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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
---------------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
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(MARK ONE)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
</TABLE>
Commission File Number: 0-22317
MELITA INTERNATIONAL CORPORATION
(Exact Name of Registrant Specified in Its Charter)
<TABLE>
<S> <C>
GEORGIA 58-1378534
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5051 PEACHTREE CORNERS CIRCLE 30092
NORCROSS, GEORGIA (Zip Code)
(Address of principal executive offices)
</TABLE>
Registrant's telephone number, including area code:
(770) 239-4000
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
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TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
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<S> <C>
None. None
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF EACH CLASS
-------------------
Common Stock, no par value per share
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 [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based upon the average of the closing bid and ask quotations for
the Common Stock on March 11, 1998 as reported by The Nasdaq Stock Market, was
approximately $61,274,500. The shares of Common Stock held by each officer and
director and by each person known to the company who owns 5% or more of the
outstanding Common Stock have been excluded in that such persons may be deemed
to be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes. As of March 11, 1998, Registrant
had outstanding 15,168,395 shares of Common Stock.
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PART I
ITEM 1. BUSINESS
OVERVIEW
Melita International Corporation is a leading provider of integrated
customer interaction and intelligent call management solutions that enable
businesses to automate call center activities and enhance their telephony-based
customer commerce. The Company's principal products, PhoneFrame(R)CS and
PhoneFrame Explorer, are 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. Melita's PhoneFrame product line is a set of comprehensive call center
solutions based on a client/server architecture that integrate with industry
standard computing and telephony infrastructures. The Company's customers
include leading worldwide organizations in industries such as banking, financial
services, telemarketing, retail, communications and service bureaus, where
businesses are engaged in frequent telephone contact with customers or
prospects.
The Company is a Georgia corporation which began operations in 1983. Prior
to June 4, 1997, the "Company" refers to the Company and its combined
affiliates, Melita Europe Limited and Inventions, Inc. Since June 4, 1997, the
"Company" refers to the Company and its consolidated wholly-owned subsidiaries.
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 themselves, 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") and Internet-based services. 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, computer systems and applications.
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. Common examples of outbound call center applications include
collection, telemarketing, teleservice and customer support. Increasingly, call
center applications feature dynamic inbound/outbound or "blended" functionality,
which permits agents to be switched automatically between inbound and outbound
calls as inbound call demand varies.
A key objective of an organization's outbound call center 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
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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 were expensive, provided limited
functionality and productivity and were generally closed and proprietary.
Distributed, standards-based computing environments have allowed call center
systems to be developed which utilize CTI, other standard Application
Programming Interfaces ("APIs") and the flexibility and openness of
client/server architectures. The result is that call center systems now can
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 seek call center
solutions that are adaptable to emerging technologies, flexible, scalable,
intuitive to use, allow transparent data access, and integrate existing IT and
telephony systems.
THE MELITA SOLUTION
Melita provides integrated customer interaction and intelligent call
management solutions that automate outbound or blended call centers, enabling
its customers to enhance telephony-based customer commerce. The Company's
principal products, PhoneFrame CS and PhoneFrame Explorer are scaleable,
integrated software and hardware solutions based on a distributed client/server
architecture capable of supporting installations with more than 250 simultaneous
users on a single server. The PhoneFrame product line provides comprehensive
functionality and a user-friendly application development environment enabling
organizations to conduct effective telephone 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 operating costs
through patented predictive dialing and inbound/outbound call management
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-follow script generation and application development
software.
- The ability to leverage existing investments in call center systems and
adapt to emerging technologies through standards-based open, scaleable,
distributed client/server architecture.
A critical element of the comprehensive solutions Melita provides is its
underlying philosophy of Customer Care(R). Melita's products represent a
critical link between the business enterprise and its customers, providing the
business with a solution that allows it to provide the best customer care.
Melita's Customer Care philosophy focuses on enhancing the quality of People to
People Communication(TM) and is reflected in all facets of the Company's
operations and products. The Company has incorporated applications into its
existing products which reflect this philosophy, including its patented
predictive dialing algorithms, Cancel Dial(R), dynamic inbound/outbound call
blending and Single System Image View(TM).
STRATEGY
The Company's primary objective is to be the leading provider of outbound
and blended customer contact and intelligent call management solutions. The
Company's strategy to achieve this objective includes the following key
elements:
Leverage Installed Base of Customers. 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
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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 global
technology leader in the field of call center automation software and CTI,
having pioneered many of the industry's fundamental call center
technologies. The Company holds a comprehensive US and foreign based patent
portfolio covering various processes and technologies utilized in call
management systems. The Company intends to focus its development efforts on
software, with an emphasis on customer interaction and distributed
applications spanning an enterprise.
Continue to Focus on Providing Comprehensive Call Center
Solutions. The Company provides call center optimization, system design,
application configuration and integration services in conjunction with the
installation of its call center solutions. The Company will continue its
emphasis on providing these design and integration services both directly
and through strategic alliances.
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. In
addition, the Company is expanding its global and national accounts program
which focuses on sales and marketing efforts on large, multinational
corporations.
Increase Penetration of International Markets. The Company currently
has relationships with Value Added Resellers ("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 Europe, 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 1997, approximately 71% 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 seeks to leverage its existing application functionality to
gain market share in the overall call management systems market.
PRODUCTS
The Company's newest product, PhoneFrame Explorer, is an integrated suite
of client/server software applications and hardware that provides outbound and
blended call management solutions. PhoneFrame Explorer software components are
based on open standards, allowing integration with varied and complex user
environments. PhoneFrame Explorer utilizes industry standard components and
eliminates the need for proprietary hardware.
PhoneFrame Explorer 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, PBX/ACDs, IVRs and
the Internet. Utilizing customer records residing in an organization's existing
databases, PhoneFrame automates customer contacts and guides agents through the
customer interaction process.
Components of the PhoneFrame Explorer include the Universal Telephony
Platform(TM) ("UTP(TM)"), the Universal Server(R), the Software Applications
Suite and Magellan(TM).
The Universal Telephony Platform ("UTP") provides state-of-the-art
telephony, call analysis functionality and media management. It is based on
Melita's MPower(TM) Architecture and employs industry standard telephony
components and the Windows NT operating system. The UTP offers an international
set of digital interfaces including T1 and E1. This open NT server-based
communications platform incorporates numerous
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standards, including SCSA, CORBA and ISDN. UTP's enhanced CTI capabilities
enable call blending and "single-switch" software only solutions.
The Universal Server controls and coordinates system operations. It is an
IBM RISC/AIX based platform which is used to manage calling list data, call
attempts, contact history, agent profiles, call processing and agent supervision
activity.
The PhoneFrame Explorer Software Application Suite includes Melita's
software applications, which leverages the functionality in industry standard
software and protocols such as Windows NT, Unix AIX, Sybase Database, Crystal
Report Writers and industry standard protocols including TCP/IP and System
Network Management Protocol (SNMP) for remote system management.
Magellan, Melita's desktop application software, provides user-defined,
graphical user interfaces to guide telephone agents through conversations.
Magellan supports real-time access to enterprise-wide customer and product
information residing anywhere within the computing and telephony
infrastructures. Magellan is based on standards and supports EHLLAPI, DDE and
ODBC.
SERVICES
The Company provides multiple forms of service and support for its
customers. Services are primarily contracted along with the purchase of a
system, but when requested by a customer, the Company will also provide
additional training and consulting. Service personnel are located throughout the
United States and also in the United Kingdom, Mexico, and Canada. Additional
international services are provided by the company's international VARs.
The primary forms of services are: maintenance, installation, training,
custom applications and consulting. Customers who receive maintenance services
are entitled to customer and technical support 24 hours a day, seven days a
week. Maintenance customers also receive ongoing system support and baseline
software upgrades. The Company contracts with IBM, TSS and other parties to
provide local hardware support.
Installation and integration services consist of custom application
configuration design and documentation along with the physical installation and
integration of the system. Introductory training classes are provided as part of
each initial system purchase and advanced classes are provided for additional
fees. Consulting and other special customer services such as custom application
development, scripting and call center consulting are also offered to customers
by service personnel.
SALES AND MARKETING
The Company sells its products primarily through a direct sales channel and
through VARs. Sales in the United States, Mexico, 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's marketing activities include product management, product
marketing, direct marketing, public relations, press and analyst communications,
event support and management of the Company's website. The Company's Business
Development Group is responsible for developing alliances, joint marketing and
co-development relationships with call center industry suppliers.
The Company's customers independently operate domestic and international
User Groups. Each group conducts annual as well as regional User Group meetings
typically focused on common applications and call center opportunities. The
Company participates as invited in the User Group conferences generally by
conducting seminars, product demonstrations and training sessions.
CUSTOMERS
The Company's call management solutions are used by organizations in a
broad range of industries. In 1997, the top five industry groups by revenue
were: banking, financial services, telemarketing, communications, and service
bureaus. Revenues from the top five customers were 25.0% of total revenues in
1995, 24.5% of total revenues in 1996, and 27.9% of total revenues in 1997. In
1995 and 1996, no single customer accounted
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for more than 10% of revenues. In 1997, BancOne Services Corporation accounted
for 11.8% of revenues. 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.
ENGINEERING, 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 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)
telephony-based contact services, including the Company's patented predictive
dialing and dynamic call blending applications. 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 Graphical User Interface ("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'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 off-the-shelf analog and digital connectivity to
telecommunications equipment and services. The Company's newest generation of
agent workstation software, Magellan supports a variety of standard data access
methodologies including EHLLAPI, DDE, ODBC and CTI links which are often
proprietary and therefore require CTI middleware such as IBM's CallPath or
Dialogic's CTConnect to facilitate integration with various PBX/ACD switching
platforms.
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 solution. 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 study, the Company is one of four
leading suppliers of outbound call processing products in a market with greater
than fifty suppliers identified. The Company also competes in the CTI segment of
the market, where principal competitors include Genesys Telecommunications
Laboratories, Inc., Nabnasset Corporation and IMA, among others. The Company may
face additional competition from PBX/ACD vendors, other communications solution
and 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 one of the major
factors considered by 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.
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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.
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
numerous U.S. and foreign patents covering various processes and technologies
utilized in call management systems. These patents cover the Company's
proprietary implementations of applications such as inbound/outbound call
blending, call progress analysis, screen pops of the called person's account
information, Cancel Dial and Single System Image View. The Company also has a
number of pending patent applications on customer interaction management
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 U.S. patents or patent applications.
EMPLOYEES
As of January 31, 1998, the Company had 315 full-time employees, (106 in
customer service and operations, 104 in sales and marketing, 61 in research and
development and 44 in administration), of whom 283 were based in the United
States and 32 were based in other countries. With the exception of the Company's
subsidiary employees in Mexico, none of the employees of the Company are covered
by a collective bargaining agreement. The Company considers its employee
relations 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 personnel is intense,
and there can be no assurance that the Company will be successful in retaining
or recruiting key personnel.
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EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
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NAME AGE POSITION
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Aleksander Szlam......................... 46 Chairman of the Board and Chief Executive Officer
Mark B. Adams............................ 46 Vice President, Finance & Chief Financial Officer
Dan K. Lowring........................... 38 Vice President, Corporate and Strategic Planning,
Treasurer and Secretary
William K. Dumont........................ 48 Vice President, Sales
John A. Lamb............................. 45 Vice President, New Business Development
Lee H. Davies............................ 54 Vice President, International
Donald L. House.......................... 56 Director
Don W. Hubble............................ 59 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.
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.
Dan K. Lowring has served as Vice President, Corporate and Strategic
Planning since December 1997, and served as Secretary since March 1997 and as
Treasurer of the Company since January 1997. From July 1993 to December 1996 he
served as Director of Finance, from March 1993 to July 1993, he served as
Controller, and from October 1990 to March 1993 he served as Manager of Finance
for the Company.
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, International of the Company
since September 1997 and was Vice President, Operations of the Company from
September 1995 to September 1997. 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.
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 Microhelp, Inc., a
software development company. From 1990 to 1995, he held various positions in
the sales and engineering departments of the Company.
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
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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 is Chairman, President and CEO of Angelica Corporation. Mr.
Hubble served with National Service Industries, Inc. ("NSI") from 1980 until
October 1996, most recently serving as President and Chief Operating Officer.
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.
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. 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. Please see Exhibit
99.1 "Safe Harbor Compliance Statement for Forward Looking Statements", the
terms of which are incorporated herein, for additional factors to be considered
by shareholders and prospective shareholders.
ITEM 2. 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. The facility is owned by a partnership controlled by the Company's
Chairman of the Board, Chief Executive Officer and principal shareholder.
The Company also leases space for several sales and support centers located
throughout the United States and in Mexico, 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.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 1997.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS
MATTERS
Melita's Common Stock has been traded on the Nasdaq National Market under
the symbol "MELI" since its initial public offering on June 4, 1997. Prior to
that date there was no public market for Melita's Common Stock. The following
table sets forth the range of high and low daily closing prices per share of
Common Stock on the National Market System for each quarter since the IPO of the
year ended December 31, 1997 as reported by the National Association of
Securities Dealers Automated Quotation System (NASDAQ).
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FISCAL 1997 HIGH LOW
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Second Quarter.............................................. $13.000 $10.000
Third Quarter............................................... 12.875 8.000
Fourth Quarter.............................................. 11.750 8.125
</TABLE>
As of March 11, 1998 there were approximately 151 registered holders of
record of the Company's Common Stock and approximately 1,110 beneficial
shareholders of the Company's Common Stock.
The Company has never paid cash dividends on its Common Stock and has no
present intentions to pay cash dividends in the future. The Company intends to
retain any future earnings to finance the growth of the Company.
During the past three years, the Company has issued the following
securities which were not registered under the Securities Act of 1933 as amended
(the "Securities Act"). In connection with the Company's acquisition of all the
outstanding shares of Melita Europe Limited ("Melita Europe") and Inventions,
Inc. ("Inventions") by share exchange, on June 4, 1997, the Company issued a
total of 3,143,395 shares of its Common Stock to the former shareholders of
Melita Europe and Inventions. The consideration issued by the Company was
determined based on a share exchange ratio analysis of the Company, Melita
Europe and Inventions by an independent appraiser. No underwriter was engaged in
connection with the issuance of the shares. The sale and issuance of shares was
exempt from registration under the Securities Act by virtue of Section 4(2) of
the Securities Act and Regulation D promulgated thereunder.
9
<PAGE> 11
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain financial data with respect to the
Company for each of the five years in the period ended December 31, 1997.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS
DATA:
NET REVENUES:
Product.............................. $46,065 $32,077 $24,620 $18,186 $17,709
Service.............................. 19,725 15,463 10,662 8,970 6,959
------- ------- ------- ------- -------
Total revenues............. 65,790 47,540 35,282 27,156 24,668
COST OF REVENUES:
Product.............................. 15,531 11,494 8,730 6,310 5,181
Service.............................. 9,642 6,863 5,282 3,254 2,924
------- ------- ------- ------- -------
Total cost of revenues..... 25,173 18,357 14,012 9,564 8,105
------- ------- ------- ------- -------
GROSS MARGIN......................... 40,617 29,183 21,270 17,592 16,563
OPERATING EXPENSES:
Engineering, research and
development........................ 6,880 5,070 4,050 3,660 3,386
Selling, general and
administrative..................... 22,320 16,765 12,559 11,332 9,528
------- ------- ------- ------- -------
Total operating expenses... 29,200 21,835 16,609 14,992 12,914
------- ------- ------- ------- -------
INCOME FROM OPERATIONS............... 11,417 7,348 4,661 2,600 3,649
OTHER INCOME (EXPENSE), Net.......... 662 261 88 46 186
------- ------- ------- ------- -------
INCOME BEFORE INCOME TAXES........... 12,079 7,609 4,749 2,646 3,835
INCOME TAX PROVISION (BENEFIT):
Tax provision as a C corporation..... 3,023 -- -- (26) 25
Deferred tax adjustment.............. (1,473) -- -- -- --
------- ------- ------- ------- -------
NET INCOME................. $10,529 $ 7,609 $ 4,749 $ 2,672 $ 3,810
======= ======= ======= ======= =======
INCOME BEFORE PRO FORMA INCOME
TAXES.............................. $12,079 $ 7,609 $ 4,749 $ 2,672 $ 3,810
PRO FORMA INCOME TAXES............... 4,469 2,827 1,794 1,164 1,454
------- ------- ------- ------- -------
PRO FORMA NET INCOME....... $ 7,610 $ 4,782 $ 2,955 $ 1,508 $ 2,356
======= ======= ======= ======= =======
EARNINGS PER SHARE:
Diluted earnings per share........... $ 0.73 $ 0.62 $ 0.38 $ 0.24 $ 0.34
Pro forma diluted earnings per
share.............................. $ 0.53 $ 0.39 $ 0.24 $ 0.14 $ 0.21
WEIGHTED AVERAGE SHARES OUTSTANDING:
Diluted.............................. 14,386 12,363 12,338 11,143 11,143
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital...................... $32,251 $ 8,124 $ 6,904 $ 8,594 $ 8,955
Total assets......................... 56,395 27,069 20,928 17,635 15,679
Long-term debt, net of current
portion............................ -- -- 2,644 3,068 3,111
Total shareholders' equity........... 37,289 10,872 6,657 7,103 7,385
</TABLE>
10
<PAGE> 12
MELITA INTERNATIONAL CORPORATION
QUARTER ENDED
<TABLE>
<CAPTION>
1996 1997
-------------------------------------- --------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31
------- ------- -------- ------- ------- ------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET REVENUES:
Product.................. $7,691 $ 8,108 $ 7,428 $ 8,850 $10,265 $10,714 $11,728 $13,358
Service.................. 3,330 3,778 4,161 4,194 4,404 4,816 5,200 5,305
------ ------- ------- ------- ------- ------- ------- -------
Total
revenues..... 11,021 11,886 11,589 13,044 14,669 15,530 16,928 18,663
------ ------- ------- ------- ------- ------- ------- -------
COST OF REVENUES:
Product.................. 2,449 2,990 2,660 3,395 3,836 3,565 3,812 4,318
Service.................. 1,439 1,733 1,902 1,789 1,931 2,433 2,628 2,650
------ ------- ------- ------- ------- ------- ------- -------
Total cost of
revenues..... 3,888 4,723 4,562 5,184 5,767 5,998 6,440 6,968
------ ------- ------- ------- ------- ------- ------- -------
GROSS MARGIN............. 7,133 7,163 7,027 7,860 8,902 9,532 10,488 11,695
------ ------- ------- ------- ------- ------- ------- -------
OPERATING EXPENSES:
Engineering, research and
development............ 945 1,151 1,409 1,565 1,381 1,644 1,793 2,062
Selling, general and
administrative......... 4,137 3,992 4,212 4,424 5,134 5,231 5,732 6,223
------ ------- ------- ------- ------- ------- ------- -------
Total operating
expenses..... 5,082 5,143 5,621 5,989 6,515 6,875 7,525 8,285
------ ------- ------- ------- ------- ------- ------- -------
INCOME FROM OPERATIONS... 2,051 2,020 1,406 1,871 2,387 2,657 2,963 3,410
OTHER INCOME (EXPENSE),
Net.................... (11) 54 20 198 (51) (9) 396 326
------ ------- ------- ------- ------- ------- ------- -------
INCOME BEFORE INCOME
TAXES.................. 2,040 2,074 1,426 2,069 2,336 2,648 3,359 3,736
INCOME TAX PROVISION
(BENEFIT):
Tax provision as a C
corporation............ -- -- -- -- 16 393 1,276 1,338
Deferred tax
adjustment............. -- -- -- -- -- (1,473) -- --
------ ------- ------- ------- ------- ------- ------- -------
NET INCOME..... $2,040 $ 2,074 $ 1,426 $ 2,069 $ 2,320 $ 3,728 $ 2,083 $ 2,398
====== ======= ======= ======= ======= ======= ======= =======
INCOME BEFORE PRO FORMA
INCOME TAXES........... 2,040 2,074 1,426 2,069 2,336 2,648 3,359 3,736
PRO FORMA INCOME TAXES... 762 775 517 773 911 983 1,276 1,299
------ ------- ------- ------- ------- ------- ------- -------
PRO FORMA NET
INCOME....... $1,278 $ 1,299 $ 909 $ 1,296 $ 1,425 $ 1,665 $ 2,083 $ 2,437
====== ======= ======= ======= ======= ======= ======= =======
</TABLE>
11
<PAGE> 13
MELITA INTERNATIONAL CORPORATION
QUARTER ENDED
<TABLE>
<CAPTION>
1996 1997
-------------------------------------- --------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31
------- ------- -------- ------- ------- ------- -------- -------
(AS A PERCENTAGE OF TOTAL NET REVENUES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET REVENUES:
Product.................. 69.8% 68.2% 64.1% 67.8% 70.0% 69.0% 69.3% 71.6%
Service.................. 30.2 31.8 35.9 32.2 30.0 31.0 30.7 28.4
----- ----- ----- ----- ----- ----- ----- -----
Total
revenues..... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- ----- ----- -----
COST OF REVENUES:
Product.................. 22.2 25.2 23.0 26.0 26.1 23.0 22.5 23.1
Service.................. 13.1 14.6 16.4 13.7 13.2 15.6 15.5 14.2
----- ----- ----- ----- ----- ----- ----- -----
Total cost of
revenues..... 35.3 39.8 39.4 39.7 39.3 38.6 38.0 37.3
----- ----- ----- ----- ----- ----- ----- -----
GROSS MARGIN............. 64.7 60.2 60.6 60.3 60.7 61.4 62.0 62.7
----- ----- ----- ----- ----- ----- ----- -----
OPERATING EXPENSES:
Engineering, research and
development............ 8.6 9.7 12.2 12.0 9.4 10.6 10.6 11.0
Selling, general and
administrative......... 37.5 33.6 36.3 33.9 35.0 33.7 33.9 33.4
----- ----- ----- ----- ----- ----- ----- -----
Total operating
expenses..... 46.1 43.3 48.5 45.9 44.4 44.3 44.5 44.4
----- ----- ----- ----- ----- ----- ----- -----
INCOME FROM OPERATIONS... 18.6 16.9 12.1 14.4 16.3 17.1 17.5 18.3
OTHER INCOME
(EXPENSE),
Net.......... (0.1) 0.5 0.2 1.5 (0.4) (0.1) 2.3 1.7
----- ----- ----- ----- ----- ----- ----- -----
INCOME BEFORE INCOME
TAXES.................. 18.5 17.4 12.3 15.9 15.9 17.0 19.8 20.0
INCOME TAX PROVISION AS A
C CORPORATION.......... -- -- -- -- 0.1 2.5 7.5 7.2
DEFERRED TAX
ADJUSTMENT............. -- -- -- -- -- (9.5) -- --
----- ----- ----- ----- ----- ----- ----- -----
NET INCOME..... 18.5% 17.4% 12.3% 15.9% 15.8% 24.0% 12.3% 12.8%
===== ===== ===== ===== ===== ===== ===== =====
INCOME BEFORE PRO FORMA
INCOME TAXES........... 18.5 17.4 12.3 15.9 15.9 17.0 19.8 20.0
PRO FORMA INCOME TAXES... 6.9 6.5 4.5 5.9 6.2 6.3 7.5 6.9
----- ----- ----- ----- ----- ----- ----- -----
PRO FORMA NET
INCOME....... 11.6% 10.9% 7.8% 10.0% 9.7% 10.7% 12.3% 13.1%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
12
<PAGE> 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Melita International Corporation is a leading provider of integrated
customer interaction and intelligent call management solutions that enable
businesses to automate call center activities and enhance their telephony-based
customer commerce. The Company's principal products, PhoneFrame CS and
PhoneFrame Explorer, are integrated systems 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.
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 if there are no significant post-delivery obligations,
if collection is probable and if the agreement requires payment within one year.
Revenues from post-contract maintenance support are recognized ratably over the
term of the support period. Post-contract maintenance support revenues accounted
for approximately 21.2% of revenues in 1997. Revenues from consulting,
installation and training services are recognized as the services are performed.
Of these revenues, only revenues from maintenance contracts are expected to be
recurring. In any given period, a significant portion of the Company's revenues
may be derived from large sales to a limited number of customers. During 1995
and 1996, no customer accounted for more than 10% of revenues. During 1997, only
BancOne Services Corporation, at 11.8%, accounted for greater than 10% of the
Company's revenues. Revenues of the five largest customers approximated 25.0%,
24.5% and 27.9%, for 1995, 1996 and 1997, respectively.
International revenues, or revenues from sales to customers outside the
United States accounted for 22.5%, 21.0% and 18.4% of the Company's revenues for
1995, 1996 and 1997 respectively. The Company relies on VARs to sell, install
and support its products in countries outside of the United States, Canada,
Mexico and the United Kingdom. The Company believes that its continued growth
and profitability will require further expansion of its international
operations. To successfully expand international sales, the Company must
establish additional foreign operations, hire additional personnel and recruit
additional VARs. To the extent the Company is unable to do so on a timely basis,
the Company's revenue growth, if any, may be slowed, and profitability may be
adversely affected as significant costs may be incurred in advance of the
international revenues. The Company's international revenues are denominated
primarily 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 ($2,000), $162,000
and ($20,000) in 1995, 1996 and 1997, 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.
RESULTS OF OPERATIONS
The following table sets forth items shown in the Company's Consolidated
Statement of Operations as a percentage of total revenues for the periods
indicated. The table should be read in conjunction with the Financial Statement
and notes to Consolidated Financial Statements contained elsewhere herein.
13
<PAGE> 15
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
NET REVENUES:
Product................................................... 70.0% 67.5% 69.8%
Service................................................... 30.0 32.5 30.2
----- ----- -----
Total revenues.................................... 100.0 100.0 100.0
----- ----- -----
COST OF REVENUES:
Product................................................... 23.6 24.2 24.7
Service................................................... 14.7 14.4 15.0
----- ----- -----
Total cost of revenues............................ 38.3 38.6 39.7
----- ----- -----
GROSS MARGIN................................................ 61.7 61.4 60.3
----- ----- -----
OPERATING EXPENSES:
Engineering, research and development..................... 10.5 10.7 11.5
Selling, general and administrative....................... 33.8 35.2 35.6
----- ----- -----
Total operating expenses.......................... 44.3 45.9 47.1
----- ----- -----
INCOME FROM OPERATIONS...................................... 17.4 15.5 13.2
OTHER INCOME (EXPENSE), Net................................. 1.0 0.5 0.3
----- ----- -----
INCOME BEFORE INCOME TAXES.................................. 18.4 16.0 13.5
INCOME TAX PROVISION (BENEFIT):............................. 2.4 -- --
----- ----- -----
NET INCOME........................................ 16.0 16.0 13.5
===== ===== =====
INCOME BEFORE INCOME TAXES.................................. 18.4 16.0 13.5
PRO FORMA INCOME TAXES...................................... 6.8 6.0 5.1
----- ----- -----
PRO FORMA NET INCOME.............................. 11.6% 10.0% 8.4%
===== ===== =====
</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>
YEAR ENDED
DECEMBER 31,
---------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Cost of product revenues.................................... 33.7% 35.8% 35.5%
Cost of service revenues.................................... 48.9% 44.4% 49.5%
</TABLE>
REVENUES
Product. The Company increased its product revenues by 30.3% from $24.6
million in 1995 to $32.1 million in 1996, and by 43.6% to $46.1 million in 1997.
The increase in product revenues was due to continued strong demand for the
intelligent call center management solutions provided by the Company's products,
new product offerings and increased sales and marketing efforts. Over this
period, the call center solutions provided by the Company were expanded by the
introduction of PhoneFrame CS in the first half of 1995, the introduction of
Magellan in the fourth quarter of 1996, and the introduction of PhoneFrame
Explorer in the fourth quarter of 1997.
Service. The Company increased its service revenues by 45.0% from $10.7
million in 1995 to $15.5 million in 1996, and by 27.6% to $19.7 million in 1997.
Service revenues increased primarily due to an increase in the number of
post-contract maintenance support agreements and, to a lesser degree, from
revenues generated by installation of new systems and upgrades to existing
systems.
14
<PAGE> 16
COST OF REVENUES
Product. The cost of product revenues includes the cost of material, cost
of sublicensing third-party software and employee-related costs for product
assembly. Cost of product revenues increased from $8.7 million, or 35.5% of
related product revenues, in 1995, to $11.5 million, or 35.8% of related product
revenues, in 1996, and to $15.5 million, or 33.7% of related product revenues,
in 1997. The increase in absolute dollars in the cost of product revenues was
due to the increase in the volume of shipments of the Company's products. The
1996 increase, as a percentage of product revenues, was primarily 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. The 1997 decrease, as a percentage of product revenues, was
primarily due to product design improvements and reduced material purchase
costs.
Service. The cost of service revenues is primarily comprised of
employee-related costs for customer support, consulting and field service
personnel and fees paid to third-parties for installation services and post-
installation hardware maintenance services. Cost of service revenues increased
from $5.3 million, or 49.5% of related service revenues, in 1995, to $6.9
million, or 44.4% of related service revenues, in 1996, and to $9.6 million, or
48.9% of related product revenues, in 1997. The increase in absolute dollars in
the cost of service revenues was primarily due to the increase in service
personnel to support the larger installed customer base and higher volume of
installations. The 1996 decrease, as a percentage of service revenues, was
primarily due to operational efficiencies, reduced third-party hardware
maintenance fees and improved functionality within the software to facilitate
the installation. The 1997 increase, as a percentage of service revenues, was
primarily due to increases in support service personnel, increases in the salary
compensation levels and higher third-party hardware maintenance fees.
OPERATING EXPENSES
Engineering, research and development. Engineering, research and
development expenses primarily consist of employee-related costs for engineering
personnel involved with software, voice processing and CTI technology
development. Also included are outside contractor costs for development projects
and expendable equipment purchases. Engineering, research and development costs
increased from $4.1 million, or 11.5% of revenues, in 1995 to $5.1 million, or
10.7% of revenues, in 1996, and to $6.9 million, or 10.5% of revenues, in 1997.
The increase in absolute dollars resulted primarily from the addition of
developers and outside contractors to support the Company's new product
development efforts, which resulted in the release of PhoneFrame CS 2.0 and
Magellan in 1996 and PhoneFrame Explorer in 1997. The Company intends to
continue to invest heavily in product development activities. As a result,
engineering, research and development costs are expected to increase in absolute
dollars and may increase as a percentage of revenues in the future.
Selling, general and administrative. Selling, general and administrative
expenses consist primarily of employee-related costs for sales, marketing,
administrative, finance and human resources personnel. Also included are
marketing expenditures for trade shows, advertising and other promotional
expenditures. Selling, general and administrative costs increased from $12.6
million, or 35.6% of revenues, in 1995 to $16.8 million, or 35.2% of revenues,
in 1996, and to $22.3 million, or 33.8% of revenues, in 1997. These increases in
absolute dollars were primarily related to the expansion of the Company's sales
and marketing resources, increased commission expenses due to higher sales, and
increased levels of marketing activities. The decreases as a percentage of total
revenues were primarily a result of leveraging the infrastructure and
improvements to operating efficiencies. The Company intends to continue to
expand its sales, marketing and sales support operations in 1998. As result,
selling, general and administrative costs are expected to increase in absolute
dollars and may increase as a percentage of revenue in the future.
15
<PAGE> 17
OTHER INCOME (EXPENSE), NET
Other income (expense), net. Other income (expense), net increased from
$88,000 in 1995 to $261,000 in 1996 and to $662,000 in 1997. The increase in
1996 was primarily attributable to foreign exchange gains, as the British pound
strengthened against the U.S. dollar. The increase in 1997 was primarily due to
interest income earned on the Company's investments in marketable securities,
which increased substantially due to the net proceeds of the June, 1997, initial
public offering of its stock and the $11.2 million of positive cash flow from
operations recorded during 1997.
INCOME TAX PROVISION (BENEFIT)
Income Taxes. In connection with the initial public offering on June 4,
1997, the Company converted its U.S. taxable status 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 deferred
tax assets of $1,473,000. Subsequent to its conversion, the Company also
recorded tax provisions at the effective tax rate of 37.0% in 1997.
Pro Forma Income Taxes. Pro forma income taxes increased from $1.8 million
in 1995 to $2.8 million in 1996 and to $4.5 million in 1997. The Company's pro
forma effective tax rates were 37.8% in 1995, 37.2% in 1996, and 37.0% in 1997.
The Company expects its effective tax rate to decrease for 1998. (See Note 3 of
the Notes to Financial Statements.)
QUARTERLY RESULTS OF OPERATIONS
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 order dates and actual order dates, as
well as non-recurring or unanticipated large orders, can cause significant
variations in the Company's operating results from quarter to quarter.
FINANCIAL CONDITION
Total assets as of December 31, 1997, were $56.4 million, an increase of
$29.3 million from December 31, 1996. The increase was primarily due to
increases in cash, cash equivalents and marketable securities, accounts
receivable, net property and equipment and the establishment of deferred tax
assets. Cash, cash equivalents and marketable securities increased by $21.0
million, primarily due to the net proceeds from the initial public offering in
June, 1997, and positive operating cash flow during 1997. Accounts receivable
increased $3.9 million primarily due to increased sales levels. Net property and
equipment increased by $2.2 million primarily due to purchases of equipment and
software to support the increased number of employees and communications
equipment used for development purposes.
16
<PAGE> 18
Current liabilities as of December 31, 1997, were $19.1 million, an
increase of $2.9 million from December 31, 1996. The increase was primarily due
to an increase in accounts payable and accrued liabilities partially offset by a
decrease in the note payable to a stockholder which was paid in 1997.
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 $7.5
million in 1995, $9.3 million in 1996 and $11.2 million in 1997. In 1996, the
Company's cash was generated by net income, an increase in customer deposits and
offset by an increase in accounts receivable. In 1997, the Company's cash was
generated by net income, an increase in accounts payable and accrued
liabilities, partially offset by an increase in accounts receivable and a
decrease in customer deposits.
The Company's investing activities used cash of $1.7 million in 1995, $1.5
million in 1996 and $27.5 million in 1997. The Company's use of cash was
primarily for the purchase of capital equipment and software to support the
Company's growth and the investment in marketable securities. The increase from
1996 to 1997 of funds available for investing is principally due to the proceeds
from the Company's initial public offering in 1997.
The Company's financing activities used cash of $5.2 million in 1995, $3.8
million in 1996 and generated $13.2 million in 1997. During 1997, the Company
received $36.0 million of cash from the initial public offering of its stock.
The Company paid out $22.8 million to stockholders in distributions or
repayments of notes payable to stockholders. The balance was invested in
marketable securities.
As of December 31, 1997, the Company had working capital of $32.3 million.
Cash and marketable securities were $30.8 million. The Company estimates that it
will incur capital expenditures of approximately $4.0 million in 1998, related
to anticipated increased capital needs of technology and facility upgrades, and
support of increased staffing. The Company believes that existing cash and
marketable securities and potential cash flow from operations will be sufficient
to meet its cash requirements for the next twelve months.
YEAR 2000 COMPLIANCE
The Company has completed an initial assessment of its internal systems and
received confirmation from its principal suppliers that the systems either are
or will be Year 2000 compliant. Neither the cost nor impact of any necessary
compliance efforts are expected to be material.
The Company also has evaluated its products for issues relating to Year
2000 compliance. Although the Company has made substantial changes to its
current products to ensure Year 2000 compliance, no assurance can be made that
the Products will, in fact, operate correctly. In the event that Year 2000
related defects are detected, the Company will necessarily have to redirect
resources from development of other products which could result in delays in
deploying additional products and features. The Company has initiated a
comprehensive program through which it is making available to existing customers
upgrades for currently installed products which are not Year 2000 compliant. See
Risk Factors -- Risks Associated with Technological Advances; Necessity of
Developing New Products; Compliance to Industry Requirements.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." Statement of Financial Accounting Standards
("SFAS") No. 130 is designed to improve the reporting of changes in equity from
period to period. SFAS No. 130 is effective for the Company's fiscal year ending
December 31, 1998. Management does not expect SFAS No. 130 to have a significant
impact on the Company's financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information." SFAS No.
131 requires that an enterprise disclose certain information about operating
segments. SFAS No. 131 is effective for financial statements for the
17
<PAGE> 19
Company's fiscal year ending December 31, 1998. The Company does not expect that
SFAS No. 131 will require significant revision of prior disclosures.
In December 1997, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 97-2, "Software Revenue Recognition." The
standard is effective for transactions entered into in fiscal years beginning
after December 15, 1997. The Company has adopted the standard during the first
quarter of fiscal 1998. The adoption of the standard is not expected to have
significant impact on the Company's financial statements.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MELITA INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND 1996
TOGETHER WITH
AUDITORS' REPORT
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... 19
Consolidated Balance Sheets as of December 31, 1997 and
1996...................................................... 20
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996, and 1995......................... 21
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1997, 1996 and 1995.............. 22
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996, and 1995......................... 23
Notes to Consolidated Financial Statements.................. 24
</TABLE>
18
<PAGE> 20
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and the Board of Directors of
Melita International Corporation:
We have audited the accompanying consolidated balance sheets of MELITA
INTERNATIONAL CORPORATION (a Georgia corporation) AND SUBSIDIARIES as of
December 31, 1997 and 1996 and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Melita International
Corporation and subsidiaries as of December 31, 1997 and 1996 and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
January 30, 1998
19
<PAGE> 21
MELITA INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
IN THOUSANDS, EXCEPT SHARE DATA
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 6,845 $ 9,849
Marketable securities..................................... 23,969 --
Accounts receivable, net of allowance for doubtful
accounts of $876 and $487 at December 31, 1997 and 1996,
respectively............................................ 15,796 11,860
Inventories............................................... 2,461 2,442
Deferred taxes............................................ 2,035 --
Prepaid expenses and other................................ 251 170
------- -------
Total current assets............................... 51,357 24,321
------- -------
PROPERTY AND EQUIPMENT, AT COST
Furniture and fixtures.................................... 1,648 1,361
Equipment................................................. 8,195 5,476
Leasehold improvements.................................... 831 343
------- -------
Total property and equipment....................... 10,674 7,180
Less accumulated depreciation...................... 5,735 4,456
------- -------
Net property and equipment......................... 4,939 2,724
Other assets................................................ 99 24
------- -------
$56,395 $27,069
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 5,326 $ 2,429
Accrued liabilities....................................... 7,763 4,210
Deferred revenue.......................................... 4,029 3,065
Customer deposits......................................... 1,988 3,849
Current maturities of note payable to stockholder (Note
2)...................................................... -- 2,625
Current maturities of capital lease obligations (Note
5)...................................................... -- 19
------- -------
Total current liabilities.......................... 19,106 16,197
------- -------
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' EQUITY:
Preferred stock:
Melita International Corporation, no par value; 20,000,000
shares authorized, 0 shares issued and outstanding at
December 31, 1997, and 1996............................. -- --
Common stock:
Melita International Corporation, no par value;
100,000,000 shares authorized, 15,168,395 shares issued
and outstanding at December 31, 1997, and 8,000,000
shares issued and outstanding at December 31, 1996...... 69 2
Melita Europe Limited, L1 par value; 50,000 shares
authorized, no shares issued and outstanding at December
31, 1997 and 31,328 shares issued and outstanding at
December 31, 1996....................................... -- 46
Inventions, Inc., $5 par value; 100 shares authorized, no
shares issued and outstanding December 31, 1997, 100
shares issued and outstanding December 31, 1996......... -- 1
Additional paid-in capital................................ 36,046 20
Net change in unrealized gains of marketable securities... 15 --
Foreign currency translation adjustment................... 15 35
Retained earnings......................................... 1,144 10,768
------- -------
Total stockholders' equity......................... 37,289 10,872
------- -------
$56,395 $27,069
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
20
<PAGE> 22
MELITA INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
IN THOUSANDS, EXCEPT PER SHARE DATA
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
NET REVENUES:
Product..................................................... $46,065 $32,077 $24,620
Service..................................................... 19,725 15,463 10,662
------- ------- -------
Total revenues.................................... 65,790 47,540 35,282
------- ------- -------
COST OF REVENUES:
Product..................................................... 15,531 11,494 8,730
Service..................................................... 9,642 6,863 5,282
------- ------- -------
Total cost of revenues............................ 25,173 18,357 14,012
------- ------- -------
GROSS MARGIN................................................ 40,617 29,183 21,270
------- ------- -------
OPERATING EXPENSES:
Engineering, research and development....................... 6,880 5,070 4,050
Selling, general, and administrative........................ 22,320 16,765 12,559
------- ------- -------
Total operating expenses.......................... 29,200 21,835 16,609
------- ------- -------
INCOME FROM OPERATIONS...................................... 11,417 7,348 4,661
OTHER INCOME (EXPENSE), NET................................. 662 261 88
------- ------- -------
INCOME BEFORE INCOME TAXES.................................. 12,079 7,609 4,749
------- ------- -------
INCOME TAX PROVISION (BENEFIT):
Tax provision as C corporation.............................. 3,023 -- --
Deferred tax adjustment..................................... (1,473) -- --
------- ------- -------
NET INCOME.................................................. $10,529 $ 7,609 $ 4,749
======= ======= =======
INCOME BEFORE INCOME TAXES.................................. $12,079 $ 7,609 $ 4,749
PRO FORMA INCOME TAXES...................................... 4,469 2,827 1,794
------- ------- -------
PRO FORMA NET INCOME........................................ $ 7,610 $ 4,782 $ 2,955
======= ======= =======
EARNINGS PER SHARE:
Basic earnings per share.................................... $ 0.76 $ 0.63 $ 0.39
======= ======= =======
Diluted earnings per share.................................. $ 0.73 $ 0.62 $ 0.38
======= ======= =======
Pro forma basic earnings per share.......................... $ 0.55 $ 0.40 $ 0.24
======= ======= =======
Pro forma diluted earnings per share........................ $ 0.53 $ 0.39 $ 0.24
======= ======= =======
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic....................................................... 13,832 12,088 12,088
======= ======= =======
Diluted..................................................... 14,386 12,363 12,338
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
21
<PAGE> 23
MELITA INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FOREIGN UNREALIZED
COMMON STOCK ADDITIONAL CURRENCY GAIN ON
------------------- PAID-IN TRANSLATION MARKETABLE RETAINED
SHARES AMOUNT CAPITAL ADJUSTMENT SECURITIES EARNINGS TOTAL
---------- ------ ---------- ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994................. 8,031,428 $49 $ 20 $ 5 $-- $ 7,030 $ 7,104
Net income before pro forma income
taxes.................................. -- -- -- -- -- 4,749 4,749
Cash distributions to stockholders....... -- -- -- -- -- (5,196) (5,196)
Foreign currency translation
adjustment............................. -- -- -- -- -- -- --
---------- --- ------- ---- --- -------- --------
BALANCE, December 31, 1995................. 8,031,428 49 20 5 -- 6,583 6,657
Net income before pro forma income
taxes.................................. -- -- -- -- -- 7,609 7,609
Cash distributions to stockholders....... -- -- -- -- -- (3,424) (3,424)
Foreign currency translation
adjustment............................. -- -- -- 30 -- -- 30
---------- --- ------- ---- --- -------- --------
BALANCE, December 31, 1996................. 8,031,428 49 20 35 -- 10,768 10,872
Net income before pro forma income
taxes.................................. -- -- -- -- -- 10,529 10,529
Issuance of common stock................. 4,025,000 -- 36,046 -- -- -- 36,046
Issuance of stock in combination
transaction (Note 1)................... 3,143,395 67 (20) -- -- -- 47
Cancellation of stock in combination
transaction (Note 1)................... (31,428) (47) -- -- -- -- (47)
Note and cash distributions to
stockholders........................... -- -- -- -- -- (20,153) (20,153)
Unrealized gain on marketable
securities............................. -- -- -- -- 15 -- 15
Foreign currency translation
adjustment............................. -- -- -- (20) -- -- (20)
---------- --- ------- ---- --- -------- --------
BALANCE, December 31, 1997................. 15,168,395 $69 $36,046 $ 15 $15 $ 1,144 $ 37,289
========== === ======= ==== === ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
22
<PAGE> 24
MELITA INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Pro forma net income........................................ $ 7,610 $ 4,782 $ 2,955
Adjustments to reconcile pro forma net income to net cash
provided by operating activities:
Pro forma income taxes.................................... 1,446 2,827 1,794
Deferred taxes............................................ (562) -- --
Depreciation and amortization............................. 1,279 1,141 997
Loss (gain) on sale of property and equipment............. -- 6 (51)
Changes in assets and liabilities:
Accounts receivable.................................... (3,935) (2,657) (1,095)
Inventories............................................ (19) 585 (990)
Prepaid expenses and other assets...................... (81) 172 165
Accounts payable....................................... 2,897 (334) 1,595
Accrued liabilities.................................... 3,552 794 161
Deferred revenue....................................... 964 472 607
Customer deposits...................................... (1,861) 1,417 1,416
Other, net............................................. (95) 63 (18)
-------- ------- -------
Total adjustments................................. 3,585 4,486 4,581
-------- ------- -------
Net cash provided by operating activities......... 11,195 9,268 7,536
-------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (3,494) (1,531) (1,879)
Purchases of marketable securities........................ (23,954) -- --
Proceeds from sale of property and equipment.............. -- -- 132
-------- ------- -------
Net cash used in investing activities............. (27,448) (1,531) (1,747)
-------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of capital lease obligations.................... (19) (48) (40)
Net proceeds from issuance of common stock................ 36,046 -- --
Repayment of notes payable to stockholder................. (2,625) -- --
Repayment of notes payable to stockholder representing
distributions.......................................... (12,900) (375) --
Distributions to stockholder.............................. (7,253) (3,424) (5,196)
-------- ------- -------
Net cash provided by (used in) financing
activities...................................... 13,249 (3,847) (5,236)
-------- ------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS........... (3,004) 3,890 553
CASH AND CASH EQUIVALENTS, beginning of year................ 9,849 5,959 5,406
-------- ------- -------
CASH AND CASH EQUIVALENTS, end of year...................... $ 6,845 $ 9,849 $ 5,959
======== ======= =======
MARKETABLE SECURITIES....................................... $ 23,969 $ -- --
======== ======= =======
CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES............ $ 30,814 $ 9,849 $ 5,959
======== ======= =======
CASH PAID FOR INTEREST DURING THE YEAR...................... $ 335 $ 279 $ 302
======== ======= =======
INCOME TAXES PAID........................................... $ 3,198 $ -- --
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
23
<PAGE> 25
MELITA INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Melita International Corporation (the "Company") is a leading provider of
integrated customer interaction and intelligent call management solutions that
enable customers to operate efficient call centers. The Company's principal
product is an integrated suite of client/server software applications and
hardware that provides outbound and blended call management solutions. Melita
offers periodic ongoing maintenance support for its products, as well as
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 the Pacific Rim.
COMPLETION OF INITIAL PUBLIC OFFERING
On June 4, 1997, the Company completed an initial public offering (the
"Offering") of 4,025,000 shares at $10 per share resulting in net proceeds of
$36,046,000.
BASIS OF COMBINATION
Prior to June 4, 1997, the financial statements are presented on a combined
basis and include the accounts of Melita International Corporation ("Melita"),
Melita Europe Limited ("Melita Europe") and Inventions, Inc. ("Inventions"),
since all were under common control. All significant intercompany accounts and
transactions have been eliminated in combination.
Concurrent with the Offering, the stockholders of Melita Europe and
Inventions contributed their respective shares in exchange for 3,143,395 shares
of Melita. The combination was treated similar to a pooling of interest and no
step-up basis was recorded as the entities involved were under common control.
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements since June 4, 1997 include the
accounts of the Company and its wholly-owned subsidiaries. All significant
intercompany balances have been eliminated in consolidation.
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.
MARKETABLE SECURITIES
The Company's marketable securities are categorized as available-for-sale
securities, as defined by the Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Unrealized holding gains and losses are reflected as a net amount
in a separate component of stockholders' equity until realized. For the purpose
of computing realized gains and losses, cost is identified on a specific
identification basis.
24
<PAGE> 26
MELITA INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. Inventories consist of the following at December 31,
1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Raw materials............................................... $1,251 $1,055
Work in process............................................. 457 337
Finished goods.............................................. 753 1,050
------ ------
Total inventories........................................... $2,461 $2,442
====== ======
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. The straight-line method of
depreciation was adopted for property placed in service after September 30,
1997. Prior to September 30, 1997 an accelerated method was used. The difference
between the accelerated method and the straight-line method was immaterial. The
estimated useful lives are as follows:
<TABLE>
<S> <C>
Furniture and fixtures............................. Five to seven years
Equipment.......................................... Three to seven years
Leasehold improvements............................. Remaining life of lease
</TABLE>
INCOME TAXES
In connection with the Offering, the Company converted its U.S. taxable
status 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 deferred tax assets of $1,473,000.
Prior to June 4, 1997, Melita and Inventions were organized as S
corporations under the Internal Revenue Code and, therefore, were not subject to
federal income taxes. The income or loss of Melita and Inventions was included
in the stockholders' individual federal and state tax returns, and as such, no
provision for income taxes was recorded in the accompanying combined statements
of operations. The Company historically made distributions to cover the
stockholders' anticipated tax liability.
The accompanying financial statements prior to June 4, 1997 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 SFAS No. 52, "Foreign Currency Translation." Net assets of
Melita Europe are translated at the current rates of exchange at December 31.
Income and expense items are translated at the average exchange rate for the
year. The resulting translation adjustments are recorded in stockholders'
equity. The Company has recognized foreign exchange gains (losses) of
approximately ($20,000), $162,000 and ($2,000) in 1997, 1996 and 1995,
respectively.
REVENUE RECOGNITION
The Company generates product revenues primarily from the sale and
licensing of its call center systems or software. The Company's service revenues
are generated from maintenance contracts which include
25
<PAGE> 27
MELITA INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 five 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 $4,029,000
and $3,065,000 at December 31, 1997 and 1996, respectively.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Research and development expenditures are charged to expenses as incurred.
Software development costs 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, 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, 1997, 1996
and 1995. Therefore, the Company has charged all software development costs to
expense as incurred for the years ended December 31, 1997, 1996 and 1995.
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, 1997 and 1996, the Company did
not consider itself to have any significant concentrations of credit risk.
During 1997, only BancOne Services Corporation, at 11.8%, accounted for greater
than 10% of revenues. In 1997, 1996 and 1995 the Company's five largest
customers accounted for approximately 27.9%, 24.5% and 25.0% respectively, of
its total revenues. These sales were predominantly to customers in the financial
services industry. 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.
26
<PAGE> 28
MELITA INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 BASIC AND DILUTED NET INCOME PER SHARE
Pro forma basic earnings per share are computed using pro forma net income
divided by (i) the weighted average number of shares of common stock outstanding
("Weighted Shares") for the period presented including the number of shares
issued in the combination of Melita, Melita Europe and Inventions discussed in
Note 1; and (ii) the number of shares pursuant to Staff Accounting Bulletin 1B.3
that, at the assumed public offering price, would yield proceeds in the amount
necessary to pay the distribution to the majority stockholder as a result of the
Offering that are not covered by the earnings for the year ("Distribution
Shares").
The only difference between basic and diluted net income per share is the
result of the treasury stock method effect of common equivalent shares (CESs).
Pro forma diluted net income per share is computed using pro forma net income
divided by (i) Weighted Shares, (ii) the Distribution Shares and (iii) the
treasury stock method effect of CESs outstanding for each period presented of
554,000; 275,000 and 250,000 for the years ended December 31, 1997, 1996 and
1995, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The book values of accounts receivable, accounts payable, and other
financial instruments approximate their fair values at December 31, 1997 and
1996 principally because of the short-term maturities of these instruments.
ACCRUED LIABILITIES
Accrued liabilities at December 31, 1997 and 1996 include the following (in
thousands):
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Accrued salaries and wages.................................. $3,279 $2,437
Other current liabilities................................... 4,169 1,496
Accrued rent................................................ 315 277
------ ------
Total accrued liabilities......................... $7,763 $4,210
====== ======
</TABLE>
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 is designed to improve the
reporting of changes in equity from period to period. SFAS No. 130 is effective
for the Company's fiscal year ending December 31, 1998. Management does not
expect SFAS No. 130 to have a significant impact on the Company's financial
statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information." SFAS No.
131 requires that an enterprise disclose certain information about operating
segments. SFAS No. 131 is effective for financial statements for the Company's
fiscal year ending December 31, 1998. The Company does not expect that SFAS No.
131 will require significant revision of prior disclosures.
27
<PAGE> 29
MELITA INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-2, "Software Revenue Recognition." The standard
is effective for transactions entered into in fiscal years beginning after
December 15, 1997. The Company will adopt the standard during the first quarter
of fiscal 1998. The adoption of the standard is not expected to have a
significant impact on the Company's 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 STOCKHOLDER
Notes payable to stockholder during the years ended December 31, 1997 and
1996 is as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Note payable to stockholder; due in equal quarterly
installments of $187,500 beginning July 1, 1996, interest
payable monthly at the prime rate plus 1%................. $ -- $2,625
Less current maturities..................................... -- 2,625
------ ------
Note payable to stockholder, net of current maturities...... $ -- $ --
====== ======
</TABLE>
Interest paid to stockholder was $335,000, $271,000 and $294,000 for the
years ended December 31, 1997, 1996 and 1995, respectively.
In 1997, the Company issued notes payable in the amount of $12,900,000
representing undistributed earnings through December 31, 1996. Additionally, the
Company accumulated earnings of $7,253,000 through the closing date of the
Offering. With the proceeds from the Offering, the Company paid the $2,625,000
and the $12,900,000 notes payable and the $7,253,000 of additional accumulated
earnings through the closing date of the Offering.
3. INCOME TAXES
In connection with the Offering, the Company converted its U.S. taxable
status from an S corporation to a C corporation and, accordingly, is subject to
federal and state income taxes. The components of the total deferred tax assets
as of December 31, 1997 are as follows (in thousands):
<TABLE>
<S> <C>
Deferred tax assets and liabilities:
Deferred revenue.......................................... $1,207
Accrued liabilities....................................... 230
Allowance for doubtful accounts........................... 263
Depreciation.............................................. (70)
Inventory................................................. 405
------
Total deferred tax assets......................... $2,035
======
</TABLE>
28
<PAGE> 30
MELITA INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following summarizes the components of the pro forma income tax
provision for the years ended December 31, 1997, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Current domestic taxes:
Federal................................................ $4,405 $2,775 $1,572
State.................................................. 517 326 185
Foreign taxes............................................ 109 (75) 2
Deferred taxes........................................... (562) (199) 35
------ ------ ------
Pro forma tax provision........................ $4,469 $2,827 $1,794
====== ====== ======
</TABLE>
A reconciliation from the federal statutory rate to the pro forma tax
provision for the years ended December 31, 1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<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.......................................... (1.2) (1.3) (0.9)
Other....................................................... 0.2 0.5 0.7
---- ---- ----
Pro forma effective tax rate...................... 37.0% 37.2% 37.8%
==== ==== ====
</TABLE>
4. BENEFIT PLAN
Melita has a defined contribution 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 $429,000,
$119,000 and $90,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
5. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
At December 31, 1997, the future minimum operating lease payments
(including leases with related parties) under noncancelable operating leases
were as follows (in thousands):
<TABLE>
<S> <C>
1998........................................................ $ 663
1999........................................................ 631
2000........................................................ 620
2001........................................................ 600
2002........................................................ 607
Thereafter.................................................. 1,768
------
Total future minimum lease payments............... $4,889
======
</TABLE>
The Company's leases are primarily for equipment and rental of facilities.
Total rental expense for operating leases was $714,000, $751,000 and $728,000 in
1997, 1996 and 1995, 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 stockholder purchased
29
<PAGE> 31
MELITA INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED 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 stockholder was $544,000, $543,000 and
$60,000 in 1997, 1996 and 1995, respectively.
LEGAL MATTERS
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 not currently a party to any material legal proceedings.
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 are granted at the fair market value
and are exercisable based on the specific terms of the grant up to ten years
from the grant date. Options granted primarily vest ratably over a four- or
five-year employment period. The Company reserved the right to purchase vested
options at the then-estimated fair market value prior to the date of an IPO.
During 1996 and 1995, the Company purchased 30,250 and 44,294 respectively,
vested but unexercisable options held by terminated employees for $39,774 and
$2,658, respectively. No options were purchased during 1997. 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 Plan. Options are granted at
the fair market value and are exercisable based on the specific terms of the
grant up to ten years from the grant date. The options vest primarily over a
four-year period subject to acceleration upon the achievement of certain
performance measures.
30
<PAGE> 32
MELITA INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Activity for the 1992 Plan and 1997 Plan is as follows:
<TABLE>
<CAPTION>
OPTION
OPTIONS PRICE
--------- ------------
<S> <C> <C>
OUTSTANDING AT DECEMBER 31, 1993............................ 303,848 $2.75-$2.96
Granted..................................................... 36,375 2.91
Exercised................................................... --
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................................................... --
Forfeited/repurchased....................................... (161,200) 2.81
---------
OUTSTANDING AT DECEMBER 31, 1995............................ 861,450 2.75-3.00
Granted..................................................... 133,785 4.07
Exercised................................................... --
Forfeited/repurchased....................................... (57,463) 2.75-4.07
---------
OUTSTANDING AT DECEMBER 31, 1996............................ 937,772 2.75-4.07
Granted..................................................... 457,325 5.50-10.00
Exercised................................................... --
Forfeited/repurchased....................................... (120,309) 2.91-10.00
---------
OUTSTANDING AT DECEMBER 31, 1997............................ 1,274,788 2.75-10.00
=========
</TABLE>
At December 31, 1997, options to purchase 75,212 shares were available for
future grant and 498,638 shares were exercisable. 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.
During 1995, the Financial Accounting Standards Board issued SFAS No. 123,
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 1997 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 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Risk-free interest rate........................ 5.7%-6.5% 5.4%-6.5% 6.0%-7.8%
Expected dividend yield........................ -- -- --
Expected lives................................. 5 years 5 years 5 years
Expected volatility............................ 65% 65% 65%
</TABLE>
31
<PAGE> 33
MELITA INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The total value of the options granted during the years ended December 31,
1997, 1996 and 1995 were computed as approximately $1,716,000, $264,000 and
$996,000 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 Company's reported pro forma net income and pro forma net income
per share for the years ended December 31, 1997, 1996 and 1995 would have
decreased to the following pro forma amounts (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Pro forma net income:
As reported in the financial statements................ $7,610 $4,782 $2,955
Pro forma in accordance with SFAS No. 123.............. 7,288 4,581 2,867
Pro forma basic net income per common and common
equivalent share:
As reported in the financial statements................ .55 .40 .24
Pro forma in accordance with SFAS No. 123.............. .53 .38 .24
Pro forma diluted net income per common and common
equivalent share:
As reported in the financial statements................ .53 .39 .24
Pro forma in accordance with SFAS No. 123.............. .51 .37 .23
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF SHARES WEIGHTED NUMBER WEIGHTED
OUTSTANDING AT AVERAGE EXERCISABLE AT AVERAGE
EXERCISE PRICES DECEMBER 31, 1997 EXERCISE PRICE DECEMBER 31, 1997 EXERCISE PRICE
- --------------- ----------------- -------------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
$2.75 - $ 4.00 785,252 $2.8811 425,073 $2.8567
4.01 - 8.00 226,536 4.9905 64,565 4.7114
8.01 - 10.00 263,000 9.2676 9,000 9.1667
2.75 - 10.00 1,274,788 4.5736 498,638 3.2107
</TABLE>
7. SEGMENT AND GEOGRAPHIC INFORMATION
The Company is a multinational corporation with operations in the United States,
Canada, Mexico and Europe. The following represents total revenues, net income
and total assets of the following countries representing over 10% of the
combined totals for years ended December 31, 1997, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
United States:
Total revenues.................................... $53,694 $37,568 $27,356
Net income........................................ 8,682 6,217 3,949
Total assets...................................... 51,612 23,799 19,305
Europe:
Total revenues.................................... $ 7,347 $ 4,292 $ 3,252
Net income........................................ 1,680 452 125
Total assets...................................... 4,594 3,270 1,623
Other:
Total revenues.................................... $ 4,749 $ 5,680 $ 4,674
Net income........................................ 167 940 675
Total assets...................................... 189 -- --
</TABLE>
8. 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
32
<PAGE> 34
MELITA INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 on the effective date of the
Offering, the Company effected a 100 to 1 reverse stock split to return the
number of authorized shares to 20,000,000 shares and issued and outstanding
shares to 8,000,000 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 the Offering, the Company's authorized
capital stock consisted 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.
9. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Following is a summary of the pro forma quarterly results of operations for
the years ended December 31, 1997, 1996 and 1995 (in thousands except per share
amounts):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH TOTAL
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
1997
Net revenues......................... $14,669 $15,530 $16,928 $18,663 $65,790
Gross margin......................... 8,902 9,532 10,488 11,695 40,617
Pro forma net income................. 1,425 1,665 2,083 2,437 7,610
Pro forma diluted earnings per
share.............................. .11 .13 .13 .15 .53
1996
Net revenues......................... $11,021 $11,886 $11,589 $13,044 $47,540
Gross margin......................... 7,133 7,163 7,027 7,860 29,183
Pro forma net income................. 1,278 1,299 909 1,296 4,782
Pro forma diluted earnings per
share.............................. .10 .11 .07 .10 .39
1995
Net revenues......................... $ 7,889 $ 7,665 $ 8,780 $10,948 $35,282
Gross margin......................... 5,012 4,723 5,049 6,486 21,270
Pro forma net income................. 713 544 695 1,003 2,955
Pro forma diluted earnings per
share.............................. .06 .04 .06 .08 .24
</TABLE>
33
<PAGE> 35
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
34
<PAGE> 36
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL
STATEMENT SCHEDULE
To the Stockholders and the Board of Directors
of Melita International Corporation:
We have audited in accordance with generally accepted auditing standards,
the financial statements of Melita International Corporation (a Georgia
Corporation) and Subsidiaries included in this Form 10-K and have issued our
report thereon dated January 30, 1998. Our audit was made for the purpose of
forming an opinion on the basic financial statements taken as a whole. The
schedule on page 36 is the responsibility of the company's management and is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
January 30, 1998
35
<PAGE> 37
MELITA INTERNATIONAL CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO
BEGINNING COST AND BALANCE AT
OF YEAR EXPENSES DEDUCTIONS END 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
1997
Allowance for doubtful accounts............. $487,000 $1,140,000 $ 751,000 $876,000
Allowance for inventory obsolescence........ 485,000 986,000 596,000 875,000
</TABLE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
The information concerning the directors of the Company required under this
item is incorporated herein by reference to the Company's definitive proxy
statement pursuant to Regulation 14A, to be filed with the Commission not later
than 120 days after the close of the Company's 1997 fiscal year ended December
31, 1997 under the heading "Election of Directors". Certain information
regarding directors and executive officers of the Company is included in Part I,
Item 1 of this report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information concerning the directors of the Company required under this
item is incorporated herein by reference to the Company's definitive proxy
statement pursuant to Regulation 14A, to be filed with the Commission not later
than 120 days after the close of the Company's 1997 fiscal year ended December
31, 1997 under the heading "Compensation and Other Information Concerning
Directors and Officers".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information concerning the directors of the Company required under this
item is incorporated herein by reference to the Company's definitive proxy
statement pursuant to Regulation 14A, to be filed with the Commission not later
than 120 days after the close of the Company's 1997 fiscal year ended December
31, 1997 under the heading "Principal Holders of Voting Securities" and
"Election of Directors".
ITEM 13. CERTAIN RELATIONSHIPS AND TRANSACTIONS
The information concerning the directors of the Company required under this
item is incorporated herein by reference to the Company's definitive proxy
statement pursuant to Regulation 14A, to be filed with the Commission not later
than 120 days after the close of the Company's 1997 fiscal year ended December
31, 1997 under the heading "Principal Holders of Voting Securities" and
"Election of Directors".
36
<PAGE> 38
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements
The financial statements of Melita International Corporation and
reports of independent auditors as set forth under Item 8 of this report
on Form 10-K are incorporated herein by reference.
2. Financial Statement Schedule
(i) The Financial Statement Schedule of Melita International
Corporation for the Years Ended December 31, 1997, 1996 and 1995 is
filed as part of this Report on Form 10-K and should be read in
conjunction with the Financial Statements, and related notes thereto, of
Melita International Corporation.
(ii) Report of Independent Public Accountants on Financial
Statement Schedule.
(b) Reports on Form 8-K with respect to resignation of J. Neil Smith,
President, filed December 9, 1997.
(i) Report on Form 8-K with respect to the resignation of J. Neil
Smith, President, filed December 9, 1997.
(c) Exhibits. The following exhibits are filed as part of, or are
incorporated by reference into, this report on Form 10-K:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
3.1 -- Amended and Restated Articles of Incorporation of the
Company (incorporated by reference to Exhibit 3.3 to
Amendment No. 1 to the Company's Registration Statement on
Form S-1 No. 333-22855 filed March 28, 1997).
3.2 -- Amended and Restated Bylaws of the Company (incorporated by
reference to Exhibit 3.4 to Amendment No. 1 to the Company's
Registration Statement on Form S-1 No. 333-22855 filed March
28, 1997).
10.1 -- Lease Agreement between the Company and 5051 Peachtree
Corners Circle, L.L.C. (incorporated by reference to Exhibit
10.1 to the Company's Registration Statement on Form S-1 No.
333-22855 filed March 6, 1997).
10.2 -- 1992 Stock Option Plan effective June 4, 1992, as amended
March 1, 1997 (incorporated by reference to Exhibit 10.2 to
the Company's Registration Statement on Form S-1 No.
333-22855 filed March 6, 1997).
10.3 -- 1997 Stock Option Plan effective February 6, 1997, as
amended October 21, 1997.
10.4 -- Employee Stock Purchase Plan adopted March 1, 1997
(incorporated by reference to Exhibit 10.4 to Amendment No.
1 to the Company's Registration Statement on Form S-1 No.
333-22855 filed March 28, 1997).
10.5 -- 401(k) Profit Sharing Plan as amended effective January 1,
1993 (incorporated by reference to Exhibit 10.5 to the
Company's Registration Statement on Form S-1 No. 333-22855
filed March 6, 1997).
10.6 -- Employment Agreement between the Company and Aleksander
Szlam dated March 5, 1997 (incorporated by reference to
Exhibit 10.6 to Amendment No. 1 to the Company's
Registration Statement on Form S-1 No. 333-22855 filed March
28, 1997).
</TABLE>
37
<PAGE> 39
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
10.7 -- Form of Tax Indemnification Agreement between the Company
and certain shareholders of the Company (incorporated by
reference to Exhibit 10.8 to the Company's Registration
Statement on Form S-1 No. 333-22855 filed March 6, 1997).
10.8 -- Form of Tax Indemnification Agreement between Inventions,
Inc. and certain shareholders of Inventions, Inc.
(incorporated by reference to Exhibit 10.9 to the Company's
Registration Statement on Form S-1 No. 333-22855 filed March
6, 1997).
11.1 -- Statement re: Computation of per share earnings.
21.1 -- List of subsidiaries of the Company.
23.1 -- Consent of Arthur Andersen LLP.
27.1 -- Financial Data Schedule (SEC use only).
27.2 -- Restated Financial Data Schedule (SEC use only).
27.3 -- Restated Financial Data Schedule (SEC use only).
99.1 -- Private Securities Litigation Reform Act of 1995 Safe Harbor
Compliance Statement for Forward-Looking Statements.
</TABLE>
38
<PAGE> 40
SIGNATURES
Pursuant to the requirements of Section 12 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MELITA INTERNATIONAL CORPORATION
By: /s/ ALEKSANDER SZLAM
------------------------------------
Aleksander Szlam
Chairman of the Board and
Chief Executive Officer
March 30, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant 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 March 30, 1998
- ----------------------------------------------------- Executive Officer (Principal
Aleksander Szlam Executive Officer)
/s/ MARK B. ADAMS Vice President -- Finance and March 30, 1998
- ----------------------------------------------------- Chief Financial Officer
Mark B. Adams (Principal Financial and
Accounting Officer)
/s/ DON W. HUBBLE Director March 30, 1998
- -----------------------------------------------------
Don W. Hubble
/s/ DONALD L. HOUSE Director March 30, 1998
- -----------------------------------------------------
Donald L. House
</TABLE>
39
<PAGE> 41
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
3.1 -- Amended and Restated Articles of Incorporation of the
Company (incorporated by reference to Exhibit 3.3 to
Amendment No. 1 to the Company's Registration Statement on
Form S-1 No. 333-22855 filed March 28, 1997).
3.2 -- Amended and Restated Bylaws of the Company (incorporated by
reference to Exhibit 3.4 to Amendment No. 1 to the Company's
Registration Statement on Form S-1 No. 333-22855 filed March
28, 1997).
10.1 -- Lease Agreement between the Company and 5051 Peachtree
Corners Circle, L.L.C. (incorporated by reference to Exhibit
10.1 to the Company's Registration Statement on Form S-1 No.
333-22855 filed March 6, 1997).
10.2 -- 1992 Stock Option Plan effective June 4, 1992, as amended
March 1, 1997 (incorporated by reference to Exhibit 10.2 to
the Company's Registration Statement on Form S-1 No.
333-22855 filed March 6, 1997).
10.3 -- 1997 Stock Option Plan effective February 6, 1997, as
amended October 21, 1997.
10.4 -- Employee Stock Purchase Plan adopted March 1, 1997
(incorporated by reference to Exhibit 10.4 to Amendment No.
1 to the Company's Registration Statement on Form S-1 No.
333-22855 filed March 28, 1997).
10.5 -- 401(k) Profit Sharing Plan as amended effective January 1,
1993 (incorporated by reference to Exhibit 10.5 to the
Company's Registration Statement on Form S-1 No. 333-22855
filed March 6, 1997).
10.6 -- Employment Agreement between the Company and Aleksander
Szlam dated March 5, 1997 (incorporated by reference to
Exhibit 10.6 to Amendment No. 1 to the Company's
Registration Statement on Form S-1 No. 333-22855 filed March
28, 1997).
10.7 -- Form of Tax Indemnification Agreement between the Company
and certain shareholders of the Company (incorporated by
reference to Exhibit 10.8 to the Company's Registration
Statement on Form S-1 No. 333-22855 filed March 6, 1997).
10.8 -- Form of Tax Indemnification Agreement between Inventions,
Inc. and certain shareholders of Inventions, Inc.
(incorporated by reference to Exhibit 10.9 to the Company's
Registration Statement on Form S-1 No. 333-22855 filed March
6, 1997).
11.1 -- Statement re: Computation of per share earnings.
21.1 -- List of subsidiaries of the Company.
23.1 -- Consent of Arthur Andersen LLP.
27.1 -- Financial Data Schedule (SEC use only).
27.2 -- Restated Financial Data Schedule (SEC use only).
27.3 -- Restated Financial Data Schedule (SEC use only).
99.1 -- Private Securities Litigation Reform Act of 1995 Safe Harbor
Compliance Statement for Forward-Looking Statements.
</TABLE>
40
<PAGE> 1
EXHIBIT 10.3
AMENDMENT NO. 1
TO
MELITA INTERNATIONAL CORPORATION
1997 STOCK OPTION PLAN
The Melita International Corporation 1997 Stock Option (the "Plan") is
hereby amended as follows:
1. Amendment Regarding Option Replenishment. Section 3 of the Plan is
hereby amended as follows:
SECTION 3.
SHARES SUBJECT TO OPTIONS
The initial number of Shares reserved for issuance under this Plan shall be
1,850,000 Shares of Common Stock, less the number of Shares (a) which have been
issued pursuant to exercised grants made under the Melita International
Corporation 1992 Discounted Stock Option Plan (the "1992 Plan"), or (b) which
are subject to options granted which remain outstanding under the 1992 Plan.
The number of shares of Common Stock available for issuance under the Plan
shall be automatically adjusted on the first day of each fiscal year, beginning
with the 1998 fiscal year, by a number of Shares such that the total number of
shares reserved for issuance under this Plan equals the sum of (i) the
aggregate number of Shares previously issued under this Plan and the 1992 Plan;
(ii) the aggregate number of Shares subject to then outstanding options granted
under this Plan and the 1992 Plan; and (iii) 5% of the number of shares of
Common Stock outstanding on the last day of the preceding fiscal year.
Notwithstanding the foregoing, not more than 750,000 of the Shares available
for grant each year shall be available for issuance pursuant to ISOs, such that
not more than 7,500,000 shares resulting from such automatic adjustments may
ever be issued pursuant to ISOs during the term of the Plan.
Such Shares shall be reserved, to the extent that the Company deems
appropriate, from authorized but unissued Shares, and from Shares which have
been reacquired by the Company. Furthermore, any Shares subject to an Option
which remain unissued after the cancellation, expiration or exchange of such
Option thereafter shall again become available for use under this Plan, and any
Shares subject to an option granted under the 1992 Plan which remain unissued
after the cancellation, expiration or exchange of such option thereafter shall
become available for use under this Plan. Notwithstanding the above, any
Surrendered Shares which remain after the surrender of an Option under Section
11 shall not again become available for use under this Plan.
2. Effective Date. The effective date of this Amendment shall be October
21, 1997, provided, the shareholders of the Company approve this Amendment
within 12 months after such effective date. Any Options granted under the Plan
as amended hereby before the date of such approval automatically shall be
granted subject to such approval.
3. Miscellaneous.
(a) Capitalized terms not otherwise defined herein shall have the
meanings given them in the Plan.
(b) Except as specifically amended hereby, the Plan shall remain in
full force and effect.
<PAGE> 2
MELITA INTERNATIONAL CORPORATION
1997 STOCK OPTION PLAN
SECTION 1.
PURPOSE
The purpose of this Plan is to promote the interests of the Company by
granting Options to purchase Shares to Employees and Key Persons in order to
attract and retain Employees and Key Persons by providing an additional
incentive to work to increase the value of Shares and a stake in the future of
the Company which corresponds to the stake of each of the Company's
shareholders.
SECTION 2.
DEFINITIONS
Each term set forth in this Section 2 shall have the meaning set forth
opposite such term for purposes of this Plan and, for purposes of such
definitions, the singular shall include the plural and the plural shall include
the singular, and reference to one gender shall include the other gender.
2.1 BOARD means the Board of Directors of the Company.
2.2 CODE means the Internal Revenue Code of 1986, as amended.
2.3. COMMITTEE means the Committee appointed in Section 5.
2.4 COMMON STOCK means the common stock of the Company, no par value per
share.
2.5 COMPANY means Melita International Corporation, a Georgia
corporation, and any successor to such organization.
2.6 CONTINUOUS SERVICE means a period of continuous performance of
services by an Employee or Key Person for the Company, a Subsidiary or a
Parent.
2.7 EMPLOYEE means an employee of the Company, a Subsidiary or a Parent.
2.8 EXCHANGE ACT means the Securities Exchange Act of 1934, as amended.
2.9 EXERCISE PRICE means the price which shall be paid to purchase one
(1) Share upon the exercise of an Option granted under this Plan.
2.10 EXISTING PERSON means (a) a shareholder or holder of any option or
warrant of the Company as of the effective date of the Plan or (b) any lineal
descendant or antecedent, father, mother, spouse, brother, or sister of such
shareholder or option or warrant holder or (c) a partnership, corporation,
limited liability company, trust or other entity formed primarily for the
benefit of any of the foregoing.
2.11 FAIR MARKET VALUE of each Share on any date means the price
determined below on the last business day immediately preceding the date of
valuation:
<PAGE> 3
(a) The closing sales price per Share, regular way, or in the
absence thereof the mean of the last reported bid and asked quotations, on such
date on the exchange having the greatest volume of trading in the Shares during
the thirty-day period preceding such date (or if such exchange was not open for
trading on such date, the next preceding date on which it was open); or
(b) If there is no price as specified in (a), the final reported
sales price per Share, or if not reported, the mean of the closing high bid and
low asked prices in the over-the-counter market for the Shares as reported by
the National Association of Securities Dealers Automatic Quotation System, or
if not so reported, then as reported by the National Quotation Bureau
Incorporated, or if such organization is not in existence, by an organization
providing similar services, on such date (or if such date is not a date for
which such system or organization generally provides reports, then on the next
preceding date for which it does so); or
(c) If there also is no price as specified in (b), the price per
Share determined by the Board by reference to bid-and-asked quotations for the
Shares provided by members of an association of brokers and dealers registered
pursuant to Subsection 15(b) of the Exchange Act, which members make a market
in the Shares, for such recent dates as the Board shall determine to be
appropriate for fairly determining current market value; or
(d) If there also is no price as specified in (c), an amount per
Share determined in good faith by the Board to be the price at which the
Committee acting in good faith determines through any reasonable valuation
method that a Share might change hands between a willing buyer and a willing
seller, neither being under any compulsion to buy or to sell and both having
reasonable knowledge of the relevant facts. The Fair Market Value may be based
on the most recent valuation of the Company performed by the Company's auditors
or by other professionals retained to value the Company.
2.12 INITIAL PUBLIC OFFERING means the first offering of Common Stock
for sale by the Company pursuant to a registration statement filed in
accordance with the 1933 Act or any comparable law then in effect.
2.13 ISO means an option granted under this Plan to purchase Shares
which is intended by the Company to satisfy the requirements of Code Section
422 as an incentive stock option.
2.14 KEY PERSON means (i) a member of the Board who is not an Employee,
(ii) a consultant, distributor or other person who has rendered valuable
services to the Company, a Subsidiary or a Parent, (iii) a person who has
incurred, or is willing to incur, financial risk in the form of guaranteeing or
acting as co-obligor with respect to debts or other obligations of the Company,
or (iv) a person who has extended credit to the Company. Key Persons are not
limited to individuals and, subject to the preceding definition, may include
corporations, partnerships, associations and other entities.
2.15 NON-ISO means an option granted under this Plan to purchase Shares
which is not intended by the Company to satisfy the requirements of Code
Section 422.
2.16 OPTION means an ISO or a Non-ISO.
2.17 OPTIONEE means any grantee of an Option.
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<PAGE> 4
2.18 PARENT means any corporation which is a parent of the Company
(within the meaning of Code Section 424).
2.19 PLAN means the Melita International Corporation 1997 Stock Option
Plan, as amended from time to time.
2.20 SHARE means a share of the Common Stock of the Company.
2.21 STOCK OPTION GRANT means the written agreement or instrument which
sets forth the terms of an Option granted to an Employee or Key Person under
this Plan.
2.22 SUBSIDIARY means any corporation which is a subsidiary of the
Company (within the meaning of Code Section 424(f)).
2.23 SURRENDERED SHARES means the Shares described in Section 11.2 which
(in lieu of being purchased) are surrendered for cash or Shares, or for a
combination of cash and Shares, in accordance with Section 11.
2.24 TEN PERCENT SHAREHOLDER means a person who owns (after taking into
account the attribution rules of Code Section 424(d)) more than ten percent
(10%) of the total combined voting power of all classes of shares of either the
Company, a Subsidiary or a Parent.
2.25 1933 ACT means the Securities Act of 1933, as amended.
SECTION 3.
SHARES SUBJECT TO OPTIONS
1,350,000 Shares of Common Stock, less the number of Shares (a) which
have been issued pursuant to exercised grants made under the Melita
International Corporation 1992 Discounted Stock Option Plan, or (b) which are
subject to options granted which remain outstanding under the Melita
International Corporation 1992 Discounted Stock Option Plan, shall be reserved
for issuance under this Plan. Such Shares shall be reserved, to the extent that
the Company deems appropriate, from authorized but unissued Shares, and from
Shares which have been reacquired by the Company. Furthermore, any Shares
subject to an Option which remain unissued after the cancellation, expiration
or exchange of such Option thereafter shall again become available for use
under this Plan, and any Shares subject to an option granted under the Melita
International Corporation 1992 Discounted Stock Option Plan which remain
unissued after the cancellation, expiration or exchange of such option
thereafter shall become available for use under this Plan. Notwithstanding the
above, any Surrendered Shares which remain after the surrender of an Option
under Section 11 shall not again become available for use under this Plan.
SECTION 4.
EFFECTIVE DATE
The effective date of this Plan shall be February 6, 1997, provided, the
shareholders of the Company approve this Plan within twelve (12) months after
such effective date. If such effective date comes before such shareholder
approval, any Options granted under this Plan before the date of such approval
automatically shall be granted subject to such approval.
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<PAGE> 5
SECTION 5.
COMMITTEE
This Plan shall be administered by the Committee appointed by the Board.
The Committee acting in its absolute discretion shall exercise such powers and
take such action as expressly called for under this Plan and, further, the
Committee shall have the power to interpret this Plan and (subject to Section
15) to take such other action in the administration and operation of this Plan
as the Committee deems equitable under the circumstances. The Committee's
actions shall be binding on the Company, on each affected Employee or Key
Person, and on each other person directly or indirectly affected by such
actions. Notwithstanding anything else to the contrary herein, the Board shall
have the authority and the final and conclusive decision to assume the powers
and responsibilities outlined above with respect to the Committee, in whole or
in part.
SECTION 6.
ELIGIBILITY
Except as provided below, only Employees shall be eligible for the grant
of Options under this Plan, but no Employee shall have the right to be granted
an Option under this Plan merely as a result of his or her status as an
Employee. Key Persons may be eligible, subject to written approval by the
Board, for the grant of Options under this Plan, but only if the Key Person has
provided valuable services to the Company, a Subsidiary or a Parent and only if
the Option is a Non-ISO.
SECTION 7.
GRANT OF OPTIONS
The Committee, acting pursuant to the procedure established by the
Board, shall either have the right to grant Options under this Plan, or
recommend to the Board that Options be granted under this Plan. In accordance
with the procedure established by the Board, the Committee, in its absolute
discretion, shall have the right to grant Options under this Plan from time to
time to purchase Shares and, further, shall have the right to grant new Options
in exchange for outstanding Options. Such Options shall be granted to Employees
or Key Persons selected by the Committee, acting in its discretion as set forth
above, and neither the Board nor the Committee shall be under any obligation
whatsoever to grant Options to all Employees or Key Persons, or to grant all
Options subject to the same terms and conditions. Each grant of an Option shall
be evidenced by a Stock Option Grant and each Stock Option Grant shall:
1. specify whether the Option is an ISO or Non-ISO; and
2. incorporate such other terms and conditions as the
Committee, acting in its absolute discretion, deems
consistent with the terms of this Plan, including
(without limitation) a restriction on the number of
Shares subject to the Option which first become
exercisable or subject to surrender during any
calendar year.
In determining Employee(s) or Key Person(s) to whom an Option shall be
granted and the number of Shares to be covered by such Option, the Committee
may take into account the recommendations of the President of the Company and
its other officers, the duties of the Employee or Key Person, the present and
potential contributions of the Employee or Key Person to the success of the
Company, the anticipated number of years of service remaining before the
attainment by the Employee of retirement age, and other factors deemed relevant
by the Committee, in its sole discretion, in connection with
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<PAGE> 6
accomplishing the purpose of this Plan. An Employee or Key Person who has been
granted an Option to purchase Shares of the Company, whether under this Plan or
otherwise, may be granted one or more additional Options.
If the Committee grants an ISO and a Non-ISO to an Employee on the same
date, the right of the Employee to exercise or surrender one such Option shall
not be conditioned on his or her failure to exercise or surrender the other
such Option.
SECTION 8.
EXERCISE PRICE
If an Option is an ISO, the Exercise Price for each Share subject to
such Option shall be no less than the Fair Market Value of a Share on the date
such Option is granted or, if such Option is granted to a Ten Percent
Shareholder, the Exercise Price for each Share subject to such Option shall be
no less than 110% of the Fair Market Value of a Share on the date such Option
is granted. If an Option is a Non-ISO, the Exercise Price for each Share shall
be no less than the minimum price required by applicable state law, or by the
Company's governing instrument, or $0.01, whichever price is greater. The
Exercise Price shall be payable in full in cash upon the exercise of any
Option.
SECTION 9.
EXERCISE PERIOD
Each Option granted under this Plan shall be exercisable in whole or in
part at such time or times as set forth in the related Stock Option Grant, but
no Stock Option Grant shall:
1. make an Option exercisable before the date (a) such Option
is granted; or (b) on which the Employee or Key Person
to whom the Option is granted shall have completed 12 months of
Continuous Service following the date of grant plus, for any
person who has not continuously performed services for the
Company, a Parent or a Subsidiary for at least six months prior
to the date of grant, an additional number of months equal to
the difference between (i) six months and (ii) the number of
months of Continuous Service prior to the date of grant; or
2. make an Option exercisable after the earlier of the:
(a) date such Option is exercised in full, or
(b) date which is the tenth (10th) anniversary of the
date such Option is granted, if such Option is a
Non-ISO or an ISO granted to a non-Ten Percent
Shareholder, or the date which is the fifth (5th)
anniversary of the date such Option is granted, if
such Option is an ISO granted to a Ten Percent
Shareholder.
A Stock Option Grant may provide for the exercise of an Option after the
employment of an Employee has terminated for any reason whatsoever, including
death or disability. The Committee shall have the right, in its discretion, to
accelerate the time during which any Option may be exercised and to include in
a Stock Option Grant provisions that will automatically trigger acceleration of
the time during which an Option may be exercised, including, without
limitation, a Change of Control, as described in Section 17 hereinbelow.
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<PAGE> 7
The Committee shall have the right, in its sole discretion, to condition
the vesting and exercisability of all or any portion of an Option upon an
Employee's successful attainment of annual or other periodic performance
objectives, as set forth in the Stock Option Grant.
SECTION 10.
NONTRANSFERABILITY
No Option granted under this Plan shall be transferable by an Employee
or Key Person other than by will or by the laws of descent and distribution,
and such Option shall be exercisable during an Employee's or Key Person's
lifetime only by the Employee or Key Person, as the case may be. The person or
persons to whom an Option is transferred by will or by the laws of descent and
distribution thereafter shall be treated as the Employee or Key Person.
SECTION 11.
SURRENDER OF OPTIONS
11.1 GENERAL RULE. Only until the occurrence of an Initial Public
Offering, the Committee, acting in its absolute discretion, may incorporate a
provision in a Stock Option Grant to allow an Employee or Key Person to
surrender his or her Option in whole or in part in lieu of the exercise in
whole or in part of that Option on any date that:
1. the Fair Market Value of the Shares subject to such Option
exceeds the Exercise Price for such Shares; and
2. the Option to purchase such Shares is otherwise
exercisable.
11.2 PROCEDURE. The surrender of an Option in whole or in part shall be
effected by the delivery of the Stock Option Grant to the Committee, together
with a statement signed by the Employee or Key Person which specifies the
number of Shares ("Surrendered Shares") as to which the Employee or Key Person
surrenders his or her Option and how he or she desires payment be made for such
Surrendered Shares.
11.3 PAYMENT. An Employee or Key Person in exchange for his or her
Surrendered Shares shall receive a payment in cash or in Shares, or in a
combination of cash and Shares, equal in amount on the date such surrender is
effected to the excess of the Fair Market Value of the Surrendered Shares on
such date over the Exercise Price for the Surrendered Shares. The Committee,
acting in its absolute discretion, can approve or disapprove an Employee's or
Key Person's request for payment in whole or in part in cash and can make that
payment in cash, in shares or in such combination of cash and Shares as the
Committee deems appropriate. A request for payment only in Shares shall be
approved and made in Shares to the extent payment can be made in whole Shares
and (at the Committee's discretion) in cash in lieu of any fractional Shares.
11.4 RESTRICTIONS. Any Stock Option Grant which incorporates a provision
to allow an Employee or Key Person to surrender his or her Option in whole or
in part also shall incorporate such additional restrictions on the exercise or
surrender of such Option as the Committee deems necessary to satisfy the
conditions to the exemption under Rule 16b-3 (or any successor exemption) to
Section 16(b) of the Exchange Act. Notwithstanding any other provision of the
Plan of a Stock Option Grant, no provision permitting the surrender of an
Option shall be enforceable or of any force and effect upon the occurrence of
an Initial Public Offering.
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<PAGE> 8
SECTION 12.
SECURITIES REGISTRATION
Each Stock Option Grant may provide that, upon the receipt of Shares as
a result of the surrender or exercise of an Option, the Employee or Key Person
shall, if so requested by the Company, hold such Shares for investment and not
with a view of resale or distribution to the public and, if so requested by the
Company, shall deliver to the Company a written statement satisfactory to the
Company to that effect. Each Stock Option Grant may also provide that, if so
requested by the Company, the Employee or Key Person shall make a written
representation to the Company that he or she will not sell or offer to sell any
of such Shares unless a registration statement shall be in effect with respect
to such Shares under the 1933 Act, and any applicable state securities law or,
unless he or she shall have furnished to the Company an opinion, in form and
substance satisfactory to the Company, of legal counsel acceptable to the
Company, that such registration is not required. Certificates representing the
Shares issued upon the exercise or surrender of an Option granted under this
Plan may at the discretion of the Company bear a legend to the effect that such
Shares have not been registered under the 1933 Act or any applicable state
securities law and that such Shares may not be sold or offered for sale in the
absence of an effective registration statement as to such Shares under the 1933
Act and any applicable state securities law or an opinion, in form and
substance satisfactory to the Company, of legal counsel acceptable to the
Company, that such registration is not required.
SECTION 13.
LIFE OF PLAN
No Option shall be granted under this Plan on or after the earlier of:
1. the tenth (10th) anniversary of the effective date of this
Plan (as determined under Section 4 of this Plan), in which
event this Plan otherwise thereafter shall continue in
effect until all outstanding Options have been surrendered
or exercised in full or no longer are exercisable, or
2. the date on which all of the Shares reserved under Section
3 of this Plan have (as a result of the surrender or
exercise of Options granted under this Plan) been issued or
no longer are available for use under this Plan, in which
event this Plan also shall terminate on such date.
SECTION 14.
ADJUSTMENT
The number of Shares reserved under Section 3 of this Plan, and the
number of Shares and other securities and property subject to Options granted
under this Plan, and the Exercise Price of such Options shall be adjusted by
the Committee in an equitable manner to reflect any change in the
capitalization of the Company, including, but not limited to, such changes as
stock dividends or stock splits. Furthermore, the Committee shall have the
right to adjust (in a manner which satisfies the requirements of Code Section
424(a)) the number of Shares reserved under Section 3 of this Plan, and the
number of Shares subject to Options granted under this Plan, and the Exercise
Price of such Options in the event of any corporate transaction described in
Code Section 424(a) which provides for the substitution or assumption of such
Options. If any adjustment under this Section 14 creates a fractional Share or
a right to acquire a fractional Share, such fractional Share shall be
disregarded, and the number of Shares
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<PAGE> 9
reserved under this Plan and the number subject to any Options granted under
this Plan shall be the next lower number of Shares, rounding all fractions
downward. An adjustment made under this Section 14 by the Committee shall be
conclusive and binding on all affected persons and, further, shall not
constitute an increase in the number of Shares reserved under Section 3 of this
Plan.
SECTION 15.
SALE OR MERGER OF THE COMPANY
If the Company agrees to sell all or substantially all of its assets for
cash or property, or for a combination of cash and property, or agrees to any
merger, consolidation, reorganization, division or other transaction in which
Shares are converted into another security or into the right to receive
securities or property and such agreement does not provide for the assumption
of or substitution for the Options granted under this Plan, each Option at the
direction and discretion of the Committee, or as is otherwise provided in the
Stock Option Grants, may be canceled unilaterally by the Company in exchange
for the vested whole Shares (or, subject to satisfying the conditions to the
exemption under Rule 16b-3 or any successor exemption to Section 16(b) of the
Exchange Act, for the whole Shares and the cash in lieu of a fractional Share)
which each Employee or Key Person otherwise would receive if he or she
exercised the vested portion of his or her outstanding Option on a date
immediately preceding such sale or other corporate transaction, any such
exchange to be made only upon the payment of the Exercise Price for such
outstanding Options.
SECTION 16.
AMENDMENT OR TERMINATION
This Plan may be amended by the Committee from time to time to the
extent that the Committee deems necessary or appropriate; provided, however, no
such amendment shall be made absent the approval of the shareholders of the
Company (1) to increase the number of Shares reserved under Section 3 except as
set forth in Section 14, (2) to extend the maximum life of the Plan under
Section 13 or the maximum exercise period under Section 9, (3) to decrease the
minimum Exercise Price under Section 8, or (4) to change the designation of
Employees or Key Persons eligible for Options under Section 6. The Committee
also may suspend the granting of Options under this Plan at any time and may
terminate this Plan at any time; provided, however, the Company shall not have
the right to modify, amend or cancel any Option granted before such suspension
or termination unless (1) the Employee or Key Person consents in writing to
such modification, amendment or cancellation or (2) there is a dissolution or
liquidation of the Company or a transaction described in Section 14 or Section
15 of this Plan.
SECTION 17.
CHANGE OF CONTROL
For purposes of this Plan and documents evidencing Options granted
pursuant to this Plan, a "Change of Control" of the Company shall be deemed to
have occurred if one of the following events takes place:
1. Any person other than an Existing Person becomes a holder of
record, as reflected on the stock transfer ledger of the
Company, of securities of the Company representing a right of
the person, acting individually and not in concert with any
other party (and not acting through a contract, arrangement,
understanding, relationship, proxy, voting trust, voting
agreement, or other device), to vote more than fifty percent
(50%) of the combined voting power of the Company's then
outstanding securities;
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<PAGE> 10
2. A person other than an Existing Person obtains the right to
elect a majority of the members of the Board of Directors of
the Company, but not including any such right granted solely
pursuant to a proxy solicited by the Board of Directors of
the Company;
3. The Company or any of its subsidiaries shall sell, assign or
otherwise transfer, directly or indirectly, assets (including
stock or other securities of subsidiaries, but other than the
grant of licenses to intangible assets in the ordinary course
of business) having a fair market value of sixty-six percent
(66%) or more of all the assets of the Company and its
subsidiaries to any third party, other than a wholly-owned
subsidiary of the Company; or
4. Any person other than an Existing Person becomes a beneficial
owner (as such term is used in Rule 13d-3 under the Exchange
Act) of securities of the Company representing more than
fifty percent (50%) of the combined voting power of the
Company's then outstanding securities, as determined for
purposes of the election of members of the Board of Directors
of the Company.
Notwithstanding the above, no Change of Control shall be deemed to
occur solely as the result of the issuance of new securities pursuant to (a) an
Initial Public Offering or (b) the exercise of warrants and options granted and
outstanding as of the effective date of the Plan. In addition, a Change of
Control shall not, solely with respect to Section 17, Subsection 3 above, be
deemed to occur as a result of any conveyance, transfer or grant to a bank or
other financial institution of a collateral assignment of, securities title to
or security interest in any goods, accounts, inventory, general intangibles or
other assets of the Company or any of its subsidiaries to secure the
obligations of the Company or any of its subsidiaries to such bank or other
financial institution, or the exercise of any rights or remedies by such bank
or other financial institution relation thereto.
SECTION 18.
MISCELLANEOUS
18.1 SHAREHOLDER RIGHTS. No Employee or Key Person shall have any rights
as a shareholder of the Company as a result of the grant of an Option to him or
to her under this Plan or his or her exercise or surrender of such Option
pending the actual delivery of Shares subject to such Option to such Employee
or Key Person.
18.2 NO CONTRACT OF EMPLOYMENT. The grant of an Option to an Employee or
Key Person under this Plan shall not constitute a contract of employment or
other contract relating to the performance of any services by the Employee or
Key Person and shall not confer on an Employee or Key Person any rights upon
his or her termination of employment or other relationship in addition to those
rights, if any, expressly set forth in the Stock Option Grant which evidences
his or her Option.
18.3 WITHHOLDING. The exercise or surrender of any Option granted under
this Plan shall constitute an Employee's or Key Person's full and complete
consent to whatever action the Committee directs to satisfy the federal and
state tax withholding requirements, if any, which the Committee in its
discretion deems applicable to such exercise or surrender.
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<PAGE> 11
18.4 TRANSFER. The transfer of an Employee between or among the Company,
a Subsidiary or a Parent shall not be treated as a termination of his or her
employment under this Plan.
18.5 CONSTRUCTION. This Plan shall be construed under the laws of the
State of Georgia.
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MELITA INTERNATIONAL CORPORATION
1997 STOCK OPTION PLAN
STOCK OPTION GRANT CERTIFICATE
MELITA INTERNATIONAL CORPORATION, a Georgia corporation (the "Company"), hereby
grants to the optionee named below ("Optionee") an option (this "Option") to
purchase the total number of shares shown below of Common Stock of the Company
(the "Shares") at the exercise price per share set forth below (the "Exercise
Price"), subject to all of the terms and conditions on the reverse side of this
Stock Option Grant Certificate and the Melita International Corporation 1997
Stock Option Plan (the "Plan"). Unless otherwise defined herein, capitalized
terms used herein shall have the meanings ascribed to them in the Plan. The
terms and conditions set forth on the reverse side hereof and the terms and
conditions of the Plan are incorporated herein by reference.
<TABLE>
<S> <C> <C>
In witness whereof, this Stock Option Shares Subject to Option: Optionee hereby acknowledges
Grant has been executed by the Company -------- receipt of a copy of the Plan,
by a duly authorized officer as of the represents that Optionee has read and
date specified hereon. Exercise Price Per Share: $ understands the terms and provisions of
-------- the Plan, and accepts this Option
MELITA INTERNATIONAL CORPORATION subject to all the terms and conditions
Term of Option: Years expiring of the Plan and this Stock Option Grant
---- ----- Certificate. Optionee acknowledges that
By: there may be adverse tax consequences
----------------------------------- Shares subject to issuance under this upon exercise of this Option or
Option shall be eligible for exercise disposition of the Shares and that
Date of Grant: according to the vesting schedule Optionee should consult a tax adviser
Type of Stock Option: described in Section 10 on the reverse prior to such exercise or disposition.
[ ] Incentive of this Stock Option Grant certificate.
[ ] Non-Qualified
Vesting Extension Period: --------------------------------------
Months Signature of Optionee
--------
Not Applicable
-------- --------------------------------------
Print Name of Optionee
Vesting: Four Year Performance Vesting
</TABLE>
<PAGE> 13
1. EXERCISE PERIOD OF OPTION. Subject to the terms and conditions of this
Option and the Plan, and unless otherwise modified by a written modification
signed by the Company and Optionee, this Option may be exercised with respect to
all of the Shares, but only according to the vesting schedule specified on the
obverse side of this Stock Option Grant Certificate and as described in Section
10 below, prior to the date which is the last day of the Term set forth on the
face hereof following the date of grant (hereinafter "Expiration Date").
2. RESTRICTIONS ON EXERCISE. This Option may not be exercised, unless such
exercise is in compliance with the Securities Act of 1933, as amended, and all
applicable state securities laws, as they are in effect on the date of exercise,
and the requirements of any stock exchange or national market system on which
the Company's Common Stock may be listed at the time of exercise. Optionee
understands that the Company is under no obligation to register, qualify or list
the Shares with the Securities and Exchange Commission ("SEC"), any state
securities commission or any stock exchange or national market system to effect
such compliance.
3. TERMINATION OF OPTION. Except as provided below in this Section, this
Option may not be exercised after the date which is thirty (30) days after
Optionee ceases to perform services for the Company, or any Parent or
Subsidiary. Optionee shall be considered to perform services for the Company, or
any Parent or Subsidiary, for all purposes under this Section and Section 10
hereof, if Optionee is an officer or full-time employee of the Company, or any
Parent or Subsidiary, or if the Committee determines that Optionee is rendering
substantial services as a part-time employee, consultant, contractor or advisor
to the Company, or any Parent or Subsidiary. The Committee shall have discretion
to determine whether Optionee has ceased to perform services for the Company, or
any Parent or Subsidiary, and the effective date on which such services cease
(the "Termination Date"). Notwithstanding anything contained herein to the
contrary, if the corporate position of Optionee is, at any time, altered or
revised such that Optionee's responsibilities are materially reduced or
decreased for any reason, as determined by the Committee in its sole discretion,
the vesting of Shares under Section 10 shall cease, effective as of the date of
such reduction in Optionee's employment responsibilities; provided, however,
except as otherwise provided in this Option and the Plan, Optionee shall have
the right to exercise this Option with respect to Shares which have vested under
Section 10 as of the date of such reduction of Optionee's responsibilities.
(a) Termination Generally. If Optionee ceases to perform services for
the Company, or any Parent or Subsidiary, for any reason, except death or
disability (within the meaning of Code Section 22(e)(3)), this Option shall
immediately be forfeited, along with any and all rights or subsequent rights
attached thereto, thirty (30) days following the Termination Date, but in no
event later than the Expiration Date.
(b) Death or Disability. If Optionee ceases to perform services for the
Company, or any Parent or Subsidiary, as a result of the death or disability of
Optionee (as determined by the Committee in its sole discretion), this Option,
to the extent (and only to the extent) that it would have been exercisable by
Optionee on the Termination Date, may be exercised by Optionee (or, in the event
of Optionee's death, by Optionee's legal representative) within ninety (90) days
after the Termination Date, but in no event later than the Expiration Date.
(c) No Right to Employment. Nothing in the Plan or this Stock Option
Grant Certificate shall confer on Optionee any right to continue in the employ
of, or other relationship with, the Company, or any Parent or Subsidiary, or
limit in any way the right of the Company, or any Parent or Subsidiary, to
terminate Optionee's employment or other relationship at any time, with or
without cause.
4. MANNER OF EXERCISE.
(a) Exercise Agreement. This Option shall be exercisable by delivery to
the Company of an executed Exercise and Shareholder Agreement ("Exercise
Agreement") in the form of the Exercise Agreement delivered to Optionee, if
applicable, or in such other form as may be approved or accepted by the Company,
which shall set forth Optionee's election to exercise this Option with respect
to some or all of the Shares, the number of Shares being purchased, any
restrictions imposed on the Shares, and such other representations and
agreements as may be required by the Company to comply with applicable
securities laws.
(b) Exercise Price. Such Exercise Agreement shall be accompanied by
full payment of the Exercise Price for the Shares being purchased. Payment for
the Shares may be made in U.S. dollars in cash (by check).
(c) Withholding Taxes. Prior to the issuance of Shares upon exercise
of this Option, Optionee must pay, or make adequate provision for, any
applicable federal or state withholding obligations of the Company.
(d) Issuance of Shares. Provided that such Exercise Agreement and
payment are in form and substance satisfactory to counsel for the Company, the
Company shall cause the Shares to be issued in the name of Optionee or
Optionee's legal representative.
5. NOTICE OF DISQUALIFYING DISPOSITION OF ISO SHARES. If this Option is an
ISO, and if Optionee sells or otherwise disposes of any of the Shares acquired
pursuant to the ISO on or before the later of: (a) the date two (2) years after
the Date of Grant, or (b) the date one (1) year after exercise of the ISO, with
respect to the Shares to be sold or disposed, Optionee shall immediately notify
the Company in writing of such sale or disposition. Optionee acknowledges and
agrees that Optionee may be subject to income tax withholding by the Company on
the compensation income recognized by Optionee from any such early disposition
by payment in cash or out of the current wages or earnings payable to Optionee.
6. NONTRANSFERABILITY OF OPTION. This Option may not be transferred in any
manner, other than by will or by the laws of descent and distribution, and may
be exercised during Optionee's lifetime only by Optionee. The terms of this
Option shall be binding upon the executor, administrators, successors and
assigns of Optionee.
7. TAX CONSEQUENCES. OPTIONEE UNDERSTANDS THAT THE GRANT AND EXERCISE OF
THIS OPTION, AND THE SALE OF SHARES OBTAINED THROUGH THE EXERCISE OF THIS
OPTION, MAY HAVE TAX IMPLICATIONS THAT COULD RESULT IN ADVERSE TAX CONSEQUENCES
TO OPTIONEE. OPTIONEE REPRESENTS THAT OPTIONEE HAS CONSULTED WITH, OR WILL
CONSULT WITH, HIS OR HER TAX ADVISOR AND OPTIONEE FURTHER ACKNOWLEDGES THAT
OPTIONEE IS NOT RELYING ON THE COMPANY OR ANY EMPLOYEE, OFFICER OR DIRECTOR OF,
OR COUNSEL OR ACCOUNTANTS FOR, THE COMPANY FOR ANY TAX, FINANCIAL OR LEGAL
ADVICE.
8. INTERPRETATION. Any dispute regarding the interpretation of this Stock
Option Grant Certificate shall be submitted by Optionee or the Company to the
Committee, which shall review such dispute at its next regular meeting. The
resolution of such a dispute by the Committee shall be final and binding on the
Company and Optionee.
9. ENTIRE AGREEMENT. The Plan and the Exercise Agreement are incorporated
herein by this reference. Optionee acknowledges and agrees that the granting of
this Option constitutes a full accord, satisfaction and release of all
obligations or commitments made to Optionee by the Company or any of its
officers, directors, shareholders or affiliates with respect to the issuance of
any securities, or rights to acquire securities, of the Company or any of its
affiliates. This Stock Option Grant Certificate, the Plan and the Exercise
Agreement constitute the entire agreement of the parties hereto, and supersede
all prior undertakings and agreements with respect to the subject matter hereof.
10. VESTING AND EXERCISE OF SHARES. Subject to the terms of the Plan, this
Option and the Exercise Agreement, the Shares issued pursuant to the exercise of
this Stock Option Grant Certificate shall be subject to the vesting restrictions
selected on the obverse side of this Option and defined below. For purposes of
this Section, "Continuous Service" means a period of continuous performance of
services by Optionee for the Company, a Parent, or a Subsidiary, beginning on
and after the Effective Date, February 7, 1997, or such other date as is
established by the Commitee, as determined by the Committee.
Four Year Performance Vesting: Optionee may exercise this Option with
respect to the percentage of Shares set forth below only after Optionee has
completed the following periods of Continuous Service following the date of
grant:
(a) After twelve (12) months of Continuous Service, up to twenty-five
percent (25%) of the Shares, provided that the Year One Performance
Objectives, set forth below, have been achieved, in the sole judgment of
the Committee; further provided, that if the Year One Performance
Objectives have not been achieved, Optionee may exercise this Option with
respect to the aforementioned 25% of the Shares only upon completion of
forty-eight months of Continuous Service.
YEAR ONE PERFORMANCE OBJECTIVES:
(b) After twenty-four (24) months of Continuous Service, an additional
twenty-five percent (25%) of the Shares (over and above those subject to
Subsection (a) above), provided that the Year Two Performance Objectives,
set forth below, have been achieved, in the sole judgment of the Committee;
further provided, that if the Year Two Performance Objectives have not been
achieved, Optionee may exercise this Option with respect to the
aforementioned 25% of the Shares only upon completion of forty-eight months
of Continuous Service.
YEAR TWO PERFORMANCE OBJECTIVES:
(c) After thirty-six (36) months of Continuous Service, an additional
twenty-five percent (25%) of the Shares: and
(d) After forty-eight (48) months of Continuous Service, up to one
hundred percent (100%) of the Shares;
provided, however, that for any Optionee who has not continuously performed
services for the Company, a Parent or a Subsidiary for at least six months
prior to the Date of Grant, each of the periods referred to in clauses (a)
through (d) shall be extended by the number of months equal to the
difference between (i) six months and (ii) the number of months of
Continuous Service prior to the Date of Grant (the "Vesting Extension
Period"), as indicated on the obverse hereof.
Notwithstanding the above, an Optionee shall become one hundred percent (100%)
vested and shall be entitled to exercise the Option as to one hundred percent
(100%) of the Shares granted pursuant to this Stock Option Grant Certificate
upon a Change of Control of the Company, as defined in Section 17 of the Plan.
<PAGE> 14
MELITA INTERNATIONAL CORPORATION
1997 STOCK OPTION PLAN
EXERCISE AND SHAREHOLDER AGREEMENT
This Exercise and Shareholder Agreement (the "Exercise Agreement") is
made this_____ day of__________ , 199___ by and between Melita International
Corporation (the "Company") and the optionee named below ("Optionee")
pursuant to that certain Stock Option Grant described below which was granted
to Optionee under the Melita 1997 Stock Option Plan (the "Plan").
Optionee:
---------------------------------------
Social Security Number:
---------------------------------------
Address:
---------------------------------------
---------------------------------------
---------------------------------------
Number of Shares Purchased:
---------------------------------------
Price Per Share $
--------------------------------------
Aggregate Purchase Price: $
--------------------------------------
Date of Stock Option Grant:
--------------------------------------
Optionee hereby delivers to the Company the Aggregate Purchase Price
by check in the amount of $___________, receipt of which is acknowledged by the
Board of Directors ("Board") of the Company.
The Company and Optionee hereby agree as follows:
1. PURCHASE OF SHARES. On this date and subject to the terms and
conditions of this Exercise Agreement and the Plan, Optionee hereby exercises,
subject to the contingencies below, the Stock Option Grant between the Company
and Optionee dated as of the "Date of Stock Option Grant" set forth above (the
"Option") with respect to the "Number of Shares Purchased" set forth above of
the Company's Common Stock at the "Aggregate Purchase Price" set forth above
(the "Purchase Price") and the "Price per Share" set forth above (the "Purchase
Price Per Share"). The term "Shares" refers to the shares of the Company's no
par value common stock purchased under this Exercise Agreement and includes all
securities received (a) in replacement of the Shares and (b) as a result of
stock dividends or stock splits in respect of the Shares. Capitalized terms
used in this Exercise Agreement that are not defined herein have the
definitions ascribed to them in the Plan and the Option.
2. REPRESENTATIONS OF PURCHASER. Optionee represents and warrants to
the Company that:
(a) Optionee acknowledges that Optionee has received, read
and understood the Plan and the Option and agrees to abide by and be bound by
their terms and conditions;
<PAGE> 15
(b) Optionee is purchasing the Shares for Optionee's own
account for investment purposes only and not with a view to, or for sale in
connection with, a distribution of the Shares within the meaning of the
Securities Act of 1933, as amended (the "1933 Act");
(c) Optionee has no present intention of selling or otherwise
disposing of all or any portion of the Shares;
(d) Optionee is fully aware of (i) the highly speculative
nature of the investment in the Shares; (ii) the financial hazards involved in
the investment of the Shares; and (iii) the lack of liquidity of the Shares and
the restrictions on transferability of the Shares (e.g., that Optionee may not
be able to sell or dispose of the Shares or use them as collateral for loans);
and
(e) Optionee is capable of evaluating the merits and risks of
this investment, has the ability to protect Optionee's own interests in this
transaction and is financially capable of bearing a total loss of this
investment.
3. COMPLIANCE WITH SECURITIES LAWS. Optionee understands and
acknowledges that the Shares have not been registered under the 1933 Act and
that, notwithstanding any other provision of the Option to the contrary, the
exercise of any rights to purchase any Shares is expressly conditioned upon
compliance with the 1933 Act and all applicable state securities laws. Optionee
agrees to cooperate with the Company to ensure compliance with such laws.
4. COMPANY'S RIGHT OF FIRST REFUSAL. Before any Shares held by
Optionee or any transferee (either being sometimes referred to herein as the
"Holder") may be sold or otherwise transferred (including transfer by gift or
operation of law), the Company shall have an assignable right of first refusal
to purchase the Shares on the terms and conditions set forth in this Section 4
(the "Right of First Refusal").
(a) Notice of Proposed Transfer. The Holder of the Shares
shall deliver to the Company a written notice (the "Notice") stating (i) the
Holder's bona fide intention to sell or otherwise transfer such Shares, (ii)
the name of each proposed purchaser or other transferee ("Proposed
Transferee"), (iii) the number of Shares to be transferred to each Proposed
Transferee, and (iv) the bona fide cash price or other consideration for which
the Holder proposes to transfer the Shares (the "Offered Price"); in addition,
by providing the Notice, the Holder is deemed to be offering to sell the Shares
at the Offered Price to the Company.
(b) Exercise of Right of First Refusal. At any time within
thirty (30) days after receipt of the Notice, the Company or its assignee may,
by giving written notice to the Holder, elect to purchase any or all of the
Shares proposed to be transferred to any one or more of the Proposed
Transferees, at the purchase price determined in accordance with Subsection (c)
below.
(c) Purchase Price. The purchase price for the Shares
purchased under this Section 4 shall be the Offered Price. If the Offered Price
includes consideration other than cash, the cash equivalent value of the
non-cash consideration shall be determined by the Board in good faith.
(d) Payment. Payment of the purchase price shall be made, at
the option of the Company or its assignee, either (i) in cash (by check), by
cancellation of all or a portion of any outstanding indebtedness of the Holder
to the Company or such assignee, or by any combination thereof
-2-
<PAGE> 16
within thirty (30) days after receipt of the Notice or (ii) in the manner and
at the time(s) set forth in the Notice.
(e) Holder's Right to Transfer. If all of the Shares proposed
in the Notice to be transferred to a given Proposed Transferee are not
purchased by the Company and/or its assignee as provided in this Section 4,
then the Holder may sell or otherwise transfer such Shares to that Proposed
Transferee at the Offered Price or at a higher price, provided that such sale
or other transfer is consummated within one hundred and twenty (120) days after
the date of the Notice and provided further that any such sale or other
transfer is effected in accordance with any applicable securities laws and the
Proposed Transferee agrees in writing that the provisions of this Section 4
shall continue to apply to the Shares in the hands of such Proposed Transferee.
If the Shares described in the Notice are not transferred to the Proposed
Transferee within such period, a new Notice shall be given to the Company, and
the Company shall again be offered the Right of First Refusal, before any
Shares held by the Holder may be sold or otherwise transferred.
(f) Exception for Certain Family Transfers. Anything to the
contrary contained in this Section 4 notwithstanding, the transfer of any or
all of the Shares, during Optionee's lifetime or on Optionee's death by will or
intestacy, to Optionee's immediate family or to a trust for the benefit of
Optionee or Optionee's immediate family shall be exempt from the provisions of
this Section; provided, that as a condition to receiving the Shares, the
transferee or other recipient shall agree in writing to receive and hold the
Shares so transferred subject to the provisions of this Agreement, and to
transfer such Shares no further except in accordance with the terms of this
Agreement. As used herein, "immediate family" shall mean the Optionee's spouse,
lineal descendant or antecedent, father, mother, brother or sister.
(g) Termination of Right of First Refusal. The Right of First
Refusal shall terminate as to any Shares upon an Initial Public Offering (as
such term is defined in the Plan).
5. COMPANY'S REPURCHASE OPTION. The Company shall have the
option to repurchase all or a portion of the Shares on the terms and
conditions set forth in this Section 5 (the "Repurchase Option") if Optionee
should cease to be employed by the Company for any reason, or no reason,
including without limitation Optionee's death, disability, voluntary
resignation or termination by the Company with or without cause.
(a) Right of Termination Unaffected. Nothing in this
Agreement shall be construed to limit or otherwise affect in any manner
whatsoever the right or power of the Company to terminate Optionee's employment
or association with the Company at any time, for any reason or no reason, with
or without cause. For purposes of this Agreement, Optionee shall be considered
to be employed by the Company or associated with the Company if Optionee is an
officer, director or full-time employee of the Company or any Parent or
Subsidiary of the Company or if the Board determines that Optionee is rendering
substantial services as a part-time employee, consultant, contractor or advisor
to the Company or any Parent or Subsidiary of the Company. The Board shall have
discretion to determine whether Optionee has ceased to be employed by or
associated with the Company or any Parent or Subsidiary and the effective date
on which such employment or association is terminated (the "Termination Date").
(b) Exercise of Repurchase Option. Subject to Section 5(e)
below, any time following the Termination Date, the Company may elect to
repurchase any or all of the Shares by giving Optionee written notice of
exercise of the Repurchase Option.
-3-
<PAGE> 17
(c) Calculation of Repurchase Price. In the event Optionee's
employment with the Company terminates for any reason whatsoever, the Company
or its assignee shall have the option to repurchase from Optionee (or from
Optionee's personal representative as the case may be) any or all of the Shares
at a price equal to the Fair Market Value (as defined in the Plan) of such
Shares on the Termination Date.
(d) Payment of Repurchase Price. The repurchase price shall
be payable, at the option of the Company or its assignee, by (i) check, (ii) by
cancellation of all or a portion of any outstanding indebtedness of Optionee to
the Company or such assignee, (iii) by delivery of a promissory note of the
Company payable in equal annual installments over a four (4) year period from
the date of repurchase at a per annum interest rate equal to the prime rate as
announced from time to time by the Company's principal bank or, if the Company
has no principal bank, that rate announced by the Wall Street Journal as the
prevailing "prime rate" of interest per annum, as of the Termination Date, or
(iv) any combination of the above.
(e) Termination of Repurchase Rights. The Repurchase Option
shall terminate as to any Shares upon an Initial Public Offering (as such term
is defined in the Plan).
6. COMPLIANCE WITH FEDERAL AND STATE SECURITIES LAWS. Optionee
understands and acknowledges that, in reliance upon the representations and
warranties made by Optionee herein, the Shares have not been registered with
the Securities and Exchange Commission ("SEC") under the 1933 Act, but have
been issued under an exemption or exemptions from the registration requirements
of the 1933 Act which impose certain restrictions on Optionee's ability to
transfer the Shares and have not been registered under any Georgia securities
laws or the securities laws of any other state. Optionee understands that
Optionee may not transfer any Shares unless such Shares are registered under
the 1933 Act and the securities laws of Georgia (or the securities laws of any
other state, if applicable) or unless, in the opinion of counsel to the
Company, an exemption from such registration is available. Optionee understands
that only the Company may file a registration statement with the SEC or Georgia
(or other applicable states), and that the Company is under no obligation to do
so with respect to the Shares. Optionee has also been advised that an exemption
from registration may not be available or may not permit Optionee to transfer
all or any of the Shares in the amounts or at the times proposed by Optionee.
7. ESCROW. As security for the faithful performance of this
Exercise Agreement, Optionee agrees, immediately upon receipt of the
certificate(s) evidencing the Shares, to deliver such certificate(s), to the
Secretary of the Company or its designee ("Escrow Holder"), who is hereby
appointed to hold such certificate(s) in escrow and to take all such actions
and to effectuate all such transfers and/or releases of such Shares as are in
accordance with the terms of this Exercise Agreement. Optionee and the Company
agree that Escrow Holder shall not be liable to any party to this Exercise
Agreement (or to any other party) for any actions or omissions unless Escrow
Holder is grossly negligent relative thereto. The Escrow Holder may rely upon
any letter, notice or other document executed by any signature reputed to be
genuine and may rely upon advice of counsel and obey any order of any court
with respect to the transactions contemplated herein. The Shares shall be
released from escrow upon termination of both the Right of First Refusal set
forth in Section 4 and the Repurchase Option set forth in Section 5; provided,
however, that such release shall not affect the rights of the Company with
respect to any pledge of Shares to the Company. Optionee hereby irrevocably
constitutes and appoints Escrow Holder as Optionee's agent and attorney-in-fact
for the purpose of executing and delivering any and all documents necessary to
transfer any Shares purchased hereunder to the Company pursuant to the terms of
this Exercise Agreement and to record such transfer on the books of the
Company, such appointment being made with full power of substitution in the
premises.
-4-
<PAGE> 18
8. LEGENDS. Optionee understands and agrees that the certificate(s)
representing the Shares will bear legends in substantially the following form:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE GEORGIA SECURITIES ACT OF 1973, AS AMENDED
("GEORGIA ACT"), UNDER ANY OTHER STATE SECURITIES LAW, OR UNDER
THE SECURITIES ACT OF 1933, AS AMENDED ("FEDERAL ACT"). THESE
SHARES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED
FOR SALE, HYPOTHECATED, SOLD OR TRANSFERRED, NOR WILL ANY
ASSIGNEE OR TRANSFEREE THEREOF BE RECOGNIZED BY THE CORPORATION
AS HAVING AN INTEREST IN SUCH SHARES, IN THE ABSENCE OF (I) AN
EFFECTIVE REGISTRATION STATEMENT WITH RESPECT TO THE SHARES
UNDER THE FEDERAL ACT, OR AN OPINION OF COUNSEL SATISFACTORY TO
THE CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED, AND (II)
AN EFFECTIVE REGISTRATION STATEMENT WITH RESPECT TO THE SHARES
UNDER THE GEORGIA ACT AND UNDER ANY OTHER APPLICABLE STATE LAW,
OR AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION THAT
SUCH SHARES WILL BE OFFERED FOR SALE, HYPOTHECATED, SOLD OR
TRANSFERRED ONLY IN A TRANSACTION WHICH IS EXEMPT UNDER, OR
WHICH IS OTHERWISE IN COMPLIANCE WITH, THE GEORGIA ACT AND ANY
OTHER APPLICABLE STATE SECURITIES LAWS.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THAT
CERTAIN EXERCISE AND SHAREHOLDER AGREEMENT DATED THE _____ DAY
OF _______________, 19___, A COPY OF WHICH IS ON FILE WITH THE
CORPORATION."
9. STOP-TRANSFER NOTICES. Optionee understands and agrees that, in
order to ensure compliance with the restrictions referred to herein, the
Company may issue appropriate "stop-transfer" instructions to its transfer
agent, if any, and that, if the Company transfers its own securities, it may
make appropriate notations to the same effect in its own records.
10. TAX CONSEQUENCES. OPTIONEE UNDERSTANDS THAT OPTIONEE MAY SUFFER
ADVERSE TAX CONSEQUENCES AS A RESULT OF OPTIONEE'S PURCHASE OR DISPOSITION OF
THE SHARES. OPTIONEE REPRESENTS THAT OPTIONEE HAS CONSULTED WITH ANY TAX
CONSULTANT(S) OPTIONEE DEEMS ADVISABLE IN CONNECTION WITH THE PURCHASE OR
DISPOSITION OF THE SHARES AND THAT OPTIONEE IS NOT RELYING ON THE COMPANY FOR
ANY TAX ADVICE. IN PARTICULAR, OPTIONEE REPRESENTS THAT OPTIONEE HAS CONSULTED
WITH OPTIONEE'S TAX ADVISORS CONCERNING THE ADVISABILITY OF FILING AN ELECTION
WITH THE INTERNAL REVENUE SERVICE UNDER SECTION 83(B) OF THE INTERNAL REVENUE
CODE OF 1986, AS IT MAY BE AMENDED FROM TIME TO TIME.
11. ENTIRE AGREEMENT. The Plan and the Option are incorporated herein
by reference. This Exercise Agreement, the Plan and the Option constitute the
entire agreement of the parties and supersede in their entirety all prior
undertakings and agreements of the Company and Optionee with respect to the
subject matter hereof, and are governed by Georgia law except for that body of
law pertaining to conflict of laws.
-5-
<PAGE> 19
Submitted by: Accepted by:
OPTIONEE: COMPANY:
- -------------------------------------- MELITA INTERNATIONAL
(Print name of Optionee) CORPORATION
By:
- -------------------------------------- --------------------------------
(Signature of Optionee)
Title:
-----------------------------
Dated: Dated:
------------------------------- -----------------------------
-6-
<PAGE> 1
EXHIBIT 11.1
Net Income Per Share
MELITA INTERNATIONAL CORPORATION
COMPUTATION OF NET INCOME PER SHARE
(in thousands, except per share data)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
BASIC
Weighted average common shares
outstanding 8,000 8,000 8,000
Effect of the combination 3,143 3,143 3,143
Effect of the issuance of shares in
the IPO 2,395 -- --
Dilutive effect of common equivalent
shares -- -- --
Effect of shareholder distribution 294 945 945
Weighted average common
equivalent shares outstanding 13,832 12,088 12,088
====== ====== ======
Net income after income tax 10,529 7,609 4,749
Earnings per share 0.76 0.63 0.39
====== ====== ======
Pro forma net income 7,610 4,782 2,955
Pro forma earnings per share 0.55 0.40 0.24
====== ====== ======
FULLY DILUTED
Weighted average common shares
outstanding 8,000 8,000 8,000
Effect of the combination 3,143 3,143 3,143
Effect of the issuance of shares in
the IPO 2,395 -- --
Dilutive effect of common equivalent
shares 554 275 250
Effect of shareholder distribution 294 945 945
Weighted average common
equivalent shares outstanding 14,386 12,363 12,338
====== ====== ======
Net income after income tax 10,529 7,609 4,749
Earnings per share 0.73 0.62 0.38
====== ====== ======
Pro forma net income 7,610 4,782 2,955
Pro forma earnings per share 0.53 0.39 0.24
====== ====== ======
</TABLE>
49
<PAGE> 1
EXHIBIT 21.1
Subsidiaries of the Company
<TABLE>
<CAPTION>
Name of Subsidiary Jurisdiction of Incorporation
------------------ -----------------------------
<S> <C>
Melita Finance Corporation Delaware
Melita Intellectual Property, Inc. Delaware
Inventions, Inc. Georgia
Melita de Mexico, S. de R.L.de C.V. Mexico
Support Groups, S. de R.L.de C.V. Mexico
Melita Europe Limited United Kingdom
Melita International FSC, Ltd. Barbados
</TABLE>
51
<PAGE> 1
Exhibit 23.1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our reports included in this Form 10-K into the Company's previously filed
Registration Statement File No. 333-41503.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
March 26, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF MELITA INTERNATIONAL FOR THE YEAR ENDED DECEMBER 31,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 6,845
<SECURITIES> 23,969
<RECEIVABLES> 15,796
<ALLOWANCES> 0
<INVENTORY> 2,461
<CURRENT-ASSETS> 51,357
<PP&E> 10,674
<DEPRECIATION> 5,735
<TOTAL-ASSETS> 56,395
<CURRENT-LIABILITIES> 19,106
<BONDS> 0
0
0
<COMMON> 69
<OTHER-SE> 37,220
<TOTAL-LIABILITY-AND-EQUITY> 56,395
<SALES> 65,790
<TOTAL-REVENUES> 65,790
<CGS> 25,173
<TOTAL-COSTS> 25,173
<OTHER-EXPENSES> 28,538
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 12,079
<INCOME-TAX> 1,550
<INCOME-CONTINUING> 10,529
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,0529
<EPS-PRIMARY> 0.76
<EPS-DILUTED> 0.73
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF MELITA INTERNATIONAL FOR THE YEAR ENDED DECEMBER 31,
1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 47,540
<TOTAL-REVENUES> 47,540
<CGS> 18,357
<TOTAL-COSTS> 18,357
<OTHER-EXPENSES> 21,574
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 7,609
<INCOME-TAX> 0
<INCOME-CONTINUING> 7,609
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,609
<EPS-PRIMARY> 0.63
<EPS-DILUTED> 0.62
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF MELITA INTERNATIONAL FOR THE YEAR ENDED DECEMBER 31,
1995, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 35,282
<TOTAL-REVENUES> 35,282
<CGS> 14,012
<TOTAL-COSTS> 14,012
<OTHER-EXPENSES> 16,521
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,749
<INCOME-TAX> 0
<INCOME-CONTINUING> 4,749
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,749
<EPS-PRIMARY> 0.39
<EPS-DILUTED> 0.38
</TABLE>
<PAGE> 1
EXHIBIT 99.1
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
SAFE HARBOR COMPLIANCE STATEMENT
FOR FORWARD-LOOKING STATEMENTS
In passing the Private Securities Litigation Reform Act of 1995 (the
"Reform Act"), 15 U.S.C.A. Sections 77z-2 and 78u-5 (Supp. 1996), Congress
encouraged public companies to make "forward-looking statements" by creating a
safe harbor to protect companies from securities law liability in connection
with forward-looking statements. Melita International Corporation ("Melita" or
the "Company") intends to qualify both its written and oral forward-looking
statements for protection under the Reform Act and any other similar safe
harbor provisions.
"Forward-looking statements" are defined by the Reform Act. Generally,
forward-looking statements include expressed expectations of future events and
the assumptions on which the expressed expectations are based. All
forward-looking statements are inherently uncertain as they are based on
various expectations and assumptions concerning future events and they are
subject to numerous known and unknown risks and uncertainties which could cause
actual events or results to differ materially from those projected. Due to
those uncertainties and risks, the investment community is urged not to place
undue reliance on written or oral forward-looking statements of Melita. The
Company undertakes no obligation to update or revise this Safe Harbor
Compliance Statement for forward-looking statements (the "Safe Harbor
Statement") to reflect future developments. In addition, Melita undertakes no
obligation to update or revise forward-looking statements to reflect changed
assumptions, the occurrence of unanticipated events or changes to future
operating results over time. This Safe Harbor Statement supersedes that
certain Safe Harbor Statement filed as Exhibit 99.1 to the Company's Quarterly
Report on Form 10-Q dated August 14, 1997.
Melita provides the following risk factor disclosure in connection with
its continuing effort to qualify its written and oral forward-looking
statements for the safe harbor protection of the Reform Act and any other
similar safe harbor provisions. Important factors currently known to
management that could cause actual results to differ materially from those in
forward-looking statements include the following:
DEPENDENCE ON LIMITED 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 Explorer and upgrades and
additions to its PhoneFrame CS products and related services.
PhoneFrame CS was introduced in early 1995 and PhoneFrame
Explorer in late 1997. The Company expects that these products
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 customer contact and intelligent call center
management solutions as its primary line of business. As a
result, any factors adversely affecting the market for call
center systems in general, or the PhoneFrame Explorer and
PhoneFrame CS products in particular, could adversely affect the
Company's business, financial condition and results of
operations. The Company faces a potential charge resulting from
the impact of having to write down inventory of outdated products
which cannot be sold. 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 automated solutions, 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 1997, the
Company's five largest customers accounted for 27.9% of the
Company's total revenues. In 1996, the Company's five largest
customers accounted for 24.5% of its total revenues. In 1995, the
Company's five largest customers accounted for 25.0% 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
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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 order dates and actual order dates, as well
as non-recurring 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
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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 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 Corporation
("Davox"), EIS International, Inc. ("EIS") and Mosaix
International, Inc. ("Mosaix"). The Company also competes in the
CTI segment of the market, where principal competitors include
AnswerSoft, Inc., Genesys Telecommunications Laboratories, Inc.,
and Nabnasset Corporation, among others. The Company may face
additional competition from PBX/ACD vendors, system integrators,
other communications equipment and service providers, computer
hardware and software vendors and others. The Company may also
face additional competition from non-traditional competitors in
the emerging computer telephony market. Such competitors may
include Interactive Intelligence 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. Competition from these or other sources could result in
price reductions and loss of market share which could adversely
affect the Company's business, financial condition and results of
operations.
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CONTROL BY PRINCIPAL SHAREHOLDER
Aleksander Szlam, the Company's Chairman of the Board, Chief
Executive Officer and principal shareholder, is the beneficial
owner of approximately 73.5% of the outstanding shares of Common
Stock. Accordingly, Mr. Szlam is 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; COMPLIANCE TO INDUSTRY REQUIREMENTS
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 and technological 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 anticipate, 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
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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 applications to function
properly with existing applications, difficulty in recruiting
sufficient numbers of programmers with the proper technical
skills and capabilities, loss of programmers and other technical
personnel with existing 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. The Company
recently evaluated its Products for issues relating to Year 2000
("Y2K") Compliance. Although the Company has made substantial
changes to its Products to assure Y2K Compliance, no assurance
can be made that the Products will, in fact, operate correctly.
Any Y2K related defects which are detected will necessarily
detract resources from development of other products and may
result in delays in deploying additional products and features.
In addition, any litigation as a result of Y2K non-compliance may
materially adversely affect the Company's financial condition,
the Company's business or results of operations.
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,
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 recently
implemented 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
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support organization will be effective. The Company is also
implementing a plan to outsource a significant portion of the
Product's production and integration to a non-affiliated third
party. There can be no assurance that the implementation of this
outsourcing plan will be successful or that managing the
transition can be accomplished without disruption to the
Company's normal operation. In addition, due to the highly
complex nature of the Company's products, no assurance can be
made that the Products produced and integrated by the outsourcing
third-party will provide operation as reliable as those produced
and integrated by Employees of the Company. Any disruptions
resulting from the implementation of the help-desk information
system the decentralization plan or the outsourcing 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 1995, 1996 and
1997 accounted for 22.5%, 21.0% and 18.4%, 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.
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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, time consuming and may not
uncover all defects prior to shipment and installation at a
Customer's location. 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 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
which the Company is dependent upon the third-party to correct
and that may be difficult for the Company to detect and correct.
POTENTIAL LIABILITY TO CUSTOMERS
The Company's products may be critical to the operations of
its customers' businesses and provide benefits that may be
difficult to quantify. Any failure in a Company product or a
customer'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.
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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 the
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 the 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.
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 or other communications practices, if
enacted, would not adversely affect the Company.
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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.
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 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.
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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 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. Although the
Company has an employment agreement with Mr. Szlam, the
agreement does not obligate him to continue his employment with
the Company. There can be no assurance that the Company will be
able to retain the services of Mr. Szlam. The Company does not
maintain key man life insurance on Mr. Szlam. The loss of the
services of Mr. Szlam would have a material adverse effect on the
Company's business, financial condition and results of
operations. The Company is currently in the process of searching
for a President/COO. There is no assurance that this position
will be filled in the near term.
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.
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SHARES ELIGIBLE FOR FUTURE SALE
As described in the Company's Form S-8 dated December 4, 1997
and filed with the Commission, the Company has 1,600,000 shares
of Common Stock reserved for issuance under its stock plans, of
which 1,116,541 shares were subject to outstanding options as of
the date of filing of the S-8. 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 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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