1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): FEBRUARY 3, 1998
DATAWORKS CORPORATION
(Exact name of registrant as specified in its charter)
CALIFORNIA
(State or other jurisdiction of incorporation)
0-26814 33-0209937
(Commission File No.) (IRS Employer Identification No.)
5910 PACIFIC CENTER BLVD., SUITE 300
SAN DIEGO, CALIFORNIA 92121
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (619) 546-9600
2
ITEM 5. OTHER EVENTS.
In September 1997, DataWorks Corporation, a California corporation
("DataWorks" or the "Company"), acquired Interactive Group, Inc. ("Interactive")
in a transaction accounted for by DataWorks as a pooling of interests.
Accordingly, the Company is filing herewith the consolidated financial
statements of the Company, restated to reflect the acquisition of Interactive as
a pooling of interests.
2.
3
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(C) EXHIBITS.
The following are filed as Exhibits to this Report:
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Price Waterhouse LLP, Independent Accountants.
23.3 Consent of Romito, Tomasetti & Associates, P.C., Independent
Auditors.
3.
4
INDEX TO FINANCIAL STATEMENTS
PAGE
----
DATAWORKS CORPORATION
AUDITED FINANCIAL STATEMENTS
Report of Ernst & Young LLP, Independent Auditors........................ F-2
Report of Price Waterhouse LLP, Independent Accountants.................. F-3
Report of Romito, Tomasetti & Assoc., P.C., Independent Auditors........ F-4
Supplemental Consolidated Balance Sheets as of December 31, 1996 and 1995 F-5
Supplemental Consolidated Statements of Income for the Years Ended
December 31, 1996, 1995 and 1994....................................... F-6
Supplemental Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1996, 1995 and 1994........................... F-7
Supplemental Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994....................................... F-8
Notes to Supplemental Consolidated Financial Statements.................. F-9
F-1
5
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
DataWorks Corporation
We have audited the accompanying supplemental consolidated balance sheets of
DataWorks Corporation (formed as a result of the consolidation of DataWorks
Corporation and Interactive Group, Inc.) as of December 31, 1996 and 1995, and
the related supplemental consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1996. The supplemental consolidated financial statements give retroactive
effect to the merger of DataWorks Corporation and Interactive Group, Inc. on
September 29, 1997, which has been accounted for using the pooling-of-interest
method as described in the notes to the supplemental consolidated financial
statements. The supplemental financial statements are the responsibility of
DataWorks' management. Our responsibility is to express an opinion on these
supplemental financial statements based on our audits. We did not audit the
financial statements of DCD Corporation or Intrepid Software, Inc. and
Affiliates, which statements reflect total assets of $6,628,433 as of December
31, 1995, and total revenues of $11,482,867 and $12,907,446 for the years ended
December 31, 1995 and 1994, respectively. Those statements were audited by other
auditors whose reports have been furnished to us, and our opinion, insofar as
they relate to data included for DCD Corporation and Intrepid Software, Inc. and
Affiliates, is based solely on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
supplemental financial statements referred to above present fairly, in all
material respects, the consolidated financial position of DataWorks Corporation
at December 31, 1996 and 1995, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31,
1996, after giving retroactive effect to the merger of Interactive Group, Inc.
as described in the notes to the supplemental financial statements in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
San Diego, California
February 19, 1997
F-2
6
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
DCD Corporation
In our opinion, the balance sheet and the related statements of operations,
of stockholders' equity (deficit) and of cash flows (not presented separately
herein) present fairly, in all material respects, the financial position of DCD
Corporation at December 31, 1995, and the results of its operations and its cash
flows for each of the two years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above. We have not audited the financial statements of DCD Corporation for any
period subsequent to December 31, 1995.
PRICE WATERHOUSE LLP
Minneapolis, Minnesota
April 5, 1996
F-3
7
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Intrepid Software, Inc. and Affiliates:
We have audited the combined balance sheet of Intrepid Software, Inc. and
Affiliates as of December 31, 1994, and the related combined statements of
earnings, stockholder's equity and cash flows for each of the years in the two
year period ended December 31, 1994 (not included herein). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits 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, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Intrepid
Software, Inc. and Affiliates as of December 31, 1994, and the results of its
operations and its cash flows for each of the years in the two year period ended
December 31, 1994, in conformity with generally accepted accounting principles.
/s/ Romito, Tomasetti & Associates, P.C.
March 17, 1995
F-4
8
DATAWORKS CORPORATION
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(in thousands)
DECEMBER 31,
----------------------
1996 1995
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 50,825 $ 17,472
Accounts receivable, net of allowance for doubtful accounts of
$1,527 and $1,112 at December 31, 1996 and 1995, respectively 40,427 25,736
Deferred income taxes 3,098 2,344
Other current assets 6,798 2,495
-------- --------
Total current assets 101,148 48,047
Receivable from officer 155 206
Equipment, furniture and fixtures, net 7,070 4,527
Capitalized software costs, net 5,034 1,918
Intangible assets, net 6,201 6,657
Deferred income taxes 1,134 1,173
Other assets 460 388
======== ========
Total assets $121,202 $ 62,916
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 10,178 $ 8,261
Accrued compensation 5,069 2,908
Taxes payable 1,387 1,517
Deferred revenue 9,939 8,858
Short-term borrowings and current portion of long-term
obligations 2,013 1,099
Other accrued liabilities 5,736 4,838
-------- --------
Total current liabilities 34,322 27,481
Deferred income taxes 2,801 1,929
Deferred rent 126 161
Long-term obligations, less current portion 1,864 2,105
Commitments
Shareholders' equity:
Common shares, no stated par value:
Authorized shares - 25,000
Issued and outstanding shares - 13,570 and 10,957 at
December 31, 1996 and 1995, respectively 78,703 32,471
Retained earnings (accumulated deficit) 3,249 (1,248)
Cumulative foreign currency translation adjustments 137 17
-------- --------
Total shareholders' equity 82,089 31,240
======== ========
Total liabilities and shareholders' equity $121,202 $ 62,916
======== ========
See accompanying notes
F-5
9
DATAWORKS CORPORATION
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share information)
YEARS ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
-------- -------- --------
Net revenues:
Software licenses $ 55,169 $ 34,129 $ 22,260
Hardware 13,443 12,356 9,656
Maintenance and other services 48,327 29,519 19,790
-------- -------- --------
Total net revenues 116,939 76,004 51,706
Cost of revenues:
Software licenses 6,584 4,772 3,981
Hardware 9,966 9,309 7,436
Maintenance and other services 35,632 18,577 12,270
-------- -------- --------
Total cost of revenues 52,182 32,658 23,687
-------- -------- --------
Gross profit 64,757 43,346 28,019
Operating expenses:
Sales and marketing 29,632 19,817 13,412
Research and development 8,918 5,163 4,126
General and administrative 14,659 9,146 6,505
Acquisition and related costs 3,656 -- --
ESOP contribution -- 446 429
Write-off of software license -- 235 --
Compensation expense associated with
employee stock bonus -- 871 --
Purchased research and development -- 3,250 --
-------- -------- --------
Total operating expenses 56,865 38,928 24,472
-------- -------- --------
Income from operations 7,892 4,418 3,547
Interest income (expense), net 247 (1,250) (1,221)
-------- -------- --------
Income before income taxes and extraordinary
item 8,139 3,168 2,326
Provision for income taxes 3,642 932 708
-------- -------- --------
Income before extraordinary item 4,497 2,236 1,618
Extraordinary item, net of income taxes -- (1,017) (157)
======== ======== ========
Net income $ 4,497 $ 1,219 $ 1,461
======== ======== ========
Per share information:
Income before extraordinary item $ 0.38 $ 0.25 $ 0.23
Extraordinary item -- (0.11) (0.02)
-------- -------- --------
Net income $ 0.38 $ 0.14 $ 0.21
======== ======== ========
Shares used in per share computations 11,954 8,812 6,989
======== ======== ========
See accompanying notes
F-6
10
DATAWORKS CORPORATION
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(in thousands, except share amounts)
PREFERRED STOCK COMMON STOCK RETAINED
----------------------------- ----------------------------- EARNINGS
SHARES AMOUNT SHARES AMOUNT (DEFICIT)
----------- ----------- ----------- ----------- -----------
Balance at January 1, 1994 -- $ -- 6,454,501 $ 451 $ (2,886)
Issuance of common stock
upon exercise of warrants -- -- 11,537 -- --
Issuance of common stock
in connection with the
acquisition of Madic-Compufact -- -- 146,038 4 --
Issuance of warrants to purchase
shares of common stock -- -- -- 175 --
Dividends declared on
common stock -- -- -- -- (393)
Repayments of ESOP
receivable -- -- -- -- --
Employee stock bonus -- -- 22,712 19 --
Foreign currency
translation adjustment -- -- -- -- --
Net income -- -- -- -- 1,461
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1994 -- -- 6,634,788 649 (1,818)
Issuance of common stock to
comply with certain
antidilution provisions -- -- 2,246 -- --
Issuance of warrants to
purchase shares of common stock -- -- -- 29 --
Issuance of Series A
preferred stock, net 864,696 5,938 -- -- --
Issuance of common stock
upon exercise of warrants
and stock options -- -- 1,229,455 1,532 --
Conversion of Series A
preferred stock upon initial
public offering (864,696) (5,938) 864,696 5,938 --
Issuance of common stock
upon initial public
offering, net -- -- 2,566,480 24,195 --
Dividends declared on --
common stock -- -- -- -- (649)
Repayments of ESOP receivable -- -- -- -- --
Compensation relating to
the granting of stock
options and stock bonus -- -- 90,849 466 --
Repurchase of common stock -- -- (431,533) (400) --
Tax benefit related to --
stock options exercised -- -- -- 62 --
Foreign currency
translation adjustment -- -- -- -- --
Net income -- -- -- -- 1,219
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1995 -- -- 10,956,981 32,471 (1,248)
Issuance of common
stock upon exercise
of stock options -- -- 335,159 226 --
Issuance of common
stock upon -- -- 14,092 122 --
exercise of warrants
Issuance of common
stock in follow-on
public offering, net -- -- 2,112,735 41,330 --
Issuance of common
stock under
Employee Stock
Purchase Plan -- -- 153,990 1,231 --
Tax benefit related to
exercise of stock options -- -- -- 3,180 --
Compensation relating to --
the granting of stock options -- -- -- 161 --
Repurchase of common stock -- -- (3,324) (18) --
Foreign currency
translation adjustment -- -- -- -- --
Net income -- -- -- -- 4,497
=========== =========== =========== =========== ===========
Balance at December 31, 1996 -- $ -- 13,569,633 $ 78,703 $ 3,249
=========== =========== =========== =========== ===========
CUMULATIVE
FOREIGN
CURRENCY SHAREHOLDERS'
RECEIVABLE TRANSLATION EQUITY
FROM ESOP ADJUSTMENTS (DEFICIT)
----------- ----------- -----------
Balance at January 1, 1994 $ (1,943) $ 39 $ (4,339)
Issuance of common stock
upon exercise of warrants -- -- --
Issuance of common stock
in connection with the
acquisition of Madic-Compufact -- -- 4
Issuance of warrants to purchase
shares of common stock -- -- 175
Dividends declared on
common stock -- -- (393)
Repayments of ESOP
receivable 855 -- 855
Employee stock bonus -- -- 19
Foreign currency
translation adjustment -- (12) (12)
Net income -- -- 1,461
----------- ----------- -----------
Balance at December 31, 1994 (1,088) 27 (2,230)
Issuance of common stock to
comply with certain
antidilution provisions -- -- --
Issuance of warrants to
purchase shares of common stock -- -- 29
Issuance of Series A
preferred stock, net -- -- 5,938
Issuance of common stock
upon exercise of warrants
and stock options -- -- 1,532
Conversion of Series A
preferred stock upon initial
public offering -- -- --
Issuance of common stock
upon initial public
offering, net -- -- 24,195
Dividends declared on
common stock -- -- (649)
Repayments of ESOP receivable 1,088 -- 1,088
Compensation relating to
the granting of stock
options and stock bonus -- -- 466
Repurchase of common stock -- -- (400)
Tax benefit related to
stock options exercised -- -- 62
Foreign currency
translation adjustment -- (10) (10)
Net income -- -- 1,219
----------- ----------- -----------
Balance at December 31, 1995 -- 17 31,240
Issuance of common
stock upon exercise
of stock options -- -- 226
Issuance of common
stock upon
exercise of warrants -- -- 122
Issuance of common
stock in follow-on
public offering, net -- -- 41,330
Issuance of common
stock under
Employee Stock
Purchase Plan -- -- 1,231
Tax benefit related to
exercise of stock options -- -- 3,180
Compensation relating to
the granting of stock options -- -- 161
Repurchase of common stock -- -- (18)
Foreign currency
translation adjustment -- 120 120
Net income -- -- 4,497
=========== =========== ===========
Balance at December 31, 1996 $ -- $ 137 $ 82,089
=========== =========== ===========
See accompanying notes
F-7
11
DATAWORKS CORPORATION
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
-------- -------- --------
OPERATING ACTIVITIES
Net income $ 4,497 $ 1,219 $ 1,461
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation and amortization of intangible
assets 3,474 1,742 1,169
Amortization of debt discount and debt
issue costs -- 214 255
Reduction of advances to officers charged
to operating expenses -- 109 200
Notes payable issued for professional
services -- -- 314
Compensation relating to the granting of
options and stock bonus 161 466 19
Purchased research and development write-off
of software license -- 3,250 --
Write-off of software license -- 235 --
Deferred income taxes 774 (1,605) (371)
Extraordinary item, non-cash portion -- 886 157
Other (48) 85 (22)
Changes in operating assets and
liabilities, net of effects from
purchase of Madic-Compufact Corporation:
Accounts receivable (14,691) (9,897) (4,503)
Other current assets (2,801) (1,684) (57)
Deferred revenue 1,081 2,314 2,350
Accounts payable 1,917 820 353
Accrued compensation 2,161 707 665
Other accrued liabilities and income
taxes payable 1,737 2,032 262
Accrued ESOP contribution -- -- (38)
-------- -------- --------
Net cash provided by (used in) operating
activities (1,738) 893 2,214
INVESTING ACTIVITIES
Purchases of equipment, furniture and
fixtures (4,757) (2,499) (1,264)
Additions to capitalized software costs (2,979) (1,334) (475)
Payment for purchase of Madic-Compufact
Corporation, net of cash acquired of $155,445 -- -- (5,113)
Increase in intangible assets -- (310) --
Advances to officers 51 (224) (91)
Acquisition of businesses -- (1,500) --
Other assets (43) (115) 54
-------- -------- --------
Net cash used in investing activities (7,728) (5,982) (6,889)
FINANCING ACTIVITIES
Net increase (decrease) in obligations under
lines of credit -- (2,751) 2,751
Proceeds from notes payable 1,200 1,250 7,195
Repayments of notes payable and capital leases (1,377) (6,978) (2,257)
Deferred debt issue costs -- (164) (975)
Repayment of payables to shareholder -- (50) (431)
Repurchase of common stock (18) (400) --
Issuance of common stock, net 42,909 24,402 --
Issuance of Series A preferred stock, net -- 4,688 --
Dividend paid on Class A common stock -- (649) (393)
-------- -------- --------
Net cash provided by financing activities 42,714 19,348 5,890
Effect of exchange rate on cash 105 34 73
-------- -------- --------
Net increase in cash and cash equivalents 33,353 14,293 1,288
Cash and cash equivalents at beginning of year 17,472 3,179 1,891
-------- -------- --------
Cash and cash equivalents at end of year $ 50,825 $ 17,472 $ 3,179
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for interest $ 290 $ 1,389 $ 934
======== ======== ========
Cash paid during the year for income taxes $ 1,875 $ 930 $ 716
======== ======== ========
NON-CASH TRANSACTIONS:
Note Payable for business acquisition $ -- $ 2,500 $ --
======== ======== ========
Earnout payable for business acquisitions $ 573 $ -- $ --
======== ======== ========
See accompanying notes
F-8
12
DATAWORKS CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
DataWorks Corporation ("DataWorks" or "the Company") is a California
corporation which develops, markets, implements and supports open systems,
client/server-based Enterprise Resource Planning software for mid-range discrete
manufacturing companies.
As described more fully in Note 2, on September 29, 1997, the Company
acquired Interactive Group, Inc. ("Interactive"). The acquisition was accounted
for as a pooling of interests and, accordingly, the supplemental consolidated
financial statements reflect the combined financial position and operating
results for the Company and Interactive for all periods presented giving
retroactive effect to the pooling transaction. These supplemental consolidated
financial statements will become the historical consolidated financial
statements of DataWorks Corporation upon the issuance of financial statements
for the period that includes the date of the merger. In addition, the
consolidated financial statements include the accounts of DataWorks'
wholly-owned subsidiaries DCD Corporation ("DCD"), Madic-Compufact Corporation
("Madic") from May 27, 1994 (Note 2) and DataWorks (Europe) Ltd. All significant
intercompany accounts and transactions have been eliminated in consolidation.
On September 27, 1996, the Company acquired DCD Corporation (DCD). The
acquisition was accounted for as a pooling of interests and, accordingly, the
consolidated financial statements reflect the combined financial position and
operating results for the Company and DCD for all periods presented.
On March 20, 1995, Interactive completed a merger (Note 2) with Intrepid
Software, Inc. ("Intrepid"), this acquisition was accounted for as a pooling of
interests and, accordingly the financial statements reflect the combined
financial position and operating results for all periods presented.
On December 31, 1995, Interactive acquired all of the outstanding shares of
Just-In-Time Enterprise Systems, Inc. ("JIT") from Fourth Shift Corporation
("FSC") of Minneapolis, Minnesota, a publicly traded manufacturing software
company (Note 2). This acquisition was accounted for under the purchase method
of accounting. The results of operations of JIT are included in the consolidated
statements of operations since the date of the acquisition.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates. With the
acquisition of JIT, the Company may incur up to a total of $1.2 million of
contingent consideration due to FSC, which is payable based on a percentage of
future revenues generated from the JIT software after December 31, 1995. This
contingent payment is due on January 31, 1999 (Notes 2 and 4).
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly liquid investments with
remaining maturities, when acquired, of three months or less. DataWorks
evaluates the financial strength of institutions at which significant
investments are made and believes the related credit risk is limited to an
acceptable level.
DataWorks has classified its investments as available-for-sale in accordance
with Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Available-for-sale
securities are carried at amounts which approximate fair value, with unrealized
gains and losses, net of tax, reported in a separate component of shareholders'
equity. Realized gains and losses and declines in value judged to be
other-than-temporary, if any, in available-for-sale securities are included in
investment income. The cost of securities sold is based on the specific
identification method.
F-9
13
DATAWORKS CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Included in cash and cash equivalents at December 31, 1996 were
approximately $29.9 million invested in tax exempt commercial paper and auction
securities, and $12.1 million invested in municipal bonds and corporate notes.
At December 31, 1995 approximately $11.1 million, was invested in a mutual fund
classified as available-for-sale. The mutual fund invests in U.S. Treasury
securities and obligations of U.S. government agencies. As of December 31, 1996
and 1995, the difference between amortized cost and the estimated fair value of
the investments was not material.
Equipment, Furniture and Fixtures
Equipment, furniture and fixtures are recorded at cost. DataWorks provides
for depreciation on equipment, furniture and fixtures using the straight-line
method over the estimated useful lives of the assets, generally three to seven
years. Leasehold improvements are amortized over the lesser of their estimates
useful life or term of the lease.
Capitalized Software Costs
In accordance with Statement of Financial Accounting Standards No. 86
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed," costs incurred in the research and development of new software
products and significant enhancements to existing software products are charged
against operations as incurred until the technological feasibility of the
product has been established. After technological feasibility has been
established, direct production costs, including programming and testing, are
capitalized. Amortization of these costs will begin when the product becomes
available for sale.
Capitalized software costs are amortized using the greater of the amount
computed using the ratio of current product revenues to estimated total product
revenues or the straight-line method over the estimated economic lives of the
products. It is possible that estimated total product revenues, the estimated
economic life of the product, or both will be reduced in the future. As a
result, the carrying amount of capitalized software costs may be reduced in the
future, which could result in material charges to the results of operations in
future periods.
Intangible Assets
Intangible assets arose from the acquisition of Madic (see Note 2). The
excess of cost over the fair value of the net assets purchased (goodwill) is
being amortized over ten years. The customer list and non-compete agreement are
being amortized over ten and three years, respectively. Intangible assets were
also acquired in the JIT acquisition, and are comprised of the trademarks and
trade names, assembled work force, customer base, and developed technology
purchased as detailed in Note 2. These intangible assets are being amortized
over estimated useful lives ranging from three to ten years. Periodically,
management assesses whether there has been a permanent impairment in the value
of intangible assets and the amount of such impairment is determined by
comparing anticipated undiscounted future cash flows from operating activities
with the carrying value of intangible assets.
Foreign Currency Translation
The Company has determined that the local currency of the United Kingdom
operations is the functional currency. Accordingly, assets and liabilities are
translated at the average exchange rate in effect during the period. Translation
adjustments are reported as a separate component of shareholders' equity.
Realized gains and losses related to foreign currency transactions are reported
as income or expense in the period presented. Such gains and losses were not
material for any period presented.
F-10
14
DATAWORKS CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition
Revenue is derived from licensing software, the sale of hardware,
maintenance, implementation and installation, consulting and custom programming
services. Contract revenue related to software licenses and hardware sales is
recognized upon delivery of the products, provided that no significant vendor
obligations remain and the collection of the related receivable is deemed
probable, net of estimated future returns. Maintenance contract revenue is
recognized ratably over the period the service is provided. Revenue from
implementation and installation, consulting and custom programming is billed and
recognized as the services are provided. Amounts billed but not recognized are
deferred in the accompanying consolidated balance sheets. Insignificant vendor
obligations are accounted for by deferring revenue attributable to the
obligations and recognizing it ratably as the obligations are fulfilled.
Revenues on long-term contracts are recognized on the percentage-of-completion
method with progress-to-completion measured based upon labor hours incurred.
Estimates related to all long-term contracts are reviewed periodically. The
effect on revenues or costs from any revisions to estimates is recorded in the
period in which such revisions are made. DataWorks' policy is in compliance with
the provisions of the American Institute of Certified Public Accountants
Statement of Position 91-1, "Software Revenue Recognition."
Interest Expense
Interest expense included amounts due under DataWorks' various loan
agreements and through 1995, amortization of debt issue costs and amortization
of debt discount.
Accounting Standard on Impairment of Long-Lived Assets
Effective January 1, 1996, DataWorks adopted Statement of Financial
Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived Assets
and Long-Lived Assets to be Disposed Of." The adoption in 1996 had no material
effect on the consolidated financial statements.
Concentration of Credit Risk
DataWorks sells its products primarily to manufacturing companies located
throughout the United States. Credit is extended based on an evaluation of the
customer's financial condition and terms of DataWorks' sales normally require a
significant up-front cash deposit. DataWorks estimates its potential losses on
trade receivables on an ongoing basis and provides for anticipated losses in the
period in which the revenues are recognized. Actual losses may differ from
DataWorks' estimates, which could have a material impact on DataWorks' results
of operations in future periods. For the three years ended December 31, 1996,
the Company had no individual customer which accounted for 10% or more of total
annual revenues.
Net Income Per Share
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings Per Share, which supersedes APB Opinion No. 15. Statement No.
128 replaces the presentation of primary EPS with "Basic EPS" which includes no
dilution and is based on weighted-average common shares outstanding for the
period. Companies with complex capital structures, including the Company, will
also be required to present "Diluted EPS" that reflects the potential dilution
of securities like employee stock options and warrants to purchase common stock.
Statement No. 128 is effective for financial statements issued for periods
ending after December 15, 1997. The Company has not yet determined what the
impact of Statement No. 128 will be on the calculation of earnings per share.
F-11
15
DATAWORKS CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. BUSINESS COMBINATIONS
On September 29, 1997, the Company acquired Interactive Group, Inc., a
Delaware corporation, which develops, markets, implements and supports
integrated business information systems that enable discrete manufacturers to
manage their enterprise-wide information requirements. Under the terms of the
acquisition agreement, stockholders of Interactive will receive 0.8054 shares of
the Company's common stock for each share of Interactive common stock they own
at the time the acquisition is consummated. In addition, options and warrants to
acquire Interactive common stock will be converted as a result of the
acquisition into equivalent options and warrants for the Company common stock,
based upon the exchange ratio. The acquisition has been accounted for under he
pooling-of-interests method of accounting. Accordingly, the historical financial
statements for periods prior to the consummation of the combination have been
restated as though the companies had been combined for all periods presented.
On September 27, 1996, the Company acquired DCD, a Minnesota corporation,
which designs, develops, markets and supports management software for use by
lower tier mid-range manufacturers in the make-to-order manufacturing industry.
In connection with the acquisition, the shareholders of DCD received 1,763,704
shares of common stock of the Company. The acquisition has been accounted for
under the pooling-of-interests method of accounting. Accordingly, the historical
financial statements for periods prior to the consummation of the combination
have been restated as though the companies had been combined for all periods
presented.
Total revenues and net income (loss) of DataWorks, DCD and Interactive for
the periods preceding the acquisitions were:
DATAWORKS DCD INTERACTIVE COMBINED
Six months ended June 30, 1997 (Unaudited)
Total revenues $ 34,002 $ -- $ 28,442 $ 62,444
Net income 2,963 -- 367 3,330
Year ended December 31, 1996
Total revenues 60,748 -- 56,191 116,939
Net income 3,236 -- 1,261 4,497
Year ended December 31, 1995
Total revenues 31,528 11,483 32,993 76,004
Extraordinary item, net of income taxes (1,017) -- -- (1,017)
Net income (loss) 576 1,781 (1,138) 1,219
In January 1996, DataWorks purchased certain assets of Arrowkey Systems
("Arrowkey") for $450,000. In addition, DataWorks may be required to pay up to
$75,000 annually through 1998 if certain sales levels of Arrowkey software
products are achieved (as defined). The owner of Arrowkey is an employee of
DataWorks.
Pursuant to a Plan and Agreement of Merger on March 20, 1995, Interactive
issued 511,725 shares of its common stock for all of the outstanding common
stock of Intrepid. All share and per share amounts in the accompanying
consolidated financial statements and notes thereto have been retroactively
adjusted to give effect to the exchange of shares. The accompanying consolidated
financial statements of the Company have been restated to reflect the merger,
which has been accounted for as pooling-of-interests.
The combined historical financial statements of Intrepid include the
accounts of Intrepid and its affiliate, Ultimate Business Systems, Inc. ("UBS").
In December 1994, UBS was merged into Intrepid in a tax-free statutory merger,
with Intrepid as the surviving entity. Because these companies were under common
control, the merger was accounted for in a manner similar to that in
pooling-of-interests accounting.
On December 31, 1995, Interactive acquired all of the outstanding shares of
JIT in exchange for $1.5 million of cash, a $2.5 million note payable, and the
assumption of net liabilities of $4.3 million. These liabilities do not take
into account any potential losses associated with litigation that JIT is subject
to in the normal course of business. In the opinion of management, the
resolution of these matters will not have a material adverse effect on the
Company's results of operations or financial position.
In addition, $1.2 million of contingent consideration is payable based on a
percentage of future revenues generated from the JIT software. During the year
ended December 31, 1996, Interactive accrued $415,000 under the earnout
calculation and recorded a corresponding increase to its intangible assets
related to the purchase price of JIT (Note 5).
F-12
16
DATAWORKS CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. BUSINESS COMBINATIONS (CONTINUED)
A summary of the purchase price and the allocation of costs to the assets
acquired from JIT is as follows as of December 31, 1996 (in thousands):
Current assets $2,165
Fixed assets 863
Intangible assets 2,455
In-process technology 3,250
======
$8,733
======
For the year ended December 31, 1995, Interactive recorded a non-recurring
expense of $3.25 million for purchased in-process research and development
related to the JIT acquisition.
Effective May 27, 1994, DataWorks completed the acquisition of the
outstanding stock of Madic, a company which is dedicated to developing,
marketing and licensing integrated manufacturing and financial software
applications. The purchase price was $5,348,128, including acquisition costs of
$203,753 and 146,038 shares of common stock. The transaction was accounted for
as a purchase and DataWorks' statements of operations include the results of
operations of Madic from the date of acquisition.
The purchase price, including related acquisition costs, has been allocated
to the tangible and intangible assets acquired and liabilities assumed based on
their respective fair value on the date of acquisition as follows (in
thousands):
Cash $ 155
Trade accounts receivable, net 1,714
Equipment, furniture and fixtures 174
Intangibles:
Customer list $ 3,300
Goodwill 1,531
Covenant not to compete 500 5,331
--------
Other 96
------
Total assets 7,470
Liabilities assumed (2,122)
======
Net assets acquired $5,348
======
3. FINANCIAL STATEMENT INFORMATION
Equipment, Furniture and Fixtures
Equipment, furniture and fixtures consists of the following (in thousands):
DECEMBER 31,
-----------------------
1996 1995
-------- --------
Computer equipment $ 9,051 $ 6,509
Office furniture, fixtures and
equipment and other 5,337 3,010
-------- --------
14,388 9,519
Less accumulated depreciation and
amortization (7,318) (4,992)
======== ========
$ 7,070 $ 4,527
======== ========
F-13
17
DATAWORKS CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. FINANCIAL STATEMENT INFORMATION (CONTINUED)
Intangible Assets
Intangible assets consist of the following (in thousands):
DECEMBER 31,
------------------------
1996 1995
------- -------
Customer list $ 3,300 $ 3,300
Goodwill 1,531 1,531
Covenant not to compete 810 810
Assembled workforce 831 790
Trademarks and trade names 457 457
Customer base 563 440
Developed technology 770 353
Other 68 51
------- -------
8,330 7,732
Less accumulated
amortization (2,129) (1,075)
======= =======
$ 6,201 $ 6,657
======= =======
4. EMPLOYEE STOCK OWNERSHIP PLAN AND RECAPITALIZATION
DCD established an ESOP in 1992 for the benefit of all employees meeting
certain eligibility requirements. On November 13, 1992, DCD obtained financing
of $2,550,000 from a commercial bank and advanced the proceeds to the ESOP which
purchased 899,640 shares of common stock from a DCD stockholder. The ESOP note
payable was secured by the assets of DCD and a $500,000 personal guarantee of
the selling stockholder. During 1995, the ESOP note payable and "Receivable from
ESOP" were paid in full.
DCD recorded the funds advanced to the ESOP as a "Receivable from ESOP"
which was a reduction of stockholder's equity. As DCD made discretionary
contributions and dividends to the ESOP, these amounts were used to repay the
"Receivable from ESOP" and the related ESOP note payable. As the principal
amount of the loan was repaid, the "Receivable from ESOP" was reduced
accordingly. The amount of the repayments during 1995 and 1994 were $1,087,503
and $855,355, respectively.
During 1995, DCD paid $56,408 of interest expense, contributed $438,477 to
the ESOP and incurred $7,073 of other ESOP related expenses. During 1994, DCD
paid $95,138 of interest expense, contributed $424,001 to the ESOP and incurred
$5,396 of other ESOP related expenses. During 1995 and 1994, DCD also paid
dividends of $649,026 and $393,133, respectively, on common stock owned by the
ESOP. At December 31, 1995 and 1994, the ESOP had released and allocated 899,640
and 529,573 shares, respectively.
F-14
18
DATAWORKS CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following (in thousands):
DECEMBER 31,
------------------------
1996 1995
------ ------
8.75% note payable to Fourth Shift Corporation; principal and interest payable
in twelve equal quarterly installments of $239,130 each,
commencing on April 1, 1996 through January 1, 1999 $1,934 $2,500
Revolving line of credit agreement with United Kingdom Bank (the "United Kingdom
Agreement"); interest payable monthly at the bank's prime rate,
plus 2% (8% at December 31, 1996); expires May 31, 1997 - 533
Revolving line of credit agreement; interest payable monthly (8.06% - 8.25%
at December 31, 1996); expires June 30, 1997 1,200 -
Non-interest bearing earnout payable to FSC; due January 31, 1999 415 -
Other 328 171
------ ------
3,877 3,204
Less current portion of long-term obligations (2,013) (1,099)
====== ======
$1,864 $2,105
====== ======
Maturities of long-term obligations after 1996 are as follows (in
thousands):
1997 $ 2,013
1998 1,163
1999 701
========
$ 3,877
========
The note payable to Fourth Shift Corporation is secured by a security
interest granted to FSC in all of the outstanding capital stock of JIT, the JIT
Software and a portion of the receivables of the Company related to the JIT
Software.
The United Kingdom Agreement is limited to borrowings of 800,000 British
pounds ($1.3 million at December 31, 1996) and is secured by the accounts
receivable of Interactive (U.K.) Ltd. The United Kingdom Agreement contains
restrictive covenants, including limitations on the payment of dividends. At
December 31, 1996, the Company was in compliance with all such covenants.
The Company has a revolving line of credit under an agreement (the
"Interactive Agreement") with its bank which provides for borrowings of up to $3
million through June 30, 1997. Under the Interactive Agreement, the Company may
elect to receive certain advances (the "Variable Rate Advances") in any amount,
which bear interest at the bank's reference rate per annum (8.25% at December
31, 1996). Interest on the Variable Rate Advances is payable monthly. Principal
is due upon maturity of the Interactive Agreement. The Company had $600,000 in
variable rate advances outstanding under the Agreement at December 31, 1996 and
none outstanding at December 31, 1995. In addition, the Company may elect to
receive certain advances (the "Fixed Rate Advances") in the minimum amount of
$100,000, to remain outstanding for a fixed period of time, generally 30 or 60
days, which bear interest at the Eurodollar rate plus 2% per annum (8.06% at
December 31, 1996). Principal and interest on Fixed Rate Advances are due at the
end of the fixed period; however, the outstanding balance may be renewed
indefinitely through June 30, 1997. The Company had $600,000 in fixed rate
advances outstanding under the Interactive Agreement at December 31, 1996 and
none outstanding at December 31, 1995. In January 1997, the Company increased
its bank line of credit for borrowings to $4 million.
F-15
19
DATAWORKS CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM OBLIGATIONS (CONTINUED)
The Interactive Agreement also contains a clause providing for the issuance
by the bank of standby letters of credit on behalf of the Company, not to exceed
$3 million. No such letters of credit were outstanding at December 31, 1996.
Advances under the Interactive Agreement are secured by substantially all of
Interactive's assets. The agreement contains restrictive covenants including the
maintenance of certain financial ratios, limitations on dividend payments,
additional borrowings, loans and advances, and limitations on repurchase of the
Company's stock, except repurchases made under the Stock Purchase Agreement
referred to in Note 9. At December 31, 1996, the Company obtained a waiver from
its bank for a covenant violation relating to the purchase of certain assets and
was in compliance with all remaining covenants.
In December 1996, the Company amended its banking facility agreement to be
unsecured. This facility provides for borrowings up to a maximum of $6,000,000
and bears interest at the bank's prime rate (8.25% at December 31, 1996) and has
an expiration date of June 30, 1997. At December 31, 1996 and 1995, DataWorks
had no borrowings outstanding under the banking facility.
The agreement for the banking facility contains certain restrictions and
limitations on DataWorks' operations, including restrictions on advances to
certain officers, sale of assets, mergers or other forms of business
combinations, as well as the payment of dividends. The agreements also contain
covenants which require DataWorks to maintain certain levels of liquidity (as
defined), net worth, profitability and debt service coverage.
In addition, in July 1996, the Company secured a line of credit agreement
with a bank which provides for borrowings up to $1,000,000 at 1% over the bank's
base rate (9.25% at December 31, 1996). Borrowings under the line are secured by
a portion of the Company's accounts receivable, inventory, equipment and
intangible assets. The agreement is subject to various loan covenants. The line
of credit expires on July 31, 1997. At December 31, 1996, the Company had no
borrowings outstanding under this credit agreement.
Extraordinary Items
In connection with a repayment of the note payable in May 1994 for
$1,340,000, the repayment of a senior term note payable in September 1995, and
the settlement of subordinated notes payable in August and November 1995, the
related unamortized debt issue costs and debt discount were written off. In
addition, DataWorks also incurred prepayment and other cash charges related to
the payment of the senior term note. In accordance with generally accepted
accounting principles, these write-offs and cash charges, net of the related
income tax benefits, have been reported as extraordinary items in the
accompanying consolidated statements of operations. The composition of the
extraordinary items are as follows (in thousands):
YEARS ENDED DECEMBER 31,
------------------------
1995 1994
---------- ----------
Write-off of unamortized debt issue costs
and debt discount $ 886 $ 248
Cash prepayment penalty and other cash
charges 838 -
-------- -------
1,724 248
Income tax benefit (707) (91)
======== =======
$ 1,017 $ 157
======== =======
F-16
20
DATAWORKS CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES
The provision (benefit) for income taxes consist of (in thousands):
DECEMBER 31,
---------------------------------------
1996 1995 1994
---------- ---------- ---------
Current:
Federal $ 1,827 $ 1,113 $ 643
Foreign 561 398 322
State 480 269 114
---------- ---------- ---------
2,868 1,780 1,079
Deferred:
Federal 720 (779) (325)
Foreign - - -
State 54 (69) (46)
---------- ---------- ---------
774 (848) (371)
========== ========== =========
$ 3,642 $ 932 $ 708
========== ========== =========
Deferred income taxes are provided for temporary differences in recognizing
certain income and expense items for financial reporting and tax reporting
purposes. Significant components of deferred tax assets and liabilities are (in
thousands):
DECEMBER 31,
----------------------------
1996 1995
-------------- -------------
DEFERRED TAX LIABILITIES:
Difference in tax basis of acquired
intangibles $ (1,066) $ (1,155)
Capitalized software costs (1,735) (724)
Depreciation (49) (94)
Other (110) (65)
----------- -----------
Total deferred tax liabilities (2,960) (2,038)
DEFERRED TAX ASSETS:
Net operating loss and credit
carryforwards 994 1,371
Deferred revenue and expenses 500 471
Allowance for doubtful accounts and
product returns 307 183
Purchased research and development 1,183 1,267
Research tax credits 211 158
Accrued liabilities and other 1,347 176
----------- -----------
Total deferred tax assets 4,542 3,626
=========== ===========
Net deferred tax assets (liabilities) $ 1,582 $ 1,588
=========== ===========
The effective income tax rate varied from the statutory federal rate as
follows:
YEARS ENDED DECEMBER 31,
-------------- ------------- --------------
1996 1995 1994
-------------- ------------- --------------
Income tax provision
(benefit) at statutory rate $ 2,784 $ 1,077 $ 818
State income tax provision,
net of federal benefits 410 163 84
Benefit of tax credits (278) (105) -
Non deductible merger expenses 682 - -
ESOP dividend tax benefit - (256) (159)
Effect of foreign rates 16 (38) 32
Utilization of research tax
credits and net operating
loss carryforwards (228) - (102)
Permanent differences 73 (54) 61
Change in deferred tax asset
valuation allowance - - (66)
Other 183 145 40
=========== =========== =========
$ 3,642 $ 932 $ 708
=========== =========== =========
F-17
21
DATAWORKS CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
At December 31, 1996, DataWorks has federal and state research and
development credit carryforwards of approximately $523,000 and $80,000,
respectively, which will begin to expire in 2002, unless previously utilized.
DCD has federal net operating loss carryforwards of approximately $2,100,000
which will begin to expire in 2011, unless previously utilized. Because these
loss carryforwards were incurred by DCD before the acquisition by DataWorks,
they can only be utilized to offset future DCD separate company taxable income.
In accordance with Sections 382 and 383 of the Internal Revenue Code, a
change in ownership of greater than fifty percent of a corporation within a
three-year period will place an annual limitation on the corporation's ability
to utilize its existing carryforwards. Upon the closing of DataWorks' initial
public offering, an ownership change occurred; however, the limitation will not
have a material effect on DataWorks' ability to utilize its carryforwards. Also,
upon the acquisition of DCD by DataWorks, an ownership change occurred with
respect to DCD. However, the limitation will not have a material effect on DCD's
ability to utilize its carryforwards.
7. RECEIVABLE FROM OFFICER
At December 31, 1996 and 1995, the receivable from officer is from one of
DataWorks' principal officers and shareholders and consists of net advances
totaling $155,300 and $206,000, respectively. The advances will be repaid or
offset against any future performance bonuses earned and approved by the Board
of Directors.
8. COMMITMENTS AND CONTINGENCIES
The Company is obligated under various noncancellable operating leases for
equipment, vehicles and office space through 2002. The Company's headquarters
facilities lease in the United Kingdom contains a clause under which the Company
may cancel the lease in 1997 with a maximum penalty of six months' rental
payments. Accordingly, minimum lease commitments reflect only the noncancellable
portion of the total portion of the total payments due under this lease. Certain
of the leases provide that the Company pay all or a portion of taxes,
maintenance, insurance and other operating expenses, and certain of the rents
are subject to adjustment for changes as determined by certain consumer price
indices and exchange rates. Two of DataWorks' corporate office lease agreements
provides for deferred payment terms. For financial reporting purposes, rent
expense is recorded on the straight-line basis over the term of the lease.
Accordingly, deferred rent in the accompanying consolidated balance sheets
represents the difference between rent expense accrued and amounts paid under
the lease agreement.
Minimum lease commitments for noncancellable operating as of December 31,
1996 are as follows (in thousands):
YEARS ENDING DECEMBER 31,
-------------------------
1997 $ 3,540
1998 2,587
1999 1,944
2000 1,508
2001 and thereafter 1,587
=========
$ 11,166
=========
Aggregate rent expense was approximately $3,437,000, $2,663,000 and $2,184,000
in 1996, 1995 and 1994, respectively.
F-18
22
DATAWORKS CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Contingencies
The Company is subject to legal proceedings and claims that arise in the
normal course of business. While the outcome of the proceedings and claims
cannot be predicted with certainty, management does not believe that the outcome
of any of these matters will have a material adverse effect on the Company's
consolidated financial position or results of operations.
9. SHAREHOLDERS' EQUITY
In January 1991, the Company entered into a stock and cash bonus arrangement
(the "Arrangement") with an officer of the Company that provides for the
issuance of common stock as a bonus for services rendered. On each January 1,
1992, 1993 and 1994, 22,712 shares of common stock were issued. In conjunction
with these stock bonuses, the officer received cash bonuses sufficient to cover
the income taxes payable as a result of such stock bonuses. The Company has
recognized as compensation expense the total of the current fair value of the
common stock at the date the bonuses were paid, as determined by an independent
valuation, and the cash bonus amount. On January 1, 1995, the Company issued
90,849 shares of common stock and the related cash bonus under the Arrangement.
No further cash or stock bonuses have been provided for under this Arrangement.
On March 20, 1995, Interactive removed the forfeiture provisions associated with
the Arrangement, and compensation expense of $871,000 related to this bonus was
recorded by the Company, consisting of the then current fair value of the common
stock and the related cash bonus under the Arrangement.
In June 1994, the Company entered into a stock purchase agreement with a
shareholder under which the Company had the option to purchase 431,533 shares
held by the shareholder for $.93 per share. On May 25, 1995, the Company
exercised its option and repurchased the shares of common stock from the
shareholder for $400,000.
Common Stock
In December 1996, the Company raised net proceeds of approximately
$41,300,000 through a follow-on public offering of its common stock.
Series A Preferred Stock
In August 1995, the Company received an aggregate of $6,250,000 through the
sale of Series A preferred stock of which $1,250,000 was obtained through the
conversion of subordinated notes payable. The Series A preferred stock was
issued at $7.23 per share and was automatically converted into 864,696 shares of
common stock upon closing of DataWorks' initial public offering.
As of December 31, 1996, DataWorks is authorized to issue 5,000,000 shares
of preferred stock; no shares are outstanding.
Warrants
In connection with various financing arrangements, the Company issued
warrants to purchase 1,382,183 shares of DataWorks' common stock at prices
ranging from $0.026 to $8.68 per share. In connection with the completion of the
initial public offering in November 1995, 1,345,869 warrants were converted to
1,050,843 shares of common stock for cash proceeds of $175,439 and the
settlement of $1,300,000 of subordinated notes payable. During 1996, warrants
were exercised for the purchase of 14,092 shares of common stock at $8.68 per
share. At December 31, 1996, warrants to purchase 22,222 shares of common stock
at $8.68 per share remain outstanding. The warrants expire in August, 2000.
In addition, in May 1995, the Company granted a warrant to an underwriter
for the purchase of up to 104,702 shares of common stock at an exercise price of
$9.68 per share. The warrant expires May, 2000.
F-19
23
DATAWORKS CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SHAREHOLDERS' EQUITY (CONTINUED)
In 1990, a warrant was issued to an Interactive shareholder to purchase
113,852 shares of Company common stock at $.22 per share. The warrant was
exercised in March 1995 by reducing the subordinated debenture payable to the
shareholder.
Stock Option Exercised by Officer
In July 1996, an officer of DCD exercised an option to acquire 37% of DCD's
common shares in accordance with the terms of the option. For tax purposes, the
exercise of the option is compensatory. Accordingly, as of December 31, 1996,
the Company has recorded a tax benefit of approximately $2.5 million as an
addition to common stock.
Stock Option Plans
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation" (SFAS 123) requires
use of option valuation models that were not developed for use in valuing
employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
DataWorks has an Equity Incentive Plan (the "Plan") under which 2,052,700
shares of common stock are reserved for issuance to eligible employees,
directors and consultants of DataWorks. The Plan provides for awards in the form
of options, stock bonuses, restricted shares or stock appreciation rights
("SARs"). The terms of any stock awards under the Plan, including vesting
requirements, are determined by the Board of Directors, subject to the
provisions of the Plan. Options issued under the Plan are either incentive stock
options ("ISOs") or nonstatutory stock options ("NSOs"). The exercise price of
the ISOs is not less than the fair market value on the date of grant and the
exercise price of the NSOs is determined by the Board of Directors. Options
granted under the Plan generally become exercisable over a period of four years
and the maximum term of options granted is ten years.
On September 13, 1995, DataWorks adopted the Non-Employee Directors' Stock
Option Plan (the "Directors' Plan") under which 75,000 shares of common stock
are reserved for issuance upon exercise of options granted by DataWorks to
non-employee members of the board of directors. The exercise price of the
options will be at the fair market value of the stock on the date of grant.
Options granted under the Directors' Plan will become exercisable over three
years and expire ten years from the date of grant. As of December 31, 1996,
15,000 options were granted under the Directors' Plan. For the years ended
December 31, 1996 and 1995, the Company recorded $91,000 and $15,000,
respectively, in compensation expense related to employee stock options granted
at less than fair market value on the date of grant.
In addition, at December 31, 1996, DataWorks has outstanding options to
purchase an additional 130,358 shares of common stock at prices ranging from
$1.30 to $5.20 per share outside of the plans, of which 71,983 were exercisable.
The Company recorded $70,000 of expense related to the estimated fair market
value of certain of these options on their date of grant.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company has accounted
for its employee stock options under the fair value method of that Statement.
The fair value of these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions for 1996 and 1995, respectively: risk-free interest rates of 6%;
dividend yield of 0%; volatility factors of the expected market price of the
Company's common stock of 67.5% for 1996 and 1995, and a weighted-average life
of the option of 4.70 years. Volatility factors are not applicable to non public
companies.
F-20
24
DATAWORKS CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SHAREHOLDERS' EQUITY (CONTINUED)
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands, except for earnings per share
information):
YEARS ENDED
DECEMBER 31,
----------------
1996 1995
------- -------
Pro forma net income $ 3,406 $ 1,147
======= =======
Pro forma earnings per share $ .28 $ .13
======= =======
The results above are not likely to be representative of the effects of
applying FAS 123 on reported net income or loss for future years as these
amounts reflect the expense for only one or two years vesting.
A summary of the Company's stock option activity, including those issued
outside of the plans, and related information for the years ended December 31
follows:
1996 1995 1994
------------------- ------------------- ------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- ----- ------- ----- ------- -----
Outstanding - beginning
of year 1,104,927 $ 3.91 525,788 $ .26 448,865 $.25
Granted 662,301 17.67 682,359 6.06 76,923 .39
Exercised (335,158) .67 (64,759) .49 - -
Forfeited (32,554) 7.02 (38,461) .39 - -
--------- ------ --------- ----- ------- ----
Outstanding - end of
year 1,399,516 $11.16 1,104,927 $3.91 525,788 $.26
--------- ------ --------- ----- ------- ----
Exercisable at end of
year 390,351 358,761 304,413
Weighted-average fair
value of options
granted during the
year $ 9.27 $ 2.04
F-21
25
DATAWORKS CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SHAREHOLDERS' EQUITY (CONTINUED)
The weighted-average remaining contractual life of the options outstanding
at December 31, 1996 is 8.53 years.
The following table summarizes information about stock options outstanding
at December 31, 1996:
OUTSTANDING EXERCISABLE
-------------------------------------- ---------------------------
REMAINING WEIGHTED EXERCISE PRICE
RANGE OF NUMBER CONTRACTUAL AVERAGE NUMBER WEIGHTED
EXERCISE PRICES OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE AVERAGE
--------------- ----------- ------------------------- ----------- --------
.16 to .65 164,458 5.76 $.34 128,138 $.34
1.30 34,615 8.30 1.30 19,230 1.30
2.86 78,337 8.35 2.86 25,962 2.86
3.73 48,324 5.81 3.73 16,108 3.73
4.97 28,189 .28 4.97 28,189 4.97
5.20 42,231 8.64 5.20 14,261 5.20
6.36 20,135 9.62 6.36 - -
6.40 45,908 8.82 6.40 15,303 6.40
7.53 173,564 8.82 7.53 50,623 7.53
9.75 80,000 8.77 9.75 29,651 9.75
10.73 to 11.50 307,055 9.02 11.23 59,970 11.05
16.00 to 18.25 96,700 9.52 16.35 2,916 18.25
25.75 280,000 9.74 25.75 - -
At December 31, 1996, options for 432,763 shares were available for future
grant.
Employee Stock Purchase Plan
On September 13, 1995, DataWorks adopted an Employee Stock Purchase Plan
(the "Purchase Plan") under which 230,540 shares of common stock are reserved
for sale to employees. DataWorks' Board of Directors may grant eligible
employees the right to purchase a fixed number of shares of common stock (up to
but not exceeding 15% of each employee's earnings) over a fixed offering period
(not to exceed 27 months) at the lesser of 85% of the fair market value of the
stock on the grant date or 85% of the fair market value on the purchase date or
dates specified on the date of grant. At December 31, 1996, 153,991 shares have
been issued under the Purchase Plan.
Shares Reserved for Future Issuance
The following common stock is reserved for future issuance at December 31,
1996:
Stock options:
Granted and outstanding 1,399,516
Reserved for future grants 432,763
---------
1,832,279
Warrants 126,924
Employee stock purchase plan 76,550
---------
2,035,753
=========
10. EMPLOYEE RETIREMENT AND PROFIT SHARING PLANS
Effective July 1, 1994, DataWorks established a 401(k) defined contribution
retirement plan (the "Retirement Plan") covering all employees. The Retirement
Plan provides for voluntary employee contributions from 1% to 15% of annual
compensation (as defined). DataWorks may contribute such amounts as determined
by the Board of Directors. Participants vest in employer contributions over five
years at a rate of 20% for each year of service. There were no employer
contributions to the Retirement Plan during the years ended December 31, 1996,
1995 or 1994.
Interactive maintains profit sharing and deferred savings plans for its
employees, which allow participants to make contributions by salary reduction
pursuant to Section 401(k) of the Internal Revenue Code. Under both plans,
Interactive contributions are discretionary, and employees vest immediately in
their contributions. Interactive U.K. Subsidiary also maintains a defined
contribution pension plan for its employees. Expenses for the plans aggregated
approximately $571,000, $314,000, and $220,000 for the years ended December 31,
1996, 1995 and 1994, respectively.
F-22
26
DATAWORKS CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE RETIREMENT AND PROFIT SHARING PLANS (CONTINUED)
In addition, DCD has a profit sharing plan which provides for an annual
contribution not to exceed the maximum allowed as a deduction under the Internal
Revenue Code. The plan covers substantially all employees after specified
periods of service and the attainment of minimum age requirements. Each year's
contribution is determined by the Board of Directors. No Company contributions
to the plan were declared or made during 1996, 1995 or 1994.
Effective July 1996, DCD established a 401(k) defined contribution
retirement plan (the "DCD plan") covering all employees of DCD. The DCD plan
provides for voluntary employee contributions from 1% to 15% of annual
compensation (as defined). DCD may match these contributions at 50% on the first
6% of employee contributions. For the year ended December 31, 1996, DCD
contributions to the plan totaled $87,393.
11. GEOGRAPHIC DATA
The Company's operations consist of one business segment: the development,
marketing, implementation, and support of integrated business information
systems for the discrete manufacturing industry. The Company has operations in
North America and Europe. The operations and identifiable assets of the Company
by geographic area are as follows (in thousands):
YEARS ENDED DECEMBER 31,
--------------------------------------------
1996 1995 1994
--------- ------- -------
Revenues from unaffiliated customers:
North America $ 96,794 $62,768 $41,050
Europe 20,145 13,236 10,656
========= ======= =======
$116,939 $76,004 $51,706
========= ======= =======
Income before income taxes:
North America $6,138 $1,995 $1,479
Europe 2,001 1,173 848
========= ======= =======
$8,139 $3,168 $2,327
========= ======= =======
Identifiable assets:
North America $111,797 $55,777 $21,699
Europe 9,405 7,139 5,075
========= ======= =======
$121,202 $62,916 $26,774
========= ======= =======
12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
In thousands, except per share data.
YEAR ENDED DECEMBER 31, 1996
---------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
---------------- ----------------- ---------------- ----------------- -----------------
Revenues $25,982 $29,089 $27,676 $34,192 $116,939
Gross margin 13,848 15,974 15,181 19,754 64,757
Net income (loss) 1,376 1,682 (1,009) 2,448 4,497
Net income (loss) per share (a) .12 .14 (.09)(d) .19 .38
F-23
27
DATAWORKS CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
---------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1995
---------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
---------------- ----------------- ---------------- ----------------- -----------------
Revenues $14,995 $17,986 $18,981 $24,042 $76,004
Gross margin 7,958 10,338 11,105 13,944 43,345
Net income (loss) (456)(b) 1,053 700 (78)(c) 1,219
Net income (loss) per share (a) (.06) .13 .08 (.01) .14
(a) The sum of quarterly net income per share does not equal the annual
amount due to charges in the average common and common share equivalents
outstanding.
(b) Includes a non-recurring, after-tax compensation expense of $560,000
associated with the final stock grant and cash bonus pursuant to a
compensation arrangement with an officer of the Company.
(c) Includes one-time charges in the aggregate, after-tax amount of
$2,091,000 in connection with the JIT acquisition.
(d) Includes one-time charges in the aggregate, after-tax amount of
$2,083,000 in connection wit the DCD acquisition.
F-24
28
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
DATAWORKS CORPORATION
Dated: February 3, 1998 By: /s/ NORMAN R. FARQUHAR
--------------------------------
Norman R. Farquhar
Executive Vice President, Chief
Financial Officer and Director
4.
29
INDEX TO EXHIBITS
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Price Waterhouse LLP, Independent Accountants.
23.3 Consent of Romito, Tomasetti & Associates, P.C., Independent
Auditors.
5.