<PAGE> 1
This filing is made pursuant
to Rule 424(b)(4)
under the Securities Act of
1933 in connection with
Registration No. 333-20579
2,200,000 SHARES
LOGO
COMMON STOCK
------------------------
Of the 2,200,000 shares of Common Stock offered hereby, 1,365,000 shares
are being offered by TriTeal Corporation ("TriTeal" or the "Company") and
835,000 shares are being offered by certain stockholders of the Company (the
"Selling Stockholders"). See "Principal and Selling Stockholders." The Company
will not receive any of the proceeds from the sale of shares by the Selling
Stockholders.
The Common Stock is quoted on the Nasdaq National Market under the symbol
"TEAL." On February 19, 1997, the last reported sale price of Common Stock was
$19.50 per share. See "Price Range of Common Stock."
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 5 OF THIS PROSPECTUS FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<S> <C> <C> <C> <C>
============================================================================================
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions(1) Company(2) Stockholders
- --------------------------------------------------------------------------------------------
Per Share................... $19.25 $1.06 $18.19 $18.19
- --------------------------------------------------------------------------------------------
Total....................... $42,350,000 $2,332,000 $24,829,350 $15,188,650
- --------------------------------------------------------------------------------------------
Total Assuming Full Exercise
of Over-Allotment
Option(3)................. $48,702,500 $2,681,800 $30,832,050 $15,188,650
============================================================================================
</TABLE>
(1) See "Underwriting."
(2) Before deducting expenses estimated at $500,000, which are payable by the
Company.
(3) Assuming exercise in full of the 30-day option granted by the Company to the
Underwriters to purchase up to 330,000 additional shares, on the same terms,
solely to cover over-allotments. See "Underwriting."
------------------------
The shares of Common Stock are offered by the Underwriters, subject to
prior sale, when, as and if delivered to and accepted by the Underwriters, and
subject to their right to reject orders in whole or in part. It is expected that
delivery of the Common Stock will be made in New York City on or about February
25, 1997.
------------------------
PAINEWEBBER INCORPORATED
HAMBRECHT & QUIST
PIPER JAFFRAY INC.
------------------------
THE DATE OF THIS PROSPECTUS IS FEBRUARY 19, 1997.
<PAGE> 2
LOCATED ON THE OUTSIDE OF THE GATEFOLD COVER IS A GRAPHIC DEPICTING A SERIES
OF SEVEN CONNECTED COMPUTER TERMINALS (WORKSTATIONS, PCS, X TERMINALS AND AN NC)
BELOW AN ENLARGED IMAGE OF A COMPUTER SCREEN NEXT TO A BOX OF THE FOLLOWING
ENLARGED TEXT:
TRITEAL PROVIDES A COMMON, INTUITIVE OPERATING ENVIRONMENT ACROSS MOST
LEADING PLATFORMS USED IN THE ENTERPRISE CLIENT/SERVER MARKET.
THE FOLLOWING TEXT IS LOCATED NEAR THE BOTTOM OF PAGE:
SOFTNC(TM)
TRITEAL RECENTLY INTRODUCED ITS JAVA-BASED SOFTNC(TM) TECHNOLOGY, A
THIN-CLIENT, PLATFORM-INDEPENDENT SOLUTION DESIGNED TO ALLOW SIMULTANEOUS ACCESS
TO JAVA AND LEGACY APPLICATIONS.
LOCATED ON THE INSIDE OF THE GATEFOLD COVER IS A GRAPHIC DEPICTING FOUR
COMPUTER TERMINALS. BEHIND EACH TERMINAL IS A PICTURE OF THE CAPITOL, AN OIL
DERRICK, STOCK MARKET TRADERS OR A TELEPHONE OPERATOR. THE FOLLOWING TEXT IS SET
FORTH IN A CENTRAL BOX:
TRITEAL PRODUCTS ALLOW USERS IN A CLIENT/SERVER ENVIRONMENT TO EASILY ACCESS
APPLICATIONS, DATA AND NETWORK RESOURCES FROM SERVERS ON THE NETWORK.
THE CENTRAL BOX IS SURROUNDED BY THE FOLLOWING DESCRIPTIONS OF PRODUCTS AND
PRODUCT CAPABILITIES:
FINANCE
TED MAKES IT EASIER FOR A WALL STREET TRADER TO RUN MORE APPLICATIONS
SIMULTANEOUSLY BY EMPLOYING MULTIPLE WORKSPACES AND INTEROPERATIVE FEATURES.
- With TriTeal's Graphical Workspace Manager(TM) (GWM), a trader can easily
navigate among multiple applications.
- TED allows transparent application access to the user, enabling
organizations to more effectively deploy hardware resources.
TELECOMMUNICATIONS
EVERY DAY, THOUSANDS OF LONG-DISTANCE OPERATORS USE TRITEAL'S DESKTOP TO
ACCESS MISSION-CRITICAL APPLICATIONS AND DATA FOR PROMPT RESPONSE TO CUSTOMER
INQUIRIES.
- TED allows databases residing in different locations to be accessed just
as easily as a local application.
- TED allows applications developed in-house to be integrated with other
applications on the desktop, enabling users to link vital data.
OIL AND GAS
IN THE OIL AND GAS INDUSTRY, USERS OFTEN ACCESS APPLICATIONS AND DATA FROM
REMOTE REGIONS OF THE WORLD. TRITEAL'S DESKTOP GIVES THEM A SINGLE POINT OF
ACCESS FROM ANY NUMBER OF CLIENT PLATFORMS.
- TED comes with many standard applications, such as a personal and group
calendar system, e-mail, file manager and context-sensitive help.
- TriTeal has delivered several value-added applications, including
TEDVISION(TM), an integrated browser; TEDSERVER(TM), an enterprise Web server,
TEDFAX(TM), which provides faxing capability; TEDSECURE, a security application;
WINTED(TM), for PC-to-workstation interoperability; and LOCALTED(TM), for X
terminal support.
GOVERNMENT
FEDERAL GOVERNMENT AGENCIES, JUST LIKE COMMERCIAL ENTERPRISES, MUST DEAL
WITH MANY DISPARATE HARDWARE PLATFORMS, OPERATING SYSTEMS AND APPLICATIONS. TED
PROVIDES A COMMON OPERATING ENVIRONMENT FOR CROSS-AGENCY PROJECTS.
- TEDSECURE(TM) is an optional application that allows a user to easily send
secured data through an open systems network. Used for sensitive but
unclassified information, TEDSECURE was developed by TriTeal in conjunction with
the National Security Agency.
- TED organizes applications, data, printers and other resources into a
logical and easy-to-use front panel.
------------------------
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 10b-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE
"UNDERWRITING."
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
------------------------
<PAGE> 3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements appearing elsewhere in this
Prospectus. This Prospectus contains forward-looking statements that involve
risks and uncertainties. The Company's actual results may differ materially from
the results discussed in the forward-looking statements. Factors that might
cause such a difference include, but are not limited to, those discussed in
"Risk Factors" and elsewhere in this Prospectus.
THE COMPANY
TriTeal Corporation develops, markets and supports open systems-based,
mission-critical desktop system software and integrated applications that enable
multi-platform deployment of client/server applications throughout an
enterprise. TriTeal recently introduced its Java-based SoftNC technology, a
thin-client, platform-independent solution designed to allow simultaneous access
to Java and legacy applications. The Company's objective is to establish its
desktop system software as the de facto standard operating environment in the
enterprise client/server market and to deliver follow-on applications to its
installed base of customers. To date, the Company has established an installed
base of over 100,000 seats of the TriTeal Enterprise Desktop ("TED") family of
products (including predecessor products) to customers in a variety of targeted
vertical markets, including financial services, government, telecommunications,
oil and gas and manufacturing. Representative licensees of the Company's
products include AT&T, Mobil Oil, Morgan Stanley & Co., Motorola and the U.S.
Department of Defense.
In the mid-1980s, the development of powerful and cost-effective servers,
workstations and other client/server technologies increasingly led many large
organizations to adopt these technologies for deployment of new,
mission-critical software applications. Client/server solutions were typically
developed and deployed on proprietary platforms (hardware, operating system and
desktop software) to solve specific business problems. As a result, large
enterprises typically deployed a variety of proprietary platforms, network
architectures and applications that were not compatible, easily networked or
interoperable. According to Sentry Market Research, the average number of
operating systems supported in the client/server environment increased from four
systems in 1991 to 10 systems in 1995 and a projected 12 systems by the end of
1996. In addition, the rapid adoption of Internet/intranet technologies has
increased the fragmentation of the operating environment. The fragmentation
among computing technologies presents the enterprise with a number of
challenges, including (i) higher systems administration, training, development
and support costs associated with maintaining multiple proprietary systems; (ii)
difficulty in accessing data and applications residing on multiple disparate
platforms; and (iii) lack of flexibility in adopting advanced new technologies
while protecting significant investments in legacy systems.
The Company's flagship product, TED, is designed to solve many of the
problems resulting from this client/server platform fragmentation within the
enterprise. TED allows individual users, system administrators and developers to
easily access applications, data and network resources across most leading
platforms used in the enterprise client/server market. In addition, TED provides
a common, intuitive operating environment that "looks and feels" the same on
every platform on which it operates. This interoperability and consistency
allows the enterprise customer to reduce systems administration, training,
development and support costs, thereby enabling increased operating efficiency
and productivity throughout the enterprise. To further increase functionality,
TriTeal has developed follow-on products, such as TEDSECURE and NTED, that are
either sold separately or bundled with the current release of TED.
The Company's SoftNC technology is designed to operate on any hardware
device that includes a Java Virtual Machine ("JVM"), enabling the use of Java
applications without the need for a browser. SoftNC technology is designed to
allow users to operate Java applications simultaneously with existing legacy
mainframe, client/server and Windows applications. The Company is currently
developing products for network computers, PCs and workstations based on its
SoftNC technology.
The Company has entered into strategic relationships to facilitate the
development, marketing, distribution and support of its TED family of products.
The Company utilizes channel organizations such as original equipment
manufacturers ("OEMs"), value-added resellers ("VARs") and system integrators to
create demand and deliver TED products and services to its customers. In
addition, the Company has licensed certain of its desktop and Internet
technologies to a number of companies including AT&T, Hewlett-Packard, IBM,
Network Computing Devices, Novell, The Santa Cruz Operation ("SCO"), Siemens
Nixdorf Informationssystemse AG and Tektronix.
The Company was incorporated in California in January 1993 and
reincorporated in Delaware in August 1996. The Company's principal executive
offices are located at 2011 Palomar Airport Road, Carlsbad, California 92009,
and its telephone number is (619) 930-2077. Unless the context otherwise
requires, the terms "TriTeal" and the "Company" refer to TriTeal Corporation, a
Delaware corporation, its subsidiary, and the Delaware corporation's
predecessor.
3
<PAGE> 4
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company................. 1,365,000 shares
Common Stock Offered by the Selling Stockholders.... 835,000 shares
------------------
Total Offering...................................... 2,200,000 shares
Common Stock to be Outstanding after the Offering... 10,655,679 shares(1)
Use of Proceeds..................................... For general corporate purposes, including
working capital and capital expenditures
Nasdaq National Market Symbol....................... TEAL
</TABLE>
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED MARCH 31, DECEMBER 31,
----------------------------- -------------------
1994 1995 1996 1995 1996
------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues............................... $ 433 $4,110 $ 8,221 $ 4,402 $11,112
Gross profit............................... 238 2,941 6,049 3,174 8,777
Net income (loss).......................... 75 116 (4,842) (4,197) (980)
Net income (loss) per share(2)............. $ 0.01 $ 0.02 $ (0.72) $ (0.63) $ (0.12)
Shares used in computing net income (loss)
per share(2)............................. 6,463 6,503 6,712 6,712 7,966
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------
ACTUAL AS ADJUSTED(3)
------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments................... $21,939 $ 46,268
Working capital..................................................... 22,941 47,270
Total assets........................................................ 30,156 54,485
Long-term debt...................................................... -- --
Total stockholders' equity.......................................... 24,360 48,689
</TABLE>
- ---------------
(1) Based on the number of shares of Common Stock outstanding as of December 31,
1996. Excludes, as of December 31, 1996, 1,593,562 shares of Common Stock
subject to outstanding options. See "Management" and "Description of Capital
Stock."
(2) For an explanation of the determination of the number of shares used in
computing net income (loss) per share, see Note 1 of Notes to Consolidated
Financial Statements.
(3) As adjusted to give effect to the sale by the Company of 1,365,000 shares of
Common Stock and the application of the net proceeds therefrom. See "Use of
Proceeds" and "Capitalization."
------------------------
Unless otherwise indicated, all information in this Prospectus assumes (i)
no exercise of the Underwriters' over-allotment option; (ii) the issuance of
32,277 shares upon the exercise in full of a warrant upon the completion of this
offering; and (iii) the issuance of 48,550 shares upon the exercise of
outstanding options upon the completion of this offering. See "Description of
Capital Stock," "Underwriting" and Notes to Consolidated Financial Statements.
------------------------
TriTeal(TM), TED(TM), SoftNC(TM), UniTED(TM), TEDFAX(TM), WINTED(TM),
LOCALTED(TM), TEDVISION(TM), TEDSECURE(TM), TEDSERVER(TM), NTED(TM) and the
TriTeal logo are trademarks of the Company. This Prospectus also contains
trademarks of other companies.
4
<PAGE> 5
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. Prospective investors should carefully consider the following
risk factors, in addition to the other information contained in this Prospectus,
before purchasing the shares of Common Stock being offered hereby. This
Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements as a result of certain
factors, including those set forth in the following risk factors and elsewhere
in this Prospectus.
LIMITED OPERATING HISTORY
The Company was founded in January 1993 and commenced shipment of its
initial software products in May 1993 and its current flagship product, TED, in
August 1995. Accordingly, the Company has only a limited operating history upon
which an evaluation of the Company and its prospects can be based, making
prediction of future operating results difficult, if not impossible. The
Company's prospects must be considered in light of the risks and uncertainties
frequently encountered by companies in their early stages of development,
particularly those companies in new and rapidly evolving markets. To address
these risks, the Company must, among other things, respond to competitive
developments, continue to attract, retain and motivate qualified persons and
continue to upgrade its software products and services. There can be no
assurance that the Company will be successful in addressing such risks. Although
the Company has experienced revenue growth in recent periods, such growth rates
should not be relied upon as indicative of future operating results, and there
can be no assurance that the Company will be able to sustain revenue growth. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
HISTORY OF OPERATING LOSSES; UNCERTAINTY OF FUTURE OPERATING RESULTS
Since its inception, the Company has incurred substantial costs to
research, develop and enhance its technology and products, to recruit and train
a marketing and sales group and to establish an administrative organization. As
a result, the Company incurred a net loss in its fiscal year ended March 31,
1996 and for the nine months ended December 31, 1996. Through December 31, 1996,
the Company had an accumulated deficit of $5.6 million. The Company anticipates
that its operating expenses will increase substantially in the foreseeable
future as it increases its sales and marketing activities, expands its
operations and management and continues the development of its products and
technologies. Accordingly, there can be no assurance that the Company will
achieve or sustain profitability. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
FLUCTUATIONS IN QUARTERLY RESULTS
The Company has experienced significant fluctuations in its revenues and
operating results from quarter to quarter and anticipates that it will continue
to experience such quarterly fluctuations. The Company's revenues and operating
results have generally been higher in the fourth fiscal quarter than in any
preceding quarter of each fiscal year, due largely, the Company believes, to the
positive effect of the Company's incentive sales compensation plans. In
addition, as a result of the Company's incentive sales compensation plans, first
fiscal quarter revenues in any year are typically lower than revenues in the
immediately preceding fourth fiscal quarter. There can be no assurance, however,
that such patterns of operating results will be repeated in the future. In
addition, the Company's sales are made predominantly in the third month of each
fiscal quarter and tend to be concentrated in the latter half of that third
month. Accordingly, the Company's quarterly results of operations are difficult
to predict, and delays in product delivery or in closings of sales near the end
of a quarter could cause quarterly revenues to fall substantially short of
anticipated levels and, to a greater degree, adversely affect profitability.
Factors that may contribute to such fluctuations, in addition to incentive
compensation, include seasonal factors, such as the fiscal year ends of the
government and other customers and reduction in European business during summer
months; the number of new orders and product shipments; the size and timing of
individual orders; the timing of introduction of products or product
enhancements by the Company, the Company's competitors or other providers of
hardware, software and components for the Company's market; competition and
pricing in the software industry; market acceptance of new products; reduction
in demand for existing products and shortening of product life cycles as a
result of
5
<PAGE> 6
new product introductions by competitors; product quality problems; customer
order deferrals in anticipation of new products; changes in customer budgets;
changes in operating expenses; changes in Company strategy; personnel changes;
changes in foreign currency exchange rates; changes in mix of products sold; and
changes in general economic conditions.
The Company's sales generally reflect a relatively high average of revenues
per order. The loss or delay in receipt of individual orders, therefore, could
have a more significant impact on the revenues and quarterly results of the
Company than on those of companies with higher sales volumes or lower revenues
per order. The Company's software products generally are shipped as orders are
received, and revenues are recognized upon delivery of the products, provided no
significant vendor obligations exist and collection of the related receivable is
deemed probable. As a result, software license revenues in any quarter are
substantially dependent on orders booked and shipped in that quarter. The timing
of license fee revenue is difficult to predict because of the length of the
Company's sales cycle, which is typically three to nine months from the initial
contact. Because the Company's operating expenses are based on anticipated
revenue trends and because a high percentage of the Company's expenses are
relatively fixed, a delay in the recognition of revenue from a limited number of
license transactions could cause significant variations in operating results
from quarter to quarter and could result in losses substantially in excess of
anticipated amounts. To the extent such expenses precede, or are not
subsequently followed by, increased revenues, the Company's operating results
would be materially and adversely affected. In addition, the achievement of
anticipated revenues is substantially dependent on the ability of the Company to
attract, on a timely basis, and retain skilled personnel, especially sales and
support personnel. As a result of the foregoing factors, among others, revenues
for any quarter are subject to significant variation, and the Company believes
that period-to-period comparisons of its results of operations are not
necessarily meaningful and should not be relied upon as indications of future
performance. Fluctuations in operating results may also result in volatility in
the price of the Company's Common Stock in the public market. Due to all of the
foregoing factors, among others, it is likely that, from time to time in the
future, the Company's results of operations would be below the expectations of
public market analysts and investors. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
RELIANCE ON CERTAIN RELATIONSHIPS
In connection with the Company's TED family of products, the Company has
established strategic relationships with a number of organizations that it
believes are important to its ability to enhance its worldwide sales, marketing
and support activities as well as to develop and market enhancements and new
applications for its products. The Company's indirect channel relationships
provide marketing and sales opportunities for the Company's direct sales force
and expand distribution of its products. These relationships also assist the
Company in keeping pace with technological and marketing developments and the
needs of major customers and vendors. There can be no assurance that the Company
will be able to continue to successfully manage its strategic relationships or
that any customer, system integrator or distributor will continue to market or
to purchase the TED family of products or that the Company will be successful in
establishing strategic relationships in connection with its SoftNC technology or
products. The failure by the Company to maintain these relationships or the
failure to establish new relationships in the future could have a material
adverse effect on the Company's business, results of operations and financial
condition. There can be no assurance that these events will not occur in the
future. See "Business -- Marketing and Sales."
The Company licenses technology from OEMs and other third parties to enable
the Company to develop new applications for its products. Such licenses are
terminable on the occurrence of certain events. This software is then integrated
with internally developed software and used in the Company's products to perform
key functions. There can be no assurance that these third-party technology
licenses will continue to be available to the Company on commercially reasonable
terms, if at all. The loss of or inability to maintain any of these technology
licenses could result in delays or reductions in product shipments until
equivalent technology, if any, could be identified, licensed and integrated. Any
such delays or reductions in product shipments could materially and adversely
affect the Company's business, results of operations and financial condition.
6
<PAGE> 7
PRODUCT CONCENTRATION
To date, substantially all of the Company's revenues have been attributable
to sales of licenses of the TED family of products and related services. The
Company has not introduced for commercial sale any products based on, or
recognized any revenues from licenses of, its SoftNC technology. The Company
currently expects the TED family of products and related services to account for
substantially all of its revenues for the foreseeable future. As a result,
factors adversely affecting the pricing of or demand for the TED products, such
as competition or technological change, could have a material adverse effect on
the Company's business, results of operations and financial condition. The
Company's future financial performance will depend, in significant part, on the
successful development, introduction and customer acceptance of new and enhanced
versions of the TED family of products and related services and on the Company's
ability to develop and commercialize products based on the Company's SoftNC
technology. There can be no assurance that the Company will continue to be
successful in developing and marketing the TED family of products and related
services, or that the Company will be successful in developing and marketing
products based on the Company's SoftNC technology. See "Business -- Products and
Technologies."
CUSTOMER AND MARKET CONCENTRATION
A relatively small number of customers (primarily resellers) account for a
significant percentage of the Company's revenues. In fiscal 1995, sales to AT&T,
IBM and British Columbia Telephone accounted for 29%, 12% and 11% of revenues,
respectively. In fiscal 1996, sales to Logicon and AT&T accounted for 18% and
12% of revenues, respectively, and sales to the Company's top four customers
accounted for approximately 45% of revenues. During the nine months ended
December 31, 1995, AT&T accounted for 15% of revenues. During the nine months
ended December 31, 1996, two of the Company's resellers, IBM and Sylvest
Management, accounted for 50% and 24% of revenues, respectively. The Company
expects that sales of its products to a limited number of customers and
resellers will continue to account for a high percentage of revenue for the
foreseeable future. The Company believes that more than 30% of its revenues
during fiscal 1996 and more than 50% of its revenues during the nine months
ended December 31, 1996 were derived, indirectly through distributors, from
sales to departments and agencies of the U.S. Government. The Company believes
that the success and further development of the Company's business will continue
to be dependent in significant part upon its ability to continue such indirect
sales. A significant reduction in the federal funds available for agencies and
departments the Company is supplying, either through agency budget cuts by
Congress or the imposition of budgetary constraints, or a determination by the
Government that such funding of agencies and departments should be reduced or
discontinued, would have a material adverse effect on the Company's results of
operations. The future success of the Company will depend on its ability to
obtain orders from new customers and successfully market its products in diverse
industries. The loss of a major customer or any reduction or delay in orders by
such customers, or the failure of the Company to successfully market its
products in existing targeted industry segments or new industry segments, would
have a material adverse effect on the Company's business, results of operations
and financial condition.
Because a large portion of the Company's revenues are currently derived
from enterprises that support UNIX operating systems, a significant decline in
the UNIX operating systems market would have a material adverse effect on the
Company's business, results of operations and financial condition. Similarly,
widespread adoption of other desktop system software and operating environments,
such as Windows NT, Java-based operating environments or other technologies,
could create a more homogeneous environment throughout an enterprise, which
would have a material adverse effect on the Company's business, results of
operations and financial condition. See "Business -- Customers and Markets."
EVOLVING DISTRIBUTION CHANNELS
The Company's strategy is to leverage its sales and marketing through its
indirect channel relationships, which include OEMs, VARs and system integrators,
that distribute or resell the Company's products in their respective markets. To
the extent that average selling prices through indirect channel relationships
decline relative to the Company's direct sales in the future, the Company's
average selling prices and gross margins may be materially and adversely
affected.
7
<PAGE> 8
In addition, the Company's agreements with indirect channel entities
typically do not restrict such entities from distributing competing products
and, in many cases, may be terminated by either party without cause.
Furthermore, in some cases the Company has granted exclusive distribution rights
that are limited by territory and in duration. Consequently, the Company may be
adversely affected should any indirect channel entity fail to adequately
penetrate its market segment. In addition, failure to recruit, manage or retain
important indirect channel entities, or to manage conflict within the channel,
could materially and adversely affect the business, results of operations and
financial condition of the Company.
The Company plans to expand its direct sales force. There can be no
assurance that such internal expansion will be successfully completed, that the
cost of such expansion will not exceed the revenues generated or that the
Company's sales and marketing organization will be able to compete successfully
against the significantly more extensive and well-funded sales and marketing
operations of many of the Company's current or potential competitors. The
Company's inability to effectively manage the expansion of its direct sales
force could have a material adverse effect on the Company's business, results of
operations and financial condition. See "Business -- Marketing and Sales."
INDUSTRY CONDITIONS, NEW PRODUCT DEVELOPMENT AND TECHNOLOGICAL CHANGE
The client/server and desktop system software market is characterized by
rapid technological advancements, evolving industry standards, changes in
consumer expectations and frequent new product introductions and enhancements.
The introduction of products embodying new technologies and the emergence of new
industry standards could render the Company's existing products and products
currently under development obsolete and unmarketable. Accordingly, the life
cycles of the Company's products are difficult to estimate. The Company's future
success will depend upon its ability to enhance its current products and to
develop and introduce new products that keep pace with technological
developments, respond to evolving consumer requirements and achieve market
acceptance. The Company's future success will also depend in part upon its
ability to maintain and enhance its technology relationships in order to provide
customers with integrated product solutions. The Company's ability to develop
and introduce new products and enhancements on a timely basis may be adversely
affected by a number of factors, including the ability of the Company's
engineers to solve technical problems and to test products, as well as business
priorities in light of the availability of development and other resources and
other factors, including factors that may be outside the control of the Company.
If the Company is unable to develop on a timely basis new software products or
enhancements to existing products, if such new products or enhancements do not
achieve market acceptance, or if the Company is unable to maintain its
technology relationships, the Company's business, results of operations and
financial condition will be materially and adversely affected. See
"Business -- Products and Technologies" and "Business -- Research and
Development."
The Company's current products are designed to adhere to certain open
systems standards, and current and future sales of the Company's products will
be dependent, in part, on market acceptance of such standards. Emergence of new
industry standards could require the Company to modify its products to adhere to
such standards. There can be no assurance that the Company would be successful
in incorporating new standards effectively or on a timely basis or that any
resulting products would achieve commercial acceptance. Failure by the Company
to effectively incorporate into its products new industry standards that are
widely adopted in the markets served by the Company would have a material
adverse effect on the Company's business, results of operations and financial
condition.
DEPENDENCE ON GROWTH OF DESKTOP SYSTEM AND CLIENT/SERVER MARKET
All of the Company's business is in the desktop system and client/server
application software markets, which are still emerging markets that are
intensely competitive, highly fragmented and subject to rapid change. The
Company's future financial performance will depend in large part on continued
growth in the number of organizations adopting client/server computing
environments, the continued use by these organizations of a variety of
incompatible computing technologies and commercial acceptance of the Company's
products as a desktop systems software solution to address these problems of
fragmentation. There can be no assurance that the desktop system and
client/server application software markets will maintain their
8
<PAGE> 9
current level of growth or that they will continue to be heterogeneous or that
the Company's principal product, TED, will be widely adopted. If the desktop
system and client/server application software markets fail to grow or grow more
slowly or if the enterprise environment becomes more homogeneous than the
Company currently anticipates, or if the Company's products are not widely
adopted, the Company's business, results of operations and financial condition
would be materially adversely affected. The Company has spent, and intends to
continue to spend, significant resources educating potential customers about the
benefits of its products. However, there can be no assurance that such
expenditures will enable the Company's products to achieve any additional degree
of market acceptance. See "Business -- Customers and Markets."
Certain of the Company's products and products in development are intended
for use with the Internet/intranet. The commercial market for products and
services designed for use with the Internet/intranet has only recently begun to
develop, and the success of the Company's products and products in development,
if commercially released, may depend, in part, on their compatibility with the
Internet. Rapid growth in the use of the Internet/intranet is a recent
phenomenon and there can be no assurance that communication over the
Internet/intranet will become widespread. To the extent that the Internet
continues to experience rapid growth in the level of use and the number of
users, there can be no assurance that the Internet infrastructure will be able
to support the demands of such growth or will not otherwise lose its utility due
to delays in the development and adoption of new standards and protocols
required to handle increased levels of activity or due to increased government
regulation. It is difficult to predict with any assurance whether the demand for
Internet-related products and services will increase or decrease in the future.
There can be no assurance that the Company will be able to successfully compete
in the market for Internet-related products and services without substantial
modification or customization of the Company's products or services or the
introduction of new products and services.
COMPETITION
The market in which the Company competes is characterized by rapidly
changing technology and evolving standards. The Company's competitors and
potential competitors, which include Microsoft Corporation ("Microsoft"),
Netscape Communications Corporation ("Netscape") and the original Common Desktop
Environment ("CDE") developers (Hewlett-Packard Company ("Hewlett-Packard"),
IBM, Novell, Inc. ("Novell") and Sunsoft, a subsidiary of Sun Microsystems,
Inc.), have or may have a more established and larger marketing and sales
organization, significantly greater financial and technical resources and a
larger installed base of customers, as well as greater name recognition than the
Company. Accordingly, such competitors or potential competitors may be able to
respond more quickly to new or emerging technologies and changes in customer
requirements or devote greater resources to the development, promotion and sales
of their products than the Company. The Company also expects that competition
will increase as a result of software industry consolidation. In addition,
current and potential competitors have established or may establish cooperative
relationships among themselves or with third parties to increase the ability of
their products to address the needs of the enterprise customers in the Company's
markets. Accordingly, it is possible that new competitors or alliances among
competitors may emerge and rapidly acquire significant market share. Increased
competition may result in price reductions, reduced gross margins and loss of
market share, any of which could have a material adverse effect on the Company's
business, results of operations and financial condition. There can be no
assurance that the Company will be able to compete successfully against current
and future competitors, or that competitive factors faced by the Company will
not have a material adverse effect on the Company's business, results of
operations and financial condition. See "Business -- Competition."
The Company's products are based in part on a non-exclusive license of the
CDE industry standard. Each of the original CDE developers has developed or is
developing unique implementations of CDE specific to its own UNIX platforms.
Because CDE was developed as an open systems industry standard, any of the
original CDE developers, or their assignees, other competitors or third-party
licensees, may develop similar products or sell competing products in the
Company's markets. In addition, the Company has developed its TED product based
in part on a non-exclusive license of the CDE technology from Hewlett-Packard.
Under the terms of the Company's license agreement with Hewlett-Packard, all
modifications to the CDE developed by the Company are owned by the Company and
are licensed back to Hewlett-Packard on a non-exclusive basis. There can be
9
<PAGE> 10
no assurance that one or more of these competitors and potential competitors
will not develop or market products that would directly compete with the
Company's products or license a third party to do so.
MANAGEMENT OF GROWTH
The Company has recently experienced a period of significant growth in
total revenues that has placed and is expected to continue to place a
significant strain upon its managerial, financial and operational resources. To
manage its expansion, the Company must improve these resources on a timely basis
and continue to expand, train and manage its employee base. In addition, the
Company will be required to manage multiple relationships with various
customers, distribution channels, technology licensors and licensees and other
third parties. There can be no assurance that the Company's systems, procedures
or controls will be adequate to support the Company's operations or that the
Company's management will be able to achieve the rapid execution necessary to
fully exploit any future market opportunity for the Company's products and
services or successfully manage relationships with its customers, distribution
channels, technology licensors and licensees or other third parties. The
Company's future operating results will also depend on its ability to expand its
sales and marketing organizations, implement and manage new distribution
channels to penetrate different and broader markets and expand its support
organization. If the Company is unable to manage expansion effectively, the
Company's business, results of operations and financial condition will be
materially and adversely affected. There can be no assurance, however, that such
expansion or growth will occur. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
LENGTHY SALES CYCLE
The licensing of the Company's products by its customers typically involves
a significant technical evaluation and commitment of capital and other
resources, with delays frequently associated with customers' internal procedures
to approve large capital expenditures and to test and accept new technologies
that affect key operations. For these and other reasons, the sales cycle
associated with the licensing of the Company's products is typically lengthy and
subject to a number of significant risks. There can be no assurance that the
Company will not experience these and additional delays in the future in sales
of the Company's products. Because of the lengthy sales cycle and the large size
of many customers' orders, if revenues forecasted from a specific customer for a
particular quarter are not realized in that quarter, the Company's operating
results for that quarter could be materially and adversely affected. See
"-- Fluctuations in Quarterly Results."
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING
The Company's operations to date have required substantial amounts of
capital. The Company expects to spend substantial funds to support the growth of
its products, to develop new products, to add enhancements and additional
applications to its products and to expand internationally. The Company
anticipates that its existing capital resources and credit facilities, including
the net proceeds of this offering and interest earned thereon, should enable it
to maintain its current and planned operations for at least the next 12 months.
The Company's capital requirements will depend on numerous factors,
including the progress of the Company's research and development programs, the
commercial acceptance of its products, the resources the Company devotes to
advanced technologies and the demand for its products. To the extent that funds
generated from operations, together with the net proceeds from this offering,
are insufficient, the Company will have to raise additional funds to meet its
capital requirements. If additional funds are raised through the issuance of
equity securities, the percentage ownership of the stockholders of the Company
will be reduced, stockholders may experience additional dilution, and such
equity securities may have rights, preferences or privileges senior to those of
the holders of the Company's Common Stock. No assurance can be given that
additional financing will be available on acceptable terms, if at all. If
adequate funds are not available, the Company may have to, among other things,
reduce substantially or eliminate expenditures for the development and marketing
of its products. See "Use of Proceeds" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
10
<PAGE> 11
DEPENDENCE ON KEY PERSONNEL
The Company's performance and prospects are substantially dependent on the
continued service of its executive officers and key technical and sales and
marketing personnel, most of whom have worked together for only a short period
of time. Given the Company's early stage of development, the Company is
dependent on its ability to retain and motivate highly qualified personnel,
especially its management and technical and sales personnel. The Company has
"key person" life insurance policies on certain of its executive officers. Even
so, the loss of the services of any of its executive officers or other key
employees could have a material adverse effect on the business, results of
operations and financial condition of the Company.
The Company's future success also depends on its continuing ability to
identify, hire, train and retain other highly qualified technical and managerial
personnel. Competition for such personnel is intense, and there can be no
assurance that the Company will be able to identify, attract, assimilate or
retain other highly qualified technical and managerial personnel in the future.
The inability to identify, attract and retain the necessary technical and
managerial personnel could have a material adverse effect upon the Company's
business, results of operations and financial condition.
PRODUCT LIABILITY
The Company's license agreements with its customers typically contain
provisions designed to limit the Company's exposure to potential product
liability claims. However, it is possible that the limitation of liability
provisions contained in the Company's license agreements may not be effective
under the laws of certain jurisdictions. Although the Company has not
experienced any product liability claims to date, the sale and support of
products by the Company may entail the risk of such claims, and there can be no
assurance that the Company will not be subject to such claims in the future. A
successful product liability claim brought against the Company could have a
material adverse effect upon the Company's business, results of operations and
financial condition.
RISK OF PRODUCT DEFECTS
Software products as complex as those offered by the Company frequently
contain errors or failures, especially when first introduced or when new
versions are released. Although the Company conducts extensive product testing,
the Company may discover software errors in its new products or enhancements
after their release, possibly resulting in a loss or delay of recognition of
revenues. The Company's products are typically intended for use in applications
that may be critical to a customer's business. As a result, the Company expects
that its customers and potential customers have a greater sensitivity to product
defects than the market for software products generally. Although the Company's
business has not been adversely affected by any such errors to date, there can
be no assurance that, despite testing by the Company and by current and
potential customers, errors will not be found in products or releases after
commencement of commercial shipments, resulting in loss of revenue or delay in
market acceptance, diversion of development resources, damage to the Company's
reputation or increased service and warranty costs, any of which could have a
material adverse effect upon the Company's business, results of operations and
financial condition. See "Business -- Research and Development."
DEPENDENCE ON PROPRIETARY TECHNOLOGY; RISKS OF INFRINGEMENT
The Company's success and ability to compete is dependent in part upon its
proprietary technology. While the Company relies on trademark, trade secret,
copyright law, confidentiality procedures and contractual provisions to protect
its technology, the Company believes that factors such as the technological and
creative skills of its personnel, new product developments, frequent product
enhancements, name recognition and reliable product maintenance are more
essential to establishing and maintaining a technology leadership position. The
Company presently has no patents and has three patent applications pending.
There can be no assurance that any patents will issue from such applications or
that others will not develop technologies that are similar or superior to the
Company's technology. The Company believes the source code for the Company's
proprietary software is protected both as a trade secret and copyright work.
However,
11
<PAGE> 12
effective trademark, copyright and trade secret protection may not be available
in every foreign country in which the Company's products are distributed. The
Company's policy is to enter into confidentiality agreements with its employees,
consultants and vendors, and the Company generally controls access to and
distribution of its software, documentation and other proprietary information.
Despite these precautions, it may be possible for a third party to copy or
otherwise obtain and use the Company's products or technology without
authorization. There can be no assurance that the steps taken by the Company to
protect its proprietary technology will be adequate to prevent misappropriation
of its technology by third parties or that third parties will not be able to
develop similar technology independently.
The Company may receive notices from third parties claiming that the
Company's products infringe third party proprietary rights. The Company expects
that, as the number of software products in the industry increases and the
functionality of these products further overlaps, software products will
increasingly be subject to such claims. Any such claim, with or without merit,
could result in costly litigation and may require the Company to enter into
royalty or licensing arrangements. However, such royalty or licensing
arrangements, if required, may not be available on terms acceptable to the
Company, if at all. Consequently, any such litigation could have a material
adverse effect on the Company's business, results of operations and financial
condition. See "Business -- License Agreements and Intellectual Property."
INTERNATIONAL OPERATIONS
Although, to date, the Company has not made a significant percentage of its
sales internationally, a significant portion of the Company's sales are to large
multinational companies. To meet the needs of such companies, both domestically
and internationally, the Company must directly or indirectly provide worldwide
sales and product support services. As a result, the Company intends to expand
its existing international operations and enter additional international
markets, which will require significant management attention and financial
resources and could adversely affect the Company's operating margins and
earnings, if any. The Company opened an office in The Netherlands in December
1994 to meet the needs of its international customers. In order to successfully
expand international sales, the Company must hire additional personnel and
develop relationships with additional international vendors. To the extent that
the Company is unable to do so on a timely basis, the Company's growth, if any,
in international sales will be limited, and the Company's business, results of
operations and financial condition could be materially and adversely affected.
In addition, there can be no assurance that the Company will be able to maintain
or increase international market demand for its products.
Additional risks inherent in the Company's international business
activities generally include currency fluctuations, unexpected changes in
regulatory requirements, tariffs and other trade barriers, costs of and the
Company's limited experience in localizing products for foreign countries, lack
of acceptance of localized products in foreign countries, longer accounts
receivable payment cycles, difficulties in managing international operations,
potentially weaker protection for intellectual property in certain foreign
countries, potentially adverse tax consequences including restrictions on the
repatriation of earnings, and the burdens of complying with a wide variety of
foreign laws and practices. To date, substantially all of the Company's
international revenues have been denominated in U.S. dollars. Although exposure
to currency fluctuations to date has been insignificant, there can be no
assurance that fluctuations in future currency exchange rates will not have a
material adverse effect on revenues from international sales. There can be no
assurance that such factors will not have a material adverse effect on the
Company's future international operations and, consequently, the Company's
business, results of operations and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business -- Marketing and Sales."
UNCERTAINTY AS TO USE OF UNALLOCATED NET PROCEEDS
The Company's primary purpose in conducting this offering is to obtain
additional working capital. As of the date of this Prospectus, the Company has
no current specific plans for the net proceeds to the Company from this offering
other than for working capital and general corporate purposes. Accordingly, the
Company's management will retain broad discretion as to the allocation of the
Company's net proceeds from this offering. Pending any such uses, the Company
plans to invest the net proceeds in short-term, investment-grade,
interest-bearing securities. See "Use of Proceeds."
12
<PAGE> 13
CONTROL BY DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL STOCKHOLDERS
Upon completion of this offering, the current directors, executive officers
and their respective affiliates will beneficially own approximately 31.2% of the
outstanding Common Stock (30.3% of the outstanding Common Stock if the
over-allotment option is exercised in full). As a result, these stockholders
will be able to exercise significant influence over all matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions. Such concentration of ownership may also
have the effect of delaying, deferring or preventing a change in control of the
Company. See "Principal and Selling Stockholders" and "Description of Capital
Stock."
POTENTIAL VOLATILITY OF STOCK PRICE
The market price of the Company's Common Stock has been, and may continue
to be, highly volatile and could be subject to wide fluctuations in response to
quarterly variations in operating results, announcements of technological
innovations or new software or services by the Company or its competitors,
changes in or failure of the Company to meet financial estimates by securities
analysts, general market conditions or other events or factors, many of which
are beyond the Company's control. In addition, the stock market has experienced
significant price and volume fluctuations that have particularly affected the
market prices of equity securities of many high technology companies and that
often have been unrelated to the operating performance of such companies. These
broad market fluctuations may adversely affect the market price of the Company's
Common Stock. In the past, following periods of volatility in the market price
for a company's securities, securities class action litigation has often been
instituted. Such litigation could result in substantial costs and a diversion of
management attention and resources, which could have a material adverse effect
on the Company's business, results of operations and financial condition.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial numbers of shares of Common Stock in the public market
following this offering could adversely affect the market price for the Common
Stock. Upon completion of this offering, the Company will have outstanding an
aggregate of 10,655,679 shares of Common Stock, based upon the number of shares
outstanding as of December 31, 1996. In addition to the 2,200,000 shares sold in
this offering, 2,904,727 of the outstanding Common Stock (which were sold in the
Company's initial public offering or issued upon exercise of stock options
covered by a registration statement) will be freely tradable without restriction
or further registration under the Securities Act of 1933, as amended (the
"Securities Act"), unless such shares are purchased by "affiliates" of the
Company, as that term is defined in Rule 144 under the Securities Act. The
remaining 5,550,952 shares of Common Stock held by existing stockholders are
"restricted securities" as that term is defined in Rule 144 under the Securities
Act (the "Restricted Shares"). Restricted Shares may be sold in the public
market only if registered or if they qualify for an exemption from registration
under Rules 144, 144(k) or 701 promulgated under the Securities Act. As a result
of contractual restrictions and the provisions of Rules 144 and 701, additional
shares will be available for sale in the public market as follows: (i)
approximately 338,063 Restricted Shares will be eligible for immediate sale on
the date of this Prospectus; (ii) approximately 4,870,518 Restricted Shares will
be eligible for sale 90 days after the date of this Prospectus upon expiration
of lock-up agreements and upon expiration of their respective holding periods
under Rule 144, assuming certain revisions to Rule 144 are effected by the
Securities and Exchange Commission prior to that time, and (iii) the remainder
of the Restricted Shares will be eligible for sale from time to time thereafter
upon expiration of their respective holding periods under Rule 144. In October
1996, the Company filed a registration statement under the Securities Act
covering an aggregate of 2,477,654 shares of the Company's Common Stock,
including shares issuable pursuant to outstanding options and shares available
for grant under the Company's 1995 Stock Option Plan and Employee Stock Purchase
Plan. Accordingly, shares registered under such registration statement are
available for sale in the public market, unless such shares are subject to
vesting restrictions with the Company or to the contractual restrictions
described above. In addition, after this offering, the holders of 1,684,919
shares of Common Stock will be entitled to certain rights with respect to
registration of such shares under the Securities Act. To the extent that a
significant portion of the Restricted Shares are sold by the holders thereof,
such shares may adversely affect
13
<PAGE> 14
the market price of the Company's Common Stock. See "Description of Capital
Stock" and "Shares Eligible for Future Sale."
ANTITAKEOVER PROVISIONS
Certain provisions of the Company's Certificate of Incorporation and
Bylaws, as well as provisions of Delaware law, could discourage potential
acquisition proposals and delay or prevent a change in control of the Company.
For example, the Company's Certificate of Incorporation authorizes the Board of
Directors to issue up to 5,000,000 shares of Preferred Stock and to determine
the designations, price, rights, powers, preferences, privileges and
limitations, including voting rights, of those shares without any further vote
or action by the stockholders. The rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. The Certificate of
Incorporation and Bylaws, among other things, provide for a classified Board of
Directors, require that stockholder actions occur at duly called meetings of the
stockholders, provide that special meetings of stockholders may be called only
by the Chairman of the Board of Directors, the Chief Executive Officer or a
majority of the Board of Directors, do not permit cumulative voting in the
election of directors and require advance notice of stockholder proposals and
director nominations. These provisions, as well as certain applicable provisions
of Delaware law, could serve to depress the Company's stock price or discourage
a hostile bid in which stockholders could receive a premium for their shares. In
addition, these provisions could have the effect of making it more difficult for
a third party to acquire a majority of the outstanding voting stock of the
Company, or delay, prevent or deter a merger, acquisition or tender offer in
which the Company's stockholders could receive a premium for their shares, or a
proxy contest for control of the Company or other change in the Company's
management. See "Management" and "Description of Capital Stock -- Delaware Law
and Certain Charter Provisions."
DILUTION
Investors participating in this offering will incur immediate, substantial
dilution. To the extent outstanding options or warrants to purchase the
Company's Common Stock are exercised, there will be further dilution. See
"Dilution."
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<PAGE> 15
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,365,000 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$24.3 million ($30.3 million if the Underwriters' over-allotment option is
exercised in full), after deducting underwriting discounts and commissions and
estimated offering expenses. The Company will not receive any of the proceeds
from the sale of shares by the Selling Stockholders.
The principal purpose of this offering is to obtain additional capital. The
Company intends to use the proceeds of this offering for working capital and
other general corporate purposes, including business development, marketing and
promotional activities, continued development of new products, enhancements and
new applications for the Company's products and other uses as deemed appropriate
by the Board of Directors. The amounts and timing of these expenditures will
vary significantly depending upon a number of factors, including the amount of
cash generated by the Company's operations, the progress of the Company's
product research, development and testing activities and the market response to
the introduction of its products.
In addition, the Company may use a portion of the net proceeds of this
offering to acquire or invest in businesses, products, services or technologies
complementary to the Company's current business, through mergers, acquisitions,
joint ventures or otherwise. However, the Company has no specific agreements or
commitments and is not currently engaged in any negotiations with respect to
such transactions. Accordingly, the Company's management will retain broad
discretion as to the allocation of the net proceeds of this offering. Pending
the uses described above, the Company intends to invest the net proceeds of this
offering in short-term, interest-bearing investment grade securities.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock commenced trading on the Nasdaq National Market
on August 6, 1996 under the symbol "TEAL." The following table sets forth, for
the periods indicated, the high and low sale prices per share of the Common
Stock, as reported by the Nasdaq National Market.
<TABLE>
<CAPTION>
YEAR ENDING MARCH 31, 1997 HIGH LOW
----------------------------------------------------------- ------ ------
<S> <C> <C>
Second Quarter (commencing August 6, 1996)................. $15.75 $ 8.00
Third Quarter.............................................. 21.75 12.25
Fourth Quarter (through February 19, 1997)................. 23.25 17.00
</TABLE>
The last reported sale price of the Common Stock on the Nasdaq National
Market on February 19, 1997 was $19.50 per share. As of January 30, 1997, there
were approximately 187 holders of record of the Company's Common Stock.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain any future earnings to finance
the growth and development of its business and therefore does not anticipate
paying any cash dividends in the foreseeable future. In addition, the Company's
line of credit agreement currently prohibits the payment of cash dividends on
its capital stock without the consent of the lender.
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<PAGE> 16
CAPITALIZATION
The following table sets forth the capitalization of the Company at
December 31, 1996 and as adjusted to give effect to the sale of the 1,365,000
shares of Common Stock offered by the Company hereby and the application of the
estimated net proceeds therefrom. This table should be read in conjunction with
the Consolidated Financial Statements and Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt (1)..................................................... $ -- $ --
Stockholders' equity:
Preferred Stock, $.001 par value, 5,000,000 shares authorized;
none issued and outstanding, actual and as adjusted............... -- --
Common Stock, $.001 par value, 30,000,000 shares authorized;
9,209,852 shares issued and outstanding, actual; 10,655,679 shares
issued and outstanding, as adjusted (2)........................... 9 11
Additional paid-in capital........................................... 30,195 54,522
Notes receivable from stockholders................................... (101) (101)
Deferred compensation................................................ (113) (113)
Retained earnings (deficit).......................................... (5,630) (5,630)
------ ------
Total stockholders' equity........................................ 24,360 48,689
------ ------
Total capitalization......................................... $24,360 $48,689
====== ======
</TABLE>
- ---------------
(1) See Note 4 of Notes to Consolidated Financial Statements.
(2) Excludes, as of December 31, 1996, 1,593,562 shares of Common Stock subject
to outstanding options. See "Management" and "Description of Capital Stock."
16
<PAGE> 17
DILUTION
The net tangible book value of the Company as of December 31, 1996 was
approximately $24.2 million or $2.63 per share of Common Stock. Net tangible
book value per share is equal to the Company's total tangible assets less its
total liabilities, divided by the number of outstanding shares of Common Stock.
After giving effect to the sale of 1,365,000 shares of Common Stock offered by
the Company hereby (after deducting underwriting discounts and commissions and
estimated offering expenses), the as adjusted net tangible book value of the
Company at December 31, 1996 would have been approximately $48.6 million or
$4.56 per share of Common Stock. This represents an immediate increase in such
net tangible book value of $1.93 per share to existing stockholders and an
immediate dilution of $14.69 per share to new investors purchasing shares in
this offering. The following table illustrates this per share dilution.
<TABLE>
<S> <C> <C>
Public offering price per share..................................... $19.25
Net tangible book value per share as of December 31, 1996......... $2.63
Increase in net tangible book value per share attributable to new
investors...................................................... 1.93
-----
Net tangible book value per share after this offering............. 4.56
-----
Dilution per share to new investors................................. $14.69
=====
</TABLE>
The following table summarizes, as of December 31, 1996, the differences
between existing stockholders and the new investors with respect to the number
of shares of Common Stock purchased from the Company, the total consideration
paid to the Company and the average price per share paid (before deducting
underwriting discounts and commissions and estimated offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- --------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)(2)...... 9,290,679 87.2% $32,780,606 55.5% $ 3.53
New investors(1)................. 1,365,000 12.8 26,276,250 44.5% $ 19.25
--------- ----- ----------- -----
Total.................. 10,655,679 100.0% $59,056,856 100.0%
========= ===== =========== =====
</TABLE>
- ---------------
(1) Sales by Selling Stockholders in this offering will reduce the number of
shares held by existing stockholders to 8,455,679 shares or approximately
79.4% of the total shares of Common Stock outstanding after this offering,
and will increase the number of shares to be purchased by new investors to
2,200,000 shares or approximately 20.6% of the total shares of Common Stock
outstanding after this offering.
(2) The foregoing tables and calculations exclude 1,593,562 shares of Common
Stock issuable upon exercise of outstanding stock options, as of December
31, 1996, with a weighted average exercise price of $3.46 per share. To the
extent that options are exercised in the future, there will be further
dilution to new investors. See "Management -- 1995 Stock Option Plan" and
Note 7 of Notes to Consolidated Financial Statements.
17
<PAGE> 18
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The data set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and Notes thereto included elsewhere in
this Prospectus. The statement of operations data for the years ended March 31,
1994, 1995 and 1996 and the balance sheet data at March 31, 1995 and 1996 are
derived from the Consolidated Financial Statements of the Company and the Notes
thereto included elsewhere in this Prospectus, which have been audited by Ernst
& Young LLP, independent auditors, whose report is included in this Prospectus.
The balance sheet data at March 31, 1994 is derived from the audited
Consolidated Financial Statements of the Company not included in this
Prospectus. The consolidated statement of operations data for the nine months
ended December 31, 1995 and 1996 and the consolidated balance sheet data at
December 31, 1996 are derived from unaudited consolidated financial statements
included elsewhere in this Prospectus and contain all adjustments, consisting of
normal recurring adjustments, necessary for a fair presentation of the financial
position and results of operations for such periods. The results of operations
for the nine months ended December 31, 1996 are not necessarily indicative of
results to be expected for the full fiscal year.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED MARCH 31, DECEMBER 31,
-------------------------------- -------------------
1994(1) 1995 1996 1995 1996
------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
License fees......................... $ 148 $ 2,575 $ 6,750 $ 3,228 $ 9,657
Maintenance and services............. 285 1,535 1,471 1,174 1,455
------ ------- -------- ------- -------
Total revenues.................. 433 4,110 8,221 4,402 11,112
Cost of revenues:
Cost of license fees................. 3 785 1,751 903 1,887
Cost of maintenance and services..... 192 384 421 325 448
------ ------- -------- ------- -------
Total cost of revenues.......... 195 1,169 2,172 1,228 2,335
------ ------- -------- ------- -------
Gross profit.................... 238 2,941 6,049 3,174 8,777
Operating expenses:
Research and development............. 8 485 2,391 1,753 1,678
Selling, general and
administrative..................... 99 2,290 8,569 5,685 8,573
------ ------- -------- ------- -------
Total operating expenses........ 107 2,775 10,960 7,438 10,251
------ ------- -------- ------- -------
Operating income (loss)......... 131 166 (4,911) (4,264) (1,474)
Interest income (expense), net.......... -- (2) (26) (16) 494
------ ------- -------- ------- -------
Income (loss) before provision for
(benefit from) income taxes.......... 132 164 (4,937) (4,280) (980)
Provision for (benefit from) income
taxes................................ 56 48 (95) (83) --
------ ------- -------- ------- -------
Net income (loss)....................... $ 75 $ 116 $ (4,842) $(4,197) $ (980)
====== ======= ======== ======= =======
Net income (loss) per share(2).......... $ 0.01 $ 0.02 $ (0.72) $ (0.63) $ (0.12)
====== ======= ======== ======= =======
Shares used in computing net income
(loss) per share(2).................. 6,463 6,503 6,712 6,712 7,966
====== ======= ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
------------------------------- DECEMBER 31,
1994 1995 1996 1996
------- ------- ------- -------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments............................. $ 22 $ 1,225 $ 301 $21,939
Working capital............................ 95 1,541 428 22,941
Total assets............................... 238 3,155 6,636 30,156
Long-term debt, less current portion....... 79 120 243 --
Total stockholders' equity................. 85 1,740 1,269 24,360
</TABLE>
- ---------------
(1) The Company was incorporated on January 14, 1993, but did not commence
operations until after March 31, 1993. Accordingly, there were no results of
operations for the period from January 14, 1993 (inception) through March
31, 1993, and no balance sheet data at March 31, 1993.
(2) See Note 1 of Notes to Consolidated Financial Statements.
18
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements that involve risks
and uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements as a result of certain
factors, including those set forth under "Risk Factors" and elsewhere in this
Prospectus. The following discussion should be read in conjunction with the
Financial Statements and the Notes thereto included elsewhere in this
Prospectus.
OVERVIEW
TriTeal develops, markets and supports open systems-based, mission-critical
desktop system software and integrated applications that enable multi-platform
deployment of client/server applications throughout an enterprise. TriTeal
recently introduced its Java-based SoftNC technology, a thin-client,
platform-independent solution designed to allow simultaneous access to Java and
legacy applications. The Company was founded in January 1993, commenced
operations in April 1993 and released its first product in May 1993. In August
1995, the Company introduced its current flagship product, TED. The Company's
current products are based, in part, on certain technologies licensed from
Hewlett-Packard, Spyglass, Inc. ("Spyglass"), SPYRUS and other technology
vendors. The Company's revenues are derived principally from two sources: (i)
license fees for the use of the Company's software products, and (ii)
maintenance agreements and software development contract revenues. To date,
substantially all of the Company's revenues have been attributable to sales of
licenses of the TED family of products and related services. The Company has not
introduced for commercial sale any products based on, or recognized any revenues
from licenses of, its SoftNC technology. Revenues from software licenses are
generally recognized upon shipment of software. Revenues from maintenance
agreements are recognized over the contract terms, which generally is one year.
Software development contract revenues are recognized using the
percentage-of-completion method. See Note 1 of Notes to Consolidated Financial
Statements.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
of net revenues represented by each item reflected on the Company's Statements
of Operations.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED MARCH 31, DECEMBER 31,
---------------------- -------------
1994 1995 1996 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues:
License fees............................................ 34% 63% 82% 73% 87%
Maintenance and services................................ 66 37 18 27 13
--- --- --- --- ---
Total revenues.................................. 100 100 100 100 100
Costs of revenues:
Cost of license fees.................................... 1 19 21 21 17
Cost of maintenance and services........................ 44 9 5 7 4
--- --- --- --- ---
Total cost of revenues.......................... 45 28 26 28 21
--- --- --- --- ---
Gross profit.................................... 55 72 74 72 79
Operating expenses:
Research and development................................ 2 12 29 40 15
Selling, general and administrative..................... 23 56 104 129 77
--- --- --- --- ---
Total operating expenses........................ 25 68 133 169 92
--- --- ---
Operating income (loss)......................... 30 4 (59) (97) (13)
Interest income (expense), net............................ -- -- -- -- 4
--- --- --- --- ---
Income (loss) before provision for
(benefit from) income taxes............................. 30 4 (59) (97) (9)
Provision for (benefit from) income taxes................. 13 1 -- (2) --
--- --- --- --- ---
Net income (loss)......................................... 17% 3 % (59)% (95)% (9)%
=== === === === ===
</TABLE>
19
<PAGE> 20
NINE MONTHS ENDED DECEMBER 31, 1995 AND 1996
Revenues
TriTeal's revenues are derived principally from license fees, maintenance
agreements and software development contracts. The Company's total revenues
increased from $4.4 million for the nine months ended December 31, 1995 to $11.1
million for the nine months ended December 31, 1996. During the nine months
ended December 31, 1996, two of the Company's resellers, IBM and Sylvest
Management, accounted for 50% and 24% of revenues, respectively. License fees
increased from $3.2 million for the nine months ended December 31, 1995 to $9.7
million for the nine months ended December 31, 1996. During the nine months
ended December 31, 1995 and 1996, license fees aggregated 73% and 87% of total
revenues, respectively. This increase in license fees was due primarily to
increased market acceptance of the Company's existing products, introduction of
enhanced and new products and expansion of the Company's direct sales force.
Maintenance and services revenues, which also include revenues derived from
software development contracts, increased from $1.2 million for the nine months
ended December 31, 1995 to $1.5 million for the nine months ended December 31,
1996. Maintenance, which consists primarily of technical support, increased from
$504,000 for the nine months ended December 31, 1995 to $1.2 million for the
nine months ended December 31, 1996. The increase in maintenance revenues was
due primarily to additional maintenance agreements associated with a larger
installed base of customers. The Company does not anticipate receiving a
significant amount of revenues from software development contracts in the
future; however, it may enter into such contracts in special situations where
the technology may allow the Company to introduce new products, penetrate new
markets or establish strategic relationships.
Cost of Revenues
The Company's total cost of revenues increased from $1.2 million for the
nine months ended December 31, 1995 to $2.3 million for the nine months ended
December 31, 1996. As a percentage of revenues, gross margin increased from 72%
for the nine months ended December 31, 1995 to 79% for the nine months ended
December 31, 1996. The increase in gross margin was a result of the shift in
revenue mix to software license revenues, which typically have higher gross
margins, as well as lower average third-party royalty rates. There can be no
assurance that gross margins will remain at this level in the future. The cost
of license fees, which consists primarily of third-party royalties for licensed
technology and media and documentation, increased from $903,000 for the nine
months ended December 31, 1995 to $1.9 million for the nine months ended
December 31, 1996. The increase in the cost of license fees was due principally
to a higher volume of sales of licenses. The cost of maintenance and services,
which consists primarily of labor and services, increased from $325,000 for the
nine months ended December 31, 1995 to $448,000 for the nine months ended
December 31, 1996. The increase in the cost of maintenance and services was due
primarily to the increase in the number of customer support and development
personnel and related overhead costs necessary to support a larger installed
customer base, product upgrades and development activities, offset in part by
the decrease in revenue from software development contracts.
Research and Development
Research and development expenses include expenses associated with the
development of new products, enhancements of existing products and quality
assurance activities. These expenses consist principally of personnel costs,
overhead costs relating to occupancy, equipment depreciation and supplies. In
accordance with Statement of Financial Accounting Standards No. 86, development
costs incurred in the research and development of new software products and
enhancements to existing software products are expensed as incurred until
technological feasibility in the form of a working model has been established.
To date, the Company's software development has been completed concurrent with
the establishment of technological feasibility and, accordingly, no costs have
been capitalized. Research and development expenses decreased from $1.8 million
for the nine months ended December 31, 1995 to $1.7 million for the nine months
ended December 31, 1996. The decrease in research and development expenses was
primarily attributable to a $600,000 non-recurring charge in 1995 for in-process
technology, offset in large part by increased costs associated with both
additional headcount and expanded research and development efforts during the
nine months ended December 31, 1996. The Company believes that a significant
level of investment for product
20
<PAGE> 21
development is required to remain competitive and, accordingly, the Company
anticipates that, for the foreseeable future, these expenses will continue to
increase in absolute dollars.
Selling, General and Administrative
Selling, general and administrative expenses consist primarily of salaries,
commissions and bonuses, promotional expenses and occupancy costs. Selling,
general and administrative expenses increased from $5.7 million for the nine
months ended December 31, 1995 to $8.6 million for the nine months ended
December 31, 1996. The increase in selling, general and administrative expenses
was due primarily to sales commissions and bonuses associated with increased
sales volume, additional promotional activities, the hiring of additional sales
and marketing personnel and, to a lesser degree, increased administrative
personnel and occupancy costs. The Company believes that selling, general and
administrative expenses will increase in absolute dollar amounts as the Company
expands its sales and administrative staff, adds infrastructure and incurs
additional costs related to being a public company.
Interest Income (Expense), Net
Interest income (expense), net, represents interest earned on the Company's
cash, cash equivalents and short-term investments, offset in part by interest
expense on the Company's borrowings, principally its equipment loan. Interest
expense was $17,000 for the nine months ended December 31, 1995, compared to
interest income of $494,000 for the nine months ended December 31, 1996. This
increase was attributable to earnings on the proceeds from the Company's initial
public offering in August 1996.
YEARS ENDED MARCH 31, 1994, 1995 AND 1996
Revenues
The Company's total revenues increased from $433,000 in fiscal 1994 to $4.1
million in fiscal 1995 and $8.2 million in fiscal 1996. License fees increased
from $148,000 in fiscal 1994 to $2.6 million in fiscal 1995 and $6.8 million in
fiscal 1996. During the years ended March 31, 1994, 1995 and 1996, license fees
aggregated 34%, 63% and 82% of total revenues, respectively. These increases in
license fees were due primarily to increased market acceptance of the Company's
existing products, introduction of enhanced and new products and expansion of
the Company's direct sales force. Maintenance and services revenues, which also
include revenues derived from software development contracts, increased from
$285,000 in fiscal 1994 to $1.5 million in both fiscal 1995 and fiscal 1996,
respectively. Maintenance, which consists primarily of technical support,
increased from $267,000 in fiscal 1995 to $752,000 in fiscal 1996. The increase
in maintenance revenues was due primarily to additional maintenance agreements
associated with a larger installed base of customers. There were no maintenance
revenues in 1994.
Cost of Revenues
The Company's total cost of revenues increased from $195,000 in fiscal 1994
to $1.2 million in fiscal 1995 and $2.2 million in fiscal 1996. The cost of
license fees increased from $3,000 in 1994 to $785,000 in fiscal 1995 and $1.8
million in fiscal 1996. These increases in the cost of license fees were due
principally to a higher volume of sales of licenses. The cost of maintenance and
services increased from $192,000 in fiscal 1994 to $384,000 in fiscal 1995 and
$421,000 in fiscal 1996. These increases in the cost of maintenance and services
were due primarily to an increase in the number of customer support and
development personnel and related overhead costs necessary to support a larger
installed customer base, product upgrades and development activities. As a
percentage of revenues, gross profit increased from 55% in fiscal 1994 to 72% in
fiscal 1995 and 74% in fiscal 1996. The annual increases in gross margin were a
result of the shift in revenue mix to software license revenues, which typically
have higher gross margins.
Research and Development
Research and development expenses increased from $8,000 in fiscal 1994 to
$484,000 in fiscal 1995 and $2.4 million in fiscal 1996. Research and
development expenses represented 2%, 12% and 29% of total
21
<PAGE> 22
revenues in fiscal 1994, 1995 and 1996, respectively. The increases in research
and development expenses were attributable primarily to the development of the
Company's research and development organization and reflect the increased costs
associated with both additional headcount as well as expanded research and
development efforts. Additionally, the increase in fiscal 1996 includes $800,000
related to license fees for certain Internet/intranet technologies.
Selling, General and Administrative
Selling, general and administrative expenses increased from $99,000 in
fiscal 1994 to $2.3 million in fiscal 1995 and $8.6 million in fiscal 1996. The
increases in selling, general and administrative expenses were due primarily to
the hiring of additional sales and marketing personnel, sales commissions and
bonuses associated with increased sales volume, additional promotional
activities and increased administrative personnel and occupancy costs.
Interest Income (Expense), Net
Interest income (expense), net, represents interest expense on the
Company's borrowings, principally its equipment loan, offset in part by interest
income earned on the Company's cash and cash equivalents.
Income Taxes
At March 31, 1996, the Company had net operating loss carryforwards for
federal and state tax reporting purposes of approximately $4.9 million and $1.8
million, respectively. The Company also had research and development credit
carryforwards for federal and state tax reporting purposes of $24,000 and
$30,000, respectively. Utilization of the carryforwards may be subject to annual
limitations due to changes in the Company's ownership resulting from the
Company's prior financings and this offering. See Note 8 of Notes to
Consolidated Financial Statements. The net operating loss carryforwards expire,
if not utilized, at various dates through 2010 and 2000 for federal and state
tax reporting purposes, respectively. A valuation allowance has been recorded
for the entire net deferred tax asset as a result of uncertainties regarding the
realization of the asset due to the limited operating history of the Company.
See Note 8 of Notes to Consolidated Financial Statements.
The Company had effective tax rates of approximately 43% and 29% in fiscal
1994 and fiscal 1995, respectively. These rates differ from the federal
statutory rate primarily due to state income taxes and permanent differences.
22
<PAGE> 23
SELECTED QUARTERLY RESULTS
The following tables set forth certain unaudited consolidated financial
information by quarter for fiscal 1996 and the three quarters ended December 31,
1996. This quarterly information has been prepared on a consistent basis with
the audited consolidated financial statements and, in the opinion of management,
includes all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the information for the periods presented.
The operating results for any quarter are not necessarily indicative of results
for any future period.
<TABLE>
<CAPTION>
THREE MONTH PERIODS ENDED
----------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1995 1995 1995 1996 1996 1996 1996
-------- --------- -------- -------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
License fees..................................... $ 790 $ 838 $ 1,600 $ 3,522 $ 2,337 $ 3,066 $ 4,254
Maintenance and services......................... 528 420 226 297 464 539 452
------ ------ ------- ------- ------- ------ -------
Total revenues............................. 1,318 1,258 1,826 3,819 2,801 3,605 4,706
Costs of revenues:
Cost of license fees............................. 270 315 317 849 520 520 847
Cost of maintenance and services................. 142 101 82 96 108 159 181
------ ------ ------- ------- ------- ------ -------
Total costs of revenues.................... 412 416 399 945 628 679 1,028
------ ------ ------- ------- ------- ------ -------
Gross profit............................... 906 842 1,427 2,874 2,173 2,926 3,678
Operating expenses:
Research and development......................... 289 406 1,058 638 483 552 643
Selling, general and administrative.............. 1,533 2,011 2,142 2,883 2,674 2,793 3,106
------ ------ ------- ------- ------- ------ -------
Total operating expenses................... 1,822 2,417 3,200 3,521 3,157 3,345 3,749
------ ------ ------- ------- ------- ------ -------
Operating income (loss).................... (916) (1,575) (1,773) (647) (984) (419) (71)
Interest income (expense), net..................... (2) (11) (4) (9) (10) 165 339
------ ------ ------- ------- ------- ------ -------
Income (loss) before provision for (benefit from)
income taxes..................................... (918) (1,586) (1,777) (656) (994) (254) 268
Provision for (benefit from) income taxes.......... (18) (31) (34) (12) -- -- --
------ ------ ------- ------- ------- ------ -------
Net income (loss).................................. $ (900) $(1,555) $(1,743) $ (644) $ (994) $ (254) $ 268
====== ====== ======= ======= ======= ====== =======
</TABLE>
FACTORS AFFECTING OPERATING RESULTS
The Company has experienced significant fluctuations in its revenues and
operating results from quarter to quarter and anticipates that it will continue
to experience such quarterly fluctuations. The Company's revenues and operating
results have generally been higher in the fourth fiscal quarter than in any
preceding quarter of each fiscal year, due largely, the Company believes, to the
positive effect of the Company's incentive sales compensation plans. In
addition, as a result of the Company's incentive sales compensation plans, first
fiscal quarter revenues in any year are typically lower than revenues in the
immediately preceding fourth fiscal quarter. There can be no assurance, however,
that such patterns of operating results will be repeated in the future. In
addition, the Company's sales are made predominantly in the third month of each
fiscal quarter and tend to be concentrated in the latter half of that third
month. Accordingly, the Company's quarterly results of operations are difficult
to predict, and delays in product delivery or in closings of sales near the end
of a quarter could cause quarterly revenues to fall substantially short of
anticipated levels and, to a greater degree, adversely affect profitability.
Factors that may contribute to such fluctuations, in addition to incentive
compensation, include seasonal factors, such as the fiscal year ends of the
government and other customers and reduction in European business during summer
months; the number of new orders and product shipments; the size and timing of
individual orders; the timing of introduction of products or product
enhancements by the Company, the Company's competitors or other providers of
hardware, software and components for the Company's market; competition and
pricing in the software industry; market acceptance of new products; reduction
in demand for existing products and shortening of product life cycles as a
result of new product introductions by competitors; product quality problems;
customer order deferrals in anticipation of new products; changes in customer
budgets; changes in operating expenses; changes in Company strategy;
23
<PAGE> 24
personnel changes; changes in foreign currency exchange rates; changes in mix of
products sold; and changes in general economic conditions.
The Company's sales generally reflect a relatively high average of revenues
per order. The loss or delay in receipt of individual orders, therefore, could
have a more significant impact on the revenues and quarterly results of the
Company than on those of companies with higher sales volumes or lower revenues
per order. The Company's software products generally are shipped as orders are
received, and revenues are recognized upon delivery of the products, provided no
significant vendor obligations exist and collection of the related receivable is
deemed probable. As a result, software license revenues in any quarter are
substantially dependent on orders booked and shipped in that quarter. The timing
of license fee revenue is difficult to predict because of the length of the
Company's sales cycle, which is typically three to nine months from the initial
contact. Because the Company's operating expenses are based on anticipated
revenue trends and because a high percentage of the Company's expenses are
relatively fixed, a delay in the recognition of revenue from a limited number of
license transactions could cause significant variations in operating results
from quarter to quarter and could result in losses substantially in excess of
anticipated amounts. To the extent such expenses precede, or are not
subsequently followed by, increased revenues, the Company's operating results
would be materially and adversely affected. In addition, the achievement of
anticipated revenues is substantially dependent on the ability of the Company to
attract, on a timely basis, and retain skilled personnel, especially sales and
support personnel. As a result of the foregoing factors, among others, revenues
for any quarter are subject to significant variation, and the Company believes
that period-to-period comparisons of its results of operations are not
necessarily meaningful and should not be relied upon as indications of future
performance. Fluctuations in operating results may also result in volatility in
the price of the Company's Common Stock in the public market. Due to all of the
foregoing factors, among others, it is likely that, from time to time in the
future, the Company's results of operations would be below the expectations of
public market analysts and investors.
The Company has recently experienced a period of significant growth in
total revenues that has placed and is expected to continue to place a
significant strain upon its managerial, financial and operational resources. To
manage its expansion, the Company must improve these resources on a timely basis
and continue to expand, train and manage its employee base. In addition, the
Company will be required to manage multiple relationships with various
customers, distribution channels, technology licensors and licensees and other
third parties. There can be no assurance that the Company's systems, procedures
or controls will be adequate to support the Company's operations or that the
Company's management will be able to achieve the rapid execution necessary to
fully exploit any future market opportunity for the Company's software products
and services or successfully manage relationships with its customers,
distribution channels, technology licensors and licensees or other third
parties. The Company's future operating results will also depend on its ability
to expand its sales and marketing organizations, implement and manage new
distribution channels to penetrate different and broader markets and expand its
support organization. If the Company is unable to manage expansion effectively,
the Company's business, results of operations and financial condition will be
materially and adversely affected. There can be no assurance, however, that such
expansion or growth will occur.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations and met its
capital expenditure requirements primarily from proceeds of the Company's
initial public offering of Common Stock and private sales of Preferred Stock,
borrowings under its bank credit facility and cash flow from operations. Net
cash provided by operating activities was $48,000 in fiscal 1994. Net cash used
for operating activities was $23,000 and $4.6 million in fiscal 1995 and fiscal
1996, respectively. The net cash used during these periods was primarily due to
a net loss in fiscal 1996 and increases in accounts receivable and prepaid
expenses and other current assets, which were partially offset by increases in
royalties payable, accrued compensation and related benefits and deferred
revenues. Net cash used in operating activities was $1.2 million for the nine
months ended December 31, 1996. The net cash used during this period was
primarily due to the net loss for the period, as well as a decrease in accounts
payable and increases in accounts receivable and prepaid expenses. This was
partially offset by increases in other accrued liabilities, royalties payable
and deferred revenues.
24
<PAGE> 25
Investing activities used net cash of $83,000, $407,000, $1.0 million in
fiscal 1994, 1995, 1996, respectively, and consisted primarily of the purchase
of property and equipment. For the nine months ended December 31, 1996,
investing activities used net cash of $18.5 million and consisted primarily of
the purchase of short-term investments and, to a lesser extent, the purchase of
property and equipment. Capital expenditures have generally consisted of
computer workstations, networking equipment, office furniture and equipment and
leasehold improvements. The Company had no material firm commitments for capital
expenditures at December 31, 1996, but expects to purchase additional computer
equipment and to enhance its management information systems during the fourth
quarter of fiscal 1997 and throughout fiscal 1998. The Company may utilize a
portion of the net proceeds of this offering for such expenditures. See "Use of
Proceeds."
Financing activities generated cash of $58,000, $1.6 million and $4.7
million in fiscal 1994, 1995 and 1996, respectively, from the issuance of
Preferred Stock, the issuance of Common Stock and from the net proceeds of
long-term debt. For the nine months ended December 31, 1996, financing
activities generated $23.6 million from the issuance of Preferred Stock and
Common Stock, offset in part by repayments of long-term debt. Through December
31, 1996, the Company had raised $9.4 million from the sale of Preferred Stock
and $20.4 million from the sale of Common Stock in the Company's initial public
offering. At December 31, 1996, the Company had $21.9 million in cash, cash
equivalents and short-term investments and working capital of $22.9 million. The
Company has a $3.0 million revolving bank credit facility which expires on
October 30, 1997. Borrowings are secured by substantially all Company assets. At
December 31, 1996, there were no amounts due under the facility.
As of December 31, 1996, the Company's principal commitments consisted of
obligations under operating leases, aggregating $728,000, and the Company had no
material commitments for capital expenditures. The Company had a total of $2.1
million of royalties payable at December 31, 1996, of which $977,000 were
overdue.
The Company's operations to date have required substantial amounts of
capital. The Company expects to spend substantial funds to support the growth of
its products, to add enhancements and additional applications to its products
and to expand internationally. The Company believes that the net proceeds from
this offering, together with its cash balance and credit facilities, will be
sufficient to meet its anticipated cash needs for working capital, capital
expenditures and business expansion for at least the next 12 months. The
estimate of the period for which the Company expects the net proceeds from this
offering together with its available cash balances and credit facilities to be
sufficient to meet its capital requirements is a forward-looking statement that
involves risks and uncertainties as set forth herein and under the caption "Risk
Factors" in the Registration Statement. The Company's capital requirements will
depend on numerous factors, including the progress of the Company's research and
development programs, the commercial acceptance of its products, the resources
the Company devotes to advanced technologies and the demand for its products. To
the extent that funds generated from operations, together with the net proceeds
from this offering, are insufficient, the Company will have to raise additional
funds to meet its capital requirements. If additional funds are raised through
the issuance of equity securities, the percentage ownership of the stockholders
of the Company will be reduced, stockholders may experience additional dilution,
and such equity securities may have rights, preferences or privileges senior to
those of the holders of the Company's Common Stock. No assurance can be given
that additional financing will be available on acceptable terms, if at all. If
adequate funds are not available, the Company may have to, among other things,
reduce substantially or eliminate expenditures for the development and marketing
of its products.
25
<PAGE> 26
BUSINESS
TriTeal Corporation develops, markets and supports open systems-based,
mission-critical desktop system software and integrated applications that enable
multi-platform deployment of client/server applications throughout an
enterprise. TriTeal recently introduced its Java-based SoftNC technology, a
thin-client, platform-independent solution designed to allow simultaneous access
to Java and legacy applications. The Company's flagship product, the TriTeal
Enterprise Desktop ("TED"), allows individual users, system administrators and
developers to easily access applications, data and network resources from a
common, intuitive operating environment across most leading platforms used in
the enterprise client/server market. TED's consistency and interoperability
allow the enterprise greater flexibility in deploying client/server hardware and
in integrating existing legacy applications, thereby enabling increased
operating efficiency and productivity. To further increase functionality in the
operating environment, TriTeal has developed follow-on products that are either
sold separately or bundled with the current release of TED. In addition, TriTeal
is currently developing Java-based SoftNC desktops for network computers, PCs
and workstations. The Company provides customers with a broad range of services,
including needs assessment and analysis, application development, software
integration and training.
INDUSTRY BACKGROUND
In the mid-1980s, the development of powerful and cost-effective servers,
workstations and other client/server technologies increasingly led many large
enterprise organizations to adopt these technologies for deployment of new
mission-critical software applications. Client/server solutions were typically
developed and deployed on disparate, proprietary platforms (hardware, operating
system and desktop software) to solve specific business problems. For example, a
Hewlett-Packard proprietary vendor configuration might include PA/RISC as the
processor, HP/UX as the operating system and HP VUE as the desktop. In contrast,
a Sun Microsystems, Inc. proprietary configuration might include SPARC as the
processor, SunOS as the operating system and OpenLook as the desktop. As a
result, large enterprises typically deployed a variety of hardware platforms,
network architectures and applications that were not compatible, easily
networked or interoperable. The multiplicity of systems within the enterprise
was compounded as advanced new technologies became available that were not fully
compatible with existing systems. For example, the recent introduction of
Microsoft Windows NT and the increased adoption of Internet/intranet
technologies have added to the problem of fragmentation within the enterprise.
According to Sentry Market Research, the average number of operating systems
supported in the client/server enterprise increased from four systems in 1991 to
10 systems in 1995 and a projected 12 systems by the end of 1996.
This fragmentation among computing technologies continues to present the
enterprise with a number of challenges. The cost of maintaining system
administration, training, development and support functions for each platform,
as well as the costs associated with the delivery of applications and data
across disparate platforms, can be substantial. Moreover, because the desktop
and the operating system are generally dependant on a particular hardware
platform, the end user is typically restricted to that platform and cannot
easily access applications or data residing on other platforms in the
enterprise. In addition, with proprietary systems, the enterprise is often
restricted to a limited selection of compatible hardware components. Finally,
the desire to maintain the substantial investments made by the enterprise in
legacy applications for specific platforms, along with the ability to perform
critical day-to-day work activities on those legacy applications, has continued
to compound the fragmentation problem.
Historically, enterprises have developed custom software solutions in order
to achieve interoperability among disparate platforms. These solutions, however,
are costly and labor intensive to develop and implement, and require substantial
technical resources to support each of the various platforms within the
enterprise. Adding a single new application to a custom solution can require
substantial engineering efforts. Moreover, accessing applications running on
different platforms can be extremely complex, increasing the training required
for users and reducing user productivity.
The open systems vendor community has attempted to resolve some of these
fragmentation issues through a series of initiatives, which include CDE, Motif
and DCE (Distributed Computing Environment) technologies and standards. While
these and other initiatives are supported by the hardware vendors, the
26
<PAGE> 27
Company believes that the technologies and standards are typically implemented
in a proprietary manner, which is inconsistent with the fundamental purpose of
these initiatives.
The increasing fragmentation of the enterprise client/server environment,
together with recent advances in computer networking and Internet/intranet
technologies, have fueled the need for a cost-effective, easy-to-use, unified
enterprise operating environment that enables effective deployment of
mission-critical client/server applications on the wide range of platforms and
operating systems commonly used throughout an enterprise. To address this need,
the Company believes that any solution should (i) interoperate among multiple
disparate platforms and operating systems; (ii) provide users with a consistent
look and feel to minimize training and enhance productivity; (iii) offer
sophisticated features and substantial functionality based on open systems
industry standards to facilitate integration with multiple platforms and
operating systems; (iv) provide systems administrators with effective management
tools; (v) provide developers with a single set of application programming
interfaces ("APIs") to create applications; and (vi) enable enterprise customers
to adopt advanced new technologies, including Internet/intranet technologies,
while protecting valuable legacy client/server software and systems.
THE TRITEAL SOLUTION
To address the problem of fragmentation within the enterprise, TriTeal
developed its desktop system software solution, TED, and its recently introduced
SoftNC technology, which provide the following benefits:
- Interoperability. TED provides interoperability among disparate platforms
by allowing applications from various client/server platforms to display and
operate on any client platforms on which TED is supported. For example, an
application that was developed for an IBM platform can, with TED, easily be
accessed by a user on a Sun system. Additionally, a Windows desktop user can
access UNIX applications without leaving the Windows environment. Similarly, the
Company is developing products based on its SoftNC technology that are being
designed to permit interoperability across any platform that includes a JVM.
- Consistency. TED looks, behaves and provides the same capabilities in the
same manner on every platform on which it operates. TED provides the enterprise
with a common set of systems, facilities, resources, commands, application
programming interfaces and a graphical user interface, across disparate
computing platforms. The products the Company is developing based on its SoftNC
technology are being designed to allow the user and the enterprise to adopt
similar look and feel capabilities for Java applications.
- Enterprise Cost Efficiencies. TED's interoperability and consistency
allow the enterprise customer to reduce systems administration and training
costs, to achieve increased operating efficiency and productivity throughout the
enterprise and to leverage existing hardware and software investments. The
products being developed based on the Company's SoftNC technology are being
designed to provide similar cost efficiencies.
- Open Systems Environment. The Company implements open systems standards
in its products. These standards include, among others, CDE, Motif, X11, DCE,
Java, HTML (Hypertext Mark-up Language) and HTTP (Hypertext Transfer Protocol).
By adhering to these standards, TriTeal provides users with access to numerous
standards-based legacy applications.
- Robust Features and Functions. TED provides a number of features and
functions designed to enhance and simplify a multi-platform networked
environment. For example, TED's integrated desktop features include file, style
and help managers, electronic mail and a calendar function. In addition, TED
includes a graphical workspace manager, key binding support, an integrated Web
browser, a fax application and an optional security module. The products being
developed based on the Company's SoftNC technology are being designed to provide
robust features and functions.
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<PAGE> 28
THE TRITEAL STRATEGY
TriTeal's objective is to establish its desktop system software as the de
facto standard operating environment in the enterprise client/server market. To
achieve this objective, the Company has adopted the following core strategies:
Continue to Evolve Client/Server and Internet/intranet-based
Solutions. TriTeal's strategy is to build products that address enterprise
fragmentation issues by providing a homogeneous environment for client/server,
personal productivity and network computer applications. The Company has an
ongoing development program to continue to enhance the TED product and to
develop follow-on products that can be sold into the TED installed base. To
date, TriTeal has developed several follow-on products, which are either sold or
bundled with the current release of TED, including NTED, WINTED, LOCALTED,
TEDSECURE, TEDVISION, TEDFAX and TEDSERVER Early Release. In addition, the
Company is developing Java-based products based on its recently introduced
SoftNC technology, including SoftNC desktops for network computers, PCs and
workstations.
Commitment to Open Systems Technologies and Standards. The Company believes
that open systems are important to enterprise customers that have made
substantial investments in standards-based legacy systems applications. TriTeal
intends to continue to develop and deliver products that adhere to published
specifications and accepted industry standards and to create new products and
technologies that can then be branded as compliant with industry standards. The
Company also plans to continue its active membership with organizations that
determine industry standards, such as the Open Group and World Wide Web
Consortium.
Penetrate Global Markets Vertically. The Company's strategy is to penetrate
vertical markets with a targeted sales force that can respond to the particular
needs of these markets. These markets include, among others, financial services,
government, telecommunications and oil and gas. Where appropriate, the Company
develops specialized product features and functions to address special needs of
vertical markets. These features and functions can then be generalized by
incorporating them into other TriTeal products for sale in other market
segments.
Leveraged Business Model. The Company's strategy is to use indirect channel
organizations, such as OEMs, VARs and system integrators, when appropriate, to
create demand and deliver TriTeal products and services to its customers. The
Company believes that established channel organizations offer the benefits of an
installed base of customers and worldwide sales coverage. In addition, when
appropriate, the Company intends to continue to license from third parties
component technologies as the basis for new product development. TriTeal
believes that this strategy enables it to gain time to market, mitigate risk
associated with new technology development and lower research and development
costs.
Deliver Enterprise-Level Service and Support. The Company's service and
support organization offers a single point of contact to facilitate resolution
of issues across all supported platforms and maintains an engineering and
technical support staff trained in cross-platform issues to provide enterprise
technology solutions and system integrity. The Company believes that this
approach to enterprise support is a key differentiating feature as compared to
other desktop vendors. TriTeal intends to continue its investment in
infrastructure, personnel and systems to provide support to enterprise
organizations worldwide. The Company utilizes knowledge obtained through its
support organization to evolve the Company's products in response to enterprise
needs.
The Company's strategies involve substantial risk. There can be no
assurance that the Company will be successful in implementing its strategies or
that its strategies, even if implemented, will lead to successful achievement of
the Company's objectives. If the Company is unable to implement its strategies
effectively, the Company's business, results of operations and financial
condition would be materially and adversely affected.
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<PAGE> 29
PRODUCTS AND TECHNOLOGIES
TriTeal currently offers the TED family of products, providing open
systems-based, mission-critical desktop system software and integrated
applications that enable multi-platform deployment of client/server applications
throughout an enterprise. The Company recently introduced its Java-based SoftNC
technology, a thin-client, platform-independent solution designed to allow
simultaneous access to Java and legacy applications. The Company also has a
number of products in development, including enhancements to TED and products
based on SoftNC technology.
TED Family of Products
TED provides a common intuitive environment across multiple hardware and
operating systems. To further increase functionality in the operating
environment, TriTeal has developed follow-on products that are either sold
separately or bundled with TED. The following table describes TriTeal's current
products:
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION US LIST PRICE(1)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
TED 4.0 Consistent, easy-to-use interface for accessing - $425 per seat
- Cross-platform CDE applications, data and network services. X/Open- (including
- Integrated browser designated CDE with value-added features documentation)
- Graphical Workspace including key bindings, multi-screen support, - $340 per seat
Manager graphical workspace manager, automatic login and for additional
- Integrated fax session save. Internationalized and localized right-to-use
- Multi-screen support version of TED 4.0 for the Japanese market. Also license
- Support for X Terminals, includes Web browser and client/server fax tool.
PCs and Macs
- -----------------------------------------------------------------------------------------------------------
TED 4.1 Netscape Navigator integration, featuring - $425 per seat
- CDE 1.0.10 Maintenance drag-and-drop capability, customizable options (including
Release and improved navigational tool. documentation)
- GWM 2.0 - $340 per seat for
- Pluggable Authentication additional
Module (PAM) right-
- Mailer Enhancements to-use
- Additional Key Bindings and license
Resources
- TEDscape
- TEDvision 2.1
- NTED 1.0 support
- -----------------------------------------------------------------------------------------------------------
NTED 1.0 Provides remote access to Windows applications Pricing based on
- Easy access to Windows running in native mode on a multi-user Windows NT configuration
applications from TED server from a TED for UNIX client.
- Run Windows applications in
native mode
- Single application and file
management
- Interoperability between
UNIX and Windows NT
- -----------------------------------------------------------------------------------------------------------
LOCALTED Provides local access to TED's window management $150 per seat
features for an X Terminal.
- -----------------------------------------------------------------------------------------------------------
WINTED Provides full access to TED's features for a PC $100 per seat
user.
- -----------------------------------------------------------------------------------------------------------
TEDSECURE 1.0 Provides secure communications and controlled $200 per seat
access to shared files on an open network.
- -----------------------------------------------------------------------------------------------------------
TEDSERVER EARLY RELEASE High performance, multi-platform Web server. $199 per server
Early commercial version available.
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Based on the Company's price list as of December 1996. Actual price depends
on quantity purchased, among other factors.
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<PAGE> 30
TriTeal Enterprise Desktop: TED 4.0. TED 4.0, introduced in August 1995, is
a fully integrated common user environment in which features and applications
work in concert. For example, drag-and-drop functionality is consistent
throughout the desktop, copy and paste works throughout each application, and
window management is consistent. With its rich graphical display of intuitive
icons, customizable workspaces and other user-friendly features, TED makes it
easy for users to access data, applications and network services without having
to use operating system commands. TED has been designated CDE-compliant by
X/Open Co., Ltd. Standard CDE features include a calendar manager, application
manager, file manager, style manager, mail tool, terminal emulator, print tool
and help system, among others. In addition to standard CDE features, TED
includes (i) a graphical workspace manager, which allows the user to easily
control and navigate multiple workspaces, (ii) multiple screen support, which
expands the number of applications and workspaces immediately available and
(iii) key bindings to simplify routine operations.
TED 4.0 integrated applications include TEDFAX and TEDVISION. TEDFAX is a
powerful, easy-to-use, integrated fax software product that enables users to
compose, edit, send, receive and manage inbound and outgoing faxes directly from
their desktops. As with all TED features and applications, TEDFAX implements
drag-and-drop between the desktop, TEDFAX and other CDE clients. TEDVISION
allows the user to access the Web and other Internet/intranet services and
includes standard browser features, such as hot lists and pop-up menus.
Moreover, with TEDVISION, users can browse local and remote file systems, which
eliminates the need to access a separate application, such as a file or
application manager.
The Company has developed a version of TED 4.0 localized for the Japanese
market. In addition, the Company is developing German, French and Spanish
localizations.
TriTeal Enterprise Desktop: TED 4.1. TED 4.1, an upgrade to TED 4.0,
provides users with a number of enhancements, including drag-and-drop
integration between Netscape Navigator and TED, DCE and Kerberos login
authentication and enhancements to the graphical workspace manager.
NTED. NTED provides TED users with easy access to Windows applications
directly from TED using familiar Windows icons. NTED delivers Windows
applications running natively on a Windows NT server to TED users, while
providing applications and file integration as well as interoperability between
the two environments. Users can then cut, copy and paste between Windows and
UNIX. In addition, applications and files from both environments can be
organized and accessed from a single application manager and file manager. NTED
is sold separately as an optional module for TED.
LOCALTED. LOCALTED allows the user to access TED's front panel and window
manager locally on the X Terminal. Because LOCALTED reduces dependence on the
host server and network, overall system performance is improved.
WINTED. WINTED displays the TED front panel on Windows-based platforms,
providing full access to TED's features and interoperability between TED and the
Windows desktop.
TEDSECURE 1.0. TEDSECURE is a data level desktop security product designed
for use by government agencies and contractors. Developed in conjunction with
the National Security Agency ("NSA"), TEDSECURE provides data protection and
digital signature capability that has been approved by the NSA for federal
agencies. TEDSECURE provides cryptographic facilities and digital signatures,
which allow users to send unclassified but sensitive data across an open
network. TEDSECURE, based on technology licensed from SPYRUS, was implemented
utilizing standard United States Government security algorithms ("FORTEZZA").
TEDSECURE is sold separately as an optional module and is fully integrated with
TED.
TEDSERVER Early Release. TEDSERVER is a high performance, multi-platform
Web server, based on a single process, single-thread architecture that provides
performance advantages over multi-process, multi-thread Web server
architectures. This architecture reduces operating system overhead, allowing the
server engine to handle simultaneous Web hits faster and more efficiently than
most other servers. TEDSERVER is sold separately as an optional module for TED.
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<PAGE> 31
TED Products in Development
TriTeal has an ongoing program to develop new TED products and product
enhancements. The products described below are currently in development and are
expected to be commercially released over the next 12 months:
TED 4.2. TED 4.2, an enhanced version of TED, will extend DCE
integration and provide easier installation. TED 4.2 is expected to offer
license keys, a version upgrade script and support for DCE/Kerberos login.
NTED 2.0. NTED 2.0 is being developed as an enhanced version of NTED
1.0 which will make use of the Windows NT registry to make Windows
applications available to all remote users without the need for action by a
system administrator.
TED for Windows. TED for Windows is being designed to provide advanced
desktop management capabilities plus optional remote access to UNIX files
and applications using an on-demand X server remote access to Windows files
and applications using NTED. All desktop applications management is
expected to be local.
Java-Based SoftNC Technology
TriTeal recently introduced its Java-based SoftNC technology, a
thin-client, platform-independent solution designed to allow simultaneous access
to Java and legacy applications. Written entirely in Java, SoftNC technology is
designed to operate on any hardware device that includes a JVM. While most
currently available Java-based alternatives to graphical user interfaces rely on
browsers, SoftNC technology offers a graphical user interface that delivers Java
applications directly from the desktop without the need for a browser. As a
result, users have access not only to hyper-linked data, but also to a broad set
of applications, including legacy, mainframe, UNIX and PC applications. SoftNC's
infrastructure is designed to enable a user logging onto the network from any
device through a URL to access the user's customized desktop. The user can then
access resources throughout the network via a messaging backbone of
communicating Object Request Brokers associated with each system. SoftNC's
agents are designed to provide services such as computation, personal
productivity or system resource management, accessible from anywhere on the
network.
The Company is currently developing the following products based on its
SoftNC technology:
SoftNC Desktop for Network Computers. SoftNC Desktop for Network
Computers is being developed to operate on any hardware device that
includes a JVM. In addition, it is being designed to provide full-featured
desktop functionality, including overlapping windows, menus, drag-and-drop
and full desktop scalability, while offering the benefits associated with
thin-client architecture, including legacy application integration and
centralized administration. Developers will be able to write an application
once and, without re-porting, deploy that application across multiple
platforms.
SoftNC Desktop for PCs and Workstations. TriTeal is developing SoftNC
Desktop for PCs and Workstations to provide enterprise users of PCs and
workstations with the same features and functionality as SoftNC for Network
Computers.
The statements made in this Prospectus regarding scheduled release dates
and anticipated features of the Company's products under development and
proposed enhancements are forward-looking statements, and the actual release
dates and features of such products or enhancements could differ materially from
those projected as a result of a variety of factors, including the ability of
the Company's engineers to solve technical problems and to test products, as
well as business priorities in light of the availability of development and
other resources and other factors, including factors that may be outside the
control of the Company and factors
31
<PAGE> 32
discussed in "Risk Factors." There can be no assurance that the Company will not
experience difficulties that could delay or prevent the successful development,
introduction and marketing of new products, or that new products and product
enhancements will satisfy the requirements of the marketplace or achieve market
acceptance.
To date, substantially all of the Company's revenues have been attributable
to sales of licenses of the TED family of products and related services. The
Company has not introduced for commercial sale any products based on, or
recognized any revenues from licenses of, its SoftNC technology. The Company
currently expects the TED family of products and related services to account for
substantially all of its revenues for the foreseeable future. As a result,
factors adversely affecting the pricing of or demand for TED products, such as
competition or technological change, could have a material adverse effect on the
Company's business, results of operations and financial condition. The Company's
future financial performance will depend, in significant part, on the successful
development, introduction and customer acceptance of new and enhanced versions
of the TED family of products and related services and on the Company's ability
to develop and commercialize products based on the Company's SoftNC technology.
There can be no assurance that the Company will continue to be successful in
developing and marketing the TED family of products and related services, or
that the Company will be successful in developing and marketing products based
on the Company's SoftNC technology.
CUSTOMERS AND MARKETS
The Company's target market consists of Global 1000 enterprise customers
that use multiple client/server platforms for mission-critical applications.
TriTeal has targeted specific vertical markets, including financial services,
government, telecommunications, oil and gas, manufacturing and other industries.
The Company has licensed in excess of 100,000 seats of the TED family of
products (including predecessor products) to date. Representative current
licensees, by industry segment, include:
<TABLE>
<CAPTION>
FINANCIAL MANUFACTURING GOVERNMENT
- --------------------------- -------------------------- -----------------------------------
<S> <C> <C>
Deutsche Bank DynCorp Argonne National Labs
Lehman Brothers Ford Microelectric Defense Information Systems Agency
JP Morgan Lockheed Martin Loral Defense
Merrill Lynch Logicon National Institutes of Health
Morgan Stanley & Co. Motorola National Securities Agency
PaineWebber Incorporated United States Air Force
National Aeronautics and Space
Administration
TELECOMMUNICATIONS TECHNOLOGY OIL AND GAS
- --------------------------- -------------------------- -----------------------------------
AT&T Computer Sciences Corp. Mobil Oil
British Columbia Telephone Hewlett-Packard Norway Shell Oil
Nortel Technology Progress Software Statoil
Southwestern Bell
</TABLE>
Certain of the licensees listed above have purchased the Company's product
on a pilot or initial deployment basis. There can be no assurance that such
licensees, or any of the Company's other licensees, will purchase additional
licenses to the Company's products in the future.
The Company has also licensed certain of its desktop and Internet
technologies through licensing agreements and joint development and marketing
agreements to a number of companies, including AT&T, Hewlett-Packard, IBM,
Network Computing Devices ("NCD"), Novell, SCO, Siemens Nixdorf
Informationssystemse AG ("SNI") and Tektronix, Inc. ("Tektronix"), among others.
A relatively small number of customers (primarily resellers) account for a
significant percentage of the Company's revenues. In fiscal 1995, sales to AT&T,
IBM and British Columbia Telephone accounted for
32
<PAGE> 33
29%, 12% and 11% of revenues, respectively. In fiscal 1996, sales to Logicon and
AT&T accounted for 18% and 12% of revenues, respectively, and sales to the
Company's top four customers accounted for approximately 45% of revenues. During
the nine months ended December 31, 1995, AT&T accounted for 15% of revenues.
During the nine months ended December 31, 1996, two of the Company's resellers,
IBM and Sylvest Management, accounted for 50% and 24% of revenues, respectively.
The Company expects that sales of its products to a limited number of customers
will continue to account for a high percentage of revenue for the foreseeable
future. The Company believes that more than 30% of its revenues during fiscal
1996 and more than 50% of its revenues during the nine months ended December 31,
1996 were derived indirectly through distributors from sales to departments and
agencies of the U.S. Government. The Company believes that the success and
further development of the Company's business will continue to be dependent, in
significant part, upon its ability to continue such indirect sales. A
significant reduction in the federal funds available for agencies and
departments the Company is supplying, either through agency budget cuts by
Congress or the imposition of budgetary constraints, or a determination by the
Government that funding of such agencies and departments should be reduced or
discontinued, would have a material adverse effect on the Company's results of
operations. The future success of the Company will depend on its ability to
obtain orders from new customers and successfully market its products in diverse
industries. The loss of a major customer or any reduction or delay in orders by
such customers, or the failure of the Company to successfully market its
products in existing targeted industry segments or new industry segments, would
have a material adverse effect on the Company's business, results of operations
and financial condition.
All of the Company's business is in the desktop system, client/server and
Internet/intranet application software markets, which are still emerging markets
that are intensely competitive, highly fragmented and subject to rapid change.
The Company's future financial performance will depend in large part on
continued growth in the number of organizations adopting client/server computing
environments, the continued use by these organizations of a variety of
incompatible computing technologies and commercial acceptance of the Company's
products as a desktop system software solution to address these problems of
fragmentation. There can be no assurance that the desktop system software,
client/server or Internet/intranet markets will maintain their current level of
growth, or that they will continue to be heterogeneous or that the Company's
principal product, TED, will be widely adopted. If the desktop system software,
client/server or Internet/intranet markets fail to grow or grow more slowly or
if the enterprise becomes more homogeneous than the Company currently
anticipates, or if the Company's products are not widely adopted, the Company's
business, results of operations and financial condition would be materially and
adversely affected. The Company has spent, and intends to continue to spend,
significant resources educating potential customers about the benefits of its
products. However, there can be no assurance that such expenditures will enable
the Company's products to achieve any additional degree of market acceptance.
Because a large portion of the Company's revenues are currently derived
from enterprises that support UNIX operating systems, a significant decline in
the UNIX operating systems market would have a material adverse effect on the
Company's business, results of operations and financial condition. Similarly,
widespread adoption of other desktop system software and operating environments,
such as Windows NT, Web-based operating environments or other technologies,
could create a more homogeneous environment throughout an enterprise, which
would have a material adverse effect on the Company's business, results of
operations and financial condition.
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<PAGE> 34
MARKETING AND SALES
The Company markets and sells its products in the United States, Europe and
Pacific Rim countries through its direct sales force, OEMs, system integrators,
VARs and its master distributor relationship with Ryoyo Electro Corporation
("Ryoyo"). As of December 31, 1996, the Company employed 41 individuals in its
sales and marketing organization. The Company's direct sales staff is based at
the Company's corporate headquarters in Carlsbad, California, and at field sales
offices in the metropolitan areas of San Diego, Dallas, Boston, New York, Chapel
Hill, Washington, D.C., London and Amsterdam. To support its sales force, the
Company conducts comprehensive marketing programs, which include direct mail,
public relations, advertising, seminars, trade shows and other industry events.
The Company's direct sales force is responsible for creating demand for the
Company's products. Sales leads are generated through direct calls to known
prospects, direct mail, seminars, advertising, telemarketing and requests for
proposals from prospects. The Company's field sales force conducts presentations
and demonstrations of the Company's products to management and users at the
prospect site as part of the Company's direct sales effort. Fully functional
evaluation units are provided to prospects as requested. The Company's field
engineers assist prospects in technical matters pertaining to the evaluation
software. The Company plans to expand its direct sales force. There can be no
assurance that such internal expansion will be successfully completed, that the
cost of such expansion will not exceed the revenues generated or that the
Company's sales and marketing organization will be able to compete successfully
against the significantly more extensive and well-funded sales and marketing
operations of many of the Company's current or potential competitors. The
Company's inability to effectively manage the expansion of its direct sales
force could have a material adverse effect on the Company's business, results of
operations and financial condition.
The licensing of the Company's products by its customers typically involves
a significant technical evaluation and commitment of capital and other
resources, and is often subject to the delays frequently associated with
customers' internal procedures to approve large capital expenditures and to test
and accept new technologies that affect key operations. For these and other
reasons, the sales cycle associated with the licensing of the Company's products
is typically lengthy and subject to a number of significant risks that are
beyond the Company's control. There can be no assurance that the Company will
not experience these and additional future delays in sales of the Company's
products because of the lengthy sales cycle and the large size of many
customers' orders. If revenues forecasted from a specific customer for a
particular quarter are not realized in that quarter, the Company's operating
results for that quarter could be materially and adversely affected.
The Company's strategy is to leverage sales and marketing through its
indirect channel relationships, which include OEMs, VARs and system integrators,
that distribute or resell the Company's products in their respective markets.
The Company has entered into several OEM reseller agreements pursuant to which
the reseller provides either TED or a modified version of TED to its customers.
The Company has established OEM relationships with AT&T, Hummingbird, IBM, NCD,
SCO, Silicon Graphics, Inc., SNI and Tektronix in connection with the TED family
of products. The Company is currently pursuing strategic OEM relationships in
connection with its SoftNC technology. These entities have been engaged to help
create and fulfill demand and support end-user sites. The Company typically
selects channel entities on the basis of their industry expertise, supported
customer base and system integration capabilities. The Company has entered into
agreements with VARs and system integrators in connection with the TED family of
products, including Logicon, Shell Services Corporation, Stornet and Worldwide
Technologies. The Company may, in the future, seek to establish strategic VAR
and system integrator relationships in connection with its SoftNC technology.
Certain of these entities have received advanced training and certification
through the Company to ensure appropriate skills and knowledge with respect to
the Company's products. The Company's sales representatives work with these
channel entities in activities such as educational and sales seminars, local or
regional user conferences and industry trade shows.
There can be no assurance that the Company will be able to continue to
successfully manage its relationships with indirect channel entities or that any
OEM, VAR or system integrator will continue to market or to purchase the TED
family of products or that the Company will be successful in establishing
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<PAGE> 35
strategic relationships in connection with its SoftNC technology or products.
The failure by the Company to maintain these relationships or the failure to
establish new relationships in the future could have a material adverse effect
on the Company's business, results of operations and financial condition. There
can be no assurance that these events will not occur in the future. To the
extent that average selling prices through indirect channel relationships
decline relative to the Company's direct sales in the future, the Company's
average selling prices and gross margins may be materially and adversely
affected.
The Company currently maintains the European headquarters of its European
subsidiary, TriTeal B.V., in The Netherlands. The Company also has a satellite
office in the United Kingdom. These offices are responsible for generating and
fulfilling customer demand and supporting indirect channel activities. In
addition, the Company's marketing department supports European activities from
the Company's headquarters in Carlsbad, California. The Company intends to
continue to expand its direct and indirect sales and marketing activities
worldwide, which will require significant management and financial resources.
The Company has committed and intends to continue to commit significant time and
financial resources to developing international sales and support channels.
Total export sales for the years ended March 31, 1995 and 1996 and for the nine
months ended December 31, 1995 and 1996 were approximately $50,000, $1.3
million, $575,000 and $358,000, respectively. See Note 6 of Notes to
Consolidated Financial Statements. To the extent that the Company is unable to
expand its international sales organization in a timely manner, the Company's
growth, if any, in international sales will be limited, and the Company's
business, results of operations and financial condition could be materially and
adversely affected.
The Company has a Master Distribution Agreement with Ryoyo under which
Ryoyo distributes the localized version of TED throughout Japan and functions as
the Company's sole representative for Japan. The Company has an agreement with
Pacific Advantage, Ltd. under which Pacific Advantage, Ltd. will serve as the
Company's manufacturer's representative to service the markets of the Pacific
Rim outside of Japan.
There can be no assurance that the Company will be able to maintain or
increase international market demand for its products. Risks inherent in the
Company's international business activities generally include currency
fluctuations, unexpected changes in regulatory requirements, tariffs and other
trade barriers, costs of and the Company's limited experience in localizing
products for foreign countries, lack of acceptance of localized products in
foreign countries, longer accounts receivable payment cycles, difficulties in
managing international operations, potentially weaker protection for
intellectual property in certain foreign countries, potentially adverse tax
consequences including restrictions on the repatriation of earnings, and the
burdens of complying with a wide variety of foreign laws and practices. To date,
substantially all of the Company's international revenues have been denominated
in U.S. dollars. Although exposure to currency fluctuations to date has been
insignificant, there can be no assurance that fluctuations in future currency
exchange rates will not have a material adverse effect on revenues from
international sales and thus the Company's business, results of operations and
financial condition. There can be no assurance that such factors will not have a
material adverse effect on the Company's future international operations and,
consequently, the Company's business, results of operations and financial
condition.
SERVICES AND SUPPORT
The Company has established a services and support organization to provide
enterprise technology solutions and system integrity. The Company assigns a
support representative to each of its customers as a point of contact for
resolving issues. TriTeal's engineering and customer support representatives are
trained in cross-platform issues in order to diagnose and solve technical
problems related not only to the Company's products, but also to the software
and hardware technologies with which the Company's products interact. The
Company believes that its single contact system for enterprise support is a key
differentiating feature as compared to other vendors.
TriTeal's support structure involves phone support and channel support
through the Company's engineering and field organizations. The Company's
services and support organization offers support both domestically and
internationally. This support is purchased separately from the product. The
Company tracks all support requests through a customer database that maintains
current status reports as well as historical logs
35
<PAGE> 36
of customer interactions. When appropriate, these support representatives
provide the customer with direct access to the Company's development engineers.
In addition, the Company maintains a technical support area on its Web site
which contains enhancements and corrections to software defects that may be
accessed through a file transfer protocol, thereby enabling TED users to install
that code on their platforms automatically, using TED's drag and drop
functionality. In addition, the Company offers pre- and post-sales support from
its field systems engineers, who are based in all of the Company's sites
worldwide. For those enterprise customers that require custom features, the
Company can deploy its engineering resources to assist the customer on its
development efforts.
The Company has created the UniTED Partners Program, which trains selected
resellers in providing enterprise support. UniTED Partners are awarded TriTeal
Certification after five days of support training for field engineers. The
Company recommends certified UniTED Partners to its enterprise customers to
address their training needs at three levels: end-user, developer and system
administration.
RESEARCH AND DEVELOPMENT
As of December 31, 1996, the Company employed 34 persons in its research
and development organization. The Company believes that its future success
depends in large part upon its ability to continue to enhance its existing
products and to develop new products that maintain cross-platform technological
competitiveness. The Company relies on extensive input concerning product
development from the Company's customers communicated through the Company's
sales and marketing organizations, as well as market research data. TriTeal's
research and development efforts are directed at increasing product
functionality, improving product performance, expanding the capabilities of its
products to interoperate with other acquired technologies and developing new
products.
The Company's research and development organization consists of three
groups: engineering, quality assurance and advanced research. These groups are
dedicated to maintaining the Company's core products, engineering corrections to
system defects, implementing performance enhancements and building complementary
desktop services and applications. The Company also encourages application
integration by assisting other software companies or MIS organizations in the
integration process. The Company seeks to support open systems standard
software, while providing additional features and functionality that complement
and enhance standardized software.
Each of the client/server, desktop system software and Internet/intranet
markets is characterized by rapid technological advances, evolving industry
standards, changes in consumer expectations, and frequent new product
introductions and enhancements. The introduction of products embodying new
technologies and the emergence of new industry standards could render the
Company's existing products as well as products currently under development
obsolete and unmarketable. Accordingly, the life cycles of the Company's
products are difficult to estimate. The Company's future success will depend
upon its ability to enhance its current products and to develop and introduce
new products that keep pace with technological developments, respond to evolving
consumer requirements and achieve market acceptance. The Company's future
success will also depend in part upon its ability to maintain and enhance its
technology relationships in order to provide customers with integrated product
solutions. The Company's ability to develop and introduce new products and
enhancements on a timely basis may be adversely affected by a number of factors,
including the ability of the Company's engineers to solve technical problems and
to test products as well as business priorities in light of the availability of
development and other resources and other factors, including factors that may be
outside the control of the Company and factors discussed in "Risk Factors." If
the Company is unable to develop on a timely basis new software products or
enhancements to existing products, if such new products or enhancements do not
achieve market acceptance, or if the Company is unable to maintain its
technology relationships, the Company's business, results of operations and
financial condition will be materially and adversely affected.
The Company's current products are designed to adhere to certain open
systems standards, and current and future sales of the Company's products will
be dependent, in part, on market acceptance of such standards. Emergence of new
industry standards could require the Company to modify its products to adhere to
such standards. There can be no assurance that the Company would be successful
in incorporating new
36
<PAGE> 37
standards effectively or on a timely basis or that any resulting products would
achieve commercial acceptance. Failure by the Company to effectively incorporate
into its products new industry standards that are widely adopted in the markets
served by the Company would have a material adverse effect on the Company's
business, results of operations and financial condition.
COMPETITION
The market in which the Company competes is characterized by rapidly
changing technology and evolving standards. The Company's competitors and
potential competitors, which include Microsoft Corporation, Netscape and the
original CDE developers (Hewlett-Packard, IBM, Novell and Sunsoft, a subsidiary
of Sun Microsystems, Inc.), have or may have a more established and larger
marketing and sales organization, significantly greater financial and technical
resources and a larger installed base of customers, as well as greater name
recognition than the Company. Accordingly, such competitors or potential
competitors may be able to respond more quickly to new or emerging technologies
and changes in customer requirements or devote greater resources to the
development, promotion and sales of their products than the Company. The Company
also expects that competition will increase as a result of software industry
consolidation. In addition, current and potential competitors have established
or may establish cooperative relationships among themselves or with third
parties to increase the ability of their products to address the needs of
enterprise customers in the Company's markets. Accordingly, it is possible that
new competitors or alliances among competitors may emerge and rapidly acquire
significant market share. Increased competition may result in price reductions,
reduced gross margins and loss of market share, any of which could have a
material adverse effect on the Company's business, results of operations and
financial condition. There can be no assurance that the Company will be able to
compete successfully against current and future competitors, or that competitive
factors faced by the Company will not have a material adverse effect on the
Company's business, results of operations and financial condition.
The Company's products are based in part on a non-exclusive license of the
CDE industry standard. Each of the original CDE developers has developed or is
developing unique implementations of CDE specific to its own UNIX platforms.
Because CDE was developed as an open systems industry standard, any of the
original CDE developers, or their assignees, other competitors or third-party
licensees, may develop similar products or sell competing products in the
Company's markets. In addition, the Company has developed its TED product based
in part on a non-exclusive license of the CDE technology from Hewlett-Packard.
Under the terms of the Company's license agreement with Hewlett-Packard, all
modifications to the CDE developed by the Company are owned by the Company and
are licensed back to Hewlett-Packard on a non-exclusive basis. There can be no
assurance that one or more of these competitors and potential competitors will
not develop or market products that would directly compete with the Company's
products or license a third party to do so.
The Company believes that the principal competitive factors affecting its
market include adherence to open systems standards, product features and
functionality, ability to integrate with third-party products, ease of use,
quality, performance, price, customer service and support, effectiveness of
sales and marketing efforts and company reputation. Although the Company
believes that it currently competes favorably with respect to such factors,
there can be no assurance that the Company can maintain its competitive position
against current and potential customers, especially those with greater
financial, marketing, service, support, technical and other resources than the
Company.
LICENSE AGREEMENTS AND INTELLECTUAL PROPERTY
The Company relies on certain technology which it licenses from third
parties, including software which is integrated with internally developed
software and used in the Company's products to perform key functions. There can
be no assurance that these third-party technology licenses will continue to be
available to the Company on commercially reasonable terms, if at all. The loss
of or inability to maintain any of these technology licenses could result in
delays or reductions in product shipments until equivalent technology, if any,
could be identified, licensed and integrated. Any such delays or reductions in
product shipments could materially and adversely affect the Company's business,
result of operations and financial condition.
37
<PAGE> 38
The Company's principal product, TED, is based in part on X11, Motif and
CDE standards specified and administered by X/Open Company, Ltd. Certain of the
Company's third-party technology licensing agreements for implementation of
these standards are summarized below:
The Company has developed its TED product based in part on a non-exclusive
license of CDE technology from Hewlett-Packard. Under the terms of the license
agreement with Hewlett-Packard, all modifications to CDE developed by the
Company are owned by the Company, and the Company granted to Hewlett-Packard a
paid-up, non-exclusive, worldwide license to use, reproduce, distribute and
prepare derivative works of such modifications in both source code and object
code form. The Hewlett-Packard license agreement terminates in July 1997,
subject to unlimited one-year extensions at the Company's option. The
Hewlett-Packard license agreement is also terminable on breach, bankruptcy or
cessation of business by either party. In addition, if an infringement action is
brought against Hewlett-Packard relating to the CDE technology licensed by
Hewlett-Packard to TriTeal and Hewlett-Packard is not able to procure for
TriTeal the use of CDE, replace CDE with a non-infringing product or modify CDE
to be non-infringing, then Hewlett-Packard may terminate TriTeal's rights to its
CDE to the extent necessary to avoid infringement. In the event the
Hewlett-Packard license agreement is terminated, the Company believes that it
could successfully license comparable CDE technology from another source.
In May 1996, the Company entered into a software license agreement with
SCO, pursuant to which the Company granted to SCO a non-exclusive, royalty-free
license to certain TriTeal desktop technology in exchange for the grant to the
Company of a non-exclusive, royalty-free license to CDE, effective if SCO
obtains the right to sublicense CDE. The SCO license agreement terminates in May
1999, subject to one-year extensions upon mutual agreement of the parties.
Pursuant to a license agreement with OSF, the Company has licensed Motif
applications from OSF on a non-exclusive basis. The OSF license agreement is
terminable by OSF in the event of default by the Company in its payment
obligations or upon the Company's bankruptcy.
In May 1995, TriTeal entered into a software license agreement with SPYRUS,
pursuant to which SPYRUS granted to the Company a worldwide, non-exclusive,
royalty-bearing license for SPYRUS' network security technology, which is the
basis for the Company's TEDSECURE product. The SPYRUS license agreement
terminates in May 2000, but may be extended for one-year terms at the Company's
option, subject to the written consent of SPYRUS.
Pursuant to an OEM source license agreement between the Company and
Spyglass, the Company licensed certain Internet/intranet component technologies
from Spyglass, on a non-exclusive, royalty-bearing basis. The Spyglass license
agreement terminates in September 1998, subject to one-year extensions at the
Company's option. The Company has incorporated this technology from Spyglass
into TEDSERVER and TEDVISION products.
While it may be necessary or desirable in the future to obtain other
licenses relating to one or more of the Company's products or to current or
future technologies, there can be no assurance that the Company will be able to
do so on commercially reasonable terms, if at all.
The Company's success and ability to compete is dependent in part upon its
proprietary technology. While the Company relies on trademark, trade secret,
copyright law confidentiality procedures and contracts as provisions to protect
its technology, the Company believes that factors such as the technological and
creative skills of its personnel, new product developments, frequent product
enhancements, name recognition and reliable product maintenance are more
essential to establishing and maintaining a technology leadership position. The
Company presently has no patents and has three patent applications pending.
There can be no assurance that any patents will issue from such applications or
that others will not develop technologies that are similar or superior to the
Company's technology. The Company believes the source code for the Company's
proprietary software is protected both as a trade secret and copyright work.
However, effective trademark, copyright and trade secret protection may not be
available in every foreign country in which the Company's products are
distributed. The Company's policy is to enter into confidentiality agreements
with its employees, consultants and vendors, and the Company generally controls
access to, and distribution of, its
38
<PAGE> 39
software, documentation and other proprietary information. Despite these
precautions, it may be possible for a third party to copy or otherwise obtain
and use the Company's products or technology without authorization. There can be
no assurance that the steps taken by the Company to protect its proprietary
technology will be adequate to prevent misappropriation of its technology by
third parties, or that third parties will not be able to develop similar
technology independently.
The Company may receive notices from third parties claiming that the
Company's products infringe third party proprietary rights. The Company expects
that, as the number of software products in the industry increases and the
functionality of these products further overlaps, software products will
increasingly be subject to such claims. Any such claim, with or without merit,
could result in costly litigation and require the Company to enter into royalty
or licensing arrangements. Such royalty or licensing arrangements, if required,
may not be available on terms acceptable to the Company, if at all.
Consequently, any such litigation could have a material adverse effect on the
Company's business, results of operations and financial condition.
EMPLOYEES
As of December 31, 1996, the Company had 106 full-time employees, including
41 in sales and marketing, 44 in product development and support services and 21
in finance and administration. The Company's employees are not represented by
any collective bargaining organization, and the Company has never experienced a
work stoppage. The Company believes that its relations with its employees are
good. The loss of certain key employees or the Company's inability to attract
and retain other qualified employees could have a material adverse effect on the
Company's business and operations.
FACILITIES
The Company leases approximately 19,000 square feet of office space for its
corporate headquarters in Carlsbad, California, under operating leases expiring
at various dates through 1999. The Company also occupies approximately 8,500
square feet of office space under lease and rental agreements in various
locations across the United States in support of its regional activities and
approximately 2,600 square feet of office space in The Netherlands. The Company
believes that its current facilities are adequate for the foreseeable future and
that suitable additional or alternative space will be available in the future on
commercially reasonable terms as needed.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
39
<PAGE> 40
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information as of January 31, 1997,
regarding the directors and executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
--------------------------------------- ---- ---------------------------------------
<S> <C> <C>
Jeffrey D. Witous...................... 35 President, Chief Executive Officer and
Chairman of the Board
Arthur S. Budman....................... 35 Chief Financial Officer and Director
Victoria Z. Farrell.................... 45 Vice President, Marketing
Ronald B. Hegli........................ 36 Vice President, Engineering
Robert D. Ruhe......................... 39 Executive Vice President, Worldwide
Field Operations
Rand R. Schulman....................... 44 Executive Vice President
Garrett L. Thomas...................... 52 Vice President, Corporate General
Counsel
Oran M. Thomas......................... 34 Chief Technology Officer
Armando E. Viteri...................... 37 Vice President, Corporate Development
Gregory J. White....................... 38 Chief Operating Officer and Secretary
Dr. Terry A. Straeter(1)............... 53 Director
Gary A. Wetsel(1)...................... 51 Director
</TABLE>
- ---------------
(1) Members of the Audit Committee and Compensation Committee
JEFFREY D. WITOUS co-founded the Company and has served as Chief Executive
Officer since April 1995, Chairman of the Board since March 1994 and President
since June 1996. From March 1994 to April 1995, Mr. Witous served as Executive
Vice President of Business Development. Prior to joining the Company, Mr. Witous
served as National Business Development Manager for Sun Microsystems Computer
Corporation ("SMCC"), a subsidiary of Sun Microsystems, Inc. ("Sun"), a computer
hardware, software and services company, from April 1991 to January 1994.
ARTHUR S. BUDMAN joined the Company in November 1994, was appointed Chief
Financial Officer in February 1995 and was elected to the Board of Directors in
January 1996. From January 1985 to November 1994, he was employed by Ernst &
Young LLP, a public accounting firm, serving most recently as Senior Manager.
Mr. Budman is co-founder of the San Diego Software Industry Council, a trade
association for software companies. Mr. Budman is a Certified Public Accountant.
VICTORIA Z. FARRELL has served as Vice President, Marketing since March
1996. From November 1995 to March 1996, she was Director of Marketing for the
Company. From May 1995 to November 1995, Ms. Farrell served as Director of
Database Services at Migration Software Systems, Ltd., an engineering consulting
company. From June 1976 to May 1995, she held numerous positions at Digital
Equipment Corporation, a computer manufacturer, serving most recently as
Marketing Manager of the UNIX Systems Group.
RONALD B. HEGLI has served as Vice President of Engineering since December
1996. From March 1994 to December 1996, Mr. Hegli held various engineering
positions, including Manager of Development and Director of Engineering. From
May 1988 to March 1994, Mr. Hegli was a Senior Engineer at Digital Equipment
Corporation, where he was the lead engineer for desktop environments, including
the initial port of the CDE to the Alpha platform. From August 1983 to May 1988,
Mr. Hegli was a senior engineer at General Electric Company, developing computer
systems for nuclear power plant monitoring.
ROBERT D. RUHE has served as Executive Vice President, Worldwide Field
Operations since September 1996. Mr. Ruhe served as Vice President of Federal
Business from May 1995 to September 1996. From
40
<PAGE> 41
July 1992 to May 1995, he served as Manager of National Civilian Federal Sales
for Sun Microsystems Federal Inc. From February 1981 to July 1992, he was
employed by Digital Equipment Corporation, a computer manufacturer, where he
served most recently as Strategic Federal Account Manager.
RAND R. SCHULMAN has served as Executive Vice President since February
1996. From July 1994 to February 1996, he was Vice President of Marketing for
the Company. From January 1992 to June 1994, Mr. Schulman served as Vice
President of Sales and Marketing at Pages Software, a computer software company.
Mr. Schulman was employed in various capacities from December 1983 to January
1992 by Island Graphics/Dainippon Screen Mfg. Co., a computer software company,
serving most recently as General Manager and Senior Vice President.
GARRETT L. THOMAS joined the Company in January 1997 as Vice President,
Corporate General Counsel. For the past 13 years, he has held various legal
positions with Sun, most recently as General Counsel of Sun's government
operation. Prior to joining Sun, Mr. Thomas held various legal positions at
software and telecommunications companies.
ORAN M. THOMAS co-founded the Company and has served as Chief Technical
Officer since April 1995. From January 1993 to November 1993, Mr. Thomas served
as President and Secretary of the Company. From January 1993 to February 1995,
he served as the Company's Chief Financial Officer. Mr. Thomas served as a
director of the Company from January 1993 to January 1996. From January 1988 to
September 1993, he served as Senior Software Engineer at Science Applications
International Corporation, a software company, where he managed the
multi-platform, commercial systems software development group.
ARMANDO E. VITERI has served as Vice President, Corporate Development,
since September 1996. From November 1994 to September 1996, he served as Vice
President, Worldwide Sales, for the Company. From October 1983 to November 1994,
Mr. Viteri was employed with SMCC, serving in a variety of sales, engineering
and marketing management positions, most recently as Director of Eastern
Operations.
GREGORY J. WHITE co-founded the Company, has served as Chief Operating
Officer since April 1995 and as Secretary since November 1993. From November
1993 to March 1994 and from April 1995 to June 1996, he served as President of
the Company. From March 1994 to January 1995, Mr. White served as Chief
Executive Officer for the Company. From July 1990 to September 1993, he held the
position of Sales Executive for SMCC.
DR. TERRY A. STRAETER has served as a director of the Company since
February 1996. Since November 1992, Dr. Straeter has served as President, Chief
Executive Officer and a director of GDE Systems, Inc., a manufacturer of defense
electronic systems, which was acquired by Tracor, Inc. in November 1994. Since
November 1994, he has also served as Corporate Vice President of GDE Systems'
parent company, Tracor, Inc., an electronics and aerospace manufacturer. From
1991 to 1992, Dr. Straeter served as Corporate Vice President and General
Manager for General Dynamics Corporation, Electronics Division, a manufacturer
of defense electronic systems.
GARY A. WETSEL has served as a director of the Company since February 1996.
Mr. Wetsel has served as Executive Vice President and Chief Operating Officer
for Wyse Technology, Inc., a computer hardware manufacturer, since November
1996. He served as Chief Executive Officer and Director of Borland International
Inc. ("Borland"), a software company, from December 1995 until July 1996 and as
President and director from January 1995 until July 1996. From November 1994 to
January 1995, Mr. Wetsel served as Senior Vice President and Chief Financial
Officer of Borland. From 1990 to 1994, Mr. Wetsel served as Executive Vice
President and Chief Financial Officer of Octel Communications Corporation, a
telecommunications company.
Each officer serves at the discretion of the Board of Directors. The
Company's Bylaws permit the Board of Directors to establish by resolution the
authorized number of directors, and the Company currently has four directors
authorized. There are no family relationships among any of the directors or
officers of the Company.
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<PAGE> 42
BOARD COMPOSITION
The Company currently has authorized four directors. In accordance with the
Company's Certificate of Incorporation, the Board of Directors is divided into
three classes with staggered three-year terms. Class I consists of Mr. Budman,
Class II consists of Mr. Witous and Class III consists of Dr. Straeter and Mr.
Wetsel. At each annual meeting of stockholders, the successors to directors
whose term then expires will be elected to serve from the time of election and
qualification until the third annual meeting following election. Any additional
directorships resulting from an increase in the number of directors will be
distributed among the three classes so that, as nearly as possible, each class
will consist of one-third of the directors. This classification of the Board of
Directors may have the effect of delaying or preventing changes in control or
management of the Company.
BOARD COMMITTEES
The Audit Committee of the Board of Directors, composed of Dr. Straeter and
Mr. Wetsel, was formed in June 1996 to review the internal accounting procedures
of the Company and consult with and review the services provided by the
Company's independent auditors. The Compensation Committee of the Board of
Directors, composed of Dr. Straeter and Mr. Wetsel, was formed in June 1996 to
review and recommend to the Board the compensation and benefits of all officers
of the Company and review general policy relating to compensation and benefits
of employees of the Company. The Compensation Committee will also administer the
issuance of stock options and other awards under the Company's 1995 Stock Option
Plan.
DIRECTOR COMPENSATION
Directors currently do not receive any cash compensation from the Company
for their service as members of the Board of Directors, although they are
reimbursed for certain expenses in connection with attendance at Board and
Committee meetings.
In February 1996, the Company granted nonstatutory stock options to each of
Dr. Straeter and Mr. Wetsel, outside directors of the Company, to purchase
50,000 shares of the Company's Common Stock at an exercise price of $3.50 per
share (the then fair market value per share of the Company's Common Stock as
determined in good faith by the Company's Board of Directors). Such options vest
monthly over 48 months.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Until June 1996, the Company did not have a Compensation Committee of the
Board of Directors, and the entire Board participated in all compensation
decisions. In June 1996, the Board of Directors appointed the Compensation
Committee. No member of the Compensation Committee was, at any time during the
fiscal year ended March 31, 1996, or at any other time, an officer or employee
of the Company. Each of the Company's directors, other than Mr. Wetsel, has
acquired shares of the Company's Common Stock. See "Certain Transactions" and
"Principal and Selling Stockholders."
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<PAGE> 43
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation awarded or paid to or
earned by the Company's Chief Executive Officer and the four other most highly
compensated executive officers whose salary and bonus were in excess of $100,000
for services rendered to the Company during the fiscal year ended March 31, 1996
(collectively, the "Named Executive Officers"):
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
-------------
AWARDS (2)
-------------
ANNUAL COMPENSATION (1) SECURITIES
------------------------ UNDERLYING
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS(#)
- ----------------------------------------------------- --------- -------- -------------
<S> <C> <C> <C>
Jeffrey D. Witous.................................... $ 120,000 $60,314 --
President, Chief Executive Officer
and Chairman of the Board
Rand R. Schulman..................................... $ 110,000 $42,566 8,000
Executive Vice President
Oran M. Thomas....................................... $ 120,000 $61,514 --
Chief Technology Officer
Armando Viteri....................................... $ 110,000 $51,933 7,000
Vice President, Corporate Development
Gregory J. White..................................... $ 120,000 $61,514 --
Chief Operating Officer and Secretary
</TABLE>
- ---------------
(1) In accordance with the rules of the Securities and Exchange Commission (the
"Commission"), the compensation described in this table does not include
medical, group life insurance or other benefits received by the Named
Executive Officers which are available generally to all salaried employees
of the Company, and certain perquisites and other personal benefits received
by the Named Executive Officers which do not exceed the lesser of $50,000 or
10% of any such officer's salary and bonus disclosed in this table.
(2) At the end of fiscal 1996, the aggregate restricted stock holdings of the
Named Executive Officers and the value thereof at the year-end, based on the
initial public offering price of $8.00 per share, without giving effect to
the diminution of value attributable to the restrictions on such stock, were
as follows: Mr. Witous $155,000 (20,000 shares); Mr. Schulman $1,356,250
(175,000 shares); and Armando Viteri $1,038,500 (134,000 shares). The
preceding amounts include shares purchased as restricted stock in July 1995
that remain subject to restriction as follows: Mr. Witous no shares; Mr.
Schulman 116,667 shares; and Mr. Viteri 89,333 shares. Dividends on these
shares of restricted stock will be paid when, as and if declared on the
Company's Common Stock by the Company's Board of Directors. To date, the
Company has not paid any dividends and does not anticipate paying any
dividends on its Common Stock in the foreseeable future.
43
<PAGE> 44
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth, for the fiscal year ended March 31, 1996,
certain information regarding options granted to each of the Named Executive
Officers:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL
-------------------------------------------------------- REALIZABLE
PERCENTAGE VALUE AT ASSUMED
NUMBER OF OF TOTAL ANNUAL RATES OF
SECURITIES OPTIONS STOCK PRICE
UNDERLYING GRANTED TO APPRECIATION FOR
OPTIONS EMPLOYEES IN EXERCISE OPTION TERMS(4)($)
GRANTED FISCAL PRICE EXPIRATION -------------------
NAME (#)(1) YEAR(2) ($/SH)(3) DATE 5% 10%
- --------------------------- ---------- ------------ ---------------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Jeffrey D. Witous.......... -- -- -- -- -- --
Rand R. Schulman........... 8,000 1% $ 2.50 12/30/05 $12,578 $31,875
Oran M. Thomas............. -- -- -- -- -- --
Armando Viteri............. 7,000 1% $ 2.50 12/30/05 $11,006 $27,890
Gregory J. White........... -- -- -- -- -- --
</TABLE>
- ---------------
(1) Options have a maximum term of 10 years measured from the date of grant,
subject to earlier termination upon the optionee's cessation of service with
the Company. These options vest 25% on the first anniversary of the date of
grant and vest ratably on a monthly basis over a three-year period after the
first anniversary of the date of grant.
(2) Based on options to purchase 731,550 shares granted to employees in fiscal
1996, including the Named Executive Officers.
(3) The exercise price is equal to 100% of the fair market value of the Common
Stock on the date of grant, as determined by the Board of Directors.
(4) The potential realizable value is calculated based on the term of the option
at its time of grant (10 years). It is calculated assuming that the stock
price on the date of grant appreciates at the indicated annual rate,
compounded annually for the entire term of the option and that the option is
exercised and sold on the last day of its term for the appreciated stock
price. These amounts represent certain assumed rates of appreciation only,
in accordance with the rules of the Commission, and do not reflect the
Company's estimate or projection of future stock price performance. Actual
gains, if any, are dependent on the actual future performance of the
Company's Common Stock and no gain to the optionee is possible unless the
stock price increases over the option term, which will benefit all
stockholders.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth, with respect to each of the Named Executive
Officers, information regarding the number and value of securities underlying
unexercised options held by the Named Executive Officers as of March 31, 1996:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-
OPTIONS AT MONEY OPTIONS AT
FISCAL YEAR END (#) FISCAL YEAR END ($)(1)
----------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Jeffrey D. Witous........................ -- -- -- --
Rand R. Schulman......................... -- 8,000 -- $ 44,000
Oran M. Thomas........................... -- -- -- --
Armando Viteri........................... -- 7,000 -- $ 38,500
Gregory J. White......................... -- -- -- --
</TABLE>
- ---------------
(1) Based on the initial public offering price of $8.00 per share of Common
Stock, in accordance with the rules of the Commission. Amounts reflected are
based on the assumed value minus the exercise price, multiplied by the
number of shares underlying the option.
44
<PAGE> 45
1995 STOCK OPTION PLAN
The Company's 1995 Stock Option Plan (the "1995 Plan"), covering an
aggregate of 1,350,000 shares of Common Stock, was adopted by the Company's
Board of Directors in May 1995.
The 1995 Plan is administered by the Board unless the Board delegates
authority to a committee of disinterested directors. The Board has the authority
to select the persons to whom rights under the 1995 Plan will be granted (a
"Stock Award"), to determine whether a Stock Award will be an incentive stock
option (within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code")), a nonqualified stock option, a stock bonus, a right to
purchase restricted stock, or a combination of the foregoing, to specify the
type of consideration, if any, to be paid to the Company upon exercise of a
Stock Award and to determine the time or times when a person will be permitted
to purchase or receive stock pursuant to a Stock Award. Subject to certain
limitations, incentive stock options may be granted only to employees of the
Company, while Stock Awards other than incentive stock options may be granted to
employees and directors of and consultants to the Company.
The maximum term of incentive and nonqualified stock options is 10 years.
The exercise price of incentive stock options must equal at least 100% of the
fair market value of the Common Stock on the date of grant. The exercise price
of nonqualified stock options must equal at least 85% of the fair market value
of the Common Stock on the date of grant. The exercise price of incentive stock
options granted to any person holding more than 10% of the total combined voting
power of all classes of stock of the Company must equal at least 110% of fair
market value of the Common Stock of the Company as of the date of grant and the
term of such option cannot exceed five years. The aggregate fair market value of
the stock with respect to which incentive stock options are first exercisable in
any calendar year may not exceed $100,000. Incentive stock options granted under
the 1995 Plan are non-transferable; other stock awards may be transferred
pursuant to the terms of the applicable Stock Award agreement. Stock options
generally expire 30 days after the termination of an optionee's employment or
other service relationship with the Company. In general, if an optionee dies
while in a service relationship with the Company, such person's option may be
exercised up to 18 months after his death. In general, if an optionee is
disabled while in a service relationship with the Company, such person's option
may be exercised up to six months following his disablement.
The purchase price of Common Stock under a stock purchase agreement as well
as the form of consideration to be paid to the Company upon exercise may be
determined by the Board. The Board has the authority to award stock pursuant to
a stock bonus in consideration of past services actually rendered to the
Company. Rights under a stock bonus or restricted stock purchase agreement
generally are not assignable and the Common Stock sold or awarded pursuant to a
stock bonus or stock purchase agreement may be subject to a repurchase option in
favor of the Company.
A total of 1,350,000 shares of Common Stock has been authorized for
issuance, under the 1995 Plan. As of December 31, 1996, the Company had
outstanding options to purchase an aggregate of 758,428 shares at exercise
prices ranging from $0.25 to $20.50 per share pursuant to the 1995 Plan
(including shares held by optionees that have elected to exercise such options
and sell the shares to be received upon such exercise in this offering). As of
December 31, 1996, no shares had been issued as a bonus or restricted stock
under the 1995 Plan.
STOCK OPTIONS GRANTED OUTSIDE OF THE 1995 PLAN
The Company has from time to time granted nonstatutory options to purchase
shares of Common Stock outside of the 1995 Plan ("Non-Plan Options") to certain
directors, officers, employees of and consultants to the Company. As of December
31, 1996, Non-Plan Options were outstanding to purchase an aggregate of 883,684
shares of Common Stock (including shares held by optionees that have elected to
exercise such options and sell the shares to be received upon such exercise in
this offering) at a weighted average exercise price of $0.53 per share, and no
Non-Plan Options had been exercised. Generally, Non-Plan Options vest at the
rate of one-third of the shares subject to the Option at the end of each year
over a three-year period.
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<PAGE> 46
Non-Plan Options typically have a term of three years, except that Non-Plan
Options generally expire 30 days after the termination of an optionee's
employment or other service relationship with the Company. In general, if an
optionee dies while in an employment or service relationship with the Company,
that person's option may be exercised up to six months after his death. For
information with respect to Non-Plan Options granted to non-employee directors,
see "-- Director Compensation."
EMPLOYEE STOCK PURCHASE PLAN
On June 11, 1996, the Board adopted, and the stockholders subsequently
approved, the Employee Stock Purchase Plan (the "Purchase Plan") covering an
aggregate of 250,000 shares of Common Stock. The Purchase Plan is intended to
qualify as an employee stock purchase plan within the meaning of Section 423 of
the Code. Under the Purchase Plan, the Board may authorize participation by
eligible employees, including officers, in periodic offerings of up to 27 months
in length. The Purchase Plan provides that the Board shall specify certain terms
and conditions that will apply to each such offering within the parameters set
forth in the Purchase Plan. The initial offering under the Purchase Plan
commenced on August 6, 1996 and will terminate in July 1998.
Employees who satisfy the applicable length of service requirement
specified by the Board for an offering are eligible to participate in the
Purchase Plan for the period of such offering if they are employed by the
Company or a subsidiary of the Company designated by the Board for at least 20
hours per week and are customarily employed by the Company or such a designated
subsidiary of the Company designated by the Board for at least five months per
calendar year. Participating employees may elect to have up to 15% of their
earnings (or such lesser amount specified by the Board for a particular offering
period) withheld from their paychecks pursuant to the Purchase Plan. The amount
withheld is then used to purchase shares of Common Stock on specified purchase
dates determined by the Board. The price of Common Stock purchased under the
Purchase Plan generally will be equal to 85% of the lower of the fair market
value of the Common Stock at the commencement date of each offering period or
the specified purchase date. Employees may end their participation in the
offering at any time during the offering period, and participation ends
automatically on termination of employment with the Company. Under the Purchase
Plan, rights of any employee to purchase stock under all employee stock purchase
plans may not accrue at a rate that exceeds $25,000 in fair market value per
calendar year in which rights are outstanding, and no person may purchase shares
to the extent such person would own 5% or more of the total combined value or
voting power of all classes of stock of the Company and its affiliates
(including stock subject to options).
In the event of a merger, reorganization, consolidation or liquidation
involving the Company, the Board has discretion to provide that each right to
purchase Common Stock will be assumed or an equivalent right substituted by the
successor corporation, or the Board may shorten the offering period and provide
for all sums collected by payroll deductions to be applied to purchase stock
immediately prior to such merger or other transaction. The Board has the
authority to amend or terminate the Purchase Plan at any time; however, no such
action may adversely affect any outstanding rights to purchase Common Stock
under the Purchase Plan.
EXECUTIVE BONUS ARRANGEMENT
The Company's Compensation Committee has approved an informal bonus
arrangement for the Company's Executive Officers effective through fiscal 1997.
If the Company meets certain quarterly earnings per share performance targets,
the Company's Executive Officers are paid bonus amounts that have been
established by the Compensation Committee. To the extent that the Company
exceeds the quarterly performance target, the Executive Officers' bonus payments
are increased at the same percentage rate as the percentage rate at which the
Company exceeded its earnings per share target, except that such over-bonus
payment percentage will not exceed 30% of over-target profit. Although the terms
of any future arrangement have not yet been proposed, the Company anticipates
that the Compensation Committee will adopt a similar bonus structure for fiscal
1998.
401(K) PLAN
The Company has established a tax-qualified employee savings and retirement
plan (the "401(k) Plan"). The 401(k) Plan covers all Company employees beginning
the first day of the month following the month of their employment. Pursuant to
the 401(k) Plan, employees may elect to reduce their current compensation by
46
<PAGE> 47
up to the lesser of 15% of eligible compensation or the statutorily prescribed
annual limit ($9,500 in 1997) and have the amount of such reduction contributed
to the 401(k) Plan. The trustee under the 401(k) Plan, at the direction of each
participant, invests the assets of the 401(k) Plan in any of eight investment
options. The 401(k) Plan is intended to qualify under Section 401 of the Code,
so that contributions to the 401(k) Plan by employees, and income earned on
401(k) Plan contributions, are not taxable to employees until withdrawn, and so
that the contributions by employees will be deductible by the Company when made.
The Company may contribute such amounts as determined by the Board of Directors.
There were no employer contributions to the 401(k) Plan during the year ended
March 31, 1996.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Bylaws provide that the Company will indemnify its directors
and executive officers and may indemnify its other officers, employees and other
agents to the fullest extent not prohibited by Delaware law. The Company is also
empowered under its Bylaws to enter into indemnification agreements with its
directors and officers and to purchase insurance on behalf of any person it is
required or permitted to indemnify. Pursuant to this provision, the Company has
entered into indemnification agreements with each of its directors and executive
officers.
In addition, the Company's Certificate of Incorporation provides that the
Company's directors will not be liable for monetary damages for breach of the
directors' fiduciary duty of care to the Company or its stockholders for
monetary damages for breach of his fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to the Company or
its stockholders; (ii) for acts or omissions not in good faith or involving
intentional misconduct or knowing violations of law; (iii) for the payment by
the Company of unlawful dividends or the payment by the Company for unlawful
stock repurchases or redemptions; or (iv) for any transaction from which the
director received an improper benefit. If the Delaware General Corporation Law
is amended to authorize corporate action further eliminating or limiting the
personal liability of directors, then the liability of a director will, under
the Company's Certificate of Incorporation, be eliminated or limited to the
fullest extent permitted by the Delaware General Corporation Law, as so amended.
These provisions in the Certificate of Incorporation do not eliminate the duty
of care, and in appropriate circumstances equitable remedies such as an
injunction or other forms of non-monetary relief would remain available under
Delaware law. These provisions also do not affect a director's responsibilities
under any other laws, such as the federal securities laws or state or federal
environmental laws.
47
<PAGE> 48
CERTAIN TRANSACTIONS
From March 1, 1993 to May 31, 1995, non-qualified stock options to purchase
Common Stock of the Company were granted to certain of the directors and
executive officers of the Company as follows: Jeffrey D. Witous, the Company's
Chairman, President and Chief Executive Officer, 20,000 shares; Rand R.
Schulman, the Company's Executive Vice President, 175,000 shares; Arthur S.
Budman, the Company's Chief Financial Officer, 102,000 shares; Armando Viteri,
the Company's Vice President, Corporate Development, 134,000 shares; and Robert
D. Ruhe, the Company's Executive Vice President, Worldwide Field Operations,
10,000 shares. The exercise price of such options was $0.25 per share, the fair
market value of the Common Stock on the date of grant as determined by the Board
of Directors. In July 1995, each of such options was canceled in exchange for an
equal number of shares of restricted Common Stock of the Company with a purchase
price of $0.25 per share (the fair market value of the Common Stock on the date
of purchase). The purchase price for such shares was paid with a promissory note
bearing interest at 6% per annum and payable on the earlier of (i) July 2005 or
(ii) immediately upon termination of employment with the Company. Such notes are
secured by the shares purchased. The purchased shares are subject to vesting
over a three-year period following the date of issuance (one-third of the total
shares per year), so that the Company has the right to repurchase unvested
shares at cost in the event the purchaser's employment with the Company
terminates.
In September 1995, the Company completed a private placement pursuant to
which the Company issued 800,000 shares of its Series B Preferred Stock at a
purchase price of $5.00 per share. In connection with such financing, Rudi
Vanderbeeken, formerly an executive officer of the Company, purchased 42,640
shares of Series B Preferred Stock, and John E. Witous and Joanne M. Witous, the
parents of Jeffrey D. Witous, a director and executive officer of the Company,
purchased 10,000 shares of Series B Preferred Stock.
In June 1996, the Company completed a private placement pursuant to which
the Company issued 566,164 shares of its Series C Preferred Stock at a purchase
price of $7.00 per share. In connection with such financing, Dr. Terry Straeter,
a director of the Company, purchased 14,285 shares of Series C Preferred Stock,
and John E. Witous and Joanne M. Witous, the parents of Jeffrey D. Witous, a
director and executive officer of the Company, purchased 7,142 shares of Series
C Preferred Stock.
In addition, the Company has entered into indemnification agreements with
each of its executive officers and directors. See "Management -- Limitation of
Liability and Indemnification Matters."
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<PAGE> 49
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's outstanding Common Stock as of December
31, 1996, and as adjusted to reflect the sale of the Common Stock being offered
hereby by (i) each person (or group of affiliated persons) who is known by the
Company to own beneficially more than 5% of the Company's Common Stock; (ii)
each of the Company's directors; (iii) each of the Named Executive Officers;
(iv) all directors and executive officers of the Company as a group; and (v)
Selling Stockholders.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
DIRECTORS, OFFERING(1) OFFERING(1)
EXECUTIVE OFFICERS --------------------- SHARES ---------------------
AND 5% STOCKHOLDERS NUMBER PERCENT BEING OFFERED NUMBER PERCENT
- ------------------------------------------------ --------- ------- ------------- --------- -------
<S> <C> <C> <C> <C> <C>
Jeffrey D. Witous (2)........................... 997,000 10.8% 50,000 947,000 8.9%
Rand R. Schulman (3)............................ 177,333 1.9 28,881 148,452 1.4
Oran M. Thomas (4).............................. 1,000,000 10.9 95,000 905,000 8.5
Armando Viteri (5).............................. 134,041 1.5 20,000 114,041 1.1
Gregory J. White (6)............................ 1,040,000 11.3 50,000 990,000 9.3
Arthur S. Budman (7)............................ 114,291 1.2 15,000 99,291 *
Terry A. Straeter (8)........................... 26,789 * -- 26,789 *
Gary A. Wetsel (9).............................. 12,504 * -- 12,504 *
All directors and executive officers as a
group (12 persons) (10)....................... 3,636,352 39.2 289,181 3,347,171 31.2
</TABLE>
<TABLE>
<CAPTION>
SELLING STOCKHOLDERS
- ------------------------------------------------
<S> <C> <C> <C> <C> <C>
Steven K. Beal(11).............................. 151,000 1.6% 15,000 136,000 1.3%
Konstantinos P. Caldis(12)...................... 150,000 1.6 15,000 135,000 1.2
Robert Gagnard.................................. 220,000 2.4 25,000 195,000 1.8
David H. Koch................................... 187,793 2.0 52,488 135,305 1.3
Timothy T. Kraft................................ 150,000 1.6 10,000 140,000 1.3
Robert O'Rourke................................. 161,451 1.8 25,000 136,451 1.3
Donald E. and Eileen Sanshu..................... 150,000 1.6 10,000 140,000 1.3
Other Selling Stockholders(13).................. 1,030,484 11.1 393,331 637,153 5.9
</TABLE>
- ---------------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect
to securities. Except as indicated by footnote, and subject to community
property laws where applicable, to the best of the Company's knowledge, the
persons named in the table above have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them.
Options to purchase shares of Common Stock that are exercisable within 60
days of December 31, 1996 are deemed to be beneficially owned by the person
holding such options for the purpose of computing the percentage ownership
of such person, but are not treated as outstanding for the purpose of
computing the percentage ownership of any other person. Applicable
percentage of beneficial ownership is based on 9,209,852 shares of Common
Stock (excluding 80,827 shares to be issued upon exercise of outstanding
options and warrants upon the completion of this offering) outstanding as
of December 31, 1996, and 10,655,679 shares of Common Stock outstanding
after completion of this offering. Except as set forth above, the address
of each person set forth above is the address of the Company appearing
elsewhere in this Prospectus.
(2) Includes 200,000 shares of Common Stock held by JMK Enterprises, L.P. in
which Jeffrey D. Witous and his wife, Julie E. Witous, are general
partners.
(3) Includes 58,334 shares of Common Stock subject to repurchase by the Company
and 2,333 shares of Common Stock issuable pursuant to options exercisable
within 60 days of December 31, 1996.
(4) Includes 1,000,000 shares of Common Stock held by Oran M. Thomas and his
wife, Deborah L. Einhorn, as trustees of the Thomas-Einhorn Family Trust
U/T/A dated November 8, 1996.
(5) Includes 47,333 shares of Common Stock subject to repurchase by the
Company, 2,041 shares of Common Stock issuable pursuant to options
exercisable within 60 days of December 31, 1996, 1,500 shares of Common
Stock held by Armando Viteri as trustee of the Maria Viteri Irrevocable
Trust and 1,500 shares of Common Stock held by Mr. Viteri as Trustee of the
Scott Viteri Irrevocable Trust.
(6) Includes 400,000 shares of Common Stock held by the Valley Oaks Family
Partnership in which Gregory J. White and his wife, Teri L. White, are
general partners.
49
<PAGE> 50
(7) Includes 43,000 shares of Common Stock subject to repurchase by the Company
and 11,291 shares of Common Stock issuable pursuant to options exercisable
within 60 days of December 31, 1996.
(8) Includes 12,504 shares of Common Stock issuable pursuant to options
exercisable within 60 days of December 31, 1996.
(9) Includes 12,504 shares of Common Stock issuable pursuant to options
exercisable within 60 days of December 31, 1996.
(10) Includes 59,067 shares of Common Stock issuable pursuant to options
exercisable within 60 days of December 31, 1996. Includes the following
executive officers (and the number of shares to be sold by such executive
officers in the offering): Victoria Z. Farrell (300 shares); Ronald B.
Hegli (10,000 shares); and Robert B. Ruhe (20,000 shares).
(11) Includes 151,000 shares of Common Stock issuable pursuant to options
exercisable within 60 days of December 31, 1996.
(12) Includes 150,000 shares of Common Stock issuable pursuant to options
exercisable within 60 days of December 31, 1996.
(13) Includes 85,156 shares of Common Stock issuable pursuant to options
excercisable within 60 days of December 31, 1996. Includes stockholders
each of whom owned less than 1% of the Company's Common Stock prior to the
offering and will own less than 1% of the Company's Common Stock following
the offering. Such stockholders (and the number of shares to be sold by
such stockholders in the offering) include: John C. Beer (1,800 shares);
Peter Bell (7,142 shares); Mark Bonsack (11,500 shares); Sophie and Arthur
Brody Foundation (20,000 shares); Gregory Cohn (1,000 shares); Martin Cohn
(2,500 shares); Cooperative Holding Corporation (6,000 shares); Robert L.
Davis (6,000 shares); Manual Dupkin II Education and Charitable Trust
(28,571 shares); Benjamin Casado (21,000 shares); FFA General Partnership
(2,428 shares); Arthur J. and Elizabeth Foxe Franke (18,020 shares); Bruce
Friedman (1,250 shares); A.W. Greif T/U/D FBO David L. Greif (3,500
shares); Bruce H. Heimann, Trustee, FBO B. Heimann Family Trust U/A/D
12/18/90 (13,320 shares); David L. and Barbara J. Heimann, Co-Trustees,
David L. Heimann Family Trust U/A/D 10/12/88 (12,000 shares); Charles S.
Hilliard (10,000 shares); Imperial Bancorp (32,277 shares); James Jimmerson
(6,650 shares); David Korkosz (20,000 shares); W. Kevin Kreitz (5,500
shares); James P. Lampert (2,142 shares); Lloyd Software Ltd. (50,000
shares); Richard S. Mertz (7,000 shares); William C. and Joelene Mertz
(7,000 shares); J.J. Miller II, Trustee, UD Joshua W. Miller Trust (7,142
shares); Geraldine F. Morrow Family Irrevocable Trust (10,000 shares);
Noble Ouye (1,800 shares); Edmund A. and Susan R. Restivo, Jr. (1,500
shares); Van Duyn Ridgway, Trustee, FBO Thayer Ridgway II and Marianne
Ayers Trust UDT 8/13/92 (2,347 shares); Van Duyn Ridgway, Trustee, FBO
Ridgway 1992 Family Trust UDT 8/14/92 (5,000 shares); Robert Rinaldi (8,000
shares); Rothschild Charitable Foundation, Inc. (7,142 shares); S. Kann
Sons Co. (7,000 shares); Richard Serbin (5,000 shares); Slade, Inc. (12,500
shares); John Solaro (8,000 shares); Robert Stein (8,300 shares); and
Wright & Roy Investments LLC (13,000 shares).
50
<PAGE> 51
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 30,000,000 shares
of Common Stock, $.001 par value, and 5,000,000 shares of Preferred Stock, $.001
par value.
COMMON STOCK
As of December 31, 1996, there were 9,209,852 shares of the Company's
Common Stock outstanding (excluding 80,827 shares to be issued upon exercise of
outstanding options and warrants upon the completion of this offering) held by
approximately 186 holders of record.
Holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Subject to
preferences that may be applicable to any outstanding shares of Preferred Stock,
holders of Common Stock are entitled to receive ratably such dividends, if any,
as may be declared by the Board of Directors out of funds legally available for
the payment of dividends. See "Dividend Policy." In the event of a liquidation,
dissolution or winding up of the Company, holders of Common Stock are entitled
to share ratably in all assets remaining after payment of liabilities and
liquidation preferences of any outstanding shares of Preferred Stock. Holders of
Common Stock have no preemptive rights or rights to convert their Common Stock
into any other securities. There are no redemption or sinking fund provisions
applicable to the Common Stock. All outstanding shares of Common Stock are
validly issued, fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors has the authority, without further action by the
stockholders, to issue up to 5,000,000 shares of Preferred Stock in one or more
series and to fix the designations, powers, preferences, privileges, and
relative participating, optional or special rights and the qualifications,
limitations or restrictions thereof, including dividend rights, conversion
rights, voting rights, terms of redemption and liquidation preferences, any or
all of which may be greater than the rights of the Common Stock. The Board of
Directors, without stockholder approval, can issue Preferred Stock with voting,
conversion or other rights that could adversely affect the voting power and
other rights of the holders of Common Stock. Preferred Stock could thus be
issued quickly with terms calculated to delay or prevent a change in control of
the Company or make removal of management more difficult. Additionally, the
issuance of Preferred Stock may have the effect of decreasing the market price
of the Common Stock, and may adversely affect the voting and other rights of the
holders of Common Stock. There are currently no shares of Preferred Stock
outstanding, and the Company has no current plans to issue any of the Preferred
Stock.
WARRANTS
As of December 31, 1996, there was a warrant outstanding to purchase 32,277
shares of Common Stock (the "Warrant") at an exercise price of $2.13 per share.
The Warrant was issued to Imperial Bank in May 1995 pursuant to the terms of the
Company's line of credit facility. Imperial Bank has elected to fully exercise
the Warrant and sell all of the 32,277 shares to be received upon such exercise
in this offering. See "Principal and Selling Stockholders."
REGISTRATION RIGHTS
The holders of 1,684,919 shares of Common Stock (the "Registrable
Securities") or their transferees are entitled to certain rights with respect to
the registration of such shares under the Securities Act. These rights are
provided under the terms of an agreement between the Company and the holders of
Registrable Securities. If the Company registers any of its Common Stock either
for its own account or for the account of other security holders, the holders of
Registrable Securities are entitled to include their shares of Common Stock in
the registration, subject to the ability of the underwriters to limit the number
of shares included in the offering. The holders of Registrable Securities may
also require the Company, on two occasions (but no more than once during any
12-month period), to register all or a portion of their Registrable Securities
on Form S-3 when use of such form becomes available to the Company, provided,
among other limitations, that (i) the
51
<PAGE> 52
proposed aggregate selling price (net of any underwriters' discounts or
commissions) is at least $10,000,000, and (ii) the Company shall not be
obligated to effect any such registration at any time prior to August 6, 1997.
Subject to certain limitations, all registration expenses will be borne by the
Company.
DELAWARE LAW AND CERTAIN CHARTER PROVISIONS
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law (the "Delaware Law"), an antitakeover law. In general,
the statute prohibits a publicly held Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
For purposes of Section 203, a "business combination" includes a merger, asset
sale or other transaction resulting in a financial benefit to the interested
stockholder, and an "interested stockholder" is a person who, together with
affiliates and associates, owns (or within the three preceding years, did own)
15% or more of the corporation's voting stock.
The Company's Certificate of Incorporation and Bylaws include a number of
provisions that may have the effect of deterring hostile takeovers or delaying
or preventing changes in control or management of the Company. The Company's
Certificate of Incorporation provides that the Board of Directors is divided
into three classes of directors, with each class serving a staggered three-year
term. The classification system of electing directors may tend to discourage a
third party from making a tender offer or otherwise attempting to obtain control
of the Company and may maintain the composition of the Board of Directors, as
the classification of the Board of Directors generally increases the difficulty
of replacing a majority of directors. The Company's Certificate of Incorporation
also provides that all stockholder action must be effected at a duly called
meeting of stockholders and not by a consent in writing. In addition, the
Company's Bylaws provide that special meetings of the stockholders may be called
only by the Chairman of the Board of Directors, the Chief Executive Officer or a
majority of the Board of Directors. The Company's Certificate of Incorporation
does not include a provision for cumulative voting for directors. Under
cumulative voting, a minority stockholder holding a sufficient percentage of a
class of shares may be able to ensure the election of one or more directors. The
Company's Bylaws establish procedures, including advance notice procedures with
regard to the nomination of candidates for election as directors and stockholder
proposals. These and other provisions of the Certificate of Incorporation and
Bylaws could discourage potential acquisition proposals and could delay or
prevent a change in control of management of the Company. Such provisions also
may have the effect of preventing changes in the management of the Company. See
"Risk Factors -- Antitakeover Provisions."
TRANSFER AGENT AND REGISTRAR
American Stock Transfer & Trust Company is the transfer agent and registrar
for the Company's Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial numbers of shares of Common Stock of the Company in
the public market following this offering could adversely affect the market
price of the Common Stock. Upon completion of this offering, the Company will
have outstanding an aggregate of 10,655,679 shares of Common Stock, based on the
number of shares of Common Stock outstanding as of December 31, 1996. Of these
shares, all of the 2,200,000 shares of Common Stock sold in this offering,
2,875,000 shares of Common Stock which were sold in the Company's initial public
offering, and 29,727 registered shares of Common Stock issued upon exercise of
options will be freely tradable (unless such shares are held by an "affiliate"
of the Company as such term is defined in the Securities Act) without
restriction or registration under the Securities Act. The remaining 5,550,952
shares were issued and sold by the Company in private transactions ("Restricted
Shares") and are eligible for public sale only if registered under the
Securities Act or sold in accordance with Rule 144 or Rule 701 thereunder, which
rules are summarized below. As a result of the contractual restrictions
described below and the provisions of Rule 144 or Rule 701: (i) approximately
338,063 Restricted Shares will be available for immediate sale in the public
market on the date of this Prospectus; (ii) approximately 4,870,518 Restricted
Shares will be eligible for sale 90 days after the date of this Prospectus upon
expiration of lock-up agreements (as described below) and upon expiration of
their respective holding periods under Rule 144, assuming the revisions to Rule
144 described below are effected by the Securities and Exchange Commission prior
to that
52
<PAGE> 53
time; and (iii) the remainder of the Restricted Shares will be eligible for sale
from time to time thereafter upon expiration of their respective holding
periods, subject in each case to the restrictions on such sales by "affiliates"
of the Company as such term is defined in the Securities Act.
The Company's executive officers, directors and certain stockholders, who
own 4,367,874 Restricted Shares, have agreed, subject to certain exceptions,
that they will not, without the prior written consent of PaineWebber
Incorporated, offer, sell, contract to sell, grant any option to purchase, or
otherwise dispose of any shares of Common Stock or securities convertible into
or exercisable or exchangeable for Common Stock of the Company for a period of
90 days from the date of this Prospectus (the "Lockup Period"). PaineWebber
Incorporated, in its sole discretion at any time and without notice, may release
any or all shares from the lockup agreements and permit holders of the shares to
resell all or any portion of their shares at any time prior to the expiration of
the Lockup Period.
In general, under Rule 144 as currently in effect, any holder of Restricted
Shares, including an affiliate of the Company, as to which at least two years
have elapsed since the later of the date of their acquisition from the Company
or an affiliate, would be entitled within any three-month period to sell a
number of shares that does not exceed the greater of 1% of the then outstanding
shares of Common Stock (approximately 106,556 shares immediately after the
completion of this offering assuming no exercise of the Underwriters' over-
allotment option) or the average weekly trading volume of the Common Stock on
the Nasdaq National Market during the four calendar weeks preceding the date on
which notice of the sale is filed with the Commission. Sales under Rule 144 are
subject to certain requirements relating to manner of sale, notice and
availability of current public information about the Company. However, a person
(or persons whose shares are aggregated) who is not deemed to have been an
affiliate of the Company at any time during the 90 days immediately preceding
the sale and who owns beneficially Restricted Shares is entitled to sell such
shares under Rule 144(k) without regard to the limitations described above,
provided that at least three years have lapsed since the later of the date the
shares were acquired from the Company or from an affiliate of the Company. The
foregoing is a summary of Rule 144 and is not intended to be a complete
description of it.
The Securities and Exchange Commission has recently approved revisions to
Rule 144, the effect of which will be to shorten the holding periods under Rule
144 from two years to one year and to shorten the holding period under Rule
144(k) from three years to two years. The revisions will be effective 60 days
after publication in the Federal Register.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from the Company by its employees,
directors, officers, consultants or advisers pursuant to written compensatory
benefit plans or written contracts relating to the compensation of such persons.
In addition, the Commission has indicated that Rule 701 will apply to stock
options granted by the Company before this offering, along with the shares
acquired upon exercise of such options. Securities issued in reliance on Rule
701 are deemed to be Restricted Shares and (unless subject to the contractual
restrictions described above) may be sold by persons other than affiliates
subject only to the manner of sale provisions of Rule 144 and by affiliates
under Rule 144 without compliance with its minimum holding period requirements.
In October 1996, the Company filed a registration statement under the
Securities Act covering an aggregate of 2,977,654 shares of the Company's Common
Stock, including 1,343,970 shares issuable pursuant to outstanding options and
shares available for grant under the 1995 Plan, 883,684 shares issuable pursuant
to outstanding options issued outside of the 1995 Plan and 250,000 shares of
Common Stock reserved for issuance under the Purchase Plan. Such registration
was effective upon filing. Accordingly, shares registered under such
registration statement are available for sale in the public market, unless such
shares are subject to vesting restrictions with the Company or the contractual
restrictions described above. In addition, the sale of shares registered under
such registration statement may be subject to certain volume limitations.
In addition, after this offering, the holders of 1,684,919 shares of Common
Stock will be entitled to certain rights to cause the Company to register the
sale of such shares under the Securities Act. Registration of such shares under
the Securities Act would result in such shares becoming freely tradable without
restriction under the Securities Act (except for shares purchased by affiliates
of the Company) immediately upon the effectiveness of such registration. See
"Description of Capital Stock -- Registration Rights."
53
<PAGE> 54
UNDERWRITING
The Underwriters named below, acting through PaineWebber Incorporated,
Hambrecht & Quist LLC and Piper Jaffray Inc. (the "Representatives"), have
severally agreed, subject to the terms and conditions set forth in the
Underwriting Agreement by and among the Company, the Selling Stockholders and
the Representatives (the "Underwriting Agreement"), to purchase from the Company
and the Selling Stockholders, and the Company and the Selling Stockholders have
agreed to sell to the Underwriters, respectively, 1,365,000 shares and 835,000
shares of the Company's Common Stock, which in the aggregate equals the number
of shares of Common Stock set forth opposite the names of such Underwriters
below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
------------------------------------------------------------------ ---------
<S> <C>
PaineWebber Incorporated.......................................... 440,000
Hambrecht & Quist LLC............................................. 440,000
Piper Jaffray Inc................................................. 440,000
Alex. Brown & Sons Incorporated................................... 80,000
Donaldson, Lufkin & Jenrette Securities Corporation............... 80,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated................ 80,000
Morgan Stanley & Co. Incorporated................................. 80,000
Prudential Securities Incorporated................................ 80,000
Smith Barney Inc.................................................. 80,000
Fahnestock & Co. Inc.............................................. 50,000
GS2 Securities, Inc............................................... 50,000
Ladenburg, Thalmann & Co. Inc..................................... 50,000
Pennsylvania Merchant Group Ltd................................... 50,000
Torrey Pines Securities, Inc...................................... 50,000
Tucker Anthony Incorporated....................................... 50,000
Unterberg Harris.................................................. 50,000
Wessels, Arnold & Henderson....................................... 50,000
---------
Total................................................... 2,200,000
========
</TABLE>
The Underwriting Agreement provides that the obligation of the Underwriters
to purchase all of the shares of Common Stock is subject to certain conditions.
The Underwriters are committed to purchase, and the Company is obligated to
sell, all of the shares of Common Stock offered by this Prospectus, if any of
the shares of Common Stock being sold pursuant to the Underwriting Agreement are
purchased.
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public at the public offering
price set forth on the cover page of this Prospectus, and to certain securities
dealers at such price less a concession not in excess of $0.60 per share. The
Underwriters may allow, and such dealers may reallow, a discount not in excess
of $0.10 per share. After the initial public offering, the public offering price
and the concessions and discounts may be changed by the Representatives.
The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to 330,000
additional shares of Common Stock at the public offering price less the
underwriting discount and commissions set forth on the cover page of this
Prospectus. The Underwriters may exercise such option only to cover
over-allotments in the sale of the shares that the Underwriters have agreed to
purchase. To the extent that the Underwriters exercise such option, each of the
Underwriters will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares as is approximately
the percentage of shares of Common Stock that it is obligated to purchase of the
total number of the shares under the Underwriting Agreement and as shown in the
table set forth above.
In connection with this offering, certain Underwriters and selling group
members (if any) or their respective affiliates may engage in passive market
making transactions in the Common Stock on the Nasdaq
54
<PAGE> 55
National Market in accordance with Rule 10b-6A under the Exchange Act during the
two business day period before commencement of offers or sales of the Common
Stock. The passive market making transactions must comply with applicable volume
and price limits and be identified as such. In general, a passive market maker
may display its bid at a price not in excess of the highest independent bid for
such security; if all independent bids are lowered below the passive market
maker's bid, however, such bid must then be lowered when certain purchase limits
are exceeded.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments that the Underwriters may be required to make in respect thereof.
The Company, its directors and executive officers and certain stockholders
have agreed not to offer, sell, contract to sell or grant any option to purchase
or otherwise dispose of any shares of Common Stock owned by them prior to the
expiration of 90 days from the date of this Prospectus, except (i) for shares of
Common Stock offered hereby; (ii) with the prior written consent of PaineWebber
Incorporated; and (iii) in the case of the Company, for the issuance of shares
of Common Stock upon the exercise of options or the grant of options to purchase
shares of Common Stock.
In June 1996, Infotech Partners II, a limited partnership comprising
employees of Piper Jaffray Inc., and certain employees of Piper Jaffray and
their affiliates purchased from the Company an aggregate of 71,425 shares of
Series C Preferred Stock for an aggregate cash purchase price of approximately
$499,975. Upon the completion of the Company's initial public offering in August
1996, the Series C Preferred Stock was converted into an aggregate of 71,425
shares of Common Stock, representing less than 1% of outstanding Common Stock,
assuming no exercise of the Underwriters' over-allotment option.
In fiscal 1994, the Company and PaineWebber Incorporated entered into a
software licensing and services agreement pursuant to which PaineWebber
Incorporated received a license to use one of the Company's products. On
December 29, 1995, the Company and PaineWebber Incorporated entered into a
software licensing and services agreement to upgrade to TED. The terms of such
agreements were negotiated by the parties at arms' length prior to the Company's
selection of PaineWebber Incorporated as a Representative.
In June 1996, an employee of Prudential Securities purchased from the
Company, as part of the Company's Series C Preferred Stock financing, an
aggregate of 7,142 shares of Series C Preferred Stock for an aggregate cash
purchase price of approximately $49,995. The Series C Preferred Stock was
converted into an aggregate of 7,142 shares of Common Stock upon completion of
the Company's initial public offering in August 1996 and represents less than 1%
of the outstanding Common Stock of the Company. The shares of Common Stock
acquired upon conversion of the Series C Preferred Stock may be deemed by the
National Association of Securities Dealers, Inc. to be underwriting compensation
in connection with this offering.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by its counsel, Cooley Godward LLP, San Diego, California. Pillsbury
Madison & Sutro LLP, Menlo Park, California, is acting as counsel for the
Underwriters in connection with certain legal matters relating to the shares of
Common Stock offered hereby.
EXPERTS
The financial statements of the Company as of March 31, 1995 and 1996, and
for each of the years in the three-year period ended March 31, 1996, appearing
in this Prospectus and Registration Statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein and in the Registration Statement and have been included in
reliance upon such report given upon the authority of such firm as experts in
auditing and accounting.
55
<PAGE> 56
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and at the Commission's
following Regional Offices: Midwest Regional Office, CitiCorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661; and Northeast Regional
Office, 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of
such material can be obtained at prescribed rates from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549. The Commission also maintains a site on the World Wide
Web that contains reports, proxy and information statements and other
information regarding the Company. The address for such site is
http://www.sec.gov.
A Registration Statement on Form S-1, including amendments thereto,
relating to the Common Stock offered hereby has been filed by the Company with
the Securities and Exchange Commission, Washington, D.C. This Prospectus does
not contain all of the information set forth in the Registration Statement and
the exhibits and schedules thereto. Statements contained in this Prospectus as
to the contents of any contract or other document referred to are not
necessarily complete and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference. For
further information with respect to the Company and the Common Stock offered
hereby, reference is made to such Registration Statement, exhibits and
schedules. A copy of the Registration Statement may be inspected by anyone
without charge at the Commission's principal office located at Room 1024, 450
Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, the Northeast
Regional Office located at 7 World Trade Center, Suite 1300, New York, New York
10048, and the Midwest Regional Office located at the CitiCorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511, and copies of all or
any part thereof may be obtained from the Public Reference Branch of the
Commission upon the payment of certain fees prescribed by the Commission.
56
<PAGE> 57
TRITEAL CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors...................................... F-2
Consolidated Balance Sheets as of March 31, 1995 and 1996 and December 31, 1996
(unaudited).......................................................................... F-3
Consolidated Statements of Operations for the years ended
March 31, 1994, 1995 and 1996 and for the nine months ended December 31, 1995 and
1996 (unaudited)..................................................................... F-4
Consolidated Statements of Stockholders' Equity for the years ended
March 31, 1994, 1995 and 1996 and for the nine months ended December 31, 1996
(unaudited).......................................................................... F-5
Consolidated Statements of Cash Flows for the years ended
March 31, 1994, 1995 and 1996 and for the nine months ended December 31, 1995 and
1996 (unaudited)..................................................................... F-6
Notes to Consolidated Financial Statements............................................. F-7
</TABLE>
F-1
<PAGE> 58
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
TriTeal Corporation
We have audited the accompanying consolidated balance sheets of TriTeal
Corporation as of March 31, 1995 and 1996 and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended March 31, 1996. These consolidated 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 financial statements referred to above present fairly,
in all material respects, the financial position of TriTeal Corporation at March
31, 1995 and 1996, and the results of its operations and its cash flows for each
of the three years in the period ended March 31, 1996 in conformity with
generally accepted accounting principles.
San Diego, California
June 13, 1996
ERNST & YOUNG LLP
F-2
<PAGE> 59
TRITEAL CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 31,
----------------------- DECEMBER 31,
1995 1996 1996
---------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents............................... $1,224,636 $ 301,251 $ 4,229,876
Short-term investments.................................. -- -- 17,708,938
Accounts receivable, net of allowance for doubtful
accounts of $60,000 at March 31, 1995 and $80,000 at
March 31, 1996 and December 31, 1996................. 1,479,271 4,872,054 5,657,207
Prepaid expenses and other current assets............... 36,077 378,485 1,141,229
---------- ----------- -----------
Total current assets............................ 2,739,984 5,551,790 28,737,250
Property and equipment, net............................... 392,144 1,024,040 1,226,959
Other assets, net......................................... 23,333 60,140 191,872
---------- ----------- -----------
Total assets.................................... $3,155,461 $6,635,970 $ 30,156,081
========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit.......................................... $ -- $ 113,542 $ --
Accounts payable........................................ 183,011 784,575 445,234
Accrued liabilities..................................... 621,761 3,181,761 4,214,157
Deferred revenues....................................... 373,355 922,732 1,136,980
Current portion of long-term debt....................... 21,304 121,388 --
---------- ----------- -----------
Total current liabilities....................... 1,199,431 5,123,998 5,796,371
Long-term debt............................................ 120,221 242,776 --
Deferred income taxes..................................... 95,500 -- --
Stockholders' equity:
Preferred Stock, $.001 par value
Authorized shares -- 5,000,000
Issued and outstanding shares -- 727,247 and
1,527,247 at March 31, 1995 and 1996, respectively
(no shares at December 31, 1996)...................
Preference in liquidation -- $9,512,184.............. 727 1,527 --
Common Stock, $.001 par value
Authorized shares -- 30,000,000
Issued and outstanding shares -- 3,492,902, 4,186,902
and 9,209,852 at March 31, 1995 and 1996, and
December 31, 1996, respectively.................... 3,493 4,187 9,210
Additional paid-in capital.............................. 1,544,819 5,869,825 30,195,296
Preferred stock subscriptions........................... -- 363,129 --
Notes receivable from stockholders...................... -- (167,250) (101,667)
Deferred compensation................................... -- (151,900) (113,200)
Retained earnings (deficit)............................. 191,270 (4,650,322) (5,629,929)
---------- ----------- -----------
Total stockholders' equity...................... 1,740,309 1,269,196 24,359,710
---------- ----------- -----------
Total liabilities and stockholders' equity...... $3,155,461 $6,635,970 $ 30,156,081
========== =========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE> 60
TRITEAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED MARCH 31, DECEMBER 31,
------------------------------------- -------------------------
1994 1995 1996 1995 1996
---------- ---------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
License fees.................... $ 147,519 $2,575,294 $ 6,750,281 $ 3,227,808 $ 9,657,074
Maintenance and services........ 285,605 1,534,572 1,470,883 1,173,897 1,455,396
---------- ---------- ---------- ----------- -----------
Total revenues.......... 433,124 4,109,866 8,221,164 4,401,705 11,112,470
Costs of revenues:
Cost of license fees............ 2,950 785,550 1,751,442 902,720 1,886,775
Cost of maintenance and
services..................... 192,091 383,754 420,969 324,794 448,066
---------- ---------- ---------- ----------- -----------
Total costs of
revenues.............. 195,041 1,169,304 2,172,411 1,227,514 2,334,841
---------- ---------- ---------- ----------- -----------
Gross profit............ 238,083 2,940,562 6,048,753 3,174,191 8,777,629
Operating expenses:
Research and development........ 7,470 484,499 2,390,627 1,753,142 1,678,703
Selling, general and
administrative............... 99,210 2,290,064 8,569,275 5,684,486 8,572,788
---------- ---------- ---------- ----------- -----------
Total operating
expenses.............. 106,680 2,774,563 10,959,902 7,437,628 10,251,491
---------- ---------- ---------- ----------- -----------
Operating income (loss)........... 131,403 165,999 (4,911,149) (4,263,437) (1,473,862)
Interest income (expense), net.... -- (2,317) (25,943) (16,535) 494,255
---------- ---------- ---------- ----------- -----------
Income (loss) before provision for
(benefit from) income taxes..... 131,403 163,682 (4,937,092) (4,279,972) (979,607)
Provision for (benefit from)
income taxes.................... 56,015 47,800 (95,500) (83,000) --
---------- ---------- ---------- ----------- -----------
Net income (loss)................. $ 75,388 $ 115,882 $(4,841,592) $(4,196,972) $ (979,607)
========== ========== ========== =========== ===========
Net income (loss) per share....... $ 0.01 $ 0.02 $ (0.72) $ (0.63) $ (0.12)
========== ========== ========== =========== ===========
Shares used in computing net
income (loss) per share......... 6,463,155 6,503,134 6,712,321 6,712,321 7,966,133
========== ========== ========== =========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 61
TRITEAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE NOTES
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE
------------------- ------------------ PAID-IN PREFERRED STOCK FROM
SHARES AMOUNT SHARES AMOUNT CAPITAL SUBSCRIPTIONS STOCKHOLDERS
---------- ------ --------- ------ ----------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1993....... -- $ -- -- $ -- $ -- $ -- $ --
Issuance of common stock for
cash........................ -- -- 3,492,902 3,493 6,507 -- --
Net income.................... -- -- -- -- -- -- --
--------- ------ --------- ------ ---------- -------- ---------
Balance at March 31, 1994....... -- -- 3,492,902 3,493 6,507 -- --
Issuance of Series A
convertible preferred
stock....................... 727,247 727 -- -- 1,538,312 -- --
Net income.................... -- -- -- -- -- -- --
--------- ------ --------- ------ ---------- -------- ---------
Balance at March 31, 1995....... 727,247 727 3,492,902 3,493 1,544,819 -- --
Issuance of Series B
convertible preferred
stock....................... 800,000 800 -- -- 3,964,200 -- --
Preferred stock
subscriptions............... -- -- -- -- -- 363,129 --
Issuance of common stock in
exchange for notes
receivable and services
rendered.................... -- -- 694,000 694 172,806 -- (167,250)
Deferred compensation......... -- -- -- -- 188,000 -- --
Amortization of deferred
compensation................ -- -- -- -- -- -- --
Net loss...................... -- -- -- -- -- -- --
--------- ------ --------- ------ ---------- -------- ---------
Balance at March 31, 1996....... 1,527,247 1,527 4,186,902 4,187 5,869,825 363,129 (167,250)
Issuance of Series C
convertible preferred stock
(unaudited)................. 566,164 566 -- -- 3,928,727 (363,129) --
Conversion of preferred stock
into common stock upon
initial public offering
(unaudited)................. (2,093,411) (2,093) 2,093,411 2,093 -- -- --
Issuance of common stock upon
initial public offering
(unaudited)................. -- -- 2,875,000 2,875 20,379,119 -- --
Issuance of common stock upon
exercise of options
(unaudited)................. -- -- 54,539 55 17,625 -- --
Repayments of notes receivable
from stockholders
(unaudited)................. -- -- -- -- -- -- 65,583
Amortization of deferred
compensation (unaudited).... -- -- -- -- -- -- --
Net loss (unaudited).......... -- -- -- -- -- -- --
--------- ------ --------- ------ ---------- -------- ---------
Balance at December 31, 1996
(unaudited)................... -- $ -- 9,209,852 $9,210 $30,195,296 $ -- $ (101,667)
========= ====== ========= ====== ========== ======== =========
<CAPTION>
RETAINED
DEFERRED EARNINGS
COMPENSATION (DEFICIT) TOTAL
------------- ----------- -----------
<S> <C> <C> <C>
Balance at March 31, 1993....... $ -- $ -- $ --
Issuance of common stock for
cash........................ -- -- 10,000
Net income.................... -- 75,388 75,388
--------- ----------- -----------
Balance at March 31, 1994....... -- 75,388 85,388
Issuance of Series A
convertible preferred
stock....................... -- -- 1,539,039
Net income.................... -- 115,882 115,882
--------- ----------- -----------
Balance at March 31, 1995....... -- 191,270 1,740,309
Issuance of Series B
convertible preferred
stock....................... -- -- 3,965,000
Preferred stock
subscriptions............... -- -- 363,129
Issuance of common stock in
exchange for notes
receivable and services
rendered.................... -- -- 6,250
Deferred compensation......... (188,000) -- --
Amortization of deferred
compensation................ 36,100 -- 36,100
Net loss...................... -- (4,841,592) (4,841,592)
--------- ----------- -----------
Balance at March 31, 1996....... (151,900) (4,650,322) 1,269,196
Issuance of Series C
convertible preferred stock
(unaudited)................. -- -- 3,566,164
Conversion of preferred stock
into common stock upon
initial public offering
(unaudited)................. -- -- --
Issuance of common stock upon
initial public offering
(unaudited)................. -- -- 20,381,994
Issuance of common stock upon
exercise of options
(unaudited)................. -- -- 17,680
Repayments of notes receivable
from stockholders
(unaudited)................. -- -- 65,583
Amortization of deferred
compensation (unaudited).... 38,700 -- 38,700
Net loss (unaudited).......... -- (979,607) (979,607)
--------- ----------- -----------
Balance at December 31, 1996
(unaudited)................... $(113,200) $(5,629,929) $24,359,710
========= =========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 62
TRITEAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED MARCH 31, DECEMBER 31,
------------------------------------- --------------------------
1994 1995 1996 1995 1996
--------- ----------- ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................... $ 75,388 $ 115,882 $(4,841,592) $(4,196,972) $ (979,607)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization............... 14,088 60,863 332,445 223,713 427,174
Amortization of deferred compensation....... -- -- 36,100 20,400 38,700
Issuance of common stock for services....... -- -- 6,250 6,250 --
Deferred income taxes....................... 50,552 44,947 (95,500) -- --
Changes in operating assets and liabilities:
Accounts receivable....................... (146,807) (1,332,464) (3,392,783) (795,833) (785,153)
Prepaid expenses and other current
assets................................. -- (36,077) (342,408) (356,049) (762,744)
Accounts payable.......................... -- 163,011 601,564 95,476 (339,341)
Accrued liabilities....................... 35,025 606,737 2,560,000 1,252,605 1,032,396
Deferred revenue.......................... 19,400 353,955 549,377 80,735 214,248
---------- ------------ ------------ ----------- ------------
Net cash provided by (used in) operating
activities.................................... 47,646 (23,146) (4,586,547) (3,669,675) (1,154,327)
Cash flows from investing activities:
Short-term investments........................ -- -- -- -- (17,708,938)
Purchase of property and equipment............ (70,440) (396,655) (964,341) (817,528) (630,093)
Other assets.................................. (12,981) (10,352) (36,807) (33,727) (131,732)
---------- ------------ ------------ ----------- ------------
Net cash used in investing activities........... (83,421) (407,007) (1,001,148) (851,255) (18,470,763)
Cash flows from financing activities:
Net proceeds from (repayments of) line of
credit...................................... -- -- 113,542 113,542 (113,542)
Proceeds from long-term debt.................. 60,343 125,123 364,164 251,271 --
Repayments of long-term debt.................. (12,211) (31,730) (141,525) (19,355) (364,164)
Proceeds from repayments of notes receivable
from stockholders........................... -- -- -- -- 65,583
Proceeds from issuance of common stock,
net......................................... 10,000 -- -- -- 20,399,674
Proceeds from stock subscriptions, net........ -- -- 363,129 -- --
Proceeds from issuance of preferred stock,
net......................................... -- 1,539,039 3,965,000 3,965,000 3,566,164
---------- ------------ ------------ ----------- ------------
Net cash provided by financing activities....... 58,132 1,632,432 4,664,310 4,310,458 23,553,715
---------- ------------ ------------ ----------- ------------
Increase (decrease) in cash and cash
equivalents................................... 22,357 1,202,279 (923,385) (210,472) 3,928,625
Cash and cash equivalents at beginning of
period........................................ -- 22,357 1,224,636 1,224,636 301,251
---------- ------------ ------------ ----------- ------------
Cash and cash equivalents at end of period...... $ 22,357 $ 1,224,636 $ 301,251 $ 1,014,164 $ 4,229,876
========== ============ ============ =========== ============
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest...................................... $ 3,358 $ 7,904 $ 42,243 $ 29,493 $ 28,155
========== ============ ============ =========== ============
Income taxes.................................. $ 800 $ 7,407 $ -- $ -- $ --
========== ============ ============ =========== ============
Supplemental disclosure of noncash financing
activities:
Issuance of common stock in exchange for notes
receivable.................................. $ -- $ -- $ 167,250 $ 167,250 $ --
========== ============ ============ =========== ============
</TABLE>
See accompanying notes.
F-6
<PAGE> 63
TRITEAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF DECEMBER 31, 1996 AND FOR THE NINE MONTHS ENDED
DECEMBER 31, 1995 AND 1996 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
TriTeal Corporation (the "Company"), develops, markets and supports open
systems-based, mission-critical desktop system software and integrated
applications that enable multi-platform deployment of client/ server
applications throughout an enterprise. The Company recently introduced its
Java-based SoftNC technology, a thin-client, platform-independent solution
designed to allow simultaneous access to Java and legacy applications.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary in The Netherlands. To date, substantially all
of the Company's international operations have been denominated in U.S. dollars.
Foreign currency transaction gains and losses were insignificant for the years
ended March 31, 1995 and 1996 and for the nine months ended December 31, 1995
and 1996. All intercompany accounts and transactions have been eliminated in
consolidation.
Interim Financial Information
The financial statements at December 31, 1996 and for the nine months ended
December 31, 1995 and 1996 are unaudited, but include all adjustments
(consisting of normal recurring adjustments) which management considers
necessary for a fair statement of the financial position at such dates and the
operating results and cash flows for such periods. Results for interim periods
are not necessarily indicative of results for the entire year or any future
periods.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets
(principally 3 to 5 years). Leasehold improvements are amortized over the lesser
of the estimated economic life of the asset or the remaining term of the lease.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly liquid investments
with maturities of three months or less when purchased. Short-term investments
are recorded at amortized cost plus accrued interest which approximates market
value. The Company generally invests its excess cash in commercial paper,
corporate debt instruments and U.S. government securities. The Company has
established guidelines relative to diversification and maturities that are
periodically reviewed and modified to take advantage of trends in yields and
interest rates. The Company has not experienced any losses on its cash
equivalents or short-term investments.
The Company applies Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," to value its
investments. Under the statement, the Company classifies its short-term
investments as "Available-for-Sale" and records such assets at estimated fair
value in the balance sheet. As of March 31, 1995 and 1996 and as of December 31,
1996, the cost of cash equivalents and short-term investments was equal to
estimated fair value.
F-7
<PAGE> 64
TRITEAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF DECEMBER 31, 1996 AND FOR THE NINE MONTHS ENDED
DECEMBER 31, 1995 AND 1996 IS UNAUDITED)
Concentration of Credit Risk
Credit is extended based on an evaluation of the customer's financial
condition and collateral is generally not required. Credit losses have been
minimal and such losses have been within management's expectations.
Revenue Recognition
Revenue from sales of software licenses is recognized upon product shipment
provided that no significant vendor obligations remain and collection of the
resulting receivable is deemed probable. Maintenance revenue is recognized
ratably over the term of the maintenance agreement, which in most cases is one
year. Revenue from other contract services is recognized under the
percentage-of-completion method.
Capitalized Software
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed," development costs incurred in the research and development
of new software products and enhancements to existing software products are
expensed as incurred until technological feasibility in the form of a working
model has been established. To date, the Company's software development has been
completed concurrent with the establishment of technological feasibility, and,
accordingly, no costs have been capitalized.
Income Taxes
The Company accounts for income taxes following the provisions of SFAS 109,
"Accounting for Income Taxes." SFAS 109 is an asset and liability approach that
requires the recognition of deferred tax assets and liabilities for expected
future tax consequences of events that have been recognized in the Company's
financial statements or tax returns.
Computation of Net Income (Loss) Per Share
Net income (loss) per share is computed using the weighted average number
of common shares and common stock equivalents outstanding. Common equivalent
shares from stock options and warrants are excluded from the computation when
their effect is antidilutive except that, pursuant to the Securities and
Exchange Commission Staff Accounting Bulletins, common shares and common
equivalent shares issued during the twelve months prior to the initial filing of
the Registration Statement with the Securities and Exchange Commission have been
included in the calculation as outstanding for all periods prior to the
Company's initial public offering (using the treasury stock method). The
calculation also gives effect to the conversion of all convertible preferred
shares (using the if-converted method), which automatically converted into
common shares upon completion of the Company's initial public offering.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and disclosures made in the accompanying notes to the consolidated
financial statements. Actual results could differ from those estimates.
F-8
<PAGE> 65
TRITEAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF DECEMBER 31, 1996 AND FOR THE NINE MONTHS ENDED
DECEMBER 31, 1995 AND 1996 IS UNAUDITED)
Stock Options
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation," which is effective for the
Company's 1997 financial statements. SFAS No. 123 allows companies to account
for stock-based compensation under either the new provisions of SFAS No. 123 or
the provisions of APB 25, but requires pro-forma disclosure in the footnotes to
the financial statements as if the measurement provisions of SFAS No. 123 had
been adopted. The Company intends to continue accounting for its stock-based
compensation in accordance with the provisions of APB 25. As such, the
provisions will not impact the financial position or the results of operations
of the Company.
2. BALANCE SHEET COMPONENTS
Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
MARCH 31,
----------------------- DECEMBER 31,
1995 1996 1996
--------- ----------- ------------
<S> <C> <C> <C>
Computer equipment....................... $ 325,043 $ 988,356 $ 1,474,771
Furniture and fixtures................... 103,468 384,416 480,488
Leasehold improvements................... 38,583 58,663 106,269
--------- ----------- ----------
467,094 1,431,435 2,061,528
Less accumulated depreciation and
amortization........................... (74,950) (407,395) (834,569)
--------- ----------- ----------
$ 392,144 $ 1,024,040 $ 1,226,959
========= =========== ==========
</TABLE>
Accrued Liabilities
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
----------------------- DECEMBER 31,
1995 1996 1996
--------- ----------- ------------
<S> <C> <C> <C>
Royalties payable........................ $ 334,615 $ 2,030,346 $ 2,314,913
Accrued compensation and related
benefits............................... 207,471 877,222 1,498,016
Other accrued liabilities................ 79,675 274,193 401,228
--------- ----------- ----------
$ 621,761 $ 3,181,761 $ 4,214,157
========= =========== ==========
</TABLE>
3. LINE OF CREDIT FACILITY
Effective March 31, 1995, the Company entered into a revolving bank credit
facility (the "Facility"). Borrowings are secured by substantially all Company
assets and are limited to the lesser of $1,100,000 or 80% of eligible accounts
receivable. Interest is payable monthly at prime plus 1.5% (9.75% at March 31,
1996). At March 31, 1996, $113,542 was outstanding under the Facility.
F-9
<PAGE> 66
TRITEAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF DECEMBER 31, 1996 AND FOR THE NINE MONTHS ENDED
DECEMBER 31, 1995 AND 1996 IS UNAUDITED)
4. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
MARCH 31,
------------------- DECEMBER 31,
1995 1996 1996
-------- -------- ------------
<S> <C> <C> <C>
Note payable to bank, secured by $ --
substantially all Company assets........... $ -- $364,164
Notes payable to bank, secured by --
substantially all Company assets and
personally guaranteed by an Officer of the
Company.................................... 112,883 --
Notes payable to stockholders................ 28,642 -- --
-------- -------- -------
141,525 364,164 --
Less current portion......................... 21,304 121,388 --
-------- -------- -------
Long-term debt............................... $120,221 $242,776 $ --
======== ======== =======
</TABLE>
During April 1995, the Company refinanced the notes payable to bank
aggregating $112,883 at March 31, 1995 with borrowings from the Facility (Note
3).
At March 31, 1996, the Company had borrowed $364,164 for equipment
purchases under the Facility. During April 1996, these borrowings were
refinanced and converted to a three-year term loan with equal monthly principal
payments plus interest at prime plus 2% (10.25% at March 31, 1996) on the unpaid
balance.
Maturities of long-term debt, including the refinancing in April 1996, are
as follows:
<TABLE>
<CAPTION>
YEARS ENDING MARCH 31, AMOUNT
-------------------------------------------------- --------
<S> <C>
1997.............................................. $121,388
1998.............................................. 121,388
1999.............................................. 121,388
--------
$364,164
========
</TABLE>
5. LEASE COMMITMENTS
The Company leases its offices under operating lease agreements which
expire at various dates through October 1999. Future annual minimum lease
payments under noncancellable operating leases having initial terms in excess of
one year at March 31, 1996 are as follows:
<TABLE>
<CAPTION>
YEARS ENDING MARCH 31, AMOUNT
-------------------------------------------------- --------
<S> <C>
1997.............................................. $361,343
1998.............................................. 277,292
1999.............................................. 150,051
2000.............................................. 18,581
--------
$807,267
========
</TABLE>
Rent expense for the years ended March 31, 1994, 1995 and 1996 was $17,171,
$65,000 and $413,185, respectively. Rent expense for the nine months ended
December 31, 1995 and 1996 was $275,877 and $402,544, respectively.
F-10
<PAGE> 67
TRITEAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF DECEMBER 31, 1996 AND FOR THE NINE MONTHS ENDED
DECEMBER 31, 1995 AND 1996 IS UNAUDITED)
6. BUSINESS SEGMENT AND GEOGRAPHIC AREA INFORMATION
The Company conducts its business within one industry segment. Total export
sales for the years ended March 31, 1995 and 1996 and for the nine months ended
December 31, 1995 and 1996 were $49,110, $1,256,790, $574,715 and $357,997,
respectively. There were no export sales in 1994.
Sales to individual customers (primarily resellers) exceeding 10% or more
of revenues in each year ended March 31 were as follows: During 1994, two
customers accounted for 45% and 24% of revenues, respectively; during 1995,
three customers accounted for 29%, 12% and 11% of revenues, respectively; and
during 1996, two customers accounted for 18% and 12% of revenues, respectively.
During the nine months ended December 31, 1995, one customer accounted for 15%
of revenues. During the nine months ended December 31, 1996, two customers
accounted for 50% and 24% of revenues, respectively.
7. STOCKHOLDERS' EQUITY
Convertible Preferred Stock
The holders of Series A, Series B and Series C Convertible Preferred Stock
are entitled to receive dividends, when, as and if declared by the Board of
Directors, at the rate of $0.10, $0.23 and $0.32, respectively, per share per
annum prior to the payment of any dividend on the outstanding Common Stock.
In the event of liquidation, holders of each outstanding share of Series A,
Series B and Series C Convertible Preferred Stock have a liquidation preference
of $2.13, $5.00 and $7.00 per share, respectively, plus all accrued but unpaid
dividends.
The Preferred Stock is convertible into Common Stock at the option of the
holders, at an initial conversion price of $2.13, $5.00 and $7.00 per share for
the Series A, Series B and Series C, respectively, subject to adjustments under
certain circumstances. Conversion is mandatory concurrent with a firm
underwritten initial public offering equal to or greater than $10,000,000 with a
price per share of not less than $8.00. Preferred stockholders have voting
rights equal to the number of common shares they would have upon conversion.
Common Stock
From March 1, 1993 to May 31, 1995, the Company granted an aggregate of
669,000 non-qualified stock options to certain executive officers and key
employees of the Company. The exercise price of such options was $0.25 per
share, the fair value of the common stock on the date of grant as determined by
the Board of Directors. Such options vest over a three year period in accordance
with the original vesting schedule of the options. In July 1995, the Company
cancelled such options and issued 669,000 shares of common stock to certain
officers and key employees under restricted stock purchase agreements (the
"Agreements"). Pursuant to the Agreements, the Company has the option to
repurchase, at the original option issue price of $0.25 per share, the unvested
shares in the event of termination of employment. At March 31, 1996 and December
31, 1996, 307,667 and 182,334 shares were subject to repurchase by the Company,
respectively.
Stock Option Plans
During 1995, the Company adopted the 1995 Stock Option Plan (the "Plan"),
under which 1,350,000 shares of the Company's Common Stock were reserved for
issuance upon exercise of options granted by the Company. The Plan provides for
the grant of both incentive and nonstatutory stock options to officers,
directors, employees and consultants of the Company. Options granted by the
Company generally vest over a three to four year period and are exercisable for
a period of ten years from the date of grant. Options are granted at the fair
market value of the shares at the date of grant as determined by the Board of
Directors.
F-11
<PAGE> 68
TRITEAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF DECEMBER 31, 1996 AND FOR THE NINE MONTHS ENDED
DECEMBER 31, 1995 AND 1996 IS UNAUDITED)
The Company recorded $188,000 of deferred compensation for options granted
during the year ended March 31, 1996, representing the difference between the
option exercise price and the deemed fair market value for financial statement
presentation purposes. The Company is amortizing such compensation ratably over
the vesting period of the options. During the year ended March 31, 1996 and for
the nine months ended December 31, 1996, the Company charged to operations
$36,100 and $38,700, respectively, for amortization of such deferred
compensation.
A summary of stock option transactions including 899,350 non-qualified
stock options granted outside of the Plan is as follows:
<TABLE>
<CAPTION>
WEIGHTED
OPTION AVERAGE
PRICE PRICE
SHARES PER SHARE PER SHARE
--------- -------------- ---------
<S> <C> <C> <C>
Granted...................................... 555,000 $ 0.001 - 0.25 $ 0.03
Outstanding at March 31, 1994.................. 555,000 $ 0.001 - 0.25 $ 0.03
Granted...................................... 787,900 $ 0.25 $ 0.25
Outstanding at March 31, 1995.................. 1,342,900 $ 0.001 - 0.25 $ 0.16
Granted...................................... 731,550 $ 0.25 - 5.00 $ 0.82
Canceled..................................... (706,750) $ 0.001 - 0.50 $ 0.19
Outstanding at March 31, 1996.................. 1,367,700 $ 0.001 - 5.00 $ 0.72
Granted (unaudited).......................... 349,102 $ 6.00 - 20.50 $ 13.19
Exercised (unaudited)........................ (54,539) $ .25 - 2.50 $ 1.70
Canceled (unaudited)......................... (20,151) $ .25 - 2.50 $ 2.35
Outstanding at December 31, 1996 (unaudited)... 1,642,112 $ .001 - 20.50 $ 3.36
</TABLE>
At March 31, 1996 and December 31, 1996, options to purchase 461,385 and
679,225 common shares, respectively, were exercisable and options to purchase
881,650 and 608,100 common shares, respectively, were available for future
grant, subject to stockholder approval.
Warrant
In connection with the Line of Credit Facility (Notes 3 and 4), the Company
issued a warrant for the purchase of 32,277 shares of common stock at $2.13 per
share. The warrant is exercisable immediately and expires in 2000.
Common Stock Reserved
At March 31, 1996 and December 31, 1996, a total of 3,808,874 and 2,477,088
shares, respectively, of the Company's Common Stock have been reserved for the
conversion of Convertible Preferred Stock, the exercise of options and warrants
outstanding and the issuance of stock under the 1996 Employee Stock Purchase
Plan.
F-12
<PAGE> 69
TRITEAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF DECEMBER 31, 1996 AND FOR THE NINE MONTHS ENDED
DECEMBER 31, 1995 AND 1996 IS UNAUDITED)
8. INCOME TAXES
The provision for (benefit from) income taxes consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
--------------------------------
1994 1995 1996
------- ------- --------
<S> <C> <C> <C>
CURRENT
Federal............................................ $ 5,215 $ -- $ --
State.............................................. 800 800 --
------- ------- ----------
Total current...................................... 6,015 800 --
DEFERRED
Federal............................................ 39,000 46,900 (85,900)
State.............................................. 11,000 100 (9,600)
------- ------- ----------
Total deferred..................................... 51,000 47,000 (95,500)
------- ------- ----------
Total provision for (benefit from) income taxes...... $56,015 $47,800 $(95,500)
======= ======= ==========
</TABLE>
The reconciliation of the Company's income tax provision (benefit) computed
at the Federal statutory rate in effect for each of the three years presented
below to the recorded provision for (benefit from) income taxes is as follows:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
------------------------------------
1994 1995 1996
------- -------- -----------
<S> <C> <C> <C>
Provision (benefit) at Federal statutory rate..... $44,677 $ 57,289 $(1,694,557)
State income tax provision, net of federal
benefit......................................... 8,448 585 --
Net operating loss not benefited.................. -- -- 1,599,057
Permanent differences and other................... 2,890 (10,074) --
------- ------- ------------
Provision (benefit) at effective rate............. $56,015 $ 47,800 $ (95,500)
======= ======= ============
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
Significant components of the Company's net deferred tax liabilities are as
follows:
<TABLE>
<CAPTION>
MARCH 31,
-----------------------
1995 1996
--------- ---------
<S> <C> <C>
Deferred tax liabilities:
Accrual to cash adjustments................................ $(140,000) $(276,000)
Depreciation............................................... (6,200) (6,000)
--------- ---------
Total deferred tax liabilities.......................... (146,200) (282,000)
Deferred tax assets:
Capitalized research expense............................... -- 76,400
Net operating loss carryforwards........................... 16,800 1,853,000
Research tax credit carryforwards.......................... 33,900 43,900
Depreciation............................................... -- 38,600
--------- ---------
Total deferred tax assets............................... 50,700 1,896,000
Valuation allowance........................................ -- 1,614,000
--------- ---------
Net deferred tax assets................................. 50,700 282,000
--------- ---------
Net deferred tax liabilities................................. $ (95,500) $ --
========= =========
</TABLE>
F-13
<PAGE> 70
TRITEAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF DECEMBER 31, 1996 AND FOR THE NINE MONTHS ENDED
DECEMBER 31, 1995 AND 1996 IS UNAUDITED)
As of March 31, 1996, the Company has approximately $4,900,000 and
$1,800,000 of federal and state net operating loss carryforwards, respectively.
The difference between the Federal and state tax loss carryforwards is primarily
attributable to the capitalization of research expenses for California purposes
and the 50% limitation on the California tax loss carryforwards. These Federal
and state carryforwards will begin expiring in 2010 and 2000, respectively,
unless previously utilized. The Company also has Federal and state research tax
credit carryforwards of approximately $24,000 and $30,000, respectively, which
will begin expiring in 2008, unless previously utilized.
Federal and California tax laws limit the utilization of net operating loss
and tax credit carryforwards that arise prior to certain cumulative changes in a
corporation's ownership resulting in a change of control of the Company.
However, the Company believes that such limitations will not have a material
impact on the utilization of the carryforwards.
9. EMPLOYEE RETIREMENT PLAN
The Company has established a 401(k) defined contribution retirement plan
(the "Plan") covering all employees. The Plan provides for voluntary employee
contributions from 1% to 15% of annual compensation (as defined). The Company
may contribute such amounts as determined by the Board of Directors. There were
no employer contributions to the Plan during the year ended March 31, 1996 or
the nine months ended December 31, 1996.
10. RECENT EVENTS (UNAUDITED)
Reincorporation
In August 1996, the Company reincorporated in the state of Delaware,
providing for 30,000,000 authorized shares of Common Stock with a $.001 par
value per share and for 5,000,000 authorized shares of Preferred Stock with a
$.001 par value per share. Pursuant to the reincorporation, each share of Common
Stock and each share of Preferred Stock of the Delaware corporation was
exchanged for one share of Common Stock and one share of Preferred Stock,
respectively, of the predecessor California corporation. The accompanying
financial statements have been retroactively restated to give effect to the
reincorporation.
1996 Employee Stock Purchase Plan
On June 11, 1996, the Company adopted the 1996 Employee Stock Purchase Plan
(the "Purchase Plan") and reserved 250,000 shares for issuance thereunder. The
Purchase Plan became effective upon the completion of the Company's initial
public offering in August 1996. The Purchase Plan permits eligible employees to
purchase common stock, through payroll deductions of up to 15% of the employee's
compensation, at a price equal to 85% of the fair market value of the common
stock at either the beginning or the end of the offering period, whichever is
lower.
Initial Public Offering
On August 6, 1996, the Company completed its initial public offering of
2,500,000 shares of its Common Stock. Net proceeds to the Company aggregated
approximately $17.6 million. As of the closing date of the offering, all of the
Preferred Stock outstanding was converted, on a one-for-one basis, into an
aggregate of 2,093,411 shares of Common Stock. A portion of the proceeds was
used to repay the Company's long-term debt (Note 4). On August 29, 1996, the
underwriters of the offering exercised their over-allotment option to
F-14
<PAGE> 71
TRITEAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF DECEMBER 31, 1996 AND FOR THE NINE MONTHS ENDED
DECEMBER 31, 1995 AND 1996 IS UNAUDITED)
purchase an additional 375,000 shares of Common Stock. Net proceeds to the
Company aggregated approximately $2.8 million.
Line of Credit Facility
On August 4, 1996, the $1.1 million Facility expired (Note 3). On November
18, 1996, the Company entered into a $3 million revolving bank credit facility
which expires on October 30, 1997. Borrowings are secured by substantially all
Company assets and bear interest at the bank's prime rate (8.25% at December 31,
1996). At December 31, 1996, no amounts were outstanding under the facility.
Registration Statement
On February 19, 1997, the Company completed a public offering of 2,200,000
shares of the Company's Common Stock at $19.25 per share, of which 1,365,000
shares were sold by the Company and 835,000 shares were sold by certain
stockholders of the Company. The net proceeds to the Company were approximately
$24.3 million.
F-15
<PAGE> 72
============================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION AND
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY, ANY SELLING STOCKHOLDER OR THE UNDERWRITERS. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES
IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary..................... 3
Risk Factors........................... 5
Use of Proceeds........................ 15
Price Range of Common Stock............ 15
Dividend Policy........................ 15
Capitalization......................... 16
Dilution............................... 17
Selected Financial Data................ 18
Management's Discussion and Analysis
of Financial Condition and Results of
Operations........................... 19
Business............................... 26
Management............................. 40
Certain Transactions................... 48
Principal and Selling Stockholders..... 49
Description of Capital Stock........... 51
Shares Eligible for Future Sale........ 52
Underwriting........................... 54
Legal Matters.......................... 55
Experts................................ 55
Available Information.................. 56
Index to Financial Statements.......... F-1
==============================================
</TABLE>
============================================================
2,200,000 SHARES
LOGO
COMMON STOCK
------------------------
PROSPECTUS
------------------------
PAINEWEBBER INCORPORATED
HAMBRECHT & QUIST
PIPER JAFFRAY INC.
------------------------
FEBRUARY 19, 1997
============================================================
