<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 20, 1996
REGISTRATION NO. 333-13771
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
VERSATILITY INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
DELAWARE 7372 52-1214354
(State or other jurisdiction
of incorporation or (Primary Standard Industrial (I.R.S. Employer
organization) Classification Code Number) Identification Number)
</TABLE>
11781 LEE JACKSON MEMORIAL HIGHWAY
SEVENTH FLOOR
FAIRFAX, VIRGINIA 22033
(703) 591-2900
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
RONALD R. CHARNOCK
PRESIDENT, CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD OF DIRECTORS
VERSATILITY INC.
11781 LEE JACKSON MEMORIAL HIGHWAY
SEVENTH FLOOR
FAIRFAX, VIRGINIA 22033
(703) 591-2900
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------
COPIES TO:
<TABLE>
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LAWRENCE S. WITTENBERG, ESQ. BRENT B. SILER, ESQ.
TESTA, HURWITZ & THIBEAULT, LLP HALE AND DORR
HIGH STREET TOWER 1455 PENNSYLVANIA AVENUE, N.W.
125 HIGH STREET SUITE 1000
BOSTON, MASSACHUSETTS 02110 WASHINGTON, D.C. 20004
(617) 248-7000 (202) 942-8400
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this registration statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]________
If this form is a post effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED NOVEMBER 20, 1996
PROSPECTUS
- ----------
2,200,000 SHARES
[VERSATILITY INC. LOGO]
COMMON STOCK
------------
All of the 2,200,000 shares of Common Stock offered hereby are being
offered by Versatility Inc. ("Versatility" or the "Company"). Prior to this
offering, there has been no public market for the Common Stock of the Company.
It is currently estimated that the initial public offering price of the Common
Stock will be between $13.00 and $15.00 per share. See "Underwriting" for
information relating to the factors to be considered in determining the initial
public offering price.
The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "VERS."
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING
ON PAGE 5 FOR A DISCUSSION OF CERTAIN RISK FACTORS THAT SHOULD BE CONSIDERED BY
PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
------------------------
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>
<CAPTION>
===============================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share................. $ $ $
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Total(3).................. $ $ $
================================================================================
</TABLE>
(1) The Company and certain stockholders (the "Selling Stockholders") have
agreed to indemnify the several Underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, as amended. See
"Principal and Selling Stockholders" and "Underwriting."
(2) Before deducting expenses estimated at $780,000, payable by the Company.
(3) The Company and the Selling Stockholders have granted to the several
Underwriters options, exercisable within 30 days after the date hereof, to
purchase up to an additional 330,000 shares of Common Stock solely to cover
over-allotments, if any. If all of such additional shares are purchased,
the total Price to Public, Underwriting Discount, Proceeds to Company and
Proceeds to the Selling Stockholders will be $ , $ , $
and $ , respectively. See "Principal and Selling Stockholders" and
"Underwriting."
------------------------
The shares of Common Stock are offered by the several Underwriters subject
to prior sale, when, as and if issued to and accepted by them, subject to
approval of certain legal matters by counsel for the Underwriters and certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
delivery of the shares of Common Stock will be made in New York, New York, on or
about , 1996.
------------------------
MERRILL LYNCH & CO.
MONTGOMERY SECURITIES
OPPENHEIMER & CO., INC.
------------------------
The date of this Prospectus is , 1996
<PAGE> 3
[Logo]
Versatility Inc.
VERSATILITY TELESALES CALL CENTER APPLICATION
---------------------------------------------
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<S> <C> <C> <C> <C> <C>
Agents may perform Products are Simple and Questions and The application includes The Next Step
account searches displayed in a complex orders Objections enables extensive on-line help. button is used
using search strings, features and and quotes can agents to quickly Agents can search for to navigate
wild cards and benefits format be generated and field common help topics, obtain through a pre-
case-sensitive with cross-sell tracked by questions that glossary information or defined flow
searches. and up-sell account. may arise during access cue cards for of screens.
information. conversation. step-by-step
instructions.
</TABLE>
[Picture of computer screen with arrows pointing from descriptive paragraphs to
parts of the computer screen.]
The Profile Screen displays demographic information about the account.
The Desktop Telephone brings telephony services to the agent's PC. The system
provides autodialing, predictive dialing and voice/data transfer.
The Call Status Bar is used to indicate the outcome of the conversation,
important for tracking trends with regard to products, services and account
preferences/dislikes.
A color-coded transaction clock indicates the time spent with an account. It
also shows the agents' current time and the account's current time, each
expressed in the appropriate time zone.
PowerGuide is a presentation support tool providing call guides, scripting and
integration to other applications and database.
PowerGuide uses buttons and hot spots for intelligent branching to other panels
or applications.
Versatility is a trademark, and POWERGUIDE(R) and the Company's logo are
registered trademarks, of the Company. This Prospectus also includes
trademarks and tradenames of other companies.
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 TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified
in its entirety by, the more detailed information, including "Risk Factors" and
the Consolidated Financial Statements and Notes thereto, appearing elsewhere in
this Prospectus.
THE COMPANY
Versatility is a leading provider of client/server customer interaction
software that enables businesses to automate and enhance their telemarketing and
teleselling capabilities. The Company's software products are designed to
increase the productivity and revenue-generating capabilities of organizations
operating call centers to interact with existing and potential customers. The
Company's products include desktop software applications, development and
customization tools and optional server-based software services, and support a
wide variety of leading computing platforms, allowing users to implement a
scaleable, flexible and interoperable software solution that can be used
independently or as part of an integrated enterprise-wide customer interaction
implementation. Versatility also offers fee-based professional, consulting and
maintenance services to provide implementation, integration and ongoing support
of the Company's software products.
Companies in a variety of industries recognize the strategic importance of
developing and maintaining long-term customer relationships. Companies are
increasingly viewing every stage of customer interaction, from initial sales and
marketing activities to post-sales service and support, as an opportunity to
distinguish their products and services, "cross-sell" related products or
"up-sell" higher margin products, and receive and process valuable customer
feedback. In recent years, telephony-based customer interaction has become an
increasingly significant channel as organizations have recognized that the
telephone can help them more effectively leverage their sales and marketing
investments, access a larger customer base, enhance customer satisfaction and
increase revenue.
The telephony-based customer interaction market is expected to grow
significantly over the next few years. Industry sources estimate that the market
for call center hardware and software is expected to exceed $10.0 billion by
2001. The customer interaction software market, which in addition to the
principal markets addressed by the Company includes customer support, help desk,
field sales force automation and quality assurance applications, is expected to
grow from $1.1 billion in 1995 to over $2.7 billion in 1998.
Versatility provides a suite of software applications that provide call
center agents with the guidance and product and customer information they need
to effectively sell increasingly complex products and services. The Company's
software can enhance revenue-generating functions by supporting not only order
taking but also cross-selling and up-selling other products and services.
Versatility's products also permit the gathering of valuable information
concerning customer needs, buying patterns and demographics, are fully
integrated with the organization's information and telephone systems, enabling
more effective exchange of gathered data and can readily be tailored to the
needs of particular businesses, marketing campaigns or call center agents. The
Company's software solutions are scaleable to support large volumes of calls and
open to permit integration with a wide variety of telephony and computing
systems.
The Company's products are used by customers operating large and mid-sized
call centers for activities including telebanking, claims servicing, customer
service, consumer product telesales and other applications. Since introducing
Versatility Series in May 1995, the Company has licensed Versatility Series
applications for use on over 6,000 agent desktops. The Company's customers
include Avantel, S.A., British Telecommunications Plc ("BT"), Chase Bank, Medco
Containment Services and Mellon Bank. Versatility markets its products and
services to customers in a number of targeted industries, including the
financial services and communications industries. The Company sells its software
and services in the United States through a direct sales organization that
focuses primarily on enterprise-wide, large-scale solutions with complex
requirements. In addition, Versatility markets and sells software through
value-added resellers ("VARs"), distributors and third party systems integrators
in the United States and internationally.
------------------------
The Company was incorporated as National Political Resources, Inc. in the
District of Columbia in 1981 and merged into NPRI, Inc., a Virginia corporation,
in July 1991. In January 1996, NPRI, Inc. reincorporated in Delaware. The
Company changed its name to Versatility Inc. in June 1996. The Company's
executive offices are located at 11781 Lee Jackson Memorial Highway, Seventh
Floor, Fairfax, Virginia 22033, and its telephone number is (703) 591-2900. As
used herein, the term "Company" refers to Versatility Inc., its subsidiaries and
the predecessors of Versatility Inc.
3
<PAGE> 5
THE OFFERING
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<S> <C>
Common Stock offered by the Company......................... 2,200,000 shares
Common Stock to be outstanding after the offering(1)........ 7,201,883 shares
Use of proceeds............................................. Working capital and other
general corporate purposes,
including expansion of the
Company's sales and marketing
and product development
organizations.
Proposed Nasdaq National Market symbol...................... VERS
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED APRIL 30, OCTOBER 31,
---------------------------------------------------- ------------------
1992 1993 1994 1995 1996 1995 1996
------ ------ ------ ------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue:
License revenue.............................. $4,226 $5,510 $5,393 $ 8,045 $10,345 $3,616 $ 7,548
Service and maintenance revenue.............. 2,271 2,411 2,987 3,440 6,190 3,035 3,923
Total revenue............................ 6,497 7,921 8,380 11,485 16,535 6,651 11,471
Write-off of capitalized software(2)........... -- -- -- -- 829 829 --
Income (loss) from operations(2)............... (171) (383) 161 1,981 861 (145) 612
Net income (loss).............................. (174) (372) 110 1,257 657 (92) 418
Pro forma net income (loss) per share(3)....... $ 0.12 $(0.02) $ 0.07
Pro forma weighted average number of shares
outstanding(3)............................... 5,603 5,603 5,603
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 31, 1996
-----------------------------------
PRO PRO FORMA AS
ACTUAL FORMA(4) ADJUSTED(4)(5)
------- -------- --------------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents....................................................... $ 1,983 $ 1,983 $ 29,847
Working capital................................................................. 5,311 5,311 33,175
Total assets.................................................................... 13,149 13,149 41,013
Long-term debt, less current portion............................................ 201 201 201
Redeemable convertible preferred stock.......................................... 3,737 -- --
Stockholders' equity............................................................ 2,080 5,817 33,681
</TABLE>
- ---------------
(1) Excludes (i) 740,505 shares of Common Stock issuable upon the exercise of
outstanding options and (ii) 711,000 shares of Common Stock available for
issuance pursuant to the Company's stock plans. See "Management -- Stock
Plans."
(2) Income from operations in fiscal 1994, 1995 and 1996 and in the six months
ended October 31, 1995 reflects the impact of the capitalization and
subsequent amortization of software development costs. Income from
operations in fiscal 1996, including the six months ended October 31, 1995,
reflects a one-time write-off of unamortized software development costs of
$829,000 in July 1995. Had the software development costs not been required
to be capitalized, and the corresponding amortization and write-off not been
recorded, income (loss) from operations in fiscal 1994, 1995 and 1996 and in
the six months ended October 31, 1995 would have been ($91,000), $1.4
million, $1.7 million and $684,000, respectively.
(3) Calculated on the basis described in Note 1 of Notes to Consolidated
Financial Statements.
(4) Gives effect to the automatic conversion of all outstanding shares of the
Company's Series A Preferred Stock into 992,061 shares of Common Stock upon
the closing of this offering.
(5) Adjusted to reflect the sale by the Company of shares of Common Stock
offered hereby at an assumed initial public offering price of $14.00 per
share and the receipt of the estimated net proceeds therefrom.
Except as otherwise noted or the context otherwise requires, all
information contained in this Prospectus (i) assumes no exercise of the
Underwriters' over-allotment option, (ii) reflects the automatic conversion of
all outstanding shares of Series A Convertible Preferred Stock (the "Series A
Preferred Stock") into 992,061 shares of Common Stock upon the closing of this
offering and (iii) reflects the filing of an Amended and Restated Certificate of
Incorporation upon the closing of this offering to delete all references to the
Series A Preferred Stock and to create a class of authorized but undesignated
preferred stock. See "Description of Capital Stock," "Underwriting" and Notes 7
and 13 of Notes to Consolidated Financial Statements. The Company's fiscal year
ends on April 30. All references to fiscal years in this Prospectus refer to the
fiscal years ending in the calendar years indicated (e.g., fiscal 1996 refers to
the fiscal year ended April 30, 1996).
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."
4
<PAGE> 6
RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be considered in evaluating the Company and its business before
purchasing shares of Common Stock offered hereby.
DEPENDENCE ON NEW PRODUCTS; RISK ASSOCIATED WITH SERVICING THE CUSTOMER
INTERACTION SOFTWARE MARKET
The Company currently derives substantially all of its revenue from sales
of its Versatility Series software and related services. The Versatility Series
was introduced in May 1995, and the Company expects that this product and
related services, together with Versatility CallCenter, introduced in August
1996, will continue to account for a substantial portion of the Company's
revenue for the foreseeable future. However, the Company has little operating
history with the Versatility Series and Versatility CallCenter products. The
Company's financial results for periods prior to fiscal 1996 reflect sales of
the Company's previous generation of products, which the Company no longer
actively markets. The lifecycle of the Company's current products is difficult
to estimate as a result of many factors, including the unknown future demand for
customer interaction software and the effects of competition in this market.
Moreover, although the Company intends to enhance these products and develop
related products, the Company's strategy is to continue to focus on providing
customer interaction software applications as its sole line of business. As a
result, any factor adversely affecting the market for customer interaction
software applications in general, or the Versatility Series and Versatility
CallCenter products in particular, could adversely affect the Company's
business, financial condition and results of operations. The market for customer
interaction software products is intensely competitive, highly fragmented and
subject to rapid change. The Company's future success will depend on continued
growth in the market for customer interaction applications. There can be no
assurance that the market for customer interaction applications will continue to
grow. If this market fails to grow or grows more slowly than the Company
currently anticipates, the Company's business, financial condition and results
of operations would be materially adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
DEPENDENCE ON LARGE LICENSE FEES AND CUSTOMER CONCENTRATION
A relatively small number of customers have accounted for a significant
percentage of the Company's revenue in any given period. In fiscal 1996, the
Company's eight largest customers accounted for 73.3% of the Company's total
revenue, two of which, BT and Medco Containment Services, accounted for 25.7%
and 22.2%, respectively. In the first six months of fiscal 1997, two customers,
BT and Avantel, S.A., accounted for 24.9% and 18.7%, respectively, of the
Company's total revenue. Although the particular customers may change from
period to period, the Company expects that large sales to a limited number of
customers will continue to account for a significant percentage of its revenue
in any particular period for the foreseeable future. Therefore, the loss,
deferral or cancellation of an order could have a significant impact on the
Company's operating results in a particular quarter. The Company has no
long-term contracts with its customers and there can be no assurance that its
current customers will place additional orders, or that the Company will obtain
orders of similar magnitude from other customers. The loss of any major customer
or any reduction, delay in or cancellation of orders by any such customer, or
the failure of the Company to market successfully to new customers could have a
materially adverse effect on the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Quarterly Results of Operations."
QUARTERLY FLUCTUATIONS IN REVENUE AND OPERATING RESULTS
The Company's revenue and operating results could fluctuate significantly
from quarter to quarter due to a combination of factors, including variations in
the demand for the Company's products, the level of product and price
competition, the length of the Company's sales process, the size and timing of
individual transactions, the mix of products and services sold, the mix of sales
through direct and indirect channels, any delay in or cancellation of customer
implementations, the Company's success in expanding its customer support
organization, direct sales force and indirect distribution channels, the timing
of new product introductions and enhancements by the Company or its competitors,
the ratio of international to domestic
5
<PAGE> 7
sales, commercial strategies adopted by competitors, changes in foreign currency
exchange rates, customers' budgets constraints, and the Company's ability to
control costs. In addition, a limited number of relatively large customer orders
has accounted for and is likely to continue to account for a substantial portion
of the Company's total revenue in any particular quarter. The timing of such
orders can be difficult to predict given the average size of the Company's
orders and the length of its sales process. The Company has in the past
recognized a substantial portion of its revenue in the last month of a quarter.
Therefore, the loss, deferral or cancellation of an order could have a
significant adverse impact on the Company's revenue and operating results in a
particular quarter. Because the Company's operating expense levels are
relatively fixed and tied to anticipated levels of revenue, any delay in the
recognition of revenue from a limited number of license transactions could cause
significant variations in operating results from quarter to quarter. Based upon
all of the foregoing, the Company believes that quarter-to-quarter comparisons
of its results of operations are not necessarily meaningful and such comparisons
should not be relied upon as indications of future performance. It is also
likely that the Company's future quarterly operating results in any given period
will not meet the expectations of market analysts or investors, which could have
an adverse effect on the price of the Company's Common Stock. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Quarterly Results of Operations."
LENGTH OF SALES AND IMPLEMENTATION PROCESSES
Selling the Company's products generally requires the Company to provide a
significant level of education to prospective customers regarding the use and
benefits of the Company's products. In addition, implementation of the Company's
products involves a significant commitment of resources by prospective customers
and is commonly associated with substantial integration efforts which may be
performed by the Company, by the customer, or by a third party systems
integrator. For these and other reasons, the length of time between the date of
initial contact with the potential customer and the implementation of the
Company's products is often lengthy, typically ranging from two to nine months
or more, and is subject to delays over which the Company has little or no
control. The Company's implementation cycle could be lengthened by increases in
the size and complexity of its implementations and by delays in its customers'
adoption of client/server computing environments. Delay in or cancellation of
the sale or implementation of applications could have a materially adverse
effect on the Company's business, financial condition and results of operations
and cause the Company's operating results to vary significantly from quarter to
quarter. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Quarterly Results of Operations."
EXPANSION OF SALES FORCE AND CHANNELS OF DISTRIBUTION
Historically, the Company has distributed its products primarily through
its direct sales force. An integral part of the Company's strategy includes
expanding its direct sales force while developing additional marketing, sales
and implementation relationships with third party systems integrators and
value-added resellers ("VARs"). The Company's ability to achieve significant
revenue growth in the future will depend on its ability to attract, train and
retain additional qualified direct sales personnel. In addition, the Company
currently is investing, and intends to continue investing, significant resources
to develop its relationships with third party systems integrators and VARs,
especially in international markets. The Company has only limited experience
distributing its products through indirect channels. If the Company is unable to
develop its relationships with third party systems integrators and VARs, or if
the third party systems integrators and VARs with which the Company develops
relationships are unable to effectively market, sell and implement the Company's
software applications, the Company's business, financial condition and results
of operations could be materially adversely affected. See "Business -- Sales and
Marketing."
DEPENDENCE ON INDIRECT DISTRIBUTION CHANNELS; POTENTIAL FOR CHANNEL CONFLICT
The Company's strategy is to increase its use of third party systems
integrators and VARs to distribute its products. These independent sales
organizations, which generally install and support the product lines of a number
of companies, are not under the direct control of the Company, are not subject
to any minimum purchase requirements and can discontinue marketing the Company's
products at any time without cause.
6
<PAGE> 8
Many of the Company's third party systems integrators and VARs sell or co-market
potentially competitive products. Accordingly, the Company must compete for the
focus and sales efforts of its third party systems integrators and VARs.
Additionally, selling through indirect channels may limit the Company's contacts
with its customers. As a result, the Company's ability to accurately forecast
sales and revenue, evaluate customer satisfaction and recognize emerging
customer requirements may be hindered. In addition, the Company's gross profit
on sales to third party systems integrators and VARs tends to be lower than on
its direct sales, although the Company's selling and marketing expenses and
servicing costs also tend to be lower with respect to these sales. There can be
no assurance that the Company's current third party systems integrators and VARs
will continue to distribute or recommend the Company's products or do so
successfully. There can also be no assurance that one or more of these companies
will not begin to market products in competition with the Company. The
termination of one or more of these relationships could adversely affect the
Company's business, financial condition and results of operations. See "Business
- -- Sales and Marketing."
The Company's strategy of marketing its products directly to end-users and
indirectly through VARs and third party systems integrators may result in
distribution channel conflicts. The Company's direct sales efforts may compete
with those of its indirect channels and, to the extent different resellers
target the same customers, resellers may also come into conflict with each
other. Although the Company has attempted to manage its distribution channels in
a manner to avoid potential conflicts, there can be no assurance that channel
conflicts will not materially adversely affect its relationships with existing
third party systems integrators or VARs or adversely affect its ability to
attract new third party systems integrators and VARs. See "Business -- Sales and
Marketing."
INTERNATIONAL OPERATIONS
Revenue from sales outside the United States in fiscal 1994, 1995, 1996 and
the first six months of fiscal 1997 accounted for approximately 18.8%, 16.3%,
40.8% and 53.6%, respectively, of the Company's total revenue. International
operations are subject to inherent risks, including the impact of possible
recessionary environments in economies outside the United States, changes in
demand for the Company's products resulting from fluctuations in exchange rates,
unexpected changes in legal and regulatory requirements including those relating
to telemarketing activities, changes in tariffs, seasonality of sales, costs of
localizing products for foreign markets, longer accounts receivable collection
periods and greater difficulty in accounts receivable collection, difficulties
and costs of staffing and managing foreign operations, reduced protection for
intellectual property rights in some countries, potentially adverse tax
consequences and political and economic instability. There can be no assurance
that the Company will be able to sustain or increase international revenue, or
that the factors listed above will not have a material adverse impact on the
Company's international operations. While the Company's expenses incurred in
foreign countries are typically denominated in the local currencies, revenue
generated by the Company's international sales typically is paid in U.S. dollars
or British pounds. Although exposure to currency fluctuations to date has been
insignificant, there can be no assurance that fluctuations in currency exchange
rates in the future will not have a material adverse impact on the Company's
international operations. The Company currently does not engage in hedging
activities.
A significant element of the Company's strategy is to continue the
expansion of its operations in international markets. This expansion has
required and will continue to require significant management attention and
financial resources to develop international sales channels. Because of the
difficulty in penetrating new markets, along with the Company's size and
geographic location, there can be no assurance that the Company will be able to
maintain or increase international revenue. To the extent that the Company is
unable to do so, the Company's financial condition and results of operations
could be materially adversely affected. A substantial portion of the Company's
international sales are expected to be made using indirect selling channels,
such as third party systems integrators and VARs. A reduction in sales by all or
some of these distributors or a termination of their relationships with the
Company could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Sales and
Marketing."
7
<PAGE> 9
COMPETITION
The market for the Company's products is intensely competitive, highly
fragmented and subject to rapid change. Because the Company offers multiple
applications which can be purchased separately or integrated as part of the
Versatility Series, the Company competes with a variety of companies depending
on the target market for their applications software products. The Company's
principal competitors in the customer interaction software market are Brock
International, Inc., Digital Systems International, Inc., Information Management
Associates, Inc., Scopus Technology, Inc. and The Vantive Corporation. For
installations where telephony functions are of prime importance, competitors
include Davox Corporation, Early Cloud and Company (a division of IBM) and EIS
International, Inc. The Company also competes with third party professional
service organizations that develop custom software and with the information
technology departments of potential customers, which develop applications
internally. Among the Company's potential competitors are also a number of large
hardware and software companies that may develop or acquire products that
compete with the Company's products. Increased competition is likely to result
in price reductions, reduced operating margins and loss of market share, any of
which could materially adversely affect the Company's business, financial
condition and results of operations. Many of the Company's current and potential
competitors have significantly greater financial, technical, marketing and other
resources than the Company. As a result, they may be able to respond more
quickly to new or emerging technologies and changes in customer requirements, or
to devote greater resources to the development, promotion and sale of products
than can the Company. There can be no assurance that the Company will be able to
compete successfully against current and future competitors or that competitive
pressures faced by the Company will not materially adversely affect its
business, financial condition and results of operations. See "Business --
Competition."
MANAGEMENT OF GROWTH
The Company has recently experienced significant growth in revenue,
operations and personnel. Continued growth will challenge the Company's
management systems and resources and require the Company to improve and upgrade
its management information systems. In addition, the Company will need to hire
more technical, sales and marketing, support and administrative personnel to
adequately service and support its growing customer base. There can be no
assurance that the Company will be able to successfully upgrade its systems or
to attract, retain and successfully train the necessary personnel to accomplish
its growth strategies or that it will not experience constraints that will
adversely affect its ability to satisfy customer demand in a timely fashion or
to satisfactorily support its customers. Any of these events could injure the
Company's reputation or lead to loss of customers. If the Company is unable to
manage growth effectively, the Company's business, financial condition and
results of operations could be adversely affected. See "Business -- Employees"
and "Management -- Executive Officers and Directors."
DEPENDENCE ON GROWTH OF CLIENT/SERVER COMPUTING ENVIRONMENT
The client/server software environment is relatively new. The Company
markets its products solely to customers that have committed or are committing
their call center systems to client/server environments, or are converting
legacy systems, in part or in whole, to a client/server environment. The
Company's success will depend on further development of and growth in the number
of organizations adopting client/server computing environments. There can be no
assurance, however, that the client/server market will maintain its current rate
of growth. There also can be no assurance that the client/server computing
trends anticipated by the Company will occur or that the Company will be able to
respond effectively to the evolving requirements of this market. If the
client/server market fails to grow, or grows at a rate slower than experienced
in the past, the Company's business, financial condition and results of
operations could be materially adversely affected.
RAPID TECHNOLOGICAL CHANGE AND PRODUCT DEVELOPMENT RISKS
The customer interaction software market is subject to rapid technological
change, changing customer needs, frequent new product introductions and evolving
industry standards that may render existing products and services obsolete. As a
result, the Company's position in this market could be eroded rapidly by
unforeseen changes in application features and functions. The life cycles of the
Company's products are difficult to estimate. The Company's growth and future
operating results will depend in part upon its ability to
8
<PAGE> 10
enhance existing applications and develop and introduce new applications that
meet or exceed technological advances in the marketplace, that meet changing
customer requirements, that respond to competitive products and that achieve
market acceptance. The Company's product development and testing efforts are
expected to require substantial investments by the Company. There can be no
assurance that the Company will possess sufficient resources to make these
necessary investments. The Company has in the past experienced delays both in
developing new products and in customizing existing products, and there can be
no assurance that the Company will not experience difficulties that could cause
delays in the future. In addition, there can be no assurance that such products
will meet the requirements of the marketplace and achieve market acceptance, or
that the Company's current or future products will conform to industry
standards. If the Company is unable, for technological or other reasons, to
develop and introduce new and enhanced products in a timely manner, the
Company's business, financial condition and results of operations could be
materially adversely affected.
Software products as complex as those offered by the Company may contain
errors that may be detected at any point in the products' life cycles. The
Company has, in the past, discovered software errors in certain of its products
and has experienced delays in shipment of products during the period required to
correct these errors. In particular, the computing environment is characterized
by a wide variety of standard and non-standard configurations that make
pre-release testing for programming or compatibility errors very difficult and
time consuming. There can be no assurance that, despite extensive testing by the
Company and by current and potential customers, errors will not be found,
resulting in loss of, or delay in, market acceptance and sales, diversion of
development resources, injury to the Company's reputation, or increased service
and warranty costs, any of which could have a material adverse effect on the
Company's business, financial condition and results of operations. See "Business
- -- Product Development."
DIFFICULTY IN PROTECTING PROPRIETARY TECHNOLOGY; RISK OF INFRINGEMENT
The Company relies on a combination of copyright, trade secret and
trademark laws, confidentiality procedures and contractual provisions to protect
its proprietary rights in its products and technology. The Company does not rely
upon patent protection and does not currently expect to seek patents on any
aspects of its technology. There can be no assurance that the confidentiality
agreements and other methods on which the Company relies to protect its trade
secrets and proprietary technology will be adequate. Further, the Company may be
subject to additional risks as it enters into transactions in countries where
intellectual property laws are not well developed or are poorly enforced. Legal
protections of the Company's rights may be ineffective in such countries.
Litigation to defend and enforce the Company's intellectual property rights
could result in substantial costs and diversion of resources and could have a
materially adverse effect on the Company's business, financial condition and
results of operations, regardless of the final outcome of such litigation.
Despite the Company's efforts to safeguard and maintain its proprietary rights
both in the United States and abroad, there can be no assurance that the Company
will be successful in doing so or that the steps taken by the Company in this
regard will be adequate to deter misappropriation or independent third-party
development of the Company's technology or to prevent an unauthorized third
party from copying or otherwise obtaining and using the Company's products or
technology. There also can be no assurance that others will not independently
develop similar technologies or duplicate any technology developed by the
Company. Any such events could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company has entered into agreements with a small number of its
customers requiring the Company to place its source code in escrow. These escrow
agreements typically provide that these customers have a limited, non-exclusive
right to use such code in the event that there is a bankruptcy proceeding by or
against the Company, if the Company ceases to do business or if the Company
fails to meet its support obligations. Entering into such agreements may
increase the likelihood of misappropriation by third parties.
As the number of customer interaction software applications in the industry
increases and the functionality of these products further overlaps, software
development companies like the Company may increasingly become subject to claims
of infringement or misappropriation of the intellectual property rights of
others. There can be no assurance that third parties will not assert
infringement or misappropriation claims
9
<PAGE> 11
against the Company in the future with respect to current or future products.
Any claims or litigation, with or without merit, could be time-consuming, result
in costly litigation, cause product shipment delays or 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, which could have a material adverse effect on the Company's
business, financial condition and results of operations. Adverse determinations
in such claims or litigation could also have a material adverse effect on the
Company's business, financial condition and results of operations.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant extent upon the continued
service of its executive officers and other key management and technical
personnel, and on its ability to continue to attract, retain and motivate
qualified personnel, such as experienced software developers and sales
personnel. Competition for such employees is very intense. The Company has no
long-term employment contracts with any of its employees. The loss of the
services of one or more of the Company's executive officers, software developers
or other key personnel or the Company's inability to recruit replacements for
such personnel could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company maintains $1.0
million of key-man life insurance on Ronald R. Charnock, the Company's President
and Chief Executive Officer. See "Business -- Employees" and "Management --
Executive Officers and Directors."
REGULATORY ENVIRONMENT
Certain uses of outbound call processing systems are regulated by federal,
state and foreign law. Although the compliance with these laws may limit the
potential use of the Company's products in some respects, the Company's systems
can be programmed to operate automatically in full compliance with these laws
through the use of appropriate calling lists and calling campaign time
parameters. There can be no assurance, however, that future legislation further
restricting telephone solicitation practices, if enacted, would not adversely
affect the Company. See "Business -- Regulatory Environment."
CONTROL BY DIRECTORS, EXECUTIVE OFFICERS AND THEIR AFFILIATES
Upon the closing of this offering, the Company's directors, executive
officers and other employees, together with entities affiliated with them, will
beneficially own approximately 66.5% of the outstanding Common Stock (62.8% if
the Underwriters' over-allotment option is exercised in full). Accordingly, such
persons together will have sufficient voting power to control the outcome of
matters submitted to the stockholders for approval (including the election of
the Board of Directors) and also to have control over the management and affairs
of the Company. As a result of such control, certain transactions may not be
possible without the approval of such stockholders. These transactions include
mergers involving the Company, tender offers, open-market purchase programs or
other purchases of Common Stock that could give stockholders of the Company the
opportunity to realize a premium over the then-prevailing market price for their
shares of Common Stock. See "Principal and Selling Stockholders" and
"Description of Capital Stock -- Delaware Law and Certain Charter and By-Law
Provisions; Anti-Takeover Effects."
BROAD DISCRETION IN USE OF PROCEEDS
The Company intends to use the proceeds of this offering primarily for
working capital and general corporate purposes, including expansion of the
Company's sales and marketing and product development organizations. The Company
has not identified specific uses of the net proceeds to be received by it from
this offering. Accordingly, the Company's management will have broad discretion
as to the use of such proceeds without any action or approval of the Company's
stockholders. See "Use of Proceeds."
ABSENCE OF PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price will be determined through negotiations
among the Company and the Underwriters. See "Underwriting" for a discussion of
factors to be considered in determining the initial public offering price of the
Common Stock. There can be no assurance that an active public market for the
Common Stock will develop or be sustained after the offering or that the market
price of the Common Stock will not decline below the initial public offering
price. The trading price of the Common Stock could be subject to wide
fluctuations in response to quarter-to-quarter variations in operating results,
announcements of technological innovations or new
10
<PAGE> 12
products by the Company or its competitors, general conditions in the customer
interaction software market, changes in earnings estimates by analysts, or other
events or factors. Extreme price and trading volume volatility has significantly
affected the market prices of securities of many high technology companies in
recent months, for reasons frequently unrelated to the operating performance of
the specific companies. These broad market fluctuations may adversely affect the
market price of the Company's Common Stock. See "Underwriting."
EFFECT OF ANTI-TAKEOVER PROVISIONS
Upon the closing of this offering, the Company's Board of Directors will
have the authority to issue up to 2,000,000 shares of Preferred Stock and to
determine the price, rights, preferences and privileges of those shares without
any further vote or action by the Company's 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 shares of Preferred Stock that may be issued in
the future. While the Company has no present intention to issue shares of
Preferred Stock, such issuance could have the effect of making it more difficult
for a third party to effect a change of control of the Company. In addition, the
Preferred Stock may have other rights, including voting and economic rights,
senior to the Common Stock, and, as a result, the issuance thereof could have a
material adverse effect on the market value of the Common Stock. Furthermore,
the Company is subject to the anti-takeover provisions of Section 203 of the
Delaware General Corporation Law, which prohibits the Company 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 first becomes an
"interested stockholder," unless the business combination is approved in a
prescribed manner. The application of Section 203 could also have the effect of
delaying or preventing a change of control of the Company. Certain other
provisions of the Company's Second Amended and Restated Certificate of
Incorporation, including a classified board of directors and a prohibition on
stockholder action by written consent, may have the effect of delaying or
preventing changes of control or management of the Company, which could
adversely affect the market price of the Company's Common Stock. See
"Management -- Executive Officers and Directors" and "Description of Capital
Stock -- Delaware Law and Certain Charter and By-Law Provisions; Anti-Takeover
Effects."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market after
this offering could adversely affect the prevailing market price of the Common
Stock. In addition to the 2,200,000 shares of Common Stock offered hereby
(assuming no exercise of the Underwriters' over-allotment option), as of the
date of this Prospectus (the "Effective Date"), there will be 5,001,883 shares
of Common Stock outstanding, all of which are "restricted" shares (the
"Restricted Shares") under the Securities Act of 1933, as amended (the
"Securities Act"). Approximately 640,000 Restricted Shares will be eligible for
sale immediately following the Effective Date in reliance on Rule 144(k)
promulgated under the Securities Act. Beginning 90 days after the Effective
Date, an additional 3,360,000 Restricted Shares will first become eligible for
sale in the public markets pursuant to Rules 144 promulgated under the
Securities Act. Of such shares, all but 4,911 are subject to "lock-up"
agreements with the Underwriters which will expire 180 days after the date of
this Prospectus (or earlier, with the consent of Merrill Lynch & Co.). The
remaining 1,001,883 Restricted Shares will not be eligible for sale under Rule
144 until the expiration of a two-year holding period from the date of their
acquisition. In addition, as of November 15, 1996, options to purchase an
aggregate of 740,505 shares of Common Stock were outstanding. Of the shares
issuable upon the exercise of options, 652,592 shares of Common Stock are
subject to lock-up agreements with the Underwriters. The Company intends to file
with the Securities and Exchange Commission a registration statement on Form S-8
within 90 days following the Effective Date. See "Principal and Selling
Stockholders" and "Shares Eligible for Future Sale."
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of the Common Stock offered hereby will suffer an immediate and
substantial dilution in the pro forma net tangible book value of the Common
Stock from the initial public offering price. See "Dilution."
11
<PAGE> 13
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,200,000 shares of
Common Stock offered hereby, at an assumed initial public offering price of
$14.00 per share, after deducting the estimated underwriting discount and
estimated offering expenses, are estimated to be $27.9 million ($29.6 million if
the Underwriters' over-allotment option is exercised in full). The Company will
not receive any proceeds from the sale of shares of Common Stock by the Selling
Stockholders upon the exercise of the Underwriters' over-allotment options. See
"Principal and Selling Stockholders."
The principal purposes of this offering are to increase the Company's
equity capital and to create a public market for the Company's Common Stock,
which will facilitate future access by the Company to public equity markets and
enhance the ability of the Company to use its Common Stock as a means for
attracting and retaining key employees. The Company intends to use the net
proceeds of this offering primarily for working capital and general corporate
purposes, including expansion of the Company's sales and marketing and product
development organizations. A portion of the net proceeds may also be used for
investments in or acquisitions of complementary businesses, products or
technologies, although no such transactions are currently being discussed or are
under negotiation. Pending such uses, the Company expects to invest the net
proceeds in short-term, interest-bearing, investment grade securities.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common Stock.
The Company currently intends to retain any earnings for use in its business and
does not anticipate paying any cash dividends on its capital stock in the
foreseeable future. In addition, the Company's loan agreement with its
commercial bank prohibits the payment of cash dividends.
12
<PAGE> 14
CAPITALIZATION
<TABLE>
The following table sets forth the capitalization of the Company as of
October 31, 1996 (i) on an actual basis, (ii) on a pro forma basis to reflect
the automatic conversion of all outstanding shares of Series A Preferred Stock
into 992,061 shares of Common Stock upon the closing of this offering, and (iii)
on an adjusted basis to reflect the sale by the Company of the 2,200,000 shares
of Common Stock offered hereby and the receipt by the Company of the estimated
net proceeds therefrom, based on an assumed initial public offering price of
$14.00 per share and after deducting the estimated underwriting discount and
estimated offering expenses. The information in this table is qualified by, and
should be read in conjunction with, the Consolidated Financial Statements and
Notes thereto appearing elsewhere in this Prospectus.
<CAPTION>
OCTOBER 31, 1996
-------------------------------------
PRO FORMA AS
ACTUAL PRO FORMA ADJUSTED
------ --------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt, less current portion.................... $ 201 $ 201 $ 201
Series A Redeemable Convertible Preferred Stock, $.01
par value, 992,061 shares authorized, issued and
outstanding (actual); no shares authorized, issued or
outstanding (pro forma and pro forma as adjusted)..... 3,737 -- --
Stockholders' equity:
Preferred Stock, $.01 par value, no shares
authorized, issued or outstanding (actual);
2,000,000 shares authorized, no shares issued or
outstanding (pro forma and pro forma as
adjusted)........................................ -- -- --
Common Stock, $.01 par value, 20,000,000 shares
authorized; 4,000,000 shares issued and
outstanding (actual); 4,992,061 shares issued and
outstanding (pro forma); 7,192,061 shares issued
and outstanding (pro forma as adjusted)(1)....... 40 50 72
Additional paid-in capital.............................. -- 3,727 31,569
Retained earnings....................................... 2,102 2,102 2,102
Foreign currency translation adjustment................. (62) (62) (62)
------ ------ -------
Total stockholders' equity......................... 2,080 5,817 33,681
------ ------ -------
Total capitalization.......................... $6,018 $6,018 $33,882
====== ====== =======
<FN>
- ---------------
(1) Excludes (i) 750,327 shares of Common Stock issuable upon the exercise of options outstanding
as of October 31, 1996, and (ii) 711,000 shares of Common Stock available for issuance pursuant
to the Company's stock plans. See "Management -- Stock Plans" and Notes 9 and 13 of Notes to
Consolidated Financial Statements.
</TABLE>
13
<PAGE> 15
DILUTION
The pro forma net tangible book value of the Company at October 31, 1996
was $5.8 million, or $1.17 per share of Common Stock. Pro forma net tangible
book value per share represents the amount of total tangible assets less total
liabilities, divided by the total number of shares of Common Stock outstanding
(giving effect to the conversion to Common Stock of all outstanding shares of
Series A Preferred Stock). After giving effect to the sale of the 2,200,000
shares of Common Stock offered by the Company hereby, at an assumed initial
public offering price of $14.00 per share and after deducting the estimated
underwriting discount and estimated offering expenses, the pro forma net
tangible book value of the Company at October 31, 1996 would have been $33.7
million, or $4.68 per share of Common Stock. This represents an immediate
increase in such pro forma net tangible book value of $3.51 per share to
existing stockholders and an immediate dilution of $9.32 per share to investors
purchasing shares in this offering. The following table illustrates this per
share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................. $ 14.00
Pro forma net tangible book value per share before the
offering................................................. $ 1.17
Increase in net tangible book value per share attributable
to new investors......................................... 3.51
------
Pro forma net tangible book value per share after the
offering...................................................... 4.68
-------
Dilution per share to new investors(1).......................... $ 9.32
======
</TABLE>
- ---------------
(1) If the Underwriters' over-allotment option is exercised in full, the pro
forma net tangible book value after this offering would be approximately
$4.83 per share, resulting in dilution to new investors in this offering of
$9.17 per share. See "Underwriting."
The following table sets forth, on a pro forma basis as of October 31,
1996, the number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company, and the average price paid per share by
existing stockholders and to be paid by the purchasers of the shares offered by
the Company hereby (at an assumed initial public offering price of $14.00 per
share and before deducting the underwriting discount and offering expenses):
<TABLE>
<CAPTION>
SHARES TOTAL
PURCHASED CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............... 4,992,061 69.4% $ 3,501,000 10.2% $ 0.70
New investors....................... 2,200,000 30.6 30,800,000 89.8 14.00
--------- ------- ----------- -------
Total.......................... 7,192,061 100.0% $34,301,000 100.0%
======== ===== ========== =====
</TABLE>
The foregoing tables assume no exercise of outstanding stock options. As of
October 31, 1996, there were 750,327 shares of Common Stock issuable upon the
exercise of outstanding options at a weighted average exercise price of $2.60
per share. To the extent these options are exercised in the future, there will
be further dilution to new investors.
14
<PAGE> 16
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth for the periods indicated selected
consolidated financial data of the Company. The statement of operations data for
the years ended April 30, 1994, 1995 and 1996 and the balance sheet data as of
April 30, 1995 and 1996 have been derived from Consolidated Financial Statements
audited by Deloitte & Touche LLP, independent auditors, which are included
elsewhere in this Prospectus. The statement of operations data for the years
ended April 30, 1992 and 1993 and the balance sheet data as of April 30, 1992,
1993 and 1994 have been derived from Consolidated Financial Statements audited,
in the case of fiscal 1993 and 1994, by Deloitte & Touche LLP, independent
auditors, and in the case of fiscal 1992, by other independent auditors, not
included in this Prospectus. Data for the six months ended October 31, 1995 and
1996 have been derived from unaudited Consolidated Financial Statements included
elsewhere in this Prospectus and, in the opinion of management, include all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the results of operations for the periods presented.
Results for the six months ended October 31, 1996 are not necessarily indicative
of the results to be expected for the full year ending April 30, 1997. This data
is qualified by the more detailed Consolidated Financial Statements and Notes
thereto included elsewhere in this Prospectus and should be read in conjunction
with such Consolidated Financial Statements and Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere herein.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED APRIL 30, OCTOBER 31,
----------------------------------------------- ------------------
1992 1993 1994 1995 1996 1995 1996
------ ------ ------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenue:
License revenue...................... $4,226 $5,510 $5,393 $8,045 $10,345 $ 3,616 $ 7,548
Service and maintenance revenue...... 2,271 2,411 2,987 3,440 6,190 3,035 3,923
------ ------ ------ ------- ------ ------ -------
Total revenue.................... 6,497 7,921 8,380 11,485 16,535 6,651 11,471
Cost of revenue:
License revenue...................... 1,501 1,890 1,924 1,493 573 243 409
Service and maintenance revenue...... 1,196 1,745 2,056 2,385 4,267 1,763 2,471
------ ------ ------ ------- ------ ------ -------
Total cost of revenue............ 2,697 3,635 3,980 3,878 4,840 2,006 2,880
------ ------ ------ ------- ------ ------ -------
Gross margin........................... 3,800 4,286 4,400 7,607 11,695 4,645 8,591
------ ------ ------ ------- ------ ------ -------
Operating expenses:
Selling, general and
administrative..................... 3,506 4,048 3,717 4,550 7,770 2,937 6,592
Research and development............. 247 183 389 711 2,074 957 1,280
Depreciation and amortization........ 218 438 133 365 161 67 107
Write-off of capitalized software.... -- -- -- -- 829 829 --
------ ------ ------ ------- ------ ------ -------
Total operating expenses......... 3,971 4,669 4,239 5,626 10,834 4,790 7,979
------ ------ ------ ------- ------ ------ -------
Income (loss) from operations.......... (171) (383) 161 1,981 861 (145) 612
Interest income (expense), net....... (11) (7) (20) (9) 3 13 (13)
------ ------ ------ ------- ------ ------ -------
Income (loss) before provision
(benefit) for income taxes........... (182) (390) 141 1,972 864 (132) 599
Provision (benefit) for income taxes... (8) (18) 31 715 207 (40) 181
------ ------ ------ ------- ------ ------ -------
Net income (loss)...................... $ (174) $ (372) $ 110 $1,257 $ 657 $ (92) $ 418
====== ====== ====== ======= ====== ====== =======
Pro forma net income (loss) per
share(1)............................. $ 0.12 $ (0.02) $ 0.07
====== ====== =======
Pro forma weighted average common and
common equivalent shares
outstanding(1)....................... 5,603 5,603 5,603
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 31, 1996
APRIL 30, ------------------
----------------------------------------------- PRO
1992 1993 1994 1995 1996 ACTUAL FORMA(2)
------ ------ ------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.............. $ 281 $ 108 $ 192 $1,414 $ 2,280 $ 1,983 $ 1,983
Working capital (deficiency)........... (151) (318) (573) 446 5,066 5,311 5,311
Total assets........................... 2,979 2,832 2,060 4,288 9,631 13,149 13,149
Long-term debt, less current portion... 159 101 114 51 70 201 201
Redeemable convertible preferred
stock................................ -- -- -- -- 3,561 3,737 --
Stockholders' equity (deficit)......... 345 (35) 75 1,331 1,834 2,080 5,817
</TABLE>
- ---------------
(1) Calculated on the basis described in Note 1 of Notes to Consolidated
Financial Statements.
(2) Gives effect to the automatic conversion of all outstanding shares of Series
A Preferred Stock into 992,061 shares of Common Stock upon the closing of
this offering.
15
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Versatility is a leading provider of client/server customer interaction
software that enables businesses to automate their telemarketing and teleselling
capabilities. Founded in 1981 as an information management consulting firm,
Versatility introduced its first commercial product in 1985, a telemarketing
application product based on the Digital Equipment Corporation ("DEC") VAX/VMS
System. The Company operated as a DEC value-added reseller, supplying turnkey
call center solutions to large and mid-sized companies in a variety of
industries, until the end of fiscal 1994. In November 1993, the Company began
developing applications based on the client/server architecture which culminated
with the release of the Versatility Series in May 1995. In fiscal 1996,
substantially all of the Company's revenue was derived from sales or services
related to the Versatility Series. In August 1996, the Company released
Versatility CallCenter, a CD-ROM-based call center software application that
supports call centers of 50 agents or less.
The Company's revenue is derived principally from two sources: (i) product
license fees for the use of the Company's software products and (ii) service
fees for implementation, maintenance, consulting and training related to the
Company's software products. Over the last three fiscal years, the Company's
total revenue has increased at a compounded annual growth rate of 40.5%.
Historically, the Company's service and maintenance revenue has increased with
license revenue. However, to the extent the Company is successful in
implementing its strategy of distributing a greater proportion of its products
through third party systems integrators and VARs, who will perform such
services, the Company expects that, in future periods, service and maintenance
revenue will decrease as a percentage of total revenue. While hardware sales
relating to implementation of the Company's VAX/VMS application represented
22.8% and 12.1% of the Company's revenue in fiscal 1994 and 1995, respectively,
the Company has not had significant levels of hardware revenue since the
introduction of its client/server products beginning in fiscal 1996. Revenue
from hardware sales have been included in license revenue for such years.
The Company's contracts with its customers often involve significant
customization and installation obligations. In these situations, license revenue
is recognized based on the percentage of completion method which is based on
achievement of certain milestones. When the Company is under no obligation to
install or customize the software, license revenue is recognized upon shipment.
Service revenue for implementation, consulting and training is recognized as the
service is performed. Revenue from maintenance services is recognized ratably
over the term of the service agreement.
The Company's strategy is to increase its use of third party systems
integrators and VARs to distribute its products. Because the Company generally
has no obligation to provide installation, maintenance, training or other
services under such arrangements, the Company generally recognizes software
license revenue from third party systems integrators and VARs upon shipment of
an order. The Company does not expect to receive substantial amounts of service
or maintenance revenue under such arrangements.
For the fiscal year ended April 30, 1996, the Company's eight largest
customers accounted for 73.3% of the Company's total revenue, of which two
customers, British Telecommunications, Plc ("BT") and Medco Containment
Services, accounted for 25.7% and 22.2%, respectively. For the first six months
of fiscal 1997, BT and Avantel, S.A. accounted for 24.9% and 18.7%,
respectively, of the Company's total revenue. Although the particular customers
may change from period to period, the Company expects that large sales to a
limited number of customers will continue to account for a significant
percentage of its total revenue in any particular period. Given the customer
concentration and the duration of the sales and implementation cycle, the loss
of a major customer or any reduction or delay in sales to or implementation by
these or other customers could have a material adverse effect on the Company's
operating results in any particular period. See "Risk Factors -- Dependence on
Large License Fees and Customer Concentration," "-- Length of Sales and
Implementation Process" and "-- Fluctuations in Revenue and Operating Results."
Revenue from customers outside the United States accounted for 18.8%,
16.3%, 40.8 % and 53.6% of the Company's total revenue for fiscal 1994, 1995 and
1996 and the first six months of fiscal 1997, respectively.
16
<PAGE> 18
While the Company's expenses incurred in foreign countries are typically
denominated in the local currencies, revenue generated by the Company's
international sales typically is paid in U.S. dollars or British pounds.
Although exposure to currency fluctuations to date has been insignificant, there
can be no assurance that fluctuations in currency exchange rates in the future
will not have a material adverse impact on the Company's international
operations. The Company currently does not engage in hedging activities.
During the course of the development of the client/server software
applications, the Company capitalized costs associated with the Versatility
Series in compliance with Statement of Financial Accounting Standards No. 86
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed" ("SFAS 86"). The amount of software capitalized totaled $995,000 and,
beginning in November 1994, was amortized over three years on a straight-line
basis. In connection with two major implementations of the Versatility Series
product in July 1995, the Company decided to add features and functions which
were substantially different than those included in the software as originally
capitalized. Management determined that these features and functions
substantially altered the content of the product, effectively eliminating any
remaining useful life of the capitalized asset. Accordingly, the Company wrote
off the remaining asset of $829,000 in the first quarter of fiscal 1996. The
Company anticipates that for the foreseeable future, no software development
costs will meet the requirements for capitalization under SFAS 86.
RESULTS OF OPERATIONS
The following table sets forth certain financial data for the periods
indicated as a percentage of total revenue:
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL REVENUE
---------------------------------------------------
SIX MONTHS
ENDED OCTOBER
YEAR ENDED APRIL 30, 31,
------------------------- ---------------
1994 1995 1996 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenue:
License revenue......................... 64.4% 70.0% 62.6% 54.4% 65.8%
Service and maintenance revenue......... 35.6 30.0 37.4 45.6 34.2
----- ----- ----- ----- -----
Total revenue...................... 100.0 100.0 100.0 100.0 100.0
Cost of revenue:
License revenue......................... 23.0 13.0 3.5 3.7 3.6
Service and maintenance revenue......... 24.5 20.8 25.8 26.5 21.5
----- ----- ----- ----- -----
Total cost of revenue.............. 47.5 33.8 29.3 30.2 25.1
----- ----- ----- ----- -----
Gross margin................................. 52.5 66.2 70.7 69.8 74.9
----- ----- ----- ----- -----
Operating expenses:
Selling, general and administrative..... 44.4 39.6 47.0 44.1 57.5
Research and development................ 4.6 6.2 12.5 14.4 11.2
Depreciation and amortization........... 1.6 3.2 1.0 1.0 0.9
Write-off of capitalized software....... -- -- 5.0 12.5 --
----- ----- ----- ----- -----
Total operating expenses........... 50.6 49.0 65.5 72.0 69.6
----- ----- ----- ----- -----
Income (loss) from operations................ 1.9 17.2 5.2 (2.2) 5.3
Interest income (expense), net............... (0.2) (0.1) (0.0) 0.2 (0.1)
----- ----- ----- ----- -----
Income (loss) before provision (benefit) for
income taxes............................... 1.7 17.1 5.2 (2.0) 5.2
Provision (benefit) for income taxes......... 0.4 6.2 1.2 (0.6) 1.6
----- ----- ----- ----- -----
Net income (loss)............................ 1.3% 10.9% 4.0% (1.4)% 3.6%
===== ===== ===== ===== =====
</TABLE>
The following table sets forth, for each component of revenue, the cost of
such revenue expressed as a percentage of such revenue for the periods
indicated:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED APRIL 30, OCTOBER 31,
------------------------- ---------------
1994 1995 1996 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Cost of license revenue...................... 35.7% 18.6% 5.5% 6.7% 5.4%
Cost of service and maintenance revenue...... 68.8% 69.3% 68.9% 58.1% 63.0%
</TABLE>
17
<PAGE> 19
SIX MONTHS ENDED OCTOBER 31, 1996 COMPARED TO SIX MONTHS ENDED OCTOBER 31,
1995
Revenue. Total revenue increased 72.5% from $6.7 million in the first half
of fiscal 1996 to $11.5 million in the first half of fiscal 1997. Revenue from
license fees increased 108.8% from $3.6 million in the first half of fiscal
1996, or 54.4% of total revenue, to $7.5 million in the first half of fiscal
1997, or 65.8% of total revenue. In the first half of fiscal 1997, BT conducted
a partial rollout of its implementation of the Versatility Series in the United
Kingdom which contributed approximately $2.1 million of license revenue. In
addition, in the second quarter of fiscal 1997 Avantel, S.A. entered into a
contract for an additional site license resulting in $1.4 million of license
revenue. Service revenue increased 29.3% from $3.0 million in the first half of
fiscal 1996 to $3.9 million in the first half of fiscal 1997. Service revenue,
however, decreased as a percentage of total revenue from 45.6% in the first half
of fiscal 1996 to 34.2% in the first half of fiscal 1997, as a result of the
Company's increase in indirect sales which generally do not provide installation
or service revenue to the Company.
Cost of Revenue. Cost of license revenue is comprised of the costs of
media, packaging, documentation and incidental hardware costs. In years prior to
fiscal 1996, the cost of license revenue also included significant costs related
to hardware and third party software. Cost of service and maintenance revenue
consists of salaries, wages, benefits and other direct costs related to
installing, customizing and supporting customer implementations. These costs
also include telephone support and training.
Total cost of revenue increased from $2.0 million in the first half of
fiscal 1996, or 30.2% of total revenue, to $2.9 million for the first half of
fiscal 1997, or 25.1% of total revenue. Cost of license revenue increased from
$243,000 in the first half of fiscal 1996, or 6.7% of license revenue, to
$409,000 in the first half of fiscal 1997, or 5.4% of license revenue. The
higher costs of license revenue in the first half of fiscal 1997 included costs
relating to incidental hardware sold with the Versatility Series product. Cost
of service and maintenance revenue increased from $1.8 million in the first half
of fiscal 1996, or 58.1% of service and maintenance revenue, to $2.5 million in
the first half of fiscal 1997, or 63.0% of service and maintenance revenue, as a
result of additions to the Company's consulting, customization and
implementation staff to support the growing number of the Company's customers.
During the first quarter of fiscal 1997, the Company's cost of service and
maintenance revenue increased as a percentage of such revenue due in part to the
engagement of contract programmers to complete certain custom implementations of
the Versatility Series. The Company's cost of service and maintenance revenue
declined as a percentage of such revenue during the second quarter of fiscal
1997, due in part to completion of the implementations noted above as well as a
higher average billing rate for services than historically experienced.
Selling, General and Administrative. Selling expenses consist of personnel
costs, including compensation and benefits and costs of travel, advertising,
public relations, seminars and trade shows. General and administrative expenses
represent the costs of executive, finance and support personnel and unallocated
corporate expenses such as rent, utilities, legal and auditing. Selling, general
and administrative expenses increased from $2.9 million for the first half of
fiscal 1996, or 44.2% of total revenue, to $6.6 million for the first half of
fiscal 1997, or 57.5% of total revenue. This increase represents costs related
to additions to the Company's sales force and administrative personnel needed to
support the Company's growth. In the last half of fiscal 1996, the Company added
a 12-person product management department. This department had costs of $919,000
in the first half of fiscal 1997. The Company also doubled its total sales staff
and introduced new selling channels between the two periods, resulting in total
selling costs of $2.7 million in the first half of fiscal 1997 compared to $1.0
million for the same period in the prior year. General and administrative costs
increased from $1.3 million in the first half of fiscal 1996 to $2.2 million in
the first half of fiscal 1997 as a result of increases in administrative
overhead to support the larger employee base, higher recruiting costs for
administrative personnel, costs relating to additional headquarters office
space, costs relating to new office space in the United Kingdom and higher legal
and accounting fees. Marketing costs increased from $629,000 in the first half
of fiscal 1996 to $716,000 in the first half of fiscal 1997 due to higher
consulting and recruiting expenses relating to marketing personnel.
Research and Development. Research and development expenses consist of
personnel costs and direct overhead costs incurred in developing software
features and functionality. Research and development expenses
18
<PAGE> 20
increased from $957,000 in the first half of fiscal 1996, or 14.4% of total
revenue, to $1.3 million in the first half of fiscal 1997, or 11.2% of total
revenue. The increase was due to the hiring of additional software engineers to
support increased development activities.
Depreciation and Amortization and Write-off of Capitalized
Software. Depreciation and amortization expenses were $67,000 in the first half
of fiscal 1996 and $107,000 in the first half of fiscal 1997. Additionally, in
the first half of fiscal 1996, the Company wrote off all remaining capitalized
software totaling $829,000. No amounts were written off in the first half of
fiscal 1997 and the Company anticipates that, for the foreseeable future, no
software development costs will meet the requirements for capitalization.
Interest Income (Expense), Net. Interest income (expense), net consists of
interest earned on cash and cash equivalents, offset by interest expense on debt
and equipment financing. Net interest income (expense) was $13,000 in the first
half of fiscal 1996 and ($13,000) in the first half of fiscal 1997. The
difference results from interest expense attributable to borrowings under the
Company's line of credit in the first half of fiscal 1997.
Provision (Benefit) for Income Taxes. The Company accounts for income
taxes under Statement of Financial Accounting Standards No. 109 "Accounting for
Income Taxes"("SFAS 109"). The provision for income taxes is computed based on
pretax income, with deferred income taxes recorded for the differences between
pretax accounting and pretax taxable income. The Company's provision (benefit)
for income taxes was ($40,000) in the first half of fiscal 1996 compared to
$181,000 in the first half of fiscal 1997. For the first half of fiscal 1996 and
1997, the effective tax rate was approximately 30.0%. The favorable effective
tax rate for these periods reflected a significant portion of sales through the
Company's Foreign Sales Corporation and other tax benefits.
Net Income (Loss). Net income (loss) improved from ($92,000) for the first
half of fiscal 1996 to $418,000 for the first half of fiscal 1997. If the
Company had not been required to capitalize software development costs and no
amortization or write-off had been recorded, net income for the first half of
fiscal 1996 would have been $488,000.
FISCAL 1996 COMPARED TO FISCAL 1995
Revenue. Total revenue increased 44.0% from $11.5 million in fiscal 1995
to $16.5 million in fiscal 1996. Revenue from license fees increased 28.6% from
$8.0 million in fiscal 1995, or 70.0% of total revenue, to $10.3 million in
fiscal 1996, or 62.6% of total revenue. Service and maintenance revenue
increased 79.9% from $3.4 million in fiscal 1995, or 30.0% of total revenue, to
$6.2 million in fiscal 1996, or 37.4% of total revenue. The increase in total
revenue was significantly influenced by the roll-out of the Versatility Series
at BT which contributed $3.0 million in license revenue and $1.2 million in
service and maintenance revenue. Revenue from hardware sales decreased from $1.4
million in fiscal 1995 to $139,000 in fiscal 1996, as the Company completed its
transition to licensing products based on a client/server architecture. Hardware
revenue in fiscal 1995 was derived primarily from sales of DEC VAX/VMS hardware,
while such revenue for fiscal 1996 consisted of incidental sales of hardware
related to the Versatility Series product. The Company does not expect
significant hardware sales to occur in the future.
Cost of Revenue. Total cost of revenue increased from $3.9 million in
fiscal 1995, or 33.8% of total revenue, to $4.8 million in fiscal 1996, or 29.3%
of total revenue. Cost of license revenue decreased from $1.5 million in fiscal
1995, or 18.6% of license revenue, to $573,000 in fiscal 1996, or 5.5% of
license revenue. This decrease resulted from the Company's shift away from
providing complete hardware and software configurations for its customers using
DEC hardware and software. The cost of service and maintenance revenue increased
from $2.4 million in fiscal 1995, or 69.3% of service and maintenance revenue,
to $4.3 million in fiscal 1996, or 68.9% of service and maintenance revenue. The
increase represents the addition of consulting and other staff to support
additional revenue as well as the costs relating to the installation of the
Company's products at BT.
Selling, General and Administrative. The Company's selling, general and
administrative expenses increased from $4.6 million in fiscal 1995, or 39.6% of
total revenue, to $7.8 million in fiscal 1996, or 47.0% of
19
<PAGE> 21
total revenue. The increase was primarily attributable to additions to the
Company's sales and marketing staff. During fiscal 1996, the number of the
Company's employees grew from 67 to 135. Of the increase, 45 new hires joined
the sales and marketing departments, with the remainder accepting management or
administrative positions.
Research and Development. Research and development expenses increased from
$711,000 in fiscal 1995, or 6.2% of total revenue, to $2.1 million in fiscal
1996, or 12.5% of total revenue. In addition, $743,000 of research and
development expenditures were capitalized in fiscal 1995, while no such costs
were capitalized in fiscal 1996. If these capitalized software development
expenditures were added, research and development expenses for fiscal 1995,
would have been $1.5 million. This increase in research and development
expenditures resulted from the addition of software developers needed to support
the Company's new product development, as well as costs relating to enhancements
to the Versatility Series and Versatility CallCenter products.
Depreciation and Amortization and Write-off of Capitalized
Software. Depreciation and amortization expenses decreased from $365,000 in
fiscal 1995 to $161,000 in fiscal 1996. Certain assets had been fully amortized
in fiscal 1995 and the Company entered into leasing arrangements for capital
equipment acquired in fiscal 1996. Depreciation and amortization expenses in
fiscal 1995 included $166,000 of amortization of capitalized software. The
unamortized portion of this asset, amounting to $829,000, was written off in
fiscal 1996 as management determined that no net realizable value in the asset
remained. No such write-off was recorded in fiscal 1995.
Interest Income (Expense), Net. Interest income (expense), net was
($9,000) in fiscal 1995 and $3,000 in fiscal 1996. The difference resulted from
higher available cash balances in fiscal 1996, primarily due to the cash raised
in a private placement in January 1996, which was partially offset by increased
interest expense due to borrowings under the Company's line of credit.
Provision (Benefit) for Income Taxes. The Company's provision for income
taxes was $715,000 in fiscal 1995 compared to $207,000 in fiscal 1996. The
effective rate in fiscal 1995 was 36.3%, while the effective rate in fiscal 1996
was 24.0%. The Company incurred a lower effective rate in fiscal 1996 due to tax
benefits derived from sales made through the Company's Foreign Sales Corporation
and due to a previously unrecognized tax benefit derived from the write-off in a
previous period of an investment in a discontinued subsidiary.
Net Income (Loss). Net income decreased from $1.3 million for fiscal 1995
to $657,000 for fiscal 1996. If the Company had not been required to capitalize
software development costs and no amortization or write-off had been recorded,
net income for fiscal 1995 and fiscal 1996 would have been $889,000 and $1.3
million, respectively.
FISCAL 1995 COMPARED TO FISCAL 1994
Revenue. Revenue increased 37.1% from $8.4 million in fiscal 1994 to $11.5
million in fiscal 1995. Most of this increase resulted from a 49.2% increase in
license revenue from $5.4 million in fiscal 1994, or 64.4% of total revenue, to
$8.0 million in fiscal 1995, or 70.0% of total revenue. In addition, service and
maintenance revenue increased 15.2%, from $3.0 million in fiscal 1994, or 35.6%
of total revenue, to $3.4 million in fiscal 1995, or 30.0% of total revenue.
Total revenue in fiscal 1994 and fiscal 1995 also included $1.9 million and $1.4
million, respectively, in hardware sales, the result of the last of the
Company's DEC VAX/VMS implementations undertaken prior to release of the
Company's client/server products. Hardware sales represented 22.8% of the
Company's total revenue in fiscal 1994 and 12.1% of total revenue in fiscal
1995.
Cost of Revenue. Total cost of revenue was $3.9 million in both fiscal
1994 and 1995, but decreased as a percentage of total revenue from 47.5% in
fiscal 1994 to 33.8% in fiscal 1995. Cost of license revenue decreased 22.4%
from $1.9 million in fiscal 1994, or 35.7% of license revenue, to $1.5 million
in fiscal 1995, or 18.6% of license revenue. This decrease was a result of a
smaller proportion of revenue from hardware sales which had a higher cost of
license revenue than other components of sales. Cost of service and maintenance
revenue increased 16.0% from $2.1 million in fiscal 1994, or 68.8% of service
and maintenance revenue, to $2.4
20
<PAGE> 22
million in fiscal 1995, or 69.3% of service and maintenance revenue. This
increase was a result of increased hiring in the services and maintenance areas.
Selling, General and Administrative. The Company's selling, general and
administrative expenses increased from $3.7 million in fiscal 1994, or 44.4% of
total revenue, to $4.6 million in fiscal 1995, or 39.6% of total revenue. The
increase in costs were due to the addition of four sales representatives and a
new five-person marketing department. In fiscal 1995, the Company also moved to
new headquarters, increasing rent and related moving and utilities expenses by
$211,000.
Research and Development. Research and development expenses increased
82.8% from $389,000 in fiscal 1994, or 4.6% of total revenue, to $711,000 in
fiscal 1995, or 6.2% of total revenue. In addition, $251,000 of research and
development expenditures were capitalized in fiscal 1994, while $743,000 were
capitalized in fiscal 1995. If amounts capitalized were added, research and
development expenses would have been $640,000 in fiscal 1994 and $1.5 million in
fiscal 1995, or 7.6% and 12.7% of total revenue, respectively. The increase in
research and development expenses represents costs relating to additions to the
Company's research and development department and overhead expenditures needed
to undertake the development of client/server products.
Depreciation and Amortization. Depreciation and amortization expenses
increased from $133,000 in fiscal 1994 to $365,000 in fiscal 1995. The increase
in these expenses during fiscal 1995 was primarily due to amortization of
capitalized software of $166,000.
Interest Income (Expense), Net. Interest income (expense), net was
($20,000) in fiscal 1994 and ($9,000) in fiscal 1995. The difference resulted
from higher interest expense in fiscal 1994 on a note payable relating to the
acquisition of a subsequently discontinued subsidiary.
Provision (Benefit) for Income Taxes. The provision for income taxes
increased from $31,000 in fiscal 1994 to $715,000 in fiscal 1995. This increase
represented a change in the effective tax rate from 22.0% to 36.3%. The change
in the effective rate resulted from utilization in fiscal 1994 of operating loss
carryforwards from prior years which were not available in fiscal 1995.
Net Income (Loss). Net income increased from $110,000 for fiscal 1994 to
$1.3 million for fiscal 1995. If the Company had not been required to capitalize
software development costs and no amortization had been recorded, net loss in
fiscal 1994 would have been ($86,000), while net income in fiscal 1995 would
have been $889,000.
21
<PAGE> 23
QUARTERLY RESULTS OF OPERATIONS
<TABLE>
The following table presents certain unaudited quarterly financial
information for the eight quarters ended October 31, 1996. In the opinion of the
Company's management, this information has been prepared on the same basis as
the Consolidated Financial Statements appearing elsewhere in this Prospectus and
includes all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the financial results set forth herein. Results of
operations for any previous quarter are not necessarily indicative of results
for any future period.
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------------
1995 1996
-------------------------------------- ---------------------------------------
JAN. 31 APRIL 30 JULY 31 OCT. 31 JAN. 31 APRIL 30 JULY 31 OCT. 31
------- -------- ------- ------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Revenue:
License revenue........................... $2,366 $2,570 $1,473 $2,142 $2,267 $4,463 $3,788 $3,760
Service and maintenance revenue........... 910 1,045 1,189 1,846 1,690 1,465 1,632 2,291
------ ------ ------ ------ ------ ------ ------ ------
Total revenue......................... 3,276 3,615 2,662 3,988 3,957 5,928 5,420 6,051
Cost of revenue:
License revenue........................... 335 764 32 210 115 216 205 204
Service and maintenance revenue........... 563 672 767 996 1,101 1,403 1,232 1,239
------ ------ ------ ------ ------ ------ ------ ------
Total cost of revenue................. 898 1,436 799 1,206 1,216 1,619 1,437 1,443
------ ------ ------ ------ ------ ------ ------ ------
Gross margin.................................. 2,378 2,179 1,863 2,782 2,741 4,309 3,983 4,608
------ ------ ------ ------ ------ ------ ------ ------
Operating expenses:
Selling, general and administrative....... 1,096 1,503 1,304 1,633 1,826 3,007 3,037 3,555
Research and development.................. 138 363 476 481 473 644 618 662
Depreciation and amortization............. 130 140 32 35 45 49 50 57
Write-off of capitalized software......... -- -- 829 -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------
Total operating expenses.............. 1,364 2,006 2,641 2,149 2,344 3,700 3,705 4,274
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) from operations................. 1,014 173 (778) 633 397 609 278 334
Interest income (expense), net................ (1) (5) 9 4 0 (10) (6) (7)
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) before provision (benefit) for
income taxes................................ 1,013 168 (769) 637 397 599 272 327
Provision (benefit) for income taxes.......... 365 65 (199) 159 104 143 70 111
------ ------ ------ ------ ------ ------ ------ ------
Net income (loss)............................. $ 648 $ 103 $ (570) $ 478 $ 293 $ 456 $ 202 $ 216
====== ====== ====== ====== ====== ====== ====== ======
<CAPTION>
(AS A PERCENTAGE OF TOTAL REVENUE)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
License revenue.......................... 72.2% 71.1% 55.3% 53.7% 57.3% 75.3% 69.9% 62.1%
Service and maintenance revenue.......... 27.8 28.9 44.7 46.3 42.7 24.7 30.1 37.9
----- ----- ----- ----- ----- ----- ----- -----
Total revenue........................ 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenue:
License revenue.......................... 10.2 21.1 1.2 5.2 2.9 3.6 3.8 3.4
Service and maintenance revenue.......... 17.2 18.6 28.8 25.0 27.8 23.7 22.7 20.5
----- ----- ----- ----- ----- ----- ----- -----
Total cost of revenue................ 27.4 39.7 30.0 30.2 30.7 27.3 26.5 23.9
----- ----- ----- ----- ----- ----- ----- -----
Gross margin................................. 72.6 60.3 70.0 69.8 69.3 72.7 73.5 76.1
----- ----- ----- ----- ----- ----- ----- -----
Operating expenses:
Selling, general and administrative...... 33.5 41.6 49.0 40.9 46.2 50.7 56.1 58.7
Research and development................. 4.2 10.0 17.9 12.1 12.0 10.9 11.4 10.9
Depreciation and amortization............ 4.0 3.9 1.2 0.9 1.1 0.8 0.9 1.0
Write-off of capitalized software........ -- -- 31.1 -- -- -- -- --
----- ----- ----- ----- ----- ----- ----- -----
Total operating expenses............. 41.7 55.5 99.2 53.9 59.3 62.4 68.4 70.6
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from operations................ 30.9 4.8 (29.2) 15.9 10.0 10.3 5.1 5.5
Interest income (expense), net............... (0.0) (0.1) 0.3 0.1 0.0 (0.2) (0.1) (0.1)
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before provision (benefit) for
income taxes............................... 30.9 4.7 (28.9) 16.0 10.0 10.1 5.0 5.4
Provision (benefit) for income taxes......... 11.1 1.8 (7.5) 4.0 2.6 2.4 1.3 1.8
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss)............................ 19.8% 2.9% (21.4)% 12.0% 7.4% 7.7% 3.7% 3.6%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
<TABLE>
The following table sets forth, for each component of revenue, the cost of
such revenue expressed as a percentage of such revenue for the periods
indicated:
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------
1995 1996
-------------------------------------- --------------------------------------
JAN. 31 APRIL 30 JULY 31 OCT. 31 JAN. 31 APRIL 30 JULY 31 OCT. 31
------- -------- ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cost of license revenue....................... 14.2% 29.7% 2.2% 9.8% 5.1% 4.8% 5.4% 5.4%
Cost of service and maintenance revenue....... 61.9% 64.3% 64.5% 54.0% 65.1% 95.8% 75.5% 54.1%
</TABLE>
22
<PAGE> 24
The Company's revenue and operating results could fluctuate significantly
from quarter to quarter due to a combination of factors, including variations in
the demand for the Company's products, the level of product and price
competition, the length of the Company's sales process, the size and timing of
individual transactions, any delay in or cancellation of customer
implementations, the Company's success in expanding its customer support
organization, direct sales force and indirect distribution channels, the timing
of new product introductions and enhancements by the Company or its competitors,
the mix of products and services sold, the mix of sales through direct and
indirect channels, any delay in or cancellation of customer implementations, the
Company's success in expanding its customer support organization, direct sales
force and indirect distribution channels, the timing of new product
introductions and enhancements by the Company or its competitors, the ratio of
international to domestic sales, commercial strategies adopted by competitors,
changes in foreign currency exchange rates, customers' budgets constraints, and
the Company's ability to control costs. In addition, a limited number of
relatively large customer orders has accounted for and is likely to account for
a substantial portion of the Company's total revenue in any particular quarter.
The timing of such orders can be difficult to predict given the average size of
the Company's orders and the length of its sales process. The Company has in the
past recognized a substantial portion of its revenue in the last month of a
quarter. Therefore, the loss, deferral or cancellation of an order could have a
significant adverse impact on the Company's revenue and operating results in a
particular quarter. Because the Company's operating expense levels are
relatively fixed and tied to anticipated levels of revenue, any delay in the
recognition of revenue from a limited number of license transactions could cause
significant variations in operating results from quarter to quarter. Based on
the foregoing, the Company believes that quarter-to-quarter comparisons of its
results of operations are not necessarily meaningful and such comparisons should
not be relied upon as indications of future performance.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations to date primarily through cash
generated from operations, through the private sale of preferred stock in
January 1996 totaling $3.5 million and from funds obtained from revolving credit
facilities with commercial banks. The Company's existing $2.5 million line of
credit had an outstanding balance of $2.0 million at October 31, 1996, and
$229,000 was outstanding under its $1.0 million equipment line of credit.
Advances under the working capital line bear interest at a variable annual rate
equal to the prime rate of the bank plus 0.5%, and advances under the equipment
line bear interest at a variable annual rate equal to the prime rate of the bank
plus 1.0%. Both lines expire on August 5, 1997.
At October 31, 1996, the Company had $2.0 million in cash and $8.2 million
in accounts receivable. For the six months ended October 31, 1996, net cash used
by operations totaled $698,000. In addition, the Company used $756,000 for
investing activities, which included $240,000 for the expansion of the Company's
distribution channels and $516,000 loaned to Serenity Real Properties Limited
Partnership. These uses of cash were partially offset by net borrowings of $1.2
million under the Company's working capital line of credit, resulting in a net
cash decrease of $297,000.
In fiscal 1996, cash used in operations totaled $2.9 million, primarily due
to an increase in accounts receivable resulting from the rapid expansion of the
Company's operations. This use was offset by cash provided by the Company's
preferred stock financing in January 1996, resulting in a net cash increase of
$866,000.
The Company invested $156,000, $235,000 and $240,000 in capital
expenditures in fiscal 1995, fiscal 1996 and the first half of fiscal 1997,
respectively. Capital expenditures include purchases of computer hardware used
primarily in product development, product demonstrations, training and support.
Over the course of fiscal 1996, the Company has financed a portion of its
capital equipment needs through operating leases. During the six months ended
October 31, 1996, the Company financed $229,000 of the capital assets acquired
through a capital lease under its $1.0 million equipment line of credit.
The Company anticipates that its existing cash balances, funds anticipated
to be generated from operations, combined with the proceeds from this offering
and interest thereon, will be adequate to satisfy its working capital
requirements for its current and planned operations for at least the next twelve
months. The Company's future operating and capital requirements will depend on
numerous factors, including the progress of the Company's internal research and
development programs, the level of resources the Company devotes to the
development of marketing and sales capabilities, technological advances, the
status of competing products, and the successful development and timely
introduction of its own products. In the longer term, the Company may require
additional equity or debt financing. No assurance can be given that these funds
will be available to the Company on acceptable terms, if at all.
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BUSINESS
Versatility is a leading provider of client/server customer interaction
software that enables businesses to automate and enhance their telemarketing and
teleselling capabilities. The Company's software products are designed to
increase the productivity and revenue-generating capabilities of organizations
operating call centers to interact with existing and potential customers. The
Company's products include desktop software applications, development and
customization tools and optional server-based software services, and support a
wide variety of leading computing platforms, allowing users to implement a
scaleable, flexible and interoperable software solution that can be used
independently or as part of an integrated enterprise-wide customer interaction
implementation. Versatility also offers fee-based professional, consulting and
maintenance services to provide implementation, integration and ongoing support
of the Company's software products.
The Company's products are used by customers operating large and mid-sized
call centers for activities including telebanking, claims servicing, customer
service, consumer product telesales and other applications. Since introducing
the Versatility Series in May 1995, the Company has licensed Versatility Series
applications for use on over 6,000 agent desktops. The Company's customers
include Avantel, S.A., British Telecommunications, Plc, Chase Bank, Medco
Containment Services, Inc. and Mellon Bank. Versatility markets its products and
services to customers in a number of targeted industries, including the
financial services and communications industries. The Company sells its software
and services in the United States through a direct sales organization that
focuses primarily on enterprise-wide, large-scale solutions with complex
requirements. In addition, Versatility markets and sells software through
value-added resellers, distributors and third party systems integrators, in the
United States and internationally.
INDUSTRY BACKGROUND
Companies in a variety of industries recognize the strategic importance of
developing and maintaining long-term customer relationships. Companies are
increasingly viewing every stage of customer interaction, from initial sales and
marketing activities to post-sales service and support, as an opportunity to
distinguish their products and services, "cross-sell" related products or
"up-sell" higher margin products, and receive and process valuable customer
feedback. Effective customer interaction can significantly increase revenue,
build customer loyalty, allow organizations to better incorporate customer
requirements into future product releases and reduce customer acquisition and
retention costs. Customer interaction can be provided through a number of
channels, including field sales and support, direct marketing programs,
telephone contact and unassisted selling channels such as the Internet.
In recent years, telephony-based customer interaction has become an
increasingly significant channel as organizations have recognized that the
telephone can help them more effectively leverage their sales and marketing
investments, access a larger customer base, enhance customer satisfaction and
increase revenue. The increase in telephony-based customer interaction has also
been driven by a number of other factors, including decreased telecommunications
costs, the proliferation of toll-free 800 numbers, and the introduction of new
technology, such as computer/telephone integration ("CTI"), which automates the
calling process while providing real-time access to computer-based information
resources.
The telephony-based customer interaction market is expected to grow
significantly over the next few years. Industry sources estimate that the market
for call center hardware and software is expected to exceed $10.0 billion by
2001. The customer interaction software market, which in addition to the
principal markets addressed by the Company includes customer support, help desk,
field sales force automation and quality assurance applications, is expected to
grow from $1.1 billion in 1995 to over $2.7 billion in 1998.
Telephony-based customer interaction activities may be conducted through
either "formal" or "informal" call centers. Formal call centers generally are
large rooms with supervisor stations and agent workstations linked to a central
telephone switch and computer system, where agents handle a steady flow of
contacts relating to a relatively fixed set of products or services. Common
examples of formal call centers are credit card marketing operations and
customer support centers performing activities such as insurance claims
processing. In contrast, informal call centers are more loosely related groups
of "phone workers" providing services that are less structured and may not rely
exclusively on the telephone. Examples of informal call
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centers include real estate agencies, regional brokerage offices and similar
operations. Historically, companies have viewed their call centers as either
"cost-generating" or "revenue-generating." Revenue-generating call centers such
as telemarketing operations were usually focused on sales and marketing
functions. Cost-generating call centers typically did not handle
revenue-generating calls and instead focused on providing customer service or
support functions. In addition, call centers typically focus either on handling
inbound calls, for functions such as product support, or conducting outbound
calls, for functions such as magazine subscription sales.
The typical formal call center is comprised of a high capacity telephone
switch supported by an interactive voice response ("IVR") unit and an automated
call distributor ("ACD") that together screen and route incoming calls to
agents, "predictive dialers" used to automate outbound dialing, a data network
that supports agent workstations and monitoring and reporting systems used by
call center managers. Informal call centers typically use a standard office
phone system on a private branch exchange ("PBX") rather than a specialized
telephone switch.
Call center systems generally include specialized applications software
which allows organizations to conduct inbound or outbound calling activities,
manage system resources, monitor call center capacity and provide system usage
and other reporting capabilities. These applications have historically been
developed for centralized, mainframe-based information systems. While
effectively automating many functions such as inbound call distribution,
outbound dialing, and simple database management, these legacy applications were
often very expensive to install and did not offer sufficient flexibility to
allow customization or to adapt to an organization's changing requirements. In
addition, these applications did not provide high levels of scaleability or
interoperability with an organization's other information systems. Recently,
call center technology has joined the more general migration from
mainframe-based legacy systems to distributed computing systems based on open
systems and client/server architecture. This development has allowed companies
to incorporate leading hardware and software products from multiple vendors into
more advanced and productive call center systems.
To date, however, the software component of these systems has been used
primarily to implement the telephony functions of the center, such as predictive
dialing and "dynamic call blending," which permits agents to be automatically
switched between inbound and outbound calls, rather than focusing on increasing
the productivity of the telephone agent's interaction with the customer.
Customer interaction applications that have been developed for these systems
have been primarily focused on automating technical support and other customer
support ("help desk") functions and primarily address opportunities for
organizations to reduce customer support costs rather than to generate
additional revenue.
To leverage an organization's call center investment and take full
advantage of the revenue generating potential of teleselling and telemarketing
in a client/server computing environment, companies require software
applications that: (i) can provide call center agents with the guidance and
product and customer information they need to effectively sell increasingly
complex products and services; (ii) enhance revenue-generating functions by
supporting not only order taking but also cross-selling and up-selling other
products and services; (iii) permit the gathering of valuable information
concerning customer needs, buying patterns and demographics; (iv) are fully
integrated with the organization's information and telephone systems, enabling
more effective exchange of gathered data; (v) can readily be tailored to the
needs of particular businesses, marketing campaigns or call center agents; and
(vi) are scaleable to support large volumes of calls and open to permit
integration with a wide variety of telephony and computing systems.
THE VERSATILITY SOLUTION
Versatility provides a suite of software applications and related services
that allow its customers to operate flexible and highly functional inbound
and/or outbound call centers which can significantly enhance their
telephony-based sales and marketing capabilities. The Company's applications
allow an organization to automate the most significant telephony-based customer
interaction functions, including generating and qualifying sales leads,
providing comprehensive product or service information, generating order quotes
and processing and fulfilling customer orders. The Company's products are
designed to support both formal call
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centers, typically involving large and mid-sized installations, and informal
call centers, requiring a smaller scale implementation, for customers in the
United States and internationally.
The Company's products include a number of software applications which
provide call center agents with desktop access to a variety of information in an
easy-to-use graphical format, including customer identity and call history,
comprehensive product descriptions such as features and benefits, and a list of
related products or services which an agent can cross-sell or up-sell to the
customer. The Company's software includes scripting capabilities which
efficiently guide agents through each stage of the sales process, including
initial contact, presentation of product offerings, responses to frequently
asked questions or objections, quote generation, order taking and fulfillment.
In addition, the Company's products can be easily tailored to the specific needs
of the organization or marketing campaign and customized to match the skill sets
of individual call center agents. The Company's products also facilitate
exchange of information between the call center and the organization's other
information systems, allowing the organization to incorporate data generated in
the call center into their other business operations, including new product
development. In addition to desktop applications, the Company's products include
optional server-based software which allows customers to leverage CTI and other
technologies to increase the speed and productivity of their telephony-based
activities.
The Versatility Series, the Company's principal product, uses an advanced,
scaleable three-tier client/server architecture capable of supporting
installations with more than 1,000 simultaneous users on a single server. The
Versatility Series is highly customizable, allowing modification to suit a
specific industry or application. The Versatility Series can also be integrated
with the customer's information systems or with third party applications, such
as help desk or field sales automation software, to provide a customer with a
comprehensive, enterprise-wide customer interaction solution.
In August 1996, the Company released the Versatility CallCenter
client/server packaged software application which provides the basic features
and functions of the Versatility Series desktop applications to smaller formal
or informal call centers, typically found in mid-sized companies or departments
of larger organizations. Customers using the Versatility CallCenter product can
expand to the more scaleable Versatility Series.
STRATEGY
The Company's objective is to be a leading provider of customer interaction
software by offering advanced and highly functional applications that allow
customers to leverage their investment in call centers and maximize
telephony-based revenue and customer satisfaction. The Company's strategy to
achieve this objective includes the following key elements:
Target Specific Industries. The Company's marketing strategy is to focus
on selected industries in which it can develop a leading market share. The
Company currently targets the financial services and communications industries,
which have a relatively long experience with telephony-based customer
interaction. The Company believes that its targeted marketing strategy better
focuses product development efforts, controls selling costs and leads to higher
overall customer satisfaction. At the same time, the Company has designed its
desktop applications and database model to easily support modifications or
additional functions to support the needs of additional industries.
Use Multiple Distribution Channels. The Company believes that it can more
rapidly obtain market share by using a combination of direct and indirect sales
channels. While the Company will continue to use direct sales and support as the
primary channel for selling the Versatility Series to large call center
operations, the Company intends to increasingly form alliances with large third
party systems integrators to increase its presence in the market for large-scale
systems. The Company has also recently begun to market the Versatility Series
through VARs and distributors and intends to use these indirect channels to
market its Versatility CallCenter product to mid-size companies.
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Expand Existing Customer Relationships. The Company believes that
follow-on sales to existing customers can leverage Versatility's sales and
marketing investment and can also provide a more stable revenue base. The
Company believes that significant opportunities exist to increase the number of
licenses sold to many of its existing customers through expanded implementations
or sales to additional groups within a customer's organization. The Company
focuses on increasing follow-on sales by providing high levels of post-sales
support to maximize customer satisfaction.
Maintain Technology Leadership. The Company has over 15 years of
experience in developing call center technology and has invested substantial
resources in new product development. In 1988, the Company released one of the
first CTI-enabled software applications and, in 1995, the Company was the first
to release a client/server software application specifically designed for
telemarketing and telesales functions. The Company intends to maintain its
technology leadership by enhancing the performance and functionality of its
products and by assuring that its products are compatible with emerging
telephony technology and computing environments.
Increase International Revenue. The Company believes that international
markets offer significant growth opportunities. The Company has positioned
itself to take advantage of these opportunities by commencing operations in the
United Kingdom in 1992 and by developing and expanding its relationships with a
number of international VARs and distributors to allow the Company to
cost-effectively increase its international revenue. The Company intends to
continue to expand its international presence by adding VARs and distributors in
targeted countries.
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PRODUCTS
The Company's products include the Versatility Series, a suite of modular
applications that includes optional software-based marketing and telephony
services. The Versatility Series can be modified with available customization
tools and is designed to support customers with large user populations. For
smaller installations, the Company offers Versatility CallCenter, which includes
key elements of the Versatility Series applications, scaled to support 50 users
or less.
The following table illustrates the features and functions of the Company's
two core product families:
<TABLE>
VERSATILITY PRODUCTS
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C>
PRODUCT NAME FEATURES AND FUNCTIONS
- ---------------------------------------------------------------------------------------------------------------------------------
Versatility Series
- ---------------------------------------------------------------------------------------------------------------------------------
Versatility Call Center Applications
Versatility Telemarketing Client/server desktop application consisting of customer demographic profiles, list
management, contact histories, product information, features and benefits, questions,
answers and objections, simple product ordering and PowerGuide scripts, call guides and
marketing information
Versatility Telesales All of the above plus: screen-based telephony, quotation generation and maintenance,
complex order generation, fulfillment, calendaring, task scheduling and reminders
Versatility Teleservice (1) All of the above plus: installed product/service profiles, knowlege-based search engine,
problem and case tracking and escalation
Versatility Telephone All of the above plus: account opportunity management, activity tracking and forecasting,
Account Management (1) diary management and appointment scheduling
- ---------------------------------------------------------------------------------------------------------------------------------
Versatility Open Telephony Services
Versatility OpenTel Unassisted server-generated telephony, screen pops of account information using automatic
number identification, call transfer and campaign routing based on dialed number
identification
Versatility Predictive Predictive outbound call dialing, accounting recycling and center management and monitoring
facility
Versatility Call Blending Dynamic inbound and outbound call and agent load balancing and center management and
monitoring facility
Versatility IVR Interactive voice response unit, transaction data capturing and call handling facility
- ---------------------------------------------------------------------------------------------------------------------------------
Versatility Marketing Management
Services
Versatility Campaign Plus Marketing campaign list creation and maintenance and monitoring facility, including
adaptive marketing and demographic profile templates
Versatility Fulfillment Fulfillment facility with back office systems integration
Versatility Insight Data warehousing, performance monitoring and real-time tracking of center, agent and
transaction activity
Versatility Monitor Real-time agent and supervisor screen monitoring and observation facility
- ---------------------------------------------------------------------------------------------------------------------------------
Versatility CallCenter A CD-ROM-based product consisting of the Versatility Telesales application, Versatility
OpenTel and a campaign and list management facility that includes elements of Versatility
Campaign Plus
- ---------------------------------------------------------------------------------------------------------------------------------
(1) Currently in development and expected to be released by the end of fiscal 1997.
</TABLE>
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VERSATILITY SERIES. The Versatility Series is generally marketed to large
organizations operating formal call centers. At the core of the Versatility
Series are the Versatility Call Center Applications, which allow call center
agents to effectively conduct telemarketing and telesales activities.
Versatility Series customers purchase one of the Versatility Call Center
Applications and usually purchase one or more optional services from either the
Versatility Marketing Management Services or the Versatility Open Telephony
Services.
The Versatility Call Center Applications include two existing applications,
Versatility Telemarketing and Versatility Telesales. The Company is also
developing two additional applications, Versatility Teleservice and Versatility
Telephone Account Management, which will include the same architecture and core
functionality as the Company's current applications, with additional features
specifically designed to address teleservicing and telephone account management
activities. Versatility Telemarketing supplies a call center agent with customer
information as an outbound telephone call is made or as an inbound call is
routed to that agent. Once customer contact is made, an agent can access product
information, such as features, benefits and commonly asked questions, in order
to effectively and accurately market and sell that product. An agent can then
click to descriptions of other products to cross-sell or up-sell. To close a
sale, an agent can access on-line order taking and fulfillment capabilities.
Building on these core functions, Versatility Telesales provides additional
capabilities to generate on-line quotes, readily access information regarding
discounts and schedule automatic customer call-backs.
All Versatility Call Center Applications are Windows-based and are
integrated with the Versatility PowerGuide facility, a presentation support tool
providing call guides and scripting capabilities. PowerGuide enables selling
scripts to be tailored to the needs of the company or marketing campaign and
customized to match the skill sets of particular telemarketing agents.
PowerGuide can integrate with one or more external applications, such as word
processing, spreadsheet, and graphics presentation applications, using
Microsoft's Dynamic Data Exchange standard to exchange information between
applications. PowerGuide can also be used to generate Microsoft Visual Basic
forms and applications.
Versatility Call Center Applications allow customers to develop many
versions of the application which can be tailored extensively and used
simultaneously. For example, a call center may want to have a different
application design and functionality for each marketing and selling campaign.
Each tailored application can be augmented by its own tailored Versatility
PowerGuide session.
In addition to Versatility Call Center Applications, the Versatility Series
provide network server services, called the Versatility Marketing Management
Services, which provide the call center network and its managers with a number
of capabilities, including list, database and campaign management, adaptive
marketing, statistical tracking, data warehousing, decision support, document
production, integration with document management systems and centralized call
center operations management. Additionally, the Versatility Series CTI services,
called Versatility Open Telephony Services, which integrate the telephone and
computer systems, provide functions such as screen-based telephony, "screen
pops" in which relevant caller information appears on an agent's screen as an
inbound call arrives or as an outbound call is initiated, predictive dialing of
outbound campaigns, coordination of service levels, inbound and outbound dynamic
call blending and IVR integration and coordination.
All Versatility Series products are licensed based on the total number of
concurrent desktop users. Versatility Call Center Applications start at a U.S.
list price of $950 per licensed user. Versatility Marketing Management Services
and Versatility Open Telephony Services are sold as optional modules as part of
a total Versatility Series system. The U.S. list price of these network modules
ranges from $300 to $2,500 per user per service. A majority of the revenue from
the Versatility Series products has been derived from customers with contracts
ranging in value from $200,000 to $1.0 million.
VERSATILITY CALLCENTER. In August 1996, the Company released Versatility
CallCenter, a CD-ROM-based call center software application that supports formal
or informal call centers of 50 agents or less. Versatility CallCenter includes
many of the features of the Versatility Call Center Applications, including
customer profiles, product information, product features and benefits, question
and objection handling, quotation preparation and order taking and servicing,
literature fulfillment, activity tracking with call back calendars and
reminders, scripting and call guides. In addition, the product supports list
management and call
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recycling for outbound campaigns and CTI for screen-based dialing and incoming
call management, including screen pops of customer profile information.
Versatility CallCenter also incorporates several network-based server facilities
that include elements of the Versatility Marketing Management and Versatility
Open Telephony services, redesigned to meet the needs of this smaller customer.
Versatility CallCenter is also licensed based on the number of concurrent users
and has a U.S. list price of $1,695 per user.
Certain uses of outbound call processing systems are regulated by federal,
state and foreign law, including the Telephone Consumer Protection Act of 1991
and the Federal Fair Debt Collection Practices Act. Although compliance with
these laws may limit the potential uses of the Company's products in some
respects, the Company's products can be programmed to operate automatically in
full compliance with these laws through the use of appropriate calling lists and
calling campaign time parameters. There can be no assurance, however, that
future legislation further restricting telephone solicitation practices, if
enacted, would not adversely affect the Company.
SERVICES
Versatility provides fee-based maintenance and support services designed to
increase the effectiveness and ongoing performance of its customer's call center
operations and to increase the Company's revenue base. Substantially all of the
Company's customers have ongoing maintenance contracts. As of September 30,
1996, the Company employed 19, 12 and five employees providing professional
services, maintenance and training, respectively.
Professional Services. The Company's consultants work closely with
customers to provide assistance with application implementation and
customization, interface development, communications and information systems
integration, planning and project management. Fees for professional services are
charged separately from the Company's software product licenses and are
generally charged on a time-and-materials basis.
Maintenance. Maintenance services are available for an annual fee equal to
a percentage of the total license price. Maintenance services include software
updates, maintenance releases and technical support. The Company offers
telephone, pager, electronic mail, dialup modem and facsimile customer support.
The Company also provides customers with account management services, technical
bulletins, weekly status reports and ongoing communications on new features or
products under development.
Training. The Company offers a comprehensive set of training courses
covering systems administration, specific training on certain product modules
and project team training as well as training courses for the Company's
resellers. Training classes are offered at the Company's offices in Fairfax,
Virginia and Aldermaston, U.K. The Company also provides extensive on-site
training services for most enterprise installations, including customized
training for each customer. Fees for education and training are generally
charged in addition to the license fees and are charged on a per-student,
per-class or time-and-materials basis.
CUSTOMERS AND MARKETS
Since introducing the Versatility Series in May 1995, the Company has
licensed Versatility Series applications for use on over 6,000 agent desktops.
The following list includes customers who have purchased over $250,000 of
Versatility Series software and services:
AT&T Canada Long Distance
AT&T Wireless Services
Avantel, S.A.
British Telecommunications, Plc
Chase Bank
Medco Containment Services, Inc.
Mellon Bank, N.A.
Primeco Personal Communications, L.P.
The Polk Company
Sanwa Bank
Faneuil ISG Inc.
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Organizations from a number of different industries have implemented the
Versatility Series, as illustrated by the following examples:
Financial Services
A major commercial bank was committed to providing cost-effective
telephony-based customer service. In addition, the bank wanted to identify,
retain and cross-sell its retail customer base and to target, qualify and
attract high profit accounts from other banks. The bank's existing customer
service system was mainframe-based and was difficult and time-consuming for
agents to understand and use. The bank emphasized three objectives in
implementing a new system: enhanced customer service responsiveness, reduced
transaction times and the support of sales-oriented activities in its customer
service operation.
After implementing the Versatility Telesales desktop application, the bank
was able to reduce transaction times with an easy-to-use application that
provides telebanking agents with real-time access to comprehensive customer
information stored on the bank's legacy mainframe systems. The new system also
reduces transaction times by using the quotation, order taking, cross-sell,
up-sell and fulfillment capabilities of the Versatility Telesales application.
Additionally, product and market information provided by Versatility PowerGuide
enables agents to more effectively sell bank products and services during the
call.
Pharmaceutical Provider
A direct distributor of pharmaceutical products sought to differentiate its
services and enhance its efficiency. The company's previous system was not
GUI-based and was difficult to use, requiring agents to memorize multiple codes
and procedures before becoming fully effective. The company could not reduce the
inherent complexity of its interactions with customers, but required a system
that was easier to learn and that enabled agents to become productive more
rapidly. Also, the company felt that introducing proactive outbound calling for
market research and product sales would contribute to the overall effectiveness
of its telemarketing operations. The new solution had to be implemented quickly,
and also be customizable to meet the unique and changing needs of its business.
Using the business objects and development tools of the Versatility Call
Center Applications, the company created a customized version of the Versatility
Series applications. By using Versatility PowerGuide, call guides can be created
to assist agents in handling various types of calls and to highlight likely
issues or problems. As a result, more customer service issues are resolved
without the need to call the customer back. This company also uses Versatility
IVR to collect customer information, which can be stored in the company's
database or transferred to an appropriate agent if agent assistance is requested
by the caller. This company is in the process of implementing Versatility
Telemarketing and Campaign Plus for new, outbound sales and service campaigns.
Communications
A global communications company, operating in an increasingly competitive
market, required a way to react quickly and effectively to competitors that were
targeting specific customers for their many products and services. Given the
scope of its call center operations, the company required a solution supporting
hundreds of agents at multiple sites operating as a single "virtual" call center
that could be centrally managed and administered. This company was also
undergoing significant operational changes and wanted to make information
contained in legacy systems available to various operating departments.
The company implemented a tailored version of the Versatility Telesales
application which is currently used to support inbound calls made in response to
targeted direct marketing campaigns, including catalog mailings. The Company
also uses the Versatility Series to rapidly design multiple outbound marketing
campaigns targeted to specific customer segments. The system supports agents in
over ten call centers, all working from a centralized database and over the
existing corporate communications network. Using Versatility OpenTel, agents are
able to use a PC screen phone to place calls to assigned accounts and to route
calls from these accounts to the assigned agent. Agent supervisors and call
center managers, as well as corporate marketing, use Versatility Insight to
obtain real-time graphs and reports on calling activity, including agent, center
and marketing campaign performance. This information is used to direct
supervisors to those
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agents that need assistance and to create or modify outbound marketing campaigns
targeted for specific products or product sets.
TECHNOLOGY AND PRODUCT DEVELOPMENT
The Company's core technology was designed to facilitate the development
and customization of enterprise-wide customer interaction applications which are
interoperable with a number of other applications and can be used by a wide
variety of customers. The Company's applications are built upon a common core
architecture that is designed to leverage efficiently the performance and
scaleability of client/server computing and object-oriented development
methodologies. Versatility believes that its product architecture allows it to
craft tailored solutions for its customers and to simplify and facilitate new
product development.
The Versatility Series and Versatility CallCenter products are built using
a highly scaleable and flexible three-tier client/server model which takes
advantage of the difference in computing power between the desktop client and
the server to free-up limited desktop computing power and memory. The Company's
products support a number of client computing platforms, such as Microsoft
Windows 3.1, Microsoft Windows 95 and Microsoft Windows NT; leading relational
databases from Oracle, Informix, Sybase, Ingres, and Microsoft; and server
operating systems, such as Microsoft Windows NT Server and various versions of
Unix. The Company's products have been developed using Microsoft Visual C++,
Microsoft Foundation Classes and Centura Team Developer.
Versatility began the development of products based on a client/server
architecture in November 1993. The Company made substantial investments in new
product development in 1994 and introduced the Versatility Series in May 1995.
In August 1996, the Company released Versatility CallCenter. The Company
continues to make substantial investments in product development to improve and
enhance the functionality of its existing products. The Company also intends to
expand its existing product offerings and to introduce new products for the
client/server applications market. Although the Company expects that certain of
its new products will be developed internally, the Company may, based on timing
and cost considerations, acquire technology and products from third parties.
The Company's current development efforts include the completion of
Versatility Teleservice and Versatility Telephone Account Management
applications as well as development of Versatility Open Web, a new server module
which will expand a call center's ability to sell to and support customers over
the Internet. Versatility Open Web is being designed to enable a potential
customer to click on a button on a company's site on the World Wide Web, which
sends a message directing an agent at a company's call center to respond to this
inquiry. The call center agent will also be simultaneously provided with
customer information entered by the customer while viewing the Web site, and
will be able to see the Web pages previously viewed by the customer. Customer
information could also be transferred to a database for future use in marketing
campaigns. Versatility Open Web, which is currently expected to be released by
the end of 1996, is being designed to run on Windows NT and to be used with the
Company's other applications and services or as a stand-alone application.
As of October 31, 1996, the Company's research and development and quality
assurance staff consisted of 28 employees. The Company's total expenses for
research and development for fiscal years 1994, 1995, 1996 and the first six
months of fiscal 1997 were $389,000, $711,000, $2.1 million and $1.3 million,
respectively. The Company anticipates that it will continue to commit
substantial resources to research and development in the future.
The Company's future success will depend on its ability to enhance its
current products and to develop and introduce new products on a timely basis
that keep pace with technological developments, emerging industry standards and
the increasingly sophisticated needs of its customers and markets. There can be
no assurance that the Company will not experience difficulties that could delay
or prevent the successful development, introduction and marketing of these
products, or that its new products and product enhancements will adequately meet
the requirements of the marketplace and achieve market acceptance. Furthermore,
changing resource allocations can delay new products and certain product
enhancements. If the Company is unable, for technological or other reasons, to
develop and introduce new products or enhancements, the Company's business,
financial condition and results of operations will be materially adversely
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<PAGE> 34
affected. In addition, software products as complex as those offered by the
Company may contain undetected errors or failures when first introduced or when
new versions are released. The Company has in the past discovered software
errors in certain of its new products or enhancements and has experienced delays
or lost revenue during the period required to correct these errors. Although the
Company has not experienced material adverse effects resulting from 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 new products or
releases after commencement of commercial shipments, resulting in loss of or
delay in market acceptance, which could have a material adverse effect upon the
Company's business, financial condition and results of operations. See "Risk
Factors -- Rapid Technological Change and Product Development Risks."
SALES AND MARKETING
Sales. The Company believes that the coordinated use of multiple selling
channels is required to reach the diverse and growing base of prospective
customers. Based on their telemarketing strategies and buying patterns, these
prospective customers can be divided into three groups: (i) customers with
large-scale installations which are best served through direct sales teams, (ii)
customers with large-scale installations who require turnkey system solutions
from third party systems integrators, and (iii) customers with mid-sized
installations who need basic solutions that can be purchased relatively
inexpensively and can be quickly implemented. To address these groups, in
November 1995, the Company established four strategic selling units to focus
attention and specific solutions to targeted selling channels and markets. These
four selling units are: Enterprise Solutions, Alliances, Channels, and
International.
Enterprise Solutions. Enterprise Solutions is the Company's domestic
direct sales unit which focuses on the financial services and
communications industries. The Enterprise Solutions selling unit markets
the Versatility Series to large organizations which require a customized
and integrated call center application. This selling unit consists of 29
employees who are divided into sales and sales support teams for each
target market, a professional services organization that performs
implementation, project management and customization activities and a
customer services group responsible for post-implementation support.
Alliances. The Alliances selling unit markets the Versatility Series
to third party systems integrators and distributors who provide
comprehensive solutions to large-scale enterprise-wide environments and who
want to provide their customers with an integrated call center solution.
This selling unit consists of sales and sales personnel supporting third
party systems integrators and distributors and a services department that
handles certain support activities for the distributors or for their
customers. The Company currently has active relationships with several
third party systems integrators including Electronic Data Systems
Corporation, American Management Systems, Inc., Norstan Inc. and Cincom
Systems, Inc. As of October 31, 1996, this selling unit consisted of 9
employees.
Channels. The Channels selling unit targets mid-sized companies that
operate formal and informal call centers of 10 to 50 agents. This selling
unit markets the Versatility CallCenter product to Versatility Integration
Professional ("VIP") resellers and will sell directly to an end user
customer if there is not a trained VIP reseller in place to support the
sale. This selling unit was formed to develop regional-based sales and
support teams to evaluate, recruit and train VIP resellers. As of October
31, 1996, this selling unit consisted of 9 employees and had arrangements
with 15 VIP resellers.
International. The International selling unit markets the Versatility
Series and Versatility CallCenter products to third party systems
integrators, distributors and resellers outside of North America. This
selling unit has regional sales and support teams covering Western Europe,
the Middle East and certain African countries and expects to begin selling
in the Pacific Rim and Latin American regions. The International selling
unit is headquartered in Aldermaston, U.K., with support personnel located
in the Netherlands and Sweden and, as of October 31, 1996, consisted of 17
employees.
Marketing. The Company's marketing efforts support each of the strategic
selling units. The Company's marketing programs include product management,
product marketing, maintenance and enhancement of the Company's Web site, direct
marketing, including the operation of the Company's in-house direct mail and
telemarketing operation, public relations and press and analyst communications
and event support. The
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<PAGE> 35
Company's marketing department also maintains marketing relationships with a
variety of third party vendors, such as telephone switch manufacturers, computer
manufacturers, database providers and others. As of October 31, 1996, the
Company's marketing department consisted of 13 employees. The Company uses the
Versatility CallCenter product in its in-house direct marketing and
telemarketing facility.
COMPETITION
The market for the Company's products is intensely competitive, highly
fragmented and subject to rapid change. Because the Company offers multiple
applications which can be purchased separately or integrated as part of the
Versatility Series, the Company competes with a variety of companies depending
on the target market for their applications software products. The Company's
principal competitors in the customer interaction software market are Brock
International, Inc., Digital Systems International, Inc, Information Management
Associates, Inc., Scopus Technology, Inc., and The Vantive Corporation. For
installations where telephony functions are of prime importance, competitors
include Davox Corporation, Early Cloud and Company (a division of IBM) and EIS
International, Inc. The Company also competes with third party professional
service organizations that develop custom software and with the information
technology departments of potential customers. The Company's potential
competitors also include a number of large hardware and software companies that
may develop or acquire products that compete with the Company's products. The
Company believes that the principal competitive factors affecting its market
include product features such as flexibility, scaleability, interoperability,
functionality and ease of use, as well as product reputation, quality,
performance, price, customer service and support, the effectiveness of sales and
marketing efforts and vendor reputation. Although the Company believes that its
products currently compete favorably with respect to such factors, there can be
no assurance that the Company can maintain its competitive position against
current and potential competitors, especially those with significantly greater
financial, marketing, service, support, technical and other resources.
In addition, the Company believes that existing competitors and new market
entrants will attempt to develop fully integrated customer interaction solution
applications suites that may include call center telesales and telemarketing
applications which provide comparable functionality to the Company's existing
applications. The Company also expects that competition will increase as a
result of software industry consolidation. 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 Company's potential customers. Accordingly, it is possible that new
competitors or alliances among competitors will emerge and rapidly acquire
significant market share.
Increased competition is likely to result in price reductions, reduced
operating margins and loss of market share, any of which could materially
adversely affect the Company's business, financial condition and results of
operations. Many of the Company's current and potential competitors have
significantly greater financial, technical, marketing and other resources than
the Company. As a result, they may be able to respond more quickly to new or
emerging technologies and changes in customer requirements, or to devote greater
resources to the development, promotion and sale of their products than can the
Company. There can be no assurance that the Company will be able to compete
successfully against current and future competitors or that competitive
pressures faced by the Company will not materially adversely affect its
business, financial condition and results of operations. See "Risk Factors --
Competition."
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company relies on a combination of copyright, trade secret and
trademark laws, confidentiality procedures and contractual provisions to protect
its proprietary rights in its products and technology. The Company does not rely
upon patent protection and does not currently expect to seek patents on any
aspects of its technology. There can be no assurance that the confidentiality
agreements and other methods on which the Company relies to protect its trade
secrets and proprietary technology will be adequate. Further, the Company may be
subject to additional risks as it enters into transactions in countries where
intellectual property laws are not well developed or are poorly enforced. Legal
protections of the Company's rights may be ineffective in such countries.
Litigation to defend and enforce the Company's intellectual property rights
could result in substantial costs and diversion of resources and could have a
material adverse effect on the Company's
34
<PAGE> 36
business, financial condition and results of operations, regardless of the final
outcome of such litigation. Despite the Company's efforts to safeguard and
maintain its proprietary rights both in the United States and abroad, there can
be no assurance that the Company will be successful in doing so, or that the
steps taken by the Company in this regard will be adequate to deter
misappropriation or independent third-party development of the Company's
technology or to prevent an unauthorized third party from copying or otherwise
obtaining and using the Company's products or technology. There also can be no
assurance that others will not independently develop similar technologies or
duplicate any technology developed by the Company. Any such events could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company has entered into agreements with a small number of its
customers requiring the Company to place its source code in escrow. These escrow
agreements typically provide that these customers have a limited, non-exclusive
right to use such code in the event that there is a bankruptcy proceeding by or
against the Company, if the Company ceases to do business or if the Company
fails to meet its support obligations. Entering into such agreements may
increase the likelihood of misappropriation by third parties.
As the number of customer interaction software applications in the industry
increases and the functionality of these products further overlaps, software
development companies like the Company may increasingly become subject to claims
of infringement or misappropriation of the intellectual property rights of
others. There can be no assurance that third parties will not assert
infringement or misappropriation claims against the Company in the future with
respect to current or future products. Any claims or litigation, with or without
merit, could be time-consuming, result in costly litigation, cause product
shipment delays or 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, which could have a
material adverse effect on the Company's business, financial condition and
results of operations. Adverse determinations in such claims or litigation could
also have a material adverse effect on the Company's business, financial
condition and results of operations.
REGULATORY ENVIRONMENT
Certain uses of outbound call processing systems are regulated by federal,
state and foreign law. The Federal Telephone Consumer Protection Act (the
"TCPA") prohibits the use of automatic dialing equipment to call emergency
telephone lines, health care and similar facility patient telephone lines, and
telephone lines where the called party is charged for incoming calls, such as
those used by pager and cellular phone services. The TCPA prohibits use of such
equipment to engage two or more lines of a multi-line business simultaneously.
Among other things, the TCPA required the Federal Communications Commission
("FCC") to create regulations protecting residential telephone subscribers from
unwanted telephone solicitations. The rules adopted by the FCC require that
telemarketers maintain a company-specific "do-not-call list" which contains the
names and numbers of residential subscribers who do not want to receive calls.
An entity which has an "established business relationship" with a party it calls
and tax-exempt nonprofit organizations are exempt from do-not-call lists. The
rules also require that telemarketers may call consumers only after 8 a.m. and
before 9 p.m., local time. Certain states have enacted similar laws limiting
access to telephone subscribers who object to receiving solicitations. Although
compliance with these laws may limit the potential use of the Company's products
in some respects, the Company's systems can be programmed to operate
automatically in full compliance with these laws through the use of appropriate
calling lists and calling campaign time parameters. There can be no assurance,
however, that future legislation further restricting telephone solicitation
practices, if enacted, would not adversely affect the Company.
EMPLOYEES
As of October 31, 1996, the Company had 146 full-time employees, of which
129 were based in the United States and 17 were based internationally. None of
the employees of the Company is covered by a collective bargaining agreement.
The Company does not have long-term employment agreements with any of its
employees. The Company considers its relations with its employees to be good.
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<PAGE> 37
The Company believes its future success will depend in large part on the
Company's ability to recruit and retain qualified employees, especially
experienced software engineering and sales personnel. The competition for such
personnel is intense. There can be no assurance that the Company will be
successful in retaining or recruiting key personnel.
FACILITIES
The Company's principal administrative, sales, marketing, support, and
research and development facility is located in 40,303 square feet of modern
office space in Fairfax, Virginia. This facility is leased to the Company
through 2004. The Company also leases 2,463 square feet in Irvine, California
and 6,600 square feet in Aldermaston, U.K. Management believes its current
facilities are adequate to meet its needs through the next twelve months and
that, if required, suitable additional or alternative space will be available to
accommodate expansion of the Company's operations on commercially reasonable
terms.
LEGAL PROCEEDINGS
One of the Company's former VARs has filed a claim for arbitration against
the Company asserting, among other things, that the Company misrepresented the
functionality of its products and wrongfully terminated the VAR's reseller
agreement, and claiming not less than $1.0 million in damages. The Company
intends to vigorously defend this action and, based upon information currently
available, believes that the action will not have a material impact on the
Company. However, because the arbitration proceedings are at a preliminary stage
and discovery has not yet begun, the Company cannot predict the ultimate outcome
of this action and there can be no assurance that the Company will be successful
in the arbitration proceedings.
Versatility is not a party to any other material legal proceedings.
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<PAGE> 38
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------- --- -------------------------------------------------------------------------
<S> <C> <C>
Ronald R. Charnock................. 46 President, Chief Executive Officer and Chairman of the Board of Directors
Donald C. Yount, Jr. .............. 35 Senior Vice President, Finance and Chief Financial Officer
Marcus W. Heth..................... 41 Senior Vice President, Technologies, Secretary and Director
Stephen P. Winings................. 45 Senior Vice President, Marketing
Thomas A. Smith(1)(2).............. 34 Director
Charles A. Johnson(1)(2)........... 47 Director
Paul J. Palmer(1).................. 65 Director
</TABLE>
- ---------------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
RONALD R. CHARNOCK has served as President, Chief Executive Officer and
Chairman of the Board of Directors since co-founding the Company in 1981. From
1975 to the founding of the Company, Mr. Charnock was Director of the Computer
Services Division of the Republican National Committee. Mr. Charnock was the
founder in June 1990 and was the initial Chairman, serving until October 1994,
of the Alliance of Computer-Based Telephony Application Suppliers of the North
American Telecommunications Association. In October 1994, Mr. Charnock was
elected Vice Chairman of the Multimedia Telecommunications Association and
elected Chairman of that association in January 1996.
DONALD C. YOUNT, JR. has served as the Company's Chief Financial Officer
since July 1995. From March 1990 to July 1995, Mr. Yount held various positions
with K-III Communications Corporation ("K-III"), a diversified communications
company, most recently as Vice President and Chief Financial Officer of one of
K-III's operating companies, Films for the Humanities, Inc. Prior to joining
K-III, Mr. Yount was employed by the North America Corporate Finance Group of
the Chase Manhattan Bank, by Deloitte, Haskins and Sells as a consultant and by
Peat, Marwick & Co. as an auditor. Mr. Yount is a certified public accountant.
MARCUS W. HETH co-founded the Company in 1981 and has served as a director
of the Company since that time and as Treasurer and Secretary since January
1996. In May 1996, Mr. Heth became the Company's Senior Vice President,
Technologies. From October 1993 to May 1996, Mr. Heth was President of NPRI
Technologies, Inc., a wholly owned subsidiary of the Company. From August 1991
to October 1993, Mr. Heth was the Company's Vice President of Sales and
Marketing. From May 1981 to August 1991, he was the Company's Vice President,
Business Operations. Prior to co-founding the Company in 1981, Mr. Heth was
employed by the Republican National Committee, most recently as Manager of
Software Development.
STEPHEN P. WININGS, Senior Vice President, Marketing, joined the Company in
August 1996. From 1991 to August 1996, Mr. Winings was Vice President,
Marketing, of Software AG of North America. From 1989 to 1991, he was President
and Chief Executive Officer, Technology Division, for the Institute for
International Research, an information research company. From 1988 to 1989, Mr.
Winings was Executive Vice President, Corporate Development with CLC
Corporation, a technology training company. From 1987 to 1988, Mr. Winings was
Division President of Prentice Hall Information a division of Paramount
Communications. From 1986 to 1987, he was Division President with Simon &
Schuster, a division of Paramount Communications.
THOMAS A. SMITH has been a director since January 1996. Since October 1990,
Mr. Smith has been employed by the Edison Venture Fund. In 1993, Mr. Smith
became a general partner of the Edison Venture Fund and has directed Edison's
Washington, D.C. office since 1994. From 1986 to 1990, Mr. Smith was a senior
associate in the risk capital investment subsidiary of The Chase Manhattan
Corporation.
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<PAGE> 39
CHARLES A. JOHNSON has been a director of the Company since January 1996.
Since 1993, Mr. Johnson has been a general partner of Noro-Moseley Partners III,
L.P., an Atlanta-based venture capital firm. From 1992 to 1993, Mr. Johnson was
an independent consultant. In 1983, Mr. Johnson co-founded Sales Technologies,
Inc., a startup software company, and served as its President and Chief
Executive Officer until Sales Technologies, Inc. was acquired by Dun and
Bradstreet in January 1989. Mr. Johnson continued in his role as Chief Executive
Officer of that division of Dun and Bradstreet until February 1992. Prior to
founding Sales Technologies, Inc., Mr. Johnson was a management consultant with
McKinsey & Company and held a number of sales and marketing positions with
Procter & Gamble.
PAUL J. PALMER has been a Director of the Company since September 1996.
Since January 1994, Mr. Palmer has been an executive consultant specializing in
the software industry. From 1957 until his retirement in December 1993, Mr.
Palmer held various positions in marketing and development with IBM, most
recently as Vice President.
Executive officers of the Company are elected by the Board of Directors on
an annual basis and serve until their successors are duly elected and qualified.
Messrs. Smith and Johnson were nominated and elected pursuant to a Voting
Agreement which was entered into in connection with the issuance of the Series A
Preferred Stock, which Voting Agreement will terminate upon the closing of this
offering. There are no family relationships among any of the executive officers
or directors of the Company.
Upon the closing of this offering, the Company's Board of Directors will be
divided into three classes each of whose members will serve for staggered
three-year terms. Messrs. Heth and Johnson will serve in the class the term of
which expires in 1997; Messrs. Palmer and Smith will serve in the class the term
of which expires in 1998; and Mr. Charnock will serve in the class the term of
which expires in 1999. Upon the expiration of the term of each class of
directors, directors comprising such class of directors will be elected for a
three-year term at the next succeeding annual meeting of stockholders.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to January 1996, the Company had no separate compensation committee
or other board committee performing equivalent functions, and these functions
were performed by the Company's Board of Directors. In January 1996, the Company
established a Compensation Committee which consisted of Messrs. Smith and
Johnson. In September 1996, the Board of Directors established a new
Compensation Committee which consists of Messrs. Smith, Johnson and Palmer, each
of whom are non-employee directors. See "Management -- Executive Compensation"
for shares issued and options granted to executive officers as compensation for
services rendered in fiscal 1996.
See "Certain Transactions" for information regarding certain relationships
and transactions between the Company and certain members of the Board of
Directors.
DIRECTOR COMMITTEES AND COMPENSATION
Committees. The Audit Committee consists of Messrs. Smith and Johnson. The
Audit Committee reviews with the Company's independent auditors the scope and
timing of their audit services and any other services they are asked to perform,
the auditor's report on the Company's financial statements following completion
of their audit and the Company's policies and procedures with respect to
internal accounting and financial controls. In addition, the Audit Committee
makes annual recommendations to the Board of Directors for the appointment of
independent auditors for the ensuing year.
The Compensation Committee consists of Messrs. Smith, Johnson and Palmer.
The Compensation Committee reviews and evaluates the compensation and benefits
of all officers of the Company, reviews general policy matters relating to
compensation and benefits of employees of the Company and makes recommendations
concerning these matters to the Board of Directors. The Compensation Committee
also administers the Company's 1995 Employee Stock Option Plan and the 1995
Incentive Stock Option Plan, and, upon the closing of this offering, will
administer the Company's 1996 Stock Option Plan and 1996 Employee Stock Purchase
Plan. See "-- Stock Plans."
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<PAGE> 40
Director Compensation. All non-employee directors are reimbursed for
travel and other related expenses incurred in attending meetings of the Board of
Directors. On September 30, 1996, in connection with his election to the Board
of Directors, Mr. Palmer was granted options to purchase 15,000 shares of Common
Stock at an exercise price of $10.50 per share. These options expire five years
from the date of grant with 5,000 shares vesting immediately and the remainder
vesting quarterly over two years.
EXECUTIVE COMPENSATION
Summary Compensation. The following table sets forth the compensation
earned by the Company's Chief Executive Officer and each of the other most
highly compensated executive officers of the Company whose total salary and
bonus for fiscal 1996 exceeded $100,000 (collectively, the "Named Executive
Officers") for services rendered in all capacities to the Company in fiscal
1996:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION(1)
---------------
ANNUAL COMPENSATION SECURITIES
---------------------- UNDERLYING
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS
- ----------------------------------------------------- --------- -------- ---------------
<S> <C> <C> <C>
Ronald R. Charnock, Chief Executive Officer,
President and Chairman of the Board of Directors... $145,000 $151,858 --
Marcus W. Heth, Senior Vice President, Technologies,
Secretary and Director............................. 140,000 150,993 --
Donald C. Yount, Jr., Senior Vice President, Finance
and Chief Financial Officer........................ 78,077 19,050 6,004
</TABLE>
- ------------
(1) The Company did not make any restricted stock awards, grant any stock
appreciation rights or make any long-term incentive payments during fiscal
1996.
Option Grants. The following table provides information concerning grants
of stock options made during fiscal 1996 by the Company to the Named Executive
Officers:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------- POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED
TOTAL ANNUAL RATES OF STOCK
OPTIONS PRICE APPRECIATION
GRANTED TO EXERCISE FOR OPTION TERM(4)
OPTIONS EMPLOYEES PRICE EXPIRATION ---------------------
NAME GRANTED IN FISCAL YEAR(3) ($/SH) DATE 5% 10%
- -------------------------------- ----- ----------------- -------- ---------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Ronald R. Charnock.............. -- -- -- -- -- --
Marcus W. Heth.................. -- -- -- -- -- --
Donald C. Yount, Jr............. 4,040(1) 0.99% $ 0.80 1/16/01 $ 893 $1,973
1,964(2) 0.80 4/30/01 434 959
</TABLE>
- ------------
(1) Options vested 100% on the date of grant. Options were granted at the fair
market value of the Company's Common Stock as determined by the Company's
Board of Directors on the date of grant.
(2) Options vest 20% on the date of grant with an additional 20% vesting
annually on the anniversary date of such grant. Options were granted at the
fair market value of the Company's Common Stock as determined by the
Company's Board of Directors on the date of grant.
(3) Based on options to purchase an aggregate of 611,327 shares of Common Stock
granted to all employees of the Company in fiscal 1996, including the Named
Executive Officers.
(4) The potential realizable value is calculated based on the term of the option
at the time of grant (five years). Stock price appreciation of 5% and 10% is
based on the fair value at the time of grant and assumes that the option is
exercised at the exercise price and sold on the last day of its term at the
appreciated price, pursuant to rules promulgated by the Securities and
Exchange Commission. The potential realizable value does not represent the
Company's prediction of its stock price performance. This table does not
take into account any appreciation of the fair value of the Common Stock
from the date of grant to date. There can be no assurance that the actual
stock price appreciation over the five-year option term will be at the
assumed 5% and 10% levels or at any other defined level.
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<PAGE> 41
Option Exercises and Unexercised Option Holdings. The following table
provides information regarding unexercised stock options held as of April 30,
1996 by each of the Named Executive Officers. None of the Named Executive
Officers exercised any stock options in fiscal 1996.
AGGREGATE OPTION EXERCISES AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT YEAR-END OPTIONS AT YEAR-END(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Ronald R. Charnock...................... -- -- -- --
Marcus W. Heth.......................... -- -- -- --
Donald C. Yount, Jr..................... 4,432 1,572 $58,502 $20,750
</TABLE>
- ---------------
(1) There was no public trading market for the Common Stock as of April 30,
1996. Accordingly, these values have been calculated on the basis of the
assumed initial public offering price of $14.00 per share, less the
applicable exercise price.
STOCK PLANS
1995 Employee Stock Option Plan. The Company's 1995 Employee Stock Option
Plan (the "1995 Employee Plan"), which was adopted by the Board of Directors and
approved by the Company's stockholders on January 16, 1996, provides for the
issuance of a maximum of 430,708 shares of Common Stock, less any shares issued
under the 1995 Incentive Plan (as defined below), pursuant to the grant of
non-statutory stock options to employees, non-employees or consultants of the
Company. Options granted under the 1995 Employee Plan become fully vested on the
date of grant and are not transferable by the holder except by will or by the
laws of descent and distribution.
As of November 15, 1996, options to purchase 218,936 shares of Common Stock
at a price of $0.80 per share were outstanding under the 1995 Employee Plan, and
9,822 of such options had been exercised. On September 30, 1996, the Company's
Board of Directors determined that no further options would be granted under the
1995 Employee Plan.
1995 Incentive Stock Option Plan. The Company's 1995 Incentive Stock
Option Plan (the "1995 Incentive Plan") was adopted by the Board of Directors
and approved by the Company's stockholders on January 16, 1996. The 1995
Incentive Plan provides for the issuance of a maximum of 430,708 shares of
Common Stock less any shares issued under the 1995 Employee Plan pursuant to the
grant to officers and employees of "incentive stock options" within the meaning
of the Internal Revenue Code. Options granted under the 1995 Incentive Plan
generally vest 20% on the date of grant and 20% annually thereafter on the
anniversary of the date of the grant and are not transferable by the holder
except by will or by the laws of descent and distribution.
As of November 15, 1996, options to purchase 62,569 shares of Common Stock
at a price of $0.80 per share were outstanding under the 1995 Incentive Plan and
no such options had been exercised. On September 30, 1996, the Company's Board
of Directors determined that no further options would be granted under the 1995
Incentive Plan.
In addition to options granted under the 1995 Employee Plan and the 1995
Incentive Plan, in January 1996, the Company granted Louis Venezia options to
purchase 320,000 shares of Common Stock at an exercise price of $0.80 per share.
1996 Stock Option Plan. The Company's 1996 Stock Option Plan (the "1996
Plan") was adopted by the Board of Directors on September 30, 1996 and approved
by the Company's stockholders on September 30, 1996. The 1996 Plan provides for
the issuance of a maximum of 750,000 shares of Common Stock pursuant to the
grant to employees of "incentive stock options" within the meaning of the
Internal Revenue Code and the grant of non-qualified stock options, stock awards
or opportunities to make direct purchases of stock in the Company to employees,
consultants, directors and officers of the Company.
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<PAGE> 42
The 1996 Plan is administered by the Compensation Committee of the Board of
Directors. Subject to the provisions of the 1996 Plan, the Compensation
Committee has the authority to select the optionees and determine the terms of
the options granted, including: (i) the number of shares subject to each option,
(ii) when the option becomes exercisable, (iii) the exercise price of the option
(which in the case of an incentive stock option cannot be less than the market
price of the Common Stock as of the date of grant), (iv) the duration of the
option and (v) the time, manner and form of payment upon exercise of an option.
An option is not transferable by the optionholder except by will or by the laws
of descent and distribution. Generally, no incentive stock option may be
exercised more than 90 days following termination of employment. However, in the
event that termination is due to death or disability, the option is exercisable
for a maximum of 180 days after such termination.
As of November 15, 1996, options to purchase 139,000 shares of Common Stock
at a price of $10.50 per share were outstanding under the 1996 Plan, and no
options had been exercised.
1996 Employee Stock Purchase Plan. The 1996 Employee Stock Purchase Plan
(the "1996 Purchase Plan") was adopted by the Board of Directors on September
30, 1996 and approved by the Company's stockholders on September 30, 1996. The
1996 Purchase Plan will take effect upon completion of this offering. The 1996
Purchase Plan provides for the issuance of a maximum of 100,000 shares of Common
Stock pursuant to the exercise of nontransferable purchase rights granted to
participating employees.
The 1996 Purchase Plan is administered by the Compensation Committee of the
Board of Directors. All employees of the Company whose customary employment is
20 hours or more per week and more than five months in any calendar year and who
have completed at least one year of employment, except employees who own five
percent or more of the Company's stock, are eligible to participate in the 1996
Purchase Plan. Employees who own five percent or more of the Company's Common
Stock and directors who are not employees of the Company may not participate in
the 1996 Purchase Plan. To participate in the 1996 Purchase Plan, an employee
must authorize the Company to deduct an amount (not less than one percent nor
more than ten percent of a participant's total cash compensation) from his or
her pay during six-month periods commencing on January 1 and July 1 of each year
(each a "Plan Period"), but in no case shall an employee be entitled to purchase
more than 250 shares in any Plan Period. The exercise price for the purchase
right each Plan Period is 85% of the lesser of the market price of the Common
Stock on the first or last business day of the Plan Period. If an employee is
not a participant on the last day of the Plan Period, such employee is not
entitled to exercise his or her purchase right, and the amount of his or her
accumulated payroll deductions will be refunded. An employee's rights under the
1996 Purchase Plan terminate upon his or her voluntary withdrawal from the plan
at any time or upon termination of employment. No options have been granted to
date under the 1996 Purchase Plan.
401(K) PLAN
The Company maintains a 401(k) retirement savings plan (the "401(k) Plan").
All employees of the Company who have completed six months of service are
eligible to participate in the 401(k) Plan. The 401(k) Plan provides that each
participant may contribute a portion of his or her pre-tax compensation (up to a
statutorily prescribed annual limit, $9,500 in 1996) to the 401(k) Plan. The
percentage elected by certain highly compensated participants may be required to
be lower. All amounts contributed to the 401(k) Plan by employee participants
and earnings on these contributions are fully vested at all times. The Company,
at its discretion, may contribute to the 401(k) Plan. Such Company contributions
become fully vested upon a participant's completion of three years of service.
The Company has never made a discretionary contribution, although the Company
may elect to make contributions in the future.
41
<PAGE> 43
CERTAIN TRANSACTIONS
Prior to October 31, 1996, the Company was the 1% general partner of
Serenity Real Properties Limited Partnership (the "Partnership") of which Mr.
Ronald R. Charnock, the Company's President and Chief Executive Officer, Mr.
Marcus W. Heth, the Company's Senior Vice President, Technologies, and Mr. Keith
P. Roberts, the Company's Director of Product Development, were the limited
partners holding the remaining 99% of the partnership interests (the "Limited
Partners"). The Partnership is the owner of an office building in Alexandria,
Virginia (the "Property"), which was the Company's headquarters until October
1994 and which was leased by the Company under a lease expiring in April 1997
and providing for monthly rental payments of $10,000. In addition, the Company
had guaranteed a mortgage loan made by a commercial bank to the Partnership,
which had an outstanding balance of $614,000 at September 30, 1996. This loan
was also guaranteed by each of the Limited Partners and was secured by a
mortgage on the Property.
On October 31, 1996, the Company sold its general partnership interest in
the Partnership, for consideration equal to its capital account of $3,131, to
Serenity L.L.C., whose members are the Limited Partners. In connection with the
sale of its general partnership interest in the Partnership, the Company made to
the Partnership a loan of $519,305 evidenced by a Deed of Trust Note which bears
interest at the prime rate and is payable upon the earliest of (i) the sale of
the Property, (ii) demand by the Company and (iii) October 31, 1997. The Deed of
Trust Note is secured by a mortgage on the Property and is guaranteed by each of
the Limited Partners. The Partnership used the proceeds of this loan to repay
its loan from the bank and discharge its mortgage on the Property. In connection
with these transactions, the Partnership agreed to the termination of its lease
with Company. The Company believes that these transactions were in the best
interest of the Company and its stockholders and that the consideration received
by it for its general partnership interest in the Partnership was not less than
the fair value of the interest.
The Company has extended loans to Mr. Charnock, with principal and accrued
interest totaling $113,045 at November 6, 1996. Such loans are evidenced by a
promissory note, are payable on the earliest of (i) demand and (ii) November 6,
1997 and bear interest at the prime rate.
Certain obligations under the Company's Master Equipment Lease with its
leasing agent, are personally guaranteed by Mr. Charnock. As of October 31,
1996, $937,000 was outstanding under the Master Equipment Lease, of which
$598,000 is guaranteed by Mr. Charnock. Such payments are due monthly through
March 2000.
The Company has adopted a policy whereby all future transactions between
the Company and its officers, directors and affiliates will be on terms no less
favorable to the Company than could be obtained from unaffiliated third parties
and will be approved by a majority of the disinterested members of the Board of
Directors.
42
<PAGE> 44
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of November 15, 1996 (i) by each
person or entity known by the Company to own beneficially more than 5% of the
outstanding shares of Common Stock, (ii) by each director of the Company, (iii)
by each of the Named Executive Officers and (iv) by all directors and executive
officers of the Company as a group. This table assumes no exercise of the
Underwriters' overallotment options. The Company and two of the Company's
stockholders, Edison Venture Fund III, L.P. and Noro-Moseley Partners III, L.P.,
have granted to the Underwriters options to purchase 131,588, 113,378 and 85,034
shares, respectively, to cover over-allotments. See "Underwriting." Footnotes 2
and 3 to the table provide information regarding the stock holdings of the
Selling Stockholders after this offering in the event the Underwriters exercise
the over-allotment options in full. Unless otherwise indicated below, to the
knowledge of the Company, each person or entity listed below maintains a
business address c/o Versatility Inc., 11781 Lee Jackson Memorial Highway,
Seventh Floor, Fairfax, Virginia 22033 and has sole voting and investment power
over the shares of Common Stock shown as beneficially owned, except to the
extent authority is shared by spouses under applicable law.
<TABLE>
<CAPTION>
PERCENT OWNED(1)
------------------------------
SHARES BENEFICIALLY BEFORE THE AFTER THE
NAME AND ADDRESS OWNED OFFERING OFFERING
- --------------------------------------------------- ------------------- ------------ -----------
<S> <C> <C> <C>
Edison Venture Fund III, L.P.(2)................... 566,892 11.3% 7.9%
997 Lenox Drive, #3
Lawrenceville, NJ 08648
Noro-Moseley Partners III, L.P.(3)................. 425,169 8.5% 5.9%
4200 North Side Parkway, NW
Building 9
Atlanta, GA 30327
Keith D. Roberts................................... 1,000,000 20.0% 13.9%
Benjamin Cotten.................................... 320,000 6.4% 4.4%
Ronald R. Charnock................................. 1,360,000 27.2% 18.9%
Donald C. Yount, Jr.(4)............................ 8,432 * *
Marcus W. Heth..................................... 1,000,000 20.0% 13.9%
Thomas A. Smith(5)................................. 566,892 11.3% 7.9%
Charles A. Johnson(6).............................. 425,169 8.5% 5.9%
Paul J. Palmer(7).................................. 6,250 * *
Louis Venezia(8)................................... 332,468 6.2% 4.4%
Ernest Connon(9)................................... 320,493 6.4% 4.4%
Stephen P. Winings(10)............................. 4,000 * *
All Executive Officers and Directors as a group
(7 persons)(4)(5)(6)(7)(10)...................... 3,370,743 67.1% 46.7%
</TABLE>
- ---------------
* Less than 1% of the outstanding Common Stock.
(1) The number of shares of Common Stock deemed outstanding prior to this
offering includes 5,001,883 shares of Common Stock outstanding as of
November 15, 1996 (including 992,061 shares to be issued upon the automatic
conversion of all outstanding shares of Series A Preferred Stock on the
closing of this offering). The number of shares of Common Stock deemed
outstanding after this offering includes an additional 2,200,000 shares of
Common Stock which are being offered for sale by the Company in this
offering.
(2) If the Underwriters' over-allotment options are exercised in full, Edison
Venture Fund III, L.P. will sell 113,378 shares and thereafter beneficially
own 453,514 shares, representing 6.2% of the outstanding Common Stock.
(3) If the Underwriters' over-allotment options are exercised in full,
Noro-Moseley Partners III, L.P. will sell 85,034 shares and thereafter
beneficially own 340,135 shares, representing 4.6% of the outstanding
Common Stock.
(4) Consists of 8,432 shares issuable pursuant to stock options which are
exercisable within 60 days of November 15, 1996.
43
<PAGE> 45
(5) Consists of 566,892 shares of Common Stock held by Edison Venture Fund III,
L.P., of which Mr. Smith is a general partner. Mr. Smith may be deemed to
share voting and investment power with respect to these shares. Mr. Smith
disclaims beneficial ownership of such shares.
(6) Consists of 425,169 shares held by Noro-Moseley Partners III, L.P. of which
Mr. Johnson is a general partner. Mr. Johnson may be deemed to share voting
and investment power with respect to these shares. Mr. Johnson disclaims
beneficial ownership of such shares.
(7) Consists of 6,250 shares issuable pursuant to stock options which are
exercisable within 60 days of November 15, 1996.
(8) Consists of 332,468 shares issuable pursuant to stock options which are
exercisable within 60 days of November 15, 1996.
(9) Includes 493 shares issuable pursuant to stock options which are
exercisable within 60 days of November 15, 1996.
(10) Consists of 4,000 shares issuable pursuant to stock options which are
exercisable within 60 days of November 15, 1996.
44
<PAGE> 46
DESCRIPTION OF CAPITAL STOCK
Effective upon the closing of this offering, the authorized capital stock
of the Company will consist of 20,000,000 shares of Common Stock, par value $.01
per share, and 2,000,000 shares of Preferred Stock, par value $.01 per share.
COMMON STOCK
As of November 15, 1996, there were 5,001,883 shares of Common Stock
outstanding and held of record by 9 stockholders, after giving effect to the
automatic conversion of all outstanding shares of Series A Preferred Stock upon
the closing of this offering. Based upon the number of shares outstanding as of
that date and giving effect to the issuance of the 2,200,000 shares of Common
Stock offered hereby, there will be 7,201,883 shares of Common Stock outstanding
upon the closing of this offering.
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of Common Stock
entitled to vote in any election of directors may elect all of the directors
standing for election. 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 therefor, subject to any preferential dividend rights of
any Preferred Stock then outstanding. Upon the liquidation, dissolution or
winding up of the Company, the holders of Common Stock are entitled to receive
ratably the net assets of the Company available after the payment of all debts
and other liabilities and subject to the prior rights of any Preferred Stock
then outstanding. Holders of the Common Stock have no preemptive, subscription,
redemption or conversion rights. The outstanding shares of Common Stock are, and
the shares offered by the Company in this offering will be, when issued and paid
for, fully paid and nonassessable. The rights, preferences and privileges of
holders of Common Stock are subject to, and may be adversely affected by, the
rights of the holders of shares of any series of Preferred Stock which the
Company may designate and issue in the future. Upon the closing of this
offering, there will be no shares of Preferred Stock outstanding.
PREFERRED STOCK
The Second Amended and Restated Certificate of Incorporation of the Company
approved by the stockholders of the Company on September 30, 1996, which will be
filed immediately after the closing of this offering, will delete all references
to the formerly designated Series A Preferred Stock.
The Board of Directors will be authorized without further stockholder
approval, subject to certain limitations prescribed by law, to issue from time
to time up to an aggregate of 2,000,000 shares of Preferred Stock in one or more
series and to fix or alter the designations, preferences, rights and any
qualifications, limitations or restrictions of the shares of each such series
thereof, including the dividend rights, dividend rates, conversion rights,
voting rights, terms of redemption (including sinking fund provisions),
redemption price or prices, liquidation preferences and the number of shares
constituting any series or designations of such series. The issuance of
Preferred Stock may have the effect of delaying, deferring or preventing a
change of control of the Company. The Company has no present plans to designate
or issue any shares of Preferred Stock.
REGISTRATION RIGHTS
At the completion of this offering, certain stockholders of the Company
(the "Rightsholders") will be entitled to require the Company to register under
the Securities Act of 1933, as amended (the "Act"), up to a total of 992,061
shares of outstanding Common Stock (the "Registrable Shares") under the terms of
an agreement among the Company and the Rightsholders (the "Registration
Agreement"). The Registration Agreement provides that in the event the Company
proposes to register any of its securities under the Act at any time or times,
the Rightsholders, subject to certain exceptions, shall be entitled to include
Registrable Shares in such registration. However, the managing underwriter of
any such offering may exclude for marketing reasons some or all of such
Registrable Shares from such registration. Certain Rightsholders also have,
subject to certain conditions and limitations, additional rights to require the
Company to prepare and file a registration statement under the Act with respect
to their Registrable Shares if Rightsholders holding at least 40% of the
Registrable Shares held by all such Rightsholders so request at any time six
months or more after the date of this Prospectus. Rightsholders may also, at any
time, require the Company to file a
45
<PAGE> 47
registration statement on Form S-3 under the Act, or any successor form thereto,
if the aggregate price to the public of such offering can reasonably be
anticipated to exceed $4,000,000 and if the Company is entitled to use Form S-3.
There is no limitation on the number of registrations on Form S-3 that may be
requested by Rightsholders. The Company is generally required to bear the
expenses of all such registrations, except underwriting discounts and
commissions.
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS; ANTI-TAKEOVER EFFECTS
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law (the "DGCL"). Subject to certain exceptions, Section 203
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 interested stockholder attained such status with the
approval of the Board of Directors or unless the business combination is
approved in a prescribed manner. A "business combination" includes mergers,
asset sales and other transactions resulting in a financial benefit to the
interested stockholder. Subject to certain exceptions, an "interested
stockholder" is a person who, together with affiliates and associates, owns, or
within three years did own, 15% or more of the corporation's voting stock.
The Company's Second Amended and Restated Certificate of Incorporation
provides for the division of the Board of Directors into three classes as nearly
equal in size as possible with staggered three-year terms. See "Management --
Executive Officers and Directors." Any director may be removed without cause
only by the vote of at least 75% of the shares entitled to vote for the election
of directors or with cause by the vote of at least a majority of such shares.
These provisions could have the effect of making it more difficult for a third
party to acquire, or of discouraging a third party from acquiring, control of
the Company.
The Company's Amended and Restated By-laws, which will be in effect upon
the closing of the offering, provide that for nominations for the Board of
Directors or for other business to be properly brought by a stockholder before a
meeting of stockholders, the stockholder must first have given timely notice
thereof in writing to the Secretary of the Company. To be timely, a notice of
nominations or other business to be brought before an annual meeting must be
delivered not less than 120 days nor more than 150 days prior to the first
anniversary of the date of the proxy statement delivered to stockholders in
connection with the preceding year's annual meeting or, if the date of the
annual meeting is either more than 30 days before or more than 60 days after
such anniversary, or if no proxy statement was delivered to stockholders in
connection with the preceding year's annual meeting, such notice must be
delivered not earlier than 90 days prior to such annual meeting and not later
than the later of 60 days prior to the annual meeting or 10 days following the
date on which public announcement of the date of such annual meeting is first
made by the Company. With respect to special meetings, notice must generally be
delivered not more than 90 days prior to such meeting and not later than the
later of 60 days prior to such meeting or 10 days following the day on which
public announcement of such meeting is first made by the Company. The notice
must contain, among other things, certain information about the stockholder
delivering the notice and, as applicable, background information about each
nominee or a description of the proposed business to be brought before the
meeting.
The Company's Second Amended and Restated Certificate of Incorporation
authorizes the Board of Directors, when considering a tender offer or merger or
acquisition proposal, to take into account factors in addition to potential
economic benefits to stockholders. Such factors may include: (i) the interests
of the Company's stockholders, including the possibility that these interests
might be best served by the continued independence of the Company; (ii) whether
the proposed transaction might violate Federal or state laws; (iii) the
consideration being offered in the proposed transaction in relation to the then
current market price for the outstanding capital stock of the Company, as well
as in relation to the market price for the capital stock of the Company over a
period of years, the estimated price that might be achieved in a negotiated sale
of the Company as a whole or in part or through orderly liquidation, the
premiums over market price for the securities of other corporations in similar
transactions, current political, economic and other factors bearing on
securities prices and the Company's financial condition and future prospects;
and (iv) the social, legal and economic effects upon employees, suppliers,
customers, creditors and others having similar relationships with the Company,
upon the communities in which the Company conducts its business and upon the
economy of
46
<PAGE> 48
the state, region and nation. The foregoing provisions could have the effect of
making it more difficult for a third party to acquire, or of discouraging a
third party from acquiring, control of the Company.
The Company's Second Amended and Restated Certificate of Incorporation
provides that any action required or permitted to be taken by the stockholders
of the Company may be taken only at a duly called annual or special meeting of
the stockholders and not by written consent, and that special meetings may be
called only by the Chairman of the Board of Directors, a majority of the Board
of Directors, or the President of the Company. These provisions could have the
effect of delaying until the next annual stockholder's meeting stockholder
actions that are favored by the holders of a majority of the outstanding voting
securities of the Company. These provisions may also discourage another person
or entity from making a tender offer for the Company's Common Stock, because
such person or entity, even if it acquired a majority of the outstanding voting
securities of the Company, would be able to take action as a stockholder (such
as electing new directors or approving a merger) only at a duly called
stockholder's meeting, and not by written consent.
The DGCL provides generally that the affirmative vote of a majority of the
shares entitled to vote on any matter is required to amend a corporation's
certificate of incorporation or By-laws, unless a corporation's certificate of
incorporation or by-laws, as the case may be, requires a greater percentage. The
Second Amended and Restated Certificate of Incorporation requires the
affirmative vote of the holders of at least 75% of the outstanding voting stock
of the Company to amend or repeal certain charter provisions and to reduce the
number of authorized shares of Common Stock and Preferred Stock. Such 75% vote
is also required to amend or repeal certain By-law provisions. The By-laws may
be amended or repealed by a majority vote of the Board of Directors or the
holders of a majority of the shares of the Company's voting stock. Such 75%
stockholder vote would be in addition to any separate class vote that might in
the future be required pursuant to the terms of any Preferred Stock that might
be outstanding at the time any such amendments are submitted to stockholders.
The foregoing provisions could have the effect of making it more difficult for a
third party to acquire, or of discouraging a third party from acquiring, control
of the Company.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Second Amended and Restated Certificate of Incorporation contains
certain provisions permitted under the DGCL relating to the liability of
directors. These provisions eliminate a director's personal liability for
monetary damages resulting from a breach of fiduciary duty, except in certain
circumstances involving certain wrongful acts, such as the breach of a
director's duty of loyalty or acts or omissions which involve intentional
misconduct or a knowing violation of law. These provisions do not limit or
eliminate the rights of the Company or any stockholder to seek non-monetary
relief, such as an injunction or rescission, in the event of a breach of a
director's fiduciary duty. These provisions will not alter a director's
liability under Federal securities laws. The Company's Second Amended and
Restated Certificate of Incorporation also contains provisions requiring the
Company to indemnify the directors and officers of the Company to the fullest
extent permitted by the DGCL. The Company believes that these provisions will
assist the Company in attracting and retaining qualified individuals to serve as
directors.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Boston EquiServ, a
Bank of Boston State Street service company.
47
<PAGE> 49
SHARES ELIGIBLE FOR FUTURE SALE
Upon the closing of this offering, the Company will have 7,201,883 shares
of Common Stock outstanding. Of these shares, the 2,200,000 shares sold in this
offering will be freely tradable without restriction or further registration
under the Act, except that any shares purchased by "affiliates" of the Company,
as that term is defined in Rule 144 ("Rule 144") under the Act ("Affiliates"),
may generally only be sold in compliance with the limitations of Rule 144
described below.
SALES OF RESTRICTED SHARES
The remaining 5,001,883 shares of Common Stock are deemed "Restricted
Shares" under Rule 144. Of the Restricted Shares, 640,000 shares may be eligible
for sale in the public market in accordance with Rule 144(k) under the Act
immediately following the Effective Date; all of these shares are subject to the
180-day lock-up agreements described below (the "Lock-up Agreements"). An
additional 3,360,000 Restricted Shares will become eligible for sale in the
public market in accordance with Rule 144 under the Act beginning 90 days after
the Effective Date. Of these shares, all but 4,911 are subject to Lock-up
Agreements. The remaining 1,001,883 outstanding Restricted Shares will not be
eligible for sale under Rule 144 until the expiration of a two-year holding
period from the date of their acquisition, and may be resold in the public
market only in compliance with the registration requirements of the Act or
pursuant to a valid exemption therefrom. In addition, certain securityholders
have the right to have their Restricted Shares registered by the Company under
the Act. See "Description of Capital Stock -- Registration Rights."
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an Affiliate, who has beneficially owned
Restricted Shares for at least two years is entitled to sell, within any
three-month period, a number of such shares that does not exceed the greater of
(i) one percent of the then outstanding shares of Common Stock (approximately
72,019 shares immediately after this offering) or (ii) the average weekly
trading volume of the Common Stock in the Nasdaq National Market during the four
calendar weeks preceding the date on which notice of such sale is filed. In
addition, under Rule 144(k), a person who is not an Affiliate and has not been
an Affiliate for at least three months prior to the sale and who has
beneficially owned Restricted Shares for at least three years may resell such
shares without compliance with the foregoing requirements. In meeting the two-
and three-year holding periods described above, a holder of Restricted Shares
can include the holding periods of a prior owner who was not an Affiliate. The
Securities and Exchange Commission has proposed an amendment to Rule 144 which
would reduce the holding period required for shares subject to Rule 144 to be
come eligible for sale in the public market from two years to one year and from
three years to two years in the case of Rule 144(k).
Rule 701 under the Act provides that the shares of Common Stock acquired on
the exercise of currently outstanding options may be resold by persons, other
than Affiliates, beginning 90 days after the date of this Prospectus, subject
only to the manner of sale provisions of Rule 144, and by Affiliates under Rule
144 without compliance with its two-year minimum holding period, subject to
certain limitations.
OPTIONS
As of November 15, 1996, options to purchase a total of 740,505 shares of
Common Stock were outstanding. Of the shares issuable pursuant to such options,
652,592 are subject to Lock-up Agreements.
The Company intends to file one or more registration statements on Form S-8
under the Act to register all shares of Common Stock subject to outstanding
stock options and Common Stock issuable pursuant to the Company's stock option
and purchase plans that do not qualify for an exemption under Rule 701 from the
registration requirements of the Act. The Company expects to file these
registration statements 90 days following the closing of this offering, and such
registration statements are expected to become effective upon filing. Shares
covered by these registration statements will thereupon be eligible for sale in
the public markets, subject to the Lock-up Agreements, to the extent applicable.
48
<PAGE> 50
LOCK-UP AGREEMENTS
All executive officers and directors of the Company and certain
stockholders, who in the aggregate hold 4,996,972 shares of Common Stock, and
holders of options to purchase 652,592 shares of Common Stock, have agreed,
pursuant to the Lock-up Agreements, that they will not, directly or indirectly,
offer, sell, offer to sell, contract to sell, grant any option to purchase or
otherwise sell or dispose (or announce any offer, sale, offer of sale, contract
of sale, grant of any option to purchase or any other sale or disposition) any
shares of Common Stock or other capital stock of the Company or any securities
convertible into, or exercisable or exchangeable for, any shares of Common Stock
or other capital stock of the Company for a period of 180 days after the date of
this Prospectus without the prior written consent of Merrill Lynch.
REGISTRATION RIGHTS
At the completion of this offering, certain stockholders of the Company
will be entitled to require the Company to register under the Act up to a total
of 992,061 shares of outstanding Common Stock. See "Description of Capital Stock
- -- Registration Rights."
49
<PAGE> 51
UNDERWRITING
Subject to the terms and conditions set forth in a purchase agreement (the
"Purchase Agreement"), the Company has agreed to sell to each of the
Underwriters named below, and each of the Underwriters, for whom Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), Montgomery Securities and
Oppenheimer & Co., Inc. are acting as the representatives (the
"Representatives"), has severally agreed to purchase from the Company, the
aggregate number of shares of Common Stock set forth opposite its name below.
The Underwriters are committed to purchase all of such shares if any are
purchased. Under certain circumstances, the commitments of non-defaulting
Underwriters may be increased as set forth in the Purchase Agreement.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
Merrill Lynch, Pierce Fenner & Smith Incorporated...............................
Montgomery Securities...........................................................
Oppenheimer & Co., Inc. ........................................................
---------
Total...................................................................... 2,200,000
=========
</TABLE>
Prior to the offering, there has been no public market for the shares of
Common Stock. The initial public offering price will be determined through
negotiations among the Company and the Representatives. Among the factors to be
considered in determining the initial public offering price of the Common Stock,
in addition to the prevailing market conditions, are price-earnings ratios of
publicly-traded companies that the Representatives believe to be comparable to
the Company, certain financial information of the Company, the history of, and
the prospects for, the Company and the industry in which it competes, an
assessment of the Company's management, its past and present operations, the
prospects for and timing of future revenue of the Company, the present state of
the Company's development, and the above factors in relation to market values
and various valuation measures of companies engaged in activities similar to the
Company. There can be no assurance that an active trading market will develop
for the Common Stock or that the Common Stock will trade in the public market
subsequent to the offering at or above the initial public offering price.
The Representatives have advised the Company that the Underwriters propose
initially 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
dealers at such price less a concession not in excess of $ per share. The
Underwriters may allow, and such dealers may reallow, a discount not in excess
of $ per share on sales to certain other dealers. After the initial public
offering, the public offering price, concession and discount may be changed.
The Company and the Selling Stockholders have granted the Underwriters
options, exercisable for 30 days after the date hereof, to purchase up to
330,000 additional shares of Common Stock to cover over-allotments, if any, at
the initial public offering price, less the underwriting discount. If the
Underwriters exercise these options, each of the Underwriters will have a firm
commitment, subject to certain conditions, to purchase approximately the same
percentage thereof which the number of shares of Common Stock to be purchased by
it in the foregoing table is of the 2,200,000 shares of Common Stock offered
hereby. See "Principal and Selling Stockholders".
50
<PAGE> 52
The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities under
the Act, or to contribute to payments the Underwriters may be required to make
in respect thereof.
The Company and all of the Company's stockholders have agreed, subject to
certain exceptions, not to sell, offer to sell, grant any option for the sale
of, or otherwise dispose of any Common Stock or securities convertible into or
exercisable for Common Stock, without the prior written consent of Merrill
Lynch, for a period of 180 days after the date of this Prospectus.
Notwithstanding the foregoing, the Company may, without the consent of Merrill
Lynch, offer, issue or sell, or otherwise dispose of shares of Common Stock or
other securities (i) pursuant to the Purchase Agreement, (ii) pursuant to
reservations, agreements, or employee or director benefit plans described or
referred to in this Prospectus or (iii) pursuant to the exercise of options
referred to in this Prospectus.
The Underwriters do not intend to confirm sales of Common Stock offered
hereby to any accounts over which they exercise discretionary authority.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts.
Certain legal matters in connection with this offering will be passed upon for
the Underwriters by Hale and Dorr, Washington, D.C.
EXPERTS
The consolidated financial statements as of April 30, 1995 and 1996 and for
each of the three years in the period ended April 30, 1996 included in this
Prospectus and the related financial statement schedule included elsewhere in
the registration statement have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports appearing herein and elsewhere
in the registration statement, and have been so included in reliance upon the
reports of such firm given upon their authority as experts in accounting and
auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (including all amendments and
exhibits thereto, the "Registration Statement") under the Act, with respect to
the Common Stock offered hereby. As permitted by the rules and regulations of
the Commission, this Prospectus omits certain information contained in the
Registration Statement. For further information with respect to the Company and
the Common Stock offered hereby, reference is hereby made to the Registration
Statement and to the exhibits and schedules filed therewith as a part thereof.
Statements contained in this Prospectus regarding the contents of any agreement
or other document filed as an exhibit to the Registration Statement are not
necessarily complete, and in each instance reference is made to the copy of such
agreement filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference. The Registration Statement,
including the exhibits and schedules thereto, may be inspected at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at certain of its Regional Offices located at 7
World Trade Center, 13th Floor, New York, NY 10048 and 500 West Madison Street,
Chicago, IL 60661. Copies of all or any part thereof may be obtained from the
Commission, 450 Fifth Street, Washington, D.C. 20549 upon payment of the
prescribed fees. The Commission maintains a World Wide Web site at
http://www.sec.gov from which information concerning registrants may be
obtained.
The Company intends to furnish to its stockholders annual reports
containing financial statements audited by an independent accounting firm and
quarterly reports containing unaudited financial statements for the first three
quarters of each fiscal year.
51
<PAGE> 53
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
VERSATILITY INC.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.......................................................... F-2
Consolidated Balance Sheets at April 30, 1995 and 1996 and unaudited at October 31,
1996................................................................................ F-3
Consolidated Statements of Operations for the years ended April 30, 1994, 1995 and
1996 and the unaudited six months ended October 31, 1995 and 1996................... F-5
Consolidated Statements of Cash Flows for the years ended April 30, 1994, 1995 and
1996 and the unaudited six months ended October 31, 1995 and 1996................... F-6
Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the years
ended April 30, 1994, 1995 and 1996 and the unaudited six months ended October 31,
1996................................................................................ F-7
Notes to Consolidated Financial Statements............................................ F-8
</TABLE>
F-1
<PAGE> 54
INDEPENDENT AUDITORS' REPORT
Board of Directors of Versatility Inc.:
We have audited the accompanying consolidated balance sheets of Versatility
Inc., and subsidiaries (the "Company") as of April 30, 1995 and 1996, and the
related consolidated statements of operations, of changes in stockholders'
equity (deficit), and of cash flows for the years ended April 30, 1994, 1995 and
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Versatility Inc. and
subsidiaries at April 30, 1995 and 1996, and the results of their operations and
their cash flows for each of the three years in the period ended April 30, 1996
in conformity with generally accepted accounting principles.
Washington, DC
June 21, 1996, except for Note 13 paragraphs 1 through 5
as to which the date is October 3, 1996 and
Note 13 paragraphs 6 through 8 as to which
the date is October 31, 1996
F-2
<PAGE> 55
VERSATILITY INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
APRIL 30, OCTOBER 31, 1996
-------------------------- --------------------------
1995 1996 ACTUAL PRO FORMA
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents (Note
1)................................ $ 1,414,205 $ 2,280,273 $ 1,983,026 $ 1,983,026
Accounts receivable -- (net of
allowance for doubtful accounts of
$70,354, $157,874 and $191,262 --
unaudited)........................ 1,423,094 5,707,724 8,161,046 8,161,046
Prepaid expenses.................... 24,956 642,045 1,100,648 1,100,648
Inventory (Note 1).................. 7,356 -- 15,997 15,997
Note receivable (Note 13)........... -- -- 519,305 519,305
Deferred income taxes (Note 10)..... -- 130,238 130,238 130,238
----------- ----------- ----------- -----------
Total current assets........... 2,869,611 8,760,280 11,910,260 11,910,260
----------- ----------- ----------- -----------
Other assets:
Related party receivables (Note
3)................................ 114,016 80,000 89,165 89,165
Deposits............................ 77,531 157,835 158,347 158,347
Investments (Note 3)................ 4,126 3,137 -- --
Assets held for sale................ -- 76,004 101,646 101,646
Capitalized software, net of
accumulated amortization of
$165,805 for 1995
(Note 1).......................... 829,026 -- -- --
Purchased software, net of
accumulated amortization of $0,
$11,500 and $23,000
-- unaudited(Note 1).............. -- 103,500 92,000 92,000
----------- ----------- ----------- -----------
Total other assets............. 1,024,699 420,476 441,158 441,158
----------- ----------- ----------- -----------
Property and equipment (Note 1):
Computers........................... 809,845 893,674 1,042,364 1,042,364
Office furniture and equipment...... 575,000 637,559 664,413 664,413
Leasehold improvements.............. 180,347 181,485 187,051 187,051
Capital leases...................... 113,278 160,822 425,219 425,219
----------- ----------- ----------- -----------
1,678,470 1,873,540 2,319,047 2,319,047
Less: Accumulated depreciation and
amortization...................... (1,285,168) (1,423,234) (1,521,248) (1,521,248)
----------- ----------- ----------- -----------
Net property and equipment..... 393,302 450,306 797,799 797,799
----------- ----------- ----------- -----------
Total.................................... $ 4,287,612 $ 9,631,062 $13,149,217 $13,149,217
=========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 56
VERSATILITY INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
APRIL 30, OCTOBER 31, 1996
----------------------- -------------------------
1995 1996 ACTUAL PRO FORMA
---------- ---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................... $ 890,455 $ 824,745 $ 1,163,105 $ 1,163,105
Accrued liabilities (Note 4).............. 752,075 1,393,653 2,239,201 2,239,201
Related party payables (Note 3)........... 86,218 3,443 78,079 78,079
Income taxes payable (Note 10)............ 448,767 356,503 237,878 237,878
Capital lease payable (Note 6)............ 22,976 30,848 109,674 109,674
Current maturities of notes payable (Note
5)...................................... 35,250 -- -- --
Line of credit (Notes 5 and 13)........... -- 800,772 1,972,736 1,972,736
Deferred revenue (Note 1)................. 188,106 284,700 798,380 798,380
---------- ---------- ----------- -----------
Total current liabilities............ 2,423,847 3,694,664 6,599,053 6,599,053
---------- ---------- ----------- -----------
Long-term liabilities:
Capital lease payable, less current
maturities (Note 6)..................... 51,042 69,983 200,834 200,834
Deferred rent (Note 1).................... 154,006 221,899 283,012 283,012
Deferred income taxes (Note 10)........... 327,454 249,401 249,401 249,401
---------- ---------- ----------- -----------
Total other liabilities.............. 532,502 541,283 733,247 733,247
---------- ---------- ----------- -----------
Commitments and Contingencies (Notes 6 and 13)
Redeemable preferred stock
Series A redeemable convertible preferred
stock, par value $.01 -- 992,061 shares
authorized, issued and outstanding,
liquidation preference -- $3.52784 per share
(Note 7)..................................... -- 3,561,293 3,737,293 --
Stockholders' equity (Note 8):
Common stock, par value $.01 -- 20,000,000
shares authorized, actual: 4,000,000
shares issued and outstanding; pro
forma: 4,992,061 shares issued and
outstanding
(Notes 1 and 8)......................... 40,000 40,000 40,000 49,921
Additional paid-in capital................ -- -- -- 3,727,372
Foreign currency translation adjustments
(Note 1)................................ -- (66,311) (62,680) (62,680)
Retained earnings......................... 1,291,263 1,860,133 2,102,304 2,102,304
---------- ---------- ----------- -----------
Stockholders' equity................. 1,331,263 1,833,822 2,079,624 5,816,917
---------- ---------- ----------- -----------
Total.......................................... $4,287,612 $9,631,062 $13,149,217 $13,149,217
========= ========= ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 57
VERSATILITY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED APRIL 30, OCTOBER 31,
------------------------------------- ------------------------
1994 1995 1996 1995 1996
---------- ---------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
License revenue (Note 1)................ $5,392,891 $8,045,345 $10,345,323 $3,615,602 $ 7,548,410
Service and maintenance revenue (Note
1).................................... 2,987,444 3,439,806 6,189,949 3,034,914 3,923,094
---------- ---------- ----------- ---------- ----------
Total revenue...................... 8,380,335 11,485,151 16,535,272 6,650,516 11,471,504
Cost of revenue:
License revenue......................... 1,923,777 1,493,194 573,329 242,734 409,476
Service and maintenance revenue......... 2,056,524 2,384,946 4,266,984 1,763,147 2,471,013
---------- ---------- ----------- ---------- ----------
Total cost of revenue.............. 3,980,301 3,878,140 4,840,313 2,005,881 2,880,489
---------- ---------- ----------- ---------- ----------
Gross margin................................ 4,400,034 7,607,011 11,694,959 4,644,635 8,591,015
Operating expenses:
Selling, general and administrative..... 3,716,966 4,550,182 7,769,751 2,936,407 6,592,245
Research and development................ 389,154 710,828 2,073,797 956,978 1,279,965
Depreciation and amortization........... 133,444 365,490 161,346 67,322 107,083
Write off of capitalized software....... -- -- 829,026 829,026 --
---------- ---------- ----------- ---------- ----------
Total operating expenses........... 4,239,564 5,626,500 10,833,920 4,789,733 7,979,293
---------- ---------- ----------- ---------- ----------
Income (loss) from operations............... 160,470 1,980,511 861,039 (145,098) 611,722
Interest income (expense), net (Note 12).... (19,259) (8,977) 3,140 13,212 (12,551)
---------- ---------- ----------- ---------- ----------
Income (loss) before provision (benefit) for
income taxes.............................. 141,211 1,971,534 864,179 (131,886) 599,171
Provision (benefit) for income taxes (Notes
1 and 10)................................. 31,087 714,947 207,309 (40,000) 181,000
---------- ---------- ----------- ---------- ----------
Net income (loss)........................... $ 110,124 $1,256,587 $ 656,870 $ (91,886) $ 418,171
========== ========== =========== ========== ==========
Pro forma net income (loss) per share....... $ 0.12 $ (0.02) $ 0.07
=========== ========== ==========
Pro forma weighted average common and common
equivalent shares outstanding............. 5,603,205 5,603,205 5,603,205
=========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 58
VERSATILITY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED APRIL 30, OCTOBER 31,
------------------------------------ -----------------------
1994 1995 1996 1995 1996
--------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Cash flows from operating activities:
Net income (loss).................................... $ 110,124 $1,256,587 $ 656,870 $ (91,886) $ 418,171
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation..................................... 133,444 199,685 149,846 67,322 95,583
Amortization..................................... -- 165,805 11,500 -- 11,500
Loss (gain) on equity investment................. (107) (122) 989 -- 6
Deferred income taxes............................ (100,800) 288,719 (208,291) (316,230) --
Write-off of capitalized software................ -- -- 829,026 829,026 --
Changes in assets and liabilities:
Accounts receivable.......................... 936,409 (414,912) (4,284,630) (1,615,759) (2,453,322)
Income taxes receivable...................... 207,419 -- -- -- --
Prepaid expenses............................. (5,772) (8,156) (617,089) (476,684) (458,603)
Inventory.................................... 36,260 -- 7,356 -- (15,997)
Related party receivables.................... (13,584) 3,143 34,016 (51,053) (9,165)
Deposits..................................... 6,573 (52,184) (80,304) (35,414) (512)
Accounts payable............................. (867,102) 170,482 (65,710) 184,572 338,360
Accrued liabilities.......................... 68,783 319,481 641,578 (113,677) 845,548
Related party payables....................... (48,242) 4,460 (82,775) 44,400 74,636
Income taxes payable......................... 131,887 308,580 (92,264) (145,346) (118,625)
Deferred rent................................ (61,416) 20,938 67,893 21,746 61,113
Deferred revenue............................. (40,020) (53,740) 96,594 16,198 513,680
--------- ----------- ----------- ----------- ----------
Net cash (used in) provided by operating
activities............................. 493,856 2,208,766 (2,935,395) (1,682,785) (697,627)
--------- ----------- ----------- ----------- ----------
Cash flows from investing activities:
Purchase of property and equipment and assets held
for sale........................................... (79,949) (155,734) (235,310) (104,225) (239,777)
Software development costs........................... (251,435) (743,396) -- -- --
Purchased software................................... -- -- (115,000) (55,000) --
Related party note receivable........................ -- -- -- -- (516,174)
--------- ----------- ----------- ----------- ----------
Net cash used in investing activities.... (331,384) (899,130) (350,310) (159,225) (755,951)
--------- ----------- ----------- ----------- ----------
Cash flows from financing activities:
Borrowings under line of credit...................... -- -- 800,772 500,000 2,490,214
Payments under line of credit........................ -- -- -- -- (1,318,250)
Proceeds from sale of preferred stock, net........... -- -- 3,473,293 -- --
Principal payments under note payable................ (55,090) (65,453) (35,250) (31,691) --
Principal payments under capital leases.............. (23,008) (22,432) (20,731) (11,957) (19,264)
--------- ----------- ----------- ----------- ----------
Net cash provided by (used in) financing
activities............................. (78,098) (87,885) 4,218,084 456,352 1,152,700
--------- ----------- ----------- ----------- ----------
Effect of exchange rate changes on cash.................. -- -- (66,311) (28,547) 3,631
--------- ----------- ----------- ----------- ----------
Net increase (decrease) in cash and cash equivalents..... 84,374 1,221,751 866,068 (1,414,205) (297,247)
Cash and cash equivalents, beginning of period........... 108,080 192,454 1,414,205 1,414,205 2,280,273
--------- ----------- ----------- ----------- ----------
Cash and cash equivalents, end of period................. $ 192,454 $1,414,205 $ 2,280,273 $ -- $1,983,026
========= =========== =========== =========== ==========
Supplemental disclosures of cash flow information:
Interest paid........................................ $ 30,244 $ 18,691 $ 27,732 $ 6,994 $ 66,195
========= =========== =========== =========== ==========
Income taxes paid.................................... $ 8,300 $ 114,309 $ 506,490 $ 350,800 $ 303,635
========= =========== =========== =========== ==========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 59
VERSATILITY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
NUMBER OF FOREIGN
SHARES OF ADDITIONAL CURRENCY RETAINED
COMMON COMMON PAID-IN TRANSLATION EARNINGS
STOCK STOCK CAPITAL ADJUSTMENTS (DEFICIT) TOTAL
--------- ------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, May 1, 1993......................... 4,000,000 $40,000 $ -- $ -- $ (75,448) $ (35,448)
Net income............................... 110,124 110,124
--------- ------- ---------- ----------- ---------- ----------
Balance, April 30, 1994...................... 4,000,000 40,000 -- -- 34,676 74,676
Net income............................... 1,256,587 1,256,587
--------- ------- ---------- ----------- ---------- ----------
Balance, April 30, 1995...................... 4,000,000 40,000 -- -- 1,291,263 1,331,263
Foreign currency translation
adjustments............................ (66,311) (66,311)
Accretion of dividends on redeemable
preferred stock........................ (88,000) (88,000)
Net income............................... 656,870 656,870
--------- ------- ---------- ----------- ---------- ----------
Balance, April 30, 1996...................... 4,000,000 40,000 -- (66,311) 1,860,133 1,833,822
Foreign currency translation adjustments
(unaudited)............................ 3,631 3,631
Accretion of dividends on redeemable
preferred stock (unaudited)............ (176,000) (176,000)
Net income (unaudited)................... 418,171 418,171
--------- ------- ---------- ----------- ---------- ----------
Balance, October 31, 1996 (unaudited)........ 4,000,000 $40,000 $ -- $ (62,680) $2,102,304 $2,079,624
--------- ------- ---------- ----------- ---------- ----------
Pro Forma Balance, October 31, 1996
(unaudited)................................ 4,992,061 $49,921 $3,727,372 $ (62,680) $2,102,304 $5,816,917
========== ======== ========= =========== ========= =========
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE> 60
VERSATILITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1994, 1995 AND 1996 AND THE SIX MONTHS ENDED OCTOBER 31,
1995 AND 1996 (UNAUDITED)
Versatility Inc. (the "Company") was incorporated as National Political
Resources, Inc, in the District of Columbia in 1981 and merged into NPRI, Inc.,
a Virginia corporation, in July 1991. In January 1996, NPRI, Inc. reincorporated
in Delaware. The Company changed its name to Versatility Inc. in June 1996.
The Company is a provider of client/server customer interaction software
that enables businesses to automate and enhance their telemarketing and
teleselling capabilities. The Company's products include software applications,
development and customization tools and optional software services. The Company
also offers fee-based professional, consulting and maintenance services.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The financial statements include the results
of Versatility Inc., and its wholly owned subsidiaries, NPRI Technologies, Ltd.
and Versatility (UK) Limited. All significant intercompany accounts and
transactions have been eliminated in consolidation. On April 30, 1996, NPRI
Technologies, Ltd. was dissolved, and its operations were merged with
Versatility Inc. The Company accounts for its investment in Serenity Real
Property Limited Partnership using the equity method. (See Note 3)
Cash and Cash Equivalents - For purposes of the Statements of Cash Flows,
the Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents. The Company's investments consist
of a money market account.
Inventory - Inventory consists of miscellaneous hardware and is stated at
the lower of cost or market, on a first-in, first-out basis.
Capitalized Software - During the course of the development of the
Versatility Series software, the Company capitalized its development costs in
compliance with Statement of Financial Accounting Standards No. 86 "Accounting
for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed."
The amount of software capitalized totaled $995,000 and, beginning in November
1994, was amortized over three years on a straight-line basis. In connection
with two major implementations of the Versatility Series product in July 1995,
the Company decided to add features and functions to the product that were
substantially different than those included in the software as originally
capitalized. Management determined that these features and functions
substantially altered the content of the product, effectively eliminating any
remaining useful life of the capitalized asset. Accordingly, the Company wrote
off the remaining asset of $829,000 in the first quarter of fiscal 1996.
Purchased Software - Purchased software is amortized on a straight-line
basis over the shorter of five years or the useful life of the asset.
Property and Equipment - Property and equipment are stated at cost.
Depreciation on property and equipment, including amortization on capital
leases, is computed on a straight-line basis over the estimated useful lives of
the assets, ranging from three to ten years. The leasehold improvements are
depreciated over the shorter of the useful life of the assets or the term of the
related lease. Repairs and maintenance are charged to operations as incurred.
Major improvements and betterments are capitalized.
Deferred Rent - Deferred rent represents the effects of certain rent
concessions that are amortized over the life of the lease on a straight-line
basis.
Recapitalization - In conjunction with the issuance of the Series A
redeemable convertible preferred stock (the "Series A Preferred Stock") (See
Note 7), the Company declared, on January 24, 1996, a 4,000 for 1 stock split on
its common stock, and changed the par value from $1.00 to $.01. The shares
outstanding have been restated to give effect to the stock split.
Redeemable Preferred Stock - The Company accretes the increase in the
redemption value of its Series A Preferred Stock through a charge to retained
earnings. (See Notes 7 and 13)
F-8
<PAGE> 61
VERSATILITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1994, 1995 AND 1996 AND THE SIX MONTHS ENDED OCTOBER 31,
1995 AND 1996 (UNAUDITED) -- (CONTINUED)
Currency Translation - Assets and liabilities of the Company's foreign
operations are translated into U.S. dollars at the exchange rate in effect at
the balance sheet date and revenues and expenses are translated at average rates
in effect during the period. The unrealized currency translation adjustment is
reflected as a separate component of stockholders' equity on the balance sheet.
Revenue Recognition - The Company's revenue is derived principally from two
sources: (i) product license fees for the use of the Company's software products
and (ii) service fees for implementation, maintenance, consulting and training
related to the Company's software products. The Company's contracts with its
customer often involve significant customization and installation obligations.
In these situations, license revenue is recognized based on the percentage of
completion method which is based on achievement of certain milestones. When the
Company is under no obligation to install or customize the software, license
revenue is recognized upon shipment. Service revenue for implementation,
consulting services and training is generally recognized as the services are
performed. Revenue from maintenance services is recognized ratably over the term
of the service agreement.
Revenue from hardware sales relating to the implementation of the Company's
VAX/VMS application are included in license revenue. These hardware sales were
$1.9 million and $1.4 million for the years ended April 30, 1994 and 1995,
respectively. Hardware sales for the year ended April 30, 1996 and the six
months ended October 31, 1996 were insignificant.
Income Taxes - The Company accounts for income taxes under the provisions
of Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (SFAS 109). SFAS 109 requires, among other things, using the liability
method of computing deferred income taxes.
Pro Forma Net Income (Loss) Per Share - Pro forma net income (loss) per
share is computed using the weighted average number of common and common
equivalent shares outstanding during the period. Common equivalent shares
consist of redeemable convertible preferred stock (using the as if converted
method) and stock options (using the treasury stock method). Common equivalent
shares are excluded from the computation if their effect is antidilutive except
that (i) pursuant to the Securities and Exchange Commission Staff Accounting
Bulletins and staff policy, such computations include all common and common
equivalent shares issued within the 12 months preceding the filing date as if
they were outstanding for all periods presented (using the treasury stock method
and the anticipated public offering price) and (ii) redeemable convertible
preferred stock outstanding during the period is included (using the as
converted method) in the computation as common equivalent shares even when the
effect is antidilutive. Historical earnings per share prior to fiscal 1996 have
not been presented since such amounts are not deemed meaningful due to the
significant change in the Company's capital structure that will occur in
connection with the proposed offering.
Non-cash Transactions - The Company acquired $113,278, $47,544 and $228,941
(unaudited) of equipment through capital leases during fiscal 1994 and 1996 and
the six months ended October 31, 1996, respectively.
Concentration of Credit Risk - Financial instruments which potentially
subject the Company to a concentration of credit risk principally consist of
accounts receivable. In fiscal 1996, two customers accounted for 25.7% and 22.2%
of the Company's total revenue, respectively, and in the first half of fiscal
1997, two customers accounted for 24.9% and 18.7%, respectively, of the
Company's total revenue. As of April 30, 1996, 44.3% of accounts receivable was
concentrated with one customer. The Company has subsequently collected all of
these accounts receivable from this customer. The Company generally does not
require collateral on accounts receivable as the majority of the Company's
customers are large, well established companies. The Company provides reserves
for credit losses and such losses have been insignificant.
Stock Based Compensation - The Company grants stock options for a fixed
number of shares to employees with an exercise price not less than the estimated
fair value of the shares as determined by the
F-9
<PAGE> 62
VERSATILITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1994, 1995 AND 1996 AND THE SIX MONTHS ENDED OCTOBER 31,
1995 AND 1996 (UNAUDITED) -- (CONTINUED)
Board of Directors at the date of grant. The Company accounts for stock option
grants in accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees", and, accordingly, recognizes compensation expense for stock option
grants only when the exercise price is less than the fair value of the shares at
the date of grant.
In October 1995, the FASB issued Statement of Financial Accounting Standard
No. 123, "Accounting for Stock-Based Compensation," (SFAS 123) which provides an
alternative to APB Opinion No. 25 in accounting for stock-based compensation
issued to employees. As permitted by SFAS 123, the Company plans to continue to
account for stock-based compensation in accordance with APB Opinion No. 25. The
Company will present in its annual financial statements the additional
disclosures required by SFAS 123.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reported period. Actual results could differ
from those estimates.
Unaudited Interim Financial Data - The unaudited interim financial
statements for the six months ended October 31, 1995 and 1996 have been prepared
on the same basis as the audited consolidated financial statements and, in the
opinion of management, include all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial information set
forth therein, in accordance with generally accepted accounting principles. The
data disclosed in the notes to the consolidated financial statements for these
periods are unaudited. The Company believes the results of operations for the
interim periods are not necessarily indicative of the results to be expected for
any future period.
2. BUSINESS ACQUISITION
Versatility (UK) Limited was acquired by the Company during December 1995.
The shareholders of the Company were the same shareholders of Versatility (UK)
Limited, with proportionate ownership in both companies being the same. The
acquisition was completed by exchanging 2,000,000 shares of common stock of the
Company for all of the outstanding capital stock of Versatility (UK) Limited.
The shares of Versatility (UK) Limited were subsequently retired. The business
combination has been treated as an exchange between companies under common
control, which is accounted for in a manner similar to a pooling of interests.
Accordingly, the consolidated financial statements for all periods prior to the
combination have been restated to reflect the combined operations. Intercompany
transactions have been eliminated.
The following is a reconciliation of revenue and earnings previously
reported by the Company for the year ended April 30, 1995 with the combined
amounts currently presented in the financial statements for that year:
<TABLE>
<CAPTION>
VERSATILITY (UK) INTERCOMPANY CONSOLIDATED
COMPANY LIMITED ROYALTIES AMOUNTS
----------- ---------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales.......................... $10,516,837 $1,801,964 ($833,650) $11,485,151
Income from operations............. 951,896 1,028,615 -- 1,980,511
</TABLE>
Included in consolidated results of operations for the year ended April 30,
1996 are the following results of the previously separate companies for the
period of May 1, 1995 to December 31, 1995:
<TABLE>
<CAPTION>
VERSATILITY (UK) INTERCOMPANY CONSOLIDATED
COMPANY LIMITED ROYALTIES AMOUNTS
---------- ---------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales........................... $6,688,983 $2,530,343 ($571,361) $ 8,647,965
Income from operations.............. 191,137 344,775 -- 535,912
</TABLE>
F-10
<PAGE> 63
VERSATILITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1994, 1995 AND 1996 AND THE SIX MONTHS ENDED OCTOBER 31,
1995 AND 1996 (UNAUDITED) -- (CONTINUED)
3. RELATED PARTY TRANSACTIONS
Related Party Receivables - The Company has the following receivables from
related parties or affiliated entities at April 30, 1995 and 1996 and October
31, 1996 as follows:
<TABLE>
<CAPTION>
APRIL 30,
-------------------- OCTOBER 31,
1995 1996 1996
-------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Stockholder loans............................ $109,170 $65,544 $78,290
Other........................................ 4,846 14,456 10,875
-------- ------- -----------
$114,016 $80,000 $89,165
======== ======= ===========
</TABLE>
The stockholder loans accrue interest at the prime rate. The loans and any
interest accrued thereunder may be offset against accrued bonuses. Included in
accounts receivable is approximately $29,000 and $37,000 of accrued interest
relating to these loans for fiscal 1995 and 1996, respectively.
The Company leases office space from Serenity Real Properties Limited
Partnership (the "Partnership"). The limited partners are stockholders in the
Company and the Company is the general partner. (See Notes 6 and 13)
As general partner, the Company holds a 1% interest and is allocated 1% of
the net income or loss of the Partnership. The Company would be responsible for
all of the losses to the extent that the Partnership's liabilities exceed its
assets. As of April 30, 1996, the Partnership's unaudited financial position was
as follows:
<TABLE>
<CAPTION>
UNAUDITED
----------
<S> <C>
Current assets (including $3,443 receivable from the
Company)................................................... $173,818
Land, buildings, equipment and intangibles................... 762,056
----------
Total assets................................................. $935,874
==========
Mortgage payable............................................. $622,217
Partners' capital............................................ 313,657
----------
Total liabilities and partners' capital...................... $935,874
==========
</TABLE>
As general partner, the Company is contingently liable for the liabilities
of the Partnership should the Partnership not be able to satisfy its obligations
on a timely basis. Additionally, the Company is contingently liable for the
mortgage note payable as guarantor.
The Partnership's annual rental income is $120,000, all of which is derived
from the Company. An equal amount has been expensed by the Company.
4. ACCRUED LIABILITIES
Accrued liabilities consisted of the following as of April 30, 1995 and
1996 and October 31, 1996:
<TABLE>
<CAPTION>
APRIL 30, OCTOBER
--------------------- 31,
1995 1996 1996
-------- ---------- ----------
<S> <C> <C> <C>
(UNAUDITED)
Accrued commissions and salaries................... $244,837 $ 335,395 $ 611,715
Accrued bonuses.................................... 207,113 461,586 417,413
Accrued payroll taxes and withholdings............. 173,279 341,397 459,144
Accrued vacation................................... 86,388 203,219 322,257
Other.............................................. 40,458 52,056 428,672
-------- ---------- ----------
$752,075 $1,393,653 $2,239,201
======== ========= =========
</TABLE>
F-11
<PAGE> 64
VERSATILITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1994, 1995 AND 1996 AND THE SIX MONTHS ENDED OCTOBER 31,
1995 AND 1996 (UNAUDITED) -- (CONTINUED)
5. LINE OF CREDIT
In June 1995, the Company obtained a $1.0 million line of credit from a
bank for financing accounts receivable and working capital. The line of credit
is collateralized with a first priority security interest in all accounts
receivable. The line expires on August 31, 1996. Amounts outstanding under the
line plus accrued interest at April 30, 1996 were $800,772. The weighted average
interest rate for fiscal 1996 was 9.1%. The line of credit has various
covenants, including limitations on disposition of assets. The Company also must
maintain certain financial ratios. The Company's loan agreement prohibits the
payment of cash dividends. On August 28, 1996, the Company obtained a new line
of credit. (See Note 13)
At April 30, 1995, the Company had a note payable of $35,250. The note was
paid in full in December 1995.
6. COMMITMENTS
Operating Leases -- Versatility is committed on a lease for office space in
Alexandria, Virginia, through Apri1 30, 1997, at an annual rate of $120,000 to
the Partnership. (See Notes 3 and 13)
The Company leases office space, equipment and automobiles under
noncancelable operating leases expiring through 2004. The leases for office
space have abatements that range from two to six months and scheduled annual
rent escalations of approximately 3%. None of the equipment or automobile
agreements contain unusual renewal or purchase options. Total rent expense for
the years ended April 30, 1994, 1995 and 1996 was $390,049, $514,963 and
$876,093, respectively.
As of April 30, 1996, future minimum lease payments for the operating
leases are as follows:
<TABLE>
<CAPTION>
YEARS ENDING APRIL 30,
-----------------------------------------------------------
<S> <C>
1997.................................................. $1,138,480
1998.................................................. 1,067,062
1999.................................................. 986,789
2000.................................................. 928,834
2001.................................................. 851,401
Thereafter............................................ 2,767,986
----------
Total................................................. $7,740,552
=========
</TABLE>
Capital Leases -- The Company is obligated under capital leases for various
office equipment. As of April 30, 1996, future minimum lease payments for the
capital leases are as follows:
<TABLE>
<CAPTION>
YEARS ENDING APRIL 30,
------------------------------------------------------------
<S> <C>
1997................................................... $ 45,156
1998................................................... 45,156
1999................................................... 14,500
2000................................................... 9,504
2001................................................... 7,920
--------
Total.................................................. 122,236
Less: Imputed interest at 12%.......................... (21,405)
--------
Present value of future minimum lease payments......... $100,831
========
</TABLE>
7. REDEEMABLE CONVERTIBLE PREFERRED STOCK
On January 24, 1996, the Company issued 992,061 shares of the Company's
Series A Preferred Stock. Shares of Series A Preferred Stock have the same
voting rights as common stock. The holders of the Series A
F-12
<PAGE> 65
VERSATILITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1994, 1995 AND 1996 AND THE SIX MONTHS ENDED OCTOBER 31,
1995 AND 1996 (UNAUDITED) -- (CONTINUED)
Preferred Stock (the "Holders"), voting as a separate series, shall be entitled
to elect two directors of the Company. If the Company incurs an Underperformance
Event, as defined in the Series A Preferred Stock Agreement (the "Agreement"),
the Holders shall be entitled to elect a majority of the directors of the
Company. The Agreement also contains certain registration rights and affirmative
and negative covenants.
When and if declared by the Board of Directors, the Series A Preferred
Stock accrues quarterly dividends for payment at the rate per annum of $0.352784
per share (the "Accruing Dividends"). Accruing Dividends accrue on the annual
anniversary date of the initial purchase (January 24th), whether or not earned
or declared, and shall be cumulative. Such dividend will be payable only (i) if,
as and when determined by the Board of Directors; or (ii) upon the liquidation,
dissolution or winding up of the Company; or (iii) upon redemption of the Series
A Preferred Stock. Any accrued but unpaid Accrued Dividends on any shares of
Series A Preferred Stock shall expire upon any conversion of such share of
Series A Preferred Stock. No dividends may be paid on common stock unless the
Series A Preferred Stock receives a dividend of an equal amount on a per share
basis.
Shares of the Series A Preferred Stock are convertible into common stock at
the option of the holder. The conversion rate is one share of common stock for
each share of Series A Preferred Stock. Each share of Series A Preferred Stock
will automatically (and mandatorily) be converted into one share of common stock
upon the closing of an underwritten public offering of shares of common stock in
which (i) the aggregate price paid for such shares by the public shall be at
least $15 million and (ii) the price paid by the public for such shares shall be
at least $14.12 per share. The automatic conversion will result in an additional
992,061 shares of common stock. (See Note 13)
At any time on or after January 16, 1999, with the approval of the holders
of 66-2/3% of the then outstanding shares of Series A Preferred Stock, one or
more Holders may require the Company to redeem 33-1/3% of the shares of the then
outstanding shares of the Series A Preferred Stock. On or after the second
anniversary date from the Original Redemption Date, as defined in the Agreement,
the Holders may require the Company to redeem 50% of the shares of the then
outstanding shares of the Series A Preferred Stock, and on or after the third
anniversary date from the Original Redemption Date, the Holders may require the
Company to redeem 100% of the shares of the then outstanding shares of the
Series A Preferred Stock.
Upon liquidation, dissolution or winding up of the Company, whether
voluntary or involuntary, the Holders shall first be entitled, before any
distribution or payment is made upon any stock ranking on liquidation junior to
the Series A Preferred Stock, to be paid an amount equal to $3.52784 per share
plus, in the case of each share, an amount equal to all Accruing Dividends
thereon (whether or not declared), or if insufficient funds exist, a pro rata
share of assets available for distribution. (See Note 13)
8. STOCKHOLDERS' EQUITY
As of April 30, 1995, the Company had 5,000 shares of common stock
authorized, 1,000 shares issued and outstanding, and no preferred stock
authorized, issued or outstanding. In January 1996, a recapitalization of the
Company was effected. A new corporation was formed, whereby 4,000 shares of
Versatility Inc. common stock were issued for every one share previously
outstanding. The total authorized shares of common stock were increased to
20,000,000 and 992,061 shares of Series A Preferred Stock were authorized. (See
Note 13)
9. BENEFIT PLANS
The Company has a savings and investment plan (the "Plan") which covers
employees of the Company and that qualifies under section 401(k) of the Internal
Revenue Code. All full-time employees who are at least 21 years old and have
completed at least six months of service are eligible to participate. Under the
terms of
F-13
<PAGE> 66
VERSATILITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1994, 1995 AND 1996 AND THE SIX MONTHS ENDED OCTOBER 31,
1995 AND 1996 (UNAUDITED) -- (CONTINUED)
the Plan, employees may defer a portion of their salaries as employee
contributions. A discretionary corporate contribution is determined annually.
The Company has never made a contribution. Employee contributions are vested
immediately; however, discretionary company contributions are 100% vested upon
three years of service. The Company is not obligated under any other post
retirement benefit plans.
In April 1993, the Company adopted the Employee Special Incentive Plan (the
"1993 Incentive Plan"). Under the Incentive Plan, employees who met the
eligibility requirements were awarded deferred compensation units. On January
16, 1996, the Incentive Plan was terminated and the Company's 1995 Employee
Stock Option Plan (the "1995 Employee Plan") and 1995 Incentive Stock Option
Plan (the "1995 Incentive Plan") were adopted by the Company's Board of
Directors and Stockholders. In connection with the adoption of the 1995 Employee
Plan, the Company's Compensation Committee of the Board of Directors granted
non-statutory options to purchase an aggregate of 228,758 shares of Common Stock
to employees who had vested deferred compensation units pursuant to the
terminated 1993 Incentive Plan. All such options became fully vested upon grant.
1995 Employee Plan. The 1995 Employee Plan provides for the issuance of a
maximum of 430,708 shares of Common Stock, less any shares issued under the 1995
Incentive Plan, pursuant to the grant of non-statutory stock options to
employees, non-employees or consultants of the Company. Options granted under
the 1995 Employee Plan are not transferable by the holder except by will or by
the laws of descent and distribution. As of April 30, 1996, options to purchase
228,758 shares of Common Stock at a price of $0.80 per share were outstanding
under the 1995 Employee Plan, and no such options had been exercised. (See Note
13)
1995 Incentive Plan. The 1995 Incentive Plan provides for the issuance of
a maximum of 430,708 shares of Common Stock, less any shares issued under the
1995 Employee Plan, pursuant to the grant to officers and employees of
"incentive stock options" within the meaning of the Internal Revenue Code.
Options granted under the 1995 Incentive Plan generally vest 20% on the date of
grant and thereafter 20% on the anniversary of the date of the grant and are not
transferable by the holder except by will or by the laws of descent and
distribution. As of April 30, 1996, options to purchase 62,569 shares of Common
Stock at a price of $0.80 per share were outstanding under the 1995 Incentive
Plan and no such options had been exercised. (See Note 13)
Options to purchase 320,000 shares of Common Stock were granted to an
officer on January 17, 1996. These stock options vested immediately with an
exercise price of $.80 per share, which was determined by the Board of Directors
of the Company to be the fair market value.
10. INCOME TAXES
The provision for income taxes is computed based on pretax accounting
income. Deferred income taxes include the tax effects of temporary differences
between pretax accounting income and tax income. A deferred income tax liability
has been recorded to reflect the temporary differences between the financial
statements and the tax returns.
F-14
<PAGE> 67
VERSATILITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1994, 1995 AND 1996 AND THE SIX MONTHS ENDED OCTOBER 31,
1995 AND 1996 (UNAUDITED) -- (CONTINUED)
The provision for income taxes at April 30, 1994, 1995 and 1996 consist of
the following:
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Current provision:
Federal................................................ $ 89,515 $ 335,267 $ 284,641
Foreign................................................ 24,887 51,518 78,520
State.................................................. 17,485 39,443 51,229
--------- --------- ---------
Total current provision........................... 131,887 426,228 414,390
--------- --------- ---------
Deferred provision:
Federal................................................ (85,332) 258,328 (175,496)
Foreign................................................ 1,200 -- --
State.................................................. (16,668) 30,391 (31,585)
--------- --------- ---------
Total deferred provision (benefit)................ (100,800) 288,719 (207,081)
--------- --------- ---------
Total provision for income taxes............................ $ 31,087 $ 714,947 $ 207,309
========= ========= =========
</TABLE>
The approximate tax effects of each type of temporary difference that gave
rise to the Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Deferred tax assets:
Vacation expense....................................... $ 19,147 $ 19,125 $ 70,309
Accrued bonus expenses................................. 6,194 78,703 --
Bad debt reserve....................................... 26,735 26,735 59,929
Rent expense........................................... -- -- 84,233
Net operating loss carryforward........................ 125,782 -- --
Other.................................................. 9,036 2,202 --
--------- --------- ---------
Total deferred tax assets.............................. 186,894 126,765 214,471
Valuation allowance.................................... (126,375) (126,765) --
--------- --------- ---------
Net deferred tax assets................................ $ 60,519 $ -- $ 214,471
========= ========= =========
Deferred tax liabilities:
Software costs......................................... $ 92,994 $ 315,030 --
Accelerated depreciation and other..................... 6,260 12,424 333,634
--------- --------- ---------
Total deferred tax liabilities......................... $ 99,254 $ 327,454 $ 333,634
========= ========= =========
</TABLE>
The provision for income taxes differs from the amount computed by applying
the statutory U.S. Federal income tax rate to income before taxes as a result of
the following:
<TABLE>
<CAPTION>
1994 1995 1996
----- ---- -----
<S> <C> <C> <C>
U.S. Federal statutory rate.................................. 34.0% 34.0% 34.0%
State income taxes, net of Federal income tax benefit........ 4.0 4.0 4.0
Impact of foreign earnings and taxes......................... 9.7 (1.0) (1.7)
General business credits..................................... -- (3.1) --
Benefit from foreign sales corporation....................... -- -- (13.4)
Net operating loss........................................... (41.0) -- --
Other........................................................ 15.3 2.4 1.0
----- ---- -----
Effective tax rate........................................... 22.0% 36.3% 23.9%
===== ==== =====
</TABLE>
F-15
<PAGE> 68
VERSATILITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1994, 1995 AND 1996 AND THE SIX MONTHS ENDED OCTOBER 31,
1995 AND 1996 (UNAUDITED) -- (CONTINUED)
11. BUSINESS SEGMENT AND GEOGRAPHIC AREA INFORMATION
The Company operates in one industry segment, the development and marketing
of computer software programs and related services. The Company markets its
products worldwide and operations can be grouped into two main geographic areas.
Pertinent financial data by major geographic area is summarized below.
<TABLE>
<CAPTION>
ELIMINATIONS AND
UNITED UNITED OTHER CORPORATE
STATES KINGDOM EXPENSES CONSOLIDATED
----------- ---------- ----------------- -----------
<S> <C> <C> <C> <C>
Years ending April 30, 1994:
Revenue.................... $ 7,796,870 $1,574,375 $ (990,910) $ 8,380,335
Income from operations..... 451,711 1,088,823 (1,380,064) 160,470
Identifiable assets........ 1,843,156 216,833 -- 2,059,989
1995:
Revenue.................... $10,516,837 $1,801,964 $ (833,650) $11,485,151
Income from operations..... 2,969,058 1,028,615 (2,017,162) 1,980,511
Identifiable assets........ 3,834,339 453,273 -- 4,287,612
1996:
Revenue.................... $14,241,435 $2,991,493 $ (697,656) $16,535,272
Income from operations..... 5,250,464 1,060,603 (5,450,028) 861,039
Identifiable assets........ 9,518,498 112,564 -- 9,631,062
</TABLE>
The Company charges a royalty to Versatility (UK) Limited for software
sales of the Company's products sold by Versatility (UK) Limited. The royalty is
intended to cover primarily software development expense and marketing expense.
Versatility (UK) Limited reflects the royalty as a cost of revenue. For fiscal
1994, 1995 and 1996 the royalty was $990,910, $833,650 and $697,656,
respectively. These amounts were eliminated in consolidation and are not
reflected in the revenue and income from operations amounts above.
Significant customers:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Customer A............................................ -- -- 25.7%
Customer B............................................ -- -- 22.2%
Customer C............................................ -- 17.7% --
Customer D............................................ 13.0% -- --
</TABLE>
Included in United States revenue is $68,654 and $3.8 million of export
revenue for fiscal 1995 and 1996, respectively. For fiscal 1996, $2.1 million of
export sales were generated in the United Kingdom, with the remaining sales in
both fiscal 1995 and 1996 generated in Canada and Mexico. Included in United
Kingdom revenue is $617,544 and $527,681 of export revenue for fiscal 1995 and
1996, respectively, which was generated in Western Europe, exclusive of the
United Kingdom. Export revenue for fiscal 1994 was insignificant for both the
United States and the United Kingdom.
12. INTEREST INCOME (EXPENSE), NET
Interest income (expense), net includes interest income of $10,985, $9,369,
$66,643 and $28,108 (unaudited) in fiscal 1994, 1995 and 1996 and the six months
ending October 31, 1996, respectively, and interest expense of $30,244, $18,346,
$63,503, and $40,659 (unaudited) in fiscal 1994, 1995 and 1996 and the six
months ending October 31, 1996, respectively.
13. SUBSEQUENT EVENTS
Line of Credit
On August 28, 1996, the Company obtained a new $2.5 million operating line
of credit from a bank for financing accounts receivable and working capital and
a new $1.0 million equipment line of credit from the
F-16
<PAGE> 69
VERSATILITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1994, 1995 AND 1996 AND THE SIX MONTHS ENDED OCTOBER 31,
1995 AND 1996 (UNAUDITED) -- (CONTINUED)
same bank to finance acquisition of property and equipment. These lines of
credit expire on August 5, 1997 and are secured by all of the Company's assets.
The operating and equipment lines of credit bear interest at the prime rate plus
0.5% and 1.0%, respectively. The lines of credit are collateralized with a first
priority security interest in all assets. The lines of credit have various
covenants, including limitations on disposition of assets. The Company also must
maintain certain financial ratios and is prohibited from paying cash dividends.
The amount outstanding under the operating line plus accrued interest at October
31, 1996 was $2.0 million. The amount borrowed under the equipment line was
$228,941 at October 31, 1996 and is included with the capital lease payable.
Stock Option Plans
On September 30, 1996, the Board of Directors determined that no further
options would be granted under the 1995 Employee Stock Option Plan and the 1995
Incentive Stock Option Plan. (See Note 9) In addition, the Board of Directors
adopted the 1996 Stock Option Plan, which provides for the issuance of a maximum
of 750,000 shares of common stock. On September 30, 1996, the Board of Directors
granted options to purchase 139,000 shares of common stock with an exercise
price of $10.50 per share, which was determined by the Board of Directors to be
the fair market value. Options to purchase 124,000 shares of common stock become
exercisable in cumulative annual increments of 20% each year, with the first 20%
becoming exercisable upon the date of grant. Options for the remaining 15,000
shares become exercisable in cumulative quarterly increments of 1,250 shares,
with 5,000 shares being immediately exercisable.
1996 Employee Stock Purchase Plan
On September 30, 1996, the Board of Directors adopted the 1996 Employee
Stock Purchase Plan (the "1996 Purchase Plan"). The 1996 Purchase Plan will take
effect upon the completion of the initial public offering and provides for the
issuance of a maximum of 100,000 shares of common stock. The 1996 Purchase Plan
will enable eligible employees to purchase common stock at 85% of the lower of
the fair market value of the Company's common stock on the first day or the last
day of each six-month purchase period.
Preferred Stock
On October 3, 1996, the Company filed an Amendment to its Amended and
Restated Certificate of Incorporation, providing for the automatic conversion of
all outstanding shares of Series A Preferred Stock into 992,061 shares of common
stock upon the closing of an underwritten public offering of shares of common
stock in which (i) the aggregate price paid for such shares by the public is at
least $15.0 million and (ii) the per share price paid by the public for such
shares is at least $11.00. On September 30, 1996, the Company's stockholders
approved the Second Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation"), which will be filed immediately after the
closing of the initial public offering. The Certificate of Incorporation will
delete all references to the formerly designated Series A Preferred Stock. In
addition, 2,000,000 shares of preferred stock will be authorized and the Board
of Directors will have the authority to issue the preferred stock in one or more
series and to fix the rights, preferences, privileges and restrictions thereof.
(See Note 7)
Legal Proceedings
One of the Company's former VARs has filed a claim for arbitration against
the Company asserting, among other things, that the Company misrepresented the
functionality of its products and wrongfully terminated the VAR's reseller
agreement, and claiming not less than $1.0 million in damages. The Company
intends to vigorously defend this action and, based upon information currently
available, believes that the action will not have a material impact on the
Company. However, because the arbitration proceedings are at a preliminary stage
and discovery has not yet begun, the Company cannot predict the ultimate outcome
of this action and there can be no assurance that the Company will be successful
in the arbitration proceedings.
F-17
<PAGE> 70
VERSATILITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1994, 1995 AND 1996 AND THE SIX MONTHS ENDED OCTOBER 31,
1995 AND 1996 (UNAUDITED) -- (CONTINUED)
Sale of Partnership Interest and Termination of Lease
Prior to October 31, 1996, the Company was the 1% general partner of
Serenity Real Properties Limited Partnership (the "Partnership") of which Mr.
Ronald R. Charnock, the Company's President and Chief Executive Officer, Mr.
Marcus W. Heth, the Company's Senior Vice President, Technologies, and Mr. Keith
P. Roberts, the Company's Director of Product Development, were the limited
partners holding the remaining 99% of the partnership interests (the "Limited
Partners"). The Partnership is the owner of an office building in Alexandria,
Virginia (the "Property"), which was the Company's headquarters until October
1994 and which was leased by the Company under a lease expiring in April 1997
and providing for monthly rental payments of $10,000. In addition, the Company
had guaranteed a mortgage loan made by a commercial bank to the Partnership,
which had an outstanding balance of $614,000 at September 30, 1996. This loan
was also guaranteed by each of the Limited Partners and was secured by a
mortgage on the Property.
On October 31, 1996, the Company sold its general partnership interest in
the Partnership, for consideration equal to its capital account of $3,131, to
Serenity L.L.C., whose members are the Limited Partners. In connection with the
sale of its general partnership interest in the Partnership, the Company made to
the Partnership a loan of $519,000 evidenced by a Deed of Trust Note which bears
interest at the same rate and is payable upon the earliest of (i) the sale of
the Property, (ii) demand by the Company and (iii) October 31, 1997. The Deed of
Trust Note is secured by a mortgage on the Property and is guaranteed by each of
the Limited Partners. The Partnership used the proceeds of this loan to repay
its loan from the bank and discharge its mortgage on the Property. In connection
with these transactions, the Partnership agreed to the termination of its lease
with the Company.
Initial Public Offering
The Company has filed with the Securities and Exchange Commission a Form
S-1 relating to an initial public offering of 2,200,000 shares of common stock.
F-18
<PAGE> 71
======================================================
------------------------------------------------------
NO DEALER, SALESPERSON, OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, THE SELLING STOCKHOLDERS OR THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE
COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION
THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR
IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary.......................... 3
Risk Factors................................ 5
Use of Proceeds............................. 12
Dividend Policy............................. 12
Capitalization.............................. 13
Dilution.................................... 14
Selected Consolidated Financial Data........ 15
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................ 16
Business.................................... 24
Management.................................. 37
Certain Transactions........................ 42
Principal and Selling Stockholders.......... 43
Description of Capital Stock................ 45
Shares Eligible for Future Sale............. 48
Underwriting................................ 50
Legal Matters............................... 51
Experts..................................... 51
Additional Information...................... 51
Index to Consolidated Financial Statements.. F-1
------------------------
UNTIL (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------------------------------------
======================================================
======================================================
------------------------------------------------------
2,200,000 SHARES
[VERSATILITY INC. LOGO]
COMMON STOCK
---------------------------
PROSPECTUS
---------------------------
MERRILL LYNCH & CO.
MONTGOMERY SECURITIES
OPPENHEIMER & CO., INC.
, 1996
------------------------------------------------------
======================================================
<PAGE> 72
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
Estimated expenses (other than the underwriting discount) payable in
connection with the sale of the Common Stock offered hereby are as follows:
<S> <C>
Registration fee...................................................... $ 11,500.00
NASD filing fee....................................................... 4,295.00
Nasdaq National Market listing fee.................................... 36,305.00
Printing and engraving expenses....................................... 150,000.00
Legal fees and expenses............................................... 300,000.00
Accounting fees and expenses.......................................... 250,000.00
Blue Sky fees and expenses (including legal fees)..................... 20,000.00
Transfer agent and registrar fees and expenses........................ 4,000.00
Miscellaneous......................................................... 3,900.00
-----------
Total....................................................... $780,000.00
-----------
</TABLE>
The Company will bear all expenses shown above.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Delaware General Corporation Law and the Company's charter and by-laws
provide for indemnification of the Company's directors and officers for
liabilities and expenses that they may incur in such capacities. In general,
directors and officers are indemnified with respect to actions taken in good
faith in a manner reasonably believed to be in, or not opposed to, the best
interests of the Company and, with respect to any criminal action or proceeding,
actions that the indemnitee had no reasonable cause to believe were unlawful.
Reference is made to the Company's charter and by-laws filed as Exhibits 3.2 and
3.3 hereto, respectively.
The Purchase Agreement provides that the Underwriters are obligated, under
certain circumstances, to indemnify directors, officers and controlling persons
of the Company against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Act"). Reference is made to the form of
Purchase Agreement filed as Exhibit 1.1 hereto.
The Company intends to obtain directors and officers liability insurance
for the benefit of its directors and certain of its officers.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since May 3, 1995, the Company has issued the following securities that
were not registered under the Act:
(a) Issuances of Capital Stock.
In January 1996, the Company issued and sold an aggregate of 992,061 shares
of its Series A Preferred Stock to two investors in a private financing for an
aggregate of $3,499,832. Such shares will automatically convert into 992,061
shares of Common Stock upon the closing of this offering.
In January 1996, the Company reincorporated in Delaware. In connection with
the reincorporation, the stockholders of the Company's Virginia predecessor
exchanged their shares of Common Stock for the same number of shares of Common
Stock of the Company.
II-1
<PAGE> 73
(b) Certain Grants and Exercises of Stock Options.
The Company has issued options to purchase an aggregate of 740,505 shares
of Common Stock under the 1995 Employee Stock Option Plan, the 1995 Incentive
Stock Option Plan and the 1996 Stock Plan, exercisable at a weighted average
exercise price of $2.60 per share, and 9,822 shares have been issued upon the
exercise of options.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ---------------------------------------------------------------------------
<C> <S> <C>
*1.1 Form of Purchase Agreement
*3.1 Amended and Restated Certificate of Incorporation of the Company, as
amended
3.2 Form of Second Amended and Restated Certificate of Incorporation of the
Company (to be filed immediately after the closing of the offering)
3.3 Amended and Restated By-laws of the Company
*4.1 Specimen certificate representing the Common Stock
4.2 Registration Rights Agreement between the Company and certain
securityholders, dated as of January 24, 1996
*5.1 Opinion of Testa, Hurwitz & Thibeault, LLP
10.1 1995 Employee Stock Option Plan
10.2 1995 Incentive Stock Option Plan
10.3 1996 Employee Stock Purchase Plan
10.4 1996 Stock Option Plan
10.5 Lease Agreement between the State of California Public Employees'
Retirement System and the Company dated July 10, 1994, as amended
10.6 Loan and Security Agreement between the Company and Silicon Valley Bank,
dated as of August 28, 1996
*10.7 Deed of Trust Note dated as of October 31, 1996 issued by Serenity Real
Properties Limited Partnership to the Company
*11.1 Computation of Earnings Per Share
*21.1 Subsidiaries
*23.1 Consent of Deloitte & Touche LLP
*23.3 Consent of Testa, Hurwitz & Thibeault, LLP (included in Exhibit 5.1)
24.1 Power of Attorney (see page II-4)
</TABLE>
- ---------------
* Filed herewith.
(b) Financial Statement Schedules:
Schedule II -- Valuation and Qualifying Accounts
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to provisions described in Item 14 above, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes (1) to provide to the
Underwriters at the closing specified in the Purchase Agreement certificates in
such denominations and registered in such names as required by the
II-2
<PAGE> 74
Underwriters to permit prompt delivery to each purchaser; (2) that for purposes
of determining any liability under the Act, the information omitted from the
form of prospectus filed as part of a registration statement in reliance upon
Rule 430A and contained in the form of prospectus filed by the registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be deemed to be
part of this registration statement as of the time it was declared effective;
and (3) that for the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-3
<PAGE> 75
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in Fairfax,
Virginia on November 20, 1996.
VERSATILITY INC.
/S/ RONALD R. CHARNOCK
By:.................................
RONALD R. CHARNOCK
CHIEF EXECUTIVE OFFICER, PRESIDENT
AND CHAIRMAN
OF THE BOARD OF DIRECTORS
POWER OF ATTORNEY AND SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
- ------------------------------------- --------------------------------- -----------------
<C> <S> <C>
/S/ RONALD R. CHARNOCK Chief Executive Officer, November 20, 1996
.................................... President (Principal Executive
RONALD R. CHARNOCK Officer) and Chairman of the
Board of Directors
/S/ DONALD C. YOUNT, JR. Chief Financial Officer November 20, 1996
.................................... (Principal Financial Officer and
DONALD C. YOUNT, JR. Principal Accounting Officer)
* Senior Vice President, November 20, 1996
.................................... Technologies, Secretary and
MARCUS W. HETH Director
* Director November 20, 1996
....................................
THOMAS A. SMITH
* Director November 20, 1996
....................................
CHARLES A. JOHNSON
* Director November 20, 1996
....................................
PAUL PALMER
</TABLE>
*By: /S/ RONALD R. CHARNOCK
...............................
RONALD R. CHARNOCK
AS ATTORNEY-IN-FACT
II-4
<PAGE> 76
VERSATILITY INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
---------------------------------
BALANCE AT CHARGED TO COSTS CHARGED TO BALANCE AT
DESCRIPTION MAY 1, AND EXPENSES OTHER ACCOUNTS DEDUCTIONS APRIL 30,
- ------------------------------------ ---------- ---------------- -------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Fiscal 1994
Allowance for doubtful accounts... $ 205,000 $ 50,771 -- $185,417 $ 70,354
Fiscal 1995
Allowance for doubtful accounts... 70,354 102,241 -- 102,241 70,354
Fiscal 1996
Allowance for doubtful accounts... 70,354 122,424 -- 34,904 157,874
</TABLE>
S-1
<PAGE> 77
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ---------------------------------------------------------------------------
<C> <S> <C>
*1.1 Form of Purchase Agreement
*3.1 Amended and Restated Certificate of Incorporation of the Company, as
amended
3.2 Form of Second Amended and Restated Certificate of Incorporation of the
Company (to be filed immediately after the closing of the offering)
3.3 Amended and Restated By-laws of the Company
*4.1 Specimen certificate representing the Common Stock
4.2 Registration Rights Agreement between the Company and certain
securityholders, dated as of January 24, 1996
*5.1 Opinion of Testa, Hurwitz & Thibeault, LLP
10.1 1995 Employee Stock Option Plan
10.2 1995 Incentive Stock Option Plan
10.3 1996 Employee Stock Purchase Plan
10.4 1996 Stock Option Plan
10.5 Lease Agreement between the State of California Public Employees'
Retirement System and the Company dated July 10, 1994, as amended
10.6 Loan and Security Agreement between the Company and Silicon Valley Bank,
dated as of August 28, 1996
*10.7 Deed of Trust Note dated as of October 31, 1996 issued by Serenity Real
Properties Limited Partnership to the Company
*11.1 Computation of Earnings Per Share
*21.1 Subsidiaries
*23.1 Consent of Deloitte & Touche LLP
*23.3 Consent of Testa, Hurwitz & Thibeault, LLP (included in Exhibit 5.1)
24.1 Power of Attorney (see page II-4)
</TABLE>
- ---------------
* Filed herewith.
<PAGE> 1
Exhibit 1.1
VERSATILITY INC.
(a Delaware corporation)
2,200,000 Shares of Common Stock
(Par Value $.01 Per Share)
PURCHASE AGREEMENT
_____________, 1996
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
MONTGOMERY SECURITIES
OPPENHEIMER & CO., INC.
as Representatives of the several Underwriters
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Ladies and Gentlemen:
Versatility Inc., a Delaware corporation (the "Company"), and the
persons listed on Schedule B hereto (the "Selling Shareholders"), confirm their
respective agreements with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch"), Montgomery Securities ("Montgomery") and
Oppenheimer & Co., Inc. ("Oppenheimer") and each of the other Underwriters named
in Schedule A hereto (collectively, the "Underwriters," which term shall also
include any underwriter substituted as hereinafter provided in Section 10
hereof), for whom Merrill Lynch, Montgomery and Oppenheimer are acting as
representatives (in such capacity, the "Representatives"), with respect to (i)
the sale by the Company and the purchase by the
<PAGE> 2
Underwriters, acting severally and not jointly, of the respective numbers of
shares of Common Stock, par value $.01 per share, of the Company ("Common
Stock") set forth in Schedule A hereto and (ii) the grant by the Company and the
Selling Shareholders to the Underwriters, acting severally and not jointly, of
the option described in Section 2(b) hereof to purchase all or any part of
330,000 additional shares of Common Stock to cover over-allotments, if any. The
aforesaid 2,200,000 shares of Common Stock (the "Initial Securities") to be
purchased by the Underwriters and all or any part of the 330,000 shares of
Common Stock subject to the option described in Section 2(b) hereof (the "Option
Securities") are hereinafter called, collectively, the "Securities."
The Company and the Selling Shareholders understand that the
Underwriters propose to make a public offering of the Securities as soon as the
Representatives deem advisable after this Agreement has been executed and
delivered.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (No. 333-___) covering the
registration of the Securities under the Securities Act of 1933, as amended (the
"1933 Act"), including the related preliminary prospectus or prospectuses.
Promptly after execution and delivery of this Agreement, the Company will either
(i) prepare and file a prospectus in accordance with the provisions of Rule 430A
("Rule 430A") of the rules and regulations of the Commission under the 1933 Act
(the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of
the 1933 Act Regulations or (ii) if the Company has elected to rely upon Rule
434 ("Rule 434") of the 1933 Act Regulations, prepare and file a term sheet (a
"Term Sheet") in accordance with the provisions of Rule 434 and Rule 424(b). The
information included in such prospectus or in such Term Sheet, as the case may
be, that was omitted from such registration statement at the time it became
effective, but that is deemed to be part of such registration statement at the
time it became effective (a) pursuant to paragraph (b) of Rule 430A is referred
to as "Rule 430A Information" or (b) pursuant to paragraph (d) of Rule 434 is
referred to as "Rule 434 Information." Each prospectus used before such
registration statement became effective, and any prospectus that omitted, as
applicable, the Rule 430A Information or the Rule 434 Information, that was used
after such effectiveness and prior to the execution and delivery
<PAGE> 3
of this Agreement, is herein called a "preliminary prospectus." Such
registration statement, including the exhibits thereto and schedules thereto at
the time it became effective and including the Rule 430A Information and the
Rule 434 Information, as applicable, is herein called the "Registration
Statement." Any registration statement filed pursuant to Rule 462(b) of the 1933
Act Regulations is herein referred to as the "Rule 462(b) Registration
Statement," and after such filing the term "Registration Statement" shall
include the Rule 462(b) Registration Statement. The final prospectus in the form
first furnished to the Underwriters for use in connection with the offering of
the Securities is herein called the "Prospectus." If Rule 434 is relied on, the
term "Prospectus" shall refer to the preliminary prospectus dated ____________,
1996 together with the Term Sheet and all references in this Agreement to the
date of the Prospectus shall mean the date of the Term Sheet. For purposes of
this Agreement, all references to the Registration Statement, any preliminary
prospectus, the Prospectus or any Term Sheet or any amendment or supplement to
any of the foregoing shall be deemed to include the copy filed with the
Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval
system ("EDGAR").
SECTION 1. Representations and Warranties.
(a) Representations and Warranties by the Company. The Company
represents and warrants to each Underwriter as of the date hereof, as of the
Closing Time referred to in Section 2(c) hereof, and as of each Date of Delivery
(if any) referred to in Section 2(b) hereof, and agrees with each Underwriter,
as follows:
(i) Compliance with Registration Requirements. Each
of the Registration Statement and any Rule 462(b)
Registration Statement has become effective under the 1933
Act and no stop order suspending the effectiveness of the
Registration Statement or any Rule 462(b) Registration
Statement has been issued under the 1933 Act and no
proceedings for that purpose have been instituted or are
pending or, to the knowledge of the Company, are
contemplated by the Commission, and any request on the part
<PAGE> 4
of the Commission for additional information has been
complied with.
At the respective times the Registration Statement, any Rule
462(b) Registration Statement and any post-effective amendments thereto
became effective and at the Closing Time (and, if any Option Securities
are purchased, at the Date of Delivery), the Registration Statement,
the Rule 462(b) Registration Statement and any amendments and
supplements thereto complied and will comply in all material respects
with the requirements of the 1933 Act and the 1933 Act Regulations and
did not and will not contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading. Neither the
Prospectus nor any amendments or supplements thereto, at the time the
Prospectus or any such amendment or supplement was issued and at the
Closing Time (and, if any Option Securities are purchased, at the Date
of Delivery), included or will include an untrue statement of a
material fact or omitted or will omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. If Rule 434
is used, the Company will comply with the requirements of Rule 434 and
the Prospectus shall not be "materially different," as such term is
used in Rule 434, from the prospectus included in the Registration
Statement at the time it became effective. The representations and
warranties in this subsection shall not apply to statements in or
omissions from the Registration Statement or Prospectus made in
reliance upon and in conformity with information furnished to the
Company in writing by any Underwriter through Merrill Lynch expressly
for use in the Registration Statement or Prospectus.
Each preliminary prospectus and the prospectus filed as part of
the Registration Statement as originally filed or as part of any
amendment thereto, or filed pursuant to Rule 424 under the 1933 Act,
complied when so filed in all material respects with the 1933 Act
Regulations and each preliminary prospectus and the Prospectus
delivered to the Underwriters for use in connection with this offering
was identical to the electronically transmitted copies thereof filed
with the
<PAGE> 5
Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
(ii) Independent Accountants. The accountants who certified
the financial statements and supporting schedules included in the
Registration Statement are independent public accountants as required
by the 1933 Act and the 1933 Act Regulations.
(iii) Financial Statements. The financial statements included
in the Registration Statement and the Prospectus, together with the
related schedules and notes, present fairly the financial position of
the Company and its consolidated subsidiaries at the dates indicated
and the statement of operations, stockholders' equity and cash flows of
the Company and its consolidated subsidiaries for the periods
specified; said financial statements have been prepared in conformity
with generally accepted accounting principles ("GAAP") applied on a
consistent basis throughout the periods involved. The supporting
schedules included in the Registration Statement present fairly in
accordance with GAAP the information required to be stated therein. The
selected financial data and the summary financial information included
in the Prospectus present fairly the information shown therein and have
been compiled on a basis consistent with that of the audited financial
statements included in the Registration Statement.
(iv) No Material Adverse Change in Business. Since the
respective dates as of which information is given in the Registration
Statement and the Prospectus, except as otherwise stated therein, (A)
there has been no material adverse change in the condition, financial
or otherwise, or in the earnings, business affairs or business
prospects of the Company and its subsidiaries considered as one
enterprise, whether or not arising in the ordinary course of business
(a "Material Adverse Effect"), (B) there have been no transactions
entered into by the Company or any of its subsidiaries, other than
those in the ordinary course of business, which are material with
respect to the Company and its subsidiaries considered as one
enterprise, and (C) there has been no dividend or distribution of any
kind declared,
<PAGE> 6
paid or made by the Company on any class of its capital
stock.
(v) Good Standing of the Company. The Company has been duly
organized and is validly existing as a corporation in good standing
under the laws of the State of Delaware and has corporate power and
authority to own, lease and operate its properties and to conduct its
business as described in the Prospectus and to enter into and perform
its obligations under this Agreement; and the Company is duly qualified
as a foreign corporation to transact business and is in good standing
in each other jurisdiction in which such qualification is required,
whether by reason of the ownership or leasing of property or the
conduct of business, except where the failure so to qualify or to be in
good standing would not result in a Material Adverse Effect.
(vi) Good Standing of Subsidiaries. Each "significant
subsidiary" of the Company (as such term is defined in Rule 1-02 of
Regulation S-X) (each a "Subsidiary" and, collectively, the
"Subsidiaries") is listed on Exhibit 21.1 to the Registration Statement
and has been duly organized and is validly existing as a corporation in
good standing under the laws of the jurisdiction of its incorporation,
has corporate power and authority to own, lease and operate its
properties and to conduct its business as described in the Prospectus
and is duly qualified as a foreign corporation to transact business and
is in good standing in each jurisdiction in which such qualification is
required, whether by reason of the ownership or leasing of property or
the conduct of business, except where the failure so to qualify or to
be in good standing would not result in a Material Adverse Effect;
except as otherwise disclosed in the Registration Statement, all of the
issued and outstanding capital stock of each such Subsidiary has been
duly authorized and validly issued, is fully paid and non-assessable
and is owned by the Company, directly or through subsidiaries, free and
clear of any security interest, mortgage, pledge, lien, encumbrance,
claim or equity (except that the Company has pledged its shares of
stock in each Subsidiary to Silicon Valley Bank to secure the line of
credit described in the Prospectus); none of the outstanding shares of
capital stock of any Subsidiary was issued in violation of the
preemptive or similar rights of
<PAGE> 7
any security holder of such Subsidiary. The only subsidiaries of the
Company are the subsidiaries listed on Exhibit 21.1 to the Registration
Statement.
(vii) Capitalization. The authorized, issued and outstanding
capital stock of the Company is set forth in the Prospectus in the
column entitled "Actual" under the caption "Capitalization" (except for
subsequent issuances, if any, pursuant to this Agreement, pursuant to
reservations, agreements or employee benefit plans referred to in the
Prospectus or pursuant to the exercise of convertible securities or
options referred to in the Prospectus). The shares of issued and
outstanding capital stock, including the Securities to be purchased by
the Underwriters from the Selling Shareholders, have been duly
authorized and validly issued and are fully paid and non-assessable;
none of the outstanding shares of capital stock, including the
Securities to be purchased by the Underwriters from the Selling
Shareholders, was issued in violation of the preemptive or other
similar rights of any securityholder of the Company.
(viii) Authorization of Agreement. This Agreement has been
duly authorized, executed and delivered by the Company.
(ix) Authorization and Description of Securities. The
Securities to be purchased by the Underwriters from the Company have
been duly authorized for issuance and sale to the Underwriters pursuant
to this Agreement and, when issued and delivered by the Company
pursuant to this Agreement against payment of the consideration set
forth herein, will be validly issued and fully paid and non-assessable;
the Common Stock conforms to all statements relating thereto contained
in the Prospectus and such description conforms to the rights set forth
in the instruments defining the same; no holder of the Securities will
be subject to personal liability by reason of being such a holder; and
the issuance of the Securities is not subject to the preemptive or
other similar rights of any securityholder of the Company.
(x) Absence of Defaults and Conflicts. Neither the Company nor
any of its Subsidiaries is in violation of its
<PAGE> 8
charter or by-laws or in default in the performance or observance of
any obligation, agreement, covenant or condition contained in any
contract, indenture, mortgage, deed of trust, loan or credit agreement,
note, lease or other agreement or instrument to which the Company or
any of its Subsidiaries is a party or by which it or any of them may be
bound, or to which any of the property or assets of the Company or any
Subsidiary is subject (collectively, "Agreements and Instruments")
except for such defaults that would not result in a Material Adverse
Effect; and the execution, delivery and performance of this Agreement
and the consummation of the transactions contemplated herein and in the
Registration Statement (including the issuance and sale of the
Securities and the use of the proceeds from the sale of the Securities
as described in the Prospectus under the caption "Use of Proceeds") and
compliance by the Company with its obligations hereunder have been duly
authorized by all necessary corporate action and do not and will not,
whether with or without the giving of notice or passage of time or
both, conflict with or constitute a breach of, or default or Repayment
Event (as defined below) under, or result in the creation or imposition
of any lien, charge or encumbrance upon any property or assets of the
Company or any subsidiary pursuant to, the Agreements and Instruments
(except for such conflicts, breaches or defaults or liens, charges or
encumbrances that would not result in a Material Adverse Effect), nor
will such action result in any violation of the provisions of the
charter or by-laws of the Company or any subsidiary or any applicable
law, statute, rule, regulation, judgment, order, writ or decree of any
government, government instrumentality or court, domestic or foreign,
having jurisdiction over the Company or any Subsidiary or any of their
assets, properties or operations.
As used herein, a "Repayment Event" means any event or condition which
gives the holder of any note, debenture or other evidence of
indebtedness (or any person acting on such holder's behalf) the right
to require the repurchase, redemption or repayment of all or a portion
of such indebtedness by the Company or any Subsidiary.
(xi) Absence of Labor Dispute. No labor dispute with
the employees of the Company or any Subsidiary exists or, to
the knowledge of the Company, is imminent, and the Company
is not aware of any existing or imminent labor disturbance
<PAGE> 9
by the employees of any of its or any Subsidiary's principal suppliers,
manufacturers, customers or contractors, which, in either case, may
reasonably be expected to result in a Material Adverse Effect.
(xii) Absence of Proceedings. There is no action, suit,
proceeding, inquiry or investigation before or brought by any court or
governmental agency or body, domestic or foreign, now pending, or, to
the knowledge of the Company, threatened, against or affecting the
Company or any Subsidiary, which is required to be disclosed in the
Registration Statement (other than as disclosed therein), or which
might reasonably be expected to result in a Material Adverse Effect, or
which might reasonably be expected to materially and adversely affect
the properties or assets thereof or the consummation of the
transactions contemplated in this Agreement or the performance by the
Company of its obligations hereunder; the aggregate of all pending
legal or governmental proceedings to which the Company or any
Subsidiary is a party or of which any of their respective property or
assets is the subject which are not described in the Registration
Statement, including ordinary routine litigation incidental to the
business, could not reasonably be expected to result in a Material
Adverse Effect.
(xiii) Accuracy of Exhibits. There are no contracts or documents
which are required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits thereto which have not been so
described and filed as required.
(xiv) Possession of Intellectual Property. The Company and its
Subsidiaries own or possess, or can acquire on reasonable terms,
adequate patents, patent rights, licenses, inventions, copyrights,
know-how (including trade secrets and other unpatented and/or
unpatentable proprietary or confidential information, systems or
procedures), trademarks, service marks, trade names or other
intellectual property (collectively, "Intellectual Property") necessary
to carry on the business now operated by them, and neither the Company
nor any of its Subsidiaries has received any notice or is otherwise
aware of any infringement of or
<PAGE> 10
conflict with asserted rights of others with respect to any
Intellectual Property or of any facts or circumstances which would
render any Intellectual Property invalid or inadequate to protect the
interest of the Company or any of its Subsidiaries therein, and which
infringement or conflict (if the subject of any unfavorable decision,
ruling or funding) or invalidity or inadequacy, singly or in the
aggregate, would result in a Material Adverse Effect.
(xv) Absence of Further Requirements. No filing with, or
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or
agency is necessary or required for the performance by the Company of
its obligations hereunder, in connection with the offering, issuance or
sale of the Securities hereunder or the consummation of the
transactions contemplated by this Agreement, except such as have been
already obtained or as may be required under the 1933 Act or the 1933
Act Regulations, state securities laws or the rules and regulations of
the National Association of Securities Dealers, Inc.
(xvi) Possession of Licenses and Permits. The Company and its
Subsidiaries possess such permits, licenses, approvals, consents and
other authorizations (collectively, "Governmental Licenses") issued by
the appropriate federal, state, local or foreign regulatory agencies or
bodies necessary to conduct the business now operated by them, except
where the failure to possess such Governmental License would not,
singly or in the aggregate, have a Material Adverse Effect; the Company
and its Subsidiaries are in compliance with the terms and conditions of
all such Governmental Licenses, except where the failure so to comply
would not, singly or in the aggregate, have a Material Adverse Effect;
all of the Governmental Licenses are valid and in full force and
effect, except when the invalidity of such Governmental Licenses or the
failure of such Governmental Licenses to be in full force and effect
would not have a Material Adverse Effect; and neither the Company nor
any of its Subsidiaries has received any notice of proceedings relating
to the revocation or modification of any such Governmental Licenses
which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or funding, would result in a Material Adverse Effect.
<PAGE> 11
(xvii) Title to Property. Neither the Company nor any of its
Subsidiaries owns any real property; and all of the leases and
subleases material to the business of the Company and its Subsidiaries,
considered as one enterprise, and under which the Company or any of its
Subsidiaries holds properties described in the Prospectus, are in full
force and effect, and neither the Company nor any Subsidiary has any
notice of any material claim of any sort that has been asserted by
anyone adverse to the rights of the Company or any Subsidiary under any
of the leases or subleases mentioned above, or affecting or questioning
the rights of the Company or such Subsidiary to the continued
possession of the leased or subleased premises under any such lease or
sublease.
(xviii) Compliance with Cuba Act. The Company has complied with,
and is and will be in compliance with, the provisions of that certain
Florida act relating to disclosure of doing business with Cuba,
codified as Section 517.075 of the Florida statutes, and the rules and
regulations thereunder (collectively, the "Cuba Act") or is exempt
therefrom.
(xix) Investment Company Act. The Company is not, and upon the
issuance and sale of the Securities as herein contemplated and the
application of the net proceeds therefrom as described in the
Prospectus will not be, an "investment company" or an entity
"controlled" by an "investment company" as such terms are defined in
the Investment Company Act of 1940, as amended (the "1940 Act").
(xx) Environmental Laws. Except as described in the
Registration Statement and except as would not, singly or in the
aggregate, result in a Material Adverse Effect, (A) neither the Company
nor any of its Subsidiaries is in violation of any federal, state,
local or foreign statute, law, rule, regulation, ordinance, code,
policy or rule of common law or any judicial or administrative
interpretation thereof, including any judicial or administrative order,
consent, decree or judgment, relating to pollution or protection of
human health, the environment (including, without limitation, ambient
air, surface water, groundwater,
<PAGE> 12
land surface or subsurface strata) or wildlife, including, without
limitation, laws and regulations relating to the release or threatened
release of chemicals, pollutants, contaminants, wastes, toxic
substances, hazardous substances, petroleum or petroleum products
(collectively, "Hazardous Materials") or to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport
or handling of Hazardous Materials (collectively, "Environmental
Laws"), (B) the Company and its Subsidiaries have all permits,
authorizations and approvals required under any applicable
Environmental Laws and are each in compliance with their requirements,
(C) there are no pending or threatened administrative, regulatory or
judicial actions, suits, demands, demand letters, claims, liens,
notices of noncompliance or violation, investigation or proceedings
relating to any Environmental Law against the Company or any of its
Subsidiaries and (D) there are no events or circumstances that might
reasonably be expected to form the basis of an order for clean-up or
remediation, or an action, suit or proceeding by any private party or
governmental body or agency, against or affecting the Company or any of
its Subsidiaries relating to Hazardous Materials or any Environmental
Laws.
(xxi) Registration Rights. There are no persons with
registration rights or other similar rights, which have not been
satisfied or waived, to have any securities registered pursuant to the
Registration Statement or otherwise registered by the Company under the
1933 Act.
(b) Representations and Warranties by the Selling
Shareholders. Each Selling Shareholder, severally, represents and warrants to
each Underwriter as of the date hereof, as of the Closing Time, and, if such
Selling Shareholder is selling Option Securities on a Date of Delivery, as of
each such Date of Delivery, and agrees with each Underwriter, as follows:
(i) Accurate Disclosure. To the best knowledge of such
Selling Shareholder, the representations and warranties of the Company
contained in Section 1(a) hereof are true and correct; such Selling
Shareholder has reviewed and is familiar with the Registration
Statement and the Prospectus and neither the Prospectus nor any
amendments or supplements thereto includes any untrue statement of a
material fact or
<PAGE> 13
omits to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading; such Selling Shareholder is not prompted to
sell the Securities to be sold by such Selling Shareholder hereunder by
any information concerning the Company or any subsidiary of the Company
which is not set forth in the Prospectus.
(ii) Authorization of Agreements. Each Selling Shareholder has
the full right, power and authority to enter into this Agreement and a
Power of Attorney and Custody Agreement (the "Power of Attorney and
Custody Agreement") and to sell, transfer and deliver the Securities to
be sold by such Selling Shareholder hereunder. The execution and
delivery of this Agreement and the Power of Attorney and Custody
Agreement and the sale and delivery of the Securities to be sold by
such Selling Shareholder and the consummation of the transactions
contemplated herein and compliance by such Selling Shareholder with its
obligations hereunder have been duly authorized by such Selling
Shareholder and do not and will not, whether with or without the giving
of notice or passage of time or both, conflict with or constitute a
breach of, or default under, or result in the creation or imposition of
any tax, lien, charge or encumbrance upon the Securities to be sold by
such Selling Shareholder or any property or assets of such Selling
Shareholder pursuant to any contract, indenture, mortgage, deed of
trust, loan or credit agreement, note, license, lease or other
agreement or instrument to which such Selling Shareholder is a party or
by which such Selling Shareholder may be bound, or to which any of the
property or assets of such Selling Shareholder is subject, nor will
such action result in any violation of the provisions of the charter or
by-laws or other organizational instrument of such Selling Shareholder,
if applicable, or any applicable treaty, law, statute, rule,
regulation, judgment, order, writ or decree of any government,
government instrumentality or court, domestic or foreign, having
jurisdiction over such Selling Shareholder or any of its properties.
(iii) Good and Marketable Title. Such Selling Shareholder has
and will at the Closing Time and, if any
<PAGE> 14
Option Securities are purchased, on the Date of Delivery, have good and
marketable title to the Securities to be sold by such Selling
Shareholder hereunder, free and clear of any security interest,
mortgage, pledge, lien, charge, claim, equity or encumbrance of any
kind, other than pursuant to this Agreement; and upon delivery of such
Securities and payment of the purchase price therefor as herein
contemplated, assuming each such Underwriter has no notice of any
adverse claim, each of the Underwriters will receive good and
marketable title to the Securities purchased by it from such Selling
Shareholder, free and clear of any security interest, mortgage, pledge,
lien, charge, claim, equity or encumbrance of any kind.
(iv) Due Execution of Power of Attorney and Custody Agreement.
Such Selling Shareholder has duly executed and delivered, in the form
heretofore furnished to the Representatives, the Irrevocable Power of
Attorney with [Ronald R. Charnock and Donald C. Yount, Jr.], or either
of them, as attorney-in-fact (the "Attorney-in-Fact") and the Custody
Agreement with the Company as custodian (the "Custodian")(together, the
"Power of Attorney and Custody Agreement"); the Custodian is authorized
to deliver the Securities to be sold by such Selling Shareholder
hereunder and to accept payment therefor; and the Attorney-in-Fact is
authorized to execute and deliver this Agreement and the certificate
referred to in Section 5(f) or that may be required pursuant to
Sections 5(1) and 5(m) on behalf of such Selling Shareholder, to sell,
assign and transfer to the Underwriters the Securities to be sold by
such Selling Shareholder hereunder, to determine the purchase price to
be paid by the Underwriters to such Selling Shareholder, as provided in
Section 2(a) hereof, to authorize the delivery of the Securities to be
sold by such Selling Shareholder hereunder, to accept payment therefor,
and otherwise to act on behalf of such Selling Shareholder in
connection with this Agreement.
(v) Absence of Manipulation. Such Selling Shareholder has not
taken, and will not take, directly or indirectly, any action which is
designed to or which has constituted or which might reasonably be
expected to cause or result in stabilization or manipulation of the
price of any security
<PAGE> 15
of the Company to facilitate the sale or resale of the
Securities.
(vi) Absence of Further Requirements. No filing with, or
consent, approval, authorization, order, registration, qualification or
decree of, any court or governmental authority or agency, domestic or
foreign, is necessary or required for the performance by such Selling
Shareholder of its obligations hereunder or in the Power of Attorney
and Custody Agreement, or in connection with the sale and delivery of
the Securities hereunder or the consummation of the transactions
contemplated by this Agreement.
(vii) Restriction on Sale of Securities. During a period of 180
days from the date of the Prospectus, such Selling Shareholder will
not, without the prior written consent of Merrill Lynch, (i) offer,
pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of,
directly or indirectly, any share of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock or
file any registration statement under the 1933 Act with respect to any
of the foregoing or (ii) enter into any swap or any other agreement or
any transaction that transfers, in whole or in part, directly or
indirectly, the economic consequence of ownership of the Common Stock,
whether any such swap or transaction described in clause (i) or (ii)
above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise. The foregoing sentence shall not
apply to the Securities to be sold hereunder.
(viii) Certificates Suitable for Transfer. Certificates for all
of the Securities to be sold by such Selling Shareholder pursuant to
this Agreement, in suitable form for transfer by delivery or
accompanied by duly executed instruments of transfer or assignment in
blank with signatures guaranteed, have been placed in custody with the
Custodian with irrevocable conditional instructions to deliver such
Securities to the Underwriters pursuant to this Agreement.
<PAGE> 16
(ix) No Association with NASD. Neither such Selling
Shareholder nor any affiliates of such Selling Shareholder, directly or
indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with, or has any other
association with (within the meaning of Article I, Section 1(m) of the
By-laws of the National Association of Securities Dealers, Inc.), any
member firm of the National Association of Securities Dealers, Inc.
(c) Officer's Certificates. Any certificate signed by any officer of
the Company or any of its Subsidiaries delivered to the Representatives or to
counsel for the Underwriters shall be deemed a representation and warranty by
the Company to each Underwriter as to the matters covered thereby, and any
certificate signed by or on behalf of the Selling Shareholders as such and
delivered to the Representatives or to counsel for the Underwriters pursuant to
the terms of this Agreement shall be deemed a representation and warranty by
such Selling Shareholder to the Underwriters as to the matters covered thereby.
SECTION 2. Sale and Delivery to Underwriters; Closing.
(a) Initial Securities. On the basis of the representations and
warranties herein contained and subject to the terms and conditions herein set
forth, the Company agrees to sell to each Underwriter, severally and not
jointly, and each Underwriter, severally and not jointly, agrees to purchase
from the Company, at the price per share set forth in Schedule C, that
proportion of the number of Initial Securities which the number of Initial
Securities set forth in Schedule A opposite the name of such Underwriter, plus
any additional number of Initial Securities which such Underwriter may become
obligated to purchase pursuant to the provisions of Section 10 hereof, bears to
the total number of Initial Securities, subject, in each case, to such
adjustments among the Underwriters as the Representatives in their sole
discretion shall make to eliminate any sales or purchases of fractional
securities.
(b) Option Securities. In addition, on the basis of the representations
and warranties herein contained and subject to the terms and conditions herein
set forth, the Company and the Selling Shareholders, acting severally and not
jointly, hereby grant an option to the Underwriters, severally and not jointly,
to purchase up to an additional 330,000 shares of Common Stock,
<PAGE> 17
as set forth on Schedule B, at the price per share set forth in Schedule C, less
an amount per share equal to any dividends or distributions declared by the
Company and payable on the Initial Securities but not payable on the Option
Securities. The option hereby granted will expire 30 days after the date hereof
and may be exercised in whole or in part from time to time only for the purpose
of covering over-allotments which may be made in connection with the offering
and distribution of the Initial Securities upon notice by the Representatives to
the Company and the Selling Shareholders setting forth the number of Option
Securities as to which the several Underwriters are then exercising the option
and the time and date of payment and delivery for such Option Securities. Any
such time and date of delivery (a "Date of Delivery") shall be determined by the
Representatives, but shall not be later than seven full business days after the
exercise of said option, nor in any event prior to the Closing Time, as
hereinafter defined. If the option is exercised as to all or any portion of the
Option Securities, the Company and each Selling Shareholder, acting severally
and not jointly, will sell that proportion of the Option Securities then being
purchased which the Maximum Number of Option Securities set forth opposite the
name of such person in Schedule B hereto bears to the aggregate Maximum Number
of Option Securities to be sold by the Company and the Selling Shareholders in
the aggregate, and each of the Underwriters, acting severally and not jointly,
will purchase that proportion of the total number of Option Securities then
being purchased which the number of Initial Securities set forth in Schedule A
opposite the name of such Underwriter bears to the total number of Initial
Securities, subject in each case to such adjustments as the Representatives in
their discretion shall make to eliminate any sales or purchases of fractional
shares.
(c) Payment. Payment of the purchase price for, and delivery of
certificates for, the Initial Securities shall be made at the offices of Hale
and Dorr, Washington, D.C., or at such other place as shall be agreed upon by
the Representatives and the Company at 10:00 A.M. (Eastern time) on the third
business day (or the fourth business day, if the pricing occurs after 4:30 P.M.
(Eastern time) pursuant to Rule 15c6-1(c) of the Securities Exchange Act of 1934
(the "1934 Act")) after the date hereof (unless postponed in accordance with the
provisions of
<PAGE> 18
Section 10), or such other time not later than ten business days after such date
as shall be agreed upon by the Representatives and the Company (such time and
date of payment and delivery being herein called "Closing Time").
In addition, in the event that any or all of the Option Securities are
purchased by the Underwriters, payment of the purchase price for, and delivery
of certificates for, such Option Securities shall be made at the above-mentioned
offices, or at such other place as shall be agreed upon by the Representatives,
the Company and the Selling Shareholders on each Date of Delivery as specified
in the notice from the Representatives to the Company and the Selling
Shareholders.
Payment shall be made to the Company and the Selling Shareholders by
wire transfer of immediately available funds to bank accounts designated by the
Company and the Custodian pursuant to each Selling Shareholder's Power of
Attorney and Custody Agreement, as the case may be, against delivery to the
Representatives for the respective accounts of the Underwriters of certificates
for the Securities to be purchased by them. It is understood that each
Underwriter has authorized the Representatives, for its account, to accept
delivery of, receipt for, and make payment of the purchase price for, the
Initial Securities and the Option Securities, if any, which it has agreed to
purchase. Merrill Lynch, individually and not as representative of the
Underwriters, may (but shall not be obligated to) make payment of the purchase
price for the Initial Securities or the Option Securities, if any, to be
purchased by any Underwriter whose funds have not been received by the Closing
Time or the relevant Date of Delivery, as the case may be, but such payment
shall not relieve such Underwriter from its obligations hereunder.
(d) Denominations; Registration. Certificates for the Initial
Securities and the Option Securities, if any, shall be in such denominations and
registered in such names as the Representatives may request in writing at least
one full business day before the Closing Time or the relevant Date of Delivery,
as the case may be. The certificates for the Initial Securities and the Option
Securities, if any, will be made available for examination and packaging by the
Representatives in The City of New York not later than 10:00 A.M. (Eastern time)
on the business
<PAGE> 19
day prior to the Closing Time or the relevant Date of Delivery, as the case may
be.
SECTION 3. Covenants of the Company. The Company covenants with each
Underwriter as follows:
(a) Compliance with Securities Regulations and Commission Requests. The
Company, subject to Section 3(b), will comply with the requirements of Rule 430A
or Rule 434, as applicable, and will notify the Representatives immediately, and
confirm the notice in writing, (i) when any post-effective amendment to the
Registration Statement shall become effective, or any supplement to the
Prospectus or any amended Prospectus shall have been filed, (ii) of the receipt
of any comments from the Commission, (iii) of any request by the Commission for
any amendment to the Registration Statement or any amendment or supplement to
the Prospectus or for additional information, and (iv) of the issuance by the
Commission of any stop order suspending the effectiveness of the Registration
Statement or of any order preventing or suspending the use of any preliminary
prospectus, or of the suspension of the qualification of the Securities for
offering or sale in any jurisdiction, or of the initiation or threatening of any
proceedings for any of such purposes. The Company will promptly effect the
filings necessary pursuant to Rule 424(b) and will take such steps as it deems
necessary to ascertain promptly whether the form of prospectus transmitted for
filing under Rule 424(b) was received for filing by the Commission and, in the
event that it was not, it will promptly file such prospectus. The Company will
make every reasonable effort to prevent the issuance of any stop order and, if
any stop order is issued, to obtain the lifting thereof at the earliest possible
moment.
(b) Filing of Amendments. The Company will give the Representatives
notice of its intention to file or prepare any amendment to the Registration
Statement (including any filing under Rule 462(b)), any Term Sheet or any
amendment, supplement or revision to either the prospectus included in the
Registration Statement at the time it became effective or to the Prospectus,
will furnish the Representatives with copies of any such documents a reasonable
amount of time prior to such proposed filing or use, as the case may be, and
will not file or use any
<PAGE> 20
such document to which the Representatives or counsel for the Underwriters shall
object.
(c) Delivery of Registration Statements. The Company has furnished or
will deliver to the Representatives and counsel for the Underwriters, without
charge, signed copies of the Registration Statement as originally filed and of
each amendment thereto (including exhibits filed therewith or incorporated by
reference therein) and signed copies of all consents and certificates of
experts, and (if requested) will also deliver to the Representatives, without
charge, a conformed copy of the Registration Statement as originally filed and
of each amendment thereto (without exhibits) for each of the Underwriters. The
copies of the Registration Statement and each amendment thereto furnished to the
Underwriters will be identical to the electronically transmitted copies thereof
filed with the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
(d) Delivery of Prospectuses. The Company has delivered to each
Underwriter, without charge, as many copies of each preliminary prospectus as
such Underwriter reasonably requested, and the Company hereby consents to the
use of such copies for purposes permitted by the 1933 Act. The Company will
furnish to each Underwriter, without charge, during the period when the
Prospectus is required to be delivered under the 1933 Act or the 1934 Act, such
number of copies of the Prospectus (as amended or supplemented) as such
Underwriter may reasonably request. The Prospectus and any amendments or
supplements thereto furnished to the Underwriters will be identical to the
electronically transmitted copies thereof filed with the Commission pursuant to
EDGAR, except to the extent permitted by Regulation S-T.
(e) Continued Compliance with Securities Laws. The Company will comply
with the 1933 Act and the 1933 Act Regulations so as to permit the completion of
the distribution of the Securities as contemplated in this Agreement and in the
Prospectus. If at any time when a prospectus is required by the 1933 Act to be
delivered in connection with sales of the Securities, any event shall occur or
condition shall exist as a result of which it is necessary, in the opinion of
counsel for the Underwriters or for the Company, to amend the Registration
Statement or amend or supplement the Prospectus in order that the Prospectus
will not include any untrue statements of a material fact or omit to state
<PAGE> 21
a material fact necessary in order to make the statements therein not misleading
in the light of the circumstances existing at the time it is delivered to a
purchaser, or if it shall be necessary, in the opinion of such counsel, at any
such time to amend the Registration Statement or amend or supplement the
Prospectus in order to comply with the requirements of the 1933 Act or the 1933
Act Regulations, the Company will promptly prepare and file with the Commission,
subject to Section 3(b), such amendment or supplement as may be necessary to
correct such statement or omission or to make the Registration Statement or the
Prospectus comply with such requirements, and the Company will furnish to the
Underwriters such number of copies of such amendment or supplement as the
Underwriters may reasonably request.
(f) Blue Sky Qualifications. The Company will use its best efforts, in
cooperation with the Underwriters, to qualify the Securities for offering and
sale under the applicable securities laws of such states and other jurisdictions
as the Representatives may designate and to maintain such qualifications in
effect for a period of not less than one year from the later of the effective
date of the Registration Statement and any Rule 462(b) Registration Statement;
provided, however, that the Company shall not be obligated to file any general
consent to service of process or to qualify as a foreign corporation or as a
dealer in securities in any jurisdiction in which it is not so qualified or to
subject itself to taxation in respect of doing business in any jurisdiction in
which it is not otherwise so subject. In each jurisdiction in which the
Securities have been so qualified, the Company will file such statements and
reports as may be required by the laws of such jurisdiction to continue such
qualification in effect for a period of not less than one year from the
effective date of the Registration Statement and any Rule 462(b) Registration
Statement.
(g) Rule 158. The Company will timely file such reports pursuant to the
1934 Act as are necessary in order to make generally available to its
securityholders as soon as practicable an earnings statement for the purposes
of, and to provide the benefits contemplated by, the last paragraph of Section
11(a) of the 1933 Act.
<PAGE> 22
(h) Use of Proceeds. The Company will use the net proceeds received by
it from the sale of the Securities in substantially the manner specified in the
Prospectus under "Use of Proceeds."
(i) Listing. The Company will use its best efforts to effect and
maintain the quotation of the Common Stock (including the Securities) on the
Nasdaq National Market and will file with the Nasdaq National Market all
documents and notices required by the Nasdaq National Market of companies that
have securities that are traded in the over-the-counter market and quotations
for which are reported by the Nasdaq National Market.
(j) Restriction on Sale of Securities. During a period of 180 days from
the date of the Prospectus, the Company will not, without the prior written
consent of Merrill Lynch, (i) directly or indirectly, offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase or otherwise
transfer or dispose of any share of Common Stock or any securities convertible
into or exercisable or exchangeable for Common Stock or file any registration
statement under the 1933 Act with respect to any of the foregoing or (ii) enter
into any swap or any other agreement or any transaction that transfers, in whole
or in part, directly or indirectly, the economic consequence of ownership of the
Common Stock, whether any such swap or transaction described in clause (i) or
(ii) above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise. The foregoing sentence shall not apply to (A)
the Securities to be sold hereunder, (B) any shares of Common Stock issued by
the Company upon the exercise of an option or warrant or the conversion of a
security outstanding on the date hereof and referred to in the Prospectus or (C)
any shares of Common Stock issued or options to purchase Common Stock granted
pursuant to existing employee benefit plans of the Company referred to in the
Prospectus.
(k) Reporting Requirements. The Company, during the period when the
Prospectus is required to be delivered under the 1933 Act or the 1934 Act, will
file all documents required to be filed with the Commission pursuant to the 1934
Act within the time periods required by the 1934 Act and the rules and
regulations of the Commission thereunder.
<PAGE> 23
(l) Compliance with Rule 463. The Company will file with the Commission
such reports on Form SR as may be required pursuant to Rule 463 of the 1933 Act
Regulations.
SECTION 4. Payment of Expenses.
(a) Expenses. The Company and the Selling Shareholders will pay or
cause to be paid all expenses incident to the performance of their obligations
under this Agreement, including (i) the preparation, printing and filing of the
Registration Statement (including financial statements and exhibits) as
originally filed and of each amendment thereto, (ii) the preparation, printing
and delivery to the Underwriters of this Agreement, any Agreement among
Underwriters and such other documents as may be required in connection with the
offering, purchase, sale, issuance or delivery of the Securities, (iii) the
preparation, issuance and delivery of the certificates for the Securities to the
Underwriters, including any stock or other transfer taxes and any stamp or other
duties payable upon the sale, issuance or delivery of the Securities to the
Underwriters, (iv) the fees and disbursements of the Company's counsel,
accountants and other advisors, (v) the qualification of the Securities under
securities laws in accordance with the provisions of Section 3(f) hereof,
including filing fees and the reasonable fees and disbursements of counsel for
the Underwriters in connection therewith and in connection with the preparation
of the Blue Sky Survey and any supplement thereto, (vi) the printing and
delivery to the Underwriters of copies of each preliminary prospectus, any Term
Sheets and of the Prospectus and any amendments or supplements thereto, (vii)
the preparation, printing and delivery to the Underwriters of copies of the Blue
Sky Survey and any supplement thereto, (viii) the fees and expenses of any
transfer agent or registrar for the Securities, (ix) the filing fees incident
to, and the reasonable fees and disbursements of counsel to the Underwriters in
connection with, the review by the National Association of Securities Dealers,
Inc. (the "NASD") of the terms of the sale of the Securities and (x) the fees
and expenses incurred in connection with the inclusion of the Securities in the
Nasdaq National Market.
(b) Expenses of the Selling Shareholders. The Selling Shareholders,
jointly and severally, will pay all expenses
<PAGE> 24
incident to the performance of their respective obligations under, and the
consummation of the transactions contemplated by this Agreement, including (i)
any stamp duties, capital duties and stock transfer taxes, if any, payable upon
the sale of the Securities to the Underwriters, and their transfer between the
Underwriters pursuant to an agreement between such Underwriters, and (ii) the
fees and disbursements of their respective counsel and accountants.
(c) Termination of Agreement. If this Agreement is terminated by the
Representatives in accordance with the provisions of Section 5, Section 9(a)(i)
or Section 11 hereof, the Company and the Selling Shareholders shall reimburse
the Underwriters for all of their out-of-pocket expenses, including the
reasonable fees and disbursements of counsel for the Underwriters.
(d) Allocation of Expenses. The provisions of this Section shall not
affect any agreement that the Company and the Selling Shareholders may make for
the sharing of such costs and expenses.
SECTION 5. Conditions of Underwriters' Obligations. The obligations of
the several Underwriters hereunder are subject to the accuracy of the
representations and warranties of the Company and the Selling Shareholders
contained in Section 1 hereof or in certificates of any officer of the Company
or any Subsidiary of the Company or on behalf of any Selling Shareholder
delivered pursuant to the provisions hereof, to the performance by the Company
of its covenants and other obligations hereunder, and to the following further
conditions:
(a) Effectiveness of Registration Statement. The Registration
Statement, including any Rule 462(b) Registration Statement, has become
effective and at Closing Time no stop order suspending the effectiveness of the
Registration Statement shall have been issued under the 1933 Act or proceedings
therefor initiated or threatened by the Commission, and any request on the part
of the Commission for additional information shall have been complied with to
the reasonable satisfaction of counsel to the Underwriters. A prospectus
containing the Rule 430A Information shall have been filed with the Commission
in accordance with Rule 424(b) (or a post-effective amendment providing such
information shall have been filed and declared effective in accordance with the
requirements of Rule 430A) or, if the Company has elected to
<PAGE> 25
rely upon Rule 434, a Term Sheet shall have been filed with the Commission in
accordance with Rule 424(b).
(b) Opinion of Counsel for Company. At Closing Time, the
Representatives shall have received the favorable opinion, dated as of Closing
Time, of Testa, Hurwitz & Thibeault, LLP, counsel for the Company, in form and
substance satisfactory to counsel for the Underwriters, to the effect that:
(i) The Company has been duly incorporated and is
validly existing as a corporation in good standing under the laws of
the State of Delaware.
(ii) The Company has corporate power and authority to
own, lease and operate its properties and to conduct its business as
described in the Prospectus and to enter into and perform its
obligations under this Agreement.
(iii) The Company is duly qualified as a foreign
corporation to transact business and is in good standing in each
jurisdiction listed on Schedule D hereto.
(iv) The authorized, issued and outstanding capital
stock of the Company is as set forth in the Prospectus in the column
entitled "Actual" under the caption "Capitalization" (except for
subsequent issuances, if any, pursuant to this Agreement or pursuant to
reservations, agreements or employee benefit plans referred to in the
Prospectus or pursuant to the exercise of convertible securities or
options referred to in the Prospectus); the shares of issued and
outstanding capital stock of the Company have been duly authorized and
validly issued and are fully paid and non-assessable; and none of the
outstanding shares of capital stock of the Company was issued in
violation of the preemptive or other similar rights of any
securityholder of the Company.
(v) The Securities to be purchased by the
Underwriters from the Company have been duly authorized for issuance
and sale to the Underwriters pursuant to this Agreement and, when
issued and delivered by the Company pursuant to this Agreement against
payment of the
<PAGE> 26
consideration set forth in this Agreement, will be validly issued and
fully paid and non-assessable.
(vi) The issuance and sale of the Securities by the
Company is not subject to the preemptive or other similar rights of any
securityholder of the Company arising by operation of law, under the
charter or by-laws of the Company, or, to the best of such counsel's
knowledge, under any agreement to which the Company or any of its
Subsidiaries is a party or otherwise.
(vii) Each Subsidiary has been duly incorporated and is
validly existing as a corporation in good standing under the laws of
the jurisdiction of its incorporation, has corporate power and
authority to own, lease and operate its properties and to conduct its
business as described in the Prospectus and is duly qualified as a
foreign corporation to transact business and is in good standing in
each jurisdiction in which such qualification is required, whether by
reason of the ownership or leasing of property or the conduct of
business, except where the failure so to qualify or to be in good
standing would not result in a Material Adverse Effect; except as
otherwise disclosed in the Registration Statement, all of the issued
and outstanding capital stock of each Subsidiary has been duly
authorized and validly issued, is fully paid and non-assessable and, to
the best of such counsel's knowledge, is owned by the Company, directly
or through subsidiaries, free and clear of any security interest,
mortgage, pledge, lien, encumbrance, claim or equity (except that the
Company has pledged all shares of stock in the Subsidiaries to Silicon
Valley Bank to secure the line of credit described in the Prospectus);
none of the outstanding shares of capital stock of any Subsidiary was
issued in violation of the preemptive or similar rights of any
securityholder of such Subsidiary arising by operation of law, under
the charter or by-laws of such Subsidiary, or, to the best of such
counsel's knowledge, under any agreement to which such Subsidiary is a
party or otherwise.
(viii) This Agreement has been duly authorized,
executed and delivered by the Company.
<PAGE> 27
(ix) The Registration Statement, including any Rule
462(b) Registration Statement, has been declared effective under the
1933 Act; any required filing of the Prospectus pursuant to Rule 424(b)
has been made in the manner and within the time period required by Rule
424(b); and, to the best of such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement or any Rule
462(b) Registration Statement has been issued under the 1933 Act and,
to the best of such counsel's knowledge, no proceedings for that
purpose have been instituted or are pending or threatened by the
Commission.
(x) The Registration Statement, including any Rule
462(b) Registration Statement, the Rule 430A Information and the Rule
434 Information, as applicable, the Prospectus, and each amendment or
supplement to the Registration Statement and Prospectus, as of their
respective effective or issue dates (other than the financial
statements and supporting schedules included therein or omitted
therefrom, as to which such counsel need express no opinion) complied
as to form in all material respects with the requirements of the 1933
Act and the 1933 Act Regulations.
(xi) If Rule 434 has been relied upon, the Prospectus
was not "materially different," as such term is used in Rule 434, from
the prospectus included in the Registration Statement at the time it
became effective.
(xii) The form of certificate used to evidence the
Common Stock complies in all material respects with all applicable
statutory requirements, with any applicable requirements of the charter
and by-laws of the Company and the requirements of the Nasdaq National
Market.
(xiii) To the best of such counsel's knowledge, there is
not pending or threatened any action, suit, proceeding, inquiry or
investigation, to which the Company or any Subsidiary is a party, or to
which the property of the Company or any Subsidiary is subject, before
or brought by any court or governmental agency or body, domestic or
foreign, which might reasonably be expected to result in a
<PAGE> 28
Material Adverse Effect, or which might reasonably be expected to
materially and adversely affect the properties or assets thereof or the
consummation of the transactions contemplated in this Agreement or the
performance by the Company of its obligations thereunder.
(xiv) The information in the Prospectus under the
captions "Business -- Legal Proceedings," "Management -- Stock Plans,"
"Description of Capital Stock" and "Shares Eligible for Future Sale"
and in the Registration Statement under Items 14 and 15, to the extent
that it constitutes matters of law, summaries of legal matters, the
Company's charter, bylaws or employee benefit plans or legal
proceedings, or legal conclusions, has been reviewed by such counsel
and is correct in all material respects.
(xv) To the best of such counsel's knowledge, there
are no statutes or regulations that are required to be described in the
Prospectus that are not described as required.
(xvi) All descriptions in the Registration Statement of
contracts and other documents to which the Company or its Subsidiaries
are a party are accurate in all material respects; to the best of such
counsel's knowledge, there are no franchises, contracts, indentures,
mortgages, loan agreements, notes, leases or other instruments required
to be described or referred to in the Registration Statement or to be
filed as exhibits thereto other than those described or referred to
therein or filed or incorporated by reference as exhibits thereto, and
the descriptions thereof or references thereto are correct in all
material respects.
(xvii) To the best of such counsel's knowledge, neither
the Company nor any Subsidiary is in violation of its charter or
by-laws and no default by the Company or any Subsidiary exists in the
due performance or observance of any material obligation, agreement,
covenant or condition contained in any contract, indenture, mortgage,
loan agreement, note, lease or other agreement or instrument that is
described or referred to in the Registration Statement or the
Prospectus or filed or incorporated by reference as an exhibit to the
Registration Statement.
<PAGE> 29
(xviii) No filing with, or authorization, approval,
consent, license, order, registration, qualification or decree of, any
court or governmental authority or agency, domestic or foreign (other
than under the 1933 Act and the 1933 Act Regulations, which have been
obtained, or as may be required under the securities or blue sky laws
of the various states, as to which such counsel need express no
opinion) is necessary or required in connection with the due
authorization, execution and delivery of this Agreement or for the
offering, issuance, sale or delivery of the Securities.
(xix) The execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated in this
Agreement and in the Registration Statement (including the issuance and
sale of the Securities) and compliance by the Company with its
obligations under this Agreement do not and will not, whether with or
without the giving of notice or lapse of time or both, conflict with or
constitute a breach of, or default or Repayment Event (as defined in
Section 1(a)(x) of this Agreement) under or result in the creation or
imposition of any lien, charge or encumbrance upon any property or
assets of the Company or any Subsidiary pursuant to any contract,
indenture, mortgage, deed of trust, loan or credit agreement, note,
lease or any other agreement or instrument, known to such counsel, to
which the Company or any Subsidiary is a party or by which it or any of
them may be bound, or to which any of the property or assets of the
Company or any Subsidiary is subject (except for such conflicts,
breaches or defaults or liens, charges or encumbrances that would not
have a Material Adverse Effect), nor will such action result in any
violation of the provisions of the charter or by-laws of the Company or
any Subsidiary, or any applicable law, statute, rule, regulation,
judgment, order, writ or decree, known to such counsel, of any
government, government instrumentality or court, domestic or foreign,
having jurisdiction over the Company or any Subsidiary or any of their
respective properties, assets or operations.
<PAGE> 30
(xx) To the best of such counsel's knowledge, there
are no persons with registration rights or other similar rights, which
have not been satisfied or waived, to have any securities registered
pursuant to the Registration Statement or otherwise registered by the
Company under the 1933 Act.
(xxi) The Company is not, and upon the issuance and
sale of the Securities as contemplated in this Agreement and the
application of the net proceeds therefrom as described in the
Prospectus will not be, an "investment company" or an entity
"controlled" by an "investment company," as such terms are defined in
the 1940 Act.
Such opinion shall also include a statement to the effect that
nothing has come to such counsel's attention that would lead it to
believe that the Registration Statement or any amendment thereto,
including the Rule 430A Information and Rule 434 Information (if
applicable), (except for financial statements and schedules and other
financial data included therein or omitted therefrom, as to which such
counsel need make no statement), at the time such Registration
Statement or any such amendment became effective, contained an untrue
statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading or that the Prospectus or any amendment or
supplement thereto (except for financial statements and schedules and
other financial data included therein or omitted therefrom, as to which
such counsel need make no statement), at the time the Prospectus was
issued, at the time any such amended or supplemented prospectus was
issued or at the Closing Time, included or includes an untrue statement
of a material fact or omitted or omits to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
In rendering such opinion, such counsel may rely as to matters of fact
(but not as to legal conclusions), to the extent they deem proper, on
certificates of responsible officers of the Company and public officials, and as
to matters governed by the laws of states other than the Commonwealth of
Massachusetts, the Delaware General Corporation Law or Federal laws, on local
<PAGE> 31
counsel in such jurisdictions. Such opinion shall not state that it is to be
governed or qualified by, or that it is otherwise subject to, any treatise,
written policy or other document relating to legal opinions, including, without
limitation, the Legal Opinion Accord of the ABA Section of Business Law (1991).
(c) Opinion of Counsel for the Selling Shareholders. At Closing Time,
the Representatives shall have received the favorable opinion, dated as of
Closing Time, of ________, counsel for the Selling Shareholders, in form and
substance satisfactory to counsel for the Underwriters, to the effect that:
(i) No filing with, or consent, approval, authorization,
license, order, registration, qualification or decree of, any court or
governmental authority or agency, domestic or foreign, (other than the
issuance of the order of the Commission declaring the Registration
Statement effective and such authorizations, approvals or consents as
may be necessary under state securities laws, as to which such counsel
need express no opinion) is necessary or required to be obtained by the
Selling Shareholders for the performance by each Selling Shareholder of
its obligations under this Agreement or in the Power of Attorney and
Custody Agreement, or in connection with the offer, sale or delivery of
the Securities.
(ii) Each Power of Attorney and Custody Agreement has been
duly executed and delivered by the respective Selling Shareholder named
therein and constitutes the legal, valid and binding agreement of such
Selling Shareholder.
(iii) This Agreement has been duly authorized, executed and
delivered by or on behalf of each Selling Shareholder.
(iv) Each Attorney-in-Fact has been duly authorized by the
Selling Shareholders to deliver the Securities on behalf of the Selling
Shareholders in accordance with the terms of this Agreement.
(v) The execution, delivery and performance of this
Agreement and the Power of Attorney and Custody Agreement
<PAGE> 32
and the sale and delivery of the Securities and the consummation of the
transactions contemplated in this Agreement and in the Registration
Statement and compliance by the Selling Shareholders with their
obligations under this Agreement have been duly authorized by all
necessary action on the part of the Selling Shareholders and do not and
will not, whether with or without the giving of notice or passage of
time or both, conflict with or constitute a breach of, or default under
or result in the creation or imposition of any tax, lien, charge or
encumbrance upon the Securities or any property or assets of the
Selling Shareholders pursuant to, any contract, indenture, mortgage,
deed of trust, loan or credit agreement, note, license, lease or other
instrument or agreement to which any Selling Shareholder is a party or
by which it may be bound, or to which any of the property or assets of
the Selling Shareholders may be subject nor will such action result in
any violation of the provisions of the charter or by-laws of the
Selling Shareholders, if applicable, or any law, administrative
regulation, judgment or order of any governmental agency or body or any
administrative or court decree having jurisdiction over such Selling
Shareholder or any of its properties.
(vi) To the best of such counsel's knowledge, each Selling
Shareholder has valid and marketable title to the Securities to be sold
by such Selling Shareholder pursuant to this Agreement, free and clear
of any pledge, lien, security interest, charge, claim, equity or
encumbrance of any kind, and has full right, power and authority to
sell, transfer and deliver such Securities pursuant to this Agreement.
By delivery of a certificate or certificates therefor, such Selling
Shareholder will transfer to the Underwriters who have purchased such
Securities pursuant to this Agreement (without notice of any defect in
the title of such Selling Shareholder and who are otherwise bona fide
purchasers for purposes of the Uniform Commercial Code) valid and
marketable title to such Securities, free and clear of any pledge,
lien, security interest, charge, claim, equity or encumbrance of any
kind.
(d) Opinion of Counsel for Underwriters. At Closing Time,
the Representatives shall have received the favorable opinion,
dated as of Closing Time, of Hale and Dorr, counsel for the
<PAGE> 33
Underwriters, with respect to the matters set forth in clauses (i), (ii), (v),
(vi) (solely as to preemptive or other similar rights arising by operation of
law or under the charter or by-laws of the Company), (viii) through (x),
inclusive, (xii) and (xiv) (solely as to the information in the Prospectus under
the caption "Description of Capital Stock -- Common Stock") of Section 5(b) of
this Agreement. Such opinion shall also include a statement to the effect of the
penultimate paragraph of such Section 5(b). In giving such opinion such counsel
may rely, as to all matters governed by the laws of jurisdictions other than the
federal law of the United States and the General Corporation Law statute of the
State of Delaware, upon the opinions of counsel satisfactory to the
Representatives. Such counsel may also state that, insofar as such opinion
involves factual matters, they have relied, to the extent they deem proper, upon
certificates of officers of the Company and its subsidiaries and certificates of
public officials.
(e) Officers' Certificate. At Closing Time, there shall not have been,
since the date hereof or since the respective dates as of which information is
given in the Prospectus, any material adverse change in the condition, financial
or otherwise, or in the earnings, business affairs or business prospects of the
Company and its Subsidiaries considered as one enterprise, whether or not
arising in the ordinary course of business, and the Representatives shall have
received a certificate of the President or a Vice President of the Company and
of the chief financial or chief accounting officer of the Company, dated as of
Closing Time, to the effect that (i) there has been no such material adverse
change, (ii) the representations and warranties in Section 1(a) hereof are true
and correct with the same force and effect as though expressly made at and as of
Closing Time, (iii) the Company has complied with all agreements and satisfied
all conditions on its part to be performed or satisfied at or prior to Closing
Time, and (iv) no stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have been
instituted or are pending or are contemplated by the Commission.
(f) Certificate of Selling Shareholders. At Closing Time, the
Representatives shall have received a certificate of the Attorney-in-Fact on
behalf of each Selling Shareholder, dated as
<PAGE> 34
of Closing Time, to the effect that (i) the representations and warranties of
each Selling Shareholder contained in Section 1(b) hereof are true and correct
in all respects with the same force and effect as though expressly made at and
as of Closing Time and (ii) each Selling Shareholder has complied in all
material respects with all agreements and all conditions on its part to be
performed under this Agreement at or prior to Closing Time.
(g) Accountant's Comfort Letter. At the time of the execution of this
Agreement, the Representatives shall have received from Deloitte & Touche LLP a
letter, dated such date, in form and substance satisfactory to the
Representatives, containing statements and information of the type ordinarily
included in accountants' "comfort letters" to underwriters with respect to the
financial statements and certain financial information contained in the
Registration Statement and the Prospectus.
(h) Bring-down Comfort Letter. At Closing Time, the Representatives
shall have received from Deloitte & Touche LLP a letter, dated as of Closing
Time, to the effect that they reaffirm the statements made in the letter
furnished pursuant to subsection (g) of this Section , except that the specified
date referred to shall be a date not more than three business days prior to
Closing Time.
(i) Approval of Listing. At Closing Time, the Common Stock (including
the Securities) shall have been approved for inclusion in the Nasdaq National
Market, subject only to official notice of issuance.
(j) No Objection. The NASD has confirmed that it has not raised any
objection with respect to the fairness and reasonableness of the underwriting
terms and arrangements.
(k) Lock-up Agreements. At the date of this Agreement, the
Representatives shall have received 180-day lock-up agreements substantially in
the form previously delivered to the Company by counsel to the Underwriters,
signed by all officers, directors and shareholders of the Company, and by the
holders of options to purchase at least the number of shares of Common Stock
indicated in the Prospectus as being subject to such lock-up agreements.
<PAGE> 35
(l) Conditions to Purchase of Option Securities. In the event that the
Underwriters exercise their option provided in Section 2(b) hereof to purchase
all or any portion of the Option Securities, the representations and warranties
of the Company and the Selling Shareholders contained herein and the statements
in any certificates furnished by the Company and the Selling Shareholders and
any Subsidiary of the Company hereunder shall be true and correct as of each
Date of Delivery and, at the relevant Date of Delivery, the Representatives
shall have received:
(i) Officers' Certificate. A certificate, dated such Date of
Delivery, of the President or a Vice President of the Company and of
the chief financial or chief accounting officer of the Company
confirming that the certificate delivered at the Closing Time pursuant
to Section 5(e) hereof remains true and correct as of such Date of
Delivery.
(ii) Certificate of Selling Shareholders. A certificate, dated
such Date of Delivery, of the Attorney-in-Fact on behalf of each
Selling Shareholder confirming that the certificate delivered at
Closing Time pursuant to Section 5(f) remains true and correct as of
such Date of Delivery.
(iii) Opinion of Counsel for Company. The favorable opinion of
Testa, Hurwitz & Thibeault, LLP, counsel for the Company, in form and
substance satisfactory to counsel for the Underwriters, dated such Date
of Delivery, relating to the Option Securities to be purchased on such
Date of Delivery and otherwise to the same effect as the opinion
required by Section 5(b) hereof.
(iv) Opinion of Counsel for the Selling Shareholders. The
favorable opinion of ________________, counsel for the Selling
Shareholders, in form and substance satisfactory to counsel for the
Underwriters, dated such Date of Delivery, relating to the Option
Securities to be purchased on such Date of Delivery and otherwise to
the same effect as the opinion required by Section 5(c) hereof.
(v) Opinion of Counsel for Underwriters. The favorable opinion
of Hale and Dorr, counsel for the
<PAGE> 36
Underwriters, dated such Date of Delivery, relating to the Option
Securities to be purchased on such Date of Delivery and otherwise to
the same effect as the opinion required by Section 5(d) hereof.
(vi) Bring-down Comfort Letter. A letter from Deloitte & Touche
LLP, in form and substance satisfactory to the Representatives and
dated such Date of Delivery, substantially in the same form and
substance as the letter furnished to the Representatives pursuant to
Section 5(h) hereof, except that the "specified date" in the letter
furnished pursuant to this paragraph shall be a date not more than five
days prior to such Date of Delivery.
(m) Additional Documents. At Closing Time and at each Date of Delivery
counsel for the Underwriters shall have been furnished with such documents and
opinions as they may require for the purpose of enabling them to pass upon the
issuance and sale of the Securities as herein contemplated, or in order to
evidence the accuracy of any of the representations or warranties, or the
fulfillment of any of the conditions, herein contained; and all proceedings
taken by the Company and the Selling Shareholders in connection with the
issuance and sale of the Securities as herein contemplated shall be satisfactory
in form and substance to the Representatives and counsel for the Underwriters.
(n) Termination of Agreement. If any condition specified in this
Section shall not have been fulfilled when and as required to be fulfilled, this
Agreement, or, in the case of any condition to the purchase of Option Securities
on a Date of Delivery which is after the Closing Time, the obligations of the
several Underwriters to purchase the relevant Option Securities, may be
terminated by the Representatives by notice to the Company at any time at or
prior to Closing Time or such Date of Delivery, as the case may be, and such
termination shall be without liability of any party to any other party except as
provided in Section 4 and except that Sections 1, 6, 7 and 8 shall survive any
such termination and remain in full force and effect.
SECTION 6. Indemnification.
(a) Indemnification of Underwriters. The Company and the Selling
Shareholders, jointly and severally, agree to indemnify
<PAGE> 37
and hold harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, arising out of any untrue statement or
alleged untrue statement of a material fact contained in the
Registration Statement (or any amendment thereto), including the Rule
430A Information and the Rule 434 Information, if applicable, or the
omission or alleged omission therefrom of a material fact required to
be stated therein or necessary to make the statements therein not
misleading or arising out of any untrue statement or alleged untrue
statement of a material fact included in any preliminary prospectus or
the Prospectus (or any amendment or supplement thereto), or the
omission or alleged omission therefrom of a material fact necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, to the extent of the aggregate amount
paid in settlement of any litigation, or any investigation or
proceeding by any governmental agency or body, commenced or threatened,
or of any claim whatsoever based upon any such untrue statement or
omission, or any such alleged untrue statement or omission provided
that (subject to Section 6(d) below) any such settlement is effected
with the written consent of the Company and the Selling Shareholders;
and
(iii) against any and all expense whatsoever, as incurred
(including the fees and disbursements of counsel chosen by Merrill
Lynch), reasonably incurred in investigating, preparing or defending
against any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim
whatsoever based upon any such untrue statement or omission, or any
such alleged untrue statement or omission, to the extent that any such
expense is not paid under (i) or (ii) above;
<PAGE> 38
provided, however that this indemnity agreement shall not (i) apply to
any loss, liability, claim, damage or expense to the extent arising out
of any untrue statement or omission or alleged untrue statement or
omission made in reliance upon and in conformity with written
information furnished to the Company by any Underwriter through Merrill
Lynch expressly for use in the Registration Statement (or any amendment
thereto), including the Rule 430A Information and the Rule 434
Information, if applicable, or any preliminary prospectus or the
Prospectus (or any amendment or supplement thereto) or (ii) inure to
the benefit of any Underwriter from whom the person asserting any loss,
liability, claim, damage or expense purchased Securities, or any person
controlling such Underwriter, if a copy of the Prospectus (as then
amended or supplemented if the Company shall have furnished any
amendments or supplements thereto) was not sent or given by or on
behalf of such Underwriter to such person, if required by law to have
been so delivered, at or prior to the written confirmation of such
Securities to such person, and if the Prospectus (as so amended or
supplemented) would have cured any defect giving rise to such loss,
liability, claim, damage or expense; and further provided that each
Selling Shareholder's aggregate liability under this Section 6 shall be
limited to an amount equal to the net proceeds (after deducting the
underwriting discount, but before deducting expenses) received by such
Selling Shareholder from the sale of Securities pursuant to this
Agreement.
(b) Indemnification of Company, Directors and Officers and
Selling Shareholders. Each Underwriter severally agrees to indemnify
and hold harmless the Company, its directors, each of its officers who
signed the Registration Statement, and each person, if any, who
controls the Company within the meaning of Section 15 of the 1933 Act
or Section 20 of the 1934 Act, and each Selling Shareholder and each
person, if any, who controls any Selling Shareholder within the meaning
of Section 15 of the 1933 Act or Section 20 of the 1934 Act against any
and all loss, liability, claim, damage and expense described in the
indemnity contained in subsection (a) of this Section , as incurred,
but only with respect to untrue statements or omissions, or alleged
untrue statements or omissions, made in the Registration Statement (or
any amendment thereto), including the Rule 430A Information and
<PAGE> 39
the Rule 434 Information, if applicable, or any preliminary prospectus
or the Prospectus (or any amendment or supplement thereto) in reliance
upon and in conformity with written information furnished to the
Company by such Underwriter through Merrill Lynch expressly for use in
the Registration Statement (or any amendment thereto) or such
preliminary prospectus or the Prospectus (or any amendment or
supplement thereto).
(c) Actions against Parties; Notification. Each indemnified party shall
give notice as promptly as reasonably practicable to each indemnifying party of
any action commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify all indemnifying party shall not relieve
such indemnifying party from any liability hereunder to the extent it is not
materially prejudiced as a result thereof and in any event shall not relieve it
from any liability which it may have otherwise than on account of this indemnity
agreement. In the case of parties indemnified pursuant to Section 6(a) above,
counsel to the indemnified parties shall be selected by Merrill Lynch, and, in
the case of parties indemnified pursuant to Section 6(b) above, counsel to the
indemnified parties shall be selected by the Company or the Selling
Shareholders. An indemnifying party may participate at its own expense in the
defense of any such action; provided, however, that counsel to the indemnifying
party shall not (except with the consent of the indemnified party) also be
counsel to the indemnified party. In no event shall the indemnifying parties be
liable for fees and expenses of more than one counsel (in addition to any local
counsel) separate from their own counsel for all indemnified parties in
connection with any one action or separate but similar or related actions in the
same jurisdiction arising out of the same general allegations or circumstances.
No indemnifying party shall, without the prior written consent of the
indemnified parties, settle or compromise or consent to the entry of any
judgment with respect to any litigation, or any investigation or proceeding by
any governmental agency or body, commenced or threatened, or any claim
whatsoever in respect of which indemnification or contribution could be sought
under this Section 6 or Section 7 hereof (whether or not the indemnified parties
are actual or potential parties thereto), unless such settlement, compromise or
consent (i) includes an unconditional
<PAGE> 40
release of each indemnified party from all liability arising out of such
litigation, investigation, proceeding or claim and (ii) does not include a
statement as to or an admission of fault, culpability or a failure to act by or
on behalf of any indemnified party.
(d) Settlement without Consent if Failure to Reimburse. If at any time
an indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel, such indemnifying party
agrees that it shall be liable for any settlement of the nature contemplated by
Section 6(a)(ii) effected without its written consent if (i) such settlement is
entered into more than 45 days after receipt by such indemnifying party of the
aforesaid request, (ii) such indemnifying party shall have received notice of
the terms of such settlement at least 30 days prior to such settlement being
entered into and (iii) such indemnifying party shall not have reimbursed such
indemnified party in accordance with such request prior to the date of such
settlement.
SECTION 7. Contribution. If the indemnification provided for in Section
6 hereof is for any reason unavailable to or insufficient to hold harmless an
indemnified party in respect of any losses, liabilities, claims, damages or
expenses referred to therein, then each indemnifying party shall contribute to
the aggregate amount of such losses, liabilities, claims, damages and expenses
incurred by such indemnified party, as incurred, (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company and the
Selling Shareholders on the one hand and the Underwriters on the other hand from
the offering of the Securities pursuant to this Agreement or (ii) if the
allocation provided by clause (i) is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of the Company and the
Selling Shareholders on the one hand and of the Underwriters on the other hand
in connection with the statements or omissions which resulted in such losses,
liabilities, claims, damages or expenses, as well as any other relevant
equitable considerations. Neither the Company, any Selling Shareholder nor any
Underwriter shall in any case be required to contribute any amounts under this
Section 7 which in the aggregate exceed the amount of indemnification payments
that the Company, such Selling Shareholder or Underwriter, as the case may be,
would otherwise
<PAGE> 41
have been obligated to make under Section 6 above, had the indemnification
provided for in such Section 6 been available.
The relative benefits received by the Company and the Selling
Shareholders on the one hand and the Underwriters on the other hand in
connection with the offering of the Securities pursuant to this Agreement shall
be deemed to be in the same respective proportions as the total net proceeds
from the offering of the Securities pursuant to this Agreement (before deducting
expenses) received by the Company and the Selling Shareholders and the total
underwriting discount received by the Underwriters, in each case as set forth on
the cover of the Prospectus, or, if Rule 434 is used, the corresponding location
on the Term Sheet bear to the aggregate initial public offering price of the
Securities as set forth on such cover.
The relative fault of the Company and the Selling Shareholders on the
one hand and the Underwriters on the other hand shall be determined by reference
to, among other things, whether any such untrue or alleged untrue statement of a
material fact or omission or alleged omission to state a material fact relates
to information supplied by the Company or the Selling Shareholders or by the
Underwriters and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission.
The Company, the Selling Shareholders and the Underwriters agree that
it would not be just and equitable if contribution pursuant to this Section 7
were determined by pro rata allocation (even if the Underwriters were treated as
one entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to above in this Section
7. The aggregate amount of losses, liabilities, claims, damages and expenses
incurred by an indemnified party and referred to above in this Section 7 shall
be deemed to include any legal or other expenses reasonably incurred by such
indemnified party in investigating, preparing or defending against any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever based upon any such
untrue or alleged untrue statement or omission or alleged omission.
<PAGE> 42
Notwithstanding the provisions of this Section 7, no Underwriter shall
be required to contribute any amount in excess of the amount by which the total
price at which the Securities underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of any such untrue or
alleged untrue statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls an
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act shall have the same rights to contribution as such Underwriter, and
each director of the Company, each officer of the Company who signed the
Registration Statement, and each person, if any, who controls the Company or any
Selling Shareholder within the meaning of Section 15 of the 1933 Act or Section
20 of the 1934 Act shall have the same rights to contribution as the Company or
such Selling Shareholder, as the case may be. The Underwriters' respective
obligations to contribute pursuant to this Section 7 are several in proportion
to the number of Initial Securities set forth opposite their respective names in
Schedule A hereto and not joint.
The provisions of this Section shall not affect any agreement among the
Company and the Selling Shareholders with respect to contribution.
SECTION 8. Representations, Warranties and Agreements to Survive
Delivery. All representations, warranties and agreements contained in this
Agreement or in certificates of officers of the Company or any of its
subsidiaries or the Selling Shareholders submitted pursuant hereto, shall remain
operative and in full force and effect, regardless of any investigation made by
or on behalf of any Underwriter or controlling person, or by or on behalf of the
Company or the Selling Shareholders and shall survive delivery of the Securities
to the Underwriters.
SECTION 9. Termination of Agreement.
<PAGE> 43
(a) Termination; General. The Representatives may terminate this
Agreement, by notice to the Company and the Selling Shareholders, at any time at
or prior to Closing Time (i) if there has been, since the time of execution of
this Agreement or since the respective dates as of which information is given in
the Prospectus, any material adverse change in the condition, financial or
otherwise, or in the earnings, business affairs or business prospects of the
Company and its subsidiaries considered as one enterprise, whether or not
arising in the ordinary course of business, or (ii) if there has occurred any
material adverse change in the financial markets in the United States or the
international financial markets, any outbreak of hostilities or escalation
thereof or other calamity or crisis or any change or development involving a
prospective change in national or international political, financial or economic
conditions, in each case the effect of which is such as to make it, in the
judgment of the Representatives, impracticable to market the Securities or to
enforce contracts for the sale of the Securities, or (iii) if trading in any
securities of the Company has been suspended or materially limited by the
Commission or the Nasdaq National Market, or if trading generally on the
American Stock Exchange or the New York Stock Exchange or in the Nasdaq National
Market has been suspended or materially limited, or minimum or maximum prices
for trading have been fixed, or maximum ranges for prices have been required, by
any of said exchanges or by such system or by order of the Commission, the
National Association of Securities Dealers, Inc. or any other governmental
authority, or (iv) if a banking moratorium has been declared by either Federal
or New York authorities.
(b) Liabilities. If this Agreement is terminated pursuant to this
Section , such termination shall be without liability of any party to any other
party except as provided in Section 4 hereof, and provided further that Sections
1, 6, 7 and 8 shall survive such termination and remain in full force and
effect.
SECTION 10. Default by One or More of the Underwriters. If one or more
of the Underwriters shall fail at Closing Time or a Date of Delivery to purchase
the Securities which it or they are obligated to purchase under this Agreement
(the "Defaulted Securities"), the Representatives shall have the right, within
24 hours thereafter, to make arrangements for one or more of the
<PAGE> 44
non-defaulting Underwriters, or any other underwriters, to purchase all, but not
less than all, of the Defaulted Securities in such amounts as may be agreed upon
and upon the terms herein set forth; if, however, the Representatives shall not
have completed such arrangements within such 24-hour period, then:
(a) if the number of Defaulted Securities does not exceed 10% of the
number of Securities to be purchased on such date, each of the non-defaulting
Underwriters shall be obligated, severally and not jointly, to purchase the full
amount thereof in the proportions that their respective underwriting obligations
hereunder bear to the underwriting obligations of all non-defaulting
Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the number of
Securities to be purchased on such date, this Agreement or, with respect to any
Date of Delivery which occurs after the Closing Time, the obligation of the
Underwriters to purchase and of the Company to sell the Option Securities to be
purchased and sold on such Date of Delivery shall terminate without liability on
the part of any non-defaulting Underwriter.
No action taken pursuant to this Section shall relieve any defaulting
Underwriter from liability in respect of its default.
In the event of any such default which does not result in a termination
of this Agreement or, in the case of a Date of Delivery which is after the
Closing Time, which does not result in a termination of the obligation of the
Underwriters to purchase and the Company to sell the relevant Option Securities,
as the case may be, either the (i) Representatives or (ii) the Company and any
Selling Shareholder shall have the right to postpone Closing Time or the
relevant Date of Delivery, as the case may be, for a period not exceeding seven
days in order to effect any required changes in the Registration Statement or
Prospectus or in any other documents or arrangements. As used herein, the term
"Underwriter" includes any person substituted for an Underwriter under this
Section 10.
SECTION 11. Default by one or more of the Selling Shareholders or the
Company.
(a) If a Selling Shareholder shall fail at a Date of Delivery to sell
and deliver the number of Securities which such
<PAGE> 45
Selling Shareholder is obligated to sell hereunder, and the remaining Selling
Shareholders do not exercise the right hereby granted to increase, pro rata or
otherwise, the number of Securities to be sold by them hereunder to the total
number to be sold by all Selling Shareholders as set forth in Schedule B hereto,
then the Underwriters may, at the option of the Representatives, by notice from
the Representatives to the Company and the non-defaulting Selling Shareholders,
either (a) terminate this Agreement without any liability on the fault of any
non-defaulting party except that the provisions of Sections 1, 4, 6, 7 and 8
shall remain in full force and effect or (b) elect to purchase the Securities
which the non-defaulting Selling Shareholders and the Company have agreed to
sell hereunder. No action taken pursuant to this Section 11 shall relieve any
Selling Shareholder so defaulting from liability, if any, in respect of such
default.
In the event of a default by any Selling Shareholder as referred to in
this Section 11, each of the Representatives and the non-defaulting Selling
Shareholders shall have the right to postpone the Date of Delivery for a period
not exceeding seven days in order to effect any required change in the
Registration Statement or Prospectus or in any other documents or arrangements.
(b) If the Company shall fail at Closing Time or at the Date of
Delivery to sell the number of Securities that it is obligated to sell
hereunder, then this Agreement shall terminate without any liability on the part
of any nondefaulting party; provided, however, that the provisions of Sections
1, 4, 6, 7 and 8 shall remain in full force and effect. No action taken pursuant
to this Section shall relieve the Company from liability, if any, in respect of
such default.
SECTION 12. Notices. All notices and other communications hereunder
shall be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the
Underwriters shall be directed to the Representatives in care of Merrill Lynch
at North Tower, World Financial Center, New York, New York 10281-1201, attention
of Larry Santoro, Director and Wood Steinberg, Esq.; to Montgomery at 600
Montgomery Street, San Francisco, California
<PAGE> 46
94111, attention of __________; and to Oppenheimer at Oppenheimer Tower, World
Financial Center, 200 Liberty Street, New York, New York 10281, attention of
__________; in each case with a copy to Hale and Dorr, 1455 Pennsylvania Avenue,
N.W., Suite 1000, Washington, D.C. 20004, attention of Brent B. Siler, Esq.;
notices to the Company shall be directed to it at 11781 Lee Jackson Memorial
Highway, Suite 600, Fairfax, Virginia 22033, attention of ________, with a copy
to Testa, Hurwitz & Thibeault, LLP, High Street Tower, 125 High Street, Boston,
Massachusetts 02110, attention of Lawrence S. Wittenberg, Esq.; notices to the
Selling Shareholders shall be directed to ____________, attention of
____________, with a copy to ______________________.
SECTION 13. Parties. This Agreement shall each inure to the benefit of
and be binding upon the Underwriters, the Company and the Selling Shareholders
and their respective successors. Nothing expressed or mentioned in this
Agreement is intended or shall be construed to give any person, firm or
corporation, other than the Underwriters, the Company, the Selling Shareholders
and their respective successors and the controlling persons and officers and
directors referred to in Sections 6 and 7 and their heirs and legal
representatives, any legal or equitable right, remedy or claim under or in
respect of this Agreement or any provision herein contained. This Agreement and
all conditions and provisions hereof are intended to be for the sole and
exclusive benefit of the Underwriters, the Company, the Selling Shareholders and
their respective successors, and said controlling persons and officers and
directors and their heirs and legal representatives, and for the benefit of no
other person, firm or corporation. No purchaser of Securities from any
Underwriter shall be deemed to be a successor by reason merely of such purchase.
SECTION 14. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. SPECIFIED
TIMES OF DAY REFER TO NEW YORK CITY TIME.
SECTION 15. Effect of Headings. The Article and Section headings herein
are for convenience only and shall not affect the construction hereof.
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company and the
<PAGE> 47
Attorney-in-Fact for the Selling Shareholders a counterpart hereof, whereupon
this instrument, along with all counterparts, will become a binding agreement
among the Underwriters, the Company and the Selling Shareholders in accordance
with its terms.
Very truly yours,
VERSATILITY INC.
By: __________________________
Name:
Title:
SELLING SHAREHOLDERS
By:___________________________
As Attorney-in-Fact acting
on behalf of the Selling
Shareholders named in
Schedule B hereto
<PAGE> 48
CONFIRMED AND ACCEPTED, as of the date first above written:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
MONTGOMERY SECURITIES
OPPENHEIMER & CO., INC.
By: MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By: ______________________________________
Authorized Signatory
For themselves and as Representative of
the other Underwriters named in
Schedule A hereto.
<PAGE> 49
SCHEDULE A
<TABLE>
<CAPTION>
Number of
Initial
Name of Underwriter Securities
------------------- ----------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.......................
Montgomery Securities..............................
Oppenheimer & Co., Inc.............................
---------
Total ................................. 2,200,000
=========
</TABLE>
Sch A-1
<PAGE> 50
SCHEDULE B
<TABLE>
<CAPTION>
Maximum Number of Option
Securities to Be Sold
---------------------
<S> <C>
Versatility Inc. .................................... 131,588
Edison Venture
Fund III, L.P. ................................. 113,378
Noro-Moseley
Partners III, L.P. ............................. 85,034
-------
Total ............................................... 330,000
</TABLE>
Sch B-1
<PAGE> 51
SCHEDULE C
VERSATILITY INC.
2,200,000 Shares of Common Stock
(Par Value $.01 Per Share)
1. The initial public offering price per share for the
Securities, determined as provided in Section 2, shall be $_____.
2. The purchase price per share for the Securities to be paid by the
several Underwriters shall be $____, being an amount equal to the initial public
offering price set forth above less $____ per share; provided that the purchase
price per share for any Option Securities purchased upon the exercise of the
over-allotment option described in Section 2(b) shall be reduced by an amount
per share equal to any dividends or distributions declared by the Company and
payable on the Initial Securities but not payable on the Option Securities.
Sch C-1
<PAGE> 52
SCHEDULE D
Jurisdictions of Qualification as a Foreign Corporation
to Transact Business
Sch D-1
<PAGE> 1
EXHIBIT 3.1
-----------
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
NPRI, INC.
The undersigned, a natural person, for the purpose of amending and
restating the Certificate of Incorporation of NPRI, Inc., originally filed on
January 3, 1996, under the provisions and subject to the requirements of the
laws of the State of Delaware (particularly Chapter 1, Title 8 of the Delaware
Code, as amended, and referred to as the "General Corporation Law of the State
of Delaware" and Section 245 thereof), hereby certifies that:
FIRST
The name of the corporation is:
NPRI, INC.
SECOND
The address of the registered office of the corporation in the State of
Delaware is 1013 Centre Road, City of Wilmington, County of New Castle, and the
name of the corporation's registered agent in the State of Delaware is The
Prentice-Hall Corporation System, Inc.
THIRD
The purpose of the corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of the
State of Delaware.
FOURTH
The total number of shares of stock which the corporation shall have
authority to issue is 20,000,000 shares of common stock having a par value of
$.01 per share and 992,061 shares of Series A preferred stock having a par value
of $.01 per share.
The board of directors of the Corporation is authorized, subject to the
limitations prescribed by law, to provide by resolution or resolutions for the
issuance of the shares of preferred stock as a class or in series, and, by
filing a certificate of designations, pursuant to the General Corporation Law of
the State of Delaware, setting forth a copy of such resolution or resolutions to
establish from time to time the number of shares to be included in each such
series and to fix the designation, powers, preferences and rights of the shares
of the class or of each such series and the qualifications,
<PAGE> 2
-2-
limitations, and restrictions thereof. The authority of the board of directors
with respect to the class or each series shall include, but not be limited to,
determination of the following:
a) the number of shares constituting any series and the distinctive
designation of that series;
b) the dividend rate of the shares of the class or of any series, whether
dividends shall be cumulative, and if so, from which date or dates, and the
relative rights of priority, if any of payment of dividends on shares of the
class or of that series;
c) whether the class or any series shall have voting rights, in addition to
the voting rights provided by law, and if so, the terms of such voting rights;
d) whether the class or any series shall have conversion privileges, and if
so, the terms and conditions of conversion, including provision for adjustment
of the conversion rate in such events as the board of directors shall determine;
e) whether or not the shares of the class or of any series shall be
redeemable, and if so, the terms and conditions of such redemption, including
the date or date upon or after which they shall be redeemable and the amount per
share payable in case of redemption, which amount may vary under different
conditions and at different redemption dates;
f) whether the class or any series shall have a sinking fund for the
redemption or purchase of shares of the class or of that series, and if so, the
terms and amount of such sinking fund;
g) the rights of the shares of the class or of any series in the event of
voluntary or involuntary dissolution or winding up of the corporation, and the
relative rights of priority, if any, of payment of shares of the class or of
that series; and
h) any other powers, preferences, rights, qualifications, limitations and
restrictions of the class or of that series.
All rights accruing to the outstanding shares of the Corporation not
expressly provided for to the contrary herein or in any certificate of
designation shall be vested in the common stock.
Attached as Exhibit A hereto is a statement of designation, powers,
preferences, rights, qualifications and limitations in respect of the
Corporation's Series A preferred stock.
FIFTH
The Board of Directors and Shareholders have unanimously approved this
Amended and Restated Certificate of Incorporation.
SIXTH
The corporation is to have perpetual existence.
<PAGE> 3
-3-
SEVENTH
In furtherance and not in limitation of the powers conferred by statute,
the Board of Directors of the corporation is expressly authorized to make,
alter, or repeal the Bylaws of the corporation. Except as provided to the
contrary in the provisions establishing a class of stock, the number of
authorized shares of such class may be increased or decreased (but not below the
number of shares thereof then outstanding) by the affirmative vote of a majority
of the stock of the Corporation entitled to vote, voting as a single class.
EIGHTH
The corporation shall, to the fullest extent permitted by Section 145 of
the General Corporation Law of the State of Delaware, as the same may be amended
and supplemented, indemnify any and all persons who it shall have power to
indemnify under said section from and against any and all of the expenses,
liabilities, or other matters referred to in or covered by said section, and the
indemnification provided for herein shall not be deemed exclusive of any other
rights to which those indemnified may be entitled under any bylaw, agreement,
vote of stockholders, or disinterested directors or otherwise, both as to action
in his official capacity and as to action in any other capacity while holding
such office, and shall continue as to a person who has ceased to be a director
or officer and shall inure to the benefit of the heirs, executors, and
administrators of such a person.
NINTH
From time to time any of the provisions of this Certificate of
Incorporation may be amended, altered, or repealed, and other provisions
authorized by the laws of the State of Delaware at the time in force may be
added or inserted in the manner and at the time prescribed by said laws, and all
rights at any time conferred upon the stockholders of the corporation by this
Certificate of Incorporation are granted subject to the provisions of this
Article NINTH.
The effective date of this Certificate of Incorporation, and the date upon
which the existence of the corporation shall commence, shall be the date upon
which the Secretary of State of the State of Delaware endorses the word "Filed"
on the Certificate.
I, the undersigned, being the Vice President of the above mentioned
corporation, do make this Amended and Restated Certificate of Incorporation,
hereby declaring and certifying that this is my act and the facts stated herein
are true, and accordingly have hereunto set my hand upon this 15th day of
January, 1996.
------------------------------------
Vice President
<PAGE> 4
EXHIBIT A
---------
SERIES A CONVERTIBLE PREFERRED STOCK
1. NUMBER OF SHARES. The series of Preferred Stock designated and known as
"Series A Convertible Preferred Stock" shall consist of 992,061 shares.
2. Voting.
------
2A. GENERAL. Except as may be otherwise provided in these terms of the
Series A Convertible Preferred Stock or by law, the Series A Convertible
Preferred Stock shall vote together with all other classes and series of stock
of the Corporation as a single class on all actions to be taken by the
stockholders of the Corporation. Each share of Series A Convertible Preferred
Stock shall entitle the holder thereof to such number of votes per share on each
such action as shall equal the number of shares of Common Stock (including
fractions of a share) into which each share of Series A Convertible Preferred
Stock is then convertible.
2B. BOARD SIZE. The Corporation shall not, without the written consent
or affirmative vote of the holders of at least two-thirds of the then
outstanding shares of Series A Convertible Preferred Stock, given in writing or
by vote at a meeting, consenting or voting (as the case may be) separately as a
series, increase the maximum number of directors constituting the Board of
Directors to a number in excess of six.
2C. BOARD SEATS. The holders of the Series A Convertible Preferred
Stock, voting as a separate series, shall be entitled to elect two (2) directors
of the Corporation. The holders of the Common Stock, voting as a separate class,
shall be entitled to elect three (3) directors of the Corporation. A sixth
director (the "Sixth Director") of the Corporation shall be such person, if any,
who is a non-employee of the Corporation and who has received a plurality vote
of the holders of the Series A Convertible Preferred Stock, voting as a separate
series, and a plurality vote of the holders of the Common Stock, voting as a
separate class. Notwithstanding the foregoing or anything else to the contrary
provided elsewhere in the Certificate of Incorporation, if the Corporation
incurs an Underperfomance Event, as defined in that certain Voting Agreement
between the Corporation, the several Purchasers and the Management Shareholders
as defined therein, the holders of the Series A Convertible Preferred Stock,
voting as a separate series, shall be entitled to elect a majority of the
directors of the Corporation. At any meeting (or in a written consent in lieu
thereof) held for the purpose of electing directors, the presence in person or
by proxy (or the written consent) of the holders of a majority of the shares of
Series A Convertible Preferred Stock then outstanding shall constitute a quorum
of the Series A Convertible Preferred Stock for the election of directors to be
elected solely by the holders of the Series A Convertible Preferred Stock or
jointly by the holders of the Series A Convertible Preferred Stock and the
Common Stock. A vacancy in any directorship elected by the holders of the Series
A Convertible Preferred Stock shall be filled only by vote or written consent of
the holders of the Series A Convertible Preferred Stock, a vacancy in any
directorship elected by the holders of the Common Stock shall be filled only by
vote or written consent of the holders of the Common Stock and a vacancy in the
directorship elected jointly by the holders of the Series A Convertible
Preferred Stock and the Common Stock shall be filled only by vote or written
consent of the Series A Convertible Preferred Stock and the Common Stock as
provided above.
<PAGE> 5
-2-
3. DIVIDENDS. The holders of the Series A Convertible Preferred Stock shall
be entitled to receive, out of funds legally available therefor the following:
3A. ACCRUING DIVIDENDS. When and if declared by the Board of
Directors, quarterly dividends at the rate per annum of $0.352784 per share (the
"Accruing Dividends"). Accruing Dividends shall accrue on the annual anniversary
date of the initial purchase, whether or not earned or declared, and shall be
cumulative. Such dividend will be payable only (i) if, as and when determined by
the Board of Directors; or (ii) upon the liquidation, dissolution or winding up
of the Corporation as described in Section 4 below; or (iii) upon redemption of
the Series A Convertible Preferred Stock as described in Section 8 below. Any
accrued but unpaid Accrued Dividends on any shares of Series A Preferred Stock
shall expire upon any conversion of such share of Series A Convertible Preferred
Stock as described in Section 7 below.
3B. DIVIDENDS ON COMMON. In addition to any Accruing Dividends
pursuant to Section 3A, when and if declared by the Board of Directors,
dividends at the same rate as dividends (other than dividends paid in additional
shares of Common Stock) are paid with respect to the Common Stock (treating each
share of Series A Convertible Preferred Stock as being equal to the number of
shares of Common Stock (including fractions of a share) into which each share of
Series A Convertible Preferred Stock is then convertible) (the "Common
Dividends").
4. LIQUIDATION. Upon any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, the holders of the shares of
Series A Convertible Preferred Stock shall first be entitled, before any
distribution or payment is made upon any stock ranking on liquidation junior to
the Series A Convertible Preferred Stock, to be paid an amount equal to $3.52784
per share plus, in the case of each share, an amount equal to all Accruing
Dividends thereon (whether or not declared) and any other dividends declared but
unpaid thereon (including, but not limited to, Common Dividends), computed to
the date payment thereof is made available, such amount payable with respect to
one share of Series A Convertible Preferred Stock being sometimes referred to as
the "Liquidation Preference Payment" and with respect to all shares of Series A
Convertible Preferred Stock being sometimes referred to as the "Liquidation
Preference Payments". If upon such liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, the assets to be distributed
among the holders of Series A Convertible Preferred Stock shall be insufficient
to permit payment in full to the holders of Series A Convertible Preferred Stock
of the Liquidation Preference Payments, then the entire assets of the
Corporation to be so distributed shall be distributed ratably among the holders
of Series A Convertible Preferred Stock. Upon any such liquidation, dissolution
or winding up of the Corporation, immediately after the holders of Series A
Convertible Preferred Stock shall have been paid in full the Liquidation
Preference Payments, the remaining net assets of the Corporation available for
distribution shall be distributed ratably among the holders of Series A
Convertible Preferred Stock and Common Stock (with each share of Series A
Convertible Preferred Stock being deemed, for such purpose, to be equal to the
number of shares of Common Stock (including fractions of a share) into which
such share of Series A Convertible Preferred Stock is convertible immediately
prior to the close of business on the business day fixed for such distribution).
Written notice of such liquidation, dissolution or winding up, stating a payment
date, the amount of the Liquidation Preference Payments and the place where said
Liquidation Preference Payments shall be made, shall be delivered in person,
mailed by certified or registered mail, return receipt requested, or sent by
telecopier or telex, not less than 20 days prior to the payment date stated
<PAGE> 6
-3-
therein, to the holders of record of Series A Convertible Preferred Stock, such
notice to be addressed to each such holder at its address as shown by the
records of the Corporation.
5. MERGER. Subject to the provisions set forth in subparagraph 7P below,
any consolidation or merger involving the Corporation and any other entity or
entities (other than a merger to reincorporate the Corporation in a different
jurisdiction) in which the shares of Common Stock and Series A Convertible
Preferred Stock of the Corporation outstanding immediately prior to the close of
the transaction represent, or are converted into or exchanged for equity
securities that represent, less than a majority of the combined voting power of
the equity securities of the surviving or resulting entity immediately following
the close of the transaction, or the sale, lease, abandonment, transfer or other
disposition by the Corporation of all or substantially all its assets, in a
single transaction or a series of transactions, shall be deemed to be a
liquidation, dissolution or winding up of the Corporation within the meaning of
the provisions of paragraph 4. For purposes hereof, the Common Stock shall rank
on liquidation junior to the Series A Convertible Preferred Stock.
6. RESTRICTIONS. At any time when shares of Series A Convertible Preferred
Stock are outstanding, except where the vote or written consent of the holders
of a greater number of shares of the Corporation is required by law or by the
Certificate of Incorporation, and in addition to any other vote required by law
or the Certificate of Incorporation, without the approval of the holders of at
least 66-2/3% of the then outstanding shares of Series A Convertible Preferred
Stock, given in writing or by vote at a meeting, consenting or voting (as the
case may be) separately as a series, the Corporation will not:
6A. Create or authorize the creation of any additional class or series
of shares of stock unless the same ranks junior to the Series A Convertible
Preferred Stock as to the distribution of assets on the liquidation, dissolution
or winding up of the Corporation, or increase the authorized amount of the
Series A Convertible Preferred Stock or increase the authorized amount of any
additional class or series of shares of stock unless the same ranks junior to
the Series A Convertible Preferred Stock as to the distribution of assets on the
liquidation, dissolution or winding up of the Corporation, or create or
authorize any obligation or security convertible into shares of Series A
Convertible Preferred Stock or into shares of any other class or series of stock
unless the same ranks junior to the Series A Convertible Preferred Stock as to
the distribution of assets on the liquidation, dissolution or winding up of the
Corporation, whether any such creation, authorization or increase shall be by
means of amendment to the Certificate of Incorporation or by merger,
consolidation or otherwise;
6B. Consent to any liquidation, dissolution or winding up of the
Corporation or consolidate or merge into or with any other entity or entities or
sell, lease, abandon, transfer or otherwise dispose of all or substantially all
its assets;
6C. Amend, alter or repeal its Certificate of Incorporation or
By-laws.
6D. Purchase or set aside any sums for the purchase of, or pay any
dividend or make any distribution on, any shares of stock other than the Series
A Convertible Preferred Stock, except for dividends or other distributions
payable on the Common Stock solely in the form of additional shares of Common
Stock and except for the purchase of shares of Common Stock from former
employees of the Corporation who acquired such shares directly from the
Corporation, if each such purchase is made pursuant to contractual rights held
by the Corporation relating to the
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termination of employment of such former employee and the purchase price does
not exceed the original issue price paid by such former employee to the
Corporation for such shares; or
6E. Redeem or otherwise acquire any shares of Series A Convertible
Preferred Stock except as expressly authorized in paragraph 8 hereof or pursuant
to a purchase offer made pro rata to all holders of the shares of Series A
Convertible Preferred Stock on the basis of the aggregate number of outstanding
shares of Series A Convertible Preferred Stock then held by each such holder.
7. CONVERSIONS. The holders of shares of Series A Convertible Preferred
Stock shall have the following conversion rights:
7A. RIGHT TO CONVERT. Subject to the terms and conditions of this
paragraph 7, the holder of any share or shares of Series A Convertible Preferred
Stock shall have the right, at its option at any time, to convert any such
shares of Series A Convertible Preferred Stock (except that upon any liquidation
of the Corporation the right of conversion shall terminate at the close of
business on the business day fixed for payment of the amount distributable on
the Series A Convertible Preferred Stock) into such number of fully paid and
nonassessable shares of Common Stock as is obtained by (i) multiplying the
number of shares of Series A Convertible Preferred Stock so to be converted by
$3.52784 and (ii) dividing the result by the conversion price of $3.52784 per
share or, in case an adjustment of such price has taken place pursuant to the
further provisions of this paragraph 7, then by the conversion price as last
adjusted and in effect at the date any share or shares of Series A Convertible
Preferred Stock are surrendered for conversion (such price, or such price as
last adjusted, being referred to as the "Conversion Price"). Such rights of
conversion shall be exercised by the holder thereof by giving written notice
that the holder elects to convert a stated number of shares of Series A
Convertible Preferred Stock into Common Stock and by surrender of a certificate
or certificates for the shares so to be converted to the Corporation at its
principal office (or such other office or agency of the Corporation as the
Corporation may designate by notice in writing to the holders of the Series A
Convertible Preferred Stock) at any time during its usual business hours on the
date set forth in such notice, together with a statement of the name or names
(with address) in which the certificate or certificates for shares of Common
Stock shall be issued.
7B. ISSUANCE OF CERTIFICATES; TIME CONVERSION EFFECTED. Promptly after
the receipt of the written notice referred to in subparagraph 7A and surrender
of the certificate or certificates for the share or shares of Series A
Convertible Preferred Stock to be converted, the Corporation shall issue and
deliver, or cause to be issued and delivered, to the holder, registered in such
name or names as such holder may direct, a certificate or certificates for the
number of whole shares of Common Stock issuable upon the conversion of such
share or shares of Series A Convertible Preferred Stock. To the extent permitted
by law, such conversion shall be deemed to have been effected and the Conversion
Price shall be determined as of the close of business on the date on which such
written notice shall have been received by the Corporation and the certificate
or certificates for such share or shares shall have been surrendered as
aforesaid, and at such time the rights of the holder of such share or shares of
Series A Convertible Preferred Stock shall cease, and the person or persons in
whose name or names any certificate or certificates for shares of Common Stock
shall be issuable upon such conversion shall be deemed to have become the holder
or holders of record of the shares represented thereby.
<PAGE> 8
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7C. FRACTIONAL SHARES; DIVIDENDS; PARTIAL CONVERSION. No fractional
shares shall be issued upon conversion of Series A Convertible Preferred Stock
into Common Stock and no payment or adjustment shall be made upon any conversion
on account of any cash dividends on the Common Stock issued upon such
conversion. At the time of each conversion, the Corporation shall pay in cash an
amount equal to all dividends, excluding Accruing Dividends, accrued and unpaid
on the shares of Series A Convertible Preferred Stock surrendered for conversion
to the date upon which such conversion is deemed to take place as provided in
subparagraph 7B. In case the number of shares of Series A Convertible Preferred
Stock represented by the certificate or certificates surrendered pursuant to
subparagraph 7A exceeds the number of shares converted, the Corporation shall,
upon such conversion, execute and deliver to the holder, at the expense of the
Corporation, a new certificate or certificates for the number of shares of
Series A Convertible Preferred Stock represented by the certificate or
certificates surrendered which are not to be converted. If any fractional share
of Common Stock would, except for the provisions of the first sentence of this
subparagraph 7C, be delivered upon such conversion, the Corporation, in lieu of
delivering such fractional share, shall pay to the holder surrendering the
Series A Convertible Preferred Stock for conversion an amount in cash equal to
the current market price of such fractional share as determined in good faith by
the Board of Directors of the Corporation.
7D. ADJUSTMENT OF PRICE UPON ISSUANCE OF COMMON STOCK. Except as
provided in subparagraph 7E, if and whenever the Corporation shall issue or
sell, or is, in accordance with subparagraphs 7D(1) through 7D(7), deemed to
have issued or sold, any shares of Common Stock for a consideration per share
less than the Conversion Price in effect immediately prior to the time of such
issue or sale, then, forthwith upon such issue or sale, the Conversion Price
shall be reduced to the price determined by dividing (i) an amount equal to the
sum of (a) the number of shares of Common Stock outstanding immediately prior to
such issue or sale multiplied by the then existing Conversion Price and (b) the
consideration, if any, received by the Corporation upon such issue or sale, by
(ii) the total number of shares of Common Stock outstanding immediately after
such issue or sale.
For purposes of this subparagraph 7D, the following subparagraphs 7D(1) to
7D(7) shall also be applicable:
7D(1) ISSUANCE OF RIGHTS OR OPTIONS. In case at any time the
Corporation shall in any manner grant (whether directly or by assumption in a
merger or otherwise) any warrants or other rights to subscribe for or to
purchase, or any options for the purchase of, Common Stock or any stock or
security convertible into or exchangeable for Common Stock (such warrants,
rights or options being called "Options" and such convertible or exchangeable
stock or securities being called "Convertible Securities") whether or not such
Options or the right to convert or exchange any such Convertible Securities are
immediately exercisable, and the price per share for which Common Stock is
issuable upon the exercise of such Options or upon the conversion or exchange of
such Convertible Securities (determined by dividing (i) the total amount, if
any, received or receivable by the Corporation as consideration for the granting
of such Options, plus the minimum aggregate amount of additional consideration
payable to the Corporation upon the exercise of all such Options, plus, in the
case of such Options which relate to Convertible Securities, the minimum
aggregate amount of additional consideration, if any, payable upon the issue or
sale of such Convertible Securities and upon the conversion or exchange thereof,
by (ii) the total maximum number of shares of Common Stock issuable upon the
exercise of such Options or upon the conversion or exchange of all such
Convertible Securities issuable upon the exercise of such Options) shall be less
than the Conversion Price in effect immediately prior to the time of the
granting of such Options, then the total maximum number of shares of Common
Stock issuable upon the exercise of such Options or upon conversion or exchange
of the total maximum amount of such Convertible
<PAGE> 9
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Securities issuable upon the exercise of such Options shall be deemed to have
been issued for such price per share as of the date of granting of such Options
or the issuance of such Convertible Securities and thereafter shall be deemed to
be outstanding. Except as otherwise provided in subparagraph 7D(3), no
adjustment of the Conversion Price shall be made upon the actual issue of such
Common Stock or of such Convertible Securities upon exercise of such Options or
upon the actual issue of such Common Stock upon conversion or exchange of such
Convertible Securities.
7D(2) ISSUANCE OF CONVERTIBLE SECURITIES. In case the Corporation
shall in any manner issue (whether directly or by assumption in a merger or
otherwise) or sell any Convertible Securities, whether or not the rights to
exchange or convert any such Convertible Securities are immediately exercisable,
and the price per share for which Common Stock is issuable upon such conversion
or exchange (determined by dividing (i) the total amount received or receivable
by the Corporation as consideration for the issue or sale of such Convertible
Securities, plus the minimum aggregate amount of additional consideration, if
any, payable to the Corporation upon the conversion or exchange thereof, by (ii)
the total maximum number of shares of Common Stock issuable upon the conversion
or exchange of all such Convertible Securities) shall be less than the
Conversion Price in effect immediately prior to the time of such issue or sale,
then the total maximum number of shares of Common Stock issuable upon conversion
or exchange of all such Convertible Securities shall be deemed to have been
issued for such price per share as of the date of the issue or sale of such
Convertible Securities and thereafter shall be deemed to be outstanding,
provided that (a) except as otherwise provided in subparagraph 7D(3), no
adjustment of the Conversion Price shall be made upon the actual issue of such
Common Stock upon conversion or exchange of such Convertible Securities and (b)
if any such issue or sale of such Convertible Securities is made upon exercise
of any Options to purchase any such Convertible Securities for which adjustments
of the Conversion Price have been or are to be made pursuant to other provisions
of this subparagraph 7D, no further adjustment of the Conversion Price shall be
made by reason of such issue or sale.
7D(3) CHANGE IN OPTION PRICE OR CONVERSION RATE. Upon the
happening of any of the following events, namely, if the purchase price provided
for in any Option referred to in subparagraph 7D(1), the additional
consideration, if any, payable upon the conversion or exchange of any
Convertible Securities referred to in subparagraph 7D(1) or 7D(2), or the rate
at which Convertible Securities referred to in subparagraph 7D(1) or 7D(2) are
convertible into or exchangeable for Common Stock shall change at any time
(including, but not limited to, changes under or by reason of provisions
designed to protect against dilution), the Conversion Price in effect at the
time of such event shall forthwith be readjusted to the Conversion Price which
would have been in effect at such time had such Options or Convertible
Securities still outstanding provided for such changed purchase price,
additional consideration or conversion rate, as the case may be, at the time
initially granted, issued or sold, but only if as a result of such adjustment
the Conversion Price then in effect hereunder is thereby reduced; and on the
termination of any such Option or any such right to convert or exchange such
Convertible Securities, the Conversion Price then in effect hereunder shall
forthwith be increased to the Conversion Price which would have been in effect
at the time of such termination had such Option or Convertible Securities, to
the extent outstanding immediately prior to such termination, never been issued.
<PAGE> 10
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7D(4) STOCK DIVIDENDS. In case the Corporation shall declare a
dividend or make any other distribution upon any stock of the Corporation
payable in Common Stock (except for dividends or distributions upon the Common
Stock), Options or Convertible Securities, any Common Stock, Options or
Convertible Securities, as the case may be, issuable in payment of such dividend
or distribution shall be deemed to have been issued or sold without
consideration.
7D(5) CONSIDERATION FOR STOCK. In case any shares of Common
Stock, Options or Convertible Securities shall be issued or sold for cash, the
consideration received therefor shall be deemed to be the amount received by the
Corporation therefor, without deduction therefrom of any expenses incurred or
any underwriting commissions or concessions paid or allowed by the Corporation
in connection therewith. In case any shares of Common Stock, Options or
Convertible Securities shall be issued or sold for a consideration other than
cash, the amount of the consideration other than cash received by the
Corporation shall be deemed to be the fair value of such consideration as
determined in good faith by the Board of Directors of the Corporation, without
deduction of any expenses incurred or any underwriting commissions or
concessions paid or allowed by the Corporation in connection therewith. In case
any Options shall be issued in connection with the issue and sale of other
securities of the Corporation, together comprising one integral transaction in
which no specific consideration is allocated to such Options by the parties
thereto, such Options shall be deemed to have been issued for such consideration
as determined in good faith by the Board of Directors of the Corporation.
7D(6) RECORD DATE. In case the Corporation shall take a record of
the holders of its Common Stock for the purpose of entitling them (i) to receive
a dividend or other distribution payable in Common Stock, Options or Convertible
Securities or (ii) to subscribe for or purchase Common Stock, Options or
Convertible Securities, then such record date shall be deemed to be the date of
the issue or sale of the shares of Common Stock deemed to have been issued or
sold upon the declaration of such dividend or the making of such other
distribution or the date of the granting of such right of subscription or
purchase, as the case may be.
7D(7) TREASURY SHARES. The number of shares of Common Stock
outstanding at any given time shall not include shares owned or held by or for
the account of the Corporation, and the disposition of any such shares shall be
considered an issue or sale of Common Stock for the purpose of this subparagraph
7D.
7E. CERTAIN ISSUES OF COMMON STOCK EXCEPTED. Anything herein to the
contrary notwithstanding, the Corporation shall not be required to make any
adjustment of the Conversion Price in the case of the issuance from and after
the date of filing of these terms of the Series A Convertible Preferred Stock of
(i) up to 320,000 shares of Common Stock issuable upon the exercise of those
certain options granted to Louis A. Venezia on or about January 16, 1996 and
(ii) up to 430,708 shares of Common Stock issuable upon the exercise of options
granted by the Corporation (appropriately adjusted in each case to reflect the
occurrence of any event described in subparagraph 7F) of Common Stock to
directors, officers, employees or consultants of the Corporation in connection
with their service as directors of the Corporation, their employment by the
Corporation or their retention as consultants by the Corporation, plus such
number of shares of Common Stock which are repurchased by the Corporation from
such persons after such date pursuant to contractual rights held by the
Corporation and at repurchase prices not exceeding the respective original
purchase prices paid by such persons to the Corporation therefor.
<PAGE> 11
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7F. SUBDIVISION OR COMBINATION OF COMMON STOCK. In case the
Corporation shall at any time subdivide (by any stock split, stock dividend or
otherwise) its outstanding shares of Common Stock into a greater number of
shares, the Conversion Price in effect immediately prior to such subdivision
shall be proportionately reduced, and, conversely, in case the outstanding
shares of Common Stock shall be combined into a smaller number of shares, the
Conversion Price in effect immediately prior to such combination shall be
proportionately increased. In the case of any such subdivision, no further
adjustment shall be made pursuant to subparagraph 7D(4) by reason thereof.
7G. REORGANIZATION OR RECLASSIFICATION. If any capital reorganization
or reclassification of the capital stock of the Corporation shall be effected in
such a way that holders of Common Stock shall be entitled to receive stock,
securities or assets with respect to or in exchange for Common Stock, then, as a
condition of such reorganization or reclassification, lawful and adequate
provisions shall be made whereby each holder of a share or shares of Series A
Convertible Preferred Stock shall thereupon have the right to receive, upon the
basis and upon the terms and conditions specified herein and in lieu of the
shares of Common Stock immediately theretofore receivable upon the conversion of
such share or shares of Series A Convertible Preferred Stock, such shares of
stock, securities or assets as may be issued or payable with respect to or in
exchange for a number of outstanding shares of such Common Stock equal to the
number of shares of such Common Stock immediately theretofore receivable upon
such conversion had such reorganization or reclassification not taken place, and
in any such case appropriate provisions shall be made with respect to the rights
and interests of such holder to the end that the provisions hereof (including
without limitation provisions for adjustments of the Conversion Price) shall
thereafter be applicable, as nearly as may be, in relation to any shares of
stock, securities or assets thereafter deliverable upon the exercise of such
conversion rights.
7H. FAILURE TO REDEEM. If the Corporation fails, for any reason or for
no reason, to redeem on any Redemption Date (as defined in paragraph 8) all of
the shares of Series A Convertible Preferred Stock required to be redeemed on
such Redemption Date in accordance with the terms and conditions of paragraph 8,
the Conversion Price then in effect shall be immediately reduced to an amount
equal to 95% thereof. Thereafter, until such redemption has been made in full in
accordance with such terms and conditions, the Conversion Price shall be further
reduced on the 90th day following such Redemption Date and at the end of each
90-day period thereafter to an amount equal to 95% of the Conversion Price in
effect immediately prior to each such reduction.
7I. NOTICE OF ADJUSTMENT. Upon any adjustment of the Conversion Price,
then and in each such case the Corporation shall give written notice thereof, by
delivery in person, certified or registered mail, return receipt requested,
telecopier or telex, addressed to each holder of shares of Series A Convertible
Preferred Stock at the address of such holder as shown on the books of the
Corporation, which notice shall state the Conversion Price resulting from such
adjustment, setting forth in reasonable detail the method upon which such
calculation is based.
7J. OTHER NOTICES. In case at any time:
(1) the Corporation shall declare any dividend upon its Common
Stock payable in cash or stock or make any other distribution to the holders of
its Common Stock;
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(2) the Corporation shall offer for subscription PRO RATA to the
holders of its Common Stock any additional shares of stock of any class or other
rights;
(3) there shall be any capital reorganization or reclassification
of the capital stock of the Corporation, or a consolidation or merger of the
Corporation with or into another entity or entities, or a sale, lease,
abandonment, transfer or other disposition of all or substantially all its
assets; or
(4) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Corporation;
then, in any one or more of said cases, the Corporation shall give, by delivery
in person, certified or registered mail, return receipt requested, telecopier or
telex, addressed to each holder of any shares of Series A Convertible Preferred
Stock at the address of such holder as shown on the books of the Corporation,
(a) at least 20 days' prior written notice of the date on which the books of the
Corporation shall close or a record shall be taken for such dividend,
distribution or subscription rights or for determining rights to vote in respect
of any such reorganization, reclassification, consolidation, merger,
disposition, dissolution, liquidation or winding up and (b) in the case of any
such reorganization, reclassification, consolidation, merger, disposition,
dissolution, liquidation or winding up, at least 20 days' prior written notice
of the date when the same shall take place. Such notice in accordance with the
foregoing clause (a) shall also specify, in the case of any such dividend,
distribution or subscription rights, the date on which the holders of Common
Stock shall be entitled thereto and such notice in accordance with the foregoing
clause (b) shall also specify the date on which the holders of Common Stock
shall be entitled to exchange their Common Stock for securities or other
property deliverable upon such reorganization, reclassification, consolidation,
merger, disposition, dissolution, liquidation or winding up, as the case may be.
7K. STOCK TO BE RESERVED. The Corporation will at all times reserve
and keep available out of its authorized Common Stock, solely for the purpose of
issuance upon the conversion of Series A Convertible Preferred Stock as herein
provided, such number of shares of Common Stock as shall then be issuable upon
the conversion of all outstanding shares of Series A Convertible Preferred
Stock. The Corporation covenants that all shares of Common Stock which shall be
so issued shall be duly and validly issued and fully paid and nonassessable and
free from all taxes, liens and charges with respect to the issue thereof, and,
without limiting the generality of the foregoing, the Corporation covenants that
it will from time to time take all such action as may be requisite to assure
that the par value per share of the Common Stock is at all times equal to or
less than the Conversion Price in effect at the time. The Corporation will take
all such action as may be necessary to assure that all such shares of Common
Stock may be so issued without violation of any applicable law or regulation, or
of any requirement of any national securities exchange upon which the Common
Stock may be listed. The Corporation will not take any action which results in
any adjustment of the Conversion Price if the total number of shares of Common
Stock issued and issuable after such action upon conversion of the Series A
Convertible Preferred Stock would exceed the total number of shares of Common
Stock then authorized by the Certificate of Incorporation.
7L. NO REISSUANCE OF SERIES A CONVERTIBLE PREFERRED STOCK. Shares of
Series A Convertible Preferred Stock which are converted into shares of Common
Stock as provided herein shall not be reissued.
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7M. ISSUE TAX. The issuance of certificates for shares of Common Stock
upon conversion of Series A Convertible Preferred Stock shall be made without
charge to the holders thereof for any issuance tax in respect thereof, provided
that the Corporation shall not be required to pay any tax which may be payable
in respect of any transfer involved in the issuance and delivery of any
certificate in a name other than that of the holder of the Series A Convertible
Preferred Stock which is being converted.
7N. CLOSING OF BOOKS. The Corporation will at no time close its
transfer books against the transfer of any Series A Convertible Preferred Stock
or of any shares of Common Stock issued or issuable upon the conversion of any
shares of Series A Convertible Preferred Stock in any manner which interferes
with the timely conversion of such Series A Convertible Preferred Stock, except
as may otherwise be required to comply with applicable securities laws.
7O. DEFINITION OF COMMON STOCK. As used in this paragraph 7, the term
"Common Stock" shall mean and include the Corporation's authorized Common Stock,
par value $.01 per share, as constituted on the date of filing of these terms of
the Series A Convertible Preferred Stock, and shall also include any capital
stock of any class of the Corporation thereafter authorized which shall neither
be limited to a fixed sum or percentage in respect of the rights of the holders
thereof to participate in dividends nor entitled to a preference in the
distribution of assets upon the voluntary or involuntary liquidation,
dissolution or winding up of the Corporation; provided that the shares of Common
Stock receivable upon conversion of shares of Series A Convertible Preferred
Stock shall include only shares designated as Common Stock of the Corporation on
the date of filing of this instrument, or in case of any reorganization or
reclassification of the outstanding shares thereof, the stock, securities or
assets provided for in subparagraph 7G.
7P. MANDATORY CONVERSION. If at any time the Corporation shall effect
a firm commitment underwritten public offering of shares of Common Stock in
which (i) the aggregate price paid for such shares by the public shall be at
least $15,000,000 and (ii) the price paid by the public for such shares shall be
at least $14.11136 per share (appropriately adjusted to reflect the occurrence
of any event described in subparagraph 7F), then effective upon the closing of
the sale of such shares by the Corporation pursuant to such public offering, all
outstanding shares of Series A Convertible Preferred Stock shall automatically
convert to shares of Common Stock on the basis set forth in this paragraph 7. If
at any time the Corporation is a party to a merger with or into one or more
public corporations which (i) would otherwise be treated as a liquidation,
dissolution or winding up of the Corporation pursuant to paragraph 5 above, (ii)
is being accounted for under Generally Accepted Accounting Principles as a
pooling of interest, and (iii) the value of shares to be distributed to holders
of the Corporation's Common Stock, based on the market price of the class of
shares to be distributed immediately prior to closing the merger, per share of
Common Stock (after giving effect to the conversion of the Series A Convertible
Preferred Stock) is at least equal to $3.52784 per share plus, in the case of
each share, an amount equal to all Accruing Dividends (whether or not declared)
computed as of the closing date of the merger, then effective immediately prior
to the closing of such merger of the Corporation, all outstanding shares of
Series A Convertible Preferred Stock shall automatically convert to shares of
Common Stock on the basis set forth in this paragraph 7; PROVIDED, HOWEVER, that
such conversion shall be conditioned on the receipt of a representation by the
Chief Financial Officer of the acquiring public corporation representing that
the merger will be treated as a pooling of interests in accordance with
Generally Accepted Accounting Principles as consistently applied. In
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addition, any agreement of merger must include a provision whereby the holders
of the then converted Series A Convertible Preferred Stock will be compensated
by the acquiring corporation for any Liquidation Preference Payments computed as
of the closing date of the merger, if, subsequent to the merger, the transaction
is deemed ineligible for treatment as a pooling of interest. Holders of shares
of Series A Convertible Preferred Stock converted pursuant to this subparagraph
7P may deliver to the Corporation at its principal office (or such other office
or agency of the Corporation as the Corporation may designate by notice in
writing to such holders) during its usual business hours, the certificate or
certificates for the shares so converted. As promptly as practicable thereafter,
the Corporation shall issue and deliver to such holder a certificate or
certificates for the number of whole shares of Common Stock to which such holder
is entitled, together with any cash dividends and payment in lieu of fractional
shares to which such holder may be entitled pursuant to subparagraph 7C. Until
such time as a holder of shares of Series A Convertible Preferred Stock shall
surrender his or its certificates therefor as provided above, such certificates
shall be deemed to represent the shares of Common Stock to which such holder
shall be entitled upon the surrender thereof.
8. REDEMPTION. The shares of Series A Convertible Preferred Stock shall be
redeemed as follows:
8A. OPTIONAL REDEMPTION. The Corporation shall not have the right to
call or redeem at any time all or any shares of Series A Convertible Preferred
Stock. With the approval of the holders of 66-2/3% of the then outstanding
shares of Series A Convertible Preferred Stock, one or more holders of shares of
Series A Convertible Preferred Stock may, by giving notice (the "Notice") to the
Corporation at any time and from time to time after January 16, 1999, require
the Corporation to redeem 33-1/3% of the shares of the then outstanding shares
of the Series A Convertible Preferred Stock redeemed on the Original Redemption
Date (as defined below). With the approval of the holders of a majority of the
then outstanding shares of Series A Convertible Preferred Stock, one or more
holders of shares of Series A Convertible Preferred Stock may, by giving notice
to the Corporation on or after the second anniversary date from the Original
Redemption Date redeem 50% of the remainder of the shares of Series A
Convertible Preferred Stock then outstanding. With the approval of the holders
of a majority of the then outstanding shares of Series A Convertible Preferred
Stock, one or more holders of shares of Series A Convertible Preferred Stock
may, by giving notice to the Corporation on or after the third anniversary date
from the Original Redemption Date redeem 100% of the then outstanding shares.
Upon receipt of the Notice, the Corporation will so notify all other persons
holding Series A Convertible Preferred Stock. After receipt of any such notice
described above, the Corporation shall fix the first date for redemption (the
"Original Redemption Date"), provided that such Original Redemption Date shall
occur no later than the earlier to occur of (i) one hundred and eighty (180)
days after receipt of the Notice, or (ii) sixty (60) days after receipt of the
appraisal pursuant to Section 7B. All holders of Series A Convertible Preferred
Stock shall deliver to the Corporation during regular business hours, at the
office of any transfer agent of the Corporation for the Series A Convertible
Preferred Stock, or at the principal office of the Corporation or at such other
place as may be designated by the Corporation, the certificate or certificates
for the Series A Convertible Preferred Stock, duly endorsed for transfer to the
Corporation (if required by it) on or before the Original Redemption Date. The
Original Redemption Date and each Anniversary Redemption Date are collectively
referred to as the "Redemption Dates" and each individually a "Redemption Date".
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8B. REDEMPTION PRICE AND PAYMENT. The shares of Series A Convertible
Preferred Stock to be redeemed on any Redemption Date shall be redeemed by
paying for each share in cash an amount equal to the greater of: (i) the
Liquidation Preference Payment; or (ii) the fair market value of the Series A
Convertible Preferred Stock (based on the fair market value of the entire
corporation as a going concern, without deduction for minority interest,
marketability discounts or the effect of any redemption of the Series A
Convertible Preferred Stock required to be made hereunder, and without any
premium for control of the Board of Directors) as determined by a qualified
appraiser selected by the holders of at least 66-2/3% of the then outstanding
shares of Series A Convertible Preferred Stock and approved by the Board of
Directors computed as of such Redemption Date, such amount being referred to as
the "Redemption Price". The fees and expenses of any such organization shall be
paid by the Corporation. Such payment shall be made in full on the applicable
Redemption Date to the holders entitled thereto. Notwithstanding the foregoing,
upon delivery of a written notice to the Company (a "Tax Notice"), holders of a
majority of the Series A Convertible Preferred Stock shall have the right, on
any of the Redemption Dates set forth above, to sell additional shares of Series
A Convertible Preferred Stock to the Company so that such redemption will be
treated as an "exchange" under Sections 302(a) and (b) of the Internal Revenue
Code of 1986, as amended. If holders of a majority of the Series A Convertible
Preferred Stock deliver a Tax Notice to the Company as provided above, the
Company shall redeem each share set forth in the Tax Notice by paying the
Redemption Price for each such share. At its election, the Company may satisfy
its obligation to redeem the shares set forth in the Tax Notice by delivering to
the holders of the Series A Convertible Preferred Stock a promissory note of the
Company, bearing interest at 10%, for the full amount of the Redemption Price of
the shares set forth in the Tax Notice, and due and payable on such Redemption
Dates as the shares set forth in the Tax Notice could have been redeemed
pursuant to paragraph 8A; PROVIDED, HOWEVER, that the ability of the Company to
issue a promissory note to cover the redeemed shares set forth in the Tax Notice
will be subject to compliance by the Company with the General Corporation Law of
the State of Delaware.
8C. REDEMPTION MECHANICS. At least 20 but not more than 30 days prior
to each Redemption Date, written notice (the "Redemption Notice") shall be given
by the Corporation by delivery in person, certified or registered mail, return
receipt requested, telecopier or telex, to each holder of record (at the close
of business on the business day next preceding the day on which the Redemption
Notice is given) of shares of Series A Convertible Preferred Stock notifying
such holder of the redemption and specifying the Redemption Price, such
Redemption Date, the number of shares of Series A Convertible Preferred Stock to
be redeemed from such holder (computed on a pro rata basis in accordance with
the number of such shares held by all holders thereof) and the place where said
Redemption Price shall be payable. The Redemption Notice shall be addressed to
each holder at his address as shown by the records of the Corporation. From and
after the close of business on a Redemption Date, unless there shall have been a
default in the payment of the Redemption Price, all rights of holders of shares
of Series A Convertible Preferred Stock (except the right to receive the
Redemption Price) shall cease with respect to the shares to be redeemed on such
Redemption Date, and such shares shall not thereafter be transferred on the
books of the Corporation or be deemed to be outstanding for any purpose
whatsoever. If the funds of the Corporation legally available for redemption of
shares of Series A Convertible Preferred Stock on a Redemption Date are
insufficient to redeem the total number of shares of Series A Convertible
Preferred Stock to be redeemed on such Redemption Date, the holders of such
shares shall share ratably in any funds legally available for redemption of such
shares according to the respective amounts which would be payable to them if the
full number of shares to be redeemed on such Redemption Date were actually
redeemed. The shares
<PAGE> 16
-13-
of Series A Convertible Preferred Stock required to be redeemed but not so
redeemed shall remain outstanding and entitled to all rights and preferences
provided herein. At any time thereafter when additional funds of the Corporation
are legally available for the redemption of such shares of Series A Convertible
Preferred Stock, such funds will be used, at the end of the next succeeding
fiscal quarter, to redeem the balance of such shares, or such portion thereof
for which funds are then legally available, on the basis set forth above.
8D. REDEEMED OR OTHERWISE ACQUIRED SHARES TO BE RETIRED. Any shares of
Series A Convertible Preferred Stock redeemed pursuant to this paragraph 8 or
otherwise acquired by the Corporation in any manner whatsoever shall be canceled
and shall not under any circumstances be reissued; and the Corporation may from
time to time take such appropriate corporate action as may be necessary to
reduce accordingly the number of authorized shares of Series A Convertible
Preferred Stock.
9. AMENDMENTS. No provision of these terms of the Series A Convertible
Preferred Stock may be amended, modified or waived without the written consent
or affirmative vote of the holders of at least two-thirds of the then
outstanding shares of Series A Convertible Preferred Stock.
<PAGE> 17
CERTIFICATE OF AMENDMENT
NPRI, INC.
ARTICLE FIRST: The name of the Corporation is NPRI, INC.
ARTICLE SECOND: The Certificate of Incorporation is hereby amended as
follows:
Article First of the Certificate of Incorporation is hereby
repealed. In its place, the following language shall apply:
First. The name of the Corporation is
VerSatility Inc.
IN WITNESS WHEREOF, the undersigned, duly authorized officers of the
Corporation, certify that the said amendment was duly adopted in accordance
with Section 242 of the General Corporation Law.
Dated: April 22, 1996
NPRI INC.
/s/ Ronald Charnock
------------------------
Ronald Charnock
Chairman
ATTEST:
/s/ Ben Cotten
- ---------------------
Ben Cotten
Assistant Secretary
<PAGE> 18
------------------------------
CERTIFICATE OF AMENDMENT
OF
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
VERSATILITY INC.
(INCORPORATED JANUARY 3, 1996)
------------------------------
(Pursuant to Section 242 of the General Corporation Law of the State of
Delaware)
I, Ronald R. Charnock, President of Versatility Inc. (the "Corporation"), a
corporation organized and existing under and by virtue of the General
Corporation Law of the State of Delaware, hereby certify:
FIRST. That on September 30, 1996, at a meeting of the Board of Directors
of the Corporation, the Board of Directors adopted resolutions setting forth a
proposed amendment to the Amended and Restated Certificate of Incorporation of
the Corporation, declaring said amendment to be advisable and directing that
said amendment be considered by the stockholders of the Corporation entitled to
vote in respect thereof.
SECOND. That thereafter, in accordance with Section 228 of the General
Corporation Law of the State of Delaware, stockholders of the Corporation
holding the necessary number of shares as required by statute and the Amended
and Restated Certificate of Incorporation approved said amendment by written
consent dated September 30, 1996, and prompt written notice of the taking of
such corporate action without a meeting by less than unanimous written consent
was given to those stockholders who did not consent thereto in writing.
THIRD. That said amendment amends the Amended and Restated Certificate of
Incorporation of the Corporation by striking out paragraph 7P of Exhibit A of
Article FOURTH thereof and substituting in lieu thereof the following:
"7P. Mandatory Conversion. If the Corporation shall effect a firm
commitment underwritten public offering (a "Public Offering") of shares of
Common Stock in which (i) the aggregate price paid for such shares by the public
shall be at least $15,000,000 and (ii) the price paid by the public for such
shares shall be at least (A) $11.00 per share if such Public Offering occurs on
or prior to April 30, 1997 or (B) $14.11136 if such Public Offering occurs
subsequent to April 30, 1997 (appropriately adjusted to reflect the occurrence
of any event described in subparagraph 7F), then effective upon the closing of
the sale of such shares by the Corporation pursuant to such public offering, all
outstanding shares of Series A Convertible Preferred Stock shall automatically
convert to shares of Common Stock on the basis set forth in this
<PAGE> 19
-2-
paragraph 7. If at any time the Corporation is a party to a merger with or into
one or more public corporations which (i) would otherwise be treated as a
liquidation, dissolution or winding up of the Corporation pursuant to paragraph
5 above, (ii) is being accounted for under Generally Accepted Accounting
Principles as a pooling of interest, and (iii) the value of shares to be
distributed to holders of the Corporation's Common Stock, based on the market
price of the class of shares to be distributed immediately prior to closing the
merger, per share of Common Stock (after giving effect to the conversion of the
Series A Convertible Preferred Stock) is at least equal to $3.52784 per share
plus, in the case of each share, an amount equal to all Accruing Dividends
(whether or not declared) computed as of the closing date of the merger, then
effective immediately prior to the closing of such merger of the Corporation,
all outstanding shares of Series A Convertible Preferred Stock shall
automatically convert to shares of Common Stock on the basis set forth in this
paragraph 7; provided, however, that such conversion shall be conditioned on the
receipt of a representation by the Chief Financial Officer of the acquiring
public corporation representing that the merger will be treated as a pooling of
interests in accordance with Generally Accepted Accounting Principles as
consistently applied. In addition, any agreement of merger must include a
provision whereby the holders of the then converted Series A Convertible
Preferred Stock will be compensated by the acquiring corporation for any
Liquidation Preference Payments computed as of the closing date of the merger,
if, subsequent to the merger, the transaction is deemed ineligible for treatment
as a pooling of interest. Holders of shares of Series A Convertible Preferred
Stock converted pursuant to this subparagraph 7P may deliver to the Corporation
at its principal office (or such other office or agency of the Corporation as
the Corporation may designate by notice in writing to such holders) during its
usual business hours, the certificate or certificates for the shares so
converted. As promptly as practicable thereafter, the Corporation shall issue
and deliver to such holder a certificate or certificates for the number of whole
shares of Common Stock to which such holder is entitled, together with any cash
dividends and payment in lieu of fractional shares to which such holder may be
entitled pursuant to subparagraph 7C. Until such time as a holder of shares of
Series A Convertible Preferred Stock shall surrender his or its certificates
therefor as provided above, such certificates shall be deemed to represent the
shares of Common Stock to which such holder shall be entitled upon the surrender
thereof."
FOURTH. That said amendment amends the Amended and Restated Certificate of
Incorporation by striking out Article EIGHTH and by substituting in lieu of said
Article the following new Article EIGHTH:
"EIGHTH. No director (including any advisory director) of the Corporation
shall be personally liable to the Corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director notwithstanding any provision
of law imposing such liability; provided, however, that, to the extent provided
by applicable law, this provision shall not eliminate the liability of a
director (i) for any breach of the director's duty of loyalty to the Corporation
or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the General Corporation Law of the State of Delaware, or (iv) for
any
<PAGE> 20
-3-
transaction from which the director derived an improper personal benefit. If
the General Corporation Law of the State of Delaware is amended hereafter to
authorize corporation action further eliminating or limiting the personal
liability of directors, then the liability of a director of the Corporation
shall be eliminated or limited to the fullest extent permitted by the General
Corporation Law of the State of Delaware, as so amended. No amendment to or
repeal of this provision shall apply to or have any effect on the liability or
alleged liability of any director for or with respect to any acts or omissions
of such director occurring prior to such amendment or repeal."
FIFTH. That said amendment amends the Amended and Restated Certificate of
Incorporation of the Corporation by inserting the following new Article TENTH:
"TENTH. The Corporation shall, to the maximum extent permitted from time to
time under the laws of the State of Delaware, indemnify and upon request shall
advance expenses to any person who is or was a party or is threatened to be made
a party to any threatened, pending or completed action, suit, proceeding or
claim, whether civil, criminal, administrative or investigative, by reason of
the fact that he is or was or has agreed to be a director or officer of the
Corporation or while a director or officer is or was serving at the request of
the Corporation as a director, officer, partner, trustee, employee or agent of
any corporation, partnership, joint venture, trust or other enterprise,
including service with respect to employee benefit plans, against any and all
expenses (including attorney's fees and expenses), judgments, fines, penalties
and amounts paid in settlement or incurred in connection with the investigation,
preparation to defend or defense of such action, suit, proceeding or claim;
provided, however, that the foregoing shall not require the Corporation to
indemnify or advance expenses to any person in connection with any action, suit,
proceeding, claim or counterclaim initiated by or on behalf of such person. Such
indemnification shall not be exclusive of other indemnification rights arising
under any By-law, agreement, vote of directors or stockholders or otherwise and
shall inure to the benefit of the heirs and legal representatives of such
person. Any repeal or modification of the foregoing provisions of this Article
TENTH shall not adversely affect any right of protection of a director or
officer of this Corporation existing at the time of such repeal or
modification."
<PAGE> 21
-4-
IN WITNESS WHEREOF, the undersigned has hereunto signed his name and
affirms that the statements made in this Certificate of Amendment to Amended and
Restated Certificate of Incorporation are true under the penalties of perjury
this 30th day of September, 1996.
--------------------------------------------
Ronald R. Charnock
President
Attest:
- --------------------------------
Marcus W. Heth
Secretary
<PAGE> 22
CERTIFICATE OF AMENDMENT
VERSATILITY INC.
ARTICLE FIRST: The name of the Corporation is VerSatility Inc.
ARTICLE SECOND: The Certificate of Incorporation is hereby amended as
follows:
Article First of the Certificate of Incorporation is hereby
repealed. In its place, the following language shall apply:
First: The name of the Corporation is
Versatility Inc.
IN WITNESS WHEREOF, the undersigned, duly authorized officers of the
Corporation, certify that the said amendment was duly adopted in accordance
with Section 242 of the General Corporation Law.
Dated: October 23, 1996
VerSatility Inc.
/s/ Ronald Charnock
--------------------------
Ronald Charnock
Chairman
ATTEST:
/s/ Marcus Heth
- -------------------
Marcus Heth
Secretary
<PAGE> 1
Enclosed please find a copy of the specimen stock certificate for Versatility
Inc.
VERSATILITY INC. transferable on the books of the Corporation by the holder
hereof in person or by duly authorized attorney upon surrender of this
Certificate properly endorsed. This certificate and the shares represented
hereby are issued and shall be subject to all of the provisions of the Second
Amended and Restated Certificate of Incorporation and Amended and Restated
By-Laws of the Corporation, each as from time to time amended (copies of which
are on file with the Transfer Agent and Registrar), to all of which the holder
by acceptance hereof assents. This certificate is not valid until countersigned
and registered by the Transfer Agent and Registrar.
Witness the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
Secretary President.
Versatiltiy Inc.
The Corporation is authorized to issue more than one class of stock. The
Corporation will furnish without charge to each stockholder who so requests a
copy of the powers, designations, preferences and relative rights of the shares
of each outstanding class of stock or series thereof of the Corporation, and the
qualifications, limitations or restrictions of such prefernces and/or rights.
For value received, _____________________________________ hereby sell,
assign and transfer unto _______________________________________ Shares of the
common stock represented by the within Certificate, and do hereby irrevocably
constitute and appoint ____________________________________________________
Attorney to transfer the said stock on the books of the within named Corporation
with full power of substitution in the premises.
Dated__________________
Signature Guaranteed: ______________________________________
<PAGE> 1
-----------------------
TESTA, HURWITZ & THIBEAULT, LLP EXHIBIT 5.1
----------------------- -----------
ATTORNEYS AT LAW
HIGH STREET TOWER, 125 HIGH STREET
OFFICE (617) 248-7000 BOSTON, MASSACHUSETTS 02110-2725 FAX (617) 248-7100
November 18, 1996
Versatility Inc.
11781 Lee Jackson Memorial Highway
Seventh Floor
Fairfax, VA 22033
Re: Registration Statement on Form S-1 (No. 333-13771)
Relating to 2,530,000 Shares of Common Stock
--------------------------------------------------
Ladies and Gentlemen:
This opinion relates to an aggregate of 2,530,000 shares of Common Stock,
$.01 par value per share (the "Common Stock"), of Versatility Inc. (the
"Company"), which are the subject matter of a Registration Statement on Form S-1
filed with the Securities and Exchange Commission on October 9, 1996, as amended
by Amendment No. 1 to Form S-1 Registration Statement as filed with the
Securities and Exchange Commission on November 19, 1996 (the "Registration
Statement").
The 2,530,000 shares of Common Stock covered by the Registration Statement
consist of 2,200,000 shares being sold by the Company and 330,000 shares subject
to an over-allotment option granted by the Company and certain securityholders
of the Company (the "Selling Stockholders") to the underwriters to be named in
the prospectus (the "Prospectus") included in the Registration Statement.
Based upon such investigation as we have deemed necessary, we are of the
opinion that the shares of Common Stock being sold by the Selling Stockholders
have been legally issued and are fully paid and non-assessable and that when the
shares of Common Stock to be sold by the Company pursuant to the Prospectus have
been issued and paid for in accordance with the terms described in the
Prospectus, such shares of Common Stock will have been validly issued and will
be fully paid and nonassessable.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the reference to our firm in the Prospectus under
the caption "Legal Matters."
Very truly yours,
/s/ Testa, Hurwitz & Thibeault, LLP
TESTA, HURWITZ & THIBEAULT, LLP
<PAGE> 1
Exhibit 10.7
$519,304.84 October 31, 1996
Fairfax, Virginia
DEED OF TRUST NOTE
------------------
FOR VALUE RECEIVED, the undersigned, Serenity Real Properties Limited
Partnership (the "Maker"), formerly known as Versatility Real Properties Limited
Partnership, promises to pay to the order of Versatility Inc. (the "Holder"), a
Delaware corporation, at 11781 Lee Jackson Memorial Highway, Suite 600, Fairfax,
VA 22033, or at such other place as the Holder may from time to time designate
in writing, the principal sum of $519,304.84 and to pay simple interest on that
principal sum at the prime rate as determined by Silicon Valley Bank (the
"Bank"), which rate shall change when and as the prime rate of the Bank shall
change (the "Prime Rate"), provided that the rate of interest shall never exceed
the maximum permitted by law. Any change in interest rate resulting from a
change in the Prime Rate shall be effective at the beginning of the business day
on which such change in the Prime Rate becomes effective.
This Note is given by the Maker for good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged.
The principal of this Note shall be payable on the earlier of (i) the sale
of refinancing of the Property or any transfer of any interest herein, (ii) one
year from the date hereof, or (iii) demand by Holder. Interest due under this
Note shall begin to accrue on the date first noted above and shall be payable
semi-annually commencing on the date six months from such date until all
principal and interest are paid in full.
THIS NOTE IS SECURED BY A CERTAIN DEED OF TRUST OF EVEN DATE HEREWITH (THE
"DEED OF TRUST") FROM THE MAKER, CONVEYING TO THE TRUSTEES NAMED THEREIN, FOR
THE BENEFIT OF THE HOLDER, THE PROPERTY.
All payments of principal and interest shall be payable in lawful money of
the United States and in immediately available funds, without offset, on the
date when due at the place designated by the Holder.
In the event that the Maker fails to make any payment under this Note on
the date when such payment is due and such failure continues for more than
fifteen (15) days, the Maker shall pay to the Holder, upon demand therefor, a
late charge equal to five percent (5%) of the total amount of the delinquent
payment.
If the Maker fails to make any payment under this Note when due and such
failure continues unremedied for twenty (20) days after written notice therefor
from the Holder to the Maker, then, in such event, the entire principal balance
hereof and all accrued and unpaid interest shall at once become due and payable
at the option of the Holder, without further demand or notice, and in addition
thereto, and not in substitution therefor. Failure to exercise or delay in
exercising said option or to pursue such other rights and remedies shall not
constitute a waiver of such option or such other rights and remedies or of the
right to exercise any of the same in the event of any subsequent default.
The Maker may repay this Note, in whole or in part, at any time and from
time to time without premium or penalty.
<PAGE> 2
-2-
Each party liable hereon in any capacity, whether as Maker, endorser,
surety, guarantor or otherwise (whether one or more hereinafter called an
"Obligor"), (i) waives its homestead exemption, (ii) waives presentment, demand,
protest and notice of presentment, notice of protect and notice of dishonor of
this debt and each and every other notice of any kind respecting this Note,
(iii) agrees that the Holder, at any time or times, without notice to it or its
consent, may grant extensions of time, without limit as to the number or the
aggregate period of such extensions, for the payment of any principal due
hereon, and (iv) to the extent not prohibited by law, waives the benefit of any
law or rule of law intended for its advantage or protection as an Obligor
hereunder or providing for its release or discharge from liability hereon, in
whole or in part, on account of any facts or circumstances other than full and
complete payment of all amounts due hereunder. No renewal or extension of this
Note, and no delay in enforcement of this Note or in exercising any right, power
or remedy hereunder, provided by applicable law, or otherwise shall affect the
liability of any Obligor.
Whenever used herein, the words "Maker," "Holder" and "Obligor" shall be
deemed to include their respective heirs, legal representatives, successors and
assigns. All words used herein shall be deemed to refer to the singular,
plural, masculine, feminine or neuter as the identity of the person or entity or
the context may require.
In the event any one or more of the provisions contained in this Note shall
for any reason be held to be invalid, illegal or unenforceable in any respect,
such invalidity, illegality or unenforceability shall not affect any other
provisions of this Note, but this Note shall be construed as if such invalid,
illegal or unenforceable provision had never been contained herein or therein.
Should the indebtedness represented by this Note or any part thereof be
collected at law or in equity, or in bankruptcy, receivership or any other court
proceeding (whether at the trial or appellate level), or should this Note be
placed in the hands of attorneys for collection upon default, the Maker agrees
to pay on demand, in addition to the principal and all accrued and unpaid
interest due hereon, all costs of collection or attempting to collect this Note,
including reasonable attorneys' fees and expenses.
Any filing of voluntary or involuntary bankruptcy affecting the Maker or
appointment of a receiver or a composition with creditors shall constitute an
immediate demand for all amounts due under this Note.
No provision hereof may be waived or modified orally, but all such waivers
or modifications shall be in writing, signed by the party against whom
enforcement of any waiver, change, modification or discharge is sought.
This Note shall be governed by and construed under and in accordance with
the laws of the Commonwealth of Virginia.
All notices, demands, requests, consents or approvals required under this
Note shall be in writing and shall be deemed to have been properly given when
hand delivered or when mailed by first class certified or registered mail,
return receipt requested, postage prepaid, to the following addresses:
<PAGE> 3
-3-
If to Holder:
Versatility Inc.
c/o Donald Yount, CFO
11781 Lee Jackson Memorial Highway, Suite 600
Fairfax, VA 22033
If to Maker:
Serenity Real Properties Limited Partnership
c/o Ronald R. Charnock
11781 Lee Jackson Memorial Highway, Suite 600
Fairfax, VA 22033
The Maker hereby waives any and all rights to trial by jury fully to the
extent that any such right shall now or hereafter exist in any claim, action,
proceeding or counterclaim by either party against the other on any matters
arising out of or in any way connected with this Note.
The Maker hereby agrees that any action or proceeding under this Note may
be commenced against it in any court of competent jurisdiction within the
Commonwealth of Virginia, by service of process upon any attorney-in-fact as
designated by the Holder within this Commonwealth. The Maker agrees that any
such suit, action or proceeding arising out of or relating to this Note may be
instituted in the Circuit Court for the County of Fairfax, Virginia, or in the
United States District Court for the Eastern District of Virginia at the option
of the Holder; and the Maker hereby waives any objection to the venue of any
such suit, action or proceeding. Nothing herein shall affect the right of the
Holder to accomplish service of process in any other manner permitted by law.
IN WITNESS WHEREOF, the undersigned have duly executed this Note as of the
day and year first hereinabove set forth.
MAKER:
Serenity Real Properties Limited
Partnership
(Formerly known as Versatility Real
Properties Limited)
By: /s/ Ronald R. Charnock
----------------------------------
Serenity, L.L.C., General Partner
By Ronald R. Charnock, Member
WITNESS:
/s/ D. C. Yount Date: 10/31/96
- ----------------------------- -------------------------------
<PAGE> 1
EXHIBIT 11.1
VERSATILITY INC.
<TABLE>
STATEMENT REGARDING COMPUTATION OF PRO FORMA NET INCOME (LOSS) PER SHARE
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
APRIL 30, 1996 OCTOBER 31, 1996
-------------- ----------------
<S> <C> <C>
Net Income (Loss)............................................... $ 656,870 $ 418,171
---------- ----------
Shares Outstanding.............................................. 4,000,000 4,000,000
Add:
Shares issuable upon conversion of Series A Redeemable
Convertible Preferred Stock.............................. 992,061 992,061
Shares issuable from the assumed exercise of options as
determined by the application of the treasury stock
method................................................... 611,144 611,144
---------- ----------
5,603,205 5,603,205
========== ==========
Pro Forma Net Income (Loss) Per Common Share.................... $ .12 $ .07
========== ==========
</TABLE>
The above computations include all common equivalent shares issued within
the 12 months preceding the filing date as if they were outstanding for all
periods presented (using the treasury stock method and the anticipated public
offering price).
<PAGE> 1
EXHIBIT 21.1
------------
SUBSIDIARIES OF THE REGISTRANT
Versatility (UK) LIMITED
<PAGE> 1
EXHIBIT 23.1
CONSENT
To the Board of Directors of Versatility Inc.
Fairfax, Virginia
We consent to the use in this Amendment No. 1 to Registration Statement No.
333-13771 relating to 2,530,000 shares of Common Stock of Versatility Inc. on
Form S-1 of our report dated June 21, 1996 (except for Note 13 paragraphs 1
through 5 as to which the date is October 3, 1996, and paragraphs 6 through 8 as
to which the date is October 31, 1996), appearing in the Prospectus, which is a
part of this Registration Statement, and to the references to us under the
headings "Selected Consolidated Financial Data" and "Experts" in such
Prospectus.
Our audits of the consolidated financial statements referred to in our
aforementioned report also included the financial statement schedule of
Versatility Inc., listed in Item 16(b). This financial statement schedule is the
responsibility of the Corporation's management. Our responsibility is to express
an opinion based on our audits. In our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
Washington, DC
November 19, 1996
