<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 11, 2000
REGISTRATION NO. 333-33422
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
QUINTUS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<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, CA 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, CA 94539
(510) 624-2800
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
DAVID W. FERGUSON, ESQ. MARK A. KLEIN, ESQ.
DAVIS POLK & WARDWELL KIRKPATRICK & LOCKHART LLP
1600 EL CAMINO REAL 9100 WILSHIRE BOULEVARD
MENLO PARK, CA 94025 8-EAST
(650) 752-2000 BEVERLY HILLS, CA 90212
(310) 273-1870
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this registration statement and certain
other conditions under the merger agreement are met or waived.
------------------------
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, 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, 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. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C> <C>
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PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER UNIT PRICE(2) FEE(3)
- ----------------------------------------------------------------------------------------------------------------------------
Common Stock, $.001 Par Value........... 6,054,681 N/A $186,603,286 $49,263
- ----------------------------------------------------------------------------------------------------------------------------
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</TABLE>
(1) Represents the maximum number of shares of the Registrant's Common Stock
issuable in connection with the merger in exchange for shares of
Mustang.com, Inc.'s common stock, based on (i) the maximum number of the
Mustang.com shares exchangeable in the merger and (ii) the exchange ratio
applicable in the merger (0.793 shares of the Registrant's Common Stock for
each share of Mustang.com, Inc.'s Common Stock).
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(f)(1) and Rule 457(c) of the Securities Act, Nasdaq
National Market, as established by the average of the high and low sales
prices of Mustang.com, Inc.'s shares on March 27, 2000 on the Nasdaq
SmallCap Market, which was $24.44.
(3) The registration fee of $49,263 was previously paid by the Registrant upon
its initial filing of this registration statement.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
MUSTANG LOGO
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 11, 2000
To the shareholders of Mustang.com, Inc.:
You are cordially invited to attend the special meeting of shareholders
(the "Special Meeting") of Mustang.com, Inc. that will be held at the Rio Bravo
Resort, 11200 Lake Ming Road, Bakersfield, California 93306 on May 11, 2000
starting at 10:00 a.m. local time. At the Special Meeting, you will be asked to
vote on the following proposals:
1. To approve and adopt the Agreement and Plan of Merger (the "Merger
Agreement") dated as of February 25, 2000 between Mustang.com and
Quintus Corporation. Pursuant to the Merger Agreement, Mustang.com will
be merged with a subsidiary of Quintus and each shareholder of
Mustang.com will receive 0.793 of a share of Quintus common stock for
each share of Mustang.com common stock that each shareholder owns; and
2. To transact such other business as may properly come before the Special
Meeting, including any adjournment or postponement of the Special
Meeting.
Shareholders may vote in person or by proxy. The proxy statement, which
explains in detail the merger, and the accompanying proxy card are attached to
this notice. Only holders of record of Mustang.com shares at the close of
business on April 10, 2000 will be entitled to vote at the meeting or any
adjournment thereof with respect to the matters described above. As of April 10,
2000, there were 6,768,136 shares of Mustang.com common stock outstanding.
Please sign, date and mail the enclosed proxy card promptly using the
enclosed postage-paid envelope. This action will not limit your right to vote in
person if you wish to attend the Special Meeting.
THE MERGER IS AN IMPORTANT DECISION FOR MUSTANG.COM AND ITS SHAREHOLDERS.
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, WE URGE YOU TO COMPLETE,
SIGN AND PROMPTLY RETURN THE ENCLOSED PROXY CARD TO ENSURE THAT YOUR SHARES WILL
BE VOTED AT THE MEETING.
PLEASE DO NOT SEND ANY OF YOUR SHARES AT THIS TIME.
By Order of the Board of Directors
Michael S. Noling,
Michael S. Noling
Secretary
April 11, 2000
Should you have any questions regarding the Special Meeting or the attached
proxy statement/ prospectus, please contact our proxy solicitor, Georgeson
Shareholder Communications Inc. Banks and brokers should call (212) 440-9800
(collect); all others call toll free at (800) 223-2064.
<PAGE> 3
[QUINTUS LOGO]
<TABLE>
<S> <C>
PROXY STATEMENT PROSPECTUS
OF OF
MUSTANG.COM, INC. QUINTUS CORPORATION
</TABLE>
The boards of directors of Quintus Corporation and Mustang.com, Inc. have
approved a transaction pursuant to which a subsidiary of Quintus will merge with
Mustang.com, and Mustang.com will become a wholly-owned subsidiary of Quintus.
Upon the completion of the merger, Mustang.com shareholders will receive
approximately 0.793 of a share of Quintus common stock for each share of
Mustang.com common stock held by them and Quintus will assume all outstanding
options and warrants to purchase Mustang.com common stock. Based on
Mustang.com's outstanding stock as of March 15, 2000, a total of approximately
4,871,369 shares of Quintus common stock are expected to be issued in the
merger. In addition, options and warrants of Mustang.com will be converted into
options and warrants to purchase approximately 1,182,981 shares of Quintus
common stock in the merger, based on Mustang.com's outstanding options and
warrants as of March 15, 2000.
------------------------
Quintus common stock trades on the Nasdaq Stock Market under the symbol
"QNTS." On April 7, 2000 the closing price of Quintus common stock was $22.4375
per share.
Completion of the merger requires the approval of Mustang.com's
shareholders of the merger agreement and the merger. Mustang.com has scheduled a
special meeting of its shareholders to vote on these proposals. Whether or not
you plan to attend the special meeting, please take the time to vote by
completing and mailing the enclosed proxy card to Mustang.com. If you sign, date
and mail your proxy card without indicating how you want to vote, your proxy
will count as a vote in favor of the proposals. You may vote at the special
meeting if you owned shares of Mustang.com stock as of the close of business on
April 10, 2000. The date, time and place of the special meeting are as follows:
May 11, 2000
10:00 a.m.
The Rio Bravo Resort
11200 Lake Ming Road
Bakersfield, CA 93306
WE STRONGLY URGE YOU TO READ AND CONSIDER CAREFULLY THIS PROXY
STATEMENT/PROSPECTUS IN ITS ENTIRETY, INCLUDING THE MATTERS REFERRED TO UNDER
"RISK FACTORS RELATING TO THE MERGER" BEGINNING ON PAGE 18.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE QUINTUS COMMON STOCK TO BE ISSUED IN
THE MERGER OR DETERMINED IF THIS PROXY STATEMENT/ PROSPECTUS IS ACCURATE OR
ADEQUATE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this proxy statement/prospectus is April 11, 2000 and this
proxy statement/prospectus and the accompanying form of proxy card are first
being mailed to the shareholders of Mustang.com on or about April 12, 2000.
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Questions and Answers About the Merger...................... 1
Prospectus Summary.......................................... 4
Selected Historical Consolidated Financial Data............. 10
Comparative Per Share Data.................................. 14
Market Price Information.................................... 16
Risk Factors Relating to the Merger......................... 18
Risk Factors Relating to Quintus............................ 20
Risks Relating to Mustang.com............................... 28
Information Regarding Forward-Looking Statements............ 34
The Merger.................................................. 36
Opinion of Mustang.com's Financial Advisor.................. 45
Interests of Related Persons in the Merger.................. 49
The Merger Agreement........................................ 51
The Shareholders' Meeting................................... 56
Comparison of Rights of Holders of Quintus Common Stock and
Mustang.com Common Stock.................................. 58
Management's Discussion and Analysis of Financial Condition
and Results of Operations of Quintus Corporation.......... 65
Management's Discussion and Analysis of Financial Condition
and Results of Operations of Mustang.com.................. 77
Business of Quintus Corporation............................. 82
Business of Mustang.com..................................... 95
Description of Quintus Capital Stock........................ 105
Shares Eligible for Future Sale............................. 108
Management of Quintus Following the Merger.................. 110
Principal Shareholders of Quintus Corporation............... 122
Principal Shareholders of Mustang.com....................... 125
Quintus Related Party Transactions.......................... 126
Mustang.com Related Party Transactions...................... 129
Dissenters' Rights.......................................... 130
Legal Matters............................................... 132
Experts..................................................... 132
Change in Accountants....................................... 132
Future Shareholder Proposals................................ 133
Where You Can Find More Information......................... 133
Quintus Corporation and Mustang.com Index to Financial
Statements................................................ F-1
List Of Annexes
Annex A
Annex B
Annex C
</TABLE>
i
<PAGE> 5
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHY ARE THE COMPANIES PROPOSING TO MERGE?
A: Quintus and Mustang.com believe the merger will extend Quintus'
leadership position in the rapidly growing e-customer relationship management,
or eCRM, market. Mustang.com's technology complements Quintus' by providing
high-volume, reliable e-mail management, adherence to open standards,
integration with the full range of standard e-mail environments, and rapid
customer deployment. Following the transaction, Quintus will be the only
provider of a fully integrated solution that addresses this entire eCRM market
providing users with a single integrated view of customers across existing and
emerging communication channels.
Q: WHEN AND WHERE IS THE SHAREHOLDERS' MEETING?
A: The Mustang.com special shareholders' meeting will take place at 10:00
a.m. on May 11, 2000 at The Rio Bravo Resort, 11200 Lake Ming Road, Bakersfield,
CA 93306. At the Mustang.com special shareholders' meeting, Mustang.com
shareholders will be asked to approve the merger agreement and the merger
pursuant to which a wholly-owned subsidiary of Quintus will merge with and into
Mustang.com, and Mustang.com shareholders will become shareholders of Quintus.
Q: WHAT WILL I RECEIVE IN THE MERGER?
A: You will receive 0.793 of a share of Quintus common stock for each share
of Mustang.com common stock that you hold. Quintus will not issue fractional
shares of its common stock. Instead, you will receive cash, without interest,
based on the closing price of Quintus common stock on the Nasdaq National Market
on the trading day prior to the day on which the merger is completed.
The number of shares of Quintus common stock to be issued in connection
with the merger is fixed and will not be adjusted based upon changes in the
value of these shares. As a result, the value of the shares you receive in the
merger will not be known at the time you vote on the merger and may go up or
down as the market price of Quintus common stock goes up or down.
Q: WHAT DO I NEED TO DO NOW?
A: Indicate on your proxy card how you want to vote, sign it and mail it in
the enclosed return envelope, as soon as possible, so that your shares may be
represented at the shareholders' meeting. You may also attend the shareholders'
meeting and vote your shares in person.
Q: WHAT DO I DO IF I WANT TO CHANGE MY VOTE?
A: Send in a later-dated, signed proxy card to Mustang.com's secretary. You
can also attend the Mustang.com special shareholders' meeting in person and
vote. You may also revoke your proxy by sending a notice of revocation to
Mustang.com's secretary.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE
MY SHARES FOR ME?
A: If you do not provide your broker with instructions on how to vote your
"street name" shares, your broker will not be able to vote those shares for or
against the merger. You should therefore instruct your broker how to vote your
shares, following the directions provided by your broker.
1
<PAGE> 6
If you are a Mustang.com shareholder and do not give voting instructions to
your broker, you will, in effect, be voting against the merger, unless you
appear in person at the Mustang.com special shareholders' meeting and vote in
favor of the merger.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. If the merger is completed, Mustang.com shareholders will be sent
written instructions for exchanging their stock certificates. Quintus
Corporation shareholders will keep their existing certificates.
Q: WHEN IS THE MERGER GOING TO BE COMPLETED?
A: Quintus and Mustang.com hope to complete the merger as soon as possible
after Mustang.com's shareholders approve the transaction at the special
shareholders' meeting. However, Quintus and Mustang.com cannot predict the exact
timing because the merger is subject to governmental and other regulatory
approvals.
Q: WHAT ARE THE MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF
THE MERGER?
A: The merger is intended to qualify as a tax-free reorganization for U.S.
federal income tax purposes. If the merger qualifies as a reorganization,
Mustang.com shareholders generally will not recognize gain or loss on the
exchange of their stock in the merger, except for any gain or loss recognized in
connection with any cash received instead of a fractional share of Quintus
stock. However, the tax consequences of the merger to you will depend on the
facts of your particular situation. Quintus and Mustang.com encourage you to
contact your tax advisors to determine the tax consequences of the merger to
you. To review the tax consequences to Quintus and Mustang.com shareholders in
greater detail, see the section entitled "The Merger -- Material United States
Federal Income Tax Consequences" in this proxy statement/prospectus.
Q: WHAT SHAREHOLDER VOTE IS REQUIRED TO APPROVE THE MERGER AGREEMENT AND
THE MERGER?
A: A majority of the outstanding shares of Mustang.com common stock
entitled to vote constitutes a quorum for the Mustang.com special meeting. The
affirmative vote of the holders of at least a majority of the outstanding shares
of Mustang.com common stock is required to approve the merger agreement and the
merger.
Q: DOES THE MUSTANG.COM BOARD OF DIRECTORS RECOMMEND APPROVAL OF THE MERGER
AGREEMENT AND THE MERGER?
A: Yes. After careful consideration, the Mustang.com board of directors
unanimously recommends that its shareholders vote in favor of the merger
agreement and the merger.
Q: DO I HAVE DISSENTERS' RIGHTS IN CONNECTION WITH THE MERGER?
A: Yes. Mustang.com shareholders are entitled to dissenters' rights in
connection with the merger. These rights are described in the section entitled
"Dissenters' Rights" in this proxy statement/prospectus.
2
<PAGE> 7
Q: WHOM MAY I CONTACT WITH ANY ADDITIONAL QUESTIONS?
A: You may call Donald M. Leonard, the Chief Financial Officer of
Mustang.com, at (661) 873-2500.
ADDITIONAL QUESTIONS AND ANSWERS ABOUT THE MERGER FOR MUSTANG.COM EMPLOYEES AND
WARRANTHOLDERS
Q: WHAT WILL HAPPEN TO EMPLOYEE STOCK OPTIONS HELD BY MUSTANG.COM EMPLOYEES
AND WARRANTS HELD BY MUSTANG.COM WARRANTHOLDERS?
A: The outstanding Mustang.com options and warrants will convert into
options and warrants for Quintus common stock, at the same 0.793 exchange ratio
that applies to Mustang.com common stock. Thus, for each share of Mustang.com
common stock on which you have an option or warrant, you will receive an option
or warrant to purchase 0.793 of a share of Quintus common stock. In addition,
the exercise price per share will be adjusted by dividing the current exercise
price by 0.793.
Example:
- An option or warrant to purchase 1,000 shares of Mustang.com common stock
at an exercise price of $10.00 per share will convert to an option or
warrant to purchase 793 shares of Quintus common stock (1,000 X 0.793) at
an exercise price of $12.61 per share ($10.00 / 0.793).
Q: MAY I EXERCISE STOCK OPTIONS AND WARRANTS AND SELL MUSTANG.COM COMMON
STOCK BETWEEN NOW AND THE COMPLETION OF THE MERGER?
A: Yes, in the same manner you would have done so prior to the announcement
of the merger.
Q: WHAT WILL HAPPEN TO MUSTANG.COM'S EMPLOYEE STOCK PURCHASE PLAN ("ESPP")?
A: The ESPP will be terminated upon completion of the merger. The
participation period then in process will end. The funds that are accumulated
through your payroll deductions up until that time will be applied to purchase
shares of Mustang.com common stock. Those shares of Mustang.com common stock
will then be exchanged in the merger for Quintus common stock. Any cash
remaining in your accounts after the purchase of shares of Mustang.com will be
returned.
3
<PAGE> 8
PROSPECTUS SUMMARY
This summary contains selected information from this proxy
statement/prospectus and may not contain all of the information that is
important to you. To understand the merger fully and to obtain a more complete
description of the legal terms of the merger, you should carefully read this
entire document, including the Annexes, and the documents to which you are
referred. If you require additional information, see "Where You Can Find More
Information" on page 133.
THE COMPANIES
Quintus Corporation
47212 Mission Falls Court
Fremont, CA 94539
Telephone: (510) 624-2800
Quintus provides 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, e-mail and the
telephone. The 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. Quintus eContact enables
companies to handle high volumes of customer interactions and leverage
opportunities to sell additional products and services to their customers.
Mustang.com, Inc.
6200 Lake Ming Road
Bakersfield, CA 93306
Telephone: (661) 873-2500
Founded in 1986, Mustang.com was one of the first providers of e-mail
management solutions with its award-winning Message Center(TM) product.
Introduced in 1997, Mustang Message Center enables loyal, high quality customer
relationships through Internet and e-mail based customer interactions.
Mustang.com is headquartered in Bakersfield, California with offices in Austin,
Chicago, Ft. Lauderdale, New York, Phoenix, Seattle and Washington DC.
JOINT REASONS FOR THE MERGER (SEE PAGE 38)
Quintus and Mustang.com believe that the business combination should
produce a number of potential benefits that may contribute to the success of the
combined company. These potential benefits from the combination include:
- extending Quintus' leadership in the eCRM market by combining
Mustang.com's award-winning e-mail management offerings with Quintus'
existing strengths in integrating multiple channels of customer contact;
- combining both companies' products in order to provide fully-integrated
solutions that can meet users' demands for a single, comprehensive view
of their customers across existing and emerging communication channels;
- providing Quintus with the opportunity to offer its solutions on an
outsourced, hosted basis;
- creating a combined customer base of over 750 companies and more than
24,000 e-mail management seats that could give Quintus greater scale and
presence in the eCRM market;
4
<PAGE> 9
- creating opportunities for cross-marketing of the two companies' products
to a larger combined customer base due to the complementary nature of
each company's product offering;
- combining the two companies' sales forces and distribution channels that
could enable broader distribution coverage and more effective marketing
of the combined company's offerings;
- combining the two companies' management and product development teams;
and
- joining the similar corporate cultures of the two companies.
Achieving these objectives depends on the successful integration of two
companies that have previously operated independently and on the other
uncertainties referred to under "Risk Factors Relating to the Merger" on page
18.
RECOMMENDATION TO MUSTANG.COM SHAREHOLDERS
Mustang.com's board of directors believes that the merger is fair to you
and in your best interests and unanimously recommends that you vote FOR the
approval of the merger agreement and the merger.
THE MERGER
QUINTUS AND MUSTANG.COM HAVE ATTACHED THE MERGER AGREEMENT AS ANNEX A TO
THIS PROXY STATEMENT/PROSPECTUS. QUINTUS AND MUSTANG.COM ENCOURAGE YOU TO READ
THIS AGREEMENT BECAUSE IT IS THE LEGAL DOCUMENT THAT GOVERNS THE MERGER.
WHAT MUSTANG.COM SHAREHOLDERS WILL RECEIVE IN THE MERGER
As a result of the merger, Mustang.com shareholders will receive, for each
Mustang.com common share that they own, 0.793 of a share of Quintus common
stock. Quintus will not issue any fractional shares of common stock in the
merger. Mustang.com shareholders will instead receive cash for any fractional
shares of Quintus common stock owed to them.
Example:
- If you currently own 100 shares of Mustang.com common stock, after the
merger you will receive 79 shares of Quintus common stock and a check for
the value of .3 of a share of Quintus common stock, rounded to the
nearest one cent. The value of the shares of Quintus common stock that
you receive will fluctuate as the price of a share of Quintus common
stock changes.
- On April 7, 2000, the average of the high and low sales prices of shares
of Quintus common stock on the Nasdaq National Market was $23. Applying
the 0.793 exchange ratio to the Quintus closing price on that date, each
holder of Mustang.com common stock would be entitled to receive shares of
Quintus common stock with a market value of approximately $18.24 for each
Mustang.com share. The actual value of the shares of Quintus common stock
to be issued in the merger, however, will depend on market prices at that
time, and may be more or less than the value given in this example. You
are urged to obtain current price quotations for Mustang.com and Quintus
common stock.
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES (SEE PAGE 41)
The merger is intended to qualify as a tax-free reorganization for U.S.
federal income tax purposes. If the merger so qualifies, shareholders of
Mustang.com common stock will generally not
5
<PAGE> 10
recognize any gain or loss on the exchange of their Mustang.com stock for
Quintus common stock in the merger, except for any gain or loss recognized in
connection with any cash received instead of a fractional share of Quintus
stock. The companies themselves, as well as current shareholders of Quintus
common stock, will not recognize gain or loss as a result of the merger.
THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES DESCRIBED ABOVE MAY NOT
APPLY TO ALL HOLDERS OF MUSTANG.COM COMMON STOCK. YOUR TAX CONSEQUENCES WILL
DEPEND ON YOUR OWN SITUATION. YOU SHOULD CONSULT YOUR TAX ADVISOR FOR A FULL
UNDERSTANDING OF THE TAX CONSEQUENCES OF THE MERGER TO YOU.
COMPARATIVE PER SHARE DATA (SEE PAGE 14)
Quintus common stock is listed on the Nasdaq National Market under the
symbols "QNTS" and Mustang.com common stock is listed on the Nasdaq SmallCap
Market under the symbol "MSTG". On February 25, 2000, the last full trading day
before the public announcement of the proposed merger, the last reported sale
price of Quintus common stock on the Nasdaq National Market was $48.25 and the
last reported sale price of Mustang.com common stock on the Nasdaq SmallCap
Market was $25.88. On April 7, 2000, the last reported sale price for Quintus
common stock was $22.4375 and $17 for Mustang.com common stock.
OWNERSHIP OF QUINTUS AFTER THE MERGER
Quintus will issue approximately 4,871,369 shares of Quintus common stock
to Mustang.com shareholders in the merger. These shares of Quintus common stock
will represent approximately 14.55% of the outstanding Quintus common stock
after the merger. This information is based on the number of shares of Quintus
and Mustang.com common stock outstanding on March 15, 2000, and does not take
into account stock options or warrants of Mustang.com.
MUSTANG.COM SHAREHOLDER VOTE REQUIRED
At the Mustang.com shareholders' special meeting, the merger and the merger
agreement must be approved by a majority of all outstanding shares of
Mustang.com common stock entitled to vote.
DISSENTERS' RIGHTS (SEE PAGE 130)
Holders of Mustang.com stock who do not vote in favor of the merger may,
under certain circumstances and by following procedures prescribed by California
law, exercise dissenters' rights and receive cash for their shares of
Mustang.com common stock. A dissenting shareholder must follow the appropriate
procedures under California law or will lose such rights.
MANAGEMENT OF QUINTUS FOLLOWING THE MERGER (SEE PAGE 110)
Following the merger, Alan K. Anderson will continue to be Chairman and
Chief Executive Officer of Quintus and James A. Harrer, President and Chief
Executive Officer of Mustang.com, will become President of Quintus Online, a new
division devoted to Quintus' online products and services.
6
<PAGE> 11
INTERESTS OF THE DIRECTORS AND OFFICERS OF MUSTANG.COM IN THE MERGER
In considering the recommendation of Mustang.com's board of directors, you
should be aware of the interests that Mustang.com executive officers and
directors have in the merger. These include the following:
- Mustang.com executive officers are eligible to receive retention and
severance benefits;
- Mustang.com executive officers and directors will have the benefit of
accelerated vesting of options to acquire Mustang.com common stock
granted under Mustang.com's stock option plans, as described below, in
connection with the merger; and
- Mustang.com officers and directors have customary rights to
indemnification against specified liabilities.
In considering the fairness of the merger to Mustang.com shareholders, the
Mustang.com board of directors took into account these interests. These
interests are different from and in addition to your and their interests as
shareholders. Mustang.com officers and directors have options to acquire
Mustang.com common stock that will be converted under the terms of Mustang.com's
stock option plans into options to acquire shares of Quintus common stock. As of
March 31, 2000, the officers and directors of Mustang.com have options for an
aggregate of 675,166 shares of Mustang.com common stock, which options were
vested with respect to 259,533 shares. Assuming the merger is completed on March
31, 2000, these options would vest with respect to up to an additional 415,633
shares of Mustang.com common stock upon completion of the merger. (Certain of
these options may not vest to the extent such vesting would trigger the payment
of excise tax pursuant to Section 280G of the Internal Revenue Code.) All of
these options will be converted in the merger into options to acquire
approximately 535,407 shares of Quintus common stock. In addition, as of April
10, 2000, the record date, the executive officers and directors of Mustang.com,
and its affiliates, beneficially-owned 956,358 shares of Mustang.com common
stock. These shares will be converted in the merger into approximately 758,391
shares of Quintus common stock.
SHARE OWNERSHIP OF MANAGEMENT AND DIRECTORS
On April 10, 2000, the record date for the Mustang.com's shareholders'
meeting, directors and executive officers of Mustang.com owned and were entitled
to vote 657,664 shares of Mustang.com common stock, or approximately 9.7% of the
Mustang.com common stock outstanding on that date.
Each of the directors and executive officers of Mustang.com and their
affiliates have advised Mustang.com that they intend to vote their shares in
favor of the merger.
ACCOUNTING TREATMENT
The merger will be accounted for under the "purchase" method of accounting
in accordance with generally accepted accounting principles.
CONDITIONS TO COMPLETION OF THE MERGER (SEE PAGE 54)
Quintus and Mustang.com will complete the merger only if certain conditions
specified are satisfied or waived, including the following:
- the representations and warranties of the respective parties made in the
merger agreement remain accurate in all material respects;
- the parties perform in all material respects their respective covenants
and obligations in the merger agreement;
7
<PAGE> 12
- the shareholders of Mustang.com approve the merger;
- the applicable waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, expires or it terminates;
- 5% or less of Mustang.com shareholders exercise and perfect their
dissenters' rights;
- there is an absence of any law or court order prohibiting the merger; and
- Quintus and Mustang.com receive the opinions of their respective counsel
that the merger will qualify as a tax-free reorganization for United
States federal income tax purposes.
TERMINATION OF THE MERGER AGREEMENT (SEE PAGE 55)
Quintus' board of directors and Mustang.com's board of directors can
jointly agree to terminate the merger agreement at any time before completing
the merger. In addition, the merger agreement may be terminated if:
- the merger is not completed by June 30, 2000 (however, a party in
material breach of its obligations under the merger agreement cannot
terminate it for this reason);
- a court order prohibits the merger;
- Mustang.com shareholders do not approve the merger;
- Mustang.com's board of directors withdraws, modifies or changes its
approval of the merger agreement or its recommendation to its
shareholders or fails to call and properly convene a shareholders'
meeting to vote upon the merger;
- either company breaches materially any of its representations or
warranties under the merger agreement, resulting in its inability to
satisfy a condition to the completion of the merger by June 30, 2000;
- either company breaches materially any of its covenants or agreements
under the merger agreement and fails to cure that breach within a twenty
(20) day period; or
- Mustang.com solicits or enters into discussions with respect to an
alternative transaction which could reasonably be expected to interfere
with the merger.
TERMINATION FEES AND EXPENSES (SEE PAGE 55)
The merger agreement obligates Mustang.com to pay to Quintus a termination
fee of $5 million and to reimburse Quintus for all its out-of-pocket fees and
expenses up to $2.5 million if:
- the merger agreement is terminated for certain of the reasons described
above under "Termination of the Merger Agreement"; or
- within 12 months of termination of the merger agreement, due to the
merger not being completed by June 30, 2000 or Mustang.com shareholders
not approving the merger, Mustang.com merges with another company,
another company acquires 50% or more of Mustang.com's assets or stock, or
Mustang.com implements a plan of liquidation, recapitalization or share
repurchase relating to 50% or more of its stock, or a dividend relating
to 50% or more of its stock or assets.
OPINION OF MUSTANG.COM'S FINANCIAL ADVISOR (SEE PAGE 45)
In deciding to approve the merger, Mustang.com's board of directors
considered the opinion of their financial advisors as to the fairness of the
merger exchange ratio to the Mustang.com shareholders. Mustang.com received an
opinion from First Security Van Kasper to the effect that the
8
<PAGE> 13
merger exchange ratio was fair from a financial point of view to the
shareholders of Mustang.com. Quintus and Mustang.com have attached the full text
of this opinion as Annex B. You are encouraged to read it.
REGULATORY MATTERS
The transactions contemplated in the merger agreement require filing under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. Expiration
or termination of the applicable waiting period under the Hart-Scott-Rodino Act,
or the HSR Act, is a condition to completion of the merger. Quintus and
Mustang.com were granted early termination of the applicable waiting period
under the HSR Act on April 4, 2000.
9
<PAGE> 14
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
QUINTUS SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following selected historical consolidated financial data should be
read in conjunction with Quintus' consolidated financial statements and the
related notes and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" of Quintus Corporation, which is included
elsewhere in this proxy statement/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 Quintus' consolidated financial statements included elsewhere in
this proxy statements/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
Quintus' consolidated financial statements included elsewhere in this proxy
statement/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 proxy statement/prospectus. Prior to May 25, 1995, Quintus was a
wholly-owned subsidiary of Intergraph Corporation. The financial data for the
year ended and as of March 31, 1995 is derived from Quintus' predecessor
entity's 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 Quintus' operations during
the year ended March 31, 1996.
During July 1997 and November 1997, Quintus acquired Call Center
Enterprises, Inc. and Nabnasset Corporation, respectively. In connection with
these acquisitions, Quintus acquired intangible assets of approximately $10.9
million, which are being amortized over a three year period, and Quintus
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 the notes to Quintus' consolidated financial
statements included elsewhere in this proxy statement/prospectus.
During November 1999, Quintus acquired Acuity Corporation. In connection
with this acquisition, Quintus acquired intangible assets of approximately $44.6
million, which are being amortized over a period ranging from four to five
years, and recorded a charge for $3.0 million for in-process research and
development costs during the quarter ended December 31, 1999. This transaction
is described at Note 3 of Quintus' notes to unaudited consolidated condensed
financial statements for the quarter ended December 31, 1999, included elsewhere
in this proxy statement/prospectus.
The consolidated statements of operations data for the nine months ended
December 31, 1998 and 1999 and the consolidated balance sheet data as of
December 31, 1999 are derived from Quintus' unaudited consolidated condensed
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 Quintus' 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.
10
<PAGE> 15
QUINTUS SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
FOR THE
PERIOD
FROM
MAY 25,
1995
YEAR ENDED THROUGH NINE MONTHS ENDED
MARCH 31, MARCH 31, YEAR ENDED MARCH 31, DECEMBER 31,
1995 --------- ----------------------------- -------------------
(PREDECESSOR) 1996 1997 1998 1999 1998 1999
------------- --------- ------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues.................. $ 7,108 $ 6,441 $13,614 $ 21,890 $ 30,307 $ 21,814 $ 35,603
Cost of revenues.......... 2,174 1,622 5,171 8,290 9,177 7,025 9,947
Gross profit.............. 4,934 4,819 8,443 13,600 21,130 14,789 25,656
Loss from continuing
operations.............. (2,152) (8,263) (3,366) (9,606) (9,669) (8,862) (10,331)
Net loss from continuing
operations.............. (3,128) (8,295) (3,526) (10,146) (10,586) (9,568) (10,460)
Net Loss.................. (3,128) (8,295) (3,526) (11,249) (11,466) (10,998) (10,460)
Basic and diluted net loss
per share from
continuing operations... -- $(76.63) $ (4.25) $ (6.88) $ (3.73) $ (3.24) $ (1.24)
Basic and diluted net loss
per share............... -- $(76.63) $ (4.25) $ (7.53) $ (4.04) $ (3.72) $ (1.24)
Shares used in
computation, basic and
diluted................. 109 868 1,695 2,835 2,955 8,434
</TABLE>
<TABLE>
AS OF
DECEMBER 31,
AS OF MARCH 31,
----------------------------------------
1995 1999
(PREDECESSOR)
1996 1997 1998 1999
------------- ------- -------- -------- -------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents...... $ 1,117 $ 792 $ 3,045 $ 1,986 $ 1,785 $ 36,820
Short-term investments......... -- -- -- -- -- 30,700
Working capital (deficit)...... 1,537 582 1,552 (11,250) (8,644) 64,242
Total assets................... 4,943 5,699 9,852 23,141 19,594 136,682
Long-term obligations, net of
current portion.............. 14,510 528 19 4,246 2,201 1,947
Redeemable convertible
preferred stock.............. -- 9,478 14,110 17,811 17,811 --
Total stockholders' equity
(deficiency)................. (11,696) (7,850) (10,831) (20,333) (20,091) 113,640
</TABLE>
11
<PAGE> 16
MUSTANG.COM SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected historical consolidated financial data should be
read in conjunction with Mustang.com's financial statements and the related
notes and with "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this proxy statement/prospectus.
The statements of operations data for the years ended December 31, 1997,
1998 and 1999 and balance sheet data as of December 31, 1998 and 1999 are
derived from financial statements audited by Arthur Andersen LLP, which are
included elsewhere in this proxy statements/prospectus. The statements of
operations data for the years ended December 31, 1995 and 1996 and balance sheet
data as of December 31, 1995, 1996 and 1997 are derived from financial
statements audited by Arthur Andersen LLP, which are not included in this proxy
statement/prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues................................... $ 4,820 $ 3,810 $ 1,898 $ 2,011 $ 3,711
Cost of revenues........................... 932 646 331 178 441
Gross profit............................... 3,888 3,164 1,568 1,833 3,270
Loss from operations....................... (1,454) (3,642) (1,413) (1,184) (1,043)
Net loss................................... (1,097) (3,453) (1,341) (1,157) (906)
------- ------- ------- ------- -------
Basic and diluted net loss per share....... $ (0.32) $ (1.03) $ (0.40) $ (0.31) $ (0.19)
------- ------- ------- ------- -------
Shares used in computation, basic and
diluted................................. 3,050 3,360 3,384 3,707 4,822
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1995 1996 1997 1998 1999
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents...................... $4,615 $2,920 $1,404 $1,850 $ 8,848
Working capital................................ 5,603 2,294 1,051 1,706 8,382
Total assets................................... 7,677 4,311 2,351 2,892 10,189
Long-term obligations, net of current
portion..................................... 399 337 269 261 252
Total stockholders' equity..................... 6,249 2,826 1,497 2,050 8,761
</TABLE>
12
<PAGE> 17
QUINTUS SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected unaudited pro forma condensed combined financial
data should be read in conjunction with Quintus' selected unaudited pro forma
condensed combined financial statements and related notes included elsewhere in
the proxy statement/prospectus.
The selected unaudited pro forma condensed combined balance sheet data
gives effect to Quintus' acquisition of Mustang.com and was prepared as if the
acquisition of Mustang.com was completed as of December 31, 1999.
The selected unaudited pro forma condensed combined statement of operations
data gives effect to Quintus' acquisition of Acuity in November 1999 and the
acquisition of Mustang.com and were prepared as if both acquisitions were
completed on April 1, 1998. The selected unaudited pro forma condensed combined
statement of operations data for the year ended March 31, 1999 has been derived
by combining the audited historical statements of operations of Quintus for the
year ended March 31, 1999 and the audited historical statements of operations of
Acuity and Mustang.com for the year ended December 31, 1998. The selected
unaudited pro forma condensed combined statement of operations data for the nine
months ended December 31, 1999 has been derived by combining the unaudited
historical statements of operations of Quintus, Acuity and Mustang.com for the
nine months ended December 31, 1999.
The pro forma information below is presented for illustrative purposes only
and is not necessarily indicative of the operating results or financial position
that would have occurred if the merger had been consummated at the beginning of
the earliest period presented, nor is it necessarily indicative of future
operating results or financial position. The pro forma adjustments are based
upon information and assumptions available at the time of the filing of this
document.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
MARCH 31, DECEMBER 31,
1999 1999
---------- -----------------
<S> <C> <C>
PRO FORMA STATEMENT OF OPERATIONS DATA:
Revenue................................................... $ 39,037 $ 39,699
Cost of revenue........................................... 10,736 11,011
Gross profit.............................................. 28,301 28,688
Loss from continuing operations........................... (80,474) (62,099)
Net loss from continuing operations....................... (81,306) (62,190)
Pro forma basic and diluted net loss per share from
continuing operations.................................. $ (2.70) $ (1.96)
Shares used in computing pro forma basic and diluted net
loss per share from continuing operations.............. 30,100 31,715
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
1999
------------
<S> <C>
PRO FORMA BALANCE SHEET DATA AT PERIOD END:
Cash and cash equivalents................................. $ 45,668
Short-term investments.................................... 30,700
Working capital........................................... 69,624
Total assets.............................................. 411,311
Long-term obligations, net of current portion............. 2,199
Total stockholders' equity................................ 383,840
</TABLE>
13
<PAGE> 18
COMPARATIVE PER SHARE DATA
The following table reflects (a) the historical net loss and book value per
share of Quintus common stock and the historical net loss and book value per
share of Mustang.com common stock in comparison with the unaudited pro forma net
loss and book value per share after giving effect to Quintus' proposed
acquisition of Mustang.com and after giving effect to the acquisition by Quintus
of Acuity, and (b) the equivalent pro forma net loss and book value per share
attributable to 0.793 of a share of a Quintus common stock which will be
received for each share of Mustang.com.
For Quintus, the historical book value per share is computed by dividing
the stockholders' equity as of March 31, 1999 and December 31, 1999,
respectively, by the actual common shares outstanding and, for Mustang.com, the
historical book value per share is computed by dividing the stockholders' equity
as of December 31, 1998 and December 31, 1999, respectively, by the actual
common shares outstanding.
The pro forma per share loss from continuing operations is computed by
dividing the pro forma loss from continuing operations by the pro forma weighted
average number of shares outstanding, assuming Quintus had acquired Mustang.com
at the beginning of the earliest period presented. The pro forma combined book
value per share is computed by dividing the total pro forma stockholders' equity
by the pro forma number of common shares outstanding at December 31, 1999,
assuming the merger had occurred on that date. The Mustang.com equivalent pro
forma combined per share amounts are calculated by multiplying the Quintus pro
forma combined per share amounts by the exchange ratio of 0.793.
The following information should be read in conjunction with the separate
selected audited historical consolidated financial statements and related notes
of Quintus and Mustang.com, the selected unaudited interim condensed
consolidated financial statements of Quintus, the unaudited pro forma condensed
combined financial information and related notes of Quintus, and the selected
historical and selected unaudited pro forma financial data included elsewhere in
this proxy statement/prospectus. The pro forma information is presented for
illustrative purposes only and is not necessarily indicative of the operating
results or financial position that would have occurred if the acquisition of
Mustang.com had been consummated as of the beginning of the respective periods
presented, nor is it necessarily indicative of the future operating results or
financial position of the combined companies.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
MARCH 31, DECEMBER 31,
1999 1999
---------- -----------------
<S> <C> <C>
HISTORICAL QUINTUS:
Net loss from continuing operations per share -- basic and
diluted................................................... $(3.73) $(1.24)
Book value per share at the end of the period............... (4.77) 3.42
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1999
------------ ------------
<S> <C> <C>
HISTORICAL MUSTANG.COM:
Net loss from continuing operations per share -- basic and
diluted................................................... $(0.31) $(0.19)
Book value per share at the end of the period............... 0.50 1.47
</TABLE>
14
<PAGE> 19
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
MARCH 31, DECEMBER 31,
1999 1999
---------- -----------------
<S> <C> <C>
PRO FORMA COMBINED:
Pro forma net loss from continuing operations per Quintus
share -- basic and diluted................................ $(2.70) $(1.96)
Pro forma net loss from continuing operations per equivalent
Mustang.com share -- basic and diluted.................... (2.14) (1.55)
Pro forma book value per Quintus share at December 31,
1999...................................................... 10.06
Pro forma book value per equivalent Mustang.com share at
December 31, 1999......................................... 7.98
</TABLE>
15
<PAGE> 20
MARKET PRICE INFORMATION
Quintus common stock has been traded on the Nasdaq National Market under
the symbol "QNTS" since November 16, 1999. The following table sets forth, for
the periods indicated, the high and low closing prices of Quintus common stock
as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
------- ------
<S> <C> <C>
Fourth Quarter 1999 (from November 16, 1999)................ $ 56.50 $18.00
First Quarter 2000.......................................... $56.375 $27.50
</TABLE>
Shares of Mustang.com's common stock have been traded on the
over-the-counter market since its initial public offering on April 5, 1995 and
are included in the Nasdaq Stock Market under the symbol "MSTG". The following
table sets forth, for the quarters indicated, the high and low last reported
sale prices as reported on the Nasdaq National Market through October 14, 1998
and the high and low bid prices as reported on the Nasdaq SmallCap Market from
October 15, 1998. Quotations since October 15, 1998 reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not represent actual
transactions.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1998
First Quarter............................................. $ 4.06 $ 1.25
Second Quarter............................................ $ 3.25 $ 1.25
Third Quarter............................................. $ 2.38 $ 1.50
Fourth Quarter............................................ $ 3.00 $ 1.00
1999
First Quarter............................................. $ 5.94 $ 2.25
Second Quarter............................................ $12.00 $ 3.94
Third Quarter............................................. $ 9.00 $ 4.75
Fourth Quarter............................................ $18.25 $ 6.13
2000
First Quarter............................................. $29.63 $12.25
</TABLE>
As of March 15, 2000, Quintus estimates that there were approximately 399
holders of record of Quintus common stock and a substantially greater number of
beneficial owners. As of March 15, 2000, there were approximately 129 holders of
record of Mustang.com capital stock.
The table below sets forth the high and low sale prices per share of
Quintus common stock on the Nasdaq National Market on February 25, 2000, the
last completed trading day prior to the public announcement of the proposed
merger, and on April 7, 2000. Also set forth is the implied equivalent value of
one share of Mustang.com common stock on each respective date, assuming an
exchange ratio of 0.793 of a share of Quintus common stock for each share of
Mustang.com common stock.
<TABLE>
<CAPTION>
APPROXIMATE
QUINTUS MUSTANG.COM
COMMON STOCK EQUIVALENT
------------------ ------------------
HIGH LOW HIGH LOW
------- ------- ------- -------
<S> <C> <C> <C> <C>
February 25, 2000.............................. $52.375 $47.500 $41.533 $37.668
April 7, 2000.................................. $23.813 $22.188 $18.884 $17.595
</TABLE>
As the table above indicates, fluctuations in the market price of Quintus
common stock affect the value of the Mustang.com common stock for which they are
exchanged. The table illustrates that between February 25, 2000 and April 7,
2000, the value of a share of Mustang.com common stock,
16
<PAGE> 21
had it been exchanged for Quintus common stock at the assumed exchange ratio,
would have fluctuated between $17.595 and $41.533.
The foregoing table only shows historical comparisons. These comparisons
may not provide meaningful information to you in determining whether to approve
the merger and the merger agreement. Because the number of shares of Quintus
common stock to be issued to the holders of Mustang.com common stock is fixed,
changes in the market price of Quintus common stock will affect the dollar value
of Quintus common stock to be received by shareholders of Mustang.com in the
merger. Mustang.com shareholders are urged to obtain current market quotations
for Quintus common stock and to review carefully the other information contained
in this proxy statement/ prospectus prior to considering whether to approve the
merger and the merger agreement.
17
<PAGE> 22
RISK FACTORS RELATING TO THE MERGER
In addition to the risks relating to the businesses of Quintus and
Mustang.com that are described below, you should carefully consider the
following risk factors relating to the merger in determining whether to vote in
favor of the merger. You should also consider the risk factors that will
generally have an impact on the combined company's financial condition, results
of operations and business after the merger, including those described under
"Information Regarding Forward-Looking Statements."
MUSTANG.COM SHAREHOLDERS WILL RECEIVE IN THE MERGER QUINTUS SHARES THAT WILL
FLUCTUATE IN VALUE
In the merger, Mustang.com's shareholders will receive 0.793 of a share of
Quintus common stock for each share of Mustang.com common stock. The market
price of the Quintus common stock to be issued in the merger will change as a
result of changes in the business, operations or prospects of Quintus or
Mustang.com or market assessments of the impact of the merger. Because the
market price of Quintus common stock fluctuates, the value of the Quintus shares
to be received by Mustang.com shareholders will depend upon the market price of
the shares at the time of the merger. There can be no assurance as to this
value. For historical and current market prices of Quintus shares, see
"Comparative Per Share Data" on page 14.
The market price of Quintus common stock has been and may continue to be
volatile. For example, from November 16, 1999 to April 7, 2000, Quintus common
stock traded as high as $56.50 per share and as low as $18.00 per share. You
should not view these facts, however, as necessarily indicating the future
market performance or volatility of Quintus shares. The actual performance and
volatility of Quintus shares could be significantly more or less than that
indicated by the above facts, on an absolute or a relative basis.
QUINTUS MAY EXPERIENCE DIFFICULTIES IN COMBINING THE OPERATIONS OF THE TWO
COMPANIES
The merger involves the integration of two companies that have previously
operated independently. The companies must integrate numerous systems, including
those involving management information, sales, accounting and finance, billing,
employee benefits, payroll and research and development. Specifically, the two
companies have a number of information systems that are dissimilar. The
companies will have to integrate or, in some cases, replace these systems.
IF QUINTUS DOES NOT SUCCESSFULLY INTEGRATE MUSTANG.COM OR THE MERGER'S BENEFITS
DO NOT MEET THE EXPECTATIONS OF FINANCIAL OR INDUSTRY ANALYSTS, THE MARKET PRICE
OF QUINTUS COMMON STOCK MAY DECLINE
The market price of Quintus common stock may decline as a result of the
merger if:
- the integration of Quintus and Mustang.com is unsuccessful;
- Quintus does not achieve the perceived benefits of the merger as rapidly
as, or to the extent, anticipated by financial or industry analysts; or
- the effect of the merger on Quintus' financial results is not consistent
with the expectations of financial or industry analysts.
18
<PAGE> 23
FAILURE TO COMPLETE THE MERGER COULD NEGATIVELY IMPACT THE MARKET PRICE OF
MUSTANG.COM'S COMMON STOCK AND MUSTANG.COM'S OPERATING RESULTS
If the merger is not completed for any reason, Mustang.com may be subject
to a number of material risks, including:
- Mustang.com may be required to pay Quintus a termination fee of up to $5
million and/or reimburse Quintus for expenses of up to $2.5 million;
- the market price of Mustang.com common stock may decline to the extent
that the current market price of common stock reflects a market
assumption that the merger will be completed; and
- costs related to the merger, such as legal and accounting fees, must be
paid even if the merger is not completed.
If the merger agreement is terminated and Mustang.com's board of directors
seeks another merger or business combination, Mustang.com may not be able to
find a partner willing to pay an equivalent or more attractive price than the
price to be paid by Quintus in the merger.
OFFICERS AND DIRECTORS HAVE POTENTIAL CONFLICTS OF INTEREST IN THE MERGER
In considering the recommendations of the Mustang.com board of directors
that the shareholders approve the merger, you should be aware that some of the
directors and officers may have interests in the merger different from, or in
addition to, yours, including the following:
- as of March 31, 2000, the officers and directors of Mustang.com owned
options to purchase an aggregate of 675,166 shares of Mustang.com common
stock, of which 415,633 are unvested. If the merger is completed, all of
the unvested options will accelerate and become immediately exercisable,
except to the extent such accelerated vesting would be considered a
"golden parachute payment" within the meaning of Section 280G of the
Internal Revenue Code;
- certain officers of Mustang.com are entitled to certain benefits,
including severance packages, under their employment agreements with
Mustang.com if their employment is terminated as a result of the merger
or other similar transactions;
- upon completion of the merger, Quintus may enter into employment
agreements with some executive officers of Mustang.com; and
- Quintus has agreed to cause the surviving corporation in the merger to
indemnify each present and former Mustang.com officer and director
against liabilities arising out of such person's services as an officer
or director. Quintus will cause the surviving corporation to maintain
officers' and directors' liability insurance to cover any such
liabilities for the next six years.
The directors and officers of Mustang.com may therefore have been more
likely to vote to approve the merger agreement and the merger than if they did
not have these interests. Mustang.com shareholders should consider whether these
interests may have influenced these directors and officers to support or
recommend the merger.
19
<PAGE> 24
RISK FACTORS RELATING TO QUINTUS
QUINTUS MAY NOT ACHIEVE PROFITABILITY AND, AS A RESULT, THE TRADING PRICE OF ITS
COMMON STOCK COULD DECLINE AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT
Quintus has not had a profitable quarter and it cannot assure you that it
will become profitable. Quintus expects to increase its sales and marketing,
research and development, and other expenses as it attempts to grow its
business. As a result, Quintus will need to generate significant revenues to
become profitable, which it may be unable to do. If Quintus fails to become
profitable, the trading price of its common stock could decline significantly.
Quintus has funded its operations through the sale of equity securities,
borrowings and the sale of its products and services. Quintus incurred net
losses from continuing operations of $8.8 million and $5.2 million for the third
quarter of fiscal 2000 and 1999, respectively, and $10.5 million and $9.6
million for the nine months ended December 31, 1999 and 1998, respectively. As
of December 31, 1999 Quintus had an accumulated deficit of $45.1 million. In
addition, in November 1999, Quintus acquired 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,
respectively. Acuity had an accumulated deficit of $25.3 million as of September
30, 1999. In connection with its acquisition of Acuity, Quintus recorded
approximately $44.6 million of goodwill and intangible assets, which will be
amortized on a monthly basis over periods of four to five years. In connection
with the acquisition of Acuity, Quintus recognized a charge for in-process
technologies of approximately $3.0 million in the quarter ending December 31,
1999.
BECAUSE QUINTUS RECENTLY EXPANDED THE SCOPE OF ITS PRODUCT OFFERING, IT MAY BE
DIFFICULT FOR YOU TO EVALUATE ITS BUSINESS PROSPECTS
In February 1999, Quintus expanded the scope of its product offering with
components for managing email and Internet-based customer interactions and
introduced the Quintus eContact suite. As a result, while it sold many of the
components that are included in its eContact suite prior to 1999, Quintus has
only recently sold the components for managing email and Internet-based customer
interactions. Quintus sold its 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.
Quintus cannot assure you that its eContact suite will achieve market
acceptance. In addition, Quintus is still integrating Acuity's WebCenter and
WebACD products into its eContact suite. Quintus may encounter technical
difficulties, delays and unforeseen expenses as Quintus continues its product
integration and development efforts.
IF INITIAL IMPLEMENTATION OF THE QUINTUS ECONTACT SUITE SUFFERS PROBLEMS OR
DELAYS, QUINTUS' REPUTATION AND FUTURE OPERATING RESULTS MAY BE HARMED
Quintus is just beginning to deploy its eContact suite. The initial
implementation of its eContact suite may encounter problems or delays. Although
Quintus has successfully deployed some of the components of its eContact suite,
Quintus has not deployed eContact with integrated computer telephony, email, Web
chat and Web self-service capabilities. To successfully implement its eContact
suite, Quintus must complete the integration of these components and will likely
have to integrate eContact with a wide variety of complex systems currently used
by its customers. If these implementations meet with significant technological
obstacles, Quintus may be forced to spend additional resources, harming its
operating results. If the ease and speed of this implementation does not meet
the expectations of its customers, Quintus' reputation and ability to sell its
eContact suite will be harmed.
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<PAGE> 25
BECAUSE QUINTUS' QUARTERLY REVENUES AND OPERATING RESULTS MAY FLUCTUATE
SIGNIFICANTLY, THE TRADING PRICE OF ITS COMMON STOCK IS LIKELY TO BE VOLATILE
It is likely that in some future quarter Quintus' revenues and operating
results will fall below the expectations of market analysts and investors. If
this happens, the trading price of Quintus common stock may fall substantially.
Quintus' revenues and operating results are likely to vary significantly from
quarter to quarter due to a variety of factors, including the risks described in
this section.
Quintus' ability to forecast revenues is limited. Quintus derives
substantially all of its revenues from licenses of Quintus' software and related
services. License revenues in any quarter are substantially dependent on orders
booked and shipped in that quarter, and Quintus cannot predict revenues for any
future quarter with any significant degree of certainty. In addition, Quintus
expects that sales derived through indirect channels, which are more difficult
to forecast, may increase as a percentage of total revenues in the future.
Quintus' expenses are relatively fixed and are based, in part, on its
expectations of future revenues. Consequently, if revenue levels do not meet
Quintus' expectations, its operating results will suffer.
BECAUSE QUINTUS DEPENDS UPON A LIMITED NUMBER OF LARGE SALES FOR A SUBSTANTIAL
PORTION OF ITS REVENUES, THE FAILURE TO OBTAIN LARGE PROSPECTIVE CUSTOMERS COULD
CAUSE QUINTUS' REVENUES TO FALL QUICKLY AND UNEXPECTEDLY
Quintus depends upon a limited number of large sales for a substantial
portion of its revenues in each quarter. For example, in the third quarter of
fiscal 2000 and in the nine months ended December 31, 1999, its largest
customer, Ticketmaster L.L.P., accounted for 38.7% and 17.8% of its total
revenues, respectively. Quintus' failure to successfully close one or more large
sales in any particular period could cause its revenues to drop quickly and
unexpectedly. Quintus expects to continue to be dependent upon a limited number
of customers for a significant portion of its revenues, and these customers are
expected to vary from period-to-period. The loss of prospective major customers
could result in its failure to meet quarterly revenue expectations, causing the
trading price of its common stock to fall.
QUINTUS RELIES HEAVILY ON ITS INDIRECT DISTRIBUTION CHANNELS, PARTICULARLY ITS
DISTRIBUTION AGREEMENT WITH LUCENT TECHNOLOGIES
If Lucent Technologies were to cease reselling or fail to continue to
promote its products, Quintus' operating results could be harmed. Lucent
Technologies accounted for 5.8% and 21.1% of its total revenues for the third
quarter of fiscal 2000 and 1999 and 19.8% and 22.9% of its total revenues for
the nine months ended December 31, 1999 and 1998, respectively. Quintus'
distribution agreement with Lucent Technologies expires in May 2002 and can be
terminated beforehand 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 its
products, or its failure to attract and retain qualified new resellers in the
future could also harm Quintus' business. Typically its resellers do not have
minimum purchase or resale obligations, can cease marketing Quintus' products at
any time, and may offer competing products. Quintus intends to expand its
indirect distribution channels by establishing additional relationships with
resellers and distribution partners. Competition for these relationships is
intense, and Quintus may be unable to establish relationships on favorable
terms, if at all. Even if Quintus is successful in establishing these
relationships, they may not substantially increase its revenues.
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QUINTUS FACES A NUMBER OF RISKS RELATED TO QUINTUS' RECENT ACQUISITION OF ACUITY
AND ITS PROPOSED ACQUISITION OF MUSTANG.COM, AND QUINTUS MAY FACE SIMILAR RISKS
IN THE FUTURE IF QUINTUS ACQUIRES OTHER BUSINESSES OR TECHNOLOGIES
In November 1999, Quintus acquired Acuity, a company located in Austin,
Texas, where Quintus previously had no other operations. Although its
integration of Acuity's products, personnel and systems is largely complete,
unknown complications could arise in the future. If difficulties stemming from
this integration arise in the future, Quintus' business and operating results
are likely to suffer. Further, the acquisition of Acuity was Quintus' third
acquisition within the last three years, and it may make more acquisitions in
the future. If Quintus is unable to integrate effectively Mustang.com or any
newly acquired businesses, technologies or products, Quintus' 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, Quintus 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 Quintus shareholders. Moreover, Quintus
may not be able to operate any acquired businesses profitably or otherwise
implement its growth strategy successfully.
BECAUSE MANY OF QUINTUS' SALES PEOPLE ARE NEW HIRES AND HIRING ADDITIONAL SALES
PERSONNEL IS PARTICULARLY COMPETITIVE, IT MAY BE UNABLE TO EXPAND ITS BUSINESS
Quintus has replaced a large number of its sales people during the last
year. As a result, many of its sales personnel are new to Quintus. Quintus
expects its new sales personnel will require substantial training in its
products and sales practices. New sales personnel tend to be less productive
than those with greater experience selling its products. Moreover, Quintus
intends 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, Quintus has experienced difficulty hiring
employees with appropriate qualifications in the time frame desired. Any delays
or difficulties Quintus encounters in these recruiting, training or retention
efforts could impair its ability to attract new customers and enhance its
relationships with existing customers.
BECAUSE THE ECRM MARKET IS HIGHLY COMPETITIVE, QUINTUS MAY NOT BE ABLE TO
SUCCEED AND YOU MAY LOSE PART OR ALL OF YOUR INVESTMENT
If Quintus fails to compete successfully in the highly competitive and
rapidly changing eCRM market, it may not be able to succeed and you may lose
part or all of your investment. Quintus faces competition primarily from
customer relationship management software firms, emerging Internet customer
interaction software vendors and computer telephony software companies. Quintus
also faces 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, Quintus expects to face additional
competition in the future.
Many of Quintus' competitors can devote significantly more resources to the
development, promotion and sale of products than Quintus can, and many of them
can respond to new technologies and changes in customer preferences more quickly
than Quintus can. Further, other companies with resources greater than Quintus
may attempt to gain market share in the eCRM market by acquiring or forming
strategic alliances with its competitors.
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QUINTUS' 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. Quintus' 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 its market. If eCRM software fails to achieve market acceptance, its
business will suffer and may not succeed.
BECAUSE QUINTUS DEPENDS ON THIRD-PARTY SYSTEMS INTEGRATORS TO SELL AND IMPLEMENT
ITS PRODUCTS, ITS REVENUES WILL LIKELY SUFFER IF IT DOES NOT DEVELOP AND
MAINTAIN THESE RELATIONSHIPS
Quintus relies on systems integrators to promote, sell and implement its
solution. If Quintus fails to maintain and develop relationships with systems
integrators, its revenues will likely suffer. Quintus currently relies on
systems integrators such as AnswerThink Consulting Group, Cambridge Technology
Partners and eLoyalty to recommend its products to their customers and to
install its products. If Quintus is unable to rely on systems integrators to
implement its products, Quintus will likely have to provide these services
itself, resulting in increased costs. As a result, its ability to grow may be
harmed. In addition, systems integrators may develop, market or recommend
products that compete with its products. For this reason, Quintus must cultivate
its relationships with these firms, and its failure to do so could result in
reduced sales revenues. Further, if these systems integrators fail to implement
Quintus' products successfully, its reputation may be harmed.
BECAUSE THE SALES CYCLE FOR QUINTUS' PRODUCTS CAN BE QUITE LENGTHY, IT IS
DIFFICULT FOR QUINTUS TO PREDICT WHEN OR WHETHER A SALE WILL BE MADE
The timing of Quintus' revenues is difficult to predict in large part due
to the length and variability of the sales cycle for its products. Companies
often view the purchase of Quintus' products as a significant and strategic
decision. As a result, companies tend to take significant time and effort
evaluating Quintus' 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 Quintus may incur substantial sales and marketing
expenses and expend significant management efforts. Quintus does not recoup
these investments if the prospective customer does not ultimately license its
product.
IF QUINTUS IS 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, QUINTUS' BUSINESS WILL SUFFER
The eCRM market is new and is likely to change rapidly. Quintus' future
success will depend on its ability to effectively and timely anticipate changing
customer requirements and offer products and services that meet these demands.
Potential customers may seek features that its products do not have. As a
result, Quintus 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. Quintus may experience design, development,
marketing and other difficulties that could delay or prevent the introduction of
new products and enhancements. For example, Quintus' ability to introduce new
products would be impaired if Quintus cannot continue to attract, hire, train
and retain highly skilled personnel.
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QUINTUS' FAILURE TO MANAGE ITS RAPID GROWTH COULD INCREASE ITS COSTS AND HARM
ITS BUSINESS
Quintus has experienced rapid growth and plans to continue to significantly
expand its operations. Quintus may not be able to manage this growth
effectively, which would impair its ability to attract and service customers and
cause it to incur higher operating costs. Expanding its operations has placed a
significant strain on its personnel and other resources. Its revenues have grown
to $35.6 million in the nine months ended December 31, 1999 from $21.8 million
in the nine months ended December 31, 1998. Quintus' headcount increased from
189 employees as of December 31, 1998 to 275 employees as of December 31, 1999.
To manage its growth effectively, Quintus may need to further improve its
operational, financial and management systems. Quintus cannot assure you that it
will improve these systems adequately.
IF QUINTUS DOES NOT SUCCESSFULLY ADDRESS THE RISKS INHERENT IN THE EXPANSION OF
ITS INTERNATIONAL OPERATIONS, ITS OPERATING RESULTS MAY SUFFER
Quintus has limited experience in international operations and may not be
able to compete effectively in international markets. Quintus currently intends
to expend significant financial and management resources to expand its
international operations. Quintus believe that the future expansion of its
international operations is important to the growth of its business. Most of its
international sales are generated through resellers and distributors, and
Quintus expects substantial costs and resources will be required to continue to
train and support these resellers.
Among the various risks Quintus faces 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 Quintus' operating
costs and hurt its financial performance;
- technology standards that are different from those on which Quintus
products are designed, which could require expensive redesigns of
Quintus' products;
- political and economic instability;
- unexpected changes in regulatory requirements that could make Quintus'
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 QUINTUS DEPENDS ON LICENSED THIRD-PARTY TECHNOLOGIES, QUINTUS WILL FACE
ADDITIONAL COSTS IF IT HAS TO REPLACE THESE TECHNOLOGIES
Quintus' products incorporate technologies that is licensed from third
parties. Although Quintus believes it could obtain similar technologies from
alternative sources, substituting and integrating replacement technologies could
require Quintus 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, Quintus may be required to license replacement
technologies on terms less favorable than its current terms, which would
increase its expenses. If Quintus is unable to obtain the third-party
technologies necessary for the successful operation of its products, its
business would be harmed.
UNKNOWN SOFTWARE DEFECTS COULD HARM QUINTUS' BUSINESS AND REPUTATION
Quintus' software interacts with other complex systems and software. Its
software products may contain defects, particularly when first introduced.
Despite Quintus' software testing procedures, it
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may not discover software defects that affect its products until after they are
deployed. These defects could result in:
- damage to Quintus' reputation;
- product returns or lost sales;
- product liability claims against Quintus;
- delays in or loss of market acceptance of Quintus' products; and
- unexpected expenses and diversion of resources to remedy errors.
The occurrence of any of these events would hurt Quintus' operating results. In
addition, Quintus' customers generally use its 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 Quintus' products, they may cause Quintus to incur significant
warranty and repair costs, divert the attention of its engineering personnel and
cause significant customer relations problems.
ALTHOUGH QUINTUS HAS TAKEN MEASURES TO PROTECT ITS INTELLECTUAL PROPERTY, ITS
COMPETITIVE POSITION MAY SUFFER IF THESE MEASURES PROVE TO BE INADEQUATE
Third parties may infringe or misappropriate Quintus' copyrights,
trademarks and similar proprietary rights. Quintus cannot be certain that the
steps it has taken to prevent the misappropriation of its intellectual property
are adequate, particularly in foreign countries where the laws may not protect
its proprietary rights as fully as in the United States. Quintus relies on a
combination of patent, copyright, trademark and trade secret laws and
restrictions on disclosure to protect its intellectual property rights. In
addition, Quintus enters into confidentiality agreements with its employees and
certain customers, vendors and strategic partners. Quintus has one issued U.S.
patent and one filed U.S. patent application. Through its acquisition of Acuity,
it acquired one additional issued U.S. patent as well as nine additional filed
U.S. patent applications. Quintus cannot assure you that any patents will be
issued from these applications or that any issued patent will protect its
intellectual property. Furthermore, other parties may independently develop
similar or competing technology or design around any patents that may be issued
to Quintus.
QUINTUS MAY FACE COSTLY INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS
Companies have in the past alleged that Quintus' products infringe their
patents, and others may make similar allegations in the future. Such claims, or
other claims that Quintus' products infringe other intellectual property rights,
may force Quintus to seek expensive licenses, re-engineer its products, engage
in expensive and time-consuming litigation or stop marketing the challenged
product. Further, by contract Quintus typically indemnifies its customers
against infringement claims related to its products. Intellectual property
litigation is expensive and time-consuming and could divert management's
attention away from running Quintus' business. This litigation could also
require Quintus 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. Quintus' failure or inability to
develop non-infringing technology or license the proprietary rights on a timely
basis in a cost-effective manner would harm its business.
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SALES OF QUINTUS COMMON STOCK INTO THE PUBLIC MARKET COULD HARM THE MARKET PRICE
OF QUINTUS COMMON STOCK AND ITS ABILITY TO RAISE MONEY THROUGH SALES OF EQUITY
SECURITIES
The value of an investment in Quintus common stock and its ability to raise
money through the sale of additional equity securities could be adversely
affected if its existing shareholders sell large amounts of their Quintus common
stock into the public market. If significant volumes of Quintus common stock are
sold into the public market, the market price of its common stock and therefore
the value of your investment could fall. This could impair Quintus' ability to
raise capital through the sale of additional equity securities. With the
exception of the shares sold in its initial public offering, substantially all
of its currently outstanding shares are subject to lock-up agreements or bylaw
restrictions providing that, with certain limited exceptions, the holders of
such shares will not sell or otherwise dispose of any of such shares prior to
May 15, 2000 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.
ANTI-TAKEOVER PROVISIONS IN QUINTUS CHARTER DOCUMENTS, AS WELL AS PROVISIONS OF
EMPLOYMENT AGREEMENTS OF SOME OF ITS KEY EXECUTIVE OFFICERS, COULD PREVENT OR
DELAY A CHANGE IN CONTROL OF QUINTUS
Provisions in Quintus' bylaws and in its 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 shareholders may only be called
by shareholders owning at least a majority of its outstanding shares;
- the ability of its board of directors to issue preferred stock without
shareholder approval; and
- the right of its board of directors to elect a director to fill a vacancy
created by the expansion of the board of directors.
In addition, some of Quintus' officers have agreements with it that provide
for acceleration of vesting following certain sales or mergers of Quintus. These
provisions could make Quintus' acquisition by a third party more costly and
could delay or prevent a change of control or changes in its management.
QUINTUS MAY HAVE CONTINGENT LIABILITY ARISING OUT OF A POSSIBLE VIOLATION OF
SECTION 5 OF THE SECURITIES ACT OF 1933 IN CONNECTION WITH ELECTRONIC MAIL SENT
TO SOME EMPLOYEES REGARDING PARTICIPATION IN ITS DIRECTED SHARE PROGRAM
As part of its initial public offering, Quintus and the underwriters
determined to make available up to 250,000 shares at the initial public offering
price for employees and other persons associated with its company. On October
25, 1999, representatives of Quintus sent electronic mail with respect to this
directed share program to its employees located in the United Kingdom and the
Netherlands and representatives of Acuity sent electronic mail with respect to
this directed share program to all Acuity employees. This electronic mail set
forth procedural aspects of the directed share program and informed the
recipients that they might have an opportunity to participate in the proposed
directed share program. Quintus may not have delivered a preliminary prospectus
for its initial public offering to its employees in the United Kingdom and the
Netherlands or to all Acuity employees prior to their receipt of the electronic
mail regarding the directed share program. Also, this electronic mail may
constitute a non-conforming prospectus. Quintus may have a contingent liability
arising out of a possible violation of Section 5 of the Securities Act of 1933
in connection with the electronic mail
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sent to these potential participants who did not receive the preliminary
prospectus prior to the email regarding the directed share program and who may
have received a non-conforming prospectus. Any liability would depend upon the
number of shares purchased by the recipients of the electronic mail. If any such
liability is asserted, Quintus will contest the matter strenuously. Quintus does
not believe that any such liability would be material to its financial
condition.
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RISKS RELATING TO MUSTANG.COM
MUSTANG.COM HAS SUFFERED LOSSES OVER THE LAST SEVERAL YEARS AND MAY NEVER BE
PROFITABLE
The following table shows the revenues and losses Mustang.com has reported
for the last three years:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Revenue....................... $1,898,000 $2,011,000 $3,711,000
Net loss...................... 1,341,000 1,157,000 906,000
</TABLE>
Mustang.com can give no assurance that it will be able to market profitably
Mustang Message Center or any of its other products or any products it may
develop in the future. Until it is able to generate sufficient revenues to
offset costs and expenses, of which there can give no assurance, it will
continue to sustain losses. Moreover, its losses may increase in the future as
it tries to implement announced plans to grow revenues.
MUSTANG.COM'S OPERATING RESULTS MAY VARY FROM QUARTER TO QUARTER AS A RESULT OF
REVENUE SHORTFALLS, INCREASED OPERATING EXPENSES OR ITS LENGTHY SALES CYCLE
Mustang.com expense levels are based, in part, on its expectations of
future revenues and are not expected to decrease, at least in the short term.
The company also expects to continue to spend substantial financial and other
resources on developing and introducing product and service offerings, and
expanding its sales, marketing and customer support organizations and operating
infrastructure. Mustang.com expects that its operating expenses will continue to
increase in absolute dollars and may increase as a percentage of revenue. If its
revenue does not correspondingly increase, its business and operating results
could suffer. Further, the competitive environment in which it competes may from
time to time force it to make tactical or strategic decisions that disrupt or
reduce anticipated revenues. Moreover, during 1998, which was the first year
that Mustang.com achieved material revenues from Mustang Message Center and its
other Internet-directed products that the company introduced during 1997, and
continuing in 2000, Mustang.com observed a trend that a disproportionate
percentage of its net sales were generated during the last month of a quarter.
As a result, a shortfall in sales in any quarter as compared to expectations may
not be identifiable until the end of a quarter. Mustang.com may not be able to
adjust its spending plan timely enough to compensate for any future revenue
shortfall. Any significant shortfall in sales in relation to its revenue
expectations would have a material adverse impact on Mustang.com's business,
results of operations, financial condition and prospects.
The purchase of the Enterprise and Service Bureau Editions of Mustang
Message Center, the company's core product, involves a significant commitment of
customers' personnel and other resources. Furthermore, the cost of the software
is typically only a small portion of the related hardware, development, training
and integration costs associated with implementing a complete e-mail management
solution. For these and other reasons, the sales cycle associated with the
purchase of Mustang Message Center is typically complex, lengthy and subject to
a number of significant risks. Such risks include changes in customers'
budgetary constraints and approval at senior levels of customers' organizations,
over which Mustang.com has no control. Such risks also include scheduling delays
by customers that prevent the company's personnel from going on site to make or
complete customer-ordered installations of Mustang Message Center. The company's
sales cycle can range from four to six months or more and varies substantially
from customer to customer. Because of the lengthy sales cycle and the dependence
of Mustang.com's quarterly revenues upon a relatively small
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number of orders that represent large dollar amounts, the loss or delay of a
single order could have a material adverse effect on Mustang.com's business,
financial condition and results of operations.
MUSTANG.COM IS DEPENDENT ON MUSTANG MESSAGE CENTER AND THERE IS AN UNCERTAIN
MARKET FOR E-MAIL MANAGEMENT SOFTWARE
Prior to 1998, most of Mustang.com's revenues were derived from its legacy
products, QmodemPro and Wildcat! Bulletin Board System software. These
communication products predated the emergence of the Internet and the Web as a
widely accepted and used communication medium. Beginning in the second quarter
of 1997 and continuing throughout that year, Mustang.com changed its focus and
launched new products designed to facilitate interaction on the Internet's World
Wide Web. Mustang.com released the Business Edition of Mustang Message Center in
September 1997, the Enterprise Edition, in February 1998 and Version 3.0 of the
Enterprise Edition in October 1999 and the Service Bureau edition in May 1999.
Mustang.com's future is dependent upon the acceptance by the market of Mustang
Message Center and its ability to market e-mail management solutions and related
services successfully. Mustang Message Center accounted for over 50% of
Mustang.com's net sales during 1998 and 99% in 1999, but it has only a limited
operating history with respect to this product. As a result, and because of the
recent emergence of the commercial e-mail management market, the company has
neither internal nor industry-based historical financial data for a significant
period upon which to project revenues or base planned operating expenses.
Mustang.com's future operating results will depend on a variety of factors,
including:
- Mustang.com's ability to maintain or increase market demand for Mustang
Message Center and its other products and services;
- the usage and acceptance of the Internet;
- the introduction and acceptance of new, enhanced or alternative products
or services by competitors of Mustang.com;
- Mustang.com's ability to anticipate and effectively adapt to a developing
market and to rapidly changing technologies;
- general economic conditions;
- competition by existing and emerging competitors;
- software defects and other quality control problems; and
- the mix of products and services that it sells.
MUSTANG.COM'S MARKET IS UNDEVELOPED AND RAPIDLY CHANGING
The markets for Mustang.com's products and services are at a very early
stage of development, are rapidly changing and are characterized by an
increasing number of market entrants that have introduced or are developing
competing products and services for use on the Internet and the World Wide Web.
As is typical for a new and rapidly evolving industry, demand for and market
acceptance of recently introduced products and services are subject to a high
level of uncertainty and risk. Acceptance and usage of the Mustang Message
Center is dependent on continued growth in use of e-mail as a primary means of
communications by businesses and consumers. Businesses that already have
invested substantial resources in traditional or other methods of conducting
business may be reluctant to adopt new commercial methodologies or strategies
that may limit or compete with their existing businesses. Individuals with
established patterns of purchasing goods and services may be reluctant to alter
those patterns. Accordingly, there are no assurances that sufficient demand for
Mustang.com's products and services will develop.
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<PAGE> 34
Further, there are no assurances that use of e-mail as a primary method of
communication or commerce over the Internet will become widespread or be
sustained, that a substantial market for Mustang.com's products and services
will emerge or that the Mustang Message Center will be generally adopted.
Mustang.com's business, financial condition and results of operations will be
materially and adversely affected if the market fails to develop as expected or
develops more slowly than expected. Similarly, its business, financial condition
and results of operations will be materially and adversely affected if the
Internet infrastructure is not adequately expanded or managed, or if
Mustang.com's products and services do not achieve market acceptance by a
significant number of businesses.
MUSTANG.COM'S BUSINESS IS INTENSELY COMPETITIVE
The market for e-mail message management products and services is intensely
competitive, and Mustang.com expects competition to increase significantly.
There are no substantial barriers to entry into Mustang.com's business, and
there is an expectation that established and new entities will enter the market
for e-mail message management products and services in the near future. It is
possible that a single supplier will dominate one or more market segments
including e-mail management, customer service and call center automation.
Furthermore, since there are many potential entrants to the field, it is
extremely difficult to assess which companies are likely to offer competitive
products and services in the future, and in some cases it is difficult to
discern whether an existing product or service is competitive with the Mustang
Message Center.
Several of Mustang.com's current and potential competitors have greater
name recognition, more diversified lines of products and services and
significantly greater financial, technical, marketing and other resources than
Mustang.com does. Such competitors may be able to undertake more extensive
marketing campaigns, adopt more aggressive pricing policies and make more
attractive offers to businesses to induce them to use their products or
services. In addition, many of Mustang.com's competitors have well-established
relationships with its current and potential customers and have extensive
knowledge of its industry. In the past, Mustang.com has lost potential customers
to competitors for various reasons, including the ability or willingness of
competitors to offer lower prices and other incentives that Mustang.com did not
match. In addition, current and potential competitors, particularly enterprise
or call center software providers that market integrated suites of products,
have established or may establish co-operative relationships among themselves or
with third parties to increase the ability of their products to address customer
needs. Accordingly, it is possible that new competitors or alliances among
competitors may emerge and rapidly acquire significant market share. Mustang.com
also expects that competition will increase as a result of industry
consolidations.
UNKNOWN SOFTWARE DEFECTS COULD DISRUPT MUSTANG.COM'S PRODUCTS AND SERVICES
Mustang.com's product and service offerings depend on complex software,
both internally developed and licensed from third parties. Complex software
often contains defects, particularly when first introduced or when new versions
are released. It is possible that, despite testing, defects may occur in the
software. These defects could result in:
- reputational damage;
- lost sales;
- product liability claims;
- delays in or loss of market acceptance of Mustang.com products;
- product returns; and
- unexpected expenses and diversion of resources to remedy errors.
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MUSTANG.COM HAS ONLY LIMITED INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
Mustang.com relies on a combination of trade secret, copyright and
trademark laws, nondisclosure agreements and other contractual provisions and
technical measures to protect its proprietary rights. There are no assurances
that trade secret, copyright and trademark protections will be adequate to
safeguard the proprietary software underlying Mustang.com's products and
services. Mustang.com also faces the risk that notwithstanding its efforts to
protect its intellectual property, competitors will be able to develop
functionally equivalent e-mail message management technologies without
infringing any of its intellectual property rights. Despite Mustang.com's
efforts to protect its proprietary rights, unauthorized parties may attempt to
copy or otherwise obtain and use products or technology that Mustang.com
considers proprietary and third parties may attempt to develop similar
technology independently. In addition, effective protection of intellectual
property rights may be unavailable or limited in certain countries.
As the use of the Internet for commercial activity increases, and the
number of products and service providers that support Internet commerce
increases, Mustang.com believes that Internet commerce technology providers may
become increasingly subject to infringement claims. Mustang.com can give no
assurances that plaintiffs will not file infringement claims in the future. Any
such claims, with or without merit, could be time consuming, result in costly
litigation, disrupt or delay the enhancement or shipment of Mustang.com's
products and services or require it to enter into royalty or licensing
agreements. Such royalty or licensing agreements, if required, may not be
available on terms acceptable or favorable to Mustang.com, which could have a
material adverse effect on its business, financial condition and results of
operations.
IF MUSTANG.COM FAILS TO EXPAND ITS SALES, MARKETING AND CUSTOMER SUPPORT
ACTIVITIES, IT MAY BE UNABLE TO EXPAND ITS BUSINESS
The complexity of the Mustang Message Center and related products and
services requires Mustang.com to have highly trained sales, marketing and
customer support personnel to educate prospective customers regarding the use
and benefits of its products and services, and provide effective customer
support. With its relatively brief operating history in the area of e-mail
management and its plans for expansion, Mustang.com has considerable need to
recruit, train, and retain qualified staff. Any delays or difficulties
Mustang.com encounters in these staffing efforts could impair its ability to
attract new customers and enhance its relationships with existing customers.
This in turn would adversely impact the timing and extent of Mustang.com's
revenue. Because many of its sales, marketing and customer support personnel
have recently joined Mustang.com and have limited experience working together,
the company's sales, marketing and customer support organizations may not be
able to compete successfully against bigger and more experienced organizations
of Mustang.com's competitors. If Mustang.com does not successfully expand its
sales, marketing and customer support activities, its business will suffer.
NEED TO UPGRADE SYSTEMS AND THE MUSTANG HOSTED NETWORK TO ACCOMMODATE GROWTH IN
ELECTRONIC COMMUNICATIONS AND COMMERCE
In February 2000, Mustang.com began offering Mustang Message Center as an
application service provider with its launch of the Mustang Network, a Web-based
hosted application service to provide an alternative for those customers which
do not want Mustang Message Center installed onsite at its location. As a
consequence of the new solution, the company faces risks related to the ability
of the Mustang Network to operate with higher activity levels while maintaining
expected performance. As the volume and complexity of customer communications
and electronic commerce increases, Mustang.com will need to expand its systems
and hosted network infrastructure. The
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expansion and adaptation of its network infrastructure will require substantial
financial, operational and management resources. Due to the recent introduction
of its hosted Web solution, Mustang.com's ability to connect and manage a
substantially larger number of customers is unknown. Customer demand for
Mustang.com's products and services could be greatly reduced if it fails to
maintain high capacity data transmission. In addition, as it upgrades its
network infrastructure, the company is likely to encounter equipment or software
incompatibility. Mustang.com may not be able to expand or adapt its hosted
network infrastructure to meet additional demand or its customers' changing
requirements in a timely manner or at all.
GROWTH IN DEMAND FOR ITS HOSTED NETWORK SOLUTION MAY ADVERSELY AFFECT
MUSTANG.COM'S NEAR TERM RESULTS OF OPERATIONS
During 1999, 99% of Mustang.com's revenues were derived from sales and
related services from the onsite installation of the Mustang Message Center at
customers' locations. An additional consequence of the Mustang Network solution
is the risk that customers who might have otherwise purchased Mustang Message
Center and related services will prefer the Mustang Network solution. Mustang
Message Center over the Mustang Network offers the same functionality as the
onsite installation of the Mustang Message Center but at a substantially lower
up front cost. Mustang.com believes that to remain competitive it must offer
Mustang Message Center as an application service provider and that, over time,
providing this service will generate revenues that more than make up for lost
sales of onsite installations. However, in the near term, its results of
operations could suffer if onsite sales are lost due to the popularity of its
hosted solution.
MUSTANG.COM FACES RISKS OF UNPLANNED SYSTEM INTERRUPTIONS AND CAPACITY
CONSTRAINTS
Mustang.com expects that its customers will experience interruptions with
its hosted network from time to time. These interruptions could be due to
hardware and operating system failures. The company expects a substantial
portion of its revenue to be derived from customers who use its hosted network.
If it is correct (of which there can be no assurance), its business will suffer
if Mustang.com experiences frequent or long system interruptions that result in
the unavailability or reduced performance of its hosted network or reduce its
ability to provide remote management services. Mustang.com expects to experience
occasional temporary capacity constraints due to sharply increased traffic or,
as has been the case for other Web-based businesses, the possibility that it
will be targeted by hackers, either of which could cause unanticipated system
disruptions, slower response times, impaired quality and degradation in levels
of customer service. If this were to continue to happen, Mustang.com's business
and reputation could be seriously harmed. The company's success largely depends
on the efficient and uninterrupted operation of its computer and communications
hardware and network systems. Substantially all of the Company's computer and
communications systems are located in Bakersfield, Kern County, California.
Mustang.com's systems and operations are vulnerable to damage or interruption
from fire, earthquake, power loss, telecommunications failure and similar
events. Any unplanned interruption of services may harm Mustang.com's ability to
attract and retain customers.
MUSTANG.COM IS DEPENDENT ON RELATIONSHIPS WITH, AND THE SYSTEM INTEGRITY OF,
HOSTING PARTNERS FOR THE MUSTANG NETWORK
Mustang.com's hosted network consists of virtual data centers co-located in
the physical data centers of its hosting partners. Accordingly, it relies on the
speed and reliability of the systems and networks of these hosting partners. If
its hosting partners experience system interruptions or delays, or if the
Company does not maintain or develop relationships with hosting partners, its
business could suffer. The lead-time to add system capacity for Mustang.com's
hosted network at its hosting partner
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has increased recently from 90 days to six months and could be extended further
in the future as the use and offerings of application service providers continue
to grow. If Mustang does not anticipate demand for its hosted network accurately
and does not provide sufficient lead-time to its hosted partner for expansion or
timely arrange for alternative hosting partners, if available, to handle growth,
its results of operations and financial condition could be materially adversely
affected.
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INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
Quintus and Mustang.com have made forward-looking statements in this proxy
statement/prospectus about Quintus and Mustang.com and the combined company that
are subject to risks and uncertainties. Forward-looking statements include the
information regarding:
- synergies;
- efficiencies;
- cost savings;
- revenue enhancements;
- capital productivity;
- returns on capital employed;
- capital spending; and
- the timetable for completing the merger.
The sections in this document that have forward-looking statements include
"Questions and Answers About the Merger," "Prospectus Summary," "Selected
Historical Consolidated Financial Data," "The Merger -- Background of the
Merger," "The Merger -- Joint Reasons for the Merger," "Selected Historical
Consolidated Financial Data -- Selected Unaudited Pro Forma Condensed Combined
Financial Data" and "Opinion of Mustang.com's Financial Advisor." Quintus' and
Mustang.com's forward-looking statements are also identified by such words as
"anticipates," "believes," "estimates," "expects," "intends" or similar
expressions.
In making these statements, Quintus and Mustang.com believe that their
expectations are based on reasonable assumptions. Yet you should understand that
the following important factors (some of which are beyond Quintus' and
Mustang.com's control) could affect Quintus' future results after completion of
the merger. These factors could also cause the results or other outcomes to
differ materially from those expressed in these forward-looking statements:
ECONOMIC AND INDUSTRY CONDITIONS
- materially adverse changes in economic or industry conditions generally
or in the markets served by Quintus or Mustang.com;
- fluctuations in exchange rates and currency values; and
- capital expenditure requirements.
POLITICAL/GOVERNMENTAL FACTORS
- political stability in relevant areas of the world;
- political developments and laws and regulations, such as legislative or
regulatory requirements, particularly concerning the Internet.
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TECHNOLOGY ADVANCES
- the development and use of new technology.
OPERATING FACTORS
- changes in operating conditions and costs;
- interest rates; and
- access to capital markets.
TRANSACTION OR COMMERCIAL FACTORS
- Quintus' ability to integrate the businesses of Quintus and Mustang.com
successfully after the merger;
- the challenges inherent in diverting management's focus and resources
from other strategic opportunities and from operational matters during
the integration process.
COMPETITIVE FACTORS
- the actions of competitors.
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THE MERGER
The following discussion summarizes the proposed merger and related
transactions. The discussion is not, however, a complete statement of all
provisions of the merger agreement and related agreements. Detailed terms of and
conditions to the merger and certain related transactions are contained in the
merger agreement, a copy of which is attached to this proxy statement/prospectus
as Annex A. Statements made in this proxy statement/prospectus with respect to
the terms of the merger and such related transactions are qualified in their
respective entireties by reference to, and holders of Mustang.com stock are
urged to read the more detailed information set forth in the merger agreement
and the other documents annexed hereto.
THE COMPANIES
Quintus Corporation
47212 Mission Falls Court
Fremont, CA 94539
Telephone: (510) 624-2800
Quintus provides 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, e-mail and the
telephone. The 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. Quintus eContact enables
companies to handle high volumes of customer interactions and leverage
opportunities to sell additional products and services to their customers.
Mustang.com, Inc.
6200 Lake Ming Road
Bakersfield, CA 93306
Telephone: (661) 873-2500
Founded in 1986, Mustang.com was one of the first providers of e-mail
management solutions with its award-winning Message Center(TM) product.
Introduced in 1997, Mustang Message Center enables loyal, high quality customer
relationships through Internet and e-mail based customer interactions.
Mustang.com is headquartered in Bakersfield, California with offices in Austin,
Chicago, Ft. Lauderdale, New York, Phoenix, Seattle and Washington DC.
BACKGROUND OF THE MERGER
On January 13, 2000, Quintus' Chairman and Chief Executive Officer, Alan K.
Anderson and Mustang.com's President and Chief Executive Officer, James A.
Harrer, had a telephonic conversation regarding the possibility of a business
combination and agreed to meet in person on January 20, 2000.
On January 20, 2000, Messrs. Anderson and Harrer met at the Los Angeles
office of Mustang.com to discuss a potential merger of the two companies and to
determine a preliminary valuation. Messrs. Anderson and Harrer had a general
discussion regarding valuation and agreed to continue discussions.
At a regular meeting of the board of directors of Quintus on January 27,
2000, the board discussed general strategic matters, including the possibility
of a merger with Mustang.com.
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On January 28, 2000, the parties executed a confidentiality agreement
pursuant to which the companies agreed to exchange certain non-public
information regarding their businesses. Also on that date, Mr. Harrer visited
Quintus' corporate headquarters to meet other senior executives of Quintus. Over
the next few days, Mustang.com and Quintus met with their financial advisors to
discuss issues that would need to be addressed in a merger transaction.
At a regular meeting of the board of directors of Mustang.com on January
29, 2000, the board discussed Mr. Harrer's discussions with Mr. Anderson,
including Quintus' interest in a business combination with Mustang.com.
Quintus and Mustang.com entered into an OEM agreement in February 2000.
Pursuant to this agreement, Quintus has integrated Mustang Message Center(TM) as
the e-mail engine for Quintus eContact.
From February 1, 2000 to February 9, 2000, representatives of Mustang.com
and Quintus, together with their advisers, held numerous further discussions
regarding the strategic rationale of a combination of the two companies. In
addition, the parties, their financial advisors and legal counsel conducted
preliminary due diligence and discussed the terms of a draft merger agreement
and various other issues related to the possible transaction.
On February 9 and 10, 2000, at special meetings of Mustang.com's board of
directors held telephonically, the board discussed proposed terms of the
business combination and on February 10, 2000 authorized management to sign an
agreement with Quintus under which Mustang.com agreed to negotiate exclusively
with Quintus regarding a business combination until February 25, 2000. The board
also discussed candidates to serve as, and the selection of, a financial advisor
to assist the board in evaluating the transaction and authorized management to
engage First Security Van Kasper, who had recently assisted Mustang.com in
selling its equity securities and who had demonstrated a thorough knowledge of,
and familiarity with, Mustang.com's industry and market, as such financial
advisor.
The parties signed a non-binding letter of intent on February 10, 2000 and,
from February 11 to February 16, Mr. Anderson telephoned individual board
members of Quintus regarding the proposed merger with Mustang.com.
On February 22, 2000, the Quintus board of directors held a telephonic
meeting at which senior management of Quintus described the negotiations to
date, the strategic and economic reasons for the transaction and various other
matters. First Albany Corporation, Quintus' financial advisors, made a
presentation to the Quintus board of directors regarding the possible merger.
From February 22, 2000 to February 24, 2000, the parties continued to
negotiate the economic terms of the transaction and the provisions of the merger
agreement.
On February 24, 2000, at a special meeting the Mustang.com board held
telephonically, Mustang.com's management, First Security Van Kasper and outside
legal counsel reviewed the terms of the definitive merger agreement and the
related documents. At this meeting, First Security Van Kasper reviewed with the
Mustang.com board of directors the financial analysis performed by First
Security Van Kasper in connection with its evaluation of the exchange ratio.
First Security delivered to the Mustang.com board its opinion to the effect
that, as of such date and based upon and subject to certain matters stated in
such opinion, the merger with Quintus was fair from a financial point of view to
the holders of Mustang.com common stock. Outside counsel for Mustang.com
described the fiduciary duties of the Mustang.com board in connection with the
proposed merger, reviewed the terms and conditions of the merger agreement and
described regulatory consents required to consummate the proposed merger. After
extensive discussions, the Mustang.com board determined
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that the merger is in the best interest of the shareholders of Mustang.com and
approved the merger agreement and the merger and resolved to recommend that
shareholders of Mustang.com vote to approve the merger agreement.
On February 25, 2000, at a special meeting held telephonically, the Quintus
board received detailed presentations from senior management of Quintus, outside
legal counsel and First Albany Corporation. First Albany discussed the financial
aspects of the transaction. Outside counsel for Quintus described the fiduciary
duties of the Quintus board in connection with the proposed merger, reviewed the
terms and conditions of the merger agreement and described regulatory consents
required to consummate the proposed merger. Following an extended review and
discussion by the Quintus board, the Quintus board determined that the merger is
in the best interest of the shareholders of Quintus and approved the merger
agreement and the merger.
Following the February 24, 2000 and February 25, 2000 meetings of the
Mustang.com board and Quintus board, respectively, the merger agreement was
executed by the parties. On the morning of February 28, 2000, the parties issued
a joint press release announcing the execution of the definitive merger
agreement.
JOINT REASONS FOR THE MERGER
Quintus and Mustang.com believe that the business combination should
produce a number of potential benefits that may contribute to the success of the
combined company. These potential benefits from the combination include:
- extending Quintus' leadership in the eCRM market by combining
Mustang.com's award winning e-mail management offerings with Quintus'
existing strengths in integrating multiple channels of customer contact;
- combining both companies' products in order to provide fully-integrated
solutions that can meet users' demands for a single, comprehensive view
of their customers across existing and emerging communication channels;
- providing Quintus with the opportunity to offer its solutions on an
outsourced, hosted basis;
- creating a combined customer base of over 750 companies and more than
24,000 e-mail management seats that could give Quintus greater scale and
presence in the eCRM market;
- creating opportunities for cross-marketing of the two companies' products
to a larger combined customer base due to the complementary nature of
each company's product offering;
- combining the two companies' sales forces and distribution channels that
could enable broader distribution coverage and more effective marketing
of the combined company's offerings;
- combining the two companies' management and product development teams;
and
- joining the similar corporate cultures of the two companies.
Following the merger, Alan K. Anderson will continue to be Chairman and
Chief Executive Officer of Quintus, and James A. Harrer, President and Chief
Executive Officer of Mustang.com will become President of Quintus Online, a new
division devoted to Quintus' online products and services.
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QUINTUS' REASONS FOR THE MERGER
At its meeting on February 25, 2000, Quintus' board of directors:
- determined that the merger agreement, the merger, and the related
transactions are fair to and in the best interests of Quintus and its
shareholders; and
- approved the merger agreement, the merger and related transactions.
In approving the transaction and making these recommendations, Quintus'
board of directors consulted with Quintus' management as well as its outside
legal counsel and its financial advisor, and carefully considered the following
material factors:
- all the reasons described above under "The Merger -- Joint Reasons for
the Merger," including the near- and longer-term synergies and
productivity improvements expected to be available to the combined
company;
- information concerning the business, assets, capital structure, financial
performance and condition and prospects of Quintus and Mustang.com,
focusing in particular on the quality of Mustang.com's assets and the
compatibility of the two companies' operations;
- current and historical prices and trading information with respect to
each company's common shares, which assisted the board of directors in
its conclusion that the merger was fairly priced;
- the possibility, as alternatives to the merger, of pursuing an
acquisition of or a business combination or joint venture with an entity
other than Mustang.com and the Quintus board's conclusion that a
transaction with Mustang.com was more feasible, and was expected to yield
greater benefits, than the likely alternatives. The Quintus board reached
this conclusion for reasons including Mustang.com's interest in pursuing
a transaction with Quintus, Quintus' view that the transaction could be
acceptably completed from a timing and regulatory standpoint, and Quintus
management's assessment of the alternatives and the expected benefits of
the merger and compatibility of the companies, as described under "The
Merger -- Joint Reasons for the Merger" above;
- the potential enhanced strategic position of the combined company beyond
Quintus' current position;
- the terms and structure of the merger and the terms and conditions of the
merger agreement, including the exchange ratio for the merger, the size
of the termination fees and the circumstances in which they are payable
(see "The Merger Agreement -- Conditions to Completion of the Merger" and
"The Merger Agreement -- Termination"); and
- the expectation that the merger is expected to qualify as a tax-free
reorganization for United States federal income tax purposes.
In view of the number and wide variety of factors considered in connection
with its evaluation of the merger and the complexity of these matters, Quintus'
board of directors did not find it practicable to, nor did it attempt to,
quantify, rank or otherwise assign relative weights to the specific factors that
it considered. In addition, the board of directors did not undertake to make any
specific determination as to whether any particular factor was favorable or
unfavorable to the board of directors' ultimate determination or assign any
particular weight to any factor, but conducted an overall analysis of the
factors described above, including through discussions with and questioning of
Quintus' management and management's analysis of the proposed merger based on
information received from Quintus' legal, financial and accounting advisors. In
considering the factors described above, individual members of Quintus' board of
directors may have given different weight to different factors. Quintus' board
of directors considered all these factors together and, on the whole, considered
them to be favorable to, and to support, its determination.
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MUSTANG.COM'S REASONS FOR THE MERGER
At its meeting on February 24, 2000, Mustang.com's board of directors voted
unanimously to enter into the merger agreement and to recommend that Mustang.com
shareholders vote to approve the merger and the merger agreement.
In the course of reaching its decision to adopt the merger agreement,
Mustang.com's board of directors consulted with Mustang.com's management, as
well as its outside legal counsel and financial advisor, and carefully
considered the following material factors:
- all the reasons described above under "The Merger -- Joint Reasons for
the Merger," including the near-term and longer-term synergies and
productivity improvements expected to be available to the combined
company;
- information concerning the business, operations, competitive position and
prospects of Mustang.com and Quintus both individually and on a combined
basis including, but not limited to, the compatibility of the two
companies' operations, the potential efficiencies, cost savings and other
synergies expected to be realized as a result of the consolidation of
Mustang.com's and Quintus' operations as well as Mustang.com's board of
directors' own knowledge of Mustang.com and Quintus;
- analyses and other information with respect to Mustang.com and Quintus
and current industry and economic conditions and trends presented to
Mustang.com's board of directors by management, including, without
limitation, a discussion of the complementary nature of the
communications management solutions offered by both companies;
- the presentation of First Security Van Kasper at the Mustang.com board of
directors' meeting held on February 24, 2000, and the opinion of First
Security Van Kasper that, as of the date of its opinion, the exchange
ratio for the merger was fair to the Mustang.com shareholders from a
financial point of view. Mustang.com has described First Security Van
Kasper's opinion in detail under the section entitled "Opinion of
Mustang.com's Financial Advisor";
- the companies' respective historical financial condition, results of
operations and estimated future results (including those of Mustang.com
as a stand-alone entity); current financial market conditions, the amount
and form of the consideration to be received by Mustang.com shareholders
in the merger, the percentage of the combined company to be owned by
Mustang.com shareholders after the merger, and information on the
historical trading ranges of Mustang.com common stock and Quintus common
stock; and
- the interests that the executive officers and directors of Mustang.com
may have in connection with the merger in addition to their interests as
shareholders of Mustang.com generally (see "Interests of Related Persons
in the Merger").
In view of the number and wide variety of factors considered in connection
with its evaluation of the merger, and the complexity of these matters,
Mustang.com's board of directors did not find it practicable to, nor did it
attempt to, quantify, rank or otherwise assign relative weights to the specific
factors it considered. In addition, the Mustang.com board did not undertake to
make any specific determination as to whether any particular factor was
favorable or unfavorable to its ultimate determination or assign any particular
weight to any factor, but conducted an overall analysis of the factors described
above, including through discussions with and questioning of Mustang.com's
management and management's analysis of the proposed merger based on information
received from Mustang.com's legal, financial and accounting advisors. In
considering the factors described above, individual members of the board of
directors may have given different weight to different factors. Mustang.com's
board of directors considered all these factors together and, on the whole,
considered them to be favorable to, and to support, its determination.
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RECOMMENDATION OF MUSTANG.COM'S BOARD OF DIRECTORS
MUSTANG.COM'S BOARD OF DIRECTORS BELIEVES THAT THE TERMS OF THE MERGER ARE
FAIR TO AND IN THE BEST INTERESTS OF MUSTANG.COM AND ITS SHAREHOLDERS AND
UNANIMOUSLY RECOMMENDS TO ITS SHAREHOLDERS THAT THEY VOTE "FOR" THE PROPOSAL TO
APPROVE AND ADOPT THE MERGER AND THE MERGER AGREEMENT.
ACCOUNTING TREATMENT
The acquisition will be accounted for using the purchase method of
accounting. The purchase price will be allocated to assets and liabilities of
Mustang.com and such assets and liabilities will be recorded at their respective
fair values upon completion of the merger. A portion of the purchase price may
be identified as in-process research and development. This amount, if any, will
be charged to Quintus' operations in the quarter the merger is completed and the
acquisition accounting and valuation amounts are finalized. The remaining
purchase price will be reflected as goodwill and other intangible assets and
amortized over several years. The results of operations and cash flows of
Mustang.com will be included in Quintus' financial statements prospectively as
of the consummation of the merger.
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the material U.S. federal income tax
consequences of the merger. This discussion is based on the Internal Revenue
Code of 1986, as amended, applicable Treasury regulations, administrative
interpretations and court decisions as in effect as of the date of this proxy
statement/prospectus, all of which may change, possibly with retroactive effect.
This discussion does not address all aspects of U.S. federal income
taxation that may be important to a Mustang.com shareholder in light of that
shareholder's particular circumstances or to a Mustang.com shareholder subject
to special rules, such as:
- a shareholder who is not a citizen or resident of the United States;
- a foreign corporation;
- a shareholder who does not hold its Mustang.com common stock as a capital
asset;
- a financial institution or insurance company;
- a tax-exempt organization;
- a dealer or broker in securities;
- a shareholder that holds its Mustang.com common stock as part of a hedge,
appreciated financial position, straddle or conversion transaction; or
- a shareholder who acquired its Mustang.com common stock pursuant to the
exercise of options or otherwise as compensation.
TAX OPINIONS
Mustang.com has received an opinion of Kirkpatrick & Lockhart LLP, and
Quintus has received an opinion of Davis Polk & Wardwell (together with
Kirkpatrick & Lockhart LLP, "tax counsel"), each dated as of the date of this
proxy statement/prospectus, that, based on the law as of that date:
- the merger will be treated for U.S. federal income tax purposes as a
reorganization within the meaning of Section 368(a) of the Internal
Revenue Code; and
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- Quintus, its merger subsidiary and Mustang.com will each be a party to
that reorganization within the meaning of Section 368(b) of the Internal
Revenue Code.
It is a condition to the obligation of each of Quintus and Mustang.com to
complete the merger that the relevant tax counsel confirm its opinion as of the
closing date. Neither Quintus nor Mustang.com intends to waive this condition.
The opinions of tax counsel regarding the merger have each relied, and the
confirmation opinions regarding the merger as of the closing date will each
rely, on (1) representations and covenants made by Quintus and Mustang.com,
including those contained in certificates of officers of Quintus and
Mustang.com, and (2) specified assumptions, including an assumption regarding
the completion of the merger in the manner contemplated by the Agreement and
Plan of Merger dated February 25, 2000. In addition, the opinions of tax counsel
have assumed, and tax counsel's ability to provide the closing date opinions
will depend on, the absence of changes in existing facts or in law between the
date of this proxy statement/prospectus and the closing date. If any of those
representations, covenants or assumptions is inaccurate, tax counsel may not be
able to provide one or more of the required closing date opinions, and the tax
consequences of the merger could differ from those described in the opinions
that tax counsel have delivered. Tax counsel's opinions neither bind the
Internal Revenue Service ("IRS") nor preclude the IRS or the courts from
adopting a contrary position. Neither Quintus nor Mustang.com intends to obtain
a ruling from the IRS on the tax consequences of the merger.
UNITED STATES FEDERAL INCOME TAX TREATMENT OF THE MERGER
The merger will be treated for U.S. federal income tax purposes as a
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code. Quintus, its merger subsidiary and Mustang.com will each be a party to
that reorganization within the meaning of Section 368(b) of the Internal Revenue
Code. None of Quintus, its merger subsidiary or Mustang.com will recognize any
gain or loss for U.S. federal income tax purposes as a result of the merger.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO MUSTANG.COM SHAREHOLDERS
For U.S. federal income tax purposes:
- A holder of Mustang.com common stock will not recognize any gain or loss
upon its exchange in the merger of its shares of Mustang.com common stock
for shares of Quintus common stock;
- If a holder of Mustang.com common stock receives cash instead of a
fractional share of Quintus common stock, the holder will be required to
recognize gain or loss, measured by the difference between (1) the amount
of cash received instead of that fractional share, and (2) the portion of
the tax basis of that holder's shares of Mustang.com common stock
allocable to that fractional share. This gain or loss will be capital
gain or loss and will be long-term capital gain or loss if the share of
Mustang.com common stock exchanged for that fractional share of Quintus
common stock was held for more than one year at the effective time of the
merger;
- A holder of Mustang.com common stock will have a tax basis in the Quintus
common stock received in the merger equal to (1) the tax basis of the
Mustang.com common stock surrendered by that holder in the merger, less
(2) any tax basis of the Mustang.com common stock surrendered that is
allocable to any fractional share of Quintus common stock for which cash
is received by that holder; and
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- The holding period for shares of Quintus common stock received in
exchange for shares of Mustang.com common stock in the merger will
include the holding period for the shares of Mustang.com common stock
surrendered in the merger.
- A holder of Mustang.com common stock who exercises dissenters' rights
with respect to a share of Mustang.com common stock and who receives
payment for such stock in cash will generally recognize capital gain or
loss, measured by the difference between (1) the shareholder's tax basis
in such share, and (2) the amount of cash received.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO QUINTUS SHAREHOLDERS
For U.S. federal income tax purposes, holders of Quintus common stock will
not recognize gain or loss as a result of the merger.
This discussion of material U.S. federal income tax consequences is
intended to provide only a general summary and is not a complete analysis or
description of all potential U.S. federal income tax consequences of the merger.
This discussion does not address tax consequences that may vary with, or are
contingent on, individual circumstances. In addition, it does not address any
non-income tax or any foreign, state or local tax consequences of the merger.
ACCORDINGLY, QUINTUS AND MUSTANG.COM STRONGLY ENCOURAGE EACH MUSTANG.COM
SHAREHOLDER TO CONSULT HIS OR HER OWN TAX ADVISOR TO DETERMINE THE PARTICULAR
UNITED STATES FEDERAL, STATE, LOCAL OR FOREIGN INCOME OR OTHER TAX CONSEQUENCES
TO THE SHAREHOLDER OF THE MERGER.
REGULATORY MATTERS
HSR FILING. The transactions contemplated in the merger agreement require
filing under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended. Expiration or termination of the applicable waiting period under the
Hart-Scott-Rodino Act is a condition to completion of the merger. Quintus and
Mustang.com were granted early termination of the applicable waiting period on
April 4, 2000.
OTHER LAWS. Quintus and Mustang.com conduct operations in a number of other
jurisdictions where regulatory filings, notifications or approvals with
applicable commissions and other authorities may be required or advisable in
connection with completion of the merger. Quintus and Mustang.com are currently
in the process of reviewing whether other filings or approvals may be required
or desirable in these other jurisdictions. Quintus and Mustang.com recognize
that some of these filings may not be completed before the closing, and that
some of these approvals, which are not as a practice required to be obtained
prior to effectiveness of a merger, may also not be obtained before the closing.
RIGHTS OF DISSENTING MUSTANG.COM SHAREHOLDERS
Mustang.com shareholders who properly dissent from the merger will be
entitled to certain dissenters' rights. A shareholder that is a shareholder as
of the record date and entitled to vote on the merger may dissent from the
merger and obtain payment for the fair value of such shareholder's shares after
completion of the merger. A shareholder who wishes to assert dissenters' rights
must comply with the requirements of California law regarding dissenters'
rights. A Mustang.com shareholder that approves the merger will not have a right
to dissent from the merger. See "Dissenters' Rights."
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FEDERAL SECURITIES LAWS CONSEQUENCES; STOCK TRANSFER RESTRICTION AGREEMENTS
This proxy statement/prospectus does not cover any resales of Quintus
common stock to be received by Mustang.com's shareholders upon completion of the
merger. No person is authorized to make any use of this document in connection
with a resale of that type.
All shares of Quintus common stock that Mustang.com shareholders receive in
the merger will be freely transferable. However, shares of Quintus common stock
received by persons who are deemed to be "affiliates" of Mustang.com under the
Securities Act and the related SEC rules and regulations at the time of the
Mustang.com shareholders' meeting will be restricted securities. These
affiliates may resell their shares of Quintus common stock only in transactions
permitted by Rule 145 or other provisions under the Securities Act. Persons who
may be deemed to be affiliates of Mustang.com for these purposes generally
include individuals or entities that control, are controlled by, or are under
common control with Mustang.com and may include officers, directors and
principal shareholders of Mustang.com. The merger agreement requires Mustang.com
to use commercially reasonable efforts to deliver or cause to be delivered to
Quintus on or prior to the effective time of the merger from each affiliate an
executed letter agreement to the effect that those persons will not offer or
sell or otherwise dispose of any shares of Quintus common stock issued to them
in the merger in violation of the Securities Act or the related SEC rules and
regulations.
LOCK-UP LETTERS
Several of Mustang.com's officers and directors have agreed to sign lock-up
agreements whereby each agrees not to dispose of any shares of Quintus common
stock prior to May 15, 2000 (assuming that the merger is completed by that
date).
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OPINION OF MUSTANG.COM'S FINANCIAL ADVISOR
On February 15, 2000, Mustang.com engaged First Security Van Kasper, or
FSVK, to provide financial advisory services to Mustang.com regarding its
proposed business combination with Quintus. On February 24, 2000, FSVK delivered
a written opinion, dated February 24, 2000, to the board of directors of
Mustang.com opining as to the fairness of the exchange ratio to the shareholders
of Mustang.com from a financial point of view. FSVK's opinion is limited to the
fairness of the exchange ratio to the shareholders of Mustang.com, from a
financial point of view, and does not address Mustang.com's underlying business
decision to proceed with the merger.
THE FULL TEXT OF THE WRITTEN OPINION OF FSVK, WHICH SETS FORTH THE
ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN IN
CONNECTION WITH THE OPINION, IS ATTACHED HERETO AS ANNEX B AND INCORPORATED
HEREIN BY REFERENCE. THE SUMMARY CONTAINED HEREIN IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO THE FULL TEXT OF THE OPINION. QUINTUS AND MUSTANG.COM URGE THE
SHAREHOLDERS OF MUSTANG.COM TO CAREFULLY READ THE OPINION IN ITS ENTIRETY.
In connection with its opinion, among other things, FSVK:
- held discussions with certain members of the management of Mustang.com
and Quintus concerning, among other things, the revenue projections for
Mustang.com and Quintus published in the most recent research analysts'
reports provided to, or reviewed by, FSVK;
- reviewed the merger agreement in the form provided to FSVK by
Mustang.com, which has been represented to FSVK as the final version to
be executed by the parties;
- reviewed Quintus' initial public offering prospectus, as amended, on Form
S-1 and Form 10-Q for the nine months ended December 31, 1999;
- reviewed Mustang.com's Annual Reports on Form 10-K for the fiscal years
ended December 31, 1998 and 1999 and Form 10-Q for the nine months ended
September 30, 1999;
- reviewed certain press releases and certain other publicly available
information for Mustang.com and Quintus;
- reviewed publicly available data and information for certain companies
that FSVK believes to be relevant;
- reviewed publicly available research reports for Mustang.com and Quintus
and other companies which FSVK determined to be relevant;
- reviewed the financial terms, to the extent publicly available, of other
recent business combinations that FSVK deemed to be relevant; and
- conducted such other financial analysis as FSVK has determined, based
upon its judgment as investment bankers, to be appropriate for purposes
of this opinion.
In their review, FSVK assumed, with the permission of Mustang.com, that the
documents to be prepared, used and signed by the parties to formally effect the
merger, including any proxy or other disclosure material to be delivered to the
shareholders of Mustang.com and Quintus to elicit any necessary consents to the
merger, will effect the merger on the terms set forth in the proposed form of
the merger agreement provided to them by Mustang.com, without material
alteration.
FSVK did not negotiate the terms of the merger, nor provide any legal
advice with respect to the merger. FSVK did not make or provide an independent
evaluation or appraisal of any of the assets or liabilities (contingent or
otherwise) of Mustang.com or Quintus, nor did FSVK make a physical inspection of
any of the properties or assets of Mustang.com or Quintus.
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In rendering its opinion, FSVK relied, without independent verification, on
the accuracy and completeness of all of the financial and other information that
was publicly available or furnished or otherwise communicated to them by
Mustang.com or Quintus. FSVK has relied upon and assumed without independent
verification that there has been no material change in the assets, financial
condition and business prospects of Mustang.com or Quintus since the dates of
the most recent financial statements made available to them. With respect to
financial projections, FSVK has used only projections published in the most
recent research analysts' reports, reviewed those projections and in certain
instances used a mean projected number. The only financial information provided
by managements of Mustang.com and Quintus that FSVK has relied upon in rendering
this opinion is the current capitalization of Mustang.com and Quintus.
Independent of the foregoing, FSVK was advised by the managements of Mustang.com
and Quintus, and has relied upon and assumed without independent verification
that:
- the projected results Quintus and Mustang.com have used for their
companies are reasonable and reflect the best currently available
estimates of the future financial results and conditions of Quintus and
Mustang.com;
- such forecasts will be realized in the amounts and time periods
contemplated thereby; and
- neither the management of Mustang.com, nor the management of Quintus, has
any information or beliefs that would make the projections incomplete or
misleading.
The opinion was based upon an analysis of the foregoing factors in light of
FSVK's assessment of general economic, financial and market conditions as they
existed and as they could be evaluated by FSVK as of the date of the opinion and
on information made available to them. Although events occurring after the date
of the opinion could materially affect the assumptions relied upon in preparing
the opinion, FSVK has no obligation to update, revise or reaffirm the opinion.
The opinion is solely for the benefit and use of the board of directors of
Mustang.com in its consideration of the merger and is not a recommendation to
any shareholder as to how such shareholder should vote with respect to the
merger. Further, the opinion addresses only the financial fairness of the
consideration to be paid by Quintus and does not address the relative merits of
the merger and any alternatives to the merger, Mustang.com's underlying decision
to proceed with or effect the merger or any other aspect of the merger.
SUMMARY OF METHODS UTILIZED
Set forth below is a brief summary of the analyses performed by FSVK in
connection with the delivery of its opinion.
COMPARISONS TO SELECTED PUBLICLY-TRADED COMPANIES
FSVK performed a valuation of Mustang.com using selected financial ratios
and multiples of nine publicly-traded companies that have inbound or outbound
email solutions, including Chordiant Software, Inc.; ClickAction, Inc.; Digital
Impact, Inc.; eGain Communications Corporation; Exactis.com, Inc.; Kana
Communications, Inc.; MessageMedia, Inc.; Primus Knowledge Solutions, Inc.; and
Quintus Corporation. FSVK determined that for purposes of this analysis, the
revenue multiple was the only relevant valuation metric. Revenue multiples used
by FSVK included current total capitalization to: (i) actual calendar year 1999
revenues; (ii) projected calendar year 2000 revenues; and (iii) projected
calendar year 2001 revenues. The multiples calculated for the publicly-traded
selected companies were as follows: the average multiple of current total
capitalization to actual calendar year 1999 revenues was 99.8; the average
multiple of current total capitalization to projected calendar year 2000
revenues was 32.2; and the average multiple of current total
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capitalization to projected calendar year 2001 revenues was 15.5, all adjusted
to exclude the highest and lowest multiples. On the basis of these multiples,
FSVK calculated approximate implied exchange ratios. The implied exchange ratios
derived from calendar 1999, calendar 2000 and calendar 2001 revenues multiples
were 0.964, 0.591 and 0.665, respectively.
No company used in the above analysis for comparison purposes is identical
to Mustang.com. Accordingly, an analysis of the results of the foregoing is not
purely mathematical; rather it involves complex considerations and judgments as
to the financial and operating characteristics of the companies and other
factors that could affect the value of the companies to which Mustang.com is
being compared.
SELECTED MERGER AND ACQUISITION MERGER ANALYSIS
FSVK researched a variety of data sources, including merger and acquisition
databases, public filings, analyst reports, press releases and news articles for
the time period from January 1, 1999 to the date of its analysis. FSVK located
45 merger and acquisition transactions within the email management software and
services and eCRM industries. Upon initial review, FSVK eliminated five of these
transactions due to poor business fit and 33 of these transactions because of
insufficient data to draw conclusions regarding valuation, differences in
transaction size or incompatible underlying deal structure. FSVK used the
remaining 12 transactions to derive an implied exchange ratio utilizing the
multiple of the enterprise value of each transaction to the revenues of each
corresponding target for the twelve-month period prior to the transaction. The
average multiple of enterprise value to latest-twelve-month revenues was 42.8.
On the basis of this average multiple, FSVK calculated an implied exchange ratio
of 0.414.
PREMIUM PAID ANALYSIS
FSVK researched the average premiums paid by acquirers to the public
targets' stock prices 30 - days, 5 - days and 1 - day prior the announcement of
the transaction. Of the 40 transactions analyzed, only 5 involved public
targets. The average premiums paid by acquirers to the public targets' stock
price 30 - days, 5 - days, and 1 - day prior to the announcement of the
transaction were 100.75%, 46.69% and 34.82%, respectively. The average premiums
paid were applied to the respective closing prices of Mustang.com's stock, which
produced implied exchange ratios for 30 - days, 5 - days and 1 - day premiums of
0.482, 0.618 and 0.720, respectively.
CONTRIBUTION ANALYSIS
FSVK analyzed the respective contributions of Mustang.com and Quintus to
the actual and estimated revenues of the combined company for calendar years
1999 and 2000 and the resulting implied exchange ratios. The relative revenue
contributions of Mustang.com and Quintus are 7.8% and 92.2% in calendar year
1999, and 9.1% and 90.9% in calendar year 2000, respectively. On the basis of
these revenue contributions, FSVK calculated implied exchange ratios of 0.424
for calendar year 1999 and 0.503 for calendar year 2000.
FSVK was advised by the managements of Mustang.com and Quintus that the
financial forecasts, projections and estimates used for their companies by FSVK
are reasonable and reflect the best currently available estimates of the future
financial results and conditions, that such forecasts, projections and estimates
will be realized in the amounts and time periods contemplated thereby and that
neither the management of Mustang.com, nor the management of Quintus, has any
information or belief that would make the forecasts, projections and estimates
incomplete or misleading. These forecasts, projections and estimates were based
on numerous variables and assumptions which are
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inherently uncertain and which may not be within the control of management,
including, without limitation, general economic, regulatory and competitive
conditions. Accordingly, actual results could vary materially from those set
forth in such forecasts, projections and estimates.
The summary set forth above describes the material analyses performed by
FSVK and does not purport to be a complete description of such analyses. The
preparation of a fairness opinion is a complex process and is not necessarily
susceptible to partial analysis or summary description. In addition, the
evaluation of fairness of the exchange ratio, from a financial point of view, as
of the date of the written opinion was to some extent a subjective one based on
the experience and judgment of FSVK, and not merely the result of mathematical
analysis of the financial data. Therefore, notwithstanding the separate factors
summarized above, FSVK believes that its analyses must be considered as a whole
and that selecting portions of its analyses, without considering all factors and
analyses, would create an incomplete view of the process underlying the analyses
by which FSVK reached its opinion.
In performing its analyses, FSVK made numerous assumptions with respect to
industry performance, general business and economic conditions and other
matters, in addition to the financial assumptions described above. The analyses
performed by FSVK are not necessarily indicative of actual values or actual
future results, which may be significantly more or less favorable than those
suggested by such analyses. Such analyses were prepared solely as part of FSVK's
analysis of the merger. The analyses do not purport to be appraisals or to
reflect the prices at which a company might be sold or the prices at which any
securities of Mustang.com or the post-merger combined company may trade at any
time in the future. Furthermore, FSVK may have given certain analyses more or
less weight than other analyses and may have deemed various assumptions more or
less probable than other assumptions, so that the ranges of valuations resulting
from any particular analysis described above should not be taken to be FSVK's
view of the actual value of the Mustang.com, Quintus or the post-merger combined
company.
METHOD OF SELECTION/QUALIFICATIONS OF FSVK
The board of directors of Mustang.com retained FSVK to act as its financial
advisor based upon its qualifications, experience and expertise. FSVK, as part
of its investment banking activities, regularly engages in the valuation of
businesses and securities in connection with mergers and acquisitions, private
placements and valuations for corporate and other purposes. FSVK, a wholly-
owned subsidiary of First Security Corporation, is a full service investment
banking and brokerage firm specializing in emerging growth and middle market
companies.
RELATIONSHIP/COMPENSATION
In the past, FSVK has provided financial advisory and corporate banking
services to Mustang.com and has received customary compensation for the
rendering of these services. FSVK currently provides research on Mustang.com,
makes a market in its stock and holds warrants to acquire shares of Mustang.com
stock at prices below the implied per share value of the merger consideration.
FSVK will also receive a fee from Mustang.com for rendering this opinion.
Other than the items referred to above, FSVK has no affiliations with
Mustang.com or Quintus. Mustang.com did not instruct FSVK with respect to the
methodologies or conclusions reached in connection with the opinion or impose
any limitations on FSVK in respect thereof.
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INTERESTS OF RELATED PERSONS IN THE MERGER
In considering the recommendations of Mustang.com's board of directors with
respect to the merger agreement, Mustang.com shareholders should be aware that
some of its directors and members of management have interests in the merger
that are different from, or in addition to, the interests of Mustang.com
shareholders generally. A description of the individuals is set forth below.
Mustang.com's board of directors was aware of these interests and considered
them, among other matters, in approving the merger.
SEVERANCE BENEFITS
Effective December 1, 1999, Mustang.com entered into employment agreements
with the following members of its senior management: James A. Harrer, President
and Chief Executive Officer; Christopher B. Rechtsteiner, Executive Vice
President; C. Scott Hunter, Vice President Engineering and Chief Technical
Officer, and Donald M. Leonard, Vice President Finance and Chief Financial
Officer. Each of the agreements is for a one-year term and automatically renews
for succeeding one year terms unless either the Company or the employee provides
the other with a notice of non-renewal at least 30 days prior to the expiration
of the then current term. The agreements are terminable by either party with or
without cause upon the expiration of 30 days' notice of termination. Upon a
termination of employment by the Company without cause or by the employee for
good reason (which includes because of a change of control of the Company), the
employee is entitled to compensation equal to nine months' salary and continued
health benefits for nine months and to immediately exercise any outstanding
options to purchase the common stock of the Company (whether or not such options
would otherwise be exercisable). These severance rights upon a change in control
of the Company are limited to an aggregate amount of up to an amount that would
not result in an "Excess Parachute Payment" to such employee within the meaning
of the Internal Revenue Code. Upon a termination by the employee without good
reason or by the Company with cause, the employee is entitled to compensation
equal to four months' salary and continued health benefits for four months.
Based on their current base annual salaries, the change in control that
will result from the consummation of the merger will entitle the above-named
executives to the following aggregate cash lump sum payments upon their
termination of employment:
<TABLE>
<CAPTION>
SEVERANCE
NAME PAYMENT
---- ---------
<S> <C>
James A. Harrer............................................. $164,934
Christopher B. Rechtsteiner................................. 104,958
C. Scott Hunter............................................. 119,952
Donald M. Leonard........................................... 68,972
</TABLE>
STOCK OPTIONS
Pursuant to their terms, as a result of the merger, some Mustang.com
options will become fully vested and exercisable. The number of unvested
Mustang.com options that will be eligible to become fully vested and exercisable
and that are held by the officers and directors of Mustang.com are set forth in
the table below. The information in the table is given as of, and assumes
completion of the merger on, March 31, 2000 and accordingly, some of the options
included in the table may vest between April 1, 2000 and the effective time of
the merger pursuant to their normal vesting schedule and not because of the
change of control resulting from the merger. Additionally, certain of these
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<PAGE> 54
options may not vest to the extent such accelerated vesting would result in an
"Excess Parachute Payment" within the meaning of the Internal Revenue Code.
<TABLE>
<CAPTION>
ACCELERATED
VESTING OF OPTIONS
NAME TITLE (NUMBER OF SHARES)
---- ----- ------------------
<S> <C> <C>
James A. Harrer............. President, Chief Executive Officer and a 127,780
Director
Christopher B.
Rechtsteiner.............. Executive Vice President 65,279
C. Scott Hunter............. Vice President Engineering and Chief 50,000
Technical Officer
Donald M. Leonard........... Vice President Finance and Chief 28,890
Financial Officer
Daniel Cooper............... Vice President, Marketing 22,918
Lynn Wright................. Vice President of Customer Service and 7,434
Chief Customer Officer
Stanley A. Hirschman........ Chairman of the Board of Directors 26,666
Michael S. Noling........... Director 26,666
Anthony P. Mazzarella....... Director 30,000
Phillip E. Pearce........... Director 30,000
</TABLE>
INDEMNIFICATION AND INSURANCE
Under the merger agreement, Quintus will:
- indemnify and hold harmless present or former directors or officers of
Mustang.com for all acts or omissions occurring prior to the effective
time of the merger, including the transactions contemplated by the merger
agreement, to the same extent these persons are indemnified and held
harmless under Delaware law or any other applicable laws or provided
under Mustang.com's certificate of incorporation or bylaws as of the date
of the merger agreement, and
- purchase insurance policies that provide, for a period of six years after
the effective time of the merger, an insurance and indemnification policy
that grants Mustang.com's officers and directors in office immediately
prior to the effective time of the merger coverage substantially
equivalent to Mustang.com's policy in effect as of the date of the merger
agreement, provided, however, that in no event will Quintus' expenditures
in any one year for this coverage exceed 150% of the annual premiums
currently paid by Mustang.com, and provided, further, that if the annual
premiums for this coverage exceed that amount, Quintus will provide a
policy providing the best available coverage not exceeding the amount.
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THE MERGER AGREEMENT
The following is a summary of the material terms of the merger agreement. A
copy of the merger agreement is attached as Annex A to this proxy
statement/prospectus and is incorporated herein by reference. The following is
not a complete statement of all the terms of the merger agreement. Statements
made in this proxy statement/prospectus are qualified by reference to the more
detailed information set forth in the merger agreement. You are encouraged to
read the entire merger agreement.
GENERAL
The merger agreement provides that, following the approval of the merger
and the merger agreement by the shareholders of Mustang.com, and the
satisfaction or waiver of the other conditions to the merger, a wholly-owned
subsidiary of Quintus formed under the laws of the State of California will
merge with and into Mustang.com, with Mustang.com surviving the merger as a
wholly-owned subsidiary of Quintus Corporation.
TIMING OF CLOSING
The closing will occur as soon as practicable after the conditions set
forth in the merger agreement have been satisfied or waived. Quintus and
Mustang.com expect that, as promptly as practicable after the closing, Quintus
and Mustang.com will file a certificate of merger with the Secretary of State of
the State of Delaware, at which time the merger will become effective.
CONVERSION OF SHARES
The merger agreement provides that each share of Mustang.com common stock
issued and outstanding immediately prior to the time the merger will become
effective will be converted into the right to receive 0.793 of a share of common
stock of Quintus. Based upon the number of outstanding shares of Quintus common
stock and Mustang.com common stock as of the record date, the shareholders of
Mustang.com immediately prior to the consummation of the merger will own
approximately 13.8% of the outstanding shares of Quintus common stock
immediately following consummation of the merger. If any shareholder of
Mustang.com would be entitled to receive a number of shares of Quintus common
stock that includes a fraction, then, in lieu of a fractional share, the holder
will be entitled to receive cash in an amount equal to the fractional share of
Quintus common stock multiplied by the closing sale price of a share of Quintus
common stock on the Nasdaq National Market on the trading day immediately
preceding the effective time of the merger.
Prior to the effective time, Quintus will deposit with an exchange agent
the certificates representing the appropriate number of shares of Quintus common
stock that will be issued to the holders of Mustang.com common stock and the
cash to be paid for the fractional shares.
As soon as practicable after the effective time, the exchange agent will
mail to each holder of a certificate or certificates representing Mustang.com
common stock that will be exchanged for Quintus common stock, a letter of
transmittal that contains instructions for the surrender of the certificates.
Upon surrender of a certificate and other required documents, the holder of a
certificate or certificates of Mustang.com common stock will receive a
certificate representing Quintus common stock and, if applicable, a check for
the cash consideration of fractional Quintus common stock.
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MUSTANG.COM STOCK OPTIONS, WARRANTS AND EMPLOYEE STOCK PURCHASE PLAN
MUSTANG.COM STOCK OPTIONS AND WARRANTS. At the effective time, each
outstanding Mustang.com stock option and warrant shall be deemed to constitute
an option or warrant to acquire, on the same terms and conditions as were
applicable under the option or warrants, the same number of shares of Quintus
common stock as the holder of the option or warrant would have been entitled to
receive pursuant to the merger agreement, had the holder exercised the
Mustang.com option or warrant in full immediately prior to the effective time of
the merger, rounded to the nearest whole number, unless rounding down is
necessary to preserve the status of incentive stock options as described below.
The exercise price per share shall equal: the aggregate exercise price for the
Mustang.com shares otherwise purchasable pursuant to the option or warrant,
divided by the aggregate number of whole Quintus shares purchasable pursuant to
the Mustang.com option in accordance with the foregoing. In the case of any
stock option that qualifies as an incentive stock option under the Internal
Revenue Code, the option price, number of shares purchasable pursuant to the
option and the terms and conditions of the exercise of such option shall be
determined in order to comply with Section 424(a) of the Internal Revenue Code.
As soon as practicable after the effective time, Quintus will notify the
holders of Mustang.com options, subject to the adjustments referred to above,
that the rights of the holders of Mustang.com options will continue on the terms
and conditions of the existing Quintus stock option plan.
Quintus will take all necessary action to implement the above, including
the reservation, issuance and listing of a sufficient number of shares of
Quintus common stock for delivery upon exercise of these substitute options.
Quintus will prepare and file a registration statement on an appropriate form,
or a post-effective amendment to a previously filed registration statement, with
respect to the Quintus common stock subject to the Mustang.com options. Where
applicable, Quintus will use its reasonable best efforts to have the
registration statement declared effective and to maintain such effectiveness.
EMPLOYEE STOCK PURCHASE PLAN. Mustang.com shall cause each option
outstanding under its employee stock purchase plan immediately prior to the
effective time to be automatically exercised immediately prior to the effective
time. Pursuant to such exercise, each holder shall receive shares of Mustang.com
common stock which will be converted into Quintus common stock at the effective
time. The employee stock purchase plan shall be terminated at the effective
time.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains customary mutual representations and
warranties of Mustang.com and Quintus, relating to, among other things:
- due incorporation and good standing;
- corporate authority to enter into the contemplated transactions;
- required consents and filings with government entities;
- absence of conflicts with organizational documents and material
agreements; and
- capitalization, ownership of subsidiaries, reports filed with the SEC,
financial statements, information supplied for use in this document,
material changes or events, undisclosed liabilities, compliance with
laws, litigation, finder's fees, opinions of financial advisors, tax
matters and intellectual property.
Mustang.com also represented and warranted as to employee benefit plans,
environmental matters, contracts, certain interests, products and antitakeover
statutes.
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COVENANTS REGARDING CONDUCT OF BUSINESS BEFORE THE MERGER
INTERIM OPERATIONS OF QUINTUS AND MUSTANG.COM. Quintus and Mustang.com have
agreed to conduct their business in the ordinary course consistent with past
practice and to use their reasonable best efforts to preserve intact their
present business organizations and relationships with third parties. The
companies have also agreed with some restrictions not to take any action outside
the parameters specified in the merger agreement such as amending their
organizational documents, changing any accounting principles or practices
(unless required by law or generally accepted accounting principles), or taking
any other action that would make any representation or warranty inaccurate in
any material respect.
In addition, Mustang.com also agreed not to:
- adopt or implement any shareholder rights plan;
- enter into any significant transaction;
- issue or dispose of equity securities, options or other securities
convertible into or exercisable for equity securities, except, with
Quintus' consent, to new employees;
- split, combine or reclassify its capital stock;
- adopt any plan of reorganization;
- incur or assume any debt, enter into capital leases, make any loans or
guarantees, encumber its shares or create any lien upon its assets;
- enter into or amend any employee benefit agreement or any other similar
arrangement;
- hire any new employees without Quintus' consent; and
- make capital expenditures, except in the ordinary course of business.
REASONABLE EFFORTS COVENANT. Quintus and Mustang.com have agreed to
cooperate with each other and use their reasonable best efforts to take all
actions and do all things necessary or advisable under the merger agreement and
applicable laws to complete the merger and the other transactions contemplated
by the merger agreement by May 15, 2000.
NO SOLICITATION. Mustang.com has agreed that it and its subsidiaries,
officers, directors, employees, investment bankers, attorneys, accountants,
consultants or other agents or advisors will not take action to solicit or
encourage an offer for an alternative acquisition or merger transaction.
Restricted actions include engaging in any discussions or negotiations with any
potential bidder, disclosing any nonpublic information relating to Mustang.com
or any of its subsidiaries or giving access to its properties, books or records
to any potential bidder. These actions are permitted in response to an
unsolicited offer so long as, before doing so the board of directors determines
in good faith, after consulting with its financial advisor and outside counsel
and taking into account all the terms and conditions of the offer, that the
offer is a superior proposal.
LOCK-UP LETTERS. Several of Mustang.com's officers and directors have
agreed to sign lock-up agreements whereby each agrees not to dispose of any
shares of Quintus common stock prior to May 15, 2000 (assuming that the merger
is completed by that date).
NON-COMPETE AGREEMENTS. Mustang.com has agreed to use its best efforts to
obtain non-compete agreements from James A. Harrer, the President and Chief
Executive Officer of Mustang.com and C. Scott Hunter, the Vice President
Engineering and Chief Technical Officer of Mustang.com, prior to the completion
of the merger.
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EMPLOYEE BENEFIT PLANS. Quintus has agreed to provide for a period of one
year from the effective time to Mustang.com employees, employee benefit plans
that are substantially comparable in the aggregate to those currently provided
by Mustang.com. Quintus shall recognize service with Mustang.com as service for
vesting and service credit purposes under any employee benefit plan or
arrangement maintained by Quintus.
INDEMNIFICATION. The surviving company will indemnify, defend and hold
harmless each person who is at the date of merger agreement, or has been prior
such date, or who becomes prior to the effective time, a director, or officer of
Mustang.com. This indemnification will cover the losses, expenses, claims,
damages or liabilities or amounts paid in settlement, arising at or prior to the
effective time that are based on the professional qualification of the person
within Mustang.com or the merger agreement.
For a period of six years after the effective time, the surviving company
will maintain the policies of directors' and officers' liability insurance
currently maintained by Mustang.com in respect of acts or omissions occurring
prior to the effective time; provided however, that in no event will Quintus'
expenditures in any one year exceed 150% of the annual premiums currently paid
by Mustang.com.
BROKER PROGRAM. Quintus has agreed to use its reasonable best efforts to
establish, effective on and after May 15, 2000, a customary broker program to
permit exercises of converted options on a "cashless" basis and to permit
resales of Quintus common stock obtained on such exercise, with the cost of such
exercises and resales to be borne by the participants in the program.
OTHER COVENANTS. The merger agreement contains additional mutual covenants,
including covenants relating to preparation and distribution of this document,
cooperation regarding filings with governmental and other agencies and
organizations and obtaining any governmental or third-party consents or
approvals, public announcements, further assurances, access to information,
mutual notification of particular events, confidential treatment of non-public
information, coordination of shareholders' meetings and actions that, to
preserve the intended tax treatment of the merger, may not be taken.
CONDITIONS TO COMPLETION OF THE MERGER
Quintus and Mustang.com will complete the merger only if certain conditions
specified are satisfied or waived, including the following:
- the representations and warranties of the respective parties made in the
merger agreement remain accurate in all material respects;
- the parties perform in all material respects their respective covenants
and obligations in the merger agreement;
- the shareholders of Mustang.com approve the merger;
- the applicable waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, expires or it terminates;
- 5% or less of Mustang.com shareholders exercise and perfect their
dissenters' rights;
- there is an absence of any law or court order prohibiting the merger; and
- Quintus and Mustang.com receive the opinions of their respective counsel
that the merger will qualify as a tax-free reorganization for United
States federal income tax purposes.
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TERMINATION OF THE MERGER AGREEMENT
Quintus' board of directors and Mustang.com's board of directors can
jointly agree to terminate the merger agreement at any time before completing
the merger. In addition, the merger agreement may be terminated if:
- the merger is not completed by June 30, 2000 (however, a party in
material breach of its obligations under the merger agreement cannot
terminate it for this reason);
- a court order prohibits the merger;
- Mustang.com shareholders do not approve the merger;
- Mustang.com's board of directors withdraws, modifies or changes its
approval of the merger agreement or its recommendation to its
shareholders or fails to call and properly convene a shareholders'
meeting to vote upon the merger;
- either company breaches materially any of its representations or
warranties under the merger agreement, resulting in its inability to
satisfy a condition to the completion of the merger by June 30, 2000;
- either company breaches materially any of its covenants or agreements
under the merger agreement and fails to cure that breach within a twenty
(20) day period; or
- Mustang.com solicits or enters into discussions with respect to an
alternative transaction which could reasonably be expected to interfere
with the merger.
TERMINATION FEES AND EXPENSES
The merger agreement obligates Mustang.com to pay to Quintus a termination
fee of $5 million and to reimburse Quintus for all its out-of-pocket fees and
expenses up to $2.5 million if:
- the merger agreement is terminated for certain of the reasons described
above under "Termination of the Merger Agreement"; or
- within 12 months of termination of the merger agreement, due to the
merger not being completed by June 30, 2000 or Mustang.com shareholders
not approving the merger, Mustang.com merges with another company,
another company acquires 50% or more of Mustang.com's assets or stock, or
Mustang.com implements a plan of liquidation, recapitalization or share
repurchase relating to 50% or more of its stock, or a dividend relating
to 50% or more of its stock or assets.
AMENDMENT OR WAIVER OF THE MERGER AGREEMENT
The parties may amend the merger agreement or waive any of its terms and
conditions before the effective time, but after the shareholders of Quintus and
Mustang.com have approved the merger, the parties may not amend the merger
agreement if such amendment would require shareholder approval.
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THE SHAREHOLDERS' MEETING
THE MUSTANG.COM SPECIAL MEETING
GENERAL. This proxy statement/prospectus is being furnished to the
shareholders of Mustang.com in connection with the solicitation of proxies on
behalf of the Mustang.com board of directors for use at the special meeting to
be held on May 11, 2000, at the time and place specified in the accompanying
Notice of Special Meeting of Shareholders, and at any adjournment or
postponement thereof. The purpose of the special meeting is to consider and vote
upon a proposal to approve and adopt the merger agreement and the merger and to
transact such other business as may properly come before the special meeting.
Each copy of this proxy statement/prospectus mailed to holders of
Mustang.com common stock is accompanied by a form of proxy for use at the
special meeting. This proxy statement/prospectus is also furnished to
Mustang.com shareholders as a prospectus in connection with the issuance to them
of shares of Quintus common stock upon consummation of the merger.
THE BOARD OF DIRECTORS OF MUSTANG.COM HAS APPROVED THE MERGER AGREEMENT AND
RECOMMENDS A VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
RECORD DATE; QUORUM. The Mustang.com board of directors has fixed the close
of business on April 10, 2000 as the record date for the determination of the
holders of Mustang.com common stock entitled to receive notice of and to vote at
the special meeting. The presence, in person or by proxy, of the holders of a
majority of the outstanding shares of Mustang.com common stock entitled to vote
at the special meeting is necessary to constitute a quorum.
VOTE REQUIRED. As of the record date for the special meeting, there were
shares of Mustang.com common stock outstanding, each of which is entitled to one
vote on the merger agreement and the merger and each other matter properly
submitted at the special meeting. Holders of Mustang.com common stock as of the
record date of the special meeting are entitled to one vote per share of
Mustang.com common stock on each matter to be considered at the special meeting.
Approval and adoption of the merger agreement by the shareholders of Mustang.com
requires the affirmative vote of the holders of a majority of the outstanding
shares of Mustang.com common stock.
VOTING OF PROXIES. Shares of Mustang.com common stock represented by a
proxy properly signed and received at or prior to the special meeting, unless
subsequently revoked, will be voted in accordance with the instructions thereon.
If a proxy is signed and returned without indicating any voting instructions,
shares of Mustang.com common stock represented by the proxy will be voted FOR
the proposal to approve and adopt the merger agreement.
Shares of Mustang.com common stock represented at the special meeting by a
properly executed, dated and returned proxy will be treated as present at the
special meeting for purposes of determining a quorum, without regard to whether
the proxy is marked as casting a vote or abstaining. For voting purposes at the
special meeting, only shares affirmatively voted in favor of approval and
adoption of the merger agreement will be counted as favorable votes for such
approval and adoption. Any broker non-votes and abstaining votes will not be
counted in favor of approval and adoption of the merger agreement. Since
applicable law requires a majority of the outstanding shares, broker non-votes
and abstentions will have the same effect as votes cast against the proposal.
The persons named as proxies by a shareholder may propose and vote for one
or more adjournments of the special meeting to permit further solicitations of
proxies in favor of approval and adoption of the merger agreement and merger;
however, no proxy that is voted against the approval and adoption of the merger
agreement will be voted in favor of any such adjournment. An
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adjournment proposal requires the affirmative vote of a majority of the votes
cast by holders of Mustang.com common stock and, therefore, broker non-votes and
abstentions will have no effect.
REVOCABILITY OF PROXIES. The grant of a proxy on the enclosed form does not
preclude a shareholder from voting in person. A shareholder may revoke a proxy
at any time prior to its exercise by submitting a signed written revocation to
the Secretary of Mustang.com, by submitting a signed proxy bearing a later date
or by appearing at the special meeting and voting in person at the special
meeting. No special form of revocation is required. Attendance at the special
meeting will not, in and of itself, constitute revocation of a proxy.
SOLICITATION OF PROXIES. Mustang.com will bear the cost of the solicitation
of proxies from its shareholders, including the costs of preparing, filing,
printing and distributing this proxy statement/ prospectus and any other
solicitation materials that are used. In addition to solicitation by mail, the
directors, officers and employees of Mustang.com may solicit proxies from
shareholders of Mustang.com by telephone or telegram or by other means of
communication.
Such directors, officers and employees will not be additionally compensated
but may be reimbursed for reasonable out-of-pocket expenses in connection with
such solicitation. Arrangements will also be made with brokerage houses and
other custodians, nominees and fiduciaries for the forwarding of solicitation
material to the beneficial owners of stock held of record by such persons, and
Mustang.com will reimburse such custodians, nominees and fiduciaries for their
reasonable out-of-pocket expenses in connection therewith.
In addition, Mustang.com has retained Georgeson Shareholder Communications
Inc. to assist in the solicitation of proxies by Mustang.com for a fee of $8,500
plus reasonable out-of-pocket costs and expenses. For questions or requests
regarding proxies or related materials banks and brokers should call (212)
440-9800 (collect) and all others should call toll free (800) 223-2064.
THE MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING ARE OF GREAT IMPORTANCE
TO THE MUSTANG.COM SHAREHOLDERS. ACCORDINGLY, MUSTANG.COM SHAREHOLDERS ARE URGED
TO READ AND CAREFULLY CONSIDER THE INFORMATION PRESENTED IN THIS JOINT PROXY
STATEMENT/ PROSPECTUS, AND TO COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE
ENCLOSED PROXY IN THE ENCLOSED POSTAGE PRE-PAID ENVELOPE.
SHAREHOLDERS SHOULD NOT SEND MUSTANG.COM COMMON STOCK CERTIFICATES WITH
THEIR PROXY CARDS. IF THE MERGER AGREEMENT IS APPROVED BY THE SHAREHOLDERS AND
THE MERGER IS CONSUMMATED, TRANSMITTAL FORMS AND INSTRUCTIONS WILL BE SENT FOR
THE EXCHANGE OF SHARES OF MUSTANG.COM COMMON STOCK FOR QUINTUS COMMON STOCK.
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COMPARISON OF RIGHTS OF HOLDERS OF QUINTUS COMMON STOCK
AND MUSTANG.COM COMMON STOCK
In connection with the Merger, the shareholders of Mustang.com will be
exchanging shares of a California corporation (Mustang.com) for shares of a
Delaware corporation (Quintus). California law and Delaware law differ in many
respects. It is not practical to summarize all of the differences that could
materially affect the rights of Mustang.com shareholders as holders of shares of
Quintus common stock following the Merger. However, the significant differences
between the corporation laws of California and Delaware include the following:
SIZE OF BOARD OF DIRECTORS
Under California law, although changes in the number of directors must in
general be approved by the shareholders, the board of directors may fix the
exact number of directors within a stated range set forth in the articles of
incorporation or bylaws, if the stated range has been approved by the
shareholders. In Mustang.com's case, the range is stated in its bylaws at no
less than five and no more than nine directors. Mustang.com's current board
consists of five members.
Delaware law permits the board of directors to change the authorized number
of directors by amendment to the bylaws or in the manner provided in the bylaws
unless the number of directors is fixed in the certificate of incorporation, in
which case a change in the number of directors may be made only by amendment to
the certificate of incorporation. Quintus' charter documents do not currently
fix or restrict the number of directors. Quintus' charter documents provide that
the number of directors shall be determined by the board of directors or by the
shareholders at the annual meeting of shareholders. Currently Quintus' board of
directors consists of eight members.
CLASSIFIED BOARD OF DIRECTORS
A classified board is one on which a certain number, but not all, of the
directors are elected on a rotating basis each year. Under California law,
directors generally must be elected annually; however, a "listed" corporation is
permitted to adopt a classified board. A "listed" corporation is defined under
California law as a corporation with (1) outstanding securities listed on the
New York or American Stock Exchange or (2) a class of securities designated as a
national market security on Nasdaq National Market. Mustang.com's Articles of
Incorporation do not provide for a classified board.
Delaware law permits, but does not require, a classified board of
directors, pursuant to which the directors can be divided into as many as three
classes with staggered terms of office with only one class of directors standing
for election each year. Quintus' certificate of incorporation currently does not
provide for a classified board.
CUMULATIVE VOTING
California Law provides that any shareholder is entitled to cumulate his or
her votes in the election of directors upon proper notice of his or her
intention to do so, except that a "listed" corporation may eliminate cumulative
voting with shareholder approval. Mustang.com's articles of incorporation have
not eliminated cumulative voting with respect to the election of directors.
Under Delaware law, cumulative voting in the election of directors is not
mandatory, and for cumulative voting to be effective it must be expressly
provided for in the certificate of incorporation. In an election of directors
under cumulative voting, each share of stock normally having one vote is
entitled to a number of votes equal to the number of directors to be elected. A
shareholder may then cast all such votes for a single candidate or may allocate
them among as many candidates as the
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shareholder may choose. Without cumulative voting, the holders of a majority of
the shares present at an annual meeting would have the power to elect all the
directors to be elected at that meeting, and no person could be elected without
the support of holders of a majority of the shares. Quintus' certificate of
incorporation does not provide for cumulative voting.
REMOVAL OF DIRECTORS
Under California law, any director or the entire board of directors may be
removed, with or without cause, with the approval of a majority of the
outstanding shares entitled to vote; however, no directors may be removed
(unless the entire board is removed) if the number of votes cast against the
removal would be sufficient to elect the director under cumulative voting. The
charter documents of Mustang.com have neither eliminated cumulative voting nor
provided for a classified board of directors.
Under Delaware law, a director of a corporation that does not have a
classified board of directors or cumulative voting may be removed without cause
by a majority shareholder vote. In the case of a Delaware corporation having
cumulative voting, if less than the entire board is to be removed, a director
may not be removed unless the shares voted against such removal would not be
sufficient to elect the director under cumulative voting. A director of a
corporation with a classified board of directors can be removed only for cause
unless the certificate of incorporation otherwise provides. The charter
documents for Quintus do not provide for cumulative voting or a classified
board.
LOANS TO OFFICERS AND EMPLOYEES
Under California law, any such loan or guaranty to or for the benefit of a
director or officer of the corporation or any of its subsidiaries requires
approval of the shareholders unless such loan or guaranty is provided under a
plan approved by shareholders owning a majority of the outstanding shares of the
corporation. In addition, under California law, shareholders of any corporation
with 100 or more shareholders of record may approve a bylaw authorizing the
board of directors alone to approve a loan or guaranty to or on behalf of an
officer (whether or not a director) if the board determines that such a loan or
guaranty may reasonably be expected to benefit the corporation. Mustang.com's
shareholders have approved such a bylaw.
Under Delaware law, a corporation may make loans to, guarantee the
obligations of, or otherwise assist its officers or other employees and those of
its subsidiaries when such action, in the judgment of the directors, may
reasonably be expected to benefit the corporation.
POWER TO CALL SPECIAL SHAREHOLDERS' MEETING
Under California law, a special meeting of shareholders may be called by
the board of directors, the Chairman of the Board, the President and the holders
of shares entitled to cast not less than 10% of the votes at such meeting and
such other persons as are authorized by the articles of incorporation or bylaws.
Under Delaware law, a special meeting of shareholders may be called by the
board of directors or by any other person authorized to do so in the certificate
of incorporation or the bylaws.
INDEMNIFICATION AND LIMITATION OF LIABILITY
California and Delaware laws have similar provisions and limitations
respecting indemnification by a corporation of its officers, directors and
employees. Neither Quintus nor Mustang.com is aware of any pending legal action
against the officers, directors or employees of such company which would
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be covered by such indemnification provisions. Both California and Delaware law
permit a corporation to adopt a provision in its charter eliminating the
liability of a director to the corporation or its shareholders for monetary
damages for breach of fiduciary duty as a director, provided such liability does
not arise from certain proscribed conduct (including intentional misconduct and
breach of the duty of loyalty).
INSPECTION OF SHAREHOLDERS' LIST
Both California and Delaware law allow any shareholder to inspect the
shareholders' list for a purpose reasonably related to such person's interest as
a shareholder. California law provides, in addition, an absolute right to
inspect and copy the corporation's shareholders' list by a person or persons
holding 5% or more of a corporation's voting shares, or any shareholder or
shareholders holding 1% or more of such shares who has filed a Schedule 14B with
the Commission relating to the election of directors. Delaware law does not
provide for any such absolute right of inspection.
DIVIDENDS AND REPURCHASES OF SHARES
Under California law, a corporation may not make any distribution
(including dividends, whether in cash or other property, and repurchases of its
shares) unless either the corporation's retained earnings immediately prior to
the proposed distribution equal or exceed the amount of the proposed
distribution or, immediately after giving effect to such distribution, the
corporation's assets (exclusive of good will, capitalized research and
development expenses and deferred charges) would be at least equal to 125% of
its liabilities (not including deferred taxes, deferred income and other
deferred credits), and the corporation's current assets, as defined, would be at
least equal to its current liabilities (or 125% of its current liabilities if
the average pre-tax and pre-interest earnings for the preceding two fiscal years
were less than the average interest expenses for such year). Such tests are
applied to California corporations on a consolidated basis. Under California
law, there are certain exceptions to the foregoing rules for repurchases of
shares in connection with certain rescission actions or pursuant to certain
employee stock plans.
Delaware law permits a corporation, unless otherwise restricted by its
certificate of incorporation, to declare and pay dividends out of its surplus
or, if there is no surplus, out of net profits for the fiscal year in which the
dividend is declared and/or for the preceding fiscal year as long as the amount
of capital of the corporation is not less than the aggregate amount of the
capital represented by the issued and outstanding stock of all classes having a
preference upon the distribution of assets. In addition, Delaware law generally
provides that a corporation may redeem or repurchase its shares only if such
redemption or repurchase would not impair the capital of the corporation. The
ability of a Delaware corporation to pay dividends on, or to make repurchases or
redemptions of, its shares is dependent on the financial status of the
corporation standing alone and not on a consolidated basis. In determining the
amount of surplus of a Delaware corporation, the assets of the corporation,
including stock of subsidiaries owned by the corporation, must be valued at
their fair market value as determined by the board of directors, regardless of
their historical book value.
APPROVAL OF CERTAIN CORPORATE TRANSACTIONS
Under both California and Delaware law, with certain exceptions, any merger
or sale of all or substantially all the assets must be approved by the board of
directors and a majority of the outstanding shares entitled to vote. Under
California law, similar board and shareholder approval is also required in
connection with certain additional acquisition transactions. Mustang.com's
Articles of Incorporation do not contain provisions that vary from the default
provisions of California law.
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CLASS VOTING IN CERTAIN CORPORATE TRANSACTIONS
Under California law, with certain exceptions, any merger, certain sales of
all or substantially all the assets of a corporation and certain other
transactions must be approved by a majority of the outstanding shares of each
class of stock (without regard to limitations on voting rights). Mustang.com has
only one class of capital stock outstanding, namely, common stock.
Delaware law does not generally require a class vote, except in connection
with certain amendments to the certificate of incorporation that, among other
things, adversely affect a class of stock.
AMENDMENT OF THE ARTICLES
Under California law, an amendment to the articles of incorporation
requires the approval of the corporation's board of directors and a majority of
the outstanding shares entitled to vote, either before or after the board
approval, although certain minor amendments may be adopted by the board alone
such as amendments causing stock splits (including an increase in the authorized
number of shares in proportion thereto) and amendments changing names and
addresses given in the articles. Additionally, under California law, the holders
of a class of stock are entitled to vote as a class if a proposed amendment to
the articles would (i) increase or decrease the aggregate number of authorized
shares of such class; (ii) effect an exchange, reclassification or cancellation
of all or part of the shares of such class, other than a stock split; (iii)
effect an exchange, or create a right of exchange, of all or part of the shares
of another class into the shares of such class; (iv) change the rights,
preferences, privileges or restrictions of the shares of such class; (v) create
a new class of shares having rights, preferences or privileges prior to the
shares of such class, or increase the rights, preferences or privileges or the
number of authorized shares having rights, preference or privileges prior to the
shares of such class; (vi) in the case of preferred shares, divide the shares of
any class into series having different rights, preferences, privileges or
restrictions or authorize the board of directors to do so; or (vii) cancel or
otherwise affect dividends on the shares of such class which have accrued but
have not been paid. Mustang.com's Articles of Incorporation do not contain
provisions that vary from the default provisions under California law.
Under Delaware law, an amendment to the certificate of incorporation
requires the approval of the corporation's board of directors and a majority of
the outstanding shares. Additionally, under Delaware law, the holders of a class
of stock are entitled to vote as a class if a proposed amendment would (i)
increase or decrease the aggregate number of authorized shares of such class or
(ii) increase or decrease the par value of the shares of such class so as to
affect them adversely. If any proposed amendment would alter or change the
powers, preferences or special rights of one or more series of any class so as
to affect them adversely, but shall not so affect the entire class, then only
the shares of the series so affected by the amendment shall be considered a
separate class.
AMENDMENT OF BYLAWS
Under California law, a corporation's bylaws may be adopted, amended or
repealed either by the board of directors or the shareholders of the
corporation. Mustang.com's charter documents permit amendment or repeal by a
majority of either the board of directors or the shareholders, except that the
indefinite number of Mustang.com's directors (between five and nine) may be
changed, or a definite number fixed without provision for an indefinite number,
only by an amendment to the bylaws adopted by a majority of the outstanding
shares entitled to vote. Moreover, an amendment to the bylaws reducing the
number or the minimum number of directors to a number less than five cannot be
adopted if the votes cast against its adoption at a meeting of the shareholders,
or the shares
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not consenting in the case of action by written consent, are equal to more than
16 2/3% of the outstanding shares entitled to vote.
Under Delaware law, after a corporation has received any payment for any of
its stock, the power to adopt, amend or repeal bylaws is entirely with the
shareholders of the corporation. However, a corporation may, in its certificate
of incorporation, confer the power to adopt, amend or repeal bylaws upon the
directors of the corporation. Quintus' certificate of incorporation expressly
empowers Quintus' board of directors to adopt, amend or repeal the corporation's
bylaws.
SHAREHOLDER CONSENT IN LIEU OF MEETING
Under California law, unless otherwise provided in the articles of
incorporation, any action required to be taken or which may be taken at an
annual or special meeting of shareholders may be taken without a meeting if a
consent in writing is signed by the holders of outstanding shares having not
less than the minimum number of votes that would be necessary to authorize such
action at a meeting at which all shares entitled to vote were present and voted.
If consent is sought for less than the shareholders entitled to vote, notice, as
required under California law, shall be given. Mustang.com's Articles of
Incorporation do not contain any provision in contradiction of the default
provisions of California law. Additionally, Mustang.com's Bylaws state that each
outstanding share, regardless of class, shall be entitled to one vote on each
matter submitted to a vote of the shareholders.
Under Delaware law, unless otherwise provided in the certificate of
incorporation, any action to be taken at an annual or special meeting of
shareholders, may be taken without a meeting, without prior notice and without a
vote if a written consent to the action shall be signed by the holders of
outstanding stock having not less than the minimum number of votes that would be
necessary to authorize such action at a meeting at which all shares entitled to
vote were present and voted. Additionally, unless the certificate of
incorporation provides otherwise, shareholders may act by written consent to
elect directors; provided, however, that, if such consent is less than
unanimous, such action by written consent may be held in lieu of an annual
meeting only if all of the directorships to which directors could be elected at
an annual meeting are vacant and are filled by such action.
DISSENTERS' RIGHTS
Under California and Delaware law, a shareholder of a corporation
participating in certain major corporate transactions may, under varying
circumstances, be entitled to dissenters' rights pursuant to which such
shareholder may receive cash in the amount of the fair market value of the
shares held by such shareholder (as determined by a court or by agreement of the
corporation and the shareholder) in lieu of the consideration such shareholder
would otherwise receive in the transaction.
Pursuant to provisions of California law, shareholders of a California
corporation whose shares are listed on a national securities exchange or on a
list of over-the-counter margin stocks issued by the Board of Governors of the
Federal Reserve System generally do not have dissenters' rights unless the
holders of at least 5% of the class of outstanding shares claim the right.
Additionally, dissenters' rights are unavailable if the shareholders of a
corporation or the corporation itself, or both, immediately prior to a
reorganization shall own (immediately after the reorganization) more than
five-sixths of the voting power of the surviving or acquiring corporation or its
parent. Under California law, a shareholder attempting to assert dissenters'
rights must hold capital stock which satisfies each of the following
requirements: (i) the shares must have been outstanding on the company's record
date; (ii) the shares must not have been voted in favor of the merger; (iii) the
holder of such shares must make a written demand that the company repurchase
such shares of capital stock at fair market
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value; and (iv) the holder of such shares must submit certificates for
endorsement. A vote by proxy or in person against the Merger does not in and of
itself constitute a demand for appraisal under California law. Dissenters'
rights are available to shareholders of Mustang.com with respect to the merger.
See "Dissenters' Rights."
Under Delaware law, such dissenters' rights are not available to (i)
shareholders with respect to a merger or consolidation by a corporation the
shares of which are either listed on a national securities exchange or
designated as a national market system security on an inter-dealer quotation
system by the National Association of Securities Dealers, Inc. or are held of
record by more than 2,000 holders if such shareholders receive only shares of
the surviving corporation or shares of any other corporation which are either
listed on a national securities exchange or designated as a national market
system security on an inter-dealer quotation system by the National Association
of Securities Dealers, Inc. or are held of record by more than 2,000 holders; or
(ii) shareholders of a corporation surviving a merger if no vote of the
shareholders of the surviving corporation is required to approve the merger
because, among other things, the number of shares to be issued in the merger
does not exceed 20% of the shares of the surviving corporation outstanding
immediately prior to the merger and if certain other conditions are met.
Delaware law also does not provide shareholders of a corporation with
dissenters' rights when the corporation acquires another business through the
issuance of its stock (i) in exchange for the assets of the business to be
acquired; (ii) in exchange for the outstanding stock of the corporation to be
acquired; or (iii) in a merger of the corporation to be acquired with a
subsidiary of the acquiring corporation. California law, by contrast, would
treat these kinds of acquisitions in the same manner as a direct merger of the
acquiring corporation with the corporation to be acquired.
DISSOLUTION
Under California law, shareholders holding 50% or more of the voting power
may authorize a corporation's dissolution, with or without the approval of the
corporation's board of directors and this right may not be modified by the
articles of incorporation. Under Delaware law, a dissolution must be approved by
shareholders holding 100% of the total voting power or the dissolution must be
initiated by the board of directors and approved by a simple majority of the
shareholders of the corporation. In the event of such a board-initiated
dissolution, Delaware law allows a Delaware corporation to include in its
certificate of incorporation a supermajority voting requirement in connection
with dissolutions.
TAKEOVER LEGISLATION
Section 203 of Delaware law makes it more difficult to effect certain
transactions between a corporation and a person or group who or which owns 15%
or more of the corporation's outstanding voting stock (including any rights to
acquire stock pursuant to an option, warrant, agreement, arrangement or
understanding, or upon the exercise of conversion or exchange rights, and stock
with respect to which the person has voting rights only), or is an affiliate or
associate of the corporation and was the owner of 15% or more of such voting
stock at any time within the previous three years (excluding persons who became
15% shareholders by action of the corporation alone). For a period of three
years following the date that a shareholder became a holder of 15% or more of
the corporation's outstanding voting stock, the following types of transactions
between the corporation and the 15% shareholder are prohibited (unless certain
conditions, described below, are met): (i) mergers or consolidations; (ii)
sales, leases, exchanges or other transfers of 10% or more of the aggregate
assets of the corporation; (iii) issuances or transfers by the corporation of
any stock of the corporation which would have the effect of increasing the 15%
shareholder's proportionate share of the stock of any class or series of the
corporation; (iv) receipt by the 15% shareholder of the benefit (except
proportionately as a shareholder) of loans, advances, guarantees, pledges or
other financial benefits
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provided by the corporation; and (v) any other transaction which has the effect
of increasing the proportionate share of the stock of any class or series of the
corporation which is owned by the 15% shareholder. The three-year ban does not
apply if either the proposed transactions or the transaction by which the 15%
shareholder became a 15% shareholder is approved by the board of directors of
the corporation prior to the date such shareholder became a 15% shareholder.
Additionally, a 15% shareholder may avoid the statutory restriction if upon the
consummation of the transaction whereby such shareholder became a 15%
shareholder, the shareholder owns at least 85% of the outstanding voting stock
of the corporation without regard to those shares owned by the corporation's
officers and directors or certain employee stock plans. Business combinations
are also permitted within the three year period if approved by the board of
directors and, at an annual or special meeting, by the holders of 66 2/3% of the
voting stock not owned by the 15% shareholder.
A corporation may, at its option, exclude itself from the coverage of this
Delaware law provision by providing in its certificate of incorporation or
bylaws at any time to exempt itself from coverage, provided that a bylaw or
charter amendment cannot become effective for 12 months after such amendment is
adopted. In addition, any transaction is exempt from the statutory ban if it is
proposed at a time when the corporation has proposed, and a majority of certain
continuing directors of the corporation have approved, a transaction with a
party who is not a 15% shareholder of the corporation (or who became such with
board approval) if the proposed transaction involves (i) certain mergers or
consolidations involving the corporation; (ii) a sale or other transfer of over
50% of the aggregate assets of the corporation; or (iii) a tender or exchange
offer for 50% or more of the outstanding voting stock of the corporation.
INTERESTED DIRECTOR TRANSACTIONS
Under both California and Delaware law, certain contracts or transactions
in which one or more of a corporation's directors has an interest are not void
or voidable because of such interest provided that certain conditions, such as
obtaining the required approval and fulfilling the requirements of good faith
and full disclosure, are met. With certain exceptions, the conditions are
similar under California and Delaware law. Under California and Delaware law,
(a) either the shareholders or the board of directors must approve any such
contract or transaction after full disclosure of the material facts, and, in the
case of board of director approval, the contract or transaction must also be
"just and reasonable" (in California) or "fair" (in Delaware) to the
corporation, or (b) the contract or transaction must have been just and
reasonable or fair as to the corporation at the time it was approved. In the
latter case, California law explicitly places the burden of proof on the
interested director. Under California law, if shareholder approval is sought,
the interested director is not entitled to vote his or her shares at a
shareholder meeting with respect to any action regarding such contract or
transaction. If board of director approval is sought, the contract or
transaction must be approved by a majority vote of a quorum of the directors,
without counting the vote of any interested directors (except that interested
directors may be counted for purposes of establishing a quorum).
SHAREHOLDER DERIVATIVE SUITS
California law provides that a shareholder bringing a derivative action on
behalf of a corporation need not have been a shareholder at the time of the
transaction in question, provided that certain tests are met. Under Delaware
law, a shareholder may only bring a derivative action on behalf of the
corporation if the shareholder was a shareholder of the corporation at the time
of the transaction in question or his or her stock thereafter devolved upon him
or her by operation of law. California law also provides that the corporation or
the defendant in a derivative suit may make a motion to the court for an order
requiring the plaintiff shareholder to furnish a security bond. Delaware law
does not have a similar bonding requirement.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF QUINTUS CORPORATION
You should read the following discussion and analysis of Quintus' financial
condition and results of operations in conjunction with Quintus' consolidated
financial statements and related notes included elsewhere in this proxy
statement/prospectus. This discussion and analysis contains forward-looking
statements that involve risks, uncertainties and assumptions. Quintus' 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 proxy statement/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 Quintus primarily provided application software and
consulting services to the help desk market. Since then Quintus has introduced
several customer relationship management applications for call centers. In
November 1997, Quintus acquired Nabnasset Corporation, a provider of computer
telephony integration software. Following the acquisition Quintus introduced its
Quintus CTI product and began integrating it with its customer relationship
management applications. As new communication channels have emerged, Quintus has
introduced new products and added functionality to its existing products. In
February 1999, Quintus introduced its Quintus eContact suite as a platform for
integrating its existing products with new channel applications. As part of its
eContact suite, Quintus also resells an email management product from
Brightware. In November 1999, Quintus acquired Acuity, a provider of software
products to manage Internet-based customer interactions.
Quintus provides 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.
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 Quintus' 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.
The Quintus eContact software suite allows companies to personalize, route
and manage customer interactions. Quintus' 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.
Quintus derives substantially all of its revenues from licenses and
services associated with its 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 Quintus' 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-
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specific objective evidence exists to allocate the total fee to elements of the
arrangement. License revenues for contracts requiring Quintus 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 Quintus
that they have sold its software and all revenue recognition criteria have been
met.
Service revenues include maintenance revenues which were 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.
Quintus sells its products to customers in North and South America, Europe,
South Africa and Japan through a direct sales force and indirectly through
resellers and distribution partners. All of Quintus' sales are denominated in
U.S. dollars. Quintus intends to establish additional distribution relationships
with partners outside of the United States and it expects international revenues
to continue to increase as a percentage of its total revenues in the future.
Quintus also expects that sales of its 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, Quintus 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, Quintus 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 Quintus'
consolidated financial statements.
In November 1997, Quintus acquired Nabnasset for $3.5 million in cash,
stock and options to purchase Quintus 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.
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RESULTS OF OPERATIONS
The following table sets forth Quintus' results of operations as a
percentage of total revenues:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
YEAR ENDED MARCH 31, DECEMBER 31, DECEMBER 31,
----------------------- --------------- --------------
1997 1998 1999 1998 1999 1998 1999
----- ----- ----- ------ ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
License.................... 61.7% 59.2% 58.0% 49.2% 70.1% 58.9% 64.1%
Service.................... 38.3 40.8 42.0 50.8 29.9 41.1 35.9
----- ----- ----- ------ ----- ----- -----
Total revenues.......... 100.0 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ------ ----- ----- -----
Cost of revenues:
License.................... 7.1 3.2 1.8 2.6 9.8 1.9 5.6
Service.................... 30.8 34.6 28.5 40.7 21.3 30.3 22.3
----- ----- ----- ------ ----- ----- -----
Total cost of
revenues.............. 37.9 37.8 30.3 43.3 31.1 32.2 27.9
----- ----- ----- ------ ----- ----- -----
Gross profit................. 62.1 62.2 69.7 56.7 68.9 67.8 72.1
Operating expenses:
Sales and marketing........ 50.5 51.8 56.6 77.9 58.1 60.8 48.5
Research and development... 26.9 23.3 22.2 30.1 24.5 23.6 20.6
General and
administrative.......... 9.3 14.8 11.8 18.6 11.9 12.6 10.1
Amortization of
intangibles............. -- 6.1 10.5 13.4 15.1 11.0 10.2
Acquired in-process
technologies............ -- 10.1 -- -- 22.2 -- 8.4
Stock-based compensation... -- -- 0.6 1.0 4.2 0.4 3.3
----- ----- ----- ------ ----- ----- -----
Total operating
expenses.............. 86.7 106.1 101.7 141.0 136.0 108.4 101.1
----- ----- ----- ------ ----- ----- -----
Loss from continuing
operations................. (24.6) (43.9) (32.0) (84.3) (67.1) (40.6) (29.0)
Interest income (expense),
net........................ (1.2) (2.5) (3.0) (3.0) 2.1 (3.2) (0.4)
----- ----- ----- ------ ----- ----- -----
Net loss from continuing
operations................. (25.8) (46.4) (35.0) (87.3) (65.0) (43.8) (29.4)
Discontinued operations:
Loss from discontinued
operations.............. -- (5.0) (6.2) (13.2) -- (6.6) --
Gain on disposal of
discontinued
operations.............. -- -- 3.3 -- -- -- --
----- ----- ----- ------ ----- ----- -----
Net loss..................... (25.8)% (51.4)% (37.9)% (100.5)% (65.0)% (50.4)% (29.4)%
===== ===== ===== ====== ===== ===== =====
</TABLE>
NINE MONTHS ENDED DECEMBER 31, 1998 AND 1999
REVENUES
Total revenues. Total revenues for the third quarter of fiscal 2000
increased 127.0% to $13.5 million from $6.0 million in the third quarter of
fiscal 1999. For the nine months ended December 31, 1999, total revenues
increased 63.2% to $35.6 million from $21.8 million in the comparable period of
fiscal 1999. One customer, Ticketmaster, L.L.P., accounted for 38.7% and 17.8%
of total revenues in the third quarter of fiscal 2000 and for the nine months
ended December 31, 1999, respectively. No one customer accounted for more than
10.0% of total revenues for the third quarter of fiscal 1999 and for the nine
months ended December 31, 1998.
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License. License revenues increased 223.2% to $9.5 million in the third
quarter of fiscal 2000 from $3.0 million in the third quarter of fiscal 1999.
Total license revenues in the nine months ended December 31, 1999 increased
77.7% to $22.8 million from $12.8 million in the comparable period in fiscal
1999. The increase in license revenues was primarily due to an increase in the
number of licenses sold to new and existing customers and increased sales
generated by Quintus' expanded sales force. The increase in the number of
licenses was primarily due to increased market acceptance of Quintus' products,
both in the United States and internationally.
Service. Service revenues increased 33.7% to $4.0 million in the third
quarter of fiscal 2000 from $3.0 million in the third quarter of fiscal 1999.
Service revenues in the nine months ended December 31, 1999 increased 42.5% to
$12.8 million from $9.0 million in the comparable period of fiscal 1999. The
increase in absolute dollars was primarily due to growth in Quintus' consulting
business and growth in its installed base of customers with a maintenance
contract. Service revenues as a percentage of total revenues decreased to 29.9%
for the third quarter of fiscal 2000 from 50.8% for the third quarter of fiscal
1999, and to 35.9% in the period ended December 31, 1999 from 41.1% in the
period ended December 31, 1998. Service revenues decreased as a percentage of
total revenues as Quintus continues to have third-party system integrators
undertake a greater percentage of its product implementation. In future periods,
Quintus expects this trend to continue.
COST OF REVENUES
License. Cost of licenses consists primarily of royalties, product
packaging, documentation and production. Cost of licenses increased 751.0% to
$1.3 million in the third quarter of fiscal 2000 from $155,000 in the third
quarter of fiscal 1999 representing 13.9% and 5.3% of license revenues in the
respective periods. Cost of licenses increased 370.4% to $2.0 million in the
nine months ended December 31, 1999 from $423,000 in the comparable period in
fiscal 1999 representing 8.7% and 3.3% of license revenues in the respective
periods. The increase was primarily due to an increase in sales of third-party
license revenues and the resulting increase in third-party royalty payments and
to a lesser extent increases in material costs and other related expenses. 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 increased 19.0% to $2.9
million in the third quarter of fiscal 2000 from $2.4 million in the third
quarter of fiscal 1999, representing 71.4% and 80.2% of service revenues,
respectively. Cost of services increased 20.5% to $8.0 million in the nine
months ended December 31, 1999 from $6.6 million in the comparable period in
fiscal 1999, representing 62.2% and 73.6% of service revenues, respectively. The
dollar increase was primarily due to the number of third-party consultants
Quintus engaged to provide consulting and implementation of its products and an
increase in its installed base for its maintenance contracts. Cost of services
as a percentage of service revenues declined primarily due to an increase in
margins for service revenues. 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 EXPENSE
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 69.0% to $7.8 million in
the third quarter of fiscal 2000 from $4.6 million in the third quarter of
fiscal 1999, representing 58.1% and 77.9% of total revenues in the respective
quarter. For the nine months ended December 31, 1999, sales and marketing
expenses increased 30.4% to
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17.3 million from $13.3 million in the comparable period in fiscal 1999,
representing 48.5% and 60.8% of total revenues in the respective periods. The
increase in the dollar amount of sales and marketing expenses was attributable
primarily to the addition of sales and marketing personnel, which increased from
67 employees at December 31, 1998 to 99 employees at December 31, 1999, an
increase in sales commissions associated with increases in revenues and higher
marketing costs due to expanded advertising and promotional activities. Sales
and marketing expenses as a percentage of total revenues decreased primarily due
to growth in total revenues. Quintus intends to invest substantial resources to
expand its direct sales force and other distribution channels, and to conduct
marketing programs to support its 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 84.8% to $3.3 million in the third quarter of
fiscal 2000 from $1.8 million in the third quarter of fiscal 1999, representing
24.5% and 30.1% of total revenues in the respective quarter. For the nine months
ended December 31, 1999, research and development expenses increased 41.6% to
$7.3 million from $5.1 million in the comparable period of fiscal 1999,
representing 20.6% and 23.6% of total revenues in the respective periods. The
increase in research and development expenses was primarily due to increases in
personnel, which increased from 42 employees at December 31, 1998 to 84
employees at December 31, 1999. The decline in research and development expenses
as a percentage of total revenues was primarily due to the growth in total
revenues. Quintus anticipates that research and development expenses in absolute
dollars will continue to 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 professional fees and allowance
for doubtful accounts. General and administrative expenses increased 45.2% to
$1.6 million in the third quarter of fiscal 2000 from $1.1 million in the third
quarter of fiscal 1999, representing 11.9% and 18.6% of total revenues in the
respective quarter. For the nine months ended December 31, 1999, general and
administrative expenses increased 31.4% from to $3.6 million from $2.7 million
in the comparable period of fiscal 1999, representing 10.1% and 12.6% of total
revenues in the respective periods. The dollar increase was primarily due to
increase in personnel, which increased from 24 employees at December 31, 1998 to
35 employees at December 31, 1999, and associated expenses necessary to manage
and support Quintus' increased scale of operations. The decline in general and
administrative expenses as a percentage of total revenues was primarily due to
the growth in total revenues. Quintus currently expects general and
administrative expenses to increase in absolute dollars in the future as Quintus
continues to expand its infrastructure.
Amortization of intangibles. Amortization of intangibles represents costs
associated with Quintus' acquisition of Nabnasset in November 1997 and its
acquisition of Acuity in November 1999. Amortization is recorded on a
straight-line basis over a period of three to five years ending September 2004.
Amortization of intangibles was $2.0 million and $798,000 for the third quarter
of fiscal 2000 and 1999, respectively, representing 15.1% and 13.4% of total
revenues in the respective quarter. Amortization of intangibles was $3.6 million
and $2.4 million for the nine months ended December 31, 1999 and 1998,
respectively, representing 10.2% and 11.0% of total revenues in the respective
periods.
Acquired in-process technologies. In November 1999, Quintus acquired Acuity
for $47.1 million based on capital stock issued, the value of options and
warrants assumed, and transaction costs incurred. The transaction was accounted
for as a purchase. In this acquisition, acquired technologies
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of $3.0 million were charged to operations in the third quarter of fiscal 2000
as the technologies did not have alternative future uses as of the date of the
acquisition. There were no acquired in-process technologies for the respective
quarter and nine months ended December 31, 1998.
Stock-based compensation. In the nine months ended December 31, 1999 and
1998, Quintus recorded deferred stock-based compensation of $2.7 million and
$431,000, relating to stock options granted to employees. Such amounts represent
the difference between the exercise price and the deemed fair value of Quintus
common stock at the date of grant. These amounts are being amortized over the
vesting periods of the granted options. In the third quarter of fiscal 2000 and
1999, Quintus recognized stock-based compensation expense, in continuing
operations, related to options granted to employees of $574,000 and $56,000,
respectively. In the nine months ended December 31, 1999 and 1998, Quintus
recognized stock-based compensation expense, in continuing operations, related
to options granted to employees of $1.2 million and $116,000, respectively.
Other income (expense), net. Other income in the third quarter of fiscal
2000 consisted primarily of interest income from Quintus' investments of initial
public offering proceeds in short-term investments. Interest expense of $181,000
in the third quarter of fiscal 1999 and $706,000 in the nine months ended
December 31, 1998 was primarily due to Quintus' line of credit with a financial
institution, which was paid in full in the third quarter of fiscal 2000.
Included within interest expense in the nine months ended December 31, 1998, is
$165,000 with respect to warrants granted in connection with notes payable to
shareholders.
DISCONTINUED OPERATIONS
On February 26, 1999, Quintus sold the assets of its Call Center
Enterprises division. The division had a loss of $781,000 for the third quarter
of fiscal 1999 and $1.4 million for the nine months ended December 31, 1998,
which were recorded as discontinued operations. Quintus 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.
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 Quintus' customer base as well as an
increase in sales to its existing customers. In addition, Quintus acquired
Nabnasset in November 1997 and began realizing license revenues from Quintus'
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
Quintus' 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 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
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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 Quintus' 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 Quintus' 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 Quintus' 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 Quintus'
infrastructure expansion. The percentage decrease from fiscal 1998 to 1999 was
primarily due to Quintus' 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, Quintus acquired
Nabnasset for $3.5 million in cash, stock and options to purchase Quintus 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.
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<PAGE> 76
Stock-based compensation. During fiscal 1998 and 1999 Quintus recorded
deferred stock-based compensation of $99,000 and $1.1 million relating to stock
options granted to employees. Quintus had no deferred stock compensation
relating to stock options granted to employees in fiscal 1997. Quintus 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, Quintus recognized
interest expense of $258,000 and $165,000 with respect to warrants granted in
connection with notes payable to shareholders.
Discontinued operations. Quintus' 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.
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<PAGE> 77
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited quarterly results of operations
data for the seven quarters ended December 31, 1999, as well as such data
expressed as a percentage of Quintus' total revenues for the periods presented.
The information in the table below should be read in conjunction with Quintus'
annual audited consolidated financial statements and related notes included
elsewhere in this prospectus. Quintus has prepared this information on the same
basis as its consolidated financial statements and the information includes all
adjustments, consisting only of normal recurring adjustments, that it considers
necessary for a fair presentation of Quintus' financial position and operating
results for the quarters presented. Quintus' quarterly operating results have
varied substantially in the past and may vary substantially in the future. You
should not draw any conclusions about Quintus' 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, SEPTEMBER 30, DECEMBER 31,
1998 1998 1998 1999 1999 1999 1999
-------- ------------- ------------ --------- -------- ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
License................... $ 4,790 $ 5,123 $ 2,930 $ 4,734 $ 6,126 $ 7,222 $ 9,471
Service................... 2,762 3,185 3,024 3,759 4,167 4,575 4,042
------- ------- ------- ------- ------- ------- -------
Total revenues..... 7,552 8,308 5,954 8,493 10,293 11,797 13,513
Cost of revenues:
License................... 74 194 155 131 218 453 1,319
Service................... 1,957 2,219 2,426 2,021 2,421 2,650 2,886
------- ------- ------- ------- ------- ------- -------
Total cost of
revenues......... 2,031 2,413 2,581 2,152 2,639 3,103 4,205
Gross profit................ 5,521 5,895 3,373 6,341 7,654 8,694 9,308
Operating expenses:
Sales and marketing....... 4,518 4,098 4,639 3,892 4,314 5,124 7,840
Research and
development............. 1,795 1,558 1,792 1,574 1,873 2,101 3,312
General and
administrative.......... 803 829 1,109 836 998 995 1,610
Amortization of
intangibles............. 796 800 798 791 796 796 2,045
Acquired in-process
technologies............ -- -- -- -- -- -- 3,000
Stock-based
compensation............ 4 56 56 55 169 440 574
------- ------- ------- ------- ------- ------- -------
Total operating
expenses......... 7,916 7,341 8,394 7,148 8,150 9,456 18,381
------- ------- ------- ------- ------- ------- -------
Loss from continuing
operations................ (2,395) (1,446) (5,021) (807) (496) (762) (9,073)
Interest income (expense),
net....................... (391) (134) (181) (211) (194) (231) 296
------- ------- ------- ------- ------- ------- -------
Net loss from continuing
operations................ (2,786) (1,580) (5,202) (1,018) (690) (993) (8,777)
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) $(8,777)
======= ======= ======= ======= ======= ======= =======
</TABLE>
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<PAGE> 78
<TABLE>
<CAPTION>
AS A PERCENTAGE OF TOTAL REVENUES
---------------------------------------------------------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1998 1998 1998 1999 1999 1999 1999
-------- ------------- ------------ --------- -------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
License................... 63.4% 61.7% 49.2% 55.7% 59.5% 61.2% 70.1%
Service................... 36.6 38.3 50.8 44.3 40.5 38.8 29.9
----- ----- ------ ----- ----- ----- -----
Total revenues..... 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenues:
License................... 1.0 2.3 2.6 1.5 2.1 3.8 9.8
Service................... 25.9 26.7 40.7 23.8 23.5 22.5 21.3
----- ----- ------ ----- ----- ----- -----
Total costs of
revenues......... 26.9 29.0 43.3 25.3 25.6 26.3 31.1
Gross profit................ 73.1 71.0 56.7 74.7 74.4 73.7 68.9
Operating expenses:
Sales and marketing....... 59.8 49.3 77.9 45.8 41.9 43.4 58.0
Research and
development............. 23.8 18.8 30.1 18.5 18.2 17.8 24.5
General and
administrative.......... 10.6 10.0 18.6 9.8 9.7 8.4 11.9
Amortization of
intangibles............. 10.5 9.6 13.4 9.3 7.7 6.7 15.1
Acquired in-process
technologies............ -- -- -- -- -- -- 22.2
Stock-based
compensation............ 0.1 0.7 0.9 0.6 1.6 3.7 4.3
----- ----- ------ ----- ----- ----- -----
Total operating
expenses......... 104.8 88.4 140.9 84.2 79.1 80.2 136.0
----- ----- ------ ----- ----- ----- -----
Loss from continuing
operations................ (31.7) (17.4) (84.3) (9.5) (4.8) (6.5) (67.1)
Interest income (expense),
net....................... (5.2) 1.6 3.0 2.5 1.9 2.0 2.2
----- ----- ------ ----- ----- ----- -----
Net loss from continuing
operations................ (36.9) (19.0) (87.3) (12.0) (6.7) (8.4) (64.9)
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)% (64.9)%
===== ===== ====== ===== ===== ===== =====
</TABLE>
License revenues have generally increased in each of the seven quarters
ended December 31, 1999, primarily due to increased market acceptance for
Quintus' products. Service revenues except for the quarter ended December 31,
1999 have also generally increased in each of these quarters primarily due to
the recognition of maintenance revenues attributable to Quintus' growing
installed base, and to a lesser extent, consulting and training services
associated with increased sales of its products. In the quarter ended December
31, 1998 Quintus recorded a large net loss due to its 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 Quintus' sales force
during the quarter. In addition Quintus' newly hired sales personnel, who were
still gaining experience with its products, were unable to close a large number
of sales forecasted for the quarter. In the following quarter Quintus
experienced further turnover in its sales personnel and it implemented tighter
expense controls resulting in lower overall operating expenses. In the quarter
ended December 31, 1999, Quintus incurred a significant net loss primarily due
to increased operating expenses resulting from the acquisition of Acuity and an
increase in sales and marketing expenses due to increased personnel and expanded
advertising and promotional expenses. The increase in expenses driven by the
Acuity acquisition was primarily
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<PAGE> 79
attributable to increased amortization of goodwill, write-off of in-process
research and development expenses and increased personnel costs attributable to
sales and marketing, research and development and general and administrative
expenses.
Quintus' 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 its control. As a result of its limited
operating history, Quintus cannot forecast operating expenses based on
historical results. Accordingly, Quintus bases its anticipated level of expense
in part on future revenue projections. Most of Quintus' expenses are fixed in
the short term and Quintus may not be able to quickly reduce spending if
revenues are lower than Quintus has projected. Quintus' ability to forecast its
quarterly revenues accurately is limited given its limited operating history,
the length of its sales cycle and other uncertainties in its business. If
revenues in a particular quarter do not meet projections, Quintus' 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.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999, Quintus' principal source of liquidity was
approximately $67.5 million of cash, cash equivalents and short-term
investments.
On November 16, 1999, Quintus completed an initial public offering in which
it sold 5,175,000 shares of common stock at $18 per share, including 675,000
shares in connection with the exercise of the underwriters' overallotment
option. The total proceeds from this transaction were $85.0 million, net of
underwriters' discounts and other related costs of $8.2 million. Immediately
after the closing of the Quintus offering, it paid $18.1 million to holders of
some series of its preferred stock. The remaining net proceeds were held in cash
equivalents and short-term investments at December 31, 1999.
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 nine months
ended December 31, 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 Quintus'
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 nine months ended December 31, 1999 was primarily due to a net loss of
$10.5 million and an increase in accounts receivable, offset in part by an
increase in depreciation and amortization, a $3 million non-cash charge for
in-process technologies related to the acquisition of Acuity, and increases in
accrued compensation and accounts payable.
Cash used in investing activities was $1.0 million, $3.7 million and $32.1
million in fiscal 1997 and 1998 and for the nine months ended December 31, 1999.
Cash used in investing activities was primarily for purchases of property and
equipment in each period in 1997 and 1998. In addition, cash used in fiscal 1998
included $2.5 million for the acquisition of Nabnasset. Cash used in investing
activities for the nine months ended December 31, 1999 was primarily for
purchases of short-term investments. 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 $70.9 million in fiscal 1997, 1998 and 1999 and for the nine
months ended December 31, 1999. For
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<PAGE> 80
fiscal 1997, 1998 and 1999 cash provided by financing activities consisted
primarily of proceeds from private sales of preferred stock and borrowings under
a bank line of credit. For the nine months ended December 31, 1999, cash
provided by financing activities consisted primarily of net proceeds from
Quintus' initial public offering in November 1999 of $85.0 million and net
proceeds from issuance of preferred stock of $11.2 million, offset in part by
payments of $18.1 million to some series of its preferred shareholders and $4.9
million in repayments of its bank line of credit.
Quintus expects to experience significant growth in its operating expenses,
particularly sales and marketing and research and development expenses, for the
foreseeable future in order to execute its business plan. As a result, Quintus
anticipates that these operating expenses, as well as planned capital
expenditures, will constitute a material use of its cash resources. In addition,
Quintus may utilize cash resources to fund acquisitions or investments in
complementary business, technologies or product lines. Quintus currently
anticipates that its current cash, cash equivalents and investments will be
sufficient to meet its anticipated cash needs for working capital and capital
for at least the next 12 months. Thereafter, Quintus may find it necessary to
obtain additional equity or debt financing. In the event additional financing is
required, Quintus may not be able to raise it on acceptable terms or at all.
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<PAGE> 81
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF MUSTANG.COM
GENERAL
Mustang.com develops, markets, services and supports the Mustang Message
Center, an e-mail management software solution that offers companies and other
enterprises the ability to manage their inbound e-mail and Internet-based
inquiries timely and accurately. Mustang Message Center competes in the emerging
e-mail response management market and has received several prestigious awards as
best product in its class from sources devoted to monitoring the rapidly growing
computer telephony, customer management, e-mail management and call center
markets.
Mustang.com also develops, markets and supports other software products
that offer businesses the capability to improve customer service, market
products, enhance sales and increase employee productivity. These products
include ListCaster, a powerful e-mail message server that allows easy mass
e-mailings from maintained lists and enables e-mail recipients to correspond
with each other through the originating site on the World Wide Web of the
Internet called a "Website"; and FileCenter, a high performance application that
permits operators of Websites known as "webmasters" to provide their users with
an organized, searchable library of files. The company's other product line
includes the QmodemPro line of telecommunications software.
During the years ended December 31, 1997, 1998 and 1999, the company
reported revenue of approximately $1,898,000, $2,011,000 and $3,711,000,
respectively, and incurred net losses of approximately $1,341,000, $1,157,000
and $906,000, respectively. There can be no assurance that the company will be
able to profitably market Mustang Message Center, any of its other products or
any products it may develop in the future. Until the company is able to generate
sufficient revenues to offset costs and expenses, of which there can be no
assurance, Mustang.com will continue to sustain losses.
Before 1998, most of the company's revenues were derived from its Wildcat!
WinServer and BBS software. Beginning in the second quarter of 1997 and
continuing throughout the year, Mustang.com changed its focus and launched new
products designed to facilitate interaction on the Internet's World Wide Web.
Mustang.com released the Business Edition of Mustang Message Center in September
1997, the Enterprise Edition in February 1998 and the Service Bureau Edition in
May 1999. The future of the company is dependent upon the acceptance by the
marketplace of Mustang Message Center and Mustang.com's ability to market this
e-mail management solution successfully. Mustang Message Center accounted for
over 50 percent of the company's net sales during 1998 and 98 percent of the
company's net sales during 1999, but Mustang.com has only limited operating
history with respect to this product. As a result of this, as well as the recent
emergence of the commercial e-mail management market, the company has neither
internal nor industry-based historical financial data for a significant period
upon which to project revenues or base planned operating expenses. Future
operating results will depend on a variety of factors, including Mustang.com's
ability to maintain or increase market demand for Mustang Message Center and its
other products and services, usage and acceptance of the Internet, and the
introduction and acceptance of new, enhanced or alternative products or services
by Mustang.com or its competitors. Other factors that could affect its operating
results include Mustang.com's ability to anticipate and effectively adapt to a
developing market and to rapidly changing technologies, general economic
conditions, competition by existing and emerging competitors, software defects
and other quality control problems and the mix of products and services sold.
The purchase of the Enterprise and Service Bureau Editions of Mustang
Message Center, the company's core product, involves a significant commitment of
customers' personnel and other
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<PAGE> 82
resources. Furthermore, the cost of the software is typically only a small
portion of the related hardware, development, training and integration costs
associated with implementing a complete e-mail management solution. For these
and other reasons, the sales cycle associated with the purchase of Mustang
Message Center is typically complex, lengthy and subject to a number of
significant risks. Such risks include changes in customers' budgetary
constraints and approval at senior levels of customers' organizations, over
which the company has no control. The company's sales cycle can range from four
to six months or more and varies substantially from customer to customer.
Because of the lengthy sales cycle and the dependence of the company's quarterly
revenues upon a relatively small number of orders that represent large dollar
amounts, the loss or delay of a single order could have a material adverse
effect on the company's business, financial condition and results of operations.
Mustang.com's expense levels are based, in part, on its expectations as to
future revenues and are not expected to decrease, at least in the short term.
Further, Mustang.com may from time to time be forced by the competitive
environment in which it competes to make tactical or strategic decisions that
disrupt or reduce anticipated revenues. Moreover, during 1998, which was the
first year that the company achieved material revenues from Mustang Message
Center and its other Internet-directed products introduced during 1997, the
company observed a trend that a disproportionate percentage of the company's net
sales were generated during the last month of a quarter. As a result, a
shortfall in sales in any quarter as compared to expectations may not be
identifiable until the end of a quarter. Mustang.com may not be able to adjust
its spending plan in a timely manner to compensate for any future revenue
shortfall. Any significant shortfall in sales in relation to the company's
revenue expectations would have a material adverse impact on the company's
business, results of operations, financial condition and prospects.
The following table presents unaudited selected financial data for each of
the eight quarters in the period ended December 31, 1999.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1999
---------------------------------------- ----------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Summary of Operations:
Revenue................ $ 398 $ 404 $ 502 $ 707 $ 773 $ 803 $1,029 $1,106
Gross profit........... 332 371 460 670 724 697 892 956
Operating expenses..... 782 677 726 832 728 846 1,140 1,599
Loss from operations... (450) (307) (266) (161) (4) (149) (247) (643)
Net income (loss)...... (444) (303) (263) (147) 10 (113) (229) (574)
Net (income) loss per
common share (basic and
dilated)............... $(0.13) $(0.09) $(0.07) $(0.04) $0.00 $(0.02) $(0.05) $(0.10)
</TABLE>
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<PAGE> 83
RESULTS OF OPERATIONS
The following table sets forth, for the years ended December 31, 1997, 1998
and 1999, income statement data of the company expressed in dollars and as a
percentage of revenues and the percentage increase or decrease in the dollar
amounts of such data in 1998 from 1997 and 1999 from 1998:
<TABLE>
<CAPTION>
PERCENTAGE
INCREASE
(DECREASE) IN
YEAR ENDED DECEMBER 31, DOLLAR
---------------------------------------------------------------------------------- AMOUNTS
1997 1998 1999 --------------
------------------------- ------------------------- ------------------------ 1998 1999
PERCENT OF PERCENT OF PERCENT OF FROM FROM
AMOUNT REVENUE AMOUNT REVENUE AMOUNT REVENUE 1997 1998
----------- ---------- ----------- ---------- ---------- ---------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue.............. $ 1,898,402 100.0% $ 2,010,721 100.0% $3,710,935 100.0% 5.9% 84.6%
Cost of Revenue...... 330,828 17.4 177,928 8.8 441,386 11.9 (46.2) 148.1
----------- ----- ----------- ----- ---------- -----
Gross profit......... 1,567,574 82.6 1,832,793 91.2 3,269,549 88.1 16.9 78.4
Operating expenses:
Research and
development...... 696,819 36.7 611,990 30.4 820,554 22.1 (12.2) 34.1
Selling and
marketing........ 930,426 49.0 974,525 48.5 1,638,298 44.1 4.7 68.1
General and
administrative... 1,353,486 71.3 1,430,335 71.1 1,853,730 50.0 5.7 29.6
----------- ----- ----------- ----- ---------- -----
Loss from
operations....... (1,413,157) (74.4) (1,184,057) (58.9) (1,043,033) (28.1) 16.2 11.9
Other income, net.... 73,284 3.9 28,342 1.4 137,556 3.7 61.3 385.3
----------- ----- ----------- ----- ---------- -----
Loss before provision
for income taxes... (1,339,873) (70.6) (1,155,715) (57.5) (905,477) (24.4) 13.7 21.7
Benefit (provision)
for income taxes... (800) 0.0 (800) 0.0 (800) 0.0 0.0 0.0
----------- ----- ----------- ----- ---------- -----
Net Loss............. $(1,340,673) (70.6)% $(1,156,515) (57.5)% $ (906,277) (24.4)% 13.7% 21.6%
=========== ===== =========== ===== ========== =====
</TABLE>
COMPARISON OF YEARS ENDED DECEMBER 31, 1999 AND 1998
Revenues for the year ended December 31, 1999 were $3,710,935, an increase
of $1,700,214 or 84.6% more than revenues for the year ended December 31, 1998.
As a percentage of revenues by product category for the year 1999 versus 1998
showed the QmodemPro line at 2% and 5%, the Wildcat! line at nil and 23%, the
Internet directed product line consisting of Mustang Message Center, ListCaster
and FileCenter at 98% and 68%, and other products at nil and 4%, respectively.
Because of its decision to focus on products that are designed to facilitate
interaction on the Internet, Mustang.com sold its Wildcat! WinServer, Wildcat!
BBS and Off-line Xpress BBS mail reader product lines to Santronics Software,
Inc. of Homestead, Florida in November 1998. That accounts for nil sales of
products from this line in 1999. The increase in revenues in 1999 over 1998 was
primarily the result of greater market acceptance of Mustang Message Center.
Gross profit for the year increased from $1,832,793 in 1998 to $3,269,549
in 1999, but decreased as a percentage of revenues from 91.2% in 1998 to 88.1%
in 1999. While the increase in revenues accounted for the increase in gross
profit absolute dollars, gross profit declined as a percentage of revenues
because costs of revenue increased at a rate faster than revenues. Costs of
revenue increased principally because of expansion in Professional Services and
its associated costs. The company does not expect the gross profit percentage to
remain at the current level. As more turnkey solutions are sold through
Mustang.com's Professional Services division, the company expects the gross
profit percentage to decrease.
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<PAGE> 84
Research and development expenses increased $208,564 in 1999 from 1998 and
decreased as a percentage of revenues from 30.4% in 1998 to 22.1% in 1999. The
increase in dollars spent is primarily attributable to the increased headcount
in this department from 11 in 1998 to 12 in 1999. In an effort to improve its
competitive position, the company expects to invest a significant amount of its
resources for the development of new products and product enhancements.
Selling and marketing expenses for 1999 were $1,638,298, an increase of
$663,773 over 1998, and decreased as a percentage of revenues from 48.5% in 1998
to 44.2% in 1999. The primary reason for the increase in dollars was the focus
on increasing the sales staff and strategically placing sales offices throughout
the U.S. The headcount increased from 6 in 1998 to 20 in 1999.
General and administrative expenses increased in 1999 over the previous
year, from $1,430,335 in 1998 to $1,853,730 in 1999, but decreased as a
percentage of revenue from 71.1% in 1998 to 50.0% in 1999. The items primarily
accounting for the increase in dollars were insurance, legal expenses and
travel.
Other income increased $109,214 from $28,342 in 1998 to $137,556 in 1999
due to higher cash balances and therefore more interest income.
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1997
Revenues for the year ended December 31, 1998 were $2,010,721, an increase
of $112,319 or 5.9% more than revenues for the year ended December 31, 1997. As
a percentage of revenues by product category for the year 1998 vs. 1997 showed
the QmodemPro line at 5% and 15%, the Wildcat! line at 23% and 77%, the Internet
directed product line at 68% and 5%, and other products at 4% and 3%,
respectively. The increase in revenues from the Internet directed product line
was directly related to market acceptance of the Mustang Message Center
Enterprise Edition, which was released in February 1998.
Gross profit for the year increased from $1,567,574 in 1997 to $1,832,793
in 1998, an increase as a percentage of revenues from 82.6% in 1997 to 91.2% in
1998.
Research and development expenses decreased $84,829 in 1998 from 1997 and
also decreased as a percentage of revenues from 36.7% in 1997 to 30.4% in 1998.
The decrease in actual dollars spent is attributable to the headcount reduction
in this department from 12 in 1997 to 11 in 1998. The increase in revenues
accounted for the decrease as a percentage of revenues. In an effort to improve
its competitive position, the company expects to invest a significant amount of
its resources for the development of new products and product enhancements.
Selling and marketing expenses for 1998 were $974,525, an increase of
$44,099 over 1997, and decreased as a percentage of revenues from 49.0% in 1997
to 48.5% in 1998. The items primarily accounting for the increase in dollars
were promotional costs and selling expenses. Promotional costs were mainly due
to the increase in trade shows attended in 1998 compared to 1997 and the selling
expenses were larger because the Mustang Message Center products typical
customer and sales warrants more face to face meeting to complete a sale.
General and administrative expenses increased in 1998 over the previous
year, from $1,353,486 in 1997 to $1,430,335 in 1998, but decreased as a
percentage of revenue from 71.3% in 1997 to 71.1% in 1998. The items primarily
accounting for the increase in dollars were insurance, legal expenses and
travel. The minimal decrease as a percentage of revenues is attributable to the
increase in revenues.
Other income decreased $44,942 from $73,284 in 1997 to $28,342 in 1998 due
to lower cash balances, therefore resulting in less interest income.
There was no change in 1997 and 1998 in benefit (provision) for income
taxes.
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<PAGE> 85
LIQUIDITY AND CAPITAL RESOURCES
The company has financed its operations from the proceeds from the sale of
its equity securities and cash flows from operations. Cash and short-term
investment balances at December 31, 1999 were approximately $8,848,000, an
increase of approximately $7,000,000 from December 31, 1998. On March 31, 1999,
the company sold for gross proceeds of $250,000 an aggregate of 64,820 shares of
its common stock and Warrants to purchase an aggregate of 64,820 shares of its
common stock under Regulation S of the Securities Act of 1933. In October 1999,
Mustang.com completed a private placement of its securities to accredited
investors receiving proceeds, before offering expenses, of approximately
$5,600,000. In the financing, Mustang.com issued 765,908 shares of its common
stock at $7.3125 per share and warrants to purchase up to 574,431 shares of its
common stock. The principal reasons for the increase in cash were the receipt of
net proceeds aggregating approximately $7,600,000 from these 1999 equity
financings, the exercise of outstanding warrants and the decrease in the
company's net loss from operations during the period. Accounts receivable
increased approximately $285,000 in 1999, from $409,077 at December 31, 1998 to
$693,739 at December 31, 1999. Accounts receivable average days to collect were
52 and 46 days for the years ended December 31, 1998 and 1999, respectively.
At December 31, 1999, Mustang.com had net operating loss carryforwards
available of approximately $6,200,000 and $3,600,000 of Federal and State,
respectively, which will expire at the end of 2014. Section 382 of the Internal
Revenue Code provides that when a company undergoes an "ownership change," the
corporation's use of its net operating losses is limited in each subsequent
year. An "ownership change" occurs when, as of any testing date, the sum of the
increases in ownership of each shareholder that owns five percent or more of the
value of a company's stock as compared to that shareholder's lowest percentage
ownership during the preceding three-year period exceeds fifty percentage
points. Mustang.com has issued a substantial number of shares of its common
stock since January 1, 1998 and this may result in an "ownership change" for
income tax purposes. As a consequence, Mustang.com estimates that it may not be
able to use a substantial amount of its available federal net operating loss
carryforwards to reduce its taxable income, if any, in the future. It is
expected that the completion of the merger with Quintus Corporation will result
in an "ownership change" for tax purposes.
Longer term cash requirements, other than normal operating expenses, are
anticipated for development of new software products and enhancements of
existing products, launching new products and enhancements and the possible
acquisition of businesses, software products or technologies complementary to
the company's business. The company intends to meet its long-term liquidity
needs through available cash and cash flow as well as through financing from
outside sources. The company believes that its existing cash, cash equivalents,
marketable securities and cash generated from operations will be sufficient to
meet the company's working capital and capital expenditure requirements for at
least the next 12 months.
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BUSINESS OF QUINTUS CORPORATION
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.
Quintus believes 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
Quintus provides 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. 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. This 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. Quintus' recent
acquisition of Acuity will extend its ability to provide customer service
functionality through Web chat, Web self-service, browser-based collaboration
and email. Quintus' 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
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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.
Quintus has 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.
Quintus' eContact suite consists of several different software applications
that can be sold separately or in a group. Quintus only recently introduced and
sold the email management and Internet-based customer service components of its
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. Quintus' 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. Quintus currently sells 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 its 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.
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
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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, Quintus' solution is based on open
standards, enabling it to share information with existing customer relationship
management applications and legacy systems.
QUINTUS' GROWTH STRATEGY
Quintus' 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 Quintus' strategy include:
MAINTAIN AND EXTEND TECHNOLOGY LEADERSHIP. Quintus continues to leverage
leading Internet and telephony technologies to enhance the performance and
functionality of its products. Quintus believes its 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. Quintus plans to incorporate new technologies, such as
Internet telephony, speech recognition and digital video, into its solution as
they achieve significant market acceptance. Quintus intends to maintain its
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. Quintus intends to
continue to develop and extend its distribution capabilities. Quintus sells its
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. Quintus plans to increase the size of its
direct sales organization and broaden its indirect distribution network with
strategic resellers and other distribution partners.
TARGET GLOBAL 1000 COMPANIES. Quintus plans to continue to target Global
1000 companies as they rapidly transition their businesses online. Quintus
believes 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. Its customers
include Global 1000 companies such as Citigroup, Lucent Technologies, Procter &
Gamble and United Airlines.
TARGET LEADING INTERNET-BASED COMPANIES. Quintus plans to continue to
target leading Internet-based companies. Quintus believes 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 its WebCenter product line include
drugstore.com, living.com and REI.com.
DEVELOP AND EXPAND STRATEGIC RELATIONSHIPS. Quintus plans to continue to
develop technology and marketing relationships with leading vendors of
complementary products in order to increase its visibility in the marketplace
and broaden the functionality of its solution. Quintus currently has a strategic
relationship with Brightware. Quintus also intends to expand its strategic
relationships with leading systems integrators that have significant influence
over companies' purchasing decisions. Quintus believes that systems integrators
help provide industry-specific expertise and support its growth and entry into
new markets. Quintus currently has implementation relationships with AnswerThink
Consulting Group, Cambridge Technology Partners and eLoyalty.
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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.
The Quintus eContact suite is priced according to the product components
purchased and the number of users. Product components are typically priced from
$50,000 to $100,000 per installation, with per user prices typically ranging
from $800 to $4,200.
QUINTUS ECONTACT ENGINE
The Quintus eContact engine is the foundation of its eContact suite and
enables customer interactions, such as customer orders, inquiries and service
requests, to be managed consistently across multiple communication channels.
Quintus' 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 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 tool set gives
companies the flexibility to respond to changing business needs. Quintus'
eContact engine also provides centralized administration of its 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 Quintus'
eContact suite through Quintus' 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.
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QUINTUS ECONTACT CHANNEL APPLICATIONS
Quintus' channel applications enable companies to manage customer
interactions consistently across multiple communication channels including the
Internet, e-mail and the telephone. Companies can deploy Quintus' channel
applications separately or as a comprehensive solution to meet their evolving
needs for customer service centers handling interactions across multiple
communications channels.
<TABLE>
<CAPTION>
CHANNEL APPLICATION PRODUCT DESCRIPTION
------------------- -------------------
<S> <C>
Computer Telephony Integration Quintus CTI integrates eContact with
advanced telephony systems. Quintus
WebCenter provides Web self-service and
online customer service through Web chat,
browser-based collaboration and Web
callback.
E-mail Management Quintus has an existing OEM relationship
with Mustang.com under which the Mustang
Message Center email engine has already
been integrated with the other self-help
and live-help capabilities of Quintus
WebCenter. Emails are routed and managed
using the same business rules, routing
capabilities, and agent interface used for
other types of web interaction. Email
Management analyzes the email message
content, determines the nature of the
customer request, and either responds
automatically to the email or routes the
email to the most appropriate agent along
with suggested responses and relevant
customer information. Quintus also resells
Brightware's natural language analysis
email software under a non-exclusive
reseller agreement.
Electronic Commerce Connector Quintus eCommerce Connector integrates
eContact with 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 infrastructure with Quintus' 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 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 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,
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companies can enhance their Web sites and deliver a more engaging and
personalized customer experience by providing immediately available online
customer service options. Quintus has not yet implemented WebCenter as part of
its eContact suite; however, WebCenter has been sold to over 100 customers and
Quintus is currently engaged in its first WebCenter and eContact deployment.
EMAIL MANAGEMENT. Quintus delivers 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 its
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 Quintus' 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, Quintus'
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
Quintus currently markets four business applications that address the needs
of customer service centers for sales and service, consumer relations, technical
support and human resources. Quintus' 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.
Quintus' business applications can also be integrated with third-party
applications and data sources.
<TABLE>
<CAPTION>
BUSINESS APPLICATION PRODUCT DESCRIPTION
-------------------- -------------------
<S> <C>
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
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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. Quintus also offers 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.
CUSTOMERS
To date, Quintus has licensed its software products to over 450 customers,
including companies in the financial services, telecommunications and consumer
product industries. The following is a representative list of companies from
which Quintus has derived more than $300,000 of license and service revenue
since April 1, 1996.
AMS Management Systems
Anheuser-Busch
Canada Trust
Canadian Imperial Bank of
Commerce
Capita Group
Citigroup
Clarke American
Countrywide Home Loans
Deere & Company
Engen Petroleum
First Union Bank
Hartford Insurance
Inova Healthcare Services
International Paper
Lucent Technologies
Massachusetts Division of
Employment & Training
Meca Software
Northern Trust
Perot Systems Corporation
PricewaterhouseCoopers
Procter & Gamble
Reuters
The Santa Cruz Operation
Siemens Nixdorf
Steelcase
Sun Microsystems
Telefonica do Brasil
Ticketmaster
United Airlines
Ziptone, LLC
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TECHNOLOGY
Quintus eContact is based on a scalable, multi-tiered architecture.
Quintus' 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. Quintus' 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 life cycle 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 Quintus' eContact suite.
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. Quintus has built its 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.
Quintus' 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
Quintus believes that high quality services and support are critical
requirements for continued growth and increased sales of its products. Quintus
has made and expects to continue to make significant investments to increase its
ability to service and support its customers.
Quintus' customer support services organization is organized into four
groups including customer service management, professional services, technical
support and education services.
CUSTOMER SERVICE MANAGEMENT. Quintus' customer service management team
handles many aspects of its customer relationships including answering general
questions, renewing maintenance
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agreements, shipping product upgrades and coordinating with its other resources
to meet customer needs.
PROFESSIONAL SERVICES. Quintus' professional services group helps
facilitate the implementation of its solution. Quintus provides systems
integration services to support its entire product suite. Quintus' services
include integration, customization, data modeling, project management and
business rules development. The professional services group also provides
support for Quintus' implementation partners.
TECHNICAL SUPPORT. Quintus' technical services group is dedicated to
providing the highest level of support to its customers. Quintus currently
operates 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 Quintus' online knowledge repository and the ability to directly log and
track their issues through its Web site. Quintus offers a tiered maintenance and
support program. Customers can choose from its existing support packages or have
a custom package developed to meet their particular needs including 24x7
coverage and other assistance options.
EDUCATION SERVICES. Quintus' education services group offers a full
spectrum of classes providing the training needed to understand, implement and
use its solution. Quintus offers lectures and teaching labs to end-users,
administrators, developers and system integration partners at its facilities in
California and Massachusetts. Upon request, Quintus can also provide customized
on-site training.
SALES AND MARKETING
SALES. Quintus sells its products through a direct sales force and
indirectly through resellers and distribution partners. To date, Quintus
targeted its 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. Quintus' sales force
consists primarily of sales people and sales engineers located in its sales
offices in numerous locations across the United States. Quintus also maintains
international offices in Amsterdam and London from which it provides sales
support to its international distribution partners.
Quintus currently has relationships with 15 domestic and international
reseller and distribution partners including IBM Japan, Lucent Technologies and
Logica. Quintus also enhances its sales efforts through strategic relationships
with systems integrators such as AnswerThink Consulting Group, Cambridge
Technology Partners and eLoyalty. Quintus intends to continue to expand its
sales efforts by increasing the size of its direct sales force and broadening
its indirect distribution channels.
MARKETING. Quintus' marketing efforts focus on creating market awareness
for eCRM solutions, promoting its products and services, and generating sales
opportunities. Quintus has 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. Quintus also advertises on the
Internet and uses its Web site to enhance its market presence and generate
additional leads.
RESEARCH AND DEVELOPMENT
Quintus' research and development efforts are focused primarily around
enhancing its core technology and developing additional applications for the
Quintus eContact suite. Quintus operates development centers in California,
Massachusetts and Texas. Quintus' software development approach consists of a
well-defined methodology that provides guidelines for planning, controlling and
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implementing projects. This approach uses a cross-functional, team-based
development and release process. Quintus' research and development group works
closely with customers, partners, Quintus' 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 Quintus' research and development
group have extensive experience in customer relationship management software as
well as Internet and telephony communication technologies.
Quintus' research and development expenditures were approximately $3.7
million, $5.1 million, $6.7 million and $7.3 million in fiscal 1997, 1998 and
1999 and for the nine months ended December 31, 1999. Quintus believes that its
future performance will depend in large part on its ability to enhance its
current product line, develop new products and maintain its technological
competitiveness. As a result, Quintus intend to continue to expend significant
resources in research and development.
COMPETITION
Quintus currently faces 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 (recently acquired by Cisco Systems) and computer
telephony software vendors such as Genesys Telecommunications Laboratories
(recently acquired by Alcatel). Because there are relatively low barriers to
entry in the software market, Quintus expects 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 Quintus' products. Quintus 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 Quintus' current and potential competitors have longer operating
histories, significantly greater financial, technical, sales, marketing and
other resources, greater name recognition and a larger installed base of
customers than Quintus does. As a result, these competitors can devote greater
resources to the development, promotion and sale of products than Quintus can
and may be able to respond to new or emerging technologies and changes in
customer requirements more quickly than Quintus 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 Quintus' current or
prospective customers. In addition, a number of companies with significantly
greater resources than Quintus could attempt to increase their presence in the
eCRM market by acquiring or forming strategic alliances with Quintus'
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 Quintus' competitors have been acquired by significantly
larger companies, creating a number of stronger competitors with greater
resources than Quintus'. Cisco Systems acquired GeoTel Communications in June
1999 and WebLine Communications in November 1999. These acquisitions strengthen
Cisco's position as a provider of call routing and Web chat software. In January
2000, Alcatel acquired Genesys Telecommunications Laboratories, adding Genesys'
computer telephony software functionality to its voice and data network
capabilities. More recently, in December 1999, PeopleSoft acquired The Vantive
Corporation, a provider of customer relationship management software. In
addition, in March 2000, Nortel acquired Clarify, a provider of customer
relationship management software.
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Quintus cannot assure you that it 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 Quintus' business, financial condition and results of
operations. In order to be successful in the future, Quintus 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 Quintus' existing products obsolete.
PATENTS AND PROPRIETARY RIGHTS
Quintus' success and competitiveness are dependent to a significant degree
on the protection of its proprietary technology. Quintus relies primarily on a
combination of copyrights, trademarks, licenses, trade secret laws and
restrictions on disclosure to protect its intellectual property and proprietary
rights. Quintus also enters into confidentiality agreements with its employees
and consultants, and generally controls access to and distribution of its
documentation and other proprietary information. Despite these precautions,
others may be able to copy or reverse engineer aspects of Quintus' products, to
obtain and use information that Quintus regards as proprietary or to
independently develop similar technology. Any such actions by competitors could
harm Quintus' business, operating results and financial condition.
In addition, the laws of some foreign countries may not protect Quintus'
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.
Quintus may need to take legal action in the future to enforce or defend
its intellectual property and proprietary rights, to protect its 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 Quintus' business, operating results and
financial condition.
Quintus attempts to avoid infringing upon known intellectual property and
proprietary rights of third parties in its product development efforts. However,
Quintus has not conducted and does not plan to conduct comprehensive patent
searches to determine whether the technology used in its 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 Quintus' products were to violate the
proprietary rights of others, Quintus may be liable for substantial damages. In
addition, Quintus may be required to re-engineer its products or seek to obtain
licenses to continue offering its products. Quintus cannot assure you that such
efforts would be successful.
EMPLOYEES
As of March 1, 2000, Quintus had a total of 283 employees, including 87
people in research and development, 102 people in sales and marketing, 57 people
in customer support services and 37 people in general and administrative
services. Quintus does not have a collective bargaining agreement with any of
its employees and Quintus considers its employee relations to be good.
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FACILITIES
Quintus' principal administrative, sales, marketing, support and research
and development facilities are located in approximately 36,000 square feet of
space in Fremont, California. Quintus' lease of approximately 30,000 square feet
expires in December 2000, and its lease of approximately 6,000 square feet
expires in April 2001. Quintus leases several office suites in the United States
and the United Kingdom for sales and service personnel. In addition, Quintus
maintains offices in Acton, Massachusetts and has its European headquarters in
Amsterdam, the Netherlands.
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BUSINESS OF MUSTANG.COM
COMPANY BACKGROUND
Mustang.com develops, markets, services and supports the Mustang Message
Center, an e-mail management software solution that offers companies and other
enterprises the ability to manage their inbound e-mail and Internet-based
inquiries timely and accurately. Mustang Message Center competes in the emerging
e-mail management market and has received several prestigious awards as best
product in its class from sources devoted to monitoring the rapidly growing
computer telephony, customer management, e-mail management and call center
markets.
Mustang.com also develops, markets and supports other software products
that offer businesses the capability to improve customer service, market
products, enhance sales and increase employee productivity. These products
include ListCaster, a powerful e-mail message server that allows easy mass
e-mailings from maintained lists and enables e-mail recipients to correspond
with each other through the originating site on the World Wide Web of the
Internet called a "Website"; and FileCenter, a high performance application that
permits operators of Websites known as "webmasters" to provide their users with
an organized, searchable library of files. Mustang.com began operations in 1986
as a sole proprietorship, became a general partnership in 1987 and incorporated
in California under the name Mustang Software, Inc. on December 23, 1988. The
company changed its name to Mustang.com, Inc. on October 12, 1999. Its executive
offices and sales, marketing and administration facilities are located at 6200
Lake Ming Road, Bakersfield, California, 93306 and its telephone number is (661)
873-2500. It completed its initial public offering of common stock in April
1995. The company maintains a Website on the Web at "http://www.mustang.com."
Information contained on the Website is not part of this Report.
INDUSTRY OVERVIEW
The Internet is a worldwide network of private and public computer networks
that link businesses, universities, government agencies and other users having
different computer systems and networks, by means of a common telecommunications
standard. Use of the Internet has grown rapidly since its commercialization in
the early 1990s. International Data Corporation ("IDC") projects the number of
Internet users worldwide to increase from 160 million in 1998 to 510 million by
2003 and that over the same period e-commerce will grow from $50 billion to $1.3
trillion. IDC says that by 2003, 62% of the US population will be online, up
from only 26% in 1998.
The market opportunity for e-mail management software continues to grow due
to the emerging use of the use of the Internet for communication and innovation.
According to IDC, the market for e-mail response solutions is still in its early
growth stage and is expected to increase in the United States from approximately
$27 million in revenue in 1998 to approximately $183 million in 2003, a compound
annual growth rate of 46.7%. Worldwide, it is expected to increase from
approximately $29.5 million in revenue in 1998 to approximately $342 million in
2003, a compound annual growth rate of 63.2%.
CURRENT PRODUCTS
MUSTANG MESSAGE CENTER. The Mustang Message Center is an intelligent e-mail
routing and tracking system, which provides a company or other enterprise with
tools to manage inbound Internet e-mail. Mustang Message Center handles inbound
e-mail much like an automated call distributor handles voice telephone traffic
and helps achieve the same levels of efficiency and customer service through
e-mail that companies strive for in other aspects of their business. Mustang
Message Center
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works with all of the popular e-mail software applications such as Microsoft
Exchange, Microsoft Outlook, Lotus Notes, cc Mail, Eudora Mail and all other
Internet e-mail applications using the industry-standard Post Office Protocol
version 3 ("POP3") server accounts, including those running on Windows,
Macintosh, OS/2 and Unix.
The benefits of using Mustang Message Center to manage in-bound e-mail
include:
INTELLIGENT ROUTING. Mustang Message Center automatically routes incoming
e-mail messages to the enterprise personnel or "agents" that the company
predetermines will be best equipped to respond to them quickly and efficiently.
Standard routing is based on the address in the message and keywords in the
message's subject line, body, sender's address or header to a specific message
pool where it queued for response by the agents.
TRACKING. Mustang Message Center automatically assigns a tracking number to
each incoming message that is addressed to any of a user's defined Mustang
Message Center e-mail pools. At the same time, Mustang Message Center notifies
the customer that his message has been received by sending him an acknowledgment
e-mail that includes the assigned tracking number. The original message and all
replies are tracked so the company has a complete audit trail for incoming and
outgoing corporate e-mail. This provides management with a quick and easy way to
follow up on any complaints or problems a customer might report.
MEASUREMENT. Using the detailed reports that Mustang Message Center
creates, businesses can identify which employees, and employee groups are
handling the inbound e-mail, measure their average response time and monitor
overall system and employee efficiency and effectiveness. This helps with the
decision of when to expand or eliminate staffing, by allowing analysis of how
much time is actually being spent answering e-mail and evaluating how effective
agents are at responding.
INTEGRATION. Mustang Message Center's open, switch-inspired architecture
and intelligent routing environment provide both client-side and server side
Application Programming Interfaces (APIs) enabling enterprises to tightly
integrate Mustang Message Center with existing third-party or custom developed
customer management technologies including but not limited to, Customer
Management, Help Desk, Sales Force Automation, Computer Telephony Integration,
workflow applications and telephone systems. To facilitate this integration by
enterprises with available call center technologies, Mustang.com also offers
Mustang Message Center Architect, a development toolkit that enables developers
of enterprise application software to integrate the Mustang Message Center
agent-client functionality directly into their applications.
EFFICIENCY. Management no longer needs to waste time tracking down e-mail
problems. If customers complain that they have not received a timely reply, it
only takes a few moments to find the original message and identify its status
through Mustang Message Center's reporting and monitoring functions. It is
expected that because they know that their performance is being monitored,
employees will be more motivated to answer e-mail in a timely manner.
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The table below describes the three message center platforms:
<TABLE>
<CAPTION>
EDITION COST DESCRIPTION
------- ---- -----------
<S> <C> <C>
Business................ $1,500 a server, plus Mustang Message Center Business Edition is
$250 per agent an e-mail management solution designed for
small businesses that process up to 200
messages per day. The product stores its
data and configurations in Microsoft
Access databases and includes all of the
tracking and reporting features required
to manage e-mail efficiently and
effectively. This edition enables
potential customers to familiarize
themselves with the technology and
processes of e-mail management prior to
investing in the Enterprise Edition
platform.
Enterprise.............. $10,000 a server, Mustang Message Center Enterprise Edition
plus $250 per agent is designed for companies processing tens
of thousands of e-mails per day. The
Enterprise Edition provides more extensive
routing capabilities, with external
routing via the system's ActiveX scripting
interface. Also included are client-side
and server-side API's to enable
integration with existing legacy,
e-commerce and eService applications such
as workforce management, help desk, sales
force automation, customer relationship
management ("CRM") and workflow management
packages. In addition, this edition stores
its data in Microsoft SQL Server or Oracle
databases for enhanced performance,
dependability and scalability.
Service Bureau $25,000 a server plus Mustang Message Center Service Bureau
Edition............... $250 per agent Edition is designed for companies that
provide customer service, customer
support, or Internet services for multiple
clients in an integrated customer service
representative ("CSR") environment. By
running multiple Mustang.com Servers on a
single server, each with access to its own
discrete data stores, this offering
directly targets service bureaus, Internet
service providers (ISP's) and
multi-functional business unit
implementations.
</TABLE>
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To supplement the Mustang Message Center, the company has developed
additional applications to meet the needs of individual customer service
organizations. The table below describes some of the additional products that
complement Mustang Message Center.
<TABLE>
<CAPTION>
PRODUCT PRICE FUNCTIONALITY
------- ----- -------------
<S> <C> <C>
Mustang AgentPro....... $10,000 Mustang AgentPro is a robust Windows
application that delivers a fully
integrated, rapid-message-response
client application for the Mustang
Message Center. Mustang AgentPro
eliminates the need for third-party
e-mail applications on the CSR desktop,
enabling full time CSR management of
inbound e-mail. Mustang AgentPro is
designed specifically for
mission-critical, high volume e-mail
management operations that require
dedicated CSR focus for the processing
of inbound e-mail.
Mustang Outlook $7,500 Mustang Outlook Agent incorporates the
Agent................ entire feature set of Mustang Message
Center into the Microsoft Exchange or
Outlook messaging and collaboration
environment. Mustang Outlook Agent helps
enterprises to leverage existing
Exchange/Outlook infrastructure by
standardizing all e-mail management
functions.
Mustang TeleAgent...... $5,000 Mustang TeleAgent provides traditional
call center CSR's with the same customer
e-mail contact history that is available
via any of the standard Mustang Agent
applications, using a thin-client,
Windows-based application designed for
seamless integration with existing CRM
solutions.
Mustang Notify......... $7,500 Mustang Notify is a real-time alarm and
integrated workflow application that
eliminates the need for managers and
administrators to continuously monitor
their Mustang Message Center solution
via real-time pager, e-mail or cell
phone notification.
Mustang AutoAgents..... Individual Case Basis Mustang AutoAgents allow the Mustang.com
Pricing Services team to customize an automated
e-mail management solution by
integrating Mustang Message Center with
a company's existing enterprise
databases and business applications for
fully automated or assisted CSR e-mail
response.
</TABLE>
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<TABLE>
<CAPTION>
PRODUCT PRICE FUNCTIONALITY
------- ----- -------------
<S> <C> <C>
Mustang Architect...... $7,500 Mustang Architect is the developer's
toolkit for the Mustang Message Center
platform. Mustang Architect enables
integration and customization of the
complete Mustang Message Center platform
within an existing proprietary or
commercial customer management solution
that supports the listed modalities.
Mustang $10,000 Mustang KnowledgeLink enables the
KnowledgeLink........ selective publishing of Mustang Message
Center's response library content as
HTML. Mustang KnowledgeLink is an
intelligent, Web-based, self-help
solution that dramatically reduces
inbound e-mail volumes to CSR's.
</TABLE>
MUSTANG NETWORK
In February 2000, Mustang.com began offering Mustang Message Center as an
application service provider ("ASP") with its launch of the Mustang Network.
ASPs provide a contractual service offering to deploy, host, manage, and rent
access to an application from a centrally managed facility. ASPs are responsible
for either directly or indirectly providing all the specific activities and
expertise aimed at managing a software application or set of applications.
Mustang Network is a Web-based hosted application service to provide an
alternative for those customers which do not want Mustang Message Center
installed onsite at their locations. Through a network of service centers and
hosting partners linked by high-speed Internet connections, the Mustang Network
provides the company's customers with multiple redundant paths to access their
hosted customer service applications and remotely manage these applications
which reside on server machines co-located at the company hosting partners'
facilities. The Mustang Network provides a complete e-mail management solution
including intelligent message processing, sophisticated agent workflow,
real-time agent and system metrics and historical reporting applications. The
Mustang Network provides an alternative for companies engaged in electronic
commerce that seek to deploy quickly and efficiently scale their customer
service capabilities. In addition to bandwidth and application support,
Mustang's Professional Services team manages all of the administration,
workflow, content and IT services for the customers on a 24-hour-a-day,
seven-day-a-week basis.
OTHER PRODUCTS
LISTCASTER. Mustang's ListCaster is a powerful mailing list server and
SMTP/POP3 server for Windows 95, Windows 98 and Windows NT. A mailing list
server is a software program that automates the administration of mailing lists.
E-mail messages are sent to the server which, in turn, sends the messages to all
subscribers of the list. SMTP or Simple Mail Transfer Protocol is the outgoing
mail server, i.e., the computer contacted to send mail out. POP3 is the incoming
mail server, i.e., the computer to which mail is delivered.
Webmasters using ListCaster can draw customers to their Websites by sending
e-mail announcing new Web pages, products, services or possibilities directly to
people whose names and e-mail addresses have been compiled on a mailing list.
Once the addressee has received the message, e-mail clients permit the addressee
to link automatically to any URL located in the body of the message. A URL
(Uniform Resource Locator) is a unique identifier for a Web page or other
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resource on the Internet that can be embedded into the message sent by
ListCaster. Once the message recipient clicks on the URL contained in the
message, he is immediately taken to the linked Web page and thereby is available
to receive advertising and promotion of offered products and services.
ListCaster was originally released in May 1997 and updated by Versions 2.0
and 2.1, which were released in June and October 1998, respectively. ListCaster
2.1 has a suggested retail price of $499.
FILECENTER. Mustang's FileCenter is a high-performance software program
that automatically manages the process of submitting, posting, and locating
files on Internet and Intranet sites. FileCenter stores file information,
including file name, description, author, and location, in a Microsoft Access
database for quick searches. Taking full advantage of Microsoft's Active Server
technology, FileCenter indexes all the words found in the document, enabling
users to search for the files they need by title, author, description, date,
even the number of downloads. FileCenter eliminates the need to have programmers
manage Websites using File Transfer Protocol ("FTP") to download files to a
remote computer requesting the files.
FileCenter enables the creators of files to upload them to FileCenter's
library using a Web browser such as Microsoft Internet Explorer 3 or 4 or
Netscape Navigator 3 or 4 by simply clicking on an "upload" icon on a Web page.
The system's Wizard prompts the submitter of the file for all relevant
information. FileCenter automatically catalogs the file and can even optionally
scan the file for viruses using McAfee Virus Scan. FileCenter posts the file,
updates the new submission list, places the file in the proper category and
group, and creates the necessary HTML code to permit viewing the index with an
ordinary browser. System users can then search on any of FileCenter's database
fields including the name of the person uploading the file and the date of
submission. Because the process is completely automated, companies can use
FileCenter to post files on FTP sites rather than waste the disk space and
bandwidth required to distribute them as e-mail attachments. By using FileCenter
along with Mustang's ListCaster interested people, such as those desiring a
product upgrade or software patch, can be automatically notified when pertinent
files are posted on the Website. Administrators also have the option of
requiring down-loaders to fill out forms that are automatically e-mailed to the
submitter of the file. This permits authors of financial documents to track
their use, and permits shareware authors to monitor file downloads.
FileCenter was released in October 1997 and upgraded to the version
currently available in February 1998. It has a suggested retail price of $999.
SUPPORT SERVICES
Support services, which include maintenance, implementation, consulting,
installation, training and sales support, are an important element of
Mustang.com's business. The company intends to devote substantial additional
resources to supporting its customers and seeking to provide training to
indirect channels as the company's e-mail management solution becomes more
widely adopted. There can be no assurance the company will be successful in its
efforts to provide sufficient resources to expand its customer support
capabilities or that its services will be widely sought by customers.
PROFESSIONAL SERVICES
Mustang.com provides consulting and systems integration services through
its Professional Services group. Mustang's Professional Services team provides
complete system implementation, integration, training, remote system management,
executive briefings, and other consulting and services necessary for the
implementation of mission-critical e-mail management solutions. The company
seeks to deploy its Mustang Message Center platform in an average of three to
five business
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days compared to the three to eight weeks which, management believes, is needed
by competitors. Mustang.com believes that the rapid implementation process
coupled with the company's technology, have led directly to Mustang's success
against competition.
The company is expanding its professional services department to support
Mustang's effort to maximize each client relationship to meet the demand for
follow-up service and introduce new products as they are developed. Three
service engineers were recently added to the Professional Services group
bringing the total up to five professional consultants at December 31, 1999. The
company plans to hire additional professional service representatives as
regional offices are opened and business warrants the support. The company
believes that its professional services strategy helps maintain strong client
relationships by informing clients of new products, performing peer reviews,
system upgrades, custom developments, and integration to maximize its clients'
customer service capabilities. This strategy creates additional opportunities
for client contact and allows the existing client base to feed the company's
recurring revenue stream. Clients using all levels of Mustang's platforms
purchase peer review and system upgrades with ASP's ranging from $5,000 to
$10,000.
TECHNICAL SUPPORT
Mustang.com provides customer support for all its product lines. Support
options consist of direct real-time technical product via telephone with its
support staff as well as electronic support available on the company's Web site,
via e-mail or through user-to-user public discussion forums, which may or may
not involve Mustang's technical personnel. Fee-based maintenance and support
contracts are offered at the time a product is sold or thereafter and are
renewable periodically. These support agreements are typically priced at 20
percent of the list price of the related software. Maintenance and support
agreements entitle customers to software upgrades and fixes, as well as
technical support via the Web, e-mail and telephone on either a toll-free or
toll call basis.
SALES, MARKETING AND DISTRIBUTION
The company has targeted enterprises with substantial influx of e-mail as
its primary direct customers. It has also focused particularly on the call
center market and to a lesser extent the help desk market for its Mustang
Message Center, believing that these markets present practical opportunities for
Mustang Message Center use and integration with other applications or product
suites of OEMs and VARs.
In 1998, the company began concentrating on building a direct sales force
to sell its Mustang Message Center directly to businesses. At December 31, 1999,
Mustang's direct sales force consisted of 14 individuals, compared to four
individuals engaged in telesales at December 31, 1998.
The company also uses OEM and VAR distribution channels for Mustang Message
Center and has pursued partnership and integration opportunities to support the
sale and integration of Mustang Message Center. The company views OEM and VAR
distribution channels as an important channel for the continued growth and
adoption of Mustang Message Center. These include an OEM arrangement with
Siemens Business Communications, which makes provision for Siemens to
incorporate Mustang's Mustang Message Center Enterprise Edition into Siemens'
ProCenter MX product line initially in North America, and later throughout
Siemens' worldwide operations and channels. They also include the recently
announced integration of Mustang.com's Mustang Message Center with eContact
offered by Quintus Corporation. Such integration provides an integrated solution
provided by Quintus for email management, web self help, live help through
web-chat and browser-collaboration, voice over the Internet, and traditional
phone calls.
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The company is implementing its own certification program for the Mustang
Message Center for the purpose of enabling third-party application developers to
certify that their products can be integrated with the Mustang Message Center
platform. Mustang.com believes the certification program will add functionality
and integration capabilities to the Mustang Message Center, as well as promote
the goal of establishing the application as the default e-mail response
management platform in the call center, customer management, help desk and
electronic commerce markets.
Mustang.com markets Mustang Message Center through media advertising both
independently, in cooperation with Mustang-certified distributors and VARs, and
to OEMs and other companies that maintain joint market or joint sales agreements
with the company. The company uses print media ad campaigns targeted at industry
trade journals designed to invoke direct sales. The company also plans to
continue to promote Mustang Message Center at industry-specific trade shows
centered around customer management, call centers, electronic commerce, computer
telephony and other support products and services.
Sales of Mustang Message Center products and services accounted for 98% of
total revenues during 1999 as compared to 54% of total revenues in 1998.
Mustang.com distributes its other products domestically through
distributors and resellers, through OEMs who bundle the company's products with
their own products, and through direct sales to end-users. Direct sales by the
company of products from these lines are made from the company's Web site, by
mail order to end users who are solicited through Web Server notices and
mailings to Mustang.com's installed customer base, catalogs and media
advertising. Sales of ListCaster and FileCenter software accounted for 3% and
nil, respectively, of total revenues during 1999 and 4% and 1%, respectively, of
total revenues during 1998.
INTERNATIONAL SALES. Internationally, the company sells directly via
in-house telesales operations and through distributors who purchase, warehouse
and sell software. In 1998 and 1999, revenues from international sales (other
than sales of the Wildcat! Line of products, which the company discontinued in
November 1998) represented approximately 9% and 12%, respectively, of total
revenues.
COMPETITION
The market for e-mail message management products and services is intensely
competitive, and Mustang.com expects competition to increase significantly.
There are no substantial barriers to entry into Mustang's business, and it
expects established and new entities to enter the market for e-mail message
management products and services in the near future. It is possible that a
single supplier will dominate one or more market segments. Furthermore, since
there are many potential entrants to the field, it is extremely difficult to
assess which companies are likely to offer competitive products and services in
the future, and in some cases it is difficult to discern whether an existing
product or service is competitive with the Mustang Message Center.
Mustang's principal competitors in the e-mail message management market
include Aptex, Brightware, eGain, Exactis.com, Inc., Kana Communications,
MessageMedia and Octane Software, each of which provides software solutions for
e-mail management. Mustang.com also competes with other firms that provide
e-mail message management services on an outsourcing basis. The company competes
with a number of independent software suppliers who offer Web Server or
telecommunications software as or among their product line(s). Several of
Mustang's current and potential competitors have greater name recognition,
larger installed customer bases, more diversified lines of products and services
and significantly greater financial, technical, marketing and other resources
than Mustang. Such competitors may be able to undertake more extensive marketing
campaigns, adopt
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more aggressive pricing policies and make more attractive offers to businesses
to induce them to use their products or services.
PRODUCT DEVELOPMENT
The markets for the company's products are characterized by rapidly
changing technology and frequent new product introductions. Accordingly, the
company believes its future prospects depend on its ability not only to enhance
and successfully market its existing products, but also to develop and introduce
new products in a timely fashion which achieve market acceptance. There can be
no assurance that the company will be able to identify, design, develop, market
or support such products successfully or that the company will be able to
respond effectively to technological changes or product announcements by
competitors. In particular, if the company fails to successfully anticipate
customer demand for new products or product enhancements or upgrades or
otherwise makes incorrect product development decisions, the company could be
adversely affected both by the loss of anticipated revenue and, possibly, its
competitors' increase in their installed base of customers. These adverse
results could be particularly significant if the company were to make a number
of incorrect product development decisions in succession or within a short
period of time. Mustang.com has on a number of occasions experienced delays in
the commencement of commercial shipments of new products and enhancements,
resulting in delay or loss of product revenues. From time to time, Mustang.com
and others may announce new products, capabilities or technologies that have the
potential to replace or shorten the life cycle of Mustang.com's existing product
offerings. There can be no assurance that announcements of currently planned or
other new product offerings will not cause customers to defer purchasing
existing company products or cause distributors to return products to
Mustang.com. In addition, programs as complex as the software products offered
by Mustang.com may contain undetected errors or "bugs" when they are first
introduced or as new versions are released. Delays or difficulties associated
with new product introductions or product enhancements, or the introduction of
unsuccessful products or products containing undetected "bugs", could have a
material adverse effect on Mustang.com's business, operating results and
financial condition.
During 1997, 1998 and 1999, Mustang.com spent approximately $697,000,
$612,000 and $821,000, respectively, for research and development of new
products and enhancements to existing products.
PROPRIETARY RIGHTS
Mustang.com relies on a combination of trade secret, copyright and
trademark laws, nondisclosure agreements and other contractual provisions and
technical measures to protect its proprietary rights. Mustang.com believes that,
due to the rapid pace of technological innovation for Internet products,
Mustang's ability to establish and maintain a position of technology leadership
in the industry depends more on the skills of its development personnel than
upon the legal protections afforded its existing technology. There can be no
assurance that trade secret, copyright and trademark protections will be
adequate to safeguard the proprietary software underlying Mustang.com's products
and services. Similarly, there can be no assurance that agreements with
employees, consultants and others who participate in the development of its
software will not be breached, that Mustang.com will have adequate remedies for
any breach or that Mustang.com's trade secrets will not otherwise become known.
Mustang.com also faces the risk that notwithstanding Mustang.com's efforts to
protect its intellectual property, competitors will be able to develop
functionally equivalent e-mail message management technologies without
infringing any of Mustang.com's intellectual property rights. Despite
Mustang.com's efforts to protect its proprietary rights, unauthorized parties
may attempt to copy or otherwise obtain and use products or technology that
Mustang.com considers
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proprietary, and third parties may attempt to develop similar technology
independently. In addition, effective protection of intellectual property rights
may be unavailable or limited in certain countries. Accordingly, there can be no
assurance that Mustang's means of protecting its proprietary rights will be
adequate or that Mustang's competitors will not independently develop similar
technology.
As the use of the Internet for commercial activity increases, and the
number of products and service providers that support Internet commerce
increases, Mustang.com believes that Internet commerce technology providers may
become increasingly subject to infringement claims. There can be no assurance
that infringement claims will not be filed by plaintiffs in the future. Any such
claims, with or without merit, could be time consuming, result in costly
litigation, disrupt or delay the enhancement or shipment of Mustang's products
and services or require Mustang.com to enter into royalty or licensing
agreements. Such royalty or licensing agreements, if required, may not be
available on terms acceptable or favorable to Mustang, which could have a
material adverse effect on Mustang's business, financial condition and results
of operations. In addition, Mustang.com may initiate claims or litigation
against third parties for infringement of Mustang's proprietary rights or to
establish the validity of Mustang's proprietary rights.
EMPLOYEES
On December 31, 1999 the company employed 58 persons (all of whom were
employed full-time), of which 12 were involved in engineering and product
support, six in order processing and shipping/receiving, 20 in sales and
marketing, 13 in technical support and professional services and seven in
general administration. The company's employees are not covered by a collective
bargaining agreement. The company considers its relationship with its employees
to be satisfactory.
PROPERTIES
The company's executive offices and sales, marketing and production
facilities occupy an approximately 12,000 square foot building located in
Bakersfield, California. This building is leased from two individuals, one of
whom is James A. Harrer, the company's Chief Executive Officer and a principal
shareholder. See "Mustang.com Related Party Transactions." The other individual
is a former officer and director of Mustang.com.
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DESCRIPTION OF QUINTUS CAPITAL STOCK
GENERAL
Quintus' authorized capital stock consists 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 Quintus' certificate of
incorporation and bylaws and by the provisions of applicable law.
COMMON STOCK
As of March 15, 2000, there were 33,472,376 shares of common stock
outstanding that were held of record by approximately 399 shareholders. There
will be 39,527,057 shares of common stock outstanding after giving effect to the
issuance of 6,054,681 shares in connection with Quintus' acquisition of
Mustang.com, based upon shares outstanding as of March 15, 2000.
The holders of Quintus common stock are entitled to one vote per share on
all matters to be voted upon by the shareholders. 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. Quintus has never declared or paid cash dividends on its common stock
or other securities and does not currently anticipate paying cash dividends in
the future. Quintus' 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
Quintus' 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 shareholders. 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 shareholders 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, Quintus has no plans to issue any of the
preferred stock.
WARRANTS
As of March 15, 2000, the following warrants to purchase a total of 762,615
shares of Quintus' capital stock were outstanding:
- 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;
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- warrants to purchase a total of 245,339 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;
- warrants to purchase 300,000 shares of common stock at $7.50 per share,
which expire on November 19, 2000;
- warrants to purchase a total of 6,239 Series E preferred stock at $2.25
per share, which expire on February 23, 2001.
- warrants to purchase a total of 122,081 common stock at $2.25 per share,
which expire February 23, 2001; and
- warrants to purchase a total of 55,490 common stock at $2.25 per share,
which expire September 3, 2001.
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 shareholder
actions must be effected at a duly called meeting and not by a consent in
writing. The bylaws provide that Quintus' shareholders may call a special
meeting of shareholders only upon a request of shareholders owning at least 10%
of Quintus' 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 Quintus' shares and, as a consequence, they
also may inhibit fluctuations in the market price of its shares that could
result from actual or rumored takeover attempts. Such provisions also may have
the effect of preventing changes in Quintus' management.
DELAWARE TAKEOVER STATUTE. Quintus is 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 shareholder for a period of three years following the date that such
shareholder became an interested shareholder, unless:
- prior to such date, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
shareholder becoming an interested shareholder;
- upon consummation of the transaction that resulted in the shareholder
becoming an interested shareholder, the interested shareholder 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
shareholders, and not by written consent, by
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the affirmative vote of at least 66 2/3% of the outstanding voting stock
that is not owned by the interested shareholder.
Section 203 defines business combination to include:
- any merger or consolidation involving the corporation and the interested
shareholder;
- any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested shareholder;
- with some exceptions, any transaction that results in the issuance or
transfer by the corporation of any stock of the corporation to the
interested shareholder;
- 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 shareholder; or
- the receipt by the interested shareholder 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 shareholder 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 the merger, the holders of 21,728,872 shares of common stock and
warrants to purchase common stock will be entitled to registration rights. If
Quintus proposes to register any of its securities under the Securities Act,
either for its own account or for the account of other security holders
exercising registration rights, it must notify these securityholders and these
securityholders may be entitled to include all or part of their shares in the
registration. Additionally, holders of 21,728,872 shares of common stock and
warrants to purchase common stock have demand registration rights under which
they may require Quintus to use its best efforts to register shares of their
common stock. Further, the holders of these demand rights may require Quintus to
file additional 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
Quintus' right to not effect a requested registration within six months
following an offering of its securities, including this offering.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for Quintus common stock is Chase
Manhattan Shareholder Services, L.L.C.
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SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of common stock in the public market
following this merger, including shares issued upon exercise of outstanding
options and warrants, could adversely affect the prevailing market price of
Quintus common stock and could impair its ability to raise capital through the
sale of its equity securities. As described below, approximately 27,650,000 of
its shares currently outstanding may not be available for sale immediately after
this merger due to contractual and legal restrictions on resale. However, public
sales of substantial amounts of Quintus common stock after these restrictions
lapse could adversely affect the prevailing market price of its stock and its
ability to raise equity capital in the future.
Upon completion of this merger, Quintus will have outstanding approximately
39,527,057 shares of common stock, based upon shares outstanding as of March 15,
2000. Approximately 27,650,000 shares of common stock held by existing
shareholders and 519,942 shares to be received by Mustang.com shareholders will
be subject to lock-up agreements or bylaw restrictions providing that, with
certain limited exceptions, the shareholder will not offer, sell, contract to
sell or otherwise dispose of any common stock or any securities that are
convertible into common stock prior to May 15, 2000 without the prior written
consent of Donaldson, Lufkin & Jenrette Securities Corporation, or in the case
of the shares to be received by Mustang.com shareholders, without the prior
written consent of Quintus. 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.
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 395,270 shares immediately after this merger; 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 Quintus. 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 Quintus' 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. However, all Rule 701 shares are subject to
lock-up
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agreements or bylaw restrictions and will only become eligible for sale on or
after May 15, 2000. 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.
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MANAGEMENT OF QUINTUS FOLLOWING THE MERGER
DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------- --- -----------------------------------------
<S> <C> <C>
EXECUTIVE DIRECTORS
Alan Anderson.......................... 37 Chairman and Chief Executive Officer
John Burke............................. 40 President
James A. Harrer........................ 41 President of Quintus Online
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 Senior Vice President, Channels and
International Sales
Mark Payne............................. 45 Vice President, International Operations
Candace Sestric........................ 53 Vice President, Worldwide Customer
Support Services
DIRECTORS
Paul Bartlett.......................... 39 Director
Andrew Busey........................... 28 Director
Fredric Harman......................... 40 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 Quintus' Chief Executive Officer since May 1995
and Quintus' Chairman since September 1999. From May 1995 to July 1999, Mr.
Anderson also served as Quintus' 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 Quintus' 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.
JAMES A. HARRER will become President of Quintus Online, a new division
devoted to Quintus' online products and services, effective upon completion of
the merger. Mr. Harrer founded
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Mustang.com's business in January 1986 and has served in various positions for
Mustang.com. He currently serves as its President and Chief Executive Officer.
SUSAN SALVESEN has served as Quintus' 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 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 Quintus' Senior Vice President,
Engineering since June 1996. From January 1994 to June 1996, Mr. Sitaram served
as Quintus' 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 its Vice President, Marketing since May 1998. From October 1997 to May
1998, Mr. Byrd served as Quintus' Vice President, Product Marketing, from June
1996 to October 1997, as its Chief Technology Officer, from June 1995 to June
1996, as its Vice President, Engineering and from December 1993 to June 1995, as
a vice president in its consulting group. Prior to this, Mr. Byrd held a range
of engineering, consulting and marketing positions for Quintus. Mr. Byrd
received his B.A. in philosophy from the University of Durham, England.
JOHN CECALA has served as Quintus' 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 Quintus'
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 Quintus' Senior Vice President, Channels and
International Sales since January 2000. From September 1999 to December 1999,
Mr. Nunn served as Quintus' Vice President, Americas Operations. From January
1999 to September 1999, he served as Quintus' Senior Vice President of Sales.
From October 1997 to December 1998, Mr. Nunn served as Quintus' 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 Quintus' 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 Quintus' Vice President, Worldwide Customer
Support Services 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
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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.
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 became a director of Quintus upon the closing of its
acquisition of Acuity in November 1999. 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. 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
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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 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 Quintus' executive officers and directors, including
stock compensation and loans. In addition, the compensation committee reviews
and approves stock compensation arrangements for all of Quintus' employees and
administers its 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 Quintus' 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 Quintus' corporate financial reporting and its internal and external
audits, including, among other things, Quintus' internal audit and control
functions, the results and scope of the annual audit and other services provided
by Quintus' independent auditors and its compliance with legal matters that have
a significant impact on Quintus' financial reports. The audit committee also
consults with Quintus' management and Quintus' independent auditors prior to the
presentation of financial statements to shareholders and, as appropriate,
initiates inquiries into aspects of Quintus' financial affairs. In addition, the
audit committee has the responsibility to consider and recommend the appointment
of, and to review fee arrangements with, Quintus' 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 its
common stock. Following this offering, directors will receive automatic option
grants under Quintus' 1999 Director Option Plan. If a change in control of
Quintus occurs, a non-employee director's option granted under its 1999 Director
Option Plan will become fully vested. See "Stock Plans -- 1999 Director Option
Plan."
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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 Quintus' board of directors or its 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.
INDEMNIFICATION
In September 1999, the board of directors authorized Quintus to enter into
indemnification agreements with each of Quintus' directors and executive
officers. The form of indemnification agreement provides that Quintus will
indemnify its 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 its bylaws.
Quintus' certificate of incorporation and bylaws each contain certain
provisions relating to the limitation of liability and indemnification of its
directors and officers. Quintus' certificate of incorporation provides that its
directors will not be personally liable to Quintus or its shareholders 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 its
shareholders;
- 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.
Quintus' certificate of incorporation also provides that if the Delaware
General Corporation Law is amended after the approval by its shareholders of
Quintus' certificate of incorporation to authorize corporate action further
eliminating or limiting the personal liability of directors, then the liability
of its 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 Quintus' directors or officers for any violation of
applicable federal securities laws.
In addition, as permitted by Section 145 of the Delaware General
Corporation Law, Quintus' bylaws provide that
- Quintus is required to indemnify its directors and executive officers to
the fullest extent permitted by the Delaware General Corporation Law;
- Quintus may, in its discretion, indemnify other of its officers,
employees and agents as provided by the Delaware General Corporation Law;
- with some exceptions, Quintus is required to advance all expenses
incurred by its directors and executive officers in connection with a
legal proceeding;
- the rights conferred in the bylaws are not exclusive;
- Quintus is authorized to enter into indemnification agreements with its
directors, officers, employees and agents; and
- Quintus may not retroactively amend its bylaw provisions relating to
indemnification.
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EXECUTIVE COMPENSATION
The following table sets forth information with respect to compensation for
the fiscal years ended March 31, 2000 and March 31, 1999 paid by Quintus for
services by its Chief Executive Officer and its 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 in October
1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
-------------------- UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) OPTIONS
--------------------------- ------ -------- -------- ------------
<S> <C> <C> <C> <C>
2000 $223,313 $ N/A --
Alan Anderson, Chief Executive Officer........ 1999 190,000 11,875 --
2000 159,872 N/A 70,000
Susan Salvesen, Chief Financial Officer....... 1999 150,000 10,000 25,000
Muralidhar Sitaram, Senior Vice President, 2000 172,500 N/A 70,000
Engineering................................. 1999 155,833 -- 85,000
Peter Kenyon, former Vice President, Field
Operations.................................. 1999 89,702 304,773 --
John Burke, President......................... 2000 146,328 N/A --
</TABLE>
(1) Bonuses for the year ended March 31, 2000 will be determined after
completion of the audit of the Consolidated Financial Statements for the year
ended March 31, 2000.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth each grant of stock options during the
fiscal year ended March 31, 2000 to each of the Named Executive Officers.
Quintus granted a total of 2,454,314 options to its employees during fiscal
2000, including 685,000 options at a price of $5.00 granted to an employee
outside of the Plan. No stock appreciation rights were granted to these
individuals during this period.
The exercise prices of the options Quintus grants are equal to the fair
market value of Quintus common stock on the date of grant. The exercise price
may be paid in cash, in shares of Quintus 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. Quintus may also finance the option
exercise by lending 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 ranging from $18.00 per share (the initial public
offering price) to $33.75 per share that appreciates at the indicated rate for
the entire ten-year term of the option and that the option is exercised at the
exercise price and sold on the last day of its term at the appreciated price.
Stock price appreciation rates of 5% and 10% are assumed pursuant to rules
promulgated by the Securities and Exchange Commission and do not represent
Quintus' prediction of its stock price performance.
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<PAGE> 120
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATE OF
NUMBER OF STOCK
SECURITIES % OF TOTAL PRICE APPRECIATION
UNDERLYING OPTIONS GRANTED EXERCISE FOR OPTION TERM
OPTIONS TO EMPLOYEES IN PRICE EXPIRATION -------------------------
NAME GRANTED FISCAL YEAR ($/SHARE) DATE 5% 10%
---- ---------- --------------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Alan Anderson........... -- --% $ -- -- $ -- $ --
Susan Salvesen.......... 30,000 1.2 8.25 9/1/09 632,103 1,153,121
20,000 0.8 33.75 1/30/10 424,504 1,075,776
20,000 0.8 32.75 3/26/10 411,926 1,043,901
Muralidhar Sitaram...... 30,000 1.2 8.25 9/1/09 632,103 1,153,121
20,000 0.8 33.75 1/30/10 424,504 1,075,776
20,000 0.8 32.75 3/26/10 411,926 1,043,901
John Burke.............. 685,000 2.8 5.00 7/5/09 16,659,271 28,555,845
</TABLE>
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table sets forth, for each of the Named Executive Officers,
the number of options exercised during the fiscal year ended March 31, 2000 and
the number and value of securities underlying unexercised options that were held
by the Named Executive Officers as of March 31, 2000. No stock appreciation
rights were exercised by the Named Executive Officers in fiscal year 2000, 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 Quintus' 1995 Stock Option Plan are immediately
exercisable for all the option shares, but any shares purchased under those
options may be repurchased by Quintus, at the original exercise price paid per
share, if the optionee ceases to remain with Quintus prior to the vesting in his
or her shares. The headings "Vested" refer to shares that Quintus may no longer
repurchase; the headings "Unvested" refer to shares that Quintus had rights to
repurchase as of March 31, 2000.
The amounts in the "Value of Unexercised In-the-Money Options at March 31,
2000" column are based on $1.75 per share, the fair market value of Quintus
common stock at the end of fiscal 2000, less the exercise price payable for such
shares.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING
UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT MARCH 31, IN-THE-MONEY OPTIONS
2000 AT MARCH 31, 2000
SHARES ACQUIRED -------------------- -------------------------
NAME ON EXERCISE VALUE REALIZED VESTED UNVESTED VESTED UNVESTED
---- --------------- -------------- -------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Alan Anderson........ -- $ -- -- -- $ -- $ --
Susan Salvesen....... 132,000 66,000 123,707 164,293 3,458,657 3,375,093
Muralidhar Sitaram... -- -- 35,520 134,480 945,162 2,499,213
John Burke........... -- -- -- 685,000 -- 16,910,938
</TABLE>
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<PAGE> 121
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 by the Named Executive Officers
and any other person in connection with certain changes in control of Quintus.
In connection with Quintus' adoption of the 1999 Stock Incentive Plan, Quintus
has 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 Quintus, and his or her employment may be
terminated at any time. Quintus has entered into an agreement with Mr. Anderson,
its 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, Quintus
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 Quintus' right to repurchase his unvested shares should he
cease his service with Quintus. As of December 1999, Mr. Anderson had fully
vested in 671,429 of these shares. Provided that Mr. Anderson remains in
Quintus' 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 Quintus 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.
Quintus has entered into an agreement with Mr. Burke, its 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. Quintus' 1999 Stock Incentive Plan became effective in
November 1999. Quintus has reserved 1,000,000 shares of its common stock for
issuance under the 1999 Stock Incentive Plan. Additionally, 217,000 shares not
yet issued under Quintus' 1995 Stock Option Plan became available under the 1999
Stock Incentive Plan on the date of Quintus' initial public offering. On January
1 of each year, starting with the year 2000, the number of shares in the reserve
will automatically increase by a number equal to the lesser of (a) 5% of the
total number of shares of common stock that are outstanding at that time or, (b)
by 2,000,000 shares. As of January 1, 2000, the reserve automatically increased
by 1,662,867 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
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<PAGE> 122
become available for awards under the 1999 Stock Incentive Plan. Quintus has not
yet granted any options under the 1999 Stock Incentive Plan.
Outstanding options under the 1995 Stock Option Plan have been incorporated
into the 1999 Stock Incentive Plan 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 of directors 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 Quintus' 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
Quintus' 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 Quintus' 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 Quintus common stock,
restricted shares of Quintus 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 Quintus 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 Quintus 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
Quintus; or
- a loan from a broker designated by Quintus, secured by the option shares.
Options vest at the time or times determined by the compensation committee.
In most cases, Quintus' 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 Quintus 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
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<PAGE> 123
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, Quintus' 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
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 Quintus; and
- in the case of treasury shares only, services to be provided to Quintus
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 Quintus; and
- in the case of treasury shares only, services to be provided to Quintus
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 its own shareholders own 50% or less of
the surviving corporation or its parent company;
- a sale of all or substantially all of Quintus' assets;
- the replacement of more than one-half of Quintus' directors over a
24-month period; or
- an acquisition of 50% or more of Quintus' outstanding stock by any person
or group, other than a person related to Quintus such as a holding
company owned by its shareholders.
Amendments or Termination. Quintus' board may amend or terminate the 1999
Stock Incentive Plan at any time. If Quintus' board amends the plan, it does not
need to ask for shareholder 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. Quintus' Employee Stock Purchase Plan
became effective in November 1999. Quintus' Employee Stock Purchase Plan is
intended to qualify under Section 423 of
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<PAGE> 124
the Internal Revenue Code. Quintus has reserved 1,000,000 shares of its 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 Quintus 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 Quintus' board of directors.
Eligibility. All of Quintus' employees are eligible to participate if they
are employed by Quintus 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 began on the effective date of Quintus' initial public offering
and ends on October 31, 2001.
Amount of contributions. Quintus' 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 Quintus 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
Quintus' 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, Quintus' 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. Quintus' board of directors may amend or terminate the Employee Stock
Purchase Plan at any time. Quintus' chief executive officer may also amend the
plan in certain respects. If Quintus' 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 its shareholders.
1999 DIRECTOR OPTION PLAN
Share reserve. Quintus' 1999 Director Option Plan became effective in
November 1999. Quintus has reserved 500,000 shares of its 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 Quintus' board of directors, although all grants under
the plan are automatic and non-discretionary.
Initial grants. Only the non-employee members of Quintus' board of
directors will be eligible for option grants under the 1999 Director Option
Plan. Each non-employee director who first joins Quintus' 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.
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<PAGE> 125
Annual grants. At the time of each of Quintus' annual shareholders'
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 Quintus 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 Quintus common stock on the
option grant date. A director may pay the exercise 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 Quintus. 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. Quintus' board may amend or terminate the 1999
Director Option Plan at any time. If Quintus' board amends the plan, it does not
need to ask for shareholder 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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<PAGE> 126
PRINCIPAL SHAREHOLDERS OF QUINTUS CORPORATION
The following table sets forth the beneficial ownership of Quintus' common
stock as of March 15, 2000 and is adjusted to reflect the closing of Quintus'
acquisition of Mustang.com. Specifically, it reflects:
- each person who is known by Quintus to beneficially own more than 5% of
Quintus common stock;
- each of the named executive officers;
- each of Quintus' directors; and
- all of Quintus' directors and executive officers as a group (11 persons).
As of March 15, 2000, there were 33,472,376 shares of Quintus common stock
outstanding. Based on this number, Quintus will issue 6,054,681 shares in
connection with its acquisition of Mustang.com. Thus, the figures in the
"Outstanding Before Merger" and "Outstanding After Merger" columns below are
based on 33,472,376 and 39,527,057 shares outstanding.
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 March 15, 2000 are deemed outstanding
for purposes of computing the percentage ownership of any other 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
NUMBER OF SHARES OPTIONS OR WARRANTS ----------------------------
BENEFICIALLY INCLUDED IN BENEFICIAL OUTSTANDING OUTSTANDING
NAME OF BENEFICIAL OWNER OWNED OWNERSHIP BEFORE MERGER AFTER MERGER
------------------------ ---------------- ---------------------- ------------- ------------
<S> <C> <C> <C> <C>
Entities Affiliated with Donaldson,
Lufkin &
Jenrette, Inc.(a)...................... 11,842,037 140,193 35.4% 30.0%
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 -- 8.7 7.4
525 University Avenue, Suite 1300
Palo Alto, CA 94301
HarbourVest Partners IV -- Direct Fund
L.P.(c)................................ 1,530,908 105,146 4.6 3.9
One Financial Center
Boston, MA 02111
Alan K. Anderson......................... 1,142,858 -- 3.4 2.9
John J. Burke............................ 685,000 685,000 2.0 1.7
Susan Salvesen........................... 249,250 89,250 * *
Muralidhar Sitaram....................... 331,250 131,250 * *
Paul Bartlett............................ 116,453 40,000 * *
Andrew Busey............................. 602,319 -- 1.8 1.5
Fredric Harman(d)........................ 2,903,516 -- 8.7 7.4
Will Herman.............................. 220,241 60,000 * *
Alexander Rosen(e)....................... 11,842,037 -- 35.4 30.0
Robert Shaw.............................. 84,097 -- * *
Jeanne Wohlers........................... 122,049 -- * *
All directors and executive officers as a
group(11).............................. 18,299,070 1,005,500 54.7 46.3
</TABLE>
- -------------------------
* Less than 1%.
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<PAGE> 127
(a) Includes 653,655 shares held by entities affiliated with Donaldson, Lufkin &
Jenrette, Inc., of which 7,253 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 45,803 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 87,137 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., and
66,198 shares held by Oak VI Affiliates Fund, L.P. Mr. Harman has indirect
ownership of the shares and has shared power to vote and 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) Hancock Venture Partners, Inc. is the managing general partner of Back Bay
Partners XII L.P., the general partner of HarbourVest Partners IV-Direct
Fund L.P. D. Brooks Zug and Edward W. Kane, who comprise the investment
committee of Hancock Venture Partners, Inc., hold the power to vote and
dispose of the shares held by HarbourVest Partners IV-Direct Fund L.P.
(d) 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.
123
<PAGE> 128
(e) 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.
124
<PAGE> 129
PRINCIPAL SHAREHOLDERS OF MUSTANG.COM
The following table sets forth as of March 13, 2000 information regarding
the beneficial ownership of Mustang.com's common stock by (i) each person known
by Mustang.com to be the beneficial owner of more than five percent of the
outstanding shares of common stock, (ii) each of the directors of Mustang.com,
(iii) each of Mustang.com's executive officers whose annual salary and bonus
were in excess of $100,000 during 1999, and (iv) the executive officers and
directors of Mustang.com as a group.
<TABLE>
<CAPTION>
COMMON STOCK(A)
-----------------
NAME OF BENEFICIAL OWNER OR IDENTITY OF GROUP NUMBER PERCENT
--------------------------------------------- ------- -------
<S> <C> <C>
James A. Harrer........................................ 725,778 11.7%
Christopher B. Rechtsteiner............................ 39,721 *
C. Scott Hunter........................................ 34,811 *
Stanley A. Hirschman................................... 53,250 *
Michael S. Noling...................................... 33,334 *
Anthony P. Mazzarella.................................. 9,375 *
Phillip E. Pearce...................................... 9,375 *
Austin W. Marxe and David M. Greenhouse (b)............ 500,427 7.9
All executive officers and directors as a group (10)
persons.............................................. 956,358 14.9
</TABLE>
- -------------------------
* Less than 1%.
(a) Includes any shares purchasable upon exercise of options or warrants
exercisable within 60 days of March 13, 2000, but does not give effect to
any change of control provisions in options that may become applicable as a
result of the successful consummation of the merger with Quintus.
(b) Information concerning beneficial ownership by Messrs. Marxe and Greenhouse
is based on an Amendment No. 1 to Schedule 13G dated March 1, 2000 filed on
their behalf (among others) with the Securities and Exchange Commission on
March 2, 2000.
125
<PAGE> 130
QUINTUS RELATED PARTY TRANSACTIONS
RELATIONSHIPS AMONG OFFICERS OR DIRECTORS WITH CERTAIN INVESTORS
Two of Quintus' directors are associated with entities that each own more
than five percent of Quintus' 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 shareholder.
STOCK TRANSACTIONS
The following table summarizes the sales of preferred stock to Quintus'
executive officers, directors and principal shareholders, and persons and
entities associated with them, since its inception. Each share of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock automatically converted into one share of common stock and
received a cash payment equal to approximately 92.5% of the original per share
purchase price upon the closing of Quintus' initial public offering. Each share
of Series E Preferred Stock and Series F Preferred Stock automatically converted
into one share of common stock upon the closing of Quintus' initial public
offering. See "Principal Shareholders of Quintus Corporation" 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
Quintus' directors
Entities Associated with
DLJ Capital Corporation
(Mr. Rosen).............. 9,000,000 699,300 501,182 -- 1,304,100 -- $16,369,272
Entities Associated with Oak
Investment Partners (Mr.
Harman).................... -- -- 2,094,240 -- 669,085 -- $ 6,776,701
Other 5% shareholders
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
Quintus has entered into employment agreements or compensation arrangements
with Alan Anderson, Quintus' Chief Executive Officer, and John Burke, Quintus'
President. See "Management of Quintus Following the Merger -- Employment and
Change of Control Agreements."
OPTION GRANTS
Quintus has granted options to its directors and executive officers, and
Quintus intends to grant additional options to its directors and executive
officers in the future. See "Management of Quintus
126
<PAGE> 131
Following the Merger -- Option Grants in Last Fiscal Year" and "Management of
Quintus Following the Merger -- Director Compensation."
INDEMNIFICATION AGREEMENTS
Quintus has entered into indemnification agreements with its directors and
executive officers. Such agreements may require Quintus, among other things, to
indemnify its 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 of Quintus Following the
Merger -- Indemnification."
RIGHTS OF CERTAIN SHAREHOLDERS
Certain holders of Quintus 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 shareholders 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 QUINTUS' DIRECTORS ARE ASSOCIATED
Quintus has 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 Quintus.
If Quintus hires any Hall, Kinion candidate, either immediately or within 6
months of the date the candidate is first referred to Quintus by Hall, Kinion,
Quintus pays Hall, Kinion 20% of the candidate's base annual salary. Paul
Bartlett, one of Quintus' directors, is president of Hall, Kinion. In fiscal
1999 and the nine months ended December 31, 1999, Quintus paid an aggregate of
$20,387 and $412,555, respectively, to Hall, Kinion under this agreement.
Mr. Busey, who became one of Quintus' directors upon the closing of its
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 $78,000
in connection with this license.
LOANS TO CERTAIN EXECUTIVE OFFICERS AND DIRECTORS
On May 14, 1996, Quintus loaned Alan Anderson, its Chief Executive Officer,
a total of $37,500 for the exercise of stock options. Mr. Anderson purchased
750,000 shares of Quintus common stock with the loan. In connection with the
loan, Quintus 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 December 31, 1999, the amount outstanding on this
note was $46,914.
On May 14, 1996, Quintus loaned Alan Anderson, its Chief Executive Officer,
a total of $19,643 for the exercise of stock options. Mr. Anderson purchased
392,858 shares of Quintus common stock with the loan. In connection with the
loan, Quintus entered into a stock pledge agreement with Mr. Anderson on May 14,
1996 and became the holder of a full-recourse promissory note from
127
<PAGE> 132
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 December 31, 1999, the amount outstanding on
this note was $24,573.
On April 20, 1999, Quintus loaned Susan Salvesen, Quintus' Chief Financial
Officer, a total of $164,868 for the exercise of a stock option. She purchased
132,000 shares of Quintus common stock with the loan. In connection with the
loan, Quintus 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 December 31, 1999, the amount outstanding on
this note was $170,950.
Quintus believes that the transactions above were made on terms no less
favorable to it than could have been obtained from unaffiliated parties. All
future transactions, including loans between Quintus and its officers,
directors, principal shareholders 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 Quintus than could have been obtained from unaffiliated parties.
128
<PAGE> 133
MUSTANG.COM RELATED PARTY TRANSACTIONS
Mustang.com leased its executive offices and sales, marketing and
production facilities from James A. Harrer, a director and the company's
President and Chief Executive Officer and a third party who is a former officer
and director of Mustang.com pursuant to a lease that commenced on December 1,
1993 and expired on November 30, 1998. From December 1998 through January 2000,
Mustang.com occupied the premises on a month-to-month basis, paying monthly rent
of $13,458. In February 2000, Mustang.com entered into an Addendum to the
original lease agreement to extend that lease through January 2005 on the same
terms except for a 4% cost of living adjustment. Mustang.com believes that this
lease is on terms no less favorable than those that could have been obtained
from an unaffiliated third party and that the rent is comparable to that for
similar facilities in the area. Messrs. Harrer and the third party incurred debt
in the aggregate amount of $822,000, following two loans in the respective
original principal amounts of $450,000 and $372,000, to purchase said
facilities. Monthly payments of Messrs. Harrer and the third party under these
two loans equal approximately $4,500 and $2,900, respectively. Mustang.com has
guaranteed all of this debt and has subordinated its leasehold interest in the
facilities to the lenders. In addition, in the event of a default by Mr. Harrer
and the third party under the loan agreement covering $372,000 of this debt, the
lender thereunder may exercise an assignment from Mr. Harrer and the third party
of their interest as landlord in a contingent 20-year lease, previously signed
by Mustang.com as tenant, for such facilities. In that event, this contingent
lease provides for a monthly rent of $6,200, would supersede the current lease,
and would obligate Mustang.com to pay such rent through November 2013.
129
<PAGE> 134
DISSENTERS' RIGHTS
If the merger agreement is approved by the required vote of Mustang.com
shareholders and is not abandoned or terminated, holders of Mustang.com capital
stock who did not vote in favor of the merger may, by complying with Sections
1300 through 1312 of the California Corporations Code, be entitled to appraisal
rights as described therein. The record holders of the shares of Mustang.com
capital stock that are eligible to, and do, exercise their appraisal rights with
respect to the merger are referred to herein as "Dissenting Shareholders," and
the shares of stock with respect to which they exercise appraisal rights are
referred to herein as "Dissenting Shares."
The following discussion is not a complete statement of the law pertaining
to dissenters' rights under the California Corporations Code and is qualified in
its entirety by reference to Sections 1300 through 1312 of the California
Corporations Code, the full text of which are attached to this proxy
statement/prospectus as Annex C and incorporated herein by reference. Annex C
should be reviewed carefully by any Mustang.com shareholder who wishes to
exercise dissenters' rights or who wishes to preserve the right to do so, since
failure to comply with the procedures of the relevant statute will result in the
loss of dissenters' rights.
ANY HOLDER OF MUSTANG.COM COMMON STOCK WISHING TO EXERCISE APPRAISAL RIGHTS
IS URGED TO CONSULT LEGAL COUNSEL BEFORE ATTEMPTING TO EXERCISE SUCH RIGHTS.
CALIFORNIA DISSENTERS' RIGHTS
Shares of Mustang.com stock must satisfy each of the following requirements
to qualify as Dissenting Shares under California law:
- the shares of Mustang.com capital stock must have been outstanding on
, 2000;
- the shares of Mustang.com stock must not have been voted in favor of the
merger;
- the holder of such shares of Mustang.com stock must make a written demand
that Mustang.com repurchase such shares of Mustang.com capital stock at
fair market value (as described below); and
- the holder of such shares of Mustang.com capital stock must submit
certificates for endorsement (as described below).
A vote by proxy or in person against the merger does not in and of itself
constitute a demand for appraisal under California law.
Pursuant to Sections 1300 through 1312 of the California Corporations Code,
holders of Dissenting Shares may require Mustang.com to repurchase their
Dissenting Shares at a price equal to the fair market value of such shares
determined as of the day before the first announcement of the terms of the
merger, excluding any appreciation or depreciation as a consequence of the
proposed merger, but adjusted for any stock split, reverse stock split or stock
dividend that becomes effective thereafter.
130
<PAGE> 135
Within ten days following approval of the merger by Mustang.com
shareholders, Mustang.com is required to mail a dissenters' notice to each
person who did not vote in favor of the merger. The dissenters' notice must
contain the following:
- A notice of the approval of the merger;
- A statement of the price determined by Mustang.com to represent the fair
market value of Dissenting Shares (which shall constitute an offer by
Mustang.com to purchase such Dissenting Shares at such stated price); and
- A brief description of the procedures for such holders to exercise their
rights as Dissenting Shareholders.
Within 30 days after the date on which the notice of the approval of the
merger by the outstanding shares is mailed to Dissenting Shareholders, a
Dissenting Shareholder must:
- Demand that Mustang.com repurchase such shareholder's Dissenting Shares;
- The demand shall set forth the number and class of Dissenting Shares held
of record by such Dissenting Shareholder that the Dissenting Shareholder
demands that Mustang.com purchase;
- The demand shall include a statement of what such Dissenting Shareholder
claims to be the fair market value of the Dissenting Shares as of the day
before the announcement of the proposed merger. The statement of fair
market value constitutes an offer by the Dissenting Shareholder to sell
the Dissenting Shares at such price within such 30-day period; and
- Submit to Mustang.com or its transfer agent certificates representing any
Dissenting Shares that the Dissenting Shareholder demands Mustang.com
purchase, so that such Dissenting Shares may either be stamped or
endorsed with the statement that the shares are not Dissenting Shares or
exchanged for certificates of appropriate denomination so stamped or
endorsed.
If upon the Dissenting Shareholder's surrender of the certificates
representing the Dissenting Shares, Mustang.com and a Dissenting Shareholder
agree upon the price to be paid for the Dissenting Shares and agree that such
shares are Dissenting Shares, then the agreed price is required by law to be
paid to the Dissenting Shareholder within the later of 30 days after the date of
such agreement or 30 days after any statutory or contractual conditions to the
consummation of the merger are satisfied or waived.
If Mustang.com and a Dissenting Shareholder disagree as to the price for
such Dissenting Shares or disagree as to whether such shares are entitled to be
classified as Dissenting Shares, such holder has the right to bring an action in
California Superior Court, within six months after the date on which the notice
of the shareholders' approval of the merger is mailed, to resolve such dispute.
In such action, the court will determine whether the shares of Mustang.com
common stock held by such shareholder are Dissenting Shares, the fair market
value of such shares of Mustang.com common stock, or both. California law
provides, among other things, that a Dissenting Shareholder may not withdraw the
demand for payment of the fair market value of Dissenting Shares unless
Mustang.com consents to such request for withdrawal.
131
<PAGE> 136
LEGAL MATTERS
Davis Polk & Wardwell, special counsel to Quintus, will pass on the
validity of the Quintus common stock to be issued to Mustang.com shareholders in
the merger. It is a condition to the completion of the merger that Quintus and
Mustang.com receive opinions from Davis Polk & Wardwell and Kirkpatrick &
Lockhart LLP, special counsel to Mustang.com, respectively, to the effect that,
among other things, the merger will be a reorganization for United States
federal income tax purposes. See "The Merger Agreement -- Conditions to
Completion of the Merger" and "The Merger -- Material United States Federal
Income Tax Consequences."
EXPERTS
The Quintus consolidated financial statements as of and for the year ended
March 31, 1999, included in this proxy statement/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 proxy statement/prospectus, and have been so included in the
reliance upon the reports of such firm given upon their authority as experts in
auditing and accounting.
The consolidated financial statements of Quintus at March 31, 1998 and for
the two years in the period ended March 31, 1998, included in the Proxy
Statement of Mustang.com, which is referred to and made a part of this
Prospectus and Registration Statement, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report appearing elsewhere herein,
and are included in reliance upon such report given on the authority of such
firm 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
proxy statement/prospectus 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.
The Mustang.com financial statements as of December 31, 1998 and 1999 and
for each of the three years in the period ended December 31, 1999 included in
this proxy statement/prospectus have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included herein upon the authority of said firm as experts in
auditing and accounting.
CHANGE IN ACCOUNTANTS
On March 9, 1999, Quintus' audit committee dismissed Ernst & Young LLP as
its independent auditors and subsequently appointed Deloitte & Touche LLP as its
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. Quintus 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 Quintus' board
of directors.
132
<PAGE> 137
FUTURE SHAREHOLDER PROPOSALS
The deadline for submission of shareholder proposals intended to be
presented at the 2000 Annual Meeting of Shareholders of Mustang.com was January
11, 2000 (and for proposals that were not to be submitted pursuant to Rule 14a-8
under the Securities Exchange Act of 1934, March 27, 2000). Accordingly, if
proxy materials are required to be delivered and completion of the merger does
not occur, it is too late to submit shareholder proposals for the 2000 Annual
Meeting.
WHERE YOU CAN FIND MORE INFORMATION
Quintus and Mustang.com file annual, quarterly and special reports, proxy
statements and other information with the SEC. You may read and copy any
reports, statements or other information that Quintus and Mustang.com file at
the SEC's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information
on the public reference rooms. Quintus' and Mustang.com's SEC filings are also
available to the public from commercial document retrieval services and at the
web site maintained by the SEC at "http://www.sec.gov".
Quintus filed a registration statement on Form S-4 to register with the SEC
the Quintus Corporation common shares to be issued to Mustang.com shareholders
in the merger. This proxy statement/prospectus is a part of that registration
statement and constitutes a prospectus of Quintus in addition to being a proxy
statement of Mustang.com for its special meeting. As permitted by SEC rules,
this proxy statement/prospectus does not contain all the information that you
can find in the registration statement or the exhibits to that statement.
No person is authorized to give any information or to make any
representation with respect to the matters described in this document other than
those contained herein and, if given or made, such information or representation
must not be relied upon as having been authorized by Quintus or Mustang.com.
This document does not constitute an offer to sell, or a solicitation of an
offer to purchase, the securities offered hereby, nor does it constitute the
solicitation of a proxy, in any jurisdiction on which, or to any person to whom,
it is unlawful to make such offer or solicitation. Neither the delivery of this
document nor any sale made hereby, under any circumstances, shall create any
implication that there has been no change in the affairs of Quintus or
Mustang.com since the date hereof, or that the information herein is correct as
of any time subsequent to its date.
133
<PAGE> 138
QUINTUS CORPORATION AND MUSTANG.COM
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
QUINTUS' AUDITED FINANCIAL STATEMENTS FOR FISCAL YEARS ENDED
MARCH 31, 1997, 1998 AND 1999
Independent Auditors' 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
QUINTUS' UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS FOR THE THREE AND NINE MONTHS ENDED DECEMBER
31, 1998 AND 1999
Condensed Consolidated Balance Sheets....................... F-26
Condensed Consolidated Statements of Operations and
Comprehensive Loss........................................ F-27
Condensed Consolidated Statements of Cash Flows............. F-28
Notes to Condensed Consolidated Financial Statements........ F-29
ACUITY CORP.'S AUDITED FINANCIAL STATEMENTS FOR THE YEARS
ENDED DECEMBER 31, 1997 AND 1998 AND UNAUDITED CONDENSED
FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1999
Report of Independent Accountants........................... F-33
Balance Sheets.............................................. F-34
Statements of Operations.................................... F-35
Statements of Changes in Stockholders' Equity (Deficit)..... F-36
Statements of Cash Flows.................................... F-37
Notes to Financial Statements............................... F-38
MUSTANG.COM'S AUDITED FINANCIAL STATEMENTS FOR THE YEARS
ENDED DECEMBER 31, 1997, 1998 AND 1999
Report of Independent Public Accountants.................... F-50
Balance Sheets.............................................. F-51
Statements of Operations.................................... F-52
Statements of Stockholders' Equity.......................... F-53
Statements of Cash Flows.................................... F-54
Notes to Financial Statements............................... F-55
UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL STATEMENTS
Pro Forma Condensed Combining Financial Statements.......... F-63
Pro Forma Condensed Combining Balance Sheets................ F-65
Pro Forma Condensed Combining Statements of Operations...... F-66
Notes to Pro Forma Condensed Combining Financial
Statements................................................ F-68
REPORTS ON SCHEDULE, AND SCHEDULE II
Report on Schedule of Deloitte & Touche LLP, Independent
Auditors.................................................. F-69
Report of Independent Auditors -- Ernst & Young, LLP........ F-70
Schedule II: Quintus Valuation and Qualifying Accounts...... F-71
</TABLE>
F-1
<PAGE> 139
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
(November 10, 1999 as to Note 15)
F-2
<PAGE> 140
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 auditing standards generally
accepted in the United States. 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 accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Palo Alto, California
April 30, 1998
F-3
<PAGE> 141
QUINTUS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1998 1999
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash........................................................ $ 1,986 $ 1,785
Accounts receivable, less allowance for doubtful accounts of
$848 and $729............................................. 7,573 8,671
Prepaid expenses and other assets........................... 608 573
-------- --------
Total current assets.................................... 10,167 11,029
Property and equipment, net................................. 3,508 3,162
Purchased technology, less accumulated amortization of $556
and $1,889................................................ 3,444 2,111
Intangible assets, less accumulated amortization of $1,059
and $2,630................................................ 5,803 2,970
Other assets................................................ 219 322
-------- --------
Total assets............................................ $ 23,141 $ 19,594
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Accounts payable............................................ $ 1,762 $ 2,352
Accrued compensation and related benefits................... 2,073 2,114
Other accrued liabilities................................... 1,633 2,268
Deferred revenue............................................ 5,008 6,615
Borrowings under bank line of credit........................ 4,950 4,868
Notes payable to stockholders............................... 4,500 --
Current portion of capital lease obligations................ 134 109
Current portion of long-term debt........................... 1,357 1,347
-------- --------
Total current liabilities............................... 21,417 19,673
Capital lease obligations, less current portion............. 109 101
Long-term debt, less current portion........................ 2,637 1,700
Deferred revenue............................................ 1,500 400
Commitments and contingencies (Note 7) Redeemable
convertible preferred stock............................... 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
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
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
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
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
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..................................... -- --
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 4
Additional paid-in capital.................................. 2,914 15,483
Notes receivable from stockholders.......................... (58) (117)
Deferred compensation....................................... (79) (884)
Accumulated deficit......................................... (23,128) (34,594)
-------- --------
Total stockholders' deficiency.......................... (20,333) (20,091)
-------- --------
Total liabilities and stockholders' deficiency.......... $ 23,141 $ 19,594
======== ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 142
QUINTUS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
REVENUES:
License................................................... $ 8,406 $ 12,948 $ 17,577
Service................................................... 5,208 8,942 12,730
------- -------- --------
Total revenues....................................... 13,614 21,890 30,307
COST OF REVENUES:
License................................................... 972 708 554
Service................................................... 4,199 7,582 8,623
------- -------- --------
Total cost of revenues............................... 5,171 8,290 9,177
------- -------- --------
Gross profit.............................................. 8,443 13,600 21,130
OPERATING EXPENSES:
Sales and marketing....................................... 6,879 11,336 17,147
Research and development.................................. 3,667 5,102 6,719
General and administrative................................ 1,263 3,233 3,577
Amortization of intangibles............................... -- 1,335 3,185
Acquired in-process technologies.......................... -- 2,200 --
Stock-based compensation.................................. -- -- 171
------- -------- --------
Total operating expenses............................. 11,809 23,206 30,799
------- -------- --------
Loss from continuing operations........................... (3,366) (9,606) (9,669)
OTHER INCOME (EXPENSE):
Interest expense.......................................... (157) (567) (804)
Other income (expense), net............................... (3) 27 (113)
------- -------- --------
Total other income (expense)......................... (160) (540) (917)
------- -------- --------
Net loss from continuing operations....................... (3,526) (10,146) (10,586)
DISCONTINUED OPERATIONS (NOTE 3):
Loss from discontinued operations......................... -- (1,103) (1,891)
Gain on disposal of discontinued operations............... -- -- 1,011
Net loss.................................................. (3,526) (11,249) (11,466)
Redeemable preferred stock accretion...................... (167) (1,519) --
------- -------- --------
Loss applicable to common stockholders.................... $(3,693) $(12,768) $(11,466)
======= ======== ========
BASIC AND DILUTED NET LOSS PER COMMON SHARE:
Continuing operations..................................... $ (4.25) $ (6.88) $ (3.73)
Discontinued operations:
Loss from operations................................... -- (0.65) (0.67)
Gain on disposal....................................... -- -- 0.36
------- -------- --------
Basic and diluted net loss per common share................. $ (4.25) $ (7.53) $ (4.04)
======= ======== ========
Shares used in computation, basic and diluted............... 868 1,695 2,835
======= ======== ========
Pro forma basic and diluted net loss per share (Note 1):
Continuing operations..................................... $ (0.53)
Discontinued operations:
Loss from operations................................... (0.09)
Gain on disposal....................................... 0.05
--------
Pro forma basic and diluted net loss per share (Note 1)..... $ (0.57)
========
Shares used to compute pro forma basic and diluted net loss
per share (Note 1)........................................ $ 20,137
========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 143
QUINTUS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
NOTES
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE
------------------- ------------------ PAID FROM DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL 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)
========== === ========= === ======= ===== =======
<CAPTION>
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)
======== ========
</TABLE>
F-6
<PAGE> 144
QUINTUS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................................. $(3,526) $(11,249) $(11,466)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 822 3,148 5,090
Stock based compensation.................................. -- 20 250
Noncash interest expense.................................. -- 118 231
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
Changes in operating assets and liabilities:
Accounts receivable..................................... (1,569) (1,522) (1,333)
Prepaid expenses and other current assets............... (414) (68) 35
Accounts payable........................................ 1,072 (1,110) 590
Accrued compensation and related benefits............... 378 1,219 41
Other accrued liabilities and other long-term
liabilities........................................... 218 (1,145) (469)
Deferred revenue........................................ 770 3,981 507
------- -------- --------
Net cash used in operating activities....................... (2,000) (3,950) (7,300)
------- -------- --------
INVESTING ACTIVITIES:
Purchase of businesses, net of cash acquired.............. -- (2,461) --
Purchase of property and equipment........................ (990) (1,172) (1,073)
Proceeds from sale of property and equipment.............. 27 -- --
Proceeds from sale of discontinued operations............. -- -- 2,100
Increase in other assets.................................. (25) (45) (103)
------- -------- --------
Net cash provided by (used in) investing activities......... (988) (3,678) 924
------- -------- --------
FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock................. 4,085 -- 5,275
Proceeds from issuance of common stock.................... 96 167 107
Repurchase of common stock................................ (4) (42) (42)
Proceeds from payment of notes receivable................. -- -- --
Proceeds from notes payable to stockholders............... 1,000 4,500 1,000
Borrowings (repayments) under bank line of credit......... 668 4,950 (82)
Proceeds from (repayments of) bank loan................... (577) (2,943) 51
Principal payments on capital lease obligations........... (27) (63) (134)
------- -------- --------
Net cash provided by (used in) financing activities......... 5,241 6,569 6,175
------- -------- --------
Net increase (decrease) in cash............................. 2,253 (1,059) (201)
Cash at beginning of period................................. 792 3,045 1,986
------- -------- --------
Cash at end of period....................................... $ 3,045 $ 1,986 $ 1,785
======= ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -- CASH
PAID FOR INTEREST......................................... $ 160 $ 282 $ 643
======= ======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Property acquired under capital leases.................... -- -- $ 101
======= ======== ========
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
======= ======== ========
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> 145
QUINTUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1997, 1998 AND 1999
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 license revenue for contracts not requiring
significant customization services is recognized upon
F-8
<PAGE> 146
QUINTUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999
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).
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
F-9
<PAGE> 147
QUINTUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999
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 Company's initial
public offering plus the number of shares whose proceeds are to be used to repay
the cash distribution at $18 per share, reduced by expected per share offering
costs.
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 employees; relationship with Lucent; 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
F-10
<PAGE> 148
QUINTUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999
business segments and related disclosures about its products, services and
geographic areas and major customers. The Company operates in two reportable
segments (see Note 13).
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 98-5 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>
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 $2,100,000 with a gain on disposal of
$1,011,000. As a result, the operations of CCE have been
F-11
<PAGE> 149
QUINTUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999
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 INC.
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 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.
F-12
<PAGE> 150
QUINTUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999
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,
----------------
1998 1999
------ ------
<S> <C> <C>
Land.................................................. $ 170 $ 170
Building.............................................. 688 688
Computer equipment and software....................... 4,179 6,075
Furniture and equipment............................... 548 1,279
Leasehold improvements................................ 184 306
------ ------
5,769 8,518
Less accumulated depreciation and amortization........ 2,261 5,356
------ ------
Net property and equipment............................ $3,508 $3,162
====== ======
</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 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.
F-13
<PAGE> 151
QUINTUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999
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).
6. LONG-TERM DEBT
Long-term debt consists of the following (in thousands, except monthly
installments and interest rates):
<TABLE>
<CAPTION>
MARCH 31,
----------------
1998 1999
------ ------
<S> <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
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
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
------ ------
Total................................................ 3,994 3,047
Less current portion........................................ 1,357 1,347
------ ------
Long-term debt.............................................. $2,637 $1,700
====== ======
</TABLE>
F-14
<PAGE> 152
QUINTUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999
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 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
F-15
<PAGE> 153
QUINTUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999
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, $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.
F-16
<PAGE> 154
QUINTUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999
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 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.
F-17
<PAGE> 155
QUINTUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999
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................................................ (712,809) 0.96
----------
Balances, March 31, 1999................................ 2,013,413 1.17
</TABLE>
At March 31, 1999, 517,232 shares were available under the Plan for future
grant.
Additional information regarding options outstanding as of March 31, 1999
is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS VESTED
------------------------------ --------------------------------------
WEIGHTED AVERAGE
REMAINING
NUMBER CONTRACTUAL VESTED AT MARCH 31, WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE(YEARS) 1999 EXERCISE PRICE
------------------------ ----------- ---------------- ------------------- ----------------
<S> <C> <C> <C> <C>
$0.03 - $0.10................ 210,815 7.70 190,262 $0.05
$0.15 - $0.53................ 393,228 7.00 266,030 0.44
$1.25 - $1.75................ 1,409,370 9.33 168,340 1.39
--------- ---- ------- -----
2,013,413 8.91 624,632 $0.58
========= ==== ======= =====
</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
F-18
<PAGE> 156
QUINTUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999
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 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.
F-19
<PAGE> 157
QUINTUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999
WARRANTS
The Company had the following outstanding warrants to purchase common stock
and preferred stock at March 31, 1999:
<TABLE>
<CAPTION>
EXERCISE PRICE
NUMBER OF SHARES STOCK PER SHARE DATE ISSUED EXPIRATION OF 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 stock $1.43 August 1996 August 2000 or upon an
initial public
offering of common
stock
55,340 Series C preferred stock $1.91 September 1996 Earlier of September
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 - March November 2001
1998
132,518 Common stock $0.30 April 1998 - May 1998 November 2001
</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.
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................................. 2,013,413
Exercise of warrants................................ 722,645
----------
Total............................................. 19,828,805
==========
</TABLE>
F-20
<PAGE> 158
QUINTUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999
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 MARCH 31,
-------------------------------
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
Net loss from continuing operations..................... $(3,526) $(10,146) $(10,586)
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)
======= ======== ========
Shares (denominator):
Weighted average common shares outstanding.............. 2,095 3,530 4,194
Weighted average common shares outstanding subject to
repurchase............................................ (1,227) (1,835) (1,359)
------- -------- --------
Shares used in computation, basic and diluted........... 868 1,695 2,835
======= ======== ========
Loss per share from continuing operations applicable to
common stockholders, basic and diluted................ $ (4.25) $ (6.88) $ (3.73)
======= ======== ========
</TABLE>
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 MARCH 31,
--------------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Convertible preferred stock....................... 12,515,918 13,970,914 16,575,515
Shares of common stock subject to repurchase...... 1,985,648 1,873,390 949,998
Outstanding options............................... 339,533 1,823,700 2,013,413
Warrants.......................................... 252,602 590,127 722,645
---------- ---------- ----------
Total........................................... 15,093,701 18,258,131 20,261,571
========== ========== ==========
</TABLE>
F-21
<PAGE> 159
QUINTUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999
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.
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.
F-22
<PAGE> 160
QUINTUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999
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 2, 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,
-------------------------------------------------------------------------------
1997 1998 1999
----------- ------------------------------- -------------------------------
REVENUES(1) REVENUES(1) LONG-LIVED ASSETS REVENUES(1) LONG-LIVED ASSETS
----------- ----------- ----------------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
United States........... $11,536 $18,830 $3,727 $24,749 $3,391
Rest of the world(2).... 2,078 3,060 -- 5,558 93
------- ------- ------ ------- ------
$13,614 $21,890 $3,727 $30,307 $3,484
======= ======= ====== ======= ======
</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.
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.
F-23
<PAGE> 161
QUINTUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999
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 license revenues have been recognized during the quarter
ended September 30, 1999, except $522,000, which has been deferred. The deferred
revenue is due upon installation of the software by an independent third party.
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 November 10, 1999, Quintus consummated its 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
issued approximately 2,018,905 shares of common stock valued at approximately
$16,656,000, approximately 3,047,378 shares of Series G preferred stock valued
at approximately $25,141,000 and assumed approximately 751,231 options and
warrants to purchase common and preferred stock valued at approximately
$4,360,000. The aggregate purchase price, including approximately $300,000 of
transaction costs not paid in stock, will be approximately $46,457,000. The
acquisition will be accounted for using the purchase method of accounting.
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 the initial public offering will become 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
F-24
<PAGE> 162
QUINTUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999
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 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-25
<PAGE> 163
QUINTUS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 1999
------------ ---------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 36,820 $ 1,785
Short-term investments.................................... 30,700 --
Accounts receivable, net.................................. 16,284 8,671
Prepaid expenses and other assets......................... 1,533 573
-------- --------
Total current assets.................................... 85,337 11,029
Property and equipment, net................................. 4,463 3,162
Purchased technology, net................................... 1,788 2,111
Intangible assets, net...................................... 44,264 2,970
Other assets................................................ 830 322
-------- --------
Total assets................................................ $136,682 $ 19,594
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities:
Accounts payable.......................................... $ 3,601 $ 2,352
Accrued compensation and related benefits................. 4,873 2,114
Other accrued liabilities................................. 3,656 2,268
Deferred revenue.......................................... 8,077 6,615
Borrowings under bank line of credit...................... -- 4,868
Current portion of debt and lease obligations............. 888 1,456
-------- --------
Total current liabilities............................... 21,095 19,673
Debt and lease obligations, less current portion............ 1,447 1,801
Deferred revenue............................................ 500 400
Redeemable convertible preferred stock...................... -- 17,811
STOCKHOLDER'S EQUITY (DEFICIENCY)
Convertible preferred stock, $0.001 par value; authorized
shares -- 10,000,000 in December 1999 and 14,555,000 in
March 1999; issued and outstanding shares -- none in
December 1999 and 13,970,914 in March 1999.............. -- 14
Redeemable convertible preferred stock, $0.001 par value;
authorized shares -- none in December 1999 and 4,500,000
in March 1999; issued and outstanding shares -- none in
December 1999 and 3,967,935 in March 1999............... -- 3
Common stock, $0.001 par value; authorized
shares -- 100,000,000 in December 1999 and 40,000,000 in
March 1999; issued and outstanding shares -- 33,257,765
in December 1999 and 4,208,478 in March 1999............ 34 4
Additional paid-in capital................................ 161,439 15,483
Notes receivable from stockholders........................ (223) (117)
Deferred compensation..................................... (2,526) (884)
Accumulated other income (loss) items..................... (30) --
Accumulated deficit....................................... (45,054) (34,594)
-------- --------
Total stockholders' equity (deficiency)................. 113,640 (20,091)
-------- --------
Total liabilities and stockholders' equity (deficiency)..... $136,682 $ 19,594
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-26
<PAGE> 164
QUINTUS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------- ---------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
License................................. $ 9,471 $ 2,930 $ 22,819 $ 12,843
Service................................. 4,042 3,024 12,784 8,971
------- ------- -------- --------
Total revenues....................... 13,513 5,954 35,603 21,814
COST OF REVENUES:
License................................. 1,319 155 1,990 423
Service................................. 2,886 2,426 7,957 6,602
------- ------- -------- --------
Total cost of revenues............... 4,205 2,581 9,947 7,025
------- ------- -------- --------
Gross profit.............................. 9,308 3,373 25,656 14,789
OPERATING EXPENSES:
Sales and marketing..................... 7,840 4,639 17,278 13,255
Research and development................ 3,312 1,792 7,286 5,145
General and administrative.............. 1,610 1,109 3,603 2,741
Amortization of intangibles............. 2,045 798 3,637 2,394
Acquired in-process technologies........ 3,000 -- 3,000 --
Stock-based compensation................ 574 56 1,183 116
------- ------- -------- --------
Total operating expenses............. 18,381 8,394 35,987 23,651
------- ------- -------- --------
Loss from continuing operations........... (9,073) (5,021) (10,331) (8,862)
Other income (expense), net............... 296 (181) (129) (706)
------- ------- -------- --------
Net loss from continuing operations....... (8,777) (5,202) (10,460) (9,568)
Loss from discontinued operations......... -- (781) -- (1,430)
------- ------- -------- --------
Net loss.................................. (8,777) (5,983) (10,460) (10,998)
======= ======= ======== ========
OTHER COMPREHENSIVE LOSS:
Unrealized loss on short-term
investments.......................... (30) -- (30) --
------- ------- -------- --------
Comprehensive loss........................ $(8,807) $(5,983) $(10,490) $(10,998)
======= ======= ======== ========
BASIC AND DILUTED NET LOSS PER COMMON
SHARE:
Continuing operations................... $ (0.48) $ (1.62) $ (1.24) $ (3.24)
Discontinued operations................. -- (0.25) -- (0.48)
------- ------- -------- --------
Basic and diluted net loss per common
share................................... $ (0.48) $ (1.87) $ (1.24) $ (3.72)
======= ======= ======== ========
Shares used in computation, basic and
diluted................................. 18,298 3,207 8,434 2,955
======= ======= ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-27
<PAGE> 165
QUINTUS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
----------------------------
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................................. $(10,460) $(10,998)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 5,010 3,854
Stock based compensation................................ 1,183 116
Noncash interest expense................................ -- 72
Acquired in-process technologies........................ 3,000 --
Provision for doubtful accounts......................... 300 200
Changes in operating assets and liabilities:
Accounts receivable................................... (7,740) (1,743)
Prepaid expenses and other current assets............. (158) 69
Accounts payable...................................... 1,234 (98)
Accrued compensation and related benefits............. 2,760 224
Other accrued liabilities............................. 605 1,337
Deferred revenue...................................... 499 2,666
-------- --------
Net cash used in operating activities....................... (3,767) (4,301)
-------- --------
INVESTING ACTIVITIES:
Purchase of businesses, net of cash acquired.............. 744 --
Purchase of property and equipment........................ (1,649) (1,750)
Purchase of short-term investments........................ (30,730) --
Increase in other assets.................................. (440) (87)
-------- --------
Net cash used in investing activities....................... (32,075) (1,837)
-------- --------
FINANCING ACTIVITIES:
Proceeds from initial public offering, net................ 84,964 --
Proceeds from issuance of preferred stock................. 11,247 5,275
Proceeds from issuance of common stock.................... 368 78
Repurchase of common stock................................ (6) (29)
Proceeds from payment of notes receivable................. 59 1
Proceeds from notes payable to stockholders............... -- 1,000
Payments of redeemable preferred stock.................... (18,122) --
Borrowings (repayment) under bank line of credit.......... (4,868) 118
Borrowings (repayments of) bank loan...................... (2,623) (2,050)
Principal payments on capital lease obligations........... (142) (90)
-------- --------
Net cash provided by financing activities................... 70,877 4,303
-------- --------
Net increase (decrease) in cash and cash equivalents........ 35,035 (1,835)
Cash and cash equivalents at beginning of period............ 1,785 1,986
-------- --------
Cash and cash equivalents at end of period.................. $ 36,820 $ 151
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW:
Cash paid for interest.................................... $ 528 $ 318
======== ========
SUPPLEMENTAL NONCASH ACTIVITIES:
Issuance of common stock and preferred stock and
assumption of options and warrants for the acquisition
of Acuity............................................... $ 46,157 $ --
Issuance of common stock in exchange for notes
receivable.............................................. $ 165 $ --
Property acquired under capital lease..................... $ 446 $ --
Issuance of warrants...................................... $ 660 $ 165
Issuance of common stock below fair market value.......... $ 2,725 $ 405
Issuance of Series E preferred stock for notes payable to
stockholders............................................ $ -- $ 5,684
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-28
<PAGE> 166
QUINTUS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared by Quintus Corporation ("Quintus") and reflect all adjustments,
consisting only of normal recurring adjustments, which are, in the opinion of
management, necessary for a fair presentation of our financial position and
results of operations for the interim periods. The statements have been prepared
in accordance with the regulations of the Securities and Exchange Commission.
Accordingly, they do not include all information and footnotes required by
generally accepted accounting principles. The result of operations for the three
and nine-month periods ended December 31, 1999 are not necessarily indicative of
the operating results to be expected for the full fiscal year or future
operating periods. The information included in this report should be read in
conjunction with the audited consolidated financial statements and notes thereto
included elsewhere in this proxy statement/prospectus.
2. INITIAL PUBLIC OFFERING
On November 16, 1999, Quintus completed an initial public offering in which
it sold 5,175,000 shares of common stock at $18 per share, which included
675,000 shares in connection with the exercise of the underwriters' over
allotment option. The total proceeds from this transaction were $85.0 million,
net of underwriters' discounts and other related costs of $8.2 million.
Immediately after the closing of the offering, Quintus paid $18.1 million to
holders of some series of preferred stock as required by the original terms of
the preferred stock. The remaining net proceeds were held in cash equivalents
and short-term investments at December 31, 1999. Upon the completion of the
offering, all 17,938,849 shares of preferred stock, par value $0.001 per share,
were automatically converted to common stock on a one for one basis.
3. ACQUISITION OF ACUITY CORPORATION
On November 10, 1999, Quintus completed its acquisition of Acuity
Corporation ("Acuity"), a company specializing in providing Web based customer
interaction software. The transaction was accounted for using the purchase
method of accounting and, accordingly, the net assets and results of operations
of Acuity have been included in Quintus' consolidated financial statements since
the acquisition date. Quintus issued 2,021,146 shares of common stock and
3,047,378 shares of preferred stock. The shares of preferred stock were
converted to common stock upon the completion of the offering on November 16,
1999. In addition, Quintus assumed warrants and options to purchase 328,364
shares and 422,867 shares of common stock, respectively. The purchase price for
the acquisition was $47.1 million based on capital stock issued, the value of
the options and warrants assumed, and transaction costs incurred. Quintus
recognized a charge for in-process technologies of $3.0 million in the quarter
ended December 31, 1999. The fair market value of assets acquired and
liabilities assumed in the acquisition were as follows (in thousands):
<TABLE>
<S> <C>
Tangible assets............................................. $ 3,616
Goodwill and other intangible assets........................ 44,609
In-process research and development......................... 3,000
Liabilities assumed......................................... (4,079)
-------
$47,146
=======
</TABLE>
F-29
<PAGE> 167
QUINTUS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Intangible assets consist of purchased technology and assembled workforce
of $1.4 million which are being amortized over four years, trademark and trade
name, customer related intangibles and goodwill of $43.2 million which are being
amortized over five years, the in-process research and development of $3.0
million which was expensed upon acquisition.
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 was charged
to Quintus' operations during the quarter ended December 31, 1999. 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 included 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 following unaudited pro forma consolidated results of operations for
the nine months ended December 31, 1999 and 1998 assume the acquisition of
Acuity occurred as of April 1 of each period. The one-time $3.0 million charge
for purchased in-process technology was excluded as it was a material
nonrecurring charge.
(in thousands, except per share data):
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- -----------------
<S> <C> <C>
Revenues........................................... 36,761 26,664
Net Loss from Continuing Operations................ (18,609) (22,854)
Loss Per Share..................................... (1.85) (4.59)
</TABLE>
F-30
<PAGE> 168
QUINTUS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. COMMON STOCK AND NET LOSS PER 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>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------- ---------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net loss from continuing operations
(numerator), basic and diluted....... $(8,777) $(5,983) $(10,460) $(10,998)
======= ======= ======== ========
Shares (denominator):
Weighted average common shares
outstanding....................... 19,026 4,217 9,222 4,230
Weighted average common shares
outstanding subject to
repurchase........................ (728) (1,010) (788) (1,275)
------- ------- -------- --------
Shares used in computation, basic and
diluted.............................. 18,298 3,207 8,434 2,955
======= ======= ======== ========
Loss per share from continuing
operations, basic and diluted........ $ (0.48) $ (1.87) $ (1.24) $ (3.72)
======= ======= ======== ========
</TABLE>
At December 31, 1999 and 1998, options to purchase 2,859,664 and 1,946,309
shares of common stock, and warrants to purchase 837,358 and 722,645 shares of
common stock and preferred stock (in 1998) were excluded from the calculation of
net loss per share as their inclusion would be antidilutive.
5. COMPREHENSIVE LOSS
In fiscal 2000, Quintus adopted the Financial Accounting Standards Board
(SFAS) No. 130, Reporting Comprehensive Income. SFAS No. 130 requires companies
to report a new, additional measure of income on the income statement or to
create a new financial statement that shows the new measure of income.
Comprehensive income includes unrealized gains and losses on debt and equity
securities that have been previously excluded from net loss and instead,
reflected in equity. Quintus has reported the components of comprehensive loss
on its consolidated statements of operations.
6. RECENT ACCOUNTING PRONOUNCEMENTS
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 was effective for Quintus beginning April 1,
1999. The adoption of this statement did not have a significant impact on the
financial position, results of operations or cash flows of the Company.
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 98-5 will be effective for Quintus' fiscal year ending
March 31, 2000. Quintus believes the adoption of this
F-31
<PAGE> 169
QUINTUS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 Quintus' fiscal year ending March 31, 2001. Management believes
that this statement will not have a significant impact on Quintus' financial
position, results of operations or cash flows.
7. LEGAL MATTERS
Quintus 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 Quintus' financial condition.
F-32
<PAGE> 170
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.
/s/ PRICEWATERHOUSECOOPERS LLP
Austin, Texas
February 8, 1999, except as to Notes 4 and 11,
for which the date is March 31, 1999
F-33
<PAGE> 171
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 (deficit):
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-34
<PAGE> 172
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-35
<PAGE> 173
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
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION TREASURY STOCK
--------- ------ --------- ------ ----------- ------------ --------------
<S> <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 $ -- $ --
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........................... -- -- -- -- -- -- --
--------- ------ --------- ------ ----------- --------- ---------
Balance at December 31, 1997....... 6,220,994 6,221 4,852,383 4,852 12,847,565 -- (76,000)
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........................... -- -- -- -- -- -- --
--------- ------ --------- ------ ----------- --------- ---------
Balance at December 31, 1998....... 8,252,074 8,252 5,253,430 5,253 20,069,214 -- (280,000)
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 -- --
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 -- --
Repurchase of unvested stock
options (unaudited)............... -- -- (14,062) (14) (2,797) -- --
Stock-based compensation
(unaudited)....................... -- -- -- -- 160,034 (160,034) --
Net loss (unaudited)............... -- -- -- -- -- -- --
--------- ------ --------- ------ ----------- --------- ---------
Balance at September 30, 1999
(unaudited)....................... 9,520,414 $9,520 5,446,595 $5,447 $25,482,096 $(160,034) $(280,000)
========= ====== ========= ====== =========== ========= =========
<CAPTION>
TOTAL
STOCKHOLDERS'
ACCUMULATED EQUITY
DEFICIT (DEFICIT)
------------ -------------
<S> <C> <C>
Balance at January 1, 1997......... $ (5,217,134) $ 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) (6,566,490)
------------ -----------
Balance at December 31, 1997....... (11,783,624) 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) (7,683,896)
------------ -----------
Balance at December 31, 1998....... (19,467,520) 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)....................... (1,072,494) --
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)............... (165,812) (2,811)
Stock-based compensation
(unaudited)....................... -- --
Net loss (unaudited)............... (4,643,340) (4,643,340)
------------ -----------
Balance at September 30, 1999
(unaudited)....................... $(25,349,166) $ (292,137)
============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-36
<PAGE> 174
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)
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-37
<PAGE> 175
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
approximately $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-38
<PAGE> 176
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
were $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. Certain of the Company's software
sales involve significant modification or customization of the Company's
product. The Company records revenue on the sale of software products that
include significant modification and customization, for which no vendor specific
objective evidence exists for certain of the elements in the arrangement, on the
completed contract method. In instances where there are customer acceptance
criteria related to the Company's products, such revenue is deferred until the
acceptance criteria have been satisfied. 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-39
<PAGE> 177
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
F-40
<PAGE> 178
ACUITY CORP.
(FORMERLY KNOWN AS ICHAT, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
to fully offset the net deferred tax asset because the realization of tax
benefits associated with net operating loss carryforwards is not assured.
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
---------- ----------- -------------
(UNAUDITED)
<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>
F-41
<PAGE> 179
ACUITY CORP.
(FORMERLY KNOWN AS ICHAT, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 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
---------- ---------- -------------
(UNAUDITED)
<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
F-42
<PAGE> 180
ACUITY CORP.
(FORMERLY KNOWN AS ICHAT, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
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 investing and financing activities:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------ -------------------------
1997 1998 1998 1999
-------- ------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<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-43
<PAGE> 181
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
F-44
<PAGE> 182
ACUITY CORP.
(FORMERLY KNOWN AS ICHAT, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
the fair market value of the stock and non-statutory stock options can not be
granted for less than 110% of the fair 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-
AVERAGE
AVAILABLE EXERCISE EXERCISE
FOR GRANT SHARES PRICE 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-45
<PAGE> 183
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
-------------------------------
WEIGHTED-AVERAGE
NUMBER REMAINING NUMBER
EXERCISE 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-46
<PAGE> 184
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
----------- -----------
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-47
<PAGE> 185
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-48
<PAGE> 186
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-49
<PAGE> 187
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Mustang.com, Inc.:
We have audited the accompanying balance sheets of Mustang.com, Inc.
(formerly Mustang Software, Inc. and a California corporation) as of December
31, 1999 and 1998, and the related statements of operations, shareholders'
equity and cash flows for the three years in the period ended December 31, 1999.
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 auditing standards generally
accepted in the United States. 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 financial statements referred to above present fairly,
in all material respects, the financial position of Mustang.com, Inc. as of
December 31, 1999 and 1998, and the results of its operations and its cash flows
for the three years in the period ended December 31, 1999 in conformity with
accounting principles generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
Los Angeles, California
February 9, 2000
F-50
<PAGE> 188
MUSTANG.COM, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1999
----------- -----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................... $ 1,849,700 $ 8,847,602
Accounts receivable, net of allowance for doubtful accounts
of $168,200 and $170,000 at December 31, 1998 and 1999,
respectively.............................................. 409,077 693,739
Inventories................................................. 9,196 13,373
Prepaid expenses............................................ 19,660 3,750
----------- -----------
Total current assets................................... 2,287,633 9,558,464
----------- -----------
PROPERTY AND EQUIPMENT:
Property and equipment...................................... 1,239,882 1,278,371
Accumulated depreciation.................................... (647,027) (650,293)
----------- -----------
Net property and equipment............................. 592,855 628,078
----------- -----------
OTHER ASSETS................................................ 11,183 2,485
----------- -----------
2,891,671 10,189,027
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable............................................ $ 233,854 $ 492,942
Current portion of capital lease............................ 8,259 9,111
Accrued payroll............................................. 62,000 150,000
Accrued liabilities......................................... 52,381 175,005
Income taxes payable........................................ 99,776 99,776
Deferred revenue............................................ 125,000 250,000
----------- -----------
Total current liabilities.............................. 581,270 1,176,834
----------- -----------
CAPITAL LEASE OBLIGATION, net of current portion............ 260,747 251,636
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 8)
Shareholders' Equity:
Preferred stock, no par value:
Authorized -- 10,000,000 shares 8,081 issued and
outstanding as of December 31, 1998.................... 730,229 0
Common stock, no par value:
Authorized -- 30,000,000 shares Issued and
outstanding -- 4,098,845 and 5,969,384 shares at
December 31, 1998 and 1999, respectively............... 7,618,954 15,966,363
Accumulated deficit......................................... (6,299,529) (7,205,806)
----------- -----------
Total shareholders' equity............................. 2,049,654 8,760,557
----------- -----------
$ 2,891,671 $10,189,027
=========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-51
<PAGE> 189
MUSTANG.COM, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
REVENUE........................................ $ 1,898,402 $ 2,010,721 $ 3,710,935
COST OF REVENUE................................ 330,828 177,928 441,386
----------- ----------- -----------
Gross profit.............................. 1,567,574 1,832,793 3,269,549
----------- ----------- -----------
OPERATING EXPENSES:
Research and development..................... 696,819 611,990 820,554
Selling and marketing........................ 930,426 974,525 1,638,298
General and administrative................... 1,353,486 1,430,335 1,853,730
----------- ----------- -----------
Total operating expenses.................. 2,980,731 3,016,850 4,312,582
----------- ----------- -----------
Loss from operations...................... (1,413,157) (1,184,057) (1,043,033)
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense............................... (36,585) (30,294) (28,156)
Interest income................................ 104,234 61,048 141,100
Other.......................................... 5,635 (2,412) 24,612
----------- ----------- -----------
Total other income (expense).............. 73,284 28,342 137,556
----------- ----------- -----------
Loss before provision for income taxes......... (1,339,873) (1,155,715) (905,477)
Provision for income taxes..................... 800 800 800
----------- ----------- -----------
Net Loss....................................... $ 1,340,673 $(1,156,515) $ (906,277)
=========== =========== ===========
NET LOSS PER COMMON SHARE -- BASIC AND
DILUTED...................................... $ (.40) $ (.31) $ (.19)
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING -- BASIC AND DILUTED............. 3,383,771 3,707,334 4,821,680
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-52
<PAGE> 190
MUSTANG.COM, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
------------------ ----------------------- ACCUMULATED
SHARES AMOUNT SHARES AMOUNT DEFICIT TOTAL
------ --------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31,
1996.................. -- $ -- 3,374,967 $ 6,628,722 $(3,802,341) $ 2,826,381
Issuance of stock,
ESPP.................. -- -- 17,761 11,323 -- 11,323
Net loss................ -- -- -- -- (1,340,673) (1,340,673)
------ --------- --------- ----------- ----------- -----------
BALANCE, December 31,
1997.................. -- -- 3,392,728 6,640,045 (5,143,014) 1,497,031
Exercise of stock
options............... -- -- 57,716 69,424 -- 69,424
Issuance of stock,
ESPP.................. -- -- 6,921 7,354 -- 7,354
Issuance of stock, net
of offering cost of
approximately
$73,000............... -- -- 641,480 902,131 -- 902,131
Issuance of stock, net
of offering cost of
approximately
$44,000............... 8,081 730,229 -- -- -- 730,229
Net loss................ -- -- -- -- (1,156,515) (1,156,515)
------ --------- --------- ----------- ----------- -----------
BALANCE, December 31,
1998.................. 8,081 730,229 4,098,845 7,618,954 (6,299,529) 2,049,654
Exercise of stock
options............... -- -- 211,376 325,946 -- 325,946
Exercise of warrants.... -- -- 431,820 1,844,407 -- 1,844,407
Issuance of stock,
ESPP.................. -- -- 4,900 14,212 -- 14,212
Issuance of stock, net
of offering cost of
approximately
$417,000.............. -- -- 830,728 5,432,615 -- 5,432,615
Conversion of preferred
stock................. (8,081) (730,229) 391,715 730,229 -- --
Net loss................ -- -- -- -- (906,277) (906,277)
------ --------- --------- ----------- ----------- -----------
BALANCE, December 31,
1999.................. -- $ -- 5,969,384 $15,966,363 $(7,205,806) $ 8,760,557
====== ========= ========= =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-53
<PAGE> 191
MUSTANG.COM, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1998 1999
----------- ----------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................... $(1,340,673) $(1,156,515) $ (906,277)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization...................... 150,485 141,732 186,139
Loss (gain) on sale of property and equipment...... (5,635) 2,412 4,379
Provision for losses on accounts receivable........ -- 8,200 1,800
Changes in assets and liabilities:
Accounts receivable............................. 57,152 (410,899) (286,462)
Inventories..................................... 128,220 90,719 (4,177)
Prepaid expenses................................ 27,285 8,555 15,910
Other assets.................................... 1,300 (100) 8,698
Accounts payable................................ (554,600) (8,597) 259,088
Accrued payroll................................. (40,000) 7,000 88,000
Accrued liabilities............................. (35,717) (41,721) 122,624
Income taxes payable............................ 138,136 196,780 --
Accrued warranty and support.................... -- (45,000) --
Deferred revenue................................ -- 45,000 125,000
----------- ----------- ----------
Net cash used by operating activities......... (1,474,047) (1,162,434) (385,278)
----------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment....... 8,107 -- 3,000
Purchases of property and equipment................ -- (32,565) (228,741)
----------- ----------- ----------
Net cash provided by (used in) investing
activities................................. 8,107 (32,565) (225,741)
----------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of stock................ 11,323 1,709,138 7,617,180
Payments on capital lease obligation............... (61,838) (68,215) (8,259)
----------- ----------- ----------
Net cash provided by (used in) financing
activities................................. (50,515) 1,640,923 7,608,921
----------- ----------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................................ (1,516,455) 445,924 6,997,902
CASH AND CASH EQUIVALENTS, beginning of year......... 2,920,231 1,403,776 1,849,700
----------- ----------- ----------
CASH AND CASH EQUIVALENTS, end of year............... $ 1,403,776 $ 1,849,700 $8,847,602
=========== =========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest............................. $ 36,585 $ 30,294 $ 28,156
Cash paid for taxes................................ $ 800 $ 800 $ 800
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-54
<PAGE> 192
MUSTANG.COM, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. LINE OF BUSINESS
Mustang.com, Inc. (the Company) is an internet enterprise solutions
provider that enhances customer relationships through the design, development
and support of Internet and e-mail based customer management software
application. Similar to most companies in this line of business, the Company's
products are subject to rapid technological changes. Because of technological
changes, the Company continuously needs to expend resources to develop new
products. The Company has incurred losses from operations and, for the last 5
years, operations have not generated cash. In 1998 and 1999, the Company
completed private placements resulting in net proceeds of approximately $1.6
million and $5.4 million, respectively. On October 12, 1999, the Company changed
its name from Mustang Software, Inc. to Mustang.com, Inc.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Revenue Recognition
The Company recognizes license revenue from the Company's standard products
upon shipment of the source code if no significant modification or customization
of the software is required and collection of the resulting receivable is
probable. If modification or customization is essential to the functionality of
the software, revenue is deferred until the modification is complete.
The Company also enters into engineering services contracts with OEMs to
adapt the Company's software and supporting electronics to specific OEM
requirements. Since these contracts are of relatively short duration, revenue on
such contracts is recognized when the work is completed. Maintenance revenues
are recognized ratably over the term of the contracts.
b. Cash and Cash Equivalents
Cash consists of demand deposits with financial institutions. The Company
considers all highly liquid short-term investments with original maturities of
three months or less to be cash equivalents for the purposes of the balance
sheets and statements of cash flows.
c. Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
and consist primarily of manuals, computer disks, and shipping containers.
d. Software Development Costs
Under the provisions of Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed," the Company is required to capitalize software development costs when
"technological feasibility" of the product has been established and anticipated
future revenues assure recovery of the capitalized amounts. Because of the
relatively short time period between "technological feasibility" and product
release, relatively small amounts of software development costs have been
capitalized and are included in other assets in the accompanying balance sheets.
F-55
<PAGE> 193
MUSTANG.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
e. Warranties
The Company provides a warranty of 30 days. A provision for warranty
expense is recorded at the time of shipment. The Company has not experienced any
significant warranty claims.
f. Property and Equipment
Property and equipment are stated at cost. Maintenance and repairs are
charged to expense as incurred and the costs of betterments that increase the
useful lives of the assets are capitalized. Property and equipment consists of
the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1999
---------- ----------
<S> <C> <C>
Building............................................... $ 552,000 $ 552,000
Vehicles............................................... 11,149 11,149
Office Equipment....................................... 121,174 170,624
Show Displays.......................................... 99,585 99,585
Leasehold Improvements................................. 18,945 18,946
Computer Equipment..................................... 437,029 426,067
---------- ----------
1,237,882 1,278,371
Less -- Accumulated depreciation and amortization...... (647,027) (650,293)
---------- ----------
Net Property and Equipment............................. $ 592,855 $ 628,078
========== ==========
</TABLE>
Depreciation and amortization of property and equipment are computed using
the straight-line method over the following estimated useful lives:
<TABLE>
<S> <C>
Building................................................... 20 years
Vehicles................................................... 5 years
Office Equipment........................................... 5 to 7 years
Show Displays.............................................. 5 to 7 years
Leasehold Improvements..................................... 7 years
Computer Equipment......................................... 3 to 5 years
</TABLE>
g. Statement of Cash Flows
The Company prepares its statement of cash flows using the indirect method
as defined under Statement of Financial Accounting Standards (SFAS) No. 95,
"Statement of Cash Flows." During 1999 all the holders of Series A Preferred
Stock converted their shares into 391,715 shares of common stock.
h. Net Loss Per Common Share
Net loss per common share -- basic for the years ended December 31, 1997,
1998 and 1999 is based on the weighted average number of common shares
outstanding. Net loss per common shares -- dilutive also include the effect of
common shares contingently issuable from preferred stock, options and warrants
(in periods which they have a dilutive effect) using the Treasury Stock method.
F-56
<PAGE> 194
MUSTANG.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
Stock options and warrants are excluded in the computation of loss per
share -- dilutive in fiscal year 1997, 1998 and 1999 because they are
anti-dilutive.
i. Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109), under which deferred assets and liabilities are provided on differences
between financial reporting and taxable income using enacted tax rates.
j. Use of Estimates in the Preparation of Financial Statements
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, liabilities and
disclosure of contingencies at the date of the financial statements as well as
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
3. RELATED PARTY TRANSACTIONS
In December 1993, the Company entered into a five-year lease agreement with
two principal shareholders for its facility. During 1999 the Company was on a
month to month lease requiring monthly rental payments of $13,458. In February
2000 the Company entered into a lease agreement to extend their current lease
through January 2005.
The shareholders incurred debt of approximately $822,000 to purchase the
facility. The Company has guaranteed all of this debt. In the event of default
by the shareholders under the loan agreement covering $372,000 of this debt, the
lender thereunder may exercise an assignment of the shareholders' interest as
landlord in a contingent 20-year lease previously signed by the Company as
tenant for the facility. This contingent lease provides for a monthly rent of
$6,200 and supersedes the current lease in the event of any such assignment. The
lease has been accounted for as a capital lease (see Note 8). During 1997, 1998
and 1999 the Company recorded $36,000, $30,000 and $28,000, respectively of
interest expense related to the lease obligation.
4. INCOME TAXES
Deferred tax assets or liabilities are computed based on the temporary
differences between financial statement and income tax bases of assets and
liabilities using the enacted marginal income tax rate in effect for the year in
which the differences are expected to reverse. Deferred income tax expenses or
credits are based on the changes in the deferred income tax assets or
liabilities from period to period. The income tax expense for 1999, 1998 and
1997, is limited to minimum state tax amounts due for each year due to the
Company's operating losses. At December 31, 1999, the Company has net operating
loss carryforwards available of approximately $6,200,000 and $3,600,000 for
Federal and State, respectively, which will expire through the fiscal year 2014.
The use of net operating loss carryforward would be restricted if Company has
significant change in ownership as defined by the Internal Revenue Code.
F-57
<PAGE> 195
MUSTANG.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
The provision for income taxes is comprised of the following components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Current:
Federal................................................... $ -- $ -- $ --
State..................................................... 800 800 800
Deferred:
Federal................................................... -- -- --
State..................................................... -- -- --
---- ---- ----
Provision for income taxes.................................. $800 $800 $800
==== ==== ====
</TABLE>
The approximate tax effect of temporary differences which gave rise to
significant deferred tax liabilities and assets are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1998 1999
----------- -----------
<S> <C> <C>
Depreciation and amortization............................... $ (42,700) $ (14,000)
Research and development credits............................ 351,000 395,000
Reserves.................................................... 71,500 68,000
Accrued liabilities......................................... 62,600 130,000
NOL carryforward............................................ 1,900,000 2,400,000
Other....................................................... 2,600 21,000
----------- -----------
Deferred tax asset.......................................... 2,345,000 3,000,000
Valuation allowance......................................... (2,345,000) (3,000,000)
----------- -----------
Net deferred tax asset...................................... $ -- $ --
=========== ===========
</TABLE>
Due to a limited history of earnings, a valuation reserve was recorded in
1998 and 1999.
5. COMMON AND PREFERRED STOCK PRIVATE PLACEMENTS
In September 1998, the Company sold for gross proceeds of $1,500,000 an
aggregate of 612,000 shares of its common stock, 5,246 shares of its Series A
Convertible Preferred Stock (the Series A Preferred Stock) and Warrants to
purchase an aggregate of 180,000 shares of its common stock (the Warrants). In
the December 1998, the Company sold for gross proceeds of $250,000 an aggregate
of 2,500 shares of its Series A Preferred Stock and Warrants to purchase of
75,000 shares of its Common Stock.
During 1999 all the holders of Series A Preferred Stock converted their
shares into 391,715 shares of common stock.
For its services in the two transactions, the Company paid to the placement
agent fees consisting of $65,000 cash, 29,480 shares of its common stock, 335
shares of its Series A Preferred Stock and Warrants to purchase an aggregate of
67,000 shares of common stock.
F-58
<PAGE> 196
MUSTANG.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
In March 1999, the Company sold for proceeds of $250,000 an aggregate of
61,820 shares of common stock and warrants to purchase an additional 61,820
shares of its common stock at exercise price of $4.04 per share. For its
services in the transaction, the Company paid to the placement agent fees
consisting of 3,000 shares of its common stock and warrants to purchase
additional 3,000 shares of common stock.
In October 1999, the Company sold for net proceeds of $5,182,615, an
aggregate of 765,908 shares of common stock and warrants to purchase an
additional 574,431 shares of its common stock at an exercise price of $8.78 per
share.
6. STOCK WARRANTS AND STOCK OPTIONS
In 1995, the Company sold to the representatives of the underwriters
warrants, to purchase 125,000 shares of common stock for $125. The warrants are
exercisable for a period of four years commencing April 5, 1996 at an exercise
price of $7.80.
The Company adopted a stock option plan in 1994 (the 1994 Stock Option
Plan). Incentive and nonqualified options under this plan may be granted to
employees, officers and consultants of the Company. There are 1,100,000 shares
of common stock reserved for issuance under this plan. The exercise prices of
the options are determined by the Board of Directors, but may not be less than
100% of the fair market value on the date of grant. Options generally become
exercisable over three years.
In October 1995, the FASB issued Statement No. 123, "Accounting for
Stock-Based Compensation." Had the company applied the fair-value based method
of accounting which is not required, under statement 123, compensation expense
from its plans would have had the effects of increasing the 1997, 1998 and 1999
net loss to the pro forma amounts of $1,682,000, $1,501,000 and $1,355,000
respectively, with corresponding pro forma loss per share of $0.50, $0.40 and
$0.28, respectively. These pro forma amounts were determined by estimating the
fair value of each option on its grant date using the Black-Scholes
option-pricing model. Assumptions of no dividend yield, 4.61% - 6.50% for risk
free interest rates, 5 to 6 years expected lives and expected rate of volatility
of 100%, 100% and 110% in 1997, 1998 and 1999, respectively, were applied to all
grants for each year presented. The weighted average fair value at grant date
for the options granted during 1997, 1998, and 1999 was, $0.64, $1.35 and $3.99
per option, respectively.
F-59
<PAGE> 197
MUSTANG.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
Stock option informed with respect to the Company's stock option plan is as
follows:
<TABLE>
<CAPTION>
OUTSTANDING STOCK OPTIONS
-----------------------------
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Balance, December 31, 1996.......................... 359,430 3.74
Options revalued -- canceled...................... (300,550) 4.06
Options revalued -- granted....................... 300,550 1.31
Options granted................................... 235,900 1.34
Options canceled.................................. (65,300) 1.32
Options exercised................................. -- --
-------- ----
Balance, December 31, 1997.......................... 530,030 1.41
Options granted................................... 264,000 1.75
Options canceled.................................. (113,950) 1.40
Options exercised................................. (57,716) 1.20
-------- ----
Balance, December 31, 1998.......................... 622,364 1.58
Options granted................................... 445,000 6.15
Options canceled.................................. (61,659) 4.55
Options exercised................................. (211,376) 1.61
-------- ----
Balance, December 31, 1999.......................... 794,329 3.90
======== ====
</TABLE>
At December 31, 1997, 1998 and 1999, 24,690, 294,907 and 270,941 options
were exercisable, respectively. The following table summarizes information about
options outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------- -------------------------------
NUMBER OF WEIGHTED AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
EXERCISE PRICE 12/31/99 CONTRACTUAL LIFE EXERCISE PRICE 12/31/99 EXERCISE PRICE
- -------------- -------------- ---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$1.13 - 1.50 153,133 7.2 years $ 1.33 115,669 $1.32
$1.75 - 2.11 235,821 7.4 years $ 1.81 113,238 $1.84
$ 2.75 35,000 9.0 years $ 2.75 8,751 $2.75
$5.00 - 7.47 332,375 9.6 years $ 5.90 33,283 $6.62
$8.78 - 13.00 32,000 9.8 years $ 8.98 -- --
$ 15.69 6,000 9.9 years $15.69 -- --
------- --------- ------- -----
$1.13 - 15.69 794,329 8.3 years $ 3.90 270,941 $2.07
============= ======= ========= ====== ======= =====
</TABLE>
7. EMPLOYEE STOCK PURCHASE PLAN
The Board of Directors approved 100,000 shares of the Company's Common
Stock to be included in the Employee Stock Purchase Plan (ESPP). The ESPP allows
eligible employees to purchase common stock of the Company, through payroll
deductions at 85 percent of the lower of the market price on the first day or
the last day of the semi-annual purchase period. During 1997, 1998 and 1999
shares of common stock issued under this plan were 17,761, 6,921 and 4,900,
respectively.
F-60
<PAGE> 198
MUSTANG.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
8. COMMITMENTS AND CONTINGENCIES
The Company leases an office facility under a capital lease from a
partnership consisting of an officer/shareholder (see Note 3) and a former
officer and certain equipment under operating leases. The partnership purchased
the facility primarily through the issuance of debt that the Company guaranteed.
In addition (as discussed in Note 3), one of the lenders obtained, as additional
security, an assignment of the partnerships' interest as landlord in a
contingent 20-year lease previously signed by the Company. This contingent lease
provides for a monthly rent of $6,200 and supersedes the current lease in the
event of a default. The lease has been accounted for as a capital lease, because
the Company guarantee was required to obtain the debt, the Company has
guaranteed all of the debt related to the facility and over ninety percent of
the purchase price was financed. The Company's future minimum rental commitments
under these leases and the discounted present value of the capital lease
obligation (at 10 percent) at December 31, 1999 are summarized as follows:
<TABLE>
<CAPTION>
CAPITAL LEASE
OFFICE FACILITY
(SEE NOTE 3)
---------------------
BUILDING LAND OPERATING LEASES
--------- -------- ----------------
<S> <C> <C> <C>
2000..................................... $ 34,000 $ 40,000 $120,000
2001..................................... 34,000 40,000 99,000
2002..................................... 34,000 40,000 107,000
2003..................................... 34,000 40,000 115,000
2004..................................... 34,000 40,000 122,000
Thereafter............................... 317,000 360,000 10,000
--------- -------- --------
$ 487,000 $560,000 $573,000
========= ======== ========
Less -- Portion representing interest.... $(226,300)
=========
260,700
(9,100)
Less -- Current portion.................. $ 251,600
=========
</TABLE>
In calculating the discounted present value of the capital lease
obligation, the following assumptions were used:
- Monthly payments of $11,535 from December 1993 to November 1998, as
adjusted (see Note 3),
- Monthly payments of $6,200 from December 1998 to 2013,
- $3,333 of each monthly payment relates to land.
From time to time, the Company is involved in various legal actions which
arise in the ordinary course of business. The Company does not believe that
losses, if any, incurred will have a significant impact on the Company's
financial position or results of operations.
9. PROFIT-SHARING PLAN
The Company has a Profit-Sharing Plan (the Plan) which covers most
full-time employees. Contributions to the Plan are made at the discretion of the
Board of Directors. The Company did not
F-61
<PAGE> 199
MUSTANG.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
make any contributions for the years ended December 31, 1997 and 1998. During
the year ended December 31, 1999, the Company contributed approximately $3,000.
10. SALE OF PRODUCT LINES
In November 1998, the Company sold its Wildcat! Interactive Net Server,
Wildcat! BBS and off-line Xpress BBS mail reader product lines (the product
lines) and any associated inventory and intangible assets (the assets) to
Santronics Software, Inc. (Santronics). Under the terms of the agreement,
Santronics has assumed ownership and responsibility for the sale and support of
the product lines.
F-62
<PAGE> 200
QUINTUS CORPORATION
PRO FORMA CONDENSED COMBINING
FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 1999 AND
NINE MONTHS ENDED DECEMBER 31, 1999
On February 25, 2000 Quintus Corporation entered into an agreement to
acquire Mustang.com for consideration preliminarily valued at $273.2 million
consisting of: Quintus common stock valued at $219.4 million, options to
purchase Quintus common stock valued at $29.1 million, warrants to purchase
Quintus common stock valued at $21.7 million and estimated direct acquisition
costs of $3.0 million. The actual consideration for the acquisition of
Mustang.com cannot yet be determined since the acquisition has not yet been
completed. For the purpose of the following pro forma financial information, the
number of shares of Quintus common stock assumed to be issued in the acquisition
of Mustang.com is approximately 4.9 million. This amount is based on the number
of shares of Mustang.com outstanding as of February 25, 2000. Similarly, the
estimated value of options and warrants to purchase Quintus common stock to be
issued in the acquisition of Mustang.com is based on the outstanding options and
warrants to purchase Mustang.com common shares as of February 25, 2000. The
actual number of Quintus common shares, options and warrants to be issued will
be based on the actual outstanding common shares, options and warrants of
Mustang.com as of the date of completion of the merger. The estimated
acquisition related costs consist primarily of investment banker, legal and
accounting fees to be incurred directly related to the acquisition of
Mustang.com.
The acquisition will be accounted for using the purchase method of
accounting. The following represents the allocation of the purchase price to the
historical net book values of the acquired assets and assumed liabilities of
Mustang.com as of the date of the pro forma balance sheet, and is for
illustrative purposes only. The actual purchase price allocation will be based
on fair values of the assets acquired and assumed liabilities as of the actual
acquisition date. Assuming the transaction occurred on December 31, 1999, the
allocation would have been as follows:
<TABLE>
<CAPTION>
AMOUNT($)
-----------
<S> <C>
Tangible Assets............................................ 10,189,000
Goodwill and other intangibles............................. 264,440,000
Liabilities assumed........................................ (1,429,000)
-----------
273,200,000
===========
</TABLE>
The allocation above is based on the assumption that the entire amount of
the total consideration exceeding the net assets acquired as been identified as
goodwill and other intangibles to be amortized on a straight line basis over
five years. Quintus has not yet completed the valuation of the intangible assets
acquired. When completed, certain amounts identified as intangible assets maybe
amortized over a period other than the five year period represented in the pro
forma statements of operations. Additionally, a portion of the purchase price
maybe identified as in-process research and development. This amount, if any,
will be charged to Quintus' operations in the quarter the merger is completed
and the acquisition accounting and valuation amounts are finalized.
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 gives effect to Quintus' acquisition of Mustang.com and was
prepared as if the acquisition of Mustang.com was completed as of December 31,
1999. The unaudited pro forma condensed combining statements of operations give
effect to Quintus' acquisition of Acuity in November 1999 and the acquisition of
Mustang.com and were prepared as if the acquisitions were completed on April 1,
1998. To prepare the pro forma unaudited condensed combining statements of
operations, the Quintus statement of
F-63
<PAGE> 201
QUINTUS CORPORATION
PRO FORMA CONDENSED COMBINING
FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED MARCH 31, 1999 AND
NINE MONTHS ENDED DECEMBER 31, 1999
operations for the year ended March 31, 1999 has been combined with the
statement of operations of Acuity and Mustang.com 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 Quintus for the
nine months ended December 31, 1999 has been combined with the statement of
operations of Acuity for the period from April 1, 1999 to November 10, 1999, the
date of acquisition, and the statement of operations of Mustang.com for the nine
months ended December 31, 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. The statement of operations
of Mustang.com 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 $773,000, $4,000 and $10,000 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 3,047,378
shares of preferred stock issued in connection with the acquisition of Acuity
into common stock since these shares automatically converted 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, Acuity
and Mustang.com.
The pro forma financial information is presented for illustrative purposes
only and is not necessarily indicative of the future financial position or
future results of operations of Quintus after the acquisitions of Acuity and
Mustang.com, or of the financial position or results of operations of the
consolidated company that would have actually occurred had the acquisitions of
Acuity and Mustang.com been effected as of the dates above.
F-64
<PAGE> 202
QUINTUS CORPORATION
PRO FORMA CONDENSED COMBINING BALANCE SHEETS
DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
QUINTUS MUSTANG ADJUSTMENTS NOTES COMBINED
-------- ------- ----------- ----- ---------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash.................................... $ 36,820 $8,848 $ -- $ 45,668
Short-term investments.................. 30,700 -- -- 30,700
Accounts receivable, less allowance for
doubtful accounts.................... 16,284 694 -- 16,978
Prepaid expenses and other accounts..... 1,533 17 -- 1,550
-------- ------- -------- --------
Total current assets................. 85,337 9,559 -- 94,896
Property and equipment, net............... 4,463 628 -- 5,091
Purchased technology, less accumulated
amortization............................ 1,788 -- -- 1,788
Intangible assets, less accumulated
amortization............................ 44,264 -- 264,440 2 308,704
Other assets.............................. 830 2 -- 832
-------- ------- -------- --------
Total assets......................... $136,682 $10,189 $264,440 $411,311
======== ======= ======== ========
LIABILITIES AND STOCKHOLDERS EQUITY
Current Liabilities:
Accounts payable........................ $ 3,601 $ 493 $ -- $ 4,094
Accrued liabilities..................... 8,529 425 3,000 3 11,954
Deferred revenue........................ 8,077 250 -- 8,327
Current portion of long-term debt....... 888 9 -- 897
-------- ------- -------- --------
Total current liabilities............ 21,095 1,177 3,000 25,272
Long-term debt, less current portion...... 1,447 252 -- 1,699
Deferred revenue.......................... 500 -- -- 500
Stockholders' Equity:
Preferred stock......................... -- -- -- --
Common stock............................ 34 15,966 (15,961) 1 39
Additional paid-in capital.............. 161,439 -- 270,195 1 431,634
Notes receivable from stockholder....... (223) -- -- (223)
Deferred stock-based compensation....... (2,526) -- -- (2,526)
Accumulated other comprehensive income
(loss) items......................... (30) -- -- (30)
Accumulated deficit..................... (45,054) (7,206) 7,206 1 (45,054)
-------- ------- -------- --------
Total stockholders' equity........... 113,640 8,760 261,440 383,840
-------- ------- -------- --------
Total liabilities and stockholders'
equity............................. $136,682 $10,189 $264,440 $411,311
======== ======= ======== ========
</TABLE>
F-65
<PAGE> 203
QUINTUS CORPORATION
PRO FORMA CONDENSED COMBINING STATEMENTS OF OPERATIONS
YEAR ENDED MARCH 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
QUINTUS ACUITY MUSTANG
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, DECEMBER 31, PRO FORMA DECEMBER 31, PRO FORMA
1999 1998 ADJUSTMENTS NOTES SUBTOTAL 1998 ADJUSTMENTS NOTES
---------- ------------ ----------- ----- -------- ------------ ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue....................... $ 30,307 $ 6,719 $ -- $ 37,026 $ 2,011 $ --
Cost of revenue............... 9,177 1,381 -- 10,558 178 --
-------- ------- ------- -------- ------- --------
Gross profit.................. 21,130 5,338 -- 26,468 1,833 --
Operating expenses:
Sales and marketing......... 17,147 6,312 -- 23,459 975 --
Research and development.... 6,719 4,390 -- 11,109 612 --
General and
administrative............ 3,577 2,377 -- 5,954 1,430 --
Amortization of
intangibles............... 3,185 -- 8,992 6 12,177 -- 52,888 4
Stock-based compensation.... 171 -- -- 171 -- --
-------- ------- ------- -------- ------- --------
Total operating expenses.... 30,799 13,079 8,992 52,870 3,017 52,888
Loss from continuing
operations.................. (9,669) (7,741) (8,992) (26,402) (1,184) (52,888)
Other income (expense), net... (917) 57 -- (860) 28 --
-------- ------- ------- -------- ------- --------
Net loss from continuing
operations.................. $(10,586) $(7,684) $(8,992) $(27,262) $(1,156) $(52,888)
======== ======= ======= ======== ======= ========
Pro forma basic and diluted
net loss per share from
continuing operations....... (0.53) (1.08)
======== ========
Shares used in pro forma basic
and diluted loss per share
from continuing
operations.................. 20,137(a) 5,069 7 25,206 4,894 5
======== ======= ======== ========
<CAPTION>
PRO FORMA
COMBINED
---------
<S> <C>
Revenue....................... $ 39,037
Cost of revenue............... 10,736
--------
Gross profit.................. 28,301
Operating expenses:
Sales and marketing......... 24,434
Research and development.... 11,721
General and
administrative............ 7,384
Amortization of
intangibles............... 65,065
Stock-based compensation.... 171
--------
Total operating expenses.... 108,775
Loss from continuing
operations.................. (80,474)
Other income (expense), net... (832)
--------
Net loss from continuing
operations.................. $(81,306)
========
Pro forma basic and diluted
net loss per share from
continuing operations....... (2.70)
========
Shares used in pro forma basic
and diluted loss per share
from continuing
operations.................. 30,100
========
</TABLE>
- -------------------------
(a) The Company made a contractual $17,811,000 cash distribution to convertible
preferred stockholders upon conversion to common stock using a portion of
the proceeds from its 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 plus the number of shares
whose proceeds are to be used to repay the cash distribution, at an offering
price of $18, reduced by expected per share offering costs.
F-66
<PAGE> 204
QUINTUS CORPORATION
PRO FORMA CONDENSED COMBINING STATEMENTS OF OPERATIONS
NINE MONTHS PERIOD ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
QUINTUS ACUITY PERIOD MUSTANG
NINE MONTH FROM NINE MONTH
PERIOD ENDED APRIL 1, 1999 PERIOD ENDED
DECEMBER 31, TO NOVEMBER 10, PRO FORMA DECEMBER 31, PRO FORMA
1999 1999 ADJUSTMENTS NOTES SUB TOTAL 1999 ADJUSTMENTS
------------ --------------- ----------- ----- --------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue........................... $ 35,603 $ 1,158 $ -- $ 36,761 $ 2,938 $ --
Cost of revenue................... 9,947 672 -- 10,619 392 --
-------- ------- ------- -------- ------- --------
Gross profit...................... 25,656 486 -- 26,142 2,546 --
Operating expenses:
Sales and marketing............. 17,278 2,730 -- 20,008 1,387 --
Research and development........ 7,286 2,327 -- 9,613 691 --
General and administrative...... 3,603 1,022 -- 4,625 1,507 --
Amortization of intangibles..... 3,637 -- 5,470 6 9,107 -- 39,666
Acquired in-process
technologies.................. 3,000 -- 7 3,000 -- --
Stock-based compensation........ 1,183 -- -- 1,183 -- --
-------- ------- ------- -------- ------- --------
Total operating expenses...... 35,987 6,079 5,470 47,536 3,585 39,666
Loss from continuing operations... (10,331) (5,593) (5,470) (21,394) (1,039) (39,666)
Other income (expense), net....... (129) (86) -- (215) 124 --
-------- ------- ------- -------- ------- --------
Net loss from continuing
operations...................... $(10,460) $(5,679) $(5,470) $(21,609) $ (915) $(39,666)
======== ======= ======= ======== ======= ========
Pro forma basic and diluted net
loss per share from continuing
operations...................... (0.46) (0.69)
======== ========
Shares used in pro forma basic and
diluted loss per share from
continuing operations........... 22,644(b) 4,177 8 26,821 4,894
======== ======= ======== ========
<CAPTION>
PRO FORMA
NOTES COMBINED
----- ---------
<S> <C> <C>
Revenue........................... $ 39,699
Cost of revenue................... 11,011
--------
Gross profit...................... 28,688
Operating expenses:
Sales and marketing............. 21,395
Research and development........ 10,304
General and administrative...... 6,132
Amortization of intangibles..... 4 48,773
Acquired in-process
technologies.................. 3,000
Stock-based compensation........ 1,183
--------
Total operating expenses...... 90,787
Loss from continuing operations... (62,099)
Other income (expense), net....... (91)
--------
Net loss from continuing
operations...................... $(62,190)
========
Pro forma basic and diluted net
loss per share from continuing
operations...................... (1.96)
========
Shares used in pro forma basic and
diluted loss per share from
continuing operations........... 5 31,715
========
</TABLE>
- -------------------------
(b) 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. No adjustment is made to reflect the $17,811,000 cash distribution
to convertible preferred stockholders upon conversion to common stock using
a portion of the proceeds from its initial public offering as discussed in
(a) since this transaction is reflected in the unaudited historical
financial statements for the nine months ended December 31, 1999.
F-67
<PAGE> 205
QUINTUS CORPORATION
NOTES TO PRO FORMA CONDENSED COMBINING FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 1999 AND NINE MONTHS ENDED DECEMBER 31, 1999
PRO FORMA ADJUSTMENTS FOR THE ACQUISITION OF MUSTANG.COM
1. Reflects the elimination of Mustang.com's net equity and the issuance of
Quintus common stock, options and warrants with a value of $270.2 million in
connection with Quintus' proposed acquisition of Mustang.com.
2. Reflects the recording of the excess of the purchase price over net
assets acquired as goodwill and other intangible assets to be amortized over an
estimated useful life of five years. Quintus has not yet completed the valuation
of the intangible assets acquired. When completed, certain amounts identified as
intangible assets maybe amortized over a period other than the 5 year period
represented in the pro forma statements of operations. Additionally, a portion
of the purchase price maybe identified as in-process research and development.
This amount, if any, will be charged to Quintus' operations in the quarter the
merger is completed and the acquisition accounting and valuation amounts are
finalized.
3. Reflects the accrual of estimated costs to be paid in cash directly
attributable to the completion of the acquisition.
4. Reflects pro forma amortization of the goodwill balance over an
estimated useful life of five years.
5. Reflects the issuance of Quintus common shares for the acquisition of
Mustang.com.
PRO FORMA ADJUSTMENTS FOR THE ACQUISITION OF ACUITY
6. Reflects pro forma amortization of the purchased intangibles over the
estimated useful lives as follows:
<TABLE>
<CAPTION>
AMORTIZATION
CHARGE
TWELVE MONTHS PERIOD FROM
PERIOD OF ENDED APRIL 1 TO
INTANGIBLE ASSET AMOUNT($) AMORTIZATION MARCH 31, 1999 NOVEMBER 10, 1999
---------------- ----------- ------------ -------------- -----------------
<S> <C> <C> <C> <C>
Purchased Technology........ $ 700,000 4 years $ 175,000 $ 106,458
Assembled Workforce......... 700,000 4 years 175,000 106,458
Trademark................... 1,200,000 5 years 240,000 146,000
Customer related
intangibles............... 4,200,000 5 years 840,000 511,000
Goodwill.................... 37,808,733 5 years 7,561,747 4,600,063
----------- ---------- ----------
$44,608,733 $8,991,747 $5,469,979
=========== ========== ==========
</TABLE>
7. Reflects the issuance of 5,068,524 shares of Quintus common and
preferred stock for the acquisition of Acuity, net of 891,924 shares included in
the weighted average shares reflected in the unaudited financial statements for
the nine months ended December 31, 1999.
F-68
<PAGE> 206
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 (November 10, 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 21(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
F-69
<PAGE> 207
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 schedule
listed in Item 21(b) of this Registration Statement. This schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits.
In our opinion, the financial statement schedule 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
F-70
<PAGE> 208
SCHEDULE II:
QUINTUS VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COST 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>
F-71
<PAGE> 209
ANNEX A
AGREEMENT AND PLAN OF MERGER
DATED AS OF FEBRUARY 25, 2000
BETWEEN
MUSTANG.COM, INC.
AND
QUINTUS CORPORATION
<PAGE> 210
TABLE OF CONTENTS
-------------------------
ARTICLE 1
THE MERGER
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
SECTION 1.01. The Merger.................................................. A-1
SECTION 1.02. Conversion of Shares........................................ A-1
SECTION 1.03. Surrender and Payment....................................... A-2
SECTION 1.04. Stock Options and Employee Stock Purchase Plan.............. A-3
SECTION 1.05. Warrants.................................................... A-4
SECTION 1.06. Adjustments................................................. A-4
SECTION 1.07. Fractional Shares........................................... A-4
SECTION 1.08. Withholding Rights.......................................... A-4
SECTION 1.09. Lost Certificates........................................... A-5
SECTION 1.10. Dissenting Shares........................................... A-5
ARTICLE 2
THE SURVIVING CORPORATION
SECTION 2.01. Articles of Incorporation................................... A-5
SECTION 2.02. Bylaws...................................................... A-5
SECTION 2.03. Directors and Officers...................................... A-5
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
SECTION 3.01. Corporate Existence and Power............................... A-6
SECTION 3.02. Corporate Authorization..................................... A-6
SECTION 3.03. Governmental Authorization.................................. A-6
SECTION 3.04. Non-Contravention........................................... A-6
SECTION 3.05. Capitalization.............................................. A-7
SECTION 3.06. Subsidiaries................................................ A-7
SECTION 3.07. SEC Filings................................................. A-8
SECTION 3.08. Financial Statements........................................ A-8
SECTION 3.09. Disclosure Documents........................................ A-8
SECTION 3.10. Absence of Certain Changes.................................. A-9
SECTION 3.11. No Undisclosed Material Liabilities......................... A-10
SECTION 3.12. Compliance with Laws and Court Orders....................... A-10
SECTION 3.13. Litigation.................................................. A-10
SECTION 3.14. Finders' Fees............................................... A-10
SECTION 3.15. Opinion of Financial Advisor................................ A-10
SECTION 3.16. Taxes....................................................... A-10
SECTION 3.17. Employee Benefit Plans...................................... A-12
SECTION 3.18. Environmental Matters....................................... A-13
SECTION 3.19. Contracts................................................... A-13
SECTION 3.20. Real Property............................................... A-14
SECTION 3.21. Intellectual Property....................................... A-14
SECTION 3.22. Certain Interests........................................... A-16
SECTION 3.23. Products.................................................... A-16
</TABLE>
A-i
<PAGE> 211
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
SECTION 3.24. Tax Treatment............................................... A-16
SECTION 3.25. Antitakeover Statutes....................................... A-16
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF PARENT
SECTION 4.01. Corporate Existence and Power............................... A-17
SECTION 4.02. Corporate Authorization..................................... A-17
SECTION 4.03. Governmental Authorization.................................. A-17
SECTION 4.04. Non-Contravention........................................... A-17
SECTION 4.05. Capitalization.............................................. A-18
SECTION 4.06. Subsidiaries................................................ A-18
SECTION 4.07. SEC Filings................................................. A-18
SECTION 4.08. Financial Statements........................................ A-19
SECTION 4.09. Disclosure Documents........................................ A-19
SECTION 4.10. Absence of Certain Changes.................................. A-19
SECTION 4.11. No Undisclosed Material Liabilities......................... A-20
SECTION 4.12. Compliance with Laws and Court Orders....................... A-20
SECTION 4.13. Litigation.................................................. A-20
SECTION 4.14. Finders' Fees............................................... A-20
SECTION 4.15. Opinion of Financial Advisor................................ A-20
SECTION 4.16. Taxes....................................................... A-20
SECTION 4.17. Tax Treatment............................................... A-21
SECTION 4.18. Laws and Authorizations..................................... A-21
SECTION 4.19. Intellectual Property....................................... A-21
ARTICLE 5
COVENANTS OF THE COMPANY
SECTION 5.01. Conduct of the Company...................................... A-22
SECTION 5.02. Stockholder Meeting; Proxy Material......................... A-23
SECTION 5.03. No Solicitation............................................. A-24
SECTION 5.04. Lock-Up Letters............................................. A-25
SECTION 5.05. Non-Compete Agreements...................................... A-25
ARTICLE 6
COVENANTS OF PARENT
SECTION 6.01. Conduct of Parent........................................... A-25
SECTION 6.02. Obligations of Merger Subsidiary............................ A-25
SECTION 6.03. Director and Officer Liability.............................. A-25
SECTION 6.04. Registration Statement...................................... A-26
SECTION 6.05. Stock Exchange Listing...................................... A-26
SECTION 6.06. Employee Benefits........................................... A-26
SECTION 6.07. Broker Program.............................................. A-26
ARTICLE 7
COVENANTS OF PARENT AND THE COMPANY
SECTION 7.01. Best Efforts................................................ A-27
SECTION 7.02. Certain Filings............................................. A-27
SECTION 7.03. Public Announcements........................................ A-27
SECTION 7.04. Further Assurances.......................................... A-27
</TABLE>
A-ii
<PAGE> 212
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
SECTION 7.05. Access to Information....................................... A-27
SECTION 7.06. Notices of Certain Events................................... A-28
SECTION 7.07. Tax-free Reorganization..................................... A-28
SECTION 7.08. Affiliates.................................................. A-28
ARTICLE 8
CONDITIONS TO THE MERGER
SECTION 8.01. Conditions to Obligations of Each Party..................... A-28
SECTION 8.02. Conditions to the Obligations of Parent..................... A-29
SECTION 8.03. Conditions to the Obligations of the Company................ A-30
ARTICLE 9
TERMINATION
SECTION 9.01. Termination................................................. A-30
SECTION 9.02. Effect of Termination....................................... A-31
ARTICLE 10
DEFINITIONS
SECTION Definitions.................................................
10.01. A-31
ARTICLE 11
MISCELLANEOUS
SECTION Notices.....................................................
11.01. A-34
SECTION Survival of Representations and Warranties..................
11.02. A-35
SECTION Amendments; No Waivers......................................
11.03. A-35
SECTION Expenses....................................................
11.04. A-35
SECTION Successors and Assigns......................................
11.05. A-36
SECTION Governing Law...............................................
11.06. A-36
SECTION Jurisdiction................................................
11.07. A-36
SECTION WAIVER OF JURY TRIAL........................................
11.08. A-37
SECTION Counterparts; Effectiveness.................................
11.09. A-37
SECTION Entire Agreement............................................
11.10. A-37
SECTION Captions....................................................
11.11. A-37
SECTION Severability................................................
11.12. A-37
SECTION Specific Performance........................................
11.13. A-37
</TABLE>
EXHIBIT A FORM OF LOCK-UP AGREEMENT
EXHIBIT B FORM OF NON-COMPETE AGREEMENT
EXHIBIT C FORM OF AFFILIATES LETTER
EXHIBIT D FORM OF TAX OPINION
EXHIBIT E TAX REPRESENTATION LETTER
EXHIBIT F TAX REPRESENTATION LETTER
EXHIBIT G FORM OF TAX OPINION
EXHIBIT H FINANCIAL STATEMENTS OF COMPANY
THE TABLE OF CONTENTS IS NOT A PART OF THIS AGREEMENT.
A-iii
<PAGE> 213
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER dated as of February 25, 2000 between
MUSTANG.COM, INC., a California corporation (the "COMPANY"), and QUINTUS
CORPORATION, a Delaware corporation ("PARENT").
WHEREAS, the Board of Directors of the Company has (i) determined that the
Merger (as defined below) is fair to and in the best interests of the Company's
stockholders and (ii) approved the Merger in accordance with this Agreement;
WHEREAS, the Board of Directors of Parent has approved the Merger in
accordance with this Agreement; and
WHEREAS, it is intended that the Merger be treated for Federal income tax
purposes as a tax-free reorganization under Section 368(a) of the Internal
Revenue Code of 1986, as amended (the "CODE"),
NOW, THEREFORE, in consideration of the premises and the representations,
warranties, covenants and agreements herein contained, and intending to be
legally bound hereby, the Company and Parent hereby agree as follows:
ARTICLE 1
THE MERGER
SECTION 1.01. The Merger. (a) As promptly as reasonably practicable after
the date hereof, Parent shall take all necessary actions to form a wholly-owned
subsidiary ("MERGER SUBSIDIARY") pursuant to and in accordance with the
California Law. At the Effective Time, Merger Subsidiary shall be merged (the
"MERGER") with and into the Company in accordance with the California Law,
whereupon the separate existence of Merger Subsidiary shall cease, and the
Company shall be the surviving corporation (the "SURVIVING CORPORATION"). The
Merger is intended to qualify as a reorganization under Section 368(a) of the
Code.
(b) As soon as practicable after satisfaction or, to the extent permitted
hereunder, waiver of all conditions to the Merger, the Company and Merger
Subsidiary will file an agreement of merger with the California Secretary of
State and make all other filings or recordings required by California Law in
connection with the Merger. The Merger shall become effective at such time (the
"EFFECTIVE TIME") as the agreement of merger is duly filed with the California
Secretary of State (or at such later time as may be specified in the agreement
of merger); provided however, that the Effective Time shall not be before April
25, 2000.
(c) The effect of the Merger shall be as provided in the applicable
provisions of the California Law. Without limiting the generality of the
foregoing, and subject thereto, from and after the Effective Time, all the
property, rights, privileges, powers and franchises of the Company and Merger
Subsidiary shall vest in the Surviving Corporation, and all debts, liabilities,
obligations, restrictions, disabilities and duties of each of the Company and
Merger Subsidiary shall become the debts, liabilities, obligations,
restrictions, disabilities and duties of the Surviving Corporation.
SECTION 1.02. Conversion of Shares. At the Effective Time, by virtue of the
Merger and without any action on the part of Merger Subsidiary, the Company or
the holders of any securities of the Company:
(a) except as otherwise provided in Section 1.02(b), each share of
Company Stock outstanding immediately prior to the Effective Time shall be
converted into the right to receive
A-1
<PAGE> 214
0.793 shares of Parent Stock (together with cash in lieu of fractional
shares of Parent Stock as specified below, the "MERGER CONSIDERATION");
(b) each share of Company Stock owned by Parent or any of its
Subsidiaries immediately prior to the Effective Time shall be canceled, and
no payment shall be made with respect thereto; and
(c) each share of common stock of Merger Subsidiary outstanding
immediately prior to the Effective Time shall be converted into and become
one share of common stock of the Surviving Corporation with the same
rights, powers and privileges as the shares so converted and shall
constitute the only outstanding shares of capital stock of the Surviving
Corporation.
SECTION 1.03. Surrender and Payment. (a) Prior to the Effective Time,
Parent shall appoint an agent (the "EXCHANGE AGENT") for the purpose of
exchanging certificates representing shares of Company Stock (the
"CERTIFICATES") for the Merger Consideration. Parent will make available to the
Exchange Agent, as needed, the Merger Consideration to be paid in respect of the
shares of Company Stock. Promptly after the Effective Time, Parent will send, or
will cause the Exchange Agent to send, to each holder of shares of Company Stock
at the Effective Time a letter of transmittal and instructions (which shall
specify that the delivery shall be effected, and risk of loss and title shall
pass, only upon proper delivery of the Certificates to the Exchange Agent) for
use in such exchange.
(b) Each holder of shares of Company Stock that have been converted into
the right to receive the Merger Consideration will be entitled to receive, upon
surrender to the Exchange Agent of a Certificate, together with a properly
completed letter of transmittal, the Merger Consideration in respect of the
Company Stock represented by such Certificate. Until so surrendered, each such
Certificate shall represent after the Effective Time for all purposes only the
right to receive such Merger Consideration.
(c) If any portion of the Merger Consideration is to be paid to a Person
other than the Person in whose name the Certificate is registered, it shall be a
condition to such payment that the Certificate so surrendered shall be properly
endorsed or otherwise be in proper form for transfer and that the Person
requesting such payment shall pay to the Exchange Agent any transfer or other
taxes required as a result of such payment to a Person other than the registered
holder of such Certificate or establish to the satisfaction of the Exchange
Agent that such tax has been paid or is not payable.
(d) After the Effective Time, there shall be no further registration of
transfers of shares of Company Stock. If, after the Effective Time, Certificates
are presented to the Surviving Corporation, they shall be canceled and exchanged
for the Merger Consideration provided for, and in accordance with the procedures
set forth, in this Article.
(e) Any portion of the Merger Consideration made available to the Exchange
Agent pursuant to Section 1.03(a) that remains unclaimed by the holders of
shares of Company Stock six months after the Effective Time shall be returned to
Parent, upon demand, and any such holder who has not exchanged them for the
Merger Consideration in accordance with this Section prior to that time shall
thereafter look only to Parent for payment of the Merger Consideration, and any
dividends and distributions with respect thereto, in respect of such shares
without any interest thereon. Notwithstanding the foregoing, Parent shall not be
liable to any holder of shares of Company Stock for any amounts paid to a public
official pursuant to applicable abandoned property, escheat or similar laws. Any
amounts remaining unclaimed by holders of shares of Company Stock two years
after the Effective Time (or such earlier date, immediately prior to such time
when the amounts would otherwise escheat to or become property of any
governmental authority) shall become, to the extent
A-2
<PAGE> 215
permitted by applicable law, the property of Parent free and clear of any claims
or interest of any Person previously entitled thereto.
(f) Subject to Section 1.09 with respect to lost Certificates, no dividends
or other distributions with respect to securities of Parent constituting part of
the Merger Consideration, and no cash payment in lieu of fractional shares as
provided in Section 1.07, shall be paid to the holder of any unsurrendered
Certificates until such Certificates are surrendered as provided in this
Section. Following such surrender, there shall be paid, without interest, to the
Person in whose name the securities of Parent have been registered, (i) at the
time of such surrender, the amount of any cash payable in lieu of fractional
shares to which such Person is entitled pursuant to Section 1.07 and the amount
of all dividends or other distributions with a record date after the Effective
Time previously paid or payable on the date of such surrender with respect to
such securities, and (ii) at the appropriate payment date, the amount of
dividends or other distributions with a record date after the Effective Time and
prior to surrender and with a payment date subsequent to surrender payable with
respect to such securities.
SECTION 1.04. Stock Options and Employee Stock Purchase Plan. (a) The terms
of each outstanding option to purchase shares of Company Stock under any stock
option or compensation plan or arrangement of the Company (each, a "COMPANY
STOCK OPTION"), whether or not exercisable or vested, shall be adjusted as
necessary to provide that, at the Effective Time, each Company Stock Option
outstanding immediately prior to the Effective Time shall be deemed to
constitute an option to acquire the same number of shares of Parent Stock as the
holder of such Company Stock Option would have been entitled to receive pursuant
to the Merger had such holder exercised such Company Stock Option in full
immediately prior to the Effective Time, at a price per share of Parent Stock
equal to (i) the aggregate exercise price for the shares of Company Stock
otherwise purchasable pursuant to such Company Stock Option divided by (ii) the
aggregate number of shares of Parent Stock deemed purchasable pursuant to such
Company Stock Option (each, as so adjusted, an "ADJUSTED OPTION"), provided that
any fractional share of Parent Stock resulting from an aggregation of all the
shares of a holder subject to Company Stock Option shall be rounded to the
nearest whole share, and provided further that, for any Company Stock Option to
which Section 421 of the Code applies by reason of its qualification under any
of Sections 422 through 424 of the Code, the option price, the number of shares
purchasable pursuant to such option and the terms and conditions of exercise of
such option shall be determined in order to comply with Section 424 of the Code.
Except as otherwise required under the existing terms of the Company Stock
Options, such options to acquire Parent Stock will be subject to the terms and
conditions of Parent's existing stock option plan.
(b) After the date hereof, no new offering period shall commence under the
Company's Employee Stock Purchase Plan (the "ESPP"). Notwithstanding the
provisions of Section 1.04(a) hereof, in accordance with the terms of the ESPP,
the Company shall cause each option outstanding under the ESPP immediately prior
to the Effective Time to be automatically exercised immediately prior to the
Effective Time. Pursuant to such action, the holder of each such option shall
receive shares of Company Stock which will be converted into Parent Stock at the
Effective Time in accordance with the provisions of Section 1.02(a) hereof. As
of the Effective Time, the ESPP shall be terminated.
(c) Prior to the Effective Time, the Company shall (i) use its best efforts
to obtain any consents from holders of options to purchase shares of Company
Stock granted under any Company Stock Option and (ii) make any amendments to the
terms of such Company Stock Option that are necessary to give effect to the
transactions contemplated by this Section 1.04.
A-3
<PAGE> 216
(d) Parent shall take such actions as are necessary for the assumption of
any Company Stock Option pursuant to this Section 1.04, including the
reservation, issuance and listing of Parent Stock as is necessary to effectuate
the transactions contemplated by this Section 1.04. Parent shall prepare and
file with the SEC a registration statement on an appropriate form, or a
post-effective amendment to a registration statement previously filed under the
1933 Act, with respect to the shares of Parent Stock subject to each Company
Stock Option and, where applicable, shall use its reasonable best efforts to
have such registration statement declared effective by May 15, 2000 or, if it
occurs later, by the Effective Time and to maintain the effectiveness of such
registration statement covering such Company Stock Option (and to maintain the
current status of the prospectus contained therein) for so long as such Company
Stock Option remains outstanding. With respect to those individuals, if any,
who, subsequent to the Effective Time, will be subject to the reporting
requirements under Section 16(a) of the 1934 Act, where applicable, Parent shall
use all reasonable efforts to administer any Company Stock Option assumed
pursuant to this Section 1.04 in a manner that complies with Rule 16b-3
promulgated under the 1934 Act to the extent the Company Stock Option complies
with such rule prior to the Merger.
SECTION 1.05. Warrants. The terms of each outstanding warrant to purchase
shares of Company Stock (each a "COMPANY STOCK WARRANT") shall be adjusted as
necessary to provide that, at the Effective Time, each Company Stock Warrant
outstanding immediately prior to the Effective Time shall be deemed to
constitute a warrant to acquire the same number of shares of Parent Stock as the
holder of such Company Stock Warrant would have been entitled to receive
pursuant to the Merger had such holder exercised such Company Stock Warrant in
full immediately prior to the Effective Time, at a price per share of Parent
Stock equal to (i) the aggregate exercise price for the shares of Company Stock
otherwise purchasable pursuant to such Company Stock Warrant divided by (ii) the
aggregate number of shares of Parent Stock deemed purchasable pursuant to such
Company Stock Warrant (each, as so adjusted, an "ADJUSTED WARRANT"), provided
that any fractional share of Parent Stock resulting from an aggregation of all
the shares of a holder subject to a Company Stock Warrant shall be rounded to
the nearest whole share. Each Adjusted Warrant will be subject to the same terms
and conditions as applicable under the relevant Company Stock Warrant
immediately prior to the Effective Time.
SECTION 1.06. Adjustments. If, during the period between the date of this
Agreement and the Effective Time, any change in the outstanding shares of
capital stock of the Company or Parent shall occur, including by reason of any
reclassification, recapitalization, stock split or combination, exchange or
readjustment of shares, or any stock dividend thereon with a record date during
such period, the Merger Consideration and any other amounts payable pursuant to
this Agreement shall be appropriately adjusted.
SECTION 1.07. Fractional Shares. No fractional shares of Parent Stock shall
be issued in the Merger. All fractional shares of Parent Stock that a holder of
shares of Company Stock would otherwise be entitled to receive as a result of
the Merger shall be aggregated and if a fractional share results from such
aggregation, such holder shall be entitled to receive, in lieu thereof, an
amount in cash without interest determined by multiplying the closing sale price
of a share of Parent Stock on the Nasdaq National Market on the trading day
immediately preceding the Effective Time by the fraction of a share of Parent
Stock to which such holder would otherwise have been entitled.
SECTION 1.08. Withholding Rights. Each of the Surviving Corporation and
Parent shall be entitled to deduct and withhold from the consideration otherwise
payable to any Person pursuant to this Article such amounts as it is required to
deduct and withhold with respect to the making of such payment under any
provision of federal, state, local or foreign tax law. If the Surviving
Corporation or Parent, as the case may be, so withholds amounts, such amounts
shall be treated for all purposes of this Agreement as having been paid to the
holder of the shares of Company Stock in respect of
A-4
<PAGE> 217
which the Surviving Corporation or Parent, as the case may be, made such
deduction and withholding.
SECTION 1.09. Lost Certificates. If any Certificate shall have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the Person
claiming such Certificate to be lost, stolen or destroyed and, if required by
the Surviving Corporation, the posting by such Person of a bond, in such
reasonable amount as the Surviving Corporation may direct, as indemnity against
any claim that may be made against it with respect to such Certificate, the
Exchange Agent will issue, in exchange for such lost, stolen or destroyed
Certificate, the Merger Consideration to be paid in respect of the shares of
Company Stock represented by such Certificate, as contemplated by this Article.
SECTION 1.10. Dissenting Shares. (a) Notwithstanding any provision of this
Agreement to the contrary, shares of Company Stock that are outstanding
immediately prior to the Effective Time and which are held by shareholders who
shall have exercised and perfected appraisal rights for such shares in
accordance with California Law (collectively, the "DISSENTING SHARES") shall not
be converted into or represent the right to receive the Merger Consideration.
Such shareholders shall be entitled to receive payment of the appraised value of
such shares of Company Stock held by them in accordance with California Law,
except that all Dissenting Shares held by shareholders who shall have failed to
perfect or who effectively shall have withdrawn or lost their rights to
appraisal of such shares of Company Stock held by them in accordance with
California Law shall thereupon be deemed to have been converted into and to have
become exchangeable for, as of the Effective Time, the right to receive the
Merger Consideration, without any interest thereon, upon surrender, in the
manner provided in Section 1.03, of the certificate or certificates that
formerly evidenced such shares. The Company shall pay to any holders of
Dissenting Shares all amounts to which such holders are entitled by exercise and
perfection of their rights under California Law, and neither Parent nor any
Affiliate of Parent shall make any such payment or reimburse the Company for any
such payment.
(b) The Company shall give Parent (i) prompt notice of any demands for
appraisal received by the Company, withdrawals of such demands, and any other
instruments served pursuant to California Law and received by the Company and
(ii) the opportunity to direct all negotiations and proceedings with respect to
demands for appraisal under the California Law. The Company shall not, except
with the prior consent of Parent, make any payment with respect to any demands
for appraisal or offer to settle or settle any such demands.
ARTICLE 2
THE SURVIVING CORPORATION
SECTION 2.01. Articles of Incorporation. The articles of incorporation of
the Company in effect at the Effective Time shall be the articles of
incorporation of the Surviving Corporation until amended in accordance with
applicable law.
SECTION 2.02. Bylaws. The bylaws of Merger Subsidiary in effect at the
Effective Time shall be the bylaws of the Surviving Corporation until amended in
accordance with applicable law.
SECTION 2.03. Directors and Officers. From and after the Effective Time,
until successors are duly elected or appointed and qualified in accordance with
applicable law, (a) the directors of Merger Subsidiary at the Effective Time
shall be the directors of the Surviving Corporation and (b) the officers of the
Merger Subsidiary at the Effective Time shall be the officers of the Surviving
Corporation.
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ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as set forth on the Disclosure Schedule delivered by the Company to
Parent (the "COMPANY DISCLOSURE SCHEDULE"), the Company hereby represents and
warrants to Parent that:
SECTION 3.01. Corporate Existence and Power. The Company is a corporation
duly incorporated, validly existing and in good standing under the laws of the
State of California and has all corporate powers and all governmental licenses,
authorizations, permits, consents and approvals required to carry on its
business as now conducted, except for those licenses, authorizations, permits,
consents and approvals the absence of which would not have, individually or in
the aggregate, a Material Adverse Effect on the Company. The Company is duly
qualified to do business as a foreign corporation and is in good standing in
each jurisdiction where such qualification is necessary, except for those
jurisdictions where failure to be so qualified would not have, individually or
in the aggregate, a Material Adverse Effect on the Company. The Company has
heretofore delivered to Parent true and complete copies of the articles of
incorporation and bylaws of the Company as currently in effect.
SECTION 3.02. Corporate Authorization. (a) The execution, delivery and
performance by the Company of this Agreement and the consummation by the Company
of the transactions contemplated hereby and thereby are within the Company's
corporate powers and, except for the required approval of the Company's
stockholders in connection with the consummation of the Merger, have been duly
authorized by all necessary corporate action on the part of the Company. The
affirmative vote of the holders of a majority of the outstanding shares of
Company Stock is the only vote of the holders of any of the Company's capital
stock necessary in connection with the consummation of the Merger. This
Agreement constitutes a valid and binding agreement of the Company.
(b) At a meeting duly called and held, the Company's Board of Directors has
(i) unanimously determined that this Agreement and the transactions contemplated
hereby are fair to and in the best interests of the Company's stockholders, (ii)
unanimously approved and adopted this Agreement and the transactions
contemplated hereby and (iii) unanimously resolved (subject to Section 5.03(b))
to recommend approval and adoption of this Agreement by its stockholders.
SECTION 3.03. Governmental Authorization. The execution, delivery and
performance by the Company of this Agreement and the consummation by the Company
of the transactions contemplated hereby requires no action by or in respect of,
or filing with, any governmental body, agency, official or authority, domestic,
foreign or supranational, other than (a) the filing of a certificate of merger
with respect to the Merger with the California Secretary of State and
appropriate documents with the relevant authorities of other states in which
Company is qualified to do business, (b) compliance with any applicable
requirements of the HSR Act, (c) compliance with any applicable requirements of
the 1933 Act, the 1934 Act, and any other applicable securities laws, whether
state or foreign and (d) any actions or filings the absence of which would not
be reasonably expected to have, individually or in the aggregate, a material
effect on the Company or materially to impair the ability of the Company to
consummate the transactions contemplated by this Agreement.
SECTION 3.04. Non-Contravention. The execution, delivery and performance by
the Company of this Agreement and the consummation of the transactions
contemplated hereby do not and will not (a) contravene, conflict with, or result
in any violation or breach of any provision of the articles of incorporation or
bylaws of the Company, (b) assuming compliance with the matters referred to in
Section 3.03, contravene, conflict with or result in a violation or breach of
any provision of any applicable law, statute, ordinance, rule, regulation,
judgment, injunction, order or decree that would have a material effect on the
Company, (c) require any material consent or other action by any
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Person under, constitute a material default, or an event that, with or without
notice or lapse of time or both, would constitute a material default under, or
cause or permit the termination, cancellation, acceleration or other change of
any right or obligation or the loss of any benefit to which the Company is
entitled under any provision of any agreement or other instrument binding upon
the Company or any license, franchise, permit, certificate, approval or other
similar authorization affecting, or relating in any way to, the assets or
business of the Company or (d) result in the creation or imposition of any Lien
on any material asset of the Company.
SECTION 3.05. Capitalization. (a) The authorized capital stock of the
Company consists of 30,000,000 shares of Company Stock and 10,000,000 shares of
preferred stock, no par value. As of February 24, 2000, there were outstanding
(i) no shares of preferred stock, (ii) 6,117,054 shares of Company Stock, (iii)
stock options to purchase an aggregate of 848,847 shares of Company Stock
pursuant to the 1994 Incentive Stock Option Plan and Nonstatutory Stock Option
Plan (of which options to purchase an aggregate of 264,863 shares of Company
Stock were then exercisable) and pursuant to certain agreements and arrangements
with consultants and other persons associated with the Company and (iv) warrants
to purchase 674,955 shares of Company Stock pursuant to the agreements listed in
Section 3.05 of the Company Disclosure Schedule. Based upon the elections made
by participants in the ESPP, the maximum number of shares of Company Common
Stock which may be issued under the ESPP as of the date immediately prior to the
Effective Time is 54,051. All outstanding shares of capital stock of the Company
have been, and all shares that may be issued pursuant to the Company's option
plans and pursuant to the warrants referred to above will be, when issued in
accordance with the respective terms thereof, duly authorized and validly issued
and are fully paid and nonassessable.
(b) Except as set forth in this Section 3.05 and for changes since February
24, 2000 resulting from the exercise of employee stock options or warrants
outstanding on such date, there are no outstanding (i) shares of capital stock
or voting securities of the Company, (ii) securities of the Company convertible
into or exchangeable for shares of capital stock or voting securities of the
Company or (iii) options or other rights to acquire from the Company, or other
obligation of the Company to issue, any capital stock, voting securities or
securities convertible into or exchangeable for capital stock or voting
securities of the Company (the items in clauses (i), (ii) and (iii) being
referred to collectively as the "COMPANY SECURITIES"). There are no outstanding
obligations of the Company to repurchase, redeem or otherwise acquire any of the
Company Securities.
SECTION 3.06. Subsidiaries. (a) The Company's only Subsidiary is Mustang
Software Inc. That Subsidiary does not currently conduct and has not previously
conducted any business, does not have any employees (other than its directors
and officers) and does not have any liabilities or obligations (other than
organizational liabilities or obligations). The Company has never had any other
Subsidiary.
(b) All of the outstanding capital stock of, or other voting securities or
ownership interests in, the Company's Subsidiary, is owned by the Company,
directly or indirectly, free and clear of any Lien and free of any other
limitation or restriction (including any restriction on the right to vote, sell
or otherwise dispose of such capital stock or other voting securities or
ownership interests). There are no outstanding (i) securities of the Company or
its Subsidiary convertible into or exchangeable for shares of capital stock or
other voting securities or ownership interests in any Subsidiary of the Company
or (ii) options or other rights to acquire from the Company or its Subsidiary,
or other obligation of the Company or its Subsidiary to issue, any capital stock
or other voting securities or ownership interests in, or any securities
convertible into or exchangeable for any capital stock or other voting
securities or ownership interests in, that Subsidiary (the items in clauses (i)
and (ii) being referred to collectively as the "COMPANY SUBSIDIARY SECURITIES").
There are no outstanding
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obligations of the Company or its Subsidiary to repurchase, redeem or otherwise
acquire any of the Company Subsidiary Securities.
SECTION 3.07. SEC Filings. (a) The Company has delivered to Parent (i) the
Company's annual reports on Form 10-K for its fiscal years ended December 31,
1998, 1997 and 1996, (ii) its quarterly reports on Form 10-Q for each of its
fiscal quarters ended since December 31, 1998 (other than the quarter ended
December 31, 1999), (iii) its proxy or information statements relating to
meetings of, or actions taken without a meeting by, the stockholders of the
Company held since December 31, 1998, and (iv) all of its other reports,
statements, schedules and registration statements filed with the SEC since
January 1, 1997 (the documents referred to in this Section 3.07(a),
collectively, the "COMPANY SEC DOCUMENTS").
(b) As of its filing date, each Company SEC Document complied as to form in
all material respects with the applicable requirements of the 1933 Act and the
1934 Act, as the case may be.
(c) As of its filing date, each Company SEC Document filed pursuant to the
1934 Act did not, and each such Company SEC Document filed subsequent to the
date hereof will not, contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements made therein,
in the light of the circumstances under which they were made, not misleading.
(d) Each Company SEC Document that is a registration statement, as amended
or supplemented, if applicable, filed pursuant to the 1933 Act, as of the date
such registration statement or amendment became effective, did not contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein not misleading.
SECTION 3.08. Financial Statements. The audited financial statements and
unaudited interim financial statements (including, in each case, any related
notes or schedules) of the Company attached hereto as Exhibit H fairly present,
in conformity with generally accepted accounting principles ("GAAP") applied on
a consistent basis (except as may be indicated in the notes thereto), the
financial position of the Company and its Subsidiaries as of the Company Balance
Sheet Date and their results of operations and cash flows for the period then
ended.
SECTION 3.09. Disclosure Documents. (a) The proxy or information statement
of the Company to be filed with the SEC in connection with the Merger (the
"COMPANY PROXY STATEMENT") and any amendments or supplements thereto will, when
filed, comply as to form in all material respects with the applicable
requirements of the 1934 Act. At the time the Company Proxy Statement or any
amendment or supplement thereto is first mailed to stockholders of the Company,
and at the time such stockholders vote on adoption of this Agreement and at the
Effective Time, the Company Proxy Statement, as supplemented or amended, if
applicable, will not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements made therein,
in the light of the circumstances under which they were made, not misleading.
The representations and warranties contained in this Section 3.09(a) will not
apply to statements or omissions included in the Company Proxy Statement based
upon information furnished to the Company by Parent specifically for use
therein.
(b) None of the information provided by the Company for inclusion in the
Registration Statement or any amendment or supplement thereto, at the time the
Registration Statement or any amendment or supplement becomes effective and at
the Effective Time, will contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in order
to make the statements therein not misleading.
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SECTION 3.10. Absence of Certain Changes. Since the Company Balance Sheet
Date, the business of the Company has been conducted in the ordinary course
consistent with past practices and, except as disclosed in the Company
Disclosure Schedule, there has not been:
(a) any event, occurrence, development or state of circumstances or
facts that has had or could reasonably be expected to have, individually or
in the aggregate, a Material Adverse Effect on the Company;
(b) any declaration, setting aside or payment of any dividend or other
distribution with respect to any shares of capital stock of the Company ,
or any repurchase, redemption or other acquisition by the Company of any
outstanding shares of capital stock or other securities of, or other
ownership interests in, the Company;
(c) any amendment of any material term of any outstanding security of
the Company;
(d) any incurrence, assumption or guarantee by the Company of any
indebtedness for borrowed money or any entry into or amendment of any
capital lease;
(e) any creation or other incurrence by the Company of any Lien on any
asset;
(f) any making of any loan, advance or capital contributions to or
investment in any Person;
(g) any material damage, destruction or other casualty loss (whether
or not covered by insurance) affecting the business or assets of the
Company;
(h) any transaction or commitment made, or any contract or agreement
entered into, by the Company relating to its assets or business (including
the acquisition or disposition of any assets) or any relinquishment by the
Company of any contract or other right, in either case, material to the
Company, other than transactions and commitments in the ordinary course of
business consistent with past practices and those contemplated by this
Agreement;
(i) any change in any method of accounting, method of tax accounting
or accounting principles or practice by the Company, except for any such
change required by reason of a concurrent change in GAAP or Regulation S-X
under the 1934 Act;
(j) any (i) grant of any severance or termination pay to (or amendment
to any existing arrangement with) any director, officer or employee of the
Company, (ii) increase in benefits payable under any existing severance or
termination pay policies or employment agreements, (iii) entering into or
amending any employment, deferred compensation or other similar agreement
(or any amendment to any such existing agreement) with any director,
officer or employee of the Company, (iv) establishment, adoption or
amendment (except as required by applicable law) of any collective
bargaining, bonus, profit-sharing, thrift, pension, retirement, deferred
compensation, compensation, stock option, restricted stock or other benefit
plan or arrangement covering any director, officer or employee of the
Company, (v) increase in compensation, bonus or other benefits payable to
any director, officer or employee of the Company (other than in the case of
employees who are not directors or officers, where such increases are in
the ordinary course of business consistent with past practice) or (vi) any
consulting agreement;
(k) any Tax election made or changed, any annual tax accounting period
changed, any method of tax accounting adopted or changed, any material
amended Tax Returns filed, any material closing agreement entered into, any
material Tax claim, audit or assessment settled or any right to claim a
material Tax refund, offset or other reduction in Tax liability
surrendered; or
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(l) any labor dispute, other than routine individual grievances, or
any activity or proceeding by a labor union or representative thereof to
organize any employees of the Company, which employees were not subject to
a collective bargaining agreement at the Company Balance Sheet Date, or any
lockouts, strikes, slowdowns, work stoppages or threats thereof by or with
respect to such employees.
SECTION 3.11. No Undisclosed Material Liabilities. There are no liabilities
or obligations of the Company of any kind whatsoever, whether accrued,
contingent, absolute, determined, determinable or otherwise, and there is no
existing condition, situation or set of circumstances that could reasonably be
expected to result in such a liability or obligation, other than:
(a) liabilities or obligations disclosed and provided for in the
Company Balance Sheet or in the notes thereto or in the Company SEC
Documents filed prior to the date hereof,
(b) liabilities or obligations incurred in the ordinary course of
business consistent with past practices since the Company Balance Sheet
Date that would not be material individually or in the aggregate, and
(c) liabilities or obligations under this Agreement or the
transactions contemplated hereby.
SECTION 3.12. Compliance with Laws and Court Orders. The Company is and,
since January 1, 1998 has been in compliance with, and to the knowledge of the
Company is not under investigation with respect to and has not been threatened
to be charged with or given notice of any violation of, any applicable law,
statute, ordinance, rule, regulation, judgment, injunction, order or decree that
would be material to the Company.
SECTION 3.13. Litigation. Except as set forth in the Company SEC Documents
filed prior to the date hereof, there is no action, suit, investigation or
proceeding (or any basis therefor) pending against, or, to the knowledge of the
Company, threatened against or affecting, the Company, any present or former
officer, director or employee of the Company or any Person for whom the Company
may be liable or any of their respective properties before any court or
arbitrator or before or by any governmental body, agency or official, domestic,
foreign or supranational, that, if determined or resolved adversely in
accordance with the plaintiff's demands, could reasonably be expected to be
material to the Company individually or in the aggregate, that in any manner
challenges or seeks to prevent, enjoin, alter or materially delay the Merger or
any of the other transactions contemplated hereby.
SECTION 3.14. Finders' Fees. Except for First Security Van Kasper, a copy
of whose engagement agreement has been provided to Parent, there is no
investment banker, broker, finder or other intermediary that has been retained
by or is authorized to act on behalf of the Company who might be entitled to any
fee or commission from the Company or any of its Affiliates in connection with
the transactions contemplated by this Agreement.
SECTION 3.15. Opinion of Financial Advisor. The Company has received the
opinion of First Security Van Kasper, financial advisor to the Company, to the
effect that, as of the date of this Agreement, the Merger Consideration is fair
to the Company's stockholders from a financial point of view.
SECTION 3.16. Taxes. (a) All Tax Returns required to be filed with any
Taxing Authority by, or with respect to, the Company have been timely filed in
accordance with all applicable laws.
(b) The Company has timely paid all Taxes shown as due and payable on the
Tax Returns that have been so filed, and, as of the time of filing, the Tax
Returns correctly reflected the facts regarding the income, business, assets,
operations, activities and the status of Company (other than
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Taxes which are being contested in good faith and for which adequate reserves
are reflected on the Company Balance Sheet).
(c) The Company has made provision for all Taxes payable by the Company for
which no Tax Return has yet been filed.
(d) The charges, accruals and reserves for Taxes with respect to the
Company reflected on the Company Balance Sheet are adequate under GAAP to cover
the Tax liabilities accruing through the date thereof.
(e) The federal income Tax Returns of the Company have been examined and
settled with the appropriate Governmental Authority (or the applicable statutes
of limitation for the assessment of such taxes have expired) for all years
through 1995.
(f) The Company has not requested any extension of time within which to
file any Tax Return in respect of any taxable year which has not since been
filed, and no outstanding waivers or comparable consents regarding the
application of the statute of limitations with respect to any Taxes or Tax
Returns has been given by or on behalf of the Company.
(g) No federal, state, local or foreign audits, review, or other actions
("COMPANY AUDITS") exist or have been initiated or threatened with regard to any
Taxes or Tax Returns of or with respect to the Company, and the Company has not
received any notice of such a Company Audit.
(h) All Tax deficiencies which have been claimed or asserted with respect
to the Company by any Taxing Authority have been fully paid or settled (and the
amount of such settlement has been fully paid).
(i) No claim has been made by a Taxing Authority in a jurisdiction where
the Company does not file Tax Returns to the effect that Company is or may be
subject to taxation by that jurisdiction.
(j) The Company has not been a member of an affiliated, consolidated,
combined or unitary group other than one of which the Company was the common
parent, or made any election or participated in any arrangement whereby any Tax
liability or any Tax asset of the Company was determined or taken into account
for Tax purposes with reference to or in conjunction with any Tax liability or
any Tax asset of any other person.
(k) The Company is not a party to any Tax sharing agreement or to any other
agreement or arrangement, as a result of which liability of Company to a
Governmental Authority is determined or taken into account with reference to the
activities of any other person, and the Company is not currently under any
obligation to pay any amounts as a result of having been a party to such an
agreement or arrangement, regardless of whether such Tax is imposed on the
Company.
(l) "TAXES" shall mean any and all taxes, charges, fees, levies or other
assessments, including income, gross receipts, excise, real or personal
property, sales, withholding, social security, retirement, unemployment,
occupation, use, goods and services, service use, license, value added, capital,
net worth, payroll, profits, withholding, franchise, transfer and recording
taxes, fees and charges, and any other taxes, assessment or similar charges
imposed by the IRS or any taxing authority (whether domestic or foreign
including any state, county, local or foreign government or any subdivision or
taxing agency thereof (including a United States possession)) (a "TAXING
AUTHORITY"), whether computed on a separate, consolidated, unitary, combined or
any other basis; and such term shall include any interest whether paid or
received, fines, penalties or additional amounts attributable to, or imposed
upon, or with respect to, any such taxes, charges, fees, levies or other
assessments. "TAX RETURN" shall mean any report, return, document, declaration
or other information or filing required to be supplied to any Taxing Authority
or jurisdiction (foreign or domestic) with respect to Taxes,
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including information returns, any documents with respect to or accompanying
payments of estimated Taxes, or with respect to or accompanying requests for the
extension of time in which to file any such report, return, document,
declaration or other information.
SECTION 3.17. Employee Benefit Plans. (a) The Company has provided Parent
with a list and copies of the Employee Plans (and, if applicable, related trust
agreements) and all amendments thereto and written interpretations thereof
together with the most recent annual report (Form 5500 including, if applicable,
Schedule B thereto) and the most recent actuarial valuation report prepared in
connection with any Employee Plan.
(b) Neither the Company nor any ERISA Affiliate of the Company maintains or
contributes to, or within the past six years, has maintained or contributed to,
any plan or arrangement subject to Title IV of ERISA.
(c) Each Employee Plan that is intended to be qualified under Section
401(a) of the Code is so qualified and has been so qualified during the period
since its adoption; each trust created under any such Plan is exempt from tax
under Section 501(a) of the Code and has been so exempt since its creation. The
Company has provided Parent with the most recent determination letter of the
Internal Revenue Service relating to each such Employee Plan. Each Employee Plan
has been maintained in substantial compliance with its terms and with the
requirements prescribed by any and all applicable statutes, orders, rules and
regulations, including but not limited to ERISA and the Code.
(d) The Company does not have any current or projected liability in respect
of post-employment or post-retirement health or medical or life insurance
benefits for retired, former or current employees of the Company, except as
required to avoid excise tax under Section 4980B of the Code. No condition
exists that would prevent the Company from amending or terminating any Employee
Plan providing health or medical benefits in respect of any active employee of
the Company.
(e) There has been no amendment to, written interpretation of or
announcement (whether or not written) by the Company relating to, or change in
employee participation or coverage under, any Employee Plan that would increase
materially the expense of maintaining such Employee Plan above the level of the
expense incurred in respect thereof for the most recent fiscal year ended prior
to the date hereof.
(f) There is no contract, plan or arrangement (written or otherwise)
covering any employee or former employee of the Company that, individually or
collectively, could give rise to the payment of any amount that would not be
deductible pursuant to the terms of Sections 280G or 162(m) of the Code.
(g) There has been no failure of a group health plan (as defined in Section
5000(b)(1) of the Code) to meet the requirements of Code Section 4980B(f) with
respect to a qualified beneficiary (as defined in Section 4980B(g)). The Company
has not contributed to a nonconforming group health plan (as defined in Section
5000(c)) and no ERISA Affiliate of the Company has incurred a tax under Section
5000(a) that is or could become a liability of the Company.
(h) No employee or former employee of the Company will become entitled to
any bonus, retirement, severance, job security or similar benefit or enhanced
such benefit (including acceleration of vesting or exercise of an incentive
award) as a result of the transactions contemplated hereby.
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SECTION 3.18. Environmental Matters. (a) Except as set forth in the Company
SEC Documents prior to the date hereof and except as could not reasonably be
expected to have, individually or in the aggregate, a material effect on the
Company:
(i) no notice, notification, demand, request for information,
citation, summons or order has been received, no complaint has been filed,
no penalty has been assessed, and no investigation, action, claim, suit,
proceeding or review (or any basis therefor) is pending or, to the
knowledge of the Company, is threatened by any governmental entity or other
Person relating to or arising out of any Environmental Law;
(ii) the Company is and has been in compliance with all Environmental
Laws and all Environmental Permits; and
(iii) there are no liabilities of or relating to the Company of any
kind whatsoever, whether accrued, contingent, absolute, determined,
determinable or otherwise arising under or relating to any Environmental
Law and there are no facts, conditions, situations or set of circumstances
that could reasonably be expected to result in or be the basis for any such
liability.
(b) There has been no environmental investigation, study, audit, test,
review or other analysis conducted of which the Company has knowledge in
relation to the current or prior business of the Company or any property or
facility now or previously owned or leased by the Company that has not been
delivered to Parent at least five days prior to the date hereof.
(c) The Company does not own, lease or operate and has not owned, leased or
operated any real property, and does not conduct and has not conducted any
operations, in New Jersey or Connecticut.
(d) For purposes of this Section 3.18, the term "COMPANY" shall include any
entity that is, in whole or in part, a predecessor of the Company.
SECTION 3.19. Contracts. (a) Section 3.19 of the Company Disclosure
Schedule lists the following written contracts and agreements of the Company
(such contracts and agreements being "MATERIAL CONTRACTS"):
(i) each contract and agreement for the purchase or lease of personal
property with any supplier or for the furnishing of services to the Company
that in each case involves annual payment in excess of $75,000;
(ii) all customer, OEM, or "hosting" agreements and all broker,
exclusive dealing or exclusivity, distributor, dealer, manufacturer's
representative, franchise, agency, sales promotion and market research
agreements, to which the Company is a party or any other material contract
that compensates any person other than employees based on any sales by the
Company;
(iii) all leases and subleases of real property;
(iv) all contracts and agreements relating to indebtedness for
borrowed money or capital leases other than trade indebtedness of the
Company;
(v) all contracts and agreements involving annual payments in excess
of $75,000 to which the Company is a party;
(vi) all contracts and agreements that limit or purport to limit the
ability of the Company to compete in any line of business or with any
person or in any geographic area or during any period of time;
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(vii) all contracts relating to trafficking arrangements and domain
name registration and customer list agreements;
(viii) all contracts and agreements between or among the Company and
any stockholder, director or officer of the Company or any affiliate of
such person; and
(ix) any other material agreement of the Company which is terminable
upon or prohibits a change of ownership or control of the Company.
(b) Each Material Contract: (i) is valid and binding on the Company and, to
the knowledge of the Company, on the other parties thereto, and is in full force
and effect, and (ii) upon consummation of the transactions contemplated by this
Agreement, shall continue in full force and effect without material penalty or
other material adverse consequence. The Company is not in material breach of, or
material default under, any Material Contract and, to the knowledge of the
Company, no other party to any Material Contract is in material breach thereof
or material default thereunder.
SECTION 3.20. Real Property. The Company does not own and has never owned
any real property.
SECTION 3.21. Intellectual Property. (a) Section 3.21 of the Company
Disclosure Schedule sets forth a true and complete list of all (i) Software and
other Intellectual Property owned by the Company and material to the business of
the Company ("OWNED INTELLECTUAL PROPERTY") and (ii) licenses or sublicenses of
Intellectual Property to the Company, and licenses or sublicenses of
Intellectual Property by the Company to any third party, in each case that are
material to the business of the Company and are not readily available from
commercial sources ("LICENSED INTELLECTUAL PROPERTY"). For purposes hereof,
"INTELLECTUAL PROPERTY" means: (i) United States, international, and foreign
patents, patent applications and statutory invention registrations, (ii)
trademarks, service marks, trade dress, slogans, logos, domain names, and other
source identifiers, including registrations and applications for registration
thereof, (iii) copyrights, including registrations and applications for
registration thereof and (iv) confidential and proprietary information,
including trade secrets and know-how. For purposes hereof, "SOFTWARE" means all
material computer software developed by or on behalf of the Company, including
such computer software and databases of customers and contact lists that are
proprietary to the Company and the software operated by the Company on its web
sites.
(b) The use of the Owned Intellectual Property and the Licensed
Intellectual Property by the Company does not conflict with or infringe in any
material way upon the Intellectual Property rights of any third party, and no
claim has been asserted with respect to any such alleged conflict or
infringement. The Company is the exclusive owner of the entire and unencumbered
right, title and interest in and to each item of Owned Intellectual Property.
The Company is entitled to use all Licensed Intellectual Property in the
ordinary course of business, subject only to the terms of the licenses of the
Licensed Intellectual Property.
(c) The Owned Intellectual Property and the Licensed Intellectual Property
include all of the Intellectual Property and Software used in the ordinary
conduct of the business of the Company, and there are no other items of
Intellectual Property or Software that are material to such ordinary day-to-day
conduct of such business. To the knowledge of the Company, the Owned
Intellectual Property and any Intellectual Property licensed to the Company
under the Licensed Intellectual Property, is subsisting, valid and enforceable,
and has not been adjudged invalid or unenforceable in whole or part.
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(d) No legal proceedings have been asserted, are pending, or threatened
against the Company (i) based upon or challenging or seeking to deny or restrict
the use by the Company of any of the Owned Intellectual Property or Licensed
Intellectual Property, (ii) alleging that any services provided by, processes
used by, or products manufactured or sold by the Company infringe upon or
misappropriate any Intellectual Property right of any third party, or (iii)
alleging that any Intellectual Property licensed under the Licensed Intellectual
Property infringes upon any Intellectual Property right of any third party or is
being licensed or sublicensed in conflict with the terms of any license or other
agreement. To the knowledge of the Company, no person is engaging in any
activity that infringes in any material respect upon the Owned Intellectual
Property. The consummation of the transactions contemplated by this Agreement
will not result in the termination or material impairment of any of the Owned
Intellectual Property.
(e) Except as set forth in Section 3.21 of the Company Disclosure Schedule,
the Company has not granted any license or similar right to any third party with
respect to the Owned Intellectual Property or Licensed Intellectual Property.
The Company has delivered or made available to Parent correct and complete
copies of all the licenses and sublicenses by the Company of the Licensed
Intellectual Property. With respect to each such license and sublicense:
(i) such license or sublicense is valid and binding and in full force
and effect;
(ii) such license or sublicense will not cease to be valid and binding
and in full force and effect on terms identical to those currently in
effect as a result of the consummation of the transactions contemplated by
this Agreement, nor will the consummation of the transactions contemplated
by this Agreement constitute a breach or default under such license or
sublicense or otherwise give the licensor or sublicensor a right to
terminate such license or sublicense; and
(iii) (A) the Company has not received any notice of termination or
cancellation under such license or sublicense, (B) the Company has not
received any notice of a breach or default under such license or
sublicense, which breach has not been cured, and (C) the Company has not
granted to any other third party any rights, adverse or otherwise, under
such license or sublicense that would constitute a breach of such license
or sublicense; and
(iv) to the knowledge of the Company, the Company nor any other party
to such license or sublicense is in breach or default in any material
respect, and, to the Company's knowledge, no event has occurred that, with
notice or lapse of time would constitute such a breach or default or permit
termination, modification or acceleration under such license or sublicense.
(f) To the knowledge of the Company, the Software is free of all viruses,
worms, trojan horses and other material known contaminants, and does not contain
any bugs, errors, or problems of a material nature that disrupt its operations
or have a material impact on the operation of other software programs or
operating systems and no rights in the Software have been transferred to any
third party.
(g) To the knowledge of the Company, the Company has the right to use all
software development tools, library functions, compilers, and other third party
software that is material to the business of the Company, or that is required to
operate or modify the Software.
(h) The Company has taken reasonable steps in accordance with normal
industry practice to maintain the confidentiality of their customer lists and
customer information, trade secrets and other confidential Intellectual
Property.
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SECTION 3.22. Certain Interests. (a) Except as disclosed in the Company SEC
Documents or otherwise in this Agreement, to the knowledge of the Company, none
of the shareholders of the Company or their affiliates or any officer or
director of the Company and no immediate relative or spouse (or immediate
relative of such spouse) who resides with, or is a dependent of, any such
officer or director:
(i) has any material direct or indirect financial interest in any
significant competitor, supplier or customer of the Company, provided,
however, that the ownership of securities representing no more than 2% of
the outstanding voting power of any competitor, supplier or customer, and
which are listed on any national securities exchange or traded actively in
the national over-the-counter market, shall not be deemed to be a
"FINANCIAL INTEREST" as long as the person owning such securities has no
other connection or relationship with such competitor, supplier or
customer;
(ii) owns, directly or indirectly, in whole or in part, or has any
other interest in any material tangible or intangible property which the
Company uses or has used in the conduct of its business or otherwise
(except for any such ownership or interest resulting from the ownership of
securities in a public company); or
(iii) except as set forth in Section 3.22(a) of the Company Disclosure
Schedule, has outstanding any indebtedness to the Company.
(b) Except as set forth in Section 3.22(b) of the Company Disclosure
Schedule, except for the payment of employee compensation in the ordinary course
of business, the Company does not have any liability or any other obligation of
any nature whatsoever to any shareholder of the Company or any affiliate thereof
or to any officer or director of the Company or, to the knowledge of the
Company, to any immediate relative or spouse (or immediate relative of such
spouse) of any such officer or director.
SECTION 3.23. Products. Each of the software and other products that are
currently being produced or sold by the Company (or that have been produced or
sold by the Company in the past) (i) is in material compliance with all
applicable laws and regulations, (ii) conforms in all material respects to the
descriptions, design specifications, warranties and affirmations of fact made in
connection with its sale and (iii) is fit for the purposes for which it is
designed and is free of any material design defect, flaw or inadequacy. The
Company has not been advised by its customers of any material design defect,
flaw or inadequacy with respect to its products.
SECTION 3.24. Tax Treatment. Neither the Company nor any of its Affiliates
has taken or agreed to take any action, or is aware of any fact or circumstance,
that would prevent the Merger from qualifying as a reorganization within the
meaning of Section 368(a) of the Code (a "368(a) REORGANIZATION").
SECTION 3.25. Antitakeover Statutes. No "control share acquisition," "fair
price," "moratorium" or other antitakeover laws or regulations enacted under
U.S. state or federal laws apply to this Agreement or any of the transactions
contemplated hereby.
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ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF PARENT
Except as set forth on the Disclosure Schedule delivered by Parent to the
Company (the "PARENT DISCLOSURE SCHEDULE"), Parent hereby represents and
warrants to the Company that:
SECTION 4.01. Corporate Existence and Power. The Parent is a corporation
duly incorporated, validly existing and in good standing under the laws of the
State of Delaware and has all corporate powers and all governmental licenses,
authorizations, permits, consents and approvals required to carry on its
business as now conducted, except for those licenses, authorizations, permits,
consents and approvals the absence of which would not have, individually or in
the aggregate, a Material Adverse Effect on Parent. Parent is duly qualified to
do business as a foreign corporation and is in good standing in each
jurisdiction where such qualification is necessary, except for those
jurisdictions where failure to be so qualified would not have, individually or
in the aggregate, a Material Adverse Effect on Parent. Parent has heretofore
delivered to the Company true and complete copies of the certificate of
incorporation and bylaws of Parent as currently in effect.
SECTION 4.02. Corporate Authorization. The execution, delivery and
performance by Parent of this Agreement and the consummation by Parent of the
transactions contemplated hereby are within the corporate powers of Parent and
have been duly authorized by all necessary corporate action. This Agreement
constitutes a valid and binding agreement of Parent.
SECTION 4.03. Governmental Authorization. The execution, delivery and
performance by Parent of this Agreement and the consummation by Parent of the
transactions contemplated hereby require no action by or in respect of, or
filing with, any governmental body, agency, official or authority, domestic,
foreign or supranational, other than (a) the filing of a certificate of merger
with respect to the Merger with the Delaware Secretary of State and appropriate
documents with the relevant authorities of other states in which Parent is
qualified to do business, (b) compliance with any applicable requirements of the
HSR Act, (c) compliance with any applicable requirements of the 1933 Act, the
1934 Act and any other securities laws, whether state or foreign and (d) any
actions or filings the absence of which would not be reasonably expected to
have, individually or in the aggregate, a Material Adverse Effect on Parent or
materially to impair the ability of the Parent to consummate the transactions
contemplated by this Agreement.
SECTION 4.04. Non-Contravention. The execution, delivery and performance by
Parent of this Agreement and the consummation by Parent of the transactions
contemplated hereby do not and will not (a) contravene, conflict with, or result
in any violation or breach of any provision of the certificate of incorporation
or bylaws of the Parent, (b) assuming compliance with the matters referred to in
Section 4.03, contravene, conflict with or result in a violation or breach of
any provision of any law, statute, ordinance, rule, regulation, judgment,
injunction, order or decree that would have a material effect on the Parent, (c)
require any material consent or other action by any Person under, constitute a
default under, or cause or permit the termination, cancellation, acceleration or
other change of any right or obligation or the loss of any benefit to which
Parent or any of its Subsidiaries is entitled under any provision of any
agreement or other instrument binding upon Parent or any of its Subsidiaries or
any license, franchise, permit, certificate, approval or other similar
authorization affecting, or relating in any way to, the assets or business of
the Parent and its Subsidiaries or (d) result in the creation or imposition of
any Lien on any material asset of the Parent or any of its Subsidiaries referred
to in clauses (e) and (f) that would not be reasonably expected to have,
individually or in the aggregate, a Material Adverse Effect on Parent or
materially to impair the ability of Parent and Merger Subsidiary to consummate
the transactions contemplated by this Agreement.
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SECTION 4.05. Capitalization. (a) The authorized capital stock of Parent
consists of 100,000,000 shares of Parent Stock and 10,000,000 shares of
preferred stock, par value $0.001 per share. As of February 22, 2000, there were
outstanding (i) no shares of preferred stock, (ii) 33,447,962 shares of Parent
Stock, (iii) employee stock options to purchase an aggregate of 3,689,846 shares
of Parent Stock pursuant to the 1999 Stock Incentive Plan, the 1999 Stock Plan,
the Employee Stock Purchase Plan and the 1999 Director Option Plan, (of which
options to purchase an aggregate of 3,370,869 shares of Parent Stock were then
exercisable) (iv) no shares of convertible preferred stock, (v) no shares of
redeemable convertible preferred stock and (vi) warrants to purchase 762,622
shares of Parent Stock. All of the Parent Stock to be issued pursuant to the
Merger will be duly authorized and validly issued.
(b) Except as set forth in this Section 4.05, as of February 22, 2000 there
are no outstanding (i) shares of capital stock or voting securities of Parent,
(ii) securities of Parent convertible into or exchangeable for shares of capital
stock or voting securities of Parent or (iii) options or other rights to acquire
from Parent or other obligation of Parent to issue, any capital stock, voting
securities or securities convertible into or exchangeable for capital stock or
voting securities of Parent. There are no outstanding obligations of Parent or
any of its Subsidiaries to repurchase, redeem or otherwise acquire any of the
securities referred to in clause (i), (ii) or (iii) above.
(c) The shares of Parent Stock to be issued as part of the Merger
Consideration have been duly authorized and, when issued and delivered in
accordance with the terms of this Agreement, will have been validly issued and
will be fully paid and nonassessable and the issuance thereof is not subject to
any preemptive or other similar right.
SECTION 4.06. Subsidiaries. (a) Each Subsidiary of Parent is a corporation
duly incorporated, validly existing and in good standing under the laws of its
jurisdiction of incorporation, has all corporate powers and all governmental
licenses, authorizations, permits, consents and approvals required to carry on
its business as now conducted, except for those licenses, authorizations,
permits, consents and approvals the absence of which would not have,
individually or in the aggregate, a Material Adverse Effect on Parent. Each
Subsidiary of Parent is duly qualified to do business as a foreign corporation
and is in good standing in each jurisdiction where such qualification is
necessary, except for those jurisdictions where failure to be so qualified would
not have, individually or in the aggregate, a Material Adverse Effect on Parent.
(b) All of the outstanding capital stock of, or other voting securities or
ownership interests in, each Subsidiary of Parent, is owned by Parent, directly
or indirectly, free and clear of any Lien and free of any other limitation or
restriction (including any restriction on the right to vote, sell or otherwise
dispose of such capital stock or other voting securities or ownership
interests). As of the date hereof, there are no outstanding (i) securities of
Parent or any of its Subsidiaries convertible into or exchangeable for shares of
capital stock or other voting securities or ownership interests in any of its
Subsidiaries or (ii) options or other rights to acquire from Parent or any of
its Subsidiaries, or other obligation of Parent or any of its Subsidiaries to
issue, any capital stock or other voting securities or ownership interests in,
or any securities convertible into or exchangeable for any capital stock or
other voting securities or ownership interests in, any Subsidiary of Parent. As
of the date hereof, there are no outstanding obligations of Parent or any of its
Subsidiaries to repurchase, redeem or otherwise acquire any of the securities
referred to in clauses (i) or (ii) above.
SECTION 4.07. SEC Filings. Parent has delivered to the Company its Form S-1
(Registration No. 333-86919) filed with the SEC on November 15, 1999 (the
"PARENT FORM S-1") and its Form 10-Q for the fiscal quarter ended December 31,
1999 (the "PARENT FORM 10-Q"). The Parent Form S-1, as of the date such
registration statement or any amendment became effective, and the Parent Form
10-Q, as of the date of filing with the SEC (together, the "PARENT SEC
DOCUMENTS"),
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did not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading.
SECTION 4.08. Financial Statements. The audited consolidated financial
statements and unaudited consolidated interim financial statements of Parent
included in the Parent SEC Documents fairly present, in conformity with GAAP
applied on a consistent basis (except as may be indicated in the notes thereto),
the consolidated financial position of Parent and its consolidated Subsidiaries
as of the dates thereof and their consolidated results of operations and cash
flows for the periods then ended (subject to normal year-end adjustments in the
case of any unaudited interim financial statements).
SECTION 4.09. Disclosure Documents. (a) None of the information provided by
Parent for inclusion in the Company Proxy Statement or any amendment or
supplement thereto, at the time the Company Proxy Statement or any amendment or
supplement thereto is first mailed to stockholders of the Company and at the
time the stockholders vote on adoption of this Agreement and at the Effective
Time, will contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements made therein, in the
light of the circumstances under which they were made, not misleading.
(b) The Registration Statement of Parent to be filed with the SEC with
respect to the offering of Parent Stock in connection with the Merger (the
"REGISTRATION STATEMENT") and any amendments or supplements thereto, when filed,
will comply as to form in all material respects with the requirements of the
1933 Act. At the time the Registration Statement or any amendment or supplement
thereto becomes effective and at the Effective Time, the Registration Statement,
as amended or supplemented, will not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading. The
representations and warranties contained in this Section 4.09 will not apply to
statements or omissions in the Registration Statement or any amendment or
supplement thereto based upon information furnished to Parent or Merger
Subsidiary by the Company specifically for use therein.
SECTION 4.10. Absence of Certain Changes. Since Parent Balance Sheet Date,
the business of Parent and its Subsidiaries has been conducted in the ordinary
course consistent with past practice and, except as disclosed in this Section
4.10, there has not been:
(a) any event, occurrence, development or state of circumstances or
facts that has had or would reasonably be expected to have, individually or
in the aggregate, a Material Adverse Effect on Parent;
(b) any declaration, setting aside or payment of any dividend or other
distribution with respect to any shares of capital stock of Parent other
than Parent's normal quarterly dividend, or any repurchase, redemption or
other acquisition by Parent or any of its Subsidiaries of any outstanding
shares of capital stock or other securities of, or other ownership
interests in, Parent or any of its Subsidiaries;
(c) any change in any method of accounting, method of tax accounting,
or accounting practice by Parent or any of its Subsidiaries, except for any
such change required by reason of a concurrent change in GAAP or Regulation
S-X under the 1934 Act;
(d) any damage, destruction or other casualty loss (whether or not
covered by insurance) affecting the business or assets of Parent or any of
its Subsidiaries which would, individually or in the aggregate, have a
Material Adverse Effect on Parent; and
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(e) any material labor dispute, other than routine individual
grievances, or, to the knowledge of Parent, any activity or proceeding by a
labor union or representative thereof to organize any employees of Parent
or any of its Subsidiaries, which employees were not subject to a
collective bargaining agreement at the Parent Balance Sheet Date, or any
material lockouts, strikes, slowdowns, work stoppages or threats thereof by
or with respect to such employees other than any such events that would
not, individually or in the aggregate, have a Material Adverse Effect on
Parent.
SECTION 4.11. No Undisclosed Material Liabilities. There are no liabilities
or obligations of Parent or any of its Subsidiaries of any kind whatsoever,
whether accrued, contingent, absolute, determined, determinable or otherwise,
that would be required by GAAP to be reflected on a consolidated balance sheet
of Parent, and there is no existing condition, situation or set of circumstances
that could reasonably be expected to result in such a liability, other than:
(a) liabilities or obligations disclosed and provided for in the
Parent Balance Sheet or in the notes thereto or in the Parent SEC
Documents;
(b) liabilities or obligations incurred in the ordinary course of
business consistent with past practices since the Parent Balance Sheet Date
that would not reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect on Parent; and
(c) liabilities or obligations under this Agreement or the
transactions contemplated hereby.
SECTION 4.12. Compliance with Laws and Court Orders. Parent and each of its
Subsidiaries is and, since January 1, 1998 has been in compliance with, and to
the knowledge of Parent is not under investigation with respect to and has not
been threatened to be charged with or given notice of any violation of, any
applicable law, rule, regulation, judgment, injunction, order or decree that
would be material to the Parent.
SECTION 4.13. Litigation. Except as set forth in the Parent SEC Documents,
there is no action, suit, investigation or proceeding (or any basis therefor)
pending against, or, to the knowledge of Parent, threatened against or
affecting, Parent, any of its Subsidiaries, any present or former officer,
director or employee of Parent or any of its Subsidiaries or any other Person
for whom Parent or any Subsidiary may be liable or any of their respective
properties before any court or arbitrator or any governmental body, agency or
official, domestic, foreign or supranational, that, if determined or resolved
adversely in accordance with the plaintiff's demands, could reasonably be
expected to be material to the Parent individually or in the aggregate, that in
any manner challenges or seeks to prevent, enjoin, alter or materially delay the
Merger or any of the other transactions contemplated hereby.
SECTION 4.14. Finders' Fees. Except for First Albany Corporation, whose
fees will be paid by Parent, there is no investment banker, broker, finder or
other intermediary that has been retained by or is authorized to act on behalf
of Parent who might be entitled to any fee or commission from the Company or any
of its Affiliates upon consummation of the transactions contemplated by this
Agreement.
SECTION 4.15. Opinion of Financial Advisor. Parent has received the opinion
of First Albany Corporation, financial advisors to Parent, to the effect that,
as of the date of this Agreement, the Merger Consideration is fair to Parent's
stockholders from a financial point of view.
SECTION 4.16. Taxes. (a) All Tax Returns required to be filed with any
Taxing Authority by, or with respect to, Parent and its Subsidiaries have been
filed in accordance with all applicable laws.
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(b) Parent and each of its Subsidiaries has timely paid all Taxes shown as
due and payable on the Tax Returns that have been so filed, and, as of the time
of filing, the Tax Returns correctly reflected the facts regarding the income,
business, assets, operations, activities and the status of Parent and each of
its Subsidiaries (other than Taxes which are being contested in good faith and
for which adequate reserves are reflected on the Parent Balance Sheet).
(c) Parent and its Subsidiaries have made provision for all Taxes payable
by Parent and its Subsidiaries for which no Tax Return has yet been filed.
(d) The charges, accruals and reserves for Taxes with respect to Parent and
its Subsidiaries reflected on the Parent Balance Sheet are adequate under GAAP
to cover the Tax liabilities accruing through the date thereof.
(e) The federal income Tax Returns of Parent and its Subsidiaries have been
examined and settled with the appropriate Governmental Authority (or the
applicable statutes of limitation for the assessment of such taxes have expired)
for all years through fiscal 1999.
(f) No federal, state, local or foreign audits, reviews or other actions
("PARENT AUDITS") exist or have been initiated or threatened with regard to any
Taxes or Tax Returns of or with respect to Parent or any of its Subsidiaries,
and neither Parent nor any of its Subsidiaries has received any notice of such a
Parent Audit.
(g) No claim has been made by a Taxing Authority in a jurisdiction where
either Parent or its Subsidiaries does not file Tax Returns to the effect that
Parent or its Subsidiaries is or may be subject to taxation by that
jurisdiction.
(h) Neither Parent nor any of its Subsidiaries has been a member of an
affiliated, consolidated, combined or unitary group other than one of which
Parent was the common parent, or made any election or participated in any
arrangement whereby any Tax liability or any Tax asset of Parent or any of its
Subsidiaries was determined or taken into account for Tax purposes with
reference to or in conjunction with any Tax liability or any Tax asset of any
other person.
SECTION 4.17. Tax Treatment. Neither Parent nor any of its Affiliates has
taken or agreed to take any action, or is aware of any fact or circumstance,
that would prevent the Merger from qualifying as a 368(a) Reorganization.
SECTION 4.18. Laws and Authorizations. (a) Neither Parent 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 ("PARENT
ENVIRONMENTAL LAWS") or any provisions of ERISA, or the rules and regulations
promulgated thereunder, except for such violations which, singly or in the
aggregate, would not have a Material Adverse Effect on Parent.
(b) There are no costs or liabilities associated with Parent Environmental
Laws (including, without limitation, any capital or operating expenditures
required for clean-up, closure of properties or compliance with Parent
Environmental Laws, 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 on Parent.
SECTION 4.19. Intellectual Property. Except as described in the Parent SEC
Documents, Parent 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 ("PARENT INTELLECTUAL PROPERTY") currently
employed by them in connection
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with the business now operated by them except where the failure to own or
possess or otherwise be able to acquire such Parent Intellectual Property would
not, singly or in the aggregate, have a Material Adverse Effect on Parent.
ARTICLE 5
COVENANTS OF THE COMPANY
The Company agrees that:
SECTION 5.01. Conduct of the Company. From the date hereof until the
Effective Time, the Company and its Subsidiary shall conduct their business in
the ordinary course consistent with past practice and shall use their reasonable
best efforts to preserve intact their business organizations and relationships
with third parties and to keep available the services of their present officers
and employees. Without limiting the generality of the foregoing, from the date
hereof until the Effective Time the Company will not:
(a) adopt or propose any change to its articles of incorporation or
bylaws;
(b) adopt or implement any stockholder rights plan;
(c) authorize for issuance, issue, sell, deliver or agree or commit to
issue, sell or deliver (whether through the issuance or granting of
options, warrants, commitments, subscriptions, rights to purchase or
otherwise) any stock of any class or any other securities (except bank
loans) or equity equivalents (including, without limitation, any stock
options or stock appreciation rights), except for the issuance and sale by
the Company of Company Stock pursuant to Company Stock Options and warrants
issued and outstanding as of the date hereof and except that, with the
prior written consent of Parent, the Company may issue options to employees
hired after the date hereof (other than directors and officers);
(d) split, combine or reclassify any shares of its capital stock,
declare, set aside or pay any dividend or other distribution (whether in
cash, stock or property or any combination thereof) in respect of its
capital stock, make any other actual, constructive or deemed distribution
in respect of its capital stock or otherwise make any payments to
shareholders in their capacity as such, or redeem or otherwise acquire any
of its securities;
(e) except as otherwise permitted by this Agreement, adopt a plan of
complete or partial liquidation, dissolution, merger, consolidation,
restructuring, recapitalization or other reorganization of the Company or
its Subsidiary (other than the Merger);
(f) (i) incur or assume any long-term or short-term debt or enter into
or amend capital leases; (ii) assume, guarantee, endorse or otherwise
become liable or responsible (whether directly, contingently or otherwise)
for the obligations of any other Person; (iii) make any loans, advances or
capital contributions to, or investments in, any other Person; (iv) pledge
or otherwise encumber shares of capital stock of the Company or its
Subsidiary; or (v) mortgage or pledge any of its material assets, tangible
or intangible, or create or suffer to exist any Lien thereupon (other than
tax Liens for taxes not yet due);
(g) except as may be required by law, enter into, adopt or amend or
terminate any bonus, profit sharing, compensation, severance, termination,
stock option, stock appreciation right, restricted stock, performance unit,
stock equivalent, stock purchase agreement, pension, retirement, deferred
compensation, employment, severance or other employee benefit agreement,
trust, plan, fund or other arrangement for the benefit or welfare of any
director, officer or
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employee in any manner, or increase in any manner the compensation or
fringe benefits of any director, officer or employee or pay any benefit not
required by any plan and arrangement as in effect as of the date hereof
(including, without limitation, the granting of stock appreciation rights
or performance units);
(h) except as otherwise permitted by this Agreement, acquire, sell,
lease or dispose of any assets in any single transaction or series of
related transactions (other than in the ordinary course of business);
(i) hire any new employees without the prior written consent of
Parent;
(j) except as may be required as a result of a change in law or in
GAAP, change any of the accounting principles or practices used by it;
(k) revalue in any material respect any of its assets, including,
without limitation, writing down the value of inventory or writing-off
notes or accounts receivable other than as required under GAAP in the
ordinary course of business;
(l) (i) acquire (by merger, consolidation, or acquisition of stock or
assets) any corporation, partnership, or other business organization or
division thereof or any equity interest therein; (ii) enter into any
contract or agreement that would be required to be disclosed pursuant to
Section 3.19, which cannot be terminated without twelve months notice, or
that would otherwise be material to the Company; or (iii) authorize any new
capital expenditure or expenditures which, in the aggregate, are in excess
of $150,000;
(m) make any tax election or settle or compromise any income tax
liability material to the Company and its Subsidiary;
(n) settle or compromise any pending or threatened suit, action or
claim;
(o) the Company will not, and will not permit its Subsidiary to, sell,
lease, license or otherwise dispose of any assets, securities or property
except (i) pursuant to existing contracts or commitments and (ii) in the
ordinary course consistent with past practice;
(p) the Company will not, and will not permit its Subsidiary to, (i)
take any action that would make any representation and warranty of the
Company hereunder inaccurate in any respect at, or as of any time prior to,
the Effective Time or (ii) omit to take any action necessary to prevent any
such representation or warranty from being inaccurate in any respect at any
such time; and
(q) the Company will not, and will not permit its Subsidiary to, agree
or commit to do any of the foregoing.
SECTION 5.02. Stockholder Meeting; Proxy Material. The Company shall cause
a meeting of its stockholders (the "COMPANY STOCKHOLDER MEETING") to be duly
called and held as soon as reasonably practicable for the purpose of voting on
the approval and adoption of this Agreement and the Merger. Subject to Section
5.03(b), the Board of Directors of the Company shall recommend approval and
adoption of this Agreement and the Merger by the Company's stockholders. In
connection with such meeting, the Company will (a) promptly prepare and file
with the SEC, use its best efforts to have cleared by the SEC and thereafter
mail to its stockholders as promptly as practicable the Company Proxy Statement
and all other proxy materials for such meeting, (b) use its reasonable best
efforts to obtain the necessary approvals by its stockholders of this Agreement
and the transactions contemplated hereby and (c) otherwise comply with all legal
requirements applicable to such meeting.
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SECTION 5.03. No Solicitation. (a) Neither the Company nor any of its
Subsidiaries shall, nor shall the Company or any of its Subsidiaries authorize
or permit any of its or their officers, directors, employees, investment
bankers, attorneys, accountants, consultants or other agents or advisors to,
directly or indirectly, (i) solicit, initiate or take any action to facilitate
or encourage the submission of any Acquisition Proposal, (ii) enter into or
participate in any discussions or negotiations with, furnish any information
relating to the Company or any of its Subsidiaries or afford access to the
business, properties, assets, books or records of the Company or any of its
Subsidiaries to, otherwise cooperate in any way with, or knowingly assist,
participate in, facilitate or encourage any effort by any Third Party that is
seeking to make, or has made, an Acquisition Proposal or (iii) grant any waiver
or release under any standstill or similar agreement with respect to any class
of equity securities of the Company or any of its Subsidiaries.
(b) Notwithstanding the foregoing, if the Board of Directors of the Company
determines in good faith, on the basis of written advice from Kirkpatrick &
Lockhart LLP, outside legal counsel to the Company, that it must take such
action to comply with its fiduciary duties under applicable law, the Board of
Directors of the Company, may (i) engage in negotiations or discussions with any
Third Party that has made an Acquisition Proposal (without prior solicitation by
or negotiation with the Company) which the Board of Directors reasonably
determines to be a Superior Proposal, (ii) furnish to such Third Party nonpublic
information relating to the Company or any of its Subsidiaries pursuant to a
confidentiality agreement with terms no less favorable to the Company than those
contained in the Confidentiality Agreement dated as of January 28, 2000 between
the Company and Parent (the "CONFIDENTIALITY AGREEMENT"), (iii) following
receipt of such Superior Proposal, take and disclose to its stockholders a
position contemplated by Rule 14e-2(a) under the 1934 Act or otherwise make
disclosure to them or (iv) following receipt of such Superior Proposal, fail to
make, withdraw, or modify in a manner adverse to Parent its recommendation to
its stockholders referred to in Section 5.02 hereof.
(c) The Board of Directors of the Company shall not take any of the actions
referred to in clauses (i) through (iv) of the preceding subsection unless the
Company shall have delivered to Parent a prior written notice advising Parent
that it intends to take such action, and the Company shall continue to advise
Parent after taking such action. In addition, the Company shall notify Parent
promptly (but in no event later than 36 hours) after receipt by the Company (or
any of its advisors) of any Acquisition Proposal, any indication that a Third
Party is considering making an Acquisition Proposal or of any request for
information relating to the Company or any of its Subsidiaries or for access to
the business, properties, assets, books or records of the Company or any of its
Subsidiaries by any Third Party that may be considering making, or has made, an
Acquisition Proposal. The Company shall provide such notice orally and in
writing and shall identify the Third Party making, and the terms and conditions
of, any such Acquisition Proposal, indication or request. The Company shall keep
Parent reasonably informed of the status and details of any such Acquisition
Proposal, indication or request. The Company shall, and shall cause its
Subsidiaries and the advisors, employees and other agents of the Company and any
of its Subsidiaries to, cease immediately and cause to be terminated any and all
existing activities, discussions or negotiations, if any, with any Third Party
conducted prior to the date hereof with respect to any Acquisition Proposal and
shall use its commercially reasonable efforts to cause any such Party (or its
agents or advisors) in possession of confidential information about the Company
that was furnished by or on behalf of the Company to return or destroy all such
information.
"SUPERIOR PROPOSAL" means any bona fide, unsolicited written Acquisition
Proposal for at least a majority of the outstanding shares of Company Stock on
terms that the Board of Directors of the Company determines in good faith by a
majority vote, on the basis of the advice of a financial advisor of nationally
recognized reputation and taking into account all the terms and conditions of
the
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Acquisition Proposal, including any break-up fees, expense reimbursement
provisions and conditions to consummation, are more favorable and provide
greater value to all the Company's stockholders than as provided hereunder and
for which financing, to the extent required, is then fully committed or
reasonably determined to be available by the Board of Directors of the Company.
SECTION 5.04. Lock-Up Letters. Prior to the Effective Time, the Company
will obtain and deliver from each of James Harrer, Donald Leonard, Christopher
Rechtsteiner, C. Scott Hunter, Dan Cooper and Lynn Wright a lock-up agreement,
substantially in the form of Exhibit A hereto, whereby each agrees not to offer
to sell, grant any option for the sale of, or otherwise dispose of any Parent
Stock prior to May 15, 2000.
SECTION 5.05. Non-Compete Agreements. On or prior to the Effective Time,
the Company shall use its best efforts to obtain from James Harrer and C. Scott
Hunter a non-compete agreement, substantially in the form of Exhibit B hereto.
ARTICLE 6
COVENANTS OF PARENT
Parent agrees that:
SECTION 6.01. Conduct of Parent. Parent agrees that, from the date hereof
until the Effective Time, Parent and its Subsidiaries shall conduct their
business in the ordinary course consistent with past practice and shall use
their reasonable best efforts to preserve intact their business organizations
and relationships with third parties and to keep available the services of their
present officers and employees. Without limiting the generality of the
foregoing, from the date hereof until the Effective Time:
(a) Parent will not adopt or propose any change in its articles of
incorporation or bylaws;
(b) except as may be required as a result of a change in law or in
GAAP, change any of the accounting principles or practices used by it;
(c) Parent will not, and will not permit any of its Subsidiaries to,
take any action that would make any representation and warranty of Parent
hereunder inaccurate in any respect at, or as of any time prior to, the
Effective Time.
SECTION 6.02. Obligations of Merger Subsidiary. Parent will take all action
necessary to cause Merger Subsidiary to perform its obligations under this
Agreement and to consummate the Merger on the terms and conditions set forth in
this Agreement.
SECTION 6.03. Director and Officer Liability. Parent shall cause the
Surviving Corporation, and the Surviving Corporation hereby agrees, to do the
following:
(a) For six years after the Effective Time, the Surviving Corporation
shall indemnify and hold harmless the present and former officers and
directors of the Company (each an "INDEMNIFIED PERSON") in respect of acts
or omissions occurring at or prior to the Effective Time to the fullest
extent permitted by Delaware Law or any other applicable laws or provided
under the Company's articles of incorporation and bylaws in effect on the
date hereof, provided that such indemnification shall be subject to any
limitation imposed from time to time under applicable law.
(b) For six years after the Effective Time, the Surviving Corporation
shall provide officers' and directors' liability insurance in respect of
acts or omissions occurring prior to the Effective
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Time covering each such Indemnified Person currently covered by the
Company's officers' and directors' liability insurance policy on terms with
respect to coverage and amount no less favorable than those of such policy
in effect on the date hereof, provided that, in satisfying its obligation
under this Section 6.03(b), the Surviving Corporation shall not be
obligated to pay premiums in excess of 150% of the amount per annum the
Company paid in its last full fiscal year, which amount the Company has
disclosed to Parent prior to the date hereof; provided further, that Parent
shall be obligated to provide such coverage as may be obtained for such
amount.
(c) If Parent, the Surviving Corporation or any of its successors or
assigns (i) consolidates with or merges into any other Person and shall not
be the continuing or surviving corporation or entity of such consolidation
or merger, or (ii) transfers or conveys all or substantially all of its
properties and assets to any Person, then, and in each such case, to the
extent necessary, proper provision shall be made so that the successors and
assigns of Parent or the Surviving Corporation, as the case may be, shall
assume the obligations set forth in this Section 6.03.
(d) The rights of each Indemnified Person under this Section 6.03
shall be in addition to any rights such Person may have under the article
of incorporation or bylaws of the Company or any of its Subsidiaries, or
under California Law or any other applicable laws or under any agreement of
any Indemnified Person with the Company or any of its Subsidiaries. These
rights shall survive consummation of the Merger and are intended to
benefit, and shall be enforceable by, each Indemnified Person.
SECTION 6.04. Registration Statement. Parent shall promptly prepare and
file with the SEC under the 1933 Act the Registration Statement and shall use
its best efforts to cause the Registration Statement to be declared effective by
the SEC as promptly as practicable. Parent shall promptly take any action
required to be taken under foreign or state securities or Blue Sky laws in
connection with the issuance of Parent Stock in the Merger.
SECTION 6.05. Stock Exchange Listing. Parent shall use its best efforts to
cause the shares of Parent Stock to be issued in connection with the Merger to
be listed on the Nasdaq National Market.
SECTION 6.06. Employee Benefits. For one year following the Effective Time,
the employees of the Company will be provided compensation and benefits (other
than stock based compensation) that are, in the reasonable judgment of Parent,
substantially comparable in the aggregate to those provided by the Company to
its employees as of the date hereof. After the Effective Time, Parent shall
recognize service with the Company and its subsidiaries as service for vesting
and service credit purposes under any employee benefit plan or arrangement
maintained by Parent. Nothing in this Section shall obligate Parent, the Company
or any of their respective Subsidiaries to continue the employment of any person
for any period.
SECTION 6.07. Broker Program. Parent shall use its reasonable best efforts
to establish, effective on and after May 15, 2000, a customary broker program to
permit exercises of Adjusted Options on a "cashless" basis and to permit resales
of Parent Stock obtained on such exercise, with the cost of such exercises and
resales to be borne by the participants.
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ARTICLE 7
COVENANTS OF PARENT AND THE COMPANY
The parties hereto agree that:
SECTION 7.01. Best Efforts. Subject to the terms and conditions of this
Agreement, Company and Parent will use their reasonable best efforts to take, or
cause to be taken, all actions and to do, or cause to be done, all things
necessary, proper or advisable under applicable laws and regulations to
consummate the transactions contemplated by this Agreement by May 15, 2000. In
furtherance and not in limitation of the foregoing, each of Parent and Company
agrees to make an appropriate filing of a Notification and Report Form pursuant
to the HSR Act with respect to the transactions contemplated hereby as promptly
as practicable and in any event within ten business days of the date hereof and
to supply as promptly as practicable any additional information and documentary
material that may be requested pursuant to the HSR Act and to take all other
actions necessary to cause the expiration or termination of the applicable
waiting periods under the HSR Act as soon as practicable.
SECTION 7.02. Certain Filings. The Company and Parent shall cooperate with
one another (a) in connection with the preparation of the Company Proxy
Statement and the Registration Statement, (b) in determining whether any action
by or in respect of, or filing with, any governmental body, agency, official, or
authority is required, or any actions, consents, approvals or waivers are
required to be obtained from parties to any material contracts, in connection
with the consummation of the transactions contemplated by this Agreement and (c)
in taking such actions or making any such filings, furnishing information
required in connection therewith or with the Company Proxy Statement or the
Registration Statement and seeking timely to obtain any such actions, consents,
approvals or waivers.
SECTION 7.03. Public Announcements. Parent and the Company will consult
with each other before issuing any press release or making any public statement
with respect to this Agreement or the transactions contemplated hereby and,
except as may be required by applicable law or any listing agreement with the
Nasdaq Stock Market, will not issue any such press release or make any such
public statement prior to such consultation.
SECTION 7.04. Further Assurances. At and after the Effective Time, the
officers and directors of the Surviving Corporation will be authorized to
execute and deliver, in the name and on behalf of the Company or Merger
Subsidiary, any deeds, bills of sale, assignments or assurances and to take and
do, in the name and on behalf of the Company or Merger Subsidiary, any other
actions and things to vest, perfect or confirm of record or otherwise in the
Surviving Corporation any and all right, title and interest in, to and under any
of the rights, properties or assets of the Company acquired or to be acquired by
the Surviving Corporation as a result of, or in connection with, the Merger.
SECTION 7.05. Access to Information. From the date hereof until the
Effective Time and subject to applicable law and the Confidentiality Agreement,
the Company and Parent shall (a) give to the other party, its counsel, financial
advisors, auditors and other authorized representatives reasonable access to the
offices, properties, books and records of such party, (b) furnish to the other
party, its counsel, financial advisors, auditors and other authorized
representatives such financial and operating data and other information as such
Persons may reasonably request and (c) instruct its employees, counsel,
financial advisors, auditors and other authorized representatives to cooperate
with the other party in its investigation. Any investigation pursuant to this
Section shall be conducted in such manner as not to interfere unreasonably with
the conduct of the business of the other party. Unless otherwise required by
law, each of Company and Parent will hold, and will cause its respective
officers, employees, counsel, financial advisors, auditors and other authorized
representatives to hold,
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any nonpublic information obtained in any such investigation in confidence in
accordance with the Confidentiality Agreement. No information or knowledge
obtained in any investigation pursuant to this Section shall affect or be deemed
to modify any representation or warranty made by any party hereunder.
SECTION 7.06. Notices of Certain Events. Each of the Company and Parent
shall promptly notify the other of:
(a) any notice or other communication from any Person alleging that
the consent of such Person is or may be required in connection with the
transactions contemplated by this Agreement;
(b) any notice or other communication from any governmental or
regulatory agency or authority in connection with the transactions
contemplated by this Agreement; and
(c) any actions, suits, claims, investigations or proceedings
commenced or, to its knowledge, threatened against, relating to or
involving or otherwise affecting the Company or any of its Subsidiaries
that, if pending on the date of this Agreement, would have been required to
have been disclosed pursuant to Section 3.11, 3.12, 3.13, 3.16, 3.18, 3.19,
3.20, 3.21, 3.22, 3.23, 4.11, 4.12, 4.13, or 4.16, as the case may be, or
that relate to the consummation of the transactions contemplated by this
Agreement.
SECTION 7.07. Tax-free Reorganization. (a) Prior to the Effective Time,
each party shall use its best efforts to cause the Merger to qualify as a 368(a)
Reorganization, and will not take any action, or fail to take any action,
reasonably likely to cause the Merger not so to qualify. Parent shall not take,
or cause the Company to take, any action after the Effective Time reasonably
likely to cause the Merger not to qualify as a 368(a) Reorganization.
(b) Each party shall use its reasonable best efforts to obtain the opinions
referred to in Sections 8.02(f) and 8.03(b).
SECTION 7.08. Affiliates. Within 30 days following the date of this
Agreement, the Company shall deliver to Parent a letter identifying all known
Persons who may be deemed affiliates of the Company under Rule 145 of the 1933
Act. The Company shall use its reasonable efforts to obtain a written agreement
from each Person who may be so deemed as soon as practicable and, in any event,
prior to the Effective Time, substantially in the form of Exhibit C hereto.
ARTICLE 8
CONDITIONS TO THE MERGER
SECTION 8.01. Conditions to Obligations of Each Party. The obligations of
the Company and Parent to consummate the Merger are subject to the satisfaction
of the following conditions:
(a) this Agreement shall have been approved and adopted by the
stockholders of the Company in accordance with California Law;
(b) any applicable waiting period under the HSR Act relating to the
Merger shall have expired or been terminated;
(c) no provision of any applicable law or regulation and no judgment,
injunction, order or decree shall prohibit the consummation of the Merger;
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(d) the Registration Statement shall have been declared effective and
no stop order suspending the effectiveness of the Registration Statement
shall be in effect and no proceedings for such purpose shall be pending
before or threatened by the SEC;
(e) the shares of Parent Stock to be issued in the Merger shall have
been approved for listing on the Nasdaq National Market; and
(f) all actions by or in respect of, or filings with, any governmental
body, agency, official or authority, domestic, foreign or supranational,
required to permit the consummation of the Merger shall have been taken,
made or obtained.
SECTION 8.02. Conditions to the Obligations of Parent. The obligations of
Parent to consummate the Merger are subject to the satisfaction of the following
further conditions:
(a) (i) the Company shall have performed in all material respects all
of its obligations hereunder required to be performed by it at or prior to
the Effective Time, (ii) the representations and warranties of the Company
contained in this Agreement and in any certificate or other writing
delivered by the Company pursuant hereto shall be true in all material
respects at and as of the Effective Time as if made at and as of such time
and (iii) Parent shall have received a certificate signed by the chief
executive officer of the Company to the foregoing effect;
(b) no court, arbitrator or governmental body, agency or official,
domestic or foreign, shall have issued any order, and there shall not be
any statute, rule or regulation, restraining or prohibiting the
consummation of the Merger or the effective operation of the business of
Parent and its Subsidiaries or the Company and its Subsidiaries after the
Effective Time;
(c) there shall not have been instituted or pending any action or
proceeding (or any investigation or other inquiry that would reasonably be
expected to result in such action or proceeding) by any government or
governmental authority or agency, domestic, foreign or supranational, or by
any other Person, domestic, foreign or supranational, before any court or
governmental authority or agency, domestic, foreign or supranational, (i)
challenging or seeking to make illegal, to delay materially or otherwise
directly or indirectly to restrain or prohibit the consummation of the
Merger, seeking to obtain material damages or otherwise directly or
indirectly relating to the transactions contemplated by the Merger, (ii)
seeking to restrain or prohibit Parent's ownership or operation (or that of
its respective Subsidiaries or Affiliates) of all or any material portion
of the business or assets of the Company and its Subsidiaries, taken as a
whole, or of Parent and its Subsidiaries, taken as a whole, or to compel
Parent or any of its Subsidiaries or Affiliates to dispose of or hold
separate all or any material portion of the business or assets of the
Company and its Subsidiaries, taken as a whole, or of Parent and its
Subsidiaries, taken as a whole or (iii) that otherwise, in the judgment of
Parent, is likely to have a Material Adverse Effect on the Company or
Parent;
(d) there shall not have been any action taken, or any statute, rule,
regulation, injunction, order or decree proposed, enacted, enforced,
promulgated, issued or deemed applicable to the Merger, by any court,
government or governmental authority or agency, domestic, foreign or
supranational, other than the application of the waiting period provisions
of the HSR Act to the Merger, that, in the judgment of Parent, is likely,
directly or indirectly, to result in any of the consequences referred to in
clauses (i) through (iii) of paragraph (c) above;
(e) Dissenting Shares shall not exceed 5% of the Company Stock
outstanding immediately prior to the Effective Time;
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(f) Parent shall have received an opinion of Davis Polk & Wardwell
substantially in the form of Exhibit D hereto, on the basis of certain
facts, representations and assumptions set forth in such opinion, dated the
Effective Time, to the effect that the Merger will be treated for federal
income tax purposes as a reorganization qualifying under the provision of
Section 368(a) of the Code and that each of Parent, Merger Subsidiary and
the Company will be a party to the reorganization within the meaning of
Section 368(b) of the Code. In rendering such opinion, such counsel shall
be entitled to rely upon representations of officers of Parent and the
Company substantially in the form of Exhibits E and F hereto; and
(g) the Company shall have delivered a comfort letter on the effective
date of the Registration Statement, and a bring-down comfort letter
immediately prior to the Effective Time, in form and substance satisfactory
to Parent, from its independent public accountants, with respect to the
financial statements and certain financial information contained in or
incorporated by reference into the Registration Statement; provided,
however, that Parent, shall, as a condition precedent to receiving such
comfort letter, furnish the Company's independent public accountants with
such information and representations as reasonably necessary for such
independent public accountants to render the comfort letter to Parent.
SECTION 8.03. Conditions to the Obligations of the Company. The obligations
of the Company to consummate the Merger are subject to the satisfaction of the
following further conditions:
(a) Parent shall have performed in all material respects all of its
obligations hereunder required to be performed by it at or prior to the
Effective Time, the representations and warranties of Parent contained in
this Agreement and in any certificate or other writing delivered by Parent
pursuant hereto shall be true in all material respects at and as of the
Effective Time as if made at and as of such time and the Company shall have
received a certificate signed by the chief executive officer of Parent to
the foregoing effect; and
(b) the Company shall have received an opinion of Kirkpatrick &
Lockhart LLP substantially in the form of Exhibit G hereto, on the basis of
certain facts, representations and assumptions set forth in such opinion,
dated the Effective Time, to the effect that the Merger will be treated for
federal income tax purposes as a reorganization qualifying under the
provisions of Section 368(a) of the Code and that each of Parent, Merger
Subsidiary and the Company will be a party to the reorganization within the
meaning of Section 368(b) of the Code. In rendering such opinion, such
counsel shall be entitled to rely upon representations of officers of
Parent and the Company substantially in the form of Exhibit E and F hereto.
ARTICLE 9
TERMINATION
SECTION 9.01. Termination. This Agreement may be terminated and the Merger
may be abandoned at any time prior to the Effective Time (notwithstanding any
approval of this Agreement by the stockholders of the Company):
(a) by mutual written agreement of the Company and Parent;
(b) by either the Company or Parent, if:
(i) the Merger has not been consummated on or before June 30, 2000,
provided that the right to terminate this Agreement pursuant to this
Section 9.01(b)(i) shall not be available to any party whose breach of
any provision of this Agreement results in the failure of the Merger to
be consummated by such time;
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(ii) there shall be any law or regulation that makes consummation
of the Merger illegal or otherwise prohibited or any judgment,
injunction, order or decree of any court or governmental body having
competent jurisdiction enjoining Company or Parent from consummating the
Merger is entered and such judgment, injunction, judgment or order shall
have become final and nonappealable; or
(iii) this Agreement shall not have been approved and adopted in
accordance with California Law by the Company's stockholders at the
Company Stockholder Meeting (or any adjournment thereof).
(c) by Parent, if the Board of Directors of the Company shall have
failed to make or withdraw, or modified in a manner adverse to Parent, its
approval or recommendation of this Agreement or the Merger, or shall have
failed to call the Company Stockholder Meeting in accordance with Section
5.02.
(d) by Parent, if (i) a breach of or failure to perform any
representation, warranty, covenant or agreement on the part of the Company
set forth in this Agreement shall have occurred that would cause the
condition set forth in Section 8.02(a) not to be satisfied, and either such
condition is incapable of being satisfied by June 30, 2000 or the Company
has failed to cure such breach within 20 business days after notice by
Parent thereon or (ii) the Company shall have willfully and materially
breached its obligations under Sections 5.02 or 5.03; or
(e) by the Company, if a breach of or failure to perform any
representation, warranty, covenant or agreement on the part of the Parent
set forth in this Agreement shall have occurred that would cause the
condition set forth in Section 8.03(a) not to be satisfied, and such
condition is incapable of being satisfied by June 30, 2000 or Parent has
failed to cure such breach within 20 Business Days after notice by the
Company thereof.
The party desiring to terminate this Agreement pursuant to this Section 9.01
(other than pursuant to Section 9.01(a)) shall give notice of such termination
to the other party.
SECTION 9.02. Effect of Termination. If this Agreement is terminated
pursuant to Section 9.01, this Agreement shall become void and of no effect
without liability of any party (or any stockholder, director, officer, employee,
agent, consultant or representative of such party) to the other party hereto,
provided that, if such termination shall result from the willful (a) failure of
either party to fulfill a condition to the performance of the obligations of the
other party or (b) failure of either party to perform a covenant hereof, such
party shall be fully liable for any and all liabilities and damages incurred or
suffered by the other party as a result of such failure. The provisions of
Section 7.03 and Article 11 shall survive any termination hereof pursuant to
Section 9.01.
ARTICLE 10
DEFINITIONS
SECTION 10.01. Definitions. (a) The following terms, as used herein, have
the following meanings:
"ACQUISITION PROPOSAL" means, other than the transactions contemplated by
this Agreement, any offer or proposal for, any indication of interest in, or any
submission of inquiries from any Third Party relating to (a) any acquisition or
purchase, direct or indirect, of 20% or more of the consolidated assets of the
Company or over 20% of any class of equity or voting securities of the Company,
(b) any tender offer (including a self-tender offer) or exchange offer that, if
consummated, would result in such Third Party's beneficially owning 20% or more
of any class of equity or voting securities
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of the Company, (c) a merger, consolidation, share exchange, business
combination, sale of substantially all the assets, reorganization,
recapitalization, liquidation, dissolution or other similar transaction
involving the Company, or (d) any other transaction the consummation of which
could reasonably be expected to impede, interfere with, prevent or materially
delay the Merger or that could reasonably be expected to dilute materially the
benefits to Parent of the transactions contemplated hereby.
"AFFILIATE" means, with respect to any Person, any other Person directly or
indirectly controlling, controlled by, or under common control with such Person.
"BUSINESS DAY" means a day, other than Saturday, Sunday or other day on
which commercial banks in Los Angeles or San Francisco, California or New York,
New York are authorized or required by law to close.
"CALIFORNIA LAW" means the California General Corporation Law.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMPANY BALANCE SHEET" means the balance sheet of the Company as of
December 31, 1999 and the footnotes thereto, included in Exhibit H hereto.
"COMPANY BALANCE SHEET DATE" means December 31, 1999.
"COMPANY STOCK" means the common stock, no par value, of the Company.
"DELAWARE LAW" means the General Corporation Law of the State of Delaware.
"EMPLOYEE PLAN" means (a) any "employee benefit plan", as defined in
Section 3(3) of ERISA, that (i) is subject to any provision of ERISA, (ii) is
maintained, administered or contributed to by the Company or any of its
Affiliates and (iii) covers any employee or former employee of the Company or
any Subsidiary and (b) any employment, severance or similar contract or
arrangement (whether or not written) providing for compensation, bonus,
profit-sharing, stock option, or other stock-related rights or other forms of
incentive or deferred compensation, vacation benefits, insurance coverage
(including any self-insured arrangements), health or medical benefits,
disability benefits, worker's compensation, supplemental unemployment benefits,
severance benefits and post-employment or retirement benefits (including
compensation, pension, health, medical or life insurance or other benefits) that
(i) is entered into, maintained, administered or contributed to, as the case may
be, by the Company or any of its Affiliates and (ii) covers any employee or
former employee of the Company or any Subsidiary.
"ENVIRONMENTAL LAWS" means any federal, state, local or foreign law
(including, without limitation, common law), treaty, judicial decision,
regulation, rule, judgment, order, decree, injunction, permit or governmental
restriction or requirement or any agreement with any governmental authority or
other third party, relating to human health and safety, the environment or to
pollutants, contaminants, wastes or chemicals or any toxic, radioactive,
ignitable, corrosive, reactive or otherwise hazardous substances, wastes or
materials.
"ENVIRONMENTAL PERMITS" means all permits, licenses, franchises,
certificates, approvals and other similar authorizations of governmental
authorities relating to or required by Environmental Laws and affecting, or
relating in any way to, the business of the Company or any Subsidiary as
currently conducted.
"ERISA" means the Employee Retirement Income Security Act of 1974.
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<PAGE> 245
"ERISA AFFILIATE" of any entity means any other entity that, together with
such entity, would be treated as a single employer under Section 414 of the
Code.
"GOVERNMENTAL AUTHORITY" means any United States federal, state, local,
foreign or other governmental, administrative or regulatory authority, body,
agency, court, tribunal or similar entity.
"HSR ACT" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976.
"LIEN" means, with respect to any property or asset, any mortgage, lien,
pledge, charge, security interest, encumbrance or other adverse claim of any
kind in respect of such property or asset. For purposes of this Agreement, a
Person shall be deemed to own subject to a Lien any property or asset that it
has acquired or holds subject to the interest of a vendor or lessor under any
conditional sale agreement, capital lease or other title retention agreement
relating to such property or asset.
"MATERIAL ADVERSE EFFECT" means, with respect to any Person, any change or
effect that has had or is likely to have, individually or in the aggregate with
other changes or effects, a material adverse effect on the condition (financial
or otherwise), business, technology, assets or results of operations of such
Person and its Subsidiaries, taken as a whole.
"1933 ACT" means the Securities Act of 1933.
"1934 ACT" means the Securities Exchange Act of 1934.
"PARENT BALANCE SHEET" means the consolidated balance sheet of Parent as of
December 31, 1999 and the footnotes thereto set forth in the Parent Form 10-Q.
"PARENT BALANCE SHEET DATE" means December 31, 1999.
"PARENT STOCK" means the common stock, $0.001 par value, of Parent.
"PERSON" means an individual, corporation, partnership, limited liability
company, association, trust or other entity or organization, including a
government or political subdivision or an agency or instrumentality thereof.
"SEC" means the Securities and Exchange Commission.
"SUBSIDIARY" means, with respect to any Person, any entity of which
securities or other ownership interests having ordinary voting power to elect a
majority of the board of directors or other persons performing similar functions
are at any time directly or indirectly owned by such Person.
"THIRD PARTY" means any Person as defined in Section 13(d) of the 1934 Act,
other than Parent or any of its Affiliates.
Any reference in this Agreement to a statute shall be to such statute, as
amended from time to time, and to the rules and regulations promulgated
thereunder.
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<PAGE> 246
(b) Each of the following terms is defined in the Section set forth
opposite such term:
<TABLE>
<CAPTION>
TERM SECTION
---- -------
<S> <C>
Adjusted Option......................................... 1.04
Certificates............................................ 1.03
Company Proxy Statement................................. 3.09
Company SEC Documents................................... 3.07
Company Securities...................................... 3.05
Company Stockholder Meeting............................. 5.02
Company Stock Option.................................... 1.04
Company Subsidiary Securities........................... 3.06
Confidentiality Agreement............................... 5.03
Effective Time.......................................... 1.01
Exchange Agent.......................................... 1.03
GAAP.................................................... 3.08
Indemnified Person...................................... 6.03
Merger.................................................. 1.01
Merger Consideration.................................... 1.02
Parent Form S-1......................................... 4.07
Payment Event........................................... 11.04
Registration Statement.................................. 4.09
Superior Proposal....................................... 5.03
Surviving Corporation................................... 1.01
Tax Return.............................................. 3.16
Taxes................................................... 3.16
Taxing Authority........................................ 3.16
368(a) Reorganization................................... 3.24
</TABLE>
ARTICLE 11
MISCELLANEOUS
SECTION 11.01. Notices. All notices, requests and other communications to
any party hereunder shall be in writing (including facsimile transmission) and
shall be given,
if to Parent or Merger Subsidiary, to:
Quintus Corporation
47212 Mission Falls Court
Fremont, CA 94539
Attention: Susan Salvesen
Fax: (510) 624-2895
with a copy to:
Davis Polk & Wardwell
1600 El Camino Real
Menlo Park, CA 94025
Attention: David W. Ferguson
Fax: (650) 752-2111
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<PAGE> 247
if to the Company, to:
Mustang.com, Inc.
6200 Lake Ming Road
Bakersfield, CA 93306
Attention: James A. Harrer
Fax: (661) 873-2457
with a copy to:
Kirkpatrick & Lockhart LLP
9100 Wilshire Boulevard
Beverly Hills, CA 90212
Attention: Mark A. Klein
Fax: (310) 274-8357
or such other address or facsimile number as such party may hereafter specify
for the purpose by notice to the other parties hereto. All such notices,
requests and other communications shall be deemed received on the date of
receipt by the recipient thereof if received prior to 5 p.m., and such day is a
Business Day, in the place of receipt. Otherwise, any such notice, request or
communication shall be deemed not to have been received until the next
succeeding Business Day in the place of receipt.
SECTION 11.02. Survival of Representations and Warranties. The
representations and warranties and agreements contained herein and in any
certificate or other writing delivered pursuant hereto shall not survive the
Effective Time or the termination of this Agreement, except for the agreements
set forth in Sections 1.04(d), 6.03, 6.06, 6.07, 8.02, 11.04, 11.06, 11.07 and
11.08.
SECTION 11.03. Amendments; No Waivers. (a) Any provision of this Agreement
may be amended or waived prior to the Effective Time if, but only if, such
amendment or waiver is in writing and is signed, in the case of an amendment, by
each party to this Agreement or, in the case of a waiver, by each party against
whom the waiver is to be effective, provided that, after the adoption of this
Agreement by the stockholders of the Company and without their further approval,
no such amendment or waiver shall reduce the amount or change the kind of
consideration to be received in exchange for any shares of capital stock of the
Company.
(b) No failure or delay by either party in exercising any right, power or
privilege hereunder shall operate as a waiver thereof nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. The rights and remedies herein
provided shall be cumulative and not exclusive of any rights or remedies
provided by law.
SECTION 11.04. Expenses. (a) Except as otherwise provided in this Section,
all costs and expenses incurred in connection with this Agreement shall be paid
by the party incurring such cost or expense.
(b) If a Payment Event (as hereinafter defined) occurs, the Company shall
(i) pay Parent (by wire transfer of immediately available funds), a fee of
$5,000,000 (the "BREAKUP FEE") and (ii) reimburse Parent and its Affiliates (by
wire transfer of immediately available funds) for 100% of their documented
out-of-pocket fees and expenses (including reasonable fees and expenses of their
counsel) up to $2,500,000 actually incurred by any of them in connection with
this Agreement and the transactions contemplated hereby (the "EXPENSE
REIMBURSEMENT"). The Breakup Fee shall be payable simultaneously with the
occurrence of a Payment Event (if a Payment Event specified in clause (a) below
occurs) or, within two Business Days following such Payment Event (if a Payment
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<PAGE> 248
Event specified in clauses (b) or (c) below occur). The Expense Reimbursement
shall be payable within two Business Days following a Payment Event.
"PAYMENT EVENT" means (a) the termination of this Agreement pursuant to
Section 9.01(d)(ii), or (b) if the Board of Directors of the Company shall have
failed to make or withdrawn, or modified in a manner adverse to Parent, its
approval or recommendation of this Agreement or the Merger, or shall have failed
to call the Company Stockholder Meeting in accordance with Section 5.02, or (c)
the occurrence of any of the following events within 12 months of the
termination of this Agreement pursuant to Sections 9.01(b)(i) or (b)(iii): (i)
the Company merges with or into, or is acquired, directly or indirectly, by
merger or otherwise by, a Third Party; (ii) a Third Party, directly or
indirectly, acquires more than 50% of the total assets of the Company and its
Subsidiaries, taken as a whole; (iii) a Third Party, directly or indirectly,
acquires more than 50% of the outstanding shares of Company Stock; or (iv) the
Company adopts or implements a plan of liquidation, recapitalization or share
repurchase relating to more than 50% of the outstanding shares of Company Stock
or an extraordinary dividend relating to more than 50% of such outstanding
shares or 50% of the assets of the Company and its Subsidiaries, taken as a
whole.
(c) The fees of the Company's counsel, accountants, and any of its
representatives in connection with this Agreement and the transactions
contemplated hereby shall not, without the express written consent of Parent
(which consent shall not be unreasonably withheld), exceed $1,000,000.
(d) The Company acknowledges that the agreements contained in this Section
11.04 are an integral part of the transactions contemplated by this Agreement
and that, without these agreements, Parent and Merger Subsidiary would not enter
into this Agreement. Accordingly, if the Company fails promptly to pay any
amount due to Parent pursuant to this Section 11.04, it shall also pay any costs
and expenses incurred by Parent or Merger Subsidiary in connection with a legal
action to enforce this Agreement that results in a judgment against the Company
for such amount.
SECTION 11.05. Successors and Assigns. The provisions of this Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns, provided that no party may assign, delegate
or otherwise transfer any of its rights or obligations under this Agreement
without the consent of each other party hereto, except that Parent or Merger
Subsidiary may transfer or assign, in whole or from time to time in part, to one
or more of their Affiliates, the right to enter into the transactions
contemplated by this Agreement, but any such transfer or assignment will not
relieve Parent or Merger Subsidiary of its obligations hereunder.
SECTION 11.06. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware, without regard
to the conflicts of law rules of such state.
SECTION 11.07. Jurisdiction. Any suit, action or proceeding seeking to
enforce any provision of, or based on any matter arising out of or in connection
with, this Agreement or the transactions contemplated hereby may be brought in
any federal court located in the State of California or any California state
court, and each of the parties hereby consents to the non-exclusive jurisdiction
of such courts (and of the appropriate appellate courts therefrom) in any such
suit, action or proceeding and irrevocably waives, to the fullest extent
permitted by law, any objection that it may now or hereafter have to the laying
of the venue of any such suit, action or proceeding in any such court or that
any such suit, action or proceeding brought in any such court has been brought
in an inconvenient form. Process in any such suit, action or proceeding may be
served on any party anywhere in the world, whether within or without the
jurisdiction of any such court. Without limiting the foregoing, each party
agrees that service of process on such party as provided in Section 11.01 shall
be deemed effective service of process on such party.
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<PAGE> 249
SECTION 11.08. WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO HEREBY
IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING
ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED
HEREBY.
SECTION 11.09. Counterparts; Effectiveness. This Agreement may be signed in
any number of counterparts, each of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Agreement shall become effective when each party hereto shall have received
counterparts hereof signed by the other party hereto. Except as provided in
Section 7.04, no provision of this Agreement is intended to confer any rights,
benefits, remedies, obligations or liabilities hereunder upon any Person other
than the parties hereto and their respective successors and assigns.
SECTION 11.10. Entire Agreement. This Agreement and the Confidentiality
Agreement constitutes the entire agreement between the parties with respect to
the subject matter of this Agreement and supersede all prior agreements and
understandings, both oral and written, between the parties with respect to the
subject matter of this Agreement.
SECTION 11.11. Captions. The captions herein are included for convenience
of reference only and shall be ignored in the construction or interpretation
hereof.
SECTION 11.12. Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void or unenforceable, the remainder of the
terms, provisions, covenants and restrictions of this Agreement shall remain in
full force and effect and shall in no way be affected, impaired or invalidated.
Upon such a determination, the parties shall negotiate in good faith to modify
this Agreement so as to effect the original intent of the parties as closely as
possible in an acceptable manner so that the transactions contemplated hereby be
consummated as originally contemplated to the fullest extent possible.
SECTION 11.13. Specific Performance. The parties hereto agree that
irreparable damage would occur if any provision of this Agreement were not
performed in accordance with the terms hereof and that the parties shall be
entitled to an injunction or injunctions to prevent breaches of this Agreement
or to enforce specifically the performance of the terms and provisions hereof in
any federal court located in the State of California or any California state
court, in addition to any other remedy to which they are entitled at law or in
equity.
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<PAGE> 250
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.
MUSTANG.COM, INC.
By: /s/ JAMES A. HARRER
------------------------------------
James A. Harrer
President and Chief Executive
Officer
QUINTUS CORPORATION
By: /s/ ALAN K. ANDERSON
------------------------------------
Alan K. Anderson
Chairman and Chief Executive Officer
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<PAGE> 251
EXHIBIT A
FORM OF LOCK-UP AGREEMENT
QUINTUS CORPORATION
47212 Mission Falls Court
Fremont, CA 94539
Ladies and Gentlemen:
Pursuant to the terms of an Agreement and Plan of Merger dated as of
February 25, 2000 (the "AGREEMENT") between QUINTUS CORPORATION, a Delaware
corporation ("PARENT") and MUSTANG.COM, INC., a California corporation (the
"COMPANY"), the undersigned will receive shares of common stock, $0.001 par
value per share, of Parent (the "SHARES"), in exchange for shares of common
stock of the Company owned by the undersigned.
In order to induce Parent to enter into the Agreement, the undersigned
hereby agrees as follows:
1. Prior to May 15, 2000, the undersigned will not (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 or any securities convertible into or exercisable or exchangeable
for Shares, (ii) enter into any swap or other arrangement that transfers
all or a portion of the economic consequences associated with the ownership
of any Shares (regardless of whether any of the transactions described in
clause (i) or (ii) is to be settled by the delivery of Shares, or such
other securities, in cash or otherwise).
2. The undersigned acknowledges that the Parent may impose stock
transfer restrictions on the Shares to enforce the provisions of this
Agreement.
Very truly yours,
By:
------------------------------------
Name:
AGREED TO:
QUINTUS CORPORATION
By:
-----------------------------------------------------
Name:
<PAGE> 252
EXHIBIT B
FORM OF NON-COMPETE AGREEMENT
This Agreement is dated as of , 2000, and is between [James
Harrer] [C. Scott Hunter] (the "STOCKHOLDER") and QUINTUS CORPORATION, a
Delaware corporation ("QUINTUS CORPORATION").
A. The Stockholder is a stockholder of MUSTANG.COM, INC., a California
corporation (the "COMPANY").
B. The Stockholder is the [Chief Executive Officer] [Vice President] of the
Company.
C. Mustang.com, Inc. is a provider of electronic customer relationship
management solutions that enables companies to manage customer interactions,
such as customer orders, inquiries and service requests (such activities being
referred to herein as the "BUSINESS ACTIVITIES").
D. Quintus Corporation proposes to purchase from the Stockholder and the
other stockholders of the Company under an Agreement and Plan of Merger dated as
of February 25, 2000 (the "MERGER AGREEMENT"), all of the issued and outstanding
shares of capital stock of the Company.
E. In light of the Stockholder's ownership of outstanding shares of capital
stock of the Company, his position with the Company and his contributions in the
past to the growth and development of the Company and its affiliates, one of the
conditions to the consummation by Quintus Corporation of the transactions
contemplated by the Merger Agreement is that the Stockholder enter into this
Agreement for the purpose of preserving for Quintus Corporation's benefit the
goodwill, proprietary rights and going concern value of the Company and its
affiliates, and to protect Quintus Corporation's and the Company's business
opportunities. Quintus Corporation considers this Agreement integral to the
transactions contemplated by the Merger Agreement, and would not consummate such
transactions without the Stockholder's execution of this Agreement.
NOW, THEREFORE, for the purposes of inducing Quintus Corporation to
consummate the transactions contemplated in the Merger Agreement and to preserve
the goodwill, proprietary rights and going concern value of the Company, and to
protect Quintus Corporation's and the Company's business opportunities, the
parties agree as follows:
1. The Stockholder acknowledges that the trade secrets, private or
secret processes as they exist from time to time, and confidential
information concerning products, developments, manufacturing techniques,
new product plans, equipment, inventions, discoveries, patent applications,
ideas, designs, engineering drawings, sketches, renderings, other drawings,
manufacturing and test data, computer programs, progress reports,
materials, costs, specifications, processes, methods, research, procurement
and sales activities and procedures, promotion and pricing techniques and
credit and financial data concerning customers or suppliers of the Company
and its affiliates, as well as information relating to the management,
operation or planning of the Company and its affiliates (the "PROPRIETARY
INFORMATION") are valuable, special and unique assets of the Company and
its affiliates, access to and knowledge of which have been gained by virtue
of the Stockholder's position and involvement with the Company. In light of
the highly competitive nature of the industries in which the Company and
its affiliates conduct their businesses, the Stockholder agrees that all
Proprietary Information shall be considered confidential. In recognition of
this fact, the Stockholder agrees that he will not, during and after the
term of this Agreement, disclose any of such Proprietary Information to any
person or entity for any reason or purpose whatsoever, and he will not make
use of any Proprietary Information
<PAGE> 253
for his own purposes or for the benefit of any person or entity (except the
Company and its affiliates) under any circumstances.
This Section 1 does not apply to any invention that qualifies fully
under the provisions of California Labor Code Section 2870, which is
restated on attached Appendix A. I will disclose anything I believe is
excluded by Section 2870 so that the Company can make an independent
assessment.
2. In order further to protect the confidentiality of the Proprietary
Information and in recognition of the highly competitive nature of the
industries in which the Company and its affiliates conduct their
businesses, and to protect Quintus Corporation's and the Company's business
opportunities, the Stockholder further agrees as follows:
(a) The Stockholder will not, during and for the period commencing
with the date hereof and ending on the date that is [James Harrer -- 2
years] [C. Scott Hunter -- 1 year] after such date, directly or
indirectly engage in any Business Activities whether such engagement is
as an officer, director, proprietor, employee, partner, investor (other
than as a holder of less than 2% of the outstanding capital stock of a
publicly traded corporation), consultant, advisor, agent or otherwise on
behalf of Kana Communications, Silknet Software Inc., eGain
Communications Corp. or any other company or division of a company
engaged in any Business Activities (other than the Company or its
affiliates), or any affiliate or successor thereof.
(b) The Stockholder will not, during and for the period commencing
with the date hereof and ending on the date that is [James Harrer -- 2
years] [C. Scott Hunter -- 1 year] after such date, directly or
indirectly engage in any Business Activities (other than on behalf of
the Company or its affiliates) by providing services or supplying
products to any customer with whom the Company or its subsidiaries have
done any business, whether as an officer, director, proprietor,
employee, partner, investor (other than as a holder of less than 2% of
the outstanding capital stock of a publicly traded corporation),
consultant, advisor, agent or otherwise.
(c) The Stockholder will not, during and for the period commencing
with the date hereof and ending on the date that is [James Harrer -- 2
years] [C. Scott Hunter -- 1 year] after such date, directly or
indirectly assist others in engaging in any of the Business Activities
that are prohibited to the Stockholder.
(d) The Stockholder will not, during and for the period commencing
with the date hereof and ending on the date that is [James Harrer -- 2
years] [C. Scott Hunter -- 1 year] after such date, directly or
indirectly induce or attempt to induce employees of the Company, Quintus
Corporation or any of their affiliates to engage in any activities
hereby prohibited to the Stockholder or to terminate their employment.
It is expressly understood and agreed that although the Stockholder
and Quintus Corporation consider the restrictions contained in each of
subsections 2(a) through (d) above to be reasonable for the purpose of
preserving the goodwill, proprietary rights and going concern value of the
Company and its affiliates, and to protect Quintus Corporation's and the
Company's business opportunities, if a final judicial determination is made
by a court of competent jurisdiction that the time or territory or any
other restriction contained in Section 1 or this Section 2 is an
unenforceable restriction on the activities of the Stockholder, the
provisions of Section 1 or this Section 2 shall not be rendered void but
shall be deemed amended to apply as to such maximum time and territory and
to such other extent as such court may judicially determine or indicate to
be reasonable. Alternatively, if the court referred to above finds that any
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<PAGE> 254
restriction contained in Section 1 or this Section 2 or any remedy provided
in Section 3 of this Agreement is unenforceable, and such restriction or
remedy cannot be amended so as to make it enforceable, such finding shall
not affect the enforceability of any of the other restrictions contained
therein or the availability of any other remedy. The provisions of Section
1 or this Section 2 shall in no respect limit or otherwise affect the
obligations of the Stockholder under other agreements with Quintus
Corporation or the Company.
3. The Stockholder acknowledges and agrees that Quintus Corporation's
remedy at law for a breach or threatened breach of any of the provisions of
Sections 1 or 2 of this Agreement would be inadequate that in the event of
such breach or threatened breach injunctive relief would be appropriate. It
is understood and agreed that the existence of such breach or threatened
breach shall be determined by a court of competent jurisdiction and nothing
contained herein shall be deemed an admission by the Stockholder that such
breach or threatened breach has occurred. Nothing herein contained shall be
construed as prohibiting Quintus Corporation from pursuing, in addition,
any other remedies available to it for any such breach or threatened
breach. The waiver by Quintus Corporation of a breach of any provision of
this Agreement by the Stockholder shall not operate or be construed as a
waiver of a breach of any other provision of this Agreement or of any
subsequent breach by the Stockholder.
4. This Agreement shall not be assignable by either party except by
the Company to any subsidiary or affiliate of Quintus Corporation or the
Company or to any successor in interest to the Company's or Quintus
Corporation's business.
5. This Agreement shall be governed by and construed in accordance
with the laws of the State of California without regard to the principles
of conflict of law.
6. The provisions of this Agreement are for the benefit of Quintus
Corporation and the Company, and may be enforced by either of such
corporations or their assignees as permitted by Section 4.
7. Any notice required or permitted to be given under this Agreement
shall be deemed properly given if in writing and delivered by hand and
receipt is acknowledged by the party to whom said notice shall be directed,
or if mailed by certified or registered mail with postage prepaid with
return receipt requested, or sent by express courier service, charges
prepaid by shipper, addressed as follows (or to such other address as a
party is directed pursuant to written notice from the other party):
(a) If to Quintus Corporation to:
47212 Mission Falls Court
Fremont, CA 94539
Attention: Susan Salvesen
Fax: (510) 770-1377
(b) If to the Stockholder to:
B-3
<PAGE> 255
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
QUINTUS CORPORATION
By
--------------------------------------
Name:
[STOCKHOLDER]
--------------------------------------
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<PAGE> 256
APPENDIX A
California Labor Code Section 2870. Application of provision providing
that employee shall assign or offer to assign rights to invention to employer.
A. Any provision in an employment agreement which provides that an employee
shall assign, or offer to assign, any of his or her rights in an invention to
his or her employer shall not apply to an invention that the employee developed
entirely on his or her own time without using the employer's equipment,
supplies, facilities, or trade secret information except for those inventions
that either:
1. Relate at the time of conception or reduction to practice of the
invention to the employer's business, or actual or demonstrably anticipated
research or development of the employer; or
2. Result form any work performed by the employee for his employer.
B. To the extent a provision in an employment agreement purports to require
an employee to assign an invention otherwise excluded from being required to be
assigned under subdivision (a), the provision is against the public policy of
this state and is unenforceable.
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<PAGE> 257
EXHIBIT C
FORM OF AFFILIATES LETTER
MUSTANG.COM, INC.
QUINTUS CORPORATION
Ladies and Gentlemen:
The undersigned has been advised that, as of the date of this letter, the
undersigned may be deemed to be an "affiliate" of MUSTANG.COM, INC., a
California corporation (the "COMPANY"), as the term "affiliate" is defined for
purposes of paragraphs (c) and (d) of Rule 145 of the rules and regulations (the
"RULES AND REGULATIONS") of the Securities and Exchange Commission (the "SEC"),
promulgated under the Securities Act of 1933, as amended (the "1933 ACT").
Pursuant to the terms of the Agreement and Plan of Merger dated as of February
25, 2000 (the "MERGER AGREEMENT") between the Company and QUINTUS CORPORATION, a
Delaware corporation ("PARENT"), a wholly-owned subsidiary of Parent will be
merged with and into the Company, with the Company to be the surviving
corporation in the merger (the "MERGER").
The undersigned represents, warrants and covenants to the Company and
Parent that:
A. The undersigned shall not make any sale, transfer or other
disposition of Company Common Shares in violation of the 1933 Act or the
Rules and Regulations.
B. The undersigned has carefully read this letter and the Merger
Agreement and discussed, to the extent the undersigned felt necessary with
the undersigned's counsel or counsel for the Company, the requirements of
such documents and other applicable limitations upon the undersigned's
ability to sell, transfer or otherwise dispose of Company Common Shares.
C. The undersigned has been advised that, at the time the Merger is
submitted for a vote of the stockholders of Company, the undersigned may be
deemed an affiliate of the Company.
D. The undersigned further understands and agrees that the
representations, warranties, covenants and agreements of the undersigned
set forth herein are for the benefit of the Company, Parent and the
Surviving Corporation (as defined in the Merger Agreement) and will be
relied upon by such firms and their respective counsel and accountants.
E. The undersigned understands and agrees that this letter agreement
shall apply to all shares of the capital stock of the Company and Parent
that are deemed beneficially owned by the undersigned pursuant to
applicable federal securities laws.
Execution of this letter should not be considered an admission on the
part of the undersigned that the undersigned is an "affiliate" of the
Company as described in the first paragraph of this letter, nor as a waiver
of any rights that the undersigned may have to object to any claim that the
undersigned is such an affiliate on or after the date of this letter.
Very truly yours,
By:
------------------------------------
Accepted this day of
By:
--------------------------------------------------------
<PAGE> 258
EXHIBIT D
FORM OF TAX OPINION
[Date]
Quintus Corporation
[address]
Ladies and Gentlemen:
We have acted as counsel for Quintus Corporation ("PARENT"), a Delaware
corporation, in connection with the Merger (the "MERGER"), as defined and
described in the Agreement and Plan of Merger dated as of February 25, 2000 (the
"MERGER AGREEMENT") by and between Mustang.com, Inc. ("COMPANY"), a California
corporation, and Parent. You have requested our opinion regarding the United
States federal income tax consequences of the Merger. Unless otherwise
indicated, each capitalized term used herein has the meaning ascribed to it in
the Merger Agreement.
In connection with this opinion, we have examined the Merger Agreement, the
Registration Statement on Form S-4 related to the Merger, which includes the
Proxy Statement/Prospectus (the "PROXY STATEMENT/PROSPECTUS"), filed with the
Securities and Exchange Commission (the "COMMISSION") on [ ], 2000,
and such other documents as we have deemed necessary or appropriate in order to
enable us to render our opinion. For purposes of this opinion, we have assumed
(i) the validity and accuracy of the documents that we have examined, (ii) that
the Merger will be consummated in the manner described in Merger Agreement and
the Proxy Statement/ Prospectus, and (iii) that the representations made by
Parent (together with Merger Subsidiary) and Company pursuant to Sections
8.02(f) and 8.03(b), respectively, of the Merger Agreement are accurate and
complete. In rendering our opinion, we have considered the applicable provisions
of the Internal Revenue Code of 1986, as amended (the "CODE"), Treasury
Department regulations promulgated thereunder, pertinent judicial authorities,
interpretive rulings of the IRS and such other authorities as we have considered
relevant. It should be noted that statutes, regulations, judicial decisions and
administrative interpretations are subject to change at any time (possibly with
retroactive effect). A change in the authorities or the inaccuracy of any of the
documents or assumptions on which our opinion is based could affect our
conclusions.
Based upon the foregoing, in our opinion, the Merger will be treated for
United States federal income tax purposes as a reorganization within the meaning
of Section 368(a) of the Code, and Parent, Company and Merger Subsidiary will
each be a party to that reorganization within the meaning of Section 368(b) of
the Code. Other than as expressly set forth above, we express no opinion as to
the United States federal, state, local, foreign or other tax consequences of
the Merger.
We are qualified to practice law in the State of New York, and we do not
purport to be experts on, or to express any opinion herein concerning, any laws
other than the laws of the State of New York and the laws of the United States.
Very truly yours,
/s/ DAVIS POLK & WARDWELL
<PAGE> 259
EXHIBIT E
[MUSTANG.COM, INC. LETTERHEAD]
[Date]
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
Kirkpatrick & Lockhart LLP
Henry W. Oliver Building
535 Smithfield Street
Pittsburgh, Pennsylvania 15222-2312
Ladies and Gentlemen:
In connection with the opinions to be delivered pursuant to Sections
8.02(f) and 8.03(b) of the Agreement and Plan of Merger (the "MERGER
AGREEMENT")(1), dated as of February 25, 2000, between Mustang.com, Inc., a
California corporation ("COMPANY") and Quintus Corporation, a Delaware
corporation ("PARENT"), the undersigned officer of Company hereby certifies and
represents as to Company that the facts relating to the merger (the "MERGER") of
that certain California corporation and wholly-owned subsidiary of Parent formed
pursuant to Section 1.01 of the Merger Agreement ("MERGER SUBSIDIARY"), with and
into Company pursuant to the Merger Agreement, and as described in the Proxy
Statement/Prospectus dated February 25, 2000 (the "PROXY STATEMENT/ PROSPECTUS")
are true, correct and complete in all respects at the Effective Time and that:
1. The consideration to be received in the Merger by holders of common
stock of Company ("COMPANY STOCK") was determined by arm's length
negotiations between the managements of Parent and Company. In connection
with the Merger, no holder of Company Stock will receive in exchange for
such stock, directly or indirectly, any consideration other than common
stock of Parent ("PARENT STOCK") and, in lieu of fractional shares of
Parent Stock, cash, except that holders of Company Stock timely exercising
their dissenters' rights under applicable laws will receive cash for their
Company Stock.
2. The fair market value of the Parent Stock and cash in lieu of a
fractional share of Parent Stock received by each Company shareholder will
be approximately equal to the fair market value of the Company Stock
surrendered in exchange therefor.
3. In the Merger, shares of Company Stock representing control of
Company, as defined in Section 368(c) of the Internal Revenue Code of 1986,
as amended (the "CODE"), will be exchanged solely for voting stock of
Parent. The payment of cash in lieu of fractional shares of Parent Stock to
holders of Company Stock is solely for the purpose of avoiding the expense
and inconvenience to Parent of issuing fractional shares and does not
represent separately bargained for consideration. The total cash
consideration that will be paid in the Merger to the holders of Company
Stock instead of issuing fractional shares of Parent Stock will not exceed
one percent of the total consideration that will be issued in the Merger to
the holders of Company Stock with respect to their shares of Company Stock.
Redemptions and any other dispositions of Company Stock in exchange for
cash originating with Parent will be taken into account for purposes of
this representation.
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(1)All defined terms used herein and not otherwise defined have the meaning
ascribed to them in the Merger Agreement.
<PAGE> 260
4. Company has no plan or intention to issue additional shares of its
stock that would result in Parent losing control (within the meaning of
Section 368(c) of the Code) of Company.
5. In the Merger, to the best knowledge of the management of Company,
Merger Subsidiary will have no assets or liabilities at the Effective Time,
and therefore will have no liabilities assumed by Company and will not
transfer to Company any assets subject to liabilities.
6. Immediately after the Merger, Company will hold at least 90% of the
fair market value of the net assets and at least 70% of the fair market
value of the gross assets held by Company immediately prior to the Merger.
For purposes of this representation, assets of Company held immediately
prior to the Merger include cash, if any, paid by Company to holders of
Company Stock in lieu of fractional shares or to holders pursuant to the
exercise of dissenters' rights under applicable laws, amounts paid or
incurred by Company in connection with the Merger, including amounts used
to pay Company's reorganization expenses and all payments, redemptions and
distributions (except for regular, normal dividends, if any) made in
contemplation of or as part of the Merger. The Company has not disposed of
any of its assets (other than distributions of cash either as regular,
normal dividends or as a result of valid exercises of dissenters' rights
under applicable laws by holders of Company Stock) in contemplation of or
as part of the Merger.
7. No assets of Company have been sold, transferred or otherwise
disposed of which would prevent Parent from continuing the historic
business of Company or from using a significant portion of Company's
historic business assets in a business following the merger, and, to the
best knowledge of Company, Company intends to continue its historic
business or use a significant portion of its historic business assets in a
business.
8. To the best knowledge of the management of Company, as of the
Effective Time, neither Parent nor any person related to Parent within the
meaning of Treasury Regulation Section 1.368-1(e)(3): (i) will be under any
obligation, or will have entered into any agreement, to redeem or
repurchase any shares of Parent Stock issued in the Merger or to make any
extraordinary distribution in respect of Parent Stock; or (ii) will have
any plan or intention to reacquire any shares of Parent Stock issued in the
Merger. To the best knowledge of the management of Company, after the
Merger, no dividends or distributions will be made to the former Company
stockholders by Parent other than dividends or distributions made to all
holders of Parent Stock.
9. Company and the holders of Company Stock each will pay its or their
own expenses, if any, incurred in connection with or as part of the Merger
or related transactions. Company has not paid or will not pay, directly or
indirectly, any expenses (including transfer taxes) incurred by any holder
of Company Stock in connection with or as part of the Merger or any related
transactions. Company has not agreed to assume, nor will it directly or
indirectly assume, any other expense or other liability, whether fixed or
contingent, of any holder of Company Stock.
10. There is no intercorporate indebtedness existing between Parent
and Company or between Merger Subsidiary and Company that was issued,
acquired or will be settled at a discount.
11. At the Effective Time, the only capital stock of Company issued
and outstanding will be Company Stock.
12. At the Effective Time, Company will not have outstanding any
warrants, options, convertible securities, or any other type of right
pursuant to which any person could acquire
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<PAGE> 261
stock in Company that, if exercised or converted, would affect Parent's
acquisition or retention of control of Company, as defined in Section
368(c) of the Code.
13. In the Merger, no liabilities of shareholders of Company will be
assumed by Parent, and Parent will not assume any liabilities relating to
any Company Stock acquired by Parent in the Merger. Furthermore, to the
best knowledge of the management of Company, there is no plan or intention
for Parent to assume any liabilities of Company, unless specifically
provided in the Merger Agreement.
14. At the Effective Time, the total fair market value of the assets
of Company will exceed the sum of its liabilities, plus the amount of
liabilities, if any, to which such assets are subject.
15. Company is not, nor at the Effective Time will be, under the
jurisdiction of a court in a Title 11 or similar case within the meaning of
Section 368(a)(3)(A).
16. Company is not an "investment company" within the meaning of
Section 368(a)(2)(F)(iii) and (iv) of the Code.
17. None of the employee compensation received or to be received by
any shareholder-employees of Company is or will be separate consideration
for, or allocable to, any of their shares of Company Stock to be
surrendered in the Merger. None of the shares of Parent Stock to be
received by any shareholder-employee of Company in the Merger is or will be
separate consideration for, or allocable to, any employment, consulting or
similar arrangement. To the best knowledge of Company, any compensation
paid or to be paid to any shareholder of Company who will be an employee of
or perform advisory services for Parent, Company, or any affiliate thereof
after the Merger, will be determined by bargaining at arm's length.
18. Since the date of the Merger Agreement and prior to the Effective
Time, except for the issuance of Company Stock pursuant to the rights
described in paragraph 12 hereof, Company has not issued any additional
shares of Company Stock.
19. The holders of Company Stock will have dissenters' rights with
respect to the Merger under applicable laws. In the event that any holders
of Company Stock do not vote in favor of the Merger and perfect their right
to appraisal and payment, any amounts paid to such holders in an appraisal
proceeding will be paid by Company out of its own funds. No funds will be
supplied for such payments, directly or indirectly, by Parent, nor will
Parent directly or indirectly reimburse Company for any such payments.
20. To the best knowledge and belief of the management of Company,
neither Parent nor any person related to Parent (within the meaning of
Treasury Regulation Section 1.368-1(e)(3)) owns or within the past 5 years
has owned, beneficially or of record, any class of stock of Company or any
securities of Company or any instrument giving the holder the right to
acquire any such stock or securities.
21. Prior to and in connection with the Merger no stock of the Company
has been or will be (i) redeemed or otherwise acquired by Company or by a
person related to Company (within the meaning of Treasury Regulation
Section 1.368-1(e)(3) determined without regard to Treasury Regulation
Section 1.368-1(e)(3)(i)(A)), or (ii) the subject of any distribution by
Company other than regular, normal dividends and Company Stock acquired in
the ordinary course of business in connection with employee incentive and
benefit programs, or other programs or arrangements in existence on the
date of the Merger Agreement.
22. The Merger is being effected for bona fide business reasons and
will be carried out strictly in accordance with the Merger Agreement, and
as described in the Proxy Statement/
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<PAGE> 262
Prospectus, and none of the material terms and conditions therein has been
or will be waived or modified.
23. The Merger Agreement and the documents described in the Merger
Agreement represent the entire understanding of Parent, Merger Subsidiary
and Company with respect to the Merger and there are no written or oral
agreements regarding the Merger other than those expressly referred to in
the Merger Agreement.
E-4
<PAGE> 263
We understand that Davis Polk & Wardwell and Kirkpatrick & Lockhart LLP
will rely on this Certificate in rendering their opinions as to certain United
States federal income tax consequences of the Merger, and we will promptly and
timely inform them if, after signing this Certificate, we have reason to believe
that any of the facts described herein or in the Proxy Statement/Prospectus or
any of the representations made in this Certificate are or have become untrue,
incorrect or incomplete in any respect.
Very truly yours,
Mustang.com, Inc.
By:
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Title:
-----------------------------------
E-5
<PAGE> 264
EXHIBIT F
[QUINTUS CORPORATION LETTERHEAD]
[Date]
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
Kirkpatrick & Lockhart LLP
Henry W. Oliver Building
535 Smithfield Street
Pittsburgh, Pennsylvania 15222-2312
Ladies and Gentlemen:
In connection with the opinions to be delivered pursuant to Sections
8.02(f) and 8.03(b) of the Agreement and Plan of Merger (the "MERGER
AGREEMENT")(2), dated as of February 25, 2000, between Mustang.com, Inc., a
California corporation ("COMPANY") and Quintus Corporation, a Delaware
corporation ("PARENT"), the undersigned officer of Parent hereby certifies and
represents as to Parent and that certain California corporation and wholly-owned
subsidiary of Parent formed pursuant to Section 1.01 of the Merger Agreement
("MERGER SUBSIDIARY") that the facts relating to the merger (the "MERGER") of
Merger Subsidiary with and into Company pursuant to the Merger Agreement, and as
described in the Proxy Statement/Prospectus dated [ ], 2000 (the
"PROXY STATEMENT/PROSPECTUS") are true, correct and complete in all respects at
the Effective Time and that:
1. The consideration to be received in the Merger by holders of common
stock of Company ("COMPANY STOCK") was determined by arm's length
negotiations between the managements of Parent and Company. In connection
with the Merger, no holder of Company Stock will receive in exchange for
such stock, directly or indirectly, any consideration other than common
stock of Parent ("PARENT STOCK") and, in lieu of fractional shares of
Parent Stock, cash, except that holders of Company Stock timely exercising
their dissenters' rights under applicable laws will receive cash for their
Company Stock.
2. The fair market value of the Parent Stock and cash in lieu of a
fractional share of Parent Stock received by each Company shareholder will
be approximately equal to the fair market value of the Company Stock
surrendered in exchange therefor.
3. In the Merger, shares of Company Stock representing control of
Company, as defined in Section 368(c) of the Internal Revenue Code of 1986,
as amended (the "CODE"), will be exchanged solely for voting stock of
Parent. The payment of cash in lieu of fractional shares of Parent Stock to
holders of Company Stock is solely for the purpose of avoiding the expense
and inconvenience to Parent of issuing fractional shares and does not
represent separately bargained for consideration. The total cash
consideration that will be paid in the Merger to the holders of Company
Stock instead of issuing fractional shares of Parent Stock will not exceed
one percent of the total consideration that will be issued in the Merger to
the holders of Company Stock with respect to their shares of Company Stock.
Redemptions and any other dispositions of
- ---------------
(2)All defined terms used herein and not otherwise defined have the meaning
ascribed to them in the Merger Agreement.
<PAGE> 265
Company Stock in exchange for cash originating with Parent will be taken
into account for purposes of this representation.
4. Following the Merger, Parent has no plan or intention to cause
Company to issue additional shares of stock that would result in Parent
losing control (within the meaning of Section 368(c) of the Code) of
Company.
5. Prior to the Merger, Parent will be in control of Merger Subsidiary
within the meaning of Section 368(c) of the Code. Merger Subsidiary has
been formed solely in order to consummate the Merger, and at no time has
conducted or will conduct any business activities or other operations of
any kind other than the issuance of its stock to Parent prior to the
Effective Time.
6. In the Merger, Merger Subsidiary will have no assets or liabilities
at the Effective Time, and therefore will have no liabilities assumed by
Company and will not transfer to Company any assets subject to liabilities.
7. Parent has no plan or intention to liquidate Company, to merge
Company with or into another corporation, to sell, exchange, transfer or
otherwise dispose of any stock of Company or to cause Company to sell,
exchange, transfer or otherwise dispose of any of its assets, except for
(i) dispositions made in the ordinary course of business, (ii) transfers
described in Treasury Regulation Section 1.368-2(k), (iii) asset
dispositions to the extent that all such dispositions, sale, transfer or
exchange of assets will not, in the aggregate, violate paragraph 8 of this
letter.
8. After the Merger, Company will hold at least 90% of the fair market
value of the net assets and at least 70% of the fair market value of the
gross assets held by Company immediately prior to the Merger. For purposes
of this representation, assets of Company held immediately prior to the
Merger include cash, if any, paid by Company to holders of Company Stock in
lieu of fractional shares or to holders pursuant to the exercise of
dissenters' rights under applicable laws, amounts paid or incurred by
Company in connection with the Merger, including amounts used to pay
reorganization expenses and all payments, redemptions and distributions
(except for regular, normal dividends, if any) made in contemplation of or
as part of the Merger.
9. Following the Merger, Parent will cause Company to continue its
historic business or use a significant portion of its historic business
assets in a business.
10. As of the Effective Time, neither Parent nor any person related to
Parent within the meaning of Treasury Regulation Section 1.368-1(e)(3): (i)
will be under any obligation, or will have entered into any agreement, to
redeem or repurchase any shares of Parent Stock issued in the Merger or to
make any extraordinary distribution in respect of Parent Stock; or (ii)
will have any plan or intention to reacquire any shares of Parent Stock
issued in the Merger. After the Merger, no dividends or distributions will
be made to the former Company stockholders by Parent other than dividends
or distributions made to all holders of Parent Stock.
11. Parent and Merger Subsidiary each will pay its or their own
expenses, if any, incurred in connection with or as part of the Merger or
related transactions. Neither Parent nor Merger Subsidiary has paid or will
pay, directly or indirectly, any expenses (including transfer taxes)
incurred by any holder of Company Stock in connection with or as part of
the Merger or any related transactions. Neither Parent nor Merger
Subsidiary has agreed to assume, nor will it directly or indirectly assume,
any other expense or other liability, whether fixed or contingent, of any
holder of Company Stock.
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<PAGE> 266
12. There is no intercorporate indebtedness existing between Parent
and Company or between Merger Subsidiary and Company that was issued,
acquired or will be settled at a discount.
13. All shares of Parent Stock into which shares of Company Stock will
be converted pursuant to the Merger will be newly issued or treasury
shares, and will be issued by Parent directly to holders of Company Stock
pursuant to the Merger.
14. To the best knowledge of the management of Parent, at the
Effective Time, Company will not have outstanding any warrants, options,
convertible securities, or any other type of right pursuant to which any
person could acquire stock in Company that, if exercised or converted,
would affect Parent's acquisition or retention of control of Company, as
defined in Section 368(c) of the Code.
15. In the Merger, no liabilities of shareholders of Company will be
assumed by Parent, and Parent will not assume any liabilities relating to
any Company Stock acquired by Parent in the Merger. Furthermore, there is
no plan or intention for Parent to assume any liabilities of Company,
unless specifically provided in the Merger Agreement.
16. To the best knowledge of the management of Parent, at the
Effective Time, the total fair market value of the assets of Company will
exceed the sum of its liabilities, plus the amount of liabilities, if any,
to which such assets are subject.
17. None of Parent or Merger Subsidiary is, nor at the Effective Time
will be, under the jurisdiction of a court in a Title 11 or similar case
within the meaning of Section 368(a)(3)(A).
18. Neither Parent nor Merger Subsidiary is an "investment company"
within the meaning of Section 368(a)(2)(F)(iii) and (iv) of the Code.
19. None of the employee compensation received or to be received by
any shareholder-employees of Company is or will be separate consideration
for, or allocable to, any of their shares of Company Stock to be
surrendered in the Merger. None of the shares of Parent Stock to be
received by any shareholder-employee of Company in the Merger is or will be
separate consideration for, or allocable to, any employment, consulting or
similar arrangement. Any compensation paid or to be paid to any shareholder
of Company who will be an employee of or perform advisory services for
Parent, Company, or any affiliate thereof after the Merger, will be
determined by bargaining at arm's length.
20. The holders of Company Stock will have dissenters' rights with
respect to the Merger under applicable laws. In the event that any holders
of Company Stock do not vote in favor of the Merger and perfect their right
to appraisal and payment, any amounts paid to such holders in an appraisal
proceeding will be paid by Company out of its own funds. No funds will be
supplied for such payments, directly or indirectly, by Parent, nor will
Parent directly or indirectly reimburse Company for any such payments.
21. Neither Parent nor any person related to Parent (within the
meaning of Treasury Regulation Section 1.368-1(e)(3)) owns or within the
past 5 years has owned, beneficially or of record, any class of stock of
Company or any securities of Company or any instrument giving the holder
the right to acquire any such stock or securities.
22. The Merger is being effected for bona fide business reasons and
will be carried out strictly in accordance with the Merger Agreement, and
as described in the Proxy Statement/ Prospectus, and none of the material
terms and conditions therein has been or will be waived or modified.
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<PAGE> 267
23. The Merger Agreement and the documents described in the Merger
Agreement represent the entire understanding of Parent, Merger Subsidiary
and Company with respect to the Merger and there are no written or oral
agreements regarding the Merger other than those expressly referred to in
the Merger Agreement.
We understand that Davis Polk & Wardwell and Kirkpatrick & Lockhart LLP
will rely on this Certificate in rendering their opinions as to certain United
States federal income tax consequences of the Merger, and we will promptly and
timely inform them if, after signing this Certificate, we have reason to believe
that any of the facts described herein or in the Proxy Statement/Prospectus or
any of the representations made in this Certificate are or have become untrue,
incorrect or incomplete in any respect.
Very truly yours,
Quintus Corporation
By:
--------------------------------------
Title:
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<PAGE> 268
EXHIBIT G
FORM OF TAX OPINION
[Date]
Mustang.com, Inc.
[address]
Ladies and Gentlemen:
We have acted as counsel for Mustang.com, Inc. ("Company"), a California
corporation, in connection with the Merger (the "Merger"), as defined and
described in the Agreement and Plan of Merger dated as of February 25, 2000 (the
"Merger Agreement") by and between Quintus Corporation ("Parent"), a Delaware
corporation, and Company. You have requested our opinion regarding the United
States federal income tax consequences of the Merger. Unless otherwise
indicated, each capitalized term used herein has the meaning ascribed to it in
the Merger Agreement.
In connection with this opinion, we have examined the Merger Agreement, the
Registration Statement on Form S-4 related to the Merger, which includes the
Proxy Statement/Prospectus (the "Proxy Statement/Prospectus"), filed with the
Securities and Exchange Commission (the "Commission") on [ ], 2000,
and such other documents as we have deemed necessary or appropriate in order to
enable us to render our opinion. For purposes of this opinion, we have assumed
(i) the validity and accuracy of the documents that we have examined, (ii) that
the Merger will be consummated in the manner described in Merger Agreement and
the Proxy Statement/ Prospectus, and (iii) that the representations made by
Parent (together with Merger Subsidiary) and Company pursuant to Sections
8.02(f) and 8.03(b), respectively, of the Merger Agreement are accurate and
complete. In rendering our opinion, we have considered the applicable provisions
of the Internal Revenue Code of 1986, as amended (the "Code"), Treasury
Department regulations promulgated thereunder, pertinent judicial authorities,
interpretive rulings of the IRS and such other authorities as we have considered
relevant. It should be noted that statutes, regulations, judicial decisions and
administrative interpretations are subject to change at any time (possibly with
retroactive effect). A change in the authorities or the inaccuracy of any of the
documents or assumptions on which our opinion is based could affect our
conclusions.
Based upon the foregoing, in our opinion, the Merger will be treated for
United States federal income tax purposes as a reorganization within the meaning
of Section 368(a) of the Code, and Parent, Company and Merger Subsidiary will
each be a party to that reorganization within the meaning of Section 368(b) of
the Code. Other than as expressly set forth above, we express no opinion as to
the United States federal, state, local, foreign or other tax consequences of
the Merger.
The opinion is being furnished pursuant to Section 8.03(b) of the Merger
Agreement. Any material changes in the facts from those set forth or assumed
herein or in the Proxy Statement/ Prospectus may affect the conclusions stated
herein.
Yours truly,
/s/ KIRKPATRICK & LOCKHART LLP
<PAGE> 269
ANNEX B
[LETTERHEAD FOR FIRST SECURITY VAN KASPER]
February 24, 2000
Board of Directors
Mustang.com, Inc.
6200 Lake Ming Road
Bakersfield, CA 93306
Gentlemen:
You have requested that we render our opinion as to the fairness, from a
financial point of view, to the shareholders of Mustang.com, Inc., a California
corporation ("Mustang"), of the exchange ratio in a proposed merger (the
"Transaction") of a newly formed and wholly-owned subsidiary of Quintus
Corporation, a Delaware corporation ("Quintus"), with and into Mustang pursuant
to the proposed form of Agreement and Plan of Merger provided to us and to be
executed by both parties (the "Agreement"). All capitalized terms not defined
herein shall have the meanings set forth in the Agreement.
In connection with our opinion, among other things, we have: (i) held
discussions with certain members of the management of Mustang and Quintus
concerning, among other things, the revenue projections for Mustang and Quintus
published in the most recent research analysts' reports provided to, or reviewed
by, us; (ii) reviewed the Agreement in the form provided to us by Mustang, which
has been represented to us as the final version to be executed by the parties;
(iii) reviewed Quintus' initial public offering prospectus, as amended, on Form
S-1 and Form 10-Q for the nine months ended December 31, 1999; (iv) reviewed
Mustang's Annual Reports on Form 10-K for the fiscal years ended December 31,
1998 and 1999 and Form 10-Q for the nine months ended September 30, 1999; (v)
reviewed certain press releases and certain other publicly available information
for Mustang and Quintus; (vi) reviewed publicly available data and information
for certain companies which we believe to be relevant; (vii) reviewed publicly
available research reports for Mustang and Quintus and other companies which we
have determined to be relevant; (viii) reviewed the financial terms, to the
extent publicly available, of other recent business combinations which we have
deemed to be relevant; and (ix) conducted such other financial analysis as we
have determined, based upon our judgment as investment bankers, to be
appropriate for purposes of this opinion.
In our review we have assumed, with your permission, that the documents to
be prepared, used and signed by the parties to formally effect the Transaction,
including any proxy or other disclosure material to be delivered to the
shareholders of Mustang to elicit any necessary consent to the Transaction, will
effect the Transaction on the terms set forth in the proposed form of the
Agreement provided to us by Mustang, without material alteration.
We have not negotiated the Transaction, nor provided any legal advice with
respect to the Transaction. We have not made, nor have we been provided with, an
independent evaluation or appraisal of any of the assets or liabilities
(contingent or otherwise) of Mustang nor have we made a physical inspection of
any of the properties or assets of Mustang. We were not requested to, and did
not, solicit third party indications of interest in acquiring all or any part of
Mustang.
In rendering this opinion, we have relied, without independent
verification, on the accuracy and completeness of all of the financial and other
information that was publicly available or furnished or
<PAGE> 270
otherwise communicated to us by Mustang or Quintus. We have assumed that there
has been no material change in the assets, financial condition, business or
prospects of Mustang or Quintus since the date of the most recent historical
financial statements made available to us. With respect to financial
projections, we have used only projections published in the most recent research
analysts' reports, reviewed those projections and in certain instances used a
mean projected number. The only financial information provided by managements of
Mustang and Quintus that we have relied upon in rendering this opinion is the
current capitalization of Mustang and Quintus. Independent of the foregoing, we
have been advised by the managements of Mustang and Quintus, and have relied
upon and assumed without independent verification, that the projected results we
have used for their companies are reasonable and reflect the best currently
available estimates of the future financial results and conditions of Mustang
and Quintus, that such forecasts will be realized in the amounts and time
periods contemplated thereby and that neither the management of Mustang, nor the
management of Quintus, has any information or belief that would make the
projections incomplete or misleading.
Our opinion is based upon analysis of the foregoing factors in light of our
assessment of general economic, financial and market conditions as they exist
and as they can be evaluated by us as of the date hereof and on information made
available to us as of the date hereof. Although events occurring after the date
hereof could materially affect the assumptions relied upon in preparing this
opinion, we do not have any obligation to update, revise or reaffirm this
opinion.
This opinion is solely for the benefit and use of the Board of Directors of
Mustang in its consideration of the Transaction and is not a recommendation to
any shareholder as to how such shareholder should vote with respect to the
Transaction. Further, this opinion addresses only the financial fairness of the
exchange ratio and does not address the relative merits of the Transaction and
any alternatives to the Transaction, Mustang's underlying decision to proceed
with or effect the Transaction or any other aspect of the Transaction. This
opinion may not be used or referred to, or quoted or disclosed to any person in
any manner, without our prior written consent in each instance. In furnishing
this opinion, we do not admit that we are experts within the meaning of the term
"experts" as used in the Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder, nor do we admit that this opinion
constitutes a report or valuation within the meaning of Section 11 of the
Securities Act.
First Security Van Kasper, Inc., as part of its investment banking
business, is regularly engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions. In the past, we have
provided financial advisory and corporate banking services to Mustang and have
received customary compensation for the rendering of these services. We
currently provide research on Mustang, make a market in its stock and hold
warrants to acquire shares of Mustang stock at prices below the implied per
share value of the Merger Consideration. We will also receive a fee from Mustang
for rendering this opinion.
Based upon and subject to the foregoing, we are of the opinion that, as of
the date hereof, the exchange ratio is fair to the shareholders of Mustang from
a financial point of view.
Very truly yours,
FIRST SECURITY VAN KASPER
<PAGE> 271
ANNEX C
CHAPTER 13. DISSENTERS' RIGHTS
1300 RIGHT TO REQUIRE PURCHASE -- "DISSENTING SHARES" AND "DISSENTING
SHAREHOLDER" DENIED.
(a) If the approval of the outstanding shares (Section 152) of a
corporation is required for a reorganization under subdivisions (a) and (b) or
subdivision (e) or (f) of Section 1201, each shareholder of the corporation
entitled to vote on the transaction and each shareholder of a subsidiary
corporation in a short-form merger may, by complying with this chapter, require
the corporation in which the shareholder holds shares to purchase for cash at
their fair market value the shares owned by the shareholder which are dissenting
shares as defined in subdivision (b). The fair market value shall be determined
as of the day before the first announcement of the terms of the proposed
reorganization or short-form merger, excluding any appreciation or depreciation
in consequence of the proposed action, but adjusted for any stock split, reverse
stock split, or share dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or
short-form merger either (A) listed on any national securities exchange
certified by the Commissioner of Corporations under subdivision (o) of
Section 25100 or (B) listed on the list of OTC margin stocks issued by the
Board of Governors of the Federal Reserve System, and the notice of meeting
of shareholders to act upon the reorganization summarizes this section and
Sections 1301, 1302, 1303 and 1304; provided, however, that this provision
does not apply to any shares with respect to which there exists any
restriction on transfer imposed by the corporation or by any law or
regulation; and provided, further, that this provision does not apply to
any class of shares described in subparagraph (A) or (B) if demands for
payment are filed with respect to 5 percent or more of the outstanding
shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted
in favor of the reorganization or, (B) if described in subparagraph (A) or
(B) of paragraph (1) (without regard to the provisos in that paragraph),
were voted against the reorganization, or which were held of record on the
effective date of a short-form merger; provided, however, that subparagraph
(A) rather than subparagraph (B) of this paragraph applies in any case
where the approval required by Section 1201 is sought by written consent
rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the
recordholder of dissenting shares and includes a transferee of record.
1301 DEMAND FOR PURCHASE.
(a) If, in the case of a reorganization, any shareholders of a corporation
have a right under Section 1300, subject to compliance with paragraphs (3) and
(4) of subdivision (b) thereof, to require the corporation to purchase their
shares for cash, such corporation shall mail to each such
<PAGE> 272
shareholder a notice of the approval of the reorganization by its outstanding
shares (Section 152) within 10 days after the date of such approval, accompanied
by a copy of Sections 1300, 1302, 1303, 1304 and this section, a statement of
the price determined by the corporation to represent the fair market value of
the dissenting shares, and a brief description of the procedure to be followed
if the shareholder desires to exercise the shareholder's right under such
sections. The statement of price constitutes an offer by the corporation to
purchase at the price stated any dissenting shares as defined in subdivision (b)
of Section 1300, unless they lose their status as dissenting shares under
Section 1309.
(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of
record by the shareholder which the shareholder demands that the corporation
purchase and shall contain a statement of what such shareholder claims to be the
fair market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market value
constitutes an offer by the shareholder to sell the shares at such price.
1302 ENDORSEMENT OF SHARES.
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder, the shareholder shall submit to the corporation at
its principal office or at the office of any transfer agent thereof, (a) if the
shares are certificated securities, the shareholder's certificates representing
any shares which the shareholder demands that the corporation purchase, to be
stamped or endorsed with a statement that the shares are dissenting shares or to
be exchanged for certificates of appropriate denomination so stamped or endorsed
or (b) if the shares are uncertificated securities, written notice of the number
of shares which the shareholder demands that the corporation purchase. Upon
subsequent transfers of the dissenting shares on the books of the corporation,
the new certificates, initial transaction statement, and other written
statements issued therefor shall bear a like statement, together with the name
of the original dissenting holder of the shares.
1303 AGREED PRICE -- TIME OF PAYMENT.
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the fair
market value of any dissenting shares as between the corporation and the holders
thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount thereof
has been agreed or within 30 days after any statutory or contractual conditions
to the reorganization are satisfied, whichever is later, and in
2
<PAGE> 273
the case of certificated securities, subject to surrender of the certificates
therefor, unless provided otherwise by agreement.
1304 DISSENTER'S ACTION TO ENFORCE PAYMENT.
(a) If the corporation denies that the shares are dissenting shares, or the
corporation and the shareholder fail to agree upon the fair market value of the
shares, then the shareholder demanding purchase of such shares as dissenting
shares or any interested corporation, within six months after the date on which
notice of the approval by the outstanding shares (Section 152) or notice
pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, but
not thereafter, may file a complaint in the superior court of the proper county
praying the court to determine whether the shares are dissenting shares or the
fair market value of the dissenting shares or both or may intervene in any
action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues. If
the status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
1305 APPRAISERS' REPORT -- PAYMENT -- COSTS.
(a) If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share. Within the time fixed by
the court, the appraisers, or a majority of them, shall make and file a report
in the office of the clerk of the court. Thereupon, on the motion of any party,
the report shall be submitted to the court and considered on such evidence as
the court considers relevant. If the court finds the report reasonable, the
court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a
report within 10 days from the date of their appointment or within such further
time as may be allowed by the court or the report is not confirmed by the court,
the court shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market value
of each dissenting share multiplied by the number of dissenting shares which any
dissenting shareholder who is a party, or who has intervened, is entitled to
require the corporation to purchase, with interest thereon at the legal rate
from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for the
shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than 125
percent of the price offered by the corporation under subdivision (a) of Section
1301).
3
<PAGE> 274
1306 DISSENTING SHAREHOLDERS' STATUS AS CREDITOR.
To the extent that the provisions of Chapter 5 prevent the payment to any
holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
1307 DIVIDENDS PAID AS CREDIT AGAINST PAYMENT.
Cash dividends declared and paid by the corporation upon the dissenting
shares after the date of approval of the reorganization by the outstanding
shares (Section 152) and prior to payment for the shares by the corporation
shall be credited against the total amount to be paid by the corporation
therefor.
1308 CONTINUING RIGHTS AND PRIVILEGES OF DISSENTING SHAREHOLDERS.
Except as expressly limited in this chapter, holders of dissenting shares
continue to have all the rights and privileges incident to their shares, until
the fair market value of their shares is agreed upon or determined. A dissenting
shareholder may not withdraw a demand for payment unless the corporation
consents thereto.
1309 TERMINATION OF DISSENTING SHAREHOLDER STATUS.
Dissenting shares lose their status as dissenting shares and the holders
thereof cease to be dissenting shareholders and cease to be entitled to require
the corporation to purchase their shares upon the happening of any of the
following:
(a) The corporation abandons the reorganization. Upon abandonment of
the reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter
all necessary expenses incurred in such proceedings and reasonable
attorneys' fees.
(b) The shares are transferred prior to their submission for
endorsement in accordance with Section 1302 or are surrendered for
conversion into shares of another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon
the status of the shares as dissenting shares or upon the purchase price of
the shares, and neither files a complaint or intervenes in a pending action
as provided in Section 1304, within six months after the date on which
notice of the approval by the outstanding shares or notice pursuant to
subdivision (i) of Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
1310 SUSPENSION OF PROCEEDINGS FOR PAYMENT PENDING LITIGATION.
If litigation is instituted to test the sufficiency or regularity of the
votes of the shareholders in authorizing a reorganization, any proceedings under
Sections 1304 and 1305 shall be suspended until final determination of such
litigation.
4
<PAGE> 275
1311 EXEMPT SHARES.
This chapter, except Section 1312, does not apply to classes of shares
whose terms and provisions specifically set forth the amount to be paid in
respect to such shares in the event of a reorganization or merger.
1312 ATTACKING VALIDITY OF REORGANIZATION OR MERGER.
(a) No shareholder of a corporation who has a right under this chapter to
demand payment of cash for the shares held by the shareholder shall have any
right at law or in equity to attack the validity of the reorganization or
short-form merger, or to have the reorganization or short-form merger set aside
or rescinded, except in an action to test whether the number of shares required
to authorize or approve the reorganization have been legally voted in favor
thereof; but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event of
a reorganization or short-form merger is entitled to payment in accordance with
those terms and provisions or, if the principal terms of the reorganization are
approved pursuant to subdivision (b) of Section 1202, is entitled to payment in
accordance with the terms and provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash for
such shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or short-form
merger or to have the reorganization or short-form merger set aside or
rescinded, the shareholder shall not thereafter have any right to demand payment
of cash for the shareholder's shares pursuant to this chapter. The court in any
action attacking the validity of the reorganization or short-form merger or to
have the reorganization or short-form merger set aside or rescinded shall not
restrain or enjoin the consummation of the transaction except upon 10 days'
prior notice to the corporation and upon a determination by the court that
clearly no other remedy will adequately protect the complaining shareholder or
the class of shareholders of which such shareholder is a member.
(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable as
to the shareholders of any party so controlled.
5
<PAGE> 276
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. 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.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) List of Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1(1) Agreement and Plan of Merger between the Registrant and
Mustang.com, Inc., dated February 25, 2000.
2.1(2) Agreement and Plan of Reorganization by and among
Registrant, Acquity Corp., Ribeye Acquisition Corp. and
certain stockholders of Aquity Corp., dated September 10,
1999.
3.3(2) Registrant's Restated Certificate of Incorporation.
3.5(2) Registrant's Amended and Restated Bylaws.
4.1(2) Reference is made to Exhibits 3.3 and 3.5.
4.2(2) Specimen Common Stock certificate.
4.3(2) Registrant's Amended and Restated Investors Rights
Agreement, dated November 10, 1999.
5.1 Opinion of Davis Polk & Wardwell.
8.1 Opinion of Davis Polk & Wardwell as to tax matters.
8.2 Opinion of Kirkpatrick & Lockhart LLP as to tax matters.
10.1(2) Form of Indemnification Agreement entered into between
Registrant and each of its directors and officers.
10.2(2) 1995 Stock Option Plan and forms of agreements thereunder.
</TABLE>
II-1
<PAGE> 277
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.3(2) 1999 Stock Incentive Plan and forms of agreements
thereunder.
10.4(2) Employee Stock Purchase Plan.
10.5(2) 1999 Director Option Plan.
10.6(2) Light Industrial Lease between Registrant and Teachers
Insurance and Annuity Association of America, dated October
6, 1995.
10.7(2) Sublease between Registrant and Oryx Technology Corporation
and SurgX Corporation, dated October 1, 1999.
10.8(2)+ Software Distribution Agreement dated May 5, 1997, between
Nabnasset Corporation and Lucent Technologies Inc.
10.10(2)+ Authorized OEM/Reseller Agreement dated December 22, 1998,
between Registrant and Brightware, Inc.
10.11(2) Employment agreement between Registrant and Alan Anderson,
dated May 23, 1995 and Notice of Grant of Stock Option.
10.12(2) Employment agreement between Registrant and John Burke,
dated June 11, 1999.
10.13(2) Loan and Security Agreement between Registrant and Silicon
Valley Bank, dated September 18, 1998.
10.14(2) Sublease Agreement between Pavilion Technologies, Inc. and
Acuity Corp., dated December 19, 1996.
10.15(3)+ Authorized OEM/Reseller Agreement between Quintus
Corporation and Lipstream Networks, Inc., dated December 3,
1999.
10.16(3) Sublease between Quintus Corporation and Advanced Radio
Telecom Corp., dated December 13, 1999, and Corresponding
Master Lease.
10.17(3) Second Amendment to OEM/Reseller Agreement between Quintus
Corporation and Brightware, Inc., dated December 22, 1999.
21.1(5) List of the Registrant's subsidiaries.
23.1 Consent of Davis Polk & Wardwell (included in Exhibit 5.5)
23.2 Consent of Kirkpatrick & Lockhart LLP (included in Exhibit
8.2)
23.3 Consent of Deloitte & Touche LLP.
23.4 Consent of Ernst & Young, LLP.
23.5 Consent of PricewaterhouseCoopers LLP.
23.6 Consent of Arthur Andersen LLP.
23.7(5) Consent of First Security Van Kasper.
27.1(3) Financial Data Schedule.
99.1(4) Opinion of First Security Van Kasper.
99.2 Form of proxy for special meeting of shareholders of
Mustang.com, Inc.
</TABLE>
- -------------------------
(1) Included as Annex A to the Proxy Statement/Prospectus which is part of this
Registration Statement.
(2) Incorporated herein by reference to the Registrant's Registration Statement
on Form S-1 declared effective by the Securities and Exchange Commission on
November 15, 1999.
(3) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
dated December 31, 1999.
(4) Included as Annex B to the Proxy Statement/Prospectus which is part of this
Registration Statement.
(5) Previously filed.
+ Portions of these exhibits have been omitted pursuant to requests for
confidential treatment.
II-2
<PAGE> 278
(b) Financial Statement Schedules
(1) Schedule II - Valuation and Qualifying Accounts
(c) The opinion of First Security Van Kasper is included as Annex B to the
proxy statement/ prospectus contained in this Registration Statement.
ITEM 22. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes:
(i) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
(2) That every prospectus (i) that is filed pursuant to paragraph (1)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Securities Act of 1933 and is used in connection
with an offering of securities subject to Rule 415, will be filed as a part
of an amendment to the registration statement and will not be used until
such amendment is effective, and that, for purposes of determining any
liability under the Securities Act of 1933, each such post-effective
amendment 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.
(3) That, for purposes of determining any liability under the
Securities Act of 1933, each filing of the Registrant's annual report
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934
(and, where applicable, each filing of an employee benefit plan's annual
report pursuant to Section 15(d) of the Securities Exchange Act of 1934)
that is incorporated by reference in the registration statement 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.
(4) To respond to requests for information that is incorporated by
reference into the joint proxy statement/prospectus pursuant to Item 4,
10(b), 11 or 13 of this form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the registration
statement through the date of responding to the request.
(5) To supply by means of a post-effective amendment all information
concerning a transaction, and Quintus Corporation being acquired involved
therein, that was not the subject of and included in the registration
statement when it became effective.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant
II-3
<PAGE> 279
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
II-4
<PAGE> 280
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 1 to the Registration Statement on
Form S-4 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Fremont, State of California, on this 11th day of
April, 2000.
QUINTUS CORPORATION
By: /s/ SUSAN SALVESEN
------------------------------------
Susan Salvesen
Chief Financial Officer and
Secretary
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 1 to the registration statement on Form S-4 has been signed
by the following persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
* Chief Executive Officer (Principal April 11, 2000
- --------------------------------------------- Executive Officer) and Director
Alan K. Anderson
* Chief Financial Officer (Principal April 11, 2000
- --------------------------------------------- Financial and Accounting Officer) and
Susan Salvesen Secretary
* Director April 11, 2000
- ---------------------------------------------
Paul H. Barlett
* Director April 11, 2000
- ---------------------------------------------
Andrew Busey
* Director April 11, 2000
- ---------------------------------------------
Fredric W. Harman
* Director April 11, 2000
- ---------------------------------------------
William Herman
* Director April 11, 2000
- ---------------------------------------------
Alexander Rosen
* Director April 11, 2000
- ---------------------------------------------
Robert W. Shaw
* Director April 11, 2000
- ---------------------------------------------
Jeanne Wohlers
*By: /s/ SUSAN SALVESEN Chief Financial Officer and Secretary April 11, 2000
---------------------------------------
Susan Salvesen
</TABLE>
II-5
<PAGE> 281
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
2.1(1) Agreement and Plan of Merger between the Registrant and
Mustang.com, Inc., dated February 25, 2000.
2.1(2) Agreement and Plan of Reorganization by and among
Registrant, Acquity Corp., Ribeye Acquisition Corp. and
certain stockholders of Aquity Corp., dated September 10,
1999.
3.3(2) Registrant's Restated Certificate of Incorporation.
3.5(2) Registrant's Amended and Restated Bylaws.
4.1(2) Reference is made to Exhibits 3.3 and 3.5.
4.2(2) Specimen Common Stock certificate.
4.3(2) Registrant's Amended and Restated Investors Rights
Agreement, dated November 10, 1999.
5.1 Opinion of Davis Polk & Wardwell.
8.1 Opinion of Davis Polk & Wardwell as to tax matters.
8.2 Opinion of Kirkpatrick & Lockhart LLP as to tax matters.
10.1(2) Form of Indemnification Agreement entered into between
Registrant and each of its directors and officers.
10.2(2) 1995 Stock Option Plan and forms of agreements thereunder.
10.3(2) 1999 Stock Incentive Plan and forms of agreements
thereunder.
10.4(2) Employee Stock Purchase Plan.
10.5(2) 1999 Director Option Plan.
10.6(2) Light Industrial Lease between Registrant and Teachers
Insurance and Annuity Association of America, dated October
6, 1995.
10.7(2) Sublease between Registrant and Oryx Technology Corporation
and SurgX Corporation, dated October 1, 1999.
10.8(2)+ Software Distribution Agreement dated May 5, 1997, between
Nabnasset Corporation and Lucent Technologies Inc.
10.10(2)+ Authorized OEM/Reseller Agreement dated December 22, 1998,
between Registrant and Brightware, Inc.
10.11(2) Employment agreement between Registrant and Alan Anderson,
dated May 23, 1995 and Notice of Grant of Stock Option.
10.12(2) Employment agreement between Registrant and John Burke,
dated June 11, 1999.
10.13(2) Loan and Security Agreement between Registrant and Silicon
Valley Bank, dated September 18, 1998.
10.14(2) Sublease Agreement between Pavilion Technologies, Inc. and
Acuity Corp., dated December 19, 1996.
10.15(3)+ Authorized OEM/Reseller Agreement between Quintus
Corporation and Lipstream Networks, Inc., dated December 3,
1999.
10.16(3) Sublease between Quintus Corporation and Advanced Radio
Telecom Corp., dated December 13, 1999, and Corresponding
Master Lease.
10.17(3) Second Amendment to OEM/Reseller Agreement between Quintus
Corporation and Brightware, Inc., dated December 22, 1999.
21.1(5) List of the Registrant's subsidiaries.
23.1 Consent of Davis Polk & Wardwell (included in Exhibit 5.1).
23.2 Consent of Kirkpatrick & Lockhart LLP (included in Exhibit
8.2).
23.3 Consent of Deloitte & Touche LLP.
23.4 Consent of Ernst & Young, LLP.
</TABLE>
<PAGE> 282
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
23.5 Consent of PricewaterhouseCoopers LLP.
23.6 Consent of Arthur Andersen LLP.
23.7(5) Consent of First Security Van Kasper.
27.1(3) Financial Data Schedule.
99.1(4) Opinion of First Security Van Kasper.
99.2 Form of proxy for special meeting of shareholders of
Mustang.com, Inc.
</TABLE>
- -------------------------
(1) Included as Annex A to the Proxy Statement/Prospectus which is part of this
Registration Statement.
(2) Incorporated herein by reference to the Registrant's Registration Statement
on Form S-1 declared effective by the Securities and Exchange Commission on
November 15, 1999.
(3) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
dated December 31, 1999.
(4) Included as Annex B to the Proxy Statement/Prospectus which is part of this
Registration Statement.
(5) Previously filed.
+ Portions of these exhibits have been omitted pursuant to requests for
confidential treatment.
<PAGE> 1
Exhibit 5.1
April 11, 2000
Quintus Corporation
47212 Mission Falls Court
Fremont, CA 94539
Ladies and Gentlemen:
We have acted as special counsel to Quintus Corporation ("Quintus") in
connection with its Registration Statement on Form S-4 (File No. 333-33422) (the
"Registration Statement") and Amendment No. 1 to the Registration Statement,
filed with the Securities and Exchange Commission under the Securities Act of
1933, as amended (the "Securities Act"), relating to the registration by Quintus
of shares (the "Shares") of its common stock, par value $0.001 per share, to be
issued pursuant to the terms of the Agreement and Plan of Merger dated as of
February 25, 2000 between Quintus and Mustang.com, Inc. (the "Merger
Agreement").
We have examined originals or copies, certified or otherwise identified to
our satisfaction, of such documents, corporate records, certificates and other
instruments, and have conducted such other investigations as we have deemed
necessary or advisable for the purposes of this opinion.
On the basis of the foregoing, we are of the opinion that the Shares have
been duly authorized and, when issued and delivered in accordance with the terms
and conditions of the Merger Agreement, will be validly issued, fully paid and
non-assessable.
We are members of the Bar of the State of New York and the foregoing
opinion is limited to the laws of the State of New York and the General
Corporation Law of the State of Delaware.
<PAGE> 2
Quintus Corporation 2 April 11, 2000
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to us under the caption "Legal
Matters" in the Proxy Statement/Prospectus constituting a part of the
Registration Statement.
Very truly yours,
/s/ DAVIS POLK & WARDWELL
----------------------------------
<PAGE> 1
EXHIBIT 8.1
April 7, 2000
Re: REGISTRATION STATEMENT ON FORM S-4
Quintus Corporation
47212 Mission Falls Court
Fremont, CA 94539
Ladies and Gentlemen:
We have acted as counsel for Quintus Corporation ("PARENT"), a Delaware
corporation, in connection with (i) the Merger (the "MERGER"), as defined and
described in the Agreement and Plan of Merger dated as of February 25, 2000 (the
"MERGER AGREEMENT") by and between Mustang.com, Inc. ("COMPANY"), a California
corporation, and Parent and (ii) the preparation and filing of the related
Registration Statement on Form S-4, which includes the Proxy
Statement/Prospectus (the "PROXY STATEMENT/ PROSPECTUS"), filed with the
Securities and Exchange Commission (the "COMMISSION"). You have requested our
opinion regarding the United States federal income tax consequences of the
Merger. Unless otherwise indicated, each capitalized term used herein has the
meaning ascribed to it in the Merger Agreement.
In connection with this opinion, we have examined the Merger Agreement,
the Proxy Statement/Prospectus and such other documents as we have deemed
necessary or appropriate in order to enable us to render our opinion. For
purposes of this opinion, we have assumed (i) the validity and accuracy of the
documents that we have examined, (ii) that the Merger will be consummated in the
manner described in Merger Agreement and the Proxy Statement/Prospectus, and
(iii) that the representations made by Parent (together with Merger Subsidiary)
and Company pursuant to Sections 8.02(f) and 8.03(b), respectively, of the
Merger Agreement are accurate and complete. In rendering our opinion, we have
considered the applicable provisions of the Internal Revenue Code of 1986, as
amended (the "CODE"), Treasury Department regulations promulgated thereunder,
pertinent judicial authorities, interpretive rulings of the Internal Revenue
Service and such other authorities as we have considered relevant. It should be
noted that statutes, regulations, judicial decisions and administrative
interpretations are subject to change at any time (possibly with retroactive
effect). A change in the authorities or the inaccuracy of any of the documents
or assumptions on which our opinion is based could affect our conclusions.
<PAGE> 2
Based upon the foregoing, in our opinion, the Merger will be treated for
United States federal income tax purposes as a reorganization within the meaning
of Section 368(a) of the Code, and Parent, Company and Merger Subsidiary will
each be a party to that reorganization within the meaning of Section 368(b) of
the Code. Other than as expressly set forth above, we express no opinion as to
the United States federal, state, local, foreign or other tax consequences of
the Merger.
We hereby consent to the discussion of this opinion in the Proxy
Statement/Prospectus, to the filing of this opinion as an exhibit to the Proxy
Statement/Prospectus and to the reference to our firm under the headings "THE
MERGER-Material United States Federal Income Tax Consequences" and "LEGAL
MATTERS" in the Proxy Statement/Prospectus. In giving such consent, we do not
thereby admit that we are in the category of persons whose consent is required
under Section 7 of the Securities Act of 1933, as amended, or the rules and
regulations of the Commission thereunder.
Very truly yours,
/s/ Davis Polk & Wardwell
<PAGE> 1
EXHIBIT 8.2
April 7, 2000
Mustang.com, Inc.
6200 Lake Ming Road
Bakersfield, CA 93306
Ladies and Gentlemen:
We have acted as counsel for Mustang.com, Inc. ("COMPANY"), a
California corporation, in connection with (i) the Merger (the "MERGER"), as
defined and described in the Agreement and Plan of Merger dated as of February
25, 2000 (the "MERGER AGREEMENT") by and between Quintus Corporation ("PARENT"),
a Delaware corporation, and Company and (ii) the preparation and filing of the
related Proxy Statement/Prospectus (the "PROXY STATEMENT/ PROSPECTUS"), filed
with the Securities and Exchange Commission (the "COMMISSION"). You have
requested our opinion regarding the United States federal income tax
consequences of the Merger. Unless otherwise indicated, each capitalized term
used herein has the meaning ascribed to it in the Merger Agreement.
In connection with this opinion, we have examined the Merger
Agreement, the Proxy Statement/Prospectus, and such other documents as we have
deemed necessary or appropriate in order to enable us to render our opinion. For
purposes of this opinion, we have assumed (i) the validity and accuracy of the
documents that we have examined, (ii) that the Merger will be consummated in the
manner described in Merger Agreement and the Proxy Statement/ Prospectus, and
(iii) that the representations made by Parent (together with Merger Subsidiary)
and Company pursuant to Sections 8.02(f) and 8.03(b), respectively, of the
Merger Agreement are accurate and complete. In rendering our opinion, we have
considered the applicable provisions of the Internal Revenue Code of 1986, as
amended (the "CODE"), Treasury Department regulations promulgated thereunder,
pertinent judicial authorities, interpretive rulings of the Internal Revenue
Service and such other authorities as we have considered relevant. It should be
noted that statutes, regulations, judicial decisions and administrative
interpretations are subject to change at any time (possibly with retroactive
effect). A change in the authorities or the inaccuracy of any of the documents
or assumptions on which our opinion is based could affect our conclusions.
Based upon the foregoing, in our opinion, the Merger will be treated
for United States federal income tax purposes as a reorganization within the
meaning of Section 368(a) of the Code, and Parent, Company and Merger Subsidiary
will each be a party to that reorganization
<PAGE> 2
within the meaning of Section 368(b) of the Code. Other than as expressly set
forth above, we express no opinion as to the United States federal, state,
local, foreign or other tax consequences of the Merger.
We hereby consent to the discussion of this opinion in the Proxy
Statement/ Prospectus, to the filing of this opinion as an exhibit to the Proxy
Statement/Prospectus and to the reference to our firm under the headings "THE
MERGER-Material United States Federal Income Tax Consequences" and "LEGAL
MATTERS" in the Proxy Statement/Prospectus. In giving such consent, we do not
thereby admit that we are in the category of persons whose consent is required
under Section 7 of the Securities Act of 1933, as amended, or the rules and
regulations of the Commission thereunder.
Yours truly,
/s/ Kirkpatrick & Lockhart LLP
<PAGE> 1
EXHIBIT 23.3
CONSENT OF DELOITTE & TOUCHE LLP, INDEPENDENT AUDITORS
We consent to the use in this Amendment No. 1 to Registration Statement No.
333-33422 of Quintus Corporation on Form S-4 of our report dated June 18, 1999
(November 10, 1999 as to Note 15), appearing in this proxy statement/
prospectus, which is part of this Registration Statement, and of our report
dated July 18, 1999, relating to the financial statement schedule appearing
elsewhere in this Registration Statement.
We also consent to the reference to us under the heading "Selected Historical
Consolidated Financial Data" and "Experts" in such proxy statement/prospectus.
San Jose, California
April 10, 2000
<PAGE> 1
EXHIBIT 23.4
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Experts" and
"Selected Financial Data" and to the use of our reports dated April 30, 1998,
included in Amendment No. 1 to the Proxy Statement of Quintus Corporation
and Mustang.com that is made a part of the Registration Statement on Form
S-4 and related Prospectus of Quintus Corporation.
/s/ Ernst & Young LLP
Palo Alto, California
April 10, 2000
<PAGE> 1
EXHIBIT 23.5
CONSENT OF PRICEWATERHOUSECOOPERS LLP
We hereby consent to the use in this Amendment No. 1 to Registration Statement
No. 333-33422 of Quintus Corporation on Form S-4 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. appearing in this proxy
statement/prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
proxy statement/prospectus.
Austin, Texas
April 10, 2000
<PAGE> 1
EXHIBIT 23.6
[ARTHUR ANDERSEN LOGO]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
included in this registration statement on Form S-4 and to the incorporation by
reference in this registration statement of our report dated February 9, 2000
included in Mustang.com Inc.'s Form 10-KSB for the year ended December 31, 1999
and to all references to our Firm included in this registration statement.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Los Angeles, California
April 7, 2000
<PAGE> 1
EXHIBIT 99.2
[PROXY]
MUSTANG.COM, INC.
6200 Lake Ming Road
Bakersfield, California 93306
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints James A. Harrer and Donald M. Leonard,
and each of them, each with the power to appoint his substitute, and hereby
authorizes each of them to represent and vote as designated below, all the
shares of Common Stock of Mustang.com, Inc. held of record by the undersigned on
April 10, 2000, at the Special Meeting of Shareholders to be held on May 11,
2000 or any adjournments thereof.
1. To approve and adopt the Agreement and
Plan of Merger dated as of February 25,
2000 between Mustang.com and Quintus
Corporation, pursuant to which
Mustang.com will be merged with a
subsidiary of Quintus and each
shareholder of Mustang.com will receive
0.793 of a share of Quintus common stock
for each share of Mustang.com common
stock that shareholder owns.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
<PAGE> 2
2. In their discretion, the Proxies are
each authorized to vote upon such other
business as may properly come before the
meeting.
This Proxy, when properly executed, will be voted in the manner directed
herein by the undersigned shareholder. If no direction is made, this Proxy will
be voted FOR Proposal 1.
Dated: ______________________, 2000
____________________________________
(Signature)
____________________________________
(Signature if held jointly)
Please sign exactly as name appears
below. When shares are held by joint
tenants, both should sign. When signing
as an attorney, as executor,
administrator, trustee or guardian,
please give full title to such. If a
corporation, please sign in full
corporate name, by President or other
authorized officer. If a partnership,
please sign in partnership name by
authorized person.
