<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 4, 1997
REGISTRATION NO. 333-22855
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
MELITA INTERNATIONAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
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GEORGIA 3661 58-1378534
(State or other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
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5051 PEACHTREE CORNERS CIRCLE
NORCROSS, GEORGIA 30092-2500
(770) 239-4000
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
---------------------
J. NEIL SMITH
PRESIDENT AND CHIEF OPERATING OFFICER
MELITA INTERNATIONAL CORPORATION
5051 PEACHTREE CORNERS CIRCLE
NORCROSS, GEORGIA 30092-2500
(770) 239-4000
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
---------------------
COPIES TO:
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JOHN FRANKLIN SMITH, ESQ. MARK G. BORDEN, ESQ.
LARRY W. SHACKELFORD, ESQ. BRENT B. SILER, ESQ.
MORRIS, MANNING & MARTIN, L.L.P. HALE AND DORR LLP
1600 ATLANTA FINANCIAL CENTER 1455 PENNSYLVANIA AVENUE, N.W.
3343 PEACHTREE ROAD, N.E. WASHINGTON, D.C. 20004
ATLANTA, GEORGIA 30326 (202) 942-8400
(404) 233-7000
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement is declared effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
---------------
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
---------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT 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 SECTION 8(A), MAY
DETERMINE.
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<PAGE> 2
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.
SUBJECT TO COMPLETION, DATED JUNE 4, 1997
3,500,000 SHARES
MELITA(R) INTERNATIONAL LOGO
COMMON STOCK
All of the shares of Common Stock offered hereby are being sold by the
Company. Prior to this offering, there has been no public market for the Common
Stock of the Company. It is currently estimated that the initial public offering
price of the Common Stock will be between $9.00 and $11.00 per share. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price. The Common Stock has been approved for
listing on the Nasdaq National Market under the symbol "MELI," subject to
official notice of issuance.
SEE "RISK FACTORS" COMMENCING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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========================================================================================================
Price to Underwriting Proceeds to
Public Discount(1) Company(2)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share............... $ $ $
Total(3)................ $ $ $
========================================================================================================
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(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting expenses payable by the Company, estimated at $1,300,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 525,000 additional shares of Common Stock solely to cover
over-allotments, if any. If the Underwriters exercise this option in full,
the Price to Public will total $ , the Underwriting Discount will
total $ and the Proceeds to Company will total $ . See
"Underwriting."
The shares of Common Stock are offered by the several Underwriters named
herein, subject to receipt and acceptance by them and subject to their right to
reject any order in whole or in part. It is expected that delivery of the
certificates representing such shares will be made against payment therefor at
the office of Montgomery Securities on or about , 1997.
------------------------
MONTGOMERY SECURITIES ROBERTSON, STEPHENS & COMPANY
, 1997
<PAGE> 3
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK
OFFERED HEREBY, INCLUDING THE ENTRY OF STABILIZING BIDS, SYNDICATE COVERING
TRANSACTIONS OR THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE> 4
[ARTWORK/DIAGRAMS DEPICTED IN PROSPECTUS]
1. Inside front page is captioned:
"Melita's Command Post(TM) graphical desktop lets supervisors monitor
call center activity at a glance." Graphics portray a screen generated by
the Company's PhoneFrame(R) CS product. The screen is labeled "Production
Monitoring." Features of the screen are highlighted by the following text:
" - Call List Display Panel. Displays status of active calling
lists.
- The Tool Bar. Brings up different productivity views to
monitor and control the activity of a call center.
- Agent Status Legend. User defined legends to choose conditions
or calling states.
- ViewPort Display Area. Real time production monitoring of
agent status using customized floor plans.
- Trunk State Display Panel. Graphically depicts enabled and
disabled trunk states."
2. Inside front page gate-fold portrays the following:
Center: Photograph of a Call Center agent and customers speaking over the
telephone illustrating the Company's concept of "People To People
Communication." Arrows to the top, left, bottom and right of the photograph
point to additional diagrams.
Top: Arrow extending from central photograph points to the word
"Applications." Above and to the left of "Applications" is a list of the
CTI applications: MPACT, PowerPACT and ActionPACT. Above and to the right
of "Applications," the Company's Megellan application is listed.
Right: Arrow extending from central photograph points to the words "System
Management" which are superimposed over a picture of four overlapping
screens generated by PhoneFrame CS Command Post Desktop.
Bottom: Arrow extending from central photograph points to the text:
"Applications and solutions for customer communications:
- Comprehensive Call Center Solutions
- Build and Improve Customer Relationships
- Increase Agent Productivity
- Reduce Operating Costs"
Left: Arrow extending from central photograph points to the word
"Technology." To the immediate left of "Technology" is a diagram of the
Company's call center system.
3. Graphic on page 29 of the prospectus in the "Business" section is labeled
"PhoneFrame CS Architecture." The center portion of the graphic depicts a
bar labeled "Local Area Network." Below the Local Area Network bar are
drawings representing a customer's host computing center, the Company's
call processor, the Company's Universal Switch components, the customer's
PBX/ACD and a "cloud" labeled "PSTN" (public switch telephone network).
Each of these components are linked to the Local Area Network. The
Universal Switch, PBX/ACD and PSTN are linked together.
Above the Local Area Network bar are drawings representing the Company's
Universal Workstations and corresponding telephone sets, the Company's
Command Post Windows NT and the Company's Universal Server running on a
RISC/6000 system with Sybase. The telephone sets are connected to the
PBX/ACD with a dotted line. The Command Post and the Universal Server each
are connected to the Local Area Network.
4. Inside back page graphics portray a screen generated by the
Company's Magellan product. The screen is labeled "Magellan Application
Interpreter." The text appearing above the picture of the screen is as
follows:
"Provides agent with information, not just data....
Magellan(TM) navigates multiple corporate data sources and presents
needed information in a Single System Image View(TM). Solutions from basic
"screen pops" to sophisticated customer interaction applications can be created
and modified on-the-fly without programming. Magellan(TM) allows applications to
be developed and deployed quickly, making agents more efficient by presenting
them with the information needed to make timely and informed decisions."
The image of the "Magellan Application Interpreter" screen is enhanced by text
that highlights Magellan's features as follows:
- Employs script windows to bring together text and real-time
data from multiple resources.
- Customer data may be entered with the click of a mouse.
- Customizes on-line help functions.
- Displays talk time with the call gauge.
- Programmable action buttons for background applications.
- Buttons may be customized to display specific actions and
reactions.
- Imports visual elements in graphic boxes.
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and the Combined Financial Statements and
Notes thereto, appearing elsewhere in this Prospectus.
THE COMPANY
Melita International Corporation ("Melita" or the "Company") is a leading
provider of customer contact and call management systems that enable businesses
to automate call center activities and enhance their telephony-based customer
interaction. The Company's principal product, PhoneFrame CS, is used by
organizations to increase agent productivity, reduce the costs of call center
operations and enhance revenue generation for a broad range of activities,
including debt collection, telemarketing and customer service. PhoneFrame CS is
an innovative, comprehensive call center solution based on client/server
software that integrates with industry standard computing and telephony
infrastructures. The Company's customers include leading organizations in
industries such as banking, financial services, retail, communications and
service bureaus, where businesses are engaged in frequent telephone contact with
customers or prospects.
In many industries, customer retention costs are significantly lower than
the costs of customer acquisition. Consequently, many businesses have come to
view long-term customer relationships as a key corporate asset and a source of
competitive advantage. To build customer loyalty, organizations are leveraging
available customer information by disseminating this information to employees
responsible for customer interaction in order to enhance the quality of each
customer contact. In addition, organizations recognize that telephony-based
interaction has become an increasingly effective means of customer contact as
telecommunications costs have decreased and enabling technologies such as
computer/telephony integration ("CTI") have emerged to automate the customer
interaction process.
According to industry sources, the CTI, outbound call management and
automatic call distribution market segments of the worldwide call center systems
market aggregated $2.8 billion in 1996 and are expected to grow at a compound
annual growth rate of 19.1% to $6.7 billion by 2001. The Company's primary
target markets, CTI and outbound call management, were approximately $1.3
billion worldwide in 1996 and are together expected to grow at a compound annual
growth rate of 27.6% to $4.4 billion by 2001.
The Company provides comprehensive solutions to the call center industry
based on a scaleable client/server software architecture capable of supporting
installations with more than 500 simultaneous users on a single server.
PhoneFrame CS provides comprehensive functionality and a user-friendly
application development environment designed to provide increased agent
productivity, lower telecommunication costs and low nuisance call rates. The
Company's software allows call center system managers to control and monitor
call center activity at a glance by providing call flow script creation and
editing, call campaign configuration, resource definition and management, and
system management and reporting capabilities. The Company's products also
provide enhanced interaction with customers through front-end applications which
utilize real-time access to information to guide call center agents through each
step of the customer interaction process. The Company's call management solution
leverages existing investments in call center, information and telephony
systems.
The Company currently has over 400 systems in operation worldwide. Selected
customers include AirTouch Communications, Inc., BancOne Services Corporation,
Barclays Bank PLC, Citicorp, Credicard SA Brazil, Dun & Bradstreet Corporation,
Grupo Financiero Bancomer, S.A. de C.V., J.C. Penney Company, Inc., National
Westminster Bank and Snyder Communications, Inc. The Company sells its products
through a direct sales force in the United States, Canada and the United
Kingdom. In 1996, the Company derived approximately 21.0% of its total revenues
from sales outside the United States. International distribution is largely
through direct sales and value-added resellers ("VARs").
---------------------
Melita International Corporation is a Georgia corporation organized in
1979. Unless the context otherwise requires, references in this Prospectus to
"Melita" or the "Company" refer to Melita International Corporation and its
combined affiliates, Melita Europe Limited and Inventions, Inc. The Company's
principal executive offices are located at 5051 Peachtree Corners Circle,
Norcross, Georgia 30092-2500, and its telephone number is (770) 239-4000.
3
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THE OFFERING
Common Stock offered by the Company.... 3,500,000 shares
Common Stock to be outstanding after
the offering........................... 14,643,395 shares(1)
Use of proceeds........................ For (i) repayment of notes payable
to the Company's principal
shareholder, (ii) payment of
undistributed S corporation earnings
and (iii) general corporate purposes
and working capital.
Proposed Nasdaq National Market
symbol................................. MELI
- ---------------
(1) Includes 3,143,395 shares of Common Stock to be issued in connection with
the combination (the "Combination") of the Company, Melita Europe Limited
("Melita Europe") and Inventions, Inc. ("Inventions") which will occur
concurrently with the effective date of this offering. Excludes an aggregate
of 1,600,000 shares of Common Stock reserved for issuance under the 1992
Stock Option Plan, the 1997 Stock Option Plan and the Stock Purchase Plan
(as defined herein), of which 1,104,097 shares were subject to options
outstanding as of the date of this Prospectus at a weighted average exercise
price of $3.43 per share. See "Management -- Employee Benefit Plans" and
Note 6 of the Notes to Combined Financial Statements.
SUMMARY COMBINED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- -------- --------
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STATEMENT OF OPERATIONS DATA:
Total revenues.................. $24,703 $24,668 $27,156 $35,282 $47,540 $11,021 $14,669
Gross margin.................... 16,059 16,563 17,592 21,270 29,183 7,133 8,092
Income from operations.......... 3,178 3,649 2,600 4,661 7,348 2,051 2,387
Pro forma net income (1)........ $ 2,157 $ 2,356 $ 1,508 $ 2,955 $ 4,782 $ 1,278 $ 1,425
Pro forma net income per common
and common equivalent share... $ 0.39 $ 0.11
======= =======
Pro forma weighted average
common and common equivalent
shares outstanding(2)......... 12,363 12,647
======= =======
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MARCH 31, 1997
---------------------------------------
PRO FORMA
ACTUAL PRO FORMA(3) AS ADJUSTED(4)
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BALANCE SHEET DATA:
Working capital (deficit).................................. $(4,324) $(5,885) $ 25,365
Total assets............................................... 28,105 17,478 42,578
Long-term debt, net of current portion..................... -- -- --
Shareholders' equity (deficit)............................. (1,485) (3,046) 28,204
</TABLE>
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(1) Upon the effective date of this offering, the Company will terminate its
status as an S corporation. Thereafter, the Company will be subject to
federal and state corporate income taxes. Pro forma net income is presented
as if the Company had been subject to corporate income taxes for all periods
presented. See "Termination of S Corporation Status and Related
Distributions" and Notes 1 and 3 of the Notes to Combined Financial
Statements.
(2) See Note 1 of the Notes to Combined Financial Statements.
(3) Pro forma to give effect to the following: (i) the issuance of 3,143,395
shares of Common Stock in connection with the Combination, which will occur
concurrently with the effective date of this offering, (ii) the repayment at
the closing of this offering of a note payable to the principal shareholder
(the "1992
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Note") with a principal balance of $2.4 million and notes payable (the "1997
Notes") of $12.9 million issued in February 1997 representing a portion of
the undistributed S corporation earnings at December 31, 1996 (the "Note
Repayment"), (iii) the interest accrual of $250,000 relating to the 1997
Notes (the "Interest Accrual"), (iv) the inclusion of current deferred tax
assets of $1.1 million due to the termination of the S corporation status
(the "Deferred Tax Adjustment") and (v) the payment subsequent to March 31,
1997 of a cash distribution representing estimated undistributed 1997 S
corporation earnings of $2.5 million through March 31, 1997 (the
"Distribution"). See "Termination of S Corporation Status and Related
Distributions," "Use of Proceeds," "Capitalization," "Certain Transactions"
and Notes 2, 3 and 8 of the Notes to Combined Financial Statements.
(4) Pro forma as adjusted to give effect to the sale by the Company of the
3,500,000 shares of Common Stock offered hereby at an assumed initial public
offering price of $10.00 per share and the receipt of the estimated net
proceeds therefrom. See "Use of Proceeds" and "Capitalization."
FORWARD-LOOKING STATEMENTS
Information contained in this Prospectus includes "forward-looking
statements" that are based largely on the Company's current expectations and are
subject to a number of risks and uncertainties. The Company faces many risks and
uncertainties, including those described in this Prospectus under the caption
"Risk Factors." Because of these many risks and uncertainties, the Company's
actual results may differ materially from any results presented in or implied by
the forward-looking statements included in this Prospectus.
---------------------
Except as otherwise noted, all information in this Prospectus (i) assumes
no exercise of the Underwriters' over-allotment option, (ii) gives effect to the
recapitalization of the Company's Common Stock whereby each share of the
Company's outstanding Voting Common Stock and Non-Voting Common Stock (each
having no par value per share) will be converted into 1/100 of a share of voting
Common Stock, no par value per share ("Common Stock") and (iii) gives effect to
the Combination (as defined in footnote 1 in "The Offering" above). The
recapitalization and the Combination will be effected contemporaneously with the
effectiveness of this offering. See "Certain Transactions," "Underwriting" and
Note 9 of the Notes to Combined Financial Statements.
Cancel Dial(R), Melita(R), PhoneFrame(R), Universal Access(R), Universal
Server(R) and Universal Switch(R) are registered trademarks or service marks of
the Company. ActionPACT(TM), Customer Care(SM), PhoneFrame Command Post(TM),
Magellan(TM), MPACT(TM), People to People Communication(TM), PowerPACT(TM),
QFlow(TM), Single System Image View(TM), Universal Workstation(TM) and UTP(TM)
are trademarks or service marks of the Company. This Prospectus also includes
trademarks, service marks and trade names of other companies.
5
<PAGE> 8
RISK FACTORS
Prospective investors should consider carefully the following factors, in
addition to the other information contained in this Prospectus, in evaluating
the Company and its business before purchasing shares of Common Stock offered
hereby.
DEPENDENCE ON SINGLE PRODUCT LINE; RISKS ASSOCIATED WITH SERVICING THE MARKET
FOR CALL CENTER SOLUTIONS
The Company currently derives substantially all of its revenues from sales
of its PhoneFrame CS product and related services. PhoneFrame CS was introduced
in early 1995, and the Company expects that this product and related services
will continue to account for a substantial portion of the Company's revenues for
the foreseeable future. Although the Company intends to enhance these products
and develop related products, the Company expects to continue to focus on
providing call center systems as its primary line of business. As a result, any
factor adversely affecting the market for call center systems in general, or the
PhoneFrame CS product in particular, could adversely affect the Company's
business, financial condition and results of operations. The market for call
center systems is intensely competitive, highly fragmented and subject to rapid
change. The Company's future success will depend on continued growth in the
market for call center systems, and there can be no assurance that this market
will continue to grow. If this market fails to grow or grows more slowly than
the Company currently anticipates, the Company's business, financial condition
and results of operations would be materially adversely affected.
RELIANCE ON SIGNIFICANT CUSTOMERS
The Company has derived and believes that it will continue to derive a
significant portion of its revenues in any period from a limited number of large
corporate clients. During 1996, the Company's five largest customers accounted
for 24.5% of the Company's total revenues. In 1995, the Company's five largest
customers accounted for 24.8% of its total revenues. Although the specific
customers may change from period to period, the Company expects that large sales
to a limited number of customers will continue to account for a significant
percentage of its revenues in any particular period for the foreseeable future.
Therefore, the loss, deferral or cancellation of an order could have a
significant impact on the Company's operating results in a particular quarter.
There can be no assurance that its current customers will place additional
orders, or that the Company will obtain orders of similar magnitude from other
customers. The loss of any major customer or any reduction, delay in or
cancellation of orders by any such customer or the failure of the Company to
market successfully to new customers could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business -- Customers."
POTENTIAL VARIABILITY OF QUARTERLY FINANCIAL RESULTS
The Company's revenues and operating results could vary substantially from
quarter to quarter. Among the factors that could cause these variations are
changes in the demand for the Company's products, the level of product and price
competition, the length of the Company's sales process, the size and timing of
individual transactions, the mix of products and services sold, software defects
and other product quality problems, any delay in or cancellation of customer
installations, the Company's success in expanding its direct sales force and
indirect distribution channels, the timing of new product introductions and
enhancements by the Company or its competitors, customer order deferrals in
anticipation of enhancements or new products offered by the Company or its
competitors, commercial strategies adopted by competitors, changes in foreign
currency exchange rates, customers' fiscal constraints, the Company's ability to
control costs and general economic conditions. In addition, a limited number of
relatively large customer orders has accounted for and is likely to continue to
account for a substantial portion of the Company's total revenues in any
particular quarter. Sales of the Company's software products generally involve a
significant commitment of management attention and resources by prospective
customers. Accordingly, the Company's sales process is often lengthy and subject
to delays associated with the long approval process that accompanies significant
customer initiatives or capital expenditures. The Company's sales cycle, from
initial trial to complete installation, varies substantially from customer to
customer. Because a high percentage of the Company's costs are for staffing and
operating expenses and are fixed in the short term, based on anticipated revenue
levels, variations between anticipated
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order dates and actual order dates, as well as nonrecurring or unanticipated
large orders, can cause significant variations in the Company's operating
results from quarter to quarter. As a result of the foregoing factors, the
Company's operating results for a future quarter may be below the expectations
of securities analysts and investors. In such event, the market price of the
Company's Common Stock likely will be adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Quarterly Results of Operations."
LIMITED PREDICTABILITY OF SALES DUE TO LENGTHY SALES PROCESS
The sale of the Company's products generally requires the Company to
provide a significant level of education to prospective customers regarding the
use and benefits of the Company's products. In addition, implementation of the
Company's products involves a significant commitment of resources by prospective
customers and is commonly associated with substantial integration efforts which
may be performed by the Company or the customer. For these and other reasons,
the length of time between the date of initial contact with the potential
customer and the installation and use of the Company's products is typically six
months or more, and may be subject to delays over which the Company has little
or no control. The Company's implementation cycle could be lengthened in the
future by increases in the size and complexity of its installations. Delay in or
cancellation of sales could have a material adverse effect on the Company's
business, financial condition and results of operations, and could cause the
Company's operating results to vary significantly from quarter to quarter. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Quarterly Results of Operations."
COMPETITION
The market for the Company's products is intensely competitive, fragmented
and subject to rapid change. Because the Company's principal products are call
management systems, which include both software applications and hardware, the
Company competes with a variety of companies which provide these components
independently or as an integrated system. The Company's primary competitors in
the field of integrated inbound/outbound call management systems are Davox
Corporation ("Davox"), EIS International, Inc. ("EIS") and Mosaix International,
Inc. ("Mosaix"). The Company competes primarily against Davox and Mosaix in the
collections segment of the outbound call management systems market, and against
EIS in the telemarketing and telesales segments of the inbound/outbound call
management systems market. The Company also competes in the CTI segment of the
market, where principal competitors include AnswerSoft, Inc., Genesys
Telecommunications Laboratories, Inc., Nabnasset Corporation and Brock
International, Inc., among others. The Company may face additional competition
from PBX/ACD vendors, other telecommunications equipment providers,
telecommunications service providers, computer hardware and software vendors and
others. The Company generally faces competition from one or more of its
principal competitors on major installations and believes that price is a major
factor considered by its prospective customers. Increased competition has
contributed significantly to price reductions and the Company expects these
price reductions to continue. In addition, increased competition may result in
reduced operating margins and loss of market share, either of which could
materially adversely affect the Company's business, financial condition and
results of operations. Many of the Company's current and potential competitors
have significantly greater financial, technical, marketing and other resources
than the Company. As a result, they may be able to respond more quickly to new
or emerging technologies and changes in customer requirements, or to devote
greater resources to the development, promotion and sale of their products than
could the Company. There can be no assurance that the Company will be able to
compete successfully against current and future competitors or that competitive
pressures faced by the Company will not materially adversely affect its
business, financial condition and results of operations. See
"Business -- Competition."
CONTROL BY PRINCIPAL SHAREHOLDER
Upon completion of this offering, Aleksander Szlam, the Company's Chairman
of the Board, Chief Executive Officer and principal shareholder, will
beneficially own approximately 76.1% of the outstanding shares of Common Stock
(73.5% if the Underwriters' over-allotment option is exercised in full).
Accordingly,
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<PAGE> 10
Mr. Szlam will be in a position to control the Company through his ability to
control any election of members of the Board of Directors, as well as any
decision whether to merge or sell the assets of the Company, to adopt, amend or
repeal the Company's Amended and Restated Articles of Incorporation and Bylaws,
or to take other actions requiring the vote or consent of the Company's
shareholders. This concentration of ownership could also discourage bids for the
shares of Common Stock at a premium to, or create a depressive effect on, the
market price of the Common Stock. See "Principal Shareholders" and "Description
of Capital Stock."
COMPETITIVE MARKET FOR PERSONNEL
The future success of the Company's growth strategy will depend to a
significant extent on its ability to attract, train, motivate and retain highly
skilled professionals, particularly software developers, sales and marketing
personnel and other senior technical personnel. An inability to hire such
additional qualified personnel could impair the Company's ability to adequately
manage and complete its existing sales and to bid for, obtain and implement new
sales. Further, the Company must train and manage its growing employee base,
requiring an increase in the level of responsibility for both existing and new
management personnel. There can be no assurance that the management personnel
and systems currently in place will be adequate or that the Company will be able
to assimilate new employees successfully. Highly skilled employees with the
education and training required by the Company are in high demand. Accordingly,
there can be no assurance that the Company will be successful in attracting or
retaining current or future employees. See "Business -- Employees."
RISKS ASSOCIATED WITH TECHNOLOGICAL ADVANCES; NECESSITY OF DEVELOPING NEW
PRODUCTS
The market for call center systems is subject to rapid technological
change, changing customer needs, frequent new product introductions and evolving
industry standards that may render existing products and services obsolete. As a
result, the Company's position in this market could be eroded rapidly by
unforeseen changes in customer requirements for application features, functions
and technologies. The Company's growth and future operating results will depend
in part upon its ability to enhance existing applications and develop and
introduce new applications that meet or exceed technological advances in the
marketplace, that meet changing customer requirements, that respond to
competitive products and that achieve market acceptance. The Company's product
development and testing efforts have required, and are expected to continue to
require, substantial investments by the Company. There can be no assurance the
Company will possess sufficient resources to make these necessary investments.
The Company has in the past experienced delays both in developing new products
and customizing existing products. These delays have occurred due to the complex
nature of the Company's products, difficulties in getting newly developed
software code to function properly with existing code, difficulty in recruiting
sufficient numbers of programmers with the proper technical skills and
capabilities, loss of programmers with existing technical knowledge of the
Company's products, changing standards or protocols within the computer and
telephony equipment with which the Company's products integrate, inherent
limitations in, and unforeseen problems with using, other company or industry
products and software, changes in design specifications once technical problems
are uncovered, and unforeseen problems with the implementation of a client
server architecture and distributed processing. There can be no assurance that
the Company will not experience difficulties that could cause such delays in the
future. In addition, there can be no assurance that such products will meet the
requirements of the marketplace and achieve market acceptance, or that the
Company's current or future products will conform to industry standards. If the
Company is unable, for technological or other reasons, to develop and introduce
new and enhanced products in a timely manner, the Company's business, financial
condition and results of operations could be materially adversely affected. See
"Business -- Technology, Research and Product Development."
MANAGEMENT OF GROWTH
The Company has recently experienced significant growth in revenue,
operations and personnel. Continued growth will place significant demands on its
management and other resources. In particular, the Company will have to continue
to increase the number of its personnel, particularly skilled technical,
8
<PAGE> 11
marketing and management personnel, and continue to develop and improve its
operational, financial, communications and other internal systems. The Company's
inability to manage its growth effectively could have a material adverse effect
on the quality of the Company's services and projects, its ability to attract
and retain key personnel, its business prospects and its results of operations
and financial condition. The Company is currently in the process of implementing
a new help-desk information system to upgrade its automated customer support
capability. No assurance can be given that the implementation of this system
will not result in disruptions to the Company's business. In addition, the
Company is in the process of implementing a plan to decentralize its sales and
support functions throughout existing and planned regional offices. There can be
no assurance that the Company will be successful in implementing this
decentralization plan or managing the transition without disruptions in the
sales and support functions or that the new decentralized sales and support
organization will be effective. Any disruptions resulting from the
implementation of the help-desk information system or the decentralization plan,
or the failure to implement these changes in a timely manner, could have a
material adverse effect on the Company's business, results of operations and
financial condition. See "Business -- Employees" and "Management -- Executive
Officers and Directors."
INTERNATIONAL OPERATIONS
Revenue from sales outside the United States in 1994, 1995 and 1996
accounted for 20.9%, 22.5% and 21.0%, respectively, of the Company's total
revenues. International operations are subject to inherent risks, including the
impact of possible recessionary environments in economies outside the United
States, changes in legal and regulatory requirements including those relating to
telemarketing activities, changes in tariffs, seasonality of sales, costs of
localizing products for foreign markets, longer accounts receivable collection
periods and greater difficulty in accounts receivable collection, difficulties
and costs of staffing and managing foreign operations, reduced protection for
intellectual property rights in some countries, potentially adverse tax
consequences and political and economic instability. There can be no assurance
that the Company will be able to sustain or increase international revenue, or
that the factors listed above will not have a material adverse impact on the
Company's international operations. While the Company's expenses incurred in
foreign countries typically are denominated in the local currencies, revenues
generated by the Company's international sales typically are paid in U.S.
dollars or British pounds. Accordingly, while exposure to currency fluctuations
to date has been insignificant, there can be no assurance that fluctuations in
currency exchange rates in the future will not have a material adverse impact on
the Company's international operations. The Company currently does not engage in
currency hedging activities.
A significant element of the Company's business strategy is to continue
expansion of its operations in international markets. This expansion has
required and will continue to require significant management attention and
financial resources to develop international sales channels. Because of the
difficulty in penetrating new markets, there can be no assurance that the
Company will be able to maintain or increase international revenues. To the
extent that the Company is unable to do so, the Company's financial condition
and results of operations could be materially adversely affected. See
"Business -- Strategy."
RISK OF SOFTWARE DEFECTS; DEPENDENCE ON THIRD-PARTY SOFTWARE
Software products as complex as those offered by the Company may contain
errors that may be detected at any point in the products' life cycles. The
Company has, in the past, discovered software errors in certain of its products
and has experienced delays in shipment of products during the period required to
correct these errors. In particular, the call center environment is
characterized by a wide variety of standard and non-standard configurations that
make pre-release testing for programming or compatibility errors very difficult
and time consuming. There can be no assurance that, despite extensive testing by
the Company and by current and potential customers, errors will not be found,
resulting in a loss of, or delay in, market acceptance and sales, diversion of
development resources, injury to the Company's reputation or increased service
and warranty cost, any of which could have a material adverse affect on the
Company's business, financial condition and results of operations. Certain
software used in the Company's products is licensed by the Company from third
parties. There can be no assurance that the Company will continue to be able to
resell this software under its licenses or, if any licensor terminates its
agreement with the Company, that the
9
<PAGE> 12
Company will be able to develop or otherwise procure replacement software from
another supplier on a timely basis or on commercially reasonable terms. In
addition, such third-party software may contain errors that would be difficult
for the Company to detect and correct.
POTENTIAL LIABILITY TO CLIENTS
The Company's products may be critical to the operations of its clients'
businesses and provide benefits that may be difficult to quantify. Any failure
in a Company product or a client's system could result in a claim for
substantial damages against the Company, regardless of the Company's
responsibility for such failure. Although the Company attempts to limit
contractually its liability for damages arising from product failures or
negligent acts or omissions, there can be no assurance the limitations of
liability set forth in its contracts will be enforceable in all instances or
would otherwise protect the Company from liability for damages. Although the
Company maintains general liability insurance coverage, including coverage for
product liability and errors or omissions, there can be no assurance that such
coverage will continue to be available on reasonable terms or will be available
in sufficient amounts to cover one or more large claims, or that the insurer
will not disclaim coverage as to any future claim. The successful assertion of
one or more large claims against the Company that exceed available insurance
coverage or changes in the Company's insurance policies, including premium
increases or the imposition of large deductible or co-insurance requirements,
could adversely affect the Company's results of operations and financial
condition.
RISKS ASSOCIATED WITH POSSIBLE ACQUISITIONS
The Company may in the future engage in selective acquisitions of
businesses that are complementary to those of the Company, including other
providers of call management or CTI solutions or technology. While the Company
has from time to time in the past considered acquisition opportunities, it has
never acquired a significant business and has no existing agreements or
commitments to effect any acquisition. Accordingly, there can be no assurance
that the Company will be able to identify suitable acquisition candidates
available for sale at reasonable prices, consummate any acquisition or
successfully integrate any acquired business into the Company's operations.
Further, acquisitions may involve a number of additional risks, including
diversion of management's attention, failure to retain key acquired personnel,
unanticipated events or circumstances and legal liabilities, some or all of
which could have a material adverse effect on the Company's results of
operations and financial condition. Problems with an acquired business could
have a material adverse impact on the performance of the Company as a whole. The
Company expects to finance any future acquisitions with the proceeds of this
offering as well as with possible debt financing, the issuance of equity
securities (common or preferred stock) or a combination of the foregoing. There
can be no assurance that the Company will be able to arrange adequate financing
on acceptable terms. If the Company were to proceed with one or more significant
future acquisitions in which the consideration consisted of cash, a substantial
portion of the Company's available cash (possibly including a portion of the
proceeds of this offering) could be used to consummate the acquisitions. If the
Company were to consummate one or more significant acquisitions in which the
consideration consisted of stock, shareholders of the Company could suffer
significant dilution of their interests in the Company. Many business
acquisitions must be accounted for as a purchase. Most of the businesses that
might become attractive acquisition candidates for the Company are likely to
have significant intangible assets and acquisition of these businesses, if
accounted for as a purchase, would typically result in substantial goodwill
amortization charges to the Company, reducing future earnings. In addition, such
acquisitions could involve non-recurring acquisition-related charges, such as
the write-off or write-down of software development costs or other intangible
items.
TERMINATION OF S CORPORATION STATUS AND SUBSTANTIAL DISTRIBUTION OF OFFERING
PROCEEDS TO CURRENT SHAREHOLDERS; OTHER BENEFITS TO PRINCIPAL SHAREHOLDER
Since September 1, 1988, the Company has been treated for federal income
tax purposes as an S corporation under the Internal Revenue Code of 1986, as
amended (the "Code"). Upon the effective date of this offering (the "Termination
Date"), the Company will terminate its status as an S corporation under the Code
and thereafter will be subject to federal and state income taxes.
10
<PAGE> 13
The Company will use a substantial portion of the proceeds of this offering
to make the following payments to its principal shareholder: (i) repayment of
the 1992 Note and the 1997 Notes, aggregating approximately $15.3 million, and
(ii) a distribution of accumulated 1997 S corporation earnings. Purchasers of
Common Stock in this offering will not receive any portion of the S corporation
distribution. See "Termination of S Corporation Status and Related
Distributions," "Use of Proceeds," "Certain Transactions" and Note 3 of the
Notes to Combined Financial Statements.
REGULATORY ENVIRONMENT
Certain uses of outbound call processing systems are regulated by federal,
state and foreign laws and regulations. While the Company's systems are
generally designed to operate in compliance with these laws and regulations
through the use of appropriate calling lists and calling campaign time
parameters, compliance with these laws and regulations may limit the usefulness
of the Company's products to its customers and potential customers, and these
laws and regulations could therefore adversely affect demand for the Company's
products. In addition, there can be no assurance that future legislation or
regulatory activity further restricting telephone practices, if enacted, would
not adversely affect the Company. See "Business -- Regulatory Environment."
INTELLECTUAL PROPERTY RIGHTS
The Company relies on a combination of patent, copyright, trade secret and
trademark laws, confidentiality procedures and contractual provisions to protect
its proprietary rights in its products and technology. There can be no
assurance, however, that these measures will be adequate to protect its trade
secrets and proprietary technology. Further, the Company may be subject to
additional risks as it enters into transactions in countries where intellectual
property laws are not well developed or are poorly enforced. Legal protections
of the Company's rights may be ineffective in such countries. Litigation to
defend and enforce the Company's intellectual property rights could result in
substantial costs and diversion of resources and could have a material adverse
effect on the Company's business, financial condition and results of operations,
regardless of the final outcome of such litigation. Despite the Company's
efforts to safeguard and maintain its proprietary rights both in the United
States and abroad, there can be no assurance that the Company will be successful
in doing so or that the steps taken by the Company in this regard will be
adequate to deter misappropriation or independent third-party development of the
Company's technology or to prevent an unauthorized third party from copying or
otherwise obtaining and using the Company's products or technology. There can be
no assurance that others will not independently develop similar technologies or
duplicate any technology developed by the Company. Any such events could have a
material adverse affect on the Company's business, financial condition and
results of operations.
The Company has entered into agreements with certain of its distributors
giving them a limited, non-exclusive right to use portions of the Company's
source code to create foreign language versions of the Company's products for
distribution in foreign markets. In addition, the Company has entered into
agreements with a small number of its customers requiring the Company to place
its source code in escrow. These escrow arrangements typically provide that
these customers have a limited, non-exclusive right to use such code in the
event that there is a bankruptcy proceeding by or against the Company, if the
Company ceases to do business or if the Company fails to meet its support
obligations. These arrangements may increase the likelihood of misappropriation
by third parties.
As the number of call management software applications in the industry
increases and the functionality of these products further overlaps, software
development companies like the Company may increasingly become subject to claims
of infringement or misappropriation of the intellectual property rights of
others. Although the Company believes that its software components and other
intellectual property do not infringe on the intellectual property rights of
others, there can be no assurance that such a claim will not be asserted against
the Company in the future, that assertion of such claims will not result in
litigation or that the Company would prevail in such litigation or be able to
obtain a license for the use of any infringed intellectual property from a third
party on commercially reasonable terms. Furthermore, litigation, regardless of
its outcome, could result in substantial cost to the Company, divert
management's attention from the Company's operations and delay
11
<PAGE> 14
customer purchasing decisions. Any infringement claim or litigation against the
Company could, therefore, have a material adverse effect on the Company's
results of operations and financial condition. See "Business -- Proprietary
Rights."
DEPENDENCE ON KEY PERSONNEL
The Company's success will depend in large part upon the continued
availability of the services of Aleksander Szlam, the Company's Chairman and
Chief Executive Officer, and J. Neil Smith, the Company's President and Chief
Operating Officer. Although the Company has employment agreements with Mr. Szlam
and Mr. Smith, these agreements do not obligate either of them to continue his
employment with the Company. There can be no assurance that the Company will be
able to retain the services of Messrs. Szlam and Smith. The Company does not
maintain key man life insurance on Mr. Szlam or Mr. Smith. The loss of the
services of one or both of them would have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Management."
BROAD MANAGEMENT DISCRETION AS TO USE OF PROCEEDS
A substantial portion of the net proceeds to be received by the Company in
connection with this offering is allocated to working capital and general
corporate purposes. Accordingly, management will have broad discretion with
respect to the expenditure of such proceeds. Purchasers of shares of Common
Stock offered hereby will be entrusting their funds to the Company's management,
upon whose judgment they must depend, with limited information concerning the
specific working capital requirements and general corporate purposes to which
the funds will ultimately be applied. See "Use of Proceeds."
CERTAIN ANTI-TAKEOVER PROVISIONS
The Board of Directors has authority to issue up to 20,000,000 shares of
preferred stock and to fix the rights, preferences, privileges and restrictions,
including voting rights, of the preferred stock without further vote or action
by the Company's shareholders. The rights of the holders of the Common Stock
will be subject to, and may be adversely affected by, the rights of the holders
of preferred stock that may be issued in the future. While the Company has no
present intention to issue shares of preferred stock, such issuance could have
the effect of making it more difficult for a third party to acquire a majority
of the outstanding voting stock of the Company. In addition, the Company's
Amended and Restated Articles of Incorporation and Bylaws contain provisions
that may discourage proposals or bids to acquire the Company. These provisions
could have the effect of making it more difficult for a third party to acquire
control of the Company and adversely affect prevailing market prices for the
Common Stock. See "Description of Capital Stock -- Certain Articles of
Incorporation and Bylaw Provisions" and "Certain Provisions of Georgia Law."
SHARES ELIGIBLE FOR FUTURE SALE
Upon the closing of this offering, the Company will have 14,643,395 shares
of Common Stock outstanding. The 3,500,000 shares of Common Stock sold in this
offering will be freely tradable without restriction or limitation under the
Securities Act of 1933, as amended (the "Securities Act"), except for shares
purchased by "affiliates" (as defined under the Securities Act). The remaining
11,143,395 shares of Common Stock will become eligible for sale beginning in
February 1998 subject to the volume and other limitations of Rule 144 under the
Securities Act. All of the officers, directors and existing shareholders of the
Company are subject to lock-up agreements under which they have agreed not to
sell or otherwise dispose of any of their shares for a period of 180 days after
the date of this Prospectus without the prior written consent of Montgomery
Securities. Upon completion of this offering, the Company will have 1,600,000
shares of Common Stock reserved for issuance under its stock plans, of which
1,104,097 shares are subject to outstanding options. Promptly following the
completion of this offering, the Company intends to file one or more
registration statements on Form S-8 to register these shares. Sales of
substantial amounts of Common Stock in the public markets, pursuant to Rule 144
or otherwise, or the availability of such shares for sale could adversely affect
the prevailing market prices for the Common Stock and impair the Company's
ability to raise
12
<PAGE> 15
additional capital through the sale of equity securities in the future should it
desire to do so. See "Management -- Employee Benefit Plans" and "Shares Eligible
for Future Sale."
NO PRIOR PUBLIC MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Common
Stock. Although the Company has made application for the quotation of the Common
Stock on the Nasdaq National Market, there can be no assurance that an active
trading market will develop or be sustained after the offering. The initial
public offering price of the Common Stock offered hereby will be determined by
negotiation between the Company and the Representatives of the Underwriters and
may bear no relationship to the market price of the Common Stock after the
offering. The market price of the Common Stock could be subject to significant
fluctuations in response to variations in quarterly operating results and other
factors. In addition, the securities markets have experienced significant price
and volume fluctuations from time to time that have often been unrelated or
disproportionate to the operating performance of particular companies. Any
announcement with respect to any adverse variance in revenue or earnings from
levels generally expected by securities analysts or investors for a given period
would have an immediate and significant adverse effect on the trading price of
the Common Stock. In addition, factors such as announcements of technological
innovations or new products by the Company, its competitors or third parties,
rumors of such innovations or new products, changing conditions in the market
for call center systems, changes in estimates by securities analysts,
announcements of extraordinary events, such as acquisitions or litigation, or
general economic conditions may have a significant adverse impact on the market
price of the Common Stock. See "Underwriting."
DILUTION
The purchasers of the Common Stock offered hereby will experience immediate
and significant dilution in the pro forma net tangible book value of the Common
Stock from the initial public offering price. See "Dilution."
13
<PAGE> 16
TERMINATION OF S CORPORATION STATUS AND RELATED DISTRIBUTIONS
Since September 1, 1988, the Company has elected to operate under
Subchapter S of the Code and comparable provisions of certain state income tax
laws. An S corporation generally is not subject to income tax at the corporate
level (with certain exceptions under state income tax laws). Instead, the S
corporation's income generally passes through to shareholders and is taxed on
their personal income tax returns. As a result, the Company's earnings have been
taxed for federal and state income tax purposes, with certain exceptions,
directly to the existing shareholders of the Company.
Upon the effective date of this offering (the "Termination Date"), the
Company will terminate its status as an S corporation under the Code. All
undistributed S corporation earnings through the Termination Date will be
distributed to the Company's principal shareholder using a portion of the net
proceeds of this offering. At December 31, 1996, the undistributed S corporation
earnings of the Company were estimated to be $14.4 million. Subsequent to
December 31, 1996, the Company distributed these amounts to its principal
shareholder, including a distribution of $1.5 million in cash and the issuance
of the 1997 Notes having an aggregate principal amount of $12.9 million. The
1997 Notes bear interest at a rate equal to the applicable federal rate under
the Code (currently 5.7%) and will accrue interest of approximately $250,000
through the expected Termination Date. The 1997 Notes will be repaid in full
using a portion of the proceeds of this offering. As of March 31, 1997,
undistributed 1997 S corporation earnings were estimated to be $2.5 million,
$1.8 million of which was distributed by the Company in April 1997. The Company
expects to accumulate additional earnings through the Termination Date. The
Company currently estimates that such additional earnings will be between $1.0
million and $3.0 million, although the actual amount of such earnings may vary
significantly. These accumulated earnings will be distributed to the principal
shareholder using a portion of the net proceeds of this offering. The actual
amount of this distribution will be reduced to the extent additional
distributions of 1997 accumulated earnings are made by the Company to the
principal shareholder prior to the Termination Date with other corporate funds.
The principal shareholder has agreed to indemnify the Company should its
status as an S Corporation during any portion of the period for which it claimed
such status in federal or state income tax filings ever be successfully
challenged. See "Risk Factors -- Termination of S Corporation Status and
Substantial Distribution of Offering Proceeds to Current Shareholders; Other
Benefits to Principal Shareholder," "Use of Proceeds" and "Certain
Transactions."
In connection with the termination of its S corporation status, the Company
will report an increase in earnings which will be recognized in the quarter
during which the Termination Date occurs with the addition of approximately $1.1
million in deferred tax assets.
14
<PAGE> 17
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,500,000 shares of
Common Stock offered hereby are estimated to be approximately $31.3 million
($36.1 million if the Underwriters' over-allotment option is exercised in full),
assuming an initial public offering price of $10.00 per share and after
deducting estimated underwriting discounts and estimated expenses payable by the
Company in connection with the offering.
From the net proceeds of the offering, the Company will make the following
payments to its principal shareholder: (i) repayment of the $12.9 million
principal balance of the 1997 Notes, together with accrued interest thereon
which the Company estimates will then be $250,000, (ii) repayment of the 1992
Note, which the Company expects will then have a principal balance of $2.3
million, (iii) the payment of undistributed S corporation earnings through March
31, 1997, of approximately $700,000, and (iv) a distribution of all
undistributed accumulated S corporation earnings for the period from April 1,
1997 through the effective date. The Company currently estimates that the
undistributed accumulated earnings as of the estimated effective date will be
between $1.0 million and $3.0 million, although the actual amount of such
earnings may vary significantly. The actual amount of this distribution will be
reduced to the extent any prior distributions of 1997 accumulated earnings are
made by the Company to its principal shareholder.
The 1997 Notes and the 1992 Note were issued to reflect the distribution of
accumulated earnings to the principal shareholder. The 1997 Notes bear interest
at the minimum rate required to avoid imputation of interest using the
applicable federal rate under the Code (currently 5.7%). Payment of the 1997
Notes is due in full upon demand. The 1992 Note bears interest at a rate equal
to the prime rate plus 1% per annum. Interest on the note is payable monthly,
and principal is payable in 16 equal quarterly installments beginning July 1,
1996. The 1992 Note contains an acceleration provision at the option of the
noteholder upon certain designated changes in ownership, which was triggered by
changes in the capital structure in February 1997. See "Termination of S
Corporation Status and Related Distributions" and "Certain Transactions."
The remainder of the net proceeds will be used for working capital and
other general corporate purposes. Such purposes may include possible
acquisitions of, or investments in, businesses and technologies that are
complementary to those of the Company. The Company has no specific agreements,
commitments or understandings with respect to any such acquisitions or
investments. Pending application of the net proceeds as described above, the
Company intends to invest the net proceeds in short-term, interest-bearing
securities. See "Risk Factors -- Broad Management Discretion as to Use of
Proceeds." The Company is proceeding with the offering at this time in part to
establish a public trading market for shares of the Common Stock (including
shares issuable pursuant to the exercise of options) in what the Company
perceives as favorable market conditions.
DIVIDEND POLICY
The Company historically has made substantial distributions to its
shareholders related to its S corporation status and the resulting tax payment
obligations imposed on its shareholders, including a total since January 1, 1995
of $12.1 million in cash and $12.9 million in the form of the 1997 Notes. Other
than the distribution to be made to the Company's principal shareholder
described under "Termination of S Corporation Status and Related Distributions,"
the Company does not intend to declare or pay cash dividends in the foreseeable
future. Management anticipates that all earnings and other cash resources of the
Company, if any, will be retained by the Company for investment in its business.
15
<PAGE> 18
CAPITALIZATION
The following table sets forth the short-term indebtedness and
capitalization of the Company at March 31, 1997 on an actual, pro forma and pro
forma as adjusted basis. This table should be read in conjunction with the
Company's Combined Financial Statements and Notes thereto.
<TABLE>
<CAPTION>
MARCH 31, 1997
-----------------------------------
PRO PRO FORMA
ACTUAL FORMA(1) AS ADJUSTED(2)
------- -------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Current portion of long term debt........................... $15,352 $15,352 $ 15
======= ======= =======
Long-term debt, net of current portion...................... $ -- $ -- $ --
Shareholders' equity:
Preferred stock:
Melita International Corporation, no par value,
20,000,000 shares authorized(3), no shares issued or
outstanding.......................................... -- -- --
Common stock:
Melita International Corporation, no par value;
100,000,000 shares authorized(3); 8,000,000 shares
issued and outstanding, actual; 11,143,395 shares
issued and outstanding, pro forma; 14,643,395 shares
issued and outstanding, pro forma as adjusted(4)..... 2 69 31,319
Melita Europe Limited, L1 par value; 50,000 shares
authorized; 31,128 shares issued and outstanding
actual; no shares issued or outstanding pro forma or
pro forma as adjusted................................ 46 -- --
Inventions, Inc., $5 par value; 100 shares authorized;
100 shares issued and outstanding actual; no shares
issued or outstanding pro forma or pro forma as
adjusted............................................. 1 -- --
Additional paid-in capital................................ 20 -- --
Cumulative foreign currency translation adjustment........ 13 13 13
Retained earnings......................................... (1,567) (3,128) (3,128)
------- ------- -------
Total shareholders' equity........................ (1,485) (3,046) 28,204
------- ------- -------
Total capitalization......................... $(1,485) $(3,046) $28,204
======= ======= =======
</TABLE>
- ---------------
(1) Pro forma to give effect to (i) the issuance of 3,143,395 shares of Common
Stock in connection with the Combination, (ii) the Note Repayment, (iii)
the Interest Accrual, (iv) the Deferred Tax Adjustment and (v) the
Distribution. See "Termination of S Corporation Status and Related
Distributions," "Use of Proceeds," "Certain Transactions" and Notes 2, 3
and 8 of the Notes to Combined Financial Statements included elsewhere in
this prospectus.
(2) Pro forma as adjusted to give effect to the sale by the Company of the
3,500,000 shares of Common Stock offered hereby at an assumed initial
public offering price of $10.00 per share and the receipt of the estimated
net proceeds therefrom. See "Use of Proceeds."
(3) Gives effect to an amendment to the Company's Articles of Incorporation to
be filed after December 31, 1996 to increase its authorized capital stock.
(4) Actual, pro forma and pro forma as adjusted shares issued and outstanding
exclude an aggregate of 1,600,000 shares of Common Stock reserved for
issuance under the 1992 Stock Option Plan, the 1997 Stock Option Plan and
the Stock Purchase Plan, of which 1,104,097 shares were subject to options
outstanding as of the date of this Prospectus at a weighted average
exercise price of $3.43 per share. See "Management -- Employee Benefit
Plans" and Note 6 of the Notes to Combined Financial Statements.
16
<PAGE> 19
DILUTION
The net tangible book deficit of the Common Stock as of March 31, 1997 was
approximately $(1.5 million) or $(.19) per share. The pro forma net tangible
book deficit of the Common Stock as of March 31, 1997 was approximately $(3.1
million) or $(.27) per share. The pro forma net tangible book deficit per share
represents the excess of the Company's total liabilities over total tangible
assets, divided by the total number of shares of Common Stock outstanding, after
giving effect to the Combination, the Distribution and the Deferred Tax
Adjustment.
After giving effect to the sale by the Company of the 3,500,000 shares of
Common Stock offered hereby at an assumed initial public offering price of
$10.00 per share, and the receipt of the estimated net proceeds therefrom, the
pro forma net tangible book value of the Company (total tangible assets less
total liabilities) as of March 31, 1997 would have been approximately $28.2
million, or $1.93 per share. This represents an immediate increase in pro forma
net tangible book value of $2.20 per share to existing shareholders and an
immediate dilution in pro forma net tangible book value of $8.07 per share to
purchasers of Common Stock in this offering, as illustrated in the following
table:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................... $10.00
------
Net tangible book value per share as of March 31, 1997.... $(.19)
Decrease per share attributable to pro forma
adjustments............................................ (.08)
-----
Pro forma net tangible book deficit per share as of March
31, 1997............................................... (.27)
Increase per share attributable to new investors.......... 2.20
-----
Pro forma net tangible book value per share as of March 31, 1997
after the offering............................................... 1.93
------
Dilution per share to new investors................................ $ 8.07
======
</TABLE>
The following table sets forth, as of March 31, 1997, on a pro forma basis
after giving effect to the issuance of shares of Common Stock in connection with
the Combination, the number of shares of Common Stock issued by the Company and
the total consideration and the average price per share paid by the existing
shareholders and new investors, assuming the sale by the Company of 3,500,000
shares of Common Stock at an assumed initial public offering price of $10.00 per
share, and before deducting the estimated underwriting discount and estimated
offering expenses:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders.... 11,143,395 76.1% $ 69,000 0.2% $ 0.01
New investors............ 3,500,000 23.9 35,000,000 99.8 $10.00
---------- ----- ----------- -----
Total.......... 14,643,395 100.0% $35,069,000 100.0%
========== ===== =========== =====
</TABLE>
Assuming full exercise of the Underwriters' over-allotment option, the
percentage of shares held by existing shareholders would be 73.5% of the total
number of shares of Common Stock to be outstanding after the offering, and the
number of shares held by new investors would be increased to 4,025,000 shares,
or 26.5% of the total number of shares of Common Stock to be outstanding after
the offering. See "Principal Shareholders."
Following the closing of this offering, the Company will have outstanding
options to acquire approximately 1,104,097 shares of Common Stock at exercise
prices ranging from $2.75 to $5.50 per share and a weighted average exercise
price of $3.43 per share. The exercise of these options would have the effect of
increasing the net tangible book value dilution to new investors in this
offering.
17
<PAGE> 20
SELECTED COMBINED FINANCIAL DATA
The selected combined financial data of the Company set forth below should
be read in conjunction with the Combined Financial Statements of the Company,
including the Notes thereto, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The combined statement of
operations data for the years ended December 31, 1994, 1995 and 1996 and the
combined balance sheet data as of December 31, 1995 and 1996 are derived from,
and are qualified by reference to, the combined financial statements audited by
Arthur Andersen LLP and included elsewhere in this Prospectus. The combined
statement of operations data for the years ended December 31, 1992 and 1993 and
the combined balance sheet data as of December 31, 1992, 1993 and 1994 are
derived from unaudited combined financial statements. The combined financial
data for the three months ended March 31, 1996 and 1997 has been derived from
the unaudited financial statements of the Company, but includes all adjustments
(consisting only of normal recurring adjustments) which the Company considers
necessary for a fair presentation of the results of operations for the periods
presented. The results of operations for the three month period ended March 31,
1997 may not be indicative of the operating results that may be expected for the
Company's fiscal year ended December 31, 1997.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------- -----------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues:
Product.............................................. $19,047 $17,709 $18,186 $24,620 $32,077 $ 7,691 $10,265
Service.............................................. 5,656 6,959 8,970 10,662 15,463 3,330 4,404
------- ------- ------- ------- ------- ------- -------
Total revenues................................. 24,703 24,668 27,156 35,282 47,540 11,021 14,669
Cost of revenues:
Product.............................................. 5,298 5,181 6,310 8,730 11,494 2,449 3,836
Service.............................................. 3,346 2,924 3,254 5,282 6,863 1,439 1,931
------- ------- ------- ------- ------- ------- -------
Total cost of revenues......................... 8,644 8,105 9,564 14,012 18,357 3,888 5,767
------- ------- ------- ------- ------- ------- -------
Gross margin........................................... 16,059 16,563 17,592 21,270 29,183 7,133 8,902
Operating expenses:
Research and development............................. 3,952 3,386 3,660 4,050 5,070 945 1,381
Selling, general and administrative.................. 8,929 9,528 11,332 12,559 16,765 4,137 5,134
------- ------- ------- ------- ------- ------- -------
Total operating expenses....................... 12,881 12,914 14,992 16,609 21,835 5,082 6,515
------- ------- ------- ------- ------- ------- -------
Income from operations................................. 3,178 3,649 2,600 4,661 7,348 2,051 2,387
Other income (expense), net............................ 216 186 46 88 261 (11) (51)
------- ------- ------- ------- ------- ------- -------
Income before income taxes............................. 3,394 3,835 2,646 4,749 7,609 2,040 2,336
Income tax provision (benefit)......................... (19) 25 (26) -- -- -- 16
------- ------- ------- ------- ------- ------- -------
Net income before pro forma income tax provision....... 3,413 3,810 2,672 4,749 7,609 2,040 2,320
Pro forma income taxes(1).............................. 1,256 1,454 1,164 1,794 2,827 762 895
------- ------- ------- ------- ------- ------- -------
Pro forma net income(1)................................ $ 2,157 $ 2,356 $ 1,508 $ 2,955 $ 4,782 $ 1,278 $ 1,425
======= ======= ======= ======= ======= ======= =======
Pro forma net income per common and common equivalent
share................................................ $ 0.39 $ 0.11
======= =======
Pro forma weighted average common and common equivalent
shares outstanding(2)................................ $12,363 $12,647
======= =======
</TABLE>
18
<PAGE> 21
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, 1997
----------------------------------------------- -----------------------
1992 1993 1994 1995 1996 ACTUAL PRO FORMA(3)
------- ------- ------- ------- ------- ------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit).................... $ 7,831 $ 8,955 $ 8,594 $ 6,904 $ 8,124 $(4,324) $(5,885)
Total assets................................. 13,076 15,679 17,635 20,928 27,069 28,105 17,478
Long-term debt, net of current portion....... 3,176 3,111 3,068 2,644 -- -- --
Total shareholders' equity (deficit)......... 6,143 7,385 7,103 6,657 10,872 (1,485) (3,046)
</TABLE>
- ---------------
(1) Upon the effective date of this offering, the Company will terminate its
status as an S corporation. Thereafter, the Company will be subject to
federal and state income taxes. Pro forma net income is presented as if the
Company had been subject to corporate income taxes for all periods
presented. See "Termination of S Corporation Status and Related
Distributions," and Notes 1 and 3 of the Notes to Combined Financial
Statements.
(2) See Note 1 of the Notes to Combined Financial Statements.
(3) Presented on a pro forma basis to give effect to (i) the issuance of
3,143,395 shares of Common Stock in connection with the Combination, (ii)
the Distribution, (iii) the Interest Accrual, (iv) the Deferred Tax
Adjustment and (v) the Note Repayment. See "Termination of S Corporation
Status and Related Distributions," "Use of Proceeds," "Capitalization,"
"Certain Transactions" and Notes 2, 3 and 8 of the Notes to Combined
Financial Statements.
19
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Melita is a leading provider of customer contact and call management
systems that enable customers to operate efficient call centers. The Company's
principal product, PhoneFrame CS, is an integrated system comprised of both
hardware and software based on open, client/server architecture. Melita offers
ongoing maintenance support of its products. The Company also offers fee-based
installation, training and consulting services. Historically, the Company has
internally generated the funds necessary for its growth through profits and cash
provided by operating activities.
In 1988, the Company introduced its first call management solution, based
on digital voice technology and the DOS operating system, driving revenue growth
from $10.8 million to $24.7 million during the period from 1989 to 1992. The
Company introduced Staccato, a UNIX-based client/server version of its call
center software, in 1992. Due to the slow market acceptance of client/server
call center solutions, the Company's revenues were relatively flat from 1992 to
1994. In 1994, the Company introduced Interlude, a more open, scaleable and
standards-based version of the product, and in 1995 the Company made significant
additions to its management team, sales and marketing efforts and installation
and support capabilities, which contributed to growth of 29.9% in total revenues
from 1994 to 1995.
The Company's revenues are derived primarily from two sources: (i) product
license fees for the use of the Company's software products and revenues from
sales of related computer and telephony hardware to utilize the software and
(ii) service fees for ongoing system support, maintenance, installation,
training and consulting services. The Company recognizes product revenue upon
shipment of the product and when the Company has no significant obligations yet
to be satisfied. Revenues from maintenance contracts are recognized ratably over
the term of the support period. Revenues from consulting, installation and
training services are recognized as the services are performed.
Cost of product revenues primarily includes cost of material and assembly
of components for products shipped, together with salaries and benefits of
production personnel. Cost of service revenues consists primarily of salaries
and benefits of customer support and field service personnel. Cost of service
revenues includes related operating costs such as training, computer support and
travel costs. The Company contracts with third parties to provide maintenance on
hardware provided as part of the Company's systems.
Research and development expenses primarily consist of salaries and
benefits of engineering personnel involved with software and voice processing
technology development. Also included are costs for subcontracted development
projects and expendable equipment purchases.
Selling, general and administrative expenses consist primarily of salaries,
commissions and benefits of sales, marketing, administrative, finance and human
resources personnel. Also included are marketing expenditures, travel, rent and
other costs.
Total revenues from sales outside the United States accounted for 20.9%,
22.5%, and 21.0% of the Company's total revenues for 1994, 1995 and 1996,
respectively. The Company relies on VARs to sell, install and support its
products in countries outside of the United States, Canada and the United
Kingdom. The Company's international revenues are primarily denominated in U.S.
dollars or British pounds. The Company's expenses incurred in foreign countries
are typically denominated in local currencies. The Company has recognized
foreign exchange gains (losses) of approximately $31,000, $(2,000) and $162,000
in 1994, 1995 and 1996, respectively. There can be no assurance that future
fluctuations in currency exchange rates will not have a material adverse impact
on the Company's future international operations.
20
<PAGE> 23
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data as a
percentage of total revenues for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
--------------------- -------------
1994 1995 1996 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net revenues:
Product.......................................... 67.0% 69.8% 67.5% 69.8% 70.0%
Service.......................................... 33.0 30.2 32.5 30.2 30.0
----- ----- ----- ----- -----
Total revenues........................... 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- -----
Cost of revenues:
Product.......................................... 23.2 24.7 24.2 22.2 26.1
Service.......................................... 12.0 15.0 14.4 13.1 13.2
----- ----- ----- ----- -----
Total cost of revenues................... 35.2 39.7 38.6 35.3 39.3
----- ----- ----- ----- -----
Gross margin....................................... 64.8 60.3 61.4 64.7 60.7
----- ----- ----- ----- -----
Operating expenses:
Research and development......................... 13.5 11.5 10.7 8.6 9.4
Selling, general and administrative.............. 41.7 35.6 35.2 37.5 35.0
----- ----- ----- ----- -----
Total operating expenses................. 55.2 47.1 45.9 46.1 44.4
----- ----- ----- ----- -----
Income from operations............................. 9.6 13.2 15.5 18.6 16.3
Other income (expense), net........................ 0.2 0.3 0.5 (0.1) (0.4)
----- ----- ----- ----- -----
Income before income taxes......................... 9.8 13.5 16.0 18.5 15.9
Income tax benefit (provision)..................... 0.1 -- -- -- (0.1)
----- ----- ----- ----- -----
Net income before pro forma income taxes........... 9.9 13.5 16.0 18.5 15.8
----- ----- ----- ----- -----
Pro forma income taxes............................. 4.3 5.1 6.0 6.9 6.1
----- ----- ----- ----- -----
Pro forma net income............................... 5.6% 8.4% 10.0% 11.6% 9.7%
===== ===== ===== ===== =====
</TABLE>
The following table sets forth, for each component of net revenues, the
cost of such revenues as a percentage of such revenues for the periods
indicated:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
----------------------- --------------
1994 1995 1996 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Cost of product revenues................... 34.7% 35.5% 35.8% 31.8% 37.4%
Cost of service revenues................... 36.3% 49.5% 44.4% 43.2% 43.8%
</TABLE>
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31,
1996
Revenues. Total revenues increased 33.1% to $14.7 million in the first
quarter of 1997 from $11.0 million in the first quarter of 1996. Revenues from
product sales increased 33.5% to $10.3 million in the first quarter of 1997 from
$7.7 million in the first quarter of 1996. The increase in product revenues was
due to demand for the Company's products, increased marketing and sales efforts
and the introduction of a new product feature, Magellan CS in the fourth quarter
of 1996, which increased sales of the Company's systems. Service revenues
increased 32.3% to $4.4 million in the first quarter of 1997, or 30.0% of total
revenues, from $3.3 million in the first quarter of 1996, or 30.2% of total
revenues. Service revenues increased primarily due to an increase in the number
of contractual maintenance agreements and also from revenues generated from
installation and training.
Cost of Revenues. Total cost of revenues was $5.8 million in the first
quarter of 1997, representing a 48.7% increase over total cost of revenues of
$3.9 million in the first quarter of 1996. Total cost of revenues represented
39.3% and 35.3% of total revenues in the first quarters of 1997 and 1996,
respectively. Cost of product revenues was $3.8 million in the first quarter of
1997, or 37.4% of product revenues, increasing by
21
<PAGE> 24
56.6% from $2.4 million in the first quarter of 1996, or 31.8% of product
revenues. Cost of product revenues increased as percentage of product revenues
due to lower unit sales prices and a change in the size and mix of the products
shipped. Cost of service revenues was $1.9 million in the first quarter of 1997,
or 43.8% of service revenues, increasing by 34.2% from $1.4 million in the first
quarter of 1996, or 43.2% of service revenues.
Research and Development. Research and development expenses were $1.4
million in the first quarter of 1997, representing a 46.1% increase over the
$945,000 expended in the first quarter of 1996. The increase resulted primarily
from the addition of developers to support the Company's new product development
efforts and the subcontracting of certain feature development efforts incurred
during 1997.
Selling, General and Administrative. Selling, general and administrative
expenses were $5.1 million in the first quarter of 1997, representing a 24.1%
increase over $4.1 million expended in the first quarter of 1996. This increase
was the result of an increase in sales commissions corresponding to the increase
in revenues and additional staff required to support the higher sales levels in
1997. Selling, general and administration expenses decreased as a percentage of
total revenues from 37.5% in the first quarter of 1996 to 35.0% in the first
quarter of 1997.
Income from Operations. As a result of the foregoing factors, income from
operations was $2.4 million in the first quarter of 1997, representing a 16.4%
increase over income from operations of $2.1 million in the first quarter of
1996. Operating income decreased as a percentage of total revenues from 18.6% in
the first quarter of 1996 to 16.3% in the first quarter of 1997.
Other Income (Expense), Net. Other income (expense), net was a net expense
of $51,000 in the first quarter of 1997 compared to a net expense of $11,000 in
the first quarter of 1996. In the first quarter of 1997, interest expense
increased from 1996 levels due to increased debt.
Pro Forma Income Taxes. Pro forma income taxes were $895,000 in the first
quarter of 1997 as compared to $762,000 in the first quarter of 1996, as a
result of the Company's increased net income before income taxes in 1997. The
Company's pro forma effective tax rate was 39.0% in the first quarter of 1997,
compared to 37.4% in the first quarter of 1996.
Pro Forma Net Income. Pro forma net income was $1.4 million in the first
quarter of 1997, representing an 11.5% increase over pro forma net income of
$1.3 million in the first quarter of 1996. As a percentage of total revenues,
pro forma net income decreased from 11.6% in the first quarter of 1996 to 9.7%
in the first quarter of 1997.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenues. Total revenues increased 34.7% to $47.5 million in 1996 from
$35.3 million in 1995. Revenues from product sales increased 30.3% to $32.1
million in 1996, or 67.5% of total revenues, from $24.6 million in 1995, or
69.8% of total revenues. The increase in product revenues was due to strong
demand for the Company's PhoneFrame CS product introduced in the first half of
1995, increased sales and marketing efforts and the introduction of Magellan CS
in the fourth quarter of 1996. Service revenues increased 45.0% to $15.5 million
in 1996, or 32.5% of total revenues, from $10.7 million in 1995, or 30.2% of
total revenues. Service revenues increased primarily due to an increase in the
number of contractual maintenance agreements and, to a lesser degree, from
revenues generated by installation and training.
Cost of Revenues. Total cost of revenues was $18.4 million in 1996,
representing a 31.0% increase over total cost of revenues of $14.0 million in
1995. Total cost of revenues represented 38.6% and 39.7% of total revenues in
1996 and 1995, respectively. Cost of product revenues was $11.5 million in 1996,
or 35.8% of product revenues, increasing by 31.7% from $8.7 million in 1995, or
35.5% of product revenues. Cost of product revenues increased slightly as a
percentage of product revenues due to lower per unit sales prices and a $701,000
increase in inventory obsolescence expense, which were partially offset by
product cost reductions. The increase in inventory obsolescence expense was due
to the write-off of returned inventory, which was deemed to be no longer
saleable due to technological advances in the Company's products, and a change
in the estimated net realizable value of component parts. Cost of service
revenues was $6.9 million in 1996, or 44.4% of service revenues, increasing by
29.9% from $5.3 million in 1995, or 49.5% of service revenues. The cost of
22
<PAGE> 25
service revenues increased as the Company hired additional support and
installation staff to support the increased sales volume. Cost of service
revenues, as a percentage of service revenues, decreased 5.1 percentage points
due to operational efficiencies, reduced third-party maintenance fees for field
support of computer equipment resold by the Company and improved features within
the software to facilitate the installation process.
Research and Development. The Company's research and development expenses
increased by 25.2% to $5.1 million in 1996, or 10.7% of total revenues, from
$4.1 million in 1995, or 11.5% of total revenues. The increase resulted
primarily from the addition of developers to support the Company's new product
development efforts, which resulted in the release of PhoneFrame CS 2.0 and
Magellan CS in 1996. Research and development expenses decreased as a percentage
of total revenues in 1996 due to the growth in total revenues in 1996.
Selling, General and Administrative. Selling, general and administrative
expenses were $16.8 million in 1996, representing a 33.5% increase over selling,
general and administrative expenses of $12.6 million in 1995. The increase was
the result of an increase in sales commissions corresponding to an increase in
revenues and additional staff hired to support the higher sales levels in 1996.
Selling, general and administrative expenses were 35.3% and 35.6% of total
revenues in 1996 and 1995, respectively.
Income from Operations. As a result of the foregoing factors, income from
operations was $7.3 million in 1996, representing a 57.6% increase over income
from operations of $4.7 million in 1995. Operating income increased as a
percentage of total revenues from 13.2% in 1995 to 15.5% in 1996.
Other Income (Expense), Net. Other income (expense), net increased to
$261,000 in 1996 from $88,000 in 1995. The increase was primarily attributable
to foreign exchange gains, as the British pound strengthened against the U.S.
dollar.
Pro Forma Income Taxes. Pro forma income taxes were $2.8 million in 1996
as compared to $1.8 million in 1995, as a result of the Company's increased net
income before income taxes in 1996. The Company's pro forma effective tax rate
was 37.2% in 1996, compared to 37.8% in 1995.
Pro Forma Net Income. Pro forma net income was $4.8 million in 1996,
representing a 61.8% increase over pro forma net income of $3.0 million in 1995.
As a percentage of total revenues, pro forma net income increased from 8.4% in
1995 to 10.0% in 1996.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Revenues. Total revenues increased 29.9% to $35.3 million in 1995 from
$27.2 million in 1994. Revenues from product sales increased 35.4% to $24.6
million in 1995, or 69.8% of total revenues, from $18.2 million in 1994, or
67.0% of total revenues. The increase in product revenues was due to increased
sales volume attributable primarily to demand for the Company's first release of
PhoneFrame CS introduced in 1995. Service revenues increased 18.9% to $10.7
million in 1995, or 30.2% of total revenues, from $9.0 million in 1994, or 33.0%
of total revenues. Service revenues increased primarily due to an increase in
the number of contractual maintenance agreements and, to a lesser degree, from
revenues generated by installation of systems and upgrading, but declined as a
percentage of total revenues due to the timing of product sales.
Cost of Revenues. Total cost of revenues was $14.0 million in 1995,
representing a 46.5% increase over total cost of revenues of $9.6 million in
1994. Total cost of revenues represented 39.7% and 35.2% of total revenues in
1995 and 1994, respectively. Cost of product revenues was $8.7 million in 1995,
or 35.5% of product revenues, increasing by 38.4% from $6.3 million in 1994, or
34.7% of product revenues. Cost of service revenues was $5.3 million in 1995, or
49.5% of service revenues, increasing by 62.3% from $3.3 million in 1994, or
36.3% of service revenues. The cost of service revenues increased as the Company
hired additional support and installation staff to support the increased sales
volume. Cost of service revenues, as a percentage of service revenues, increased
13.2 percentage points, as the Company increased its customer service and field
service support groups by over 31.0% to improve the Company's level of service
and, to a lesser degree, an increase in the cost of third-party maintenance for
field support of computer equipment resold by the Company.
Research and Development. The Company's research and development expenses
increased by 10.7% to $4.1 million in 1995, or 11.5% of total revenues, from
$3.7 million in 1994, or 13.5% of total revenues. The
23
<PAGE> 26
increase in expenditures resulted from the addition of developers to support the
Company's new product development efforts. Research and development expenses
decreased as a percentage of total revenues in 1995.
Selling, General and Administrative. Selling, general and administrative
expenses were $12.6 million in 1995, representing a 10.8% increase over selling,
general and administrative expenses of $11.3 million in 1994. The increase was
the result of the increase in sales commissions corresponding to an increase in
revenues and additional personnel hired to support the higher sales levels in
1995. Selling, general and administrative expenses were 35.6% and 41.7% of total
revenues in 1995 and 1994, respectively. Selling, general and administrative
expenses decreased as a percentage of total revenues primarily as a result of
cost containment initiatives in general and administrative expenses.
Income from Operations. As a result of the foregoing factors, income from
operations was $4.7 million in 1995, representing a 79.3% increase over income
from operations of $2.6 million in 1994. Operating income increased as a
percentage of total revenues from 9.6% in 1994 to 13.2% in 1995.
Other Income (Expense), Net. Other income (expense), net increased to
$88,000 in 1995 from $46,000 in 1994. The increase was primarily attributable to
increased interest income due to the Company's higher average investment
balances.
Pro Forma Income Taxes. Pro forma income taxes were $1.8 million in 1995
as compared to $1.2 million in 1994, as a result of the Company's increased net
income before income taxes in 1995. The Company's pro forma effective tax rate
was 37.8% in 1995, compared to 43.6% in 1994, due to non-deductible foreign
losses in 1994.
Pro Forma Net Income. Pro forma net income was $3.0 million in 1995,
representing a 96.0% increase over pro forma net income of $1.5 million in 1994.
As a percentage of total revenues, pro forma net income increased from 5.6% in
1994 to 8.4% for 1995.
QUARTERLY RESULTS OF OPERATIONS
The following table presents certain unaudited quarterly statement of
operations data for each of the last nine quarters. This information is derived
from unaudited combined financial statements and, in the opinion of management,
includes all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of that information. The results of operations
for any quarter are not necessarily indicative of the results to be expected for
any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------
1995 1996 1997
-------------------------------------- -------------------------------------- -------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31
------- ------- -------- ------- ------- ------- -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues:
Product....................... $5,698 $5,198 $6,051 $ 7,673 $ 7,691 $ 8,108 $ 7,428 $ 8,850 $10,265
Service....................... 2,191 2,467 2,729 3,275 3,330 3,778 4,161 4,194 4,404
------ ------ ------ ------- ------- ------- ------- ------- -------
Total revenues......... 7,889 7,665 8,780 10,948 11,021 11,886 11,589 13,044 14,669
------ ------ ------ ------- ------- ------- ------- ------- -------
Cost of revenues:
Product....................... 1,867 1,905 2,471 2,487 2,449 2,990 2,660 3,395 3,836
Service....................... 1,010 1,037 1,260 1,975 1,439 1,733 1,902 1,789 1,931
------ ------ ------ ------- ------- ------- ------- ------- -------
Total cost of
revenues............. 2,877 2,942 3,731 4,462 3,888 4,723 4,562 5,184 5,767
------ ------ ------ ------- ------- ------- ------- ------- -------
Gross margin.................... 5,012 4,723 5,049 6,486 7,133 7,163 7,027 7,860 8,902
------ ------ ------ ------- ------- ------- ------- ------- -------
Operating expenses:
Research and development...... 1,024 885 901 1,240 945 1,151 1,409 1,565 1,381
Selling, general and
administrative.............. 2,842 2,998 3,072 3,647 4,137 3,992 4,212 4,424 5,134
------ ------ ------ ------- ------- ------- ------- ------- -------
Total operating
expenses............. 3,866 3,883 3,973 4,887 5,082 5,143 5,621 5,989 6,515
------ ------ ------ ------- ------- ------- ------- ------- -------
Income from operations.......... 1,146 840 1,076 1,599 2,051 2,020 1,406 1,871 2,387
Other income (expense), net..... (1) 34 41 14 (11) 54 20 198 (51)
------ ------ ------ ------- ------- ------- ------- ------- -------
Income before pro forma income
taxes......................... 1,145 874 1,117 1,613 2,040 2,074 1,426 2,069 2,336
Income tax provision............ -- -- -- -- -- -- -- -- 16
------ ------ ------ ------- ------- ------- ------- ------- -------
Net income before income
taxes......................... 1,145 874 1,117 1,613 2,040 2,074 1,426 2,069 2,320
Pro forma income taxes.......... 432 330 422 610 762 775 517 773 895
------ ------ ------ ------- ------- ------- ------- ------- -------
Pro forma net income............ $ 713 $ 544 $ 695 $ 1,003 $ 1,278 $ 1,299 $ 909 $ 1,296 $ 1,425
====== ====== ====== ======= ======= ======= ======= ======= =======
</TABLE>
24
<PAGE> 27
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------
1995 1996 1997
-------------------------------------- -------------------------------------- -------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31
------- ------- -------- ------- ------- ------- -------- ------- -------
(AS A PERCENTAGE OF TOTAL NET REVENUES)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues:
Product....................... 72.2% 67.8% 68.9% 70.1% 69.8% 68.2% 64.1% 67.8% 70.0%
Service....................... 27.8 32.2 31.1 29.9 30.2 31.8 35.9 32.2 30.0
------ ------ ------ ------- ------- ------- ------- ------- -------
Total revenues......... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
------ ------ ------ ------- ------- ------- ------- ------- -------
Cost of revenues:
Product....................... 23.7 24.9 28.1 22.7 22.2 25.2 23.0 26.0 26.1
Service....................... 12.8 13.5 14.4 18.0 13.1 14.6 16.4 13.7 13.2
------ ------ ------ ------- ------- ------- ------- ------- -------
Total cost of
revenues............. 36.5 38.4 42.5 40.7 35.3 39.8 39.4 39.7 39.3
------ ------ ------ ------- ------- ------- ------- ------- -------
Gross margin.................... 63.5 61.6 57.5 59.3 64.7 60.2 60.6 60.3 60.7
------ ------ ------ ------- ------- ------- ------- ------- -------
Operating expenses:
Research and development...... 13.0 11.5 10.3 11.3 8.6 9.7 12.2 12.0 9.4
Selling, general and
administrative.............. 36.0 39.1 35.0 33.3 37.5 33.6 36.3 33.9 35.0
------ ------ ------ ------- ------- ------- ------- ------- -------
Total operating
expenses............. 49.0 50.6 45.3 44.6 46.1 43.3 48.5 45.9 44.4
------ ------ ------ ------- ------- ------- ------- ------- -------
Income from operations.......... 14.5 11.0 12.2 14.7 18.6 16.9 12.1 14.4 16.3
Other income (expense), net..... -- 0.4 0.5 0.1 (0.1) 0.5 0.2 1.5 (0.4)
------ ------ ------ ------- ------- ------- ------- ------- -------
Income before pro forma income
taxes......................... 14.5 11.4 12.7 14.8 18.5 17.4 12.3 15.9 15.9
Income tax provision............ -- -- -- -- -- -- -- -- 0.1
------ ------ ------ ------- ------- ------- ------- ------- -------
Net income before income
taxes......................... 14.5 11.4 12.7 14.8 18.5 17.4 12.3 15.9 15.8
Pro forma income taxes.......... 5.5 4.3 4.8 5.6 6.9 6.5 4.5 5.9 6.1
------ ------ ------ ------- ------- ------- ------- ------- -------
Pro forma net income............ 9.0% 7.1% 7.9% 9.2% 11.6% 10.9% 7.8% 10.0% 9.7%
====== ====== ====== ======= ======= ======= ======= ======= =======
</TABLE>
The Company's revenues and operating results could vary substantially from
quarter to quarter. Among the factors that could cause these variations are
changes in the demand for the Company's products, the level of product and price
competition, the length of the Company's sales process, the size and timing of
individual transactions, the mix of products and services sold, software defects
and other product quality problems, any delay in or cancellation of customer
installations, the Company's success in expanding its direct sales force and
indirect distribution channels, the timing of new product introductions and
enhancements by the Company or its competitors, customer order deferrals in
anticipation of enhancements or new products offered by the Company or its
competitors, commercial strategies adopted by competitors, changes in foreign
currency exchange rates, customers' fiscal constraints, the Company's ability to
control costs and general economic conditions. In addition, a limited number of
relatively large customer orders has accounted for and is likely to continue to
account for a substantial portion of the Company's total revenues in any
particular quarter. Sales of the Company's software products generally involve a
significant commitment of management attention and resources by prospective
customers. Accordingly the Company's sales process is often lengthy and subject
to delays associated with the long approval process that accompanies significant
customer initiatives or capital expenditures. The Company's sales cycle, from
initial trial to complete installation, varies substantially from customer to
customer. Because a high percentage of the Company's costs are for staffing and
operating expenses which are fixed in the short term and based on anticipated
revenue levels, variations between anticipated order dates and actual order
dates, as well as nonrecurring or unanticipated large orders, can cause
significant variations in the Company's operating results from quarter to
quarter. See "Risk Factors -- Variability of Quarterly Financial Results."
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations to date primarily through internally
generated cash flow.
The Company's operating activities generated cash of $5.1 million in 1994,
$7.5 million in 1995 and $9.3 million in 1996. In 1996, the Company's cash was
generated by operating activities and an increase in customer deposits,
partially offset by an increase in accounts receivable. Both customer deposits
and accounts receivables increased due to the Company's increased business
volume.
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<PAGE> 28
The Company's investing activities used cash of $800,000 in 1994, $1.7
million in 1995 and $1.5 million in 1996. The Company's use of cash was
primarily for the purchase of capital equipment to support the Company's growth.
The Company's financing activities used cash of $3.0 million in 1994, $5.2
million in 1995 and $3.8 million in 1996. The primary use of cash was
distributions to the Company's shareholders.
As of December 31, 1996, the Company had working capital of $8.1 million.
Cash and cash equivalents were $9.8 million. The Company estimates that it will
incur capital expenditures of approximately $2.0 million in 1997, of which
$800,000 will be incurred to complete an upgrade of the internal Customer Care
Center. The Company anticipates that its existing cash balances and funds
anticipated to be generated from operations, combined with the net proceeds from
this offering and interest thereon, will be adequate to satisfy its working
capital requirements for its current and planned operations for at least the
next twelve months.
NEW ACCOUNTING PRONOUNCEMENTS
In October of 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting
for the Impairment of Long-Lived Assets to Be Disposed Of." The Company's
adoption of SFAS No. 121 in the first quarter of 1996 did not have a significant
impact on the Company's combined financial statements.
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123 ("SFAS 123") which establishes a fair value based method for accounting
for stock-based compensation plans. With respect to stock options granted to
employees, SFAS 123 permits companies to continue using the accounting method
promulgated by the Accounting Principals Board Opinion No. 25 ("APB 25"),
"Accounting for Stock Issued to Employees," to measure compensation or,
alternatively, to adopt the fair value based method prescribed by SFAS 123. If
the APB 25 method is continued, pro forma footnote disclosures are required as
if SFAS 123 accounting provisions were followed. Management has determined not
to adopt the SFAS 123 accounting recognition provisions. Accordingly, SFAS 123
will not have any impact on the Company's financial statements, except for the
addition of the required footnote disclosures. See Note 6 of the Notes to
Combined Financial Statements.
The American Institute of Certified Public Accountants has issued an
exposure draft to amend the provisions of Statement of Position 91-1, "Software
Revenue Recognition." The adoption of the standards in the current version of
the exposure draft would not be expected to have a significant impact on the
Company's combined financial statements.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128 ("SFAS 128"), "Earnings Per Share." SFAS 128 is designed to improve the
earnings per share information provided in financial statements by simplifying
the existing computational guidelines, revising the disclosure requirements, and
increasing the comparability of earnings per share data on an international
basis. SFAS 128 is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods. Earlier application is not
permitted. The Company will adopt SFAS 128 on December 31, 1997. Management has
not determined the effect that SFAS 128 will have on earnings per share.
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<PAGE> 29
BUSINESS
OVERVIEW
Melita International Corporation is a leading provider of customer contact
and call management systems that enable businesses to automate call center
activities and enhance their telephony-based customer interaction. The Company's
principal product, PhoneFrame CS, is used by organizations to increase agent
productivity, reduce the costs of call center operations and enhance revenue
generation for a broad range of activities, including debt collection,
telemarketing and customer service. PhoneFrame CS is a comprehensive call center
solution based on client/server software that integrates with industry standard
computing and telephony infrastructures. The Company's customers include leading
organizations in industries such as banking, financial services, retail,
communications and service bureaus, where businesses are engaged in frequent
telephone contact with customers or prospects.
The Company currently has over 400 systems in operation worldwide. Selected
customers include AirTouch Communications, Inc., BancOne Services Corporation,
Barclays Bank PLC, Citicorp, Credicard SA Brazil, Dun & Bradstreet Corporation,
Grupo Financiero Bancomer, S.A de C.V., J.C. Penney Company, Inc., National
Westminster Bank and Snyder Communications, Inc. The Company sells its products
through a direct sales force in the United States, Canada and the United
Kingdom. In 1996, the Company derived approximately 21.0% of its total revenues
from sales outside the United States. International distribution is largely
through direct sales and VARs.
INDUSTRY BACKGROUND
Long-term customer relationships are critical to the success of businesses
operating in an increasingly competitive global marketplace. As customers become
more sophisticated and demanding in the level of service they require,
businesses are striving to develop and improve customer relationships as a means
to distinguish their products and services. This effort requires businesses to
use every opportunity to interact with customers, from marketing and sales
activities to post-sales service, support and collections. Effective customer
interaction can build customer loyalty, which in turn can lead to reduced
customer retention costs and increased revenue potential. As organizations seek
to improve the quality of their interaction with customers across the
enterprise, the use of information systems to facilitate this interaction has
become a core competency.
In recent years, telephony-based customer interaction has become a more
effective means of communication for organizations. Increased usage of
telephony-based customer interaction has been facilitated by decreasing
telecommunications costs, the proliferation of toll-free telephone numbers and
the introduction of new enabling technologies, such as computer/telephony
integration ("CTI"). CTI automates the generation and management of
telephony-based customer contacts while providing real-time access to
computer-based information resources. This automation is provided within call
centers through the use of specialized software and hardware that integrate
telephony platforms and computer systems.
According to industry sources, the CTI, outbound call management and
automatic call distribution market segments of the worldwide call center systems
market aggregated $2.8 billion in 1996 and are expected to grow at a compound
annual growth rate of 19.1% to $6.7 billion by 2001. The Company's primary
target markets, CTI and outbound call management, were approximately $1.3
billion worldwide in 1996 and are together expected to grow at a compound annual
growth rate of 27.6% to $4.4 billion by 2001.
Call centers enable agents to process a steady flow of outbound or inbound
telephone contacts relating to products and services. Call centers generally
consist of supervisor and agent workstations linked to a central telephone
switch and computer system. Call centers historically have focused either on
conducting outbound calls, for functions such as collections and product sales,
or managing inbound calls, for functions such as product support, order
processing and customer service. Inbound call centers utilize an interactive
voice response ("IVR") unit and an automatic call distribution ("ACD") system
that together screen and route incoming calls through the call center. Outbound
call centers incorporate predictive dialing software to automate outbound
dialing. Increasingly, call center applications feature dynamic inbound/outbound
or
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<PAGE> 30
"blended" functionality which permits agents to be automatically switched
between inbound and outbound calls as inbound call demand varies. Common
examples of outbound call center applications include debt collection for banks,
finance companies and large retailers, credit card marketing and customer
support activities such as customer surveys. According to industry sources,
collections and telemarketing software applications accounted for 80% of all
outbound call center software application revenues worldwide in 1996.
A key objective of organizations operating outbound call centers is
maximizing the time spent by agents on the telephone with customers or potential
customers while minimizing the "nuisance call" rate. A nuisance call is a live
contact which the call management system must either put on hold or disconnect
because no agent is available. High nuisance call rates caused by overdialing
result in high telecommunications costs and poor customer relations. Call center
systems which utilize sophisticated predictive dialing software can minimize the
nuisance call rate while maintaining high agent productivity. The Company
believes that this capability is essential to organizations operating call
centers.
Call center systems were originally developed as centralized,
mainframe-based information systems, which offered a platform to enable the
automation of many functions, including inbound call distribution, outbound
dialing, and limited database management. These systems were expensive, provided
limited functionality and productivity and were generally closed and
proprietary. With the advent of distributed computing environments, call center
systems have been developed which utilize CTI and the flexibility and openness
of client/server architectures. These developments have allowed companies to
incorporate leading hardware and software products from multiple vendors, have
significantly reduced the cost of implementation and have increased system
functionality and flexibility.
Call centers have evolved into a core competency for businesses engaged in
frequent telephone contacts with customers or prospects. In order to maximize
the return on their call center investment, businesses require call center
solutions that: (i) provide call center agents with the tools needed to
effectively manage interaction with their customers; (ii) provide agents
transparent access to information across the enterprise; (iii) guide agents
through a complex set of customer interaction scenarios; (iv) fully integrate
existing information and telephone systems; (v) are adaptable to the changing
needs of particular businesses and applications; (vi) are scaleable to support
large volumes of calls; and (vii) permit the gathering of valuable information
concerning customer needs, buying patterns and demographics. Customer-focused
organizations are seeking call center solutions which provide state-of-the-art
functionality while remaining adaptable to emerging technologies.
THE MELITA SOLUTION
Melita provides customer contact and call management systems that automate
outbound or blended call centers, enabling its customers to enhance
telephony-based customer interaction. The Company's principal product,
PhoneFrame CS, is a scaleable, integrated software and hardware solution based
on a distributed client/server architecture capable of supporting installations
with more than 500 simultaneous users on a single server. PhoneFrame CS provides
comprehensive functionality and a user-friendly application development
environment enabling organizations to conduct effective telephone calling
programs for a broad range of activities, including debt collection,
telemarketing and customer service. The Melita solution provides:
- High agent productivity, low nuisance call rates and low
telecommunications costs through patented predictive dialing and
inbound/outbound call blending functionality;
- Enhanced agent interaction with customers through front-end software
applications which utilize real-time access to information to guide agents
through each step of the customer interaction;
- Dynamic campaign development, deployment and modification through
powerful, easy-to-use script generation and application development
software.
- The ability to leverage existing investment in call center systems and
adapt to emerging technologies through an open, scaleable, distributed
client/server architecture.
The Company believes that a critical element of the comprehensive solutions
it provides is its underlying philosophy of Customer Care. The Company's
products represent a critical link between the business
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<PAGE> 31
enterprise and its customers, providing the business with a solution that allows
it to provide the best customer care. The Company's Customer Care philosophy
focuses on enhancing the quality of people-to-people communication and is
reflected in all facets of the Company's operations. The Company has
incorporated features into its existing products which reflect this philosophy,
including its patented predictive dialing features, Cancel Dial and dynamic
inbound/outbound call blending functionality. As part of its commitment to
Customer Care, the Company intends to continue to develop and introduce new
products and features to improve the ability of a business to interact with its
customers.
STRATEGY
The Company's objective is to be a leading provider of customer contact and
call management systems. The Company's strategy to achieve this objective
includes the following key elements:
Leverage Installed Base of Customers: The Company currently targets
customers in the banking, financial services, retail, communications and
service bureau industries. In 1996, 54.7% of the Company's product revenues
were from sales of additional seats or capacity upgrades to product
software or changes in features or product components for its existing
customer base. The Company will continue to focus sales and marketing
efforts on its installed base of customers. The Company also intends to
continue to leverage its penetration of currently targeted vertical markets
by using its existing customers as a reference base to gain new customers.
Maintain Technology Leadership: The Company believes it is a
technology leader in the field of call center software and CTI, having
pioneered many of the industry's fundamental call center technologies. The
Company owns 15 U.S. patents, with six additional U.S. patents pending,
covering various processes and technologies utilized in call management
systems. The Company has also been awarded 26 related foreign patents, of
which 17 are still active. The Company believes that in the future advanced
call management systems will consist primarily of innovative software
utilizing off-the-shelf hardware. As a result, the Company intends to focus
its development efforts on software, with an emphasis on customer
interaction and distributed applications.
Continue to Focus on Providing Comprehensive Call Center
Solutions: The Company provides system design, application configuration
and integration services in conjunction with the installation of its call
center solutions. The Company believes its ability to provide comprehensive
call center systems integration is an important factor in the purchasing
decisions of customers, and it intends to continue its emphasis on
providing these design and integration services.
Continue to Expand Sales and Marketing: The Company intends to pursue
an increased share of the market for call management systems by hiring
additional sales and marketing personnel. The Company plans to open
additional sales offices both domestically and internationally and is
implementing a program aimed at targeted vertical markets. In addition, the
Company is establishing a national account program which is intended to
focus sales and marketing efforts on large, multinational corporations.
Increase Penetration of International Markets: In 1996, the Company
generated 21.0% of its total revenues from sales outside the United States
and has 26 employees dedicated to its international operations. The Company
currently has contractual relationships with VARs in Europe, Latin America
and the Pacific Rim. The Company intends to commit additional resources to
these relationships in selected international markets to enhance its
revenue base. The Company also intends to expand its international
operations through hiring additional personnel, opening new offices and
forming additional relationships with VARs in Latin America and the Pacific
Rim.
Pursue Adjacent Markets: The Company has developed a leadership
position in the collections segment of the outbound call management systems
market. In 1996, approximately 80% of the Company's total revenues were
attributable to systems sold for collections applications, with the
remainder attributed primarily to telemarketing and telesales applications.
The Company recently introduced Magellan CS which leverages the existing
dynamic inbound/outbound functionality of PhoneFrame CS to target
applications in telemarketing and telesales. The Company seeks to leverage
its existing dynamic inbound/outbound functionality to gain market share in
the overall call management systems market. The Company believes the
distinction between inbound and outbound call management
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<PAGE> 32
systems will diminish and that it is well positioned to provide both
inbound and outbound call management solutions.
PRODUCTS
The Company's principal product, PhoneFrame CS, is an integrated suite of
client/server software applications and hardware that provides outbound and
blended call management solutions. PhoneFrame CS software components are based
on open standards, allowing integration with varied and complex user
environments.
PhoneFrame CS is sold to organizations that operate outbound and blended
call centers. These call centers require solutions that integrate with existing
communication and information systems including mainframe-based information
systems, local area networks, agent workstations and PBX/ACDs. Utilizing
customer records residing in an organization's existing databases, PhoneFrame CS
automates customer contacts and guides agents through the customer interaction
process.
[ARCHITECTURE OVERVIEW CHART]
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<PAGE> 33
Customers purchase a PhoneFrame CS system from the Company. Within that
system, they are able to select from the key components of the PhoneFrame CS
product features: the Universal Server, Command Post, Universal Workstation and
the Universal Switch. The Universal Server and Command Post are always included
and the customer may select from the options listed within the Universal
Workstation, Universal Switch and MPACT sections below.
<TABLE>
<CAPTION>
PHONEFRAME CS
PRODUCT COMPONENT DESCRIPTION
<S> <C>
Universal Server Server software that controls and coordinates system operation. Used to
manage calling list data, call attempt and contact history, agent profiles,
time zone and area code data, call processing, agent and supervisor
activity.
Platform: IBM RISC/6000, AIX operating system, Sybase database
Command Post Suite of software applications used by system managers to configure,
operate, monitor and report on system activities utilizing an interactive
GUI.
Platform: Pentium PC, Windows NT
Universal Workstation Client-based software which runs on the agent workstation and manages the
client session with the Universal Server for each call routed to the agent
workstation. The Universal Workstation utilizes one of the following
options:
Universal Access Software that controls screen presentation and data manipulation and allows
the agent to work within an enterprise information system.
MTAccess Software that runs in the background and interacts with screen presentation
and data manipulation applications provided by the existing enterprise
information systems.
Magellan CS Software that controls Windows GUI screen presentation on the agent
workstation. Provides read/write access to data in customer's existing
systems. Additionally, Magellan Builder, which resides on the Command Post
or a dedicated PC, facilitates development of customer interaction and call
flow applications featuring an interactive GUI.
Platform: PC, Windows 3.1, 95 and NT
Universal Switch Proprietary switching component of the system. Interfaces with existing
telephony equipment or directly with PSTN using digital or analog
interfaces.
Call Processor PC-based Switch and Voice Processor controller and client-based software
interface to Universal Server.
Voice Processor Software that performs call progress analysis and call characterization for
each call attempt (e.g., busy signal, ringback signal, fax machine, modem,
voicemail, answering machine, live contact). Also provides voice messaging
services for inbound and outbound applications.
Platform: PC, Dialogic voice processing cards
Switch High speed, real-time digital switching matrix.
Platform: Motorola 68030 CPU, VME-Bus, OS/9 operating system
MPACT Software option for the Universal Server that communicates with leading
PBX/ACDs through CTI links, using one or both of the following:
PowerPACT Software option that provides ability to use an existing PBX/ACD for
switching and/or call progress analysis in place of the Voice Processor and
Switch.
ActionPACT Software option that monitors service levels on a call center's ACD via its
CTI links and dynamically and automatically move agents from outbound
applications to inbound applications and vice versa.
</TABLE>
The Universal Server software is the heart of each PhoneFrame CS system,
providing centralized control for the operation and management of the system. It
integrates a Sybase database to provide calling list
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<PAGE> 34
management, and to store operational data for real-time and historical
reporting. TCP/IP is used as the transport protocol for communication with all
client components of the system. The Universal Server also includes software
that facilitates integration with popular user platforms to perform extended
functions such as real-time calling list data acquisition, dynamic call
blending, Internet callback and enterprise reporting.
The Command Post is a suite of software applications used for call flow
script creation and editing, call campaign configuration, resource definition
and management, agent and production monitoring and system reporting. Command
Post runs on Windows NT and consists of software modules that automate the
operation and monitoring of the system. Builder is used to automate data
exchange with user databases and create calling campaigns. QFlow is used to
implement user-defined strategies for calling campaigns based on real-time
events such as time of day, hit rate and list penetration. Production Monitoring
provides an interactive graphical representation of the call center that allows
managers to access, monitor and control system resources such as agents and
trunks. The Report Scheduler automates the generation of system reports. Reports
can be written in any Windows SQL-based report writer.
The Company's Universal Workstation is client-based software which runs on
the agent workstation, and is available in three different software options:
Universal Access, MTAccess and Magellan CS. Each option supports Microsoft's
Dynamic Data Exchange ("DDE") and industry standard Enhanced High Level Language
Application Programming Interface ("EHLLAPI") for exchanging information with
external applications. Each Universal Workstation software option meets
different needs for agent workstation functionality.
Universal Access for Windows and Universal Access for OS/2 manage the
client session with the Universal Server for each call routed to an agent
workstation and provide basic information about the called party, including
customer identification or account number. Universal Access facilitates
automated access to other enterprise information systems and can be configured
to toggle between applications.
MTAccess interfaces with screen presentation and data manipulation
applications software provided by the customer. Similar to the Universal Access
options, MTAccess manages the client session with the Universal Server for each
call routed to the agent workstation. Initial contact information about the
called party is provided to the agent through the customer's application.
Magellan CS is the Company's recently introduced Universal Workstation
software. Magellan CS consists of two components, Magellan Interpreter and
Magellan Builder. Magellan Builder allows system managers to create and
dynamically modify call flow applications, complete with many features of a
Windows GUI, such as buttons and checklists, without any programming. Magellan
Interpreter provides agents with a composite view of enterprise-wide customer
information through a Windows GUI. Agent interaction with customers is guided by
Magellan CS applications, which provide agents with the customer information
necessary to make timely, informed customer interaction decisions. Magellan CS
supports EHLLAPI, DDE, object linking and embedding ("OLE"), open database
connectivity ("ODBC"), telephony application programming interface ("TAPI") and
telephony services application programming interface ("TSAPI") for accessing
customers' information and telephony systems. Additionally, through the use of
resource files, Magellan CS has been designed to facilitate localization for
international deployment.
The Universal Switch is the Company's proprietary switching platform that
interfaces with existing telephone equipment or directly with the Public
Switched Telephone Network ("PSTN") using digital and analog interfaces. All
inbound and outbound calls can be processed through the Universal Switch, which
performs two major functions: call processing and switching. The Call Processor
serves as the controller and client software interface to the Universal Server.
The Voice Processor performs all telephone call processing including call
progress analysis, which determines the type of call result that has been
achieved. Call progress analysis utilizes a digital signal processing algorithm
which detects various tone and voice patterns including busy signals, ringback
signals, fax machines, modems, voice mail and answering machines as well as live
contacts. The Voice Processor also provides voice messaging services for inbound
and outbound applications. The Switch performs high speed switching to connect
live contacts to the next available, appropriate agent in real time.
The Company's MPACT software option enables PhoneFrame CS to be integrated
with industry leading PBX/ACDs through the use of CTI links. PowerPACT allows
PhoneFrame CS to use a customer's existing
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<PAGE> 35
PBX/ACD in place of the Switch and Voice Processor components. The Voice
Processor, in conjunction with PowerPACT software, can provide call progress
analysis for PBX/ACDs that do not provide this functionality. ActionPACT
provides the ability for PhoneFrame CS to monitor service levels on a call
center's PBX/ACD via its CTI link and dynamically and automatically move agents
from outbound applications to inbound applications and vice versa. PowerPACT and
ActionPACT allow users to leverage their investment in installed PBX/ACD
equipment.
SERVICES
A significant portion of the Company's revenues is derived from on-going
system support, maintenance, installation, training, customization and
consulting services. Upon purchase of a system, customers generally enter into a
maintenance agreement covering on-going system support and software upgrades.
These agreements can have a duration of up to five years. In addition, the
Company provides installation, training, customization and consulting services
during the implementation process. For additional fees, the Company will from
time to time provide additional training or consulting services at the
customer's request.
The Customer Care Group consists of the Customer Care Center ("CCC"), the
Technical Assistance Center ("TAC"), the Applications Integration Engineers and
the Training and Customer Education Division. The CCC provides 24 x 7 customer
support by telephone. The TAC provides high level technical support, coordinates
new product development and beta tests, and provides additional expert support
for the other groups within the service function. The Applications Integration
Engineers provide configuration, scripting, reconfiguration, custom application
development and other special customer services. The Training and Customer
Education Division develops documentation for installation and support of the
Company's products, provides on-site and off-site training to customers through
an array of classes, and offers consulting services. Introductory training
classes are provided as part of each initial system purchase and advanced
classes are provided for additional fees. As of January 31, 1997, the Customer
Care Group employed a total of 72 employees.
The Field Implementation Services Group is responsible for systems design,
sales support, implementation and project management and serves as the customer
installation liaison. The Field Implementation Services Group is divided into
three regional divisions covering the United States and Canada, and one
international division. International support is also provided by technical
support personnel located in the United Kingdom and the Company's international
VARs. As of January 31, 1997, this group employed a total of 38 employees.
The Company contracts with IBM to provide local hardware support in the
United States and Canada, and can dispatch local personnel from IBM national
service centers to address hardware issues.
SALES AND MARKETING
The Company sells its products primarily through a direct sales channel and
through VARs. Sales in the United States, Canada and the United Kingdom are
conducted primarily through direct channels. Distribution in other countries is
conducted through a combination of direct sales and VARs. The Company has sales
offices located in Atlanta, Boston, Dallas, Los Angeles, Philadelphia, Salt Lake
City, White Plains, London and Toronto.
The Company's marketing activities include product management, product
marketing, direct marketing, public relations, press and analyst communications,
event support and management of the Company's Web site. The Company's Business
Development Group is responsible for developing joint marketing and co-
development relationships with call center industry suppliers. The Company is
also implementing a program aimed at specific vertical markets. In addition, the
Company is establishing a national account program which is intended to focus
sales and marketing efforts on large, multinational corporations.
As of January 1, 1997, the Company's sales personnel, including the Sales,
Marketing, Product Management and Business Development groups consisted of 54
employees worldwide.
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The Company's customers independently operate domestic and international
User Groups, which have approximately 300 and 35 members, respectively. The
domestic User Group was formed in 1990, and is managed by an independent board
of directors that coordinate User Group activity. The international User Group
was formed in 1991. Activities of both the domestic and international User
Groups include an annual User Group conference. Additionally, the domestic User
Group conducts regional User Group meetings typically focused on common
applications and call center opportunities. The 1996 annual domestic User Group
conference was attended by approximately 260 people. Although the Company is not
a sponsor of the User Group conferences, it generally sends Company employees
who conduct seminars, product demonstrations and training sessions.
CUSTOMERS
The Company's call management solutions are used by organizations in a
broad range of industries. Since the introduction of PhoneFrame CS in 1995, the
Company has licensed its software for use on over 5,000 agent workstations and
has shipped over 100 systems. The Company's top five customers accounted for
24.5% of the Company's total revenues in 1996. The Company's top five customers
accounted for 24.8% of the Company's total revenues in 1995. Although specific
customers may change from period to period, the Company expects that large sales
to a limited number of customers will continue to account for a significant
percentage of its revenues in any particular period for the foreseeable future.
The following table sets forth certain of the Company's current customers
who have purchased $200,000 or more in products and services from the Company
during the two year period ended December 31, 1996:
<TABLE>
<CAPTION>
CUSTOMERS APPLICATIONS
<S> <C> <C>
BANKING
BancOne Services Corporation Citicorp Collections
Banco Popular de Puerto Rico Credicard SA Brazil Telemarketing
Grupo Financiero Bancomer, S.A. de C.V. First USA Bank Customer Service
Barclays Bank PLC (UK) Marine Midland Bank Fraud Detection
Chemical Bank National Westminster Bank
Chevy Chase, FSB
FINANCIAL SERVICES
Americredit Financial Services, Inc. Guardian National Acceptance Collections
AmSouth Consumer Collections Corporation Telemarketing
Countrywide Funding Intuition, Inc. Customer Service
Dun & Bradstreet Corporation Strong Capital Management, Inc. Prospect Outreach
Green Tree Financial Corporation Marketing
Business Information Surveys
RETAIL
Circuit City Stores, Inc. J.C. Penney Company, Inc. Collections
Eagle Managed Care Mercantile Stores Company, Inc. Telemarketing
Financial Management Control The Foschini Group (PTY),
Hudson's Bay Company Limited
COMMUNICATIONS
AirTouch Communications, Inc. Telemarketing
Comcast Cellular Communications Collections
Continental Cablevision of Customer Service
Broward County, FL Customer Welcome
IDT Corporation Campaigns
SERVICE BUREAU
The Call Centre Ltd. (UK) Collections
Decisions Group Ltd. (UK) Telemarketing
National Action Financial Services, Inc. Customer Service
Snyder Communications, Inc. Fundraising
Sales
Loan Servicing
Appointment Scheduling
</TABLE>
TECHNOLOGY, RESEARCH AND PRODUCT DEVELOPMENT
The Company intends to continue investment in research and development to
maintain its position as a leader in call center technology. The Company has
developed a client/server software architecture that
34
<PAGE> 37
facilitates the deployment, configuration and interoperability of its call
center solutions. The design of the system provides three core sets of services:
(i) user interface presentation and navigation, (ii) server-based system
management services, and (iii) telephone call processing services, including the
Company's patented predictive dialing and dynamic call blending features. The
Company's products are based on an open architecture and industry standards and
provide seamless integration with third-party systems or customers' existing
technology infrastructure. The Company will seek to develop future products that
adhere to existing and emerging standards.
The presentation and navigation components of the software have been
implemented using Windows GUI guidelines. Usability labs and focus groups are
used to define interface requirements and verify ease of use. TCP/IP is used as
the transport layer for all client/server communication. Adherence to Winsock
and other standards facilitates integration with third-party desktop
applications and protocol stacks. The Company is working to broaden the
incorporation of Simple Network Management Protocol ("SNMP") into its product
architecture to facilitate enterprise-wide network management for both computer
and telephony components.
The Company's telephony hardware and software have been designed using
industry standards and the Company intends to continue this approach. The
Company's systems use standard analog and digital connectivity to
telecommunications equipment and services. The Company's newest generation of
agent workstation software, Magellan CS, supports the evolving telephony
application program interfaces TAPI and TSAPI, and future products are expected
to support those interfaces as well. CTI links to various PBX/ACDs are often
proprietary and the Company therefore uses various interfaces such as CallPath,
CallBridge, ASAI, Meridian Link and the Application Bridge to facilitate
integration with various switching platforms.
Magellan CS, released in 1996, and Magellan SA, which the Company currently
plans to release in 1997, have been developed using object oriented methods and
technology. Magellan SA is a version of the Company's Magellan CS product that
will provide the functionality of Magellan CS to call center systems not
employing PhoneFrame CS. The Company expects Magellan SA will be used for a
variety of call center applications, including inbound applications, in which an
outbound call management system is not necessary or is already installed.
Magellan SA is intended to allow system managers to develop applications which
present a uniform Windows GUI independent of the application. Each application
can be developed by the system manager with scripting, data processing and
presentation and telephony services specific to the application while providing
agents with a consistent presentation. Like Magellan CS, Magellan SA will
support EHLLAPI, DDE, OLE, ODBC, TAPI and TSAPI for access to customers'
information and telephony systems. There can be no assurance that Magellan CS or
Magellan SA will generate significant amounts of revenue or incremental revenue
growth in the future.
The Company is currently developing the Universal Telephony Platform
("UTP"), a new subsystem which incorporates the functionality of a telephony
switch and voice processor. The UTP has been designed using the Common Object
Request Broker Architecture ("CORBA") to support distributed objects in an open
systems environment. UTP runs on Windows NT and uses off-the-shelf voice
processing components. Asynchronous Transfer Mode ("ATM") technology is used to
link multiple UTP components across standard ATM networks, providing seamless,
multi-site resource allocation, management and utilization. SNMP is used to
provide standards based network management.
As of January 31, 1997, the Company's research and development and quality
assurance staffs consisted of 42 employees. The Company's total expenses for
research and development for 1994, 1995 and 1996 were $3.7 million, $4.1
million, and $5.1 million, respectively. The Company anticipates that it will
continue to commit substantial resources to research and development in the
future. See "Risk Factors -- Risks Associated with Technological Advances;
Necessity of Developing New Products."
COMPETITION
The market for the Company's products is intensely competitive, fragmented
and subject to rapid change. Because the Company's principal products are call
center systems, which include both software applications and hardware, the
Company competes with a variety of companies which provide these components
independently or as an integrated system. The Company's principal competitors in
the field of integrated inbound/outbound call management systems are Davox, EIS
and Mosaix. According to a recent industry
35
<PAGE> 38
study, the Company is one of four leading suppliers of outbound call processing
products out of a total of 64 suppliers identified in the market. The Company
competes primarily against Davox and Mosaix in the collections segment of the
call management systems market, and against EIS in the telemarketing and
telesales segments of the call management systems market. The Company also
competes in the CTI segment of the market, where principal competitors include
AnswerSoft, Inc., Genesys Telecommunications Laboratories, Inc., Nabnasset
Corporation and Brock International, Inc., among others. The Company may face
additional competition from PBX/ACD vendors, other telecommunications equipment
providers, telecommunications service providers, computer hardware and software
vendors and others. The Company generally faces competition from one or more of
its principal competitors on major installations and believes that price is a
major factor considered by its prospective customers. Many of the Company's
current and potential competitors have significantly greater financial,
technical, marketing and other resources than the Company. As a result, they may
be able to respond more quickly to new or emerging technologies and changes in
customer requirements, or to devote more resources to the development, promotion
and sales of products than the Company. Competition from these or other sources
could result in price reductions and loss of market share which could materially
adversely affect the Company's business, financial condition and results of
operations.
The Company believes that the primary competitive factors affecting its
markets include product features such as flexibility, scalability,
interoperability, functionality and ease of use, as well as reputation, quality,
performance, price and customer service and support. See "Risk
Factors -- Competition."
REGULATORY ENVIRONMENT
Certain uses of outbound call management systems are regulated by federal,
state and foreign law. The Federal Telephone Consumer Protection Act (the
"TCPA") prohibits the use of automatic dialing equipment to call emergency
telephone lines, health care and similar facility patient telephone lines, and
telephone lines where the called party is charged for incoming calls, such as
those used by pager and cellular phone services. The TCPA prohibits use of such
equipment to engage two or more lines of a multi-line business simultaneously,
and restricts the use of artificial or prerecorded voice messages in calls to
residential lines. Among other things, the TCPA required the Federal
Communications Commission ("FCC") to create regulations protecting residential
telephone subscribers from unwanted telephone solicitations. In addition, the
Telemarketing and Consumer Fraud and Abuse Prevention Act authorized the Federal
Trade Commission ("FTC") to prohibit a variety of deceptive and/or abusive
telemarketing practices, including, among other things, repetitive or harassing
calls and requests by telemarketers for payments before certain types of
services are provided. The Rules adopted by the FCC and FTC prohibit calls to
persons who have indicated that they do not wish to be contacted, and the FCC
specifically requires telemarketers to maintain a company-specific "do-not-call
list" which contains the names and numbers of residential subscribers who do not
want to receive calls. An entity which has an "established business
relationship" with a party it calls and tax-exempt nonprofit organizations are
exempt from do-not-call lists. The rules also require that telemarketers may
call consumers only after 8 a.m. and before 9 p.m., local time. Certain states
have enacted similar laws limiting access to telephone subscribers who object to
receiving solicitations. Fair Debt Collection Practices Act ("FDCPA") limits
communication by certain debt collectors with consumers only after 8:00 a.m. and
before 9:00 p.m., local time, and not at the consumer's place of business. Many
of the Company's customers are exempt from the FDCPA. Although compliance with
these laws may limit the potential use of the Company's products in some
respects, the Company's systems can be programmed to operate automatically in
full compliance with these laws through the use of appropriate calling lists and
calling campaign time parameters. There can be no assurance, however, that
future legislation further restricting telephone solicitation practices, if
enacted, would not adversely affect the Company. See "Risk Factors -- Regulatory
Environment."
PROPRIETARY RIGHTS
The Company relies on a combination of patent, copyright, trade secret and
trademark laws, confidentiality procedures and contractual provisions to protect
its proprietary rights in its products and technology. The Company holds 15 U.S.
patents, with six additional U.S. patents pending, covering various processes
and technologies utilized in call management systems. The Company has also been
awarded 26 related foreign
36
<PAGE> 39
patents, of which 17 are still active. The patents cover the Company's
proprietary implementations of features such as inbound/outbound call blending,
call progress analysis, screen pops of the called person's account information
and Cancel Dial. The Company also has a number of pending patent applications on
call technology innovations for which patents have not issued. In many cases,
the Company has also received or applied for patents in other countries covering
the innovations covered by existing patents or patent applications. With certain
exceptions, the Company historically has not actively pursued infringements of
these patents. There can be no assurance that any future attempt by the Company
to enforce its patents would be successful or would result in royalties which
exceed the cost of such enforcement efforts, or that the Company will be able to
detect all instances of infringement. The Company generally enters into
confidentiality agreements with its employees, consultants, clients and
potential clients and limits access to, and distribution of, its proprietary
information. The Company maintains trademarks and service marks to identify its
products, development tools and service offerings and relies upon trademark and
trade dress laws to protect its proprietary rights in these marks.
The Company has entered into agreements with certain of its distributors
giving them a limited, non-exclusive right to use portions of the Company's
source code to create foreign language versions of the Company's products for
distribution in foreign markets. In addition, the Company has entered into
agreements with a small number of its customers requiring the Company to place
its source code in escrow. These escrow arrangements typically provide that
these customers have a limited, non-exclusive right to use such code in the
event that there is a bankruptcy proceeding by or against the Company, if the
Company ceases to do business or if the Company fails to meet its support
obligations. These arrangements may increase the likelihood of misappropriation
by third parties.
The Company may be subject to additional risks as it enters into
transactions in countries where intellectual property laws are not well
developed or are poorly enforced. Legal protections of the Company's rights may
be ineffective in such countries. Litigation to defend and enforce the Company's
intellectual property rights could result in substantial costs and diversion of
resources and could have a material adverse effect on the Company's business,
financial condition and results of operations, regardless of the final outcome
of such litigation. Despite the Company's efforts to safeguard and maintain its
proprietary rights both in the United States and abroad, there can be no
assurance that the Company will be successful in doing so, or that the steps
taken by the Company in this regard will be adequate to deter misappropriation
or independent third-party development of the Company's technology or to prevent
an unauthorized third party from copying or otherwise obtaining and using the
Company's products or technology. Any such events could have a material adverse
effect on the Company's business, financial condition and results of operations.
As the number of call center software applications in the industry
increases and the functionality of these products further overlaps, software
development companies similar to the Company may increasingly become subject to
claims of infringement or misappropriation of the intellectual property rights
of others. Although the Company believes that its software components and other
intellectual property do not infringe on the intellectual property rights of
others, there can be no assurance that such a claim will not be asserted against
the Company in the future, that assertion of such claims will not result in
litigation or that the Company would prevail in such litigation or be able to
obtain a license for the use of any infringed intellectual property from a third
party on commercially reasonable terms. Furthermore, litigation, regardless of
its outcome, could result in substantial cost to the Company and divert
management's attention from the Company's operations. Any infringement claim or
litigation against the Company could, therefore, have a materially adverse
affect on the Company's results of operations and financial condition.
EMPLOYEES
As of January 31, 1997, the Company had 236 full-time employees, of which
215 were based in the United States and 21 were based in other countries. None
of the employees of the Company is covered by a collective bargaining agreement.
The Company considers its relations with its employees to be good.
The Company believes its future success will depend in large part on its
ability to recruit and retain qualified employees, especially experienced
software engineering personnel. The competition for such
37
<PAGE> 40
personnel is intense, and there can be no assurance that the Company will be
successful in retaining or recruiting key personnel. See "Risk
Factors -- Competitive Market for Personnel."
PROPERTIES
The Company's principal administrative, sales, marketing, support, and
research and development facility is located in 100,000 square feet of modern
office space in Norcross, Georgia. This facility is leased to the Company
through 2005, and approximately 75% of the space is presently actively utilized.
The facility is owned by a partnership controlled by the Company's Chairman of
the Board, Chief Executive Officer and principal shareholder. See "Certain
Transactions."
The Company also leases space for seven sales and support centers located
throughout the United States and in London and Toronto. Management believes its
current facilities are adequate to meet its needs through the next twelve months
and that, if required, suitable additional or alternative space will be
available to accommodate expansion of the Company's operations on commercially
reasonable terms.
LEGAL PROCEEDINGS
The Company is not currently a party to any material legal proceedings.
38
<PAGE> 41
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Aleksander Szlam............... 45 Chairman of the Board and Chief Executive Officer
J. Neil Smith.................. 56 President, Chief Operating Officer and Director
Mark B. Adams.................. 45 Vice President, Finance and Chief Financial Officer
William K. Dumont.............. 48 Vice President, Sales
Lee H. Davies.................. 53 Vice President, Operations
Dean A. Trumbull............... 37 Vice President, Advanced Technology
John A. Lamb................... 44 Vice President, New Business Development
A. Scott Anderson.............. 41 Vice President, International
John M. Goodeve-Docker......... 50 Managing Director of Melita Europe
Dan K. Lowring................. 37 Treasurer and Secretary
Donald L. House................ 55 Proposed Director
Don W. Hubble.................. 58 Proposed Director
</TABLE>
Aleksander Szlam founded the Company in 1979 and has served as Chairman of
the Board and Chief Executive Officer of the Company since its inception. Mr.
Szlam also has served as Chairman of the Board, President and Chief Executive
Officer of Inventions since 1987, and Chairman of the Board of Melita Europe
since 1991. Prior to founding Melita, Mr. Szlam worked as a design engineer and
scientist at Lockheed Corporation, NCR and Solid State Systems.
J. Neil Smith has served as President, Chief Operating Officer and a
director of the Company since January 1995. Prior to joining the Company, Mr.
Smith served as Chairman of the Board, President and Chief Executive Officer of
American Technical Services Group, Inc., a systems integration company, from
1987 to 1994.
Mark B. Adams has served as Vice President, Finance and Chief Financial
Officer of the Company since September 1996. During 1996 prior to joining the
Company, Mr. Adams served as President of INITIAL Contract Services, a building
services company. From 1993 to 1995, Mr. Adams served as Executive Vice
President, Finance and Chief Financial Officer of INITIAL Contract Services.
From 1989 to 1993, Mr. Adams served as Vice President, Finance for Suntory Water
Group, a consumer products company. Mr. Adams is a member of the American
Institute of Certified Public Accountants and is a Certified Public Accountant
in the State of Georgia.
William K. Dumont has served as Vice President, Sales of the Company since
December 1996. From 1994 to 1996, Mr. Dumont served as Regional Manager for
Octel Communications Corporation, and from 1990 to 1994 he served as Regional
Vice President of VMX, Inc., both of which are voice processing companies.
Lee H. Davies has served as Vice President, Operations of the Company since
September 1995. Prior to joining the Company, Mr. Davies served as Vice
President of Sales, Marketing and Customer Support for Aristacom International,
Inc., an inbound call center software company, from 1994 to 1995. From 1991 to
1994, Mr. Davies served as a marketing director for Digital Equipment
Corporation.
Dean A. Trumbull has served as Vice President, Advanced Technology of the
Company since October 1994. Prior to joining the Company, Mr. Trumbull served as
a software engineering project leader and call processing group manager for
Intecom, Inc., a telecommunications corporation, from 1983 to 1994, and, during
1994, as Software Development Manager for its multimedia software subsidiary,
Incitz Incorporated.
John A. Lamb has served as Vice President, New Business Development of the
Company since September 1996, and was Director of Special Projects of the
Company from February 1996 to September 1996. From January 1995 to November
1995, he was Vice President, Research and Development of
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<PAGE> 42
Microhelp, Inc., a software development company. From 1990 to 1995, he held
various positions in the sales and engineering departments of the Company.
A. Scott Anderson has served as Vice President, International of the
Company since February 1997. From 1995 to 1997, Mr. Anderson served as Senior
Vice President -- International Sales of S2 Systems, Inc., a software subsidiary
of Stratus Computer, Inc., a data communications software and development
services company. He served as Director of International Sales of S2 Systems
during 1995. Prior to that time, he was Director of International Operations of
BellSouth Systems Integration, a division of BellSouth Enterprises, from 1992
until its acquisition by S2 Systems in 1994.
John M. Goodeve-Docker has served as Managing Director of Melita Europe
since June 1995. He served as Deputy Managing Director for Melita Europe from
January 1994 to June 1995 and as Business Development Director from November
1992 to December 1993. Prior to joining the Company, Mr. Goodeve-Docker served
as General Manager of Trend Communications Ltd., an information technology data
communications manufacturer and distributor in the U.K., from 1991 to 1992.
Dan K. Lowring has served as Treasurer of the Company since January 1997
and as Secretary since March 1997. From July 1993 to December 1996 he served as
Director, Finance of the Company. From March 1993 to July 1993, he served as
Controller of the Company, and from October 1990 to March 1993 he served as
Manager, Finance of the Company.
The Company intends to add Donald L. House and Don W. Hubble as members of
its Board of Directors within 90 days after the date of this Prospectus. It will
be necessary for the Company to appoint these or two other independent directors
within the 90 day time period in order to maintain its Nasdaq National Market
listing. Failure to appoint two such directors could result in a delisting of
the Common Stock from the Nasdaq National Market.
Donald L. House has served as Chairman of the Board of Directors of SQL
Financials International, Inc., a client/server software company, since January
1993. From September 1991 until December 1992, Mr. House served as President of
Prentice Hall Professional Software, Inc., a subsidiary of Simon and Schuster,
Inc. Since 1988, he has been a business advisor, director and investor in a
number of emerging growth high technology companies. From 1968 through 1987, Mr.
House served in a number of positions with Management Science America, Inc., a
provider of application software. Mr. House presently serves as a director of
XcelleNet, Inc., a remote access software company, and as Chairman of its Audit
and Nominating Committees.
Don W. Hubble served with National Service Industries, Inc. ("NSI") from
1980 until October 1996, most recently serving as President and Chief Operating
Officer. During this period, Mr. Hubble also served in various capacities with a
number of divisions of NSI, including National Linen Service, Block Industries,
and Certified Leasing Company.
There are no family relationships between any of the directors or executive
officers of the Company.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company's Board of Directors intends to establish an Executive
Committee, an Audit Committee and a Compensation Committee. The Executive
Committee will be empowered to exercise all authority of the Board of Directors
of the Company, except as limited by the Georgia Business Corporation Code
("GBCC"). Under Georgia law, the Executive Committee may not, among other
things, approve or propose to shareholders actions required to be approved by
shareholders, fill vacancies on the Board of Directors, amend the articles of
incorporation or bylaws or approve a plan of merger. The Company expects that
the Executive Committee will include Messrs. Szlam and Smith. The Audit
Committee will be responsible for recommending independent auditors, reviewing
with the independent auditors the scope and results of the audit engagement,
monitoring the Company's financial policies and control procedures, and
reviewing and monitoring the provisions of nonaudit services by the Company's
auditors. The Compensation Committee will be responsible for reviewing and
recommending salaries, bonuses and other compensation for the Company's
executive officers. The Compensation Committee also will be responsible for
administering the Company's stock option and stock purchase plans and for
establishing the terms and conditions of all stock options and
40
<PAGE> 43
purchase rights granted under these plans. At least two of the new independent
directors will be appointed to each of the Audit and Compensation Committees at
the time they are elected to the Board of the Directors of the Company.
DIRECTOR COMPENSATION
Prior to this offering, no member of the Board of Directors of the Company
received compensation for service on the Board. Following the consummation of
the offering, the Company expects to pay the non-employee directors fees for
each board meeting attended and each committee meeting attended which is held
independently of a board meeting. In addition, the Company expects to grant to
each nonemployee director options covering 2,000 shares of the Common Stock each
year, with one-fourth of such options vesting for each quarterly board meeting
attended.
EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid or accrued by
the Company in 1996 for its Chief Executive Officer and the four other most
highly compensated executive officers of the Company in 1996 (collectively, the
"Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION NUMBER OF
---------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS(1) COMPENSATION OPTIONS COMPENSATION
--------------------------- -------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Aleksander Szlam...................... $300,001 $154,502 $86,040(2) -- --
Chairman of the Board and
Chief Executive Officer
J. Neil Smith......................... 220,399 82,500 --(3) -- --
President and Chief Operating
Officer
Lee H. Davies......................... 127,211 13,320 --(3) -- --
Vice President -- Operations
Dean A. Trumbull...................... 110,816 20,000 --(3) 40,000 --
Vice President -- Advanced
Technology
John M. Goodeve-Docker................ 85,333 32,000 18,576(4) -- $ 3,040(5)
Managing Director of Melita Europe
</TABLE>
- ---------------
(1) Bonuses awarded and paid in 1996 were based upon 1995 performance.
(2) Includes the value of the non-business use of two automobiles provided by
the Company and reimbursement of the associated income taxes in the
aggregate amount of $64,068, health and life insurance premiums and
reimbursement of the associated income taxes in the aggregate amount of
$13,623, auto insurance premiums and reimbursement of the associated income
taxes in the aggregate amount of $6,308, and ad valorem tax payments and
reimbursement of the associated income taxes in the aggregate amount of
$2,041.
(3) In accordance with the rules of the Securities and Exchange Commission (the
"Commission"), other compensation in the form of perquisites and other
personal benefits has been omitted because such perquisites and other
personal benefits constituted less than the lesser of $50,000 or 10% of the
total annual salary and bonus for the Named Executive Officer for such
year.
(4) Consists of the value of the non-business use of an automobile provided by
the Company.
(5) Consists of a retirement savings contribution of $3,040 paid by the Company.
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<PAGE> 44
The following table sets forth all individual grants of stock options
during the year ended December 31, 1996, to each of the Named Executive
Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
-------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF STOCK
SECURITIES PERCENT OF TOTAL PRICE APPRECIATION FOR
UNDERLYING OPTIONS GRANTED EXERCISE OR OPTION TERM(2)
OPTIONS TO EMPLOYEES IN BASE PRICE EXPIRATION -----------------------
NAME GRANTED FISCAL YEAR PER SHARE DATE 5% 10%
- ---- ---------- ---------------- ----------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Aleksander Szlam.............. -- -- -- -- -- --
J. Neil Smith................. -- -- -- -- -- --
Lee H. Davies................. -- -- -- -- -- --
Dean A. Trumbull.............. 40,000(1) 29.9% $4.07 1/1/03 $66,276 $154,451
John M. Goodeve-Docker........ -- -- -- -- -- --
</TABLE>
- ---------------
(1) This option was granted with an exercise price equal to the fair market
value of the Common Stock on the date of grant as determined by the Board
of Directors. The option is a nonqualified stock option, vests over five
years and has a seven-year term.
(2) The potential realizable value is calculated based on the seven-year term of
the option at the time of its grant. It is calculated by assuming that the
stock price on the date of grant ($4.07) appreciates at the indicated
annual rate, compounded annually for the entire term of the option. The
actual realizable value of the options based on the price to the public in
the offering will substantially exceed the potential realizable value shown
in the table.
The following table summarizes the value of the outstanding options held by
the Named Executive Officers at December 31, 1996. No options were exercised by
the Named Executive Officers during the year ended December 31, 1996.
YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS AT FISCAL
AT FISCAL YEAR-END YEAR-END(1)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Aleksander Szlam........................... -- -- -- --
J. Neil Smith.............................. -- 450,000 -- $1,165,500
Lee H. Davies.............................. -- -- -- --
Dean A. Trumbull........................... -- 40,000 -- 57,200
John M. Goodeve-Docker..................... -- -- -- --
</TABLE>
- ---------------
(1) Based on the estimated fair market value of the Company's Common Stock as of
December 31, 1996, of $5.50 per share, less the exercise price payable upon
exercise of such options. Such estimated fair market value as of December
31, 1996, is substantially lower than the initial public offering price per
share in this offering.
EMPLOYEE BENEFIT PLANS
1997 Stock Option Plan
The Company's 1997 Stock Option Plan (the "1997 Stock Option Plan") became
effective on February 6, 1997. The aggregate number of shares reserved for
issuance under the 1997 Stock Option Plan is 1,350,000 shares, less the number
of shares issued pursuant to the Company's 1992 Discounted Stock Option Plan.
The purpose of the 1997 Stock Option Plan is to provide incentives for key
employees, officers, consultants and directors to promote the success of the
Company, and to enhance the Company's ability to attract and retain the services
of such persons. Options granted under the 1997 Stock Option Plan may be
42
<PAGE> 45
either options intended to qualify as "incentive stock options" under Section
422 of the Code or nonqualified stock options.
As of February 28, 1997, options to purchase 125,000 shares of Common Stock
were outstanding under the 1997 Stock Option Plan at a weighted average exercise
price of $5.50 per share and no shares of Common Stock have been issued upon
exercise of options granted under the 1997 Stock Option Plan.
1992 Discounted Stock Option Plan
The Company's 1992 Discounted Stock Option Plan (the "1992 Stock Option
Plan") became effective on June 4, 1992. The aggregate number of shares reserved
for issuance under the 1992 Stock Option Plan is 1,000,000 shares. The purpose
of the 1992 Stock Option Plan is to provide incentives for key employees to
promote the success of the Company, and to enhance the Company's ability to
attract and retain the services of such persons. Options granted under the 1992
Stock Option Plan are not intended to qualify as "incentive stock options" under
Section 422 of the Code. Options granted under the 1992 Stock Option Plan vest
over a period of time specified in the relevant option agreement, and will first
become exercisable as to the vested portion 14 months after the closing of this
offering.
As of February 28, 1997, options to purchase 979,097 shares of Common Stock
were outstanding under the 1992 Stock Option Plan at a weighted average exercise
price of $3.16 per share and no shares of Common Stock have been issued upon
exercise of options granted under the 1992 Stock Option Plan.
Employee Stock Purchase Plan
The Company adopted an Employee Stock Purchase Plan (the "Stock Purchase
Plan") on March 1, 1997, to become effective on the closing of this offering. A
total of 250,000 shares of the Company's Common Stock have been reserved for
issuance under the Stock Purchase Plan. The Stock Purchase Plan is intended to
qualify under sec. 423 of the Code. An employee electing to participate in the
Stock Purchase Plan must authorize on a semi-annual basis a stated dollar amount
or percentage of the employee's regular pay (not to exceed 10%) to be deducted
by the Company from the employee's pay. The price at which employees may
purchase Common Stock is 85% of the closing price of the Common Stock on the
Nasdaq National Market on the first day of the semi-annual period or the last
day of the semi-annual period, whichever is lower. An employee may not sell
shares of Common Stock purchased under the Stock Purchase Plan until the later
of: (i) 180 days after the closing of this offering; or (ii) the first day of
the second semi-annual period following the semi-annual period in which the
right to purchase such shares was granted. Employees of the Company who have
completed six full months of service with the Company and whose customary
employment is more than 20 hours per week for more than nine months per calendar
year are eligible to participate in the Stock Purchase Plan. An employee may not
be granted an option under the Stock Purchase Plan if after the granting of the
option such employee would be deemed to own 5% or more of the combined voting
power or value of all classes of stock of the Company. As of March 1, 1997,
approximately 240 employees are eligible to participate in the Stock Purchase
Plan. The Stock Purchase Plan will be administered by the Compensation Committee
of the Board of Directors.
401(k) Profit Sharing Plan
The Company maintains a 401(k) Profit Sharing Plan (the "401(k) Plan")
which is intended to be a tax-qualified defined contribution plan under Section
401(k) of the Code. In general, all U.S. employees of the Company who have
completed six months of service are eligible to participate. The 401(k) Plan
includes a salary deferral arrangement pursuant to which participants may
contribute, subject to certain Code limitations, a maximum of 15% of their
salary on a pre-tax basis, with a maximum deferral of $9,500. Subject to certain
Code limitations, the Company may make a matching contribution at the discretion
of the Board of Directors. In 1996, the Company's matching contribution was 40%
of each participant's contribution up to 6% of the participant's salary, for an
aggregate contribution of $119,000. A separate account is maintained for each
participant in the 401(k) Plan. The portion of a participant's account
attributable to his or her own contributions is 100% vested. The portion of the
account attributable to Company contributions (including matching contributions)
vests ratably over the next six years of service with the Company. Distributions
from
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<PAGE> 46
the 401(k) Plan may be made in the form of a lump-sum payment in cash or
property or in the form of an annuity.
AGREEMENTS WITH EMPLOYEES
Principal employees of the Company, including executive officers, are
required to sign an agreement with the Company restricting the ability of the
employee to compete with the Company during his or her employment and for a
period of one year thereafter, restricting solicitation of customers and
employees following employment with the Company, and providing for ownership and
assignment of intellectual property rights to the Company.
Mr. Szlam has entered into a two-year employment agreement with the Company
which commences on the effective date of this offering. Pursuant to the
agreement, Mr. Szlam is entitled to receive an annual base salary of $300,000,
and is entitled to annual bonuses of $160,000. Mr. Szlam's employment under the
agreement automatically renews for additional two-year terms unless the Company
or Mr. Szlam cancels such renewal by giving three months' prior written notice.
Under the terms of the agreement, Mr. Szlam has agreed to assign to the Company
all patents, copyrights and other intellectual property developed by him during
the course of his employment by the Company. In addition, Mr. Szlam has agreed
not to solicit the customers or employees of the Company or to compete with the
Company for two years following any termination of his employment.
Mr. Smith has entered into an employment agreement with the Company which
commences on the effective date of this offering and terminates on July 31,
1999. Pursuant to the agreement, Mr. Smith is entitled to receive an annual base
salary of $225,000, and is entitled to annual bonuses of up to $100,000 at the
discretion of the Board. Mr. Smith's employment under the agreement
automatically renews for additional two-year terms unless the Company or Mr.
Smith cancels such renewal by giving three months' prior written notice. If Mr.
Smith's employment is terminated by the Company other than for cause, death or
disability, he will be entitled to severance pay equal to one year's salary.
Following a material diminishment of Mr. Smith's duties or authority ("good
reason"), he will be entitled to terminate his employment and receive severance
pay equal to one year of salary. All options currently held by Mr. Smith will
vest upon completion of this offering, but will not be exercisable until
beginning 14 months after completion of this offering. Notwithstanding the
foregoing, (i) if Mr. Smith voluntarily resigns his positions with the Company
without good reason, his right to exercise his current options will be forfeited
with respect to one-fourth of his options for each full year which the
resignation occurs prior to July 1, 2000, and (ii) if Mr. Smith is terminated by
the Company other than for cause or if he voluntarily resigns for good reason,
his current options shall be immediately vested and exercisable. Under the terms
of the agreement, Mr. Smith has agreed to assign to the Company all patents,
copyrights and other intellectual property developed by him during the course of
his employment by the Company. In addition, Mr. Smith has agreed not to solicit
the customers or employees of the Company or to compete with the Company for two
years following any termination of his employment.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1996, compensation of executive officers of the Company was
determined by Mr. Szlam, Chairman of the Board and Chief Executive Officer of
the Company. See "Certain Transactions" for information concerning certain
transactions and relationships between the Company and Mr. Szlam. Simultaneously
with the expansion of the Board of Directors following the completion of this
offering, the Company will establish a Compensation Committee to review the
performance of executive officers, establish overall employee compensation
policies and recommend to the Board of Directors major compensation programs. No
voting member of the Compensation Committee will be an executive officer of the
Company. Messrs. Szlam and Smith will be ex officio members of the Compensation
Committee.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
Upon the closing of this offering, the Company's Amended and Restated
Articles of Incorporation will provide that the liability of the directors for
monetary damages shall be limited to the fullest extent permissible under
Georgia law. Under Georgia law, liability of a director cannot be limited for
(i) any appropriation, in violation of his duties, of any business opportunity
of the Company, (ii) acts or omissions
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<PAGE> 47
which involve intentional misconduct or a knowing violation of law, (iii) any
liability under Section 14-2-832 of the GBCC, which relates to unlawful payments
of dividends and unlawful stock repurchases and redemptions, or (iv) any
transaction from which he derived an improper personal benefit. This limitation
of liability will not affect the availability of injunctive relief or other
equitable remedies.
Upon the closing of this offering, the Company's Amended and Restated
Bylaws will provide that the Company shall indemnify each of its directors and
officers to the extent that he is or was a party, or is threatened to be made a
party, to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative by reason of the fact
that such person is or was a director or officer of the Company, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement in connection with such action, suit or proceeding; provided,
however, that no indemnification shall be made for (i) any appropriation, in
violation of his duties, of any business opportunity of the Company, (ii) acts
or omissions which involve intentional misconduct or a knowing violation of law,
(iii) any liability under Section 14-2-832 of the GBCC, which relates to
unlawful payments of dividends and unlawful stock repurchases and redemptions,
or (iv) any transaction from which he derived an improper personal benefit.
The Company intends to maintain directors and officers liability insurance
coverage following this offering.
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<PAGE> 48
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of February 28, 1997, and
as adjusted to reflect the sale by the Company of the shares offered hereby, by
(i) each director of the Company; (ii) each of the Named Executive Officers;
(iii) each shareholder known by the Company to be the beneficial owner of more
than 5% of the Company's Common Stock; and (iv) all executive officers and
directors as a group. Except as otherwise noted, the persons or entities named
in the table have sole voting and investment power with respect to all the
shares of Common Stock beneficially owned by them, subject to community property
laws where applicable.
<TABLE>
<CAPTION>
PERCENTAGE OF
COMMON STOCK
OUTSTANDING
NUMBER OF SHARES --------------------
BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER(1) OWNED OFFERING OFFERING
- --------------------------------------- ---------------- -------- --------
<S> <C> <C> <C>
Aleksander Szlam (2)...................................... 11,143,395 100.0% 76.1%
J. Neil Smith (3)......................................... -- -- --
Lee H. Davies (4)......................................... 5,000 * *
Dean A. Trumbull (5)...................................... -- -- --
John M. Goodeve-Docker (6)................................ 5,000 * *
All executive officers and directors as a group (10
persons)(7)............................................. 11,163,395 100.0% 76.1%
</TABLE>
- ---------------
* Less than 1%.
(1) Except as set forth herein, the street address of the named beneficial owner
is c/o Melita International Corporation, 5051 Peachtree Corners Circle,
Norcross, Georgia 30092-2500.
(2) Consists of 11,143,395 shares held by a limited partnership controlled by
Mr. Szlam.
(3) Excludes 450,000 shares issuable pursuant to currently vested options
exercisable beginning 14 months after the closing of this offering, subject
to certain acceleration and defeasance provisions. See "Agreements with
Employees."
(4) Includes 5,000 shares issuable pursuant to currently exercisable options.
(5) Excludes 10,000 shares issuable pursuant to currently vested options
exercisable beginning 14 months after the closing of this offering.
(6) Includes 5,000 shares issuable pursuant to currently exercisable options.
(7) Includes 11,143,395 shares held by a limited partnership controlled by Mr.
Szlam and 20,000 shares issuable pursuant to currently exercisable options.
Excludes 460,000 shares issuable pursuant to currently vested options
exercisable beginning 14 months after the closing of this offering.
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<PAGE> 49
CERTAIN TRANSACTIONS
RELATED PARTY TRANSACTIONS
In August 1994, the Company entered into a lease agreement with an
unrelated party to lease its headquarters facility commencing April 1995. The
agreement provides for annual lease payments ranging from $542,000 to $636,000
per year over a ten-year term. In November 1995, Mr. Szlam, the Company's
Chairman of the Board, Chief Executive Officer and principal shareholder,
purchased the facility through a limited liability company controlled by Mr.
Szlam and his wife. The limited liability company now rents the facility to the
Company under the terms of the original lease. Rent expense paid to the limited
liability company was $60,000 and $543,000 in 1995 and 1996, respectively.
During 1994, the Company paid $325,000 in research and development fees to
an entity owned by Mr. Szlam's brother-in-law.
The Board of Directors of the Company has adopted a resolution whereby all
future transactions, including any loans from the Company to its officers,
directors, principal shareholders or affiliates, will be approved by a majority
of the Board of Directors, including a majority of the independent and
disinterested members of the Board of Directors, if required by law, or a
majority of the disinterested shareholders, and will be on terms no less
favorable to the Company than could be obtained from unaffiliated third parties.
COMBINATION OF MELITA EUROPE AND INVENTIONS
Upon the effective date of this offering, the Company will acquire Melita
Europe and Inventions by share exchanges with their existing shareholders, which
are Mr. Szlam, a limited partnership controlled by Mr. Szlam and a trust
controlled by his spouse. The Company will issue a total of 3,143,395 shares of
its Common Stock to the shareholders of Melita Europe and Inventions in such
share exchanges. The exchange ratios and number of shares issued in the share
exchanges were based on relative valuations of the Company, Melita Europe and
Inventions determined by an independent appraisal firm.
S CORPORATION DISTRIBUTION AND TERMINATION OF S CORPORATION STATUS
Upon the Termination Date, the Company will terminate its status as an S
corporation under the Code. All undistributed S corporation earnings through the
Termination Date will be distributed to the Company's principal shareholder
using a portion of the net proceeds of this offering. See "Termination of S
Corporation Status and Related Distributions," "-- Repayment of Shareholder
Notes" below and Notes 1 and 3 of the Notes to Combined Financial Statements.
REPAYMENT OF SHAREHOLDER NOTES
In connection with a June 19, 1992 distribution of S corporation
accumulated earnings, Melita issued a note payable (the "1992 Note") to Mr.
Szlam in the principal amount of $3.0 million. The note bears interest at a rate
equal to the prime rate plus 1% per annum, and the outstanding principal balance
of this note as of March 1, 1997, was $2.4 million. Interest on the note is
payable monthly, and principal is payable in 16 equal quarterly installments
beginning July 1, 1996. The note contains an acceleration provision at the
option of the noteholder upon certain designated changes in ownership, which was
triggered by changes in the capital structure in February 1997. The largest
amount outstanding under this note during 1996 was $3.0 million.
In connection with a February 7, 1997 distribution of S corporation
earnings accumulated through December 31, 1996, Melita and Inventions issued
notes payable (the "1997 Notes") to Mr. Szlam. These two notes have an aggregate
principal amount of $12.9 million. Each of the notes bears interest at the
minimum rate required to avoid imputation of interest using the applicable
federal rate under the Code (currently 5.7%). The outstanding principal balance
on these notes as of March 31, 1997, was $12.9 million, and the largest
aggregate amount outstanding under these notes during the period from issuance
to March 31, 1997 was $13.2 million. Payment of these notes is due in full upon
demand.
The 1992 Note and 1997 Notes will be repaid in full with a portion of the
net proceeds of this offering.
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<PAGE> 50
TAX INDEMNIFICATION AGREEMENT
Melita and Inventions have entered into Tax Indemnification Agreements with
their existing shareholders prior to this offering providing for, among other
things, the indemnification of the Company by such shareholders for any federal
and state income taxes (including interest) incurred by the Company if for any
reason the Company is deemed to be treated as a C corporation during any period
for which it reported its earnings to the taxing authorities as an S
corporation. The Tax Indemnification Agreements further provide for the
cross-indemnification of the Company and of each existing shareholder for
certain additional taxes (including interest and, in the case of existing
shareholders, penalties) resulting from the Company's operations during the
period in which it was an S corporation.
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<PAGE> 51
DESCRIPTION OF CAPITAL STOCK
Upon the effectiveness of this offering, the Company's authorized capital
stock will consist of 100,000,000 shares of Common Stock, no par value per
share, and 20,000,000 shares of preferred stock, no par value per share. As of
March 1, 1997, after giving effect to the issuance of 3,143,395 shares of Common
Stock in connection with the Combination, the Company had issued and outstanding
11,143,395 shares of Common Stock held by three stockholders of record. The
following description of the capital stock of the Company is a summary and is
qualified in its entirety by the provisions of the Company's Amended and
Restated Articles of Incorporation and Amended and Restated Bylaws, copies of
which have been filed as exhibits to the Registration Statement of which this
Prospectus is a part.
COMMON STOCK
Holders of shares of Common Stock are entitled to one vote per share for
the election of directors and on all matters to be submitted to a vote of the
Company's shareholders. The Common Stock does not have cumulative voting rights,
and, as a result, the holders of a majority of the shares of Common Stock
entitled to vote in any election of directors may elect all of the directors
standing for election and the holders of the remaining shares will not be able
to elect any directors. Subject to the rights of any holders of preferred stock
which may be issued in the future, the holders of shares of Common Stock are
entitled to share ratably in such dividends as may be declared by the Board of
Directors and paid by the Company out of funds legally available therefor. In
the event of dissolution, liquidation or winding up of the Company, holders of
shares of Common Stock are entitled to share ratably in all assets remaining
after payment of all liabilities and liquidation preferences, if any. Holders of
shares of Common Stock have no preemptive, subscription, redemption or
conversion rights. The outstanding shares of Common Stock are, and the shares of
Common Stock to be issued by the Company in connection with this offering will
be, duly authorized, validly issued, fully paid and nonassessable. The rights of
holders of Common Stock will be subject to, and may be adversely affected by,
the rights, privileges and preferences of the holders of any shares of preferred
stock that the Company may designate and issue in the future.
PREFERRED STOCK
The Board of Directors is authorized, subject to certain limitations
prescribed by law, without further shareholder approval, to issue from time to
time up to an aggregate of 20,000,000 shares of preferred stock in one or more
series and to fix or alter the designations, preferences, rights and any
qualifications, limitations or restrictions on the shares of each such series
thereof, including the dividend rights, dividend rates, conversion rights,
voting rights, terms of redemption (including sinking fund provisions),
redemption price or prices, liquidation preferences and the number of shares
constituting any series or designations of such series. The issuance of
preferred stock may have the effect of delaying, deferring or preventing a
change of control of the Company. There are no outstanding shares of preferred
stock, and no series have been designated. The Company does not currently have
any intention to designate or issue any preferred stock.
CERTAIN PROVISIONS OF ARTICLES OF INCORPORATION AND BYLAWS
The Amended and Restated Bylaws provide that special meetings of
shareholders may be called only by (i) the Board of Directors, (ii) the Chairman
of the Board of Directors (if one is so appointed), (iii) the Chief Executive
Officer, (iv) the President of the Company or (v) holders of not less than 50%
of all votes entitled to be cast on any issue proposed to be considered at the
proposed special meeting.
The Company's Amended and Restated Bylaws establish an advance notice
procedure for the nomination of candidates for election as directors and other
shareholder proposals to be considered at shareholders meetings, other than by
or at the direction of the Board of Directors or other designated parties.
Notice of shareholder proposals and director nominations must be given timely in
writing to the Secretary of the Company before the meeting at which such matters
are to be acted upon or directors are to be elected. Such notice, to be timely,
must be received at the principal executive offices of the Company not less than
60 days before the date of the meeting at which the director(s) are to be
elected or the proposal is to be considered;
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<PAGE> 52
however, if less than 70 days notice or prior public disclosure of the date of
the scheduled meeting is given or made, notice by the shareholder, to be timely,
must be delivered or received not later than the close of business on the tenth
day following the earlier of the day on which notice of the date of the meeting
is mailed to shareholders or public disclosure of the date of such meeting is
made.
Notice to the Company from a shareholder who intends to present a proposal
or to nominate a person for election as a director at a shareholders' meeting
must contain certain information about the shareholder giving such notice and,
in the case of director nominations, all information that would be required to
be included in a proxy statement soliciting proxies for the election of the
proposed nominee (including such person's written consent to serve as a director
if so elected). If the chairman of the meeting determines that a shareholder's
proposal or nomination is not made in accordance with the procedures set forth
in the Amended and Restated Bylaws, such proposal or nomination, at the
direction of such presiding officer, may be disregarded. The notice requirement
for shareholder proposals contained in the Amended and Restated Bylaws does not
restrict a shareholder's right to include proposals in the Company's annual
proxy materials pursuant to rules promulgated under the Securities Exchange Act
of 1934, as amended.
The Board of Directors shall have the power to increase or decrease the
authorized number of directors, with or without shareholder approval. Newly
created directorships resulting from any increase in the number of directors or
any vacancy on the Board of Directors may be filled by the affirmative vote of a
majority of the remaining directors then in office or, if not filled by the
directors, by the shareholders.
In discharging the duties of their respective positions and in determining
what is believed to be in the best interest of the Company, the Board of
Directors, and individual directors, in addition to considering the effects of
any action on the Company or is shareholders, may, to the extent permitted by
applicable Georgia law, consider the interests of the employees, customers,
suppliers and creditors of the Company and its subsidiaries, the communities in
which offices or other establishments of the Company and its subsidiaries are
located, and all other factors such directors may consider pertinent; provided,
however, that this provision of the Company's Amended and Restated Articles of
Incorporation solely grants discretionary authority to the directors and no
constituency shall be deemed to have been given any right to consideration
thereby.
The preceding provisions of the Amended and Restated Articles of
Incorporation and Bylaws may be changed only upon the affirmative vote of
holders of at least a majority of the outstanding shares of Common Stock.
The provisions of the Amended and Restated Articles of Incorporation and
Bylaws summarized in the preceding paragraphs and the provisions of the GBCC
described under "Certain Provisions of Georgia Law," contain provisions that may
have the effect of delaying, deferring or preventing a non-negotiated merger or
other business combination involving the Company. These provisions are intended
to encourage any person interested in acquiring the Company to negotiate with
and obtain the approval of the Board of Directors in connection with the
transaction. Certain of these provisions may, however, discourage a future
acquisition of the Company not approved by the Board of Directors in which
shareholders might receive an attractive value for their shares or that a
substantial number or even a majority of the Company's shareholders might
believe to be in their best interest. As a result, shareholders who desire to
participate in such a transaction may not have the opportunity to do so. Such
provisions could also discourage bids for the Common Stock at a premium to the
prevailing market price, as well as create a depressive effect on the market
price of the Common Stock.
CERTAIN PROVISIONS OF GEORGIA LAW
Georgia Business Combination Statute. The Company has elected in its
Bylaws to be subject to provisions of the GBCC prohibiting various "business
combinations" involving "interested shareholders" for a period of five years
after the shareholder becomes an interested shareholder of the Company. Such
provisions prohibit any business combination with an interested shareholder
unless either (i) prior to such time, the Board of Directors approves either the
business combination or the transaction by which such shareholder became an
interested shareholder, (ii) in the transaction that resulted in the shareholder
becoming an interested shareholder, the interested shareholder became the
beneficial owner of at least 90% of the outstanding voting stock of the Company
which was not held by directors, officers, affiliates thereof,
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<PAGE> 53
subsidiaries or certain employee stock option plans of the Company, or (iii)
subsequent to becoming an interested shareholder, such shareholder acquired
additional shares resulting in such shareholder owning at least 90% of the
outstanding voting stock of the Company and the business combination is approved
by a majority of the disinterested shareholders' shares not held by directors,
officers, affiliates thereof, subsidiaries or certain employee stock option
plans of the Company. Under the relevant provisions of the GBCC, a "business
combination" is defined to include, among other things, (i) any merger,
consolidation, share exchange or any sale, transfer or other disposition (or
series of related sales or transfers) of assets of the Company having an
aggregate book value of 10% or more of the Company's net assets (measured as of
the end of the most recent fiscal quarter), with an interested shareholder of
the Company or any other corporation which is or, after giving effect to such
business combination, becomes an affiliate of any such interested shareholder,
(ii) the liquidation or dissolution of the Company, (iii) the receipt by an
interested shareholder of any benefit from any loan, advance, guarantee, pledge,
tax credit or other financial benefit from the Company, other than in the
ordinary course of business and (iv) certain other transactions involving the
issuance or reclassification of securities of the Company which produce the
result that 5% or more of the total equity shares of the Company, or of any
class or series thereof, is owned by an interested shareholder. An "interested
shareholder" is defined by the GBCC to include any person or entity that,
together with its affiliates, beneficially owns or has the right to own 10% or
more of the outstanding voting shares of the Company, or any person that is an
affiliate of the Company and has, at any time within the preceding two-year
period, been the beneficial owner of 10% or more of the outstanding voting
shares of the Company. The restrictions on business combinations shall not apply
to any person who was an interested shareholder before the adoption of the Bylaw
which made the provisions applicable to the Company nor to any persons who
subsequently become interested shareholders inadvertently, subsequently divest
sufficient shares so that the shareholder ceases to be an interested shareholder
and would not, at any time within the five-year period immediately before a
business combination involving the shareholder, have been an interested
shareholder but for the inadvertent acquisition.
Georgia Fair Price Statute. The Company has elected in its Bylaws to be
subject to the "Fair Price" provisions of the GBCC. These provisions require
that a "business combination" with an "interested shareholder" be (a)
unanimously approved by "continuing directors" who must constitute at least
three members of the board of directors at the time of such approval, or (b)
recommended by at least two-thirds of the "continuing directors" and approved by
a majority of the shareholders excluding the "interested shareholder," unless
certain standards regarding the consideration paid to shareholders in the
transaction are met. Subject to certain exceptions, a "business combination"
includes (i) any merger or consolidation of the corporation or a subsidiary of
the Company; (ii) any share exchange; (iii) any sale, lease, transfer, or other
disposition of assets of the Company or its subsidiary occurring within a 12
month period and having an aggregate book value equal to 10% or more of the net
assets of the Company; (iv) any transaction that results in the issuance or
transfer by the Company of any stock of the Company or the subsidiary
representing 5% or more of the total market value of the outstanding stock of
the Company to any interested shareholder within a 12 month period, except
pursuant to a transaction that effects a pro rata distribution to all
shareholders of the Company; (v) the adoption of any plan or proposal for the
liquidation or dissolution of the corporation in which anything other than cash
will be received by an interested shareholder; and (vi) any transaction
occurring within a 12 month period involving the Company or a subsidiary of the
Company that has the effect of increasing by 5% or more the proportionate share
of the stock of any class or series of the Company or the subsidiary that is
directly or beneficially owned by the interested shareholder. An "interested
shareholder" is defined the same as it is defined in the Georgia Business
Combination Statute. A "continuing director" includes any director who is not an
affiliate or associate of an interested shareholder or any board approved
successor of such a director who is not an affiliate or associate of an
interested shareholder.
The Fair Price provisions do not restrict a business combination if: (a)
the aggregate amount of the cash, and fair market value of any non-cash
property, measured five days before the consummation date, to be received per
share by the shareholders is at least equal to the highest of: (i) the highest
per share price, including brokerage commissions, transfer taxes, and soliciting
dealers' fees, paid by the interested shareholder for any shares of the same
class or series acquired by it within two years preceding the announcement date
or in the transaction in which it became an interested shareholder; (ii) the
higher of the fair market value per
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share as determined on the announcement date or the determination date; or (iii)
in the case of shares other than common shares, the highest amount per share to
which preferred shareholders are entitled in the event of liquidation,
dissolution, or winding up of the corporation, provided that subparagraph (iii)
shall only be applicable if the interested shareholder acquired the shares
within the two year period immediately preceding the announcement date; and (b)
shareholders receive cash or the form of consideration used in the past by the
interested shareholder to purchase the largest number of shares of such class or
series. Further, subject to exceptions, prior to the time the business
combination with the interested shareholder takes place, without the approval of
the board of directors, there must have been: (i) no failure to declare and pay
full dividends on the Company's outstanding preferred shares; (ii) no reduction
in the annual rate of dividends paid on common shares except as to reflect any
subdivision of the shares; (iii) an increase in the annual rate of dividends to
reflect any reclassification of shares; and (iv) not more than a 1% increase in
the interested shareholder's ownership of any of the Company's stock in any 12
month period. An interested shareholder may not receive a direct or indirect
benefit, except proportionately as a shareholder, of any loans, advances,
guarantees, pledges, or other financial assistance or any tax credits or other
tax advantages provided by the corporation or its subsidiaries, either in
anticipation of or in connection with such business combination or otherwise.
LISTING
Application has been made to include the Company's Common Stock on the
Nasdaq National Market under the trading symbol "MELI."
TRANSFER AGENT AND REGISTRAR
The transfer agent for the Company's Common Stock is First Union National
Bank of North Carolina.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the securities
of the Company.
Upon completion of this offering, the Company will have outstanding
14,643,395 shares of Common Stock (assuming no exercise of the underwriters'
over-allotment option or options outstanding under the Company's stock option
plans). Of these shares, the 3,500,000 shares sold in this offering will be
freely tradable without restriction or further registration under the Securities
Act, unless they are purchased by "affiliates" of the Company as that term is
defined in Rule 144 under the Securities Act (which sales would be subject to
certain limitations and restrictions described below). The remaining 11,143,395
shares of Common Stock may be sold in the public market beginning in February
1998, subject to the volume and other limitations of Rule 144 promulgated under
the Securities Act. The holders of all of these remaining shares have executed
180-day lock-up agreements with Montgomery Securities. See "Underwriting."
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned shares for a least one year (including the holding
period of any prior owner except an affiliate) is entitled to sell in "brokers'
transactions" or to market makers, within any three-month period a number of
shares that does not exceed the greater of (i) one percent of the number of
shares of Common Stock then outstanding (approximately 146,500 shares
immediately after this offering) or (ii) the average weekly trading volume in
the Common Stock during the four calendar weeks preceding the required filing of
a Form 144 with respect to such sale. Sales under Rule 144 are subject to the
availability of current public information about the Company. Under Rule 144(k),
a person who is not deemed to have been an affiliate of the Company at any time
during the 90 days 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 having to comply with the manner of sale, public information, volume
limitation or notice filing provisions of Rule 144. Under Rule 701 under the
Securities Act, persons who purchase shares upon exercise of options granted
prior to this offering are entitled to sell such shares 90 days after this
offering in reliance on Rule 144, without having to comply with the holding
period requirements of Rule 144 and, in the case of non-affiliates, without
having to comply with the volume limitation or notice filing provisions of Rule
144.
After the completion of this offering, the Company intends to file one or
more Registration Statements on Form S-8 under the Securities Act to register an
aggregate of 1,600,000 shares of Common Stock reserved for issuance under the
1992 Stock Option Plan, the 1997 Stock Option Plan and the Stock Purchase Plan.
After the date of such filing, if not otherwise subject to a lock-up agreement,
shares purchased pursuant to these plans generally would be available for resale
in the public market. The Company has granted options under such plans to
purchase an aggregate of 1,104,097 shares of which options to purchase an
aggregate of 20,000 shares are currently exercisable. See
"Management -- Employee Benefit Plans."
53
<PAGE> 56
UNDERWRITING
The underwriters named below, represented by Montgomery Securities and
Robertson, Stephens & Company LLC (the "Representatives"), have severally
agreed, subject to the terms and conditions set forth in the Underwriting
Agreement, to purchase from the Company the number of shares of Common Stock
indicated below opposite their respective names at the initial public offering
price less the underwriting discount set forth on the cover page of this
Prospectus. The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters are committed to purchase all of the shares, if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Montgomery Securities.......................................
Robertson, Stephens & Company LLC...........................
---------
Total............................................. 3,500,000
=========
</TABLE>
The Representatives have advised the Company that the Underwriters propose
initially to offer the Common Stock to the public on the terms set forth on the
cover page of this Prospectus. The Underwriters may allow to selected dealers a
concession of not more than $ per share; and the Underwriters may
allow, and such dealers may reallow, a concession of not more than $
per share to certain other dealers. After the initial public offering, the
offering price and other selling terms may be changed by the Representatives.
The Common Stock is offered subject to receipt and acceptance by the
Underwriters and to certain other conditions, including the right to reject
orders in whole or in part.
The Company has granted the Underwriters an option, exercisable during the
30-day period after the date of this Prospectus, to purchase up to a maximum of
525,000 additional shares of Common Stock to cover over-allotments, if any, at
the same price per share as the initial shares to be purchased by the
Underwriters. To the extent the Underwriters exercise this option, each of the
Underwriters will be committed, subject to certain conditions, to purchase such
additional shares in approximately the same proportion as set forth in the above
table. The Underwriters may purchase such shares only to cover over-allotments
made in connection with this offering.
The holders of all of the Company's Common Stock, who immediately following
the offering (assuming no exercise of the over-allotment option) collectively
will beneficially own 11,143,395 shares of Common Stock, and each of the
Company's officers and directors, have agreed that for a period of 180 days
after the date of this Prospectus they will not, without the prior written
consent of Montgomery Securities, directly or indirectly, sell, offer, contract
or grant an option to sell, pledge, transfer, except with respect to certain
transfers to family members or trusts for the benefit of family members,
establish an open put equivalent position or otherwise dispose of any shares of
Common Stock, options or warrants to acquire shares of Common Stock or
securities convertible into or exchangeable or exercisable for shares of Common
Stock, or publicly announce the intention to do any of the foregoing. In
addition, the Company has agreed that for a period of 180 days after the date of
this Prospectus it will not, without the consent of Montgomery Securities,
directly or indirectly, sell, offer, contract or grant an option to sell,
pledge, transfer or otherwise dispose of, or announce the offering of, or file
any registration statement under the Securities Act in respect of, any shares of
Common Stock, options or warrants to acquire shares of Common Stock or
securities convertible into or exchangeable or exercisable for shares of Common
Stock, or publicly announce the intention to do any of the foregoing, except for
shares of Common Stock offered hereby and shares issued pursuant to the 1992
Stock
54
<PAGE> 57
Option Plan, the 1997 Stock Option Plan or the Stock Purchase Plan. See
"Management -- Employee Benefit Plans" and "Shares Eligible for Future Sale."
The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities, including civil liabilities under the
Securities Act, or will contribute to payments the Underwriters may be required
to make in respect thereof.
Certain persons participating in this offering may engage in transactions,
including stabilizing bids, syndicate covering transactions or the imposition of
penalty bids, which may involve the purchase of Common Stock of the Company on
the Nasdaq National Market or otherwise. Such transactions may stabilize or
maintain the market price of the Common Stock at a level above that which might
otherwise prevail in the open market and, if commenced, may be discontinued at
any time.
The Representatives have advised the Company that the Underwriters do not
expect to make sales of Common Stock offered by this Prospectus to accounts over
which they exercise discretionary authority in excess of 5% of this offering.
Prior to this offering, there has been no public market for the Common
Stock. Consequently, the initial offering price will be determined through
negotiations between the Company and the Representatives. Among the factors to
be considered in such negotiations will be the history of and prospects for the
Company and the industry in which the Company competes, an assessment of the
Company's management, the Company's past and present operations and financial
performance, its past and present earnings and the trend of such earnings, the
prospects for future earnings of the Company, the present state of the Company's
development, the general condition of the securities markets at the time of the
offering and the market prices of publicly traded common stocks of comparable
companies in recent periods.
LEGAL MATTERS
The validity of the issuance of the shares of the Common Stock offered
hereby will be passed upon for the Company by Morris, Manning & Martin, L.L.P.,
Atlanta, Georgia. Certain legal matters in connection with this offering will be
passed upon for the Underwriters by Hale and Dorr LLP, Washington, D.C.
EXPERTS
The combined financial statements included in this prospectus and elsewhere
in the Registration Statement have been audited by Arthur Andersen LLP,
independent public accountants, as set forth in their reports. In those reports,
that firm states that with respect to Melita Europe its opinion is based on the
reports of other independent public accountants, namely BDO Stoy Hayward. The
financial statements referred to above have been included herein in reliance
upon the authority of those firms as experts in giving said reports.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (together with all
amendments, schedules and exhibits thereto, the "Registration Statement") under
the Securities Act with respect to the shares of Common Stock offered hereby.
This Prospectus, which constitutes a part of the Registration Statement, does
not contain all of the information set forth in the Registration Statement,
certain parts of which are omitted in accordance with the rules and regulations
of the Commission. For further information with respect to the Company and the
Common Stock offered hereby, reference is made to the Registration Statement.
Statements made in this Prospectus as to the contents of any contract, agreement
or other document are not necessarily complete, and in each instance, reference
is made to the copy of such contract or other document filed as an exhibit to
the Registration Statement, each such statement being qualified in all respects
by such reference. The Registration Statement and the exhibits and schedules
thereto may be inspected without charge at the public reference facilities
maintained by the Commission in Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the following regional offices of the Commission: Seven World
Trade Center, Suite 1300, New York, New
55
<PAGE> 58
York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such material can be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, Room 1024, at prescribed rates. In addition, the Company is required to
file electronic versions of these documents with the Commission through the
Commissions Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system.
The Commission maintains a World Wide Web Site at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.
The Company intends to furnish to its shareholders annual reports
containing consolidated financial statements audited by an independent public
accounting firm and quarterly reports for the first three quarters of each
fiscal year containing unaudited interim financial information.
56
<PAGE> 59
MELITA INTERNATIONAL CORPORATION
MELITA EUROPE LIMITED AND INVENTIONS, INC.
INDEX TO COMBINED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
COMBINED FINANCIAL STATEMENTS:
Report of Independent Public Accountants -- Arthur Andersen
LLP....................................................... F-2
Report of the Auditors -- BDO Stoy Hayward.................. F-3
Combined Balance Sheets as of December 31, 1995 and 1996 and
March 31, 1997............................................ F-4
Combined Statements of Operations for the three years in the
period ended December 31, 1996 and for the three months
ended March 31, 1996 and 1997............................. F-5
Combined Statements of Shareholders' Equity for the three
years in the period ended December 31, 1996 and for the
three months ended March 31, 1997......................... F-6
Combined Statements of Cash Flows for the three years in the
period ended December 31, 1996 and for the three months
ended March 31, 1996 and 1997............................. F-7
Notes to Combined Financial Statements...................... F-8
</TABLE>
F-1
<PAGE> 60
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Melita International Corporation,
Melita Europe Limited and
Inventions, Inc.:
We have audited the accompanying combined balance sheets of MELITA
INTERNATIONAL CORPORATION (a Georgia corporation), MELITA EUROPE LIMITED (a
private limited company incorporated in the United Kingdom) and INVENTIONS, INC.
(a Georgia corporation) (collectively the "Company") as of December 31, 1995 and
1996 and the related combined statements of operations, shareholders' equity,
and cash flows for the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of Melita Europe Limited,
which statements reflect total assets of 8% and 12% at December 31, 1995 and
1996, respectively, and total revenues of 5%, 9%, and 9% of the combined totals
for the three years in the period ended December 31, 1996, respectively. Those
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to the amounts included for the entity,
is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
Our audits also included examining, on a test basis, evidence supporting the
translation of Melita Europe Limited's financial statements from British pounds
to US dollars and from the Companies Act of 1985 to generally accepted
accounting principles. We believe that our audits and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the financial statements referred to above present fairly, in all material
respects, the combined financial position of Melita International Corporation,
Melita Europe Limited and Inventions, Inc. as of December 31, 1995 and 1996 and
the combined results of their operations and their cash flows for the three
years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 28, 1997
(except with respect to the
matter discussed in Note 9,
as to which the date is
June 4, 1997)
F-2
<PAGE> 61
MELITA EUROPE LIMITED
REPORT OF THE AUDITORS
To the shareholders of Melita Europe Limited:
We have audited the financial statements of Melita Europe Limited for the
three years ended 31 December 1996.
Respective responsibilities of directors and auditors
The Company's directors are responsible for the preparation of the
financial statements. It is our responsibility to form an independent opinion,
based on our audits, on those statements and to report our opinion to you.
Basis of opinion
We conducted our audits in accordance with Auditing Standards issued by the
Auditing Practices Board. The results of the audits would not have been
materially different had the audits been conducted in accordance with Generally
Accepted Auditing Standards in the United States. An audit includes examination,
on a test basis, of evidence relevant to the amounts and disclosures in the
financial statements. It also includes an assessment of the significant
estimates and judgements made by the directors in the preparation of the
financial statements, and of whether the accounting policies are appropriate to
the Company's circumstances, consistently applied and adequately disclosed.
We planned and performed our audits so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the financial statements.
Opinion
In our opinion the financial statements and including those for the years
ended 31 December 1994 and 1995 as previously audited by us, give a true and
fair view of the state of the Company's affairs as at 31 December 1996 and of
its profit for the three years ended 31 December 1996 and have been properly
prepared in accordance with the Companies Act 1985.
BDO Stoy Hayward
Chartered Accountants
and Registered Auditors
Ewell, Epsom, Surrey
25 April 1997
F-3
<PAGE> 62
MELITA INTERNATIONAL CORPORATION,
MELITA EUROPE LIMITED AND INVENTIONS, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
----------------- MARCH 31, MARCH 31,
1995 1996 1997 1997 (NOTE 8)
------- ------- ------------ --------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 5,959 $ 9,849 $11,687 $ 0
Accounts receivable, net of allowance for doubtful
accounts of $331
and $487 at December 31, 1995 and 1996, respectively,
and $495 at March 31, 1997.............................. 9,203 11,860 11,187 11,187
Inventories............................................... 3,027 2,442 1,919 1,919
Deferred taxes............................................ 0 0 0 1,060
Prepaid expenses and other................................ 342 170 473 473
------- ------- ------- -------
Total current assets................................ 18,531 24,321 25,266 14,639
------- ------- ------- -------
Property and equipment, at cost:
Furniture and fixtures.................................... 1,341 1,361 1,366 1,366
Equipment................................................. 4,255 5,476 5,957 5,957
Leasehold improvements.................................... 166 343 343 343
------- ------- ------- -------
Total property and equipment........................ 5,762 7,180 7,666 7,666
Less accumulated depreciation and amortization............ 3,423 4,456 (4,848) (4,848)
------- ------- ------- -------
Net property and equipment.......................... 2,339 2,724 2,818 2,818
------- ------- ------- -------
Other assets................................................ 58 24 21 21
------- ------- ------- -------
$20,928 $27,069 $28,105 $17,478
======= ======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Cash overdraft............................................ $ 0 $ 0 $ 0 $ 6,150
Accounts payable.......................................... 2,763 2,429 2,999 2,999
Accrued liabilities....................................... 3,416 4,210 4,178 4,299
Deferred revenue.......................................... 2,593 3,065 3,850 3,850
Customer deposits......................................... 2,432 3,849 3,211 3,211
Current maturities of notes payable to shareholder (Note
2)...................................................... 375 2,625 15,337 0
Current maturities of capital lease obligations (Note
5)...................................................... 48 19 15 15
------- ------- ------- -------
Total current liabilities........................... 11,627 16,197 29,590 20,524
------- ------- ------- -------
Notes payable to shareholder, net of current maturities
(Note 2).................................................. 2,625 0 0 0
------- ------- ------- -------
Capital lease obligations, net of current maturities (Note
5)........................................................ 19 0 0 0
------- ------- ------- -------
Commitments and contingencies (Note 5)
Shareholders' equity:
Preferred stock:
Melita International Corporation, no par value;
20,000,000 shares authorized, no shares issued and
outstanding at December 31, 1995 and 1996 and March
31, 1997 and March 31, 1997 pro forma................. 0 0 0 0
Common stock:
Melita International Corporation, no par value;
100,000,000 shares authorized, 8,000,000 shares issued
and outstanding December 31, 1995 and 1996, and
11,143,395 shares issued and outstanding March 31,
1997 and March 31, 1997 pro forma..................... 2 2 2 69
Melita Europe Limited, L1 par value; 50,000 shares
authorized, 31,328 shares issued and outstanding
December 31, 1995 and 1996, and March 31, 1997, no
shares issued and outstanding pro forma............... 46 46 46 0
Inventions, Inc., $5 par value; 100 shares authorized,
100 shares issued and outstanding December 31, 1995
and 1996, and March 31, 1997, no shares issued and
outstanding pro forma................................. 1 1 1 0
Additional paid-in capital................................ 20 20 20 0
Cumulative foreign currency translation adjustment........ 5 35 13 13
Retained earnings (deficit)............................... 6,583 10,768 (1,567) (3,128)
------- ------- ------- -------
Total shareholders' equity (deficit)................ 6,657 10,872 (1,485) (3,046)
------- ------- ------- -------
$20,928 $27,069 $28,105 $17,478
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these combined balance sheets.
F-4
<PAGE> 63
MELITA INTERNATIONAL CORPORATION,
MELITA EUROPE LIMITED AND INVENTIONS, INC.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------- -------------------
1994 1995 1996 1996 1997
------- ------- ------- -------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net revenues:
Product.................................... $18,186 $24,620 $32,077 $ 7,691 $10,265
Service.................................... 8,970 10,662 15,463 3,330 4,404
------- ------- ------- ------- -------
Total revenues..................... 27,156 35,282 47,540 11,021 14,669
------- ------- ------- ------- -------
Cost of revenues:
Product.................................... 6,310 8,730 11,494 2,449 3,836
Service.................................... 3,254 5,282 6,863 1,439 1,931
------- ------- ------- ------- -------
Total cost of revenues............. 9,564 14,012 18,357 3,888 5,767
------- ------- ------- ------- -------
Gross margin................................. 17,592 21,270 29,183 7,133 8,902
------- ------- ------- ------- -------
Operating expenses:
Research and development................... 3,660 4,050 5,070 945 1,381
Selling, general, and administrative....... 11,332 12,559 16,765 4,137 5,134
------- ------- ------- ------- -------
Total operating expenses........... 14,992 16,609 21,835 5,082 6,515
------- ------- ------- ------- -------
Income from operations....................... 2,600 4,661 7,348 2,051 2,387
Other income (expense), net.................. 46 88 261 (11) (51)
------- ------- ------- ------- -------
Income before income taxes................... 2,646 4,749 7,609 2,040 2,336
Income tax (benefit) provision............... (26) 0 0 0 16
------- ------- ------- ------- -------
Net income before pro forma income taxes..... 2,672 4,749 7,609 2,040 2,320
Pro forma income taxes....................... 1,164 1,794 2,827 762 895
------- ------- ------- ------- -------
Pro forma net income......................... $ 1,508 $ 2,955 $ 4,782 $ 1,278 $ 1,425
======= ======= ======= ======= =======
Pro forma net income per common and common
equivalent share........................... $ 0.39 $ 0.11
======= =======
Pro forma weighted average common and common
equivalent shares outstanding.............. 12,363 12,647
======= =======
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-5
<PAGE> 64
MELITA INTERNATIONAL CORPORATION,
MELITA EUROPE LIMITED AND INVENTIONS, INC.
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------------------------------------
MELITA CUMULATIVE
INTERNATIONAL MELITA EUROPE FOREIGN
PREFERRED STOCK CORPORATION LIMITED INVENTIONS, INC. ADDITIONAL CURRENCY
--------------- ------------------ --------------- ----------------- PAID-IN TRANSLATION
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL ADJUSTMENT
------ ------ --------- ------ ------ ------ ------- ------- ---------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1993............... 0 $0 8,000,000 $2 31,328 $46 100 $1 $20 $ 8
Net income before
pro forma income
taxes............ 0 0 0 0 0 0 0 0 0 0
Distributions to
shareholders..... 0 0 0 0 0 0 0 0 0 0
Foreign currency
translation
adjustment....... 0 0 0 0 0 0 0 0 0 (3)
-- -- --------- -- ------ --- --- -- --- ---
Balance, December 31,
1994............... 0 0 8,000,000 2 31,328 46 100 1 20 5
Net income before
pro forma income
taxes............ 0 0 0 0 0 0 0 0 0 0
Distributions to
shareholders..... 0 0 0 0 0 0 0 0 0 0
Foreign currency
translation
adjustment....... 0 0 0 0 0 0 0 0 0 0
-- -- --------- -- ------ --- --- -- --- ---
Balance, December 31,
1995............... 0 0 8,000,000 2 31,328 46 100 1 20 5
Net income before
pro forma income
taxes............ 0 0 0 0 0 0 0 0 0 0
Distributions to
shareholders..... 0 0 0 0 0 0 0 0 0 0
Foreign currency
translation
adjustment....... 0 0 0 0 0 0 0 0 0 30
-- -- --------- -- ------ --- --- -- --- ---
Balance, December 31,
1996............... 0 0 8,000,000 2 31,328 46 100 1 20 35
Net income before pro
forma income taxes
(unaudited)........ 0 0 0 0 0 0 0 0 0 0
Note and cash
distributions to
shareholders
(unaudited)........ 0 0 0 0 0 0 0 0 0 0
Foreign currency
translation
adjustment
(unaudited)........ 0 0 0 0 0 0 0 0 0 (22)
-- -- --------- -- ------ --- --- -- --- ---
Balance, March 31,
1997 (unaudited)... 0 $0 8,000,000 $2 31,328 $46 100 $1 $20 $13
== == ========= == ====== === === == === ===
<CAPTION>
RETAINED
EARNINGS TOTAL
--------- --------
<S> <C> <C>
Balance, December 31,
1993............... $ 7,282 $ 7,359
Net income before
pro forma income
taxes............ 2,672 2,672
Distributions to
shareholders..... (2,924) (2,924)
Foreign currency
translation
adjustment....... 0 (3)
-------- --------
Balance, December 31,
1994............... 7,030 7,104
Net income before
pro forma income
taxes............ 4,749 4,749
Distributions to
shareholders..... (5,196) (5,196)
Foreign currency
translation
adjustment....... 0 0
-------- --------
Balance, December 31,
1995............... 6,583 6,657
Net income before
pro forma income
taxes............ 7,609 7,609
Distributions to
shareholders..... (3,424) (3,424)
Foreign currency
translation
adjustment....... 0 30
-------- --------
Balance, December 31,
1996............... 10,768 10,872
Net income before pro
forma income taxes
(unaudited)........ 2,320 2,320
Note and cash
distributions to
shareholders
(unaudited)........ (14,655) (14,655)
Foreign currency
translation
adjustment
(unaudited)........ 0 (22)
-------- --------
Balance, March 31,
1997 (unaudited)... $ (1,567) $ (1,485)
======== ========
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-6
<PAGE> 65
MELITA INTERNATIONAL CORPORATION,
MELITA EUROPE LIMITED AND INVENTIONS, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------- ------------------
1994 1995 1996 1996 1997
------- ------- ------- ------- -------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Pro forma net income................... $ 1,508 $ 2,955 $ 4,782 $ 1,278 $ 1,425
------- ------- ------- ------- -------
Adjustments to reconcile pro forma net
income to net cash provided by
operating activities:
Pro forma income taxes.............. 1,164 1,794 2,827 762 895
Depreciation and amortization....... 768 997 1,141 242 392
(Gain) loss on sale of property and
equipment......................... 0 (51) 6 0 0
Changes in assets and liabilities:
Accounts receivable............... 130 (1,095) (2,657) (2,455) 673
Inventories....................... (355) (990) 585 (221) 524
Prepaid expenses and other
assets......................... (405) 165 172 56 (303)
Accounts payable.................. 154 1,595 (334) (256) 570
Accrued liabilities............... 178 161 794 75 (180)
Deferred revenue.................. 996 607 472 1,119 785
Customer deposits................. 975 1,416 1,417 (176) (638)
Other, net........................ (51) (18) 63 15 (19)
------- ------- ------- ------- -------
Total adjustments.............. 3,554 4,581 4,486 (839) 2,699
------- ------- ------- ------- -------
Net cash provided by operating
activities................... 5,062 7,536 9,268 439 4,124
------- ------- ------- ------- -------
Cash flows from investing activities:
Purchases of property and equipment.... (783) (1,879) (1,531) (267) (486)
Proceeds from sale of property and
equipment........................... 0 132 0 0 0
------- ------- ------- ------- -------
Net cash used in investing
activities................... (783) (1,747) (1,531) (267) (486)
------- ------- ------- ------- -------
Cash flows from financing activities:
Repayment of capital lease
obligations......................... (65) (40) (48) (16) (4)
Repayment of note payable to
shareholder......................... 0 0 (375) 0 (188)
Distributions to shareholders.......... (2,924) (5,196) (3,424) (1,386) (1,608)
------- ------- ------- ------- -------
Net cash used in financing
activities................... (2,989) (5,236) (3,847) (1,402) (1,800)
------- ------- ------- ------- -------
Net change in cash and cash
equivalents............................ 1,290 553 3,890 (1,230) 1,838
Cash and cash equivalents, beginning of
year................................... 4,116 5,406 5,959 5,959 9,849
------- ------- ------- ------- -------
Cash and cash equivalents, end of year... $ 5,406 $ 5,959 $ 9,849 $ 4,729 $11,687
======= ======= ======= ======= =======
Cash paid for interest during the year... $ 265 $ 302 $ 279 $ 71 $ 56
======= ======= ======= ======= =======
Income taxes paid........................ $ 0 $ 29 $ 0 $ 0 $ 16
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-7
<PAGE> 66
MELITA INTERNATIONAL CORPORATION,
MELITA EUROPE LIMITED AND INVENTIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(INFORMATION AS OF MARCH 31, 1997 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Melita International Corporation ("Melita"), Melita Europe Limited ("Melita
Europe"), and Inventions, Inc. ("Inventions") (collectively, the "Company") are
effectively owned and controlled by related individuals. The Company is a
provider of customer contact and call management systems that enable customers
to operate efficient call centers. The Company's principal product, PhoneFrame
CS, is an integrated system comprised of both hardware and software. Melita
offers periodic ongoing maintenance support of its products. The Company also
offers fee-based installation, training and consulting services. The Company
markets its products worldwide through direct sales forces and through
distributors in Europe, Latin America and Asia (Note 7).
The Company is planning an initial public offering (the "Offering") of its
common stock. In connection with the planned Offering, the Company will convert
from an S corporation to a C corporation and Melita Europe and Inventions will
be combined into Melita (Note 8).
BASIS OF COMBINATION
The policy of the Company is to present combined financial statements
including the accounts of Melita, Melita Europe and Inventions, since all are
under common control. All significant intercompany accounts and transactions
have been eliminated in combination.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash or cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Cost includes raw materials, labor and overhead. Market is defined as
replacement cost for work in progress and purchased parts and net realizable
value for finished goods.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and are depreciated primarily
using an accelerated depreciation method over the following estimated useful
lives:
<TABLE>
<S> <C>
Furniture and fixtures Five to seven years
Equipment Three to five years
Leasehold improvements Remaining life of lease
</TABLE>
INCOME TAXES
Melita and Inventions are organized as S corporations under the Internal
Revenue Code and, therefore, are not subject to federal income taxes. The income
or loss of Melita and Inventions is included in the shareholders' individual
federal and state tax returns, and as such, no provision for income taxes is
recorded in the accompanying combined statements of operations. The Company has
historically made distributions to cover the shareholders' anticipated tax
liability.
F-8
<PAGE> 67
MELITA INTERNATIONAL CORPORATION,
MELITA EUROPE LIMITED AND INVENTIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The accompanying combined financial statements reflect a provision for
income taxes on a pro forma basis as if the Company were liable for federal and
state income taxes as a taxable corporate entity throughout the years presented.
The pro forma income tax provision has been computed by applying the Company's
anticipated statutory tax rate to pretax income, adjusted for permanent tax
differences (Note 3).
FOREIGN CURRENCY TRANSLATION
The financial statements of Melita Europe are translated into U.S. dollars
in accordance with Statement of Financial Accounting Standards ("SFAS") No. 52,
"Foreign Currency Translation." Net assets of Melita Europe are translated at
the current rates of exchange. Income and expense items are translated at the
average exchange rate for the year. The resulting translation adjustments are
recorded in shareholders' equity. The Company has recognized foreign exchange
gains (losses) of approximately $31,000, $(2,000) and $162,000 in fiscal 1994,
1995 and 1996, respectively, and $0 and $(83,000) for the three months ended
March 31, 1996 and 1997, respectively.
REVENUE RECOGNITION
The Company generates product revenues primarily from its principal
product, PhoneFrame CS, an integrated system comprised of both hardware and
software. The Company's service revenues are generated from maintenance
contracts which include support, parts and labor and software update rights.
Service revenues also include fee-based installation, training and consulting
services.
The Company recognizes product revenues upon shipment of the product and
when the Company has no significant obligations yet to be satisfied. The
Company's sales contracts provide for certain payment terms normally based upon
signing the contract, customer receipt of the product, and commencement of
operation of the customer's system.
Revenues from maintenance contracts are recognized ratably over the term of
the contractual support period which ranges up to 5 years. If maintenance is
included in the original integrated product contract, such amounts are unbundled
from the license fee based on the value established by independent sale of such
maintenance to customers. Consulting revenues are primarily related to
implementation services performed under separate service arrangements related to
the installation of the Company's hardware and software products. Revenues from
consulting, installation and training services are recognized as the services
are performed.
Deferred revenues primarily relate to products that have not yet been
delivered and maintenance services which have been paid by the customers prior
to the performance of those services. Deferred revenue amounted to $2,593,000
and $3,065,000 at December 31, 1995 and 1996, respectively, and $3,851,000 at
March 31, 1997.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Research and development expenditures are charged to expense as incurred.
The system software delivers the functionality and controls the hardware
components. Computer software development costs of the system software products
are charged to research and development expense until technological feasibility
is established, after which remaining software production costs are capitalized
in accordance with SFAS No. 86, "Accounting for Costs of Computer Software to be
Sold, Leased, or Otherwise Marketed." The Company has defined technological
feasibility of its products as the point in time at which the Company has a
working model of the related product, which is when the product has achieved
"beta" status. Historically, the development costs incurred during the period
between the achievement of beta status by a product and the point at which the
product is available for general release to customers have not been material.
Accordingly,
F-9
<PAGE> 68
MELITA INTERNATIONAL CORPORATION,
MELITA EUROPE LIMITED AND INVENTIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
the Company has concluded that the amount of development costs capitalizable
under the provisions of SFAS No. 86 was not material to the financial statements
for the years ended December 31, 1994, 1995 and 1996 or for the three months
ended March 31, 1997. Therefore, the Company has charged all software
development costs to expense as incurred for the years ended December 31, 1994,
1995 and 1996 and the three months ended March 31, 1997.
WARRANTY COSTS
The Company generally warranties its products for 90 days and provides for
estimated warranty costs upon shipment of such products. Warranty costs have not
been and are not anticipated to be significant.
CONCENTRATIONS OF CREDIT RISK
Concentrations of credit risk with respect to accounts receivable are
limited due to the wide variety of customers and markets for which the Company's
services are provided as well as their dispersion across many different
geographic areas. As a result, as of December 31, 1995 and 1996, the Company did
not consider itself to have any significant concentrations of credit risk.
During 1996, the Company's five largest customers accounted for approximately
24.5% of the Company's total revenues. In 1995, the Company's five largest
customers accounted for approximately 24.8% of its total revenues. Although the
particular customers may change from period to period, the Company expects that
large sales to a limited number of customers will continue to account for a
significant percentage of its revenues in any particular period for the
foreseeable future.
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, the
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.
PRO FORMA NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Pro forma net income per common and common equivalent share is computed
using the weighted average number of shares of common stock and dilutive common
stock equivalent shares ("CSEs") from stock options using the treasury stock
method. Additionally, the weighted average common and common equivalent shares
outstanding reflect the shares issued as a result of the combination of Melita,
Melita Europe and Inventions and the effects of the stock recapitalization
discussed in Note 8 as if the events occurred at the beginning of the period.
Pursuant to the Securities and Exchange Commission Staff Accounting Bulletins,
common stock and CSEs issued at prices below the expected public offering price
during the 12-month period prior to filing of the registration statement in
connection with the Company's planned Offering have been included in the
calculation as if they were outstanding for all periods presented prior to the
Offering, regardless of whether they are dilutive. Pursuant to Staff Accounting
Bulletin 1B.3, pro forma earnings per share gives effect to the issuance by the
Company of the number of shares that, at the assumed public offering price,
would yield proceeds in the amount necessary to pay the shareholder distribution
discussed in Note 8 that is not covered by the earnings for the year.
Historical net income per share has not been presented in view of the S
corporation status in prior periods and the anticipated change in capital
structure upon closing of the planned Offering.
F-10
<PAGE> 69
MELITA INTERNATIONAL CORPORATION,
MELITA EUROPE LIMITED AND INVENTIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The book values of accounts receivable, accounts payable and other
financial instruments approximate their fair values principally because of the
short-term maturities of these instruments. The fair value of the Company's
long-term debt is estimated based on the current rates offered to the Company
for debt of similar terms and maturities. Under this method, the Company's fair
value of long-term debt was not significantly different than the stated value at
December 31, 1995 and 1996.
ACCRUED LIABILITIES
Accrued liabilities include the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- MARCH 31,
1995 1996 1997
------ ------ ---------
<S> <C> <C> <C>
Accrued salaries and wages.............................. $1,666 $2,437 $2,367
Other current liabilities............................... 1,193 807 1,506
Accrued royalties....................................... 293 689 24
Accrued rent............................................ 264 277 281
------ ------ ------
Total accrued liabilities..................... $3,416 $4,210 $4,178
====== ====== ======
</TABLE>
NEW ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board issued SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." The Company's adoption of SFAS No. 121 in the first
quarter of 1996 did not have a significant impact on the Company's combined
financial statements.
The American Institute of Certified Public Accountants has issued an
exposure draft to amend the provisions of Statement of Position 91-1, "Software
Revenue Recognition." The adoption of the standards in the current version of
the exposure draft would not be expected to have a significant impact on the
Company's combined financial statements.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year financial
statements to conform to the current year presentation.
2. NOTES PAYABLE TO SHAREHOLDER
Notes payable to shareholder are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- MARCH 31,
1995 1996 1997
------ ------ ---------
<S> <C> <C> <C>
Note payable to shareholder; due in equal quarterly
installments of $187,500 beginning July 1, 1996,
interest payable monthly at the prime rate plus 1%
(9.25% at December 31, 1996).......................... $3,000 $2,625 $ 2,437
Notes payable to shareholder; due upon demand, interest
accrues monthly at the applicable federal rate
(approximately 5.7% at February 7, 1997) (Note 8)..... 0 0 12,900
Less current maturities................................. 375 2,625 15,337
------ ------ -------
Note payable to shareholder, net of current
maturities............................................ $2,625 $ 0 $ 0
====== ====== =======
</TABLE>
F-11
<PAGE> 70
MELITA INTERNATIONAL CORPORATION,
MELITA EUROPE LIMITED AND INVENTIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Interest paid to shareholder was $251,000, $294,000 and $271,000 for the
years ended December 31, 1994, 1995 and 1996, respectively, and $69,000 and
$56,000 for the three months ended March 31, 1996 and 1997, respectively.
The installment note payable to shareholder contains an acceleration
provision at the option of the shareholder upon certain changes in capital
structure, as defined. As a result of the stock recapitalization discussed in
Note 9, that right became exercisable. The note has therefore been classified as
current at December 31, 1996 as a result of the acceleration option.
3. INCOME TAXES
In connection with the planned Offering, the Company will convert from an S
corporation to a C corporation and, accordingly, will be subject to future
federal and state income taxes. Upon conversion to C corporation status, the
Company will record deferred taxes for which it will be responsible following
termination of S corporation status. The assets below will be reflected on the
balance sheet of the Company with a corresponding non-recurring income amount in
the statement of operations at the completion of the Offering. The components of
the pro forma total deferred tax assets as of December 31, 1996 are as follows
(in thousands):
<TABLE>
<S> <C>
Deferred tax assets:
Deferred revenue.......................................... $ 321
Other accrued liabilities................................. 198
Allowance for doubtful accounts........................... 171
Accrued commissions....................................... 115
Accrued rent.............................................. 105
Depreciation.............................................. 95
Inventory................................................. 56
------
Total deferred tax assets......................... $1,061
======
</TABLE>
The following summarizes the components of the pro forma income tax
provision for the years ended December 31, 1994, 1995 and 1996 (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Current domestic taxes:
Federal................................................ $ 664 $1,572 $2,775
State.................................................. 78 185 326
Foreign taxes............................................ (9) 2 (75)
Deferred taxes........................................... 431 35 (199)
------ ------ ------
$1,164 $1,794 $2,827
====== ====== ======
</TABLE>
F-12
<PAGE> 71
MELITA INTERNATIONAL CORPORATION,
MELITA EUROPE LIMITED AND INVENTIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation from the federal statutory rate to the pro forma tax
provision for the years ended December 31, 1994, 1995 and 1996 is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Statutory federal tax rate................................. 34.0% 34.0% 34.0%
State income taxes, net of federal tax benefit............. 4.0 4.0 4.0
Foreign operations......................................... 4.0 (0.9) (1.3)
Other...................................................... 1.6 0.7 0.5
---- ---- ----
43.6% 37.8% 37.2%
==== ==== ====
</TABLE>
The Company's effective tax rate is affected by the income or loss at
Melita Europe. Melita Europe incurred a loss in fiscal 1994 and had income in
1995 and 1996. This effect is included above as foreign operations. The
Company's net operating loss carryforwards are immaterial at December 31, 1996.
4. BENEFIT PLAN
Melita has a profit-sharing plan (the "Plan") for substantially all Melita
employees meeting the eligibility requirements as defined in the plan agreement.
The Plan provides for annual contributions by Melita at the discretion of the
board of directors. The Plan also contains a 401(k) feature which allows
participants to contribute up to 15% of their eligible compensation, as defined,
and provides for discretionary employer matching contributions. Total
contributions by Melita to the Plan were $92,000, $90,000 and $119,000 for
fiscal 1994, 1995 and 1996, respectively. The Company expensed $31,000 and
$63,000 for the three months ended March 31, 1996 and 1997, respectively,
related to this Plan.
5. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
At December 31, 1996, the present value of future minimum capital lease
payments and future minimum operating lease payments (including leases with
related parties) under noncancelable operating leases were as follows (in
thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1997........................................................ $19 $ 659
1998........................................................ 0 628
1999........................................................ 0 624
2000........................................................ 0 581
2001........................................................ 0 589
Thereafter.................................................. 0 2,369
--- ------
Total future minimum lease payments............... 19 $5,450
======
Less amounts representing interest.......................... 0
---
Present value of future minimum lease payments.............. $19
===
</TABLE>
The Company's capital and operating leases are primarily for equipment and
rental of facilities. Total rental expense for operating leases was $840,000,
$728,000 and $751,000 in fiscal 1994, 1995 and 1996, respectively, and $226,000
and $162,000 for the three months ended March 31, 1996 and 1997, respectively.
In August 1994, the Company entered into a lease agreement with an
unrelated party to lease land and buildings commencing April 1995. The agreement
provides for annual rentals of approximately $542,000 to $636,000 per year over
a ten-year term. In November 1995, the Company's majority shareholder purchased
F-13
<PAGE> 72
MELITA INTERNATIONAL CORPORATION,
MELITA EUROPE LIMITED AND INVENTIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
the land and buildings and now rents them to the Company under the terms of the
original lease. Rent expense paid to the shareholder was $60,000 and $543,000 in
fiscal 1995 and 1996, respectively, and $181,000 and $136,000 for the three
months ended March 31, 1996 and 1997, respectively.
LEGAL PROCEEDINGS
Many of the Company's installations involve products that are critical to
the operations of its clients' businesses. Any failure in a Company product
could result in a claim for substantial damages against the Company, regardless
of the Company's responsibility for such failure. Although the Company attempts
to limit contractually its liability for damages arising from product failures
or negligent acts or omissions, there can be no assurance the limitations of
liability set forth in its contracts will be enforceable in all instances.
The Company is subject to legal proceedings and claims which have arisen in
the ordinary course of business. In the opinion of management, the amount of
potential liability with respect to these actions will not materially affect the
financial position or results of operations of the Company.
RELATED-PARTY TRANSACTIONS
During 1994, the Company incurred and paid $325,000 in research and
development fees to a related party (through family relationship). The Company
did not incur these fees in 1995 or 1996.
6. STOCK OPTION PLANS
During 1992, the Company approved a stock option plan (the "1992 Plan") for
key employees for which 640,000 shares of common stock were authorized for use
in the plan. During 1995, the number of authorized shares was increased to
1,000,000 shares of common stock. Options under the plan are granted at
estimated fair market value as determined by the board of directors and are
exercisable 14 months after an initial public offering or ratably over a
three-year period beginning seven years from the plan initiation date, but in no
case can the exercise period continue beyond 10 years. Options granted vest
ratably over a four- or five-year employment period. The Company reserves the
right to purchase vested options at the then-estimated fair market value, less
the applicable exercise price prior to the date of an initial public offering.
During 1994, 1995 and 1996, the Company purchased 22,311, 44,294 and 30,250,
respectively, vested but unexercisable options held by terminated employees for
$3,570, $2,658 and $39,774, respectively. Cash paid to repurchase options is
expensed as incurred.
On February 6, 1997, the Company approved the 1997 Stock Option Plan (the
"1997 Plan") for which 1,350,000 shares of common stock were authorized for
issuance less any options issued under the 1992 stock option plan. Options under
the 1997 Plan are granted at the estimated fair market value and are exercisable
based on the specific terms of the stock option grant, but in no case can extend
beyond ten years past the date of grant. The options vest primarily over a
four-year period subject to acceleration upon the achievement of certain
performance measures. On February 6, 1997, the Company issued options to
purchase an aggregate of 125,000 shares of common stock at $5.50 per share under
the 1997 Plan. As of March 31, 1997, 20,000 options were exercisable under the
1997 Plan.
F-14
<PAGE> 73
MELITA INTERNATIONAL CORPORATION,
MELITA EUROPE LIMITED AND INVENTIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Activity for the 1992 Plan and the 1997 Plan is as follows:
<TABLE>
<CAPTION>
OPTION
OPTIONS PRICE
-------- -----------
<S> <C> <C>
Options outstanding at December 31, 1993.................... 303,848 $2.75-$2.96
Granted................................................... 36,375 2.91
Exercised................................................. 0
Forfeited/repurchased..................................... (58,098) 2.75- 2.96
---------
Outstanding at December 31, 1994............................ 282,125 2.75- 2.96
Granted................................................... 740,525 2.81- 3.00
Exercised................................................. 0
Forfeited/repurchased..................................... (161,200) 2.81
---------
Outstanding at December 31, 1995............................ 861,450 2.75- 3.00
Granted................................................... 133,785 4.07
Exercised................................................. 0
Forfeited/repurchased..................................... (57,463) 2.75- 4.07
---------
Outstanding at December 31, 1996............................ 937,772 2.75- 4.07
Granted................................................... 168,325 5.50
Exercised................................................. 0
Forfeited/repurchased..................................... (2,000) 2.81- 4.07
---------
Outstanding at March 31, 1997............................... 1,104,097
=========
</TABLE>
At December 31, 1996, options to purchase 62,228 shares were available for
future grant and no shares were exercisable due to the stock option plan
provision for the exercise date noted above. At March 31, 1997, options to
purchase 20,000 shares were excercisable and 245,903 shares were available for
grant.
During 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation" which defines a fair value-based
method of accounting for an employee stock option plan or similar equity
instrument. However, it also allows an entity to continue to measure
compensation cost for those plans using the method of accounting prescribed by
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees." Entities electing to remain with the accounting in APB No. 25
must make pro forma disclosures of net income and, if presented, earnings per
share, as if the fair value-based method of accounting defined in the statement
had been applied.
The Company has elected to account for its stock-based compensation plan
under APB No. 25; however, the Company has computed for pro forma disclosure
purposes the value of all options granted during 1995 and 1996 using the
Black-Scholes option pricing model as prescribed by SFAS No. 123 using the
following weighted average assumptions used for grants in 1995 and 1996:
<TABLE>
<S> <C>
Risk-free interest rate..................................... 5.4%-7.8%
Expected dividend yield..................................... 0
Expected lives.............................................. 4-5 years
Expected volatility......................................... 65%
</TABLE>
The total value of the options granted during the years ended December 31,
1995 and 1996 were computed as approximately $996,000 and $264,000,
respectively, which would be amortized over the vesting period of the options.
If the Company had accounted for these plans in accordance with SFAS No. 123,
the
F-15
<PAGE> 74
MELITA INTERNATIONAL CORPORATION,
MELITA EUROPE LIMITED AND INVENTIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Company's reported pro forma net income and pro forma net income per share for
the years ended December 31, 1995 and 1996 would have decreased to the following
pro forma amounts (in thousands):
<TABLE>
<CAPTION>
1995 1996
------ ------
<S> <C> <C>
Pro forma net income:
As reported in the financial statements................... $2,955 $4,782
Pro forma in accordance with SFAS No. 123................. 2,867 4,581
Pro forma net income per common and common equivalent share
As reported in the financial statements................... -- .39
Pro forma in accordance with SFAS No. 123................. -- .37
</TABLE>
7. SEGMENT AND GEOGRAPHIC INFORMATION
The Company is a multinational corporation with operations in the United
States and the United Kingdom.
The following represents total revenues, net income and total assets of the
following countries representing over 10% of the combined totals for the periods
presented (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------- ------------------
1994 1995 1996 1996 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
United States:
Total revenues......................... $21,483 $27,356 $37,568 $ 9,361 $13,777
Net income............................. 3,093 4,624 7,157 2,303 3,069
Total assets........................... 16,704 19,305 23,799 20,695 26,790
United Kingdom:
Total revenues......................... $ 1,309 $ 3,252 $ 4,292 $ 415 $ 326
Net (loss) income...................... (421) 125 452 (263) (749)
Total assets........................... 931 1,623 3,270 1,638 1,315
Other:
Total revenues......................... $ 4,364 $ 4,674 $ 5,680 $ 1,245 $ 566
</TABLE>
8. SUBSEQUENT EVENTS
INITIAL PUBLIC OFFERING
In the second quarter of 1997, the Company is planning an initial public
offering of its common stock. There can be no assurance that the Offering will
be completed. Prior to the Offering, the Company will pay a cash distribution to
shareholders equal to the amount of undistributed S corporation earnings for
both Melita and Inventions from September 1, 1988 through the date of the
Offering.
COMBINATION
Concurrent with the Offering, the shareholders of Melita Europe and
Inventions will contribute their respective shares in exchange for 3,143,395
shares of Melita. The combination will be treated similar to a pooling of
interest and no step-up in basis will be recorded as the entities involved are
under common control.
UNAUDITED PRO FORMA INFORMATION
The accompanying unaudited pro forma combined balance sheet as of March 31,
1997 is based on the Company's historical balance sheet as of March 31, 1997, as
adjusted to reflect (i) the combination of Melita,
F-16
<PAGE> 75
MELITA INTERNATIONAL CORPORATION,
MELITA EUROPE LIMITED AND INVENTIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Melita Europe and Inventions through the issuance of 3,143,395 shares of
Melita's no par value common stock (post recapitalization and reverse stock
split), (ii) the payment of the notes payable to shareholder of $15,337,000 and
the accrued interest thereon as discussed below, (iii) the recording of current
deferred tax assets of approximately $1,060,000 as a result of the change in
corporate filing status upon the consummation of the offering discussed in Note
3, and (iv) the effects on historical retained earnings of the payment of the
distribution to shareholders of the undistributed S corporation earnings at
March 31, 1997. The pro forma information does not give effect to the proceeds
to the Company of the Offering.
Using a portion of the proceeds of the Offering and other funds, the
Company intends to distribute to the pre-offering shareholders all undistributed
S corporation earnings from September 1, 1988 to the effective date of the
Offering. At December 31, 1996, the undistributed S corporation earnings of the
Company were approximately $14,400,000. Subsequent to December 31, 1996, the
Company distributed these amounts to the principal shareholders in the form of
approximately $1,500,000 in cash and two notes having an aggregate principal
amount of approximately $12,900,000. The notes carry an interest rate equal to
the applicable federal rate under the Internal Revenue Code, (approximately 5.7%
at February 7, 1997). The principal amount of the notes, together with the
accrued interest on the notes through the effective date of the Offering
(estimated to be approximately $250,000), will be repaid using a portion of the
proceeds of the Offering. At March 31, 1997, the additional undistributed S
corporation earnings of the Company were estimated to be approximately
$2,500,000. The Company expects to accumulate additional earnings from April 1,
1997 to the effective date of the Offering which will also be distributed to the
pre-offering shareholders.
9. STOCK RECAPITALIZATION
On February 7, 1997, the Company and Inventions recapitalized their
authorized, issued, and outstanding common stock by declaring a stock dividend
of 99 shares of nonvoting common stock with respect to each outstanding share of
voting common stock. In connection with the stock dividend, the Company amended
its articles of incorporation to increase its authorized capital stock to
2,000,000,000 shares, consisting of 20,000,000 shares of voting common stock and
1,980,000,000 shares of nonvoting common stock and Inventions amended its
articles of incorporation to increase its authorized capital stock to 10,000
shares, consisting of 100 shares of voting common stock and 9,900 shares of
nonvoting common stock. Concurrently with the effective date of the Offering,
the Company will effect a 100 to 1 reverse stock split to return the number of
authorized, issued, and outstanding shares to the original number of shares.
Accordingly, the financial statements reflect the capitalization of the Company
as if the stock dividend and the reverse stock split occurred at the beginning
of each period presented.
Additionally, upon completion of this Offering, the Company's authorized
capital stock will consist of 100,000,000 shares of common stock, no par value
per share, and 20,000,000 shares of preferred stock, no par value per share.
F-17
<PAGE> 76
3. Inside (second to) back page graphics portray a screen generated by the
Company's Magellan product. The screen is labeled "Magellan Application
Interpreter." The text appearing above the picture of the screen is as
follows:
"Provides agent with information, not just data....
Megellan(TM) navigates multiple corporate data sources and presents
needed information in a Single System Image View(TM). Solutions from basic
"screen pops" to sophisticated customer interaction applications can be created
and modified on-the-fly without programming. Magellan(TM) allows applications to
be developed and deployed quickly, making agents more efficient by presenting
them with the information needed to make timely and informed decisions."
The image of the "Magellan Application Interpreter" screen is enhanced by text
that highlights Magellan's features as follows:
- Employs script windows to bring together text and real-time
data from multiple resources.
- Customer data may be entered with the click of a mouse.
- Customizes on-line help functions.
- Displays talk time with the call gauge.
- Programmable action buttons for background applications.
- Buttons may be customized to display specific actions and
reactions.
- Imports visual elements in graphic boxes.
-2-
<PAGE> 77
4. Inside back page is captioned:
"Melita's Command Post(TM) graphical desktop lets supervisors monitor
call center activity at a glance." Graphics portray a screen generated by
the Company's PhoneFrame(R) CS product. The screen is labeled "Production
Monitoring." Features of the screen are highlighted by the following text:
" - Call List Display Panel. Displays status of active calling
lists.
- The Tool Bar. Brings up different productivity views to
monitor and control the activity of a call center.
- Agent Status Legend. User defined legends to choose conditions
or calling states.
- ViewPort Display Area. Real time production monitoring of
agent status using customized floor plans.
- Trunk State Display Panel. Graphically depicts enabled and
disabled trunk states."
-3-
<PAGE> 78
======================================================
No dealer, sales representative or any other person has been authorized to
give any information or to make any representations in connection with this
offering other than those contained in this Prospectus, and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Company or the Underwriters. This Prospectus does not
constitute an offer to sell, or a solicitation of an offer to buy, any
securities other than the shares of Common Stock to which it relates or an offer
to, or a solicitation of, any person in any jurisdiction in which such an offer
or solicitation would be unlawful. Neither the delivery of this Prospectus nor
any sale made hereunder shall, under any circumstances, create any implication
that there has been no change in the affairs of the Company or that the
information contained herein is correct as of any time subsequent to the date
hereof.
----------------------------
TABLE OF CONTENTS
----------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 6
Termination of S Corporation Status
and Related Distributions........... 14
Use of Proceeds....................... 15
Dividend Policy....................... 15
Capitalization........................ 16
Dilution.............................. 17
Selected Combined Financial Data...... 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 20
Business.............................. 27
Management............................ 39
Principal Shareholders................ 46
Certain Transactions.................. 47
Description of Capital Stock.......... 49
Shares Eligible for Future Sale....... 53
Underwriting.......................... 54
Legal Matters......................... 55
Experts............................... 55
Additional Information................ 55
Index to Combined Financial
Statements.......................... F-1
</TABLE>
----------------------------
Until , 1997 (25 days after the date of this Prospectus), all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as Underwriters and with respect to their unsold allotments or
subscriptions.
======================================================
======================================================
3,500,000 SHARES
MELITA(R) INTERNATIONAL LOGO
COMMON STOCK
------------------------
PROSPECTUS
------------------------
MONTGOMERY SECURITIES
ROBERTSON, STEPHENS & COMPANY
, 1997
======================================================
<PAGE> 79
PART II
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 10,606
National Association of Securities Dealers, Inc. fee........ 4,000
Nasdaq National Market listing fee.......................... 54,109
Accountants' fees and expenses.............................. 250,000
Legal fees and expenses..................................... 350,000
Blue Sky fees and expenses.................................. 10,000
Transfer Agent's fees and expenses.......................... 10,000
Printing and engraving expenses............................. 200,000
Miscellaneous............................................... 411,285
----------
Total Expenses.................................... $1,300,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Amended and Restated Bylaws provide that the Company shall
indemnify each of its directors and officers to the extent that he or she is or
was a party, or is threatened to be made a party, to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative by reason of the fact that such person is or was a director,
officer, employee or agent of the Company, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement in connection
with such action, suit or proceeding; provided, however, that no indemnification
shall be made for (i) any appropriation, in violation of his duties, of any
business opportunity of the Company, (ii) acts or omissions which involve
intentional misconduct or a knowing violation of law, (iii) any liability under
Section 14-2-832 of the GBCC, which relates to unlawful payments of dividends
and unlawful stock repurchases and redemptions, or (iv) any transaction from
which he or she derived an improper personal benefit.
Section 8 of the Underwriting Agreement filed as Exhibit 1.1 hereto also
contains certain provisions pursuant to which certain officers, directors and
controlling persons of the Company may be entitled to be indemnified by the
Underwriters named therein.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, the Registrant has issued the securities set
forth below which were not registered under the Securities Act.
In connection with the Company's acquisition of all of the outstanding
shares of Melita Europe and Inventions by share exchange, upon the effective
date of this offering the Company will issue a total of 3,143,395 shares of its
Common Stock to the former shareholders of Melita Europe and Inventions. The
consideration to be issued by the Company was determined based on a share
exchange ratio analysis of the Company, Melita Europe and Inventions by an
independent appraiser which established their relative values to be $60,753,982,
$4,225,000 and $16,200,000, respectively.
The Registrant has issued stock options for an aggregate of 1,659,485
shares of its Common Stock under the 1992 Stock Option Plan and the 1997 Stock
Option Plan. Options for an aggregate of 1,104,097 shares are currently
outstanding at a weighted average exercise price of $3.43 per share.
No underwriters were engaged in connection with any of the foregoing
issuances of securities. The sale and issuance of shares listed above were
exempt from registration under the Securities Act by virtue of Sections 3(a),
3(b) and 4(a) of the Securities Act and in reliance on Rule 701 and Regulation D
promulgated thereunder.
II-1
<PAGE> 80
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits. The following is a list of exhibits filed as part of the
Registration Statement.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S> <C>
1.1 -- Form of Underwriting Agreement.
2.1+ -- Share Exchange Agreement by and between the Registrant and
the shareholders of Melita Europe Limited.
2.2+ -- Share Exchange Agreement by and between the Registrant and
the shareholders of Inventions, Inc.
3.1+ -- Restated Articles of Incorporation of the Registrant dated
June 4, 1992, as amended February 7, 1997.
3.2+ -- Bylaws of the Registrant.
3.3+ -- Form of Amended and Restated Articles of Incorporation of
the Registrant, to be effective upon the effectiveness of
this offering.
3.4+ -- Form of Amended and Restated Bylaws of the Registrant, to be
effective upon the effectiveness of this offering.
4.1+ -- See Exhibits 3.3 and 3.4 for provisions of the Amended and
Restated Articles of Incorporation and Amended and Restated
Bylaws of the Registrant defining rights of the holders of
Common Stock of the Registrant.
4.2+ -- Specimen Stock Certificate.
5.1 -- Opinion of Morris, Manning & Martin, L.L.P., Counsel to the
Registrant, as to the legality of the shares being
registered.
10.1+ -- Lease Agreement between the Registrant and 5051 Peachtree
Corners Circle, L.L.C.
10.2+ -- 1992 Stock Option Plan effective June 4, 1992, as amended
March 1, 1997.
10.3+ -- 1997 Stock Option Plan effective February 6, 1997.
10.4+ -- Employee Stock Purchase Plan adopted March 1, 1997.
10.5+ -- 401(k) Profit Sharing Plan as amended effective January 1,
1993.
10.6+ -- Employment Agreement between the Registrant and Aleksander
Szlam dated March 5, 1997.
10.7+ -- Employment Agreement between the Registrant and J. Neil
Smith dated March 5, 1997.
10.8+ -- Form of Tax Indemnification Agreement between the Registrant
and certain shareholders of the Registrant.
10.9+ -- Form of Tax Indemnification Agreement between Inventions,
Inc. and certain shareholders of Inventions, Inc.
10.10+ -- $3,000,000 Note of the Registrant in favor of Aleksander
Szlam dated June 19, 1992.
11.1+ -- Statement re: Computation of Per Share Earnings.
21.1+ -- List of Subsidiaries.
23.1 -- Consent of Arthur Andersen LLP.
23.2 -- Consent of BDO Stoy Hayward.
23.3 -- Consent of Morris, Manning & Martin, L.L.P. (included in
Exhibit 5.1).
24.1+ -- Powers of Attorney (included on signature page).
27.1+ -- Financial Data Schedule. (For SEC use only)
99.1+ -- Report of Independent Public Accountants on Financial
Statement Schedule.
</TABLE>
- ---------------
+ Previously filed.
(b) Financial Statement Schedules: Schedule II -- Valuation and Qualifying
Accounts.
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement certificates
in such denominations and registered in such names as required by the
Underwriters to permit prompt delivery to each purchaser.
II-2
<PAGE> 81
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the 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 Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(c) The Registrant hereby undertakes that:
(i) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of the
Registration Statement as of the time it was declared effective.
(ii) For purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 82
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment to the Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Atlanta, State of
Georgia on the 4th day of June, 1997.
Melita International Corporation
By: /s/ J. NEIL SMITH
------------------------------------
J. Neil Smith
President and Chief Operating
Officer
Pursuant to the requirements of the Securities Act, this Amendment to the
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ ALEKSANDER SZLAM Chairman of the Board and Chief June 4, 1997
- ----------------------------------------------------- Executive Officer (Principal
Aleksander Szlam Executive Officer)
/s/ J. NEIL SMITH Director June 4, 1997
- -----------------------------------------------------
J. Neil Smith
/s/ MARK B. ADAMS Vice President, Finance and June 4, 1997
- ----------------------------------------------------- Chief Financial Officer
Mark B. Adams (Principal Financial and
Accounting Officer)
</TABLE>
II-4
<PAGE> 83
SCHEDULE II
MELITA INTERNATIONAL CORPORATION
MELITA EUROPE LIMITED AND INVENTIONS, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
CHARGED
BALANCE AT TO COSTS BALANCE
BEGINNING AND AT END
CLASSIFICATION OF YEAR EXPENSES DEDUCTIONS(1) OF YEAR
-------------- ---------- -------- ------------- --------
<S> <C> <C> <C> <C>
1994
Allowance for doubtful accounts............. $200,000 $146,000 116,000 $230,000
Allowance for inventory obsolescence........ 40,000 40,000 64,000 16,000
1995
Allowance for doubtful accounts............. 230,000 117,000 16,000 331,000
Allowance for inventory obsolescence........ 16,000 130,000 -- 146,000
1996
Allowance for doubtful accounts............. 331,000 260,000 104,000 487,000
Allowance for inventory obsolescence........ 146,000 831,000 492,000 485,000
</TABLE>
- ---------------
(1) Represents amounts written off
<PAGE> 1
EXHIBIT 1.1
3,500,000 Shares
Melita International Corporation
Common Stock
UNDERWRITING AGREEMENT
DATED June 4, 1997
<PAGE> 2
UNDERWRITING AGREEMENT
June 4, 1997
MONTGOMERY SECURITIES
ROBERTSON, STEPHENS & COMPANY LLC
As Representatives of the several Underwriters
c/o MONTGOMERY SECURITIES
Two International Place - 25th Floor
Boston, Massachusetts 02110
Ladies and Gentlemen:
INTRODUCTORY. Melita International Corporation, a Georgia
corporation (the "Company"), proposes to issue and sell to the several
underwriters named in Schedule A (the "Underwriters") an aggregate of 3,500,000
shares (the "Firm Common Shares") of its Common Stock, no par value (the "Common
Stock"). In addition, the Company has granted to the Underwriters an option to
purchase up to an additional 525,000 shares (the "Optional Common Shares") of
Common Stock, as provided in Section 2 hereof. The Firm Common Shares and, if
and to the extent such option is exercised, the Optional Common Shares are
collectively called the "Common Shares." Montgomery Securities and Robertson,
Stephens & Company LLC have agreed to act as representatives of the several
Underwriters (in such capacity, the "Representatives") in connection with the
offering and sale of the Common Shares.
The Company has prepared and filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-1 (File No.
333-22855), which contains a form of prospectus to be used in connection with
the public offering and sale of the Common Shares. Such registration statement,
as amended, including the financial statements, exhibits and schedules thereto,
in the form in which it was declared effective by the Commission under the
Securities Act of 1933 and the rules and regulations promulgated thereunder
(collectively, the "Securities Act"), including any information deemed to be a
part thereof at the time of effectiveness pursuant to Rule 430A or Rule 434
under the Securities Act, is called the "Registration Statement." Any
registration statement filed by the Company pursuant to Rule 462(b) under the
Securities Act is called the "Rule 462(b) Registration Statement," and from and
after the date and time of filing of the Rule 462(b) Registration Statement the
term "Registration Statement" shall include the Rule 462(b) Registration
Statement. Such prospectus, in the form first used by the Underwriters to
confirm sales of the Common Shares, is called the "Prospectus"; provided,
however, if the Company has, with the consent of Montgomery Securities,
1
<PAGE> 3
elected to rely upon Rule 434 under the Securities Act, the term "Prospectus"
shall mean the Company's prospectus subject to completion (each, a "preliminary
prospectus") dated May 9, 1997 (such preliminary prospectus is called the "Rule
434 preliminary prospectus"), together with the applicable term sheet (the "Term
Sheet") prepared and filed by the Company with the Commission under Rules 434
and 424(b) under the Securities Act and all references in this Agreement to the
date of the Prospectus shall mean the date of the Term Sheet. All references in
this Agreement to the Registration Statement, the Rule 462(b) Registration
Statement, a preliminary prospectus, the Prospectus or the Term Sheet, or any
amendments or supplements to any of the foregoing, shall include any copy
thereof filed with the Commission pursuant to its Electronic Data Gathering,
Analysis and Retrieval System ("EDGAR").
The Company and Aleksander Szlam and Szlam Partners, L.P. (together the
"Principal Shareholders") hereby confirm their agreements with the Underwriters
as follows:
SECTION 1. REPRESENTATIONS AND WARRANTIES.
A. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE PRINCIPAL
SHAREHOLDERS. Each of the Company and the Principal Shareholders hereby
represent, warrant and covenant to each Underwriter as follows:
(a) Compliance with Registration Requirements. The Registration
Statement and any Rule 462(b) Registration Statement have been declared
effective by the Commission under the Securities Act. The Company has
complied to the Commission's satisfaction with all requests of the
Commission for additional or supplemental information. No stop order
suspending the effectiveness of the Registration Statement or any Rule
462(b) Registration Statement is in effect and no proceedings for such
purpose have been instituted or are pending or, to the best knowledge of
the Company, are contemplated or threatened by the Commission.
Each preliminary prospectus and the Prospectus when filed complied
in all material respects with the Securities Act and, if filed by
electronic transmission pursuant to EDGAR (except as may be permitted by
Regulation S-T under the Securities Act), was identical to the copy
thereof delivered to the Underwriters for use in connection with the
offer and sale of the Common Shares. Each of the Registration Statement,
any Rule 462(b) Registration Statement and any post-effective amendment
thereto, at the time it became effective and at all subsequent times,
complied and will comply in all material respects with the Securities Act
and did not and will not contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading. The Prospectus,
as amended or supplemented, as of its date and
-2-
<PAGE> 4
at all subsequent times, did not and will not contain any untrue
statement of a material fact or omit to state a material fact necessary
in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. The
representations and warranties set forth in the two immediately preceding
sentences do not apply to statements in or omissions from the
Registration Statement, any Rule 462(b) Registration Statement, or any
post-effective amendment thereto, or the Prospectus, or any amendments or
supplements thereto, made in reliance upon and in conformity with
information relating to any Underwriter furnished to the Company in
writing by the Representative expressly for use therein. There are no
contracts or other documents required to be described in the Prospectus
or to be filed as exhibits to the Registration Statement which have not
been described or filed as required.
(b) Offering Materials Furnished to Underwriters. The Company has
delivered to the Representatives two complete manually signed copies of
the Registration Statement and of each consent and certificate of experts
filed as a part thereof, and conformed copies of the Registration
Statement (without exhibits) and preliminary prospectuses and the
Prospectus, as amended or supplemented, in such quantities and at such
places as the Representatives have reasonably requested for each of the
Underwriters.
(c) Distribution of Offering Material By the Company. The Company
has not distributed and will not distribute, prior to the later of the
Second Closing Date (as defined below) and the completion of the
Underwriters' distribution of the Common Shares, any offering material in
connection with the offering and sale of the Common Shares other than a
preliminary prospectus, the Prospectus or the Registration Statement and
the other materials permitted by the Securities Act.
(d) The Underwriting Agreement. This Agreement has been duly
authorized, executed and delivered by, and is a valid and binding
agreement of, the Company, enforceable in accordance with its terms,
except as rights to indemnification hereunder may be limited by
applicable law and except as the enforcement hereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting the rights and remedies of creditors or by
general equitable principles.
(e) Authorization of the Common Shares. The Common Shares to be
purchased by the Underwriters from the Company have been duly authorized
for issuance and sale pursuant to this Agreement and, when issued and
delivered by the Company pursuant to this Agreement, will be validly
issued, fully paid and nonassessable.
-3-
<PAGE> 5
(f) No Applicable Registration or Other Similar Rights. There are
no persons with registration or other similar rights to have any equity
or debt securities registered for sale under the Registration Statement
or included in the offering contemplated by this Agreement, except for
such rights as have been duly waived.
(g) No Material Adverse Change. Except as otherwise disclosed in
the Prospectus, subsequent to the respective dates as of which
information is given in the Prospectus: (i) there has been no material
adverse change, or any development that could reasonably be expected to
result in a material adverse change, in the condition, financial or
otherwise, or in the earnings, business, operations or prospects, whether
or not arising from transactions in the ordinary course of business, of
the Company and its subsidiaries, considered as one entity (any such
change is called a "Material Adverse Change"); (ii) the Company and its
subsidiaries, considered as one entity, have not incurred any material
liability or obligation, indirect, direct or contingent, not in the
ordinary course of business nor entered into any material transaction or
agreement not in the ordinary course of business; and (iii) there has
been no dividend or distribution of any kind declared, paid or made by
the Company or, except for dividends paid to the Company or other
subsidiaries, any of its subsidiaries on any class of capital stock or
repurchase or redemption by the Company or any of its subsidiaries of any
class of capital stock.
(h) Independent Accountants. Arthur Andersen LLP and BDO Stoy
Hayward, who have expressed their opinion with respect to the financial
statements (which term as used in this Agreement includes the related
notes thereto) and supporting schedules filed with the Commission as a
part of the Registration Statement and included in the Prospectus, are
independent public or certified public accountants as required by the
Securities Act.
(i) Preparation of the Financial Statements. The combined
financial statements filed with the Commission as a part of the
Registration Statement and included in the Prospectus present fairly the
consolidated financial position of the Company and its subsidiaries as of
and at the dates of such financial statements and the results of their
operations and cash flows for the periods specified. The supporting
schedules included in the Registration Statement present fairly the
information required to be stated therein. Such financial statements and
supporting schedules have been prepared in conformity with generally
accepted accounting principles applied on a consistent basis throughout
the periods involved as certified by the independent accountants named in
paragraph 1(A)(h) above, except as may be expressly stated in the related
notes thereto. No other financial statements or supporting schedules are
required to be included in the Registration Statement. The financial data
set forth in the Prospectus under the captions
-4-
<PAGE> 6
"Prospectus Summary--Summary Combined Financial Information," "Selected
Combined Financial Data" and "Capitalization" fairly present the
information set forth therein on a basis consistent with that of the
audited financial statements contained in the Registration Statement.
(j) Incorporation and Good Standing of the Company and its
Subsidiaries. Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation and has corporate
power and authority to own and lease its properties and to conduct its
business as described in the Prospectus and, in the case of the Company,
to enter into and perform its obligations under this Agreement. Each of
the Company and each subsidiary is duly qualified as a foreign
corporation to transact business and is in good standing in each
jurisdiction in which such qualification is required, whether by reason
of the ownership or leasing of property or the conduct of business,
except for such jurisdictions where the failure to so qualify or to be in
good standing would not, individually or in the aggregate, result in a
Material Adverse Change. All of the issued and outstanding capital stock
of each subsidiary has been duly authorized and validly issued, is fully
paid and nonassessable and is owned by the Company, directly or through
subsidiaries, free and clear of any security interest, mortgage, pledge,
lien, encumbrance or claim. The Company does not own or control, directly
or indirectly, any corporation, association or other entity other than
the subsidiaries listed in Exhibit 21.1 to the Registration Statement.
(k) Capitalization and Other Capital Stock Matters. The
authorized, issued and outstanding capital stock of the Company is as set
forth in the Prospectus under the caption "Capitalization" (other than
for subsequent issuances, if any, pursuant to employee benefit plans
described in the Prospectus or upon exercise of outstanding options
described in the Prospectus). The Common Stock (including the Common
Shares) conforms in all material respects to the description thereof
contained in the Prospectus. All of the issued and outstanding shares of
Common Stock have been duly authorized and validly issued, are fully paid
and nonassessable and have been issued in compliance with federal and
state securities laws. None of the outstanding shares of Common Stock
were issued in violation of any preemptive rights, rights of first
refusal or other similar rights to subscribe for or purchase securities
of the Company. There are no authorized or outstanding options, warrants,
preemptive rights, rights of first refusal or other rights to purchase,
or equity or debt securities convertible into or exchangeable or
exercisable for, any capital stock of the Company or any of its
subsidiaries other than those accurately described in the Prospectus. The
description of the Company's stock option, stock bonus and other stock
plans or arrangements, and the options or other rights granted
thereunder, set forth in the Prospectus
-5-
<PAGE> 7
accurately and fairly presents the information required to be shown with
respect to such plans, arrangements, options and rights.
(l) Stock Exchange Listing. The Common Shares have been approved
for inclusion on the Nasdaq National Market, subject only to official
notice of issuance.
(m) Non-Contravention of Existing Instruments; No Further
Authorizations or Approvals Required. Neither the Company nor any of its
subsidiaries is in violation of its articles of incorporation or other
charter documents or bylaws or is in default (or, with the giving of
notice or lapse of time, would be in default) ("Default") under any
indenture, mortgage, loan or credit agreement, note, contract, franchise,
lease or other material instrument to which the Company or any of its
subsidiaries is a party or by which it or any of them may be bound, or to
which any of the property or assets of the Company or any of its
subsidiaries is subject (each, an "Existing Instrument"), except for such
Defaults as would not, individually or in the aggregate, result in a
Material Adverse Change. The Company's execution, delivery and
performance of this Agreement and consummation of the transactions
contemplated hereby and by the Prospectus (i) have been duly authorized
by all necessary corporate action and will not result in any violation of
the provisions of the articles of incorporation or other charter
documents or bylaws of the Company or any subsidiary, (ii) will not
conflict with or constitute a breach of, or Default under, or result in
the creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Company or any of its subsidiaries pursuant to,
or require the consent of any other part to, any Existing Instrument,
except for such conflicts, breaches, Defaults, liens, charges or
encumbrances as would not, individually or in the aggregate, result in a
Material Adverse Change and (iii) will not result in any violation of any
law, administrative regulation or administrative or court decree
applicable to the Company or any subsidiary. No consent, approval,
authorization or other order of, or registration or filing with, any
court or other governmental or regulatory authority or agency, is
required for the Company's execution, delivery and performance of this
Agreement and consummation of the transactions contemplated hereby and by
the Prospectus, except such as have been obtained or made by the Company
and are in full force and effect under the Securities Act, applicable
state securities or blue sky laws and from the National Association of
Securities Dealers, Inc. (the "NASD").
(n) No Material Actions or Proceedings. There are no legal or
governmental actions, suits or proceedings pending or, to the best of the
Company's knowledge, threatened (i) against or affecting the Company or
any of its subsidiaries, (ii) which has as the subject thereof any
officer or director
-6-
<PAGE> 8
of, or property owned or leased by, the Company or any of its
subsidiaries or (iii) relating to environmental or discrimination
matters, where in any such case (A) there is a reasonable possibility
that such action, suit or proceeding might be determined adversely to the
Company or such subsidiary and (B) any such action, suit or proceeding,
if so determined adversely, would reasonably be expected to result in a
Material Adverse Change or adversely affect the consummation of the
transactions contemplated by this Agreement. No material labor dispute
with the employees of the Company or any of its subsidiaries exists or,
to the best of the Company's knowledge, is threatened or imminent.
(o) Intellectual Property Rights. Except as disclosed in the
Prospectus, the Company and its subsidiaries own or possess sufficient
trademarks, trade names, patent rights, copyrights, licenses, approvals,
trade secrets and other similar rights (collectively, "Intellectual
Property Rights") reasonably necessary to conduct their businesses as now
conducted; and the expected expiration of any of such Intellectual
Property Rights would not result in a Material Adverse Change. Neither
the Company nor any of its subsidiaries has received any notice of
infringement or conflict with asserted Intellectual Property Rights of
others, which infringement or conflict, if the subject of an unfavorable
decision, would result in a Material Adverse Change.
(p) All Necessary Permits, etc. The Company and each subsidiary
possess such valid and current certificates, authorizations or permits
issued by the appropriate state, federal or foreign regulatory agencies
or bodies necessary to conduct their respective businesses, and neither
the Company nor any subsidiary has received any notice of proceedings
relating to the revocation or modification of, or non-compliance with,
any such certificate, authorization or permit which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding,
could result in a Material Adverse Change.
(q) Title to Properties. The Company and each of its subsidiaries
has good and marketable title to all the properties and assets reflected
as owned in the financial statements referred to in Section 1(A)(i) above
(or elsewhere in the Prospectus), in each case free and clear of any
security interests, mortgages, liens, encumbrances, equities, claims and
other defects, except such as do not materially and adversely affect the
value of such property and do not materially interfere with the use made
or proposed to be made of such property by the Company or such
subsidiary. The real property, improvements, equipment and personal
property held under lease by the Company or any subsidiary are held under
valid and enforceable leases, with such exceptions as are not material
and do not materially interfere with the
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<PAGE> 9
use made or proposed to be made of such real property, improvements,
equipment or personal property by the Company or such subsidiary.
(r) Tax Law Compliance. The Company and its subsidiaries have
filed all necessary federal, state and foreign income and franchise tax
returns and have paid all taxes required to be paid by any of them and,
if due and payable, any related or similar assessment, fine or penalty
levied against any of them. The Company has made adequate charges,
accruals and reserves in the applicable financial statements referred to
in Section 1(A)(i) above as required by generally accepted accounting
principles in respect of all federal, state and foreign income and
franchise taxes for all periods as to which the tax liability of the
Company or any of its subsidiaries has not been finally determined.
(s) Company Not an "Investment Company." The Company has been
advised of the rules and requirements under the Investment Company Act of
1940, as amended (the "Investment Company Act"). The Company is not, and
after receipt of payment for the Common Shares will not be, an
"investment company" within the meaning of Investment Company Act and
will conduct its business in a manner so that it will not become subject
to the Investment Company Act.
(t) Insurance. Each of the Company and its subsidiaries is insured
by recognized, financially sound and reputable institutions with policies
in such amounts and with such deductibles and covering such risks as are
generally deemed adequate and customary for their businesses including,
but not limited to, policies covering real and personal property owned or
leased by the Company and its subsidiaries against theft, damage,
destruction, acts of vandalism and other risks customarily insured
against by other comparable companies. The Company has no reason to
believe that it or any subsidiary will not be able (i) to renew its
existing insurance coverage as and when such policies expire or (ii) to
obtain comparable coverage from similar institutions as may be necessary
or appropriate to conduct its business as now conducted and at a cost
that would not result in a Material Adverse Change. Neither of the
Company nor any subsidiary has been denied any insurance coverage which
it has sought or for which it has applied.
(u) No Price Stabilization or Manipulation. The Company has not
taken and will not take, directly or indirectly, any action designed to
or that might be reasonably expected to cause or result in stabilization
or manipulation of the price of the Common Stock to facilitate the sale
or resale of the Common Shares.
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<PAGE> 10
(v) Related Party Transactions. There are no business
relationships or related-party transactions involving the Company or any
subsidiary or any other person required to be described in the Prospectus
which have not been described as required.
(w) No Unlawful Contributions or Other Payments. To the best of
the Company's knowledge after due inquiry, neither the Company nor any of
its subsidiaries nor, any employee or agent of the Company or any
subsidiary, has made any contribution or other payment to any official
of, or candidate for, any federal, state or foreign office in violation
of any law or of the character required to be disclosed in the
Prospectus.
(x) Company's Accounting System. The Company maintains a system of
accounting controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or
specific authorization; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles as applied in the United States and to
maintain accountability for assets; (iii) access to assets is permitted
only in accordance with management's general or specific authorization;
and (iv) the recorded accountability for assets is compared with existing
assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(y) Compliance with Environmental Laws. Except as would not,
individually or in the aggregate, result in a Material Adverse Change (i)
to the best of the Company's knowledge, neither the Company nor any of
its subsidiaries is in violation of any federal, state, local or foreign
law or regulation relating to pollution or protection of human health or
the environment (including, without limitation, ambient air, surface
water, groundwater, land surface or subsurface strata) or wildlife,
including without limitation, laws and regulations relating to emissions,
discharges, releases or threatened releases of chemicals, pollutants,
contaminants, wastes, toxic substances, hazardous substances, petroleum
and petroleum products (collectively, "Materials of Environmental
Concern"), or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
Materials of Environment Concern (collectively, "Environmental Laws"),
which violation includes, but is not limited to, noncompliance with any
permits or other governmental authorizations required for the operation
of the business of the Company or its subsidiaries under applicable
Environmental Laws, or noncompliance with the terms and conditions
thereof, nor has the Company or any of its subsidiaries received any
written communication, whether from a governmental authority, citizens
group, employee or otherwise, that alleges that the Company or any of its
subsidiaries is in violation of any Environmental Law; (ii) to the best
of the
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<PAGE> 11
Company's knowledge there is no claim, action or cause of action filed
with a court or governmental authority, no investigation with respect to
which the Company has received written notice, and no written notice by
any person or entity alleging potential liability for investigatory
costs, cleanup costs, governmental responses costs, natural resources
damages, property damages, personal injuries, attorneys' fees or
penalties arising out of, based on or resulting from the presence, or
release into the environment, of any Material of Environmental Concern at
any location owned, leased or operated by the Company or any of its
subsidiaries, now or in the past (collectively, "Environmental Claims"),
pending or, threatened against the Company or any of its subsidiaries or
any person or entity whose liability for any Environmental Claim the
Company or any of its subsidiaries has retained or assumed either
contractually or by operation of law; and (iii) to the best of the
Company's knowledge, there are no past or present actions, activities,
circumstances, conditions, events or incidents, including, without
limitation, the release, emission, discharge, presence or disposal of any
Material of Environmental Concern, that reasonably could result in a
violation of any Environmental Law or form the basis of a potential
Environmental Claim against the Company or any of its subsidiaries or
against any person or entity whose liability for any Environmental Claim
the Company or any of its subsidiaries has retained or assumed either
contractually or by operation of law.
(z) ERISA Compliance. The Company and its subsidiaries and any
"employee benefit plan" (as defined under the Employee Retirement Income
Security Act of 1974, as amended, and the regulations and published
interpretations thereunder (collectively, "ERISA")) established or
maintained by the Company, its subsidiaries or their "ERISA Affiliates"
(as defined below) are in compliance in all material respects with ERISA.
"ERISA Affiliate" means, with respect to the Company or a subsidiary, any
member of any group of organizations described in Sections 414(b),(c),(m)
or (o) of the Internal Revenue Code of 1986, as amended, and the
regulations and published interpretations thereunder (the "Code") of
which the Company or such subsidiary is a member. No "reportable event"
(as defined under ERISA) has occurred or is reasonably expected to occur
with respect to any "employee benefit plan" established or maintained by
the Company, its subsidiaries or any of their ERISA Affiliates. No
"employee benefit plan" established or maintained by the Company, its
subsidiaries or any of their ERISA Affiliates, if such "employee benefit
plan" were terminated, would have any "amount of unfunded benefit
liabilities" (as defined under ERISA). Neither the Company, its
subsidiaries nor any of their ERISA Affiliates has incurred or reasonably
expects to incur any liability under (i) Title IV of ERISA with respect
to termination of, or withdrawal from, any "employee benefit plan" or
(ii) Sections 412, 4971, 4975 or 4980B of the Code. Each "employee
benefit
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<PAGE> 12
plan" established or maintained by the Company, its subsidiaries or any
of their ERISA Affiliates that is intended to be qualified under Section
401(a) of the Code is so qualified and nothing has occurred, whether by
action or failure to act, which would cause the loss of such
qualification.
(aa) S Corporation Status. For all periods from its election under
Subchapter S of the Code until the date of this Agreement, the Company
was qualified as an S corporation pursuant to an election validly made
under Subchapter S of the Code (which election has not been revoked or
terminated for any such period) and the Company has not been subject to
federal corporate taxes for such periods. The Company's Subchapter S
election was duly terminated on the close of business on the date of this
Agreement, and the Company will be subject to federal corporate income
taxes from and after the date of this Agreement.
B. REPRESENTATIONS AND WARRANTIES OF THE PRINCIPAL SHAREHOLDERS. In
addition to the representations, warranties and covenants set forth in Section
1(A), the Principal Shareholders represent, warrant and covenant to each
Underwriter as follows:
(a) The Underwriting Agreement. This Agreement has been duly
authorized, executed and delivered by or on behalf of the Principal
Shareholders and is a valid and binding agreement of the Principal
Shareholders, enforceable in accordance with its terms, except as rights
to indemnification hereunder may be limited by applicable law and except
as the enforcement hereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
the rights and remedies of creditors or by general equitable principles.
(b) Non-Contravention; No Further Authorizations or Approvals
Required. The execution and delivery by the Principal Shareholders of,
and the performance by such Principal Shareholders of their obligations
under, this Agreement, will not contravene or conflict with, result in a
breach of, or constitute a Default under, or require the consent of any
other party to, any agreement or instrument to which such Principal
Shareholders are a party or by which either is bound or under which
either is entitled to any right or benefit, any provision of applicable
law or any judgment, order, decree or regulation applicable to such
Principal Shareholders of any court, regulatory body, administrative
agency, governmental body or arbitrator having jurisdiction over such
Principal Shareholders. No consent, approval, authorization or other
order of, or registration or filing with, any court or other governmental
authority or agency, is required for the consummation by such Principal
Shareholders of the transactions contemplated in this Agreement.
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<PAGE> 13
(c) No Registration or Other Similar Rights. Such Principal
Shareholders do not have any registration or other similar rights to have
any equity or debt securities registered for sale by the Company under
the Registration Statement or included in the offering contemplated by
this Agreement, except for such rights as are described in the Prospectus
under "Shares Eligible for Future Sale."
(d) No Price Stabilization or Manipulation. Such Principal
Shareholders have not taken and will not take, directly or indirectly,
any action designed to or that might be reasonably expected to cause or
result in stabilization or manipulation of the price of any security of
the Company to facilitate the sale or resale of the Common Shares.
Any certificate signed by an officer of the Company, executed by him in
his official capacity, and delivered to the Representatives or to counsel for
the Underwriters shall be deemed to be a representation and warranty by the
Company to each Underwriter as to the matters set forth therein.
SECTION 2. PURCHASE, SALE AND DELIVERY OF THE COMMON SHARES.
The Firm Common Shares. The Company agrees to issue and sell to the
several Underwriters the Firm Common Shares on the basis of the representations,
warranties and agreements and upon the terms herein set forth. On the basis of
the representations, warranties and agreements herein contained, and upon the
terms but subject to the conditions herein set forth, the Underwriters agree,
severally and not jointly, to purchase from the Company the respective number of
Firm Common Shares set forth opposite their names on Schedule A. The purchase
price per Firm Common Share to be paid by the several Underwriters to the
Company shall be $[___] per share.
The First Closing Date. Delivery of certificates for the Firm Common
Shares to be purchased by the Underwriters and payment therefor shall be made at
the offices of Montgomery Securities, 600 Montgomery Street, San Francisco,
California (or such other place as may be agreed to by the Company and the
Representatives) at 6:00 a.m. San Francisco time, on [___], or such other time
and date not later than 10:30 a.m. San Francisco time, on [___] as the
Representatives shall designate by notice to the Company (the time and date of
such closing are called the "First Closing Date"). The Company hereby
acknowledges that circumstances under which the Representatives may provide
notice to postpone the First Closing Date as originally scheduled include, but
are in no way limited to, any determination by the Company or the
Representatives to recirculate to the public copies of an amended or
supplemented Prospectus or a delay as contemplated by the provisions of Section
10.
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<PAGE> 14
The Optional Common Shares; the Second Closing Date. In addition, on the
basis of the representations, warranties and agreements herein contained, and
upon the terms but subject to the conditions herein set forth, the Company
hereby grants an option to the several Underwriters to purchase, severally and
not jointly, up to an aggregate of 525,000 Optional Common Shares from the
Company at the purchase price per share to be paid by the Underwriters for the
Firm Common Shares. The option granted hereunder is for use by the Underwriters
solely in covering any over-allotments in connection with the sale and
distribution of the Firm Common Shares. The option granted hereunder may be
exercised at any time (but not more than once) upon notice by the
Representatives to the Company, which notice may be given at any time within 30
days from the date of this Agreement. Such notice shall set forth (i) the
aggregate number of Optional Common Shares as to which the Underwriters are
exercising the option, (ii) the names and denominations in which the
certificates for the Optional Common Shares are to be registered and (iii) the
time, date and place at which such certificates will be delivered (which time
and date may be simultaneous with, but not earlier than, the First Closing Date;
and in such case the term "First Closing Date" shall refer to the time and date
of delivery of certificates for the Firm Common Shares and the Optional Common
Shares). Such time and date of delivery, if subsequent to the First Closing
Date, is called the "Second Closing Date" and shall be determined by the
Representatives and shall not be earlier than three nor later than five full
business days after delivery of such notice of exercise. If any Optional Common
Shares are to be purchased, each Underwriter agrees, severally and not jointly,
to purchase the number of Optional Common Shares (subject to such adjustments to
eliminate fractional shares as the Representatives may determine) that bears the
same proportion to the total number of Optional Common Shares to be purchased as
the number of Firm Common Shares set forth on Schedule A opposite the name of
such Underwriter bears to the total number of Firm Common Shares. The
Representatives may cancel the option at any time prior to its expiration by
giving written notice of such cancellation to the Company.
Public Offering of the Common Shares. The Representatives hereby advise
the Company that the Underwriters intend to offer for sale to the public, as
described in the Prospectus, their respective portions of the Common Shares as
soon after this Agreement has been executed and the Registration Statement has
been declared effective as the Representatives, in their sole judgment, have
determined is advisable and practicable.
Payment for the Common Shares. Payment for the Common Shares shall be
made at the First Closing Date (and, if applicable, at the Second Closing Date)
by wire transfer of immediately available funds to the order of the Company.
It is understood that the Representatives have been authorized, for their
own accounts and the accounts of the several Underwriters, to accept delivery of
and give a receipt for, and make payment of the purchase price for, the Firm
Common Shares
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<PAGE> 15
and any Optional Common Shares the Underwriters have agreed to purchase.
Montgomery Securities, individually and not as one of the Representatives of the
Underwriters, may (but shall not be obligated to) make payment for any Common
Shares to be purchased by any Underwriter whose funds shall not have been
received by the Representatives by the First Closing Date or the Second Closing
Date, as the case may be, for the account of such Underwriter, but any such
payment shall not relieve such Underwriter from any of its obligations under
this Agreement.
Delivery of the Common Shares. The Company shall deliver, or cause to be
delivered, to the Representatives for the accounts of the several Underwriters
certificates for the Firm Common Shares at the First Closing Date, against the
irrevocable release of a wire transfer of immediately available funds to an
account designated by the Company for the amount of the purchase price therefor.
The Company shall also deliver, or cause to be delivered, to the Representatives
for the accounts of the several Underwriters, certificates for the Optional
Common Shares the Underwriters have agreed to purchase at the First Closing Date
or the Second Closing Date, as the case may be, against the irrevocable release
of a wire transfer of immediately available funds to an account designated by
the Company for the amount of the purchase price therefor. The certificates for
the Common Shares shall be in definitive form and registered in such names and
denominations as the Representatives shall have requested at least two full
business days prior to the First Closing Date (or the Second Closing Date, as
the case may be) and shall be made available for inspection on the business day
preceding the First Closing Date (or the Second Closing Date, as the case may
be) at a location in New York City as the Representatives may designate. Time
shall be of the essence, and delivery at the time and place specified in this
Agreement is a further condition to the obligations of the Underwriters.
Delivery of Prospectus to the Underwriters. Not later than 12:00 p.m. on
the second business day following the date the Common Shares are released by the
Underwriters for sale to the public, the Company shall deliver or cause to be
delivered copies of the Prospectus in such quantities and at such places as the
Representatives shall reasonably request.
SECTION 3. ADDITIONAL COVENANTS OF THE COMPANY. The Company further
covenants and agrees with each Underwriter as follows:
(a) Representatives' Review of Proposed Amendments and
Supplements. During such period beginning on the date hereof and ending
on the later of the First Closing Date or such date, as in the opinion of
counsel for the Underwriters, the Prospectus is no longer required by law
to be delivered in connection with sales by an Underwriter or dealer (the
"Prospectus Delivery Period"), prior to amending or supplementing the
Registration Statement (including any registration statement filed under
Rule 462(b) under the
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<PAGE> 16
Securities Act) or the Prospectus, the Company shall furnish to the
Representatives for review a copy of each such proposed amendment or
supplement, and the Company shall not file any such proposed amendment or
supplement to which the Representatives reasonably object.
(b) Securities Act Compliance. After the date of this Agreement,
the Company shall promptly advise the Representatives in writing (i) of
the receipt of any comments of, or requests for additional or
supplemental information from, the Commission, (ii) of the time and date
of any filing of any post-effective amendment to the Registration
Statement or any amendment or supplement to any preliminary prospectus or
the Prospectus, (iii) of the time and date that any post-effective
amendment to the Registration Statement becomes effective and (iv) of the
issuance by the Commission of any stop order suspending the effectiveness
of the Registration Statement or any post-effective amendment thereto or
of any order preventing or suspending the use of any preliminary
prospectus or the Prospectus, or of any proceedings to remove, suspend or
terminate from listing or quotation the Common Stock from any securities
exchange upon which it is listed for trading or included or designated
for quotation, or of the threatening or initiation of any proceedings for
any of such purposes. If the Commission shall enter any such stop order
at any time, the Company will use its best efforts to obtain the lifting
of such order at the earliest possible moment. Additionally, the Company
agrees that it shall comply with the provisions of Rules 424(b), 430A and
434, as applicable, under the Securities Act and will use its reasonable
efforts to confirm that any filings made by the Company under such Rule
424(b) were received in a timely manner by the Commission.
(c) Amendments and Supplements to the Prospectus and Other
Securities Act Matters. If, during the Prospectus Delivery Period, any
event shall occur or condition exist as a result of which it is necessary
to amend or supplement the Prospectus in order to make the statements
therein, in the light of the circumstances when the Prospectus is
delivered to a purchaser, not misleading, or if in the opinion of the
Representatives or counsel for the Underwriters it is otherwise necessary
to amend or supplement the Prospectus to comply with law, the Company
agrees to promptly prepare (subject to Section 3(a) hereof), file with
the Commission and furnish at its own expense to the Underwriters and to
dealers, amendments or supplements to the Prospectus so that the
statements in the Prospectus as so amended or supplemented will not, in
the light of the circumstances when the Prospectus is delivered to a
purchaser, be misleading or so that the Prospectus, as amended or
supplemented, will comply with law.
(d) Copies of any Amendments and Supplements to the Prospectus.
The Company agrees to furnish the Representatives, without charge, during
the
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<PAGE> 17
Prospectus Delivery Period, as many copies of the Prospectus and any
amendments and supplements thereto as the Representatives may request.
(e) Blue Sky Compliance. The Company shall cooperate with the
Representatives and counsel for the Underwriters to qualify or register
the Common Shares for sale under (or obtain exemptions from the
application of) the Blue Sky or state securities laws of those
jurisdictions designated by the Representatives, shall comply with such
laws and shall continue such qualifications, registrations and exemptions
in effect so long as required for the distribution of the Common Shares.
The Company shall not be required to qualify as a foreign corporation or
to take any action that would subject it to general service of process in
any such jurisdiction where it is not presently qualified or where it
would be subject to taxation as a foreign corporation. The Company will
advise the Representatives promptly of the suspension of the
qualification or registration of (or any such exemption relating to) the
Common Shares for offering, sale or trading in any jurisdiction or any
initiation or threat of any proceeding for any such purpose, and in the
event of the issuance of any order suspending such qualification,
registration or exemption, the Company shall use its best efforts to
obtain the withdrawal thereof at the earliest possible moment.
(f) Use of Proceeds. The Company shall apply the net proceeds from
the sale of the Common Shares sold by it in all material respects in the
manner described under the caption "Use of Proceeds" in the Prospectus.
(g) Transfer Agent. The Company shall engage and maintain, at its
expense, a registrar and transfer agent for the Common Stock.
(h) Earnings Statement. As soon as practicable, the Company will
make generally available to its security holders and to the
Representatives an earnings statement (which need not be audited)
covering the twelve-month period beginning after the effective date of
the Registration Statement that will satisfy the last paragraph of
Section 11(a) of the Securities Act.
(i) Periodic Reporting Obligations. During the Prospectus Delivery
Period the Company shall file, on a timely basis, with the Commission and
the Nasdaq National Market all reports and documents required to be filed
under the Exchange Act. Additionally, the Company shall file with the
Commission all reports on Form SR as may be required under Rule 463 under
the Securities Act.
(j) Agreement Not To Offer or Sell Additional Securities. During
the period of 180 days following the date of the Prospectus, the Company
will not, without the prior written consent of Montgomery Securities
(which consent
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<PAGE> 18
may be withheld at the sole discretion of Montgomery Securities),
directly or indirectly, sell, offer, contract or grant any option to
sell, pledge, transfer or establish an open "put equivalent position"
within the meaning of Rule 16a-1(h) under the Exchange Act, or otherwise
dispose of or transfer, or announce the offering of, or file any
registration statement under the Securities Act in respect of, any shares
of Common Stock, options or warrants to acquire shares of the Common
Stock or securities exchangeable or exercisable for or convertible into
shares of Common Stock (other than as contemplated by this Agreement with
respect to the Common Shares); provided, however, that the Company may
issue shares of its Common Stock or options to purchase its Common Stock,
or Common Stock upon exercise of options, pursuant to any stock option,
stock bonus or other stock plan or arrangement described in the
Prospectus, but only if the holders of such shares, options, or shares
issued upon exercise of such options, agree in writing not to sell,
offer, dispose of or otherwise transfer any such shares or options during
such 180 day period without the prior written consent of Montgomery
Securities (which consent may be withheld at the sole discretion of
Montgomery Securities).
(k) Future Reports to the Representative. During the period of
five years hereafter the Company will furnish to the Representative at
Two International Place, Boston, MA 02110 Attention: M. Benjamin Howe:
(i) as soon as practicable after the end of each fiscal year, copies of
the Annual Report of the Company containing the balance sheet of the
Company as of the close of such fiscal year and statements of income,
shareholders' equity and cash flows for the year then ended and the
opinion thereon of the Company's independent public or certified public
accountants; (ii) as soon as practicable after the filing thereof, copies
of each proxy statement, Annual Report on Form 10-K, Quarterly Report on
Form 10-Q, Current Report on Form 8-K or other report filed by the
Company with the Commission, the NASD or any securities exchange; and
(iii) as soon as available, copies of any report or communication of the
Company mailed generally to holders of its capital stock.
Montgomery Securities, on behalf of the several Underwriters, may, in its
sole discretion, waive in writing the performance by the Company of any one or
more of the foregoing covenants or extend the time for their performance.
SECTION 4. PAYMENT OF EXPENSES. The Company agrees to pay all costs, fees
and expenses incurred in connection with the performance of its obligations
hereunder and in connection with the transactions contemplated hereby, including
without limitation (i) all expenses incident to the issuance and delivery of the
Common Shares (including all printing and engraving costs), (ii) all fees and
expenses of the registrar and transfer agent of the Common Stock, (iii) all
necessary issue, transfer and other stamp taxes in connection with the issuance
and sale of the Common Shares to the Underwriters, (iv) all fees and expenses of
the Company's
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<PAGE> 19
counsel, independent public or certified pubic accountants and other advisors,
(v) all costs and expenses incurred in connection with the preparation,
printing, filing, shipping and distribution of the Registration Statement
(including financial statements, exhibits, schedules, consents and certificates
of experts), each preliminary prospectus and the Prospectus, and all amendments
and supplements thereto, and this Agreement, (vi) all filing fees, attorneys'
fees and expenses incurred by the Company or the Underwriters in connection with
qualifying or registering (or obtaining exemptions from the qualification or
registration of) all or any part of the Common Shares for offer and sale under
the Blue Sky laws, and, if requested by the Representatives, preparing and
printing a "Blue Sky Survey" or memorandum, and any supplements thereto,
advising the Underwriters of such qualifications, registrations and exemptions,
(vii) the filing fees incident to, and the reasonable fees and expenses of
counsel for the Underwriters in connection with, the NASD's review and approval
of the Underwriters' participation in the offering and distribution of the
Common Shares, (viii) the fees and expenses associated with including the Common
Stock on the Nasdaq National Market, and (ix) all other fees, costs and expenses
referred to in Item 14 of Part II of the Registration Statement. Except as
provided in this Section 4, Section 6, Section 8 and Section 9 hereof, the
Underwriters shall pay their own expenses, including the fees and disbursements
of their counsel.
SECTION 5. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS. The
obligations of the several Underwriters to purchase and pay for the Common
Shares as provided herein on the First Closing Date and, with respect to the
Optional Common Shares, the Second Closing Date, shall be subject to the
accuracy of the representations and warranties on the part of the Company and
the Principal Shareholders set forth in Sections 1(A) and 1(B) hereof as of the
date hereof and as of the First Closing Date as though then made and, with
respect to the Optional Common Shares, as of the Second Closing Date as though
then made, to the timely performance by the Company and the Principal
Shareholders of their respective covenants and other obligations hereunder, and
to each of the following additional conditions:
(a) Accountants' Comfort Letter. On the date hereof, the
Representatives shall have received from Arthur Andersen LLP and BDO Stoy
Hayward, independent public or certified public accountants for the
Company, letters dated the date hereof addressed to the Underwriters, in
form and substance satisfactory to the Representatives, containing
statements and information of the type ordinarily included in
accountants' "comfort letters" to underwriters, delivered according to
Statement of Auditing Standards No. 72 (or any successor bulletin), with
respect to the audited and unaudited financial statements and certain
financial information contained in the Registration Statement and the
Prospectus (and the Representatives shall have received additional
conformed copies for each of the Underwriters of such accountants'
letter.
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<PAGE> 20
(b) Compliance with Registration Requirements; No Stop Order; No
Objection from NASD. For the period from and after effectiveness of this
Agreement and prior to the First Closing Date and, with respect to the
Optional Common Shares, the Second Closing Date:
(i) the Company shall have filed the Prospectus with the
Commission (including the information required by Rule 430A under
the Securities Act) in the manner and within the time period
required by Rule 424(b) under the Securities Act; or the Company
shall have filed a post-effective amendment to the Registration
Statement containing the information required by such Rule 430A,
and such post-effective amendment shall have become effective; or,
if the Company elected to rely upon Rule 434 under the Securities
Act and obtained the Representatives' consent thereto, the Company
shall have filed a Term Sheet with the Commission in the manner
and within the time period required by such Rule 424(b);
(ii) no stop order suspending the effectiveness of the
Registration Statement, any Rule 462(b) Registration Statement, or
any post-effective amendment to the Registration Statement, shall
be in effect and no proceedings for such purpose shall have been
instituted or threatened by the Commission; and
(iii) the NASD shall have raised no objection to the
fairness and reasonableness of the underwriting terms and
arrangements.
(c) No Material Adverse Change. For the period from and after the
date of this Agreement and prior to the First Closing Date and, with
respect to the Optional Common Shares, the Second Closing Date, in the
judgment of the Representatives there shall not have occurred any
Material Adverse Change.
(d) Opinions of Counsel for the Company and the Principal
Shareholders. On each of the First Closing Date and the Second Closing
Date the Representatives shall have received (i) the favorable opinion of
Morris, Manning & Martin L.L.P., counsel for the Company and the
Principal Shareholders, dated as of such Closing Date, the form of which
is attached as Exhibit A and (ii) the favorable opinion of Jones & Askew,
LLP, patent counsel for the Company, the form of which is attached as
Exhibit B (and the Representatives shall have received additional
conformed copies of such counsels' legal opinions for each of the several
Underwriters).
(e) Opinion of Counsel for the Underwriters. On each of the First
Closing Date and the Second Closing Date the Representatives shall have
received the
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favorable opinion of Hale and Dorr LLP, counsel for the Underwriters,
dated as of such Closing Date, with respect to the matters set forth in
paragraphs (i), (vii), (viii), (ix), (xi), (xii), and the next-to-last
paragraph of Exhibit A (and the Representatives shall have received
additional conformed copies of such counsel's legal opinion for each of
the several Underwriters).
(f) Officers' Certificate. On each of the First Closing Date and
the Second Closing Date the Representatives shall have received a written
certificate executed by the Chairman of the Board, Chief Executive
Officer or President of the Company and the Chief Financial Officer or
Chief Accounting Officer of the Company, dated as of such Closing Date,
to the effect set forth in subsections (b)(ii) and (c) of this Section
5, and further to the effect that:
(i) for the period from and after the date of this
Agreement and prior to such Closing Date, there has not occurred any
Material Adverse Change;
(ii) the representations, warranties and covenants of the
Company set forth in Section 1(A) of this Agreement are true and correct
with the same force and effect as though expressly made on and as of such
Closing Date; and
(iii) the Company has complied with all the agreements and
satisfied all the conditions on its part to be performed or satisfied at
or prior to such Closing Date.
(g) Bring-down Comfort Letter. On each of the First Closing Date
and the Second Closing Date the Representatives shall have received from
Arthur Andersen LLP and BDO Stoy Hayward, independent public or certified
public accountants for the Company, letters dated such date, in form and
substance satisfactory to the Representatives, to the effect that they
reaffirm the statements made in the letters furnished by them pursuant to
subsection (a) of this Section 5, except that the specified date referred
to therein for the carrying out of procedures shall be no more than three
business days prior to the First Closing Date or Second Closing Date, as
the case may be (and the Representatives shall have received additional
conformed copies of such accountants' letter for each of the several
Underwriters).
(h) Lock-Up Agreement from Certain Shareholders of the Company. On
the date hereof, the Company shall have furnished to the Representatives
an agreement in the form of Exhibit C hereto from each director, officer
and each beneficial owner of Common Stock (as defined and determined
according to Rule 13d-3 under the Exchange Act, except that a one hundred
eighty day period shall be used rather than the sixty day period set
forth therein), and
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such agreement shall be in full force and effect on each of the First
Closing Date and the Second Closing Date.
(i) Additional Documents. On or before each of the First
Closing Date and the Second Closing Date, the Representatives and counsel
for the Underwriters shall have received such information, documents and
opinions as they may reasonably require for the purposes of enabling them
to pass upon the issuance and sale of the Common Shares as contemplated
herein, or in order to evidence the accuracy of any of the
representations and warranties, or the satisfaction of any of the
conditions or agreements, herein contained.
If any condition specified in this Section 5 is not satisfied when and as
required to be satisfied, this Agreement may be terminated by the
Representatives by notice to the Company at any time on or prior to the First
Closing Date and, with respect to the Optional Common Shares, at any time prior
to the Second Closing Date, which termination shall be without liability on the
part of any party to any other party, except that Section 4, Section 6, Section
8 and Section 9 shall at all times be effective and shall survive such
termination.
SECTION 6. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If this Agreement is
terminated by the Representatives pursuant to Section 5, Section 7, Section 10
or Section 11, or if the sale to the Underwriters of the Common Shares on the
First Closing Date is not consummated because of any refusal, inability or
failure on the part of the Company to perform any agreement herein or to comply
with any provision hereof, the Company agrees to reimburse the Representatives
and the other Underwriters (or such Underwriters as have terminated this
Agreement with respect to themselves), severally, upon demand for all
out-of-pocket expenses that shall have been reasonably incurred by the
Representatives and the Underwriters in connection with the proposed purchase
and the offering and sale of the Common Shares, including but not limited to
fees and disbursements of counsel, printing expenses, travel expenses, postage,
facsimile and telephone charges.
SECTION 7. EFFECTIVENESS OF THIS AGREEMENT. This Agreement shall not
become effective until the later of (i) the execution of this Agreement by the
parties hereto and (ii) notification by the Commission to the Company and the
Representatives of the effectiveness of the Registration Statement under the
Securities Act. Prior to such effectiveness, this Agreement may be terminated by
any party by notice to each of the other parties hereto, and any such
termination shall be without liability on the part of (a) the Company to any
Underwriter, except that the Company shall be obligated to reimburse the
expenses of the Representatives and the Underwriters pursuant to Sections 4 and
6 hereof, (b) of any Underwriter to the Company, or (c) of any party hereto to
any other party except that the provisions of Section 8 and Section 9 shall at
all times be effective and shall survive such termination.
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<PAGE> 23
SECTION 8. INDEMNIFICATION.
(a) Indemnification of the Underwriters. Each of the Company and
the Principal Shareholders, jointly and severally, agree to indemnify and
hold harmless each Underwriter, its officers and employees, and each
person, if any, who controls any Underwriter within the meaning of the
Securities Act and the Exchange Act against any loss, claim, damage,
liability or expense, as incurred, to which such Underwriter or such
controlling person may become subject, under the Securities Act, the
Exchange Act or other federal or state statutory law or regulation, or at
common law or otherwise (including in settlement of any litigation, if
such settlement is effected with the written consent of the Company or
the Principal Shareholders, as the case may be), insofar as such loss,
claim, damage, liability or expense (or actions in respect thereof as
contemplated below) arises out of or is based (i) upon any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement, or any amendment thereto, including any
information deemed to be a part thereof pursuant to Rule 430A or Rule 434
under the Securities Act, or the omission or alleged omission therefrom
of a material fact required to be stated therein or necessary to make the
statements therein not misleading; or (ii) upon any untrue statement or
alleged untrue statement of a material fact contained in any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto), or
the omission or alleged omission therefrom of a material fact necessary
in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; or (iii) in
whole or in part upon any inaccuracy in the representations and
warranties of the Company or the Principal Shareholders contained herein;
or (iv) in whole or in part upon any failure of the Company or the
Principal Shareholders to perform their respective obligations hereunder
or under law; or (v) any act or failure to act or any alleged act or
failure to act by any Underwriter in connection with, or relating in any
manner to, the Common Stock or the offering contemplated hereby, and
which is included as part of or referred to in any loss, claim, damage,
liability or action arising out of or based upon any matter covered by
clause (i) or (ii) above; provided that neither the Company nor the
Principal Shareholders shall be liable under this clause (v) to the
extent that a court of competent jurisdiction shall have determined by a
final judgment that such loss, claim, damage, liability or action
resulted directly from any such acts or failures to act undertaken or
omitted to be taken by such Underwriter through its gross negligence or
willful misconduct; and to reimburse each Underwriter and each such
controlling person for any and all expenses (including the fees and
disbursements of counsel chosen by Montgomery Securities) as such
expenses are reasonably incurred by such Underwriter or such controlling
person in connection with investigating, defending, settling,
compromising or paying any such loss, claim, damage,
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<PAGE> 24
liability, expense or action; provided that the foregoing indemnity
agreement shall not apply to any loss, claim, damage, liability or
expense to the extent, but only to the extent, arising out of or based
upon any untrue statement or alleged untrue statement or omission or
alleged omission made in reliance upon and in conformity with written
information furnished to the Company by the Representatives expressly for
use in the Registration Statement, any preliminary prospectus or the
Prospectus (or any amendment or supplement thereto); and provided,
further, that with respect to any preliminary prospectus, the foregoing
indemnity agreement shall not inure to the benefit of any Underwriter
from whom the person asserting any loss, claim, damage, liability or
expense purchased Common Shares, or any person controlling such
Underwriter, if copies of the Prospectus were timely delivered to the
Underwriter pursuant to Section 2 and a copy of the Prospectus (as then
amended or supplemented if the Company shall have furnished any
amendments or supplements thereto) was not sent or given by or on behalf
of such Underwriter to such person, if required by law so to have been
delivered, at or prior to the written confirmation of the sale of the
Common Shares to such person, and if the Prospectus (as so amended or
supplemented) would have cured the defect giving rise to such loss,
claim, damage, liability or expense; and provided, further, that the
Principal Shareholders shall not be liable under this Section 8(a) for an
aggregate amount in excess of the sum of (i) $15,525,000 plus (ii) the
aggregate value of any dividends or distributions (other than the
distribution of the 1997 Notes described in the Prospectus and excluding
any payments of principal or interest under the 1992 Note or the 1997
Notes) made to, or declared or committed to be made to, the shareholders
of the Company or any of its subsidiaries between January 1, 1997 and the
First Closing Date; and provided, further, that the Principal
Shareholders shall not be required to provide indemnification hereunder
until the Underwriter or controlling person seeking indemnification shall
have first made a demand for payment on the Company with respect to any
loss, claim, damage, liability or expense and the Company shall have
either rejected such demand or failed to make such requested payment
within 60 days after receipt thereof. The indemnity agreement set forth
in this Section 8(a) shall be in addition to any liabilities that the
Company and the Principal Shareholders may otherwise have.
(b) Indemnification of the Company, its Directors and Officers.
Each Underwriter agrees, severally and not jointly, to indemnify and hold
harmless the Principal Shareholders, the Company, each of its directors,
each of its officers who signed the Registration Statement and each
person, if any, who controls the Company within the meaning of the
Securities Act or the Exchange Act, against any loss, claim, damage,
liability or expense, as incurred, to which the Company, or any such
director, officer or controlling person, or the Principal Shareholders
may become subject, under the Securities
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<PAGE> 25
Act, the Exchange Act, or other federal or state statutory law or
regulation, or at common law or otherwise (including in settlement of any
litigation, if such settlement is effected with the written consent of
such Underwriter), insofar as such loss, claim, damage, liability or
expense (or actions in respect thereof as contemplated below) arises out
of or is based upon any untrue or alleged untrue statement of a material
fact contained in the Registration Statement, any preliminary prospectus
or the Prospectus (or any amendment or supplement thereto), or arises out
of or is based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, in each case to the extent, but only
to the extent, that such untrue statement or alleged untrue statement or
omission or alleged omission was made in the Registration Statement, any
preliminary prospectus, the Prospectus (or any amendment or supplement
thereto), in reliance upon and in conformity with written information
furnished to the Company by the Representatives expressly for use
therein; and to reimburse the Company, the Principal Shareholders, or any
such director, officer or controlling person for any legal and other
expense reasonably incurred by the Company, the Principal Shareholders,
or any such director, officer or controlling person in connection with
investigating, defending, settling, compromising or paying any such loss,
claim, damage, liability, expense or action. The Company hereby
acknowledges that the only information that the Underwriters have
furnished to the Company expressly for use in the Registration Statement,
any preliminary prospectus or the Prospectus (or any amendment or
supplement thereto) are the statements set forth (A) as the last
paragraph on the inside front cover page of the Prospectus concerning
stabilization by the Underwriters and (B) in the table in the first
paragraph and as the second and second to last paragraphs under the
caption "Underwriting" in the Prospectus; and the Underwriters confirm
that such statements are correct. The indemnity agreement set forth in
this Section 8(b) shall be in addition to any liabilities that each
Underwriter may otherwise have.
(c) Notifications and Other Indemnification Procedures. Promptly
after receipt by an indemnified party under this Section 8 of notice of
the commencement of any action, such indemnified party will, if a claim
in respect thereof is to be made against an indemnifying party under this
Section 8, notify the indemnifying party in writing of the commencement
thereof, but the omission so to notify the indemnifying party will not
relieve it from any liability which it may have to any indemnified party
for contribution or otherwise than under the indemnity agreement
contained in this Section 8 or to the extent it is not prejudiced as a
proximate result of such failure. In case any such action is brought
against any indemnified party and such indemnified party seeks or intends
to seek indemnity from an indemnifying party, the indemnifying party will
be entitled to participate in, and, to the
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extent that it shall elect, jointly with all other indemnifying parties
similarly notified, by written notice delivered to the indemnified party
promptly after receiving the aforesaid notice from such indemnified
party, to assume the defense thereof with counsel reasonably satisfactory
to such indemnified party; provided, however, if the defendants in any
such action include both the indemnified party and the indemnifying party
and the indemnified party shall have reasonably concluded that a conflict
may arise between the positions of the indemnifying party and the
indemnified party in conducting the defense of any such action or that
there may be legal defenses available to it and/or other indemnified
parties which are different from or additional to those available to the
indemnifying party, the indemnified party or parties shall have the right
to select separate counsel to assume such legal defenses and to otherwise
participate in the defense of such action on behalf of such indemnified
party or parties. Upon receipt of notice from the indemnifying party to
such indemnified party of such indemnifying party's election so to assume
the defense of such action and approval by the indemnified party of
counsel, the indemnifying party will not be liable to such indemnified
party under this Section 8 for any legal or other expenses subsequently
incurred by such indemnified party in connection with the defense thereof
unless (i) the indemnified party shall have employed separate counsel in
accordance with the proviso to the next preceding sentence (it being
understood, however, that the indemnifying party shall not be liable for
the expenses of more than one separate counsel (together with local
counsel), approved by the indemnifying party (Montgomery Securities in
the case of Section 8(b) and Section 9), representing the indemnified
parties who are parties to such action) or (ii) the indemnifying party
shall not have employed counsel satisfactory to the indemnified party to
represent the indemnified party within a reasonable time after notice of
commencement of the action, in each of which cases the fees and expenses
of counsel shall be at the expense of the indemnifying party.
(d) Settlements. The indemnifying party under this Section 8 shall
not be liable for any settlement of any proceeding effected without its
written consent, but if settled with such consent or if there be a final
judgment for the plaintiff, the indemnifying party agrees to indemnify
the indemnified party against any loss, claim, damage, liability or
expense by reason of such settlement or judgment. Notwithstanding the
foregoing sentence, if at any time an indemnified party shall have
requested an indemnifying party to reimburse the indemnified party for
fees and expenses of counsel as contemplated by Section 8(c) hereof, the
indemnifying party agrees that it shall be liable for any settlement of
any proceeding effected without its written consent if (i) such
settlement is entered into more than 30 days after receipt by such
indemnifying party of the aforesaid request and (ii) such indemnifying
party shall not have reimbursed the indemnified party in accordance with
such request prior to the date of such settlement. No indemnifying party
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shall, without the prior written consent of the indemnified party, effect
any settlement, compromise or consent to the entry of judgment in any
pending or threatened action, suit or proceeding in respect of which any
indemnified party is or could have been a party and indemnity was or
could have been sought hereunder by such indemnified party, unless such
settlement, compromise or consent includes an unconditional release of
such indemnified party from all liability on claims that are the subject
matter of such action, suit or proceeding.
SECTION 9. CONTRIBUTION. If the indemnification provided for in Section 8
is for any reason held to be unavailable to or otherwise insufficient to hold
harmless an indemnified party in respect of any losses, claims, damages,
liabilities or expenses referred to therein, then each indemnifying party shall
contribute to the aggregate amount paid or payable by such indemnified party, as
incurred, as a result of any losses, claims, damages, liabilities or expenses
referred to therein (i) in such proportion as is appropriate to reflect the
relative benefits received by the Company and the Principal Shareholders, on the
one hand, and the Underwriters, on the other hand, from the offering of the
Common Shares pursuant to this Agreement or (ii) if the allocation provided by
clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company and the Principal Shareholders,
on the one hand, and the Underwriters, on the other hand, in connection with the
statements or omissions or inaccuracies in the representations and warranties
herein which resulted in such losses, claims, damages, liabilities or expenses,
as well as any other relevant equitable considerations. The relative benefits
received by the Company and the Principal Shareholders, on the one hand, and the
Underwriters, on the other hand, in connection with the offering of the Common
Shares pursuant to this Agreement shall be deemed to be in the same respective
proportions as the total net proceeds from the offering of the Common Shares
pursuant to this Agreement (before deducting expenses) received by the Company,
and the total underwriting discount received by the Underwriters, in each case
as set forth on the front cover page of the Prospectus (or, if Rule 434 under
the Securities Act is used, the corresponding location on the Term Sheet) bear
to the aggregate initial public offering price of the Common Shares as set forth
on such cover. The relative fault of the Company and the Principal Shareholders,
on the one hand, and the Underwriters, on the other hand, shall be determined by
reference to, among other things, whether any such untrue or alleged untrue
statement of a material fact or omission or alleged omission to state a material
fact or any such inaccurate or alleged inaccurate representation or warranty
relates to information supplied by the Company or the Principal Shareholders, on
the one hand, or the Underwriters, on the other hand, and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission.
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The amount paid or payable by a party as a result of the losses,
claims, damages, liabilities and expenses referred to above shall be deemed to
include, subject to the limitations set forth in Section 8(c), any legal or
other fees or expenses reasonably incurred by such party in connection with
investigating or defending any action or claim. The provisions set forth in
Section 8(c) with respect to notice of commencement of any action shall apply if
a claim for contribution is to be made under this Section 9; provided, however,
that no additional notice shall be required with respect to any action for which
notice has been given under Section 8(c) for purposes of indemnification.
The Company, the Principal Shareholders and the Underwriters agree that
it would not be just and equitable if contribution pursuant to this Section 9
were determined solely by pro rata allocation (even if the Underwriters were
treated as one entity for such purpose) or by any other method of allocation
which does not take account of the equitable considerations referred to in this
Section 9.
Notwithstanding the provisions of this Section 9, no Underwriter shall
be required to contribute any amount in excess of the underwriting commissions
received by such Underwriter in connection with the Common Shares underwritten
by it and distributed to the public. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 9 are several, and not joint, in proportion to their
respective underwriting commitments as set forth opposite their names in
Schedule A. For purposes of this Section 9, each officer and employee of an
Underwriter and each person, if any, who controls an Underwriter within the
meaning of the Securities Act and the Exchange Act shall have the same rights to
contribution as such Underwriter, and each director of the Company, each officer
of the Company who signed the Registration Statement, and each person, if any,
who controls the Company within the meaning of the Securities Act and the
Exchange Act shall have the same rights to contribution as the Company.
SECTION 10. DEFAULT OF ONE OR MORE OF THE SEVERAL UNDERWRITERS. If, on
the First Closing Date or the Second Closing Date, as the case may be, any one
or more of the several Underwriters shall fail or refuse to purchase Common
Shares that it or they have agreed to purchase hereunder on such date, and the
aggregate number of Common Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase does not exceed 10% of the
aggregate number of the Common Shares to be purchased on such date, the other
Underwriters shall be obligated, severally, in the proportions that the number
of Firm Common Shares set forth opposite their respective names on Schedule A
bears to the aggregate number of Firm Common Shares set forth opposite the names
of all such non-defaulting Underwriters, or in such other proportions as may be
specified by the
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<PAGE> 29
Representatives with the consent of the non-defaulting Underwriters, to purchase
the Common Shares which such defaulting Underwriter or Underwriters agreed but
failed or refused to purchase on such date. If, on the First Closing Date or the
Second Closing Date, as the case may be, any one or more of the Underwriters
shall fail or refuse to purchase Common Shares and the aggregate number of
Common Shares with respect to which such default occurs exceeds 10% of the
aggregate number of Common Shares to be purchased on such date, and arrangements
satisfactory to the Representatives and the Company for the purchase of such
Common Shares are not made within 48 hours after such default, this Agreement
shall terminate without liability of any party (other than the defaulting
Underwriter(s)) to any other party except that the expenses to be paid by the
Company under the provisions of Section 4, Section 8 and Section 9 shall at all
times be effective and shall survive such termination. In any such case either
the Representatives or the Company shall have the right to postpone the First
Closing Date or the Second Closing Date, as the case may be, but in no event for
longer than seven days in order that the required changes, if any, to the
Registration Statement and the Prospectus or any other documents or arrangements
may be effected.
As used in this Agreement, the term "Underwriter" shall be deemed to
include any person substituted for a defaulting Underwriter under this Section
10. Any action taken under this Section 10 shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
SECTION 11. TERMINATION OF THIS AGREEMENT. Prior to the First Closing
Date this Agreement may be terminated by the Representatives by notice given to
the Company if at any time (i) trading or quotation in any of the Company's
securities shall have been suspended or limited by the Commission or by the
Nasdaq Stock Market, or trading in securities generally on either the Nasdaq
Stock Market or the New York Stock Exchange shall have been suspended or
limited, or minimum or maximum prices shall have been generally established on
any of such stock exchanges by the Commission or the NASD; (ii) a general
banking moratorium shall have been declared by any of federal, New York or
California authorities; (iii) there shall have occurred any outbreak or
escalation of national or international hostilities or any crisis or calamity,
or any change in the United States or international financial markets, or any
substantial change or development involving a prospective substantial change in
United States' or international political, financial or economic conditions, as
in the judgment of the Representatives is material and adverse and makes it
impracticable to market the Common Shares in the manner and on the terms
described in the Prospectus or to enforce contracts for the sale of securities;
(iv) in the judgment of the Representatives there shall have occurred any
Material Adverse Change; or (v) the Company shall have sustained a loss by
strike, fire, flood, earthquake, accident or other calamity of such character as
in the judgment of the Representatives may interfere materially with the conduct
of the business and operations of the Company regardless of whether or not such
loss shall have been
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insured. Any termination pursuant to this Section 11 shall be without liability
on the part of (a) the Company or the Principal Shareholders to any Underwriter,
except that the Company shall be obligated to reimburse the expenses of the
Representatives and the Underwriters pursuant to Sections 4 and 6 hereof, (b)
any Underwriter to the Company, or (c) of any party hereto to any other party
except that the provisions of Section 8 and Section 9 shall at all times be
effective and shall survive such termination.
SECTION 12. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY. The
respective indemnities, agreements, representations, warranties and other
statements of the Company, of its officers, of the Principal Shareholders and of
the several Underwriters set forth in or made pursuant to this Agreement will
remain in full force and effect, regardless of any investigation made by or on
behalf of any Underwriter or the Company or any of its or their partners,
officers or directors or any controlling person, or the Principal Shareholders,
as the case may be, and will survive delivery of and payment for the Common
Shares sold hereunder and any termination of this Agreement.
SECTION 13. NOTICES. All communications hereunder shall be in writing and
shall be mailed, hand delivered or telecopied and confirmed to the parties
hereto as follows:
If to the Representatives:
Montgomery Securities
600 Montgomery Street
San Francisco, California 94111
Facsimile: 415-249-5558
Attention: Richard A. Smith
with copies to:
Montgomery Securities
600 Montgomery Street
San Francisco, California 94111
Facsimile: (415) 249-5553
Attention: David A. Baylor, Esq.
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<PAGE> 31
Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109
Facsimile: (617) 526-5000
Attention: Mark G. Borden, Esq.
If to the Company:
Melita International Corporation
5051 Peachtree Corners Circle
Norcross, Georgia 30092-2500
Facsimile: (770) 409-4445
Attention: J. Neil Smith, President
with a copy to:
Morris, Manning & Martin L.L.P.
3343 Peachtree Road, NE
Suite 1600
Atlanta, Georgia 30326
Facsimile: (404) 365-9532
Attention: John F. Smith, Esq.
Any party hereto may change the address for receipt of communications by giving
written notice to the others.
SECTION 14. SUCCESSORS. This Agreement will inure to the benefit of and
be binding upon the parties hereto, including any substitute Underwriters
pursuant to Section 10 hereof, and to the benefit of the employees, officers and
directors and controlling persons referred to in Section 8 and Section 9, and in
each case their respective successors, personal representatives and assigns, and
no other person will have any right or obligation hereunder. The term
"successors" shall not include any purchaser of the Common Shares as such from
any of the Underwriters merely by reason of such purchase.
SECTION 15. PARTIAL UNENFORCEABILITY. The invalidity or unenforceability
of any Section, paragraph or provision of this Agreement shall not affect the
validity or enforceability of any other Section, paragraph or provision hereof.
If any Section, paragraph or provision of this Agreement is for any reason
determined to be invalid or unenforceable, there shall be deemed to be made such
minor changes (and only such minor changes) as are necessary to make it valid
and enforceable.
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SECTION 16. GOVERNING LAW PROVISIONS.
(a) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK
APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED IN SUCH STATE.
(b) Consent to Jurisdiction. Any legal suit, action or proceeding
arising out of or based upon this Agreement or the transactions
contemplated hereby ("Related Proceedings") may be instituted in the
federal courts of the United States of America located in the City and
County of San Francisco or the courts of the State of California in each
case located in the City and County of San Francisco (collectively, the
"Specified Courts"), and each party irrevocably submits to the exclusive
jurisdiction (except for proceedings instituted in regard to the
enforcement of a judgment of any such court (a "Related Judgment"), as to
which such jurisdiction is non-exclusive) of such courts in any such
suit, action or proceeding. Service of any process, summons, notice or
document by mail to such party's address set forth above shall be
effective service of process for any suit, action or other proceeding
brought in any such court. The parties irrevocably and unconditionally
waive any objection to the laying of venue of any suit, action or other
proceeding in the Specified Courts and irrevocably and unconditionally
waive and agree not to plead or claim in any such court that any such
suit, action or other proceeding brought in any such court has been
brought in an inconvenient forum.
(c) Waiver of Immunity. With respect to any Related Proceeding,
each party irrevocably waives, to the fullest extent permitted by
applicable law, all immunity (whether on the basis of sovereignty or
otherwise) from jurisdiction, service of process, attachment (both before
and after judgment) and execution to which it might otherwise be entitled
in the Specified Courts, and with respect to any Related Judgment, each
party waives any such immunity in the Specified Courts or any other court
of competent jurisdiction, and will not raise or claim or cause to be
pleaded any such immunity at or in respect of any such Related Proceeding
or Related Judgment, including, without limitation, any immunity pursuant
to the United States Foreign Sovereign Immunities Act of 1976, as
amended.
SECTION 17. GENERAL PROVISIONS. This Agreement constitutes the entire
agreement of the parties to this Agreement and supersedes all prior written or
oral and all contemporaneous oral agreements, understandings and negotiations
with respect to the subject matter hereof. This Agreement may be executed in two
or more counterparts, each one of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Agreement
-31-
<PAGE> 33
may not be amended or modified unless in writing by all of the parties hereto,
and no condition herein (express or implied) may be waived unless waived in
writing by each party whom the condition is meant to benefit. The Table of
Contents and the Section headings herein are for the convenience of the parties
only and shall not affect the construction or interpretation of this Agreement.
Each of the parties hereto acknowledges that it is a sophisticated
business person who was adequately represented by counsel during negotiations
regarding the provisions hereof, including, without limitation, the
indemnification provisions of Section 8 and the contribution provisions of
Section 9, and is fully informed regarding said provisions. Each of the parties
hereto further acknowledges that the provisions of Sections 8 and 9 hereto
fairly allocate the risks in light of the ability of the parties to investigate
the Company, its affairs and its business in order to assure that adequate
disclosure has been made in the Registration Statement, any preliminary
prospectus and the Prospectus (and any amendments and supplements thereto), as
required by the Securities Act and the Exchange Act.
-32-
<PAGE> 34
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to the Company the enclosed copies hereof,
whereupon this instrument, along with all counterparts hereof, shall become a
binding agreement in accordance with its terms.
Very truly yours,
MELITA INTERNATIONAL CORPORATION
By:
--------------------------
J. Neil Smith,
President
PRINCIPAL SHAREHOLDERS
Aleksander Szlam
SZLAM PARTNERS, L.P.
By:
--------------------------
Szlam Management Company, LLC
By:
--------------------------
Aleksander Szlam, Member
By:
--------------------------
Halina Szlam, Member
The foregoing Underwriting Agreement is hereby confirmed and accepted by
the Representatives in San Francisco, California as of the date first above
written.
-33-
<PAGE> 35
MONTGOMERY SECURITIES
ROBERTSON, STEPHENS & COMPANY LLC
Acting as Representatives of the several Underwriters named in the attached
Schedule A.
By: MONTGOMERY SECURITIES
By:
----------------------------------
Authorized Signatory
-34-
<PAGE> 36
SCHEDULE A
<TABLE>
<CAPTION>
NUMBER OF
FIRM COMMON SHARES
UNDERWRITERS TO BE PURCHASED
- ------------ ---------------
<S> <C>
Montgomery Securities....................................[___]
Robertson, Stephens & Company LLC........................[___]
[___] ...................................................[___]
[___] ...................................................[___]
[___] ...................................................[___]
---------
Total 3,500,000
</TABLE> ---------
<PAGE> 37
EXHIBIT A
The final opinion in draft form will be attached as Exhibit A at the time this
Agreement is executed.
Opinion of counsel for the Company and the Principal
Shareholders to be delivered pursuant to Section 5(d) of the Underwriting
Agreement.
References to the Prospectus in this Exhibit A include any
supplements thereto at the Closing Date.
(i) The Company has been duly incorporated and is
validly existing as a corporation in good standing under the laws of
the State of Georgia.
(ii) The Company has corporate power and authority to
own, lease and operate its properties and to conduct its business as
described in the Prospectus and to enter into and perform its
obligations under the Underwriting Agreement.
(iii) The Company is duly qualified as a foreign
corporation to transact business and is in good standing in each
jurisdiction in which such qualification is required, whether by
reason of the ownership or leasing of property or the conduct of
business, except for such jurisdictions where the failure to so
qualify or to be in good standing would not, individually or in the
aggregate, result in a Material Adverse Change.
(iv) Each significant subsidiary (as defined in Rule
405 under the Securities Act) has been duly incorporated and is
validly existing as a corporation in good standing under the laws of
the jurisdiction of its incorporation, has corporate power and
authority to own, lease and operate its properties and to conduct its
business as described in the Prospectus and, to the best knowledge of
such counsel, is duly qualified as a foreign corporation to transact
business and is in good standing in each jurisdiction in which such
qualification is required, whether by reason of the ownership or
leasing of property or the conduct of business, except for such
jurisdictions where the failure to so qualify or to be in good
standing would not, individually or in the aggregate, result in a
Material Adverse Change.
(v) All of the issued and outstanding capital stock of
each such significant subsidiary has been duly authorized and validly
issued, is fully paid and non-assessable and is owned by the Company,
directly or through subsidiaries, free and clear of any security
interest, mortgage, pledge, lien, encumbrance or, to the best
knowledge of such counsel, any pending or threatened claim.
<PAGE> 38
(vi) The authorized, issued and outstanding capital
stock of the Company (including the Common Stock) conform to the
descriptions thereof set forth in the Prospectus. All of the
outstanding shares of Common Stock have been duly authorized and
validly issued, are fully paid and nonassessable and, to the best of
such counsel's knowledge, have been issued in compliance with the
registration and qualification requirements of federal and state
securities laws. The form of certificate used to evidence the Common
Stock is in due and proper form and complies with all applicable
requirements of the articles of incorporation and bylaws of the
Company and the Georgia Business Corporations Code. The description of
the Company's stock option, stock bonus and other stock plans or
arrangements, and the options or other rights granted and exercised
thereunder, set forth in the Prospectus accurately and fairly presents
the information required to be shown with respect to such plans,
arrangements, options and rights.
(vii) No shareholder of the Company or any other person
has any preemptive right, right of first refusal or other similar
right to subscribe for or purchase securities of the Company arising
(i) by operation of the articles of incorporation or bylaws of the
Company or the Georgia Business Corporations Code or (ii) to the best
knowledge of such counsel, otherwise.
(viii) To the best knowledge of such counsel the
Underwriting Agreement has been duly authorized, executed and
delivered by, and is a valid and binding agreement of, the Company,
enforceable in accordance with its terms, except as rights to
indemnification thereunder may be limited by applicable law and except
as the enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally or by general equitable
principles.
(ix) The Common Shares to be purchased by the
Underwriters from the Company have been duly authorized for issuance
and sale pursuant to the Underwriting Agreement and, when issued and
delivered by the Company pursuant to the Underwriting Agreement
against payment of the consideration set forth therein, will be
validly issued, fully paid and nonassessable.
(x) The Registration Statement and the Rule 462(b)
Registration Statement, if any, has been declared effective by the
Commission under the Securities Act. To the best knowledge of such
counsel, no stop order suspending the effectiveness of either of the
Registration Statement or the Rule 462(b) Registration Statement, if
any, has been issued under the Securities Act and no proceedings for
such purpose have been instituted or are pending or are contemplated
or threatened by the Commission. Any required filing of the Prospectus
and any supplement thereto pursuant to
<PAGE> 39
Rule 424(b) under the Securities Act has been made in the manner and
within the time period required by such Rule 424(b).
(xi) The Registration Statement, including any Rule
462(b) Registration Statement, the Prospectus, and each amendment or
supplement to the Registration Statement and the Prospectus, as of
their respective effective or issue dates (other than the financial
statements and supporting schedules included therein or in exhibits to
or excluded from the Registration Statement, as to which no opinion
need be rendered) comply as to form in all material respects with the
applicable requirements of the Securities Act.
(xii) The Common Shares have been approved for listing
on the Nasdaq National Market.
(xiii) The statements (i) in the Prospectus under the
captions "Risk Factors--Certain Anti-Takeover Provisions," "Risk
Factors--Shares Eligible For Future Sale," "Business--Regulatory
Environment," "Business--Proprietary Rights," "Management -- Employee
Benefit Plans," "Management-Agreements with Employees,"
"Management--Limitation of Liability and Indemnification of Officers
and Directors," "Certain Transactions," "Description of Capital
Stock," "Shares Eligible for Future Sale," and "Underwriting" and (ii)
in Item 14 and Item 15 of the Registration Statement, insofar as such
statements constitute matters of law, summaries of legal matters, the
Company's articles of incorporation or bylaw provisions, documents or
legal proceedings, or legal conclusions, has been reviewed by such
counsel and fairly present and summarize, in all material respects,
the matters referred to therein.
(xiv) To the best knowledge of such counsel, there are
no legal or governmental actions, suits or proceedings pending or
threatened which are required to be disclosed in the Registration
Statement, other than those disclosed therein.
(xv) To the best knowledge of such counsel, there are
no Existing Instruments required to be described or referred to in the
Registration Statement or to be filed as exhibits thereto other than
those described or referred to therein or filed or incorporated by
reference as exhibits thereto; and the descriptions thereof and
references thereto are correct in all material respects.
(xvi) To the best knowledge of such counsel no consent,
approval, authorization or other order of, or registration or filing
with, any court or other governmental authority or agency, is required
for the Company's execution, delivery and performance of the
Underwriting Agreement and consummation of the transactions
contemplated thereby and by the Prospectus, except as required under
the Securities Act, applicable state
<PAGE> 40
securities or blue sky laws and under the rules of the NASD.
(xvii) The execution and delivery of the Underwriting
Agreement by the Company and the performance by the Company of its
obligations thereunder (other than performance by the Company of its
obligations under the indemnification section of the Underwriting
Agreement, as to which no opinion need be rendered) (i) have been duly
authorized by all necessary corporate action on the part of the
Company; (ii) will not result in any violation of the provisions of
the articles of incorporation or other charter documents or bylaws of
the Company or any subsidiary; (iii) to the best knowledge of such
counsel, will not constitute a breach of, or Default under, or result
in the creation or imposition of any lien, charge or encumbrance upon
any property or assets of the Company or any of its subsidiaries
pursuant to any material Existing Instrument; or (iv) to the best
knowledge of such counsel, will not result in any violation of any
law, administrative regulation or administrative or court decree
applicable to the Company or any subsidiary.
(xviii) The Company is not, and after receipt of payment
for the Common Shares will not be, an "investment company" within the
meaning of Investment Company Act.
(xix) To the best knowledge of such counsel, there are
no persons with registration or other similar rights to have any
equity or debt securities registered for sale under the Registration
Statement or included in the offering contemplated by the Underwriting
Agreement, except for such rights as have been duly waived.
(xx) To the best knowledge of such counsel, neither the
Company nor any subsidiary is in violation of its articles of
incorporation or other charter documents or bylaws or any law,
administrative regulation or administrative or court decree applicable
to the Company or any subsidiary or is in Default in the performance
or observance of any obligation, agreement, covenant or condition
contained in any material Existing Instrument, except in each such
case for such violations or Defaults as would not, individually or in
the aggregate, result in a Material Adverse Change.
(xxi) To the best knowledge of such counsel, the
Underwriting Agreement has been duly authorized, executed and
delivered by or on behalf of, and is a valid and binding agreement of,
the Principal Shareholders, enforceable in accordance with its terms,
except as rights to indemnification thereunder may be limited by
applicable law and except as the enforcement thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar
laws relating to or affecting creditors' rights generally or by
general equitable principles.
<PAGE> 41
(xxii) The execution and delivery by the Principal
Shareholders of, and the performance by the Principal Shareholders of
their obligations under, the Underwriting Agreement will not
contravene or conflict with, result in a breach of, constitute a
default under, violate or contravene any provision of applicable law
or regulation, or violate, result in a breach of or constitute a
default under the terms of any agreement or instrument to which the
Principal Shareholders are a party or by which they are bound, or any
judgment, order or decree applicable to the Principal Shareholders of
any court, regulatory body, administrative agency, governmental body
or arbitrator having jurisdiction over the Principal Shareholders.
(xxiii) To the best of such counsel's knowledge, no
consent, approval, authorization or other order of, or registration or
filing with, any court or governmental authority or agency, is
required for the consummation by the Principal Shareholders of the
transactions contemplated in the Underwriting Agreement.
In addition, such counsel shall state that they have
participated in conferences with officers and other representatives of
the Company, representatives of the independent public or certified
public accountants for the Company and with representatives of the
Underwriters at which the contents of the Registration Statement and
the Prospectus, and any supplements or amendments thereto, and related
matters were discussed and, although such counsel is not passing upon
and does not assume any responsibility for the accuracy, completeness
or fairness of the statements contained in the Registration Statement
or the Prospectus (other than as specified above), and any supplements
or amendments thereto, on the basis of the foregoing, nothing has come
to their attention which would lead them to believe that either the
Registration Statement or any amendments thereto, at the time the
Registration Statement or such amendments became effective, contained
an untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading or that the Prospectus, as of its date or at
the First Closing Date or the Second Closing Date, as the case may be,
contained an untrue statement of a material fact or omitted to state a
material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not
misleading (it being understood that such counsel need express no
belief as to the financial statements or schedules or other financial
or statistical data derived therefrom, included in the Registration
Statement or the Prospectus or any amendments or supplements thereto).
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws of any jurisdiction other than the Georgia
Business Corporations Code or the federal law of the United States, to the
extent they deem proper and specified in such opinion, upon the opinion (which
shall be dated the First Closing Date or the Second Closing Date, as the case
may be, shall be
<PAGE> 42
satisfactory in form and substance to the Underwriters, shall expressly state
that the Underwriters may rely on such opinion as if it were addressed to them
and shall be furnished to the Representatives) of other counsel of good standing
whom they believe to be reliable and who are satisfactory to counsel for the
Underwriters; provided, however, that such counsel shall further state that they
believe that they and the Underwriters are justified in relying upon such
opinion of other counsel, and (B) as to matters of fact, to the extent they deem
proper, on certificates of responsible officers of the Company, the Principal
Shareholders and public officials.
<PAGE> 43
EXHIBIT B
The final opinion in draft form should be attached as Exhibit B at the time this
Agreement is executed.
Opinion of patent counsel for the Company to be delivered
pursuant to Section 5(d) of the Underwriting Agreement.
References to the Prospectus in this Exhibit B include any
supplements thereto at the Closing Date.
(i) to the knowledge of such counsel, the Company owns or has obtained
licenses for all applications relating to the patents and patent applications,
trademarks, service marks and trademark and service mark applications (the
"Patent and Trademark Rights") described in the Prospectus as being owned or
used by or licensed to the Company;
(ii) to the knowledge of such counsel (A) except as described in the
Prospectus, there are no rights of third parties to any Patent and Trademark
Rights described in the Prospectus as being owned by or licensed to the Company
or that is necessary for the conduct of its business; (B) there is no pending or
threatened action, suit, proceeding or claim by others challenging the rights of
the Company in or to such Patent and Trademark Rights, and such counsel is
unaware of any facts which would form a reasonable basis for any such claim; (C)
there is no pending or threatened action, suit, proceeding or claim by others
challenging the validity or scope of such Patent or Trademark Rights, and such
counsel is unaware of any facts which would form a reasonable basis for any such
claim; (D) there is no pending or threatened action, suit, proceeding or claim
by others that the Company infringes or otherwise violates any patent,
trademark, copyright, trade secret or other proprietary right of others, and
such counsel is unaware of any facts which would form a reasonable basis for any
such claim; (E) there is no patent or patent application not owned by the
Company which contains claims that dominate or may dominate any Patent or
Trademark Rights described in the Prospectus as being owned or used by or
licensed to the Company or that is necessary for the conduct of its business or
that interferes with the issued or pending claims of any such Patent or
Trademark Right; and (F) there is no prior art that may render any patent held
by the Company invalid or any patent application held by the Company
unpatentable which has not been disclosed to the U.S. Patent and Trademark
Office; and
(iii) the statements in the Prospectus under the captions "Risk
Factors-Intellectual Property Rights," "Business--Strategy," and in the first
paragraph of text under the caption "Business--Proprietary Rights," insofar as
such statements constitute a summary of legal matters, documents or proceedings
relating to Patent
<PAGE> 44
or Trademark Rights, are accurate in all material respects and fairly present in
all material respects the information purported to be shown.
<PAGE> 45
EXHIBIT C
[Date]
Montgomery Securities
As Representatives of the Several Underwriters
c/o Montgomery Securities
600 Montgomery Street
San Francisco, California 94111
RE: Melita International Corporation (the "Company")
Ladies & Gentlemen:
The undersigned is an owner of record or beneficially of certain shares of
Common Stock of the Company ("Common Stock") or securities convertible into or
exchangeable or exercisable for Common Stock. The Company proposes to carry out
a public offering of Common Stock (the "Offering") for which you will act as the
representatives of the underwriters. The undersigned recognizes that the
Offering will be of benefit to the undersigned and will benefit the Company by,
among other things, raising additional capital for its operations. The
undersigned acknowledges that you and the other underwriters are relying on the
representations and agreements of the undersigned contained in this letter in
carrying out the Offering and in entering into underwriting arrangements with
the Company with respect to the Offering.
In consideration of the foregoing, the undersigned hereby agrees that the
undersigned will not, without the prior written consent of Montgomery Securities
(which consent may be withheld in its sole discretion), directly or indirectly,
sell, offer, contract or grant any option to sell (including without limitation
any short sale), pledge, transfer, establish an open "put equivalent position"
within the meaning of Rule 16a-1(h) under the Securities Exchange Act of 1934,
or otherwise dispose of any shares of Common Stock, options or warrants to
acquire shares of Common Stock, or securities exchangeable or exercisable for or
convertible into shares of Common Stock currently or hereafter owned either of
record or beneficially (as defined in Rule 13d-3 under Securities Exchange Act
of 1934, as amended) by the undersigned, or publicly announce the undersigned's
intention to do any of the foregoing, for a period commencing on the date hereof
and continuing through the close of trading on the date 180 days after the date
of the Prospectus. Notwithstanding the foregoing, the undersigned may make bona
fide gifts or transfers effected through private transactions to family members
of the undersigned or to trusts, all of the beneficiaries of which are family
members of the undersigned, provided such donee agrees in writing for the
benefit of Montgomery Securities to be bound by restrictions the same as those
set forth in this letter. The undersigned also agrees and consents to the entry
of stop transfer instructions with the Company's transfer agent and registrar
against the transfer of shares of Common
<PAGE> 46
Stock or securities convertible into or exchangeable or exercisable for Common
Stock held by the undersigned except in compliance with the foregoing
restrictions.
With respect to the Offering only, the undersigned waives any registration
rights relating to registration under the Securities Act of any Common Stock
owned either of record or beneficially by the undersigned, including any rights
to receive notice of the Offering.
This agreement is irrevocable and will be binding on the undersigned and the
respective successors, heirs, personal representatives, and assigns of the
undersigned.
- -----------------------------------
Printed Name of Holder
By:
--------------------------------
Signature
- -----------------------------------
Printed Name of Person Signing
(and indicate capacity of person
signing if signing as custodian,
trustee, or on behalf of an entity)
<PAGE> 1
EXHIBIT 5.1
[MORRIS, MANNING & MARTIN LETTERHEAD]
June 4, 1997
Melita International Corporation
5051 Peachtree Corners Circle
Norcross, Georgia 30092-2500
Re: Registration Statement on Form S-1
Ladies and Gentlemen:
We have served as counsel for Melita International Corporation, a Georgia
corporation (the "Company"), in connection with the registration under the
Securities Act of 1933, as amended, pursuant to the Company's Registration
Statement on Form S-1 (No. 333-22855)(the "Registration Statement"), of a
proposed public offering by the Company of 3,500,000 shares (the
"Shares") of the Company's authorized common stock, no par value (the
"Common Stock"), all of which are to be sold by the Company. In addition, the
Company has granted to the underwriters an option to purchase 525,000 shares
of Common Stock to cover over-allotments, if any (the "Over-Allotment Shares").
We have examined and are familiar with originals or copies (certified or
otherwise identified to our satisfaction) of such documents, corporate records
and other instruments relating to the incorporation of the Company and to the
authorization and issuance of the outstanding shares of Common Stock, the
Shares and the Over-Allotment Shares to be sold by the Company, as appropriate,
as we have deemed necessary and advisable.
Based upon the foregoing and having regard for such legal considerations
that we have deemed relevant, it is our opinion that:
1. The 3,500,000 Shares to be issued and sold by the Company will be,
upon issuance, sale and delivery as contemplated in the Registration Statement,
legally and validly issued, fully paid and nonassessable.
2. The Over-Allotment Shares to be sold by the Company, upon the
exercise of the over-allotment option by the Underwriters, will be
<PAGE> 2
MORRIS, MANNING & MARTIN
a limited liability partnership
March 3, 1997
Page 2
legally and validly issued, fully paid and nonassessable.
We do hereby consent to the reference to our firm under the heading "Legal
Matters" in the Prospectus contained in the Registration Statement and to the
filing of this Opinion as Exhibit 5.1 thereto.
Respectfully,
MORRIS, MANNING & MARTIN, L.L.P.
<PAGE> 1
EXHIBIT 23.1
[LETTERHEAD OF ARTHUR ANDERSEN LLP APPEARS HERE]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our firm) included in or made part of this
Registration Statement.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
June 4, 1997
<PAGE> 1
EXHIBIT 23.2
[LETTERHEAD OF BDO STOY HAYWARD APPEARS HERE]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement on Form S-1 of our report dated April 25, 1997 on the
financial statements of Melita Europe Limited as of December 31, 1995 and
December 31, 1996 and for the three years in the period ended December 31, 1996.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
BDO STOY HAYWARD
Ewell, Epsom Surrey
June 4, 1997
