<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
--------------- -----------------
Commission file number 0-22317
-------
MELITA INTERNATIONAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
GEORGIA 58-1378534
(State or other Jurisdiction of Incorporation (I.R.S. Employer Identification
or Organization) Number)
5051 PEACHTREE CORNERS CIRCLE
NORCROSS, GEORGIA 30092-2500
(770) 239-4330
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes No X
------ ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. Common stock, no par value,
outstanding as of August 11, 1997: 15,168,395 shares.
Page 1 of 13
<PAGE> 2
PART 1 - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1997 (Unaudited) 3
and December 31, 1996.
Unaudited Consolidated Statements of Income for the three months ended June 30, 4
1997 and 1996 and for the six months ended June 30, 1997 and 1996.
Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 5
1997 and 1996
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and 8
Results of Operations.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 2. Changes in Securities 10
Item 3. Defaults Upon Senior Securities 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
</TABLE>
Page 2 of 13
<PAGE> 3
MELITA INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
----------- ------------
<S> <C> <C>
Current assets: (Unaudited)
Cash and cash equivalents $ 29,984 $ 9,849
Accounts receivable, net of allowance for doubtful 12,315 11,860
accounts of $318 at June 30, 1997 and $487 at December 31, 1996
Inventories 1,355 2,442
Deferred taxes 1,473 --
Prepaid expenses and other 398 170
----------- -----------
Total current assets 45,525 24,321
Property and equipment, net of accumulated depreciation 3,458 2,724
Other assets 35 24
----------- -----------
$ 49,018 $ 27,069
=========== ===========
Current liabilities:
Accounts payable $ 2,826 $ 2,429
Accrued liabilities 6,193 4,210
Deferred revenue 3,803 3,065
Customer deposits 2,110 3,849
Current maturities of notes payable to shareholder -- 2,625
Current maturities of capital lease obligations -- 19
----------- -----------
Total current liabilities 14,932 16,197
Commitments and contingencies
Shareholders' equity
Preferred Stock:
Melita International Corporation, no par value; 20,000 shares authorized,
no shares issued and outstanding at December 31, 1996 and June 30, 1997 -- --
Common Stock:
Melita International Corporation, no par value; 100,000 shares
authorized, 8,000 shares issued and outstanding December 31, 1996 and
15,168 shares issued and outstanding June 30, 1997 69 2
Melita Europe Limited, L1 par value; 50 shares authorized, 31 shares
issued and outstanding December 31, 1996 and no shares issued and
outstanding at June 30, 1997 -- 46
Inventions, Inc., $5 par value; .1 shares authorized, .1 shares issued
and outstanding December 31, 1996 and no shares issued and outstanding
at June 30, 1997 -- 1
Additional paid-in capital 36,102 20
Cumulative foreign currency translation adjustment 8 35
Retained earnings (deficit) (2,093) 10,768
----------- -----------
Total shareholders' equity (deficit) 34,086 10,872
----------- -----------
$ 49,018 $ 27,069
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
Page 3 of 13
<PAGE> 4
MELITA INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT FOR SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
1997 1996 1997 1996
-------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Net revenues:
Product $ 10,714 $ 8,108 $ 20,979 $ 15,799
Service 4,816 3,778 9,220 7,108
------------- ------------- ----------- ------------
Total revenues 15,530 11,886 30,199 22,907
Cost of revenues:
Product 3,565 2,990 7,401 5,439
Service 2,433 1,733 4,364 3,172
------------- ------------- ----------- ------------
Total cost of revenues 5,998 4,723 11,765 8,611
Gross margin 9,532 7,163 18,434 14,296
Operating expenses:
Research and development 1,644 1,151 3,025 2,096
Selling, general and administrative 5,231 3,992 10,365 8,129
------------- ------------- ----------- ------------
Total operating expenses 6,875 5,143 13,390 10,225
------------- ------------- ----------- ------------
Income from operations 2,657 2,020 5,044 4,071
Other income (expense), net (9) 54 (60) 43
------------- ------------- ----------- ------------
Income before income taxes 2,648 2,074 4,984 4,114
Income tax provision (benefit):
Tax provision as 'C' Corporation 393 -- 409 --
Deferred tax adjustment (1,473) -- (1,473) --
------------- ------------- ----------- ------------
Net income after income tax $ 3,728 $ 2,074 $ 6,048 $ 4,114
============= ============= =========== ============
Income before income taxes 2,648 2,074 4,984 4,114
Pro forma income tax provision (Note 6) 983 775 1,894 1,537
------------- ------------- ----------- ------------
Pro forma net income $ 1,665 $ 1,299 $ 3,090 $ 2,577
============= ============= =========== ============
Primary earnings per share $ 0.29 $ 0.17 $ 0.47 $ 0.33
============= ============= =========== ============
Weighted average common and common
equivalent shares 12,868 12,360 12,758 12,360
Pro forma earnings per share $ 0.13 $ 0.11 $ 0.24 $ 0.21
============= ============= =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
Page 4 of 13
<PAGE> 5
MELITA INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended
June 30,
1997 1996
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 6,048 $ 4,114
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 655 504
Deferred taxes (1,473) --
Changes in assets and liabilities:
Accounts receivable (455) (1,955)
Inventories 1,087 (494)
Prepaid expenses and other assets (228) 47
Accounts payable 397 (264)
Accrued liabilities 1,982 67
Deferred revenue 740 1,329
Customer deposits (1,739) (237)
Other, net (38) (1)
---------- ----------
Total adjustments 928 (1,004)
---------- ----------
Net cash provided by operating activities 6,976 3,110
Cash flows from investing activities:
Purchases of property and equipment (1,389) (741)
---------- ----------
Net cash used in investing activities (1,389) (741)
Cash flows from financing activities:
Repayment of capital lease obligations (19) (28)
Net proceeds from issuance of common stock 36,102 --
Repayment of note payable to shareholder (15,525) --
Distributions to shareholders (6,010) (3,181)
---------- ----------
Net cash provided by financing activities 14,548 (3,209)
Net change in cash and cash equivalents 20,135 (840)
Cash and cash equivalents, beginning of period 9,849 5,959
---------- ----------
Cash and cash equivalents, end of period $ 29,984 $ 5,119
========== ==========
Supplemental disclosure of cash flow information:
Cash paid for interest during the period $ 360 $ 139
========== ==========
Income taxes paid $ 32 $ --
========== ==========
</TABLE>
Page 5 of 13
<PAGE> 6
MELITA INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
1. Basis of Presentation
The unaudited consolidated financial statements presented herein have been
prepared in accordance with generally accepted accounting principles applicable
to interim financial statements. Accordingly, they do not include all of the
information and notes required by generally accepted accounting principles for
complete financial statements. In the opinion of the Company's management,
these consolidated financial statements contain all adjustments (which comprise
only normal and recurring accruals) necessary to present fairly the financial
position as of June 30, 1997, the results of operations and changes in cash
flows for the six months ended June 30, 1997 and 1996. The interim results for
the three months and six months ended June 30, 1997 are not necessarily
indicative of the results to be expected for the full year. These statements
should be read in conjunction with the Company's combined financial statements
for the year ended December 31, 1996, as filed in its Prospectus dated June 4,
1997.
2. Principles of Consolidation
The accompanying financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant inter-company balances and
transactions have been eliminated in consolidation.
3. Completion of Initial Public Offering and Combination
On June 4, 1997, the Company completed its initial public offering ("IPO") of
common stock. The Company sold 4,025 shares of common stock, including the
underwriters' over-allotment of 525 shares, for $40,250 less issuance costs of
$4,148. Concurrently with the IPO, the Company issued 3,143 shares in
connection with the combination of Melita International, Melita Europe Limited
and Inventions, Inc.
4. Inventories
Inventories consist of the following at:
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
------------- -----------------
<S> <C> <C>
Raw Materials 631 1,059
Work in process 242 337
Finished goods 482 1,046
----- ------
Total inventories 1,355 2,442
</TABLE>
5. Earnings Per Share
Earnings per share are computed using the weighted-average number of common
stock and dilutive common stock equivalents ("CSE") shares from stock options
and warrants (using the treasury stock method) outstanding during each period.
Also included are (1) common stock and CSE's issued at a price below the
initial public offering price during the 12 month period prior to June 4, 1997,
and (2) CSE's in an amount necessary to pay the shareholder distributions.
Page 6 of 13
<PAGE> 7
6. Income Taxes
In connection with the IPO the Company converted from an S corporation to a
C corporation and, accordingly, is subject to federal and state income
taxes. Upon the conversion, the Company recognized a one-time benefit by
recording the asset related to the future reduction of income tax payments due
to timing differences between the recognition of income for financial
statements and income tax regulations. Pro forma income tax provisions
reflect the Company's anticipated effective tax rate of 38.0% for 1997 and
37.2% in 1996.
7. Accounting Pronouncements
During the first quarter of 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128, Earnings Per Share.
This standard is effective for fiscal years ending after December 15, 1997 and
early adoption is not permitted. The Company will adopt this statement for its
year ended December 31, 1997.
Pro forma calculations of basic and diluted earnings per share, in conformance
with SFA's No. 128, are as follows:
<TABLE>
<CAPTION>
For the three months For the six months
ended ended
June 30, June 30,
1997 1996 1997 1996
-------- --------- -------- --------
<S> <C> <C> <C> <C>
Basic EPS .31 .17 .49 .34
Basic pro forma EPS .14 .11 .25 .21
Diluted EPS .29 .17 .47 .33
Diluted pro forma EPS .13 .11 .24 .21
</TABLE>
Page 7 of 13
<PAGE> 8
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Total revenues of $15.5 million in the second quarter of 1997 increased 30.7%
from $11.9 million in the second quarter of 1996. Total revenues increased to
$30.2 million in the first six months of 1997 as compared to $22.9 million in
the corresponding period of 1996, representing growth of 31.8%.
Product revenues increased 32.1% to $10.7 million and 32.8% to $21.0 million
for the quarter and six month periods ended June 30, 1997 as compared to the
same periods in 1996, respectively. Service revenues increased 27.5% to $4.8
million in the second quarter and 29.7% to $9.2 million for the six months ended
June 30, 1997. The growth in product revenues was due to continued increasing
demand for the Company's products, increased marketing and sales efforts and
the introduction of a new product feature, Magellan CS, which increased sales
of the Company's systems. Service revenues increased during the quarter and
six month period due to the continued expansion of the Company's installed
customer base and the increased volume of installations during the period.
Cost of product revenue, as a percentage of product revenue, was 33.3% and
35.3% in the second quarter and first six months of fiscal 1997, respectively,
compared to 36.9% and 34.4% for the comparable 1996 periods. Product cost as a
percentage of product revenue decreased during the second quarter principally
due to the continuing efforts to cost reduce the product, and due to changes in
the product mix. The slight increase in product costs for the first six months
is due primarily to lower per unit sales prices.
Research and development cost was $1.6 million in the second quarter of fiscal
1997, a $493,000 increase over the second quarter of 1996. For the first six
months of 1997, research and development cost increased to $3.0 million, an
increase of $929,000 over the comparable 1996 period. Research and development
cost increased as a percentage of revenue to 10.6% from 9.7% and to 10.0% from
9.2% for the three month and six month comparable periods ended June 30, 1997
and 1996, respectively. The overall cost increase during the three and six
month periods ended June 30, 1997 resulted primarily from the addition of
developers to support the Company's new product development efforts and the
subcontracting of certain feature development efforts during 1997.
Selling, general and administrative expenses were $5.2 million for the second
quarter of 1997 as compared to $4.0 million in the comparable 1996 period.
Selling, general and administrative expense for the first six months of fiscal
1997 increased to $10.4 million, an increase of $2.2 million (27.5%) over the
comparable 1996 period. This increase was the result of an increase in sales
commissions corresponding to the increase in revenues and the additional staff
required to support the larger sales levels in 1997. Selling, general and
administrative expense increased slightly as a percentage of revenue to 33.7%
from 33.6% for the second quarter of fiscal 1997, and decreased as a percentage
of revenue to 34.3% from 35.5% for the first six months of fiscal 1997.
Income from operations was $2.7 million in the second quarter of 1997,
representing a 31.5% increase over income from operations of $2.0 million in
the first quarter of 1996. Income from operations was $5.0 million in the first
six months of 1997, representing a 23.9% increase over income from operations
of $4.1 million in the corresponding period in 1996. These increases were the
result of the foregoing factors.
Page 8 of 13
<PAGE> 9
Other income (expense), net was a net expense of $9,000 in the second quarter
of 1997 compared to net income of $54,000 in the second quarter of 1996. Other
income (expense), net was a net expense of $60,000 for the first six months of
1997 compared to net income of $43,000 in the first six months of 1996.
Interest expense, which is included in other income (expense), net increased
from 1996 levels in both periods during 1997 due to increased debt.
Income tax provisions have been recorded for the period subsequent to the IPO.
The Company, prior to the IPO was not subject to federal or state income taxes.
As a result of its election to be treated as an S Corporation for income tax
purposes prior to the IPO, pro forma net income amounts include additional
provisions for income taxes determined by applying the Company's anticipated
statutory tax rate to income before income taxes, adjusted for permanent tax
differences. The Company's S Corporation status was terminated in conjunction
with the completion of its initial public offering in June 1997. Upon the
termination of its S Corporation election, the Company recorded certain
deferred tax assets in the amount of $1.5 million.
Pro forma net income increased to $1.7 million in the second quarter of 1997
from $1.3 million in the second quarter of 1996. Pro forma net income rose to
$3.1 million in the first six months of 1997 compared to $2.6 million in the
first six months of 1996.
LIQUIDITY AND CAPITAL RESOURCES
In June 1997, the Company completed its initial public offering, in which the
Company received net proceeds of approximately $36.1 million after deducting
underwriting discounts and offering expenses. The Company applied a portion of
the net proceeds to (1) repay outstanding shareholder notes of $15.2 million,
(2) payment of $245,000 in accrued interest on the shareholder notes, and (3)
pay undistributed S Corporation earnings of $ 2.4 million. Prior to the IPO
date, the company made payments of $375,000 to repay shareholder notes, and
$3.6 million in distributions to shareholders. The balance of the net proceeds
of the offering (approximately $18.3 million) will be utilized for general
corporate purposes. Such purposes may also include possible acquisitions of, or
investments in, businesses and technologies that are complementary to those of
the Company.
As of June 30, 1997, the Company had $30.0 million in cash and cash
equivalents, compared to $9.8 million as of December 31, 1996. The Company's
working capital increased to $30.6 million from $8.1 million over the same
period. Operating activities provided $7.0 million during the first six months
of fiscal 1997. Cash used in investing activities totaled $1.4 million during
the first six months of fiscal 1997. Such investing activities consisted of
purchases of property and equipment. Cash provided by financing activities
totaled $14.5 million during the first six months of fiscal 1997, due to the
issuance of common stock in the initial public offering offset by repayment of
the Company's outstanding indebtedness noted above. The Company anticipates
that existing cash and cash equivalents will be adequate to meet its cash
requirements for the next twelve months.
FORWARD LOOKING STATEMENTS
Certain statements contained in this filing are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995,
including but not limited to statements related to plans for future business
development activities, anticipated costs of revenues, product mix and service
revenues, research and development and selling, general and administrative
activities, and liquidity and capital needs and resources. Such
forward-looking statements are subject to risks, uncertainties and other
factors which could cause actual results to differ materially from future
results expressed or implied by such forward-looking statements. For further
information about these and other factors that could affect the Company's
future results, please see Exhibit 99.1 to this report. Investors are
cautioned that any forward looking statements are not guarantees of future
performance and involve risks and uncertainties, and that actual results may
differ materially from those contemplated by such forward looking statements.
Page 9 of 13
<PAGE> 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities.
None
Item 3 Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit 11 Statement re Computation of per share earnings.
Exhibit 27 Financial Data Schedule (for SEC use only).
Exhibit 99.1 Certain risk factors related to the Company.
(b) Reports on Form 8-K. No Report on Form 8-K was filed during the
quarter ended June 30, 1997.
Page 10 of 13
<PAGE> 11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MELITA INTERNATIONAL CORPORATION
Date: August 14, 1997 By: /s/ J. Neil Smith
-------------------------
J. Neil Smith
President and Chief Operating
Officer
Date: August 14, 1997 By: /s/ Mark B. Adams
-------------------------
Mark B. Adams
Chief Financial Officer
Page 11 of 13
<PAGE> 1
EXHIBIT 11
MELITA INTERNATIONAL CORPORATION
COMPUTATION OF PRO FORMA EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30 Ended June 30
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
PRIMARY (1)
Weighted average common stock outstanding 8,000 8,000 8,000 8,000
Effect of the combination (2) 3,143 3,143 3,143 3,143
Effect of issuance of shares in IPO 1,058 -- 529 --
Dilutive effect of common stock equivalents 596 139 395 139
Cheap stock adjustment (3) 71 133 94 133
Effect of shareholder distribution (4) -- 945 597 945
------- ------- ------- -------
Weighted average common and common equivalent shares 12,868 12,360 12,758 12,360
Net income after income tax 3,728 2,074 6,048 4,114
Earnings per share 0.29 0.17 0.47 0.33
Pro forma net income 1,665 1,299 3,090 2,577
Pro forma earnings per share 0.13 0.11 0.24 0.21
</TABLE>
(1) Fully diluted earnings per share would change only the dilutive effect of
common stock equivalents noted above. If the dilutive effect of common stock
equivalents was computed on a fully dilutive basis, the weighted average common
and common equivalent shares would be 13,084, 12,462, 13,162, and 12,463, for
the three months ended June 30, 1997 and 1996, and the six months ended June 30,
1997 and 1996, respectively.
(2) Reflects pro forma issuance of 3,143 shares of Common Stock in connection
with the combination of Melita International Corporation, Melita Europe Limited
and Inventions, Inc.
(3) Pursuant to Securities and Exchange Commission Staff Accounting Bulletin
No. 83, common stock and common stock equivalents issued at prices below the
assumed initial public offering price per share ("cheap stock") during the
twelve months immediately preceding the initial filing date of the Company's
Registration Statement for its public offering have been included as
outstanding for all periods presented.
(4) Pursuant to Staff Accounting Bulletin 1B.3, pro forma earnings per share
gives effect to the issuance by the Company of the numbers of shares that, of
the assumed public offering price, would yield proceeds in the amount necessary
to pay the shareholder distribution that is not covered by the earnings during
the period.
Page 12 of 13
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 29,984
<SECURITIES> 0
<RECEIVABLES> 12,633
<ALLOWANCES> (318)
<INVENTORY> 1,355
<CURRENT-ASSETS> 45,525
<PP&E> 8,569
<DEPRECIATION> (5,111)
<TOTAL-ASSETS> 49,018
<CURRENT-LIABILITIES> 14,932
<BONDS> 0
0
0
<COMMON> 69
<OTHER-SE> 34,017
<TOTAL-LIABILITY-AND-EQUITY> 49,018
<SALES> 30,199
<TOTAL-REVENUES> 30,199
<CGS> 11,765
<TOTAL-COSTS> 11,765
<OTHER-EXPENSES> 13,108
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 342
<INCOME-PRETAX> 4,984
<INCOME-TAX> 1,064
<INCOME-CONTINUING> 6,048
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,048
<EPS-PRIMARY> .47
<EPS-DILUTED> .47
</TABLE>
<PAGE> 1
EXHIBIT 99.1
MELITA INTERNATIONAL CORPORATION
RISK FACTORS
The following factors may affect the Company's future performance, and
should be considered by all investors and prospective investors in the Company.
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.
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
<PAGE> 2
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.
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.
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.
CONTROL BY PRINCIPAL SHAREHOLDER
Aleksander Szlam, the Company's Chairman of the Board, Chief Executive
Officer and principal shareholder, beneficially owns approximately 73.5% of the
outstanding shares of Common Stock. Accordingly,
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Mr. Szlam is, and likely will continue to 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.
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.
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.
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,
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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.
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.
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
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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. 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 its
initial public 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.
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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.
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
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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.
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.
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.
SHARES ELIGIBLE FOR FUTURE SALE
Approximately 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 of 1933. Upon completion of this
offering, the Company will have 1,600,000 shares of Common Stock reserved for
issuance under its stock plans. 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
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additional capital through the sale of equity securities in the future should it
desire to do so.
POSSIBLE VOLATILITY OF STOCK PRICE
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.
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