<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 9, 1996
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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VERSATILITY INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 7372 52-1214354
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or 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)
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COPIES TO:
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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>
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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. / /
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF OFFERING PRICE AGGREGATE
SECURITIES TO AMOUNT TO BE PER OFFERING AMOUNT OF
BE REGISTERED REGISTERED(1) SHARE(2) PRICE(2) REGISTRATION FEE
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Common Stock, $.01 par value.... 2,530,000 shares $15.00 $37,950,000 $11,500.00
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(1) Includes 330,000 shares of Common Stock which may be purchased by the
Underwriters to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee.
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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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 OCTOBER 9, 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.
Application has been made for quotation of the Common Stock 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.
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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).................................... $ $ $
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(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.
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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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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, while the customer interaction software market 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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Common Stock offered by the Company......................... 2,200,000 shares
Common Stock to be outstanding after the offering(1)........ 7,192,061 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
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SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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THREE MONTHS ENDED
YEAR ENDED APRIL 30, JULY 31,
---------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1995 1996
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CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue:
License revenue............................. $4,226 $5,510 $5,393 $ 8,045 $10,345 $ 1,473 $ 3,788
Service and maintenance revenue............. 2,271 2,411 2,987 3,440 6,190 1,189 1,632
Total revenue........................... 6,497 7,921 8,380 11,485 16,535 2,662 5,420
Write-off of capitalized software(2).......... -- -- -- -- 829 829 --
Income (loss) from operations(2).............. (171) (383) 161 1,981 861 (778) 278
Net income (loss)............................. (174) (372) 110 1,257 657 (570) 202
Pro forma net income (loss) per share(3)...... $ 0.12 $ (0.10) $ 0.04
Pro forma weighted average number of shares
outstanding(3).............................. 5,603 5,603 5,603
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JULY 31, 1996
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PRO FORMA AS
ACTUAL PRO FORMA(4) ADJUSTED(4)(5)
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CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.................................................... $2,083 $2,083 $ 29,947
Working capital.............................................................. 5,179 5,179 33,043
Total assets................................................................. 8,937 8,937 36,801
Long-term debt, less current portion......................................... 59 59 59
Redeemable convertible preferred stock....................................... 3,649 -- --
Stockholders' equity......................................................... 1,955 5,604 33,468
</TABLE>
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(1) Excludes (i) 750,327 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 three months
ended July 31, 1995 reflects the impact of the capitalization and subsequent
amortization of software development costs. Income from operations in fiscal
1996, including the three months ended July 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 capitalized, and the
corresponding amortization and write-off not been recorded, income (loss)
from operations in fiscal 1994, 1995 and 1996 and in the three months ended
July 31, 1995 would have been ($110,000), $1.4 million, $1.7 million and
$60,000, 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 quarter of fiscal 1997, one customer, BT,
accounted for 43.6% 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 quarter of fiscal 1997 accounted for approximately 18.8%, 16.3%, 40.8%
and 57.8%, 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."
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 66.6% of the outstanding Common Stock (62.9% 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 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
10
<PAGE> 12
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 4,992,061 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. All of such shares 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 992,061
Restricted Shares will not be eligible for sale under Rule 144 until January
1998. In addition, as of September 30, 1996, options to purchase an aggregate of
750,327 shares of Common Stock were outstanding. Of the shares issuable upon the
exercise of options, 43,473 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
The following table sets forth the capitalization of the Company as of July
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.
<TABLE>
<CAPTION>
JULY 31, 1996
-------------------------------------
PRO FORMA AS
ACTUAL PRO FORMA ADJUSTED
------ --------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt, less current portion.................... $ 59 $ 59 $ 59
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)..... 3,649 -- --
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.............................. -- 3,639 31,481
Retained earnings....................................... 1,974 1,974 1,974
Foreign currency translation adjustment................. (59) (59) (59)
------ ------ -------
Total stockholders' equity......................... 1,955 5,604 33,468
------ ------ -------
Total capitalization.......................... $5,663 $ 5,663 $ 33,527
====== ====== =======
</TABLE>
- ---------------
(1) Excludes (i) 611,327 shares of Common Stock issuable upon the exercise of
options outstanding as of July 31, 1996, (ii) 139,000 shares of Common
Stock issuable upon the exercise of options granted on September 30, 1996,
and (iii) 711,000 shares of Common Stock available for issuance pursuant to
the Company's stock plans. See "Management -- Stock Plans" and Notes 8, 9
and 13 of Notes to Consolidated Financial Statements.
13
<PAGE> 15
DILUTION
The pro forma net tangible book value of the Company at July 31, 1996 was
$5.6 million, or $1.12 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 July 31, 1996 would have been $33.5
million, or $4.65 per share of Common Stock. This represents an immediate
increase in such pro forma net tangible book value of $3.53 per share to
existing stockholders and an immediate dilution of $9.35 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................................................. $ 1.12
Increase in net tangible book value per share attributable
to new investors......................................... 3.53
------
Pro forma net tangible book value per share after the
offering...................................................... 4.65
-------
Dilution per share to new investors(1).......................... $ 9.35
======
</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
$4.80 per share, resulting in dilution to new investors in this offering of
$9.20 per share. See "Underwriting."
The following table sets forth, on a pro forma basis as of July 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
July 31, 1996, there were 611,327 shares of Common Stock issuable upon the
exercise of outstanding options at an exercise price of $0.80 per share.
Additional options to purchase 139,000 shares of Common Stock were granted on
September 30, 1996 at an exercise price of $10.50 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 three months ended July 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 three months ended July 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>
THREE MONTHS
ENDED
YEAR ENDED APRIL 30, JULY 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 $1,473 $3,788
Service and maintenance revenue........ 2,271 2,411 2,987 3,440 6,190 1,189 1,632
------ ------ ------ ------- ------ ------
Total revenue...................... 6,497 7,921 8,380 11,485 16,535 2,662 5,420
Cost of revenue:
License revenue........................ 1,501 1,890 1,924 1,493 573 32 205
Service and maintenance revenue........ 1,196 1,745 2,056 2,385 4,267 767 1,232
------ ------ ------ ------- ------ ------
Total cost of revenue.............. 2,697 3,635 3,980 3,878 4,840 799 1,437
------ ------ ------ ------- ------ ------
Gross margin............................. 3,800 4,286 4,400 7,607 11,695 1,863 3,983
------ ------ ------ ------- ------ ------
Operating expenses:
Selling, general and administrative.... 3,506 4,048 3,717 4,550 7,770 1,304 3,037
Research and development............... 247 183 389 711 2,074 476 618
Depreciation and amortization.......... 218 438 133 365 161 32 50
Write-off of capitalized software...... -- -- -- -- 829 829 --
------ ------ ------ ------- ------ ------
Total operating expenses........... 3,971 4,669 4,239 5,626 10,834 2,641 3,705
------ ------ ------ ------- ------ ------
Income (loss) from operations............ (171) (383) 161 1,981 861 (778) 278
Interest income (expense), net......... (11) (7) (20) (9) 3 9 (6)
------ ------ ------ ------- ------ ------
Income (loss) before provision (benefit)
for income taxes....................... (182) (390) 141 1,972 864 (769) 272
Provision (benefit) for income taxes..... (8) (18) 31 715 207 (199) 70
------ ------ ------ ------- ------ ------
Net income (loss)........................ $ (174) $ (372) $ 110 $1,257 $ 657 $ (570) $ 202
====== ====== ====== ======= ====== ======
Pro forma net income (loss) per
share(1)............................... $ 0.12 $(0.10) $ 0.04
====== ======
Pro forma weighted average common and
common equivalent shares
outstanding(1)......................... 5,603 5,603 5,603
====== ======
</TABLE>
<TABLE>
<CAPTION>
JULY 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 $2,083 $2,083
Working capital (deficiency)............. (151) (318) (573) 446 5,066 5,179 5,179
Total assets............................. 2,979 2,832 2,060 4,288 9,631 8,937 8,937
Long-term debt, less current portion..... 159 101 114 51 70 59 59
Redeemable convertible preferred stock... -- -- -- -- 3,561 3,649 --
Stockholders' equity (deficit)........... 345 (35) 75 1,331 1,834 1,955 5,604
</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 quarter of
fiscal 1997, BT accounted for 43.6% 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 57.8% of the Company's total revenue for fiscal 1994, 1995 and
1996 and the first quarter of fiscal 1997, respectively. While
16
<PAGE> 18
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 1995, 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
---------------------------------------------------
THREE MONTHS
YEAR ENDED APRIL 30, ENDED JULY 31,
------------------------- ---------------
1994 1995 1996 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenue:
License revenue......................... 64.4% 70.0% 62.6% 55.3% 69.9%
Service and maintenance revenue......... 35.6 30.0 37.4 44.7 30.1
----- ----- ----- ----- -----
Total revenue...................... 100.0 100.0 100.0 100.0 100.0
Cost of revenue:
License revenue......................... 23.0 13.0 3.5 1.2 3.8
Service and maintenance revenue......... 24.5 20.8 25.8 28.8 22.7
----- ----- ----- ----- -----
Total cost of revenue.............. 47.5 33.8 29.3 30.0 26.5
----- ----- ----- ----- -----
Gross margin................................. 52.5 66.2 70.7 70.0 73.5
----- ----- ----- ----- -----
Operating expenses:
Selling, general and administrative..... 44.4 39.6 47.0 49.0 56.1
Research and development................ 4.6 6.2 12.5 17.9 11.4
Depreciation and amortization........... 1.6 3.2 1.0 1.2 0.9
Write-off of capitalized software....... -- -- 5.0 31.1 --
----- ----- ----- ----- -----
Total operating expenses........... 50.6 49.0 65.5 99.2 68.4
----- ----- ----- ----- -----
Income (loss) from operations................ 1.9 17.2 5.2 (29.2) 5.1
Interest income (expense), net............... (0.2) (0.1) (0.0) 0.3 (0.1)
----- ----- ----- ----- -----
Income (loss) before provision (benefit) for
income taxes............................... 1.7 17.1 5.2 (28.9) 5.0
Provision (benefit) for income taxes......... 0.4 6.2 1.2 (7.5) 1.3
----- ----- ----- ----- -----
Net income (loss)............................ 1.3% 10.9% 4.0% (21.4)% 3.7%
===== ===== ===== ===== =====
</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:
17
<PAGE> 19
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED APRIL 30, JULY 31,
------------------------- ---------------
1994 1995 1996 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Cost of license revenue...................... 35.7% 18.6% 5.5% 2.2% 5.4%
Cost of service and maintenance revenue...... 68.8% 69.3% 68.9% 64.5% 75.5%
</TABLE>
THREE MONTHS ENDED JULY 31, 1996 COMPARED TO THREE MONTHS ENDED JULY 31, 1995
Revenue. Total revenue increased 103.6% from $2.7 million in the first
quarter of fiscal 1996 to $5.4 million in the first quarter of fiscal 1997.
Revenue from license fees increased 157.2% from $1.5 million in the first
quarter of fiscal 1996, or 55.3% of total revenue, to $3.8 million in the first
quarter of fiscal 1997, or 69.9% of total revenue. In the first quarter 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. Service revenue increased 37.2% from $1.2 million in
the first quarter of fiscal 1996 to $1.6 million in the first quarter of fiscal
1997. Service revenue, however, decreased as a percentage of total revenue from
44.7% in the first quarter of fiscal 1996 to 30.1% in the first quarter 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 $799,000 in the first quarter of
fiscal 1996, or 30.0% of total revenue, to $1.4 million for the first quarter of
fiscal 1997, or 26.5% of total revenue. Cost of license revenue increased from
$32,000 in the first quarter of fiscal 1996, or 2.2% of license revenue, to
$205,000 in the first quarter of fiscal 1997, or 5.4% of license revenue. The
higher costs of license revenue in the first quarter of fiscal 1997 included
costs relating to incidental hardware sold with the Versatility Series product.
Cost of service and maintenance revenue increased from $767,000 in the first
quarter of fiscal 1996, or 64.5% of service and maintenance revenue, to $1.2
million in the first quarter of fiscal 1997, or 75.5% 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.
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 $1.3 million for the first quarter of
fiscal 1996, or 49.0% of total revenue, to $3.0 million for the first quarter of
fiscal 1997, or 56.1% 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. The Company also doubled its total
sales staff and introduced new selling channels, resulting in total selling
costs of $1.2 million in the first quarter of fiscal 1997 compared to $516,000
for the same period in the prior year. General and administrative costs
increased from $511,000 in the first quarter of fiscal 1996 to $1.0 million in
the first quarter of fiscal 1997 as a result of increases in administrative
overhead to support the larger employee base, higher recruiting costs, costs
relating to additional headquarters office space, costs relating to new office
space in the United Kingdom and higher legal and accounting fees.
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 increased from
$476,000 in the first quarter of fiscal 1996, or 17.9% of total revenue, to
$618,000 in the first quarter of fiscal 1997, or 11.4% of total revenue. The
increase was due to the hiring of additional software engineers to support
increased development activities.
18
<PAGE> 20
Depreciation and Amortization and Write-off of Capitalized
Software. Depreciation and amortization expenses were $32,000 in the first
quarter of fiscal 1996 and $50,000 in the first quarter of fiscal 1997.
Additionally, in the first quarter of fiscal 1996, the Company wrote off all
remaining capitalized software totaling $829,000. No amounts were written off in
the first quarter 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 $9,000 in the first
quarter of fiscal 1996 and ($6,000) in the first quarter of fiscal 1997. The
difference results from interest expense attributable to borrowings under the
Company's line of credit in the first quarter 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 ($199,000) in the first quarter of fiscal 1996 compared to
$70,000 in the first quarter of fiscal 1997. For the first quarter of fiscal
1996 and 1997, the effective tax rate was approximately 26.0%. 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 ($570,000) for the
first quarter of fiscal 1996 to $202,000 for the first quarter of fiscal 1997.
If the Company had not capitalized software development costs and no
amortization or write-off had been recorded, net income for the first quarter of
fiscal 1996 would have been $45,000.
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 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.
19
<PAGE> 21
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 capitalized 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 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 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
20
<PAGE> 22
marketing department. In fiscal 1995, the Company also moved to new
headquarters, increasing rent and related moving and utilities expenses by
$257,000.
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
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 capitalized 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
The following table presents certain unaudited quarterly financial
information for the seven quarters ended July 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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------------
1995 1996
------------------------------------------- --------------------------------
JAN. 31 APRIL 30 JULY 31 OCT. 31 JAN. 31 APRIL 30 JULY 31
-------- ---------- -------- -------- -------- --------- ---------
<S> <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
Service and maintenance revenue.............. 910 1,045 1,189 1,846 1,690 1,465 1,632
------ ------ ------ ------ ------ ------ ------
Total revenue............................ 3,276 3,615 2,662 3,988 3,957 5,928 5,420
Cost of revenue:
License revenue.............................. 335 764 32 210 115 216 205
Service and maintenance revenue.............. 563 672 767 996 1,101 1,403 1,232
------ ------ ------ ------ ------ ------ ------
Total cost of revenue.................... 898 1,436 799 1,206 1,216 1,619 1,437
Gross margin..................................... 2,378 2,179 1,863 2,782 2,741 4,309 3,983
------ ------ ------ ------ ------ ------ ------
Operating expenses:
Selling, general and administrative.......... 1,096 1,503 1,304 1,633 1,826 3,007 3,037
Research and development..................... 138 363 476 481 473 644 618
Depreciation and amortization................ 130 140 32 35 45 49 50
Write-off of capitalized software............ -- -- 829 -- -- -- --
------ ------ ------ ------ ------ ------ ------
Total operating expenses................. 1,364 2,006 2,641 2,149 2,344 3,700 3,705
------ ------ ------ ------ ------ ------ ------
Income (loss) from operations.................... 1,014 173 (778) 633 397 609 278
Interest income (expense), net................... (1) (5) 9 4 0 (10) (6)
------ ------ ------ ------ ------ ------ ------
Income (loss) before provision (benefit) for
income taxes................................... 1,013 168 (769) 637 397 599 272
Provision (benefit) for income taxes............. 365 65 (199) 159 104 143 70
------ ------ ------ ------ ------ ------ ------
Net income (loss)................................ $ 648 $ 103 $ (570) $ 478 $ 293 $ 456 $ 202
====== ====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
(AS A PERCENTAGE OF TOTAL REVENUE)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
License revenue.............................. 72.2% 71.1% 55.3% 53.7% 57.3% 75.3% 69.9%
Service and maintenance revenue.............. 27.8 28.9 44.7 46.3 42.7 24.7 30.1
----- ----- ----- ----- ----- ----- -----
Total revenue............................ 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
Service and maintenance revenue.............. 17.2 18.6 28.8 25.0 27.8 23.7 22.7
----- ----- ----- ----- ----- ----- -----
Total cost of revenue.................... 27.4 39.7 30.0 30.2 30.7 27.3 26.5
----- ----- ----- ----- ----- ----- -----
Gross margin..................................... 72.6 60.3 70.0 69.8 69.3 72.7 73.5
----- ----- ----- ----- ----- ----- -----
Operating expenses:
Selling, general and administrative.......... 33.5 41.6 49.0 40.9 46.2 50.7 56.1
Research and development..................... 4.2 10.0 17.9 12.1 12.0 10.9 11.4
Depreciation and amortization................ 4.0 3.9 1.2 0.9 1.1 0.8 0.9
Write-off of capitalized software............ -- -- 31.1 -- -- -- --
----- ----- ----- ----- ----- ----- -----
Total operating expenses................. 41.7 55.5 99.2 53.9 59.3 62.4 68.4
----- ----- ----- ----- ----- ----- -----
Income (loss) from operations.................... 30.9 4.8 (29.2) 15.9 10.0 10.3 5.1
Interest income (expense), net................... (0.0) (0.1) 0.3 0.1 0.0 (0.2) (0.1)
----- ----- ----- ----- ----- ----- -----
Income (loss) before provision (benefit) for
income taxes................................... 30.9 4.7 (28.9) 16.0 10.0 10.1 5.0
Provision (benefit) for income taxes............. 11.1 1.8 (7.5) 4.0 2.6 2.4 1.3
----- ----- ----- ----- ----- ----- -----
Net income (loss)................................ 19.8% 2.9% (21.4)% 12.0% 7.4% 7.7% 3.7%
===== ===== ===== ===== ===== ===== =====
</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>
THREE MONTHS ENDED
------------------------------------------------------------------------------
1995 1996
------------------------------------------- --------------------------------
JAN. 31 APRIL 30 JULY 31 OCT. 31 JAN. 31 APRIL 30 JULY 31
-------- ---------- -------- -------- -------- --------- ---------
<S> <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%
Cost of service and maintenance revenue.......... 61.9% 64.3% 64.5% 54.0% 65.1% 95.8% 75.5%
</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 $1.2 million at September 30, 1996, and
advances under the line bear interest at a variable annual rate equal to the
prime rate of the bank plus 0.5%. The line expires on August 5, 1997.
At July 31, 1996, the Company had $2.1 million in cash and $5.1 million in
accounts receivable. For the quarter ended July 31, 1996, net cash generated by
operations totaled $525,000, which was offset by the use of cash to retire
short-term borrowings under the Company's working capital line of credit and for
capital expenditures on infrastructure associated with the expansion of the
Company's distribution channels, resulting in a net decrease in cash of
$197,000.
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 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 $173,000 in capital
expenditures in fiscal 1995, fiscal 1996 and the first quarter 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 quarter ended July
31, 1996, the Company did not finance any of the capital assets acquired, but
anticipates that this practice will be employed in the future.
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 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, while the customer interaction software market 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.
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
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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.
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.
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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. Initial direct sales to a
customer have typically ranged from $200,000 to $1.0 million, with certain
transactions that have been considerably greater than $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.
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
Customer Access Resources
Medco Containment Services
Mellon Bank
PCS Primeco
R.L. Polk Company
Sanwa Bank
The Faneuil Group
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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
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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 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 September 30, 1996, the Company's research and development and
quality assurance staff consisted of 30 employees. The Company's total expenses
for research and development for fiscal years 1994, 1995, 1996 and the first
quarter of fiscal 1997 were $389,000, $711,000, $2.1 million and $618,000,
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 enhance-
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ments 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 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 September 30, 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 September
30, 1996, this selling unit consisted of 8 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 September 30, 1996, consisted of
16 employees.
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<PAGE> 35
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 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
September 30, 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
34
<PAGE> 36
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 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.
EMPLOYEES
As of September 30, 1996, the Company had 145 full-time employees, of which
129 were based in the United States and 16 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.
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
The Company is not a party to any material legal proceedings.
35
<PAGE> 37
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 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 a general partner of the Edison Venture Fund and has directed
Edison's Washington, D.C. office. 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> 38
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 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> 39
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 $151,858 --
Marcus W. Heth, Senior Vice President,
Technologies, Secretary and Director............ 140,000 150,993 --
Donald C. Yount, Jr., Senior Vice President,
Finance and Chief Financial Officer............. 78,077 19,050 6,004
</TABLE>
- ------------
(1) The Company did not make any restricted stock awards, grant any stock
appreciation rights or make any long-term incentive payments during fiscal
1996.
Option Grants. The following table provides information concerning grants
of stock options made during fiscal 1996 by the Company to the Named Executive
Officers:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL
------------------------------------------------------ REALIZABLE VALUE AT
PERCENT OF ASSUMED ANNUAL
TOTAL RATES OF STOCK
OPTIONS PRICE APPRECIATION
GRANTED TO EXERCISE FOR OPTION TERM(3)
OPTIONS EMPLOYEES PRICE EXPIRATION -------------------
NAME GRANTED(1) IN FISCAL YEAR(2) ($/SH) DATE 5% 10%
- -------------------------------- ---------- ----------------- -------- ---------- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Ronald R. Charnock.............. -- -- -- -- -- --
Marcus W. Heth.................. -- -- -- -- -- --
Donald C. Yount, Jr............. 4,040 0.99% $ 0.80 1/27/01 $893 $1,973
1,964 0.80 4/30/01 434 959
</TABLE>
- ------------
(1) All 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.
(2) 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.
(3) 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> 40
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 September 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. 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 September 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. 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.
39
<PAGE> 41
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 September 30, 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.
40
<PAGE> 42
CERTAIN TRANSACTIONS
Prior to October , 1997, the Company was the 1% general partner of
Versatility 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 , 1996, the Company sold its general partnership interest in
the Partnership, for consideration equal to its capital account of $3,131, to
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
$552,496 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 9, 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, from time to time, extended loans to Mr. Charnock. Such
loans are payable on demand and bear interest at the prime rate. During fiscal
1996, the maximum amounts extended to Mr. Charnock, including accrued interest,
totaled $117,934. As of September 30, 1996, outstanding loans, including accrued
interest, to Mr. Charnock totaled $111,968.
Certain obligations under the Company's Master Equipment Lease with its
leasing agent, are personally guaranteed by Mr. Charnock.
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.
41
<PAGE> 43
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of September 30, 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 11.4% 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% 4.5%
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 11.4% 7.9%
Charles A. Johnson(6).............................. 425,169 8.5% 5.9%
Paul Palmer(7)..................................... 5,000 * *
Louis Venezia(8)................................... 332,468 6.2% 4.4%
Ernest Connon(9)................................... 320,493 6.4% 4.5%
Stephen P. Winings(10)............................. 4,000 * *
All Executive Officers and Directors as a group
(7 persons)(4)(5)(6)(7)(10)...................... 3,369,493 67.3% 46.8%
</TABLE>
- ---------------
* Less than 1% of the outstanding Common Stock.
(1) The number of shares of Common Stock deemed outstanding prior to this
offering includes 4,992,061 shares of Common Stock outstanding as of
September 30, 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 September 30, 1996.
42
<PAGE> 44
(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 5,000 shares issuable pursuant to stock options which are
exercisable within 60 days of September 30, 1996.
(8) Consists of 332,468 shares issuable pursuant to stock options which are
exercisable within 60 days of September 30, 1996.
(9) Includes 493 shares issuable pursuant to stock options which are
exercisable within 60 days of September 30, 1996.
(10) Consists of 4,000 shares issuable pursuant to stock options which are
exercisable within 60 days of September 30, 1996.
43
<PAGE> 45
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 September 30, 1996, there were 4,992,061 shares of Common Stock
outstanding and held of record by 7 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 7,192,061 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
44
<PAGE> 46
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 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
45
<PAGE> 47
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 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.
46
<PAGE> 48
SHARES ELIGIBLE FOR FUTURE SALE
Upon the closing of this offering, the Company will have 7,192,061 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 4,992,061 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. All of these shares are subject to Lock-up Agreements. The
remaining 992,061 outstanding Restricted Shares will not be eligible for sale
under Rule 144 until January 1998, 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
71,920 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 September 30, 1996, options to purchase a total of 750,327 shares of
Common Stock were outstanding. Of the shares issuable pursuant to such options,
43,473 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.
47
<PAGE> 49
LOCK-UP AGREEMENTS
All stockholders and all executive officers and directors of the Company,
who in the aggregate hold all of the outstanding shares of Common Stock and
options to purchase 43,473 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."
48
<PAGE> 50
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".
49
<PAGE> 51
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 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.
50
<PAGE> 52
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 July 31,
1996................................................................................ F-3
Consolidated Statements of Operations for the years ended April 30, 1994, 1995 and
1996 and the unaudited three months ended July 31, 1995 and 1996.................... F-5
Consolidated Statements of Cash Flows for the years ended April 30, 1994, 1995 and
1996 and the unaudited three months ended July 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 three months ended July 31,
1996................................................................................ F-7
Notes to Consolidated Financial Statements............................................ F-8
</TABLE>
F-1
<PAGE> 53
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.
DELOITTE & TOUCHE LLP
Washington, DC
June 21, 1996, except for Note 13
as to which the date is October 3, 1996.
F-2
<PAGE> 54
VERSATILITY INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
APRIL 30, JULY 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 $2,082,955 $2,082,955
Accounts receivable -- (net of
allowance for doubtful accounts of
$70,354, $157,874 and $152,002)...... 1,423,094 5,707,724 5,065,784 5,065,784
Prepaid expenses....................... 24,956 642,045 651,305 651,305
Inventory (Note 1)..................... 7,356 -- 1,674 1,674
Deferred income taxes (Note 10)........ -- 130,238 130,238 130,238
---------- ---------- ---------- ----------
Total current assets.............. 2,869,611 8,760,280 7,931,956 7,931,956
---------- ---------- ---------- ----------
Other assets:
Related party receivables (Note 3)..... 114,016 80,000 91,759 91,759
Deposits............................... 77,531 157,835 157,067 157,067
Investments (Note 3)................... 4,126 3,137 3,165 3,165
Assets held for sale................... -- 76,004 216,221 216,221
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
$17,250 (Note 1)..................... -- 103,500 97,750 97,750
---------- ---------- ---------- ----------
Total other assets................ 1,024,699 420,476 565,962 565,962
---------- ---------- ---------- ----------
Property and equipment (Note 1):
Computers.............................. 809,845 893,674 915,253 915,253
Office furniture and equipment......... 575,000 637,559 649,089 649,089
Leasehold improvements................. 180,347 181,485 183,071 183,071
Capital leases......................... 113,278 160,822 161,130 161,130
---------- ---------- ---------- ----------
1,678,470 1,873,540 1,908,543 1,908,543
Less: Accumulated depreciation and
amortization......................... (1,285,168) (1,423,234) (1,469,731) (1,469,731)
---------- ---------- ---------- ----------
Net property and equipment........ 393,302 450,306 438,812 438,812
---------- ---------- ---------- ----------
Total....................................... $4,287,612 $9,631,062 $8,936,730 $8,936,730
========== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 55
VERSATILITY INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
APRIL 30, JULY 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 $ 315,093 $ 315,093
Accrued liabilities (Note 4)............... 752,075 1,393,653 1,548,879 1,548,879
Related party payables (Note 3)............ 86,218 3,443 30,000 30,000
Income taxes payable (Note 10)............. 448,767 356,503 155,579 155,579
Capital lease payable (Note 6)............. 22,976 30,848 30,848 30,848
Current maturities of notes payable (Note
5)....................................... 35,250 -- -- --
Line of credit (Note 5).................... -- 800,772 255,764 255,764
Deferred revenue (Note 1).................. 188,106 284,700 416,516 416,516
---------- ---------- ---------- ----------
Total current liabilities............. 2,423,847 3,694,664 2,752,679 2,752,679
---------- ---------- ---------- ----------
Long-term liabilities:
Capital lease payable, less current
maturities (Note 6)...................... 51,042 69,983 59,383 59,383
Deferred rent (Note 1)..................... 154,006 221,899 271,238 271,238
Deferred income taxes (Note 10)............ 327,454 249,401 249,401 249,401
---------- ---------- ---------- ----------
Total other liabilities............... 532,502 541,283 580,022 580,022
---------- ---------- ---------- ----------
Commitments (Note 6)
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 3,649,293 --
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................. -- -- -- 3,639,372
Foreign currency translation adjustments
(Note 1)................................. -- (66,311) (59,743) (59,743 )
Retained earnings.......................... 1,291,263 1,860,133 1,974,479 1,974,479
---------- ---------- ---------- ----------
Stockholders' equity.................. 1,331,263 1,833,822 1,954,736 5,604,029
---------- ---------- ---------- ----------
Total........................................... $4,287,612 $9,631,062 $8,936,730 $8,936,730
========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 56
VERSATILITY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED APRIL 30, JULY 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 $1,473,029 $3,788,164
Service and maintenance revenue (Note
1)................................... 2,987,444 3,439,806 6,189,949 1,189,124 1,631,868
---------- ---------- ----------- ---------- ----------
Total revenue..................... 8,380,335 11,485,151 16,535,272 2,662,153 5,420,032
Cost of revenue:
License revenue........................ 1,923,777 1,493,194 573,329 32,611 205,224
Service and maintenance revenue........ 2,056,524 2,384,946 4,266,984 766,782 1,231,682
---------- ---------- ----------- ---------- ----------
Total cost of revenue............. 3,980,301 3,878,140 4,840,313 799,393 1,436,906
---------- ---------- ----------- ---------- ----------
Gross margin............................... 4,400,034 7,607,011 11,694,959 1,862,760 3,983,126
Operating expenses:
Selling, general and administrative.... 3,716,966 4,550,182 7,769,751 1,303,812 3,036,786
Research and development............... 389,154 710,828 2,073,797 475,589 618,566
Depreciation and amortization.......... 133,444 365,490 161,346 32,661 49,816
Write off of capitalized software...... -- -- 829,026 829,026 --
---------- ---------- ----------- ---------- ----------
Total operating expenses.......... 4,239,564 5,626,500 10,833,920 2,641,088 3,705,168
---------- ---------- ----------- ---------- ----------
Income (loss) from operations.............. 160,470 1,980,511 861,039 (778,328) 277,958
Interest income (expense), net (Note 12)... (19,259) (8,977) 3,140 9,102 (5,612)
---------- ---------- ----------- ---------- ----------
Income (loss) before provision (benefit)
for income taxes......................... 141,211 1,971,534 864,179 (769,226) 272,346
Provision (benefit) for income taxes (Notes
1 and 10)................................ 31,087 714,947 207,309 (198,876) 70,000
---------- ---------- ----------- ---------- ----------
Net income (loss).......................... $ 110,124 $1,256,587 $ 656,870 $ (570,350) $ 202,346
========== ========== =========== ========== ==========
Pro forma net income (loss) per share...... $ 0.12 $ (0.10) $ 0.04
=========== ========== ==========
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> 57
VERSATILITY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED JULY
YEAR ENDED APRIL 30, 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 $ (570,350) $ 202,346
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation..................................... 133,444 199,685 149,846 32,661 44,066
Amortization..................................... -- 165,805 11,500 -- 5,750
Loss (gain) on equity investment................. (107) (122) 989 -- (28)
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) (775,482) 641,940
Income taxes receivable...................... 207,419 -- -- -- --
Prepaid expenses............................. (5,772) (8,156) (617,089) (198,443) (9,260)
Inventory.................................... 36,260 -- 7,356 -- (1,674)
Related party receivables.................... (13,584) 3,143 34,016 (54,675) (11,759)
Deposits..................................... 6,573 (52,184) (80,304) 803 768
Accounts payable............................. (867,102) 170,482 (65,710) 159,200 (509,652)
Accrued liabilities.......................... 68,783 319,481 641,578 (156,323) 155,226
Related party payables....................... (48,242) 4,460 (82,775) 30,000 26,557
Income taxes payable......................... 131,887 308,580 (92,264) (304,346) (200,924)
Deferred rent................................ (61,416) 20,938 67,893 11,192 49,339
Deferred revenue............................. (40,020) (53,740) 96,594 46,633 131,816
--------- ----------- ----------- ----------- ----------
Net cash (used in) provided by operating
activities............................. 493,856 2,208,766 (2,935,395) (1,266,334) 524,511
--------- ----------- ----------- ----------- ----------
Cash flows from investing activities:
Purchase of property and equipment and assets held
for sale........................................... (79,949) (155,734) (235,310) (43,272) (172,789)
Software development costs........................... (251,435) (743,396) -- -- --
Purchased software................................... -- -- (115,000) (50,000) --
--------- ----------- ----------- ----------- ----------
Net cash used in investing activities.... (331,384) (899,130) (350,310) (93,272) (172,789)
--------- ----------- ----------- ----------- ----------
Cash flows from financing activities:
Borrowings (payments) under line of credit........... -- -- 800,772 -- (545,008)
Proceeds from sale of preferred stock, net........... -- -- 3,473,293 -- --
Principal payments under note payable................ (55,090) (65,453) (35,250) (11,031) --
Principal payments under capital leases.............. (23,008) (22,432) (20,731) (10,686) (10,600)
--------- ----------- ----------- ----------- ----------
Net cash provided by (used in) financing
activities............................. (78,098) (87,885) 4,218,084 (21,717) (555,608)
--------- ----------- ----------- ----------- ----------
Effect of exchange rate changes on cash.................. -- -- (66,311) (32,882) 6,568
--------- ----------- ----------- ----------- ----------
Net increase (decrease) in cash and cash equivalents..... 84,374 1,221,751 866,068 (1,414,205) (197,318)
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 $ -- $2,082,955
========= =========== =========== =========== ==========
Supplemental disclosures of cash flow information:
Interest paid........................................ $ 30,244 $ 18,691 $ 27,732 $ 3,119 $ 51,630
========= =========== =========== =========== ==========
Income taxes paid.................................... $ 8,300 $ 114,309 $ 506,490 $ 350,800 $ 273,000
========= =========== =========== =========== ==========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 58
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)............................ 6,568 6,568
Accretion of dividends on redeemable
preferred stock (unaudited)............ (88,000) (88,000)
Net income (unaudited)................... 202,346 202,346
--------- ------- ---------- ----------- ---------- ----------
Balance, July 31, 1996 (unaudited)........... 4,000,000 $40,000 $ -- $ (59,743) $1,974,479 $1,954,736
--------- ------- ---------- ----------- ---------- ----------
Pro Forma Balance, July 31, 1996
(unaudited)................................ 4,992,061 $49,921 $3,639,372 $ (59,743) $1,974,479 $5,604,029
========== ======== ========= =========== ========= =========
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE> 59
VERSATILITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1994, 1995 AND 1996 AND THE THREE MONTHS ENDED JULY 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 NPRI 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 Versatility 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
1995, 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> 60
VERSATILITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1994, 1995 AND 1996 AND THE THREE MONTHS ENDED JULY 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.
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 and $47,544 of
equipment through capital leases during fiscal 1994 and fiscal 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 quarter of fiscal
1997, one customer accounted for 43.6% 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 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.
F-9
<PAGE> 61
VERSATILITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1994, 1995 AND 1996 AND THE THREE MONTHS ENDED JULY 31,
1995 AND 1996 (UNAUDITED) -- (CONTINUED)
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 three months ended July 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
NPRI Limited was acquired by the Company during December 1995. The
shareholders of the Company were the same shareholders of NPRI 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 NPRI Limited. The shares of NPRI 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>
NPRI 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>
NPRI 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> 62
VERSATILITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1994, 1995 AND 1996 AND THE THREE MONTHS ENDED JULY 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 July 31,
1996 as follows:
<TABLE>
<CAPTION>
APRIL 30,
-------------------- JULY 31,
1995 1996 1996
-------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Stockholder loans............................ $109,170 $65,544 $ 78,290
Other........................................ 4,846 14,456 13,469
-------- ------- -----------
$114,016 $80,000 $ 91,759
======== ======= ===========
</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 Versatility Real Properties Limited
Partnership (the "Partnership"). The limited partners are stockholders in the
Company and the Company is the general partner. (See Note 6)
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> <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 July 31, 1996:
<TABLE>
<CAPTION>
APRIL 30,
--------------------- JULY 31,
1995 1996 1996
-------- ---------- ----------
<S> <C> <C> <C>
(UNAUDITED)
Accrued commissions and salaries................... $244,837 $ 335,395 $ 340,495
Accrued bonuses.................................... 207,113 461,586 322,787
Accrued payroll taxes and withholdings............. 173,279 341,397 509,196
Accrued vacation................................... 86,388 203,219 266,089
Other.............................................. 40,458 52,056 110,312
-------- ---------- ----------
$752,075 $1,393,653 $1,548,879
======== ========= =========
</TABLE>
F-11
<PAGE> 63
VERSATILITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1994, 1995 AND 1996 AND THE THREE MONTHS ENDED JULY 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 Note 3)
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> 64
VERSATILITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1994, 1995 AND 1996 AND THE THREE MONTHS ENDED JULY 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
F-13
<PAGE> 65
VERSATILITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1994, 1995 AND 1996 AND THE THREE MONTHS ENDED JULY 31,
1995 AND 1996 (UNAUDITED) -- (CONTINUED)
21 years old and have completed at least six months of service are eligible to
participate. Under the terms of 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 timing differences between the financial
statements and the tax returns.
F-14
<PAGE> 66
VERSATILITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1994, 1995 AND 1996 AND THE THREE MONTHS ENDED JULY 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> 67
VERSATILITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1994, 1995 AND 1996 AND THE THREE MONTHS ENDED JULY 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 NPRI Limited for software sales of the
Company's products sold by NPRI Limited. The royalty is intended to cover
primarily software development expense and marketing expense. NPRI 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 $3,752,433 of export
revenue for fiscal 1995 and 1996, respectively. Included in United Kingdom
revenue is $617,544 and $527,681 of export revenue for fiscal 1995 and 1996,
respectively. 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 $16,011 (unaudited) in fiscal 1994, 1995 and 1996 and the three
months ending July 31, 1996, respectively, and interest expense of $30,244,
$18,346, $63,503, and $21,621 (unaudited) in fiscal 1994, 1995 and 1996 and the
three months ending July 31, 1996, respectively.
F-16
<PAGE> 68
VERSATILITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1994, 1995 AND 1996 AND THE THREE MONTHS ENDED JULY 31,
1995 AND 1996 (UNAUDITED) -- (CONTINUED)
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 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.
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 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)
Initial Public Offering
The Company plans to file 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-17
<PAGE> 69
------------------------------------------------------
------------------------------------------------------
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
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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............................. 36
Certain Transactions................... 41
Principal and Selling Stockholders..... 42
Description of Capital Stock........... 44
Shares Eligible for Future Sale........ 47
Underwriting........................... 49
Legal Matters.......................... 50
Experts................................ 50
Additional Information................. 50
Index to Consolidated Financial
Statements........................... F-1
</TABLE>
------------------------
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> 70
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Estimated expenses (other than the underwriting discount) payable in
connection with the sale of the Common Stock offered hereby are as follows:
<TABLE>
<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 $3,499,832.48. 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> 71
(b) Certain Grants and Exercises of Stock Options.
The Company has issued options to purchase an aggregate of 750,327 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.
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 9, 1996 issued by Versatility 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>
- ---------------
* To be filed by amendment.
(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> 72
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> 73
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Fairfax, Virginia on October ,
1996.
VERSATILITY INC.
By:.................................
RONALD R. CHARNOCK
CHIEF EXECUTIVE OFFICER, PRESIDENT
AND CHAIRMAN
OF THE BOARD OF DIRECTORS
POWER OF ATTORNEY AND SIGNATURES
The undersigned directors and officers of Versatility Inc. do hereby
constitute and appoint Ronald R. Charnock and Donald C. Yount, Jr. and each of
them, with full power of substitution, our true and lawful attorneys-in-fact and
agents to do any and all acts and things in our name and behalf in our
capacities as directors and officers, and to execute any and all instruments for
us and in our names in the capacities indicated below which such person may deem
necessary or advisable to enable Versatility Inc. to comply with the Securities
Act of 1933, as amended, and any rules, regulations and requirements of the SEC,
in connection with this Registration Statement, including specifically, but not
limited to, power and authority to sign for us, or any of us, in the capacities
indicated below, any and all amendments (including post-effective amendments
filed pursuant to Rule 462(b) of the Securities Act of 1933, as amended) hereto;
and we do hereby ratify and confirm all that such person or persons shall do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
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>
Chief Executive Officer, October , 1996
.................................... President (Principal Executive
RONALD R. CHARNOCK Officer) and Chairman of the
Board of Directors
Chief Financial Officer October , 1996
.................................... (Principal Financial Officer and
DONALD C. YOUNT, JR. Principal Accounting Officer)
Senior Vice President, October , 1996
.................................... Technologies, Secretary and
MARCUS W. HETH Director
Director October , 1996
....................................
THOMAS A. SMITH
Director October , 1996
....................................
CHARLES A. JOHNSON
Director October , 1996
....................................
PAUL PALMER
</TABLE>
II-4
<PAGE> 74
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ------------
<C> <S>
*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 9, 1996 issued by Versatility 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)
<FN>
- ---------------
* To be filed by amendment.
</TABLE>
<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
<PAGE> 7
-4-
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
-5-
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
-6-
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;
<PAGE> 12
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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.
<PAGE> 13
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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
<PAGE> 14
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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".
<PAGE> 15
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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
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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
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> 18
-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> 19
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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."
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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> 1
EXHIBIT 3.2
-----------
SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
VERSATILITY INC.
(INCORPORATED JANUARY 3, 1996)
* * * * * *
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, do hereby certify that the Certificate
of Incorporation of Versatility Inc., as amended, originally incorporated under
the name, NPRI, Inc., has been further amended, and restated as amended, in
accordance with provisions of Sections 242 and 245 of the General Corporation
Law of the State of Delaware, and, as amended and restated, is set forth in its
entirety as follows:
FIRST. The name of the Corporation is Versatility Inc.
SECOND. The address of the registered office of the Corporation in the
State of Delaware is 1013 Centre Road, Wilmington, New Castle County, Delaware
19085. The name of its registered agent at such address is The Prentice-Hall
Corporation System, Inc.
THIRD. The nature of the business or purposes to be conducted or promoted
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 all classes of capital stock which
the Corporation shall have authority to issue is 22,000,000 shares, consisting
of 20,000,000 shares of Common Stock with a par value of $.01 per share (the
"Common Stock") and 2,000,000 shares of Preferred Stock with a par value of $.01
per share (the "Preferred Stock").
A description of the respective classes of stock and a statement of the
designations, powers, preferences and rights, and the qualifications,
limitations and restrictions of the Preferred Stock and Common Stock are as
follows:
A. COMMON STOCK
------------
1. GENERAL. All shares of Common Stock will be identical and will entitle
the holders thereof to the same rights, powers and privileges. The rights,
powers and privileges of the holders of the Common Stock are subject to and
qualified by the rights of holders of the Preferred Stock.
<PAGE> 2
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2. DIVIDENDS. Dividends may be declared and paid on the Common Stock from
funds lawfully available therefor as and when determined by the Board of
Directors and subject to any preferential dividend rights of any then
outstanding Preferred Stock.
3. DISSOLUTION, LIQUIDATION OR WINDING UP. In the event of any dissolution,
liquidation or winding up of the affairs of the Corporation, whether voluntary
or involuntary, each issued and outstanding share of Common Stock shall entitle
the holder thereof to receive an equal portion of the net assets of the
Corporation available for distribution to the holders of Common Stock, subject
to any preferential rights of any then outstanding Preferred Stock.
4. VOTING RIGHTS. Except as otherwise required by law or this Second
Amended and Restated Certificate of Incorporation, each holder of Common Stock
shall have one vote in respect of each share of stock held of record by such
holder on the books of the Corporation for the election of directors and on all
matters submitted to a vote of stockholders of the Corporation. Except as
otherwise required by law or provided herein, holders of Common Stock shall vote
together with holders of the Preferred Stock as a single class, subject to any
special or preferential voting rights of any then outstanding Preferred Stock.
There shall be no cumulative voting.
B. PREFERRED STOCK
---------------
The Preferred Stock may be issued in one or more series at such time or
times and for such consideration or considerations as the Board of Directors of
the Corporation may determine. Each series shall be so designated as to
distinguish the shares thereof from the shares of all other series and classes.
Except as otherwise provided in this Second Amended and Restated Certificate of
Incorporation, different series of Preferred Stock shall not be construed to
constitute different classes of shares for the purpose of voting by classes.
The Board of Directors is expressly authorized to provide for the issuance
of all or any shares of the undesignated Preferred Stock in one or more series,
each with such designations, preferences, voting powers (or special,
preferential or no voting powers), relative, participating, optional or other
special rights and privileges and such qualifications, limitations or
restrictions thereof as shall be stated in the resolution or resolutions adopted
by the Board of Directors to create such series, and a certificate of said
resolution or resolutions (a "Certificate of Designation") shall be filed in
accordance with the General Corporation Law of the State of Delaware. The
authority of the Board of Directors with respect to each such series shall
include, without limitation of the foregoing, the right to provide that the
shares of each such series may be: (i) subject to redemption at such time or
times and at such price or prices; (ii) entitled to receive dividends (which may
be cumulative or non-cumulative) at such rates, on such conditions, and at such
times, and payable in preference to, or in such relation to, the dividends
payable on any other class or classes or any other series; (iii) entitled to
such rights upon the dissolution of, or upon any distribution of the assets of,
the Corporation; (iv) convertible into, or exchangeable for, shares of any other
class or classes of stock, or of any other series of the same or any other class
or classes of stock of the Corporation at such price or prices or at such rates
of exchange and with such adjustments, if any; (v) entitled to the benefit of
such limitations, if any, on the issuance of additional shares of such series or
shares of any other series of Preferred Stock; or (vi) entitled to
<PAGE> 3
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such other preferences, powers, qualifications, rights and privileges, all as
the Board of Directors may deem advisable and as are not inconsistent with law
and the provisions of this Second Amended and Restated Certificate of
Incorporation.
FIFTH. The Corporation is to have perpetual existence.
SIXTH. The following provisions are included for the management of the
business and the conduct of the affairs of the Corporation, and for further
definition, limitation and regulation of the powers of the Corporation and of
its Board of Directors and stockholders:
1. The business and affairs of the Corporation shall be managed by or
under the direction of the Board of Directors of the Corporation.
2. The Board of Directors of the Corporation is expressly authorized
to adopt, amend or repeal the By-Laws of the Corporation, subject to any
limitation thereof contained in the By-Laws. Except as otherwise provided by
this Second Amended and Restated Certificate of Incorporation, by the By-Laws of
the Corporation or by law, the stockholders shall also have the power to adopt,
amend or repeal the By-Laws of the Corporation by the affirmative vote of the
holders of a majority of the shares of the capital stock of the Corporation
issued and outstanding and entitled to vote at any regular or special meeting of
stockholders, provided notice of such alteration, amendment, repeal or adoption
of new By-Laws shall have been stated in the notice of such meeting.
3. Stockholders of the Corporation may not take any action by written
consent in lieu of a meeting.
4. Special meetings of stockholders may be called at any time only by
the President, the Chairman of the Board of Directors (if any) or a majority of
the Board of Directors. Business transacted at any special meeting of
stockholders shall be limited to matters relating to the purpose or purposes
stated in the notice of meeting.
5. The books of the Corporation may be kept at such place within or
without the State of Delaware as the By-Laws of the Corporation may provide or
as may be designated from time to time by the Board of Directors of the
Corporation.
SEVENTH.
1. NUMBER OF DIRECTORS. The number of directors which shall constitute the
whole Board of Directors shall be determined by resolution of a majority of the
Board of Directors, but in no event shall the number of directors be less than
three. The number of directors may be decreased at any time and from time to
time by a majority of the directors then in office, but only to eliminate
vacancies existing by reason of the death, resignation, removal or expiration of
the term of one or more directors. The directors shall be elected at the annual
meeting of stockholders by such stockholders as have the right to vote on such
election. Directors need not be stockholders of the Corporation.
<PAGE> 4
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2. CLASSES OF DIRECTORS. The Board of Directors shall be and is divided
into three classes: Class I, Class II and Class III. No one class shall have
more than one director more than any other class.
3. ELECTION OF DIRECTORS. Elections of directors need not be by written
ballot except as and to the extent provided in the By-Laws of the Corporation.
4. TERMS OF OFFICE. Each director shall serve for a term ending on the date
of the third annual meeting following the annual meeting at which such director
was elected; provided, however, that each initial director in Class I shall
serve for a term ending on the date of the annual meeting next following the end
of the Corporation's fiscal year ending April 30, 1997; each initial director in
Class II shall serve for a term ending on the date of the annual meeting next
following the end of the Corporation's fiscal year ending April 30, 1998; and
each initial director in Class III shall serve for a term ending on the date of
the annual meeting next following the end of the Corporation's fiscal year
ending April 30, 1999.
5. ALLOCATION OF DIRECTORS AMONG CLASSES IN THE EVENT OF INCREASES OR
DECREASES IN THE NUMBER OF DIRECTORS. In the event of any increase or decrease
in the authorized number of directors, (i) each director then serving as such
shall nevertheless continue as director of the class of which he or she is a
member until the expiration of such director's current term or his or her prior
death, retirement or resignation and (ii) the newly created or eliminated
directorships resulting from such increase or decrease shall be apportioned by
the Board of Directors among the three classes of directors so as to ensure that
no one class has more than one director more than any other class. To the extent
possible, consistent with the foregoing rule, any newly created directorships
shall be added to those classes whose terms of office are to expire at the
earliest dates following such allocation, unless otherwise provided for from
time to time by resolution adopted by a majority of the directors then in
office, though less than a quorum. No decrease in the number of directors
constituting the whole Board of Directors shall shorten the term of an incumbent
Director.
6. TENURE. Notwithstanding any provisions to the contrary contained herein,
each director shall hold office until his or her successor is elected and
qualified, or until his or her earlier death, resignation or removal.
7. VACANCIES. Unless and until filled by the stockholders, any vacancy in
the Board of Directors, however occurring, including a vacancy resulting from an
enlargement of the Board of Directors, may be filled only by vote of a majority
of the directors then in office, even if less than a quorum, or by a sole
remaining director. A director elected to fill a vacancy shall be elected for
the unexpired term of his or her predecessor in office, if applicable, and a
director chosen to fill a position resulting from an increase in the number of
directors shall hold office until the next election of the class for which such
director shall have been chosen and until his or her successor is elected and
qualified, or until his or her earlier death, resignation or removal.
<PAGE> 5
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8. QUORUM. A majority of the total number of the whole Board of Directors
shall constitute a quorum at all meetings of the Board of Directors. In the
event one or more of the directors shall be disqualified to vote at any meeting,
then the required quorum shall be reduced by one for each such director so
disqualified; provided, however, that in no case shall less than one-third (1/3)
of the number so fixed constitute a quorum. In the absence of a quorum at any
such meeting, a majority of the directors present may adjourn the meeting from
time to time without further notice other than announcement at the meeting,
until a quorum shall be present.
9. ACTION AT MEETING. At any meeting of the Board of Directors at which a
quorum is present, the vote of a majority of those present shall be sufficient
to take any action, unless a different vote is specified by law or the
Corporation's By-Laws.
10. REMOVAL. Any one or more or all of the directors may be removed without
cause only by the holders of at least seventy-five percent (75%) of the shares
then entitled to vote at an election of directors. Any one or more or all of the
directors may be removed with cause only by the holders of at least a majority
of the shares then entitled to vote at an election of directors.
11. STOCKHOLDER NOMINATIONS AND INTRODUCTION OF BUSINESS, ETC. Advance
notice of stockholder nominations for election of directors and other business
to be brought by stockholders before a meeting of stockholders shall be given in
the manner provided in the By-Laws of the Corporation.
12. RIGHTS OF PREFERRED STOCK. The provisions of this Article are subject
to the rights of the holders of any series of Preferred Stock from time to time
outstanding.
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 transaction from which the director derived an improper personal benefit. 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.
NINTH. The Board of Directors of the Corporation, when evaluating any offer
of another party (a) to make a tender or exchange offer for any equity security
of the Corporation or (b) to effect a business combination, shall, in connection
with the exercise of its judgment in determining what is in the best interests
of the Corporation as whole, be authorized to give due consideration to any such
factors as the Board of Directors determines to be relevant, including, without
limitation:
<PAGE> 6
-6-
(i) the interests of the Corporation's stockholders, including the
possibility that these interests might be best served by the continued
independence of the Corporation;
(ii) whether the proposed transaction might violate federal or state
laws;
(iii) not only the consideration being offered in the proposed
transaction, in relation to the then current market price for the
outstanding capital stock of the Corporation, but also to the market price
for the capital stock of the Corporation over a period of years, the
estimated price that might be achieved in a negotiated sale of the
Corporation 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 Corporation'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
Corporation, upon the communities in which the Corporation conducts its
business and upon the economy of the state, region and nation.
In connection with any such evaluation, the Board of Directors is authorized to
conduct such investigations and engage in such legal proceedings as the Board of
Directors may determine.
TENTH.
1. ACTIONS, SUITS AND PROCEEDINGS OTHER THAN BY OR IN THE RIGHT OF THE
CORPORATION. The Corporation shall indemnify each person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation), by
reason of the fact that he is or was, or has agreed to become, a director or
officer of the Corporation, or is or was serving, or has agreed to serve, at the
request of the Corporation, as a director, officer or trustee of, or in a
similar capacity with, another corporation, partnership, joint venture, trust or
other enterprise (including any employee benefit plan) (all such persons being
referred to hereafter as an "Indemnitee"), or by reason of any action alleged to
have been taken or omitted in such capacity, against all expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him or on his behalf in connection with such action, suit
or proceeding and any appeal therefrom, if he acted in good faith and in a
manner he reasonably believed to be in, or not opposed to, the best interests of
the Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction or upon a
plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in, or not opposed to, the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful. Notwithstanding
anything to the contrary in this Article, except as set forth in Section 6
below, the Corporation shall not indemnify an Indemnitee seeking indemnification
in connection with a proceeding (or part thereof) initiated by the Indemnitee
unless the initiation thereof was approved by the Board of Directors of the
Corporation.
<PAGE> 7
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2. ACTIONS OR SUITS BY OR IN THE RIGHT OF THE CORPORATION. The Corporation
shall indemnify any Indemnitee who was or is a party or is threatened to be made
a party to any threatened, pending or completed action or suit by or in the
right of the Corporation to procure a judgment in its favor by reason of the
fact that he is or was, or has agreed to become, a director or officer of the
Corporation, or is or was serving, or has agreed to serve, at the request of the
Corporation, as a director, officer or trustee of, or in a similar capacity
with, another corporation, partnership, joint venture, trust or other enterprise
(including any employee benefit plan), or by reason of any action alleged to
have been taken or omitted in such capacity, against all expenses (including
attorneys' fees) and amounts paid in settlement actually and reasonably incurred
by him or on his behalf in connection with such action, suit or proceeding and
any appeal therefrom, if he acted in good faith and in a manner he reasonably
believed to be in, or not opposed to, the best interests of the Corporation,
except that no indemnification shall be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be liable to the
Corporation unless and only to the extent that the Court of Chancery of Delaware
or the court in which such action or suit was brought shall determine upon
application that, despite the adjudication of such liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses (including attorneys' fees) which the Court of
Chancery of Delaware or such other court shall deem proper.
3. INDEMNIFICATION FOR EXPENSES OF SUCCESSFUL PARTY. Notwithstanding the
other provisions of this Article, to the extent that an Indemnitee has been
successful, on the merits or otherwise, in defense of any action, suit or
proceeding referred to in Sections 1 and 2 of this Article, or in defense of any
claim, issue or matter therein, or on appeal from any such action, suit or
proceeding, he shall be indemnified against all expenses (including attorneys'
fees) actually and reasonably incurred by him or on his behalf in connection
therewith. Without limiting the foregoing, if any action, suit or proceeding is
disposed of, on the merits or otherwise (including a disposition without
prejudice), without (i) the disposition being adverse to the Indemnitee, (ii) an
adjudication that the Indemnitee was liable to the Corporation, (iii) a plea of
guilty or nolo contendere by the Indemnitee, (iv) an adjudication that the
Indemnitee did not act in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the Corporation, and (v) with
respect to any criminal proceeding, an adjudication that the Indemnitee had
reasonable cause to believe his conduct was unlawful, the Indemnitee shall be
considered for the purpose hereof to have been wholly successful with respect
thereto.
4. NOTIFICATION AND DEFENSE OF CLAIM. As a condition precedent to his right
to be indemnified, the Indemnitee must notify the Corporation in writing as soon
as practicable of any action, suit, proceeding or investigation involving him
for which indemnity will or could be sought. With respect to any action, suit,
proceeding or investigation of which the Corporation is so notified, the
Corporation will be entitled to participate therein at its own expense and/or to
assume the defense thereof at its own expense, with legal counsel reasonably
acceptable to the Indemnitee. After notice from the Corporation to the
Indemnitee of its election so to assume such defense, the Corporation shall not
be liable to the Indemnitee for any legal or other expenses subsequently
incurred by the Indemnitee in connection with such claim, other than as provided
below in this Section 4. The Indemnitee shall have the right to employ his own
counsel in
<PAGE> 8
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connection with such claim, but the fees and expenses of such counsel incurred
after notice from the Corporation of its assumption of the defense thereof shall
be at the expense of the Indemnitee unless (i) the employment of counsel by the
Indemnitee has been authorized by the Corporation, (ii) counsel to the
Indemnitee shall have reasonably concluded that there may be a conflict of
interest or position on any significant issue between the Corporation and the
Indemnitee in the conduct of the defense of such action or (iii) the Corporation
shall not in fact have employed counsel to assume the defense of such action, in
each of which cases the fees and expenses of counsel for the Indemnitee shall be
at the expense of the Corporation, except as otherwise expressly provided by
this Article. The Corporation shall not be entitled, without the consent of the
Indemnitee, to assume the defense of any claim brought by or in the right of the
Corporation or as to which counsel for the Indemnitee shall have reasonably made
the conclusion provided for in clause (ii) above.
5. ADVANCE OF EXPENSES. Subject to the provisions of Section 6 below, in
the event that the Corporation does not assume the defense pursuant to Section 4
of this Article of any action, suit, proceeding or investigation of which the
Corporation receives notice under this Article, any expenses (including
attorneys' fees) incurred by an Indemnitee in defending a civil or criminal
action, suit, proceeding or investigation or any appeal therefrom shall be paid
by the Corporation in advance of the final disposition of such matter, PROVIDED,
HOWEVER, that the payment of such expenses incurred by an Indemnitee in advance
of the final disposition of such matter shall be made only upon receipt of an
undertaking by or on behalf of the Indemnitee to repay all amounts so advanced
in the event that it shall ultimately be determined that the Indemnitee is not
entitled to be indemnified by the Corporation as authorized in this Article.
Such undertaking may be accepted without reference to the financial ability of
such person to make such repayment.
6. PROCEDURE FOR INDEMNIFICATION. In order to obtain indemnification or
advancement of expenses pursuant to Section 1, 2, 3 or 5 of this Article, the
Indemnitee shall submit to the Corporation a written request, including in such
request such documentation and information as is reasonably available to the
Indemnitee and is reasonably necessary to determine whether and to what extent
the Indemnitee is entitled to indemnification or advancement of expenses. Any
such indemnification or advancement of expenses shall be made promptly, and in
any event within 60 days after receipt by the Corporation of the written request
of the Indemnitee, unless with respect to requests under Section 1, 2 or 5 the
Corporation determines, by clear and convincing evidence, within such 60-day
period that the Indemnitee did not meet the applicable standard of conduct set
forth in Section 1 or 2, as the case may be. Such determination shall be made in
each instance by (a) a majority vote of the directors of the Corporation who are
not at that time parties to the action, suit or proceeding in question
("disinterested directors"), even though less than a quorum, (b) if there are no
such disinterested directors, or if such disinterested directors so direct, by
independent legal counsel (who may be regular legal counsel to the corporation)
in a written opinion, (c) a majority vote of a quorum of the outstanding shares
of stock of all classes entitled to vote for directors, voting as a single
class, which quorum shall consist of stockholders who are not at that time
parties to the action, suit or proceeding in question, or (d) a court of
competent jurisdiction.
<PAGE> 9
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7. REMEDIES. The right to indemnification or advances as granted by this
Article shall be enforceable by the Indemnitee in any court of competent
jurisdiction if the Corporation denies such request, in whole or in part, or if
no disposition thereof is made within the 60-day period referred to above in
Section 6. Unless otherwise provided by law, the burden of proving that the
Indemnitee is not entitled to indemnification or advancement of expenses under
this Article shall be on the Corporation. Neither the failure of the Corporation
to have made a determination prior to the commencement of such action that
indemnification is proper in the circumstances because the Indemnitee has met
the applicable standard of conduct, nor an actual determination by the
Corporation pursuant to Section 6 that the Indemnitee has not met such
applicable standard of conduct, shall be a defense to the action or create a
presumption that the Indemnitee has not met the applicable standard of conduct.
The Indemnitee's expenses (including attorneys' fees) incurred in connection
with successfully establishing his right to indemnification, in whole or in
part, in any such proceeding shall also be indemnified by the Corporation.
8. SUBSEQUENT AMENDMENT. No amendment, termination or repeal of this
Article or of the relevant provisions of the General Corporation Law of the
State of Delaware or any other applicable laws shall affect or diminish in any
way the rights of any Indemnitee to indemnification under the provisions hereof
with respect to any action, suit, proceeding or investigation arising out of or
relating to any actions, transactions or facts occurring prior to the final
adoption of such amendment, termination or repeal.
9. OTHER RIGHTS. The indemnification and advancement of expenses provided
by this Article shall not be deemed exclusive of any other rights to which an
Indemnitee seeking indemnification or advancement of expenses may be entitled
under any law (common or statutory), agreement or 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 office for the Corporation,
and shall continue as to an Indemnitee who has ceased to be a director or
officer, and shall inure to the benefit of the estate, heirs, executors and
administrators of the Indemnitee. Nothing contained in this Article shall be
deemed to prohibit, and the Corporation is specifically authorized to enter
into, agreements with officers and directors providing indemnification rights
and procedures different from those set forth in this Article. In addition, the
Corporation may, to the extent authorized from time to time by its Board of
Directors, grant indemnification rights to other employees or agents of the
Corporation or other persons serving the Corporation and such rights may be
equivalent to, or greater or less than, those set forth in this Article.
10. PARTIAL INDEMNIFICATION. If an Indemnitee is entitled under any
provision of this Article to indemnification by the Corporation for some or a
portion of the expenses (including attorneys' fees), judgments, fines or amounts
paid in settlement actually and reasonably incurred by him or on his behalf in
connection with any action, suit, proceeding or investigation and any appeal
therefrom but not, however, for the total amount thereof, the Corporation shall
nevertheless indemnify the Indemnitee for the portion of such expenses
(including attorneys' fees), judgments, fines or amounts paid in settlement to
which the Indemnitee is entitled.
11. INSURANCE. The Corporation may purchase and maintain insurance, at its
expense, to protect itself and any director, officer, employee or agent of the
Corporation or another
<PAGE> 10
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corporation, partnership, joint venture, trust or other enterprise (including
any employee benefit plan) against any expense, liability or loss incurred by
him in any such capacity, or arising out of his status as such, whether or not
the Corporation would have the power to indemnify such person against such
expense, liability or loss under the General Corporation Law of the State of
Delaware.
12. MERGER OR CONSOLIDATION. If the Corporation is merged into or
consolidated with another corporation and the Corporation is not the surviving
corporation, the surviving corporation shall assume the obligations of the
Corporation under this Article with respect to any action, suit, proceeding or
investigation arising out of or relating to any actions, transactions or facts
occurring prior to the date of such merger or consolidation.
13. SAVINGS CLAUSE. If this Article or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify each Indemnitee as to any expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement in
connection with any action, suit, proceeding or investigation, whether civil,
criminal or administrative, including an action by or in the right of the
Corporation, to the fullest extent permitted by an applicable portion of this
Article that shall not have been invalidated and to the fullest extent permitted
by applicable law.
14. DEFINITIONS. Terms used herein and defined in Section 145(h) and
Section 145(i) of the General Corporation Law of the State of Delaware shall
have the respective meanings assigned to such terms in such Section 145(h) and
Section 145(i).
15. SUBSEQUENT LEGISLATION. If the General Corporation Law of the State of
Delaware is amended after adoption of this Article to expand further the
indemnification permitted to Indemnitees, then the Corporation shall indemnify
such persons to the fullest extent permitted by the General Corporation Law of
the State of Delaware, as so amended.
ELEVENTH. The Corporation reserves the right to amend or repeal any
provision contained in this Second Amended and Restated Certificate of
Incorporation in the manner prescribed by the laws of the State of Delaware and
all rights conferred upon stockholders are granted subject to this reservation,
PROVIDED, HOWEVER, that in addition to the vote of the holders of any class or
series of stock of the Corporation required by law, by this Second Amended and
Restated Certificate of Incorporation or a Certificate of Designation with
respect to a series of Preferred Stock, the affirmative vote of the holders of
shares of voting stock of the Corporation representing at least seventy-five
percent (75%) of the voting power of all of the then outstanding shares of the
capital stock of the Corporation entitled to vote generally in the election of
directors, voting together as a single class, shall be required to (i) reduce or
eliminate the number of authorized shares of Common Stock or the number of
authorized shares of Preferred Stock set forth in Article FOURTH or (ii) amend
or repeal, or adopt any provision inconsistent with, Parts A and B of Article
FOURTH and Articles FIFTH, SIXTH, SEVENTH, EIGHTH, NINTH, TENTH and this Article
ELEVENTH of this Second Amended and Restated Certificate of Incorporation.
<PAGE> 11
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IN WITNESS WHEREOF, the undersigned has hereunto signed his name and
affirms that the statements made in this Second Amended and Restated Certificate
of Incorporation are true under the penalties of perjury this [____] day of
[_______], 1996.
------------------------------
Ronald R. Charnock
President
<PAGE> 1
EXHIBIT 3.3
-----------
AMENDED AND RESTATED
BY-LAWS
OF
VERSATILITY INC.
Adopted September 30, 1996
Effective __________ __, 1996
<PAGE> 2
BY-LAWS
TABLE OF CONTENTS
-----------------
Page
----
ARTICLE 1 - STOCKHOLDERS................................................1
1.1 Place of Meetings..............................................1
1.2 Annual Meeting.................................................1
1.3 Special Meetings...............................................1
1.4 Notice of Meetings.............................................1
1.5 Voting List....................................................2
1.6 Quorum.........................................................2
1.7 Adjournments...................................................2
1.8 Voting and Proxies.............................................2
1.9 Action at Meeting..............................................3
1.10 Introduction of Business at Meetings...........................3
A. Annual Meetings of Stockholders.............................3
B. Special Meetings of Stockholders............................5
C. General.....................................................5
1.11 Action without Meeting..........................................6
ARTICLE 2 - DIRECTORS...................................................6
2.1 General Powers.................................................6
2.2 Number; Election and Qualification.............................7
2.3 Terms in Office................................................7
2.4 Allocation of Directors Among Classes in the Event of
Increases or Decreases in the Number of Directors............7
2.5 Tenure.........................................................7
2.6 Vacancies......................................................7
2.7 Resignation....................................................8
2.8 Regular Meetings...............................................8
2.9 Special Meetings...............................................8
2.10 Notice of Special Meetings.....................................8
2.11 Meetings by Telephone Conference Calls.........................8
2.12 Quorum.........................................................8
2.13 Action at Meeting..............................................9
2.14 Action by Written Consent......................................9
2.15 Removal........................................................9
2.16 Committees.....................................................9
2.17 Compensation of Directors.....................................10
2.18 Amendments to Article.........................................10
ARTICLE 3 - OFFICERS...................................................10
<PAGE> 3
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3.1 Enumeration...................................................10
3.2 Election......................................................10
3.3 Qualification.................................................11
3.4 Tenure........................................................11
3.5 Resignation and Removal.......................................11
3.6 Vacancies.....................................................11
3.7 Chairman of the Board and Vice-Chairman of the Board..........11
3.8 President.....................................................11
3.9 Vice Presidents...............................................12
3.10 Secretary and Assistant Secretaries...........................12
3.11 Treasurer and Assistant Treasurers............................12
3.12 Salaries......................................................13
3.13 Action with Respect to Securities of Other Corporations.......13
ARTICLE 4 - CAPITAL STOCK..............................................14
4.1 Issuance of Stock.............................................14
4.2 Certificates of Stock.........................................14
4.3 Transfers.....................................................14
4.4 Lost, Stolen or Destroyed Certificates........................14
4.5 Record Date...................................................15
ARTICLE 5 - GENERAL PROVISIONS.........................................15
5.1 Fiscal Year...................................................15
5.2 Corporate Seal................................................15
5.3 Notices.......................................................15
5.4 Waiver of Notice..............................................16
5.5 Evidence of Authority.........................................16
5.6 Facsimile Signatures..........................................16
5.7 Reliance upon Books, Reports and Records......................16
5.8 Time Periods..................................................16
5.9 Certificate of Incorporation..................................16
5.10 Transactions with Interested Parties..........................16
5.11 Severability..................................................17
5.12 Pronouns......................................................17
ARTICLE 6 - AMENDMENTS.................................................17
6.1 By the Board of Directors.....................................17
6.2 By the Stockholders...........................................17
<PAGE> 4
AMENDED AND RESTATED
BY-LAWS
OF
VERSATILITY INC. (the "Corporation")
ARTICLE 1 - STOCKHOLDERSARTICLE 1 - STOCKHOLDERS
------------------------------------------------
1.1 PLACE OF MEETINGS. All meetings of stockholders shall be held at such
place within or without the State of Delaware as may be designated from time to
time by the Chairman of the Board (if any), the board of directors of the
Corporation (the "Board of Directors") or the President or, if not so
designated, at the registered office of the Corporation.
1.2 ANNUAL MEETING. The annual meeting of stockholders for the election
of directors and for the transaction of such other business as may properly be
brought before the meeting shall be held on a date to be fixed by the Chairman
of the Board (if any), Board of Directors or the President (which date shall
not be a legal holiday in the place where the meeting is to be held) at the
time and place to be fixed by the Chairman of the Board, the Board of
Directors or the President and stated in the notice of the meeting.
1.3 SPECIAL MEETINGS. Special meetings of stockholders may be called at
any time by the Chairman of the Board (if any), a majority of the Board of
Directors or the President and shall be held at such place, on such date and at
such time as shall be fixed by the Board of Directors or the person calling the
meeting. Business transacted at any special meeting of stockholders shall be
limited to matters relating to the purpose or purposes stated in the notice of
meeting. Notwithstanding any other provision of law, the Certificate of
Incorporation or these By-Laws, and notwithstanding the fact that a lesser
percentage may be specified by law, the affirmative vote of the holders of at
least seventy-five percent (75%) of the votes which all the stockholders would
be entitled to cast at any annual election of directors or class of directors
shall be required to amend or repeal, or to adopt any provision inconsistent
with, this Section 1.3.
1.4 NOTICE OF MEETINGS. Except as otherwise provided by law, written
notice of each meeting of stockholders, whether annual or special, shall be
given not less than 10 nor more than 60 days before the date of the meeting to
each stockholder entitled to vote at such meeting. The notices of all meetings
shall state the place, date and hour of the meeting. The notice of a special
meeting shall state, in addition, the purpose or purposes for which the meeting
is called. If mailed, notice is given when deposited in the United States mail,
postage prepaid, directed to the stockholder at his or her address as it
appears on the records of the Corporation.
1.5 VOTING LIST. The officer who has charge of the stock ledger of the
Corporation shall prepare, at least 10 days before every meeting of
stockholders, a complete list of the
<PAGE> 5
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stockholders entitled to vote at the meeting, arranged in alphabetical order,
and showing the address of each stockholder and the number of shares registered
in the name of each stockholder. Such list shall be open to the examination of
any stockholder, for any purpose germane to the meeting, during ordinary
business hours, for a period of at least 10 days prior to the meeting, either at
a place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or if not so specified, at the place
where the meeting is to be held. The list shall also be produced and kept at the
time and place of the meeting during the whole time of the meeting, and may be
inspected by any stockholder who is present. This list shall presumptively
determine the identity of the stockholders entitled to vote at the meeting and
the number of shares held by each of them.
1.6 QUORUM. Except as otherwise provided by law, the Certificate of
Incorporation or these By-Laws, the holders of a majority of the shares of
the capital stock of the Corporation issued and outstanding and entitled to vote
at the meeting, present in person or represented by proxy, shall constitute a
quorum for the transaction of business. Shares held by brokers which such
brokers are prohibited from voting (pursuant to their discretionary authority on
behalf of beneficial owners of such shares who have not submitted a proxy with
respect to such shares) on some or all of the matters before the stockholders,
but which shares would otherwise be entitled to vote at the meeting ("Broker
Non-Votes") shall be counted, for the purpose of determining the presence or
absence of a quorum, both (a) toward the total voting power of the shares of
capital stock of the Corporation and (b) as being represented by proxy. If a
quorum has been established for the purpose of conducting the meeting, a quorum
shall be deemed to be present for the purpose of all votes to be conducted at
such meeting, provided that where a separate vote by a class or classes, or
series thereof, is required, a majority of the voting power of the shares of
such class or classes, or series, present in person or represented by proxy
shall constitute a quorum entitled to take action with respect to that vote on
that matter. If a quorum shall fail to attend any meeting, the chairman of the
meeting or the holders of a majority of the voting power of the shares of stock
entitled to vote who are present, in person or by proxy, may adjourn the meeting
to another place, date, or time.
1.7 ADJOURNMENTS. Any meeting of stockholders may be adjourned to any
other time and to any other place at which a meeting of stockholders may be
held under these By-Laws by the stockholders present or represented at the
meeting and entitled to vote, although less than a quorum, or, if no
stockholder is present, by any officer entitled to preside at or to act as
Secretary of such meeting. It shall not be necessary to notify any stockholder
of any adjournment of less than 30 days if the time and place of the adjourned
meeting are announced at the meeting at which adjournment is taken, unless
after the adjournment a new record date is fixed for the adjourned meeting. At
the adjourned meeting, the Corporation may transact any business which
might have been transacted at the original meeting.
1.8 VOTING AND PROXIES. At any meeting of the stockholders, each
stockholder shall have one vote for each share of stock entitled to vote at
such meeting held of record by such stockholder and a proportionate vote for
each fractional share so held, unless otherwise provided in the Certificate of
Incorporation. Each stockholder of record entitled to vote at a meeting of
stockholders, or to express consent or dissent to corporate action in
writing without a meeting (to
<PAGE> 6
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the extent not otherwise prohibited by the Certificate of Incorporation or these
By-Laws), may vote or express such consent or dissent in person or may authorize
another person or persons to vote or act for such stockholder by written proxy
executed by such stockholder or his or her authorized agent or by a transmission
permitted by law and delivered to the Secretary of the Corporation. No such
proxy shall be voted or acted upon after three years from the date of its
execution, unless the proxy expressly provides for a longer period. Any copy,
facsimile telecommunication or other reliable reproduction of the writing or
transmission created pursuant to this Section 1.8 may be substituted or used in
lieu of the original writing or transmission for any and all purposes for which
the original writing or transmission could be used, provided that such copy,
facsimile telecommunication or reproduction shall be a complete reproduction of
the entire original writing or transmission.
In the election of directors, voting shall be by written ballot, and for
any other action, voting need not be by ballot except where otherwise required
by law or the Certificate of Incorporation, and may take place via a voice vote.
Any vote not taken by voice shall be taken by ballots, each of which shall state
the name of the stockholder or proxy voting and such other information as may be
required under the procedure established for the meeting.
1.9 ACTION AT MEETING. When a quorum is present at any meeting of
stockholders, the holders of a majority of the stock present or represented and
voting on a matter (or if there are two or more classes of stock entitled to
vote as separate classes, then in the case of each such class, the holders of a
majority of the stock of that class present or represented and voting on such
matter) shall decide any matter to be voted upon by the stockholders at such
meeting, except when a different vote is required by express provision of law,
the Certificate of Incorporation or these By-Laws. Except as otherwise provided
by the Certificate of Incorporation, all elections of directors shall be
determined by a plurality of the votes cast, and except as otherwise required
by law or the Certificate of Incorporation, all other matters shall be
determined by a majority of the votes cast affirmatively or negatively. For the
purposes of this paragraph, Broker Non-Votes represented at the meeting but not
permitted to vote on a particular matter shall not be counted, with respect to
the vote on such matter, in the number of (a) votes cast, (b) votes cast
affirmatively, or (c) votes cast negatively.
1.10 INTRODUCTION OF BUSINESS AT MEETINGS
A. ANNUAL MEETINGS OF STOCKHOLDERS
-------------------------------
(1) Nominations of persons for election to the Board of Directors
and the proposal of business to be considered by the stockholders may be made at
an annual meeting of stockholders (a) pursuant to the Corporation's notice of
meeting, (b) by or at the direction of the Board of Directors or (c) by any
stockholder of the Corporation who was a stockholder of record at the time of
giving of notice provided for in this Section 1.10, who is entitled to vote at
the meeting and who complies with the notice procedures set forth in this
Section 1.10.
(2) For nominations or other business to be properly brought
before an annual meeting by a stockholder pursuant to clause (c) of paragraph
(A)(1) of this Section 1.10,
<PAGE> 7
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the stockholder must have given timely notice thereof in writing to the
Secretary of the Corporation and such other business must otherwise be a proper
matter for stockholder action. To be timely, a stockholder's notice shall be
delivered to the Secretary at the principal executive offices of the Corporation
not later than the close of business on the one hundred twentieth (120th) day
nor earlier than the close of business on the one hundred fiftieth (150th) day
prior to the first anniversary of the date of the proxy statement delivered to
stockholders in connection with the preceding year's annual meeting; provided,
however, that if either (i) the date of the annual meeting is more than thirty
(30) days before or more than sixty (60) days after such an anniversary date or
(ii) no proxy statement was delivered to stockholders in connection with the
preceding year's annual meeting, notice by the stockholder to be timely must be
so delivered not earlier than the close of business on the ninetieth (90th) day
prior to such annual meeting and not later than the close of business on the
later of the sixtieth (60th) day prior to such annual meeting or the close of
business on the tenth (10th) day following the day on which public announcement
of the date of such meeting is first made by the Corporation. Such stockholder's
notice shall set forth (a) as to each person whom the stockholder proposes to
nominate for election or reelection as a director, all information relating to
such person that is required to be disclosed in solicitations of proxies for
election of directors, or is otherwise required, in each case pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") (including such person's written consent to being named in the
proxy statement as a nominee and to serving as a director if elected); (b) as to
any other business that the stockholder proposes to bring before the meeting, a
brief description of the business desired to be brought before the meeting, the
reasons for conducting such business at the meeting and any material interest in
such business of such stockholder and the beneficial owner, if any, on whose
behalf the proposal is made; and (c) as to the stockholder giving the notice and
the beneficial owner, if any, on whose behalf the nomination or proposal is made
(i) the name and address of such stockholder, as they appear on the
Corporation's books, and of such beneficial owner and (ii) the class and number
of shares of capital stock of the Corporation that are owned beneficially and
held of record by such stockholder and such beneficial owner.
(3) Notwithstanding anything in the second sentence of paragraph
(A)(2) of this Section 1.10 to the contrary, in the event that the number of
directors to be elected to the Board of Directors of the Corporation is
increased and there is no public announcement by the Corporation naming all of
the nominees for director or specifying the size of the increased Board of
Directors at least seventy (70) days prior to the first anniversary of the
preceding year's annual meeting (or, if the annual meeting is held more than
thirty (30) days before or sixty (60) days after such anniversary date, at least
seventy (70) days prior to such annual meeting), a stockholder's notice required
by this Section 1.10 shall also be considered timely, but only with respect to
nominees for any new positions created by such increase, if it shall be
delivered to the Secretary at the principal executive office of the Corporation
not later than the close of business on the tenth (10th) day following the day
on which such public announcement is first made by the Corporation.
B. SPECIAL MEETINGS OF STOCKHOLDERS. Only such business shall be
conducted at a special meeting of stockholders as shall have been brought
before the meeting pursuant to the Corporation's notice of meeting.
Nominations of persons for election to the Board of Directors
<PAGE> 8
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may be made at a special meeting of stockholders at which directors are to be
elected pursuant to the Corporation's notice of meeting (a) by or at the
direction of the Board of Directors or (b) provided that the Board of Directors
has determined that directors shall be elected at such meeting, by any
stockholder of the Corporation who is a stockholder of record at the time of
giving of notice of the special meeting, who shall be entitled to vote at the
meeting and who complies with the notice procedures set forth in this Section
1.10. If the Corporation calls a special meeting of stockholders for the purpose
of electing one or more directors to the Board of Directors, any such
stockholder may nominate a person or persons (as the case may be), for election
to such position(s) as specified in the Corporation's notice of meeting, if the
stockholder's notice required by paragraph (A)(2) of this Section 1.10 shall be
delivered to the Secretary at the principal executive offices of the Corporation
not earlier than the ninetieth (90th) day prior to such special meeting nor
later than the later of (x) the close of business on the sixtieth (60th) day
prior to such special meeting or (y) the close of business on the tenth (10th)
day following the day on which public announcement is first made of the date of
such special meeting and of the nominees proposed by the Board of Directors to
be elected at such meeting.
C. GENERAL.
-------
(1) Only such persons who are nominated in accordance with the
procedures set forth in this Section 1.10 shall be eligible to serve as
directors and only such business shall be conducted at a meeting of stockholders
as shall have been brought before the meeting in accordance with the procedures
set forth in this Section 1.10. Except as otherwise provided by law, the
Certificate of Incorporation or these By-Laws, the chairman of the meeting shall
have the power and duty to determine whether a nomination or any business
proposed to be brought before the meeting was made or proposed, as the case may
be, in accordance with the procedures set forth in this Section 1.10 and, if any
proposed nomination or business is not in compliance herewith, to declare that
such defective proposal or nomination shall be disregarded.
(2) For purposes of this Section 1.10, "public announcement"
shall mean disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable national news service or in a document publicly
filed by the Corporation with the Securities and Exchange Commission pursuant to
Section 13, 14 or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this Section
1.10, a stockholder shall also comply with all applicable requirements of the
Exchange Act and the rules and regulations thereunder with respect to the
matters set forth herein. Nothing in this Section 1.10 shall be deemed to affect
any rights (i) of stockholders to request inclusion of proposals in the
Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act or
(ii) of the holders of any series of Preferred Stock to elect directors under
specified circumstances.
1.11 ACTION WITHOUT MEETING. Stockholders of the Corporation may not take
any action by written consent in lieu of a meeting. Notwithstanding any other
provision of law, the Certificate of Incorporation or these By-Laws, and
notwithstanding the fact that a lesser percentage may be specified by law, the
affirmative vote of the holders of at least seventy-five
<PAGE> 9
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percent (75%) of the votes which all the stockholders would be entitled to cast
at any annual election of directors or class of directors shall be required to
amend or repeal, or to adopt any provision inconsistent with, this Section 1.11.
ARTICLE 2 - DIRECTORS
---------------------
2.1 GENERAL POWERS. The business and affairs of the Corporation shall be
managed by or under the direction of a Board of Directors, who may exercise all
of the powers of the Corporation except as otherwise provided by law or the
Certificate of Incorporation. In the event of a vacancy in the Board of
Directors, the remaining directors, except as otherwise provided by law or the
Certificate of Incorporation, may exercise the powers of the full Board of
Directors until the vacancy is filled. Without limiting the foregoing, the Board
of Directors may:
(a) declare dividends from time to time in accordance with law;
(b) purchase or otherwise acquire any property, rights or privileges
on such terms as it shall determine;
(c) authorize the creation, making and issuance, in such form as it
may determine, of written obligations of every kind, negotiable or
non-negotiable, secured or unsecured, to borrow funds and guarantee obligations,
and to do all things necessary in connection therewith;
(d) remove any officer of the Corporation with or without cause, and
from time to time to devolve the powers and duties of any officer upon any other
person for the time being;
(e) confer upon any officer of the Corporation the power to appoint,
remove and suspend subordinate officers, employees and agents;
(f) adopt from time to time such stock option, stock purchase, bonus
or other compensation plans for directors, officers, employees, consultants and
agents of the Corporation and its subsidiaries as it may determine;
(g) adopt from time to time such insurance, retirement, and other
benefit plans for directors, officers, employees, consultants and agents of the
Corporation and its subsidiaries as it may determine; and
(h) adopt from time to time regulations, not inconsistent herewith,
for the management of the Corporation's business and affairs.
2.2 NUMBER; ELECTION AND QUALIFICATION. The number of directors which shall
constitute the whole Board of Directors shall be determined by resolution of the
Board of Directors, but in no event shall be less than three. The number of
directors may be decreased at
<PAGE> 10
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any time and from time to time by a majority of the directors then in office,
but only to eliminate vacancies existing by reason of the death, resignation,
removal or expiration of the term of one or more directors. The directors shall
be elected at the annual meeting of stockholders by such stockholders as have
the right to vote on such election. Directors need not be stockholders of the
Corporation.
2.3 TERMS IN OFFICE. Each director shall serve for a term ending on the
date of the third annual meeting following the annual meeting at which such
director was elected; provided, however, that each initial director in Class I
shall serve for a term ending on the date of the annual meeting next following
the end of the Corporation's fiscal year ending April 30, 1996; each initial
director in Class II shall serve for a term ending on the date of the annual
meeting next following the end of the Corporation's fiscal year ending April 30,
1997; and each initial director in Class III shall serve for a term ending on
the date of the annual meeting next following the end of the Corporation's
fiscal year ending April 30, 1998.
2.4 ALLOCATION OF DIRECTORS AMONG CLASSES IN THE EVENT OF INCREASES OR
DECREASES IN THE NUMBER OF DIRECTORS. In the event of any increase or decrease
in the authorized number of directors, (i) each director then serving as such
shall nevertheless continue as a director of the class of which he or she is a
member until the expiration of such director's current term or his or her prior
death, retirement or resignation and (ii) the newly created or eliminated
directorships resulting from such increase or decrease shall be apportioned by
the Board of Directors among the three classes of directors, subject to Section
2.3. No decrease in the number of directors constituting the whole Board of
Directors shall shorten the term of an incumbent Director.
2.5 TENURE. Notwithstanding any provisions to the contrary contained
herein, each director shall hold office until his or her successor is elected
and qualified, or until his or her earlier death, resignation or removal.
2.6 VACANCIES. Unless and until filled by the stockholders, any vacancy in
the Board of Directors, however occurring, including a vacancy resulting from an
enlargement thereof, may be filled by vote of a majority of the directors then
in office, although less than a quorum, or by a sole remaining director. A
director elected to fill a vacancy shall be elected for the unexpired term of
his or her predecessor in office, and a director chosen to fill a position
resulting from an increase in the number of directors shall hold office until
the next annual meeting of stockholders at which directors of the class for
which such director was chosen are to be elected and until his or her successor
is elected and qualified, or until his or her earlier death, resignation or
removal.
2.7 RESIGNATION. Any director may resign by delivering his or her written
resignation to the Corporation at its principal office or to the President or
Secretary. Such resignation shall be effective upon receipt unless it is
specified to be effective at some other time or upon the happening of some other
event.
2.8 REGULAR MEETINGS. Regular meetings of the Board of Directors may be
held without notice at such time and place, either within or without the State
of Delaware, as shall be determined from time to time by the Board of Directors;
provided that any director who is absent
<PAGE> 11
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when such a determination is made shall be given notice of the determination.
Regular meetings of the Board of Directors shall be held at such place or
places, on such date or dates, and at such time or times as shall have been
established by the Board of Directors and publicized among all directors. A
notice of each regular meeting shall not be required.
2.9 SPECIAL MEETINGS. Special meetings of the Board of Directors may be
held at any time and place, within or without the State of Delaware, designated
in a call by the Chairman of the Board (if any), the President, two or more
directors, or by one director in the event that there is only a single director
in office.
2.10 NOTICE OF SPECIAL MEETINGS. Notice of any special meeting of directors
shall be given to each director by the Secretary or by the officer or one of the
directors calling the meeting. Notice shall be duly given to each director (i)
by giving notice to such director in person or by telephone at least 48 hours in
advance of the meeting, (ii) by sending a telegram or delivering written notice
by facsimile transmission or by hand, to his or her last known business or home
address at least 48 hours in advance of the meeting, or (iii) by mailing written
notice to his or her last known business or home address at least 72 hours in
advance of the meeting. A notice or waiver of notice of a meeting of the Board
of Directors need not specify the purposes of the meeting.
2.11 MEETINGS BY TELEPHONE CONFERENCE CALLS. Directors or any members of
any committee designated by the Board of Directors may participate in a meeting
of the Board of Directors or such committee by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and participation by such means shall be deemed
to constitute presence in person at such meeting.
2.12 QUORUM. A majority of the total number of the whole Board of Directors
shall constitute a quorum at all meetings of the Board of Directors. In the
event one or more of the directors shall be disqualified to vote at any meeting,
then the required quorum shall be reduced by one for each such director so
disqualified; provided, however, that in no case shall less than one-third (1/3)
of the total number of the whole Board of Directors constitute a quorum. In the
absence of a quorum at any such meeting, a majority of the directors present may
adjourn the meeting from time to time without further notice other than
announcement at the meeting, until a quorum shall be present.
2.13 ACTION AT MEETING. At any meeting of the Board of Directors at which a
quorum is present, the vote of a majority of those present shall be sufficient
to take any action, unless a different vote is specified by law, the Certificate
of Incorporation or these By-Laws.
2.14 ACTION BY WRITTEN CONSENT. Any action required or permitted to be
taken at any meeting of the Board of Directors or of any committee of the Board
of Directors may be taken without a meeting, if all members of the Board of
Directors or committee, as the case may be, consent to such action in writing,
and the written consents are filed with the minutes of proceedings of the Board
of Directors or committee.
<PAGE> 12
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2.15 REMOVAL. Unless otherwise provided in the Certificate of
Incorporation, any one or more or all of the directors may be removed, only for
cause, by the holders of at least a majority of the shares then entitled to vote
at an election of directors.
2.16 COMMITTEES. The Board of Directors may, by resolution passed by a
majority of the whole Board, designate one or more committees, each committee to
consist of one or more of the directors of the Corporation. The Board of
Directors may designate one or more directors as alternate members of any
committee, who may replace any absent or disqualified member at any meeting of
such committee. In the absence or disqualification of a member of a committee,
the member or members of such committee present at any meeting and not
disqualified from voting, whether or not such member or members constitute a
quorum, may unanimously appoint another member of the Board of Directors to act
at such meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided in the resolution of the Board of Directors
and subject to the provisions of the General Corporation Law of the State of
Delaware, shall have and may exercise all the powers and authority of the Board
of Directors in the management of the business and affairs of the Corporation
and may authorize the seal of the Corporation to be affixed to all papers which
may require it. Each such committee shall keep minutes and make such reports as
the Board of Directors may from time to time request. Except as the Board of
Directors may otherwise determine or as provided herein, any committee may make
rules for the conduct of its business, but unless otherwise provided by the
directors or in such rules, its business shall be conducted as nearly as
possible in the same manner as is provided in these By-Laws for the Board of
Directors. Adequate provisions shall be made for notice to members of all
meeting of committees. Unless otherwise specified, one-third (1/3) of the
members of any committee shall constitute a quorum unless the committee shall
consist of one (1) or two (2) members, in which event one (1) member shall
constitute a quorum; and all matters shall be determined by a majority vote of
the members present. Action may be taken by any committee without a meeting if
all members thereof consent thereto in writing, and the writing or writings are
filed with the minutes of the proceedings of such committee.
2.17 COMPENSATION OF DIRECTORS. Directors may be paid such compensation for
their services and such reimbursement for expenses of attendance at meetings as
the Board of Directors may from time to time determine. No such payment shall
preclude any director from serving the Corporation or any of its parent or
subsidiary corporations in any other capacity and receiving compensation for
such service.
2.18 AMENDMENTS TO ARTICLE. Notwithstanding any other provisions of law,
the Certificate of Incorporation or these By-Laws, and notwithstanding the fact
that a lesser percentage may be specified by law, the affirmative vote of the
holders of a least seventy-five percent (75%) of the votes which all the
stockholders would be entitled to cast at any annual election of directors or
class of directors shall be required to amend or repeal, or to adopt any
provision inconsistent with, this Article 2.
2.19 LIMITATION OF LIABILITY. A Director of the Corporation shall not be
personally liable to the Corporation or its shareholders for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its shareholders,
<PAGE> 13
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(ii) for acts or omissions not in good faith which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the
Delaware General Corporation Law, or (iv) for any transaction from which the
director derived an improper personal benefit. If the Delaware General
Corporation Law is amended after approval by the shareholders of this Section
2.19 to further eliminate or limit 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 Delaware General Corporation Law, as so amended.
Any repeal or modification of this Section 2.19 by the stockholders of the
Corporation shall not adversely affect any limitation on the personal liability
of a director of the Corporation existing at the time of such repeal or
modification.
ARTICLE 3 - OFFICERS
--------------------
3.1 ENUMERATION. The officers of the Corporation shall consist of a
President, a Secretary, a Treasurer and such other officers with such other
titles as the Board of Directors shall determine, including, but not limited to,
a Chairman of the Board, a Vice-Chairman of the Board, and one or more Vice
Presidents, Assistant Treasurers and Assistant Secretaries. The Board of
Directors may appoint such other officers as it may deem appropriate.
3.2 ELECTION. The President, Treasurer and Secretary shall be elected
annually by the Board of Directors at its first meeting following the annual
meeting of stockholders. Other officers may be appointed by the Board of
Directors at such meeting or at any other meeting.
3.3 QUALIFICATION. No officer need be a stockholder. Any two or more
offices may be held by the same person.
3.4 TENURE. Except as otherwise provided by law, by the Certificate of
Incorporation or by these By-Laws, each officer shall hold office until his or
her successor is elected and qualified, unless a different term is specified in
the vote choosing or appointing such officer, or until his or her earlier death,
resignation or removal.
3.5 RESIGNATION AND REMOVAL. Any officer may resign by delivering his or
her written resignation to the Chairman of the Board (if any), to the Board of
Directors at a meeting thereof, to the Corporation at its principal office or to
the President or Secretary. Such resignation shall be effective upon receipt
unless it is specified to be effective at some other time or upon the happening
of some other event.
Any officer may be removed at any time, with or without cause, by vote of a
majority of the entire number of directors then in office.
Except as the Board of Directors may otherwise determine, no officer who
resigns or is removed shall have any right to any compensation as an officer for
any period following his or her resignation or removal, or any right to damage
on account of such removal, whether his or her
<PAGE> 14
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compensation be by the month or by the year or otherwise, unless such
compensation is expressly provided in a duly authorized written agreement with
the Corporation.
3.6 VACANCIES. The Board of Directors may fill any vacancy occurring in
any office for any reason and may, in its discretion, leave unfilled for such
period as it may determine any offices other than those of President, Treasurer
and Secretary. Each such successor shall hold office for the unexpired term of
his predecessor and until his or her successor is elected and qualified, or
until his or her earlier death, resignation or removal.
3.7 CHAIRMAN OF THE BOARD AND VICE-CHAIRMAN OF THE BOARD. The Chairman of
the Board, if any, shall preside at all meetings of the Board of Directors and
stockholders at which he or she is present and shall perform such duties and
possess such powers as are designated by the Board of Directors. If the Board of
Directors appoints a Vice-Chairman of the Board, he or she shall, in the absence
or disability of the Chairman of the Board, perform the duties and exercise the
powers of the Chairman of the Board and shall perform such other duties and
possess such other powers as may from time to time be designated by the Board of
Directors.
3.8 PRESIDENT. The President shall, subject to the direction of the Board
of Directors, have general charge and supervision of the business of the
Corporation. Unless otherwise provided by the Board of Directors, the President
shall preside at all meetings of the stockholders, and, if a director, at all
meetings of the Board of Directors. Unless the Board of Directors has designated
another officer as the Chief Executive Officer, the President shall be the Chief
Executive Officer of the Corporation. The President shall perform such other
duties and shall have such other powers as the Board of Directors may from time
to time prescribe. The President shall have the power to enter into contracts
and otherwise bind the Corporation in matters arising in the ordinary course of
the Corporation's business.
3.9 VICE PRESIDENTS. Any Vice President shall perform such duties and
possess such powers as the Board of Directors or the President may from time to
time prescribe. In the event of the absence, inability or refusal to act of the
President, the Vice President (or if there shall be more than one, the Vice
Presidents in the order determined by the Board of Directors) shall perform the
duties of the President and, when so performing, shall have all the powers of
and be subject to all the restrictions upon the President. The Board of
Directors may assign to any Vice President the title of Executive Vice
President, Senior Vice President or any other title selected by the Board of
Directors. Unless otherwise determined by the Board of Directors, any Vice
President shall have the power to enter into contracts and otherwise bind the
Corporation in matters arising in the ordinary course of the Corporation's
business.
3.10 SECRETARY AND ASSISTANT SECRETARIES. The Secretary shall perform such
duties and shall have such powers as the Board of Directors or the President may
from time to time prescribe. In addition, the Secretary shall perform such
duties and have such powers as are incident to the office of secretary,
including without limitation the duty and power to give notices of all meetings
of stockholders and special meetings of the Board of Directors, to attend all
meetings of stockholders and the Board of Directors and keep a record of the
proceedings, to maintain a stock ledger and prepare lists of stockholders and
their addresses as required, to be
<PAGE> 15
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custodian of corporate records and the corporate seal and to affix and attest to
the same on documents.
Any Assistant Secretary shall perform such duties and possess such powers
as the Board of Directors, the President or the Secretary may from time to time
prescribe. In the event of the absence, inability or refusal to act of the
Secretary, the Assistant Secretary (or if there shall be more than one, the
Assistant Secretaries in the order determined by the Board of Directors) shall
perform the duties and exercise the powers of the Secretary.
In the absence of the Secretary or any Assistant Secretary at any meeting
of stockholders or directors, the person presiding at the meeting shall
designate a temporary secretary to keep a record of the meeting.
3.11 TREASURER AND ASSISTANT TREASURERS. The Treasurer shall perform such
duties and shall have such powers as the Board of Directors or the President may
from time to time prescribe. In addition, the Treasurer shall perform such
duties and have such powers as are incident to the office of treasurer,
including without limitation the duty and power to keep and be responsible for
all funds and securities of the Corporation, to deposit funds of the Corporation
in depositories selected in accordance with these By-Laws, to disburse such
funds as ordered by the Board of Directors, to make proper accounts for such
funds, and to render as required by the Board of Directors statements of all
such transactions and of the financial condition of the Corporation.
Any Assistant Treasurer shall perform such duties and possess such powers
as the Board of Directors, the President or the Treasurer may from time to time
prescribe. In the event of the absence, inability or refusal to act of the
Treasurer, the Assistant Treasurer (or if there shall be more than one, the
Assistant Treasurers in the order determined by the Board of Directors) shall
perform the duties and exercise the powers of the Treasurer.
3.12 SALARIES. Officers of the Corporation shall be entitled to such
salaries, compensation or reimbursement as shall be fixed or allowed from time
to time by the Board of Directors.
3.13 ACTION WITH RESPECT TO SECURITIES OF OTHER CORPORATIONS. Unless
otherwise directed by the Board of Directors, the President or any officer of
the Corporation authorized by the President shall have power to vote and
otherwise act on behalf of the Corporation, in person or by proxy, at any
meeting of stockholders of or with respect to any action of stockholders of any
other corporation in which the Corporation may hold securities and otherwise to
exercise any and all rights and powers which this Corporation may possess by
reason of its ownership of securities in such other corporation.
<PAGE> 16
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ARTICLE 4 - CAPITAL STOCK
-------------------------
4.1 ISSUANCE OF STOCK. Unless otherwise voted by the stockholders and
subject to the provisions of the Certificate of Incorporation, the whole or any
part of any unissued balance of the authorized capital stock of the Corporation
or the whole or any part of any issued, authorized capital stock of the
Corporation held in its treasury may be issued, sold, transferred or otherwise
disposed of by vote of the Board of Directors in such manner, for such
consideration and on such terms as the Board of Directors may determine.
4.2 CERTIFICATES OF STOCK. Every holder of stock of the Corporation shall
be entitled to have a certificate, in such form as may be prescribed by law and
by the Board of Directors, certifying the number and class of shares owned by
such stockholder in the Corporation. Each such certificate shall be signed by,
or in the name of the Corporation by, the Chairman or Vice-Chairman, if any, of
the Board of Directors, or the President or a Vice President, and the Treasurer
or an Assistant Treasurer, or the Secretary or an Assistant Secretary of the
Corporation. Any or all of the signatures on such certificate may be a
facsimile.
Each certificate for shares of stock which are subject to any restriction
on transfer pursuant to the Certificate of Incorporation, the By-Laws,
applicable securities laws or any agreement among any number of shareholders or
among such holders and the Corporation shall have conspicuously noted on the
face or back of such certificate either the full text of such restriction or a
statement of the existence of such restriction.
4.3 TRANSFERS. Except as otherwise established by rules and regulations
adopted by the Board of Directors, and subject to applicable law, shares of
stock may be transferred on the books of the Corporation by the surrender to the
Corporation or its transfer agent of the certificate representing such shares,
properly endorsed or accompanied by a written assignment or power of attorney
properly executed, and with such proof of authority or the authenticity of
signature as the Corporation or its transfer agent may reasonably require.
Except as may be otherwise required by law, by the Certificate of Incorporation
or by these By-Laws, the Corporation shall be entitled to treat the record
holder of stock as shown on its books as the owner of such stock for all
purposes, including the payment of dividends and the right to vote with respect
to such stock, regardless of any transfer, pledge or other disposition of such
stock, until the shares have been transferred on the books of the Corporation in
accordance with the requirements of these By-Laws.
4.4 LOST, STOLEN OR DESTROYED CERTIFICATES. The Corporation may issue a new
certificate of stock in place of any previously issued certificate alleged to
have been lost, stolen, or destroyed, upon such terms and conditions as the
President may prescribe, including the presentation of reasonable evidence of
such loss, theft or destruction and the giving of such indemnity as the
President may require for the protection of the Corporation or any transfer
agent or registrar.
<PAGE> 17
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4.5 RECORD DATE. The Board of Directors may fix in advance a date as a
record date for the determination of the stockholders entitled to notice of or
to vote at any meeting of stockholders or, to the extent permitted by the
Certificate of Incorporation and these By-Laws, to express consent (or dissent)
to corporate action in writing without a meeting, or entitled to receive payment
of any dividend or other distribution or allotment of any rights in respect of
any change, conversion or exchange of stock, or for the purpose of any other
lawful action. Such record date shall not be more than 60 nor less than 10 days
before the date of such meeting, nor more than 60 days prior to any other action
to which such record date relates.
If no record date is fixed, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the day before the day on which notice is given, or, if
notice is waived, at the close of business on the day before the day on which
the meeting is held. The record date for determining stockholders entitled to
express consent to corporate action in writing without a meeting (to the extent
permitted by the Certificate of Incorporation and these By-Laws) when no prior
action by the Board of Directors is necessary, shall be the day on which the
first written consent is expressed. The record date for determining stockholders
for any other purpose shall be at the close of business on the day on which the
Board of Directors adopts the resolution relating to such purpose.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
ARTICLE 5 - GENERAL PROVISIONS
------------------------------
5.1 FISCAL YEAR. The fiscal year of the Corporation shall be fixed by
resolution of the Board of Directors.
5.2 CORPORATE SEAL. The corporate seal shall be in such form as shall be
approved by the Board of Directors.
5.3 NOTICES. Except as otherwise specifically provided herein or required
by law or the Certificate of Incorporation, all notices required to be given to
any stockholder, director, officer, employee or agent of the Corporation shall
be in writing and may in every instance be effectively given by hand delivery to
the recipient thereof, by depositing such notice in the mails, postage paid, or
by sending such notice by prepaid telegram or facsimile transmission. Any such
notice shall be addressed to such stockholder, director, officer, employee or
agent at his or her last known address as the same appears on the books of the
Corporation. The time when such notice is received shall be deemed to be the
time of the giving of the notice.
5.4 WAIVER OF NOTICE. Whenever any notice whatsoever is required to be
given by law, by the Certificate of Incorporation or by these By-Laws, a waiver
of such notice either in writing signed by the person entitled to such notice or
such person's duly authorized attorney, or by telegraph, facsimile transmission
or any other available method, whether before, at or after the
<PAGE> 18
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time stated in such waiver, or the appearance of such person or persons at such
meeting in person or by proxy, shall be deemed equivalent to such notice.
5.5 EVIDENCE OF AUTHORITY. A certificate by the Secretary, or an Assistant
Secretary, or a temporary Secretary, as to any action taken by the stockholders,
directors, a committee or any officer or representative of the Corporation
shall, as to all persons who rely on the certificate in good faith, be
conclusive evidence of such action.
5.6 FACSIMILE SIGNATURES. In addition to the provisions for use of
facsimile signatures elsewhere specifically authorized in these By-Laws,
facsimile signatures of any officer or officers of the Corporation may be used
whenever and as authorized by the Board of Directors or a committee thereof.
5.7 RELIANCE UPON BOOKS, REPORTS AND RECORDS. Each director, each member
of any committee designated by the Board of Directors, and each officer of the
Corporation shall, in the performance of his or her duties, be fully protected
in relying in good faith upon the books of account or other records of the
Corporation and upon such information, opinions, reports or statements presented
to the Corporation by any of its officers or employees or committees of the
Board of Directors so designated, or by any other person as to matters which
such director or committee member reasonably believes are within such other
person's professional or expert competence and who has been selected with
reasonable care by or on behalf of the Corporation.
5.8 TIME PERIODS. In applying any provision of these By-Laws that requires
that an act be done or not be done a specified number of days prior to an event
or that an act be done during a period of a specified number of days prior to an
event, calendar days shall be used, the day of the doing of the act shall be
excluded, and the day of the event shall be included.
5.9 CERTIFICATE OF INCORPORATION. All references in these By-Laws to the
Certificate of Incorporation shall be deemed to refer to the Certificate of
Incorporation of the Corporation, as amended and in effect from time to time.
5.10 TRANSACTIONS WITH INTERESTED PARTIES. No contract or transaction
between the Corporation and one or more of the directors or officers, or between
the Corporation and any other corporation, partnership, association, or other
organization in which one or more of the directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because such director or officer is present at or
participates in the meeting of the Board of Directors or a committee of the
Board of Directors which authorizes the contract or transaction or solely
because his, her or their votes are counted for such purpose, if:
(1) The material facts as to his or her relationship or interest and
as to the contract or transaction are disclosed or are known to the Board of
Directors or the committee, and the Board or committee in good faith authorizes
the contract or transaction by the affirmative vote of a majority of the
disinterested directors, even though the disinterested directors be less than a
quorum;
<PAGE> 19
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(2) The material facts as to his or her relationship or interest and
as to the contract or transaction are disclosed or are known to the stockholders
entitled to vote thereon, and the contract or transaction is specifically
approved in good faith by vote of the stockholders; or
(3) The contract or transaction is fair as to the Corporation as of
the time it is authorized, approved or ratified, by the Board of Directors, a
committee of the Board of Directors, or the stockholders.
Common or interested directors may be counted in determining the presence
of a quorum at a meeting of the Board of Directors or of a committee which
authorizes the contract or transaction.
5.11 SEVERABILITY. Any determination that any provision of these By-Laws is
for any reason inapplicable, illegal or ineffective shall not affect or
invalidate any other provision of these By-Laws.
5.12 PRONOUNS. All pronouns used in these By-Laws shall be deemed to refer
to the masculine, feminine or neuter, singular or plural, as the identity of the
persons or persons so designated may require.
ARTICLE 6 - AMENDMENTS
----------------------
6.1 BY THE BOARD OF DIRECTORS. Except as is otherwise set forth in these
By-Laws, these By-Laws may be altered, amended or repealed, or new By-Laws may
be adopted, by the affirmative vote of a majority of the directors present at
any regular or special meeting of the Board of Directors at which a quorum is
present.
6.2 BY THE STOCKHOLDERS. Except as otherwise set forth in these By-Laws,
these By-Laws may be altered, amended or repealed or new By-Laws may be adopted
by the affirmative vote of the holders of a majority of the shares of the
capital stock of the Corporation issued and outstanding and entitled to vote at
any regular meeting of stockholders, or at any special meeting of stockholders,
provided notice of such alteration, amendment, repeal or adoption of new By-Laws
shall have been stated in the notice of such special meeting.
<PAGE> 1
EXHIBIT 4.2
REGISTRATION RIGHTS AGREEMENT
January 24, 1996
To each of the several Purchasers named in Schedule 1.01 to the Series A
Convertible Preferred Stock Purchase Agreement of even date herewith
Dear Sirs:
This will confirm that in consideration of your agreement on the
date hereof to purchase an aggregate of 992,061 shares (the "Preferred Shares")
of Series A Convertible Preferred Stock, $.01 par value ("Preferred Stock"), of
NPRI, Inc., a Delaware corporation (the "Company"), pursuant to the Series A
Convertible Preferred Stock Purchase Agreement of even date herewith (the
"Purchase Agreement") between the Company and you and as an inducement to the
Purchasers named in SCHEDULE 1.01 therein to consummate the transactions
contemplated by the Purchase Agreement, the Company covenants and agrees with
each of you as follows:
1. CERTAIN DEFINITIONS. As used in this Agreement, the following
terms shall have the following respective meanings:
"COMMISSION" shall mean the Securities and Exchange Commission, or
any other federal agency at the time administering the Securities Act.
"COMMON STOCK" shall mean the Common Stock, $.01 par value, of the
Company, as constituted as of the date of this Agreement.
"CONVERSION SHARES" shall mean shares of Common Stock issued upon
conversion of the Preferred Shares.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended, or any similar federal statute, and the rules and regulations of
the Commission thereunder, all as the same shall be in effect at the time.
"REGISTRATION EXPENSES" shall mean the expenses so described in
Section 8.
"RESTRICTED STOCK" shall mean the Conversion Shares, excluding
Conversion Shares which have been (a) registered under the Securities Act
pursuant to an effective registration statement filed thereunder and
disposed of in accordance with the registration statement covering them or
(b) publicly sold pursuant to Rule 144 under the Securities Act.
<PAGE> 2
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"SECURITIES ACT" shall mean the Securities Act of 1933, as amended,
or any similar federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
"SELLING EXPENSES" shall mean the expenses so described in Section
8.
2. RESTRICTIVE LEGEND. Each certificate representing Preferred
Shares or Conversion Shares shall, except as otherwise provided in this Section
2 or in Section 3, be stamped or otherwise imprinted with a legend substantially
in the following form:
"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933 OR ANY STATE SECURITIES LAWS AND MAY NOT BE TRANSFERRED OR
OTHERWISE DISPOSED OF UNLESS IT HAS BEEN REGISTERED UNDER SUCH ACT
AND ALL SUCH APPLICABLE LAWS OR AN EXEMPTION FROM REGISTRATION IS
AVAILABLE."
A certificate shall not bear such legend if in the opinion of counsel
satisfactory to the Company (it being agreed that Testa, Hurwitz & Thibeault
shall be satisfactory) the securities represented thereby may be publicly sold
without registration under the Securities Act and any applicable state
securities laws.
3. NOTICE OF PROPOSED TRANSFER. Prior to any proposed transfer of
any Preferred Shares or Conversion Shares (other than under the circumstances
described in Sections 4, 5 or 6), the holder thereof shall give written notice
to the Company of its intention to effect such transfer. Each such notice shall
describe the manner of the proposed transfer and, if requested by the Company,
shall be accompanied by an opinion of counsel satisfactory to the Company (it
being agreed that Testa, Hurwitz & Thibeault shall be satisfactory) to the
effect that the proposed transfer may be effected without registration under the
Securities Act and any applicable state securities laws, whereupon the holder of
such stock shall be entitled to transfer such stock in accordance with the terms
of its notice; PROVIDED, HOWEVER, that no such opinion of counsel shall be
required for a transfer to one or more partners of the transferor (in the case
of a transferor that is a partnership) or to an affiliated corporation or
limited liability company (in the case of a transferor that is a corporation or
limited liability company). Each certificate for Preferred Shares or Conversion
Shares transferred as above provided shall bear the legend set forth in Section
2, except that such certificate shall not bear such legend if (i) such transfer
is in accordance with the provisions of Rule 144 (or any other rule permitting
public sale without registration under the Securities Act) or (ii) the opinion
of counsel referred to above is to the further effect that the transferee and
any subsequent transferee (other than an affiliate of the Company) would be
entitled to transfer such securities in a public sale without registration under
the Securities Act. The restrictions provided for in this Section 3 shall not
apply to securities which are not required to bear the legend prescribed by
Section 2 in accordance with the provisions of that Section.
<PAGE> 3
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4. REQUIRED REGISTRATION. (a) At any time after the earliest of (i)
six months after any registration statement covering a public offering of
securities of the Company under the Securities Act shall have become effective,
(ii) six months after the Company shall have become a reporting company under
Section 12 of the Exchange Act, and (iii) the first anniversary of the date of
this Agreement, the holders of Restricted Stock constituting at least 40% of the
total shares of Restricted Stock then outstanding may request the Company to
register under the Securities Act all or any portion of the shares of Restricted
Stock held by such requesting holder or holders for sale in the manner specified
in such notice, PROVIDED that the shares of Restricted Stock for which
registration has been requested shall constitute at least 20% of the total
shares of Restricted Stock originally issued if such holder or holders shall
request the registration of less than all shares of Restricted Stock then held
by such holder or holders (or any lesser percentage if the reasonably
anticipated aggregate price to the public of such public offering would exceed
$5,000,000). For purposes of this Section 4 and Sections 5, 6, 13(a) and 13(d),
the term "Restricted Stock" shall be deemed to include the number of shares of
Restricted Stock which would be issuable to a holder of Preferred Shares upon
conversion of all Preferred Shares held by such holder at such time, PROVIDED,
HOWEVER, that the only securities which the Company shall be required to
register pursuant hereto shall be shares of Common Stock, and PROVIDED, FURTHER,
HOWEVER, that, in any underwritten public offering contemplated by this Section
4 or Sections 5 and 6, the holders of Preferred Shares shall be entitled to sell
such Preferred Shares to the underwriters for conversion and sale of the shares
of Common Stock issued upon conversion thereof. Notwithstanding anything to the
contrary contained herein, no request may be made under this Section 4 within
120 days after the effective date of a registration statement filed by the
Company covering a firm commitment underwritten public offering in which the
holders of Restricted Stock shall have been entitled to join pursuant to
Sections 5 or 6 and in which there shall have been effectively registered all
shares of Restricted Stock as to which registration shall have been requested.
(b) Following receipt of any notice under this Section 4, the
Company shall immediately notify all holders of Restricted Stock from whom
notice has not been received and shall use its best efforts to register under
the Securities Act, for public sale in accordance with the method of disposition
specified in such notice from requesting holders, the number of shares of
Restricted Stock specified in such notice (and in all notices received by the
Company from other holders within 30 days after the giving of such notice by the
Company). If such method of disposition shall be an underwritten public
offering, the holders of a majority of the shares of Restricted Stock to be sold
in such offering may designate the managing underwriter of such offering,
subject to the approval of the Company, which approval shall not be unreasonably
withheld or delayed. The Company shall be obligated to register Restricted Stock
pursuant to this Section 4 on two occasions only, PROVIDED, HOWEVER, that such
obligation shall be deemed satisfied only when a registration statement covering
all shares of Restricted Stock specified in notices received as aforesaid, for
sale in accordance with the method of disposition specified by the requesting
holders, shall have become effective and, if such method of disposition is a
firm commitment underwritten public offering, all such shares shall have been
sold pursuant thereto.
(c) The Company shall be entitled to include in any registration
statement referred to in this Section 4, for sale in accordance with the method
of disposition specified by the
<PAGE> 4
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requesting holders, shares of Common Stock to be sold by the Company for its own
account, except as and to the extent that, in the opinion of the managing
underwriter (if such method of disposition shall be an underwritten public
offering), such inclusion would adversely affect the marketing of the Restricted
Stock to be sold. Except for registration statements on Form S-4, S-8 or any
successor thereto, the Company will not file with the Commission any other
registration statement with respect to its Common Stock, whether for its own
account or that of other stockholders, from the date of receipt of a notice from
requesting holders pursuant to this Section 4 until the completion of the period
of distribution of the registration contemplated thereby.
5. INCIDENTAL REGISTRATION. If the Company at any time (other than
pursuant to Section 4 or Section 6) proposes to register any of its securities
under the Securities Act for sale to the public, whether for its own account or
for the account of other security holders or both (except with respect to
registration statements on Forms S-4, S-8 or another form not available for
registering the Restricted Stock for sale to the public), each such time it will
give written notice to all holders of outstanding Restricted Stock of its
intention so to do. Upon the written request of any such holder, received by the
Company within 30 days after the giving of any such notice by the Company, to
register any of its Restricted Stock, the Company will use its best efforts to
cause the Restricted Stock as to which registration shall have been so requested
to be included in the securities to be covered by the registration statement
proposed to be filed by the Company, all to the extent requisite to permit the
sale or other disposition by the holder of such Restricted Stock so registered.
In the event that any registration pursuant to this Section 5 shall be, in whole
or in part, an underwritten public offering of Common Stock, the number of
shares of Restricted Stock to be included in such an underwriting may be reduced
(pro rata among the requesting holders based upon the number of shares of
Restricted Stock owned by such holders) if and to the extent that the managing
underwriter shall be of the opinion that such inclusion would adversely affect
the marketing of the securities to be sold by the Company therein, PROVIDED,
HOWEVER, that such number of shares of Restricted Stock shall not be reduced if
any shares are to be included in such underwriting for the account of any person
other than the Company or requesting holders of Restricted Stock, and PROVIDED,
FURTHER, however, that in no event may less than one-fifth of the total number
of shares of Common Stock to be included in such underwriting be made available
for shares of Restricted Stock. Notwithstanding the foregoing provisions, the
Company may withdraw any registration statement referred to in this Section 5
without thereby incurring any liability to the holders of Restricted Stock.
6. REGISTRATION ON FORM S-3. If at any time (i) a holder or holders
of Preferred Shares or Restricted Stock request that the Company file a
registration statement on Form S-3 or any successor thereto for a public
offering of all or any portion of the shares of Restricted Stock held by such
requesting holder or holders, the reasonably anticipated aggregate price to the
public of which would exceed $4,000,000, and (ii) the Company is a registrant
entitled to use Form S-3 or any successor thereto to register such shares, then
the Company shall use its best efforts to register under the Securities Act on
Form S-3 or any successor thereto, for public sale in accordance with the method
of disposition specified in such notice, the number of shares of Restricted
Stock specified in such notice. Whenever the Company is required by this Section
6 to use its best efforts to effect the registration of Restricted Stock, each
of the procedures and
<PAGE> 5
-5-
requirements of Section 4 (including but not limited to the requirement that the
Company notify all holders of Restricted Stock from whom notice has not been
received and provide them with the opportunity to participate in the offering)
shall apply to such registration, PROVIDED, HOWEVER, that there shall be no
limitation on the number of registrations on Form S-3 which may be requested and
obtained under this Section 6, and PROVIDED, FURTHER, HOWEVER, that the
requirements contained in the first sentence of Section 4(a) shall not apply to
any registration on Form S-3 which may be requested and obtained under this
Section 6.
7. REGISTRATION PROCEDURES. If and whenever the Company is
required by the provisions of Sections 4, 5 or 6 to use its best efforts to
effect the registration of any shares of Restricted Stock under the Securities
Act, the Company will, as expeditiously as possible:
(a) prepare and file with the Commission a registration statement
(which, in the case of an underwritten public offering pursuant to Section 4,
shall be on Form S-1 or other form of general applicability satisfactory to the
managing underwriter selected as therein provided) with respect to such
securities and use its best efforts to cause such registration statement to
become and remain effective for the period of the distribution contemplated
thereby (determined as hereinafter provided);
(b) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective for
the period specified in paragraph (a) above and comply with the provisions of
the Securities Act with respect to the disposition of all Restricted Stock
covered by such registration statement in accordance with the sellers' intended
method of disposition set forth in such registration statement for such period;
(c) furnish to each seller of Restricted Stock and to each
underwriter such number of copies of the registration statement and the
prospectus included therein (including each preliminary prospectus) as such
persons reasonably may request in order to facilitate the public sale or other
disposition of the Restricted Stock covered by such registration statement;
(d) use its best efforts to register or qualify the Restricted Stock
covered by such registration statement under the securities or "blue sky" laws
of such jurisdictions as the sellers of Restricted Stock or, in the case of an
underwritten public offering, the managing underwriter reasonably shall request,
PROVIDED, HOWEVER, that the Company shall not for any such purpose be required
to qualify generally to transact business as a foreign corporation in any
jurisdiction where it is not so qualified or to consent to general service of
process in any such jurisdiction;
(e) use its best efforts to list the Restricted Stock covered by
such registration statement with any securities exchange on which the Common
Stock of the Company is then listed;
(f) immediately notify each seller of Restricted Stock and each
underwriter under such registration statement, at any time when a prospectus
relating thereto is required to be delivered under the Securities Act, of the
happening of any event of which the Company has
<PAGE> 6
-6-
knowledge as a result of which the prospectus contained in such registration
statement, as then in effect, includes an untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary to
make the statements therein not misleading in light of the circumstances then
existing;
(g) if the offering is underwritten and at the request of any seller
of Restricted Stock, use its best efforts to furnish on the date that Restricted
Stock is delivered to the underwriters for sale pursuant to such registration:
(i) an opinion dated such date of counsel representing the Company for the
purposes of such registration, addressed to the underwriters and to such seller,
stating that such registration statement has become effective under the
Securities Act and that (A) to the best knowledge of such counsel, no stop order
suspending the effectiveness thereof has been issued and no proceedings for that
purpose have been instituted or are pending or contemplated under the Securities
Act, (B) the registration statement, the related prospectus and each amendment
or supplement thereof comply as to form in all material respects with the
requirements of the Securities Act (except that such counsel need not express
any opinion as to financial statements contained therein) and (C) to such other
effects as reasonably may be requested by counsel for the underwriters or by
such seller or its counsel and (ii) a letter dated such date from the
independent public accountants retained by the Company, addressed to the
underwriters and to such seller, stating that they are independent public
accountants within the meaning of the Securities Act and that, in the opinion of
such accountants, the financial statements of the Company included in the
registration statement or the prospectus, or any amendment or supplement
thereof, comply as to form in all material respects with the applicable
accounting requirements of the Securities Act, and such letter shall
additionally cover such other financial matters (including information as to the
period ending no more than five business days prior to the date of such letter)
with respect to such registration as such underwriters reasonably may request;
and
(h) make available for inspection by each seller of Restricted
Stock, any underwriter participating in any distribution pursuant to such
registration statement, and any attorney, accountant or other agent retained by
such seller or underwriter, all financial and other records, pertinent corporate
documents and properties of the Company, and cause the Company's officers,
directors and employees to supply all information reasonably requested by any
such seller, underwriter, attorney, accountant or agent in connection with such
registration statement.
For purposes of Section 7(a) and 7(b) and of Section 4(c), the
period of distribution of Restricted Stock in a firm commitment underwritten
public offering shall be deemed to extend until each underwriter has completed
the distribution of all securities purchased by it, and the period of
distribution of Restricted Stock in any other registration shall be deemed to
extend until the earlier of the sale of all Restricted Stock covered thereby and
120 days after the effective date thereof.
In connection with each registration hereunder, the sellers of
Restricted Stock will furnish to the Company in writing such information with
respect to themselves and the proposed distribution by them as reasonably shall
be necessary in order to assure compliance with federal and applicable state
securities laws.
<PAGE> 7
-7-
In connection with each registration pursuant to Sections 4, 5 or 6
covering an underwritten public offering, the Company and each seller agree to
enter into a written agreement with the managing underwriter selected in the
manner herein provided in such form and containing such provisions as are
customary in the securities business for such an arrangement between such
underwriter and companies of the Company's size and investment stature.
8. EXPENSES. All expenses incurred by the Company in complying with
Sections 4, 5 and 6, including, without limitation, all registration and filing
fees, printing expenses, fees and disbursements of counsel and independent
public accountants for the Company, fees and expenses (including counsel fees)
incurred in connection with complying with state securities or "blue sky" laws,
fees of the National Association of Securities Dealers, Inc., transfer taxes,
fees of transfer agents and registrars, costs of insurance and fees and
disbursements of one counsel for the sellers of Restricted Stock, but excluding
any Selling Expenses, are called "Registration Expenses". All underwriting
discounts and selling commissions applicable to the sale of Restricted Stock are
called "Selling Expenses".
The Company will pay all Registration Expenses in connection with
each registration statement under Sections 4, 5 or 6. All Selling Expenses in
connection with each registration statement under Sections 4, 5 or 6 shall be
borne by the participating sellers in proportion to the number of shares sold by
each, or by such participating sellers other than the Company (except to the
extent the Company shall be a seller) as they may agree.
9. INDEMNIFICATION AND CONTRIBUTION. (a) In the event of a
registration of any of the Restricted Stock under the Securities Act pursuant to
Sections 4, 5 or 6, the Company will indemnify and hold harmless each seller of
such Restricted Stock thereunder, each underwriter of such Restricted Stock
thereunder and each other person, if any, who controls such seller or
underwriter within the meaning of the Securities Act, against any losses,
claims, damages or liabilities, joint or several, to which such seller,
underwriter or controlling person may become subject under the Securities Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any registration statement
under which such Restricted Stock was registered under the Securities Act
pursuant to Sections 4, 5 or 6, any preliminary prospectus or final prospectus
contained therein, or any amendment or supplement thereof, or arise out of or
are based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, and will reimburse each such seller, each such underwriter and each
such controlling person for any legal or other expenses reasonably incurred by
them in connection with investigating or defending any such loss, claim, damage,
liability or action, PROVIDED, HOWEVER, that the Company will not be liable in
any such case if and to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission so made in conformity with information
furnished by any such seller, any such underwriter or any such controlling
person in writing specifically for use in such registration statement or
prospectus.
<PAGE> 8
-8-
(b) In the event of a registration of any of the Restricted Stock
under the Securities Act pursuant to Sections 4, 5 or 6, each seller of such
Restricted Stock thereunder, severally and not jointly, will indemnify and hold
harmless the Company, each person, if any, who controls the Company within the
meaning of the Securities Act, each officer of the Company who signs the
registration statement, each director of the Company, each underwriter and each
person who controls any underwriter within the meaning of the Securities Act,
against all losses, claims, damages or liabilities, joint or several, to which
the Company or such officer, director, underwriter or controlling person may
become subject under the Securities Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon any untrue statement or alleged untrue statement of any material
fact contained in the registration statement under which such Restricted Stock
was registered under the Securities Act pursuant to Sections 4, 5 or 6, any
preliminary prospectus or final prospectus contained therein, or any amendment
or supplement thereof, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and will reimburse the
Company and each such officer, director, underwriter and controlling person for
any legal or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or action,
PROVIDED, HOWEVER, that such seller will be liable hereunder in any such case if
and only to the extent that any such loss, claim, damage or liability arises out
of or is based upon an untrue statement or alleged untrue statement or omission
or alleged omission made in reliance upon and in conformity with information
pertaining to such seller, as such, furnished in writing to the Company by such
seller specifically for use in such registration statement or prospectus, and
PROVIDED, FURTHER, HOWEVER, that the liability of each seller hereunder shall be
limited to the proportion of any such loss, claim, damage, liability or expense
which is equal to the proportion that the public offering price of the shares
sold by such seller under such registration statement bears to the total public
offering price of all securities sold thereunder, but not in any event to exceed
the proceeds received by such seller from the sale of Restricted Stock covered
by such registration statement.
(c) Promptly after receipt by an indemnified party hereunder of
notice of the commencement of any action, such indemnified party shall, if a
claim in respect thereof is to be made against the indemnifying party hereunder,
notify the indemnifying party in writing thereof, but the omission so to notify
the indemnifying party shall not relieve it from any liability which it may have
to such indemnified party other than under this Section 9 and shall only relieve
it from any liability which it may have to such indemnified party under this
Section 9 if and to the extent the indemnifying party is prejudiced by such
omission. In case any such action shall be brought against any indemnified party
and it shall notify the indemnifying party of the commencement thereof, the
indemnifying party shall be entitled to participate in and, to the extent it
shall wish, to assume and undertake the defense thereof with counsel
satisfactory to such indemnified party, and, after notice from the indemnifying
party to such indemnified party of its election so to assume and undertake the
defense thereof, the indemnifying party shall not be liable to such indemnified
party under this Section 9 for any legal expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation and of liaison with counsel so selected, PROVIDED,
HOWEVER, that, if the defendants in any such action include both the indemnified
party and the indemnifying party and
<PAGE> 9
-9-
the indemnified party shall have reasonably concluded that there may be
reasonable defenses available to it which are different from or additional to
those available to the indemnifying party or if the interests of the indemnified
party reasonably may be deemed to conflict with the interests of the
indemnifying party, the indemnified party shall have the right to select a
separate counsel and to assume such legal defenses and otherwise to participate
in the defense of such action, with the expenses and fees of such separate
counsel and other expenses related to such participation to be reimbursed by the
indemnifying party as incurred.
(d) In order to provide for just and equitable contribution to joint
liability under the Securities Act in any case in which either (i) any holder of
Restricted Stock exercising rights under this Agreement, or any controlling
person of any such holder, makes a claim for indemnification pursuant to this
Section 9 but it is judicially determined (by the entry of a final judgment or
decree by a court of competent jurisdiction and the expiration of time to appeal
or the denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 9 provides for
indemnification in such case, or (ii) contribution under the Securities Act may
be required on the part of any such selling holder or any such controlling
person in circumstances for which indemnification is provided under this Section
9; then, and in each such case, the Company and such holder will contribute to
the aggregate losses, claims, damages or liabilities to which they may be
subject (after contribution from others) in such proportion so that such holder
is responsible for the portion represented by the percentage that the public
offering price of its Restricted Stock offered by the registration statement
bears to the public offering price of all securities offered by such
registration statement, and the Company is responsible for the remaining
portion; PROVIDED, HOWEVER, that, in any such case, (A) no such holder will be
required to contribute any amount in excess of the public offering price of all
such Restricted Stock offered by it pursuant to such registration statement; and
(B) no person or entity guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) will be entitled to contribution
from any person or entity who was not guilty of such fraudulent
misrepresentation.
10. CHANGES IN COMMON STOCK OR PREFERRED STOCK. If, and as often as,
there is any change in the Common Stock or the Preferred Stock by way of a stock
split, stock dividend, combination or reclassification, or through a merger,
consolidation, reorganization or recapitalization, or by any other means,
appropriate adjustment shall be made in the provisions hereof so that the rights
and privileges granted hereby shall continue with respect to the Common Stock or
the Preferred Stock as so changed.
11. RULE 144 REPORTING. With a view to making available the benefits
of certain rules and regulations of the Commission which may at any time permit
the sale of the Restricted Stock to the public without registration, at all
times after 90 days after any registration statement covering a public offering
of securities of the Company under the Securities Act shall have become
effective, the Company agrees to:
(a) make and keep public information available, as those terms are
understood and defined in Rule 144 under the Securities Act;
<PAGE> 10
-10-
(b) use its best efforts to file with the Commission in a timely
manner all reports and other documents required of the Company under the
Securities Act and the Exchange Act; and
(c) furnish to each holder of Restricted Stock forthwith upon
request a written statement by the Company as to its compliance with the
reporting requirements of such Rule 144 and of the Securities Act and the
Exchange Act, a copy of the most recent annual or quarterly report of the
Company, and such other reports and documents so filed by the Company as such
holder may reasonably request in availing itself of any rule or regulation of
the Commission allowing such holder to sell any Restricted Stock without
registration.
12. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to you as follows:
(a) The execution, delivery and performance of this Agreement by the
Company have been duly authorized by all requisite corporate action and will not
violate any provision of law, any order of any court or other agency of
government, the Charter or By-laws of the Company or any provision of any
indenture, agreement or other instrument to which it or any or its properties or
assets is bound, conflict with, result in a breach of or constitute (with due
notice or lapse of time or both) a default under any such indenture, agreement
or other instrument or result in the creation or imposition of any lien, charge
or encumbrance of any nature whatsoever upon any of the properties or assets of
the Company.
(b) This Agreement has been duly executed and delivered by the
Company and constitutes the legal, valid and binding obligation of the Company,
enforceable in accordance with its terms.
13. MISCELLANEOUS.
(a) All covenants and agreements contained in this Agreement by or
on behalf of any of the parties hereto shall bind and inure to the benefit of
the respective successors and assigns of the parties hereto (including without
limitation transferees of any Preferred Shares or Restricted Stock), whether so
expressed or not, PROVIDED, HOWEVER, that registration rights conferred herein
on the holders of Preferred Shares or Restricted Stock shall only inure to the
benefit of a transferee of Preferred Shares or Restricted Stock if (i) there is
transferred to such transferee at least 20% of the total shares of Restricted
Stock originally issued pursuant to the Purchase Agreement to the direct or
indirect transferor of such transferee or (ii) such transferee is a partner,
shareholder or affiliate of a party hereto.
(b) All notices, requests, consents and other communications
hereunder shall be in writing and shall be delivered in person, mailed by
certified or registered mail, return receipt requested, or sent by telecopier or
telex, addressed as follows:
if to the Company or any other party hereto, at the address of such
party set forth in the Purchase Agreement;
<PAGE> 11
-11-
if to any subsequent holder of Preferred Shares or Restricted Stock,
to it at such address as may have been furnished to the Company in writing
by such holder;
or, in any case, at such other address or addresses as shall have been furnished
in writing to the Company (in the case of a holder of Preferred Shares or
Restricted Stock) or to the holders of Preferred Shares or Restricted Stock (in
the case of the Company) in accordance with the provisions of this paragraph.
(c) This Agreement shall be governed by and construed in accordance
with the laws of the State of Delaware.
(d) This Agreement may not be amended or modified, and no provision
hereof may be waived, without the written consent of the Company and the holders
of at least two-thirds of the outstanding shares of Restricted Stock.
(e) This Agreement may be executed in two or more counterparts, each
of which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
(f) The obligations of the Company to register shares of Restricted
Stock under Sections 4, 5 or 6 shall terminate on the fifteenth anniversary of
the date of this Agreement.
(g) If requested in writing by the underwriters for the initial
underwritten public offering of securities of the Company, each holder of
Restricted Stock who is a party to this Agreement shall agree not to sell
publicly any shares of Restricted Stock or any other shares of Common Stock
(other than shares of Restricted Stock or other shares of Common Stock being
registered in such offering), without the consent of such underwriters, for a
period of not more than 120 days following the effective date of the
registration statement relating to such offering; PROVIDED, HOWEVER, that all
persons entitled to registration rights with respect to shares of Common Stock
who are not parties to this Agreement, all other persons selling shares of
Common Stock in such offering, all persons holding in excess of 1% of the
capital stock of the Company on a fully diluted basis and all executive officers
and directors of the Company shall also have agreed not to sell publicly their
Common Stock under the circumstances and pursuant to the terms set forth in this
Section 13(g).
(h) Notwithstanding the provisions of Section 7(a), the Company's
obligation to file a registration statement, or cause such registration
statement to become and remain effective, shall be suspended for a period not to
exceed 90 days in any 24-month period if there exists at the time material
non-public information relating to the Company which, in the reasonable opinion
of the Company, should not be disclosed.
(i) The Company shall not grant to any third party any registration
rights more favorable than or inconsistent with any of those contained herein,
so long as any of the registration rights under this Agreement remains in
effect.
<PAGE> 12
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(j) If any provision of this Agreement shall be held to be illegal,
invalid or unenforceable, such illegality, invalidity or unenforceability shall
attach only to such provision and shall not in any manner affect or render
illegal, invalid or unenforceable any other provision of this Agreement, and
this Agreement shall be carried out as if any such illegal, invalid or
unenforceable provision were not contained herein.
Please indicate your acceptance of the foregoing by signing and
returning the enclosed counterpart of this letter, whereupon this Agreement
shall be a binding agreement between the Company and you.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 13
-14-
Very truly yours,
/s/ Ronald Charnock
-------------------------------
By: Ronald Charnock
----------------------------
Title: President
-------------------------
AGREED TO AND ACCEPTED as of the date first
above written.
Purchasers named in Schedule 1.01 to the Purchase
Agreement:
EDISON VENTURE FUND III, L.P.
By: Edison Partners III, L.P.,
its General Partner
By: /s/ Thomas A. Smith
-------------------------------
General Partner
NORO-MOSELEY PARTNERS III, L.P.
By: Moseley & Co., L.L.C.,
its General Partner
By: /s/ Charles A. Johnson
-------------------------------
Member
<PAGE> 1
EXHIBIT 10.1
NPRI, INC.
1995 EMPLOYEE STOCK OPTION PLAN
The proper execution of the duties and responsibilities of the
executives, officers and other key employees of NPRI, Inc. and its subsidiaries
and certain non-employees and consultants as determined by the Board of
Directors is a vital factor in the continued growth and success of the Company.
Toward this end, it is necessary to attract, motivate and retain effective and
capable employees, non-employees and consultants at all levels of the Company to
assume positions which contribute materially to the successful operation of the
business of the Company. It benefits the Company to bind the interests of these
persons more closely to its own interest by offering them options to purchase
shares of common stock of the Company and thereby provide them with added
incentive to remain in its employ, or non-employees and consultants and to
increase its prosperity and growth.
ARTICLE 1
DEFINITIONS
The following words and terms, unless the context clearly indicates
otherwise, have the following meanings. Where appropriate in the context of this
Stock Option Plan, the singular shall include the plural, the masculine gender
shall include the feminine, and vice versa:
1:01 "Board" means the Board of Directors of NPRI, Inc.
1:02 "Committee" means the stock option committee consisting of three
(3) or more disinterested directors as more specifically described in Section
3:01.
1:03 "Common Stock" means the common stock of NPRI, Inc.
1:04 "Company" means NPRI, Inc. and any subsidiary thereof.
1:05 "Option" means the options granted pursuant to this Plan.
1:06 "Option Agreement" means an agreement provided for in Section
6:01.
1:07 "Participant" means an individual designated pursuant to Section
3:03 who has executed an Option Agreement.
1:08 "Permanent Disability" means the inability of an individual to
engage in any substantial gainful activity by reason of any
medically-determinable physical or
<PAGE> 2
mental impairment which can be expected to result in death or which has lasted
or can be expected to last for a continuous period of not less than 12 months.
1:09 "Plan" means this NPRI 1995 Employee Stock Option Plan.
1:10 "Plan Administrator" means the Committee appointed by the Board.
1:11 "SEC" means the United States Securities and Exchange Commission.
1:12 "Vesting" means 20% per year for each year.
ARTICLE 2
EFFECTIVE DATE OF THE PLAN
2:01 On _________________, the Board adopted this Plan subject to
approval by the Shareholders. The Plan shall become effective at the next
Special Meeting of Shareholders, provided it is approved by a majority of the
Shareholders of the Company at that time. No Options granted prior to
Shareholder approval of the Plan shall be exercisable unless and until the
Shareholders of the Company approve this Plan and the Options granted prior to
such approval.
ARTICLE 3
ADMINISTRATION
3:01 The Plan shall be administered by a stock option committee (the
"Committee") consisting of not less than three (3) directors who shall each be
"disinterested persons" as no member of the Committee shall (i) be eligible to
receive Option awards under this plan, or (ii) have been awarded or granted
equity securities under the Plan or any other plan of the Company during the
period of one year prior to serving on the Committee except as may be permitted
in the SEC's Rule 16b-3(c)(2)(i). The Board may, from time to time, remove
members from or add members to the Committee. Vacancies in the Committee,
however caused, shall be filled by the Board. The Committee shall select one of
its members chairman and shall hold meetings at such times and places as it may
determine. The Committee may appoint a secretary and, subject to the provisions
of the Plan and to policies determined by the Board, may make such rules and
regulations for the conduct of its business as it shall deem advisable.
3:02 The Committee shall establish from time to time, subject to the
limitations of the Plan as hereinafter set forth, such rules and regulations,
and amendments thereof,
-2-
<PAGE> 3
as it deems necessary to comply with applicable law and regulation and for the
proper administration of the Plan. Every decision and action of the Committee
shall be valid if approved by (i) a majority of the Committee members then in
office at a meeting, or (ii) all of the Committee members then in office by
unanimous written consent in lieu of meeting.
3:03 The Committee shall make all determinations as to the persons
except the non-employees and consultants (including officers and key employees)
who in the opinion of the Committee should receive Options. The Committee shall
also designate the time or times at which Options are granted, the number of
shares for which Options are to be granted to each person, and the term and
price of each Option. No member of the Board or the Committee shall be liable
for any action or determination made in good faith with respect to the Plan or
any Option. The Board shall determine the amount of options, if any, to be given
to non-employees and consultants and the terms of vesting and any other material
conditions pertaining to such options. After the action of the Board, the
administration of those options shall be done by the Committee.
3:04 Options shall be granted only after prior designation by the
Committee and the execution of an Option Agreement. Vesting shall be 20% per
year. The Board or a committee by the Board which could be this committee shall
have the flexibility to grant options under different terms and conditions for
exemplary performance or extraordinary efforts or other criteria for those who
may or could be eligible under this Plan. The Committee shall report to the
Secretary of the Company the names of persons granted Options, the number of
Options granted, and the terms and conditions of each Option.
ARTICLE 4
PARTICIPATION IN THE PLAN
4:01 Participation in the Plan shall be limited to full-time officers
and employees, non-employees and consultants of the Company as the case may be
who, from time to time, shall be designated by the Board or the Committee in
accordance with Section 3:03.
ARTICLE 5
STOCK SUBJECT TO PLAN
5:01 There are reserved for the granting of Options under the Plan, and
for subsequent issuance and sale pursuant to granted Options, of up to Four
Hundred Thirty Thousand Seven Hundred Eight (430,708) shares which is the
equivalent of 7.5% of the common stock on a fully diluted basis less any shares
issued under the 1995 Incentive Stock Option Plan of unissued by authorized
Common Stock or of Common Stock held
-3-
<PAGE> 4
in treasury. The combination of this Option Plan and Stock Option Plan has a
maximum number of shares of Four Hundred Thirty Thousand Seven Hundred Eight
(430,708) which is the equivalent of 7.5% of the common stock on a fully diluted
basis. If for any reason shares for which an Option has been granted lapses and
is not subject to purchase thereunder, those shares shall be available for the
granting of Options.
5:02 Proceeds of the purchase of optioned shares shall be used for the
general business purposes of the Company.
5:03 In the event of reorganization, recapitalization, stock split,
stock dividend, stock combination, merger, consolidation, acquisition of
property or stock, any change in the capital structure of the Company, or
similar changes in the Company's Common Stock, the Committee shall make such
adjustments as may be appropriate in the number and kind of shares reserved for
purchase and in the number, kind and price of shares covered by Options granted
but not then exercised; provided, however, that any Options to purchase
fractional shares resulting from any such adjustment shall be eliminated.
5:04 If the Company shall at any time merge or consolidate with or into
another corporation and (i) the Company is not the surviving entity, or (ii) the
Company is the surviving entity and the shareholders of the Company are required
to exchange their shares of Common Stock for property and/or securities, the
holder of each Option will thereafter receive, upon the exercise thereof, the
securities and/or property to which a holder of the number of shares of Common
Stock then deliverable upon the exercise of such Option would have been entitled
upon such merger or consolidation, and the Company shall take such steps in
connection with such merger or consolidation as may be necessary to assure that
the provisions of this Plan shall thereafter be applicable, as nearly as
reasonably may be, in relation to any securities or property thereafter
deliverable upon the exercise of such Option, provided, however, that under no
circumstance shall any Option exercise date be accelerated in contemplation of
such action. A sale of all or substantially all the assets of the Company for
consideration (apart from the assumption of obligations) consisting primarily of
securities shall be deemed a merger or consolidation for the foregoing purposes.
Notwithstanding the foregoing, the provisions of this Section 5:04 shall be
subject to Section 6:04.
The surviving entity following any reorganization may at any time,
in its sole discretion, tender substitute options as it may deem appropriate.
However, in no event may the substitute options entitle the Participant to any
fewer shares (or at any greater aggregate price) or any less other property than
the Participant would be entitled to under the immediately preceding paragraph
upon an exercise of the Options held prior to the substitution of the new
option.
5:05 In the event of the proposed dissolution or liquidation of the
Company, the Options granted hereunder shall terminate as of a date to be fixed
by the Committee, provided that not less than thirty (30) days prior written
notice of the date so fixed shall be given to the Participant, and the
Participant shall have the right, during the period of
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<PAGE> 5
thirty (30) days preceding such termination, to exercise his Options.
Notwithstanding the foregoing, the provisions of this Section shall be subject
to Section 6:04.
ARTICLE 6
TERMS AND CONDITIONS OF OPTIONS
6:01 Each Option shall be evidenced by an Option Agreement specifying
the number of shares of Common Stock covered thereby in such form as the
Committee from time to time may determine, provided that no provision of the
Option Agreement shall be inconsistent with this Plan and such Option Agreement
may incorporate all or any of the terms of this Plan by reference.
6:02 The Option price per share shall not be less than 100% of the fair
market value of a share of the Common Stock on the date on which the Option is
granted. The Common Stock is not currently listed upon an established stock
exchange or traded in the over-the-counter market. Accordingly, until such time
as the Common Stock is listed upon an established stock exchange or traded in
the over-the-counter market, the fair market value of shares of the Common Stock
shall be determined in good faith by the Committee. When and if the Common Stock
is listed upon an established stock exchange or exchanges such fair market value
shall be deemed to be the highest closing price of the Common Stock on such
stock exchange or exchanges on the day the option is granted or if no sale of
the Common Stock shall have been made on any stock exchange on that day, on the
next preceding day on which there was a sale of such stock. When and if shares
of the Common Stock are traded in the over-the-counter market but not on an
established exchange or exchanges, the fair market value per share shall be the
mean between dealer "bid" and "asked" prices of the Common Stock as reported by
the National Association of Securities Dealers, Inc., on the day the option is
granted. Subject to the foregoing, the Committee in fixing the Option price
shall have full authority and discretion and be fully protected in doing so.
6:03 No Option may be granted under this Plan after December 31, 2000.
6:04 The term of any Option granted under this Plan shall be up to 5
years from the date on which it was granted. The Committee shall have the right
to set the time or times within which an Option shall be exercised, and to
accelerate the time or times of exercise; provided, however, that no Option
shall be exercisable until (i) after the Shareholders of the Company approve the
Plan; and (ii) at least six (6) months from the date of grant.
6:05 Each Option by its terms shall be non-transferable and
non-assignable except that valid Option rights may be transferred by
testamentary instrument (will), by the laws of descent and distribution, or
pursuant to a qualified domestic relations order as defined in the Internal
Revenue Code or Title I of the Employee Retirement Income
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<PAGE> 6
Security Act or the rules thereunder. Otherwise, an Option is exercisable only
by such Participant.
6:06 Each Option granted under the Plan shall terminate and may no
longer be exercised if the Participant ceases to be an employee of the Company,
except that (i) if the Participant dies while in the employ of the Company, or
within two (2) months after the termination of such employment, or within six
(6) months if determined to be permanently disabled, such Option may be
exercised on his behalf as set forth in 6.07 below; and (ii) if the
Participant's employment shall have been terminated for any reason other than
his death, or permanent disability, he may at any time within a period of two
(2) months after such termination exercise such Option to the extent that the
Option was exercisable pursuant to Section 6.04 above by him on the date of the
termination of his employment; provided, however, that in the case of
termination for cause by the Company of the employment of the Participant or if
a Participant shall terminate his employment in violation of any employment
agreement with the Company, then his Option shall terminate and expire
concurrently with the termination of his employment and shall not thereafter be
exercisable to any extent. The definition of "cause" shall be as set forth in
the Option Agreement with each Participant.
6:07 If the Participant dies during the term of his Option while in the
employ of the Company, or within the two (2) month period after the termination
of employment or within six (6) months of becoming permanently disabled, without
having fully exercised his option, the executor or administrator of his estate
or the person who inherits the right to exercise the Option by bequest or
inheritance shall have the right within twelve (12) months after the
Participant's death to purchase the number of shares which the deceased
Participant was entitled to purchase at the date of his death, after which time
the Option shall lapse.
6:08 A Participant may, at any time, elect in writing to abandon an
Option or any part thereof.
ARTICLE 7
METHODS OF EXERCISE OF OPTION
7:01 The Participant (or other person acting under Section 6.07)
desiring to exercise an Option as to all or part of the shares of Common Stock
subject to that option shall notify the Secretary of the Company in writing at
its principal office to that effect, specifying the number of shares to be
purchased. The Committee shall have the right to set the time or times within
which each Option shall be exercisable, and to accelerate the time or times of
exercise. Unless the Option Agreement executed by a Participant expressly
otherwise provides, the Option shall be exercisable at any time or from time to
time after the expiration of one year from the date of grant and prior to
termination of the Option. Options must be exercised in multiples of 100 shares,
unless all Options theretofore granted are exercised at that time. An Option may
not be exercised to any
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<PAGE> 7
extent, either by the Participant to whom it was granted, or by any person after
the Participant's death, unless the Participant to whom the Option was granted
has remained in the continuous employ of the Company, and/or of a subsidiary,
for not less than twelve (12) months from the date the Option was granted.
7:02 The notice shall be accompanied by payment to the Company of the
full purchase price or the Committee in its sole and absolute discretion may
accept an assignment of proceeds or funds or other similar documents from a
qualified brokerage company which trades on a national or regional exchange as a
financial institution. With the prior consent of the Company the Option may be
exercised as to the number of shares specified in the notice by tendering to the
Company shares of Common Stock already owned by the Participant which, together
with any cash tendered therewith shall equal in value the full purchase price.
The value of the tendered shares for this purpose shall be the fair market value
(as determined in accordance with the procedures set forth in Section 6:02) of
such shares (valued as if unlegended and freely transferable) on the date the
Participant executes and dates the notice provided in Section 7.01, and the
Participant shall deliver only that number of shares of Common Stock which,
together with any cash delivered, has an aggregate value of not less than the
full purchase price for the Option.
7:03 A Participant shall have none of the rights of a Stockholder until
the shares of Common Stock covered by the Option are issued to him. If the
shares of Common Stock issuable pursuant to the exercise of an Option are not
registered under the Securities Act of 1933, as amended, the Company may require
that the Participant deliver an investment representation letter at the time of
exercise in form acceptable to the Company and its counsel, and the Company may
place appropriate legends restricting transfer under applicable securities laws
on the certificates for the shares of Common Stock to be issued.
ARTICLE 8
AMENDMENTS AND DISCONTINUANCE OF THE PLAN
8:01 The Committee shall have the right at any time and from time to
time to amend, suspend, or terminate the Plan provided that, except as provided
in Section 5:03, no such amendment, suspension, or termination shall (i) revoke
or alter the terms of any valid Option previously granted in accordance with
this Plan; (ii) increase the number of shares to be reserved for issuance of
Options; (iii) change the price determined pursuant to the provisions of Section
6:02; (iv) change the class of eligible employees to whom Options may be granted
under this Plan; (v) extend the term of the Plan beyond five (5) years or
provide for options exercisable more than two (2) years after the date granted;
(vi) permit any member of the Committee to be eligible as a Participant; or
(vii) otherwise materially modify the Plan, except as provided herein or as
necessary to comply with applicable law, without Shareholder approval.
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<PAGE> 8
8:02 This Plan shall terminate at midnight on December 31, 2001. Options
outstanding at the termination of the Plan shall not be affected by such
termination.
ARTICLE 9
MISCELLANEOUS PROVISIONS
9:01 The Plan shall be construed, whenever possible, to be in conformity
with the requirements of all applicable federal law, including without
limitation the SEC's Rule 16b-3. To the extent not in conflict with the
preceding sentence, the Plan shall be construed, administered and governed in
all respect under any by the laws of the State of Delaware, except where
preempted by federal law.
9:02 If any provision of the Plan is held invalid or unenforceable, the
invalidity or unenforceability shall not affect any other provisions and the
Plan shall be construed and enforced as if those provisions had not been
included.
9:03 This Plan shall be binding upon heirs, executors, administrators,
successors and assigns of all parties hereto, present and future.
9:04 The Plan shall not be deemed to constitute a contract between any
employee and the Company. Nothing in the Plan shall give any employee the right
to be retained in the employ of the Company, and all employees shall remain
subject to discharge, discipline or layoff to the same extent as if the Plan had
not been put into effect.
9:05 In addition to such other rights of indemnification as they may
have as directors or as members of the Committee, the members of the Committee
shall be indemnified by the Corporation against the reasonable expenses,
including attorney's fees actually and necessarily incurred in connection with
the defense of any action, suit, or proceeding, or in connection with any appeal
therein, to which they or any of them may be a party by reason of any action
taken or failure to act under or in connection with the Plan or any option
granted thereunder, and against all amounts paid by them in settlement thereof
(provided such settlement is approved by independent legal counsel selected by
the Corporation) or paid by them in satisfaction of a judgment in any such
action, suit, or proceeding, except in relation to matters as to which it shall
be adjudged in such action, suit, or proceeding that such Committee member is
liable for negligence or misconduct in performance of his duties; provided that
within 60 days after institution of any such action, suit, or proceeding a
Committee member shall in writing offer the Corporation the opportunity, at its
own expense, to handle and defend the same.
9:06 The Option Agreement shall provide the employee shall upon each
exercise of a part or all of the option granted represent a warrant that his
purchase of stock pursuant to such option is for investment only, and not with
the view of distribution
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<PAGE> 9
involving a public offering unless such shares are provided for in such public
offering or such shares are registered. At any time the Board may waive the
requirement of such provision and any option agreement entered into under this
Plan.
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<PAGE> 1
EXHIBIT 10.2
NPRI, INC.
1995 INCENTIVE STOCK OPTION PLAN
The purpose of this plan is to secure for the corporation and its
shareholders, the benefits which flow from providing corporate officers and
managerial employees with the incentive inherent in common stock ownership. It
has been generally recognized that stock option plans aid in the retention of
confident executives and furnish a device to attract executives and exceptional
ability to the corporation because the opportunity offered to acquire a
proprietary interest in the business. Stock options granted under the Plan are
intended to qualify as incentive stock options within the meaning of Section 422
of the Internal Revenue Code of 1986 as amended.
ARTICLE 1
DEFINITIONS
The following words and terms, unless the context clearly indicates
otherwise, have the following meanings. Where appropriate in the context of this
Incentive Stock Option Plan, the singular shall include the plural, the
masculine gender shall include the feminine, and vice versa:
1:01 "Board" means the Board of Directors of NPRI, Inc.
1:02 "Committee" means the incentive stock option committee consisting
of three (3) or more disinterested directors as more specifically described in
Section 3:01.
1:03 "Common Stock" means the common stock of NPRI, Inc.
1:04 "Company" means NPRI, Inc. and any subsidiary thereof.
1:05 "Option" means the options granted pursuant to this Plan.
1:06 "Option Agreement" means an agreement provided for in
Section 6:01.
1:07 "Participant" means an individual designated pursuant to Section
3:03 who has executed an Option Agreement.
1:08 "Permanent Disability" means the inability of an individual to
engage in any substantial gainful activity by reason of any medically-
determinable physical or mental impairment which can be expected to result in
death or which has lasted or can be expected to last for a continuous period of
not less than 12 months.
1:09 "Plan" means this NPRI 1995 Incentive Stock Option Plan.
<PAGE> 2
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1:10 "Plan Administrator" means the Committee appointed by the Board.
1:11 "SEC" means the United States Securities and Exchange Commission.
1:12 "Vesting: means 20% per year for each year.
ARTICLE 2
EFFECTIVE DATE OF THE PLAN
2:01 On _____________, the Board adopted this Plan subject to approval
by the Shareholders. The Plan shall become effective at the next Special Meeting
of Shareholders, provided it is approved by a majority of the Shareholders of
the Company at that time. No Options granted prior to Shareholder approval of
the Plan shall be exercisable unless and until the Shareholders of the Company
approve this Plan and the Options granted prior to such approval.
ARTICLE 3
3:01 The Plan shall be administered by an incentive stock option
committee (the "Committee") consisting of not less than three (3) directors who
shall each be "disinterested persons" as no member of the Committee shall (i) be
eligible to receive Option awards under this plan, or (ii) owe more than 10% of
the voting stock of the corporation, or (iii) have been awarded or granted
equity securities under the Plan or any other plan of the Company during the
period of one year prior to serving on the Committee except as may be permitted
in the SEC's Rule 16b-3(c)(2)(i). The Board may, from time to time, remove
members from or add members to the Committee. Vacancies in the Committee,
[however caused, shall be filled by the Board, The Committee] shall select one
of its members chairman and shall hold meetings at such times and places as it
may determine. The Committee may appoint a secretary and, subject to the
provisions of the Plan and to policies determined by the Board, may make such
rules and regulations for the conduct of its business as it shall deem
advisable.
3:02 The Committee shall establish from time to time, subject to the
limitations of the Plan as hereinafter set forth, such rules and regulations,
and amendments thereof, as it deems necessary to comply with applicable law and
regulation and for the proper administration of the Plan. Every decision and
action of the Committee shall be valid if approved by (i) a majority of the
Committee members then in office at a meeting, or (ii) all of the Committee
members then in office by unanimous written consent in lieu of meeting.
3:03 The Committee shall make all determinations as to the persons
(including officers and key employees) who in the opinion of the Committee
should receive Options. The
<PAGE> 3
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Committee shall also designate the time or times at which Options are granted,
the number of shares for which Options are to be granted to each person, and the
term and price of each Option. No member of the Board or the Committee shall be
liable for any action or determination made in good faith with respect to the
Plan or any Option.
3:04 Options shall be granted only after prior designation by the
Committee and the execution of an Option Agreement. Vesting shall be at 20% per
year. The Committee shall report to the Secretary of the Company the names of
persons granted Options, the number of Options granted, and the terms and
conditions of each Option.
ARTICLE 4
PARTICIPATION IN THE PLAN
4:01 Participation in the Plan shall be limited to full-time officers
and employees of the Company who, from time to time, shall be designated by the
Committee in accordance with Section 3:03, provided however, that no shareholder
who owns directly or by attribution more than 10% of the common stock on a fully
diluted basis shall be eligible to be a participant.
4:02 The Company has an existing plan known as the Employee Special
Incentive Plan which was known as the phantom stock plan. The Company is
terminating that plan and converting all the shares under that plan and
immediately vesting those participants with the allocated options as of the
execution of the termination agreement of the plan. The participants and the
number of options which are converted into this plan are identified on Schedule
A and attached hereto.
ARTICLE 5
STOCK SUBJECT TO PLAN
5:01 There are reserved for the granting of Options under the Plan, and
for subsequent issuance and sale pursuant to granted Options, of up to Four
Hundred Thirty Thousand Seven Hundred Eight (430,708) shares which is the
equivalent of 7.5% of the common stock on a fully diluted basis less any shares
issued under the 1995 Employee Stock Option Plan of unissued but authorized
Common Stock or of Common Stock held in treasury. The combination of this
Incentive Stock Option Plan and 1995 Employee Stock Option Plan has a maximum
number of shares of 430,708 which is the equivalent of 7.5% of the common stock
on a fully diluted basis. If for any reason shares for which an Option under
this Plan has been granted lapses and is not subject to purchase thereunder,
those shares shall be available for the granting of Options.
<PAGE> 4
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5:02 Proceeds of the purchase of optioned shares shall be used for the
general business purposes of the Company.
5:03 In the event of reorganization, recapitalization, stock split,
stock dividend, stock combination, merger, consolidation, acquisition of
property or stock, any change in the capital structure of the Company, or
similar changes in the Company's Common Stock, the Committee shall make such
adjustments as may be appropriate in the number and kind of shares reserved for
purchase and in the number, kind and price of shares covered by Options granted
but not then exercised; provided, however, that any Options to purchase
fractional shares resulting from any such adjustment shall be eliminated.
5:04 If the Company shall at any time merge or consolidate with or into
another corporation and (i) the Company is not the surviving entity, or (ii) the
Company is the surviving entity and the shareholders of the Company are required
to exchange their shares of Common Stock for property and/or securities, the
holder of each Option will thereafter receive, upon the exercise thereof, the
securities and/or property to which a holder of the number of shares of Common
Stock then deliverable upon the exercise of such Option would have been entitled
upon such merger or consolidation, and the Company shall take such steps in
connection with such merger or consolidation as may be necessary to assure that
the provisions of this Plan shall thereafter be applicable, as nearly as
reasonably may be, in relation to any securities or property thereafter
deliverable upon the exercise of such Option, provided, however, that under no
circumstance shall any Option exercise date be accelerated in contemplation of
such action. A sale of all or substantially all the assets of the Company for
consideration (apart from the assumption of obligations) consisting primarily of
securities shall be deemed a merger or consolidation for the foregoing purposes.
Notwithstanding the foregoing, the provisions of this Section 5:04 shall be
subject to Section 6:04.
The surviving entity following any reorganization may at any time, in
its sole discretion, tender substitute options as it may deem appropriate.
However, in no event may the substitute options entitle the Participant to any
fewer shares (or at any greater aggregate price) or any less other property than
the Participant would be entitled to under the immediately preceding paragraph
upon an exercise of the Options held prior to the substitution of the new
option.
5:05 In the event of the proposed dissolution or liquidation of the
Company, the Options granted hereunder shall terminate as of a date to be fixed
by the Committee, provided that not less than thirty (30) days' prior written
notice of the date so fixed shall be given to the Participant, and the
Participant shall have the right, during the period of thirty (30) days
preceding such termination, to exercise his Options. Notwithstanding the
foregoing, the provisions of this Section shall be subject to Section 6:04.
ARTICLE 6
<PAGE> 5
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TERMS AND CONDITIONS OF OPTIONS
6:01 Each Option shall be evidenced by an Option Agreement specifying
the number of shares of Common Stock covered thereby in such form as the
Committee from time to time may determine, provided that no provision of the
Option Agreement shall be inconsistent with this Plan and such Option Agreement
may incorporate all or any of the terms of this Plan by reference.
6:02 The Option price per share shall not be less than 85% of the fair
market value of a share of the Common Stock on the date on which the Option is
granted. The Common Stock is not currently listed upon an established stock
exchange or traded in the over-the-counter market. Accordingly, until such time
as the Common Stock is listed upon an established stock exchange or traded in
the over-the-counter market, the fair market value of shares of the Common Stock
shall be determined in good faith by the Committee. When and if the Common Stock
is listed upon an established stock exchange or exchanges such fair market value
shall be deemed to be the highest closing price of the Common Stock on such
stock exchange or exchanges on the day the option is granted or if no sale of
the Common Stock shall have been made on any stock exchange on that day, on the
next preceding day on which there was a sale of such stock. When and if shares
of the Common Stock are traded in the over-the-counter market but not on an
established exchange or exchanges, the fair market value per share shall be the
mean between dealer "bid" and "asked" prices of the Common Stock as reported by
the National Association of Securities Dealers, Inc., on the day the option is
granted. Subject to the foregoing, the Committee in fixing the Option price
shall have full authority and discretion and be fully protected in doing so.
6:03 No Option may be granted under this Plan after December 31, 2000.
6:04 The term of any Option granted under this Plan shall be up to 5
years from the date on which it was granted. The Committee shall have the right
to set the time or times within which an Option shall be exercised, and to
accelerate the time or times of exercise; provided, however, that no Option
shall be exercisable until (i) after the Shareholders of the Company approve the
Plan; and (ii) at least six (6) months from the date of grant.
6:05 Each Option by its terms shall be non-transferable and
non-assignable except that valid Option rights may be transferred by
testamentary instrument (will), by the laws of descent and distribution, or
pursuant to a qualified domestic relations order as defined in the Internal
Revenue Code or Title I of the Employee Retirement Income Security Act or the
rules thereunder. Otherwise, an Option is exercisable only by such Participant.
6:06 Each Option granted under the Plan shall terminate and may no
longer be exercised if the Participant ceases to be an employee of the Company,
except that (i) if the Participant dies while in the employ of the Company, or
within two (2) months after the termination of such employment, or within six
(6) months if determined to be permanently disabled, such Option may be
exercised on his behalf as set forth in 6:07 below; and (ii) if the
<PAGE> 6
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Participant's employment shall have been terminated for any reason other than
his death, or permanent disability, he may at any time within a period of two
(2) months after such termination exercise such Option to the extent that the
Option was exercisable pursuant to Section 6:04 above by him on the date of the
termination of his employment; provided, however, that in the case of
termination for cause by the Company of the employment of the Participant or if
a Participant shall terminate his employment in violation of any employment
agreement with the Company, then his Option shall terminate and expire
concurrently with the termination of his employment and shall not thereafter be
exercisable to any extent. The definition of "cause" shall be as set forth in
the Option Agreement with each Participant.
6:07 If the Participant dies during the term of his Option while in the
employ of the Company, or within the two (2) month period after the termination
of employment, or within six (6) months if determined to be permanently disabled
without having fully exercised his Option, the executor or administrator of his
estate or the person who inherits the right to exercise the Option by bequest or
inheritance shall have the right within twelve (12) months after the
Participant's death to purchase the number of shares which the deceased
Participant was entitled to purchase at the date of his death, after which time
the Option shall lapse.
6:08 A Participant may, at any time, elect in writing to abandon an
Option or any part thereof.
6:09 No person to whom options are granted hereunder shall receive
options, first exercisable during any single calendar year, for shares, the fair
market value of which (determined at the time of grant of the options) exceeds
$100,000. Accordingly, no optionee shall be entitled to exercise options in any
single calendar year, except to the extent first exercisable in previous
calendar years, for shares of common stock, the value of which (determined at
the time of grant of the options) exceeds $100,000.
ARTICLE 7
METHODS OF EXERCISE OF OPTION
7:01 The Participant (or other person acting under Section 6:07)
desiring to exercise an Option as to all or part of the shares of Common Stock
subject to that option shall notify the Secretary of the Company in writing at
its principal office to that effect, specifying the number of shares to be
purchased. The Committee shall have the right to set the time or times within
which each Option shall be exercisable, and to accelerate the time or times of
exercise. Unless the Option Agreement executed by a Participant expressly
otherwise provides, the Option shall be exercisable at any time or from time to
time after the expiration of one year from the date of grant and prior to
termination of the Option. Options must be exercised in multiples of 100 shares,
unless all Options theretofore granted are exercised at that time. An Option may
not be exercised to any extent, either by the Participant to whom it was
granted, or by any person after the Participant's death, unless the Participant
to whom the Option was granted has remained in
<PAGE> 7
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the continuous employ of the Company, and/or of a subsidiary, for not less than
twelve (12) months from the date the Option was granted.
7:02 The notice shall be accompanied by payment to the Company of the
full purchase price. With the prior consent of the Company the Option may be
exercised as to the number of shares specified in the notice by tendering to the
Company shares of Common stock already owned by the Participant which, together
with any cash tendered therewith shall equal in value the full purchase price.
The value of the tendered shares for this purpose shall be the fair market value
(as determined in accordance with the procedures set forth in Section 6:02) of
such shares (valued as if unlegended and freely transferable) on the date the
Participant executes and dates the notice provided in Section 7:01, and the
Participant shall deliver only that number of shares of Common Stock which,
together with any cash delivered, has an aggregate value of not less than the
full purchase price for the Option.
7:03 A Participant shall have none of the rights of a Stockholder until
the shares of Common Stock covered by the Option are issued to him. If the
shares of Common Stock issuable pursuant to the exercise of an Option are not
registered under the Securities Act of 1933, as amended, the Company may require
that the Participant deliver an investment representation letter at the time of
exercise in form acceptable to the Company and its counsel, and the Company may
place appropriate legends restricting transfer under applicable securities laws
on the certificates for the shares of Common Stock to be issued.
ARTICLE 8
AMENDMENTS AND DISCONTINUANCE OF THE PLAN
8:01 The Committee shall have the right at any time and from time to
time to amend, suspend, or terminate the Plan provided that, except as provided
in Section 5:03, no such amendment, suspension, or termination shall; (i) revoke
or alter the terms of any valid Option previously granted in accordance with
this Plan; (ii) increase the number of shares to be reserved for issuance of
Options; (iii) change the price determined pursuant to the provisions of Section
6:02; (iv) change the class of eligible employees to whom Options may be granted
under this Plan; (v) extend the term of the Plan beyond five (5) years or
provide for options exercisable more than two(2) years after the date granted;
(vi) permit any member of the Committee to be eligible as a Participant or (vii)
otherwise materially modify the Plan, except as provided herein or as necessary
to comply with applicable law, without Shareholder approval.
8:02 This Plan shall terminate at midnight on December 31, 2001. Options
outstanding at the termination of the Plan shall not be affected by such
termination.
ARTICLE 9
<PAGE> 8
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MISCELLANEOUS PROVISIONS
9:01 The Plan shall be construed, whenever possible, to be in conformity
with the requirements of all applicable federal law, including without
limitation the SEC's Rule 16b-3. To the extent not in conflict with the
preceding sentence, the Plan shall be construed, administered and governed in
all respect under and by the laws of the State of Delaware, except where
preempted by federal law.
9:02 If any provision of the Plan is held invalid or unenforceable, the
invalidity or unenforceability shall not affect any other provisions and the
Plan shall be construed and enforced as if those provisions had not been
included.
9:03 This Plan shall be binding upon heirs, executors, administrators,
successors and assigns of all parties hereto, present and future.
9:04 The Plan shall not be deemed to constitute a contract between any
employee and the Company. Nothing in the Plan shall give any employee the right
to be retained in the employ of the Company, and all employees shall remain
subject to discharge, discipline or layoff to the same extent as if the Plan had
not been put into effect.
9:05 In addition to such other rights of indemnification as they may
have as directors or as members of the Committee, the members of the Committee
shall be indemnified by the Corporation against the reasonable expenses,
including attorney's fees actually and necessarily incurred in connection with
the defense of any action, suit, or proceeding, or in connection with any appeal
therein, to which they or any of them may be a party by reason of any action
taken or failure to act under or in connection with the Plan or any option
granted thereunder, and against all amounts paid by them in settlement thereof
(provided such settlement is approved by independent legal counsel selected by
the Corporation) or paid by them in satisfaction of a judgment in any such
action, suit, or proceeding, except in relation to matters as to which it shall
be adjudged in such action, suit, or proceeding that such Committee member is
liable for negligence or misconduct in performance of his duties; provided that
within 60 days after institution of any such action, suit, or proceeding a
Committee member shall in writing offer the Corporation the opportunity, at its
own expense, to handle and defend the same.
9:06 The Option Agreement shall provide the employee shall upon each
exercise of a part or all of the option granted represent a warrant that his
purchase of stock pursuant to such option is for investment only, and not with
the view of distribution involving a public offering unless such shares are
provided for in such public offering or such shares are registered. At any time
the Board may waive the requirement of such provision and any option agreement
entered into under this Plan.
<PAGE> 1
EXHIBIT 10.3
------------
VERSATILITY INC.
1996 EMPLOYEE STOCK PURCHASE PLAN
ARTICLE 1 - PURPOSE.
- -------------------
This 1996 Employee Stock Purchase Plan (the "Plan") is intended to
encourage stock ownership by all eligible employees of Versatility Inc. (the
"Company"), a Delaware corporation, and its participating subsidiaries (as
defined in Article 17) so that they may share in the growth of the Company by
acquiring or increasing their proprietary interest in the Company. The Plan is
designed to encourage eligible employees to remain in the employ of the Company
and its participating subsidiaries. The Plan is intended to constitute an
"employee stock purchase plan" within the meaning of Section 423(b) of the
Internal Revenue Code of 1986, as amended (the "Code").
ARTICLE 2 - ADMINISTRATION OF THE PLAN.
- --------------------------------------
The Plan may be administered by a committee appointed by the Board of
Directors of the Company (the "Committee"). The Committee shall consist of not
less than two members of the Company's Board of Directors. The Board of
Directors may from time to time remove members from, or add members to, the
Committee. Vacancies on the Committee, howsoever caused, shall be filled by the
Board of Directors. The Committee may select one of its members as Chairman, and
shall hold meetings at such times and places as it may determine. Acts by a
majority of the Committee, or acts reduced to or approved in writing by a
majority of the members of the Committee, shall be the valid acts of the
Committee.
The interpretation and construction by the Committee of any provisions of
the Plan or of any option granted under it shall be final, unless otherwise
determined by the Board of Directors. The Committee may from time to time adopt
such rules and regulations for carrying out the Plan as it may deem best,
provided that any such rules and regulations shall be applied on a uniform basis
to all employees under the Plan. No member of the Board of Directors or the
Committee shall be liable for any action or determination made in good faith
with respect to the Plan or any option granted under it.
In the event the Board of Directors fails to appoint or refrains from
appointing a Committee, the Board of Directors shall have all power and
authority to administer the Plan. In such event, the word "Committee" wherever
used herein shall be deemed to mean the Board of Directors.
ARTICLE 3 - ELIGIBLE EMPLOYEES.
- ------------------------------
All employees of the Company or any of its participating subsidiaries whose
customary employment is more than 20 hours per week and for more than five
months in any calendar year and who have completed one year of employment shall
be eligible to receive options under the Plan to purchase common stock of the
Company, and all eligible employees shall have the same rights and privileges
hereunder. Persons who are eligible employees on the first business day of any
Payment Period (as defined in Article 5) shall receive their options as of such
day. Persons who become eligible employees after any date on which options are
granted under the Plan shall be granted options on the first day of the next
succeeding Payment Period on which options are granted to eligible employees
under the Plan. In no event, however, may an employee be granted an option if
such employee, immediately after the option
<PAGE> 2
-2-
was granted, would be treated as owning stock possessing five percent or more of
the total combined voting power or value of all classes of stock of the Company
or of any parent corporation or subsidiary corporation, as the terms "parent
corporation" and "subsidiary corporation" are defined in Section 424(e) and (f)
of the Code. For purposes of determining stock ownership under this paragraph,
the rules of Section 424(d) of the Code shall apply, and stock which the
employee may purchase under outstanding options shall be treated as stock owned
by the employee.
ARTICLE 4 - STOCK SUBJECT TO THE PLAN.
- -------------------------------------
The stock subject to the options under the Plan shall be shares of the
Company's authorized but unissued Common Sock, par value $.01 per share (the
"Common Stock"), or shares of Common Stock reacquired by the Company, including
shares purchased in the open market. The aggregate number of shares which may be
issued pursuant to the Plan is 100,000, subject to adjustment as provided in
Article 12. If any option granted under the Plan shall expire or terminate for
any reason without having been exercised in full or shall cease for any reason
to be exercisable in whole or in part, the unpurchased shares subject thereto
shall again be available under the Plan.
ARTICLE 5 - PAYMENT PERIOD AND STOCK OPTIONS.
- --------------------------------------------
The first Payment Period during which payroll deductions will be
accumulated under the Plan shall commence on the later to occur of January 1,
1997 and the first day of the first calendar month following effectiveness of
the Form S-8 registration statement filed with the Securities and Exchange
Commission covering the shares to be issued pursuant to the Plan and shall end
on April 30, 1997. For the remainder of the duration of the Plan, Payment
Periods shall consist of the six-month periods commencing on May 1 and November
1 and ending on October 31 and April 30 of each calendar year.
Twice each year, on the first business day of each Payment Period, the
Company will grant to each eligible employee who is then a participant in the
Plan an option to purchase on the last day of such Payment Period, at the Option
Price hereinafter provided for, a maximum of 250 shares, on condition that such
employee remains eligible to participate in the Plan throughout the remainder of
such Payment Period. The participant shall be entitled to exercise the option so
granted only to the extent of the participant's accumulated payroll deductions
on the last day of such Payment Period. If the participant's accumulated payroll
deductions on the last day of the Payment Period would enable the participant to
purchase more than 250 shares except for the 250 share limitation, the excess of
the amount of the accumulated payroll deductions over the aggregate purchase
price of the 250 shares shall be promptly refunded to the participant by the
Company, without interest. The Option Price per share for each Payment Period
shall be the lesser of (i) 85% of the average market price of the Common Stock
on the first business day of the Payment Period and (ii) 85% of the average
market price of the Common Stock on the last business day of the Payment Period,
in either event rounded. The foregoing limitation on the number of shares
subject to option and the Option Price shall be subject to adjustment as
provided in Article 12.
For purposes of the Plan, the term "average market price" on any date
means: (i) the average (on that date) of the high and low prices of the Common
Stock on the principal national securities exchange on which the Common Stock
is traded, if the Common Stock is then traded on a national securities exchange;
or (ii) the last reported sale price (on that date) of the Common Stock on the
NASDAQ National Market, if the Common Stock is not then traded on a national
securities exchange; or (iii) the average of the closing bid and asked prices
last quoted (on that date) by an established quotation service for
over-the-counter securities, if the Common Stock is not reported on the NASDAQ
National Market; or (iv) if the Common Stock is not publicly traded, the fair
market value of the Common Stock as
<PAGE> 3
-3-
determined by the Committee after taking into consideration all factors which it
deems appropriate, including, without limitation, recent sale and offer prices
of the Common Stock in private transactions negotiated at arm's length.
For purposes of the Plan, the term "business day" means a day on which
there is trading on the NASDAQ National Market or the aforementioned national
securities exchange, whichever is applicable pursuant to the preceding
paragraph; and if neither is applicable, a day that is not a Saturday, Sunday or
legal holiday in the State of Delaware.
No employee shall be granted an option which permits the employee's right
to purchase stock under the Plan, and under all other Section 423(b) employee
stock purchase plans of the Company and any parent or subsidiary corporations,
to accrue at a rate which exceeds $25,000 of fair market value of such stock
(determined on the date or dates that options on such stock were granted) for
each calendar year in which such option is outstanding at any time. The purpose
of the limitation in the preceding sentence is to comply with Section 423(b)(8)
of the Code. If the participant's accumulated payroll deductions on the last day
of the Payment Period would otherwise enable the participant to purchase Common
Stock in excess of the Section 423(b)(8) limitation described in this paragraph,
the excess of the amount of the accumulated payroll deductions over the
aggregate purchase price of the shares actually purchased shall be promptly
refunded to the participant by the Company, without interest.
ARTICLE 6 - EXERCISE OF OPTION.
- ------------------------------
Each eligible employee who continues to be a participant in the Plan on the
last day of a Payment Period shall be deemed to have exercised his or her option
on such date and shall be deemed to have purchased from the Company such number
of full shares of Common Stock reserved for the purpose of the Plan as the
participant's accumulated payroll deductions on such date will pay for at the
Option Price, subject to the 250 share limit of the option and the Section
423(b)(8) limitation described in Article 5. If the individual is not a
participant on the last day of a Payment Period, then he or she shall not be
entitled to exercise his or her option. Only full shares of Common Stock may be
purchased under the Plan. Unused payroll deductions remaining in a participant's
account at the end of a Payment Period by reason of the inability to purchase a
fractional share shall be carried forward to the next Payment Period.
ARTICLE 7 - AUTHORIZATION FOR ENTERING THE PLAN.
- -----------------------------------------------
An employee may elect to enter the Plan by filling out, signing and
delivering to the Company an authorization:
A. Stating the percentage to be deducted regularly from the employee's
pay;
B. Authorizing the purchase of stock for the employee in each Payment
Period in accordance with the terms of the Plan; and
C. Specifying the exact name or names in which stock purchased for the
employee is to be issued as provided under Article 11 hereof.
Such authorization must be received by the Company at least ten days before the
first day of the next succeeding Payment Period and shall take effect only if
the employee is an eligible employee on the first business day of such Payment
Period.
<PAGE> 4
-4-
Unless a participant files a new authorization or withdraws from the Plan,
the deductions and purchases under the authorization the participant has on file
under the Plan will continue from one Payment Period to succeeding Payment
Periods as long as the Plan remains in effect.
The Company will accumulate and hold for each participant's account the
amounts deducted from his or her pay. No interest will be paid on these amounts.
ARTICLE 8 - MAXIMUM AMOUNT OF PAYROLL DEDUCTIONS.
- ------------------------------------------------
An employee may authorize payroll deductions in an amount (expressed as a
whole percentage) not less than one percent (1%) but not more than ten percent
(10%) of the employee's total compensation, including base pay or salary and any
overtime, bonuses or commissions.
ARTICLE 9 - CHANGE IN PAYROLL DEDUCTIONS.
- ----------------------------------------
Deductions may not be increased or decreased during a Payment Period.
However, a participant may withdraw in full from the Plan.
ARTICLE 10 - WITHDRAWAL FROM THE PLAN.
- -------------------------------------
A participant may withdraw from the Plan (in whole but not in part) at any
time prior to the last day of a Payment Period by delivering a withdrawal notice
to the Company.
To re-enter the Plan, an employee who has previously withdrawn must file a
new authorization at least ten days before the first day of the next Payment
Period in which he or she wishes to participate. The employee's re-entry into
the Plan becomes effective at the beginning of such Payment Period, provided
that he or she is an eligible employee on the first business day of the Payment
Period.
ARTICLE 11 - ISSUANCE OF STOCK.
- ------------------------------
Certificates for stock issued to participants shall be delivered as soon as
practicable after each Payment Period by the Company's transfer agent.
Stock purchased under the Plan shall be issued only in the name of the
participant, or if the participant's authorization so specifies, in the name of
the participant and another person of legal age as joint tenants with rights of
survivorship.
ARTICLE 12 - ADJUSTMENTS.
- ------------------------
Upon the happening of any of the following described events, a
participant's rights under options granted under the Plan shall be adjusted as
hereinafter provided:
A. In the event that the shares of Common Stock shall be subdivided or
combined into a greater or smaller number of shares or if, upon a
reorganization, split-up, liquidation, recapitalization or the like of the
Company, the shares of Common Stock shall be exchanged for other securities
of the Company, each participant shall be entitled, subject to the
conditions herein stated, to purchase such number of shares of Common Stock
or amount of other securities of the Company as were exchangeable for the
number of shares of Common Stock that such participant would have been
entitled to purchase except for such action, and appropriate adjustments
shall be made in the purchase price per share to reflect such subdivision,
combination or exchange; and
<PAGE> 5
-5-
B. In the event the Company shall issue any of its shares as a stock
dividend upon or with respect to the shares of stock of the class which
shall at the time be subject to option hereunder, each participant upon
exercising such an option shall be entitled to receive (for the purchase
price paid upon such exercise) the shares as to which the participant is
exercising his or her option and, in addition thereto (at no additional
cost), such number of shares of the class or classes in which such stock
dividend or dividends were declared or paid, and such amount of cash in
lieu of fractional shares, as is equal to the number of shares thereof and
the amount of cash in lieu of fractional shares, respectively, which the
participant would have received if the participant had been the holder of
the shares as to which the participant is exercising his or her option at
all times between the date of the granting of such option and the date of
its exercise.
Upon the happening of any of the foregoing events, the class and aggregate
number of shares set forth in Article 4 hereof which are subject to options
which have been or may be granted under the Plan and the limitations set forth
in the second paragraph of Article 5 shall also be appropriately adjusted to
reflect the events specified in paragraphs A and B above. Notwithstanding the
foregoing, any adjustments made pursuant to paragraphs A or B shall be made only
after the Committee, based on advice of counsel for the Company, determines
whether such adjustments would constitute a "modification" (as that term is
defined in Section 424 of the Code). If the Committee determines that such
adjustments would constitute a modification, it may refrain from making such
adjustments.
If the Company is to be consolidated with or acquired by another entity in
a merger, a sale of all or substantially all of the Company's assets or
otherwise (an "Acquisition"), the Committee or the board of directors of any
entity assuming the obligations of the Company hereunder (the "Successor Board")
shall, with respect to options then outstanding under the Plan, either (i) make
appropriate provision for the continuation of such options by arranging for the
substitution on an equitable basis for the shares then subject to such options
either (a) the consideration payable with respect to the outstanding shares of
the Common Stock in connection with the Acquisition, (b) shares of stock of the
successor corporation, or a parent or subsidiary of such corporation, or (c)
such other securities as the Successor Board deems appropriate, the fair market
value of which shall not materially exceed the fair market value of the shares
of Common Stock subject to such options immediately preceding the Acquisition;
or (ii) terminate each participant's options in exchange for a cash payment
equal to the excess of (a) the fair market value on the date of the Acquisition,
of the number of shares of Common Stock that the participant's accumulated
payroll deductions as of the date of the Acquisition could purchase, at an
option price determined with reference only to the first business day of the
applicable Payment Period and subject to the 250 share, Code Section 423(b)(8)
and fractional-share limitations on the amount of stock a participant would be
entitled to purchase, over (b) the result of multiplying such number of shares
by such option price.
The Committee or Successor Board shall determine the adjustments to be made
under this Article 12, and its determination shall be conclusive.
ARTICLE 13 - NO TRANSFER OR ASSIGNMENT OF EMPLOYEE'S RIGHTS.
- -----------------------------------------------------------
An option granted under the Plan may not be transferred or assigned and may
be exercised only by the participant.
ARTICLE 14 - TERMINATION OF EMPLOYEE'S RIGHTS.
- ---------------------------------------------
Whenever a participant ceases to be an eligible employee because of
retirement, voluntary or involuntary termination, resignation, layoff,
discharge, death or for any other reason, his or her rights
<PAGE> 6
-6-
under the Plan shall immediately terminate, and the Company shall promptly
refund, without interest, the entire balance of his or her payroll deduction
account under the Plan. Notwithstanding the foregoing, eligible employment shall
be treated as continuing intact while a participant is on military leave, sick
leave or other bona fide leave of absence, for up to 90 days, or for so long as
the participant's right to re-employment is guaranteed either by statute or by
contract, if longer than 90 days.
ARTICLE 15 - TERMINATION AND AMENDMENTS TO PLAN.
- -----------------------------------------------
The Plan may be terminated at any time by the Company's Board of Directors
but such termination shall not affect options then outstanding under the Plan.
It will terminate in any case when all or substantially all of the unissued
shares of stock reserved for the purposes of the Plan have been purchased. If at
any time shares of stock reserved for the purpose of the Plan remain available
for purchase but not in sufficient number to satisfy all then unfilled purchase
requirements, the available shares shall be apportioned among participants in
proportion to the amount of payroll deductions accumulated on behalf of each
participant that would otherwise be used to purchase stock, and the Plan shall
terminate. Upon such termination or any other termination of the Plan, all
payroll deductions not used to purchase stock will be refunded, without
interest.
The Committee or the Board of Directors may from time to time adopt
amendments to the Plan provided that, without the approval of the stockholders
of the Company, no amendment may (i) increase the number of shares that may be
issued under the Plan; (ii) change the class of employees eligible to receive
options under the Plan, if such action would be treated as the adoption of a new
plan for purposes of Section 423(b) of the Code; or (iii) cause Rule 16b-3 under
the Securities Exchange Act of 1934 to become inapplicable to the Plan.
ARTICLE 16 - LIMITS ON SALE OF STOCK PURCHASED UNDER THE PLAN.
- -------------------------------------------------------------
The Plan is intended to provide shares of Common Stock for investment and
not for resale. The Company does not, however, intend to restrict or influence
any employee in the conduct of his or her own affairs. An employee may,
therefore, sell stock purchased under the Plan at any time the employee chooses,
subject to compliance with any applicable federal or state securities laws and
subject to any restrictions imposed under Article 21 to ensure that tax
withholding obligations are satisfied. THE EMPLOYEE ASSUMES THE RISK OF ANY
MARKET FLUCTUATIONS IN THE PRICE OF THE STOCK.
ARTICLE 17 - PARTICIPATING SUBSIDIARIES.
- ---------------------------------------
The term "participating subsidiary" shall mean any present or future
subsidiary of the Company, as that term is defined in Section 424(f) of the
Code, which is designated from time to time by the Board of Directors to
participate in the Plan. The Board of Directors shall have the power to make
such designation before or after the Plan is approved by the stockholders.
ARTICLE 18 - OPTIONEES NOT STOCKHOLDERS.
- ---------------------------------------
Neither the granting of an option to an employee nor the deductions from
his or her pay shall constitute such employee a stockholder of the shares
covered by an option until such shares have been actually purchased by the
employee.
<PAGE> 7
-7-
ARTICLE 19 - APPLICATION OF FUNDS.
- ---------------------------------
The proceeds received by the Company from the sale of Common Stock pursuant
to options granted under the Plan will be used for general corporate purposes.
ARTICLE 20 - NOTICE TO COMPANY OF DISQUALIFYING DISPOSITION.
- -----------------------------------------------------------
By electing to participate in the Plan, each participant agrees to notify
the Company in writing immediately after the participant transfers Common Stock
acquired under the Plan, if such transfer occurs within two years after the
first business day of the Payment Period in which such Common Stock was
acquired. Each participant further agrees to provide any information about such
a transfer as may be requested by the Company or any subsidiary corporation in
order to assist it in complying with the tax laws. Such dispositions generally
are treated as "disqualifying dispositions" under Sections 421 and 424 of the
Code, which have certain tax consequences to participants and to the Company and
its participating subsidiaries.
ARTICLE 21 - WITHHOLDING OF ADDITIONAL INCOME TAXES.
- ---------------------------------------------------
By electing to participate in the Plan, each participant acknowledges that
the Company and its participating subsidiaries are required to withhold taxes
with respect to the amounts deducted from the participant's compensation and
accumulated for the benefit of the participant under the Plan, and each
participant agrees that the Company and its participating subsidiaries may
deduct additional amounts from the participant's compensation, when amounts are
added to the participant's account, used to purchase Common Stock or refunded,
in order to satisfy such withholding obligations. Each participant further
acknowledges that when Common Stock is purchased under the Plan the Company and
its participating subsidiaries may be required to withhold taxes with respect to
all or a portion of the difference between the fair market value of the Common
Stock purchased and its purchase price, and each participant agrees that such
taxes may be withheld from compensation otherwise payable to such participant.
It is intended that tax withholding will be accomplished in such a manner that
the full amount of payroll deductions elected by the participant under Article 7
will be used to purchase Common Stock. However, if amounts sufficient to satisfy
applicable tax withholding obligations have not been withheld from compensation
otherwise payable to any participant, then, notwithstanding any other provision
of the Plan, the Company may withhold such taxes from the participant's
accumulated payroll deductions and apply the net amount to the purchase of
Common Stock, unless the participant pays to the Company, prior to the exercise
date, an amount sufficient to satisfy such withholding obligations. Each
participant further acknowledges that the Company and its participating
subsidiaries may be required to withhold taxes in connection with the
disposition of stock acquired under the Plan and agrees that the Company or any
participating subsidiary may take whatever action it considers appropriate to
satisfy such withholding requirements, including deducting from compensation
otherwise payable to such participant an amount sufficient to satisfy such
withholding requirements or conditioning any disposition of Common Stock by the
participant upon the payment to the Company or such subsidiary of an amount
sufficient to satisfy such withholding requirements.
ARTICLE 22 - GOVERNMENTAL REGULATIONS.
- -------------------------------------
The Company's obligation to sell and deliver shares of Common Stock under
the Plan is subject to the approval of any governmental authority required in
connection with the authorization, issuance or sale of such shares.
<PAGE> 8
-8-
Government regulations may impose reporting or other obligations on the
Company with respect to the Plan. For example, the Company may be required to
identify shares of Common Stock issued under the Plan on its stock ownership
records and send tax information statements to employees and former employees
who transfer title to such shares.
ARTICLE 23 - GOVERNING LAW.
- --------------------------
The validity and construction of the Plan shall be governed by the laws of
Delaware, without giving effect to the principles of conflicts of law thereof.
ARTICLE 24 - APPROVAL OF BOARD OF DIRECTORS AND STOCKHOLDERS OF THE COMPANY.
- ---------------------------------------------------------------------------
The Plan was adopted by the Board of Directors on September 30, 1996 and
was approved by the stockholders of the Company on September 30, 1996.
<PAGE> 1
EXHIBIT 10.4
------------
VERSATILITY INC.
1996 STOCK PLAN
---------------
1. PURPOSE. The purpose of the Versatility Inc. 1996 Stock Plan (the
"Plan") is to encourage key employees of Versatility Inc. (the "Company") and of
any present or future parent or subsidiary of the Company (collectively,
"Related Corporations") and other individuals who render services to the Company
or a Related Corporation, by providing opportunities to participate in the
ownership of the Company and its future growth through (a) the grant of options
which qualify as "incentive stock options" ("ISOs") under Section 422(b) of the
Internal Revenue Code of 1986, as amended (the "Code"); (b) the grant of options
which do not qualify as ISOs ("Non-Qualified Options"); (c) awards of stock in
the Company ("Awards"); and (d) opportunities to make direct purchases of stock
in the Company ("Purchases"). Both ISOs and Non-Qualified Options are referred
to hereafter individually as an "Option" and collectively as "Options." Options,
Awards and authorizations to make Purchases are referred to hereafter
collectively as "Stock Rights." As used herein, the terms "parent" and
"subsidiary" mean "parent corporation" and "subsidiary corporation,"
respectively, as those terms are defined in Section 424 of the Code.
2. ADMINISTRATION OF THE PLAN.
--------------------------
A. BOARD OR COMMITTEE ADMINISTRATION. The Plan shall be administered
by the Board of Directors of the Company (the "Board") or, subject to
Paragraph 2D (relating to compliance with Section 162(m) of the Code), by a
committee appointed by the Board (the "Committee"). Hereinafter, all
references in this Plan to the "Committee" shall mean the Board if no
Committee has been appointed. Subject to ratification of the grant or
authorization of each Stock Right by the Board (if so required by
applicable state law), and subject to the terms of the Plan, the Committee
shall have the authority to: (i) determine to whom (from among the class of
employees eligible under paragraph 3 to receive ISOs) ISOs shall be
granted, and to whom (from among the class of individuals and entities
eligible under paragraph 3 to receive Non-Qualified Options and Awards and
to make Purchases) Non-Qualified Options, Awards and authorizations to make
Purchases may be granted; (ii) determine the time or times at which Options
or Awards shall be granted or Purchases made; (iii) determine the purchase
price of shares subject to each Option or Purchase, which prices shall not
be less than the minimum price specified in paragraph 6; (iv) determine
whether each Option granted shall be an ISO or a Non-Qualified Option; (v)
determine (subject to paragraph 7) the time or times when each Option shall
become exercisable and the duration of the exercise period; (vi) extend the
period during which outstanding Options may be exercised; (vii) determine
whether restrictions such as repurchase options are to be imposed on shares
subject to Options, Awards and Purchases and the nature of such
restrictions, if any, and (viii) interpret the Plan and prescribe and
rescind rules and regulations
<PAGE> 2
-2-
relating to it. If the Committee determines to issue a Non-Qualified
Option, it shall take whatever actions it deems necessary, under Section
422 of the Code and the regulations promulgated thereunder, to ensure that
such Option is not treated as an ISO. The interpretation and construction
by the Committee of any provisions of the Plan or of any Stock Right
granted under it shall be final unless otherwise determined by the Board.
The Committee may from time to time adopt such rules and regulations for
carrying out the Plan as it may deem advisable. No member of the Board or
the Committee shall be liable for any action or determination made in good
faith with respect to the Plan or any Stock Right granted under it.
B. COMMITTEE ACTIONS. The Committee may select one of its members as
its chairman, and shall hold meetings at such time and places as it may
determine. A majority of the Committee shall constitute a quorum and acts
of a majority of the members of the Committee at a meeting at which a
quorum is present, or acts reduced to or approved in writing by all the
members of the Committee (if consistent with applicable state law), shall
be the valid acts of the Committee. From time to time the Board may
increase the size of the Committee and appoint additional members thereof,
remove members (with or without cause) and appoint new members in
substitution therefor, fill vacancies however caused, or remove all members
of the Committee and thereafter directly administer the Plan.
C. GRANT OF STOCK RIGHTS TO BOARD MEMBERS. Stock Rights may be granted
to members of the Board. All grants of Stock Rights to members of the Board
shall in all respects be made in accordance with the provisions of this
Plan applicable to other eligible persons. Members of the Board who either
(i) are eligible to receive grants of Stock Rights pursuant to the Plan or
(ii) have been granted Stock Rights may vote on any matters affecting the
administration of the Plan or the grant of any Stock Rights pursuant to the
Plan, except that no such member shall act upon the granting to himself or
herself of Stock Rights, but any such member may be counted in determining
the existence of a quorum at any meeting of the Board during which action
is taken with respect to the granting to such member of Stock Rights.
D. PERFORMANCE-BASED COMPENSATION. The Board, in its discretion, may
take such action as may be necessary to ensure that Stock Rights granted
under the Plan qualify as "qualified performance-based compensation" within
the meaning of Section 162(m) of the Code and applicable regulations
promulgated thereunder ("Performance-Based Compensation"). Such action may
include, in the Board's discretion, some or all of the following (i) if the
Board determines that Stock Rights granted under the Plan generally shall
constitute Performance-Based Compensation, the Plan shall be administered,
to the extent required for such Stock Rights to constitute
Performance-Based Compensation, by a Committee consisting solely of two or
more "outside directors" (as defined in applicable regulations promulgated
under Section 162(m) of the Code), (ii) if any Non-Qualified Options with
an exercise price less than the fair market value per share of Common Stock
are granted
<PAGE> 3
-3-
under the Plan and the Board determines that such Options should constitute
Performance-Based Compensation, such options shall be made exercisable only
upon the attainment of a pre-established, objective performance goal
established by the Committee, and such grant shall be submitted for, and
shall be contingent upon shareholder approval and (iii) Stock Rights
granted under the Plan may be subject to such other terms and conditions as
are necessary for compensation recognized in connection with the exercise
or disposition of such Stock Right or the disposition of Common Stock
acquired pursuant to such Stock Right, to constitute Performance-Based
Compensation.
3. ELIGIBLE EMPLOYEES AND OTHERS. ISOs may be granted only to employees of
the Company or any Related Corporation. Non-Qualified Options, Awards and
authorizations to make Purchases may be granted to any employee, officer or
director (whether or not also an employee) or consultant of the Company or any
Related Corporation. The Committee may take into consideration a recipient's
individual circumstances in determining whether to grant a Stock Right. The
granting of any Stock Right to any individual or entity shall neither entitle
that individual or entity to, nor disqualify such individual or entity from,
participation in any other grant of Stock Rights.
4. STOCK. The stock subject to Stock Rights shall be authorized but
unissued shares of Common Stock of the Company, par value $.01 per share (the
"Common Stock"), or shares of Common Stock reacquired by the Company in any
manner. The aggregate number of shares which may be issued pursuant to the Plan
is 750,000, subject to adjustment as provided in paragraph 13. If any Option
granted under the Plan shall expire or terminate for any reason without having
been exercised in full or shall cease for any reason to be exercisable in whole
or in part or shall be repurchased by the Company, the unpurchased shares of
Common Stock subject to such Option shall again be available for grants of Stock
Rights under the Plan.
No employee of the Company or any Related Corporation may be granted
Options to acquire, in the aggregate, more than 525,000 of shares of Common
Stock under the Plan during any fiscal year of the Company. If any Option
granted under the Plan shall expire or terminate for any reason without having
been exercised in full or shall cease for any reason to be exercisable in whole
or in part or shall be repurchased by the Company, the shares subject to such
Option shall be included in the determination of the aggregate number of shares
of Common Stock deemed to have been granted to such employee under the Plan.
5. GRANTING OF STOCK RIGHTS. Stock Rights may be granted under the Plan at
any time on or after September 30, 1996 and prior to September 30, 2006. The
date of grant of a Stock Right under the Plan will be the date specified by the
Committee at the time it grants the Stock Right; provided, however, that such
date shall not be prior to the date on which the Committee acts to approve the
grant.
<PAGE> 4
-4-
6. MINIMUM OPTION PRICE; ISO LIMITATIONS.
--------------------------------------
A. PRICE FOR NON-QUALIFIED OPTIONS, AWARDS AND PURCHASES. Subject to
Paragraph 2D (relating to compliance with Section 162(m) of the Code), the
exercise price per share specified in the agreement relating to each
Non-Qualified Option granted, and the purchase price per share of stock
granted in any Award or authorized as a Purchase, under the Plan may be
less than the fair market value of the Common Stock of the Company on the
date of grant; provided that, in no event shall such exercise price or such
purchase price be less than the minimum legal consideration required
therefor under the laws of any jurisdiction in which the Company or its
successors in interest may be organized.
B. PRICE FOR ISOS. The exercise price per share specified in the
agreement relating to each ISO granted under the Plan shall not be less
than the fair market value per share of Common Stock on the date of such
grant. In the case of an ISO to be granted to an employee owning stock
possessing more than ten percent (10%) of the total combined voting power
of all classes of stock of the Company or any Related Corporation, the
price per share specified in the agreement relating to such ISO shall not
be less than one hundred ten percent (110%) of the fair market value per
share of Common Stock on the date of grant. For purposes of determining
stock ownership under this paragraph, the rules of Section 424(d) of the
Code shall apply. The date of grant for purposes of this subparagraph shall
mean the date that the Company or Related Corporation completes the
corporate action constituting an offer of stock for sale to an individual.
C. $100,000 ANNUAL LIMITATION ON ISO VESTING. Each eligible employee
may be granted Options treated as ISOs only to the extent that, in the
aggregate under this Plan and all incentive stock option plans of the
Company and any Related Corporation, ISOs do not become exercisable for the
first time by such employee during any calendar year with respect to stock
having a fair market value (determined at the time the ISOs were granted)
in excess of $100,000. The Company intends to designate any Options granted
in excess of such limitation as Non-Qualified Options, and the Company
shall issue separate certificates to the optionee with respect to Options
that are Non-Qualified Options and Options that are ISOs.
D. DETERMINATION OF FAIR MARKET VALUE. If, at the time an Option is
granted under the Plan, the Company's Common Stock is publicly traded,
"fair market value" shall be determined as of the date of grant or, if the
prices or quotes discussed in this sentence are unavailable for such date,
the last business day for which such prices or quotes are available prior
to the date of grant and shall mean (i) the average (on that date) of the
high and low prices of the Common Stock on the principal national
securities exchange on which the Common Stock is traded, if the Common
Stock is then traded on a national securities exchange; or (ii) the last
reported sale price (on that date) of the Common Stock on the Nasdaq
National
<PAGE> 5
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Market, if the Common Stock is not then traded on a national securities
exchange; or (iii) the closing bid price (or average of bid prices) last
quoted (on that date) by an established quotation service for
over-the-counter securities, if the Common Stock is not reported on the
Nasdaq National Market. If the Common Stock is not publicly traded at the
time an Option is granted under the Plan, "fair market value" shall mean
the fair value of the Common Stock as determined by the Committee after
taking into consideration all factors which it deems appropriate,
including, without limitation, recent sale and offer prices of the Common
Stock in private transactions negotiated at arm's length.
7. OPTION DURATION. Subject to earlier termination as provided in
paragraphs 9 and 10 or in the agreement relating to such Option, each Option
shall expire on the date specified by the Committee, but not more than (i) ten
years from the date of grant in the case of Options generally and (ii) five
years from the date of grant in the case of ISOs granted to an employee owning
stock possessing more than ten percent (10%) of the total combined voting power
of all classes of stock of the Company or any Related Corporation, as determined
under paragraph 6(B). Subject to earlier termination as provided in paragraphs 9
and 10, the term of each ISO shall be the term set forth in the original
instrument granting such ISO, except with respect to any part of such ISO that
is converted into a Non-Qualified Option pursuant to paragraph 16.
8. EXERCISE OF OPTION. Subject to the provisions of Paragraphs 9 through
12, each Option granted under the Plan shall be exercisable as follows:
A. VESTING. The Option shall either be fully exercisable on the date
of grant or shall become exercisable thereafter in such installments as the
Committee may specify.
B. FULL VESTING OF INSTALLMENTS. Once an installment becomes
exercisable, it shall remain exercisable until expiration or termination of
the Option, unless otherwise specified by the Committee.
C. PARTIAL EXERCISE. Each Option or installment may be exercised at
any time or from time to time, in whole or in part, for up to the total
number of shares with respect to which it is then exercisable.
D. ACCELERATION OF VESTING. The Committee shall have the right to
accelerate the date that any installment of any Option becomes exercisable;
provided that the Committee shall not, without the consent of an optionee,
accelerate the permitted exercise date of any installment of any Option
granted to any employee as an ISO (and not previously converted into a
Non-Qualified Option pursuant to paragraph 16) if such acceleration would
violate the annual vesting limitation contained in Section 422(d) of the
Code, as described in paragraph 6(C).
<PAGE> 6
-6-
9. TERMINATION OF EMPLOYMENT. Unless otherwise specified in the agreement
relating to such ISO, if an ISO optionee ceases to be employed by the Company
and all Related Corporations other than by reason of death or disability as
defined in paragraph 10, no further installments of his or her ISOs shall become
exercisable, and his or her ISOs shall terminate on the earlier of (a) three
months after the date of termination of his or her employment, or (b) their
specified expiration dates, except to the extent that such ISOs (or unexercised
installments thereof) have been converted into Non-Qualified Options pursuant to
paragraph 16. For purposes of this paragraph 9, employment shall be considered
as continuing uninterrupted during any bona fide leave of absence (such as those
attributable to illness, military obligations or governmental service) provided
that the period of such leave does not exceed 90 days or, if longer, any period
during which such optionee's right to reemployment is guaranteed by statute or
by contract. A bona fide leave of absence with the written approval of the
Committee shall not be considered an interruption of employment under this
paragraph 9, provided that such written approval contractually obligates the
Company or any Related Corporation to continue the employment of the optionee
after the approved period of absence. ISOs granted under the Plan shall not be
affected by any change of employment within or among the Company and Related
Corporations, so long as the optionee continues to be an employee of the Company
or any Related Corporation. Nothing in the Plan shall be deemed to give any
grantee of any Stock Right the right to be retained in employment or other
service by the Company or any Related Corporation for any period of time.
10. DEATH; DISABILITY.
-----------------
A. DEATH. If an ISO optionee ceases to be employed by the Company and
all Related Corporations by reason of his or her death, any ISO owned by
such optionee may be exercised, to the extent otherwise exercisable on the
date of death, by the estate, personal representative or beneficiary who
has acquired the ISO by will or by the laws of descent and distribution,
until the earlier of (i) the specified expiration date of the ISO or (ii)
180 days from the date of the optionee's death.
B. DISABILITY. If an ISO optionee ceases to be employed by the Company
and all Related Corporations by reason of his or her disability, such
optionee shall have the right to exercise any ISO held by him or her on the
date of termination of employment, for the number of shares for which he or
she could have exercised it on that date, until the earlier of (i) the
specified expiration date of the ISO or (ii) 180 days from the date of the
termination of the optionee's employment. For the purposes of the Plan, the
term "disability" shall mean "permanent and total disability" as defined in
Section 22(e)(3) of the Code or any successor statute.
11. ASSIGNABILITY. No ISO shall be assignable or transferable by the
optionee except by will or by the laws of descent and distribution, and during
the lifetime of the optionee shall be exercisable only by such optionee.
<PAGE> 7
-7-
12. TERMS AND CONDITIONS OF OPTIONS. Options shall be evidenced by
instruments (which need not be identical) in such forms as the Committee may
from time to time approve. Such instruments shall conform to the terms and
conditions set forth in paragraphs 6 through 11 hereof and may contain such
other provisions as the Committee deems advisable which are not inconsistent
with the Plan, including restrictions applicable to shares of Common Stock
issuable upon exercise of Options. The Committee may specify that any
Non-Qualified Option shall be subject to the restrictions set forth herein with
respect to ISOs, or to such other termination and cancellation provisions as the
Committee may determine. The Committee may from time to time confer authority
and responsibility on one or more of its own members and/or one or more officers
of the Company to execute and deliver such instruments. The proper officers of
the Company are authorized and directed to take any and all action necessary or
advisable from time to time to carry out the terms of such instruments.
13. ADJUSTMENTS. Upon the occurrence of any of the following events, an
optionee's rights with respect to Options granted to such optionee hereunder
shall be adjusted as hereinafter provided, unless otherwise specifically
provided in the written agreement between the optionee and the Company relating
to such Option:
A. STOCK DIVIDENDS AND STOCK SPLITS. If the shares of Common Stock
shall be subdivided or combined into a greater or smaller number of shares
or if the Company shall issue any shares of Common Stock as a stock
dividend on its outstanding Common Stock, the number of shares of Common
Stock deliverable upon the exercise of Options shall be appropriately
increased or decreased proportionately, and appropriate adjustments shall
be made in the purchase price per share to reflect such subdivision,
combination or stock dividend.
B. CONSOLIDATIONS OR MERGERS. If the Company is to be consolidated
with or acquired by another entity in a merger or other reorganization in
which the holders of the outstanding voting stock of the Company
immediately preceding the consummation of such event, shall, immediately
following such event, hold, as a group, less than a majority of the voting
securities of the surviving or successor entity, or in the event of a sale
of all or substantially all of the Company's assets or otherwise (each, an
"Acquisition"), the Committee or the board of directors of any entity
assuming the obligations of the Company hereunder (the "Successor Board"),
shall, as to outstanding Options, either (i) make appropriate provision for
the continuation of such Options by substituting on an equitable basis for
the shares then subject to such Options either (a) the consideration
payable with respect to the outstanding shares of Common Stock in
connection with the Acquisition, (b) shares of stock of the surviving or
successor corporation or (c) such other securities as the Successor Board
deems appropriate, the fair market value of which shall not materially
exceed the fair market value of the shares of Common Stock subject to such
Options immediately preceding the Acquisition; or (ii) upon written notice
to the optionees, provide that all Options must be exercised, to the extent
then exercisable or to be exercisable as a result of the Acquisition,
within a specified
<PAGE> 8
-8-
number of days of the date of such notice, at the end of which period the
Options shall terminate; or (iii) terminate all Options in exchange for a
cash payment equal to the excess of the fair market value of the shares
subject to such Options (to the extent then exercisable or to be
exercisable as a result of the Acquisition) over the exercise price
thereof.
C. RECAPITALIZATION OR REORGANIZATION. In the event of a
recapitalization or reorganization of the Company (other than a transaction
described in subparagraph B above) pursuant to which securities of the
Company or of another corporation are issued with respect to the
outstanding shares of Common Stock, an optionee upon exercising an Option
shall be entitled to receive for the purchase price paid upon such exercise
the securities he or she would have received if he or she had exercised
such Option prior to such recapitalization or reorganization.
D. MODIFICATION OF ISOS. Notwithstanding the foregoing, any
adjustments made pursuant to subparagraphs A, B or C with respect to ISOs
shall be made only after the Committee, after consulting with counsel for
the Company, determines whether such adjustments would constitute a
"modification" of such ISOs (as that term is defined in Section 424 of the
Code) or would cause any adverse tax consequences for the holders of such
ISOs. If the Committee determines that such adjustments made with respect
to ISOs would constitute a modification of such ISOs or would cause adverse
tax consequences to the holders, it may refrain from making such
adjustments.
E. DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, each Option will terminate
immediately prior to the consummation of such proposed action or at such
other time and subject to such other conditions as shall be determined by
the Committee.
F. ISSUANCES OF SECURITIES. Except as expressly provided herein, no
issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or
price of shares subject to Options. No adjustments shall be made for
dividends paid in cash or in property other than securities of the Company.
G. FRACTIONAL SHARES. No fractional shares shall be issued under the
Plan and the optionee shall receive from the Company cash in lieu of such
fractional shares.
H. ADJUSTMENTS. Upon the happening of any of the events described in
subparagraphs A, B or C above, the class and aggregate number of shares set
forth in paragraph 4 hereof that are subject to Stock Rights which
previously have been or subsequently may be granted under the Plan shall
also be appropriately adjusted to reflect the events described in such
subparagraphs. The Committee or the Successor
<PAGE> 9
-9-
Board shall determine the specific adjustments to be made under this
paragraph 13 and, subject to paragraph 2, its determination shall be
conclusive.
14. MEANS OF EXERCISING OPTIONS. An Option (or any part or installment
thereof) shall be exercised by giving written notice to the Company at its
principal office address, or to such transfer agent as the Company shall
designate. Such notice shall identify the Option being exercised and specify the
number of shares as to which such Option is being exercised, accompanied by full
payment of the purchase price therefor either (a) in United States dollars in
cash or by check, (b) at the discretion of the Committee, through delivery of
previously-held shares of Common Stock or the withholding from the shares of
Common Stock otherwise deliverable upon exercise of an Option shares having a
fair market value equal as of the date of the exercise to the cash exercise
price of the Option, (c) at the discretion of the Committee, by delivery of the
grantee's personal recourse note bearing interest payable not less than annually
at no less than 100% of the lowest applicable Federal rate, as defined in
Section 1274(d) of the Code, (d) at the discretion of the Committee and
consistent with applicable law, through the delivery of an assignment to the
Company of a sufficient amount of the proceeds from the sale of the Common Stock
acquired upon exercise of the Option and an authorization to the broker or
selling agent to pay that amount to the Company, which sale shall be at the
participant's direction at the time of exercise, or (e) at the discretion of the
Committee, by any combination of (a), (b), (c) and (d) above. If the Committee
exercises its discretion to permit payment of the exercise price of an ISO by
means of the methods set forth in clauses (b), (c), (d) or (e) of the preceding
sentence, such discretion shall be exercised in writing at the time of the grant
of the ISO in question. The holder of an Option shall not have the rights of a
shareholder with respect to the shares covered by such Option until the date of
issuance of a stock certificate to such holder for such shares. Except as
expressly provided above in paragraph 13 with respect to changes in
capitalization and stock dividends, no adjustment shall be made for dividends or
similar rights for which the record date is before the date such stock
certificate is issued.
15. TERM AND AMENDMENT OF PLAN. This Plan was adopted by the Board on
September 30, 1996, subject, with respect to the validation of ISOs granted
under the Plan, to approval of the Plan by the stockholders of the Company at
the next Meeting of Stockholders or, in lieu thereof, by written consent. If the
approval of stockholders is not obtained prior to September 30, 1997, any grants
of ISOs under the Plan made prior to that date will be rescinded. The Plan shall
expire at the end of the day on September 29, 2006 (except as to Options
outstanding on that date). Subject to the provisions of paragraph 5 above,
Options may be granted under the Plan prior to the date of stockholder approval
of the Plan. The Board may terminate or amend the Plan in any respect at any
time, except that, without the approval of the stockholders obtained within 12
months before or after the Board adopts a resolution authorizing any of the
following actions: (a) the total number of shares that may be issued under the
Plan may not be increased (except by adjustment pursuant to paragraph 13); (b)
the provisions of paragraph 3 regarding eligibility for grants of ISOs may not
be modified; (c) the provisions of paragraph 6(B) regarding the exercise price
at which shares may be offered
<PAGE> 10
-10-
pursuant to ISOs may not be modified (except by adjustment pursuant to paragraph
13); and (d) the expiration date of the Plan may not be extended. Except as
otherwise provided in this paragraph 15, in no event may action of the Board or
stockholders alter or impair the rights of a grantee, without such grantee's
consent, under any Stock Right previously granted to such grantee.
16. MODIFICATIONS OF ISOS; CONVERSION OF ISOS INTO NON-QUALIFIED OPTIONS.
Subject to Paragraph 13D, without the prior written consent of the holder of an
ISO, the Committee shall not alter the terms of such ISO (including the means of
exercising such ISO) if such alteration would constitute a modification (within
the meaning of Section 424(h)(3) of the Code). The Committee, at the written
request or with the written consent of any optionee, may in its discretion take
such actions as may be necessary to convert such optionee's ISOs (or any
installments or portions of installments thereof) that have not been exercised
on the date of conversion into Non-Qualified Options at any time prior to the
expiration of such ISOs, regardless of whether the optionee is an employee of
the Company or a Related Corporation at the time of such conversion. Such
actions may include, but shall not be limited to, extending the exercise period
or reducing the exercise price of the appropriate installments of such ISOs. At
the time of such conversion, the Committee (with the consent of the optionee)
may impose such conditions on the exercise of the resulting Non-Qualified
Options as the Committee in its discretion may determine, provided that such
conditions shall not be inconsistent with this Plan. Nothing in the Plan shall
be deemed to give any optionee the right to have such optionee's ISOs converted
into Non-Qualified Options, and no such conversion shall occur until and unless
the Committee takes appropriate action. Upon the taking of such action, the
Company shall issue separate certificates to the optionee with respect to
Options that are Non-Qualified Options and Options that are ISOs.
17. APPLICATION OF FUNDS. The proceeds received by the Company from the
sale of shares pursuant to Options granted and Purchases authorized under the
Plan shall be used for general corporate purposes.
18. NOTICE TO COMPANY OF DISQUALIFYING DISPOSITION. By accepting an ISO
granted under the Plan, each optionee agrees to notify the Company in writing
immediately after such optionee makes a Disqualifying Disposition (as described
in Sections 421, 422 and 424 of the Code and regulations thereunder) of any
stock acquired pursuant to the exercise of ISOs granted under the Plan. A
Disqualifying Disposition is generally any disposition occurring on or before
the later of (a) the date two years following the date the ISO was granted or
(b) the date one year following the date the ISO was exercised.
19. WITHHOLDING OF ADDITIONAL INCOME TAXES. Upon the exercise of a
Non-Qualified Option, the transfer of a Non-Qualified Stock Option pursuant to
an arm's-length transaction, the grant of an Award, the making of a Purchase of
Common Stock for less than its fair market value, the making of a Disqualifying
Disposition (as defined in paragraph 18), the vesting or transfer of restricted
stock or securities acquired
<PAGE> 11
-11-
on the exercise of an Option hereunder, or the making of a distribution or other
payment with respect to such stock or securities, the Company may withhold taxes
in respect of amounts that constitute compensation includible in gross income.
The Committee in its discretion may condition (i) the exercise of an Option,
(ii) the transfer of a Non-Qualified Stock Option, (iii) the grant of an Award,
(iv) the making of a Purchase of Common Stock for less than its fair market
value, or (v) the vesting or transferability of restricted stock or securities
acquired by exercising an Option, on the grantee's making satisfactory
arrangement for such withholding. Such arrangement may include payment by the
grantee in cash or by check of the amount of the withholding taxes or, at the
discretion of the Committee, by the grantee's delivery of previously held shares
of Common Stock or the withholding from the shares of Common Stock otherwise
deliverable upon exercise of a Option shares having an aggregate fair market
value equal to the amount of such withholding taxes.
20. GOVERNMENTAL REGULATION. The Company's obligation to sell and deliver
shares of the Common Stock under this Plan is subject to the approval of any
governmental authority required in connection with the authorization, issuance
or sale of such shares.
Government regulations may impose reporting or other obligations on the
Company with respect to the Plan. For example, the Company may be required to
send tax information statements to employees and former employees that exercise
ISOs under the Plan, and the Company may be required to file tax information
returns reporting the income received by grantees of Options in connection with
the Plan.
21. GOVERNING LAW. The validity and construction of the Plan and the
instruments evidencing Options shall be governed by the laws of Delaware, or the
laws of any jurisdiction in which the Company or its successors in interest may
be organized.
<PAGE> 1
EXHIBIT 10.5
LEASE AGREEMENT
between
STATE OF CALIFORNIA PUBLIC EMPLOYEES RETIREMENT SYSTEM
and
NPRI, INC.
<PAGE> 2
- i -
TABLE OF CONTENTS
Page
----
1. DEFINITIONS.............................................................3
2. LEASE TERM..............................................................7
3. BASIC RENTAL............................................................7
4. BASIC RENTAL ESCALATION.................................................8
5. SECURITY DEPOSIT........................................................9
6. LANDLORD'S OBLIGATIONS..................................................9
7. IMPROVEMENT OF THE PREMISES............................................10
8. OPERATING EXPENSES.....................................................12
9. USE....................................................................14
10. TENANT'S REPAIRS AND ALTERATIONS.......................................14
11. ASSIGNMENT AND SUBLETTING..............................................15
12. INDEMNITY..............................................................18
13. SUBORDINATION..........................................................18
14. RULES AND REGULATIONS..................................................19
15. INSPECTION.............................................................19
16. CONDEMNATION...........................................................20
17. FIRE OR OTHER CASUALTY.................................................20
18. HOLDING OVER...........................................................21
19. TAXES..................................................................21
20. EVENTS OF DEFAULT......................................................22
21. REMEDIES...............................................................22
22. SURRENDER OF PREMISES..................................................24
23. ATTORNEYS' FEES........................................................25
24. INTENTIONALLY OMITTED..................................................25
25. MECHANICS' LIENS.......................................................25
26. WAIVER OF SUBROGATION; INSURANCE.......................................25
27. INTENTIONALLY OMITTED..................................................26
28. BROKERAGE..............................................................26
29. ESTOPPEL CERTIFICATES..................................................26
30. NOTICES................................................................26
31. FORCE MAJEURE..........................................................28
32 SEVERABILITY...........................................................28
33. AMENDMENTS; WAIVER; BINDING EFFECT.....................................28
34. QUIET ENJOYMENT........................................................28
35. LIABILITY OF TENANT....................................................29
36. LANDLORD LIABILITY.....................................................29
37. CERTAIN RIGHTS RESERVED BY LANDLORD....................................29
38. FINANCIAL STATEMENTS...................................................30
39. NOTICE TO LENDER.......................................................30
40. MISCELLANEOUS..........................................................30
41. ADDITIONAL RENT........................................................31
<PAGE> 3
- ii -
42. ENTIRE AGREEMENT.......................................................31
43. LEGAL PROCEEDINGS......................................................31
44. LAWS AND REGULATIONS...................................................31
45. AMERICANS WITH DISABILITIES ACT ("ADA")................................31
46. ENVIRONMENTAL PROTECTIONS..............................................32
47. PARKING................................................................33
48. RIGHT OF FIRST OFFER...................................................33
49. OPTION TO RENEW........................................................34
50. TENANT ACCESS..........................................................35
51. MOVING ALLOWANCE.......................................................35
52. TERMINATION OPTION.....................................................35
53. INTERIOR SIGNAGE.......................................................35
54. EXHIBITS...............................................................35
<PAGE> 4
DATA SHEET
This Data Sheet is an integral part of this Lease and all of the terms hereof
are incorporated into this Lease in all respects. In addition to the other
provisions which are elsewhere in this Lease, the following, whenever used in
this Lease, shall have the meanings set forth in this Data Sheet.
(a) Premises Suite 600 consisting of the sixth (6th) floor of
the Building, outlined on the floor plan
attached hereto as Exhibit A (Section l(l)).
(b) Area of Premises Approximately 18,947 rentable square feet
comprising the sixth (6th) floor of the Building
(Exhibit A and Section l(l)).
(c) Building Oakwood Center, located at 11781 Lee Jackson
Memorial Highway, Fairfax, Virginia 22030
(Section l(d))
(d) Basic Rental $13.50 per rentable square foot per year payable
in equal monthly installments of $21,315.38,
subject to adjustment as herein provided
(Sections l(b) and 3).
(e) Annual Basic Rental $255,784.50 (Section 3).
(f) Annual Basic Rental Three percent (3%) of the escalated Basic Rental
Escalation then in effect (Section 4).
(g) Additional Rent See Section 41.
(h) Lease Term 10 years and 0 months, commencing on the
Commencement Date (Sections 1(j) and 2).
(i) Commencement Date See Section l(e).
(j) Building Operation Hours Monday through Friday, 8:00 a.m. to 6:00 p.m.
and Saturday, 8:00 a.m. to 1:00 p.m.
(k) Permitted Use Any general business office purposes and for no
other purpose (Sections l(k) and 9).
(1) Tenant's Proportionate 14.81% (See Section l(s)).
Share of Building Space
(m) Tenant's Proportionate 3.5 per 1000 rentable square feet, which is 66
Share of Parking Spaces unreserved spaces (Section 47).
<PAGE> 5
(2)
(n) Brokers Involved C.B. Commercial Real Estate Group, Inc. and
Barnes, Morris, Pardoe and Foster, Inc.
(o) Security Deposit See Sections l(n) and 5.
(p) Notices
If to Landlord: STATE OF CALIFORNIA PUBLIC EMPLOYEES
RETIREMENT SYSTEM
c/o C.B. Commercial Real Estate Group, Inc.
11781 Lee Jackson Highway, Suite 200
Fairfax, Virginia 22030
with a copy to: Edward R. Parker, Esquire
5511 Staples Mill Road
Richmond, Virginia 23228
and
Equitable Real Estate Investment Management, Inc.
1875 Eye Street, N.W., Suite 900
Washington, D.C. 20006
If to Tenant, prior to
the Commencement Date: Ronald R. Charnock, President
NPRI, Inc.
99 Canal Center, Suite 420
Alexandria, VA 22314
If to Tenant, after
the Commencement Date: At the Premises
<PAGE> 6
LEASE AGREEMENT
THIS LEASE AGREEMENT in entered into an of the 10th day of July, 1994,
between STATE OF CALIFORNIA PUBLIC EMPLOYEES RETIREMENT SYSTEM, an agency of the
State of California (hereinafter called "Landlord"), whose address for purposes
hereof is c/o Equitable Real Estate Investment Management Corp., 1875 Eye
Street, N.W., Suite 900, Washington, D.C. 20006 and NPRI, INC., a corporation
(hereinafter called "Tenant"), whose address for purposes, hereof is 11781 Lee
Jackson Memorial Highway, Suits 600, Fairfax, Virginia 22030.
1. DEFINITIONS.
(a) "Basic Cost": The actual costs incurred by the Landlord
in operating and maintaining the Building and the Land during each calendar year
of the Lease Term for which Landlord has not been reimbursed by insurance
proceeds, condemnation awards or otherwise.
Such costs shall include, by way of example rather than
of limitation, (i) real property, front-foot benefit, metropolitan district and
other similar taxes, including any taxes imposed on leases or income generated
thereon (exclusive of federal and state income and franchise taxes and/or
similar taxes related to Landlord's business) or public or private assessments,
general or special, ordinary or extraordinary, foreseen or unforeseen (other
than Lease Taxes) levied against the Building or the Land; (ii) charges or fees
for, and taxes on, the furnishing of electricity, water, sewer service, gas,
fuel, or other utility services to the Building and the Land; (iii) costs of
providing elevator, janitorial and trash removal service, restriping,
resurfacing, maintaining and repairing all walkways, roadways and parking areas
on the Land, security costs, and cost of maintaining grounds, common areas and
mechanical systems of the Building and the Land; (iv) all other costs of
maintaining and repairing any or all of the Building or Land; (v) all costs
reasonably allocated by Landlord to the common areas of the Building and the
Land in a multi-building development; (vi) charges or fees for any necessary
governmental permits and licenses; (vii) management fees, overhead and expenses
reasonably related to management of the Building (including salaries for
personnel directly responsible for management of the Building); (viii) premiums
for hazard, liability, workmen's compensation or similar insurance upon any or
all of the Building and the Land; (ix) costs arising under service contracts
with independent contractors; and (x) the cost of any other items which, under
generally accepted accounting principles consistently applied from year to year
with respect to the Building or the Land, constitute operating or maintenance
costs attributable to any or all of the Building or the Land.
Such costs shall not include (i) the expense of principal
and interest payments made by the Landlord pursuant to the provisions of any
mortgage or deed of trust covering the Building or the Land; (ii) any deduction
for depreciation of the Building taken on the landlord's income tax returns; or
(iii) the cost of capital Improvements made to the Building, other than capital
improvements, modifications or equipment required by federal, state or local
ordinance, rule, regulation or law or determined by Landlord in good faith to
result in savings or
<PAGE> 7
-4-
reductions in Basic Cost generally, in which case the cost thereof shall be
included in Basic Cost for the calendar year in which the cost shall have been
incurred and in subsequent calendar years, on a straight line basis, such items
will be amortized over an appropriate period and with an appropriate interest
factor selected in good faith by Landlord. If Landlord shall have leased any
such items of capital equipment designed to result in savings or reductions in
Basic Cost, then the rental and other costs paid pursuant to such leasing shall
be included in Basic Cost for each calendar year in which they shall have been
incurred.
In addition to the foregoing, Basic Cost shall not
include: Ground rent; compensation paid to officers or executives of Landlord or
the management agent; income or franchise taxes (exclusive of business taxes)
imposed or measured by the net income of Landlord from the operation of the
building; costs of painting or decorating any areas of the building other than
public areas, or preparing, improving or altering space for any existing, new or
renewal tenant; leasing commissions; cost of operating the Building's heating,
ventilation and air conditioning system beyond the Building's normal hours of
operation; management fees to the extent materially in excess of the fair market
management fees prevailing from time to time for comparable services furnished
to comparable buildings in the metropolitan Washington, D.C. suburban area by
management companies under management contracts; wages, salaries or other
compensation or benefits paid to clerks or attendants in any concessions or
newsstands operated by Landlord, or paid to any person to the extent not engaged
in the repair, maintenance or operation of the Building (excluding the Building
property manager); all ownership costs not allocable to the advertising,
marketing and promotional expenses in connection with leasing; legal and
accounting fees relating (i) to disputes with tenants, prospective tenants or
other occupants of the Building, or (ii) disputes with purchasers, prospective
purchasers, mortgages or prospective mortgagees of the Building; any amount
incurred for repairs or other work occasioned by fire, windstorm or other
casualty, except to the extent of the deductible under Landlord's fire and
casualty insurance policy, or a commercially responsible deductible, whichever
is less; the expense of providing any product or service to any tenant if such
product or service is not available on an equal basis to all office tenants of
the Building without separate charge; any amount incurred to a company or other
entity affiliated with Landlord to the extent the same exceeds the amount which
would have been incurred on a fair market basis in the absence of such
affiliation; the excess costs of furnishing electricity to retail areas of the
Building; or any deposits into operating reserves. To the extent that any of the
costs of management, repair or operation of the Building, including but not
limited to management fees, personnel costs and insurance premiums exceed those
normally provided to office tenants, only the portion of such costs that is
allocable to the office space in the Building, as reasonably determined by
Landlord, shall be included in the basic cost. Basic Cost shall be net only and
for that purpose shall be deemed reduced by the amount of all reimbursements,
recoupments, payments, discounts, credits, reductions, allowances, or the like
received or receivable from any insurance company or condemning authority or
actually received by Landlord from any other source in connection with operating
the Building.
In determining Basic Cost, where less than 95% of the
Building's rentable square footage is occupied during all or any part of a year,
those items of the Basic Cost which vary according to occupancy, such as
electricity and janitorial services, shall be increased to that
<PAGE> 8
-5-
amount which would have been incurred had the Building been 95% occupied during
the entire year.
(b) "Basic Rental": $13.50 per rentable square foot per year
payable in equal monthly installments of $21,315.38, subject to adjustment as
herein provided.
(c) "Base Year Stop": The Basic Cost (as defined in subparagraph
(a) above, including specifically, but without limitation, the provision for
increasing variable costs where the Building is less than 95% occupied) incurred
during the calendar year 1994 divided by the number of rentable square feet in
the Building.
(d) "Building": The office building which has been constructed on
land located at 11781 Lee Jackson Memorial Highway, Fairfax, Virginia and known
as Oakwood Center.
(e) "Commencement Date": The earlier of: (i) the date of
Substantial Completion or (ii) the date the Tenant or any one claiming under or
through the Tenant first occupies the Premises or any portion thereof (except as
expressly permitted hereunder). The anticipated Commencement Date is October 1,
1994, and in no event shall the Commencement Date occur prior to October 1, 1994
unless Landlord and Tenant mutually agree upon an earlier date. Notwithstanding
the foregoing, at such time as the Premises is in a condition to permit
installation of telephone lines, cable and computer networking, which the
parties believe should be two (2) weeks prior to the anticipated Commencement
Date, Tenant shall have access to the Premises, without charge, subject to a
mutually agreed-upon schedule.
(f) "Event of Default": As defined in Section 20 of this Lease.
(g) "Excess": As defined in Section 8 of this Lease.
(h) "Land": The entire tract of land on which the Building is
located and upon which other buildings are located which have shared common
facilities, and subject from time to time, to (i) increase through the
acquisition of adjoining properties, and (ii) reduction through the sale or
transfer by Landlord or the reservations of any such property from the
development of which the Building is a part. The term Land shall also include
any property that must be maintained by Landlord due to the existence of any
public or private easement.
(i) "Landlord's Contractor": As defined in Section 7(d) of this
Lease.
(j) "Lease Term": The period commencing on the Commencement Date
and continuing for ten (10) years and zero (0) months thereafter; provided,
however, if the term of this Lease commences on a date other than the first day
of a calendar month, the Lease Term shall consist of, in addition to the number
of years and months provided above, the remainder of the calendar month during
which this Lease is deemed to have commenced.
(k) "Permitted Use": Any general business office purposes and for
no other purpose.
<PAGE> 9
-6-
(l) "Premises": Suite 600, consisting of the Sixth floor of the
Building, generally outlined on the floor plan attached hereto as Exhibit A and
consisting of approximately 18,947 rentable square feet. The Premises shall be
measured in accordance with the Washington, D.C. Association of Realtors
Standard Method of Measurement for Office Buildings, and shall be confirmed by
Landlord's architect, at Landlord's expense, if requested by Tenant.
(m) "Rules and Regulations": The Landlord's rules and regulations
sent to Tenant in writing from time to time, as amended or substituted for from
time to time, the current form of which is attached hereto as Exhibit C.
(n) "Security Deposit": $21,315.38.
(o) "Special Tenant Work": As defined in Section 7(d) of this
Lease.
(p) "Standard Tenant Work": As defined in section 7(d) of this
Lease.
(q) "Substantial Completion": The date when the work to be
performed by Landlord in the Premises in accordance with this Lease shall have
been substantially completed notwithstanding that certain details of
construction, mechanical adjustment or decoration remain to be performed, the
noncompletion of which would not materially interfere with the Tenant's use of
the Premises; provided that Tenant may legally occupy the Premises in accordance
with the requirements of the Fairfax County Code.
For purposes of determining the date of Substantial
Completion, there shall not be considered the duration of any delay which is
caused by: (i) changes in the work to be completed by Landlord in readying the
Premises for Tenant's occupancy, which changes have been requested by Tenant
after the approval by Landlord and Tenant of the Tenant Plans; (ii) delays, not
caused by Landlord, in furnishing materials or procuring labor required by
Tenant for installations or work in the Premises which are not encompassed
within Standard Tenant Work; (iii) any failure by Tenant, to furnish any
required plan, information, approval or consent (including, without limitation,
the Tenant Plans) within the required period of time, or any failure to fully
and completely cooperate with Landlord in the preparation of the Tenant Plans;
or (iv) the performance of any work or activity in the Premises by Tenant or any
of its employees, agents or contractors. The decision of Landlord's construction
manager shall be finally determinative of the date of Substantial Completion,
unless Tenant objects thereto.
(r) "Tenant Plans": As defined in Section 7(a) of this Lease.
(s) "Tenant's Proportionate Share": 14.81%. Such percentage is
equal to a fraction, the numerator of which equals the number of rentable square
feet within the Premises and the denominator of which equals the total number of
rentable square feet in the Building, which is 127,925 square feet.
<PAGE> 10
-7-
2. LEASE TERM.
(a) Landlord, in consideration of the rent to be paid and the
other covenants and agreements to be performed by Tenant and upon the terms
hereinafter stated, does hereby lease, demise and let unto Tenant the Premises,
as defined herein and outlined on the floor plan attached hereto as Exhibit A,
commencing on the Commencement Date and ending, without the necessity of notice
from either party to the other, such notice being expressly waived, on the last
day of the Lease Term, unless sooner terminated as herein provided.
(b) If the Landlord shall be unable to tender possession of the
Premises on the anticipated occupancy date, the Landlord shall not be liable for
any damage caused thereby, nor shall this Lease be void or voidable by Tenant,
but in such event, unless the delay results (i) from failure of Tenant to
provide plans or otherwise perform in accordance with the requirements of the
Lease or (ii) from any delay in Landlord's ability to tender possession of the
Premises caused by Tenant, no rental shall be payable by Tenant prior to actual
tender to Tenant of possession of the Premises. Notwithstanding the foregoing,
if the Premises are not Substantially complete within ninety (90) days of the
date of issuance of all permits and licenses necessary to construct the
Premises, provided that any delay in substantially completing the Premises is
not attributable to (i) any Tenant delay detailed in Section 7, (ii) the
requirements of any Special Tenant work or (iii) the FORCE MAJEURE provisions of
Section 31, Landlord shall grant Tenant one (1) day of Basic Rental abatement
for each day of delay beyond the ninetieth (90th) day that the Tenant cannot
occupy the Premises.
(c) By occupying the Premises, Tenant shall be deemed to have
accepted the same as suitable for the purpose herein intended and to have
acknowledged that the Premises comply fully with Landlord's obligations, with
the exception of any "punch list" type items in the Tenant Plans which may not
have been completed. Tenant agrees that its failure to deliver to Landlord such
a written "punch list" within five (5) business days after occupancy shall be
conclusive proof that no such Items exist. Within ten (10) business days of
delivery of the Premises by Landlord to Tenant, Tenant agrees to execute and
return to Landlord a letter prepared by Landlord confirming the Commencement
Date, a copy of which is attached hereto as Exhibit B, certifying that Tenant
has accepted delivery of the Premises, and that the condition of the Premises
complies with Landlord's obligations hereunder, subject to any "punch list"
items in the Tenant Plans which may not have been completed.
3. BASIC RENTAL
(a) Tenant promises and agrees to pay Landlord the Basic Rental
(subject to adjustment as hereinafter provided) without demand, notice,
deduction, counterclaim or setoff, for each month of the entire Lease Term. The
first unabated monthly installment shall be due and payable upon execution of
this Lease. The Basic Rental for each subsequent month shall be paid in advance
beginning on the first day of the calendar month following the expiration of the
first calendar month of the Lease Term and continuing thereafter on or before
the first day of each succeeding calendar month during the term hereof;
provided, however, that Basic Rental for the second calendar month shall be
prorated based on one-three hundred sixtieth (1/360th) of the
<PAGE> 11
-8-
current annual Basic Rental for each day of the first partial month, if any,
this Lease in effect and shall be due and payable as aforesaid.
(b) In the event any installment of the Basic Rental, or any
other sums which became owing by Tenant to Landlord under the provisions hereof,
are not received within five (5) business days after the due date thereof
(without in any way implying Landlord's consent to such late payment), Tenant
shall pay, in addition to such Installment of the Basic Rental or such other
sums owed, and not as a penalty, additional rent in the form of a late payment
charge equal to five percent (5%) of such monthly installment of the Basic
Rental or such other sums owed for each month or part thereof such payment is
overdue. Notwithstanding the foregoing, the foregoing late charges shall not
apply to any sums which may have been advanced by Landlord to or for the benefit
of Tenant pursuant to the provisions of this Lease, it being understood that
such sums shall bear interest from the date of the advance until paid in full,
which Tenant hereby agrees to pay to Landlord, at the rate of eighteen percent
(18%) per annum or the highest rate permitted by law, whichever is less.
(c) Notwithstanding anything to the contrary contained in this
Lease, Landlord agrees to fully abate the first six (6) months of Basic Rental.
4. BASIC RENTAL ESCALATION. The Basic Rental shall be increased
annually, effective on each anniversary of the first full month after the
Commencement Date during the term hereof, by an amount equal to three percent
(3%) of the escalated Basic Rental then in effect. In addition, the Basic Rental
shall increase by $2.00 per rentable square foot in year six (6) of the Lease
Term. The Basic Rental is payable as follows:
<TABLE>
<CAPTION>
YEAR ANNUALIZED RENT MONTHLY RENT
---- --------------- ------------
<S> <C> <C>
1 $255,784.50 $21,315.38
2 $263,458.04 $21,954.84
3 $271,361.78 $22,613.48
4 $279,502.63 $23,291.89
5 $287,887.71 $23,990.64
6 $334,414.55 $27,867.88
7 $344,446.99 $28,703.92
8 $354,780.40 $29,565.03
9 $365,423.81 $30,451.98
10 $376,386.52 $31,365.54
</TABLE>
<PAGE> 12
-9-
5. SECURITY DEPOSIT. The Security Deposit, which shall be paid upon
execution of this Lease, shall be held by Landlord without liability for
interest and not in trust or in a separate account, as security for the
performance by Tenant of Tenant's covenants and obligations under this Lease.
The Security Deposit shall not be considered an advance payment of rental or a
measure of Landlord's damages in case of default by Tenant. Upon the occurrence
of any Event of Default by Tenant, Landlord may, from time to time in its sole
discretion, without prejudice to any other remedy, use and apply the Security
Deposit to the extent necessary to make good any arrearages of rent and any
other damage, injury, expense or liability suffered by Landlord by such Event of
Default. Following any such application of the Security Deposit, Tenant shall
pay to Landlord on demand as additional rent the amount so applied in order to
restore the Security Deposit to its original amount. If Tenant is not then in
default hereunder, any remaining balance of the Security Deposit shall be
returned by Landlord to Tenant within sixty (60) days after the termination of
this Lease and (i) Tenant shall have surrendered the entire Premises to
Landlord, (ii) Landlord shall have inspected the Premises after such vacation,
and (iii) Tenant shall have complied with all of the terms, conditions and
covenants in the Lease. If Landlord transfers its interest in the Premises
during the Lease Term, Landlord may assign the Security Deposit to the
transferee and thereafter shall have no further liability for the return of such
Security Deposit.
6. LANDLORD'S OBLIGATIONS.
(a) Subject to the limitations hereinafter set forth, Landlord
agrees, while Tenant is occupying the Premises and is not in breach of, or
default under, this Lease, to furnish to Tenant: (i) facilities to provide water
at those points of supply both within the Premises and those provided for
general use of tenants of the Building; (ii) facilities to provide a supply of
electrical current reasonably necessary for general business office use and
occupancy of the Premises and electric lighting and a supply of electrical
current to the common areas of the Building; (iii) heating and refrigerated air
conditioning in season, and (iv) elevator and janitorial service to the
Premises, all such services to be provided in scope, duality and frequency to
those services being customarily provided by landlords in comparable office
buildings in the surrounding area. Heating, ventilation and air conditioning
requirements and standards under this Lease shall be subject, however, to such
regulations as the Department of Energy or other local, state or federal
governmental agency, Board or commission shall adopt from time to time. In
addition, Landlord agrees to maintain the public and common areas of the
Building, such as lobbies, stairs, corridors and restrooms, in reasonably good
order and condition; provided, however, that Tenant shall reimburse Landlord,
upon demand for all repairs and additional maintenance resulting from damages to
such public or common areas caused by Tenant, or its employees, agents or
invitees. Landlord reserves the right, exercisable with appropriate notice and
without liability to Tenant for damage or injury to property, persons or
business and without affecting an eviction, constructive or actual, or
disturbance of Tenant's use or possession of the Premises, or giving rise to any
claim by Tenant for setoff or abatement of rent, to decorate and to make
repairs, alterations, additions, modifications, changes or Improvements, whether
structural or otherwise, in and about the Building, or any part thereof, and for
such purposes to enter upon
<PAGE> 13
-10-
the Premises and, during the continuance of any such work, to temporarily close
doors, entryways, public space and corridors in the Building and to interrupt or
temporarily suspend Building services and facilities.
(b) If Landlord, to any extent, fails to make available any
of the services to be provided by Landlord expressly set forth above or if any
slowdown, stoppage or interruption of, or any change in the quantity, character
or availability of, the services to be provided by Landlord expressly set forth
above occurs, such failure or occurrence shall not render Landlord liable in any
respect for damages to either person, property or business, nor be construed as
an eviction of Tenant or work an abatement of rent, nor relieve Tenant from
fulfillment of any covenant or agreement hereof. Should any equipment or
machinery furnished by Landlord break down or for any cause beyond Landlord's
reasonable control cease to function properly, Landlord shall use reasonable
diligence to repair same promptly, but Tenant shall have no claim for abatement
of rent or damages on account of any interruptions in service occasioned thereby
or resulting therefrom; provided, however, that if (I) any such services are not
furnished to the Premises for seven (7) or more consecutive days after Landlord
receives notice from Tenant, (II) the Premises are thereby rendered untenable,
and (III) the Landlord is not diligently pursuing a cure of such interruption,
then commencing with the eighth (8th) day after Landlord receives such notice,
the Basic Rental shall be abated until the Premises are again tenable.
7. IMPROVEMENT OF THE PREMISES.
(a) Landlord and Tenant agree to comply with the following
schedule in build-out of the Premises:
(i) If a Space Plan has not as yet been prepared and
approved by Landlord and Tenant, Tenant shall submit a Space Plan within five
(5) business days after full execution of this Lease. Tenant shall have the
right to choose its own architect, Lederer & Associates, to prepare the Space
Plan, provided that: (i) the final Space Plan must be reasonably approved by
Landlord; and (ii) the cost of Landlord's contribution towards Tenant's
architect shall not exceed $1,891.70 (the "Space Plan Allowance"), which cost
shall be paid directly to Tenant's architect. In consideration of the Space Plan
Allowance, Tenant shall provide to Landlord a final Space Plan which satisfies
all building codes and includes all details of design intent. Any costs for
Tenant's architect in excess of the Space Plan Allowance shall be paid by
Tenant. If delay in occupancy occurs as a result of Tenant's failure to timely
submit a Space Plan as provided herein, Tenant shall be liable to Landlord for
each day beyond the projected Commencement Date that delivery of the Premises is
delayed.
(ii) Upon Landlord's acceptance of the Space Plan,
Tenant shall, within five (5) business days of Landlord's acceptance, obtain
from its architect, Lederer & Associates, detailed floor plan layouts, together
with working drawings and written instructions sufficiently detailed to enable
Landlord to let firm contracts (herein called "Tenant Plans") with respect to
and reflecting the partitions and improvements in the Premises. Tenant shall
have the right to choose its own architect, Lederer & Associates, to prepare the
Tenant Plans, provided
<PAGE> 14
-11-
that: (i) the final Tenant Plans must be reasonably approved by Landlord; and
(ii) the cost of Landlord's contribution towards Tenant's architect shall not
exceed $8,526.15 (the "Tenant Plans Allowance"), which cost shall be paid
directly to Tenant's architect. The Tenant Plans Allowance shall not include the
cost of Mechanical and Electrical Plans ("M.E.P.s"), however, the cost of the
M.E.P.s shall be included in the Tenant Allowance (defined in subsection (e)
below). In consideration of the Tenant Plans Allowance, Tenant shall provide to
Landlord Tenant Plans which satisfy all building codes and include all details
of design intent. Any costs for Tenant's architect in excess of the Tenant Plans
Allowance shall be paid by Tenant. If Landlord, in good faith, reasonably
objects to any aspect of the Tenant Plans submitted by Tenant, Tenant shall
modify such Tenant Plans to address Landlord's objections, and submit new Tenant
Plans to Landlord for approval. The Tenant Plans shall remain subject to
Landlord's review and approval which approval shall not be unreasonably
withheld, and shall be modified to take account of any changes reasonably
required by Landlord. If Tenant fails to timely deliver the Tenant Plans as
required herein, Tenant shall pay to Landlord as additional rent a per them
charge for each day beyond the initially projected Commencement Date that
occupancy is delayed due to Tenant's failure to timely comply with the
requirements in this Section.
(iii) Time is of the essence as to all dates provided in
this subsection.
(b) Landlord shall, in a good and workmanlike manner, cause
the Premises to be improved and completed in accordance with the Tenant Plans by
"Landlord's Contractor" (as hereinafter defined). Landlord reserves the right
however, (i) to make substitutions of material of equivalent grade and quality
when and if any specified material shall not be readily and reasonably
available, and (ii) to make changes necessitated by conditions met in the course
of construction, provided that Tenant's approval of any substantial change shall
first be obtained (which approval shall not be unreasonably withhold or delayed
so long as there shall be general conformity with Tenant Plans).
(c) In the completion and preparation of the Premises in
accordance with the Tenant Plans, Landlord agrees to perform at its own expense
up to the amount of the Tenant Allowance (as defined in subsection (e) below)
those items of work set forth on the schedule attached hereto as Exhibit E,
Tenant Space Plan (all work therein referred to as "Standard Tenant Work") and
the Tenant Plans. All work to be performed by Landlord in addition to or in
substitution for Standard Tenant Work is hereinafter referred to as "Special
Tenant Work." All Tenant Work shall be furnished, installed and performed by
Landlord, utilizing a general contractor or construction manager ("Landlord's
Contractor"), which may be an affiliate of Landlord or a partner in Landlord or
an affiliate of a partner in Landlord. Landlord's Contractor shall be selected
as follows: Landlord and Tenant shall choose at least three (3) contractors to
bid on the construction, at least one (1) of which shall be chosen by Tenant's
construction manager, (I/CON) Advisor Services. The bid list and final bids may
be reviewed by Tenant's construction manager, however, the final decision
regarding the contractor shall be Landlord's. The lowest bid is not necessarily
the bid which will be accepted by Landlord. Landlord's Contractor's fee shall
not exceed five percent (5%) of the cost of material, labor and service. All
Special Tenant Work shall be performed by Landlord's Contractor, for and on
behalf of Tenant and at Tenant's sole expense (subject to a credit against any
unused portion of the Tenant
<PAGE> 15
-12-
Allowance), based on Landlord's out-of-pocket contract or purchase price for
materials, labor and service, including, without limit, any reasonable
contractor's fee for the contractor's overhead and profit, not to exceed five
percent (5%), and charges for cutting, patching, cleaning up and removal of
waste and debris, plus architects' and engineers' fees, plus the product
obtained by multiplying all of the foregoing (as reduced by appropriate credits
for substituted Standard Tenant Work) by five percent (5%) for Landlord's
expenses and profit in handling the substitution.
(d) Tenant shall pay Landlord as additional rent for all Tenant
work in excess of the Tenant Allowance from time to time during the progress of
the work, within ten (10) days after Landlord shall have given Tenant an invoice
or invoices therefor, in amounts representing Landlord's cost of such work
performed (including, for this purpose, material for Special Tenant Work
purchased and delivered to the Building prior to the date of the invoice), less
the amounts paid by Tenant on account. Any failure by Tenant to pay for all such
work shall constitute failure to pay rent when due and an Event of Default by
Tenant hereunder, giving rise to all remedies available to Landlord under this
Lease and at law or equity for non-payment of rent.
(e) Landlord shall contribute up to $275,489.38 (the "Tenant
Allowance") toward the completion of the buildout of the Premises, which include
the Space Plan Allowance, the Tenant Plans Allowance, Landlord's Contractor's
fees, Tenant's construction manager's fees and expenditures for data and phone
cabling. Any costs in excess of the Tenant Allowance shall be paid solely by
Tenant.
(f) All Allowances outlined in this Section are based upon square
footage of 18,947 rentable square feet and are subject to adjustment should the
rentable square footage change.
8. OPERATING EXPENSES.
(a) Beginning with the second Lease Year, Tenant shall pay as
additional rent an amount (per each square foot within the Premises) equal to
the excess ("Excess") from time to time of the per square foot Basic Cost (which
shall be calculated by dividing the Basic Cost by the total rentable square feet
in the Building) over the Base Year Stop. Landlord, at its option, may collect
such additional rent for each calendar year in a lump sum, to be due and payable
within thirty (30) days after Landlord furnishes to Tenant a statement of actual
Basic Cost for the previous year, or, beginning with the first day of the
thirteenth month following the Commencement Date, and on each January 1,
thereafter, Landlord shall also have the option to make a good faith estimate of
the Excess for each upcoming calendar year and may require the monthly payment
of such additional rent equal to one-twelfth (1/12) of such estimate.
(b) By May 1 of each calendar year during Tenant's occupancy and
the calendar year following termination of this Lease, or as soon thereafter as
practical, Landlord shall furnish to Tenant a statement of Landlord's actual
Basic Cost for the previous year. If for any calendar year additional rent
collected for the prior year as a result of Landlord's estimate of Basic Cost is
(i) in excess of the additional rent actually due during such prior year, then
Landlord shall either credit such overpayment toward Tenant's estimated share of
operating
<PAGE> 16
-13-
expenses for the next year or refund to Tenant any overpayment or (ii) less than
the additional rent actually due during such prior year, then Tenant shall pay
to Landlord, on demand, any underpayment with respect to the prior year.
(c) Each statement furnished by Landlord to Tenant shall be
conclusive and binding upon Tenant unless, within ninety (90) days after receipt
of such statement, Tenant delivers to Landlord a written notice specifying the
particular details for which such statement is claimed to be incorrect. Pending
the determination of such dispute, Tenant shall pay without delay the full
amount of the additional rent payable by Tenant in accordance with each such
statement that Tenant in disputing. Without limiting the preceding sentence,
Tenant, or a certified public accountant acting as Tenant's agent, shall have
the right, during Landlord's normal business hours and after reasonable notice
of Tenant's desire to inspect the books and records of Landlord applicable to
the determination of any statement of any additional rent payable by Tenant for
the purpose of verifying in good faith the information contained in such
statement for a period of up to one year after the receipt of such statement by
Tenant. In the event that Tenant's inspection discloses that Landlord's billings
to Tenant for increased Operating Expenses exceeded by any amount the actual
operating expenses attributable to Tenant, then Landlord shall refund the
difference as noted in subsection (b) above. In the event that Tenant's
inspection discloses that Landlord's billings to Tenant for increased Operating
Expenses exceeded by five percent (5%) the actual operating expenses
attributable to Tenant, then Landlord will also pay Tenant for the reasonable
expense incurred in performing such inspection, but in any event not more than
$1,000.00.
(d) Should Tenant require any additional work or service,
including but not limited to heating, ventilation and air conditioning ("HVAC")
furnished outside Landlord's normal operating hours of 8:00 a.m. to 6:00 p.m.,
Monday through Friday, 8:00 a.m. to 1:00 p.m., Saturday, excluding holidays,
Landlord may, upon reasonable advance notice by Tenant, furnish such additional
services at a charge equal to Landlord's actual cost, plus reasonable overhead
for the additional services provided, it being agreed that the cost to the
Landlord of such additional services shall not be considered or treated as Basic
Cost.
(e) Landlord may, at any time in its reasonable discretion,
require separate metering for gas, electric power or for any other utility
service required by Tenant if such service is deemed by Landlord to be in excess
of Building standard usage, in which case the cost of such metering shall be at
Tenant's sole cost and expense, due and payable upon demand by Landlord, and in
which event Tenant shall pay for all such utility service in excess of its
normal and customary usage, as metered. For any utility services that are
separately metered as prescribed herein, the amount of said services which had
been included in the calculation of the Base Year Stop or the calculation of
Basic Cost shall be excluded therefrom.
(f) Notwithstanding any expiration or termination of this Lease
prior to the end of the Lease Term, Tenant's obligations to pay any and all
additional rent pursuant to this Lease shall continue and shall cover all
periods up to the expiration or termination date of this Lease. Tenant's
obligation to pay any and all additional rent or other sums owing by Tenant to
Landlord under this Lease shall survive any expiration or termination of this
Lease.
<PAGE> 17
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9. USE. Tenant shall use the Premises only for the Permitted Use.
Tenant will not occupy or use the Premises, or permit any portion of the
Premises to be occupied or used, for any business or purpose other than the
Permitted Use or for any use or purpose which is unlawful, in part or in whole,
or extra hazardous, nor will Tenant permit anything to be done which shall in
any way cause substantial noise, vibrations or fumes, or increase the rate of
insurance on the Building or contents or cause any cancellation of any insurance
policy covering the Building or any portion of its contents. In the event that,
by reason of acts or omissions of Tenant, there shall be any increase in the
rate of insurance on the Building or contents created by Tenant's acts,
omissions or conduct of business, Tenant hereby agrees to pay to Landlord the
amount of such increase on demand. Tenant will conduct its business and control
its agents, employees and invitees in such a manner as not to create any
nuisance, nor interfere with or disturb the possession of other tenants or
Landlord in the management of the Building. Tenant shall not, without the prior
written consent of Landlord, paint, install lighting or decorations, or install
any signs, window or door lettering or advertising media of any type on or about
the Premises or any part thereof.
10. TENANT'S REPAIRS AND ALTERATIONS. Tenant shall not in any manner
deface or injure or make unapproved modifications of the Premises or the
Building and will pay the cost of repairing any damage or injury done to the
Premises or the Building or any part thereof by Tenant or Tenant's agents,
employees or invitees. Tenant shall throughout the Lease Term take good care of
the Premises and keep them free from waste and nuisance of any kind. Tenant
agrees, at Tenant's sole cost and expense, to keep the Premises, including,
without limitation, all fixtures installed by Tenant and any plate glass and
special store fronts, in good condition and make all necessary non-structural
repairs and replacements except those caused by fire, casualty or acts of God
covered by Landlord's fire insurance policy covering the Building. Such repairs
and replacements shall be in quality equal to the original wood and
installation. If Tenant fails to make such repairs within fifteen (15) days
after the occurrence of the damage or injury, Landlord may, at its sole option,
make such repair, and Tenant shall, upon demand therefor, pay Landlord for
Landlord's cost thereof plus ten percent (10%) for overhead costs.
Notwithstanding the foregoing, if (i) the damage is of such a nature that it
does not present a risk to the health or safety of other tenants and/or invitees
of the Building and/or the Premises; (ii) Tenant has commenced repairing the
damage within the fifteen (15) day period; and (iii) Tenant is continuing to
diligently pursue the repair of the damage, then Tenant shall have an additional
thirty (30) days in which to effect the repair and/or replacement.
Notwithstanding anything in the Lease to the contrary, Tenant
will not make or allow to be made any alterations or physical additions in or to
the Premises, including changes in locks on doors, plumbing, lighting, wiring or
partitions, without the prior written consent of Landlord; provided, however,
that Tenant need not obtain Landlord's consent to minor, cosmetic alterations or
additions which do not affect the underlying Building operating systems. All
maintenance, repairs, alterations, additions or Improvements shall be conducted
only by contractors or subcontractors approved in advance in writing by
Landlord, it being understood that Tenant shall procure and maintain, and shall
cause such contractors and subcontractors engaged by or on behalf of Tenant to
procure and maintain, insurance coverage against such
<PAGE> 18
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risks, in such amounts and with such companies as Landlord may require in
connection with any such maintenance, repair, alteration, addition or
improvement.
At the end or other termination of this Lease, Tenant shall
deliver up the Premises with all improvements located therein in good repair and
condition, reasonable wear and tear excepted, and shall deliver to Landlord all
keys to the Premises. All alterations, additions or improvements (whether
temporary or permanent in character) made in or upon the Premises by Landlord or
Tenant shall be Landlord's property upon termination of this Lease and shall
remain on the Premises without compensation to Tenant; provided, however, that
if Landlord elects to have Tenant remove any alteration, addition, improvement
or partition, Landlord shall do so upon giving consent to such alteration,
addition, improvement or partition. Tenant shall then remove such alteration,
addition, improvement or partition whether erected by Landlord or Tenant, and
shall restore the Premises to its original condition by the date of termination
of this Lease or upon earlier vacating of the Premises, except as provided
herein. Landlord hereby elects to have any and all computer and/or telephone
cables installed by Tenant or which may in the future be installed by Tenant,
removed upon the termination of the Lease or upon Tenant's earlier vacating of
the Premises. If Tenant fails to restore the Premises upon Landlord's request,
Landlord shall have the right to perform such restoration and Tenant shall be
liable for all costs and expenses incurred by Landlord therefor.
11. ASSIGNMENT AND SUBLETTING.
(a) LANDLORD'S PRIOR CONSENT REQUIRED. Neither Tenant nor
Tenant's representatives, successors and assigns nor any subtenant or assignee
will assign, transfer, mortgage or otherwise encumber this Lease or sublet or
rent (or permit the occupancy or use of) the Premises, or any part thereof,
without obtaining the prior written consent of Landlord, which consent will not
be unreasonably withheld as provided in subsection (b) below, nor shall any
assignment or transfer of this Lease or the right of occupancy hereunder be
effectuated by operation of law or otherwise without the prior written consent
of Landlord. Any reasonable expenses incurred by Landlord with respect to the
review and consent or denial of consent of the foregoing, in an amount not to
exceed $1,000 per request, shall be paid by Tenant to Landlord as additional
rent, and shall be due and payable with the monthly installment of rent when
billed.
(b) QUALIFICATION OF SUBTENANT. Subject to the provisions of
Section 11(c) hereof, Landlord shall not unreasonably withhold or delay its
consent hereunder to any sublease by Tenant, provided that all of the following
conditions are met:
(i) Tenant must first notify Landlord, in writing, of
any proposed sublease, at least twenty (20) days prior to the effective date of
such proposed sublease. The notice to Landlord must include a copy of the
proposed sublease and a copy of the proposed subtenant's financial statement for
its most recent fiscal year, prepared in accordance with generally accepted
accounting principles and certified by a public accountant or an executive
officer of the proposed subtenant.
(ii) The subtenant must have a credit rating
satisfactory to Landlord (in Landlord's reasonable judgment).
<PAGE> 19
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(iii) The sublease must be expressly subject and
subordinate to this Lease, must require that any subtenant must comply with and
abide by all of the terms of the Lease, and must provide that any termination of
this Lease shall extinguish the sublease as well.
(iv) The subtenant may not propose to change the use of
the premises to a purpose other than as stated in Section 9 hereof, may not be a
place of public accommodation as defined under the Americans with Disabilities
Act, nor conduct its business in a manner which, in Landlord's reasonable
judgment, is not appropriate for comparable office buildings in the metropolitan
Washington, D.C. area.
(v) The subtenant may not be a tenant, subtenant, or
other occupant, of any part of the Building, unless Landlord is unable to offer
such occupant comparable space elsewhere in the Building.
(vi) The Tenant may not be in default under this Lease,
or have committed two events of default hereunder during the previous twelve
(12) months, whether cured or not.
(vii) The sublease shall contain the following clause:
"UNDERLYING LEASE AGREEMENT. This Sublease and
Subtenant's rights under this Sublease shall at all times be subject and
subordinate to the underlying Lease identified in Paragraph hereof, and
Subtenant shall perform all obligations of Tenant under said Lease, with
respect to the Sublease Premises. Subtenant acknowledges that any
termination of the underlying Lease shall extinguish this Sublease.
Landlord's consent to this Sublease shall not make Landlord a party to
this Sublease, shall not create any privity of contract between Landlord
and Subtenant or other contractual liability or duty on the part of the
Landlord to the Subtenant, shall not constitute its consent or waiver of
consent to any subsequent sublease or sub-sublease, and shall not in any
manner increase, decrease or otherwise affect the rights and obligations
of Landlord and Tenant under the underlying Lease, in respect of the
Sublease Premises. Subtenant shall have no right to assign this Sublease
or further sublet the Premises without the prior written consent of
Landlord. Any term of this Sublease that in any way conflicts with or
alters the provisions of the underlying Lease shall be of no effect as
to Landlord and Landlord shall not assume any obligations as landlord
under the Sublease and Tenant shall not acquire any rights under the
Sublease directly assertable against Landlord under the underlying
Lease. Tenant hereby collaterally assigns to Landlord this Sublease and
any and all payments due to Tenant from Subtenant as additional security
for Tenant's performance of all of its covenants and obligations under
the underlying Lease, and authorizes Landlord to collect the same
directly from Subtenant and otherwise administer the provisions of this
Sublease, at the option of Landlord. Subtenant hereby consents to such
collateral assignment of this Sublease to Landlord and agrees to observe
its obligations created hereby."
(c) LANDLORD'S RIGHT OF FIRST REFUSAL. Landlord shall have
the right, within twenty (20) days after receipt of the notice from Tenant,
required under Section 11(b)(i) above,
<PAGE> 20
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that Tenant proposes to sublease all or a portion of the Premises, to elect (i)
to terminate this Lease in its entirety if Tenant intends to sublet all or
substantially all of the Premises or, if Tenant proposes to sublet a portion of
the Premises, to terminate this Lease only with respect to such portion of the
Premises; or (ii) to require Tenant to pay Landlord, within ten (10) days of
receipt, one-half (1/2) of the amount of rent payable by such sublease in excess
of the amount of rent payable by Tenant hereunder with respect to the portion of
the Premises sublet, offset by any direct expenses incurred by Tenant in
subleasing such portion of the Premises (amortized in equal monthly payments
over the initial term of such sublease). Upon exercise by Landlord of the option
set forth in subsection (i) above, Tenant shall surrender the Premises or such
portion of the Premises, as the case may be, to Landlord, and thereafter the
rent to be paid by Tenant pursuant to Section 3 above shall be that portion of
the total rent which the amount of square foot area remaining in the possession
of Tenant bears to the total square foot area of the Premises. In the event that
Landlord does not exercise its right to terminate this Lease, within said twenty
(20) day period, Tenant shall have the right, subject to the provisions of
subsection (ii) above, to sublet the Premises or a portion thereof after first
obtaining the written consent of Landlord as provided in Section 11(a) above.
Upon exercise by Landlord of the option set forth in subsection (ii) above,
Tenant covenants and agrees to provide Landlord with semi-annual statements,
prepared and verified by a certified public accountant or executive officer of
Tenant, stating the amount of rent received by Tenant from its subtenant(s)
during such semi-annual period. If such statement shows Tenant failed to make
the full payment required by subsection (ii) above, a late charge equal to ten
percent (10%) of the amount due shall be paid by Tenant to Landlord as
additional rent, and shall be due and payable with the monthly installment of
rent next becoming due. For purposes of calculating any amounts due from Tenant
pursuant to subsection (ii) above, the "amount of rent payable by Tenant"
exclusive of such amounts due pursuant to subsection (ii) shall be that portion
of the total rent which the amount of square foot area sublet by Tenant bears to
the total square foot area of the Premises.
(d) NO WAIVER OR RELEASE. The consent by Landlord to any
assignment or subletting shall not be construed as a waiver or release of Tenant
from the terms of any covenant or obligation under this Lease, nor shall the
collection or acceptance of rent from any such assignee, subtenant or occupant
constitute a waiver or release of Tenant of any covenant or obligation contained
in this Lease, nor shall any such assignment or subletting be construed to
relieve Tenant from obtaining the consent in writing of Landlord to any further
assignment or subletting. Tenant hereby assigns to Landlord the rent due from
any subtenant of Tenant and hereby authorizes each such subtenant to pay said
rent directly to Landlord, at Landlord's option, in the event of any default by
Tenant under the terms of this Lease.
(e) SUBSIDIARY OR AFFILIATE. Provided Tenant delivers
notice to Landlord not less than thirty (30) days prior to any such assignment
or sublease, Tenant may assign this Lease, or sublease all or part of the
Premises, without the consent of Landlord, to:
(i) any corporation that has the power to
direct Tenant's management and operation with a net worth comparable to
Tenant's, or any corporation whose management and operation is controlled by
Tenant with a net worth comparable to Tenant's; or
<PAGE> 21
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(ii) any corporation a majority of whose voting stock
is owned by Tenant; or
(iii) any corporation in which or with which Tenant, its
corporate successors or assigns, is merged or consolidated, in accordance with
applicable statutory provisions for merger or consolidation of corporations, so
long as (A) the liabilities of the corporations participating in such merger or
consolidation are assumed by the corporation surviving such merger or created by
such consolidation and (B) the successor can demonstrate by balance sheets and
other financial documentation submitted to Landlord that it in capable of
servicing all of Tenant's financial obligations under this Lease.
12. INDEMNITY.
(a) Landlord shall not be liable for, and Tenant shall indemnify
and save harmless Landlord, ground lessor, if any, and Landlord's managing
agent, if any, from and against and from all fines, damages, suits, claims,
demands, losses and actions (including reasonable attorneys' fees) for any
injury to person (including death) or damage to or loss of property on or about
the Premises caused by Tenant, its employees, contractors, subtenants, invitees
or by any other person entering the Premises or the Building under the express
or implied invitation of Tenant, or arising out of Tenant's use of the Premises.
Landlord shall not be liable or responsible for any loss or damage to any
property or death or injury to any person occasioned by theft, fire, act of God,
public enemy, criminal conduct of third parties, injunction, riot, strike,
insurrection, war, court order, requisition or other governmental body or
authority, by other tenants of the Building or any other matter beyond the
reasonable control of Landlord, or for any injury or damage or inconvenience
which may arise through repair or alteration of any part of the Building, or
failure to make repairs, or from any cause whatever except Landlord's negligence
or willful misconduct.
(b) Tenant shall not be liable for, and Landlord shall indemnify
and save harmless Tenant from and against all fines, damages, suits, claims,
demands, losses and actions (including reasonable attorneys' fees) for any
injury to person (including death) or damage to or loss of property on or about
the common areas of the Building caused by the negligence or willful misconduct
of Landlord, its employees, contractors, invitees or by any other person
entering the common areas of the Building under the express or implied
invitation of Landlord, or arising out of Landlord's use of the common areas.
Tenant shall not be liable or responsible for any loss or damage to any property
or death or injury to any person occasioned by theft, fire, act of God, public
enemy, criminal conduct of third parties, injunction, riot, strike,
insurrection, war, court order, requisition or other governmental body or
authority, by other tenants of the Building or any other matter beyond the
reasonable control of Tenant, except the negligence or willful misconduct of
Tenant, its agents, employees, invitees and contractors.
13. SUBORDINATION. This Lease and all rights of Tenant hereunder
shall be and are subject and subordinate at all times to any deeds of trust,
mortgages, installment sale agreements and other instruments or encumbrances, as
well as to any ground leases or primary leases, that now or hereafter cover all
or any part of the Building, the Land or an interest of
<PAGE> 22
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Landlord therein, and to any and all advances made on the security thereof, and
to any and all increase, renewals, modifications, consolidations, replacements
and extensions of any of such deeds of trust, mortgages, installment sale
agreements, instruments, encumbrances or leases, as well as any substitutions
therefor, all automatically and without the necessity of any further action on
the part of Tenant to effectuate such subordination. Tenant shall, however, upon
demand at any time or times execute, acknowledge and deliver to Landlord any and
all instruments and certificates that in the reasonable judgment of Landlord may
be necessary or proper to confirm or evidence such subordination.
Notwithstanding the foregoing, if any mortgagee, trust beneficiary or ground
lessor shall elect to have this Lease treated as if it became effective and
Tenant had taken possession prior to the lion of its mortgage or deed of trust
or prior to its ground lease, and shall give notice thereof to Tenant, this
Lease shall be deemed to have become effective and Tenant's right to possession
shall be considered prior to such mortgage, deed of trust, or prior to its
ground lease whether this Lease is dated prior or subsequent to the date of said
mortgage, deed of trust or ground lease or the date of recording thereof. In the
event any mortgage or deed of trust to which this Lease is subordinate is
foreclosed or a deed in lieu of foreclosure is given to the mortgagee or
beneficiary, Tenant shall attorn to the purchaser at the foreclosure sale or to
the grantee under the deed in lieu of foreclosure in the event any ground lease
to which this Lease is subordinate in terminated, Tenant shall attorn to the
ground lessor. Tenant shall upon demand at any time execute, acknowledge and
deliver to Landlord's mortgagee (including the beneficiary under any deed of
trust) or other holder any and all instruments and certificates that in the
judgment of Landlord's mortgages may be necessary or proper to confirm or
evidence such attornment. Notwithstanding the foregoing, Landlord shall make
best efforts to obtain a non-disturbance agreement from all mortgagees and
beneficiaries of any deeds of trust now or hereafter placed on the Building,
provided that the same can be obtained at no cost, expense, or liability to
Landlord. Landlord shall, however, have no liability to Tenant as a result of
its failure to obtain any non-disturbance agreement, provided that Landlord
endeavored in good faith to obtain such an agreement.
14. RULES AND REGULATIONS. Tenant and Tenant's agents, contractors,
employees and invitees will comply fully with all requirements of the Rules and
Regulations of the Building and related facilities, as specified in the Rules
and Regulations now or hereafter sent by Landlord to Tenant. Landlord shall at
all times have the right to change such rules and regulations to promulgate
other Rules and Regulations in such manner as Landlord may deem advisable, in
its reasonable discretion, for safety, care or cleanliness of the Building and
related facilities or the Premises, and for preservation of good order therein,
all of which Rules and Regulations, changes and amendments will be forwarded to
Tenant in writing and shall be carried out and observed by Tenant. Tenant shall
be responsible for compliance therewith by the agents, contractors, employees
and invitees of Tenant.
15. INSPECTION. Landlord or its officers, agents and
representatives, and any ground lessor or mortgagee thereof, shall have the
rights to enter into and upon any and all parts of the Premises at all
reasonable hours upon reasonable advance notice (or, in any emergency or for the
purpose of performing routine maintenance, at any hour and without advance
notice) to (a) inspect the Premises at any time, (b) clean or make repairs or
alterations or additions as Landlord may deem necessary (but without any
obligation to do so, except as expressly provided
<PAGE> 23
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for herein), or (c) show the Premises to prospective tenants (during the last
nine (9) months of the Lease Term), purchasers or lenders; and Tenant shall not
be deemed entitled to any abatement or reduction of rent by reason there of, nor
shall such be to be actual or constructive eviction; provided, however, that
Landlord shall use all reasonable efforts to not interfere with, interrupt or
otherwise disturb Tenant's business.
16. CONDEMNATION. If the whole or, as determined by Landlord in its
reasonable discretion, any substantial part of the Land or the Building should
be taken for any public or quasi-public use under governmental law, ordinance or
regulation, or by right of eminent domain, or by private purchase in lieu
thereof and the taking would prevent or materially interfere with the use of the
Premises for the purpose for which they are being used, as mutually determined
by Landlord and Tenant, this Lease shall terminate and the rent shall be abated
during the unexpired portion of this Lease, effective when the physical taking
of said Land or the Building shall occur. If part of the Land or Building shall
be taken for any public or quasi-public use under any governmental law,
ordinance or regulation, or by right of eminent domain, or by private purchase
in lieu thereof, and this Lease is not terminated as provided in the sentence
above, this Lease shall not terminate but the rent payable hereunder during the
unexpired portion of this Lease shall be reduced to such extent as Landlord and
Tenant shall mutually determine is fair and reasonable under all of the
circumstances. In the event of any such taking or private purchase in lieu
thereof, Landlord and Tenant shall each be entitled to all remedies provided by
law; provided, however, that any award paid to Tenant shall not detract from any
award which Landlord is entitled to receive.
17. FIRE OR OTHER CASUALTY. In the event of damage to or destruction
of the Premises or the Building, or the entrances and other common facilities
necessary to provide normal access to the Premises, caused by fire or other
casualty, Tenant shall provide immediate notice thereof to Landlord, and
Landlord shall make repairs and restorations as hereafter expressly provided,
unless this Lease shall be terminated by Landlord or unless any mortgagee which
is entitled to receive casualty insurance proceeds fails to make available to
Landlord a sufficient amount of such proceeds to cover the cost of such repairs
and restoration.
If (i) the damage is of such nature or extent, in the judgment of
Landlord's architect, that more than one hundred fifty (150) consecutive days,
after commencement of the work, would be required (with normal work crews and
hours) to repair and restore the part of the Premises or Building which has been
damaged, or (ii) a substantial portion of the Premises or the Building is so
damaged that, in Landlord's sole judgment, it is uneconomic to restore or repair
the Premises or the Building, as the case may be, Landlord shall so advise
Tenant promptly; and Landlord or Tenant, for a period of ten (10) days
thereafter, shall have the right to terminate this Lease by written notice to
the other, as of the date specified in such notice, which termination date shall
be no later than thirty (30) days after the date of such notice. In the event of
such fire or other casualty, if this Lease in not terminated pursuant to the
terms of this Section 17, and if (i) sufficient casualty insurance proceeds are
available for use for such restoration or repair, and (ii) this Lease is then in
full force and effect, Landlord shall proceed promptly and diligently to restore
the Premises to its substantially similar condition prior to the occurrence of
the damage, provided that Landlord shall not be obligated to repair or restore
any alterations, additions or
<PAGE> 24
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fixtures which Tenant or any other tenant may have installed unless Tenant, in a
manner satisfactory to Landlord, assures payment in full of all costs which may
be incurred by Landlord in connection therewith. Landlord shall not insure any
improvements or alterations to the Premises in excess of Standard Tenant Work,
or any fixtures, equipment or other property of Tenant. Tenant shall, at its
sole expense, insure the value of its leasehold improvements, fixtures,
equipment or other property located in the Premises, for the purpose of
providing funds to Landlord to repair and restore the Premises to its
substantially similar condition prior to occurrence of the damage. If there be
any such alteration, fixtures or additions and Tenant does not assure or agree
to assure payment of the cost or restoration or repair as aforesaid, Landlord
shall have the right to determine the manner in which the Premises shall be
restored so as to be substantially the same as the Premises existed prior to the
damage occurring, as if such alterations, additions or fixtures had not been
made or installed. The validity and effect of this Lease shall not be impaired
in any way by, and Landlord shall have no liability as a result of, the failure
of Landlord to complete repairs and restoration of the Premises or of the
Building within one hundred fifty (150) consecutive days after commencement of
work, even if Landlord had in good faith notified Tenant that it estimated that
the repair and restoration would be completed within such period, provided that
Landlord proceeds diligently with such repair and restoration.
In the case of damage to the Premises not caused by the
negligence or willful misconduct of the Tenant or any of its agents, employees
or invitees, and which is of a nature or extent that Tenant's continued
occupancy is substantially impaired, the rent otherwise payable by Tenant
hereunder shall be equitably abated or adjusted for the duration of such
impairment as determined by Landlord. In no event, however, shall any damages be
payable by Landlord to Tenant in respect of business interruption resulting from
any fire or other casualty on the Premises or Building. Tenant shall be
responsible to insure and/or repair all of Tenant's leasehold improvements and
all equipment, fixtures and personal property located in the Premises.
18. HOLDING OVER. Tenant shall, at the termination of this Lease by
lapse of time or otherwise, yield up immediate possession to Landlord. If Tenant
holds over after the expiration or termination of this Lease, all of the other
terms and provisions of this Lease shall be applicable during such period,
except that Tenant shall pay Landlord from time to time upon demand, as partial
damages for the period of any holdover, an amount equal to one hundred fifty
percent (150%) of the Basic Rental in effect on the termination date, computed
on a daily basis for each day of the holdover period. No holding over by Tenant
shall operate to extend this Lease except as otherwise expressly provided in
this Lease. The foregoing notwithstanding, Landlord, in addition to accepting
the daily damages during the period of such holding over, shall be entitled to
pursue all remedies at law or equity, including, without limitation, rights to
ejectment and damages.
19. TAXES. Tenant shall be liable for all taxes levied or assessed
against personal property, furniture or fixtures placed by Tenant in the
Premises, and if any such taxes for which Tenant is liable are in any way levied
or assessed against Landlord, Tenant shall pay the Landlord upon demand that
part of such taxes for which Tenant is primarily liable hereunder.
<PAGE> 25
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20. EVENTS OF DEFAULT. The occurrence of any of the following events
shall be deemed to be an event of default ("Event of Default") by Tenant under
this Lease:
(a) Tenant shall fail to pay when due any rental or other sums
payable by Tenant hereunder (or under any other lease now or hereafter executed
by Tenant in connection with space in the Building), and same is not cured
within ten (10) days after Landlord's written notice thereof to Tenant.
(b) Tenant shall fail to comply with or observe Section 46 of
this Lease (or a comparable section of any other lease now or hereafter executed
by Tenant in connection with space in the Building).
(c) Tenant shall fail to comply with or observe any other
provision of this Lease (or any other lease now or hereafter executed by Tenant
in connection with space in the Building), and same is not cured within fifteen
(15) days after Landlord's written notice thereof to Tenant.
(d) Tenant abandons the Premises;
(e) Tenant shall apply for or consent to the appointment of a
receiver, trustee or liquidator of itself or himself or any of its or his
property, admit in writing its or his inability to pay its or his debts as they
mature, make a general assignment for the benefit of creditors, be adjudicated a
bankrupt, insolvent or file a voluntary petition in bankruptcy or a petition or
an answer seeking reorganization or an arrangement with creditors or to take
advantage of any bankruptcy, reorganization, insolvency, readjustment of debt,
dissolution or liquidation law or statute, or an answer admitting the material
allegations of a petition filed against it or him in any proceeding under any
such law, or if action shall be taken by Tenant for the purposes of effecting
any of the foregoing.
(f) Any court of competent jurisdiction shall enter an order,
judgment or decree approving a petition seeking reorganization of Tenant or all
or a substantial part of the assets of Tenant, or appointing a receiver,
sequestrator, trustee or liquidator of Tenant or any of its or his property, and
such order, judgment or decree shall continue unstayed and in effect for any
period of at least thirty (30) days.
21. REMEDIES. Upon the occurrence of any Event of Default specified
in this Lease, Landlord shall have the option to pursue any one or more of the
following remedies without any notice or demand whatsoever:
(a) Distrain, collect or bring an action for such rent as may be
in arrears, and request entry of judgment therefor as provided for in case of
rent in arrears, or file a proof of claim in any bankruptcy or insolvency
proceeding for such rent, or institute any other proceedings, whether similar or
dissimilar to the foregoing, to enforce payment thereof.
(b) Declare due and payable and sue for and recover, all unpaid
rent for the unexpired period of the Lease Term (and also all additional rent as
the amounts thereof can be
<PAGE> 26
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determined or reasonably estimated) as if by the terms of this Lease the same
were payable in advance, together with all legal fees and other expenses
incurred by Landlord in connection with the enforcement of any of Landlord's
rights and remedies hereunder.
(c) Terminate this Lease, in which event Tenant shall immediately
surrender the Premises to Landlord, and if Tenant fails to do so, Landlord may,
without prejudice to any other remedy which it may have for possession or
arrearages in rent, enter upon and take possession of the Premises and expel or
remove Tenant and any other person who may be occupying the Premises or any part
thereof, without being liable for trespass or any claim for damages therefor,
and Tenant agrees to pay to Landlord on demand the amount of all lose and damage
which Landlord may suffer by reason of such termination, whether through
inability to relet the Premises on satisfactory terms or otherwise, including
the loss of rental for the remainder of the Lease Term.
(d) Without termination of the Lease, enter upon and take
possession of the Premises and expel or remove Tenant and any other person who
may be occupying the Premises or any part thereof, without being liable for
trespass or any claim or damages therefor; and if Landlord so elects, relet the
Premises on behalf of the Tenant on such terms as Landlord shall deem advisable
and receive the receive the rent therefor, and Tenant agrees to pay to Landlord
on demand any deficiency that may arise by reason of such reletting for the
remainder of the Lease Term.
(e) without termination of the Lease, enter upon the Premises, by
force if necessary, without being liable for trespass or any claim for damages
therefor, and do whatever Tenant is obligated to do under the terms of this
Lease; and Tenant agrees to reimburse Landlord on demand for any expenses which
Landlord may incur in thus effecting compliance with Tenant's obligations under
this Lease, and Tenant further agrees that Landlord shall not be liable for any
damages resulting to the Tenant from such action.
(f) if Tenant falls to perform any covenant or observe any
condition to be performed or observed by Tenant hereunder or acts in violation
of any covenant or condition hereof, Landlord may, but shall not be required to
on behalf of Tenant, perform such covenant and/or take such steps, including
entering upon the Premises, as may be necessary or appropriate, if Landlord
shall have given Tenant at least three (3) days prior written notice of
Landlord's intention to do so, unless an emergency situation exists, in which
case Landlord shall have the right to proceed immediately and all costs and
expenses incurred by Landlord in so doing, including reasonable legal fees,
shall be paid by Tenant to Landlord upon demand, plus interest at the overdue
interest rate set forth herein from the date of expenditures) by Landlord, an
additional rent. Landlord's proceeding under the rights reserved to Landlord
under this Section shall not in any way prejudice or waive any rights Landlord
might otherwise have against Tenant by reason of Tenant's default.
(g) Exercise any other rights and remedies available to Landlord
at or in equity. No reentry or taking possession of the Premises by Landlord
shall be construed as an election on its part to terminate this Lease, unless a
written notice of such intention be given to
<PAGE> 27
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Tenant. Neither pursuit of any of the foregoing remedies provided nor any other
remedies provided herein or by law shall constitute a forfeiture or waiver of
any rent due to Landlord hereunder or of any damages accruing to Landlord by
reason of the violation of any of the terms, provisions and covenants herein
contained. Landlord's acceptance of rent following an Event of Default hereunder
shall not be construed as Landlord's waiver of such Event of Default. No waiver
by Landlord of any violation or breach of any of the terms, provisions and
covenants herein contained shall be deemed or construed to constitute a waiver
of any other violation or Event of Default. The loss or damage that Landlord may
suffer by reason of termination of this Lease or the deficiency from any
reletting an provided for above shall include the expense of repossession and
any repairs or remodeling undertaken by Landlord following possession. Should
Landlord at any time terminate this Lease for any default, Tenant shall not be
relieved of its liabilities and obligations hereunder and, in addition to any
other remedy Landlord may have, Landlord may recover from Tenant all damages
Landlord may incur by reason of such default, including the cost of recovering
the Premises and the loss of rental for the remainder of the Lease Term.
Tenant's obligations and liabilities under this Lease shall also survive
repossession and reletting of the Premises by Landlord pursuant to the foregoing
provisions of this Section 21.
(h) The abatement of Basic Rental, if any, and other concessions
of the Landlord (which may include among other items: (i) brokerage fees) (ii)
moving allowances; (iii) Tenant improvements; (iv) Lease assumptions; (v)
unamortized portions of the build-out; and (vi) any other cash allowances or
payments) are subject to the condition that, throughout the Lease Term, Tenant
will perform and comply with all of the terms, covenants and conditions of this
Lease to be performed or complied with by Tenant. If, after the occurrence of an
Event of Default, Landlord terminates this Lease or reenters and takes
possession of the Premises without such a termination, the abatement of Basic
Rental and other Landlord concessions shall cease to apply and Tenant shall be
obligated, within 10 days after demand, to pay to Landlord the Basic Rental
abated and the value of all Landlord's concessions. Landlord's right to recover
the Basic Rental abated and the value of all Landlord's concessions shall be in
addition to any other remedies available to Landlord as a result of such
termination or reentry.
(i) All rights and remedies of Landlord and Tenant herein
enumerated shall be cumulative, and none shall exclude any other right or remedy
allowed by law.
(j) In addition to any other rights and remedies provided in this
Lease, and with or without terminating this Lease, Landlord may with force of
law, re-enter, terminate Tenant's right of possession and take possession of the
Premises, the provision of this Section 21 operating as a notice to quit, any
other notice to quit or of Landlord's intention to reenter the Premises being
hereby expressly waived.
22. SURRENDER OF PREMISES. No act done and no failure to act by
Landlord or its agents during the term hereby granted shall be deemed an
acceptance of a surrender of the Premises, and no agreement to accept a
surrender of the Premises shall be valid unless the same be made in writing and
signed by Landlord.
<PAGE> 28
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23. ATTORNEYS' FEES. In case it should be necessary or proper for
Landlord to bring any action under this Lease or to consult or place this Lease,
or any amount payable by Tenant hereunder, with an attorney concerning a default
of Tenant hereunder, whether such default is later cured, then Tenant shall pay
any and all reasonable attorney's fees, court Costs and expenses of Landlord
incurred in connection with such enforcement.
24. INTENTIONALLY OMITTED.
25. MECHANICS' LIENS. Tenant shall not permit any mechanics' lien or
other liens to be placed upon the Premises or the Building or improvements
thereon during the Lease Term, caused by or resulting from any work performed,
materials furnished or obligation incurred by or at the request of Tenant. In
the case of the filing of any such lien Tenant will promptly, and in any event
within thirty (30) days after the filing thereof, satisfy or release such lien
by means of payment thereof, banding Landlord against any loss occasioned
thereby (in which case Tenant shall have the right in due diligence to contest
and dispute such lion so long as such bond remains in place), or take such other
action as may be otherwise acceptable to Landlord.
26. WAIVER OR SUBROGATION; INSURANCE.
(a) Landlord and Tenant hereby release the other from any and all
liability or responsibility to the other or anyone claiming through or under
them by way of subrogation or otherwise for any loss or damage to property, but
only to the extent that such loss or damage is covered by any insurance then in
force, even if such fire or other casualty shall have been caused by the fault
or negligence of the other party, or anyone for whom such party may be
responsible; provided, however, that such release shall be applicable and in
force and effect only with respect to any loss or damage occurring during such
time as the policy or policies of insurance covering said lose shall contain a
clause or endorsement to the effect that this release shall not adversely affect
or impair said insurance or prejudice the right of the insured to recover
thereunder.
(b) Tenant shall maintain throughout the Lease Term, at Tenant's
sole cost and expense, workers' compensation insurance at no less than statutory
requirements, business interruption insurance, insurance against lose or
liability in connection with bodily injury, death, property damage and
destruction, in or upon the Premises or the remainder of the Land, and arising
out of the use of all or any portion of the same by Tenant or its agents,
employees, officers, invitees, visitors and guests, under policies of commercial
general liability insurance having such limits as to each as may be reasonably
required by Landlord from time to time, but in any event a combined bodily
injury and property damage limit of not less than Three Million Dollars
($3,000,000) per occurrence. All liability insurance required hereunder shall be
written to apply to all bodily injury, property damage, personal injury and
other covered loss, however occasioned, which occurred or arose (or the onset of
which occurred or arose) in whole or in part during the policy period. Such
policies shall name Landlord and Tenant, (and, at Landlord's or such mortgagee's
or paramount lessor's or installment seller's request) any mortgagee of all or
any portion of the Buildings and any landlord of, or installment seller to,
Landlord as the insured parties, shall provide that they shall not be modified
or canceled without at least thirty (30) days'
<PAGE> 29
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prior written notice to Landlord and any other party designated an aforesaid and
shall be issued by insurers of recognized responsibility licensed to do business
in the jurisdiction in which the Building is located and acceptable to Landlord.
Copies of all such policies certified by the insurers to be true and complete
shall be supplied to Landlord and such mortgagees, paramount lessors and
installment sellers at all times.
27. INTENTIONALLY OMITTED.
28. BROKERAGE. Tenant warrants that it has had no dealings with any
broker or agent other than C.B. Commercial Real Estate Group, Inc. and Barnes,
Morris, Pardoe and Foster, Inc. in connection with the negotiation or execution
of this Lease, and Tenant agrees to indemnify Landlord against all costs,
expenses, attorneys' fees or other liability for commissions or other
compensation or charges claimed by any other broker or agent claiming the same
by, through or under Tenant. Upon final consummation of this Lease, Landlord
agrees to pay such brokers pursuant to a separate agreement and will indemnify
Tenant from any claims made by such brokers for commissions earned due to this
Lease.
29. ESTOPPEL CERTIFICATES. Tenant shall from time to time, within
fifteen (15) days after Landlord shall have requested the same of Tenant,
execute, acknowledge and deliver to Landlord a written instrument in recordable
form and otherwise in such form as required by Landlord (i) certifying that this
Lease is in full force and effect and has not been modified, supplemented or
amended in any way (or, if there have been modifications, supplements or
amendments thereto, that it is in full force and effect as modified,
supplemented or amended and stating such modifications supplements and
amendments; and (ii) stating any other fact or certifying any other condition
reasonably requested by Landlord or requested by any mortgagee or prospective
mortgagee or purchaser of the Property or of any Interest therein. In the event
that Tenant shall fail to return a fully executed copy of such certificate to
Landlord within the foregoing ten (10) day period, then Tenant shall be deemed
to have approved and confirmed all of the terms, certifications and
representation contained in such certificate, and Tenant irrevocably authorizes
and appoints Landlord as its attorney-in-fact to execute such certificate on
behalf of Tenant.
30. NOTICES. Each provision of this Lease or of any applicable
governmental laws, ordinances, regulations and other requirements with reference
to the sending, mailing or delivery of any notice or the making of any payment
by Landlord to Tenant or with reference to the sending, mailing or delivery or
the making of any payment by Tenant to Landlord shall be deemed to be complied
with when and if the following steps are taken:
(a) All rent and other payments required to be made by Tenant to
Landlord hereunder shall be payable to Landlord at the address for Landlord set
forth below or at such other address an Landlord may specify from time to time
by written notice delivered in accordance herewith. Tenant's obligation to pay
rent and any other amounts to Landlord under the terms of this Lease shall not
be deemed satisfied until such rent or other amounts have been actually received
by Landlord.
<PAGE> 30
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(b) All payments required to be made by Landlord to Tenant
hereunder shall be payable to Tenant at the address set forth below, or at such
other address within the continental United States as Tenant may specify from
time to time by written notice delivered in accordance herewith.
(c) With the exception of subsection (a) above, any notice or
document required or permitted to be delivered hereunder shall be deemed to be
delivered (i) when delivered personally or (ii) whether actually received or
not, when deposited in the United States Mail, postage prepaid, registered or
certified mail, return receipt requested, addressed to the parties hereto at the
respective addresses set out below, or at such other address as they have
previously specified by written notice delivered in accordance herewith.
If to Landlord, at:
STATE OF CALIFORNIA PUBLIC EMPLOYEES RETIREMENT SYSTEM
c/o C.B. Commercial Real Estate Group, Inc.
11781 Lee Jackson Highway, Suite 200
Fairfax, Virginia 22030
with a copy to:
Edward R. Parker, Esquire
5511 Staples Mill Road
Richmond, Virginia 23228
and
Equitable Real Estate Investment Management, Inc.
1875 Eye Street, N.W., Suite 900
Washington, D.C. 20006
If to Tenant, prior to the Commencement Date, at:
Ronald R. Charnock, President
NPRI, Inc.
99 Canal Center, Suite 420
Alexandria, VA 22314
If to Tenant, after the Commencement Date, at:
The Premises
with a copy to:
Ben Cotten, Esq.
Cotten & Selfon
<PAGE> 31
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1899 L Street, N.W., 12th Floor
Washington, D.C. 20036
If and when included within the term "Landlord," as used in this instrument,
there are more than one person, firm or corporation, all shall jointly arrange
among themselves for their joint execution of such notice specifying some
individual at the specific address for the receipt of notices and payments to
Landlord; if and when included within the term Tenant, as used in this
instrument, there are more than one person, firm or corporation, all shall
jointly arrange among themselves for their joint execution of such notice
specifying some individual at some specific address within the continental
United States for the receipt of notices and payment to Tenant. All parties
included within the terms "Landlord" and "Tenant," respectively, shall be bound
by notices given in accordance with the provisions of this paragraph to the same
effect as if each had received such notice.
31. FORCE MAJEURE. Whenever a period of time is herein prescribed
for action to be taken by Landlord or Tenant or whenever Landlord or Tenant is
otherwise obligated to perform hereunder, neither Landlord nor Tenant shall be
liable or responsible for, and there shall be excluded from the computation for
any such period of time, any delays or failures to perform due to strikes,
riots, acts of God, shortages of labor or materials, war, governmental laws,
regulations or restrictions or any other causes of any kind whatsoever which are
beyond the reasonable control of that party; provided, however, that the failure
to pay any rent or additional rent hereunder, for any reason, shall not be
considered to be beyond the reasonable control of Tenant.
32 SEVERABILITY. If any clause or provision of this Lease in
illegal, invalid or unenforceable under present or future laws effective during
the Lease Term, then and in that event, the remainder of this Lease shall not be
affected thereby.
33. AMENDMENTS; WAIVER; BINDING EFFECT. The provisions of this Lease
may not be waived, altered, changed or amended, except by instrument in writing
signed by both parties hereto, and such instrument may be subject to the
approval of any mortgagees, and ground lessors of record. The acceptance of
Basic Rental, additional rent or other payments by Landlord, or the endorsement
or statement on any check, any letter accompanying any check or other tender of
Basic Rental, additional rent or other payment shall not be deemed an accord and
satisfaction or a waiver of any obligation of Tenant, regardless of whether
Landlord had knowledge of any breach of such obligation. The terms and
conditions contained in this Lease shall apply to, inure to the benefit of, and
be binding upon the parties hereto, and upon their respective successors in
interest and legal representatives, except an otherwise herein expressly
provided.
34. QUIET ENJOYMENT. Provided Tenant has performed all of the terms
and conditions of this Lease, including the payment of rent, to be performed by
Tenant, Tenant shall peaceably and quietly hold and enjoy the Premises for the
Lease Term, without hindrance from Landlord or others claiming through Landlord,
subject to the terms and conditions of this Lease
<PAGE> 32
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and to all mortgages, ground leases and other encumbrances to which this Lease
is subject and subordinate.
35. LIABILITY OF TENANT. If there is more than one Tenant, the
obligations hereunder imposed upon Tenant shall be joint and several. If there
in a guarantor of Tenant's obligations hereunder, the obligations hereunder
imposed upon Tenant shall be the joint and several obligations of Tenant and
such guarantor, and Landlord need not first proceed against Tenant before
proceeding against such guarantor nor shall any such guarantor be released from
its guaranty for any reason whatsoever, including without limitation any
extensions or renewals hereof, any amendments hereto, any waivers hereof or
failure to give such guarantor any notices hereunder.
36. LANDLORD LIABILITY. The liability of Landlord and all officers,
employees, shareholders, venturers or partners (general or limited) of Landlord
to Tenant for any default by Landlord under the terms of this Lease shall be
non-recourse and limited to the interest of Landlord in the Building, and
Landlord or any officer, employee, shareholder, venturer or partner (general or
limited) of Landlord shall have the right to sell or transfer all or any portion
of the Land or the Building to any third party, and upon any such sale or other
transfer of all of the Building or the Land, and the corresponding assignment of
this Lease, the previous Landlord shall have no further liability or obligation
to Tenant hereunder or otherwise.
37. CERTAIN RIGHTS RESERVED BY LANDLORD. Landlord shall have the
following rights, exercisable without notice, except as provided herein, and
without liability to Tenant for damage or injury to property, persons or
business and without effecting an eviction, constructive or actual, or
disturbance of Tenant's use or possession or giving rise to any claim or setoff
or abatement of rent or affecting any of Tenant's obligations hereunder:
(a) To change the name by which the Building is designated upon
four (4) months written notice to Tenant.
(b) To decorate and to make repairs, alterations, additions,
changes or improvements, whether structural or otherwise, in and about the
Building, or any part thereof, and for such purposes to enter upon the Premises
and, during the continuance of any such work, to temporarily close doors, entry
ways, public space and corridors in the Building, to interrupt or temporarily
suspend Building services and facilities and to change the arrangement and
location of entrances or passageways, doors and doorways, corridors, elevators,
stairs, toilets, or other public parts of the Building, so long as the Premises
are reasonably accessible.
(c) To grant to anyone the exclusive right to conduct any
business or render any service in or to the Building, provided such exclusive
right shall not operate to exclude Tenant from the use expressly permitted
herein.
(d) To take all such reasonable measures as Landlord may deem
advisable for the security of the Building and its occupants security of the
Building and its occupants, including without limitation, the search of all
persons entering or leaving the Building, the evacuation of the Building for
cause, suspected cause, or for drill purposes, the temporary denial
<PAGE> 33
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of access to the Building, and the closing of the Building after normal business
hours and on Saturdays, Sundays and holidays; subject, however, to Tenant's
right to admittance when the Building is closed after normal business hours
under such reasonable regulations as Landlord may prescribe from time to time
which may include, by way of example but not of limitation, that person entering
or leaving the Building, whether or not during normal business hours, identify
themselves to a security officer by registration or otherwise and that such
persons establish their right to enter or leave the Building.
38. FINANCIAL STATEMENTS. Tenant agrees to provide to Landlord within
14 days of request by Landlord but no more than once per year, the most recent
audited annual financial statements of Tenant, including balance sheets, income
statements, and financial notes ("Statements"). Tenant consents that Landlord
may release the Statements to Landlord's subsidiaries, affiliates, lenders,
advisors, joint venture partners, or potential purchasers of the property for
the purposes of evaluating Tenant's financial condition with respect to
performance under the Lease. Landlord agrees to keep the Statements confidential
and to not release the Statements to third parties except as set forth herein.
39. NOTICE TO LENDER. If the Premises or the Building or any part
thereof are at any time subject to a mortgage or a deed of trust or other
similar instrument and the Lease or the rentals are assigned to such mortgagee,
trustee or beneficiary and the Tenant is given written notice thereof, including
the post office address of such assignee, then Tenant shall not terminate this
Lease or abate rentals for any default on the part of Landlord without first
giving written notice by certified or registered mail, return receipt requested,
to such mortgagee, trustee, beneficiary and assignee, specifying the default in
reasonable detail, and affording such mortgagee, trustee, beneficiary and
assignee a reasonable opportunity to make performance, at its election, for and
on behalf of the Landlord.
40. MISCELLANEOUS.
(a) Any approval by Landlord and Landlord's architects and/or
engineers of any of Tenant's drawings, plans and specifications which are
prepared in connection with any construction of improvements in the Premises
shall not in any way be construed or operate to bind Landlord or to constitute a
representation or warranty of Landlord as to the adequacy or sufficiency of such
drawings, plans and specifications, or the improvements to which they relate, or
any use, purpose, or condition, but such approval shall merely be the consent of
Landlord as may be required hereunder in connection with Tenant's construction
of improvements in the Premises in accordance with such drawings, plans and
specifications.
(b) Each and every covenant and agreement contained in this Lease
is, and shall be construed to be, a separate and independent covenant and
agreement.
(c) Neither Landlord nor Landlord's agents or brokers have made
any representations or promises with respect to the Premises, the Building or
the Land except as herein expressly set forth and no rights, easements or
licenses are acquired by Tenant by implication or otherwise except as expressly
set forth in the provisions of this Lease.
<PAGE> 34
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(d) Time is of the essence as to all provisions of this Lease
applicable to Tenant's obligations hereunder.
(e) The submission of this Lease to Tenant shall not be construed
as an offer, nor shall Tenant have any rights with respect thereto unless and
until Landlord shall, or shall cause its managing agent to, execute a copy of
this Lease and deliver the same to Tenant.
41. ADDITIONAL RENT. The Tenant shall pay as additional rent any
money required to be paid pursuant to the provisions of this Lease. If such
amounts or charges are not paid at the time provided in this Lease, they shall
nevertheless, if not paid when due, be collectable as additional rent with the
next installment of rent thereafter falling due hereunder, but nothing herein
contained shall be deemed to suspend or delay the payment of any amount of money
or charge at the time the same becomes due and payable hereunder, or limit any
other remedy of the Landlord.
42. ENTIRE AGREEMENT. The Lease contains all covenants and agreements
between Landlord and Tenant relating in any manner to the rent, use and
occupancy of Premises and Tenant's use of the Building and other matters set
forth in this Lease. No prior agreement or understanding pertaining to the same
shall be valid or of any force or effect and the covenants and agreements of
this Lease shall not be altered, modified or added to except in writing signed
by Landlord and Tenant.
43. LEGAL PROCEEDINGS. Landlord and Tenant hereby waive the right to
a jury trial in any action, proceeding or counterclaim between Tenant and
Landlord or their successors arising out of this Lease or Tenant's occupancy of
the Premises or Tenant's right to occupy the same.
44. LAWS AND REGULATIONS. Tenant agrees at Tenant's expense to
comply with all applicable laws, ordinances, rules, and regulations, whether now
in effect or hereafter enacted or promulgated, of any governmental entity or
agency having jurisdiction of the Premises.
45. AMERICANS WITH DISABILITIES ACT ("ADA")
(a) Tenant hereby represents that it is not a public
accommodation, as defined in the ADA.
(b) The Landlord shall take whatever steps are necessary to cause
the common areas of the building to meet the requirements of Title III of the
ADA.
(c) The Tenant at its sole cost and expense shall be solely
responsible for taking any and all measures which are required to comply with
the requirements of Title I and/or Title III of the ADA within the Premises and,
if the measures required outside of the Premises are attributable to Tenant's
alterations to the Premises, outside of the Premises as well. Any Alterations to
the Premises made by Tenant for the purpose of complying with the ADA or which
otherwise require compliance with the ADA shall be done in accordance with this
Lease;
<PAGE> 35
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provided, however, that Landlord's consent to such Alterations shall not
constitute either Landlord's assumption, in whole or in part, of Tenant's
representation or confirmation by Landlord that such Alterations comply with the
provisions of the ADA.
(d) Tenant shall indemnify the Landlord for all claims, damages,
judgments, penalties, fines, administrative proceedings, costs, expenses and
liability arising from Tenant's failure to comply with any of the requirements
of Title I and/or Title III of the ADA within the Premises.
(e) Landlord shall indemnify the Tenant for all claims, damages,
judgments, penalties, fines, administrative proceedings, cost, expenses and
liability arising from Landlord's failure to comply with Title III of the ADA
within the common areas.
46. ENVIRONMENTAL PROTECTIONS.
(a) Notwithstanding the generality of Section 9 above, Tenant
shall conduct all activity in compliance with all federal, state, and local
laws, statutes, ordinances, rules, regulations, orders and requirements of
common law concerning protection of the environment or human health
("Environmental Laws"). Tenant shall also cause its subtenants (if subtenants
are permitted by this Lease or are hereafter approved by Landlord), licensees,
invitees, agents, contractors, subcontractors and employees to comply with all
Environmental Laws. Tenant and its permitted subtenants, licensees, invitees,
agents, contractors, and subcontractors shall obtain, maintain, and comply with
all necessary environmental permits, approvals, registrations and licenses.
In addition to and not in limitation of the foregoing, Tenant,
its permitted subtenants, licensees, invitees, agents contractors,
subcontractors and employees shall not generate, refine, produce, transfer,
process or transport Hazardous Material on, above, beneath or near the Premises,
the Building or the Land. As used herein, the term "Hazardous Materials" shall
include, without limitation, all of the following: (1) hazardous substances, as
such term is defined in the Comprehensive Environmental Response, Compensation
and Liability Act ("CERCLA"), 42 U.S.C. Section 9601 (14), as amended by the
Superfund Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499, 100
Stat. 1613 (Oct. 17, 1986) ("SARA"); (2) regulated substances, within the
meaning of Title I of the Resource Conservation and Recovery Act, 42 U.S.C.
Sections 6991-6991(i), as amended by SARA; (3) any element, compound or material
which can pose a threat to the public health or the environment when released
into the environment; (4) hazardous waste as defined in the Virginia Waste
Management Act, Title 10.1, Chapter 14 of the Code of Virginia; (5) petroleum
and petroleum byproducts; (6) an object or material which is contaminated with
any of the foregoing; (7) any other substance designated by any of the
Environmental Laws or a federal, state or local agency as detrimental to public
health, safety and the environment.
(b) Tenant shall protect, indemnify and save Landlord harmless
from and against any and all liability, loss, damage, cost or expense (including
reasonable attorneys' fees) that Landlord may suffer or incur as a result of any
claims, demands, damages, losses, liabilities, costs, charges, suits, orders,
judgments or adjudications asserted, assessed, filed, or entered
<PAGE> 36
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against Landlord or any of the Building or the Land, by any third party,
including, without limitation, any governmental authority, arising from Tenant's
breach of Environmental Laws or otherwise arising from the alleged generation,
refining, production, storage, handling, use, transfer, processing,
transportation, release, spillage, pumping, pouring, emission, emptying,
dumping, discharge or escape of Hazardous Materials on, from or affecting the
Premises, the Building or the Land, including, without limitation, liability for
costs and expenses of abatement, correction, clean-up or other remedy, fines,
damages, response (including death) and property damage.
(c) Tenant, its permitted subtenants, licensees, invitees,
agents, contractors, subcontractors and employees shall not release, spill,
pump, pour, emit, empty, dump or otherwise discharge or allow to escape
Hazardous Materials onto the Land or Building, and Tenant shall take all action
necessary to remedy the results of any such release, spillage, pumping, pouring,
emission, emptying, dumping, discharge, or escape.
(d) Tenant shall within 48 hours of receipt deliver to Landlord
copies of any written communication relating to the Building or the Land between
Tenant and any governmental agency or instrumentality concerning or relating to
Environmental Laws.
47. PARKING. Tenant, its permitted subtenants, licensees, invitees,
agents, contractors, subcontractors and employees shall not use parking spaces
on the Land or Building in excess of that number set out on the attached Data
Sheet which has been reasonably determined by Landlord to be Tenant's
proportionate share of the total parking spaces available on the Building and
Land. Notwithstanding anything contained herein, if any governmental regulation
or ordinance is enacted or amended after the effective date of this Lease so as
to allow or require a modification in Tenant's number of parking spaces,
Landlord reserves the right to make such modification without modifying in any
way the rent due hereunder or any other obligations of Tenant. Should Tenant
exercise its rights to lease Additional Space, pursuant to Section 48 below,
Tenant shall also be entitled to additional parking spaces, pursuant to the
ratio contained in subparagraph (m) of the Data Sheet.
48. RIGHT OF FIRST OFFER. Tenant shall have the first right to lease
up to 10,000 square feet on the second (2nd) floor of the Building (the
"Additional Space,), provided:
(a) This right of first offer is subordinate to the rights of (i)
the current tenant(s) in the Additional Space to renew, extend or otherwise
negotiate a new lease for the Additional Space; (ii) the rights of all future
tenants in such space, to renew or extend their leases; and (iii) the rights of
existing tenants to the Additional Space as of the date of execution of this
Lease;
(b) Tenant is not in default under this Lease, either at the time
the Additional Space becomes available or at the time Tenant is to take
occupancy of the Additional Space;
(c) Landlord has made a good faith determination that Tenant
remains creditworthy;
<PAGE> 37
-34-
(d) Tenant must lease all of the Additional Space offered;
(e) Tenant exercises its option as provided in this Section by
delivering to Landlord written notice of its Intention within five (5) business
days after Landlord has notified Tenant that the Additional space is available;
(f) All terms of the lease of the Additional Space shall be upon
those terms and conditions as are negotiated in good faith between the parties;
(f) Tenant executes an addendum or a new lease for the Additional
Space within twenty (20) days after Landlord's receipt of Tenant's notice to
lease the Additional Space; and
(g) This right of first offer shall be offered not more than once
in each nine (9) month period of the Lease Term.
Landlord may notify Tenant of the availability of the Additional
Space up to six (6) months prior to its availability. If Tenant fails to comply
with each of the above conditions within the time specified, then this right of
first offer will lapse and be of no further force and effect, and Landlord shall
have the right to lease all or any part of the Additional Space to a third party
under the same or any other terms and conditions, whether or not such terms and
conditions are more or less favorable than those offered to Tenant. This right
of first offer to lease the Additional Space is personal to Tenant and is
nontransferable.
49. OPTION TO RENEW. Tenant shall have the right to extend the term
of this Lease for one (1) additional five (5) year lease term (the "Renewal
Term"), upon the following conditions:
(a) Tenant is not in default under this Lease, either at the time
any notice hereunder is given, or at the time the Renewal Term is to commence;
(b) Landlord has made a good faith determination that Tenant
remains creditworthy;
(c) Tenant has delivered to Landlord notice of its intention to
exercise thin option, not less than 270 days prior to the end of the Lease Term;
(d) All lease terms for the Renewal Term shall be the same as in
this Lease, except that the Basic Rental and Landlord concessions, if any, for
the Renewal Term shall be negotiated in good faith between the parties; and
(e) If Landlord and Tenant fail to agree as to all terms and sign
an Addendum to the Lease extending the Lease term as provided in this Section at
least 180 days prior to the end of the lease term, then Tenant's right to extend
the term of this Lease shall lapse and Tenant's renewal option shall be of no
force and effect. The renewal option is personal to Tenant and is
nontransferable.
<PAGE> 38
-35-
50. TENANT ACCESS. Tenant shall have access to the Premises 24 hours
per day, 365 days per year. Landlord shall provide Tenant with a restricted
entry access system for after-hours access to the Building.
51. MOVING ALLOWANCE. To assist Tenant with the cost of its
relocation, Landlord shall provide Tenant with a moving allowance of $18,947.00
which shall be paid to Tenant within thirty (30) days of the Commencement Date.
The Moving Allowance is based upon square footage of 18,947 rentable square feet
and is subject to adjustment should the rentable square footage change.
52. TERMINATION OPTION. Tenant shall have the right to terminate the
Lease at the end of the sixtieth (60th) month of the lease term, provided: (a)
Tenant is not in default under the Lease either at the time notice is delivered
or on the proposed termination date; (b) Tenant delivers a written notice to
Landlord of its intention to terminate no later than the first day of the
fifty-second (52nd) month of the lease term; and (c) Tenant delivers to
Landlord, with the notice provided in (b), a payment in the amount of
$317,362.25.
53. INTERIOR SIGNAGE. See Rules and Regulations, attached hereto as
Exhibit C, Section 3.
54. EXHIBITS.
(i) Exhibit A - Outline of Premises
(ii) Exhibit B - Tenant Acceptance Letter
(iii) Exhibit C - Rules and Regulations
(iv) Exhibit D - Intentionally Omitted
(v) Exhibit E - Tenant Space Plan
IN WITNESS WHEREOF, the parties hereto have executed this Lease
and affixed their seals as of the date first above written.
Tenant:
WITNESS/ATTEST: NPRI, INC.
/s/ Catherine Keller By: /s/ Ronald Charnock (SEAL)
- -------------------- -------------------------
Name: Ronald Charnock
Title: President
<PAGE> 39
-36-
Landlord:
WITNESS/ATTEST: STATE OF CALIFORNIA PUBLIC
EMPLOYEES RETIREMENT SYSTEM
/s/ J. Stumpf By: Equitable Real Estate Investment
- ---------------------------- Management, Inc., as Advisor
By: /s/ Margaret S. Cleary (SEAL)
--------------------------------
Name: Margaret S. Cleary
Title: Agent/Attorney-in-fact
<PAGE> 40
EXHIBIT B
STATE OF CALIFORNIA PUBLIC EMPLOYEES RETIREMENT SYSTEM
c/o Equitable Real Estate Investment Management, Inc.
1875 Eye Street, N.W., Suite 900
Washington, DC 20006
The undersigned, by the execution of this letter, hereby confirms that
the Commencement Date of the Lease Term of that certain lease agreement (the
"Lease Agreement") by and between STATE OF CALIFORNIA PUBLIC EMPLOYEES
RETIREMENT SYSTEM (the "Landlord") and the undersigned (the "Tenant") is October
1, 1994, and Tenant hereby accepts delivery of the Premises and recognizes that
the Landlord has fulfilled all obligations regarding the delivery of the
Premises subject to any "punch list" items in the Tenant Plans which may not
have been completed. All capitalized terms not defined herein shall have the
meanings assigned to then in the Lease Agreement.
ACCEPTED AND AGREED to this 11th day of July, 1994.
TENANT:
NPRI, INC.
By: /s/ Ronald Charnock
----------------------------
Title: President
----------------------------
<PAGE> 41
EXHIBIT C
RULES AND REGULATIONS
---------------------
1. Sidewalks, doorways, vestibules, halls, stairways, and similar areas
shall not be obstructed nor shall refuse, furniture, boxes or other items be
placed therein by Tenant or its officers, agents, contractors and employees, or
used for any purpose other than ingress and egrees to and from the leased
premises, or for going from one part of the Building to another part of the
Building. Canvassing, soliciting and peddling in the Building or on the Land are
prohibited.
2. Plumbing fixtures and appliances shall be used only for the purposes
for which constructed, and no unsuitable material shall be placed therein.
3. No signs, directories, posters, advertisements, or notices shall be
painted or affixed on or to any of the windows or doors, or in corridors or
other parts of the Building, except, Shall be first approved in writing by
Landlord in its discretion. One building standard plaque will be prepared by
Landlord at Landlord's expense. No additional signs shall be posted without
Landlord's prior written consent as to location and form, and the cost of
preparing and posting such signs shall be borne solely by Tenant. Landlord shall
have the right to remove all unapproved signs without notice to Tenant, at the
expense of Tenant.
4. Tenant shall not do, or permit anything to be done in or about the
Building, or bring or keep anything therein, that will in any way increase the
rate of fire or other insurance on the Building, or on property kept therein or
otherwise increase the possibility of fire or other casualty.
5. Landlord shall have the power to prescribe the weight and position of
heavy equipment or objects which may overstress any portion of the floor. All
damage done to the Building by the improper placing of such heavy items will be
repaid at the sole expense of the responsible Tenant.
6. A Tenant shall notify the Building manager when safes or other heavy
equipment are to be taken in or out of the Building, and the moving shall be
done after written permission is obtained from Landlord on such conditions as
Landlord shall require. Any moving in or out of Tenant's equipment, furniture,
files, and/or fixtures shall be done only with prior written notice to Landlord,
and Landlord shall be entitled to prescribe the hours of such activity, the
elevators which shall be available for such activity and shall, in addition, be
entitled to place such other conditions upon Tenant's moving activities as
Landlord deems appropriate. Tenant shall bear all risk of loss relating to
damage incurred with respect to Tenant's property in the process of such a move,
and in addition, shall indemnify and hold Landlord harmless as to all losses,
damages, claims, causes of action, costs and/or expenses relating to personal
injury or property damage sustained by Landlord or any third party on account of
Tenant's moving activities.
7. Corridor doors, when not in use, shall be kept closed.
<PAGE> 42
8. All deliveries must be made via the service entrance and elevators,
designated by Landlord for service, if any, during Landlord's normal operating
hours. Landlord's written approval must be obtained for any delivery after
normal working hours.
9. Each Tenant shall cooperate with Landlord's employees in keeping the
leased Premises neat and clean.
10. Tenant shall not cause or permit any improper noises in the
Building, or allow any unpleasant odors to emanate from the leased Premises, or
otherwise interfere, injure or annoy in any way other tenants, or persona having
business with then.
11. No animals shall be brought into or kept in or about the Building.
12. No boxes, crates or other such materials shall be stored in hallways
or other common areas. When Tenant must dispose of crates, boxes, etc., it will
be the responsibility of Tenant to dispose of same prior to, or after the hours
of 7:30 a.m. and 6:30 p.m., respectively, so as to avoid having such debris
visible in the common areas during normal business hours.
13. No machinery of any kind, other than ordinary office machines such
as copiers, typewriters and PC's shall be operated on the leased Premises
without the prior written consent of Landlord, nor shall Tenant use or keep in
the Building any inflammable or explosive fluid or substance (including
Christmas trees or ornaments), or any illuminating materials, except candles. No
space heaters or fans shall be operated in the Building.
14. No bicycles, motorcycles or similar vehicles will be allowed in the
Building.
15. Any wall damage deemed by Building management to be excessive from
nails, screws, hooks, etc. shall be repaired by Tenant when requested by
Landlord. Nothing shall be affixed to, or made to hang from the ceiling of the
Premises without Landlord's prior written consent.
16. Landlord has the right to evacuate the Building in the event of fire
alarms, emergency or catastrophe.
17. No food and/or beverages shall be distributed from Tenant's office
without the prior written approval of the management of the Building.
18. No additional locks shall be placed upon any doors without the prior
written consent of Landlord. All necessary keys shall be furnished by Landlord,
and the same shall be surrendered upon termination of this Lease, and Tenant
shall then give Landlord or his agent an explanation of the combination of any
locks on the doors or vaults. Tenant shall initially be given two (2) keys to
the Premises by Landlord. No duplicates of such keys shall be made by Tenant.
Additional keys shall be obtained only from Landlord, at a fee to be determined
by Landlord.
C-2
<PAGE> 43
19. Tenant will not locate furnishings or cabinets adjacent to
mechanical or electrical access panels so as to prevent operating personnel from
servicing such units as routine or emergency access may require. Cost of moving
such furnishings for Landlord's access will be for Tenant's account. The
lighting and air conditioning equipment of the Building will remain the
exclusive charge of the Building designated personnel.
20. Tenant shall comply with parking rules and regulations as may be
posted and distributed from time to time.
21. No portion of the Building shall be used for the purposes of lodging
rooms.
22. Vending machines or dispensing machines of any kind will not be
placed in the leased Premises by Tenant without prior written consent of
Landlord.
23. Prior written approval, which shall be at Landlord's sole
discretion, must be obtained for installation of window shades, blinds, drapes,
or any other window treatment of any kind whatsoever, other than building
standard mini blinds. Landlord will control all internal lighting that may be
visible from the exterior of the Building and shall have the right to change any
unapproved lighting, without notice to Tenant, at Tenant's expense.
24. No Tenant shall make any changes or alterations to any portion of
the Building without Landlord's prior written approval, which may be given on
such conditions as Landlord may elect. All such work shall be done by Landlord
or by contractors and/or workmen approved by Landlord, working under Landlord's
supervision.
25. Tenant shall cooperate fully with all recycling programs of Landlord
and with any and all regulations, laws, etc. imposed on the Building by any
governmental body or Landlord's insurance carriers.
26. Landlord reserves the right to rescind any of these rules and make
such other and further rules and regulations as in its judgment shall from time
to time be needful for the operation of the Building, which rules shall be
binding upon each Tenant upon delivery to such Tenant of notice thereof in
writing.
C-3
<PAGE> 44
LEASE AMENDMENT
This Amendment to Lease Agreement (the "Amendment") is made this 31st
day of October, 1995, between The State of California Public Employees'
Retirement System ("Landlord"), and NPRI, Inc. ("Tenant").
WHEREAS, Landlord and Tenant entered into a Lease Agreement dated July
10, 1994 (the "Lease"), for premises containing approximately 18,947 rentable
square feet of space known as Suite 600 (the "Premises"), in the office building
located at 11781 Lee Jackson Memorial Highway, Fairfax, Virginia (the
"Building"); and
WHEREAS, the Lease commenced on October 1, 1994, and is scheduled to
expire on September 30, 2004; and
WHEREAS, Landlord and Tenant wish to amend the Lease to expand the
Premises leased by Landlord to Tenant in the Building, all on the terms
hereinafter contained.
NOW, THEREFORE, in consideration of the foregoing, and other good and
valuable consideration, the receipt and sufficiency of which are acknowledged by
the parties, the parties agree as follows:
1. EXPANSION PREMISES. Landlord hereby demises and leases to Tenant and
Tenant hereby leases and accepts from Landlord, for a term and upon the
conditions hereinafter provided, an additional two thousand four hundred nine
(2,409) rentable square feet of space on the third (3rd) floor of the Building,
outlined on the floor plan attached hereto and incorporated herein by reference
as Exhibit A (the "Expansion Premises").
2. EXPANSION PREMISES TERM. The Lease for the Expansion Premises will
commence on November 1, 1995, and expire in accordance with the terms of the
Lease.
3. EXPANSION PREMISES BASIC RENTAL. Tenant shall pay Landlord Basic
Rental for the Expansion Premises during the Lease Term, in legal tender, at
Landlord's office, the annual sum of thirty-five thousand five hundred
thirty-two and 75/100 dollars ($35,532.75), payable in equal monthly sums of two
thousand nine hundred sixty-one and 06/100 dollars ($2,961.06), in advance,
promptly on the first day of each calendar month of the Lease Term, without
notice or demand, the same being hereby waived, and without any setoff,
deduction, or recoupment whatsoever. The first unabated month's installment of
Expansion Premises Basic Rental shall be due and payable upon execution of this
Amendment. The Expansion Premises Basic Rental provided in this paragraph shall
be in addition to any other rent due to the Landlord under the Lease with
respect to the Premises. Notwithstanding the foregoing, Landlord agrees to abate
the first four (4) full months of Expansion Premises Basic Rental.
<PAGE> 45
<TABLE>
4. ESCALATION IN BASIC RENTAL FOR EXPANSION PREMISES. The Expansion
Premises Basic Rental shall increase each year, effective on October 1, by an
amount equal to three percent (3%) of the escalated Expansion Premises Basic
Rental then in effect. In addition to the foregoing, the Expansion Premises
Basic Rental shall increase by $1.50 per rentable square foot in year 6 of the
original Lease Term. The Basic Rental for the Expansion Premises is payable as
follows:
<CAPTION>
YEAR ANNUALIZED RENT MONTHLY RENT
---- --------------- ------------
<S> <C> <C>
11/95 - 9/96 $35,532.75 $2,961.06
10/96 - 9/97 $36,598.73 $3,049.89
10/97 - 9/98 $37,696.69 $3,141.39
10/98 - 9/99 $38,827.60 $3,235.63
10/99 - 9/00 $43,602.90 $3,633.58
10/00 - 9/01 $44,910.99 $3,742.58
10/01 - 9/02 $46,258.32 $3,854.86
10/02 - 9/03 $47,646.07 $3,970.51
10/03 - 9/94 $49,075.45 $4,089.62
</TABLE>
5. EXPANSION PREMISES OPERATING EXPENSES. Commencing on the Expansion
Premises Commencement Date, Tenant shall pay as additional rent, the amount by
which the per square foot Basic Cost for the Expansion Premises exceeds the Base
Year Stop ("Excess"), all as more fully provided in Section 8 of the Lease.
Tenant's pro rata share of any such costs or expenses shall be 1.87%. This pro
rata share is solely for the Expansion Premises, and is in addition to any pro
rata share to be paid by Tenant for the Premises.
6. TENANT IMPROVEMENTS. Tenant agrees to accept the Expansion Premises
in its "as-is" condition.
7. DEFINED TERMS. Except as otherwise expressly provided herein, all
defined terms shall have the same meanings as provided in the Lease.
8. HEADINGS. Headings contained in this Amendment are for convenience
only and are not substantive to the provisions of this Amendment.
9. LEASE TERMS RATIFIED. Except as otherwise expressly provided herein,
and unless inconsistent with the terms hereof, all other terms, conditions and
covenants of the Lease are hereby ratified and confirmed.
2
<PAGE> 46
IN WITNESS WHEREOF, the parties have executed this Amendment by affixing
their hands and seals as of the date noted above.
WITNESS/ATTEST: STATE OF CALIFORNIA PUBLIC
EMPLOYEES RETIREMENT SYSTEM
By: Equitable Real Estate Investment
Management Corp., its advisor
/s/ J. Stumpf By: /s/ Margaret S. Cleary (SEAL)
- ------------------------ -----------------------------------
Name: Margaret S. Cleary
----------------------------------------
Title: Vice President
----------------------------------------
WITNESS/ATTEST: NPRI, INC.
/s/ D. Yount By: /s/ Ronald Charnock (SEAL)
- ------------------------ -----------------------------------
Name: Ronald Charnock
----------------------------------------
Title: President
----------------------------------------
3
<PAGE> 1
EXHIBIT 10.6
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT (this "Agreement") is entered into as of
August 28, 1996, by and between SILICON VALLEY BANK, a California-chartered bank
("Bank") with its principal place of business at 3003 Tasman Drive, Santa Clara,
California 95054 and with a loan production office located at One Central Plaza,
11300 Rockville Pike, Suite 701, Rockville, Maryland 20852, doing business under
the name "Silicon Valley East" and VERSATILITY, INC., a corporation duly
organized under the laws of the State of Delaware and the Subsidiaries set forth
on the signature page hereto (collectively, "Borrower").
RECITALS
Borrower wishes to obtain credit from time to time from Bank, and Bank
desires to extend credit to Borrower. This Agreement sets forth the terms on
which Bank will advance credit to Borrower, and Borrower will repay the amounts
owing to Bank.
AGREEMENT
---------
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION
----------------------------
1.1 DEFINITIONS. As used in this Agreement, the following terms shall
have the following definitions:
"Accounts" means all presently existing and hereafter arising
accounts, contract rights, and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods (including, without limitation, the
licensing of software and other technology) or the rendering of services by
Borrower, whether or not earned by performance, and any and all credit
insurance, guaranties, and other security therefor, as well as all merchandise
returned to or reclaimed by Borrower and Borrower's Books relating to any of the
foregoing.
"Advance" or "Advances" means an advance under the Committed
Revolving Line.
"Affiliate" means, with respect to any Person, any Person that
owns or controls directly or indirectly such Person, any Person that controls or
is controlled by or is under common control with such Person, and each of such
Person's senior executive officers, directors, and partners.
"Bank Expenses" means all: reasonable costs or expenses (including
reasonable attorneys' fees and expenses) incurred in connection with the
preparation, negotiation, administration, and enforcement of the Loan Documents;
and Bank's reasonable attorneys' fees
<PAGE> 2
-2-
and expenses incurred in amending, enforcing or defending the Loan Documents,
whether or not suit is brought.
"Borrower's Books" means all of Borrower's books and records
including: ledgers; records concerning Borrower's assets or liabilities, the
Collateral, business operations or financial condition; and all computer
programs, or tape files, and the equipment, containing such information.
"Borrowing Base" has the meaning set forth in Section 2.1 hereof.
"Business Day" means any day that is not a Saturday, Sunday, or
other day on which banks in the State of California or Maryland are authorized
or required to close.
"Closing Date" means the date of this Agreement.
"Code" means the Virginia Uniform Commercial Code.
"Collateral" means the property described on Exhibit A attached
hereto.
"Committed Revolving Line" means Two Million Five Hundred Thousand
Dollars ($2,500,000).
"Contingent Obligation" means, as applied to any Person, any '
direct or indirect liability, contingent or otherwise, of that Person with
respect to (i) any indebtedness, lease, dividend, letter of credit or other
obligation of another, including, without limitation, any such obligation
directly or indirectly guaranteed, endorsed, co-made or discounted or sold with
recourse by that Person, or in respect of which that Person is otherwise
directly or indirectly liable; (ii) any obligations with respect to undrawn
letters of credit issued for the account of that Person; and (iii) all
obligations arising under any interest rate, currency or commodity swap
agreement, interest rate cap agreement, interest rate collar agreement, or other
agreement or arrangement designated to protect a Person against fluctuation in
interest rates, currency exchange rates or commodity prices; provided, however,
that the term "Contingent Obligation" shall not include endorsements for
collection or deposit in the ordinary course of business. The amount of any
Contingent Obligation shall be deemed to be an amount equal to the stated or
determined amount of the primary obligation in respect of which such Contingent
Obligation is made or, if not stated or determinable, the maximum reasonably
anticipated liability in respect thereof as determined by such Person in good
faith; provided, however, that such amount shall not in any event exceed the
maximum amount of the obligations under the guarantee or other support
arrangement.
"Current Assets" means, as of any applicable date, all amounts
that should, in accordance with GAAP, be included as current assets on the
consolidated balance sheet of Borrower and its Subsidiaries as at such date.
"Current Liabilities" means, as of any applicable date, all
amounts that should, in accordance with GAAP, be included as current liabilities
on the consolidated balance
<PAGE> 3
-3-
sheet of Borrower and its Subsidiaries, as at such date, plus, to the extent not
already included therein, all outstanding Advances and Term Loan Advances made
under this Agreement, including all Indebtedness that is payable upon demand or
within one year from the date of determination thereof unless such Indebtedness
is renewable or extendable at the option of Borrower or any Subsidiary to a date
more than one year from the date of determination, but excluding Subordinated
Debt.
"Daily Balance" means the amount of the Obligations owed at the
end of a given day.
"Eligible Accounts" means those Accounts that arise in the
ordinary course of Borrower's business that comply with all of Borrower's
representations and warranties to Bank set forth in Section 5.4; PROVIDED, that
standards of eligibility may be fixed and revised from time to time by Bank in
Bank's reasonable judgment and upon notification thereof to Borrower in
accordance with the provisions hereof. Unless otherwise agreed to by Bank,
Eligible Accounts shall not include the following:
(a) Accounts that the account debtor has failed to pay within
ninety (90) days of invoice date;
(b) Accounts with respect to an account debtor, fifty percent
(50%) of whose Accounts the account debtor has failed to pay within ninety (90)
days of invoice date;
(c) Accounts with respect to which the account debtor is an
officer, employee, or agent of Borrower;
(d) Accounts with respect to which goods are placed on
consignment, guaranteed sale, sale or return, sale on approval, bill and hold,
or other terms by reason of which the payment by the account debtor may be
conditional;
(e) Accounts with respect to which the account debtor is an
Affiliate (other than by virtue of being directly or indirectly under common
ownership or control with Borrower) of Borrower;
(f) Accounts with respect to which the account debtor does not
have its principal place of business in the United States, and Accounts arising
from products shipped to or services provided to branches or offices located in
the United States of any account debtor that does not have its principal place
of business in the United States;
(g) Accounts with respect to which the account debtor is a
federal, state, or local governmental entity or any department, agency, or
instrumentality thereof;
(h) Accounts with respect to which Borrower is liable to the
account debtor for goods sold or services rendered by the account debtor to
Borrower, but only to the extent of any amounts owing to the account debtor
against amounts owed to Borrower;
<PAGE> 4
-4-
(i) Accounts with respect to an account debtor, including
Subsidiaries and Affiliates, whose total obligations to Borrower exceed
twenty-five percent (25%) of all Accounts, to the extent such obligations exceed
the aforementioned percentage, except as approved in writing by Bank;
(j) Accounts with respect to which the account debtor disputes
liability or makes any claim with respect thereto as to which Bank believes, in
its sole discretion, that there may be a basis for dispute (but only to the
extent of the amount subject to such dispute or claim), or is subject to any
Insolvency Proceeding, or becomes insolvent, or goes out of business; and
(k) Accounts for which Bank reasonably determines the prospect
of collection to be materially impaired, based upon the nature of the account or
the financial condition of the account debtor.
"Equipment" means all present and future machinery, equipment,
tenant improvements, furniture, fixtures, vehicles, tools, parts and attachments
in which Borrower has any interest.
"ERISA" means the Employment Retirement Income Security Act of
1974, as amended, and the regulations thereunder.
"Exam Date" means the date on which Bank confirms in writing to
Borrower that it has conducted an exam of Borrower's Accounts, the results of
which are satisfactory to Bank in all respects.
"GAAP" means generally accepted accounting principles as in effect
from time to time.
"Indebtedness" means (a) all indebtedness for borrowed money or
the deferred purchase price of property or services, including without
limitation reimbursement and other obligations with respect to surety bonds and
letters of credit, (b) all obligations evidenced by notes, bonds, debentures or
similar instruments, (c) all capital lease obligations and (d) all Contingent
Obligations.
"Insolvency Proceeding" means any proceeding commenced by or
against any person or entity under any provision of the United States Bankruptcy
Code, as amended, or under any other bankruptcy or insolvency law, including
assignments for the benefit of creditors, formal or informal moratoria,
compositions, extension generally with its creditors, or proceedings seeking
reorganization, arrangement, or other relief.
"Inventory" means all present and future inventory in which
Borrower has any interest, including merchandise, raw materials, parts,
supplies, packing and shipping materials, work in process and finished products
intended for sale or lease or to be furnished under a contract of service, of
every kind and description now or at any time hereafter owned by
<PAGE> 5
-5-
or in the custody or possession, actual or constructive, of Borrower, including
such inventory as is temporarily out of its custody or possession or in transit
and including any returns upon any accounts or other proceeds, including
insurance proceeds, resulting from the sale or disposition of any of the
foregoing and any documents of title representing any of the above, and
Borrower's Books relating to any of the foregoing.
"Investment" means any beneficial ownership of (including stock,
partnership interest or other securities) any Person, or any loan, advance or
capital contribution to any Person.
"IRC" means the Internal Revenue Code of 1986, as amended, and the
regulations thereunder.
"Lien" means any mortgage, lien, deed of trust, charge, pledge,
security interest or other encumbrance.
"Loan Documents" means, collectively, this Agreement, the
Revolving Promissory Note, the Term Note, and any other agreement entered into
between Borrower and Bank in connection with this Agreement, all as amended or
extended from time to time.
"Material Adverse Effect" means a material adverse effect on (i)
the business operations or condition (financial or otherwise) of Borrower and
its Subsidiaries taken as a whole or (ii) the ability of Borrower to repay the
Obligations or otherwise perform its obligations under the Loan Documents.
"Revolving Maturity Date" means August 5, 1997.
"Negotiable Collateral" means all of Borrower's present and future
letters of credit of which it is a beneficiary, notes, drafts, instruments,
securities, documents of title, and chattel paper, and Borrower's Books relating
to any of the foregoing.
"Note" means the Revolving Promissory Note or the Term Note, and
"Notes" mean collectively the Revolving Promissory Note and the term Note.
"Obligations" means all debt, principal, interest, Bank Expenses
and other amounts owed to Bank by Borrower pursuant to the Note, this Agreement
or any other agreement, whether absolute or contingent, due or to become due,
now existing or hereafter arising, including any interest that accrues after the
commencement of an Insolvency Proceeding and including any debt, liability, or
obligation owing from Borrower to others that Bank may have obtained by
assignment or otherwise.
"Payment Date" means the fifth calendar day of each month.
"Periodic Payments" means all installments or similar recurring
payments that Borrower may now or hereafter become obligated to pay to Bank
pursuant to the terms and
<PAGE> 6
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provisions of any instrument, or agreement now or hereafter in existence between
Borrower and Bank.
"Permitted Indebtedness" means:
(a) Indebtedness of Borrower in favor of Bank arising under this
Agreement or any other Loan Document;
(b) Indebtedness existing on the Closing Date and disclosed in
the Schedule;
(c) Subordinated Debt;
(d) Indebtedness to trade creditors incurred in the ordinary
course of business; and
(e) Indebtedness in connection with any Permitted Liens.
"Permitted Investment" means:
(a) Investments existing on the Closing Date disclosed in the
Schedule; and
(b) (i) marketable direct obligations issued or unconditionally
guaranteed by the United States of America or any agency or any State thereof
maturing within one (1) year from the date of acquisition thereof, (ii)
commercial paper maturing no more than one (1) year from the date of creation
thereof and currently having the highest rating obtainable from either Standard
& Poor's Corporation or Moody's Investors Service, Inc., and (iii) certificates
of deposit maturing no more than one (1) year from the date of investment
therein issued by Bank.
<PAGE> 7
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"Permitted Liens" means the following:
(a) Any Liens existing on the Closing Date and disclosed in the
Schedule or arising under this Agreement or the other Loan Documents;
(b) Liens for taxes, fees, assessments or other governmental
charges or levies, either not delinquent or being contested in good faith by
appropriate proceedings, provided the same have no priority over any of Bank's
security interests;
(c) Liens (i) upon or in any equipment acquired or held by
Borrower or any of its Subsidiaries to secure the purchase price of such
equipment or indebtedness incurred solely for the purpose of financing the
acquisition of such equipment, or (ii) existing on such equipment at the time of
its acquisition, provided that the Lien is confined solely to the property so
acquired and improvements thereon, and the proceeds of such equipment;
(d) Liens incurred in connection with the extension, renewal or
refinancing of the indebtedness secured by Liens of the type described in
clauses (a) through (c) above, PROVIDED that any extension, renewal or
replacement Lien shall be limited to the property encumbered by the existing
Lien and the principal amount of the indebtedness being extended, renewed or
refinanced does not increase.
"Person" means any individual, sole proprietorship, partnership,
limited liability company, joint venture, trust, unincorporated organization,
association, corporation, institution, public benefit corporation, firm, joint
stock company, estate, entity or governmental agency.
"Prime Rate" means the variable rate of interest, per annum, most
recently announced by Bank, as its "prime rate," whether or not such announced
rate is the lowest rate available from Bank.
"Quick Assets" means, at any date as of which the amount thereof
shall be determined, the consolidated cash, cash-equivalents, accounts
receivable and investments, with maturities not to exceed ninety (90) days, of
Borrower determined in accordance with GAAP.
"Responsible Officer" means each of the Chief Executive Officer,
the Chief Financial Officer and the Controller of Borrower.
"Revolving Maturity Date" means August 5, 1997.
"Revolving Promissory Note" means that certain Revolving
Promissory Note of even date herewith in substantially the form of EXHIBIT E
hereto in the maximum principal amount of $2,500,000 from Borrower in favor of
Bank, together with all renewals, amendments, modifications and substitutions
therefore.
<PAGE> 8
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"Schedule" means the schedule of exceptions attached hereto.
"Subordinated Debt" means any debt incurred by Borrower that is
subordinated to the debt owing by Borrower to Bank on terms acceptable to Bank
(and identified as being such by Borrower and Bank).
"Subsidiary" means the Subsidiaries on the signature page of this
Agreement, together with any corporation or partnership in which (i) more than
50% of the partnership interests or (ii) more than fifty percent (50%) of the
stock of which by the terms thereof ordinary voting power to elect the Board of
Directors, managers or trustees of the entity shall, at the time as of which any
determination is being made, be owned by Borrower, either directly or through an
Affiliate.
"Tangible Net Worth" means at any date as of which the amount
thereof shall be determined, the consolidated total assets of Borrower and its
Subsidiaries, plus preferred stock of the Borrower and its Subsidiaries, MINUS,
without duplication, (i) the sum of any amounts attributable to (a) goodwill,
(b) intangible items such as unamortized debt discount and expense, patents,
trade and service marks and names, copyrights and research and development
expenses except prepaid expenses, and (c) all reserves not already deducted from
assets, and (ii) Total Liabilities.
"Term Loan" means a term loan in the principal amount of One
Million Dollars ($1,000,000).
"Term Loan Advance" means an advance under the Term Loan.
"Term Note" means the term note delivered by Borrower to Bank in
connection with the Term Loan in substantially the form of EXHIBIT F.
"Total Liabilities" means at any date as of which the amount
thereof shall be determined, all obligations that should, in accordance with
GAAP be classified as liabilities on the consolidated balance sheet of Borrower,
including in any event all Indebtedness, but specifically excluding Subordinated
Debt.
1.2 ACCOUNTING TERMS. All accounting terms not specifically defined
herein shall be construed in accordance with GAAP and all calculations made
hereunder shall be made in accordance with GAAP. When used herein, the terms
"financial statements" shall include the notes and schedules thereto.
<PAGE> 9
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2. LOAN AND TERMS OF PAYMENT
-------------------------
2.1 ADVANCES. Subject to and upon the terms and conditions of this
Agreement, Bank agrees to make Advances to Borrower in an aggregate amount not
to exceed the Committed Revolving Line or the Borrowing Base, whichever is less,
minus (i) the face amount of all outstanding Letters of Credit (including drawn
but unreimbursed Letters of Credit) and minus (ii) the Foreign Exchange. For
purposes of this Agreement, "Borrowing Base" shall mean from the date hereof
until the Exam Date an amount equal to seventy percent (70%) of Eligible
Accounts, and from the Exam Date until the Revolving Maturity Date an amount
equal to eighty percent (80%) of Eligible Accounts. Subject to the terms and
conditions of this Agreement, amounts borrowed pursuant to this Section 2.1 may
be repaid and reborrowed at any time during the term of this Agreement.
On the Closing Date, Borrower shall execute and deliver to Bank the
Revolving Promissory Note.
Whenever Borrower desires an Advance, Borrower will notify Bank by
facsimile transmission or telephone no later than 3:00 p.m., Washington, D.C.
time, on the Business Day that the Advance is to be made. Each such notification
shall be promptly confirmed by a Payment/Advance Form in substantially the form
of EXHIBIT B hereto. Bank is authorized to make Advances under this Agreement,
based upon instructions received from a Responsible Officer, or without
instructions if in Bank's discretion such Advances are necessary to meet
Obligations which have become due and remain unpaid. Bank shall be entitled to
rely on any telephonic notice given by a person who Bank reasonably believes to
be a Responsible Officer, and Borrower shall indemnify and hold Bank harmless
for any damages or loss suffered by Bank as a result of such reliance. Bank will
credit the amount of Advances made under this Section 2.1 to Borrower's deposit
account.
The Committed Revolving Line shall terminate on the Revolving Maturity
Date, at which time all Advances under this Section 2.1 and other amounts due
under this Agreement (except as otherwise expressly specified herein) shall be
immediately due and payable.
2.2 LETTERS OF CREDIT. (a) Subject to the terms and conditions of
this Agreement, Bank agrees to issue or cause to be issued letters of credit for
the account of Borrower in an aggregate face amount not to exceed (i) the lesser
of the Committed Revolving Line or the Borrowing Base minus (ii) the then
outstanding principal balance of the Advances provided that the face amount of
outstanding Letters of Credit (including drawn but unreimbursed Letters of
Credit) and the total gross amount of all Exchange Contracts to which Borrower
is a party shall not in any case exceed in the aggregate One Million Dollars
($1,000,000). Each such letter of credit shall have an expiry date no later than
the Revolving Maturity Date. All such letters of credit shall be, in form and
substance, acceptable to Bank in its sole discretion and shall be subject to the
terms and conditions of Bank's form of application and letter of credit
agreement.
<PAGE> 10
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(b) The obligation of Borrower to immediately reimburse Bank for
drawings made under Letters of Credit shall be absolute, unconditional and
irrevocable, and shall be performed strictly in accordance with the terms of
this Agreement and such Letters of Credit, under all circumstances whatsoever.
Borrower shall indemnify, defend and hold Bank harmless from any loss, cost,
expense or liability, including, without limitation, reasonable attorneys' fees,
arising out of or in connection with any letters of credit.
2.3 FOREIGN EXCHANGE CONTRACT; FOREIGN EXCHANGE SETTLEMENTS. (a)
Subject to the terms of this Agreement, Borrower may utilize up to $1,000,000
for foreign exchange contracts (the "Exchange Contracts"), pursuant to which
Bank shall sell to or purchase from Borrower foreign currency on a spot or
future basis. All Exchange Contracts must provide for delivery of settlement on
or before the Revolving Maturity Date. The limit available at any time shall be
reduced by the following amounts (the "Foreign Exchange Reserve") on each day
(the "Determination Date"): on all outstanding Exchange Contracts on which
delivery is to be effected or settlement allowed more than two business days
from the Determination Date, 10% of the gross amount of the Exchange Contracts;
plus on all outstanding Exchange Contracts on which delivery is to be effected
or settlement allowed within two business days after the Determination Date,
100% of the gross amount of the Exchange Contracts. In lieu of the Foreign
Exchange Reserve for 100% of the gross amount of any Exchange Contract, Borrower
may request that Bank treat such amount as an advance under the Committed
Revolving Line.
(b) Bank may, in its discretion, terminate the Exchange
Contracts at any time (a) that an Event of Default occurs or (b) that there is
no sufficient availability under the Committed Revolving Line and Borrower does
not have available funds in its bank account to satisfy the Foreign Exchange
Reserve. If Bank terminates the Exchange Contracts, and without limitation of
any applicable indemnities, Borrower agrees to reimburse Bank for any and all
fees, costs and expenses relating thereto or arising in connection therewith.
(c) Borrower shall not permit the face amount of outstanding
Letters of Credit (including drawn but unreimbursed Letters of Credit) and the
total gross amount of all Exchange Contracts on which delivery is to be effected
and settlement allowed in any two business day period to be more than $1,000,000
nor shall Borrower permit the face amount of outstanding Letters of Credit
(including drawn but unreimbursed Letters of Credit) and the total gross amount
of all Exchange Contracts to which Borrower is a party, outstanding at any one
time, to exceed $1,000,000.
(d) Borrower shall execute all standard form applications and
agreements of Bank in connection with the Exchange Contracts and, without
limiting any of the terms of such applications and agreements, Borrower will pay
all standard fees and charges of Bank in connection with the Exchange Contracts.
2.4 Term Loan.
---------
(a) At any time from the date hereof through April 30, 1997
(the "Term Loan Availability End Date"), Borrower may from time to time request
advances (each a
<PAGE> 11
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"Term Loan Advance" and collectively, the "Term Loan Advances") from Bank in an
aggregate amount not to exceed One Million Dollars ($1,000,000). Amounts
borrowed pursuant to this Section 2.4 may not be readvanced.
All Term Loan Advances made prior to the Term Loan Availability End
Date shall be evidenced by the Term Note ("Term Note") to be executed and
delivered by Borrower to Bank on the Closing Date. All Term Loan Advances shall
be repaid in accordance with the terms of the Term Note.
(c) Borrower shall deliver to Bank, at the time of each Term
Loan Advance an invoice for the Equipment to be purchased. The Term Loan
Advances shall be used by Borrower only to purchase Equipment and shall not
exceed ninety percent (90%) of the invoice amount of such Equipment approved
from time to time by Bank, excluding taxes, shipping, warranty charges, freight
discounts and installation expense. Software may, however, constitute up to
twenty five percent (25%) of the aggregate amount advanced under the Term Loan.
(d) Interest shall accrue from the date of each Term Loan
Advance at the rate specified in the Term Note and shall be payable monthly as
provided therein.
(e) When Borrower desires to obtain a Term Loan Advance,
Borrower shall notify Bank (which notice shall be irrevocable) by facsimile
transmission to be received no later than 1:00 p.m. Washington, D.C. time one
(1) Business Day before the day on which the Term Loan Advance is to be made.
Such notice shall be substantially in the form of EXHIBIT B. The notice shall be
signed by a Responsible Officer and include a copy of the invoice for the
Equipment to be financed.
2.5 Additional Terms.
----------------
(a) INTEREST RATE. All Advances and Term Loan Advances shall
bear interest, on the average Daily Balance, at the rate or rates set forth in
the Notes.
(b) DEFAULT RATE. All Obligations shall bear interest, from and
after the occurrence of an Event of Default, at a rate equal to five (5)
percentage points above the interest rate applicable immediately prior to the
occurrence of the Event of Default.
(c) PAYMENTS. Interest under each Note shall be due and payable
on the Payment Date of each month during the term thereof. Borrower hereby
authorizes Bank to debit any accounts with Bank, including, without limitation,
Account Number 3300018441for payments of principal and interest due on the
Obligations and any other amounts owing by Borrower to Bank. Bank will notify
Borrower of all debits which Bank makes against Borrower's accounts. Any such
debits against Borrower's accounts in no way shall be deemed a set-off. Any
interest not paid when due shall be compounded by becoming a part of the
Obligations, and such interest shall thereafter accrue interest at the rate then
applicable hereunder.
<PAGE> 12
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(d) COMPUTATION. In the event the Prime Rate is changed from
time to time hereafter, the applicable rate of interest under the Notes shall be
increased or decreased effective as of 12:01 a.m. on the day the Prime Rate is
changed, by an amount equal to such change in the Prime Rate. All interest
chargeable under the Loan Documents shall be computed on the basis of a three
hundred sixty (360) day year for the actual number of days elapsed.
2.6 CREDITING PAYMENTS. Prior to the occurrence of an Event of
Default, Bank shall credit a wire transfer of funds, check or other item of
payment to such deposit account or Obligation as Borrower specifies. After the
occurrence of an Event of Default, the receipt by Bank of any wire transfer of
funds, check, or other item of payment shall be immediately applied to
conditionally reduce Obligations, but shall not be considered a payment on
account unless such payment is of immediately available federal funds or unless
and until such check or other item of payment is honored when presented for
payment. Notwithstanding anything to the contrary contained herein, any wire
transfer or payment received by Bank after 10:00 a.m. Washington, D.C. time
shall be deemed to have been received by Bank as of the opening of business on
the immediately following Business Day. Whenever any payment to Bank under the
Loan Documents would otherwise be due (except by reason of acceleration) on a
date that is not a Business Day, such payment shall instead be due on the next
Business Day, and additional fees or interest, as the case may be, shall accrue
and be payable for the period of such extension.
2.7 FEES. Borrower shall pay to Bank the following:
(a) FACILITY FEE. A Facility Fee equal to Seventeen Thousand
Five Hundred Dollars ($17,500), $8,750 of which fee has already been paid and
the balance of which fee ($8,750) shall be due on the Closing Date and shall be
fully earned and non-refundable;
(b) FINANCIAL EXAMINATION AND APPRAISAL FEES. Bank's customary
fees and out-of-pocket expenses for Bank's examinations of Borrower's Accounts,
and for each appraisal of Collateral performed from time to time by Bank or its
agents; provided, however, that such examinations and appraisals shall be
conducted at reasonable times and upon reasonable notice and (so long as no
Event of Default has occurred hereunder) shall not be conducted at the
Borrower's expense more than once in a six-month period; and
(c) BANK EXPENSES. Upon demand from Bank, including, without
limitation, upon the date hereof, all Bank Expenses incurred through the date
hereof, including reasonable attorneys' fees and expenses, and, after the date
hereof, all Bank Expenses, including reasonable attorneys' fees and expenses,
appraisal fees, search fees, collection costs, recordation taxes, and filing
fees, as and when they become due.
2.8 ADDITIONAL COSTS. In case any law, regulation, treaty or
official directive or the interpretation or application thereof by any court or
any governmental authority charged with the administration thereof or the
compliance with any guideline or request of any central bank or other
governmental authority (whether or not having the force of law):
<PAGE> 13
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(a) subjects Bank to any tax with respect to payments of
principal or interest or any other amounts payable hereunder by Borrower or
otherwise with respect to the transactions contemplated hereby (except for taxes
on the overall net income of Bank imposed by the United States of America or any
political subdivision thereof);
(b) imposes, modifies or deems applicable any deposit insurance,
reserve, special deposit or similar requirement against assets held by, or
deposits in or for the account of, or loans by, Bank; or
(c) imposes upon Bank any other condition with respect to its
performance under this Agreement,
and the result of any of the foregoing is to increase the cost to Bank, reduce
the income receivable by Bank or impose any expense upon Bank with respect to
any loans, Bank shall notify Borrower thereof. Borrower agrees to pay to Bank
the amount of such increase in cost, reduction in income or additional expense
as and when such cost, reduction or expense is incurred or determined, upon
presentation by Bank of a statement of the amount and setting forth Bank's
calculation thereof, all in reasonable detail, which statement shall be deemed
true and correct absent manifest error.
2.9 TERM. Except as otherwise set forth herein, this Agreement shall
become effective on the Closing Date and, subject to Section 12.7, shall
continue in full force and effect for a term ending on the Revolving Maturity
Date. Notwithstanding the foregoing, Bank shall have the right to terminate its
obligation to make Advances or Term Loan Advances under this Agreement
immediately and without notice upon the occurrence and during the continuance of
an Event of Default. Notwithstanding termination, Bank's Lien on the Collateral
shall remain in effect for so long as any Obligations are outstanding.
3. CONDITIONS OF LOANS
-------------------
3.1 CONDITIONS PRECEDENT TO INITIAL ADVANCE. The obligation of Bank
to make the initial Advance or Term Loan Advance is subject to the condition
precedent that Bank shall have received, in form and substance satisfactory to
Bank, the following:
(a) this Agreement;
(b) the Revolving Promissory Note;
(c) the Term Note;
(d) a certificate of the Secretary of Borrower with respect to
incumbency and resolutions authorizing the execution and delivery of this
Agreement;
(e) an opinion of Borrower's counsel;
<PAGE> 14
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(g) financing statements (Forms UCC-1);
(h) insurance certificate;
(i) payment of the fees and Bank Expenses then due specified in
Section 2.7 hereof; and
(j) such other documents, and completion of such other matters,
as Bank may reasonably deem necessary or appropriate.
3.2 CONDITIONS PRECEDENT TO ALL ADVANCES. The obligation of Bank to
make each Advance or Term Loan Advance, including the initial Advance or Term
Loan Advance, is further subject to the following conditions:
(a) timely receipt by Bank of the Payment/Advance Form as
provided in Section 2.1; and
(b) the representations and warranties contained in Section 5
shall be true and correct in all material respects on and as of the date of such
Payment/Advance Form and on the effective date of each Advance or Term Loan
Advance as though made at and as of each such date, and no Event of Default
shall have occurred and be continuing, or would result from such Advance or Term
Loan Advance. The making of each Advance or Term Loan Advance shall be deemed to
be a representation and warranty by Borrower on the date of such Advance or Term
Loan Advance as to the accuracy of the facts referred to in this Section 3.2(b).
4. CREATION OF SECURITY INTEREST
-----------------------------
4.1 GRANT OF SECURITY INTEREST. Borrower grants and pledges to
Bank a continuing security interest in all presently existing and hereafter
acquired or arising Collateral in order to secure prompt repayment of any and
all Obligations and in order to secure prompt performance by Borrower of each of
its covenants and duties under the Loan Documents. Except as set forth in the
Schedule, such security interest constitutes a valid, first priority security
interest in the presently existing Collateral, and will constitute a valid,
first priority security interest in Collateral acquired after the date hereof.
Borrower acknowledges that Bank may place a "hold" on any Deposit Account
pledged as Collateral to secure the Obligations.
4.2 DELIVERY OF ADDITIONAL DOCUMENTATION REQUIRED. Borrower shall
from time to time execute and deliver to Bank, at the request of Bank, all
Negotiable Collateral, all financing statements and other documents that Bank
may reasonably request, in form satisfactory to Bank, to perfect and continue
perfected Bank's security interests in the Collateral and in order to fully
consummate all of the transactions contemplated under the Loan Documents.
4.3 RIGHT TO INSPECT. Bank (through any of its officers, employees,
or agents) shall have the right, upon reasonable prior notice, from time to time
during Borrower's usual
<PAGE> 15
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business hours, to inspect Borrower's Books and to make copies thereof and to
check, test, and appraise the Collateral in order to verify Borrower's financial
condition or the amount, condition of, or any other matter relating to, the
Collateral, provided that Bank shall use reasonable efforts so as not to
interfere with Borrower's business operations and provided further that so long
as no Event of Default has occurred and is continuing, Bank shall not conduct
such inspections or appraisals more than once in a six-month period.
5. REPRESENTATIONS AND WARRANTIES
------------------------------
Borrower represents and warrants as follows:
5.1 DUE ORGANIZATION AND QUALIFICATION. Borrower and each
Subsidiary is a corporation duly existing and in good standing under the laws of
its state of incorporation and qualified and licensed to do business in, and is
in good standing in, any state in which the conduct of its business or its
ownership of property requires that it be so qualified, except where a failure
to be so qualified would not have a Material Adverse Effect.
5.2 DUE AUTHORIZATION; NO CONFLICT. The execution, delivery, and
performance of the Loan Documents are within Borrower's powers, have been duly
authorized, and are not in conflict with nor constitute a breach of any
provision contained in Borrower's Articles of Incorporation or Bylaws, nor will
they constitute an event of default under any material agreement to which
Borrower is a party or by which Borrower is bound. Borrower is not in default
under any agreement to which it is a party or by which it is bound, which
default could have a Material Adverse Effect.
5.3 NO PRIOR ENCUMBRANCES. Borrower has good and indefeasible title
to the Collateral, free and clear of Liens, except for Permitted Liens.
5.4 BONA FIDE ELIGIBLE ACCOUNTS. The Eligible Accounts are bona fide
existing obligations. The property giving rise to such Eligible Accounts has
been delivered to the account debtor or to the account debtor's agent for
immediate shipment to and unconditional acceptance by the account debtor.
Borrower has not received notice of actual or imminent Insolvency Proceeding of
any account debtor that is included in any Borrowing Base Certificate as an
Eligible Account.
5.5 NAME; LOCATION OF CHIEF EXECUTIVE OFFICE. Except as disclosed
in the Schedule, Borrower has not done business under any name other than that
specified on the signature page hereof. The chief executive office of Borrower
is located at the address indicated in Section 10 hereof.
5.6 LITIGATION. Except as set forth in the Schedule, there are no
actions or proceedings pending by or against Borrower or any Subsidiary before
any court or administrative agency in which an adverse decision could have a
Material Adverse
<PAGE> 16
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Effect or a material adverse effect on Borrower's interest or Bank's security
interest in the Collateral. Borrower does not have knowledge of any such pending
or threatened actions or proceedings.
5.7 NO MATERIAL ADVERSE CHANGE IN FINANCIAL STATEMENTS. All
consolidated financial statements related to Borrower and any Subsidiary that
have been delivered by Borrower to Bank fairly present in all material respects
Borrower's consolidated financial condition as of the date thereof and
Borrower's consolidated results of operations for the period then ended. There
has not been a material adverse change in the consolidated financial condition
of Borrower since the date of the most recent of such financial statements
submitted to Bank.
5.8 SOLVENCY. Borrower is solvent and able to pay its debts
(including trade debts) as and when they mature.
5.9 REGULATORY COMPLIANCE. Borrower and each Subsidiary has met the
minimum funding requirements of ERISA with respect to any employee benefit plans
subject to ERISA. No event has occurred resulting from Borrower's failure to
comply with ERISA that is reasonably likely to result in Borrower's incurring
any liability that could have a Material Adverse Effect. Borrower is not an
"investment company" or a company "controlled" by an "investment company" within
the meaning of the Investment Company Act of 1940. Borrower is not engaged
principally, or as one of the important activities, in the business of extending
credit for the purpose of purchasing or carrying margin stock (within the
meaning of Regulations G, T and U of the Board of Governors of the Federal
Reserve System). To the best of Borrower's knowledge, Borrower has complied with
all the provisions of the Federal Fair Labor Standards Act. To best of
Borrower's knowledge, Borrower has not violated any statutes, laws, ordinances
or rules applicable to it, violation of which could have a Material Adverse
Effect.
5.10 ENVIRONMENTAL CONDITION. None of Borrower's or any Subsidiary's
properties or assets has ever been used by Borrower or any Subsidiary or, to the
best of Borrower's knowledge, by previous owners or operators, in the disposal
of, or to produce, store, handle, treat, release, or transport, any hazardous
waste or hazardous substance other than in accordance with applicable law; to
the best of Borrower's knowledge, none of Borrower's properties or assets has
ever been designated or identified in any manner pursuant to any environmental
protection statute as a hazardous waste or hazardous substance disposal site, or
a candidate for closure pursuant to any environmental protection statute; no
lien arising under any environmental protection statute has attached to any
revenues or to any real or personal property owned by Borrower or any
Subsidiary; and neither Borrower nor any Subsidiary has received a summons,
citation, notice, or directive from the Environmental Protection Agency or any
other federal, state or other governmental agency concerning any action or
omission by Borrower or any Subsidiary resulting in the releasing, or otherwise
disposing of hazardous waste or hazardous substances into the environment.
5.11 TAXES. Borrower and each Subsidiary has filed or caused to be
filed all tax returns required to be filed, and has paid, or has made adequate
provision for the payment of, all taxes reflected therein, except those being
contested in good faith and by appropriate proceedings.
<PAGE> 17
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5.12 SUBSIDIARIES. Borrower does not own any stock, partnership
interest or other equity securities of any Person, except for Permitted
Investments.
5.13 GOVERNMENT CONSENTS. To the best of its knowledge, Borrower and
each Subsidiary has obtained all consents, approvals and authorizations of, made
all declarations or filings with, and given all notices to, all governmental
authorities that are necessary for the continued operation of Borrower's
business as currently conducted.
5.14 FULL DISCLOSURE. No representation, warranty or other statement
made by Borrower in any certificate or written statement furnished to Bank
contains any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements contained in such certificates or
statements not misleading.
6. AFFIRMATIVE COVENANTS
---------------------
Borrower covenants and agrees that, until payment in full of all
outstanding Obligations, and for so long as Bank may have any commitment to make
an Advance or Term Loan Advance hereunder, Borrower shall do all of the
following:
6.1 GOOD STANDING. Borrower shall maintain its and each of its
Subsidiaries' corporate existence and good standing in its jurisdiction of
incorporation and maintain qualification in each jurisdiction in which the
failure to so qualify could have a Material Adverse Effect. Borrower shall
maintain, and shall cause each of its Subsidiaries to maintain, to the extent
consistent with prudent management of Borrower's business, in force all
licenses, approvals and agreements, the loss of which could have a Material
Adverse Effect.
6.2 GOVERNMENT COMPLIANCE. Borrower shall meet, and shall cause each
Subsidiary to meet, the minimum funding requirements of ERISA with respect to
any employee benefit plans subject to ERISA. Borrower shall comply, and shall
cause each Subsidiary to comply, with all statutes, laws, ordinances and
government rules and regulations to which it is subject, noncompliance with
which could have a Material Adverse Effect or a material adverse effect on the
Collateral or the priority of Bank's Lien on the Collateral.
6.3 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES. Borrower shall
deliver to Bank: (a) as soon as available, but in any event within twenty five
(25) days after the end of each month, a company prepared consolidated balance
sheet and income statement covering Borrower's consolidated operations during
such period, certified by an officer of Borrower reasonably acceptable to Bank;
(b) as soon as available, but in any event within ninety (90) days after the end
of Borrower's fiscal year, audited consolidated financial statements of Borrower
prepared in accordance with GAAP, consistently applied, together with an
unqualified opinion on such financial statements of an independent certified
public accounting firm reasonably acceptable to Bank; (c) promptly upon receipt
of notice thereof, a report of any legal actions pending or threatened against
Borrower or any Subsidiary that could result in damages or costs to
<PAGE> 18
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Borrower or any Subsidiary of One Hundred Thousand Dollars ($100,000) or more;
and (d) such budgets, sales projections, operating plans or other financial
information as Bank may reasonably request from time to time.
Within fifteen (15) days after the last day of each month, Borrower
shall deliver to Bank a Borrowing Base Certificate signed by a Responsible
Officer in substantially the form of EXHIBIT C hereto, together with aged
listings of accounts receivable and accounts payable.
Within twenty (25) days after the last day of each month, Borrower
shall deliver to Bank with the monthly financial statements a Compliance
Certificate signed by a Responsible Officer in substantially the form of EXHIBIT
D hereto.
Bank shall have a right from time to time hereafter to examine the
Collateral at Borrower's expense, provided that such examinations will be
conducted no more often than every six (6) months unless an Event of Default has
occurred and is continuing.
6.4 INVENTORY; RETURNS. Borrower shall keep all Inventory in good
and marketable condition, free from all material defects. Returns and
allowances, if any, as between Borrower and its account debtors shall be on the
same basis and in accordance with the usual customary practices of Borrower, as
they exist at the time of the execution and delivery of this Agreement. Borrower
shall promptly notify Bank of all returns and recoveries and of all disputes and
claims, where the return, recovery, dispute or claim involves more than Fifty
Thousand Dollars ($50,000).
6.5 TAXES. Borrower shall make, and shall cause each Subsidiary to
make, due and timely payment or deposit of all material federal, state, and
local taxes, assessments, or contributions required of it by law, and will
execute and deliver to Bank, on demand, appropriate certificates attesting to
the payment or deposit thereof; and Borrower will make, and will cause each
Subsidiary to make, timely payment or deposit of all material tax payments and
withholding taxes required of it by applicable laws, including, but not limited
to, those laws concerning F.I.C.A., F.U.T.A., state disability, and local,
state, and federal income taxes, and will, upon request, furnish Bank with proof
satisfactory to Bank indicating that Borrower or a Subsidiary has made such
payments or deposits; provided that Borrower or a Subsidiary need not make any
payment if the amount or validity of such payment is contested in good faith by
appropriate proceedings and is reserved against (to the extent required by GAAP)
by Borrower.
6.6 Insurance.
---------
(a) Borrower, at its expense, shall keep the Collateral insured
against loss or damage by fire, theft, explosion, sprinklers, and all other
hazards and risks, and in such amounts, as ordinarily insured against by other
owners in similar businesses conducted in the locations where Borrower's
business is conducted on the date hereof. Borrower shall also maintain insurance
relating to Borrower's ownership and use of the Collateral in amounts and of a
type that are customary to businesses similar to Borrower's.
<PAGE> 19
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(b) All such policies of insurance shall be in such form, with
such companies, and in such amounts as reasonably satisfactory to Bank. All such
policies of property insurance shall contain a lender's loss payable
endorsement, in a form satisfactory to Bank, showing Bank as an additional loss
payee thereof and all liability insurance policies shall show Bank as an
additional insured, and shall specify that the insurer must give at least twenty
(20) days notice to Bank before canceling its policy for any reason. Borrower
shall deliver to Bank certified copies of such policies of insurance and
evidence of the payments of all premiums therefor. All proceeds payable under
any such policy shall, at the option of Bank, be payable to Bank to be applied
on account of the Obligations.
6.7 PRINCIPAL DEPOSITORY. Borrower shall maintain its principal
depository and operating accounts with Bank.
6.8 LIQUIDITY. Borrower shall maintain, as of the last day of each
fiscal calendar quarter, a ratio of Quick Assets to Current Liabilities, less
deferred revenues of at least 1.5 to 1.0.
6.9 DEBT-TANGIBLE NET WORTH RATIO. Borrower shall maintain, as of
the last day of each fiscal calendar quarter, a ratio of Total Liabilities less
deferred revenues to Tangible Net Worth of not more than 1.2 to 1.0.
6.10 MINIMUM TANGIBLE NET WORTH Borrower shall maintain as of last
day of each fiscal calendar quarter, a Tangible Net Worth of not less than the
following amounts at the following times:
Closing Date through
April 29, 1997 $5,500,000;
April 30, 1997 and the greater of (i) $5,500,000 or
thereafter (ii) ninety
percent (90%) of
Tangible Net Worth
as reported by
Borrower for the
fiscal year then
ending.
6.11 MINIMUM DEBT SERVICE COVERAGE. Borrower shall maintain, tested
as of the last day of each of Borrower's fiscal calendar quarters for the four
(4) quarter period ending on that date, a ratio of net income, plus depreciation
and interest expense, less capitalized software, divided by the current portion
of long term debt, plus interest expense of at least 1.50 to 1.00.
6.12 TRADEMARKS. Borrower will continue to use its trademarks and
will file any and all renewals of its trademarks with the Patent and Trademark
Office of the United States and any State or local governmental agency, prior to
any Trademark lapsing.
<PAGE> 20
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6.13 NEWLY CREATED INTELLECTUAL PROPERTY. Borrower will promptly
notify Bank of all new trademark, patent and copyright registrations and
applications for registration now or hereafter filed by Borrower.
6.14 FURTHER ASSURANCES. At any time and from time to time Borrower
shall execute and deliver such further instruments and take such further action
as may reasonably be requested by Bank to effect the purposes of this Agreement.
7. NEGATIVE COVENANTS
------------------
Borrower covenants and agrees that, so long as any credit hereunder
shall be available and until payment in full of the outstanding Obligations or
for so long as Bank may have any commitment to make any Advances or Term Loan
Advances, Borrower will not do any of the following:
7.1 DISPOSITIONS. Convey, sell, lease, transfer or otherwise dispose
of (collectively, a "Transfer"), or permit any of its Subsidiaries to Transfer,
all or any part of its business or property, other than: (i) Transfers of
Inventory in the ordinary course of business; (ii) Transfers of non-exclusive
licenses and similar arrangements for the use of the property of Borrower or its
Subsidiaries; or (iii) Transfers of worn-out or obsolete Equipment.
7.2 CHANGE IN BUSINESS. Engage in any business, or permit any of its
Subsidiaries to engage in any business, other than the businesses currently
engaged in by Borrower and any business substantially similar or related thereto
(or incidental thereto), or suffer a material change in Borrower's ownership
(other than as a result of a public offering), management or directors. Borrower
will not, without thirty (30) days prior written notification to Bank, relocate
its chief executive office.
7.3 MERGERS OR ACQUISITIONS. Merge or consolidate, or permit any of
its Subsidiaries to merge or consolidate, with or into any other business
organization, or acquire, or permit any of its Subsidiaries to acquire, all or
substantially all of the capital stock or property of another Person, unless
Borrower gives Bank not less than ten days prior notice of said merger or
consolidation and said merger or consolidation is with a Person in a like or
same, business, the Responsible Officers of the resulting entity will be the
same as Borrower and after the completion of said merger or consolidation,
Borrower is in compliance with all of the material terms and conditions of this
Agreement.
7.4 INDEBTEDNESS. Create, incur, assume or be or remain liable with
respect to any Indebtedness, or permit any Subsidiary so to do, other than
Permitted Indebtedness.
7.5 ENCUMBRANCES. Create, incur, assume or suffer to exist any Lien
with respect to any of its property, or assign or otherwise convey any right to
receive income, including the sale of any Accounts, or permit any of its
Subsidiaries so to do, except for Permitted Liens.
<PAGE> 21
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7.6 DISTRIBUTIONS. Pay any dividends or make any other distribution
or payment on account of or in redemption, retirement or purchase of any capital
stock.
7.7 INVESTMENTS. Directly or indirectly acquire or own, or make any
Investment in or to any Person, or permit any of its Subsidiaries so to do,
other than Permitted Investments.
7.8 TRANSACTIONS WITH AFFILIATES. Directly or indirectly enter into
or permit to exist any material transaction with any Affiliate of Borrower
except for transactions that are in the ordinary course of Borrower's business,
upon fair and reasonable terms that are no less favorable to Borrower than would
be obtained in an arm's length transaction with a nonaffiliated Person.
7.9 SUBORDINATED DEBT. Make any payment in respect of any
Subordinated Debt, or permit any of its Subsidiaries to make any such payment,
except in compliance with the terms of such Subordinated Debt, or amend any
provision contained in any documentation relating to the Subordinated Debt
without Bank's prior written consent.
7.10 INVENTORY. Store the Inventory with a bailee, warehouseman, or
similar party unless Bank has received a pledge of the warehouse receipt
covering such Inventory. Except for Inventory sold in the ordinary course of
business and except for such other locations as Bank may approve in writing,
Borrower shall keep the Inventory only at the location set forth in Section 10
hereof and such other locations of which Borrower gives Bank prior written
notice and as to which Borrower signs and files a financing statement where
needed to perfect Bank's security interest.
7.11 COMPLIANCE. Become an "investment company" controlled by an
"investment company," within the meaning of the Investment Company Act of 1940,
or become principally engaged in, or undertake as one of its important
activities, the business of extending credit for the purpose of purchasing or
carrying margin stock, or use the proceeds of any Advance or Term Loan Advance
for such purpose. Fail to meet the minimum funding requirements of ERISA, permit
a Reportable Event or Prohibited Transaction, as defined in ERISA, to occur,
fail to comply with the Federal Fair Labor Standards Act or violate any law or
regulation, which violation could have a Material Adverse Effect or a material
adverse effect on the Collateral or the priority of Bank's Lien on the
Collateral, or permit any of its Subsidiaries to do any of the foregoing.
8. EVENTS OF DEFAULT
-----------------
Any one or more of the following events shall constitute an Event of
Default by Borrower under this Agreement:
<PAGE> 22
-22-
8.1 PAYMENT DEFAULT. If Borrower fails to pay, when due, any of the
Obligations.
8.2 COVENANT DEFAULT.
(a) If Borrower fails to perform any obligation under Sections
6.7, 6.8, 6.9, 6.10, or 6.11 or violates any of the covenants contained in
Article 7 of this Agreement; or
(b) If Borrower fails or neglects to perform, keep, or observe
any other material term, provision, condition, covenant, or agreement contained
in this Agreement, in any of the Loan Documents, or in any other present or
future agreement between Borrower and Bank and as to any default under such
other term, provision, condition, covenant or agreement that can be cured, has
failed to cure such default within ten (10) days after Borrower receives notice
thereof or any officer of Borrower becomes aware thereof; provided, however,
that if the default cannot by its nature be cured within the ten (10) day period
or cannot after diligent attempts by Borrower be cured within such ten (10) day
period, and such default is likely to be cured within a reasonable time, then
Borrower shall have an additional reasonable period (which shall not in any case
exceed thirty (30) days) to attempt to cure such default, and within such
reasonable time period the failure to have cured such default shall not be
deemed an Event of Default (provided that no Advances or Term Loan Advances will
be required to be made during such cure period);
8.3 MATERIAL ADVERSE CHANGE. If there (i) occurs a material adverse
change in the business, operations, or condition (financial or otherwise) of
Borrower, or (ii) is a material impairment of the prospect of repayment of any
portion of the Obligations or (iii) is a material impairment of the value or
priority of Bank's security interests in the Collateral;
8.4 ATTACHMENT. If any material portion of Borrower's assets is
attached, seized, subjected to a writ or distress warrant, or is levied upon, or
comes into the possession of any trustee, receiver or person acting in a similar
capacity and such attachment, seizure, writ or distress warrant or levy has not
been removed, discharged or rescinded or bonded over within ten (10) days, or if
Borrower is enjoined, restrained, or in any way prevented by court order from
continuing to conduct all or any material part of its business affairs, or if a
judgment or other claim becomes a lien or encumbrance upon any material portion
of Borrower's assets, or if a notice of lien, levy, or assessment is filed of
record with respect to any of Borrower's assets by the United States Government,
or any department, agency, or instrumentality thereof, or by any state, county,
municipal, or governmental agency, and the same is not paid within ten (10) days
after Borrower receives notice thereof, provided that none of the foregoing
shall constitute an Event of Default where such action or event is stayed or an
adequate bond has been posted pending a good faith contest by Borrower (provided
that no Advances or Term Loan Advances will be required to be made during such
cure period);
8.5 INSOLVENCY. If Borrower becomes insolvent, or if an Insolvency
Proceeding is commenced by Borrower, or if an Insolvency Proceeding is commenced
against Borrower and is not dismissed or stayed within ten (10) days (provided
that no Advances or Term Loan Advances will be made prior to the dismissal of
such Insolvency Proceeding);
<PAGE> 23
-23-
8.6 OTHER AGREEMENTS. If there is a default in any agreement to
which Borrower is a party with a third party or parties resulting in a right by
such third party or parties, whether or not exercised, to accelerate the
maturity of any Indebtedness in an amount in excess of One Hundred Thousand
Dollars ($100,000) or that could have a Material Adverse Effect;
8.7 SUBORDINATED DEBT. If Borrower makes any payment on account of
Subordinated Debt, except to the extent such payment is allowed under any
subordination agreement entered into with Bank;
8.8 JUDGMENTS. If a judgment or judgments for the payment of money
in an amount, individually or in the aggregate, of at least Fifty Thousand
Dollars ($50,000) shall be rendered against Borrower and shall remain
unsatisfied and unstayed for a period of ten (10) days (provided that no
Advances or Term Loan Advances will be made prior to the satisfaction or stay of
such judgment); or
8.9 MISREPRESENTATIONS. If any material misrepresentation or
material misstatement exists now or hereafter in any warranty or representation
set forth herein or in any certificate delivered to Bank by any Responsible
Officer pursuant to this Agreement or to induce Bank to enter into this
Agreement or any other Loan Document.
9. BANK'S RIGHTS AND REMEDIES
--------------------------
9.1 RIGHTS AND REMEDIES. Upon the occurrence and during the
continuance of an Event of Default, (after giving effect to any applicable grace
or cure periods) Bank may, at its election, without notice of its election and
without demand, do any one or more of the following, all of which are authorized
by Borrower:
(a) Declare all Obligations, whether evidenced by this
Agreement, by any of the other Loan Documents, or otherwise, immediately due and
payable (provided that upon the occurrence of an Event of Default described in
Section 8.5 all Obligations shall become immediately due and payable without any
action by Bank);
(b) Cease advancing money or extending credit to or for the
benefit of Borrower under this Agreement or under any other agreement between
Borrower and Bank;
(c) Demand that Borrower (i) deposit cash with Bank in an amount
equal to the amount of any Letters of Credit remaining undrawn, as collateral
security for the repayment of any future drawings under such Letters of Credit,
and Borrower shall forthwith deposit and pay such amounts, and (ii) pay in
advance all Letters of Credit fees scheduled to be paid or payable over the
remaining term of the Letters of Credit;
(d) Settle or adjust disputes and claims directly with account
debtors for amounts, upon terms and in whatever order that Bank reasonably
considers advisable;
<PAGE> 24
-24-
(e) Without further notice to or demand upon Borrower, make such
payments and do such acts as Bank considers necessary or reasonable to protect
its security interest in the Collateral. Borrower agrees to assemble the
Collateral if Bank so requires, and to make the Collateral available to Bank as
Bank may designate. Borrower authorizes Bank to enter the premises where the
Collateral is located, to take and maintain possession of the Collateral, or any
part of it, and to pay, purchase, contest, or compromise any encumbrance,
charge, or lien which in Bank's determination appears to be prior or superior to
its security interest and to pay all expenses incurred in connection therewith.
With respect to any of Borrower's owned premises, Borrower hereby grants Bank a
license to enter into possession of such premises and to occupy the same,
without charge, for up to one hundred twenty (120) days in order to exercise any
of Bank's rights or remedies provided herein, at law, in equity, or otherwise;
(f) Without further notice to Borrower set off and apply to the
Obligations any and all (i) balances and deposits of Borrower held by Bank, or
(ii) indebtedness at any time owing to or for the credit or the account of
Borrower held by Bank;
(g) Ship, reclaim, recover, store, finish, maintain, repair,
prepare for sale, advertise for sale, and sell (in the manner provided for
herein) the Collateral. Bank is hereby granted a license or other right, solely
pursuant to the provisions of this Section 9.1, to use, without charge,
Borrower's labels, patents, copyrights, rights of use of any name, trade
secrets, trade names, trademarks, service marks, and advertising matter, or any
property of a similar nature, as it pertains to the Collateral, in completing
production of, advertising for sale, and selling any Collateral and, in
connection with Bank's exercise of its rights under this Section 9.1, Borrower's
rights under all licenses and all franchise agreements shall inure to Bank's
benefit;
(h) Sell the Collateral at either a public or private sale, or
both, by way of one or more contracts or transactions, for cash or on terms, in
such manner and at such places (including Borrower's premises) as Bank
determines is commercially reasonable;
(i) Bank may credit bid and purchase at any public sale;
(j) Any deficiency that exists after disposition of the
Collateral as provided above will be paid immediately by Borrower; and
(k) Bank may enjoin Borrower from further use or licensing of
any name, trade secrets, trade names, trademarks, service marks, and advertising
matter, or any property of a similar nature, of Borrower.
9.2 POWER OF ATTORNEY. Effective only upon the occurrence and during
the continuance of an Event of Default (after giving effect to any applicable
grace or cure period), Borrower hereby irrevocably appoints Bank (and any of
Bank's designated officers, or employees) as Borrower's true and lawful attorney
to: (a) send requests for verification of Accounts or notify account debtors of
Bank's security interest in the Accounts; (b) endorse
<PAGE> 25
-25-
Borrower's name on any checks or other forms of payment or security that may
come into Bank's possession; (c) sign Borrower's name on any invoice or bill of
lading relating to any Account, drafts against account debtors, schedules and
assignments of Accounts, verifications of Accounts, and notices to account
debtors; (d) make, settle, and adjust all claims under and decisions with
respect to Borrower's policies of insurance; (e) settle and adjust disputes and
claims respecting the accounts directly with account debtors, for amounts and
upon terms which Bank determines to be reasonable; and (f) in furtherance of the
exercise of any of the Bank's rights and remedies set forth in Section 9.1
hereof, provided Bank may exercise such power of attorney to sign the name of
Borrower on any of the documents described in Section 4.2 regardless of whether
an Event of Default has occurred. The appointment of Bank as Borrower's attorney
in fact, and each and every one of Bank's rights and powers, being coupled with
an interest, is irrevocable until all of the Obligations have been fully repaid
and performed and Bank's obligation to provide advances hereunder is terminated.
9.3 ACCOUNTS COLLECTION. At any time after the occurrence of an
Event of Default, Bank may notify any Person owing funds to Borrower of Bank's
security interest in such funds and verify the amount of such Account. Borrower
shall collect all amounts owing to Borrower for Bank, receive in trust all
payments as Bank's trustee, and immediately deliver such payments to Bank in
their original form as received from the account debtor, with proper
endorsements for deposit.
9.4 BANK EXPENSES. If Borrower fails to pay any amounts or furnish
any required proof of payment due to third persons or entities, as required
under the terms of this Agreement, then Bank may do any or all of the following:
(a) make payment of the same or any part thereof; (b) set up such reserves under
the Committed Revolving Line as Bank deems necessary to protect Bank from the
exposure created by such failure; or (c) obtain and maintain insurance policies
of the type discussed in Section 6.6 of this Agreement, and take any action with
respect to such policies as Bank deems prudent. Any amounts so paid or deposited
by Bank shall constitute Bank Expenses, shall be immediately due and payable,
and shall bear interest at the then applicable rate hereinabove provided, and
shall be secured by the Collateral. Any payments made by Bank shall not
constitute an agreement by Bank to make similar payments in the future or a
waiver by Bank of any Event of Default under this Agreement.
9.5 BANK'S LIABILITY FOR COLLATERAL. So long as Bank complies with
reasonable banking practices, Bank shall not in any way or manner be liable or
responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage
thereto occurring or arising in any manner or fashion from any cause; (c) any
diminution in the value thereof; or (d) any act or default of any carrier,
warehouseman, bailee, forwarding agency, or other person whomsoever. All risk of
loss, damage or destruction of the Collateral shall be borne by Borrower.
9.6 REMEDIES CUMULATIVE. Bank's rights and remedies under this
Agreement, the Loan Documents, and all other agreements shall be cumulative.
Bank shall have all other rights and remedies not inconsistent herewith as
provided under the Code, by law, or in equity. No exercise by Bank of one right
or remedy shall be deemed an election, and no waiver by Bank of any Event of
Default on Borrower's part shall be deemed a continuing waiver. No delay by
<PAGE> 26
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Bank shall constitute a waiver, election, or acquiescence by it. No waiver by
Bank shall be effective unless made in a written document signed on behalf of
Bank and then shall be effective only in the specific instance and for the
specific purpose for which it was given.
9.7 DEMAND; PROTEST. Borrower waives demand, protest, notice of
protest, notice of default or dishonor, notice of payment and nonpayment, notice
of any default, nonpayment at maturity, release, compromise, settlement,
extension, or renewal of accounts, documents, instruments, chattel paper, and
guarantees at any time held by Bank on which Borrower may in any way be liable.
10. NOTICES
-------
Unless otherwise provided in this Agreement, all notices or demands
by any party relating to this Agreement or any other agreement entered into in
connection herewith shall be in writing and (except for financial statements and
other informational documents which may be sent by first-class mail, postage
prepaid) shall be personally delivered or sent by a recognized overnight
delivery service, certified mail, postage prepaid, return receipt requested, or
by telefacsimile to Borrower or to Bank, as the case may be, at its addresses
set forth below:
If to Borrower VerSatility, Inc.
11781 Lee Jackson Memorial Highway, Suite 600
Fairfax, Virginia 22033
Attn: Donald Yount
FAX: (703) 591-2992
If to Bank: Silicon Valley East
One Central Plaza
11300 Rockville Pike, Suite 701
Rockville, Maryland 20852
Attn: J. Frank Tower
Vice President
FAX: (301) 984-6282
With a Copy to: Silicon Valley Bank
3003 Tasman Drive
Santa Clara, California 95054
Attn: Loan Services
Fax: (408) 496-2426
The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to the
other.
<PAGE> 27
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11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER
------------------------------------------
This Agreement shall be governed by, and construed in accordance with,
the internal laws of the State of Maryland, without regard to principles of
conflicts of law. BORROWER ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS
PROPERTIES, UNCONDITIONALLY, THE NON-EXCLUSIVE JURISDICTION OF ANY STATE OR
FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE OF MARYLAND IN ANY ACTION,
SUIT, OR PROCEEDING OF ANY KIND, AGAINST IT WHICH ARISES OUT OF OR BY REASON OF
THIS AGREEMENT; PROVIDED, HOWEVER, THAT IF FOR ANY REASON BANK CANNOT AVAIL
ITSELF OF THE COURTS OF MARYLAND, BORROWER ACCEPTS JURISDICTION OF THE COURTS
AND VENUE IN SANTA CLARA COUNTY, CALIFORNIA. BORROWER AND BANK EACH HEREBY WAIVE
THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED
UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS
CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY
CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND
AGREES THAT THE FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO
ENTER INTO THIS AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS
REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND
VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL
COUNSEL.
12. GENERAL PROVISIONS
------------------
12.1 SUCCESSORS AND ASSIGNS. This Agreement shall bind and inure to
the benefit of the respective successors and permitted assigns of each of the
parties; PROVIDED, however, that neither this Agreement nor any rights hereunder
may be assigned by Borrower without Bank's prior written consent, which consent
may be granted or withheld in Bank's sole discretion. Bank shall have the right
without the consent of or notice to Borrower to sell, transfer, negotiate, or
grant participation in all or any part of, or any interest in, Bank's
obligations, rights and benefits hereunder.
12.2 INDEMNIFICATION. Borrower shall defend, indemnify and hold
harmless Bank and its officers, employees, and agents against: (a) all
obligations, demands, claims, and liabilities claimed or asserted by any other
party in connection with the transactions contemplated by this Agreement; and
(b) all losses or Bank Expenses in any way suffered, incurred, or paid by Bank
as a result of or in any way arising out of, following, or consequential to
transactions between Bank and Borrower whether under this Agreement, or
otherwise (including without limitation reasonable attorneys fees and expenses),
except for losses caused by Bank's gross negligence or willful misconduct.
12.3 TIME OF ESSENCE. Time is of the essence for the performance of
all obligations set forth in this Agreement.
<PAGE> 28
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12.4 SEVERABILITY OF PROVISIONS. Each provision of this Agreement
shall be severable from every other provision of this Agreement for the purpose
of determining the legal enforceability of any specific provision.
12.5 AMENDMENTS IN WRITING, INTEGRATION. This Agreement cannot be
amended or terminated orally. All prior agreements, understandings,
representations, warranties, and negotiations between the parties hereto with
respect to the subject matter of this Agreement, if any, are merged into this
Agreement and the Loan Documents.
12.6 COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by different parties on separate counterparts, each of which,
when executed and delivered, shall be deemed to be an original, and all of
which, when taken together, shall constitute but one and the same Agreement.
12.7 SURVIVAL. All covenants, representations and warranties made in
this Agreement shall continue in full force and effect so long as any
Obligations remain outstanding. The obligations of Borrower to indemnify Bank
with respect to the expenses, damages, losses, costs and liabilities described
in Section 12.2 shall survive until all applicable statute of limitations
periods with respect to actions that may be brought against Bank have run,
provided that so long as the obligations set forth in the first sentence of this
Section 12.7 have been satisfied, and Bank has no commitment to make any
Advances or Term Loan Advances or to make any other loans to Borrower, Bank
shall release all security interests granted hereunder and redeliver all
Collateral held by it in accordance with applicable law.
12.8 CONFIDENTIALITY. In handling any confidential information Bank
shall exercise the same degree of care that it exercises with respect to its own
proprietary information of the same types to maintain the confidentiality of any
non-public information thereby received or received pursuant to this Agreement
except that disclosure of such information may be made (i) to the subsidiaries
or affiliates of Bank in connection with their present or prospective business
relations with Borrower, (ii) to prospective transferees or purchasers of any
interest in the Loans, provided that they have entered into a comparable
confidentiality agreement in favor of Borrower and have delivered a copy to
Borrower, (iii) as required by law, regulations, rule or order, subpoena,
judicial order or similar order and (iv) as may be required in connection with
the examination, audit or similar investigation of Bank. Confidential
information hereunder shall not include information that either: (a) is in the
public domain or in the knowledge or possession of Bank when disclosed to Bank,
or becomes part of the public domain after disclosure to Bank through no fault
of Bank; or (b) is disclosed to Bank by a third party, provided Bank does not
have actual knowledge that such third party is prohibited from disclosing such
information.
12.9 COUNTERSIGNATURE. This Agreement shall become effective only
when it shall have been executed by Borrower and Bank (provided, however, in on
event shall this Agreement become effective until signed by and officer of Bank
in California).
<PAGE> 29
-29-
12.10 RIGHT OF CONTRIBUTION. Borrower and the Bank agree that on and
after the Closing Date, each Borrower (an "Entitled Borrower") shall be entitled
to contribution from each other Borrower to the extent, if any, that (a) an
Entitled Borrower incurs any Obligations in excess of such Entitled Borrowers
Net Valuation (as hereinafter defined) or (b) the Obligations incurred by such
Entitled Borrower would leave such Entitled Borrower with an unreasonably small
amount of capital to enable the Entitled Borrower to operate the business in
which it is engaged, and/or the Obligations incurred by such Entitled Borrower
prevent such Entitled Borrower from paying its debts as such debts mature;
provided, however, that such right of contribution shall be subordinated to the
payment of the Obligations and may not be exercised by any Borrower until all of
the Obligations have been paid in full. Nothing in this Section shall be deemed
to in any manner impair the joint and several liability of each Borrower for any
and all of the Obligations. The provisions of this Section shall be in addition
to and shall in no manner limit any other rights of contribution available to
any Borrower. The term "Net Valuation" as used in this Section means the amount
by which (1) an Entitled Borrower's property at a fair valuation exceeds (2)
such Entitled Borrower's debts.
<PAGE> 30
-30-
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
VERSATILITY, INC.
By: /s/ Ronald Charnock
-----------------------------------
Name: Ronald Charnock
Title:
NPRI, LTD
By: /s/ Ronald Charnock
-----------------------------------
Name: Ronald Charnock
Title:
SILICON VALLEY BANK, doing business as
SILICON VALLEY EAST
By: /s/ J. Frank Tower
-----------------------------------
Name: J. Frank Tower
Title: Vice President
SILICON VALLEY BANK
By: /s/ J. Christine Ware
-----------------------------------
Name: Christine Ware
Title: Vice President
(Signed in Santa Clara County,
California)
<PAGE> 31
-31-
EXHIBITS
--------
A. Description of Collateral
B. Loan/ Payment Advance Telephone Request Form
C. Borrowing Base Certificate
D. Compliance Certificate
E. Revolving Promissory Note
F. Term Note
<PAGE> 32
-32-
EXHIBIT A
The Collateral shall consist of all right, title and interest of Borrower in and
to the following:
(a) All goods and equipment now owned or hereafter acquired, including,
without limitation, all machinery, fixtures, vehicles (including motor
vehicles and trailers), and any interest in any of the foregoing, and
all attachments, accessories, accessions, replacements, substitutions,
additions, and improvements to any of the foregoing, wherever located;
(b) All inventory, now owned or hereafter acquired, including, without
limitation, all merchandise, raw materials, parts, supplies, packing
and shipping materials, work in process and finished products including
such inventory as is temporarily out of Borrower's custody or
possession or in transit and including any returns upon any accounts or
other proceeds, including insurance proceeds, resulting from the sale
or disposition of any of the foregoing and any documents of title
representing any of the above, and Borrower's Books relating to any of
the foregoing;
(c) All contract rights and general intangibles now owned or hereafter
acquired, including, without limitation, goodwill, trademarks,
servicemarks, trade styles, trade names, patents, patent applications,
leases, license agreements, franchise agreements, blueprints, drawings,
purchase orders, customer lists, route lists, infringements, claims,
computer programs, computer discs, computer tapes, literature, reports,
catalogs, design rights, income tax refunds, payments of insurance and
rights to payment of any kind;
(d) All now existing and hereafter arising accounts, contract rights,
royalties, license rights and all other forms of obligations owing to
Borrower arising out of the sale or lease of goods, the licensing of
technology or the rendering of services by Borrower, whether or not
earned by performance, and any and all credit insurance, guaranties,
and other security therefor, as well as all merchandise returned to or
reclaimed by Borrower and Borrower's Books relating to any of the
foregoing;
(e) All documents, cash, deposit accounts, securities, letters of credit,
certificates of deposit, instruments and chattel paper now owned or
hereafter acquired and Borrower's Books relating to the foregoing;
(f) All copyright rights, copyright applications, copyright registrations
and like protections in each work of authorship and derivative work
thereof, whether published or unpublished, now owned or hereafter
acquired; all trade secret rights, including all rights to unpatented
inventions, know-how, operating manuals, license rights and agreements
and confidential information, now owned or hereafter acquired; all mask
work or similar rights available for the protection of semiconductor
chips, now owned or hereafter acquired; all claims for damages by way
of any past, present and future infringement of any of the foregoing;
and
(g) Any and all claims, rights and interests in any of the above and all
substitutions for, additions and accessions to and proceeds thereof.
<PAGE> 33
-33-
EXHIBIT B
LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., E.S.T.
TO: CENTRAL CLIENT SERVICE DIVISION DATE:
FAX#: TIME:
FROM:
CLIENT NAME VERSATILITY, INC.
REQUESTED BY: __________________________________________________
AUTHORIZED SIGNATURE:
PHONE NUMBER:
FROM ACCOUNT # TO ACCOUNT #
REQUESTED TRANSACTION TYPE REQUEST DOLLAR AMOUNT
-----------------------------------------------------------------------
PRINCIPAL INCREASE (ADVANCE) $
PRINCIPAL PAYMENT (ONLY) $
INTEREST PAYMENT (ONLY) $
PRINCIPAL AND INTEREST (PAYMENT) $
OTHER INSTRUCTIONS:
All representations and warranties of Borrower stated in the Loan
Agreement are true, correct and complete in all material respects as of the date
of the telephone request for and Advance confirmed by this Borrowing
Certificate; provided, however, that those representations and warranties
expressly referring to another date shall be true, correct and complete in all
material respects as of such date.
<PAGE> 34
-34-
BANK USE ONLY
TELEPHONE REQUEST:
- ------------------
The following person is authorized to request the loan payment transfer/loan
advance on the advance designated account and is known to me.
Authorized Requester Phone # ( )
-----------------------------
Received By (Bank) Phone # ( )
-----------------------------
Authorized Signature (Bank)
<PAGE> 35
-35-
EXHIBIT C
BORROWING BASE CERTIFICATE
Borrower: VerSatility, Inc.
Bank: Silicon Valley Bank
Commitment Amount: $2,500,000
ACCOUNTS RECEIVABLE
1. Accounts Receivable Book Value as of $
------------
2. Additions (please explain on reverse) $
3. TOTAL ACCOUNTS RECEIVABLE $
ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication)
4. Amounts over 90 days due $
5. Balance of 50% over 90 day accounts $
6. Concentration Limits $
7. Foreign Accounts $
8. Governmental Accounts $
9. Contra Accounts $
10. Promotion or Demo Accounts $
11. Intercompany/Employee Accounts $
12. Other (please explain on reverse) $
13. TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS $
14. Eligible Accounts (#3 minus #13) $
15. LOAN VALUE OF ACCOUNTS (____% of #14) $
BALANCES
16. Maximum Loan Amount $2,500,000
----------
17. Total Funds Available (Lesser of #16 or #15) $
18. Present balance owing on Line of Credit $
19. Outstanding under Sublimits (Letters of Credit/
Foreign Exchange Contract ) $
20. RESERVE POSITION (#17 minus #18 and #19) $
The undersigned represents and warrants that the foregoing is true, complete and
correct, and that the information reflected in this Borrowing Base Certificate
complies with the representations and warranties set forth in the Loan and
Security Agreement between the undersigned and Silicon Valley Bank.
<PAGE> 36
-36-
COMMENTS:
VERSATILITY, INC.
By:
----------------------------
Authorized Signer
<PAGE> 37
-37-
EXHIBIT D
COMPLIANCE CERTIFICATE
TO: SILICON VALLEY BANK
FROM: VERSATILITY, INC.
The undersigned authorized officer of VerSatility hereby certifies that in
accordance with the terms and conditions of the Loan and Security Agreement
between Borrower and Bank (the "Agreement"), (i) Borrower is in complete
compliance for the period ending _____________, 1996 with all required covenants
except as noted below and (ii) all representations and warranties of Borrower
stated in the Agreement are true and correct in all material respects as of the
date hereof. Attached herewith are the required documents supporting the above
certification. The Officer further certifies that these are prepared in
accordance with Generally Accepted Accounting Principles (GAAP) and are
consistently applied from one period to the next except as explained in an
accompanying letter or footnotes. The Officer expressly acknowledges that h no
borrowings may be requested by the Borrower at any time or date of determination
that Borrower is not in compliance with any of the terms of the Agreement, and
that such compliance is determined not just at the date this certificate is
delivered.
<TABLE>
PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER "COMPLIES"
COLUMN.
<CAPTION>
REPORTING COVENANT REQUIRED COMPLIES
- ------------------ -------- --------
<S> <C> <C>
Monthly financial statements Monthly within 25 days Yes/No
Annual (CPA Audited) FYE within 90 days Yes/No
A/R & A/P Agings Monthly within 15 days Yes/No
A/R Audit Initial and Semi-Annual Yes/No
<CAPTION>
FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES
- ------------------ -------- ------ --------
<S> <C> <C> <C>
Maintain on a Quarterly Basis:
Liquidity 1.5 to 1.0 ____ to 1.0 Yes/No
Minimum Tangible Net Worth $5,500,000 $________ Yes/No
</TABLE>
<PAGE> 38
-38-
<TABLE>
<S> <C> <C> <C>
April 30, 1997 and thereafter Greater of $5,500,000
or 90% of reported
TNW for year end $_________ Yes/No
Maximum Debt/Tangible Net 1.2 to 1.0 ____ to 1.0 Yes/No
Minimum Debt Service Contract 1.5 to 1.0 ____ to 1.0 Yes/No
</TABLE>
<PAGE> 39
-39-
- --------------------------------------------------------------------------------
BANK USE ONLY
Received by:
AUTHORIZED SIGNER
Date:
Verified:
AUTHORIZED SIGNER
Date:
Compliance Status: Yes No
- --------------------------------------------------------------------------------
COMMENTS REGARDING EXCEPTIONS: See Attached.
Sincerely,
VERSATILITY, INC.
By:_______________________
Title
Date__________________, 199__
<PAGE> 40
EXHIBIT E
REVOLVING PROMISSORY NOTE
$2,500,000 Rockville, Maryland
August 28, 1996
FOR VALUE RECEIVED, the undersigned, VERSATILITY, INC., a Delaware
corporation and the Subsidiaries listed on the signature page hereto
(collectively, "Borrower") jointly and severally promise to pay to the order of
SILICON VALLEY BANK, a California-chartered bank ("Bank"), at such place as the
holder hereof may designate, in lawful money of the United States of America,
the aggregate unpaid principal amount of all advances ("Advances") made by Bank
to Borrower in accordance with the terms and conditions of the Loan and Security
Agreement between Borrower and Bank of even date herewith (as amended from time
to time the "Loan Agreement"), up to a maximum principal amount of TWO MILLION
FIVE HUNDRED THOUSAND DOLLARS ($2,500,000) ("Principal Sum"), or so much thereof
as may be advanced or readvanced and remains unpaid. Borrower shall also pay
interest on the aggregate unpaid principal amount of such Advances, as follows:
Commencing as of the date hereof and continuing until repayment in full of
all sums due hereunder, the unpaid Principal Sum shall bear interest at the
variable rate of interest, per annum, most recently announced by Bank as its
"prime rate," whether or not such announced rate is the lowest rate available
from Bank (the "Prime Rate") plus one half of one percent (.50%) per annum. The
rate of interest charged under this Note shall change immediately and
contemporaneously with any change in the Prime Rate. All interest payable under
the terms of this Note shall be calculated on the basis of a 360-day year and
the actual number of days elapsed.
The unpaid Principal Sum, together with interest thereon at the rate or
rates provided above, shall be payable as follows:
(a) Interest only on the unpaid principal amount shall be due and
payable monthly in arrears, commencing September 5, 1996, and continuing on the
first day of each calendar month thereafter to maturity; and
(b) Unless sooner paid, the unpaid Principal Sum, together with
interest accrued and unpaid thereon, shall be due and payable in full on August
5, 1997.
The fact that the balance hereunder may be reduced to zero from time to
time pursuant to the Loan Agreement will not affect the continuing validity of
this Note or the Loan Agreement, and the balance may be increased to the
Principal Sum after any such reduction to zero.
This Note is the "Revolving Promissory Note" described in the Loan
Agreement, to which reference is hereby made for a more complete statement of
the terms and
<PAGE> 41
-2-
conditions under which the loans and advances evidenced hereby are made. This
Note is secured as provided in the Loan Agreement. All capitalized terms used
herein and not otherwise defined shall have the meanings given to such terms in
the Loan Agreement.
Borrower irrevocably waives the right to direct the application of any and
all payments at any time hereafter received by Bank from or on behalf of
Borrower and Borrower irrevocably agrees that Bank shall have the continuing
exclusive right to apply any and all such payments against the then due and
owing obligations of Borrower as Bank may deem advisable. In the absence of a
specific determination by Bank with respect thereto, all payments shall be
applied in the following order: (a) then due and payable fees and expenses; (b)
then due and payable interest payments and mandatory prepayments; and (c) then
due and payable principal payments and optional prepayments.
Bank is hereby authorized by Borrower to endorse on Bank's books and
records each Advance made by Bank under this Note and the amount of each payment
or prepayment of principal of each such Advance received by Bank; it being
understood, however, that failure to make any such endorsement (or any error in
notation) shall not affect the obligations of Borrower with respect to Advances
made hereunder, and payments of principal by Borrower shall be credited to
Borrower notwithstanding the failure to make a notation (or any errors in
notation) thereof on such books and records.
The occurrence of any one or more of the following events shall constitute
an event of default (individually, an "Event of Default" and collectively, the
"Events of Default") under the terms of this Note:
(a) The failure of Borrower to pay to Bank when due any and all
amounts payable by Borrower to Bank under the terms of this Note; or
(b) The occurrence of an event of default (as defined therein) under
the terms and conditions of any of the other Loan Documents.
Upon the occurrence of an Event of Default, at the option of Bank, all
amounts payable by Borrower to Bank under the terms of this Note shall
immediately become due and payable by Borrower to Bank without notice to
Borrower or any other person, and Bank shall have all of the rights, powers, and
remedies available under the terms of this Note, any of the other Loan Documents
and all applicable laws. Borrower and all endorsers, guarantors, and other
parties who may now or in the future be primarily or secondarily liable for the
payment of the indebtedness evidenced by this Note hereby severally waive
presentment, protest and demand, notice of protest, notice of demand and of
dishonor and non-payment of this Note and expressly agree that this Note or any
payment hereunder may be extended from time to time without in any way affecting
the liability of Borrower, guarantors and endorsers.
Upon the occurrence of an Event of Default, Borrower hereby authorizes any
attorney designated by Bank or any clerk of any court of record to appear for
Borrower
<PAGE> 42
-3-
in any court of record and confess judgment without prior hearing against
Borrower in favor of Bank for and in the amount of the unpaid Principal Sum, all
interest accrued and unpaid thereon, all other amounts payable by Borrower to
Bank under the terms of this Note or any of the other Loan Documents, costs of
suit, and attorneys' fees of fifteen percent (15%) of the unpaid Principal Sum
and interest then due hereunder; provided, however, if the actual attorney's
fees incurred by the Bank are less than 15% of such amount, and all obligations
owed to the Bank by the Borrower have been paid, the Bank will refund (to the
extent actually collected) to the Borrower an amount equal to the difference
between 15% of such amount and the amount of actual attorney's fees incurred.
Borrower hereby releases, to the extent permitted by applicable law, all errors
and all rights of exemption, appeal, stay of execution, inquisition, and other
rights to which Borrower may otherwise be entitled under the laws of the United
States of America or of any state or possession of the United States of America
now in force and which may hereafter be enacted. The authority and power to
appear for and enter judgment against Borrower shall not be exhausted by one or
more exercises thereof or by any imperfect exercise thereof and shall not be
extinguished by any judgment entered pursuant thereto. Such authority may be
exercised on one or more occasions or from time to time in the same or different
jurisdictions as often as Bank shall deem necessary or desirable, for all of
which this Note shall be a sufficient warrant.
Borrower promises to pay all costs and expense of collection of this Note
and to pay all reasonable attorneys' fees incurred in such collection, whether
or not there is a suit or action, or in any suit or action to collect this Note
or in any appeal thereof. Borrower waives presentment, demand, protest, notice
of protest, notice of dishonor, notice of nonpayment, and any and all other
notices and demands in connection with the delivery, acceptance, performance
default or enforcement of this Note, as well as any applicable statutes of
limitations. No delay by Bank in exercising any power or right hereunder shall
operate as a waiver of any power or right. Time is of the essence as to all
obligations hereunder.
This Note is issued pursuant to the Loan Agreement, which shall govern the
rights and obligations of Borrower with respect to all obligations hereunder.
Borrower acknowledges and agrees that this Note shall be governed by the
laws of the State of Maryland, excluding conflicts of laws principles, even
though for the convenience and at the request of Borrower, this Note may be
executed elsewhere.
BORROWER ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES,
UNCONDITIONALLY, THE NON-EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT OF
COMPETENT JURISDICTION IN THE STATE OF MARYLAND IN ANY ACTION, SUIT, OR
PROCEEDING OF ANY KIND, AGAINST IT WHICH ARISES OUT OF OR BY REASON OF THIS
AGREEMENT; PROVIDED, HOWEVER, THAT IF FOR ANY REASON BANK CANNOT AVAIL ITSELF OF
THE COURTS OF MARYLAND, BORROWER ACCEPTS JURISDICTION OF THE COURTS AND VENUE IN
SANTA CLARA
<PAGE> 43
-4-
COUNTY, CALIFORNIA. BORROWER AND BANK EACH HEREBY WAIVE THEIR RESPECTIVE RIGHTS
TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY
OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING
CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR
STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE FOREGOING WAIVER
CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT. EACH
PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL
COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS
FOLLOWING CONSULTATION WITH LEGAL COUNSEL.
Until such time as the Bank is not committed to extend further credit to
the Borrower and all obligations of the Borrower to the Bank have been
indefeasibly paid in full in cash, and subject to and not in limitation of the
provisions set forth in the next following paragraph below, no Borrower shall
have any right of subrogation (whether contractual, arising under the Bankruptcy
Code or otherwise), reimbursement or contribution from any Borrower or any
guarantor, nor any right of recourse to its security for any of the debts and
obligations of any Borrower which are the subject of this Note. Except as
otherwise expressly permitted by the Loan Agreement, any and all present and
future debts and obligations of any Borrower to any other Borrower are hereby
subordinated to the full payment and performance of all present and future debts
and obligations to the Bank under this Note and the Loan Agreement and the Loan
Documents, provided, however, notwithstanding anything set forth in this Note to
the contrary, prior to the occurrence of a payment default, the Borrower shall
be permitted to make payments on account of any of such present and future debts
and obligations from time to time in accordance with the terms thereof.
Each Borrower further agrees that, if any payment made by any Borrower or
any other person is applied to this Note and is at any time annulled, set aside,
rescinded, invalidated, declared to be fraudulent or preferential or otherwise
required to be refunded or repaid, or the proceeds of any property hereafter
securing this Note is required to be returned by the Bank to any Borrower, its
estate, trustee, receiver or any other party, including, without limitation,
such Borrower, under any bankruptcy law, state or federal law, common law or
equitable cause, then, to the extent of such payment or repayment, such
Borrower's liability hereunder (and any lien, security interest or other
collateral securing such liability) shall be and remain in full force and
effect, as fully as if such payment had never been made, or, if prior thereto
any such lien, security interest or other collateral hereafter securing such
Borrower's liability hereunder shall have been released or terminated by virtue
of such cancellation or surrender, this Note (and such lien, security interest
or other collateral) shall be reinstated in full force and effect, and such
prior cancellation or surrender shall not diminish, release, discharge, impair
or otherwise affect the obligations of such Borrower in respect of the amount of
such payment (or any lien, security interest or other collateral securing such
obligation).
<PAGE> 44
-5-
The JOINT AND SEVERAL obligations of each Borrower under this Note shall be
absolute, irrevocable and unconditional and shall remain in full force and
effect until the outstanding principal of and interest on this Note and all
other obligations or amounts due hereunder and under the Loan Agreement and the
Loan Documents shall have been indefeasibly paid in full in cash in accordance
with the terms thereof and this Note shall have been canceled.
IN WITNESS WHEREOF, Borrower has caused this Note to be executed under seal
by its duly authorized officers as of the date first written above.
WITNESS OR ATTEST: VERSATILITY, INC.
______________________________ By:__________________________(SEAL)
Name:
Title:
WITNESS OR ATTEST: NPRI, LTD
______________________________ By:__________________________(SEAL)
Name:
Title:
<PAGE> 45
EXHIBIT F
TERM NOTE
---------
$1,000,000 Rockville, Maryland
August 28, 1996
FOR VALUE RECEIVED, the undersigned, VERSATILITY, INC., a Delaware
corporation and the Subsidiaries listed on the signature page hereto
(collectively, "Borrower") jointly and severally promise to pay to the order of
SILICON VALLEY BANK, a California-chartered bank doing business as "Silicon
Valley Bank" ("Bank"), at such place as the holder hereof may designate, in
lawful money of the United States of America, the principal amount of One
Million Dollars ($1,000,000) (the "Principal Sum"), or so much thereof as may be
advanced hereunder in accordance with the terms and conditions of the Loan and
Security Agreement between Borrower and Bank dated August 28, 1996 (as amended
from time to time, the "Loan Agreement"). Borrower shall pay interest on the
outstanding Principal Sum, as follows:
Commencing as of the date hereof and continuing until repayment in full of
all sums due hereunder, the unpaid Principal Sum shall bear interest at the
variable rate of interest, per annum, most recently announced by Bank as its
"prime rate," whether or not such announced rate is the lowest rate available
from Bank (the "Prime Rate") plus one percent (1.0%) per annum. The rate of
interest charged under this Note shall change immediately and contemporaneously
with any change in the Prime Rate. All interest payable under the terms of this
Note shall be calculated on the basis of a 360-day year and the actual number of
days elapsed.
Advances under this Note shall be made in two (2) tranches. All advances
made on or prior to October 31, 1996 shall be called the "Tranche 1 Advances."
All advances made after October 31, 1996, but on or before April 30, 1997 shall
be called "Tranche 2 Advances." No advances may be made on this Note after April
30, 1997.
The unpaid Principal Sum, together with interest thereon at the rate or
rates provided above, shall be payable as follows:
(a) Interest only on the unpaid principal amount shall be due and
payable monthly in arrears, commencing __________ __, 1996, and continuing on
the same day of each calendar month thereafter to maturity; and
(b) In addition to the monthly payments of interest as set forth above,
the outstanding amount of Tranche 1 Advances as of November 1, 1996 (the
"Tranche 1 Balance") shall be due and payable in equal consecutive monthly
principal installments each in an amount equal to one-thirty six (1/36) of the
Tranche 1 Balance commencing on November 5, 1996 and continuing on the same day
of each calendar month thereafter until October 5, 1999, when unless sooner paid
the entire unpaid principal amount of the Tranche 1 Balance shall be due and
payable in full;
<PAGE> 46
-2-
(c) In addition to the monthly payments of interest as set forth above,
the outstanding amount of Tranche 2 Advances as of May 1, 1997 (the "Tranche 2
Balance") shall be due and payable in equal consecutive monthly principal
installments each in an amount equal to one-thirty six (1/36) of the Tranche 2
Balance commencing on May 5, 1997 and continuing on the same day of each
calendar month thereafter until maturity; and
(d) Unless sooner paid, the unpaid Principal Sum, together with interest
accrued and unpaid thereon, shall be due and payable in full on April 5, 2000.
This Note is the "Term Note" described in the Loan Agreement, to which
reference is hereby made for a more complete statement of the terms and
conditions under which the loans and advance evidenced hereby are made. This
Note is secured as provided in the Loan Agreement. All capitalized terms used
herein and not otherwise defined shall have the meanings given to such terms in
the Loan Agreement.
Borrower irrevocably waives the right to direct the application of any and
all payments at any time hereafter received by Bank from or on behalf of
Borrower and Borrower irrevocably agrees that Bank shall have the continuing
exclusive right to apply any and all such payments against the then due and
owing obligations of Borrower as Bank may deem advisable. In the absence of a
specific determination by Bank with respect thereto, all payments shall be
applied in the following order: (a) then due and payable fees and expenses; (b)
then due and payable interest payments and mandatory prepayments; and (c) then
due and payable principal payments and optional prepayments.
The occurrence of any one or more of the following events shall constitute
an event of default (individually, an "Event of Default" and collectively, the
"Events of Default") under the terms of this Note:
(a) The failure of Borrower to pay to Bank when due any and all amounts
payable by Borrower to Bank under the terms of this Note; or
(b) The occurrence of an event of default (as defined therein) under the
terms and conditions of any of the other Loan Documents.
Upon the occurrence of an Event of Default, at the option of Bank, all
amounts payable by Borrower to Bank under the terms of this Note shall
immediately become due and payable by Borrower to Bank without notice to
Borrower or any other person, and Bank shall have all of the rights, powers, and
remedies available under the terms of this Note, any of the other Loan Documents
and all applicable laws. Borrower and all endorsers, guarantors, and other
parties who may now or in the future be primarily or secondarily liable for the
payment of the indebtedness evidenced by this Note hereby severally waive
presentment, protest and demand, notice of protest, notice of demand and of
dishonor and non-payment of this Note and expressly agree that this Note or any
<PAGE> 47
-3-
payment hereunder may be extended from time to time without in any way affecting
the liability of Borrower, guarantors and endorsers.
Upon the occurrence of an Event of Default, Borrower hereby authorizes any
attorney designated by Bank or any clerk of any court of record to appear for
Borrower in any court of record and confess judgment without prior hearing
against Borrower in favor of Bank for and in the amount of the unpaid Principal
Sum, all interest accrued and unpaid thereon, all other amounts payable by
Borrower to Bank under the terms of this Note or any of the other Loan
Documents, costs of suit, and attorneys' fees of fifteen percent (15%) of the
unpaid Principal Sum and interest then due hereunder; provided, however, if the
actual attorney's fees incurred by the Bank are less than 15% of such amount,
and all obligations owed to the Bank by the Borrower have been paid, the Bank
will refund (to the extent actually collected) to the Borrower an amount equal
to the difference between 15% of such amount and the amount of actual attorney's
fees incurred. The authority and power to appear for and enter judgment against
Borrower shall not be exhausted by one or more exercises thereof or by any
imperfect exercise thereof and shall not be extinguished by any judgment entered
pursuant thereto. Such authority may be exercised on one or more occasions or
from time to time in the same or different jurisdictions as often as Bank shall
deem necessary or desirable, for all of which this Note shall be a sufficient
warrant.
Borrower promises to pay all costs and expense of collection of this Note
and to pay all reasonable attorneys' fees incurred in such collection, whether
or not there is a suit or action, or in any suit or action to collet this Note
or in any appeal thereof. Borrower waives presentment, demand, protest, notice
of protest, notice of dishonor, notice of nonpayment, and any and all other
notices and demands in connection with the delivery, acceptance, performance
default or enforcement of this Note, as well as any applicable statutes of
limitations. No delay by Bank in exercising any power or right hereunder shall
operate as a waiver of any power or right. Time is of the essence as to all
obligations hereunder.
This Note is issued pursuant to the Loan Agreement, which shall govern the
rights and obligations of Borrower with respect to all obligations hereunder.
Borrower acknowledges and agrees that this Note shall be governed by the
laws of the State of Maryland, excluding conflicts of laws principles, even
though for the convenience and at the request of Borrower, this Note may be
executed elsewhere.
BORROWER ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES,
UNCONDITIONALLY, THE NON-EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT OF
COMPETENT JURISDICTION IN THE STATE OF MARYLAND IN ANY ACTION, SUIT, OR
PROCEEDING OF ANY KIND, AGAINST IT WHICH ARISES OUT OF OR BY REASON OF THIS
AGREEMENT; PROVIDED, HOWEVER, THAT IF FOR ANY REASON BANK CANNOT AVAIL ITSELF OF
THE COURTS OF MARYLAND, BORROWER
<PAGE> 48
-4-
ACCEPTS JURISDICTION OF THE COURTS AND VENUE IN SANTA CLARA COUNTY, CALIFORNIA.
BORROWER AND BANK EACH HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF
ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN
DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT
CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR
STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE FOREGOING WAIVER
CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT. EACH
PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL
COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS
FOLLOWING CONSULTATION WITH LEGAL COUNSEL.
IN WITNESS WHEREOF, Borrower has caused this Note to be executed under seal
by its duly authorized officers as of the date first written above.
WITNESS OR ATTEST: VERSATILITY, INC.
______________________________ By:__________________________(SEAL)
Name:
Title:
WITNESS OR ATTEST: NPRI, LTD
______________________________ By:__________________________(SEAL)
Name:
Title:
<PAGE> 1
EXHIBIT 11.1
VERSATILITY INC.
STATEMENT REGARDING COMPUTATION OF
PRO FORMA NET INCOME (LOSS)
PER SHARE
<TABLE>
<CAPTION>
Year Ended Three Months
April 30, Ended
1996 July 31, 1996
---------- -------------
<S> <C> <C>
Net Income (Loss) $ 656,870 $ 202,346
---------- ----------
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 $.04
========== ==========
</TABLE>
The above computations inclue 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).
<PAGE> 1
EXHIBIT 21.1
------------
SUBSIDIARIES OF THE REGISTRANT
Versatility Ltd.
<PAGE> 1
EXHIBIT 23.1
CONSENT
We consent to the use in this Registration Statement 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 as to which the date is October 3, 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 Company'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.
DELOITTE & TOUCHE LLP
Washington, DC
October 9, 1996
