-----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, TPH7BoHNZOueLZP8a/meqJBMvsHhVMFYykyQOxEL6zsYRpx0z+XesLJRqoLhEqPM Y9zLiw5tlCSU5f39BFvllw== 0000950135-98-002040.txt : 19980401 0000950135-98-002040.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950135-98-002040 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARDENT SOFTWARE INC CENTRAL INDEX KEY: 0000885474 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 042818132 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-13631 FILM NUMBER: 98580292 BUSINESS ADDRESS: STREET 1: 50 WASHINGTON ST CITY: WESTBOROUGH STATE: MA ZIP: 01581-1013 BUSINESS PHONE: 5083663888 MAIL ADDRESS: STREET 1: 50 WASHINGTON ST CITY: WESTBOROUGH STATE: MA ZIP: 01581-1013 FORMER COMPANY: FORMER CONFORMED NAME: VMARK SOFTWARE INC DATE OF NAME CHANGE: 19940112 10-K405 1 ARDENT SOFTWARE, INC. 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the Year Ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) Commission File Number: 0-20059 ARDENT SOFTWARE, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 04-2818132 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 50 WASHINGTON STREET WESTBORO, MASSACHUSETTS 01581-1021 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) TELEPHONE NUMBER: (508) 366-3888 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of Class Common Stock, $.01 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of February 14, 1998, there were outstanding 14,219,606 shares of the registrant's common stock, $.01 par value. As of that date, the aggregate market value of voting stock held by non-affiliates of the registrant was approximately $152,860,765. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive Proxy Statement for the Annual Meeting of Stockholders are incorporated by reference into Part III. 2 This Form 10-K, future filings of the registrant, press releases of the registrant, and oral statements made with the approval of an authorized executive officer of the Registrant may contain forward looking statements. In connection therewith, please see the cautionary statements and risk factors contained in Item 1, "Business -- Cautionary Statement" and "Business -- Risk Factors", which identify important factors which could cause actual results to differ materially from those in any such forward-looking statements. PART I ITEM 1. GENERAL Ardent Software, Inc. (formerly VMARK Software, Inc.) and its subsidiaries ("Ardent" or the "Company") is a data management software company. The Company designs, develops, markets, sells and supports software that enables businesses to maximize the information value of their data by giving them greater control over ever-changing application complexity. Ardent's products are used for developing, deploying, and maintaining business applications and data warehouse solutions. Principal products include UniVerse and UniData, both extended relational database management systems (RDBMS); DataStage, a software product that simplifies data mart and data warehouse development management and administration; and the O2 System, an object database management system (ODBMS) for building and deploying complex applications. Ardent products are available worldwide and are complemented by a variety of services including technical support, consulting, and education. BUSINESS STRATEGY Ardent was founded in the mid-1980's to develop and market extended relational database management systems, providing a means for thousands of business software applications, originally developed on certain proprietary systems, to be migrated with minimal re-coding to open systems running on the Unix platform. In February, 1998, the Company merged with Unidata, Inc., a relational database, object database, and software tools developer and marketer. The driving force for this merger was to leverage the combined strengths of two technology product leaders in the extended relational database marketplace, and to further the Company's entry into the data warehousing and object database technology sectors. Ardent is structured around three product-focused business units: Relational Technology and Tools; DataWarehouse; and Object Technology. The Company maintains 68 sales/distribution offices in 52 countries around the world. In addition to direct sales, Ardent has established more than 1,000 Value Added Resellers (VAR's) that market the various Ardent products as part of their vertical market business solutions. The Company's strategy is to provide cost-effective and comprehensive software and services for developing, deploying, and maintaining business applications and data warehouses. Ardent's focus is to support and expand its existing customer and reseller base while expanding its presence in the object database and data warehouse markets. Key features of Ardent strategy are: - - Improved Developer and User Productivity -- The Company promotes increased productivity of developers and users by offering products and services that make it easier to manage today's most complex business applications. - - Open Systems and Portability -- Ardent's products are designed to operate uniformly across a broad range of computer systems, including PCs, workstations, and servers, ensuring that customers do not bear unnecessary costs for application re-deployment or user retraining. - - Client/Server, 3-Tier and N-Tier Technologies -- Ardent's solutions are designed to take advantage of current and future trends in computing network architectures, preparing the company and its customers for distributed computing solutions. - - Worldwide Distribution -- Ardent sells its products and services worldwide to a broad range of customer segments through multiple channels, including more than 1,000 VAR's who provide packaged application 2 3 solutions for numerous vertical markets; Systems Integrators who utilize Ardent products and services when building solutions for their customers; a worldwide direct sales force; distributors in key markets throughout the world; and numerous strategic Original Equipment Manufacturer (OEM) agreements. - - International Presence -- Ardent maintains principal engineering and sales subsidiaries in three strategic regions, the United Kingdom, France, and Asia Pacific. Additionally, the Company has established subsidiary operations in emerging growth markets, including Spain, New Zealand, South America, Russia, Germany, and Canada. - - Recurring Revenue -- The Company's distribution and pricing strategies for its products are intended to generate recurring revenue. The sale of a development license generally leads to follow-on sales as applications are deployed and expanded. The Company also receives maintenance fees and charges for consulting assignments and training courses. - - Worldwide Customer Service -- Ardent offers installation assistance, telephone and on-line support, consulting services, and training both at worldwide Ardent locations and on-site at VAR and customer locations. PRODUCTS Ardent, following its merger with Unidata, possesses a broadened portfolio that puts the Company in a strong position to serve the current and ever-changing needs of its growing customer base. The Company's three business units collectively provide effective data management solutions that help customers simplify their complex data management issues. Relational Technology & Tools Products The traditional portion of Ardent's business is represented by its Relational Technology & Tools business unit. This collection of software technologies has long enabled customers to manage the most complex business data in applications customized to a broad range of vertical industries. Products sold through this business unit include: UniVerse and UniData extended relational database management systems (RDBMS) -- Each product is built on a powerful architecture that provides the inherent capabilities developers need to produce, enhance and deploy high performance business applications in open systems environments across UNIX and NT platforms. Complete with ancillary products and toolsets, UniVerse and UniData are some of the leading technologies for high volume transaction processing requirements involving complex data structures and relationships. RedBack -- A comprehensive solution for building and delivering scalable, transactional applications for the Internet and corporate intranets, RedBack lowers web technology barriers and makes it easier to integrate web-based systems with existing data and applications. wIntegrate -- A Graphical User Interface (GUI) development tool for bringing the power of a Windows interface to character-based applications. System Builder -- A powerful application development tool that allows developers to migrate applications to graphical user interfaces (GUI) and muti-tier deployment architectures, while preserving their original application investment. ESL -- An integrated toolset for building OS/2 and Windows GUI applications with mainframe data sources. ESL features an integrated development environment with a full set of visual tools, a debugger, compiler and a non-procedural, event-driven language. In addition to these products, the Relational Technology & Tools business unit offers a variety of middleware products, a COBOL migration solution, and a set of data analysis and reporting tools. 3 4 Data Warehouse Products The rapid accumulation of data in operational systems has created the need to manage the movement of data into a database optimized for business analysis, called a data warehouse or data mart depending upon its scope. Ardent's data warehouse products simplify the complexities of the entire data warehouse life cycle. DataStage -- DataStage is a comprehensive solution for the fast, easy creation and maintenance of data marts and data warehouses. DataStage is an integrated, simple-to-use system that provides the tools for the customer to build and manage these vital data stores. As a result, users have access to the data they need to make faster, smarter business decisions. DataStage addresses what has historically been the most difficult and time-consuming portion of a data mart or data warehouse implementation. Using a simple, point-and-click interface, the user can easily extract, cleanse, transform, and integrate data from operation systems, archives, and third-party data sources. The result is a cost-effective, usable data mart or warehouse which is up and running quickly and which can easily adapt to change. DataStage offers support for a wide variety of data sources, including popular databases such as Oracle, Microsoft SQL Server, UniVerse, Sybase, Informix, and others, as well as legacy databases, thus minimizing incompatibility issues. Object Technology Products In light of the growth of the Internet and the phenomena of the Java programming language, object database technology is fast becoming the solution of choice among leading-edge application developers seeking to model today's most complex business environments. A proven technology and the leading object database in use throughout Europe, the O2 System is one of the leading database products for complex application developments. O2 Object Database System -- An open, standard environment that enables object developers to build high performance database applications. O2 fits within existing computing environments, is database independent, and makes object development simpler because it is compatible with both the Java and C++ object data models. Surrounding the O2 System is a complete set of application development tools and language bindings tailored to the evolving needs of today's application developers. O2 also provides interfaces to other databases, the Web and CORBA. SERVICES In addition to its three product-focused business units, Ardent provides customers worldwide with a full spectrum of services. These services include Technical Support for customers purchasing maintenance contracts on Ardent's software products; Education Services for customers learning how to use and work with Ardent's products; and Consulting Services to assist customers with implementing solutions based on Ardent's technologies. SALES AND MARKETING Ardent sells its products and services throughout the world to a broad range of customer markets and through multiple channels, including the following: - - More than 1,000 VAR's which provide packaged application solutions for targeted vertical markets. - - Systems Integrators which utilize Ardent products and services when building solutions for their customers. - - Direct distributors and value-added OEM distributor agreements which sell Ardent products as an integral part of their commercial offerings. - - A worldwide, direct sales force. In the United States, the Company's sales and support staff are located at its Westboro, Massachusetts headquarters; Arlington, Texas; Bellevue, Washington; Bridgewater, New Jersey; Cary, North Carolina; Columbus, Ohio; Denver, Colorado; Irvine, California; Palo Alto, California; Princeton, New Jersey; Rosemont, Illinois; and Tampa, Florida. 4 5 Internationally, the Company has seven wholly owned international subsidiaries located in the United Kingdom, France, Spain, Canada, Germany, South Africa, and the Asia Pacific territory which includes Australia, Japan and Russia. The Company also has exclusive distributors in Argentina, Brazil, and Ecuador which, in turn, maintain a distributor sales channel. Revenue derived from outside the United States was approximately 38%, 40%, and 29% of total revenue in 1997, 1996, and 1995 respectively. The Company intends to continue making investments in international activities. Ardent implements a variety of marketing programs to assist in the sale of its products and services, including advertising and public relations campaigns, regional seminars, reseller and end-user group meetings, and cooperative programs. In addition, the Company participates in various computer industry and vertical market trade shows, and provides catalogs, visual aids, newsletters, and product sales literature, both in printed form and on the world wide web. CUSTOMERS Ardent's products are used by end-users in a broad range of industries. Over 2,000,000 users employed Ardent products. A sampling of its customers include: Aetna John Deere Anheuser-Busch Kaiser Permanente Bankers Trust Lucent Technologies Cabletron Motorola Chase Manhattan Corporation New York City Library Eurotunnel Sears, Roebuck & France Telecom Company Fujitsu Lab Sony Corporation GE Aerospace Stanford University Hyatt International Travelers Insurance Hewlett Packard U.S. Sprint IBM Wells Fargo Xerox PRODUCT DEVELOPMENT The Company believes that continuing enhancements of its products and the development of new products will be required in order to maintain its competitive position. In 1997, the Company began shipping commercially UniVerse version 9.4.1; UniData version 4.1; UniData 3.3/NT; RedBack version 2.0; wIntegrate version 3.0; System Builder 3.1; O2 version 5.0; DataStage version 2.2 and DataStage version 3.0/NT. Throughout the year, the Company invested in the further development of these existing products and established new technology sharing relationships to begin work on new products. The Company's development efforts are focused on enhancing the features of and adding new functionality to all of its products. In 1997, 1996, and 1995, the Company's expenses relating to product development were $7,180,000, $8,875,000, and $10,111,000 respectively. The Company has experienced little turnover in its product development personnel and believes that the experience, stability, and depth of its product development staff are important factors in the Company's success. COMPETITION The computer software and service industry is intensely and increasingly competitive. Because of the breadth of its overall product offering, Ardent competes with many companies offering alternative solutions. Many of these firms have greater financial, marketing and technical resources than Ardent. They may be able to adapt more quickly to new or emerging technologies and standards or changes in customer requirements, or they may be able to devote greater resources to the promotion and sale of their products than can Ardent. 5 6 The Company competes with other providers of database management products and services for resellers. The Company's resellers in turn compete with the vendors of other computer software and service providers. EMPLOYEES As of December 31, 1997, the Company had a total of 316 employees worldwide, consisting of 187 in sales, support and marketing, 72 in engineering, and 57 in finance and administration. The Company has experienced no work stoppages and believes its relations with its employees are good. PROPRIETARY RIGHTS AND LICENSES The Company depends upon a combination of copyrights and restrictions on access to its trade secrets to protect its proprietary rights. The Company distributes its products under software license agreements which grant customers a perpetual, non-exclusive license to the Company's products and contain terms and conditions prohibiting the unauthorized reproduction or transfer of the Company's products. Generally, the Company's products are furnished to customers only in object code form. In the limited cases where the Company makes its source codes available to third parties, it does so only under an obligation of confidentiality. In addition, the Company generally enters into confidentiality agreements with management and programming staff and limits access to and distribution of its proprietary information. While the Company has not registered any of its copyrights, it generally includes copyright notices in its software. Despite these precautions, it may be possible for unauthorized third parties to copy aspects of the Company's products or to obtain information that the Company regards as proprietary. The Company believes that, due to the rapid pace of innovation within the software industry, factors such as the technological and creative skills of its personnel and ongoing reliable product maintenance and support are more important in establishing and maintaining a leadership position within the industry than are the various legal protections of its technology. In addition, the Company believes its policy of not furnishing updates, enhancements and other continuing product support to unauthorized users of its software products substantially reduces the risk of unauthorized reproduction. All trademarks and registered trademarks used herein are the property of their respective owners. CAUTIONARY STATEMENT When used anywhere in the Form 10-K and in future filings by the Company with the Securities and Exchange Commission, in the Company's press releases and in oral statements made with the approval of an authorized executive officer of the Company, the words or phrases "will likely result", "are expected to", "will continue", "is anticipated", "estimated", "project", or "outlook" or similar expressions (including confirmations by an authorized executive officer of the Company or any such expressions made by a third party with respect to the Company) are intended to identify "forward-looking statements," which speak only as of the date made. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements. The Company wishes to advise readers that the various risk factors described below in this Form 10-K could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. The Company specifically declines any obligation to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. RISK FACTORS Information with respect to risk factors is located in Item 7, "Management's Discussion of Financial Condition and Results of Operations" under the caption "Factors Affecting Future Results". 6 7 ITEM 2. PROPERTIES The Company's principal administrative, marketing, product development, and support facilities are located in Westboro, Massachusetts, where the Company occupies approximately 90,000 square feet of office space under a lease that expires in 2014. The Company also leases office space for its twenty US and foreign sales and support offices and one foreign product development office. The terms of these leases generally range from one to five years. The Company believes the current space is adequate for its current needs and that additional space will be available as needed. ITEM 3. LEGAL PROCEEDINGS LITIGATION The Company is a defendant, together with certain of its officers, in two actions initially filed in October 1995 in the U.S. District Court for the District of Massachusetts. Those actions have been consolidated through the filing of a Consolidated Amended Complaint (the "Complaint"). The plaintiffs allege in the Complaint that the Company and certain of its officers, during July through October 1995, made certain untrue statements and failed to disclose certain information regarding the Company's prospective financial performance in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and that such statements and omissions artificially inflated the market prices of the Company's stock. The plaintiffs purport to bring the actions on behalf of certain classes of stockholders and seek damages in unspecified amounts. The Company has denied the allegations in its answer to the Complaint. The discovery stage of the proceeding is now substantially complete and the Company has filed a motion for summary judgement which is expected to be heard within the next several months. Company management believes that the actions are without merit and plans to continue to oppose them vigorously. The Company is a defendant in two actions filed against Unidata, prior to its merger with the Company, one in May, 1996 in the U.S. District Court for the Western District of Washington and one filed in September, 1996, in the U.S. District Court for the District of Colorado. The plaintiffs allege in both suits that Unidata authorized usage of certain Unidata products for distribution and assert claims for fraud, breach of contract, unfair competition, RICO violations, and trademark and copyright infringement. Unidata denied the allegations in its answers to the complaint and the proceedings for each case are currently in the arbitration stage. Company management believes that the actions are without merit and plans to continue to oppose them vigorously. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's stockholders during the fourth quarter of the year ended December 31, 1997. 7 8 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Common stock of Ardent Software, Inc. is traded on the NASDAQ Stock Market under the symbol "ARDT" (formerly "VMRK"). The table below presents the high and low prices for Ardent Software, Inc. common stock for the periods indicated. The prices reflect interdealer prices, without retail mark-ups, mark-downs or commissions, and may not necessarily represent actual transactions. 1997 HIGH LOW ---- ------- ------ First Quarter................................ $ 7.875 $ 5.75 Second Quarter............................... 8.625 5.875 Third Quarter................................ 10.875 7.75 Fourth Quarter............................... 11.75 6.625 1996 HIGH LOW ---- ------- ------ First Quarter................................ $ 9.875 $ 6.50 Second Quarter............................... 12.625 7.00 Third Quarter................................ 11.125 6.50 Fourth Quarter............................... 10.00 5.50 The Company has not paid cash dividends on its common stock and does not intend to do so in the foreseeable future. The Company presently intends to retain its earnings to finance future growth of its business. Cash dividends are subject to restriction under the Company's line of credit agreement. As of December 31, 1997, there were approximately 305 shareholders of record and approximately 4,000 beneficial owners of the Company's common stock. 8 9 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
1997 1996 1995 1994 1993 ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenue: Software.................................................. $31,494 $35,149 $37,365 $40,867 $39,486 Services and other........................................ 26,060 34,117 30,999 24,585 17,717 ------- ------- ------- ------- ------- Total revenue........................................... 57,554 69,266 68,364 65,452 57,203 ------- ------- ------- ------- ------- Costs and expenses: Cost of software.......................................... 3,961 4,745 5,040 4,989 4,335 Cost of services and other................................ 12,678 18,552 16,539 11,870 9,710 Selling and marketing..................................... 23,219 26,929 26,082 23,885 22,332 Product development....................................... 7,180 8,875 10,111 10,605 10,211 General and administrative................................ 5,237 7,351 7,908 6,801 7,345 Merger integration, exit and restructuring costs.......... -- 4,322 6,882 1,700 4,800 Litigation................................................ -- -- 499 650 -- Purchased research and development........................ -- -- -- 2,750 -- ------- ------- ------- ------- ------- Total costs and expenses................................ 52,275 70,774 73,061 63,250 58,733 ------- ------- ------- ------- ------- Income (loss) from operations............................... 5,279 (1,508) (4,697) 2,202 (1,530) ------- ------- ------- ------- ------- Other income (expense): Other income (net)........................................ 930 472 664 626 432 Interest expense.......................................... (1,025) (869) (990) (105) (20) Loss on investment in joint venture....................... -- (176) -- -- -- ------- ------- ------- ------- ------- Total other income (expense)............................ (95) (573) (326) 521 412 Income (loss) before provision for income taxes, extraordinary items and change in accounting.............. 5,184 (2,081) (5,023) 2,723 (1,118) Provision (credit) for income taxes......................... 1,800 560 (1,133) 2,944 1,080 ------- ------- ------- ------- ------- Income (loss) before extraordinary items and change in accounting................................................ 3,384 (2,641) (3,890) (221) (2,198) Extraordinary item -- loss from disposal of assets acquired in a pooling of interests, net of tax benefit............. -- (4,734) -- -- -- Change in accounting........................................ -- -- -- -- 650 ------- ------- ------- ------- ------- Net income (loss)........................................... $ 3,384 $(7,375) $(3,890) $ (221) $(1,548) ======= ======= ======= ======= ======= Basic net income (loss) per common share: Before extraordinary item or change in accounting......... $ 0.41 $ (0.33) $ (0.49) $ (0.03) $ (0.29) Net income (loss)......................................... $ 0.41 $ (0.91) $ (0.49) $ (0.03) $ (0.21) Diluted net income (loss) per common share: Before extraordinary item or change in accounting......... $ 0.40 $ (0.33) $ (0.49) $ (0.03) $ (0.29) Net income (loss)......................................... $ 0.40 $ (0.91) $ (0.49) $ (0.03) $ (0.21) Basic weighted average number of common shares outstanding............................................... 8,199 8,096 8,013 7,824 7,515 ======= ======= ======= ======= ======= Diluted weighted average number of common and common equivalent shares outstanding............................. 8,531 8,096 8,013 7,824 7,515 ======= ======= ======= ======= =======
1997 1996 1995 1994 1993 ------- ------- ------- ------- ------- CONSOLIDATED BALANCE SHEET DATA: Cash and equivalents........................................ $23,224 $14,733 $12,267 $16,017 $16,649 Working capital............................................. 21,492 14,282 17,566 22,668 19,233 Total assets................................................ 57,646 59,977 63,353 65,482 47,422 Long term debt, less current portion........................ 8,798 9,015 9,227 9,438 2 Stockholders' equity........................................ 33,531 28,831 37,167 39,338 33,701
9 10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table sets forth certain items from the Company's Consolidated Statement of Operations as a percentage of total revenue and the percentage change in dollar amounts of such items.
YEAR ENDED DECEMBER 31 PERIOD-TO-PERIOD CHANGE ----------------------- ------------------------------ 1997 1996 1995 1997 VS. 1996 1996 VS. 1995 ----- ----- ----- ------------- ------------- Revenue: Software.................................. 54.7% 50.7% 54.7% (10.4)% (5.9)% Services and other........................ 45.3 49.3 45.3 (23.6) 10.1 ----- ----- ----- ------ ------ Total revenue........................... 100.0 100.0 100.0 (16.9) 1.3 ----- ----- ----- ------ ------ Costs and expenses: Costs of software......................... 6.9% 6.9% 7.4% (16.5)% (5.9)% Costs of services and other............... 22.0 26.8 24.2 (31.7) 12.2 Selling and marketing..................... 40.3 38.9 38.2 (13.8) 3.2 Product development....................... 12.5 12.8 14.8 (19.1) (12.2) General and administrative................ 9.1 10.6 11.6 (28.8) (7.0) Merger integration, restructuring costs... -- 6.2 10.1 (100.0) (37.2) Litigation costs.......................... -- -- .7 * * ----- ----- ----- ------ ------ Total costs and expenses................ 90.8 102.2 107.0 (26.1) (3.1) ----- ----- ----- ------ ------ Income (loss) from operations............... 9.2% (2.2)% (7.0)% 450.1% 67.9% ===== ===== ===== ====== ======
* Not meaningful The Company's revenue is derived from the licensing of software and the delivery of related services. These services include consulting, training and product maintenance. The Company generally licenses its software for use on individual computers. Customers may elect to contract with the Company for product maintenance, which includes product and documentation enhancements, as well as telephone support for product problem resolution, by paying annual or quarterly fees or paying fees based upon usage of such maintenance services. 1997 COMPARED TO 1996 The Company's total revenue decreased 17% to $57,554,000 in 1997 from $69,266,000 in 1996. The overall decline in total revenue is primarily due to the Company having exited certain non-strategic and unprofitable businesses in the fourth quarter of 1996, including the Object Studio product line and related services. This decrease is also the result of the decline in the value of overseas revenue due to the strengthening of the US dollar in 1997 as approximately 38% of total revenue for 1997 and 40% of revenue for 1996 was contributed from foreign operations. Software license revenue decreased 10% to $31,494,000 in 1997 from $35,149,000 in 1996. This decrease is primarily due to the elimination of sales of the Object Studio product line, as noted above. This decline was partially offset by the impact of revenue associated with the Company's data warehouse product, DataStage, which was released in late January, 1997. Software revenue increased to approximately 55% of total revenue in fiscal year 1997 from 51% in 1996. Services and other revenue declined 24% to $26,060,000 in 1997 from $34,117,000 in 1996. This decrease is due to the elimination of Object Studio related consulting and maintenance services, which represented approximately 50% of consulting revenue and 12% of maintenance revenue in fiscal year 1996. The Company also disposed of its third-party education business in 1996 which had represented approximately 45% of the Company's training revenue. This decline was partially offset by the revenue associated with DataStage consulting projects, as well as the increase in maintenance revenue consistent with the growth of the Company's installed license base. Costs of software, which consist of amortization of technology licenses and capitalized software, product royalties, product documentation, packaging, media and production costs decreased 17% to $3,961,000 in 1997 from $4,745,000 in 1996. As a percentage of license revenue, costs of software remained consistent at 13% for 10 11 both 1997 and 1996. The dollar decrease in costs of software for 1997 compared to 1996 is a result of the write-off of certain intangible assets in connection with the restructuring and extraordinary charges recorded in December 1996, the decline in license revenue and the expiration of certain royalty contracts in late 1997. Costs of services and other, which consist of personnel-related costs, outside consulting fees, facilities and other costs associated with the delivery of consulting, training and maintenance revenues, decreased 32% to $12,678,000 in 1997 from $18,552,000 in 1996 due to the elimination of Object Studio related consulting and maintenance costs. As a percent of service and other revenue the costs of these services decreased to 49% in 1997 from 54% in 1996. The profit margin associated with services and other revenue increased approximately 5% in 1997 due to a change in the sales mix. A higher percentage of services and other revenue in 1997 is comprised of customer maintenance support revenue which typically has a higher profit margin than revenue derived from training and consulting services. Selling and marketing expenses, which consist primarily of sales organization costs, marketing program expenses, advertising and salespersons salaries and commissions, decreased 14% to $23,219,000 in 1997 from $26,929,000 in 1996. As a percent of total revenue, sales and marketing costs increased 1% to 40% of revenue in 1997 from 39% of revenue in 1996. The increase in sales and marketing costs as a percentage of revenue is a result of the increase in DataStage marketing and program activities throughout 1997 and the increase in the data warehouse sales force. These increases were offset by savings associated with the elimination of Object Studio marketing activities. Product development expenses, which consist principally of costs of development staff and facility-related costs, decreased 19% to $7,180,000 in 1997 from $8,875,000 in 1996. As a percent of total revenue, product development expenses decreased 1% to 12% of revenue in 1997 from 13% in 1996. The relative flat level of spending as a percentage of revenue in 1997 over 1996 is due to the cost savings associated with the elimination of development efforts previously dedicated to the Object Studio product offset by an increase in spending on data warehouse product development. General and administrative expenses, which consist of the costs of finance, legal, human resources, information systems and administrative functions, decreased 29% to $5,237,000 in 1997 from $7,351,000 in 1996. As a percent of total revenue, general and administrative costs decreased 2% to 9% in 1997 from 11% in 1996. This decrease in expense is primarily due to the decrease in the bad debt provision, as well as the elimination of the administrative costs associated with the Company's German subsidiary, which is currently inactive as it had previously sold Object Studio products and services. Other expenses decreased by 83% during 1997 when compared to 1996. This decrease is due principally to interest income earned on the increasing levels of cash and equivalents throughout 1997. Also, in 1996 the Company recorded a loss on investment of joint venture of $176,000. There was no gain or loss recognized from the investment in the joint venture in 1997. The Company recorded a $1,800,000 tax provision in 1997 on income before tax of $5,184,000 representing an effective rate of approximately 35%. The 1997 tax provision was a result of earnings generated from worldwide operations partially offset by the reduction of the valuation allowance associated with the Company's net operating losses due to the utilization of foreign net loss carryforwards which had been fully reserved for in prior years. Future effective tax rates will be dependent on a number of factors including but not limited to geographical mix of earnings. Total deferred tax assets, net of liabilities, amount to $8,557,000 against which the Company has provided a valuation allowance of $5,247,000 at December 31, 1997. Realization of the Company's net deferred tax assets is dependent upon the Company generating sufficient taxable income in future years in appropriate tax jurisdictions to obtain benefit from the reversal of temporary differences and from net operating loss carryforwards. 1996 COMPARED TO 1995 The Company's total revenue increased 1% to $69,266,000 in 1996 from $68,364,000 in 1995. Software license revenue decreased 6% to $35,149,000 in 1996 from $37,365,000 in 1995. The overall decline in license revenue resulted from decreased sales of the Hyperstar middleware product, the ESL integrated development 11 12 tool and the UniVerse database management software. The decline in sales of the UniVerse product can be attributed to delays in new UniVerse orders as customers awaited the release of UniVerse 9.0, which was released for general availability in the middle of the fourth quarter of 1996. Sales of UniVerse licenses for the fourth quarter of 1996 exceeded sales for the second and third quarters of 1996. Services and other revenue increased 10% to $34,117,000 in 1996 from $30,999,000 in 1995. All the major elements of services and other revenue increased in 1996 versus 1995 with training revenue increasing 34% to $5,821,000, consulting revenue increasing 10% to $10,496,000 and maintenance revenue increasing 5% to $17,351,000 in 1996. The increase in training revenue for 1996 came solely as a result of an increase in the training associated with Ardent products such as UniVerse. The Company undertook, in 1996, a strategy of aggressively selling appropriate training and education courses associated with the sale of new Ardent licenses. Consulting revenue increased as the Company was engaged to perform several large consulting contracts during 1996. These contracts were some of the largest in the Company's history and the revenue was recognized ratably over the length of the contracts in 1996. Maintenance revenue increased consistent with the expansion of the Company's installed base. Costs of software, which consist of amortization of technology licenses and capitalized software, product royalties, product documentation, packaging, media and production costs decreased 6% to $4,745,000 in 1996 from $5,040,000 in 1995. As a percentage of license revenue, costs of software remained consistent at 13% for both 1996 and 1995. The dollar decrease in costs of software for 1996 compared to 1995 is a result of lower royalty costs due to a decrease in license sales as well as the full amortization of previously capitalized software and purchased technology. Costs of services and other, which consist of personnel-related costs, outside consulting fees, facilities and other costs associated with the delivery of consulting, training and maintenance revenues, increased 12% to $18,552,000 in 1996 from $16,539,000 in 1995. As a percent of service and other revenue the costs of these services increased to 54% in 1996 from 53% in 1995; causing a 1% decrease in the gross margin realized from service revenue in 1996. The dollar increase in the costs of services and other is due directly to the increase in the level of services and other revenue recognized in 1996. The costs of services and other is variable over a twelve month period and should increase or decrease consistently with the services and other revenue. The 1% loss of gross margin in 1996 versus 1995 is attributed to the larger increases in consulting and training revenue as compared to maintenance revenue. Consulting and training revenue historically have a lower gross margin than maintenance revenue. Sales and marketing expenses which consist primarily of sales organization costs, marketing program expenses, advertising and salespersons salaries and commissions, increased 3% to $26,929,000 in 1996 from $26,082,000 in 1995. As a percent of total revenue, sales and marketing costs increased 1% to 39% of revenue in 1996 from 38% of revenue in 1995. The increase in sales and marketing costs is a result of increased investment in the North American sales force in the latter part of 1996, additional marketing spending associated with the Company's release 9.0 of UniVerse and beta release of DataStage and continued investment in its international operations. This increased spending occurred in the second half of 1996 while the revenue impact from these products and related promotions is expected to occur in the future. Product development expenses, which consist principally of costs of development staff and facility-related costs, decreased 12% to $8,875,000 in 1996 from $10,111,000 in 1995. As a percent of total revenue, product development expenses decreased 2% to 13% of revenue in 1996 from 15% in 1995. The Company experienced this reduction in 1996 due to economies of scale associated with the merger with Easel Corporation, headcount reductions in connection with the second quarter restructuring and the establishment of a joint venture in connection with future development efforts associated with the Object Studio product line. General and administrative expenses, which consist of the costs of finance, legal, human resources, information systems and administrative functions decreased 7% to $7,351,000 in 1996 from $7,908,000 in 1995. As a percent of total revenue, general and administrative costs decreased 1% to 11% in 1996 from 12% in 1995. The dollar decrease in expenses is due to a reduction in headcount associated with these functions in 1996 and a reduction in the bad debt provision recorded in 1996 compared to 1995. 12 13 In 1996, the Company recorded non-recurring charges of $4,322,000. These charges related to two separate restructurings undertaken by the Company in May and December 1996. In May, the Company recorded a $2,125,000 restructuring charge associated with the downsizing of the ObjectStudio product line and associated development efforts. The charge included approximately $1,900,000 in employee severance and benefits, $153,000 for the write-off of capitalized software and $72,000 for facility abandonment. In December the Company recorded a $2,197,000 restructuring charge associated with further staff reductions throughout all areas of the Company, as well as the write-off of certain intangible assets associated with discontinued product lines. The charge included approximately $1,591,000 in employee severance and $606,000 in intangible asset write-offs. Other expenses increased by 76% during 1996 when compared to 1995. This increase is due principally to the Company's share in the loss of the joint venture, which amounted to $176,000 in 1996. The Company recorded a $560,000 tax provision in 1996 on a loss before tax of $2,081,000. The 1995 effective tax rate was 23%. The 1996 tax provision was a result of earnings generated from operations in certain international jurisdictions, partially offset by the benefit of timing differences occurring in the United States and was also impacted by certain non-deductible costs associated with funding of the joint venture. In addition, benefit of losses generated by certain foreign subsidiaries was not recognized due to uncertainty regarding realization. Future effective tax rates will be dependent on a number of factors including but not limited to geographical mix of earnings. Total net deferred tax assets amount to $10,813,000 against which the Company has provided a valuation allowance $5,444,000 at December 31, 1996. Realization of the Company's net deferred tax assets is dependent upon the Company generating sufficient taxable income in future years in appropriate tax jurisdictions to obtain benefit from the reversal of temporary differences and from net operating loss carryforwards. In December 1996, as part of the Company's ongoing efforts to direct the business towards growth areas, management, at the direction of the Board of Directors, undertook a review of all existing businesses, including those acquired through the merger with Easel. Following this review, in December 1996, management recommended and the Board of Directors approved a comprehensive plan to exit certain businesses. In general, these businesses represented portions of the business with minimal profitability and lower future growth prospects. Among the product lines and businesses to be discontinued or abandoned were certain product lines of business present at the date of the merger with Easel. Because these dispositions were not contemplated at the date of the merger and are therefore outside of the normal course of business, they have been presented as an extraordinary item in accordance with APB16. The extraordinary item aggregated $5,918,000 before tax, with a related tax benefit of $1,184,000. See Note 10 to the consolidated financial statements for further discussion. INFLATION Certain of the Company's expenses increase with general inflation in the economy. However, the Company does not believe that its results of operations have been, or will be, adversely affected by inflation. LIQUIDITY AND CAPITAL RESOURCES The Company has funded its operations to date primarily through sales of equity securities and positive cash flow from operations. As of December 31, 1997, the Company had $23,224,000 in cash and equivalents and $21,492,000 in working capital. The Company has a working capital line of credit with a bank under which the Company may borrow, on an unsecured basis, the lesser of up to 80% of domestic eligible accounts receivable and 70-80% of foreign eligible accounts receivable or $10,000,000, conditioned upon meeting certain financial covenants, including maintaining specified levels of quarterly earnings, tangible net worth, working capital and liquidity. The line of credit also limits the Company's ability to pay dividends. As of December 31, 1997, there were no borrowings outstanding on the line. Accounts receivable, net of the allowance for doubtful accounts, decreased from $14,860,000 at December 31, 1996 to $9,823,000 at December 31, 1997. The allowance for doubtful accounts decreased to $1,530,000 at December 31, 1997 from $1,864,000 at December 31, 1996. Throughout 1997, the Company 13 14 improved its receivable cash collections and generated $11,257,000 in cash from operations. The Company used $2,224,000 in investing activities in 1997. The Company's significant cash investments in 1997 consisted of expenditures for capitalized software of $1,158,000 and expenditures made on the cash surrender value of officers' life insurance of $707,000. Current liabilities decreased from $22,131,000 as of December 31, 1996 to $15,317,000 as of December 31, 1997. The decrease is attributable to the Company's pay down on the line of credit in 1997 of $1,462,000, as well as the decrease in accrued restructuring costs of $4,478,000 which were also paid out in 1997. Long-term liabilities decreased slightly year over year as payments were made on capital lease obligations. The Company hedges its exposure to foreign currency fluctuations through foreign exchange forward contracts. As of December 31, 1997, the Company had foreign exchange forward contracts outstanding used to hedge foreign exchange exposure on intercompany balances of certain of its international subsidiaries. These contracts are comprised of contracts to sell foreign currency aggregating $5,236,000 of notional amount (principally British pounds and French francs). These contracts are short-term in duration (typically 90 days) and have limited market risk, since decreases or increases in the unrealized gain or loss on any position is generally fully offset by corresponding increases or decreases in gains and losses on the intercompany balances being hedged. Credit risk is limited to the risk that counterparties to these contracts fail to deliver at maturity. The Company deals only with reputable financial institutions in entering into these contracts and therefore believes that credit risk is insignificant. Currency forward contracts are used only to hedge identified foreign currency commitments and are never held for speculative purposes. The gains and losses associated with currency rate changes on these contracts, net of the corresponding gains and losses on the hedged intercompany accounts, are recorded as a component of other income/expense in the period the change occurs. Foreign exchange gains or losses were not material in any period presented. The Company believes that its available cash and anticipated cash generated from operations will be sufficient to finance the Company's operations and meet its foreseeable cash requirements, including expected capital expenditures, at least through 1997 and for the foreseeable future. These sources can be augmented by short-term borrowings under the credit facility, which currently has availability of $5,830,000. During the year, the Company transferred its rights to certain accounts receivable to a finance company in exchange for cash payments from the finance company. Receivables sold under these arrangements aggregated $7,150,000 in 1997. The Company, together with a third-party leasing company, offers a leasing program available to current and potential customers. Under the program, customers are able to purchase Ardent products through operating and capital leases with a third party lessor. All sales under this program are subject to the Company's normal revenue recognition policies and are made without recourse to the Company. Sales under the program in the year ended December 31, 1997 totaled approximately $1,536,000. As part of the merger with Unidata, Inc. in February, 1998, the Company estimates to incur nonrecurring costs of approximately $14,800,000. This estimate includes $3,900,000 for financial advisor, legal and accounting fees related to the merger and $10,900,000 for costs associated with the combining operations of the two companies including estimated cash expenditures of $5,500,000 for severance and benefits, $2,000,000 for closure of facilities and $3,400,000 for non-cash charges for the write-off of redundant assets. The non- recurring cost is an estimate only, although it is not likely that material additional costs will be incurred. NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 130, "Reporting Comprehensive Income" (SFAS 130) and SFAS No. 131, "Disclosure About Segments of an Enterprise and Related Information" (SFAS 131). SFAS 130 requires the presentation of an additional primary financial statement in the format prescribed by the standard. SFAS 131 requires disclosure about the Company's operations on a disaggregated basis consistent with management's internal reporting structure. The Company will adopt these standards in the first quarter of fiscal year 1998. 14 15 In October 1997, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 97-2, "Software Revenue Recognition." The Company intends to adopt this pronouncement in the first quarter of fiscal year 1998 and does not expect it to have a material affect on the revenue recognition practices of the Company. YEAR 2000 The Company has conducted a review of its computer systems to identify those areas that could be affected by the "Year 2000" issue. The Company presently believes, with modification to the existing software, the "Year 2000" problem will not pose significant operational problems and costs to complete this process are not anticipated to be material to its financial position or results of operations in any given year. FACTORS AFFECTING FUTURE RESULTS The Company operates in a rapidly changing environment that involves a number of risks, many of which are beyond the Company's control. The following discussion highlights some of these risks. The Company's future operating results may vary substantially from period to period. The timing and amount of the Company's license fee revenues are subject to a number of factors that make estimation of revenues and operating results prior to the end of the quarter extremely uncertain. Quarterly fluctuations may be caused by several factors including but not limited to timing of customer orders, adjustments of delivery schedules to accommodate customer or regulatory requirements, timing and level of international sales, mix of products sold, and timing of level of expenditures for sales, marketing and new product development. The Company generally ships its products upon receipt of orders and maintains no significant backlog. The Company has experienced a pattern of recording 60 percent to 80 percent of its quarterly revenues in the third month of the quarter, with a concentration of such revenues in the last two weeks of that third month. The Company's operating expenses are based on projected annual and quarterly revenue levels and a substantial portion of the Company's costs and expenses, including costs of personnel and facilities, cannot be easily reduced. As a result, if projected revenues are not achieved in the expected time frame, the Company's results of operations for that quarter would be adversely affected. Accordingly, the results of any one period may not be indicative of the operating results for future periods. The market price of the Company's common stock is highly volatile. Failure to achieve revenue, earnings, and other operating and financial results as forecasted or anticipated by analysts could result in an immediate adverse effect on the market price of the Company's stock. Technological developments, customer requirements and industry standards change frequently in the computer software database market. As a result, the Company's success will depend upon our ability to enhance current products and to develop or acquire new products which meet customer needs and comply with industry standards. The possibility exists that the Company's products will be rendered obsolete by technological advances, or that the Company will not be able to develop and market the products required to continue to be competitive. Certain of the Company's planned products are in various stages of development. It is possible that such products will prove not to be commercially viable or that we will experience operational problems with such products after commercial introduction that could delay or defeat the ability of such products to generate revenue. The products that the Company intends to devote substantial resources in the foreseeable future are object oriented database products and data warehousing and datamart products. There is no assurance that products in either of these two areas will be commercially successful. In particular, object technology requires customers to make a substantial investment in retraining application programmers. Several companies have failed in attempts to introduce object technology and there is no assurance that such technology will gain widespread customer acceptance. The Company has experienced product delays and undetected errors or bugs in certain products in the past and may experience such problems in the future. The Company's success will also depend on the ability of its products to interoperate and perform well with existing and future industry-standard leading application software products intended to be used in connection with relational database management systems. 15 16 Approximately 38% of the Company's total revenue in fiscal 1997 was attributable to international sales made through international subsidiaries. Because a substantial portion of the Company's total revenue is derived from such international operations, which are conducted in foreign currencies, changes in the value of those currencies relative to the United States dollar may affect the Company's results of operations and financial position. The Company engages in certain currency-hedging transactions intended to reduce the effect of fluctuations of foreign currency exchange rates on the Company's results of operations. However, there can be no assurance that such hedging transactions will materially reduce the effect of fluctuations on such results. If, for any reason, exchange or price controls or other restrictions on the conversion of foreign currencies were imposed, the Company's business could be adversely affected. Other potential risks inherent in the Company's international business generally include longer payment cycles, greater difficulties in accounts receivable collection and the burdens of complying with a wide variety of foreign laws and regulations. The market for application development software is intensely competitive. The Company competes with many companies offering alternative solutions to the needs addressed by the Company's products. Many of these competitors may have greater financial, marketing, or technical resources than the Company and may be able to adapt more quickly to new or emerging technologies and standards or changes in customer requirements or to devote greater resources to the promotion and sale of their products than the Company. The Company's business is led by a number of key, highly skilled technical, managerial and marketing personnel, the loss of which could adversely affect the Company. Competition of such personnel in the software industry is intense. The success of the Company depends in large part on the ability to hire and retain such personnel. The Company cannot guarantee that the merger with Unidata, Inc., consummated on February 10, 1998, will be efficient, effective and timely enough to achieve the anticipated benefits of the merger. Integrating the two companies successfully will require the timely combination of management, sales and marketing research and development teams that are in different geographic locations. Integration of the companies also will require the combination of complex software technology, product lines and software development plans. James T. Dresher owns beneficially approximately 21% of the outstanding common stock of the Company. Such concentration of ownership gives Mr. Dresher substantial power to affect the outcome of the election of directors and other matters requiring stockholder vote and, in addition, may have the effect of delaying or preventing a change in control of the Company. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Company's consolidated financial statements and the related independent auditor's report are presented in the following pages. The consolidated financial statements filed in this Item 8 are as follows:
PAGE ---- Independent Auditors' Report................................ 17 Consolidated Balance Sheets as of December 31, 1997 and 1996...................................................... 18 Consolidated Statements of Operations for each of the three years in the period ended December 31, 1997............... 19 Consolidated Statements of Stockholders' Equity for each of the three years in the period ended December 31, 1997..... 20 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1997............... 21 Notes to Consolidated Financial Statements.................. 22 Selected Quarterly Financial Data (unaudited)............... 35
16 17 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Ardent Software, Inc. : We have audited the consolidated balance sheets of Ardent Software, Inc. (formerly VMARK Software, Inc.) and its subsidiaries (the Company) as of December 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. Our audits also included the financial statement schedule listed in the Index at Item 14. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits. 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, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 1997 and 1996, and the 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. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Deloitte & Touche LLP Boston, Massachusetts January 23, 1998 17 18 ARDENT SOFTWARE, INC. CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ---------------------- 1997 1996 --------- --------- (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS Current assets: Cash and equivalents...................................... $ 23,224 $ 14,733 Accounts receivable (less allowance for doubtful accounts, $1,530 in 1997 and $1,864 in 1996)...................... 9,823 14,860 Income tax receivable..................................... 322 1,103 Prepaid expenses and other current assets................. 2,963 4,309 Deferred income taxes..................................... 477 1,320 Assets held for sale...................................... -- 420 -------- -------- Total current assets.................................... 36,809 36,745 -------- -------- Property and equipment: Building under capital lease.............................. 9,689 9,689 Computer equipment........................................ 6,906 7,040 Office furnishings and fixtures........................... 3,207 3,187 Leasehold improvements.................................... 1,295 1,239 -------- -------- Total................................................... 21,097 21,155 Less accumulated depreciation and amortization............ 8,923 6,950 -------- -------- Property and equipment -- net............................. 12,174 14,205 -------- -------- Other long-term assets: Intangible assets -- net.................................. 3,502 3,667 Deferred income taxes..................................... 2,827 3,717 Other long-term assets.................................... 2,334 1,643 -------- -------- Total other long-term assets............................ 8,663 9,027 -------- -------- Total....................................................... $ 57,646 $ 59,977 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Line of credit............................................ $ -- $ 1,462 Current portion of capital lease obligation............... 216 211 Accounts payable.......................................... 1,956 2,779 Accrued compensation...................................... 2,357 2,021 Accrued expenses.......................................... 4,077 4,374 Accrued restructuring costs............................... 1,068 5,546 Deferred revenue.......................................... 5,643 5,738 -------- -------- Total current liabilities............................... 15,317 22,131 -------- -------- Long-term liabilities: Capital lease obligation.................................. 8,798 9,015 -------- -------- Commitments and contingencies Stockholders' equity: Preferred stock, $.01 par value, authorized 10,000,000 shares; issued none Common stock, $.01 par value, authorized 25,000,000 shares; issued and outstanding 8,596,905 in 1997 and 8,380,474 in 1996....................................... 85 83 Additional paid-in capital................................ 47,767 46,297 Accumulated deficit....................................... (11,200) (14,584) Cumulative translation adjustment......................... (79) 105 Treasury stock at cost, 280,082 shares.................... (2,956) (2,956) Unearned compensation..................................... (86) (114) -------- -------- Total stockholders' equity.............................. 33,531 28,831 -------- -------- Total....................................................... $ 57,646 $ 59,977 ======== ========
See notes to consolidated financial statements. 18 19 ARDENT SOFTWARE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ----------------------------- 1997 1996 1995 ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenue: Software.................................................. $31,494 $35,149 $37,365 Services and other........................................ 26,060 34,117 30,999 ------- ------- ------- Total revenue........................................... 57,554 69,266 68,364 ------- ------- ------- Costs and expenses: Cost of software.......................................... 3,961 4,745 5,040 Cost of services and other................................ 12,678 18,552 16,539 Selling and marketing..................................... 23,219 26,929 26,082 Product development....................................... 7,180 8,875 10,111 General and administrative................................ 5,237 7,351 7,908 Merger integration, exit and restructuring costs.......... -- 4,322 6,882 Litigation costs.......................................... -- -- 499 ------- ------- ------- Total costs and expenses................................ 52,275 70,774 73,061 ------- ------- ------- Income (loss) from operations............................... 5,279 (1,508) (4,697) ------- ------- ------- Other expense: Other income (net)........................................ 930 472 664 Interest expense.......................................... (1,025) (869) (990) Loss on investment in joint venture....................... -- (176) -- ------- ------- ------- Total other expense..................................... (95) (573) (326) Income (loss) before provision for income taxes and extraordinary item........................................ 5,184 (2,081) (5,023) Provision for (benefit from) income taxes................... 1,800 560 (1,133) ------- ------- ------- Income (loss) before extraordinary item..................... 3,384 (2,641) (3,890) Extraordinary loss from disposal of assets acquired in a pooling of interests, net of tax benefit of $1,184........ -- (4,734) -- ------- ------- ------- Net income (loss)........................................... $ 3,384 $(7,375) $(3,890) ======= ======= ======= Basic income (loss) per common share: Before extraordinary item................................. $ 0.41 $ (0.33) $ (0.49) Net income (loss)......................................... $ 0.41 $ (0.91) $ (0.49) ======= ======= ======= Diluted income (loss) per common share: Before extraordinary item................................. $ 0.40 $ (0.33) $ (0.49) Net income (loss)......................................... $ 0.40 $ (0.91) $ (0.49) ======= ======= ======= Shares for basic computation................................ 8,199 8,096 8,013 Shares for diluted computation.............................. 8,531 8,096 8,013 ======= ======= =======
See notes to consolidated financial statements. 19 20 ARDENT SOFTWARE, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK ADDITIONAL CUMULATIVE ------------------ PAID-IN ACCUMULATED TRANSLATION TREASURY UNEARNED SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT STOCK COMPENSATION TOTAL --------- ------ ---------- ----------- ----------- -------- ------------ ------- (IN THOUSANDS, EXCEPT SHARE DATA) Balance, January 1, 1995.... 7,893,255 $78 $42,719 $ (3,319) $(140) $ -- $ -- $39,338 Issuance of stock for cash...................... 214,217 3 1,423 1,426 Repurchase and retirement of common stock.............. (3,777) (59) (59) Tax benefit arising from early disposition of stock options................... 300 300 Net loss.................... (3,890) (3,890) Translation adjustment...... 52 52 --------- --- ------- -------- ----- ------- ----- ------- Balance, December 31, 1995...................... 8,103,695 81 44,383 (7,209) (88) -- -- 37,167 Issuance of stock for cash...................... 276,779 2 1,582 1,584 Unearned compensation....... 140 (114) 26 Repurchase of common stock (280,082 shares).......... (2,956) (2,956) Tax benefit arising from early disposition of stock options................... 192 192 Net loss.................... (7,375) (7,375) Translation adjustment...... 193 193 --------- --- ------- -------- ----- ------- ----- ------- Balance, December 31, 1996...................... 8,380,474 83 46,297 (14,584) 105 (2,956) (114) 28,831 Issuance of stock for cash...................... 216,431 2 1,324 1,326 Unearned compensation....... 28 28 Tax benefit arising from early disposition of stock options................... 146 146 Net income.................. 3,384 3,384 Translation adjustment...... (184) (184) --------- --- ------- -------- ----- ------- ----- ------- Balance, December 31, 1997...................... 8,596,905 $85 $47,767 $(11,200) $ (79) $(2,956) $ (86) $33,531 ========= === ======= ======== ===== ======= ===== =======
See notes to consolidated financial statements. 20 21 ARDENT SOFTWARE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ----------------------------- 1997 1996 1995 ------- ------- ------- (IN THOUSANDS) Cash flows from operating activities: Net income (loss)........................................... $ 3,384 $(7,375) $(3,890) Adjustments to reconcile net income (loss) to cash provided by operating activities (net of acquisitions): Depreciation and amortization............................. 2,233 2,873 2,681 Amortization of intangible assets......................... 1,620 2,801 4,333 Equity in loss of joint venture........................... -- 176 -- Deferred income taxes..................................... 1,703 16 (1,494) Stock compensation........................................ 28 26 -- Writedown of assets in connection with exit of businesses.............................................. -- 3,059 -- Increase (decrease) in cash from: Accounts receivable....................................... 4,347 590 4 Other current assets...................................... 1,930 576 (1,259) Current liabilities....................................... (3,988) 4,490 2,084 ------- ------- ------- Cash provided by operating activities................... 11,257 7,232 2,459 ------- ------- ------- Cash flows from investing activities: Expenditures for property and equipment -- net............ (359) (1,820) (3,141) Expenditures for intangible assets........................ -- (163) (2,250) Capitalized software costs................................ (1,158) (1,658) (418) Increase in cash surrender value of officers' life insurance and deposits and other........................ (707) (115) (461) ------- ------- ------- Cash used in investing activities....................... (2,224) (3,756) (6,270) ------- ------- ------- Cash flows from financing activities: Sale of common stock...................................... 1,326 1,584 1,426 Repurchase of common stock................................ -- (2,956) (59) Repayments of note payable................................ -- (587) -- Borrowing (repayments) under line of credit............... (1,462) 1,462 (1,250) Repayments of capital lease and other obligations......... (212) (240) (165) ------- ------- ------- Cash used in financing activities......................... (348) (737) (48) ------- ------- ------- Effect of exchange rate changes on cash..................... (194) (273) 109 ------- ------- ------- Increase (decrease) in cash and equivalents................. 8,491 2,466 (3,750) Cash and equivalents, beginning of year..................... 14,733 12,267 16,017 ------- ------- ------- Cash and equivalents, end of year........................... $23,224 $14,733 $12,267 ======= ======= =======
See notes to consolidated financial statements 21 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of the Business -- Ardent Software, Inc., formerly VMARK Software, Inc. (see Note 12), and subsidiaries (the Company) designs, develops, markets, sells and supports software for developing, deploying, and maintaining business applications and data warehousing solutions. The Company also provides a comprehensive range of services, including customer maintenance support, training, on-site assistance and consulting. The Company has operations in the United States, Canada, Europe, Australia, and Africa. Selling and marketing activities are conducted through direct selling efforts, value-added resellers, and distributors throughout the world. Research and development efforts are conducted in the United States and the United Kingdom. Use of Estimates -- The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires, out of necessity, the use of estimates to determine the appropriate carrying value of certain assets and liabilities. Each of these estimates requires the Company to assess past history and to estimate probable outcomes in the future. Actual results could differ from these estimates. Basis of Presentation -- The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. All significant intercompany balances and transactions have been eliminated. Foreign Currency Translation -- The functional currency of foreign operations is deemed to be the local country's currency. Assets and liabilities of operations outside the United States are translated into United States dollars using current exchange rates at the balance sheet date. Results of operations are translated at average exchange rates prevailing during each period. Translation adjustments are accumulated as a separate component of stockholders' equity. The Company hedges its exposure to foreign currency fluctuations through foreign exchange forward contracts. As of December 31, 1997, the Company had foreign exchange forward contracts outstanding used to hedge foreign exchange exposure on intercompany balances of certain of its international subsidiaries. These contracts are comprised of contracts to sell foreign currency aggregating $5,236,000 of notional amount (principally British pounds and French francs). These contracts are short-term in duration (typically 90 days) and have limited market risk, since decreases or increases in the unrealized gain or loss on any position is generally fully offset by corresponding increases or decreases in gains and losses on the intercompany balances being hedged. Credit risk is limited to the risk that counterparties to these contracts fail to deliver at maturity. The Company deals only with reputable financial institutions in entering into these contracts and therefore believes that credit risk is insignificant. Currency forward contracts are used only to hedge identified foreign currency commitments and are never held for speculative purposes. The gains and losses associated with currency rate changes on these contracts, net of the corresponding gains and losses on the hedged intercompany accounts, are recorded as a component of other income/expense in the period the change occurs. Foreign exchange gains or losses were not material in any period presented. Revenue Recognition -- Revenue from the sale of software licenses is recognized upon shipment of the product provided that no significant obligations remain and collection of the receivables is considered probable. Insignificant vendor and post-contract support obligations, if any, are accrued upon shipment. Revenue from customer maintenance support agreements is deferred and recognized ratably over the term of the agreements. Revenue from training and consulting is recognized as the related services are performed. Concentration of Credit Risk -- The Company sells its products to various companies in several industries. The Company performs on-going credit evaluations of its customers and maintains allowances for potential credit losses, and such losses have been within management's expectations. The Company generally requires no collateral from its customers. Software Development Costs -- Certain software development costs for products and product enhancements are capitalized after technological feasibility has been established. Such costs are included in intangible assets and are amortized over two years using the straight-line method. Related accumulated amortization was 22 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 1. NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) approximately $352,000 and $119,000 at December 31, 1997 and 1996, respectively. Research and development costs and software development costs incurred before technological feasibility has been established are expensed as incurred. Property and Equipment -- Purchased property and equipment is recorded at cost. Leased equipment is recorded at the present value of the minimum lease payments required during the lease period. Depreciation and amortization are provided on the straight-line method over the estimated useful lives of the related assets (three to eleven years) or over the terms of the related leases (three to twenty years) whichever is shorter. Capitalized cost of the leased assets was $9,689,000 and related accumulated amortization was $1,493,000 and $1,008,000 at December 31, 1997 and 1996, respectively. Intangible Assets -- Intangible assets, other than capitalized software development costs, are principally comprised of purchased technology and goodwill and are recorded at cost. Amortization expense is recorded to costs of software and other depending on the use of the related intangible asset. Amortization expense is provided on a straight-line method over the estimated life of the asset (two to five years). The Company periodically reviews the carrying value of intangible assets in relation to expectations of nondiscounted future cash flows attributable to each asset. A permanent impairment in the value of an intangible asset is recognized in operating results in the period the impairment occurs. Accumulated amortization was $9,145,000 and $7,590,000 at December 31, 1997 and 1996, respectively. Cash Equivalents -- The Company considers all short-term, highly liquid investments, purchased with a remaining maturity of three months or less, to be cash equivalents. Supplemental cash flow information is as follows ( in thousands):
YEAR ENDED DECEMBER 31, -------------------------- 1997 1996 1995 ------ ------ ------ Cash paid for income taxes.............................. $ 136 $ 386 $2,906 Cash refunds of income taxes............................ 1,913 3,406 -- Cash paid for interest.................................. 1,025 869 896 Transfer of accounts receivable as consideration for purchase acquisition.................................. -- -- 1,000
Income Taxes -- Deferred taxes are provided to reflect temporary differences in the basis between book and tax assets and liabilities. Deferred tax assets and liabilities are measured using currently enacted tax rates (see Note 5). Income (Loss) Per Common Share -- In the fourth quarter of 1997, the Company adopted Statement of Financial Accounting Standards No. 128, Earnings Per Share (SFAS 128). Prior to the fourth quarter of 1997, the Company computed income (loss) per common share using the methods outlined in Accounting Principles Board Opinion No. 15, Earnings Per Share, and its interpretations. Previously reported income (loss) per common share for years prior to 1997 did not differ from that computed using SFAS 128. Basic income (loss) per common share is computed using the weighted average number of common shares outstanding during each year. Diluted income (loss) per common share reflects the effect of the Company's outstanding options (using the treasury stock method), except where such items would be antidilutive. 23 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 1. NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) A reconciliation between shares used for the computation of basic income (loss) per common share and diluted is as follows (in thousands):
1997 1996 1995 ------ ------ ------ Shares for basic computation............................ 8,199 8,096 8,013 Effect of dilutive stock options........................ 332 -- -- ------ ------ ------ Shares for diluted computation.......................... 8,531 8,096 8,013 ====== ====== ======
Fair Value of Financial Instruments -- Financial instruments held or used by the Company include cash and its equivalents, accounts receivable, accounts payable, capital lease obligations and foreign currency forward contracts. The fair values of these instruments, which could change if market conditions change, are based on management's estimates. With the exception of forward contracts, management believes that the carrying value of these instruments approximates fair value. The unrealized gain on foreign exchange contracts at December 31, 1997 was approximately $107,000. At December 31, 1996 there was an unrealized loss on foreign exchange contracts of approximately $306,000. Stock-Based Compensation -- Compensation cost associated with awards of stock or options to employees is measured using the intrinsic value method. Tax benefits associated with early exercise of stock options are generally recorded as increases to additional paid-in capital. New Accounting Pronouncements -- In October 1997, the American Institute of Certified Public Accountants released Statement of Position No. 97-2, Software Revenue Recognition (SOP 97-2), which the Company will be required to adopt in 1998. Adoption of the provisions of SOP 97-2 will not result in significant changes to the Company's historical revenue recognition practices and, accordingly, is not expected to have a material impact on financial position, results of operations or cash flows of the Company. In June 1997, the Financial Accounting Standards Board (FASB) released Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information (SFAS 131), which the Company will be required to adopt in 1998. SFAS 131 will require the Company to provide information about the segments of its business based upon discrete components of its businesses. In addition, SFAS 131 requires that such information be provided in greater detail than currently required. The Company is currently evaluating its lines of business to determine reportable segments, but has not yet completed such evaluation. In June 1997, the FASB released Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," (SFAS 130) which the Company will be required to adopt in 1998. SFAS 130 requires that the Company provide a prominent display of the components of items of other comprehensive income. The only item that the Company currently records as other comprehensive income is the change in cumulative translation adjustment resulting from changes in exchange rates and the effect of those changes upon translation of the financial statements of the Company's foreign operations. Adoption of SFAS 130 will not have an effect on reported consolidated results of operations or financial position. Changes in Presentation -- Certain prior year amounts have been reclassified to conform to the current year presentation. 2. MERGERS AND ACQUISITIONS Merger with Unidata, Inc. (Unaudited) On February 10, 1998, the Company merged with Unidata, Inc. (see Note 11). 24 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2. MERGERS AND ACQUISITIONS -- (CONTINUED) Merger with Easel Corporation On June 14, 1995, the Company merged with Easel Corporation (Easel). In connection with the merger, the Company issued approximately 1,500,000 shares of common stock to Easel shareholders in exchange for substantially all of their interest in Easel. The merger was accounted for as a pooling-of-interests. In connection with the merger, the Company recorded one-time charges aggregating $6,882,000, reflecting costs of integrating the operations of the two companies, as well as the costs of personnel termination (for which a specific plan was in place), facilities closures, and legal, accounting and investment banking fees associated with the transaction. All related costs were completely paid by the end of 1996. ACQUISITIONS During the last three years, the Company has made the following acquisitions, all of which were accounted for as purchases and the results of operations included with those of the Company from the date of acquisition (amounts in thousands):
LIABILITIES TOTAL COMPANY ACQUIRED CASH PAID ASSUMED CONSIDERATION ---------------- --------- ----------- ------------- FT Technology Institute (January 1996)..... $ 360 $ -- $ 360 VMARK Canada (September 1995).............. 1,329 171 1,500 Edgetech S.A. (January 1995)............... 1,500 -- 1,500
FT Technology Institute -- FT Technology Institute operates as an education and service training business based in Sydney, Australia. The purchase price was allocated between property and equipment and goodwill based upon an independent appraisal. In December 1996, the Company decided to withdraw from this line of business. The writedown of the remaining net book value of related assets and employee termination costs are included in the results of operations in 1996 as a component of costs and expenses. See Note 9. VMARK Canada -- VMARK Canada previously operated as an independent distributor for the Company. Of the total cash included in consideration for the purchase, $750,000 was paid at closing and the remainder was payable in the form of a note which was paid in February 1996. The purchase price was allocated between property and equipment and intangible assets based upon an independent appraisal. Edgetech S.A. -- Edgetech S.A. previously operated as an independent distributor for the Company. Of the total cash consideration shown above, $500,000 was paid at closing and the remainder was payable in the form of a note. In March 1995, the Company transferred an account receivable to the sellers in full satisfaction of amounts due. The Company guaranteed collection of the receivable, which has since been repaid, and paid interest to the sellers aggregating $71,600. The purchase price was allocated between property and equipment and intangible assets based upon an independent appraisal. Pro Forma Results of Operations -- The results of operations of the acquired entities were not significant to the Company. Accordingly, pro forma information has not been presented. Other Purchases -- During 1995, the Company purchased completed software tools and technology from outside vendors totaling $480,000. 3. FINANCING AND LEASING ARRANGEMENTS Leasing Arrangements The Company has a twenty-year capital lease on its principal operating facility which commenced in November 1994. The Company leases other office facilities, motor vehicles and certain office furnishings under noncancelable operating lease agreements expiring on various dates through December 2002. Total rent 25 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 3. FINANCING AND LEASING ARRANGEMENTS -- (CONTINUED) expense under all operating leases for the years ended December 31, 1997, 1996 and 1995 approximated $1,556,000, $1,832,000 and $2,665,000, respectively. At December 31, 1997, future minimum payments under operating and capital leases are due as follows (in thousands):
OPERATING LEASES CAPITAL LEASE ---------------- ------------- 1998.............................................. $1,328 $ 982 1999.............................................. 863 982 2000.............................................. 552 982 2001.............................................. 392 982 2002.............................................. 38 982 Thereafter........................................ -- 12,147 ------ ------- $3,173 17,057 ====== Less amount representing interest................. (8,043) ------- 9,014 Amounts due within one year....................... 216 ------- Long-term debt.................................... $ 8,798 =======
Line of Credit The Company has an unsecured working capital line of credit with a bank under which the Company may borrow up to the lesser of 80% of domestic and 70-80% of foreign eligible accounts receivable or $10,000,000. The agreement limits the Company's ability to pay dividends and, among other things, requires the Company to maintain specified minimum levels of tangible net worth and working capital and limits the ratio of debt to tangible net worth. Interest on outstanding borrowings under the facility is at the bank's prime rate (8.5% and 8.25% at December 31, 1997 and 1996, respectively). At December 31, 1997 there were no borrowings outstanding under the line of credit facility; as of that date $5,830,000 was available to the Company under the line of credit. Receivables Financing Arrangements As part of the Company's working capital management, certain accounts receivable are periodically factored to financial institutions. Such factoring arrangements are treated as sales in accordance with SFAS 125, since the Company relinquishes control and all rights over the accounts are transferred to the factor. Receivables sold under these arrangements aggregated $7,150,000 in 1997. These sales are typically done on a limited recourse basis, and any potential losses are evaluated at the time the asset is sold. To date, no losses on factored receivables have been incurred, other than the fee charged to the Company by the factor. The Company, together with a third-party leasing company, offers a leasing program to current and potential customers. Under the program, customers are able to purchase Ardent products through operating and capital leases with a third party lessor. All sales under this program are subject to the Company's normal revenue recognition policies and are made without recourse to the Company. Sales under the program in the year ended December 31, 1997 totaled approximately $1,536,000. 4. STOCKHOLDERS' EQUITY Preferred Stock -- The Board of Directors is authorized to designate one or more series of preferred stock and to establish the voting, dividend, liquidation and other rights and preferences of the shares of each series, and to provide for the issuance of shares of any series. The Board of Directors has designated 15,000 shares of 26 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 4. STOCKHOLDERS' EQUITY -- (CONTINUED) $0.01 par value preferred stock as Series A Junior Preferred Stock. At December 31, 1997, no shares of preferred stock were outstanding. Preferred Share Purchase Rights -- On June 6, 1996, the Company's Board of Directors declared a dividend of one purchase right (a "Right") for every outstanding share of the Company's common stock. The Rights were distributed on June 12, 1996 to holders of record as of that date. Each Right entitles the holder to purchase from the Company one one-thousandth of a share of Series A Junior Preferred Stock at a price of $75, subject to adjustments in certain events. The Rights will be exercisable only if a person or group acquires 15% or more of the outstanding shares of the Company's common stock or announces a tender offer, the consummation of which would result in such person or group owning 30% or more of the Company's common stock. If a person or group (other than the Company and its affiliates) acquires 15% or more of the Company's outstanding common stock, each Right (other than Rights held by such person or group) will entitle the holder to receive shares of Common Stock, or in certain circumstances, cash, property, or other securities of the Company, having a market value of two times the exercise price of the Right. In addition if the Company were acquired in a merger or other business combination, or if more than 50% of its assets or earning power were sold, each holder of a Right would be entitled to exercise such Right and thereby receive common stock of the acquiring company with a market value of two times the exercise price of the Right. Furthermore, at any time after a person or group acquires more than 15% of the outstanding stock, but prior to the acquisition of 50% of such stock, the Board of Directors may, at its option, exchange all or a part of the Rights at an exchange ratio of one share of Common Stock for each Right. The Company will be entitled to redeem the Rights at $.01 per Right, subject to adjustment in certain events, at any time on or prior to the tenth day after public announcement that a 15% or greater position has been acquired by any person or group. The Rights expire on June 12, 2006. 1986 Stock Option Plan -- The Company's 1986 Stock Option Plan (the 1986 Plan) provides for the issuance of up to an aggregate 2,916,000 shares of common stock upon the exercise of incentive stock options (ISOs) and non-qualified stock options (NSOs) granted to key employees and consultants of the Company and its subsidiaries. The exercise price for ISOs must be at least equal to the fair market value of the underlying shares of common stock at the time of grant, and the exercise price of NSOs may be at any price established by the Board of Directors. The term of each option may not exceed ten years. Options are exercisable either in full immediately, or in installments, as the Board of Directors may determine at the time it grants such options. In general, the shares acquired by exercising the options vest ratably over four to five years from the date the options first become exercisable. As of December 31, 1997, there were 404,456 options available for grant under the 1986 Plan. On October 7, 1997 the Board of Directors adopted and on February 10, 1998 the stockholders approved an increase to the total number of shares issuable under the 1986 Plan to 4,500,000. 1991 Director Stock Option Plan -- The 1991 Director Stock Option Plan (the Director Plan) provides for the grant of non-qualified stock options to non-employee directors of the Company for the purchase of up to an aggregate of 350,000 shares of common stock. Under the Director Plan, each non-employee director is entitled to receive, when first elected to serve as a director, an option to purchase 15,000 shares. In addition, each non-employee director is entitled to receive on January 31 of each year an option to purchase 5,000 shares (10,000 shares for years after 1998). The exercise price of the options may not be less than fair market value on the date of grant. Options may only be exercised with respect to vested shares. As of December 31, 1997, there were 154,302 options available for grant under the Director Plan. 1995 Non-Statutory Stock Option Plan -- The Company's 1995 Non-Statutory Stock Option Plan (the 1995 Plan), provides for the grant of non-qualified stock options to key employees (other than executive officers, who are not eligible to participate) and consultants of the Company for the purchase of up to an aggregate of 3,750,000 shares of common stock. The exercise price of the options may be at any price established by the Board of Directors which administers the 1995 Plan. The term of each option may not 27 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 4. STOCKHOLDERS' EQUITY -- (CONTINUED) exceed ten years. Options are exercisable over periods determined at the discretion of the Board of Directors and are generally subject to vesting on a monthly basis over four to five years. As of December 31, 1997, there were 2,575,769 options available for grant under the 1995 Plan. The following is a summary of activity for all of the Company's option plans:
WEIGHTED AVERAGE EXERCISE PRICE SHARES PER SHARE --------- ---------------- Outstanding at January 1, 1995....................... 1,408,260 $10.82 Granted............................................ 903,881 8.99 Exercised.......................................... (157,095) 3.94 Canceled........................................... (270,664) 14.59 --------- ------ Outstanding at December 31, 1995..................... 1,884,382 9.61 Granted............................................ 1,484,317 8.33 Exercised.......................................... (118,983) 4.49 Canceled........................................... (775,359) 12.04 --------- ------ Outstanding at December 31, 1996..................... 2,474,357 8.14 Granted............................................ 950,950 6.77 Exercised.......................................... (143,971) 6.30 Canceled........................................... (768,486) 8.50 --------- ------ Outstanding at December 31, 1997..................... 2,512,850 $ 7.54 ========= ======
The following table sets forth information regarding options outstanding at December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE AND/OR --------------------------------------------------- SHARES TRANSFERRABLE NUMBER WEIGHTED AVERAGE ------------------------------ RANGE OF OF REMAINING CONTRACTUAL WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE EXERCISE PRICES SHARES LIFE (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE - --------------- --------- --------------------- ---------------- ----------- ---------------- $ .16 - $ 2.50............. 98,104 4.4 $ 1.94 98,104 $ 1.94 4.90 - 6.88............. 916,915 8.8 6.41 233,563 6.33 7.00 - 8.75............. 1,102,612 8.4 7.66 424,383 7.71 9.12 - 11.00............. 301,199 7.9 10.22 124,181 10.13 12.00 - 14.88............. 64,990 6.5 12.60 46,109 12.65 16.00 - 17.88............. 27,711 6.7 16.51 21,206 16.61 20.59 - 23.50............. 1,319 2.8 22.86 1,053 22.98 --------- ------- 2,512,850 8.3 $ 7.54 948,599 $ 7.59 ========= =======
At December 31, 1996 and 1995, respectively, 648,702 and 1,299,200 options were exercisable or the related shares were transferable. As described in Note 1, the Company uses the intrinsic value method to measure compensation expense associated with grants of stock options to employees. Had the Company used the fair value method to measure compensation, the Company's net income (loss) and income (loss) per share would have been $921,000 or $0.11 per share in 1997, $(9,462,000) or $(1.17) per share in 1996 and $(4,317,000) or $(0.54) per share in 1995. The fair value of each stock option is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions in 1997, 1996 and 1995: expected lives of .5 to 6 years, expected volatility of 46.9% in 1997 and 64.9% in 1996 and 1995, a dividend yield of 0% and a risk-free interest rate of 5% in 1997 and 6.10% in 1996 and 1995. The weighted average fair value of options granted and awarded in 1997, 1996 and 1995 was $3.41, $5.33 and $6.09, respectively. The option pricing model used was designed to value readily tradable stock options with relatively short lives. The options granted to employees are not tradable and have contractual lives of ten years. However, 28 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 4. STOCKHOLDERS' EQUITY -- (CONTINUED) management believes that the assumptions used and the model applied to value the awards yields a reasonable estimate of the fair value of the grants made under the circumstances. During 1996, a total of 80,000 options were granted to certain officers of the Company at exercise prices which were an aggregate of $140,000 lower than the market value at the date of grant. This amount was recorded as unearned compensation and is being amortized to expense over the five year vesting period of the options. Related compensation expense was approximately $28,000 and $26,000 in 1997 and 1996, respectively. The weighted average exercise price of the options involved is $6.38 per share. In January 1996, the Company offered non-officer employees holding incentive stock options with an exercise price greater than $7.75 (the then current market price) per share, the opportunity to exchange their options for the equivalent number of non-qualified stock options with an exercise price equal to fair market value of the common stock. As a result of this offer, options for approximately 326,107 shares were exchanged. On January 31, 1998, an additional 25,000 options were granted under the Directors Plan at an exercise price of $7.00. Employee Stock Purchase Plan -- The Company's Employee Stock Purchase Plan (the Purchase Plan) provides for the purchase of Company's common stock at six-month intervals at 85% of the lower of the fair market value on the first day or the last day of each six-month period. The Company issued 72,460, 157,590 and 58,580 shares in 1997, 1996 and 1995, respectively, under the Purchase Plan. At December 31, 1997, 134,633 shares were reserved for future issuance's under the Purchase Plan. The pro forma disclosures presented above include compensation expense related to the Purchase Plan of $74,000, $446,000 and $168,000 in 1997, 1996 and 1995, respectively. On September 30, 1997 the Board of Directors adopted and on February 10, 1998 the shareholders approved an increase of 200,000 to shares issuable under the Purchase Plan. 5. INCOME TAXES The components of income (loss) before income taxes and extraordinary item was comprised of the following (in thousands):
YEAR ENDED DECEMBER 31, ---------------------------- 1997 1996 1995 ------ ------- ------- Domestic.............................................. $3,940 $ (611) $(3,783) Foreign............................................... 1,244 (1,470) (1,240) ------ ------- ------- $5,184 $(2,081) $(5,023) ====== ======= =======
The components of the provision (benefit) for income taxes consists of the following (in thousands):
YEAR ENDED DECEMBER 31, --------------------------- 1997 1996 1995 ------ ------ ------- Current: Federal.............................................. $ 107 $ (295) $ -- State................................................ 70 (55) -- Foreign.............................................. (94) (259) 361 ------ ------ ------- Total.............................................. 83 (609) 361 ------ ------ ------- Deferred: Federal.............................................. 1,159 824 (770) State................................................ 176 154 (88) Foreign.............................................. 382 191 (636) ------ ------ ------- Total.............................................. 1,717 1,169 (1,494) ------ ------ ------- Total.......................................... $1,800 560 $(1,133) ====== ====== =======
29 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. INCOME TAXES -- (CONTINUED) Significant components of the Company's deferred income tax assets and liabilities were as follows at December 31 (in thousands):
1997 1996 ------- ------- Current assets: Accounts receivable....................................... $ 394 $ 404 Accrued expenses and other................................ 83 916 ------- ------- Total current assets.................................... $ 477 $ 1,320 ======= ======= Long-term assets and liabilities: Property and equipment.................................... (159) $ 80 Intangible assets......................................... 498 385 Capitalized software costs................................ (511) -- Net operating loss carryforwards - U.S.................... 5,460 5,725 Net operating loss carryforwards - foreign................ 1,720 2,071 Tax credit carryforwards - U.S............................ 967 967 Other - foreign........................................... 99 (67) Valuation allowance....................................... (5,247) (5,444) ------- ------- Total net long-term assets.............................. $ 2,827 $ 3,717 ======= =======
The valuation allowance for deferred tax assets as of December 31, 1996, was $5,444,000. The net change in the total valuation allowance for the year ended December 31, 1997, was a decrease of $197,000 principally due to the realization in 1997 of previously reserved tax benefits of foreign loss carryforwards. A valuation allowance of $5,247,000 remains at December 31, 1997, and is primarily attributable to loss and credit carryforwards. At December 31, 1997, the Company has federal net operating loss carryforwards of approximately $15,000,000, and federal tax credit carryforwards of approximately $967,000, that all expire through 2010. Due to the "change in ownership" provisions of the Internal Revenue Code of 1986, the availability of net operating loss and tax credit carryforwards to offset future federal taxable income is subject to cumulative annual limitations. Restrictions on net operating loss carryforwards expire at a rate of approximately $1,800,000 per year. As of December 31, 1997, $4,900,000 of limited net operating loss carryforwards were not subject to restrictions of future usage. Foreign tax loss carryforwards of $4,600,000 are available for use in reducing future taxable income in certain foreign jurisdictions. The difference between the provision (benefit) for income taxes and the amount computed by applying the federal statutory income tax rate of 35% to income (loss) before provision (benefit) for income taxes is explained below:
YEAR ENDED DECEMBER 31, -------------------- 1997 1996 1995 ---- ---- ---- Statutory tax rate.......................................... 35% (35)% (35)% State taxes, net of federal benefit......................... 3 (4) (4) Surtax exemption............................................ (1) 1 1 Nondeductible charges and other............................. 1 35 12 Foreign income taxes........................................ 1 4 3 Change in valuation allowance............................... (4) -- -- Foreign net operating losses for which no benefit is recognized................................................ -- 26 -- --- --- --- Effective tax rate.......................................... 35% 27% (23)% === === ===
30 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. SEGMENT INFORMATION The Company operates in one industry segment consisting of the development, marketing and support of software for the development and execution of commercial applications for industry standard operating systems. Geographic segment information was as follows (in thousands):
YEAR ENDED DECEMBER 31, ----------------------------- 1997 1996 1995 ------- ------- ------- Revenue: United States (including export sales).................... $35,942 $41,651 $48,780 Other North America....................................... 1,029 1,444 578 United Kingdom............................................ 5,937 5,517 6,602 France.................................................... 7,310 6,257 -- Germany................................................... 28 7,198 5,814 Asia Pacific, primarily Australia......................... 5,851 5,939 5,147 South Africa.............................................. 1,457 1,260 1,365 Other..................................................... -- -- 78 ------- ------- ------- Total revenue........................................... $57,554 $69,266 $68,364 ======= ======= ======= Merger integration, exit and restructuring costs: United States............................................. $ -- $ 3,471 $ 5,561 Other North America....................................... -- -- -- United Kingdom............................................ -- 9 998 France.................................................... -- 268 -- Germany................................................... -- -- 323 Asia Pacific, primarily Australia......................... -- 574 -- South Africa.............................................. -- -- -- Other..................................................... -- -- -- ------- ------- ------- Total merger integration, exit and restructuring costs................................................. $ -- $ 4,322 $ 6,882 ======= ======= ======= Operating income (loss): United States............................................. $ 4,354 $ 138 $(3,483) Other North America....................................... 155 (183) 256 United Kingdom............................................ 2 (459) (1,998) France.................................................... 362 (321) -- Germany................................................... 28 107 43 Asia Pacific, primarily Australia......................... 215 (719) 287 South Africa.............................................. 171 5 207 Other..................................................... (8) (76) (9) ------- ------- ------- Total operating income (loss)........................... $ 5,279 $(1,508) $(4,697) ======= ======= ======= Identifiable assets: United States............................................. $54,562 $48,216 $58,050 Other North America....................................... 369 763 611 United Kingdom............................................ 3,940 4,435 2,545 France.................................................... 3,488 4,249 -- Germany................................................... 19 2,563 12 Asia Pacific, primarily Australia......................... 2,815 2,564 945 South Africa.............................................. 1,008 1,316 588 Other..................................................... 4 5 -- Eliminations.............................................. (8,559) (4,134) 602 ------- ------- ------- Total identifiable assets............................... $57,646 $59,977 $63,353 ======= ======= =======
Export sales from the United States did not exceed ten percent of revenue for any year presented. 31 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. LITIGATION The Company is a defendant, together with certain of its officers, in two actions initially filed in October 1995 in the U.S. District Court for the District of Massachusetts. Those actions have been consolidated through the filing of a Consolidated Amended Complaint (the "Complaint"). The plaintiffs allege in the Complaint that the Company and certain of its officers, during July through October 1995, made certain untrue statements and failed to disclose certain information regarding the Company's prospective financial performance in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and that such statements and omissions artificially inflated the market prices of the Company's stock. The plaintiffs purport to bring the actions on behalf of certain classes of stockholders and seek damages in unspecified amounts. The Company has denied the allegations in its answer to the Complaint. The discovery stage of the proceeding is now substantially complete and the Company has filed a motion for summary judgement which is expected to be heard within the next several months. Based upon its review to date, management of the Company believes that the actions are without merit and plans to oppose them vigorously. During 1995, the Company recorded approximately $499,000 in settlement costs. Approximately $300,000 in costs were recorded relating to the settlement and payout of two potential lawsuits involving Easel at the time of merger with the Company. Approximately $199,000 was recorded due to the additional settlement costs incurred in 1995 based on a court rendered decision in a 1994 suit settlement. 8. RETIREMENT PLANS The Company provides certain supplemental requirement benefits to its executive officers, which it has funded through life insurance policies in a "split dollar" arrangement. The executive officers are allowed to borrow against the excess cash surrender value in the policy over and above the Company's cumulative paid in premiums. Upon termination of a policy or the death of the insured executive, the Company will receive proceeds equal to the amount of the cumulative premium paid by the Company. The Company may borrow against its share of the accumulated cash surrender value in the respective policies at any time. The Company accounts for these policies as a defined contribution plan and expenses premiums on the policies as incurred, which represents the compensation element of the plan. In addition, since the Company controls its share of the cash surrender value of the policies at all times, it accounts for any changes in cash surrender value in accordance with the guidance provided in Financial Accounting Standards Board Technical Bulletin No. 85-4, "Accounting for Purchases of Life Insurance." Accordingly, increases or decreases in cash surrender value are recognized each period and the asset recorded on the Company's books represents the lesser of the Company's share of cash surrender value or the cumulative premiums paid on the policies. This amount is included in other long-term assets and was $2,016,000 and $1,356,000 at December 31, 1997 and 1996, respectively. Total premiums in 1997, 1996, and 1995 were approximately $659,000, $466,000, and $420,000, respectively. The Company has a 401(k) retirement and savings plan (the Plan) covering substantially all domestic employees. The Plan allows each participant to contribute up to 15% of his or her base wage up to an amount not to exceed an annual statutory maximum. Through December 31, 1995, the Company matched contributions in an amount equal to 25% of the contributions of each participant in excess of 2% of such participant's annual compensation up to 4% of such participant's annual compensation. Effective January 1, 1996, the Company increased its matching contribution to 50% of the contributions of each participant in excess of 2% of such participant's annual compensation, up to 4% of such participant's annual compensation. The Company made matching contributions to the Plan of approximately $253,000, $315,000, and $125,000 in 1997, 1996, and 1995, respectively. 9. RESTRUCTURING COSTS The 1996 results include a $2,125,000 restructuring charge associated with the downsizing of Object Studio-related activities. The charge was recorded pursuant to a formal plan adopted and announced in May 1996. The charge included approximately $1,900,000 in employee severance and benefits, $153,000 for 32 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 9. RESTRUCTURING COSTS -- (CONTINUED) the write off of capitalized software and $72,000 related to abandonment of facilities. Fifty employees were terminated in this restructuring. As of December 31, 1997, approximately $98,000 in employee severance and benefits were unpaid. The 1996 results also include a $2,197,000 charge associated with a restructuring and reduction in staff from all areas of the Company. Management approved the restructuring plan late in fiscal year 1996 with the intent to bring costs in line with revenues. The charge included $1,591,000 in employee severance and benefits and $606,000 for the write-off of intangible assets. This intangible asset write-off related to the impairment of the remaining net book value of technology purchased in 1992, the development of which ceased with the release of UniVerse 9.0. Thirty-four employees were terminated in this restructuring. As of December 31, 1997, approximately $9,000 in employee severance and benefits were unpaid. 10. EXTRAORDINARY ITEM In December 1996, as part of the Company's ongoing efforts to direct the business towards growth areas, management, at the direction of the Board of Directors, undertook a review of all existing businesses, including those acquired through the merger with Easel discussed in Note 2. Following this review, in December 1996, management recommended and the Board of Directors approved a comprehensive plan to exit certain businesses. In general, these businesses represented portions of the business with minimal profitability and lower future growth prospects. For discussion of certain abandoned businesses and asset write-offs, see Note 9. Among the product lines and businesses to be discontinued or abandoned were certain products or lines of business present at the date of the merger with Easel. Because these dispositions were not contemplated at the date of the merger and are therefore outside of the normal course of business, they have been presented as an extraordinary item. The components of the extraordinary item recorded in 1996 consist of the following (in thousands): Net loss on disposition of ASG.............................. $ 537 Object Studio: Asset writedown........................................... 1,845 Facilities closure........................................ 1,419 Severance related costs................................... 417 Expected costs and funding for joint venture.............. 1,700 ------- Pre-tax extraordinary item.................................. 5,918 Tax benefit................................................. (1,184) ------- Extraordinary loss.......................................... $ 4,734 =======
The Company's US education business, ASG, was sold to a third party for $420,000. The net loss reflected above represents the writedown of the assets of ASG to net realizable value. The amount received for ASG is included in assets held for sale on the consolidated balance sheet as of December 31, 1996. In October, 1996, the Company entered into a joint venture with one of its resellers (the "Other Party") to develop and support the ObjectStudio product suite. This joint venture was formed to allow the Company to reduce its ongoing cash cost of continued development of ObjectStudio. The Company's investment consisted of certain product rights. The Company's share of the venture's loss for the quarter ended December 31, 1996 is included as a component of other income and expense. Despite the formation of the joint venture, profitability related to the ObjectStudio product line continued to be below expectation. In addition, certain actions by competitors in the ObjectStudio marketplace led the Company to conclude that it was not in the best interest of the Company to continue to support this product 33 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 10. EXTRAORDINARY ITEM -- (CONTINUED) line and that the Company would be best served by focusing its resources on product lines with more favorable prospects. Accordingly, the Company decided to exit the ObjectStudio product line. To facilitate exit from the ObjectStudio product line, in December 1996 the Company entered into certain agreements which effectively transferred all of the Company's rights to the product to the Other Party. The Other Party also agreed to take over the operations of the Company's German subsidiary (devoted to ObjectStudio) and to assume all of the Company's obligations related to ObjectStudio in exchange for a one time payment of $300,000. In addition, the Company agreed to maintain its funding commitment to the joint venture for 1997, aggregating $1,400,000, and accepted a significant reduction in its rights in the venture. Because the Company had committed to pay the one time payment and 1997 funding, such costs were considered to be exit costs and were accrued at December 31, 1996. As a result of the plan to exit the ObjectStudio business, forty employees were terminated and such costs were accrued at December 31, 1996. The Company also incurred costs for facility abandonment related to the German subsidiary which was also charged to the extraordinary item. In 1997, the Company recorded no revenue or expenses associated with ObjectStudio activity or the joint venture. In addition, the Company has paid substantially all amounts described above and the dissolution of the joint venture commenced in 1997, in line with the Company's expectations in 1996. At December 31, 1997, approximately $961,000 in facilities costs remain unpaid. 11. EVENTS SUBSEQUENT TO THE DATE OF THE INDEPENDENT AUDITOR'S REPORT (UNAUDITED) Merger with Unidata, Inc. -- On February 10, 1998, following approval by the Company's stockholders, the Company consummated a merger with Unidata, Inc. ("Unidata"), a relational database, object database and software tools developer and marketer. Such merger is expected to be accounted for as a pooling of interests, and accordingly, once financial statements for periods including the date of consummation are prepared, the results of operations of the Company and Unidata, Inc. will be retroactively combined for all periods presented. In connection with the merger, the Company issued approximately 5,750,000 shares of common stock for all outstanding common stock of Unidata. In addition, options outstanding under Unidata's stock option plans were converted into options to acquire the Company's common stock at prices adjusted to reflect the conversion rate between the two stocks. Following the merger, the Company changed its name to Ardent Software, Inc. Summarized pro forma statement of operations data for the Company combined with Unidata for the fiscal years ended 1997, 1996, and 1995 are as follows (in thousands):
FISCAL YEAR ENDED ------------------------------- 1997 1996 1995 -------- -------- ------- Revenue............................................ $106,666 $110,499 $92,721 Income (loss) from operations...................... 6,668 (4,079) (3,019) Net income (loss).................................. 2,825 (9,993) (2,626) Net income (loss) per share: Basic............................................ $ 0.20 $ (0.75) $ (0.20) Diluted.......................................... $ 0.20 $ (0.75) $ (0.20) Basic weighted average shares outstanding.......... 13,856 13,243 13,063 Diluted weighted average shares outstanding........ 14,188 13,243 13,063
Unidata is a defendant in two actions filed, one in May, 1996 in the U.S. District Court for the Western District of Washington and one filed in September, 1996, in the U.S. District Court for the District of Colorado. The plaintiffs allege in both suits that Unidata authorized usage of certain Unidata products for 34 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 11. EVENTS SUBSEQUENT TO THE DATE OF THE INDEPENDENT AUDITOR'S REPORT (UNAUDITED) -- (CONTINUED) distribution and assert claims for fraud, breach of contract, unfair competition, RICO violations, and trademark and copyright infringement. Unidata has denied the allegations in its answers to the complaint and the proceedings for each case are currently in the arbitration stage. Based upon reviews to date, management of Unidata believes that the actions are without merit and intends to oppose them vigorously. 12. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED -- IN THOUSANDS)
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- 1997 Revenue................................... $13,721 $15,040 $13,770 $15,023 Income from operations.................... 593 1,110 1,379 2,197 Net income................................ 305 651 864 1,564 Basic net income per common share......... .04 .08 .11 .19 Diluted net income per common share....... .04 .08 .10 .18 1996 Revenue................................... $17,736 $17,958 $16,688 $16,884 Income (loss) from operations............. 970 (531) 316 (2,263) Net income (loss)......................... 559 (725) 131 (7,340) Basic net income (loss) per common share................................... .07 (.09) .02 (.91) Diluted net income (loss) per common share................................... .07 (.09) .02 (.91)
Income (loss) per share has been restated in accordance with SFAS 128. See Note 1 -- Income (Loss) Per Common Share. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information with respect to Directors may be found under the caption "Election of Directors" appearing in the Company's definitive Proxy Statement for the 1998 Annual Meeting of Stockholders. Such information is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information set forth under the captions "Executive Officer Compensation" and "Director Compensation" appearing in the Company's definitive proxy statement for the 1998 Annual Meeting of Stockholders is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information set forth under the captions "Principal Stockholders" and "Stock Ownership of Directors and Executive Officers" appearing in the Company's definitive proxy statement for the 1998 Annual Meeting of Stockholders is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Not applicable. 35 36 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K (1) Financial Statements The following financial statements are filed as part of this Annual Report: Independent Auditors Report. Consolidated Balance Sheets as of December 31, 1997 and 1996. Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995. Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995. Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995. Notes to Consolidated Financial Statements. Supplemental Financial Data not covered by the Independent Auditors Report: Selected Quarterly Financial Data (2) Financial Statement Schedule Schedule II -- Valuation and Qualifying Accounts All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. (3) Exhibits Documents listed below, except for documents incorporated herein by reference, are being filed as exhibits herewith. Pursuant to Rule 12b-32 of the General Rules and Regulations promulgated by the Commission under the Securities Exchange Act of 1934, certain exhibits re incorporated herein by reference. 2.1 Agreement and Plan of Merger and Reorganization dated as of October 7, 1997 between VMARK and Unidata.(9) 2.2 Amendment to Agreement and Plan of Merger and Reorganization dated as of November 7, 1997 between VMARK and Unidata.(9) 2.3 Certificate of Merger dated February 10, 1998 between VMARK and Unidata. 3.2 Second Restated Certificate of Incorporation of the Company.(1) 3.3 By-laws of the Company, as amended and restated effective as of March 17, 1992.(1) 3.3a Amendment to By-laws effective February 10, 1994.(3) 3.3b Amendment to By-laws effective February 10, 1998. 3.4 Certificate of Designations, Rights, Preferences and Privileges of Series A Junior Preferred Stock.(7) 4.1 Rights Agreement dated as of June 12, 1996 between the Company and State Street Bank and Trust Company, as Rights Agent.(7) 4.2 First Amendment to Rights Agreement dated as of September 30, 1997 between the Company, as Rights Agent.(9) 10.1a 1986 Stock Option Plan, as amended and restated.(2) 10.1d Amendment to 1986 Stock Option Plan effective January 28, 1997.(10) 10.2 1991 Director Stock Option Plan, as amended and restated.(2) 10.2b Amendment to 1991 Director Stock Option Plan effective January 31, 1995. (10) 10.2c Amendment to 1991 Director Stock Option Plan effective July 29, 1996.(10) 10.6 Restated Registration Rights Agreement dated as of April 10, 1992 between the Company and certain of its stockholders.(1) 10.11a Lease dated as of May 5, 1994 between the Company and 50 Washington Street Associated Limited Partnership(4) 10.18a Employee Stock Purchase Plan, as amended and restated.(2) 10.23 Split Dollar Life Insurance Agreement between the Company and James K. Walsh dated as of October 12, 1993.(3) 10.27 Split Dollar Life Insurance Agreement between the Company and Jason E. Silvia dated as of April 27, 1994.(6) 36 37 10.28 Asset Purchase Agreement between the Company and Constellation Software, Inc. dated February 15, 1994.(5) 10.31 1995 Non-Statutory Stock Option Plan, as amended and effected January 1, 1996.(10) 10.32 Split Dollar Life Insurance Agreement between the Company and Charles F. Kane dated as of December 15, 1995.(10) 10.33 Split Dollar Life Insurance Agreement between the Company and Peter L. Fiore dated as of September 15, 1996.(10) 10.34 Split Dollar Life Insurance Agreement between the Company and Peter Gyenes dated as of June 15, 1996.(10) 10.35 Loan and Security Agreement dated as of May 3, 1996 by and between Silicon Valley Bank and Company.(10) 10.36 Amended and Restated Promissory Note -- Revolving Line of Credit loans by the Company to Silicon Valley Bank, dated May 3, 1996.(10) 10.38 Second Loan Modification Agreement to the Loan and Security Agreement (dated May 3, 1996) and the First Amendment to the Amended and Restated Promissory Note (dated May 3, 1996) dated September 9, 1997 by and between Silicon Valley Bank and the Company.(9) 10.39 Split Dollar Life Insurance Agreement between the Company and James D. Foy dated as of April 15, 1997.(9) 10.40 Registration Rights Agreement dated February 10, 1998 between the Company and James T. Dresher.(11) 10.41 Registration Rights Agreement dated December 1, 1995 between Massachusetts Mutual Life Insurance Company and certain affiliates and the Company. 10.42 Distribution Agreement dated November, 1995 among System Builder Software Ltd., SB Tech Pty. Ltd., Desmond Miller and the Company. 10.43 Shareholder Agreement dated November 14, 1995 among certain Shareholders of the Company and the Company. 21.1 Subsidiaries of Ardent. 23 Independent Auditors' Consent. 27.1 Financial Data Schedule.
- --------------- (1) Incorporated by reference to the respective exhibit filed with the Company's Registration Statement on Form S- 1, File No. 33-46533, initially filed on March 19, 1992. (2) Incorporated by reference to the respective exhibit to the Company's Registration Statement on Form S-8, File No. 333-00218, filed on January 5, 1996. (3) Incorporated by reference to the exhibit filed with the Company's Form 10-K dated March 28, 1994. (4) Incorporated by reference to the exhibit filed with the Company's Form 8-K dated May 19, 1994. (5) Incorporated by reference to the exhibit filed with the Company's Form 8-K dated March 1, 1994. (6) Incorporated by reference to the exhibit with the Company's Form 8-K dated March 29, 1996. (7) Incorporated by reference to the respective exhibit of the Company's Registration Statement on Form 8-A dated July 17, 1996, File No. 000-20059, filed on July 29, 1996. (8) Incorporated by reference to the exhibit filed with the Company's Form 10-K dated March 28, 1996. (9) Incorporated by reference to the exhibit filed with the Company's Form 10-Q dated November 12, 1997. (10) Incorporated by reference to the exhibit filed with the Company's Form 10-K dated March 31, 1997. (11) Incorporated by reference to the exhibit filed with the Company's Form 10-Q dated February 12, 1998. (4) Reports on Form 8-K No reports on Form 8-K were filed by the Company during the fourth quarter of the year ended December 31, 1997. 37 38 SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 28th day of March, 1998. ARDENT SOFTWARE, INC. By: /s/ PETER GYENES --------------------------------- Peter Gyenes Chairman of the Board and Chief Executive Officer 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.
SIGNATURE TITLE DATE ------------------------------- ----------------------------------------------- -------------- /s/ PETER GYENES Chairman of the Board and Chief Executive ------------------------------ Officer (Principal Executive Officer) Peter Gyenes /s/ CHARLES F. KANE Vice President, Finance, and Chief Financial ------------------------------ Officer (Principal Finance and Accounting Charles F. Kane Officer) /s/ MARTIN HART Director ------------------------------ Martin Hart /s/ ROBERT G. CLAUSSEN Director ------------------------------ Robert G. Claussen /s/ ROBERT MORRILL Director ------------------------------ Robert Morrill /s/ JAMES DRESHER Director ------------------------------ James Dresher /s/ DAVID BRUNEL President, Director and Chief Operating Officer ------------------------------ David Brunel
39 SCHEDULE 11 ARDENT SOFTWARE, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO BALANCE BEGINNING OF COSTS AND AT END OF YEAR EXPENSES DEDUCTIONS YEAR ------------ ---------- ----------- ---------- Allowance for doubtful accounts receivable: For the Year Ended December 31, 1997....... $1,864,000 $ 238,000 $ (572,000) $1,530,000 ========== ========== =========== ========== For the Year Ended December 31, 1996....... $1,891,000 $1,286,000 $(1,313,000) $1,864,000 ========== ========== =========== ========== For the Year Ended December 31, 1995....... $ 828,000 $1,849,000 786,000) $1,891,000 ========== ========== =========== ==========
EX-2.3 2 CERTIFICATE OF MERGER 1 EXHIBIT 2.3 CERTIFICATE OF MERGER OF VMARK SOFTWARE, INC. AND UNIDATA, INC. It is hereby certified that: 1. The constituent corporations participating in the merger are: (i) VMARK Software, Inc., which is incorporated under the laws of the State of Delaware; and (ii) Unidata, Inc., which is incorporated under the laws of the State of Colorado. 2. An Agreement and Plan of Merger and Reorganization has been approved, adopted, certified, executed and acknowledged by each of the constituent corporations in accordance with the provisions of Section 252 of the General Corporation Law of the State of Delaware. 3. The surviving corporation in the merger is VMARK Software, Inc., which will continue its existence as said surviving corporation under the name Ardent Software, Inc. 4. The Second Restated Certificate of Incorporation of VMARK Software, Inc., as now in force and effect, shall be the Certificate of Incorporation of said surviving corporation, except that the Second Restated Certificate of Incorporation shall be amended (i) to change the name of the surviving corporation as set forth in the foregoing paragraph and (ii) to delete the first sentence of Article IV and replace it as follows: "The total number of shares of stock which the Corporation shall have the authority to issue is 50,000,000, of which 40,000,000 shares shall be Common Stock, $.01 par value, and 10,000,000 shares shall be Preferred Stock, $.01 par value." 5. The executed Agreement and Plan of Merger and Reorganization between the constituent corporations is on file at the principal place of business of the surviving corporation, the address of which is as follows: Ardent Software, Inc. 2 50 Washington Street Westboro, Massachusetts 01581-1021 6. A copy of the Agreement and Plan of Merger and Reorganization will be furnished by the surviving corporation, on request and without cost, to any stockholder of each of the constituent corporations. 7. The authorized capital stock of Unidata, Inc. is 40,000,000 shares of Class A common stock, no par value, 3,000,000 shares of Class B common stock, no par value, and 10,000,000 shares of preferred stock, no par value. 8. This Certificate of Merger shall become effective upon the filing of this certificate. Dated: As of February 10, 1998. 3 VMARK SOFTWARE, INC. By: /s/ Peter Gyenes President and CEO (Title) Attest: /s/ Richard N. Hoehn UNIDATA, INC. By: /s/ David W. Brunel President and CEO (Title) Attest: /s/ Harold Nussenfeld EX-3.3(B) 3 AMENDMENT TO BY-LAWS 1 EXHIBIT 3.3b ARDENT SOFTWARE, INC. AMENDMENT TO BY-LAWS ---------------- ARTICLE XIV of the By-laws of Ardent Software, Inc. (formerly VMark Software, Inc.) was amended by the Board of Directors on February 10, 1998, effective as of that date, to delete such Article in its entirety and insert in its place the following: CHAIRMAN OF THE BOARD; PRESIDENT If a chairman of the board of directors is elected, he shall preside at all meetings of the board of directors at which he is present and, if so designated by the board, shall be the chief executive officer of the corporation. The president shall be chief executive officer of the corporation unless the chairman of the board of directors is so designated, in which event the president shall be the chief operating officer. The chief executive officer shall, subject to the direction and under the supervision of the board of directors, have general and active control of the affairs and business of the corporation and general supervision over its officers, agents and employees. He shall preside, when present, at all meetings of stockholders and shall have custody of the treasurer's bond, if any. EX-10.41 4 REGISTRATION RIGHTS AGREEMENT 1 Exhibit 10.41 REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement (the "Agreement") is entered into as of December 1, 1995 by and among (1) Unidata, Inc., a Colorado corporation (the "Company"), (ii) Massachusetts Mutual Life Insurance Company, MassMutual Corporate Investors, MassMutual Participation Investors and MassMutual Corporate Value Partners Limited (hereinafter referred to collectively as the "Institutional Investors"), and (iii) James T. Dresher ("Dresher"). WHEREAS, the Institutional Investors have negotiated with the officers of the Company to enter into a Note Agreement, dated as of the date hereof (the "Note Agreement"), pursuant to which the Institutional Investors will purchase from the Company (i) $10,000,000 aggregate principal amount of the Company's 11.5% Senior Subordinated Notes due December 1, 2003 (the "Notes"), (ii) Warrants (the "Warrants") to purchase 250,000 shares of Class B Common Stock, having no par value per share (the "Class B Common Stock"), of the Company, and (iii) 500,000 shares of Class B Common Stock of the Company for an aggregate consideration equal to $2,000,000. The Notes, Warrants and Class B Common Stock are collectively referred to as the "Institutional Investor Securities." The shares of Class B Common Stock including the shares of Class B Common Stock to be issued upon exercise of the Warrants together with the shares of Class A Common Stock, having no par value per share (the "Class A Common Stock") of the Company, to be issued to the Institutional Investors upon conversion of the Class B Common Stock, are collectively referred to as the "Institutional Investor Stock". The term "Common Stock" as used herein shall include the Class A Common Stock and the Class B Common Stock, including the shares of Class B Common Stock deliverable upon the exercise of the rights granted under the Warrants; provided, however, that for purposes of the registration rights contained in Section 4, Common Stock shall include only Class A Common Stock of the Company and any class of Common Stock issued in substitution therefor. WHEREAS, Dresher and his Related Parties (as defined below) own 9,200,000 shares of Class A Common Stock of the Company, which will constitute approximately 75% of the capital stock outstanding immediately after the purchase of the Institutional Investor Securities by the Institutional Investors. WHEREAS, the Institutional Investors have required as an absolute condition to the purchase of the Institutional Investor Securities from the Company, that the Company and Dresher enter into this Agreement, and whereas the Company and Dresher are desirous that the Institutional Investors enter into the Note Agreement and purchase from the Company the Institutional Investor Securities described above, the Company and Dresher have agreed to enter into this Agreement. NOW THEREFORE, in consideration of the mutual covenants herein contained and for other good and valuable consideration, the parties agree as follows: 2 SECTION 1. ACQUISITION OF INSTITUTIONAL INVESTOR STOCK. (a) Acquired for Own Account. Each of the Institutional Investors represents and warrants that the Institutional Investor Stock to be acquired by it pursuant to the Note Agreement will be acquired for investment purposes only and not with a view toward resale or distribution thereof in violation of the Securities Act of 1933, as amended (the "Act"), and will not be disposed of in contravention of the Act. (b) Institutional Investor Stock Not Registered. Each of the Institutional Investors acknowledges that none of the Institutional Investor Stock has been registered pursuant to the Act. (c) Knowledge of Transaction. Each of the Institutional Investors represents and warrants that it has had an opportunity to ask questions and receive answers concerning the terms and conditions of the Note Agreement, has had legal counsel review such terms and conditions and has had sufficient opportunity for such Institutional Investor and its legal counsel to conduct diligence concerning the Company. SECTION 2. RESTRICTIONS ON TRANSFER. (a) Transfer of Institutional Investor Stock. With the exception of the Institutional Investor Stock owned by MassMutual Corporate Value Partners Limited which may be pledged to its creditors from time to time, none of the Institutional Investors will sell, pledge or otherwise transfer any interest in any shares of Institutional Investor Stock except pursuant to the provisions of subsections (b), (c) or (d) of this Section 2 or unless such sale occurs in connection with or after a Qualified Public Offering consummated by the Company. Any attempted transfer of Institutional Investor Stock in violation of this Agreement shall be void and of no effect. As used herein, "Qualified Public Offering" shall mean a public offering of Common Stock registered under the Act which results in net proceeds to the Company and any of its shareholders participating in such public offering in an aggregate amount of at least $15,000,000. (b) First Refusal Rights. Any Institutional Investor desiring to transfer any shares of Institutional Investor Stock (other than pursuant to Section 2(c) below), shall, at least 120 days prior to making such transfer, deliver written notice (a "Sale Notice") to the Company and Dresher disclosing in detail the identity of the prospective transferee(s) and the terms and conditions of the proposed transfer. Such Institutional Investor agrees not to consummate any such transfer until the earlier to occur of (i) 120 days after the Sale Notice has been delivered to the Company and Dresher, and (ii) the date on which the parties to the transfer have been determined pursuant to this Section 2(b). The date of the first to occur of such events is referred to as the "Authorization Date." Within ninety (90) days of receiving such Sale Notice, the Company may elect to purchase all or any portion of the Institutional Investor Stock proposed to be transferred upon the same terms and conditions as set forth in the Sale Notice by notifying such Institutional Investor in writing within such 90-day period. If the Company does not elect to purchase all of the shares of Institutional Investor Stock specified in the Sale Notice, Dresher may elect to purchase any portion of such Institutional Investor Stock that the Company elects not to purchase upon the same terms and conditions as set forth in the Sale Notice, provided that Dresher notifies in writing such Institutional Investor of Dresher's election to purchase within the 3 same 90-day period following receipt of the Sale Notice. If the Company and Dresher together do not elect to purchase all of the shares of Institutional Investor Stock specified in the Sale Notice, such Institutional Investor may, during the 90-day period immediately following the Authorization Date, transfer such shares of Institutional Investor Stock that the Company has not elected to purchase at a price and on terms no more favorable to the proposed transferee(s) than specified in the Sale Notice; provided that if such transfer shall be consummated prior to a Qualified Public Offering, such transferee has agreed in writing to be bound by the provisions of this Agreement prior to such transfer. Any shares of Institutional Investor Stock not transferred within such 90-day period shall be subject to the provisions of this Section 2(b) upon a subsequent attempt by such Institutional Investor to transfer such Institutional Investor Stock. The right of first refusal provided in this Section 2(b) shall terminate upon the Company's consummation of a Qualified Public Offering. (c) Sale of the Company. If the Board of Directors of the Company and the holders of at least 66% of shares of Class A Common Stock (or other voting capital stock) (the "Required Percentage") then outstanding approve the sale of all or substantially all of the Company's consolidated assets or a sale or exchange of all or substantially all of its outstanding capital stock (an "Approved Sale"), the holders of Institutional Investor Stock (i) shall be offered the opportunity to sell or exchange all of their shares of Institutional Investor Stock for the same price and otherwise on the same terms and conditions as said holders of the Required Percentage in such Approved Sale for the same price and otherwise on the same terms and conditions as said holders and (ii) shall consent to and raise no objections against the Approved Sale of the Company and, if requested to vote on such Approved Sale, shall vote all shares of Class A Common Stock that said holders beneficially own in favor of such Approved Sale. It is intended that the provisions of this Section 2(c) constitute a "voting agreement" within the meaning of Section 7-107-302 of the Colorado Business Corporation Act (the "CBCA") and not a "voting trust" within the meaning of Section 7-107-301 of the CBCA. If the Approved Sale of the Company is structured as a sale or exchange of stock, the holders of Institutional Investor Stock shall agree to sell or exchange all of their shares of Institutional Investor Stock, including the rights to acquire shares of Institutional Investor Stock, on the terms and conditions approved by the Board of Directors and the holders of at least the Required Percentage. In any Approved Sale, all of the holders of Common Stock (including shares received or to be received upon exercise of the Warrants) shall be entitled to receive the same form and amount of consideration per share of Common Stock, or if any holders of Common Stock are given an option as to the form and amount of consideration to be received, all holders of Common Stock shall be given the same option. The holders of Institutional Investor Stock shall take all necessary and desirable actions in connection with the consummation of the Approved Sale of the Company as requested by counsel to the Company. The rights provided in this Section 2(c) shall terminate upon the Company's consummation of a Qualified Public Offering. (d) Notice of Proposed Transfer Following A Qualified Public Offering. Following the consummation of a Qualified Public Offering, any Institutional Investor desiring to transfer any shares of Institutional Investor Stock, other than pursuant to an effective registration statement under the Act, shall deliver written notice to the Company, at least 5 business days prior to the date of the proposed transfer, describing the manner and circumstances of such proposed transfer. 4 (e) Unless the Company shall have received an opinion from counsel to the Company (which opinion shall be obtained by the Company on or prior to the date of such proposed transfer) that a proposed transfer of Institutional Investor Stock may not be effected without registration or qualification under Federal or state law, such holder of Institutional Investor Stock shall be entitled to transfer such Institutional Investor Stock in the manner proposed. (f) The certificates representing the Institutional Investor Stock to be issued to the Institutional Investors shall bear the following legend: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT"), AND MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR AN EXEMPTION FROM REGISTRATION THEREUNDER. THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON TRANSFER AND CERTAIN OTHER AGREEMENTS SET FORTH IN A REGISTRATION RIGHTS AGREEMENT DATED AS OF DECEMBER 1, 1995, A COPY OF WHICH MAY BE OBTAINED BY THE HOLDER HEREOF WITHOUT CHARGE AT THE COMPANY'S PRINCIPAL PLACE OF BUSINESS. (g) Each holder of Institutional Investor Stock agrees not to effect any public sale or distribution of any equity securities of the Company, or any securities convertible into or exchangeable or exercisable for such securities, including a sale pursuant to Rule 144 (or any similar provision then in force) under the Act during the seven days prior to, and during the 180 days beginning on the effective date of the registration statement relating to any underwritten public offering of the Company's Common Stock or preferred stock, except as part of such underwritten public offering or if otherwise permitted. SECTION 3. TAG-ALONG RIGHT. With respect to any proposed transfer, sale or other disposition (collectively, a proposed transfer") of shares of Common Stock ("Shares") by Dresher or any of his Related Parties (such persons being hereinafter referred to collectively as the "Dresher Group") to a person (such other person being hereafter referred to as the "proposed purchaser"), other than pursuant to an Exempt Transfer (as defined below), each of the Institutional Investors and their respective Related Parties (collectively, the "Tag-Along Institutional Investors") shall have the right (the "Tag-Along Right") to require the proposed purchaser to purchase from such Tag-Along Institutional Investor up to the number of whole Shares owned by such Tag-Along Institutional Investor, including the rights to acquire such Shares, equal to the sum of (A) the number derived by multiplying the total number of Shares the members of the Dresher Group propose to transfer by a fraction, the numerator of which is the total number of Shares owned by such Tag-Along Institutional Investor (including Shares to be received upon exercise of the Warrants), and the denominator of which is the total number of Shares then outstanding on a fully-diluted basis and (B) any additional Shares such Tag-Along Institutional Investor shall be entitled to have purchased pursuant to the next paragraph if any other Tag-Along Institutional Investor elects not to exercise its rights 5 hereunder. Any Shares purchased from Tag-Along Institutional Investors pursuant to this Section 3 shall be for the same consideration and upon the same terms and conditions as such proposed transfer by Dresher (or his Related Parties, as the case may be). Dresher shall, not less than fifteen (15) nor more than thirty (30) calendar days prior to each proposed transfer, notify, or cause to be notified, each Tag-Along Institutional Investor in writing of each such proposed transfer, setting forth in such notice: (i) the name of the transferor and the number of Shares proposed to be transferred, (ii) the name and address of the proposed purchaser, (iii) the proposed amount and form of consideration and terms and conditions of payment offered by such proposed purchaser and (iv) that the proposed purchaser has been informed of the Tag-Along Right provided for in this Section 3 and has agreed to purchase Shares in accordance with the terms hereof. The Tag-Along Right may be exercised by any Tag-Along Institutional Investor by delivery of a written notice to Dresher or his Related Party proposing to sell Shares (the "Tag-Along Notice") within ten (10) calendar days following its receipt of the notice specified in the last sentence of the preceding paragraph. The Tag-Along Notice shall state the amount of Shares that such Tag-Along Institutional Investor proposes to include in such transfer to the proposed purchaser determined as aforesaid, plus the amount of additional Shares, if any, that such Tag-Along Institutional Investor would be willing to sell to the proposed purchaser in the event that any of the other Tag-Along Institutional Investors elects not to exercise their Tag-Along Rights in whole or in part. The maximum amount of additional Shares that each such Tag-Along Institutional Investor shall be entitled to sell, and the proposed purchaser be required to purchase, shall be determined by multiplying the total number of Shares that, under the formula described in the previous paragraph, Tag-Along Institutional Investors could have elected to sell to the proposed purchaser but elected not to so sell, by a fraction, the numerator of which is the total number of Shares owned by such Tag-Along Institutional Investor electing to sell additional Shares and the denominator of which is the total number of Shares owned by all Tag-Along Institutional Investors who delivered Tag-Along Notices. In the event that the proposed purchaser does not purchase Shares from the Tag-Along Institutional Investors on the same terms and conditions as specified in the notice referred to in the last sentence of the preceding paragraph, then Dresher and his Related Parties shall not be permitted to sell any Shares to the proposed purchaser in the proposed transfer. If no Tag-Along Notice is received during the 10-day period referred to above (or if such Notices do not cover all the Shares proposed to be transferred), Dresher and his Related Parties shall have the right, for a period of ninety (90) days after the expiration of the 10-day period referred to above, to transfer the Shares specified in the notice referred to in the last sentence of the preceding paragraph (or the remaining Shares) on terms and conditions no more favorable than those stated in the Tag-Along Notice and in accordance with the provisions of this Section 3. As used herein, the term "Exempt Transfer" shall mean (1) transfers by Dresher to his Related Parties, provided that any such transferee agrees in writing to be bound by this Agreement as if such transferee were Dresher with respect to such transferred Shares; (2) transfers by any of Dresher's Related Parties to Dresher; and (3) transfers by Dresher or any of his Related Parties which do not result in the Dresher Group owning of record less than 50% of the Shares owned by the Dresher Group on the date of this Agreement. 6 As used herein, the term "Related Party" means, with respect to any person, (A) a spouse or immediate family member or (B) a trust, corporation, partnership or other entity of which such person is a beneficiary, stockholder, partner, owner or person holding an 80% or more controlling interest. The Company agrees not to effect any transfer of Shares by Dresher until it has received evidence reasonably satisfactory to it that the Tag-Along Right, if applicable to such transfer, has been complied with. The rights provided in this Section 3 shall terminate upon the Company's consummation of a Qualified Public Offering. SECTION 4. REGISTRATION RIGHTS. (a) Piggyback Registration Rights. (1) Right to Piggyback. Subject to the last sentence of this subsection (1), whenever the Company proposes to register any Common Stock (or securities convertible into or exchangeable for, or options to acquire, Common Stock) with the Securities and Exchange Commission (the "Commission") under the Act (other than a registration on Form S-4 or S-8 or an S-3 registration statement which relates solely to a dividend reinvestment plan or employee purchase plan) in a public sale for cash and the registration form to be used may be used for the registration of the Registrable Securities (as defined in subsection (h) below) (a "Piggyback Registration "), whether or not for sale for its own account, the Company will give written notice to each of the Institutional Investors (and any transferees of such Institutional Investors) and each of the holders of Shares listed on Exhibit I hereto (collectively, including the Institutional Investors, the "Significant Holders ") (including Dresher, which, for purposes of this Section 4, shall include Dresher, his Related Parties and any transferees of Dresher and his Related Parties), at least fifteen (15) days prior to the anticipated filing date, of its intention to effect such a registration, which notice will specify the kind and number of securities proposed to be registered, the distribution arrangements and such other information that at the time would be appropriate to include in such notice, and will, subject to subsection (a)(2) below, include in such Piggyback Registration all Registrable Securities with respect to which the Company has received written requests for inclusion therein within ten (10) days after delivery of the Company's notice. Except as may otherwise be provided in this Agreement, Registrable Securities with respect to which such request for registration has been received will be registered by the Company and offered to the public in a Piggyback Registration pursuant to this Section 4 on the same terms and conditions as those applicable to the registration of Common Stock (or securities convertible into or exchangeable or exercisable for Common Stock) to be sold by the Company and by any other person selling under such registration. (2) Priority on Piggyback Registrations. If the managing underwriter or underwriters, if any, advise the holders of Registrable Securities in writing that in its or their reasonable opinion or, in the case of a Piggyback Registration not being underwritten, the Company shall reasonably determine (and notify the holders of Registrable Securities of such determination), after consultation with an investment banker of nationally recognized standing, that the number or kind of securities proposed to be sold in such registration (including Registrable Securities to be included pursuant to subsection (a)(1) above) will materially adversely affect the success of 7 such offering, the Company will include in such registration the number of securities, if any, which, in the opinion of such underwriter or underwriters, or the Company, as the case may be, can be sold as follows: (i) first, the shares the Company proposes to sell, and (ii) second, the Registrable Securities requested to be included in such registration by the Significant Holders. To the extent that the privilege of including Registrable Securities in any Piggyback Registration must be allocated among the Significant Holders, the allocation shall be made pro rata based on the number of Registrable Securities that each such participant shall have requested to include therein. (3) Selection of Underwriters. If any Piggyback Registration is an underwritten offering (other than an offering initiated as a Demand Registration as provided in subsection (b) below), the Company will select a managing underwriter or underwriters to administer the offering, which managing underwriter or underwriters will be of nationally recognized standing and reasonably acceptable to the holders of a majority of the Registrable Securities included therein. (b) Demand Registration Rights. (1) Right to Demand. At any time after (i) the Company is eligible to register Shares of Common Stock under the Act on Form S-3 and (ii) none of the Shares held by Dresher are subject to an underwriter lock-up agreement relating to such Shares, the Institutional Investors may, make a written request of the Company for registration with the Commission, under and in accordance with the provisions of the Act, of all or part of their Registrable Securities (a "Demand Registration"); provided, that (x) the Company need not effect a Demand Registration unless such Demand Registration shall include at least 50% of the Registrable Securities held on the date of such written request by the Institutional Investors collectively, (y) the Company may defer the filing of any registration statement relating to a Demand Registration for (i) a reasonable period of time (not to exceed ninety (90) days following the end of the most recently completed fiscal year or forty-five (45) days following the end of the most recently completed fiscal quarter (whichever is later)) to the extent necessary to prepare the financial statements of the Company for the fiscal period most recently ended prior to the related request, (ii) up to ninety (90) days if the Company would be required to disclose in such registration statement the existence of any fact relating to a material business situation, transaction or negotiation not otherwise required to be disclosed, or (iii) up to ninety (90) days if the Company notifies the Institutional Investors that a registration at the time and on the terms requested would adversely affect any equity financing by the Company that had been contemplated by the Company prior to receipt of notice requesting registration pursuant to this Section 4(b), and (z) if the Company elects to defer any Demand Registration pursuant to the terms of this sentence, no Demand Registration shall be deemed to have occurred for purposes of this Agreement. Subject to subsection (3) below, the Company will include in such registration all Registrable Securities of such Significant Holders with respect to which the Company has received written requests for inclusion therein. All requests made pursuant to this subsection (b)(1) will specify the aggregate number of Registrable Securities requested to be registered and will also specify the intended methods of disposition thereof. (2) Number of Demand Registrations. The Institutional Investors collectively shall be 8 entitled to one (1) Demand Registration. The expenses of the Institutional Investors requesting a Demand Registration shall be borne by the Company as provided in subsection (d) below. A Demand Registration shall not be counted as a Demand Registration hereunder until such Demand Registration has been declared effective by the Commission and remains effective for at least 60 consecutive days without being interfered with by any (i) stop order, injunction or other order or requirement of the Commission or other governmental agency or court or regulatory agency or exchange, including NASDAQ or NASD, or (ii) action by the Company or any stockholder (other than the Institutional Investor(s) requesting such Demand Registration) requiring the suspension of such offering. (3) Priority on Demand Registrations. If in any Demand Registration the managing underwriter or underwriters thereof (or in the case of a Demand Registration not being underwritten, in the opinion of the holders of a majority of the Registrable Securities included therein), advise the Company in writing that in its or their reasonable opinion the number of securities proposed to be sold in such Demand Registration exceeds the number that can be sold in such offering without having a material effect on the success of the offering (including, without limitation, an impact on the selling price or the number of Shares that any participant may sell), the Company will include in such registration only the number of securities that, in the reasonable opinion of such underwriter or underwriters (or holders of Registrable Securities, as the case may be) can be sold without having a material adverse effect on the success of the offering as follows: (i) first, the Registrable Securities held by the Institutional Investors that initiated such Demand Registration, (ii) second, the Registrable Securities requested to be included in such Demand Registration by the Significant Holders (excluding the Institutional Investors but including all other Significant Holders requesting to have Shares included in such Demand Registration pro rata among those requesting registration on the basis of the number of Shares requested to be included, and (iii) third, Shares to be issued and sold by the Company. (4) Selection of Underwriters. If a Demand Registration is an underwritten offering, the holders of a majority of the Registrable Securities to be included in such Demand Registration held by the Institutional Investors that initiated such Demand Registration shall have the right to select a managing underwriter or underwriters of recognized national standing that is or are reasonably satisfactory to the Company to administer the offering. (c) Registration Procedures. With respect to any Piggyback Registration or Demand Registration (generically, a "Registration"), the Company will, subject to Sections (4)(a)(2) and (4)(b)(3), as expeditiously as practicable: (1) prepare and file with the Commission, within ninety (90) days after mailing the applicable Notice, a registration statement or registration statements ("Registration Statement") relating to the applicable Registration on Form S-3; provided that the Company will include in any Registration Statement all information that the holders of the Registrable Securities so to be registered shall reasonably request and shall include all financial statements required by the Commission to be filed therewith, cooperate and assist in any filings required to be made with the National Association of Securities Dealers, Inc. ("NASD"), and use its best efforts to cause such Registration Statement to become effective; provided further, that before filing a Registration Statement or prospectus 9 related thereto (a "Prospectus") or any amendments or supplements thereto, the Company will furnish to the holders of the Registrable Securities covered by such Registration Statement and the underwriters, if any, copies of all such documents proposed to be filed, which documents will be subject to the reasonable review of such holders and underwriters and their respective counsel, and the Company will not file any Registration Statement or amendment thereto or any Prospectus or any supplement thereto to which the holders of a majority of the Registrable Securities covered by such Registration Statement or the underwriters, if any, shall reasonably object; (2) use its best efforts to keep such Registration Statement current for a period of ninety (90) days, or such shorter period which will terminate when all Registrable Securities covered by such Registration Statement have been sold, and prepare and file with the Commission such amendments and post-effective amendments to the Registration Statement as may be necessary to keep each Registration Statement effective for such period; cause each Prospectus to be supplemented by any required Prospectus supplement, and as so supplemented to be filed pursuant to Rule 424 under the Act; and comply with the provisions of the Act with respect to the disposition of all securities covered by such Registration Statement during the applicable period in accordance with the intended method or methods of distribution by the sellers thereof set forth in such Registration Statement or supplement to the Prospectus; the Company shall not be deemed to have used its best efforts to keep a Registration Statement effective during the applicable period if it voluntarily takes any action that would result in selling holders of the Registrable Securities covered thereby not being able to sell such Registrable Securities during that period unless such action is required under applicable law, provided that the foregoing shall not apply to actions taken by the Company in good faith and for valid business reasons, including without limitation the acquisition or divestiture of assets, so long as the Company promptly thereafter complies with the requirements of subsection (11) of this subsection (c), if applicable; (3) notify the selling holders of Registrable Securities and the managing underwriters, if any, promptly, and (if requested by any such person or entity) confirm such advice in writing, (A) when the Prospectus or any Prospectus supplement or post-effective amendment has been filed, and, with respect to the Registration Statement or any post-effective amendment, when the same has become effective, (B) of any request by the Commission for amendments or supplements to the Registration Statement or the Prospectus or for additional information, (C) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose, (D) if at any time the representations and warranties of the Company contemplated by subsection (14) below cease to be true and correct, (E) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose and (F) of the happening of any event which makes any statement made in the Registration Statement, the Prospectus or any document incorporated therein by reference untrue or which requires the making of any changes in the Registration Statement, the Prospectus or any document incorporated therein by reference in order to make the statements therein not misleading; 10 (4) make every reasonable effort to obtain the withdrawal of any order suspending the effectiveness of the Registration Statement at the earliest possible moment; (5) if requested by the managing underwriter or underwriters or a holder of Registrable Securities being sold in connection with an underwritten offering, promptly incorporate in a Prospectus supplement or post-effective amendment such information as the managing underwriters and the holders of a majority of the Registrable Securities being sold agree should be included therein relating to the plan of distribution with respect to such Registrable Securities, including, without limitation, information with respect to the number of Registrable Securities being sold to such underwriters, the purchase price being paid therefor by such underwriters and with respect to any other terms of the underwritten (or best efforts underwritten) offering of the Registrable Securities to be sold in such offering; and make all required filings of such Prospectus supplement or post-effective amendment as soon as notified of the matters to be incorporated in such Prospectus supplement or post-effective amendment; (6) furnish to each selling holder of Registrable Securities and each managing underwriter, without charge, at least one conformed copy of the Registration Statement and any amendment thereto, including financial statements and schedules, all documents incorporated therein by reference and all exhibits (including those incorporated by reference); (7) deliver to each selling holder of Registrable Securities and the underwriters, if any, without charge, as many copies of the Prospectus (including each preliminary prospectus) and any amendment or supplement thereto as such selling holder of Registrable Securities and underwriters may reasonably request; the Company consents to the use of each Prospectus or any amendment or supplement thereto by each of the selling holders of Registrable Securities and the underwriters, if any, in connection with the offering and sale of the Registrable Securities covered by such Prospectus or any amendment or supplement thereto; (8) prior to any public offering of Registrable Securities, register or qualify or cooperate with the selling holders of Registrable Securities, the underwriters, if any, and their respective counsel in connection with the registration or qualification of such Registrable Securities for offer and sale under the securities or "blue sky" laws of such jurisdictions as any seller or underwriter reasonably requests in writing, considering the amount of Registrable Securities proposed to be sold in each such jurisdiction, and do any and all other acts or things necessary or advisable to enable the disposition in such jurisdictions of the Registrable Securities covered by the Registration Statement; provided that the Company will not be required to qualify generally to do business in any jurisdiction where it is not then so qualified or to take any action that would subject it to general service of process in any such jurisdiction where it is not then so subject; (9) cooperate with the selling holders of Registrable Securities and the managing underwriters, if any, to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold and not bearing any restrictive 11 legends and to be in such denominations and registered in such names as the managing underwriters may request at least two (2) business days prior to any sale of Registrable Securities to the underwriters; (10) use its best efforts to cause the Registrable Securities covered by the applicable Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the seller or sellers thereof or the underwriters, if any, to consummate the disposition of such Registrable Securities; (11) upon the occurrence of any event contemplated by subsection (3)(F) above, prepare a supplement or post-effective amendment to the Registration Statement or the related Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of the Registrable Securities, the Prospectus will not contain an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading; (12) cause all Registrable Securities covered by any Registration Statement to be listed on each securities exchange on which similar securities issued by the Company are then listed, or cause such Registrable Securities to be authorized for trading on the NASDAQ National Market if any similar securities issued by the Company are then so authorized, if requested by the holders of a majority of such Registrable Securities or the managing underwriters, if any; (13) provide a CUSIP number for all Registrable Securities, not later than the effective date of the applicable Registration Statement; (14) enter into such agreements (including an underwriting agreement) and take all such other actions in connection therewith in order to expedite or facilitate the disposition of such Registrable Securities and in such connection, whether or not an underwriting agreement is entered into and whether or not the Registration is an underwritten Registration (A) make such representations and warranties to the holders of such Registrable Securities and the underwriters, if any, in form, substance and scope as are customarily, made by issuers to underwriters In primary underwritten offerings; (B) obtain opinions of counsel to the Company and updates thereof (which counsel and opinions (in form, scope and substance) shall be reasonably satisfactory to the managing underwriters, if any, and the holders of a majority of the Registrable Securities being sold) addressed to each selling holder and the underwriters, if any, covering the matters customarily covered in opinions requested in underwritten offerings and such other matters as may be reasonably requested by such holders and underwriters; (C) obtain "cold comfort" letters and updates thereof from the Company's independent certified public accountants addressed to the selling holders of Registrable Securities and the underwriters, if any, such letters to be in customary form and covering matters of the type customarily covered in "cold comfort" letters by underwriters in connection with primary underwritten offerings; (D) if an underwriting agreement is entered into, the same shall set forth in full the indemnification provisions and procedures set forth in subsection (f) below with 12 respect to all parties to be indemnified pursuant to said subsection; and (E) the Company shall deliver such documents and certificates as may be reasonably requested by the holders of a majority of the Registrable Securities being sold and the managing underwriters, if any, to evidence compliance with subsection 3(F) above and with any customary conditions contained in the underwriting agreement or other agreement entered into by the Company. The above shall be done at each closing under such underwriting or similar agreement or as and to the extent required thereunder; (15) make available for inspection by a representative of the holders of a majority of the Registrable Securities, any underwriter participating in any disposition pursuant to such Registration, and any attorney or accountant retained by the sellers or underwriter, all financial and other records, pertinent corporate documents and properties of the Company, and cause the Company's officers, directors and employees to supply all information reasonably requested by any such representative, underwriter, attorney or accountant in connection with such Registration Statement; provided that any records, information or documents that are designated by the Company in writing as confidential shall be kept confidential by such Persons unless disclosure of such records, information or documents is required by court or administrative order or any regulatory body having jurisdiction; (16) otherwise use its best efforts to comply with all applicable rules and regulations of the Commission, and make generally available to its security holders, earnings statements satisfying the provisions of Section 11(a) of the Act, no later than forty-five (45) days after the end of any 12-month period (or ninety (90) days, if such period is a fiscal year) (A) commencing at the end of any fiscal quarter in which Registrable Securities are sold to underwriters in a firm or best efforts underwritten offering, or (B) if not sold to underwriters in such an offering, beginning with the first month of the Company's first fiscal quarter commencing after the effective date of the Registration Statement, which statements shall cover said 12-month periods; and (17) promptly prior to the filing of any document that is to be incorporated by reference into any Registration Statement or Prospectus (after initial filing of the Registration Statement), provide copies of such document to counsel to the selling holders of Registrable Securities and to the managing underwriters, if any, make the Company's representatives available for discussion of such document and make such changes in such document prior to the filing thereof as counsel for such selling holders or underwriters may reasonably request. The Company may require each seller of Registrable Securities as to which any Registration is being effected to furnish to the Company such information regarding such seller and the proposed distribution of such securities as required by applicable laws and regulations. Each holder of Registrable Securities agrees by acquisition of such Registrable Securities that, upon receipt of any notice from the Company of the happening of any event of the kind described in subsection (3)(F) of this subsection (c), such holder will forthwith discontinue disposition of Registrable Securities pursuant to the Registration Statement until such holder's 13 receipt of copies of the supplemented or amended Prospectus as contemplated by subsection (11) of this subsection (c), or until it is advised in writing (the "Advice ") by the Company that the use of the Prospectus may be resumed, and has received copies of any additional or supplemental filings, that are incorporated by reference in the Prospectus, and, if so directed by the Company, such holder will deliver to the Company (at the Company's expense) all copies, other than permanent file copies then in such holder's possession, of the Prospectus covering such Registrable Securities current at the time of receipt of such notice. In the event the Company shall give any such notice, the time periods referred to in subsection (2) of this subsection (c) shall be extended by the number of days during the period from and including the date of the giving of such notice to and including the date when each seller of Registrable Securities covered by such Registration Statement shall have received the copies of the supplemented or amended prospectus contemplated by subsection (11) of this subsection (c) or the Advice. (d) Registration Expenses. All expenses incident to the Company's performance of or compliance with this Section 4 will be borne by the Company, including, without limitation, all registration and filing fees, the fees and expenses of the counsel and accountants for the Company (including the expenses of any "cold comfort" letters), all other costs and expenses of the Company incident to the preparation, printing and filing under the Act of the Registration Statement (and all amendments and supplements thereto) and furnishing copies thereof and of the Prospectus included therein, the costs and expenses incurred by the Company in connection with the qualification of the Registrable Securities under the state securities or "blue sky" laws of various jurisdictions, the costs and expenses associated with filings required to be made with the NASD, the costs and expenses of listing the Registrable Securities for trading on a national securities exchange or authorizing them for trading on the NASDAQ National Market and all other costs and expenses incurred by the Company in connection with any Registration hereunder and, in connection with a Demand Registration, the reasonable fees and expenses of one (1) firm of counsel selected by the Institutional Investors holding more than 50% of the Registrable Securities being sold or registered pursuant to the provisions of this Agreement; provided, that, except as otherwise provided in Section4(e)(2) below, the Company shall not bear the costs and expenses of any selling holders of Registrable Securities for underwriters' commissions or brokerage fees. (e) Indemnification. (1) Indemnification by the Company. The Company agrees to indemnify, to the full extent permitted by law, each Institutional Investor, its officers, directors and agents and each person who controls such Institutional Investor (within the meaning of the Act and the Exchange Act), against all losses, claims, damages, liabilities and expenses caused by any untrue or alleged untrue statement of a material fact contained in any Registration Statement, Prospectus or preliminary Prospectus or any omission or alleged omission to state therein a material fact necessary to make the statements therein (in the case of a Prospectus or any preliminary Prospectus, in light of the circumstances under which they were made) not misleading, except insofar as the same are caused by or contained in any information with respect to such Institutional Investor furnished in writing to the Company by such Institutional Investor or its representative expressly for use therein. The Company will also indemnify underwriters, selling brokers, dealer managers and similar securities industry professionals participating in the 14 distribution, their officers and directors and each person who controls such persons (within the meaning of the Act) to the same extent as provided above with respect to the indemnification of the Institutional Investor; provided, however, if pursuant to an underwritten public offering of Registrable Securities, the Company and any underwriters enter into an underwriting or purchase agreement relating to such offering that contains provisions relating to indemnification and contribution between the Company and such underwriters, such provisions shall be deemed to govern indemnification and contribution as between the Company and such underwriters. (2) Indemnification by Institutional Investors. In connection with any registration in which an Institutional Investor is participating, each such Institutional Investor will furnish to the Company in writing such information with respect to such Institutional Investor as the Company reasonably requests for use in connection with any Registration Statement or Prospectus and agrees to indemnify, to the full extent permitted by law, the Company, the directors and officers of the Company signing the Registration Statement, each person who controls the Company (within the meaning of the Act and the Exchange Act) and all underwriters participating in the distribution against any losses, claims, damages, liabilities and expenses resulting from any untrue statement of a material fact or any omission to state a material fact required to be stated therein or necessary to make the statements in the Registration Statement or Prospectus or preliminary Prospectus (in the case of the Prospectus or any preliminary Prospectus, in light of the circumstances under which they were made) not misleading, to the extent, but only to the extent, that such untrue statement or omission is contained in any information with respect to such Institutional Investor so furnished in writing by such Institutional Investor or its representative specifically for inclusion therein. In no event shall the liability of any Institutional Investor hereunder be greater in amount than the dollar amount of the proceeds received by such Institutional Investor upon the sale of the Registrable Securities giving rise to such indemnification obligation. The Company shall be entitled to receive indemnities from underwriters, selling brokers, dealer managers and similar securities industry professionals participating in the distribution, to the same extent as provided above with respect to information with respect to such persons or entities so furnished in writing by such persons or entities or their representatives specifically for inclusion in any Prospectus or Registration Statement. (3) Conduct of Indemnification Proceedings. Any person or entity entitled to indemnification hereunder will (i) give prompt written notice to the indemnifying party after the receipt by the indemnified party of a written notice of the commencement of any action, suit, proceeding or investigation or threat thereof made in writing for which such indemnified party will claim indemnification or contribution pursuant to this Agreement; provided, however, that the failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations under the preceding clauses (1) and (2), except to the extent that the indemnifying party is actually prejudiced by such failure to give notice and (ii) unless in such indemnified party's reasonable judgment a conflict of interest may exist between such indemnified and indemnifying parties with respect to such claim, permit such indemnifying party to assume the defense of such claim with counsel reasonably satisfactory to the indemnified party. Whether or not such defense is assumed by the indemnifying party, the indemnifying party will not be subject to any liability for any settlement made without its consent (but such consent will not be unreasonably withheld). No indemnifying party will be required to consent to the entry of any judgment or to enter into any settlement that does not include as an unconditional term 15 thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect of such claim or litigation. An indemnifying party who is not entitled to, or elects not to, assume the defense of a claim will not be obligated to pay the fees and expenses of more than one counsel in any one jurisdiction for all parties indemnified by such indemnifying party with respect to such claim, unless in the reasonable judgment of any indemnified party a conflict of interest may exist between such indemnified party and any other of such indemnified parties with respect to such claim, in which event the indemnifying party shall be obligated to pay the fees and expenses of such additional counsel or counsels. (4) Contribution. If for any reason the indemnification provided for in the preceding clauses (1) and (2) is unavailable to an indemnified party as contemplated by the preceding clauses (1) and (2), then the indemnifying party in lieu of indemnification shall contribute to the amount paid or payable by the indemnified party as a result of such loss, claim, damage, liability or expense in such proportion as is appropriate to reflect not only the relative benefits received by the indemnified party and the indemnifying party, but also the relative fault of the indemnified party and the indemnifying party, as well as any other relevant equitable considerations, provided that no Institutional Investor shall be required to contribute in an amount greater than the difference between the net proceeds received by such Institutional Investor with respect to the sale of any Shares and all amounts already contributed by such Institutional Investor with respect to such claims, including amounts paid for any legal or other fees or expenses incurred by such Institutional Investor. (f) Rule 144. The Company agrees that at all times after it has filed a registration statement pursuant to the requirements of the Act relating to any class of equity securities of the Company, it will file in a timely manner all reports required to be filed by it pursuant to the Act and the Exchange Act. Notwithstanding the foregoing, the Company may deregister any class of its equity securities under Section 12 of the Exchange Act or suspend its duty to file reports with respect to any class of its securities pursuant to Section 15(d) of the Exchange Act if it is then permitted to do so pursuant to the Exchange Act and the rules and regulations thereunder. (g) Participation in Underwritten Registrations. No Institutional Investor may participate in any underwritten registration hereunder unless such Institutional Investor (i) agrees to sell its Registrable Securities on the basis provided in any underwriting arrangements approved by the persons entitled hereunder to select the underwriter pursuant to subsections (3)(a)(3) and (3)(b)(4) above, and (ii) accurately completes in a timely manner and executes all questionnaires, powers of attorney, underwriting agreements, custody agreements and other documents customarily required under the terms of such underwriting arrangements. (h) Definition of Registrable Securities. "Registrable Securities" means the Shares held by the Institutional Investors as of the date this Agreement or hereafter acquired, but with respect to any such Share, only until such time as such Share (i) has been effectively registered under the Act and disposed of in accordance with the Registration Statement covering it or (ii) has been sold to the public pursuant to Rule 144 (or any similar provision then in force) under the Act. (i) Amendments and Waivers. The provisions of this Section 4, including the 16 provisions of this sentence, may not be amended, modified or supplemented, and waivers of or consents to departures from the provisions hereof may not be given unless approved by the Company in writing and the Company has obtained the written consent of Institutional Investors holding at least a majority of the then outstanding Registrable Securities. This Agreement may be amended, modified, waived or supplemented only by a written instrument executed by all the parties hereto that are required to execute the same. No action taken pursuant to this Agreement, including, without limitation, any investigation by or on behalf of any party, shall be deemed to constitute a waiver by the party taking such action. The waiver by any party hereto of a breach of any provision of this Agreement shall not operate or be construed as waiver of any preceding or succeeding breach and no failure by any party to exercise any right or privilege hereunder shall be deemed a waiver of such party's rights or privileges hereunder or shall be deemed a waiver of such party's rights to exercise the same at any subsequent time or times hereunder. SECTION 5. MISCELLANEOUS. (a) Successors, Assigns and Transferees. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective legal representatives, heirs, legatees, successors and assigns including any party to which any Institutional Investor has transferred or sold his or its Shares. Each transferee of Shares from an Institutional Investor shall take such Shares subject to the same restrictions as existed in the hands of the transferor. Shares sold to the public pursuant to an effective Registration Statement shall no longer be subject to any of the provisions of this Agreement. (b) Specific Performance, Etc. The Company and each of the Institutional Investors and Dresher, in addition to being entitled to exercise all rights provided herein, in the Company's Articles of Incorporation or granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Agreement. The parties hereto agree that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Agreement and hereby agree to waive the defense in any action for specific performance that a remedy at law would be adequate. (c) Notices. All notices and other communications provided for or permitted hereunder shall be in writing and shall be deemed to have been duly given if delivered personally, when transmitted by telecopy, electronic or digital transmission method, or sent by registered or certified mail (return receipt requested) postage prepaid to the parties at the following addresses (or at such other address for any party as shall be specified by like notice, provided that notices of a change of address shall be effective only upon receipt thereof). Notices sent by mail shall be effective five days after mailing. 17 (i) If to the Company, at: Unidata, Inc. 1099 18th Street, Suite 2500 Denver, CO 80202 Attention: Harold Nussenfeld, Esq. Fax: (303) 293-8880 with copies to: Latham & Watkins 633 West Fifth Street Suite 4000 Los Angeles, California 90071 Attention: Gary Olson, Esq. Fax: (213) 891-8763 (ii) If to the Institutional Investors, at: c/o Massachusetts Mutual Life Insurance Company 1295 State Street Springfield, Massachusetts 01111 Attention: Richard Morrison Fax: (413) 744-6127 with copies to: MassMutual Corporate Value Partners Limited P.O. Box 1096 George Town, Grand Cayman Cayman Islands, B.W.I. Attention: Michael Carey Fax: (iii) If to Dresher, at: James T. Dresher 1339 E. MacPhail Rd. Bel Air, MD 21015 Fax:(410) 879-6997 (d) Recapitalizations, Exchange, Etc. Affecting the Company's Stock. The provisions of this Agreement shall apply, to the full extent set forth herein with respect to the Common Stock, to any and all shares of capital stock of the Company or any successor or assign of the Company (whether by merger, consolidation, sale of assets, or otherwise) that may be issued in respect of, in exchange for, or in substitution of the Common Stock and shall be appropriately 18 adjusted for any stock dividends, splits, reverse splits, combinations, recapitalizations and the like occurring after the date hereof. (e) Termination. This Agreement shall terminate and cease to be of any further force or effect on the tenth anniversary of the date hereof. (f) Applicable Law. This Agreement shall be construed, interpreted and the rights of the parties determined in accordance with the laws of the State of Illinois without reference to any choice of law rules that would require the application of the laws of any other jurisdiction. (g) Severability. The provisions of this Agreement are severable, and if any clause or provision shall be held invalid or unenforceable in whole or in part in any jurisdiction, then such invalidity or unenforceability shall affect only such clause or provision, or part thereof, in such jurisdiction and shall not in any manner affect such clause or provision in any other jurisdiction, or any other clause or provision of this Agreement in any jurisdiction. (h) Interpretation. Time is of the essence of each provision of this Agreement of which time is an element. (i) Headings Descriptive. The headings in this Agreement are for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect. (j) Entire Agreement. This Agreement is intended by the parties as a final expression of their agreement with respect to the subject matter hereof and is intended as a complete and exclusive statement of the terms and conditions thereof. (k) Service of Process. Each party hereto irrevocably consents to the service of any process, pleading, notices or other papers by the mailing of copies thereof by registered, certified or first class mail, postage prepaid, to such party at such party's address set forth herein, or by any other method provided or permitted under Illinois law. (1) Consent and Jurisdiction. Each party hereto irrevocably and unconditionally (A) agrees that any suit, action or other legal proceeding arising out of this Agreement may be brought in the United States District Court for the Northern District of Illinois or, if such court does not have jurisdiction or will not accept jurisdiction, in any court of general jurisdiction in the County of Cook, Chicago, Illinois; (B) consents to the jurisdiction or any such court in any such suit, action or proceeding; and (C) waives any objection which such party may have to the laying of venue of any such suit, action or proceeding in any such court. (m) Attorneys' Fees. In any action or proceeding brought to enforce any provision of this Agreement, or where any provision hereof is validly asserted as a defense, the successful party shall be entitled to recover reasonable attorneys' fees in addition to any other available remedy. (n) Counterparts. This Agreement may be executed in two or more counterparts, each 19 of which shall be deemed an original but all of which shall together constitute one and the same agreement. IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement as of the date first above written. UNIDATA, INC. By /s/ David Brunel --------------------------- Its: President 20 ACCEPTED AND AGREED TO: MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY By /s/ Richard C. Morrison --------------------------- Its: Vice President This Agreement is executed on behalf of MassMutual Corporate Investors, organized under a Declaration of Trust, dated September 13, 1985, as amended from time to time. The obligations of such trust are not personally binding upon, nor shall resort be had to the property of, any of the trustees, shareholders, officers, employees or agents of such trust, but the trust property only shall be bound. MASSMUTUAL CORPORATE INVESTORS By /s/ Richard C. Morrison --------------------------- Its: Vice President This Agreement is executed on behalf of MassMutual Participation Investors, organized under a Declaration of Trust, dated April 7, 1988, as amended from time to time. The obligations of such trust are not personally binding upon, nor shall resort be had to the property of, any of the Trustees, shareholders, officers, employees or agents of such Trust, but the Trust's assets and property only shall be bound. MASSMUTUAL PARTICIPATION INVESTORS By /s/ Richard C. Morrison ----------------------------- Its: Vice President MASSMUTUAL CORPORATE VALUE PARTNERS LIMITED By Massachusetts Mutual Life Insurance Company, as Investment Manager By /s/ Richard C. Morrison ----------------------------- Its: Vice President 21 ACCEPTED AND AGREED TO: /s/ James T. Dresher ----------------------------- James T. Dresher 22 EXHIBIT 1 SIGNIFICANT HOLDERS (OTHER THAN THE INSTITUTIONAL INVESTORS) John G. Akers David W. Brunei Jeanne D. Butcher James T. Dresher James T. Dresher, Jr. Jeffrey M. Dresher Bruce D. Fraser Honor Guiney Arlene Lacharite Virginia D. Meoli Harold Nussenfeld Allan Snell John F. Schaefer Martin T. Hart Gary Olson Glenangus Holdings Corp. Integro Fiduciaire SARL System Builder Corporation EX-10.42 5 DISTRIBUTION AGREEMENT 1 EXHIBIT 10.42 DISTRIBUTION AGREEMENT Dated November 1995 Parties SYSTEM BUILDER SOFTWARE LIMITED S B TECH PTY LIMITED DESMOND MILLER Deacon Graham & James Sydney Our ref: Roderick MacKinnon: Stan Kalinko 2 DISTRIBUTION AGREEMENT made November 1995 PARTIES SYSTEM BUILDER SOFTWARE LIMITED a company incorporated in the Isle of Man of ("System Builder Software") AND S B TECH PTY LIMITED ACN 002 957 128 of Level 18, Bondi Junction Plaza II, 500 Oxford Street, Bondi Junction, Sydney in the State of New South Wales (the "Distributor") AND DESMOND MILLER of Level 18, Bondi Junction Plaza II, 500 Oxford Street, Bondi Junction, Sydney in the State of New South Wales ("Desmond Miller") INTRODUCTION A. The Distributor has distributed the Licensed Programs in the Territory on an exclusive basis of over 10 years pursuant to an oral agreement, initially with Atech System Builder Limited to the UK, the System Building Corporation Limited, thereafter System Builder Holdings Limited of Ireland and now with System Builder Software of the Isle of Man. B. System Builder Software and the Distributor wish to formalize the grant of license to the Distributor and the distribution arrangements in accordance with the terms and conditions contained herein. IT IS AGREED 1. DEFINITIONS 1.1 In this Agreement, the following definitions apply: (1) "AGREEMENT" means this document including any Schedule or Annexure to it; (2) "ALF" means the annual maintenance or annual license charges (net of Taxes) received by the Distributor from any of its Customers in addition to the Initial License Fees in respect of the Licensed Programs which ALFs are intended to cover the cost of maintenance and Enhancements; (3) "ASSOCIATED DOCUMENTATION" means operating manuals including users' manuals, programming manuals, modification manuals, flow charts, drawings and software listings which are designed to assist or supplement the understanding or application of the Licensed Programs and which are supplied from time to time by System Builder Software. (4) "COMMENCEMENT DATE" means the date hereof; 3 (5) "CPI" means the weighted average of the Consumer Price Index (All Groups) for Sydney published by the Australian Bureau of Statistics or, in the event that such index is discontinued, such index as may replace it; (6) "CUSTOMERS" means all Dealers, End Users or other customers (including value added resellers) of the Distributor who are or have been supplied with a copy or copies of the Licensed Programs; (7) "DEALER" means any person who is validly appointed by the Distributor as a dealer pursuant to a Dealership Agreement with the right to receive copies of the Licensed Programs from the Distributor for the purpose of distribution to End Users; (8) "DEALERSHIP AGREEMENT" means the agreement containing the terms and conditions upon which a Dealer may receive copies of the Licensed Programs from the Distributor substantially in the form as set out in Schedule 2 to this Agreement; (9) "END USER" means any person who has acquired an end user license from the Distributor or a Dealer to use any of the Licensed Programs in accordance with an End User License Agreement. (10) "END USER LICENSE AGREEMENT" means the license to be executed by an End User or deemed to be accepted by an End User in accordance with a shrinkwrap or on-line license containing the terms and conditions upon which an End User may use any of the Licensed Programs substantially in the form as set out in Schedule 3 to this Agreement; (11) "ENHANCEMENTS" means all: (a) adaptations, additions, advancements, refinements, modifications, upgrades, updates, enhancements and corrections relating to or connected with; (b) new releases of; and (c) substitutes of any of the computer programs referred to in paragraph (a) of the definition of Licensed Programs; (12) "EXPLOIT" means to license or sub-license (known colloquially as the sale of a license or sub-license), promote, advertise or distribute and "Exploitation" and "Exploiting" shall have a corresponding meaning; (13) "FEEDBACK SYSTEM" means a computer program provided by System Builder Software to the Distributor for the recording of Customer complaints, suggestions 2 4 and information about the operation of the Licensed Programs and to provide a mechanism for reporting of problems by End Users and Dealers to the Distributor and by the Distributor to System Builder Software by way of electronic means; (14) "INITIAL LICENSE FEES" means the initial license fees (net of Taxes) received by the Distributor from its Customers in respect of the simple use of Licensed Programs by Customers in accordance with Dealership Agreements or End User License Agreements; (15) "LICENSED PROGRAMS" means: (a) the computer programs specified in item 1 of Schedule 1 and any computer programs subsequently developed and distributed as released products by or on behalf of System Builder Software and after the Assignment or novation referred to in clause 21.3. Unidata, which are similar to or in substitution of any of the computer programs specified in Item 1 of Schedule 1 or which may have been developed using or incorporating the source code or any part of the source code of any of the computer programs specified in Item 1 of Schedule 1; and (b) Enhancements. but excludes any computer program that is discontinued or withdrawn universally by System Builder Software in accordance with clause 13.12 provided however that if any computer program discontinued or withdrawn in accordance with clause 13.12 is subsequently reintroduced universally or in the Territory (whether modified, adapted or containing any additions, advancements, refinements, corrections or enhancements) then the reintroduced computer program will be deemed to be a Licensed Program for the purposes of this Agreement; (16) "LICENSE FEES" means the list of ALFs and Initial License Fees for the Licensed Programs set by System Builder Software as an indication of License Fees to be charged by the Distributor as set out in Schedule 4 and varied from time to time in accordance with clause 4. (17) "LIST PRICES" means the list of ALFs and Initial License Fees for the Licensed Programs set by System Builder Software as an indication of License Fees to be charged by the Distributor as set out in Schedule 4 and varied from time to time in accordance with clause 4. (18) "MASTERPACK COMPANIES" means McNamee Sutton & Partners Pty Ltd ACN 003 814 999, MP Tech UK, MP Tech USA, MasterPack International (a British Virgin Island company), MasterPack Systems Pty Limited ACN 003 350 445, McNamee Sutton & Partners (Victoria) Pty Ltd ACN 007 247 369 and any other related bodies 3 5 corporate (as defined in Section 50 of the Corporations Law) or associates (as defined in Division 2 of Part 1.2 of the Corporations Law) of any of those companies. (19) "MINIMUM PAYMENT" means a sum representing the minimum Initial License Fees to be paid by the Distributor to System Builder Software for Licensed Programs ordered during any one year in accordance with clause 6; (20) "QUARTER" means the 3 month periods ending 31 March, 30 June, 30 September and 31 December in any year; (21) "TAXES" means all taxes, duties, fees or other government charges, levies or imposts which may be imposed on or in respect of the Licensed Programs which are payable by the Distributor pursuant to clause 8.3 with the exception of: (a) withholding tax and sales tax which are payable by System Builder Software in accordance with Clauses 8.3 and 5.5 respectively; and (b) any other taxes, duties, fees or other government charges, levies or imposts which are specifically incorporated into the List Prices from time to time. (22) "TERRITORY" means Australia, New Zealand, Asia and the Pacific Islands provided however that upon the entering into of the agreement contemplated by clause 21.3(5) the Territory shall be Australia and New Zealand only; (23) "TRADE MARK" means the trade marks, trade names and logos listed in Item 2 of Schedule 1; and (24) "UNIDATA" means Unidata Inc. of Denver Colorado, USA. 1.2 INTERPRETATION (1) Reference to: (a) the singular includes the plural and the plural includes the singular; (b) a party includes the party's executors, administrators, successors and permitted assigns; and (c) a month, quarter or year shall mean a calendar month, quarter or year. (2) All monetary amounts are in Australian dollars, unless otherwise stated. 4 6 (3) If an act must be done on a specified day which is not a business day, the act must be done instead on the next business day. (4) Although the Distributor is liable to pay System Builder Software a percentage of all License Fees received by it, for the purposes of calculating the License Fees payable by the Distributor during the currency of this Agreement, payments will be based on License Fees charged by the Distributor for each Quarter less credit notes issued to Customers during the Quarter and bad debts written off during the Quarter plus License Fees received during the Quarter that were previously written off as bad debts. Notwithstanding the fact that the payments are calculated in this manner, these payments are not intended to be, nor should they be deemed or otherwise construed to be, royalties and the payment of License Fees does not convey any property rights in the Licensed Programs but simply the right to Exploit the Licensed Programs in accordance with this Agreement. 2. SCOPE OF AGREEMENT 2.1 System Builder Software grants the Distributor the sole and exclusive right and license to: (1) exploit the Licensed Programs in the Territory in accordance with the terms and conditions of this Agreement; (2) appoint Dealers in any part of the Territory to Exploit the Licensed Programs pursuant to a Dealership Agreement; and (3) permit the simple use of the Licensed Programs by any End User within the Territory pursuant to an End User License Agreement. 2.2 System Builder Software grants the Distributor permission to use the Trade Mark in the Territory in connection with the marketing, sale and distribution of the Licensed Programs and the Associated Documentation in accordance with the terms and conditions of this Agreement. 3. DURATION AND TERMINATION 3.1 Subject to clause 2.2, this Agreement shall continue for a period of 25 years from the Commencement Date unless terminated earlier by either party in accordance with this Agreement. 3.2 Without limiting the generality of any other clause in this Agreement, System Builder Software may terminate this Agreement immediately by notice in writing if: (1) any payment due from the Distributor to System Builder Software pursuant to this Agreement remains unpaid after 30 days written notice by System Builder Software 5 7 to make such payment provided that if the Distributor fails to make more than 3 payments on their due dates in any 2 consecutive calendar years, System Builder Software shall be entitled to terminate that Agreement without notice; (2) the Distributor breaches any material clause of the Agreement and such breach is not remedied within 30 days of written notice by System Builder Software to remedy such breach provided that if the Distributor breaches this Agreement more than 3 times in any calendar year, System Builder Software shall be entitled to terminate this Agreement without notice; (3) the Distributor disposes of the Licensed Programs other than as authorized under this Agreement; (4) the Distributor becomes, threatens or resolves to become or is in jeopardy of becoming subject to any form of insolvency administration; or (5) a change occurs in more than fifty percent ownership of the Distributor from that as at the Commencement Date (other than as a consequence of a listing on a recognized stock exchange in Australia or elsewhere or in the context of a reconstruction or amalgamation of any of the MasterPack Companies), without the written consent of System Builder Software, such consent not to be withheld unless a new shareholder of the Distributor is a competitor of System Builder Software. 4. LIST PRICES 4.1 At the Commencement Date the List Prices shall be as set out in Schedule 4 to this Agreement. 4.2 From time to time, the Distributor may request in writing a variation to the List Prices providing details of its suggested variation. 4.3 Upon receipt of a request to vary the List Prices, System Builder Software shall acknowledge the request in writing and System Builder Software and the Distributor shall use all reasonable endeavors to reach agreement on the List Prices. However, if after 30 days from receipt by System Builder Software of such request the parties have not reached an agreement either party may then submit the dispute to expert determination. The determination must be conducted by an independent expert appointed by System Builder Software and the Distributor, or if they fail to make an appointment, appointed by the Chairman for the time being of the Australian Computer Society Inc., New South Wales Branch. To assist the expert to reach a decision, he must have regard to the following matters: (1) the determination must be conducted in an informal and speedy manner; 6 8 (2) the license fees charged by System Builder Software to its customers outside of the Territory for the Licensed Programs or programs similar to the Licensed Programs; and (3) the license fees charged by other companies for similar products both within the Territory and outside the Territory. 5. ORDERS, DELIVERY AND RISK 5.1 The parties record that System Builder Software has provided on consignment to the Distributor a stock of the Licensed Programs. 5.2 From time to time and at least once a month within 7 days of the expiration of each calendar month, the Distributor shall place an order with System Builder Software: (a) in writing on the Distributor's usual form; and (b) specifying details of Licensed Programs sold since the last order and the names and where available the addresses of the Customers. 5.3 Subject to clause 5.4 System Builder Software shall within 14 days of receipt of an order arrange for delivery thereof. 5.4 If System Builder Software notifies the Distributor within 14 days of receiving an order that it is unable to fulfil the order the Distributor shall be entitled on System Builder Software's behalf and at System Builder Software's cost to have the Licensed Programs copied by a third party. The copying of a Licensed Program pursuant to this sub-clause does not: (1) relieve the Distributor from any of its obligations under this Agreement, including the obligation to pay System Builder Software a proportion of the License Fees in accordance with clause 7; (2) confer on the Distributor the right to manufacture Licensed Programs; (3) detract from any other clause in this Agreement including clause 14.1; and (4) transfer ownership in the Licensed Programs to the Distributor or to anyone else. 5.5 Subject to clause 5.7, System Builder Software shall deliver the Licensed Programs to the offices of the Distributor and risk in the Licensed Programs shall pass upon delivery and insurance, loss or damage to the Licensed Programs following delivery shall be the responsibility of the Distributor. System Builder Software shall be responsible for costs of insurance, freight and any sales tax (which shall be prepaid by System Builder Software) in respect of Licensed Programs delivered. 7 9 5.6 System Builder Software accepts no responsibility for late delivery of any order and, in particular, accepts no responsibility for any transaction jeopardized as a result of late delivery. 5.7 Notwithstanding that risk in the Licensed Programs shall pass to the Distributor in accordance with clause 5.5, title in the Licensed Programs shall always remain with System Builder Software and the Distributor shall, at the direction of System Builder Software, store the Licensed Programs so as to indicate that they are the Licensed Programs of System Builder Software and the Distributor shall hold the Licensed Programs as bailee thereof only subject nevertheless to its right to Exploit the Licensed Programs in the ordinary course of business in accordance with this Agreement on the basis that a proportion of any monies received as a result of such Exploitation that is due by the Distributor to System Builder Software for the Licensed Programs ordered pursuant to this clause shall be held by the Distributor for the benefit of System Builder Software. 6. MINIMUM PAYMENT REQUIREMENT 6.1 During the first year of this Agreement, the Minimum Payment shall be $200,000.00. 6.2 At the expiration of each year of this Agreement, the Minimum Payment for the next following year of this Agreement shall be determined in accordance with the following formula: N = A x B ----- C where N is the Minimum Payment for the next following year of this Agreement. A is the Minimum Payment for the first year of this Agreement. B is the CPI index figure last published prior to the commencement of the next following year of this Agreement. C CPI index figure last published prior to the commencement of this Agreement. 6.3 If at the end of any year the Distributor has failed to achieve the Minimum Payment, the Distributor shall pay System Builder Software the Minimum Payment less the total amount of Initial License Fees paid by the Distributor to System Builder Software during the year pursuant to clause 7. 6.4 Within 30 days after the expiration of such calendar year System Builder Software shall by notice in writing to the Distributor confirm details of any amount payable by the Distributor 8 10 under clause 6.3 and the Distributor shall pay such amount to System Builder Software within 14 days of receipt of the notice. 6.5 From time to time, System Builder Software and the Distributor shall review the method of determining the Minimum Payment requirement and may vary same by mutual agreement. 7. LICENSE FEES 7.1 The Distributor shall use its best endeavors to charge: (1) Initial License Fees to all Customers having regard to the List Prices; (2) ALFs to all Customers having regard to the List Prices; and (3) fees for Enhancements. subject to commercial prudence and reality. 7.2 The Distributor shall be obliged, subject to commercial prudence and reality, to charge the highest amount possible for License Fees. 7.3 The Distributor shall within 21 days of the end of each Quarter provide a Quarterly report to System Builder Software containing the following information relating to Customers: (1) name and address of all Customers that have placed orders for the Licensed Programs during the Quarter; (2) description of the Licensed Programs ordered by each Customer during the Quarter; (3) number of users permitted in respect of the Licensed Programs ordered by each Customer during the Quarter; and (4) details of all License Fees charged to Customers during the Quarter, credit notes issued to Customers during the Quarter, bad debts written off during the Quarter and License fees received during the Quarter that were previously written off as bad debts. 7.4 Within 7 days of the end of each Quarter, the Distributor shall pay to System Builder Software a sum equivalent to: (1) forty percent (40%) of all Initial License Fees and of any other fees received as Initial License Fees under clause 7.5 for that Quarter; plus 9 11 (2) thirty percent (30%) of all ALFs and of any other fees received as ALFs under clause 7.5 for that Quarter; plus (3) forty percent (40%) of all fees for Enhancements received as fees for Enhancements under clause 7.5 for that Quarter, which are not ALFs. 7.5 If during the currency of this Agreement any computer programs referred to in clause 1.1(15)(a) and any Enhancements of the Licensed Programs are distributed as released products whether as alpha, beta or general releases, System Builder Software shall make such computer programs and Enhancements available to the distributor. The Distributor shall be entitled but not obliged to provide such computer programs and Enhancements as become generally available free of charge to those Customers from whom the Distributor has received ALFs and the Distributor shall charge all other Customers a fee for all such computer programs and the Enhancements, subject to commercial prudence and reality. 8. PAYMENT 8.1 If the Distributor fails to make any payment due under this Agreement on the due date for payment, without prejudice to any right of System Builder Software to terminate the Agreement, the Distributor may pay to System Builder Software interest at the Default rate on that amount, calculated and payable daily, computed from the due date until the amount is paid in full. 8.2 The Default rate is (x + 2) per cent per annum where x is the interest rate quoted by Westpac Banking Corporation ("Bank") as its Westpac Indicator Lending Rate ("Published Rate") or, should there cease to be a Published Rate, the rate which the Bank designates as being an appropriate substitute for the Published Rate ("Substitute Rate"). A certificate signed by a manager or other officer of the Bank stating the Published Rate or the Substitute Rate at a particular date is conclusive evidence of the rate at the particular date. 8.3 The Distributor shall be responsible for the payment of all Taxes (excluding withholding tax). To the extent permissible by law the Taxes shall be paid by the Distributor immediately they become due and in any event, not later than 30 days after notice in writing by System Builder Software requiring such payment. 8.4 System Builder Software indemnifies and continues to indemnify the Distributor against any withholding tax which may be imposed on or in respect of payments to be made pursuant to clause 7.4 and the Distributor indemnifies and continues to indemnify System Builder Software against any liability for Taxes. 9. TRAINING AND TECHNICAL INFORMATION 9.1 System Builder Software shall provide the Distributor or its employees with such training in the use of the Licensed Programs as System Builder Software considers necessary to 10 12 enable the Distributor to market the Licensed Programs and if requested by the Distributor, shall provide additional training for which the Distributor shall pay an additional charge. 9.2 System Builder Software does not warrant that training or information provided pursuant to this clause is sufficient to enable the Distributor or its personnel to adequately respond to all queries or concerns raised by a Customer. The Distributor acknowledges its responsibility to specify to System Builder Software from time to time precise queries and concerns for consideration and response by System Builder Software. 9.3 System Builder Software shall provide the Distributor from time to time with current information regarding the use, operation, modification, enhancement, or other technical information affecting the Licensed Programs and also provide all modifications, changes or amendments to the Associated Documentation as they become available from time to time. 10. STATUS OF DISTRIBUTOR 10.1 The Distributor is not a partner or agent of System Builder Software and does not have the power or authority, directly or indirectly or through its servants and agents, to bind System Builder Software to any agreement with a Customer or other third party or otherwise to contract, negotiate or enter into a binding relationship for or on behalf of System Builder Software, except as provided by this Agreement. 10.2 The Distributor shall observe fiduciary obligations to System Builder Software in relation to: (1) all property of System Builder Software in the Distributor's possession; (2) all moneys owing by the Distributor to System Builder Software; and (3) all confidential matters referred to in clause 16. 11. DISTRIBUTION 11.1 The Distributor shall not use or enjoy the Licensed Programs other than for the purpose of: (1) Exploiting the Licensed Programs in the Territory in accordance with the terms and conditions of this Agreement; (2) appointing Dealers in any part of the Territory in accordance with the terms and conditions of this Agreement; (3) permitting use of the Licensed Programs by any Customer within the Territory pursuant to an End User License Agreement; 11 13 (4) demonstration and training by the Distributor; and (5) its own internal operations. 11.2 This Distributor shall not distribute the Licensed Programs to any person or install the Licensed Programs on any person's premises unless the person is bound by the terms and conditions of an End User License Agreement. For the purposes of any shrinkwrap or on-line license of the Licensed Programs, the Distributor will have discharged its duty under this clause if the Distributor makes available the shrinkwrap or on-line license (as the case may be) to the End User in the form that the Licensed Program is supplied to the Distributor by System Builder Software. 11.3 Where the Licensed Programs supplied by System Builder Software are subject to a shrinkwrap or on-line license agreement containing the terms and conditions of the End User License Agreement, the Distributor shall not tamper with or authorize or permit the tampering with such shrinkwrap or on-line license or do anything which may detract from the legal enforceability of the shrinkwrap or on-line license. 11.4 Where the Distributor makes copies of the Licensed Programs pursuant to clause 5.4, the Distributor must ensure that any copies distributed by the Distributor incorporate a shrinkwrap or on-line license containing the terms and conditions of the End User License Agreement. 12. DISTRIBUTOR'S OBLIGATIONS 12.1 The Distributor shall: (1) use its best endeavors to actively promote and market the Licensed Programs in the Territory so as to: (a) maximize orders of the Licensed Programs pursuant to clause 5; (b) maximize License Fees pursuant to clause 7; (c) create demand for the Licensed Programs; and (d) obtain as many Customers as possible. Such promotion shall be at the Distributor's own expense; (2) report back to System Builder Software on a regular basis (at least once every 6 months) on its promotional activities referred to in clause 12.1(1); 12 14 (3) ensure all copies of the Licensed Programs in its possession or control retain such copyright notice as is furnished by System Builder Software from time to time; (4) not engage, directly or indirectly, without the written consent of System Builder Software, in any Exploitation of any other computer programs which: (a) have a functionality the same as or similar to the Licensed Programs; or (b) which are the same or similar to the Licensed Programs; and (c) which compete with the Licensed Programs. PROVIDED HOWEVER that this clause 12.1(4) does not preclude the Distributor from Exploiting computer programs together or in conjunction with any other computer programs as part of a bona fide application package designed to perform a specific task or type of work even if the Exploitation of any of these computer programs on their own would be prohibited under this clause 12.1(4); (5) refer to System Builder Software any information which may affect or assist in the licensing or marketing of the Licensed Programs; (6) generally act diligently as a distributor of the Licensed Programs; (7) act in good faith towards System Builder Software and use its best endeavors to give System Builder Software such assistance and co-operation as System Builder Software reasonably requires; (8) promptly forward to System Builder Software copies of all: (a) End User License Agreements entered into by the Distributor during the currency of this Agreement; (b) Dealership Agreements entered into by the Distributor during the currency of this Agreement; and (c) agreements relating to License Fees entered into by the Distributor during the currency of this Agreement; (9) maintain detailed records of the matters referred to in clause 7.3, transactions, inquires, complaints and suggested improvements related to the Licensed Programs. Such records shall be available for inspection by System Builder Software or its duly authorized representatives at all times on 24 hours' notice by System Builder Software and copies of such records shall be forwarded to System Builder Software each Quarter; 13 15 (10) refer to System Builder Software all enquiries relating to the Exploitation of the Licensed Programs outside the Territory; (11) not materially vary the terms and conditions of an existing or new Dealership Agreement or End User License Agreement from those terms and conditions contained in Schedules 2 and 3 or Associated Documentation without the written consent of System Builder Software, which consent shall not be unreasonably withheld; (12) maintain records in accordance with the Feedback System and give System Builder Software access to such records; and (13) not decompile or reverse compile or otherwise reduce the software to a humanly perceivable form or in any other way derive, from System Builder Software's software, any source code (that is, the Distributor does not have the right to use the copyright in the Licensed Programs). 12.2 The Distributor shall provide the first line of support necessary to solve any problems in the Licensed Programs, including but not limited to, having properly trained personnel available to handle Customer queries and to provide telephone support. If a problem in the Licensed Programs arises that is either too technical or too difficult for properly trained personnel of the Distributor to handle, or if the problem requires access to the source code of System Builder Software in order to solve the problem, or if the problem is of such a nature that only the developer of the Licensed Program would be able to solve the problem, then the Distributor may refer this problem to System Builder Software in accordance with clause 13.8. 13. SYSTEM BUILDER SOFTWARE'S OBLIGATIONS 13.1 System Builder Software shall act in good faith towards the Distributor and use its best endeavors to give the Distributor such assistance and co-operation as the Distributor reasonably requires. 13.2 System Builder Software warrants to the Distributor that the Licensed Programs will conform to the Associated Documentation delivered to the Distributor with the Licensed Programs in accordance with the warranty contained in the Associated Documentation. 13.3 System Builder Software makes no warranty expressed or implied that the Licensed Programs are suitable for a particular purpose whether such purpose was made known to System Builder Software or the Distributor or nor, or that the operation of the Licensed Programs will not be interrupted or will be error free or that all errors of the Licensed Programs will be corrected. 14 16 13.4 System Builder Software warrants that to the best of its knowledge and belief the rights granted in this Agreement to or in relation to System Builder Software's intellectual property do not infringe the intellectual property rights of any third party. 13.5 Other than as disclosed in clause 13.14, System Builder Software warrants that: (1) no proceedings have been instituted by any third party against System Builder Software for the infringement of that party's intellectual property rights by System Builder Software's intellectual property; and (2) no proceedings have been instituted by any third party against System Builder Software seeking to challenge the validity of System Builder Software's intellectual property. 13.6 System Builder Software has no obligation to lend or give access to its source code to the Distributor. 13.7 System Builder Software shall provide the Feedback System free of charge to the Distributor. If the Distributor requires special assistance or specific programming work then such special assistance or specific programming work will not be covered by this Agreement and the Distributor and System Builder Software will be required to enter into a separate agreement. 13.8 System Builder Software shall provide a last line of support for the Licensed Programs, including but not limited to, the support necessary to fix, or provide work arounds for, bugs in the Licensed Programs, provided that if, for any reason, System Builder Software is unable to fix, or provide such work arounds for, bugs, System Builder Software's sole liability shall be to accept the return of the Licensed Program concerned in return for a refund of the License Fees. 13.9 System Builder Software shall provide the Distributor with original artwork for any marketing and promotional material produced from time to time by System Builder Software in respect to the Licensed Programs. The Distributor shall be entitled to make copies of such marketing and promotional material from the original artwork provided always that the Distributor shall not make any variations or amendments to the material without the prior consent in writing of System Builder Software, such consent not to be unreasonably withheld. 13.10 From the Commencement Date, System Builder Software shall ensure that all marketing and promotional material produced by System Builder Software in respect of the Licensed Programs that refers to the international distributors of the Licensed Programs shall refer to the Distributor and shall provide the address and contact details of the Distributor. 15 17 13.11 Subject to obtaining the prior consent in writing of System Builder Software (such consent not to be unreasonably withheld), the Distributor can produce its own artwork for marketing and promotional material in respect of the Licensed Programs and in doing so the Distributor must ensure that all such artwork incorporates the copyright notice furnished by System Builder Software from time to time. 13.12 System Builder Software shall give at least 12 months prior written notice to the Distributor of its intention to discontinue or withdraw any of the Licensed Programs. 13.13 System Builder Software must not itself nor, subject to relevant local laws in countries outside the Territory, knowingly permit or allow distributors of the Licensed Programs outside the Territory to license or distribute the Licensed Programs inside the Territory. 13.14 The Distributor acknowledges that Pixel Ltd of the UK has alleged that the System Builder group of companies has copied a source code of Pixel Ltd and/or infringed copyright of Pixel Ltd in SB+ and Termulator and that as at the Commencement Date no proceedings have been instituted by Pixel Ltd against any of the System Builder group of companies. System Builder Software will oppose or defend any claim made or brought by Pixel Ltd as aforesaid or will procure that the relevant company in the System Builder group of companies will oppose or defend such claim at the expense of System Builder Software or the relevant company in the System Builder group and the provisions of clause 15.1(1)(d) will apply. 13.15 System Builder Software may not materially vary the terms and conditions of the End User License Agreement without the written consent of the Distributor, which consent shall not be unreasonably withheld. 14. INTELLECTUAL PROPERTY, COPYING, ALTERATION AND MODIFICATION 14.1 All industrial and intellectual property rights (including copyright) in the Licensed Programs and the Associated Documentation remain with System Builder Software. 14.2 Subject to clause 5.4 the Distributor and its Customers shall not copy or alter or modify or adapt or in any other way interfere with the Licensed Programs or Associated Documentation. 14.3 Any such copying, alteration, modification or other interference to which System Builder Software consents in writing shall be subject to such terms and conditions as System Builder Software may impose. 14.4 Without limiting the foregoing, title in any Enhancements to the Licensed Programs and the Associated Documentation shall immediately vest in System Builder Software. 16 18 15. INDEMNITIES 15.1 System Builder Software Indemnities (1) Infringement of Third Party Intellectual Property (a) Subject to clause 15.1(3), System Builder Software indemnifies and continues to indemnify the Distributor against any loss, damage, costs (on a solicitor and own client basis), expenses, demands and liability, whether direct or indirect arising out of a claim by a third party against the Distributor alleging the Distributor's, a Dealer's or an End User's use of any of the Licensed Programs infringes any intellectual or industrial property rights of that third party. (b) The Distributor must notify System Builder Software as soon as practicable in writing of any demand, action, arbitration or other proceeding (including any mediation or appeal) brought or threatened to be brought against the Distributor covered by the indemnity in clause 15.1(1)(a). (c) System Builder Software shall upon receipt of a notice pursuant to clause 15.1(1)(b) at its expense conduct the defense of a claim alleging such infringement. (d) System Builder Software is to have the sole control of any defense of the claim or any such action and all negotiations for its settlement or compromise. (2) Breach of Warranty or Representation of System Builder Software (a) Subject to clause 15.1(3), System Builder Software indemnifies and continues to indemnify the Distributor against any loss, damage, costs (on a solicitor and own client basis), expenses, demands and liability, whether direct or indirect arising out of a claim by any End User against the Distributor for a breach by the Distributor of any warranty or representation contained in the End User License Agreement, or any Associated Documentation, marketing, promotional or other written material produced by System Builder Software and provided to the Distributor or produced by the Distributor with the written consent of System Builder Software. (b) The Distributor must notify System Builder Software as soon as practicable in writing of any demand, action, arbitration or other proceeding (including any mediation or appeal) brought or threatened to be brought against the Distributor covered by the indemnity in clause 15.1(2)(2) and upon receipt 17 19 of such notice System Builder Software must, within 7 days, advise the Distributor in writing of its intention to defend such claim. (c) If System Builder Software advises the Distributor of its intention to defend a claim in accordance with clause 15.1(2)(b), the cost and expense of such defense must be paid for entirely by System Builder Software and System Builder Software will have the sole control of any such defense and all negotiations for its settlement or compromise. (d) If System Builder Software fails to notify the Distributor in writing of its intention to defend such claim or advises that it does not intend to defend such claim in accordance with clause 15.1(2)(b), System Builder Software must pay to the Distributor all liabilities and costs covered by the indemnity in clause 15.1(2)(a), whether or not the Distributor has paid or satisfied them. (3) Exclusions from System Builder Software Indemnities The indemnities in clauses 15.1(1)(a) and 15.1(2)(a) do not extend to any claims arising from: (a) use of the Licensed Program by the Distributor or any of its Customers in a manner or for a purpose not reasonably contemplated by this Agreement; (b) modification of the Licensed Program by the Distributor or any of its Customers without the prior consent of System Builder Software; (c) any warranties or representations of the Distributor made without the prior written consent of System Builder Software; (d) any act or omission by the Distributor in breach of this Agreement; or (e) any act or omission by the Distributor in breach of any Dealership Agreement or End User License Agreement. 15.2 Distributors Indemnities (1) The Distributor indemnifies and continues to indemnify System Builder Software against any loss, damage, costs (on a solicitor and owns client basis), expenses, demands and liability, arising directly or indirectly as a result of or in connection with an event specified in clauses 15.1(3)(1) to 15.1(30(e) or any other breach or non-performance of any of the obligations of the Distributor under this Agreement whether express or implied. 18 20 (2) System Builder Software must notify the Distributor as soon as practicable in writing of any demand, action, arbitration or other proceeding (including any mediation or appeal) brought or threatened to be brought against System Builder Software covered by the indemnity in clause 15.2(1) and upon receipt of such notice the Distributor must, within 7 days, advise System Builder Software in writing of its intention to defend such claim. (3) If the Distributor advises System Builder Software of its intention to defend a claim in accordance with clause 15.2(2), the cost and expense of such defense must be paid for entirely by the Distributor and the Distributor will have the sole control of any such defense and all negotiations for its settlement or compromise. (4) If the Distributor fails to notify System Builder Software in writing of its intention to defend such claim or advises that it does not intend to defend such claim in accordance with clause 15.2(2), the Distributor must pay to System Builder Software all liabilities and costs covered by the indemnity in clause 15.2(1), whether or not System Builder Software has paid or satisfied them. 16. CONFIDENTIALITY 16.1 The Distributor acknowledges the confidential nature of, and System Builder Software's intellectual and industrial property rights in, the Licensed Programs and Associated Documentation. 16.2 The Distributor may only make use of such confidential information to the extent necessary to enable the Licenses Programs and Associated Documentation to be distributed or otherwise used in a manner contemplated by this Agreement. 16.3 The Distributor may only disclose such information to those of its employees by whom it is required to enable the Licensed Programs and Associated Documentation to be distributed or otherwise used in a manner contemplated by this Agreement. 16.4 The Distributor acknowledges that any discoveries, inventions, patents, designs or other rights arising directly or indirectly out of or in the performance of this Agreement are the property of System Builder Software. 16.5 The Distributor's obligations under this clause shall survive the termination of this Agreement. 17. RESTRICTIVE COVENANT BY DESMOND MILLER 17.1 Subject to clause 17.2, Desmond Miller must not and must procure that any Controlled Entity does not without the written consent of System Builder Software (such consent not to be unreasonably withheld) either directly or indirectly at any time within the Territory 19 21 during the term of this Agreement engage in any Exploitation of any other computer programs which: (1) have a functionality the same as or similar to the Licensed Programs; or (2) which are the same as or similar to the Licensed Programs; and (3) which compete with the Licensed Programs. 17.2 Clause 17.1 does not preclude Desmond Miller from Exploiting computer programs together or in conjunction with any other computer program as part of a bona fide application package designed to perform a specific task or type of work even if the Exploitation of these computer programs on their own would be prohibited under clause 17.1. 17.3 In this clause 17 "Controlled Entity" means any company, trust, partnership or other body corporate or association ("Entity") in respect of which Desmond Miller or any of his associates (as that term is defined in Division 2 of Part 1.2 of the Corporations Law): (1) is the beneficial owner of more than 50% of the voting issued shares, units or other voting or participation interests in that Entity; (2) is entitled in the case of a company, to appoint or remove a majority of the directors to or from the board of directors of the company; or (3) is entitled to or does exercise management control of the Entity. 17.4 Desmond Miller warrants that as at the Commencement Date he or Barbara Miller are the beneficial owner(s) of not less than 95% of the issued capital of the Distributor. 18. INFRINGEMENT OF INTELLECTUAL PROPERTY OF SYSTEM BUILDER SOFTWARE 18.1 The Distributor must notify System Builder Software as soon as practicable in writing of any actual, suspected or anticipated infringement of System Builder Software's intellectual property that comes to the attention of the Distributor. 18.2 Upon receipt of any infringement notice pursuant to clause 18.1 System Builder Software shall take all steps necessary or expedient to stop such infringement and, if requested by System Builder Software, the Distributor must co-operate fully with System Builder Software in stopping any infringement, including (without limitation) becoming a party to any proceedings for infringement of the intellectual property of System Builder Software if requested by System Builder Software. The cost and expense of any such proceedings that 20 22 may be instituted by System Builder Software must be paid for entirely by System Builder Software and System Builder Software is to have the sole control of any such proceedings and all negotiations for its settlement or compromise. System Builder Software indemnifies and continues to indemnify the Distributor against any costs (on a solicitor and own client basis) and expenses incurred by the Distributor in cooperating with System Builder Software or becoming a party to any proceedings. Any recovery from such infringement proceedings is the property of System Builder Software. 18.3 The Distributor may not at any time bring legal proceedings for and on behalf of System Builder Software with respect to any infringement of System Builder Software's intellectual property without the prior consent in writing of System Builder Software. 18.4 Subject to clause 13.13, if System Builder Software discovers that a distributor of the Licensed Programs outside the Territory ("Foreign Distributor"), whether itself or through a dealer appointed by such Foreign Distributor, has Exploited the Licensed Programs in the Territory, System Builder Software will within 30 days of receipt of a notice from the Distributor advising of such Exploitation, procure that the Foreign Distributor pays to the Distributor all license or other fees received by the Foreign Distributor in respect of such Licensed Programs Exploited in the Territory. 18.5 Subject to the Distributor being able to exploit the Licensed Programs as contemplated in clause 1.4 of Schedule 6, if the Distributor (or a Dealer appointed by the Distributor) Exploits the Licensed Programs outside the Territory, the Distributor will pay to the distributor of the Licensed Programs in the relevant country outside the Territory in which the Licensed Programs were Exploited all license or other fees received by the Distributor in respect of such Licensed Programs exploited outside the Territory within 30 days of receipt of a notice from System Builder Software or the said distributor. 19. LIABILITY OF SYSTEM BUILDER SOFTWARE GENERALLY 19.1 All statutory or implied conditions and warranties are excluded to the extent permitted by law. 19.2 To the extent permitted by law, liability under any condition or warranty which cannot legally by excluded is limited at the option of System Builder Software to: (1) in the case of goods: (a) the replacement of the goods or the supply of equivalent goods; (b) the repair of the goods; (c) the payment of the cost of replacing the goods; or 21 23 (d) the payment of the cost of having the goods repaired; or (e) the refund of the proportion of License Fees received by System Builder Software from the Distributor pursuant to Clause 7.4; and (2) in the case of services: (a) supplying the services again; or (b) paying the cost of having the services supplied again. 19.3 The Distributor warrants that it has not relied on any representation made by System Builder Software which has been stated expressly in this Agreement or in any descriptions or illustrations or specifications contained in any Associated Documentation. 20. RIGHTS UPON TERMINATION 20.1 Termination of this Agreement pursuant to clause 3 does not affect any claim either party may have against the other under this Agreement at the date of termination. 20.2 If notice is given to the Distributor pursuant to clause 3, System Builder Software may, in addition to termination the Agreement: (1) repossess any copies of the Licensed Programs in the possession, custody or control of the Distributor; (2) repossess any copies of the Associated Documentation in the possession, custody or control of the Distributor; (3) be deemed agent of the Distributor for the purposes of recovering outstanding License Fees and other charges due in relation to the Licensed Programs. (4) retain any moneys paid; (5) be regarded as discharged from any further obligations under this Agreement; and (6) pursue any additional or alternative remedies provided by law. 20.3 Upon expiry of this Agreement or in the event of termination of this Agreement, the Distributor shall: (1) forthwith cease to use the Licensed Programs other than for the Distributor's own internal operations, provided that such own use be subject to an End User license Agreement and payment of License Fees; 22 24 (2) forthwith return to System Builder Software all stationery and signs bearing the Trade Mark then in its possession; (3) cease to use or supply the Licensed Programs, Associated Documentation and all material of whatever nature, the copyright of which is vested in System Builder Software or where the continued use thereof would in any way infringe the copyright of System Builder Software; (4) immediately discontinue the use of the Trade Mark or any other matter or materials indicative of being a distributor of System Builder Software; (5) not any time thereafter: (a) make any use of the Licensed Programs other than for the Distributor's own internal operations, provided that such own use be subject to an End User License Agreement and payment of License Fees; (b) make any use of the Trade Mark; or (c) purport to be a distributor or otherwise of System Builder Software; (6) forthwith pay to System Builder Software all monies owing to System Builder Software as at the date of termination or expiration, as the case may be, including, without limiting the generality of the foregoing, all amounts owing on orders placed on account of License Fees and any interest thereon; (7) if so required in writing by System Builder Software, assign its rights under any Dealership Agreements and Ed User Agreements; and (8) forthwith return to System Builder Software all consignment stock of Licensed Program, all Associated Documentation and all other property belonging to System Builder Software, all material referred to in clause 20.3(3) and anything else that is in the possession of the Distributor pursuant to this Agreement. 21. ASSIGNMENT 21.1 Except as provided in clause 11, the benefit of this Agreement shall not e dealt with in any way by the Distributor (whether by assignment or otherwise) without System Builder Software's prior written consent. This will not prevent the Distributor from assigning or transferring this Agreement (without the consent of System Builder Software) in the context of carrying out a bona fide corporate reconstruction or listing on a recognized stock exchange in Australia or elsewhere. 23 25 21.2 The Distributor acknowledges that System Builder Software may assign the right to receive License Fees to an Australian subsidiary. Upon notice of such assignment to the Distributor, it shall pay all amounts payable under this Agreement to the assignee. 21.3 The Distributor acknowledges that System Building Software intends either to assign the benefits of this Agreement to Unidata and for Unidata to assume the obligations of System Builder Software under this Agreement ("Assignment") or to novate this Agreement to Unidata on the following basis: (1) System Builder Software will procure that Unidata will agree to be bound in writing to the Distributor by the terms and conditions of this Agreement as if it were a party to this Agreement; (2) the Distributor hereby agrees to an Assignment or a novation of the Agreement in accordance with the provisions of this clause; (3) the Distributor will be deemed to have released System Builder Software from all of its obligations and liabilities under this Agreement as at the date of the Assignment or novation; (4) the Distributor will cooperate with System Builder Software and Unidata and provide all information, execute all documents and perform all other acts which System Builder Software reasonably requires to assist with such Assignment or novation; (5) System Builder Software shall procure that Unidata executes all documents and perform all other acts necessary or desirable to give effect to such an Assignment or novation, including (without limitation) incorporation the terms and conditions of the covenant set out in Schedule 6 into the Assignment or novation and System Builder Software undertakes to ensure that Unidata is bound to and obliged to comply with the terms and conditions set out in Schedule 6; (6) System Builder Software will procure that Unidata will agree to pay directly to the Distributor amounts equivalent to the sixty percent (60%) of the license or other fees which System Builder Software would have continued to pay to the Distributor pursuant to clause 22.1 but for such Assignment or novation; and (7) all stamp duty and the reasonable legal fees and expenses incurred by the Distributor in documenting and signing the Assignment or novation will be paid for by System Builder Software. 22. UNIDESKTOP 22.1 Subject to clause 21,3(6), System Builder Software agrees to pay the Distributor sixty percent (60%) of all license or other fees received by System Builder Software from Unidata 24 26 in respect of the Exploitation of the computer software product known as Unidesktop as defined in the agreement entered into between System Builder Holdings Limited, thereafter System Builder Software and Unidata in the Territory within 14 days of receipt. 22.2 System Builder Software will procure that Unidata agree in writing to provide a Quarterly report within 21 days of the end of each Quarter to the Distributor containing the following information: (1) name and address of all customers of Unidata that have placed orders for Unidesktop in the Territory during the Quarter; (2) number of user permitted in respect of Unidesktop ordered by each customer of Unidata in the Territory during the Quarter; and (3) details of all license and other fees received by Unidata for the Exploitation of Unidesktop in the Territory during the Quarter. 23. NOTICES 23.1 Notices under this Agreement may be delivered by hand, by mail or by facsimile to the addresses specified in Schedule 5. 23.2 Notice will be deemed given: (1) in the case of hand delivery, upon delivery; (2) in the case of posting, 3 days after despatch if in Australia and 5 days if overseas; (3) in the case of facsimile, upon completion of transmission. 24. VARIATION 24.1 An amendment or variation of this Agreement is not effective unless it is in writing an designed by the parties. 25. ENTIRE UNDERSTANDING 25.1 This Agreement: (1) contains the entire agreement and understanding between the parties on everything connected with the subject matter of this Agreement; and (2) supersedes any prior agreement or understanding on anything connected with that subject matter. 25 27 25.2 Each party has entered into this Agreement without relying on any representation by any other party or any person purporting to represent that party. 26. GOVERNING LAW AND JURISDICTION 26.1 This Agreement will be governed by and construed according to the law of the State of New South Wales. 26.2 The parties submit to the non-exclusive jurisdiction of the courts of the State of New South Wales and the Federal Court of Australia. 27. COSTS AND DISBURSEMENTS 27.1 Each party must pay its own costs and disbursements connected with the negotiation, preparation and execution of this Agreement. 27.2 The Distributor must pay all stamp duty and other government imposes payable in connection with this Agreement and, subject to clause 21.3(8), all other documents and matters referred to in this Agreement when due or earlier if requested in writing by System Builder Software. EXECUTED as an Agreement. Signed for and on behalf of ) SYSTEM BUILDER SOFTWARE LIMITED ) by NEILL MILLER ) in the presence of: ) /s/ Katherine Miller /s/ Neill Miller - ------------------------------------- --------------------------------- Signature of Witness Signature of Neill Miller Katherine Miller - ------------------------------------- Name of Witness (BLOCK LETTERS) 10A Dalley Ave., Vancluse 2030 - ------------------------------------- Address of Witness 26 28 Signed for and on behalf of ) S B TECH PTY LIMITED ) by DESMOND MILLER ) in the presence of: ) /s/ Katherine Miller /s/ Desmond Miller - ------------------------------------- --------------------------------- Signature of Witness Signature of Desmond Miller Katherine Miller - ------------------------------------- Name of Witness (BLOCK LETTERS) 10A Dalley Ave., Vancluse 2030 - ------------------------------------- Address of Witness SIGNED by DESMOND MILLER ) in respect of clause 17 only ) in the presence of: ) /s/ Katherine Miller /s/ Desmond Miller - ------------------------------------- --------------------------------- Signature of Witness Signature of Desmond Miller Katherine Miller - ------------------------------------- Name of Witness (BLOCK LETTERS) 10A Dalley Avenue, Vancluse 2030 - ------------------------------------- Address of Witness 27 EX-10.43 6 SHAREHOLDER AGREEMENT 1 EXHIBIT 10.43 SHAREHOLDER AGREEMENT This Shareholder Agreement (the "Agreement") is entered into as of November 14, 1995 by and among (i) Unidata, Inc., a Colorado corporation (the "Company"), (ii) System Builder Corporation, a company organized under the laws of Ireland ("SBC"), Integro Fiduciaire SARL, a company organized under the laws of Jersey ("Integro"), as trustee (and in no other capacity), Jurgen Joarder, Mike Kontorvich and Carol McIntosh (collectively, the "Shareholders"), and (iii) James T. Dresher ("Dresher"). WHEREAS, pursuant to that certain Asset Purchase Agreement (the "Purchase Agreement"), dated as of November 1, 1995, by and among the Company, System Builder Holdings Limited, a company organized under the laws of the Isle of Man ("SB Holdings"), SB Operations Limited, a company organized under the laws of the Isle of Man ("SB Operations"), and the Shareholders, the Company is acquiring substantially all the assets and assuming certain liabilities of SB Holdings, SB Software and SB Operations. WHEREAS, as partial consideration for the Company's acquisition of the assets of SB Holdings, SB Software and SB Operations, the Company has agreed to issue to SB Holdings, and then to permit SB Holdings to transfer to the Shareholders, 1,277,730 shares (the "Shareholder Stock") of common stock ("Common Stock") no par value of the Company; WHEREAS, Dresher and his Related Parties (as defined below) own 9,200,000 shares of Common Stock, which will constitute approximately 79% of the Common Stock outstanding immediately after closing of the Purchase Agreement; and WHEREAS, it is a condition precedent to the obligations of SB Holdings, SB Software, SB Operations and the Shareholders under the Purchase Agreement that the Shareholders, Dresher and the Company shall have entered into this Agreement. NOW THEREFORE, in condition of the mutual covenants herein contained and for other good and valuable consideration, the parties agree as follows: Section 1. ACQUISITION OF SHAREHOLDER STOCK. (a) ACQUIRED FOR OWN ACCOUNT. Each of the Shareholders represents and warrants that the Shareholder stock to be acquired by it pursuant to the Purchase Agreement will be acquired for investment purposes only and not with a view toward resale or distribution thereof in violation of the Securities Act of 1933, as amended (the "Act"), and will not be disposed of in contravention of the Act. 2 (b) SHAREHOLDER STOCK NOT REGISTERED. Each of the Shareholders acknowledges that none of the Shareholder Stock has been registered pursuant to the Act. (c) KNOWLEDGE OF TRANSACTION. Each of the Shareholders represents and warrants that it has had an opportunity to ask questions and receive answers concerning the terms and conditions of the Purchase Agreement, has had legal counsel review such terms and conditions and has had sufficient opportunity for such Shareholder and its legal counsel to conduct diligence concerning the Company. (d) PRIORITY OF INDEMNIFICATION AND STOCK PLEDGE AGREEMENT. Nothing contained in this Agreement shall in any way supersede, modify, amend or diminish the rights of the "Buyers," as defined and specified in the Indemnification and Stock Pledge Agreement entered into concurrently herewith (the "Pledge Agreement"). In the event of any conflict between the provisions of this Agreement and the Pledge Agreement, the provisions of the Pledge Agreement shall control. Section 2. RESTRICTIONS ON TRANSFER. (a) TRANSFER OF SHAREHOLDER STOCK. None of the Shareholders will sell, pledge or otherwise transfer any interest in any shares of Shareholder Stock except pursuant to the provisions of subsections (b) or (c) of this Section 2 or unless such sale occurs in connection with or after a Qualified Public Offering consummated by the Company. Any attempted transfer of Shareholder Stock in violation of this Agreement shall be void and of no effect. As used herein, "Qualified Public Offering" shall mean a public offering of Common Stock registered under the Act which results in net proceeds to the Company and any of its shareholders participating in such public offering in an aggregate amount of at least $15,000,000. (b) FIRST REFUSAL RIGHTS. Any Shareholder desiring to transfer any shares of Shareholder Stock (other than pursuant to Section 2(c) below), shall, at least 120 days prior to making such transfer, deliver written notice (a "Sale Notice") to the Company and Dresher disclosing in detail the identity of the prospective transferee(s) and the terms and conditions of the proposed transfer. Such Shareholder agrees not to consummate any such transfer until the earlier to occur of (i) 120 days after the Sale Notice has been delivered to the Company and Dresher, and (ii) the date on which the parties to the transfer have been determined pursuant to this Section 2(b). The date of the first to occur of such events is referred to as the "Authorization Date". Within ninety (90) days of receiving such Sale Notice, the Company may elect to purchase all or any portion of the Shareholder Stock proposed to be transferred upon the same terms and conditions as set forth in the Sale Notice. If the Company does not elect to purchase all of the shares of Shareholder Stock specified in the Sale Notice, Dresher may elect to purchase any portion of such Shareholder that the Company elects not to purchase upon the same terms and conditions as set forth in the Sale Notice, provided that Dresher notifies such Shareholder of Dresher's election to purchase within the same 90-day period following receipt of the Sale Notice. If the Company and Dresher together do not elect to purchase all of the shares of Shareholder Stock specified in the Sale Notice, such Shareholder may, during the 90 day Period 2 3 immediately following the Authorization Date, transfer such shares of Shareholder Stock that the Company and Dresher have not elected to purchase at a price and on terms no more favorable to the proposed transferee(s) than specified in the Sale Notice; PROVIDED that prior to any such transfer, such transferee has agreed in writing to be bound by the provisions of this Agreement. Any shares of Stockholders Stock not transferred within such 90 day period shall be subject to the provisions of this Section 2(b) upon a subsequent attempt by such Shareholder to transfer such Shareholder Stock. The right of first refusal provided in this Section 2(b) shall terminate upon the Company's consummation of a Qualified Public Offering. (c) SALE OF THE COMPANY. If the Board of Directors of the Company and the holders of at least 66% of shares of Common Stock (or other voting capital stock) (the "Required Percentage") then outstanding approve the sale of all or substantially all of the Company's consolidated assets or a sale or exchange of all of their shares of Shareholder Stock for the same price and otherwise on the same terms and conditions as said holders of the Required Percentage in such Approved Sale for the same price and otherwise on the same terms and conditions as said holders and (ii) shall consent to and raise no objections against the Approved Sale of the Company and, if requested to vote on such Approved Sale, shall vote all shares of Common Stock that said holders beneficially own in favor of such Approved Sale. It is intended that the provision of this Section 2(c) consummate a "voting agreement" within the meaning of Section 7-107-302 of the Colorado Business Corporation Act (the "CBCA") and not a "voting trust" within the meaning of 7-107-301 of the CBCA. If the Approved Sale of the Company is structured as a sale or exchange of stock, the holders of Shareholder Stock shall agree to sell or exchange all of their shares of Shareholder Stock and rights to acquire shares of Shareholder Stock on the terms and conditions approved by the Board of Directors and the holders of at least the Required Percentage. In any Approved Sale, all of the holders of Common Stock shall be entitled to receive the same forms and amount of consideration per share of Common Stock, or if any holders of Common Stock are given an option as to the form and amount of considerations to be received, all holders of Common Stock shall be given the same option. The holders of Shareholder Stock shall take all necessary and desirable actions in connection with the Consummation of the Approved Sale of the Company as requested by counsel to the Company. The rights provided in this Section 2(c) shall terminate upon the Company's consummation of a Qualified Public Offering. (d) The certificates representing the Shareholder Stock to be issued to the Shareholder shall bear the following legend: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT"), AND MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF ANY EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR AN EXEMPTION FROM REGISTRATION THEREUNDER. THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON TRANSFER AND CERTAIN OTHER AGREEMENTS SET FORTH IN A SHAREHOLDER AGREEMENT DATED AS OF NOVEMBER 1, 1995, A COPY OF 3 4 WHICH MAY BE OBTAINED BY THE HOLDER HEREOF WITHOUT CHARGE AT THE COMPANY'S PRINCIPAL PLACE OF BUSINESS. (e) No holder of Shareholder Stock may sell, transfer or dispose of any such securities (except pursuant to an effective registration statement under the Act) without first delivering to the company a legal opinion acceptable in form and substance to the Company by counsel acceptable to the Company that registration under the Act is not required in connection with such transfer. (f) Each holder of Shareholder Stock agrees not to effect any public sale or distribution of any equity securities of the Company, or any securities convertible into or exchangeable or exercisable for such securities, including a sale pursuant to Rule 144 (or any similar provision then in force) under the Act during the seven days prior to, and during the 180 days beginning on the effective date of the registration statement relating to any underwritten public offering of the Company's Common Stock or preferred stock, except as part of such underwritten public offering or if otherwise permitted. Section 3. TAG-ALONG RIGHT. With respect to any proposed transfer, sale or other disposition (collectively, a "proposed transfer") of shares of Common Stock ("Shares") by Dresher or any of his Related Parties (such persons being hereinafter referred to collectively referred to as the "proposed purchaser"), other than pursuant to an Exempt Transfer (as defined below), each of the Shareholders and their respective Related Parties (collectively, the "Tag-Along Shareholders") shall have the right (the "Tag-Along Right") to require the proposed purchaser to purchase from such Tag-Along Shareholder up to the number of whole Shares owned by such Tag-Along Shareholder equal to the sum of (A) the number derived by multiplying the total number of Shares the members of the Dresher Group propose to transfer by a fraction, the numerator of which is the total number of Shares owned by such Tag-Along Shareholder, and the denominator of which is the total number of Shares then outstanding on a fully-diluted basis and (B) any additional Shares of any other Tag-Along Shareholder shall be entitled to have purchased pursuant to the next paragraph if any other Tag-along Shareholder elects not to exercise its rights hereunder. Any Shares purchased from Tag-Along Shareholder elects not to exercise its rights hereunder. Any Shares purchased from Tag-Along Shareholders pursuant to this Section 3 shall be for the same consideration and upon the same terms and conditions as such proposed transfer by Dresher (or his Related Parties, as the case may be). Dresher shall, not less than fifteen (15) not more than thirty (30) calendar days prior to each proposed transfer, notify, or cause to be notified, each Tag-Along Shareholder in writing of each proposed transfer, setting forth in such notice: (i) the name of the transferor and the number of Shares proposed to be transferred, (ii) the name and address of the proposed purchaser, (iii) the proposed amount and form of consideration and terms and conditions of payment offered by such proposed purchaser and (iv) that the proposed purchaser has been informed of the Tag-Along Right provided for in this Section 3 and has agreed to purchase Shares in accordance with the terms hereof. 4 5 The Tag-Along Right may be exercised by any Tag-Along Shareholder by delivery of a written notice to Dresher or his Related Party proposing to sell Shares (the "Tag-Along Notice") within ten (10) calendar days following its receipt of the notice specified in the last sentence of the preceding paragraph. The Tag-Along Notice shall state the amount of Shares that such Tag-Along Shareholder proposes to include in such transfer to the proposed purchaser determined as aforesaid, plus the amount of additional Shares, if any, that such Tag-Along Shareholder would be willing to sell to the proposed purchaser in the event that any of the other Tag-Along Shareholders elect not to exercise their Tag-Along Rights in whole or in part. The maximum amount of additional Shares that each such Tag-Along Shareholder shall be entitled to sell, and the proposed purchaser be required to purchase, shall be determined by multiplying the total number of Shares that, under the formula described in the previous paragraph, Tag-along Shareholders could have elected to sell to the proposed purchaser but elected not to so sell, by a fraction, the numerator of which is the total number of Shares owned by such Tag-Along Shareholder electing to sell additional Shares and the denominator of which is the total number of Shares owned by all Tag-Along Shareholders who delivered Tag-Along Notices, In the event that the proposed purchaser does not purchase Shares from the Tag-Along Shareholders on the same terms and conditions as specified in the notice referred to in the last sentence of the preceding paragraph, then Dresher and his Related Parties shall not be permitted to sell any Shares to the proposed purchaser in the proposed transfer. If no Tag-Along Notice is received during the 10-day period referred to above (or if such Notices do not cover all the Shares proposed to be transferred), Dresher and his Related Parties shall have the right, for a period of ninety (90) days after the expiration of the 10-day period referred to above, to transfer the Shares specified in the notice referred to in the last sentence of the preceding paragraph (or the remaining Shares) on terms and conditions no more favorable than those stated in the Tag-Along Notice and in accordance with the provisions of this Section 3. As used herein, the term "Exempt Transfer" shall mean (1) transfers by Dresher to his Related Parties, provided that any such transferee agrees in writing to be bound by this Agreement as if such transferee were Dresher with respect to such transferred Shares; (2) transfers by any of Dresher's Related Parties to Dresher, and (3) transfers by Dresher or any of his Related Parties which do not result in the Dresher Group owning of record less than 50% of the Shares owned by the Dresher Group on the date of this Agreement. As used herein, the term "Related Party" means, with respect to any person, (A) a spouse or immediate family member or (B) a trust, corporation, partnership or other entity of which such person is a beneficiary, stockholder, partner, owner or person holding an 80% or more controlling interest. The Company agrees not to effect any transfer of Shares by Dresher until it has received evidence reasonably satisfactory to it that the Tag-Along Right, if applicable to such transfer, has been complied with. The right provided in this Section 3 shall terminate upon the Company's consummation of a Qualified Public Offering. Section 4. REGISTRATION RIGHTS. 5 6 (a) PIGGYBACK REGISTRATION RIGHTS. (1) RIGHT TO PIGGYBACK. Subject to the last sentence of this subsection (1), whenever the Company proposes to register any Common Stock (or securities convertible into or exchangeable for, or options to acquire, Common Stock) with the Securities and Exchange Commission (the "Commission") under the Act (other than a registration on Form S-4 or S-8, or a Form S-3 registration statement which relates solely to a dividend reinvestment plan or employee purchase plan) in a public sale for cash and the registration form to be used may be used for the registration of the Registrable Securities (as defined in subsection (h) below) (a "Piggyback Registration"), whether or not for sale for its own account , the Company will give written notice to each of the holders of Shares listed on EXHIBIT 1 hereto (the "Significant Holders") (including Dresher, which, for purposes of this Section 4, shall include Dresher, his Related Parties and any transferees of Dresher and his Related Parties), at least fifteen (15) days prior to the anticipated filing date, of its intention to effect such a registration, which notice will specify the kind and number of securities proposed to be registered, the distribution arrangements and such other information that at the time would be appropriate to include in such notice, and will, subject to subsection (a)(2) below, include in such Piggyback Registration all Registrable Securities with respect to which the Company has received written requests for inclusion therein within ten (10) days after delivery of the Company's notice. Except as may otherwise be provided in this Agreement, Registrable Securities with respect to which such request for registration has been received will be registered by the Company and offered to the public in a Piggyback Registration pursuant to this Section 4 on the same terms and conditions as those applicable to the registration of Common Stock (or securities convertible into or exchangeable or exercisable for Common Stock) to be sold by the Company and by any other person selling under such registration. (2) PRIORITY ON PIGGYBACK REGISTRATION. If the managing underwriter or underwriters, if any, advise the holders of Registrable Securities in writing that in its or their reasonable opinion or, in the case of a Piggyback Registration not being underwritten, the Company shall reasonably determine (and notify the holders of Registrable Securities of such determination), after consultation with an investment banker of nationally recognized standing, that the number or kind of securities proposed to be sold in such registration (including Registrable Securities to be included pursuant to subsection (a)(1) above) will materially adversely affect the success of such offering, the Company will include in such registration the number of securities, if any, which, in the opinion of such underwriter or underwriters, or the Company, as the case may be, can be sold as follows: (i) first, the shares the Company proposes to sell, and (ii) second, the Registrable Securities requested to be included in such registration by the Significant Holders. To the extent that the privilege of including Registrable Securities in any Piggyback Registration must be allocated among the Significant Holders, the allocation shall be made pro rata based on the number of Registrable Securities that each such participant shall have requested to include therein. Notwithstanding the foregoing, the parties agree that the priority provisions provided for in Section 4(a)(2) of the Institutional Registration Rights Agreement shall govern with respect to any Demand Registration effected at the request of an Institutional Inventor. See Section 5(r) below. 6 7 (3) SELECTION OF UNDERWRITERS. If any Piggyback Registration is an underwritten offering (other than an offering initiated as a Demand Registration as provided in subsection (b) below), the Company will select a managing underwriter or underwriters to administer the offering, which managing underwriter or underwriters will be of nationally recognized standing and reasonably acceptable to the holders of a majority of the Registrable Securities included therein. (b) DEMAND REGISTRATION RIGHTS. (1) RIGHT TO DEMAND. At any time after (i) the Company is eligible to register Shares of Common Stock under the Act on Form S-3 and (ii) none of the Shares hold by Dresher are subject to an underwriter lock-up agreement relating to such Shares, any of SBC, Integro and Dresher (each of SBC, Integro and Dresher, a "Demanding Group") may, make a written request of the Company for registration with the Commission , under and in accordance with the provisions of the Act, of all or part of their Registrable Securities (a "Demand Registration"); PROVIDED, that (x) the Company need not effect a Demand Registration unless such Demand Registration shall include at least 50% of the Registrable Securities held on the date of such written request by SBC and Integro collectively or at least 15% (in the case of the first Demand Registration) of the Registrable Securities held by Dresher immediately after the consummation of the transactions contemplated by the Purchase Agreement (subject to adjustment only for stock splits and recombinations and pro rata stock dividends and the like), (y) the Company may defer the filing of any registration statement relating to a Demand Registration for (i) a reasonable period of time (not to exceed ninety (90) days following the end of the most recently completed fiscal year or forty-five (45) days following the end of the most recently completed fiscal quarter (whichever is later)) to the extent necessary to prepare the financial statements of the Company for the fiscal period most recently ended prior to the related request, (ii) up to ninety (90) days if the Company would be required to disclose in such registration statement the existence of any fact relating to a material business situation, transaction or negotiation not otherwise required to be disclosed, or (iii) up to ninety (90) days if the Company notifies the Significant Holders that a registration at the time and on the terms requested would adversely affect any equity financing by the Company that had been contemplated by the Company prior to receipt of notice requesting registration pursuant to this Section 4(b), and (z) if the Company elects to defer any Demand Registration pursuant to the terms of this sentence, no Demand Registration shall be deemed to have occurred for purposes of this Agreement. Within ten (10) days after receipt of the request for a Demand Registration, the Company will send written notice (the "Notice") of such registration request and its intention to comply therewith to each of the other Significant Holders that shall have the option to exercise their piggyback rights as provided in Section 4(a) above. Subject to subsection (3) below, the Company will include in such registration all Registrable Securities of such Significant Holders with respect to which the Company has received written requests for inclusion therein within ten (10) days after delivery of the Notice. All requests made pursuant to this subsection (b)(1) will specify the aggregate number of Registrable Securities requested to be registered and will also specify the intended methods of disposition thereof. 7 8 (2) NUMBER OF DEMAND REGISTRATIONS. SBC and Integro collectively shall be entitled to two (2) Demand Registrations and Dresher shall be entitled to five (5) Demand Registrations. The expenses of each Significant Holder requesting a Demand Registration shall be borne by the Company as provided in subsection (d) below. A Demand Registration shall not be counted as a Demand Registration hereunder until such Demand Registration has been declared effective by the Commission. Notwithstanding anything in this Section 4(b) to the contrary, in no event will the Company be required to effect, in the aggregate, without regard to the holder of Registrable Securities making such request, more than two (2) effective registrations pursuant to this Section 4(b) within any 180-day period. (3) PRIORITY ON DEMAND REGISTRATIONS. If in any Demand Registration the managing underwriter or underwriters thereof (or in the case of a Demand Registration not being underwritten, in the opinion of the holders of a majority of the Registrable Securities included therein), advise the Company in writing that in its or their reasonable opinion the number of securities proposed to be sold in such Demand Registration exceeds the number that can be sold in such offering without having a material effect on the success of the offering (including, without limitation, an impact on the selling price or the number of Shares that any participant may sell), the Company will include in such registration only the number of securities that, in the reasonable opinion of such underwriter or underwriters (or holders of Registrable Securities, as the case may be) can be sold without having a material adverse effect on the success of the offering as follows: (i) first, the Registrable Securities requested to be included in such Demand Registration by the Significant Holders (including the Demanding Group and all other Significant Holders requested to have Shares included in such Demand Registration pursuant to subsection (1) above) pro rata among those requesting registration on the basis of the number of Shares requested to be included, and (ii) second, Shares to be issued and sold by the Company. (4) SELECTION OF UNDERWRITERS. If a Demand Registration is underwritten offering, the holders of a majority of the Registrable Securities to be included in such Demand Registration held by members of the Demanding Group that initiated such Demand Registration shall have the right to select a managing underwriter or underwriters of recognized national standing that is or are reasonably satisfactory to the Company to administer the offering. (c) REGISTRATION PROCEDURES. With respect to any Piggyback Registration or Demand Registration (generally, a "Registration"), the Company will, subject to Sections (4)(a)(2) and (4)(b)(3), as expeditiously as practicable: (1) prepare and file with the Commission, within ninety (90) days after mailing the applicable Notice, a registration statement or registration statements (the "Registration Statement") relating to the applicable Registration; PROVIDED that the Company will include in any Registration Statement all information that the holders of the Registrable Securities so to be registered shall reasonably request and shall include all financial statements required by the Commission to be filed therewith, cooperation and assist in any filings required to be made with the National Association of Security Dealers, Inc. ("NASD"), and use its best efforts to cause such Registration Statement to become effective; PROVIDED FURTHER, that before filing a 8 9 Registration Statement or prospectus related thereto (a "Prospectus") or any amendments or supplements thereto, the Company will furnish to the holders of the Registrable Securities covered by such Registration Statement and the underwriters, if any, copies of all such documents proposed to be filed, which documents will be subject to the reasonable review of such holders and underwriters and their respective counsel, and the Company will not file any Registration Statement or amendment thereto or any Prospectus or any supplement thereto to which the holders of a majority of the Registrable Securities covered by such Registration Statement or the underwriters, if any, shall reasonably object; (2) use its best efforts to keep such Registration Statement current for a period of ninety (90) days, or such shorter period which will terminate when all Registrable Securities covered by such Registration Statement have been sold, and prepare and file with the Commission such amendments and post-effective amendments to the Registration Statement as may be necessary to keep each Registration Statement effect for such period; cause each Prospectus to be supplemented by any required Prospectus supplement, and as so supplemented to be filed pursuant to Rule 424 under the Act; and comply with the provisions of the Act with respect to the disposition of all securities covered by such Registration Statement during the applicable period in accordance with the intended method or methods of distribution by the sellers thereof set forth in such Registration Statement or supplement to the Prospectus; the Company shall not be deemed to have used its best efforts to keep a Registration Statement effective during the application period if it voluntarily takes any action that would result in selling holders of the Registrable Securities covered thereby not being able to sell such Registrable Securities during that period unless such action is required under applicable law, PROVIDED that the foregoing shall not apply to actions taken by the Company in good faith and for valid business reasons, including without limitation the acquisitions or divestiture of assets, so long as the Company promptly thereafter complies with the requirements of subsection (11) of this subsection (c), if applicable; (3) notify the selling holders of Registrable Securities and the managing underwriters, if any, promptly, and (if requested by any such person or entity) confirm such advice in writing, (A) when the Prospectus or any Prospectus supplement or post-effective amendment has been filed, and, with respect to the Registration Statement or any post-effective amendment, when the same has become effective, (B) of any request by the Commission for amendments or supplements to the Registration Statement or the Prospectus or for additional information, (C) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose, (D) if at any time the representations and warranties of the Company contemplated by subsection (14) below cease to be true and correct, (E) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose and (F) of the happening of any event which makes any statement made in the Registration Statement, the Prospectus or any document incorporated therein by reference untrue or which requires the making of any changes in the Registration Statement, the Prospectus or any document incorporated therein by reference in order to make the statements therein not misleading; 9 10 (4) make every reasonable effort to obtain the withdrawal of any order suspending the effectiveness of the Registration Statement at the earliest possible moment; (5) if requested by the managing underwriter or underwriters or a holder of Registrable Securities being sold in connection with an underwritten offering, promptly incorporated in a Prospectus supplement or post-effective amendment such information as the managing underwriters and the holders of a majority of the Registrable Securities being sold agree should be included therein related to the plan of distribution with respect to the number of Registrable Securities being sold to such underwriters, the purchase price being paid therefor by such underwriters and with respect to any other terms of the underwritten (or best efforts underwritten) offering of the Registrable Securities to be sold in such offering; and make all required filings of such Prospectus supplement or post-effective amendment as soon as notified of the matter to be incorporated in such Prospectus supplement or post-effective amendment; (6) furnish to each seller holder of Registrable Securities and each managing underwriter, without charge, at least one conformed copy of the Registration Statement and any amendment thereto, including financial statements and schedules, all documents incorporated therein by reference and all exhibits (including those incorporated by reference); (7) deliver to each selling holder of Registrable Securities and the underwriters, if any, without charge, as many copies of the Prospectus (including each preliminary prospectus) and any amendment or supplement thereto as such selling holder of Registrable Securities and underwriters may reasonably request; the Company consents to the use of each Prospectus or any amendment or supplement thereto by each of the selling holders of Registrable Securities and the underwriters, if any, in connection with the offering and sale of the Registrable Securities covered by such Prospectus or any amendment or supplement thereto; (8) prior to any public offering of Registrable Securities, register or qualify or cooperate with the selling holders of Registrable Securities, the underwriters, if any, and their respective counsel in connection with the registration or qualification of such Registrable Securities for offer and sale under the securities or "blue sky" laws of such jurisdictions as any seller or underwriter reasonably requests in writing, considering the amount of Registrable Securities proposed to be sold in each such jurisdiction, and do any and all other acts or things necessary or advisable to enable the disposition in such jurisdictions of the Registrable Securities covered by the Registration Statement; PROVIDED that the Company will not be required to qualify generally to do business in any jurisdiction where it is not then so qualified or to take any action that would subject it to general service of process in any such jurisdiction where it is not then subject; (9) cooperated with the selling holders of Registrable Securities and the managing underwriters, if any, to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold and not bearing any restrictive legends and to be in such denominations and registered in such names as the managing underwriters may request at least two (2) business days prior to any sale of Registrable Securities to the underwriters; 10 11 (10) use its best efforts to cause the Registrable Securities covered by the applicable Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the seller or sellers thereof or the underwriters, if any, to consummate the disposition of such Registrable Securities; (11) upon the occurrences of any event contemplated by subsection (3)(F) above, prepare a supplemental or post-effective amendment to the Registration Statement or the related Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of the Registrable Securities, the Prospectus will not contain an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading; (12) cause all Registrable Securities covered by any Registration Statement to be listed on each securities exchange on which similar securities issued by the Company are then listed, or cause such Registrable Securities to be authorized for trading on the Nasdaq National Market if any similar securities issued by the Company are then so authorized, if requested by the holders of a majority of such Registrable Securities or the managing underwriters, if any; (13) provide a CUSIP number for all Registrable Securities, not later than the effective date of the applicable Registration Statement; (14) enter into such agreements (including an underwriting agreement) and take all such other actions in connection therewith in order to expedite or facilitate the disposition of such Registrable Securities and in such connection, whether or not an underwriting agreement is entered into and whether or not the Registration is an underwritten Registration (A) make such representations and warranties to the holders of such Registrable Securities and the underwriters, if any, in form, substance and scope as are customarily made by issuers to underwritten in primary underwritten offerings; (B) obtain opinions of counsel to the Company and updates thereof (which counsel and opinions (in form, scope and substance) shall be reasonably satisfactory to the managing underwriters, if any, and the holders of a majority of the Registrable Securities being sold) addressed to each selling holder and the underwriters, if any, covering the matters customarily covered in opinions requested in underwritten offerings and such other matters as may be reasonably requested by such holders and underwriters; (C) obtain "cold comfort") letters and updates thereof from the Company's independent certified public accountants addressed to the selling holders of Registrable Securities and the underwriters, if any, such letters to be in customary form and covering matters of the type customarily covered in "cold comfort" letters by underwriters in connection with primary underwritten offerings; (D) if an underwriting agreement is entered into, the same shall set forth in full the indemnification provisions and procedures set forth in subsection (f) below with respect to all parties to be indemnified pursuant to said subsection; and (E) the Company shall deliver such documents and certificates as may be reasonably requested by the holders of a majority of the Registrable Securities being sold and the managing underwriters, if any, to evidence compliance with subsection 3(F) above and with any customary conditions continued in the underwriting 11 12 agreement or other agreement entered into by the Company. The above shall be done at each closing under such underwriting or similar agreement or as and to the extent required thereunder; (15) make available for inspection by a representative of the holders of a majority of the Registrable Securities, any underwriter participating in any disposition pursuant to such Registration, and any attorney or accountants retained by the sellers or underwriter, all financial and other records, pertinent corporate documents and properties of the Company, and cause the Company's officers, directors and employees to supply all information reasonably requested by any such representative, underwriter, attorney or accountant in connection with such Registration Statement; PROVIDED, that any records, information or documents that are designated by the Company in writing as confidential shall be kept confidential by such Persons unless disclosure of such records, information or documents is required by court or administrative order or any regulatory body having jurisdiction; (16) otherwise use its best efforts to comply with all applicable rules and regulations of the Commission, and make generally available to its security holders, earnings statements satisfying the provisions of Section 11(a) of the Act, no later than forty-five (45) days after the end of any 12-month period (or ninety (90) days, if such period is a fiscal year) (A) commencing at the end of any fiscal quarter in which Registrable Securities are sold to underwriters in a firm or best efforts underwritten offering, or (B) if not sold to underwriters in such an offering, beginning with the first month of the Company's first fiscal quarter commencing after the effective date of the Registration Statement, which statements shall cover said 12-month periods; and (17) promptly prior to the filing of any document that is to be incorporated by reference into any Registration Statement or Prospectus (after initial filing of the Registration Statement), provide copies of such document to counsel to the selling holders of Registrable Securities and to the managing underwriters, if any, make the Company's representatives available for discussion of such document and make such changes in such document prior to the filing thereof as counsel for such selling holders or underwriters may reasonably request. The Company may require each seller of Registrable Securities as to which any Registration is being effected to furnish to the Company such information regarding such seller and the proposed distribution of such securities as the Company may from time to time reasonably request in writing. Each holder of Registrable Securities agrees by acquisition of such Registrable Securities that, upon receipt of any notice from the Company of the happening of any event of the kind described in subsection (3)(F) of this subsection (c), such holder will forthwith discontinue disposition of Registrable Securities pursuant to the Registration Statement until such holder's receipt of copies of the supplemented or amended Prospectus as contemplated by subsection (11) of this subsection (c), or until it is advised in writing (the "Advice") by the Company that the use of the Prospectus may be resumed, and has received copies of any additional or supplemental filings that are incorporated by reference in the Prospectus, and, if so directed by the Company, 12 13 such holder will deliver to the Company (at the Company's expense) all copies, other than permanent file copies then in such holder's possession, of the Prospectus covering such Registrable Securities current at the time of receipt of such notice. In the event the Company shall give any such notice, the time periods referred to in subsection (2) of this subsection (c) shall be extended by the number of days during the period from and including the date of the giving of such notice to and including the date when each seller of Registrable Securities covered by such Registration Statement shall have received the copies of the supplemental or amended prospectus contemplated by subsection (11) of this subsection (c) or the Advice. (d) REGISTRATION EXPENSES. All expenses incident to the Company's performance of or compliance with this Section 4 will be borne by the Company, including, without limitation, all registration and filing fees, the fees and expenses of the counsel and accountants for the Company (including the expenses of any "cold comfort" letters), all other costs and expenses of the Company incident to the preparation, printing and filing under the Act of the Registration Statement (and all amendments and supplements thereto) and furnishing copies thereof and of the Prospectus included therein, the costs and expenses incurred by the Company in connection with the qualification of the Registrable Securities under the state securities or "blue sky" laws of various jurisdictions, the costs and expenses associated with filings required to be made with the NASD, the costs and expenses of listing the Registrable Securities for trading on a national securities exchange or authorizing them for trading on the Nasdaq National Market and all other costs and expenses incurred by the Company in connection with any Registration hereunder, PROVIDED, that, except as otherwise provided in Section 4(e)(2) below, the Company shall not bear the costs and expenses of any selling holders of Registrable Securities for underwriters' commissions, brokerage fees, transfer taxes or the fees and expenses of any counsel, accountants or other representative retained by any selling holder of Registrable Securities. (e) INDEMNIFICATION. (1) INDEMNIFICATION BY THE COMPANY. The Company agrees to indemnify, to the full extent permitted by law, each Significant Holder, its officers, directors and agents and each person who controls such Significant Holder (within the meaning of the Act and the Exchange Act), against all losses, claims, damages, liabilities and expenses caused by any untrue or alleged untrue statement of a material fact contained in any Registration Statement, Prospectus or preliminary Prospectus or any omission or alleged omission to state therein a material fact necessary to make the statements therein (in the case of a Prospectus or any preliminary Prospectus, in light of the circumstances under which they were made) not misleading, except insofar as the same are caused by or contained in any information with respect to such Significant Holder furnished in writing to the Company by such Significant Holder or its representative expressly for use therein. The Company will also indemnify underwriters participating in the distribution, their officers and directors and each person who controls such persons (within the meaning of the Act) to the same extent as provided above with respect to the indemnification of the Significant Holders; PROVIDED, HOWEVER, if pursuant to an underwritten public offering of Registrable Securities, the Company and any underwriters enter into an underwriting or purchase agreement relating to such offering that contains provisions relating to 13 14 indemnification and contribution between the Company and such underwriters, such provisions shall be deemed to govern indemnification and contribution as between the Company and such underwriters. (2) INDEMNIFICATION BY HOLDERS OF REGISTRABLE SECURITIES. In connection with any registration in which a Significant Holder is participating, each such Significant Holder will furnish to the Company in writing such information with respect to such Significant Holder as the Company reasonably requests for use in connection with any Registration Statement or Prospectus and agrees to indemnify, to the full extent permitted by law, the Company, the directors and officers of the Company signing the Registration Statement, each person who controls the Company (within the meaning of the Act and the Exchange Act), and all underwriters participating in the distribution against any losses, claims, damages, liabilities and expenses resulting from any untrue statement of a material fact or any omission to state a material fact required to be stated therein or necessary to make the statements in the Registration Statement or Prospectus or preliminary Prospectus (in the case of the Prospectus or any preliminary Prospectus, in light of the circumstances under which they were made) not misleading, to the extent, but only to the extent, that such untrue statement or omission is contained in any information with respect to such Significant Holder so furnished in writing by such Significant Holder or its representative specifically for inclusion therein. In no event shall the liability of any Significant Holder hereunder be greater in amount than the dollar amount of the proceeds received by such Significant Holder upon the sale of the Registrable Securities giving rise to such indemnification obligation. The Company shall be entitled to receive indemnities from underwriters, selling brokers, dealer managers and similar securities industry professionals participating in the distribution, to the same extent as provided above with respect to information with respect to such persons or entities so furnished in writing by such persons or entities or their representatives specifically for inclusion in any Prospectus or Registration Statement. (3) CONDUCT OF INDEMNIFICATION PROCEEDINGS. Any person or entity entitled to indemnification hereunder will (i) give prompt written notice to the indemnifying party after the receipt by the indemnified party of a written notice of the commencement of any action, suit, proceeding or investigation or threat thereof made in writing for which such indemnified party will claim indemnification or contribution pursuant to this Agreement; PROVIDED, HOWEVER, that the failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations under the preceding clauses (1) and (2), except to the extent that the indemnifying party is actually prejudiced by such failure to give notice and (ii) unless in such indemnified party's reasonable judgment a conflict of interest may exist between such indemnified and indemnifying parties with respect to such claim, permit such indemnifying party to assume the defense of such claim with counsel reasonably satisfactory to the indemnified party. Whether or not such defense is assumed by the indemnifying party, the indemnifying party will not be subject to any liability for any settlement made without its consent (but such consent will not be unreasonably withheld). No indemnifying party will be required to consent to the entry of any judgment or to enter into any settlement that does not include as a unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a 14 15 release from all liability in respect of such claim or litigation. An indemnifying party who is not entitled to, or elects not to, assume the defense of a claim will not be obligated to pay the fees and expenses of more than one counsel in any one jurisdiction for all parties indemnified by such indemnifying party with respect to such claim, unless in the reasonable judgment of any indemnified party a conflict of interest may exist between such indemnified party and any other of such indemnified parties with respect to such claim, in which event the indemnified party shall be obligated to pay the fees and expenses of such additional counsel or counsels. (4) CONTRIBUTION. If for any reason the indemnification provided for in the preceding clauses (1) and (2) is unavailable to an indemnified party as contemplated by the preceding clauses (1) and (2), then the indemnified party in lieu of indemnification shall contribute to the amount paid or payable by the indemnified party as a result of such loss, claim, damage, liability or expense in such proportion as is appropriate to reflect not only the relative benefits received by the indemnified party and the indemnifying party, but also the relative fault of the indemnified party and the indemnifying party, as well as any other relevant equitable considerations, provided that no Significant Holder shall be required to contribute in an amount greater than the difference between the net proceeds received by such Significant Holder with respect to the sale of any Shares and all amounts already contributed by such Significant Holder with respect to such claims, including amounts paid for any legal or other fees or expenses incurred by such Significant Holder. (f) RULE 144. The Company agrees that all times after it has filed a registration statement pursuant to the requirements of the Act relating to any class of equity securities of the Company, it will file in a timely manner all reports required to be filed by it pursuant to the Act and the Exchange Act. Notwithstanding the foregoing, the Company may deregister any class of its equity securities under Section 12 of the Exchange Act or suspend its duty to file reports with respect to any class of its securities pursuant to Section 15(d) of the Exchange Act if it is then permitted to do so pursuant to the Exchange Act and the rules and regulations thereunder. (g) PARTICIPATION IN UNDERWRITTEN REGISTRATIONS. No Significant Holder may participate in any underwritten registration hereunder unless such Significant Holder (i) agrees to sell its Registrable Securities on the basis provided in any underwriting in any underwriting arrangements approved by the persons entitled hereunder to select the underwriter pursuant to subsections (3)(a)(3) and (3)(b)(4) above, and (ii) accurately completes in a timely manner and executes all questionnaires, powers of attorney, underwriting agreements, custody agreements and other documents customarily required under the terms of such underwriting arrangements. (h) DEFINITION OF REGISTRABLE SECURITIES. "Registrable Securities" means the Shares held by the Significant Holders as of the date this Agreement or hereafter acquired, but with respect to any such Share, only until such time as such Share (i) has been effectively registered under the Act and disposed of in accordance with the Registration Statement covering it or (ii) is permitted to be sold to the public pursuant to Rule 144(k) (or any similar provision then in force which does not impose volume limitations on resale of the Registrable Securities) under the Act. 15 16 (i) AMENDMENTS AND WAIVERS. The provisions of this Section 4, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers of or consents to departures from the provisions hereof may not be given unless approved by the Company in writing and the Company has obtained the written consent of Significant Holders holding at least a majority of the then outstanding Registrable Securities. Notwithstanding the foregoing, any amendment, waiver or consent that materially and adversely affects any of the Shareholders as a group or Dresher is a group differently from the other groups shall require the prior written approval of the holders of at least a majority of the Shares then held by all members of the group so affected. This Agreement may be amended, modified, waived or supplemented only by a written instrument executed by all the parties hereto that are required to execute the same. No action taken pursuant to this Agreement, including, without limitation, any investigation by or on behalf of any party, shall be deemed to constitute a waiver by the party taking such action. The waiver by any party hereto of a breach of any provision of this Agreement shall not operate or be construed as waiver of any preceding or succeeding breach and no failure by any party to exercise any right or privilege hereunder shall be deemed a waiver of such party's rights or privileges hereunder or shall be deemed a waiver of such party=s rights to exercise the same at any subsequent time or times hereunder. Section 5. MISCELLANEOUS. (a) SUCCESSORS, ASSIGNS AND TRANSFEREES. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective legal representatives, heirs, legatees, successors and assigns including any party to which any Significant Holder has transferred or sold his or its Shares. Each transferee of Shares from a Significant Holder shall take such Shares subject to the same restrictions as existed in the hands of the transferor. Shares sold to the public pursuant to an effective Registration Statement shall no longer be subject to any of the provisions of this Agreement. Notwithstanding the foregoing, the rights granted to the holders of the Registrable Securities under Section 4 hereof shall not be transferable by the Significant Holders (other than the Dresher Group). (b) SPECIFIC PERFORMANCE, ETC. The Company and the Shareholders and Dresher, in addition to being entitled to exercise all rights provided herein, in the Company's Certificate of Incorporation or granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Agreement. The parties hereto agree that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Agreement and hereby agree to waive the defense in any action for specific performance that a remedy at law would be adequate. (c) NOTICES. All notices and other communications provided for or permitted hereunder shall be in writing and shall be deemed to have been duly given if delivered personally, when transmitted by telecopy, electronic or digital transmission method, or sent by registered or certified mail (return receipt requested) postage prepaid to the parties at the following addresses (or at such other address for any party as shall be specified by like notice, 16 17 provided that notices of a change of address shall be effective only upon receipt thereof). Notices sent by mail shall be effective five days after mailing. (i) If to the Company, at: Unidata, Inc. 1099 18th Street, Suite 2500 Denver, CO 80202 Attention: Harold Nussenfeld, Esq. Fax: (303) 293-8880 with copies to: Latham & Watkins 633 West Fifth Street Suite 4000 Los Angeles, CA 90071 Attention: Gary Olson, Esq. Fax: (213) 891-8763 (ii) If to the Shareholders, at: Neill Miller Level 18 Plaza II 500 Oxford Street Bondi Junction, NSW 2022 Sydney, Australia Fax: 011 61-2-387-4784 with copies to: Morris, Manning & Martin, L.L.P. 1600 Atlanta Financial Center 3343 Peachtree Road, N.E. Atlanta, GA 30326 Attention: Charles R. Beandrot, Jr., Esq. Fax: (404) 365-9532 (iii) If to Dresher, at: James T. Dresher 1339 E. MacPahil Road Bel Air, MD 21015 Fax: (410) 879-6997 17 18 (e) RECAPITALIZATIONS, EXCHANGE, ETC. AFFECTING THE COMPANY'S STOCK. The provisions of this Agreement shall apply, to the full extent set forth herein with respect to the Common Stock, to any and all shares of capital stock of the company or any successor or assign of the Company (whether by merger, consolidation, sale of assets, or otherwise) that may be issued in respect of, in exchange for, or in substitution of the Common Stock and shall be appropriately adjusted for any stock dividends, splits, reverse splits, combinations, recapitalizations and the like occurring after the date hereof. (f) INSPECTION. Copies of this Agreement will be available for inspection or copying by any Significant Holder at the offices of the Company. (g) TERMINATION. This Agreement shall terminate and cease to be of any further force or effect on the tenth anniversary of the date hereof. (h) APPLICABLE LAW. This Agreement shall be construed, interpreted and the rights of the parties determined in accordance with the laws of the State of Colorado without reference to any choice of law rules that would require the application of the laws of any other jurisdiction. (i) ATTORNEY-IN-FACT. With respect to all matters pertaining to this Agreement, Dresher and the Company shall rely upon the Attorney-in-Fact designated pursuant to the Attorney-in-Fact Agreement executed pursuant to the Purchase Agreement and the actions of the Attorney-in-Fact with respect to provisions hereof shall be binding upon the Shareholders in all respects. (j) SEVERABILITY. The provisions of this Agreement are severable, and if any clause or provision shall be held invalid or unenforceable in whole or in part in any jurisdiction, then such invalidity or unenforceability shall affect only such clause or provision, or part thereof, in such jurisdiction and shall not in any manner affect such clause or provision in any other jurisdiction, or any other clause or provision of this Agreement in any jurisdiction. (k) INTERPRETATION. Time is of the essence of each provision of this Agreement of which time is an element. (l) HEADINGS DESCRIPTIVE. The headings in this Agreement are for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect. (m) ENTIRE AGREEMENT. This Agreement is intended by the parties as a final expression of their agreement with respect to the subject matter hereof and is intended as a complete and exclusive statement of the terms and conditions thereof. 18 19 (n) SERVICE OF PROCESS; CONSENT TO JURISDICTION. (1) SERVICE OF PROCESS. Each party hereto irrevocably consents to the service of any process, pleading, notices or other papers by the mailing of copies thereof by registered, certified or first class mail, postage prepaid, to such party at such party's address set forth herein, or by any other method provided or permitted under Colorado law. (2) CONSENT AND JURISDICTION. Each party hereto irrevocably and unconditionally (A) agrees that any suit, action or other legal proceeding arising out of this Agreement may be brought in the United States District Court for the District of Colorado or, if such court does not have jurisdiction or will not accept jurisdiction, in any court of general jurisdiction in the County of Denver, Colorado; (B) consents to the jurisdiction or any such court in any such suit, action or proceeding; and (C) waives any objection which such party may have to the laying of venue of any such suit, action or proceeding in any such court. (o) ARBITRATION. In the event that there shall be a dispute among the parties arising out of or relating to this Agreement, or the breach thereof, the parties agree that such dispute shall be resolved by final and binding arbitration in Denver, Colorado, administered by the American Arbitration Association in accordance with its International Arbitration Rules. Any award issued as a result of such arbitration shall be final and binding between the parties thereto and shall be enforceable by any court having jurisdiction over the party against whom enforcement is sought. The fees and expenses of such arbitration (including reasonable attorney's fees) or any action to enforce an arbitration award shall be paid by the party that does not prevail in such arbitration. Notwithstanding anything to the contrary herein, nothing shall prevent any party from seeking equitable relief, in the event of a breach or a threatened breach of any provisions of this Agreement, in a court of competent jurisdiction without the need to first seek arbitration. (p) ATTORNEY'S FEES. In any action or proceeding brought to enforce any provision of this Agreement, or where any provision hereof is validly asserted as a defense, the successful party shall be entitled to recover reasonable attorneys' fees in addition to any other available remedy. (q) COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which shall together constitute one and the same agreement. (r) REGISTRATION RIGHTS GRANTED TO INSTITUTIONAL INVESTORS. The parties hereto acknowledge receipt of a draft Registration Rights Agreement dated November 9, 1995 (the executed version of which is referred to herein as the Institutional Registration Rights so long as it is substantially in the form of such draft) pursuant to which the Company proposes to grant certain Piggyback and Demand Registration Rights and Tag-Along Rights to Mass Mutual and certain of its affiliates (the "Institutional Investors"). The parties hereby agree to be bound by the terms thereof and further agree that with respect to Demand Registrations effected pursuant 19 20 to this Agreement, the Institutional Investors shall be deemed to be significant Holders and shall be entitled to the piggyback registration rights granted to a Significant Holder pursuant to Section 4(a)(1). 20 21 [SIGNATURE PAGE TO SHAREHOLDER AGREEMENT] IN WITNESS WHEREOF, the parties have executed this Shareholder Agreement as of the date first above written. Executed by UNIDATA, INC. :/s/ DAVID BRUNEL ----------------------- Name: David Brunel Its: President in the presence of: :Harold Nassenfeld (Witness) :/s/ HAROLD NUSSENFELD ----------------------- Signatory ACCEPTED AND AGREED TO: Executed by SYSTEM BUILDER CORPORATION LIMITED :/s/ NEILL B. MILLER ------------------------ Name: Neill B. Miller Its: Director in the presence of: :Colin Rogoff (Witness) :/s/ COLIN ROGOFF ------------------------ Signatory 21 22 Executed by INTEGRO FIDUCIAIRE SARL, as trustee (and in no other capacity) :/s/ [ILLEGIBLE] ----------------------- Director in the presence of: : ----------------------- (Witness) :/s/ M. HARRISON ----------------------- Signatory Executed by JURGEN JOARDER :/s/ JURGEN JOARDER in the presence of: :Colin Rogoff (Witness) :/s/ COLIN ROGOFF ----------------------- Signatory Executed by MIKE KONTOROVICH :/s/ MIKE KONTOROVICH in the presence of: :Colin Rogoff (Witness) :/s/ COLIN ROGOFF ----------------------- Signatory 22 23 Executed by CAROL MCINTOSH :/s/ CAROL MCINTOSH ----------------------- in the presence of: :Colin Rogoff (Witness) :/s/ COLIN ROGOFF ----------------------- Signatory Executed by JAMES T. DRESHER :/s/ JAMES T. DRESHER in the presence of: : ----------------------- (Witness) :/s/ ROBIN D. TOWNER ----------------------- Signatory 23 24 EXHIBIT 1 SIGNIFICANT HOLDERS John G. Akers David W. Brunel Jeanne D. Butcher James T. Dresher James T. Dresher, Jr. Jeffrey M. Dresher Bruce D. Fraser Honor Guiney Arlene Lacharite Virginia D. Meoli Harold Nussenfeld Allan Snell John F. Schaefer Martin T. Hart Gary Olson Glenangus Holdings Corp. Integro Fiduciary SARL System Builder Corporation Massachusetts Mutual Life Insurance Company Mass Mutual Corporate Investors Mass Mutual Participation Investors Mass Mutual Corporate Value Partners Limited 24 EX-21.1 7 SUBSIDIAIRES 1 EXHIBIT 21.1 SUBSIDIARIES Ardent Software Pty. Ltd. North Sydney, NSW AUSTRALIA Unidata Asia Pacific Pty. Ltd. North Sydney, NSW AUSTRALIA VMARK Software Canada Company Pickering, Ontario CANADA Unidata Canada, Ltd. Pickering, Ontario CANADA Ardent Software Ltd. High Wycombe, Bucks UNITED KINGDOM Ardent Software Europe SA Boulogne FRANCE Unidata France SA Boulogne FRANCE O2 Technology SA Versailles FRANCE VMARK Software GmbH Stuttgart GERMANY Easel Japan K.K. Meguro-ku, Tokyo JAPAN VMARK Software Africa Pty. Ltd. Parktown SOUTH AFRICA VMARK Canada, Inc. VMARK Holding Corp. EX-23 8 CONSENT OF DELOITTE & TOUCHE LLP 1 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements No. 33-49022, No. 33-64566, No. 33-80372, No. 33-85806, and 333-00218 of our report dated January 23, 1998, appearing in the Annual Report on From 10-K of Ardent Software, Inc. (formerly VMARK Software, Inc.) for the year ended December 31, 1997. /s/ Deloitte & Touche LLP - ------------------------- Deloitte & Touche LLP Boston, Massachusetts March 28, 1998 EX-27.1 9 FINANCIAL DATA SCHEUDLE FOR FY 1997
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS APPEARING IN THE FORM 10-K TO WHICH THIS SCHEDULE IS AN EXHIBIT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1 US DOLLARS 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 1 23,224,000 0 11,353,000 1,530,000 0 36,809,000 21,097,000 8,923,000 57,646,000 15,317,000 0 0 0 85,000 33,446,000 57,646,000 31,494,000 57,554,000 3,961,000 16,639,000 0 238,000 1,025,000 5,184,000 1,800,000 3,384,000 0 0 0 3,384,000 .41 .40
EX-27.2 10 RESTATED FDS FOR 9 MOS FY 1997
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS APPEARING IN THE FORM 10-Q TO WHICH THIS SCHEDULE IS AN EXHIBIT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1 US DOLLARS 9-MOS DEC-31-1997 JAN-01-1997 SEP-28-1997 1 21,038,000 0 10,539,000 1,829,000 0 35,516,000 20,937,000 8,302,000 57,400,000 16,718,000 0 0 0 85,000 31,746,000 57,400,000 23,218,000 42,531,000 2,968,000 12,681,000 0 17,000 796,000 2,935,000 1,115,000 1,820,000 0 0 0 1,820,000 .22 .21
EX-27.3 11 RESTATED FDS FOR 6 MOS FY 1997
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS APPEARING IN THE FORM 10-Q TO WHICH THIS SCHEDULE IS AN EXHIBIT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1 US DOLLARS 6-MOS DEC-31-1997 JAN-01-1997 JUN-29-1997 1 19,215,000 0 11,339,000 1,920,000 0 35,033,000 20,888,000 7,908,000 57,154,000 18,052,000 0 0 0 84,000 30,113,000 57,154,000 15,900,000 28,761,000 11,965,000 8,749,000 0 377,000 563,000 1,543,000 587,000 956,000 0 0 0 956,000 .12 .11
EX-27.4 12 RESTATED FDS FOR 3 MOS FY 1997
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS APPEARING IN THE FORM 10-Q TO WHICH THIS SCHEDULE IS AN EXHIBIT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1 US DOLLARS 3-MOS DEC-31-1997 JAN-01-1997 MAR-30-1997 1 15,225,000 0 13,204,000 1,815,000 0 33,428,000 20,597,000 7,219,000 56,189,000 17,988,000 0 0 0 84,000 29,159,000 56,189,000 7,242,000 13,721,000 1,048,000 4,448,000 0 216,000 323,000 492,000 187,000 305,000 0 0 0 305,000 .04 .04
EX-27.5 13 RESTATED FDS FOR FY 1996
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS APPEARING IN THE FORM 10-K TO WHICH THIS SCHEDULE IS AN EXHIBIT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1 US DOLLARS 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 1 14,733,000 0 16,724,000 1,864,000 0 36,413,000 21,115,000 6,950,000 59,977,000 22,131,000 0 0 0 83,000 28,748,000 59,977,000 35,149,000 69,266,000 4,745,000 23,297,000 0 1,286,000 869,000 (2,081,000) 560,000 (2,641,000) 0 (4,734,000) 0 (7,375,000) (.91) (.91)
EX-27.6 14 RESTATED FDS FOR 9 MOS FY 1996
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS APPEARING IN THE FORM 10-Q TO WHICH THIS SCHEDULE IS AN EXHIBIT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1 US DOLLARS 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 1 12,994,000 0 17,123,000 2,272,000 0 34,104,000 20,588,000 6,098,000 60,354,000 15,953,000 0 0 0 82,000 35,245,000 60,354,000 26,475,000 52,382,000 3,657,000 17,413,000 0 1,269,000 605,000 424,000 459,000 (35,000) 0 0 0 (35,000) .00 .00
EX-27.7 15 RESTATED FDS FOR 6 MOS FY 1996
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS APPEARING IN THE FORM 10-Q TO WHICH THIS SCHEDULE IS AN EXHIBIT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1 US DOLLARS 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 1 13,080,000 0 17,033,000 1,608,000 0 34,415,000 27,741,000 9,810,000 60,814,000 16,599,000 0 0 0 81,000 35,002 60,814,000 18,325,000 35,694,000 2,336,000 11,464,000 0 593,000 371,000 237,000 403,000 (166,000) 0 0 0 (166,000) (.02) (.02)
EX-27.8 16 RESTATED FDS FOR 3 MOS FY 1996
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS APPEARING IN THE FORM 10-Q TO WHICH THIS SCHEDULE IS AN EXHIBIT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1 US DOLLARS 3-MOS DEC-31-1996 JAN-01-1996 MAR-31-1996 1 14,287,000 0 17,654,000 2,033,000 0 15,239,000 24,521,000 9,282,000 62,461,000 15,438,000 0 0 0 81,000 37,743,000 62,461,000 9,087,000 17,736,000 1,165,000 16,766,000 71,000 318,000 171,000 870,000 311,000 559,000 0 0 0 559,000 .07 .07
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