability under Section 16(b) of the Exchange Act, then the Option shall terminate on the earlier of (i) the expiration of the term of the Option set forth in the Option Agreement, or (ii) the tenth (10th) day after the last date on which such exercise would result in such liability under Section 16(b) of the Exchange Act. Finally, an Optionee's Option Agreement may also provide that if the exercise of the Option following the termination of the Optionee's Continuous Status as an Employee, Director or Consultant (other than upon the Optionee's death or disability) would be prohibited at any time solely because the issuance of shares would violate the registration requirements under the Act, then the Option shall terminate on the earlier of (i) the expiration of the term of the Option set forth in the first paragraph of this subsection 6(f), or (ii) the expiration of a period of three (3) months after the termination of the Optionee's Continuous Status as an Employee, Director or Consultant during which the exercise of the Option would not be in violation of such registration requirements. (g) DISABILITY OF OPTIONEE. In the event an Optionee's Continuous Status as an Employee, Director or Consultant terminates as a result of the Optionee's disability, the Optionee may exercise his or her Option (to the extent that the Optionee was entitled to exercise it at the date of termination), but only within such period of time ending on the earlier of (i) the date twelve (12) months following such termination (or such longer or shorter period specified in the Option Agreement), or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, at the date of termination, the Optionee is not entitled to exercise his or her entire Option, the shares covered by the unexercisable portion of the Option shall revert to and again become available for issuance under the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the shares covered by such Option shall revert to and again become available for issuance under the Plan. (h) DEATH OF OPTIONEE. In the event of the death of an Optionee during, or within a period specified in the Option after the termination of, the Optionee's Continuous Status as an Employee, Director or Consultant, the Option may be exercised (to the extent the Optionee was entitled to exercise the Option at the date of death) by the Optionee's estate, by a person who acquired the right to exercise the Option by bequest or inheritance or by a person designated to exercise the option upon the Optionee's death pursuant to subsection 6(d), but only within the period ending on the earlier of (i) the date 8. 9 twelve (12) months following the date of death (or such longer or shorter period specified in the Option Agreement), or (ii) the expiration of the term of such Option as set forth in the Option Agreement. If, at the time of death, the Optionee was not entitled to exercise his or her entire Option, the shares covered by the unexercisable portion of the Option shall revert to and again become available for issuance under the Plan. If, after death, the Option is not exercised within the time specified herein, the Option shall terminate, and the shares covered by such Option shall revert to and again become available for issuance under the Plan. (i) EARLY EXERCISE. The Option may, but need not, include a provision whereby the Optionee may elect at any time while an Employee, Director or Consultant to exercise the Option as to any part or all of the shares subject to the Option prior to the full vesting of the Option. Any unvested shares so purchased shall be subject to a repurchase right in favor of the Company, with the repurchase price to be equal to the original purchase price of the stock, or to any other restriction the Board determines to be appropriate. (j) RE-LOAD OPTIONS. Without in any way limiting the authority of the Board or Committee to make or not to make grants of Options hereunder, the Board or Committee shall have the authority (but not an obligation) to include as part of any Option Agreement a provision entitling the Optionee to a further Option (a "Re-Load Option") in the event the Optionee exercises the Option evidenced by the Option agreement, in whole or in part, by surrendering other shares of Common Stock in accordance with this Plan and the terms and conditions of the Option Agreement. Any such Re-Load Option (i) shall be for a number of shares equal to the number of shares surrendered as part or all of the exercise price of such Option; (ii) shall have an expiration date which is the same as the expiration date of the Option the exercise of which gave rise to such Re-Load Option; and (iii) shall have an exercise price which is equal to one hundred percent (100%) of the Fair Market Value of the Common Stock subject to the Re-Load Option on the date of exercise of the original Option. Notwithstanding the foregoing, a Re-Load Option which is intended to be an Incentive Stock Option and which is granted to a 10% stockholder (as described in subsection 5(b)), shall have an exercise price which is equal to one hundred ten percent (110%) of the Fair Market Value of the stock subject to the Re-Load Option on the date of exercise of the original Option and shall have a term which is no longer than five (5) years. Any such Re-Load Option may be an Incentive Stock Option or a Nonstatutory Stock Option, as the Board or Committee may designate at the time of the grant of the original Option; provided, however, that the designation of any Re-Load Option as an Incentive Stock Option shall be subject to the one hundred thousand dollar ($100,000) annual limitation on exercisability of Incentive Stock Options described in subsection 12(e) of the Plan and in Section 422(d) of the Code. There shall be no Re-Load Options 9. 10 on a Re-Load Option. Any such Re-Load Option shall be subject to the availability of sufficient shares under subsection 4(a) and shall be subject to such other terms and conditions as the Board or Committee may determine which are not inconsistent with the express provisions of the Plan regarding the terms of Options. 7. TERMS OF STOCK BONUSES AND PURCHASES OF RESTRICTED STOCK. Each stock bonus or restricted stock purchase agreement shall be in such form and shall contain such terms and conditions as the Board or the Committee shall deem appropriate. The terms and conditions of stock bonus or restricted stock purchase agreements may change from time to time, and the terms and conditions of separate agreements need not be identical, but each stock bonus or restricted stock purchase agreement shall include (through incorporation of provisions hereof by reference in the agreement or otherwise) the substance of each of the following provisions as appropriate: (a) PURCHASE PRICE. The purchase price under each restricted stock purchase agreement shall be such amount as the Board or Committee shall determine and designate in such agreement. Notwithstanding the foregoing, the Board or the Committee may determine that eligible participants in the Plan may be awarded stock pursuant to a stock bonus agreement in consideration for past services actually rendered to the Company or for its benefit. (b) TRANSFERABILITY. No rights under a stock bonus or restricted stock purchase agreement shall be transferable except by will or the laws of descent and distribution or pursuant to a domestic relations order satisfying the requirements of Rule 16a-12 and any administrative interpretations or pronouncements thereunder, so long as stock awarded under such agreement remains subject to the terms of the agreement. (c) CONSIDERATION. The purchase price of stock acquired pursuant to a stock purchase agreement shall be paid either: (i) in cash at the time of purchase; (ii) at the discretion of the Board or the Committee, according to a deferred payment or other arrangement with the person to whom the stock is sold; or (iii) in any other form of legal consideration that may be acceptable to the Board or the Committee in its discretion. Notwithstanding the foregoing, the Board or the Committee to which administration of the Plan has been delegated may award stock pursuant to a stock bonus agreement in consideration for past services actually rendered to the Company or for its benefit. (d) VESTING. Shares of stock sold or awarded under the Plan may, but need not, be subject to a repurchase option (or in the case of a stock bonus award, a reacquisition option) in favor of the Company in accordance with a vesting schedule to be determined by the Board or the Committee and such other terms and conditions as determined by the Board or Committee in its sole discretion. 10. 11 (e) TERMINATION OF EMPLOYMENT OR RELATIONSHIP AS A DIRECTOR OR CONSULTANT. In the event a Participant's Continuous Status as an Employee, Director or Consultant terminates, the Company may repurchase or otherwise reacquire, subject to the limitations described in subsection 7(d), any or all of the shares of stock held by that person which have not vested as of the date of termination under the terms of the stock bonus or restricted stock purchase agreement between the Company and such person. 8. STOCK APPRECIATION RIGHTS. (a) The Board or Committee shall have full power and authority, exercisable in its sole discretion, to grant Stock Appreciation Rights under the Plan to Employees or Directors of or Consultants to, the Company or its Affiliates. To exercise any outstanding Stock Appreciation Right, the holder must provide written notice of exercise to the Company in compliance with the provisions of the Stock Award Agreement evidencing such right. If a Stock Appreciation Right is granted to an individual who is at the time subject to Section 16(b) of the Exchange Act (a "Section 16(b) Insider"), the Stock Award Agreement of grant shall incorporate all the terms and conditions at the time necessary to assure that the subsequent exercise of such right shall qualify for the safe-harbor exemption from short-swing profit liability provided by the rules (or any successor rules or regulations) promulgated under Section 16 of the Exchange Act. No limitation shall exist on the aggregate amount of cash payments the Company may make under the Plan in connection with the exercise of Stock Appreciation Rights. (b) Three types of Stock Appreciation Rights shall be authorized for issuance under the Plan: (i) TANDEM STOCK APPRECIATION RIGHTS. Tandem Stock Appreciation Rights will be granted appurtenant to an Option, and shall, except as specifically set forth in this Section 8, be subject to the same terms and conditions applicable to the particular Option grant to which it pertains. Tandem Stock Appreciation Rights will require the holder to elect between the exercise of the underlying Option for shares of stock and the surrender, in whole or in part, of such Option for an appreciation distribution. The appreciation distribution payable on the exercised Tandem Right shall be in cash (or, if so provided, in an equivalent number of shares of stock based on Fair Market Value on the date of the Option surrender) in an amount up to the excess of (A) the Fair Market Value (on the date of the Option surrender) of the number of shares of stock covered by that portion of the surrendered Option in which the Optionee is vested over (B) the aggregate exercise price payable for such vested shares. (ii) CONCURRENT STOCK APPRECIATION RIGHTS. Concurrent Rights will be granted appurtenant to an Option and may apply to all or any portion of the shares of stock subject to the underlying Option and shall, except as specifically set forth in this 11. 12 Section 8, be subject to the same terms and conditions applicable to the particular Option grant to which it pertains. A Concurrent Right shall be exercised automatically at the same time the underlying Option is exercised with respect to the particular shares of stock to which the Concurrent Right pertains. The appreciation distribution payable on an exercised Concurrent Right shall be in cash (or, if so provided, in an equivalent number of shares of stock based on Fair Market Value on the date of the exercise of the Concurrent Right) in an amount equal to such portion as shall be determined by the Board or the Committee at the time of the grant of the excess of (A) the aggregate Fair Market Value (on the date of the exercise of the Concurrent Right) of the vested shares of stock purchased under the underlying Option which have Concurrent Rights appurtenant to them over (B) the aggregate exercise price paid for such shares. (iii) INDEPENDENT STOCK APPRECIATION RIGHTS. Independent Rights will be granted independently of any Option and shall, except as specifically set forth in this Section 8, be subject to the same terms and conditions applicable to Nonstatutory Stock Options as set forth in Section 6. They shall be denominated in share equivalents. The appreciation distribution payable on the exercised Independent Right shall be not greater than an amount equal to the excess of (A) the aggregate Fair Market Value (on the date of the exercise of the Independent Right) of a number of shares of Company stock equal to the number of share equivalents in which the holder is vested under such Independent Right, and with respect to which the holder is exercising the Independent Right on such date, over (B) the aggregate Fair Market Value (on the date of the grant of the Independent Right) of such number of shares of Company stock. The appreciation distribution payable on the exercised Independent Right shall be in cash or, if so provided, in an equivalent number of shares of stock based on Fair Market Value on the date of the exercise of the Independent Right. 9. CANCELLATION AND RE-GRANT OF OPTIONS. The Board or the Committee shall have the authority to effect, at any time and from time to time, (i) the repricing of any outstanding Options and/or any Stock Appreciation Rights under the Plan and/or (ii) with the consent of the affected holders of Options and/or Stock Appreciation Rights, the cancellation of any outstanding Options and/or any Stock Appreciation Rights under the Plan and the grant in substitution therefor of new Options and/or Stock Appreciation Rights under the Plan covering the same or different numbers of shares of stock, but having an exercise price per share not less than eighty-five percent (85%) of the Fair Market Value (one hundred percent (100%) of the Fair Market Value in the case of an Incentive Stock Option) or, in the case of a 10% stockholder (as described in subsection 5(b)), not less than one hundred ten percent (110%) of the Fair Market Value) per share of stock on the new grant date. Notwithstanding the foregoing, the Board or the Committee may grant an Option and/or Stock Appreciation Right with an exercise price lower than that set forth above if such 12. 13 Option and/or Stock Appreciation Right is granted as part of a transaction to which section 424(a) of the Code applies. 10. COVENANTS OF THE COMPANY. (a) During the terms of the Stock Awards, the Company shall keep available at all times the number of shares of stock required to satisfy such Stock Awards. (b) The Company shall seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to issue and sell shares of stock upon exercise of the Stock Award; provided, however, that this undertaking shall not require the Company to register under the Securities Act of 1933, as amended (the "Securities Act") either the Plan, any Stock Award or any stock issued or issuable pursuant to any such Stock Award. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority which counsel for the Company deems necessary for the lawful issuance and sale of stock under the Plan, the Company shall be relieved from any liability for failure to issue and sell stock upon exercise of such Stock Awards unless and until such authority is obtained. 11. USE OF PROCEEDS FROM STOCK. Proceeds from the sale of stock pursuant to Stock Awards shall constitute general funds of the Company. 12. MISCELLANEOUS. (a) Neither an Employee, Director or Consultant nor any person to whom a Stock Award is transferred under subsection 6(d), 7(b), or 8(b) shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares subject to such Stock Award unless and until such person has satisfied all requirements for exercise of the Stock Award pursuant to its terms. (b) Throughout the term of any Stock Award, the Company shall deliver to the holder of such Stock Award, not later than one hundred twenty (120) days after the close of each of the Company's fiscal years during the term of such Stock Award, a balance sheet and an income statement. (c) Nothing in the Plan or any instrument executed or Stock Award granted pursuant thereto shall confer upon any Employee, Director, Consultant or other holder of Stock Awards any right to continue in the employ of the Company or any Affiliate (or to continue acting as a Director or Consultant) or shall affect the right of the Company or any Affiliate to terminate the employment of any Employee with or without cause, the right of the Company's Board of Directors and/or the Company's shareholders to remove 13. 14 any Director pursuant to the terms of the Company's Bylaws and the provisions of the California Corporations Code, or the right to terminate the relationship of any Consultant pursuant to the terms of such Consultant's agreement with the Company or Affiliate. (d) To the extent that the aggregate Fair Market Value (determined at the time of grant) of stock with respect to which Incentive Stock Options are exercisable for the first time by any Optionee during any calendar year under all plans of the Company and its Affiliates exceeds one hundred thousand dollars ($100,000), the Options or portions thereof which exceed such limit (according to the order in which they were granted) shall be treated as Nonstatutory Stock Options. (e) The Company may require any person to whom a Stock Award is granted, or any person to whom a Stock Award is transferred pursuant to subsection 6(d), 7(b) or 8(b), as a condition of exercising or acquiring stock under any Stock Award, (1) to give written assurances satisfactory to the Company as to such person's knowledge and experience in financial and business matters and/or to employ a purchaser representative reasonably satisfactory to the Company who is knowledgeable and experienced in financial and business matters, and that he or she is capable of evaluating, alone or together with the purchaser representative, the merits and risks of exercising the Stock Award; and (2) to give written assurances satisfactory to the Company stating that such person is acquiring the stock subject to the Stock Award for such person's own account and not with any present intention of selling or otherwise distributing the stock. The foregoing requirements, and any assurances given pursuant to such requirements, shall be inoperative if (i) the issuance of the shares upon the exercise or acquisition of stock under the Stock Award has been registered under a then currently effective registration statement under the Securities Act, or (ii) as to any particular requirement, a determination is made by counsel for the Company that such requirement need not be met in the circumstances under the then applicable securities laws. The Company may, upon advice of counsel to the Company, place legends on stock certificates issued under the Plan as such counsel deems necessary or appropriate in order to comply with applicable securities laws, including, but not limited to, legends restricting the transfer of the stock. (f) To the extent provided by the terms of a Stock Award Agreement, the person to whom a Stock Award is granted may satisfy any federal, state or local tax withholding obligation relating to the exercise or acquisition of stock under a Stock Award by any of the following means or by a combination of such means: (1) tendering a cash payment; (2) authorizing the Company to withhold shares from the shares of the common stock otherwise issuable to the participant as a result of the exercise or acquisition of stock under the Stock Award; or (3) delivering to the Company owned and unencumbered shares of the common stock of the Company. 14. 15 13. ADJUSTMENTS UPON CHANGES IN STOCK. (a) If any change is made in the stock subject to the Plan, or subject to any Stock Award, without the receipt of consideration by the Company (through merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by the Company), the Plan will be appropriately adjusted in the class(es) and maximum number of shares subject to the Plan pursuant to subsection 4(a) and the outstanding Stock Awards will be appropriately adjusted in the class(es) and number of shares and price per share of stock subject to such outstanding Stock Awards. Such adjustments shall be made by the Board or the Committee, the determination of which shall be final, binding and conclusive. (The conversion of any convertible securities of the Company shall not be treated as a "transaction not involving the receipt of consideration by the Company".) (b) In the event of: (1) a merger or consolidation in which the Company is not the surviving corporation, (2) a reverse merger in which the Company is the surviving corporation but the shares of the Company's common stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise, (3) a sale of all or substantially all of the Company's assets, (4) any other capital reorganization in which the beneficial ownership of more than fifty percent (50%) of the shares of the Company entitled to vote changes, or (5) the acquisition by any person, entity or group (excluding any employee benefit plan, or related trust, sponsored or maintained by the Company or any subsidiary of the Company) of the beneficial ownership, directly or indirectly, of securities of the Company representing more than fifty percent (50%) of the combined voting in the election of directors of the Company, then to the extent permitted by applicable law: (i) any surviving or acquiring corporation, or an Affiliate of such surviving or acquiring corporation, shall assume any Stock Awards outstanding under the Plan or shall substitute similar Stock Awards for those outstanding under the Plan, or (ii) such Stock Awards shall continue in full force and effect. In the event any surviving or acquiring corporation and its Affiliates refuse to assume or continue such Stock Awards, or to substitute similar Stock Awards for those outstanding under the Plan, then the vesting schedules applicable to all outstanding Stock Awards shall be accelerated so that all outstanding Stock Awards are fully vested, and any Options shall be terminated if not exercised prior to such event. In the event of a dissolution or liquidation of the Company, the vesting schedules applicable to all outstanding Stock Awards shall be accelerated so that all outstanding Stock Awards are fully vested, and any Options shall be terminated if not exercised prior to such event. 15. 16 14. AMENDMENT OF THE PLAN AND STOCK AWARDS. (a) The Board at any time, and from time to time, may amend the Plan. However, except as provided in Section 13 relating to adjustments upon changes in stock, no amendment shall be effective unless approved by the stockholders of the Company within twelve (12) months before or after the adoption of the amendment, where the amendment will: (i) Increase the number of shares reserved for Stock Awards under the Plan; (ii) Modify the requirements as to eligibility for participation in the Plan (to the extent such modification requires stockholder approval in order for the Plan to satisfy the requirements of Section 422 of the Code); or (iii) Modify the Plan in any other way if such modification requires stockholder approval in order for the Plan to satisfy the requirements of Section 422 of the Code. (b) The Board may in its sole discretion submit any other amendment to the Plan for stockholder approval, including, but not limited to, amendments to the Plan intended to satisfy the requirements of Section 162(m) of the Code and the regulations promulgated thereunder regarding the exclusion of performance-based compensation from the limit on corporate deductibility of compensation paid to certain executive officers. (c) It is expressly contemplated that the Board may amend the Plan in any respect the Board deems necessary or advisable to provide eligible Employees, Directors or Consultants with the maximum benefits provided or to be provided under the provisions of the Code and the regulations promulgated thereunder relating to Incentive Stock Options and/or to bring the Plan and/or Incentive Stock Options granted under it into compliance therewith. (d) Rights and obligations under any Stock Award granted before amendment of the Plan shall not be impaired by any amendment of the Plan unless (i) the Company requests the consent of the person to whom the Stock Award was granted and (ii) such person consents in writing. (e) The Board at any time, and from time to time, may amend the terms of any one or more Stock Award; provided, however, that the rights and obligations under any Stock Award shall not be impaired by any such amendment unless (i) the Company requests the consent of the person to whom the Stock Award was granted and (ii) such person consents in writing. 16. 17 15. TERMINATION OR SUSPENSION OF THE PLAN. (a) The Board may suspend or terminate the Plan at any time. Unless sooner terminated, the Plan shall terminate on October 4, 2005, which shall be within ten (10) years from the date the Plan is adopted by the Board or approved by the stockholders of the Company, whichever is earlier. No Stock Awards may be granted under the Plan while the Plan is suspended or after it is terminated. (b) Rights and obligations under any Stock Award granted while the Plan is in effect shall not be impaired by suspension or termination of the Plan, except with the consent of the person to whom the Stock Award was granted. 16. EFFECTIVE DATE OF PLAN. The Plan shall become effective upon the initial registration of any class of the Company's equity securities under Section 12 of the Exchange Act, but no Stock Awards granted under the Plan shall be exercised or vested unless and until the Plan has been approved by the stockholders of the Company, which approval shall be within twelve (12) months before or after the date the Plan is adopted by the Board. 17. EX-10.5 4 EXHIBIT 10.5 1 EXHIBIT 10.5 DATAWORKS CORPORATION 1995 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN ADOPTED ON SEPTEMBER 13, 1995 AMENDED MAY 23, 1996 AMENDED APRIL 17, 1997 1. PURPOSE. (a) The purpose of the 1995 Non-Employee Directors' Stock Option Plan (the "Plan") is to provide a means by which certain directors of DataWorks Corporation (the "Company") who are not otherwise employees of the Company or of any Affiliate of the Company (a "Non-Employee Director") will be given an opportunity to purchase stock of the Company. (b) The word "Affiliate" as used in the Plan means any parent corporation or subsidiary corporation of the Company as those terms are defined in Sections 424(e) and (f), respectively, of the Internal Revenue Code of 1986, as amended from time to time (the "Code"). (c) The Company, by means of the Plan, seeks to retain the services of certain persons now serving as Non-Employee Directors of the Company, to secure and retain the services of persons capable of serving in such capacity, and to provide incentives for such persons to exert maximum efforts for the success of the Company. 1. 2 2. ADMINISTRATION. (a) The Plan shall be administered by the Board of Directors of the Company (the "Board") unless and until the Board delegates administration to a committee, as provided in subparagraph 2(b). (b) The Board may delegate administration of the Plan to a committee composed of not fewer than two (2) members of the Board (the "Committee"). If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board, subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan. 3. SHARES SUBJECT TO THE PLAN. (a) Subject to the provisions of paragraph 10 relating to adjustments upon changes in stock, the stock that may be sold pursuant to options granted under the Plan shall not exceed in the aggregate one hundred fifty thousand (150,000) shares of the Company's common stock. If any option granted under the Plan shall for any reason expire or otherwise terminate without having been exercised in full, the stock not purchased under such option shall again become available for the Plan. (b) The stock subject to the Plan may be unissued shares or reacquired shares, bought on the market or otherwise. 4. ELIGIBILITY. 2. 3 (a) Options shall be granted only to Non-Employee Directors of the Company who are Eligible Directors, as defined in subparagraph 4(b). (b) Notwithstanding any other provision hereof, "Eligible Directors" shall mean all Non-Employee Directors of the Company serving as members of the Board from time to time after the effectiveness of the Company's initial public offering of common stock (the "Effective Date"); provided, however, that any Non-Employee Director whose membership on the Board commenced prior to the Effective Date pursuant to a capital investment in the Company by an entity which such Non-Employee Director represents shall become an Eligible Director only if and when he or she is elected as a Non-Employee Director by the shareholders of the Company after the Effective Date, which shall be treated as such person's initial election to be a Non-Employee Director for purposes of the Plan (including, but not limited to subparagraph 5(a) hereof). 5. NON-DISCRETIONARY GRANTS. (a) Each person who, after the Effective Date, for the first time becomes an Eligible Director automatically shall be granted, upon the date of his or her initial election to be a Non-Employee Director by the Board or shareholders of the Company, an option to purchase twenty thousand (20,000) shares of common stock of the Company on the terms and conditions set forth herein. (b) On the date of each annual meeting of the shareholders of the Company after the Effective Date, each person who is then an Eligible Director and continues on the Board thereafter (other than a person who receives a grant under subparagraph 5(a) on 3. 4 such date) automatically shall be granted an option to purchase five thousand (5,000) shares of common stock of the Company on the terms and conditions set forth herein. 6. OPTION PROVISIONS. Each option shall be subject to the following terms and conditions: (a) The term of each option commences on the date it is granted and, unless sooner terminated as set forth herein, expires on the date ten (10) years from the date of grant (the "Expiration Date"). If the optionee's service as a Non-Employee Director or employee of or consultant to the Company or any Affiliate terminates for any reason or for no reason, the option shall terminate on the earlier of the Expiration Date or the date twelve (12) months following the date of termination of all such service; provided, however, that if such termination of service is due to the optionee's death, the option shall terminate on the earlier of the Expiration Date or eighteen (18) months following the date of the optionee's death. In any and all circumstances, an option may be exercised following termination of the optionee's service as a Non-Employee Director or employee of or consultant to the Company or any Affiliate only as to that number of shares as to which it was exercisable under the provisions of subparagraph 6(e) on the date of termination of all such service. (b) The exercise price of each option shall be one hundred percent (100%) of the fair market value of the stock subject to such option on the date such option is granted. 4. 5 (c) Payment of the exercise price of each option is due in full in cash upon any exercise, provided that an option may be exercised pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board which results in the receipt of cash (or check) by the Company prior to the issuance of shares of the Company's common stock. (d) An option shall not be transferable except by will or by the laws of descent and distribution, or pursuant to a domestic relations order satisfying the requirements of Rule 16b-3 under the Securities Exchange Act of 1934 ("Rule 16b-3"), and shall be exercisable during the lifetime of the person to whom the option is granted only by such person (or by his or her guardian or legal representative) or transferee pursuant to such an order. Notwithstanding the foregoing, the optionee may, by delivering written notice to the Company in a form satisfactory to the Company, designate a third party who, in the event of the death of the optionee, shall thereafter be entitled to exercise the option. (e) The option shall become exercisable in installments over a period of three years from the date of grant as follows: one twelfth (1/12) of the shares shall vest on the date three months after the date of grant and one thirty-sixth (1/36) of the shares shall vest each month thereafter, provided that the optionee has, during the entire period prior to such vesting date, continuously served as a Non-Employee Director or employee of or consultant to the Company or any Affiliate of the Company, whereupon such option shall become fully exercisable in accordance with its terms with respect to that portion of the shares represented by that installment. 5. 6 (f) The Company may require any optionee, or any person to whom an option is transferred under subparagraph 6(d), as a condition of exercising any such option: (i) to give written assurances satisfactory to the Company as to the optionee's knowledge and experience in financial and business matters; and (ii) to give written assurances satisfactory to the Company stating that such person is acquiring the stock subject to the option for such person's own account and not with any present intention of selling or otherwise distributing the stock. These requirements, and any assurances given pursuant to such requirements, shall be inoperative if (i) the issuance of the shares upon the exercise of the option has been registered under a then-currently-effective registration statement under the Securities Act of 1933, as amended (the "Securities Act"), or (ii), as to any particular requirement, a determination is made by counsel for the Company that such requirement need not be met in the circumstances under the then-applicable securities laws. (g) Notwithstanding anything to the contrary contained herein, an option may not be exercised unless the shares issuable upon exercise of such option are then registered under the Securities Act or, if such shares are not then so registered, the Company has determined that such exercise and issuance would be exempt from the registration requirements of the Securities Act. 7. COVENANTS OF THE COMPANY. (a) During the terms of the options granted under the Plan, the Company shall keep available at all times the number of shares of stock required to satisfy such options. 6. 7 (b) The Company shall seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to issue and sell shares of stock upon exercise of the options granted under the Plan; provided, however, that this undertaking shall not require the Company to register under the Securities Act either the Plan, any option granted under the Plan, or any stock issued or issuable pursuant to any such option. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority which counsel for the Company deems necessary for the lawful issuance and sale of stock under the Plan, the Company shall be relieved from any liability for failure to issue and sell stock upon exercise of such options. 8. USE OF PROCEEDS FROM STOCK. Proceeds from the sale of stock pursuant to options granted under the Plan shall constitute general funds of the Company. 9. MISCELLANEOUS. (a) Neither an optionee nor any person to whom an option is transferred under subparagraph 6(d) shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares subject to such option unless and until such person has satisfied all requirements for exercise of the option pursuant to its terms. (b) Throughout the term of any option granted pursuant to the Plan, the Company shall make available to the holder of such option, not later than one hundred twenty (120) days after the close of each of the Company's fiscal years during the option 7. 8 term, upon request, such financial and other information regarding the Company as comprises the annual report to the shareholders of the Company provided for in the Bylaws of the Company and such other information regarding the Company as the holder of such option may reasonably request. (c) Nothing in the Plan or in any instrument executed pursuant thereto shall confer upon any Eligible Director any right to continue in the service of the Company or any Affiliate or shall affect any right of the Company, its Board or shareholders or any Affiliate to terminate the service of any Eligible Director with or without cause. (d) No Eligible Director, individually or as a member of a group, and no beneficiary or other person claiming under or through him, shall have any right, title or interest in or to any option reserved for the purposes of the Plan except as to such shares of common stock, if any, as shall have been reserved for him pursuant to an option granted to him. (e) In connection with each option granted pursuant to the Plan, it shall be a condition precedent to the Company's obligation to issue or transfer shares to an Eligible Director, or to evidence the removal or lapse of any restrictions on transfer, that such Eligible Director make arrangements satisfactory to the Company to insure that the amount of any federal or other withholding tax required to be withheld with respect to such sale or transfer, or such removal or lapse, is made available to the Company for timely payment of such tax. 8. 9 (f) As used in this Plan, "fair market value" means, as of any date, the value of the common stock of the Company determined as follows: (i) If the common stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market, the fair market value of a share of common stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such system or exchange (or the exchange with the greatest volume of trading in common stock) on the last market trading day prior to the day of determination, as reported in the Wall Street Journal or such other source as the Board deems reliable; (ii) If the common stock is quoted on Nasdaq (but not on the National Market thereof) or is regularly quoted by a recognized securities dealer but selling prices are not reported, the fair market value of a share of common stock shall be the mean between the bid and asked prices for the common stock on the last market trading day prior to the day of determination, as reported in the Wall Street Journal or such other source as the Board deems reliable; (iii) In the absence of an established market for the common stock, the fair market value shall be determined in good faith by the Board. 10. ADJUSTMENTS UPON CHANGES IN STOCK. (a) If any change is made in the stock subject to the Plan, or subject to any option granted under the Plan (through merger, consolidation, reorganization, recapitalization, stock dividend, dividend in property other than cash, stock split, 9. 10 liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by the Company), the Plan and outstanding options will be appropriately adjusted in the class(es) and maximum number of shares subject to the Plan and the class(es) and number of shares and price per share of stock subject to outstanding options. Such adjustments shall be made by the Board, the determination of which shall be final, binding and conclusive. (The conversion of any convertible securities of the Company shall not be treated as a "transaction not involving the receipt of consideration by the Company.") (b) In the event of: (1) a dissolution, liquidation or sale of substantially all of the assets of the Company; (2) a merger or consolidation in which the Company is not the surviving corporation; (3) a reverse merger in which the Company is the surviving corporation but the shares of the Company's common stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise; or (4) any other capital reorganization (including a sale of stock of the Company to a single purchaser or single group of affiliated purchasers) after which less than fifty percent (50%) of the outstanding voting shares of the new or continuing corporation are owned by shareholders of the Company immediately before such transaction, the time during which options outstanding under the Plan may be exercised shall be accelerated to permit the optionee to exercise all such options in full prior to such event, and the options shall terminate if not exercised prior to such event. 10. 11 11. AMENDMENT OF THE PLAN. (a) The Board at any time, and from time to time, may amend the Plan and/or some or all outstanding options granted under the Plan; provided, however, that the Board shall not amend the plan more than once every six (6) months with respect to the provisions of the Plan which relate to the amount, price and timing of grants, other than to comport with changes in the Code or applicable regulations or rulings thereunder. Except as provided in paragraph 10 relating to adjustments upon changes in stock, no amendment shall be effective unless approved by the shareholders of the Company within twelve (12) months before or after the adoption of the amendment, where the amendment will: (i) Increase the number of shares which may be issued under the Plan; or (ii) Modify the Plan in any other way if such modification requires shareholder approval in order for the Plan to comply with the requirements of Section 162(m) of the Code. (b) Rights and obligations under any option granted before any amendment of the Plan shall not be impaired by such amendment unless (i) the Company requests the consent of the person to whom the option was granted and (ii) such person consents in writing. 12. TERMINATION OR SUSPENSION OF THE PLAN. (a) The Board may suspend or terminate the Plan at any time. Unless sooner terminated, the Plan shall terminate on the date that is ten years after the Effective Date. 11. 12 No options may be granted under the Plan while the Plan is suspended or after it is terminated. (b) Rights and obligations under any option granted while the Plan is in effect shall not be impaired by suspension or termination of the Plan, except with the consent of the person to whom the option was granted. (c) The Plan shall terminate upon the occurrence of any of the events described in Section 10(b) above. 13. EFFECTIVE DATE OF PLAN; CONDITIONS OF EXERCISE. (a) The Plan shall become effective on the Effective Date (as defined in subparagraph 4(b)), subject to the condition that the Plan be approved by the shareholders of the Company. (b) No option granted under the Plan shall be exercised or exercisable unless and until the condition of subparagraph 13(a) above has been met. 12. EX-10.6 5 EXHIBIT 10.6 1 EXHIBIT 10.6 DATAWORKS CORPORATION EMPLOYEE STOCK PURCHASE PLAN ADOPTED SEPTEMBER 13, 1995 AS AMENDED FEBRUARY 3, 1997 1. PURPOSE. (a) The purpose of the Employee Stock Purchase Plan (the "Plan") is to provide a means by which employees of Dataworks Corporation, a California corporation (the "Company"), and its Affiliates, as defined in subparagraph 1(b), which are designated as provided in subparagraph 2(b), may be given an opportunity to purchase stock of the Company. (b) The word "Affiliate" as used in the Plan means any parent corporation or subsidiary corporation of the Company, as those terms are defined in Sections 424(e) and (f), respectively, of the Internal Revenue Code of 1986, as amended (the "Code"). (c) The Company, by means of the Plan, seeks to retain the services of its employees, to secure and retain the services of new employees, and to provide incentives for such persons to exert maximum efforts for the success of the Company. (d) The Company intends that the rights to purchase stock of the Company granted under the Plan be considered options issued under an "employee stock purchase plan" as that term is defined in Section 423(b) of the Code. 2. ADMINISTRATION. (a) The Plan shall be administered by the Board of Directors (the "Board") of the Company unless and until the Board delegates administration to a Committee, as provided in subparagraph 2(c). Whether or not the Board has delegated administration, the Board shall have the final power to determine all questions of policy and expediency that may arise in the administration of the Plan. (b) The Board shall have the power, subject to, and within the limitations of, the express provisions of the Plan: (i) To determine when and how rights to purchase stock of the Company shall be granted and the provisions of each offering of such rights (which need not be identical). (ii) To designate from time to time which Affiliates of the Company shall be eligible to participate in the Plan. 1. 2 (iii) To construe and interpret the Plan and rights granted under it, and to establish, amend and revoke rules and regulations for its administration. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective. (iv) To amend the Plan as provided in paragraph 13. (v) Generally, to exercise such powers and to perform such acts as the Board deems necessary or expedient to promote the best interests of the Company and its Affiliates. (c) The Board may delegate administration of the Plan to a Committee composed of not fewer than two (2) members of the Board (the "Committee"). If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board, subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan. 3. SHARES SUBJECT TO THE PLAN. (a) Subject to the provisions of paragraph 12 relating to adjustments upon changes in stock, the stock that may be sold pursuant to rights granted under the Plan shall not exceed in the aggregate three hundred thousand (300,000) shares of the Company's common stock (the "Common Stock") after giving effect to the one for 2.6 reverse stock split to be effected in September 1995. If any right granted under the Plan shall for any reason terminate without having been exercised, the Common Stock not purchased under such right shall again become available for the Plan. (b) The stock subject to the Plan may be unissued shares or reacquired shares, bought on the market or otherwise. 4. GRANT OF RIGHTS; OFFERING. (a) The Board or the Committee may from time to time grant or provide for the grant of rights to purchase Common Stock of the Company under the Plan to eligible employees (an "Offering") on a date or dates (the "Offering Date(s)") selected by the Board or the Committee. Each Offering shall be in such form and shall contain such terms and conditions as the Board or the Committee shall deem appropriate. The provisions of separate Offerings need not be identical, but each Offering shall include (through incorporation of the provisions of this Plan by reference in the Offering or otherwise) the period during which the Offering shall be effective, which period shall not 2. 3 exceed twenty-seven (27) months beginning with the Offering Date, and the substance of the provisions contained in paragraphs 5 through 8, inclusive. (b) If an employee has more than one right outstanding under the Plan, unless he or she otherwise indicates in agreements or notices delivered hereunder: (1) each agreement or notice delivered by that employee will be deemed to apply to all of his or her rights under the Plan, and (2) a right with a lower exercise price (or an earlier-granted right, if two rights have identical exercise prices), will be exercised to the fullest possible extent before a right with a higher exercise price (or a later-granted right, if two rights have identical exercise prices) will be exercised. 5. ELIGIBILITY. (a) Rights may be granted only to employees of the Company or, as the Board or the Committee may designate as provided in subparagraph 2(b), to employees of any Affiliate of the Company. Except as provided in subparagraph 5(b), an employee of the Company or any Affiliate shall not be eligible to be granted rights under the Plan, unless, on the Offering Date, such employee has been in the employ of the Company or any Affiliate for such continuous period preceding such grant as the Board or the Committee may require, but in no event shall the required period of continuous employment be greater than two (2) years. In addition, unless otherwise determined by the Board or the Committee and set forth in the terms of the applicable Offering, no employee of the Company or any Affiliate shall be eligible to be granted rights under the Plan, unless, on the Offering Date, such employee's customary employment with the Company or such Affiliate is for at least twenty (20) hours per week and at least five (5) months per calendar year. (b) The Board or the Committee may provide that, each person who, during the course of an Offering, first becomes an eligible employee of the Company or designated Affiliate will, on a date or dates specified in the Offering which coincides with the day on which such person becomes an eligible employee or occurs thereafter, receive a right under that Offering, which right shall thereafter be deemed to be a part of that Offering. Such right shall have the same characteristics as any rights originally granted under that Offering, as described herein, except that: (i) the date on which such right is granted shall be the "Offering Date" of such right for all purposes, including determination of the exercise price of such right; (ii) the period of the Offering with respect to such right shall begin on its Offering Date and end coincident with the end of such Offering; and 3. 4 (iii) the Board or the Committee may provide that if such person first becomes an eligible employee within a specified period of time before the end of the Offering, he or she will not receive any right under that Offering. (c) No employee shall be eligible for the grant of any rights under the Plan if, immediately after any such rights are granted, such employee owns stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or of any Affiliate. For purposes of this subparagraph 5(c), the rules of Section 424(d) of the Code shall apply in determining the stock ownership of any employee, and stock which such employee may purchase under all outstanding rights and options shall be treated as stock owned by such employee. (d) An eligible employee may be granted rights under the Plan only if such rights, together with any other rights granted under "employee stock purchase plans" of the Company and any Affiliates, as specified by Section 423(b)(8) of the Code, do not permit such employee's rights to purchase stock of the Company or any Affiliate to accrue at a rate which exceeds twenty-five thousand dollars ($25,000) of fair market value of such stock (determined at the time such rights are granted) for each calendar year in which such rights are outstanding at any time. (e) Officers of the Company and any designated Affiliate shall be eligible to participate in Offerings under the Plan, provided, however, that the Board may provide in an Offering that certain employees who are highly compensated employees within the meaning of Section 423(b)(4)(D) of the Code shall not be eligible to participate. 6. RIGHTS; PURCHASE PRICE. (a) On each Offering Date, each eligible employee, pursuant to an Offering made under the Plan, shall be granted the right to purchase up to the number of shares of Common Stock of the Company purchasable with a percentage designated by the Board or the Committee not exceeding fifteen percent (15%) of such employee's Earnings (as defined in subparagraph 7(a)) during the period which begins on the Offering Date (or such later date as the Board or the Committee determines for a particular Offering) and ends on the date stated in the Offering, which date shall be no later than the end of the Offering. The Board or the Committee shall establish one or more dates during an Offering (the "Purchase Date(s)") on which rights granted under the Plan shall be exercised and purchases of Common Stock effected in accordance with such Offering. (b) In connection with each Offering made under this Plan, the Board or the Committee shall specify a maximum number of shares which may be purchased by any employee as well as a maximum aggregate number of shares which may be purchased by all eligible employees pursuant to such Offering. In addition, in connection with each 4. 5 Offering which contains more than one Purchase Date, the Board or the Committee may specify a maximum aggregate number of shares which may be purchased by all eligible employees on any given Purchase Date under the Offering. If the aggregate purchase of shares upon exercise of rights granted under the Offering would exceed any such maximum aggregate number, the Board or the Committee shall make a pro rata allocation of the shares available in as nearly a uniform manner as shall be practicable and as it shall deem to be equitable. (c) The purchase price of stock acquired pursuant to rights granted under the Plan shall be not less than the lesser of: (i) an amount equal to eighty-five percent (85%) of the fair market value of the stock on the Offering Date; or (ii) an amount equal to eighty-five percent (85%) of the fair market value of the stock on the Purchase Date. 7. PARTICIPATION; WITHDRAWAL; TERMINATION. (a) An eligible employee may become a participant in the Plan pursuant to an Offering by delivering a participation agreement to the Company within the time specified in the Offering, in such form as the Company provides. Each such agreement shall authorize payroll deductions of up to the maximum percentage specified by the Board or the Committee of such employee's Earnings during the Offering. "Earnings" is defined as an employee's regular salary or wages (including amounts thereof elected to be deferred by the employee, that would otherwise have been paid, under any cash or deferred arrangement established by the Company), which shall include commissions and overtime pay, but shall exclude bonuses, incentive pay, profit sharing, other remuneration paid directly to the employee, the cost of employee benefits paid for by the Company or an Affiliate, education or tuition reimbursements, imputed income arising under any group insurance or benefit program, traveling expenses, business and moving expense reimbursements, income received in connection with stock options, contributions made by the Company or an Affiliate under any employee benefit plan, and similar items of compensation. The payroll deductions made for each participant shall be credited to an account for such participant under the Plan and shall be deposited with the general funds of the Company or an Affiliate. A participant may reduce (including to zero), increase or begin such payroll deductions after the beginning of any Offering only as provided for in the Offering. A participant may make additional payments into his or her account only if specifically provided for in the Offering and only if the participant has not had the maximum amount withheld during the Offering. 5. 6 (b) At any time during an Offering, a participant may terminate his or her payroll deductions under the Plan and withdraw from the Offering by delivering to the Company a notice of withdrawal in such form as the Company provides. Such withdrawal may be elected at any time prior to the end of the Offering except as provided by the Board or the Committee in the Offering. Upon such withdrawal from the Offering by a participant, the Company shall distribute to such participant all of his or her accumulated payroll deductions (reduced to the extent, if any, such deductions have been used to acquire stock for the participant) under the Offering, without interest, and such participant's interest in that Offering shall be automatically terminated. A participant's withdrawal from an Offering will have no effect upon such participant's eligibility to participate in any other Offerings under the Plan but such participant will be required to deliver a new participation agreement in order to participate in subsequent Offerings under the Plan. (c) Rights granted pursuant to any Offering under the Plan shall terminate immediately upon cessation of any participating employee's employment with the Company and any designated Affiliate, for any reason, and the Company shall distribute to such terminated employee all of his or her accumulated payroll deductions (reduced to the extent, if any, such deductions have been used to acquire stock for the terminated employee), under the Offering, without interest. (d) Rights granted under the Plan shall not be transferable, and, except as provided in paragraph 14, shall be exercisable only by the person to whom such rights are granted. 8. EXERCISE. (a) On each date specified therefor in the relevant Offering ("Purchase Date"), each participant's accumulated payroll deductions and other additional payments specifically provided for in the Offering (without any increase for interest) will be applied to the purchase of whole shares of stock of the Company, up to the maximum number of shares permitted pursuant to the terms of the Plan and the applicable Offering, at the purchase price specified in the Offering. No fractional shares shall be issued upon the exercise of rights granted under the Plan. The amount, if any, of accumulated payroll deductions remaining in each participant's account after the purchase of shares which is less than the amount required to purchase one share of stock on the final Purchase Date of an Offering shall be held in each such participant's account for the purchase of shares under the next Offering under the Plan, unless such participant withdraws from such next Offering, as provided in subparagraph 7(b), or is no longer eligible to be granted rights under the Plan, as provided in paragraph 5, in which case such amount shall be distributed to the participant after such final Purchase Date, without interest. The amount, if any, of accumulated payroll deductions remaining in any participant's account after the purchase 6. 7 of shares which is equal to the amount required to purchase whole shares of stock on the final Purchase Date of an Offering shall be distributed in full to the participant after such Purchase Date, without interest. (b) No rights granted under the Plan may be exercised to any extent unless the Plan (including rights granted thereunder) is covered by an effective registration statement pursuant to the Securities Act of 1933, as amended (the "Securities Act"). If on a Purchase Date in any Offering hereunder the Plan is not so registered, no rights granted under the Plan or any Offering shall be exercised on such Purchase Date, and the Purchase Date shall be delayed until the Plan is subject to such an effective registration statement, except that the Purchase Date shall not be delayed more than twelve (12) months and the Purchase Date shall in no event be more than twenty-seven (27) months from the Offering Date. If on the Purchase Date of any Offering hereunder, as delayed to the maximum extent permissible, the Plan is not registered, no rights granted under the Plan or any Offering shall be exercised and all payroll deductions accumulated during the Offering (reduced to the extent, if any, such deductions have been used to acquire stock) shall be distributed to the participants, without interest. 9. COVENANTS OF THE COMPANY. (a) During the terms of the rights granted under the Plan, the Company shall keep available at all times the number of shares of stock required to satisfy such rights. (b) The Company shall seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to issue and sell shares of stock upon exercise of the rights granted under the Plan. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority which counsel for the Company deems necessary for the lawful issuance and sale of stock under the Plan, the Company shall be relieved from any liability for failure to issue and sell stock upon exercise of such rights unless and until such authority is obtained. 10. USE OF PROCEEDS FROM STOCK. Proceeds from the sale of stock pursuant to rights granted under the Plan shall constitute general funds of the Company. 11. RIGHTS AS A SHAREHOLDER. 7. 8 A participant shall not be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares subject to rights granted under the Plan unless and until the participant's shareholdings acquired upon exercise of rights under the Plan are recorded in the books of the Company. 12. ADJUSTMENTS UPON CHANGES IN STOCK. (a) If any change is made in the stock subject to the Plan, or subject to any rights granted under the Plan (through merger, consolidation, reorganization, recapitalization, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or otherwise), the Plan and outstanding rights will be appropriately adjusted in the class(es) and maximum number of shares subject to the Plan and the class(es) and number of shares and price per share of stock subject to outstanding rights. (b) In the event of: (1) a dissolution or liquidation of the Company; (2) a merger or consolidation in which the Company is not the surviving corporation; (3) a reverse merger in which the Company is the surviving corporation but the shares of the Company's Common Stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise; or (4) any other capital reorganization in which more than fifty percent (50%) of the shares of the Company entitled to vote are exchanged, then, as determined by the Board in its sole discretion (i) any surviving corporation may assume outstanding rights or substitute similar rights for those under the Plan, (ii) such rights may continue in full force and effect, or (iii) participants' accumulated payroll deductions may be used to purchase Common Stock immediately prior to the transaction described above and the participants' rights under the ongoing Offering terminated. 13. AMENDMENT OF THE PLAN. (a) The Board at any time, and from time to time, may amend the Plan. However, except as provided in paragraph 12 relating to adjustments upon changes in stock, no amendment shall be effective unless approved by the shareholders of the Company within twelve (12) months before or after the adoption of the amendment, where the amendment will: (i) Increase the number of shares reserved for rights under the Plan; or (ii) Modify the provisions as to eligibility for participation in the Plan (to the extent such modification requires shareholder approval in order for the Plan to obtain employee stock purchase plan treatment under Section 423 of the Code). Rule 16b-3. 8. 9 It is expressly contemplated that the Board may amend the Plan in any respect the Board deems necessary or advisable to provide eligible employees with the maximum benefits provided or to be provided under the provisions of the Code and the regulations promulgated thereunder relating to employee stock purchase plans and/or to bring the Plan and/or rights granted under it into compliance therewith. (b) Rights and obligations under any rights granted before amendment of the Plan shall not be impaired by any amendment of the Plan, except with the consent of the person to whom such rights were granted or except as necessary to comply with any laws or governmental regulation. 14. DESIGNATION OF BENEFICIARY. (a) A participant may file a written designation of a beneficiary who is to receive any shares and cash, if any, from the participant's account under the Plan in the event of such participant's death subsequent to the end of an Offering but prior to delivery to him of such shares and cash. In addition, a participant may file a written designation of a beneficiary who is to receive any cash from the participant's account under the Plan in the event of such participant's death during an Offering. (b) Such designation of beneficiary may be changed by the participant at any time by written notice. In the event of the death of a participant and in the absence of a beneficiary validly designated under the Plan who is living at the time of such participant's death, the Company shall deliver such shares and/or cash to the executor or administrator of the estate of the participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may deliver such shares and/or cash to the spouse or to any one or more dependents or relatives of the participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate. 15. TERMINATION OR SUSPENSION OF THE PLAN. (a) The Board may suspend or terminate the Plan at any time. Unless sooner terminated, the Plan shall terminate on September 12, 2005. No rights may be granted under the Plan while the Plan is suspended or after it is terminated. (b) Rights and obligations under any rights granted while the Plan is in effect shall not be altered or impaired by suspension or termination of the Plan, except as expressly provided in the Plan or with the consent of the person to whom such rights were granted or except as necessary to comply with any laws or governmental regulation. 16. EFFECTIVE DATE OF PLAN. 9. 10 The Plan shall become effective upon the effectiveness of the Company's initial public offering of shares of common stock, but no rights granted under the Plan shall be exercised unless and until the Plan has been approved by the shareholders of the Company. 10. 11 DATAWORKS CORPORATION EMPLOYEE STOCK PURCHASE PLAN OFFERING (As Revised October 5, 1995) 1. GRANT; OFFERING DATE. (a) The Board of Directors of DataWorks Corporation, a California corporation (the "Company"), pursuant to the Company's Employee Stock Purchase Plan (the "Plan"), hereby authorizes the grant of rights to purchase shares of the common stock of the Company ("Common Stock") to all Eligible Employees (an "Offering"). The first Offering shall begin simultaneously with the effectiveness of the Company's registration statement under the Securities Act of 1933 with respect to the initial public offering of the Company's Common Stock (the "Effective Time") and end on July 31, 1997 (the "Initial Offering"). Thereafter, an Offering shall begin on August 1 every two (2) years, beginning with calendar year 1997, and shall end on the day prior to the second anniversary of its Offering Date. The first day of an Offering is that Offering's "Offering Date." (b) Notwithstanding the foregoing provisions of this paragraph 1 or any other provisions hereunder, if the Effective Time occurs on or after November 1, 1995, then (a) the Initial Offering shall end on January 31, 1998, and (b) subsequent Offerings shall begin on February 1 every two (2) years, beginning with February 1, 1998, and shall end on the day prior to the second anniversary of their respective Offering Dates. (c) Prior to the commencement of any Offering, the Board of Directors (or the Committee described in subparagraph 2(c) of the Plan, if any) may change any or all terms of such Offering and any subsequent Offerings. The granting of rights pursuant to each Offering hereunder shall occur on each respective Offering Date unless, prior to such date (a) the Board of Directors (or such Committee) determines that such Offering shall not occur, or (b) no shares remain available for issuance under the Plan in connection with the Offering. 2. ELIGIBLE EMPLOYEES. (a) All employees of the Company and each of its Affiliates (as defined in the Plan) incorporated in the United States shall be granted rights to purchase Common Stock under each Offering on the Offering Date of such Offering, provided that each such employee otherwise meets the employment requirements of subparagraph 5(a) of the Plan on the Offering Date of such Offering (an "Eligible Employee"). Notwithstanding the 1. 12 foregoing, no employee who is disqualified by subparagraph 5(c) or 5(d) of the Plan shall be an Eligible Employee or be granted rights under an Offering. (b) Notwithstanding the foregoing, each person who first becomes an Eligible Employee during any Offering and at least six (6) months prior to the final Purchase Date (as defined in paragraph 6 hereof) of the Offering will, on the next February 1 or August 1 during that Offering, receive a right under such Offering, which right shall thereafter be deemed to be a part of the Offering. Such right shall have the same characteristics as any rights originally granted under the Offering except that: (i) the date on which such right is granted shall be the "Offering Date" of such right for all purposes, including determination of the exercise price of such right; and (ii) the Offering for such right shall begin on its Offering Date and end coincident with the end of the ongoing Offering. 3. RIGHTS. (a) Subject to the limitations contained herein and in the Plan, on each Offering Date each Eligible Employee shall be granted the right to purchase the number of shares of Common Stock purchasable with up to fifteen percent (15%) of such employee's Earnings (as defined in the Plan) paid during the period of such Offering beginning after such Eligible Employee first commences participation; provided, however, that no employee may purchase Common Stock on a particular Purchase Date that would result in more than fifteen percent (15%) of such employee's Earnings in the period from the Offering Date to such Purchase Date having been applied to purchase shares under all ongoing Offerings under the Plan and all other Company plans intended to qualify as "employee stock purchase plus" under Section 423 of the Internal Revenue Code of 1986, as amended (the "Code"). Notwithstanding the foregoing, the maximum number of shares of Common Stock an Eligible Employee may purchase on any Purchase Date in an Offering shall be such number of shares as has a fair market value (determined as of the Offering Date for such Offering) equal to (x) $25,000 multiplied by the number of calendar years in which the right under such Offering has been outstanding at any time, minus (y) the fair market value of any other shares of Common Stock (determined as of the relevant Offering Date with respect to such shares) which, for purposes of the limitation of Section 423(b)(8) of the Code, are attributed to any of such calendar years in which the right is outstanding. The amount in clause (y) of the previous sentence shall be determined in accordance with regulations applicable under Section 423(b)(8) of the Code based on (i) the number of shares previously purchased with respect to such calendar years pursuant to such Offering or any other Offering under the Plan, or pursuant to any other Company plans intended to qualify as "employee stock purchase plans" 2. 13 under Section 423 of the Code, and (ii) the number of shares subject to other rights outstanding on the Offering Date for such Offering pursuant to the Plan or any other such Company plan. (b) The maximum aggregate number of shares available to be purchased by Eligible Employees under an Offering shall be the number of shares remaining available under the Plan on the Offering Date. If the aggregate purchase of shares of Common Stock upon exercise of rights granted under the Offering would exceed the maximum aggregate number of shares available, the Board shall make a pro rata allocation of the shares available in a uniform and equitable manner. 4. PURCHASE PRICE. The purchase price of the Common Stock under the Offering shall be the lesser of eighty-five percent (85%) of the fair market value of the Common Stock on the Offering Date or eighty-five percent (85 %) of the fair market value of the Common Stock on the Purchase Date, in each case rounded up to the nearest whole cent per share. For the Initial Offering, the fair market value of the Common Stock at the time when the Offering commences shall be the price per share at which shares of Common Stock are first sold to the public in the Company's initial public offering. 5. PARTICIPATION. (a) Except as otherwise provided in this paragraph 5, an Eligible Employee may elect to participate in an Offering only at the beginning of the Offering; provided, however, that a person who first becomes an Eligible Employee after the commencement of any Offering and at least six (6) months prior to the final Purchase Date of the Offering may elect to participate at the Offering Date applicable to such Eligible Employee as determined in accordance with subparagraph 2(b). An Eligible Employee shall become a participant in an Offering by delivering an agreement authorizing payroll deductions. Such deductions must be in whole dollars, with a minimum dollar amount of ten dollars ($10) per pay period and a maximum amount not expected to exceed fifteen percent (15%) of earnings over the course of the Offering, or in whole percentages, with a minimum percentage of one percent (1%) and a maximum percentage of fifteen percent (15%). A participant may not make additional payments into his or her account. The agreement shall be made on such enrollment form as the Company provides, and must be delivered to the Company before the Offering Date to be effective for the remaining portion of that Offering, unless a later time for filing the enrollment form is set by the Board for all Eligible Employees with respect to a given Offering Date. As to the Initial Offering, the time for filing an enrollment form and commencing participation for individuals who are Eligible Employees on the Offering Date for the Initial Offering shall be determined by the Company and communicated to such Eligible Employees. 3. 14 (b) A participant may not increase his or her participation level during the course of an Offering. A participant may reduce (including to zero) his or her participation level only once during any six month period ending on a Purchase Date (except not during the ten (10) days preceding a Purchase Date), by delivering a notice to the Company in such form and at such time as the Company provides. A participant may withdraw from an Offering and receive his or her accumulated payroll deductions from the Offering (reduced to the extent, if any, such deductions have been used to acquire Common Stock for the participant on any prior Purchase Dates), without interest, at any time prior to the end of the Offering, excluding only each ten (10) day period immediately preceding a Purchase Date, by delivering a withdrawn notice to the Company in such form as the Company provides. 6. PURCHASERS. Subject to the limitations contained herein, on each Purchase Date, each participant's accumulated payroll deductions (without any increase for interest) shall be applied to the purchase of whole shares of Common Stock, up to the maximum number of shares permitted under the Plan and the Offering. "Purchase Date" shall be defined as each January 31 and July 31 (i.e., the first Purchase Date of the Initial Offering shall be January 31, 1996). 7. NOTICES AND AGREEMENTS. Any notices or agreements provided for in an Offering or the Plan shall be given in writing, in a form provided by the Company, and unless specifically provided for in the Plan or this Offering shall be deemed effectively given upon receipt or, in the case of notices and agreements delivered by the Company, five (5) days after deposit in the United States mail, postage prepaid. 8. EXERCISE CONTINGENT ON SHAREHOLDER APPROVAL. The rights granted under an Offering are subject to the approval of the Plan by the shareholders as required for the Plan to obtain employee stock purchase plan treatment under Section 423 of the Code and to comply with the requirements of Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended. 9. OFFERING SUBJECT TO PLAN. Each Offering is subject to all the provisions of the Plan, and its provisions are hereby made a part of the Offering, and is further subject to all interpretations, amendments, rules and 4. 15 regulations which may from time to time be promulgated and adopted pursuant to the Plan. In the event of any conflict between the provisions of an Offering and those of the Plan (including interpretations, amendments, rules and regulations which may from time to time be promulgated and adopted pursuant to the Plan), the provisions of the Plan shall control. 5. EX-10.20 6 EXHIBIT 10.20 1 EXHIBIT 10.20 DATAWORKS CORPORATION 5910 PACIFIC CENTER BLVD., SUITE 300 SAN DIEGO, CALIFORNIA 92121 September 29, 1997 Mr. Robert C. Vernon 3230 Rutledge Drive Las Vegas, NV 89120 Re: Employment Terms Dear Mr. Vernon: DataWorks Corporation (the "Company") is pleased to offer you the position of President, International Operations, on the terms set forth below, effective immediately following the closing of the strategic merger between the Company and Interactive Group, Inc. As such, you will head DataWorks' international ERP market and will represent all DataWorks products, including the JIT and INFOFLO product lines. During your employment with the Company, you, and your principal offices, will be based in the Las Vegas area; and you will report directly to Stuart W. Clifton. Your base compensation will be $250,000 per annum. Upon countersigning this letter accepting this offer of employment (provided the closing of the merger between the Company and Interactive has occurred), you will be entitled to receive from the Company a "retention bonus" of $300,000, payable quarterly over two years on the first day of each calendar quarter hereafter, to be paid in installments of $37,500 (with the first payment of $37,500 to be paid on October 1, 1997). Your compensation hereunder will be subject to payroll deductions and all required withholdings, and you will be entitled to additional compensation, including stock options, as may be agreed upon by you and the Company. In any event, you will be eligible to participate in and benefit from the employee benefit plans and benefit arrangements of the Company, including its bonus and stock award programs, to the same extent the Company's other executive officers are so eligible. You will be evaluated for any award under the Company's bonus plan as then in effect at the Chief Executive Officer level. Immediately following the effectiveness of your employment with the Company as provided above, you will be granted an option to purchase 40,000 shares of Common Stock of the Company pursuant to the Company's 1995 Equity Incentive Plan, at an exercise price equal to 110% of the fair market value of the Common Stock on the date of such effectiveness and vesting in accordance with the Company's standard policies so long as you continue to be employed with the Company. Such option shall be an incentive stock option to the extent compliant with applicable law, and a nonstatutory stock option to the extent necessary to ensure such compliance. 2 Mr. Robert C. Vernon September 29, 1997 Page Two Further, the grant of such option shall not preclude you from receiving other option grants as described in the preceding paragraph. You will be paid on the Company's normal paydays. As an exempt salaried employee, you will be expected to work the hours required by the nature of your work assignments. The Company may modify your position, duties, compensation and benefits from time to time as it deems necessary; provided, however that an adverse and substantial reduction in the nature or status of your responsibilities or in your base compensation, other than for Cause (as defined below), or a change in your work location without your consent, shall be deemed a constructive termination without Cause for purposes of this Agreement. As a Company employee, you will be expected to abide by Company rules and regulations, and (if requested by the Company) sign and comply with a confidentiality agreement or a proprietary information and inventions agreement, which, among other things, prohibits unauthorized use or disclosure of Company proprietary information. Your employment relationship with the Company is at-will. Subject only to the obligation to pay you the severance benefits described in next paragraph and the retention bonus payments described above in the event the Company terminates your employment without Cause, in order to protect our mutual employment rights, either you or the Company may terminate your employment relationship at any time and for any reason whatsoever, with or without Cause or advance notice. This at-will employment relationship cannot be changed except in a writing signed by a duly authorized officer of the Company. In the event the Company terminates your employment without Cause, in addition to receiving continued payment of your retention bonus until it is fully paid, you shall receive as severance an aggregate amount equal to your then annual base salary, which amount shall be paid in equal monthly installments over the 12-month period following the date of termination. "Cause" for termination shall mean (a) willful breach or habitual neglect of your duties and failure to remedy your performance within 30 days after written notice to you, or (b) misconduct, including but not limited to: (i) conviction of any felony or of any crime involving moral turpitude or dishonesty; (ii) participation in any fraud against the Company; (iii) breach of your Proprietary Information and Inventions Agreement; or (iv) conduct by you which in the good faith and reasonable determination of the Board of Directors of the Company demonstrates your gross unfitness to serve. 3 Mr. Robert C. Vernon September 29, 1997 Page Three The employment terms in this letter supersede any other agreements or promises made to you by anyone, whether oral or written, including any employment agreement or arrangement between you and the Company in existence prior to the date hereof. Sincerely, DATAWORKS CORPORATION /s/ Norman R. Farquhar --------------------------------------- Norman R. Farquhar Executive Vice President and Chief Financial Officer Accepted by: /s/ Robert C. Vernon - ----------------------------- Robert C. Vernon 9/24/97 - ----------------------------- Date EX-10.21 7 EXHIBIT 10.21 1 EXHIBIT 10.21 DATAWORKS CORPORATION 5910 PACIFIC CENTER BLVD., SUITE 300 SAN DIEGO, CALIFORNIA 92121 September 29, 1997 Mr. Mark Hellinger 1211 Santa Luisa Drive Solana Beach, CA 92075 Re: Employment Terms Dear Mr. Hellinger: DataWorks Corporation (the "Company") is pleased to offer you the position of President, Mid-Tier Division, on the terms set forth below, effective immediately following the closing of the strategic merger between the Company and Interactive Group, Inc. As such, you will head DataWorks U.S. Mid-Tier ERP market. You will report directly to me. Your base compensation will be $200,000 per annum. Upon countersigning this letter accepting this offer of employment (provided the closing of the merger between the Company and Interactive has occurred), you will be entitled to receive from the Company a "retention bonus" of $300,000, payable quarterly over two years on the first day of each calendar quarter hereafter to be paid in installments of $37,500 (with the first payment of $37,500 to be paid on October 1, 1997). Your compensation hereunder will be subject to payroll deductions and all required withholdings, and you will be entitled to additional compensation, including stock options, as may be agreed upon by you and the Company. In any event, you will be eligible to participate in and benefit from the employee benefit plans and benefit arrangements of the Company, including its bonus and stock award programs, to the same extent the Company's other executive officers are so eligible. You will be evaluated for any award under the Company's bonus plan as then in effect at the Executive Vice President level. Immediately following the effectiveness of your employment with the Company as provided above, you will be granted an option to purchase 25,000 shares of Common Stock of the Company pursuant to the Company's 1995 Equity Incentive Plan, at an exercise price equal to 110% of the fair market value of the Common Stock on the date of such effectiveness and vesting in accordance with the Company's standard policies so long as you continue to be employed with the Company. Such option shall be an incentive stock option to the extent compliant with applicable law, and a nonstatutory stock option to the extent necessary to ensure such compliance. Further, the grant of such option shall not preclude you from receiving other option grants as described in the preceding paragraph. 2 Mr. Mark Hellinger September 29, 1997 Page 2 You will be paid on the Company's normal paydays. As an exempt salaried employee, you will be expected to work the hours required by the nature of your work assignments. The Company or may modify your position, duties, work location, compensation and benefits from time to time as it deems necessary; provided, however that an adverse and substantial reduction in the nature or status of your responsibilities or in your base compensation, other than for Cause (as defined below), shall be deemed a constructive termination without Cause for purposes of this Agreement. As a Company employee, you will be expected to abide by Company rules and regulations, and (if requested by the Company) sign and comply with a confidentiality agreement or a proprietary information and inventions agreement, which, among other things, prohibits unauthorized use or disclosure of Company proprietary information. Your employment relationship with the Company is at-will. Subject only to the obligation to pay you the severance benefits described in next paragraph and the retention bonus payment described above in the event the Company terminates your employment without Cause, in order to protect our mutual employment rights, either you or the Company may terminate your employment relationship at any time and for any reason whatsoever, with or without Cause or advance notice. This at-will employment relationship cannot be changed except in a writing signed by a duly authorized officer of the Company. In the event the Company terminates your employment without Cause, in addition to receiving continued payment of your retention bonus until it is fully paid, you shall receive as severance an aggregate amount equal to your then annual base salary, which amount shall be paid in equal monthly installments over the 12-month period following the date of termination. "Cause" for termination shall mean (a) willful breach or habitual neglect of your duties and failure to remedy your performance within 30 days after written notice to you, or (b) misconduct, including but not limited to: (i) conviction of any felony or of any crime involving moral turpitude or dishonesty; (ii) participation in any fraud against the Company; (iii) breach of your Proprietary Information and Inventions Agreement; or (iv) conduct by you which in the good faith and reasonable determination of the Board of Directors of the Company demonstrates your gross unfitness to serve. 3 Mr. Mark Hellinger September 29, 1997 Page 3 The employment terms in this letter supersede any other agreements or promises made to you by anyone, whether oral or written, including any employment agreement or arrangement between you and the Company in existence prior to the date hereof. Sincerely, DATAWORKS CORPORATION /s/ Norman R. Farquhar --------------------------------------- Norman R. Farquhar Executive Vice President and Chief Financial Officer Accepted by: /s/ Mark Hellinger - ------------------------------ Mark Hellinger 9/29/97 - ------------------------------ Date EX-10.22 8 EXHIBIT 10.22 1 EXHIBIT 10.22 NONCOMPETITION AGREEMENT This NONCOMPETITION AGREEMENT (the "Agreement") is made as of September 29, 1997, by and among DataWorks Corporation, a California corporation ("Parent"), DataWorks Acquisition Sub, Inc., a Delaware corporation ("Merger Sub"), and Robert C. Vernon ("Stockholder"). RECITALS Stockholder is a stockholder of Interactive Group, Inc., a Delaware corporation ("Company"). Parent, Merger Sub and Company have entered into an Agreement and Plan of Merger and Reorganization dated as of July 31, 1997 (the "Reorganization Agreement"), providing for the acquisition (the "Acquisition") by Parent of Company pursuant to a merger of Merger Sub and Company (the "Merger"). Stockholder plans to vote in favor of the Merger and receive all the benefits of the Merger; and in connection therewith and in exchange for the additional consideration provided herein, Stockholder has agreed pursuant to and to the extent permitted by Section 16601 of the Business and Professions Code of the State of California not to compete with Company in the manner and to the extent herein set forth. Stockholder is entering into this Agreement as an inducement to Parent and Merger Sub to consummate the Merger, with all of the attendant financial benefits to Stockholder as a stockholder of Company. AGREEMENT NOW, THEREFORE, in consideration of the mutual covenants herein contemplated and intending to be legally bound hereby, Merger Sub, Parent and Stockholder agree as follows: 1. ACKNOWLEDGMENTS BY STOCKHOLDER. Stockholder acknowledges that by virtue of his position with Company he has developed considerable expertise in the business operations of Company and has had access to extensive confidential information with respect to Company. Stockholder recognizes that Merger Sub and Parent would be irreparably damaged, and their substantial investment in Company materially impaired, if Stockholder were to enter into an activity competing with Company's business in violation of the terms of this Agreement or if Stockholder were to disclose or make unauthorized use of any confidential information concerning the business of Company. Accordingly, Stockholder expressly acknowledges that he is voluntarily entering into this Agreement and that the terms and conditions of this Agreement are fair and reasonable to Stockholder in all respects. 2. CONFIDENTIALITY. Stockholder hereby expressly affirms that any confidentiality agreement previously entered into between Company and Stockholder in effect as of the date hereof (the "Confidentiality Agreement") is and shall remain in full force and effect and Stockholder specifically agrees that the rights and privileges of Company under the Confidentiality Agreement shall inure to the benefit of Parent and Merger Sub, to the same extent as if they were original parties thereto, as well as to Company. Further, Stockholder hereby expressly agrees that Company's rights under this Agreement are in addition to, but not in substitution of, its rights under the Confidentiality Agreement and the Confidentiality Agreement remains in full force and effect. 2 3. NONCOMPETITION. Until the later of (a) five (5) years after completion of the Merger or (b) three (3) years after termination of Stockholder's employment with Parent, Stockholder shall not, directly or indirectly, without the prior written consent of Parent, (i) own, manage, operate, join, control, finance or participate in the ownership, management, operation, control or financing of, or be connected as an officer, director, employee, partner, principal, agent, representative, consultant, licensor, licensee or otherwise with, any business or enterprise engaged in any business which is competitive with the business of Company, within each of the geographical units which are listed in Appendix A hereto (the "Territory"), or (ii) engage in any other manner, within the Territory, in any business which is competitive with the business of Company. For the purposes of this Section 3, the "business of Company" shall be defined as set forth in Appendix B hereto (which also includes a list of companies deemed by the parties to be in competition with the business of Company and therefore covered by the terms of this Noncompetition Agreement). Notwithstanding the above, Stockholder shall not be deemed to be engaged directly or indirectly in any business in contravention of subparagraphs (i) or (ii) above, if (x) Stockholder participates in any such business solely as a passive investor in up to 1% of the equity securities of a company or partnership, the securities of which are publicly traded, or (y) Stockholder is employed by a business or enterprise that is engaged primarily in a business other than the business of Company and Stockholder does not apply his expertise at such business or enterprise to that part of such business or enterprise that is or could be competitive with the business of Company. 4. NON-INTERFERENCE. Stockholder further agrees that until the later of (a) five (5) years following completion of the Merger or (b) three (3) years following termination of Stockholder's employment with Parent, he will not, without the prior written consent of Parent, (i) interfere with the business of Company, Parent or Merger Sub, by soliciting, attempting to solicit, inducing, or otherwise causing any employee or consultant of Company, Parent or Merger Sub to terminate his or her employment as such in order to become an employee, consultant or independent contractor to or for any competitor of Company, Parent or Merger Sub or to or for any company with which Stockholder is associated in any way; or (ii) induce or attempt to induce any customers, suppliers, distributors, resellers, or independent contractor of Company to terminate their relationships with, or to take any action that would be disadvantageous to the business of, Company. 5. NONCOMPETITION PAYMENT. In consideration of Stockholder's obligations described herein, concurrent with the Effective Time (as defined in the Reorganization Agreement) of the Merger, the Company shall pay to Stockholder the amount of $1,150,000. 3 6. INDEPENDENCE OF OBLIGATIONS. The covenants of Stockholder set forth in this Agreement shall be construed as independent of any other agreement or arrangement between Stockholder, on the one hand, and Merger Sub, Company or Parent or any of their subsidiaries, on the other, and the existence of any claim or cause of action by Stockholder against Merger Sub, Company or Parent or any of their subsidiaries shall not constitute a defense to the enforcement of such covenants against Stockholder. 7. EQUITABLE RELIEF. Stockholder expressly acknowledges that damages alone will not be an adequate remedy for any breach by Stockholder of the covenants set forth in Sections 2, 3, and 4 hereof and that the other parties hereto, in addition to any other remedies which they may have, shall be entitled, as a matter of right, to injunctive relief, including specific performance, in any court of competent jurisdiction with respect to any actual or threatened breach by Stockholder of any of said covenants. 8. SEVERABILITY, ETC. (a) If any provision of this Agreement shall be held by a court of competent jurisdiction to be excessively broad as to duration, activity or subject, it shall be deemed to extend only over the maximum duration, activity and/or subject as to which such provision shall be valid and enforceable under applicable law. If any provisions shall, for any reason, be held by a court of competent jurisdiction to be invalid, illegal or unenforceable, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement, but this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. (b) The parties intend that the covenant contained in Section 3 above shall be construed as a series of separate covenants, one for each geographical unit specified. Except for geographical coverage, each such separate covenant shall be deemed identical in terms to the covenant contained in Section 3 above. If, in any judicial proceeding, a court shall refuse to enforce any of the separate covenants deemed included in this Agreement, then the unenforceable covenant shall be deemed eliminated from these provisions for the purpose of those proceedings to the extent necessary to permit the remaining separate covenants to be enforced. 9. NOTICES. All notices or other communications hereunder shall be in writing and deemed given if and when delivered to a party in person, or if and when mailed by registered or certified mail, return receipt requested, to the parties at the addresses set forth below or such other addresses as shall be specified by notice to the other party hereunder: 4 To Parent or Merger Sub at: DataWorks Corporation 5910 Pacific Center Boulevard San Diego, CA 92121 Attn: President To Stockholder at: 3230 Rutledge Drive Las Vegas, NV 89120 10. WAIVER OF BREACH. The failure or delay by Parent or Merger Sub in enforcing any provision of this Agreement shall not operate as a waiver thereof, and the waiver by Parent or Merger Sub or a breach of any provision of this Agreement by Stockholder shall not operate or be construed as a waiver of any subsequent breach or violation thereof. All waivers shall be in writing and signed by the party to be bound. 11. ASSIGNMENT. This Agreement shall be assignable by Parent or Merger Sub only to any person, firm or corporation which may become a successor in interest by purchase, merger or otherwise to Parent, Merger Sub or Company or the business operated by Parent, Merger Sub or Company. This Agreement is not assignable by Stockholder. 12. ENTIRE AGREEMENT; AMENDMENT. This Agreement and the Confidentiality Agreement represent the entire agreement and understanding of the parties with respect to the subject matter hereof and supersede all prior agreements and understandings of the parties in connection therewith (other than the Confidentiality Agreement). They may not be altered or amended except by an agreement in writing signed by the parties to be bound. 13. BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of Parent and its permitted successors and assigns and Stockholder and Stockholder's heirs and legal representatives. 14. GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of California as applied to contracts entered into between California residents and to be performed entirely within California. IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first above written. 5 STOCKHOLDER /s/ Robert C. Vernon --------------------------------------- DATAWORKS CORPORATION By: /s/ Norman R. Farquhar ----------------------------------- DATAWORKS ACQUISITION SUB, INC. By: /s/ Norman R. Farquhar ----------------------------------- 6 APPENDIX A TERRITORY (1) All counties of California, (2) all other states and territories of the United States of America and provinces and territories of Canada, and (3) any other foreign country or territory in which the business of Company is carried on, or in which Company intends to carry on business. 6. 7 APPENDIX B BUSINESS Enterprise Resource Planning (ERP)-related software applications for the manufacturing and industrial product marketplaces. 7. EX-10.23 9 EXHIBIT 10.23 1 EXHIBIT 10.23 NONCOMPETITION AGREEMENT This NONCOMPETITION AGREEMENT (the "Agreement") is made as of September 29, 1997, by and among DataWorks Corporation, a California corporation ("Parent"), DataWorks Acquisition Sub, Inc., a Delaware corporation ("Merger Sub"), and Mark Hellinger ("Stockholder"). RECITALS Stockholder is a stockholder of Interactive Group, Inc., a Delaware corporation ("Company"). Parent, Merger Sub and Company have entered into an Agreement and Plan of Merger and Reorganization dated as of July 31, 1997 (the "Reorganization Agreement"), providing for the acquisition (the "Acquisition") by Parent of Company pursuant to a merger of Merger Sub and Company (the "Merger"). Stockholder plans to vote in favor of the Merger and receive all the benefits of the Merger; and in connection therewith and in exchange for the additional consideration provided herein, Stockholder has agreed pursuant to and to the extent permitted by Section 16601 of the Business and Professions Code of the State of California not to compete with Company in the manner and to the extent herein set forth. Stockholder is entering into this Agreement as an inducement to Parent and Merger Sub to consummate the Merger, with all of the attendant financial benefits to Stockholder as a stockholder of Company. AGREEMENT NOW, THEREFORE, in consideration of the mutual covenants herein contemplated and intending to be legally bound hereby, Merger Sub, Parent and Stockholder agree as follows: 1. ACKNOWLEDGMENTS BY STOCKHOLDER. Stockholder acknowledges that by virtue of his position with Company he has developed considerable expertise in the business operations of Company and has had access to extensive confidential information with respect to Company. Stockholder recognizes that Merger Sub and Parent would be irreparably damaged, and their substantial investment in Company materially impaired, if Stockholder were to enter into an activity competing with Company's business in violation of the terms of this Agreement or if Stockholder were to disclose or make unauthorized use of any confidential information concerning the business of Company. Accordingly, Stockholder expressly acknowledges that he is voluntarily entering into this Agreement and that the terms and conditions of this Agreement are fair and reasonable to Stockholder in all respects. 2. CONFIDENTIALITY. Stockholder hereby expressly affirms that any confidentiality agreement previously entered into between Company and Stockholder in effect as of the date hereof (the "Confidentiality Agreement") is and shall remain in full force and effect and Stockholder specifically agrees that the rights and privileges of Company under the Confidentiality Agreement shall inure to the benefit of Parent and Merger Sub, to the same extent as if they were original parties thereto, as well as to Company. Further, Stockholder hereby expressly agrees that Company's rights under this Agreement are in addition to, but not in substitution of, its rights under the Confidentiality Agreement and the Confidentiality Agreement remains in full force and effect. 2 3. NONCOMPETITION. Until the later of (a) three (3) years after completion of the Merger or (b) two (2) years after termination of Stockholder's employment with Parent, Stockholder shall not, directly or indirectly, without the prior written consent of Parent, (i) own, manage, operate, join, control, finance or participate in the ownership, management, operation, control or financing of, or be connected as an officer, director, employee, partner, principal, agent, representative, consultant, licensor, licensee or otherwise with, any business or enterprise engaged in any business which is competitive with the business of Company, within each of the geographical units which are listed in Appendix A hereto (the "Territory"), or (ii) engage in any other manner, within the Territory, in any business which is competitive with the business of Company. For the purposes of this Section 3, the "business of Company" shall be defined as set forth in Appendix B hereto (which also includes a list of companies deemed by the parties to be in competition with the business of Company and therefore covered by the terms of this Noncompetition Agreement). Notwithstanding the above, Stockholder shall not be deemed to be engaged directly or indirectly in any business in contravention of subparagraphs (i) or (ii) above, if (x) Stockholder participates in any such business solely as a passive investor in up to 1% of the equity securities of a company or partnership, the securities of which are publicly traded, or (y) Stockholder is employed by a business or enterprise that is engaged primarily in a business other than the business of Company and Stockholder does not apply his expertise at such business or enterprise to that part of such business or enterprise that is or could be competitive with the business of Company. 4. NON-INTERFERENCE. Stockholder further agrees that until the later of (a) three (3) years following completion of the Merger or (b) two (2) years following termination of Stockholder's employment with Parent, he will not, without the prior written consent of Parent, (i) interfere with the business of Company, Parent or Merger Sub, by soliciting, attempting to solicit, inducing, or otherwise causing any employee or consultant of Company, Parent or Merger Sub to terminate his or her employment as such in order to become an employee, consultant or independent contractor to or for any competitor of Company, Parent or Merger Sub or to or for any company with which Stockholder is associated in any way; or (ii) induce or attempt to induce any customers, suppliers, distributors, resellers, or independent contractor of Company to terminate their relationships with, or to take any action that would be disadvantageous to the business of, Company. 5. NONCOMPETITION PAYMENT. In consideration of Stockholder's obligations described herein, concurrent with the Effective Time (as defined in the Reorganization Agreement) of the Merger, the Company shall pay to Stockholder the amount of $525,000. 3 6. INDEPENDENCE OF OBLIGATIONS. The covenants of Stockholder set forth in this Agreement shall be construed as independent of any other agreement or arrangement between Stockholder, on the one hand, and Merger Sub, Company or Parent or any of their subsidiaries, on the other, and the existence of any claim or cause of action by Stockholder against Merger Sub, Company or Parent or any of their subsidiaries shall not constitute a defense to the enforcement of such covenants against Stockholder. 7. EQUITABLE RELIEF. Stockholder expressly acknowledges that damages alone will not be an adequate remedy for any breach by Stockholder of the covenants set forth in Sections 2, 3, and 4 hereof and that the other parties hereto, in addition to any other remedies which they may have, shall be entitled, as a matter of right, to injunctive relief, including specific performance, in any court of competent jurisdiction with respect to any actual or threatened breach by Stockholder of any of said covenants. 8. SEVERABILITY, ETC. (a) If any provision of this Agreement shall be held by a court of competent jurisdiction to be excessively broad as to duration, activity or subject, it shall be deemed to extend only over the maximum duration, activity and/or subject as to which such provision shall be valid and enforceable under applicable law. If any provisions shall, for any reason, be held by a court of competent jurisdiction to be invalid, illegal or unenforceable, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement, but this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. (b) The parties intend that the covenant contained in Section 3 above shall be construed as a series of separate covenants, one for each geographical unit specified. Except for geographical coverage, each such separate covenant shall be deemed identical in terms to the covenant contained in Section 3 above. If, in any judicial proceeding, a court shall refuse to enforce any of the separate covenants deemed included in this Agreement, then the unenforceable covenant shall be deemed eliminated from these provisions for the purpose of those proceedings to the extent necessary to permit the remaining separate covenants to be enforced. 9. NOTICES. All notices or other communications hereunder shall be in writing and deemed given if and when delivered to a party in person, or if and when mailed by registered or certified mail, return receipt requested, to the parties at the addresses set forth below or such other addresses as shall be specified by notice to the other party hereunder: 4 To Parent or Merger Sub at: DataWorks Corporation 5910 Pacific Center Boulevard San Diego, CA 92121 Attn: President To Stockholder at: 1211 Santa Luisa Drive Solana Beach, CA 92075 10. WAIVER OF BREACH. The failure or delay by Parent or Merger Sub in enforcing any provision of this Agreement shall not operate as a waiver thereof, and the waiver by Parent or Merger Sub or a breach of any provision of this Agreement by Stockholder shall not operate or be construed as a waiver of any subsequent breach or violation thereof. All waivers shall be in writing and signed by the party to be bound. 11. ASSIGNMENT. This Agreement shall be assignable by Parent or Merger Sub only to any person, firm or corporation which may become a successor in interest by purchase, merger or otherwise to Parent, Merger Sub or Company or the business operated by Parent, Merger Sub or Company. This Agreement is not assignable by Stockholder. 12. ENTIRE AGREEMENT; AMENDMENT. This Agreement and the Confidentiality Agreement represent the entire agreement and understanding of the parties with respect to the subject matter hereof and supersede all prior agreements and understandings of the parties in connection therewith (other than the Confidentiality Agreement). They may not be altered or amended except by an agreement in writing signed by the parties to be bound. 13. BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of Parent and its permitted successors and assigns and Stockholder and Stockholder's heirs and legal representatives. 14. GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of California as applied to contracts entered into between California residents and to be performed entirely within California. 5 IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first above written. STOCKHOLDER /s/ Mark Hellinger --------------------------------------- DATAWORKS CORPORATION By: /s/ Norman R. Farquhar ----------------------------------- DATAWORKS ACQUISITION SUB, INC. By: /s/ Norman R. Farquhar ----------------------------------- 6 APPENDIX A TERRITORY (1) All counties of California, (2) all other states and territories of the United States of America and provinces and territories of Canada, and (3) any other foreign country or territory in which the business of Company is carried on, or in which Company intends to carry on business. 6. 7 APPENDIX B BUSINESS Enterprise Resource Planning (ERP)-related software applications for the manufacturing and industrial product marketplaces. 7. EX-10.24 10 EXHIBIT 10.24 1 EXHIBIT 10.24 EXECUTIVE EMPLOYMENT AGREEMENT This Executive Employment Agreement (the "Agreement") is entered into by and between DataWorks Corporation (the "Company"), a California corporation, and Stuart W. Clifton ("Executive"), effective as of December 19, 1997 ("Effective Date"). WHEREAS, the Company desires to continue to employ Executive and to assure itself of the continued services of Executive, and Executive desires to be employed by the Company, under the terms and conditions herein, and WHEREAS, the Company and Executive desire to amend and restate the terms of Executive's existing Employment Agreement dated May 27, 1994 (the "Prior Agreement"). NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. EMPLOYMENT BY THE COMPANY. The Company hereby employs Executive to render full-time services to the Company as its Chief Executive Officer and President. Executive shall have responsibilities, duties and authorities that are customarily associated with the position of Chief Executive Officer and President, and such other duties as mutually agreed upon by Executive and the Company. 2. TERM OF EMPLOYMENT. The term of Executive's employment under this Agreement shall commence as of the Effective Date and shall end upon termination of this Agreement by either party in accordance with Section 4 (the "Term"). 3. COMPENSATION. 3.1 SALARY. The Company agrees to pay Executive compensation (including base salary, bonuses and equity compensation, if any) as determined by the Company's Board of Directors (the "Board") from time to time. As of January 1, 1998, Executive's annualized base salary ("Base Salary") shall be $325,000. In addition, Executive shall be entitled to an annual bonus based upon achievement of defined goals determined by the Board in good faith and set forth in the Company's annual bonus plan for senior executives. Executive's bonus target for 1998 shall be 100% of Base Salary subject to all other provisions of such bonus plan as so determined by the Board. 3.2 STOCK OPTIONS. Executive acknowledges that on December 19, 1997 (the "Grant Date") Executive was granted a stock option (the "Option") under the Company's 1995 Equity Incentive Plan (the "Plan") in accordance with the following terms and evidenced by the Company's standard form of stock option agreement: (i) the Option shall be exercisable for 120,000 shares of the Company's Common Stock; (ii) the Option shall have a term of ten (10) years, measured from the date of grant, and shall have an exercise price equal to the "fair market value" per share of the Company's Common Stock on December 18, 1997, the day prior to the date of grant, as such term is defined in Section 2(l) of the Plan; (iii) subject to Section 4.4(b) below, the Option shares shall vest over a four (4)-year period measured from the date of grant; 1. 2 and (iv) the Option shall be an incentive stock option, as such term is defined in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), to the extent permitted by the Code. 3.3 BENEFITS. Executive shall be eligible to participate in any incentive plan, stock award plan, bonus, participation or extra compensation plan, pension, group health, disability and life insurance plan or other benefit programs which the Company provides for its executives generally. 4. TERMINATION OF EMPLOYMENT. Subject to the following provisions of this Section 4, the Company and Executive shall have the right to terminate Executive's employment at any time for any reason whatsoever, with or without Cause (as defined below). The provisions of this Section 4 shall survive any termination of Executive's employment. 4.1 COMPANY-INITIATED TERMINATION WITHOUT CAUSE. (a) Subject to Section 4.4 below, in the event the Company terminates Executive's employment without Cause and subject to (i) the execution by Executive of the release attached hereto as Exhibit A and (ii) the expiration of the seven (7) day revocation period provided for in such release during which such release shall not have been revoked (collectively, the "Release Condition"), (A) Executive shall receive as severance an aggregate cash payment (the "Severance Amount") equal to the following: (x) 200% of Executive's then current Base Salary plus (y) 200% of the annual bonus most recently paid to Executive pursuant to the Company's bonus plan for senior executives, payable in equal monthly installments over the 12-month period following the date of termination; and (B) the Company shall pay, pursuant to COBRA, all costs associated with the continuation of coverage under the Company's group health plan(s) for the 12-month period following termination. Such continuing coverage shall provide for the same terms under which Executive, Executive's spouse, and Executive's dependents were covered immediately prior to termination. Executive's compensation and benefits shall otherwise cease as of such termination date. (b) For purposes of this Agreement, "Cause" shall mean (a) willful breach or habitual neglect of Executive's duties hereunder and failure to remedy such breach or neglect within 30 days after written notice to Executive thereof, or (b) misconduct, including, but not limited to: (i) conviction of any felony or of any crime involving moral turpitude or dishonesty; (ii) participation in any fraud against the Company; (iii) Executive's repeated insubordination or refusal to comply with the reasonable request of the Board relating to the scope or performance of Executive's duties; or (iv) conduct by Executive which in the good faith and reasonable determination of the Board demonstrates Executive's gross unfitness to serve. 4.2 COMPANY-INITIATED TERMINATION FOR CAUSE. In the event Executive's employment is terminated by the Company or its successor at any time for Cause, Executive's compensation and benefits will in its entirety cease immediately, and Executive shall not be entitled to any severance benefits. 4.3 EXECUTIVE-INITIATED VOLUNTARY TERMINATION. Executive may voluntarily terminate his employment with the Company or its successor at any time by giving the Board 2. 3 thirty 30 days' written notice. In the event Executive voluntarily terminates his employment with the Company or its successor, except as otherwise provided in Section 4.4 below, all of Executive's compensation and benefits will immediately and in their entirety cease as of the termination date. Executive acknowledges that he will not receive any severance pay or benefits upon such voluntary termination except as otherwise provided in Section 4.4. 4.4 TERMINATION FOLLOWING CHANGE IN CONTROL. (a) In the event that, at the time of or within twelve (12) months following the occurrence of a Change in Control (as defined below), (i) the Company or its successor terminates Executive's employment without Cause or (ii) Executive voluntarily terminates his employment for any reason or for no reason, then, in either case, in lieu of the provisions of Sections 4.1 and 4.3, the Company or its successor shall pay to Executive, in a single lump sum no later than thirty (30) days following such termination and subject to the Release Condition, the Severance Amount and shall in addition provide the other benefits provided for in Section 4.1(a) of this Agreement. Notwithstanding any other provision of this Agreement, in no event shall Executive receive total cash payments under this Article 4 exceeding the Severance Amount provided for in Section 4.1(a). (b) In addition to any payments pursuant to Section 4.4(a) above, in the event that, at the time of or within twelve (12) months following the occurrence of a Change in Control which occurs more than one (1) year after the Effective Date, (i) the Company or its successor terminates Executive's employment without Cause or (ii) Executive voluntarily terminates his employment for any reason or for no reason, then, in either case, the vesting and exercisability of any and all options then owned by Executive to purchase shares of the Company's Common Stock shall immediately accelerate in full and become fully vested and exercisable otherwise in accordance with their terms. (c) Except as set forth in this Section 4, Executive's compensation and benefits shall cease as of the date of any termination of Executive's employment with the Company. (d) "Change in Control" means: (1) any merger, consolidation, recapitalization or similar transaction in which the holders of the Company's outstanding voting securities immediately prior to such transaction do not hold directly or indirectly at least 50% of the outstanding voting securities of the surviving entity; or (2) any sale of all or substantially all of the Company's assets. 4.5 LOANS. In the event the Company or its successor terminates Executive's employment without Cause, any Loans (as defined in the Prior Agreement) outstanding, up to an aggregate principal amount not to exceed $198,000 and all accrued interest thereon, shall automatically be forgiven by the Company. In the event Executive's employment is terminated at any time for Cause, all Loans currently outstanding and all accrued interest thereon shall automatically become due and payable in full. 3. 4 4.6 CERTAIN REDUCTIONS IN PAYMENTS. (a) In the event that any payment received or to be received by Executive pursuant to this Agreement ("Payment") would (i) constitute a "parachute payment" within the meaning of Section 280G of the Code and (ii) but for this subsection (a), be subject to the excise tax imposed by Section 4999 of the Code (the "Excise Tax"), then, subject to the provisions of subsection (b) hereof, such Payment shall be reduced, if at all, to the largest amount which Executive, in his discretion, determines would result in maximizing Executive's net proceeds with respect to such Payment (after taking into account the payment of any Excise Tax imposed on such Payment). The determination by Executive of any required reduction pursuant to this subsection (a) shall be conclusive and binding upon the Company. The Company shall reduce a Payment in accordance with this subsection (a) only upon written notice by Executive indicating the amount of such reduction, if any. If the Internal Revenue Service (the "IRS") determines that a Payment is subject to the Excise Tax, then subsection (b) hereof shall apply, and the enforcement of subsection (b) shall be the exclusive remedy to the Company for a failure by Executive to reduce the Payment so that no portion thereof is subject to the Excise Tax. (b) If, notwithstanding any reduction described in subsection (a) hereof (or in the absence of any such reduction), the IRS determines that Executive is liable for the Excise Tax as a result of the receipt of one or more Payments, then Executive shall be obligated to pay back to the Company, within thirty (30) days after final IRS determination, an amount of such Payment(s) equal to the "Repayment Amount." The Repayment Amount with respect to such Payment(s) shall be the smallest such amount, if any, as shall be required to be paid to the Company so that Executive's net proceeds with respect to such Payment(s) (after taking into account the payment of the Excise Tax imposed on such Payment(s)) shall be maximized. Notwithstanding the foregoing, the Repayment Amount with respect to such Payments shall be zero if a Repayment Amount of more than zero would not eliminate the Excise Tax imposed on such Payment(s). If the Excise Tax is not eliminated pursuant to this subsection (b), Executive shall pay the Excise Tax. 5. NOTICES. Any notice which the Company is required or may desire to give to Executive shall be given by personal delivery, facsimile or registered or certified mail, return receipt requested, addressed to Executive at the address of record with the Company, or at such other place as Executive may from time to time designate in writing. Any notice which Executive is required or may desire to give to the Company hereunder shall be given by personal delivery, facsimile or by registered or certified mail, return receipt requested, addressed to the Company at its principal office, or at such other office as the Company may from time to time designate in writing. The date of personal delivery, facsimile or mailing any such notice shall be deemed to be the date of delivery thereof. 6. ARBITRATION. If a dispute arises between the Company and Executive relating to the interpretation or performance of this Agreement, the parties agree to hold a meeting, attended by individuals with decision-making authority, regarding the dispute to attempt in good faith to negotiate a resolution of the dispute prior to pursuing other available remedies. If no such agreement can be reached within 90 days after such meeting (or, if no such meeting is held, within 30 days of the request of either party) any unresolved dispute shall be resolved by binding 4. 5 arbitration requested by either party hereto unless the dispute involves the amount of damage, loss or liability at issue in pending litigation with a third party, in which event arbitration shall not be commenced until such amount is ascertained or the parties agree to arbitration. Such arbitration shall be conducted by three arbitrators in San Diego, California, in accordance with the Commercial Arbitration Rules of the American Arbitration Association, as modified herein ("AAA"). The arbitrators shall be selected by mutual agreement of the parties or, failing such agreement, in accordance with the aforesaid AAA rules. The parties shall bear the costs of the arbitrators equally. Subject to the reasonable discretion of the arbitrators and upon good cause shown, the parties shall have the right of limited prehearing discovery, including (i) exchange of witness lists, (ii) exchange of documentary evidence and reasonably related documents, (iii) written interrogatories, and (iv) depositions under oath of any witnesses who are to be called to testify at the arbitration hearing. As soon as the discovery is concluded, the arbitrators shall hold a hearing in accordance with the aforesaid AAA rules. Thereafter the arbitrators shall promptly render a written award, together with a written opinion setting forth in reasonable detail the grounds for such award. The award shall also provide that the prevailing party shall recover its reasonable attorneys' fees and other costs incurred in the proceedings, in addition to any other relief which may be granted. Judgment may be entered in any court of competent jurisdiction to enforce the arbitral award. The duty of the parties to arbitrate any dispute hereunder shall survive expiration or termination of this Agreement for any reason. The decision of the arbitrators so appointed shall be binding and conclusive upon the parties to this Agreement. Nothing in this Section 6 shall limit the right of any party to seek or obtain appropriate injunctive or other equitable relief from any court of competent jurisdiction pending the outcome of any arbitration hereunder. 7. CONFIDENTIAL AND PROPRIETARY INFORMATION. 7.1 DEFINITION OF CONFIDENTIAL AND PROPRIETARY INFORMATION. Executive hereby acknowledges that, during the Term, Executive shall or may make use of, acquire, create, develop or add to certain confidential and/or proprietary information regarding the Company's business (whether in existence prior to, as of or after the Effective Date, collectively "Proprietary Information"), which Proprietary Information shall include, without limitation, all of the following materials and information (whether or not reduced to writing and whether or not patentable or protected by copyright): inventions, processes, formulae, programs, technical data, know-how, procedures, manuals, confidential reports and communications, marketing methods, product sales or cost information, new product ideas or improvements, new packaging ideas or improvements, research and development programs, identities or lists of suppliers, vendors, or other customers, financial information of the Company of any nature whatsoever, or any other confidential or proprietary information relating to the Company's business. The parties hereto agree that the failure of any Proprietary Information to be marked or otherwise labeled as confidential or proprietary shall not affect its status as Proprietary Information. 7.2 USE. Executive shall not, directly or indirectly, disclose, divulge, reveal, report, publish, transfer or otherwise communicate, or use for his own benefit or the benefit of any other person, partnership, firm corporation or other entity, or use to the detriment of the Company, or misuse in any way, any Proprietary Information. Executive and the Company each hereby stipulates that, as between them, all Proprietary Information acquired or made, developed or conceived of in whole or part by Executive constitutes important, material and confidential 5. 6 and/or proprietary information of the Company, constitutes unique and valuable information and affects the successful conduct of the Company's business and its goodwill, and that the Company shall be entitled to recover its damages, as well as any appropriate injunctive relief, for any breach of this Section 7. 7.3 OWNERSHIP. (a) Executive hereby acknowledges and agrees that all right, title and interest in and to any Proprietary Information shall be and shall remain the exclusive property of the Company, and that any Proprietary Information which Executive acquires from the Company was received in confidence and as a fiduciary of the Company. Without limiting the foregoing, Executive hereby assigns to the Company any and all right, title and interest which Executive may have in all Proprietary Information (including, without limitation, all inventions, trade secrets, patents, copyrights and all other rights in connection therewith) made, developed or conceived of in whole or in part by Executive during the Term, subject to Section 2780 of the California Labor Code. Executive further agrees to execute and deliver any and all instruments, and to do all other things reasonably requested by the Company, both during and after the Term, in order to vest more fully in the Company all ownership rights in such Proprietary Information. All equipment, notebooks, documents, memoranda, reports, files, samples, books, correspondence, lists, other written and graphic records and the like in any way relating to any Proprietary Information or the Company's business or its activities, which Executive shall prepare, use, construct, observe, process or control (collectively, the "Materials") shall be and shall remain the Company's exclusive property, and Executive hereby agrees to deliver all Materials, together with any and all copies thereof, promptly to the Company upon the termination of this Agreement for any reason. (b) Without limiting any other provision set forth in this Agreement, if any Proprietary Information or Materials are protected by copyright and are deemed in any way to fall within the definition of "work made for hire," as such term is defined in 17 U.S.C. Section 101, or any successor provision thereof, such work shall be considered a "work made for hire," the copyright of which shall be owned solely, completely and exclusively by the Company. Without limiting any other provision of this Agreement, if any Proprietary Information or Materials are protected by copyright and are not considered to be included in the categories of works covered by the "work made for hire" definition contained in 17 U.S.C. Section 101, or any successor provision thereof, such items shall be deemed to be assigned and transferred completely and exclusively to the Company by virtue of Executive's execution of this Agreement. 8. GENERAL. 8.1 INDEMNIFICATION. The Company shall indemnify, defend and hold harmless Executive from and against all payments, costs and expenses whatsoever (including, without limitation, reasonable attorneys' fees) which Executive may incur in connection with Executive's guaranty of any obligations of the Company in favor of Greyhound Financial Corporation or Silicon Valley Bank (unless such payments, costs and expenses are the direct result of Executive's gross negligence or willful misconduct). 6. 7 8.2 ENTIRE AGREEMENT. This Agreement shall supersede the Prior Agreement and sets forth the complete, final and exclusive embodiment of the entire agreement between Executive and the Company and supersedes all prior agreements or understandings between the parties, with respect to the subject matter hereof. This Agreement is entered into without reliance upon any promise, warranty or representation, written or oral, other than those expressly contained herein, and it supersedes any other such promises, warranties, representations or agreements. This Agreement may not be amended or modified except in a written instrument signed by Executive and a duly authorized officer or director of the Company. 8.3 SEVERABILITY. If a court of competent jurisdiction determines that any term or provision of this Agreement is invalid or unenforceable, then the remaining terms and provisions shall be unimpaired. Such court shall have the authority to modify or replace the invalid or unenforceable term or provision with a valid and enforceable term or provision which most accurately represents the parties' intention with respect to the invalid or unenforceable term or provision. 8.4 SUCCESSORS AND ASSIGNS. This Agreement shall bind the heirs, personal representatives, successors, assigns, executors and administrators of each party, and inure to the benefit of each party, its heirs, successors and assigns. However, because of the unique and personal nature of Executive's duties under this Agreement, Executive may not delegate the performance of his duties under this Agreement. 8.5 APPLICABLE LAW. This Agreement shall be deemed to have been entered into and shall be construed and enforced in accordance with the laws of the State of California as applied to contracts made and to be performed entirely within California. 8.6 HEADINGS. The section headings contained herein are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. 8.7 COUNTERPARTS. This Agreement may be executed in two counterparts, each of which shall be deemed an original, all of which together shall constitute one and the same instrument. 7. 8 IN WITNESS WHEREOF, the parties have duly authorized and caused this Agreement to be executed as follows: STUART W. CLIFTON, DATAWORKS CORPORATION, AN INDIVIDUAL A CALIFORNIA CORPORATION /s/ Stuart W. Clifton By: /s/ Norman R. Farquhar - ------------------------------ ---------------------------------- Norman R. Farquhar Executive Vice President and Chief Financial Officer 8. 9 EXHIBIT A RELEASE AND WAIVER OF CLAIMS In exchange for payment to me of amounts pursuant to Section 4 of my Employment Agreement, I hereby furnish DataWorks Corporation (the "Company") with the following release and waiver: I hereby release, and forever discharge the Company, its officers, directors, agents, employees, stockholders, successors, assigns and affiliates, of and from any and all claims, liabilities, demands, causes of action, costs, expenses, attorneys' fees, damages, indemnities and obligations of every kind and nature, in law, equity, or otherwise, known and unknown, suspected and unsuspected, disclosed and undisclosed, arising at any time prior to and including the date eight days prior to the execution date of this Release with respect to any claims relating to my employment and the termination of my employment, including but not limited to, claims pursuant to any federal, state or local law relating to employment, including, but not limited to, discrimination claims, claims under the federal Age Discrimination in Employment Act of 1967, as amended ("ADEA"), or claims for wrongful termination, breach of the covenant of good faith, contract claims, tort claims, and wage or benefit claims, including but not limited to, claims for salary, bonuses, commissions, stock, stock options, vacation pay, fringe benefits, severance pay or any form of compensation. I also acknowledge that I have read and understand Section 1542 of the California Civil Code which reads as follows: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." I hereby expressly waive and relinquish all rights and benefits under that section and any law of California or any other jurisdiction of similar effect with respect to any claims I may have against the Company. I acknowledge that, among other rights, I am waiving and releasing any rights I may have under ADEA, that this waiver and release is knowing and voluntary, and that the consideration given for this waiver and release is in addition to anything of value to which I was already entitled as an employee of the Company. I further acknowledge that I have been advised, as required by the Older Workers Benefit Protection Act, that: (a) the waiver and release granted herein does not relate to claims which may arise after this agreement is executed; (b) I have the right to consult with an attorney prior to executing this agreement (although I may choose voluntarily not to do so); (c) I have twenty-one (21) days from the date I receive this agreement, in which to consider this agreement (although I may choose voluntarily to execute this agreement earlier); (d) I have seven (7) days following the execution of this agreement to revoke my consent to the agreement; and (e) this agreement shall not be effective until the seven (7) day revocation period has expired. Date: __________________ By: __________________________________ Stuart W. Clifton 9. EX-10.28 11 EXHIBIT 10.28 1 Exhibit 10.28 THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, EXCHANGED, HYPOTHECATED OR TRANSFERRED IN ANY MANNER EXCEPT IN COMPLIANCE WITH SECTION 11 OF THE REPRESENTATIVE'S WARRANT AGREEMENT (DEFINED BELOW) PURSUANT TO WHICH THEY ISSUED WARRANTS TO PURCHASE 104,702 SHARES OF COMMON STOCK VOID AFTER 5:00 P.M. CALIFORNIA TIME, ON MAY 23, 2000 DATAWORKS CORPORATION INCORPORATED UNDER THE LAWS OF THE STATE OF CALIFORNIA This certifies that, for value received, Cruttenden Roth Incorporated, the registered holder hereof, or assigns (the "Warrantholder"), is entitled to purchase from DATAWORKS CORPORATION (the "Company"), at any time during the period commencing at 12:00 p.m., California time, on September 29, 1997, and before 5:00 p.m., California time, on May 23, 2000, at the purchase price per share of $9.69 (the "Warrant Price"), the number of shares of Common Stock of the Company set forth above (the "Shares"). The number of Shares issuable upon exercise of each Warrant evidenced hereby shall be subject to adjustment from time to time as set forth in the Representative's Warrant Agreement referred to below. The Warrants evidenced hereby may be exercised in whole or in part by presentation of this Warrant Certificate with the Purchase Form attached hereto duly executed (with a signature guarantee as provided thereon) and simultaneous payment of the Warrant Price at the principal office of the Company. Payments of such price shall be made at the option of the Warrantholder in cash or by check or through the use of the Conversion Right (as defined in Section 3(c) of the Representative's Warrant Agreement). The Warrants evidenced hereby represent the right to purchase an aggregate of up to 104,702 Shares and are issued under and in accordance with a Representative's Warrant Agreement, dated as of May 31, 1995 (the "Representative's Warrant Agreement"), between Interactive Group, Inc. and Cruttenden Roth Incorporated, and are subject to the terms and provisions contained in the Representative's Warrant Agreement, to all of which the Warrantholder by acceptance hereof consents, and to which the Company is bound. Upon any partial exercise of the Warrants evidenced hereby, there shall be signed and issued to the Warrantholders a new Warrant Certificate in respect of the Shares of Common Stock as to which the Warrants evidenced hereby shall not have been exercised. These Warrants may be exchanged at the office of the Company by surrender of this Warrant Certificate properly endorsed for one or more new Warrants of the same aggregate number of Shares of Common Stock as are evidenced by the Warrant or Warrants exchanged. No fractional Share of Common Stock will be issued upon the exercise of rights to purchase hereunder, but the Company shall pay the cash value of any fraction upon the exercise of one or more Warrants. These Warrants are transferable at the office of the Company in the manner and subject to the limitations set forth in the Representative's Warrant Agreement. This Warrant Certificate does not entitled Warrantholder to any of the rights of a shareholder of the Company. DATAWORKS CORPORATION By: /s/ Stuart W. Clifton ------------------------------------------ Title: President and Chief Executive Officer ------------------------------------------ 2 DATAWORKS CORPORATION PURCHASE FORM DATAWORKS CORPORATION 5910 Pacific Center Boulevard San Diego, California 92121 The undersigned hereby irrevocably elects to exercise the right of purchase represented by the attached Warrant Certificate for, and to purchase thereunder, ________ shares of Common Stock (the "Shares") provided for therein, and requests that certificates for the Shares be issued in the name of: --------------------------------------------- (Please Print or Type Name, Address and Social Security Number) --------------------------------------------- --------------------------------------------- --------------------------------------------- and, if said number of shares shall not be all the Shares purchasable hereunder, that a new Warrant Certificate for the balance of the Shares purchasable under the attached Warrant Certificate be registered in the name of the undersigned Warrantholder or his Assignee as below indicated and delivered to the address stated below. Dated: ___________________ Name of Warrantholder or Assignee:___________________________________________ (Please Print) Address: ----------------------------------------- ----------------------------------------- Signature: ----------------------------------------- Note: The above signature must correspond with the name as written upon the face of the Warrant Certificate in every particular, without alteration or enlargement or any change whatsoever, unless the Warrants have been assigned. Signature Guaranteed:__________________________________ (Signature must be guaranteed by a bank or trust company having an office or correspondent in the United States or by a member firm of a registered securities exchange or the National Association of Securities Dealers, Inc.) 2. 3 ASSIGNMENT (To be signed only upon assignment of Warrants) FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto (Name and Address of Assignee Must be Printed or Typewritten) ----------------------------------------- ----------------------------------------- ----------------------------------------- the attached Warrants hereby irrevocably constituting and appointing ________________________ Attorney to transfer said Warrants on the books of the Company, with full power of substitution in the premises. Dated: _______________________ _______________________________________ Signature of Registered Holder Note: The signature on this assignment must correspond with the name as it appears upon the face of the Warrant Certificate in every particular, without alteration or enlargement or any change whatsoever. Signature Guaranteed:___________________________________ (Signatures must be guaranteed by a bank or trust company having an office or correspondent in the United States or by a member firm of a registered securities exchange or the National Association of Securities Dealers, Inc.) 3. EX-10.40 12 EXHIBIT 10.40 1 EXHIBIT 10.40 COMPENSATION FOR DATAWORKS CORPORATION EXECUTIVE GROUP UNDER THE 1996 EXECUTIVE COMPENSATION PLAN PER BOARD COMPENSATION COMMITTEE APPROVAL ON JANUARY 27, 1998
NAMED EXECUTIVE OFFICER 1998 BASE SALARY* 1997 BONUS 1998 TARGET BONUS** Stuart W. Clifton $325,000 $192,500 100% Robert C. Vernon $250,000 $36,400 50% Mark Hellinger $220,000 $31,900 50% Norman R. Farquhar $210,000 $80,000 50% Robert W. Brandel $200,000 $80,000 50%
* Effective January 1, 1998. ** As a percentage of base salary. 1. EX-21.1 13 EXHIBIT 21.1 1 EXHIBIT 21.1 SUBSIDIARIES OF DATAWORKS CORPORATION 1. Madic-Compufact Corporation, a Delaware corporation 2. DataWorks (Europe) Limited, a United Kingdom limited corporation 3. DCD Corporation, a Minnesota corporation 4. Interactive Group, Inc., a Delaware corporation 1. EX-23.1 14 EXHIBIT 23.1 1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-3 No. 333-35969) and the related Prospectus, in the Registration Statements (Form S-8 No. 33-99586 and Form S-8 No. 333-45561) pertaining to the 1995 Equity Incentive Plan, Stock Options Issued Outside the 1995 Equity Incentive Plan, 1995 Employee Stock Purchase Plan, and the 1995 Non-Employee Directors' Stock Option Plan, and in the Registration Statement (Form S-8 No. 333-33451) pertaining to the Options assumed by DataWorks Corporation originally granted under the Interactive Group, Inc. 1995 Stock Option Plan and 1997 Nonstatutory Stock Option Plan (the "Interactive Plans") and outside the Interactive Plans, of DataWorks Corporation of our report dated January 26, 1998, with respect to the consolidated financial statements of DataWorks Corporation included in the Annual Report (Form 10-K) for the year ended December 31, 1997. /s/ ERNST & YOUNG LLP ERNST & YOUNG LLP San Diego, California March 27, 1998 EX-23.2 15 EXHIBIT 23.2 1 [LOGO] EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 33-99586, 333-33451 and 333-45561) and in the Prospectus constituting part of the Registration Statement on Form S-3 (No. 333-35969) of DataWorks Corporation of our report dated April 5, 1996, relating to the financial statements of DCD Corporation, which appears on page F-3 of this Form 10-K. /s/ PRICE WATERHOUSE LLP - ---------------------------- Price Waterhouse LLP Minneapolis, Minnesota March 27, 1998 EX-27 16 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 17,418 30,503 55,977 2,360 0 111,269 18,707 10,523 131,136 44,613 1,493 0 0 81,458 2,608 131,136 86,095 146,963 17,860 60,678 85,872 0 312 2,042 2,846 (804) 0 0 0 (804) (0.06) (0.06) INCLUDES ONE-TIME CHARGES OF $15.6 MILLION IN CONNECTION WITH THE INTERACTIVE ACQUISITION.
EX-27.2 17 RESTATED FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS 3-MOS 3-MOS DEC-31-1997 DEC-31-1997 DEC-31-1997 JAN-01-1997 APR-01-1997 JUL-01-1997 MAR-31-1997 JUN-30-1997 SEP-30-1997 56,348 58,461 49,448 0 0 0 38,852 39,651 43,749 1,319 1,437 2,153 0 0 0 103,276 105,621 102,165 15,417 16,910 17,963 8,328 9,274 10,032 124,236 127,911 122,150 34,844 36,663 39,709 2,100 1,959 1,571 0 0 0 0 0 0 79,312 79,848 80,669 5,200 6,683 (2,535) 124,236 127,911 122,150 16,205 17,197 22,818 29,937 32,508 38,187 3,338 3,998 4,810 13,089 14,590 15,447 14,275 16,119 34,488 0 0 0 78 90 100 2,955 2,233 (11,302) 1,066 794 (2,112) 1,889 1,439 (9,190) 0 0 0 0 0 0 0 0 0 1,889 1,439 (9,190) 0.14 0.10 (0.66) 0.13 0.10 (0.66) INCLUDES ONE-TIME CHARGES OF $15.6 MILLION IN CONNECTION WITH THE INTERACTIVE ACQUISITION.
EX-27.3 18 RESTATED FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS 3-MOS 3-MOS YEAR DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996 JAN-01-1996 APR-01-1996 JUL-01-1996 JAN-01-1996 MAR-31-1996 JUN-30-1996 SEP-30-1996 DEC-31-1996 15,095 13,886 12,138 50,825 0 0 0 0 29,140 32,190 34,382 41,954 746 1,092 1,236 1,527 0 0 0 0 49,506 51,490 52,177 101,148 10,785 11,735 12,941 14,388 5,676 6,074 6,374 7,318 65,970 68,833 71,043 121,202 28,989 30,347 32,879 34,448 2,167 1,813 1,773 1,864 0 0 0 0 0 0 0 0 32,792 33,132 33,704 78,703 115 1,655 823 3,386 65,970 68,833 71,044 121,202 14,590 17,417 15,492 68,612 25,981 29,089 27,676 116,939 3,927 4,364 3,680 16,550 12,133 13,115 12,495 52,182 11,345 12,853 17,100 56,865 0 0 0 0 70 68 66 250 2,601 3,189 (1,897) 8,139 1,224 1,507 (887) 3,642 1,377 1,682 (1,010) 4,497 0 0 0 0 0 0 0 0 0 0 0 0 1,377 1,682 (1,010) 4,497 0.12 0.15 (0.09) 0.39 0.12 0.14 (0.09) 0.38 INCLUDES ONE-TIME CHARGES OF $3.7 MILLION IN CONNECTION WITH THE DCD ACQUISITION.
EX-27.4 19 RESTATED FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 17,472 0 26,848 1,112 0 48,047 9,519 4,992 62,916 27,642 2,105 0 0 32,471 (1,231) 62,916 46,485 76,004 14,081 32,658 38,928 0 1,176 3,168 932 2,236 0 (1,017) 0 1,219 0.17 0.16
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