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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 8, 1999.
REGISTRATION NO. 333-86919
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
QUINTUS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
DELAWARE 7372 77-0021612
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
47212 MISSION FALLS COURT
FREMONT, CALIFORNIA 94539
(510) 624-2800
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
ALAN K. ANDERSON
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
QUINTUS CORPORATION
47212 MISSION FALLS COURT
FREMONT, CALIFORNIA 94539
(510) 624-2800
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
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<S> <C>
SCOTT C. DETTMER DOUGLAS H. COLLOM
DAVID T. YOUNG ROBERT F. KORNEGAY
DOUGLAS T. SHEEHY PRIYA CHERIAN HUSKINS
KEVIN A. LUCAS SCOTT GIESLER
GUNDERSON DETTMER STOUGH WILSON SONSINI GOODRICH & ROSATI
VILLENEUVE FRANKLIN & HACHIGIAN, LLP PROFESSIONAL CORPORATION
155 CONSTITUTION DRIVE 650 PAGE MILL ROAD
MENLO PARK, CALIFORNIA 94025 PALO ALTO, CALIFORNIA 94304
(650) 321-2400 (650) 493-9300
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] _____________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] _____________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] _____________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SUCH SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
WE WILL AMEND AND COMPLETE THE INFORMATION IN THIS PROSPECTUS. ALTHOUGH
WE ARE PERMITTED BY US FEDERAL SECURITIES LAW TO OFFER THESE SECURITIES
USING THIS PROSPECTUS, WE MAY NOT SELL THEM OR ACCEPT YOUR OFFER TO BUY
THEM UNTIL THE DOCUMENTATION FILED WITH THE SEC RELATING TO THESE
SECURITIES HAS BEEN DECLARED EFFECTIVE BY THE SEC. THIS PROSPECTUS IS NOT
AN OFFER TO SELL THESE SECURITIES OR OUR SOLICITATION OF YOUR OFFER TO
BUY THESE SECURITIES IN ANY JURISDICTION WHERE THAT WOULD NOT BE
PERMITTED OR LEGAL.
SUBJECT TO COMPLETION -- NOVEMBER 8, 1999
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PROSPECTUS
, 1999
LOGO
4,000,000 SHARES OF COMMON STOCK
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QUINTUS CORPORATION:
- - We provide a comprehensive software solution to manage customer interactions
and deliver consistent customer service across multiple communication
channels, including the Internet, email and the telephone.
- - Quintus Corporation
47212 Mission Falls Court
Fremont, California 94539
(510) 624-2800
PROPOSED SYMBOL AND MARKET:
- - QNTS/Nasdaq National Market
THE OFFERING:
- - We are offering 4,000,000 shares of our common stock.
- - The underwriters have an option to purchase up to 600,000 additional shares
from Quintus to cover over-allotments.
- - This is the initial public offering of our common stock. We anticipate that
the initial public offering price will be between $12.00 and $14.00 per share.
- - We plan to use the proceeds from this offering for working capital and other
general purposes, and for the required payment of approximately $18.2 million
to holders of some series of our preferred stock.
- - Closing: , 1999.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Per Share Total
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<S> <C> <C>
Public offering price: $ $
Underwriting fees:
Proceeds to Quintus:
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</TABLE>
THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 7.
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Neither the SEC nor any state securities commission has determined whether this
prospectus is truthful or complete. Nor have they made, nor will they make, any
determination as to whether anyone should buy these securities. Any
representation to the contrary is a criminal offense.
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DONALDSON, LUFKIN & JENRETTE
DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER INCORPORATED
SG COWEN
DLJDIRECT INC.
<PAGE> 3
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of the
prospectus or any sale of the common stock.
TABLE OF CONTENTS
<TABLE>
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Page
<S> <C>
Prospectus Summary.................. 3
Risk Factors........................ 7
Special Note Regarding Forward-
Looking Statements................ 16
Use of Proceeds..................... 16
Dividend Policy..................... 16
Corporate Information............... 17
Capitalization...................... 18
Dilution............................ 19
Selected Consolidated Financial
Data.............................. 20
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... 22
</TABLE>
<TABLE>
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Page
<S> <C>
Business............................ 36
Management.......................... 51
Certain Transactions................ 63
Principal Stockholders.............. 66
Description of Capital Stock........ 69
Shares Eligible for Future Sale..... 72
Underwriting........................ 74
Legal Matters....................... 77
Experts............................. 77
Change in Accountants............... 77
Additional Information.............. 77
Index to Consolidated Financial
Statements........................ F-1
</TABLE>
<PAGE> 4
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding Quintus and the common stock being sold in this offering
and the consolidated financial statements and related notes included in this
prospectus.
QUINTUS CORPORATION
We provide a comprehensive e-Customer Relationship Management or eCRM
solution to manage customer interactions, such as customer orders, inquiries and
service requests, and deliver consistent customer service across multiple
communication channels, including the Internet, email and the telephone. Our
Quintus eContact software suite includes applications that address the needs of
customer service representatives and agents in sales and service, consumer
relations, technical support and human resources centers and a routing engine to
manage customer interactions. These applications and our routing engine can be
sold separately or in a group. eContact enables companies to handle high volumes
of customer interactions and leverage opportunities to sell additional products
and services to their customers.
Customer service is increasingly critical to attracting and retaining
customers. Many companies are re-orienting their businesses to be more
responsive to customer needs and are focusing on customer satisfaction to
differentiate themselves from their competitors. In addition, the emergence of
the Internet as a medium for communication and commerce has increased
competition for customers and reduced the importance of traditional competitive
advantages such as price, location, availability and access. International Data
Corporation estimates that the number of customers buying goods and services
over the Internet worldwide will grow from approximately 30.8 million in 1998 to
182.6 million in 2003 and that the value of these purchases will increase from
$50.4 billion to $1.3 trillion over the same period.
The Internet enables customers and companies to interact in more ways than
ever before. In addition to traditional, telephone-based communications,
customers and companies can now interact through email, Web chat and Web
self-service. The Gartner Group estimates that approximately 25% of all customer
interactions will take place over the Internet via email or Web communications
by 2001. As a result of the growing number of communication channels, companies
are struggling to handle the volume and variety of customer interactions.
Customers increasingly expect to be able to interact with companies through
whichever channel best suits their needs and are likely to use a combination of
communication channels. For example, a customer may request product literature
via email, review marketing materials or fill in an application on the Web, call
to receive more detailed information or assistance, send a signed form by fax,
and check the status of an order online. We believe a significant market
opportunity exists for integrated solutions that enable companies to manage
their customer relationships across a broad range of communication channels,
including the Internet, email and the telephone. This market is referred to as
the e-Customer Relationship Management or eCRM market.
The Quintus eContact software suite allows companies to personalize, route
and manage customer interactions. Our eContact suite enables consistent customer
service through the use of common rules for prioritizing, handling and
responding to customer interactions, shared customer profile information,
uniform strategies for selling additional products and services to customers,
and consolidated management and reporting functions that allow companies to
capture and analyze customer information.
3
<PAGE> 5
The Quintus eContact suite includes:
- the eContact engine, the foundation of our eContact suite, that routes,
tracks and manages customer interactions, consolidates relevant customer
information into a common data information source, and provides reporting
capabilities that allow companies to analyze customer information;
- channel applications that enable companies to manage customer
interactions across multiple communication channels, including the
Internet, email and the telephone; and
- business applications that address the needs of customer service
representatives and agents in sales and service, consumer relations,
technical support and human resources centers and are integrated with our
eContact engine.
We only recently introduced and sold the email management and
Internet-based customer service components of our eContact suite. As a result no
customer has completed the implementation of these new components.
In addition, we provide professional services, customer service management,
technical support and educational services to facilitate successful customer
implementations.
Our objective is to be the leading provider of eCRM software solutions. Key
elements of our strategy include maintaining and extending our technology
leadership, broadening our direct and indirect distribution channels, targeting
Global 1000 and leading Internet-based companies, and developing and expanding
strategic relationships.
We sell our products through a direct sales force in North America and
indirectly through resellers and distribution partners worldwide. We have over
250 customers across many industries including financial services,
telecommunications and consumer products. Our customers include Anheuser-Busch,
Citigroup, First Union Bank, Lucent Technologies, Procter & Gamble, Sun
Microsystems, Ticketmaster and United Airlines.
ACQUISITION OF ACUITY
On September 10, 1999, we entered into an agreement to acquire Acuity
Corp., a provider of software products to manage Internet-based customer
interactions. We are currently integrating Acuity's WebCenter and WebACD
products into our Quintus eContact suite in order to provide a more
comprehensive eCRM solution. The acquisition is structured as a merger in which
Acuity will become our wholly-owned subsidiary and the stockholders of Acuity
will become our stockholders. The total number of our shares to be issued plus
the number of shares issuable upon exercise of options and warrants we will
assume in connection with the acquisition will equal 18% of our fully-diluted
capitalization immediately following the acquisition. The closing of the merger
is subject to the approval of Acuity's stockholders. Unless otherwise indicated,
all information in this prospectus assumes the closing of our acquisition of
Acuity prior to the effectiveness of this offering.
4
<PAGE> 6
THE OFFERING
Common stock offered............ 4,000,000 shares
Common stock to be outstanding
after the offering.............. 31,124,685 shares
Use of proceeds................. For working capital and other general
corporate purposes, and for the required cash
distribution upon the completion of this
offering of approximately $18.2 million to
holders of some series of our preferred
stock.
Nasdaq National Market symbol... QNTS
Generally, unless otherwise indicated, all information in this prospectus:
- gives effect to the conversion of all outstanding shares of preferred
stock into shares of common stock effective upon the closing of this
offering; and
- assumes no exercise of the underwriters' over-allotment option to
purchase up to 600,000 additional shares.
The number of shares of our common stock to be outstanding after the
offering includes:
- 22,244,595 shares of our common stock outstanding as of September 30,
1999;
- 4,551,441 shares to be issued in connection with our acquisition of
Acuity; and
- 328,649 shares issuable upon the assumed exercise of outstanding warrants
prior to the closing of this offering.
The number of shares of our common stock to be outstanding after the
offering does not include:
- 3,796,755 shares issuable upon exercise of options outstanding as of
September 30, 1999, including 877,955 options to be assumed in connection
with our acquisition of Acuity;
- 1,042,923 shares issuable upon exercise of warrants outstanding as of
September 30, 1999, including 323,927 warrants to be assumed in
connection with our acquisition of Acuity; and
- 2,981,995 shares reserved for future issuance under our stock plans as of
September 30, 1999.
5
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
----------------------------- -----------------
1997 1998 1999 1998 1999
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................... $13,614 $ 21,890 $ 30,307 $15,860 $22,090
Gross profit......................... 8,443 13,600 21,130 11,416 16,348
Net loss from continuing
operations........................ (3,526) (10,146) (10,586) (4,366) (1,683)
Net loss............................. (3,526) (11,249) (11,466) (5,015) (1,683)
Basic and diluted net loss per common
share from continuing
operations........................ $ (3.73) $ (0.49)
======== =======
Shares used in computation, basic and
diluted........................... 2,835 3,435
</TABLE>
The pro forma as adjusted column of the table below gives effect to the:
- issuance of 4,551,441 shares and the assumption of approximately $1.8
million in debt in connection with our acquisition of Acuity;
- issuance of 328,649 shares upon the assumed exercise of outstanding
warrants prior to the closing of this offering;
- required payment of approximately $18.2 million to holders of some series
of our preferred stock upon conversion of our preferred stock into our
common stock;
- sale in this offering of 4,000,000 shares of common stock at an assumed
initial public offering price of $13.00 per share; and
- conversion of all outstanding shares of our preferred stock into shares
of our common stock upon the closing of this offering.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
-------------------------
PRO FORMA
AS
ACTUAL ADJUSTED
<S> <C> <C>
BALANCE SHEET DATA:
Cash........................................................ $ 7,713 $39,677
Working capital........................................... 2,918 31,603
Total assets.............................................. 27,973 104,861
Long-term obligations, less current portion............... 1,331 1,835
Liability related to redeemable convertible preferred
stock.................................................. 17,811 --
Total stockholders' equity (deficiency)................... (9,268) 80,494
</TABLE>
6
<PAGE> 8
RISK FACTORS
An investment in our common stock involves a high degree of risk. You
should carefully consider the following risks and the other information in this
prospectus before investing in our common stock. Our business and results of
operations could be seriously harmed by any of the following risks. The trading
price of our common stock could decline due to any of these risks, and you may
lose all or part of your investment.
BECAUSE WE MAY NOT ACHIEVE PROFITABILITY, THE TRADING PRICE OF OUR COMMON STOCK
COULD DECLINE AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT.
We have not had a profitable quarter and we cannot assure you that we will
become profitable. We expect to increase our sales and marketing, research and
development, and other expenses as we attempt to grow our business. As a result,
we will need to generate significant revenues to become profitable, which we may
be unable to do. If we fail to become profitable, the trading price of our
common stock could decline significantly. We have funded our operations through
the sale of equity securities, borrowings and the sale of our products and
services. We incurred net losses from continuing operations of $3.5 million,
$10.1 million, $10.6 million and $1.7 million in fiscal 1997, 1998 and 1999 and
for the six months ended September 30, 1999. As of September 30, 1999 we had an
accumulated deficit of $36.3 million. In addition, in September 1999, we entered
into an agreement to acquire Acuity which had incurred net losses of $6.6
million, $7.7 million and $4.6 million in the years ended December 31, 1997 and
1998 and for the nine months ended September 30, 1999. Acuity had an accumulated
deficit of $25.3 million as of September 30, 1999. Upon the closing of the
acquisition of Acuity, we will record approximately $42.8 million of intangible
assets, which will be amortized on a quarterly basis over periods of four to
five years. In connection with the acquisition of Acuity, we expect to recognize
a charge for in-process technologies of approximately $3.0 million in the
quarter ending December 31, 1999.
BECAUSE WE RECENTLY EXPANDED THE SCOPE OF OUR PRODUCT OFFERING, IT MAY BE
DIFFICULT FOR YOU TO EVALUATE OUR BUSINESS PROSPECTS.
In February 1999, we expanded the scope of our product offering with
components for managing email and Internet-based customer interactions and
introduced the Quintus eContact suite. As a result, while we sold many of the
components that are included in our eContact suite prior to 1999, we have only
recently sold the components for managing email and Internet-based customer
interactions. We sold our first email management and Internet-based customer
service components in the quarter ended September 30, 1999 and, as a result, no
customer has completed the implementation of these components. We cannot assure
you that our eContact suite will achieve market acceptance. In addition, we are
still integrating Acuity's WebCenter and WebACD products into our eContact
suite. We may encounter technical difficulties, delays and unforeseen expenses
as we continue our product integration and development efforts.
IF OUR INITIAL IMPLEMENTATIONS OF THE QUINTUS ECONTACT SUITE SUFFER PROBLEMS OR
DELAYS, OUR REPUTATION AND FUTURE OPERATING RESULTS MAY BE HARMED.
We are just beginning to deploy our eContact suite. The initial
implementations of our eContact suite may encounter problems or delays. Although
we have successfully deployed some of the components of our eContact suite, we
have not deployed eContact with integrated computer telephony, email, Web chat
and Web self-service capabilities. To successfully implement our eContact suite,
we must complete the integration of its components and will likely have to
integrate eContact with a wide variety of complex systems currently used by our
customers. If these
7
<PAGE> 9
implementations meet with significant technological obstacles, we may be forced
to spend additional resources, harming our operating results. If the ease and
speed of these implementations do not meet the expectations of our customers,
our reputation and ability to sell our eContact suite will be harmed.
BECAUSE OUR QUARTERLY REVENUES AND OPERATING RESULTS MAY FLUCTUATE
SIGNIFICANTLY, THE TRADING PRICE OF OUR COMMON STOCK IS LIKELY TO BE VOLATILE.
It is likely that in some future quarter our revenues and operating results
will fall below the expectations of market analysts and investors. If this
happens, the trading price of our common stock may fall substantially. Our
revenues and operating results are likely to vary significantly from quarter to
quarter due to a variety of factors, including the risks we describe in this
section.
Our ability to forecast revenues is limited. We derive substantially all of
our revenues from licenses of our software and related services. License
revenues in any quarter are substantially dependent on orders booked and shipped
in that quarter, and we cannot predict revenues for any future quarter with any
significant degree of certainty. In addition, we expect that sales derived
through indirect channels, which are more difficult to forecast, may increase as
a percentage of total revenues in the future. Our expenses are relatively fixed
and are based, in part, on our expectations of future revenues. Consequently, if
revenue levels do not meet our expectations, our operating results will suffer.
BECAUSE WE DEPEND UPON A LIMITED NUMBER OF LARGE SALES FOR A SUBSTANTIAL PORTION
OF OUR REVENUES, THE FAILURE TO OBTAIN LARGE PROSPECTIVE CUSTOMERS COULD CAUSE
OUR REVENUES TO FALL QUICKLY AND UNEXPECTEDLY.
We depend upon a limited number of large sales for a substantial portion of
our revenues in each quarter. For example, in the six months ended September 30,
1999, our largest customer accounted for 12.6% of our total revenues. Our
failure to successfully close one or more large sales in any particular period
could cause our revenues to drop quickly and unexpectedly. We expect to continue
to be dependent upon a limited number of customers for a significant portion of
our revenues, and these customers are expected to vary from period-to-period.
The loss of prospective major customers could result in our failure to meet
quarterly revenue expectations, causing the trading price of our common stock to
fall.
WE RELY HEAVILY ON OUR INDIRECT DISTRIBUTION CHANNELS, PARTICULARLY OUR
DISTRIBUTION AGREEMENT WITH LUCENT TECHNOLOGIES.
If Lucent Technologies were to cease reselling or fail to continue to
promote our products, our operating results would be harmed. Lucent Technologies
accounted for 9.3%, 21.7% and 28.3% of our total revenues in fiscal 1998 and
1999 and for the six months ending September 30, 1999. Our distribution
agreement with Lucent Technologies expires in May 2000 but can be terminated on
30 days' notice following a material breach of the agreement. Lucent
Technologies is not obligated to make any minimum purchases.
In addition, the loss of a reseller, the failure of a reseller to sell our
products, or our failure to attract and retain qualified new resellers in the
future could also harm our business. Typically our resellers do not have minimum
purchase or resale obligations, can cease marketing our products at any time,
and may offer competing products. We intend to expand our indirect distribution
channels by establishing additional relationships with resellers and
distribution partners. Competition for these relationships is intense, and we
may be unable to establish relationships on favorable terms, if at all.
8
<PAGE> 10
Even if we are successful in establishing these relationships, they may not
substantially increase our revenues.
BECAUSE A SUBSTANTIAL PORTION OF OUR REVENUES COMES FROM SALES OF OUR QUINTUS
CTI PRODUCT, OUR OPERATING RESULTS WILL SUFFER IF THESE SALES DO NOT CONTINUE.
If sales of our Quintus CTI product do not meet our expectations, our
operating results will be harmed. Revenues from our Quintus CTI product were
38.4% and 32.1% in fiscal 1999 and for the six months ended September 30, 1999.
We expect that revenues from our Quintus CTI product will continue to account
for a substantial portion of our revenues in the future.
WE FACE A NUMBER OF RISKS RELATED TO OUR PENDING ACQUISITION OF ACUITY, AND WE
MAY FACE SIMILAR RISKS IN THE FUTURE IF WE ACQUIRE OTHER BUSINESSES OR
TECHNOLOGIES.
In September 1999, we entered into an agreement to acquire Acuity and began
integrating its WebCenter and WebACD products into the Quintus eContact suite.
If we are unable to effectively integrate Acuity's products, personnel and
systems, our business and operating results are likely to suffer. This
integration will be made more difficult by Acuity's operations being located in
Austin, Texas, where we currently have no other operations. We have just begun
to integrate Acuity with our operations and we expect this integration to place
a significant burden on our management team.
The acquisition of Acuity will be our third acquisition within the last
three years, and we may make more acquisitions in the future. If we are unable
to integrate effectively any newly acquired businesses, technologies or
products, our operating results could suffer. Integrating any newly acquired
businesses, technologies or products may be expensive and time-consuming. Future
acquisitions could also result in large and immediate write-offs for in-process
research and development, increased amortization charges or the incurrence of
debt and contingent liabilities. To finance acquisitions, we may need to raise
additional funds through public or private financings. Additional funds may not
be available on favorable terms, or at all, and, in the case of equity
financings, may result in dilution to our stockholders. Moreover, we may not be
able to operate any acquired businesses profitably or otherwise implement our
growth strategy successfully.
BECAUSE MANY OF OUR SALES PEOPLE ARE NEW HIRES AND HIRING ADDITIONAL SALES
PERSONNEL IS PARTICULARLY COMPETITIVE, WE MAY BE UNABLE TO EXPAND OUR BUSINESS.
We have replaced a large number of our sales people during the last year.
As a result, the size of our sales force has not grown substantially, and many
of our sales personnel are new to us. We expect our new sales personnel will
require substantial training in our products and sales practices. New sales
personnel tend to be less productive than those with greater experience selling
our products. Moreover, we intend to hire additional direct sales force
personnel in the United States. Competition for qualified sales personnel is
particularly intense in the software industry. In the past, we have experienced
difficulty hiring employees with appropriate qualifications in the timeframe we
desired. Any delays or difficulties we encounter in these recruiting, training
or retention efforts could impair our ability to attract new customers and
enhance our relationships with existing customers.
BECAUSE THE ECRM MARKET IS HIGHLY COMPETITIVE, WE MAY NOT BE ABLE TO SUCCEED AND
YOU MAY LOSE PART OR ALL OF YOUR INVESTMENT.
If we fail to compete successfully in the highly competitive and rapidly
changing eCRM market, we may not be able to succeed and you may lose part or all
of your investment. We face competition primarily from customer relationship
management software firms, emerging Internet customer
9
<PAGE> 11
interaction software vendors and computer telephony software companies. We also
face competition from traditional call center technology providers, large
enterprise application software vendors, independent systems integrators,
consulting firms and in-house IT departments. Because barriers to entry into the
software market are relatively low, we expect to face additional competition in
the future.
Many of our competitors can devote significantly more resources to the
development, promotion and sale of products than we can, and many of them can
respond to new technologies and changes in customer preferences more quickly
than we can. Further, other companies with resources greater than ours may
attempt to gain market share in the eCRM market by acquiring or forming
strategic alliances with our competitors. See "Business--Competition."
OUR ABILITY TO PROVIDE EMAIL MANAGEMENT FUNCTIONALITY WOULD BE HARMED IF WE
COULD NOT RESELL BRIGHTWARE'S EMAIL MANAGEMENT PRODUCT.
We resell Brightware's software to provide the email management
functionality of the Quintus eContact suite. Our agreement with Brightware can
be cancelled without cause upon 60 days' notice. If Brightware were to cancel
our reseller agreement or be acquired by one of our competitors, or their email
management product were otherwise unavailable to us, we would likely incur
substantial delays and costs as we attempt to integrate alternative email
management functionality into our product suite. In particular, there may be few
alternative sources for Brightware's natural language text analysis and
automated email response functionality. In addition, if we were not able to
resell Brightware's product, companies requiring email management functionality
would have to purchase another product. As a result, the sales process with our
prospective customers would be complicated by the need to coordinate with a
third party.
OUR BUSINESS WILL SUFFER IF THE ECRM MARKET DOES NOT GROW.
The eCRM market is new and may not grow. The use of email, Web chat and Web
self-service as channels for companies to interact with their customers is
recent and may not grow as expected. Our potential customers are just beginning
to look for solutions for managing customer interactions across multiple
communication channels, and concerns about the security, reliability and quality
of customer service delivery over the Internet may inhibit the growth of our
market. If eCRM software fails to achieve market acceptance, our business will
suffer and may not succeed.
BECAUSE WE DEPEND ON THIRD-PARTY SYSTEMS INTEGRATORS TO SELL OUR PRODUCTS, OUR
REVENUES WILL LIKELY SUFFER IF WE DO NOT DEVELOP AND MAINTAIN THESE
RELATIONSHIPS.
We rely on systems integrators to promote, sell and implement our solution.
If we fail to maintain and develop relationships with systems integrators, our
revenues will likely suffer. We currently rely on systems integrators such as
AnswerThink Consulting Group, Cambridge Technology Partners and Technology
Solutions Company to recommend our products to their customers and to install
our products. If we are unable to rely on systems integrators to implement our
products, we will likely have to provide these services ourselves, resulting in
increased costs. As a result, our ability to grow may be harmed. In addition,
systems integrators may develop, market or recommend products that compete with
our products. For this reason, we must cultivate our relationships with these
firms, and our failure to do so could result in reduced sales revenues. Further,
if these systems integrators fail to implement our products successfully, our
reputation may be harmed.
10
<PAGE> 12
BECAUSE THE SALES CYCLE FOR OUR PRODUCTS CAN BE QUITE LENGTHY, IT IS DIFFICULT
FOR US TO PREDICT WHEN OR WHETHER A SALE WILL BE MADE.
The timing of our revenues is difficult to predict in large part due to the
length and variability of the sales cycle for our products. Companies often view
the purchase of our products as a significant and strategic decision. As a
result, companies tend to take significant time and effort evaluating our
products. The amount of time and effort depends in part on the size and the
complexity of the deployment. This evaluation process frequently results in a
lengthy sales cycle, typically ranging from three to nine months. During this
time we may incur substantial sales and marketing expenses and expend
significant management efforts. We do not recoup these investments if the
prospective customer does not ultimately license our product.
IF WE ARE UNABLE TO INTRODUCE NEW ECRM PRODUCTS OR PRODUCT ENHANCEMENTS ON A
TIMELY BASIS, OR IF THE MARKET DOES NOT ACCEPT THESE PRODUCTS OR PRODUCT
ENHANCEMENTS, OUR BUSINESS WILL SUFFER.
The eCRM market is new and is likely to change rapidly. Our future success
will depend on our ability to effectively and timely anticipate changing
customer requirements and offer products and services that meet these demands.
Potential customers may seek features that our products do not have. As a
result, we may need to develop these features, and this may result in a longer
sales cycle, increased research and development expenses and reduced profit
margins. In addition, the development of new or enhanced eCRM products is a
complex and uncertain process. We may experience design, development, marketing
and other difficulties that could delay or prevent the introduction of new
products and enhancements. For example, our ability to introduce new products
would be impaired if we cannot continue to attract, hire, train and retain
highly skilled personnel.
OUR FAILURE TO MANAGE OUR RAPID GROWTH COULD INCREASE OUR COSTS AND HARM OUR
BUSINESS.
We have experienced rapid growth and plan to continue to significantly
expand our operations. We may not be able to manage this growth effectively,
which would impair our ability to attract and service customers and cause us to
incur higher operating costs. Expanding our operations has placed a significant
strain on our personnel and other resources. Our revenues have grown from $13.6
million in fiscal 1997 to $30.3 million in fiscal 1999. Our headcount increased
from 113 at the end of fiscal 1997 to 158 at the end of fiscal 1999. For the six
months ended September 30, 1999, our revenues were $22.1 million and our
headcount was 208 at the end of that period. Our planned acquisition of Acuity
will bring additional employees and operations to manage. As of September 30,
1999, Acuity had 81 employees. To manage our growth effectively, we may need to
further improve our operational, financial and management systems. We cannot
assure you that we will improve these systems adequately.
IF WE DO NOT SUCCESSFULLY ADDRESS THE RISKS INHERENT IN THE EXPANSION OF OUR
INTERNATIONAL OPERATIONS, OUR OPERATING RESULTS MAY SUFFER.
We have limited experience in international operations and may not be able
to compete effectively in international markets. We currently intend to expend
significant financial and management resources to expand our international
operations. We believe that the future expansion of our international operations
is important to the growth of our business. Most of our international sales are
generated through resellers and distributors, and we expect substantial costs
and resources will be required to continue to train and support these resellers.
11
<PAGE> 13
Among the various risks we face in conducting business internationally are:
- difficulties and costs of staffing and managing foreign operations;
- longer accounts receivable payment cycles and possible difficulties in
collecting accounts receivable, which may increase our operating costs
and hurt our financial performance;
- technology standards that are different from those on which our products
are designed, which could require expensive redesigns of our products;
- political and economic instability;
- unexpected changes in regulatory requirements that could make our
products and services more expensive and therefore less attractive to
potential customers; and
- fluctuations in currency exchange rates and the imposition of currency
exchange controls.
BECAUSE WE DEPEND ON LICENSED THIRD-PARTY TECHNOLOGIES, WE WILL FACE ADDITIONAL
COSTS IF WE HAVE TO REPLACE THESE TECHNOLOGIES.
Our products incorporate technologies that we license from third parties.
Although we believe we could obtain similar technologies from alternative
sources, substituting and integrating replacement technologies could require us
to divert significant resources. These efforts, if required, could delay the
shipment of existing products and could delay the introduction of new products
or enhancements as a result of the diversion of development resources. In
addition, we may be required to license replacement technologies on terms less
favorable than our current terms, which would increase our expenses. If we are
unable to obtain the third-party technologies necessary for the successful
operation of our products, our business would be harmed.
UNKNOWN SOFTWARE DEFECTS COULD HARM OUR BUSINESS AND REPUTATION.
Our software interacts with other complex systems and software. Our
software products may contain defects, particularly when first introduced.
Despite our software testing procedures, we may not discover software defects
that affect our products until after they are deployed. These defects could
result in:
- damage to our reputation;
- product returns or lost sales;
- product liability claims against us;
- delays in or loss of market acceptance of our products; and
- unexpected expenses and diversion of resources to remedy errors.
The occurrence of any of these events would hurt our operating results. In
addition, our customers generally use our products together with products from
other vendors. As a result, when problems occur, it may be difficult to identify
the source of the problem. Therefore, even if these problems are not caused by
our products, they may cause us to incur significant warranty and repair costs,
divert the attention of our engineering personnel and cause significant customer
relations problems.
12
<PAGE> 14
ALTHOUGH WE HAVE TAKEN MEASURES TO PROTECT OUR INTELLECTUAL PROPERTY, OUR
COMPETITIVE POSITION MAY SUFFER IF THESE MEASURES PROVE TO BE INADEQUATE.
Third parties may infringe or misappropriate our copyrights, trademarks and
similar proprietary rights. We cannot be certain that the steps we have taken to
prevent the misappropriation of our intellectual property are adequate,
particularly in foreign countries where the laws may not protect our proprietary
rights as fully as in the United States. We rely on a combination of patent,
copyright, trademark and trade secret laws and restrictions on disclosure to
protect our intellectual property rights. In addition, we enter into
confidentiality agreements with our employees and certain customers, vendors and
strategic partners. Quintus has one issued U.S. patent and one filed U.S. patent
application. Through our acquisition of Acuity, we will acquire one additional
issued U.S. patent as well as nine additional filed U.S. patent applications. We
cannot assure you that any patents will be issued from these applications or
that any issued patent will protect our intellectual property. Furthermore,
other parties may independently develop similar or competing technology or
design around any patents that may be issued to us.
WE MAY FACE COSTLY INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS.
Companies have in the past alleged that our products infringe their
patents, and others may make similar allegations in the future. Such claims or
other claims that our products infringe other intellectual property rights, may
force us to seek expensive licenses, re-engineer our products, engage in
expensive and time-consuming litigation or stop marketing the challenged
product. Further, by contract we typically indemnify our customers against
infringement claims related to our products. Intellectual property litigation is
expensive and time-consuming and could divert management's attention away from
running our business. This litigation could also require us to develop non-
infringing technology or enter into royalty or license agreements. These royalty
or license agreements, if required, may not be available on acceptable terms, if
at all. Our failure or inability to develop non-infringing technology or license
the proprietary rights on a timely basis in a cost-effective manner would harm
our business.
WE COULD LOSE REVENUES AND INCUR SIGNIFICANT COSTS IF OUR SYSTEMS OR THE SYSTEMS
OF OUR CUSTOMERS OR SIGNIFICANT THIRD PARTIES ARE NOT YEAR 2000 COMPLIANT.
We may experience material problems and costs associated with the Year 2000
and our Year 2000 compliance efforts. If our eContact suite of products,
including those software components that we license from others, do not
correctly recognize date information when the calendar year changes to 2000, we
could experience warranty or other claims by our customers. These claims could
be costly to defend and could result in judgments against us.
If our internal systems, such as engineering and finance applications, are
not Year 2000 compliant, we could experience problems running our day-to-day
business. In such a case, product development efforts could be delayed, and we
may be unable to adequately respond to the needs and concerns of our customers.
Further, if systems generally are not Year 2000 compliant, we may not be able to
obtain adequate supplies if our suppliers experience Year 2000 problems, and
companies could reduce their spending on eCRM products if they redirect
resources toward Year 2000 remediation programs. See "Business -- Year 2000
Compliance."
We have made significant efforts to ensure that our proprietary software,
the software we license from others and our internal systems are Year 2000
compliant. We believe that no serious problems will arise that will result in
significant costs. However, a reasonable "worst case" scenario might include:
13
<PAGE> 15
- Cash expenditures and lost person-hours. If certain functions of our
eContact suite fail, our customers may be unable to manage the operations
of their customer service centers and we may be forced to spend time and
money to correct these deficiencies.
- Alternative use problems. We have certified the eContact software
components, whether internally developed or licensed from others, as Year
2000 compliant in the eCRM field of use. If any of our customers have
adopted and are using eContact for alternative uses, they may face
problems that we are not aware of.
- Failure of engineering applications. While we have certified as Year 2000
compliant our material internal systems, it is possible that some of our
non-critical, narrow use engineering applications will experience
difficulties. Although we have no reason to believe that these
applications will fail, some areas of our engineering efforts could be
hindered if problems arise.
WE MAY FACE YEAR 2000-RELATED CLAIMS IN CONNECTION WITH PRIOR VERSIONS OF
ACUITY'S PRODUCTS.
Acuity has determined that certain older versions of its WebCenter software
product are not Year 2000 compliant. Acuity has attempted to contact all
customers with noncompliant products to notify them of this lack of compliance
and to offer them the opportunity to purchase a product upgrade that is Year
2000 compliant. We cannot assure you that customers of Acuity who experience
Year 2000 failures will not seek damages from Acuity or Quintus. In addition,
Acuity previously sold an iChat product that was not Year 2000 compliant. Acuity
sold its iChat product line prior to entering an agreement to be acquired by us.
We believe that any liabilities that result from the iChat product's failure to
be Year 2000 compliant will be the responsibility of the purchaser of the iChat
product line; however, third parties might still seek to assert liability
against us following our acquisition of Acuity.
SALES OF OUR COMMON STOCK INTO THE PUBLIC MARKET FOLLOWING THIS OFFERING COULD
HARM THE MARKET PRICE OF OUR COMMON STOCK AND OUR ABILITY TO RAISE MONEY THROUGH
SALES OF EQUITY SECURITIES.
The value of your investment in our common stock and our ability to raise
money through the sale of additional equity securities could be adversely
affected if our existing stockholders sell large amounts of their Quintus common
stock into the public market. If significant volumes of our common stock are
sold into the public market, the market price of our common stock and therefore
the value of your investment could fall. This could impair our ability to raise
capital through the sale of additional equity securities. Based on shares
outstanding as of September 30, 1999, upon completion of this offering, we will
have 31,124,685 shares of common stock outstanding. The holders of substantially
all of our currently outstanding stock are subject to lock-up agreements or
bylaw restrictions providing that, with certain limited exceptions, the holders
will not sell or otherwise dispose of any shares of our common stock for a
period of 180 days after the date of this prospectus without the prior written
approval of Donaldson, Lufkin & Jenrette Securities Corporation. When these
lock-up agreements and bylaw restrictions expire, many of these shares and the
shares of common stock underlying any options held by these individuals will
become eligible for sale. See "Shares Eligible for Future Sale."
THERE MAY BE NO ACTIVE TRADING MARKET IN OUR COMMON SHARES AFTER THIS OFFERING,
WHICH MAY MAKE IT DIFFICULT FOR YOU TO RESELL YOUR SHARES.
There has been no public trading market for our common shares prior to this
offering, and we cannot be sure that an active trading market will develop upon
completion of this offering or, if one does develop, that it will be sustained.
If no public trading market for our common shares develops,
14
<PAGE> 16
or if this market is not active or sustained, it may be difficult for you to
resell your shares at a price at or above the initial public offering price.
CONTROL BY EXISTING STOCKHOLDERS MAY LIMIT YOUR ABILITY TO INFLUENCE THE OUTCOME
OF DIRECTOR ELECTIONS AND THE APPROVAL OF MERGERS OR OTHER BUSINESS
COMBINATIONS.
Upon completion of this offering, our executive officers, directors and
principal stockholders and their affiliates will beneficially own 18,288,434
shares, or approximately 56.4%, of the outstanding shares of common stock. If
they were to act in concert, these stockholders would be able to significantly
influence all matters requiring approval by our stockholders, including the
election of directors and the approval of mergers or other business combination
transactions.
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS, AS WELL AS PROVISIONS OF
EMPLOYMENT AGREEMENTS OF SOME OF OUR KEY EXECUTIVE OFFICERS, COULD PREVENT OR
DELAY A CHANGE IN CONTROL OF QUINTUS.
Provisions in our bylaws and in our certificate of incorporation may have
the effect of delaying or preventing a change of control or changes in
management of Quintus. These provisions include:
- the requirement that a special meeting of stockholders may only be called
by stockholders owning at least a majority of our outstanding shares;
- the ability of our board of directors to issue preferred stock without
stockholder approval; and
- the right of our board of directors to elect a director to fill a vacancy
created by the expansion of the board of directors.
In addition, some of our officers have agreements with us that provide for
acceleration of vesting following certain sales or mergers of Quintus. These
provisions could make our acquisition by a third party more costly and could
delay or prevent a change of control or changes in our management.
15
<PAGE> 17
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. These statements
relate to future events or our future financial performance. In some cases, you
can identify forward-looking statements by terminology such as "may," "will,"
"should," "expect," "plan," "anticipate," "believe," "estimate," "predict,"
"potential" or "continue," the negative of such terms or other comparable
terminology. These statements are only predictions. Actual events or results may
differ materially. In evaluating these statements you should specifically
consider various factors, including the risks outlined under "Risk Factors."
These factors may cause our actual results to differ materially from any
forward-looking statement. Although we believe that the expectations reflected
in the forward-looking statements are reasonable, we cannot guarantee future
results, levels of activity, performance or achievements.
USE OF PROCEEDS
We estimate that the net proceeds from the sale of 4,000,000 shares of
common stock we are offering will be approximately $47.2 million at an assumed
initial public offering price of $13.00 and after deducting estimated offering
expenses of approximately $1.2 million and underwriting discounts and
commissions payable by Quintus. If the underwriters exercise their
over-allotment option in full, then the net proceeds will be approximately $54.4
million.
Under the terms of our certificate of incorporation in effect prior to this
offering, we are required to make a payment of approximately $18.2 million upon
the closing of this offering to the current holders of our Series A, Series B,
Series C and Series D preferred stock as a result of the conversion of this
preferred stock into common stock. We expect to use the remaining net proceeds
for working capital and other general corporate purposes. Some of the net
proceeds will be used to fund the expansion of our sales force and our
international operations. We currently estimate that during the next 12 months
we will incur at least $25 million to fund sales and marketing expenses, of
which at least $5 million will fund international operations. A portion of the
net proceeds may also be used to acquire or invest in complementary businesses,
technologies, product lines or products. We have no current plans, agreements or
commitments with respect to any such acquisitions or investments other than the
pending closing of our acquisition of Acuity. We will use shares of our capital
stock to complete this acquisition. Our management will have broad discretion
concerning the use of the net proceeds of this offering. We intend to invest
these proceeds in investment grade, interest-bearing securities pending their
use.
DIVIDEND POLICY
We have never declared or paid any dividends on our common stock or other
securities. We currently expect to retain future earnings, if any, for use in
the operation and expansion of our business and do not anticipate paying cash
dividends in the future. Our existing bank line of credit prohibits the payment
of cash dividends.
16
<PAGE> 18
CORPORATE INFORMATION
Quintus was incorporated in California in February 1984. Quintus became a
wholly-owned subsidiary of Intergraph Corporation in October 1989 and was
reincorporated in Delaware in June 1990. Quintus was purchased from Intergraph
Corporation in May 1995 in a management-led buyout backed by new investors. Our
principal executive offices are located at 47212 Mission Falls Court, Fremont,
California 94539 and our telephone number is (510) 624-2800. We have registered
the trademarks "Quintus" and "CustomerQ." Every other trademark, trade name or
service mark of any other company appearing in this prospectus is the property
of its holder.
17
<PAGE> 19
CAPITALIZATION
The following table sets forth our cash position, current portion of
long-term obligations and total capitalization as of September 30, 1999. The pro
forma column of the table gives effect to the issuance of an estimated 4,551,441
shares and the assumption of approximately $1.8 million in debt in connection
with our acquisition of Acuity.
The pro forma as adjusted column of the table gives effect to the:
- issuance of 328,649 shares upon the assumed exercise of outstanding
warrants that otherwise terminate upon the closing of this offering;
- conversion of all outstanding shares of our preferred stock into shares
of our common stock upon the closing of this offering;
- required payment of approximately $18.2 million to holders of some series
of our preferred stock upon conversion of our preferred stock into our
common stock; and
- sale in this offering of 4,000,000 shares of common stock at an assumed
initial public offering price of $13.00 per share, less underwriting
discounts and commissions and estimated offering expenses payable by
Quintus.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
(IN THOUSANDS)
<S> <C> <C> <C>
Cash........................................................ $ 7,713 $ 9,954 $ 39,677
======== ======== ========
Current portion of long-term obligations.................... $ 1,393 $ 1,937 $ 1,937
======== ======== ========
Long-term obligations, less current portion................. $ 1,331 $ 1,835 $ 1,835
Liability related to redeemable convertible preferred
stock..................................................... 17,811 17,811 --
Stockholders' equity (deficiency):
Convertible preferred stock, $0.001 par value, shares
authorized 19,055,000 and 17,938,849 outstanding,
actual: 19,055,000 shares authorized and 20,943,704
shares outstanding, pro forma: 10,000,000 shares
authorized and no shares outstanding, pro forma as
adjusted............................................... 18 21 --
Common stock, $0.001 par value, shares authorized
40,000,000 and 4,305,746 outstanding, actual;
40,000,000 shares authorized and 5,852,333 shares
outstanding, pro forma; 100,000,000 shares authorized
and 31,124,685 outstanding, pro forma as adjusted...... 4 6 31
Additional paid-in capital................................ 30,310 75,525 123,055
Note receivable from stockholder.......................... (223) (223) (223)
Deferred stock based compensation......................... (3,100) (3,100) (3,100)
Accumulated deficit....................................... (36,277) (39,269) (39,269)
-------- -------- --------
Total stockholders' equity (deficiency)................ (9,268) 32,960 80,494
-------- -------- --------
Total capitalization.............................. $ 9,874 $ 52,606 $ 82,329
======== ======== ========
</TABLE>
This table does not include:
- 3,796,755 shares issuable upon exercise of options outstanding as of
September 30, 1999, including 877,955 options to be assumed in connection
with our acquisition of Acuity as if it had occurred on September 30,
1999;
- 1,042,923 shares issuable upon exercise of warrants outstanding as of
September 30, 1999, including 323,927 warrants to be assumed in
connection with our acquisition of Acuity as if it had occurred on
September 30, 1999; and
- 2,981,995 shares reserved for future issuance under our stock plans as of
September 30, 1999.
18
<PAGE> 20
DILUTION
Our pro forma net tangible book value as of September 30, 1999, was $(13.0)
million, or approximately $(0.48) per share. Pro forma net tangible book value
per share represents the pro forma stockholders' equity less pro forma
intangible assets divided by the pro forma number of shares of common stock
outstanding, giving effect to the conversion of all outstanding shares of
preferred stock, the estimated 4,551,441 shares to be issued in connection with
the closing of the acquisition of Acuity and the issuance of 328,649 shares upon
the assumed exercise of outstanding warrants that otherwise terminate upon the
closing of this offering. After giving effect to the sale of the 4,000,000
shares of common stock being offered at an assumed initial public offering price
of $13.00 per share and after deducting the estimated underwriting discounts and
commissions and estimated offering expenses payable by us, our pro forma net
tangible book value at September 30, 1999, would have been $34.2 million, or
approximately $1.10 per share. This represents an immediate increase in pro
forma net tangible book value of $1.58 per share to existing stockholders and an
immediate dilution in net tangible book value of $11.90 per share to new
investors of common stock in this offering. The following table illustrates this
dilution on a per share basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $13.00
Pro forma net tangible book value per share as of
September 30, 1999..................................... $(0.48)
Increase attributable to new investors.................... $ 1.58
Pro forma net tangible book value per share after
offering.................................................. 1.10
------
Dilution per share to new investors......................... $11.90
======
</TABLE>
The following table sets forth, on a pro forma basis as of September 30,
1999, the differences between the number of shares of common stock purchased,
the total consideration paid and the average price per share paid by existing
stockholders and by the new investors purchasing shares of common stock in this
offering, before deducting underwriting discounts and commissions and estimated
offering expenses payable by us, at the assumed public offering price of $13.00
per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
<S> <C> <C> <C> <C> <C>
Existing stockholders.................. 27,124,685 87.1% $ 62,415,000 54.6% $ 2.30
New public investors................... 4,000,000 12.9 52,000,000 45.4 13.00
---------- ----- ------------ -----
Total........................ 31,124,685 100.0% $114,415,000 100.0%
========== ===== ============ =====
</TABLE>
To the extent that any shares are issued upon exercise of options or
warrants that were outstanding at September 30, 1999 or granted after that date,
or reserved for future issuance under our stock plans, there will be further
dilution to new investors.
19
<PAGE> 21
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with our consolidated financial statements and the related notes and
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus.
The consolidated statements of operations data for the years ended March
31, 1997 and 1998 and consolidated balance sheet data as of March 31, 1998 are
derived from our consolidated financial statements included elsewhere in this
prospectus, which have been audited by Ernst & Young LLP. The consolidated
statements of operations data for the year ended March 31, 1999 and consolidated
balance sheet data as of March 31, 1999 are derived from our consolidated
financial statements included elsewhere in this prospectus, which have been
audited by Deloitte & Touche LLP. The consolidated statements of operations data
for the period from May 25, 1995, the date of the acquisition of Quintus from
Intergraph Corporation in a management-led buyout with the financial backing of
new investors, to March 31, 1996 and balance sheet data as of March 31, 1996 and
1997 are derived from financial statements audited by Ernst & Young LLP, which
are not included in this prospectus. Prior to May 25, 1995, we were a
wholly-owned subsidiary of Intergraph Corporation. The financial data for the
year ended and as of March 31, 1995 is derived from Company's predecessor entity
financial records. In connection with the acquisition of Quintus from
Intergraph, in-process technology of $6.1 million and purchased software of
$398,000 was recorded. These amounts were charged to the Company's operations
during the year ended March 31, 1996.
During July 1997 and November 1997, we acquired Call Center Enterprises,
Inc. and Nabnasset Corporation, respectively. In connection with these
acquisitions, we acquired intangible assets of approximately $10.8 million,
which are being amortized over a three year period, and we recorded a charge for
approximately $2.2 million for in-process research and development costs during
the year ended March 31, 1998. These transactions are described in detail at
Note 2 of our notes to our Consolidated Financial Statements included elsewhere
in this prospectus.
The consolidated statements of operations data for the six months ended
September 30, 1998 and 1999 and the consolidated balance sheet data as of
September 30, 1999 are derived from our unaudited consolidated financial
statements which, in the opinion of management, have been prepared on the same
basis as the audited consolidated financial statements and reflect all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of our results of operations and financial position. The
historical results presented below are not necessarily indicative of the results
to be expected for any future period.
20
<PAGE> 22
<TABLE>
<CAPTION>
------------
FOR THE
PERIOD FROM
-------------- MAY 25, 1995 SIX MONTHS ENDED
YEAR ENDED THROUGH YEAR ENDED MARCH 31, SEPTEMBER 30,
MARCH 31, MARCH 31, ----------------------------- -----------------
1995 1996 1997 1998 1999 1998 1999
(PREDECESSOR) (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues:
License.......................... $ 6,193 $ 5,174 $ 8,406 $ 12,948 $ 17,577 $ 9,913 $13,348
Service.......................... 915 1,267 5,208 8,942 12,730 5,947 8,742
------- ------- ------- -------- -------- ------- -------
Total revenues............ 7,108 6,441 13,614 21,890 30,307 15,860 22,090
------- ------- ------- -------- -------- ------- -------
Cost of revenues:
License.......................... 1,394 637 972 708 554 268 671
Service.......................... 780 985 4,199 7,582 8,623 4,176 5,071
------- ------- ------- -------- -------- ------- -------
Total cost of revenues.... 2,174 1,622 5,171 8,290 9,177 4,444 5,742
------- ------- ------- -------- -------- ------- -------
Gross profit....................... 4,934 4,819 8,443 13,600 21,130 11,416 16,348
Operating expenses:
Sales and marketing.............. 3,019 4,031 6,879 11,336 17,147 8,616 9,438
Research and development......... 3,378 1,795 3,667 5,102 6,719 3,353 3,974
General and administrative....... 689 1,196 1,263 3,233 3,577 1,632 1,993
Amortization of intangibles...... -- -- -- 1,335 3,185 1,596 1,592
Acquired in-process
technologies................... -- 6,060 -- 2,200 -- -- --
Stock-based compensation......... -- -- -- -- 171 60 609
------- ------- ------- -------- -------- ------- -------
Total operating
expenses................ 7,086 13,082 11,809 23,206 30,799 15,257 17,606
------- ------- ------- -------- -------- ------- -------
Loss from continuing operations.... (2,152) (8,263) (3,366) (9,606) (9,669) (3,841) (1,258)
Interest expense, net.............. (976) (32) (160) (540) (917) (525) (425)
------- ------- ------- -------- -------- ------- -------
Net loss from continuing
operations....................... (3,128) (8,295) (3,526) (10,146) (10,586) (4,366) (1,683)
Discontinued operations:
Loss from discontinued
operations..................... -- -- -- (1,103) (1,891) (649) --
Gain on disposal of discontinued
operations..................... -- -- -- -- 1,011 -- --
------- ------- ------- -------- -------- ------- -------
Net loss........................... $(3,128) $(8,295) $(3,526) $(11,249) $(11,466) $(5,015) $(1,683)
======= ======= ======= ======== ======== ======= =======
Basic and diluted net loss per
common share from continuing
operations....................... $(76.63) $ (4.25) $ (6.88) $ (3.73) $ (1.66) $ (0.49)
======= ======= ======== ======== ======= =======
Basic and diluted net loss per
common share..................... $(76.63) $ (4.25) $ (7.53) $ (4.04) $ (1.91) $ (0.49)
======= ======= ======== ======== ======= =======
Shares used in computation, basic
and diluted...................... 109 868 1,695 2,835 2,634 3,435
- -----------------------------------
</TABLE>
<TABLE>
<CAPTION>
---------------
AS OF AS OF MARCH 31, AS OF
MARCH 31, ---------------------------------------- SEPTEMBER 30,
1995 1996 1997 1998 1999 1999
(PREDECESSOR) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash.................................... $ 1,117 $ 792 $ 3,045 $ 1,986 $ 1,785 $ 7,713
Working capital (deficiency)............ 1,537 582 1,552 (11,250) (8,644) 2,918
Total assets............................ 4,943 5,699 9,852 23,141 19,594 27,973
Long-term obligations, net of current
portion............................... 14,510 528 19 4,246 2,201 1,331
Redeemable convertible preferred
stock................................. -- 9,478 14,110 17,811 17,811 17,811
Total stockholders' deficiency.......... (11,696) (7,850) (10,831) (20,333) (20,091) (9,268)
</TABLE>
21
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial
condition and results of operations in conjunction with our consolidated
financial statements and related notes included elsewhere in this prospectus.
This discussion and analysis contains forward-looking statements that involve
risks, uncertainties and assumptions. Our actual results may differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including, but not limited to, those set forth under "Risk
Factors" and elsewhere in this prospectus.
OVERVIEW
Quintus was incorporated in 1984 to develop artificial intelligence
software and was acquired in 1989 by Intergraph Corporation, a provider of
interactive computer graphics systems. Quintus was purchased from Intergraph in
May 1995 in a management-led buyout with the financial backing of new investors.
At the time of the buyout we primarily provided application software and
consulting services to the help desk market. Since then we have introduced
several customer relationship management applications for call centers. In
November 1997, we acquired Nabnasset Corporation, a provider of computer
telephony integration software. Following the acquisition we introduced our
Quintus CTI product and began integrating it with our customer relationship
management applications. As new communication channels have emerged, we have
introduced new products and added functionality to our existing products. In
February 1999, we introduced our Quintus eContact suite as a platform for
integrating our existing products with new channel applications. As part of our
eContact suite, we also resell an email management product from Brightware. In
September 1999, we entered into an agreement to acquire Acuity, a provider of
software products to manage Internet-based customer interactions. The
acquisition is expected to close prior to the effectiveness of this offering.
Our revenues were $13.6 million, $21.9 million, $30.3 million and $22.1
million in fiscal 1997, 1998 and 1999 and for the six months ended September 30,
1999. We derive substantially all of our revenues from licenses and services
associated with our products. License revenues are derived from product sales to
customers and through resellers and distributors. Service revenues are
attributable to the installation, consulting, maintenance and other support
services related to the sale of our products.
License revenues from sales to end users are recognized upon shipment of
the product, if a signed contract exists, the fee is fixed and determinable,
collection is deemed probable and vendor-specific objective evidence exists to
allocate the total fee to elements of the arrangement. License revenues for
contracts requiring us to provide significant customization services are
recognized using percentage of completion accounting using labor days as the
basis for determining the percentage complete. License revenues from sales to
resellers and distributors are generally recognized at the time a reseller or
distributor reports to us that they have sold our software and all revenue
recognition criteria have been met.
Service revenues include maintenance revenues which are deferred and
recognized ratably over the maintenance period, which in most cases is one year,
and revenues from training and consulting services, which are recognized as
services are performed.
We sell our products to customers in North and South America, Europe, South
Africa and Japan. Sales to customers outside of the United States represented
15.3%, 14.0%, 18.3% and 13.8% of total revenues in fiscal 1997, 1998 and 1999
and for the six months ended September 30, 1999. All of our sales are
denominated in U.S. dollars. We intend to establish additional distribution
relationships
22
<PAGE> 24
with partners outside of the United States and expect international revenues to
continue to increase as a percent of our total revenues in the future.
We sell our products through a direct sales force and indirectly through
resellers and distribution partners. Lucent Technologies, which began reselling
our products in November 1997, accounted for 9.3%, 21.7% and 28.3% of total
revenues in fiscal 1998 and 1999 and for the six months ended September 30,
1999. In fiscal 1997, one customer, State Farm Insurance, accounted for 23.8% of
total revenues. In fiscal 1998 and 1999, no customer accounted for more than 10%
of total revenues. For the six months ended September 30, 1999, one customer,
Procter & Gamble, accounted for 12.6% of total revenues. We expect that sales of
our products to a limited number of parties will continue to account for a large
percentage of total revenues for the foreseeable future.
In July 1997, we acquired Call Center Enterprises, a provider of strategic
call center consulting services, for $965,000 in cash. The acquisition was
accounted for as a purchase. In February 1999, we sold this business to
AnswerThink Consulting Group for $2.1 million in cash. The results of operations
for Call Center Enterprises are presented as discontinued operations in our
consolidated financial statements.
In November 1997, we acquired Nabnasset for $3.5 million in cash, stock and
options to purchase our common stock. The transaction was accounted for as a
purchase. In this acquisition, acquired technology included both existing
technology and in-process research and development. The valuation of acquired
technology was made by applying the income forecast method, which considers the
present value of cash flows by product lines. Acquired in-process technologies
were charged to operations, as the technologies did not have alternative future
uses as of the date of the acquisition.
As of September 30, 1999 we had an accumulated deficit of approximately
$36.3 million. Our net loss from continuing operations was $3.5 million, $10.1
million, $10.6 million and $1.7 million in fiscal 1997, 1998 and 1999 and for
the six months ended September 30, 1999. These losses resulted from costs
incurred in the development and sale of our products and services. We expect to
continue to experience significant growth in our operating expenses,
particularly in the areas of sales and marketing. As a result, we expect to
incur additional losses and cannot assure you that we will achieve or sustain
profitability in the future.
23
<PAGE> 25
RESULTS OF OPERATIONS
The following table sets forth our results of operations as a percentage of
total revenues:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
----------------------- --------------
1997 1998 1999 1998 1999
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
License........................................ 61.7% 59.2% 58.0% 62.5% 60.4%
Service...................................... 38.3 40.8 42.0 37.5 39.6
----- ----- ----- ----- -----
Total revenues............................ 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- -----
Cost of revenues:
License...................................... 7.1 3.2 1.8 1.7 3.0
Service...................................... 30.8 34.6 28.5 26.3 23.0
----- ----- ----- ----- -----
Total cost of revenues.................... 37.9 37.8 30.3 28.0 26.0
----- ----- ----- ----- -----
Gross profit................................... 62.1 62.2 69.7 72.0 74.0
Operating expenses:
Sales and marketing.......................... 50.5 51.8 56.6 54.3 42.7
Research and development..................... 26.9 23.3 22.2 21.1 18.0
General and administrative................... 9.3 14.8 11.8 10.3 9.0
Amortization of intangibles.................. -- 6.1 10.5 10.1 7.2
Acquired in-process technologies............. -- 10.1 -- -- --
Stock-based compensation..................... -- -- 0.6 0.4 2.8
----- ----- ----- ----- -----
Total operating expenses.................. 86.7 106.1 101.7 96.2 79.7
----- ----- ----- ----- -----
Loss from continuing operations................ (24.6) (43.9) (32.0) (24.2) (5.7)
Interest expense, net.......................... (1.2) (2.5) (3.0) (3.3) (1.9)
----- ----- ----- ----- -----
Net loss from continuing operations............ (25.8) (46.4) (35.0) (27.5) (7.6)
Discontinued operations:
Loss from discontinued operations............ -- (5.0) (6.2) (4.1) --
Gain on disposal of discontinued
operations................................ -- -- 3.3 -- --
----- ----- ----- ----- -----
Net loss....................................... (25.8)% (51.4)% (37.9)% (31.6)% (7.6)%
===== ===== ===== ===== =====
</TABLE>
SIX MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
REVENUES
Total Revenues. Total revenues increased 39.3% from $15.9 million to $22.1
million for the six months ended September 30, 1998 and 1999.
License. License revenues increased 34.7% from $9.9 million to $13.3
million for the six months ended September 30, 1998 and 1999. The increase in
license revenues was primarily due to an increase in products sold through
Lucent Technologies from $3.1 million to $5.3 million for the six months ended
September 30, 1998 and 1999, and a large direct sale of $2.1 million to Procter
& Gamble.
Service. Service revenues increased 47.0% from $5.9 million to $8.7 million
for the six months ended September 30, 1998 and 1999. The growth in service
revenues was due primarily to an increase in maintenance revenues from $3.2
million to $4.6 million for the six months ended September 30,
24
<PAGE> 26
1998 and 1999 as a result of our increased installed base. The growth in service
revenues was also due to an increase in consulting service revenues from new and
existing customers from $2.7 million to $4.2 million for the six months ended
September 30, 1998 and 1999. In future periods, we expect service revenues to
decrease as a percentage of total revenues as we seek to have third-party system
integrators undertake a greater percentage of our product implementation.
COST OF REVENUES
License. Cost of licenses consists primarily of royalties, product
packaging, documentation and production. Cost of licenses was $268,000 and
$671,000 for the six months ended September 30, 1998 and 1999, representing 2.7%
and 5.0% of license revenues in the respective periods. The increase was
primarily due to an increase in license revenues and the resulting increase in
third-party royalty payments and to a lesser extent increases in material costs
and other related expenses. Recently, we have entered into a reseller agreement
with Brightware which requires significantly higher royalty rates. Although the
sale of products under this agreement have been minimal to date, the cost of
licenses may vary significantly in the future, depending on the mix of
internally developed and third-party products.
Service. Cost of services consists primarily of personnel costs and
third-party consulting fees associated with implementation, customization,
maintenance and other support services. Cost of services was $4.2 million and
$5.1 million for the six months ended September 30, 1998 and 1999, representing
70.2% and 58.0% of service revenues in the respective periods. The dollar
increase was primarily due to an increase in the number of third-party
consultants we engaged. Cost of services as a percentage of service revenues
declined primarily due to the higher margins for maintenance revenues. The cost
of services as a percentage of service revenues may vary between periods due to
the mix of services provided and the resources used to provide these services.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions, bonuses, travel, public relations, marketing materials
and trade shows. Sales and marketing expenses increased 9.5% from $8.6 million
to $9.4 million for the six months ended September 30, 1998 and 1999,
representing 54.3% and 42.7% of total revenues in the respective periods. The
increase in sales and marketing expenses was primarily due to higher
international operating expenses, which increased from $400,000 to $1.7 million
for the six months ended September 30, 1998 and 1999, offset by lower spending
on marketing programs. We formed our first foreign subsidiary in July of 1998.
We intend to invest substantial resources to expand our direct sales force and
other distribution channels, and to conduct marketing programs to support our
existing and new product offerings. As a result, sales and marketing expenses
are expected to increase in future periods.
Research and Development. Research and development expenses consist
primarily of personnel and related expenses associated with the development of
new products, the enhancement and localization of existing products, and quality
assurance and testing costs incurred prior to commercial production. Research
and development expenses increased 18.5% from $3.4 million to $4.0 million for
the six months ended September 30, 1998 and 1999, representing 21.1% and 18.0%
of total revenues in the respective periods. The decline in research and
development expenses as a percentage of total revenues was primarily due to the
growth in total revenues. We anticipate that research and development expenses
will increase in future periods. To date, all research and development costs
have been expensed as incurred.
General and Administrative. General and administrative expenses consist
primarily of salaries and other related costs for finance and human resource
employees, as well as accounting, legal, other
25
<PAGE> 27
professional fees and allowance for doubtful accounts. General and
administrative expenses increased 22.1% from $1.6 million to $2.0 million for
the six months ended September 30, 1998 and 1999, representing 10.3% and 9.0% of
total revenues in the respective periods. The dollar increase was primarily due
to increased staffing costs of $318,000 and associated expenses necessary to
manage and support our increased scale of operations. We anticipate that our
general and administrative expenses will continue to increase as a result of the
continued expansion of our administrative staff and facilities to support
growing operations.
Amortization of Intangibles. Amortization of intangibles represents costs
associated with our acquisition of Nabnasset in November 1997. Amortization is
recorded on a straight-line basis over a period of three years ending October
2000. Amortization of intangibles was $1.6 million for the six months ended
September 30, 1998 and 1999.
Stock-Based Compensation. In the six months ended September 30, 1998 and
1999, we recorded deferred stock-based compensation of $238,000 and $2.7
million, relating to stock options granted to employees. Such amounts represent
the difference between the exercise price and the deemed fair value of our
common stock at the date of grant. These amounts are being amortized over the
vesting periods of the granted options. In the six months ended September 30,
1998 and 1999, we recognized stock-based compensation expense, in continuing
operations, related to options granted to employees of $60,000 and $609,000.
Interest Expense, Net. Interest expense consists of interest expense and
other non-operating expenses. In the six months ended September 30, 1998,
interest expense included $165,000 with respect to warrants granted in
connection with notes payable to stockholders. There was no such expense
recognized during the six months ended September 30, 1999.
DISCONTINUED OPERATIONS
On February 26, 1999 we sold the assets of our Call Center Enterprises
division. The division was sold for $2.1 million of cash resulting in a gain on
disposal of $1.0 million. We may receive an additional payment of up to $400,000
from the sale of Call Center Enterprises based on the number of former Call
Center Enterprises employees who remain employed by the purchaser for one year
subsequent to the date of disposition. The division had a loss of $649,000 for
the six months ended September 30, 1998, which was recorded as discontinued
operations.
FISCAL 1997, 1998 AND 1999
REVENUES
Total Revenues. Total revenues were $13.6 million, $21.9 million and $30.3
million in fiscal 1997, 1998 and 1999, increasing 60.8%, from fiscal 1997 to
1998 and 38.5% from fiscal 1998 to 1999.
License. License revenues were $8.4 million, $12.9 million and $17.6
million in fiscal 1997, 1998 and 1999, increasing 54.0% from fiscal 1997 to 1998
and 35.8% from fiscal 1998 to 1999. The increase in revenues from fiscal 1997 to
1998 was primarily due to an increase in our customer base as well as an
increase in sales to our existing customers. In addition, we acquired Nabnasset
in November 1997 and began realizing license revenues from our newly acquired
Quintus CTI product. The increase in license revenues from fiscal 1998 to 1999
was primarily due to a full year of CTI product sales in fiscal 1999 compared to
fewer than five months in fiscal 1998. License revenue from our CTI product
increased from $3.1 million in fiscal 1998 to $7.7 million in fiscal 1999.
Service. Service revenues were $5.2 million, $8.9 million and $12.7 million
in fiscal 1997, 1998 and 1999, increasing 71.7% from fiscal 1997 to 1998 and
42.4% from fiscal 1998 to 1999. The
26
<PAGE> 28
increase in service revenues was primarily due to growth in the installed base
of customers with maintenance agreements and maintenance renewals from products
licensed in prior periods representing $1.9 million, $4.2 million and $7.2
million for fiscal 1997, 1998 and 1999. The growth in service revenues was also
due to an increase in consulting service revenues from new and existing
customers, representing $3.3 million, $4.7 million and $5.5 million for fiscal
1997, 1998 and 1999.
COST OF REVENUES
License. Cost of licenses was $972,000, $708,000 and $554,000 in fiscal
1997, 1998 and 1999, representing 11.6%, 5.5% and 3.2% of license revenue in the
respective periods. The decrease was primarily due to a decrease in royalty
payments associated with the licensing of our products.
Service. Cost of services was $4.2 million, $7.6 million and $8.6 million
for fiscal 1997, 1998 and 1999, representing 80.6%, 84.8% and 67.7% of service
revenue in the respective periods. From fiscal 1997 to 1998, the dollar increase
was primarily due to increases in professional services personnel, third-party
consulting expenses, and customer support staffing. From fiscal 1998 to 1999,
the dollar increase was primarily due to increases in professional services
personnel and third party consulting expenses. The decrease in cost of services
as a percentage of service revenues from fiscal 1998 to 1999 was primarily due
to a result of higher margins on our maintenance revenues.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses were $6.9 million, $11.3
million and $17.1 million in fiscal 1997, 1998 and 1999, representing 50.5%,
51.8% and 56.6% of total revenues in the respective periods. The increase was
primarily due to the expansion of our worldwide sales and marketing
organization, which increased from 34 employees in fiscal 1997 to 56 employees
in fiscal 1999, higher sales commissions associated with increased revenues and
increased marketing activities.
Research and Development. Research and development expenses were $3.7
million, $5.1 million and $6.7 million in fiscal 1997, 1998 and 1999,
representing 26.9%, 23.3% and 22.2% of total revenues in the respective periods.
The dollar increases for each of the periods were primarily due to increases in
personnel, which increased from 31 employees in fiscal 1997 to 44 employees in
fiscal 1999, and related overhead costs and to a lesser extent increased
consulting expenses.
General and Administrative. General and administrative expenses were $1.3
million, $3.2 million, and $3.6 million in fiscal 1997, 1998 and 1999,
representing 9.3%, 14.8% and 11.8% of total revenues in the respective periods.
The increase from fiscal 1997 to 1998 was primarily due to increases in
personnel, which increased from 16 employees in fiscal 1997 to 24 employees in
fiscal 1998, related overhead costs and expenses related to our infrastructure
expansion. The percentage decrease from fiscal 1998 to 1999 was primarily due to
our increased revenues.
Amortization of Intangibles. Amortization of intangibles was $1.3 million
and $3.2 million in fiscal 1998 and 1999, representing 6.1% and 10.5% of total
revenues in the respective periods. The increase was due to a full year of
amortization in fiscal 1999 versus a partial year of amortization in fiscal
1998.
Acquired In-Process Technologies. In November 1997, we acquired Nabnasset
for $3.5 million in cash, stock and options to purchase our common stock. The
transaction was accounted for as a purchase. In this acquisition, acquired
technology included both existing technology and in-process research and
development. The valuation of acquired technology was made by applying the
income forecast method, which considers the present value of cash flows by
product lines. Acquired
27
<PAGE> 29
in-process technologies were charged to operations, as the technologies did not
have alternative future uses as of the date of the acquisition.
Stock-Based Compensation. During fiscal 1998 and 1999 we recorded deferred
stock-based compensation of $99,000 and $1.1 million relating to stock options
granted to employees. We had no deferred stock compensation relating to stock
options granted to employees in fiscal 1997. We recorded $171,000 of stock-based
compensation expense in operating expenses in fiscal 1999. There was no
stock-based compensation expense recorded in operating expenses during fiscal
1997 or 1998.
Interest Expense, Net. Interest expense consists of interest expense and
other non-operating expenses. During fiscal 1998 and 1999, we recognized
interest expense of $258,000 and $165,000 with respect to warrants granted in
connection with notes payable to stockholders.
DISCONTINUED OPERATIONS
Our Call Center Enterprises division, which was sold in February 1999, had
revenues of $2.5 million and $3.2 million for fiscal 1998 and 1999, and incurred
a loss from operations of $1.1 million and $1.9 million in fiscal 1998 and 1999.
There were no assets or liabilities remaining as of March 31, 1999. Included
within the $1.0 million gain on the sale of discontinued operations is the fair
value of options granted in connection with the sale of Call Center Enterprises
of $453,000.
28
<PAGE> 30
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited quarterly results of operations
data for the six quarters ended September 30, 1999, as well as such data
expressed as a percentage of our total revenues for the periods presented. The
information in the table below should be read in conjunction with our annual
audited consolidated financial statements and related notes included elsewhere
in this prospectus. We have prepared this information on the same basis as our
consolidated financial statements and the information includes all adjustments,
consisting only of normal recurring adjustments, that we consider necessary for
a fair presentation of our financial position and operating results for the
quarters presented. Our quarterly operating results have varied substantially in
the past and may vary substantially in the future. You should not draw any
conclusions about our future results for any period from the results of
operations for any particular quarter.
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1998 1998 1998 1999 1999 SEPTEMBER 30,
(IN THOUSANDS) 1999
<S> <C> <C> <C> <C> <C> <C>
Revenues:
License.................... $ 4,790 $ 5,123 $ 2,930 $ 4,734 $ 6,126 $ 7,222
Service.................. 2,762 3,185 3,024 3,759 4,167 4,575
------- ------- ------- ------- ------- -------
Total revenues......... 7,552 8,308 5,954 8,493 10,293 11,797
Cost of revenues:
License.................. 74 194 155 131 218 453
Service.................. 1,957 2,219 2,426 2,021 2,421 2,650
------- ------- ------- ------- ------- -------
Total cost of
revenues............. 2,031 2,413 2,581 2,152 2,639 3,103
Gross profit............... 5,521 5,895 3,373 6,341 7,654 8,694
Operating expenses:
Sales and marketing...... 4,518 4,098 4,639 3,892 4,314 5,124
Research and
development............ 1,795 1,558 1,792 1,574 1,873 2,101
General and
administrative......... 803 829 1,109 836 998 995
Amortization of
intangibles............ 796 800 798 791 796 796
Stock-based
compensation........... 4 56 56 55 169 440
------- ------- ------- ------- ------- -------
Total operating
expenses............. 7,916 7,341 8,394 7,148 8,150 9,456
------- ------- ------- ------- ------- -------
Loss from continuing
operations............... (2,395) (1,446) (5,021) (807) (496) (762)
Interest expense, net...... (391) (134) (181) (211) (194) (231)
------- ------- ------- ------- ------- -------
Net loss from continuing
operations............... (2,786) (1,580) (5,202) (1,018) (690) (993)
Discontinued operations:
Loss from discontinued
operations............. (190) (459) (781) (461) -- --
Gain on disposal of
discontinued
operations............. -- -- -- 1,011 -- --
------- ------- ------- ------- ------- -------
Net loss................... $(2,976) $(2,039) $(5,983) $ (468) $ (690) $ (993)
======= ======= ======= ======= ======= =======
</TABLE>
29
<PAGE> 31
<TABLE>
<CAPTION>
AS A PERCENTAGE OF TOTAL REVENUES
------------------------------------------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1998 1998 1998 1999 1999 1999
<S> <C> <C> <C> <C> <C> <C>
Revenues:
License........................ 63.4% 61.7% 49.2% 55.7% 59.5% 61.2%
Service...................... 36.6 38.3 50.8 44.3 40.5 38.8
----- ----- ------ ----- ----- -----
Total revenues............. 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenues:
License...................... 1.0 2.3 2.6 1.5 2.1 3.8
Service...................... 25.9 26.7 40.7 23.8 23.5 22.5
----- ----- ------ ----- ----- -----
Total costs of revenues.... 26.9 29.0 43.3 25.3 25.6 26.3
Gross profit................... 73.1 71.0 56.7 74.7 74.4 73.7
Operating expenses:
Sales and marketing.......... 59.8 49.3 77.9 45.8 41.9 43.4
Research and development..... 23.8 18.8 30.1 18.5 18.2 17.8
General and administrative... 10.6 10.0 18.6 9.8 9.7 8.4
Amortization of
intangibles................ 10.5 9.6 13.4 9.3 7.7 6.7
Stock-based compensation..... 0.1 0.7 0.9 0.6 1.6 3.7
----- ----- ------ ----- ----- -----
Total operating expenses... 104.8 88.4 140.9 84.2 79.1 80.2
----- ----- ------ ----- ----- -----
Loss from continuing
operations................... (31.7) (17.4) (84.3) (9.5) (4.8) (6.5)
Interest expense, net.......... (5.2) 1.6 3.0 2.5 1.9 2.0
----- ----- ------ ----- ----- -----
Net loss from continuing
operations................... (36.9) (19.0) (87.3) (12.0) (6.7) (8.4)
Discontinued operations:
Loss from discontinued
operations................. (2.5) (5.5) (13.1) (5.4) -- --
Gain on disposal of
discontinued operations.... -- -- -- 11.9 -- --
----- ----- ------ ----- ----- -----
Net loss....................... (39.4)% (24.5)% (100.4)% (5.5)% (6.7)% (8.4)%
===== ===== ====== ===== ===== =====
</TABLE>
License revenues have generally increased in each of the six quarters ended
September 30, 1999, primarily due to increased market acceptance for our
products. Service revenues have also generally increased in each of these
quarters primarily due to the recognition of maintenance revenues attributable
to our growing installed base, and to a lesser extent, consulting and training
services associated with increased sales of our products. In the quarter ended
December 31, 1998 we recorded a large net loss due to our inability to close a
large number of license sales which had been forecasted to close in the quarter
coupled with an increase in operating expenses. Decreased license revenues for
the quarter were primarily due to significant turnover in our sales force during
the quarter. In addition our newly hired sales personnel, who were still gaining
experience with our products, were unable to close a large number of sales
forecasted for the quarter. In the following quarter we experienced further
turnover in our sales personnel and we implemented tighter expense controls
resulting in lower overall operating expenses.
Our quarterly operating results have fluctuated significantly in the past,
and will continue to fluctuate in the future, as a result of a number of
factors, many of which are outside our control. As a result of our limited
operating history, we cannot forecast operating expenses based on historical
results. Accordingly, we base our anticipated level of expense in part on future
revenue projections. Most of our expenses are fixed in the short term and we may
not be able to quickly reduce spending if revenues are lower than we have
projected. Our ability to forecast our quarterly revenues accurately is limited
given our limited operating history, the length of our sales cycle and other
uncertainties in our business. If revenues in a particular quarter do not meet
projections, our net losses in a given quarter would be greater than expected.
As a result, investors should not rely on the results of one quarter as an
indication of future performance.
30
<PAGE> 32
RECENT DEVELOPMENTS
On September 10, 1999, we entered into an agreement to acquire Acuity, a
provider of software products to manage Internet-based customer interactions. We
expect to close this acquisition prior to the effectiveness of this offering.
The acquisition is structured as a merger in which Acuity will become our
wholly-owned subsidiary and the stockholders of Acuity will become our
stockholders. The total number of our shares to be issued in connection with the
acquisition of Acuity plus the number of shares issuable upon exercise of
options and warrants we assume in the acquisition will equal 18% of our
fully-diluted capitalization immediately following the acquisition. Based on our
outstanding capitalization as of September 30, 1999, we expect to issue
approximately 3,004,854 shares of our preferred stock and 1,546,586 shares of
our common stock. In addition, we will assume warrants to purchase approximately
323,927 shares of our common and preferred stock and options to purchase
approximately 877,955 shares of our common stock. The closing of the merger is
subject to the approval of the Acuity stockholders. The acquisition will be
accounted for using the purchase method of accounting. The aggregate purchase
price for the acquisition is approximately $45.5 million based on the value of
our capital stock to be issued and the value of the options, warrants and
liabilities to be assumed. In connection with the acquisition of Acuity, we
expect to recognize a charge for in-process technologies of approximately $3.0
million in the quarter ending December 31, 1999. Acuity is located in Austin,
Texas and had 81 employees on September 30, 1999. Acuity's revenues for the year
ended December 31, 1998 were $6.7 million, of which $5.5 million were related to
a product line that was subsequently sold in March 1999. Acuity incurred net
losses of $6.6 million, $7.7 million and $4.6 million in the years ended
December 31, 1997 and 1998 and for the nine months ended September 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Since May 1995, we have financed our operations primarily through the sale
of equity securities, borrowings and the sale of our products and services. As
of September 30, 1999, we have raised approximately $41.4 million, net of
offering costs, from the issuance of preferred stock. As of September 30, 1999,
we had $7.7 million in cash.
We have a $7.5 million credit line under which $4.4 million was outstanding
as of September 30, 1999. The line had a maturity date of September 17, 1999
that was extended to December 17, 1999. Changes to the terms of the line
included a waiver to the financial covenants as well as a change of the interest
rate to prime plus 0.5% per annum. Warrants were issued to the bank to purchase
25,000 shares of Series F preferred stock at $8.25 per share. We also have a
$1.1 million term loan, of which $719,000 was outstanding as of September 30,
1999. The term loan bears interest at prime plus 2.0% per annum and is due in
monthly installments through September 2001.
Cash used in operating activities was $2.0 million, $4.0 million, $7.3
million and $3.8 million in fiscal 1997, 1998 and 1999 and for the six months
ended September 30, 1999. Cash used in fiscal 1997 was primarily due to a net
loss of $3.5 million and an increase in accounts receivable, offset in part by
an increase in accounts payable, deferred revenues and depreciation and
amortization expenses. Cash used in fiscal 1998 was primarily due to a net loss
of $11.2 million and an increase in accounts receivable, offset in part by an
increase of deferred revenues, depreciation and amortization expenses, and a
$2.2 million non-cash charge for in-process technologies related to our
acquisition of Nabnasset. Cash used in fiscal 1999 was primarily due to a net
loss of $11.5 million and a $1.0 million gain on the disposal of discontinued
operations, offset in part by depreciation and amortization expenses. Cash used
for the six months ended September 30, 1999 was primarily due to a net loss of
$1.7 million and an increase in accounts receivable and a decrease in deferred
revenues, offset in part by an increase in depreciation and amortization and
stock based compensation.
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Cash used in investing activities was $1.0 million, $3.7 million and
$396,000 in fiscal 1997 and 1998 and for the six months ended September 30,
1999. Cash used in investing activities was primarily for purchases of property
and equipment in each period. In addition, cash used in fiscal 1998 included
$2.5 million for the acquisition of Nabnasset. Cash provided by investing
activities of $924,000 in fiscal 1999 was primarily due to proceeds from the
sale of discontinued operations, offset by purchases of property and equipment.
Cash provided by financing activities was $5.2 million, $6.6 million, and
$6.2 million and $10.1 million in fiscal 1997, 1998 and 1999 and for the six
months ended September 30, 1999. Cash provided by financing activities consisted
primarily of proceeds from private sales of preferred stock and borrowings under
a bank line of credit.
We expect to experience significant growth in our operating expenses,
particularly sales and marketing and research and development expenses, for the
foreseeable future in order to execute our business plan. As a result, we
anticipate that these operating expenses, as well as planned capital
expenditures, will constitute a material use of our cash resources. In addition,
we may utilize cash resources to fund acquisitions or investments in
complementary businesses, technologies or product lines. We believe that the net
proceeds from this offering, together with bank financing, will be sufficient to
make a required cash payment of $18.2 million to holders of some series of our
preferred stock, upon the closing of this offering, and to meet our anticipated
needs for working capital and capital expenditures for at least the next 12
months. Thereafter, we may find it necessary to obtain additional equity or debt
financing. In the event additional financing is required, we may not be able to
raise it on acceptable terms or at all.
YEAR 2000 COMPLIANCE
The "Year 2000 Issue" refers generally to the problems that some software
may have in determining the correct century of the year. Many existing
electronic systems, including computer systems, use only the last two digits to
refer to a year. Therefore, these systems may recognize a date using "00" as
1900 rather than the year 2000. If not corrected, these electronic systems could
fail or create erroneous results when addressing dates on and after January 1,
2000.
We have developed and are implementing a company-wide program to inventory
any systems or devices that may be affected, identify which systems or devices
are not Year 2000 compliant and remedy any Year 2000 issues that become known to
us. The scope of our Year 2000 readiness program includes the review and
evaluation of:
- our proprietary software products;
- the software components that we license from others and are part of the
eContact suite of products;
- our IT systems, such as hardware and software used in the operation of
our business;
- our non-IT systems or embedded technology, such as micro-controllers
contained in various equipment and facilities; and
- the readiness of third parties such as suppliers and other key vendors.
We have tested our proprietary software products and determined that they
are Year 2000 compliant, when configured and used in accordance with the related
documentation, assuming that the underlying operating system of the host machine
and any other software used with or in the host machine or our products are Year
2000 compliant. Based on the results of these tests, we do not expect that
recent versions of our products will suffer Year 2000-related problems.
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We have made reasonable efforts to ensure that software licensed from third
parties that we incorporate into our eContact suite is Year 2000 compliant.
Despite our tests and assurances from the developers of these products, products
we sell may contain undetected errors or defects associated with Year 2000 date
functions. In most cases, we have determined that recent versions of these
licensed software components are Year 2000 compliant. In instances where our
customers are using older, non-compliant versions of these software components,
we have advised them specifically what changes they need to make in order to
make their systems Year 2000 compliant.
We have initiated an assessment of our material internal IT systems,
including both our own software products and third party software and hardware
technology, and our non-IT systems. We have successfully upgraded and made
compliant our source code repository and our call defect tracking system. We
expect to complete testing of our material IT systems, including a comprehensive
"roll forward" simulation test by November 30, 1999, and we expect to address
any issues that arise from these tests by the second week of December. To the
extent that we are not able to test the technology provided by third-party
vendors, we are seeking assurances from these vendors that their systems are
Year 2000 compliant. We are not currently aware of any material operational
issues or potential costs associated with preparing our internal IT and non-IT
systems for the Year 2000. Because we are substantially dependent upon the
proper functioning of our computer systems, a failure of our systems to be Year
2000 compliant could materially disrupt our operations, which could seriously
harm our business.
We do not currently have any information concerning the Year 2000
compliance status of our customers. Our current or future customers may incur
significant expenses to achieve Year 2000 compliance. If our customers are not
Year 2000 compliant, they may experience material costs to remedy problems, or
they may face litigation costs. In either case, Year 2000 issues could reduce or
eliminate the budgets that current or potential customers could have for, or
delay purchases of, our products and services. As a result, our operating
results could suffer.
We have funded our Year 2000 readiness program from operating cash flows
and have not separately accounted for these costs. To date, these costs have not
been material. We will incur additional costs for administrative personnel to
manage our testing, review and remediation efforts, and we will incur some
expenses related to outside vendor and contractor assistance. We do not believe
these expenses will materially affect our operating results. Because we have
contracted with a third party to perform the majority of our hardware and
systems upgrades, our engineering and IT projects have not been materially
delayed.
We have made significant efforts to ensure that our proprietary software,
the software we license from others and our internal systems are Year 2000
compliant. We believe that no serious problems will arise that will result in
significant costs. However, a reasonable "worst case" scenario might include:
- Cash expenditures and lost person-hours. If certain functions of our
eContact suite fail, our customers may be unable to manage their eCRM
operations and we may be forced to spend time and money to correct these
deficiencies.
- Alternative use problems. We have certified the eContact software
components, whether internally developed or licensed from others, as Year
2000 compliant in the eCRM field of use. If any of our customers have
adapted and are using eContact for alternative uses, they may face
problems that we are not aware of.
- Failure of engineering applications. While we have certified as Year 2000
compliant our material internal systems, it is possible that some of our
non-critical, narrow use engineering
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applications will experience difficulties. Although we have no reason to
believe that these applications will fail, some areas of our engineering
efforts could be hindered if problems arise.
We are in the process of designing our Year 2000 contingency plan to
address situations that may result if we are unable to achieve Year 2000
readiness for our critical operations. Although it is not yet fully developed,
we expect to complete our Year 2000 contingency plan before December 31, 1999.
We do not expect the cost of developing and implementing our contingency plan to
be material. In addition, we cannot assure you that our contingency plan will
successfully address any Year 2000 problems that may arise.
Acuity has completed its Year 2000 assessments and preparations. In
assessing its state of readiness, Acuity determined, through internal testing or
by receiving certifications from vendors, that all of its systems are generally
Year 2000 compliant. In particular, Acuity investigated the readiness of its
desktop applications and its engineering and accounting software systems. Acuity
also assessed its internal hardware and servers, as well as its telephone and
security systems. Acuity also requested that third-party providers of material
software products certify that these software products, including software
incorporated into Acuity's products, are Year 2000 compliant.
Acuity has not tracked its Year 2000 preparedness expenses separately, and,
while it is unable to accurately estimate these expenses, it does not believe
they have had or will have a material effect on its results of operations.
A reasonable worst case scenario for Acuity would involve a company-wide
shut down for an undeterminable period of time caused by the failure of its
network systems. Because it believes all material systems are Year 2000
compliant, Acuity has not implemented any definite contingency plans.
Acuity determined that certain older versions of its software product are
not Year 2000 compliant. In response, Acuity has attempted to contact all
customers with noncompliant products to notify them of this lack of compliance
and to offer them the opportunity to purchase a product upgrade that is Year
2000 compliant. Following our acquisition of Acuity, we will be liable for
claims that Acuity customers have against Acuity. In addition, Acuity previously
sold an iChat product that was not Year 2000 compliant. Acuity sold its iChat
product line prior to entering an agreement to be acquired by us. We believe
that any liabilities that result from the iChat product's failure to be Year
2000 compliant will be the responsibility of the purchaser of the iChat product
line; however, third parties might still seek to assert liability against us
following our acquisition of Acuity.
RECENT ACCOUNTING PRONOUNCEMENTS
In fiscal 1998, we adopted Statement of Financial Accounting Standards
(SFAS) No. 130, Reporting Comprehensive Income, which requires an enterprise to
report, by major components and as a single total, the change in net assets
during the period from non-owner sources. The adoption of SFAS No. 130 did not
have a material impact on our consolidated financial statements.
In fiscal 1998, we adopted SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, which established annual and interim
reporting standards for an enterprise's business segments and related
disclosures about its products, services and geographic areas and major
customers. The adoption of SFAS No. 131 did not have a material impact on our
consolidated financial statements.
In fiscal 1998, we adopted Statement of Position, or SOP 97-2, Software
Revenue Recognition, and SOP 98-4, Deferral of the Effective Date of a Provision
of SOP 97-2, Software Revenue Recognition. SOP 97-2 and SOP 98-4 provide
guidance for recognizing revenue on software
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transactions and supercede SOP 91-1. The adoption of SOP 97-2 and SOP 98-4 did
not have a material impact on our financial results.
In March 1998, the Accounting Standards Executive Committee (AcSEC) issued
SOP 98-1, Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use. SOP 98-1 establishes the accounting for costs of software
products developed or purchased for internal use, including when such costs
should be capitalized. SOP 98-1 will be effective for our fiscal year ending
March 31, 2000. We believe the adoption of this statement will not have a
significant impact on our financial position, results of operations or cash
flows.
In April 1998, the AcSEC issued SOP 98-5, Reporting on the Costs of
Start-up Activities. Under SOP 98-5, the cost of start-up activities should be
expensed as incurred. SOP 98-1 will be effective for our fiscal year ending
March 31, 2000. We believe the adoption of this statement will not have a
significant impact on our financial position, results of operations or cash
flows.
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. This
statement requires companies to record derivatives on the balance sheet as
assets or liabilities, measured at fair value. Gains or losses resulting from
changes in the values of those derivatives would be accounted for depending on
the use of the derivative and whether it qualifies for hedge accounting. SFAS
No. 133 will be effective for our fiscal year ending March 31, 2001. We believe
the adoption of this statement will not have a significant impact on our
financial position, results of operations or cash flows.
INTEREST RATE RISK
At September 30, 1999, we had an outstanding balance of $4.4 million under
a revolving line of credit with interest at prime plus 0.5% and a term loan with
an outstanding balance of $719,000 at prime plus 2.0%. A 10% movement in market
interest rates would not significantly impact our financial position or results
of operations.
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BUSINESS
INDUSTRY BACKGROUND
In today's competitive global marketplace, customer service is increasingly
critical to attracting and retaining customers. Many companies are re-orienting
their businesses to be more responsive to customer needs and are focusing on
customer service and satisfaction to differentiate themselves from their
competitors. Moreover, companies are recognizing that every customer interaction
provides an opportunity to sell additional products and services, as well as
increase customer loyalty. As a result, customer service is becoming a key
competitive advantage in many industries.
The Internet has emerged as a major medium for communication and commerce,
enabling new, highly efficient channels through which companies can engage in
commerce and interact directly with their customers. The growth of e-commerce
has increased competition for customers and reduced the importance of
traditional competitive advantages such as price, location, availability and
access. International Data Corporation estimates that the number of customers
buying goods and services over the Internet worldwide will grow from
approximately 30.8 million in 1998 to 182.6 million in 2003 and that the value
of these purchases will increase from $50.4 billion to $1.3 trillion over the
same period.
The Internet enables companies to interact with their customers in more
ways than ever before. In addition to traditional telephone-based communication
channels, customers and companies can now interact through email, Web chat and
Web self-service. These Internet-based communication channels are growing
rapidly, creating new challenges for companies attempting to provide quality
customer service. The Gartner Group estimates that approximately 25% of all
customer interactions will take place over the Internet via email or Web
communications by 2001. Forrester Research estimates that by 2001 consumers will
send companies approximately 50 million emails per day requesting product
information or service.
As a result of the growing use of these new communication channels,
companies are struggling to handle the volume and variety of customer
interactions. While Internet-based communications are forecast to grow
substantially, telephone-based communications will remain a critical component
of companies' customer service. Many companies are not equipped to address the
convergence of traditional and Internet-based communication channels and,
consequently, cannot offer customers the flexibility and service they demand.
Customers increasingly expect to be able to interact with companies through
whichever channel best suits their needs and are likely to use a combination of
communication channels. For example, a customer may request product literature
via email, review marketing materials or fill in an application on the Web, call
to receive more detailed information or assistance, send a signed form by fax,
and check the status of an order online. Companies' ability to provide
consistent customer service across all these communication channels will become
increasingly critical to delivering a superior customer experience.
In many industries, Internet-based companies have captured increasing
market share and emerged as competitive threats to traditional "brick and
mortar" companies. As a result, many Global 1000 companies are under pressure to
quickly expand their online presence. These companies have typically provided
customer service through telephone-based communication channels and are now
looking to support new Internet-based communication channels. Many of these
companies have invested considerable resources to establish call centers that
manage inbound and outbound customer calls, including customer orders, inquiries
and service requests, and telesales and telemarketing operations. As these
companies move to support Internet-based communication channels and establish
customer service centers with capabilities for handling multi-channel
communications, they will seek to leverage their existing investments in call
center infrastructure and personnel. Frost and
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Sullivan estimates that spending on Web-enabled call centers will increase from
$14.1 million in 1998 to $889.9 million in 2004.
Similarly, many Internet-based companies that have grown rapidly and built
sizable customer bases are faced with increasingly competitive online market
environments and are looking for ways to differentiate themselves from their
competitors. These Internet-based companies have relied primarily on email and
Web self-service to interact with their customers. Many have delivered
unsatisfactory customer service. According to a recent survey of Internet sites
by Jupiter Communications, more than a third had no email address listed, took
five days or more to respond or never responded to an email.
To date, companies have turned to several types of products to deliver
customer service. These products have primarily been point solutions targeted at
discrete communication channels. For example, computer telephony integration
software products, which automate call routing and reduce the time it takes to
respond to customer calls, are designed for telephone-based communications and
often are not able to handle or integrate with Internet-based communication
channels. Similarly, email management software products, which automate email
responses, typically are not integrated with other communication channels and
therefore do not provide a complete and accurate view of the customer. Companies
have also deployed customer relationship management applications to automate
customer interactions such as problem management and to provide a repository for
customer information. However, these applications are usually not integrated
with the underlying communication infrastructure and therefore cannot leverage
call routing or other features that enable more timely, efficient and
personalized customer service. Deploying these disparate solutions requires
significant integration and, as a result, they can be difficult and expensive to
implement and maintain.
We believe a significant market opportunity exists for solutions that
provide both traditional "brick and mortar" companies and new Internet-based
companies with the ability to manage customer relationships across a broad range
of communication channels including the Internet, email and the telephone. This
market is referred to as the e-Customer Relationship Management or eCRM market.
eCRM solutions enable companies to:
- manage high volumes of customer interactions;
- support a broad range of communication channels;
- deliver consistent and integrated customer service;
- leverage Internet and telephone technologies; and
- capture all relevant customer information.
THE QUINTUS SOLUTION
We provide a comprehensive eCRM solution that enables companies to manage
customer interactions, such as customer orders, inquiries and service requests,
and deliver consistent customer service across multiple communication channels,
including the Internet, email and the telephone. Our Quintus eContact software
suite includes applications that address the needs of customer service
representatives and agents in sales and service, consumer relations, technical
support and human resources centers and a routing engine that manages customer
interactions. Our eContact software suite enables companies to personalize,
route and manage customer interactions and is designed to leverage third party
products that support email and Internet-based customer service. We recently
entered into an agreement to acquire Acuity, which will extend our ability to
provide customer service functionality through Web chat, Web self-service,
browser-based collaboration and email. Our
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eContact suite enables companies to handle high volumes of customer
interactions, increase the efficiency of their customer service operations and
leverage opportunities to sell additional products and services to their
customers through the use of common rules for prioritizing, handling and
responding to customer interactions, shared customer profile information, and
consolidated management and reporting functions that allow companies to capture
and analyze customer information.
We have designed Quintus eContact to be a highly scalable and flexible
solution that can be easily deployed to assist companies in reducing the costs
and improving the efficiency of their customer service operations. eContact is
based on an open, standards-based architecture and can be integrated with other
systems, enabling companies to leverage their existing customer relationship
management applications and communication infrastructure. eContact addresses the
customer service needs of large organizations as well as rapidly growing
companies that require highly functional solutions to automate and manage high
volumes of customer interactions across traditional as well as Internet-based
communication channels.
Our eContact suite consists of several different software applications that
can be sold separately or in a group. We only recently introduced and sold the
email management and Internet-based customer service components of our eContact
suite. As a result no customer has completed the implementation of these new
components.
The key features of the Quintus eContact solution are:
Broad Range of Communication Channels. Quintus eContact is a comprehensive
solution that enables companies to provide sophisticated routing, tracking and
reporting capabilities across their communication infrastructure and manage
customer interactions via telephone, email, Web self-service, Web chat,
browser-based collaboration and Web callback. Our solution also supports third-
party e-commerce applications, facsimile and imaging applications, and advanced
telephony systems, such as automatic call distributors and interactive voice
response systems.
Integrated Applications and Communication Infrastructure. Quintus eContact
integrates communication infrastructure with customer relationship management
applications. We currently sell four customer relationship management
applications that address the needs of sales and service, consumer relations,
technical support and human resources contact centers. These applications
provide out-of-the-box functionality and allow companies to accelerate the
deployment of our solution.
Consistent Customer Service Across Communication Channels. Quintus eContact
allows companies to set business rules and personalization strategies to handle
customer interactions and deliver a consistent level of customer service across
multiple communication channels. Individual customer interactions can be managed
using transaction histories, legacy data, customer profiles and resource status
to offer a consistent and personalized level of customer service. Rules for
prioritizing, handling and responding to customer interactions and
personalization strategies can also be defined for specific communication
channels in order to leverage the attributes of each channel to provide more
targeted customer service and opportunities to sell additional products and
services to customers.
Consolidated Customer Interaction Repository. Quintus eContact provides a
consolidated repository of information about each customer interaction
regardless of communication channel. Companies can analyze customer interactions
and determine the use and effectiveness of different channels by different
customer segments. Customer service agents can access complete customer
histories and review previous interactions. As a result, agents can respond more
effectively when, for example, a customer calls to discuss an email she received
in response to an order she previously placed online.
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Highly Scalable and Flexible. Quintus eContact is designed to handle
millions of customer interactions per day and support thousands of agents across
multiple customer service centers. eContact allows companies to increase the
number of customer interactions handled by customer service agents by routing
customer interactions to the best resource available, based on agent
availability and experience, as well as prior contact history. eContact is a
modular solution, providing companies with the flexibility to implement the
solution they need today and add functionality as they expand the scope of their
customer service centers. In addition, our solution is based on open standards,
enabling it to share information with existing customer relationship management
applications and legacy systems.
OUR GROWTH STRATEGY
Our objective is to be the leading provider of eCRM software solutions that
manage customer interactions across a broad range of communication channels. Key
elements of our strategy include:
Maintain and Extend Technology Leadership. We will continue to leverage
leading Internet and telephony technologies to enhance the performance and
functionality of our products. We believe our Quintus eContact suite is the most
comprehensive solution that enables companies to efficiently and
cost-effectively manage high volumes of customer interactions across multiple
communication channels. We plan to incorporate new technologies, such as
Internet telephony, speech recognition and digital video, into our solution as
they achieve significant market acceptance. We intend to maintain our technology
leadership through focused research and development and, potentially, through
the licensing or acquisition of complementary technologies or businesses.
Broaden Direct and Indirect Distribution Capabilities. We intend to
continue to develop and extend our distribution capabilities. We sell our
solution through a direct sales force in North America and indirectly through 15
domestic and international resellers and distribution partners including IBM
Japan, Lucent Technologies and Logica. We plan to increase the size of our
direct sales organization and broaden our indirect distribution network with
strategic resellers and other distribution partners.
Target Global 1000 Companies. We plan to continue to target Global 1000
companies as they rapidly transition their businesses online. We believe that
there is a significant opportunity to provide a solution that enables these
companies to leverage their existing customer service infrastructure and deliver
a consistent and integrated level of customer service across both traditional
and Internet-based communication channels. Our customers include Global 1000
companies such as Citigroup, Lucent Technologies, Procter & Gamble and United
Airlines.
Target Leading Internet-based Companies. We plan to continue to target
leading Internet-based companies. We believe that these companies increasingly
recognize the need for higher levels of customer service in order to attract and
retain customers, and are looking for highly scalable solutions that are easy to
deploy and support both their existing Internet-based communication channels as
well as traditional communication channels. Leading Internet-based companies
that have purchased Acuity's WebCenter product line include drugstore.com,
living.com and REI.com.
Develop and Expand Strategic Relationships. We plan to continue to develop
technology and marketing relationships with leading vendors of complementary
products in order to increase our visibility in the marketplace and broaden the
functionality of our solution. We currently have a strategic relationship with
Brightware. We also intend to expand our strategic relationships with leading
systems integrators that have significant influence over companies' purchasing
decisions. We believe that systems integrators help provide industry-specific
expertise and support our growth and
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entry into new markets. We currently have implementation relationships with
AnswerThink Consulting Group, Cambridge Technology Partners and Technology
Solutions Company.
PRODUCTS
The Quintus eContact suite is a comprehensive eCRM solution that allows
companies to provide consistent customer service across a broad range of
communication channels, including voice, email, Web self-service, Web chat,
browser-based collaboration and Web callback. The eContact suite includes the
eContact engine, channel applications and business applications that can be sold
separately or in a group.
LOGO
The Quintus eContact suite is priced according to the product components
purchased and the number of users. Product components are typically priced from
$15,000 to $85,000 per installation, with per user prices typically ranging from
$500 to $2,300.
QUINTUS ECONTACT ENGINE
The Quintus eContact engine is the foundation of our eContact suite and
enables customer interactions, such as customer orders, inquiries and service
requests, to be managed consistently across multiple communication channels. Our
eContact engine, routes, tracks, and manages customer interactions, consolidates
all relevant customer information into a common data source, and provides
reporting capabilities that allow companies to capture and analyze customer
information. The eContact engine includes the following features:
- Personalization Services. The Quintus eContact engine allows companies to
personalize each customer interaction based on sophisticated rules for
prioritizing, handling and responding to customer interactions that take
into account customer profiles, transaction histories and resource
availability. A customer interaction can be managed and routed based upon
the communication channel, the customer or the purpose of that specific
customer interaction. As a result, customers can receive the same level
of service across multiple communication
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channels and companies can leverage the attributes of each communication
channel to deliver more targeted and effective customer service.
- Coordination Services. For each customer interaction, the Quintus
eContact engine captures all relevant customer information in real time.
By sharing customer information across systems, agents and communication
channels, companies can provide better informed, consistent and
synchronized customer service.
- Consolidated Data Source and Reporting. All customer profiles and
histories, as well as detailed records of every customer interaction
regardless of communication channel, are stored in a common data source.
The Quintus eContact engine provides reporting capabilities that allow
companies to perform in-depth customer segmentation and trend analysis.
- Centralized Customization and Administration. Companies can customize
rules for prioritizing, handling and responding to customer interactions,
screen layouts, Web pages, data models and data access using Quintus
eContact's drag-and-drop graphical tools. This common toolset gives
companies the flexibility to respond to changing business needs. Our
eContact engine also provides centralized administration of our solution.
Companies can control and monitor system status and availability as well
as receive notification alerts when pre-defined thresholds are met.
The Quintus eContact engine includes an enterprise data access layer that
provides access to relational databases as well as external data sources and
transactional systems, enabling companies to use their own business data to
manage customer interactions. Customer service agents interact with our eContact
suite through our agent console. The agent console provides an intuitive user
interface that displays customer information and pre-defined scripts, and can be
integrated with multiple applications, including front and back office systems
and legacy applications.
QUINTUS ECONTACT CHANNEL APPLICATIONS
Our channel applications enable companies to manage customer interactions
consistently across multiple communication channels including the Internet,
email and the telephone. Companies can deploy our channel applications
separately or as a comprehensive solution to meet their evolving needs for
customer service centers handling interactions across multiple communications
channels.
<TABLE>
<S> <C>
- -----------------------------------------------------------------------------------
CHANNEL APPLICATION PRODUCT DESCRIPTION
- -----------------------------------------------------------------------------------
Computer Telephony Quintus CTI integrates eContact with advanced telephony
Integration systems.
- -----------------------------------------------------------------------------------
Web Interaction Quintus WebCenter provides Web self-service and online
customer service through Web chat, browser-based
collaboration and Web callback.
- -----------------------------------------------------------------------------------
Email Management Quintus Email Management provides email management with
natural language text analysis and rule-driven automated
responses. We deliver this functionality by reselling
Brightware's software.
- -----------------------------------------------------------------------------------
Electronic Commerce Quintus eCommerce Connector integrates eContact with
Connector e-commerce applications to capture transaction information.
- -----------------------------------------------------------------------------------
</TABLE>
Computer Telephony Integration. Quintus CTI provides a highly scalable
platform for integrating advanced telephony systems such as automatic call
distributors and interactive voice response systems from major
telecommunications equipment vendors. Quintus CTI allows companies to apply
sophisticated rules for prioritizing, handling and responding to customer
interactions to qualify and route telephone-based customer communications. By
integrating the telephony infrastruc-
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ture with our eContact solution, Quintus CTI also enables traditional voice-only
call centers to be extended to handle Web, email and other communication
channels.
Web Interaction. Quintus WebCenter, an Acuity product, provides a
comprehensive framework to manage Internet-based customer interactions,
including Web self-service, Web chat, browser-based collaboration and Web
callback. WebCenter enables companies to provide live customer service on the
Internet. Through Acuity's WebACD, Web-based customer interactions are routed to
the appropriate resources based on agent availability and experience. Agents can
collaborate with customers by synchronizing their browsers, seeing the Web pages
that customers are viewing and pushing new Web pages to customers to assist
them. WebCenter also allows companies to build a knowledge base of frequently
asked questions, deploy it on the Web and provide customers with full search
capabilities. With WebCenter, companies can enhance their Web sites and deliver
a more engaging and personalized customer experience by providing immediately
available online customer service options. We have not yet implemented WebCenter
as part of our eContact suite; however, WebCenter has been sold to over 100
customers and we are currently engaged in our first WebCenter and eContact
deployment. We will acquire the WebCenter and WebACD products upon the closing
of our acquisition of Acuity, which is expected to occur prior to the
effectiveness of this offering.
Email Management. We deliver email management functionality by reselling
Brightware's software under a non-exclusive reseller agreement. Quintus Email
Management provides natural language analysis and automated response
capabilities, enabling companies to answer customers' emails accurately, cost-
effectively and rapidly. Email Management analyzes the email message content,
determines the nature of the customer request and automatically responds to the
email or forwards it with a suggested response to an agent for further review.
Responses can be automatically generated and include information provided by the
eContact data source or other external data sources.
Electronic Commerce Connector. Quintus eCommerce Connector enables our
eContact solution to exchange information with e-commerce applications using
standard Internet protocols. Online customer transactions and purchases can be
recorded in the eContact data source and displayed to agents providing customer
service. Companies can integrate our Internet-based customer service solution
with their e-commerce applications to offer online customer assistance at the
time of purchase as well as aftersales support. In addition, our eCommerce
Connector enables companies to leverage information on customer purchasing
patterns to sell additional products or services with each customer interaction.
QUINTUS ECONTACT BUSINESS APPLICATIONS
We currently market four business applications that address the needs of
customer service centers for sales and service, consumer relations, technical
support and human resources. Our business applications can run separately or be
integrated with the Quintus eContact suite, can be deployed across multiple
locations and are accessed through agent desktops or via a Web browser.
Companies can easily customize data models, rules for handling customer
interactions, screen forms and Web pages to meet their specific requirements.
Our business applications can also be integrated with third-party applications
and data sources.
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<TABLE>
<S> <C>
- -----------------------------------------------------------------------------------
BUSINESS PRODUCT DESCRIPTION
APPLICATION
- -----------------------------------------------------------------------------------
Sales and Service Quintus CallCenterQ supports multi-function
business-to-consumer sales, service and marketing centers.
- -----------------------------------------------------------------------------------
Consumer Relations Quintus CallCenterQ for Consumer Relations supports consumer
relations centers in the consumer product, service, travel,
hospitality and other industries.
- -----------------------------------------------------------------------------------
Technical Support Quintus CustomerQ supports business-to-business technical
support centers.
- -----------------------------------------------------------------------------------
Human Resources Quintus HRQ supports human resources centers serving
employees, former employees and retirees.
- -----------------------------------------------------------------------------------
</TABLE>
Sales and Service. Quintus CallCenterQ is designed for multi-function
sales, service and marketing centers. Targeted at business-to-consumer
industries, CallCenterQ enables agents to easily access pricing and product
information, process returns, track service issues and capture orders as well as
qualify and manage customer leads. CallCenterQ also allows companies to define
and manage marketing campaigns, and agents can be automatically prompted with
targeted opportunities to sell additional products or services to customers.
Additional features include list management, literature fulfillment, automatic
personalized letter generation, agent scripting, and outbound preview dialing.
CallCenterQ is designed to help companies maximize revenue by enabling them to
set up, administer and evaluate the effectiveness of their sales and marketing
campaigns.
Consumer Relations. Quintus CallCenterQ for Consumer Relations is designed
for consumer relations centers and is targeted primarily at the consumer
product, service, travel and hospitality industries. CallCenterQ for Consumer
Relations provides agents with the information they need to resolve customer
issues including customer history and product information, and the ability to
issue vouchers and other forms of compensation. Additional features include
scanned letter/fax viewing, frequently asked questions knowledge base, automatic
personalized letter generation, and literature fulfillment. In addition,
CallCenterQ for Consumer Relations enables companies to gather important
customer feedback and market research to help them manage their brands.
Technical Support. Quintus CustomerQ is designed for business-to-business
technical support centers. CustomerQ provides agents with complete customer
history and product information, as well as service contracts, warranties,
billing and shipping information. Companies can also allow customers to search
for solutions, enter issues, and track the status of their technical problems
through the Internet. Other features include problem resolution, case
management, access to knowledge bases, defect tracking, automatic notification
and escalation, return processing and report generation. CustomerQ enables
companies to increase customer loyalty by rapidly and effectively addressing
customer requests for technical support. We also offer Quintus HelpQ, a
technical support application, which is targeted at the internal help desk
market.
Human Resources. Quintus HRQ is designed for human resources centers
serving employees, former employees and retirees. HRQ provides human resources
personnel with detailed employee history as well as health care and financial
benefits information. Other features include problem resolution, dependent
profiles, scanned letter/fax viewing, automatic personalized letter generation
and literature fulfillment. In addition, HRQ can be integrated with leading
human resources applications and knowledge bases. HRQ helps companies be more
responsive to their employees while reducing administrative costs and improving
the productivity of human resource departments.
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CUSTOMERS
To date, we have licensed our software products to over 250 customers,
including companies in the financial services, telecommunications and consumer
product industries. The following is a representative list of companies from
which we have derived more than $300,000 of license and service revenue since
April 1, 1996.
<TABLE>
<S> <C> <C>
AMS Management Systems Engen Petroleum PricewaterhouseCoopers
Anheuser-Busch First Union Bank Procter & Gamble
Canada Trust Hartford Insurance Reuters
Canadian Imperial Bank of Inova Healthcare Services The Santa Cruz Operation
Commerce International Paper Siemens Nixdorf
Capita Group Lucent Technologies Steelcase
Citigroup Massachusetts Division of Sun Microsystems
Clarke American Employment & Training Telefonica do Brasil
Countrywide Home Loans Meca Software Ticketmaster
Deere & Company Northern Trust United Airlines
</TABLE>
Prior to our acquisition of Acuity, Acuity licensed its WebCenter product
to over 100 customers.
The following case studies illustrate how some companies are using our
products.
PROCTER & GAMBLE
Procter & Gamble is a leading food and consumer products company, marketing
over 300 brands in more than 140 countries.
Business Challenge. Each year, Procter & Gamble receives high volumes of
calls and letters from consumers concerning its products and company policies.
Procter & Gamble required a solution that could integrate its telephone, letter
and facsimile interactions, and support emerging Internet communication
channels. In addition, Procter & Gamble, which has over 110,000 employees
worldwide, was looking for a solution to help manage human resources inquiries
by both current and former employees.
Solution. Procter & Gamble licensed our Quintus CallCenter for Consumer
Relations application for its consumer relations contact centers. Procter &
Gamble is also implementing our Quintus HRQ application in its human resources
centers to handle inquiries such as health benefits, payroll and pension plans.
Procter & Gamble expects that our solution will enable it to increase the
efficiency of its call centers and improve its service to consumers and
employees by automating call center interactions, providing detailed consumer
and employee information, and tracking problem resolution to completion.
CITIGROUP
Citigroup is a leading global financial services company, providing over
100 million consumers, corporations, governments and institutions in more than
100 countries with a broad range of financial products and services.
Business Challenge. Citigroup relies on multiple call centers and thousands
of agents to provide financial services to customers over the telephone.
Citigroup needed to integrate its call center telephony systems with its
back-office systems to enable agents to access detailed customer information and
perform additional business functions. In addition, Citigroup required a
flexible and scalable solution that could be deployed across multiple call
centers. Citigroup was also looking for a
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solution that could be implemented in conjunction with its "e-Citi" initiative
to increase its presence on the Internet and deliver financial services online.
Solution. Citigroup is currently using our Quintus CTI product to integrate
its telephony systems and enable approximately 1,000 agents across multiple call
centers to deliver superior customer service. Our solution enables Citigroup to
handle service requests quickly and cost-effectively by providing agents with
detailed customer information and routing calls to the most appropriate agent.
Citigroup has also deployed our Quintus CustomerQ application integrated with
our Quintus CTI product as part of its e-Citi projects. In addition to
increasing customer satisfaction by enabling e-Citi agents to track customer
relationships and activities, our solution is designed to increase revenue by
alerting agents to likely cross-selling and up-selling opportunities.
TICKETMASTER
Ticketmaster is a leading provider of automated ticketing distribution
services, selling approximately 70 million tickets worldwide in 1998.
Business Challenge. Ticketmaster sells tickets to the public through the
telephone, the Internet and retail outlets. More recently, Ticketmaster has
started selling a greater percentage of tickets over the Internet. Through the
Internet, Ticketmaster allows customers to find information about upcoming
events and purchase tickets and other related merchandise. To support its
growing online sales and customer service needs, Ticketmaster sought a more
comprehensive solution that would enable it to provide a higher level of
customer service through automated email, Web chat, Web callback and
collaborative browsing. Ticketmaster wanted to be able to integrate this
solution with its existing call centers and telephone systems.
Solution. Ticketmaster selected our Quintus eContact suite earlier this
year. Ticketmaster expects that our solution, which is being developed, will
enable it to provide live customer support through Web chat and browser-based
collaboration, and to respond more efficiently to large volumes of emails.
Ticketmaster plans to integrate our solution within its call centers as its need
for Internet customer service increases.
ASHFORD.COM
Ashford.com is an online retailer of luxury and premium products, selling
more than 150 brands and 8,000 different styles of new and vintage watches,
fragrances, leather accessories, sunglasses and writing instruments.
Business Challenge. As a provider of luxury and premium products,
Ashford.com targets a customer group that expects a high level of customer
service. Ashford.com wanted to be able to communicate directly with its online
customers as they navigate its Web site in order to increase sales and provide
an enhanced online shopping experience.
Solution. Ashford.com deployed Acuity's WebCenter product to provide
interactive sales, service and support to customers on its Web site. WebCenter
enables Ashford.com to deliver live online assistance to its customers while
they are browsing the Web site. Customers can remain online and have one-on-one
chat sessions with customer service agents. WebCenter also allows an agent to
display Web pages on a customer's screen in real-time in order to provide
additional support. For example, an agent could help a customer fill in a
purchase form or guide a customer through the site in order to view specific
products. In addition, using WebCenter, Ashford.com can connect each customer to
the most appropriate agent, matching a customer's inquiry with an agent's area
of expertise. Since implementing WebCenter, Ashford.com has noted that customers
using its live
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customer service capabilities are more likely to make a purchase and experience
higher levels of customer satisfaction.
REI.COM
REI.com is the online division of Recreational Equipment Incorporated
(REI), a national retailer of outdoor gear and clothing.
Business Challenge. As an online retailer, REI.com depends on customers
making purchases through its Web site. REI.com found that many potential
customers on its Web site abandoned their shopping carts before completing a
purchase. In order to increase sales REI.com wanted to create a more engaging
online experience and enable customers to interact directly with its customer
service agents while navigating its Web site.
Solution. REI.com deployed Acuity's WebCenter product to provide customer
service on its Web site. WebCenter allows customers to easily find answers to
commonly asked questions by querying an online knowledge base and to receive
assistance through email or by connecting to a live customer service agent
through Web chat. Customers are also able to request that an agent call them
back. REI is currently offering live online customer assistance during peak
hours and is looking to extend it in the future. By providing live customer
support during the sales process, REI.com expects to increase the number of
potential customers that make a purchase, as well as the overall level of
customer satisfaction and loyalty.
TECHNOLOGY
Quintus eContact is based on a scalable, multi-tiered architecture. Our
eContact product suite enables eCRM features through a sequence of cooperating,
distributed software servers that perform a variety of functions, including
creating and manipulating data containers, routing customer contacts, allowing
agents to access data and interact with customers through a Web browser. Our
multi-platform solution runs on all major UNIX and Windows NT operating systems.
Electronic Data Container. When a customer contacts a company, whether by
telephone, fax, email or through a Web site, an electronic data container for
that customer interaction is created. Existing customer information can be
retrieved from the data repository to populate the data container, or new
information can be obtained directly from the customer. The data container
continually collects information throughout the lifecycle of the customer
interaction and can be routed throughout an enterprise, carrying detailed
information about the customer, including the customer's history with the
company and details of this particular customer interaction. If the customer is
transferred to another agent at another site or to an agent using a different
communication channel, the data container accompanies the transition, ensuring
that the customer perceives a seamless service process.
Enterprise Data Access Layer. Quintus eContact includes an enterprise data
access layer that provides access to relational and legacy data sources. The
enterprise data access layer creates a uniform view of third party data
regardless of the data source and allows eContact to incorporate third-party
customer information.
Abstraction and Customization. Quintus eContact uses a data abstraction
layer that allows companies to store data entities, business rules and screen
layouts as business objects. Customizations are performed on the business
objects to modify them. All changes to the business objects are automatically
reflected throughout our eContact suite.
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Workflow and Routing Engine. Quintus eContact provides a graphical tool to
create and modify customer interaction flows, define routing rules and build
agent scripts. These customer interaction flows, rules and scripts are
specified, distributed and stored in Extensible Markup Language, allowing
eContact to leverage industry-standard tools and technologies. Customer
interaction flows are defined using re-usable building blocks that can be used
to create new routing rules as companies' needs evolve.
High Availability. We have built our system using a modular,
component-based approach. Additional customer service center capabilities and
applications can be introduced without requiring companies to change their
computing infrastructure and, in most cases, without affecting their operations.
Our system also provides multiple redundant configurations, delivering the
ability to "failover" to an alternative configuration in the event of a system
failure.
CUSTOMER SUPPORT SERVICES
We believe that high quality services and support are critical requirements
for continued growth and increased sales of our products. We have made and
expect to continue to make significant investments to increase our ability to
service and support our customers.
Our customer support services organization is organized into four groups
including customer service management, professional services, technical support
and education services.
Customer Service Management. Our customer service management team handles
many aspects of our customer relationships including answering general
questions, renewing maintenance agreements, shipping product upgrades and
coordinating with our other resources to meet customer needs.
Professional Services. Our professional services group helps facilitate the
implementation of our solution. We provide systems integration services to
support our entire product suite. Our services include integration,
customization, data modeling, project management and business rules development.
The professional services group also provides support for our implementation
partners.
Technical Support. Our technical services group is dedicated to providing
the highest level of support to our customers. We currently operate three
technical support centers in the United States and rely upon a network of
service providers internationally to provide consultations via toll-free
telephone, email and the Web. Additionally, customers have 24-hour access to our
online knowledge repository and the ability to directly log and track their
issues through our Web site. We offer a tiered maintenance and support program.
Customers can choose from our existing support packages or have a custom package
developed to meet their particular needs including 24x7 coverage and other
assistance options.
Education Services. Our education services group offers a full spectrum of
classes providing the training needed to understand, implement and use our
solution. We offer lectures and teaching labs to end-users, administrators,
developers and system integration partners at our facilities in California and
Massachusetts. Upon request, we can also provide customized on-site training.
SALES AND MARKETING
Sales. We sell our products through a direct sales force and indirectly
through resellers and distribution partners. To date, we have targeted our sales
efforts at Global 1000 companies and other rapidly growing companies pursuing
eCRM initiatives, including those in the financial services, telecommunications
and consumer products industries. Our sales force consists primarily of sales
people and sales engineers located in our sales offices in numerous locations
across the United States.
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We also maintain international offices in Amsterdam and London from which we
provide sales support to our international distribution partners.
We currently have relationships with 15 domestic and international reseller
and distribution partners including IBM Japan, Lucent Technologies and Logica.
We also enhance our sales efforts through strategic relationships with systems
integrators such as AnswerThink Consulting Group, Cambridge Technology Partners
and Technology Solutions Company. We intend to continue to expand our sales
efforts by increasing the size of our direct sales force and broadening our
indirect distribution channels.
Marketing. Our marketing efforts focus on creating market awareness for
eCRM solutions, promoting our products and services, and generating sales
opportunities. We have a comprehensive marketing strategy that includes print
advertising, public relations campaigns, direct mailings, newsletters, industry
events including trade shows, analyst programs and speaking engagements, and
joint marketing arrangements. We also advertise on the Internet and use our Web
site to enhance our market presence and generate additional leads.
RESEARCH AND DEVELOPMENT
Our research and development efforts are focused primarily around enhancing
our core technology and developing additional applications for the Quintus
eContact suite. We operate development centers in California, Massachusetts and,
following the acquisition of Acuity, Texas. Our software development approach
consists of a well-defined methodology that provides guidelines for planning,
controlling and implementing projects. This approach uses a cross-functional,
team-based development and release process. Our research and development group
works closely with customers, partners, our sales and marketing group and senior
management to assist in defining product direction and to ensure that products
are brought to market successfully. Members of our research and development
group have extensive experience in customer relationship management software as
well as Internet and telephony communication technologies.
Our research and development expenditures were approximately $3.7 million,
$5.1 million, $6.7 million and $4.0 million in fiscal 1997, 1998 and 1999 and
for the six months ended September 30, 1999. We believe that our future
performance will depend in large part on our ability to enhance our current
product line, develop new products and maintain our technological
competitiveness. As a result, we intend to continue to expend significant
resources in research and development.
COMPETITION
We currently face competition primarily from customer relationship
management software vendors such as Siebel Systems and Clarify, emerging
Internet customer interaction software vendors such as Kana Communications and
WebLine Communications, and computer telephony software vendors such as Genesys
Telecommunications Laboratories. Because there are relatively low barriers to
entry in the software market, we expect additional competition from other
established and emerging companies. Potential future competitors include
traditional call center technology providers and large enterprise application
vendors as well as independent systems integrators, consulting firms and
in-house information technology departments that may develop solutions that
compete with our products. We may not be able to compete effectively in the
future as current competitors expand their product offerings and new companies
enter the rapidly evolving eCRM market.
Many of our current and potential competitors have longer operating
histories, significantly greater financial, technical, sales, marketing and
other resources, greater name recognition and a
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larger installed base of customers than we do. As a result, these competitors
can devote greater resources to the development, promotion and sale of products
than we can and may be able to respond to new or emerging technologies and
changes in customer requirements more quickly than we can.
Current and potential competitors have established and may in the future
establish relationships among themselves or with third parties to increase the
ability of their products to address the needs of our current or prospective
customers. In addition, a number of companies with significantly greater
resources than ours could attempt to increase their presence in the eCRM market
by acquiring or forming strategic alliances with our competitors. As a result,
it is likely that new competitors or alliances among competitors will emerge and
may rapidly acquire significant market share. Recently, a number of our
competitors have been acquired by significantly larger companies, creating a
number of stronger competitors with greater resources than ours. Cisco Systems
acquired GeoTel Communications in June 1999 and entered into an agreement to
acquire WebLine Communications in September 1999. These acquisitions strengthen
Cisco's position as a provider of call routing and Web chat software. In
September 1999, Alcatel entered into an agreement to acquire Genesys
Telecommunications Laboratories, adding Genesys' computer telephony software
functionality to its voice and data network capabilities. More recently, in
October 1999, PeopleSoft entered into an agreement to acquire The Vantive
Corporation, a provider of customer relationship management software. In
addition, in October 1999, Nortel entered into an agreement to acquire Clarify,
a provider of customer relationship management software.
We cannot assure you that we will be able to compete successfully against
current and future competitors. Increased competition is likely to result in
price reductions, reduced margins and loss of market share, any of which could
harm our business, financial condition and results of operations. In order to be
successful in the future, we must respond promptly and effectively to
technological change, changing customer requirements and competitors'
innovations. The introduction of new products by competitors or shifts in market
demands could render our existing products obsolete.
PATENTS AND PROPRIETARY RIGHTS
Our success and competitiveness are dependent to a significant degree on
the protection of our proprietary technology. We rely primarily on a combination
of copyrights, trademarks, licenses, trade secret laws and restrictions on
disclosure to protect our intellectual property and proprietary rights. We also
enter into confidentiality agreements with our employees and consultants, and
generally control access to and distribution of our documentation and other
proprietary information. Despite these precautions, others may be able to copy
or reverse engineer aspects of our products, to obtain and use information that
we regard as proprietary or to independently develop similar technology. Any
such actions by competitors could harm our business, operating results and
financial condition.
In addition, the laws of some foreign countries may not protect our
proprietary rights to the same extent as the laws of the United States, and
effective patent, copyright, trademark and trade secret protection may not be
available in these jurisdictions.
We may need to take legal action in the future to enforce or defend our
intellectual property and proprietary rights, to protect our trade secrets or to
determine the validity and scope of the intellectual property and proprietary
rights of others. Litigation, whether successful or unsuccessful, could result
in substantial costs and diversion of management and technical resources, either
of which could harm our business, operating results and financial condition.
We attempt to avoid infringing upon known intellectual property and
proprietary rights of third parties in our product development efforts. However,
we have not conducted and do not plan to
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conduct comprehensive patent searches to determine whether the technology used
in our products infringes patents held by others. In addition, product
development is inherently uncertain in a rapidly evolving technological
environment in which there may be numerous patent applications pending, many of
which are confidential when filed, with regard to similar technologies. If our
products were to violate the proprietary rights of others, we may be liable for
substantial damages. In addition, we may be required to reengineer our products
or seek to obtain licenses to continue offering our products. We cannot assure
you that such efforts would be successful.
EMPLOYEES
As of September 30, 1999, we had a total of 208 employees, including 54
people in research and development, 81 people in sales and marketing, 44 people
in customer support services and 29 people in general and administrative
services. We do not have a collective bargaining agreement with any of our
employees and we consider our employee relations to be good. As of September 30,
1999, Acuity had a total of 81 employees.
FACILITIES
Our principal administrative, sales, marketing, support and research and
development facilities are located in approximately 36,000 square feet of space
in Fremont, California. Our lease of approximately 30,000 square feet expires in
December 2000, and our lease of approximately 6,000 square feet expires in April
2001. We lease several office suites in the United States and the United Kingdom
for sales and service personnel. In addition, we maintain offices in Acton,
Massachusetts and have our European headquarters in Amsterdam, the Netherlands.
Upon the closing of our acquisition of Acuity, we will assume a lease for
approximately 22,000 square feet in Austin, Texas, expiring in June 2000.
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MANAGEMENT
DIRECTORS AND OFFICERS
The following table sets forth information regarding our directors and
officers as of September 30, 1999.
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Executive Officers
Alan Anderson..................... 36 Chairman and Chief Executive Officer
John Burke...................... 39 President
Susan Salvesen.................. 44 Chief Financial Officer and Secretary
Muralidhar Sitaram.............. 36 Senior Vice President, Engineering
Other Officers
Lawrence Byrd................... 42 Vice President, Marketing
John Cecala..................... 37 Vice President, Sales
Roger Nunn...................... 44 Vice President, Americas Operations
Mark Payne...................... 44 Vice President, International Operations
Candace Sestric................. 53 Vice President, Worldwide Customer Support Services
Directors
Paul Bartlett................... 39 Director
Andrew Busey.................... 28 Director Nominee
Fredric Harman.................. 39 Director
William Herman.................. 39 Director
Alexander Rosen................. 31 Director
Robert Shaw..................... 52 Director
Jeanne Wohlers.................. 54 Director
</TABLE>
EXECUTIVE OFFICERS
Alan Anderson has served as our Chief Executive Officer since May 1995 and
our Chairman since September 1999. From May 1995 to July 1999, Mr. Anderson also
served as our President. From October 1992 to May 1995, Mr. Anderson served as
Senior Vice President responsible for the North American operations of
OpenVision Technologies, a systems management software developer. From December
1991 to October of 1992, Mr. Anderson served as a director for consulting
services at Oracle Corporation, a database software company. From April 1989 to
December 1991, Mr. Anderson served as a director of professional services for
Sybase, a database software company. Mr. Anderson received his B.S. in
information systems from the University of San Francisco.
John Burke has served as our President since July 1999. From October 1996
to July 1999, Mr. Burke served as Senior Vice President for field sales and
support for SAP America, a provider of enterprise resource planning software.
From April 1996 to October 1996, Mr. Burke served as Senior Vice President of
sales and marketing for Oneware, a software development and distribution
company. From September 1990 to April 1996, Mr. Burke served as Executive Vice
President of SAP America. Mr. Burke received his B.B.A. in finance and marketing
from Ohio University.
Susan Salvesen has served as our Chief Financial Officer and Secretary
since January 1998. From April 1996 to September 1997, Ms. Salvesen served as
Vice President, Finance and Administration and Chief Financial Officer and
Secretary at Unify Corporation, a provider of e-commerce software solutions.
From May 1994 to April 1996, Ms. Salvesen served as Vice President
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of Finance and Chief Financial Officer at AG Associates, a semiconductor
equipment manufacturer. From February 1988 to May 1994, Ms. Salvesen served as
Corporate Controller at Aspect Telecommunications, a telecommunications
equipment company. Ms. Salvesen received her B.A. in economics from Rutgers
University and her M.B.A. from the University of Pittsburgh.
Muralidhar Sitaram has served as our Senior Vice President, Engineering
since June 1996. From January 1994 to June 1996, Mr. Sitaram served as our
Director of Engineering. Mr. Sitaram received his B.S. in physics and computer
science from Bombay University, India and his M.S. in computer science from the
Case Western Reserve University.
OTHER OFFICERS
Lawrence Byrd was a co-founder of Quintus in 1984 and has most recently
served as our Vice President, Marketing since May 1998. From October 1997 to May
1998, Mr. Byrd served as our Vice President, Product Marketing, from June 1996
to October 1997, as our Chief Technology Officer, from June 1995 to June 1996,
as our Vice President, Engineering and from December 1993 to June 1995, as a
vice president in our consulting group. Prior to this, Mr. Byrd held a range of
engineering, consulting and marketing positions for us. Mr. Byrd received his
B.A. in philosophy from the University of Durham, England.
John Cecala has served as our Vice President, Sales since January 1999.
From October 1995 to January 1999, Mr. Cecala served as a regional sales
manager, and from January 1994 to October 1995 he served as one of our sales
representatives. Prior to January 1994, Mr. Cecala served as a national and
strategic account sales representative for Lotus Development, a computer
software developer. Mr. Cecala received his B.A. degree in business and computer
science from Concordia University.
Roger Nunn has served as our Vice President, Americas Operations since
September 1999. From January 1999 to September 1999, Mr. Nunn served as our
Senior Vice President of Sales. From October 1997 to December 1998, Mr. Nunn
served as our Vice President of Channel Sales. From May 1994 to September 1997,
Mr. Nunn served as a Director of Marketing for Auspex Systems, a provider of
network file servers. From December 1988 to April 1994, Mr. Nunn was an area
channels manager for Sun Microsystems, a provider of computer workstations. Mr.
Nunn received his B.Sc. in engineering and his M.Sc. in management science from
Imperial College of London, England.
Mark Payne has served as our Vice President, International Operations since
July 1998. From June 1996 to June 1998, Mr. Payne served as Senior Vice
President of International Operations for Versatility, a software development
company. From July 1992 to June 1996, he served as General Manager of Northern
Europe for Gupta (now Centura), an applications development software company.
Candace Sestric has served as our Vice President, Worldwide Customer
Support since April 1997. From April 1996 to April 1997, Ms. Sestric served as
Vice President, Professional Services for Knowledge Networks, a customer
relationship management systems integrator. From November 1995 to February 1996,
Ms. Sestric served as Vice President, Customer Services for Siebel Systems, a
sales force automation software company. From June 1993 to November 1995, Ms.
Sestric served as Vice President, Worldwide Customer Support Services for Gupta
(now Centura). Ms. Sestric received her B.A. in business administration from the
College of Santa Fe.
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DIRECTORS
Paul Bartlett has served as a director of Quintus since May 1995. Mr.
Bartlett joined Hall Kinion & Associates, a recruiting and staffing firm, in
September 1996 as President and has served as a director of Hall Kinion since
January of that same year. From August 1990 to September 1996, he was with the
Sprout Group, a venture capital firm, most recently as a partner. Mr. Bartlett
received his A.B. in economics from Princeton University and his M.B.A. from the
Stanford University Graduate School of Business.
Andrew Busey will become a director of Quintus upon the closing of our
acquisition of Acuity. Mr. Busey founded Acuity in August 1995 and served as
President and Chief Executive Officer of Acuity until June 1996. From July 1996
to January 1998, Mr. Busey served as Chairman and Chief Technology Officer of
Acuity, and from January 1998 to May 1999 he served as Acuity's Chairman. Mr.
Busey is presently a director of Acuity. In October 1998, Mr. Busey co-founded
living.com, an online provider of furniture and home furnishings, and he served
as living.com's President and Chairman until September 1999. He currently is the
Chairman and Chief Technology Officer of living.com. Mr. Busey received his B.A.
degree in computer science from Duke University.
Fredric Harman has served as a director of Quintus since September 1996.
Since July 1994, Mr. Harman has served as a managing member of the general
partners of venture capital funds affiliated with Oak Investment Partners. From
April 1991 to June 1994, he served as a general partner of Morgan Stanley
Venture Capital. Mr. Harman sits on the boards of ILOG, S.A., Inktomi
Corporation, Primus Knowledge Solutions, Inc. and InterNAP Network Services. Mr.
Harman received his B.S. and M.S. in electrical engineering from Stanford
University and his M.B.A. from the Harvard Graduate School of Business.
William Herman has served as a director of Quintus since May 1995. Since
October 1998, Mr. Herman has served as President, Chief Executive Officer and a
director of Viewlogic Systems, a provider of electronic design automation
software. From December 1997 to October 1998, Mr. Herman served as President,
Viewlogic Systems Division, of Synopsys, a provider of electronic design
automation software. In October 1998, Synopsys acquired Viewlogic Systems, whose
business included the products and technologies offered by the current
Viewlogic. Mr. Herman served as President and Chief Executive Officer of the
predecessor Viewlogic from January 1997 to December 1997, and as President and
Chief Operating Officer from March 1995 to January 1997. From May 1994 to March
1995, Mr. Herman was President and Chief Operating Officer of Silerity, a
computer-aided engineering software company. Mr. Herman also sits on the board
of Hall Kinion & Associates. Mr. Herman received his B.S. in computer science
from Temple University.
Alexander Rosen has served as a director of Quintus since August 1997. Mr.
Rosen has been with the Sprout Group since 1996, most recently as a general
partner. From July 1993 to August 1994, he served as an associate for General
Atlantic Partners, a venture capital firm, focusing on software investments. Mr.
Rosen received his B.S. in electrical engineering and economics from the
Massachusetts Institute of Technology and his M.B.A. from the Stanford
University Graduate School of Business.
Robert Shaw has served as a director of Quintus since October 1995. Since
November 1998, Mr. Shaw has served as Chief Executive Officer and a director of
USWeb/CKS, an Internet professional services company. From June 1992 to August
1998, Mr. Shaw served in various capacities at Oracle, most recently as
Executive Vice President, Worldwide Consulting Services and Vertical Markets.
Mr. Shaw received his B.B.A. in finance from the University of Texas.
Jeanne Wohlers has served as a director of Quintus since October 1995. From
May 1994 to July 1998, Ms. Wohlers served as partner of Windy Hill Productions,
a producer of education and
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entertainment software. From October 1994 to April 1997, Ms. Wohlers served as a
director of OpenVision Technologies. From August 1993 to June 1995, Ms. Wohlers
was a consultant to Scopus Technology, a provider of customer information
management systems. Ms. Wohlers currently serves as an independent
director/trustee and Audit Committee Chair of 39 mutual funds managed by
American Century, and as a director of Indus International. Ms. Wohlers received
her B.A. in mathematics from Skidmore College and her M.B.A. from Columbia
University.
BOARD COMMITTEES
The board of directors has a compensation committee and an audit committee.
Compensation Committee. The compensation committee of the board of
directors reviews and makes recommendations to the board regarding all forms of
compensation provided to our executive officers and directors, including stock
compensation and loans. In addition, the compensation committee reviews and
approves stock compensation arrangements for all of our employees and
administers our 1999 Stock Incentive Plan, Employee Stock Purchase Plan and 1999
Director Option Plan. The board of directors has established a stock option
committee whose sole member is the chairman of the board of directors, Alan
Anderson. The stock option committee has the power to approve grants of stock
options under our 1999 Stock Incentive Plan to individuals who are neither
officers nor board members not exceeding 20,000 shares per grant. The current
members of the compensation committee are Messrs. Bartlett and Herman.
Audit Committee. The audit committee of the board of directors reviews and
monitors our corporate financial reporting and our internal and external audits,
including, among other things, our internal audit and control functions, the
results and scope of the annual audit and other services provided by our
independent auditors and our compliance with legal matters that have a
significant impact on our financial reports. The audit committee also consults
with our management and our independent auditors prior to the presentation of
financial statements to stockholders and, as appropriate, initiates inquiries
into aspects of our financial affairs. In addition, the audit committee has the
responsibility to consider and recommend the appointment of, and to review fee
arrangements with, our independent auditors. The current members of the audit
committee are Ms. Wohlers and Messrs. Harman and Rosen.
DIRECTOR COMPENSATION
Directors do not receive any cash fees for their service on the board or
any board committee, but they are entitled to reimbursement for all reasonable
out-of-pocket expenses incurred in connection with their attendance at board and
board committee meetings. From time to time, certain directors who are not
employees of Quintus have received grants of options to purchase shares of our
common stock. Following this offering, directors will receive automatic option
grants under our 1999 Director Option Plan. If a change in control of Quintus
occurs, a non-employee director's option granted under our 1999 Director Option
Plan will become fully vested. See "Stock Plans -- 1999 Director Option Plan."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The compensation committee of the board of directors currently consists of
Messrs. Bartlett and Herman. No interlocking relationship exists between any
member of our board of directors or our compensation committee and any member of
the board of directors or compensation committee of any other company, and no
such interlocking relationship has existed in the past.
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<PAGE> 56
INDEMNIFICATION
In September 1999, the board of directors authorized Quintus to enter into
indemnification agreements with each of our directors and executive officers.
The form of indemnification agreement provides that we will indemnify our
directors and executive officers against any and all of their expenses incurred
by reason of their status as a director or executive officer to the fullest
extent permitted by Delaware law and our bylaws.
Our certificate of incorporation and bylaws each contain certain provisions
relating to the limitation of liability and indemnification of our directors and
officers. Our certificate of incorporation provides that our directors will not
be personally liable to Quintus or our stockholders for monetary damages for any
breach of fiduciary duty as a director, except for liability
- for any breach of the director's duty of loyalty to Quintus or our
stockholders;
- for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- in connection with unlawful payments of dividends or unlawful stock
repurchases or redemptions as provided in Section 174 of the Delaware
General Corporation Law; or
- for any transaction from which the director derives any improper personal
benefit.
Our certificate of incorporation also provides that if the Delaware General
Corporation Law is amended after the approval by our stockholders of our
certificate of incorporation to authorize corporate action further eliminating
or limiting the personal liability of directors, then the liability of our
directors will be eliminated or limited to the fullest extent permitted by the
Delaware General Corporation Law. These provisions are not intended to limit the
liability of our directors or officers for any violation of applicable federal
securities laws.
In addition, as permitted by Section 145 of the Delaware General
Corporation Law, our bylaws provide that
- we are required to indemnify our directors and executive officers to the
fullest extent permitted by the Delaware General Corporation Law;
- we may, in our discretion, indemnify other of our officers, employees and
agents as provided by the Delaware General Corporation Law;
- with some exceptions, we are required to advance all expenses incurred by
our directors and executive officers in connection with a legal
proceeding;
- the rights conferred in the bylaws are not exclusive;
- we are authorized to enter into indemnification agreements with our
directors, officers, employees and agents; and
- we may not retroactively amend our bylaw provisions relating to
indemnification.
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<PAGE> 57
EXECUTIVE COMPENSATION
The following table sets forth information with respect to compensation for
the fiscal year ended March 31, 1999 paid by us for services by our Chief
Executive Officer and our other executive officers whose total salary and bonus
for such fiscal year exceeded $100,000, collectively referred to as the Named
Executive Officers. Mr. Kenyon resigned as our Vice President, Field Operations
in October 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
--------------------- UNDERLYING
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS
<S> <C> <C> <C>
Alan Anderson, Chief Executive Officer.............. $190,000 $ 11,875 --
Susan Salvesen, Chief Financial Officer............. 150,000 10,000 25,000
Muralidhar Sitaram, Senior Vice President,
Engineering....................................... 155,833 -- 85,000
Peter Kenyon, former Vice President, Field
Operations........................................ 89,702 304,773 --
</TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
The table below sets forth each grant of stock options during the fiscal
year ended March 31, 1999 to each of the Named Executive Officers. We granted a
total of 1,205,612 options to our employees during fiscal 1999. No stock
appreciation rights were granted to these individuals during this period.
Each of the options listed in the table below is immediately exercisable
except to the extent exercisability was deferred to preserve incentive stock
option tax benefits. The shares purchasable upon exercise of these options may
be repurchased by us at the original exercise price paid per share upon the
optionee's cessation of service prior to vesting in such shares. Other than Ms.
Salvesen's option for 10,000 shares, the repurchase right lapses and the
optionee vests in 25% of the option shares upon completion of one year of
service from the date of grant and the balance in a series of equal monthly
installments over the next 36 months of service. Ms. Salvesen's option for
10,000 shares vests in equal monthly installments over a two-year period. Each
of the option shares listed in the table will vest upon an acquisition of
Quintus by merger or asset purchase, unless our repurchase right in connection
with unvested option shares is transferred to the acquiring entity. Each of the
options has a ten-year term, but may be terminated earlier if the optionee
ceases to remain with us.
The exercise prices of the options we grant are equal to the fair market
value of our common stock, as valued by our board of directors, on the date of
grant. The exercise price may be paid in cash, in shares of our common stock
valued at fair market value on the exercise date or through a cashless exercise
procedure involving a same-day sale of the purchased shares. We may also finance
the option exercise by loaning the optionee sufficient funds to pay the exercise
price for the purchased shares, together with any federal and state income tax
liability incurred by the optionee in connection with such exercise.
The potential realizable values at 5% and 10% appreciation are calculated
by assuming a base price of $13.00 per share that appreciates at the indicated
rate for the entire ten-year term of the option and that the option is exercised
at the exercise price and sold on the last day of its term at the
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appreciated price. Stock price appreciation rates of 5% and 10% are assumed
pursuant to rules promulgated by the Securities and Exchange Commission and do
not represent our prediction of our stock price performance.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
----------------------------------------------------- ANNUAL RATES OF
NUMBER OF STOCK
SECURITIES % OF TOTAL PRICE APPRECIATION
UNDERLYING OPTIONS GRANTED EXERCISE FOR OPTION TERM
OPTIONS TO EMPLOYEES IN PRICE EXPIRATION -----------------------
NAME GRANTED FISCAL YEAR ($/SHARE) DATE 5% 10%
<S> <C> <C> <C> <C> <C> <C>
Alan Anderson........ -- --% $ -- -- $ -- $ --
Susan Salvesen....... 10,000 0.8 1.75 3/09/09 194,256 319,687
15,000 1.2 1.50 7/20/08 295,134 483,280
Muralidhar Sitaram... 85,000 7.1 1.75 3/09/09 1,651,179 2,717,335
Peter Kenyon......... -- -- -- -- -- --
</TABLE>
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The table below sets forth for each of the Named Executive Officers, the
number of options exercised during the fiscal year ended March 31, 1999 and the
number and value of securities underlying unexercised options that were held by
the Named Executive Officers as of March 31, 1999. No stock appreciation rights
were exercised by the Named Executive Officers in fiscal year 1999, and no stock
appreciation rights were outstanding at the end of that year.
The amounts in the "Value Realized" column are equal to the fair market
value of the purchased shares on the option exercise date, less the exercise
price paid for such shares.
Options granted under our 1995 Stock Option Plan are immediately
exercisable for all the option shares, but any shares purchased under those
options may be repurchased by us, at the original exercise price paid per share,
if the optionee ceases to remain with us prior to the vesting in his or her
shares. The headings "Vested" refer to shares we may no longer repurchase; the
headings "Unvested" refer to shares we had rights to repurchase as of March 31,
1999.
The amounts in the "Value of Unexercised in-the-Money Options at March 31,
1999" column are based on $1.75 per share, the fair market value of our common
stock at the end of fiscal 1999, less the exercise price payable for such
shares.
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
SECURITIES UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS AT
SHARES AT MARCH 31, 1999 MARCH 31, 1999
ACQUIRED ON VALUE ---------------------- ------------------
NAME EXERCISE REALIZED VESTED UNVESTED VESTED UNVESTED
<S> <C> <C> <C> <C> <C> <C>
Alan Anderson................ -- $ -- -- -- $ -- $ --
Susan Salvesen............... 28,000 7,000 33,499 156,501 15,239 71,011
Muralidhar Sitaram........... -- -- 5,312 94,688 2,656 4,844
Peter Kenyon................. -- -- -- -- -- --
</TABLE>
EMPLOYMENT AND CHANGE OF CONTROL AGREEMENTS
The compensation committee, as plan administrator of the 1999 Stock
Incentive Plan, has the authority to accelerate the vesting of the shares of
common stock subject to outstanding options held
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by the Named Executive Officers and any other person in connection with certain
changes in control of Quintus. In connection with our adoption of the 1999 Stock
Incentive Plan, we have provided that upon a change in control of Quintus, each
outstanding option and all shares of restricted stock will generally become
fully vested unless the surviving corporation assumes the option or award or
replaces it with a comparable award.
Except for Mr. Anderson and Mr. Burke, none of the Named Executive Officers
has employment agreements with us, and his or her employment may be terminated
at any time. We have entered into an agreement with Mr. Anderson, our Chief
Executive Officer, dated May 23, 1995, which provides for payment of severance
pay in the amount of nine months base salary in the event that his employment is
involuntarily terminated without cause. In May 1995, we granted Mr. Anderson
unvested options to purchase 1,142,858 shares of common stock. Subsequently, Mr.
Anderson exercised his option to purchase all of these options subject to our
right to repurchase his unvested shares should he cease his service with us. As
of September 1999, Mr. Anderson had fully vested in 671,429 of these shares.
Provided that Mr. Anderson remains in our service, the remaining 471,429 shares
of unvested common stock will vest as follows: 117,857 will vest in equal annual
installments beginning in May 2000. However, these 471,429 shares of unvested
common stock could vest in full if following this offering the per share value
of our common stock reaches specified targets as measured on May 25, 2000, 2001
or 2002. Mr. Anderson's agreement also provides that these 471,429 shares of
unvested common stock will vest in full following certain changes in control of
Quintus.
We have entered into an agreement with Mr. Burke, our President, dated June
11, 1999, which provides for payment of severance in the amount of 3 months base
salary in the event that his employment is involuntarily terminated without
cause before July 5, 2000. In addition, Mr. Burke has been granted unvested
options to purchase 685,000 shares of common stock. Of these 685,000 options,
411,000 will vest as follows: 205,000 will vest upon completion of one year of
service from the date of grant and the balance will vest in equal monthly
installments over the next 36 months of service thereafter. 274,000 of these
685,000 options will vest within three to five years, depending on Quintus'
achievement of specified license and revenue targets. Mr. Burke's agreement also
provides for accelerated vesting of up to half of his 685,000 options if his
employment is involuntarily terminated without cause within six months following
certain changes in control of Quintus and he is then vested in less than half of
such options.
STOCK PLANS
1999 STOCK INCENTIVE PLAN
Share Reserve. Our board of directors adopted our 1999 Stock Incentive Plan
in September 1999 to be effective simultaneously with this offering. We will
seek the approval of this plan by our stockholders. We have reserved 1,000,000
shares of our common stock for issuance under the 1999 Stock Incentive Plan. Any
shares not yet issued under our 1995 Stock Option Plan on the date of this
offering will also be available under the 1999 Stock Incentive Plan. On January
1 of each year, starting with the year 2000, the number of shares in the reserve
will automatically increase by 5% of the total number of shares of common stock
that are outstanding at that time or, if less, by 2,000,000 shares. In general,
if options or shares awarded under the 1999 Stock Incentive Plan or the 1995
Stock Option Plan are forfeited, then those options or shares will again become
available for awards under the 1999 Stock Incentive Plan. We have not yet
granted any options under the 1999 Stock Incentive Plan.
Outstanding options under the 1995 Stock Option Plan will be incorporated
into the 1999 Stock Incentive Plan at the time of this offering and no further
option grants will be made under the 1995
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<PAGE> 60
Stock Option Plan. The incorporated options will continue to be governed by
their existing terms, unless the Board elects to extend one or more features of
the 1999 Stock Incentive Plan to those options or to other outstanding shares.
Previously, options granted under the 1995 Stock Option Plan provided that
vesting of the shares would accelerate upon an acquisition only if not assumed
by the acquiring entity.
Administration. The compensation committee of our board of directors
administers the 1999 Stock Incentive Plan. The committee has the complete
discretion to make all decisions relating to the interpretation and operation of
our 1999 Stock Incentive Plan. The committee has the discretion to determine who
will receive an award, what type of award it will be, how many shares will be
covered by the award, what the vesting requirements will be, if any, and what
the other features and conditions of each award will be. The compensation
committee may also reprice outstanding options and modify outstanding awards in
other ways.
Eligibility. Employees, consultants and members of our board of directors
who are not employees are eligible to participate in the 1999 Stock Incentive
Plan.
Types of Award. The 1999 Stock Incentive Plan provides for the award of
incentive or nonstatutory options to purchase shares of our common stock,
restricted shares of our common stock, stock appreciation rights and stock
units.
Options. An optionee who exercises an incentive stock option may qualify
for favorable tax treatment under Section 422 of the Internal Revenue Code of
1986. On the other hand, nonstatutory stock options do not qualify for such
favorable tax treatment. The exercise price for incentive stock options granted
under the 1999 Stock Incentive Plan may not be less than 100% of the fair market
value of our common stock on the option grant date. In the case of nonstatutory
stock options, the minimum exercise price is 85% of the fair market value of our
common stock on the option grant date. Optionees may pay the exercise price by
using:
- cash;
- shares of common stock that the optionee already owns;
- a full-recourse promissory note, except that the par value of newly
issued shares must be paid in cash;
- an immediate sale of the option shares through a broker designated by us;
or
- a loan from a broker designated by us, secured by the option shares.
Options vest at the time or times determined by the compensation committee.
In most cases, our options vest over a four-year period following the date of
grant. Options generally expire ten years after they are granted, except that
they generally expire earlier if the optionee's service terminates earlier. The
1999 Stock Incentive Plan provides that no participant may receive options
covering more than 1,000,000 shares in the same year, except that a newly hired
employee may receive options covering up to 2,000,000 shares in the first year
of employment.
Stock Appreciation Rights. A participant who exercises a stock appreciation
right shall receive the increase in value of our common stock over the base
price. The base price for stock appreciation rights granted under the 1999 Stock
Incentive Plan shall be determined by the compensation committee. The settlement
value of the stock appreciation right may be paid in cash or shares of common
stock.
Stock appreciation rights vest at the time or times determined by the
compensation committee. In most cases, our stock appreciation rights vest over a
four-year period following the date of grant. Stock appreciation rights
generally expire 10 years after they are granted, except that they generally
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expire earlier if the participant's service terminates earlier. The 1999 Stock
Incentive Plan provides that no participant may receive stock appreciation
rights covering more than 1,000,000 shares in the same year, except that a newly
hired employee may receive stock appreciation rights covering up to 2,000,000
shares in the first year of employment.
Restricted Shares. Restricted shares vest at the time or times determined
by the compensation committee and may be awarded under the 1999 Stock Incentive
Plan in return for:
- cash;
- a full-recourse promissory note, except that the par value of newly
issued shares must be paid in cash;
- services already provided to us; and
- in the case of treasury shares only, services to be provided to us in the
future.
Stock units. Stock units vest at the time or times determined by the
compensation committee and may be awarded under the 1999 Stock Incentive Plan in
return for:
- cash;
- a full-recourse promissory note, except that the par value of newly
issued shares must be paid in cash;
- services already provided to us; and
- in the case of treasury shares only, services to be provided to us in the
future.
Change in Control. If a change in control of Quintus occurs, an option or
restricted stock award under the 1999 Stock Incentive Plan will generally become
fully vested. However, if the surviving corporation assumes the option or award
or replaces it with a comparable award, then vesting shall generally not
accelerate. A change in control includes:
- a merger of Quintus after which our own stockholders own 50% or less of
the surviving corporation or its parent company;
- a sale of all or substantially all of our assets;
- the replacement of more than one-half of our directors over a 24-month
period; or
- an acquisition of 50% or more of our outstanding stock by any person or
group, other than a person related to Quintus such as a holding company
owned by our stockholders.
Amendments or Termination. Our board may amend or terminate the 1999 Stock
Incentive Plan at any time. If our board amends the plan, it does not need to
ask for stockholder approval of the amendment unless applicable law requires it.
The 1999 Stock Incentive Plan will continue in effect indefinitely, unless the
board decides to terminate the plan earlier.
EMPLOYEE STOCK PURCHASE PLAN
Share Reserve and Administration. Our board of directors adopted our
Employee Stock Purchase Plan on September 9, 1999. We will seek the approval of
this plan by our stockholders. Our Employee Stock Purchase Plan is intended to
qualify under Section 423 of the Internal Revenue Code and will become effective
simultaneously with this offering. We have reserved 1,000,000 shares of our
common stock for issuance under the plan. On May 1 of each year, starting with
the year 2000, the number of shares in the reserve will automatically be
increased by 2% of the total number of shares of our common stock that are
outstanding at that time or, if less, by 1,000,000 shares. The plan will be
administered by a committee of our board of directors.
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<PAGE> 62
Eligibility. All of our employees are eligible to participate if they are
employed by us for more than 20 hours per week and for more than five months per
year. Eligible employees may begin participating in the plan at the start of any
offering period. Each offering period lasts 24 months. Overlapping offering
periods start on May 1 and November 1 of each year. However, the first offering
period will start on the effective date of this offering and end on October 31,
2001.
Amount of Contributions. Our Employee Stock Purchase Plan permits each
eligible employee to purchase common stock through payroll deductions. Each
employee's payroll deductions may not exceed 15% of the employee's cash
compensation. Purchases of our common stock will occur on April 30 and October
31 of each year. Each participant may purchase up to 2,000 shares on any
purchase date. However, the value of the shares purchased in any calendar year,
measured as of the beginning of the applicable offering period, may not exceed
$25,000.
Purchase Price. The price of each share of common stock purchased under our
Employee Stock Purchase Plan will be 85% of the lower of the fair market value
per share of common stock on the date immediately before the first day of the
applicable offering period, or the fair market value per share of common stock
on the purchase date. In the case of the first offering period, the price per
share under the plan will be 85% of the lower of the price per share to the
public in this offering, or the fair market value per share of common stock on
the purchase date.
Other Provisions. Employees may end their participation in the Employee
Stock Purchase Plan at any time. Participation ends automatically upon
termination of employment with Quintus. If a change in control of Quintus
occurs, our Employee Stock Purchase Plan will end and shares will be purchased
with the payroll deductions accumulated to date by participating employees,
unless the plan is assumed by the surviving corporation or its parent. Our board
of directors may amend or terminate the Employee Stock Purchase Plan at any
time. Our chief executive officer may also amend the plan in certain respects.
If our board increases the number of shares of common stock reserved for
issuance under the plan, except for the automatic increases described above, it
must seek the approval of our stockholders.
1999 DIRECTOR OPTION PLAN
Share Reserve. Our board of directors adopted our 1999 Director Option Plan
on September 9, 1999. We will seek the approval of this plan by our
stockholders. We have reserved 500,000 shares of our common stock for issuance
under the plan. In general, if options granted under the 1999 Director Option
Plan are forfeited, then those options will again become available for grants
under the plan. The Director Option Plan will be administered by the
compensation committee of our board of directors, although all grants under the
plan are automatic and non-discretionary.
Initial Grants. Only the non-employee members of our board of directors
will be eligible for option grants under the 1999 Director Option Plan. Each
non-employee director who first joins our board after the effective date of this
offering will receive an initial option for 30,000 shares. That grant will occur
when the director takes office. The initial options vest in monthly installments
over the two-year period following the date of grant.
Annual Grants. At the time of each of our annual stockholders' meetings,
beginning in 2000, each non-employee director who will continue to be a director
after that meeting will automatically be granted an annual option for 10,000
shares of our common stock. However, a new non-employee director who is
receiving the 30,000-share initial option will not receive the annual option in
the same calendar year. The annual options are fully vested on the first
anniversary of the date of grant.
Other Option Terms. The exercise price of each non-employee director's
option will be equal to the fair market value of our common stock on the option
grant date. A director may pay the exercise
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price by using cash, shares of common stock that the director already owns, or
an immediate sale of the option shares through a broker designated by us. The
non-employee directors' options have a 10-year term, except that they expire one
year after a director leaves the board (if earlier). If a change in control of
Quintus occurs, a non-employee director's option granted under the 1999 Director
Option Plan will become fully vested. Vesting also accelerates in the event of
the optionee's death or disability.
Amendments or Termination. Our board may amend or terminate the 1999
Director Option Plan at any time. If our board amends the plan, it does not need
to ask for stockholder approval of the amendment unless applicable law requires
it. The 1999 Director Option Plan will continue in effect indefinitely, unless
the board decides to terminate the plan.
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CERTAIN TRANSACTIONS
RELATIONSHIPS AMONG OFFICERS OR DIRECTORS WITH CERTAIN INVESTORS
Two of our directors are associated with entities that each own more than
five percent of our capital stock. Mr. Rosen is a general partner in Sprout
Group, and Mr. Harman is a general partner in Oak Investment Partners. No other
officer or director of Quintus has any material relationship with any other
principal stockholder. The Sprout Group is affiliated with Donaldson, Lufkin &
Jenrette Securities Corporation, one of the underwriters of this offering. See
"Underwriting."
STOCK TRANSACTIONS
The following table summarizes the sales of preferred stock to our
executive officers, directors and principal stockholders, and persons and
entities associated with them, since our inception. Each share of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock automatically converts into one share of common stock and the
right to receive a cash payment equal to approximately 92.5% of the original per
share purchase price upon the closing of this offering. Each share of Series E
Preferred Stock and Series F Preferred Stock automatically converts into one
share of common stock upon the closing of this offering. See "Principal
Stockholders" for a summary of the affiliations of each of the persons and
entities described below.
<TABLE>
<CAPTION>
TOTAL VALUE OF
SERIES A SERIES B SERIES C SERIES D SERIES E SERIES F PREFERRED
PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED STOCK
STOCK STOCK STOCK STOCK STOCK STOCK PURCHASED
<S> <C> <C> <C> <C> <C> <C> <C>
Date of sale............................ 5/25/95 3/7/96 9/17/96 11/10/97 5/21/98 8/26/99
Price per share......................... $1.00 $1.43 $1.91 $2.75 $4.15 $8.25
Entities associated with our directors
Entities Associated with DLJ Capital
Corporation (Mr. Rosen)............. 9,000,000 699,300 501,182 -- 1,304,100 -- 1$16,369,272
Entities Associated with Oak
Investment Partners (Mr. Harman).... -- -- 2,094,240 -- 669,085 -- $6,776,701
Other 5% stockholders
HarbourVest Partners IV............... -- -- -- 970,002 455,760 -- $4,558,910
Outside directors
William Herman........................ 100,000 -- -- -- 60,241 30,000 $ 597,500
Paul Bartlett......................... -- -- 52,356 -- 24,097 -- $ 200,002
Jeanne Wohlers........................ -- 34,420 -- -- 12,049 -- $ 99,224
Robert Shaw........................... -- -- -- -- 18,072 -- $ 74,999
</TABLE>
EMPLOYMENT AGREEMENTS AND OTHER COMPENSATION ARRANGEMENTS
We have entered into employment agreements or compensation arrangements
with Alan Anderson, our Chief Executive Officer, and John Burke, our President.
See "Management--Employment and Change of Control Agreements."
OPTION GRANTS
We have granted options to our directors and executive officers, and we
intend to grant additional options to our directors and executive officers in
the future. See "Management--Option Grants in Last Fiscal Year" and
"Management--Director Compensation."
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INDEMNIFICATION AGREEMENTS
We have entered into indemnification agreements with our directors and
executive officers. Such agreements may require us, among other things, to
indemnify our officers and directors, other than for liabilities arising from
willful misconduct of a culpable nature, and to advance their expenses incurred
as a result of any proceeding against them as to which they could be
indemnified. See "Management--Indemnification."
RIGHTS OF CERTAIN STOCKHOLDERS
Certain holders of our common stock are entitled to demand and "piggyback"
registration rights pursuant to an Amended and Restated Investors' Rights
Agreement, dated as of August 26, 1999. The following directors are parties to
this agreement: Jeanne Wohlers; William Herman; Paul Bartlett; and Robert Shaw.
In addition, the following principal stockholders are party to this agreement:
entities associated with the Sprout Group, in which Alexander Rosen is a general
partner; entities associated with Oak Investment Partners, in which director
Fredric W. Harman is a general partner; and HarbourVest Partners IV.
AGREEMENTS WITH COMPANIES WITH WHICH OUR DIRECTORS ARE ASSOCIATED
We have an ongoing contract with Hall, Kinion Associates, Inc., a
recruiting and staffing firm, under which Hall, Kinion recruits qualified
candidates for consideration of employment in specific positions with us. If we
hire any Hall, Kinion candidate, either immediately or within 6 months of the
date the candidate is first referred to us by Hall, Kinion, we pay Hall, Kinion
20% of the candidate's base annual salary. Paul Bartlett, one of our directors,
is president of Hall, Kinion. In fiscal 1999 and the six months ended September
30, 1999, we paid an aggregate of $20,387 and $217,228, respectively, to Hall,
Kinion under this agreement.
Mr. Busey, who will become one of our directors upon the closing of our
acquisition of Acuity, is the Chairman and Chief Technology Officer of
living.com, an online retailer of home furnishings. In March 1999, Acuity
licensed its WebCenter product to living.com and received approximately $90,000
in connection with this license.
LOANS TO CERTAIN EXECUTIVE OFFICERS AND DIRECTORS
On May 14, 1996, we loaned Alan Anderson, our Chief Executive Officer, a
total of $37,500 for the exercise of stock options. Mr. Anderson purchased
750,000 shares of our common stock with the loan. In connection with the loan,
we entered into a stock pledge agreement with Mr. Anderson on May 14, 1996 and
became the holder of a full-recourse promissory note from Mr. Anderson dated May
14, 1996 in the amount of $37,500 and bearing an interest rate of 6.36%,
compounded annually. Principal and interest are due on May 14, 2001, subject to
acceleration upon the cessation of Mr. Anderson's employment and certain other
events. As of September 30, 1999, the amount outstanding on this note was
$43,093.
On May 14, 1996, we loaned Alan Anderson, our Chief Executive Officer, a
total of $19,643 for the exercise of stock options. Mr. Anderson purchased
392,858 shares of our common stock with the loan. In connection with the loan,
we entered into a stock pledge agreement with Mr. Anderson on May 14, 1996 and
became the holder of a full-recourse promissory note from Mr. Anderson dated May
14, 1996 in the amount of $19,643 and bearing an interest rate of 6.36%,
compounded annually. Principal and interest are due on May 14, 2001, subject to
acceleration upon the cessation of Mr. Anderson's employment and certain other
events. As of September 30, 1999, the amount outstanding on this note was
$22,573.
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On April 20, 1999, we loaned Susan Salvesen, our Chief Financial Officer, a
total of $164,868 for the exercise of a stock option. She purchased 132,000
shares of our common stock with the loan. In connection with the loan, we
entered into a stock pledge agreement with Ms. Salvesen on April 20, 1999, and
became the holder of a full-recourse promissory note from Ms. Salvesen dated
April 20, 1999, in the amount of $164,868 and bearing an interest rate of 5.28%,
compounded annually. Principal and interest are due on April 20, 2003, subject
to acceleration upon the cessation of Ms. Salvesen's employment and certain
other events. As of September 30, 1999, the amount outstanding on this note was
$167,385.
In August 1996, Acuity loaned Mr. Busey $75,000. The note bore interest at
5.76% per annum and was collateralized by a stock pledge agreement secured by
shares owned by Mr. Busey. In 1998, Acuity forgave the note in connection with a
noncompete agreement Mr. Busey entered into with Acuity. Acuity received
interest payments of $4,320 and $2,160 during fiscal 1997 and 1998.
We believe that the transactions above were made on terms no less favorable
to us than could have been obtained from unaffiliated parties. All future
transactions, including loans between us and our officers, directors, principal
stockholders and their affiliates, will be approved by a majority of the board
of directors, including a majority of the independent and disinterested
directors, and will continue to be made on terms no less favorable to us than
could have been obtained from unaffiliated parties.
ACUITY'S SALE OF ITS ICHAT BUSINESS
In March 1999, Acuity sold its iChat business to KOZ, Inc. Under the terms
of an agency agreement between Mr. Busey and Acuity, Mr. Busey had the right to
receive 10% of the stock and cash received by Acuity for the sale of the iChat
assets. In June 1999, Acuity received 659,341 shares of KOZ Series E preferred
stock, valued at approximately $0.91 per share. Ten percent of these shares are
to be transferred to Mr. Busey, in accordance with the agency agreement. In
August 1999, Acuity received a payment of $310,000 from KOZ in connection with
the sale of the iChat business, creating an obligation to pay Mr. Busey $31,000.
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<PAGE> 67
PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of our common stock
as of September 30, 1999 and as adjusted to reflect the closing of our
acquisition of Acuity and the sale of the common stock offered in this offering
for:
- each person who is known by us to beneficially own more than 5% of our
common stock;
- each of the Named Executive Officers;
- each of our directors; and
- all of our directors and executive officers as a group (10 persons).
As of September 30, 1999, there were 22,573,244 shares of our common stock
outstanding assuming the exercise of warrants to purchase 328,649 shares of
stock that were outstanding on that date. We will issue 4,551,441 shares in
connection with our acquisition of Acuity. Thus, the figures in the "Before
Offering" and "After Offering" columns below are based on 27,124,685 and
31,124,685 shares outstanding. The information in the table below assumes no
exercise of the underwriters' over-allotment option.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of common stock subject to options
currently exercisable within 60 days of September 30, 1999 are deemed
outstanding for purposes of computing the percentage ownership of the person
holding such option but are not deemed outstanding for purposes of computing the
percentage ownership of any other person. Except where indicated, and subject to
community property laws where applicable, the persons in the table below have
sole voting and investment power with respect to all common stock shown as
beneficially owned by them. Unless otherwise indicated, the address of each of
the individuals listed in the table is c/o Quintus Corporation, 47212 Mission
Falls Court, Fremont, CA 94539.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
OPTIONS OR WARRANTS ----------------------
NUMBER OF SHARES INCLUDED IN OUTSTANDING
BENEFICIALLY BENEFICIAL BEFORE AFTER
NAME OF BENEFICIAL OWNER OWNED OWNERSHIP OFFERING OFFERING
<S> <C> <C> <C> <C>
Entities Affiliated with Donaldson,
Lufkin & Jenrette, Inc.(a).......... 11,842,037 140,193 43.4% 37.9%
c/o Sprout Group
3000 Sand Hill Road, Suite 170, Bldg.
3
Menlo Park, CA 94025
Entities Affiliated with Oak
Investment Partners(b).............. 2,903,516 140,191 10.6 9.3
525 University Avenue, Suite 1300
Palo Alto, CA 94301
HarbourVest Partners IV -- Direct Fund
L.P.(c)............................. 1,530,908 105,146 5.6 4.9
One Financial Center
Boston, MA 02111
Alan K. Anderson(d)................... 1,142,858 -- 4.2 3.7
John J. Burke......................... 685,000 685,000 2.5 2.2
Susan Salvesen........................ 248,000 88,000 * *
</TABLE>
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<PAGE> 68
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
OPTIONS OR WARRANTS ----------------------
NUMBER OF SHARES INCLUDED IN OUTSTANDING
BENEFICIALLY BENEFICIAL BEFORE AFTER
NAME OF BENEFICIAL OWNER OWNED OWNERSHIP OFFERING OFFERING
<S> <C> <C> <C> <C>
Muralidhar Sitaram.................... 330,000 130,000 1.2 1.1
Paul Bartlett......................... 116,453 40,000 * *
Andrew Busey.......................... 594,183 -- 2.2 1.9
Fredric Harman(e)..................... 2,903,516 140,191 10.6 9.3
Will Herman........................... 220,241 60,000 1.0 *
Alexander Rosen(f).................... 11,842,037 140,193 43.4 37.9
Robert Shaw........................... 84,097 -- * *
Jeanne Wohlers........................ 122,049 -- * *
All directors and executive officers
as a group(11)...................... 18,288,434 1,283,384 64.4 56.4
</TABLE>
- -------------------------
* Less than 1%.
(a) Includes 653,655 shares held by entities affiliated with Donaldson, Lufkin
& Jenrette, Inc., of which 9,947 are held in the form of warrants to
purchase Series B preferred stock, and 7,511 are held in the form of
warrants to purchase common stock. Also includes 3,605,644 shares held by
Sprout Capital VI, L.P., of which 62,815 are held in the form of warrants
to purchase Series B preferred stock and 47,437 are held in the form of
warrants to purchase common stock. Also includes 7,360,350 shares held by
Sprout Capital VII, L.P., of which 119,500 are held in the form of warrants
to purchase Series B preferred stock and 90,245 are held in the form of
warrants to purchase common stock. Also includes 17,463 and 204,925 shares
held by Sprout CEO Fund, L.P. and DLJ ESC II, L.P. DLJ ESC II, L.P. is an
Employees' Securities Corporation as defined in the Investment Company Act
of 1940. The general partner of DLJ ESC II, L.P. is DLJ LBO Plans
Management Corporation and the limited partners of DLJ ESC II, L.P. are
current or former employees of Donaldson, Lufkin & Jenrette, Inc. and its
affiliates. DLJ Capital Corporation is the managing general partner of
Sprout Capital VI, L.P., the managing general partner of Sprout Capital
VII, L.P., and the General Partner of Sprout CEO Fund, L.P. The entities
affiliated with Donaldson, Lufkin & Jenrette, Inc. (the "DLJ Entities")
have placed a sufficient number of their shares in a voting trust so that
upon the closing of this offering, the DLJ Entities will exercise voting
control over less than five percent of the outstanding common stock. The
shares subject to the voting trust are held and voted by an independent
third party, Norwest Bank Indiana, N.A., as voting trustee. DLJ Capital
Corporation has the power to dispose of the shares subject to the voting
trust that were formerly held by DLJ Capital Corporation, Sprout Capital
VI, L.P., Sprout Capital VII, L.P. and Sprout CEO Fund, L.P. DLJ LBO Plans
Management Corporation has the power to dispose of the shares subject to
the voting trust that were formerly held by DLJ ESC II, L.P. DLJ Capital
Corporation has the power to vote and dispose of its shares, as well as
those held by Sprout Capital VI, L.P., Sprout Capital VII, L.P. and Sprout
CEO Fund, L.P., that are not subject to the voting trust. DLJ LBO Plans
Management Corporation has the power to vote and dispose of shares held by
DLJ ESC II, L.P. that are not subject to the voting trust.
(b) Includes 2,837,318 shares held by Oak Investment Partners VI, L.P., of
which 136,997 are held in the form of warrants to purchase common stock.
Also includes 66,198 shares held by Oak VI Affiliates Fund, L.P., of which
3,194 are held in the form of warrants to purchase common stock. Mr. Harman
has indirect ownership of the shares and has shared power to vote and
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<PAGE> 69
dispose of the shares held by Oak Investment Partners VI, L.P. and Oak VI
Affiliates Fund, L.P. The parties who share power to vote and dispose of
the shares held by Oak Investment Partners VI, L.P., with Mr. Harman are
Bandel L. Carano, Eileen M. More, Ann H. Lamont, Edward F. Glassmeyer and
Gerald R. Gallagher, all of whom are managing members of Oak Associates VI,
LLC, the general partner of Oak Investment Partners VI, L.P. The parties
who share power to vote and dispose of the shares held by Oak VI Affiliates
Fund, L.P., with Mr. Harman are Bandel L. Carano, Eileen M. More, Ann H.
Lamont, Edward F. Glassmeyer and Gerald R. Gallagher, all of whom are
managing members of Oak VI Affiliates, LLC, the general partner of Oak VI
Affiliates Fund, L.P. Mr. Harman, Bandel L. Carano, Eileen M. More, Ann H.
Lamont, Edward F. Glassmeyer and Gerald R. Gallagher disclaim beneficial
ownership of the securities held by such partnerships in which Mr. Harman,
Bandel L. Carano, Eileen M. More, Ann H. Lamont, Edward F. Glassmeyer and
Gerald R. Gallagher do not have a pecuniary interest.
(c) HarbourVest Partners, LLC is the managing member of the general partner of
HarbourVest Partners IV-Direct Fund L.P. Edward W. Kane and D. Brooks Zug
are the managing members of HarbourVest Partners, LLC that hold the power
to vote and dispose of shares held by HarbourVest Partners IV-Direct Fund
L.P.
(d) Includes 471,429 shares of unvested common stock.
(e) Includes 2,903,516 shares held by entities affiliated with Oak Investment
Partners. See Note b above. Mr. Harman is a managing member of Oak
Associates VI, LLC, the general partner of Oak Investment Partners VI,
L.P., and a managing member of Oak VI Affiliates, LLC, the general partner
of Oak VI Affiliates Fund, L.P.
(f) Includes 11,842,037 shares held by entities affiliated with DLJ Capital
Corporation. See Note a above. Mr. Rosen is a general partner of the Sprout
Group and a general partner of DLJ Associates VII, L.P., which is a general
partner of Sprout Capital VII, L.P. Mr. Rosen disclaims beneficial
ownership of these shares, except to the extent of his pecuniary interest
arising from his interests in the partnerships named in Note a above.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
At the closing of this offering, our authorized capital stock will consist
of 100,000,000 shares of common stock, $0.001 par value, and 10,000,000 shares
of preferred stock, $0.001 par value. The following summary of certain
provisions of the common stock and the preferred stock is not complete and is
qualified by our certificate of incorporation and bylaws and by the provisions
of applicable law.
COMMON STOCK
As of September 30, 1999, there were 22,573,244 shares of common stock
outstanding that were held of record by approximately 193 stockholders. There
will be 31,124,685 shares of common stock outstanding, assuming the exercise of
328,649 warrants prior to the closing of this offering and no exercise of the
underwriters' over-allotment option and no exercise after September 30, 1999, of
outstanding options, and after giving effect to the issuance of 4,551,441 shares
in connection with our acquisition of Acuity, the sale of 4,000,000 shares of
common stock to the public in this offering and the conversion of our preferred
stock into common stock at a one-to-one ratio.
The holders of our common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding preferred stock, the holders of common stock are
entitled to receive ratably such dividends, if any, as may be declared from time
to time by the board of directors out of funds legally available therefor. We
have never declared or paid cash dividends on our common stock or other
securities and do not currently anticipate paying cash dividends in the future.
Our bank line of credit currently prohibits the payment of dividends. In the
event of the liquidation, dissolution or winding up of Quintus, the holders of
common stock are entitled to share ratably in all assets remaining after payment
of liabilities, subject to prior distribution rights of preferred stock, if any,
then outstanding. The common stock has no preemptive or conversion rights or
other subscription rights. There are no redemption or sinking fund provisions
applicable to the common stock. All outstanding shares of common stock are fully
paid and nonassessable, and the shares of common stock to be issued upon the
effectiveness of this offering will be fully paid and nonassessable.
PREFERRED STOCK
Our certificate of incorporation authorizes 10,000,000 shares of preferred
stock. The board of directors has the authority to issue the preferred stock in
one or more series and to fix the rights, preferences, privileges and
restrictions thereof, including dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares constituting any series or the designation
of such series, without further vote or action by the stockholders. The issuance
of preferred stock may have the effect of delaying, deferring or preventing a
change in control of Quintus without further action by the stockholders and may
adversely affect the voting and other rights of the holders of common stock. The
issuance of preferred stock with voting and conversion rights may adversely
affect the voting power of the holders of common stock, including the loss of
voting control to others. At present, we have no plans to issue any of the
preferred stock.
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WARRANTS
As of September 30, 1999, the following warrants to purchase a total of
718,996 shares of our capital stock were outstanding, excluding warrants to
purchase 328,649 shares of stock that we have assumed will be exercised before
the offering:
- Warrants to purchase a total of 25,000 shares of Series F preferred stock
at $8.25 per share, which expire on April 17, 2006;
- Warrants to purchase a total of 385,530 shares of common stock at $0.30
per share, which expire on November 10, 2001;
- Warrants to purchase a total of 8,466 shares of common stock at $3.94 per
share, which expire on January 7, 2002; and
- Warrants to purchase 300,000 shares of common stock at the lesser of
$7.50 or the price of shares sold in this offering per share, which
expire on the earlier of one year after the closing date of this offering
or July 18, 2004.
We have assumed throughout this prospectus the pre-offering cash exercise
of the following warrants:
- Warrants to purchase a total of 5,000 shares of common stock at $0.05 per
share;
- Warrants to purchase a total of 76,047 shares of common stock at $4.54
per share;
- Warrants to purchase a total of 192,262 shares of Series B preferred
stock at $1.43 per shares; and
- Warrants to purchase a total of 55,340 shares of Series C preferred stock
at $1.91 per share.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS
AND DELAWARE LAW
CERTIFICATE OF INCORPORATION AND BYLAWS
The certificate of incorporation provides that, effective upon the closing
of this offering, all stockholder actions must be effected at a duly called
meeting and not by a consent in writing. The bylaws provide that our
stockholders may call a special meeting of stockholders only upon a request of
stockholders owning at least 10% of our capital stock. These provisions of the
certificate of incorporation and bylaws could discourage potential acquisition
proposals and could delay or prevent a change in control of Quintus. These
provisions are intended to enhance the likelihood of continuity and stability in
the composition of the board of directors and in the policies formulated by the
board of directors and to discourage certain types of transactions that may
involve an actual or threatened change of control of Quintus. These provisions
are designed to reduce the vulnerability of Quintus to an unsolicited
acquisition proposal. The provisions also are intended to discourage certain
tactics that may be used in proxy fights. However, such provisions could have
the effect of discouraging others from making tender offers for our shares and,
as a consequence, they also may inhibit fluctuations in the market price of our
shares that could result from actual or rumored takeover attempts. Such
provisions also may have the effect of preventing changes in our management. See
"Risk Factors--Anti-takeover provisions in our charter documents and Delaware
law, as well as provisions of employment agreements of some of our key
executives, could prevent or delay a change in control of Quintus."
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DELAWARE TAKEOVER STATUTE
We are subject to Section 203 of the Delaware General Corporation Law,
which, with some exceptions, prohibits a Delaware corporation from engaging in
any business combination with any interested stockholder for a period of three
years following the date that such stockholder became an interested stockholder,
unless:
- prior to such date, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
- upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned (a) by persons who are
directors and also officers and (b) by employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer; or
- on or subsequent to such date, the business combination is approved by
the board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least 66 2/3% of the outstanding voting stock that is not owned by the
interested stockholder.
Section 203 defines business combination to include:
- any merger or consolidation involving the corporation and the interested
stockholder;
- any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder;
- with some exceptions, any transaction that results in the issuance or
transfer by the corporation of any stock of the corporation to the
interested stockholder;
- any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or series of
the corporation beneficially owned by the interested stockholder; or
- the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
REGISTRATION RIGHTS
After this offering, the holders of 21,616,461 shares of common stock and
warrants to purchase common stock will be entitled to registration rights. If we
propose to register any of our securities under the Securities Act, either for
our own account or for the account of other security holders exercising
registration rights, we must notify these securityholders and these
securityholders may be entitled to include all or part of their shares in the
registration. Additionally, holders of 21,616,461 shares of common stock and
warrants to purchase common stock have demand registration rights under which
they may require us to use our best efforts to register shares of their common
stock. Further, the holders of these demand rights may require us to file
additional
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<PAGE> 73
registration statements on Form S-3. All of these registration rights are
subject to certain conditions and limitations, including the right of
underwriters to limit the number of shares included in a registration and our
right to not effect a requested registration within six months following an
offering of our securities, including this offering.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services, L.L.C.
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of common stock in the public market
following this offering, including shares issued upon exercise of outstanding
options and warrants, could adversely affect the prevailing market price of our
common stock and could impair our ability to raise capital through the sale of
our equity securities. As described below, most of the shares currently
outstanding will not be available for sale immediately after this offering due
to contractual and legal restrictions on resale. However, public sales of
substantial amounts of our common stock after these restrictions lapse could
adversely affect the prevailing market price of our stock and our ability to
raise equity capital in the future.
Upon completion of this offering, we will have outstanding 31,124,685
shares of common stock, based upon shares outstanding as of September 30, 1999
and assuming no exercise of the underwriters' over-allotment option and no
exercise of outstanding options or warrants, other than 328,649 warrants prior
to the consummation of this offering. Of these shares, the 4,000,000 shares sold
in this offering will be freely tradable without restriction under the
Securities Act except for any shares purchased by our "affiliates," as that term
is defined in Rule 144 under the Securities Act. The remaining 27,124,685 shares
of common stock held by existing stockholders include 21,502,019 restricted
shares and 5,622,666 non-restricted shares. As described below, substantially
all of these 27,124,685 restricted and non-restricted shares are subject to
lock-up agreements or bylaw restrictions providing that, with certain limited
exceptions, the stockholder will not offer, sell, contract to sell or otherwise
dispose of any common stock or any securities that are convertible into common
stock for a period of 180 days after the date of this prospectus without the
prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation. As
a result of these lock-up agreements and bylaw restrictions, only 27,752 of
these shares may be resold prior to 181 days after the date of this prospectus.
Donaldson, Lufkin & Jenrette Securities Corporation may, in its sole discretion
and at any time without notice, release all or any portion of the securities
subject to lock-up agreements or bylaw restrictions, although it has no current
intention of doing so.
The following table shows approximately when the 27,124,685 shares of our
common stock that are not being sold in this offering, but which will be
outstanding when this offering is complete, will be eligible for sale in the
public market:
ELIGIBILITY OF SHARES FOR SALE IN THE PUBLIC MARKET
<TABLE>
<S> <C>
At the effective date....................................... 27,752
180 days after the effective date........................... 25,404,950
More than 180 days after the effective date................. 1,691,983
</TABLE>
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Resale of 16,153,605 of the restricted shares that will become available
for sale in the public market starting 180 days after the date of this
prospectus will be limited by volume and other resale restrictions under Rule
144 because the holders of those shares are our affiliates.
RULE 144
In general, under Rule 144, beginning 90 days after the date of this
prospectus, a person who has beneficially owned restricted shares for at least
one year would be entitled to sell within any three-month period a number of
shares that does not exceed the greater of:
- 1% of the number of shares of common stock then outstanding, which will
equal approximately 311,250 shares immediately after this offering; or
- the average weekly trading volume of the common stock during the four
calendar weeks preceding the filing of a Form 144 with respect to such
sale.
Sales under Rule 144 are also subject to certain manner of sale and notice
requirements and to the public availability of information about us. Under Rule
144(k), a person who is not deemed to have been an affiliate of Quintus at any
time during the three months preceding a sale, and who has beneficially owned
the shares proposed to be sold for at least two years, is entitled to sell such
shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.
RULE 701
Rule 701, as currently in effect, permits resales of shares in reliance
upon Rule 144 but without compliance with certain restrictions, including the
holding period requirement, of Rule 144. Any of our employees, officers,
directors or consultants who purchased shares under a written compensatory plan
or contract may be entitled to rely on the resale provisions of Rule 701. Rule
701 permits affiliates to sell their Rule 701 shares under Rule 144 without
complying with the holding period requirements of Rule 144. Rule 701 further
provides that nonaffiliates may sell such shares in reliance on Rule 144 without
having to comply with the holding period, public information, volume limitation
or notice provisions of Rule 144. All holders of Rule 701 shares are required to
wait until 90 days after the date of this prospectus before selling such shares.
However, all Rule 701 shares are subject to lock-up agreements or bylaw
restrictions and will only become eligible for sale upon the expiration of the
180 days following the date of this prospectus. Donaldson, Lufkin & Jenrette
Securities Corporation may, in its sole discretion and at any time without
notice, release all or any portion of the securities subject to lock-up
agreements or bylaw restrictions, although it has no current intent of doing so.
Following the date of this prospectus, we will file a registration
statement on Form S-8 to register all the shares of common stock subject to
outstanding options or reserved for future issuance under our stock plans.
Common stock issued upon exercise of outstanding vested options or issued under
or purchase plan, other than common stock issued to our affiliates, will be
available for immediate resale in the open market.
73
<PAGE> 75
UNDERWRITING
Subject to the terms and conditions contained in an underwriting agreement
dated November , 1999, the underwriters named below, who are represented by
Donaldson, Lufkin & Jenrette Securities Corporation, Dain Rauscher Wessels, a
division of Dain Rauscher Incorporated, SG Cowen Securities Corporation and
DLJdirect Inc., have severally agreed to purchase from Quintus the number of
shares of common stock set forth opposite their names below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation.........
Dain Rauscher Wessels, a division of Dain Rauscher
Incorporated...........................................
SG Cowen Securities Corporation...........................
DLJdirect Inc. ...........................................
--------
Total..................................................
========
</TABLE>
The underwriting agreement provides that the obligations of the
underwriters to purchase and accept delivery of the shares of common stock
offered by this prospectus are subject to approval by their counsel of legal
matters concerning the offering and to conditions that must be satisfied by
Quintus. The underwriters are obligated to purchase and accept delivery of all
of the shares of common stock offered by this prospectus, other than those
shares covered by the over-allotment option described below, if any are
purchased.
The underwriters initially propose to offer the shares of common stock in
part directly to the public at the initial public offering price set forth on
the cover page of this prospectus and in part to dealers, including the
underwriters, at such price less a concession not in excess of $ per share.
The underwriters may allow, and such dealers may re-allow, to other dealers a
concession not in excess of $ per share. After the initial offering of the
common stock, the public offering price and other selling terms may be changed
by the representatives at any time without notice. The underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority.
An electronic prospectus will be available on the Web site maintained by
DLJdirect Inc., an affiliate of Donaldson, Lufkin & Jenrette Securities
Corporation. Other than the prospectus in electronic format, the information on
this Web site relating to the offering is not part of this prospectus and has
not been approved or endorsed by Quintus or the underwriters, and should not be
relied on by prospective investors.
Quintus has granted to the underwriters an option, exercisable for 30 days
after the date of this prospectus, to purchase, from time to time, in whole or
in part, up to an aggregate of 600,000 additional shares of common stock at the
initial public offering price less underwriting discounts and commissions. The
underwriters may exercise the option solely to cover over-allotments, if any,
made in connection with the offering. To the extent that the underwriters
exercise the option, each underwriter will become obligated, subject to
conditions contained in the underwriting agreement, to purchase its pro rata
portion of such additional shares based on the underwriters' percentage
underwriting commitment as indicated in the above table.
74
<PAGE> 76
Quintus has agreed to indemnify the underwriters against liabilities which
may arise in connection with the offering, including liabilities under the
Securities Act of 1933, or to contribute to payments that the underwriters may
be required to make.
Quintus, its executive officers and directors and substantially all of its
stockholders and option holders are subject to agreements or bylaw restrictions
providing that, with certain limited exceptions, they will not:
- offer, pledge sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend, or otherwise transfer or dispose of
directly or indirectly any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock; or
- enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the
common stock, whether any such transaction described above is to be
settled by delivery of common stock or other securities, in cash or
otherwise
for a period of 180 days after the date of this prospectus. Donaldson, Lufkin &
Jenrette Securities Corporation may release some or all of these shares from
such restrictions prior to the expiration of the 180-day period lock-up period,
although it has no current intention of doing so.
In addition, during such 180-day period, Quintus has also agreed not to
file any registration statement with respect to the registration of any shares
of common stock or any securities convertible into or exercisable or
exchangeable for common stock without the prior written consent of Donaldson,
Lufkin & Jenrette Securities Corporation. Furthermore, no Quintus stockholders
have demand registration rights that may be exercised during such 180 day
period.
Prior to the offering, there has been no established trading market for the
common stock. The initial public offering price of the shares of common stock
offered by this prospectus will be determined by negotiation among Quintus and
the underwriters. The factors to be considered in determining the initial public
offering price include:
- the history of and the prospects for the industry in which Quintus
competes;
- the past and present operations of Quintus;
- the historical results of operations of Quintus;
- the prospectus for future earnings of Quintus;
- the recent market prices of securities of generally comparable companies;
and
- the general condition of the securities markets at the time of the
offering.
The underwriters have reserved up to 200,000 shares of the common stock to
be sold in this offering for sale to some of our employees and associates of our
employees and directors, and to other individuals or companies who have
commercial arrangements or personal relationships with us. Through this directed
share program, we intend to ensure that those individuals and companies that
have supported us, or who are in a position to support us in the future, have
the opportunity to purchase our common stock at the same price that we are
offering our shares to the general public. Prospective participants will not
receive any investment materials other than a copy of this prospectus, and will
be permitted to participate in this offering at the initial public offering
price presented on the cover page of this prospectus. No commitment to purchase
shares by any participant in the directed share program will be accepted until
after the registration statement of which this
75
<PAGE> 77
prospectus is a part is effective and an initial public offering price has been
established. The number of shares available for sale to the general public will
be reduced by the number of shares sold through the directed share program. Any
shares reserved for the directed share program which are not so purchased will
be offered by the underwriters to the general public on the same basis as the
other shares offered hereby.
Other than in the United States, no action has been taken by Quintus or the
underwriters that would permit a public offering of the shares of common stock
offered in any jurisdiction where action for that purpose is required. The
shares of common stock offered may not be offered or sold, directly or
indirectly, nor may this prospectus or any other offering material or
advertisements in connection with the offer and sale of any such shares of
common stock be distributed or published in any jurisdiction, except under
circumstances that will result in compliance with the applicable rules and
regulations of such jurisdiction. Persons into whose possession this prospectus
comes are advised to inform themselves about and observe any restrictions
relating to the offering and the distribution of this prospectus. This
prospectus does not constitute an offer to sell or a solicitation of an offer to
buy any shares of common stock offered in any jurisdiction in which such an
offer or a solicitation is unlawful.
DLJ Capital Corporation, Sprout Capital VI, L.P., Sprout Capital VII, L.P.,
Sprout CEO Fund, L.P. and DLJ ESC II, L.P., collectively referred to as the
"Sprout Entities," are affiliates of Donaldson, Lufkin & Jenrette Securities
Corporation, one of the underwriters. As described under "Principal
Stockholders," the Sprout Entities beneficially own an aggregate of 11,842,037
shares of the outstanding common stock, which represent more than 10% of the
outstanding common stock. The Sprout Entities have placed a sufficient number of
their shares in a voting trust so that upon the closing of this offering, the
Sprout Entities will exercise voting control over less than five percent of the
outstanding common stock. The shares subject to the voting trust are held and
voted by an independent third party, Norwest Bank Indiana, N.A., as voting
trustee.
Because the Sprout Entities affiliated with Donaldson, Lufkin & Jenrette
Securities Corporation beneficially own more than 10% of the outstanding common
stock, this offering is being conducted in accordance with Rule 2720 of the
Conduct Rules of the National Association of Securities Dealers, Inc., which
provides that the public offering price of an equity security be no higher than
that recommended by a "qualified independent underwriter" meeting certain
standards. In accordance with this requirement, Dain Rauscher Wessels, a
division of Dain Rauscher Incorporated, will assume the responsibilities of
acting as qualified independent underwriter and will recommend a price in
compliance with the requirements of Rule 2720. As compensation for its services
as qualified independent underwriter, we have agreed to pay $10,000 to Dain
Rauscher Wessels on the closing of this offering.
In connection with the offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
common stock. Specifically, the underwriters may over-allot the offering,
creating a syndicate short position. The underwriters may bid for and stabilize
the price of the common stock. In addition, the underwriting syndicate may
reclaim selling concessions from syndicate members and selected dealers if they
repurchase previously distributed common stock in syndicate covering
transactions, in stabilizing transactions or otherwise. These activities may
stabilize or maintain the market price of the common stock above independent
market levels. The underwriters are not required to engage in these activities,
and may end any of these activities at any time.
76
<PAGE> 78
LEGAL MATTERS
The validity of the common stock offered in this offering will be passed
upon for us by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP,
Menlo Park, California. Certain legal matters in connection with this offering
will be passed upon for the underwriters by Wilson Sonsini Goodrich & Rosati,
Professional Corporation, Palo Alto, California.
EXPERTS
The Quintus consolidated financial statements as of and for the year ended
March 31, 1999, included in this prospectus and the related financial statement
schedule for the year ended March 31, 1999 included elsewhere in the
registration statement have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their reports appearing herein and elsewhere in the
registration statement, and have been so included in the reliance upon the
reports of such firm given upon their authority as experts in auditing and
accounting.
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and schedules at March 31, 1998, and for the two years in
the period then ended, as set forth in their report. We've included our
financial statements and schedule in the prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report, given on their
authority as experts in accounting and auditing.
The Acuity financial statements as of December 31, 1997 and 1998 and for
each of the two years in the period ended December 31, 1998 included in this
prospectus and registration statement have been so included in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of that firm as experts in auditing and accounting.
CHANGE IN ACCOUNTANTS
On March 9, 1999, our audit committee dismissed Ernst & Young LLP as our
independent auditors and subsequently appointed Deloitte & Touche LLP as our
principal accountants. There were no disagreements with the former accountants
during the fiscal years ended March 31, 1997 and 1998 or during any subsequent
interim period preceding their replacement on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedures, which disagreements, if not resolved to the former accountants'
satisfaction, would have caused them to make reference to the subject matter of
the disagreement in connection with their reports. The former independent
auditors issued an unqualified report on the financial statements as of and for
the years ended March 31, 1997 and 1998. We did not consult with Deloitte &
Touche LLP on any accounting or financial reporting matters in the periods prior
to their appointment. The change in accountants was approved by our board of
directors.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 in connection with this offering. While the information
contained in this prospectus is materially complete, this prospectus does not
contain all the information set forth in the registration statement and its
exhibits and schedules. For further information with respect to Quintus and our
common stock please refer to the registration statement and to its exhibits and
schedules. A copy of the registration statement and its exhibits and schedules
may be inspected without charge at the public reference facilities maintained by
the SEC in Room 1024, 450 Fifth Street, N.W. Washington,
77
<PAGE> 79
D.C. 20549, and at the SEC's regional offices located at the Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven
World Trade Center, 13th Floor, New York, New York 10048, and copies of all or
any part of the registration statement may be obtained from such offices upon
payment of the fees prescribed by the SEC. The SEC maintains a World Wide Web
site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the SEC. The
address of the site is http://www.sec.gov.
Upon completion of this offering, we will become subject to the information
and periodic reporting requirements of the Securities Exchange Act of 1934 and
will file periodic reports, proxy statements and other information with the SEC.
Such periodic reports, proxy statements and other information will be available
for inspection and copying at the regional offices, public reference facilities
and web site of the SEC referred to above.
78
<PAGE> 80
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
QUINTUS CORPORATION:
Independent Auditor's Report--Deloitte & Touche LLP......... F-2
Report of Independent Auditors--Ernst & Young LLP......... F-3
Consolidated Balance Sheets............................... F-4
Consolidated Statements of Operations..................... F-5
Consolidated Statements of Stockholders' Deficiency....... F-6
Consolidated Statements of Cash Flows..................... F-7
Notes to Consolidated Financial Statements................ F-8
ACUITY CORP.:
Report of Independent Accountants......................... F-27
Balance Sheets............................................ F-28
Statements of Operations.................................. F-29
Statements of Changes in Stockholders' Equity (Deficit)... F-30
Statements of Cash Flows.................................. F-31
Notes to Financial Statements............................. F-32
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION:
Pro Forma Condensed Combining Financial Statements........ F-44
Pro Forma Condensed Combining Balance Sheets.............. F-46
Pro Forma Condensed Combining Statements of Operations.... F-47
Notes to Pro Forma Condensed Combining Financial
Statements............................................. F-49
</TABLE>
F-1
<PAGE> 81
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Quintus Corporation:
We have audited the accompanying consolidated balance sheet of Quintus
Corporation and subsidiaries (the Company) as of March 31, 1999, and the related
consolidated statements of operations, stockholders' deficiency, and cash flows
for the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of March 31, 1999, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
San Jose, CA
June 18, 1999
(September 29, 1999 as to Note 15)
F-2
<PAGE> 82
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Quintus Corporation
We have audited the accompanying consolidated balance sheets of Quintus
Corporation as of March 31, 1998 and the related consolidated statements of
operations, stockholders' equity (net capital deficiency), and cash flows for
the two years in the period then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Quintus Corporation at March 31, 1998 and the consolidated results of its
operations and its cash flows for the two years in the period then ended in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Palo Alto, California
April 30, 1998
F-3
<PAGE> 83
QUINTUS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31,
------------------- SEPTEMBER 30,
1998 1999 1999
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash...................................................... $ 1,986 $ 1,785 $ 7,713
Accounts receivable, less allowance for doubtful accounts
of $848, $729 and $825.................................. 7,573 8,671 12,378
Prepaid expenses and other assets......................... 608 573 926
-------- -------- --------
Total current assets................................ 10,167 11,029 21,017
Property and equipment, net................................. 3,508 3,162 3,133
Purchased technology, less accumulated amortization of $556,
$1,889 and $2,555......................................... 3,444 2,111 1,445
Intangible assets, less accumulated amortization of $1,059,
$2,630 and $3,556......................................... 5,803 2,970 2,043
Other assets................................................ 219 322 335
-------- -------- --------
Total assets................................................ $ 23,141 $ 19,594 $ 27,973
======== ======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 1,762 $ 2,352 $ 2,030
Accrued compensation and related benefits................. 2,073 2,114 2,421
Other accrued liabilities................................. 1,633 2,268 2,510
Deferred revenue.......................................... 5,008 6,615 5,377
Borrowings under bank line of credit...................... 4,950 4,868 4,368
Notes payable to stockholders............................. 4,500 -- --
Current portion of capital lease obligations.............. 134 109 46
Current portion of long-term debt......................... 1,357 1,347 1,347
-------- -------- --------
Total current liabilities........................... 21,417 19,673 18,099
Capital lease obligations, less current portion............. 109 101 264
Long-term debt, less current portion........................ 2,637 1,700 1,067
Deferred revenue............................................ 1,500 400 --
Commitments and contingencies (Note 7)
Redeemable convertible preferred stock...................... 17,811 17,811 17,811
STOCKHOLDERS' DEFICIENCY:
Series A redeemable convertible preferred stock, $0.001
par value; authorized shares -- 9,100,000; issued and
outstanding shares -- 9,100,000; aggregate liquidation
preference -- $9,100.................................... 9 9 9
Series B redeemable convertible preferred stock, $0.001
par value; authorized shares -- 1,000,000; issued and
outstanding shares -- 768,140; aggregate liquidation
preference -- $1,098.................................... 1 1 1
Series C redeemable convertible preferred stock, $0.001
par value; authorized shares -- 3,000,000; issued and
outstanding shares -- 2,647,778; aggregate liquidation
preference -- $5,057.................................... 3 3 3
Series D redeemable convertible preferred stock, $0.001
par value; authorized shares -- 1,455,000; issued and
outstanding shares -- 1,454,996; aggregate liquidation
preference -- $4,001.................................... 1 1 1
Series E convertible preferred stock, $0.001 par value;
authorized shares -- 3,000,000; issued and outstanding
shares -- 2,604,601; aggregate liquidation
preference -- $10,809................................... -- 3 3
Series F convertible preferred stock, $0.001 par value;
authorized shares -- 1,500,000; issued and outstanding
shares -- 1,363,334; aggregate liquidation
preference -- $11,247................................... -- -- 1
Common stock, $0.001 par value; authorized
shares -- 30,000,000 in 1998 and 40,000,000 in 1999;
issued and outstanding shares -- 4,117,300 in 1998;
4,208,478 in March 1999; 4,305,746 in September 1999.... 4 4 4
Additional paid-in capital................................ 2,914 15,483 30,310
Notes receivable from stockholders........................ (58) (117) (223)
Deferred compensation..................................... (79) (884) (3,100)
Accumulated deficit....................................... (23,128) (34,594) (36,277)
-------- -------- --------
Total stockholders' deficiency...................... (20,333) (20,091) (9,268)
-------- -------- --------
Total liabilities and stockholders' deficiency.............. $ 23,141 $ 19,594 $ 27,973
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 84
QUINTUS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
----------------------------- -----------------
1997 1998 1999 1998 1999
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
License........................................ $ 8,406 $ 12,948 $ 17,577 $ 9,913 $13,348
Service...................................... 5,208 8,942 12,730 5,947 8,742
------- -------- -------- ------- -------
Total revenues............................ 13,614 21,890 30,307 15,860 22,090
COST OF REVENUES:
License...................................... 972 708 554 268 671
Service...................................... 4,199 7,582 8,623 4,176 5,071
------- -------- -------- ------- -------
Total cost of revenues.................... 5,171 8,290 9,177 4,444 5,742
------- -------- -------- ------- -------
Gross profit................................... 8,443 13,600 21,130 11,416 16,348
OPERATING EXPENSES:
Sales and marketing.......................... 6,879 11,336 17,147 8,616 9,438
Research and development..................... 3,667 5,102 6,719 3,353 3,974
General and administrative................... 1,263 3,233 3,577 1,632 1,993
Amortization of intangibles.................. -- 1,335 3,185 1,596 1,592
Acquired in-process technologies............. -- 2,200 -- -- --
Stock-based compensation..................... -- -- 171 60 609
------- -------- -------- ------- -------
Total operating expenses.................. 11,809 23,206 30,799 15,257 17,606
------- -------- -------- ------- -------
Loss from continuing operations................ (3,366) (9,606) (9,669) (3,841) (1,258)
OTHER INCOME (EXPENSE):
Interest expense............................. (157) (567) (804) (495) (430)
Other income (expense), net.................. (3) 27 (113) (30) 5
------- -------- -------- ------- -------
Total other income (expense).............. (160) (540) (917) (525) (425)
------- -------- -------- ------- -------
Net loss from continuing operations............ (3,526) (10,146) (10,586) (4,366) (1,683)
DISCONTINUED OPERATIONS (NOTE 3):
Loss from discontinued operations............ -- (1,103) (1,891) (649) --
Gain on disposal of discontinued
operations................................ -- -- 1,011 -- --
------- -------- -------- ------- -------
Net loss....................................... (3,526) (11,249) (11,466) (5,015) (1,683)
Redeemable preferred stock accretion........... (167) (1,519) -- -- --
------- -------- -------- ------- -------
Loss applicable to common stockholders......... $(3,693) $(12,768) $(11,466) $(5,015) $(1,683)
======= ======== ======== ======= =======
BASIC AND DILUTED NET LOSS PER COMMON SHARE:
Continuing operations........................ $ (4.25) $ (6.88) $ (3.73) $ (1.66) $ (0.49)
Discontinued operations:
Loss from operations...................... -- (0.65) (0.67) (0.25) --
Gain on disposal.......................... -- -- 0.36 -- --
------- -------- -------- ------- -------
Basic and diluted net loss per common share.... $ (4.25) $ (7.53) $ (4.04) $ (1.91) $ (0.49)
======= ======== ======== ======= =======
Shares used in computation, basic and
diluted...................................... 868 1,695 2,835 2,634 3,435
======= ======== ======== ======= =======
Pro forma basic and diluted net loss per share
(Note 1):
Continuing operations........................ $ (0.51) $ (0.08)
Discontinued operations:
Loss from operations...................... (0.09) --
Gain on disposal.......................... 0.05 --
-------- -------
Pro forma basic and diluted net loss per share
(Note 1)..................................... $ (0.55) $ (0.08)
======== =======
Shares used to compute pro forma basic and
diluted net loss per share (Note 1).......... 20,563 21,783
======== =======
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 85
QUINTUS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL NOTES
-------------------- ------------------ PAID RECEIVABLE
CAPITAL FROM DEFERRED
SHARES AMOUNT SHARES AMOUNT ---------- STOCKHOLDERS COMPENSATION
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT APRIL 1, 1996.............. 9,868,140 $ 10 191,160 $-- $ 493 $ -- $ --
Issuance of common stock under stock
option plan........................... -- -- 2,913,646 3 151 (58) --
Issuance of preferred stock and
warrants to purchase preferred
stock................................ 2,647,778 3 -- -- 617 -- --
Repurchase of common stock............ -- -- (73,688) -- (4) -- --
Preferred stock accretion............. -- -- -- -- (167) -- --
Net loss.............................. -- -- -- -- -- -- --
---------- ------- --------- --- ------- ----- -------
BALANCE AT MARCH 31, 1997............. 12,515,918 13 3,031,118 3 1,090 (58) --
Issuance of common stock under stock
option plan.......................... -- -- 944,949 1 166 -- --
Issuance of common stock and stock
options in connection with business
combinations......................... -- -- 518,921 -- 1,044 -- --
Repurchase of common stock............ -- -- (377,688) -- (42) -- --
Issuance of warrants to purchase
common stock......................... -- -- -- -- 258 -- --
Issuance of preferred stock........... 1,454,996 1 -- -- 1,818 -- --
Preferred stock accretion............. -- -- -- -- (1,519) --
Compensatory stock arrangements....... -- -- -- -- 99 -- (99)
Amortization of deferred
compensation......................... -- -- -- -- -- -- 20
Net loss.............................. -- -- -- -- -- -- --
---------- ------- --------- --- ------- ----- -------
BALANCE AT MARCH 31, 1998............. 13,970,914 14 4,117,300 4 2,914 (58) (79)
Issuance of common stock under stock
option plan.......................... -- -- 303,090 -- 166 (59) --
Repurchase of common stock............ -- -- (211,912) -- (42) -- --
Issuance of warrants to purchase
common stock......................... -- -- -- -- 165 -- --
Issuance of preferred stock........... 2,604,601 3 -- -- 10,772 -- --
Compensatory stock arrangements....... -- -- -- -- 1,508 -- (1,055)
Amortization of deferred
compensation......................... -- -- -- -- -- -- 250
Net loss.............................. -- -- -- -- -- -- --
---------- ------- --------- --- ------- ----- -------
BALANCE AT MARCH 31, 1999............. 16,575,515 17 4,208,478 4 15,483 (117) (884)
Issuance of common stock under stock
option plan*......................... -- -- 143,606 -- 201 (165) --
Repurchase of common stock*........... -- -- (46,338) -- (5) -- --
Issuance of warrants to purchase
stock*............................... -- -- -- -- 660 -- (100)
Issuance of preferred stock*.......... 1,363,334 1 -- -- 11,246 -- --
Repayment of notes receivable*........ -- -- -- -- -- 59 --
Compensatory stock arrangements*...... -- -- -- -- 2,725 -- (2,725)
Amortization of deferred
compensation*........................ -- -- -- -- -- -- 609
Net loss*............................. -- -- -- -- -- -- --
---------- ------- --------- --- ------- ----- -------
BALANCE AT SEPTEMBER 30, 1999*........ 17,938,849 $ 18 4,305,746 $ 4 $30,310 $(223) $(3,100)
========== ======= ========= === ======= ===== =======
<CAPTION>
TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT DEFICIENCY
<S> <C> <C>
BALANCE AT APRIL 1, 1996.............. $ (8,353) $ (7,850)
Issuance of common stock under stock
option plan........................... -- 96
Issuance of preferred stock and
warrants to purchase preferred
stock................................ -- 620
Repurchase of common stock............ -- (4)
Preferred stock accretion............. -- (167)
Net loss.............................. (3,526) (3,526)
-------- --------
BALANCE AT MARCH 31, 1997............. (11,879) (10,831)
Issuance of common stock under stock
option plan.......................... -- 167
Issuance of common stock and stock
options in connection with business
combinations......................... -- 1,044
Repurchase of common stock............ -- (42)
Issuance of warrants to purchase
common stock......................... -- 258
Issuance of preferred stock........... -- 1,819
Preferred stock accretion............. -- (1,519)
Compensatory stock arrangements....... -- --
Amortization of deferred
compensation......................... -- 20
Net loss.............................. (11,249) (11,249)
-------- --------
BALANCE AT MARCH 31, 1998............. (23,128) (20,333)
Issuance of common stock under stock
option plan.......................... -- 107
Repurchase of common stock............ -- (42)
Issuance of warrants to purchase
common stock......................... -- 165
Issuance of preferred stock........... -- 10,775
Compensatory stock arrangements....... -- 453
Amortization of deferred
compensation......................... -- 250
Net loss.............................. (11,466) (11,466)
-------- --------
BALANCE AT MARCH 31, 1999............. (34,594) (20,091)
Issuance of common stock under stock
option plan*......................... -- 36
Repurchase of common stock*........... -- (5)
Issuance of warrants to purchase
stock*............................... -- 560
Issuance of preferred stock*.......... -- 11,247
Repayment of notes receivable*........ -- 59
Compensatory stock arrangements*...... -- --
Amortization of deferred
compensation*........................ -- 609
Net loss*............................. (1,683) (1,683)
-------- --------
BALANCE AT SEPTEMBER 30, 1999*........ $(36,277) $ (9,268)
======== ========
</TABLE>
- -------------------------
* Unaudited
See notes to consolidated financial statements.
F-6
<PAGE> 86
QUINTUS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
----------------------------- -----------------
1997 1998 1999 1998 1999
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................................. $(3,526) $(11,249) $(11,466) $(5,015) $(1,683)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 822 3,148 5,090 2,673 2,186
Stock based compensation................................ -- 20 250 251 609
Noncash interest expense................................ -- 118 231 231 --
Acquired in-process technologies........................ -- 2,200 -- -- --
Loss (gain) on disposal of property and equipment....... (6) 50 -- -- --
Gain on disposal of discontinued operations............. -- -- (1,011) -- --
Provision for doubtful accounts......................... 255 408 235 100 200
Changes in operating assets and liabilities:
Accounts receivable................................... (1,569) (1,522) (1,333) (3,141) (3,907)
Prepaid expenses and other current assets............. (414) (68) 35 110 (353)
Accounts payable...................................... 1,072 (1,110) 590 (311) (383)
Accrued compensation and related benefits............. 378 1,219 41 720 307
Other accrued liabilities and other long-term
liabilities........................................ 218 (1,145) (469) 334 303
Deferred revenue...................................... 770 3,981 507 (318) (1,078)
------- -------- -------- ------- -------
Net cash used in operating activities....................... (2,000) (3,950) (7,300) (4,366) (3,799)
------- -------- -------- ------- -------
INVESTING ACTIVITIES:
Purchase of businesses, net of cash acquired.............. -- (2,461) -- -- --
Purchase of property and equipment........................ (990) (1,172) (1,073) (701) (383)
Proceeds from sale of property and equipment.............. 27 -- -- -- --
Proceeds from sale of discontinued operations............. -- -- 2,100 -- --
Increase in other assets.................................. (25) (45) (103) 42 (13)
------- -------- -------- ------- -------
Net cash provided by (used in) investing activities......... (988) (3,678) 924 (659) (396)
------- -------- -------- ------- -------
FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock................. 4,085 -- 5,275 5,275 11,247
Proceeds from issuance of common stock.................... 96 167 107 58 36
Repurchase of common stock................................ (4) (42) (42) (10) (5)
Proceeds from payment of notes receivable................. -- -- -- -- 59
Proceeds from notes payable to stockholders............... 1,000 4,500 1,000 1,000 --
Borrowings (repayments) under bank line of credit......... 668 4,950 (82) -- (500)
Proceeds from (repayments of) bank loan................... (577) (2,943) 51 (1,769) (633)
Principal payments on capital lease obligations........... (27) (63) (134) (60) (81)
------- -------- -------- ------- -------
Net cash provided by (used in) financing activities......... 5,241 6,569 6,175 4,494 10,123
------- -------- -------- ------- -------
Net increase (decrease) in cash............................. 2,253 (1,059) (201) (531) 5,928
Cash at beginning of period................................. 792 3,045 1,986 1,986 1,785
------- -------- -------- ------- -------
Cash at end of period....................................... $ 3,045 $ 1,986 $ 1,785 $ 1,455 $ 7,713
======= ======== ======== ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -- CASH
PAID FOR INTEREST......................................... $ 160 $ 282 $ 643 $ 495 $ 430
======= ======== ======== ======= =======
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Property acquired under capital leases.................... $ -- $ -- $ 101 $ -- $ 181
======= ======== ======== ======= =======
Issuance of Series C preferred stock and warrants to
purchase Series B preferred stock in exchange for notes
payable................................................. $ 1,000 $ -- $ -- $ -- $ --
======= ======== ======== ======= =======
Issuance of common stock in exchange for notes
receivable.............................................. $ 58 $ -- $ 59 $ 59 $ 165
======= ======== ======== ======= =======
Issuance of Series D preferred stock in exchange for notes
payable to stockholders................................. $ -- $ 3,001 $ -- $ -- $ --
======= ======== ======== ======= =======
Issuance of Series D preferred stock, common stock and
stock options for purchase of business.................. $ -- $ 2,044 $ -- $ -- $ --
======= ======== ======== ======= =======
Issuance of Series E preferred stock in exchange for notes
payable to stockholders................................. $ -- $ -- $ 5,684 $ -- $ --
======= ======== ======== ======= =======
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE> 87
QUINTUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND SIX
MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Quintus Corporation (Quintus or the Company) provides a comprehensive
e-Customer Relationship Management ("eCRM") solution to manage customer
interactions and deliver consistent customer service across multiple
communication channels, including the Internet, email and advanced telephony
systems. The Company was founded in Delaware in May 1995.
Basis of Presentation -- The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries after the elimination
of all significant intercompany balances and transactions.
Liquidity -- As disclosed in the consolidated financial statements during
the years ended March 31, 1997, 1998 and 1999, the Company incurred net losses
from continuing operations of $3,526,000, $10,146,000 and $10,586,000 and had
net cash outflows from continuing operations of $2,000,000, $3,950,000 and
$7,300,000. The Company had a stockholders' deficiency of $20,091,000 at March
31, 1999. Management expects to incur further losses in fiscal year 2000. In
addition, in September 1999 the Company entered into an agreement to acquire
Acuity Corporation (see Note 15). Acuity Corporation has a history of losses and
net cash outflows from operations. In August 1999, the Company secured
$11,247,500 in equity financing (see Note 15). Management believes that this
equity financing when combined with existing cash on hand will be sufficient to
meet the Company's minimum obligations through March 31, 2000. However, the
Company will seek additional financing in the near term to execute its business
strategies and meet its longer term obligations.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Property and Equipment -- Property and equipment are recorded at cost and
depreciated using the straight-line method over the estimated useful lives of
the assets, which are generally two to five years. Assets recorded under capital
leases are amortized by the straight-line method over the shorter of their
respective useful lives or the lease term.
Revenue Recognition -- Statement of Position 97-2, Software Revenue
Recognition ("SOP 97-2"), was issued in October 1997 by the American Institute
of Certified Public Accountants ("AICPA") and was amended by Statement of
Position 98-4 ("SOP 98-4"). The Company adopted SOP 97-2 effective April 1, 1998
and SOP 98-4 effective March 31, 1998. The Company believes its current revenue
recognition policies and practices are consistent with SOP 97-2 and SOP 98-4.
Additionally, the AICPA issued SOP 98-9 in March 1998, which provides for
certain amendments to SOP 97-2, and is effective for transactions entered into
by the Company beginning April 1, 1999. The adoption of these amendments did not
have a material impact on its financial position, results of operations or cash
flows.
The Company licenses software to end users under noncancelable license
agreements and provides services such as installation, implementation, training,
and software maintenance. Software
F-8
<PAGE> 88
QUINTUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND SIX
MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED)
license revenue for contracts not requiring significant customization services
is recognized upon meeting each of the following criteria: an executed agreement
has been signed; products have been shipped; the license fee is fixed and
determinable; collection of the resulting receivable is probable; and vendor
specific objective evidence exists to allocate the total fee to elements of the
arrangement. Vendor-specific objective evidence is based on the price generally
charged when an element is sold separately, or if not yet sold separately, is
established by authorized management. For sales made through distributors the
Company generally recognizes revenue at the time these partners report to the
Company that they have sold the software to the end users and all revenue
recognition criteria have been met. Software license revenue from contracts
requiring the Company to perform significant customization services are
recognized on the percentage-of-completion method based on the ratio of labor
hours incurred to total estimated labor hours. Provisions for estimated losses
on contracts are made in the period in which the anticipated losses become
known. Actual costs and gross margins on such contracts could differ from
management's estimates, and such differences could be material to the financial
statements. Allowances for estimated future warranty costs are provided at the
time revenue is recognized. Service revenue includes maintenance revenue, which
is deferred and recognized ratably over the maintenance period, which in most
cases is one year, and revenue from training services which is recognized as
services are performed. Consulting revenues are recognized as services are
performed.
Software Development Costs -- Costs for the development of new software
products and substantial enhancements to existing software products are expensed
as incurred until technological feasibility has been established, at which time
any additional costs would be capitalized in accordance with Statement of
Financial Accounting Standards (SFAS) No. 86, Computer Software to be Sold,
Leased or Otherwise Marketed. The costs to develop such software have not been
capitalized as the Company believes its current software development process is
essentially completed concurrent with the establishment of technological
feasibility.
Impairment of Long-Lived Assets -- In accordance with Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," the Company
evaluates its long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable.
Intangible Assets -- Intangible assets, including purchased technology, are
related to the business acquisitions described in Note 2. Amortization is
recorded on a straight-line basis over a period of three years.
Income Taxes -- The Company accounts for income taxes under Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes. Under this
method, deferred tax liabilities and assets are recognized for the expected
future tax consequences of temporary differences between the carrying amounts
and the tax bases of assets and liabilities. A valuation allowance is recorded
to reduce net deferred tax assets to amounts that are more likely than not to be
realized.
Stock-Based Compensation -- The Company accounts for employee stock options
in accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB Opinion No. 25).
F-9
<PAGE> 89
QUINTUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND SIX
MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED)
Loss per Common Share -- Basic loss per common share excludes dilution and
is computed by dividing loss applicable to common stockholders by the weighted
average number of common shares outstanding, less the weighted average number of
common shares subject to repurchase by the Company. Diluted loss per common
share reflects the potential dilution that could occur if securities or other
contracts to issue common stock (convertible preferred stock, warrants and
common stock options) were exercised or converted into common stock. Common
share equivalents are excluded from the computation in loss periods as their
effect would be antidilutive.
Pro Forma Net Loss per Share -- The Company intends to make a $17,811,000
cash distribution to convertible preferred stockholders payable upon conversion
to common stock (see Note 8) using a portion of the proceeds from its planned
initial public offering. Pro forma basic and diluted net loss per share amounts
are calculated using the weighted average number of common shares outstanding
for the period (excluding shares subject to repurchase), the weighted average
number of common shares resulting from the assumed conversion of all outstanding
shares of convertible preferred stock upon the closing of the initial public
offering contemplated by this Prospectus plus the number of shares whose
proceeds are to be used to repay the cash distribution, assuming a $13 offering
price, reduced by expected per share offering costs.
Unaudited Interim Financial Information -- The interim financial
information for the six months ended September 30, 1998 and 1999 is unaudited
and has been prepared on the same basis as the audited financial statements. In
the opinion of management, such unaudited financial information includes all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the interim information.
Foreign Currency Transactions -- The functional currency of the Company's
foreign subsidiaries is the U.S. dollar. Accordingly, all monetary assets and
liabilities are remeasured at the current exchange rate at the end of each
period reported. Nonmonetary assets and liabilities are remeasured at historical
rates and revenues and expenses are remeasured at average exchange rates in
effect during the period, except for those expenses related balance sheet
amounts that are remeasured at historical exchange rates. Transaction gains and
losses, which are included in other income (expense) in the accompanying
consolidated statements of operations, have not been significant.
Concentration of Credit Risk -- Financial instruments which potentially
subject the Company to concentrations of credit risk consist primarily of trade
receivables. The Company sells its products to companies in diverse industries
and generally does not require its customers to provide collateral to support
accounts receivable. To reduce credit risk, management performs ongoing credit
evaluations of its customers' financial condition. The Company maintains
allowances for potential credit losses.
Certain Significant Risks and Uncertainties -- The Company operates in the
software industry, and accordingly, can be affected by a variety of factors. For
example, management of the Company believes that changes in any of the following
areas could have a significant negative effect on the Company's future financial
position, results of operations and cash flows: ability to obtain additional
financing; regulatory changes; fundamental changes in the technology underlying
software products; market acceptance of the Company's products under
development; development of distribution channels; ability to implement and
expand operational customer support and financial control systems to manage
rapid growth, both domestically and internationally; the hiring and retention of
key
F-10
<PAGE> 90
QUINTUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND SIX
MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED)
employees; relationship with Lucent; fundamental changes in technology
underlying software products; litigation or other claims against the Company.
Recently Issued Accounting Standards -- In 1998, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 130, Reporting
Comprehensive Income, which requires an enterprise to report, by major
components and as a single total, the change in net assets during the period
from nonowner sources. The Company's comprehensive loss was equal to its net
loss for all years presented.
In 1998, the Company adopted SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, which established annual and interim
reporting standards for an enterprise's business segments and related
disclosures about its products, services and geographic areas and major
customers. The Company operates in two reportable segments (see Note 15).
In March 1998, the Accounting Standards Executive Committee (AcSEC) issued
SOP 98-1, Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use. SOP 98-1 establishes the accounting for costs of software
products developed or purchased for internal use, including when such costs
should be capitalized. SOP 98-1 will be effective for the Company's fiscal year
ending March 31, 2000. The Company believes the adoption of this statement will
not have a significant impact on its financial position, results of operations
or cash flows.
In April 1998, the AcSEC issued SOP 98-5, Reporting on the Costs of
Start-up Activities. Under SOP 98-5, the cost of start-up activities should be
expensed as incurred. SOP 98-1 will be effective for the Company's fiscal year
ending March 31, 2000. The Company believes the adoption of this statement will
not have a significant impact on its financial position, results of operations
or cash flows.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. This statement
requires companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. SFAS No. 133 will
be effective for the Company's fiscal year ending March 31, 2001. Management
believes that this statement will not have a significant impact on the Company's
financial position, results of operations or cash flows.
2. BUSINESS COMBINATIONS AND DISCONTINUED OPERATIONS
CALL CENTER ENTERPRISES, INC.
In July 1997, the Company acquired Call Center Enterprises, Inc. (CCE), a
provider of strategic call center consulting services, for $965,000 in cash in a
transaction that was accounted for as a purchase. Assets acquired and
liabilities assumed in the acquisition were as follows (in thousands):
<TABLE>
<S> <C>
Accounts receivable......................................... $ 826
Other assets................................................ 30
Goodwill.................................................... 1,262
Less liabilities assumed.................................... (1,153)
-------
$ 965
=======
</TABLE>
F-11
<PAGE> 91
QUINTUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND SIX
MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED)
During fiscal 1999 the Company was required to make additional cash
payments of approximately $962,000 to former stockholders of CCE based upon
achievement of certain performance goals. These payments, which were contingent
upon the continued employment of the former CCE stockholders, were recorded as
charges to operations when the performance goal was attained.
On February 26, 1999, the Company sold the assets of CCE, which provided
implementation services for support and help-desk centers software application.
The division was sold for cash of $2,100,0000 with a gain on disposal of
$1,011,000. As a result, the operations of CCE have been classified as
discontinued operations in the statement of operations. The Company recorded
$453,000 as a reduction in the gain on disposal of discontinued operations for
the fair value of options, due to the Company accelerating vesting of CCE
employees' options as if they had been employed for 12 additional months. The
Company may receive an additional payment of up to $400,000 from the sale of CCE
based on the number of former CCE employees who remain employed by the purchaser
for one year subsequent to the date of disposition. The division had revenues of
$2,528,000 and $3,210,000 for the years ended March 31, 1998 and 1999,
respectively. There were no assets or liabilities remaining as of March 31,
1999.
NABNASSET CORPORATION
In November 1997, the Company acquired Nabnasset Corporation (Nabnasset), a
provider of software which integrates telephone, voice, and data for $1,496,000
in cash, preferred stock with a fair value of $1,000,000, and 518,921 shares of
common stock and options to purchase 617,528 shares of common stock with an
aggregate fair value of $1,044,000. The transaction was accounted for as a
purchase. Assets acquired and liabilities assumed in the acquisition were as
follows (in thousands):
<TABLE>
<S> <C>
Accounts receivable......................................... $ 1,036
Property and equipment...................................... 2,062
Other assets................................................ 75
In-process technologies..................................... 2,200
Purchased technology........................................ 4,000
Intangible assets........................................... 5,599
Accounts payable and accrued liabilities.................... (4,230)
Notes payable............................................... (6,070)
Other liabilities........................................... (1,132)
-------
$ 3,540
=======
</TABLE>
In this acquisition, acquired technology included both existing technology
and in-process research and development. The valuation of acquired technology
was made by applying the income forecast method, which considers the present
value of cash flows by product lines. As of the date of acquisition, multiple
research and development projects were underway including efforts related to the
next generation of Voice Enhanced Services Platform (VESP). The key elements of
Nabnasset's development process include: sales specification, functional
specifications, prototype development, question and answer sessions,
documentation and product release. A project is considered to be technologically
feasible upon the completion of beta testing that occurs as the final step in
the prototype development phase. At the date of acquisition, an additional
research and development effort of approximately 14 months was anticipated prior
to its release. Value was allocated to in
F-12
<PAGE> 92
QUINTUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND SIX
MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED)
process research and development based on a discounted cashflow model and
considered the core technology resident in the in-process products, Nabnasset's
past experience with typical product life cycles, demand from Nabnasset
customers for new versions incorporating additional features, the migration of
technology between platforms and the roadmap for future development. Quintus
completed development of the next generation of VESP and introduced CTI version
5.0 in January 1999. This version is sold on a stand-alone basis as a CTI
product and is also integrated into Quintus' eContact suite. Acquired in-process
technologies were charged to operations, as the technologies did not have
alternative future uses as of the date of the acquisition.
The operating results of Nabnasset have been included in the consolidated
statements of operations since the date of acquisition. Had the acquisition
taken place at the beginning of fiscal 1997, the unaudited pro forma results of
operations would have been as follows for the year ended March 31, (in
thousands, except per share data):
<TABLE>
<CAPTION>
1997 1998
<S> <C> <C>
Net revenues............................................... $17,439 $ 24,827
Net loss................................................... (7,807) (15,669)
Basic and diluted loss per common share.................... $ (5.63) $ (7.79)
</TABLE>
The pro forma results of operations give effect to certain adjustments,
including amortization of purchased intangibles and goodwill. The $2,200,000
charge for purchased in-process technology has been excluded from the pro forma
results as it is a material non-recurring charge.
The pro forma amounts are based on certain assumptions and estimates and do
not necessarily represent results which would have occurred if the acquisition
had taken place on the basis assumed above, nor are they indicative of results
of future combined operations.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
---------------- SEPTEMBER 30,
1998 1999 1999
<S> <C> <C> <C>
Land............................................. $ 170 $ 170 $ 170
Building......................................... 688 688 688
Computer equipment and software.................. 4,179 6,075 6,309
Furniture and equipment.......................... 548 1,279 1,507
Leasehold improvements........................... 184 306 306
------ ------ ------
5,769 8,518 8,980
Less accumulated depreciation and amortization... 2,261 5,356 5,847
------ ------ ------
Net property and equipment....................... $3,508 $3,162 $3,133
====== ====== ======
</TABLE>
4. BANK LINE OF CREDIT
The Company maintains a committed revolving line with a bank that provides
for borrowings of up to $7,500,000, based on a percentage of eligible accounts
receivable, with interest at the bank's prime rate plus 1.5% (9.25% at March 31,
1999). At March 31, 1999, the Company had $4,868,000 in outstanding borrowings
under the line of credit agreement. Borrowings under this facility may be
F-13
<PAGE> 93
QUINTUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND SIX
MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED)
repaid and reborrowed at any time prior to September 17, 1999 and are
collateralized by substantially all of the Company's assets and are subject to
the Company's compliance with certain financial and nonfinancial covenants.
As of March 31, 1999, the Company obtained a waiver from the bank for
noncompliance with certain covenants required by the line of credit agreement.
5. NOTES PAYABLE TO STOCKHOLDERS
As of March 31, 1998, the Company had notes payable to stockholders in the
amount of $4,500,000, which accrued interest at the prime rate plus 1% (9.5% at
March 31, 1998). In connection with the issuance of the notes payable, the
Company also issued warrants to stockholders to purchase 385,530 shares of
common stock at an exercise price of $0.30 per share. For valuation of warrants
see discussion under "Stock-Based Compensation" at Note 9. The principal and
accrued interest on the notes payable to stockholders were subsequently
converted to Series E convertible preferred stock during the year ended March
31, 1999 at the same price as the Series E convertible preferred stock was sold
to investors. During fiscal 1999 the Company had additional notes payable to
stockholders in the amount of $1,000,000, which accrued interest at the prime
rate plus 1% (8.75% at March 31, 1999).
F-14
<PAGE> 94
QUINTUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND SIX
MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED)
6. LONG-TERM DEBT
Long-term debt consists of the following (in thousands, except monthly
installments and interest rates):
<TABLE>
<CAPTION>
MARCH 31,
---------------- SEPTEMBER 30,
1998 1999 1999
<S> <C> <C> <C>
Equipment loan payable to a bank, due in monthly
installments of $20,062 through 2000, with
interest at the prime rate plus 0.75% (8.5% at
March 31, 1999). The loan is secured by the
related equipment............................. $ 785 $ -- $ --
Amortizing term loan payable to a bank, due in
monthly installments of $28,571 through
September 2001, with interest at the prime rate
plus 2% (9.75% at March 31, 1999). The loan is
secured by substantially all of the Company's
assets.......................................... -- 846 719
Mortgage notes payable to a bank, due in monthly
installments of $3,942 and $1,183 through
2020; interest rate is subject to adjustment
every three years (8.25% at March 31, 1999).
The mortgage is secured by real property...... 628 618 612
Note payable from Nabnasset acquisition, due in
monthly installments of $55,555 and $27,778
through October 2000, with interest at
7.75%......................................... 2,581 1,583 1,083
------ ------ ------
Total........................................... 3,994 3,047 2,414
Less current portion............................ 1,357 1,347 1,347
------ ------ ------
Long-term debt.................................. $2,637 $1,700 $1,067
====== ====== ======
</TABLE>
At March 31, 1999, maturities of long-term debt are as follows (in
thousands):
<TABLE>
<CAPTION>
FISCAL YEARS ENDING
MARCH 31,
<S> <C>
2000................................................. $1,347
2001................................................. 938
2002................................................. 178
2003................................................. 14
2004................................................. 16
Thereafter................................................ 554
------
Total..................................................... $3,047
======
</TABLE>
7. COMMITMENTS
LEASES
The Company leases office space under a noncancelable operating lease
expiring in December 2000. The Company leases certain office equipment under
noncancelable lease agreements that are
F-15
<PAGE> 95
QUINTUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND SIX
MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED)
accounted for as capital leases. Equipment under capital lease arrangements
included in property and equipment amounted to $365,000 and $693,000 at March
31, 1998 and 1999, respectively. The related accumulated amortization was
$99,000 and $425,000 at March 31, 1998 and 1999, respectively.
At March 31, 1999, future minimum lease payments under noncancelable
operating leases and capital leases are as follows during the years ended March
31 (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
<S> <C> <C>
2000........................................................ $132 $406
2001........................................................ 55 244
2002........................................................ 32 --
2003........................................................ 29 --
2004........................................................ 17 --
---- ----
Total future minimum lease payments......................... 265 $650
====
Less amount representing interest........................... (55)
----
Present value of future minimum lease payments.............. 210
Less current portion........................................ 109
----
Long-term portion........................................... $101
====
</TABLE>
Rent expense was $431,000, $645,000 and $856,000 for the years ended March
31, 1997, 1998 and 1999, respectively.
ROYALTIES
The Company is required to pay royalties based on product revenue in excess
of specified minimum levels. The royalty rates are generally 1% to 3% of product
revenue, and certain agreements require royalties based upon the number of
users. At March 31, 1999, required minimum payments under such royalty
agreements are as follows during the years ended March 31 (in thousands):
<TABLE>
<S> <C>
2000........................................................ $429
2001........................................................ 80
----
Total....................................................... $509
====
</TABLE>
Royalty expense totaled $416,000, $328,000 and $285,000 for the years ended
March 31, 1997, 1998 and 1999, respectively. Such amounts have been included in
the cost of license revenue.
8. REDEEMABLE CONVERTIBLE PREFERRED STOCK
Each share of Series A, B, C and D redeemable preferred stock is
convertible into one share of common stock at any time upon the election of the
holders of a majority of the then outstanding convertible preferred stock,
subject to certain antidilution adjustments. At the time of conversion, the
holders of the convertible preferred stock are entitled to a cash payment of
$0.925 for each share of Series A convertible preferred stock, $1.325 for each
share of Series B convertible preferred stock,
F-16
<PAGE> 96
QUINTUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND SIX
MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED)
$1.765 for each share of Series C convertible preferred stock, and $2.544 for
each share of Series D convertible preferred stock. Cash payments that would be
payable to convertible preferred stockholders upon conversion to common stock
total $17,811,000 as of March 31, 1999. At the time of issuance, a portion of
the proceeds from the sale was allocated to stockholders equity based on the
then fair market value of the common stock into which the shares will be
converted. The remainder was credited to redeemable preferred stock which is
presented outside of stockholders' equity. For each of the years ended March 31,
1997 and 1998, accretion of preferred stock totaled $167,000 and $1,519,000,
respectively, to reflect the difference between the carrying value and the
redemption value of the preferred stock on the date of issuance. The accretion
of the preferred stock has been recorded as an increase to the carrying value of
the redeemable preferred stock and a reduction of additional paid in capital.
There was no accretion for the year ended March 31, 1999.
The holder of each share of Series A convertible preferred stock has the
right to 10 votes, and the holder of each share of Series B, C, and D
convertible preferred stock has the right to 14 votes for each share of common
stock into which Series A, B, C, and D convertible preferred stock can be
converted.
The holders of Series A, B, C, and D convertible preferred stock are
entitled to noncumulative annual dividends of $0.20, $0.286, $0.382 and $0.55
per share, respectively, as declared by the Board of Directors, prior to the
payment of dividends to the holders of common stock. No cash dividends have been
declared through March 31, 1999.
In the event of any voluntary or involuntary liquidation of the Company,
the Series A, B, C and D convertible preferred stockholders are entitled to a
liquidation preference of $1,00, $1.43, $1.91 and $2.75 per share, respectively,
plus accrued dividends, if any.
9. STOCKHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
The holder of each share of Series E convertible preferred stock has the
right to 14 votes for each share of common stock into which Series E convertible
preferred stock can be converted.
The holders of Series E convertible preferred stock are entitled to
noncumulative annual dividends of $0.83 per share as declared by the Board of
Directors, prior to the payment of dividends to the holders of common stock. No
cash dividends have been declared through March 31, 1999.
In the event of any voluntary or involuntary liquidation of the Company,
the Series E convertible preferred stockholders are entitled to a liquidation
preference of $4.15 per share plus accrued dividends, if any.
STOCK OPTION PLAN
The 1995 Stock Option Plan (the "Plan"), authorized the grant of options to
purchase up to 4,185,714 shares of the Company's common stock. During the year
ended March 31, 1997, the Company's Board of Directors decreased options
available for issuance under the Plan by 410,715 shares. During the year ended
March 31, 1998 and 1999, the Company's Board of Directors increased options
available under the Plan by 1,012,110 and 824,993 shares, respectively. Under
the
F-17
<PAGE> 97
QUINTUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND SIX
MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED)
Plan, incentive options may be granted at a price per share no less than the
fair market value of common stock at the date of grant. Nonqualified stock
options may be granted at a price per share no less than 85% of the fair market
value on the date of grant. Options granted to any 10% stockholder may have an
exercise price per share that is not less than 110% of the fair market value per
share of common stock on the date of grant. Options granted are immediately
exercisable, and unvested shares are subject to repurchase by the Company at the
amount originally paid. Options granted generally have a maximum term of ten
years and generally vest over four or five years. At March 31, 1999, 949,998
shares of common stock were subject to repurchase by the Company.
In connection with the acquisitions by the Company described in Note 2, the
Company granted options outside of the Plan to purchase up to 1,202,528 shares
of common stock. The options are generally exercisable immediately and have
similar vesting terms as options granted under the Plan with the exception of
options to purchase 486,168 shares of common stock, which vest immediately.
The table as presented below include 685,000 options at a price of $5.00,
which were granted to an employee outside of the Plan.
\ Stock option activity is summarized as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------
WEIGHTED
NUMBER AVERAGE
OF SHARES EXERCISE PRICE
<S> <C> <C>
Balances, April 1, 1996............................... 2,742,352 $0.05
Granted (weighted average fair value of $0.02)........ 1,090,250 0.07
Exercised............................................. (2,913,646) 0.05
Canceled.............................................. (579,423) 0.05
----------
Balances, March 31, 1997 (55,479 vested at a weighted
average price of $0.05 per share)................... 339,533 0.07
Granted (weighted average fair value of $0.90)........ 2,699,367 0.57
Exercised............................................. (944,949) 0.20
Canceled.............................................. (270,251) 0.32
----------
Balances, March 31, 1998 (616,824 vested at a weighted
average price of $0.42 per share)................... 1,823,700 0.70
Granted (weighted average fair value of $1.35)........ 1,205,612 1.57
Exercised............................................. (303,090) 0.44
Canceled.............................................. (931,092) 0.91
----------
Balances, March 31, 1999.............................. 1,795,130 1.22
Granted (weighted average fair value of $3.69)........ 1,565,250 5.80
Exercised............................................. (143,606) 1.12
Canceled.............................................. (297,974) 0.80
----------
Balances, September 30, 1999.......................... 2,918,800 $3.72
==========
</TABLE>
At March 31, 1999, 517,232 shares were available under the Plan for future
grant.
F-18
<PAGE> 98
QUINTUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND SIX
MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED)
Additional information regarding options outstanding as of March 31, 1999
is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS VESTED
--------------------------- ---------------------
WEIGHTED
AVERAGE WEIGHTED
REMAINING VESTED AT AVERAGE
RANGE OF NUMBER CONTRACTUAL MARCH 31, EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) 1999 PRICE
<S> <C> <C> <C> <C>
$0.03 - $0.10........................... 210,815 7.70 190,262 $0.05
$0.15 - $0.53........................... 174,945 7.00 135,162 0.36
$1.25 - $1.75........................... 1,409,370 9.33 168,340 1.39
--------- ---- -------- -----
1,795,130 8.91 493,764 $0.59
========= ==== ======== =====
</TABLE>
ADDITIONAL STOCK PLAN INFORMATION
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation, (SFAS No. 123) requires the disclosure of pro forma
net income and earnings per share had the Company adopted the fair value method
as of the beginning of fiscal 1995. Under SFAS No. 123, the fair value of the
stock-based awards to employees is calculated through the use of option pricing
models, even though such models were developed to estimate the fair value of
freely tradable, fully transferable options without vesting restrictions, which
significantly differ from the Company's stock option awards. These models also
require subjective assumptions, including future stock price volatility and
expected time to exercise, which greatly affect the calculated values. The
Company's calculations were made using the minimum value method with the
following weighted average assumptions for 1997, 1998 and 1999; expected life,
5.2 years for 1997 grants, 6.0 years for 1998 grants, and 6.0 years for 1999
grants; risk free interest rates of 6.4% in 1997 and 6.0% in both 1998 and 1999;
and no dividends during the expected term. The Company's calculations are based
on a multiple option valuation approach and forfeitures are recognized as they
occur. If the computed fair values of the stock-based awards had been amortized
over the vesting period of the awards, pro forma net loss applicable to common
stockholders would have been approximately $3,713,000 ($4.28 per basic and
diluted share), $13,185,000 ($7.78 per basic and diluted share), and $11,887,000
($4.19 per basic and diluted share) for the years ended March 31, 1997, 1998 and
1999, respectively. However, the impact of outstanding nonvested stock options
granted prior to 1995 has been excluded from the pro forma calculation;
accordingly, the pro forma adjustments are not indicative of future period pro
forma adjustments, when the calculation will apply to all applicable stock
options.
STOCK-BASED COMPENSATION
In connection with options granted to employees to purchase common stock,
the Company recorded deferred stock compensation of $99,000 and $1,055,000 in
fiscal years 1998 and 1999, respectively. The Company had no deferred stock
compensation in fiscal year 1997. Such amounts represent the difference between
the exercise price and the deemed fair value of the Company's common stock at
the date of grant. The deferred charges are being amortized to expense through
fiscal year 2003. Stock-based compensation expense of $20,000 was recognized as
part of the Company's discontinued operations during fiscal year 1998. There was
no stock-based compensation
F-19
<PAGE> 99
QUINTUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND SIX
MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED)
expense recognized in continuing operations during fiscal year 1998. Stock-based
compensation expense of $171,000 and $79,000 was recorded as part of the
Company's continuing and discontinued operations, respectively, during fiscal
year 1999.
WARRANTS
The Company had the following outstanding warrants to purchase common stock
and preferred stock at March 31, 1999:
<TABLE>
<CAPTION>
NUMBER EXERCISE EXPIRATION
OF PRICE PER DATE OF
SHARES STOCK SHARE ISSUED WARRANTS
<C> <S> <C> <C> <C>
5,000 Common stock $0.05 April 1996 April 2006 or upon an
initial public
offering of common
stock
192,262 Series B preferred $1.43 August 1996 August 2000 or upon
stock an initial public
offering of common
stock
55,340 Series C preferred $1.91 September 1996 Earlier of September
stock 2006 or upon the
initial public
offering of common
stock
8,466 Common stock $3.94 February 1997 January 2002
76,047 Common stock $4.54 November 1997 November 2001 or upon
an initial public
offering of common
stock
253,012 Common stock $0.30 November 1997 - November 2001
March 1998
132,518 Common stock $0.30 April 1998 - November 2001
May 1998
</TABLE>
During fiscal year 1997, the Company issued warrants to purchase 13,466
shares of common stock and 247,602 shares of preferred stock. The fair value of
these warrants amounting to $26,000 was charged to general and administrative
expenses and was calculated using a risk free interest rate of 6%, expected
volatility of 50% and a term ranging from 4 to 10 years. During fiscal years
1998 and 1999, in connection with notes payable to stockholders, the Company
issued warrants to purchase 329,059 and 132,518 shares of common stock. The
balance outstanding on the notes payable to stockholders was converted to
preferred stock in May 1998. The fair value of these warrants amounting to
approximately $258,000 and $165,000 was charged to interest expense during
fiscal year 1998 and 1999, respectively, and was calculated using a risk free
interest rate of 6%, expected volatility of 50% and a term ranging from 2 1/2 to
3 years.
F-20
<PAGE> 100
QUINTUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND SIX
MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED)
COMMON STOCK RESERVED
At March 31, 1999, the Company has received shares of common stock for
issuance as follows:
<TABLE>
<S> <C>
Conversion of preferred stock............................... 16,575,515
Issuance available under 1995 Stock Option Plan............. 517,232
Exercise of options......................................... 1,795,130
Exercise of warrants........................................ 722,645
----------
Total............................................. 19,610,522
==========
</TABLE>
NOTES RECEIVABLE FROM STOCKHOLDERS
On May 14, 1996 the Company loaned a shareholder $57,143 for the exercise
of 1,142,858 stock options. The Company entered into a stock pledge agreement
with the shareholder and became the holder of a full-recourse promissory note
from the shareholder in the amount of $57,143 bearing interest at 6.36%,
compounded annually. Principal and interest are due on May 14, 2001.
On July 2, 1998 the Company loaned a shareholder $59,299 for the exercise
of 149,076 stock options. The Company entered into a stock pledge agreement with
the shareholder and became the holder of a full-recourse promissory note from
the shareholder in the amount of $59,299 bearing interest at 5.48%, compounded
semi-annually. Principal and interest are due on July 2, 1999.
10. LOSS PER COMMON SHARE
The following is a reconciliation of the numerators and denominators used
in computing basic and diluted net loss per share from continuing operations (in
thousands).
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
MARCH 31, SEPTEMBER 30,
-------------------------------- -----------------
1997 1998 1999 1998 1999
<S> <C> <C> <C> <C> <C>
Net loss from continuing operations...... $(3,526) $(10,146) $(10,586) $(4,366) $(1,683)
Redeemable preferred stock accretion..... (167) (1,519) -- -- --
------- -------- -------- ------- -------
Loss from continuing operations
applicable to common shareholders
(numerator), basic and diluted......... $(3,693) $(11,665) $(10,586) $(4,366) $(1,683)
======= ======== ======== ======= =======
Shares (denominator):
Weighted average common shares
outstanding......................... 2,095 3,530 4,194 4,207 4,275
Weighted average common shares
outstanding subject to repurchase... (1,227) (1,835) (1,359) (1,573) (840)
------- -------- -------- ------- -------
Shares used in computation, basic and
diluted................................ 868 1,695 2,835 2,634 3,435
======= ======== ======== ======= =======
Loss per share from continuing operations
applicable to common stockholders,
basic and diluted...................... $ (4.25) $ (6.88) $ (3.73) $ (1.66) $ (0.49)
======= ======== ======== ======= =======
</TABLE>
F-21
<PAGE> 101
QUINTUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND SIX
MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED)
For the above mentioned periods, the Company had securities outstanding
which could potentially dilute basic earnings per share in the future, but were
excluded in the computation of diluted net loss per share in the periods
presented, as their effect would have been antidilutive. Such outstanding
securities consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
MARCH 31, SEPTEMBER 30,
------------------------------------ -----------------------
1997 1998 1999 1998 1999
<S> <C> <C> <C> <C> <C>
Convertible preferred stock..... 12,515,918 13,970,914 16,575,515 16,575,515 17,938,849
Shares of common stock subject
to repurchase................... 1,985,648 1,873,390 949,998 1,446,200 864,831
Outstanding options............. 339,533 1,823,700 1,795,130 1,899,118 2,918,800
Warrants........................ 252,602 590,127 722,645 722,645 1,047,645
---------- ---------- ---------- ---------- ----------
Total........................... 15,093,701 18,258,131 20,043,288 20,643,478 22,770,125
========== ========== ========== ========== ==========
</TABLE>
11. INCOME TAXES
The Company's deferred income tax assets are comprised of the following at
March 31:
<TABLE>
<CAPTION>
1998 1999
(IN THOUSANDS)
<S> <C> <C>
Net deferred tax assets:
Net operating loss carryforwards............................ $ 4,836 $ 8,394
Accruals deductible in different periods.................. 2,363 1,094
General business credits.................................. 327 327
Depreciation and amortization............................. 287 285
------- -------
Total deferred tax assets................................... 7,813 10,100
Valuation allowance......................................... (6,320) (9,142)
------- -------
Net deferred tax assets..................................... 1,493 958
Deferred tax liability -- purchased intangibles............. (1,493) (958)
------- -------
Net deferred tax assets..................................... $ -- $ --
======= =======
</TABLE>
Deferred income taxes reflect the tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, as well as net operating
loss and tax credit carryforwards. Due to the uncertainty surrounding the
realization of the benefits of its favorable tax attributes in future tax
returns, as of March 31, 1998 and 1999, the Company has fully reserved its net
deferred tax assets of approximately $6,320,000 and $9,142,000, respectively.
For all periods presented the Company's effective rate differs from the
expected benefit at the federal statutory tax rate due primarily to state taxes
of approximately 5% offset by a valuation allowance against deferred tax assets.
The Company's loss from continuing operations for 1999 was generated by
$9,081,000 and $1,505,000 from domestic and international operations,
respectively. The Company did not have international operations in 1997 and
1998.
F-22
<PAGE> 102
QUINTUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND SIX
MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED)
At March 31, 1999, the Company has net operating loss (NOL) carryforwards
of approximately $24,215,000 and $5,386,000 for federal and state income tax
purposes, respectively. The federal NOL carryforwards expire beginning in 2011,
while the state NOL carryforwards expire beginning in 2001.
At March 31, 1999, the Company also has research and development credit
carryforwards of approximately $242,000 and $128,000 available to offset future
federal and state income taxes, respectively. The federal credit carryforward
expires beginning in 2011, while the state credit carryforward has no
expiration.
The extent to which the loss and credit carryforwards can be used to offset
future taxable income and tax liabilities, respectively, may be limited,
depending on the extent of ownership changes within any three-year period.
12. SAVINGS PLAN
The Company maintains a savings plan under Section 401(k) of the Internal
Revenue Code. Under the plan, employees may defer a portion of their pretax
salaries. The Company makes no matching contributions.
13. SEGMENT INFORMATION, OPERATIONS BY GEOGRAPHIC AREA AND SIGNIFICANT CUSTOMERS
As discussed in Note 1, the Company follows the requirements of SFAS No.
131, Disclosures About Segments of an Enterprise and Related Information. As
defined in SFAS No. 131, the Company operates in two reportable segments. The
Company's operations were divided into two segments: Quintus and CCE. As
discussed in Note 3, the Company discontinued its operations of CCE during
fiscal 1999. At the end of 1999, the Company operates in one reportable segment.
GEOGRAPHIC INFORMATION (IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, SIX MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------------- --------------------------------------
1997 1998 1999 1998 1999
----------- ------------------------ ------------------------ ----------- ------------------------
LONG-LIVED LONG-LIVED LONG-LIVED
REVENUES(1) REVENUES(1) ASSETS REVENUES(1) ASSETS REVENUES(1) REVENUES(1) ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
United States........ $11,536 $18,830 $ 3,727 $24,749 $3,391 $12,982 $19,052 $3,368
Rest of the
world(2)............. 2,078 3,060 -- 5,558 93 2,878 3,038 100
------- ------- ------- ------- ------ ------- ------- ------
$13,614 $21,890 $ 3,727 $30,307 $3,484 $15,860 $22,090 $3,468
======= ======= ======= ======= ====== ======= ======= ======
</TABLE>
- -------------------------
(1) Revenues are attributed to countries based on location of customer invoiced.
(2) No individual foreign country accounted for greater than 10% of total
revenues or long-lived assets in any of the periods presented.
F-23
<PAGE> 103
QUINTUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND SIX
MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED)
SIGNIFICANT CUSTOMERS
One unrelated customer accounted for 23.8% and 19.3% of total revenues in
1997 and 1999, respectively. No one customer accounted for greater than 10% of
total revenues in fiscal 1998.
Four customers accounted for 30.9%, 21.8%, 10.9% and 10.5% of accounts
receivable at March 31, 1997. One customer accounted for 21.1% and 28.6% of
accounts receivable at March 31, 1998 and 1999, respectively.
14. LITIGATION
The Company is a defendant and may be a potential defendant in lawsuits and
claims arising in the ordinary course of business. While the outcomes of such
claims, lawsuits, or other proceedings cannot be predicted with certainty,
management expects that such liability, to the extent not provided by insurance
or otherwise, will not have a material adverse effect on the financial condition
of the Company.
15. SUBSEQUENT EVENTS
On July 19, 1999, as part of a license grant, the Company issued a customer
a warrant to purchase up to 300,000 shares of the Company's common stock at an
exercise prices per share equal to the lesser of (i) the initial public offering
price, net of commissions, per one share of the Company's common stock or (ii)
$7.50 per share. All revenues, not subject to a contingency, have been recorded
during the quarter ended September 30, 1999 and the resolution of the
contingency has no bearing on the customer earning the warrant, which was earned
on July 19, 1999. Therefore, the fair value of the warrant of approximately
$560,000, was recorded as a discount to reduce revenue in the quarter ended
September 30, 1999. The Company's calculations were made using the Black Scholes
model with the following assumptions: expected life of 1.2 years; risk-free
interest rate of 6.0%; volatility of 50%; and no dividends during the expected
term.
On August 26, 1999, the Company issued a total of 1,363,334 shares of
Series F convertible preferred stock at $8.25 per share for cash consideration
of $11,247,500. The Series F convertible preferred stock is convertible into one
share of common stock and has preferences, liquidation and voting rights similar
to those of Series E preferred stock. The Series F preferred stockholders are
entitled to no cash payments upon conversion to common stock.
On September 10, 1999, Quintus entered into an Agreement and Plan of
Reorganization to acquire all of the outstanding shares and assume the
outstanding options and warrants of Acuity Corp. (Acuity), a company
specializing in providing Web based customer interaction software. Quintus will
issue approximately 1,546,586 shares of common stock valued at approximately
$12,760,000, approximately 3,004,855 shares of Series G preferred stock valued
at approximately $24,790,000, and assume approximately 1,201,882 options and
warrants to purchase common and preferred stock valued at approximately
$7,670,000. The aggregate purchase price, including approximately $300,000 of
transaction costs not paid in stock, will be approximately $45,520,000. The
agreement is subject to shareholder approval and is expected to close in
November 1999. The acquisition will be accounted for using the purchase method
of accounting.
F-24
<PAGE> 104
QUINTUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND SIX
MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED)
On September 9, 1999, the Board of Directors approved, subject to
stockholder approval, the following:
ADOPTION OF THE 1999 STOCK INCENTIVE PLAN
1,000,000 shares of common stock were reserved for issuance under the 1999
Stock Incentive Plan. Any shares not yet issued under the 1995 Stock Option Plan
on the date of this offering will also be available under the 1999 Stock
Incentive Plan. On January 1 of each year, starting with the year 2000, the
number of shares in the reserve will automatically increase by 5% of the total
number of shares of common stock that are outstanding at that time or, if less,
by 2,000,000 shares. In general, if options or shares awarded under the 1999
Stock Incentive Plan or the 1995 Stock Incentive Plan are forfeited, then those
options or shares will again become available for awards under the 1999 Stock
Incentive Plan.
Outstanding options under the 1995 Stock Option Plan will be incorporated
into the 1999 Equity Incentive Plan at the time of this offering and no further
option grants will be made under the 1995 Stock Option Plan. The incorporated
options will continue to be governed by their existing terms, unless the Board
elects one or more features of the 1999 Stock Incentive Plan to those options or
to other outstanding shares. The Board has elected to extend the change in
control acceleration feature of the 1999 Stock Inventive Plan to all outstanding
options and unvested shares. Previously, options granted under the 1995 Stock
Option Plan provided that vesting of the shares would accelerate upon an
acquisition only if not assumed by the acquiring entity.
ADOPTION OF THE EMPLOYEE STOCK PURCHASE PLAN
Under the purchase plan, eligible employees are allowed to have salary
withholdings of up to 15% of their cash compensation to purchase shares of
common stock at a price equal to 85% of the lower of the market value of the
stock on the first date immediately before the first day of the applicable
offering period or the fair market value on the purchase date. The initial
offering period commences upon the effective date for the initial public
offering of the Company's common stock. For the first offering period, shares of
common stock may be purchased at a price equal to 85% of the lower of the price
per share in the initial public offering or the market value on the purchase
date. The Company has initially reserved 1,000,000 shares of common stock under
this plan, plus an annual increase to be added on May 1st beginning with the
year 2000 equal to the lesser of (i) 1,000,000 shares, or (ii) 2% of the shares
of common stock outstanding on May 1st.
ADOPTION OF THE DIRECTORS OPTION PLAN
500,000 shares of common stock have been reserved under the Director Option
Plan. The plan provides for an initial automatic grant of an option to purchase
30,000 shares of common stock to a nonemployee director who first becomes a
director after the Company's initial public offering. The grant will occur when
the director takes office. The initial option will vest monthly over the
two-year period following the date of grant. In addition, at the time of the
annual stockholders' meeting beginning in 2000, each nonemployee director who
continues to be a director after that meeting will automatically be granted an
annual option to purchase 10,000 shares of common stock. However, a nonemployee
director who is receiving the 30,000 option initial grant will not receive the
annual
F-25
<PAGE> 105
QUINTUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND SIX
MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED)
option in the same calendar year. The annual options are fully vested on the
first anniversary of the date of grant.
Effective September 29, 1999, the Company amended the loan and security
agreement and limited waiver, maintained with a bank, to extend the maturity
date of the Company's revolving line for borrowings up to $7,500,000 from
September 17, 1999 to December 17, 1999. Changes to the terms of the line
included a waiver to the financial covenants as well as a change of the interest
rate to prime plus 0.5% per annum. In addition, the Company granted the bank a
warrant to purchase 25,000 shares of Series F Preferred Stock at an exercise
price of $8.25 per share. The fair value of the warrant was deemed at $100,000,
which will be amortized over the extension of the maturity date. The Company's
calculations were made using the Black Scholes model with the following
assumptions: expected life of .2 years; risk-free interest rate of 6.0%;
volatility of 50%; and no dividends during the expected term.
F-26
<PAGE> 106
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Acuity Corp.
In our opinion, the accompanying balance sheets and the related statements
of operations, changes in stockholders' equity and cash flows present fairly, in
all material respects, the financial position of Acuity Corp. (the "Company"),
at December 31, 1997 and 1998, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has sustained recurring losses from operations
in the years then ended December 31, 1997 and 1998 which raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also discussed in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
PricewaterhouseCoopers LLP
Austin, Texas
February 8, 1999, except as to Notes 4 and 11,
for which the date is March 31, 1999
F-27
<PAGE> 107
ACUITY CORP.
(FORMERLY KNOWN AS ICHAT, INC.)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- SEPTEMBER 30,
1997 1998 1999
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................... $ 2,135,448 $ 2,173,101 $ 2,241,424
Accounts receivable, net of allowance for doubtful
accounts of $73,215, $60,340 and $38,072,
respectively.......................................... 1,703,075 944,024 781,801
Prepaid expenses and other current assets............... 182,100 176,701 371,964
------------ ------------ ------------
Total current assets.................................. 4,020,623 3,293,826 3,395,189
Computer equipment, furniture and fixtures, net........... 1,171,168 1,233,464 915,962
Note receivable -- related party.......................... 75,000 -- --
Deposits and other assets................................. 64,478 56,013 34,034
------------ ------------ ------------
Total assets.......................................... $ 5,331,269 $ 4,583,303 $ 4,345,185
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Borrowings under line of credit......................... $ -- $ 721,240 $ 721,240
Current maturities of capital lease obligations......... -- 96,570 94,071
Current maturities of long-term obligations............. 533,534 518,182 450,000
Accounts payable........................................ 495,463 362,225 693,416
Accrued expenses........................................ 771,664 959,748 458,282
Accrued expenses -- related party....................... -- -- 166,968
Deferred revenue and customer advances.................. 1,345,809 762,776 1,549,280
------------ ------------ ------------
Total current liabilities............................. 3,146,470 3,420,741 4,133,257
Capital lease obligations, net of current maturities...... -- 239,863 179,065
Long-term obligations, net of current maturities.......... 1,185,785 587,500 325,000
------------ ------------ ------------
Total liabilities..................................... 4,332,255 4,248,104 4,637,322
------------ ------------ ------------
Commitments (Note 7)
Stockholders' Equity:
Convertible preferred stock, $.001 par value:
8,680,644 shares authorized at December 31, 1997 and
1998 and 10,306,127 shares at September 30, 1999;
6,220,994 and 8,252,074 shares issued at December
31, 1997 and 1998 and 9,520,414 at September 30,
1999, 6,173,994 and 8,252,074 outstanding in 1997
and 1998 and 9,520,414 at September 30, 1999;
liquidation value $19,857,196 at December 31, 1998
and $23,857,196 at September 30, 1999.............. 6,221 8,252 9,520
Common stock, $.001 par value, 15,000,000 shares
authorized at December 31, 1997 and 1998, and
20,727,164 shares at September 30, 1999; 4,852,383,
5,253,430 and 5,446,595 shares issued and
4,852,383, 4,853,430 and 5,046,595 outstanding at
December 31, 1997 and 1998 and September 30, 1999,
respectively....................................... 4,852 5,253 5,447
Additional paid-in capital............................ 12,847,565 20,069,214 25,482,096
Deferred stock-based compensation..................... -- -- (160,034)
Treasury stock -- at cost
Series B-1, 25,000, 0 and 0 shares, Series B-2,
22,000, 0 and 0 shares, and common stock, 0,
400,000 and 400,000 shares, respectively......... (76,000) (280,000) (280,000)
Accumulated deficit................................... (11,783,624) (19,467,520) (25,349,166)
------------ ------------ ------------
Total stockholders' equity (deficit)............. 999,014 335,199 (292,137)
------------ ------------ ------------
Total liabilities and stockholders' equity
(deficit)...................................... $ 5,331,269 $ 4,583,303 $ 4,345,185
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE> 108
ACUITY CORP.
(FORMERLY KNOWN AS ICHAT, INC.)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------- -------------------------
1997 1998 1998 1999
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenue:
License............................. $ 3,085,200 $ 4,212,501 $ 2,327,607 $ 1,025,858
Maintenance....................... 819,488 1,743,199 1,218,442 268,413
Consulting........................ 906,487 763,391 566,644 355,997
----------- ----------- ----------- -----------
Total revenue................ 4,811,175 6,719,091 4,112,693 1,650,268
Cost of revenue:
License........................... 252,536 91,547 41,541 107,451
Maintenance....................... 564,375 427,858 320,705 277,428
Consulting........................ 595,871 861,382 689,526 535,109
----------- ----------- ----------- -----------
Total cost of revenue........ 1,412,782 1,380,787 1,051,772 919,988
Gross profit........................ 3,398,393 5,338,304 3,060,921 730,280
Operating expenses:
Research and development.......... 1,542,199 4,389,983 3,310,410 2,947,024
Sales and marketing............... 6,373,790 6,311,540 4,407,055 3,910,244
General and administrative........ 2,020,157 2,377,393 1,627,777 1,163,504
----------- ----------- ----------- -----------
Total operating expenses..... 9,936,146 13,078,916 9,345,242 8,020,772
----------- ----------- ----------- -----------
Operating loss...................... (6,537,753) (7,740,612) (6,284,321) (7,290,492)
Other income (expense):
Gain on sale of assets............ -- -- -- 2,728,296
Interest expense.................. (91,452) (124,137) (86,126) (107,797)
Interest income................... 73,296 164,356 134,301 61,455
Other income (expense)............ (10,581) 16,497 16,386 (34,802)
----------- ----------- ----------- -----------
Net loss............................ (6,566,490) (7,683,896) (6,219,760) (4,643,340)
Dividend to preferred
stockholders...................... -- -- -- (1,238,296)
----------- ----------- ----------- -----------
Net loss attributable to common
stockholders...................... $(6,566,490) $(7,683,896) $(6,219,760) $(5,881,636)
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE> 109
ACUITY CORP.
(FORMERLY KNOWN AS ICHAT, INC.)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL DEFERRED
------------------ ------------------ PAID-IN STOCK-BASED TREASURY ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION STOCK DEFICIT
--------- ------ --------- ------ ----------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997..... 3,843,994 $3,844 4,145,000 $4,145 $ 5,920,897 $ -- $ -- $ (5,217,134)
Issuance of Series B-2
convertible preferred stock,
net of issuance costs........ 127,000 127 -- -- 252,123 -- -- --
Issuance of Series C
convertible preferred stock,
net of issuance costs........ 2,250,000 2,250 400,000 400 6,613,915 -- -- --
Exercise of stock options...... -- -- 307,383 307 60,630 -- -- --
Purchase of treasury stock..... -- -- -- -- -- -- (76,000) --
Net loss....................... -- -- -- -- -- -- -- (6,566,490)
--------- ------ --------- ------ ----------- --------- --------- ------------
Balance at December 31, 1997... 6,220,994 6,221 4,852,383 4,852 12,847,565 -- (76,000) (11,783,624)
Issuance of Series C
convertible preferred stock
to vendors................... 6,650 7 -- -- 13,468 -- -- --
Issuance of Series D
convertible preferred stock,
net of issuance costs........ 2,071,430 2,071 -- -- 7,203,319 -- -- --
Exercise of stock options,
net.......................... -- -- 401,047 401 80,815 -- -- --
Purchase of treasury stock..... -- -- -- -- -- -- (280,000) --
Retirement of treasury stock... (47,000) (47) -- -- (75,953) -- 76,000 --
Net loss....................... -- -- -- -- -- -- -- (7,683,896)
--------- ------ --------- ------ ----------- --------- --------- ------------
Balance at December 31, 1998... 8,252,074 8,252 5,253,430 5,253 20,069,214 -- (280,000) (19,467,520)
Issuance of Series E
convertible preferred stock,
net of issuance costs
(unaudited).................. 785,715 786 -- -- 2,616,494 -- -- --
Issuance of common stock
warrants in connection with
the issuance of Series E
convertible preferred stock
(unaudited).................. -- -- -- -- 86,428 -- -- --
Issuance of Series F
convertible preferred stock,
net of issuance costs
(unaudited).................. 482,625 482 -- -- 687,081 -- -- --
Issuance of common stock
warrants in connection with
the issuance of Series F
convertible preferred stock
(unaudited).................. -- -- -- -- 546,424 -- -- --
Non-cash dividend in connection
with the issuance of Series F
convertible preferred stock
and common stock warrants
(unaudited).................. -- -- -- -- 1,072,494 -- -- (1,072,494)
Exercise of stock options
(unaudited).................. -- -- 207,227 208 80,912 -- -- --
Non-cash dividend to
stockholders in connection
with the extension of common
stock warrants (unaudited)... -- -- -- -- 165,812 -- -- (165,812)
Repurchase of unvested stock
options (unaudited).......... -- -- (14,062) (14) (2,797) -- -- --
Stock-based compensation
(unaudited).................. -- -- -- -- 160,034 (160,034) -- --
Net loss (unaudited)........... -- -- -- -- -- -- -- (4,643,340)
--------- ------ --------- ------ ----------- --------- --------- ------------
Balance at September 30, 1999
(unaudited).................. 9,520,414 $9,520 5,446,595 $5,447 $25,482,096 $(160,034) $(280,000) $(25,349,166)
========= ====== ========= ====== =========== ========= ========= ============
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY (DEFICIT)
----------------
<S> <C>
Balance at January 1, 1997..... $ 711,752
Issuance of Series B-2
convertible preferred stock,
net of issuance costs........ 252,250
Issuance of Series C
convertible preferred stock,
net of issuance costs........ 6,616,565
Exercise of stock options...... 60,937
Purchase of treasury stock..... (76,000)
Net loss....................... (6,566,490)
-----------
Balance at December 31, 1997... 999,014
Issuance of Series C
convertible preferred stock
to vendors................... 13,475
Issuance of Series D
convertible preferred stock,
net of issuance costs........ 7,205,390
Exercise of stock options,
net.......................... 81,216
Purchase of treasury stock..... (280,000)
Retirement of treasury stock... --
Net loss....................... (7,683,896)
-----------
Balance at December 31, 1998... 335,199
Issuance of Series E
convertible preferred stock,
net of issuance costs
(unaudited).................. 2,617,280
Issuance of common stock
warrants in connection with
the issuance of Series E
convertible preferred stock
(unaudited).................. 86,428
Issuance of Series F
convertible preferred stock,
net of issuance costs
(unaudited).................. 687,563
Issuance of common stock
warrants in connection with
the issuance of Series F
convertible preferred stock
(unaudited).................. 546,424
Non-cash dividend in connection
with the issuance of Series F
convertible preferred stock
and common stock warrants
(unaudited).................. --
Exercise of stock options
(unaudited).................. 81,120
Non-cash dividend to
stockholders in connection
with the extension of common
stock warrants (unaudited)... --
Repurchase of unvested stock
options (unaudited).......... (2,811)
Stock-based compensation
(unaudited).................. --
Net loss (unaudited)........... (4,643,340)
-----------
Balance at September 30, 1999
(unaudited).................. $ (292,137)
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE> 110
ACUITY CORP.
(FORMERLY KNOWN AS ICHAT, INC.)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------- -------------------------
1997 1998 1998 1999
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................... $(6,566,490) $(7,683,896) $(6,219,760) $(4,643,340)
Adjustments to reconcile net loss to net
cash used in operating activities:
Forgiveness of related party
receivable........................... -- 75,000 75,000 --
Gain on sale of assets................. -- -- -- (2,728,296)
Depreciation........................... 540,723 745,917 580,967 532,586
Provision for doubtful accounts........ 226,567 155,574 83,582 79,666
Stock compensation expense............. -- 13,475 -- --
Changes in assets and liabilities:
Accounts receivable.................. (1,353,251) 603,477 (473,881) 82,557
Prepaid expenses and other current
assets............................ (157,991) 5,399 (113,796) (195,263)
Deposits and other assets............ (34,655) 8,465 (12,640) 21,979
Accounts payable..................... 189,594 (133,238) 294,273 331,191
Accrued expenses..................... 387,596 188,084 2,098 (501,466)
Deferred revenue and customer
advances.......................... 843,009 (583,033) 673,657 894,272
----------- ----------- ----------- -----------
Net cash used in operating activities....... (5,924,898) (6,604,776) (5,110,500) (6,126,114)
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of computer equipment, furniture
and fixtures........................... (1,218,550) (808,213) (776,334) (223,923)
Cash received from the sale of assets, net
of transaction costs................... -- -- -- 2,796,344
----------- ----------- ----------- -----------
Net cash provided by (used in) investing
activities................................ (1,218,550) (808,213) (776,334) 2,572,421
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of short-term
debt................................... 1,000,000 721,240 721,240 --
Repayment of short-term debt.............. (1,000,000) -- -- --
Proceeds from issuance of long-term
note................................... 450,000 -- -- --
Amounts paid on installment obligation.... (275,000) (300,000) (225,000) (150,000)
Repayment of other long-term debt......... (105,682) (313,637) (235,810) (180,682)
Proceeds from sales -- leaseback.......... -- 386,280 386,280 --
Repayment of capital lease obligation..... -- (49,847) (30,573) (63,297)
Proceeds from issuance of preferred
stock.................................. 7,002,250 7,250,005 7,250,005 4,000,003
Financing costs related to preferred stock
issuance............................... (133,434) (44,615) (44,615) (62,309)
Proceeds from issuance of common stock,
net.................................... 60,937 81,216 39,656 78,301
Purchase of treasury stock................ (76,000) (280,000) (280,000) --
----------- ----------- ----------- -----------
Net cash provided by financing activities... 6,923,071 7,450,642 7,581,183 3,622,016
----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents............................... (220,377) 37,653 1,694,349 68,323
Cash and cash equivalents at beginning of
period.................................... 2,355,825 2,135,448 2,135,448 2,173,101
----------- ----------- ----------- -----------
Cash and cash equivalents at end of
period.................................... $ 2,135,448 $ 2,173,101 $ 3,829,797 $ 2,241,424
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE> 111
ACUITY CORP.
(FORMERLY KNOWN AS ICHAT, INC.)
NOTES TO FINANCIAL STATEMENTS
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Acuity Corp., a Delaware corporation (the "Company") was incorporated on
August 2, 1995 as ichat, Inc. The Company is a provider of Web-based customer
interaction software. In June 1998 the Company changed its name to Acuity Corp.
to reflect a strategic change in its core product offerings from internet chat
software to its WebCenter customer interaction software. Shortly thereafter, the
Company commenced shipment of its WebCenter products that enable users to
interact with their customers over the Internet. During the year ended December
31, 1998, WebCenter revenue was approximately $1,215,000 and ichat revenue was
$5,504,000.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has incurred operating
losses since inception related primarily to the development and marketing of its
products and has an accumulated deficit of $19,467,520 as of December 31, 1998.
These factors raise substantial doubt about the Company's ability to continue as
a going concern. In February 1999, the Company completed a sale of preferred
stock and in March 1999 completed the sale of an exclusive license to its chat
technology (see note 11). The Company's management has developed a fiscal 1999
operating plan in which the Company has placed significant reliance on obtaining
additional outside financing. Management is actively pursuing additional debt
and equity financing from institutional investors as necessary and intends to
increase revenues and eventually achieve profitable operations. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying interim statements of operations and cash flows for the
nine months ended September 30, 1998 and 1999 are unaudited but include all
adjustments, consisting only of normal recurring adjustments, which the Company
considers necessary for a fair presentation of the results of operations and
cash flows for the nine months ended September 30, 1998 and 1999. The results of
operations and cash flows for the nine months ended September 30, 1999 are not
necessarily indicative of the results to be expected for the full year. The data
disclosed in these notes to the financial statements for these periods are
unaudited.
CERTAIN RISKS AND UNCERTAINTIES
The Company's operating results are significantly dependent on the
Company's ability to market and develop its products. The life cycles of the
Company's products are difficult to estimate due in
F-32
<PAGE> 112
ACUITY CORP.
(FORMERLY KNOWN AS ICHAT, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
part to the effect of future product enhancements and competition. The inability
of the Company to successfully develop and market its products as a result of
competition or other factors would have a material adverse effect on the
Company's business, financial condition and results of operations.
Concentrations of credit risk with respect to trade receivables are
generally limited due to the large number of customers, short payment terms, and
their dispersion across geographic areas. During 1998, sales to one customer was
$1,064,000, or 16%, with a related receivable balance of approximately $18,000.
Two other customers had receivable balances totaling approximately $590,000 at
December 31, 1998.
REVENUE RECOGNITION
The Company's revenues are derived from product licensing revenues, and
fees for maintenance and support, training and consulting services. Product
licensing revenues are recognized after shipment of the product, provided
persuasive evidence of an arrangement exists, collection of the resulting
receivable is probable, the fee for the arrangement is fixed and determinable
and product returns are reasonably estimable. In instances where there are
customer acceptance criteria related to the Company's products or where there is
significant modification or customization of the Company's software products,
such revenue is deferred until the acceptance criteria have been satisfied or
the product has been modified for its intended purpose. Provisions for estimated
returns and warranty are recorded at the time products are shipped.
Maintenance revenue consists of maintenance and renewal fees for providing
unspecified product updates on an if and when available basis and technical
support for the Company's software products. Maintenance revenues are recognized
ratably over the related service period, generally twelve months.
Consulting revenue consists of training and consulting services provided to
the Company's customers. Training and consulting revenues are recognized as the
related services are performed.
Customer advances and billed amounts due from customers in excess of
revenue recognized are recorded as deferred revenue.
ADVERTISING EXPENSES
Advertising expenses consist primarily of costs incurred promoting the
Company's products, including public relations, trade shows, lead generation and
promotional materials. The Company expenses all advertising costs as incurred.
The Company's advertising expenses were approximately $1,035,189 for the year
ended December 31, 1997 and $687,080 for the year ended December 31, 1998.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on hand and on deposit at local
banks. The Company considers highly liquid investments with original maturities
of three months or less to be cash equivalents. Cash equivalents consist of
deposits in money market funds at December 31, 1997 and 1998 and at September
30, 1999.
F-33
<PAGE> 113
ACUITY CORP.
(FORMERLY KNOWN AS ICHAT, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially expose the Company to
concentrations of credit risk consist primarily of cash and cash equivalents and
accounts receivable. Management does not believe there is undue risk of loss
because in management's opinion, the financial institutions in which cash is
deposited are high credit quality institutions and the securities are
obligations of the United States government. However, cash and cash equivalents
exceeded FDIC insurance coverage limits. The Company has not experienced any
losses on its deposits. Although the Company does not require collateral on
accounts receivable, it does maintain reserves for credit losses.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of certain of the Company's financial instruments,
including cash and cash equivalents, accounts and notes receivable, accounts
payable and accrued liabilities, approximated fair value as of December 31, 1997
and 1998, because of the relatively short maturity of these instruments.
The carrying amounts of the Company's borrowings under variable rate
long-term debt instruments approximate their fair value. The fair value of the
Company's other long-term obligation is estimated using discounted cash flow
analyses, based upon the Company's approximate incremental borrowing rates for
similar types of borrowing arrangements.
COMPUTER EQUIPMENT, FURNITURE AND FIXTURES
Computer equipment, furniture and fixtures, software and leasehold
improvements are recorded at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the respective assets,
generally three to seven years. Expenditures that increase the value or extend
the life of the asset are capitalized, while the cost of maintenance and repairs
are expensed as incurred. Upon disposal, assets and related accumulated
depreciation are removed from the accounts and the related gain or loss is
included in operations.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations as incurred. The
Company capitalizes certain software development costs subsequent to the
establishment of technological feasibility. Based on the Company's product
development process, technological feasibility is established upon completion of
a working model. Costs incurred by the Company between completion of the working
model and the point at which the product is ready for general release have been
insignificant.
INCOME TAXES
The Company accounts for income taxes in accordance with the liability
method. This method requires that deferred taxes be computed annually utilizing
the liability method and adjusted when new tax laws or rates are enacted.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized. The Company recorded no income
tax expense for both the years ended December 31, 1997 or 1998 and has provided
a valuation allowance to fully offset the net deferred tax asset because the
realization of tax benefits associated with net operating loss carryforwards is
not assured.
F-34
<PAGE> 114
ACUITY CORP.
(FORMERLY KNOWN AS ICHAT, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
COMPREHENSIVE INCOME
The Company has had no items of comprehensive income other than its net
loss for each of the two years in the period ended December 31, 1998.
RECLASSIFICATION
Certain amounts previously reported in 1997 have been reclassified to
conform to the 1998 presentation.
2. COMPUTER EQUIPMENT, FURNITURE AND FIXTURES:
Computer equipment, furniture and fixtures is comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- SEPTEMBER 30,
1997 1998 1999
---------- ----------- -------------
<S> <C> <C> <C>
Computer equipment.............................. $1,129,599 $ 1,624,785 $ 1,663,887
Furniture and fixtures.......................... 168,957 219,819 235,668
Office equipment................................ -- 130,030 162,009
Software........................................ 105,790 233,343 356,119
Leasehold improvements.......................... 376,920 376,920 376,920
---------- ----------- -----------
1,781,266 2,584,897 2,794,603
Less: accumulated depreciation.................. (610,098) (1,351,433) (1,878,641)
---------- ----------- -----------
$1,171,168 $ 1,233,464 $ 915,962
========== =========== ===========
</TABLE>
During 1998, the Company entered into capital leases for computer equipment
with a capitalized cost of $386,280. Amortization expense and accumulated
amortization are included in depreciation expense and accumulated depreciation,
respectively. Accumulated amortization on these capitalized leases totaled
$96,570 at December 31, 1998. Future minimum lease payments as of December 31,
1998 are as follows:
<TABLE>
<S> <C>
1999........................................................ $147,867
2000........................................................ 147,867
2001........................................................ 95,643
2002........................................................ 23,177
--------
414,554
Less amount representing interest........................... (78,121)
--------
Present value of minimum lease payments................ 336,433
Less current portion........................................ (96,570)
--------
$239,863
========
</TABLE>
3. NOTE RECEIVABLE -- RELATED PARTY:
In August 1996, the Company issued a note receivable in the amount of
$75,000, due from a shareholder and officer of the Company ("Maker"), which bore
interest at 5.76% per annum and was collateralized by a stock pledge agreement
covering certain shares of common stock held by the
F-35
<PAGE> 115
ACUITY CORP.
(FORMERLY KNOWN AS ICHAT, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Maker. During 1998, the note was forgiven by the Company as part of the
consideration given for a noncompete agreement between the officer and the
Company. The Company has received interest payments during the year ended
December 31, 1997 and 1998 of $4,320 and $2,160, respectively.
4. LINE OF CREDIT:
The Company has a revolving line of credit arrangement with a commercial
bank that enables the Company to borrow against eligible trade accounts
receivable up to a total of $2,500,000. As of December 31, 1998, the Company had
$721,240 outstanding under the revolving line of credit. The credit arrangement
contains certain financial covenants and restrictions as to various matters,
including the Company's net worth. The credit facility bears interest at prime
plus .5% (8.75% at December 31, 1998) and expires on March 25, 1999. On March
25, 1999 the Company entered into a loan modification agreement under which the
expiration date was extended to March 25, 2000.
5. LONG-TERM OBLIGATIONS:
Long-term obligations are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER 30,
1997 1998 1999
---------- ---------- -------------
<S> <C> <C> <C>
Term loans:
Variable rate term loan with a commercial bank,
bearing interest at the bank's prime rate plus 1% per
annum (8.75% at December 31, 1998). The loan requires
monthly principal and interest payments through May
1999................................................. $ 231,819 $ 68,182 $ --
Variable rate term loan with a commercial bank,
bearing interest at prime plus 1% per annum
(8.75% at December 31, 1998). The loan requires
monthly principal and interest payments through
August 2001..................................... 412,500 262,500 150,000
Installment obligation:
Non-interest bearing installment obligation to a
minority shareholder of the Company. The note
is payable in quarterly installments and is
scheduled to be paid in full in May 2001...... 1,075,000 775,000 625,000
---------- ---------- ----------
1,719,319 1,105,682 775,000
Less: current maturities........................... (533,534) (518,182) (450,000)
---------- ---------- ----------
$1,185,785 $ 587,500 325,000
========== ========== ==========
</TABLE>
The term loans and line of credit are collateralized by substantially all
the assets of the Company and contain certain financial covenants and
restrictions as to various matters, including the Company's net worth. At
December 31, 1998 the Company was not in compliance with its minimum quick ratio
and maximum loss covenants, which were waived by the bank in a letter dated
February 18, 1999. Should the Company continue to be in non-compliance with its
debt covenants, the bank has various remedies including the acceleration of the
due dates of principal payments that are currently classified as non-current
liabilities in the Company's financial statements.
F-36
<PAGE> 116
ACUITY CORP.
(FORMERLY KNOWN AS ICHAT, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest payments of $91,452, $124,137, $86,127 and $107,797 were made for
the years ended December 31, 1997 and 1998 and during the nine months ended
September 30, 1998 and 1999, respectively. No tax payments were made during the
same periods.
The following is a detail of non-cash financing activities:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------- -------------------
1997 1998 1998 1999
-------- ------- ------- --------
<S> <C> <C> <C> <C>
Issuance of 400,000 common shares to Series B
convertible preferred stock and warrant
holders.................................... $120,000 $ -- $ -- $ --
Issuance of 6,650 Series C convertible
preferred stock to vendors................... -- 13,475 -- --
Deferred revenue liability extinguished in
the sale of assets......................... -- -- -- 107,768
Accrued commission-related party associated
with the sale of assets.................... -- -- -- 166,968
Note received in exchange for the sale of
assets..................................... -- -- -- 350,000
Dividend in connection with the issuance of
Series F convertible preferred stock and
common stock warrants...................... -- -- -- 1,072,484
Dividend to stockholders in connection with
the extension of common stock warrants..... -- -- -- 165,812
</TABLE>
7. COMMITMENTS:
The Company leases its facilities and certain other equipment under
operating lease agreements. Rental expense for the years ended December 31, 1997
and 1998 was approximately $159,134 and $356,080, respectively. Future minimum
rental commitments as of December 31, 1998 under these leases are as follows:
<TABLE>
<S> <C>
1999........................................................ $350,368
2000........................................................ 283,781
2001........................................................ 188,884
2002........................................................ 86,757
2003........................................................ 29,184
--------
$938,974
========
</TABLE>
F-37
<PAGE> 117
ACUITY CORP.
(FORMERLY KNOWN AS ICHAT, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS' EQUITY:
PREFERRED STOCK
The Company currently has authorization for the issuance of 8,680,644
shares of $.001 par value preferred stock. At December 31, 1998 the following
series of convertible preferred stock were authorized:
<TABLE>
<CAPTION>
SHARES
SHARES ISSUED AND LIQUIDATION
SERIES DESIGNATED OUTSTANDING PREFERENCE
- -------------------------------------------- ---------- ----------- -----------
<S> <C> <C> <C>
Series A.................................... 750,000 750,000 750,000
Series B-1.................................. 1,868,994 1,868,994 2,803,491
Series B-2.................................. 1,305,000 1,305,000 2,283,750
Series C.................................... 2,256,650 2,256,650 6,769,950
Series D.................................... 2,500,000 2,071,430 7,250,005
</TABLE>
Each series of preferred stock is convertible into common stock at the
option of the holder on a one-for-one basis, subject to certain adjustments.
Each series of preferred stock will automatically convert upon the earliest of
(i) the closing date of an underwritten public offering of the Company's common
stock with aggregate proceeds of more than $18,000,000 and a per share offering
price of at least $9.00 or (ii) the date of an affirmative election of the
holders of 75% of the outstanding shares of preferred stock. The Company has
reserved 8,296,274 shares of common stock at December 31, 1998 to permit
conversion of the preferred stock in accordance with these terms.
Holders of the preferred stock are entitled to one vote for each share of
common stock into which such shares may be converted. Each share of preferred
stock entitles the holder to receive noncumulative dividends, if and when
declared by the board of directors, prior to any dividend paid on the common
stock. Dividends, if any, on preferred stock shall be declared at an annual rate
of 10% of the original price paid per share. As of December 31, 1998, no
dividends have been declared. In the event of liquidation, the preferred stock
has preference over the common stock in the amount equal to the original issue
price plus declared but unpaid dividends.
STOCK OPTION PLAN
During 1995, the Company adopted the 1995 Stock Option/Stock Issuance Plan
(the "Plan"), providing for two separate equity programs: (i) the Option Grant
Program providing for the granting of both incentive and non-statutory stock
options, as defined by the Internal Revenue Code, and (ii) the Stock Issuance
Program providing for the issuance of common stock directly, either through the
immediate purchase of such shares or as a bonus for services rendered to the
Company.
The Plan, as amended, provides for a maximum number of common shares to be
optioned/issued of 3,950,000. Accordingly, the Company has reserved a sufficient
number of shares of common stock to permit exercise of options or issuance of
shares in accordance with the terms of the Plan. If an option expires or becomes
unexercisable for any reason, options related to the unpurchased shares become
available for grant. Each option granted under the Plan has a term of ten years
from the date of grant and an exercise price and vesting schedule as determined
by the Plan Administrator, at the date of grant, with the exception that
incentive stock options can not be granted for less than 100% of the fair market
value of the stock and non-statutory stock options can not be granted for less
than 110% of the fair
F-38
<PAGE> 118
ACUITY CORP.
(FORMERLY KNOWN AS ICHAT, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
market value of the stock to any shareholder of the Company with a 10% or
greater interest in the common stock of the Company. The number of common stock
options exercised and unvested was 313,437 and 176,033 at December 31, 1997 and
1998, respectively.
Option activity under the Company's Plan follows:
<TABLE>
<CAPTION>
WEIGHTED-
AVAILABLE EXERCISE AVERAGE
FOR GRANT SHARES PRICE EXERCISE PRICE AMOUNT
---------- ---------- ------------- -------------- ----------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997... 991,500 1,183,500 $0.10 - $0.20 $0.13 $ 151,700
Options granted.............. (1,634,750) 1,634,750 0.10 - 0.30 0.27 442,273
Options exercised....... -- (307,383) 0.10 - 0.30 0.20 (60,937)
Options cancelled....... 766,382 (766,382) 0.10 - 0.30 0.15 (115,455)
---------- ---------- ----------
Balance at December 31,
1997....................... 123,132 1,744,485 417,581
Options approved for
grant................. 1,350,000 -- -- -- --
Options granted......... (2,775,000) 2,775,000 0.30 - 0.70 0.48 1,320,450
Options exercised....... (403,547) 0.10 - 0.50 0.20 (81,816)
Options cancelled....... 1,328,273 (1,328,273) 0.10 - 0.70 0.33 (432,724)
Options repurchased..... 2,500 0.20 0.20 --
---------- ---------- ----------
Balance at December 31,
1998....................... 28,905 2,787,665 1,223,491
Options approved for
grant (unaudited)..... 1,000,000 -- -- -- --
Options granted
(unaudited)........... (1,046,056) 1,046,056 0.70 0.70 728,972
Options exercised
(unaudited)........... -- (207,227) 0.10 - 0.70 0.39 (81,120)
Options repurchased
(unaudited)........... 14,062 -- -- -- --
Options cancelled
(unaudited)........... 762,579 (762,579) 0.10 - 0.70 0.55 (416,763)
---------- ---------- ----------
Balance at September 30, 1999
(unaudited)................ 759,490 2,863,915 $1,454,580
========== ========== ==========
</TABLE>
The weighted-average fair value of options granted during the years ended
December 31, 1997 and 1998 was $0.27 and $0.48 per share, respectively.
F-39
<PAGE> 119
ACUITY CORP.
(FORMERLY KNOWN AS ICHAT, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information with respect to stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------- OPTIONS
WEIGHTED-AVERAGE EXERCISABLE
EXERCISE NUMBER REMAINING NUMBER
PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISABLE
- --------------------------------------- ----------- ---------------- -----------
<S> <C> <C> <C>
$0.10................................. 20,000 6.9 20,000
0.15................................. 43,031 7.7 43,031
0.20................................. 25,874 8.1 25,874
0.30................................. 1,603,927 9.0 1,603,927
0.50................................. 168,500 9.3 168,500
0.70................................. 926,333 9.8 928,333
--------- ---------
Number outstanding at December 31,
1998................................. 2,787,665 2,787,665
========= =========
</TABLE>
At December 31, 1997, options to purchase 1,744,485 shares of common stock
were exercisable at a weighted average exercise price of $0.24 per share.
PRO FORMA STOCK BASED COMPENSATION
The Company has applied Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations, in
accounting for the Plan. Accordingly, no compensation expense has been
recognized for the Plan. Had compensation cost for the Plan been determined
based upon the fair value at the grant date for awards under the Plan consistent
with the methodology prescribed under Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation," such amount would
not have been materially different.
The fair value of each option grant is estimated on the date of grant using
the minimum value method with the following weighted average assumptions used
for grants in 1997 and 1998: dividend yield of 0.0%, risk-free interest rate of
6.39% in 1997 and 6.00% in 1998 and expected lives of five years. Volatility of
the Company common stock underlying the options was not considered because the
Company's equity is not publicly traded as of December 31, 1998.
COMMON STOCK WARRANTS
At December 31, 1998 the Company has outstanding warrants for the purchase
of 465,163 shares of its common stock at an exercise price of $2.75 per share.
These warrants are exercisable at any time through January 10, 1999. These
warrants were issued to holders of the Company's B-1 preferred stock as part of
a recapitalization of the Company in 1996. The warrants were issued in exchange
for warrants to purchase 465,153 shares of the Company's then authorized Series
B-3 preferred stock at an exercise price of $2.25 per share. The Company's
articles of incorporation were then amended to remove the Series B-3 preferred
stock from the Company's authorized capital.
F-40
<PAGE> 120
ACUITY CORP.
(FORMERLY KNOWN AS ICHAT, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. EMPLOYEE BENEFITS:
The Company has established a 401(k) retirement savings plan for its full
time employees. All employees meeting minimum age requirements are eligible to
enroll in the Plan sixty days after commencement of employment. As of December
31, 1998, the Company has not provided matching contributions to employee
accounts.
10. INCOME TAXES:
The Company has not recorded the tax benefits attributable to its taxable
losses incurred during the years ended December 1997 or 1998 due to the
uncertainty surrounding the recoverability of these deferred tax assets.
At December 31, 1998 the Company had federal net operating loss
carryforwards of approximately $18,500,000 available to offset future taxable
income. The Company's federal operating loss carryforwards begin to expire
starting in the year 2011.
As a result of ownership changes in prior years as defined by Internal
Revenue Code Section 382, approximately $4,365,000 in net operating loss
carryforwards are subject to a maximum annual utilization of approximately
$1,000,000 at December 31, 1998.
The components of the net deferred tax asset are as follows at December 31,
1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............................ $ 3,505,193 $ 6,292,559
Non-recurring charge related to purchased technology...... 672,093 570,883
Allowance for doubtful accounts and returns............... 131,930 124,699
Capitalization of software development costs.............. 6,479 3,906
Depreciation.............................................. 57,050 135,727
----------- -----------
Net deferred tax asset before valuation allowance........... 4,372,745 7,127,774
Valuation allowance......................................... (4,372,745) (7,127,774)
----------- -----------
Net deferred tax asset...................................... $ -- $ --
=========== ===========
</TABLE>
The following is a reconciliation of the amount of the income tax benefit
that would result from applying the statutory Federal income tax rates to pretax
loss and the reported amount of income tax benefit:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1998
----------- -----------
<S> <C> <C>
Tax benefit at statutory rate of 34%........................ $ 2,235,089 $ 2,612,524
State income tax benefit.................................... 196,343 229,140
Permanent difference........................................ (9,861) (15,603)
Other....................................................... -- (71,032)
Net increase in valuation allowance......................... (2,421,571) (2,755,029)
----------- -----------
$ -- $ --
=========== ===========
</TABLE>
F-41
<PAGE> 121
ACUITY CORP.
(FORMERLY KNOWN AS ICHAT, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. SUBSEQUENT EVENTS:
AUTHORIZATION AND SALE OF SERIES E CONVERTIBLE PREFERRED STOCK
On February 22, 1999 the Company's board of directors designated 1,142,858
shares of the Company's authorized preferred stock as Series E preferred stock.
On February 25, 1999 the Company sold 785,715 shares of Series E convertible
preferred stock and warrants to purchase 392,858 shares of common stock for an
aggregate purchase price of $2,750,000. The warrants are exercisable through
February 27, 2001 at an exercise price of $0.70 per share. The warrants were
allocated $86,428 of the proceeds from the sale of the Series E convertible
preferred stock. The fair value of the warrants were calculated using the
Black-Scholes options model with the following assumptions: dividend yield of
0%, volatility of 50%, and a risk-free interest rate of 4.91%.
Each share of Series E convertible preferred stock is entitled to receive
noncumulative dividends, when and if declared by the Company's board of
directors, at a rate of $0.35 per share per annum. Each share of Series E
preferred stock is convertible at the option of the holder into common shares of
the Company on a one for one basis, subject to certain anti-dilution provisions
as described in the Company's articles of incorporation. Conversion of the
Series E preferred stock is automatic upon either i) the sale of the Company's
common stock in a firmly underwritten public offering in which the offering
price is not less than $9.00 per share and which results in aggregate proceeds
to the Company of at least $18,000,000 net of underwriting discounts,
commissions and fees, or ii) the written consent of 75% of the outstanding
shares of Series E preferred stock.
Upon any liquidation, dissolution or winding up of the Company, the Series
E preferred shareholders are entitled to a liquidation preference of $3.50 per
share plus all declared but unpaid dividends thereon.
SALE OF EXCLUSIVE TECHNOLOGY LICENSE
In March 1999, the Company entered into an agreement to sell exclusive
source and object code licenses for the ichat software. Under the terms of the
agreement, the Company received $1.3 million in cash at the time of purchase,
notes receivable in the principal amounts of $1 million due on June 30, 1999,
$700,000 due on December 15, 1999, and $600,000 of preferred stock from the next
issuance of the purchaser. In connection with this sale, the Company entered
into a commission agreement with a stockholder under which the stockholder will
receive a total of $354,665 for negotiating the sale of these assets. At
September 30, 1999 the Company had a remaining balance due to the stockholder of
$166,968 related to this transaction. The amount has been disclosed as accrued
expenses -- related party.
12. SUBSEQUENT EVENTS (UNAUDITED)
On September 10, 1999 the Company entered into an agreement to have all of
its outstanding capital stock acquired by Quintus Corporation.
In September, 1999 the Company's board of directors designated and sold
482,625 shares of the Company's authorized preferred stock as Series F
convertible preferred stock for an aggregate purchase price of $1,250,000. The
board also issued warrants to purchase 178,570 shares of the Company's common
stock at an exercise price of $0.70 per share through September, 2001. The
F-42
<PAGE> 122
ACUITY CORP.
(FORMERLY KNOWN AS ICHAT, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
warrants were allocated $546,424 of the proceeds from the sale of the Series F
convertible preferred stock. The fair value of the warrants were calculated
using the Black-Scholes option model with the following assumptions: dividend
yield of 0%, volatility of 50%, and a risk-free interest rate of 4.91%. The fair
value of the Series F convertible preferred stock and the warrants to purchase
common stock exceeded the $1,250,000 in gross proceeds received by the Company
by $1,072,144. As a result, the Company has recorded a deemed dividend related
to this transaction.
On September 2, 1999 the Company's board of directors extended the
expiration date of the warrants that were set to expire on January 10, 1999 to
January 10, 2000. In relation to this extension, the Company has recorded a
dividend to the Company's current stockholders that are also the holders of the
Company's warrants in the amount of $165,812. The fair value of the extension of
the warrants was calculated using the Black-Scholes option model using the
following assumptions: dividend yield of 0%, volatility of 50%, and a risk-free
interest rate of 5.63%.
* * * * *
F-43
<PAGE> 123
QUINTUS CORPORATION
PRO FORMA CONDENSED COMBINING
FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 1999 AND
SIX MONTHS ENDED SEPTEMBER 30, 1999
On September 10, 1999, Quintus entered into an Agreement and Plan of
Reorganization to acquire all of the outstanding shares and assume the
outstanding options and warrants of Acuity Corp. (Acuity), a company
specializing in providing Web based customer interaction software. Quintus will
issue a total of approximately 4,551,441 shares comprised of 1,546,586 shares of
common stock valued at approximately $12,760,000, approximately 3,004,855 shares
of Series G preferred stock valued at approximately $24,790,000, and assume
approximately 877,955 options and 323,927 warrants to purchase common and
preferred stock valued at approximately $7,670,000. The aggregate purchase
price, including approximately $300,000 of transaction costs not paid in stock,
will be approximately $45,520,000. The agreement is subject to shareholder
approval and will close prior to the effectiveness of this offering.
The acquisition will be accounted for using the purchase method of
accounting. The aggregate purchase price will be allocated to the assets and
liabilities acquired based on their fair value. The total consideration is
expected to exceed the fair value of the net assets acquired by approximately
$45,820,000, which represents the following estimated intangible assets:
<TABLE>
<CAPTION>
PERIOD OF
INTANGIBLE ASSET AMOUNT($) AMORTIZATION
---------------- ---------- ------------
<S> <C> <C>
In-process research and development................... 3,000,000 N/A
Purchased technology.................................. 700,000 4 years
Assembled workforce................................... 700,000 4 years
Trademark and trade name.............................. 1,200,000 5 years
Customer related intangibles.......................... 4,200,000 5 years
Goodwill.............................................. 36,020,000 5 years
----------
45,820,000
==========
</TABLE>
The acquired technology provides a comprehensive framework to manage
internet-based customer interactions, including Web self-service, Web chat,
browser-based collaboration and Web-call back. The in-process research and
development represents technology which has not yet reached technological
feasibility and does not have alternative future uses. This amount will be
charged to Quintus' operations in the period in which the transaction is
consummated. The in-process research and development was identified and valued
through extensive interviews and discussions with Quintus and Acuity management
and the analysis of data provided by Acuity concerning developmental products,
their respective stage of development, the time and resources needed to complete
them, their expected income generating ability, target markets and associated
risks. The Income Approach, which includes an analysis of the markets, cash
flows, and risks associated with achieving such cash flows, was the primary
technique utilized in valuing each in-process research and development project.
A portion of the purchase price was allocated to the developmental projects
based on the appraised fair values of such projects. The allocation of the
purchase price is preliminary and will not be finalized until the transaction is
consummated.
The accompanying pro forma financial statements are presented in accordance
with Article 11 of Regulation S-X.
The unaudited pro forma condensed combining balance sheet has been prepared
as if the acquisition was completed as of September 30, 1999. The unaudited pro
forma condensed combining
F-44
<PAGE> 124
statements of operations were prepared as if the acquisition was completed at
the beginning of the periods presented. To prepare the pro forma unaudited
condensed combining statements of operations, the Quintus statement of
operations for the year ended March 31, 1999 has been combined with the
statement of operations of Acuity for the year ended December 31, 1998. Acuity's
revenue of $6,719,000 for the year ended December 31, 1998 includes $5,504,000
of revenue related to a product line that was sold during the first quarter of
1999. Also, the statement of operations of both Quintus and Acuity have been
combined for the six months ended September 30, 1999. The statement of
operations of Acuity for the quarter ended March 31, 1999 which has been
excluded from these pro forma financial statements included revenues, operating
loss and net income of $765,000, $2.4 million, and $321,000, respectively. This
method of combining the companies is only for presentation of pro forma
unaudited condensed combining financial statements. Actual statements of
operations of the companies will be combined from the effective date of the
acquisition.
The pro forma earnings per share disclosed in the unaudited pro forma
condensed statements of operations have assumed the conversion of the 3,004,855
shares of preferred stock to be issued in connection with the acquisition into
common stock since these shares will automatically convert upon the
effectiveness of the Company's initial public offering.
The unaudited pro forma condensed combining financial statements should be
read in conjunction with the historical financial statements of Quintus and
Acuity.
The unaudited pro forma condensed combining statements of operations do not
include the one-time $3.0 million charge for purchased in-process technology
arising from this acquisition, as it is a material nonrecurring charge. This
charge will be included in the actual consolidated statement of operations of
Quintus when the acquisition is consummated.
F-45
<PAGE> 125
QUINTUS CORPORATION
PRO FORMA CONDENSED COMBINING BALANCE SHEETS
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
QUINTUS ACUITY ADJUSTMENTS NOTES COMBINED
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash...................................... $ 7,713 2,241 $ -- 9,954
Accounts receivable, less allowance for
doubtful accounts...................... 12,378 782 -- 13,160
Prepaid expenses and other assets......... 926 372 -- 1,298
-------- -------- ------- --------
Total current assets................... 21,017 3,395 -- 24,412
Property and equipment, net................. 3,133 916 -- 4,049
Purchased technology, less accumulated
amortization.............................. 1,445 -- 700 3 2,145
Intangible assets, less accumulated
amortization.............................. 2,043 -- 42,120 3 44,163
Other assets................................ 335 34 -- 369
-------- -------- ------- --------
Total assets........................... $ 27,973 4,345 $42,820 75,138
======== ======== ======= ========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Accounts payable.......................... $ 2,030 693 $ -- 2,723
Accrued liabilities....................... 4,931 626 300 5 5,857
Deferred revenue.......................... 5,377 1,549 -- 6,926
Borrowings under bank line of credit...... 4,368 721 -- 5,089
Current portion of long-term debt......... 1,393 544 -- 1,937
-------- -------- ------- --------
Total current liabilities.............. 18,099 4,133 300 22,532
Long-term debt, less current portion........ 1,331 504 -- 1,835
Redeemable convertible preferred stock...... 17,811 -- -- 17,811
STOCKHOLDERS' EQUITY (DEFICIENCY):
Preferred stock........................... 18 10 (7) 1, 2 21
Common stock.............................. 4 5 (3) 1, 2 6
Additional paid-in capital................ 30,310 25,482 19,733 1, 2 75,525
Notes receivable from stockholder......... (223) -- -- (223)
Deferred stock-based compensation......... (3,100) (160) 160 1 (3,100)
Treasury stock............................ -- (280) 280 1
Accumulated deficit....................... (36,277) (25,349) 22,357 1, 4 (39,269)
-------- -------- ------- --------
Total stockholders' equity
(deficiency)......................... (9,268) (292) 42,520 32,960
-------- -------- ------- --------
Total liabilities and stockholders'
equity (deficiency).................. $ 27,973 4,345 $42,820 75,138
======== ======== ======= ========
</TABLE>
See notes to pro forma consolidated financial statements.
F-46
<PAGE> 126
QUINTUS CORPORATION
PRO FORMA CONDENSED COMBINING STATEMENTS OF OPERATIONS
YEAR ENDED MARCH 31, 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
QUINTUS ACUITY
YEAR ENDED YEAR ENDED
MARCH 31, DECEMBER 31, PRO FORMA
1999 1998 ADJUSTMENTS NOTES PRO FORMA
(UNAUDITED) COMBINED
<S> <C> <C> <C> <C> <C>
Revenue.............................. $ 30,307 $ 6,719 $ -- $ 37,026
Cost of revenue...................... 9,177 1,381 -- 10,558
-------- ------- ------- --------
Gross profit......................... 21,130 5,338 -- 26,468
Operating Expenses:
Sales and marketing................ 17,147 6,312 -- 23,459
Research and development........... 6,719 4,390 -- 11,109
General and administrative......... 3,577 2,377 -- 5,954
Amortization of intangibles........ 3,185 -- 8,634 6 11,819
Stock-based compensation........... 171 -- -- 171
-------- ------- ------- --------
Total operating expenses... 30,799 13,079 8,634 52,512
-------- ------- ------- --------
Loss from operations................. (9,669) (7,741) (8,634) (26,044)
Other income (expense), net.......... (917) 57 -- (860)
-------- ------- ------- --------
Net loss from continuing
operations......................... $(10,586) $(7,684) $(8,634) $(26,904)
======== ======= ======= ========
Pro forma basic and diluted loss per
share from continuing operations... $ (0.51) $ (1.07)
======== ========
Shares used in pro forma basic and
diluted loss per share............. 20,563 4,551 7 25,114
======== ======= ========
</TABLE>
See notes to pro forma consolidated financial statement of operations.
F-47
<PAGE> 127
QUINTUS CORPORATION
PRO FORMA CONDENSED COMBINING STATEMENTS OF OPERATIONS
SIX MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
QUINTUS ACUITY ADJUSTMENTS NOTES COMBINED
<S> <C> <C> <C> <C> <C>
Revenue.................................... $22,090 $ 885 $ -- $ 22,975
Cost of revenue............................ 5,742 666 -- 6,408
------- ------- ------- --------
Gross profit............................... 16,348 219 16,567
Operating Expenses:
Sales and marketing...................... 9,438 2,277 -- 11,715
Research and development................. 3,974 1,965 -- 5,939
General and administrative............... 1,993 860 -- 2,853
Amortization of intangibles.............. 1,592 -- 4,317 6 5,909
Stock-based compensation................. 609 -- -- -- 609
------- ------- ------- --------
Total operating expenses......... 17,606 5,102 4,317 27,025
------- ------- ------- --------
Loss from operations....................... (1,258) (4,883) (4,317) (10,458)
Other income (expense), net................ (425) (46) -- -- (471)
------- ------- ------- --------
Net loss from continuing operations........ $(1,683) $(4,929) $(4,317) $(10,929)
======= ======= ======= ========
Pro forma basic and diluted loss per share
from continuing operations............... $ (0.08) $ (0.42)
======= ========
Shares used in pro forma basic and diluted
loss per share........................... 21,783 4,551 7 26,334
======= ======= ========
</TABLE>
See notes to pro forma consolidated financial statement of operations.
F-48
<PAGE> 128
QUINTUS CORPORATION
NOTES TO PRO FORMA CONDENSED COMBINING FINANCIAL STATEMENTS
FOR THE YEAR ENDED MARCH 31, 1999 AND STATEMENT OF
OPERATIONS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED)
The following pro forma adjustments have been made to the pro forma
condensed combining financial statements:
1. Reflects the elimination of Acuity's shareholders' equity comprised
of preferred stock of $10,000, common stock of $5,000, additional paid in
capital of $25,482,000, deferred stock-based compensation of $160,000,
treasury stock of $280,000 and accumulated deficit of $25,349,000.
2. Reflects the issuance of approximately 3,004,855 shares of
preferred stock valued at approximately $24,790,000, approximately
1,546,586 shares of common stock valued at approximately $12,760,000 and
the assumption of approximately 1,201,822 options and warrants to purchase
common and preferred stock valued at approximately $7,670,000.
3. Reflects the allocation of purchase price to the intangible assets
identified in the purchase price allocation.
4. Reflects the one-time charge of $3,000,000 for purchased in-process
technology identified in the purchase price allocation.
5. Reflects the accrual of estimated costs to be paid in cash directly
attributable to the completion of the acquisition.
6. Reflects pro forma amortization of the purchased intangibles over
the estimated useful lives as follows:
<TABLE>
<CAPTION>
AMORTIZATION
CHARGE
TWELVE MONTHS SIX MONTHS
ENDED ENDED
AMOUNT PERIOD MARCH 31, SEPTEMBER 30,
INTANGIBLE ASSET ($) OF AMORTIZATION 1999 1999
---------------- ---------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
Purchased Technology............ 700,000 4 years 175,000 87,500
Assembled Workforce............. 700,000 4 years 175,000 87,500
Trademark....................... 1,200,000 5 years 240,000 120,000
Customer related intangibles.... 4,200,000 5 years 840,000 420,000
Goodwill........................ 36,020,000 5 years 7,204,000 3,602,000
---------- --------- ---------
42,820,000 8,634,000 4,317,000
========== ========= =========
</TABLE>
7. Reflects the issuance of approximately 4,551,442 shares for the
acquisition of Acuity. This calculation assumes the conversion of 3,004,855
shares of preferred stock to be issued in connection with the acquisition
into common stock since these shares will automatically convert upon the
effectiveness of the Company's initial public offering.
F-49
<PAGE> 129
APPENDIX TO GRAPHICS
INSIDE FRONT COVER
Graphic: The right and left sides of the page are illustrated with vertical
collages of people using computers, talking on telephones and acting as customer
service agents.
Caption: The upper left corner contains the QUINTUS logo and phrase, "e-Customer
Relationship Management for the Internet Economy." The center of the page
contains the phrase "Managing customer interactions across the Internet, email
and the telephone."
GATEFOLD
The top, right side of the gatefold contains the text "Quintus eContact," and
below it "e-Customer Relationship Management for the Internet Economy." The
center of the gatefold contains a square graphical representation of the
eContact software product. On the right side of the square are two pictures
with text illustrating "Customer Interaction Repository" and "Distributed
Real-Time Data Sharing." On the left side of the square, placed vertically, are
the text phrases "Personalization and Workflow," "Channel Applications,"
"Business Applications" and Consolidated Reporting." Leading out of the left
side of the square is a hairline connection to three pictures with text
illustrating "Web," "Email" and "Voice." On the right side of the square is a
picture with text illustrating "Enterprise Data." Above the square and below
the top text are two bullet points that read "Customer service, support and
sales through the Internet, email and the telephone" and "Consistent
personalization, routing and management of customer interactions across
communication channels." Below the square are two bullet points that read
"Allows e-commerce businesses to add online customer service to Web sites" and
"Allows traditional businesses to automate and extend existing contact centers
to new communication channels."
INSIDE BACK COVER
Placed in the middle of the page which is largely blank is the Quintus "Q"
logo, the name "QUINTUS" and the phrase "e-Customer Relationship Management for
the Internet Economy."
Page 41:
"The Quintus eContact Suite" appears above the rectangular graphic. Across the
top of the graphic (from left to right), the phrases "Channel Applications,"
eContact Engine" and "Business Applications" break up the rectangular box into
three main columns. The left-hand column is broken into five vertical segments
entitled (from top to bottom) "Computer Telephony Integration," "Web
Interaction," "Email Management," "Electronic Commerce Connector" and "Network
Routing." The word "eContact" appears in the center of the large middle column.
In the corners of the middle column, appearing above and below "eContact," are
the phrases "Personalization Services," "Coordination Services," Centralized
Customization & Administration" and "Consolidated Repository & Reporting." The
right-hand column contains the phrases (from top to bottom) "Sales & Service,"
"Consumer Relations," "Technical Support" and "Human Resources." Two narrow
sub-columns, vertically labeled "Enterprise Data Access" and "Agent Console"
separate the large middle column from the right-hand column.
<PAGE> 130
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
, 1999
LOGO
4,000,000 SHARES OF COMMON STOCK
-------------------------
PROSPECTUS
-------------------------
DONALDSON, LUFKIN & JENRETTE
DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER INCORPORATED
SG COWEN
DLJDIRECT INC.
- --------------------------------------------------------------------------------
We have not authorized any dealer, sales person or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor any
sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or the affairs of Quintus have
not changed since the date hereof.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Until , 1999 (25 days after the date of this prospectus), all
dealers that effect transactions in these shares of common stock may be required
to deliver a prospectus. This is in addition to the dealer's obligation to
deliver a prospectus when acting as an underwriter and with respect to their
unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
<PAGE> 131
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by Quintus in connection with
the sale of Common Stock being registered. All amounts are estimates except the
SEC registration fee and the NASD filing fees.
<TABLE>
<S> <C>
SEC Registration fee........................................ $ 16,624
NASD fee.................................................... 7,228
Nasdaq National Market listing fee.......................... 95,000
Printing and engraving expenses.............................
Legal fees and expenses.....................................
Accounting fees and expenses................................
Blue sky fees and expenses..................................
Transfer agent fees.........................................
Miscellaneous fees and expenses.............................
----------
Total............................................. $1,200,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's board of directors to grant indemnification to
directors and officers, including reimbursement for expenses incurred, in terms
sufficiently broad to permit such indemnification under certain circumstances
for liabilities arising under the Securities Act of 1933, as amended (the
"Securities Act"). Article VII, Section 6, of the Registrant's bylaws provides
for mandatory indemnification of its directors and permissible indemnification
of officers and employees to the maximum extent permitted by the Delaware
General Corporation Law. The Registrant's certificate of incorporation provides
that, pursuant to Delaware law, its directors shall not be liable for monetary
damages for breach of the directors' fiduciary duty as directors to Quintus and
its stockholders. This provision in the certificate of incorporation does not
eliminate the directors' fiduciary duty, and in appropriate circumstances
equitable remedies such as injunctive or other forms of non-monetary relief will
remain available under Delaware law. In addition, each director will continue to
be subject to liability for breach of the director's duty of loyalty to Quintus
for acts or omissions not in good faith or involving intentional misconduct, for
knowing violations of law, for actions leading to improper personal benefit to
the director, and for payment of dividends or approval of stock repurchases or
redemptions that are unlawful under Delaware law. The provision also does not
affect a director's responsibilities under any other law, such as the federal
securities laws or state or federal environmental laws. The Registrant has
entered into indemnification agreements with its officers and directors, a form
of which is attached as Exhibit 10.1 hereto and incorporated herein by
reference. The indemnification agreements provide the Registrant's officers and
directors with further indemnification to the maximum extent permitted by the
Delaware General Corporation Law. Reference is made to Section 7 of the
Underwriting Agreement contained in Exhibit 1.1 hereto, indemnifying officers
and directors of the Registrant against certain liabilities.
II-1
<PAGE> 132
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since September 1, 1996, we have issued and sold the following securities:
1. On September 17, 1996, we issued and sold an aggregate of 2,595,422
shares of our Series C Preferred Stock to a group of five investors for an
aggregate purchase price of $4,957,256.02. On December 18, 1996, we issued and
sold 52,356 shares of our Series C Preferred Stock to one investor for an
aggregate purchase price of $99,999.96.
2. On November 10, 1997, we issued and sold an aggregate of 1,091,362
shares of our Series D Preferred Stock to a group of three investors for an
aggregate purchase price of $3,000,000.00. On that same date, in connection with
our acquisition of Nabnasset Corporation, we issued an additional aggregate of
363,634 shares of our Series D Preferred Stock to the same three investors in
exchange for the outstanding shares of Series A preferred stock of Nabnasset
Corporation.
3. On November 10, 1997, in connection with the acquisition of Nabnasset
Corporation, we assumed two warrants issued by Nabnasset on February 12, 1997.
These two warrants are exercisable for an aggregate of 8,466 shares of our
common stock.
4. On November 10, 1997, we issued and sold six warrants to purchase an
aggregate of 72,287 shares of our common stock to a group of six investors at a
per share exercise price of $4.54.
5. On November 10, 1997, in connection with our acquisition of Nabnasset,
we assumed a warrant issued by Nabnasset to its financial advisor on that same
date. The assumed warrant is exercisable for 76,047 shares of our common stock.
On March 9, 1998, Nabnasset's financial advisor transferred warrants to purchase
an aggregate of 18,252 shares of our common stock to a group of four investors.
6. On March 12, 1998, we issued and sold two warrants to purchase an
aggregate of 13,142 shares of our common stock to two investors at a per share
exercise price of $0.30.
7. On March 16, 1998, we issued and sold a warrant to purchase an aggregate
of 9,857 shares of our common stock to an investor at a per share exercise price
of $0.30.
8. On March 17, 1998, we issued and sold three warrants to purchase an
aggregate of 13,143 shares of our common stock to an investor at a per share
exercise price of $0.30.
9. On April 30, 1998, we issued and sold six warrants to purchase an
aggregate of 24,093 shares of our common stock to six investors at a per share
exercise price of $0.30.
10. On May 21, 1998, we issued and sold an aggregate of 2,538,335 shares of
our Series E Preferred Stock to a group of thirteen investors for an aggregate
purchase price of $10,534,090.25. On May 27, 1998, we issued and sold an
additional aggregate of 66,266 shares of our Series E Preferred Stock to a group
of three investors for an aggregate purchase price of $275,003.90.
11. On May 21, 1998, we issued and sold twelve warrants to purchase an
aggregate of 253,008 shares of our common stock to twelve investors at a per
share exercise price of $0.30.
12. On August 26, 1999, we issued and sold an aggregate of 1,363,334 shares
of our Series F Preferred Stock to a group of three investors for an aggregate
purchase price of $11,247,505.50.
13. On September 2, 1999, we issued and sold a warrant to purchase an
aggregate of 300,000 shares of our common stock at a per share exercise price of
$7.50.
II-2
<PAGE> 133
14. From October 1, 1996 to September 30, 1999, we issued an aggregate of
2,617,339 shares of common stock to our employees, consultants and other service
providers pursuant to exercises of options under our stock option plans (Exhibit
10.2).
The sale of the above securities were deemed to be exempt from registration
under the Securities Act in reliance upon Section 4(2) of the Securities Act or
Regulation D promulgated thereunder, or Rule 701 promulgated under Section 3(b)
of the Securities Act, as transactions by an issuer not involving any public
offering or transactions under compensation benefit plans and contracts relating
to compensation as provided under Rule 701, or Section 3(a)(10) of the
Securities Act as a security issued after a ruling by an authorized authority
upon the fairness of the transaction's terms and conditions. With regard to the
sales of securities exempted by Section 4(2) of the Securities Act, the
recipients of securities in each transaction represented their intentions to
acquire the securities for investment only and not with a view to or for sale in
connection with any distribution and appropriate legends were affixed to the
share certificates issued in these transactions. All recipients had adequate
access, through their relationships with us, to information about us.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
2.1* Agreement and Plan of Reorganization by and among
Registrant, Acuity Corp., Ribeye Acquisition Corp. and
certain stockholders of Acuity Corp., dated September 10,
1999.
3.1* Certificate of Incorporation of Registrant, as amended to
date.
3.2* Form of Registrant's Restated Certificate of Incorporation
to be filed upon the closing of Registrant's acquisition of
Acuity Corp.
3.3* Form of Registrant's Restated Certificate of Incorporation
to be filed upon the closing of this offering.
3.4* Amended and Restated Bylaws of Registrant.
3.5* Form of Amended and Restated Bylaws to be filed upon the
closing of this offering.
4.1* Reference is made to Exhibits 3.1, 3.2, 3.3, and 3.4.
4.2 Specimen Common Stock certificate.
4.3* Form of Registrant's Amended and Restated Investors Rights
Agreement to be adopted upon the closing of Registrant's
acquisition of Acuity Corp.
5.1* Opinion of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP.
10.1* Form of Indemnification Agreement to be entered into between
Registrant and each of its directors and officers.
10.2* 1995 Stock Option Plan and form of stock purchase agreement
thereunder.
10.3* 1999 Stock Incentive Plan and forms of agreements
thereunder.
10.4* Employee Stock Purchase Plan.
10.5* 1999 Director Option Plan.
10.6* Light Industrial Lease between Registrant and Teachers
Insurance and Annuity Association of America, dated October
6, 1995.
10.7* Sublease between Registrant and Oryx Technology Corporation
and SurgX Corporation, dated October 1, 1999.
10.8*+ Software Distribution Agreement dated May 5, 1997, between
Nabnasset Corporation and Lucent Technologies Inc.
10.10*+ Authorized OEM/Reseller Agreement dated December 22, 1998,
between Registrant and Brightware, Inc.
</TABLE>
II-3
<PAGE> 134
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.11* Employment agreement between Registrant and Alan Anderson,
dated May 23, 1995 and Notice of Grant of Stock Option.
10.12* Employment agreement between Registrant and John Burke,
dated June 11, 1999.
10.13* Loan and Security Agreement between Registrant and Silicon
Valley Bank, dated as of September 18, 1998.
10.14* Sublease Agreement between Pavilion Technologies, Inc. and
Acuity Corporation, dated December 19, 1996.
16.1* Letter regarding change in certifying accountant.
21.1* Subsidiaries of Registrant.
23.1 Consent of Deloitte & Touche LLP, Independent Auditor
23.2 Consent of Ernst & Young LLP Independent Auditors
23.3 Consent of PricewaterhouseCoopers LLP, Independent
Accountants
23.4* Consent of Counsel. Reference is made to Exhibit 5.1.
24.1* Power of Attorney (see page II-7).
27.1* Financial Data Schedule.
</TABLE>
- -------------------------
* Previously filed.
+ Portions of these exhibits have been omitted pursuant to a request for
confidential treatment.
(b) FINANCIAL STATEMENT SCHEDULES
Schedule II--Valuation and Qualifying Accounts
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the Delaware General Corporation Law, the Certificate of
Incorporation or the Bylaws of the Registrant, the Underwriting Agreement, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act, and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered hereunder, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of Prospectus filed by the Registrant pursuant to
II-4
<PAGE> 135
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this Registration Statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 136
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Fremont,
State of California, on this 8th day of November, 1999.
QUINTUS CORPORATION
By: /s/ ALAN K. ANDERSON
------------------------------------
Alan K. Anderson
Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS AMENDMENT TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING
PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES
INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ ALAN K. ANDERSON Chief Executive Officer November 8, 1999
- -------------------------------------------------------- (Principal Executive
Alan K. Anderson Officer) and Director
/s/ SUSAN SALVESEN Chief Financial Officer November 8, 1999
- -------------------------------------------------------- (Principal Financial
Susan Salvesen and Accounting Officer)
and Secretary
* Director November 8, 1999
- --------------------------------------------------------
Paul H. Bartlett
* Director Nominee November 8, 1999
- --------------------------------------------------------
Andrew Busey
* Director November 8, 1999
- --------------------------------------------------------
Fredric W. Harman
* Director November 8, 1999
- --------------------------------------------------------
William Herman
* Director November 8, 1999
- --------------------------------------------------------
Alexander Rosen
* Director November 8, 1999
- --------------------------------------------------------
Robert W. Shaw
</TABLE>
II-6
<PAGE> 137
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
* Director November 8, 1999
- --------------------------------------------------------
Jeanne Wohlers
*By: /s/ SUSAN SALVESEN
----------------------------------------------------
Susan Salvesen
Attorney-in-Fact
</TABLE>
II-7
<PAGE> 138
REPORT ON SCHEDULE OF DELOITTE & TOUCHE LLP, INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
of Quintus Corporation:
We have audited the consolidated financial statements of Quintus
Corporation (the Company) as of and for the year ended March 31, 1999, and have
issued our report thereon dated June 18, 1999 (September 29, 1999 as to Note 15)
(included elsewhere in this registration statement). Our audit also included the
financial statement schedule of the Company for the year ended March 31, 1999,
listed in Item 16(b). The financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion based on
our audit. In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
San Jose, California
June 18, 1999
S-1
<PAGE> 139
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Quintus Corporation
We have audited the consolidated financial statements of Quintus
Corporation as of March 31, 1998, and for the two years in the period then
ended, and have issued our report thereon dated April 30, 1998 (included
elsewhere in this Registration Statement). Our audits also included the data for
the two years ended March 31, 1998 included in the financial statement schedules
listed in Item 16(b) of this Registration Statement. These schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Palo Alto, California
April 30, 1998
S-2
<PAGE> 140
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE CHARGED BALANCE
AT TO COST AT
BEGINNING AND END OF
OF PERIOD EXPENSES WRITE-OFFS PERIOD
--------- -------- ---------- -------
<S> <C> <C> <C> <C>
Year ended March 31, 1997
Allowance for doubtful accounts............... $569 $255 $(299) $525
==== ==== ===== ====
Year ended March 31, 1998
Allowance for doubtful accounts............. $525 $408 $ (85) $848
==== ==== ===== ====
Year ended March 31, 1999
Allowance for doubtful accounts............. $848 $235 $(354) $729
==== ==== ===== ====
</TABLE>
S-3
<PAGE> 141
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
2.1* Agreement and Plan of Reorganization by and among
Registrant, Acuity Corp., Ribeye Acquisition Corp. and
certain stockholders of Acuity Corp., dated September 10,
1999.
3.1* Certificate of Incorporation of Registrant, as amended to
date.
3.2* Form of Registrant's Restated Certificate of Incorporation
to be filed upon the closing of Registrant's acquisition of
Acuity Corp.
3.3* Form of Registrant's Restated Certificate of Incorporation
to be filed upon the closing of this offering.
3.4* Amended and Restated Bylaws of Registrant.
3.5* Form of Amended and Restated Bylaws to be filed upon the
closing of this offering.
4.1* Reference is made to Exhibits 3.1, 3.2, 3.3, and 3.4.
4.2 Specimen Common Stock certificate.
4.3* Form of Registrant's Amended and Restated Investors Rights
Agreement to be adopted upon the closing of Registrant's
acquisition of Acuity Corp.
5.1* Opinion of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP.
10.1* Form of Indemnification Agreement to be entered into between
Registrant and each of its directors and officers.
10.2* 1995 Stock Option Plan and form of stock purchase agreement
thereunder.
10.3* 1999 Stock Incentive Plan and forms of agreements
thereunder.
10.4* Employee Stock Purchase Plan.
10.5* 1999 Director Option Plan.
10.6* Light Industrial Lease between Registrant and Teachers
Insurance and Annuity Association of America, dated October
6, 1995.
10.7* Sublease between Registrant and Oryx Technology Corporation
and SurgX Corporation, dated October 1, 1999.
10.8*+ Software Distribution Agreement dated May 5, 1997, between
Nabnasset Corporation and Lucent Technologies Inc.
10.10*+ Authorized OEM/Reseller Agreement dated December 22, 1998,
between Registrant and Brightware, Inc.
10.11* Employment agreement between Registrant and Alan Anderson,
dated May 23, 1995 and Notice of Grant of Stock Option.
10.12* Employment agreement between Registrant and John Burke,
dated June 11, 1999.
10.13* Loan and Security Agreement between Registrant and Silicon
Valley Bank, dated as of September 18, 1998.
10.14* Sublease Agreement between Pavilion Technologies, Inc. and
Acuity Corporation, dated December 19, 1996.
16.1* Letter regarding change in certifying accountant.
21.1* Subsidiaries of Registrant.
23.1 Consent of Deloitte & Touche LLP, Independent Auditor
23.2 Consent of Ernst & Young LLP Independent Auditors
23.3 Consent of PricewaterhouseCoopers LLP, Independent
Accountants
23.4* Consent of Counsel. Reference is made to Exhibit 5.1.
24.1* Power of Attorney (see page II-7).
27.1* Financial Data Schedule.
</TABLE>
- -------------------------
* Previously filed.
+ Portions of these exhibits have been omitted pursuant to a request for
confidential treatment.
<PAGE> 1
EXHIBIT 1.1
4,000,000 Shares
QUINTUS CORPORATION
Common Stock
UNDERWRITING AGREEMENT
NOVEMBER ___, 1999
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
DAIN RAUSCHER WESSELS,
a division of Dain Rauscher Incorporated
SG COWEN SECURITIES CORPORATION
DLJdirect Inc.
As representatives of the
several Underwriters
named in Schedule I hereto
c/o Donaldson, Lufkin & Jenrette
Securities Corporation
277 Park Avenue
New York, New York 10172
Ladies and Gentlemen:
Quintus Corporation, a Delaware corporation (the "COMPANY"), proposes to
issue and sell 4,000,000 SHARES of its Common Stock, $0.001 par value, (the
"FIRM SHARES") to the several underwriters named in Schedule I hereto (the
"UNDERWRITERS"). The Company also proposes to issue and sell to the several
Underwriters not more than an additional 600,000 SHARES of its Common Stock,
$0.001 par value, (the "ADDITIONAL SHARES") if requested by the Underwriters as
provided in Section 2 hereof. The Firm Shares and the Additional Shares are
hereinafter referred to collectively as the "SHARES". The shares of common stock
of the Company to be outstanding after giving effect to the sales contemplated
hereby are hereinafter referred to as the "COMMON STOCK".
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<PAGE> 2
SECTION 1. Registration Statement and Prospectus. The Company has prepared
and filed with the Securities and Exchange Commission (the "COMMISSION") in
accordance with the provisions of the Securities Act of 1933, as amended, and
the rules and regulations of the Commission thereunder (collectively, the
"ACT"), a registration statement on Form S-1, including a prospectus, relating
to the Shares. The registration statement, as amended at the time it became
effective, including the information (if any) deemed to be part of the
registration statement at the time of effectiveness pursuant to Rule 430A under
the Act, is hereinafter referred to as the "REGISTRATION STATEMENT"; and the
prospectus in the form first used to confirm sales of Shares is hereinafter
referred to as the "PROSPECTUS". If the Company has filed or is required
pursuant to the terms hereof to file a registration statement pursuant to Rule
462(b) under the Act registering additional shares of Common Stock (a "RULE
462(B) REGISTRATION STATEMENT"), then, unless otherwise specified, any reference
herein to the term "Registration Statement" shall be deemed to include such Rule
462(b) Registration Statement.
SECTION 2. Agreements to Sell and Purchase and Lock-Up Agreements. On the
basis of the representations and warranties contained in this Agreement, and
subject to its terms and conditions, the Company agrees to issue and sell, and
each Underwriter agrees, severally and not jointly, to purchase from the Company
at a price per Share of $______ (the "PURCHASE PRICE") the number of Firm Shares
set forth opposite the name of such Underwriter in Schedule I hereto.
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company agrees to issue
and sell the Additional Shares and the Underwriters shall have the right to
purchase, severally and not jointly, up to 600,000 ADDITIONAL Shares from the
Company at the Purchase Price. Additional Shares may be purchased solely for the
purpose of covering over-allotments made in connection with the offering of the
Firm Shares. The Underwriters may exercise their right to purchase Additional
Shares in whole or in part from time to time by giving written notice thereof to
the Company within 30 days after the date of this Agreement. You shall give any
such notice on behalf of the Underwriters and such notice shall specify the
aggregate number of Additional Shares to be purchased pursuant to such exercise
and the date for payment and delivery thereof, which date shall be a business
day (i) no earlier than two business days after such notice has been given (and,
in any event, no earlier than the Closing Date (as hereinafter defined)) and
(ii) no later than ten business days after such notice has been given. If any
Additional Shares are to be purchased, each Underwriter, severally and not
jointly, agrees to purchase from the Company the number of Additional Shares
(subject to such adjustments to eliminate fractional shares as you may
determine) which bears the same proportion to the total number of Additional
Shares to be purchased from the Company as the number of Firm Shares set forth
opposite the name of such Underwriter in Schedule I bears to the total number of
Firm Shares.
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<PAGE> 3
The Company hereby agrees, FOR A PERIOD OF 180 DAYS AFTER THE DATE OF THE
PROSPECTUS WITHOUT THE PRIOR WRITTEN CONSENT OF DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION, not to (i) offer, pledge, sell, contract to sell, sell
any option or contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase, or otherwise transfer or dispose
of, directly or indirectly, any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock, (ii) enter
into any swap or other arrangement that transfers all or a portion of the
economic consequences associated with the ownership of any Common Stock
(regardless of whether any of the transactions described in clause (i) or (ii)
is to be settled by the delivery of Common Stock, or such other securities, in
cash or otherwise), except to the Underwriters pursuant to this Agreement OR
(III) RELEASE OR AGREE TO THE RELEASE OF ANY RESTRICTION ON TRANSFER CONTAINED
IN THE COMPANY'S BYLAWS OR ANY CONTRACT BETWEEN THE COMPANY AND ITS STOCKHOLDERS
(INCLUDING ANY HOLDERS OF OPTIONS, WARRANTS OR OTHER RIGHTS TO ACQUIRE CAPITAL
STOCK OF THE COMPANY) THAT RELATES TO A PROHIBITION ON STOCK DISPOSITIONS DURING
THE PERIOD ENDING 180 days after the date of the Prospectus. Notwithstanding
the foregoing, during such period (i) the Company may grant stock or stock
options pursuant to the Company's 1999 Stock Incentive Plan and 1999 Director
Option Plan, (ii) the Company may issue shares of Common Stock upon the exercise
of an option or warrant or the conversion of a security outstanding on the date
hereof and (iii) the Company may issue shares of Common Stock in connection with
employee subscriptions under the Company's Employee Stock Purchase Plan. The
Company also agrees not to file any registration statement with respect to any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock for a period of 180 days after the date of the
Prospectus without the prior written consent of Donaldson, Lufkin & Jenrette
Securities Corporation. The Company shall, prior to or concurrently with the
execution of this Agreement, deliver an agreement executed by (i) each of the
directors and officers of the Company and (ii) each stockholder of the Company
and each holder of any right to acquire capital stock of the Company except for
those holders where the failure to execute such agreement is approved by
Donaldson, Lufkin and Jenrette Securities Corporation, to the effect that such
person will not, during the period commencing on the date such person signs such
agreement and ending 180 days after the date of the Prospectus, without the
prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation,
(A) engage in any of the transactions described in the first sentence of this
paragraph or (B) make any demand for, or exercise any right with respect to, the
registration of any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock.
The Company hereby confirms its engagement of Dain Rauscher Wessels ("DRW")
as, and DRW hereby confirms its agreement with the Company to render services
as, a "qualified independent underwriter", within the meaning of Section (b)(15)
of Rule 2720 of the Conduct Rules of the National Association of Securities
Dealers, Inc. with respect to the offering and sale of the Shares. DRW solely in
its capacity as the qualified independent underwriter and not otherwise, is
referred to herein as the "QIU".
3
<PAGE> 4
As compensation for the services of the QIU hereunder, the Company agrees to pay
the QIU $10,000 on the Closing Date. The price at which the Shares will be sold
to the public shall not be higher than the maximum price recommended by the QIU.
SECTION 3. Terms of Public Offering. The Company is advised by you that the
Underwriters propose (i) to make a public offering of their respective portions
of the Shares as soon after the execution and delivery of this Agreement as in
your judgment is advisable and (ii) initially to offer the Shares upon the terms
set forth in the Prospectus.
SECTION 4. Delivery and Payment. The Shares shall be represented by
definitive certificates and shall be issued in such authorized denominations and
registered in such names as Donaldson, Lufkin & Jenrette Securities Corporation
shall request no later than two business days prior to the Closing Date or the
applicable Option Closing Date (as defined below), as the case may be. The
Company shall deliver the Shares, with any transfer taxes thereon duly paid by
the respective Sellers, to Donaldson, Lufkin & Jenrette Securities Corporation
through the facilities of The Depository Trust Company ("DTC"), for the
respective accounts of the several Underwriters, against payment to the Company
of the Purchase Price therefore by wire transfer of Federal or other funds
immediately available in New York City. The certificates representing the Shares
shall be made available for inspection not later than 9:30 A.M., New York City
time, on the business day prior to the Closing Date or the applicable Option
Closing Date, as the case may be, at the office of DTC or its designated
custodian (the "DESIGNATED OFFICE"). The time and date of delivery and payment
for the Firm Shares shall be 9:00 A.M., New York City time, on NOVEMBER ___,
1999 or such other time on the same or such other date as Donaldson, Lufkin &
Jenrette Securities Corporation and the Company shall agree in writing. The time
and date of delivery for the Firm Shares are hereinafter referred to as the
"CLOSING DATE". The time and date of delivery and payment for any Additional
Shares to be purchased by the Underwriters shall be 9:00 A.M., New York City
time, on the date specified in the applicable exercise notice given by you
pursuant to Section 2 or such other time on the same or such other date as
Donaldson, Lufkin & Jenrette Securities Corporation and the Company shall agree
in writing. The time and date of delivery for any Additional Shares are
hereinafter referred to as an "OPTION CLOSING DATE".
The documents to be delivered on the Closing Date or any Option Closing
Date on behalf of the parties hereto pursuant to Section 8 of this Agreement
shall be delivered at the offices of Gunderson Dettmer Stough Villeneuve
Franklin & Hachigian, LLP., 155 Constitution Drive, Menlo Park, California
94025, and the Shares shall be delivered at the Designated Office, all on the
Closing Date or such Option Closing Date, as the case may be.
SECTION 5. Agreements of the Company. The Company agrees with you:
(a) To advise you promptly and, if requested by you, to confirm such
advice in writing, (i) of any request by the Commission for amendments to the
Registration
4
<PAGE> 5
Statement or amendments or supplements to the Prospectus or for additional
information, (ii) of the issuance by the Commission of any stop order suspending
the effectiveness of the Registration Statement or of the suspension of
qualification of the Shares for offering or sale in any jurisdiction, or the
initiation of any proceeding for such purposes, (iii) when any amendment to the
Registration Statement becomes effective, (iv) if the Company is required to
file a Rule 462(b) Registration Statement after the effectiveness of this
Agreement, when the Rule 462(b) Registration Statement has become effective and
(v) of the happening of any event during the period referred to in Section 5(d)
below which makes any statement of a material fact made in the Registration
Statement or the Prospectus untrue or which requires any additions to or changes
in the Registration Statement or the Prospectus in order to make the statements
therein not misleading. If at any time the Commission shall issue any stop order
suspending the effectiveness of the Registration Statement, the Company will use
its best efforts to obtain the withdrawal or lifting of such order at the
earliest possible time.
(b) To furnish to you five signed copies of the Registration Statement as
first filed with the Commission and of each amendment to it, including all
exhibits, and to furnish to you and each Underwriter designated by you such
number of conformed copies of the Registration Statement as so filed and of each
amendment to it, without exhibits, as you may reasonably request.
(c) To prepare the Prospectus, the form and substance of which shall be
satisfactory to you, and to file the Prospectus in such form with the Commission
within the applicable period specified in Rule 424(b) under the Act; during the
period specified in Section 5(d) below, not to file any further amendment to the
Registration Statement and not to make any amendment or supplement to the
Prospectus of which you shall not previously have been advised or to which you
shall reasonably object after being so advised; and, during such period, to
prepare and file with the Commission, promptly upon your reasonable request, any
amendment to the Registration Statement or amendment or supplement to the
Prospectus which may be necessary or advisable in connection with the
distribution of the Shares by you, and to use its best efforts to cause any such
amendment to the Registration Statement to become promptly effective.
(d) Prior to 10:00 A.M., New York City time, on the SECOND business day
after the date of this Agreement and from time to time thereafter for such
period as in the opinion of counsel for the Underwriters a prospectus is
required by law to be delivered in connection with sales by an Underwriter or a
dealer, to furnish in New York City to each Underwriter and any dealer as many
copies of the Prospectus (and of any amendment or supplement to the Prospectus)
as such Underwriter or dealer may reasonably request.
(e) If during the period specified in Section 5(d), any event shall occur
or condition shall exist as a result of which, in the reasonable opinion of
counsel for the Underwriters, it becomes necessary to amend or supplement the
Prospectus in order to make the statements therein, in the light of the
circumstances when the Prospectus is
5
<PAGE> 6
delivered to a purchaser, not misleading, or if, in the reasonable opinion of
counsel for the Underwriters, it is necessary to amend or supplement the
Prospectus to comply with applicable law, forthwith to prepare and file with the
Commission an appropriate amendment or supplement to the Prospectus so that the
statements in the Prospectus, as so amended or supplemented, will not in the
light of the circumstances when it is so delivered, be misleading, or so that
the Prospectus will comply with applicable law, and to furnish to each
Underwriter and to any dealer as many copies thereof as such Underwriter or
dealer may reasonably request.
(f) Prior to any public offering of the Shares, to cooperate with you and
counsel for the Underwriters in connection with the registration or
qualification of the Shares for offer and sale by the several Underwriters and
by dealers under the state securities or Blue Sky laws of such jurisdictions as
you may reasonably request, to continue such registration or qualification in
effect so long as reasonably required for distribution of the Shares and to file
such consents to service of process or other documents as may be necessary in
order to effect such registration or qualification; provided, however, that the
Company shall not be required in connection therewith to qualify as a foreign
corporation in any jurisdiction in which it is not now so qualified or to take
any action that would subject it to general consent to service of process or
taxation other than as to matters and transactions relating to the Prospectus,
the Registration Statement, any preliminary prospectus or the offering or sale
of the Shares, in any jurisdiction in which it is not now so subject.
(g) To mail and make generally available to its stockholders as soon as
reasonably practicable an earnings statement covering the twelve-month period
ending December 31, 2000 that shall satisfy the provisions of Section 11(a) of
the Act, and to advise you in writing when such statement has been so made
available.
(h) During the period of three years after the date of this Agreement, to
furnish to you as soon as available copies of all reports or other
communications furnished to the record holders of Common Stock or furnished to
or filed with the Commission or any national securities exchange on which any
class of securities of the Company is listed and such other publicly available
information concerning the Company and its subsidiaries as you may reasonably
request.
(i) Whether or not the transactions contemplated in this Agreement are
consummated or this Agreement is terminated, to pay or cause to be paid all
expenses incident to the performance of its obligations under this Agreement,
including: (i) the fees, disbursements and expenses of the Company's counsel and
the Company's accountants in connection with the registration and delivery of
the Shares under the Act and all other fees and expenses in connection with the
preparation, printing, filing and distribution of the Registration Statement
(including financial statements and exhibits), any preliminary prospectus, the
Prospectus and all amendments and supplements to any of the foregoing, including
the mailing and delivering of copies thereof to the
6
<PAGE> 7
Underwriters and dealers in the quantities specified herein, (ii) all costs and
expenses related to the transfer and delivery of the Shares to the Underwriters,
including any transfer or other taxes payable thereon, (iii) all costs of
printing or producing this Agreement and any other agreements or documents in
connection with the offering, purchase, sale or delivery of the Shares, (iv) all
expenses in connection with the registration or qualification of the Shares for
offer and sale under the securities or Blue Sky laws of the several states and
all costs of printing or producing any Preliminary and Supplemental Blue Sky
Memoranda in connection therewith (including the filing fees and fees and
disbursements of counsel for the Underwriters in connection with such
registration or qualification and memoranda relating thereto), (v) the filing
fees and disbursements of counsel for the Underwriters in connection with the
review and clearance of the offering of the Shares by the National Association
of Securities Dealers, Inc., (vi) all fees and expenses in connection with the
preparation and filing of the registration statement on Form 8-A relating to the
Common Stock and all costs and expenses incident to the listing of the Shares on
the Nasdaq National Market, (vii) the cost of printing certificates representing
the Shares, (viii) the costs and charges of any transfer agent, registrar and/or
depositary, (ix) the fees and expenses of the QIU (including the fees and
disbursements of counsel to the QIU), (x) ALL COSTS INCURRED BY THE COMPANY IN
CONNECTION WITH ANY MEETINGS WITH PROSPECTIVE INVESTORS IN THE SHARES, AND (xi)
all other costs and expenses incident to the performance of the obligations of
the Company hereunder for which provision is not otherwise made in this Section;
provided, however, that except for the Company's specific payment obligations
under this SECTION 5(i), the Underwriters agree to pay all of their own costs
and expenses, including without limitation the fees and expenses of their
counsel, incurred in connection with the transactions contemplated by this
Agreement.
(j) To use its best efforts to list for quotation the Shares on the Nasdaq
National Market and to maintain the listing of the Shares on the Nasdaq National
Market.
(k) To use its best efforts to do and perform all things required or
necessary to be done and performed under this Agreement by the Company prior to
the Closing Date or any Option Closing Date, as the case may be, and to satisfy
all conditions precedent to the delivery of the Shares.
(l) If the Registration Statement at the time of the effectiveness of this
Agreement does not cover all of the Shares, to file a Rule 462(b) Registration
Statement with the Commission registering the Shares not so covered in
compliance with Rule 462(b) by 10:00 P.M., New York City time, on the date of
this Agreement and to pay to the Commission the filing fee for such Rule 462(b)
Registration Statement at the time of the filing thereof or to give irrevocable
instructions for the payment of such fee pursuant to Rule 111(b) under the Act.
(m) FOR A PERIOD OF 180 DAYS FROM THE DATE OF THIS AGREEMENT, (A) TO AFFIX
ON EACH CERTIFICATE EVIDENCING SHARES OF THE COMPANY'S CAPITAL STOCK ISSUED TO
7
<PAGE> 8
FORMER HOLDERS OF THE CAPITAL STOCK (INCLUDING HOLDERS OF ANY OPTIONS, WARRANTS
OR RIGHTS TO ACQUIRE SUCH CAPITAL STOCK) OF ACUITY CORPORATION A LEGEND
SUMMARIZING THE RESTRICTION ON TRANSFER SET FORTH IN SECTION ___ OF THE BYLAWS
OF THE COMPANY, AND (B) IMPOSE STOP-TRANSFER INSTRUCTIONS WITH RESPECT TO EACH
SUCH FORMER HOLDER WHO HAS NOT TENDERED A LOCK-UP AGREEMENT TO THE
REPRESENTATIVE AS OF THE DATE OF THIS AGREEMENT, AND CAUSE SUCH INSTRUCTIONS TO
REMAIN IN EFFECT UNTIL THE END OF SUCH 180-DAY PERIOD.
SECTION 6. Representations and Warranties of the Company. The Company
represents and warrants to each Underwriter that:
(a) The Registration Statement has become effective (other than any Rule
462(b) Registration Statement to be filed by the Company after the effectiveness
of this Agreement); any Rule 462(b) Registration Statement filed after the
effectiveness of this Agreement will become effective no later than 10:00 P.M.,
New York City time, on the date of this Agreement; and no stop order suspending
the effectiveness of the Registration Statement is in effect, and no proceedings
for such purpose are pending before or threatened by the Commission.
(b) (i) The Registration Statement (other than any Rule 462(b)
Registration Statement to be filed by the Company after the effectiveness of
this Agreement), when it became effective, did not contain and, as amended, if
applicable, will not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) the Registration Statement (other than
any Rule 462(b) Registration Statement to be filed by the Company after the
effectiveness of this Agreement) and the Prospectus comply and, as amended or
supplemented, if applicable, will comply in all material respects with the Act,
(iii) if the Company is required to file a Rule 462(b) Registration Statement
after the effectiveness of this Agreement, such Rule 462(b) Registration
Statement and any amendments thereto, when they become effective (A) will not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading and (B) will comply in all material respects with the Act and (iv)
the Prospectus does not contain and, as amended or supplemented, if applicable,
will not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, except that the
representations and warranties set forth in this paragraph do not apply to
statements or omissions in the Registration Statement or the Prospectus based
upon information relating to any Underwriter furnished to the Company in writing
by any Underwriter through you expressly for use therein.
(c) Each preliminary prospectus filed as part of the Registration
Statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 under the Act, complied when so filed in all material
respects with the Act, and did not contain
8
<PAGE> 9
an untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading, except that the
representations and warranties set forth in this paragraph do not apply to
statements or omissions in any preliminary prospectus based upon information
relating to any Underwriter furnished to the Company in writing by any
Underwriter through you expressly for use therein.
(d) Each of the Company and its subsidiaries has been duly incorporated,
is validly existing as a corporation in good standing under the laws of its
jurisdiction of incorporation and has the corporate power and authority to carry
on its business as described in the Prospectus and to own, lease and operate its
properties, and each is duly qualified and is in good standing as a foreign
corporation authorized to do business in each jurisdiction in which the nature
of its business or its ownership or leasing of property requires such
qualification, except where the failure to be so qualified would not have a
material adverse effect on the business, prospects, financial condition or
results of operations of the Company and its subsidiaries, taken as a whole (a
"Material Adverse Effect").
(e) There are no outstanding subscriptions, rights, warrants, options,
calls, convertible securities, commitments of sale or liens granted or issued by
the Company or any of its subsidiaries relating to or entitling any person to
purchase or otherwise to acquire any shares of the capital stock of the Company
or any of its subsidiaries, except as otherwise disclosed in the Registration
Statement.
(f) All the outstanding shares of capital stock of the Company have been
duly authorized and validly issued and are fully paid, non-assessable and not
subject to any preemptive or similar rights; all the outstanding shares of
capital stock of the Company and options and other rights to acquire capital
stock of the Company have been issued in compliance with the registration and
qualification provisions of all applicable securities laws (or applicable
exemptions thereof); and the Shares have been duly authorized and, when issued
and delivered to the Underwriters against payment therefor as provided by this
Agreement, will be validly issued, fully paid and non-assessable, and the
issuance of such Shares will not be subject to any preemptive or similar rights.
(g) All of the outstanding shares of capital stock of each of the
Company's subsidiaries have been duly authorized and validly issued and are
fully paid and non-assessable, and are owned by the Company, directly or
indirectly through one or more subsidiaries, free and clear of any security
interest, claim, lien, encumbrance or adverse interest of any nature.
(h) The authorized capital stock of the Company conforms as to legal
matters to the description thereof contained in the Prospectus.
(i) Neither the Company nor any of its subsidiaries is in violation of its
respective charter or by-laws, as currently in effect, or in default in the
performance
9
<PAGE> 10
of any obligation, agreement, covenant or condition contained in any indenture,
loan agreement, mortgage, lease or other agreement or instrument that is
material to the Company and its subsidiaries, taken as a whole, to which the
Company or any of its subsidiaries is a party or by which the Company or any of
its subsidiaries or their respective property is bound.
(j) The execution, delivery and performance of this Agreement by the
Company, the compliance by the Company with all the provisions hereof and the
consummation of the transactions contemplated hereby will not (i) require any
consent, approval, authorization or other order of, or qualification with, any
court or governmental body or agency (except such as may be required under the
securities or Blue Sky laws of the various states), (ii) conflict with or
constitute a breach of any of the terms or provisions of, or a default under,
the charter or by-laws of the Company or any of its subsidiaries or any
indenture, loan agreement, mortgage, lease or other agreement or instrument that
is material to the Company and its subsidiaries, taken as a whole, to which the
Company or any of its subsidiaries is a party or by which the Company or any of
its subsidiaries or their respective property is bound, (iii) violate or
conflict with any applicable law or any rule, regulation, judgment, order or
decree of any court or any governmental body or agency having jurisdiction over
the Company, any of its subsidiaries or their respective property or (iv) result
in the suspension, termination or revocation of any Authorization (as defined
below) of the Company or any of its subsidiaries or any other impairment of the
rights of the holder of any such Authorization.
(k) There are no legal or governmental proceedings pending to which the
Company or any of its subsidiaries is a party or to which any of their
respective property is subject that are required to be described in the
Registration Statement or the Prospectus and are not so described, and, to the
knowledge of the Company, no such proceedings are threatened; nor are there any
statutes, regulations, contracts or other documents that are required to be
described in the Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement that are not so described or filed as
required.
(l) Neither the Company nor any of its subsidiaries has violated any
foreign, federal, state or local law or regulation relating to the protection of
human health and safety, the environment or hazardous or toxic substances or
wastes, pollutants or contaminants ("ENVIRONMENTAL LAWS"), any provisions of the
Employee Retirement Income Security Act of 1974, as amended, or any provisions
of the Foreign Corrupt Practices Act, or the rules and regulations promulgated
thereunder, except for such violations which, singly or in the aggregate, would
not have a Material Adverse Effect.
(m) Each of the Company and its subsidiaries has such permits, licenses,
consents, exemptions, franchises, authorizations and other approvals (each, an
"AUTHORIZATION") of, and has made all filings with and notices to, all
governmental or regulatory authorities and self-regulatory organizations and all
courts and other tribunals,
10
<PAGE> 11
including, without limitation, under any applicable Environmental Laws, as are
necessary to own, lease, license and operate its respective properties and to
conduct its business, except where the failure to have any such Authorization or
to make any such filing or notice would not, singly or in the aggregate, have a
Material Adverse Effect. Each such Authorization is valid and in full force and
effect and each of the Company and its subsidiaries is in compliance with all
the terms and conditions thereof and with the rules and regulations of the
authorities and governing bodies having jurisdiction with respect thereto; and
no event has occurred (including, without limitation, the receipt of any notice
from any authority or governing body) which allows or, after notice or lapse of
time or both, would allow, revocation, suspension or termination of any such
Authorization or results or, after notice or lapse of time or both, would result
in any other impairment of the rights of the holder of any such Authorization;
except where such failure to be valid and in full force and effect or to be in
compliance, or the occurrence of any such event would not, singly or in the
aggregate, have a Material Adverse Effect.
(n) There are no costs or liabilities associated with Environmental Laws
(including, without limitation, any capital or operating expenditures required
for clean-up, closure of properties or compliance with Environmental Laws or any
Authorization, any related constraints on operating activities and any potential
liabilities to third parties) which would, singly or in the aggregate, have a
Material Adverse Effect.
(o) This Agreement has been duly authorized, executed and delivered by the
Company.
(p) Deloitte & Touche LLP are independent public accountants with respect
to the Company and its subsidiaries as required by the Act.
(q) The consolidated financial statements included in the Registration
Statement and the Prospectus (and any amendment or supplement thereto), together
with related schedules and notes, present fairly the consolidated financial
position, results of operations and changes in financial position of the Company
and its subsidiaries on the basis stated therein at the respective dates or for
the respective periods to which they apply; such statements and related
schedules and notes have been prepared in accordance with generally accepted
accounting principles consistently applied throughout the periods involved,
except as disclosed therein; the supporting schedules, if any, included in the
Registration Statement present fairly in accordance with generally accepted
accounting principles the information required to be stated therein; and the
other financial and statistical information and data set forth in the
Registration Statement and the Prospectus (and any amendment or supplement
thereto) are, in all material respects, accurately presented and prepared on a
basis consistent with such financial statements and the books and records of the
Company.
(r) The Company is not and, after giving effect to the offering and sale
of the Shares and the application of the proceeds thereof as described in the
Prospectus, will not
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<PAGE> 12
be, an "investment company" as such term is defined in the Investment Company
Act of 1940, as amended.
(s) Except as disclosed in the Registration Statement, there are no
contracts, agreements or understandings between the Company and any person
granting such person the right to require the Company to file a registration
statement under the Act with respect to any securities of the Company or to
require the Company to include such securities with the Shares registered
pursuant to the Registration Statement.
(t) Since the respective dates as of which information is given in the
Prospectus other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement), (i)
there has not occurred any material adverse change or any development involving
a prospective material adverse change in the condition, financial or otherwise,
or the earnings, business, management or operations of the Company and its
subsidiaries, taken as a whole, (ii) there has not been any material adverse
change or any development involving a prospective material adverse change in the
capital stock or in the long-term debt of the Company or any of its subsidiaries
and (iii) neither the Company nor any of its subsidiaries has incurred any
material liability or obligation, direct or contingent.
(u) Each certificate signed by any officer of the Company and delivered ON
THE CLOSING DATE to the Underwriters or counsel for the Underwriters shall be
deemed to be a representation and warranty by the Company to the Underwriters as
to the matters covered thereby.
(v) The acquisition of Acuity Corp. ("Acuity") was completed on NOVEMBER
__, 1999 in accordance with the terms of the Agreement and Plan of
Reorganization dated as of September 10, 1999, including all exhibits related
thereto (the "Acuity Agreement"), among the Company, a wholly owned subsidiary
of the Company formed for the purpose of effectuating the acquisition, and
Acuity. The issuance and sale by the Company of its capital stock to the former
stockholders of Acuity and the assumption by the Company of the outstanding
options, warrants and other rights to acquire capital stock of Acuity were in
compliance with the registration and qualification provisions of all applicable
securities laws (or applicable exemptions thereof). ALL CERTIFICATES EVIDENCING
SHARES OF THE CAPITAL STOCK OF THE COMPANY ISSUED TO THE FORMER STOCKHOLDERS OF
ACUITY AND TO THE HOLDERS OF OPTIONS, WARRANTS AND OTHER RIGHTS TO ACQUIRE
CAPITAL STOCK OF ACUITY THAT WERE ASSUMED IN CONNECTION WITH THE ACQUISITION
HAVE BEEN LEGENDED TO SUMMARIZE THE RESTRICTION ON TRANSFER SET FORTH IN SECTION
___ OF THE BYLAWS OF THE COMPANY.
(w) The Company and its subsidiaries have good and marketable title in fee
simple to all real property and good and marketable title to all personal
property owned by them which is material to the business of the Company and its
subsidiaries, taken as a whole, in each case free and clear of all liens,
encumbrances and defects except such as are described in the Prospectus or such
as do not materially affect the value of such
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<PAGE> 13
property and do not interfere with the use made and proposed to be made of such
property by the Company and its subsidiaries; and any real property and
buildings held under lease by the Company and its subsidiaries are held by them
under valid, subsisting and enforceable leases with such exceptions as are not
material and do not interfere with the use made and proposed to be made of such
property and buildings by the Company and its subsidiaries, in each case except
as described in the Prospectus.
(x) Except as described in the Registration Statement, the Company and its
subsidiaries own or possess, or can acquire on reasonable terms, all patents,
patent rights, licenses, inventions, copyrights, know-how (including trade
secrets and other unpatented and/or unpatentable proprietary or confidential
information, systems or procedures), trademarks, service marks and trade names
("INTELLECTUAL PROPERTY") currently employed by them in connection with the
business now operated by them except where the failure to own or possess or
otherwise be able to acquire such Intellectual Property would not, singly or in
the aggregate, have a Material Adverse Effect ; and neither the Company nor any
of its subsidiaries has received any notice of infringement of or conflict with
asserted rights of others with respect to any of such Intellectual Property
which, singly or in the aggregate, IS REQUIRED TO BE DISCLOSED IN THE
REGISTRATION STATEMENT AND THE PROSPECTUS.
(y) No relationship, direct or indirect, exists between or among the
Company or any of its subsidiaries on the one hand, and the directors, officers,
stockholders, customers or suppliers of the Company or any of its subsidiaries
on the other hand, which is required by the Act to be described in the
Registration Statement or the Prospectus which is not so described.
(z) The pro forma financial statements of the Company and its subsidiaries
and the related notes thereto set forth in the Registration Statement and the
Prospectus (and any supplement or amendment thereto) have been prepared on a
basis consistent with the historical financial statements of the Company and its
subsidiaries, give effect to the assumptions used in the preparation thereof on
a reasonable basis and in good faith and present fairly the historical and
proposed transactions contemplated by the Registration Statement and the
Prospectus. Such pro forma financial statements have been prepared in accordance
with the applicable requirements of Rule 11-02 of Regulation S-X promulgated by
the Commission. The other pro forma financial and statistical information and
data set forth in the Registration Statement and the Prospectus (and any
supplement or amendment thereto) are, in all material respects, accurately
presented and prepared on a basis consistent with the pro forma financial
statements.
(aa) All material tax returns required to be filed by the Company and each
of its subsidiaries in any jurisdiction have been filed, other than those
filings being contested in good faith, and all material taxes, including
withholding taxes, penalties and interest, assessments, fees and other charges
due pursuant to such returns or pursuant to any
13
<PAGE> 14
assessment received by the Company or any of its subsidiaries have been paid,
other than those being contested in good faith and for which adequate reserves
have been provided.
SECTION 7. Indemnification. 1) The Company agrees to indemnify and hold
harmless each Underwriter, its directors, its officers and each person, if any,
who controls any Underwriter within the meaning of Section 15 of the Act or
Section 20 of the Securities Exchange Act of 1934, as amended (the "EXCHANGE
ACT"), from and against any and all losses, claims, damages, liabilities and
judgments (including, without limitation, any legal or other expenses incurred
in connection with investigating or defending any matter, including any action,
that could give rise to any such losses, claims, damages, liabilities or
judgments) caused by any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement (or any amendment
thereto), the Prospectus (or any amendment or supplement thereto) or any
preliminary prospectus, or caused by any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, except insofar as such losses, claims,
damages, liabilities or judgments are caused by any such untrue statement or
omission or alleged untrue statement or omission based upon information relating
to any Underwriter furnished in writing to the Company by such Underwriter
through you expressly for use therein; provided, however, that the foregoing
indemnity agreement with respect to any preliminary prospectus shall not inure
to the benefit of any Underwriter who failed to deliver a Prospectus, as then
amended or supplemented, (so long as the Prospectus and any amendments or
supplements thereto was provided by the Company to the several Underwriters in
the requisite quantity and on a timely basis to permit proper delivery on or
prior to the Closing Date) to the person asserting any losses, claims, damages,
liabilities or judgments caused by any untrue statement or alleged untrue
statement of a material fact contained in such preliminary prospectus, or caused
by any omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading, if
such material misstatement or omission or alleged material misstatement or
omission was cured in the Prospectus, as so amended or supplemented, and such
Prospectus was required by law to be delivered at or prior to the written
confirmation of sale to such person.
(a) Each Underwriter agrees, severally and not jointly, to indemnify and
hold harmless the Company, its directors, its officers who sign the Registration
Statement and each person, if any, who controls the Company within the meaning
of Section 15 of the Act or Section 20 of the Exchange Act, to the same extent
as the foregoing indemnity from the Company to such Underwriter but only with
reference to information relating to such Underwriter furnished in writing to
the Company by such Underwriter through you expressly for use in the
Registration Statement (or any amendment thereto), the Prospectus (or any
amendment or supplement thereto) or any preliminary prospectus.
(b) In case any action shall be commenced involving any person in respect
of which indemnity may be sought pursuant to Section 7(a) or 7(b) (the
"indemnified
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<PAGE> 15
party"), the indemnified party shall promptly notify the person against whom
such indemnity may be sought (the "indemnifying party") in writing and the
indemnifying party shall assume the defense of such action, including the
employment of counsel reasonably satisfactory to the indemnified party and the
payment of all reasonable fees and expenses of such counsel, as incurred (except
that in the case of any action in respect of which indemnity may be sought
pursuant to both Sections 7(a) and 7(b), the Underwriter shall not be required
to assume the defense of such action pursuant to this Section 7(c), but may
employ separate counsel and participate in the defense thereof, but the fees and
expenses of such counsel, except as provided below, shall be at the expense of
such Underwriter). Any indemnified party shall have the right to employ separate
counsel in any such action and participate in the defense thereof, but the fees
and expenses of such counsel shall be at the expense of the indemnified party
unless (i) the employment of such counsel shall have been specifically
authorized in writing by the indemnifying party, (ii) the indemnifying party
shall have failed to assume the defense of such action or employ counsel
reasonably satisfactory to the indemnified party or (iii) the named parties to
any such action (including any impleaded parties) include both the indemnified
party and the indemnifying party, and the indemnified party shall have been
advised by such counsel that there may be one or more legal defenses available
to it which are different from or additional to those available to the
indemnifying party (in which case the indemnifying party shall not have the
right to assume the defense of such action on behalf of the indemnified party).
In any such case, the indemnifying party shall not, in connection with any one
action or separate but substantially similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances, be
liable for the fees and expenses of more than one separate firm of attorneys (in
addition to any local counsel) for all indemnified parties and all such fees and
expenses shall be reimbursed as they are incurred. Such firm shall be designated
in writing by Donaldson, Lufkin & Jenrette Securities Corporation, in the case
of parties indemnified pursuant to Section 7(a), and by the Company, in the case
of parties indemnified pursuant to Section 7(b). The indemnifying party shall
indemnify and hold harmless the indemnified party from and against any and all
losses, claims, damages, liabilities and judgments by reason of any settlement
of any action (i) effected with the written consent of the indemnifying party or
(ii) effected without its written consent if the settlement is entered into more
than thirty business days after the indemnifying party shall have received a
WRITTEN request from the indemnified party for reimbursement for the fees and
expenses of counsel (in any case where such fees and expenses are at the expense
of the indemnifying party) and, prior to the date of such settlement, the
indemnifying party shall have failed to comply with such reimbursement request.
No indemnifying party shall, without the prior written consent of the
indemnified party, effect any settlement or compromise of, or consent to the
entry of judgment with respect to, any pending or threatened action in respect
of which the indemnified party is or could have been a party and indemnity or
contribution may be or could have been sought hereunder by the indemnified
party, unless such settlement, compromise or judgment (i) includes an
unconditional release of the indemnified party from all liability on claims that
are or could have been the subject matter of such action and (ii) does not
include a
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<PAGE> 16
statement as to or an admission of fault, culpability or a failure to act, by or
on behalf of the indemnified party.
(c) To the extent the indemnification provided for in this Section 7 is
unavailable to an indemnified party or insufficient in respect of any losses,
claims, damages, liabilities or judgments referred to therein, then each
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities and judgments (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand and the Underwriters on the other hand from the offering
of the Shares or (ii) if the allocation provided by clause 7(d)(i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause 7(d)(i) above but also the
relative fault of the Company on the one hand and the Underwriters on the other
hand in connection with the statements or omissions which resulted in such
losses, claims, damages, liabilities or judgments, as well as any other relevant
equitable considerations. The relative benefits received by the Company on the
one hand and the Underwriters on the other hand shall be deemed to be in the
same proportion as the total net proceeds from the offering (after deducting
underwriting discounts and commissions, but before deducting expenses) received
by the Company, and the total underwriting discounts and commissions received by
the Underwriters, bear to the total price to the public of the Shares, in each
case as set forth in the table on the cover page of the Prospectus. The relative
fault of the Company on the one hand and the Underwriters on the other hand
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company or the
Underwriters and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission.
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 7(d) were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding paragraph. The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages, liabilities or judgments referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses incurred by such indemnified party in
connection with investigating or defending any matter, including any action,
that could have given rise to such losses, claims, damages, liabilities or
judgments. Notwithstanding the provisions of this Section 7, no Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price at which the Shares underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
16
<PAGE> 17
Act) shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 7(d) are several in proportion to the respective number
of Shares purchased by each of the Underwriters hereunder and not joint.
(d) The remedies provided for in this Section 7 are not exclusive and
shall not limit any rights or remedies which may otherwise be available to any
indemnified party at law or in equity.
SECTION 8. Indemnification of QIU. 2) The Company agrees to indemnify and
hold harmless the QIU, its directors, its officers and each person, if any, who
controls the QIU within the meaning of Section 15 of the Act or Section 20 of
the Exchange Act, from and against any and all losses, claims, damages,
liabilities and judgments (including, without limitation, any legal or other
expenses incurred in connection with investigating or defending any matter,
including any action, that could give rise to any such losses, claims, damages,
liabilities or judgments) related to, based upon or arising out of (i) any
untrue statement or alleged untrue statement of a material fact contained in the
Registration Statement (or any amendment thereto), the Prospectus (or any
amendment or supplement thereto) or any preliminary prospectus, or any omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, EXCEPT
INSOFAR AS SUCH LOSSES, CLAIMS, DAMAGES, LIABILITIES OR JUDGMENTS ARE CAUSED BY
ANY SUCH UNTRUE STATEMENT OR OMISSION OR ALLEGED UNTRUE STATEMENT OR OMISSION
BASED UPON INFORMATION RELATING TO THE QIU FURNISHED IN WRITING BY THE QIU
THROUGH YOU EXPRESSLY FOR USE THEREIN; or (ii) the QIU's activities as QIU under
its engagement pursuant to Section 2 hereof, except in the case of this clause
(ii) insofar as any such losses, claims, damages, liabilities or judgments are
found in a final judgment by a court of competent jurisdiction, not subject to
further appeal, to have resulted solely from the willful misconduct or gross
negligence of the QIU.
(a) In case any action shall be commenced involving any person in respect
of which indemnity may be sought pursuant to Section 8(a) (the "QIU INDEMNIFIED
PARTY"), the QIU Indemnified Party shall promptly notify the Company in writing
and the Company shall assume the defense of such action, including the
employment of counsel reasonably satisfactory to the QIU Indemnified Party and
the payment of all fees and expenses of such counsel, as incurred. Any QIU
Indemnified Party shall have the right to employ separate counsel in any such
action and participate in the defense thereof, but the reasonable fees and
expenses of such counsel shall be at the expense of the QIU Indemnified Party
unless (i) the employment of such counsel shall have been specifically
authorized in writing by the Company, (ii) the Company shall have failed to
assume the defense of such action or employ counsel reasonably satisfactory to
the QIU Indemnified Party or (iii) the named parties to any such action
(including any impleaded parties) include both the QIU Indemnified Party and the
Company, and the QIU Indemnified Party shall have been advised by such counsel
that there may be one or more legal
17
<PAGE> 18
defenses available to it which are different from or additional to those
available to the Company (in which case the Company shall not have the right to
assume the defense of such action on behalf of the QIU Indemnified Party). In
any such case, the Company shall not, in connection with any one action or
separate but substantially similar or related actions in the same jurisdiction
arising out of the same general allegations or circumstances, be liable for the
fees and expenses of more than one separate firm of attorneys (in addition to
any local counsel) for all QIU Indemnified Parties, which firm shall be
designated by the QIU, and all such fees and expenses shall be reimbursed as
they are incurred. The Company shall indemnify and hold harmless the QIU
Indemnified Party from and against any and all losses, claims, damages,
liabilities and judgments by reason of any settlement of any action (i) effected
with the written consent of the Company or (ii) effected without its written
consent if the settlement is entered into more than thirty business days after
the Company shall have received a WRITTEN request from the QIU Indemnified Party
for reimbursement for the fees and expenses of counsel (in any case where such
fees and expenses are at the expense of the Company) and, prior to the date of
such settlement, the Company shall have failed to comply with such reimbursement
request. The Company shall not, without the prior written consent of the QIU
Indemnified Party, effect any settlement or compromise of, or consent to the
entry of judgment with respect to, any pending or threatened action in respect
of which the QIU Indemnified Party is or could have been a party and indemnity
or contribution may be or could have been sought hereunder by the QIU
Indemnified Party, unless such settlement, compromise or judgment (i) includes
an unconditional release of the QIU Indemnified Party from all liability on
claims that are or could have been the subject matter of such action and (ii)
does not include a statement as to or an admission of fault, culpability or a
failure to act, by or on behalf of the QIU Indemnified Party.
(b) To the extent the indemnification provided for in this Section 8 is
unavailable to a QIU Indemnified Party or insufficient in respect of any losses,
claims, damages, liabilities or judgments referred to therein, then the Company,
in lieu of indemnifying such QIU Indemnified Party, shall contribute to the
amount paid or payable by such QIU Indemnified Party as a result of such losses,
claims, damages, liabilities and judgments (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company on the one
hand and the QIU on the other hand from the offering of the Shares or (ii) if
the allocation provided by clause 8(c)(i) above is not permitted by applicable
law, in such proportion as is appropriate to reflect not only the relative
benefits referred to in clause 8(c)(i) above but also the relative fault of the
Company on the one hand and the QIU on the other hand in connection with the
statements or omissions which resulted in such losses, claims, damages,
liabilities or judgments, as well as any other relevant equitable
considerations. The relative benefits received by the Company on the one hand
and the QIU on the other hand shall be deemed to be in the same proportion as
the total net proceeds from the offering (before deducting expenses) received by
the Company as set forth in the table on the cover page of the Prospectus, and
the fee received by the QIU pursuant to Section 2 hereof, bear to the sum of
such total net proceeds and such fee. The relative fault of the Company on the
one hand and
18
<PAGE> 19
the QIU on the other hand shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or the QIU and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission and whether the QIU's activities as QIU under its engagement pursuant
to Section 2 hereof involved any willful misconduct or gross negligence on the
part of the QIU.
The Company and the QIU agree that it would not be just and equitable if
contribution pursuant to this Section 8(c) were determined by pro rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to in the immediately preceding paragraph.
The amount paid or payable by a QIU Indemnified Party as a result of the losses,
claims, damages, liabilities or judgments referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses incurred by such QIU Indemnified Party
in connection with investigating or defending any matter, including any action,
that could have given rise to such losses, claims, damages, liabilities or
judgments. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
(c) The remedies provided for in this Section 8 are not exclusive and
shall not limit any rights or remedies which may otherwise be available to any
QIU Indemnified Party at law or in equity.
SECTION 9. Conditions of Underwriters' Obligations. The several obligations
of the Underwriters to purchase the Firm Shares under this Agreement are subject
to the satisfaction of each of the following conditions:
(a) All the representations and warranties of the Company contained in
this Agreement shall be true and correct on the Closing Date with the same force
and effect as if made on and as of the Closing Date.
(b) If the Company is required to file a Rule 462(b) Registration
Statement after the effectiveness of this Agreement, such Rule 462(b)
Registration Statement shall have become effective by 10:00 P.M., New York City
time, on the date of this Agreement; and no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been commenced or shall be pending
before or threatened by the Commission.
(c) You shall have received on the Closing Date a certificate dated the
Closing Date, signed by Alan K. Anderson and Susan Salvesen, in their capacities
as the Chief Executive Officer and Chief Financial Officer of the Company,
confirming the matters set forth in Sections 6(t), 9(a) and 9(b) and that the
Company has complied with
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<PAGE> 20
all of the agreements and satisfied all of the conditions herein contained and
required to be complied with or satisfied by the Company on or prior to the
Closing Date.
(d) Since the respective dates as of which information is given in the
Prospectus other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement,
except for any amendments or supplements of which you had notice and to which
you did not object prior to their filing with the Commission), (i) there shall
not have occurred any change or any development involving a prospective change
in the condition, financial or otherwise, or the earnings, business, management
or operations of the Company and its subsidiaries, taken as a whole, (ii) there
shall not have been any change or any development involving a prospective change
in the capital stock or in the long-term debt of the Company or any of its
subsidiaries and (iii) neither the Company nor any of its subsidiaries shall
have incurred any liability or obligation, direct or contingent, the effect of
which, in any such case described in clause 9(d)(i), 9(d)(ii) or 9(d)(iii), in
your judgment, is material and adverse and, in your judgment, makes it
impracticable to market the Shares on the terms and in the manner contemplated
in the Prospectus.
(e) PURSUANT TO THE REQUEST OF THE COMPANY, YOU shall have received on
the Closing Date an opinion (satisfactory to you and counsel for the
Underwriters), dated the Closing Date, of Gunderson Dettmer Stough Villeneuve
Franklin & Hachigian, LLP, counsel for the Company, to the effect that:
(i) each of the Company, Nabnasset Corporation, the Company's wholly
owned subsidiary, Acuity Corp., the Company's wholly owned subsidiary, and
______________________________________ has been duly incorporated, is
validly existing as a corporation in good standing under the laws of its
jurisdiction of incorporation and has the corporate power and authority to
carry on its business as described in the Prospectus and to own, lease and
operate its properties;
(ii) the Company is duly qualified and is in good standing as a
foreign corporation in California and ________________; Nabnasset is duly
qualified and is in good standing as a foreign corporation in
Massachusetts; and Acuity is duly qualified and is in good standing as a
foreign corporation in Texas; and each of THE COMPANY, ACUITY AND NABNASSET
IS duly qualified and is in good standing as a foreign corporation
authorized to do business in each STATE THAT EACH RESPECTIVE COMPANY
EMPLOYS EMPLOYEES OR OWNS OR LEASES REAL PROPERTY;
(iii) all the outstanding shares of capital stock of the Company have
been duly authorized and validly issued, are non-assessable and to such
counsel's knowledge are fully-paid and not subject to any preemptive or
similar rights;
(iv) the Shares have been duly authorized and, when issued and
delivered to the Underwriters against payment therefor as provided by this
Agreement, will be validly issued, fully paid and non-assessable, and the
issuance
20
<PAGE> 21
of such Shares will not be subject to any preemptive or similar rights
contained in the Company's certificate of incorporation or by-laws or any
agreement filed as an exhibit to the Registration Statement;
(v) all of the outstanding shares of capital stock of Nabnasset,
Acuity and ___________________________ have been duly authorized and
validly issued and are non-assessable, and to such counsel's knowledge are
fully-paid and owned by the Company, directly or indirectly through one or
more subsidiaries, free and clear of any security interest, claim, lien,
encumbrance or adverse interest of any nature;
(vi) The acquisition of Acuity was completed on November __, 1999 in
accordance with the terms of the Acuity Agreement. As a result of the
acquisition, all of the issued and outstanding capital stock of Acuity is
owned by the Company free and clear of any security interest, claim, lien,
encumbrance or adverse interest of any nature, and to the knowledge of such
counsel, no options, warrants or other rights to purchase shares of capital
stock or ownership interests in Acuity are outstanding;
(vii) this Agreement has been duly authorized, executed and delivered
by the Company;
(viii) the authorized capital stock of the Company conforms as to
legal matters to the description thereof contained in the Prospectus;
(ix) the Registration Statement has become effective under the Act;
and, to such counsel's knowledge, no stop order proceedings with respect
thereto have been instituted or are pending under the Act;
(x) the statements under the captions "Prospectus Summary -
Acquisition of Acuity", "Risk Factors the success of our business relies
heavily on... Lucent Technologies", "Management -- Indemnification", "--
Employment and Change of Control Agreements", "--Stock Plans", "Description
of Capital Stock" and "Underwriting" in the Prospectus and Items 14 and
15 of Part II of the Registration Statement, insofar as such statements
constitute a summary of the legal matters, documents or proceedings
referred to therein, fairly present the information called for with respect
to such legal matters, documents and proceedings;
(xi) the execution, delivery and performance of this Agreement by the
Company, the compliance by the Company with all the provisions hereof and
the consummation of the transactions contemplated hereby will not (A)
require any consent, approval, authorization or other order of, or
qualification with, any court or governmental body or agency (except such
as may be required under the securities or Blue Sky laws of the various
states), (B) conflict with or
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<PAGE> 22
constitute a breach of any of the terms or provisions of, or a default
under, the charter or by-laws of the Company or any of its subsidiaries or
any indenture, loan agreement, mortgage, lease or other agreement or
instrument that is filed as an exhibit to the Registration Statement, to
which the Company or any of its subsidiaries is a party or by which the
Company or any of its subsidiaries or their respective property is bound,
(C) violate or conflict with any applicable federal, Delaware corporate or
California law, RULE OR REGULATION CUSTOMARILY APPLICABLE TO A
TRANSACTION OF THE NATURE CONTEMPLATED BY THIS AGREEMENT, OR TO SUCH
COUNSEL'S KNOWLEDGE, ANY judgment, order or decree of any court or any
governmental body or agency having jurisdiction over the Company, any of
its subsidiaries or their respective property or (D) to such counsel's
knowledge, result in the suspension, termination or revocation of any
Authorization of the Company or any of its subsidiaries;
(xii) such counsel does not know of any legal or governmental
proceedings pending or threatened to which the Company or any of its
subsidiaries is a party or to which any of their respective property is
subject that are required to be described in the Registration Statement or
the Prospectus and are not so described, or of any federal, Delaware
corporate or California statutes, regulations, contracts or other documents
that are required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration Statement that
are not so described or filed as required;
(xiii) the Company is not and, after giving effect to the offering
and sale of the Shares and the application of the proceeds thereof as
described in the Prospectus, will not be, an "investment company" as such
term is defined in the Investment Company Act of 1940, as amended;
(xiv) to such counsel's knowledge, except as disclosed in the
Prospectus there are no contracts, agreements or understandings between the
Company and any person granting such person the right to require the
Company to file a registration statement under the Act with respect to any
securities of the Company or to require the Company to include such
securities with the Shares registered pursuant to the Registration
Statement; AND
(xv) IN addition, such opinion shall include statements to the
effect that (A) SUCH counsel believes that the Registration Statement and
the Prospectus and any supplement or amendment thereto (except for the
financial statements and other financial data included therein as to which
no opinion need be expressed) comply as to form in all material respects
with the Act, (B) such counsel has no reason to believe that at the time
the Registration Statement became effective, the Registration Statement and
the prospectus included therein (except for the financial statements and
other financial data as to which such counsel need not express any belief)
contained any untrue statement of a material
22
<PAGE> 23
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading and (C) such
counsel has no reason to believe that at the time the Registration
Statement became effective or on the date of this Agreement the Prospectus,
as amended or supplemented, if applicable (except for the financial
statements and other financial data, as aforesaid) contains any untrue
statement of a material fact or omits to state a material fact necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
(f) You shall have received on the Closing Date an opinion, dated the
Closing Date, of Wilson Sonsini Goodrich & Rosati, Professional Corporation,
counsel for the Underwriters, as to the matters referred to in Sections
9(e)(iv), 9(e)(vii), 9(e)(x) (but only INSOFAR AS the statements under the
CAPTIONS "Description of Capital Stock" and "Underwriting" CONSTITUTE A SUMMARY
OF THE LEGAL MATTERS, DOCUMENTS OR PROCEEDINGS REFERRED TO THEREIN) AND
9(e)(xv).
In giving such opinions with respect to the matters covered by the last
paragraph of Section 9(e) Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP and Wilson Sonsini Goodrich & Rosati, Professional Corporation,
may state that their opinion and belief are based upon their participation in
the preparation of the Registration Statement and Prospectus and any amendments
or supplements thereto and review and discussion of the contents thereof, but
are without independent check or verification except as specified.
(g) You shall have received, on each of the date hereof and the Closing
Date, a letter dated the date hereof or the Closing Date, as the case may be, in
form and substance reasonably satisfactory to you, from Deloitte & Touche LLP,
independent public accountants, containing the information and statements of the
type ordinarily included in accountants' "comfort letters" to Underwriters with
respect to the financial statements and certain financial information contained
in the Registration Statement and the Prospectus.
(h) The Company shall have delivered to you the agreements specified in
Section 2 hereof which agreements shall be in full force and effect on the
Closing Date.
(i) The Shares shall have been duly listed for quotation on the Nasdaq
National Market.
(j) The Company shall not have failed on or prior to the Closing Date to
perform or comply with any of the agreements herein contained and required to be
performed or complied with by the Company on or prior to the Closing Date.
The several obligations of the Underwriters to purchase any Additional
Shares hereunder are subject to the delivery to you on the applicable Option
Closing Date of such documents as you may reasonably request with respect to the
good standing of the
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<PAGE> 24
mpany, the due authorization and issuance of such Additional Shares and other
matters related to the issuance of such Additional Shares.
SECTION 10. Effectiveness of Agreement and Termination. This Agreement
shall become effective upon the execution and delivery of this Agreement by the
parties hereto.
This Agreement may be terminated at any time on or prior to the Closing
Date by you by written notice to the Company if any of the following has
occurred: (i) any outbreak or escalation of hostilities or other national or
international calamity or crisis or change in economic conditions or in the
financial markets of the United States or elsewhere that, in your judgment, is
material and adverse and, in your judgment, makes it impracticable to market the
Shares on the terms and in the manner contemplated in the Prospectus, (ii) the
suspension or material limitation of trading in securities or other instruments
on the New York Stock Exchange, the American Stock Exchange, the Chicago Board
of Options Exchange, the Chicago Mercantile Exchange, the Chicago Board of Trade
or the Nasdaq National Market or limitation on prices for securities or other
instruments on any such exchange or the Nasdaq National Market, (iii) the
suspension of trading of any securities of the Company on any exchange or in the
over-the-counter market, (iv) the enactment, publication, decree or other
promulgation of any federal or state statute, regulation, rule or order of any
court or other governmental authority which in your opinion materially and
adversely affects, or will materially and adversely affect, the business,
prospects, financial condition or results of operations of the Company and its
subsidiaries, taken as a whole, (v) the declaration of a banking moratorium by
either federal or New York State authorities or (vi) the taking of any action by
any federal, state or local government or agency in respect of its monetary or
fiscal affairs which in your opinion has a material adverse effect on the
financial markets in the United States.
If on the Closing Date or on an Option Closing Date, as the case may be,
any one or more of the Underwriters shall fail or refuse to purchase the Firm
Shares or Additional Shares, as the case may be, which it has or they have
agreed to purchase hereunder on such date and the aggregate number of Firm
Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase is not more
than one-tenth of the total number of Firm Shares or Additional Shares, as the
case may be, to be purchased on such date by all Underwriters, each
non-defaulting Underwriter shall be obligated severally, in the proportion which
the number of Firm Shares set forth opposite its name in Schedule I bears to the
total number of Firm Shares which all the non-defaulting Underwriters have
agreed to purchase, or in such other proportion as you may specify, to purchase
the Firm Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase on such
date; provided that in no event shall the number of Firm Shares or Additional
Shares, as the case may be, which any Underwriter has agreed to purchase
pursuant to Section 2 hereof be increased pursuant to this Section 9 by an
24
<PAGE> 25
amount in excess of one-ninth of such number of Firm Shares or Additional
Shares, as the case may be, without the written consent of such Underwriter. If
on the Closing Date any Underwriter or Underwriters shall fail or refuse to
purchase Firm Shares and the aggregate number of Firm Shares with respect to
which such default occurs is more than one-tenth of the aggregate number of Firm
Shares to be purchased by all Underwriters and arrangements satisfactory to you
and the Company for purchase of such Firm Shares are not made within 48 hours
after such default, this Agreement will terminate without liability on the part
of any non-defaulting Underwriter and the Company. In any such case which does
not result in termination of this Agreement, either you or the Company shall
have the right to postpone the Closing Date, but in no event for longer than
seven days, in order that the required changes, if any, in the Registration
Statement and the Prospectus or any other documents or arrangements may be
effected. If, on an Option Closing Date, any Underwriter or Underwriters shall
fail or refuse to purchase Additional Shares and the aggregate number of
Additional Shares with respect to which such default occurs is more than
one-tenth of the aggregate number of Additional Shares to be purchased on such
date, the non-defaulting Underwriters shall have the option to (i) terminate
their obligation hereunder to purchase such Additional Shares or (ii) purchase
not less than the number of Additional Shares that such non-defaulting
Underwriters would have been obligated to purchase on such date in the absence
of such default. Any action taken under this paragraph shall not relieve any
defaulting Underwriter from liability in respect of any default of any such
Underwriter under this Agreement.
SECTION 11. Miscellaneous. Notices given pursuant to any provision of this
Agreement shall be addressed as follows: (i) if to the Company, to Quintus
Corporation, 47212 Mission Falls Court, Fremont, California 94539, Attention:
Chief Executive Officer, and (ii) if to any Underwriter or to you, to you c/o
Donaldson, Lufkin & Jenrette Securities Corporation, 277 Park Avenue, New York,
New York 10172, Attention: Syndicate Department, or in any case to such other
address as the person to be notified may have requested in writing.
The respective indemnities, contribution agreements, representations,
warranties and other statements of the Company and the several Underwriters set
forth in or made pursuant to this Agreement shall remain operative and in full
force and effect, and will survive delivery of and payment for the Shares,
regardless of (i) any investigation, or statement as to the results thereof,
made by or on behalf of any Underwriter, the officers or directors of any
Underwriter, any person controlling any Underwriter, any QIU Indemnified Party,
the Company, the officers or directors of the Company or any person controlling
the Company, (ii) acceptance of the Shares and payment for them hereunder and
(iii) termination of this Agreement.
If for any reason the Shares are not delivered by or on behalf of the
Company as provided herein (other than as a result of any termination of this
Agreement pursuant to Section 10), the Company agrees to reimburse the several
Underwriters for all out-of-pocket expenses (including the fees and
disbursements of counsel) incurred by them.
25
<PAGE> 26
twithstanding any termination of this Agreement, the Company shall be liable for
all expenses which it has agreed to pay pursuant to Section 5(i) hereof. The
Company also agrees to reimburse the several Underwriters, their directors and
officers, any persons controlling any of the Underwriters and the QUI
Indemnified Parties for any and all fees and expenses (including, without
limitation, the fees disbursements of counsel) incurred by them in connection
with enforcing their rights hereunder (including, without limitation, pursuant
to Section 7 hereof).
Except as otherwise provided, this Agreement has been and is made solely
for the benefit of and shall be binding upon the Company, the Underwriters, the
Underwriters' directors and officers, any controlling persons referred to
herein, the QIU Indemnified Parties, the Company's directors and the Company's
officers who sign the Registration Statement and their respective successors and
assigns, all as and to the extent provided in this Agreement, and no other
person shall acquire or have any right under or by virtue of this Agreement. The
term "successors and assigns" shall not include a purchaser of any of the Shares
from any of the several Underwriters merely because of such purchase.
This Agreement shall be governed and construed in accordance with the laws
of the State of New York.
This Agreement may be signed in various counterparts which together shall
constitute one and the same instrument.
[Remainder of this page intentionally left blank]
26
<PAGE> 27
Please confirm that the foregoing correctly sets forth the agreement
between the Company and the several Underwriters.
Very truly yours,
QUINTUS CORPORATION
By:
--------------------------------
Title:
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
DAIN RAUSCHER WESSELS,
a division of Dain Rauscher Incorporated
SG Cowen Securities Corporation
DLJdirect Inc.
Acting severally on behalf of
themselves and the several
Underwriters named in
Schedule I hereto
By DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By
----------------------------------------
27
<PAGE> 28
Schedule I
<TABLE>
<CAPTION>
Number of Firm Shares
Underwriters To be Purchased
<S> <C>
Donaldson, Lufkin & Jenrette Securities
Corporation
DAIN RAUSCHER WESSELS,
a division of Dain Rauscher Incorporated
SG Cowen Securities Corporation
DLJdirect Inc.
Total
</TABLE>
<PAGE> 1
COMMON STOCK [QUINTUS LOGO] COMMON STOCK
NUMBER SHARES
------------ -------------
QNTS-
------------ -------------
INCORPORATED UNDER THE SEE REVERSE FOR
LAWS OF DELAWARE CERTAIN DEFINITIONS
CUSIP 748798 10 5
THIS CERTIFIES THAT
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, $0.001 PAR VALUE, OF
- ----------------------------- QUINTUS CORPORATION ------------------------------
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this Certificate properly
endorsed. This Certificate is not valid until countersigned by the Transfer
Agent and registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
/s/ SUSAN SALVESEN /s/ ALAN K. ANDERSON
--------------------- -----------------------
SECRETARY CHIEF EXECUTIVE OFFICER
[QUINTUS CORPORATION CORPORATE SEAL]
COUNTERSIGNED AND REGISTERED:
ChaseMellon Shareholder Services, L.L.C.
(New York, New York) TRANSFER AGENT
AND REGISTRAR
BY:
--------------------------------------------------
AUTHORIZED SIGNATURE
<PAGE> 2
257434B QX 103 Tuesday, November 2, 1999 10:22:27
QUINTUS CORPORATION
----------------------------
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- ...................Custodian...............
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act........................................
in common (State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED,___________________________hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------
_______________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE)
_______________________________________________________________________________
_______________________________________________________________________________
________________________________________________________________________ Shares
represented by the within Certificate, and do hereby irrevocably constitute and
appoint
______________________________________________________________________ Attorney
to transfer the said shares on the books of the within-named Corporation with
full power of substitution in the premises.
Dated________________________
------------------------------------------------
NOTICE: THE SIGNATURE TO THE ASSIGNMENT MUST
CORRESPOND WITH THE NAME AS WRITTEN UPON
THE FACE OF THE CERTIFICATE, IN EVERY
PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT, OR ANY CHANGE WHATEVER.
SIGNATURE(S) GUARANTEED: _______________________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND
LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN
AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM),
PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 4 to Registration Statement No.
333-86919 of Quintus Corporation on Form S-1 of our report dated June 18, 1999
(September 29, 1999 as to Note 15), appearing in the Prospectus, which is part
of this Registration Statement, and of our report dated June 18, 1999 relating
to the financial statement schedule appearing elsewhere in this Registration
Statement.
We also consent to the reference to us under the headings "Selected
Consolidated Financial Data" and "Experts" in such Prospectus.
/s/ Deloitte & Touche LLP
San Jose, California
November 5, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Experts" and
"Selected Financial Data" and to the use of our reports dated April 30, 1998, in
Amendment No. 4 to the Registration Statement (Form S-1, No. 333-86919) and
related Prospectus of Quintus Corporation.
Ernst & Young LLP
Palo Alto, California
November 5, 1999
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of our
report dated February 8, 1999, except as to Notes 4 and 11, for which the date
is March 31, 1999, relating to the financial statements of Acuity Corp., which
appear in such Registration Statement. We also consent to the reference to us
under the heading "Experts" in such Registration Statement.
PricewaterhouseCoopers LLP
Austin, Texas
November 8, 1999
