SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, For Use of the
Commission Only (as permitted by
Rule 14A-6(e)(2))
[X] Definitive Proxy Statement
[X] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14A-11(c) or Rule 14A-12
VERSATILITY INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No Fee Required
[ ] Fee computed on table below per Exchange Act Rules 14A-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is
calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[X] Fee paid previously with preliminary materials.
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[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(4) Date Filed:
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<PAGE>
[VERSATILITY INC. LOGO OMITTED]
VERSATILITY INC.
11781 LEE JACKSON MEMORIAL HIGHWAY
SEVENTH FLOOR
FAIRFAX, VIRGINIA 22033
(703) 591-2900
October 16, 1998
Dear Stockholder:
You are cordially invited to attend a Special Meeting (the "Special
Meeting") of Stockholders of Versatility Inc., a Delaware corporation (the
"Company") to be held at the Holiday Inn-Fairfax Oaks, 11787 Lee Jackson
Memorial Highway, Fairfax, Virginia 22033 on November 18, 1998, at 10:00 a.m.,
local time.
As described in the accompanying Proxy Statement, at the Special Meeting
you will be asked to consider and vote on a proposal to approve and adopt the
Agreement and Plan of Merger, dated August 20, 1998 (the "Merger Agreement"),
among the Company, Oracle Corporation, a Delaware corporation ("Oracle"), and
AQX Acquisition Corporation, a Delaware corporation and a wholly-owned
subsidiary of Oracle ("Acquisition Sub"). On the terms and subject to the
conditions of the Merger Agreement, if the stockholders of the Company approve
and adopt the Merger Agreement, Acquisition Sub will be merged with and into the
Company (the "Merger"), with the Company continuing as the surviving corporation
and becoming a wholly-owned subsidiary of Oracle, and all of the shares of
common stock, $0.01 par value, of the Company (the "Common Stock") issued and
outstanding immediately prior to the Merger will be converted into the right to
receive $1.50 per share in cash, without interest. Detailed information
concerning the Merger is set forth in the accompanying Proxy Statement which you
are urged to read carefully. A copy of the Merger Agreement is attached as
Appendix A to the accompanying Proxy Statement.
Approval and adoption of the Merger Agreement requires the affirmative vote
of a majority of the outstanding shares of Common Stock held by stockholders of
record on October 14, 1998 (the "Record Date"). Pursuant to Support Agreements,
dated August 20, 1998, among Oracle and certain stockholders of the Company who
beneficially own approximately 56.5% of the outstanding shares of Common Stock
entitled to vote at the Special Meeting (the "Support Agreements"), such
stockholders have agreed, among other things, to vote their shares in favor of
the Merger and the adoption of the Merger Agreement.
If you do not vote in favor of the Merger, you will have the right to
dissent and to seek appraisal of the fair market value of your shares if the
Merger is consummated and you comply with the Delaware law procedures explained
on pages 30 to 32 of the Proxy Statement. The Merger is conditioned upon not
having 10% or more of the stockholders properly demanding appraisal rights. If
the Merger is not consummated, there can be no assurances that the Company will
be able to continue as a going concern.
THE BOARD OF DIRECTORS OF THE COMPANY HAS CAREFULLY REVIEWED AND CONSIDERED
THE TERMS AND CONDITIONS OF THE MERGER AGREEMENT AND HAS DETERMINED THAT THE
MERGER AGREEMENT AND THE MERGER ARE FAIR TO AND IN THE BEST INTERESTS OF THE
COMPANY AND ITS STOCKHOLDERS AND HAS UNANIMOUSLY APPROVED AND ADOPTED THE MERGER
AGREEMENT AND RECOMMENDS THAT YOU VOTE FOR APPROVAL AND ADOPTION OF THE MERGER
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY.
In reaching its determination, the Board of Directors considered, among
other things, the opinion of NationsBanc Montgomery Securities, LLC ("NMS")
that, as of the date of such opinion and based upon and subject to certain
matters stated therein, the consideration to be received by the stockholders of
the Company pursuant to the Merger was fair from a financial point of view as of
the date of the Merger Agreement. The opinion of NMS is included as Appendix B
to the accompanying Proxy Statement. You are urged to read the opinion in its
entirety for further information with respect to the assumptions made, matters
considered and limitations on the review undertaken by NMS.
I urge you to read the enclosed material carefully and request that you
promptly complete and return the enclosed proxy card in the enclosed return
envelope, which requires no postage if mailed in the United States. If you
attend the Special Meeting, you may vote in person even if you have previously
returned your proxy card. YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF
SHARES YOU OWN. THE MERGER CANNOT BE COMPLETED UNLESS THE STOCKHOLDERS OF THE
COMPANY APPROVE AND ADOPT THE MERGER AGREEMENT.
If the Merger becomes effective, a Letter of Transmittal with instructions
will be mailed to all stockholders of record to use in surrendering their
certificates representing Common Stock. PLEASE DO NOT SEND YOUR CERTIFICATES
UNTIL YOU RECEIVE THE LETTER OF TRANSMITTAL.
On behalf of the Board of Directors, I thank you for your support and urge
you to vote FOR adoption of the Merger Agreement.
Sincerely,
/s/ Paul J. Zoukis
Paul J. Zoukis
President and Chief Executive Officer
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES REGULATORS. NOR HAVE THE COMMISSION
OR ANY STATE SECURITIES REGULATORS PASSED UPON THE FAIRNESS OR MERITS OF SUCH
TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN
THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
<PAGE>
VERSATILITY INC.
11781 LEE JACKSON MEMORIAL HIGHWAY
SEVENTH FLOOR
FAIRFAX, VIRGINIA 22033
(703) 591-2900
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON NOVEMBER 18, 1998
Dear Stockholder:
Notice is hereby given that a Special Meeting of Stockholders (the "Special
Meeting") of Versatility Inc., a Delaware corporation (the "Company"), will be
held at 10:00 a.m. on Wednesday, November 18, 1998 at 10:00 a.m., local time,
for the following purposes:
1. To consider and vote upon the approval and adoption of the
Agreement and Plan of Merger, dated August 20, 1998 (the "Merger
Agreement"), among the Company, Oracle Corporation, a Delaware corporation
("Oracle"), and AQX Acquisition Corporation, a Delaware corporation and a
wholly-owned subsidiary of Oracle ("Acquisition Sub"), pursuant to which
Acquisition Sub will be merged with and into the Company (the "Merger"),
with the Company continuing as the surviving corporation and becoming a
wholly-owned subsidiary of Oracle, and all of the shares of common stock,
$0.01 par value, of the Company (the "Common Stock") issued and outstanding
immediately prior to the Merger will be converted into the right to receive
$1.50 per share in cash, without interest. Detailed information concerning
the Merger is set forth in the accompanying Proxy Statement which you are
urged to read carefully. A copy of the Merger Agreement is attached as
Appendix A to the accompanying Proxy Statement.
2. To transact any other business which may properly come before the
Special Meeting or any adjournment or postponement thereof.
Stockholders of the Company who do not vote in favor of the Merger will
have the right to dissent and to seek appraisal of the fair market value of
their shares if the Merger is consummated and they comply with the Delaware law
procedures explained in the accompanying Proxy Statement. The Merger is
conditioned upon not having 10% or more of the stockholders properly demanding
appraisal rights. If the Merger is not consummated, there can be no assurances
that the Company will be able to continue as a going concern.
Approval and adoption of the Merger Agreement requires the affirmative vote
of a majority of the outstanding shares of Common Stock held by stockholders of
record on October 14, 1998 (the "Record Date"). Edison Venture Fund, L.P.,
Noro-Moseley Partners III, L.P., Keith D. Roberts, Ronald R. Charnock, Ernest J.
Connon and Marcus W. Heth, stockholders of the Company (each, an "Affiliated
Stockholder" and collectively, the "Affiliated Stockholders"), beneficially
owned an aggregate of 4,122,906 shares of Common Stock on the Record Date,
constituting approximately 56.5% of the outstanding shares of Common Stock
entitled to vote at the Special Meeting. Pursuant to Support Agreements, dated
as of August 20, 1998, among the Company, Oracle and the Affiliated
Stockholders, the Affiliated Stockholders, in their capacity as such, have
agreed, among other things, to vote their shares in favor of the Merger and the
adoption of the Merger Agreement.
Only holders of record of Common Stock at the close of business on the
Record Date are entitled to notice of and to vote at the Special Meeting or any
adjournments or postponements thereof. Any stockholder will be able to examine a
list of the holders of record, for any purpose related to the Special Meeting,
during ordinary business hours during the 10-day period before the Special
Meeting. The list will be available at the offices of the Company.
Stockholders may vote in person or by proxy. The accompanying Proxy
Statement explains the Merger in detail and is accompanied by a proxy card. In
order to assure that your vote will be counted, please complete, date, sign and
return the enclosed proxy card promptly in the enclosed prepaid envelope whether
or not you plan to attend the Special Meeting. Your proxy may be revoked at any
time before it is voted, by submitting to the Secretary of the Company a written
revocation or a proxy bearing a later date, or by attending and voting in person
at the Special Meeting.
THE BOARD OF DIRECTORS OF THE COMPANY HAS APPROVED THE MERGER AGREEMENT
AND THE MERGER AND RECOMMENDS THAT STOCKHOLDERS VOTE FOR APPROVAL AND ADOPTION
OF THE MERGER AGREEMENT.
By Order of the Board of Directors
/s/ Paul J. Zoukis
Paul J. Zoukis
President and Chief Executive Officer
Fairfax, Virginia
October 16, 1998
YOUR VOTE IS IMPORTANT. PLEASE EXECUTE AND RETURN THE ENCLOSED PROXY PROMPTLY,
WHETHER OR NOT YOU INTEND TO BE PRESENT AT THE SPECIAL MEETING. PLEASE DO NOT
SEND IN ANY CERTIFICATES FOR YOUR SHARES AT THIS TIME.
<PAGE>
[VERSATILITY INC. LOGO OMITTED]
VERSATILITY INC.
11781 LEE JACKSON MEMORIAL HIGHWAY
SEVENTH FLOOR
FAIRFAX, VIRGINIA 22033
(703) 591-2900
PROXY STATEMENT FOR SPECIAL MEETING
This Proxy Statement is being furnished to the stockholders of Versatility
Inc., a Delaware corporation ("Versatility" or the "Company"), in connection
with the solicitation by its Board of Directors (the "Board") of proxies to be
used at a Special Meeting of Stockholders (the "Special Meeting") to be held at
the Holiday Inn-Fairfax Oaks, 11787 Lee Jackson Memorial Highway, Fairfax,
Virginia 22033 on Wednesday, November 18, 1998 at 10:00 a.m., local time, and at
any postponements or adjournments thereof. This Proxy Statement, the Notice of
Special Meeting of Stockholders and the enclosed form of Proxy are first being
mailed to stockholders of Versatility on or about October 19, 1998.
The Special Meeting of Stockholders has been called to consider and vote on
a proposal to adopt the Agreement and Plan of Merger (the "Merger Agreement")
(attached to this Proxy Statement as Appendix A) pursuant to which AQX
Acquisition Corporation ("Acquisition Sub"), a Delaware corporation and
wholly-owned subsidiary of Oracle Corporation, a Delaware corporation
("Oracle"), will be merged with and into Versatility (the "Merger") and each
outstanding share (other than shares held by any stockholders who are entitled
to and who have perfected their dissenters' rights under Delaware law) of the
common stock, par value $0.01 per share, of Versatility (the "Common Stock")
will be canceled and converted automatically into the right to receive $1.50 per
share in cash (the "Merger Consideration"), payable to the holder thereof,
without interest.
The consummation of the Merger is subject to a number of conditions.
Accordingly, even if the stockholders adopt the Merger Agreement, there can be
no assurance that the Merger will be consummated. The Merger is conditioned upon
not having 10% or more of the stockholders properly demanding appraisal rights.
If the Merger is not consummated, there can be no assurances that the Company
will be able to continue as a going concern.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF
SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED
IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
------------------
The date of this Proxy Statement is October 16, 1998.
<PAGE>
TABLE OF CONTENTS
PAGE
----
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE ........................... 1
SUMMARY ................................................................... 2
Date, Time and Place of the Special Meeting .............................. 2
Purpose of the Special Meeting ........................................... 2
Record Date .............................................................. 2
Vote Required, Quorum .................................................... 2
Parties to the Merger Transaction ........................................ 3
The Proposal ............................................................. 4
Effective Time of the Merger; Payment for Shares ......................... 5
Background of the Merger Transaction ..................................... 5
The Board's Recommendation ............................................... 5
Opinion of Investment Bankers ............................................ 6
Conflicts of Interest .................................................... 6
Certain Effects of the Merger ............................................ 6
Conditions to the Merger ................................................. 6
Termination of the Merger Agreement ...................................... 7
Termination Fee and Payment of Expenses .................................. 8
License Agreement ........................................................ 8
Federal Income Tax Consequences .......................................... 9
Market Prices for Common Stock and Dividends ............................. 9
Rights of Dissenting Stockholders ........................................ 10
THE SPECIAL MEETING ....................................................... 11
Time, Place and Purpose of the Special Meeting ........................... 11
Record Date .............................................................. 11
Vote Required; Quorum .................................................... 11
Solicitation Of Proxies .................................................. 12
THE MERGER ................................................................ 12
General .................................................................. 12
Background of the Merger ................................................. 12
Recommendation of the Board of Directors ................................. 18
Opinion of NationsBanc Montgomery Securities LLC ......................... 19
Interests of Certain Persons in the Merger ............................... 22
The Merger Agreement ..................................................... 23
License Agreement ........................................................ 29
Regulatory Compliance .................................................... 30
Accounting Treatment ..................................................... 30
Appraisal Rights ......................................................... 30
Federal Income Tax Consequences .......................................... 32
Certain Effects of the Merger ............................................ 33
INFORMATION REGARDING THE COMPANY ......................................... 34
Recent Developments ...................................................... 35
Products ................................................................. 36
Services ................................................................. 37
Customers ................................................................ 37
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PAGE
----
Technology and Product Development ....................................... 38
Sales and Marketing ...................................................... 39
Competition .............................................................. 40
Intellectual Property and Other Proprietary Rights ....................... 40
Regulatory Environment ................................................... 41
Employees ................................................................ 41
Properties ............................................................... 41
Legal Proceedings ........................................................ 42
INFORMATION REGARDING ORACLE .............................................. 44
Oracle Corporation ....................................................... 44
AQX Acquisition Corporation .............................................. 44
SELECTED FINANCIAL DATA FOR VERSATILITY INC. .............................. 45
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS .................................................... 47
Overview ................................................................. 47
Recent Developments ...................................................... 48
Results of Operations .................................................... 49
Liquidity and Capital Resources .......................................... 52
Factors Which May Effect Future Operating Results ........................ 53
MARKET PRICE AND DIVIDEND INFORMATION ..................................... 61
SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT .......... 62
INDEPENDENT PUBLIC ACCOUNTANTS ............................................ 63
WHERE YOU CAN FIND ADDITIONAL INFORMATION ................................. 63
OTHER BUSINESS ............................................................ 63
1998 ANNUAL MEETING OF STOCKHOLDERS ....................................... 63
Appendices
Appendix A: Agreement and Plan of Merger ................................. A-1
Appendix B: Opinion of NationsBanc Montgomery Securities LLC ............. B-1
Appendix C: Section 262 of the General Corporate Law of the State of
Delaware ................................................... C-1
ii
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FORWARD-LOOKING STATEMENTS
Some statements contained in this Proxy Statement regarding future
financial performance and results and other statements that are not historical
facts are forward-looking statements. The words "expect," "project," "estimate,"
"predict," "anticipate," "believes" and similar expressions are also intended to
identify forward-looking statements. Such statements and Versatility's results
are subject to numerous risks, uncertainties and assumptions, including, but not
limited to: possible deficiencies in future liquidity levels, possible declines
in market growth rates, dependence on key customers, possible failure of product
development activities, the development of alternative technologies by
competitors of Versatility or its customers, price pressures and other
competitive factors, volatility in the market for Versatility's products, and
legal proceedings. These risk factors are more fully described in "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those indicated in this Proxy Statement.
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SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement. Reference is made to, and this Summary is qualified in its
entirety by, the more detailed information contained elsewhere in this Proxy
Statement. Capitalized terms used but not defined in this Summary shall have the
meanings ascribed to them elsewhere in this Proxy Statement. Stockholders are
urged to read this Proxy Statement and its appendices in their entirety before
voting.
DATE, TIME AND PLACE OF THE
SPECIAL MEETING......... A Special Meeting of the stockholders of
Versatility will be held on Wednesday, November
18, 1998, at 10:00 a.m., local time, at the
Holiday Inn-Fairfax Oaks, 11787 Lee Jackson
Memorial Highway, Fairfax, Virginia 22033.
PURPOSE OF THE
SPECIAL MEETING.......... At the Special Meeting, the stockholders will
consider and vote on a proposal to adopt the
Merger Agreement (attached to this Proxy Statement
as Appendix A) pursuant to which Acquisition Sub
will be merged with and into Versatility and each
outstanding share of Common Stock will be
cancelled and converted automatically into the
right to receive the Merger Consideration, other
than shares held by stockholders who are entitled
to and who have perfected their dissenters'
rights. See "The Merger."
RECORD DATE............... The Board has fixed the close of business on
October 14, 1998 as the record date (the "Record
Date") for the determination of stockholders
entitled to notice of, and to vote at, the Special
Meeting and any postponements or adjournments
thereof. On the Record Date, there were 7,295,009
shares of Common Stock outstanding. Each holder of
record of Common Stock at the close of business on
the Record Date is entitled to one vote for each
share of Common Stock then held on each matter
submitted to a vote of stockholders. See "The
Special Meeting -- Record Date."
VOTE REQUIRED; QUORUM.... The affirmative vote of the holders of a majority
of the outstanding shares of Common Stock entitled
to vote at the Special Meeting pursuant to
Delaware law is required to adopt the Merger
Agreement. Thus, a failure to vote or a vote to
abstain will have the same legal effect as a vote
cast against adoption. In addition, brokers who
hold shares of Common Stock as nominees will not
have discretionary authority to vote such shares
in the absence of instructions from the beneficial
owners. See "The Special Meeting -- Vote Required;
Quorum."
The holders of a majority of the outstanding
shares of Common Stock entitled to vote at the
Special Meeting must be present in person or
represented by proxy to constitute a quorum for
the transaction of business.
Edison Venture Fund, L.P., Noro-Moseley Partners
III, L.P., Keith D. Roberts, Ronald R. Charnock,
Ernest J. Connon and Marcus W. Heth, stockholders
of the Company (each, an "Affiliated Stockholder"
and collectively, the "Affiliated Stock-
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holders"), beneficially owned an aggregate of
4,122,906 shares of Common Stock on the Record
Date, constituting approximately 56.5% of the
outstanding shares of Common Stock entitled to
vote at the Special Meeting. Pursuant to Support
Agreements, dated as of August 20, 1998, among the
Company, Oracle and the Affiliated Stockholders
(the "Support Agreements"), the Affiliated
Stockholders, in their capacity as such, have
agreed, among other things, to vote their shares
of Common Stock in favor of the Merger and the
adoption of the Merger Agreement. As the
Affiliated Stockholders have agreed to vote their
shares of Common Stock in favor of the Merger
pursuant to the Support Agreements the presence of
the requisite quorum and the approval of the
Merger is assured. See "The Special Meeting --
Vote Required; Quorum."
PARTIES TO THE MERGER
TRANSACTION............... Versatility Inc. Versatility is a leading provider
of client/server customer interaction software
that enables businesses to automate and enhance
their telesales, telemarketing and teleservicing
capabilities. The Company's software products are
designed to increase the productivity and
revenue-generating capabilities of organizations
operating call centers as they interact with
existing and potential customers. The Company's
products include desktop software applications,
development and customization tools and optional
server-based software services. A wide variety of
leading computing platforms are supported allowing
users to implement a scalable, 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 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 terms
"Versatility" and the "Company" refer to
Versatility Inc., its subsidiaries and the
predecessors of Versatility Inc.
Oracle Corporation. Oracle is the world's leading
supplier of software products for information
management and the world's second largest software
company. Oracle's software products can be
categorized into three primary product families:
Server Technologies, Application Development and
Business Intelligence Tools and Business
Applications. Oracle's Technologies family of
products consists of distributed database servers,
connectivity products and gateways. The Oracle8
relational data-
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base management system ("DBMS") is the key
component of Oracle's Server Technologies database
offering for storing, manipulating and retrieving
relational, object-relational, multi-dimensional
text, spatial, video and other types of data.
Oracle's Application Development Tools consist of
a set of software products capable of building
database applications for deployment in both
client-server and web environments. Oracle also
provides a complete set of Business Intelligence
tools allowing users to report, query and analyze
data held in an operational system or data
warehouse. Oracle's Business Applications products
consist of over 45 integrated software modules for
financial management, supply chain management,
manufacturing, project systems, human resources
and front office applications. Oracle's principal
products run on a broad range of computers,
including mainframe, massively parallel,
clustered, symmetrical multi-processing,
minicomputers, workstations, personal computers
and laptop computers and over 85 different
operating systems, including UNIX, Windows and
Windows NT. In addition to software products,
Oracle offers consulting, education, support and
systems integration services in support of its
customers' use of its software products.
Oracle was incorporated on October 29, 1986 in
connection with a reincorporation of Oracle's
predecessor in Delaware, which was completed on
March 12, 1987. Oracle's former primary operating
subsidiary, Oracle Corporation, a California
corporation, was incorporated in June 1977. In May
1995, Oracle Corporation was merged into Oracle
Systems Corporation, a Delaware corporation, whose
name was changed to Oracle Corporation. Unless the
context otherwise requires, "Oracle" refers to
Oracle Corporation, its predecessor and its
subsidiaries. Oracle maintains its executive
offices and principal facilities at 500 Oracle
Parkway, Redwood City, California 94065. Its
telephone number is (650) 506-7000.
AQX Acquisition Corporation. Acquisition Sub is a
Delaware corporation organized on August 13, 1998
in connection with the Merger. Acquisition Sub's
principal executive offices are located at 500
Oracle Parkway, Redwood City, California 94065.
Oracle is the sole stockholder of Acquisition Sub.
Prior to the Merger, Acquisition Sub will not have
any significant assets or liabilities (other than
its rights and obligations in connection with the
Merger Agreement) and will not engage in any
activities other than those incident to its
formation and the transactions contemplated by the
Merger Agreement.
THE PROPOSAL.............. The Merger Agreement provides that, subject to
satisfaction of certain conditions, Acquisition
Sub will be merged into Versatility, and that
following the Merger, the separate existence of
Acquisition Sub will cease and Versatility will
continue as the surviving corporation (the
"Surviving Corporation"). At the Effective Time
(as defined below) and subject to the conditions
and
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<PAGE>
procedures set forth in the Merger Agreement, each
share of issued and outstanding Common Stock
(other than shares as to which statutory
dissenters' rights are properly perfected and not
withdrawn) will, by virtue of the Merger, be
converted into the right to receive $1.50 in cash,
without interest. See "The Merger."
EFFECTIVE TIME OF THE MERGER;
PAYMENT FOR SHARES...... The Merger will become effective (the "Effective
Time") at the time and date when a copy of a
certificate of merger is filed with the Secretary
of State of the State of Delaware pursuant to the
Delaware General Corporation Law (the "DGCL"). The
time of such filing will occur as soon as
practicable after the Special Meeting and the
definitive settlement of the putative class
actions (as defined herein), subject to approval
of the principal terms of the Merger Agreement at
the Special Meeting and satisfaction or waiver of
the other conditions of the Merger Agreement.
Detailed instructions with regard to the surrender
of certificates, together with a letter of
transmittal, will be forwarded to stockholders by
BankBoston N.A. (the "Payment Agent") promptly
following the Effective Time. Stockholders should
not submit their certificates to the Payment Agent
until they have received instructions from the
Payment Agent. Payment for shares of Common Stock
will be made to stockholders as promptly as
practical following receipt by the Payment Agent
of their certificates and other required
documents. No interest will be paid or accrued on
the cash payable upon the surrender of
certificates. See "The Merger -- The Merger
Agreement." STOCKHOLDERS SHOULD NOT SEND ANY SHARE
CERTIFICATES AT THIS TIME.
BACKGROUND OF THE MERGER.. For a description of the events leading to the
approval and adoption of the Merger Agreement by
the Board, see "The Merger -- Background of the
Merger."
THE BOARD'S RECOMMENDATION. The Board has determined that the Merger Agreement
and the transactions contemplated thereby, are
advisable and in the best interests of the Company
and its stockholders and has unanimously approved
and adopted the Merger Agreement and the
transactions contemplated thereby, including the
Merger. In reaching its unanimous determination,
the Board considered a number of factors, which
taken together support such determination,
including without limitation, the following: the
financial condition and operations of the Company,
the concerns over the Company's liquidity and
capital resources, the effects of the Company's
restatement of its historical financial
statements, the inability of the Company to obtain
new financing, the assessment of management that
the Company could not long sustain its continuing
operating losses, the analysis presented by
NationsBanc Montgomery Securities LLC ("NMS"), the
extensive solicitation process conducted by NMS in
seeking a buyer for Versatility, and the
conclusion of the Board that Oracle's proposal was
the most favorable proposal received.
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For a more complete discussion of the factors
considered by the Board, see "The Merger --
Recommendation of the Board of Directors."
OPINION OF
INVESTMENT BANKERS........ Versatility retained NMS to act as its financial
advisor to review any proposed business
combination and render its opinion to the Board.
NMS provided an opinion dated August 20, 1998, to
the Board that, as of that date, and subject to
the assumptions, limitations and qualifications
set forth in such opinion, the Merger
Consideration to be received by the holders of
Common Stock pursuant to the Merger Agreement is
fair to such stockholders, from a financial point
of view. The full text of the written opinion of
NMS, which sets forth a description of assumptions
made, matters considered and limitations on the
review undertaken by NMS, is attached as Appendix
B to this Proxy Statement. Stockholders are urged
to read such opinion carefully in its entirety.
See "The Merger -- Opinion of NationsBanc
Montgomery Securities LLC."
CONFLICTS OF INTEREST...... In considering the recommendation of the Board
with respect to the Merger, stockholders should be
aware that certain officers and directors of
Versatility have interests in connection with the
Merger which may present them with actual or
potential conflicts of interest. These interests
include those described in "The Merger --
Interests of Certain Persons in the Merger."
CERTAIN EFFECTS OF
THE MERGER............... As a result of the Merger, the entire equity
interest in Versatility will be owned by Oracle.
Stockholders will no longer have any interest in,
and will not be stockholders of, Versatility, and
therefore will not participate in its future
earnings and growth. Instead, each such holder of
Common Stock will have the right to receive $1.50
in cash, without interest, for each share held
(other than shares in respect of which dissenters'
rights have been perfected). See "The Merger --
Certain Effects of the Merger."
CONDITIONS TO
THE MERGER............... The obligations of the Company and Oracle to
complete the Merger are subject to a number of
conditions. If these conditions are not satisfied
or waived, the Merger will not be completed. These
conditions include (i) the approval of the
Company's stockholders; (ii) the receipt of final
court approval of the settlement of the putative
class actions (as defined herein) filed in the
United States District Court for the Southern
District of New York and the United States
District for the Eastern District of Virginia on
terms consistent with the Memorandum of
Understanding Concerning Settlement Terms dated
July 9, 1998 and the expiration of all rights to
appeal such settlement; (iii) the retention of
Marcus Heth and certain employees of the Company;
(iv) there shall not be instituted and continuing
any action, suit or proceeding against the
Company, Oracle, Acquisition Sub by any
governmental entity or any other person or
persons, (a) directly or indirectly relating to
the Merger or the License Agreement (as defined
herein) or any other transactions contemplated by
the Merger Agreement, (b) who is or was a
stockholder or stockholders of the
6
<PAGE>
Company, whether on behalf of such stockholder or
stockholders, or in a derivative action on behalf
of the Company, (c) alleging infringement by the
Company of intellectual property assets of any
third party or (d) which individually or in the
aggregate could reasonably be expected to have a
material adverse effect on the Company and its
subsidiaries; (v) the aggregate number of
Dissenting Shares (as defined herein) held by
Dissenting Stockholders (as defined herein) shall
not be equal to or exceed ten percent of the
outstanding shares of Common Stock immediately
prior to the Effective Time; (vi) no order being
entered in any action or proceeding or other legal
restraint or prohibition that prevents the
consummation of the Merger; (vii) the expiration
of any applicable antitrust waiting period
applicable to the Merger; (viii) the accuracy in
all material respects of the representations and
warranties of the Company and Oracle; and (ix) the
performance in all material respects by the
Company and Oracle of all obligations and
covenants required to be performed or complied
with under the Merger Agreement. See "The Merger
-- The Merger Agreement."
TERMINATION OF THE MERGER
AGREEMENT............... Either the Company or Oracle may terminate the
Merger Agreement if (i) they mutually consent in
writing; (ii) a final order shall have been issued
prohibiting the Merger; or (iii) the Merger has
not been consummated by December 31, 1998 (unless
otherwise extended).
Oracle may terminate the Merger Agreement if: (i)
prior to the Effective Time (a) the Board
withdraws or modifies its approval or
recommendation of the Merger in a manner adverse
to Oracle, (b) the Board or the Company shall have
recommended to the stockholders, taken no position
with respect to, or failed to recommend against
acceptance of a Third Party Acquisition (as
defined herein), (c) the Company has entered into
or the Board approves a definitive agreement with
respect to a Third Party Acquisition (as defined
herein), (d) the Company fails to confirm its
recommendation of the Merger Agreement upon a
written request by Oracle to do so, or (e) the
Board or the Company has resolved to do any of the
foregoing, or (ii) the Company has breached, in
any material respect, the representations,
warranties or covenants of the Merger Agreement.
The Company may terminate the Merger Agreement if:
(i) the Board shall have withdrawn or modified in
a manner adverse to Acquisition Sub or Oracle its
approval or recommendation of the Merger in order
to approve a definitive agreement related to a
superior proposal for the acquisition of the
Company, provided that the Company shall have
complied with the notice provisions hereof and
shall have made payment of the Termination Fee (as
described below) or (ii) Oracle or Acquisition Sub
have breached in any material respect, their
representations, warranties and covenants in the
Merger Agreement.
7
<PAGE>
For a more complete discussion of these
termination provisions, see "The Merger -- The
Merger Agreement."
TERMINATION FEE AND PAYMENT
OF EXPENSES............. In the event that the Merger Agreement is
terminated by Oracle or by the Company pursuant to
the Board's exercise of its fiduciary duty and the
Company was not entitled to terminate the
Agreement pursuant to a breach by Oracle, the
Company shall pay Oracle (i) a fee of $360,000,
plus (ii) an amount equal to Oracle's
out-of-pocket fees and expenses (not to exceed
$200,000). If the Company shall fail to pay any
amounts when due, interest shall accrue on such
unpaid amounts at a rate of 6% per annum.
In the event that the Merger Agreement is
terminated because the Merger was not consummated
by December 31, 1998 or as a result of a breach by
the Company (and the Company was not entitled to
terminate the Merger Agreement as a result of a
breach by Oracle) and the Company consummates a
Third Party Acquisition (as defined herein) within
12 months after the date of such termination, the
Company shall pay Oracle (i) a fee of $360,000,
plus (ii) an amount equal to Oracle's
out-of-pocket fees and expenses (not to exceed
$200,000). If the Company shall fail to pay any
amounts when due, interest shall be paid on such
unpaid amounts at a rate of 6% per annum.
For a more complete discussion of these
termination fees and expenses, see "The Merger --
The Merger Agreement."
LICENSE AGREEMENT......... On August 20, 1998, in connection with entering
into the Merger Agreement, Oracle and the Company
entered into a Technology License Agreement, which
was amended by Amendment No. 1 to the License
Agreement dated September 10, 1998 (as amended,
the "License Agreement") whereby the Company
granted to Oracle a worldwide, non-exclusive right
and license to market, reproduce, distribute and
grant sublicenses of the computer software owned
or distributed by the Company (the "Company's
Technology"). As payment for the license granted,
Oracle will pay to the Company a fee equal to 30%
of the net fees which Oracle receives for all
sublicenses of the Company's Technology until the
earlier of (i) six years from the date of the
License Agreement and (ii) the payment by Oracle
of a total of $12 million. Additionally, Oracle
has partially prepaid, and will prepay, to the
Company $2 million of such sublicense fees in
three equal monthly installments on each of
September 1, October 1 and November 1, 1998 (the
"Prepaid Sublicense Fee").
If Oracle breaches the Merger Agreement in any
material respect and fails to cure such breach
within twenty business days after written notice
or Oracle fails for any reason to pay the
sublicense fees, then the Company has the option
of terminating the License Agreement by providing
Oracle with written notice of such termination
within twenty business days after the date of the
written
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<PAGE>
notice of breach from Versatility to Oracle, which
termination shall not be effective unless and
until Versatility refunds all but $360,000 of the
Prepaid Sublicense Fee to Oracle within 180 days
of providing Oracle with notice of termination of
the License Agreement.
If the Merger Agreement is being or has been
terminated and Versatility is obligated to pay
Oracle the Termination Fee, Versatility refunds to
Oracle all of the Prepaid Sublicense Fee prior to
or simultaneously with the payment of such
Termination Fee, and the Termination Fee is paid
in accordance with the terms of the Merger
Agreement then the License Agreement shall
terminate.
For a more complete discussion of the License
Agreement see "The Merger -- the License
Agreement."
FEDERAL INCOME TAX
CONSEQUENCES.............. The receipt of the Merger Consideration by holders
of Common Stock pursuant to the Merger will be a
taxable transaction for federal income tax
purposes. For a more detailed discussion of the
federal income tax consequences of the Merger, see
"Federal Income Tax Consequences." All holders of
Common Stock are urged to consult their tax
advisors to determine the effect of the Merger on
such holders under federal, state, local and
foreign tax laws.
MARKET PRICES FOR COMMON
STOCK AND DIVIDENDS...... Following the Company's initial public offering on
December 13, 1996, until July 20, 1998, the Common
Stock was traded on the Nasdaq National Market
("Nasdaq") under the symbol "VERS." Nasdaq halted
trading of the Common Stock on March 12, 1998.
Trading resumed on Nasdaq on May 5, 1998. On July
20, 1998, Nasdaq delisted the Common Stock. On
July 21, 1998 the Common Stock began trading on
the OTC Bulletin Board. The following tables
present historical trading information about the
Common Stock closing share prices:
<TABLE>
<CAPTION>
LOW HIGH
----------- -----------
<S> <C> <C>
FISCAL 1997
Quarter ended January 31, 1997 (subsequent
to December 13, 1996) .................... $ 13.13 $ 18.25
Quarter ended April 30, 1997 ............... 8.00 13.63
FISCAL 1998
Quarter ended July 31, 1997 ................ 10.00 13.75
Quarter ended October 31, 1997 ............. 7.75 13.88
Quarter ended January 31, 1998 ............. 3.75 9.13
Quarter ended April 30, 1998 ............... 2.50 5.88
FISCAL 1999
Quarter ended July 31, 1998 ................ 0.75 2.25
Quarter ended October 31, 1998 (through
October 14, 1998) ........................ 0.94 1.94
</TABLE>
9
<PAGE>
On August 19, 1998 (the last trading day before
the Board's approval of the Merger) the closing
share price was $1.63 per share. No cash dividends
have been paid on the Common Stock by Versatility
since its shares were publicly distributed in
1996, and Versatility does not currently intend to
pay cash dividends on the Common Stock. Certain
provisions of the Company's loan agreements as
well as the Merger Agreement prohibit the
Company's ability to pay cash dividends.
RIGHTS OF DISSENTING
STOCKHOLDERS.............. Any stockholder who does not wish to accept the
Merger Consideration has the right under the DGCL
to receive the "fair value" of his, her or its
shares of Common Stock as determined by a Delaware
court. This "appraisal right" is subject to a
number of restrictions and technical requirements.
Generally, in order to perfect appraisal rights a
stockholder (i) must not vote in favor of adopting
the Merger Agreement; and (ii) must make a written
demand for appraisal before the vote on the Merger
Agreement. However, if the Merger is not
consummated, there can be no assurances that the
Company will be able to continue operations.
Merely voting against the Merger Agreement will
not protect a stockholder's right of appraisal
under the DGCL. Appendix C to this Proxy Statement
contains the applicable provisions of the DGCL
relating to appraisal rights. See "The Merger --
Appraisal Rights."
10
<PAGE>
THE SPECIAL MEETING
TIME, PLACE AND PURPOSE OF THE SPECIAL MEETING
This Proxy Statement and the accompanying proxy card are solicited by the
Board. These proxies will be used at the Special Meeting to be held at 10:00
a.m. local time, on Wednesday, November 18, 1998 at the Holiday Inn-Fairfax
Oaks, 11787 Lee Jackson Memorial Highway, Fairfax, Virginia 22033, and at any
and all postponements and adjournments thereof. The purpose of the Special
Meeting is to consider and vote on a proposal to adopt the Merger Agreement (the
"Proposal"), pursuant to which Acquisition Sub will be merged into Versatility
with Versatility continuing as the Surviving Corporation. The Board approved the
Merger Agreement. THE BOARD OF DIRECTORS OF VERSATILITY UNANIMOUSLY RECOMMENDS
THAT VERSATILITY STOCKHOLDERS VOTE FOR ADOPTION OF THE MERGER AGREEMENT.
RECORD DATE
Stockholders of record at the close of business on the Record Date will be
entitled to vote at the Special Meeting. On the Record Date, there were
7,295,009 shares of Common Stock outstanding which were held by approximately 87
stockholders of record. Each holder of record of Common Stock at the close of
business on the Record Date is entitled to one vote for each share of Common
Stock then held on each matter submitted to a vote of stockholders.
VOTE REQUIRED; QUORUM
At the Special Meeting, the holders of Common Stock will vote on the
proposal to adopt the Merger Agreement (the "Proposal"). In order to be adopted,
holders of a majority of all the outstanding shares of Common Stock must vote in
favor of approving the Merger Agreement. Votes withheld and abstentions will not
be counted as votes cast and will not be voted. In addition, brokers who hold
shares of Common Stock as nominees will not have discretionary authority to vote
such shares in the absence of instructions from the beneficial owners.
The presence, in person or by proxy, of the holders of shares representing
a majority of the outstanding shares eligible to vote at the Special Meeting
shall constitute a quorum. Shares of Common Stock held by brokers who 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, shall be counted, for
the purpose of determining the presence or absence of a quorum. If a quorum has
been established for the purpose of conducting the Special Meeting, a quorum
shall be deemed to be present for the purpose of all votes to be conducted at
such meeting.
The Affiliated Stockholders of the Company beneficially owned an aggregate
of 4,122,906 shares of Common Stock on the Record Date, constituting
approximately 56.5% of the outstanding shares of Common Stock entitled to vote
at the Special Meeting. Pursuant to the Support Agreements, the Affiliated
Stockholders, in their capacity as such, have agreed, among other things, to
vote their shares in favor of the Merger and the adoption of the Merger
Agreement. The holders of a majority of the outstanding shares entitled to vote
at the Special Meeting must be present in person or represented by proxy to
constitute a quorum for the transaction of business. As the Affiliated
Stockholders have agreed to vote their shares of Common Stock in favor of
approval and adoption of the Merger Agreement pursuant to the Support
Agreements, the presence of the requisite quorum and approval of the Merger is
assured.
All shares represented by properly executed and unrevoked proxies will be
voted at the Special Meeting. You may revoke your proxy before it is voted by
executing another proxy at a later date, by notifying the secretary of
Versatility in writing of your revocation, or by attending the Special Meeting
in person and voting in person.
11
<PAGE>
If the enclosed proxy card is duly executed and received in time for the
Special Meeting, and if no contrary instructions are included on the proxy card,
it is the intention of the persons named as proxies to vote the shares of Common
Stock represented thereby in favor of the Proposal to adopt the Merger
Agreement, and, in the discretion of the persons named as proxies, in connection
with any other business that may properly come before the Special Meeting or any
postponement or adjournment thereof.
At this time, Versatility knows of no other matters that may be presented
for stockholder action at the Special Meeting. However, if any matters, other
than approval and adoption of the Merger Agreement, should properly come before
the Special Meeting, it is the intention of the persons named in the enclosed
proxy card to vote such proxy in accordance with their best judgment.
In the event that there are not sufficient votes to adopt the Proposal
raised at the Special Meeting, it is expected that the Special Meeting will be
postponed or adjourned in order to permit further solicitation of proxies by
Versatility.
The delivery of this Proxy Statement shall not, under any circumstances,
create any implication that the information contained herein is correct after
the date hereof, October 16, 1998.
THE BOARD OF VERSATILITY UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE APPROVAL
AND ADOPTION OF THE MERGER AGREEMENT. THE AFFIRMATIVE VOTE OF HOLDERS OF A
MAJORITY OF THE OUTSTANDING SHARES OF COMMON STOCK IS REQUIRED TO ADOPT THE
MERGER AGREEMENT.
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT IN CONNECTION
WITH VERSATILITY'S SOLICITATION OF PROXIES AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY VERSATILITY OR ANY OTHER PERSON.
SOLICITATION OF PROXIES
Officers and regular employees of Versatility may solicit proxies from
stockholders by telephone, telegram, facsimile or in person. Versatility will
not pay these individuals any additional compensation for such services, except
for the reimbursement of any reasonable out-of-pocket expenses that they may
incur. Versatility will pay all expenses of the solicitation of proxies for the
Special Meeting, including the cost of mailing.
THE MERGER
GENERAL
The following information, insofar as it relates to matters contained in
the Merger Agreement, is qualified in its entirety by reference to the Merger
Agreement, which is incorporated herein by reference and attached hereto as
Appendix A. Stockholders are urged to read the Merger Agreement in its entirety.
All information contained in this Proxy Statement with respect to Oracle and its
subsidiaries, including Acquisition Sub, has been supplied by Oracle for
inclusion herein and has not been independently verified by the Company.
BACKGROUND OF THE MERGER
On February 12, 1998, the Company announced that it would be reporting a
significant loss for the third quarter of fiscal year 1998 (the three-month
period ending January 31, 1998). Over the following 30 days the Company
undertook an extensive review, under the direction of the Audit Committee of the
Board (the "Audit Committee"), of the financial condition and previously issued
financial statements of the Company. The Audit Committee engaged Deloitte &
Touche LLP to assist it in its review. On March 12, 1998, the Company announced
that, as a result of concerns over the accounting treatment of certain
transactions, it expected to restate its financial results for the fiscal year
ended April 30, 1997 and the fiscal quarters ended July 31, 1997 and October 31,
1997 and announced that its Form 10-Q for the
12
<PAGE>
quarter ending January 31, 1998 would not be filed on time. Additionally, the
Company announced that Ronald R. Charnock, the Company's Chairman of the Board,
Chief Executive Officer and founder of the Company had resigned.
In the fourth quarter of the 1998 fiscal year, the Company hired new
management to fill vacated positions in the Company's senior management. On
February 2, 1998, the Company hired Kenneth T. Nelson as the new Chief Financial
Officer. On February 26, 1998, the Company hired Paul J. Zoukis as President and
Chief Operating Officer and James J. Dellamore as Senior Vice
President-Operations. Mr. Zoukis became a member of the Board upon Mr.
Charnock's resignation. Furthermore, during March and April 1998, the Company
significantly reduced its workforce in order to reduce its need for working
capital and to offset the Company's continued operational issues and financial
losses.
On March 12, 1998, the National Association of Securities Dealers (the
"NASD") suspended trading of the Common Stock on Nasdaq and instituted
proceedings to remove the Common Stock from listing on Nasdaq.
Between March 6, 1998 and April 8, 1998 the Company and certain of its
current and former officers and directors, among others, were sued in various
putative securities class actions. Collectively, these putative class actions
(as defined herein) asserted claims under Sections 11, 12(2) and 15 of the
Securities Act of 1933, as amended (the "Securities Act") and Sections 10(b) and
20(a) of the Securities and Exchange Act of 1934, as amended (the "Exchange
Act") for alleged misrepresentations and omissions in connection with the
Securities and Exchange Commission (the "Commission") filings and other public
statements made by the Company. Among other allegations, each of the putative
class actions alleged that the Company misrepresented its financial results and
its accounting practices during the period from December 12, 1996 to March 12,
1998, including financial results and accounting practices used in connection
with the Company's initial public offering. The complaints in certain of the
putative class actions also asserted, among other allegations, that the Company
and certain of the other defendants made misrepresentations in connection with
the initial public offering and thereafter regarding the performance
capabilities of the Company's CallCenter product.
Beginning in March 1998, the Company began receiving informal requests for
information from the Commission relating to accounting and financial matters. In
May 1998, the Company was advised by the Commission that it had obtained a
formal order of investigation so that, among other matters, it may use subpoena
powers to obtain information relevant to its inquiry. The Commission has used
its subpoena powers to obtain information from various officers, directors and
employees of the Company and from persons not presently associated with the
Company.
As a result of the foregoing events and the continued decline in the
Company's financial condition, the Board directed that the Company retain
financial advisors to assist the Company in evaluating its alternatives. On
April 6, 1998, representatives of NMS met with Messrs. Zoukis and Nelson to
discuss strategic alternatives to the Company's business operations, including a
possible acquisition of the Company, and discussed the retention of NMS as
financial advisor to the Company.
At a meeting on April 14, 1998, the Board discussed at length the Company's
financial and strategic situation and alternatives. It was the view of the
Company's new management and the Board that the Company could not long sustain
its continuing operating losses. As a result of the announcement that the
Company would be restating its financial statements and the suspension of
trading in the Common Stock by Nasdaq, customers of the Company were delaying
orders of the Company's products. After considering, among other factors, the
Company's current financial turmoil and the Company's limited prospects,
including the failure to attain the financial covenant thresholds set forth in
its working capital loans, the Board authorized the exploration of strategic
alternatives and retained NMS to work with the Company's management to explore
such alternatives. Such alternatives included, without limitation, a sale of the
Company, a third party investment, a business combination or any similar
transaction or a combination of the foregoing. In deciding to authorize the
exploration process, the Board considered presentations by the Company's
management and took into account the past financial, operating and trading
performance of the Company and the Common Stock and the prospects for future
performance, including employee retention, stockholder litigation and working
capital requirements. The Board also
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<PAGE>
discussed that the Company's ability to obtain additional loans would be
restricted because Silicon Valley Bank, a California chartered bank (the "Bank")
had a security interest on all of the Company's assets, including the
intellectual property of the Company. Additionally, the Board considered
preliminary discussions with two interested companies regarding potential
acquisitions of, or strategic partnerships with, the Company. The Board directed
Messrs. Zoukis and Nelson to work with NMS to continue to develop potential
business combinations with these two companies and to develop a list of
potential strategic partners and investors for the Company.
In furtherance of the exploration process, upon retention of NMS on April
27, 1998, NMS contacted a Board-approved list of potential partners, totaling 36
corporations and investment firms, including Oracle. NMS's activities during
this time frame included several weeks of due diligence (onsite and market
analysis) on the Company, during which time, NMS and the Company produced an
informational book that was distributed to the identified parties to ascertain
their interest, if any, in acquiring or investing in the Company. NMS and the
Company's management held informational conversations and discussions with the
36 strategic buyers and financial investors. Discussions with potential
acquirors centered on a number of issues, including but not limited to, the
status of the stockholder lawsuits against the Company, the effect of these
legal proceedings and the restatement of the Company's financial results on the
continuity of business with the Company's largest customers and sale
opportunities with potential customers, the status of product development during
the legal proceedings, and the future role of the management team
post-acquisition. The risk of a judgment against the Company in the stockholder
litigation caused a number of potential partners to decline an acquisition of
the Company or undertake more significant discussions until the Company could
provide more information concerning its financial exposure to the stockholder
litigation.
On April 29, 1998, the Company announced its restated financial figures and
financial results for the third quarter of the 1998 fiscal year. The Company
disclosed in the Form 10-Q for the quarter ended January 31, 1998 that it had
incurred significant losses and that it anticipated continued significant losses
in the fourth quarter of the 1998 fiscal year. The Company also announced the
retention of NMS as the Company's financial advisor. On May 5, 1998, as a result
of the Company's release of restated financial information and the filing of the
Company's Form 10-Q for the quarter ended January 31, 1998, Nasdaq's Listing and
Qualifications Panel allowed the Common Stock to resume trading contingent upon
the Company's attainment of net tangible assets of $10 million by June 30, 1998.
On May 6, 1998, the Company's management met with a private investment firm
(the "Investment Firm") concerning a potential equity investment in the Company.
The Company gave a presentation to the Investment Firm on the Company's
background and solicited its interest in investing in the Company. On May 14,
1998, the Company held a day long due diligence meeting with the Investment Firm
to review the Company's product technology, sales prospects, organization and
customers.
On May 8, 1998, NMS made a presentation to its private equity fund in an
effort to raise private financing for the Company. On May 13, 1998, NMS
conducted an initial meeting with a producer of "outbound" telephone call
processing systems regarding a possible strategic acquisition of the Company.
This company indicated at that meeting and in subsequent conversations that it
did not have a continued interest in the Company. On May 19, 1998, the Company,
NMS and one of the original parties interested in a strategic partnership with
the Company conducted a technical review of the Company. At the meeting this
company showed interest but indicated that it was not comfortable with the
Company's technology and was not prepared to present an offer to acquire the
Company.
On May 29, 1998, June 3, 1998 and July 16, 1998, the Company and NMS
conducted initial meetings with three companies which presented the possibility
of a strategic fit with the Company. The first company indicated little
interest, citing an incomplete fit between its business and the Company's
products. The other two, a small software company traded on Nasdaq ("Bidder A")
and a small developer of voice processing software whose stock is traded on
Nasdaq ("Bidder B"), each showed potential interest in the Company and NMS
continued discussions with each in an effort to obtain a bid for the Company.
On June 18, 1998, the Investment Firm met with the Company at the Company's
headquarters in order to conduct further due diligence and to discuss a proposed
term sheet. Over the next few weeks, the Company and the Investment Firm
conducted extensive negotiations over the terms of the potential
14
<PAGE>
investment by the Investment Firm. On July 1, 1998, a meeting was held at
Versatility's headquarters with the senior management of the Investment Firm to
review all the business aspects of the proposed transaction and term sheet
status. After additional negotiations, the Investment Firm presented a final
term sheet for the investment. The final term sheet provided for a $7.5 million
investment by the Investment Firm in the form of preferred stock convertible
into Common Stock at a price of $1.15 per share and warrants for 950,000 shares
of Common Stock priced at $1.38 per share. The investment would have been
subject to a number of conditions precedent. The Investment Firm, after
reviewing the condition of the Company and market conditions, advised that it
would have its final commitment or rejection of the transaction on July 10,
1998. On July 13, 1998, the Investment Firm formally rejected the investment.
On July 9, 1998, the Company announced that it reached a settlement in
principle with the plaintiffs in all six putative securities class action
lawsuits then currently pending against the Company. The settlement in principle
was conditioned upon the execution and filing with the court of a definitive
agreement of settlement and final court approval. The Company's settlement in
principle of its stockholder litigation provided the catalyst for a number of
potential acquirors to initiate or resume their evaluation of the Company.
At a meeting on July 14, 1998, the Board discussed the financial condition
and the status of efforts to provide additional funding to the Company. Mr.
Nelson made a presentation to the Board regarding the deteriorating financial
condition of the Company and the immediate need to obtain additional financing
so that the Company could meet its working capital requirements. Mr. Nelson also
reported to the Board that as a result of the continued delay in customer
orders, the cash balances and account receivables were below the minimum
thresholds set forth in the amended credit facilities with the Bank, and, as a
result, the Company was not in compliance with its amended credit facilities.
Mr. Zoukis reported on the Investment Firm's decision not to provide financing
to the Company. The Board instructed Messrs. Zoukis and Nelson to reinitiate
discussions with the Investment Firm and continue to search for alternative
financing arrangements. The Board also discussed the status of the proceedings
with Nasdaq and the likely possibility that the Common Stock would be delisted
based on the Company's inability to obtain $10 million of net tangible assets as
of June 30, 1998. The Company's counsel was directed to respond to Nasdaq with a
request for additional time in order to assess any potential offer for the
acquisition of the Company. Mr. Zoukis also reported to the Board on the status
of the identification of potential acquirors for the Company. The Board
discussed the valuation of the Company versus the valuation of its competitors
and the current market for businesses in the Company's industry. The Board
directed NMS to continue discussions with potential acquirors, to ask for formal
offers from interested parties and to secure bridge financing, if available, in
connection with any letter of intent for the purchase of the Company.
In order to secure needed financing and to pursue strategic alternatives,
the Company requested a 45-day extension from the Nasdaq June 30, 1998 deadline.
The Company's request was denied by Nasdaq and the Common Stock was delisted
from Nasdaq on July 20, 1998. The Common Stock began trading on the OTC Bulletin
Board on July 21, 1998. As a result of the Company's current customers voicing
concerns about the Company's financial and operating instability and the
delisting of its Common Stock from Nasdaq, the Company's financial and operating
position continued to deteriorate during July and August of 1998. At the end of
July, four parties, including Oracle, began to formulate proposals for the
acquisition of the Company. Submission of proposals and subsequent negotiations
took place during the latter part of July. During this time, these parties
undertook extensive due diligence, including but not limited to, reviewing the
Company's financial information, evaluating essential technologies and
interviewing essential members of the Company's management.
On July 24, 1998, in a conference call originally scheduled for July 9,
1998 with Oracle to review the Company's products and technology, Marcus Heth
presented to representatives of Oracle a very brief overview of the Versatility
products, technology, and markets. Oracle gave a very short review of its
perspective of the market. Several days after the conference call, Oracle
informed NMS that it would like a more formal and detailed presentation at
Oracle's headquarters during the first week of August.
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During the week of July 27, 1998, Bidder A presented, and after discussions
with the Company, subsequently revised a proposed letter of intent outlining the
basic terms pursuant to which Bidder A proposed to acquire the capital stock of
the Company. Bidder A's proposed transaction would be structured as a tax-free
reorganization wherein the stockholders of the Company would receive an
aggregate of 1,000,000 shares of Bidder A common stock. Based upon the market
value of Bidder A's common stock, the Bidder A transaction amounted to a
valuation of approximately $1.03 per share of the Common Stock. Optionholders
with exercise prices of $0.80 per share (a group which does not include any of
the Company's current management) would receive $0.70 per share at closing. All
options and the Company's warrants would be cancelled. The proposed agreement
with Bidder A would include restrictions on sale of Bidder A stock by
significant stockholders of the Company for six months, a limitation of the
severance payments to the management of the Company and renegotiation of the
financial advisory fee to be paid to NMS. The Bidder A proposal also required
the retention of current management for a period of two years at reduced salary
levels. The agreement also would be conditioned upon settlement of all of the
Company's litigation, including the putative class actions (as defined herein)
and approval of both Bidder A's and the Company's banks and senior creditors.
Upon receipt of the proposed letter of intent from Bidder A, Mr. Zoukis
reported to the Board the status of negotiations with Bidder A and the prospects
of other potential acquirors making offers for the Company. In these
discussions, the Board discussed Bidder A's valuation of the Company and
reviewed the overall value to be received by the stockholders if the proposed
transaction were consummated. The Board instructed the management of the Company
to continue to pursue other alternative strategic partners and to continue to
negotiate with Bidder A in order to establish an improved valuation for the
Company and to obtain bridge financing in connection with the Bidder A proposal.
On July 30, 1998, the Company filed with the Commission its Form 10-K for
the 1998 fiscal year, which ended April 30, 1998. The financial statements
included in the Form 10-K showed that the Company incurred losses of $27.0
million for the fiscal year and that the Company's current liabilities exceeded
current assets by $498,000. As a result of the Company's deteriorating financial
condition, the failure to attain the financial covenant thresholds set forth in
the Company's credit facilities with the Bank and the outstanding putative class
action lawsuits, the independent auditors' report on the Company's financial
statements as of April 30, 1998 and for the year then ended included an
explanatory paragraph which indicated that these matters raise substantial doubt
about the Company's ability to continue as a going concern.
On August 4, 1998, at a meeting with Oracle at Oracle's headquarters in
Redwood City, California, Mr. Heth made a presentation to Oracle on a variety of
topics, including the state of the Company, the reasons for the Company's
financial decline, the Company's software architecture overview, an overview of
the Company's products, product demonstrations and a market and competitive
overview. Mr. Heth and representatives of Oracle discussed the Call Center
market, Oracle's desire to become a significant participant in that market and
Oracle's interest in the Versatility product suite. On August 5, 1998,
Versatility learned that Oracle was interested in pursuing additional
discussions regarding a possible acquisition of the Company and wanted to make
customer reference calls and visit the Company's headquarters for more technical
and business reviews. From August 6 to August 12, 1998, Versatility arranged for
customer reference calls with Oracle, informed customer contacts of the
confidentiality of these calls and set expectations that the calls were
preliminary in nature. As a result of Mr. Heth's visit, representatives of
Oracle indicated that they were impressed with the technical merits of the
Company's product line and verbally communicated to NMS an interest in acquiring
the Company.
On August 6, 1998, Oracle submitted a term sheet to the Company. The term
sheet proposed a negotiated cash tender offer for all of the Company's
outstanding shares of Common Stock. Oracle and the Company discussed an offer
price equal to $1.50 per share. Optionholders with exercisable options at an
exercise price of $0.80 per share would effectively receive $0.70 per share at
closing. All options and the Company's warrants would otherwise be cancelled.
Upon closing of the tender offer, Oracle would merge the Company with and into a
wholly-owned subsidiary of Oracle and cash out any remaining stockholders at the
same per share price. The merger would be conditioned upon the occurrence of
certain events, including, but not limited to, receiving 60% or more of the
outstanding shares of Com-
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mon Stock in the initial tender offer, obtaining the final settlement of the
putative class actions, obtaining non-competition agreements from certain
employees of the Company and obtaining employment commitments from key
employees.
From August 10, 1998 to August 12, 1998, Oracle conducted an initial visit
to the Versatility headquarters. Oracle representatives made additional customer
reference calls and attended additional Versatility technology, architecture,
and product presentations and demonstrations. Oracle representatives conducted
reviews of Versatility's finances, contracts, litigation, personnel and
organizational structure. Oracle also confirmed the $1.50 per share offer price
for the Common Stock
On August 11, 1998, the Company received a preliminary proposal from Bidder
B. Under the Bidder B proposal, the Company would be merged with and into Bidder
B and pursuant to which the stockholders of the Company would receive 40% of the
combined entity, with a reallocation of the percentage ownership after one year.
In this reallocation, stockholders of Versatility would receive between 20% and
60% of the combined entity's equity as recalculated based upon a valuation of
the relative businesses' performances over the one-year period. The consummation
of the proposal was subject to a number of conditions precedent. The closing
also would be conditioned upon the renegotiation of the debt repayments with the
Bank and negotiation of acceptable contract addenda with key customers.
On August 13, 1998, the Board convened, with representatives of NMS and
Tucker, Flyer & Lewis present, to discuss the merits of the outstanding offers
and to review the current status of the sales efforts. During the discussion,
Tucker, Flyer & Lewis advised the Board of its duties and responsibilities
towards both the stockholders and creditors of the Company. The representatives
of NMS gave a detailed presentation to the Board regarding the steps and
activities undertaken to date as financial advisors to the Company and in detail
discussed the financial terms of the proposed transactions with Oracle, Bidder A
and Bidder B. On August 13, 1998, the approximate valuation of Bidder A's offer
equaled $0.95 per share of the Common Stock based upon the then market value of
Bidder A's common stock. The Company's management presented to the Board a
description of the financial position of the Company. Management of the Company
also informed the Board that the Bank told the Company that it wanted a specific
plan from the Company by August 19, 1998. There were also discussions regarding
customers continuing to delay orders pending resolution of the financial
uncertainties facing the Company. Following the presentations from NMS and the
Company's management and after significant deliberation, the Board determined
that the Oracle proposal provided the best alternative for the stockholders of
the Company and that each of the proposals from other potential acquirors
offered less value to the stockholders and less certainty of consummation than
Oracle's cash proposal. However, the Board expressed concerns over the structure
of the Oracle proposal in light of the time required to reach the final
settlement of the putative class actions, the provision of working capital
during the tender offer period and certain other provisions set forth in the
Oracle proposal. The Board instructed management to continue negotiations with
Oracle and to maintain lines of communication with Bidder A and Bidder B.
After the August 13, 1998 Board meeting, the management of the Company
continued negotiations with Oracle. In light of the time restrictions of the
settlement of the putative class actions, the Oracle proposal was modified to be
structured as a one-step all cash merger. Management of the Company and Oracle
completed negotiation of the definitive Merger Agreement on August 20, 1998. The
terms of the Merger Agreement are more fully defined below in "-- the Merger
Agreement." Management of the Company and Oracle also negotiated the License
Agreement pursuant to which $2 million in prepaid royalties will be made
available to the Company in order to provide the Company with working capital.
See "-- License Agreement." During this period management of the Company and NMS
continued to pursue the other potential suitors for the Company.
In the evening of August 20, 1998, the Board met, with representatives of
NMS and Tucker, Flyer & Lewis present, to review and discuss the terms of the
proposed transaction. Following presentations and advice from their advisors and
discussion of the proposed transaction and available alternatives, the Board
unanimously approved the Merger and authorized execution of the Merger Agreement
and other
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ancillary documents. On August 20, 1998, the Merger Agreement was executed and
delivered by the parties and on August 21, 1998, the Company and Oracle issued a
press release announcing the proposed Merger.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board has determined that the Merger Agreement and the transactions
contemplated thereby, including the Merger, are advisable and in the best
interests of the Company and its stockholders and has unanimously approved and
adopted the Merger Agreement and the transactions contemplated thereby,
including the Merger. ACCORDINGLY, THE BOARD UNANIMOUSLY RECOMMENDS THAT
STOCKHOLDERS VOTE "FOR" APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE
TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE MERGER. See "-- Background of
the Merger" and "-- Opinion of NationsBanc Montgomery Securities LLC."
In reaching its unanimous determination that the Merger Agreement and the
transactions contemplated thereby, including the Merger, are advisable and in
the best interests of the Company and its stockholders, the Board considered a
number of factors, which factors taken together support such determination,
including without limitation, the following:
(i) the existing assets, financial condition and operations of the
Company, including, without limitation, concerns over the Company's
liquidity and capital resources, the effects of the Company's restatement
of its historical financial statements, the inability of the Company to
obtain new financing, the Company's relatively small size and market
capitalization, and the assessment of management that the Company could not
long sustain its continuing operating losses;
(ii) the current and prospective environment in which the Company
operates, including national and local economic conditions and the
competitive environment for computer software generally;
(iii) the analysis presented by NMS and the opinion of NMS to the
effect that, as of the date of such opinion and based upon and subject to
the assumptions, limitations and qualifications set forth in such opinion,
the Merger Consideration to be received by the stockholders in the Merger
was fair to such stockholders, from a financial point of view (see "--
Opinion of NationsBanc Montgomery Securities LLC");
(iv) the conclusion of the Board that Oracle's proposal was the most
favorable proposal received, in terms of the value to be realized by
stockholders of the Company and the likelihood of consummation, based on
the advice of the Company's management, as well as the Board's judgment,
after review with the Company's management and its outside legal and
financial advisors of alternatives to the Merger, that the stockholders of
the Company would realize greater value from the transaction with Oracle
than from the other alternatives available to the Company (see "--
Background of the Merger");
(v) the extensive solicitation process conducted by NMS in seeking an
acquiror for Versatility (see "-- Background of the Merger"), particularly
the fact that, based upon the discussions described therein, none of such
alternatives, even if successfully carried to completion, would have
resulted in per-share consideration to the holders of Common Stock as high
as the Merger Consideration;
(vi) the terms and conditions of the Merger Agreement, as reviewed by
the Board with its legal advisors including (a) those relating to the fee
of $360,000 and expense reimbursements (for documented out-of-pocket
expenses and fees incurred in connection with the Merger up to a maximum of
$200,000) to Oracle payable upon the termination of the Merger Agreement as
a result of competing offers, the aggregate amount of which would not, in
the Board's judgment, preclude a third party from making an offer that was
materially more favorable to the Company's stockholders and (b) those
relating to the ability of the Board to consider unsolicited offers from
third parties prior to the Effective Time (see "-- The Merger Agreement");
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(vii) the License Agreement entered into with Oracle which provides
for the payment of a prepaid license fee of $2 million to the Company,
which has assisted the Company in meeting expected working capital
requirements prior to the consummation of the Merger (see "-- License
Agreement");
(viii) the fact that the Merger Consideration is all cash and that the
Merger is not subject to financing contingencies (see "-- The Merger
Agreement"); and
(ix) the fact that the Company was not in compliance under its credit
facility with the Bank.
The foregoing discussion of the information and factors considered by the
Board is not meant to be exhaustive but is believed to include the material
factors considered by the Board. The Board did not quantify or attach any
particular weight to the various factors that it considered in reaching its
determination that the Merger Agreement and the transactions contemplated
thereby, including the Merger, are advisable and in the best interests of the
stockholders of the Company. In reaching its determination, the Board took the
various factors into account collectively and the Board did not perform a
factor-by-factor analysis, nor did the Board consider whether any individual
factor was, on balance, positive or negative.
OPINION OF NATIONSBANC MONTGOMERY SECURITIES LLC
Pursuant to an engagement letter signed as of April 27, 1998, Versatility
engaged NMS to render to the Board an opinion with respect to the fairness to
Versatility, from a financial point of view, of the consideration to be paid by
a potential acquiror in connection with its acquisition of Versatility and to
provide other advisory services. Pursuant to the Merger Agreement, each share of
Common Stock will be converted into the right to receive cash payment per share
equal to $1.50 per share, without interest. NMS is a nationally recognized firm
and, as part of its investment banking activities, is regularly engaged in the
valuation of businesses and their securities in connection with merger
transactions and other types of acquisitions, negotiated underwritings,
secondary distributions of listed and unlisted securities, private placements
and valuations for corporate and other purposes.
At the August 20, 1998 meeting of the Board, NMS delivered its written
opinion that the consideration to be paid by Oracle to the stockholders of the
Company in the Merger is fair to the stockholders of Versatility from a
financial point of view, as of the date of such opinion. The amount of such
consideration was determined pursuant to negotiations between Versatility and
Oracle and was approved by the Board. The full text of NMS's written opinion to
the Versatility Board, which sets forth the assumptions made, matters considered
and limitations of review by NMS, is attached hereto as Appendix B, and is
incorporated herein by reference. The following summary of NMS's opinion is
qualified in its entirety by reference to the full text of the opinion, attached
as Appendix B. Versatility stockholders are urged to read the opinion carefully
in its entirety.
NMS has informed Versatility that in arriving at its opinion NMS: (i)
reviewed certain publicly available financial and other data with respect to
Versatility, including the consolidated financial statements for recent years
and interim periods and certain other relevant financial and operating data
relating to Versatility made available to NMS from published sources and from
the internal records of Versatility; (ii) conducted an extensive market survey
and analysis involving 36 possible purchasers and investors; (iii) considered a
discounted cash flow analysis; (iv) considered that the purchase price would
provide a premium to the Company's stockholders as compared to recent trading
prices for the Common Stock; (v) reviewed the financial terms and conditions of
the draft Merger Agreement; (vi) reviewed certain publicly available information
concerning the trading of, and the trading market for the Common Stock; (vii)
compared the Company from a financial point of view with certain other companies
which NMS deemed to be relevant; (viii) considered the financial terms, to the
extent publicly available, of selected recent business combinations which NMS
deemed to be comparable, in whole or in part, to the Merger; (ix) reviewed and
discussed with representatives of the management of the Company certain
information of a business and financial nature regarding Versatility, furnished
to NMS by Versatility, including financial forecasts and related assumptions of
Versatility; (x) made inquiries re-
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garding, and discussed, the Merger and the Merger Agreement and other matters
related thereto with Versatility's counsel; (xi) made inquiries regarding legal
claims and other potential contingent liabilities; and (xii) performed such
other analyses and examinations as NMS deemed appropriate.
In rendering its opinion, NMS relied upon and assumed the accuracy and
completeness of all of the financial and other information that was available to
it from public sources, that was provided to it by Versatility or its
representatives or that was otherwise reviewed by it. With respect to the
financial forecasts supplied to NMS by Versatility and its representatives, NMS
assumed for purposes of its opinion that the forecasts were reasonably prepared
on bases reflecting the best available estimates and judgments of the management
of Versatility at the time of preparation as to the future financial performance
of Versatility and that estimates and judgments provided a reasonable basis upon
which NMS could form its opinion. NMS also assumed that there had been no
material improvements in the assets, financial condition, results of operations,
business or prospects since the date of the last financial statements made
available to it by Versatility. In addition, NMS did not assume responsibility
for making an independent evaluation, appraisal or physical inspection of any of
the assets or liabilities (contingent or otherwise) of Versatility, nor was it
furnished with any such appraisals. Oracle informed NMS, and NMS assumed, that
the Merger will be recorded as a purchase under generally accepted accounting
principles. NMS also assumed the Merger will be consummated in accordance with
the terms described in the Agreement, without any further amendments thereto,
and without waiver by either Versatility or Oracle of any of the conditions to
its obligations thereunder.
The following is a summary of certain analyses performed by NMS to arrive
at its opinion. NMS performed certain procedures, including each of the analyses
described below, and reviewed with Versatility management and the Board the
assumptions on which such analyses were based and other factors.
Indicated Acquisition Interest Analysis. NMS and Versatility distributed
written material regarding the business and prospects of Versatility to 36
companies that NMS and Versatility believed would have an interest in investing
in or acquiring, and have the ability to invest in or acquire, Versatility. Of
the 36 parties, only three indicated significant interest in acquiring
Versatility. Additionally, another potential acquiror indicated that it would
have an interest in acquiring the assets of Versatility after, and on the
condition that, Versatility was reorganized pursuant to Chapter 11 of Title 11
of the United States Code, as amended (the "Bankruptcy Act"). No restrictions
were placed on the form of the transaction or the form of consideration to be
paid by the purchaser. The three proposals ranged in value for the Company's
stockholders from $4.5 million ($0.54 per share) to approximately $12.4 million
($1.50 per share) calculated using the number of outstanding shares, plus
400,000 additional shares to be issued pursuant to the proposed settlement of
the putative class actions and the number of shares of Common Stock purchasable
pursuant to options with exercise prices below the Merger Consideration.
Oracle's proposal was the highest and most likely to be consummated. NMS, on
behalf of Versatility, attempted to negotiate a higher price with the three
potential acquirors, but was unable to effect an increase above $1.50 per share.
The Merger Agreement with Oracle was reviewed and negotiated, particularly with
respect to certainty of closing.
Discounted Cash Flow Analysis. NMS performed a discounted cash flow
analysis for Versatility. The analysis aggregated (a) the present value of the
projected free cash flow (defined as after-tax operating cash, minus increases
in working capital requirements) from 1998 through 2002; and (b) the present
value of a range of terminal values for the year 2002. As a result of the
negative current cash flow of Versatility and reasonably anticipated
continuation thereof, which would likely result in an insolvency proceeding
under the Bankruptcy Act, the discounted cash flow provided no evidence of value
for Versatility.
Premium Analysis. NMS reviewed publicly available information to determine
the premiums paid in six selected transactions in the technology industry
involving acquired companies with less than $400 million market capitalization
and poor historical financial performance (the "Selected Technology
Transactions"). For the Selected Technology Transactions, NMS reviewed the
percentage premium in each transaction represented by the offer prices over the
trading prices one day and one week prior to
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the announcement date of each respective transaction. The median percentage
amount by which the offer prices exceeded the closing stock prices one day and
one week prior to the announcement date for the Selected Technology Transactions
was approximately 15.0% and 3.0%, respectively. The percentage amount by which
the Merger Consideration exceeded the average closing stock price of the Common
Stock for the seven day period ending prior to August 13, 1998 is 24.0%. A
relevant range of 0.0% to 15.0% premium to the seven day average closing stock
price implies an equity value of $10 million to $11 million for Versatility.
Comparable Merger and Acquisition Transaction Analysis. NMS reviewed the
consideration paid in several acquisition transactions involving technology
companies of below $400 million market capitalization and poor historical
financial performance. NMS analyzed the consideration paid in such transactions
as a multiple of the target company's revenues for the last three months
reported annualized prior to announcement of the transaction ("LQA Revenues").
The transactions reviewed by NMS for purposes of this analysis included the
acquisition of: (i) FTP Software, Inc. by Net Manage, Inc.; (ii) Fulcrum
Technologies, Inc. by PC Docs, Inc.; (iii) CrossComm Corp. by Olicom A/S; (iv)
Easal Corp. by VMARK Software, Inc. and (v) ASK Group, Inc. by Computer
Associates International, Inc. Such analysis yielded a relevant range of
transaction multiples between 0.9x to 1.1x LQA Revenues, resulting in a range
of implied equity values for Versatility of between $5 million and $8 million.
Comparable Public Company Analysis. Using public and other available
information, NMS determined a range of implied aggregate values for Versatility
based on the multiples of LQA Revenues at which the following call center or
voice applications companies traded on August 11, 1998: EIS International, Inc.,
Mosaix, Inc. and Periphonics Corporation (the "Comparable Companies"). The
August 11, 1998 stock prices of the Comparable Companies reflected a range of
valuations of between 0.4x and 0.5x LQA Revenues. This analysis implied negative
equity values for Versatility of between $3 million and $1 million.
While the foregoing summary describes the analyses and examinations that
NMS deemed material to its opinion, it is not a comprehensive description of all
analyses and examinations actually performed. The preparation of a fairness
opinion necessarily is not susceptible to partial analysis or summary
description. NMS believes that such analyses and the summary set forth above
must be considered as a whole and that selecting portions of its analyses and of
the factors considered, without considering all such analyses and factors, would
create an incomplete view of the analyses set forth in its presentation to the
Board. In addition, NMS may have given various analyses more or less weight than
other analyses, and may have deemed various assumptions more or less probable
than other assumptions, so that the ranges of valuations resulting from any
particular analysis should not be taken to be NMS's view of the actual value of
Versatility or the Surviving Corporation.
In performing its analyses, NMS made numerous assumptions with respect to
industry performance, general business and economic conditions and other
matters, many of which are beyond the control of Versatility or Oracle. The
analyses performed by NMS are not necessarily indicative of actual values or
actual future results, which may be significantly more or less favorable than
suggested by such analyses. Such analyses were prepared solely as part of NMS's
analysis of the fairness to Versatility, from a financial point of view, of the
consideration to be paid to Versatility's stockholders by Oracle pursuant to the
Merger Agreement and were provided to the Board in connection with the delivery
of NMS's opinion. The analyses do not purport to be appraisals or to reflect the
prices at which a company might actually be sold or the prices at which any
securities may trade at the present time or at any time in the future.
As described above, NMS's opinion and presentation to the Board were among
the many factors taken into consideration by the Board in making its
determination to approve the Merger.
In connection with the Merger, Versatility has agreed to pay NMS a fee of
$1 million which will become due upon the closing of the Merger. Versatility has
also agreed to reimburse NMS for its reasonable out-of-pocket expenses. Pursuant
to a separate Indemnification and Contribution Agreement, Versatility has agreed
to indemnify NMS, its affiliates, and their respective directors, officers,
agents, stockholders, consultants, employees and controlling persons against
certain liabilities, including liabilities under the federal securities laws.
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The full text of NMS's opinion, dated August 20, 1998, which sets forth the
assumptions made, general procedures followed, matters considered and
limitations on the scope of review undertaken by NMS in rendering its opinion,
is attached hereto as Appendix B and is incorporated herein by reference in its
entirety. NMS's opinion is addressed to the Board and is directed only to the
fairness to Versatility, from a financial point of view, as of August 20, 1998,
of the consideration to be paid to the stockholders of Versatility in the Merger
and does not constitute a recommendation to any Versatility stockholder with
respect to the Merger.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the Merger, stockholders should be aware that certain
directors and officers of Versatility have interests in the Merger, as described
below.
Severance Agreements. In April 1998, the Company entered into Severance
Agreements (together, the "Severance Agreements") with each of Messrs. Paul J.
Zoukis, James J. Dellamore and Kenneth T. Nelson (the "Executives"). The
Severance Agreements generally provide that if the Executive's employment is
terminated for reasons other than cause, death or continued disability or if the
Executive terminates his employment for good reason, which includes a
termination by the Executive for any reason following a change in control of the
Company (as defined in the Severance Agreements, a "change in control" would
include the Merger) (a "Termination"), the Executive will be entitled to receive
a cash payment equal to the sum of (a) two times the executive's then-current
annual base salary, (b) two times his maximum potential bonus for the year in
which Termination occurs, (c) all bonuses previously awarded to the executive
that remain unpaid at the time of Termination, and (d) a portion of the maximum
annual bonus the Executive was eligible to receive in the year of Termination,
pro-rated for the number of months of such year during which the Executive was
in the employ of the Company. The Severance Agreements also provide for the
accelerated vesting of all unvested options and maintenance of all insurance
benefits for a period of two years after the date of Termination. The Company
also entered into a Severance Agreement with Keith Gomez, the Company's Vice
President of Finance and Controller, in March 1998, which generally provides
that if Mr. Gomez's employment is terminated without cause or if he terminates
his employment for good reason (which includes his terminating his employment
for any reason in connection with a change of control of the Company, such as
the Merger), he will be entitled to receive a cash payment equal to his
then-current annual base salary plus a portion of the maximum annual bonus he
was eligible to receive in the year his employment was terminated, pro-rated for
the number of months of such year during which he was in the employ of the
Company. If Mr. Gomez's employment terminates in connection with a change in
control, he is also entitled to the full amount of his maximum potential bonus
for the year in which termination occurs. Mr. Gomez's Severance Agreement also
provides for the accelerated vesting of all his unvested options upon a change
of control, such as the Merger. If payments under the Severance Agreements were
triggered, the amounts payable to each of Mr. Zoukis, Mr. Dellamore, Mr. Nelson
and Mr. Gomez would be, respectively, approximately $900,000, $724,000, $724,000
and $234,000. Each of Mr. Nelson's and Mr. Gomez's employment with the Company
will terminate in connection with the Merger and each accordingly will be
entitled to the severance payments described above. Each of Mr. Nelson and Mr.
Gomez entered into agreements with the Company and Oracle in connection with the
execution of the Merger Agreement whereby they agreed to waive certain
anti-dilution protection applicable to stock options they hold under a Company
stock option plan and further agreed that such stock options shall terminate
(contingent upon the closing of the Merger) at the Effective Time. Mr. Nelson
additionally agreed not to exercise any Company stock options prior to the
Effective Time.
Oracle Employment. In connection with the execution of the Merger
Agreement, Oracle entered into employment letters with certain of the Company's
officers and key employees. Each of Messrs. Zoukis, Dellamore, and Heth accepted
offers of employment with Oracle as Vice President, Sales, Vice President,
Services and Vice President of Development respectively, with annual salaries of
$250,000, $200,000 and $185,000, respectively. Such employment would begin at or
after the Effective Time and will be terminable at will. Additionally each of
Messrs. Zoukis, Dellamore and Heth would be entitled to receive a bonus equal to
their annual salary payable in two installments, the first of 30% of their base
salary after six months employment and the second of 70% of their base salary
after 12 months employ-
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ment. Upon initiation of Mr. Heth's employment at Oracle, Oracle will submit to
its Board of Directors a proposal to grant Mr. Heth options to purchase 25,000
shares of Oracle common stock. Messrs. Zoukis and Dellamore each agreed to
release any and all claims and rights that they may have under their Severance
Agreements (including all rights to amounts payable set forth in the description
of the Severance Agreement in the preceding paragraph) in exchange for a lump
sum payment, within five days of the Effective Time, of a pro rata portion of
their Versatility annual bonus earned up to the Effective Time plus $800,000 and
$640,000, respectively. Messrs. Zoukis and Dellamore agreed with Oracle and the
Company to amend their stock option agreements with the Company to waive any
antidilution protection provided therein and agreed not to exercise any of their
options to purchase Common Stock prior to the Effective Time, at which time (and
contingent upon the closing of the Merger) such options would terminate and be
of no further force and effect.
Non-Compete Agreements. In connection with the employment letters and the
Merger Agreement, Messrs. Zoukis, Dellamore, and Heth entered into Non-Compete
Agreements with the Company and Oracle whereby each agreed for a period of two
years following the Effective Time not to directly or indirectly own, operate,
manage or provide consulting services to any entity primarily engaged in the
selling, marketing, development or production of call center software or the
provision of implementation or integration support for such software and not to
engage or participate in any effort or act to solicit customers, suppliers,
associates, employees or consultants to cease doing business with the Surviving
Corporation or Oracle or in any way interfere with the business of the Surviving
Corporation. Mr. Zoukis' and Mr. Dellamore's Non-Compete Agreements provide that
Oracle shall provide certain health and insurance benefits to these Executives
for a period of 24 months following the Effective Time. These benefits shall be
payable even if Mr. Zoukis and Mr. Dellamore do not commence employment with
Oracle, and Oracle's obligation would terminate prior to the expiration of such
24 month period only if such Executive commenced employment with Oracle and
Oracle subsequently terminated such employment for cause.
Support Agreements. Messrs. Charles A. Johnson and Thomas A. Smith, each a
director of the Company, are principals in Noro-Moseley Partners III, L.P. and
Edison Venture Fund, L.P., respectively. Noro-Mosley Partners III, L.P., Edison
Venture Fund, L.P. and Messrs. Keith D. Roberts, Ronald R. Charnock, Ernest J.
Connon and Marcus W. Heth each entered into Support Agreements with the Company
and Oracle, whereby such stockholders (i) agreed to vote all their shares of
Common Stock in favor of the Merger and against any action by the Company that
would breach the Merger Agreement or impair or delay the consummation of the
Merger and (ii) granted to designees of Parent an irrevocable proxy to vote
such shares in favor of the Merger and as agreed in the Support Agreements. The
Support Agreements terminate upon the earlier of the Effective Time or the
termination of the Merger Agreement. On the Record Date, the Affiliated
Stockholders beneficially owned an aggregate of 4,122,906 shares of Common
Stock, constituting 56.5% of the outstanding shares entitled to vote at the
Special Meeting.
Indemnification. The Merger Agreement provides that all rights to
indemnification or exculpation existing in favor of any directors or officers of
Versatility, as provided in Versatility's Certificate of Incorporation or bylaws
as in effect on the date of the Merger Agreement, shall survive the Merger with
respect to matters occurring at or prior to the Effective Time. Oracle has
agreed to use its reasonable efforts to maintain the existing Versatility policy
of directors' and officers' liability and fiduciary insurance for a period of
six years after the Effective Time, subject to certain premium limitations.
THE MERGER AGREEMENT
The following summary of the Merger Agreement is subject to, and qualified
in its entirety by, the complete text of the Merger Agreement, which is attached
to this Proxy Statement as Appendix A. The terms of the Merger Agreement are the
result of arm's-length negotiations between the Company and Oracle.
Terms of the Merger. At the Effective Time, subject to the terms,
conditions and procedures set forth in the Merger Agreement and the DGCL,
Acquisition Sub will be merged with and into the Company, the separate corporate
existence of Acquisition Sub will cease, and the Company will con-
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tinue as the Surviving Corporation. Subject to and immediately following the
receipt of the requisite vote of the stockholders of the Company and the
satisfaction or waiver of the conditions to the consummation of the Merger set
forth in the Merger Agreement, the parties will cause the Merger to be
consummated by the filing of a certificate of merger as contemplated by the
DGCL. The Merger will be effective at the Effective Time.
The Merger Agreement provides that the certificate of incorporation and the
bylaws of Acquisition Sub, as in effect immediately prior to the Effective Time,
will be the certificate of incorporation and the bylaws of the Surviving
Corporation immediately after the Effective Time. The Merger Agreement provides
that the directors of Acquisition Sub immediately prior to the Effective Time
will be the directors of the Surviving Corporation immediately after the
Effective Time. The Merger Agreement further provides that the officers of
Acquisition Sub immediately prior to the Effective Time will be the officers of
the Surviving Corporation immediately after the Effective Time.
Conversion of Common Stock. Pursuant to the Merger Agreement, at the
Effective Time, each share of Common Stock that is issued and outstanding
immediately prior to the Effective Time (other than (i) shares held in treasury
by the Company, (ii) shares held by Oracle and Acquisition Sub or any direct or
indirect subsidiary of any of them or (iii) shares as to which dissenters'
rights have been perfected) will, by virtue of the Merger and without any action
on the part of the holder thereof, be converted into and represent the right to
receive, in cash, the Merger Consideration. Except for the right to receive the
Merger Consideration, from and after the Effective Time, all such shares, by
virtue of the Merger and without any action on the part of the holders of such
shares, will no longer be outstanding and will be canceled and retired and will
cease to exist. Each holder of a certificate formerly representing any of such
shares will after the Effective Time cease to have any rights with respect to
such shares other than the right to receive the Merger Consideration for such
shares upon the surrender of the certificate.
Treatment of Stock Options. The Merger Agreement provides that at the
Effective Time, each option to purchase shares of Common Stock outstanding under
the Company's 1998 Non-Qualified Stock Option Plan and 1996 Stock Option Plan
will terminate and each holder will receive in exchange therefor a cash payment
equal to the excess, if any, of the Merger Consideration times the number of
shares of Common Stock subject to such options which are vested and exercisable
as of the Effective Time over the aggregate exercise price of such option. The
Merger Agreement provides that the fair market value of the Common Stock on the
Effective Time will be deemed to equal the Merger Consideration.
The Merger Agreement provides that at the Effective Time, each option to
purchase shares of Common Stock outstanding under the Company's 1995 Employee
Stock Option Plan and 1995 Incentive Stock Option Plan (the "1995 Options") will
convert automatically into a right to receive upon exercise after the Effective
Time and subject to any continuing vesting provisions applicable to the option,
the Merger Consideration times the number of shares of Common Stock for which
the option is being exercised. The Merger Agreement further provides that no
shares of Common Stock will be issued upon the exercise of the 1995 Options
after the Effective Time.
Under the terms of the Merger Agreement, each option outstanding at the
Effective Time under the Company's 1996 Employee Stock Purchase Plan (the
"Purchase Plan") will terminate and the holder of each such option will receive
in exchange therefor a cash payment equal to the excess, if any, of (a) the
Merger Consideration times the number of shares of Common Stock that the
holder's accumulated payroll deductions could purchase as of the Effective Time,
at an option price determined with reference only to the first business day of
the applicable Payment Period (as defined in the Purchase Plan) and subject to
the limitations imposed by the Purchase Plan, over (b) the product of such
number of shares times the option price. The Merger Agreement provides that the
fair market value of the Common Stock at the Effective Time will be deemed to
equal the Merger Consideration.
Pursuant to the Merger Agreement, the Company will take all steps required
to terminate the Company's stock option plans and the Purchase Plan immediately
following the Effective Time.
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Treatment of Warrants. Under the terms of the Merger Agreement, Oracle will
not assume or continue any outstanding warrants to purchase shares of Common
Stock (the "Warrants") and at or following the Effective Time, each holder of an
outstanding Warrant will be entitled to receive an amount in cash equal to the
product of (i) the excess, if any, of the Merger Consideration over the per
share exercise price of such Warrant, and (ii) the number of shares of Common
Stock subject to such Warrant which are exercisable immediately prior to the
Effective Time.
Appraisal Rights. Pursuant to the Merger Agreement, shares of Common Stock
that are issued and outstanding immediately prior to the Effective Time and are
held by stockholders who have properly demanded appraisal of such shares in
accordance with the DGCL ("Dissenting Shares") will not be converted into the
right to receive the Merger Consideration at the Effective Time, unless and
until the holder of such Dissenting Shares has failed to perfect or has
effectively withdrawn or lost such right to appraisal and payment under the
DGCL. Under the Merger Agreement, if a holder of Dissenting Shares (a
"Dissenting Stockholder") failed to perfect or has effectively withdrawn or lost
such right to appraisal and payment, then, as of the Effective Time or the
occurrence of such event, whichever last occurs, the Dissenting Shares will be
converted into and represent solely the right to receive the Merger
Consideration, without any interest.
Payment for Shares. Under the Merger Agreement, from and after the
Effective Time, the Payment Agent will effect the exchange of the Merger
Consideration for certificates which prior to the Effective Time represented
shares of Common Stock and which as of the Effective Time represent the right to
receive the Merger Consideration (the "Certificates"). After the Effective Time,
the Payment Agent will mail to each record holder of Certificates a form of
letter of transmittal and instructions for use in surrendering such Certificates
and receiving the Merger Consideration. At or prior to the Effective Time,
Acquisition Sub will deposit in trust with the Payment Agent immediately
available funds in an amount sufficient to pay the Merger Consideration for all
such shares to the Company's stockholders. Upon the surrender of each
Certificate, the holder thereof will receive the Merger Consideration multiplied
by the number of shares represented by such Certificate. Under the Merger
Agreement if any cash is to be paid to a name other than that in which the
Certificate surrendered in exchange therefor is registered, it will be a
condition to such payment or exchange that the person requesting such payment or
exchange will pay to the Payment Agent any transfer or other taxes required by
reason of the payment of such cash to a name other than that of the registered
holder of the Certificate surrendered, or such person will establish to the
satisfaction of the Payment Agent that such tax has been paid or is not
applicable.
DETAILED INSTRUCTIONS, INCLUDING A TRANSMITTAL LETTER, WILL BE MAILED TO
STOCKHOLDERS PROMPTLY FOLLOWING THE EFFECTIVE TIME AS TO THE METHOD OF
EXCHANGING CERTIFICATES FORMERLY REPRESENTING SHARES OF COMMON STOCK FOR THE
MERGER CONSIDERATION. STOCKHOLDERS SHOULD NOT SEND CERTIFICATES REPRESENTING
THEIR SHARES OF COMMON STOCK TO THE PAYMENT AGENT, VERSATILITY OR ORACLE PRIOR
TO RECEIPT OF THE TRANSMITTAL LETTER.
Representations and Warranties. The Company has made various
representations and warranties in the Merger Agreement, in respect of itself and
its subsidiaries, relating to the following matters (which representations and
warranties are subject, in certain cases, to specified exceptions): (i)
corporate organization and qualification; (ii) capitalization; (iii) the
Company's subsidiaries, (iv) authority; (v) consents, approvals and absence of
violations; (vi) brokers and finders; (vii) the conduct of the business of the
Company; (viii) the Commission reports and financial statements; (ix)
litigation; (x) labor agreements and actions; (xi) employee benefit plans; (xii)
taxes; (xiii) absence of certain changes or events; (xiv) title to assets;
absence of liens; (xv) intellectual property; (xvi) agreements and contracts;
(xvii) proprietary information and inventions agreements; (xviii) conflicts of
interest; and (xix) the inapplicability of takeover statutes.
Oracle and Acquisition Sub have made various representations and warranties
in the Merger Agreement relating to the following matters (which representations
and warranties are subject, in certain cases, to specific exceptions): (i)
corporate organization; (ii) authority; (iii) consents, approvals and absence of
violations; (iv) brokers and finders and (vi) availability of financing.
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None of the representations or warranties of the Company, Oracle and
Acquisition Sub will survive the consummation of the Merger.
Conduct of Business Pending the Merger. The Merger Agreement provides that,
from the date of the Merger Agreement through the Effective Time, the Company
will conduct its operations only in the ordinary course of business consistent
with past practice. Without limiting the generality of the foregoing, the Merger
Agreement provides that, from the date of the Merger Agreement through the
Effective Time, the Company will not do any of the following without the prior
written consent of Oracle (except as otherwise permitted or required by the
Merger Agreement): (i) declare or pay any dividends on, or make any
distributions in respect of, its capital stock; (ii) split, combine, reclassify,
repurchase, redeem or acquire any shares of its capital stock or authorize any
other securities in respect of, in lieu of, or in substitution for, shares of
its capital stock; (iii) issue, deliver, encumber, sell or purchase any shares
of its capital stock or any securities convertible into, or warrants, options or
other rights of any kind to acquire, any shares of capital stock or any other
ownership interest (other than the issuance of Common Stock upon the exercise of
outstanding stock options and warrants); (iv) amend or otherwise change its
certificate of incorporation or bylaws; (v) acquire or agree to acquire by
merging or consolidating with, or by purchasing a substantial portion of the
assets of, or by any other manner, any business or any corporation, partnership,
association or other business organization or division; (vi) sell, lease,
license or otherwise dispose of any of its assets (other than end user licenses
in the ordinary course of business); (vii) incur, assume or pre-pay any
indebtedness for borrowed money, guarantee any indebtedness or obligation of
another person, issue or sell any debt securities or options, warrants, calls or
other rights to acquire any debt securities other than in connection with the
financing of ordinary course trade payables consistent with past practice,
pursuant to existing credit facilities in the ordinary course of business, or as
contemplated by the Merger Agreement; (viii) enter into or amend any contract or
agreement other than in the ordinary course of business consistent with past
practice; (ix) authorize any single capital expenditure which is in excess of
$100,000 or capital expenditures which are, in the aggregate, in excess of
$500,000 for the Company and its subsidiaries taken as a whole; (x) increase the
compensation payable or to become payable to its officers or employees or grant
any severance or termination pay to, or enter into any employment or severance
agreement with, any director, officer or other employee of the Company or any of
its subsidiaries, or establish, adopt, enter into or amend any collective
bargaining, bonus, profit sharing, thrift, compensation, stock option,
restricted stock, pension, retirement, deferred compensation, employment,
termination, severance or other plan, agreement, trust, fund, policy or
arrangement for the benefit of any director, officer or employee of the Company
or any of its subsidiaries; (xi) take any action with respect to accounting
policies or procedures; (xii) make any tax election or settle or compromise any
material federal, state, local or foreign income tax liability, or execute or
file with the Internal Revenue Service or any other taxing authority any
agreement or other document extending, or having the effect of extending, the
period of assessment or collection of any taxes; (xiii) amend or modify the
warranty policy of the Company or any subsidiary; (xiv) pay, discharge, satisfy,
settle or compromise any suit, claim, liability or obligation other than
liabilities reflected or reserved against on the Company's balance sheet of
April 30, 1998; (xv) take any action that would result in any of the
representations and warranties of the Company set forth in the Merger Agreement
becoming untrue in any material respect or in any of the conditions to the
Merger not being satisfied; (xvi) enter into, amend or extend any contracts,
agreements, or obligations relating to the distribution, sale, license or
marketing by third parties of the Company's or any subsidiary's products or
products licensed by the Company or any subsidiary; (xvii) materially revalue
any of its assets or make any change in accounting methods, principles or
practices; (xviii) materially accelerate or delay collection of any notes or
accounts receivable; (xix) materially delay or accelerate payment of any account
payable beyond or in advance of its due date or the date such liability would
have been paid in the ordinary course of business; or (xx) cancel or terminate
any material insurance policy naming the Company as a beneficiary or a loss
payable payee.
Other Potential Acquirors. In the Merger Agreement, the Company has agreed
that neither it, nor any of its subsidiaries, respective officers, employees,
directors, agents and representatives will solicit, initiate or encourage, the
submission of any proposals relating to any merger, sale of assets, sale of or
tender offer for the Common Stock, liquidation or similar transactions (a "Third
Party Acquisition"), or
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participate in any discussions or negotiations regarding any such Third Party
Acquisition. Notwithstanding the foregoing, the Company and its respective
directors and officers may, in response to an unsolicited written proposal with
respect to a Third Party Acquisition, if the Board determines in good faith
after consultation with outside counsel that it is necessary to comply with its
fiduciary duties to the Company's stockholders, furnish information to a
financially capable person or entity. Pursuant to the Merger Agreement, the
Company is required to notify Oracle promptly if any inquiries relating to or
proposals for a Third Party Acquisition are received by or requested from the
Company, any of its subsidiaries or any negotiations or discussions in
connection with a possible Third Party Acquisition are sought to be initiated or
continued, such notice which will indicate, in each such case, in connection
with such notice, the principal terms and conditions of any proposals or offers,
including the identity of the offering party, and thereafter keep Oracle
informed in writing, on a reasonably current basis, on the status and terms of
any such proposals or offers and the status of any such negotiations or
discussions.
The Merger Agreement provides that if the Board determines in its good
faith judgment, after consultation with outside counsel, that it is necessary to
do so in order to comply with its fiduciary duties to the Company's stockholders
under applicable law, the Board may withdraw or alter its recommendation of the
Merger and the other transactions contemplated hereby, or approve or recommend
or cause the Company to enter into an agreement with respect to a bona fide
acquisition proposal reasonably capable of being completed and more favorable to
the Company's stockholders than the Merger (a "Superior Proposal"), but in each
case only (i) after providing written notice to Oracle advising Oracle that the
Board has received a Superior Proposal, specifying the material terms and
conditions of such Superior Proposal and identifying the person or entity making
such Superior Proposal and (ii) if Oracle does not, within three business days
after Oracle's receipt of the Notice of Superior Proposal, make an offer which
the Board determines in its good faith judgment to be as favorable to the
Company's stockholders as such Superior Proposal; provided, however, that the
Company will not be entitled to enter into any agreement with respect to a
Superior Proposal unless the Merger Agreement is concurrently terminated
pursuant to its terms.
Under the Merger Agreement, until the earlier of the termination of the
Merger Agreement or the Effective Time, the Company will not approve any
acquisition of shares of Common Stock by any person (other than Oracle,
Acquisition Sub or their respective affiliates) which would result in such
person becoming an "interested stockholder" (as such term is defined in Section
203 of the DGCL) or otherwise become subject to Section 203 of the DGCL, unless
such acquisition is related to a Superior Proposal and the Company has complied
with the terms of the Merger Agreement.
Additional Covenants. Pursuant to the Merger Agreement, the Company has
covenanted to: (i) prepare and file with the Commission this Proxy Statement;
(ii) convene a special meeting of its stockholders to vote upon the adoption of
the Merger Agreement; (iii) prepare and file all reports to be filed with the
Commission; and (iv) permit Oracle to have access to the Company and its
subsidiaries' officers, employees, agents, independent auditors,
representatives, properties, books and records. Pursuant to the Merger
Agreement, Oracle has covenanted to: (i) hold in confidence all documents and
information concerning the Company and its subsidiaries furnished to Oracle in
connection with the transactions contemplated by the Merger Agreement; and (ii)
cause the Surviving Corporation to maintain for a period of not less than six
years following the Effective Time all rights to indemnification or exculpation
now existing in favor of the directors, officers or other employees and agents
of the Company and its subsidiaries, as provided in their respective
certificates of incorporation or bylaws or under separate indemnification
agreements, with respect to matters occurring prior to the Effective Time, and
to use its reasonable efforts to cause the Surviving Corporation to maintain the
existing policy of the directors' and officers' liability and fiduciary
insurance for a period six years after the Effective Time, subject to certain
premium limitations.
Pursuant to the Merger Agreement, the Company and Oracle each have
covenanted to: (i) use all commercially reasonable efforts to take all actions
and to do all things necessary in order to consummate and make effective the
transactions contemplated by the Merger Agreement; (ii) cooperate in preparing
and filing this Proxy Statement and any filings required by the
Hart-Scott-Rodino Antitrust Improvements Act of 1976; (iii) use all commercially
reasonable efforts to obtain consents and/or waivers of all third parties or
governmental entities necessary or advisable for the consummation of the
transactions
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contemplated by the Merger Agreement; (iv) contest any legal proceeding relating
to the Merger; (v) execute any additional instruments necessary to consummate
the transactions contemplated by the Merger Agreement; (vi) consult with one
another before issuing any press release or otherwise making any public
announcement; (vii) promptly provide one another with copies of all filings made
with the Commission or other governmental entity in connection with the Merger
Agreement; and (viii) promptly notify one another concerning any notice or other
communication alleging that consent may be required, from any government entity
or with respect to any actions, suits, claims or investigations against the
Company, in each case that relates to the consummation of the transactions
contemplated by the Merger Agreement.
Employee Benefits. Under the Merger Agreement, employees of the Company at
the Effective Time will be provided with employee benefit plans by the Surviving
Corporation or Oracle, except with respect to such Company benefit plans which
Oracle determines that it will continue in effect. If any employee of the
Company becomes a participant in any employee benefit plan, program, policy or
arrangement of Oracle or one of its subsidiaries, such employee will be given
credit for all service with the Company prior to the Effective Time to the
extent permissible under the current terms of such plan, program, policy or
arrangement and subject to certain other limitations set forth in the Merger
Agreement. Under the Merger Agreement, within a reasonable period of time after
the Effective Time, Oracle will issue options to purchase shares of the Common
Stock in amounts reasonably consistent with Oracle's practices for employees on
comparable levels as determined by Oracle to certain employees that remain
employees of the Surviving Corporation.
Conditions to the Merger. Pursuant to the Merger Agreement, the obligations
of the parties to the Merger Agreement to complete the Merger are subject to the
fulfillment of the following conditions: (i) the Merger will have been adopted
by the stockholders of the Company; (ii) no statute, rule, regulation, order,
stipulation or injunction will have been enacted, promulgated, entered, enforced
by any governmental entity that prohibits, restrains or restricts the
consummation of the Merger; and (iii) any applicable waiting period applicable
to the Merger and the other transactions contemplated by the Merger Agreement
will have terminated or expired, and any other required notices or approvals
from a governmental entity shall have been either filed or received.
Pursuant to the Merger Agreement, the obligations of Oracle and Acquisition
Sub to complete the Merger are further subject to the fulfillment of the
following conditions, any one or more of which may be waived: (i) the
representations and warranties of the Company set forth in the Merger Agreement
are true and correct in all material respects at and as of the Effective Time;
(ii) the Company will have performed and complied with, in all material
respects, all obligations and covenants required to be performed or complied
with by it under the Merger Agreement; (iii) the Company will have obtained
final court approval of the settlement of the putative class actions filed in
the United States District Court for the Southern District of New York and the
United States District for the Eastern District of Virginia on terms consistent
with the Memorandum of Understanding Concerning Settlement Terms dated July 9,
1998; (iv) Mr. Marcus Heth and certain employees of the Company identified in
the Merger Agreement will not have indicated in writing an intention to leave
the employ of the Company; (v) the aggregate number of Dissenting Shares held by
Dissenting Stockholders will not be equal to or exceed ten percent of the
outstanding shares of Common Stock immediately prior to the Effective Time; (vi)
there will not be instituted and continuing any action, suit or proceeding
against the Company, Oracle or Acquisition Sub by any governmental entity or any
other person or persons, directly or indirectly relating to the Merger or the
License Agreement or any other transactions contemplated by the Merger
Agreement, who is or was a stockholder or stockholders of the Company, whether
on behalf of such stockholder or stockholders, or in a derivative action on
behalf of the Company, alleging infringement by the Company of intellectual
property assets of any third party or which individually or in the aggregate
could reasonably be expected to have a material adverse effect on the Company
and its subsidiaries; (vii) no events will have occurred which have caused or
could reasonably be expected to cause a material adverse effect on the Company;
(viii) the Company will have obtained executed license agreements from certain
third parties that have access to all or any portion of the Company's client
server products; and (ix) the Bank will not have notified the Company of its
acceleration of any amounts
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due and payable to it or taken any other action to collect any such amounts or
to realize the benefit of any security interest in the Company's assets.
Under the Merger Agreement, the obligations of the Company to complete the
Merger are further subject to the fulfillment of the following conditions, any
one or more of which may be waived by the Company: (i) the representations and
warranties of Oracle and Acquisition Sub set forth in the Merger Agreement are
true and correct in all material respects at and as of the Effective Time, and
(ii) Oracle and Acquisition Sub will have performed and complied with, in all
material respects, all obligations and covenants required to be performed or
complied with by them under the Merger Agreement.
Termination of Merger Agreement. The Merger Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time in the event
of any of the following: (i) by mutual written consent of the Company and
Oracle; (ii) by the Company or Oracle, if any governmental entity has issued a
final order, decree or ruling restraining, enjoining or prohibiting the Merger
and such order, decree or ruling is final and nonappealable; (iii) by the
Company or Oracle if the Effective Time has not occurred prior to December 31,
1998, unless the terminating party's failure to fulfill any of its obligations
under the Merger Agreement was the reason that the Effective Time did occur on
or before such date; (iv) by Oracle if (a) prior to the Effective Time (1) the
Board withdraws or modifies its approval or recommendation of the Merger in a
manner adverse to Oracle, (2) the Board or the Company has recommended to the
stockholders, taken no position with respect to, or failed to recommend against
acceptance of a Third Party Acquisition, (3) the Company has entered into or the
Board approves a definitive agreement with respect to a Third Party Acquisition,
(4) the Company fails to confirm its recommendation of the Merger Agreement upon
a written request by Oracle to do so, or (5) the Board of the Company has
resolved to do any of the foregoing, or (b) the Company has breached, in any
material respect, the representations, warranties or covenants of the Merger
Agreement; (v) by the Company if (a) the Board has withdrawn or modified in a
manner adverse to Acquisition Sub or Oracle its approval or recommendation of
the Merger to approve a definitive agreement related to a Superior Proposal,
provided that the Company shall have complied with the notice provisions hereof
and shall have made payment of the Termination Fee (defined herein) or (b)
Oracle or Acquisition Sub have breached in any material respect, their
representations, warranties or covenants in the Merger Agreement.
Termination Fee. In the event that the Merger Agreement is terminated
pursuant to (iv)(a) in the paragraph above or (v)(a) in the paragraph above and
the Company was not entitled to terminate the Agreement pursuant to (v)(b)
above, or the Merger Agreement is terminated pursuant to (iii) or (iv)(b) in the
paragraph above and the Company was not entitled to terminate the Agreement
pursuant to (v)(b) above at such time and the Company consummates a Third Party
Acquisition with any person other than Oracle or any of its affiliates before or
within 12 months after the date of such termination, then, in any such event,
the Company will pay Oracle promptly (i) a fee of $360,000, plus (ii) an amount
equal to Oracle's actual and reasonably documented out-of-pocket fees and
expenses (not to exceed $200,000) incurred by Oracle and Acquisition Sub in
connection with the Merger and the Merger Agreement (the "Termination Fee"), all
of which amounts shall be payable in immediately available funds. In the event
that the Company fails to pay the Termination Fee when due, interest will be
paid on such unpaid amounts, commencing on the date such amounts became due, at
a rate of 6% per annum. The Termination Fee will not be deemed to be liquidated
damages, and the right to payment of the Termination Fee will be in addition to
(and not a maximum payment in respect of) any other damages or remedies at law
or in equity to which Oracle or the Acquisition Sub may be entitled to as a
result of an intentional breach of any term of the Merger Agreement.
LICENSE AGREEMENT
On August 20, 1998, in connection with entering into the Merger Agreement,
Oracle and the Company entered into the License Agreement whereby the Company
granted to Oracle a worldwide, non-exclusive right and license to market,
reproduce, distribute and grant sublicenses of the Company's Technology. Such
license includes (i) the right to sublicense the Company's source code to third
parties solely to the extent necessary and for the purpose of allowing such
third parties to port or localize such
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source materials and upon such terms and conditions set forth in the License
Agreement and (ii) the right to license, sublicense and authorize distributors
to market and sublicense the computer software and related documentation upon
such terms and conditions set forth in the License Agreement.
As payment for the license granted, Oracle will pay to the Company a fee
equal to 30% of the net fees which Oracle receives for all sublicenses of the
Company's Technology until the earlier of (i) six years from the date of the
License Agreement or (ii) the payment by Oracle of a total of $12 million.
Additionally, Oracle has partially prepaid, and will prepay, to the Company $2
million of such sublicense fees in three equal monthly installments on each of
September 1, October 1 and November 1, 1998.
The Company also granted to Oracle a worldwide, perpetual, paid-up, royalty
free, non-exclusive right and internal-use license to use the Company's
Technology to operate its business at no additional charge.
Until December 31, 1999, the Company will provide to Oracle technical
support services in the form of telephone consultation, assistance and advice at
the highest level of support generally provided to any other end user or
distributor, will make reasonable efforts to make corrections to errors reported
in the Company's Technology as they are first made available to other
distributors and licensees and will provide updates no later than they are first
made available to other distributors or licensees.
The Company will also deliver to Oracle certain modifications to the
Company's Technology. If the Company fails to commence promptly the definition,
design and development of such modifications, Oracle will have the option to
terminate the License Agreement and the Company must refund to Oracle the
Prepaid Sublicense Fee.
If Oracle breaches the Merger Agreement in any material respect and fails
to cure such breach within twenty business days after written notice or Oracle
fails for any reason to pay the sublicense fees, then the Company has the option
of terminating the License Agreement by providing Oracle with written notice of
such termination within twenty business days after the date of the written
notice of breach from Versatility to Oracle, which termination will not be
effective unless and until Versatility refunds all but $360,000 of the Prepaid
Sublicense Fee to Oracle within 180 days of providing Oracle with notice of
termination of the License Agreement.
The License Agreement will terminate upon repayment of the Prepaid
Sublicense Fee and payment of the Termination Fee, if the Merger Agreement is
being or has been terminated and Versatility is obligated to pay Oracle the
Termination Fee, Versatility refunds to Oracle all of the Prepaid Sublicense Fee
prior to or simultaneously with the payment of such Termination Fee, and the
Termination Fee is paid in accordance with the terms of the Merger Agreement.
REGULATORY COMPLIANCE
A certificate of merger must be filed on behalf of Versatility and
Acquisition Sub with the Secretary of State of Delaware in order to effect the
Merger.
Except as described above, Versatility is not aware of any licenses or
regulatory permits that are material to its business that might be adversely
affected by the Merger, or of any approval or other action by any governmental,
administrative or regulatory agency or authority which would be required prior
to the Effective Time.
ACCOUNTING TREATMENT
The Merger will be treated as a purchase for accounting purposes.
APPRAISAL RIGHTS
If the Merger is consummated, a holder of record of shares of Common Stock
who objects to the terms of the Merger may seek an appraisal under Section 262
of the DGCL ("Section 262") of the "fair value" of such holder's shares
("Appraisal Rights"). The following is a summary of the principal provi-
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sions of Section 262 and does not purport to be a complete description. A copy
of Section 262 is attached to this Proxy Statement as Appendix C. Failure to
take any action required by Section 262 will result in a termination or waiver
of a stockholder's rights under Section 262.
1. A stockholder electing to exercise Appraisal Rights must (a) deliver to
Versatility, on or before Versatility stockholders vote on the Merger Agreement
at the Special Meeting, a written demand for appraisal that is made by or on
behalf of the person who is the holder of record of Common Stock for which
appraisal is demanded and (b) not vote in favor of adopting the Merger
Agreement. The demand must be delivered to Versatility at 11781 Lee Jackson
Memorial Hwy., Seventh Floor, Fairfax, VA 22033, Attention: Kenneth T. Nelson. A
proxy or vote against adopting the Merger Agreement does not constitute a
demand. A stockholder electing to take such action must do so by a separate
written demand that reasonably informs Versatility of the identity of the holder
of record and of such stockholder's intention to demand appraisal of such
holder's Common Stock.
2. Only the holder of record of Common Stock is entitled to demand
Appraisal Rights for Common Stock registered in that holder's name. The demand
must be executed by or for the holder of record, fully and correctly, as the
holder's name appears on the holder's stock certificates. If Common Stock is
owned of record in a fiduciary capacity, such as by a trustee, guardian or
custodian, the demand should be executed in that capacity. If Common Stock is
owned of record by more than one person, as in a joint tenancy or tenancy in
common, the demand should be executed by or for all owners. An authorized agent,
including one of two or more joint owners, may execute the demand for appraisal
for a holder of record; however, the agent must identify the owner or owners of
record and expressly disclose the fact that, in executing the demand, the agent
is acting as agent for the owner or owners of record.
A holder of record, such as a broker, who holds Common Stock as nominee for
beneficial owners may exercise a holder's right of appraisal with respect to
Common Stock held for all or less than all of such beneficial owners. In such
case, the written demand should set forth the number of shares of Common Stock
covered by the demand. Where no number of shares of Common Stock is expressly
mentioned, the demand will be presumed to cover all shares of Common Stock
standing in the name of the holder of record.
3. Within 10 days after the Effective Time, the Surviving Corporation will
send notice of the effectiveness of the Merger to each person who prior to the
Effective Time satisfied the foregoing conditions.
4. Within 120 days after the Effective Time, the Surviving Corporation or
any stockholder who has satisfied the foregoing conditions may file a petition
in the Delaware Court of Chancery demanding a determination of the fair value of
the Common Stock. Stockholders seeking to exercise Appraisal Rights should not
assume that the Surviving Corporation will file a petition to appraise the value
of their Common Stock or that the Surviving Corporation will initiate any
negotiations with respect to the "fair value" of such Common Stock. Accordingly,
stockholders should initiate all necessary action to perfect their Appraisal
Rights within the time periods prescribed in Section 262.
5. Within 120 days after the Effective Time, any stockholder who has
complied with the requirements for exercise of Appraisal Rights, as discussed
above, is entitled, upon written request, to receive from the Surviving
Corporation a statement setting forth the aggregate number of shares of Common
Stock not voted in favor of the Merger and with respect to which demands for
appraisal have been made and the aggregate number of holders of such Common
Stock. The Surviving Corporation is required to mail such statement within 10
days after it receives a written request to do so.
6. If a petition for an appraisal is timely filed, after a hearing on the
petition, the Delaware Court of Chancery will determine the stockholders
entitled to Appraisal Rights and will appraise the Common Stock owned by such
stockholders, determining its "fair value" exclusive of any element of value
arising from the accomplishment or expectation of the Merger and will determine
the amount of interest, if any, to be paid upon the value of the Common Stock of
the stockholders entitled to appraisal. Any such judicial determination of the
"fair value" of Common Stock could be based upon considerations other
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than or in addition to the price paid in the Merger and the market value of
Common Stock, including asset values, the investment value of the Common Stock
and any other valuation considerations generally accepted in the investment
community. The value so determined for Common Stock could be more than, less
than or the same as the consideration paid pursuant to the Merger Agreement. The
Court may also order that all or a portion of any stockholder's expenses
incurred in connection with an appraisal proceeding, including, without
limitation, reasonable attorneys' fees and fees and expenses of experts utilized
in the appraisal proceeding, be charged pro rata against the value of all Common
Stock entitled to appraisal.
7. Any stockholder who has duly demanded an appraisal in compliance with
Section 262 will not, after the Effective Time, be entitled to distributions on
that Common Stock (other than those payable or deemed to be payable to
stockholders of record as of a date prior to the Effective Time).
8. Holders of Common Stock lose the right to appraisal if no petition for
appraisal is filed within 120 days after the Effective Time, or if a stockholder
delivers to the Surviving Corporation a written withdrawal of such stockholder's
demand for an appraisal and an acceptance of the Merger, except that any such
attempt to withdraw made more than 60 days after the Effective Time requires the
Surviving Corporation's written approval. If Appraisal Rights are not perfected
or a demand for Appraisal Rights is withdrawn, a stockholder will be entitled to
receive the consideration otherwise payable pursuant to the Merger Agreement.
9. If an appraisal proceeding is timely instituted, such proceeding may not
be dismissed as to any stockholder who has perfected a right of appraisal
without the approval of the Delaware Court of Chancery.
FEDERAL INCOME TAX CONSEQUENCES
Upon consummation of the Merger each outstanding share of Common Stock
(except for those with respect to which statutory appraisal rights are perfected
or those owned by Oracle or any of its subsidiaries) will be converted into the
right to receive the Merger Consideration. The following discussion is a summary
of the principal federal income tax consequences of the Merger to stockholders
of the Company whose shares of Common Stock are surrendered pursuant to the
Merger (including Dissenting Stockholders who receive cash pursuant to the
exercise of Appraisal Rights). The following discussion is for general
information only, and may not apply to particular categories of stockholders,
such as financial institutions, broker-dealers, tax-exempt entities,
stockholders who acquired their shares of Common Stock pursuant to the exercise
of employee stock options or other compensation arrangements with the Company
and stockholders who are not citizens or residents of the United States.
Furthermore, the discussion below applies only to the surrender of shares of
Common Stock which are capital assets in the hands of the surrendering
stockholder within the meaning of Section 1221 of the Internal Revenue Code of
1986, as amended (the "Code").
The following discussion of tax consequences is based upon the Code, the
income tax regulations promulgated under the Code, Internal Revenue Service
("IRS") rulings and judicial decisions now in effect as of the date of this
Proxy Statement, all of which are subject to change at any time. Any such
change, which may or may not be retroactive, could alter the tax consequences to
the stockholders as described herein. The discussion is not covered by an
opinion of counsel, nor did the Company request a private letter ruling from the
IRS with respect to any tax consequence of the Merger. Accordingly, no assurance
can be given that the IRS will agree with the statements that appear below.
BECAUSE INDIVIDUAL CIRCUMSTANCES MAY DIFFER, EACH STOCKHOLDER IS URGED TO
CONSULT SUCH STOCKHOLDER'S OWN TAX ADVISOR TO DETERMINE THE APPLICABILITY OF THE
GENERAL RULES DISCUSSED BELOW TO SUCH STOCKHOLDER AND THE PARTICULAR TAX EFFECTS
OF THE MERGER, INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL AND OTHER
TAX LAWS.
The receipt of cash pursuant to the Merger (including any cash received by
Dissenting Stockholders pursuant to the exercise of Appraisal Rights) will be a
taxable transaction for federal income tax purposes. In general, for federal
income tax purposes, a stockholder will recognize gain or loss equal to the
difference between the stockholder's adjusted tax basis in each surrendered
share of Common Stock and
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the amount of cash received by the stockholder in exchange for such surrendered
share (other than amounts received pursuant to statutory rights of appraisal
that are denominated as interest). Such gain or loss will be a capital gain or
loss. Amounts paid to Dissenting Stockholders as interest will be taxable as
ordinary income.
The effect of recognition of capital gain or loss on the federal income tax
liability of each stockholder will depend in part on such stockholder's holding
period(s) at the Effective Time for the shares of Common Stock surrendered
pursuant to the Merger. Gain or loss recognized upon the surrender of shares
with a holding period of more than 12 months will be treated as long-term
capital gain or loss. In general, in the case of noncorporate stockholders
(including individuals, estates and trusts), net long-term capital gains (after
offset by capital losses) are subject to federal income tax at a maximum rate of
20%, and may be taxed at a lower rate depending on the amount of taxable income
of such stockholder for such year. If the stockholder's holding period for the
surrendered shares of Common Stock is one year or less, any gain recognized with
respect to such shares will be treated as short-term capital gain, which is
taxed at the same rates as ordinary income. For corporations, capital gains
(whether long-term or short-term) are taxed at the same rate as ordinary income.
Losses recognized on the surrender of any such shares will be capital losses and
in general, may offset only other capital gains recognized by the stockholder
during the year. Noncorporate stockholders may offset capital losses against up
to $3,000 of ordinary income per year, and may carry forward unabsorbed capital
losses to any subsequent taxable years and capital losses may only offset
capital gains. Corporations generally may carry capital losses back to the three
prior taxable years, and forward to the subsequent five taxable years.
The receipt of cash by a stockholder of the Company pursuant to the Merger
may be subject to backup withholding unless the stockholder (i) is a corporation
or comes within certain other exempt categories, or (ii) provides a certified
taxpayer identification number on Form W-9 and otherwise complies with the
backup withholding rules. Upon the consummation of the Merger, the Payment Agent
will forward to each stockholder a Form W-9 which, when properly completed and
returned, would fulfill such identification procedures. Backup withholding
generally applies if the stockholder fails to furnish such stockholder's social
security number or other taxpayer identification number ("TIN"), or furnishes an
incorrect TIN. Backup withholding is not an additional tax but merely a
creditable advance payment which may be refunded to the extent it results in an
overpayment of tax. Certain penalties apply for failure to furnish correct
information and for failure to include reportable payments in income.
Stockholders should consult with their own tax advisors as to the qualifications
and procedures for exemption from backup withholding.
CERTAIN EFFECTS OF THE MERGER
Upon consummation of the Merger, Acquisition Sub will be merged into the
Company, the separate corporate existence of Acquisition Sub will cease, and the
Company will continue as the Surviving Corporation. After the Effective Time,
the present holders of Common Stock will no longer have any equity interest in
the Company, will not share in the future earnings or growth of the Company and
will no longer have rights to vote on corporate matters. The Company is
currently subject to the information filing requirements of the Exchange Act,
and in accordance therewith, is required to file reports and other information
with the Commission relating to its business, financial statements and other
matters. As a result of the Merger, there will cease to be any public market for
Common Stock. Upon such event, the Surviving Corporation will apply to the
Commission for the deregistration of the Common Stock under the Exchange Act.
The termination of the registration of the Common Stock under the Exchange Act
would make certain provisions of the Exchange Act (including the proxy
solicitation provisions of Section 14(a), and the short-swing trading provisions
of Section 16(b)) no longer applicable to the Company or the Surviving
Corporation.
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INFORMATION REGARDING THE COMPANY
Versatility is a leading provider of client/server customer interaction
software that enables businesses to automate and enhance their telesales,
telemarketing and teleservicing capabilities. The Company's software products
are designed to increase the productivity and revenue-generating capabilities of
organizations operating call centers as they interact with existing and
potential customers. The Company's products include desktop software
applications, development and customization tools and optional server-based
software services. A wide variety of leading computing platforms are supported
allowing users to implement a scalable, 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 12,000 agent desktops. The Company's customers
include Avantel, S.A., British Telecommunications, Plc, ("BT"), Chase Card
Members 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.
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 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 or service 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 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 the 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. 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,
scalable 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.
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
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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 terms "Versatility" and the "Company" refer to
Versatility Inc., its subsidiaries and the predecessors of Versatility Inc.
RECENT DEVELOPMENTS
On March 12, 1998, the Company announced that it expected to restate its
financial results for the fiscal year ended April 30, 1997 and the fiscal
quarters ended July 31, 1997 and October 30, 1997, and that its Form 10-Q for
the quarter ended January 31, 1998 would not be filed on time, all as a result
of concerns over the accounting treatment of certain transactions, which the
Company was examining. The report on Form 10-K/A included restated financial
statements for the fiscal year ended April 30, 1997 and reported total revenues
of $18.3 million rather than $27.4 million and a net loss of $7.9 million rather
than net income of $1.9 million. The Company's restated Forms 10-Q for the
quarters ended July 31, 1997 and October 30, 1997 and the Company's Form 10-Q
for the quarter ended January 31, 1998 reported net losses of $3.7 million, $5.0
million and $9.5 million, respectively. At the time of the restatement, the
Company believed that its cash on hand and cash flow from anticipated operating
activities might not be sufficient to meet its ongoing obligations through the
second quarter of fiscal 1999. As a result, the Company began seeking additional
financing. The uncertainties regarding the Company's financial condition have
had a material adverse affect on the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation."
Since February 1998, the Company has replaced substantially all of the
Company's senior management. The Company's current President and Chief Operating
Officer and current Chief Financial Officer joined the Company in February 1998,
together with the new Senior Vice President of Operations. The Company's former
President, Chairman and Chief Executive Officer resigned from all positions with
the Company and the former Chief Financial Officer and Vice President in charge
of sales have also left the Company.
Between April 1997 and February 1998, the Company grew its work force to
256. In March and April 1998, the Company significantly reduced its workforce as
a result of the Company's continued operating losses. On April 30, 1998 the
Company employed 108 people in the United States and 26 in the Company's
international unit.
As a result of concerns over the accounting matters disclosed in the
Company's March 12, 1998 press release, the NASD suspended trading of the Common
Stock on Nasdaq on March 12, 1998 and instituted proceedings to remove the
Common Stock from listing on Nasdaq. After the Company's release of restated
financial information and the filing of the Company's Form 10-Q for the quarter
ended January 31, 1998, Nasdaq's Listing and Qualifications Panel allowed the
Common Stock to resume trading on May 5, 1998, contingent upon the Company's
attainment of net tangible assets of $10 million by June 30, 1998. Although the
Company requested an extension for 45 days from June 30, 1998, to secure needed
financing and/or strategic alternatives, Nasdaq denied the request and delisted
the Common Stock on July 20, 1998. The Common Stock began trading on the OTC
Bulletin Board on July 21, 1998. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Factors Which May Effect Future
Operating Results."
The Company's restatement of its financial statements and delisting of the
Common Stock from Nasdaq has had a material adverse impact on the Company's
reputation, which could impair the Company's relationships with existing and
potential customers, further weakening the Company's business, financial
condition and results of operations. Certain of the Company's customers
indicated after the restatements that they intended to postpone purchases of the
Company's products and services until the Company secured financing or entered
into a relationship with a strategic partner.
On April 27, 1998, the Company engaged NMS to help the Company explore both
financing and strategic options, including the possible sale of the Company.
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On August 20, 1998, Versatility entered into the Merger Agreement with
Oracle and Acquisition Sub which provides for the Merger.
In connection with the Merger Agreement, the Company, Oracle and the Bank
entered into a Loan Modification, Consent and Forbearance Agreement (the "Loan
Modification Agreement") whereby, subject to the terms of the Loan Modification
Agreement, the Bank agreed to forebear from exercising certain remedies
available to it as a result of the Company's existing defaults under the loan
agreements with the Bank until the earlier of December 31, 1998 and the
consummation of the Merger. The Bank's continuing forbearance will terminate
upon the termination of the Merger Agreement or the Company filing a petition
for bankruptcy, becoming subject to any petition seeking bankruptcy or
reorganization, seeking or consenting to the appointment of a trustee, receiver
or liquidation, or becoming subject to a decree of bankruptcy. The Bank also
agreed to allow the Company and Oracle to enter into the License Agreement, to
waive the anti-dilution provisions applicable to its warrant to purchase 100,000
shares of Common Stock during the period of forbearance and to terminate the
Warrant Agreement between the Company and the Bank upon consummation of the
Merger. The Company agreed to deposit into an account at the Bank any refund
that the Company may receive from the IRS and/or the Commonwealth of Virginia
and agreed to withdraw such funds only pursuant to a cash plan approved by the
Bank.
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.
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, telesales and customer services
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 Series includes applications to address telemarketing,
telesales and customer services activities. The Versatility Series 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, the Versatility
Series 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. Versatility 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.
Versatility 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 or OLE Automation to exchange
information between applications. Versatility 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
provides 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,
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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, help 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. The U.S. list price of the Versatility Series is $1950
per license which includes Versatility Telesales/Teleservice, Versatility
PowerGuide, and Versatility OpenTel. Specific add-ons differ depending on
whether a customer's business model calls for an inbound only, outbound only, or
blended (inbound/outbound) center. These modules include Versatility Predictive
and Versatility Campaign Plus for outbound, and Versatility Call Blending for
blended centers. Other optional modules sold depend on the interfaces to the
customer interaction center and include Versatility OpenWeb for integrating the
Web with the call center, and Versatility IVR for integrating IVR with the call
center. The U.S. list price of these modules ranges from $200 to $1,000 per user
per service. A majority of the revenue from the Versatility Series products has
been derived from contracts with customers in amounts in excess of $200,000.
Federal, state and foreign law, including the Telephone Consumer Protection
Act of 1991 (the "TCPA") and the Federal Fair Debt Collection Practices Act,
regulate certain uses of outbound call processing systems. Although compliance
with these laws may limit the potential uses of the Company's products in some
respects, the Company's products can be programmed to operate automatically in
full compliance with these laws through the use of appropriate calling lists and
calling campaign time parameters. There can be no assurance, however, that
future legislation further restricting telephone solicitation practices, if
enacted, would not adversely affect the Company.
SERVICES
Versatility provides fee-based maintenance and support services designed to
increase the effectiveness and ongoing performance of its customer's call center
operations and to increase the Company's revenue base. As of July 31, 1998, the
Company employed 51 employees providing professional services, maintenance and
training.
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 charged
on a time-and-materials basis or for a fixed fee.
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 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
Since introducing the Versatility Series in May 1995, the Company has
licensed Versatility Series applications for use on over 12,000 agent desktops.
For the fiscal year ended April 30, 1998, the Company's two largest customers
accounted for 39.1% of the Company's total revenue, of which one cus-
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tomer, BT, accounted for 22.4% and another, Century Telecom accounted for 16.7%.
Historically, large sales to a limited number of customers has accounted for a
significant percentage of the Company's total revenue in any particular period.
Revenue from customers outside the United States accounted for 40.8%, 54.6% and
39.0% of the Company's total revenue for fiscal 1996, 1997 and 1998,
respectively.
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 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 scalability 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 products are built using a highly scalable 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 95 and Microsoft Windows
NT; leading relational databases from Oracle, Sybase, 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 Visual Basic, 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.
The Company continues to improve and enhance the functionality of its existing
products.
The Company's current development efforts include the completion of the
first industry specific version of the Versatility Series - Versatility
Financial Services. This financial industry vertical version is due to ship in
early 1999 and is designed to significantly lower the customization efforts and
costs by pre-building many of the vertical components typically requiring
customization during the deployment of the customer interaction application.
In June 1997, Versatility introduced the industry's first components-based
application architecture and delivered the initial products that contained
components -- Versatility Telesales/Teleservice v3.0 and Versatility PowerGuide
v2.0 of this component based framework. The Company will be working over the
next fiscal year to deliver the architecture and other components surrounding
what is now called the Versatility Framework.
Versatility continues to significantly expand the CTI middleware options
supported by Versatility OpenTel. Versatility OpenTel is the window on telephony
for the desktop and provides the desktop application with access to various PBX,
ACD, and IVRs. In the past, Versatility OpenTel primarily supported the Dialogic
CT-Connect CTI product that was resold by Versatility. Now, Versatility OpenTel
either supports or will support within the next three months Genesys' T-Server
product, Nabnasset's VESP product, and the Microsoft TAPI 2.1 standard in
addition to CT-Connect.
Lastly, Versatility continues to do integration work with Nortel's new
Symposium platform. In May 1997, the two companies announced the selection of
Versatility as a Nortel Symposium Partner which provides for the reselling of
the Versatility products by the various Nortel distributors and resellers in the
U.S. In addition, Nortel is bundling parts of the Versatility product line into
one of its Symposium Agent products and acting as an OEM to Versatility.
As of July 31, 1998, the Company's research and development and quality
assurance staff consisted of 25 employees. The Company's total expenses for
research and development for fiscal years 1996, 1997 and 1998 were $2.1 million,
$2.9 million and $4.4 million, respectively.
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<PAGE>
The Company's future prospects will depend on its ability to enhance its
current products and to develop and introduce new products on a timely basis
that keep pace with technological developments, emerging industry standards and
the increasingly sophisticated needs of its customers and markets. There can be
no assurance that the Company will not experience difficulties that could delay
or prevent the successful development, introduction and marketing of these
products, or that its new products and product enhancements will adequately meet
the requirements of the marketplace and achieve market acceptance. Furthermore,
changing resource allocations can delay new products and certain product
enhancements. If the Company is unable, for technological or other reasons, to
develop and introduce new products or enhancements, the Company's business,
financial condition and results of operations will be materially adversely
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.
SALES AND MARKETING
Sales. The Company believes that the coordinated use of multiple selling
channels is required to reach a 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 were Enterprise Solutions, Alliances, Channels and
International. Enterprise Solutions consists of two selling groups, which sell
directly to specific vertical markets, financial institutions and communications
services companies. In February 1997, Alliances and Channels were combined,
becoming Commercial Markets, which focuses on other opportunities in other
commercial markets, most of which are sold through third party resellers. In May
1998, the Commercial Markets Group was discontinued and the Company focused on
rebuilding its direct sales force. The International selling unit sells directly
to customers in the U.K.
Enterprise Solutions. Enterprise Solutions consists of two selling groups,
Financial Services and Telecommunications. These direct sales units focus on the
financial services and communications industries throughout North America. They
market the Versatility Series to large organizations that require a customized
and integrated call center application.
International. During fiscal year 1997 and fiscal year 1998, the
international selling unit marketed the Versatility Series products to third
party systems integrators, distributors and resellers outside of North America.
This selling unit had regional sales and support teams covering Western Europe,
the Middle East and certain African countries. The International selling unit is
headquartered in Aldermaston, U.K. Effective June 1, 1998, the Company signed a
non-exclusive distribution agreement with Cincom Systems, Inc. This
non-exclusive agreement included Cincom's absorption of Versatility's
international distribution channels. As a result of the transaction Versatility
has eliminated all its direct sales and support operations outside of the U.K.
Marketing. The Company's marketing efforts supports the Company's selling
strategy. The Company's marketing programs include product management, product
marketing, maintenance and enhancement of the Company's Web site, direct
marketing, public relations, press and analyst communications and event support.
As of July 31, 1998, the Company's marketing department consisted of 6
employees.
39
<PAGE>
COMPETITION
The market for the Company's products is intensely competitive, highly
fragmented and subject to rapid change. Because the Company offers multiple
applications that 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
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, scalability,
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.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company relies on a combination of copyright, trade secret and
trademark laws, confidentiality procedures and contractual provisions to protect
its proprietary rights in its products and technology. The Company does not rely
upon patent protection and does not currently expect to seek patents on any
aspects of its technology. There can be no assurance that the confidentiality
agreements and other methods on which the Company relies to protect its trade
secrets and proprietary technology will be adequate. Further, the Company may be
subject to additional risks as it enters into transactions in countries where
intellectual property laws are not well developed or are poorly enforced. Legal
protections of the Company's rights may be ineffective in such countries.
Litigation to defend and enforce the Company's intellectual property rights
could result in substantial costs and diversion of resources and could have a
material adverse effect on the Company's 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 technol-
40
<PAGE>
ogy 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 number of its customers
requiring the Company to place its source code in escrow. These escrow
agreements typically provide that these customers have a limited, non-exclusive
right to use such code in the event that there is a bankruptcy proceeding by or
against the Company, if the Company ceases to do business or if the Company
fails to meet its support obligations. Entering into such agreements may
increase the likelihood of misappropriation by third parties.
As the number of customer interaction software applications in the industry
increases and the functionality of these products further overlaps, software
development companies like the Company may increasingly become subject to claims
of infringement or misappropriation of the intellectual property rights of
others. There can be no assurance that third parties will not assert
infringement or misappropriation claims against the Company in the future with
respect to current or future products. Any claims or litigation, with or without
merit, could be time-consuming, result in costly litigation, cause product
shipment delays or require the Company to enter into royalty or licensing
arrangements. Such royalty or licensing arrangements, if required, may not be
available on terms acceptable to the Company, if at all, which could have a
material adverse effect on the Company's business, financial condition and
results of operations. Adverse determinations in such claims or litigation could
also have a material adverse effect on the Company's business, financial
condition and results of operations.
REGULATORY ENVIRONMENT
Federal, state and foreign laws regulate certain uses of outbound call
processing systems. The TCPA prohibits the use of automatic dialing equipment to
call emergency telephone lines, health care and similar facility patient
telephone lines, and telephone lines where the called party is charged for
incoming calls, such as those used by pager and cellular phone services. The
TCPA prohibits use of such equipment to engage two or more lines of a multi-line
business simultaneously. Among other things, the TCPA required the Federal
Communications Commission ("FCC") to create regulations protecting residential
telephone subscribers from unwanted telephone solicitations. The rules adopted
by the FCC require that telemarketers maintain a company-specific "do-not-call
list" which contains the names and numbers of residential subscribers who do not
want to receive calls. An entity which has an "established business
relationship" with a party it calls and tax-exempt nonprofit organizations are
exempt from do-not-call lists. The rules also require that telemarketers may
call consumers only after 8 a.m. and before 9 p.m., local time. Certain states
have enacted similar laws limiting access to telephone subscribers who object to
receiving solicitations. Although compliance with these laws may limit the
potential use of the Company's products in some respects, the Company's systems
can be programmed to operate automatically in full compliance with these laws
through the use of appropriate calling lists and calling campaign time
parameters. There can be no assurance, however, that future legislation further
restricting telephone solicitation practices, if enacted, would not adversely
affect the Company.
EMPLOYEES
As of July 31, 1998, the Company had 110 full-time employees, of which 91
were based in the United States and 19 were based internationally. None of the
employees of the Company are covered by a collective bargaining agreement. The
Company considers its relations with its employees to be good.
The Company believes its future prospects 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.
PROPERTIES
The Company's principal administrative, sales, marketing, support, and
research and development facility is located in 41,940 square feet of modern
office space in Fairfax, Virginia. This facility is leased
41
<PAGE>
to the Company through 2004. The Company also leases 6,600 square feet in
Aldermaston, U.K. Management believes its current facilities are adequate.
LEGAL PROCEEDINGS
Between March 6, 1998 and April 8, 1998 the Company and certain of its
current and former officers and directors, among others, were sued in various
putative securities class actions filed in the United States District Court for
the Southern District of New York and the United States District for the
Eastern District of Virginia, as follows: Thomas Esposito, et al. v.
Versatility Inc., et al. (S.D.N.Y.); Tammy Newsman v. Versatility Inc., et al.
(S.D.N.Y.); Sam Succar v. Versatility Inc. et al. (S.D.N.Y.); Thomas K. Doyle
v. Versatility Inc. et al. (E.D. VA); and Steven Bowen v. Versatility Inc. et
al. (S.D.N.Y.) (together "the putative class actions"). Collectively, the
putative class actions asserted claims under Sections 11, 12(2) and 15 of the
Securities Act and Sections 10(b) and 20(a) of the Exchange Act for alleged
misrepresentations and omissions in connection with the Commission public
filings and other public statements made by the Company. Among other
allegations, each of the putative class actions alleged that the Company
misrepresented its financial results and its accounting practices during the
period of December 12, 1996 through March 12, 1998, including in the Company's
initial public offering ("IPO") Prospectus. The complaints in certain of the
putative class actions also asserted, among other allegations, that the Company
and certain of the other defendants made misrepresentations in the IPO
Prospectus and thereafter regarding the performance capabilities of the
Company's CallCenter product. See "Management Discussion and Analysis of
Financial Condition and Results of Operations -- Factors Which May Effect
Future Operating Results."
Versatility has executed a settlement agreement with the plaintiffs in the
putative class actions currently pending against the Company. The settlement
agreement has been filed with the court and is conditioned upon the execution
and filing with the court of a definitive agreement of settlement and final
court approval.
Under the proposed settlement, the putative class actions would be
dismissed and a settlement fund would be created for the members of the proposed
class consisting of $3.5 million in cash, which represents proceeds from
Versatility's directors' and officers' liability insurance and related
recoveries by the Company. In addition, as part of the settlement, an aggregate
of 350,000 shares of Common Stock will be transferred to the Company by certain
defendants other than the Company in settlement of the claims against them.
Thereafter, the Company will issue 750,000 shares of the Common Stock for the
benefit of the proposed plaintiff class, 350,000 shares of which will be in
substitution of shares provided by those certain defendants in settlement of the
claims against them.
Since March 1998, the Company has been responding to informal requests for
information from the Commission relating to certain of the Company's financial
matters. In May 1998, the Company was advised by the Commission that it had
obtained a formal order of investigation so that, among other matters, it may
utilize subpoena powers to obtain information relevant to its inquiry. The
Commission has and may in the future utilize its subpoena powers to obtain
information from various officers, directors and employees of the Company and
from persons not presently associated with the Company. If, after completion of
its investigation, the Commission finds that violations of the federal
securities laws have occurred, the Commission has the authority to order persons
to cease and desist from committing or causing such violations and any future
violations. The Commission may also seek administrative, civil and criminal
fines and penalties and injunctive relief. The Department of Justice has the
authority in respect of criminal matters. There can be no assurance as to the
timeliness of the completion of the investigation or as to the final result
thereof, and no assurance can be given that the final result of the
investigation will not have a material adverse effect on the Company. The
Company is cooperating fully with the investigation, and has responded and will
continue to respond to requests for information in connection with the
investigation.
One of the Company's former VARs had filed a claim for arbitration
(non-binding) 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 defended this action in arbitration proceedings. In
April 1997, the arbitration
42
<PAGE>
panel awarded $267,000 in net damages to the plaintiff in the proceedings. The
arbitration panel's decision was appealed. In August 1997, the Company settled
the litigation with the former VAR for $250,000. The Company recorded a one-time
charge in the quarter ending July 31, 1997 related to this litigation for
$500,000, which included the settlement charge and other costs and expenses
associated with the litigation.
A former customer sought damages in excess $1.0 million for alleged
breaches of contract and warranties, as well as alleged misrepresentations. On
April 16, 1998, the Company filed a response denying the allegations and
counter-claiming for damages in excess of $400,000 for breach of contract. On
August 14, 1998 the Company reached an agreement and settled this litigation for
$100,000. The Company recorded the settlement costs in the first quarter of
fiscal 1999.
A customer of a Versatility reseller has sued for damages for an amount of
not less than $1,000,000. In December 1997, the District Court dismissed the
action. In February 1998, essentially the same claim was made in a different
District Court. In October 1998, the Company reached a settlement in principal
with the customer, subject to the signing of a definitive settlement agreement,
for $75,000.
43
<PAGE>
INFORMATION REGARDING ORACLE
ORACLE CORPORATION
Oracle is the world's leading supplier of software products for information
management and the world's second largest software company. Oracle's software
products can be categorized into three primary product families: Server
Technologies, Application Development and Business Intelligence Tools and
Business Applications. Oracle's Technologies family of products consists of
distributed database servers, connectivity products and gateways. The Oracle8
DBMS is the key component of Oracle's Server Technologies database offering for
storing, manipulating and retrieving relational, object- relational,
multi-dimensional text, spatial, video and other types of data. Oracle's
Application Development Tools consist of a set of software products capable of
building database applications for deployment in both client-server and web
environments. Oracle also provides a complete set of Business Intelligence tools
allowing users to report, query and analyze data held in an operational system
or data warehouse. Oracle's Business Applications products consist of over 45
integrated software modules for financial management, supply chain management,
manufacturing, project systems, human resources and front office applications.
Oracle's principal products run on a broad range of computers, including
mainframe, massively parallel, clustered, symmetrical multi-processing,
minicomputers, workstations, personal computers and laptop computers and over 85
different operating systems, including UNIX, Windows and Windows NT. In addition
to software products, Oracle offers consulting, education, support and systems
integration services in support of its customers' use of its software products.
Oracle was incorporated on October 29, 1986 in connection with a
reincorporation of Oracle's predecessor in Delaware, which was completed on
March 12, 1987. Oracle's former primary operating subsidiary, Oracle
Corporation, a California corporation, was incorporated in June 1977. In May
1995, Oracle Corporation was merged into Oracle Systems Corporation, a Delaware
corporation, whose name was changed to Oracle Corporation. Unless the context
otherwise requires, "Oracle" refers to Oracle Corporation, its predecessor and
its subsidiaries. Oracle maintains its executive offices and principal
facilities at 500 Oracle Parkway, Redwood City, California 94065. Its telephone
number is (650) 506-7000.
AQX ACQUISITION CORPORATION
Acquisition Sub is a Delaware corporation organized on August 13, 1998 in
connection with the Merger. Acquisition Sub's principal executive offices are
located at 500 Oracle Parkway, Redwood City, California 94065. Oracle is the
sole stockholder of Acquisition Sub. Prior to the Merger, Acquisition Sub will
not have any significant assets or liabilities (other than its rights and
obligations in connection with the Merger Agreement) and will not engage in any
activities other than those incident to its formation and the transactions
contemplated by the Merger Agreement. Pursuant to the terms of the Merger
Agreement, at the consummation of the Merger, Acquisition Sub will be merged
with and into the Company, and Acquisition Sub will cease to exist.
44
<PAGE>
SELECTED FINANCIAL DATA FOR VERSATILITY INC.
The following table presents certain summary selected consolidated
financial data of Versatility as of and for each of the five years in the period
ended April 30, 1998 and for the quarters ended July 31, 1997 and 1998. This
financial data was derived from the audited historical consolidated financial
statements for the years ended April 30, 1994, 1995, 1996, 1997, and 1998 and
unaudited financial statements for the quarters ended July 31, 1997 and 1998 of
Versatility and should be read in conjunction with the "Management's Discussion
and Analysis of Financial Condition and Results of Operations" contained
elsewhere in this Proxy Statement and the consolidated financial statements and
notes thereto included herein.
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
-----------------------------------------------------------
1994 1995 1996 1997 1998
--------- ------------ ---------- ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Revenue:
License revenue ................................ $5,393 $8,045 $10,345 $ 10,255 $ 9,306
Service and maintenance revenue ................ 2,987 3,440 6,190 8,054 9,847
Total revenue .................................. 8,380 11,485 16,535 18,309 19,153
Cost of revenue:
License revenue ................................ 1,924 1,493 573 1,098 3,546
Service and maintenance revenue ................ 2,056 2,385 4,267 5,868 13,345
Total cost of revenue .......................... 3,980 3,878 4,840 6,966 16,891
Gross margin ................................... 4,400 7,607 11,695 11,343 2,262
Operating expenses:
Selling, general and administrative ............ 3,717 4,550 7,770 16,751 22,247
Research and development ....................... 389 711 2,074 2,892 4,393
Litigation settlement and related costs (2)..... -- -- -- -- 2,524
Depreciation and amortization .................. 133 365 161 281 580
Write-off of capitalized software (3) .......... -- -- 829 -- --
Total operating expenses ....................... 4,239 5,626 10,834 19,924 29,744
Income (loss) from operations .................. 161 1,981 861 (8,581) (27,482)
Interest income (expense), net ................. (20) (9) 3 404 456
Income (loss) before provision (benefit) for
income taxes ................................. 141 1,972 864 (8,177) (27,026)
Provision (benefit) for income taxes ........... 31 715 207 (323) --
Net income (loss) .............................. $ 110 $1,257 $ 657 $ (7,854) $ (27,026)
====== ======== ======= ======== =========
Dividends accreted on preferred stock .......... -- -- (88) (176) --
Income available (attributable) to common
shareholders ................................. -- -- 569 (8,030) (27,026)
Net income (loss) per share (1) ................ $ 0.03 $ 0.31 $ 0.14 $ (1.53) $ (3.62)
====== ======== ======= ======== =========
Average common and common equivalent
shares outstanding (1) ....................... 4,000 4,000 4,000 5,241 7,461
====== ======== ======= ======== =========
<CAPTION>
THREE MONTHS
ENDED JULY 31,
-----------------------
1997 1998
----------- -----------
(UNAUDITED)
<S> <C> <C>
Consolidated Statement of Operations Data:
Revenue:
License revenue ................................ $ 2,044 $ 1,879
Service and maintenance revenue ................ 3,887 1,742
Total revenue .................................. 5,931 3,621
Cost of revenue:
License revenue ................................ 664 371
Service and maintenance revenue ................ 3,276 1,300
Total cost of revenue .......................... 3,940 1,671
Gross margin ................................... 1,991 1,950
Operating expenses:
Selling, general and administrative ............ 4,333 2,862
Research and development ....................... 962 658
Litigation settlement and related costs (2)..... 500 244
Depreciation and amortization .................. 98 170
Write-off of capitalized software (3) .......... -- --
Total operating expenses ....................... 5,893 3,934
Income (loss) from operations .................. (3,902) (1,984)
Interest income (expense), net ................. 249 (134)
Income (loss) before provision (benefit) for
income taxes ................................. (3,653) (2,118)
Provision (benefit) for income taxes ........... -- --
Net income (loss) .............................. $ (3,653) $ (2,118)
======== ========
Dividends accreted on preferred stock .......... -- --
Income available (attributable) to common
shareholders ................................. (3,653) (2,118)
Net income (loss) per share (1) ................ $ (0.50) $ (0.28)
======== ========
Average common and common equivalent
shares outstanding (1) ....................... 7,321 7,593
======== ========
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
APRIL 30, JULY 31,
--------------------------------------------------------- ------------
1994 1995 1996 1997 1998 1998
--------- ----------- ----------- ------------ ---------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents ...................... $ 192 $ 1,414 $ 2,280 $ 18,826 $ 5,591 $ 879
Working capital (deficiency) ................... (573) 446 5,028 25,355 (765) (2,392)
Total assets ................................... 2,060 4,288 9,631 37,090 15,546 10,511
Long-term debt, less current portion ........... 114 51 70 25 73 61
Redeemable convertible preferred stock ......... -- -- 3,561 -- -- --
Stockholders' equity (deficit) ................. 75 1,331 1,834 28,168 1,543 (295)
Book value per share ........................... 0.02 0.33 0.46 3.42 0.21 (0.4)
</TABLE>
- ----------
(1) Calculated on the basis described in Note 1 of Notes to Consolidated
Financial Statements. Basic and diluted income (loss) per share are the
same for all years presented.
(2) As discussed in Note 6 to the Consolidated Financial Statements, the
Company has recorded charges related to the settlement of the class action
and other litigation.
(3) As discussed in Note 1 to the Consolidated Financial Statements, the
Company wrote off capitalized software totaling $829,000.
46
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
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. In November 1993, the Company began developing
applications based on the client/server architecture that culminated with the
release of the Versatility Series in May 1995. Since fiscal 1996, substantially
all of the Company's revenue was derived from sales or services related to the
Versatility Series.
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
the achievement of certain performance milestones as defined in the contracts.
When the Company is under no obligation to install or customize the software,
license revenue is recognized upon shipment as long as cash collection is
probable. 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. An
allowance for doubtful accounts receivable and sales has been recorded which is
considered adequate to absorb currently estimated bad debts and disputed amounts
in these accounts.
Revenue from customers outside the United States accounted for 35.4% and
38.8% of the Company's total revenue for the first three months of fiscal 1998
and 1999, respectively. 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 not been
considered significant, 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.
The following table sets forth certain financial data for the periods
indicated as a percentage of total revenue:
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL REVENUE PERCENTAGE OF TOTAL REVENUE
YEAR ENDED APRIL 30, THREE MONTHS ENDED JULY 31,
----------------------------------------- ---------------------------
1996 1997 1998 1997 1998
---------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenue:
License revenue ................................. 62.6% 56.0% 48.6% 34.5% 51.9%
Service and maintenance revenue ................. 37.4 44.0 51.4 65.5 48.1
----- ----- ------ ----- -----
Total revenue ................................. 100.0 100.0 100.0 100.0 100.0
----- ----- ------ ----- -----
Cost of revenue:
License revenue ................................. 3.5 6.0 18.5 11.2 10.3
Service and maintenance revenue ................. 25.8 32.1 69.7 55.2 35.9
----- ----- ------ ----- -----
Total cost of revenue ......................... 29.3 38.1 88.2 66.4 46.2
----- ----- ------ ----- -----
Gross margin ..................................... 70.7 61.9 11.8 33.6 53.8
----- ----- ------ ----- -----
Operating expenses:
Selling, general and administrative ............. 47.0 91.5 116.2 73.1 79.0
Research and development ........................ 12.5 15.8 22.9 16.2 18.2
Litigation settlement and related costs ......... -- -- 13.2 8.4 6.7
Depreciation and amortization ................... 1.0 1.5 3.0 1.7 4.7
Write-off of capitalized software--... .......... 5.0 -- -- -- --
----- ----- ------ ----- -----
Total operating expenses ...................... 65.5 108.8 155.3 99.4 108.6
----- ----- ------ ----- -----
Income (loss) from operations .................... 5.2 (46.9) (143.5) (65.8) (54.8)
Interest income (expense), net ................... ( 0.0) 2.2 2.4 4.2 ( 3.7)
----- ----- ------ ----- -----
Loss before benefit for income taxes ............. 5.2 (44.7) (141.1) (61.6) (58.5)
Benefit for income taxes ......................... 1.2 ( 1.8) -- --
----- ----- ------ ----- -----
Net loss ......................................... 4.0% (42.9)% (141.1)% (61.6)% (58.5)%
===== ===== ====== ===== =====
</TABLE>
47
<PAGE>
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 JULY
YEAR ENDED APRIL 30, 31,
----------------------------------- -----------------------
1996 1997 1998 1997 1998
--------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Cost of license revenue ......................... 5.5% 10.7% 38.1% 32.5% 19.7%
Cost of service and maintenance revenue ......... 68.9% 72.9% 135.5% 84.3% 74.6%
</TABLE>
RECENT DEVELOPMENTS
On August 20, 1998, the Company entered into the Merger Agreement. Pursuant
to the terms of the Merger Agreement, at the Effective Time (i) each share of
Common Stock outstanding immediately prior to the Effective Time (other than
shares held by the Company, Acquisition Sub or Oracle (which will be cancelled)
and shares for which appraisal rights under Delaware law are perfected) will be
converted into a right to receive the Merger Consideration and (ii) each share
of Common Stock, par value $0.001 per share, of Acquisition Sub outstanding
prior to the Effective Time will be converted into the right to receive one
share of the common stock, par value $0.01 per share, of the Surviving
Corporation.
The obligations of the Company and Oracle to complete the Merger are
subject to a number of conditions. If these conditions are not satisfied or
waived, the Merger will not be completed. These conditions include (i) the
approval of the Company's stockholders; (ii) the receipt of final court approval
of the settlement of the putative class actions filed in the United States
District Court for the Southern District of New York and the United States
District for the Eastern District of Virginia on terms consistent with the
Memorandum of Understanding Concerning Settlement Terms dated July 9, 1998 and
the expiration of all rights to appeal such settlement; (iii) the retention of
Marcus Heth and certain employees of the Company; (iv) that there shall not be
instituted and continuing any action, suit or proceeding against the Company,
Oracle, Acquisition Sub by any governmental entity or any other person or
persons, (a) directly or indirectly relating to the Merger or the License
Agreement or any other transactions contemplated by the Merger Agreement, (b)
who is or was a stockholder or stockholders of the Company, whether on behalf of
such stockholder or stockholders, or in a derivative action on behalf of the
Company, (c) alleging infringement by the Company of intellectual property
assets of any third party or (d) which individually or in the aggregate could
reasonably be expected to have a material adverse effect on the Company and its
subsidiaries; (v) the aggregate number of Dissenting Shares held by Dissenting
Stockholders shall not be equal to or exceed ten percent of the outstanding
shares of Common Stock immediately prior to the Effective Time; (vi) no order
being entered in any action or proceeding or other legal restraint or
prohibition that prevents the consummation of the Merger; (vii) the expiration
of any applicable waiting period applicable to the Merger; (viii) the accuracy
in all material respects of the representations and warranties of the Company
and Oracle; and (ix) the performance in all material respects by the Company and
Oracle of all obligations and covenants required to be performed or complied
with under the Merger Agreement.
In connection with the Merger Agreement, Edison Venture Fund, L.P.,
Noro-Moseley Partners III, L.P., and Messrs. Keith D. Roberts, Ronald R.
Charnock, Ernest J. Connon and Marcus W. Heth each entered into Support
Agreements whereby the stockholders (i) agreed to vote all their shares of
Common Stock in favor of the Merger and against any action by the Company that
would breach the Merger Agreement or impair or delay the consummation of the
Merger and (ii) granted to designees of Oracle an irrevocable proxy to vote such
shares in favor of the Merger and as agreed in the Support Agreements. The
Support Agreements terminate upon the earlier of the Effective Time or the
termination of the Merger Agreement.
In connection with the Merger Agreement, the Company entered into the
License Agreement with Oracle whereby the Company agreed to grant to Oracle an
irrevocable, non-exclusive license to use the Company's Technology. Oracle will
pay the Company a sublicense fee equal to 30% of the net fees Oracle receives
for sublicenses of the Company's Technology, of which $2 million will be prepaid
in three equal monthly installments commencing on September 1, 1998. In the
event that Oracle (i) breaches
48
<PAGE>
the terms of the Merger Agreement or fails to pay the sublicense fee when due,
the Company may terminate the License Agreement upon repayment of the Prepaid
Sublicense Fee paid to the Company in excess of $360,000, or (ii) the Merger
Agreement is terminated as a result of the Company accepting a superior offer
than that presented in the Merger Agreement upon repayment of the Prepaid
Sublicense Fee and payment of the Termination Fee.
In connection with the Merger Agreement, the Company, Oracle and the Bank
entered into the Loan Modification Agreement whereby, subject to the terms of
the Loan Modification Agreement, the Bank agreed to forebear from exercising
certain remedies available to it as a result of the Company's existing defaults
under the loan agreements with the Bank until the earlier of December 31, 1998
and the consummation of the Merger. The Bank's continuing forbearance will
terminate upon the termination of the Merger Agreement. The Bank also agreed to
allow the Company and Oracle to enter into the License Agreement, to waive the
anti-dilution provisions applicable to its warrant to purchase 100,000 shares of
Common Stock during the period of forbearance and to terminate its warrant
agreement with the Bank upon consummation of the Merger. The Company agreed to
deposit into an account at the Bank any refund that the Company may receive from
the IRS and/or the Commonwealth of Virginia and agreed to withdraw such funds
only pursuant to a cash plan approved by the Bank.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JULY 31, 1998 COMPARED WITH THREE MONTHS ENDED JULY 31,
1997
Revenue. Total revenue decreased 38.9% from $5.9 million in the three
months ended July 31, 1997 to $3.6 million in the three months ended July 31,
1998. Revenue from license fees decreased 8.1% from $2.0 million in the three
months ended July 31, 1997, or 34.5% of total revenue, to $1.9 million in the
three months ended July 31, 1998, or 51.9% of total revenue. The decrease in
license fees for the quarter ending July 31, 1998, was primarily related to
sales not materializing due primarily to the events surrounding the Company
during the fourth quarter of fiscal 1998 and the first quarter in fiscal 1999.
See "Merger -- Background of the Merger." Service revenue decreased 55.2% from
$3.9 million in the three months ended July 31, 1997 to $1.7 million in the
three months ended July 31, 1998. This decrease was due to the reduced orders
related to the material uncertainties surrounding the preceding five fiscal
months. The mix of revenue changed from 34.5% license revenue and 65.5% service
revenue in the prior year to approximately 52% license revenue and 48% services
revenue in the current year, due to the larger amounts of services performed in
the first three months of fiscal 1998. In addition, the shift in revenue mix is
also attributed to the negative impact of the events surrounding the Company
during its fourth quarter of fiscal 1998 and in the first quarter of fiscal
1999.
Cost of Revenue. Cost of license revenue is comprised of the costs of
media, packaging, documentation and incidental hardware costs. 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 decreased from $3.9 million in the three months ended
July 31, 1997, or 66.4% of total revenue, to $1.7 million in the three months
ended July 31, 1998, or 46.2% of total revenue. Cost of license revenue
decreased from $664,000 in the three months ended July 31, 1997, or 32.5% of
license revenue to $371,000 in the three months ended July 31, 1998, or 19.7% of
license revenue. Cost of service and maintenance revenue decreased from $3.3
million in the three months ended July 31, 1997, or 84.3% of service and
maintenance revenue, to $1.3 million in the three months ended July 31, 1998, or
74.6% of service and maintenance revenue. The decrease was the result of
consulting staff reductions made in the Company's consulting, customization and
implementation support staff in the fourth quarter of fiscal 1998. Total cost of
revenue was positively affected in the current year compared to the same period
in the prior fiscal year due to the significant cost reductions and the limited
use of third party consultants.
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
49
<PAGE>
unallocated corporate expenses such as rent, utilities, legal and auditing.
Selling, general and administrative expenses decreased from $4.3 million for the
three months ended July 31, 1997, or 73.1% of total revenue, to $2.9 million for
the three months ended July 31, 1998, or 79.0% of total revenue. This decrease
was attributable to reductions in the Company's headcount, and lower
administrative and facility expenses.
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 decreased from
$962,000 for the three months ended July 31, 1997, or 16.2% of total revenue, to
$658,000 for the three months ended July 31, 1998, or 18.2% of total revenue.
The decrease was primarily due to the reduction in the use of outside
consultants used to assist with quality assurance testing.
Litigation Settlement and Related Costs. One of the Company's former VARs
filed a claim for arbitration against the Company in connection with the
termination of the VAR's reseller agreement with the Company, claiming not less
than $1.0 million in damages. The Company defended this action in arbitration
proceedings. In April 1997, the arbitration panel awarded $267,000 in net
damages to the plaintiff in the proceedings. The arbitration panel's decision
was appealed. In August 1997, the Company settled the litigation with the former
VAR for $250,000. The Company has recorded a one-time charge in the quarter
ended July 31, 1997 related to this litigation for $500,000, which includes the
settlement charge and other costs and expenses associated with defending the
litigation. In the period ended July 31, 1998, the Company recorded
approximately $244,000 in litigation expenses and settlement costs related to
the class action lawsuit and the settlement and costs related to customer
litigation.
Depreciation and Amortization. Depreciation and amortization expenses were
$99,000 in the three months ended July 31, 1997, and $171,000 in the three
months ended July 31, 1998. The increase in fiscal year 1999 was due to the
additional depreciation on equipment the Company purchased in fiscal 1998.
Interest Income (Expense), Net. Interest income (expense), consists of
interest earned on cash and cash equivalents, offset by interest expense on debt
and equipment financing. Net interest income (expense) was $249,000 and
$(134,000) for the three months ended July 31, 1997 and 1998, respectively. The
difference results from interest income attributable to the cash raised through
the Company's IPO in the third quarter of fiscal 1997, partially offset by
interest expense related to borrowings on the line of credit.
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 (benefit) for income taxes is computed based
on pretax income, with deferred income taxes recorded for the differences
between pretax accounting and pretax taxable income (loss). The Company did not
record a provision or benefit in fiscal 1998 or in fiscal 1999.
FISCAL 1998 COMPARED TO FISCAL 1997
Revenue. Total revenue increased 4.6% from $18.3 million in fiscal 1997 to
$19.2 million in fiscal 1998. Revenue from license fees decreased 9.3% from
$10.3 million in fiscal 1997, or 56% of total revenue, to $9.3 million, or 48.6%
of total revenue in fiscal 1998. The decrease was primarily related to indirect
sales not materializing, while the Company was de-emphasizing the Company's
direct sales activities. Service and maintenance revenue increased 22.3% from
$8.1 million in fiscal 1997, or 44% of total revenue, to $9.8 million in fiscal
1998 or 51.4% of total revenue. The increase was due to greater demand for the
Company's implementation and project management services. The shift in revenue
mix primarily related to the impact of the de-emphasis on direct sales effort in
fiscal 1998 and the Company's decision to allocate more of the Company's
resources towards performing services for existing customers.
Cost of Revenue. Cost of license revenue is comprised of the costs of
media, packaging, documentation and hardware costs. Cost of service and
maintenance revenue consists of salaries, wages, benefits and other direct costs
related to installing, customizing and supporting customer implementation and
support. These costs also include telephone support and training.
50
<PAGE>
Total cost of revenue increased 142.5% from $7.0 million in fiscal 1997, or
38% of total revenue, to $16.9 million in fiscal 1998, or 88.2% of total
revenue. Cost of license revenue increased 222.8% from $1.1 million in fiscal
1997, or 10.7% of license revenue, to $3.5 million in fiscal 1998, or 38.1% of
license revenue. The increase was directly related to the costs of third party
software and hardware provided to customers. Costs of service and maintenance
revenue increased 127.4% from $5.9 million in fiscal 1997, or 72.9% of service
and maintenance revenue, to $13.3 million in fiscal 1998, or 135.5% of service
and maintenance revenue. The increase was directly related to the additional
staff, consultants and personnel hired to support the Company's projects. Total
loss of revenue was adversely affected in fiscal 1998 compared to the prior year
due to the change in revenue mix between license and services and the use of
third party consultants which increased significantly the cost of priority
services.
Selling, General and Administrative. Selling expenses consist of personnel
costs, including compensation, benefits and the costs of travel, advertising,
public relations, seminars and trade shows. General and administrative expense
represents the costs of executive, financial, support personnel and corporate
expenses such as rent, utilities, legal and advertising. Selling, general and
administrative expenses increased 32.8% from $16.8 million in fiscal 1997, or
91.5% of total revenue, to $22.2 million in fiscal 1998 or 116.2% of total
revenue. The increase was due to additions to the Company's headcount, primarily
sales and marketing staff and expansion of US and international offices.
Research and Development. Research and development expenses consisted of
personnel costs and direct overhead costs in developing software features and
functionality. Research and development expense increased 51.9% from $2.9
million in fiscal 1997, or 15.8% of total revenue, to $4.4 million in fiscal
1998, or 22.9% of total revenue. The increase was due to hiring of additional
software engineers and the use of outside consultants to assist with quality
assurance testing.
Litigation Settlement and Related Costs. One of the Company's former VARs
filed a claim for arbitration against the Company in connection with the
termination of the VAR's reseller agreement with the Company, claiming not less
than $1.0 million in damages. The Company defended this action in arbitration
proceedings. In April 1997, the Company settled the litigation with a former VAR
for $250,000. The Company has recorded a one-time charge in the quarter ending
July 31, 1997 related to this litigation for $500,000, which includes the
settlement charge and other costs and expenses associated with defending the
litigation. Additionally, the Company has recorded a charge of $2 million in the
fourth quarter fiscal 1998 to cover the cost of the class action settlement
referred to in "Litigation Risks" and related costs.
Depreciation and Amortization. Depreciation and amortization expenses were
$281,000 in fiscal 1997 and $580,000 in 1998. The increase in fiscal year 1998
was due to the amount of additional equipment the Company purchased in 1998.
Interest Income (Expense), Net. Interest income (expense) consists of
interest earned on cash and cash equivalents, offset by interest expense on debt
and equipment financing. Net interest income (expense) was $404,000 and $456,000
for fiscal 1997 and fiscal 1998, respectively.
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 (benefit) for income tax is computed based on
pretax income, with deferred income taxes recorded for the differences between
pretax accounting and pretax taxable income (loss). The Company did not record a
benefit in fiscal 1998. The Company's provision (benefit) for income taxes was
($323,000) in fiscal 1997.
FISCAL 1997 COMPARED TO FISCAL 1996
Revenue. Total revenue increased 10.7% from $16.5 million in fiscal 1996 to
$18.3 million in fiscal 1997. Revenue from license fees essentially stayed the
same in absolute dollars from $10.3 million in fiscal 1996, or 62.6% of total
revenue, to $10.3 million in fiscal 1997, or 56.0% of total revenue. Service and
maintenance revenue increased 30.1% from $6.2 million in fiscal 1996, or 37.4%
of total revenue, to
51
<PAGE>
$8.1 million in fiscal 1997, or 44.0% of total revenue. The increase in total
revenue was significantly influenced by the roll-out of the Versatility Series
at BT, which contributed $2.1 million in service and maintenance revenue in
fiscal year 1997.
Cost of Revenue. Total cost of revenue increased from $4.8 million in
fiscal 1996, or 29.3% of total revenue to $7.0 million in fiscal 1997, or 38.1%
of total revenue. Cost of license revenue increase from $573,000 in fiscal 1996,
or 5.5% of license revenue, to $1,098,000 in fiscal 1997, or 10.7% of license
revenue. The increase was primarily related to providing third-party hardware
and software products for customers, for which costs were recognized, but
revenue has not been recognized. The cost of service and maintenance revenue
increased from $4.3 million in fiscal 1996, or 68.9% of service and maintenance
revenue, to $5.9 million in fiscal 1997, or 72.9% of service and maintenance
revenue. The increase represents the addition of consulting and other staff
needed to support projects as well as the costs relating to the installation of
the Company's products at BT and Avantel.
Selling, General and Administrative. The Company's selling, general and
administrative expenses increased from $7.8 million in fiscal 1996, or 47.0% of
total revenue, to $16.8 million in fiscal 1997, or 91.5% of total revenue. The
increase was attributable to additions to the Company's headcount, primarily
sales and marketing staff. During fiscal 1997, the number of the Company's
employees grew from 135 to 186. Of the increase, 28 new hires joined the sales
and marketing departments with the remainder accepting management or
administrative positions. The Company had planned their fiscal 1997 budget based
upon forecasts of growth in fiscal 1997 and based upon reported operating
results during the year.
Research and Development. Research and development expenses increased from
$2.1 million in fiscal 1996, or 12.5% of total revenue, to $2.9 million in
fiscal 1997, or 15.8% of total revenue. The number of staff devoted to research
and development increased over 34.6%. 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 increased from $161,000 in fiscal 1996 to
$281,000 in fiscal 1997. While the Company entered into operating leasing
arrangements for capital equipment acquired both in fiscal 1996 and 1997, the
volume of assets purchased that were either retained or financed through capital
leases, led to the increase in depreciation expense. Additionally, in fiscal
1996, the Company wrote off all remaining capitalized software totaling
$829,000. No amounts were written off in 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) consists of
interest earned on cash and cash equivalents, offset by interest expense on debt
and equipment financing. Net interest income (expense) was $3,000 in fiscal 1996
and $404,000 in fiscal 1997. The difference resulted from higher available cash
balances in fiscal 1997 primarily due to the cash raised in the Company's IPO.
Provision for Income Taxes. The Company's provision for income taxes was
$207,000 in fiscal 1996 compared to a benefit of $323,000 in fiscal 1997. The
effective rate in fiscal 1996 was 24.0% versus a benefit of 3.95% in fiscal
1997. The Company's effective rate in fiscal 1996 was 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.
LIQUIDITY AND CAPITAL RESOURCES
On October 29, 1997, the Company entered into a credit facility with the
Bank which provided for a $5.0 million operating line of credit and a new $2.0
million equipment line of credit. Since the Company was not in compliance with
various covenants in the above credit facility in subsequent quarters, on April
28, 1998, the Company entered into an amendment to the credit facility effective
April 30, 1998, in which the Bank waived all prior non-compliance and provided
for the following terms: the $2.0 million equipment line of credit was cancelled
and the outstanding balance of $256,703 was transferred to the
52
<PAGE>
operating line of credit. Subsequent to April 30, 1998, the Company permanently
paid down the operating line to $3.8 million and may not borrow any additional
amounts under the line. In addition, in exchange for the Bank's forbearance in
exercising its rights under the previous arrangement, the Company issued
warrants to the Bank to purchase 100,000 shares of the Common Stock with an
exercise price of $2.50 per share. The credit facility continues to be
collateralized by all of the Company's assets and intellectual property. The
amendment to the credit facility provides that the Company must maintain certain
financial covenants, including a minimum tangible net worth and a minimum cash
balance. As of July 31, 1998 the Company was not in compliance with these new
covenants and therefore was in default under the operating line of credit. In
connection with the Merger, the Company has entered into a Loan Modification
Agreement. See "Recent Developments." Subject to the terms of the Loan
Modification Agreement, the Bank agreed to forbear from exercising certain
remedies available to it as a result of the Company's existing defaults under
the loan agreement with the Bank until the earlier of December 31, 1998 and the
completion of the Merger.
At July 31, 1998, the Company had $879,000 in cash and cash equivalents.
For the quarter ended July 31, 1998, net cash used in operating activities
totaled $3.8 million. During the quarter, the Company liquidated approximately
$566,000 in short-term investments and generated an additional $180,000 from the
collection of notes receivable and sale of assets. During the quarter, the
Company repaid the Bank approximately $1.8 million as agreed to in the loan
amendment effective April 30, 1998 as described above. At August 31, 1998, the
Company had outstanding approximately $3.5 million under its credit facility
with the Bank and was not in compliance with various covenants thereunder.
As shown in the financial statements contained herein, the Company has
incurred substantial operating losses and anticipates a loss in the third
quarter of fiscal 1999. On August 31, 1998, the Company had approximately
$597,000 in cash and cash equivalents. The Company believes that its cash on
hand and cash flow from anticipated operating activities will not be sufficient
to meet its ongoing obligations through January 31, 1999. Additionally, the
Company expects to continue to incur significant amounts in connection with
existing lawsuits and investigations. See "Litigation." On August 20, 1998, the
Company entered into the Merger Agreement with Oracle and Acquisition Sub. See
"Recent Developments." In connection with the Merger Agreement, the Company and
Oracle entered into the License Agreement. As part of the License Agreement, on
September 1 and October 1, 1998, Oracle paid to the Company, and will make one
additional payment of, the Prepaid License Fee equal to $666,667 on November 1,
1998. See "Recent Developments." There can be no assurance that the Company will
be able to consummate the Merger, or in the event of a termination of the Merger
Agreement, raise capital on favorable terms, or at all. If the Merger Agreement
is terminated and the Company is unable to obtain additional financing
sufficient to meet its operating needs, the Company would be required to
significantly reduce the scope of, or cease conducting, its operations during
the quarter ended January 31, 1999.
FACTORS WHICH MAY EFFECT FUTURE OPERATING RESULTS
The following issues and uncertainties, among others, should be considered
in evaluating the Company's outlook.
Risks Relating to Cash Flow Levels. As of August 31, 1998, the Company had
$597,000 in cash and cash equivalents. The Company believes that its cash on
hand and cash flow from anticipated operating activities will not be sufficient
to meet its ongoing obligations through the third quarter of fiscal 1999.
Additionally, the Company expects to incur significant amounts in connection
with existing lawsuits and investigations described in "Litigation Risks." If
the Company is unable to complete the Merger Agreement, or in the event of a
termination of the Merger and the Company is unable to obtain additional
financing sufficient to meet its operating needs, the Company would be required
to significantly reduce the scope of, or cease conducting, its operations during
the quarter ended January 31, 1999.
Adverse Effects of Restatement of Financial Statements. On March 12, 1998,
the Company announced that it expected to restate its financial results for the
fiscal year ended April 30, 1997 and the fiscal quarters ended July 31, 1997 and
October 31, 1997, and that its Form 10-Q for the quarter ended January 31, 1998
would not be filed on time, all as a result of concerns over the accounting
treatment of
53
<PAGE>
certain transactions, which the Company was examining. The uncertainties
resulting from this announcement and the subsequent results of the Company's
restatement of those reports, had a material adverse affect on the Company's
business and financial condition. In addition, such announcements have had and
will continue to have additional material adverse effects on the Company. Due to
the Company's financial uncertainty, certain customers of the Company have
stated that they intend to postpone purchases of the Company's products and
services until the Company's financial condition has stabilized.
Risks Relating to Trading on the OTC Bulletin Board. The Common Stock is
currently traded on the OTC Bulletin Board, a regulated quotation service for
non-Nasdaq over the counter securities. Because the Common Stock is no longer
listed on Nasdaq, an investor could find it more difficult to dispose of, or to
obtain accurate quotations as to the market value of the Common Stock. In
addition, if the trading price of the Common Stock were to remain below $5.00
per share or the Company failed to maintain net tangible assets (total assets
less tangible assets less liabilities) in excess of $2.0 million (the "Net
Tangible Asset Test") or average revenue of at least $6.0 million for the last
three years (the `Revenue Test"), trading in the Common Stock would also be
subject to the requirements of certain rules under the Exchange Act, which
require additional disclosure by broker-dealers in connection with any trades
involving a stock defined as a penny stock (generally, any non-Nasdaq equity
security that (i) has a market price of less than $5.00 per share or (ii) fails
to meet (A) the Net Tangible Asset Test or (B) the Revenue Test, subject to
certain exception. The additional burdens imposed upon broker-dealers by such
requirements could discourage broker-dealers from effecting transactions in the
Common Stock, which could severely limit the market liquidity of the Common
Stock and the ability of investors to trade the Common Stock. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Factors Which May Effect Future Operating Results."
Risks Relating to "Penny Stock"; Possible Effect of "Penny Stock" Rules on
Liquidity for the Common Stock. Because the Common Stock is not listed on a
national securities exchange nor listed on a national or a qualified automated
quotation system, the Company may become subject to Rule 15g-9 under the
Exchange Act, which imposes additional sales practice requirements on
broker-dealers that sell such securities to persons other than established
customers and "accredited investors" (generally, individuals with a net worth in
excess or $1,000,000 or annual incomes exceeding $200,000 or $300,000 together
with their spouse). For transactions covered by Rule 15g-9, a broker-dealer must
make special suitability determinations for the purchaser and have received the
purchaser's written consent to the transaction prior to sale. Consequently, such
rule may affect the ability of broker-dealers to sell the Common Stock and may
affect the ability of a stockholder to sell any of the Common Stock in the
secondary market.
The Commission has adopted regulations that generally define a "penny
stock" to be any equity security that (i) has a market price (as therein
defined) of less than $5.00 per share or with an exercise price of less than
$5.00 per share or (ii) fails to meet (A) the Net Tangible Asset Test or (B) the
Revenue Test, subject to certain exceptions. For any transaction involving a
penny stock, unless exempt, the rules require delivery, prior to any transaction
in a penny stock, of a disclosure schedule prepared by the Commission relating
to the penny stock market. Disclosure is also required to be made about sales
commissions payable to both the broker-dealer and the registered representative
and current quotations for the securities. Finally, monthly statements are
required to be sent disclosing recent price information for the penny stock held
in the account and information on the limited market in penny stock.
There can be no assurance that the Common Stock will continue to qualify
for exemption from the penny stock restrictions. In any event, even if the
Common Stock is exempt from such restrictions, the Company would remain subject
to Section 15(b)(6) of the Exchange Act, which gives the Commission the
authority to restrict any person from participating in a distribution of penny
stock, if the Commission finds that such a restriction would be in the public
interest.
If the Common Stock was subject to the rules on penny stocks, the market
liquidity for the Common Stock could be materially adversely affected.
Litigation Risks. Between March 6, 1998 and April 8, 1998 the Company and
certain of its current and former officers and directors, among others, were
sued in the putative class actions filed in the United States District Court for
the Southern District of New York and the United States District Court
54
<PAGE>
for the Eastern District of Virginia, as follows: Thomas Esposito, et al. v.
Versatility Inc. et al. (S.D.N.Y.); Tammy Newsman v. Versatility Inc., et al.
(S.D.N.Y.); Sam Succar v. Versatility Inc., et al. (S.D.N.Y.); Thomas K. Doyle
v. Versatility Inc. et al. (E.D. Va.); and Steven Bowen v. Versatility Inc. et
al. (S.D.N.Y.). In addition, the Company's auditors and the lead underwriters
in its December 1996 IPO were named as defendants in one or more of the
putative class actions. Collectively, the putative class actions asserted
claims under Sections 11, 12(2), and 15 of the Securities Act and Sections
10(b) and 20(a) of the Exchange Act for alleged misrepresentations and
omissions in connection with the public filings with the Commission and other
public statements made by the Company. Among other allegations, each of the
putative class actions alleged that the Company misrepresented its financial
results and its accounting practices during the period December 12, 1996
through March 12, 1998, including in the Company's IPO prospectus. The
complaints in certain of the putative class actions also asserted, among other
allegations, that the Company and certain of other defendants made
misrepresentations in the IPO prospectus and thereafter regarding the
performance capabilities of the Company's CallCenter product.
Versatility has executed a settlement agreement with the plaintiffs in all
the putative class actions currently pending against the Company. The settlement
agreement has been filed with the court and is conditioned upon final court
approval of the settlement agreement. Under the proposed settlement, the class
actions would be dismissed and a settlement fund would be created for the
members of the proposed class consisting of $3.5 million in cash, which
represents proceeds from Versatility's directors' and officers' liability
insurance and related recoveries by the Company. In addition, as part of the
settlement, an aggregate of 350,000 shares of Common Stock will be transferred
to the Company by certain defendants other than the Company in settlement of the
claims against them. Thereafter, the Company will issue 750,000 shares of the
Common Stock for the benefit of the proposed plaintiff class, 350,000 shares of
which will be in substitution of shares provided by those certain defendants in
settlement of the claims against them.
Since March 1998 the Company has been responding to informal requests for
information from the Commission relating to certain of the Company's financial
matters. In May 1998, the Company was advised by the Commission that it had
obtained a formal order of investigation so that, among other matters, it may
utilize subpoena powers to obtain information relevant to its inquiry. The
Commission has and may in the future utilize its subpoena powers to obtain
information from various officers, directors and employees of the Company and
from persons not presently associated with the Company. If, after completion of
its investigation, the Commission finds that violations of the federal
securities laws have occurred, the Commission has the authority to order persons
to cease and desist from committing or causing such violations and any future
violations. The Commission may also seek administrative, civil and criminal
fines and penalties and injunctive relief. The Department of Justice has the
authority in respect of criminal matters. There can be no assurance as to the
timeliness of the completion of the investigation or as to the final result
thereof, and no assurance can be given that the final result of the
investigation will not have a material adverse effect on the Company. The
Company is cooperating fully with the investigation, and has responded and will
continue to respond to requests for information in connection with the
investigation.
One of the Company's former VARs had filed a claim for arbitration
(non-binding) against the Company asserting, among other things, that the
Company misrepresented the functionality of its products and wrongfully
terminated the VARs reseller agreement, and claiming not less than $1.0 million
in damages. The Company defended this action in arbitration proceedings. In
April 1997, the arbitration panel awarded $267,000 in net damages to the
plaintiff in the proceedings. The arbitration panel's decision was appealed. In
August 1997, the Company settled the litigation with the former VAR for
$250,000. The Company recorded a one-time charge in the quarter ended July 31,
1997 related to this litigation for $500,000, which included the settlement
charge and other costs and expenses associated with the litigation.
A former customer of the Company sought damages in excess of $1 million for
alleged breaches of contract and warranties, as well as alleged
misrepresentations. On April 16, 1998, the Company filed a response denying the
allegations and counter-claiming for damages in excess of $400,000 for breach of
contract. On August 14, 1998, the Company reached an agreement and settled this
litigation for $100,000. The Company recorded the settlement costs in the first
quarter of fiscal 1999.
55
<PAGE>
A customer of a Versatility reseller has sued for damages for an amount not
less than $1 million. In December 1997, the District Court dismissed the action.
In February 1998, essentially the same claim was made in a different District
Court. In October 1998, the Company reached a settlement in principal with the
customer, subject to the signing of a definitive settlement agreement, for
$75,000.
Risks Relating to Year 2000 Issues. The Company believes that its software
is substantially year 2000 compliant and currently does not anticipate material
expenditures to remedy any year 2000 problems. However, many computer systems
were not designed to handle any dates beyond the year 1999, and therefore, many
companies will be required to modify their computer hardware and software prior
to the year 2000 in order to remain functional. Many enterprises, including the
Company's present and potential customers, will be devoting a substantial
portion of their information systems spending to resolving this upcoming year
2000 problem, which may result in spending being diverted from network
applications, such as the Company's products, over the next two years.
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 will continue to account for all of the
Company's revenue for the foreseeable future. However, the Company has little
operating history with the Versatility Series 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 products in particular, could materially
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
outlook 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 1998, the Company's two largest
customers accounted for 39.1% of the Company's total revenue, of which, BT
accounted for 22.4%. 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
material adverse effect on the Company's business, financial condition and
results of operations. See "-- Risks Relating to Cash Flow Levels."
Quarterly Fluctuations in Revenue and Operating Results. The Company's
revenue and operating results have in the past and could continue in the future
to 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
56
<PAGE>
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
necessarily meaningful and such comparisons should not be relied upon as
indications of future performance.
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 2 to 9 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 was to expand 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
revenue growth in the future will depend on its ability to attract, train and
retain additional qualified direct sales personnel. In addition, the Company
invested 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. Subsequent to fiscal 1997, the VARs relationships did not develop as
planned and the Company has significantly reduced its relationships with many
VARs and its dependence on them for future business.
Dependence on Indirect Distribution Channels; Potential for Channel
Conflict. The Company's strategy was 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
57
<PAGE>
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.
International Operations. Revenue from sales outside the United States in
fiscal 1997 and 1998 accounted for approximately 54.6% and 39.0%, 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 effect on the Company's international
operations. The Company currently does not engage in hedging activities.
Effective June 1, 1998 the Company signed a worldwide distribution
agreement with Cincom Systems, Inc. This non-exclusive agreement includes
Cincom's absorption of Versatility's international distribution channels. With
the execution of this transaction, Versatility has eliminated all its direct
sales and support presence outside of the U.K.
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
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. The delisting of the Common
Stock from Nasdaq and the Company's current financial condition could also
continue to impair the Company's ability to compete. 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.
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 sys-
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<PAGE>
tems, 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 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 technol-
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<PAGE>
ogies 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 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.
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 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.
Since February 1998, the Company has replaced substantially all of its
senior management. The Company's current President and Chief Operating Officer
and current Chief Financial Officer joined the Company in February 1998,
together with the new Senior Vice President of Operations. The Company's former
President, Chairman and Chief Executive Officer resigned from all positions with
the Company and the former Chief Financial Officer and Vice President in charge
of sales have also left the Company.
Regulatory Environment. Federal, state and foreign law regulate certain
uses of outbound call processing systems. 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.
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<PAGE>
MARKET PRICE AND DIVIDEND INFORMATION
Following the Company's IPO on December 13, 1996, until July 20, 1998, the
Common Stock was traded on Nasdaq under the symbol "VERS". Nasdaq halted trading
of the Common Stock on March 12, 1998 and allowed the resumption of trading on
May 5, 1998 and on July 20, 1998, Nasdaq delisted the Common Stock. On July 21,
1998 the Common Stock began trading on the OTC Bulletin Board. See "Business --
Recent Developments." The following table reports the high and low sale prices
in each quarter until October 14, 1998 on the Nasdaq or OTC Bulletin Board, as
applicable:
<TABLE>
<CAPTION>
LOW HIGH
----------- -----------
<S> <C> <C>
FISCAL 1997
Quarter ended January 31, 1997 (subsequent to
December 13, 1996) .............................................. $ 13.13 $ 18.25
Quarter ended April 30, 1997 ...................................... 8.00 13.63
FISCAL 1998
Quarter ended July 30, 1997 ....................................... 10.00 13.75
Quarter ended October 30, 1997 .................................... 7.75 13.88
Quarter ended January 31, 1998 .................................... 3.75 9.13
Quarter ended April 30, 1998 ...................................... 2.50 5.88
FISCAL 1999
Quarter ended July 30, 1998 ....................................... 0.75 2.25
Quarter ended October 31, 1998 (through October 14, 1998) ......... 0.94 1.94
</TABLE>
On August 19, 1998 (the last trading day before the Board's approval of the
Merger) the closing share price was $1.63 per share. No cash dividends have been
paid on the Common Stock by Versatility since its shares were publicly
distributed in December 1996, and Versatility does not currently intend to pay
cash dividends on the Common Stock. In addition, the Company's loan agreement
with its commercial bank, as well as the Merger Agreement, prohibits the payment
of cash dividends.
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<PAGE>
SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth as of October 14, 1998: (i) the name of each
person who, to the knowledge of the Company, owned beneficially more than 5% of
the Common Stock of the Company outstanding at such date; (ii) the name of each
director; (iii) the name of each of the executive officers; and (iv) the number
of shares of Common Stock owned by each of such persons and all officers,
directors and nominees as a group and the percentage of the outstanding shares
represented thereby.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP (1) PERCENT OF CLASS (2)
- --------------------------------------------------------------------- --------------------- ---------------------
<S> <C> <C>
Edison Venture Fund III, L.P. (9)
997 Lenox Drive, #3
Lawrenceville, NJ 08648 .......................................... 516,957 7.1%
Noro-Moseley Partners III, L.P. (9)
4200 North Side Parkway, NW,
Building 9
Atlanta, GA 30327 ................................................ 376,468 5.2%
Keith D. Roberts (9)
6501 Brookes Hill Ct.
Bethesda, MD 20816 ............................................... 925,000 12.7%
Ronald R. Charnock (9)
1919 Gallows Road
10th Floor
Vienna, VA 22031 ................................................. 1,046,500 14.3%
Marcus W. Heth (9)
11781 Lee Jackson Memorial Highway
Seventh Floor
Fairfax, VA 22033 ................................................ 1,000,000 13.7%
Thomas A. Smith (3)(9)
997 Lenox Drive, #3
Lawrenceville, NJ 08648 .......................................... 516,957 7.1%
Charles A. Johnson (4)(9)
4200 North Side Parkway, NW
Building 9
Altanta, GA 30327 ................................................ 376,468 5.2%
Paul J. Palmer (5) ................................................ 14,000 *
Paul J. Zoukis (6)(10) ............................................ 94,000 1.3%
Kenneth T. Nelson (7)(10) ......................................... 56,000 *
James Dellamore (7)(10) ........................................... 56,000 *
Ernest J. Connon (8)(9) ........................................... 257,981 3.5%
Oracle Corporation (9)
500 Oracle Parkway
Redwood Shores, CA 94065 ......................................... 4,122,906 56.5%
All officers, directors and nominees as a group (8 persons) (3) (4)
(5) (6) (7) (8) .................................................. 2,371,406 31.5%
</TABLE>
- ----------
* Less than 1%
(1) Except as otherwise noted, each person or entity named in the table has
sole voting and investment power with respect to the shares of Common
Stock. The inclusion herein of any shares of Common Stock deemed
beneficially owned does not constitute an admission of beneficial ownership
of those shares.
(2) Applicable percentage of ownership as of October 14, 1998 is based upon
7,295,009 shares of Common Stock outstanding on such date. Beneficial
ownership is determined in accordance with the rules of the Commission, and
includes voting and investment power with respect to shares. Shares of
Common Stock subject to options currently exercisable or exercisable within
60 days of the Record Date are deemed outstanding for computing the
percentage ownership of the person holding such options, but are not deemed
outstanding for computing the percentage of any other person.
(3) Consists of 516,957 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.
(4) Consists of 376,468 shares of Common Stock 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.
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<PAGE>
(5) Consists of 14,000 shares of Common Stock issuable pursuant to stock
options exercisable within 60 days of October 14, 1998.
(6) Consists of 94,000 shares of Common Stock issuable pursuant to stock
options exercisable within 60 days of October 14, 1998.
(7) Consists of 56,000 shares of Common Stock issuable pursuant to outstanding
stock options exercisable within 60 days of October 14, 1998.
(8) Consists of 7,481 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days of October 14, 1998.
(9) Edison Venture Fund III, L.P., Noro-Moseley Partners III, L.P. and Messrs.
Charnock, Connon, Heth, and Roberts each entered into Support Agreements
whereby each gave Oracle a proxy to vote the shares of Common Stock
beneficially owned by them in favor the Merger. See "The Special Meeting --
Vote Required; Quorum."
(10) Messrs. Zoukis, Dellamore and Nelson agreed not to exercise any Company
stock options prior to the Effective Time. See "The Merger -- Interests of
Certain Persons in the Merger."
INDEPENDENT PUBLIC ACCOUNTANTS
Representatives of Deloitte & Touche LLP, Versatility's independent public
accountants are expected to be present at the Special Meeting, where they will
be available to respond to appropriate questions and have the opportunity to
make a statement if they so desire.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
As required by law, Versatility files reports, proxy statements and other
information with the Commission. These reports, proxy statements and other
information contain additional information about Versatility. You can inspect
and copy these materials at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington,
D.C. 20549, and at the following Regional Offices of the Commission: 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661; and 7 World Trade Center,
Suite 1300, New York, New York 10048. For further information concerning the
Commission's public reference rooms, you may call the Commission at
1-800-SEC-0330. Some of this information may also be accessed on the World Wide
Web through the Commission's Internet address at "http://www.sec.gov."
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROXY STATEMENT.
VERSATILITY HAS NOT AUTHORIZED ANYONE TO GIVE ANY INFORMATION DIFFERENT FROM THE
INFORMATION CONTAINED IN THIS PROXY STATEMENT. THIS PROXY STATEMENT IS DATED
OCTOBER 16, 1998. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS
PROXY STATEMENT IS ACCURATE AS OF ANY LATER DATE, AND THE MAILING OF THIS PROXY
STATEMENT TO STOCKHOLDERS SHALL NOT CREATE ANY IMPLICATION TO THE CONTRARY.
OTHER BUSINESS
Versatility knows of no other matter to be presented at the Special
Meeting. However, if other matters should properly come before the Special
Meeting, it is the intention of the persons named in the enclosed proxy to vote
the proxy with respect to such matters in accordance with their best judgment.
1998 ANNUAL MEETING OF STOCKHOLDERS
The Company does not plan to hold an annual meeting of stockholders for
1998 unless the Merger is not consummated. If the Merger is not consummated,
stockholder proposals must have been received by the Secretary of the Company no
later than June 25, 1999 in order to be considered for inclusion in the proxy
materials for the Company's next annual meeting of stockholders.
By Order of the Board of Directors,
Paul J. Zoukis,
President and Chief Executive Officer
YOUR VOTE IS IMPORTANT
PLEASE PROMPTLY COMPLETE AND SIGN THE ENCLOSED
FORM OF PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE
63
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
VERSATILITY INC.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report ............................................................. F-2
Consolidated Balance Sheets at April 30, 1997 and 1998 and July 31, 1998 (unaudited) ..... F-3
Consolidated Statements of Operations for the years ended April 30, 1996, 1997 and 1998
and the three months ended July 31, 1997 and 1998 (unaudited) .......................... F-4
Consolidated Statements of Cash Flows for the years ended April 30, 1996, 1997 and 1998
and the three months ended July 31, 1997 and 1998 (unaudited) .......................... F-5
Consolidated Statements of Changes in Stockholders' Equity for the years ended April 30,
1996, 1997 and 1998 and the three months ended July 31, 1998 (unaudited) ............... F-6
Notes to Consolidated Financial Statements ............................................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors of Versatility Inc.:
We have audited the accompanying consolidated balance sheets of Versatility
Inc. and its subsidiaries (the "Company") as of April 30, 1997 and 1998, and the
related consolidated statements of operations, changes in stockholders' equity,
and cash flows for each of the three years in the period ended April 30, 1998.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 its
subsidiaries at April 30, 1997 and 1998, and the results of their operations and
their cash flows for each of the three years in the period ended April 30, 1998
in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has incurred significant losses
and used significant amounts of cash in operating activities during the fiscal
years ended April 30, 1997 and 1998. In addition, the Company has negative
working capital and is not in compliance with the terms of its credit facility,
and is defending itself in several legal proceedings (see Note 6). These matters
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans concerning these matters are also described in Note
1. The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
DELOITTE & TOUCHE LLP
Washington, DC
July 27, 1998 (August 20, 1998 as to
Note 11, except for the third paragraph
of Note 11 as to which the date is
September 10, 1998)
F-2
<PAGE>
VERSATILITY INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
APRIL 30, APRIL 30, JULY 31,
1997 1998 1998
--------------- ---------------- ----------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets: ..................................................................
Cash and cash equivalents ....................................................... $ 18,825,764 $ 5,591,067 879,037
Short-term investments .......................................................... 6,039,255 565,938 --
Accounts receivable, net of allowance for doubtful accounts of $909,501,
$871,389 and $802,557 .......................................................... 5,844,987 3,681,293 4,457,334
Prepaid expenses ................................................................ 575,144 632,511 603,989
Inventory ....................................................................... 18,880 -- --
Related party receivables ....................................................... 153,381 94,421 197,419
Note receivable-related party ................................................... 519,305 -- --
Note receivable-non-related party ............................................... -- 200,000 100,000
Income taxes receivable ......................................................... -- 2,003,278 1,708,278
------------ -------------- ---------
Total current assets ........................................................... 31,976,716 12,768,508 7,946,057
------------ -------------- ---------
Other assets: ....................................................................
Income taxes receivable ......................................................... 1,530,000 -- --
Deposits ........................................................................ 187,650 289,689 365,609
Prepaid Expenses ................................................................ 259,755 37,107 --
Investments ..................................................................... 1,433,464 -- --
Assets held for sale ............................................................ 508,210 -- --
Purchased software, net of accumulated amortization of $42,098, $89,890; and
$102,796........................................................................ 177,136 168,230 155,324
------------ -------------- ---------
Total other assets ............................................................. 4,096,215 495,026 520,933
------------ -------------- ---------
Property and equipment:
Computers ....................................................................... 1,168,246 2,400,222 2,400,222
Office furniture and equipment .................................................. 665,597 932,774 851,890
Leasehold improvements .......................................................... 206,402 416,881 416,881
Capital leases .................................................................. 652,533 744,883 744,883
------------ -------------- ---------
2,692,778 4,494,760 4,413,876
Less: accumulated depreciation and amortization .................................. (1,675,749) (2,212,113) (2,369,865)
------------ -------------- ----------
Net property and equipment .................................................... 1,017,029 2,282,647 2,044,011
------------ -------------- ----------
Total ............................................................................ $ 37,089,960 $ 15,546,181 $ 10,511,001
============ ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities: .............................................................
Accounts payable ................................................................ $ 1,590,962 $ 2,277,692 $ 1,305,747
Accrued liabilities ............................................................. 2,337,034 2,995,756 1,459,017
Related party payables .......................................................... 28,030 10,240 10,240
Income taxes payable ............................................................ 104,777 -- 24,076
Capital lease payable ........................................................... 38,900 27,252 25,933
Line of credit .................................................................. 2,692,997 5,294,203 3,495,866
Deferred revenue ................................................................ 1,788,037 2,928,048 4,017,019
------------ -------------- --------------
Total current liabilities ...................................................... 8,580,737 13,533,191 10,337,898
------------ -------------- --------------
Long-term liabilities:
Capital lease payable, less current maturities .................................. 24,611 73,243 60,912
Deferred rent ................................................................... 316,360 397,006 407,173
------------ -------------- --------------
Total other liabilities ........................................................ 340,971 470,249 468,085
------------ -------------- --------------
Total liabilities ............................................................. 8,921,708 14,003,440 10,805,983
------------ -------------- --------------
Commitments and Contingencies (Notes 1 and 6)
Stockholders' equity:
Preferred stock, $.01 par value 2,000,000 shares authorized, no shares issued or
outstanding at April 30, 1997 and 1998, and July 31, 1998 ....................... -- -- --
Common stock, par value $.01 -- 20,000,000 shares authorized, 7,297,365 shares
issued and outstanding at April 30, 1997; 7,581,380 shares issued and outstand-
ing at April 30, 1998; 7,595,009 shares issued and outstanding at July 31, 1998.. 72,974 75,814 75,950
Additional paid-in capital ....................................................... 34,349,298 34,793,862 34,804,515
Foreign currency translation adjustments ......................................... (83,880) (130,870) 138,457
Accumulated deficit .............................................................. (6,170,140) (33,196,065) (35,313,904)
------------ -------------- --------------
Stockholders' equity (deficit) ................................................... 28,168,252 1,542,741 (294,982)
------------ -------------- --------------
Total ............................................................................ $ 37,089,960 $ 15,546,181 $ 10,511,001
============ ============== ==============
</TABLE>
See notes to the consolidated financial statements.
F-3
<PAGE>
VERSATILITY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
------------------------------------------------
1996 1997 1998
-------------- ---------------- ----------------
<S> <C> <C> <C>
Revenue:
License revenue ............................................ $10,345,323 $ 10,254,344 $ 9,305,989
Service and maintenance revenue ............................ 6,189,949 8,054,268 9,846,567
----------- ------------ -------------
Total revenue ............................................. 16,535,272 18,308,612 19,152,556
----------- ------------ -------------
Cost of revenue:
License revenue ............................................ 573,329 1,098,434 3,545,647
Service and maintenance revenue ............................ 4,266,984 5,867,917 13,345,416
----------- ------------ -------------
Total cost of revenue ..................................... 4,840,313 6,966,351 16,891,063
----------- ------------ -------------
Gross margin ................................................ 11,694,959 11,342,261 2,261,493
----------- ------------ -------------
Operating expenses:
Selling, general and administrative ........................ 7,769,751 16,750,776 22,247,006
Research and development ................................... 2,073,797 2,891,889 4,393,139
Litigation settlements and related costs ................... -- -- 2,522,930
Depreciation and amortization .............................. 161,346 280,682 580,159
Write-off of capitalized software .......................... 829,026 -- --
----------- ------------ -------------
Total operating expenses .................................. 10,833,920 19,923,347 29,743,234
----------- ------------ -------------
Income (loss) from operations ............................... 861,039 (8,581,086) (27,481,741)
Interest income (expense), net .............................. 3,140 403,989 455,816
----------- ------------ -------------
Income (loss) before provision for income taxes ............. 864,179 (8,177,097) (27,025,925)
Provision (benefit) for income taxes ........................ 207,309 (322,824) --
----------- ------------ -------------
Net income (loss) ........................................... $ 656,870 $ (7,854,273) $ (27,025,925)
=========== ============ =============
Dividends accreted on preferred stock ....................... $ (88,000) $ (176,000) --
----------- ------------ -------------
Net income (loss) available (attributed) to common share-
holders .................................................... $ 568,870 $ (8,030,273) $ (27,025,925)
=========== ============ =============
Basic income (loss) per share ............................... $ 0.14 $ (1.53) $ (3.62)
=========== ============ =============
Diluted income (loss) per share ............................. $ 0.14 $ (1.53) $ (3.62)
=========== ============ =============
Weighted average common and common equivalent shares
outstanding - basic and diluted ............................ 4,000,000 5,241,621 7,461,101
=========== ============ =============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JULY 31,
-------------------------------
1997 1998
--------------- ---------------
(UNAUDITED)
<S> <C> <C>
Revenue:
License revenue ............................................ $ 2,044,573 $ 1,879,313
Service and maintenance revenue ............................ 3,886,823 1,742,061
------------- -------------
Total revenue ............................................. 5,931,396 3,621,374
------------- -------------
Cost of revenue:
License revenue ............................................ 664,282 370,921
Service and maintenance revenue ............................ 3,275,587 1,300,349
------------- -------------
Total cost of revenue ..................................... 3,939,869 1,671,270
------------- -------------
Gross margin ................................................ 1,991,527 1,950,104
------------- -------------
Operating expenses:
Selling, general and administrative ........................ 4,332,895 2,862,187
Research and development ................................... 961,802 657,679
Litigation settlements and related costs ................... 500,000 243,820
Depreciation and amortization .............................. 98,560 170,660
Write-off of capitalized software .......................... -- --
------------- -------------
Total operating expenses .................................. 5,893,257 3,934,346
------------- -------------
Income (loss) from operations ............................... (3,901,730) (1,984,242)
Interest income (expense), net .............................. 248,703 (133,597)
------------- -------------
Income (loss) before provision for income taxes ............. (3,653,027) (2,117,839)
Provision (benefit) for income taxes ........................ -- --
------------- -------------
Net income (loss) ........................................... (3,653,027) (2,117,839)
============= =============
Dividends accreted on preferred stock ....................... -- --
------------- -------------
Net income (loss) available (attributed) to common share-
holders .................................................... (3,653,027) (2,117,839)
============= =============
Basic income (loss) per share ............................... $ (0.50) $ (0.28)
============= =============
Diluted income (loss) per share ............................. $ (0.50) $ (0.28)
============= =============
Weighted average common and common equivalent shares
outstanding - basic and diluted ............................ 7,320,792 7,592,654
============= =============
</TABLE>
See notes to the consolidated financial statements.
F-4
<PAGE>
VERSATILITY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
--------------------------------------------------
1996 1997 1998
--------------- ---------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ............................................. $ 656,870 $ (7,854,273) $ (27,025,925)
Adjustments to reconcile net income (loss) to net cash pro-
vided by operating activities:
Depreciation ................................................. 149,846 250,084 487,245
Amortization ................................................. 11,500 30,598 49,119
Loss on equity investments ................................... 989 6 --
Loss on disposal of fixed assets ............................. -- -- --
Deferred income taxes ........................................ (208,291) (119,163) --
Write-off of capitalized software ............................ 829,026 -- --
Changes in assets and liabilities:
Accounts receivable, net .................................... (4,284,630) (174,484) 2,163,694
Prepaid expenses ............................................ (617,089) (192,854) 165,281
Inventory ................................................... 7,356 (18,880) 18,880
Related party receivables ................................... 34,016 (36,160) 58,960
Notes Receivable - Non Related Party ........................ -- -- (200,000)
Deposits .................................................... (80,304) (29,815) (102,039)
Accounts payable ............................................ (65,710) 766,217 686,730
Accrued liabilities ......................................... 641,578 943,381 658,722
Related party payables ...................................... (82,775) 24,587 (17,790)
Income taxes payable/receivable ............................. (92,264) (1,781,726) (578,055)
Deferred rent ............................................... 67,893 94,461 80,646
Deferred revenue ............................................ 96,594 1,503,337 1,140,011
------------- ------------ -------------
Net cash used in operating activities ..................... (2,935,395) (6,594,684) (22,414,521)
------------- ------------ -------------
Cash flows from investing activities:
Purchase of investments ....................................... -- (7,472,719) --
Proceeds from sale of investments ............................. -- -- 6,906,781
Purchase of property and equipment and assets held for
sale ......................................................... (235,310) (1,249,013) (1,293,772)
Purchased software ............................................ (115,000) (104,234) (38,886)
Related party note receivable ................................. -- (516,174) 519,305
------------- ------------ -------------
Net cash (used in) provided by investing activities ....... (350,310) (9,342,140) 6,093,428
------------- ------------ -------------
Cash flows from financing activities:
Borrowings under line of credit ............................... 800,772 4,807,215 3,005,339
Payments under line of credit ................................. -- (2,914,990) (404,133)
Proceeds from sale of preferred stock, net .................... 3,473,293 -- --
Proceeds from sale of common stock, net ....................... -- 30,644,979 447,404
Principal payments under note payable ......................... (35,250) -- --
Principal payments under capital leases ....................... (20,731) (37,320) (54,866)
------------- ------------ -------------
Net cash provided by (used in) financing activities ....... 4,218,084 32,499,884 2,993,744
------------- ------------ -------------
Effect of exchange rate changes on cash ........................ (66,311) (17,569) 92,652
------------- ------------ -------------
Net increase (decrease) in cash and cash equivalents ........... 866,068 16,545,491 (13,234,697)
Cash and cash equivalents, beginning of period ................. 1,414,205 2,280,273 18,825,764
------------- ------------ -------------
Cash and cash equivalents, end of period ....................... $ 2,280,273 $ 18,825,764 $ 5,591,067
============= ============ =============
Supplemental disclosures of cash flow information:
Interest paid ................................................. $ 27,732 $ 160,061 $ 323,265
Income taxes paid ............................................. $ 506,490 $ 1,262,161 --
============= ============ =============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JULY 31,
---------------------------------
1997 1998
---------------- ----------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ............................................. $ (3,653,027) $ (2,117,839)
Adjustments to reconcile net income (loss) to net cash pro-
vided by operating activities:
Depreciation ................................................. 87,599 157,752
Amortization ................................................. 10,961 12,906
Loss on equity investments ................................... -- --
Loss on disposal of fixed assets ............................. -- 80,884
Deferred income taxes ........................................ -- 266,854
Write-off of capitalized software ............................ -- --
Changes in assets and liabilities:
Accounts receivable, net .................................... 1,403,455 (776,041)
Prepaid expenses ............................................ (180,014) 65,629
Inventory ................................................... (28,266) --
Related party receivables ................................... (10,973) (102,998)
Notes Receivable - Non Related Party ........................ -- 100,000
Deposits .................................................... (39,779) (75,920)
Accounts payable ............................................ 355,773 (971,945)
Accrued liabilities ......................................... (234,468) (1,803,593)
Related party payables ...................................... (8,590) --
Income taxes payable/receivable ............................. (300,000) 319,076
Deferred rent ............................................... 15,205 10,167
Deferred revenue ............................................ (750,612) 1,088,971
------------ ------------
Net cash used in operating activities ..................... (3,332,736) (3,746,097)
------------ ------------
Cash flows from investing activities:
Purchase of investments ....................................... -- --
Proceeds from sale of investments ............................. 48,262 565,938
Purchase of property and equipment and assets held for
sale ......................................................... (1,069,088) --
Purchased software ............................................ -- --
Related party note receivable ................................. -- --
------------ ------------
Net cash (used in) provided by investing activities ....... (1,020,826) 565,938
------------ ------------
Cash flows from financing activities:
Borrowings under line of credit ............................... 232,817 --
Payments under line of credit ................................. (36,994) (1,798,337)
Proceeds from sale of preferred stock, net .................... -- --
Proceeds from sale of common stock, net ....................... 114,431 10,789
Principal payments under note payable ......................... -- --
Principal payments under capital leases ....................... (17,495) (13,650)
------------ ------------
Net cash provided by (used in) financing activities ....... 292,759 (1,801,198)
------------ ------------
Effect of exchange rate changes on cash ........................ (22,248) 269,327
------------ ------------
Net increase (decrease) in cash and cash equivalents ........... (4,083,051) (4,712,030)
Cash and cash equivalents, beginning of period ................. 18,825,764 5,591,067
------------ ------------
Cash and cash equivalents, end of period ....................... $ 14,742,713 $ 879,037
============ ============
Supplemental disclosures of cash flow information:
Interest paid ................................................. $ 69,315 $ 143,443
Income taxes paid ............................................. $ 290,000 $ --
============ ============
</TABLE>
See notes to the consolidated financial statements.
F-5
<PAGE>
VERSATILITY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF ADDITIONAL
COMMON COMMON PAID-IN
STOCK STOCK CAPITAL
----------- ---------- --------------
<S> <C> <C> <C>
Balance, May 1, 1995 ....................... 4,000,000 $40,000 $ --
Foreign currency translation
adjustments ............................. -- -- --
Accretion of dividends on redeemable
preferred stock ......................... -- -- --
Net income ................................ -- -- --
--------- ------- -----------
Balance, April 30, 1996 .................... 4,000,000 40,000 --
Conversion of redeemable preferred
stock ................................... 992,061 9,921 $ 3,727,372
Issuance of common stock related to
public offering ......................... 2,275,364 22,754 30,598,273
Issuance of common stock related to
exercise of stock options ............... 29,940 299 23,653
Foreign currency translation
adjustments -- .......................... -- -- --
Accretion of dividends on redeemable
preferred stock ......................... -- -- --
Net loss .................................. -- -- --
--------- ------- -----------
Balance, April 30, 1997 .................... 7,297,365 72,974 34,349,298
Issuance of common stock related to
exercise of stock options and pur-
chases under the employee stock
purchase plan ........................... 284,015 2,840 444,564
Foreign currency translation adjust-
ments ................................... -- -- --
Net loss .................................. -- -- --
--------- ------- -----------
Balance, April 30, 1998 .................... 7,581,380 75,814 34,793,862
Issuance of common stock related
to exercise of stock options
(unaudited) ............................. 13,629 136 10,653
Foreign currency translation
adjustments (unaudited) ................. -- -- --
Net loss (unaudited) ...................... -- -- --
--------- ------- -----------
Balance, July 31, 1998 (unaudited) ......... 7,595,009 $75,950 $34,804,515
========= ======= ===========
<CAPTION>
FOREIGN
CURRENCY RETAINED
TRANSLATION EARNINGS
ADJUSTMENT (DEFICIT) TOTAL
------------- ----------------- ----------------
<S> <C> <C> <C>
Balance, May 1, 1995 ....................... $ -- $ 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 .................... (66,311) 1,860,133 1,833,822
Conversion of redeemable preferred
stock ................................... -- -- 3,737,293
Issuance of common stock related to
public offering ......................... -- -- 30,621,027
Issuance of common stock related to
exercise of stock options ............... -- -- 23,952
Foreign currency translation
adjustments -- .......................... (17,569) -- (17,569)
Accretion of dividends on redeemable
preferred stock ......................... -- (176,000) (176,000)
Net loss .................................. -- (7,854,273) (7,854,273)
----------- ------------- --------------
Balance, April 30, 1997 .................... (83,880) (6,170,140) 28,168,252
Issuance of common stock related to
exercise of stock options and pur-
chases under the employee stock
purchase plan ........................... -- -- 447,404
Foreign currency translation adjust-
ments ................................... (46,990) -- (46,990)
Net loss .................................. -- (27,025,925) (27,025,925)
----------- ------------- --------------
Balance, April 30, 1998 .................... (130,870) (33,196,065) 1,542,741
Issuance of common stock related
to exercise of stock options
(unaudited) ............................. -- -- 10,789
Foreign currency translation
adjustments (unaudited) ................. 269,327 -- 269,327
Net loss (unaudited) ...................... -- (2,117,839) (2,117,839)
----------- ------------- --------------
Balance, July 31, 1998 (unaudited) ......... $ 138,457 $ (35,313,904) $ (294,982)
=========== ============= ==============
</TABLE>
See notes to the consolidated financial statements.
F-6
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1996, 1997 AND 1998
(INFORMATION WITH RESPECT TO THE QUARTERS ENDED JULY 31, 1997 AND
1998 IS 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.
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, the Company issued 75,364 shares
and certain selling stockholders of the Company sold 113,636 shares.
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.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Principles -- The financial statements are prepared on a basis
consistent with U.S. generally accepted accounting principles.
Basis of Presentation of Financial Statements -- The accompanying
consolidated financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business.
As shown in the financial statements, during the years ended April 30, 1998
and 1997, the Company incurred losses of $27.0 million and $7.9 million,
respectively. As of April 30, 1998, the Company's current liabilities exceeded
current assets by $765,000. The Company believes that its cash on hand and cash
flow from anticipated operating activities may not be sufficient to meet its
ongoing obligations through the second quarter of fiscal 1999. Additionally,
certain lawsuits have been filed against the Company (see Note 6) and the
National Association of Securities Dealers ("NASD") suspended trading of the
Company's common stock on the NASDAQ National Market, and removed the Company's
common stock from listing on the National Market (see Note 6). Additionally, the
Company expects to incur significant amounts to defend the lawsuits filed
against the Company. As discussed in Note 5, subsequent to April 30, 1998, the
Company was not in compliance with certain covenants in its line of credit.
These factors among others may indicate that the Company will be unable to
continue as a going concern.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern. The Company's continuation as a going
concern is dependent upon its ability to generate sufficient cash flow to meet
its obligations on a timely basis, to comply with the terms and covenants of its
financing agreement, to obtain additional financing or refinancing as may be
required, and ultimately to attain successful operations.
In addition to maintaining continuing contacts with the Company's
customers, management is continuing its efforts to obtain additional funding,
explore strategic alternatives, including a sale of the Company and reduce costs
so that the Company can meet its obligations and sustain operations. While
significant cost cutting measures have been initiated, there can be no assurance
that the Company will have cash flows sufficient to meet its ongoing
obligations. As discussed in Note 5, the Company entered into an amended loan
agreement effective April 30, 1998. Subsequent to April 30, 1998, the Company
was not in compliance with the amended credit agreement. The Company is
reviewing its strategic
F-7
<PAGE>
alternatives, which include additional capital raising activities and evaluating
potential corporate partners. If the Company is unable to obtain additional
financing sufficient to meet its operating needs, the Company will be required
to significantly reduce the scope of its operations, which would have a material
adverse effect on the Company's business.
Interim Financial Statements -- The interim financial statements as of July
31, 1998 and for the three months ended July 31, 1997 and 1998 are unaudited. In
the opinion of the Company's management, the interim financial statements
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the results for the interim periods. The
interim period results of operations are not necessarily indicative of the
results for the entire year.
Principles of Consolidation -- The financial statements include the results
of Versatility Inc., and its wholly owned subsidiaries, NPRI Technologies, Ltd.
and Versatility (UK) Limited. All significant intercompany accounts and
transactions have been eliminated in consolidation. On April 30, 1996, NPRI
Technologies, Ltd. was dissolved, and its operations were merged with
Versatility Inc. The Company accounted for its investment in Serenity Real
Property Limited Partnership using the equity method (See Note 3).
Cash and Cash Equivalents -- For purposes of the Statements of Cash Flows,
the Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents. The Company's investments consist
of money market accounts, commercial paper and corporate bonds.
Estimates and Assumptions -- 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.
Investments -- The Company accounts for investments in accordance with
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" (SFAS 115). Under SFAS 115, the
investments are reported at amortized cost and are classified as available for
sale. Fair value, which is based on quoted market prices, approximates carrying
value. At April 30, 1996, the Company had no investments.
As of April 30, 1998, the Company's investments consisted of the following:
<TABLE>
<CAPTION>
MATURITY OF SECURITIES
---------------------------------------
AMORTIZED WITHIN ONE ONE TO FIVE FIVE TO TEN
COST BASIS YEAR YEARS YEARS
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Treasury notes ........ $ -- $ -- $ -- $ --
Municipal bonds ....... 565,938 298,501 $ -- 267,437
Corporate bonds ....... -- -- -- --
-------- -------- ---- --------
$565,938 $298,501 -- $267,437
======== ======== ==== ========
</TABLE>
Inventory -- Inventory consists of miscellaneous marketing collateral and
is stated at the lower of cost or market, on a first-in, first-out basis. During
FY98, the company wrote off its inventory as a result of its significantly
reduced operations.
Capitalized Software -- During the development of the Versatility Series
software, the Company capitalized its development costs in compliance with
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed." The amount of
software capitalized totaled $995,000 and, beginning in November 1994, was
amortized over three years on a straight-line basis. In connection with two
major implementations of the Versatility Series product in July 1995, the
Company decided to add features and functions to the product that were
substantially different than those included in the software as originally
capitalized. Management determined that these features and functions
substantially altered the content of the product, effectively eliminating any
remaining useful life of the capitalized asset. Accordingly, the Company wrote
off the remaining asset of $829,000 in the first quarter of fiscal 1996.
F-8
<PAGE>
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.
Impairment of Long-Lived Assets -- The Company reviews its long-lived
assets, including property and equipment and intangibles, for impairment
whenever events or changes in circumstances indicate that the carrying amount of
the assets may not be fully recoverable. In performing an evaluation of
recoverability, the estimated future undiscounted net cash flows of the assets
are compared to the assets' carrying amount to determine if a write down is
required.
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.
Redeemable Preferred Stock -- The Company accreted the increase in the
redemption value of its Series A preferred stock through a charge to retained
earnings through December 13, 1996, when the Series A preferred stock was
converted to common stock.
Loss Contingencies -- Accruals for loss contingencies are recorded when it
is probable that a liability has been incurred and the amount of the liability
can be reasonably estimated. Accruals are recorded for all costs associated with
the settling of certain contingencies (see Note 6). Insurance and other third
party recoveries are recorded when realization is probable based on agreements
with such parties.
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 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 the achievement of certain
performance milestones as defined in the contracts. When the Company is under no
obligation to install or customize the software, license revenue is recognized
upon shipment, as long as collection of cash is probable. 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. Amounts received in advance of revenue
recognition are classified as deferred revenues. An allowance for doubtful
accounts receivable has been recorded, which is considered adequate to absorb
currently estimated bad debts and disputed amounts in these account balances.
Revenue from hardware sales relating to the implementation of the Company's
VAX/VMS application is included in license revenue. These hardware sales were
$1.0 million, $767,000 and $1.4 million for the years ended April 30, 1996, 1997
and 1998, respectively. Revenue from the sale of hardware is recorded based on
shipping to the customer.
In October 1997, the AICPA issued SOP 97-2, "Software Revenue Recognition,"
which provides guidance in applying generally accepted accounting principles in
recognizing revenues on software transactions and supercedes SOP 91-1. The
provisions of SOP 97-2 are effective for the Company for transactions entered
into after April 30, 1998. SOP 97-2 requires revenues earned on software
arrangements involving multiple elements to be allocated to each element based
on vendor specific objective evidence of the relative fair values of the
elements. If a vendor does not have evidence of the fair value for all
F-9
<PAGE>
elements in a multiple-element arrangement, all revenue from the arrangement is
deferred until such evidence exists or until all elements are delivered. In
addition, SOP 97-2 requires that the Company have an executed software license
agreement, the license fee be fixed and determinable and collection deemed
probable by management in order to record software license revenue. The Company
currently believes the adoption of SOP 97-2 will not have a material impact on
its consolidated results of operations or financial position; however, because
implementation guidelines for this standard have not yet been issued and a wide
range of potential interpretations are being discussed by the accounting
profession, there can be no assurance that SOP 97-2 will not have a material
impact on the Company's consolidated results of operations or financial
position. In March 1998, the AICPA issued SOP 98-4 which defers the effective
date of a provision of SOP 97-2. This provision currently has no material impact
to the Company.
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. A valuation allowance is provided
when realization of deferred tax debits does not appear probable.
Net Income (loss) Per Share -- During fiscal 1998, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share." SFAS No. 128 requires the presentation of basic income per share and,
for companies with potentially dilutive securities, such as options, diluted
income per share. Basic income per share is computed using the weighted average
number of shares of common stock outstanding. Diluted income per share is
computed using the weighted average number of shares of common stock and, when
dilutive, common equivalent shares from options to purchase common stock using
the treasury stock method. The following table sets forth the computation of
basic and diluted income per share:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
-------------------------------------------------
1996 1997 1998
-------------- ---------------- -----------------
<S> <C> <C> <C>
Weighted average common shares ................... 4,000,000 5,241,621 7,461,101
Dilutive potential common shares ................. -- -- --
--------- --------- ---------
Shares used in diluted share computation ......... 4,000,000 5,241,621 7,461,101
Net income (loss) available (attributable) to
common shareholders ............................. $ 568,870 $ (8,030,273) $ (27,025,925)
Basic income (loss) per share .................... $ 0.14 $ (1.53) $ (3.62)
Diluted income (loss) per share .................. $ 0.14 $ (1.53) $ (3.62)
<CAPTION>
QUARTER ENDED JULY 31,
----------------------------------
1997 1998
----------------- ----------------
(UNAUDITED)
<S> <C> <C>
Weighted average common shares ................... 7,320,797 7,592,654
Dilutive potential common shares ................. -- --
--------- ---------
Shares used in diluted share computation ......... 7,320,797 7,592,654
Net income (loss) available (attributable) to
common shareholders ............................. $ (3,653,027) $ (2,117,839)
Basic income (loss) per share .................... $ (0.50) $ (0.28)
Diluted income (loss) per share .................. $ (0.50) $ (0.28)
</TABLE>
The dilutive effect of options for 0, 720,387 and 629,970 shares and
convertible preferred stock for 992,061, 992,061 and 0 shares has not been
considered in the computation of diluted income (loss) per share in fiscal 1996,
1997 and 1998 because such shares would be anti-dilutive. In applying the
treasury stock method, for options outstanding during fiscal year 1996, the
estimated average fair value per share approximated the exercise price for all
options. As a result, there is no dilutive effect of the options for fiscal
1996.
Non-cash Transactions -- The Company acquired $47,544, $0 and $91,850 of
equipment through capital leases during fiscal 1996, 1997 and 1998,
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. In fiscal 1997, two customers
accounted for 34.6% and 10.4% of the Company's total revenue, respectively, and
in fiscal 1998, two customers accounted for 22.1% and 16.5%, respectively. As of
April 30, 1997 and 1998, 60.7% and 43.7% of accounts receivable was concentrated
with three customers. The Company 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 estimated credit
losses.
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
F-10
<PAGE>
the Board of Directors (prior to the initial public offering) or the market
price of the stock 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". In October 1995, Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" (SFAS 123), was issued, which is
effective for fiscal years beginning after December 15, 1995. As permitted by
SFAS 123, the Company accounts for stock-based compensation in accordance with
APB Opinion No. 25 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. Pro forma net income and pro forma earnings per
share disclosures are provided for employee stock option grants made in fiscal
1998 as if the fair-value-based method defined in SFAS 123 had been applied (see
Note 7).
Reclassifications -- Certain amounts previously reported have been
reclassified to conform with current year presentation.
New Accounting Pronouncements -- In June 1997, SFAS No. 130, "Reporting
Comprehensive Income," was issued and requires that all items which meet the
definition of comprehensive income be reported for the period in which they are
recognized. Comprehensive income includes changes in the balances of items that
are reported directly in a separate component of stockholders' equity on the
consolidated balance sheets, such as foreign currency translation adjustments
and unrealized gains or losses on available-for-sale securities. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997. SFAS No. 130
requires minimum pension liability adjustments, unrealized gains and losses on
available for sale securities and foreign currency translation adjustments, to
be included in other comprehensive income. During the quarters ended July 31,
1998 and 1997 other comprehensive income (loss) consisted primarily of foreign
currency translation adjustments which totalled $269,327 and $(46,990),
respectively (unaudited).
In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," was issued and requires that a public business
enterprise report financial and descriptive information about its reportable
operating segments. Generally, financial information is required to be reported
on the basis used internally for evaluating segment performance and resource
allocation. SFAS No. 131 is effective for fiscal years beginning after December
15, 1997; however, disclosure is not required in interim financial statements in
the initial year of adoption. Accordingly, the Company will make the required
disclosures for the fiscal year ending April 30, 1999. The Company is still
determining the effect of adopting SFAS No. 131; however, management does not
anticipate that it will have a material impact.
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." The provisions of SOP
98-1 require that certain costs to develop or obtain internal use software be
capitalized. SOP 98-1 is effective for fiscal years beginning after December
1998 and will be effective for the Company beginning May 1999. The Company is
still determining the effect of adopting SOP 98-1; however, management does not
anticipate that it will have a material impact on the Company's consolidated
results of operations or financial position.
F-11
<PAGE>
2. BUSINESS ACQUISITION
Versatility (UK) Limited was acquired by the Company during December 1995.
The stockholders of the Company were the same stockholders of Versatility (UK)
Limited, with proportionate ownership in both companies being the same. The
acquisition was completed by exchanging 2,000,000 shares of common stock of the
Company for all of the outstanding capital stock of Versatility (UK) Limited.
The shares of Versatility (UK) Limited were subsequently retired. The business
combination has been treated as an exchange between companies under common
control, which is accounted for in a manner similar to a pooling of interests.
Accordingly, the consolidated financial statements for all periods prior to the
combination have been restated to reflect the combined operations. Intercompany
transactions have been eliminated. Included in consolidated results of
operations for the year ended April 30, 1996 are the following results of the
previously separate companies for the period of May 1, 1995 to December 31,
1995:
<TABLE>
<CAPTION>
VERSATILITY
(UK) INTERCOMPANY CONSOLIDATED
COMPANY LIMITED ROYALTIES AMOUNTS
------------- ------------ -------------- -------------
<S> <C> <C> <C> <C>
Net Sales ...................... $6,688,983 $2,530,343 $ (571,361) $8,647,965
Income from operations ......... 191,137 344,775 -- 535,912
</TABLE>
3. RELATED PARTY TRANSACTIONS
Related Party Receivables -- The Company has the following current
receivables from related parties or affiliated entities at April 30, 1997 and
1998 as follows:
<TABLE>
<CAPTION>
APRIL 30,
---------------------------
1997 1998
----------- -------------
<S> <C> <C>
Stockholder/Officer loan ......... $117,755 $ 113,045
Other ............................ 35,626 94,421
-------- ----------
153,381 207,466
Reserve .......................... -- (113,045)
-------- ----------
$153,381 $ 94,421
======== ==========
</TABLE>
The stockholder/officer loan accrues interest at the prime rate. The loans
and any interest accrued thereunder is payable on the earliest of (i) demand and
(ii) November 6, 1997. Included in the stockholder/ officer loan for fiscal 1997
and 1998 is $4,740 and $14,319, respectively, of accrued interest. The
stockholder/ officer loan was not paid as of November 6, 1997 and went into
default during the third quarter of fiscal year 1998. During the fourth quarter
of fiscal 1998, the officer resigned from the Company. A reserve was established
during the third quarter of fiscal 1998 due to the uncertainty of collection.
The Company leased office space from Serenity Real Properties Limited
Partnership (the "Partnership"). The limited partners are stockholders in the
Company and the Company was the general partner. Rent expense paid to the
Partnership for fiscal 1996, 1997 and 1998 was $120,000, $50,000 and $0
respectively.
SALE OF PARTNERSHIP INTEREST AND TERMINATION OF LEASE
Prior to October 31, 1996, the Company was the 1% general partner of the
Partnership of which Mr. Ronald R. Charnock, the Company's then President and
Chief Executive Officer, Mr. Marcus W. Heth, the Company's then Senior Vice
President, Technologies, and Mr. Keith P. Roberts, the Company's then 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 collateralized by a mortgage on the Property.
F-12
<PAGE>
On October 31, 1996, the Company sold its general partnership interest in
the Partnership, for consideration equal to its capital account of $3,131, to
Serenity L.L.C., whose members are the Limited Partners and
officers/stockholders of the Company. In connection with the sale of its general
partnership interest in the Partnership, the Company made to the Partnership a
loan of $519,305 evidenced by a Deed of Trust Note which bears interest at the
same rate and is payable upon the earliest of (i) the sale of the Property, (ii)
demand by the Company and (iii) October 31, 1997. The Deed of Trust Note is
collateralized by a mortgage on the Property and is guaranteed by each of the
Limited Partners. The Partnership used the proceeds of this loan to repay its
loan from the bank and discharge its mortgage on the Property. In connection
with these transactions, the Partnership agreed to the termination of its lease
with the Company. The note receivable was repaid in the second quarter of fiscal
1998.
4. ACCRUED LIABILITIES
Accrued liabilities consisted of the following as of April 30, 1997 and
1998:
<TABLE>
<CAPTION>
APRIL 30,
---------------------------
1997 1998
------------ ------------
<S> <C> <C>
Accrued commissions and salaries ........... $ 511,676 $ 360,453
Accrued bonuses ............................ 362,467 --
Accrued payroll taxes and withholdings . 195,001 113,932
Accrued vacation ........................... 289,034 259,399
Sales, use and other taxes payable ......... 654,788 475,498
Class action settlement and related costs -- 1,465,000
Other ...................................... 324,068 321,474
---------- ----------
$2,337,034 $2,995,756
========== ==========
</TABLE>
- ----------
Included in accrued liabilities at April 30, 1998 are amounts accrued for
employee severance costs of approximately $450,000.
5. LINE OF CREDIT
On August 28, 1996, the Company obtained a $2.5 million operating line of
credit from a bank for financing accounts receivable and working capital and a
$1.0 million equipment line of credit from the same bank to finance acquisitions
of property and equipment. These lines of credit expired on August 5, 1997. The
Company entered into a new line of credit on October 29, 1997 which provided for
a $5 million operating line and a $2 million equipment lease line of credit. The
operating and equipment lines of credit accrued interest at the prime rate plus
0.5% and 1.0%, respectively. The weighted average interest rate for fiscal 1996
and 1997 was 9.1% and 9.0%, respectively. The lines of credit were
collateralized with a first priority security interest in all assets. The lines
of credit have various covenants, including limitations on disposition of
assets. The Company also must maintain certain financial ratios and is
prohibited from paying cash dividends. The Company was not in compliance with
various covenants through April 28, 1998. The amount outstanding under the
operating line plus accrued interest at April 30, 1998 was $5.3 million.
On April 28, 1998, the Company entered into an amendment of the line of
credit described above (effective April 30, 1998), which waived all instances of
non-compliance and provided for the following terms: the $2.0 million equipment
line was canceled and the outstanding balance of $256,703 was transferred to the
operating line of credit. The Company permanently paid down the operating line
by $1.5 million to $3.8 million, subsequent to April 30, 1998, and agreed not to
borrow any additional amounts under the line. Subsequent to April 30, 1998, the
Company also issued 100,000 warrants convertible into common stock at an
exercise price of $2.50 per share. The line continues to be collateralized by
all of the Company's assets. As a further condition, the Company agreed to
permanently pay down the line upon receipt of any tax refunds resulting from the
Company's net operating loss carrybacks and payments made in the year ended
April 30, 1998. It is anticipated that these amounts will total approximately
$2.0
F-13
<PAGE>
million. The line matures on November 5, 1998. The interest rate was increased
to prime plus 3.0% on the amendment date. Subsequent to April 30, 1998, the
Company was not in compliance with the terms of the amended line of credit
agreement.
6. COMMITMENTS AND CONTINGENCIES
Operating Leases -- The Company leases office space, equipment and
automobiles under non-cancellable 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, 1996, 1997 and 1998 was $876,093, $1.4
million and $2,264,610, respectively.
As of April 30, 1998, future minimum lease payments for the operating
leases are as follows:
<TABLE>
<CAPTION>
YEARS ENDING APRIL 30,
---------------------------
<S> <C>
1999 ................................... 1,345,342
2000 ................................... 1,241,709
2001 ................................... 1,047,124
2002 ................................... 794,985
2003 ................................... 818,508
Thereafter ............................. 1,306,725
---------
Total .................................. $6,554,393
==========
</TABLE>
Capital Leases -- The Company is obligated under capital leases for various
office equipment. As of April 30, 1998, future minimum lease payments for the
capital leases are as follows:
<TABLE>
<CAPTION>
YEARS ENDING APRIL 30,
----------------------
<S> <C>
1999 .................................. 29,793
2000 .................................. 33,147
2001 .................................. 36,879
2002 .................................. 11,056
2003 .................................. --
------
Total ................................. 110,875
Less: interest ........................ (10,380)
-------
Present value of future minimum lease
payments ............................. $ 100,495
=========
</TABLE>
Legal Proceedings -- One of the Company's former Value Added Resellers
(VAR's) had filed a claim for arbitration (non-binding) 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 defended this action
in arbitration proceedings. In April, 1997, the arbitration panel awarded
$267,000 in net damages to the plaintiff in the proceedings. The arbitration
panel's decision was appealed. In August 1997, the Company settled the
litigation with the former VAR for $250,000. The Company recorded a one-time
charge in the quarter ending July 31, 1997 related to this litigation for
$500,000, which includes the settlement charge and other costs and expenses
associated with defending the litigation.
Between March 6, 1998 and April 8, 1998 the Company and certain of its
current and former officers and directors, among others, were sued in various
putative securities class action cases filed in the United States District
Court for the Southern District of New York and the United States District
Court for the Eastern District of Virginia, as follows: Thomas Esposito, et al,
v. Versatility, Inc. et al. (S.D.N.Y.); Thomas K. Doyle v. Versatility, Inc. et
al. (E.D. Va); and Steven Bowen v. Versatility, Inc. et al. (S.D.N.Y.)
(together "the putative class actions"). Collectively, the putative class
actions asserted claims under Sections 11, 12(2), and 15 of Securities Act of
1933 and Section 10(b) and 20(a) of the
F-14
<PAGE>
Securities Exchange Act of 1934 for alleged misrepresentations and omissions in
connection with the SEC public filings and other public statements made by the
Company. Among other allegations, each of the putative class actions alleged
that the Company misrepresented its financial results and its accounting
practices during the period of December 12, 1996 through March 12, 1998
including in the Company's IPO Prospectus. The complaints in certain of the
putative class actions also asserted, among other allegations, that the Company
and certain of other defendants made misrepresentations in the IPO Prospectus
and thereafter regarding the performance capabilities of the Company's
CallCenter product.
Versatility reached a settlement in principle with the plaintiffs in all
six putative securities class action lawsuits currently pending against the
Company on July 9, 1998. The settlement in principle is conditioned upon the
execution and filing with the Court of a definitive agreement of settlement and
final Court approval.
Under the proposed settlement, the class actions would be dismissed and a
settlement fund would be created for the members of the proposed class
consisting of $3.5 million in cash, which represents proceeds from Versatility's
directors' and officers' liability insurance and related recoveries by the
Company. In addition, as part of the settlement, an aggregate of 350,000 shares
of Versatility Common Stock will be transferred to the Company by certain
defendants other than the Company in settlement of the claims against them.
Thereafter, the Company will issue 750,000 shares of its Common Stock for the
benefit of the proposed plaintiff class, 350,000 shares of which will be in
substitution of shares provided by those certain defendants in settlement of the
claims against them. The Company has accrued liabilities of approximately $1.5
million (net of third party recoveries) at April 30, 1998 related to the
settlement.
Since March, 1998 the Company has been responding to informal requests for
information from the Commission relating to certain of the Company's financial
matters. In May, 1998, the Company was advised by the Commission that it had
obtained a formal order of investigation so that, among other matters, it may
utilize subpoena powers to obtain information relevant to its inquiry. The
Commission has and may in the future utilize its subpoena powers to obtain
information from various officers, directors and employees of the Company and
from persons not presently associated with the Company. If, after completion of
its investigation, the Commission finds that violations of the federal
securities laws have occurred the Commission has the authority to order persons
to cease and desist from committing or causing such violations and any future
violations. The Commission may also seek administrative and criminal fines and
penalties and injunctive relief. The Department of Justice has the authority in
respect of civil and criminal matters. There can be no assurance as to the
timeliness of the completion of the investigation or as to the final result
thereof, and no assurance can be given that the final result of the
investigation will not have a material adverse effect on the Company. The
Company is cooperating fully with the investigation, and has responded and will
continue to respond to requests for information in connection with the
investigation.
A former employee had sued the Company for approximately $1,200,000 for
alleged breaches of contract amongst other claims. This action was settled as of
April 30, 1998 by execution of a written settlement agreement and mutual general
release whereby the Company agreed to pay $120,000 ($50,000 immediately and
$70,000 in seven equal monthly installments). The settlement was accrued as of
April 30, 1998.
In addition, the Company is a party to various legal proceedings in the
normal course of business, consisting of contract issues and employee matters,
which outcome cannot be ascertained at this time (the more significant of which
are described below). Taken together or individually, an adverse outcome on the
results of these suits, may have a materially adverse impact on the Company.
Because the outcome of these matters cannot be ascertained at this time, the
Company has not recorded any significant accruals related to these matters. The
more significant of these matters are as follows:
o A former customer is seeking damages in excess of $1,000,000 for
alleged breaches of contract and warranties, as well as alleged
misrepresentations. On April 16, 1998, the Company filed a response
denying the allegations and counter-claiming for damages in excess of
F-15
<PAGE>
$400,000 for breach of contract. On August 14, 1998 the Company
reached an agreement and settled this litigation for $100,000. The
Company recorded the settlement costs in the first quarter of fiscal
1999.
o A customer of a Versatility reseller has sued for damages for an
amount not less than $1,000,000. In December 1997, the District Court
dismissed the action. In February 1998, essentially the same claim was
made in a different District Court. The outcome of this matter cannot
be ascertained at this time.
7. BENEFIT PLANS
401(k) Plan. The Company has a savings and investment plan (the "Plan")
which covers employees of the Company and that qualifies under section 401(k) of
the Internal Revenue Code. All full-time employees who are at least 21 years old
and have completed at least six months of service are eligible to participate.
Under the terms of the Plan, employees may defer a portion of their salaries as
employee contributions. A discretionary corporate contribution is determined
annually. The Company made contributions of $44,191 and $124,618 in fiscal 1997
and 1998, respectively. No contributions were made in fiscal 1996. 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.
Stock Option Plans. The 1996 Stock Option Plan (the "1996 Plan") provides
for the granting of incentive and nonqualified stock options to purchase up to
750,000 shares of common stock. The option price must be equal to or greater
than the fair market value at the date of grant. Options are granted for terms
of up to ten years and most are exercisable in cumulative annual increments of
20% each year, with the first 20% becoming exercisable upon the date of grant.
The 1996 Plan superceded the 1995 Employee Plan (the "Employee Plan") and the
1995 Incentive Plan (the "Incentive Plan") (collectively, the "1995 Plans"), and
on September 30, 1996 the Board of Directors determined that no further options
would be granted under the 1995 Plans.
Information regarding the Company's stock option plans is summarized below:
<TABLE>
<CAPTION>
1995 PLANS 1996 PLAN
------------------------ -------------------------
EMPLOYEE PLAN INCENTIVE PLAN
------------------------ ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE
OUTSTANDING PRICE OUTSTANDING PRICE OUTSTANDING PRICE
------------- ---------- ------------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
May 1, 1995 options outstanding ............ -- $ -- -- $ -- -- $ --
Granted ................................... 228,758 0.80 62,569 0.80 -- --
Exercised ................................. -- -- -- -- -- --
Cancelled ................................. -- -- -- -- -- --
------- ------- ------ ------- -- --------
April 30, 1996 options outstanding ......... 228,758 0.80 62,569 0.80 -- --
Granted ................................... -- -- -- -- 139,000 10.50
Exercised ................................. (29,194) 0.80 (746) 0.80 -- --
Cancelled ................................. -- -- -- -- -- --
------- ------- ------ ------- ------- --------
April 30, 1997 options outstanding ......... 199,564 $ 0.80 61,823 $ 0.80 139,000 $ 10.50
======= ======= ====== ======= ======= ========
Granted ................................... -- -- -- -- 460,894 11.50
Exercised ................................. (115,134) 0.80 (6,477) 0.80 (17,125) 10.97
Cancelled ................................. (5,640) 0.80 (17,146) 0.80 (254,789) 10.38
-------- ------- ------- ------- -------- --------
April 30, 1998 options outstanding ......... 78,790 $ 0.80 38,200 $ 0.80 327,980 $ 10.73
======== ======= ======= ======= ======== ========
Exercisable as of April 30, 1996 ........... 228,758 $ 0.80 12,514 $ 0.80 -- $ --
======== ======= ======= ======= ======== ========
Exercisable as of April 30, 1997 ........... 199,564 $ 0.80 24,282 $ 0.80 32,300 $ 10.50
======== ======= ======= ======= ======== ========
Exercisable as of April 30, 1998 ........... 78,790 $ 0.80 22,240 $ 0.80 106,556 $ 11.17
======== ======= ======= ======= ======== ========
Available for future grant ................. -- -- 404,895
======== ======= ========
</TABLE>
F-16
<PAGE>
Options to purchase 320,000 shares of Common Stock were granted to an
officer on January 17, 1996. These options are not part of the above plans.
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. 135,000 of these options were exercised as of April 30, 1998.
Pursuant to the 1996 Stock Option Plan, the Company granted options to
purchase 550,750 shares of Common Stock to employees, effective May 8, 1998. In
addition, options to purchase 25,000 shares of Common Stock were issued to a
Director of the Company on May 8, 1998.
In April 1998, the Board of Directors approved the 1998 Non-Qualified Stock
Option Plan. The Plan provides for the granting of non-qualified stock options
to purchase up to 1,250,000 shares of Common Stock. Options to purchase
1,107,000 shares of common stock were issued on May 8, 1998.
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 took effect on May 1, 1997 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 10,279 Shares have been purchased under
the 1996 Purchase Plan as of April 30, 1998.
The Company has computed the pro forma disclosures required under SFAS 123
for all stock options granted as of April 30, 1998 using the Black-Scholes
option pricing model prescribed by SFAS 123. The weighted average fair value at
date of grant for options granted during fiscal 1997 and 1998 was $5.96 and
$6.51, respectively.
The assumptions used and the weighted average information for the years
ended April 30, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
1997 1998
----------- ------------
<S> <C> <C>
Risk-free interest rates .......... 6.0% 6.0%
Expected dividend yield ........... 0.0% 0.0%
Expected lives .................... 3.5 years 3.5 years
Expected volatility ............... 75.0% 75.0%
</TABLE>
Stock options outstanding and exercisable at April 30, 1998 follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------- -------------------------
REMAINING WEIGHTED
CONTRACTUAL WEIGHTED AVERAGE
EXERCISE PRICE NUMBER LIFE IN AVERAGE EXERCISE NUMBER EXERCISE
RANGE OUTSTANDING YEARS PRICE EXERCISABLE PRICE
- ---------------- ------------- ------------- ------------------ ------------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.80 301,990 7.75 $ 0.80 286,030 $ 0.80
$ 10.50 63,240 8.42 $ 10.50 35,677 $ 10.50
$ 11.50 264,740 9.08 $ 11.50 70,879 $ 11.50
</TABLE>
The effect of applying SFAS 123 would be as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------------- ---------------- -----------------
<S> <C> <C> <C>
Pro forma net income (loss) ............. $ 459,933 $ (8,263,561) $ (28,611,004)
Pro forma net income available (attribut-
able) to common shareholders per
share .................................. $ 0.08 $ (1.61) (3.83)
</TABLE>
Compensation expense for shares issued under the employee stock purchase
plan has not been given effect as the amount is not material.
F-17
<PAGE>
8. INCOME TAXES
The provision for income taxes is computed based on pretax accounting
income for April 30, 1996, 1997 and 1998. Deferred income taxes include the tax
effects of temporary differences between pretax accounting income and taxable
income. For April 30, 1998 the Company incurred losses in accounting and taxable
income, giving rise to a taxable net operating loss of approximately $27.4
million. The Company will have federal net operating loss carryforwards from
April 30, 1998 of approximately $4.2 million after relevant loss carryback
claims. These losses will expire in 2013. In addition, the Company will have
State operating loss carryforwards of approximately $4.2 million which will
expire beginning in 2003.
The provision for income taxes at April 30, 1996, 1997 and 1998 consists
of the following:
<TABLE>
<CAPTION>
1996 1997 1998
------------- -------------- -----
<S> <C> <C> <C>
Current provision (benefit):
Federal ...................................... $ 284,641 $ (330,285) $--
Foreign ...................................... 78,520 104,777 --
State ........................................ 51,229 (97,316) --
---------- ---------- ---
Total current provision (benefit) .......... 414,390 (322,824) --
---------- ---------- ---
Deferred provision:
Federal ...................................... (175,496) -- --
Foreign ...................................... -- -- --
State ........................................ (31,585) -- --
---------- ---------- ---
Total deferred provision (benefit) ......... (207,081) -- --
---------- ---------- ---
Total provision (benefit) for income taxes $ 207,309 $ (322,824) $--
========== ========== ===
</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>
1996 1997 1998
-------------- --------------- ----------------
<S> <C> <C> <C>
Deferred tax assets:
Vacation expense ......................... $ 70,309 $ 89,858 $ 80,642
Bad debt reserve ......................... 59,929 290,907 182,050
Deferred rent ............................ 84,233 129,712 162,772
Deferred revenue ......................... -- 305,315 177,605
Accelerated depreciation and other ....... -- 37,241 82,915
Net operating loss carryforward- fed-
eral & state ........................... -- 1,762,946 11,055,961
Foreign tax credit carryforward .......... -- 35,708 35,708
General business credit carryforward ..... -- 215,279 215,279
AMT tax credit carryforward .............. -- 45,023 45,023
Other .................................... -- 15 --
---------- ------------ -------------
Total deferred tax assets ................ 214,471 2,912,004 12,037,955
========== ============ =============
Deferred tax liabilities:
Accelerated depreciation and other ....... 333,634 -- --
---------- ------------ -------------
Total deferred tax liabilities ........... 333,634 -- --
---------- ------------ -------------
Valuation allowance ...................... -- (2,912,004) (12,037,955)
---------- ------------ -------------
Net deferred tax liabilities ............. $ (119,163) $ -- $ --
========== ============ =============
</TABLE>
F-18
<PAGE>
The provision for income taxes differs from the amount computed by applying
the statutory U.S. Federal income tax rate to income loss before taxes as a
result of the following:
<TABLE>
<CAPTION>
1996 1997 1998
---------- ------------- -------------
<S> <C> <C> <C>
U.S. Federal statutory rate ..................... 34.0% (34.0)% (34.0)%
State income taxes, net of Federal in-
come tax benefit ............................... 4.0 ( 0.7) --
Impact of foreign earnings and taxes ............ ( 1.7) 1.2 --
General business credits ........................ -- -- --
Benefit from foreign sales corporation .......... (13.4) ( 2.0) --
Valuation Allowance ............................. -- 34.7 34.0
Other ........................................... 1.0 ( 3.1) --
----- ----- -----
Effective tax rate .............................. 23.9% ( 3.9)% --
===== ===== =====
</TABLE>
9. BUSINESS SEGMENT AND GEOGRAPHIC AREA INFORMATION
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 OTHER
UNITED CORPORATE
STATES UNITED KINGDOM EXPENSES CONSOLIDATED
---------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Years ending April 30,:
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
1997:
Revenue ............................... $ 14,988,383 $3,576,683 (256,454) $ 18,308,612
Income (loss) from operations ......... (2,072,077) 270,548 (6,779,557) (8,581,086)
Identifiable assets ................... 35,535,826 1,554,134 -- 37,089,960
1998:
Revenue ............................... $ 13,435,238 $6,065,000 $ (347,682) $ 19,152,556
Income (loss) from operations ......... (17,821,970) (656,408) (9,003,363) (27,481,741)
Identifiable assets ................... 15,189,795 612,683 -- 15,802,478
</TABLE>
The Company charges a royalty to Versatility (UK) Limited for software
sales of the Company's products sold by Versatility (UK) Limited. The royalty is
intended to cover primarily software development expense and marketing expense.
Versatility (UK) Limited reflects the royalty as a cost of revenue. For fiscal
1996, 1997 and 1998 the royalty was $697,656, $256,454, and $387,801
respectively. These amounts were eliminated in consolidation and are not
reflected in the revenue and income from operations amounts above.
Included in United States revenue is, $3.8 million, $6.4 million and $1.4
million of export revenue for fiscal 1996, 1997 and 1998, respectively. For
fiscal 1996 and 1997, $2.1 million and $3.8 million of United States export
sales were generated in the United Kingdom, with the remaining sales in both
fiscal 1995, 1996 and 1997 generated in Canada and Mexico. Included in United
Kingdom revenue is $527,681, $1.3 million and $2.1 million of export revenue for
fiscal 1996, 1997 and 1998, respectively, which was mainly generated in Western
Europe, exclusive of the United Kingdom.
F-19
<PAGE>
Significant customers -- The Company had the following customers with
revenue in excess of 10%:
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Customer A .......... 25.7% 34.6% 22.1%
Customer B .......... 22.2% 10.4% 16.5%
</TABLE>
10. INTEREST INCOME (EXPENSE), NET
Interest income (expense), net includes interest income of $66,643,
$544,096, and $816,590 in fiscal 1996, 1997 and 1998, respectively, and interest
expense of $63,503, $140,107 and $360,765 in fiscal 1996, 1997 and 1998
respectively.
11. SUBSEQUENT EVENTS
On August 20, 1998, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Oracle Corporation, a Delaware corporation
("Oracle"), and AQX Acquisition Corporation, a Delaware corporation and a wholly
owned subsidiary of Oracle (the "Purchaser"), which provides for the merger (the
"Merger") of the Purchaser with and into the Company, with the Company
continuing as the surviving corporation (the "Surviving Corporation"). Pursuant
to the terms of the Merger Agreement, at the effective time of the Merger (the
"Effective Time"), (i) each share of Common Stock, par value $0.01 per share, of
the Company (the "Common Stock") outstanding immediately prior to the Effective
Time (other than shares held by the Company, the Purchaser or Oracle (which will
be cancelled) and shares for which appraisal rights under Delaware law are
perfected) will be converted into a right to receive a cash payment in the
amount of $1.50 per share and (ii) each share of Common Stock, par value $0.001
per share, of the Purchaser outstanding prior to the Effective Time will be
converted into the right to receive one share of the common stock, par value
$0.01 per share, of the Surviving Corporation.
The closing of the Merger is subject to a number of conditions precedent,
including, (i) the receipt of all required government approvals, (ii) the
approval of the Merger by the stockholders of the Company, (iii) the retention
of certain key employees of the Company, (iv) the receipt of final court
approval of the settlement of the putative securities class actions and other
matters as set forth in the Merger Agreement.
In connection with the Merger Agreement, the Company entered into a
Technology License Agreement, which was amended by Amendment No. 1 to the
License Agreement dated September 10, 1998 (as amended, the "License Agreement")
with Oracle whereby the Company agreed to grant to Oracle an irrevocable,
non-exclusive license of the Company's computer software and related technology
(the "Technology"). As payment for the license granted Oracle will pay the
Company a sublicense fee equal to 30% of the net fees Oracle receives for
sublicenses of the Technology until the earlier of (i) six years from the date
of the License Agreement and (ii) the payment by Oracle of a total of
$12,000,000. Additionally, Oracle has partially prepaid and will prepay to the
Company $2,000,000 of sublicense fees in three equal monthly installments
commencing on September 1, 1998.
In connection with the Merger Agreement, the Company, Oracle and Silicon
Valley Bank, a California chartered bank (the "Bank"), entered into a Loan
Modification, Consent and Forbearance Agreement (the "Loan Modification
Agreement") whereby, pursuant to the terms of the Loan Modification Agreement,
the Bank, subject to certain conditions, agreed to forebear from exercising
certain remedies available to it as a result of the Company's existing defaults
under the loan agreements with the Bank until the earlier of December 31, 1998
and the consummation of the Merger. The Bank's continuing forbearance will
terminate upon the termination of the Merger Agreement.
On August 14, 1998, the Company reached an agreement concerning the
litigation with a former customer (see Note 6). The litigation was settled for
$100,000. The Company recorded the settlement costs in the first quarter of
fiscal 1999 (unaudited).
F-20
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of August
20, 1998, is entered into by and among Oracle Corporation, a Delaware
corporation ("Parent"), AQX Acquisition Corporation, a Delaware corporation and
a wholly owned subsidiary of Parent (the "Purchaser"), and Versatility Inc., a
Delaware corporation (the "Company").
RECITALS
A. The Boards of Directors of the Company and the Purchaser deem it
advisable and in the best interests of the stockholders of such corporations to
effect the merger (the "Merger") of the Purchaser with and into the Company, all
pursuant to this Agreement and in accordance with the Delaware General
Corporation Law (the "DGCL").
B. As a condition and inducement to Parent's and the Purchaser's
willingness to enter into this Agreement, upon the execution and delivery of
this Agreement, (i) Ronald R. Charnock, Marcus Heth, Keith Roberts, Edison
Venture Fund, Noro Mosley Partners and Ernie Connon are simultaneously entering
into and delivering support agreements in the form attached hereto as Exhibit A
(collectively, the "Support Agreements"), and (ii) the Company and Parent are
entering into a license agreement (the "License Agreement") in the form attached
hereto as Exhibit B.
The parties hereby agree as follows:
ARTICLE I
THE MERGER
1.1 MERGER.
(a) At the Effective Time (as defined in Section 1.1(b) below) and
subject to the terms and conditions hereof and the provisions of the DGCL,
the Purchaser will be merged with and into the Company in accordance with
the DGCL, the separate existence of the Purchaser shall thereupon cease and
the Company shall continue as the surviving corporation (the "Surviving
Corporation"). The Purchaser and the Company are sometimes hereinafter
referred to collectively as the "Constituent Corporations."
(b) Subject to the terms and conditions hereof, the Merger shall be
consummated as promptly as practicable after the Stockholders' Meeting (as
defined in Section 4.2), if any, by duly filing a certificate of merger, in
such form as is required by, and executed in accordance with, the relevant
provisions of the DGCL. The Merger shall be effective at such time as the
certificate of merger is duly filed with the Secretary of State of the
State of Delaware in accordance with the DGCL or at such later time as is
specified in the certificate of merger (the "Effective Time"). Prior to
such filing, a closing shall take place at the offices of Venture Law
Group, A Professional Corporation, 2800 Sand Hill Road, Menlo Park,
California, or at such other place as the parties shall agree, for the
purpose of confirming the satisfaction or waiver of the conditions
contained in Article VI hereof. The date on which such closing shall occur
is referred to herein as the "Closing Date."
(c) The separate corporate existence of the Company, as the Surviving
Corporation, with all its purposes, objects, rights, privileges, powers,
certificates and franchises, shall continue unimpaired by the Merger. The
Surviving Corporation shall succeed to all the properties and assets of the
Constituent Corporations and to all debts, choses in action and other
interests due or belonging to the Constituent Corporations and shall be
subject to and responsible for all the debts, liabilities and duties of the
Constituent Corporations with the effect set forth in Section 259 of the
DGCL.
1.2 CONVERSION OF SHARES. At the Effective Time and by virtue of the Merger
and without any action on the part of the holders of the capital stock of the
Constituent Corporations:
A-1
<PAGE>
(a) Each share of Common Stock of the Company, par value $.01 per
share (the "Common Stock") issued and outstanding immediately prior to the
Effective Time (collectively, the "Shares") (other than (i) Shares to be
canceled pursuant to Section 1.2(b) below and (ii) Dissenting Shares (as
defined in Section 1.4)) shall be converted into the right to receive in
cash an amount per Share equal to $1.50 (the "Merger Price");
(b) Each Share held in the treasury of the Company and each Share
owned by Parent, the Purchaser or the Company, or by any direct or indirect
wholly owned subsidiary of any of them, shall be canceled and retired
without payment of any consideration therefor; and
(c) Each share of common stock, par value $0.001 per share, of the
Purchaser issued and outstanding immediately prior to the Effective Time
shall be converted into one validly issued, fully paid and nonassessable
share of common stock, par value $0.01 per share, of the Surviving
Corporation.
1.3 EXCHANGE OF CERTIFICATES.
(a) From and after the Effective Time, a bank or trust company to be
designated by Parent shall act as exchange agent (the "Exchange Agent") in
effecting the exchange of the Merger Price for certificates which prior to
the Effective Time represented Shares and which as of the Effective Time
represent the right to receive the Merger Price (the "Certificates").
Promptly after the Effective Time, the Exchange Agent shall mail to each
record holder of Certificates a form of letter of transmittal and
instructions for use in surrendering such Certificates and receiving the
Merger Price therefor in a form approved by Parent and the Company. At or
prior to the Effective Time, the Purchaser shall deposit in trust with the
Exchange Agent immediately available funds in an amount sufficient to pay
the Merger Price for all such Shares to the Company's stockholders as
contemplated by this Section 2.3. Upon the surrender of each Certificate
and the issuance and delivery by the Exchange Agent of the Merger Price for
the Shares represented thereby in exchange therefor, the Certificate shall
forthwith be canceled. Until so surrendered and exchanged, each Certificate
shall represent solely the right to receive the Merger Price for the Shares
represented thereby, without any interest thereon. Upon the surrender and
exchange of such an outstanding Certificate, the holder thereof shall
receive the Merger Price multiplied by the number of Shares represented by
such Certificate, without any interest thereon. If any cash is to be paid
to a name other than that in which the Certificate surrendered in exchange
therefor is registered, it shall be a condition to such payment or exchange
that the person requesting such payment or exchange shall pay to the
Exchange Agent any transfer or other taxes required by reason of the
payment of such cash to a name other than that of the registered holder of
the Certificate surrendered, or such person shall establish to the
satisfaction of the Exchange Agent that such tax has been paid or is not
applicable. Notwithstanding the foregoing, neither the Exchange Agent nor
any party hereto shall be liable to a holder of Certificates for any part
of the Merger Price payments made to a public official pursuant to
applicable abandoned property, escheat or similar laws.
(b) Promptly following the first anniversary of the Effective Time,
the Exchange Agent shall return to the Surviving Corporation all cash
relating to the transactions described in this Agreement, and the Exchange
Agent's duties shall terminate. Thereafter, each holder of a Certificate
may surrender such Certificate to the Surviving Corporation and (subject to
applicable abandoned property, escheat and similar laws) receive in
exchange therefor the Merger Price for such Shares, without any interest
thereon, but shall have no greater rights against the Surviving Corporation
than may be accorded to general creditors of the Surviving Corporation
under applicable law. At and after the Effective Time, holders of
Certificates shall cease to have any rights as stockholders of the Company
except for the right to surrender such Certificates in exchange for the
Merger Price for such Shares or to perfect their right of appraisal with
respect to their Shares pursuant to the applicable provisions of the DGCL
and Section 1.4 below, and there shall be no transfers on the stock
transfer books of the Company or the Surviving Corporation of any Shares
that were outstanding immediately prior to the Merger.
A-2
<PAGE>
1.4 DISSENTING SHARES.
(a) Notwithstanding the provisions of Section 1.2 or any other
provision of this Agreement to the contrary, Shares that are issued and
outstanding immediately prior to the Effective Time and are held by
stockholders who shall have properly demanded appraisal of such Shares in
accordance with the DGCL ("Dissenting Shares") shall not be converted into
the right to receive the Merger Price at the Effective Time, unless and
until the holder of such Dissenting Shares shall have failed to perfect or
shall have effectively withdrawn or lost such right to appraisal and
payment under the DGCL. If a holder of Dissenting Shares (a "Dissenting
Stockholder") shall have so failed to perfect or shall have effectively
withdrawn or lost such right to appraisal and payment, then, as of the
Effective Time or the occurrence of such event, whichever last occurs, such
Dissenting Shares shall be converted into and represent solely the right to
receive the Merger Price, without any interest thereon, as provided in
Section 1.2.
(b) The Company shall give Parent (i) prompt notice of any written
demands for appraisal, withdrawals of demands for appraisal and any other
instruments served pursuant to Section 262 of the DGCL and received by the
Company, and (ii) the opportunity to control all negotiations and
proceedings with respect to such demands for appraisal. The Company shall
not, except with the prior written consent of Parent, make any payment with
respect to any demands for appraisal or settle or offer to settle any such
demands.
1.5 CERTIFICATE OF INCORPORATION AND BYLAWS OF THE SURVIVING CORPORATION.
(a) At the Effective Time the Certificate of Incorporation of the
Purchaser, as in effect immediately prior to the Effective Time, shall be
the Certificate of Incorporation of the Surviving Corporation until
thereafter amended as provided by law and such Certificate of
Incorporation; provided, however, that Article I of the Certificate of
Incorporation of the Surviving Corporation shall be amended to read as
follows: "The name of the corporation is [Company Name]."
(b) At the Effective Time the Bylaws of the Purchaser, as in effect
immediately prior to the Effective Time, shall be the Bylaws of the
Surviving Corporation until thereafter amended as provided by law, the
Certificate of Incorporation of the Surviving Corporation or such Bylaws.
1.6 DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION. At the Effective
Time, the directors of the Purchaser immediately prior to the Effective Time
shall become the directors of the Surviving Corporation, each of such directors
to hold office, subject to the applicable provisions of the Certificate of
Incorporation and Bylaws of the Surviving Corporation, until the next annual
stockholders' meeting of the Surviving Corporation and until their successors
shall be duly elected or appointed and qualified. At the Effective Time, the
officers of the Purchaser immediately prior to the Effective Time shall become
the officers of the Surviving Corporation until their respective successors are
duly elected or appointed and qualified.
1.7 WARRANTS. Parent shall not assume or continue any outstanding warrants
to purchase shares of Company Common Stock (the "Warrants"). The parties hereto
shall take all appropriate action to provide that, at or following the Effective
Time, each holder of an outstanding Warrant shall be entitled to receive an
amount in cash equal to the product of (i) the excess, if any, of the Merger
Price over the per share exercise price of such Warrant and (ii) the number of
Shares subject to such Warrant which are exercisable immediately prior to the
Effective Time.
1.8 OPTIONS. The Company Common Stock options shall be treated as set forth
in Section 5.5.
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ARTICLE II
REPRESENTATIONS AND WARRANTIES
OF PARENT AND THE PURCHASER
Parent and the Purchaser hereby jointly and severally represent and warrant
to the Company that, except as and to the extent set forth in a Disclosure
Schedule (the "Parent Disclosure Schedule") delivered to the Company on or prior
to the date hereof setting forth additional exceptions specified therein to the
representations and warranties contained in this Article II, which Disclosure
Schedule shall identify exceptions by specific Section references:
2.1 CORPORATE ORGANIZATION.
(a) Parent is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware.
(b) The Purchaser is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware. The Purchaser
has not engaged in any business since it was incorporated other than in
connection with the transactions contemplated by this Agreement. Parent
owns all of the outstanding capital stock of the Purchaser.
2.2 AUTHORITY. Each of Parent and the Purchaser has the full corporate
power and authority to execute and deliver this Agreement, to perform its
obligations hereunder and to consummate the transactions contemplated hereby.
The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly approved by the respective
Boards of Directors of Parent and the Purchaser and no other corporate
proceedings on the part of Parent or the Purchaser are necessary to consummate
the transactions so contemplated (other than, with respect to the Merger, the
filing and recordation of the appropriate merger documents as required by the
DGCL). This Agreement has been duly executed and delivered by each of Parent and
the Purchaser and, assuming the due authorization, execution and delivery
thereof by the Company, constitutes a valid and binding obligation of each of
Parent and the Purchaser, enforceable against such parties in accordance with
its terms, except as such enforceability may be limited by principles or public
policy and subject to the laws of general application relating to bankruptcy,
insolvency and the relief of debtors and rules of law governing specific
performance, injunctive relief or other equitable remedies.
2.3 CONSENTS AND APPROVALS; NO VIOLATION. Neither the execution and
delivery of this Agreement by Parent and the Purchaser nor the consummation by
Parent and the Purchaser of the transactions contemplated hereby will (i)
conflict with or result in any breach of any provision of their respective
charter documents, or (ii) assuming compliance with the matters referred to in
clause (iii) below, constitute a default (or an event which, with notice or
lapse of time or both, would constitute a default) under, or give rise to a
right of termination, cancellation or acceleration of any obligation contained
in or to the loss of a benefit under, or result in the creation of any lien or
other encumbrance upon any of the properties or assets of Parent or the
Purchaser under, any of the terms, conditions or provisions of any note, bond,
mortgage, indenture, deed of trust, license, lease agreement or other agreement,
instrument, obligation, permit, concession, franchise, license, judgment, order,
decree, statute, law, ordinance, rule or regulation applicable to Parent or the
Purchaser, or to which either of them or any of their respective properties or
assets may be subject, except for such violations, conflicts, breaches,
defaults, terminations, accelerations or creations of liens or other
encumbrances, which, individually or in the aggregate, will not have a material
adverse effect on Parent and its subsidiaries taken as a whole or prevent or
materially delay consummation of the Merger, or (iii) require any consent,
approval, authorization or permit of, or filing with or notification to, any
court, administrative agency, commission or other governmental or regulatory
authority or instrumentality, domestic or foreign (a "Governmental Entity"),
except (A) pursuant to the Exchange Act, (B) filing of a certificate of merger
pursuant to the DGCL, (C) filings required under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), and the termination or
expiration of the waiting periods thereunder, (D) filings required under
applicable antitrust laws of any foreign country, (E) filings necessary to
comply with state securities or "blue sky" laws, or (F) consents, approvals,
authorizations, permits, filings or
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notifications which if not obtained or made will not, individually or in the
aggregate, have a material adverse effect on Parent and its subsidiaries taken
as a whole or prevent or materially delay consummation of the Merger.
2.4 BROKERS AND FINDERS. Neither Parent nor the Purchaser has employed any
broker or finder or incurred any liability for any fee or commission to any
broker, finder or intermediary in connection with the transactions contemplated
hereby.
2.5 FINANCING. The Purchaser has or will have, prior to the Effective Time
of the Merger, sufficient cash or cash-equivalent funds available to consummate
the Merger and the transactions contemplated thereby and to pay related fees and
expenses.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
OF THE COMPANY
The Company hereby represents and warrants to Parent and the Purchaser
that, except as and to the extent set forth in a Disclosure Schedule (the
"Company Disclosure Schedule") delivered to Parent on or prior to the date
hereof setting forth additional exceptions specified therein to the
representations and warranties contained in this Article III, which Disclosure
Schedule shall identify exceptions by specific Section references:
3.1 CORPORATE ORGANIZATION. Each of the Company and its Subsidiaries is a
corporation duly organized, validly existing and in good standing under the laws
of its respective jurisdiction of organization, has all requisite corporate
power and authority to own or lease and operate its properties and assets and to
carry on its business as it is now being conducted, and is duly qualified or
licensed as a foreign corporation to do business and in good standing in each
jurisdiction in which the nature of the business conducted by it or the
character or location of the properties owned or leased by it makes such
qualification or licensing necessary, except where the failure to be so
organized, existing, in good standing, qualified or licensed would not have a
Material Adverse Effect. As used herein, the term "Material Adverse Effect"
means any change, event or effect that, individually or in the aggregate, is or
is reasonably likely to be materially adverse to the business, operations,
properties, condition (financial or otherwise), assets or liabilities
(including, without limitation, contingent liabilities) of the Company and its
Subsidiaries taken as a whole. The Company has made available to Parent a
complete and correct copy of the Company's and its Subsidiaries' certificates of
incorporation and bylaws (or comparable governing documents), each as amended to
the date hereof. The Company's and its Subsidiaries' certificates of
incorporation and bylaws (or comparable governing documents) made available are
in full force and effect. Neither the Company nor any of its Subsidiaries is in
violation of any of the provisions of its Certificate of Incorporation or Bylaws
(or comparable) governing documents.
3.2 CAPITALIZATION. The authorized capital stock of the Company consists of
20,000,000 shares of Company Common Stock and 2,000,000 shares of preferred
stock, par value $0.01 per share ("Preferred Stock"). As of the date hereof (i)
7,595,009 shares of Company Common Stock were issued and outstanding, (ii) no
shares of Preferred Stock were issued and outstanding, (iii) 3,500,161 shares of
Company Common Stock were reserved for issuance upon the exercise of outstanding
options to acquire shares of Company Common Stock ("Stock Options"), (iv)
100,000 shares of Company Common Stock were reserved for issuance upon the
exercise of outstanding Warrants, and (v) no shares of Company Common Stock were
held by the Company in its treasury. As of the date hereof, 1,393,000 shares of
Company Common Stock were available for issuance under the Company's 1998
Nonqualified Stock Option Plan, 404,895 shares of Company Common Stock were
available for issuance under the Company's 1996 Stock Option Plan, and no shares
of Company Common Stock were available for issuance under the either of the
Company's 1995 Employee Plan or the Company's 1995 Incentive Plan (the foregoing
Stock Option Plans are referred to, collectively, as the "Company Stock Option
Plans"). As of the date hereof, 89,725 shares of Company Common Stock were
available for issuance under the Company's Employee Stock Purchase Plan. All of
the issued and outstanding shares of Company Common Stock are duly authorized,
validly issued, fully paid and nonassessable and are not subject to preemptive
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rights created by statute, the Certificate of Incorporation or Bylaws of the
Company or any agreement to which the Company is a party or by which the Company
or its assets is bound. Each of the outstanding shares of Capital Stock or other
securities of each of the Company's Subsidiaries directly or indirectly owned by
the Company is duly authorized, validly issued, fully paid and nonassessable and
owned by the Company or by a direct or indirect Subsidiary of the Company, free
and clear of any limitation or restriction (including any restriction on the
right to vote or sell the same except as may be provided as a matter of law).
Except as disclosed in this Section 3.2 or Section 3.2 of the Company Disclosure
Schedule, there are no shares of capital stock of the Company issued or
outstanding, and except for the Stock Options and the Warrants, there are no
outstanding subscriptions, options, warrants, rights, convertible securities or
other agreements or commitments of any character (including, without limitation,
rights which will or could become exercisable as a result of this Agreement or
any transaction contemplated hereby) relating to the issued or unissued capital
stock or other securities of the Company obligating the Company to issue,
deliver or sell, or cause to be issued, delivered or sold, additional shares of
capital stock of the Company or obligating the Company to grant, extend or enter
into any subscription, option, warrant, right, convertible security or other
similar agreement or commitment. There are no voting trusts or other agreements
or understandings to which the Company is a party with respect to the voting of
the capital stock of the Company.
3.3 SUBSIDIARIES. Section 3.3 of the Company Disclosure Schedule contains a
correct and complete list of each of the Company's Subsidiaries, the
jurisdiction where each of such Subsidiaries is organized and the percentage of
outstanding capital stock of such Subsidiaries that is directly or indirectly
owned by the Company. The Company or another Subsidiary of the Company owns its
shares of the Capital Stock of each Subsidiary of the Company free and clear of
all liens, claims and encumbrances. Section 3.3 of the Company Disclosure
Schedule sets forth a true and complete list of each equity investment in an
amount of $500,000 or more or which represents a 5% or greater ownership
interest in the subject of such investment made by the Company or any of its
Subsidiaries in any other Person other than the Company's Subsidiaries ("Other
Interests"). The Other Interests are owned by the Company, by one or more of the
Company's Subsidiaries or by the Company and one or more of its Subsidiaries, in
each case free and clear of all liens, claims and encumbrances. For purposes of
this Agreement, (i) the term "Subsidiary" shall mean any corporation,
partnership, limited liability company, association, trust, unincorporated
association or other legal entity of which the Company, either alone or through
or together with any other Subsidiary, owns, directly or indirectly, 50% or more
of the capital stock, partnership interests, member interests or other ownership
interests, the holders of which are generally entitled to vote for the election
of the Board of Directors or other governing body of such corporation or other
legal entity, and (ii) "Capital Stock" shall mean common stock, preferred stock,
partnership interests, limited liability company interests or other ownership
interests entitling the holder thereof to vote with respect to matters involving
the issuer thereof, and (iii) the term "Person" shall mean an individual,
corporation (including not-for-profit), partnership, limited liability company,
association, trust, unincorporated organization, joint venture, estate,
Governmental Entity or other legal entity.
3.4 AUTHORITY. The Company has all necessary corporate power and authority
to enter into this Agreement and the License Agreement, to perform its
obligations hereunder and thereunder and to consummate the transactions
contemplated hereby and thereby. The execution and delivery of this Agreement
and the License Agreement and the consummation of the transactions contemplated
hereby and thereby have been duly approved by the Board of Directors of the
Company and no other corporate proceedings on the part of the Company are
necessary to authorize this Agreement or the license Agreement or to consummate
the transactions so contemplated (other than, with respect to the Merger, the
approval and adoption of this Agreement by holders of a majority of the
outstanding shares of Common Stock of the Company, and the filing and
recordation of the appropriate merger documents as required by the DGCL). Each
of this Agreement and the License Agreement has been duly executed and delivered
by, and, assuming the due authorization, execution and delivery thereof by
Parent and the Purchaser, constitutes a valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms, except as
such enforceability may be limited by principles or public policy and subject to
the laws of general application relating to bankruptcy, insolvency and the
relief of debtors and rules of law governing specific performance, injunctive
relief or other equitable remedies.
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3.5 CONSENTS AND APPROVALS; NO VIOLATION. Neither the execution and
delivery of this Agreement and the License Agreement by the Company nor the
consummation by the Company of the transactions contemplated hereby and thereby
will (i) (assuming stockholder approval of the Merger as described in Section
3.4 is obtained) conflict with or result in any breach or violation of any
provision of the Certificate of Incorporation or Bylaws of the Company or any of
its Subsidiaries, or (ii) except as set forth in Section 3.5 of the Company
Disclosure Schedule, constitute a default (or an event which, with notice or
lapse of time or both, would constitute a default) under, or give rise to a
right of termination, consent, approval, cancellation or acceleration of any
obligation contained in or to the loss of a benefit under, or result in the
creation of any lien or other encumbrance upon any of the properties or assets
of the Company or any of its Subsidiaries under, any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, deed of trust, license,
lease, agreement or other instrument or obligation, permit, concession,
franchise, license, judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to the Company or any of its Subsidiaries or to which the
Company, its Subsidiaries or any of their properties or assets may be subject,
except for such violations, conflicts, breaches, terminations, accelerations or
creations of liens or other encumbrances, which will not have a Material Adverse
Effect or prevent or materially delay consummation of the Merger, or (iii)
except as set forth in Section 3.5 of the Company Disclosure Schedule, require
any consent, approval, authorization or permit of, or filing with or
notification to, any Governmental Entity, except (A) pursuant to the Exchange
Act, (B) filing of a certificate of merger pursuant to the DGCL, (C) filings
under the HSR Act and the termination or expiration of the waiting periods
thereunder, (D) filings required under applicable antitrust laws of any foreign
country, (F) filings necessary to comply with state securities or "blue sky"
laws, or (G) consents, approvals, authorizations, permits, filings or
notifications which if not obtained or made will not have a Material Adverse
Effect or prevent or materially delay consummation of the Merger.
3.6 BROKERS AND FINDERS. Except for the Financial Advisor and the fees
payable by the Company to such firm described in an engagement letter dated
April 27, 1998, a complete and correct copy of which has been provided to Parent
on or prior to the date hereof, neither the Company nor any of its Subsidiaries
has employed any broker or finder or incurred any liability for any fee or
commission to any broker, finder or intermediary in connection with the
transactions contemplated hereby.
3.7 CONDUCT OF BUSINESS.
(a) The business of the Company, as presently conducted, is not being
conducted in default or violation of any term, condition or provision of
(i) its respective charter or bylaws, or (ii) except as set forth in
Section 3.7 of the Company Disclosure Schedule, any note, bond, mortgage,
indenture, deed of trust, lease, agreement or other instrument or
obligation of any kind to which the Company is a party or by which the
Company or any of its properties or assets may be bound, or (iii) any
federal, state, local or foreign statute, law, ordinance, rule, regulation,
judgment, decree, order, concession, grant, franchise, permit or license or
other governmental authorization or approval applicable to the Company,
excluding from the foregoing clauses (ii) and (iii) defaults or violations
that could not reasonably be expected to have a Material Adverse Effect.
(b) The Company has all licenses, permits, orders or approvals of, and
has made all required registrations with, all Governmental Entities that
are material to the conduct of the business of the Company (collectively,
"Permits"). All Permits are in full force and effect, no material
violations are or have been recorded in respect of any Permit, and no
proceeding is pending or threatened to revoke or limit any Permit.
(c) The Company has not received any written communication from a
Governmental Entity that alleges that the Company is not in compliance with
any Environmental Law (as defined below). There are no environmental
materials or conditions, including on-site or off-site disposal or releases
of Hazardous Materials (as defined below), that could reasonably be
expected to have a Material Adverse Effect. As used in this Agreement, the
term "Environmental Laws" means any applicable treaties, laws, regulations,
enforceable requirements, orders, decrees or judgments issued, promulgated
or entered into by any Governmental Entity, which relate to (A) pollution
or protection of the environment or (B) the generation, storage, use,
handling, disposal or transportation of or
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exposure to Hazardous Materials, including the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C.
Section 9601, et seq. ("CERCLA"), the Resource Conservation and Recovery
Act, as amended, 42 U.S.C. Section 6901 et seq., the Federal Water
Pollution Control Act, as amended, 33 U.S.C. Section 1251 et seq., the
Clean Air Act of 1970, as amended, 42 U.S.C. Section 7401 et seq., the
Toxic Substances Control Act of 1976, 15 U.S.C. Section 2601 et seq., the
Hazardous Materials Transportation Act, 49 U.S.C. Section 1801 et seq., and
any similar or implementing federal, foreign, state or local law, and all
amendments or regulations promulgated thereunder; and the term "Hazardous
Materials" means all explosive or regulated radioactive materials or
substances, biological hazards, genotoxic or mutagenic hazards, hazardous
or toxic substances, medical wastes or other wastes or chemicals, petroleum
or petroleum distillates, asbestos or asbestos-containing materials, and
all other materials or chemicals regulated pursuant to any Environmental
Law, including materials listed in 49 C.F.R. Section 172.101 and materials
defined as hazardous pursuant to Section 101(14) of CERCLA.
3.8 SEC DOCUMENTS. The Company has filed all required reports, schedules,
forms, statements and other documents with the SEC since December 31, 1996. All
reports, schedules, forms, statements and other documents filed with the SEC
since December 31, 1997 (the "SEC Documents") complied in all material respects
with the requirements of the Securities Act of 1933, as amended (the "Securities
Act"), or the Exchange Act, as the case may be, and the rules and regulations of
the SEC promulgated thereunder applicable to such SEC Documents, and, at the
time of filing, none of the SEC Documents contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The financial
statements of the Company included in the SEC Documents (the "Company Financial
Statements") comply as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with generally accepted
accounting principles (except, in the case of unaudited statements, as permitted
by Form 10-Q of the SEC) applied on a consistent basis during the periods
involved (except as may be indicated in the notes thereto) and fairly present
the financial position of the Company as of the dates thereof and its statements
of operations, stockholders' equity and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal and recurring year-end
audit adjustments which were and are not expected to be material). Except as and
to the extent set forth on the balance sheet of the Company on April 30, 1998,
including the notes thereto, or the Company Disclosure Schedule, the Company has
no liability or obligation of any nature (whether accrued, absolute, contingent
or otherwise) which would be required to be reflected on a balance sheet, or in
the notes thereto, prepared in accordance with generally accepted accounting
principles, except for liabilities and obligations incurred in the ordinary
course of business consistent with past practice since April 30, 1998 which
could not reasonably be expected to have a Material Adverse Effect. The Company
has heretofore delivered to Parent complete and correct copies of all of the SEC
Documents and all amendments and modifications thereto, as well as, to the
extent any shall exist, all amendments and modifications that have not been
filed by the Company with the SEC to all agreements, documents and other
instruments that previously had been filed by the Company with the SEC and are
currently in effect.
3.9 LITIGATION.
(a) Except as disclosed in Section 3.9 of the Company Disclosure
Schedule, there is no suit, action or proceeding pending or, to the
knowledge of the Company, threatened against the Company that seeks to
restrain or enjoin the consummation of the transactions contemplated by
this Agreement or the License Agreement or that, individually or in the
aggregate, could reasonably be expected to (i) have a Material Adverse
Effect, (ii) materially impair the ability of the Company to perform its
obligations under this Agreement or the License Agreement, or (iii) prevent
the consummation of any of the transactions contemplated by this Agreement
or the License Agreement, nor is there any judgment, decree, injunction,
rule or order of any Governmental Entity outstanding against the Company or
any of its Subsidiaries having, or that could reasonably be expected to
have, any such effect. No Governmental Entity has at any time challenged or
questioned in a writing
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delivered to the Company the legal right of the Company to design,
manufacture, offer or sell any of its products in the present manner or
style thereof.
(b) Neither the Company nor any of its Subsidiaries has ever been
notified in writing that it has been subject to an audit, compliance
review, investigation or like contract review by the office of the
Inspector General of the U.S. General Services Administration or any other
Governmental Entity or agent thereof in connection with any government
contract (a "Government Audit"). To the Company's knowledge, no Government
Audit is threatened, and in the event of any such Government Audit, to the
knowledge of the Company, no basis exists for a finding of noncompliance
with any material provision of any government contract or for a material
refund of any amounts paid or owed to the Company or any of its
Subsidiaries by any Governmental Entity pursuant to such government
contract. For each item disclosed in the Company Disclosure Schedule
pursuant to this Section 3.9, a true and complete copy of all material
correspondence and documentation with respect thereto has been made
available to Parent.
3.10 LABOR AGREEMENTS AND ACTIONS.
(a) The Company is not bound by or subject to (and none of its assets
or properties is bound by or subject to) any written or oral, express or
implied, contract, commitment or arrangement with any labor union, and no
labor union has requested or, to the knowledge of the Company, has sought
to represent any of the employees, representatives or agents of the
Company. There is no strike, unfair labor practice complaint or other labor
dispute involving the Company pending, or to the knowledge of the Company
threatened, which could have a Material Adverse Effect, nor is the Company
aware of any labor organization activity involving its employees. The
Company is not engaged in any unfair labor practice and is not in material
violation of any applicable laws respecting employment and employment
practices, terms and conditions of employment, and wages and hours. The
Company has not experienced any material work stoppage or other material
labor difficulty.
(b) Except as set forth in Section 3.10 of the Company Disclosure
Schedule, the employment of each officer and employee of the Company is
terminable at the will of the Company, and the Company has not entered into
any oral or written agreements with any of its officers or employees that
provide for severance or termination pay or acceleration of vesting on
stock options or restricted stock. Except as set forth in Section 3.10 of
the Company Disclosure Schedule, the Company is not a party to any
agreement, contract or arrangement with any officer or employee the
benefits of which are contingent, or the terms of which are materially
altered, upon the occurrence of a transaction involving the Company of the
nature of any of the transactions contemplated by this Agreement.
(c) The Company has complied in all material respects with all
applicable state and federal equal employment opportunity laws and with
other laws related to employment. The Company has conducted all employee
terminations and reductions in force in accordance with Company policy and
in compliance with all applicable laws, including but not limited to the
Worker Adjustment and Retraining Notification Act ("WARN"). Except as set
forth in Section 3.10 of the Company Disclosure Schedule, there are no, and
have not been any, claims against the Company, or to the Company's
knowledge, threatened against the Company, based on actual or alleged race,
age, sex, disability or other harassment or discrimination, or similar
tortious conduct, nor to the knowledge of the Company, is there any basis
for any such claim. There are no pending claims against the Company under
any workers' compensation plan or policy or for long term disability. There
are no pending or, to the knowledge of the Company, threatened wage claims
against the Company, and there are no other proceedings pending or, to the
knowledge of the Company, threatened against the Company, by any employee
or former employee.
(d) The Company is not aware that any executive officer intends to
terminate such officer's employment with the Company, nor does the Company
have any present intention to terminate the employment of any executive
officer. Each executive officer of the Company is currently devoting 100%
of his or her business time attending to the affairs of the Company.
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3.11 CERTAIN AGREEMENTS AND EMPLOYEE BENEFIT PLANS.
(a) Section 3.11(a) of the Company Disclosure Schedule contains a true
and complete summary or list of, or otherwise describes, (i) all employee
benefit plans (within the meaning of Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")) which are
maintained, contributed to or sponsored by the Company or any trade or
business (whether or not incorporated) which is treated as a single
employer with the Company (an "ERISA Affiliate") within the meaning of
Section 414(b), (c), (m) or (o) of the Code, for the benefit of any current
or former employee, officer or director of the Company or an ERISA
Affiliate, (ii) each loan to a non-officer employee and loans to officers
and directors of the Company, (iii) all bonus, stock option, stock
purchase, restricted stock, phantom stock, or stock appreciation right
plans, programs or arrangements, (iii) all incentive, deferred
compensation, supplemental retirement, savings, profit sharing, or
severance plans, programs or arrangements, (iv) all sabbatical, employee
relocation, vacation, cafeteria benefit (Code Section 125), dependent care
benefit (Code Section 129), life or accident insurance, disability,
medical, dental, vision or any other fringe or benefit plans, programs or
arrangements, and (v) any current or former employment or executive
compensation or severance agreements, written or otherwise, for the benefit
of, or relating to, any present or former employee, consultant or director
of the Company, as to which (with respect to any of items (i) through (v)
above) any obligation or potential liability is borne by the Company
(together, the "Company Employee Plans").
(b) The Company has delivered to Parent a true and complete copy of
each of the written Company Employee Plans and related plan documents
(including trust documents, insurance policies or contracts, employee
booklets, summary plan descriptions and other authorizing documents and
written description of any unwritten Company Employee Plan, and, to the
extent still in its possession, any material employee communications
relating thereto) and has, with respect to each Company Employee Plan which
is subject to ERISA reporting requirements, provided copies of the most
recently filed Form 5500, the most recently prepared actuarial report and
financial statement and the most current summary of material modifications.
Any Company Employee Plan intended to be qualified under Section 401(a) of
the Code has either obtained from the Internal Revenue Service a favorable
determination letter as to its qualified status under the Code, including
all amendments to the Code effected by the Tax Reform Act of 1986 and
subsequent legislation with respect to which the remedial amendment period
under Section 401(b) of the Code has expired, or has applied to the
Internal Revenue Service for such a determination letter prior to the
requisite period under applicable Treasury Regulations or Internal Revenue
Service pronouncements in which to apply for a determination letter and to
make any amendments necessary to obtain a favorable determination. The
Company has also furnished Parent with the most recent Internal Revenue
Service determination letter issued with respect to each such Company
Employee Plan, and, to the knowledge of the Company nothing has occurred
since the issuance of each such letter which could reasonably be expected
to cause the loss of the tax-qualified status of any Company Employee Plan
subject to Code Section 401(a).
(c) With respect to each Company Employee Plan, (i) there has been no
"prohibited transaction," as such term is defined in Section 406 of ERISA
and Section 4975 of the Code, (ii) each Company Employee Plan in all
material respects has been administered in accordance with its terms and in
compliance with the requirements prescribed by any and all applicable
statutes, rules and regulations (including ERISA and the Code), (iii) the
Company (or, as appropriate, an ERISA Affiliate) has prepared in good faith
and timely filed all requisite governmental reports (which were true and
correct as of the date filed) and has properly and timely filed and
distributed or posted all notices and reports to participants and
beneficiaries required to be filed, distributed or posted, (iv) no suit,
administrative proceeding, action or other litigation has been brought, or
is pending or anticipated or to the knowledge of the Company is threatened
against such Company Employee Plan (excluding claims for benefits incurred
in the ordinary course of plan administration), including any audit or
inquiry by the Internal Revenue Service or United States Department of
Labor, (v) the Company and each ERISA Affiliate have performed all material
obligations required to be performed by them and are not in any material
respect in default under or in violation of, and have no
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knowledge of any material default or violation of, such Company Employee
Plan, (vi) neither the Company nor any ERISA Affiliate, nor any officer or
director of any of them, has incurred any liability or penalty under
Sections 4976 through 4980 of the Code or Title I of ERISA, (vii) all
contributions required to be made by the Company or any ERISA Affiliate
have been made on or before their due dates, (viii) such Company Employee
Plan is not covered by, and neither the Company nor any ERISA Affiliate has
incurred or expects to incur any material liability under, Title IV of
ERISA or Section 412 of the Code, (ix) neither the Company nor any ERISA
Affiliate is a party to, or has made any contribution to or otherwise
incurred any obligation under, any "multi-employer plan" as defined in
Section 3(37) of ERISA; and (x) except as disclosed in Section 3.11(c) of
the Company Disclosure Schedule, there has been no termination or partial
termination of such Company Employee Plan within the meaning of Section 411
of ERISA which would require the acceleration of vesting of any benefits
under such Company Employee Plan pursuant to Section 411 of ERISA, except
with respect to benefits for which contributions have already been made by
the Company to such Company Employee Plan.
(d) With respect to each Company Employee Plan, the Company has in all
material respects complied with (i) the applicable health care continuation
and notice provisions of the Consolidated Omnibus Budget Reconciliation Act
of 1985 ("COBRA") and the proposed regulations thereunder, (ii) the
applicable requirements of the Family and Medical Leave Act of 1993
("FMLA") and the regulations thereunder, and (iii) the applicable
requirements of the Health Insurance Portability and Accountability Act of
1996 ("HIPAA") and the temporary regulations thereunder. Except as
disclosed in Section 3.11(d) of the Company Disclosure Schedule, no
employee or former employee of the Company or any qualifying beneficiary
thereof is currently receiving or is qualified to elect COBRA coverage with
respect to a Company Employee Plan.
(e) Except as set forth in Section 3.11(e) of the Company Disclosure
Schedule, with respect to each Company Employee Plan, there has been no
amendment to, written interpretation announcement (whether or not written)
or express or implied commitment by the Company or other ERISA Affiliate
relating to, or change in participation, coverage or benefits under, such
Company Employee Plan, other than a modification or change required by
ERISA or the Code, which would materially increase the expense of
maintaining such Plan above the level of expense incurred with respect to
that Plan for the most recent fiscal year included in the Company financial
statements. Except as set forth in Section 3.11(e) of the Company
Disclosure Schedule, the Company has made no express or implied commitment
to create any liability with respect to or cause to exist any employee
benefit plan, program or arrangement other than the Company Employee Plans,
or to enter into any contract or agreement to provide compensation or
benefits to any individual.
(f) Section 3.11(f) of the Company Disclosure Schedule contains a true
and correct list of each person who holds any stock option as of the date
hereof, together with (i) the number of shares of Company Common Stock
subject to such stock option, (ii) the date of grant of such stock option,
(iii) the extent to which such stock option is currently vested and, to the
extent such stock option is unvested, the vesting schedule, (iv) the
exercise price of such stock option, (v) whether such stock option is
intended to qualify as an incentive stock option within the meaning of
Section 422(b) of the Code (an "ISO"), and (vi) the expiration date of such
stock option. Section 3.11(f) of the Company Disclosure Schedule also sets
forth the aggregate number of ISO's and nonqualified stock options
outstanding as of the date hereof.
(g) The Company is not a party to any agreement or plan, including,
without limitation, any stock option plan, stock appreciation right plan or
stock purchase plan, any of the benefits of which will be increased, or the
vesting of benefits of which will be accelerated, by the occurrence of any
of the transactions contemplated by this Agreement or the value of any of
the benefits of which will be calculated on the basis of any of the
transactions contemplated by this Agreement, except as required pursuant to
Section 411 of the Code.
3.12 TAXES.
(a) The Company (i) has filed when due (taking into account
extensions) with the appropriate federal, state, local, foreign and other
governmental agencies, all tax returns, estimates and
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reports required to be filed by it, (ii) either paid when due and payable
or established adequate reserves or otherwise accrued all requisite
federal, state, local or foreign taxes, levies, imposts, duties, licenses
and registration fees and charges of any nature whatsoever, and
unemployment and social security taxes and income tax withholding,
including interest and penalties thereon ("Taxes"), and (iii) have
established or will establish in accordance with its normal accounting
practices and procedures accruals and reserves that, in the aggregate, are
adequate for the payment of all Taxes not yet due and payable and
attributable to any period preceding the Effective Time.
(b) No deficiencies for Taxes have been threatened or claimed by any
taxing authority in respect of any tax returns filed by the Company (or any
predecessor corporations). Neither the Company nor any predecessor
corporation has executed or filed with any taxing authority any agreement
or other document extending, or having the effect of extending, the period
of assessment or collection of any Taxes. The Company is not currently
being audited by any taxing authority nor has it received notice of a
proposed audit pertaining to Taxes. There are no tax liens on any assets of
the Company or any affiliate, except for Taxes not yet due and payable. The
accruals and reserves for taxes reflected in the balance sheet of the
Company as at April 30, 1998 are in all material respects adequate to cover
all Taxes accruable through the date thereof (including interest and
penalties, if any, thereon and Taxes being contested) in accordance with
generally accepted accounting principles.
(c) The Company neither is a party to, is bound by, nor has any
obligation under any tax sharing or similar agreement.
(d) The Company is not required to include in income (i) any amount in
respect of any adjustment under Section 481 of the Code, (ii) any deferred
intercompany transaction, or (iii) any installment sale gain, where the
inclusion in income would result in a Tax liability materially in excess of
the reserves therefor. The Company has not given a consent under Section
341(f) of the Code. The Company is not, nor has it been at any time, a
"United States real property holding corporation" within the meaning of
Section 897(c)(2) of the Code. The Company does not own any property of a
character which would give rise to any documentary, stamp or other transfer
tax as a result of the transactions contemplated by this Agreement.
(e) Except as set forth in Section 3.12 of the Company Disclosure
Schedule, the Company is not a party to any agreement, contract or
arrangement that may result, separately or in the aggregate, in the payment
of any "excess parachute payment" within the meaning of Section 280G of the
Code, determined without regard to Section 280G(b)(4) of the Code, or under
which any person may receive payments subject to the tax imposed by Section
4999 of the Code, by reason of the transactions contemplated by this
Agreement.
(f) All independent contractors and consultants have been properly
classified as independent contractors for the purposes of federal and
applicable state income tax and tax withholding laws and laws applicable to
employee benefits.
3.13 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since April 30, 1998, except as
contemplated by this Agreement, set forth in Section 3.13 of the Company
Disclosure Schedule or as disclosed in any Company SEC Document prior to July
31, 1998, the Company and each of its Subsidiaries has conducted its business
only in the ordinary course consistent with past practice, and there has not
been (i) any damage, destruction or loss, whether covered by insurance or not,
having or which, insofar as reasonably can be foreseen, in the future would have
a Material Adverse Effect, (ii) any declaration, setting aside or payment of any
dividend (whether in cash, stock or property) with respect to Company Common
Stock, or any redemption, purchase or other acquisition of any of its
securities, (iii) any event or change in the business, operations, properties,
condition (financial or otherwise), assets or liabilities (including, without
limitation, contingent liabilities) of the Company or any of its Subsidiaries
having, or which, insofar as reasonably can be foreseen, in the future would
have a Material Adverse Effect, (iv) any labor dispute, other than routine
matters, none of which is material to the Company or any of its Subsidiaries,
(v) any entry into any material commitment or transaction (including, without
limitation, any borrowing or capital expenditure) other than in the ordinary
course of business consistent with past practice,
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(vi) any material change by the Company in its accounting methods, principles or
practices, (vii) any revaluation by the Company of any asset (including, without
limitation, any writing down of the value of inventory or writing off of notes
or accounts receivable), (viii) any increase in or establishment of any bonus,
insurance, severance, deferred compensation, pension, retirement, profit
sharing, stock option (including, without limitation, the granting of stock
options, stock appreciation rights, performance awards, or restricted stock
awards), stock purchase or other employee benefit plan, or any other increase in
the compensation payable or to become payable to any officers or key employees
of the Company or any of its Subsidiaries, or (ix) entry by the Company or any
of its Subsidiaries into any licensing or other agreement with regard to the
acquisition or disposition of any material Intellectual Property other than
non-exclusive licenses granted in the ordinary course of business consistent
with past practice.
3.14 TITLE TO PROPERTIES; ABSENCE OF LIENS AND ENCUMBRANCES; CONDITION OF
EQUIPMENT.
(a) Neither the Company nor any of its Subsidiaries owns any real
property.
(b) All of the existing real property leases to which the Company or
any of its Subsidiaries is a party have been previously delivered to Buyer.
Section 3.14(b) of the Company Disclosure Schedule sets forth a complete
and accurate list of all real property leased by the Company or any of its
Subsidiaries. All such leases are in full force and effect, are valid and
effective in accordance with their respective terms, and there is not,
under any of such leases, any existing default or event of default (or
event which with notice or lapse of time, or both, would constitute a
default) that would give rise to a material claim.
(c) Except as set forth in Section 3.14 of the Company Disclosure
Schedule, the Company and each of its Subsidiaries owns or has valid
leasehold interests in all of its tangible properties and assets (real,
personal and mixed) used in its business, free and clear of any liens
(other than liens for Taxes that are not yet delinquent), charges, pledges,
security interests or other encumbrances, except as reflected in the
Company Financial Statements and except for such imperfections of title and
encumbrances, if any, that are not substantial in character, amount or
extent, and that do not and are not reasonably likely to materially detract
from the value, or interfere with the use of the property subject thereto
or affected thereby. The Company has delivered to Buyer correct and
complete copies of each lease identified in Section 3.14(b) of the Company
Disclosure Schedule and each such lease is valid and enforceable by the
Company or a Subsidiary in accordance with its terms. Neither the Company
nor any Subsidiary has received notice that, and, to the Company's
knowledge, no circumstance exists which, with the passage of time or the
giving of notice or both, could constitute a default under any such lease.
(d) Each item of machinery and equipment owned or leased by the
Company or any of its Subsidiaries is (i) adequate for the conduct of the
business of the Company consistent with its past practice, (ii) suitable
for the uses to which it is currently employed, (iii) in good operating
condition, ordinary wear and tear excepted, and (iv) regularly and properly
maintained.
3.15 INTELLECTUAL PROPERTY.
(a) The Company and each of its Subsidiaries owns, or is licensed or
otherwise possesses legally enforceable rights to use, all patents,
trademarks, trade names, service marks, copyrights and any applications for
such patents, trademarks, trade names, service marks and copyrights, and
all patent rights, trade secrets, schematics, technology, know-how,
computer software and tangible or intangible proprietary information or
material and other intellectual property or proprietary rights
(collectively, "Intellectual Property") material to the conduct of its
business as currently conducted, including without limitation all
copyrights registered in the name of the Company or any of its Subsidiaries
("Company Intellectual Property"). The Company and each of its Subsidiaries
has taken reasonable measures to protect the proprietary nature of each
item of Company Intellectual Property that it considers confidential, and
to maintain in confidence all trade secrets and confidential information
that it presently owns or uses, except where the failure to own, license or
possess legally enforceable rights to use such Company Intellectual
Property would not, individually or in the aggregate, reasonably be
expected to result in a material loss of benefits or a material loss to the
Company's business.
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(i) Section 3.15(a)(i) of the Company Disclosure Schedule lists,
as of the date hereof, all patents and patent applications and all
trademarks, registered copyrights, trade names and service marks owned
by, or licensed exclusively to, the Company or any of its Subsidiaries
and which are currently used in connection with the business of the
Company or its Subsidiaries, including the jurisdictions in which each
item of such Company Intellectual Property has been issued or
registered or in which any such application for such issuance or
registration has been filed.
(ii) Section 3.15(a)(ii) of the Company Disclosure Schedule
lists, as of the date hereof, all written licenses, sublicenses and
other agreements to which Company or any of its Subsidiaries is a
party and pursuant to which any person is authorized to use any
Company Intellectual Property rights, including without limitation all
object code end-user licenses granted to end-users in the ordinary
course of business that permit use of software products without a
right to modify, distribute or sublicense the same ("End-User
Licenses"), and excluding licenses, sublicenses or other agreements
with resellers, distributors, original equipment manufacturers and
other third party intermediaries that grant non-exclusive rights to
use or modify (for purposes of establishing program interfaces) and
resell or sublicense object code which (I) did not in any individual
case represent $500,000 or more of revenues to the Company in 1997 on
a consolidated basis, (II) were in all material respects in the
standard form of agreements provided by the Company to Parent, and
(III) the Company has no reason to believe will be material to the
Company's or any of its Subsidiaries' business or would reasonably be
expected to result in a material loss to the Company.
(iii) Section 3.15(a)(iii) of the Company Disclosure Schedule
lists, as of the date hereof, all written licenses, sublicenses and
other agreements to which the Company or any of its Subsidiaries is a
party and pursuant to which the Company or any such Subsidiary is
authorized to use any third party Intellectual Property, including
software ("Third Party Intellectual Property") which is incorporated
in any existing product or service of the Company or any of its
Subsidiaries, or any material product or service currently under
development ("Embedded Products").
(iv) Section 3.15(a)(iv) of the Company Disclosure Schedule
lists, as of the date hereof, all written agreements or other
arrangements under which the Company or any of its Subsidiaries has
provided or agreed to provide source code of any product of the
Company or any of its Subsidiaries to any third party.
(v) To the Company's knowledge after reasonable investigation,
Section 6.2(i) of the Company Disclosure Schedule lists all users of
the Company's products or Company Intellectual Property that have not
executed a license agreement with the Company relating to such use.
(vi) Section 3.15(a)(vi) of the Company Disclosure Schedule lists
all users of the Company's products or Company Intellectual Property
that have the right granted by the Company to use any portion of the
Company's products on a service bureau basis. Each of such listed
users is obligated to pay the Company fees on a per server or per
concurrent user basis with respect to the server software and on a per
user basis with respect to the client software.
The Company has made available to Parent correct and complete copies of all
patents, registrations, applications (owned by the Company or any of its
Subsidiaries), and all licenses, sublicenses and agreements referred to in this
Section 3.15(a), each as amended to date. Except for retail purchases of
software, neither the Company nor any of its Subsidiaries is a party to any oral
license, sublicense or agreement which, if reduced to written form, would be
required to be listed in Section 3.15 of the Company Disclosure Schedule under
the terms of this Section 3.15(a).
(b) With respect to each item of Company Intellectual Property that
the Company or any of its Subsidiaries owns: (i) other than common law
trademarks, and subject to such rights as have been granted by the Company
or any of its Subsidiaries under non-exclusive license agreements and
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joint development agreements entered into by the Company or any of its
Subsidiaries (copies of which have previously been made available or
disclosed in writing to Parent), the Company or its Subsidiaries possess
all right, title and interest in and to such item; and (ii) such item is
not subject to any outstanding judgment, order, decree, stipulation or
injunction that materially interferes with the conduct of the Company's or
any of its Subsidiaries' business as currently conducted.
(c) Except as set forth in Section 3.15 of the Company Disclosure
Schedule, with respect to each item of Third Party Intellectual Property
listed in Section 3.15(a)(iii): (i) the license, sublicense or other
agreement covering such item is legal, valid, binding, enforceable and in
full force and effect with respect to the Company or such subsidiary, and,
to the Company's knowledge, is legal, valid, binding, enforceable and in
full force and effect with respect to each other party thereto; (ii)
neither the Company nor any of its Subsidiaries is in material breach or
default thereunder, and, to the Company's knowledge, no other party to such
license, sublicense or other agreement is in material breach or default
thereunder, and, to the Company's knowledge, no event has occurred which
with notice or lapse of time would constitute a material breach or default
by the Company or any of its Subsidiaries or permit termination,
modification or acceleration thereunder by the other party thereto; (iii)
to the Company's knowledge, the underlying item of Third Party Intellectual
Property is not subject to any outstanding judgment, order, decree,
stipulation or injunction to which the Company or any of its Subsidiaries
is a party or has been specifically named that materially interferes with
the conduct of the Company's or any of its Subsidiaries' business as
currently conducted, nor, to the Company's knowledge, subject to any other
outstanding judgment, order, decree, stipulation or injunction that
materially interferes with the conduct of the Company's or any of its
Subsidiaries' business as currently conducted.
(d) Except as set forth in Section 3.15 of the Company Disclosure
Schedule, as of the date hereof, neither the Company nor any of its
Subsidiaries has (i) been named in any suit, action or proceeding as to
which it has been served with process which involves a claim of
infringement or misappropriation of any Intellectual Property right of any
third party or (ii) received any written notice alleging any such claim of
infringement or misappropriation. The Company has made available to Parent
correct and complete copies of all such suits, actions or proceedings or
written notices. To the Company's knowledge, except as set forth in Section
3.15 of the Company Disclosure Schedule, the manufacturing, marketing,
licensing or sale of the products or the performance of the services
offered by the Company and its Subsidiaries do not currently infringe, and
have not infringed, any Intellectual Property right of any third party
(other than patent rights) or, to the Company's knowledge, any patent
rights of third parties; and, to the knowledge of the Company, none of the
Company Intellectual Property rights are being infringed by activities,
products or services of any third party.
(e) Except as set forth in Section 3.15 of the Company Disclosure
Schedule, the execution and delivery of this Agreement by the Company, and
the consummation of the transactions contemplated hereby, will neither
cause the Company nor any of its Subsidiaries to be in violation or default
under any license, sublicense or other agreement relating to Intellectual
Property, nor terminate nor modify nor entitle any other party to any such
license, sublicense or agreement to terminate or modify such license,
sublicense or agreement, nor limit in any way the Company's or any of its
Subsidiaries' ability to conduct its business or use or provide the use of
Company Intellectual Property or any Intellectual Property rights of
others, which violation, default, termination, modification or limitation
would reasonably be expected, individually or in the aggregate, to result
in a material loss of benefits or material loss to the Company.
(f) Except for Embedded Products for which the Company has valid
non-exclusive licenses which are disclosed in Section 3.15 of the Company
Disclosure Schedule and which are adequate for each of the Company's and
its Subsidiaries' businesses as presently conducted, and except for usual
and customary rights retained by the United States government with respect
to Intellectual Property developed under research contracts with the
Federal government (the "Retained Fed Rights"), the Company is the sole and
exclusive owner or the licensee of, with all right, title and interest in
and to all Company Intellectual Property (free and clear of any liens or
encumbrances), and has
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sole and exclusive rights (and is not contractually obligated to pay any
compensation to any third party in respect thereof) to the use and
distribution thereof or the material covered thereby in connection with the
services or products in respect of which Company Intellectual Property is
being used, except where the failure to have such rights would not
reasonably be expected to result in a material loss of benefits or loss to
the Company. To the Company's knowledge, the United States government has
never exercised, and the Company has no notice that the government intends
to exercise, its rights to use or provide to others the use of the Retained
Fed Rights with respect to any Company Intellectual Property in a manner
that would be material to the Company's non-governmental business. The
Retained Fed Rights do not materially interfere with the conduct of the
Company's business.
(g) The Company has made available to Parent copies of the Company's
and each of its Subsidiaries' standard forms of End-User Licenses. Except
as disclosed in Section 3.15 of the Company Disclosure Schedule (which
describes the material variations from the standard form of End-User
License), as of the date hereof, neither the Company nor any of its
Subsidiaries has entered into any End-User Licenses which contain terms
materially different than as set forth in the standard forms of such
agreements made available to Parent.
(h) The Company and each of its Subsidiaries has taken reasonable
security measures to safeguard and maintain the secrecy, confidentiality
and value of, and its property rights in, all Company Intellectual
Property. All officers, employees and consultants of the Company or any of
its Subsidiaries who have access to proprietary information or Company
Intellectual Property have executed and delivered to the Company or such
Subsidiary an agreement regarding the protection of proprietary information
and the assignment to the Company or any of its Subsidiaries of all
Intellectual Property arising from the services performed for the Company
or any of its Subsidiaries by such persons. To the Company's knowledge, no
current or prior officers, employees or consultants of the Company or any
of its Subsidiaries claim any ownership interest in any material Company
Intellectual Property as a result of having been involved in the
development of such property while employed by or consulting to the Company
or any of its Subsidiaries, or otherwise. Except as set forth in Section
3.15 of the Company Disclosure Schedule and except for the Embedded
Products, all Company Intellectual Property has been developed by employees
of the Company or its Subsidiaries, within the course and scope of their
employment.
(i) To the Company's knowledge, there are no defects in the Company's
or any of its Subsidiaries' software products, and there are no errors in
any documentation, specifications, manuals, user guides, promotional
material, internal notes and memos, technical documentation, drawings, flow
charts, diagrams, source language statements, demo disks, benchmark test
results, and other written materials related to, associated with or used or
produced in the development of the Company's or any of its Subsidiaries'
software products (collectively, the "Design Documentation"), which defects
or errors would reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect on the Company. The occurrence in or
use by the computer software products currently sold by the Company or any
of its Subsidiaries, of dates on or after January 1, 2000 (the "Millennial
Dates") will not adversely affect the performance of the software with
respect to date dependent data, computations, output or other functions
(including without limitation, calculating, computing and sequencing) and
such software will create, sort and generate output data related to or
including Millennial Dates without errors or omissions.
(j) No government funding or university or college facilities were
used in the development of the Company's or any of its Subsidiaries'
software products and such software was not developed pursuant to any
contract or other agreement with any person or entity except pursuant to
contracts or agreements listed in Section 3.15 of the Company Disclosure
Schedule.
(k) Section 3.15 of the Company Disclosure Schedule lists all material
warranty claims (including any pending claims) related to the Company's or
any of its Subsidiaries' products and the nature of such claims, except for
customary product support and maintenance, that are pending or were made
within the past twelve months. Except as set forth in Section 3.15 of the
Company Disclosure Schedule, neither the Company nor any of its
Subsidiaries has made any material oral or written representations or
warranties with respect to its products or services.
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(l) Except as set forth in Section 3.15 of the Company Disclosure
Schedule, the Company and its Subsidiaries have been and are in compliance
with the Export Administration Act of 1979, as amended, and all regulations
promulgated thereunder.
(m) As part of the Company Disclosure Schedule, the Company has
provided Parent a list (including names, addresses, contact names,
telephone numbers as well as the termination date and next renewal date of
the agreement), which is complete in all material respects, of all
agreements or other arrangements pursuant to which the Company or any
Subsidiary is obligated to provide support services (such agreements, as
supplemented below, are referred to collectively as the "Maintenance
Agreements"). The versions of the products currently supported by the
Company or any Subsidiary are set forth in the Company Disclosure Schedule.
Prior to the Closing, the Company will supplement the Company Disclosure
Schedule with any addresses, contact names and telephone numbers omitted
from the initial Company Disclosure Schedule to include all Maintenance
Agreements entered into between the date hereof and the Closing. Section
3.15(m) of the Company Disclosure Schedule sets forth and indicates the
agreements with source code escrow provisions relative to the Company's
products.
(n) The Company and Activox are parties to a distribution agreement
dated January 1, 1998 under which the distribution rights granted to
Activox become nonexclusive in the event that Activox does not pay at least
$760,000 in royalties to the Company during 1998. Through the date hereof,
such royalties equal $75,000. The Company and NCR (Hellas) S.A. are parties
to a distribution agreement dated October 1, 1997 which expires on October
1, 1998. The Company is not a party to an agreement, and is not obligated
to become a party to an agreement, under which Baystone will acquire rights
to the source code for any of the Company's products.
(o) The statements made in the Memorandum dated August 18, 1998 from
Marcus Heth to Paul Zoukis, a copy of which has been provided to Parent, do
not contain any untrue statement of a material fact.
3.16 AGREEMENTS, CONTRACTS AND COMMITMENTS. Except as set forth in Section
3.16 of the Company Disclosure Schedule, as of the date hereof, neither the
Company nor any of its Subsidiaries is a party to or is bound by:
(a) any written or oral consulting agreement, contract or commitment
with any independent contractor or consultant other than those that are
terminable by the Company or any of its Subsidiaries on no more than 30
days' notice without liability or financial obligation, or any written or
oral consulting agreement, contract or commitment with any independent
contractor or consultant under which any benefits of which are contingent
upon the occurrence of a transaction involving the Company of the nature of
any of the transactions contemplated by this Agreement;
(b) any agreement of indemnification or any guaranty other than any
agreement of indemnification entered into in connection with the sale or
license of software products in the ordinary course of business; and any
commitment of the Company to honor or make any payment under any such
indemnification arrangement;
(c) any agreement, contract or commitment containing any covenant (i)
limiting in any respect the right of the Company or any of its Subsidiaries
to engage in any line of business or to compete with any person or (ii)
granting any exclusive distribution rights;
(d) any agreement, contract or commitment currently in force relating
to the disposition or acquisition by the Company or any of its Subsidiaries
after the date of this Agreement of a material amount of assets not in the
ordinary course of business or pursuant to which the Company has any
material ownership interest in any corporation, partnership, joint venture
or other business enterprise other than the Company's Subsidiaries;
(e) any joint marketing or development agreement currently in force
under which the Company or any of its Subsidiaries have continuing material
obligations to jointly market any product, technology or service and which
may not be canceled without penalty upon notice of 90 days or less,
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or any material agreement pursuant to which the Company or any of its
Subsidiaries have continuing material obligations to jointly develop any
intellectual property that will not be owned, in whole or in part, by the
Company or any of its Subsidiaries and which may not be canceled without
penalty upon notice of 90 days or less;
(f) any agreement, contract or commitment currently in force to
license any third party to manufacture or reproduce any Company product,
service or technology except as a distributor in the normal course of
business; or
(g) any loan, note, indenture or other instrument evidencing
indebtedness in excess of $100,000.
Neither the Company nor any of its Subsidiaries, nor to the Company's
knowledge any other party to any of the agreements, contracts or commitments to
which the Company or any of its Subsidiaries is a party or by which any of them
are bound that are required to be disclosed in the Company Disclosure Schedule
pursuant to Section 3.15 or this Section 3.16 ("Company Contracts") is, as of
the date hereof, in breach, violation or default under (other than as a result
of the insolvency of the Company), any Company Contract, except for breaches,
violations or defaults that in the aggregate would not have a Material Adverse
Effect. Except as set froth in Section 3.16 of the Company disclosure Schedule,
neither the Company nor any of its subsidiaries has received written notice that
it has breached, violated or defaulted under, any of the material terms or
conditions of any Company Contract in such a manner as would permit any other
party to cancel or terminate such Company Contract, or would permit any other
party to seek material damages or other remedies (for any or all of such
breaches, violations or defaults, in the aggregate).
3.17 PROPRIETARY INFORMATION AND INVENTIONS AGREEMENTS. Except as set forth
in Section 3.17 of the Company Disclosure Schedule, each current and former
employee, consultant and officer of the Company and each of its Subsidiaries has
executed an agreement with the Company or a Subsidiary regarding confidentiality
and proprietary information substantially in the form or forms delivered to
Parent. The Company, after reasonable investigation, is not aware that any of
its employees or consultants is in violation thereof, and the Company and each
of its Subsidiaries has used and will use reasonable efforts to prevent any such
violation. All consultants to or vendors of the Company and each of its
Subsidiaries with access to confidential information of the Company or any of
its Subsidiaries are parties to a written agreement substantially in the form or
forms provided to Parent under which, among other things, each such consultant
or vendor is obligated to maintain the confidentiality of confidential
information of the Company and its Subsidiaries. The Company is not aware that
any of its consultants or vendors are in violation thereof, and the Company will
use its best efforts to prevent any such violation.
3.18 NO CONFLICT OF INTEREST. Except as expressly disclosed in the SEC
Documents, neither the Company nor any of its Subsidiaries is indebted, directly
or indirectly, to any of its officers or directors or to their respective
spouses or children, in any amount whatsoever other than in connection with
expenses or advances of expenses incurred in the ordinary course of business or
relocation expenses of employees. To the Company's knowledge, none of the
officers or directors of the Company or any of its Subsidiaries, or any members
of their immediate families, directly or indirectly, are indebted to the Company
or any of its Subsidiaries or have any direct or indirect ownership interest in
any firm or corporation with which the Company or any of its Subsidiaries is
affiliated or with which the Company or any of its Subsidiaries has a business
relationship, or any firm or corporation which competes with the Company or any
of its Subsidiaries, except that officers, directors and/or stockholders of the
Company and its Subsidiaries may own stock in (but not exceeding two percent of
the outstanding capital stock of) publicly traded companies that compete with
the Company and its Subsidiaries. To the Company's knowledge, none of the
officers or directors of the Company or any of its Subsidiaries or any member of
their immediate families is, directly or indirectly, interested in any material
contract with the Company or any of its Subsidiaries. Neither the Company nor
any of its Subsidiaries is a guarantor or indemnitor of any indebtedness of any
other person, firm or corporation.
3.19 TAKEOVER STATUTES INAPPLICABLE. No "fair price," "moratorium,"
"control share acquisition" or other similar anti-takeover statute or regulation
(each a "Takeover Statute") is applicable to the Company, any Subsidiary of the
Company, the Shares, the Merger or any of the other transactions
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contemplated by this Agreement. The Company has heretofore delivered to Parent a
complete and correct copy of the resolutions of the Board of Directors of the
Company approving the Merger and this Agreement, and such approval is sufficient
to render inapplicable to the Merger, this Agreement and the transactions
contemplated by this Agreement the provisions of Section 203 of the DGCL.
SECTION IV
COVENANTS OF THE COMPANY AND PARENT
4.1 CONDUCT OF BUSINESS OF THE COMPANY. Except with the prior written
consent of Parent, as contemplated by this Agreement or as set forth in Section
4.1 of the Company Disclosure Schedule, during the period commencing on the date
of this Agreement and continuing until the first to occur of the Effective Time
or the termination of this Agreement in accordance with its terms, the Company
and each of its Subsidiaries shall conduct its operations in the ordinary and
usual course consistent with past practice, and the Company and each of its
Subsidiaries will endeavor to preserve intact its business organization, to keep
available the services of its officers and employees and to maintain
satisfactory relations with suppliers, contractors, distributors, licensors,
licensees, customers and others having business relationships with it. Without
limiting the generality of the foregoing and except as provided in this
Agreement or as set forth in Section 4.1 of the Company Disclosure Schedule,
prior to the Effective Time, the Company shall not, and shall not permit any of
its Subsidiaries to, directly or indirectly do, or propose to do, any of the
following, without the prior written consent of Parent:
(a) Declare or pay any dividends on or make any other distribution in
respect of any of its capital stock;
(b) Split, combine or reclassify any of its capital stock or issue or
authorize any other securities in respect of, in lieu of or in substitution
for, shares of its capital stock, or repurchase, redeem or otherwise
acquire any shares of its capital stock;
(c) Issue, deliver, encumber, sell or purchase any shares of its
capital stock or any securities convertible into, or warrants, options or
other rights of any kind to acquire, any such shares of capital stock, or
any other ownership interest (including, without limitation, any phantom
interest) (other than the issuance of Company Common Stock upon the
exercise of outstanding Stock Options and Warrants);
(d) Amend or otherwise change its Certificate of Incorporation or
Bylaws (or other comparable organizational document);
(e) Acquire or agree to acquire by merging or consolidating with, or
by purchasing a substantial portion of the assets of, or by any other
manner, any business or any corporation, partnership, association or other
business organization or division thereof;
(f) Sell, lease, license or otherwise dispose of any of its assets
(including the Company Intellectual Property), other than End-User Licenses
in the ordinary course of business consistent with its past practice;
(g) Incur, assume or pre-pay any indebtedness for borrowed money,
guarantee any indebtedness or obligation of another person, issue or sell
any debt securities or options, warrants, calls or other rights to acquire
any debt securities, enter into any "keep well" or other agreement to
maintain any financial statement condition or enter into any arrangement
having the economic effect of any of the foregoing other than (i) in
connection with the financing of ordinary course trade payables consistent
with past practice, (ii) pursuant to existing credit facilities in the
ordinary course of business, or (iii) as contemplated by this Agreement;
(h) Enter into or amend any contract or agreement other than in the
ordinary course of business consistent with past practice;
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(i) Authorize any single capital expenditure which is in excess of
$100,000 or capital expenditures which are, in the aggregate, in excess of
$500,000 for the Company and its Subsidiaries taken as a whole;
(j) Increase the compensation payable or to become payable to its
officers or employees, except for increases in accordance with past
practice in salaries or wages of employees of the Company or its
Subsidiaries who are not officers of the Company or its Subsidiaries, or
grant any severance or termination pay to, or enter into any employment or
severance agreement with, any director, officer or other employee of the
Company or any of its Subsidiaries, or establish, adopt, enter into or
amend any collective bargaining, bonus, profit sharing, thrift,
compensation, stock option, restricted stock, pension, retirement, deferred
compensation, employment, termination, severance or other plan, agreement,
trust, fund, policy or arrangement for the benefit of any director, officer
or employee of the Company or any of its Subsidiaries;
(k) Take any action, other than reasonable and usual actions in the
ordinary course of business and consistent with past practice, with respect
to accounting policies or procedures (including, without limitation,
procedures with respect to cash management, the payment of accounts payable
and the collection of accounts receivable, except as required by law);
(l) Make any tax election or settle or compromise any material
federal, state, local or foreign income tax liability, or execute or file
with the IRS or any other taxing authority any agreement or other document
extending, or having the effect of extending, the period of assessment or
collection of any taxes;
(m) Amend or modify the warranty policy of the Company or any
Subsidiary;
(n) Pay, discharge, satisfy, settle or compromise any suit, claim,
liability or obligation (absolute, accrued, asserted or unasserted,
contingent or otherwise), other than the payment, discharge or
satisfaction, in the ordinary course of business and consistent with past
practice, of liabilities reflected or reserved against in the Company's
balance sheet dated as of April 30, 1998 as filed by the Company with the
SEC in its Annual Report on Form 10-K for its fiscal year ended April 30,
1998 or subsequently incurred in the ordinary course of business and
consistent with past practice;
(o) Take any action that would result in any of the representations
and warranties of the Company set forth in this Agreement becoming untrue
in any material respect or in any of the conditions to the Merger set forth
in Article VI not being satisfied;
(p) Enter into, amend or extend any contracts, agreements, or
obligations relating to the distribution, sale, license or marketing by
third parties of the Company's or any Subsidiary's products or products
licensed by the Company or any Subsidiary, other than agreements,
extensions or amendments that grant non-exclusive rights to such third
parties and provide for termination by the Company or any Subsidiary for
convenience on not more than 60 days' notice;
(q) Materially revalue any of its assets (other than the booking of
reserves in the ordinary course of business and consistent with past
practices) or, except as required by a change in law or in generally
accepted accounting principles or the rules of the SEC, make any change in
accounting methods, principles or practices, including inventory accounting
practices;
(r) Materially accelerate or delay collection of any notes or accounts
receivable in advance of or beyond their regular due dates or the dates
when the same would have been collected in the ordinary course of business;
(s) Materially delay or accelerate payment of any account payable
beyond or in advance of its due date or the date such liability would have
been paid in the ordinary course of business; or
(t) Cancel or terminate any material insurance policy naming it as a
beneficiary or a loss payable payee or permit any such policy to lapse (it
being understood that the Company and any Subsidiary may renew any
insurance policy in effect as of the date of this Agreement).
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4.2 STOCKHOLDER MEETING; PROXY MATERIAL.
(a) The Company shall cause a meeting of its stockholders (the
"Stockholders' Meeting") to be duly called and held as soon as reasonably
practicable for the purpose of voting on the approval and adoption of this
Agreement and the transactions contemplated hereby. The Board of Directors
of the Company shall, subject to the terms of Section 4.3(b), recommend
approval and adoption of this Agreement and the Merger by the Company's
stockholders. In connection with such meeting, the Company (i) shall
promptly prepare and file with the SEC, use all reasonable efforts to have
cleared by the SEC and thereafter mail to its stockholders as promptly as
practicable the Proxy Statement and all other proxy materials for such
meeting, (ii) shall notify Parent of the receipt of any comments of the SEC
with respect to the Proxy Statement and of any requests by the SEC for any
amendment or supplement thereto or for additional information and shall
provide to Parent promptly copies of all correspondence between the Company
or any representative of the Company and the SEC, (iii) shall give Parent
and its counsel the opportunity to review the Proxy Statement prior to its
being filed with the SEC and shall give Parent and its counsel the
opportunity to review all amendments and supplements to the Proxy Statement
and all responses to requests for additional information and replies to
comments prior to their being filed with, or sent to, the SEC, (iv) shall,
subject to the fiduciary duties of its Board of Directors as advised by
counsel, use all reasonable efforts to obtain the necessary approvals by
its stockholders of this Agreement and the transactions contemplated hereby
and (v) shall otherwise comply with all legal requirements applicable to
such meeting.
(b) The Company agrees that the proxy statement to be provided to
stockholders of the Company in connection with the Stockholders' Meeting
(together with the amendments and supplements thereto, the "Proxy
Statement") and all amendments thereof and supplements thereto shall comply
as to form in all material respects with the applicable requirements of the
Exchange Act and the rules and regulations promulgated thereunder, and
shall not, at the time of (i) first mailing thereof or (ii) the
Stockholders' Meeting to be held in connection with the Merger, contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading, except that no representation is made by the Company with
respect to information supplied by Parent or any affiliates or
representatives of Parent or the Purchaser for inclusion in the Proxy
Statement.
(c) Parent and the Purchaser agree that none of the information
supplied by Parent or the Purchaser specifically for inclusion or
incorporation by reference in the Proxy Statement and all amendments
thereof and supplements thereto shall comply as to form in all material
respects with the applicable requirements of the Exchange Act and the rules
and regulations promulgated thereunder, and shall not, at the time of (i)
first mailing thereof or (ii) the Stockholders' Meeting to be held in
connection with the Merger, contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
4.3 THIRD PARTY ACQUISITIONS.
(a) The Company agrees that neither it, nor any of its Subsidiaries,
nor any of the employees, officers, directors or stockholders of the
Company or any of its Subsidiaries shall, and the Company shall direct and
cause the agents and representatives (including its Financial Advisor or
any other investment banker and any attorney or accountant retained by it
(collectively, "Company Advisors")) of it and each of its Subsidiaries not
to, directly or indirectly, initiate, solicit, encourage or otherwise
facilitate any inquiries in respect of, or the making of any proposal for,
a Third Party Acquisition (as defined in Section 4.3(b) below). The Company
further agrees that neither it, any of its Subsidiaries, nor any of the
employees, officers, directors or stockholders of the Company or any of its
Subsidiaries shall, and the Company shall direct and cause all Company
Advisors not to, directly or indirectly, engage in any negotiations
concerning, or provide any information or data to, or have any discussions
with, any Third Party (as defined in Section 4.3(b) below) relating to the
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proposal of a Third Party Acquisition, or otherwise facilitate any effort
or attempt to make or implement a Third Party Acquisition; provided,
however, that if at any time prior to the Effective Time, the Board of
Directors of the Company determines in good faith, after consultation with
outside counsel, that it is necessary to do so in order to comply with its
fiduciary duties to the Company's stockholders under applicable law, the
Company may, in response to an inquiry, proposal or offer for a Third Party
Acquisition which was not solicited subsequent to the date hereof and that
does not result from a breach of this Section 4. 3, (x) furnish only such
information with respect to the Company and its Subsidiaries to any such
person pursuant to a customary confidentiality agreement as was delivered
to Parent prior to the execution of this Agreement and (y) participate in
the discussions and negotiations regarding such inquiry, proposal or offer.
The Company shall immediately cease and cause to be terminated any existing
activities, discussions or negotiations with any Third Parties conducted
heretofore with respect to any of the foregoing, and to promptly request
each Third Party that has heretofore executed a confidentiality agreement
in connection with its consideration of acquiring the Company or any of its
Subsidiaries, if any, to return to the Company all confidential information
heretofore furnished to such Third Party by or on behalf of the Company.
The Company shall take the necessary steps to promptly inform all Company
Advisors of the obligations undertaken in this Section 4.3(a). The Company
agrees to notify Parent promptly (and in any event within 24 hours) if (i)
any inquiries relating to or proposals for a Third Party Acquisition are
received by the Company, any of its Subsidiaries or any of the Company
Advisors, (ii) any information about the Company or its Subsidiaries is
requested from the Company, its Subsidiaries or any of the Company
Advisors, or (iii) any negotiations or discussions in connection with a
possible Third Party Acquisition are sought to be initiated or continued
with the Company or any of the Company Advisors indicating, in each such
case, in connection with such notice, the principal terms and conditions of
any proposals or offers, including the identity of the offering party, and
thereafter shall keep Parent informed in writing, on a reasonably current
basis, on the status and terms of any such proposals or offers and the
status of any such negotiations or discussions.
(b) Except as permitted by this Section 4.3(b), the Board of Directors
of the Company shall not withdraw its recommendation of the Merger and
other transactions contemplated hereby or approve or recommend, or cause
the Company or any of its Subsidiaries to enter into any agreement with
respect to, any Third Party Acquisition. Notwithstanding the preceding
sentence, if the Board of Directors of the Company determines in its good
faith judgment, after consultation with outside counsel, that it is
necessary to do so in order to comply with its fiduciary duties to the
Company's stockholders under applicable law, the Board of Directors may
withdraw or alter its recommendation of the Merger and the other
transactions contemplated hereby, or approve or recommend or cause the
Company to enter into an agreement with respect to a Superior Proposal (as
defined below), but in each case only (i) after providing written notice to
Parent (a "Notice of Superior Proposal") advising Parent that the Board of
Directors has received a Superior Proposal, specifying the material terms
and conditions of such Superior Proposal and identifying the person or
entity making such Superior Proposal and (ii) if Parent does not, within
three (3) business days (or within two (2) business days with respect to
any amendment to any Superior Proposal which was noticed at least three (3)
business days prior to such amendment) after Parent's receipt of the Notice
of Superior Proposal, make an offer which the Board of Directors of the
Company determines in its good faith judgment (based on the advice of its
Financial Advisor or another financial adviser of nationally recognized
reputation) to be as favorable to the Company's stockholders as such
Superior Proposal; provided, however, that the Company shall not be
entitled to enter into any agreement with respect to a Superior Proposal
unless this Agreement is concurrently terminated by its terms pursuant to
Section 7.1(e)(i).
(c) For purposes of this Agreement, "Third Party Acquisition" means
the occurrence of any of the following events: (i) the acquisition of the
Company by merger or otherwise by any person or entity (which includes a
"person" as such term is defined in Section 13(d)(3) of the Exchange Act)
other than Parent, the Purchaser or any affiliate thereof (a "Third
Party"); (ii) the acquisition by a Third Party of 20% or more of the total
assets of the Company (other than the purchase of the
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Company's products in the ordinary course of business); (iii) the
acquisition by a Third Party of 20% or more of the outstanding Shares; (iv)
the adoption by the Company of a plan of partial or complete liquidation or
the declaration or payment of an extraordinary dividend; (v) the repurchase
by the Company of 20% or more of the outstanding Shares; or (vi) the
acquisition by the Company by merger, purchase of stock or assets, joint
venture or otherwise of a direct or indirect ownership interest or
investment in any business whose annual revenues, net income or assets is
equal to or greater than 20% of the annual revenues, net income or assets
of the Company. For purposes of this Agreement, a "Superior Proposal" means
any bona fide proposal to acquire directly or indirectly, for consideration
consisting of cash and/or securities, 100% of the Shares then outstanding
or all or substantially all the assets of the Company and otherwise on
terms which the Board of Directors of the Company by a majority vote
determines in its good faith judgment (based on consultation with its
Financial Advisor or another financial adviser of nationally recognized
reputation) to be reasonably capable of being completed (taking into
account all legal, financial, regulatory and other aspects of the proposal
and the person or entity making the proposal, including the availability of
financing therefor) and more favorable to the Company's stockholders than
the Merger.
4.4 SECTION 203 OF THE DGCL. From and after the date of this Agreement
until the earlier of the termination of this Agreement pursuant to its terms or
the Effective Time, the Company will not approve any acquisition of shares of
Company Common Stock by any person (other than Parent, the Purchaser or their
respective affiliates) which would result in such person becoming an "interested
stockholder" (as such term is defined in Section 203 of the DGCL) or otherwise
become subject to Section 203 of the DGCL, unless such acquisition is related to
a Superior Proposal and the Company has complied with Section 4.3 and, if
applicable, Section 7.3.
4.5 SEC REPORTS. From and after the date of this Agreement until the
earlier of the termination of this Agreement pursuant to its terms or the
Effective Time, the Company will timely file all reports required to be filed by
it under the Exchange Act.
4.6 INDEMNIFICATION. Parent agrees that all rights to indemnification
existing in favor of directors, officers or employees of the Company as provided
in the Company's Certificate of Incorporation, By-Laws or the indemnification
agreements listed in Section 4.6 of the Company Disclosure Schedule, with
respect to matters occurring through the Effective Time (including the Merger),
shall survive the Merger and shall continue in full force and effect for a
period of not less than six years from the Effective Time. Effective upon the
Effective Time, to the fullest extent permitted by law Parent hereby assumes the
Company's and the Surviving Corporation's obligations described in the prior
sentence for a period of six years after the Effective Time. Notwithstanding the
foregoing, this Section 4.6 shall not restrict the Company from amending its
Certificate of Incorporation or By-Laws in any manner or consolidating with or
merging into any other person so long as the indemnification obligations
contained in such Certificate of Incorporation or By-Laws with respect to
matters occurring through the Effective Time are honored by the Company and
Parent or their respective successors or assigns. In addition, if Parent, the
Surviving Corporation or any of either of its successors or assigns (i)
consolidates with or merges into any other person and shall not be the
continuing or surviving corporation or entity of such consolidation or merger or
(ii) transfers all or substantially all of its properties and assets to any
person, then and in each such case, proper provision shall be made so that the
successors and assigns of Parent and the Surviving Corporation assume the
obligations set forth in this Section 4.6. Parent also agrees to use reasonable
efforts to purchase an extension of the Company's existing director and officer
insurance policy to be effective for a period of six years after the Effective
Time; provided, however, that Parent shall not be obligated to spend more than
$150,000.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 ACCESS TO INFORMATION. Between the date of this Agreement and the
Effective Time, the Company will afford to Parent and its authorized
representatives for the transactions contemplated hereby reasonable access at
all reasonable times to the officers, employees, agents, properties, offices and
all
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other facilities, books and records of the Company as Parent may reasonably
request. Additionally, the Company will permit Parent and its authorized
representatives for the transactions contemplated hereby to make such
inspections of the Company, each of its Subsidiaries and each of their
operations at all reasonable times as it may reasonably require and will cause
its officers, employees and agents to furnish Parent with such financial and
operating data and other information with respect to the business and properties
of the Company and each of its Subsidiaries as Parent may from time to time
reasonably request. No investigation pursuant to this Section 5.1 shall affect
any representation or warranty in this Agreement of any party hereto or any
condition to the obligations of the parties hereto. Parent agrees that any
information furnished to it, its subsidiaries or its authorized representatives
pursuant to this Section 5.1 will be subject to the provisions of the
Confidentiality Agreement (as defined in Section 5.3).
5.2 LEGAL CONDITIONS TO MERGER.
(a) The Company will take, and will cause each of its Subsidiaries to
take, all reasonable actions necessary to comply promptly with all legal
requirements which may be imposed on the Company or any of its Subsidiaries
with respect to the Merger (including furnishing all information required
under the HSR Act and under applicable antitrust laws of any foreign
country) and will take, and will cause each of its Subsidiaries to take,
all reasonable actions necessary to cooperate promptly with and furnish
information to the Purchaser or Parent in connection with any such
requirements imposed upon the Purchaser or Parent in connection with the
Merger. The Company will take, and will cause each of its Subsidiaries to
take, all reasonable actions necessary to obtain (and will take and cause
to be taken all reasonable actions necessary to cooperate promptly with the
Purchaser and Parent in obtaining) any consent, authorization, order or
approval of, or any exemption by, any Governmental Entity, or other third
party, required to be obtained or made by the Company or any Subsidiary (or
by the Purchaser or Parent) in connection with the Merger or the taking of
any action contemplated thereby or by this Agreement. In addition to the
foregoing, prior to the Effective Time, the parties shall take, or cause to
be taken, all such actions as may be necessary or appropriate in order to
effectuate, as expeditiously as practicable, the Merger and the other
transactions contemplated by this Agreement, including any necessary
consents and waivers.
(b) The Purchaser and Parent will take all reasonable actions
necessary to comply promptly with all legal requirements which may be
imposed on them with respect to the Merger (including furnishing all
information required under the HSR Act and under applicable antitrust laws
of any foreign country) and will take all reasonable actions necessary to
cooperate promptly with and furnish information to the Company in
connection with any such requirements imposed upon the Company or any of
its Subsidiaries in connection with the Merger. The Purchaser and Parent
will take all reasonable actions necessary to obtain (and will take all
reasonable actions necessary to cooperate promptly with the Company in
obtaining) any consent, authorization, order or approval of, or exemption
by, any Governmental Entity, or other third party, required to be obtained
or made by the Purchaser or Parent (or by the Company or any of its
Subsidiaries) in connection with the Merger or the taking of any action
contemplated thereby or by this Agreement.
(c) Notwithstanding anything to the contrary in this Agreement,
including without limitation Section 5.2(b), as a result of filings made
with Governmental Entities pursuant to this Agreement, neither Parent nor
any of its subsidiaries, nor the Company nor any of its Subsidiaries, shall
be required to divest any of their respective businesses, product lines or
assets, or agree to any other limitation with respect to its business.
5.3 CONFIDENTIALITY AGREEMENT. The Company and Parent acknowledge that the
existing confidentiality agreement between such parties (the "Confidentiality
Agreement") shall remain in full force and effect at all times prior to the
Effective Time and after any termination of this Agreement, and such parties
agree to comply with the terms of such Agreement.
5.4 PUBLIC ANNOUNCEMENTS. The Purchaser, Parent and the Company will
consult with each other before issuing any press release or otherwise making any
public statements with respect to the Merger or any transaction contemplated
hereby and shall not issue any such press release or make any such public
statement except as they may mutually agree unless required so to do by law or
by obligations pursuant
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to any listing agreement with any national securities exchange or the National
Association of Securities Dealers, Inc. The Company and Parent have agreed as to
the form of joint press release announcing execution of this Agreement.
5.5 COMPANY STOCK PLANS.
(a) At the Effective Time, each option to purchase shares of Common
Stock outstanding under the Company's 1998 Non-Qualified Stock Option Plan
and 1996 Stock Plan shall terminate and each holder thereof shall receive
in exchange for such termination a cash payment equal, subject to Section
5.5(f) below, to the excess of (i) Merger Price times the number of shares
of Common Stock subject to such option which are vested and exercisable
(including such number of shares that become vested and exercisable under
the applicable option terms as a result of the transactions contemplated by
this Agreement), over (b) the aggregate exercise price of such option. The
fair market value of the Common Stock on the Effective Time shall be deemed
to equal the Merger Price.
(b) At the Effective Time, each option to purchase shares of Common
Stock outstanding under the Company's 1995 Employee Stock Option Plan and
1995 Incentive Stock Option Plan (the "1995 Options") shall convert
automatically into a right to receive upon exercise thereafter and subject
to any continuing vesting provisions applicable to the option the Merger
Price times the number of shares being exercised. No shares of Common Stock
shall be issued upon exercise of the 1995 Options after the Effective Time.
(c) At the Effective Time, each option outstanding under the Company's
1996 Employee Stock Purchase Plan (the "Purchase Plan") shall terminate and
the holder of each such option shall receive in exchange therefor a cash
payment equal, subject to Section 5.5(f) below, to the excess of (a) the
Merger Price times the number of shares of Common Stock that the holder's
accumulated payroll deductions as of the Effective Time could purchase, at
an option price determined with reference only to the first business day of
the applicable Payment Period (as defined in the Purchase Plan) and subject
to the limitations imposed by the Purchase Plan (including the limitation
that no option with respect to a single Payment Period be exercised for
more than 250 shares of Common Stock), over (b) the product of such number
of shares times the option price. The fair market value of the Common Stock
at the Effective Time shall be deemed to equal the Merger Price.
(d) Prior to the Effective Time, the Company shall take all actions
(including if appropriate amending the terms of the Company Stock Option
Plans and the Purchase Plan and obtaining the consent of holders of Stock
Options or stock purchase rights) that are necessary to give effect to the
transactions contemplated by Sections 5.5(a), (b) and (c).
(e) The Company shall take all steps required to terminate the Company
Stock Option Plans and the Purchase Plan immediately after the Effective
Time.
(f) Payments pursuant to Sections 5.5(a), (b) and (c) above shall be
subject to any applicable tax withholding required under the Code, the
rules and regulations thereunder or any provision of state, local or
foreign tax law. To the extent that amounts are so withheld, such withheld
amounts shall be treated for all purposes of this Agreement as having been
paid to the holder of the Stock Options and/or stock purchase rights.
5.6 CERTAIN EMPLOYEE BENEFITS MATTERS. Employees of the Company at the
Effective Time will be provided with employee benefit plans by the Surviving
Corporation or Parent, except with respect to such Company Benefit Plans Parent
determines that it will continue in effect. If any employee of the Company
becomes a participant in any employee benefit plan, program, policy or
arrangement of Parent or one of its subsidiaries, such employee shall be given
credit for all service with the Company prior to the Effective Time to the
extent permissible under the current terms of such plan, program, policy or
arrangement or through an amendment of such plan, program, policy or arrangement
at no cost in excess of $100,000 in the aggregate to Parent and without any
requirement of obtaining approval of the Parent's stockholders. Parent also
agrees to issue within a reasonable period of time after the Effective Time
options to purchase shares of its Common Stock in amounts reasonably consistent
with Parent's
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practices for employees on comparable levels as determined by Parent to the
lesser of seventy percent of the employees listed in Schedule 6.2(k) hereto or
the number of such employees that remain employees of the Surviving Corporation
at the time of the grant of the stock options. Parent also will provide bonuses
of $10,000 per employee to seventy percent of the employees listed in Schedule
6.2(k) hereto payable if such employees are employed by the Company one year
after the Effective Time.
5.7 NOTICE OF CERTAIN EVENTS. The Company shall notify Parent, and Parent
shall promptly notify the Company, of:
(i) receipt of any notice or other communication from any person
alleging that the consent of such person is or may be required in
connection with the transactions contemplated by this Agreement;
(ii) receipt of any notice or other communication from any
Governmental Entity in connection with the transactions contemplated by
this Agreement;
(iii) receipt of notice that any actions, suits, claims,
investigations or proceedings have been commenced or, to the knowledge of
the Company, threatened, against or involving the Company, any of its
Subsidiaries or Parent, as applicable, which, if pending on the date of
this Agreement, would have been required to have been disclosed pursuant to
Section 4.9 or which relate to the consummation of the transactions
contemplated by this Agreement;
(iv) the occurrence or non-occurrence of any event the occurrence or
non-occurrence of which would be likely to cause any representation or
warranty of it (and, in the case of Parent, of the Purchaser) contained in
this Agreement to be untrue or inaccurate; and
(v) any failure of the Company, Parent or the Purchaser, as the case
may be, to comply with or satisfy any covenant, condition or agreement to
be complied with or satisfied by it hereunder; provided, however, that the
delivery of any notice pursuant to this Section 6.7 shall not limit or
otherwise affect the remedies available hereunder to the party receiving
such notice.
5.8 OBLIGATIONS OF PURCHASER. Parent will take all action necessary to
cause the Purchaser to perform its obligations under this Agreement and to
consummate the Merger on the terms and conditions set forth in this Agreement.
5.9 VOTING OF SHARES. Parent agrees to cause the Purchaser to vote all
Shares beneficially owned by it in favor of adoption of this Agreement and the
Merger at the Stockholders' Meeting.
5.10 EXPENSES. Except as otherwise provided in Section 7.3, whether or not
the Merger shall be consummated, all costs and expenses incurred in connection
with this Agreement and the Merger and the other transactions contemplated
hereby shall be paid by the party incurring such cost or expense.
5.11 TAKEOVER STATUTES. If any Takeover Statute is or may become applicable
to the Merger or the other transactions contemplated by this Agreement, each of
Parent and the Company and their respective Boards of Directors shall grant such
approvals and take such lawful actions as are necessary to ensure that such
transactions may be consummated as promptly as practicable on the terms
contemplated by this Agreement and otherwise act to eliminate or minimize the
effects of such statute and any regulations promulgated thereunder on such
transactions.
ARTICLE VI
CONDITIONS
6.1 CONDITIONS OF EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The
respective obligation of each party to effect the Merger is subject to the
satisfaction prior to the Closing Date of the following conditions:
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(a) STOCKHOLDER APPROVAL. This Agreement and the Merger shall have
been approved and adopted by the affirmative vote or consent of the holders
of a majority of the outstanding shares of Common Stock of the Company in
accordance with the DGCL and the Certificate of Incorporation of the
Company.
(b) NO INJUNCTIONS OR RESTRAINTS. No temporary restraining order,
preliminary or permanent injunction or other order issued by any
Governmental Entity of competent jurisdiction nor any statute, rule,
regulation or executive order promulgated or enacted by any Governmental
Entity, nor other legal restriction, restraint or prohibition, preventing
the consummation of the Merger shall be in effect; provided, however, that
each of the parties shall have used reasonable efforts to prevent the entry
of any such injunction or other order and to appeal as promptly as
practicable any injunction or other order that may be entered.
(c) REGULATORY CONSENTS. The waiting period applicable to the
consummation of the Merger under the HSR Act and under any applicable
foreign antitrust laws shall have expired or been terminated, and, other
than filing the articles of merger, all filings with any Governmental
Entity required to be made prior to the Effective Time by the Company or
Parent or any of their respective subsidiaries, with, and all government
consents required to be obtained prior to the Effective Time by the Company
or Parent or any of their respective subsidiaries in connection with the
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby by the Company, Parent and the Purchaser
shall have been made or obtained (as the case may be).
6.2 CONDITIONS TO OBLIGATIONS OF PARENT AND THE PURCHASER. The obligations
of Parent and the Purchaser to effect the Merger are also subject to the
satisfaction or waiver by Parent prior to the Effective Time of the following
conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties
of the Company set forth in this Agreement (other than those relating to
the License Agreement) shall be true and correct in all material respects
as of the date of this Agreement and as of the Closing Date as though made
on and as of the Closing Date.
(b) PERFORMANCE OF OBLIGATIONS OF THE COMPANY. The Company shall have
performed in all material respects all obligations required to be performed
by it under this Agreement at or prior to the Closing Date.
(c) SETTLEMENT AND COURT APPROVAL OF THE LAWSUITS. The Company shall
have obtained final court approval of the settlement of the Lawsuits on
terms consistent with the Memorandum of Understanding Concerning Settlement
Terms dated July 9, 1998 (the "Memorandum of Understanding"), and all
rights to appeal, contest or modify the court's judgment approving the
settlement and dismissing the Lawsuits shall have expired without any such
rights having been exercised. In addition, the number of shares of the
Company's Common Stock purchased by persons filing requests for exclusion
from the settlement shall not exceed the number of shares set forth in the
letter between Kevin J. O'Connor and Samuel P. Sporn, dated July 30, 1998,
referred to in paragraph 15 of the Memorandum of Understanding. "Lawsuits"
means the various putative securities class actions filed in the United
States District Court for the Southern District of New York and the United
States District for the Eastern District of Virginia, as follows: Thomas
Esposito, et al. v. Versatility, Inc., et al. (S.D.N.Y.); Tammy Newsman v.
Versatility, Inc., et al. (S.D.N.Y.); Sam Succar v. Versatility, Inc. et
al. (S.D.N.Y.); Thomas K. Doyle v. Versatility, Inc. et al. (E.D. VA); and
Steven Bowen v. Versatility, Inc. et al. (S.D.N.Y.).
(d) EMPLOYEE RETENTION. Each of Marcus Heth and seventy percent of the
employees of the Company listed in Section 6.2(d) of the Company Disclosure
Schedule shall be employees of the Company as of the Effective Time and
shall not have indicated in writing an intention to leave the employment of
the Company.
(e) DISSENTING SHARES. The aggregate number of Shares held by
Dissenting Stockholders shall not be equal to or exceed ten percent of the
outstanding Shares immediately prior to the Effective Time.
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(f) NO LITIGATION. After the date hereof there shall not be instituted
and continuing any action, suit or proceeding against the Company, Parent,
Purchaser or any Indemnified Person (as defined below), by any Governmental
Entity or any other person or persons, (i) directly or indirectly relating
to the Merger or the License Agreement or any other transactions
contemplated by this Agreement; (ii) who is or was a stockholder or
stockholders of the Company, whether on behalf of such stockholder or
stockholders, or in a derivative action on behalf of the Company; (iii)
alleging infringement by the Company of intellectual property assets of any
third party; or (iv) which individually or in the aggregate could
reasonably be expected to have a Material Adverse Effect on the Company and
its subsidiaries, taken as a whole. After the date hereof there shall not
be threatened any action, suit or proceeding against the Company, Parent,
Purchaser or any Indemnified Person (as defined below), by any Governmental
Entity or any other person or persons which individually or in the
aggregate could reasonably be expected to have a Material Adverse Effect on
the Company and its subsidiaries, taken as a whole. For purposes of this
paragraph, without limitation, any action, suit or proceeding alleging
infringement by the Company of intellectual property assets of any third
party shall be considered to reasonably be expected to have a Material
Adverse Effect on the Company and its subsidiaries, taken as a whole.
"INDEMNIFIED PERSON" shall mean any director, officer, employee, consultant
or other person that the Company is obligated to indemnify or hold
harmless, whether under any law, rule, regulation, the Company's
certificate of incorporation or bylaws, any agreement or otherwise.
(g) NO ADVERSE CHANGE. No event or events shall have occurred which
have caused or could reasonably be expected to cause a Material Adverse
Effect on the Company and its subsidiaries, taken as a whole.
(h) OPINION. Parent shall have received an opinion dated as of the
Closing Date from Tucker, Flyer & Lewis, counsel to the Company, or such
other counsel as chosen by the Company and is reasonably acceptable to
Parent, substantially in the form attached hereto as Exhibit D.
(i) THIRD PARTY LICENSES. The Company shall have obtained executed
license agreements on commercially reasonable terms from each of the
entities listed in Section 6.2(i) of the Company Disclosure Schedule that
has access to all or any portion of the Company's client server products.
(j) BANK ACTIONS. On or after the date hereof, Silicon Valley Bank
shall not have notified the Company of its acceleration of any amounts due
to Silicon Valley Bank or taken any other action to collect any such
amounts or realize the benefit of any security interest in the Company's
assets.
6.3 CONDITIONS TO OBLIGATIONS OF THE COMPANY. The obligations of the
Company to effect the Merger are also subject to the satisfaction or waiver by
the Company prior to the Effective Time of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties
of Parent and the Purchaser set forth in this Agreement shall be true and
correct in all material respects as of the date of this Agreement and as of
the Closing Date as though made on and as of the Closing Date.
(b) PERFORMANCE OF OBLIGATIONS OF PARENT AND THE PURCHASER. Each of
Parent and the Purchaser shall have performed in all material respects all
obligations required to be performed by it under this Agreement at or prior
to the Closing Date.
ARTICLE VII
TERMINATION
7.1 TERMINATION. This Agreement may be terminated and the Merger may be
abandoned at any time prior to the Effective Time, notwithstanding any requisite
approval of this Agreement and the transactions contemplated hereby by the
stockholders of the Company:
(a) by mutual written consent duly authorized by the Boards of
Directors of the Company, Parent and the Purchaser;
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(b) by either Parent or the Company if any Governmental Entity shall
have issued an order, decree, ruling or taken any other action permanently
restraining, enjoining or otherwise prohibiting the acceptance for payment
of, or payment for, Shares pursuant to the Merger and such order, decree,
ruling or other action shall have become final and nonappealable;
(c) by either Parent or the Company if the Effective Time shall not
have occurred on or prior to December 31, 1998; provided, however, that the
right to terminate this Agreement pursuant to this Section 7.1(c) shall not
be available to any party the failure of which (or the failure of the
affiliates of which) to perform in any material respect any of its
obligations under this Agreement results in the failure of any condition
set forth in Article VI or if the failure of such condition results from
facts or circumstances that constitute a material breach of a
representation or warranty under this Agreement by such party;
(d) by Parent if (i) prior to the Effective Time, (A) the Board of
Directors of the Company or any committee thereof shall have withdrawn or
modified in a manner adverse to the Purchaser or Parent its approval or
recommendation of this Agreement, the Merger or any other transaction
contemplated by this Agreement; (B) the Board of Directors of the Company
or any committee thereof shall have recommended to the stockholders of the
Company, taken no position with respect to, or failed to recommend against
acceptance of a Third Party Acquisition; (C) the Company shall have entered
into any definitive agreement with respect to a Third Party Acquisition;
(D) the Company fails to confirm its recommendation of this Agreement, the
Merger and transactions contemplated by this Agreement within five days of
any written request by Parent that it do so; or (E) the Board of Directors
of the Company or any committee thereof shall have resolved to do any of
the foregoing; or (ii) the Company shall have breached in any material
respect any of its representations, warranties, covenants or other
agreements contained in this Agreement which breach cannot be or has not
been cured within 20 days after the giving of written notice to the Company
or shall have breached Section 4.3; or
(e) by the Company if (i) the Board of Directors of the Company shall
have withdrawn or modified in a manner adverse to the Purchaser or Parent
its approval or recommendation of this Agreement or the Merger in order to
approve the execution by the Company of a definitive agreement providing
for the transactions contemplated by a Superior Proposal, provided that the
Company shall have complied with the provisions of Section 4.3, including
the notice provisions therein, and shall have made payment of the fee
contemplated by Section 7.3 below; or (ii) Parent or the Purchaser shall
have breached in any material respect any of their respective
representations, warranties, covenants or other agreements contained in
this Agreement which breach cannot be or has not been cured within 20 days
after the giving of written notice to Parent or the Purchaser, as
applicable, except, in any case, for such breaches which are not reasonably
likely to affect adversely Parent's or the Purchaser's ability to complete
the Merger.
7.2 EFFECT OF TERMINATION. If this Agreement is terminated pursuant to
Section 7.1, this Agreement shall become void and of no effect with no liability
on the part of any party hereto, except for intentional breach of any provision
of this Agreement and except that the agreements contained in Sections 5.3, 5.10
and 7.3 and Article VIII shall survive the termination hereof.
7.3 CERTAIN PAYMENTS.
(a) In the event that:
(i) this Agreement is terminated pursuant to Section 7.1(d)(i) or
Section 7.1(e)(i) and the Company was not entitled to terminate the
Agreement pursuant to Section 7.1(e)(ii) at such time, or
(ii) this Agreement is terminated pursuant to Section 7.1(c) or
7.1(d)(ii), the Company was not entitled to terminate the Agreement
pursuant to Section 7.1(e)(ii) at such time and the Company shall
consummate a Third Party Acquisition with any person other than Parent
or any of its affiliates before or within 12 months after the date of
such termination, then, in any such event, the Company shall pay
Parent promptly (but in no event later than 1 business day
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after the first of such events shall have occurred) (i) a fee of
$360,000, plus (ii) an amount equal to Parent's actual and reasonably
documented out-of-pocket fees and expenses (not to exceed $200,000)
incurred by Parent and the Purchaser in connection with the Merger,
this Agreement and the consummation of the transactions contemplated
hereby, all of which amounts shall be payable in immediately available
funds (the "Termination Fee"). In the event that the Company shall
fail to pay any amounts owing pursuant to the foregoing when due,
interest shall be paid on such unpaid amounts, commencing on the date
such amounts became due, at a rate of 6% per annum. The Company
acknowledges that the agreement contained in this Section 7.3 is an
integral part of the transactions contemplated by this Agreement, and
that, without these agreements, Parent would not enter into this
Agreement; accordingly, if the Company fails promptly to pay any
amount due pursuant to this Section 7.3, and, in order to obtain such
payment, Parent commences a suit which results in a judgment against
the Company for the amounts set forth in this Section 7.3, the Company
shall pay to Parent its reasonable costs and expenses (including
attorneys' fees and expenses) in connection with such suit, together
with interest on the amounts set forth in this Section 7.3. In no
event shall the Company be obligated to pay more than one termination
fee and reimbursement of expenses pursuant to this Section 7.3.
(b) The Termination Fee shall not be deemed to be liquidated damages,
and the right to the payment of the Termination Fee shall be in addition to
(and not a maximum payment in respect of) any other damages or remedies at
law or in equity to which Parent or the Purchaser may be entitled as a
result of an intentional breach of any term or provision of this Agreement
or any Support Agreement.
ARTICLE VIII
GENERAL PROVISIONS
8.1 NONSURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. All
representations, warranties and agreements in this Agreement or in any
instrument delivered pursuant to this Agreement shall not survive the Merger,
except for the agreements contained in Sections 4.6, 5.3, 5.5, 5.6, 5.8 and 5.10
and Articles I and VIII of this Agreement, each of which shall survive the
Merger.
8.2 AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended or
waived only with the written consent of the parties; provided, however, that
Section 4.6 may only be amended with the consent of each of the persons with
rights to indemnification under Section 4.6. Any amendment or waiver effected in
accordance with this Section 8.2 shall be binding upon the parties and their
respective successors and assigns.
8.3 SEVERABILITY. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision hereof shall
not affect the validity or enforceability of any of the other provisions hereof.
If any provision of this Agreement, or the application thereof to any person or
any circumstance, is illegal, invalid or unenforceable, (a) a suitable and
equitable provision shall be substituted therefor in order to carry out, so far
as may be valid and enforceable, the intent and purpose of such invalid or
unenforceable provision and (b) the remainder of this Agreement and the
application of such provisions to other persons or circumstances shall not be
affected by such invalidity or unenforceability, nor shall such invalidity or
unenforceability affect the validity or enforceability of such provision, and
the application thereof, in any other jurisdiction.
8.4 INTERPRETATION.
(a) The table of contents and Article, Section and subsection headings
herein are for convenience of reference only, do not constitute a part of
this Agreement and shall not be deemed to limit or otherwise affect any of
the provisions hereof. Where a reference in this Agreement is made to a
Section, Schedule, Annex or Exhibit, such reference shall be to a Section
of, or Schedule, Annex or Exhibit to, this Agreement, unless otherwise
indicated. Whenever the words "include," "includes" or "including" are used
in this Agreement, they shall be deemed to be followed by the
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words "without limitation." All terms defined in this Agreement shall have
the defined meanings when used in any certificate or other document made or
delivered pursuant hereto unless otherwise defined therein. The definitions
contained in this Agreement are applicable to the singular as well as the
plural forms of such terms and to the masculine as well as to the feminine
and neuter genders of such term. Any agreement, instrument or statute
defined or referred to herein means such agreement, instrument or statute
as from time to time amended, modified or supplemented, including (in the
case of agreements or instruments) by waiver or consent and (in the case of
statutes) by succession of comparable successor statues and references to
all attachments thereto and instruments incorporated therein. References to
a person are also to its permitted successors and assigns and, in the case
of an individual, to his or her heirs and estate, as applicable.
(b) This Agreement has been negotiated at arm's length and between
persons sophisticated and knowledgeable in the matters addressed in this
Agreement. Each of the parties has been represented by experienced and
knowledgeable legal counsel. Accordingly, any rule of law or legal decision
that would require interpretation of any ambiguities in this Agreement
against the party that has drafted it is not applicable and is waived. The
provisions of this Agreement shall be interpreted in a reasonable manner to
effect the purpose of the parties and this Agreement.
8.5 ASSIGNMENT. This Agreement shall not be assignable by operation of law
or otherwise and any attempted assignment of this Agreement in violation of this
sentence shall be void; provided, however, that this Agreement shall be
assignable by any party after the Effective Time.
8.6 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
8.7 TITLES AND SUBTITLES. The titles and subtitles used in this Agreement
are used for convenience only and are not to be considered in construing or
interpreting this Agreement.
8.8 NOTICES. Any notice required or permitted by this Agreement shall be in
writing and shall be deemed sufficient upon receipt, when delivered personally
or by courier, overnight delivery service or confirmed facsimile, or forty-eight
(48) hours after being deposited in the regular mail as certified or registered
mail with postage prepaid, if such notice is addressed to the party to be
notified at such party's address or facsimile number as set forth below, or as
subsequently modified by written notice in accordance with this Section 8.8:
(a) If to Parent or the Purchaser:
Oracle Corporation
500 Oracle Parkway
Redwood City, CA 94065
Attention: Daniel S. Cooperman, Senior Vice President,
General Counsel and Secretary
with a copy to:
Venture Law Group
A Professional Corporation
2800 Sand Hill Road
Menlo Park, CA 94025
Attn: Donald M. Keller, Jr.
(b) If to the Company:
Versatility Inc.
11781 Lee Jackson Memorial Highway
Seventh Floor
Fairfax, Virginia 22033
Attention: President
with a copy to:
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Tucker, Flyer & Lewis
1615 L Street, N.W., Suite 400
Washington, DC 20036
Attn: Jack L. Lewis
8.9 ENTIRE AGREEMENT. This Agreement (including the Schedules and
Exhibits), together with the Confidentiality Agreement, are the product of all
of the parties hereto, and constitute the entire agreement between such parties
pertaining to the subject matter hereof, and merge all prior negotiations and
drafts of the parties with regard to the transactions contemplated herein. Any
and all other written or oral agreements existing between the parties hereto
regarding such transactions are expressly canceled.
8.10 NO THIRD PARTY BENEFICIARIES. This Agreement shall be binding upon and
inure solely to the benefit of each party hereto and their respective successors
and assigns, and nothing in this Agreement, express or implied, other than
pursuant to Section 4.6, 5.5 and 5.6 or the right to receive the consideration
payable in the Merger pursuant to Article I, is intended to or shall confer upon
any other person any right, benefit or remedy of any nature whatsoever under or
by reason of this Agreement.
8.11 GOVERNING LAW.
(a) This Agreement shall be governed by, and construed in accordance
with, the laws of the State of Delaware.
(b) The parties agree that irreparable damage would occur and that the
parties would not have any adequate remedy at law in the event that any of
the provisions of this Agreement were not performed in accordance with
their specific terms or were otherwise breached. It is accordingly agreed
that the parties shall be entitled to an injunction or injunctions to
prevent breaches of this Agreement and to enforce specifically the terms
and provisions of this Agreement, this being in addition to any other
remedy to which they are entitled at law or in equity.
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The parties have caused this Agreement and Plan of Merger to be signed by
their respective duly authorized officers, all as of the date first written
above.
ORACLE CORPORATION
By: /s/ David J. Roux
------------------------------------
Name: David J. Roux
Title: Exec. Vice President
AQX ACQUISITION CORPORATION
By: /s/ David J. Roux
-----------------------------------
Name: David J. Roux
Title: Exec. Vice President
VERSATILITY INC.
By: /s/ Paul J. Zoukis
-----------------------------------
Name: Paul J. Zoukis
Title: President and Chief Executive
Officer
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EXHIBIT A
FORM OF SUPPORT AGREEMENT
THIS SUPPORT AGREEMENT (this "Agreement") is made and entered into as of
__________, 1998, by and between Oracle Corporation, a Delaware corporation
("Parent"), and ________________ ("Seller").
RECITALS
A. Concurrently with the execution and delivery of this Agreement, Parent,
AQX Acquisition (the "Purchaser"), a Delaware corporation and a wholly-owned
subsidiary of Parent, and Versatility Inc., a Delaware corporation (the
"Company"), are entering into an Agreement and Plan of Merger of even date
herewith (the "Merger Agreement"), relating to the merger (the "Merger") of the
Purchaser with and into the Company (capitalized terms used but not defined
herein shall have the meanings set forth in the Merger Agreement);
B. As of the date hereof, Seller beneficially owns directly __________
Shares (the "Owned Shares"); and
C. As a condition to their willingness to enter into the Merger Agreement,
Parent and the Purchaser have required that Seller agree, and, in order to
facilitate the Merger, Seller is willing to agree to enter into the other
agreements set forth herein.
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration given to each party hereto, the receipt of which is
hereby acknowledged, the parties agree as follows:
1. AGREEMENT TO VOTE.
1.1 VOTING. Subject to the provisions of Section 1.2 below, Seller hereby
agrees that, during the time this Agreement is in effect, at any meeting of the
stockholders of the Company, however called, Seller shall (a) vote all Shares
beneficially owned by Seller in favor of the Merger; (b) vote such Shares
against any action or agreement that would result in a breach of any covenant,
representation or warranty or any other obligation or agreement of the Company
under the Merger Agreement; and (c) vote such Shares against any action or
agreement (other than the Merger Agreement or the transactions contemplated
thereby) that would impede, interfere with, delay, postpone or attempt to
discourage the Merger, including, but not limited to: (i) any extraordinary
corporate transaction, such as a merger, consolidation or other business
combination involving the Company or any of its Subsidiaries; (ii) a sale or
transfer of a material amount of assets of the Company or any of its
Subsidiaries, or a reorganization, recapitalization or liquidation of the
Company and its Subsidiaries; (iii) any change in the management or Board of
Directors of the Company, except as otherwise agreed to in writing by Parent;
(iv) any material change in the present capitalization or dividend policy of the
Company; or (v) any other material change in the Company's corporate structure
or business.
1.2 GRANT OF IRREVOCABLE PROXY; APPOINTMENT OF PROXY.
(a) Seller hereby irrevocably grants to, and appoints David J. Roux
and Daniel Cooperman, or either of them, in their respective capacities as
officers of Parent, and any individual who shall hereafter succeed to any
such office of Parent, and each of them individually, Seller's proxy and
attorney-in-fact (with full power of substitution), for and in the name,
place and stead of Seller, to vote the Shares beneficially owned by Seller
in favor of the Merger and otherwise as contemplated by Section 1.1.
(b) Seller represents that any proxies heretofore given in respect of
the Shares beneficially owned by Seller are not irrevocable, and that any
such proxies are hereby revoked.
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(c) Seller understands and acknowledges that Parent is entering into
the Merger Agreement in reliance, among other things, upon Seller's
execution and delivery of this Agreement. Seller hereby affirms that the
irrevocable proxy set forth in this Section 1.2 is given in connection with
the execution of the Merger Agreement, and that such irrevocable proxy is
given to secure the performance of the duties of Seller under this
Agreement. Seller hereby further affirms that the irrevocable proxy is
coupled with an interest and may under no circumstances be revoked. Seller
hereby ratifies and confirms all that such proxies and attorneys-in-fact
may lawfully do or cause to be done by virtue hereof. Such irrevocable
proxy is executed and intended to be irrevocable in accordance with the
provisions of Section 212(e) of the Delaware General Corporation Law.
1.3 NO INCONSISTENT ARRANGEMENTS. Seller hereby covenants and agrees that,
except as contemplated by this Agreement and the Merger Agreement, it shall not:
(a) transfer (which term shall include, without limitation, any sale,
gift, pledge or other disposition), or consent to any transfer of, any or
all of the Shares beneficially owned by Seller or any interest therein;
provided, however, that Seller may transfer (i) the Shares beneficially
owned by Seller by will or intestacy, and (ii) up to 10% of the Shares
beneficially owned by Seller as a bona fide gift or gifts, provided that
prior to any such permitted transfer, each transferee shall agree in
writing (in a form satisfactory to Parent) that such transferee will
receive and hold such Shares beneficially owned by Seller subject to the
provisions of this Agreement;
(b) enter into any contract, option or other agreement or
understanding with respect to any transfer of any or all of the Shares
beneficially owned by Seller or any interest therein;
(c) grant any proxy, power-of-attorney or other authorization in or
with respect to any or all of the Shares beneficially owned by Seller;
(d) deposit the Shares beneficially owned by Seller into a voting
trust or enter into a voting agreement or arrangement with respect to the
Shares beneficially owned by Seller; or
(e) take any other action that would make any representation or
warranty of Seller hereunder untrue or incorrect.
1.4 WAIVER OF APPRAISAL RIGHTS. Seller hereby waives any rights of
appraisal or rights to dissent from the Merger that he may have under applicable
law.
2. EXPIRATION. This Agreement shall terminate on the earlier of the
Effective Time and the termination of the Merger Agreement in accordance with
its terms.
3. REPRESENTATION AND WARRANTIES. Seller hereby represents and warrants to
Parent as follows:
3.1 TITLE. Seller has good and valid title to the Owned Shares and, upon
the acquisition thereof, will have good and valid title to any other Shares
beneficially owned by Seller, in each case, free and clear of any lien, pledge,
charge, encumbrance or claim of whatever nature and, upon the purchase of the
Shares beneficially owned by Seller by the Purchaser, Seller will deliver good
and valid title to the Shares beneficially owned by Seller, free and clear of
any lien, charge, encumbrance or claim of whatever nature.
3.2 OWNERSHIP OF SHARES. On the date hereof, the Owned Shares are owned of
record or beneficially by Seller and, on the date hereof, the Owned Shares
constitute all of the Shares owned of record or beneficially by Seller. Seller
has sole voting power and sole power of disposition with respect to all of the
Owned Shares, with no restrictions, subject to applicable federal securities
laws, on Seller's rights of disposition pertaining thereto.
3.3 POWER; BINDING AGREEMENT. Seller has the legal capacity, power and
authority to enter into and perform all of his obligations under this Agreement.
The execution, delivery and performance of this Agreement by Seller will not
violate any other agreement to which Seller is a party including, without
limitation, any voting agreement, stockholders agreement or voting trust. This
Agreement has been duly and validly executed and delivered by Seller and
constitutes a valid and binding agreement of Seller, enforceable against Seller
in accordance with its terms.
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3.4 NO CONFLICTS. Other than in connection with or in compliance with the
provisions of the Exchange Act and the HSR Act, no authorization, consent or
approval of, or filing with, any court or any public body or authority is
necessary for the consummation by Seller of the transactions contemplated by
this Agreement. The execution, delivery and performance of this Agreement and
the consummation of the transactions contemplated hereby will not constitute a
material breach, violation or default (or any event which, with notice or lapse
of time or both, would constitute a default) under, or result in the termination
of, or accelerate the performance required by, or result in a right of
termination or acceleration under, or result in the creation of any lien,
encumbrance, pledge, charge or claim upon any of the properties or assets of
Seller under, any material note, bond, mortgage, indenture, deed of trust,
license, lease, agreement or other instrument to which Seller is a party or by
which his or her properties or assets are bound.
4. ADDITIONAL SHARES. Seller hereby agrees, while this Agreement is in
effect, to promptly notify Parent of the number of any Shares acquired by Seller
after the date hereof.
5. FURTHER ASSURANCES. From time to time, at Parent's request and without
further consideration, Seller shall execute and deliver such additional
documents and take all such further action as may be reasonably necessary or
desirable to consummate and make effective the transactions contemplated by
Section 1 of this Agreement.
6. MISCELLANEOUS.
6.1 ENTIRE AGREEMENT; ASSIGNMENT. This Agreement (a) constitutes the entire
agreement between the parties with respect to the subject matter hereof and
supersedes all other prior agreements and understandings, both written and oral,
between the parties with respect to the subject matter hereof and (b) shall not
be assigned by operation of law or otherwise, provided that Parent may assign
its rights and obligations hereunder to any direct or indirect wholly-owned
subsidiary of Parent, but no such assignment shall relieve Parent of its
obligations hereunder if such assignee does not perform such obligations.
6.2 AMENDMENTS. This Agreement may not be modified, amended, altered or
supplemented, except upon the execution and delivery of a written agreement
executed by the parties hereto.
6.3 NOTICES. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given by hand delivery
or telecopy or by any courier service, such as Federal Express, providing proof
of delivery. All communications hereunder shall be delivered to the respective
parties at the following addresses:
If to Seller:
[address]
copy to:
[address]
If to Parent:
[address]
copy to:
[address]
or to such other address as the person to whom notice is given may have
previously furnished to the others in writing in the manner set forth above.
6.4 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, regardless of the laws that
might otherwise govern under applicable principles of conflicts of laws thereof.
6.5 SPECIFIC PERFORMANCE. Seller recognizes and acknowledges that a breach
by him or her of any covenants or agreements contained in this Agreement will
cause Parent to sustain damages for which it would not have an adequate remedy
at law for money damages, and therefore Seller agrees that in the
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event of any such breach, Parent shall be entitled to the remedy of specific
performance of such covenants and agreements and injunctive and other equitable
relief in addition to any other remedy to which it may be entitled, at law or in
equity.
6.6 COUNTERPARTS. This Agreement may be executed in two counterparts, each
of which shall be deemed to be an original, but both of which shall constitute
one and the same Agreement.
6.7 DESCRIPTIVE HEADINGS. The descriptive headings used herein are inserted
for convenience of reference only and are not intended to be part of or to
affect the meaning or interpretation of this Agreement.
6.8 SEVERABILITY. Whenever possible, each provision or portion of any
provision of this Agreement will be interpreted in such manner as to be
effective and valid under applicable law but if any provision or portion of any
provision of this Agreement is held to be invalid, illegal or unenforceable in
any respect under any applicable law or rule in any jurisdiction, such
invalidity, illegality or unenforceability will not affect any other provision
or portion of any provision in such jurisdiction, and this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision or portion of any provision had never been
contained herein.
6.9 NON-SURVIVAL. The representations and warranties made herein shall
terminate upon the Effective Time, other than Seller's representation and
warranty in Section 3.1, which shall survive the Merger.
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IN WITNESS WHEREOF, Parent and Seller have caused this Agreement to be duly
executed as of the day and year first above written.
PARENT:
By:
-------------------------------------
Name:
-----------------------------------
Date:
-----------------------------------
SELLER:
By:
-------------------------------------
Name:
-----------------------------------
Date:
-----------------------------------
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EXHIBIT B
TECHNOLOGY LICENSE AGREEMENT
(SOURCE CODE)
This Technology License Agreement (the "Agreement") is made by and between
Oracle Corporation ("Oracle"), a Delaware corporation, and Versatility, Inc.
("Versatility"), a ___________________ corporation with offices at 11781 Lee
Jackson Memorial Highway, 7th Floor, Fairfax, VA 22033, as of the Effective Date
set forth below. The parties hereby agree as follows:
I. DEFINITIONS
1.1 DISTRIBUTOR. "Distributor" shall mean a third party, including any
Oracle subsidiary, that is appointed by Oracle or its Distributor to market and
sublicense Versatility Technology under the terms of this Agreement. The term
"Distributor" shall include, but not be limited to, resellers, original
equipment manufacturers, value added relicensors, dealers, agents and
subdistributors.
1.2 DOCUMENTATION. "Documentation" shall mean the installation guides, user
guides and manuals for use of the Versatility Technology in printed and
machine-readable form.
1.3 INTELLECTUAL PROPERTY RIGHTS. "Intellectual Property Rights" shall mean
all patent, copyright, trade secret, trademark and other proprietary and
intellectual property rights, including moral rights.
1.4 NATURAL SUCCESSORS. "Natural Successors" shall mean any product that
substantially replaces a particular product or substantially replaces such
product in a particular market segment.
1.5 OBJECT MATERIALS. "Object Materials" shall mean materials, in
machine-readable form, necessary to run the Versatility Technology, including
all computer programming code, substantially or entirely in binary form, which
is directly executable by a computer after suitable processing but without the
intervening steps of compilation or assembly and all help, message, and overlay
files.
1.6 QUARTERS. "Quarters" shall be deemed to commence on the first day of
June, September, December and March of each year of this Agreement.
1.7 SUBSIDIARY. "Subsidiary" shall mean any corporation, partnership, firm,
entity or any person in which Oracle, directly or indirectly, holds any
ownership interest.
1.8 SOURCE MATERIALS. "Source Materials" shall mean the complete source
code from which Object Materials are compiled. Source Materials shall include,
without limitation, the fully commented source code and internal system
documentation for the Versatility Technology, as well as all other materials, in
both machine readable and hard-copy form, which are used to develop or test the
Versatility Technology. "Fully commented source code" shall mean source code
that includes all comments made by or for Versatility. Source Materials shall
include all electronically readable source documentation, design documents, data
models, help materials, tutorial programs, and appropriate debug code, including
those developed by or for Versatility during the term of this Agreement.
1.9 SUBLICENSE/SUBLICENSEE. "Sublicense" shall mean any license granted by
Oracle or its Distributors for use of Versatility Technology. "Sublicensee"
shall be a party who is granted a Sublicense, either directly by Oracle or
indirectly by a Distributor.
1.10 UPDATES. "Updates" shall mean any releases (including any
preproduction releases) of Versatility Technology created on or after the
Effective Date, including bug fixes, improvements, enhancements, new versions or
releases and other changes thereto.
1.11 VERSATILITY TECHNOLOGY. "Versatility Technology" shall mean the
computer software specified in Exhibit A hereto owned or distributed by
Versatility, any Updates, Natural Successors and translations or localizations
of the Versatility Technology. Unless otherwise specified, "Versatility
Technology" shall include Source Materials, Object Materials and Documentation.
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II. LICENSES GRANTED
2.1 DELIVERY OF VERSATILITY TECHNOLOGY.
2.1.A DELIVERY. Versatility shall deliver a complete set of the
Versatility Technology to Oracle on the Effective Date of this Agreement
and shall deliver all Updates of the Versatility Technology until December
31, 1999 promptly upon completion and in no event later than when such
Updates are delivered to any other licensee.
2.2 DEVELOPMENT AND TECHNICAL SUPPORT LICENSE. Versatility grants to Oracle
a worldwide, paid-up, royalty-free, perpetual, non-exclusive, right and license
to use, copy and modify the Versatility Technology, including using the
Versatility Technology for any development purposes and for technical support of
Sublicensees. Oracle and its Subsidiaries shall have the right to allow their
third party consultants ("Agent(s)") to use the Versatility Technology on behalf
of Oracle or the Subsidiary under the terms and conditions of this Agreement.
2.3 SUBLICENSING LICENSE.
2.3.A SCOPE OF LICENSE. Versatility hereby grants to Oracle a
worldwide, perpetual (except as otherwise provided on Article V),
non-exclusive right and license to market, reproduce, distribute and grant
Sublicenses of the Versatility Technology (excluding Source Materials) for
use on all operating environments. Oracle shall use the same or equivalent
terms for sublicensing the Versatility Technology as it does for licensing
Oracle's software products.
Versatility also grants to Oracle the right and license to sublicense
Source Materials to third parties solely to the extent necessary and for
the purpose of allowing such third parties to port or localize the Source
Materials, so long as any such third party is subject to the same terms and
conditions which Oracle normally imposes in connection with any grant of
rights to its own source code. Versatility also grants to Oracle the right
to sublicense the Versatility Technology, including the Source Materials,
to any Subsidiary to allow the Subsidiary to use the Versatility Technology
in accordance with the terms and conditions of this Agreement as they apply
to Oracle, so long as any such Subsidiary is subject to the same terms and
conditions which Oracle normally imposes in connection with any grant of
rights in its own source code. Versatility also grants to Oracle the right
(i) to deposit Source Materials in escrow and (ii) release and deliver
Source Materials to Oracle's Sublicensees and Distributors, provided that
the Source Materials are released only in conjunction with Oracle source
materials and are subject to substantially equivalent conditions and
protections used for the release of its own source materials. It is
expressly understood that, notwithstanding any other provision of this
Agreement, Oracle shall have no right to sublicense Source Materials,
except as stated in this paragraph.
2.3.B DISTRIBUTORS. Versatility grants Oracle the right to license,
sublicense and authorize Distributors to market and sublicense the Object
Materials and Documentation of the Versatility Technology under the terms
of this Agreement, including the right to license, sublicense and authorize
other distributors to exercise the same rights.
2.3.C TRIAL SUBLICENSES. Versatility grants to Oracle a worldwide,
royalty-free license to grant, at no charge, trial sublicenses of the
Object Materials and Documentation of the Versatility Technology,
consistent with Oracle's policies for granting trial licenses for its own
programs.
2.3.D TRADEMARKS. Oracle and its Distributors are entitled to market,
reproduce, distribute and sublicense the Object Materials and Documentation
of the Versatility Technology under Oracle trademarks. Versatility shall
not have the right to use such Oracle trademarks without the prior written
approval of Oracle.
2.4 INTERNAL USE LICENSE. Versatility hereby grants to Oracle and its
Subsidiaries a worldwide, perpetual (except as otherwise provided in Article V),
paid-up, royalty-free non-exclusive right and internal-use license to reproduce,
install and use the Versatility Technology, including Updates, to operate its
business at no additional charge. This internal use license does not apply to
any service bureau, outsourcing or equivalent business of Oracle; any such
service bureau business licenses would be subject to per user license fees.
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2.5 INTELLECTUAL PROPERTY RIGHTS. Versatility further grants to Oracle and
its Distributors a perpetual (except as otherwise provided in Article V),
worldwide, nonexclusive, nontransferable and paid-up license to all Intellectual
Property Rights which Versatility now owns or hereafter acquires which are
necessary to use the Versatility Technology under this Agreement; such
Intellectual Property Rights are included in the licenses granted to Oracle
under this Agreement. Other than as licensed herein, Versatility shall retain
all right, title and interest to the Versatility Technology, including the
Intellectual Property Rights. Oracle shall retain all right, title and interest
to the Intellectual Property Rights in any modifications, extensions or
derivative works of the Versatility Technology that Oracle develops or has
developed on its behalf.
Versatility shall take all action necessary to maintain the validity and
enforceability of Versatility's Intellectual Property Rights in the Versatility
Technology and shall promptly enforce its rights and remedies against third
parties who infringe such Intellectual Property Rights.
2.6 THIRD PARTY ROYALTIES. Versatility shall have sole responsibility for
payment of all royalties and other charges with respect to third party materials
included in the Versatility Technology, if any. Oracle shall have no obligation
to pay or account for such royalties or other charges.
2.7 MARKETING. Except as expressly specified in this Agreement, Oracle
shall have no obligation to distribute or market the Versatility Technology or
any products containing the Versatility Technology. Oracle shall have full
freedom and flexibility in the design and implementation of its marketing
efforts, and may discontinue any marketing efforts at any time.
III. FEES AND PAYMENTS
3.1 LICENSE FEES.
3.1.A PREPAID SUBLICENSE FEES. Oracle agrees to pay Versatility the
sum of $2,000,000.00 in prepaid sublicense fees ("Prepaid Sublicense Fees")
which shall be payable in three equal monthly installments on each of
September 1, October 1 and November 1. Upon termination or expiration of
this Agreement under Section 4.3.A or Section 5.2 below, Versatility shall
refund to Oracle the full amount of the Prepaid Sublicense Fees.
3.1.B SUBLICENSE FEES. In consideration for the rights granted by
Versatility to Oracle under this Agreement, Oracle will pay to Versatility
a fee equal to 30% of the Net Fees Oracle receives for Sublicenses of the
Versatility Technology ("Sublicense Fees") until the earlier of (i) six
years from the Effective Date of this Agreement or (ii) the payment by
Oracle of a total of Twelve Million Dollars ($12,000,000) in Sublicense
Fees. Thereafter, the licenses granted to Oracle to the Versatility
Technology under this Agreement shall be deemed to be royalty-free and
fully paid-up. In determining the Sublicense Fees due to Versatility,
Oracle shall have the right to apply the Prepaid Sublicense Fees to reduce
the Sublicense Fee due to Versatility until such time as the Prepaid
Sublicense Fee has been exhausted.
"Net Fees" shall mean license fees received by Oracle or any
Subsidiary from its Sublicensees and from its istributors net of any return
adjustments, third party commissions, shipping costs, or sales, use or
other taxes paid. In the event that Oracle or its Distributors sublicense
the Versatility Technology with other Oracle products or services for a
single price, Net Fees from such Sublicense shall equal the total Net Fees
from the Sublicense multiplied by a fraction A/(A+B), where A equals the
list price of the Versatility Technology sublicensed separately and B
equals the list price of the other products or services. If the Versatility
Technology is (i) licensed in a site license or package deal and fees for
the Versatility Technology are not distinguishable from fees for other
Oracle products that are part of the site license or package deal or (ii)
bundled with or incorporated into another Oracle product such that the
Versatility Technology does not have a separate list price, the Net Fees
for the Versatility Technology shall be based on the fee allocation agreed
to by Oracle and the Sublicensee for the products specified in the site
license or package deal or on the fee allocation made by Oracle's internal
procedures, provided such allocation reasonably reflects the relative value
of the Versatility Technology to the other Oracle products.
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Oracle and its Distributors are free to determine unilaterally the
pricing of Versatility Technology Sublicenses to their Sublicensees and
Distributors.
No Sublicense Fee or other charge shall be payable by Oracle for any
use of the Versatility Technology (i) for Oracle's internal use; (ii) for
development, technical support or maintenance activities; (iii) for
marketing, updates, trial Sublicenses, porting, documentation,
demonstrations, training, educational uses, or any other products or
services; or (iv) as back-up copies. The foregoing rights and licenses
shall be deemed to be paid-up.
3.2 PAYMENT TERMS. Within forty-five (45) days of the end of each Quarter,
Oracle shall pay to Versatility all Sublicense Fees accruing to Versatility for
that particular Quarter less any unused Prepaid Sublicense Fees. Sublicense Fees
shall be deemed to accrue in the Quarter in which Oracle recognizes the revenue.
3.3 REPORTING. Within forty-five (45) days of the last day of each Quarter,
Oracle shall send Versatility a report listing, for that Quarter, the revenues
due to Versatility under this Agreement as a result of Oracle's and its
Distributors' Sublicensing activities under this Agreement and the deduction by
Oracle of any unused Prepaid Sublicense Fees from those revenues.
IV. TECHNICAL RESPONSIBILITIES
4.1 ORACLE TECHNICAL RESPONSIBILITIES. Oracle and its Distributors shall
provide all technical support to their Sublicensees and Distributors, including
installation assistance, training, maintenance and consulting.
4.2 VERSATILITY TECHNICAL SUPPORT RESPONSIBILITIES.
4.2.A ONGOING SUPPORT SERVICES. Versatility will provide Oracle with
the following technical support services ("Technical Support") until
December 31,1999:
(i) Telephone consultation, assistance and advice at the highest
level of support generally provided to any other end user or
Distributor of Versatility;
(ii) Reasonable efforts to make corrections to errors reported in
the Versatility Technology as such corrections are first made
available to any other Versatility distributor or licensee; and
(iii) Updates no later than when they are first made available to
any other Versatility distributor or licensee.
4.3 VERSATILITY DEVELOPMENT COMMITMENTS.
4.3.A VERSATILITY COMMITMENTS. Versatility shall develop and deliver
the modifications to the Versatility Technology specified on Exhibit B (the
"Deliverables") within the timeframes specified on Exhibit B. If
Versatility fails to commence promptly the definition, design and
development of the Deliverables on Exhibit B, Oracle shall have the option
to terminate this Agreement by providing written notice to Versatility.
Within five days of such notice, Versatility shall refund to Oracle all
Prepaid Sublicense Fees.
4.3.B ACCEPTANCE PROCEDURE. Upon completion of any Deliverable,
Versatility shall promptly provide a complete copy thereof to Oracle. At
Oracle's request, Versatility will demonstrate to Oracle the functionality
of the Deliverable and shall provide Oracle with assistance in any
additional review and testing of such Deliverable in accordance with any
applicable acceptance criteria and test suites. Upon accepting any
Deliverable submitted by Versatility, Oracle shall provide to Versatility a
written acceptance of such Deliverable. If Oracle, in its reasonable
discretion, determines that any submitted Deliverable does not meet the
acceptance criteria mutually agreed upon by the parties in Exhibit B,
Oracle shall have thirty (30) business days after Versatility's submission
of the Deliverable ("Acceptance Period") to give written notice thereof to
Versatility specifying the deficiencies in detail. Versatility shall submit
a revised Deliverable to Oracle within 10 days of
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receiving such notice from Oracle. After completing any such cure,
Versatility shall resubmit the Deliverable for review and testing as set
forth above. This resubmission and retesting procedure will be repeated
until Oracle accepts the applicable Deliverables or terminates this
Agreement, in Oracle's sole discretion.
4.3.C LICENSE TO DELIVERABLES. All software (including modifications
and documentation but excluding the Deliverables), products, inventions,
documents, writings and other materials prepared or produced by Versatility
in performing Services for Oracle under this Agreement, (collectively, the
"Developments") shall be the sole and exclusive property of Oracle, subject
to Versatility's underlying rights in the pre-existing Versatility
Technology and subject to the Deliverables being the sole and exclusive
property of Versatility. Versatility agrees that the Developments shall be
works made for hire to the extent permitted by applicable law, and that
Oracle shall retain all Intellectual Property Rights in the Developments.
In the event that any of the Developments do not qualify as works made for
hire, Versatility hereby assigns to Oracle at no additional consideration
all right, title and interest and all Intellectual Property Rights in such
Developments and all extensions and renewals thereof. Versatility agrees to
execute a written assignment of such rights in the Developments to Oracle
and any other documents necessary for Oracle to establish, preserve,
perfect or enforce its Intellectual Property Rights in the Developments if
so requested by Oracle. Versatility hereby agrees not to assert at any
time, and otherwise waives, any "moral rights" that Versatility may have in
the Developments, and Versatility hereby assigns to Oracle all moral rights
therein.
V. TERM
5.1 INITIAL TERM. This Agreement shall become effective on the Effective
Date, and unless it is terminated as set forth herein shall remain in effect
perpetually.
5.2 TERMINATION OF THE AGREEMENT.
5.2.A BREACH OF MERGER AGREEMENT. If Oracle breaches the Agreement and
Plan of Merger between Oracle and Versatility (the "Merger Agreement") in
any material respect and fails to cure such breach within twenty (20)
business days after written notice of such breach from Versatility to
Oracle or Oracle fails for any reason to pay the sublicense fees set forth
in Section 3.1.A, then Versatility shall have the option of terminating
this Agreement by providing Oracle with written notice of such termination
within twenty (20) business days after the date of the written notice of
breach from Versatility to Oracle, which termination shall not be effective
unless and until Versatility refunds all but $360,000 of the Prepaid
Sublicense Fees to Oracle within one hundred eighty (180) days of providing
Oracle notice of termination.
5.2.B ACCEPTANCE OF SUPERIOR OFFER. If (i) the Merger Agreement is
being or has been terminated and Versatility is obligated to pay Oracle a
Termination Fee (as defined in the Merger Agreement) under the Merger
Agreement, (ii) Versatility refunds to Oracle all but $360,000 of the
Prepaid Sublicense Fees prior to or simultaneously with the payment of such
Termination Fee, and (iii) the Termination Fee is paid in accordance with
the terms of the Merger Agreement, then this Agreement shall terminate upon
repayment by Versatility of such Prepaid Sublicense Fees and payment of the
Termination Fee.
5.3 USE OF SOURCE MATERIALS. If any of the following events occur: (i) any
assignment of substantially all of Versatility's assets for the benefit of
creditors or the appointment of a receiver to take possession of substantially
all of Versatility's assets; (ii) any dissolution of or substantial attachment
or execution of judgment against Versatility's assets; (iii) the filing of any
voluntary or involuntary petition in bankruptcy, or any similar law, by or
against Versatility which is not dismissed within forty-five (45) days of
filing; or (iv) Versatility rejects this Agreement at any time while in
bankruptcy, then Oracle shall immediately receive and have a worldwide,
perpetual, irrevocable license to use all Source Materials, Object Materials,
Documentation and other materials related to the Versatility Technology then in
Oracle's possession to (i) continue to exercise the license rights granted under
this Agreement; and (ii) provide technical support to Sublicensees, including
making all necessary changes, modifications, additions and enhancements to the
Source Materials.
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5.4 CONTINUED RIGHTS. In the event of termination of this Agreement, in
whole or in part, any Sublicense granted by Oracle or its Distributors prior to
such expiration or under the terms of this Article VI, shall survive and
continue. Without limiting the generality of the foregoing, (i) Oracle may
Sublicense and distribute any inventory of the Versatility Technology, including
work in process, on hand at the time of such termination or expiration; (ii)
Oracle may continue to exercise the rights and licenses granted hereunder for a
period of up to eighteen (18) months after termination or expiration, so long as
such use is to support existing customers using Versatility Technology or to
satisfy then-existing contractual commitments; and (iii) Oracle may continue to
exercise the rights and licenses granted hereunder as necessary to provide
maintenance and technical support for Sublicensees.
5.5 SURVIVAL. In addition to the provisions of Sections 5.3 and 5.4 above,
the parties' rights and obligations under Sections 2.4 (Internal Use License),
2.5 (Intellectual Property Rights), 7.1 (Nondisclosure), 7.4 (Assignment) and
Article VI (Representations and Warranties) shall survive expiration or
termination of this Agreement.
VI. REPRESENTATIONS AND WARRANTIES
6.1 NO CONFLICT. Versatility represents and warrants that it is under no
obligation or restriction, nor will it assume any such obligation or
restriction, that does or would in any way interfere or conflict with, or that
does or would present a conflict of interest concerning, the performance to be
rendered by Versatility or the rights and licenses granted to Oracle herein.
6.2 INTELLECTUAL PROPERTY WARRANTY AND INFRINGEMENT INDEMNITY. Versatility
represents and warrants that (a) Versatility is the sole and exclusive owner of
the Versatility Technology,; (b) Versatility has full and sufficient right,
title and authority to assign or grant the rights and/or licenses granted to
Oracle under this Agreement; (c) the Versatility Technology has not been
published under circumstances which have caused a loss of Intellectual Property
Rights therein; (d) except as set forth on Schedule 5.2, the Versatility
Technology does not contain any materials developed by a third party; (e) the
Versatility Technology does not infringe any Intellectual Property Rights,
privacy, publicity or similar rights of any third party, nor has any claim
(whether or not embodied in an action, past or present) of such infringement
been threatened or asserted, and no such claim is pending against Versatility
or, to best of Versatility's knowledge, against any entity from which
Versatility has obtained such rights; and (f) the certificate of authorship,
attached hereto as Exhibit C, is complete and accurate.
Versatility shall, at Versatility's expense, indemnify, defend and hold
Oracle and its directors, officers, employees, agents, Distributors and
Sublicensees harmless from and against any and all liabilities, losses, damages,
costs and expenses (including reasonable attorneys fees) incurred by Oracle in
connection with any claim that the Versatility Technology licensed and used
within the scope of this Agreement infringes an Intellectual Property Right of
any third party, provided that: (a) Oracle promptly notifies Versatility in
writing of the claim; and (b) at Versatility's request and expense, Oracle
provides Versatility with all reasonable assistance, information and authority
to perform the foregoing. Versatility will not enter into a settlement agreement
without Oracle's written consent, which consent will not be unreasonably
withheld.
Versatility shall have no liability for any claim of infringement if such
infringement is caused by modifications made by Oracle to the Versatility
Technology and the unmodified Versatility Technology does not infringe the third
party's Intellectual Property Rights.
In the event the Versatility Technology is held or is believed by
Versatility to infringe the Intellectual Property Rights of a third party,
Versatility shall have the option, at its expense to: (a) modify the Versatility
Technology to be non-infringing while retaining full functionality and
equivalent performance; or (b) obtain for Oracle, at no additional cost to
Oracle, a license to continue using the Versatility Technology. Failure to
comply with the obligations described in this Section 6.2 shall constitute a
material breach of this Agreement.
6.3 PRODUCT WARRANTY. Versatility warrants that the Versatility Technology
will perform the functions, and comply in all material respects with the
specifications, described in the specifications identified in the Documentation
when operated on the appropriate hardware/operating system environment. Ver-
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satility also warrants that the Versatility Technology, including, without
limitation, any time-and-date-related codes, data entry features and internal
subroutines thereof, is designed (a) to automatically accommodate the change in
the date from December 31, 1999 to January 1, 2000 without negatively affecting
the Versatility Technology's performance; and (b) to accurately accept, reflect
and calculate all dates that are relevant to the Versatility Technology's
performance. THESE WARRANTIES ARE THE EXCLUSIVE PRODUCT WARRANTIES AND IN LIEU
OF ALL OTHER PRODUCT WARRANTIES, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED
TO IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
6.4 LIMITATION OF LIABILITY. EXCEPT FOR LIABILITY UNDER SECTION 6.2 ABOVE
AND EXCEPT FOR LIABILITY UNDER SECTION 7.1 HEREOF, (i) NEITHER PARTY SHALL HAVE
ANY LIABILITY FOR ANY INDIRECT, INCIDENTAL, SPECIAL, OR CONSEQUENTIAL DAMAGES,
INCLUDING BUT NOT LIMITED TO RELIANCE, COVER, OR LOSS OF ANTICIPATED PROFITS,
EVEN IF THE PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES; AND (ii)
NEITHER PARTY'S LIABILITY FOR DAMAGES RELATING IN ANY WAY TO THIS AGREEMENT OR
THE CONDUCT OF THE PARTIES IN FURTHERANCE HEREOF UNDER ANY LEGAL THEORY, WHETHER
CONTRACT, TORT, PRODUCT LIABILITY, BREACH OF IMPLIED DUTY, OR OTHERWISE SHALL
EXCEED $12,000,000.
The provisions of this Article VI allocate the risks under this Agreement
between Versatility and Oracle and are an intrinsic part of the bargain between
the parties. The fees provided for in this Agreement reflect this allocation of
risks and the limitation of liability specified herein.
VII. MISCELLANEOUS
7.1 NONDISCLOSURE. It is expected that the parties may disclose to each
other certain information which may be considered confidential and trade secret
information ("Confidential Information"). Confidential Information shall
include: (a) the Source Materials; (b) Confidential Information disclosed by
either party in writing that is marked as confidential at the time of
disclosure; or (c) Confidential Information disclosed by either party in any
other manner and is identified as confidential at the time of disclosure and is
also summarized and designated as confidential in a written memorandum delivered
to the receiving party within thirty (30) days of the disclosure.
Confidential Information shall not include information which: (a) is or
becomes public knowledge through no fault of the recipient; (b) was in the
receiving party's possession before receipt from the party providing such
Confidential Information; (c) is rightfully received by the receiving party from
a third party without any duty of confidentiality; (d) is disclosed to a third
party by the party providing the Confidential Information without a duty of
confidentiality on the third party; (e) is independently developed by the other
party; (f) is disclosed under operation of law; or (g) is disclosed with the
prior written approval of the party providing such Confidential Information.
Except as otherwise specified herein, the disclosing party shall retain all
Intellectual Property Rights in any Confidential Information disclosed to the
other party. The parties agree, both during the term of this Agreement and for a
period of five (5) years after termination or expiration of this Agreement to
hold each other's Confidential Information in confidence and to protect the
disclosed Confidential Information by using the same degree of care to prevent
the unauthorized use, dissemination or publication of the Confidential
Information as they use to protect their own confidential information of a like
nature. The parties agree not to make each other's Confidential Information
available in any form to any third party except as otherwise required to
exercise the licenses granted in this Agreement or to use each other's
Confidential Information for any purpose other than the implementation of this
Agreement. Each party agrees to restrict disclosure of the Confidential
Information to those of its employees who have a "need to know" and to take all
reasonable steps to ensure that Confidential Information is not disclosed or
distributed by its employees in violation of the provisions of this Agreement,
including requiring that its employees sign general agreements of
confidentiality that apply to third-party technology as well as to its own
technology.
In addition, notwithstanding the above, each party may use the residuals
from the other party's Confidential Information. The term "residuals" as used in
this paragraph shall mean the Confidential Information in nontangible form
(i.e., not in written or other documentary form, including tape or disk)
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which may be retained by those employees of Versatility or Oracle who have had
access to the other's Confidential Information including ideas, concepts,
know-how, or techniques contained therein. Neither party shall have any
obligation to limit or restrict the assignment of such employees or to pay
royalties for any work resulting from the use of residuals.
7.2 INDEPENDENT DEVELOPMENT/FREEDOM OF ACTION. Each party acknowledges that
the other party is in the software development business. Nothing in this
Agreement shall be construed to preclude either party from developing, using,
marketing, licensing, and/or selling any independently developed software which
has the same or similar functionality as Versatility Technology or any other
products, so long as such activities do not breach any of the other provisions
of this Agreement or infringe the Intellectual Property Rights of the other
party.
Additionally, nothing in this Agreement shall be construed to limit
Oracle's right to obtain services or software programs from other sources, to
prohibit either party from acquiring and marketing competitive materials, to
restrict Oracle from making, having made, using, marketing, leasing, licensing,
selling or otherwise disposing of any products or services whatsoever, nor to
limit Oracle's right to deal with any other vendors, suppliers, contractors or
customers.
7.3 GOVERNING LAW AND JURISDICTION. This Agreement, and all matters arising
out of or relating to this Agreement, shall be governed by the laws of the State
of California and shall be deemed to be executed in Redwood City, California.
7.4 ASSIGNMENT. Except for an assignment by Oracle to any parent
corporation, Subsidiary or successor in interest to Oracle, which shall not
relieve Oracle of its rights and obligations under this Agreement and shall only
be effective if such permitted assignee shall agree to be bound by all of the
provisions of this Agreement, neither party may assign any rights, duties,
obligations or privileges under this Agreement without the prior written consent
of the other party, which consent shall not be unreasonably withheld. A change
in control or ownership shall be deemed to be an assignment under this Section.
7.5 NOTICE. All notices required to be given hereunder shall be in writing
and shall be deemed to have been given upon deposit in first class mail, sent
through a nationally recognized courier service, or transmission by confirmed
telefacsimile as follows:
For Versatility: Versatility, Inc.
11781 Lee Jackson Memorial Highway
Seventh Floor
Fairfax, VA 22033
Attn: Paul Zoukis
With copy to: Tucker, Flyer & Lewis
1615 L Street, NW
Suite 400
Washington D.C., 20036
Attn: Jack L. Lewis
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For Oracle: Oracle Corporation
500 Oracle Parkway
Redwood City, CA 94065
Attn: General Counsel
Oracle Corporation
500 Oracle Parkway
Redwood City, CA 94065
Attn: Executive Vice President, Corporate Development
7.6 RELATIONSHIP BETWEEN THE PARTIES. In all matters relating to this
Agreement, Oracle and Versatility shall act as independent contractors. Neither
party will represent that it has any authority to assume or create any
obligation, expressed or implied, on behalf of the other party, or to represent
the other party as agent, employee or in any other capacity. Neither party shall
have any obligation, expressed or implied, except as expressly set forth herein.
7.7 PUBLICITY. Neither party shall disclose to any third party any details
of this Agreement, or even the fact of its without the specific prior written
approval of the other party, which approval shall not be unreasonably withheld,
or as required by law in order to enforce its rights under this Agreement.
Nothing in this Agreement confers upon Versatility any right to use Oracle's
trademarks, trade names or service marks in connection with any product,
service, promotion or publication.
7.8 FORCE MAJEURE. Neither party shall be liable to the other for failure
or delay in the performance of a required obligation if such failure or delay is
caused by riot, fire, flood, explosion, earthquake or other natural disaster,
government regulation, or other similar cause beyond such party's control,
provided that such party gives prompt written notice of such condition and
resumes its performance as soon as possible, and provided further that the other
party may terminate this Agreement if such condition continues for a period of
one hundred eighty (180) days.
7.9 ENTIRE AGREEMENT. This Agreement and the Merger Agreement set forth the
entire agreement between the parties and supersedes prior proposals, agreements
and representations between them, whether written or oral, relating to the
subject matter contained herein. This Agreement may be changed only if agreed to
in writing and signed by an authorized signatory of each party.
7.10 EXPORT. The parties agree to comply fully with all laws and
regulations to assure that the Versatility Technology or any direct product
thereof, is not exported, directly or indirectly, in violation of law. Upon
Oracle's request, Versatility shall advise Oracle of all relevant export
classifications of the Versatility Technology and shall promptly advise Oracle
of any changes with respect to such classification.
7.11 SEVERABILITY. If any provision or provisions of this Agreement shall
be held to be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
7.12 COUNTERPARTS. This Agreement may be executed in several counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
7.13 NO WAIVER. The failure of any party to enforce any of the provisions
hereof shall not be construed to be a waiver of the right of such party
thereafter to enforce such provisions.
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The Effective Date of this Agreement shall be August 20, 1998. This
Agreement shall not be effective until both parties have signed.
ORACLE CORPORATION VERSATILITY, INC.
By: By:
--------------------------------- ---------------------------------
Name: Name:
-------------------------------- --------------------------------
Title: Title:
-------------------------------- --------------------------------
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AMENDMENT NO. 1 TO LICENSE AGREEMENT*
THIS AMENDMENT NO. 1 TO LICENSE AGREEMENT (this "Amendment") is made as of
the 10th day of September, 1998 by and between Oracle Corporation, a Delaware
corporation ("Oracle"), and Versatility Inc., a Delaware corporation
("Versatility").
WHEREAS, Oracle and Versatility are parties to a Technology License
Agreement dated as of August 20, 1998 (the "Agreement"); and
WHEREAS, the parties hereto desire to amend certain provisions of the
Agreement as hereinafter set forth.
NOW, THEREFORE, in consideration of the foregoing, the mutual promises and
covenants contained herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:
1. Section 5.2.B of the Agreement is hereby deleted in its entirety and the
following provision inserted in lieu thereof:
"5.2.B Acceptance of Superior Offer
If (i) the Merger Agreement is being or has been terminated and Versatility
is obligated to pay Oracle a Termination Fee (as defined in the Merger
Agreement) under the Merger Agreement, (ii) Versatility refunds to Oracle
all of the Prepaid Sublicense Fees prior to or simultaneously with the
payment of such Termination Fee, and (iii) the Termination Fee is paid in
accordance with the terms of the Merger Agreement, then this Agreement
shall terminate upon repayment by Versatility of such Prepaid Sublicense
Fees and payment of the Termination Fee."
2. Except as specified herein, the parties hereby ratify and affirm each of
the other provisions of the Agreement referred to therein.
3. This Amendment may be executed simultaneously in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. Each counterpart shall be
an original. A facsimile signature appearing on a facsimile document shall be
given the same effect as if it were an original signature on an original
document.
- ----------
* This Amendment No. 1 to License Agreement was not attached as an exhibit to
the Merger Agreement and is included in this Appendix A for reference.
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IN WITNESS WHEREOF, Oracle and Versatility have duly executed this Agreement, or
caused it to be duly executed, under seal as of the date first set forth above.
VERSATILITY, INC.
By:
---------------------------------
Name: Kenneth T. Nelson
Title: SVP -- Finance
ORACLE CORPORATION
By:
---------------------------------
Name: David J. Roux
Title: Executive Vice President
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APPENDIX B
NATIONSBANC MONTGOMERY SECURITIES
August 20, 1998
Board of Directors
Versatility, Inc.
11781 Lee Jackson Memorial Highway
Seventh Floor
Fairfax, VA 22033
Members of the Board of Directors:
We understand that Versatility, Inc., a Delaware corporation ("Seller"),
and Oracle Corporation, a Delaware corporation ("Buyer"), have entered into a
Merger Agreement dated August 20, 1998 (the "Merger Agreement"), pursuant to
which Seller will be merged with and into Buyer, which will be the surviving
entity (the "Merger"). Pursuant to the Merger, as more fully described in the
Merger Agreement and as further described to us by management of Seller, we
understand that all of the outstanding shares of the common stock, $0.01 par
value per share ("Seller Common Stock"), of Seller will be converted into to the
right to receive $1.50 per share in cash (the "Consideration"). The terms and
conditions of the Merger are set forth in more detail in the Merger Agreement.
You have asked for our opinion as investment bankers that the Consideration
to be received by the shareholders of Seller pursuant to the Acquisition is fair
to such shareholders from a financial point of view, as of the date of the
Merger Agreement. As you are aware, we were retained as your financial advisor
to identify opportunities to maximize shareholder value, including an outright
sale. We agreed to make recommendations to you regarding the appropriate
structure, price, terms and conditions concerning a sale and to participate in
negotiations concerning the sale. In addition, we developed and administered a
strategy for sale which included an extensive market survey and auction process.
In connection with our opinion, we have, among other things: (i) reviewed
certain publicly available financial and other data with respect to Seller,
including the consolidated financial statements for recent years and interim
periods and certain other relevant financial and operating data relating to
Seller made available to us from published sources and from the internal records
of Seller; (ii) conducted an extensive market survey and analysis involving 36
possible purchasers; (iii) considered a discounted cash flow analysis and as a
result of the negative cash flow of Seller, the discounted cash flow provided no
evidence of value; (iv) considered that the purchase price would provide a
premium to Seller's shareholders as compared to recent trading prices; (v)
reviewed the financial terms and conditions of the draft Merger Agreement; (vi)
reviewed certain publicly available information concerning the trading of, and
the trading market for Seller Common Stock; (vii) compared Seller from a
financial point of view with certain other companies which we deemed to be
relevant; (viii) considered the financial terms, to the extent publicly
available, of selected recent business combinations which we deemed to be
comparable, in whole or in part, to the Merger; (ix) reviewed and discussed with
representatives of the management of Seller certain information of a business
and financial nature regarding Seller, furnished to us by Seller, including
financial forecasts and related assumptions of Seller; (x) made inquires
regarding and discussed the Merger and the Merger Agreement and other matters
related thereto with Seller's counsel; (xi) made inquiries regarding legal
claims and other potential contingent liabilities; and (xii) performed such
other analyses and examinations as we have deemed appropriate.
In connection with our review, we have not assumed any obligation
independently to verify the foregoing information and have relied on its being
accurate and complete in all material respects. We have assumed that there have
been no material improvements in Seller's assets, financial condition, results
of operations, business or prospects since the respective dates of their last
financial statements made available to us. We have relied on advice of counsel
and independent accountants to Seller as to
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all legal and financial reporting matters with respect to Seller, the Merger and
the Merger Agreement, including the legal status and financial reporting of
litigation involving Seller. We have assumed that the Merger will be consummated
in a manner that complies in all respects with the applicable provisions of the
Securities Exchange Act of 1934, as amended, and all other applicable federal
and state statutes, rules and regulations. In addition, we have not assumed
responsibility for reviewing any individual credit files, or making an
independent evaluation, appraisal or physical inspection of any of the assets or
liabilities (contingent or otherwise) of Seller, nor have we been furnished with
any such appraisals. You have informed us, and we have assumed, that the Merger
will be recorded as a purchase under generally accepted accounting principles.
Finally, our opinion is based on economic, monetary and market and other
conditions as in effect on, and the information made available to us as of, the
date hereof. Accordingly, although subsequent developments may affect this
opinion, we have not assumed any obligation to update, revise or reaffirm this
opinion.
We have further assumed with your consent that the Merger will be
consummated in accordance with the terms described in the Merger Agreement,
without any further amendments thereto, and without waiver by Seller of any of
the conditions to its obligations thereunder.
We have acted as financial advisor to Seller in connection with the Merger
and will receive a fee for our services, including rendering this opinion, a
significant portion of which is contingent upon the consummation of the Merger.
In the ordinary course of our business, we actively trade the equity securities
of Seller and Buyer of our own account and for the accounts of customers and,
accordingly, may at any time hold a long or short position in such securities.
We have also acted as an underwriter in connection with offerings of securities
of Seller and performed various investment banking services for Seller.
Based upon the foregoing and in reliance thereon, it is our opinion as
investment bankers that the Consideration to be received by the shareholders of
Seller pursuant to the Merger was fair to such shareholders from a financial
point of view, as of the date of the Merger Agreement.
Very truly yours,
/s/Nationsbanc Montgomery Securities LLC
----------------------------------------------
NATIONSBANC MONTGOMERY SECURITIES LLC
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APPENDIX C
GENERAL CORPORATION LAW OF THE STATE OF DELAWARE
(section) 262. Appraisal rights
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to (section)
228 of this title shall be entitled to an appraisal by the Court of Chancery of
the fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to (section) 251 (other than a merger effected pursuant to
(section) 251(g) of this title), (section) 252, (section) 254, (section) 257,
(section) 258, (section) 263 or (section) 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of (section) 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
(section)(section) 251, 252, 254, 257, 258, 263 and 264 of this title to
accept for such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect
thereof;
b. Shares of stock of any other corporation, or depository
receipts in respect thereof, which shares of stock (or depository
receipts in respect thereof) or depository receipts at the effective
date of the merger or consolidation will be either listed on a
national securities exchange or designated as a national market system
security on an interdealer quotation system by the National
Association of Securities Dealers, Inc. or held of record by more than
2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts
and cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a., b. and c. of
this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under (section) 253 of this title is not owned
by the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
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(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsection (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of his shares
shall deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for appraisal of his shares. Such
demand will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to (section)
228 or (section) 253 of this title, each consitutent corporation, either
before the effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constitutent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within 20 days after the date of mailing
of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constitutent corporation shall send a second notice before
the effective date of the merger or consolidation notifying each of the
holders of any class or series of stock of such constitutent corporation
that are entitled to appraisal rights of the effective date of the merger
or consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constitutent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given, provided, that
if the notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no record
date is fixed and the notice is given prior to the
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effective date, the record date shall be the close of business on the day
next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
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holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
C-4
<PAGE>
PROXY
VERSATILITY INC.
11781 LEE JACKSON MEMORIAL HIGHWAY
SEVENTH FLOOR
FAIRFAX, VIRGINIA 22033
PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned, revoking all previous proxies, hereby appoints Paul J. Zoukis
and Kenneth T. Nelson or either of them acting individually, as the proxy of the
undersigned, with full power of substitution, to vote, as indicated below and in
their discretion upon such other matters as may properly come before the
meeting, all shares which the undersigned would be entitled to vote at the
Special Meeting of the stockholders of Versatility Inc., a Delaware corporation
("Versatility"), to be held at The Holiday Inn-Fairfax Oaks, 11787 Lee Jackson
Memorial Highway, Fairfax, Virginia 22033, on Wednesday, November 18, 1998 at
10:00 a.m., local time and at any postponement or adjournment thereof.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. UNLESS OTHERWISE
SPECIFIED, THE SHARES WILL BE VOTED "FOR" THE APPROVAL OF THE MERGER AGREEMENT
DESCRIBED HEREIN. THIS PROXY ALSO DELEGATES DISCRETIONARY AUTHORITY WITH RESPECT
TO ANY OTHER BUSINESS WHICH MAY PROPERLY COME BEFORE THE MEETING OR ANY
ADJOURNMENT OR POSTPONEMENT THEREOF.
Please date and sign your Proxy on the reverse side and return it promptly.
SEE REVERSE SEE REVERSE
SIDE SIDE
CONTINUED AND TO BE SIGNED ON REVERSE SIDE.
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[X] PLEASE MARK VOTES
AS IN THIS EXAMPLE
1. To approve and adopt an Agreement and Plan of FOR AGAINST ABSTAIN
Merger, dated as of August 20, 1998 (the "Merger
Agreement"), by and among Versatility, Oracle
Corporation, a Delware corporation, and AQX [ ] [ ] [ ]
Acquisition Corporation, a Delaware corporation
("Acquisition Sub"), and the merger of
Acquisition Sub into Versatility as provided for
therein.
2. In accordance with their best judgment, the
Proxies are authorized to transact and vote upon
such other business as may properly come before [ ] [ ] [ ]
the Special Meeting and any postponement or
adjournment thereof.
THE UNDERSIGNED HEREBY ACKNOWLEDGES
RECEIPT OF THE NOTICE OF SPECIAL MEETING
AND PROXY STATEMENT.
MARK HERE FOR ADDRESS CHANGE AND NOTE AT
LEFT [ ]
NOTE: Please sign this proxy exactly as
name(s) appear on your stock
certificate. When signing as
attorney-in-fact, executor,
administrator, trustee or guardian,
please add your title as such, and if
signer is a corporation, please sign
with full corporate name by a duly
authorized officer or officers and affix
the corporate seal. Where stock is
issued in the name of two (2) or more
persons, all such persons should sign.
SIGNATURE DATE SIGNATURE DATE
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