UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended January 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from ____________________ to ____________________
Commission File Number: 0-21793
VERSATILITY INC.
(Exact name of registrant as specified in its charter)
DELAWARE 52-1214354
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11781 Lee Jackson Memorial Highway
Seventh Floor
Fairfax, Virginia 22033
(703) 591-2900
(Address and telephone number of principal executive offices)
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
As of March 14, 1997 there were 7,280,592 shares of common stock outstanding,
par value $.01 per share.
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VERSATILITY INC.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
<S> <C>
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of April 30, 1996 and January 31, 1997 3
Condensed Consolidated Statements of Operations for the Three
Months Ended January 31, 1996 and 1997 and the Nine Months
Ended January 31, 1996 and 1997 5
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
January 31, 1996 and 1997 6
Condensed Consolidated Statements of Changes in Stockholders' Equity for the
Nine Months Ended January 31, 1997 7
Notes to Condensed Consolidated Financial Statements 8
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 9
PART II: OTHER INFORMATION
Item 1: Legal Proceedings 18
Item 2: Changes in Securities 18
Item 3: Defaults upon Senior Securities 18
Item 4: Submission of Matters to a Vote of Security Holders 18
Item 5: Other Information 18
Item 6: Exhibits and Reports on Form 8-K 18
Signatures 19
</TABLE>
2
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Part I: Financial Information
Item 1: Financial Statements
VERSATILITY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
April 30, January 31,
1996 1997
---- ----
ASSETS
Current assets:
Cash and cash equivalents....... $ 2,280,273 $28,794,133
Accounts receivable, net of
allowance for doubtful accounts
of $157,874 and $124,033...... 5,707,724 10,221,286
Prepaid expenses................ 642,045 825,531
Inventory....................... -- 28,643
Note receivable................. -- 519,305
Deferred income taxes........... 130,238 130,238
----------- -----------
Total current assets....... 8,760,280 40,519,136
----------- -----------
Other assets:
Related party receivables....... 80,000 143,719
Deposits........................ 157,835 138,382
Investments..................... 3,137 --
Assets held for sale............ 76,004 281,086
Purchased software, net of
accumulated amortization of
$11,500 and $41,169........... 103,500 355,613
----------- -----------
Total other assets......... 420,476 918,800
----------- -----------
Property and equipment
Computers....................... 893,674 1,132,911
Office furniture and equipment.. 637,559 665,597
Leasehold improvements.......... 181,485 188,155
Capital leases.................. 160,822 652,533
----------- -----------
1,873,540 2,639,196
Less: Accumulated depreciation
and amortization............. (1,423,234) (1,593,914)
----------- -----------
Net property and equipment. 450,306 1,045,282
----------- -----------
Total................................ $ 9,631,062 $42,483,218
=========== ===========
3
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VERSATILITY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
April 30, January 31,
1996 1997
----------- ----
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................... $ 824,745 $ 1,123,384
Accrued liabilities....................... 1,393,653 1,931,091
Related party payables.................... 3,443 58,499
Income taxes payable...................... 356,503 --
Capital lease payable..................... 30,848 179,650
Line of credit............................ 800,772 732,683
Deferred revenue.......................... 284,700 611,597
----------- ------------
Total current liabilities............ 3,694,664 4,636,904
----------- ------------
Long-term liabilities:
Capital lease payable, less current
maturities.............................. 69,983 317,315
Deferred rent............................. 221,899 299,686
Deferred income taxes..................... 249,401 205,918
----------- ------------
Total other liabilities.............. 541,283 822,919
----------- ------------
Commitments and Contingencies
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 at April 30, 1996; no shares
authorized,issued or outstanding at
January 31, 1997............................. 3,561,293 --
Stockholders' equity
Preferred stock, $.01 par value, no
shares authorized, issued or outstanding
at April 30, 1996; 2,000,000 shares
authorized, no shares issued or
outstanding at January 31, 1997.......... -- --
Common stock, par value $.01 --
20,000,000 shares authorized,
4,000,000 shares issued and
outstanding at April 30, 1997;
7,280,592 shares issued and
outstanding at January 31, 1997......... 40,000 72,806
Additional paid-in capital................ -- 34,348,233
Foreign currency translation adjustments.. (66,311) (83,880)
Retained earnings......................... 1,860,133 2,686,236
----------- ------------
Stockholders' equity................. 1,833,822 37,023,395
----------- ------------
Total.......................................... $ 9,631,062 $ 42,483,218
=========== ============
4
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VERSATILITY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
January 31, January 31,
1996 1997 1996 1997
---------- ---------- ----------- -----------
<S> <C>
Revenue:
License revenue......................... $2,266,954 $4,880,479 $ 5,882,556 $12,428,889
Service and maintenance revenue......... 1,689,994 2,117,231 4,724,908 6,040,325
---------- ---------- ----------- -----------
Total revenue...................... 3,956,948 6,997,710 10,607,464 18,469,214
---------- ---------- ----------- -----------
Cost of revenue:
License revenue......................... 114,665 347,295 357,399 756,771
Service and maintenance revenue......... 1,101,209 1,354,527 2,864,356 3,825,540
---------- ---------- ----------- -----------
Total cost of revenue.............. 1,215,874 1,701,822 3,221,755 4,582,311
---------- ---------- ----------- -----------
Gross margin................................ 2,741,074 5,295,888 7,385,709 13,886,903
---------- ---------- ----------- -----------
Operating expenses:
Selling, general and administrative..... 1,825,843 3,795,070 4,762,250 10,387,315
Research and development................ 473,348 648,388 1,430,326 1,928,353
Depreciation and amortization........... 44,411 90,835 111,733 197,918
Write off of capitalized software....... -- -- 829,026 --
---------- ---------- ----------- -----------
Total operating expenses........... 2,343,602 4,534,293 7,133,335 12,513,586
---------- ---------- ----------- -----------
Income from operations...................... 397,472 761,595 252,374 1,373,317
Interest income (expense), net.............. (157) 122,337 13,055 109,786
---------- ---------- ----------- -----------
Income before provision for income taxes... 397,315 883,932 265,429 1,483,103
Provision for income taxes.................. 104,000 300,000 64,000 481,000
----------- ---------- ----------- -----------
Net income.................................. $ 293,315 $ 583,932 $ 201,429 $ 1,002,103
========== ========== =========== ===========
Net income per share........................ $ 0.05 $ 0.09 $ 0.04 $ 0.17
========== ========== =========== ===========
Weighted average common and common
equivalent shares outstanding............. 5,603,205 6,851,944 5,603,205 6,027,096
========== ========== =========== ===========
</TABLE>
5
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VERSATILITY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
January 31,
1996 1997
-------- --------
Cash flows from operating activities:
Net income........................................ $ 201,429 $ 1,002,103
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation.................................. 111,733 168,249
Amortization.................................. -- 29,669
Loss on equity investment..................... -- 6
Deferred income taxes......................... (316,230) (43,483)
Write-off of capitalized software............. 829,026 --
Changes in assets and liabilities:
Accounts receivable......................... (2,539,551) (4,513,562)
Prepaid expenses............................ (581,677) (183,486)
Inventory................................... -- (28,643)
Related party receivables................... (16,466) (63,719)
Deposits.................................... (71,588) 19,453
Accounts payable............................ (478,395) 298,639
Accrued liabilities......................... 339,853 537,438
Related party payables...................... (86,218) 55,056
Income taxes payable........................ (71,325) (356,503)
Deferred rent............................... 31,020 77,787
Deferred revenue............................ 73,368 326,897
----------- -----------
Net cash used in operating activities...... (2,575,021) (2,674,099)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment and
assets held for sale............................ (59,393) (530,923)
Purchased software................................ (55,000) (281,782)
Related party note receivable..................... -- (516,174)
----------- -----------
Net cash used in investing activities...... (114,393) (1,328,879)
----------- -----------
Cash flows from financing activities:
Borrowings under line of credit................... 765,000 2,791,821
Payments under line of credit..................... -- (2,859,910)
Proceeds from sale of preferred stock, net........ 3,473,293 --
Proceeds from sale of common stock, net........... -- 30,643,746
Principal payments under note payable............. (35,250) --
Principal payments under capital leases........... (17,563) (41,250)
----------- -----------
Net cash provided by financing activities.. 4,185,480 30,534,407
----------- -----------
Effect of exchange rate changes on cash.............. (89,855) (17,569)
----------- -----------
Net increase in cash and cash equivalents............ 1,406,211 26,513,860
Cash and cash equivalents, beginning of period....... 1,414,205 2,280,273
----------- -----------
Cash and cash equivalents, end of period............. $ 2,820,416 $28,794,133
=========== ===========
Supplemental disclosures of cash flow information:
Interest paid..................................... $ 13,273 $ 125,807
=========== ===========
Income taxes paid................................. $ 426,037 $ 885,461
=========== ===========
6
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VERSATILITY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(Unaudited)
<TABLE>
<CAPTION>
Number of Foreign
Shares of Additional Currency
Common Common Paid-in Translation Retained
Stock Stock Capital Adjustments Earnings Total
--------- ------- ----------- ----------- ----------- -----------
<S> <C>
Balance, April 30, 1996............... 4,000,000 $40,000 $ $(66,311) $ 1,860,133 $ 1,833,822
--
Conversion of redeemable
preferred stock.................. 992,061 9,921 3,727,372 3,737,293
Issuance of common stock related
to public offering............... 2,275,364 22,753 30,610,459 30,633,212
Issuance of common stock related
to exercise of stock options 13,167 132 10,402 10,534
Foreign currency translation
adjustments...................... (17,569) (17,569)
Accretion of dividends on
redeemable preferred stock...... (176,000) (176,000)
Net income........................ 1,002,103 1,002,103
--------- ------- ----------- -------- ----------- -----------
Balance, January 31, 1997............. 7,280,592 $72,806 $34,348,233 $(83,880) $ 2,686,236 $37,023,395
========= ======= =========== ======== =========== ===========
</TABLE>
7
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VERSATILITY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements 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
results of operations for the interim periods are not necessarily indicative of
the results to be expected for any future period. Certain information and
footnote disclosures normally contained in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto,
together with management's discussion and analysis of financial condition and
results of operations, contained in Versatility Inc.'s Prospectus dated December
12, 1996.
2. INITIAL PUBLIC OFFERING
In December 1996, Versatility Inc. (the "Company"), completed an initial public
offering of 2.2 million shares of common stock at $15.00 per share. In addition,
in January 1997, the underwriters in such public offering exercised their option
to purchase an additional 189,000 shares of common stock at $15.00 per share. Of
the additional shares purchased, 75,364 shares were issued by the Company and
113,636 shares were sold by certain selling stockholders of the Company.
Simultaneous with the closing of the initial public offering, all outstanding
shares of preferred stock were converted to common stock on a one-for-one basis.
3. NET INCOME PER SHARE
Net income 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 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).
8
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This document contains various forward-looking statements and information
that are based on management's beliefs as well as assumptions made by and
information currently available to management. Such statements are subject to
various risks and uncertainties which could cause actual results to vary
materially from those contained in such forward looking statements. Should one
or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
anticipated, estimated, expected or projected. Certain of these risks and
uncertainties as well as other risks and uncertainties are described in Factors
Which May Effect Future Operating Results herein and in the Company's
Registration Statement on Form S-1 filed under the Securities Act of 1933, as
amended, and declared effective on December 12, 1996.
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 ("VAR"), 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. 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 first nine months of fiscal 1996, British Telecommunications, Plc
("BT") and Medco Containment Services, Inc. accounted for 19.8% and 34.2%,
respectively, of the Company's total revenue. For the first nine months of
fiscal 1997, BT and Avantel, S.A. accounted for 23.8% and 14.1%, respectively,
of the Company's total revenue. Although the particular customers may change
from period to period, the Company expects that large sales to a limited number
of customers will continue to account for a significant percentage of its total
revenue in any particular period. Given the customer concentration and the
duration of the sales and implementation cycle, the loss of a major customer or
any reduction or delay in sales to or implementation by these or other customers
could have a material adverse effect on the Company's operating results in any
particular period.
Revenue from customers outside the United States accounted for 29.9% and
44.2% of the Company's total revenue for the first nine months of fiscal 1996
and fiscal 1997, respectively. While the Company's expenses incurred in foreign
countries are typically
9
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denominated in the local currencies, revenue generated by the Company's
international sales typically is paid in U.S. dollars or British pounds.
Although exposure to currency fluctuations to date has been insignificant,
there can be no assurance that fluctuations in currency exchange rates in the
future will not have a material adverse impact on the Company's international
operations. The Company currently does not engage in hedging activities.
During the course of the development of the client/server software
applications, the Company capitalized costs associated with the Versatility
Series in compliance with Statement of Financial Accounting Standards No. 86
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed" ("SFAS 86"). The amount of software capitalized totaled $995,000 and,
beginning in November 1994, was amortized over three years on a straight- line
basis. In connection with two major implementations of the Versatility Series
product in July 1995, the Company decided to add features and functions which
were substantially different than those included in the software as originally
capitalized. Management determined that these features and functions
substantially altered the content of the product, effectively eliminating any
remaining useful life of the capitalized asset. Accordingly, the Company wrote
off the remaining asset of $829,000 in the first quarter of fiscal 1996. The
Company anticipates that for the foreseeable future, no software development
costs will meet the requirements for capitalization under SFAS 86.
Results of Operations
The following table sets forth certain financial data for the periods
indicated as a percentage of total revenue:
<TABLE>
<CAPTION>
Percentage of Total Revenue
---------------------------
Three Months Ended Nine Months Ended
January 31, January 31,
------------------ ------------------
1996 1997 1996 1997
-------- -------- -------- --------
<S> <C>
Revenue:
License revenue......................... 57.3% 69.7% 55.5% 67.3%
Service and maintenance revenue......... 42.7 30.3 44.5 32.7
------- -------- ------- --------
Total revenue...................... 100.0 100.0 100.0 100.0
------- -------- ------- --------
Cost of revenue:
License revenue......................... 2.9 5.0 3.4 4.1
Service and maintenance revenue......... 27.8 19.3 27.0 20.7
------- -------- ------- --------
Total cost of revenue.............. 30.7 24.3 30.4 24.8
------- -------- ------- --------
Gross margin................................. 69.3 75.7 69.6 75.2
------- -------- ------- --------
Operating expenses:
Selling, general and administrative..... 46.2 54.2 44.9 56.2
Research and development................ 12.0 9.3 13.5 10.5
Depreciation and amortization........... 1.1 1.3 1.0 1.1
Write-off of capitalized software....... -- -- 7.8 --
------- -------- ------- -------
Total operating expenses........... 59.3 64.8 67.2 67.8
------- -------- ------- --------
Income (loss) from operations................ 10.0 10.9 2.4 7.4
Interest income (expense), net............... -- 1.7 0.1 0.6
------- -------- ------- --------
Income (loss) before provision (benefit)
for income taxes........................... 10.0 12.6 2.5 8.0
Provision (benefit) for income taxes......... 2.6 4.3 0.6 2.6
------- -------- ------- --------
Net income (loss)............................ 7.4% 8.3% 1.9% 5.4%
======= ======== ======= ========
</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:
Three Months Ended Nine Months Ended
January 31, January 31,
------------------ -----------------
1996 1997 1996 1997
---------- ------- ------ -------
Cost of license revenue.................. 5.1% 7.1% 6.1% 6.1%
Cost of service and maintenance revenue.. 65.2% 64.0% 60.6% 63.3%
Revenue. Total revenue increased 76.8% from $4.0 million in the three months
ended January 31, 1996 to $7.0 million in the three months ended January 31,
1997, and 74.1% from $10.6 million in the first nine months of fiscal 1996 to
$18.5 million in the first nine months of fiscal 1997. Revenue from license fees
increased 115.3% from $2.3 million in the three months ended January 31, 1996,
or 57.3% of total revenue, to $4.9 million in the three months ended January 31,
1997, or 69.7% of total revenue. Revenue from license fees increased 111.3% from
$5.9 million in the first nine months of fiscal 1996, or 55.5% of total revenue,
to $12.4 million in the first nine months of fiscal 1997, or 67.3% of total
revenue. In the first nine months of fiscal 1997, BT conducted a partial rollout
of its implementation of the Versatility Series in the United Kingdom which
contributed approximately $2.8 million of license revenue. In addition, in the
second quarter of fiscal 1997 Avantel, S.A. entered into a contract for an
additional site license resulting in $1.4 million of license revenue. Service
revenue increased 25.3% from $1.7 million in the three months ended January 31,
1996 to $2.1
10
<PAGE>
million in the three months ended January 31, 1997, and 27.8% from $4.7 million
in the first nine months of fiscal 1996 to $6.0 million in the first nine
months of fiscal 1997. Service revenue, however, decreased as a percentage
of total revenue from 44.5% in the first nine months of fiscal 1996 to 32.7% in
the first nine months of fiscal 1997, as a result of the Company's increase in
the use of indirect sales channels 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 $1.2 million in the three months ended
January 31, 1996, or 30.7% of total revenue, to $1.7 million in the three months
ended January 31, 1997, or 24.3% of total revenue, and from $3.2 million in the
first nine months of fiscal 1996, or 30.4% of total revenue, to $4.6 million for
the first nine months of fiscal 1997, or 24.8% of total revenue. Cost of license
revenue increased from $115,000 in the three months ended January 31, 1996, or
5.1% of license revenue to $347,000 in the three months ended January 31, 1997,
respectively, or 7.1% of license revenue, and from $357,000 in the first nine
months of fiscal 1996, or 6.1% of license revenue, to $757,000 in the first nine
months of fiscal 1997, or 6.1% of license revenue. The higher costs of license
revenue in fiscal 1997 included costs relating to incidental hardware sold with
the Versatility Series product. Cost of service and maintenance revenue
increased from $1.1 million in the three months ended January 31, 1996, or 65.2%
of service and maintenance revenue, to $1.4 million in the three months ended
January 31, 1997, or 64.0% of service and maintenance revenue. Cost of service
and maintenance revenue increased from $2.9 million in the first nine months of
fiscal 1996, or 60.6% of service and maintenance revenue, to $3.8 million in the
first nine months of fiscal 1997, or 63.3% of service and maintenance revenue.
The increase was the result of additions to the Company's consulting,
customization and implementation staff to support the growing number of the
Company's customers. During the first quarter of fiscal 1997, the Company's cost
of service and maintenance revenue increased as a percentage of such revenue due
in part to the engagement of contract programmers to complete certain custom
implementations of the Versatility Series. The Company's cost of service and
maintenance revenue declined as a percentage of such revenue during the second
and third quarters of fiscal 1997, due in part to completion of the
implementations noted above as well as a higher average billing rate for
services than historically experienced.
Selling, General and Administrative. Selling expenses consist of personnel
costs, including compensation and benefits and costs of travel, advertising,
public relations, seminars and trade shows. General and administrative expenses
represent the costs of executive, finance and support personnel and unallocated
corporate expenses such as rent, utilities, legal and auditing. Selling, general
and administrative expenses increased from $1.8 million for the three months
ended January 31, 1996, or 46.2% of total revenue, to $3.8 million for the three
months ended January 31, 1997, or 54.2% of total revenue, and from $4.8 million
for the first nine months of fiscal 1996, or 44.9% of total revenue, to $10.4
million for the first nine months of fiscal 1997, or 56.2% of total revenue.
This increase represents costs related to additions to the Company's sales force
and administrative personnel needed to support the Company's growth. In the last
half of fiscal 1996, the Company added a 12-person product management
department. This department had costs of $96,000 in the first nine months of
fiscal 1996 versus $1.0 million in the first nine months of fiscal 1997. During
the third quarter of fiscal 1997, this department was reorganized to become part
of the marketing department. The Company also doubled its total sales staff and
introduced new selling channels between the two periods, resulting in total
selling costs of $1.7 million in the first nine months of fiscal 1996 compared
to $4.6 million for the same period in fiscal 1997. Total selling costs for the
three months ended January 31, 1996 and 1997 were $662,000 and $1.8 million,
respectively. General and administrative costs increased from $2.0 million in
the first nine months of fiscal 1996 to $3.4 million in the first nine months of
fiscal 1997 as a result of increases in administrative overhead to support the
larger employee base, higher recruiting costs for administrative personnel,
costs relating to additional headquarters office space, costs relating to new
office space in the United Kingdom and higher legal and accounting fees. General
and administrative costs for the three months ended January 31, 1996 and 1997
were $748,000 and $1.2 million, respectively. Marketing costs increased from
$949,000 in the first nine months of fiscal 1996 to $1.4 million in the first
nine months of fiscal 1997 due to higher consulting and recruiting expenses
relating to marketing personnel and the reorganization of the product management
department discussed above. Marketing costs for the three months ended January
31, 1996 and 1997 were $320,000 and $716,000, respectively.
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
$473,000 for the three months ended January 31, 1996, or 12.0% of total revenue,
to $648,000 for the three months ended January 31, 1997, or 9.3% of total
revenue, and from $1.4 million for the first nine months of fiscal 1996 to $1.9
million for the first nine months of fiscal 1997, or 10.5% of total revenue. The
increase was due to the hiring of additional software engineers to support
increased development activities.
11
<PAGE>
Depreciation and Amortization and Write-off of Capitalized Software.
Depreciation and amortization expenses were $44,000 in the three months ended
January 31, 1996 and $91,000 in the three months ended January 31, 1997.
Depreciation and amortization expenses were $112,000 in the first nine months of
fiscal 1996 and $198,000 in the first nine months 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
nine months 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 was $0 and $122,000 for the three
months ended January 31, 1996 and 1997, respectively, and was $13,000 and
$110,000 in the first nine months of fiscal 1996 and fiscal 1997, respectively.
The difference results from interest income attributable to the cash raised
through the initial public offering in the third quarter of fiscal 1997,
partially offset by interest expense related to borrowings on the line of
credit.
Provision 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 for income taxes
was $104,000 and $300,000 for the three months ended January 31, 1996 and 1997,
respectively, with an effective tax rate of approximately 26.2% and 33.9%,
respectively. The Company's provision for income taxes was $64,000 in the first
nine months of fiscal 1996 compared to $481,000 in the first nine months of
fiscal 1997. For the first nine months of fiscal 1996 and 1997, the effective
tax rate was approximately 24.1% and 32.4%, respectively. 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. Net income improved from $293,000 to $584,000 for the three
months ended January 31, 1996 and 1997, respectively, and $201,000 to $1.0
million for the first nine months of fiscal 1996 and fiscal 1997, respectively.
If the Company had not been required to capitalize software development costs
and no amortization or write-off had been recorded, net income for the first
nine months of fiscal 1996 would have been $831,000.
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, from funds obtained from revolving credit
facilities with commercial banks and the Company's initial public offering in
December 1996 that raised $30.6 million in net proceeds. The Company's existing
$2.5 million line of credit had an outstanding balance of $733,000 at January
31, 1997, and $437,000 was outstanding under its $1.0 million equipment line of
credit. Advances under the working capital line bear interest at a variable
annual rate equal to the prime rate of the bank plus 0.5%, and advances under
the equipment line bear interest at a variable annual rate equal to the prime
rate of the bank plus 1.0%. Both lines expire on August 5, 1997.
At January 31, 1997, the Company had $28.8 million in cash and $10.2 million
in accounts receivable. For the nine months ended January 31, 1997, net cash
used by operations totaled $2.7 million. In addition, the Company used $1.3
million for investing activities, which included $531,000 for capital
expenditures for the expansion of the Company's distribution channels, $282,000
for purchased software and $516,000 loaned to a related party. These uses of
cash were offset by the net proceeds of $30.6 million from the Company's initial
public offering, resulting in a net cash increase of $26.5 million.
The Company invested $531,000 in capital expenditures in the first nine
months of fiscal 1997. Capital expenditures include purchases of computer
hardware used primarily in product development, product demonstrations, training
and support. During the nine months ended January 31, 1997, the Company financed
$437,000 of the capital assets acquired through a capital lease under its $1.0
million equipment line of credit.
The Company anticipates that its existing cash balances, funds anticipated
to be generated from operations, combined with the proceeds from the initial
public 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,
12
<PAGE>
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.
Factors Which May Effect Future Operating Results
In addition to the other information set forth in this Form 10-Q,
prospective investors should consider the following factors which may effect
future operating results of the Company.
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.
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 nine months of fiscal 1997, two customers, BT and
Avantel, S.A., accounted for 23.8% and 14.1%, respectively, of the Company's
total revenue. Although the particular customers may change from period to
period, the Company expects that large sales to a limited number of customers
will continue to account for a significant percentage of its revenue in any
particular period for the foreseeable future. Therefore, the loss, deferral or
cancellation of an order could have a significant impact on the Company's
operating results in a particular quarter. The Company has no long-term
contracts with its customers and there can be no assurance that its current
customers will place additional orders, or that the Company will obtain orders
of similar magnitude from other customers. The loss of any major customer or any
reduction, delay in or cancellation of orders by any such customer, or the
failure of the Company to market successfully to new customers could have a
materially adverse effect on the Company's business, financial condition and
results of operations.
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 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
13
<PAGE>
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.
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.
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 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.
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. 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.
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.
International Operations. Revenue from sales outside the United States in
fiscal 1994, 1995, 1996 and the first nine months of fiscal 1997 accounted for
approximately 18.8%, 16.3%, 40.8% and 44.2%, 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,
14
<PAGE>
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.
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.
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.
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.
15
<PAGE>
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 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.
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 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.
16
<PAGE>
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.
Regulatory Environment. Certain uses of outbound call processing systems are
regulated by federal, state and foreign law. Although the compliance with these
laws may limit the potential use of the Company's products in some respects, the
Company's systems can be programmed to operate automatically in full compliance
with these laws through the use of appropriate calling lists and calling
campaign time parameters. There can be no assurance, however, that future
legislation further restricting telephone solicitation practices, if enacted,
would not adversely affect the Company.
17
<PAGE>
Part II: Other Information
Item 1: Legal Proceedings:
One of the Company's former VARs has filed a claim for arbitration
against the Company asserting, among other things, that the Company
misrepresented the functionality of its products and wrongfully
terminated the VAR's reseller agreement, and claiming not less than
$1.0 million in damages. The Company intends to vigorously defend this
action and, based upon information currently available, believes that
the action will not have a material impact on the Company. However,
because the arbitration proceedings are at a preliminary stage, the
Company cannot predict the ultimate outcome of this action and there
can be no assurance that the Company will be successful in the
arbitration proceedings.
Item 2: Changes in Securities
In the quarter ended January 31, 1997, non-qualified stock options of
13,167 shares of common stock were exercised by former employees, with
an exercise price of $.80 per share. No underwriters were involved in
the foregoing sale of securities. Such sales were made in reliance on
an exemption from the registration provision of the Securities Act of
1933, as amended, set forth in Section 2(3) and 4(2) thereof.
Item 3: Defaults upon Securities:
Not Applicable.
Item 4: Submission of Matters to a Vote of Security Holders:
Not Applicable.
Item 5: Other Information:
Not Applicable.
Item 6: Exhibits and Reports on Form 8-K:
A. Exhibits
Exhibit No. Exhibits
11 Statement Regarding Computation of Net Income Per Share
27 Financial Data Schedule
B. Reports on Form 8-K:
There were no reports on Form 8-K filed during the period.
18
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VERSATILITY INC.
Dated: March 14, 1997 By: /s/ Donald C. Yount
--------------------
Donald C. Yount
Senior Vice President, Finance
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
19
Exhibit 11
Computation of Historical Net Income (loss) Per Common Share
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
January 31, January 31,
1996 1997 1996 1997
---------- ---------- ---------- ----------
<S> <C>
Net income $ 293,315 $ 583,932 $ 201,429 $1,002,103
========== ========== ========== ==========
Weighted average number of shares
outstanding 4,000,000 6,224,850 4,000,000 5,400,002
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 611,144 627,094 611,144 627,094
---------- ---------- ---------- ----------
5,603,205 6,851,944 5,603,205 6,027,096
========== ========== ========== ==========
Net income per common share $ 0.05 $ 0.09 $ 0.04 $ 0.17
========== ========== ========== ==========
</TABLE>
The above computations include all common equivalent shares issued within the 12
months preceding the filing date as if they were outstanding for all periods
presented (using the treasury stock method) and the as if converted method with
regards to the Series A redeemable convertible preferred stock.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE ACCOMPANYING CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-START> MAY-01-1996
<PERIOD-END> JAN-31-1997
<CASH> 28,794,133
<SECURITIES> 0
<RECEIVABLES> 10,864,624
<ALLOWANCES> 124,033
<INVENTORY> 28,643
<CURRENT-ASSETS> 40,519,136
<PP&E> 2,639,196
<DEPRECIATION> 1,593,914
<TOTAL-ASSETS> 42,483,218
<CURRENT-LIABILITIES> 4,636,904
<BONDS> 317,315
0
0
<COMMON> 72,806
<OTHER-SE> 36,950,589
<TOTAL-LIABILITY-AND-EQUITY> 42,483,218
<SALES> 12,428,889
<TOTAL-REVENUES> 18,469,214
<CGS> 756,771
<TOTAL-COSTS> 4,582,311
<OTHER-EXPENSES> 12,513,586
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 109,786
<INCOME-PRETAX> 1,483,103
<INCOME-TAX> 481,000
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