<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 27, 1997
REGISTRATION NO. 333-27293
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------
PRE-EFFECTIVE
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
TSI INTERNATIONAL SOFTWARE LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 7372 06-1132156
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
----------------
45 DANBURY ROAD
WILTON, CT 06897
(203)761-8600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
CONSTANCE F. GALLEY
PRESIDENT AND CHIEF EXECUTIVE OFFICER
TSI INTERNATIONAL SOFTWARE LTD.
45 DANBURY ROAD
WILTON, CT 06897
(203)761-8600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
----------------
COPIES TO:
MARK C. STEVENS, ESQ. LAWRENCE S. WITTENBERG, ESQ.
JEFFREY R. VETTER, ESQ. HEATHER M. STONE, ESQ.
G. CHIN CHAO, ESQ. TESTA, HURWITZ & THIBEAULT, LLP
FENWICK & WEST LLP HIGH STREET TOWER
TWO PALO ALTO SQUARE 125 HIGH STREET
PALO ALTO, CA 94306 BOSTON, MA 02110
(415) 494-0600 (617) 248-7000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of earlier effective registration statement for
the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JUNE 27, 1997
4,000,000 SHARES
[LOGO OF TSI SOFT]
COMMON STOCK
Of the 4,000,000 shares of Common Stock offered hereby, 3,000,000 shares are
being sold by TSI International Software Ltd. (the "Company") and 1,000,000
shares are being sold by the Selling Stockholders. See "Principal and Selling
Stockholders." The Company will not receive any of the proceeds from the sale
of shares by the Selling Stockholders. Prior to this offering, there has been
no public market for the Common Stock of the Company. It is currently estimated
that the initial public offering price will be between $7.00 and $9.00 per
share. See "Underwriting" for information relating to the method of determining
the initial public offering price.
-----------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS COMPANY(1) STOCKHOLDERS
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<S> <C> <C> <C> <C>
Per Share..................... $ $ $ $
- --------------------------------------------------------------------------------
Total(2)...................... $ $ $ $
</TABLE>
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(1) Before deducting expenses payable by the Company, estimated at $700,000.
(2) Certain of the Selling Stockholders have granted to the Underwriters a 30-
day option to purchase an aggregate of up to an additional 600,000 shares
of Common Stock solely to cover over-allotments, if any. See
"Underwriting." If such option is exercised in full, the total Price to
Public, Underwriting Discounts and Commissions and Proceeds to Selling
Stockholders will be $ , $ and $ , respectively.
-----------
The Common Stock is offered by the Underwriters as stated herein, subject to
receipt and acceptance by them and subject to their right to reject any order
in whole or in part. It is expected that the delivery of such shares will be
made through the offices of Robertson, Stephens & Company LLC ("Robertson,
Stephens & Company"), San Francisco, California, on or about , 1997.
ROBERTSON, STEPHENS & COMPANY
SOUNDVIEW FINANCIAL GROUP, INC.
WESSELS, ARNOLD & HENDERSON
The date of this Prospectus is , 1997.
<PAGE>
The inside front cover contains a picture with a title "Integrating Islands of
Automation" at the bottom of the graphic. The graphic contains a compass in the
upper right hand corner of the picture. The picture has the Company's Mercator
product logo labeled as "Mercator" with dotted lines emanating in a spoke like
pattern to pictures of islands, each with a graphic of a piece of computer
hardware. These islands are labeled (clockwise from the upper left corner to the
lower left corner) "Customers, Suppliers, Other Partners," "EDI," "Web
Applications," "Legacy Systems," "SAP R/3," "Best of Breed Applications," and
"Data Warehouses."
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE>
NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, BY ANY SELLING STOCKHOLDER OR BY ANY UNDERWRITER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT
RELATES, OR AN OFFER TO, OR THE SOLICITATION OF, ANY PERSON IN ANY
JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary................................................................ 4
Risk Factors........................................................... 6
Use of Proceeds........................................................ 17
Dividend Policy........................................................ 17
Capitalization......................................................... 18
Dilution............................................................... 19
Selected Financial Data................................................ 20
Management's Discussion and Analysis of Financial Condition and Results
of Operations......................................................... 21
Business............................................................... 31
Management............................................................. 42
Certain Transactions................................................... 50
Principal and Selling Stockholders..................................... 51
Description of Capital Stock........................................... 53
Shares Eligible for Future Sale........................................ 55
Underwriting........................................................... 57
Legal Matters.......................................................... 58
Experts................................................................ 58
Additional Information................................................. 59
Index to Financial Statements.......................................... F-1
</TABLE>
----------------
The Company was incorporated in Connecticut in 1985 and reincorporated in
Delaware in September 1993. The Company's principal executive offices are
located at 45 Danbury Road, Wilton, CT 06897 and its telephone number is (203)
761-8600. The Company has additional offices in Boca Raton, Florida,
Bannockburn, Illinois and Cobham, England.
The Company intends to furnish its stockholders with annual reports
containing financial statements certified by an independent public accounting
firm and, upon request, quarterly reports containing unaudited financial
statements for the first three quarters of each year.
TSI, the TSI logo, Mercator, Trading Partner, OnCall and KEY/MASTER are
registered trademarks, and Mercator for R/3, Trading Partner EC, Trading
Partner PC, Trading Partner PC/32 and OnCall*EDI are trademarks, of the
Company. This Prospectus also contains trademarks and trade names of other
companies.
3
<PAGE>
SUMMARY
This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors" and elsewhere in this
Prospectus. The following summary is qualified in its entirety by the more
detailed information, including "Risk Factors," and the Financial Statements
and Notes thereto, appearing elsewhere in this Prospectus.
THE COMPANY
TSI International Software Ltd. ("TSI International" or the "Company") is a
leading provider of software and related services that enable organizations to
integrate their business applications both internally and with external
business partners. The Company's flagship product, Mercator, is a data
transformation engine which permits enterprises to exchange information between
internal systems, to implement and integrate advanced client/server
applications such as SAP's R/3 enterprise resource planning ("ERP") system and
to integrate electronic data interchange ("EDI") data and Web-based
applications with their core business systems. In addition to Mercator, the
Company's Trading Partner products permit businesses to exchange information
with business partners and to integrate EDI data with back office applications.
The evolution of enterprise computing has resulted in a proliferation of
business software applications across disparate and heterogeneous computing
systems. To improve effectiveness, efficiency and competitive positioning,
organizations are increasingly seeking to integrate and coordinate these
applications, both within the enterprise and with a growing number of external
business partners. The traditional approach to application integration -- in-
house custom development of interfaces -- is limited in its effectiveness and
is expensive, with integration costs for purchased business applications often
exceeding the cost of the applications themselves. The requirement for
integration, and the need for software tools which automate the integration
process, is increased with each new client/server, electronic commerce or Web-
based application added to the enterprise.
The Company's products provide comprehensive off-the-shelf integration
solutions that can be quickly implemented and easily maintained and that
provide support for a broad range of applications, platforms, and data types.
Mercator was the first product to be certified by SAP for use with its
Application Link Enabling ("ALE") architecture, an inter-application messaging
technology developed by SAP as a standard for interfacing with R/3. Mercator
addresses the need of SAP customers to integrate R/3 with legacy and third-
party applications in less time and at lower cost than developing in-house
custom interfaces. Similarly, for external applications, the Company's Mercator
and Trading Partner tools permit customers to integrate business processes
across their supply and demand chains by leveraging the Internet and other
transport mechanisms for EDI.
The Company's strategy is to be the market leader in providing solutions that
integrate business applications within the enterprise and between business
partners. Specifically, the Company seeks to extend its technology leadership
in application integration, particularly with respect to its Mercator product
line, and intends to target the market for enterprise application integration
with tools and solutions for the SAP R/3 and other enterprise applications
markets. In addition to these market and product strategies, the Company
intends to expand its existing channels of distribution, leverage its customer
base by marketing additional products and services to existing customers, and
to expand its professional services capability to augment its software
offerings.
The Company markets its products and services through its direct sales force
and a network of value added resellers ("VARs"), independent software vendors
("ISVs"), systems integrators ("SIs") and distributors. The Company has
directly licensed its products to over 6,000 customers worldwide, representing
a broad range of industries. The Company's customers include Allegiance
Corporation, American Express Travel Related Services, Inc., CIGNA Corporation,
Citibank, N.A., Federal Express Corporation, Hewlett-Packard Company, Hoechst
AG, International Business Machines Corporation, Lucent Technologies, Inc.,
NYNEX Corporation and Prudential Insurance Company of America.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company...... 3,000,000 shares
Common Stock offered by the Selling
Stockholders............................ 1,000,000 shares
Common Stock to be outstanding after the
Offering................................ 9,045,942 shares(1)
Use of Proceeds.......................... Repayment of indebtedness and general
corporate purposes, including working
capital. See "Use of Proceeds."
Proposed Nasdaq National Market symbol... TSFW
</TABLE>
SUMMARY FINANCIAL INFORMATION
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------------------------- ---------------
1992 1993 1994 1995 1996 1996 1997
----------- ------- ------- ------- ------- ------- -------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Total revenues.......... $11,358 $12,843 $13,934 $16,061 $19,004 $ 4,089 $ 5,508
Operating income (loss). (4,794) (1,002) 95 907 1,414 162 352
Net income (loss)....... (4,864) (1,228) (113) 823 1,228 121 313
Net income (loss) per
share(2)............... $ 0.15 $ 0.20 $ 0.02 $ 0.05
Weighted average number
of common and common
equivalent shares
outstanding(2)......... 5,654 5,984 5,695 6,426
SUPPLEMENTARY STATEMENT
OF OPERATIONS DATA(3):
Supplementary net
income................. $ 1,452 $ 360
Supplementary net income
per share.............. .23 .05
Supplementary shares
used to compute
supplementary net
income per share....... 6,308 6,750
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1997
--------------------------------
PRO PRO FORMA AS
ACTUAL FORMA(4) ADJUSTED(4)(5)
------- -------- --------------
(unaudited)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash........................................... $ 79 $ 79 $19,109
Working capital................................ (158) (158) 18,872
Total assets................................... 8,721 8,721 27,751
Total stockholders' equity (deficiency)........ (2,032) (1,032) 20,588
</TABLE>
- --------
(1) Based on shares outstanding as of May 31, 1997. Excludes (i) an aggregate
of 1,293,757 shares of Common Stock issuable upon the exercise of options
outstanding as of May 31, 1997 under the Company's 1993 Stock Option Plan
(the "1993 Plan") and the Company's 1997 Directors Stock Option Plan (the
"Directors Plan") at a weighted average exercise price of $1.44 per share,
(ii) 711,771 shares of Common Stock issuable upon exercise of outstanding
warrants that will remain outstanding upon the completion of this offering
("Warrants") at an exercise price of $2.00 per share and (iii) an aggregate
of 2,281,764 additional shares of Common Stock reserved for issuance under
the Company's 1997 Equity Incentive Plan, the Directors Plan and 1997
Employee Stock Purchase Plan.
(2) For an explanation of the determination of the number of shares used in
computing per share amounts, see Note 1 of Notes to Financial Statements.
(3) Supplementary net income per share includes the number of shares used in
computing net income per share as well as the estimated number of shares
that would be needed (based on assumed initial public offering price of
$8.00 per share) to repay certain indebtedness to be repaid with the net
proceeds from the sale of the shares of the Common Stock offered by the
Company hereby. Supplementary net income also includes interest applicable
to such borrowings. See "Use of Proceeds" and Note 1 of Notes to Financial
Statements.
(4) Gives effect to the sale of 50,000 shares of Preferred Stock on May 15,
1997 and the application of the net proceeds therefrom, as if such
transaction had occurred as of March 31, 1997.
(5) Adjusted to reflect the sale of the 3,000,000 shares offered by the Company
hereby at an assumed initial public offering price per share of $8.00 and
the application of the net proceeds therefrom, after deducting the
estimated underwriting discounts and commissions and estimated offering
expenses. See "Capitalization" and "Use of Proceeds."
Unless otherwise indicated, all information in this Prospectus assumes no
exercise of the Underwriters' over-allotment option. See "Underwriting." Except
as otherwise noted herein, all information in this Prospectus has been adjusted
to give effect to the Company's reincorporation in Delaware in September 1993,
and reflects (i) a 3-for-1 stock split to be effected immediately prior to the
consummation of this offering, (ii) the conversion, upon completion of this
offering, of all outstanding shares of Preferred Stock of the Company into an
aggregate of 2,759,715 shares of Common Stock and (iii) the exercise of certain
outstanding warrants on a net exercise basis into an aggregate of 286,227
shares of Common Stock upon completion of this offering.
5
<PAGE>
RISK FACTORS
This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain
factors, including those set forth in the following risk factors and elsewhere
in this Prospectus. In addition to the other information in this Prospectus,
the following risk factors should be considered carefully in evaluating the
Company and its business before purchasing the Common Stock offered by this
Prospectus.
UNCERTAIN PROFITABILITY; ACCUMULATED DEFICIT
Although the Company has been profitable since 1995, the Company incurred
significant operating losses through 1993 and, at March 31, 1997, the
Company's accumulated deficit was approximately $9.7 million. There can be no
assurance that the Company's profitability will continue. The Company
introduced its Mercator product line in December 1993 and released the latest
version of this product in May 1996. The relatively recent introduction of the
Mercator product line and the relative immaturity of its market, together with
the factors described under "-- Potential Fluctuations in Quarterly Results;
Seasonality," make the prediction of future operating results impossible. The
Company's past financial performance should not be considered indicative of
future results. Although the Company has experienced growth in revenues and
net income in recent periods, there can be no assurance that revenues or net
income will continue to increase or not decrease. Future operating results
will depend on many factors, including the growth of the market for business
application integration software and related services, demand for and market
acceptance of the Company's products and related services, particularly its
Mercator products and related services, demand for and market acceptance of
the SAP R/3 system, the level of competition, the Company's success in
expanding its direct sales force, indirect distribution channels and its
professional services business, the ability of the Company to further develop
and market its products, product enhancements and new products, general
economic conditions and other factors. See "-- Potential Fluctuations in
Operating Results; Seasonality" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS; SEASONALITY
The Company's quarterly and annual operating results have varied
significantly in the past and are expected to do so in the future.
Accordingly, the Company believes that period to period comparisons of its
results of operations are not necessarily meaningful and should not be relied
upon as indications of future performance. The Company's revenues and results
of operations are difficult to forecast and could be adversely affected by
many factors, including, among others: the size, timing and terms of
individual license transactions; the sales cycle for the Company's products;
demand for and market acceptance of the Company's products and related
services (particularly its Mercator products); the number of businesses
implementing the SAP R/3 system as well as the number of such businesses
requiring third party business application integration software and related
services; the Company's ability to expand, and market acceptance of, its
professional services business; the timing of expenditures by the Company in
anticipation of product releases or increased revenue; the timing of product
enhancements and product introductions by the Company and its competitors;
market acceptance of enhanced versions of the Company's existing products and
of new products; changes in pricing policies of the Company and its
competitors; variations in the mix of products and services sold by the
Company; the mix of channels through which products and services are sold; the
success of the Company in penetrating international markets; the buying
patterns and budgeting cycles of customers; personnel changes, the Company's
ability to attract and retain qualified sales, professional services and
research and development personnel and the rate at which such personnel become
productive; and general economic conditions. In particular, the ability of the
Company to achieve growth in the future will depend on its success in adding a
substantial number of sales, professional services and research and
development personnel. Competition for such personnel is intense and there can
be no assurance the Company will be able to attract and retain these
personnel.
6
<PAGE>
Licensing of the Company's software products historically has accounted for
a substantial portion of the Company's revenues, and the Company anticipates
that this trend will continue for the foreseeable future. Software license
revenues are difficult to forecast for a number of reasons. The Company
typically does not have a material backlog of unfilled orders, and revenues in
any quarter are substantially dependent on orders booked and shipped in that
quarter. The length of the sales cycles for the Company's products can vary
significantly from customer to customer and from product to product and, in
certain instances, can be as long as nine months or more. Furthermore, the
terms and conditions of individual license transactions, including prices and
discounts, may be negotiated based on volumes and commitments, and may vary
considerably from customer to customer. In addition, the Company has generally
recognized a substantial portion of its quarterly software licensing revenues
in the last month of each quarter. Accordingly, the cancellation or deferral
of even a small number of purchases of the Company's products has in the past
and could in the future have a material adverse effect on the Company's
business, operating results and financial condition.
The Company's future revenues will also be difficult to predict and the
Company has, in the past, failed to achieve its revenue expectations for
certain periods. The Company's expense levels are based, in part, on its
expectation of future revenues, and expense levels are, to a large extent,
fixed in the short term. The Company may be unable to adjust spending in a
timely manner to compensate for any unexpected revenue shortfall. If revenue
levels are below expectations for any reason, operating results are likely to
be materially and adversely affected. Net income may be disproportionately
affected by a reduction in revenue because a large portion of the Company's
expenses is related to headcount that cannot be easily reduced without
adversely affecting the Company's business. In addition, the Company currently
intends to increase its operating expenses by expanding its research and
product development staff, particularly research and development personnel to
be devoted to the Company's Mercator product line, increasing its professional
services and sales and marketing operations, expanding distribution channels
and hiring personnel in other operating areas. The Company expects to
experience a significant time lag between the date professional services,
sales and technical personnel are hired and the date such personnel become
fully productive. The timing of such expansion and the rate at which new
technical, professional services and sales personnel become productive as well
as the timing of the introduction and success of new distribution channels
could cause material fluctuations in quarterly results of operations.
Furthermore, to the extent such increased operating expenses precede or are
not subsequently followed by increased revenues, the Company's business,
operating results and financial condition could be materially and adversely
affected.
Due to the foregoing factors, it is likely that in some future quarter the
Company's revenue or operating results will not meet the expectations of
public market analysts and investors. In such event, the price of the
Company's Common Stock would likely be materially and adversely affected.
While the Company has not historically experienced any significant seasonal
fluctuations in its revenues or results of operations, it is not uncommon for
software companies to experience strong fourth quarters followed by weaker
first quarters, in some cases with sequential declines in revenues or
operating profit. The Company believes that many software companies exhibit
this pattern in their sales cycles primarily due to customers' buying patterns
and budget cycles. There can be no assurance that the Company will not display
this pattern in future years. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
DEPENDENCE ON MERCATOR PRODUCT LINE
The Company introduced its Mercator products in 1993. In recent years, a
significant portion of the Company's revenue has been attributable to licenses
of its Mercator products and related services, and the Company expects that
revenue attributable to its Mercator products and related services will
represent an increasing portion of the Company's total revenue for the
foreseeable future. The development and marketing of its Mercator product line
has required the Company to, among other things, focus its attention and
resources away from some of its traditional products, market its products to a
different customer base and shift a large portion of its development efforts
to the Mercator product line. Accordingly, the Company's
7
<PAGE>
future operating results are highly dependent on the market acceptance and
growth of its Mercator product line and enhancements thereto. There can be no
assurance that market acceptance of the Mercator product line will increase or
remain at current levels or that the Company will be able to successfully
market the Mercator product line and develop extensions and enhancements to
this product line on a long-term basis. In the event the Company's current or
future competitors release new products that provide, or are perceived as
providing, more advanced features, greater functionality, better performance,
better compatibility with other systems or lower prices than the Mercator
product line, demand for the Company's products and services would likely
decline. See "-- Risks Associated with Technological Change, Product
Enhancements and New Product Development" and "-- Competition." A decline in
demand for, or market acceptance of, the Mercator product line as a result of
competition, technological change or other factors would have a material
adverse effect on the Company's business, operating results and financial
condition. See "Business -- Products and Services."
DEPENDENCE ON SAP R/3 SYSTEM IMPLEMENTATIONS
A substantial portion of the Company's sales of its Mercator products and
related services has been attributable to sales of Mercator for R/3 and
related services. The Company believes that its future revenue growth, if any,
will also depend in part upon continued sales of Mercator for R/3 and related
services. The Company has devoted and must continue to devote substantial
resources to identifying potential customers in the R/3 market, building
relationships with strategic partners and attracting and retaining skilled
technical, sales and professional services personnel with expertise in R/3
systems. Personnel with expertise in the R/3 system are in high demand and as
such are typically difficult to hire and retain. Regardless of the investments
the Company makes in pursuing this new market, there can be no assurance that
the Company will be successful in implementing a sales and marketing strategy
appropriate for this market or in attracting and retaining the necessary
skilled personnel.
Demand for and market acceptance of Mercator for R/3 and related services
will be dependent on the continued market acceptance of the SAP R/3 system. As
a result, any factor adversely affecting demand for or use of SAP's R/3 system
could have a material adverse effect on the Company's business, operating
results and financial condition. Implementation of the SAP R/3 system is a
costly and time-consuming process and there can be no assurance that
businesses will choose to purchase such systems. Furthermore, there can be no
assurance that businesses which may implement such systems will wish to commit
the additional resources required to implement Mercator for R/3. In addition,
SAP could in the future introduce business application integration solutions
competitive with Mercator for R/3 and related services. Moreover, any changes
in or new versions of SAP's R/3 system could materially and adversely affect
the Company's business, operating results and financial condition if the
Company were not able to successfully develop or implement any related changes
to Mercator for R/3 in a timely fashion. The Company will also be required to
maintain ALE certification for Mercator for R/3. In order to maintain such
certification, the Company's product must adhere to SAP's technical
specifications which are updated by SAP from time to time, and the Company has
no control over whether and when such specifications will be changed. Any
material change by SAP in such specifications could require the Company to
devote significant development resources to updating this product to comply
with such specifications. In such event, there can be no assurance that the
Company would be able to successfully modify Mercator for R/3 on a timely
basis, if at all, and any failure to do so could materially and adversely
affect the Company's business, operating results and financial condition.
RISKS ASSOCIATED WITH TECHNOLOGICAL CHANGE, PRODUCT ENHANCEMENTS AND NEW
PRODUCT DEVELOPMENT
The market for the Company's products and services is characterized by
extremely rapid technological change, frequent new product introductions and
enhancements, evolving industry standards, and rapidly changing customer
requirements. The introduction of products incorporating new technologies and
the
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emergence of new industry standards could render existing products obsolete
and unmarketable. Accordingly, the life cycles of the Company's products are
difficult to estimate. The Company's future success will depend in part upon
its ability to anticipate changes and enhance its current products and develop
and introduce new products that keep pace with technological advancements and
address the increasingly sophisticated needs of its customers. The Company's
products may be rendered obsolete if the Company fails to anticipate or react
to change. Development of enhancements to existing products and new products
depends, in part, on the timing of releases of new versions of applications
systems by vendors, the introduction of new applications, systems or computing
platforms, the timing of changes in platforms, the release of new standards or
changes to existing standards, and changing customer requirements, among other
factors. There can be no assurance that the Company will be successful in
developing and marketing product enhancements or new products that respond to
technological change, evolving industry standards and changing customer
requirements, that the Company will not experience difficulties that could
delay or prevent the successful development, introduction and marketing of
these products or product enhancements, or that its product enhancements or
new products will adequately meet the requirements of the marketplace and
achieve any significant degree of market acceptance. The Company has in the
past experienced delays in the introduction of product enhancements and new
products and may experience such delays in the future. Furthermore, as the
number of applications, systems and platforms supported by the Company's
products increases, the Company could experience difficulties in developing on
a timely basis product enhancements which address the increased number of new
versions of applications, systems or platforms served by its existing
products. Failure of the Company, for technological or other reasons, to
develop and introduce product enhancements or new products in a timely and
cost-effective manner or to anticipate and respond adequately to changing
market conditions, as well as any significant delay in product development or
introduction, could cause customers to delay or decide against purchases of
the Company's products, which could have a material adverse effect on the
Company's business, operating results and financial condition.
The Company may, in the future, seek to develop and market enhancements to
existing products or new products which are targeted for applications, systems
or platforms which the Company believes will achieve commercial acceptance.
These efforts could require the Company to devote significant development and
sales and marketing personnel as well as other resources to such efforts which
would otherwise be available for other purposes. There can be no assurance
that the Company will be able to successfully identify such applications,
systems or platforms, or that such applications, systems or platforms will
achieve commercial acceptance or that the Company will realize a sufficient
return on its investment. Failure of these targeted applications, systems or
platforms to achieve commercial acceptance or the failure of the Company to
achieve a sufficient return on its investment could have a material adverse
effect on the Company's business, operating results and financial condition.
In addition, the introduction or announcement by the Company, or by one or
more of its current or future competitors, of products embodying new
technologies or features could render the Company's existing products obsolete
or unmarketable. There can be no assurance that the introduction or
announcement of enhanced or new product offerings by the Company or its
current or future competitors will not cause customers to defer or cancel
purchases of existing Company products. Such deferment or cancellation of
purchases could have a material adverse effect on the Company's business,
operating results and financial condition.
DEPENDENCE UPON DEVELOPMENT OF DISTRIBUTION CHANNELS
An integral part of the Company's strategy is to expand both its direct
sales force and its indirect sales channels such as VARs, ISVs, SIs and
distributors. Although VARs, ISVs, SIs and distributors have not accounted for
a substantial percentage of the Company's total revenues historically, the
Company is increasing resources dedicated to developing and expanding its
indirect distribution channels. There can be no assurance that the Company
will be successful in expanding the number of indirect distribution channels
for its products.
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Furthermore, any new VARs, ISVs, SIs or distributors may offer competing
products, or have no minimum purchase requirements of the Company's products.
There can also be no assurance that such third parties will provide adequate
levels of services and technical support. The inability of the Company to
enter into additional indirect distribution arrangements, the failure of such
third parties to perform under agreements with the Company and to penetrate
their markets, or the inability of the Company to retain and manage VARs,
ISVs, SIs and distributors with the technical and industry expertise required
to market the Company's products successfully could have a material adverse
effect on the Company's business, operating results and financial condition.
There can be no assurance that the Company's planned efforts to expand its use
of VARs, ISVs, SIs and distributors will be successful. To the extent that the
Company is successful in increasing its sales through indirect sales channels,
it expects that those sales will be at lower per unit prices than sales
through direct channels, and revenue to the Company for each such sale will be
less than if the Company had licensed the same product to the customer
directly.
Selling through indirect channels may limit the Company's contacts with its
customers. As a result, the Company's ability to accurately forecast sales,
evaluate customer satisfaction and recognize emerging customer requirements
may be hindered. The Company's strategy of marketing its products directly to
end-users and indirectly through VARs, ISVs, SIs and distributors may result
in distribution channel conflicts. The Company's direct sales efforts may
compete with those of its indirect channels and, to the extent different
resellers target the same customers, resellers may also come into conflict
with each other. Although the Company has attempted to manage its distribution
channels to avoid potential conflicts, there can be no assurance that channel
conflicts will not materially and adversely affect its relationships with
existing VARs, ISVs, SIs or distributors or adversely affect its ability to
attract new VARs, ISVs, SIs and distributors.
The Company also plans to expand its direct sales force. The Company's
future success will depend in part upon the ability of the Company to attract,
integrate, train, motivate and retain new sales personnel. There can be no
assurance that the Company's efforts to expand its direct sales force will be
successful or that the cost of such efforts will not exceed the revenue
generated. In addition, the Company expects to experience a significant time
lag between the date sales personnel are hired and the date such personnel
become fully productive. The Company's inability to manage its sales force
expansion effectively could have a material adverse effect on the Company's
business, operating results and financial condition.
DEPENDENCE ON KEY PERSONNEL; NEED TO ATTRACT AND RETAIN SALES, PROFESSIONAL
SERVICES AND TECHNICAL PERSONNEL
The Company's future success depends in large part on the continued service
of its key technical, professional services and sales personnel, as well as
senior management. The loss of the services of any of one or more of the
Company's key employees could have a material adverse effect on the Company's
business, operating results and financial condition. All employees are
employed at-will and the Company has no fixed-term employment agreements with
its employees. The Company's future success also depends on its ability to
attract, train and retain highly qualified sales, technical, professional
services and managerial personnel, particularly sales, professional services
and technical personnel with expertise in the SAP R/3 system. An increase in
the Company's sales staff is required to expand both the Company's direct and
indirect sales activities and to achieve revenue growth. Competition for such
personnel is intense, particularly for personnel with expertise in the SAP R/3
system, and there can be no assurance that the Company can attract, assimilate
or retain such personnel. The Company has at times experienced and continues
to experience difficulty in recruiting qualified technical and sales
personnel, and anticipates such difficulties in the future. The Company has in
the past experienced and in the future expects to continue to experience a
significant time lag between the date technical, professional services and
sales personnel are hired and the date such personnel become fully productive.
If the Company is unable to hire and train on a timely basis and subsequently
retain such personnel in the future, the Company's business, operating results
and financial condition could be materially and adversely affected.
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MANAGEMENT OF GROWTH
The Company's business has grown in recent periods, with total revenues
increasing from $13.9 million in 1994 to $16.1 million in 1995 and $19.0
million in 1996 and increasing from $4.1 million for the first quarter of 1996
to $5.5 million for the comparable period of 1997. The growth of the Company's
business has placed, and is expected to continue to place, a strain on the
Company's administrative, financial, sales and operational resources and
increased demands on its systems and controls. In particular, the Company
noted an increase in days sales outstanding from December 31, 1996 to March
31, 1997 from approximately 70 days to approximately 86 days, and an increase
in total accounts receivable from $4.4 million to $5.3 million. The Company
believes this increase resulted from difficulties in implementing a new
financial accounting system which have since been resolved, and from a lack of
sufficient collections resources in light of the Company's increased sales
levels.
To deal with these concerns, the Company has implemented or is in the
process of implementing and will be required to implement in the future a
variety of new and upgraded operational and financial systems, procedures and
controls and to hire additional administrative personnel. There can be no
assurance that the Company will be able to complete the implementation of
these systems, procedures and controls or hire such personnel in a timely
manner. The failure of the Company or its management to respond to, and
manage, its growth and changing business conditions, or to adapt its
operational, management and financial control systems to accommodate its
growth could have a material adverse effect on the Company's business,
operating results and financial condition. To promote growth in the Company's
sales and operations, the Company will also have to expand its sales and
marketing organizations, expand and develop its distribution channels, fund
increasing levels of product development and increase the size of its
training, professional services and customer support organization to
accommodate expanded operations, and there can be no assurance that the
Company will be successful in these endeavors. See "Business -- Employees" and
"Management."
DEPENDENCE ON THE INTERNET AND INTRANETS
The Company believes that demand for business application integration
solutions such as those offered by the Company will depend in part upon the
adoption by businesses and end-users of the Internet and intranets as a
platform for electronic commerce and communications both within and outside
the enterprise. The Internet and intranets are new and evolving, and there can
be no assurance of their widespread adoption, particularly for electronic
commerce and communications among businesses. Critical issues concerning the
Internet and intranets, including security, reliability, cost, ease of use and
access and quality of service, remain unresolved at this time, inhibiting
adoption by many enterprises and end-users. If the Internet and intranets are
not widely used by businesses and end-users, particularly for electronic
commerce, this could have an adverse effect on the Company's business,
operating results and financial condition.
COMPETITION
The market for the Company's products and services is extremely competitive
and subject to rapid change. Because there are relatively low barriers to
entry in the software market, the Company expects additional competition from
other established and emerging companies. The Company believes that the
competitive factors affecting the market for the Company's products and
services include product functionality and features; quality of professional
services offerings; product quality, performance and price; ease of product
implementation; quality of customer support services; customer training and
documentation; and vendor and product reputation. The relative importance of
each of these factors depends upon the specific customer environment. Although
the Company believes that its products and services currently compete
favorably with respect to such factors, there can be no assurance that the
Company can maintain its competitive position against current and potential
competitors.
In the business application integration market, the Company's Mercator
products and related services compete primarily against solutions developed
internally by individual businesses to meet their specific
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business application integration needs. As a result, the Company must educate
prospective customers as to the advantages of the Company's products and
services as opposed to internally developed solutions and there can be no
assurance that the Company will be able to adequately educate potential
customers to the benefits provided by the Company's products and services. In
the EDI market, the Company's Trading Partner products compete with products
offered by companies offering proprietary Value-Added Network ("VAN") services
as part of their EDI solution and the Company's PC-based Trading Partner
products also compete with PC-based products offered by a number of other EDI
software vendors.
Many of the Company's current and potential competitors have longer
operating histories, significantly greater financial, technical, product
development and marketing resources, greater name recognition and larger
customer bases than the Company. The Company's present or future competitors
may be able to develop products comparable or superior to those offered by the
Company, adapt more quickly than the Company to new technologies, evolving
industry trends or customer requirements, or devote greater resources to the
development, promotion and sale of their products than the Company.
Accordingly, there can be no assurance that the Company will be able to
compete effectively in its markets, that competition will not intensify or
that future competition will not have a material adverse effect on the
Company's business, operating results and financial condition.
The Company expects that it will face increasing pricing pressures from its
current competitors and new market entrants. The Company's competitors may
engage in pricing practices that reduce the average selling prices of the
Company's products and related services. To offset declining average selling
prices, the Company believes that it must successfully introduce and sell
enhancements to existing products and new products on a timely basis and
develop enhancements to existing products and new products that incorporate
features that can be sold at higher average selling prices. To the extent that
enhancements to existing products and new products are not developed in a
timely manner, do not achieve customer acceptance or do not generate higher
average selling prices, the Company's gross margins may decline, and such
decline could have a material adverse effect on the Company's business,
operating results and financial condition. See "Business -- Competition."
DEPENDENCE ON PROPRIETARY TECHNOLOGY
The Company's success is dependent upon its proprietary software technology.
The Company does not currently have any patents and relies principally on
trade secret, copyright and trademark laws, nondisclosure and other
contractual agreements and technical measures to protect its technology. The
Company also believes that factors such as the technological and creative
skills of its personnel, product enhancements and new product developments are
essential to establishing and maintaining a technology leadership position.
The Company enters into confidentiality and/or license agreements with its
employees, distributors and customers, and limits access to and distribution
of its software, documentation and other proprietary information. There can be
no assurance that the steps taken by the Company will prevent misappropriation
of its technology, and such protections do not preclude competitors from
developing products with functionality or features similar to the Company's
products. Furthermore, there can be no assurance that third parties will not
independently develop competing technologies that are substantially equivalent
or superior to the Company's technologies. In addition, effective copyright
and trade secret protection may be unavailable or limited in certain foreign
countries. Any failure by or inability of the Company to protect its
proprietary technology could have a material adverse effect on the Company's
business, operating results and financial condition.
Although the Company does not believe its products infringe the proprietary
rights of any third parties, there can be no assurance that infringement
claims will not be asserted against the Company or its customers in the
future. Furthermore, the Company may initiate claims or litigation against
third parties for infringement of the Company's proprietary rights or to
establish the validity of the Company's proprietary rights. Litigation, either
as plaintiff or defendant, would cause the Company to incur substantial costs
and divert management resources from productive tasks whether or not such
litigation is resolved in the Company's favor, which could have a material
adverse effect on the Company's business, operating results and financial
condition. Parties
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making claims against the Company could secure substantial damages, as well as
injunctive or other equitable relief which could effectively block the
Company's ability to license its products in the United States or abroad. Such
a judgment could have a material adverse effect on the Company's business,
operating results and financial condition. If it appears necessary or
desirable, the Company may seek licenses to intellectual property that it is
allegedly infringing. There can be no assurance, however, that licenses could
be obtained on commercially reasonable terms, if at all, or that the terms of
any offered licensed will be acceptable to the Company. The failure to obtain
the necessary licenses or other rights could have a material adverse effect on
the Company's business, operating results and financial condition. As the
number of software products in the industry increases and the functionality of
these products further overlaps, the Company believes that software developers
may become increasingly subject to infringement claims. Any such claims, with
or without merit, can be time consuming and expensive to defend and could
adversely affect the Company's business, operating results and financial
condition. There are currently no pending claims that the Company's products,
trademarks or other proprietary rights infringe upon the proprietary rights of
third parties. See "Business -- Proprietary Technology."
RISKS ASSOCIATED WITH INTERNATIONAL EXPANSION
Although international revenues currently account for only approximately 10%
of the Company's total revenues, the Company intends to expand its sales and
marketing resources outside of the United States, which will require
significant management attention and financial resources. The Company also
expects to commit additional time and development resources to customizing its
products for selected international markets and to developing international
sales and support channels. None of the Company's products is currently a
"double byte" product, which is required to localize these products in certain
non-English character set markets such as Asia. The Company believes that it
will be required to develop double byte versions of its products and engage in
other localization activities. There can be no assurance that such efforts
will be successful.
International operations involve a number of additional risks, including the
impact of possible recessionary environments in economies outside the United
States, longer receivables collection periods and greater difficulty in
accounts receivable collection, unexpected changes in regulatory requirements,
dependence on independent resellers, reduced protection for intellectual
property rights in some countries, tariffs and other trade barriers, foreign
currency exchange rate fluctuations, difficulties in staffing and managing
foreign operations, the burdens of complying with a variety of foreign laws,
potentially adverse tax consequences and political and economic instability.
To the extent the Company's international operations expand, the Company
expects that an increasing portion of its international license and service
and other revenues will be denominated in foreign currencies, subjecting the
Company to fluctuations in foreign currency exchange rates. The Company does
not currently engage in foreign currency hedging transactions. However, as the
Company continues to expand its international operations, exposures to gains
and losses on foreign currency transactions may increase. The Company may
choose to limit such exposure by the purchase of forward foreign exchange
contracts or similar hedging strategies. There can be no assurance that any
currency exchange strategy would be successful in avoiding exchange-related
losses. There can be no assurance that the foregoing factors will not have a
material adverse effect on the Company's future international revenue and,
consequently, on the Company's business, operating results and financial
condition. The Company believes that its growth will require expansion of its
sales in foreign markets and expects to rely principally on resellers in those
markets, rather than substantially increase its direct sales force to serve
those markets. There can be no assurance that the Company will be able to
sustain or increase revenue derived from international sources.
RISK OF SOFTWARE DEFECTS; PRODUCT LIABILITY
Software products as complex as those offered by the Company may contain
defects or failures when introduced or when new versions are released. The
Company has in the past discovered software defects in certain of its products
and may experience delays or lost revenue to correct such defects in the
future.
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Although the Company has corrected known material defects in its current
products and has not experienced material adverse effects resulting from any
such defects to date, there can be no assurance that, despite testing by the
Company, errors will not be found in new products or releases after
commencement of commercial shipments, resulting in loss of market share or
failure to achieve market acceptance. Any such occurrence could have a
material adverse effect upon the Company's business, operating results and
financial condition.
The Company's license agreements with its customers typically contain
provisions designed to limit the Company's exposure to potential product
liability claims. It is possible, however, that the limitation of liability
provisions contained in the Company's license agreements, especially unsigned
"shrink-wrap" licenses, may not be effective under the laws of certain
jurisdictions. Consequently, the sale and support of the Company's software
entails the risk of such claims in the future. The Company currently has a
standard business owner's insurance policy but does not have insurance
specifically for software product liability risks or software errors and
omissions. Any product liability claim brought against the Company could have
a material adverse effect upon the Company's business, operating results and
financial condition.
POTENTIAL ACQUISITIONS
If appropriate opportunities present themselves, the Company intends to
acquire businesses, products or technologies that the Company believes are
strategic, although the Company currently has no understandings, commitments
or agreements with respect to any material acquisition and no material
acquisition is currently being pursued. There can be no assurance that the
Company will be able to successfully identify, negotiate or finance such
acquisitions, or to integrate such acquisitions with its current business. The
process of integrating an acquired business, product or technology into the
Company may result in unforeseen operating difficulties and expenditures and
may absorb significant management attention that would otherwise be available
for ongoing development of the Company's business. Moreover, there can be no
assurance that the anticipated benefits of any acquisition will be realized.
Acquisitions could result in potentially dilutive issuances of equity
securities, the incurrence of debt, contingent liabilities and/or amortization
expenses related to goodwill and other intangible assets, which could
materially adversely affect the Company's business, operating results and
financial condition. Any such future acquisitions of other technologies,
products or companies may require the Company to obtain additional equity or
debt financing, which may not be available or may be dilutive.
NO PRIOR MARKET; VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active public market will
develop or be sustained after this offering. The initial public offering price
will be determined by negotiations among the Company and the representatives
of the Underwriters based on several factors and may not be indicative of the
market price of the Common Stock after this offering. See "Underwriting" for a
discussion of the factors to be considered in determining the initial public
offering price. The market price of the shares of Common Stock is likely to be
highly volatile and may be significantly affected by factors such as actual or
anticipated fluctuations in the Company's operating results, announcements of
technological innovations or new products by the Company or its competitors,
developments with respect to patents, copyrights or proprietary rights,
conditions and trends in the software or other industries, general market
conditions and other factors. In addition, the stock market has from time to
time experienced significant price and volume fluctuations that have
particularly affected the market prices for the common stocks of technology
companies. These broad market fluctuations may adversely affect the market
price of the Company's Common Stock. In the past, following periods of
volatility in the market price of a company's securities, securities class
action litigation has often resulted. There can be no assurance that such
litigation will not occur in the future with respect to the Company. Such
litigation could result in substantial costs and a diversion of management's
attention and resources, which could have a material adverse effect upon the
Company's business, operating results and financial condition.
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CONTROL BY EXISTING STOCKHOLDERS; FACTORS INHIBITING TAKEOVER
Upon completion of this offering, officers and directors of the Company and
their affiliated entities will beneficially own approximately 48.6% of the
outstanding Common Stock of the Company (47.7% if the Underwriters' over-
allotment option is exercised in full). As a result, such persons and entities
will be able to control the management and affairs of the Company and exercise
significant influence over all matters requiring stockholder approval,
including election of directors, any merger, consolidation or sale of all or
substantially all of the Company's assets, and any other significant corporate
transaction. The concentration of ownership could have the effect of delaying
or preventing a change in control of the Company. See "Principal and Selling
Stockholders." Immediately prior to the completion of this offering, the
Company's Certificate of Incorporation will be amended and restated to include
a provision that allows the Board of Directors to issue up to 5,000,000 shares
of Preferred Stock and to determine the price, rights, preferences,
privileges, and restrictions, including voting rights, of those shares without
any further vote or action by the stockholders. Preferred Stock could be
issued, without stockholder approval, that could have voting, liquidation and
dividend rights superior to that of existing stockholders. The issuance of
Preferred Stock could adversely affect the voting powers of holders of Common
Stock and the likelihood that such holders would receive dividend payments and
payments on liquidation. The Company has no current plans to issue any
Preferred Stock. In addition, Section 203 of the Delaware General Corporation
Law ("Section 203") restricts certain business combinations with any
"interested stockholder" as defined by such statute. The issuance of Preferred
Stock as well as the provisions of Section 203 could also make it more
difficult for a third party to acquire control of the outstanding voting stock
of the Company and thereby have the effect of delaying or preventing a change
in control of the Company. See "Description of Capital Stock--Delaware Anti-
Takeover Law."
IMMEDIATE AND SUBSTANTIAL DILUTION
The initial public offering price is substantially higher than the net
tangible book value per share of Common Stock. Investors purchasing shares of
Common Stock in this offering will therefore incur immediate and substantial
dilution of $5.72 in the net tangible book value per share of the Common Stock
(at an assumed initial public offering price of $8.00 per share and after
deducting the estimated underwriting discount and estimated offering
expenses). To the extent that options or Warrants to purchase the Company's
Common Stock are exercised, there will be further dilution. See "Dilution."
UNCERTAINTY AS TO USE OF PROCEEDS
Except for the repayment of amounts outstanding under its credit line, the
Company has no specific plans as to the use of a significant portion of the
net proceeds from this offering, other than general working capital purposes.
Accordingly, the Company's management will retain broad discretion to allocate
the net proceeds from this offering to uses that the stockholders may not deem
desirable and there can be no assurance that the proceeds can or will yield a
significant return. See "Use of Proceeds."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of large amounts of the Company's Common Stock in the public market
could adversely affect the market price of the Common Stock and could impair
the Company's future ability to raise capital through offerings of its equity
securities. A substantial number of outstanding shares of Common Stock and
shares of Common Stock issuable upon the exercise of outstanding stock options
and Warrants will become available for resale in the public market at
prescribed times. Upon completion of this offering, there will be 9,045,942
shares of Common Stock of the Company outstanding. The 4,000,000 shares
offered hereby will be eligible for immediate sale in the public market
without restriction. Taking into account certain shares subject to lock-up
agreements and notwithstanding possible earlier eligibility for sale under the
provisions of Rules 144, 144(k) and 701, the number of shares that will be
available for sale in the public market will be as follows: (i) approximately
81,000 shares will be eligible for immediate sale on the effective date, (ii)
approximately 3,555 shares will become eligible for sale 90 days after the
effective date pursuant to the provisions of Rule 144 or
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Rule 701, (iii) approximately 48,000 shares will be eligible for sale in
December 1997 subject to certain volume and other resale restrictions under
Rule 144, (iv) approximately 4,763,387 shares will become eligible for sale
180 days after the effective date upon the expiration of certain lock-up
agreements and, as of that date, approximately 4,076,847 of such shares will
be subject to certain volume and other resale restrictions pursuant to Rule
144, and (v) approximately 150,000 shares will become eligible for sale in May
1998, subject to certain volume and other resale restrictions pursuant to Rule
144. Within 90 days after this offering, the Company intends to register
approximately 3,586,521 shares of the Company's Common Stock reserved for
issuance upon exercise of outstanding options or for future grants or
purchases under its stock option plans and stock purchase plan.
In addition, upon completion of this offering, there will remain outstanding
Warrants to purchase 711,771 shares of Common Stock at an exercise price of
$2.00 per share. These Warrants are exercisable at any time on a net exercise
basis. Accordingly, any shares of Common Stock issuable upon such net exercise
would be available for resale in the public market, subject to public
information, volume limitation or notice provisions of Rule 144, in the case
of affiliates.
Following this offering, the holders of 2,567,169 shares of the Company's
Common Stock and holders of Warrants to purchase 711,771 shares of Common
Stock will have certain rights to register those shares of Common Stock under
the Securities Act. See "Shares Eligible for Future Sale."
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,000,000 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$21.6 million (at an assumed initial public offering price of $8.00 per share)
after deducting the estimated underwriting discount and commissions and
estimated offering expenses. The Company will not receive any proceeds from
the sale of Common Stock by the Selling Stockholders.
The Company expects to use a portion of such proceeds for the repayment of
approximately $2.6 million of indebtedness under the Company's bank credit
line. A portion of this indebtedness bears interest at the rate of the bank's
prime lending rate plus 1.0% and the remainder bears interest at the rate of
the applicable LIBOR rate plus 3.0% (for a weighted average interest rate of
approximately 8.92% at March 31, 1997). The Company has no current specific
plans for the remainder of the net proceeds of this offering, but the Company
expects to use such net proceeds for general corporate purposes, including
working capital. A portion of the proceeds may also be used to acquire or
invest in complementary businesses or products or to obtain the right to use
complementary technologies. The Company presently has no commitments or
understandings for any such acquisitions or investments, and is not presently
engaged in any discussions or negotiations for any such acquisitions or
investments. Pending use of the net proceeds for the above purposes, the
Company intends to invest such funds in short-term, interest-bearing,
investment-grade obligations.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
Stock. The Company currently anticipates that it will retain all future
earnings for use in its business and does not anticipate paying any cash
dividends on its Common Stock in the foreseeable future. The payment of any
future dividends will be at the discretion of the Company's Board of Directors
and will depend upon, among other things, future earnings, operations, capital
requirements, the general financial condition of the Company, general business
conditions and contractual restrictions on payment of dividends, if any. The
Company's credit agreement with its bank prohibits the payment of dividends
without the bank's written consent.
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CAPITALIZATION
The following table sets forth, as of March 31, 1997, (i) the actual
capitalization of the Company, (ii) the capitalization of the Company on a pro
forma basis to give retroactive effect to the items referred to in footnote
(1) below and (iii) such pro forma capitalization as adjusted to give effect
to the sale of the 3,000,000 shares of Common Stock offered by the Company
hereby at an assumed offering price of $8.00 per share and the application of
the net proceeds therefrom.
<TABLE>
<CAPTION>
MARCH 31, 1997
-----------------------------------------
PRO FORMA
ACTUAL PRO FORMA(1) AS ADJUSTED
----------- ------------- ------------
(In thousands, except share data)
<S> <C> <C> <C>
Long-term debt:
Notes payable--bank....... 3,590 2,590 --
Equipment obligations..... 43 43 43
----------- ----------- -----------
Total long-term debt.... 3,633 2,633 43
=========== =========== ===========
Stockholders' equity
(deficiency)(2):
Preferred stock, $0.01 par
value per share;
1,638,166 shares
authorized, 860,969
shares issued and
outstanding, actual;
5,000,000 shares
authorized, no shares
issued or outstanding,
pro forma and pro forma
as adjusted.............. 9 -- --
Common stock, $0.01 par
value per share;
3,888,166 shares
authorized, 3,000,000
shares issued and
outstanding, actual;
20,000,000 shares
authorized, 6,045,942
shares issued and
outstanding, pro forma;
20,000,000 shares
authorized, 9,045,942
shares issued and
outstanding, pro forma as
adjusted(3).............. 30 60 90
Paid-in capital........... 7,888 8,867 30,457
Accumulated deficit....... (9,724) (9,724) (9,724)
Cumulative foreign
currency translation
adjustment............... (170) (170) (170)
Treasury stock at cost.... (65) (65) (65)
----------- ----------- -----------
Total stockholders'
equity (deficiency)..... (2,032) (1,032) 20,588
----------- ----------- -----------
Total capitalization.... 1,601 1,601 20,631
=========== =========== ===========
</TABLE>
- --------
(1) Gives effect to (i) the repayment of $1.0 million principal amount of
indebtedness with the proceeds of the sale of Preferred Stock on May 15,
1997, (ii) the automatic conversion of all outstanding shares of Preferred
Stock into an aggregate of 2,759,715 shares of Common Stock (including
150,000 shares of Common Stock issuable upon conversion of Preferred Stock
sold on May 15, 1997) upon the closing of this offering, and (iii) the
exercise of certain outstanding warrants, on a net exercise basis, into an
aggregate of 286,227 shares of Common Stock (based upon an assumed initial
public offering price of $8.00 per share) upon the closing of this
offering.
(2) See Note 6 of Notes to Financial Statements.
(3) Excludes (i) 1,293,757 shares of Common Stock issuable upon exercise of
stock options outstanding as of May 31, 1997 under the 1993 Plan and the
Directors Plan and (ii) 711,771 shares of Common Stock issuable upon
exercise of Warrants which will remain outstanding after the consummation
of this offering.
18
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of March 31, 1997,
was $(1.0 million) or approximately $(0.17) per share of Common Stock. Pro
forma net tangible book value per share represents total tangible assets of
the Company (taking into effect the sale by the Company of Preferred Stock on
May 15, 1997), less total liabilities (taking into effect the repayment of
$1.0 million of indebtedness with the proceeds from the sale of Preferred
Stock on May 15, 1997), divided by the number of shares of Common Stock
outstanding, assuming conversion of all outstanding shares of Preferred Stock
(including shares of Preferred Stock sold on May 15, 1997) into an aggregate
of 2,759,715 shares of Common Stock and the exercise of certain outstanding
warrants on a net exercise basis into an aggregate of 286,227 shares of Common
Stock upon completion of this offering. Pro forma net tangible book value
dilution per share represents the difference between the amount per share paid
by purchasers of shares of Common Stock in the offering made hereby and the
pro forma net tangible book value per share of Common Stock immediately after
the offering.
After giving effect to the sale of 3,000,000 shares of Common Stock offered
by the Company hereby (at an assumed initial public offering price of $8.00
per share and after deducting the estimated underwriting discounts and
commissions and estimated offering expenses), the pro forma net tangible book
value of the Company as of March 31, 1997 would have been $20.6 million or
approximately $2.28 per share. This represents an immediate increase in pro
forma net tangible book value of $2.45 per share to existing stockholders and
an immediate dilution of $5.72 per share to purchasers of Common Stock in this
offering, as illustrated in the following table:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............... $8.00
Pro forma net tangible book value per share at March 31,
1997....................................................... $(0.17)
Increase per share attributable to new investors............ 2.45
------
Pro forma net tangible book value per share after the
offering..................................................... 2.28
-----
Pro forma net tangible book value dilution per share to new
investors.................................................... $5.72
=====
</TABLE>
The following table sets forth on a pro forma basis as of March 31, 1997,
the difference between the existing stockholders and the purchasers of shares
in this offering (at an assumed initial public offering price of $8.00 per
share) with respect to the number of shares purchased from the Company, the
total consideration paid and the average price per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------- ------------------- PRICE
NUMBER(1) PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)(2)..... 6,045,942 66.8% $ 8,927,400 27.1% $1.48
New investors................... 3,000,000 33.2 24,000,000 72.9 8.00
--------- ----- ----------- -----
Totals........................ 9,045,942 100.0% $32,927,400 100.0%
========= ===== =========== =====
</TABLE>
- --------
(1) Sales by the Selling Stockholders in this offering will reduce the number
of shares of Common Stock held by existing stockholders to 5,045,942, or
55.8% (4,445,942, or 49.1% if the Underwriters' over-allotment option is
exercised in full) of the total shares of Common Stock outstanding
immediately after this offering, and will increase the number of shares of
Common Stock held by new investors to 4,000,000, or 44.2% (4,600,000, or
50.9% if the Underwriters' over-allotment option is exercised in full) of
the total number of shares of Common Stock outstanding immediately after
this offering. See "Principal and Selling Stockholders."
(2) Includes 2,759,715 shares of Common Stock issuable upon conversion of all
outstanding shares of Preferred Stock (including 150,000 shares of Common
Stock issuable upon conversion of Preferred Stock sold on May 15, 1997)
upon the closing of this offering and an aggregate of 286,227 shares of
Common Stock issuable upon the exercise of warrants on a net exercise
basis upon completion of this offering.
As of May 31, 1997, there were options outstanding to purchase a total of
1,293,757 shares of Common Stock at a weighted average exercise price of $1.44
per share and Warrants outstanding to purchase a total of 711,771 shares of
Common Stock at an exercise price of $2.00 per share, which Warrants will
remain outstanding after the consummation of this offering. To the extent that
any of these options or Warrants are exercised, there will be further dilution
to new investors. See "Capitalization," "Management -- Employee Benefit
Plans," "Description of Capital Stock" and Note 6 of Notes to Financial
Statements.
19
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data are qualified by reference to and
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Financial Statements
and Notes thereto included elsewhere in this Prospectus. The statements of
operations data presented below for each of the years in the three year period
ended December 31, 1996 and the balance sheet data as of December 31, 1995 and
1996 are derived from the financial statements of the Company, which financial
statements have been audited by KPMG Peat Marwick LLP, independent certified
public accountants, and are included elsewhere herein. The statements of
operations data presented below for the year ended December 31, 1993, and the
balance sheet data as of December 31, 1992, 1993, and 1994 are derived from
audited financial statements not included in this Prospectus. The statements
of operations data for the year ended December 31, 1992 is unaudited. The
statements of operations data presented below for the three months ended March
31, 1996 and 1997 and the balance sheet data as of March 31, 1997 are derived
from unaudited financial statements included elsewhere herein. The unaudited
financial statements include all adjustments (consisting only of normal
recurring adjustments) that the Company considers necessary for a fair
presentation of its financial position and results of operations for these
periods. The results of operations for the three months ended March 31, 1997
are not necessarily indicative of the results that may be expected for the
year ending December 31, 1997 or any other future period.
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------------- ----------------
1992 1993 1994 1995 1996 1996 1997
----------- ------- ------- ------- ------- ------- -------
(unaudited) (unaudited)
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Software licensing...................................... $ 4,292 $ 5,242 $ 6,275 $ 7,553 $ 9,310 $ 1,783 $ 2,731
Service, maintenance and other.......................... 7,066 7,601 7,659 8,508 9,694 2,306 2,777
------- ------- ------- ------- ------- ------- -------
Total revenues......................................... 11,358 12,843 13,934 16,061 19,004 4,089 5,508
------- ------- ------- ------- ------- ------- -------
Cost of revenues:
Software licensing...................................... 1,080 934 1,035 725 495 93 174
Service, maintenance and other.......................... 2,418 2,276 2,522 2,200 2,006 432 548
------- ------- ------- ------- ------- ------- -------
Total cost of revenues................................. 3,498 3,210 3,557 2,925 2,501 525 722
------- ------- ------- ------- ------- ------- -------
Gross profit............................................. 7,860 9,633 10,377 13,136 16,503 3,564 4,786
------- ------- ------- ------- ------- ------- -------
Operating expenses:
Product development..................................... 3,807 2,498 2,231 3,068 3,452 779 1,073
Selling and marketing................................... 6,598 6,218 6,124 7,160 8,715 1,894 2,584
General and administrative.............................. 2,249 1,919 1,927 2,001 2,922 729 777
------- ------- ------- ------- ------- ------- -------
Total operating expenses............................... 12,654 10,635 10,282 12,229 15,089 3,402 4,434
------- ------- ------- ------- ------- ------- -------
Operating income (loss).................................. (4,794) (1,002) 95 907 1,414 162 352
Other income (expense), net.............................. (70) (226) (208) (84) (186) (41) (39)
------- ------- ------- ------- ------- ------- -------
Net income (loss)........................................ $(4,864) $(1,228) $ (113) $ 823 $ 1,228 $ 121 $ 313
======= ======= ======= ======= ======= ======= =======
Net income (loss) per share(1)........................... $ 0.15 $ 0.20 $ 0.02 $ 0.05
======= ======= ======= =======
Weighted average number of common and common
equivalent shares outstanding(1)....................... 5,654 5,984 5,695 6,426
======= ======= ======= =======
SUPPLEMENTARY STATEMENT OF OPERATIONS DATA (2):
Supplementary net income................................. $ 1,452 $ 360
======= =======
Supplementary net income per share...................... $ .23 $ .05
======= =======
Supplementary shares used to compute supplementary
net income per share................................... 6,308 6,750
======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------- MARCH 31,
1992 1993 1994 1995 1996 1997
------ ------ ------ ------ ------- -----------
(unaudited)
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash................................................................... $ 39 $ 178 $ 450 $ 143 $ 41 $ 79
Working capital........................................................ (1,664) (2,195) (2,630) (2,128) (1,220) (158)
Total assets........................................................... 8,869 7,218 6,387 6,237 7,521 8,721
Total stockholders' (deficiency)....................................... (3,679) (4,306) (4,393) (3,570) (2,294) (2,032)
</TABLE>
- -------
(1) For an explanation of the determination of the number of shares used in
computing per share amounts, see Note 1 of Notes to Financial Statements.
(2) Supplementary net income per share includes the number of shares used in
computing net income per share as well as the estimated number of shares
that would be needed (based on an assumed initial public offering price of
$8.00 per share) to repay certain indebtedness to be repaid with the net
proceeds from the sale of the shares of the Common Stock offered by the
Company hereby. Supplementary net income also includes interest applicable
to such borrowings. See "Use of Proceeds" and Note 1 of Notes to Financial
Statements.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements which involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those set forth under "Risk Factors" and elsewhere
in this Prospectus. The following discussion should be read in conjunction
with the Financial Statements and Notes thereto included elsewhere in this
Prospectus.
OVERVIEW
The Company was incorporated in Connecticut in 1985 and reincorporated in
Delaware in September 1993. In June 1991, the Company began developing its
Mercator product and in December 1993 released Version 1.0 of Mercator. The
Company released the latest version of Mercator in May 1996 and released its
Mercator for R/3 product in June 1996.
Historically, the Company has derived a majority of its revenues from
products other than Mercator, primarily its Trading Partner family of products
and its KEY/MASTER product. However, revenue related to Mercator has grown
significantly in each of the last three years and has increased as a
percentage of total revenues. The Company believes that future growth in
revenues, if any, will be mainly attributable to its Mercator product line. In
view of the relatively recent introduction of Mercator, the Company believes
it cannot accurately predict the amount of revenues that will be attributable
to such products or the life of such products. To the extent the Company's
Mercator products do not achieve market acceptance, the Company's business,
operating results and financial condition will be materially and adversely
affected.
The Company's revenues are derived principally from two sources: (i) license
fees for the use of the Company's software products and (ii) service fees for
maintenance, consulting services and training related to the Company's
software products. The Company generally recognizes revenue from software
license fees upon shipment, unless the Company has significant post-delivery
obligations, in which case revenues are recognized when such obligations are
satisfied. The Company's KEY/MASTER product is licensed under term-use
contracts rather than for a one-time license fee, and the Company recognizes
revenue from such arrangements on a present-value basis at the inception of
the contract. Revenues from consulting and training are recognized as services
are performed, and maintenance revenues are recognized ratably over the
maintenance period, typically one year. The Company does not actively market
new term-use contracts for KEY/MASTER but continues to receive KEY/MASTER
revenues, principally maintenance revenues. As a result, KEY/MASTER accounts
for a larger proportion of maintenance revenue than license revenues and
increases the percentage of the Company's total revenues represented by
services, maintenance and other revenues. The Company intends to increase the
scope of its service offerings with the goal of increasing license revenues
from sales of its products. The Company does not believe that the mix of
software licensing and service, maintenance and other revenues will change
substantially in the future.
Mercator can be used by IT professionals as well as VARs, ISVs, SIs or other
third parties who resell, embed or otherwise bundle Mercator with their
products. To date, license fee revenues have been derived principally from
direct sales of software products through the Company's direct sales force.
Although the Company believes that such direct sales will continue to account
for a significant portion of software licensing revenues, the Company intends
to increase its use of distributors and resellers. Furthermore, the Company's
planned expansion of its sales organization is expected to cause sales and
marketing expenses to increase.
The Company markets its products in North America primarily through its
direct sales and telesales organizations. Throughout the rest of the world,
the Company markets its products through distributors, resellers and direct
sales. International revenue accounted for 10.4% and 9.4% of total revenues
for 1996 and the first three months of 1997, respectively. The Company
maintains an international sales and support office
21
<PAGE>
in the United Kingdom. The Company intends to increase its international
direct sales force and focus on establishing additional international
distributor and reseller relationships. See "Risk Factors -- Risks Associated
with International Expansion."
The size of the Company's orders can range from a few thousand dollars to
over $100,000 per order. The loss or delay of large individual orders,
therefore, can have a significant impact on the revenues and other quarterly
results of the Company. In addition, the Company has generally recognized a
substantial portion of its quarterly software licensing revenues in the last
month of each quarter, and as a result, revenue for any particular quarter may
be difficult to predict in advance. Because the Company's operating expenses
are relatively fixed, a delay in the recognitions of revenue from a limited
number of license transactions could cause significant variations in operating
results from quarter to quarter and could result in significant losses. To the
extent such expenses precede, or are not subsequently followed by, increased
revenue, the Company's operating results would be materially and adversely
affected. As a result of these and other factors, operating results for any
quarter are subject to variation, and the Company believes that period-to-
period comparisons of its results of operations are not necessarily meaningful
and should not be relied upon as indications of future performance.
In accordance with Statement of Financial Accounting Standards No. 86,
Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed, software development costs are expensed as incurred until
technological feasibility has been established, at which time such costs are
capitalized until the product is available for general release to customers.
To date, the establishment of technological feasibility of the Company's
products and general release of such software have substantially coincided. As
a result, software development costs qualifying for capitalization have been
insignificant, and therefore, the Company has not capitalized any software
development costs.
22
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage of
total revenues represented by certain items from the Company's Statements of
Operations.
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------- ----------------
1994 1995 1996 1996 1997
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenues:
Software licensing.......... 45.0% 47.0% 49.0% 43.6% 49.6%
Service, maintenance and
other...................... 55.0 53.0 51.0 56.4 50.4
-------- -------- -------- ------- -------
Total revenues............ 100.0 100.0 100.0 100.0 100.0
-------- -------- -------- ------- -------
Cost of revenues:
Software licensing.......... 7.4 4.5 2.6 2.3 3.2
Service, maintenance and
other...................... 18.1 13.7 10.6 10.5 9.9
-------- -------- -------- ------- -------
Total cost of revenues.... 25.5 18.2 13.2 12.8 13.1
-------- -------- -------- ------- -------
Gross profit.................. 74.5 81.8 86.8 87.2 86.9
-------- -------- -------- ------- -------
Operating expenses:
Product development......... 16.0 19.1 18.2 19.1 19.5
Selling and marketing....... 44.0 44.6 45.9 46.3 46.9
General and administrative.. 13.8 12.5 15.3 17.8 14.1
-------- -------- -------- ------- -------
Total operating expenses.. 73.8 76.2 79.4 83.2 80.5
-------- -------- -------- ------- -------
Operating income (loss)....... 0.7 5.6 7.4 4.0 6.4
Other income (expense), net... (1.5) (0.5) (0.9) (1.0) (0.7)
-------- -------- -------- ------- -------
Net income (loss)............. (0.8)% 5.1% 6.5% 3.0% 5.7%
======== ======== ======== ======= =======
Gross profit:
Software licensing.......... 83.5% 90.4% 94.7% 94.8% 93.6%
Service, maintenance and
other...................... 67.1 74.1 79.3 81.3 80.3
</TABLE>
THREE MONTHS ENDED MARCH 31, 1997 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1996
Revenues
Total Revenues. The Company's total revenues increased 35% from $4.1 million
in the first three months of 1996 to $5.5 million in the comparable period of
1997.
Software Licensing. Software licensing revenues increased 53% from $1.8
million in the first three months of 1996 to $2.7 million in the comparable
period of 1997, primarily as a result of a 96% increase in Mercator license
revenues.
Service, Maintenance and Other. Service, maintenance and other revenues
increased 20% from $2.3 million in the first three months of 1996 to $2.8
million in the comparable period of 1997, primarily as a result of a 136%
increase in professional services revenues primarily associated with sales of
Mercator and, to a lesser extent, an increase in Mercator maintenance revenue,
partially offset by a slight decrease in KEY/MASTER maintenance revenues.
Maintenance revenues attributable to KEY/MASTER were $1.2 million and $1.1
million for the first three months of 1996 and 1997, respectively.
Cost of Revenues
Cost of software licensing revenues consists primarily of media, manuals,
distribution costs and the cost of third party software that the Company
resells. Cost of service, maintenance and other revenues consists primarily of
personnel-related costs in providing maintenance, technical support,
consulting and training to customers. Gross margin on software licensing
revenues is higher than gross margin on service, maintenance and other
revenues, reflecting the low materials, packaging and other costs of software
products compared
23
<PAGE>
with the relatively high personnel costs associated with providing
maintenance, technical support, consulting and training services. Cost of
service, maintenance and other revenues also varies based upon the mix of
maintenance, technical support, consulting and training services.
Cost of Software Licensing. Cost of software licensing revenues increased
87% from $93,000 in the first three months of 1996 to $174,000 in the
comparable period of 1997, primarily due to increased sales of software
licenses. Software licensing gross margin remained relatively constant at 95%
and 94% in the first three months of 1996 and 1997, respectively.
Cost of Service, Maintenance and Other. Cost of service, maintenance and
other revenues increased 27% from $432,000 in the first three months of 1996
to $548,000 in the comparable period of 1997, primarily due to increased
professional services rendered, particularly Mercator-related services.
Service, maintenance and other gross margin remained relatively constant at
81% and 80% in the first three months of 1996 and 1997, respectively.
Operating Expenses
Product Development. Product development expenses include expenses
associated with the development of new products and enhancements to existing
products and consist primarily of salaries, recruiting and other personnel-
related expenses, depreciation of development equipment, supplies, travel and
allocated facilities and communications costs. Product development expenses
increased 38% from $779,000 in the first three months of 1996 to $1.1 million
in the comparable period of 1997, primarily due to increased product
development activities relating to the Company's Mercator product line.
Product development expenses as a percentage of total revenue did not change
significantly in the first three months of 1997 as compared to the first three
months of 1996. The Company believes that a significant level of research and
development expenditures is required to remain competitive. Accordingly, the
Company anticipates that it will continue to devote substantial resources to
research and development. The Company expects that the dollar amount of
research and development expenses will increase through at least the remainder
of 1997. To date, all research and development expenditures have been expensed
as incurred.
Selling and Marketing. Selling and marketing expenses consist of sales and
marketing personnel costs, including sales commissions, recruiting, travel,
advertising, public relations, seminars, trade shows, product descriptive
literature and allocated facilities and communications costs. Selling and
marketing expenses increased 36% from $1.9 million in the first three months
of 1996 to $2.6 million in the comparable period of 1997, primarily due to the
increased number of sales and marketing personnel to address Mercator
marketing opportunities and increased expenditures for Mercator-related
marketing programs. Selling and marketing expenses as a percentage of total
revenues did not change significantly in the first three months of 1997 as
compared to the first three months of 1996. The Company expects to continue
hiring additional sales and marketing personnel and to increase promotional
expenses through at least the remainder of 1997 to address Mercator marketing
opportunities and anticipates that sales and marketing expenses will increase
in absolute dollar amount.
General and Administrative. General and administrative expenses consist
primarily of salaries, recruiting and other personnel-related expenses for the
Company's administrative, executive and finance personnel as well as outside
legal and audit costs. General and administrative expenses increased 7% from
$729,000 in the first three months of 1996 to $777,000 in the comparable
period of 1997, primarily due to increased administrative expenses to support
the Company's growth. General and administrative expenses as a percentage of
total revenue decreased to 14% in the first three months of 1997 from 18% for
the comparable period of 1996, primarily due to increased revenues during the
first three months of 1997. The Company believes that the dollar amount of its
general and administrative expenses will increase as the Company expands its
administrative staff and incurs additional costs (including directors' and
officers' liability insurance, investor relations programs and increased
professional fees) related to being a public company.
24
<PAGE>
Other Income (Expense), Net
Other income represents interest income earned on the Company's term-use
contracts and was negligible in the first three months of 1996 and 1997. Other
expense represents the Company's borrowing expenses and its provision for
income taxes. Borrowing expenses were $63,000 in the first three months of
1997 as compared to $79,000 for the first three months of 1996. Due to the
utilization of net operating loss carryforwards, the provisions for income
taxes for the quarters ended March 31, 1997 and 1996 were not significant.
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
Revenues
Total Revenues. Total revenues increased 18% from $16.1 million in 1995 to
$19.0 million in 1996.
Software Licensing. Software licensing revenues increased 23% from $7.6
million in 1995 to $9.3 million in 1996, primarily due to a 74% increase in
Mercator license revenues, partially offset by a decrease in licenses of the
Company's mainframe-based Trading Partner and KEY/MASTER products.
Service, Maintenance and Other. Service, maintenance and other revenues
increased 14% from $8.5 million in 1995 to $9.7 million in 1996, primarily due
to a 53% increase in professional services revenues, particularly professional
services associated with Mercator and, to a lesser extent, an increase in
Mercator maintenance revenue, offset by a slight decrease in maintenance
revenue related to the Company's mainframe-based Trading Partner and
KEY/MASTER products. Maintenance revenues attributable to KEY/MASTER were $4.9
million and $4.6 million for 1995 and 1996, respectively.
Cost of Revenues
Cost of Software Licensing. Cost of software licensing revenues decreased
32% from $725,000 in 1995 to $495,000 in 1996, primarily due to termination of
amortization relating to the Company's acquisition of Foretell Corp. Software
licensing gross margin increased from 90% in 1995 to 95% in 1996, primarily
due to termination of such amortization.
Cost of Service, Maintenance and Other. Cost of service, maintenance and
other revenues decreased 9% from $2.2 million in 1995 to $2.0 million in 1996.
The decrease was primarily due to a decrease in the number of support
personnel related to the Company's mainframe-based Trading Partner and
KEY/MASTER products. Service, maintenance and other gross margin increased
from 74% in 1995 to 79% in 1996, primarily due to the decrease in such support
personnel.
Operating Expenses
Product Development. Product development expenses increased 13% from $3.1
million in 1995 to $3.5 million in 1996, primarily due to increased headcount
associated with the development of Mercator. Product development expenses
represented 19% and 18% of total revenues for 1995 and 1996, respectively.
Selling and Marketing. Selling and marketing expenses increased 22% from
$7.2 million in 1995 to $8.7 million in 1996. This increase was primarily due
to the increased number of sales and marketing personnel required to address
Mercator marketing opportunities and increased spending on Mercator-related
marketing programs. Selling and marketing expenses represented 44% and 46% of
total revenues for 1995 and 1996, respectively.
General and Administrative. General and administrative expenses increased
46% from $2.0 million in 1995 to $2.9 million in 1996. The increase was
primarily due to increased management and MIS staff, increased provision for
bad debts and increased depreciation. General and administrative expenses
represented 13% and 15% of total revenues for 1995 and 1996, respectively.
25
<PAGE>
Other Income (Expense), Net
Other income decreased from $370,000 in 1995 to $135,000 in 1996 due to a
one-time benefit in 1995 of $177,000 from the settlement of a lawsuit in the
Company's favor and a decrease in the amount of interest earned on term
license contracts. Borrowing expenses decreased from $420,000 in 1995 to
$286,000 in 1996 due to reduced borrowing levels. Due to the utilization of
net operating loss carryforwards, the provisions for income taxes for 1996 and
1995 were not significant.
Taxes
At December 31, 1996, the Company had federal net operating loss
carryforwards of $8.6 million, all of which expire through 2009. Due to the
"change in ownership" provisions of the Internal Revenue Code of 1986, the
availability of net operating loss carryforwards and research tax credits to
offset federal taxable income in future periods could be subject to an annual
limitation if a change in ownership for income tax purposes should occur. See
Note 8 of Notes to Financial Statements.
YEAR ENDED DECEMBER 31, 1995 COMPARED WITH YEAR ENDED DECEMBER 31, 1994
Revenues
Total Revenues. Total revenues increased 15% from $13.9 million in 1994 to
$16.1 million in 1995.
Software Licensing. Software licensing revenues increased 20% from $6.3
million in 1994 to $7.6 million in 1995. The increase in software licensing
revenues was primarily due to a 125% increase in Mercator license revenues,
partially offset by a decrease in licenses of the Company's mainframe-based
Trading Partner and KEY/MASTER products.
Service, Maintenance and Other. Service, maintenance and other revenues
increased 11% from $7.7 million in 1994 to $8.5 million in 1995. The increase
in service, maintenance and other revenues was primarily due to increases in
revenues for annual maintenance and professional services relating to the
Company's Mercator and Trading Partner products.
Cost of Revenues
Cost of Software Licensing. Cost of software licensing revenues decreased
30% from $1.0 million in 1994 to $725,000 in 1995. The decrease was primarily
due to lower costs related to the roll-out of the Company's OnCall*EDI product
that occurred in 1994, for which the Company accrued $400,000 in 1994.
Software licensing gross margin increased from 84% in 1994 to 90% in 1995,
primarily due to lower costs related to the roll-out of the Company's
OnCall*EDI product.
Cost of Service, Maintenance and Other. Cost of service, maintenance and
other revenues decreased 13% from $2.5 million in 1994 to $2.2 million in
1995. The decrease was primarily due to a reduction of staff supporting the
Company's mainframe-based Trading Partner and KEY/MASTER products. Service,
maintenance and other gross margin increased from 67% in 1994 to 74% in 1995,
primarily due to such staff reduction.
Operating Expenses
Product Development. Product development expenses increased 38% from $2.2
million in 1994 to $3.1 million in 1995, primarily due to expenses related to
the development of Mercator, particularly increased headcount devoted to
product development activities. Product development expenses represented 16%
and 19% of total revenues in 1994 and 1995, respectively.
Selling and Marketing. Selling and marketing expenses increased 17% from
$6.1 million in 1994 to $7.2 million in 1995. This increase was primarily due
to an increase in sales commissions associated with increased revenues,
increased marketing activities and the establishment of a dedicated business
development group. Selling and marketing expenses represented 44% and 45% of
total revenues for 1994 and 1995, respectively.
26
<PAGE>
General and Administrative. General and administrative expenses increased 4%
from $1.9 million in 1994 to $2.0 million in 1995. This increase was primarily
due to increased personnel and expenses relating to the Company's internal
systems. General and administrative expenses represented 14% and 13% of total
revenues for 1994 and 1995, respectively.
Other Income (Expense), Net
Other income increased from $268,000 in 1994 to $370,000 in 1995 due to a
one-time benefit in 1995 of $177,000 from the settlement of a lawsuit in the
Company's favor offset by a decrease in the amount of interest earned on term-
use contracts. Borrowing expenses decreased from $467,000 in 1994 to $420,000
in 1995 due to lower borrowing levels and lower interest rates due to its new
credit agreement. Due to the utilization of net operating loss carryforwards,
the provisions for income taxes for 1996 and 1995 were not significant.
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following tables set forth certain unaudited quarterly statement of
operations data for each of the nine quarters in the period ended March 31,
1997, as well as such data expressed as a percentage of the Company's total
revenues for the periods indicated. This data has been derived from unaudited
financial statements that have been prepared on the same basis as the audited
financial statements and, in the opinion of management, include all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of the information. The Company's quarterly results have in the
past been and may in the future be subject to significant fluctuations. As a
result, the Company believes that results of operations for interim periods
should not be relied upon as any indication of the results to be expected in
any future period. See "Risk Factors -- Potential Fluctuations in Operating
Results; Seasonality."
<TABLE>
<CAPTION>
QUARTERS ENDED
----------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1995 1995 1995 1995 1996 1996 1996 1996 1997
-------- -------- --------- -------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Software licensing..... $1,733 $1,961 $1,921 $1,938 $1,783 $1,878 $2,597 $3,052 $2,731
Service, maintenance
and other............. 2,164 2,066 2,149 2,129 2,306 2,358 2,449 2,581 2,777
------ ------ ------ ------ ------ ------ ------ ------ ------
Total revenues......... 3,897 4,027 4,070 4,067 4,089 4,236 5,046 5,633 5,508
------ ------ ------ ------ ------ ------ ------ ------ ------
Cost of revenues:
Software licensing..... 197 201 143 184 93 88 128 186 174
Service, maintenance
and other............. 707 665 389 439 432 467 505 602 548
------ ------ ------ ------ ------ ------ ------ ------ ------
Total cost of revenues. 904 866 532 623 525 555 633 788 722
------ ------ ------ ------ ------ ------ ------ ------ ------
Gross profit............ 2,993 3,161 3,538 3,444 3,564 3,681 4,413 4,845 4,786
------ ------ ------ ------ ------ ------ ------ ------ ------
Operating expenses:
Product development.... 680 852 788 748 779 831 882 960 1,073
Selling and marketing.. 1,681 2,033 1,611 1,835 1,894 2,001 2,194 2,626 2,584
General and administra-
tive.................. 481 402 514 604 729 628 761 804 777
------ ------ ------ ------ ------ ------ ------ ------ ------
Total operating ex-
penses................ 2,842 3,287 2,913 3,187 3,402 3,460 3,837 4,390 4,434
------ ------ ------ ------ ------ ------ ------ ------ ------
Operating income (loss). 151 (126) 625 257 162 221 576 455 352
Other income (expense),
net.................... (59) 129 (57) (97) (41) (35) (58) (52) (39)
------ ------ ------ ------ ------ ------ ------ ------ ------
Net income (loss)....... $ 92 $ 3 $ 568 $ 160 $ 121 $ 186 $ 518 $ 403 $ 313
====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF TOTAL REVENUES
----------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1995 1995 1995 1995 1996 1996 1996 1996 1997
-------- -------- --------- -------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Software licensing..... 44.5% 48.7% 47.2% 47.7% 43.6% 44.3% 51.5% 54.2% 49.6%
Service, maintenance
and other............. 55.5 51.3 52.8 52.3 56.4 55.7 48.5 45.8 50.4
----- ----- ----- ----- ----- ----- ----- ----- -----
Total revenues......... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- ----- ----- ----- -----
Cost of revenues:
Software licensing..... 5.1 5.0 3.5 4.5 2.3 2.1 2.5 3.3 3.2
Service, maintenance
and other............. 18.1 16.5 9.6 10.8 10.5 11.0 10.0 10.7 9.9
----- ----- ----- ----- ----- ----- ----- ----- -----
Total cost of revenues. 23.2 21.5 13.1 15.3 12.8 13.1 12.5 14.0 13.1
----- ----- ----- ----- ----- ----- ----- ----- -----
Gross profit............ 76.8 78.5 86.9 84.7 87.2 86.9 87.5 86.0 86.9
----- ----- ----- ----- ----- ----- ----- ----- -----
Operating expenses:
Product development.... 17.4 21.2 19.4 18.4 19.1 19.6 17.5 17.0 19.5
Selling and marketing.. 43.1 50.5 39.6 45.1 46.3 47.2 43.5 46.6 46.9
General and administra-
tive.................. 12.4 9.9 12.5 14.9 17.8 14.9 15.1 14.3 14.1
----- ----- ----- ----- ----- ----- ----- ----- -----
Total operating ex-
penses................ 72.9 81.6 71.5 78.4 83.2 81.7 76.1 77.9 80.5
----- ----- ----- ----- ----- ----- ----- ----- -----
Operating income (loss). 3.9 (3.1) 15.4 6.3 4.0 5.2 11.4 8.1 6.4
Other income (expense),
net.................... (1.3) 3.2 (1.4) (2.4) (1.0) (0.8) (1.1) (0.9) (0.7)
----- ----- ----- ----- ----- ----- ----- ----- -----
Net income (loss)....... 2.4% 0.1% 14.0% 3.9% 3.0% 4.4% 10.3% 7.2% 5.7%
===== ===== ===== ===== ===== ===== ===== ===== =====
Gross profit:
Software licensing..... 88.6% 89.8% 92.6% 90.5% 94.8% 95.3% 95.1% 93.9% 93.6%
Service, maintenance
and other............. 67.3 67.8 81.9 79.4 81.3 80.2 79.4 76.7 80.3
</TABLE>
The Company's revenues and operating expenses increased sequentially in each
quarter of 1996 and software licensing revenues decreased in the first quarter
of 1997. The Company believes the decrease in software licensing revenues was
primarily due to the buying patterns and budgeting cycles of its customers.
The increases in revenues and operating expenses during 1996 were primarily
attributable to the increase in Mercator-related revenues as well as Mercator-
related product development and sales and marketing expenses. While the
Company has not historically experienced any significant seasonal fluctuations
in its revenues or results of operations, it is not uncommon for software
companies to experience strong fourth quarters followed by weaker first
quarters, in some cases with sequential declines in revenues or operating
profit. The Company believes that many software companies exhibit this pattern
in their sales cycles primarily due to customers' buying patterns and budget
cycles. There can be no assurance that the Company will not display this
pattern in future years.
The Company's quarterly and annual operating results have varied
significantly in the past and are expected to do so in the future.
Accordingly, the Company believes that period to period comparisons of its
results of operations are not necessarily meaningful and should not be relied
upon as indications of future performance. The Company's revenues and results
of operations are difficult to forecast and could be adversely affected by
many factors, including, among others: the size, timing and terms of
individual license transactions; the sales cycle for the Company's products;
demand for and market acceptance of the Company's products and related
services, particularly its Mercator products; the number of businesses
implementing the SAP R/3 system as well as the number of such businesses
requiring third party business application integration software and related
services; the Company's ability to expand, and market acceptance of, its
professional services business; the timing of expenditures by the Company in
anticipation of product releases or increased revenues; the timing of product
enhancements and product introductions by the Company and its competitors;
market acceptance of enhanced versions of the Company's existing products and
of new products; changes in pricing policies of the Company and its
competitors; variations in the mix of products and services sold by the
Company; the mix of channels through which products and services are sold;
28
<PAGE>
the success of the Company in penetrating international markets; the buying
patterns and budgeting cycles of customers; personnel changes, difficulty in
attracting and retaining qualified sales, professional services and research
and development personnel and the rate at which such personnel become
productive; and general economic conditions. In particular, the ability of the
Company to achieve growth in the future will depend on its success in adding a
substantial number of sales, professional services and research and
development personnel. Competition for such personnel is intense and there can
be no assurance the Company will be able to attract and retain these
personnel.
The Company's future revenues will also be difficult to predict and the
Company has, in the past, failed to achieve its revenue expectations for
certain periods. The Company's expense levels are based, in part, on its
expectation of future revenues, and expense levels are, to a large extent,
fixed in the short term. The Company may be unable to adjust spending in a
timely manner to compensate for any unexpected revenue shortfall. If revenue
levels are below expectations for any reason, operating results are likely to
be materially and adversely affected. Net income may be disproportionately
affected by a reduction in revenues because a large portion of the Company's
expenses is related to headcount that cannot be easily reduced without
adversely affecting the Company's business. In addition, the Company currently
intends to increase its operating expenses by expanding its research and
product development staff, particularly research and development personnel to
be devoted to the Company's Mercator product line, increasing its professional
services and sales and marketing operations, expanding distribution channels
and hiring personnel in other operating areas. The Company expects to
experience a significant time lag between the date professional services,
sales and technical personnel are hired and the date such personnel become
fully productive. The timing of such expansion and the rate at which new
technical, professional services and sales personnel become productive as well
as the timing of the introduction and success of new distribution channels
could cause material fluctuations in quarterly results of operations.
Furthermore, to the extent such increased operating expenses precede or are
not subsequently followed by increased revenues, the Company's business,
operating results and financial condition could be materially and adversely
affected.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations to date primarily through private
sales of equity securities, totaling approximately $8.1 million (as of March
31, 1997), and its $4.0 million bank line of credit and cash generated from
operations. On May 15, 1997, the Company raised an additional $1.0 million
through the sale of Preferred Stock to Mitsui & Co., Ltd. and two other
foreign investors. Operating activities provided (used) net cash of $1.3
million, $1.3 million, $730,000 and $(546,000) during 1994, 1995, 1996 and the
first quarter of 1997, respectively. The Company generated net cash from 1994
through 1996 primarily as a result of its improved profitability during these
periods.
Investing activities (used) net cash of $(237,000), $(354,000), $(828,000)
and $(198,000) during 1994, 1995, 1996 and the first quarter of 1997,
respectively, primarily to fund capital expenditures needed to support
expansion of the Company's business. Financing activities generated (used) net
cash of $(818,000), $(1.3 million), $(102,000) and $787,000, for 1994, 1995,
1996 and the first quarter of 1997, respectively, from (repayments) borrowings
of debt. Since December 31, 1996, the Company has experienced an increase in
accounts receivable. In March 1997, additional borrowings were required to
fund higher levels of receivables. As of March 31, 1997, the Company had
outstanding borrowings of $3.6 million under its $4.0 million bank line of
credit. See "Risk Factors--Management of Growth."
As of March 31, 1997, the Company had debt obligations consisting of $3.6
million in borrowings outstanding under its bank line of credit and $115,000
of capital lease obligations. The Company repaid $1.0 million of outstanding
indebtedness under its bank line of credit in May 1997 with the proceeds from
the sale of Preferred Stock in May 1997. At December 31, 1996, the Company
also had commitments under operating lease agreements totalling $4.8 million
through 2012, including $787,000 for 1997. See Note 10 of Notes to Financial
Statements.
29
<PAGE>
Capital expenditures have been, and future capital expenditures are
anticipated to be, primarily for facilities, equipment and computer software
to support expansion of the Company's operations. As of March 31, 1997, the
Company had no material commitments for capital expenditures. The Company's
bank line of credit generally limits capital expenditures to $400,000 per
quarter.
At March 31, 1997, the Company had $79,000 in cash. The Company typically
operates with a relatively small amount of cash at the end of any quarter and
meets any of its additional cash needs with its bank line of credit that
expires in November 1998. The maximum amount that can be borrowed under the
bank line of credit is $4.0 million, with borrowings limited to a percentage
of eligible accounts receivable and term contracts, plus the amount of the
bank line of credit guaranteed by the Connecticut Development Authority
($600,000 as of March 31, 1997). Borrowings may take the form of prime rate
loans (which bear interest at the bank's prime rate plus 1.0%) or LIBOR rate
loans (which bear interest at the applicable LIBOR rate plus 3.0%) and, at
March 31, 1997, the weighted average interest rate on amounts outstanding
under this credit line was 8.92%. The Company's obligations under this credit
line are secured by substantially all of the Company's assets. The bank line
of credit contains certain financial covenants and also prohibits cash
dividends, mergers and acquisitions. The Company is currently in compliance
with these covenants. See Note 5 of Notes to Financial Statements.
The Company believes that the net proceeds from this offering, together with
its current cash and cash equivalent balances, its line of credit and net cash
generated by operations, will be sufficient to meet its anticipated cash needs
for working capital, capital expenditures and business expansion for at least
the next 12 months. Thereafter, if cash generated by operations is
insufficient to satisfy the Company's operating requirements, the Company may
seek additional debt or equity financing. There can be no assurance that such
financing will be available on terms acceptable to the Company. The sale of
additional equity or debt securities could result in dilution to the Company's
stockholders.
30
<PAGE>
BUSINESS
INTRODUCTION
The Company is a leading provider of software and related services that
enable organizations to integrate their business applications both internally
and with external business partners. The Company's flagship product, Mercator,
is a data transformation engine which permits enterprises to exchange
information between internal systems, implement and integrate advanced
client/server applications such as SAP's R/3 ERP system and to integrate EDI
data and Web-based applications with their core business systems. To date, the
Company has directly licensed its products to over 6,000 customers worldwide,
representing a broad range of industries. The Company's customers include
Allegiance Corporation, American Express Travel Related Services, Inc., CIGNA
Corporation, Citibank, N.A., Federal Express Corporation, Hewlett-Packard
Company, Hoechst AG, International Business Machines Corporation, Lucent
Technologies, Inc., NYNEX Corporation and Prudential Insurance Company of
America.
INDUSTRY BACKGROUND
As enterprise computing has evolved, corporations have deployed systems and
software in an effort to improve business processes, reduce costs and increase
organizational effectiveness. Organizations are now faced with a proliferation
of software applications and an increasingly heterogeneous and disparate
computing environment across the enterprise. At the same time, organizations
are increasingly seeking to integrate their various business processes and the
applications that support them through such initiatives as business process
reengineering, supply chain management projects and Web-based electronic
commerce. For many organizations, these factors have made it increasingly
critical yet substantially more difficult to provide application-to-
application interoperability and to share information within and beyond the
enterprise.
The number of applications deployed throughout the enterprise has increased
dramatically, now including both enterprise-wide systems such as SAP's R/3 and
function-specific applications such as sales force automation or customer
support. In addition to purchasing applications from independent software
vendors, most organizations continue to run customized, internally developed
solutions for specific applications. The proliferation of both internally
developed and third party applications has both increased the need to
integrate applications and has greatly complicated the integration process.
As the number of applications has increased, the number and variety of the
computing platforms and systems on which they run has also grown
significantly. The evolution of computing from mainframes to client/server and
then to the Internet and corporate intranets has not led to the emergence of a
single preferred platform, but rather has resulted in a coexistence among new
and legacy architectures. The number of technology architectures being
supported is, in fact, increasing. According to Sentry Market Research, the
typical large organization has an average of 13 different operating systems
and 10 different Database Management Systems ("DBMSs") today, as compared with
6 different operating systems and 5 different DBMSs in 1993. This diversity
compounds the difficulty faced by organizations in providing application-to-
application integration.
In addition to these technological trends within the enterprise, the number
of externally linked business partners is increasing. Many corporations,
seeking to improve their market responsiveness, competitive position and
internal efficiency are creating extended "virtual" organizations among
suppliers and customers using electronic commerce technology. Electronic
commerce, which combines standards for exchanging data such as EDI with low-
cost methods for data transport such as the Internet, now accounts for a wide
variety of business transactions including, among others, electronic payments,
purchase orders, invoices, health claims and mortgage applications. The
proliferation of partners, each with its own internal systems and
applications, and the increased demand for creating electronic information
flows across both the supply and demand chains, have exacerbated the
difficulty in integrating applications between business partners.
Historical approaches to integrating applications have been expensive,
difficult to implement and maintain, and limited in their effectiveness. For
example, the costs of integrating R/3 with existing systems
31
<PAGE>
often equals or exceeds the cost of the R/3 application software itself.
Similarly, the cost of integrating EDI with an organization's business
applications often can be the largest single cost component of implementing
EDI solutions. Traditionally, organizations have approached the integration
problem on a case-specific basis, writing individual programs to allow
applications to share information for a specific task or use. Such custom
coding is time consuming, prone to error, inflexible and difficult to maintain
over time. In addition, an individual solution coded for one specific
application generally cannot be used for other integration needs. As the
number of potential interfaces grows with each new application, the inability
to leverage these home-grown solutions becomes increasingly problematic.
Although some software tools are available to assist developers with the
integration task, most are "point" solutions designed for specific platforms,
applications, DBMSs or data formats and typically require custom coding to
create complete solutions.
As a result, organizations require a new approach to integrating business
applications, both within the enterprise and with external business partners.
A comprehensive, off-the-shelf solution is needed that can be rapidly
implemented and easily maintained, does not require custom interface programs,
and supports a heterogenous mix of platforms, architectures, databases and
third-party applications.
TSI INTERNATIONAL'S SOLUTION
TSI International develops and markets software products and related
services that allow organizations to facilitate the exchange of information
between enterprise applications as well as with external business partners.
Key benefits of the TSI International solution include:
Comprehensive Internal and External Solution. TSI International delivers
comprehensive solutions for integrating business applications both within the
enterprise and between business partners. Mercator achieves this by
transforming the business data from any application so that it can be used by
other applications without modifying the applications, without regard to the
number of applications involved, and despite differing data structures, syntax
or business rules. In addition, Mercator is scaleable to support mission-
critical enterprise integration requirements. The Company's EDI solutions
permit its customers to exchange information with business partners and to
integrate EDI data with back office applications. The Company provides
external integration solutions which leverage the Internet as a transport
mechanism for EDI and allow enterprises to integrate Web-based applications
and transactions with existing enterprise systems.
Broad Application, Platform and Data Type Support. To satisfy the wide-
ranging needs of large organizations, TSI International's solutions provide
comprehensive application, platform and data type support. Mercator can be
used to integrate internally developed as well as third party systems
regardless of the vendor of an application, the tools or programming language
in which the application is written or the standards on which the application
is based. Mercator links applications running on a wide variety of operating
systems running on popular PC and UNIX systems, such as HP, Sun Solaris and
RS/6000, as well as IBM mainframes and Digital, AS/400 and Stratus hardware.
Mercator transforms data in any format, including user defined, proprietary
formats, industry standard formats such as EDI, IDocs (SAP applications) and
HL7 (healthcare standard for clinical information), and the Company's EDI
solutions support the full range of EDI standards, both national and
international.
Pre-Packaged R/3 Solution. The Company's Mercator for R/3 product is an off-
the-shelf solution enabling customers of SAP's R/3 to more easily integrate
R/3 modules with legacy and third-party applications. Mercator for R/3 was the
first product to be certified by SAP for use with its ALE architecture, the
standard SAP has developed for interfacing with R/3. Mercator for R/3 extends
the Company's core Mercator product by providing tools to automatically
capture R/3 data definitions and adapters for integrating with R/3's inter-
application messaging system. Mercator for R/3 allows enterprises to preserve
the value of legacy data, utilize best-of-breed software applications and
reduce the cost of implementing R/3 in distributed computing environments.
32
<PAGE>
Ease of Implementation. The Company's Mercator and Trading Partner products
are off-the-shelf products which install easily and are designed to provide a
rapid return on investment. With Mercator, information technology ("IT")
professionals use a graphical user environment to create complete data
transformation solutions without the need to write custom interfaces or tailor
individual modules of code. Mercator provides a set of pre-built "plug-ins,"
including adapters for specific applications, transactions, DBMSs, and
messaging systems, in order to simplify development of business application
integration solutions. The Company's EDI products enable users to be
"commerce-ready" with little or no customization required.
STRATEGY
The Company's strategy is to be the leading supplier of software solutions
and related services for integrating business applications within the
enterprise and between business partners. Key elements of the Company's
strategy include:
Leverage and Extend Technology Leadership. The Company intends to continue
to extend its leading application integration technologies. Mercator for R/3
was the first product certified by SAP for ALE. The Company continually seeks
to leverage its core Mercator technology by developing pre-packaged solutions
for additional third party applications, data formats, DBMSs, messaging
systems and computing platforms. The Company is the leading provider of
Windows-based EDI software and has recently introduced Trading Partner PC/32,
the first EDI product designed for Windows 95 and Windows NT.
Target the Enterprise Application Market. The Company believes that
significant opportunity exists for software solutions which enable enterprise
wide ERP systems to be integrated with other applications throughout the
organization. In addition to its core Mercator products, the Company currently
markets Mercator for R/3 for users of SAP's R/3 and intends to develop and
market additional pre-packaged versions of Mercator with functionality
targeted specifically at other popular enterprise application suites.
Expand Distribution Channels. In addition to its direct sales force, the
Company is creating marketing programs to focus on third-party vendors of
application software, connectivity tools, systems integration services and
other products and services which complement the Company's core capabilities.
The Company believes that such relationships can provide market visibility for
the Company's products, additional sales opportunities, and an additional
source of services and technical support for the Company's customers. The
Company intends to expand these third-party channels in both domestic and
international markets in addition to continuing to expand its direct sales
force.
Leverage Customer Base. The Company intends to market its products and
services in order to expand their use within existing customer accounts. The
Company believes significant opportunity exists to increase the number of
Mercator licenses sold to its existing Mercator and Trading Partner customers.
In addition, the Company believes that its customers are increasingly pursuing
emerging applications such as Web-based electronic commerce and data
warehousing initiatives and that this provides an opportunity to use Mercator
to integrate these new applications with existing enterprise systems.
Expand Professional Services Capability. As the Company's solutions have
become more central to mission critical applications, there has been an
increased demand for comprehensive service offerings to complement the
Company's products. The Company intends to increase the number of its service
professionals and the scope of its service offerings with the goal of
maximizing license revenues from sales of its products. The Company expects
its service offerings to be focused on opportunities and projects which the
Company believes can lead to widespread deployments of Mercator within an
enterprise. The Company intends to augment its own service offerings by
seeking strategic relationships with major system integrators and other
service providers.
33
<PAGE>
PRODUCTS AND SERVICES
The Company's business application integration products include two software
product lines, the Mercator family and the Trading Partner family. The
following table depicts the Company's current business application integration
product offerings and suggested list prices:
<TABLE>
<CAPTION>
ORIGINAL MOST
PRODUCT NAME RELEASE DATE RECENT RELEASE US SUGGESTED LIST PRICE (1)
------------------------------------- ------------ -------------- ---------------------------
<C> <C> <C> <S>
MERCATOR PRODUCTS:
Mercator:
Authoring System.................. 12/93 5/96 $3,000/seat
Execution Engines................. 12/93 5/96 from $600 Windows/DOS to
$50,000 mainframe
Mercator for R/3..................... 6/96 6/96 from $37,500/system
TRADING PARTNER PRODUCTS:
Trading Partner PC................... 6/88 2/97 $1,495
Trading Partner PC/32................ 10/96 10/96 $1,995
Trading Partner Kits................. 10/92 various from $295
Trading Partner EC................... 11/90 10/95 $75,000
</TABLE>
- --------
(1) The terms and conditions, including sales prices and discounts from list
prices, of individual license transactions may be negotiated based on
volumes and commitments and may vary considerably from customer to
customer.
Mercator Products
The Company's flagship Mercator family of products is an integrated set of
tools used by IT professionals to integrate data between different business
applications. Mercator was initially released in December 1993 and, as of
March 31, 1997, had been licensed to more than 870 customers worldwide.
Mercator. Mercator enables application integration by transforming or
mapping data between and among the unique data formats of business
applications. It provides a Windows-based Authoring System which is used to
define data formats and mapping solutions, and separate run-time Execution
Engines for map execution. Complete data transformations can be created
without writing custom interface programs. Mercator requires no pre-processing
of data prior to mapping, can transform data between multiple sources and
destinations in a single process, and supports map execution on a wide range
of platforms. Customers who deploy a map to run on multiple platforms also
license an Execution Engine for each platform. The Company currently offers
Execution Engines for Window 3.1, Windows 95, Windows NT, PC DOS, SCO UNIX,
HP-UX, Sun Solaris/OS, AIX, Alpha NT, Digital UNIX, VAX VMS, Open VMS, OS/400,
Stratus FTX, VOS and Continuum, MVS, and MVS/CICS.
Mercator for R/3. Initially released in June 1996, Mercator for R/3 is a
version of Mercator that includes specific extensions to meet the needs of R/3
integration. Mercator for R/3 was the first software product to be certified
by SAP for use with its ALE architecture. Mercator for R/3 extends the core
Mercator product by providing tools to automatically capture R/3 data
definitions, and adapters for integrating with R/3's inter-application
messaging system. In addition, Mercator for R/3 provides data transformation
support for other R/3 data conversion and interfacing requirements including
the initial conversion of data to R/3 from existing systems and interfaces
with data warehouses.
Trading Partner Products
The Company's Trading Partner products consist of a set of EDI management
software products and include Trading Partner PC, a Windows-based product, and
Trading Partner EC, a mainframe-based product.
34
<PAGE>
The Trading Partner products can be sold as stand-alone EDI products, but are
often sold in conjunction with Mercator products to enable businesses to both
manage their EDI relationships and to integrate their EDI data into enterprise
applications. Trading Partner products allow customers to communicate with
their partners through direct connections, VANs or the Internet.
Trading Partner PC. Introduced in 1989, Trading Partner PC was the first
Windows-based EDI translator in the United States and has been licensed to
more than 5,000 businesses worldwide. In October 1996, TSI introduced Trading
Partner PC/32, the first Windows 95 desktop solution in the market. The
Company has developed more than 100 "kits" which support a particular trading
partner's EDI specifications and provide "plug and play" solutions for EDI
trading. The Company markets kits for many major EDI trading partners
including Compaq Computer Corporation, International Business Machines
Corporation, J.C. Penney Company, Inc., Sears, Roebuck and Company, Target
Stores and Wal-Mart Stores, Inc. The Company's OnCall*EDI products are a
series of EDI kits for electronic purchasing for the health care provider
market and has been licensed to more than 1,100 hospitals.
Trading Partner EC. Trading Partner EC is a mainframe-based EDI translation
product which provides EDI management capability for companies with large EDI
programs. It includes Mercator as its core data transformation engine and
offers the user the means to integrate EDI data directly into applications
without the need to write custom interface programs commonly required by other
translator products. Using Mercator, customers who plan to migrate their EDI
program from the mainframe can do so without incurring additional cost and
effort for recreating their EDI interfaces. Trading Partner EC and its
predecessor product have been licensed to more than 200 businesses worldwide.
KEY/MASTER
In addition to the Company's applications integration products described
above, the Company licenses and supports KEY/MASTER, a legacy data entry
product which is used on mainframe terminals or PCs on local area networks,
and is the leading software product for automating the key entry of high
volume, repetitive data from business documents. KEY/MASTER has been licensed
to more than 900 customers worldwide. Because KEY/MASTER is a mature product,
revenues derived from KEY/MASTER are primarily maintenance-related and the
Company expects in the future to make only minor investments in KEY/MASTER to
meet the needs of its current installed base.
Services
Professional Services. TSI offers consulting and professional services to
customers who wish to have the Company's professionals plan, design or
implement their application integration projects. The Company intends to
expand the number of service professionals and the scope of the services
offered as it continues to address the enterprise application integration
needs of large organizations. The Company believes that enterprises
implementing the R/3 system in particular represent a significant opportunity
for the Company to market its professional services in support of Mercator for
R/3.
Training. In order to assure that its customers are successful in using its
products, TSI provides training in its four training centers or at customer
locations. The Company offers a number of courses ranging from two to five
days in length with educational content including basic product functionality
and hands-on use of the product. The Company recommends that its Mercator
customers attend a basic three-day training course and believes that a
majority of its Mercator customers elect to participate in such training.
CUSTOMERS
As of March 31, 1997, TSI had directly licensed its software to more than
6,000 customers worldwide. Numerous others have licensed the Company's
products through VARs, ISVs, SIs or other third parties who distribute its
products to business partners to facilitate the integration of their
respective business applications.
35
<PAGE>
The Company's customer base includes businesses from many industries,
including finance, banking, healthcare, technology, government, retail,
manufacturing, automotive, oil and gas, utilities, communications, insurance
and transportation. The following is a partial list of the Company's end user
and third party Mercator customers:
<TABLE>
<CAPTION>
END USER CUSTOMERS VARS, ISVS AND SIS
_________________________________ _________________________________
<S> <C>
Blue Cross Blue Shield of Massachusetts Actra Business Systems LLC
Canadian National Railway Company Allegiance Corporation
CIGNA Corporation American Express Travel Related Services, Inc.
Deere & Company American Software, Inc.
Dun & Bradstreet ARI Services Network, Inc.
Eastman Kodak Company Axolotl Corp.
First Chicago NBD Corporation CEBRA Inc.
General Mills, Inc. Citibank, N.A.
Georgia-Pacific Corporation Compaq Computer Corporation
Hoechst AG Connect, Inc.
Home Savings of America Federal Express Corporation
LitleNet, Inc. GTE Data Services Incorporated
Lucent Technologies Inc. HBO & Company
Nestle Canada, Inc. Hewlett-Packard Company
NYNEX Corporation International Business Machines Corporation
Petroleos de Venezuela, S.A. Pivotpoint, Inc.
Prudential Insurance Company of America RS Information Systems, Inc.
Royal Canadian Mounted Police S2 Systems, Inc.
Sara Lee Hosiery, Inc. Software Consulting Partners, Inc.
The Toronto Dominion Bank
</TABLE>
SALES AND MARKETING
Sales
The Company markets its products and services through both direct and third
party channels. The Company's goal is to achieve broad market penetration by
pursuing multiple channels of distribution.
As of March 31, 1997, the Company's sales organization consisted of 49
employees. The Company's direct field sales force focuses on sales of Mercator
and Trading Partner products to Fortune 1000 companies. The Company also
maintains a telesales organization as part of its direct sales force which
generally targets smaller businesses. The field sales force also includes
alternate channel managers who are responsible for sales through third
parties. The sales organization includes systems engineers who assist with
both pre- and post-sales activities.
An important part of the Company's sales strategy is to continue to develop
its indirect distribution channels such as VARs, ISVs, SIs and distributors.
As of March 31, 1997, approximately 45 third parties had agreements with the
Company to resell, embed or otherwise bundle the Company's products with their
offerings in the United States. See "Risk Factors -- Dependence Upon
Development of Distribution Channels."
The Company markets its products and services outside of North America
through a sales office located in the United Kingdom and through indirect
channels. Although revenues from international customers were approximately
10% of the Company's total revenues during 1996 and the first quarter of 1997,
the international market is important to the Company, and it intends to expand
its sales and marketing efforts
36
<PAGE>
outside North America by adding distributors and additional sales staff. See
"Risk Factors--Risks Associated with International Expansion."
Marketing
The Company utilizes a wide variety of marketing programs which are intended
to attract potential customers and to promote the Company and its brand names.
The Company uses a mix of market research, analyst updates, seminars, direct
mail, print advertising, tradeshows, speaking engagements, public relations,
customer newsletters, and Web site marketing in order to achieve these goals.
The marketing department also produces collateral material for distribution to
prospects including demonstrations, presentation materials, white papers,
brochures, fact sheets, and materials that are specific to the area of
interest. The Company also hosts an annual user conference for its customers
and maintains an Alliance Program designed to support its channel partners
with a variety of programs, incentives, support plans and an annual
conference. As of March 31, 1997, there were 10 employees in the Company's
marketing organization.
TECHNOLOGY
The Company's core Mercator technology provides a platform for creating data
transformation solutions which satisfy application integration requirements
across a variety of computing environments. The architecture of the Mercator
platform is based on object concepts, providing reusability, interoperability
and scaleability during the design process and in the resulting solutions. The
Mercator platform permits the Company to efficiently construct and deliver
integration solutions for specific markets and also allows ISVs and SIs to
embed Mercator functionality within their own offerings.
The central components of the Mercator platform are a Windows-based
Authoring System for creating data transformation "maps" and one or more run-
time Execution Engines for map execution. A map is an executable module that
describes the required transformation and re-ordering of data between source
and destination objects such as files, databases, applications and messages.
The Authoring System provides an intuitive drag-and-drop environment for
defining the source and destination data objects, defining the rules for
mapping the sources to the destinations, and building the resulting map
object. Map objects built using Mercator can be ported automatically to any of
19 different execution environments.
37
<PAGE>
[Set forth on this page is an oval shaped graphic. Within the oval are two
rectangular boxes each with a caption heading, top to bottom, "Authoring System"
and "Execution Engine." Also within the oval is an oval with a caption "Map
Object" with a line from each of the boxes. The oval has an additional oval,
labeled "Transaction Workflow Management *" surrounding it and three additional
ovals below the oval, connected by lines, labeled "Adapters," "Importers" and
"Application Solutions," from left to right, respectively.]
[FLOWCHART OF THE MERCATOR PLATFORM APPEARS HERE]
* Available in the second half of 1997
Descriptions of source and destination objects are entered by the user
through Mercator's graphical interface. To simplify data definition, the
Company provides pre-packaged objects for a number of commonly used data
standards and the Company also provides importers for creating objects from
higher level (meta) data definitions. Data object definitions within Mercator
include information regarding their format, structure and business rules,
which eliminates the need to explicitly identify the context of a data object
during map construction and maintains the logical integrity of the resulting
mapping solution.
Once the source and destination objects have been defined, the user creates
maps by specifying the rules for transforming data from the sources to the
destinations. For many mapping tasks, the user need only "drag" a source
object and "drop" it on the destination object. Multiple data sources can be
transformed to multiple destinations in a single mapping operation. The user
has point-and-click access to a variety of pre-built functions to enhance the
mapping rules including support for selection, extraction, computation,
logical operations, parsing, substitution, re-ordering, validation and
conversion.
Using Mercator's Authoring System, map objects are built and tested in the
Windows environment. The resulting Mercator map can be implemented using a
Mercator Execution Engine appropriate to the target platform. Target platforms
currently supported include Windows 3.1, Windows 95, Windows NT, PC DOS, SCO
UNIX, HP-UX, Sun Solaris/OS, AIX, Alpha NT, Digital UNIX, VAX VMS, Open VMS,
OS/400, Stratus FTX and VOS, MVS, and MVS/CICS.
The Company provides adapters and importers which interface to and from
specific databases, messaging systems, and applications enabling connectivity
to a specific source or destination that can be defined directly within a
mapping operation. Adapters are currently available for ODBC-compliant
databases, Oracle7 databases, and SAP's ALE. The Company is developing
adapters for additional databases and messaging systems including MQSeries,
IBM's enterprise messaging software. Importers are currently available for
COBOL copybooks, database tables for ODBC-compliant and Oracle7 databases, and
R/3 IDocs. In addition, the Company provides pre-packaged data objects for
national and international standards for EDI and data definitions for specific
industries such as healthcare and transportation.
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<PAGE>
Mercator was architected so that adapters and importers can be added without
modifying the core Mercator technology. Mercator for R/3, for example, is a
packaged offering which leverages the core Mercator Authoring System and
Execution Engines by providing adapters for communicating with SAP's ALE
architecture and importers for R/3 data definitions ("IDocs"). The Company's
other products also leverage Mercator's core technology. The underlying EDI
translation support for OnCall*EDI is provided by Mercator and Trading Partner
EC incorporates Mercator as the data integration component for integrating EDI
data with existing applications. In addition, the Company's customers can use
Mercator to create their own applications where embedded data transformation
is a requirement.
PRODUCT DEVELOPMENT
Since inception, TSI has made substantial investments in research and
development through both internal development and technology acquisition. The
Company expects that most of its enhancements to existing products and new
products will be developed internally. However, the Company will evaluate on
an ongoing basis externally developed technologies for integration into its
product lines.
The Company expects that a substantial majority of its research and
development activities will be related to developing enhancements and
extensions to its Mercator and Trading Partner product lines. Following
Mercator's introduction, product development was initially driven by demand
for additional mapping functionality and support for additional execution
platforms. Later, development focus shifted to automating Mercator support for
specific sources and destinations through an expanded set of adapters and
importers, and development of additional pre-packaged integration solutions
for specific markets.
During the second half of 1997, the Company intends to add a graphical
transaction workflow management tool to the core set of Mercator capabilities.
This tool is designed to support graphical design and specification of
transaction workflows, sources and destinations for maps, triggering events,
and options for map execution. In addition, the Company is currently beta
testing a scaleable client/server offering for electronic commerce which is
based on Mercator technology. The Company intends to release this product in
the second half of 1997. Shipment of the product for selected hardware and
software platforms is expected to occur during the fourth quarter of 1997.
As of March 31, 1997, there were 40 employees in the Company's research and
development organization, more than half of which was dedicated to Mercator.
The Company's product development expenditures for 1994, 1995, 1996 and the
first quarter of 1997 were $2.2 million, $3.1 million, $3.4 million and $1.1
million, respectively. The Company expects that it will continue to commit
significant resources to product development in the future. To date, all
product development expenses have been expensed as incurred.
The market for the Company's products and services is characterized by
extremely rapid technological change, frequent new product introductions and
enhancements, evolving industry standards, and rapidly changing customer
requirements. The introduction of products incorporating new technologies and
the emergence of new industry standards could render existing products
obsolete and unmarketable. The Company's future success will depend in part
upon its ability to anticipate changes and enhance its current products and
develop and introduce new products that keep pace with technological
advancements and address the increasingly sophisticated needs of its
customers. See "Risk Factors -- Risks Associated with Technological Change,
Product Enhancements and New Product Development."
CUSTOMER SUPPORT
The Company believes that a high level of customer service and support is
important to its success, and the Company provides a range of support services
to its customers. The Company maintains product and technology experts on call
at all times and has support call centers located at its offices in Wilton,
Connecticut; Bannockburn, Illinois; and Boca Raton, Florida in the United
States and in its United Kingdom office. The Company is currently installing
an automated Company-wide help desk system to augment its customer support
efforts. This system is currently expected to be implemented during the third
quarter of 1997.
39
<PAGE>
COMPETITION
The market for the Company's products and services is extremely competitive
and subject to rapid change. Because there are relatively low barriers to
entry in the software market, the Company expects additional competition from
other established and emerging companies. The Company believes that the
competitive factors affecting the market for the Company's products and
services include product functionality and features; quality of professional
services offerings; product quality, performance and price; ease of product
implementation; quality of customer support services; customer training and
documentation; and vendor and product reputation. The relative importance of
each of these factors depends upon the specific customer environment. Although
the Company believes that its products and services currently compete
favorably with respect to such factors, there can be no assurance that the
Company can maintain its competitive position against current and potential
competitors.
In the business application integration market, the Company's Mercator
products and related services compete primarily against solutions developed
internally by individual businesses to meet their specific business
application integration needs. As a result, the Company must educate
prospective customers as to the advantages of the Company's products and
services as opposed to internally developed solutions and there can be no
assurance that the Company will be able to adequately educate potential
customers to the benefits provided by the Company's products and services. In
the EDI market, the Company's Trading Partner products compete with products
offered by companies offering proprietary VAN services as part of their EDI
solution and the Company's PC-based Trading Partner products also compete with
PC-based products offered by a number of other EDI software vendors.
Many of the Company's current and potential competitors have longer
operating histories, significantly greater financial, technical, product
development and marketing resources, greater name recognition and larger
customer bases than the Company. The Company's present or future competitors
may be able to develop products comparable or superior to those offered by the
Company, adapt more quickly than the Company to new technologies, evolving
industry trends or customer requirements, or devote greater resources to the
development, promotion and sale of their products than the Company.
Accordingly, there can be no assurance that the Company will be able to
compete effectively in its markets, that competition will not intensify or
that future competition will not have a material adverse effect on the
Company's business, operating results and financial condition.
The Company expects that it will face increasing pricing pressures from its
current competitors and new market entrants. The Company's competitors may
engage in pricing practices that reduce the average selling prices of the
Company's products and related services. To offset declining average selling
prices, the Company believes that it must successfully introduce and sell
enhancements to existing products and new products on a timely basis and
develop enhancements to existing products and new products that incorporate
features that can be sold at higher average selling prices. To the extent that
enhancements to existing products and new products are not developed in a
timely manner, do not achieve customer acceptance or do not generate higher
average selling prices, the Company's gross margins may decline, and such
decline could have a material adverse effect on the Company's business,
operating results and financial condition. See "Risk Factors--Competition."
PROPRIETARY TECHNOLOGY
The Company's success is dependent upon its proprietary software technology.
The Company does not currently have any patents and relies principally on
trade secret, copyright and trademark laws, nondisclosure and other
contractual agreements and technical measures to protect its technology. The
Company also believes that factors such as the technological and creative
skills of its personnel, product enhancements and new product developments are
essential to establishing and maintaining a technology leadership position.
The Company enters into confidentiality and/or license agreements with its
employees, distributors and customers, and limits access to and distribution
of its software, documentation and other proprietary information. There
40
<PAGE>
can be no assurance that the steps taken by the Company will prevent
misappropriation of its technology, and such protections do not preclude
competitors from developing products with functionality or features similar to
the Company's products. Furthermore, there can be no assurance that third
parties will not independently develop competing technologies that are
substantially equivalent or superior to the Company's technologies. In
addition, effective copyright and trade secret protection may be unavailable
or limited in certain foreign countries. Any failure by or inability of the
Company to protect its proprietary technology could have a material adverse
effect on the Company's business, operating results and financial condition.
Although the Company does not believe its products infringe the proprietary
rights of any third parties, there can be no assurance that infringement
claims will not be asserted against the Company or its customers in the
future. Furthermore, the Company may initiate claims or litigation against
third parties for infringement of the Company's proprietary rights or to
establish the validity of the Company's proprietary rights. Litigation, either
as plaintiff or defendant, would cause the Company to incur substantial costs
and divert management resources from productive tasks whether or not such
litigation is resolved in the Company's favor, which could have a material
adverse effect on the Company's business, operating results and financial
condition. Parties making claims against the Company could secure substantial
damages, as well as injunctive or other equitable relief which could
effectively block the Company's ability to license its products in the United
States or abroad. Such a judgment could have a material adverse effect on the
Company's business, operating results and financial condition. If it appears
necessary or desirable, the Company may seek licenses to intellectual property
that it is allegedly infringing. There can be no assurance, however, that
licenses could be obtained on commercially reasonable terms, if at all, or
that the terms of any offered licensed will be acceptable to the Company. The
failure to obtain the necessary licenses or other rights could have a material
adverse effect on the Company's business, operating results and financial
condition. As the number of software products in the industry increases and
the functionality of these products further overlaps, the Company believes
that software developers may become increasingly subject to infringement
claims. Any such claims, with or without merit, can be time consuming and
expensive to defend and could adversely affect the Company's business,
operating results and financial condition. There are currently no pending
claims that the Company's products, trademarks or other proprietary rights
infringe upon the proprietary rights of third parties. See "Risk Factors --
Dependence on Proprietary Technology."
EMPLOYEES
As of March 31, 1997, the Company had 151 full-time employees, including 40
in research and development, 34 in professional services and customer support,
59 in sales and marketing and 18 in finance and administration. The Company's
employees are not represented by any union and the Company believes that its
relations with employees are good. See "Risk Factors -- Dependence on Key
Personnel; Need to Attract and Retain Sales, Professional Services and
Technical Personnel."
FACILITIES
The Company's principal executive offices are located in Wilton, Connecticut
and consist of approximately 19,000 square feet under a lease expiring in
2001. The Company also leases approximately 12,000 square feet of office space
in Bannockburn, Illinois which is used primarily for its telesales operations,
approximately 8,500 square feet of office space in Boca Raton, Florida, which
is used primarily for research and development activities and approximately
3,200 square feet of office space in the United Kingdom. All of the Company's
offices have fully-equipped training centers. The Company believes that its
existing facilities are adequate to support its current needs and that, if
needed, suitable additional facilities will be available on commercially
reasonable terms.
41
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS
The executive officers, key employees and directors of the Company are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
-------------------------------- --- ----------------------------------------
<S> <C> <C>
Constance F. Galley(1).......... 55 President and Chief Executive Officer
and Director
Eric A. Amster.................. 43 Vice President, Sales
Robert Bouton................... 56 Vice President, Marketing
Ira A. Gerard................... 49 Vice President, Finance and
Administration, Chief Financial Officer
and Secretary
Paul Lemme...................... 62 Vice President, Professional Services
James Monks..................... 41 Vice President, International Operations
David Raye...................... 36 Vice President, Operations
Edward J. Watson................ 59 Executive Vice President, Business
Development
Saydean Zeldin.................. 56 Vice President, Research and Development
Stewart K.P. Gross(1)(2)........ 37 Director
Ernest E. Keet(1)(2)............ 56 Director
John J. Pendray(1)(2)........... 57 Director
Dennis G. Sisco(1)(2)........... 50 Director
</TABLE>
- --------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
Constance F. Galley has been President, Chief Executive Officer and a
director of the Company since 1985, when the Company commenced operating as an
independent entity. Prior to 1985, Ms. Galley directed the Company's Marketing
and Development Operations when the Company was part of the Dun & Bradstreet
Corporation. Ms. Galley is a member of the Board of Directors of the software
division of ITAA and is the Chairperson of SACIA, the Business Council of
Southwestern Connecticut. Ms. Galley holds a Bachelor of Arts degree in
Chemistry from Duke University.
Eric A. Amster has been Vice President, Sales since joining the Company in
December 1995. From February 1992 until December 1995, Mr. Amster was employed
by General DataComm Industries, Inc., a data communications company, where he
served most recently as Vice President of U.S. Federal and Commercial Sales.
Mr. Amster holds a Bachelor of Science degree in Computer Science from the
University of Maryland.
Robert Bouton has been Vice President, Marketing since joining the Company
in March 1992. Prior to March 1992, Mr. Bouton served in various sales and
marketing capacities in the software industry, including Vice President,
Marketing for CGI Systems. Mr. Bouton holds a Bachelor of Science degree in
Electrical Engineering from Cornell University.
Ira A. Gerard has been Vice President, Finance and Administration, Chief
Financial Officer and Secretary since joining the Company in October 1995.
From March 1994 to October 1995, Mr. Gerard served as Vice President and Chief
Financial Officer of Adage Systems International, Inc., an ERP software
company. From July 1993 to March 1994, Mr. Gerard was an independent
consultant. From December 1989 until July 1993, Mr. Gerard was employed by
Gestetner PLC, a photocopier and photographic equipment company, where he
served most recently as Vice President, Finance and Operations. Mr. Gerard
holds a Bachelor of Arts degree in Economics from Union College and a Master
of Business Administration from Harvard University.
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<PAGE>
Paul Lemme has been the Vice President, Professional Services since joining
the Company in April 1990. Prior to 1990, Mr. Lemme was President of P. Lemme
& Associates, an EDI implementation consulting company. Mr. Lemme is the
author of the book "EDI Success." Mr. Lemme attended The State University of
Iowa.
James Monks has been Vice President, International Operations of the Company
since May 1997 and was Director, International Operations of the Company from
May 1992 until May 1997. From May 1989 until May 1992, Mr. Monks served as the
Company's Director of European Operations and from April 1985 until May 1989,
Mr. Monks served as the Company's U.K. Manager. Prior to April 1985, Mr. Monks
held various technical support and management positions with the Company when
the Company was a part of the Dun & Bradstreet Corporation. Mr. Monks holds an
Honours Degree in Sports Science and Geography from the University of
Loughborough, U.K.
David Raye has been the Vice President, Operations of the Company since June
1994. From August 1992 until May 1994, Mr. Raye served as Vice President,
KEY/MASTER Operations. From August 1991 until July 1992, Mr. Raye served as
the Company's Director of Operations. Prior to August 1991, Mr. Raye served in
various management capacities in the software industry including Director of
Marketing for Information Sciences and Senior Product Marketing Manager for
On-Line Software, International. Mr. Raye holds a Bachelor of Science degree
in Marketing from Rutgers University and a Master of Business Administration
from St. John's University, New York.
Edward J. Watson has been Executive Vice President, Business Development of
the Company since June 1994. From January 1994 until June 1994, Mr. Watson
managed the Company's PC Division. From November 1990 until January 1994, Mr.
Watson was a consultant to the Company and a General Partner of DownEast
Partners, a consulting company. Prior to 1990, Mr. Watson served in various
management capacities in the software industry, including President of TSI
International (the predecessor of the Company) and Higher Order Software. Mr.
Watson is married to Ms. Saydean Zeldin, the Vice President, Research and
Development of the Company. Mr. Watson attended Oxford University.
Saydean Zeldin has been Vice President, Research and Development of the
Company since October 1994. From November 1990 to October 1994, Ms. Zeldin was
a consultant to the Company and a general partner at DownEast Partners, a
consulting company. Prior to 1990, Ms. Zeldin served in several senior
engineering positions in the software industry, including serving as Founder
and President of Touchstone Engineering, a software company that developed a
management planning system using artificial intelligence technology, and
Founder and Executive Vice President of Higher Order Software. Ms. Zeldin was
also responsible for the re-entry guidance development of the Apollo flight
software at the Instrumentation Laboratory, a laboratory of MIT. Ms. Zeldin is
married to Mr. Watson, the Executive Vice President, Business Development of
the Company. Ms. Zeldin holds a Bachelor of Arts degree in Physics from Temple
University.
Stewart K.P. Gross has served as a director of the Company since April 1993.
Mr. Gross is a Managing Director of E.M. Warburg Pincus & Co., LLC and has
been employed by E.M. Warburg Pincus & Co., LLC since 1987. Prior to 1987, Mr.
Gross was employed at Morgan Stanley & Co. Mr. Gross is a director of Vanstar
Corporation, BEA Systems and several privately-held companies.
Ernest E. Keet has served as a director of the Company since April 1985. Mr.
Keet is the Chief Executive Officer and a director of Axolotl Corp. and from
May 1995 until December 1996, was the President of Axolotl Corp. Mr. Keet has
been the President and a member of the Board of Directors of Vanguard Atlantic
Ltd. since April 1984. Mr. Keet also served as the Chairman and Chief
Executive Officer of ECsoft Ltd. from November 1989 to April 1994.
John J. Pendray has served as a director of the Company since April 1985.
Mr. Pendray has been an Executive in Residence at George Mason University
since November 1996. Prior to joining George Mason University, Mr. Pendray was
the President of the International Group at Cincinnati Bell Information
Systems from March 1993 to August 1996. From July 1992 to March 1993, Mr.
Pendray was an independent consultant. From 1985 until July 1992, Mr. Pendray
was a senior partner at Vanguard Atlantic, Ltd.
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<PAGE>
Dennis G. Sisco has served as a director of the Company since January 1990.
From December 1988 until February 1997, Mr. Sisco was the President of D&B
Enterprises, Inc. (now Cognizant Enterprises, Inc.). From December 1988 until
February 1997, Mr. Sisco had also been employed by Cognizant Corporation and
its predecessor The Dun & Bradstreet Corporation, most recently as an
Executive Vice President. Mr. Sisco is also a director of the Gartner Group,
Inc., Oacis Healthcare Holdings Corporation and Aspect Development, Inc.
Directors are elected by the stockholders at each annual meeting of
stockholders to serve until the next annual meeting of stockholders or until
their successors are duly elected and qualified. Executive officers are chosen
by, and serve at the discretion of, the Board of Directors. The current
directors were elected pursuant to a stockholders' agreement pursuant to which
certain stockholders agreed to vote their shares to elect Messrs. Gross, Keet,
Pendray and Sisco and Ms. Galley to the Board of Directors. This agreement
will be terminated upon the closing of this offering. Except for Mr. Watson
and Ms. Zeldin, there are no family relationships among any of the Company's
directors or executive officers.
DIRECTOR COMPENSATION
The Company reimburses the members of its Board for expenses associated with
their attendance at Board meetings and at Board Committee meetings. None of
the members of the Board is entitled to receive fees for attendance at Board
meetings or at Board Committee meetings.
In May 1997, the Company adopted and the Company's stockholders approved the
1997 Directors Stock Option Plan (the "Directors Plan") and reserved a total
of 225,000 shares of the Company's Common Stock for issuance thereunder.
Members of the Board who are not employees of the Company, or any parent or
subsidiary of the Company are eligible to receive stock options under the
Directors Plan. Each eligible director who is or becomes a member of the Board
on or after May 10, 1997 will automatically be granted an option for 15,000
shares. Accordingly, each of Messrs. Gross, Keet, Pendray and Sisco received
options to purchase 15,000 shares of Common Stock in May 1997. Upon each one-
year anniversary of the date such director is granted the 15,000 share option,
he or she will receive an additional option grant for 3,750 shares, provided
such director has served continuously as a member of the Board. Each 15,000
share option granted under the Directors Plan will vest over four years as to
25% of the shares on the last day of each twelve-month period following the
date such 15,000 share option was granted. Each 3,750 share option granted
under the Directors Plan will vest as to 100% of the shares on the last day of
the twelve month period following the date such 3,750 share option was
granted. Each option granted under the Directors Plan prior to the effective
date of this offering will be granted at a per share exercise price equal to
the fair market value of a share of the Company's Common Stock as determined
by the Board. Each option granted after the effective date of this offering
will be granted at a per share exercise price equal to the closing price of a
share of the Company's Common Stock on the Nasdaq National Market on the date
of grant. Options granted under the 1997 Plan generally expire three months
after the termination of the optionee's service to the Company or a parent or
subsidiary of the Company, except in the case of death or disability, in which
case the options may be exercised up to 12 months following the date of death
or termination of service. In the event of a merger, consolidation or certain
other change of control transactions, the vesting of all outstanding options
granted pursuant to the Directors Plan will accelerate and become exercisable
in full prior to the close of such corporate transaction. The Directors Plan
will terminate in May 2007, unless terminated earlier in accordance with the
provisions of the Directors Plan.
44
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by, or
paid for services rendered to the Company in all capacities during 1996 by (i)
the Company's chief executive officer and (ii) the Company's four other most
highly compensated executive officers whose salary exceeded $100,000 and who
were serving as executive officers at the end of that year (together, the
"Named Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
AWARDS
------------
SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION SALARY(1) BONUS(2) COMPENSATION OPTIONS
- --------------------------- --------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Constance F. Galley
President, Chief Executive
Officer and Director............ $165,000 $50,000 $ 5,031(3) --
Edward J. Watson
Executive Vice President,
Business Development............ $150,000 $20,000 $ 2,922(3) --
Ira A. Gerard
Vice President, Finance and
Administration, Chief Financial
Officer and Secretary........... $146,000 $20,000 $ 6,516(3) --
Saydean Zeldin
Vice President, Research and
Development..................... $130,000 $20,000 $ 2,922(3) 36,000
Eric A. Amster
Vice President, Sales........... $125,000 -- $85,951(4) 36,000
</TABLE>
- --------
(1) See "-- Compensation Agreements."
(2) Bonus amounts are reported in the year paid.
(3) Represents the portion of health, life and disability insurance premiums
paid by the Company.
(4) Includes sales commissions paid to Mr. Amster by the Company in the amount
of $80,982 in 1996 and $4,918 for the portion of health, life and
disability insurance premiums paid by the Company.
The following table sets forth information regarding option grants pursuant
to the 1993 Plan during 1996 to each of the Named Officers.
OPTION GRANTS IN 1996
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF PERCENTAGE OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO FOR OPTION TERM(4)
OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION ---------------------
NAME GRANTED(1) 1996(2) PER SHARE(3) DATE 5% 10%
- ---- ---------- ------------- -------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Constance F. Galley(5).. -- -- -- -- -- --
Edward J. Watson........ -- -- -- -- -- --
Ira A. Gerard........... -- -- -- -- -- --
Saydean Zeldin.......... 36,000 24% $1.67 11/25/06 $409,122 $686,998
Eric A. Amster.......... 36,000 24% $1.67 11/25/06 409,122 686,998
</TABLE>
- --------
(1) Options granted in 1996 vest as to twenty-five percent (25%) of the shares
covered by such option each year following the date of grant, subject to
acceleration under certain circumstances. Under the 1993 Plan, the Board
or a committee of the Board retains discretion, subject to 1993 Plan
limits, to modify the terms of outstanding options. The options have a
term of ten years if the grantee is based in the United States and a term
of seven years if the grantee is based in the United Kingdom subject to
earlier termination in certain situations related to termination of
employment. See "-- Employee Benefit Plans."
45
<PAGE>
(2) Based on a total of 150,000 options granted to all employees during 1996.
(3) All options were granted at an exercise price equal to the fair market
value of the Company's Common Stock as determined by the Board on the date
of the grant. The Company's Common Stock was not publicly traded at the
time of the option grants.
(4) Potential realizable values are calculated based on the fair market value
of the Common Stock at the date of grant (which is assumed to be the
assumed initial public offering price of $8.00 per share) and minus the
exercise price. The 5% and 10% assumed annual rates of compounded stock
appreciation are mandated by the rules of the Securities and Exchange
Commission and do not represent the Company's estimate or projection of
future Common Stock price. There can be no assurance provided to any
executive officer or any other holder of the Company's securities that the
actual stock price appreciation over the option term will be at the
assumed 5% and 10% levels or at any other defined level. Unless the market
price of the Common Stock appreciates over the option term, no value will
be realized from the option grants made to the executive officers.
(5) On May 8, 1997, Ms. Galley was granted an option under the 1993 Plan to
purchase 112,500 shares of Common Stock at an exercise price of $6.67 per
share. This option expires on May 8, 2007.
The following table sets forth information concerning unexercised options
held at December 31, 1996 with respect to each of the Named Officers. No
options were exercised by the Named Officers during 1996.
AGGREGATE OPTION EXERCISES IN 1996 AND YEAR-END VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL YEAR- IN-THE-MONEY OPTIONS
END AT FISCAL YEAR-END ($)(1)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Constance F. Galley...... 142,461 28,500 $189,948 $ 38,000
Edward J. Watson......... 120,000 36,000 $160,000 $ 48,000
Ira A. Gerard............ 36,000 108,000 $ 48,000 $144,000
Saydean Zeldin........... 45,375 79,125 $ 60,500 $ 57,500
Eric A. Amster........... 18,000 90,000 $ 24,000 $ 72,000
</TABLE>
- --------
(1) Based on the fair market value of the option shares at December 31, 1996
($1.67 as determined by the Board of Directors) less the exercise price.
COMPENSATION AGREEMENTS
The Company has entered into agreements with the following executive
officers of the Company: Constance Galley, the Company's President and Chief
Executive Officer; Ira Gerard, the Company's Vice President, Finance and
Administration and Chief Financial Officer; Eric Amster, the Company's Vice
President, Sales; Edward Watson, the Company's Executive Vice President, New
Business Development; and Saydean Zeldin, the Company's Vice President,
Research and Development.
Ms. Galley's agreement provides for an annual base salary of $225,000. Ms.
Galley is also eligible to receive an annual bonus based upon the Company
achieving certain financial objectives for such year. This agreement may be
terminated by the Company at any time for any reason. If Ms. Galley is
terminated without cause, she will continue to receive her base salary for a
one-year period following such termination. In the event that the Company is
acquired by a company that does not continue to employ Ms. Galley, she will
continue to receive her base salary for a one-year period following such
termination.
Mr. Gerard's agreement provides for an initial annual base salary of
$146,000 and a grant of an option to purchase an aggregate of 144,000 shares
of Common Stock. Mr. Gerard currently receives a base salary of $160,000. Mr.
Gerard is eligible to receive a bonus of up to $25,000 per year for meeting
corporate objectives for such year. This agreement may be terminated by the
Company at any time for any reason. If Mr. Gerard is terminated without cause,
he will continue to receive his base salary for a six-month period following
such termination. In the event that the Company is acquired by a company that
does not continue to employ Mr. Gerard, he will continue to receive his base
salary for a six-month period following such termination.
Mr. Amster's agreement provides for an annual base salary of $125,000 and a
grant of an option to purchase an aggregate of 72,000 shares of Common Stock.
Mr. Amster is eligible to receive a bonus and
46
<PAGE>
commissions of up to $145,000 per year upon meeting revenue related goals for
such year. This agreement may be terminated by the Company at any time for any
reason. If Mr. Amster is terminated without cause, he will continue to receive
his base salary for a six-month period following such termination.
Mr. Watson's agreement provides for an initial annual base salary of
$150,000. Mr. Watson currently receives a base salary of $160,000. This
agreement may be terminated by the Company at any time for any reason. If Mr.
Watson is terminated without cause, he will continue to receive his base
salary for a six-month period following such termination. In the event that
the Company is acquired by a company that does not continue to employ Mr.
Watson, he will continue to receive his base salary for a one-year period
following such termination.
Ms. Zeldin's agreement provides for an initial annual base salary of
$130,000. Ms. Zeldin currently receives a base salary of $155,000. This
agreement may be terminated by the Company at any time for any reason. If Ms.
Zeldin is terminated without cause, she will continue to receive her base
salary for a six-month period following such termination. In the event that
the Company is acquired by a company that does not continue to employ Ms.
Zeldin, she will continue to receive her base salary for a one-year period
following such termination.
EMPLOYEE BENEFIT PLANS
1997 Equity Incentive Plan. In May 1997, the Board adopted and the Company's
stockholders approved the 1997 Equity Incentive Plan (the "1997 Plan"), under
which 1,125,000 shares of the Company's Common Stock are reserved for
issuance. In addition to the 1,125,000 shares reserved for issuance
thereunder, shares that are reserved for issuance but that are not subject to
options under the 1993 Plan and shares that are subject to outstanding options
which either terminate without being exercised or that are repurchased by the
Company at the original issue price will be available for issuance under the
1997 Plan. No options have been issued under the 1997 Plan. The 1997 Plan will
become effective on the effective date of the Registration Statement of which
this Prospectus is a part and will terminate in May 2007, unless terminated
earlier in accordance with the provisions of the 1997 Plan. The 1997 Plan
authorizes the award of options, opportunities to purchase restricted stock
and stock bonuses (an "Award"). The 1997 Plan is administered by a committee
appointed by the Board, currently the Compensation Committee, consisting of
Messrs. Keet, Sisco, Pendray and Gross, all of whom are non-employee directors
under applicable federal securities laws and "outside directors" as defined
under Section 162(m) of the Internal Revenue Code of 1986, as amended (the
"Code"). The Compensation Committee has the authority to construe and
interpret the 1997 Plan and any agreement made thereunder, grant Awards and
make all other determinations necessary or advisable for the administration of
the 1997 Plan.
The 1997 Plan provides for the grant of both incentive stock options
("ISOs") that qualify under Section 422 of the Code and nonqualified stock
options ("NQSOs"). ISOs may be granted only to employees of the Company or of
a parent or subsidiary of the Company. NQSOs may be granted to employees,
officers, directors, consultants, independent contractors and advisors of the
Company or any parent or subsidiary of the Company, provided such consultants,
independent contractors, and advisors render bona fide services not in
connection with the offer and sale of securities in a capital-raising
transaction ("Eligible Service Providers"). The per share exercise price of
ISOs must be at least equal to the fair market value of a share of the
Company's Common Stock on the date of grant unless the option is an ISO
granted to a stockholder owning 10% or more of the Company's capital stock in
which case the exercise price must be at least 110% of the fair market value
of the Company's Common Stock. The per share exercise price of NQSOs must be
at least 85% of the fair market value of the Company's Common Stock. The
maximum term of options granted under the 1997 Plan is ten years if the
grantee is based in the United States and a maximum term of seven years if the
grantee is based in the United Kingdom, unless the option is an ISO granted to
a stockholder owning 10% or more of the Company's stock in which case the
maximum term is five years. Options granted under the 1997 Plan may not be
transferred in any manner other than by will or by the laws of descent and
distribution and may be exercised during the lifetime of the optionee only by
the optionee. Options granted under the 1997
47
<PAGE>
Plan generally expire three months after the termination of the optionee's
service to the Company or a parent or subsidiary of the Company, except in the
case of death or disability, in which case the options may be exercised up to
12 months following the date of death or termination of service. No person may
receive more than 300,000 shares in any calendar year pursuant to the grant of
Awards under the 1997 Plan. New employees, however, are eligible to receive
Awards up to a total of 450,000 shares in the calendar year in which they are
hired.
Opportunities to purchase shares of the Company's Common Stock ("Restricted
Stock Awards"), and awards of shares of the Company's Common Stock ("Stock
Bonuses"), either of which may be subject to a right of repurchase in favor of
the Company or other restrictions on ownership or transfer, may be given to
Eligible Service Providers. The Compensation Committee which is the
administrator of the 1997 Plan has the authority to determine the restrictions
applicable to the stock. The purchase price of Common Stock sold pursuant to a
Restricted Stock Award must be at least 85% of the fair market value of the
shares on the date of grant. Awards that are granted below 100% of fair market
value are limited under the 1997 Plan. No Eligible Service Provider may
receive more than 150,000 shares pursuant to such Awards under the 1997 Plan
and no more than 300,000 shares may be issued pursuant to such Awards for the
term of the 1997 Plan.
In the event of a merger, consolidation or certain other changes of control
transactions, any outstanding Awards will accelerate by one-year's vesting or
such additional acceleration of vesting as the Compensation Committee in its
discretion may decide, and may be assumed or replaced by the successor
corporation. In lieu of such assumption or replacement, but in addition to the
one-year's additional vesting or such additional acceleration of vesting, the
successor corporation may substitute equivalent Awards or provide
substantially similar consideration to Eligible Service Providers as is
provided to stockholders.
1993 Stock Option Plan. Under the 1993 Plan, 1,558,431 shares of Common
Stock are or have been reserved for issuance under currently outstanding
options. In May 1997 when the 1997 Plan was adopted, the Board resolved that
no further options shall be granted under the 1993 Plan following the closing
of this offering. However, all outstanding options will remain outstanding
until exercised or until they terminate or expire in accordance with their
terms. The terms of options granted under the 1993 Plan and the administration
of the plan are substantially the same as those that pertain to the 1997 Plan.
Profit Participation Plan. The Board maintains the TSI International
Software Ltd. Profit Participation Plan (the "Profit Plan") which allows the
Board at the end of the Company's year-end audit to vote to contribute a
portion of the Company's profits to a profit participation pool which does not
include executive officers or directors of the Company. Distributions from the
pool are usually made to eligible employees in two equal installments, one
distribution upon completion of the fiscal year-end audit and the second
distribution at the end of the next fiscal year. All employees who are
employed by the Company at the end of the fiscal year and who are employed at
the time of the distributions are eligible to receive such a distribution.
Employees who are not employed by the Company for the full fiscal year are
eligible to receive pro-rated distributions based upon the number of months
worked in such fiscal year. Payments under the profit participation pool
amounted to $35,000, $100,000 and $150,000 in 1994, 1995 and 1996,
respectively.
1997 Employee Stock Purchase Plan. In May 1997, the Board adopted and the
Company's stockholders approved the 1997 Employee Stock Purchase Plan (the
"Purchase Plan") and reserved a total of 750,000 shares of the Company's
Common Stock for issuance thereunder. The Purchase Plan will become effective
upon the effective date of the Registration Statement of which this Prospectus
is a part and will permit eligible employees to acquire shares of the
Company's Common Stock through payroll deductions. Eligible employees may
select a rate of payroll deduction between 2% and 15% of their compensation
and are subject to certain maximum purchase limitations described in the
Purchase Plan. Each offering under the Purchase Plan will be for a period of
12 months (the "Offering Period") and will consist of two six-month purchase
periods (each a "Purchase Period"). The purchase price for the Company's
Common Stock purchased under the Purchase Plan is 85% of the lesser of the
closing price of the Company's Common Stock on the first day of the applicable
Offering Period and the last day of the applicable Purchase Period. For the
purposes of the first
48
<PAGE>
Offering Period, eligible employees will be able to acquire shares at 85% of
the lesser of the price at which the shares are offered to the public in this
offering or the closing price of the shares on the last day of the applicable
purchase period in the first Offering Period. The first Offering Period is
expected to begin on the first business day following the effective date of
this Registration Statement and to end on July 31, 1998. The Board of
Directors has the power to set the beginning of any Offering Period and to
change the duration of Offering and Purchase Periods. The Purchase Plan is
intended to qualify as an "employee stock purchase plan" under Section 423 of
the Code.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
During 1996, the Company had no separate compensation or stock option
committee or other board committee performing equivalent functions, and these
functions were performed by the Company's Board of Directors of which
Constance F. Galley, President and Chief Executive Officer of the Company, was
and is a member. In May 1997, the Company's Board of Directors appointed a
Compensation Committee which currently consists of Stewart K.P. Gross, Ernest
E. Keet, John J. Pendray and Dennis G. Sisco, each a non-employee director of
the Company.
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF
LIABILITY
As permitted by Section 145 of the Delaware General Corporation Law, the
Bylaws of the Company provide that (i) the Company is required to indemnify
its directors and executive officers to the fullest extent permitted by the
Delaware General Corporation Law, (ii) to the fullest extent permitted by the
Delaware General Corporation Law, the Company is required to advance all
expenses, as incurred, to its directors and executive officers in connection
with a legal proceeding (subject to certain exceptions), (iii) the rights
conferred in the Bylaws are not exclusive, (iv) the Company may, in its
discretion indemnify or advance expenses to persons whom the Company is not
obligated to indemnify or advance expenses; (v) the Company is authorized to
enter into indemnification agreements with its directors, officers, employees
and agents or any person serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, including employee benefit plans and (vi) the
Company may not retroactively amend the Bylaw provisions relating to
indemnification.
The Company intends to enter into Indemnification Agreements with each of
its current directors and executive officers to give such directors and
officers additional contractual assurances regarding the scope of the
indemnification set forth in the Company's Bylaws and to provide additional
procedural protections. At present, there is no pending litigation or
proceeding involving a director, officer or employee of the Company regarding
which indemnification is sought, nor is the Company aware of any threatened
litigation that may result in claims for indemnification.
As permitted by the Delaware General Corporation Law, the Company's
Certificate of Incorporation includes a provision that eliminates the personal
liability of its directors for monetary damages for breach of fiduciary duty
as a director to the fullest extent permitted by the Delaware General
Corporation Law.
As authorized by the Company's Bylaws, the Company, with approval of the
Board, is seeking, and expects to obtain, directors' and officers' liability
insurance.
In so far as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions or otherwise, the Company has
been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable.
49
<PAGE>
CERTAIN TRANSACTIONS
Since January 1, 1994, there has not been, nor is there currently proposed,
any transaction or series of similar transactions to which the Company was or
is to be a party in which the amount involved exceeds $60,000 and in which any
director, executive officer or holder of more than 5% of any class of voting
securities of the Company or members of such person's immediate family had or
will have a direct or indirect material interest other than (i) the
compensation agreements which are described in "Management," and (ii) the
transactions described below.
From November 1990 until October 1994, Saydean Zeldin, the Company's Vice
President, Research and Development, was a consultant to the Company and a
General Partner at DownEast Partners, a consulting company. Payments to
DownEast Partners for the year ended December 31, 1994 were $122,000.
Edward Watson, the Company's Executive Vice President, Business Development,
was a General Partner of DownEast Partners until January 1994.
From August 1992 to April 1994, the Company subleased its Bannockburn,
Illinois office facility from a subsidiary of The Dun & Bradstreet Corporation
(predecessor to Cognizant Corporation), a holder of more than 5% of the
Company's outstanding capital stock. Payments under the sub-lease were $66,100
for the year ended December 31, 1994. The Company also subleased $130,000 of
furniture and fixtures from the same subsidiary of The Dun & Bradstreet
Corporation (predecessor to Cognizant Corporation). The transaction was
accounted for as a capital lease and bore interest at 9% and required monthly
payments of $4,100 through August 1995.
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All future transactions between the Company and
its officers, directors and principal stockholders and their affiliates will
be approved by a majority of the Board, including a majority of the
independent and disinterested directors of the Board, and will be on terms no
less favorable to the Company than could be obtained from unaffiliated third
parties.
50
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information known to the Company
regarding beneficial ownership of the Company's Common Stock as of May 31,
1997, and as adjusted to reflect the sale of shares offered hereby, by (i)
each person known by the Company to be the beneficial owner of more than 5% of
the Company's Common Stock, (ii) each of the Company's directors, (iii) each
Named Officer (see "Management-- Executive Compensation"), (iv) all executive
officers and directors as a group and (v) each Selling Stockholder.
<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY OWNED BENEFICIALLY OWNED
PRIOR TO OFFERING(1) AFTER OFFERING(1) (2)
EXECUTIVE OFFICERS, DIRECTORS ----------------------- NUMBER OF -------------------------
AND 5% STOCKHOLDERS NUMBER PERCENT SHARES OFFERED NUMBER PERCENT
- ----------------------------- ------------ ---------- -------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Stewart K.P. Gross .............................. 2,284,905 35.5 % -- 2,284,905 24.2%
Warburg, Pincus Capital Company, L.P. (3)
Ernest E. Keet .................................. 1,979,970 32.7 178,189 1,801,781 19.9
Vanguard Atlantic, Limited (4)
Cognizant Corporation (5)........................ 1,280,229 20.4 651,653 628,576 6.8
Constance F. Galley (6).......................... 411,207 6.6 -- 411,207 4.5
Ira A. Gerard (7)................................ 36,000 * -- 36,000 *
Eric A. Amster (8)............................... 18,000 * -- 18,000 *
Edward J. Watson (9)............................. 136,500 2.2 -- 136,500 1.5
Saydean Zeldin (10).............................. 56,625 * -- 56,625 *
John J. Pendray (11)............................. 198,057 3.3 46,875 151,182 1.7
Dennis G. Sisco.................................. -- * -- -- *
All executive officers and directors as a
group (9 persons) (12)......................... 5,121,264 72.3 225,064 4,896,200 48.6
OTHER SELLING STOCKHOLDERS
- --------------------------
Richard Bankosky (13)............................ 72,705 1.2 22,499 50,206 *
David Raye (14).................................. 46,776 * 407 46,369 *
Information Partners Capital Fund, L.P. (15)..... 167,616 2.8 100,377 67,239 *
</TABLE>
- --------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission that deem shares to be beneficially
owned by any person who has or shares voting or investment power with
respect to such shares. Unless otherwise indicated below, the persons and
entities named in the table have sole voting and sole investment power
with respect to all shares beneficially owned, subject to community
property laws where applicable. A person is deemed to be the beneficial
owner of securities that can be acquired by such person within 60 days of
May 31, 1997, upon exercise of options or warrants and such securities
are reflected in the above table. Shares of Common Stock subject to
options and warrants that are exercisable within 60 days of May 31, 1997
are deemed to be outstanding and to be beneficially owned by the person
holding such options for the purpose of computing the percentage
ownership of such person but are not treated as outstanding for the
purpose of computing the percentage ownership of any other person.
(2) Assumes that the Underwriters' over-allotment option to purchase up to
600,000 shares from certain Selling Stockholders is not exercised. If the
Underwriters' over-allotment options is exercised in full, the Selling
Stockholders will sell an additional 600,000 shares.
(3) Includes 382,281 shares of Common Stock issuable to Warburg, Pincus
Capital Company, L.P. ("Warburg") upon exercise of Warrants. Warburg,
Pincus & Co. is the sole General Partner of Warburg and has a 20%
interest in the profits of Warburg. E.M. Warburg, Pincus & Co., LLC, a
New York limited liability company, manages Warburg. Lionel I. Pincus is
the managing partner of Warburg, Pincus & Co. and the managing member of
E. M. Warburg, Pincus & Co., LLC and may be deemed to
51
<PAGE>
control both such entities. The members of E.M. Warburg, Pincus & Co., LLC
are substantially the same as the partners of Warburg, Pincus & Co. Mr.
Gross, a director of the Company, is a Managing Director and member of
E.M. Warburg, Pincus & Co., LLC and a general partner of Warburg, Pincus &
Co. As such, Mr. Gross may be deemed to have an indirect pecuniary
interest (within the meaning of Rule 16a-1 under the Exchange Act) in an
indeterminate portion of the shares beneficially owned by Warburg. Mr.
Gross disclaims beneficial ownership of these shares within the meaning of
Rule 13d-3 under the Securities Exchange Act of 1934. The address of Mr.
Gross and Warburg is 466 Lexington Avenue, New York, N.Y. 10017.
(4) Includes 1,559,325 shares of Common Stock held of record by Vanguard
Atlantic, Ltd. ("Vanguard") and 135,543 shares of Common Stock held of
record by Mr. Keet. Also includes shares of Common Stock issuable to
Vanguard upon exercise of a warrant which will be exercised on a net
exercise basis into 285,102 shares of Common Stock. Mr. Keet, a director
of the Company, is the President of Vanguard and may be deemed to
beneficially own the shares owned by such entity. Mr. Keet disclaims
beneficial ownership of such shares except to the extent of his indirect
pecuniary interest therein. The address of Vanguard is 304 Main Avenue,
Suite 290, Norwalk, Connecticut 06851 and the address of Mr. Keet is 619
Marina Boulevard, San Francisco, CA 94123.
(5) Includes 237,585 shares of Common Stock issuable upon exercise of
Warrants. Cognizant Corporation's address is 200 Nyala Farms, Westport,
Connecticut 06880.
(6) Includes 146,961 shares of Common Stock subject to options and 25,005
shares of Common Stock issuable upon exercise of Warrants.
(7) Represents 36,000 shares of Common Stock subject to options.
(8) Represents 18,000 shares of Common Stock subject to options.
(9) Includes 124,500 shares of Common Stock subject to options and 6,000
shares of Common Stock issuable upon exercise of Warrants.
(10) Represents 56,625 shares of Common Stock subject to options.
(11) Includes 1,200 shares of Common Stock subject to options, 30,000 shares
of Common Stock held of record by his wife Linda L. Pendray, 6,000 shares
of Common Stock held of record by each of his children Michael D.
Pendray, Andrew S. Pendray and Stephen L. Pendray. Mr. Pendray disclaims
beneficial ownership of the shares held by his wife and children.
(12) Includes an aggregate of 380,286 shares of Common Stock subject to
options and 650,871 shares of Common Stock issuable upon exercise of
Warrants and 285,102 shares of Common Stock issuable upon the exercise of
a warrant on a net exercise basis.
(13) Includes shares of Common Stock issuable upon exercise of a warrant which
will be exercised, on a net exercise basis, into 1,125 shares of Common
Stock.
(14) Includes 46,125 shares of Common Stock subject to options.
(15) The address of Information Partners Capital Fund, L.P. is Two Copley
Place, Boston, Massachusetts 02116.
52
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, the authorized capital stock of the
Company will consist of 20,000,000 shares of Common Stock, par value $0.01 per
share, and 5,000,000 shares of Preferred Stock, par value $0.01 per share.
Upon the consummation of this offering, and assuming the conversion of each
outstanding share of Preferred Stock into Common Stock, there will be
outstanding 9,045,942 shares of Common Stock and Warrants to purchase 711,771
shares of Common Stock.
COMMON STOCK
Subject to preferences that may be applicable to any Preferred Stock
outstanding at the time, the holders of outstanding shares of Common Stock are
entitled to receive dividends out of assets legally available therefor at such
times and in such amounts as the Board may from time to time determine. Each
stockholder is entitled to one vote for each share of Common Stock held on all
matters submitted to a vote of stockholders. Cumulative voting for the
election of directors is not provided for in the Company's Certificate of
Incorporation, which means that the holders of a majority of the shares voted
can elect all of the directors then standing for election. The Common Stock is
not entitled to preemptive rights and is not subject to conversion or
redemption. Upon liquidation, dissolution or winding-up of the Company, the
assets legally available for distribution to stockholders are distributable
ratably among the holders of the Common Stock and any participating Preferred
Stock outstanding at that time after payment of liquidation preferences, if
any, on any outstanding Preferred Stock and payment of other claims of
creditors. Each outstanding share of Common Stock is, and all shares of Common
Stock to be outstanding upon completion of this offering will be, fully paid
and nonassessable.
PREFERRED STOCK
Upon the closing of this offering, all outstanding shares of Preferred Stock
(the "Convertible Preferred"), will be converted into shares of Common Stock.
See Note 6 of Notes to Financial Statements for a description of the
Convertible Preferred. The Board is authorized, subject to any limitations
prescribed by Delaware law, to provide for the issuance of additional shares
of Preferred Stock in one or more series, to establish from time to time the
number of shares to be included in each such series, to fix the rights,
preferences and privileges of the shares of each wholly unissued series and
any qualifications, limitations or restrictions thereon, and to increase or
decrease the number of shares of any such series (but not below the number of
shares of such series then outstanding), without any further vote or action by
the stockholders. The Board may authorize the issuance of Preferred Stock with
voting or conversion rights that could adversely affect the voting power or
other rights of the holders of Common Stock. Thus, the issuance of Preferred
Stock may have the effect of delaying, deferring or preventing a change in
control of the Company. The Company has no current plan to issue any shares of
Preferred Stock.
WARRANTS
As of March 31, 1997, the Company had outstanding nine Warrants to purchase
shares of the Company's reserved, but unissued shares of Series D Convertible
Preferred Stock. These Warrants, seven of which will survive the closing of
this offering, will become exercisable into an aggregate of 711,771 shares of
Common Stock. These Warrants have an exercise price of $2.00 per share of
Common Stock and expire in June and August, 2002. These Warrants are also
exerciseable on a net exercise basis.
REGISTRATION RIGHTS
Certain investors holding an aggregate of 2,567,169 shares of Common Stock
and Warrants to purchase 711,771 shares of Common Stock of the Company have
certain "demand" rights to register the shares of Common Stock issuable upon
conversion of the Convertible Preferred and upon exercise of such Warrants to
the extent any of such shares are not included in this offering (the
"Registrable Securities") under the Securities Act. If requested by holders of
more than 50% of the Registrable Securities then outstanding, the Company must
file a registration statement under the Securities Act covering all
Registrable Securities requested to be registered. The Company is required to
effect two such "demand" registrations pursuant to these registration rights.
The "demand" rights of any particular holder of Registrable Securities will
expire three years after the consummation of the Company's initial public
offering.
53
<PAGE>
In addition, holders of Registrable Securities have certain "piggyback"
registration rights. If the Company proposes to register any of its securities
under the Securities Act other than in connection with the Company's employee
benefit plans or a corporate reorganization, the holders of Registrable
Securities may require the Company to include all or a portion of their shares
in such registration, although the managing underwriter, if any, of any such
offering has certain rights to limit the number of Registrable Securities
proposed to be included in such registration.
Further, if requested by holders of more than 50% of the then outstanding
Registrable Securities (assuming there is a reasonably anticipated aggregate
offering price to the public of at least $500,000), the Company must file a
registration statement on Form S-3 with respect to the resale of such
Registrable Securities when such form becomes available to the Company,
subject to certain conditions.
All expenses incurred in connection with the above registrations (other than
the underwriters' and brokers' discounts and commissions) will be borne by the
Company.
The Company's obligation to register the Registrable Securities will
terminate when all such Registrable Securities have been registered and sold
or are no longer outstanding.
DELAWARE ANTI-TAKEOVER LAW
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law (the "Anti-Takeover Law") regulating corporate
takeovers. The Anti-Takeover Law prevents certain Delaware corporations,
including those whose securities are listed on the Nasdaq National Market,
from engaging, under certain circumstances, in a "business combination" (which
includes a merger or sale of more than 10% of the corporation's assets) with
any "interested stockholder" (a stockholder who owns 15% or more of the
corporation's outstanding voting stock) for three years following the date
that such stockholder became an "interested stockholder." A Delaware
corporation may "opt out" of the Anti-Takeover Law with an express provision
in its original certificate of incorporation or an express provision in its
certificate of incorporation or bylaws resulting from a stockholders'
amendment approved by at least a majority of the outstanding voting shares.
The Company has not "opted out" of the provisions of the Anti-Takeover Law.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Company's Common Stock is The Bank
of New York.
LISTING
The Company has applied to list its Common Stock on the Nasdaq National
Market under the trading symbol "TSFW."
54
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for the Common Stock of the
Company. Future sales of substantial amounts of Common Stock in the public
market could adversely affect market prices prevailing from time to time.
Sales of substantial amounts of Common Stock of the Company in the public
market after the lapse of existing resale restrictions could adversely affect
the prevailing market price and the ability of the Company to raise equity
capital in the future.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned Restricted Shares for at least one year (including
the holding period of any prior owner except an affiliate of the Company)
would be entitled to sell within any three-month period a number of shares
that does not exceed the greater of: (i) one percent of the number of shares
of Common Stock then outstanding (which will equal approximately 90,459 shares
immediately after this offering); or (ii) the average weekly trading volume of
the Common Stock during the four calendar weeks preceding the filing of a Form
144 with respect to such sale. Sales under Rule 144 are also subject to
certain manner of sale provisions and notice requirements and to the
availability of current public information about the Company. Under Rule
144(k), a person who is not deemed to have been an affiliate of the Company at
any time during the 90 days preceding a sale, and who has beneficially owned
the shares proposed to be sold for at least two years (including the holding
period of any prior owner except an affiliate of the Company), is entitled to
sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Unless
otherwise restricted, "144(k) shares" may therefore be sold immediately upon
the completion of this offering.
Rule 701 permits resales of shares in reliance upon Rule 144 but without
compliance with certain restrictions, including the holding period
requirement, of Rule 144. Any employee, officer or director of or consultant
to the Company who purchased his or her shares pursuant to a written
compensatory plan or contract may be entitled to rely on the resale provisions
of Rule 701. Rule 701 permits affiliates to sell their Rule 701 shares under
Rule 144 without complying with the holding period requirements of Rule 144.
Rule 701 further provides that non-affiliates may sell such shares in reliance
on Rule 144 without having to comply with the holding period, public
information, volume limitation or notice provisions of Rule 144. In both
cases, a holder of Rule 701 shares is required to wait until 90 days after the
date of this Prospectus before selling such shares.
Upon completion of this offering, the Company will have outstanding
approximately 9,045,942 shares of Common Stock. In addition to the 4,000,000
shares of Common Stock offered hereby, as of the effective date of the
Registration Statement of which this Prospectus forms a part (the "Effective
Date"), there will be an additional 5,045,942 shares of Common Stock
outstanding, all of which are "restricted" shares (the "Restricted Shares")
under the Securities Act. Certain stockholders of the Company are subject to
lock-up agreements providing that they will not directly or indirectly offer,
sell, pledge, contract to sell, grant any option to purchase or otherwise
dispose of any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock for a period of 180 days after
the date of this Prospectus without the prior written consent of Robertson,
Stephens & Company LLC. Taking into account the lock-up agreements and
notwithstanding possible earlier eligibility for sale under the provisions of
Rules 144, 144(k) and 701, the numbers of shares that will be available for
sale in the public market will be as follows: (i) 81,000 Restricted Shares
will be eligible for sale as of the Effective Date, (ii) approximately 3,555
Restricted Shares will become eligible for sale 90 days after the Effective
Date pursuant to the provisions of Rule 144 or Rule 701, (iii) approximately
48,000 Restricted Shares will be eligible for sale in December 1997 subject to
certain volume and other resale restrictions under Rule 144, (iv)
approximately 4,763,387 Restricted Shares will become eligible for sale 180
days after the Effective Date upon expiration of certain lock-up agreements
and,
as of that date, approximately 4,076,847 of such shares will be subject to
certain volume and other resale restrictions pursuant to Rule 144, and (v)
approximately 150,000 Restricted Shares will become eligible for sale in May
1998, subject to certain volume and other resale restrictions pursuant to Rule
144. In addition, upon completion of this offering, there will remain
outstanding Warrants to purchase 711,771 shares of Common Stock at an exercise
price of $2.00 per share. These Warrants are exercisable at any time on a net
exercise
55
<PAGE>
basis. Accordingly, any shares of Common Stock issuable upon such net exercise
would be available for resale in the public market, subject to public
information, volume limitation or notice provisions of Rule 144, in the case
of affiliates.
At May 31, 1997, options to purchase 1,293,757 shares of Common Stock were
outstanding, of which options approximately 612,057 shares were then
exercisable. Immediately after this offering, the Company intends to file a
registration statement on Form S-8 under the Securities Act covering an
aggregate of 3,586,521 shares of Common Stock reserved for issuance pursuant
to outstanding options under the 1993 Plan, and outstanding options or shares
reserved for issuance under the 1997 Plan, Directors Plan and Purchase Plan.
As a result of such registration, shares of Common Stock issuable upon
exercise of options and pursuant to the Purchase Plan will be available for
sale in the public market, subject to Rule 144 volume limitations applicable
to affiliates and subject to lock-up agreements. Beginning 180 days after the
Effective Date, 708,882 shares issuable upon the exercise of vested options
will be eligible for sale in the public market, if such options are exercised.
56
<PAGE>
UNDERWRITING
The Underwriters named below, acting through their representatives,
Robertson, Stephens & Company LLC, SoundView Financial Group, Inc. and
Wessels, Arnold & Henderson, L.L.C. (the "Representatives"), have severally
agreed with the Company and the Selling Stockholders, subject to the terms and
conditions of the Underwriting Agreement, to purchase the number of shares of
Common Stock set forth opposite their respective names below. The Underwriters
are committed to purchase and pay for all such shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Robertson, Stephens & Company LLC........................................
SoundView Financial Group, Inc...........................................
Wessels, Arnold & Henderson, L.L.C.......................................
---------
Total.................................................................. 4,000,000
=========
</TABLE>
The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock to the public at the initial public
offering price set forth on the cover page of this Prospectus and to certain
dealers at such price less a concession of not in excess of $ per share, of
which $ may be reallowed to other dealers. After the initial public
offering, the public offering price, concession and reallowance to dealers may
be reduced by the Representatives. No such reduction shall change the amount
of proceeds to be received by the Company as set forth on the cover page of
this Prospectus.
Certain of the Selling Stockholders have granted to the Underwriters an
option, exercisable during the 30-day period after the date of this Prospectus
for this offering, to purchase up to 600,000 additional shares of Common
Stock, at the same price per share as the Company and the Selling Stockholders
will receive for the 4,000,000 shares that the Underwriters have agreed to
purchase. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the
same percentage of such additional shares that the number of shares of Common
Stock to be purchased by it shown in the above table represents as a
percentage of the 4,000,000 shares offered hereby. If purchased, such
additional shares will be sold by the Underwriters on the same terms as those
on which the 4,000,000 shares are being sold.
The Underwriting Agreement contains covenants of indemnity among the
Underwriters, the Company and the Selling Stockholders against certain civil
liabilities, including liabilities under the Securities Act.
Pursuant to the terms of lock-up agreements, all officers, directors and
certain security holders of the Company have agreed with the Representatives
for a period of 180 days after the effective date of this Prospectus that they
will not, subject to certain exceptions, directly or indirectly offer to sell,
contract to sell, or otherwise sell, dispose of, pledge, grant any rights with
respect to, any shares of Common Stock, any options or warrants to purchase
any shares of Common Stock, or any securities convertible into or exchangeable
for shares of Common Stock, now owned or hereafter acquired directly by such
holders or with respect to which they have the power of disposition, without
the prior written consent of Robertson, Stephens & Company,
57
<PAGE>
which may, in its sole discretion and at any time without notice, release all
or any portion of the securities subject to lock-up agreements. See "Shares
Eligible for Future Sale." In addition, the Company also has agreed that
during the 180 days following the effective date of this Prospectus the
Company will not, without the prior written consent of Robertson, Stephens &
Company, subject to certain exceptions, offer, issue, sell, contract to sell,
or otherwise dispose of any shares of Common Stock, any options or warrants to
purchase any shares of Common Stock, or any securities convertible into,
exercisable for or exchangeable for shares of Common Stock other than the
Company's sales of shares in this offering, the issuance of Common Stock upon
the exercise of outstanding options and the Company's issuance of options
under existing employee and director stock option plans.
Prior to this offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price for the Common
Stock was determined through negotiations among the Company and the
Representatives. Among the factors considered in such negotiations were
prevailing market conditions, certain financial information of the Company,
market valuations of other companies that the Company and the Representatives
believe to be comparable to the Company, estimates of the business potential
of the Company, the present state of the Company's development and other
factors deemed relevant.
The Underwriters do not intend to confirm sales of the Common Stock offered
hereby to any accounts over which they exercise discretionary authority.
The Underwriters have reserved approximately 190,000 shares of Common Stock
for sale, at the initial public offering price, to directors, officers and
employees of the Company, their business affiliates and related parties, in
each case as such persons have expressed an interest in purchasing such shares
in the offering. The number of shares of Common Stock available for sale to
the general public will be reduced to the extent such persons purchase such
reserved shares of Common Stock. Any reserved shares of Common Stock not so
purchased will be offered by the Underwriters to the general public on the
same basis as the other shares of Common Stock offered pursuant to the
offering.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company and the Selling Stockholders by Fenwick & West LLP, Palo
Alto, California. Certain legal matters will be passed upon for the
Underwriters by Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts.
EXPERTS
The financial statements and schedule of the Company as of December 31, 1995
and 1996, and for each of the years in the three year period ended December
31, 1996 included in this Prospectus and elsewhere in the registration
statement, have been included in reliance upon the reports of KPMG Peat
Marwick LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
58
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Commission, a Registration Statement on Form
S-1 under the Securities Act with respect to the shares of Common Stock
offered hereby. This Prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits and schedule thereto. For
further information with respect to the Company and the Common Stock offered
hereby, reference is made to the Registration Statement and the exhibits and
schedule thereto. Statements contained in this Prospectus regarding the
contents of any contract or any other document to which reference is made are
not necessarily complete, and in each instance reference is made to the copy
of such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. A copy of the Registration Statement and the exhibits and schedule
thereto may be inspected without charge at the offices of the Commission at
Judiciary Plaza, 450 Fifth Street, Washington, D.C. 20549, and copies of all
or any part of the Registration Statement may be obtained from the Public
Reference Section of the Commission, Washington, D.C. 20549 upon the payment
of the fees prescribed by the Commission.
59
<PAGE>
TSI INTERNATIONAL SOFTWARE LTD.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.............................................. F-2
Balance Sheets as of December 31, 1995 and 1996 and (unaudited) March 31,
1997..................................................................... F-3
Statements of Operations for the years ended December 31, 1994, 1995 and
1996 and (unaudited) for the three months ended March 31, 1996 and 1997.. F-4
Statements of Stockholders' (Deficiency) as of December 31, 1994, 1995 and
1996 and (unaudited) as of March 31, 1997................................ F-5
Statements of Cash Flows for the years ended December 31, 1994, 1995 and
1996 and (unaudited) for the three months ended March 31, 1996 and 1997.. F-6
Notes to Financial Statements............................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
TSI International Software Ltd.:
We have audited the accompanying balance sheets of TSI International
Software Ltd. (the "Company") as of December 31, 1996 and 1995, and the
related statements of operations, stockholders' (deficiency) and cash flows
for each of the years in the three year period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We 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 TSI International Software
Ltd. as of December 31, 1996 and 1995, and the results of its operations and
its cash flows for each of the years in the three year period ended December
31, 1996 in conformity with generally accepted accounting principles.
KPMG Peat Marwick llp
Stamford, Connecticut
April 14, 1997,
except for note 6,
which is as of May 15, 1997
F-2
<PAGE>
TSI INTERNATIONAL SOFTWARE LTD.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
-------------------------- MARCH 31, MARCH 31,
1995 1996 1997 1997
------------ ------------ ----------- ------------
(UNAUDITED) (unaudited--
note 6)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash.................... $ 142,500 $ 41,300 $ 79,400 $ 79,400
Accounts receivable,
less allowances of
$158,100, $319,900 and
(unaudited) $288,800... 2,932,400 4,380,900 5,296,500 5,296,500
Current portion of
investment in licensing
contracts receivable,
net of unearned finance
income of $126,100,
$84,200 and (unaudited)
$72,100 (note 3)....... 982,500 742,000 773,800 773,800
Prepaid expenses and
other current assets... 300,800 388,000 499,200 499,200
------------ ------------ ---------- -----------
Total current assets.. 4,358,200 5,552,200 6,648,900 6,648,900
Furniture, fixtures and
equipment, net (note 4).. 913,000 1,304,400 1,351,300 1,351,300
Investment in licensing
contracts receivable, net
of unearned finance
income of $91,900,
$50,100 and (unaudited)
$51,000, less current
portion (note 3)......... 896,400 551,600 600,200 600,200
Other assets.............. 69,600 113,100 120,500 120,500
------------ ------------ ---------- -----------
$ 6,237,200 $ 7,521,300 $8,720,900 $ 8,720,900
============ ============ ========== ===========
LIABILITIES AND STOCKHOLDERS' (DEFICIENCY)
Current liabilities:
Accounts payable........ $ 439,100 $ 694,800 $ 611,000 $ 611,000
Accrued expenses (note
9)..................... 1,266,500 1,486,500 1,610,200 1,610,200
Current portion of
deferred maintenance
revenue................ 4,780,200 4,591,200 4,585,400 4,585,400
------------ ------------ ---------- -----------
Total current
liabilities.......... 6,485,800 6,772,500 6,806,600 6,806,600
Long-term debt (note 5)... 2,840,100 2,790,100 3,590,100 2,590,100
Other long-term
liabilities.............. 79,300 27,400 42,600 42,600
Deferred maintenance
revenue, less current
portion.................. 401,600 225,000 313,400 313,400
------------ ------------ ---------- -----------
Total liabilities..... 9,806,800 9,815,000 10,752,700 9,752,700
------------ ------------ ---------- -----------
Stockholders' (deficiency)
(note 6):
Convertible preferred
stock ($8,219,000
aggregate liquidation
preference)............ 8,600 8,600 8,600 --
Common stock (3,888,166
shares authorized, par
value $.01)............ 30,000 30,000 30,000 60,500
Additional paid-in
capital................ 7,888,800 7,888,800 7,888,800 8,866,900
Accumulated deficit..... (11,264,500) (10,036,600) (9,723,900) (9,723,900)
Cumulative foreign
currency translation
adjustment............. (167,500) (119,500) (170,300) (170,300)
Treasury stock, at cost. (65,000) (65,000) (65,000) (65,000)
------------ ------------ ---------- -----------
Total stockholders'
(deficiency)......... (3,569,600) (2,293,700) (2,031,800) (1,031,800)
------------ ------------ ---------- -----------
$ 6,237,200 $ 7,521,300 $8,720,900 $ 8,720,900
============ ============ ========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
TSI INTERNATIONAL SOFTWARE LTD.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------- ----------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Software licensing.... $ 6,275,500 $ 7,552,900 $ 9,309,500 $1,782,500 $2,731,100
Service, maintenance
and other............ 7,658,500 8,508,500 9,694,400 2,306,000 2,776,800
----------- ----------- ----------- ---------- ----------
Total revenues...... 13,934,000 16,061,400 19,003,900 4,088,500 5,507,900
----------- ----------- ----------- ---------- ----------
Cost of revenues:
Software licensing.... 1,034,700 724,900 494,800 93,300 173,500
Service, maintenance
and other............ 2,522,000 2,200,800 2,005,700 431,400 548,200
----------- ----------- ----------- ---------- ----------
Total cost of reve-
nues............... 3,556,700 2,925,700 2,500,500 524,700 721,700
----------- ----------- ----------- ---------- ----------
Gross profit............ 10,377,300 13,135,700 16,503,400 3,563,800 4,786,200
----------- ----------- ----------- ---------- ----------
Operating expenses:
Product development... 2,231,400 3,067,600 3,452,300 779,300 1,073,400
Selling and marketing. 6,123,800 7,159,800 8,715,200 1,893,800 2,583,700
General and adminis-
trative.............. 1,926,900 2,001,200 2,921,500 728,300 777,200
----------- ----------- ----------- ---------- ----------
Total operating ex-
penses............. 10,282,100 12,228,600 15,089,000 3,401,400 4,434,300
----------- ----------- ----------- ---------- ----------
Operating income.... 95,200 907,100 1,414,400 162,400 351,900
Borrowing expenses (note
5)..................... (467,200) (419,800) (285,500) (78,500) (63,100)
Interest income......... 268,100 193,200 135,200 40,200 30,500
Other income (note 11).. -- 176,900 -- -- --
----------- ----------- ----------- ---------- ----------
Income (loss) before
income taxes....... (103,900) 857,400 1,264,100 124,100 319,300
Provision for income
taxes (note 8)......... 8,800 34,600 36,200 3,000 6,600
----------- ----------- ----------- ---------- ----------
Net income (loss)... $ (112,700) $ 822,800 $ 1,227,900 $ 121,100 $ 312,700
=========== =========== =========== ========== ==========
Net income (loss) per
share.................. $ (.02) $ .15 $ .20 $ .02 $ .05
=========== =========== =========== ========== ==========
Weighted average number
of common and common
equivalent shares out-
standing............... 5,623,608 5,653,795 5,984,375 5,694,987 6,426,073
=========== =========== =========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
TSI INTERNATIONAL SOFTWARE LTD.
STATEMENTS OF STOCKHOLDERS' (DEFICIENCY)
<TABLE>
<CAPTION>
SERIES A, B, C
AND E
CONVERTIBLE CUMULATIVE
PREFERRED STOCK COMMON STOCK FOREIGN TREASURY STOCK
---------------- ----------------- ADDITIONAL CURRENCY -------------------
PAR PAR PAID-IN ACCUMULATED TRANSLATION
SHARES VALUE SHARES VALUE CAPITAL DEFICIT ADJUSTMENT SHARES VALUE TOTAL
-------- ------ --------- ------- ---------- ------------ ----------- -------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1993........... 860,969 $8,600 3,000,000 $30,000 $8,025,500 $(11,974,600) $(169,300) (185,388) $(225,700) $(4,305,500)
Stock options
exercised...... -- -- -- -- (1,700) -- -- 750 2,000 300
Net loss........ -- -- -- -- -- (112,700) -- -- -- (112,700)
Change in
foreign
currency
adjustment..... -- -- -- -- -- -- 24,900 -- -- 24,900
-------- ------ --------- ------- ---------- ------------ --------- -------- --------- -----------
Balance at
December 31,
1994........... 860,969 8,600 3,000,000 30,000 8,023,800 (12,087,300) (144,400) (184,638) (223,700) (4,393,000)
Stock options
exercised...... -- -- -- -- (135,000) -- -- 71,160 158,700 23,700
Net income...... -- -- -- -- -- 822,800 -- -- -- 822,800
Change in
foreign
currency
adjustment..... -- -- -- -- -- -- (23,100) -- -- (23,100)
-------- ------ --------- ------- ---------- ------------ --------- -------- --------- -----------
Balance at
December 31,
1995........... 860,969 8,600 3,000,000 30,000 7,888,800 (11,264,500) (167,500) (113,478) (65,000) (3,569,600)
Net income...... -- -- -- -- -- 1,227,900 -- -- -- 1,227,900
Change in
foreign
currency
adjustment..... -- -- -- -- -- -- 48,000 -- -- 48,000
-------- ------ --------- ------- ---------- ------------ --------- -------- --------- -----------
Balance at
December 31,
1996........... 860,969 8,600 3,000,000 30,000 7,888,800 (10,036,600) (119,500) (113'478) (65,000) (2,293,700)
Net income
(unaudited).... -- -- -- -- -- 312,700 -- -- -- 312,700
Change in
foreign
currency
adjustment
(unaudited).... -- -- -- -- -- -- (50,800) -- -- (50,800)
-------- ------ --------- ------- ---------- ------------ --------- -------- --------- -----------
Balance at March
31, 1997
(unaudited).... 860,969 $8,600 3,000,000 $30,000 $7,888,800 $ (9,723,900) $(170,300) (113,478) $ (65,000) $(2,031,800)
Pro forma
adjustments:
Issuance of
Series E
Preferred Stock
(unaudited).... 50,000 500 -- -- 999,500 -- -- -- -- 1,000,000
Conversion of
Preferred Stock
(unaudited).... (910,969) (9,100) 2,759,715 $27,600 (18,500) -- -- -- -- --
Exercise of
Warrants on a
net exercise
basis
(unaudited).... -- -- 286,227 2,900 (2,900) -- -- -- -- --
-------- ------ --------- ------- ---------- ------------ --------- -------- --------- -----------
Pro forma
balance as of
March 31, 1997
(unaudited).... -- -- 6,045,942 $60,500 $8,866,900 $ (9,723,900) $(170,300) (113,478) $ (65,000) $(1,031,800)
======== ====== ========= ======= ========== ============ ========= ======== ========= ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
TSI INTERNATIONAL SOFTWARE LTD.
STATEMENTS OF CASH FLOWS
REPRESENTING INCREASES (DECREASES) IN CASH
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------ --------------------
1994 1995 1996 1996 1997
---------- ----------- ----------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operat-
ing activities:
Net income (loss)...... $ (112,700) $ 822,800 $ 1,227,900 $ 121,100 $ 312,700
Adjustments to recon-
cile net income (loss)
to net cash provided
by operating activi-
ties:
Depreciation and amor-
tization of fixed as-
sets.................. 309,900 351,000 436,100 86,500 150,900
Amortization of li-
censes and purchased
software (note 4)..... 291,000 291,300 -- -- --
Provision for losses
on accounts receiv-
able.................. 99,000 65,000 431,700 17,500 19,900
Changes in operating
assets and liabili-
ties:
Accounts receivable... (203,700) (977,200) (1,930,500) 303,300 (981,600)
Investment in licens-
ing contracts re-
ceivable............. 1,004,500 502,900 585,300 228,600 (80,400)
Prepaid expenses and
other current as-
sets................. (25,400) 69,800 (87,200) 40,200 (111,200)
Other assets.......... (21,600) (18,400) (43,500) (7,700) (7,400)
Accounts payable...... (79,600) 133,500 255,700 33,100 (83,800)
Accrued expenses...... (112,100) 155,000 220,000 39,600 123,700
Other long-term lia-
bilities............. (45,800) (57,400) -- -- 28,200
Deferred maintenance
revenue.............. 224,500 (16,100) (365,600) (232,400) 82,600
---------- ----------- ----------- --------- ---------
Net cash provided
(used) by operating
activities.......... 1,328,000 1,322,200 729,900 629,800 (546,400)
---------- ----------- ----------- --------- ---------
Cash used by investing
activities -- Purchase
of furniture, fixtures
and equipment.......... (237,300) (354,300) (827,500) (118,600) (197,800)
Cash flows from financ-
ing activities:
Net borrowings (repay-
ments) under revolving
line of credit........ (646,000) (1,150,000) (50,000) (550,000) 800,000
Payments under capital
leases................ (172,100) (143,500) (51,900) (18,300) (13,000)
Stock options exer-
cised................. 300 23,700 -- -- --
---------- ----------- ----------- --------- ---------
Net cash (used) pro-
vided by financing
activities.......... (817,800) (1,269,800) (101,900) (568,300) 787,000
---------- ----------- ----------- --------- ---------
Effect of exchange rate
changes on cash........ (500) (5,600) 98,300 (9,400) (4,700)
---------- ----------- ----------- --------- ---------
Net change in cash... 272,400 (307,500) (101,200) (66,500) 38,100
Cash at beginning of pe-
riod................... 177,600 450,000 142,500 142,500 41,300
---------- ----------- ----------- --------- ---------
Cash at end of period... $ 450,000 $ 142,500 $ 41,300 $ 76,000 $ 79,400
========== =========== =========== ========= =========
Supplemental informa-
tion:
Cash paid for:
Interest............... $ 291,000 $ 352,200 $ 278,900 $ 72,400 $ 65,400
Income taxes........... -- 21,000 27,100 20,000 20,000
Non-cash investing ac-
tivity --
Acquisition of equip-
ment under capital
leases................ $ 132,900 $ 104,600 $ -- $ -- $ 30,000
========== =========== =========== ========= =========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
TSI INTERNATIONAL SOFTWARE LTD.
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
TSI International Software Ltd. (the "Company") develops, markets, licenses,
and supports computer software and related services which allow organizations
to integrate their business applications within the enterprise and with
outside business partners. The Company's customers are located primarily
throughout the U.S. and Western Europe and represent a broad range of
industries.
(a) Revenue Recognition
Software licensing revenues are recognized upon shipment of the product if
there are no significant post-delivery obligations, or at a later date once
such obligations are satisfied. Maintenance contract revenue is recognized
ratably over the term of the contracts, which are generally for one year. The
unrecognized portion of maintenance revenue is classified as deferred
maintenance revenue in the accompanying balance sheets. Consulting and
training revenues are recognized as services are performed.
The Company licenses its KEY/MASTER product on a term-use basis for 15 to 60
month periods. The contracts provide for maintenance and generally do not have
renewal or purchase options. At contract inception, the present value of the
payments to be received under the contract is apportioned between software
licensing revenue and maintenance revenue and recognized as described above.
The present value of the payments to be received are recorded as the
investment in licensing contracts receivable. License interest revenue is
recognized over the term of the contract at a constant rate of return.
(b) Product Development Costs
Statement of Financial Accounting Standards (SFAS) No. 86, "Accounting for
the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed",
requires that software development costs: (i) be expensed as incurred until
technological feasibility (as defined therein) is achieved; and (ii)
capitalized subsequent to achieving technological feasibility and prior to the
product being available to customers. The establishment of technological
feasibility of the Company's products has essentially coincided with the
products' general release to customers. Accordingly, the Company expenses all
software development costs as incurred.
Purchased software with alternative future use is capitalized and amortized
over its expected useful life.
(c) Furniture, Fixtures and Equipment
Furniture, fixtures and equipment are carried at cost less accumulated
depreciation computed using the straight-line method over their estimated
useful lives. Furniture, fixtures and equipment held under capital leases and
leasehold improvements are amortized on a straight-line basis over the lease
term.
(d) Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. Valuation allowances
are provided for any portion of the deferred tax assets which are not more
likely than not to be realized.
F-7
<PAGE>
TSI INTERNATIONAL SOFTWARE LTD.
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(e) Net Income (Loss) Per Share
Net income (loss) per share is usually calculated using the weighted average
number of common and common equivalent shares outstanding during each period,
after retroactive adjustment for stock splits (see note 6). In addition, the
Securities and Exchange Commission requires that shares issued or options and
warrants granted within one year of an Initial Public Offering ("IPO") at
prices below the IPO price be shown as outstanding (using the Treasury Stock
method) for all periods presented. Further, in connection with the IPO, all
outstanding preferred stock will be converted into common stock on the basis
described in note 6 and, accordingly, are shown as outstanding for all periods
presented. Following are the components of common stock used to calculate net
income (loss) per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
----------------------------- -------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Weighted average common
shares outstanding....... 2,815,443 2,845,630 2,886,822 2,886,822 2,886,822
Increment for shares is-
sued within one year of
the IPO.................. 198,750 198,750 198,750 198,750 198,750
Common shares expected to
be issued for conversion
of preferred stock....... 2,609,415 2,609,415 2,609,415 2,609,415 2,609,415
Dilutive effect of stock
options.................. -- -- 289,388 -- 731,086
--------- --------- --------- --------- ---------
Weighted average common
and common equivalent
shares outstanding....... 5,623,608 5,653,795 5,984,375 5,694,987 6,426,073
========= ========= ========= ========= =========
</TABLE>
The proposed IPO contemplates that $2,590,100 of the proceeds will be used
to repay bank borrowings. Following is a calculation of supplementary net
income per share for the year ended December 31, 1996 and (unaudited) the
three months ended March 31, 1997 as if the IPO taken place on January 1, 1996
and these bank borrowings were repaid on that date.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED
1996 MARCH 31, 1997
------------- --------------
(unaudited)
<S> <C> <C>
Net income as reported.......................... $1,227,900 $ 312,700
Add interest expense related to borrowings ex-
pected to be repaid from IPO proceeds, net of
Federal tax.................................... 223,600 47,700
---------- ----------
Supplementary net income........................ $1,451,500 $ 360,400
========== ==========
Weighted average common and common equivalent
shares outstanding, as reported................ 5,984,375 6,426,073
Add shares required to be sold (at an assumed
IPO price of $8.00) to repay $2,590,100 of bank
borrowings..................................... 323,763 323,763
---------- ----------
Supplementary shares used to compute supplemen-
tary net income per share...................... 6,308,138 6,749,836
========== ==========
Supplementary net income per share.............. $ .23 $ .05
========== ==========
</TABLE>
(f) Cash Equivalents
The Company considers securities with maturities of three months or less,
when purchased, to be cash equivalents.
F-8
<PAGE>
TSI INTERNATIONAL SOFTWARE LTD.
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(g) Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
(h) Accounting Changes
During 1996, the Company adopted SFAS No. 121 -- "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
SFAS No. 121 requires companies to review assets for possible impairment and
provides guidelines for recognition of impairment losses related to long-lived
assets, certain intangibles and assets to be disposed of. The impact of the
adoption of SFAS No. 121 was not material.
Also during 1996, the Company adopted SFAS No. 123 -- "Accounting for Stock-
Based Compensation." In accordance with SFAS No. 123, the Company elected not
to record any compensation expense for stock options granted to employees at
fair value and will disclose in the notes to its financial statements the
impact on net income and net income per share as if the fair value based
compensation cost had been recognized (see note 6).
(2) FOREIGN OPERATIONS
The Company's balance sheets include foreign branch assets of $1,565,100,
$2,574,400, and $2,642,600 and liabilities of $258,800, $282,200, and $270,700
at December 31, 1995 and 1996, and (unaudited) March 31, 1997, respectively.
The foreign net income (loss) for the years ended December 31, 1994, 1995, and
1996, and (unaudited) the three months ended March 31, 1996 and 1997, after
allocation of corporate charges, was ($106,700), $133,700, $586,200, $129,600,
and $(115,600) respectively.
With the exception of direct sales activities in the United Kingdom and
Canada, the Company utilizes distributors and agents to market its products
outside the United States. Revenues generated through these third parties
amounted to $230,400, $147,100, $288,700, $91,500, and $35,700 for the years
ended December 31, 1994, 1995, and 1996, and (unaudited) for the three months
ended March 31, 1996 and 1997 respectively.
(3) INVESTMENT IN LICENSING CONTRACTS
The net investment in licensing contracts at December 31, 1996 is comprised
of future minimum contract payments receivable, net of unearned interest
income. The interest rate implicit in term-use licensing contracts was 9.5%
for contracts entered into during the years 1995 and 1996 and (unaudited) for
the first quarter of 1997. Total minimum contract payments receivable at
December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997........................................................... $ 826,200
1998........................................................... 394,100
1999........................................................... 147,800
2000........................................................... 48,000
2001........................................................... 11,800
----------
1,427,900
Less unearned interest income.................................. (134,300)
----------
1,293,600
Less current portion........................................... (742,000)
----------
Non current portion............................................ $ 551,600
==========
</TABLE>
F-9
<PAGE>
TSI INTERNATIONAL SOFTWARE LTD.
NOTES TO FINANCIAL STATEMENTS--CONTINUED
There were no transactions during the three months ended March 31, 1997
which would significantly alter these receivables.
(4) CAPITAL ASSETS
(a) Furniture, Fixtures, and Equipment
Furniture, fixtures and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ MARCH 31, USEFUL LIFE
1995 1996 1997 RANGE
----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C>
Computer systems......... $ 1,778,700 $ 2,421,700 $ 2,610,000 3-7 years
Furniture and fixtures... 465,800 545,500 553,800 3-7 years
Office equipment......... 302,800 325,800 331,400 3-7 years
Leasehold improvements... 287,600 328,500 326,400 3-10 years
Automobiles.............. 59,000 99,900 97,600 5 years
----------- ----------- -----------
2,893,900 3,721,400 3,919,200
Less accumulated depreci-
ation and amortization.. (1,980,900) (2,417,000) (2,567,900)
----------- ----------- -----------
$ 913,000 $ 1,304,400 $ 1,351,300
=========== =========== ===========
</TABLE>
Computer systems and equipment under capital leases, included in the above
totals, net of accumulated depreciation, was $203,000, $56,200, and $64,300 as
of December 31, 1995 and 1996 and (unaudited) March 31, 1997, respectively.
(b) Purchased Software
In 1990, the Company acquired software from Foretell Corporation which was
available for sale to customers at the time of purchase. The cost of
$1,484,200 was amortized over a five year period which ended in 1995.
Amortization expense for years 1994 and 1995 was $291,000 and $272,100,
respectively.
(5) LONG-TERM DEBT
Since August 1994, the Company has had a line of credit facility with a
bank. The underlying loan agreement, as amended, which expires in November
1998 and is partially guaranteed by the Connecticut Development Authority
(CDA): (a) provides for Company borrowings equal to the lesser of $4,000,000
or the sum of: (i) 80% of eligible accounts receivable, (ii) lesser
percentages of certain other receivables; and (iii) the effective dollar
amount of the guarantee of the CDA (approximately $600,000); (b) requires
interest on borrowings at either the bank's prime rate plus 1.0% or the LIBOR
rate plus 3.0%; (c) collateralizes all assets of the Company as security for
the borrowings; (d) requires the Company to maintain several financial
covenants; and (e) imposes other restrictions, including (i) prohibition on
losses, cash dividends and key management changes and (ii) limitations on
additional debt, mergers and acquisitions, stock repurchases and sales of
assets (except in the normal course of business). The Company was in
compliance with all financial covenants at December 31, 1996 but (unaudited)
was not in compliance with the indebtedness to EBITDA ratio covenant at March
31, 1997. The Company has received a waiver for this non-compliance. This
waiver pertained only to such non-compliance as of March 31, 1997. The
covenant has been amended for subsequent periods and, because management
considers it probable that the Company will be in compliance with this amended
covenant for the twelve month period subsequent to March 31, 1997, the
indebtedness under this credit facility has been classified as long-term debt.
Had the amended covenant been in effect on March 31, 1997, the Company would
have been in compliance with such amended covenant.
All repayments are due at maturity. Borrowings based on prime can be prepaid
without penalty.
F-10
<PAGE>
TSI INTERNATIONAL SOFTWARE LTD.
NOTES TO FINANCIAL STATEMENTS--CONTINUED
Borrowing costs and effective interest rates under this agreement were as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------- --------------------
1994 1995 1996 1996 1997
-------- -------- -------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Interest expense........ $395,400 $368,300 $250,200 $ 65,600 $ 60,000
Guarantee fees to CDA... 63,500 31,500 23,600 7,900 3,100
Commitment fees......... 8,300 20,000 11,700 5,000 --
-------- -------- -------- --------- ---------
$467,200 $419,800 $285,500 $ 78,500 $ 63,100
======== ======== ======== ========= =========
Effective interest rate. 10.13% 11.41% 9.51% 11.69% 8.41%
======== ======== ======== ========= =========
</TABLE>
(6) STOCKHOLDERS' (DEFICIENCY)
(a) Recent Developments
On May 8, 1997, the Board of Directors approved an IPO of the Company's
common stock and in connection therewith also approved at the closing of the
IPO: (i) an increase in the number of authorized shares of common stock and
preferred stock to 20,000,000 shares and 5,000,000 shares, respectively; and
(ii) a three-for-one common stock split. The accompanying financial statements
have been retroactively adjusted to reflect this common stock split.
Pursuant to the Company's Certificate of Incorporation, the closing of the
IPO will cause the conversion of all preferred shares into 2,759,715 shares of
common stock. In addition, on May 15, 1997, three new investors acquired a
total of 50,000 shares of Series E convertible preferred stock at $20 a share.
At the closing of the IPO, these shares will be converted into 150,000 shares
of common stock. The accompanying unaudited pro forma balance sheet at March
31, 1997 has also been retroactively adjusted for the new investment and the
conversion of all outstanding Preferred Stock.
The Board of Directors also approved the following stock-based plans:
<TABLE>
<CAPTION>
SHARES FORMS OF ISSUANCES
TYPE OF PLAN RESERVED OR GRANTS AWARDED
------------ --------- ------------------
<S> <C> <C>
Equity Incentive 1,125,000 Options, restricted shares and awards.
(replacing the 1993 Grants (under the 1993 Plan) of 112,500
Stock Option Plan) options at exercise prices from $5.00 to
$6.67 a share.
Directors Stock Option 225,000 Grants of 60,000 options at exercise price
of $6.67 a share.
Employee Stock Purchase 750,000 No grants made.
---------
2,100,000
=========
</TABLE>
(b) Preferred and Common Stock
The Company's Certificate of Incorporation authorizes 1,638,166 shares of
preferred stock, and 3,888,166 shares of common stock, each with a par value
of $.01 a share.
F-11
<PAGE>
TSI INTERNATIONAL SOFTWARE LTD.
NOTES TO FINANCIAL STATEMENTS--CONTINUED
All of the classes of Preferred Stock (a) have the right to vote on an as-
converted basis; (b) convert into common stock; and (c) have certain anti-
dilution rights. The authorized shares of preferred stock have been designated
as follows:
<TABLE>
<S> <C>
Series A Convertible Preferred Stock ("Series A stock")............ 297,405
Series B Convertible Preferred Stock ("Series B stock")............ 115,761
Series C Convertible Preferred Stock ("Series C stock")............ 725,000
Series D Convertible Preferred Stock ("Series D stock")............ 364,469
Undesignated....................................................... 135,531
---------
1,638,166
=========
</TABLE>
Upon liquidation, dissolution or winding up of the Company, before any
distribution in respect of the Series A stock, Series B stock or common stock,
the holders of the Series C stock are entitled to receive an amount equal to
$6.00 a share plus any declared and unpaid dividends. In addition, the Series
C stock is entitled to receive preferential non-cumulative dividends, when
declared, at an annual per share amount of $0.48 through December 31, 1997 and
cumulative dividends at $0.72 a share thereafter. The Series C stock may be
redeemed at the Company's option after June 30, 1997 at $6.00 a share plus all
accumulated and unpaid dividends. Further, before any distribution in respect
of the common stock, the holders of shares of the Series B stock and
subsequently the Series A stock are entitled to receive an amount equal to
$13.39 a share plus any declared and unpaid dividends. In addition, the
holders of the Series B and A stock are entitled to receive preferential non-
cumulative dividends, when declared, at an annual per share amount of $1.07
through December 31, 1997 and cumulative dividends at $1.61 a share
thereafter. The Series B and A stock may be redeemed at the Company's option
after June 30, 1997 at $13.39 a share, plus all accumulated and unpaid
dividends. No dividends have been or are required to be declared on these
shares.
At December 31, 1996 the following shares of preferred stock were
outstanding:
<TABLE>
<S> <C>
Series A stock....................................................... 297,405
Series B stock....................................................... 115,761
Series C stock....................................................... 447,803
-------
Total outstanding.................................................. 860,969
Series B Stock issuable to prevent dilution.......................... 8,936
-------
869,905
=======
</TABLE>
Certain owners of preferred and common stock hold an aggregate of nine
warrants to purchase Series D stock at $2.00 a share. The warrants expire in
2002 and, seven of which are not expected to be exercised prior to the
proposed IPO. After the IPO, the remaining warrants are exercisable for
711,771 shares of common stock.
(c) Stock Option Plan
The Company maintains a 1993 Stock Option Plan ("Plan") which provides that
the Company may grant options for employees to purchase up to 1,558,431 shares
of the Company's common stock. Options issued to date have been granted at
fair market value, as determined by the Company's Board of Directors. No
options may be granted for a term greater than 10 years.
F-12
<PAGE>
TSI INTERNATIONAL SOFTWARE LTD.
NOTES TO FINANCIAL STATEMENTS--CONTINUED
Transactions under the Plan are summarized below:
<TABLE>
<CAPTION>
1995 1996
-------- ---------
<S> <C> <C>
Shares under option at January 1........................ 739,767 919,857
Options exercised....................................... (71,160) --
Options granted......................................... 367,500 150,000
Options canceled........................................ (116,250) (6,000)
-------- ---------
Shares under option at December 31...................... 919,857 1,063,857
======== =========
Options exercisable at December 31...................... 409,107 576,357
======== =========
</TABLE>
Options were granted in 1995 and prior years at an exercise price of $0.33 a
share and options were granted during 1996 at exercise prices of $0.67 and
$1.67 a share. Substantially all options vest ratably over a four year period
from the date of grant.
There were 422,664 shares available for grant at December 31, 1996 and
(unaudited) 27,000 options were granted at $1.67 a share during the three
months ended March 31, 1997.
As discussed in Note 1, the Company adopted SFAS No. 123 during 1996 and
elected not to recognize compensation expense relating to employee stock
options where the exercise price of the option equaled the fair value (as
estimated by the Company) of the stock on the date of grant. As a non-public
entity, the Company utilized the minimum value method to determine
compensation based on the fair value of the options on the date of grant in
accordance with SFAS No. 123. Following are the resultant pro forma amounts of
net income and net income per share:
<TABLE>
<CAPTION>
1995 1996
-------- ----------
<S> <C> <C>
Net income -- as reported............................... $822,800 $1,227,900
Net income -- pro forma................................. $819,500 $1,216,600
Primary net income per share -- as reported............. $ .15 $ .20
Primary net income per share -- pro forma............... $ .15 $ .20
</TABLE>
The pro forma effect on net income for 1995 and 1996 is not representative
of the pro forma effect on net income in future years because it does not take
into consideration pro forma compensation expense related to grants made prior
to 1995.
The fair value of each option granted in 1995 and 1996 was $.21 and $.87,
respectively based on estimates on the date of grant using the modified Black-
Scholes option pricing model using the following weighted average assumptions:
<TABLE>
<S> <C>
Risk-free interest rate................................................ 6.27%
Expected life in years................................................. 6
Expected volatility.................................................... 0%
Expected dividend yield................................................ 0%
</TABLE>
(7) EMPLOYEE BONUS AND SAVINGS PLANS
The Company maintains a bonus plan for all non-executive officer employees.
The bonus plan is reviewed annually by the Board of Directors and provides for
payments based upon a percentage of pretax income, as defined. Bonus payments
of $40,000, $100,000, and $200,000 were authorized during 1994, 1995, and
1996, respectively.
F-13
<PAGE>
TSI INTERNATIONAL SOFTWARE LTD.
NOTES TO FINANCIAL STATEMENTS--CONTINUED
On July 1, 1990, the Company established a defined contribution plan under
Section 401(k) of the Internal Revenue Code which provides for voluntary
employee salary deferrals but does not require Company matching funds. The
defined contribution plan covers substantially all employees. Employees are
eligible to contribute to the defined contribution plan upon completion of
three months of service with the Company. Contributions are subject to
established limitations as determined by the Internal Revenue Service. There
have been no Company contributions to the plan to date.
(8) INCOME TAXES
The provision for income taxes is composed solely of Federal Alternative
Minimum Taxes (AMT). The AMT for the Company's fiscal year ended April 30,
1995 of $13,200 was prorated to calendar 1994 ($8,800) and 1995 ($4,400). The
AMT for the period May 1 to December 31, 1995 was approximately $32,000. The
AMT for the year ended December 31, 1996 was approximately $36,200.
At December 31, 1996, the Company had: (a) federal tax net operating loss
carryforwards of $8,646,000 expiring between the years 2000 and 2009; (b)
research and experimentation credits of $590,000 expiring between 2003 and
2008; and (c) AMT credit carryforwards of $68,100 which have no expiration
date. Section 382 of the Internal Revenue Code imposes a limitation on the
amount of tax loss carryforwards which can be utilized in any year after there
has been a 50% or greater ownership change of the Company. The ownership
change is based on the number of shares of stock or the aggregate market value
of the stock within any consecutive three year period. Future years'
utilization of the Company's tax loss carryforwards could be subject to this
limitation.
At December 31, 1995 and 1996, the components of net deferred taxes
(utilizing a 41.4% combined tax rate) were:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Deferred tax liabilities.............................. $1,306,900 $1,024,900
Deferred tax assets, net of valuation allowances of
$5,798,200 and $5,294,900 in 1995 and 1996........... 1,306,900 $1,024,900
---------- ----------
Net deferred taxes.................................. $ -- --
========== ==========
</TABLE>
Significant temporary differences which give rise to deferred tax (a)
liabilities and (b) assets are: (a) investment in licensing contracts
receivable and depreciation; and (b) net operating loss carryforwards and
deferred maintenance revenues.
The decrease in the valuation allowance of $503,300 in 1996 is the result of
the utilization of net operating loss carryforwards.
(9) ACCRUED EXPENSES
Included in accrued expenses as of December 31, 1995 and 1996 and
(unaudited) March 31, 1997 are compensation costs (regular payroll, bonus and
profit sharing) of $336,500, $548,300 and $804,200, respectively.
F-14
<PAGE>
TSI INTERNATIONAL SOFTWARE LTD.
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(10) COMMITMENTS AND CONTINGENCIES
The Company rents premises and furniture, fixtures and equipment under
operating leases which expire at various dates through 2010.
Future minimum payments, by year and in the aggregate, under operating and
capital leases at December 31, 1996 are:
<TABLE>
<CAPTION>
CAPITAL OPERATING
-------- ----------
<S> <C> <C>
1997................................................... $ 82,200 $ 787,300
1998................................................... 24,100 743,700
1999................................................... 9,000 705,900
2000................................................... -- 708,200
2001................................................... -- 453,900
Thereafter............................................. -- 1,404,300
-------- ----------
Total................................................ $115,300 $4,803,300
==========
Less amount representing interest...................... (10,200)
--------
Present value of minimum capital lease payments...... $105,100
========
</TABLE>
There were no significant modifications to the Company's portfolio of leases
during the three months ended March 31, 1997.
Certain of the aforementioned leases provide for additional payments
relating to taxes and other operating expenses. Rental expense for the years
ended December 31, 1994, 1995, and 1996 and (unaudited) the three months ended
March 31, 1996 and 1997 under all operating leases aggregated approximately
$770,900, $820,900, $717,300, $201,600, and $193,100, respectively.
(11) LITIGATION SETTLEMENT
In April 1995 the Company received cash in settlement of a lawsuit which,
after payment of legal expenses, resulted in a non-operating gain of $176,900.
F-15
<PAGE>
TSI INTERNATIONAL SOFTWARE LTD.
NOTES TO FINANCIAL STATEMENTS--CONCLUDED
(12) CONDENSED QUARTERLY INFORMATION (UNAUDITED)
The following condensed quarterly information has been prepared by
management on a basis consistent with the Company's audited financial
statements. Such quarterly information may not be indicative of future
results. Amounts are in thousands, except per share data.
<TABLE>
<CAPTION>
1995
-------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total revenues.............................. $3,897 $4,027 $4,070 $4,067
Gross profit................................ 2,993 3,161 3,538 3,444
Net income.................................. 92 3 568 160
Net income per share........................ $ .02 $ -- $ .10 $ .03
Weighted average number of common and common
equivalent shares outstanding.............. 5,624 5,624 5,672 5,695
<CAPTION>
1996
-------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total revenues.............................. $4,089 $4,236 $5,046 $5,633
Gross profit................................ 3,564 3,681 4,413 4,845
Net income.................................. 121 186 518 403
Net income per share........................ $ .02 $ .03 $ .08 $ .06
Weighted average number of common and common
equivalent shares outstanding.............. 5,695 5,847 6,152 6,243
</TABLE>
The sum of the quarterly per share amounts for 1996 does not agree to the
respective annual amount due to rounding.
F-16
<PAGE>
The inside back cover contains a chart depicting data transformation. The left
side of the graphic contains pictures of 3 computers in a vertical row with a
cube, pyramid and sphere, respectively next to the computer. Each drawing has an
arrow emanating from it to an oval in the center of the graphic. The oval
contains a vertical row of a cube, pyramid and sphere (in a vertical column)
each with two arrows emanating from it and pointing to two other three
dimensional shapes on the right side of the oval. The right side of the oval has
two arrows emanating from it and pointing towards the right. The top arrow
points to a piece of computer equipment with a three dimensional shape next to
it and the bottom arrow points to a different piece of computer equipment with a
three dimensional "pie" shape next to it.
The TSI International Data Transformation Solution
for Integrating Applications
. Concurrent transformation between multiple application sources and
destinations
. Support for any application, message or file format
. Elimination of custom written interface programs
. No modification to the underlying applications
. Support for multiple protocols for data transport
. Scalability and portability across a broad range of computing platforms
. Execution in batch mode, real-time, stand-alone, or embedded within
applications
<PAGE>
[LOGO OF TST SOFT APPEARS HERE]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth expenses, other than the underwriting
discount and commissions, to be paid by the Registrant in connection with this
offering. All amounts shown are estimates except for the Securities and
Exchange Commission registration fee, the NASD filing fee and the Nasdaq
National Market filing fee:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............. $ 12,121
NASD filing fee................................................. 4,500
Nasdaq National Market filing fee............................... 40,665
Accounting fees and expenses.................................... 125,000
Legal fees and expenses......................................... 300,000
Printing and engraving expenses................................. 135,000
Blue sky fees and expenses...................................... 15,000
Transfer agent and registrar fees and expenses.................. 12,500
Miscellaneous................................................... 55,214
--------
Total......................................................... $700,000
========
</TABLE>
- --------
* To be filed by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
As permitted by the Delaware General Corporation Law, the Registrant's
Certificate of Incorporation includes a provision that eliminates the personal
liability of its directors for monetary damages for breach of fiduciary duty
as a director to the fullest extent permitted by the Delaware General
Corporation Law. As permitted by Section 145 of the Delaware General
Corporation Law, the Bylaws of the Registrant provide that (i) the Registrant
is required to indemnify its directors and executive officers and the
directors and executive officers to the fullest extent permitted by the
Delaware General Corporation Law, (ii) to the fullest extent permitted by the
Delaware General Corporation Law, the Registrant is required to advance all
expenses, as incurred, to its directors and executive officers in connection
with a legal proceeding (subject to certain exceptions), (iii) the rights
conferred in the Bylaws are not exclusive, (iv) the Registrant may, in its
discretion indemnify or advance expenses to persons whom the Registrant is not
obligated to indemnify or advance expenses; (v) the Registrant is authorized
to enter into indemnification agreements with its directors, officers,
employees and agents or any person serving at the request of the Registrant as
a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, including employee benefit plans and
(vi) the Registrant may not retroactively amend the Bylaw provisions relating
to indemnification.
The Registrant intends to enter into indemnity agreements with each of its
directors and executive officers. The indemnity agreements provide that
directors and executive officers will be indemnified and held harmless to the
fullest possible extent permitted by law including against all expenses
(including attorneys' fees), judgments, fines and settlement amounts paid or
reasonably incurred by them in any action, suit or proceeding, including any
derivative action by or in the right of the Registrant, on account of their
services as directors, officers, employees or agents of the Registrant or as
directors, officers, employees or agents of any other company or enterprise
when they are serving in such capacities at the request of the Registrant. The
Registrant will not be obligated pursuant to the agreements to indemnify or
advance expenses to an indemnified party with respect to proceedings or claims
(i) initiated by the indemnified party and not by way of defense, except with
respect to a proceeding authorized by the Board and successful proceedings
brought to enforce a right to indemnification under the indemnity agreements,
(ii) for any amounts paid in settlement of a proceeding unless the Registrant
consents to such settlement; (iii) on account of any suit in which judgment is
rendered against the indemnified party for an accounting of profits made from
the purchase or sale by the indemnified party of securities of the Registrant
pursuant to the provisions of (S)16(b) of the
II-1
<PAGE>
Securities Exchange Act of 1934 and related laws; (iv) on account of conduct
by an indemnified party that is finally adjudged to have been in bad faith or
conduct that the indemnified party did not reasonably believe to be in, or not
opposed to, the best interests of the Registrant; (v) on account of any
criminal action or proceeding arising out of conduct that the indemnified
party had reasonable cause to believe was unlawful; or (vi) if a final
decision by a court having jurisdiction in the matter shall determine that
such indemnification is not lawful.
The indemnity agreement requires a director or executive officer to
reimburse the Registrant for expenses advanced only to the extent it is
ultimately determined that the director or executive officer is not entitled,
under Delaware law, the Bylaws, his or her indemnity agreement or otherwise to
be indemnified for such expenses. The indemnity agreement provides that it is
not exclusive of any rights a director or executive officer may have under the
Certificate of Incorporation, Bylaws, other agreements, any majority-in-
interest vote of the stockholders or vote of disinterested directors, Delaware
law, or otherwise.
The indemnification provision in the Bylaws, and the indemnity agreements
entered into between the Registrant and its directors and executive officers,
may be sufficiently broad to permit indemnification of the Registrant's
directors and executive officers for liabilities arising under the Securities
Act.
As authorized by the Registrant's Bylaws, the Registrant, with approval by
the Registrants Board, is seeking, and expects to obtain, directors and
officers liability insurance.
Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:
<TABLE>
<CAPTION>
DOCUMENT EXHIBIT NUMBER
-------- --------------
<S> <C>
Form of Underwriting Agreement............................. 1.01
Registrant's Certificate of Incorporation.................. 3.01
Registrant's Bylaws........................................ 3.04
1989 Stock Purchase Agreement, as amended.................. 4.03
Form of Indemnification Agreement.......................... 10.06
</TABLE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following table sets forth information regarding all securities sold by
the Registrant and its Connecticut predecessor since May 1, 1994.
<TABLE>
<CAPTION>
AGGREGATE
NUMBER PURCHASE FORM OF
CLASS OF PURCHASERS DATE OF SALE TITLE OF SECURITIES OF SHARES PRICE CONSIDERATION
------------------- ------------ ------------------- --------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Officers, directors and 05/94-05/97 Options to Purchase 772,500 -- --
employees Shares of Common Stock
granted under the
Company's 1993 Stock
Option Plan (1)
Officers, directors and 05/94-05/97 Common Stock purchased 71,910 $ 23,970 cash
employees upon exercise of stock
options
Mitsui & Co., Ltd., May 15, 1997 Series E Convertible 50,000 $1,000,000 cash
Mitsui Knowledge Preferred Stock
Industry Co., Ltd. and
Nippon Venture Capital
Co., Ltd.
</TABLE>
- --------
(1) With respect to the grant of stock options, exemption from registration
under the Securities Act was unnecessary in that none of such transactions
involved a "sale" of securities as such term is used in Section 2(3) of
the Securities Act.
II-2
<PAGE>
All sales of Common Stock made pursuant to the exercise of stock options
granted under the Registrant's stock option plan and issuances to independent
contractors were made pursuant to the exemption from the registration
requirements of the Securities Act afforded by Rule 701 promulgated under the
Securities Act.
All other sales were made in reliance on Registration S promulgated under
the Securities Act or Section 4(2) of the Securities Act and/or Regulation D
promulgated under the Securities Act. This sale was made to three purchasers,
two of which are affiliated, in connection with a distribution arrangement
without general solicitation or advertising. The purchasers were not United
States residents and were sophisticated investors with access to all relevant
information necessary to evaluate the investment who represented to the
Registrant that the shares were being acquired for investment.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following exhibits are filed herewith:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<C> <S>
1.01 --Form of Underwriting Agreement.+
3.01 --Registrant's Certificate of Incorporation.+
3.02 --Form of Amended and Restated Certificate of Incorporation to be
filed after the consummation of this offering.+
3.03 --Registrant's Bylaws.+
4.01 --Form of Specimen Certificate for Registrant's Common Stock.+
4.02 --Stockholders Agreement dated as of June 1, 1989, as amended.+
4.03 --1989 Stock Purchase Agreement dated as of June 1, 1989, as
amended.+
5.01 --Opinion of Fenwick & West LLP regarding legality of the securities
being issued.+
10.01 --Registrant's 1993 Stock Option Plan and related documents.+
10.02 --Registrant's 1997 Equity Incentive Plan.+
10.03 --Registrant's 1997 Directors Stock Option Plan.+
10.04 --Registrant's 1997 Employee Stock Purchase Plan.+
10.05 --Registrant's Profit Participation Plan.+
10.06 --Form of Indemnification Agreement to be entered into by Registrant
with each of its directors and executive officers.+
10.07 --Lease Agreement dated as of January 2, 1990 between Registrant and
Robert D. Scinto, as amended.+
10.08 --Office Building Lease dated as of February 4, 1994 between
Registrant and American National Bank and Trust Company of Chicago,
not individually but solely as Trustee under Trust No. 42978, as
amended.+
10.09 --Lease Agreement dated as of July 1, 1996 between Registrant and
Boca Corners, L.P., Ltd., as amended.+
10.10 --Credit Agreement dated as of July 31, 1994 between Registrant and
The Bank of New York, as amended.
10.11 --Security Agreement dated as of July 31, 1994 between Registrant
and The Bank of New York.+
10.12 --Guarantee Agreement dated as of August 22, 1994 by and between the
Connecticut Development Authority and The Bank of New York, as
amended.+
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<C> <S>
10.13 --Letter Agreement, between Registrant and Constance Galley.+
10.14 --Letter Agreement dated as of December 5, 1995 between Registrant
and Eric Amster.+
10.15 --Letter Agreement dated as of October 5, 1995, between Registrant
and Ira Gerard.+
10.16 --Letter Agreement dated as of January 1, 1994 between Registrant
and Edward Watson.+
10.17 --Letter Agreement dated as of October 1, 1994, between Registrant
and Saydean Zeldin.+
10.18 --Series E Preferred Stock Purchase Agreement dated as of May 15,
1997 between the Company and the Purchasers named therein.+
23.01 --Consent of Fenwick & West LLP (included in Exhibit 5.01).+
23.02 --Consent of KPMG Peat Marwick LLP, Independent Accountants.
27.01 --Financial Data Schedule (EDGAR version only).+
24.01 --Power of Attorney (see Page II-6 of this Registration Statement).+
</TABLE>
- --------
* To be filed by amendment.
+ Previously filed.
(b) The following financial statement schedule is filed herewith:
Schedule II -- Valuation and Qualifying Accounts
Other financial statement schedules are omitted because the information
called for is not required or is shown either in the Financial Statements or
the Notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 14 above, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Wilton, State of Connecticut, on the
26th day of June, 1997.
TSI INTERNATIONAL SOFTWARE LTD.
By: /s/ Constance F. Galley
---------------------------------
CONSTANCE F. GALLEY
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
In accordance with the requirements of the Securities Act, this Registration
Statement was signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
PRINCIPAL EXECUTIVE OFFICER:
/s/ Constance F. Galley President, Chief June 26, 1997
_____________________________________ Executive Officer
CONSTANCE F. GALLEY and a Director
PRINCIPAL FINANCIAL AND PRINCIPAL ACCOUNTING OFFICER:
/s/ Ira A. Gerard Vice President, June 26, 1997
_____________________________________ Finance and
IRA A. GERARD Administration and
Chief Financial
Officer
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
DIRECTORS:
* Director June 26, 1997
_____________________________________
STEWART K.P. GROSS
* Director June 26, 1997
_____________________________________
ERNEST E. KEET
* Director June 26, 1997
_____________________________________
JOHN J. PENDRAY
* Director June 26, 1997
_____________________________________
DENNIS G. SISCO
* /s/ Ira Gerard Attorney-in-Fact June 26, 1997
_____________________________________
IRA GERARD
</TABLE>
II-6
<PAGE>
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
The Board of Directors
TSI International Software Ltd.
The audits referred to in our report dated April 14, 1997 included the
related financial statement schedule for the years ended December 31, 1994,
1995, and 1996, included in the registration statement. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion of this financial statement schedule
based on our audits.
In our opinion, such financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects, the information set forth therein.
KPMG Peat Marwick LLP
Stamford, Connecticut
April 14, 1997
S-1
<PAGE>
TSI INTERNATIONAL SOFTWARE LTD
FINANCIAL STATEMENT SCHEDULE
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
CHARGED BALANCE
BALANCE AT TO COSTS CHARGED TO AT END
BEGINNING AND OTHER OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS(1) DEDUCTIONS(2) PERIOD
----------- ---------- -------- ----------- ------------- --------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful
Accounts Receivable:
Year ended December 31,
1994................... $399,600 $99,000 $96,600 $(443,100) $152,100
Year ended December 31,
1995................... 152,100 65,000 65,800 (124,800) 158,100
Year ended December 31,
1996................... 158,100 431,700 1,400 (271,300) 319,900
Three months ended March
31, 1996............... 158,100 17,500 -- (14,100) 161,500
Three months ended March
31, 1997............... 319,900 19,900 94,000 (145,000) 288,800
</TABLE>
- --------
(1) Recoveries of balances previously written off.
(2) Write-offs of receivables and reversals of unneeded balances.
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<C> <S>
1.01 --Form of Underwriting Agreement.+
3.01 --Registrant's Certificate of Incorporation.+
3.02 --Form of Amended and Restated Certificate of Incorporation to be
filed after the consummation of this offering.+
3.03 --Registrant's Bylaws.+
4.01 --Form of Specimen Certificate for Registrant's Common Stock.+
4.02 --Stockholders Agreement dated as of June 1, 1989, as amended.+
4.03 --1989 Stock Purchase Agreement dated as of June 1, 1989, as
amended.+
5.01 --Opinion of Fenwick & West LLP regarding legality of the securities
being issued.+
10.01 --Registrant's 1993 Stock Option Plan and related documents.+
10.02 --Registrant's 1997 Equity Incentive Plan.+
10.03 --Registrant's 1997 Directors Stock Option Plan.+
10.04 --Registrant's 1997 Employee Stock Purchase Plan.+
10.05 --Registrant's Profit Participation Plan.+
10.06 --Form of Indemnification Agreement to be entered into by Registrant
with each of its directors and executive officers.+
10.07 --Lease Agreement dated as of January 2, 1990 between Registrant and
Robert D. Scinto, as amended.+
10.08 --Office Building Lease dated as of February 4, 1994 between
Registrant and American National Bank and Trust Company of Chicago,
not individually but solely as Trustee under Trust No. 42978, as
amended.+
10.09 --Lease Agreement dated as of July 1, 1996 between Registrant and
Boca Corners, L.P., Ltd., as amended.+
10.10 --Credit Agreement dated as of July 31, 1994 between Registrant and
The Bank of New York, as amended.
10.11 --Security Agreement dated as of July 31, 1994 between Registrant
and The Bank of New York.+
10.12 --Guarantee Agreement dated as of August 22, 1994 by and between the
Connecticut Development Authority and The Bank of New York, as
amended.+
10.13 --Letter Agreement, between Registrant and Constance Galley.+
10.14 --Letter Agreement dated as of December 5, 1995 between Registrant
and Eric Amster.+
10.15 --Letter Agreement dated as of October 5, 1995, between Registrant
and Ira Gerard.+
10.16 --Letter Agreement dated as of January 1, 1994 between Registrant
and Edward Watson.+
10.17 --Letter Agreement dated as of October 1, 1994, between Registrant
and Saydean Zeldin.+
10.18 --Series E Preferred Stock Purchase Agreement dated as of May 15,
1997 between the Company and the Purchasers named therein.+
23.01 --Consent of Fenwick & West LLP (included in Exhibit 5.01).+
23.02 --Consent of KPMG Peat Marwick LLP, Independent Accountants.
27.01 --Financial Data Schedule (EDGAR version only).+
24.01 --Power of Attorney (see Page II-6 of this Registration Statement).+
</TABLE>
- --------
* To be filed by amendment.
+ Previously filed.
<PAGE>
EXHIBIT 10.10
CREDIT AGREEMENT
Dated as of July 31, 1994
TSI INTERNATIONAL SOFTWARE LTD., a Delaware corporation, and THE BANK OF
NEW YORK agree as follows:
ARTICLE 1
CREDIT FACILITY
---------------
Section 1.1 Commitment to Lend. Upon the terms and subject to the
------------------
conditions of this Agreement, the Bank agrees to make, from time to time during
the period from the Agreement Date through the Termination Date, one or more
Loans to the Borrower in an aggregate unpaid principal amount not exceeding at
any time the lesser of (a) the Commitment at such time (which amount includes
the aggregate stated amount of Letters of Credit issued for the account of the
Borrower) and (b) the Borrowing Base at such time. The Loans will be made at
the rate of interest established pursuant to the terms of Section 1.3 below.
The amount of the Commitment on the Agreement Date is $4,000,000.
Section 1.2 Manner of Borrowing. (a) The Borrower shall give the
-------------------
Bank notice (which shall be irrevocable) no later
#90068563.
-1-
<PAGE>
than 10:00 a.m. (New York time) on the Business Day before the requested date
for the making of a Loan. Each such notice shall be in the form of Schedule 1.2
------------
and shall specify (i) the requested date for the making of the requested Loan,
which shall be a Business Day and (ii) the amount of such Loan, which amount
shall be, in the case of each such Loan, not less than $100,000 and in multiples
of $50,000, or, if less, the maximum amount that can then be borrowed hereunder.
Each Loan so requested shall be disbursed by the Bank not later than 12:00 noon
(New York time) on the requested date therefor in Dollars in funds immediately
available to the Borrower by credit to an account of the Borrower at the Bank's
Office or in such other manner as may have been specified in the applicable
notice and as shall be acceptable to the Bank.
(b) At the time of any drawing under a Letter of Credit, the
resulting reimbursement obligation of the Borrower (regardless of whether the
amount complies with the requirements of Section 1.2(a)(ii)) shall immediately
become a Loan and no notice of borrowing as described in Section 1.2(a) shall be
required.
Section 1.3 Letters of Credit. (a) The Bank agrees to issue
-----------------
Letters of Credit for the account of the Borrower from time to time, subject to
satisfaction by the Borrower of the provisions set forth in paragraph (b) of
this Section and provided that (i) all Letters of Credit issued by the Bank
hereunder shall expire on or before the Termination Date, (ii)
#90068563.
-2-
<PAGE>
the sum of the aggregate stated amount of outstanding Letters of Credit and the
amount of the requested Letter of Credit shall not exceed $150,000 at any time,
and (iii) each requested Letter of Credit shall be in a minimum amount of
$25,000.
(b) The Borrower may request the Bank to issue a Letter of
Credit for the account of the Borrower by delivering a written notice to the
Bank no later than 12:00 noon (New York time) on the date seven (7) Business
Days preceding the proposed date of issuance of such Letter of Credit. The
notice shall specify the proposed date of issuance of such Letter of Credit
(which shall be a Business Day), the face amount of the Letter of Credit, the
expiration date of the Letter of Credit and the name and address of the
beneficiary of the Letter of Credit, and shall contain a description of the
documents and the verbatim text of any certificate to be presented by the
beneficiary of the Letter of Credit to the Bank, which documents and
certificate, if presented by such beneficiary to the Bank prior to the
expiration date of such Letter of Credit, will require the Bank to make payment
under the Letter of Credit; provided that the Bank, in its sole judgment, may
require changes in any such documents and certificates prior to issuing any
Letter of Credit. Prior to the issuance of any new Letter of Credit, the
Borrower shall deliver to the Bank an executed and completed Application and
Agreement for Standby Letter of Credit in form and substance satisfactory to the
Bank and, together with this Agreement, the terms and conditions of such
Application shall govern the rights and duties
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of the Bank and the Borrower with respect to such Letter of Credit.
Section 1.4 Interest. (a) Rates. Each Loan shall bear interest on
-------- -----
the outstanding principal amount thereof until due at a rate per annum equal to
the Alternative Base Rate as in effect from time to time plus 1.25%. During an
Event of Default (and whether before or after judgment), each Loan (whether or
not due) and to the maximum extent permitted by Applicable Law, each other
amount due and payable under the Borrower Loan Documents shall bear interest at
a rate per annum equal to the applicable Post-Default Rate.
(b) Payment. Interest shall be payable in arrears on each
-------
Interest Payment Date, and when any Loan shall be due (whether at maturity, by
reason of notice of prepayment or acceleration or otherwise). Interest at the
Post-Default Rate shall be payable on demand.
(c) Maximum Interest Rate. Nothing contained in the Loan
---------------------
Documents shall require the Borrower at any time to pay interest at a rate
exceeding the Maximum Permissible Rate. If interest payable by the Borrower on
any date would exceed the maximum amount permitted by the Maximum Permissible
Rate, such interest payment shall automatically be reduced to such maximum
permitted amount, and interest for any subsequent period, to the extent less
than the maximum amount permitted for such period by the Maximum Permissible
Rate, shall be increased by the unpaid amount of such reduction. Any interest
actually received for any
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period in excess of such maximum amount permitted for such period shall be
deemed to have been applied as a prepayment of the Loans.
Section 1.5 Repayment. The Loans outstanding at 5:00 p.m. (New York
---------
time) on the Termination Date shall mature and become due and payable, and shall
be repaid by the Borrower, in full at such time, together with all accrued and
unpaid interest and any other amounts due to the Bank under the Loan Documents.
Section 1.6 Prepayments. (a) Optional Prepayments. The Borrower
----------- --------------------
may, at any time and from time to time, prepay the Loans in whole or in part,
without premium or penalty, except that any partial prepayment shall be in an
aggregate principal amount of at least $100,000 and in integral multiples of
$50,000 in excess thereof. The Borrower shall give the Bank notice of each
prepayment pursuant to this Section 1.6(a) no later than 10:00 a.m. (New York
time) on the Business Day before the date of such prepayment. Each such notice
of prepayment shall be in the form of Schedule 1.6(a) and shall specify (i) the
---------------
date such prepayment is to be made and (ii) the amount of each Loan to be
prepaid. Amounts to be prepaid pursuant to this Section 1.6(a) shall
irrevocably be due and payable on the date specified in the applicable notice of
prepayment, together with interest thereon as provided in Section 1.4(b).
(b) Mandatory Prepayments. If at any time the aggregate
---------------------
unpaid principal amount of the Loans exceeds the
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Borrowing Base, the Borrower shall immediately prepay the Loans in an amount not
less than the amount of such excess.
Section 1.7 Commitment Fee; Letter of Credit Fee; Reduction of
--------------------------------------------------
Commitment. (a) The Borrower shall pay to the Bank a commitment fee on the
- ----------
daily unused amount of the Commitment for each day from the Agreement Date
through the Termination Date at a rate per annum of 1/2%, payable on the last
day of each fiscal quarter of the Borrower, on the Termination Date and on the
date of any reduction of the Commitment (to the extent accrued and unpaid on the
amount of the reduction).
(b) The Borrower shall pay to the Bank a fee for the Letters
of Credit (the "Letter of Credit Fee") at the rate of two percent (2%) per
--------------------
annum on the aggregate stated amount of Letters of Credit from time to time
outstanding.
(c) The Borrower may reduce the Commitment by giving the
Bank notice (which shall be irrevocable) thereof no later than 10:00 a.m. (New
York time) on the third Business Day before the requested date of such
reduction, except that no partial reduction shall be in an amount less than
$100,000 and any partial reduction shall be in multiples of $100,000.
Section 1.8 Computation of Interest and Fees. Interest and the
--------------------------------
commitment fee shall be computed on the basis of a year of 360 days and paid for
the actual number of days elapsed. Interest for any period shall be calculated
from and including the first day thereof to but excluding the last day thereof.
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Section 1.9 Payments by the Borrower. (a) Time, Place and Manner.
------------------------ ----------------------
All payments due to the Bank under the Borrower Loan Documents shall be made in
Dollars to the Bank at the Bank's Office or to such other Person or at such
other address as the Bank may designate by notice to the Borrower. All such
payments shall be made for the account of the Lending Office. A payment shall
not be deemed to have been made on any day unless such payment has been received
by the required Person, at the required place of payment, in Dollars in funds
immediately available to such Person, no later than 12:00 noon (New York time)
on such day.
(b) No Reductions. All payments due to the Bank under the
-------------
Borrower Loan Documents, and all other terms, conditions, covenants and
agreements to be observed and performed by the Borrower thereunder, shall be
made, observed or performed by the Borrower without any reduction or deduction
whatsoever, including any reduction or deduction for any set-off, recoupment,
counterclaim (whether sounding in tort, contract or otherwise) or Tax.
(c) Taxes. If any Tax is required to be withheld or
-----
deducted from, or is otherwise payable by the Borrower in connection with, any
payment due to the Bank under the Borrower Loan Documents, the Borrower (i)
shall, if required, withhold or deduct the amount of such Tax from such payment
and, in any case, pay such Tax to the appropriate taxing authority in accordance
with Applicable Law and (ii) shall pay to the Bank (A) such
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additional amounts as may be necessary so that the net amount received by the
Bank with respect to such payment, after withholding or deducting all Taxes
required to be withheld or deducted, is equal to the full amount payable under
the Borrower Loan Documents and (B) an amount equal to all Taxes payable by the
Bank as a result of payments made by the Borrower (whether to a taxing authority
or to the Bank) pursuant to this Section 1.9(c). If any Tax is withheld or
deducted from, or is otherwise payable by the Borrower in connection with, any
payment due to the Bank under the Borrower Loan Documents, the Borrower shall,
within thirty (30) days after the date of such payment, furnish to the Bank the
original or a certified copy of a receipt for such Tax from the applicable
taxing authority. If any payment due to the Bank under the Borrower Loan
Documents is or is expected to be made without withholding or deducting
therefrom, or otherwise paying in connection therewith, any Tax payable to any
taxing authority, the Borrower shall, within 30 days after any request from the
Bank, furnish to the Bank a certificate from such taxing authority, or an
opinion of counsel acceptable to the Bank, in either case stating that no Tax
payable to such taxing authority was or is, as the case may be, required to be
withheld or deducted from, or otherwise paid by the Borrower in connection with,
such payment.
(d) Authorization to Charge Accounts. The Borrower hereby
--------------------------------
authorizes the Bank, if and to the extent any amount payable by the Borrower
under the Borrower Loan Documents
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is not otherwise paid when due, to charge such amount against any or all of the
accounts of the Borrower or any Wholly-Owned Subsidiary with the Bank or any of
its Affiliates (whether maintained at a branch or office located within or
without the United States), with the Borrower remaining liable for any
deficiency.
(e) Extension of Payment Dates. Whenever any payment to the
--------------------------
Bank under the Borrower Loan Documents would otherwise be due (except by reason
of acceleration) on a day that is not a Business Day, such payment shall instead
be due on the next succeeding Business Day. If the date any payment under the
Borrower Loan Documents is due is extended (whether by operation of any Borrower
Loan Document, Applicable Law or otherwise), such payment shall bear interest
for such extended time at the rate of interest applicable hereunder.
Section 1.10 Evidence of Indebtedness. The Loans and the Borrower's
------------------------
obligation to repay the Loans with interest in accordance with the terms of this
Agreement shall be evidenced by this Agreement, the records of the Bank and a
single Note. The records of the Bank shall be prima facie evidence of the Loans
and accrued interest thereon and of all payments made in respect thereof.
ARTICLE 2
CONDITIONS TO LOANS
-------------------
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Section 2.1 Conditions to Initial Loan. The obligation of the Bank
--------------------------
to make the initial Loan is subject to its receipt of each of the following, in
form and substance satisfactory to the Bank:
(a) a certificate of the Secretary or an Assistant Secretary
of the Borrower, dated the requested date for the making of such Loan,
substantially in the form of Schedule 2.1(a), to which shall be attached copies
---------------
of the resolutions and by-laws referred to in such certificate;
(b) a copy of the certificate of incorporation of the
Borrower and each Subsidiary, certified, as of a recent date, by the Secretary
of State or other appropriate official of such entity's jurisdiction of
incorporation;
(c) a good standing certificate with respect to the Borrower
and each Subsidiary, issued as of a recent date by the Secretary of State or
other appropriate official of such Person's jurisdiction of incorporation,
together with a telegram from such Secretary of State or other official,
updating the information in such certificate;
(d) an opinion of counsel for the Borrower, dated the
requested date for the making of such Loan, in the form of Schedule 2.1(d),
---------------
which opinion shall state that it may be relied upon by the Authority;
(e) a certificate in the form of Schedule 2.1(e) from the
---------------
appropriate officer of the Borrower;
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(f) a copy of each Governmental Approval and other consent
or approval listed on Schedule 3.3;
------------
(g) a duly executed Note and a duly executed copy of each of
the other Loan Documents;
(h) either (i) such duly executed UCC-1 financing statements
and other documents as the Bank may request, the filing or recordation of which
is necessary or appropriate in the Bank's determination to create or perfect a
security interest in the Collateral under Applicable Law, or (ii) evidence of
the filing or recordation of the same in such offices as the Bank shall have
specified;
(i) such instruments and other documents as the Bank may
request, the possession of which is necessary or appropriate in the Bank's
determination to create or perfect a security interest in the Collateral under
Applicable Law;
(j) copies of all insurance policies and loss payee
endorsements required under any Loan Document;
(k) the Bank shall have received and reviewed a complete
collateral audit of Borrower's accounts and contracts receivable and such
collateral audit shall be in form and substance acceptable to the Bank;
(l) the Bank shall have received executed documentation
evidencing the Borrower's successful renegotiation of royalty payments to be
made to JWP, Inc. under the Borrower's contract with JWP, Inc. such that monthly
payments (before interest) do not exceed $60,000 in the first month and $50,000
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per month thereafter and $910,000 in the aggregate and such documentation shall
be in form and substance satisfactory to the Bank and its counsel;
(m) the Bank shall have received and reviewed the draft
financial statements of the Borrower, prepared in accordance with Generally
Accepted Accounting Principles, for the fiscal year ended April 30, 1994
containing the information described in Section 5.1(c)(i) hereof, which
statements shall be satisfactory to the Bank, together with a letter of KPMG
Peat Marwick, the Borrower's accountants, to the effect that it will deliver its
unqualified opinion in respect of such financial statements within ten (10) days
after the initial Loan is made;
(n) the CDA Guaranty and related documents shall have been
executed and shall be in form and substance satisfactory to the Bank and its
counsel;
(o) the Loan Documents shall have been approved by the
Authority and evidence of such approval shall have been delivered to the Bank;
(p) either (i) such duly executed UCC-3 termination
statements and other documents as the Bank may request, the filing or
recordation of which is necessary or appropriate in the Bank's determination to
release any Lien on the assets of the Borrower other than Permitted Liens, or
(ii) evidence of the filing or recordation of the same in such offices as the
Bank shall have specified;
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(q) the Escrow Agreement shall have been executed and
delivered by all parties, provided, however, that if such Escrow Agreement is
-------- -------
not executed and delivered prior to the Bank's disbursement of the initial Loan
and the Borrower does not deliver the executed Escrow Agreement within ten (10)
days after the date of disbursement of the initial Loan, the failure to deliver
the Escrow Agreement shall constitute an Event of Default;
(r) a closing fee in the aggregate amount of $40,000 shall
have been paid to the Bank;
(s) the Borrower shall have received a payoff letter from
the The First National Bank of Boston; and
(t) all fees and expenses related to the transactions
described in the Loan Documents, including all fees and expenses related to the
collateral audit and counsel's fees and expenses, shall have been paid.
Section 2.2 Conditions to Each Loan. The obligation of the Bank to
-----------------------
make each Loan, including the initial Loan, is subject to the determination of
the Bank, in its sole and absolute discretion, that each of the following
conditions has been fulfilled:
(a) the Bank shall have received (i) a notice of borrowing
with respect to such Loan complying with the requirements of Section 1.2 and
(ii) a Borrowing Base Certificate as of a date not more than thirty (30) days
before the requested date of such Loan, provided, however, that the Borrowing
-------- -------
Base
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Certificate delivered in connection with the initial Loan shall (A) be as
of July 31, 1994 and (B) evidencing a Borrowing Base at least $500,000 in excess
of the amount of the initial Loan;
(b) each Loan Document Representation and Warranty shall be
true and correct at and as of the time such Loan is to be made, both with and
without giving effect to such Loan and all other Loans to be made at such time
and to the application of the proceeds thereof;
(c) no Default shall have occurred and be continuing at the
time such Loan is to be made or would result from the making of such Loan and
all other Loans to be made at such time or from the application of the proceeds
thereof;
(d) the Bank shall have received such materials as it may
have requested pursuant to Section 5.1(g);
(e) such Loan will not contravene any Applicable Law
applicable to the Bank; and
(f) all legal matters incident to such Loan and the other
transactions contemplated by the Loan Documents shall be satisfactory to Messrs.
Winthrop, Stimson, Putnam & Roberts, counsel for the Bank.
Except to the extent that the Borrower shall have disclosed in the
notice of borrowing, or in a subsequent notice given to the Bank prior to 5:00
p.m. (New York time) on the Business Day before the requested date for the
making of the requested Loan, that a condition specified in clause (b) or (c)
above will not be fulfilled as of the requested time for the
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making of such Loan, the Borrower shall be deemed to have made a Representation
and Warranty as of the time of the making of such Loan that the conditions
specified in such clauses have been fulfilled as of such time. No such
disclosure by the Borrower that a condition specified in clause (b) or (c) above
will not be fulfilled as of the requested time for the making of the requested
Loan shall affect the right of the Bank to not make the Loan requested to be
made by it if, in the Bank's determination, such condition has not been
fulfilled at such time.
ARTICLE 3
CERTAIN REPRESENTATIONS AND WARRANTIES
--------------------------------------
In order to induce the Bank to enter into this Agreement and to make
each Loan, the Borrower represents and warrants as follows:
Section 3.1 Organization; Power; Qualification. The Borrower and
----------------------------------
each Subsidiary are corporations duly organized, validly existing and in good
standing under the laws of their respective jurisdictions of incorporation, have
the corporate power and authority to own their respective properties and to
carry on their respective businesses as now being and hereafter proposed to be
conducted and are duly qualified and in good standing as foreign corporations,
and are authorized to do business, in all jurisdictions in which the character
of their respective properties or the nature of their respective businesses
requires such qualification or authorization, except
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for qualifications and authorizations the lack of which, singly or in the
aggregate, has not had and will not have a Materially Adverse Effect on (a) the
Borrower and the Subsidiaries taken as a whole or (b) the Collateral.
Section 3.2 Subsidiaries. Schedule 3.2 sets forth, as of the
------------ ------------
Agreement Date, all of the Subsidiaries, their jurisdictions of incorporation
and the percentages of the various classes of their Capital Stock owned by the
Borrower or another Subsidiary. The Borrower or another Subsidiary, as the case
may be, has the unrestricted right to vote, and (subject to limitations imposed
by Applicable Law) to receive dividends and distributions on, all Capital Stock
indicated on Schedule 3.2 as owned by the Borrower or such Subsidiary. All such
------------
Capital Stock have been duly authorized and issued and are fully paid and
nonassessable.
Section 3.3 Authorization; Enforceability; Required Consents;
-------------------------------------------------
Absence of Conflicts. The Borrower and each Subsidiary has the power, and has
- --------------------
taken all necessary action (including, if a corporation, any necessary
stockholder action) to authorize it, to execute, deliver and perform in
accordance with their respective terms the Loan Documents to which it is a party
and, in the case of the Borrower, to borrow hereunder in the unused amount of
the Commitment. This Agreement has been, and each of the other Loan Documents
to which the Borrower or any Subsidiary is a party when delivered to the Bank
will have been, duly executed and delivered by the Borrower and each Subsidiary
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that is a party thereto and is, or when so delivered will be, a legal, valid and
binding obligation of such Loan Party, enforceable against such Loan Party in
accordance with its terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the
enforcement of creditors' rights generally. The execution, delivery and
performance in accordance with their respective terms by the Borrower and the
Subsidiaries of the Loan Documents to which they are parties, and each borrowing
hereunder, whether or not in the amount of the unused Commitment, do not and
(absent any change in any Applicable Law or applicable Contract) will not (a)
require any Governmental Approval or any other consent or approval, including
any consent or approval of any Subsidiary or any consent or approval of the
stockholders of the Borrower or any Subsidiary, other than Governmental
Approvals and other consents and approvals that have been obtained, are final
and not subject to review on appeal or to collateral attack, are in full force
and effect and, in the case of any such required under any Applicable Law or
Contract as in effect on the Agreement Date, are listed on Schedule 3.3, or (b)
------------
violate, conflict with, result in a breach of, constitute a default under, or
result in or require the creation of any Lien (other than the Security Interest)
upon any assets of the Borrower or any Subsidiary under, (i) any Contract to
which the Borrower or any Subsidiary is a party or by which the Borrower or any
Subsidiary or any of
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their respective properties may be bound or (ii) any Applicable Law.
Section 3.4 Litigation. Except as set forth on Schedule 3.4, there
---------- ------------
are not, in any court or before any arbitrator of any kind or before or by any
governmental or non-governmental body, any actions, suits or proceedings pending
or threatened (nor, to the knowledge of the Borrower and the Subsidiaries, is
there any basis therefor) against or in any other way relating to or affecting
(a) the Borrower or any Subsidiary or any of their respective businesses or
properties, (b) any Loan Document or (c) the Collateral, except actions, suits
or proceedings that, if adversely determined, would not, singly or in the
aggregate, have a Materially Adverse Effect on (x) the Borrower and the
Subsidiaries taken as a whole, (y) any Loan Document or (z) the Collateral.
Section 3.5 Burdensome Provisions. Neither the Borrower nor any
---------------------
Subsidiary is a party to or bound by any Contract or Applicable Law, compliance
with which might have a Materially Adverse Effect on (a) the Borrower and the
Subsidiaries taken as a whole, (b) any Loan Document or (c) the Collateral.
Section 3.6 No Adverse Change or Event. Since April 30, 1994, no
--------------------------
change in the business, assets, Liabilities, financial condition, results of
operations or business prospects of the Borrower or any Subsidiary has occurred,
and no event has occurred or failed to occur, that has had or might have, either
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alone or in conjunction with all other such changes, events and failures, a
Materially Adverse Effect on (a) the Borrower and the Subsidiaries taken as a
whole, (b) any Loan Document to which the Borrower or any Subsidiary is a party
or (c) the Collateral.
Section 3.7 Additional Adverse Facts. Except for facts and
------------------------
circumstances disclosed on Schedule 3.4 or Schedule 3.7 or in the notes to the
------------ ------------
financial statements referred to in Section 5.2(a), no fact or circumstance is
known to the Borrower, as of the Agreement Date, that, either alone or in
conjunction with all other such facts and circumstances, has had or might have
(so far as the Borrower and the Subsidiaries can foresee) a Materially Adverse
Effect on (a) the Borrower and the Subsidiaries taken as a whole, (b) any Loan
Document or (c) the Collateral. If a fact or circumstance disclosed on such
Schedules or in such notes should in the future have a Materially Adverse Effect
on (x) the Borrower and the Subsidiaries taken as a whole, (y) any Loan Document
or (z) the Collateral, such Materially Adverse Effect shall be a change or event
subject to Section 3.6 notwithstanding such disclosure.
Section 3.8 Title to Property; No Liens. The Borrower has good
---------------------------
title to all property used in connection with its business except as set forth
in Schedule 3.8. There are no Liens or encumbrances on the assets of the
------------
Borrower other than Permitted Liens.
ARTICLE 4
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CERTAIN COVENANTS
-----------------
Section 4.1 Preservation of Existence and Properties; Scope of
--------------------------------------------------
Business; Compliance with Law; Payment of Taxes and Claims; Preservation of
- ---------------------------------------------------------------------------
Enforceability. From the Agreement Date and until the Repayment Date, the
- --------------
Borrower shall and shall cause each Subsidiary to (a) preserve and maintain its
corporate existence and all of its other franchises, licenses, rights and
privileges, (b) preserve, protect and obtain all Intellectual Property, and
preserve and maintain in good repair, working order and condition all other
properties, required for the conduct of its business, (c) engage only in
businesses in substantially the same fields as the businesses conducted on the
Agreement Date, (d) comply with Applicable Law, (e) pay or discharge when due
all Taxes and all Liabilities that might become a Lien on any of its properties
and (f) take all action and obtain all consents and Governmental Approvals
required so that its obligations under the Loan Documents will at all times be
legal, valid and binding and enforceable in accordance with their respective
terms, except that this Section 4.1 (other than clauses (a), in so far as it
requires any Loan Party to preserve its corporate existence, (c) and (f)) shall
not apply in any circumstance where noncompliance, together with all other
noncompliances with this Section 4.1, will not have a Materially Adverse Effect
on (x) the Borrower and the Subsidiaries taken as a whole, (y) any Loan Document
or (z) the Collateral.
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Section 4.2 Insurance. From the Agreement Date and until the
---------
Repayment Date, the Borrower shall and shall cause each Subsidiary to maintain
insurance with responsible insurance companies against at least such risks and
in at least such amounts as is customarily maintained by similar businesses, or
as may be required by Applicable Law or reasonably requested by the Bank,
including, without limitation, general liability and business interruption
insurance at levels satisfactory to the Bank and the policies for which name the
Bank as loss payee. The Borrower shall provide evidence to the Bank on each
anniversary of the Agreement Date that the Borrower carries general liability
and business interruption insurance coverage as described in the preceding
sentence.
Section 4.3 Use of Proceeds. From the Agreement Date and until the
---------------
Repayment Date, the Borrower shall and shall cause each Subsidiary to use the
proceeds of the Loans only for working capital and general corporate purposes.
None of the proceeds of any of the Loans shall be used to purchase or carry, or
to reduce or retire or refinance any credit incurred to purchase or carry, any
margin stock (within the meaning of Regulations U and X of the Board of
Governors of the Federal Reserve System) or to extend credit to others for the
purpose of purchasing or carrying any margin stock. If requested by the Bank,
the Borrower shall complete and sign Part I of a copy of Federal Reserve Form
U-1 referred to in Regulation U and deliver such copy to the Bank.
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Section 4.4 Guaranties. The Borrower shall not, and shall not
----------
permit any Subsidiary to, directly or indirectly be obligated, at any time, in
respect of any Guaranty other than a Guaranty in favor of the Bank.
Section 4.5 Liens. The Borrower shall not, and shall not permit any
-----
Subsidiary to, directly or indirectly permit to exist, at any time, any Lien
upon any of its properties or assets of any character, whether now owned or
hereafter acquired, or upon any income or profits therefrom, except that this
Section 4.5 shall not apply to Permitted Liens, provided, however, that if,
-------- -------
notwithstanding this Section 4.5, any Lien which this Section prohibits shall be
created or arise, the Liabilities of the Loan Parties under the Loan Documents
shall, to the extent such Lien attaches to any asset that does not constitute
Collateral or to any asset with respect to which such Lien would be prior to the
Security Interest, automatically be secured by such Lien equally and ratably
with the other Liabilities secured thereby, and the holder of such other
Liabilities, by accepting such Lien, shall be deemed to have agreed thereto and
to share with the Bank, on that basis, the proceeds of such Lien, whether or not
the Bank's security interest shall be perfected, provided further, however, that
-------- ------- -------
notwithstanding such equal and ratable securing and sharing, the existence of
such Lien shall constitute a default by the Borrower in the performance or
observance of this Section 4.5.
Section 4.6 Restricted Payments. The Borrower shall not, and shall
-------------------
not permit any Subsidiary to, directly or
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indirectly make or declare or otherwise become obligated to make any Restricted
Payment, provided, however, that the Borrower may purchase its Capital Stock
-------- -------
from any former employee pursuant to an agreement between such employee and the
Borrower up to an aggregate amount of $25,000 per year.
Section 4.7 Merger or Consolidation. The Borrower shall not, and
-----------------------
shall not permit any Subsidiary to, directly or indirectly merge or consolidate
with any Person, except that, if after giving effect thereto no Default would
exist, this Section 4.7 shall not apply to (a) any merger or consolidation of
the Borrower with any one or more Persons, provided that the Borrower shall be
the continuing Person, and (b) any merger or consolidation of any Subsidiary
with any one or more other Subsidiaries, provided that (i) if such Subsidiary is
a Loan Party, such Subsidiary shall be the continuing Person and (ii) the
continuing Person shall, after giving effect to such merger or consolidation, be
an Indebtedness-Free Subsidiary.
Section 4.8 Disposition of Assets. The Borrower shall not, and
---------------------
shall not permit any Subsidiary to, directly or indirectly sell, lease, license,
transfer or otherwise dispose of any asset or any interest therein, except that
this Section 4.8 shall not apply to (i) any disposition of any asset or any
interest therein in the ordinary course of business or (ii) the disposition of
obsolete or retired property, and in any event shall not apply to dispositions
of assets from the date hereof having a total aggregate value of less than
$50,000.
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Section 4.9 Taxes of Other Persons. The Borrower shall not, and
----------------------
shall not permit any Subsidiary to, directly or indirectly (a) file a
consolidated tax return with any other Person other than, in the case of the
Borrower, a Subsidiary and, in the case of any such Subsidiary, the Borrower or
a Subsidiary, or (b) except as required by Applicable Law, pay or enter into any
Contract to pay any Taxes owing by any Person other than the Borrower or a
Subsidiary.
Section 4.10 Benefit Plans. The Borrower shall not, and shall not
-------------
permit any Subsidiary to, directly or indirectly (a) have, or permit any ERISA
Affiliate to have, any Benefit Plan other than an Existing Benefit Plan as set
forth on Schedule 4.10; (b) permit any Existing Benefit Plan to be amended in
any manner that would cause the aggregate Unfunded Benefit Liabilities under all
Existing Benefit Plans to exceed $75,000; or (c) permit any Existing Benefit
Plan to have a Funded Current Liability Percentage of less than 60%.
Section 4.11 Transactions with Affiliates. The Borrower shall not,
----------------------------
and shall not permit any Subsidiary to, directly or indirectly effect any
transaction with any Affiliate on a basis less favorable than would at the time
be obtainable for a comparable transaction in arms-length dealing with an
unrelated third party.
Section 4.12 Limitation on Restrictive Covenants. The Borrower shall
-----------------------------------
not, and shall not permit any Subsidiary to, directly or indirectly permit to
exist, at any time, any
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consensual restriction limiting the ability (whether by covenant, event of
default, subordination or otherwise) of any Subsidiary to (a) pay dividends or
make any other distributions on shares of its capital stock held by the Borrower
or any other Subsidiary, (b) pay any obligation owed to the Borrower or any
other Subsidiary, (c) make any loans or advances to or investments in the
Borrower or in any other Subsidiary, (d) transfer any of its property or assets
to the Borrower or any other Subsidiary, or (e) create any Lien upon its
property or assets whether now owned or hereafter acquired or upon any income or
profits therefrom, except that this Section 4.12 shall not apply to Permitted
Restrictive Covenants.
Section 4.13 Issuance or Disposition of Capital Stock. The Borrower
----------------------------------------
shall not, and shall not permit any Subsidiary to, directly or indirectly issue
any of its Capital Stock or sell, transfer or otherwise dispose of any Capital
Stock of any Subsidiary.
Section 4.14 Capital Expenditures. The Borrower shall not,
--------------------
and shall not permit any Subsidiary to, directly or indirectly make any Capital
Expenditures during the fiscal quarter ended on the date set forth below (taken
as one accounting period) which exceed in the aggregate the amount set forth
opposite such period below:
Date Amount
- ---- ------
July 31, 1994 $150,000
October 31, 1994 $150,000
January 31, 1995 $200,000
April 30, 1995 $200,000
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<PAGE>
July 31, 1995 $400,000
October 31, 1995 $400,000
January 31, 1996 $400,000
April 30, 1996 $400,000
July 31, 1996 $400,000
Termination Date $400,000
Notwithstanding anything to the contrary contained above, to the extent that
Capital Expenditures made during any period set forth above are less than the
amounts set forth opposite such period above, such amount may be carried
forward for one period and utilized to make capital expenditures in excess of
the amount permitted above in the next subsequent period.
Section 4.15 Indebtedness. The Borrower shall not, and shall not
------------
permit any Subsidiary to, directly or indirectly have any Indebtedness, other
than (i) as set forth on Schedule 4.15, (ii) additional Indebtedness incurred
-------------
in connection with capital leases as to which the Borrower is lessee, which
Indebtedness may not exceed $400,000 in the aggregate, and (iii) the Loans.
Section 4.16 Subsidiaries. The Borrower shall not form any
------------
Subsidiaries after the Agreement Date without the prior written consent of the
Bank.
Section 4.17 Changes in Key Management. The Borrower shall not,
-------------------------
directly or indirectly, cease to employ either Constance Galley or Richard
Bankosky.
Section 4.18 Minimum Consolidated Tangible Net Worth. The Borrower
---------------------------------------
shall not permit Consolidated Tangible Net Worth at
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any time during the periods set forth below to be less than the amounts set
forth below:
Period Amount
------ ------
July 31, 1994 - October 30, 1994 $1,800,000
October 31, 1994 - January 30, 1995 $1,800,000
January 31, 1995 - April 29, 1995 $1,800,000
April 30, 1995 - July 30, 1995 $1,800,000
July 31, 1995 - October 30, 1995 $2,000,000
October 31, 1995 - January 30, 1995 $2,300,000
January 31, 1996 - April 29, 1995 $3,000,000
April 30, 1996 - July 31, 1996 $3,800,000
July 31, 1996 - Termination Date $3,800,000
Section 4.19 Ratio of Consolidated Total Liabilities to Consolidated
-------------------------------------------------------
Tangible Net Worth. The Borrower shall not permit Consolidated Total
- ------------------
Liabilities at any time during the periods set forth below to exceed the ratio
of Consolidated Tangible Net Worth set forth below:
Period Ratio
------ -----
July 31, 1994 - October 30, 1994 3.50:1
October 31, 1994 - December 30, 1994 3.50:1
January 31, 1995 - April 29, 1995 3.50:1
April 30, 1995 - July 30, 1995 3.50:1
July 31, 1995 - October 30, 1995 3.00:1
October 31, 1995 - January 30, 1996 2.50:1
January 31, 1996 - April 29, 1996 2.00:1
April 30, 1996 - July 31, 1996 2.00:1
July 31, 1996 - Termination Date 2.00:1
Section 4.20 Working Capital Ratio. The Borrower shall not permit
---------------------
the ratio of Consolidated Current Assets to Consolidated Current Liabilities to
fall below the ratios set forth below for the fiscal quarters ended on the
dates set forth below:
Date Ratio
---- -----
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<PAGE>
July 31, 1994 1.10:1
October 31, 1994 1.25:1
January 31, 1995 1.25:1
April 30, 1995 1.25:1
July 31, 1995 1.25:1
October 31, 1995 1.50:1
January 31, 1996 1.50:1
April 30, 1996 1.50:1
July 31, 1996 1.50:1
Section 4.21 Net Losses. The Borrower shall not incur net losses in
----------
more than one fiscal quarter in any fiscal year or for any fiscal year.
Section 4.22 Fixed Charge Coverage Ratio. The Borrower shall not
---------------------------
permit the Fixed Charge Coverage Ratio for any period of four (4) consecutive
fiscal quarters (taken as one accounting period) ended as of the date set forth
below to be less than the ratio set forth opposite such date below:
Date Ratio
---- -----
July 31, 1994 .80:1
October 31, 1994 .80:1
January 31, 1995 .80:1
April 30, 1995 .80:1
July 31, 1995 1.00:1
October 31, 1995 1.15:1
January 31, 1996 1.50:1
April 30, 1996 1.75:1
July 31, 1996 1.75:1
Section 4.23 Interest Coverage Ratio. The Borrower shall not permit
-----------------------
the Interest Coverage Ratio for any period of four (4) consecutive fiscal
quarters (taken as one accounting period) ended as of the date set forth below
to be less than the ratio set forth opposite such date below:
Date Ratio
---- -----
July 31, 1994 1.00:1
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<PAGE>
October 31, 1994 1.00:1
January 31, 1995 1.00:1
April 30, 1995 1.50:1
July 31, 1995 2.50:1
October 31, 1995 3.00:1
January 31, 1996 4.00:1
April 30, 1996 5.00:1
July 31, 1996 5.00:1
Section 4.24 Guaranty Agreement. The Borrower shall cause any
------------------
Subsidiary formed after the Agreement Date to execute and deliver to the Bank a
Guaranty Agreement in form and substance satisfactory to the Bank.
Section 4.25 CDA Guaranty. The Borrower shall comply with all
------------
provisions of the CDA Guaranty applicable to it and shall promptly pay all fees
and expenses owing to the Authority pursuant to the CDA Guaranty.
Section 4.26 Government Receivables. The Borrower shall not permit
----------------------
more than fifteen percent (15%) of its Eligible Receivables to consist of
Receivables arising out of transactions with a governmental body, entity or
agency.
Section 4.27 Investments. The Borrower shall not invest in (by
-----------
capital contribution or otherwise), suffer to exist any investment in, or
acquire or purchase or make any commitment to purchase the obligations or
capital stock of, or other indicia of equity rights in, any Person, or permit
any of its Subsidiaries so to do, except (a) in connection with mergers,
consolidations and acquisitions not prohibited by Section 4.7 and (b)(i) the
purchase of direct obligations of the government of the United States of
America; (ii) certificates of deposit and
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<PAGE>
Eurodollar deposits of any bank organized or licensed to conduct a banking
business under the laws of the United States or any state thereof or any bank
organized under the laws of a foreign country which is licensed to conduct
banking business under the laws of the United States or any state thereof and in
each case rated A or better by Standard & Poor's Corporation or Moody's
Investors Service, Inc. or both; (iii) stock or obligations issued to the
Borrower or its Subsidiaries in settlement of claims against others by reason of
an event of bankruptcy or a composition or the readjustment of debt or a
reorganization of any debtor of the Borrower or its Subsidiaries; (iv)
commercial paper of any corporation organized under the laws of any state of the
United States having one of the two (2) highest ratings then given by Moody's
Investors Service, Inc. or Standard & Poor's Corporation and (v) money market
mutual funds having as their primary objectives safety of principal and
liquidity and which invest in short term securities with one of the two (2)
highest ratings then given by Moody's Investors Service, Inc. or Standard &
Poor's Corporation.
Section 4.28 Relocation of Borrower. The Borrower shall not relocate
----------------------
(as that term is defined in Section 32-5a of the Connecticut General Statutes
and regulations related thereto, as the same may be amended from time to time
("Section 32-5a")) outside of the State of Connecticut or relocate within the
State of Connecticut and fail to offer employment as provided by Section 32-5a.
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ARTICLE 5
FINANCIAL STATEMENTS AND INFORMATION
------------------------------------
Section 5.1 Financial Statements and Information. From the
------------------------------------
Agreement Date and until the Repayment Date, the Borrower shall furnish to the
Bank:
(a) Monthly Financial Statements; Officer's Certificate. As
---------------------------------------------------
soon as available and in any event within thirty (30) days after the end of
each calendar month, commencing with the month of July 1994:
(i) consolidated and consolidating balance sheets of
the Borrower and the Subsidiaries as at the end of such month and the
related consolidated and consolidating statements of income and retained
earnings of the Borrower and the Subsidiaries for such month and for
the elapsed portion of the fiscal year ended with the last day of such
month, setting forth in each case in comparative form the figures for
the corresponding periods of the previous fiscal year and of the
Borrower's Business Plan for the currently fiscal year; and
(ii) a certificate with respect thereto of the
president or chief financial officer of the Borrower in the form of
Schedule 5.1(a).
---------------
(b) Quarterly Financial Statements; Officer's Certificate.
-----------------------------------------------------
As soon as available and in any event within forty-five (45) days after the
close of each of the first three (3)
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quarterly accounting periods in each fiscal year of the Borrower, commencing
with the quarterly period ending July 31, 1994:
(i) consolidated and consolidating balance sheets of the
Borrower and the Subsidiaries as at the end of such quarterly period
and the related consolidated and consolidating statements of income,
retained earnings and cash flows of the Borrower and the Subsidiaries
for such quarterly period and for the elapsed portion of the fiscal year
ended with the last day of such quarterly period, setting forth in each
case in comparative form the figures for the corresponding periods of
the previous fiscal year and of the Borrower's Business Plan for the
current fiscal year; and
(ii) a certificate with respect thereto of the president or
chief financial officer of the Borrower in the form of Schedule 5.1(b).
---------------
(c) Year-End Financial Statements; Accountants' and
-----------------------------------------------
Officer's Certificates. As soon as available and in any event within ninety
- ----------------------
(90) days after the end of each fiscal year of the Borrower, commencing with the
fiscal year ending April 30, 1995:
(i) consolidated and consolidating balance sheets of the
Borrower and the Subsidiaries as at the end of such fiscal year and the
related consolidated and consolidating statements of income, retained
earnings and cash flows of the Borrower and the Subsidiaries for such
fiscal year,
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<PAGE>
setting forth in comparative form the figures as at the end of and for
the previous fiscal year;
(ii) an audit report of KPMG Peat Marwick, or other
independent certified public accountants of recognized standing
satisfactory to the Bank, on such of the financial statements referred
to in clause (i) as are consolidated financial statements, which report
shall be in scope and substance satisfactory to the Bank;
(iii) a letter of such accountants addressed to the
Bank and in form and substance satisfactory to the Bank stating that
they have caused this Agreement to be reviewed and that, in making the
examination necessary for their report on such consolidated financial
statements, nothing came to their attention that caused them to believe
that, as of the date of such financial statements, any Default exists
or, if such is not the case, specifying such Default and its nature,
when it occurred and whether it is continuing and having attached the
calculations required to establish whether or not the Borrower was in
compliance at the end of the fiscal year with the covenants contained
in Sections 4.14 through 4.17; and
(iv) a certificate of the president or chief
financial officer of the Borrower in the form of Schedule 5.1(c).
---------------
(d) Borrowing Base Information. (i) Borrowing Base
-------------------------- --------------
Certificates. Within two (2) days after any request
- ------------
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<PAGE>
therefor by the Bank and within ten (10) Business Days after the last day of
each month, commencing with the month of August 1994, a Borrowing Base
Certificate as of the date of the request therefor or the last day of such
month, as applicable.
(ii) Notice of Ineligibility. The Borrower shall notify
-----------------------
the Bank of the failure of any Collateral included in the Borrowing Base
(as calculated in the most recently delivered Borrowing Base
Certificate) to comply with the applicable criteria of eligibility
within two (2) Business Days after the Borrower first becomes, or in the
exercise of reasonable care should have become, aware of such
noncompliance.
(e) Annual Business Plan. As soon as available, and in any
--------------------
event within ninety (90) days after the end of each fiscal year of the Borrower,
commencing with the fiscal year ending April 30, 1994, an annual business plan,
which shall include monthly projected income statements, balance sheets and cash
flow statements.
(f) Reports and Filings. (i) Promptly upon receipt
-------------------
thereof, copies of all reports, if any, submitted to the Borrower or any
Subsidiary, or the Board of Directors of the Borrower or any Subsidiary, by its
independent certified public accountants, including any management letter; (ii)
as soon as practicable, copies of all such financial statements and reports as
the Borrower or any Subsidiary shall send to its stockholders and of all
registration statements and all regular or periodic
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<PAGE>
reports that the Borrower or any Subsidiary shall file, or may be required to
file, with the Securities and Exchange Commission or any successor commission.
The Borrower hereby authorizes and directs each other Person to furnish to the
Bank any Information regarding such matters that the Bank may request from such
Person.
(g) Requested Information. From time to time and promptly
---------------------
upon request of the Bank, such Information regarding the Borrower or the Loan
Documents to which the Borrower or any Subsidiary is a party, the Loans or the
business, assets, Liabilities, financial condition, results of operations or
business prospects of the Borrower and the Subsidiaries as the Bank may request,
in each case in form and substance and certified in a manner satisfactory to the
Bank.
(h) Notice of Defaults, Material Adverse Changes and Other
------------------------------------------------------
Matters. Prompt notice of: (i) any Default, (ii) the acquisition or formation
- -------
of a new Subsidiary and, in the case of each such new Subsidiary, its name,
jurisdiction of incorporation, the percentages of the various classes of its
Capital Stock owned by the Borrower or another Subsidiary, (iii) any change in
the name of the Borrower or any Subsidiary, its jurisdiction of incorporation,
the percentages of the various classes of its Capital Stock owned by the
Borrower or another Subsidiary, (iv) the threatening or commencement of, or the
occurrence or nonoccurrence of any change or event relating to, any action, suit
or proceeding that would cause the
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Representation and Warranty contained in Section 3.4 to be incorrect if made at
such time, (v) the occurrence or nonoccurrence of any change or event that would
cause the Representation and Warranty contained in Section 3.6 to be incorrect
if made at such time, (vi) any event or condition referred to in clauses (i)
through (vii) of Section 6.1(h), whether or not such event or condition shall
constitute an Event of Default, (vii) any amendment of the certificate of
incorporation or by-laws of the Borrower or any Subsidiary that is a Loan Party
and (viii) any matter or event that has had, or may have, a Materially Adverse
Effect on Collateral.
Section 5.2 Accuracy of Financial Statements and Information.
------------------------------------------------
(a) Historical Financial Statements. The Borrower hereby
-------------------------------
represents and warrants that (i) Schedule 5.2(a) sets forth a complete and
correct list of the financial statements submitted by the Borrower to the Bank
in order to induce it to execute and deliver this Agreement, (ii) such financial
statements are complete and correct and present fairly, in accordance with
Generally Accepted Accounting Principles, the consolidated and consolidating
financial position of the Borrower and the Subsidiaries as at their respective
dates and the consolidated and consolidating results of operations, retained
earnings and, as applicable, changes in financial position or cash flows of the
Borrower and such Subsidiaries for the respective periods to which such
statements relate, and (iii)
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<PAGE>
except as disclosed or reflected in such financial statements, as at the date of
the latest balance sheet listed on Schedule 5.2(a), neither the Borrower nor any
---------------
Subsidiary had any Liability, contingent or otherwise, or any unrealized or
anticipated loss, that, singly or in the aggregate, has had or might have a
Materially Adverse Effect on the Borrower and the Subsidiaries taken as a
whole.
(b) Future Financial Statements. The financial statements
---------------------------
delivered pursuant to Section 5.1(a), 5.1(b) or 5.1(c) shall be complete and
correct and present fairly, in accordance with Generally Accepted Accounting
Principles (except for changes therein or departures therefrom that are
described in the certificate or report accompanying such statements and that
have been approved in writing by the Borrower's then current independent
certified public accountants), the consolidated and consolidating financial
position of the Borrower and the Subsidiaries as at their respective dates and
the consolidated and consolidating results of operations, retained earnings and
cash flows of the Borrower and such Subsidiaries for the respective periods to
which such statements relate, and the furnishing of the same to the Bank shall
onstitute a representation and warranty by the Borrower made on the date the
same are furnished to the Bank to that effect and to the further effect that,
except as disclosed or reflected in such financial statements, as at the
respective dates thereof, neither the Borrower nor any Subsidiary had any
Liability, contingent or
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otherwise, or any unrealized or anticipated loss, that, singly or in the
aggregate, has had or might have a Materially Adverse Effect on the Borrower and
the Consolidated Subsidiaries taken as a whole.
(c) Historical Information. The Borrower hereby represents
----------------------
and warrants that all Information furnished to the Bank by or on behalf of the
Borrower or any Subsidiary prior to the Agreement Date in connection with or
pursuant to the Loan Documents and the relationships established thereunder, at
the time the same was so furnished, but in the case of Information dated as of a
prior date, as of such date, (i) in the case of any Information prepared in the
ordinary course of business, was complete and correct in the light of the
purpose prepared, and, in the case of any Information the preparation of which
was requested by the Bank, was complete and correct in all material respects to
the extent necessary to give the Bank true and accurate knowledge of the subject
matter thereof, (ii) did not contain any untrue statement of a material fact,
and (iii) did not omit to state a material fact necessary in order to make the
statements contained therein not misleading in the light of the circumstances
under which they were made.
(d) Future Information. All Information furnished to the
------------------
Bank by or on behalf of the Borrower or any Subsidiary on or after the Agreement
Date in connection with or pursuant to the Loan Documents or in connection with
or pursuant to any amendment or modification of, or waiver of rights under,
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<PAGE>
the Loan Documents, shall, at the time the same is so furnished, but in the case
of Information dated as of a prior date, as of such date, (i) in the case of any
Information prepared in the ordinary course of business, be complete and correct
in the light of the purpose prepared, and, in the case of any Information
required by the terms of the Loan Documents or the preparation of which was
requested by the Bank, be complete and correct to the extent necessary to give
the Bank true and accurate knowledge of the subject matter thereof, (ii) not
contain any untrue statement of a material fact, and (iii) not omit to state a
material fact necessary in order to make the statements contained therein not
misleading in the light of the circumstances under which they were made, and the
furnishing of the same to the Bank shall constitute a representation and
warranty by the Borrower made on the date the same are so furnished to the
effect specified in clauses (i), (ii) and (iii).
Section 5.3 Additional Covenants Relating to Disclosure. From the
-------------------------------------------
Agreement Date and until the Repayment Date, the Borrower shall and shall cause
each Subsidiary to:
(a) Accounting Methods and Financial Records. Maintain a
----------------------------------------
System of accounting, and keep such books, records and accounts (which shall be
true and complete), as may be required or necessary to permit (i) the
preparation of financial statements required to be delivered pursuant to
Sections 5.1(a), 5.1(b) and 5.1(c) and (ii) the determination of the compliance
of
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<PAGE>
the Borrower and the Subsidiaries with the terms of the Loan Documents.
(b) Fiscal Year. Maintain the same opening and closing
-----------
dates for each fiscal year as for the fiscal year reflected in the Base
Financial Statements or, if the opening and closing dates for the fiscal year
reflected in the Base Financial Statements were determined pursuant to a
formula, determine the opening and closing dates for each fiscal year pursuant
to the same formula.
(c) Visits, Inspections and Discussions. Permit, or promptly
-----------------------------------
take such actions as are necessary or desirable in order to permit,
representatives (whether or not officers or employees) of the Bank, from time to
time, as often as may be reasonably requested, to (i) visit any of its premises
or property or any premises or property of others on which any of its property
or books and records (or books and records of others relating to it) may be
located, (ii) inspect, and verify the amount, character and condition of, any of
its property, (iii) review and make extracts from its books and records and
books and records of others relating to it, including management letters
prepared by its independent certified public accountants, (iv) cause an audit of
the Collateral to be prepared and delivered to the Bank from time to time upon
the Bank's reasonable request and at the Borrower's expense, and (v) discuss
with any Person (including its principal officers, independent certified public
accountants, suppliers, customers, debtors and other creditors)
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<PAGE>
its business, assets, Liabilities, financial condition, results of operation and
business prospects, provided, however, that, if an Event of Default is not
-------- -------
continuing, the Bank will notify the Borrower prior to discussing such matters
with any supplier or customer. Notwithstanding the foregoing, any failure by the
Bank to notify the Borrower pursuant to the preceding sentence shall not affect
the Bank's rights hereunder. The Borrower hereby authorizes and directs all
other Persons (i) to permit representatives of the Bank to make such visits,
inspections, reviews and extracts of premises, property, books and records
within their possession or control and (ii) to discuss such matters with such
representatives.
The Bank will endeavor to keep all financial information
regarding the Borrower confidential and not to release any such information to
any third party not affiliated with the Bank or the Borrower other than the
Authority, provided, however, that the Bank's noncompliance with this sentence
-------- -------
will not affect its rights under this Agreement. The Bank will request that any
representative of the Bank (other than an officer or employee of the Bank or any
of its Affiliates) execute a confidentiality agreement between such
representative and the Borrower relating to information obtained by such
representative regarding the Borrower, provided, however, that any failure of
-------- -------
such representative to execute such confidentiality agreement shall not preclude
the Bank from using the services of such representative.
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<PAGE>
ARTICLE 6
DEFAULT
-------
Section 6.1 Events of Default. Each of the following shall
-----------------
constitute an Event of Default, whatever the reason for such event and whether
it shall be voluntary or involuntary, or within or without the control of the
Borrower or any Subsidiary, or be effected by operation of law or pursuant to
any judgment or order of any court or any order, rule or regulation of any
governmental or nongovernmental body:
(a) Any payment of principal of or interest on any of the
Loans or the Notes or of the commitment fee shall not be made when and as due
(whether at maturity, by reason of notice of prepayment or acceleration or
otherwise) and in accordance with the terms of this Agreement and the Notes and,
except in the case of payments of principal, such failure shall continue for two
(2) days;
(b) Any Loan Document Representation and Warranty shall at
any time prove to have been incorrect or misleading in any material respect when
made;
(c) The Borrower shall default in the performance or
observance of
(i) any term, covenant, condition or agreement
contained in Section 4.1(a) (insofar as such Section requires the
preservation of the corporate existence
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<PAGE>
of the Borrower), 4.1(f), 4.2 through 4.28, 5.1 or 5.3 of this
Agreement;
(ii) any term, covenant, condition or agreement
contained in this Agreement (other than a term, covenant, condition or
agreement a default in the performance or observance of which is
elsewhere in this Section specifically dealt with) and, if capable of
being remedied, such default shall continue unremedied for a period of
twenty (20) days; or
(iii) any term, covenant, condition or agreement
contained in any Loan Document (other than any term, covenant, condition
or agreement a default in the performance or observance of which is
elsewhere in this Section specifically dealt with) and, if capable of
being remedied, such default shall continued unremedied for a period of
ten (10) days;
(d) (i) The Borrower or any Subsidiary shall fail to pay,
in accordance with its terms and when due and payable, any of the
principal of or interest on any Indebtedness (other than the Loans)
having a then outstanding principal amount in excess of $75,000, (ii)
the maturity of any such Indebtedness shall, in whole or in part, have
been accelerated, or any such Indebtedness shall, in whole or in part,
have been required to be prepaid prior to the stated maturity thereof,
in accordance with the provisions of any Contract evidencing, providing
for the
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creation of or concerning such Indebtedness, or (iii) (A) any event
shall have occurred and be continuing that permits (or, with the
passage of time or the giving of notice or both, would permit) any
holder or holders of such Indebtedness, any trustee or agent acting on
behalf of such holder or holders or any other Person so to accelerate
such maturity or require any such prepayment and (B) if the Contract
evidencing, providing for the creation of or concerning such
Indebtedness provides for a cure period for such event, such event
shall not be cured prior to the end of such cure period or such shorter
period of time as the Bank may specify;
(e) A default shall be continuing under any Contract (other
than a Contract relating to Indebtedness to which clause (d) of this Section 6.1
is applicable) binding upon the Borrower or any Subsidiary, except a default
that, together with all other such defaults, has not had and will not have a
Materially Adverse Effect on (i) the Borrower and the Consolidated Subsidiaries
taken as a whole, (ii) any Loan Document or (iii) the Collateral;
(f) (i) The Borrower or any Subsidiary shall (A) commence a
voluntary case under the Federal bankruptcy laws (as now or hereafter in
effect), (B) file a petition seeking to take advantage of any other laws,
domestic or foreign, relating to bankruptcy, insolvency, reorganization, winding
up or composition or adjustment of debts, (C) consent to or fail to contest in a
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timely and appropriate manner any petition filed against it in an involuntary
case under such bankruptcy laws or other laws, (D) apply for, or consent to, or
fail to contest in a timely and appropriate manner, the appointment of, or the
taking of possession by, a receiver, custodian, trustee, liquidator or the like
of itself or of a substantial part of its assets, domestic or foreign, (E) admit
in writing its inability to pay, or generally not be paying, its debts (other
than those that are the subject of bona fide disputes) as they become due, (F)
make a general assignment for the benefit of creditors, or (G) take any
corporate action for the purpose of effecting any of the foregoing; or
(ii) (A) A case or other proceeding shall be
commenced against the Borrower or any Subsidiary seeking (1) relief
under the Federal bankruptcy laws (as now or hereafter in effect) or
under any other laws, domestic or foreign, relating to bankruptcy,
insolvency, reorganization, winding up or composition or adjustment of
debts, or (2) the appointment of a trustee, receiver, custodian,
liquidator or the like of the Borrower or any Subsidiary, or of all or
any substantial part of the assets, domestic or foreign, of the Borrower
or any Subsidiary, and such case or proceeding shall continue
undismissed or unstayed for a period of thirty (30) days, or (B) an
order granting the relief requested in such case or proceeding against
the Borrower or
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any Subsidiary (including an order for relief under such Federal
bankruptcy laws) shall be entered;
(g) A judgment or order shall be entered against the
Borrower or any Subsidiary by any court, and (i) in the case of a judgment or
order for the payment of money, either (A) such judgment or order shall continue
undischarged and unstayed for a period of twenty (20) days in which the
aggregate amount of all such judgments and orders exceeds $100,000 or (B)
enforcement proceedings shall have been commenced upon such judgment or order
and (ii) in the case of any judgment or order for other than the payment of
money, such judgment or order could, in the reasonable judgment of the Bank,
together with all other such judgments or orders, have a Materially Adverse
Effect on the Borrower and the Consolidated Subsidiaries taken as a whole;
(h) (i) any Termination Event shall occur with respect to
any Benefit Plan of the Borrower, any Subsidiary or any of their respective
ERISA Affiliates, (ii) any Accumulated Funding Deficiency, whether or not
waived, shall exist with respect to any such Benefit Plan, (iii) any Person
shall engage in any Prohibited Transaction involving any such Benefit Plan, (iv)
the Borrower, any Subsidiary or any of their respective ERISA Affiliates shall
be in "default" (as defined in ERISA Section 4219(c)(5)) with respect to
payments owing to any such Benefit Plan that is a Multiemployer Benefit Plan as
a result of such Person's complete or partial withdrawal (as described in ERISA
Section 4203 or 4205) therefrom, (v) the Borrower, any
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Subsidiary or any of their respective ERISA Affiliates shall fail to pay when
due an amount that is payable by it to the PBGC or to any such Benefit Plan
under Title IV of ERISA, (vi) a proceeding shall be instituted by a fiduciary of
any such Benefit Plan against the Borrower, any Subsidiary or any of their
respective ERISA Affiliates to enforce ERISA Section 515 and such proceeding
shall not have been dismissed within thirty (30) days thereafter, or (vii) any
other event or condition shall occur or exist with respect to any such Benefit
Plan, except that no event or condition referred to in clauses (i) through (vii)
shall constitute an Event of Default if it, together with all other such events
or conditions at the time existing, has not subjected, and in the reasonable
determination of the Bank will not subject, the Borrower or any Subsidiary to
any Liability that, alone or in the aggregate with all such Liabilities, exceeds
$75,000;
(i) Any Loan Party or any Affiliate of any Loan Party
asserts, or any Loan Party or any Affiliate of any Loan Party or any other
Person institutes any proceedings seeking to establish, that (i) any provision
of the Loan Documents is invalid, not binding or unenforceable, (ii) the
Guaranty of any guarantor of the obligations hereunder is limited in amount,
(iii) the amount of obligations secured under the Security Agreement is limited,
or (iv) the Security Interest is not a valid and perfected first priority
security interest in the Collateral subject only to Permitted Liens; or
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(j) The Borrower shall fail to pay any annual guaranty fee
under the CDA Guaranty.
Section 6.2 Remedies upon Event of Default. During the continuance
------------------------------
of any Event of Default (other than one specified in Section 6.1(f)) and in
every such event, the Bank, upon notice to the Borrower, may do either or both
of the following: (a) declare, in whole or, from time to time, in part, the
principal of and interest on the Loans and the Notes and all other amounts owing
under the Borrower Loan Documents to be, and the Loans and the Notes and all
such other amounts shall thereupon and to that extent become, due and payable
and (b) terminate, in whole or, from time to time, in part, the Commitment.
Upon the occurrence of an Event of Default specified in Section 6.1(f),
automatically and without any notice to the Borrower, (a) the principal of and
interest on the Loans and the Notes and all other amounts owing under the
Borrower Loan Documents shall be due and payable and (b) the Commitment shall
terminate. Presentment, demand, protest or notice of any kind (other than the
notice provided for in the first sentence of this Section 6.2) are hereby
expressly waived.
ARTICLE 7
ADDITIONAL CREDIT FACILITY PROVISIONS
-------------------------------------
Section 7.1 Regulatory Changes. If in the determination of the Bank
------------------
(a) any Regulatory Change shall directly or indirectly (i) reduce the amount of
any sum received or receivable by the Bank with respect to any Loan or the
return
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to be earned by the Bank on any Loan, (ii) impose a cost on the Bank or
any Affiliate of the Bank that is attributable to the making or maintaining of,
or the Bank's commitment to make, any Loan, (iii) require the Bank or any
Affiliate of the Bank to make any payment on or calculated by reference to the
gross amount of any amount received by the Bank under any Loan Document or (iv)
reduce, or have the effect of reducing, the rate of return on any capital of the
Bank or any Affiliate of the Bank that the Bank or such Affiliate is required to
maintain on account of any Loan or the Bank's commitment to make any Loan and
(b) such reduction, increased cost or payment shall not be fully compensated for
by an adjustment in the applicable rates of interest payable under the Loan
Documents, then the Borrower shall pay to the Bank such additional amounts as
the Bank determines will, together with any adjustment in the applicable rates
of interest payable hereunder, fully compensate for such reduction, increased '
cost or payment. Such additional amounts shall be payable, in the case of those
applicable to prior periods, within fifteen (15) days after request by such Bank
for such payment and, in the case of those applicable to future periods, on the
dates specified, or determined in accordance with a method specified, by the
Bank. The Bank will promptly notify the Borrower of any determination made by
it referred to in clauses (a) and (b) above, but the failure to give such notice
shall not affect the Bank's right to compensation.
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Section 7.2 Capital Requirements. If, in the determination of the
--------------------
Bank, the Bank or any Affiliate of the Bank is required, under Applicable Law,
interpretations, directives, requests and guidelines (whether or not having the
force of law), to maintain capital on account of any Loan or the Bank's
commitment to make any Loan, then, upon request by the Bank, the Borrower shall
from time to time thereafter pay to the Bank such additional amounts as the Bank
determines will fully compensate for any reduction in the rate of return on the
capital that the Bank or such Affiliate is so required to maintain on account of
such Loan or commitment suffered as a result of such capital requirement. Such
additional amounts shall be payable, in the case of those applicable to prior
periods, within fifteen (15) days after request by the Bank for such payment
and, in the case of those relating to future periods, on the dates specified, or
determined in accordance with a method specified, by the Bank.
Section 7.3 Determinations. In making the determinations
--------------
contemplated by Sections 7.1 and 7.2, the Bank may make such estimates,
assumptions, allocations and the like that the Bank in good faith determines to
be appropriate, and the Bank's selection thereof in accordance with this
Section 7.3, and the determinations made by the Bank on the basis thereof,
shall be final, binding and conclusive upon the Borrower, except, in the case
of such determinations, for manifest errors in computation or transmission.
The Bank shall furnish to the Borrower upon request a certificate outlining in
reasonable
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detail the computation of any amounts claimed by it under this Article 7 and the
assumptions underlying such computations.
Section 7.4 Change of Lending Office. If an event occurs with
------------------------
respect to a Lending Office that entitles the Bank to make a claim under
Section 7.1 or 7.2, the Bank shall, if requested by the Borrower, use
reasonable efforts to designate another Lending Office or Offices the
designation of which will eliminate such operability or reduce the amount the
Bank is so entitled to claim, provided that such designation would not, in the
sole and absolute discretion of the Bank, be disadvantageous to the Bank in any
manner or contrary to Bank policy. The Bank may at any time and from time to
time change any Lending Office and shall give notice of any such change to the
Borrower. Except in the case of a change in Lending Offices made at the request
of the Borrower, the designation of a new Lending Office by the Bank shall not
entitle the Bank to make a claim under Section 7.1 or 7.2 if the operability of
such clause or such claim results solely from such designation and not from a
subsequent Regulatory Change.
ARTICLE 8
MISCELLANEOUS
-------------
Section 8.1 Notices and Deliveries. (a) Notices and
---------------------- -----------
Material Other than Collateral. Except as provided in Section 8.1(b):
- --------------------------------
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(i) Manner of Delivery. All notices, communications
------------------
and materials (including all Information) to be given or delivered
pursuant to the Borrower Loan Documents shall, except in those cases
where giving notice by telephone is expressly permitted, be given or
delivered in writing (which shall include telex and telecopy
transmissions). Notices under Sections 1.2, 1.5, 1.6 and 6.2 may be by
telephone, promptly, in the case of each notice other than one under
Section 6.2, confirmed in writing. In the case of a notice given under
Section 6.2, the Bank will endeavor to confirm its telephonic notice in
writing. In the event of a discrepancy between any telephonic notice
and any written confirmation thereof, such written confirmation shall
be deemed the effective notice except to the extent that the Bank has
acted in reliance on such telephonic notice.
(ii) Addresses. All notices, communications and
---------
materials to be given or delivered pursuant to the Borrower Loan
Documents shall be given or delivered at the following respective
addresses and telecopier and telephone numbers and to the attention of
the following individuals or departments:
(A) if to the Borrower, to it at:
TSI International Software Ltd.
45 Danbury Road
Wilton, CT 06897
Telecopier No.: 203-762-9677
Telephone No.: 203-761-8600
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Attention: Mr. Richard P. Bankosky, Vice
President, Finance and Administration,
Chief Financial Officer
(B) if to the Bank, to it at:
The Bank of New York
123 Main Street
White Plains, New York 10602
Telecopier No.: 914-421-8065
Telephone No.: 914-421-8050
Attention: Mr. Edward J. Moriarty, Vice President
with a copy to:
BNY Business Center, Inc.
3 Stamford Plaza
301 Tresser Boulevard
Stamford, CT 06901
Telecopier No.: 203-967-8006
Telephone No.: 203-967-8000
Attention: Mr. Joseph Markey, Vice President
with a copy to:
Winthrop, Stimson, Putnam & Roberts
Financial Centre
695 East Main Street
P.O. Box 6760
Stamford, CT 06904-6760
Telecopier No.: 203-965-8226
Telephone No.: 203-348-2300
Attention: Frode Jensen, III, Esq.
or at such other address or telex, telecopier or telephone number or to
the attention of such other individual or department as the party to
which such information pertains may hereafter specify for the purpose
in a notice to the other specifically captioned "Notice of Change of
Address".
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(iii) Effectiveness. Each notice and communication
-------------
and any material to be given or delivered pursuant to the Borrower Loan
Documents shall be deemed so given or delivered (A) if sent by
registered or certified mail, postage prepaid, return receipt requested,
on the third Business Day after such notice, communication or material,
addressed as above provided, is delivered to a United States post office
and a receipt therefor is issued thereby, (B) if sent by any other means
of physical delivery, when such notice, communication or material is
delivered to the appropriate address as above provided, (C) if sent by
telex, when such notice, communication or material is transmitted to the
appropriate number determined as above provided in this Section 8.1 and
the appropriate answer-back is received, (D) if sent by telecopier, when
such notice, communication or material is transmitted to the appropriate
telecopier number as above provided and is received at such number and
(E) if given by telephone, when communicated to the individual or any
member of the department specified as the individual or department to
whose attention notices, communications and materials are to be given or
delivered, or, in the case of notice by the Bank to the Borrower under
Section 6.2 given by telephone as above provided, if any individual or
any member of the department to whose attention notices, communications
and materials are to be given or delivered is unavailable at the
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time, to any other officer or employee of the Borrower, except that (x)
notices of a change of address, telex, telecopier or telephone number or
individual or department to whose attention notices, communications and
materials are to be given or delivered shall not be deemed given until
received and (y) notices, communications and materials to be given or
delivered to the Bank pursuant to Sections 1.2, 1.5 and 1.6 and Article
5 shall not be deemed given or delivered until received by the officer
of the Bank responsible, at the time, for the administration of the Loan
Documents.
(iv) Reasonable Notice. Any requirement under
-----------------
Applicable Law of reasonable notice by the Bank to the Borrower of any
event in connection with, or in any way related to, the Loan Documents
or the exercise by the Bank of any of its rights thereunder shall be met
if notice of such event is given to the Borrower in the manner
prescribed above at least ten (10) days before (A) the date of such
event or (B) the date after which such event will occur.
(b) Collateral. Until the Bank shall otherwise specify,
----------
all Collateral to be delivered to the Bank pursuant to the Borrower Loan
Documents consisting of instruments, securities, chattel paper, letters of
credit or documents shall be delivered to the Bank at the Bank's Office either
by hand delivery or by registered or certified mail, postage prepaid, return
receipt requested, in either case insured in an amount not less than the greater
of the aggregate face amount and the
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aggregate fair market value of the Collateral so being delivered. All other
Collateral to be delivered to the Bank pursuant to the Borrower Loan Documents
shall be delivered to such Person, at such address, by such means and in such
manner as the Bank may designate.
Section 8.2 Expenses; Indemnification. Whether or not any Loans
-------------------------
are made hereunder, the Borrower shall:
(a) pay or reimburse the Bank for all transfer, documentary,
stamp and similar taxes, and all recording and filing fees and taxes, payable in
connection with, arising out of, or in any way related to, the execution,
delivery and performance of the Loan Documents or the making of the Loans;
(b) pay or reimburse the Bank for all costs and expenses
(including all reasonable fees and disbursements of legal counsel, appraisers,
accountants, collateral auditors and other experts employed or retained by the
Bank) incurred by the Bank in connection with, arising out of, or in any way
related to (i) the negotiation, preparation, execution and delivery of (A) the
Loan Documents and (B) whether or not executed, any waiver, amendment or consent
thereunder or thereto, (ii) the administration of and any operations under the
Loan Documents, (iii) consulting with respect to any matter in any way arising
out of, related to, or connected with, the Loan Documents, including (A) the
protection or preservation of the Collateral, (B) the protection, preservation,
exercise or enforcement of any of its rights in, under or related to the
Collateral or the Loan
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Documents or (C) the performance of any of its obligations under or related to
the Loan Documents, (iv) protecting or preserving the Collateral or (v)
protecting, preserving, exercising or enforcing any of its rights in, under or
related to the Collateral or the Loan Documents, including defending the
Security Interest as a valid, perfected, first priority security interest in the
Collateral subject only to Permitted Liens; and
(c) indemnify and hold each Indemnified Person harmless
from and against all losses (including judgments, penalties and fines) suffered,
and pay or reimburse each Indemnified Person for all costs and expenses
(including fees and disbursements of legal counsel and other experts employed or
retained by such Indemnified Person) incurred, by such Indemnified Person in
connection with, arising out of, or in any way related to (i) any Loan Document
Related Claim (whether asserted by such Indemnified Person or the Borrower or
any other Person), including the prosecution or defense thereof and any
litigation or proceeding with respect thereto (whether or not, in the case of
any such litigation or proceeding, such Indemnified Person is a party thereto),
or (ii) any investigation, governmental or otherwise, arising out of, related
to, or in any way connected with, the Loan Documents or the relationships
established thereunder, except that the foregoing indemnity shall not be
applicable to any loss suffered by any Indemnified Person to the extent such
loss is determined by a judgment of a court that is binding on the Borrower and
such Indemnified Person,
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final and not subject to review on appeal, to be the result of acts or omissions
on the part of such Indemnified Person constituting (x) willful misconduct, (y)
knowing violations of law or (z) in the case of claims by the Borrower against
such Indemnified Person, such Indemnified Person's failure to observe any other
standard applicable to it under any of the other provisions of the Loan
Documents or, but only to the extent not waivable thereunder, Applicable
Law.
Section 8.3 Amounts Payable Due upon Request for Payment. All
--------------------------------------------
amounts payable by the Borrower under Section 8.2 and under the other provisions
of the Borrower Loan Documents shall, except as otherwise expressly provided, be
immediately due upon request for the payment thereof.
Section 8.4 Remedies of the Essence. The various rights and
-----------------------
remedies of the Bank under the Borrower Loan Documents are of the essence of
those agreements, and the Bank shall be entitled to obtain a decree requiring
specific performance of each such right and remedy.
Section 8.5 Rights Cumulative. Each of the rights and remedies of
-----------------
the Bank under the Loan Documents shall be in addition to all of its other
rights and remedies under the Loan Documents and Applicable Law, and nothing in
the Loan Documents shall be construed as limiting any such rights or remedies.
Section 8.6 Disclosures. The Bank may disclose to, and exchange and
-----------
discuss with, any other Person (the Bank and each such other Person being hereby
authorized to do so) any
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Information concerning the Collateral or the Borrower or any Subsidiary (whether
received by the Bank or such other Person in connection with or pursuant to the
Loan Documents or otherwise) for the purpose of (a) complying with Applicable
Law, (b) protecting or preserving the Collateral, (c) protecting, preserving,
exercising or enforcing any of its rights in, under or related to the Collateral
or the Loan Documents, (d) performing any of its obligations under or related to
the Loan Documents or (e) consulting with respect to any of the foregoing
matters.
Section 8.7 Amendments; Waivers. Any term, covenant, agreement or
-------------------
condition of the Borrower Loan Documents may be amended, and any right under the
Borrower Loan Documents may be waived, if, but only if, such amendment or waiver
is in writing and is signed by the Bank and, in the case of an amendment, by
the Borrower. Unless otherwise specified in such waiver, a waiver of any right
under the Borrower Loan Documents shall be effective only in the specific
instance and for the specific purpose for which given. No election not to
exercise, failure to exercise or delay in exercising any right, nor any course
of dealing or performance, shall operate as a waiver of any right of the Bank
under the Borrower Loan Documents or Applicable Law, nor shall any single or
partial exercise of any such right preclude any other or further exercise
thereof or the exercise of any other right of the Bank under the Borrower Loan
Documents or Applicable Law.
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Section 8.8 Set-Off; Suspension of Payment and Performance. The
----------------------------------------------
Bank is hereby authorized by the Borrower, at any time and from time to time,
without notice, (a) during any Event of Default, to set off against, and to
appropriate and apply to the payment of, the Liabilities of the Borrower under
the Borrower Loan Documents (whether matured or unmatured, fixed or contingent
or liquidated or unliquidated) any and all Liabilities owing by the Bank or any
of its Affiliates to the Borrower or any Subsidiary (whether payable in Dollars
or any other currency, whether matured or unmatured and, in the case of
Liabilities that are deposits, whether general or special, time or demand and
however evidenced and whether maintained at a branch or office located within or
without the United States) and (b) during any Default, to suspend the payment
and performance of such Liabilities owing by the Bank or its Affiliates and, in
the case of Liabilities that are deposits, to return as unpaid for insufficient
funds any and all checks and other items drawn against such deposits.
Section 8.9 Assignments and Participations. (a) Assignments. (i)
------------------------------ -----------
The Borrower may not assign any of its rights or obligations under the Borrower
Loan Documents without the prior written consent of the Bank, and no assignment
of any such obligation shall release the Borrower therefrom unless the Bank
shall have consented to such release in a writing specifically referring to the
obligation from which the Borrower is to be released.
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(ii) The Bank may from time to time assign any or all
of its rights and obligations under the Borrower Loan Documents and with
respect to the Collateral to one or more Persons without the consent of
the Borrower. Any assignment by the Bank of any or all of its
obligations under the Borrower Loan Documents shall release the Bank
therefrom if such assignment is to an Eligible Assignee or is consented
to in writing by the Borrower.
(b) Participations. The Bank may from time to time
--------------
sell or otherwise grant participations in any or all of its rights and
obligations under the Borrower Loan Documents and with respect to the Collateral
without the consent of the Borrower.
(c) Rights of Assignees and Participants. Each
------------------------------------
assignee of, and each holder of a participation in, the rights of the Bank under
the Borrower Loan Documents and with respect to the Collateral, if and to the
extent the applicable assignment or participation agreement so provides, (i)
shall, with respect to its assignment or participation, be entitled to all of
the rights of the Bank (as fully, in the case of a holder of a participation, as
though it were the Bank) and (ii) may exercise any and all rights of set-off or
banker's lien with respect thereto (as fully, in the case of a holder of a
participation, as though the Borrower were directly indebted to such holder for
amounts payable under the Borrower Loan Documents to which such holder is
entitled under the applicable participation agreement); provided, however, that
-------- -------
no assignee or holder of a participation
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shall be entitled to any amounts that would otherwise be payable to it with
respect to its assignment or participation under Section 1.9(b) or Section 7.1
unless (x) such amounts are payable in respect of Regulatory Changes that are
enacted, adopted or issued after the date the applicable assignment or
participation agreement was executed or (y) such amounts would have been payable
to the Bank that made such assignment or granted such participation if such
assignment had not been made or such participation granted.
Section 8.10 Governing Law. This Agreement and the Notes (including
-------------
matters relating to the Maximum Permissible Rate) shall be construed in
accordance with and governed by the law of the State of New York (without giving
effect to its choice of law principles).
Section 8.11 Judicial Proceedings; Waiver of Jury Trial. Any
------------------------------------------
judicial proceeding brought against the Borrower with respect to any Loan
Document Related Claim may be brought in any court of competent jurisdiction in
the City of New York, and, by execution and delivery of this Agreement, the
Borrower (a) accepts, generally and unconditionally, the nonexclusive
jurisdiction of such courts and any related appellate court and irrevocably
agrees to be bound by any judgment rendered thereby in connection with any Loan
Document Related Claim and (b) irrevocably waives any objection it may now or
hereafter have as to the venue of any such proceeding brought in such a court or
that such a court is an inconvenient forum. The Borrower hereby
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waives personal service of process and consents that service of process upon it
may be made by certified or registered mail, return receipt requested, at its
address specified or determined in accordance with the provisions of Section
8.1(a)(ii), and service so made shall be deemed completed on the third Business
Day after such service is deposited in the mail. Nothing herein shall affect the
right of the Bank or any other Indemnified Person to serve process in any other
manner permitted by law or shall limit the right of the Bank or any other
Indemnified Person to bring proceedings against the Borrower in the courts of
any other jurisdiction. Any judicial proceeding by the Borrower against the Bank
involving any Loan Document Related Claim shall be brought only in a court
located in the City and State of New York. THE BORROWER AND THE BANK HEREBY
WAIVE TRIAL BY JURY IN ANY JUDICIAL PROCEEDING TO WHICH THEY ARE BOTH PARTIES
INVOLVING ANY LOAN DOCUMENT RELATED CLAIM.
Section 8.12 LIMITATION OF LIABILITY. NEITHER THE BANK NOR ANY OTHER
-----------------------
INDEMNIFIED PERSON SHALL HAVE ANY LIABILITY WITH RESPECT TO, AND THE BORROWER
HEREBY WAIVES, RELEASES AND AGREES NOT TO SUE FOR, ANY SPECIAL, INDIRECT OR
CONSEQUENTIAL DAMAGES SUFFERED BY THE BORROWER IN CONNECTION WITH ANY LOAN
DOCUMENT RELATED CLAIM.
Section 8.13 Severability of Provisions. Any provision of the
--------------------------
Borrower Loan Documents that is prohibited or unenforceable in any jurisdiction
shall, as to such jurisdiction, be ineffective to the extent of such prohibition
or
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unenforceability without invalidating the remaining provisions thereof or
affecting the validity or enforceability of such provision in any other
jurisdiction. To the extent permitted by Applicable Law, the Borrower hereby
waives any provision of Applicable Law that renders any provision of the
Borrower Loan Documents prohibited or unenforceable in any respect.
Section 8.14 Counterparts. This Agreement may be signed in any
------------
number of counterparts, each of which shall be an original, with the same effect
as if the signatures thereto were upon the same instrument.
Section 8.15 Survival of Obligations. Except as otherwise expressly
-----------------------
provided therein, the rights and obligations of the Borrower, the Bank and the
other Indemnified Persons under the Borrower Loan Documents shall survive the
Repayment Date and the termination of the Security Interest.
Section 8.16 Entire Agreement. This Agreement and the Notes embody
----------------
the entire agreement between the Borrower and the Bank relating to the subject
matter hereof and supersede all prior agreements, representations and
understandings, if any, relating to the subject matter hereof.
Section 8.17 Successors and Assigns. All of the provisions of this
----------------------
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and assigns.
ARTICLE 9
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INTERPRETATION
--------------
Section 9.1 Definitional Provisions. (a) Defined Terms. For the
----------------------- -------------
purposes of this Agreement:
"Account" has the meaning ascribed to such term in the Security
-------
Agreement.
"Accumulated Funding Deficiency" has the meaning ascribed to that term
------------------------------
in Section 302 of ERISA.
"Affiliate" means, with respect to a Person, any other Person that,
---------
directly or indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with, such first Person; unless
otherwise specified, "Affiliate" means an Affiliate of the Borrower.
"Agreement" means this Agreement, including all schedules, annexes and
---------
exhibits hereto.
"Agreement Date" means the date set forth as such on the last signature
--------------
page hereof.
"Alternative Base Rate" means, for any day, a rate per annum equal to
---------------------
the higher of (i) the Prime Rate in effect on such day and (ii) the sum of the
Federal Funds Rate in effect on such day plus 1/2%.
"Applicable Law" means, anything in Section 8.10 to the contrary
--------------
notwithstanding, (i) all applicable common law and principles of equity and (ii)
all applicable provisions of all (A) constitutions, statutes, rules, regulations
and orders of governmental bodies, (B) Governmental Approvals and (C) orders,
decisions, judgments and decrees of all courts (whether at law or in equity or
admiralty) and arbitrators.
"Authority" means the Connecticut Development Authority.
---------
"Bank" means (i) The Bank of New York and (ii) any Person that has been
----
assigned any or all of the rights or obligations of the Bank pursuant to Section
8.9(a).
"Bank's Office" means the address of the Bank specified in or determined
-------------
in accordance with the provisions of Section 8.1(a)(ii).
"Base Financial Statements" means the most recent, audited, consolidated
-------------------------
balance sheet of the Borrower and the Consolidated Subsidiaries referred to in
Schedule 5.2(a) and the
- --------------
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related statements of income, retained earnings and, as applicable, changes in
financial position or cash flows for the fiscal year ended with the date of such
balance sheet.
"Benefit Plan" of any Person, means, at any time, any employee benefit
------------
plan (including a Multiemployer Benefit Plan), the funding requirements of which
(under Section 302 of ERISA or Section 412 of the Code) are, or at any time
within six years immediately preceding the time in question were, in whole or in
part, the responsibility of such Person.
"Borrower" means TSI International Software Ltd., a Delaware
--------
corporation.
"Borrower Business Plan" means the annual business plan described in
----------------------
Section 5.1(e) hereof.
"Borrower Loan Documents" means the Loan Documents to which the Borrower
-----------------------
is a party.
"Borrowing Base" means, at any time, the amount equal to the sum of (A)
--------------
80% of the Eligible Accounts Receivable, (B) 75% of the Eligible Current Key
Master Receivables and (C) 70% of the Eligible Long-term Key Master Receivables
and (D) the CDA Guaranty Amount.
"Borrowing Base Certificate" means a certificate in the form of Schedule
-------------------------- --------
5.1(d).
- ------
"Business Day" means any day other than a Saturday, Sunday or other day
------------
on which banks in New York City are authorized to close.
"Capital Expenditure" means any expenditure for fixed or capital assets
-------------------
(including, without limitation, expenditures for maintenance and repairs which
should be capitalized in accordance with generally accepted Accounting
Principles and including capitalized lease obligations).
"Capital Stock" means, with respect to any Person, (i) any share of
-------------
capital stock of such Person or (ii) any security convertible into, or any
option, warrant or other right to acquire, any share of capital stock of such
Person.
"CDA Guaranty" means a partial first loss guaranty of the Authority in
------------
the amount of 30% of the aggregate amount of Loans outstanding, to a maximum of
$1,200,000, substantially in the form of Exhibit B hereto.
---------
"CDA Guaranty Amount" means the effective dollar amount of the
-------------------
guarantee of the Authority as provided in the CDA Guaranty.
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<PAGE>
"Code" means the Internal Revenue Code of 1986.
----
"Collateral" means all property in which a Lien is created pursuant to
----------
the Loan Documents.
"Commitment" means (i) the amount set forth in Section 1.1, as the same
----------
may be reduced from time to time pursuant to Section 1.6, or (ii) as the
context may require, the obligation of the Bank to make Loans in an aggregate
unpaid principal amount not exceeding such amount.
"Consolidated Current Assets" means, at any time, the consolidated
---------------------------
current assets of the Borrower and the Subsidiaries as of such time.
"Consolidated Current Liabilities" means, at any time, (a) the sum of
--------------------------------
(i) the consolidated current liabilities of the Borrower and the Subsidiaries
(excluding the Loans) plus (ii) the current liabilities of any Person (other
than the Borrower or a Subsidiary) that are Guaranteed by the Borrower or a
Subsidiary minus (b) the current portion of deferred income-maintenance revenue
(as such term is used under Generally Accepted Accounting Principles), all as of
such time.
"Consolidated Indebtedness" means, at any time, the consolidated
-------------------------
Indebtedness of the Borrower and the Subsidiaries as of such time.
"Consolidated Tangible Net Worth" means, at any time, the consolidated
-------------------------------
stockholders' equity of the Borrower and the Subsidiaries plus deferred
income-maintenance revenue (as such term is used under Generally Accepted
Accounting Principles) as of such time.
"Consolidated Total Liabilities" means, at any time, (a) the sum of (i)
------------------------------
all consolidated liabilities of the Borrower and the Subsidiaries and (ii) all
liabilities of any Person (other than the Borrower or a Subsidiary) that are
Guaranteed by the Borrower or a Subsidiary minus (b) deferred income-maintenance
revenue (as such term is used under Generally Accepted Accounting Principles),
all as of such time.
"Contingent Obligation" shall mean, as to any Person, any obligation of
---------------------
such Person guaranteeing or intended to guarantee any Indebtedness, leases,
dividends or other obligations ("primary obligation") of any other Person (the
"primary obligor") in any manner, whether directly or indirectly, including,
without limitation, any obligation of such Person, whether or not contingent,
(i) to purchase any such primary obligation or any property constituting direct
or indirect security therefor, (ii) to advance or supply funds (x) for the
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purchase or payment of any such primary obligation or (y) to maintain working
capital or equity capital of the primary obligor or otherwise to maintain the
net worth or solvency of the primary obligor, (iii) to purchase property,
securities or services primarily for the purpose of assuring the owner of any
such primary obligation of the ability of the primary obligor to make payment of
such primary obligation or (iv) otherwise to assure or hold harmless the holder
of such primary obligation against loss in respect thereof; provided, however,
-------- -------
that the term Contingent Obligation shall not include endorsements of
instruments for deposit or collection in the ordinary course of business. The
amount of any Contingent Obligation shall, unless expressly limited by its terms
to a lesser amount, be deemed to be an amount equal to the stated or
determinable amount of the primary obligation in respect of which such
Contingent Obligation is made (or such lesser amount) or, if not stated or
determinable, the maximum reasonably anticipated liability in respect thereof
(assuming such Person is required to perform thereunder) as determined by such
Person in good faith.
"Contract" means (i) any agreement (whether bi-lateral or unilateral or
--------
executory or non-executory and whether a Person entitled to rights thereunder is
so entitled directly or as a third-party beneficiary), including an indenture,
lease or license, (ii) any deed or other instrument of conveyance, (iii) any
certificate of incorporation or charter and (iv) any bylaw.
"Current Key Master Receivables" means those portions of term contract
------------------------------
receivables arising from sales, leases or maintenance contracts by the Borrower
relating to Key Master Software, normally appearing on the Borrower's balance
sheet as "Current portion of investment in licensing contracts receivable,"
which will become due and payable in one (1) year or less.
"Debt" means any Liability that constitutes "debt" or "Debt" under
----
section 101(11) of the Bankruptcy Code or under the Uniform Fraudulent
Conveyance Act, the Uniform Fraudulent Transfer Act or any analogous Applicable
Law.
"Default" means any condition or event that constitutes an Event of
-------
Default or that with the giving of notice or lapse of time or both would, unless
cured or waived, become an Event of Default.
"Dollars" and the sign "$" mean lawful money of the United States of
-------
America.
"EBIT" means, with respect to any period, the earnings of the Borrower
----
for such period before deductions have been made for interest and taxes.
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<PAGE>
"EBITDA" means, with respect to any period, EBIT before deductions have
------
been made for depreciation and amortization.
"Eligible Account Receivable" means an Eligible Receivable that is an
---------------------------
Account.
"Eligible Assignee" means (i) any commercial bank, savings and loan
-----------------
institution or savings bank organized under the laws of the United States, or
any State thereof, and having combined capital and surplus in excess of
$100,000,000, (ii) any commercial bank organized under the laws of any other
country that is a member of the Organization for Economic Cooperation and
Development ("OECD"), or a political subdivision of any such country, and having
combined capital and surplus (or the equivalent thereof under the accounting
principles applicable thereto) in excess of $100,000,000, provided that such
bank is acting through a branch, agency or Affiliate located in the country in
which it is organized or another country that is also a member of the OECD,
(iii) any Federal Reserve Bank or any central bank of any country that is a
member of the OECD, (iv) any insurance company, pension fund, mutual fund or
other financial institution of recognized standing or (v) the Authority.
"Eligible Current Key Master Receivable" means an Eligible Receivable
--------------------------------------
that is a Current Key Master Receivable.
"Eligible Long-term Key Master Receivable" means an Eligible Receivable
----------------------------------------
that is a Long-term Key Master Receivable.
"Eligible Receivable" means an Account, Current Key Master Receivable,
-------------------
Long-term Key Master Receivable of the Borrower, or such other Receivable
requested by the Borrower and approved by the Bank which in all cases the Bank
in its sole and absolute discretion determines meets all of the following
requirements:
(i) such Receivable represents a complete bona fide transaction
that, other than in the case of leases, maintenance contracts and goods for
which payment has been made but which have not yet been shipped, requires no
further act under any circumstances on the part of the Borrower to make such
Receivable payable by the account debtor and that arises from an arm's length
transaction between unrelated parties in the ordinary course of the Borrower's
business;
(ii) such Receivable shall not (A) be unpaid more than ninety (90)
days from the date of the original invoice or (B) be payable by an account
debtor (1) more than 25% of whose Receivables have remained unpaid for more than
ninety (90) days from the dates of their original invoices, (2) more than 25% of
whose Receivables do not constitute Eligible Receivables or (3)
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whose Receivables constitute, in the Bank's determination, too high a percentage
of the aggregate amount of all outstanding Receivables;
(iii) if such Receivable arises from the sale of goods, and no part of
such goods, or any other goods shipped or delivered to such account debtor has
been returned or rejected;
(iv) such Receivable is not evidenced by chattel paper or an
instrument of any kind;
(v) the account debtor with respect to such Receivable (A) is not
insolvent or the subject of any bankruptcy or insolvency proceedings of any kind
or of any other proceeding or action, threatened or pending, that might have a
Materially Adverse Effect on the business of such account debtor, (B) has not
made an assignment for the benefit of creditors or consented to or suffered the
appointment of a receiver, trustee, liquidator, custodian or the like for it or
for a significant portion of its assets or affairs or (C) is not, in the sole
discretion of the Bank, deemed ineligible for credit or other reasons;
(vi) if the account debtor with respect thereto is located outside of
the United States (excluding for this purpose the Commonwealth of Puerto Rico),
the goods that gave rise to such Receivable were shipped after receipt by the
Borrower from the account debtor of an irrevocable letter of credit, which
letter of credit has been issued or confirmed by a financial institution
acceptable to the Bank and is in form and substance acceptable to the Bank,
payable in the full face amount of the face value of the Receivable in freely
convertible Dollars at a place of payment located within such United States or
the Bank is otherwise satisfied with the collectability of the Receivable;
(vii) such Receivable is a valid, legally enforceable obligation of
the account debtor with respect thereto and is not subject to any present, or
contingent, and no facts exist that are the basis for any future, offset or
counterclaim or other defense or dispute on the part of such account debtor;
(viii) such Receivable is (A) subject to the Security Interest and the
Security Interest is perfected as to such Receivable and (B) subject to no
Liens;
(ix) such Receivable is evidenced by an invoice or other
documentation in form acceptable to the Bank;
(x) the Borrower has observed and complied with all laws of the
jurisdiction in which the account debtor on such Receivable is located that, if
not observed and complied with, would deny to the Borrower access to the courts
of such State;
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(xi) such Receivable does not arise out of any transaction with a
Subsidiary or Affiliate of the Borrower;
(xii) such Receivable is not subject to any provision prohibiting its
assignment or requiring notice of or consent to such assignment;
(xiii) if such Receivable arises from the sale of goods, the goods the
sale of which gave rise to such Receivable (A) were not, at the time of the sale
or leasing thereof, subject to any Lien, except the Security Interest and Liens
that constitute Permitted Liens under the Security Agreement and (B) were
manufactured in accordance with all Applicable Laws including those specifying
minimum wages and working conditions;
(xiv) such Receivable is payable in freely transferable Dollars;
(xv) no covenant, representation or warranty applicable to such
Receivable under any of the Loan Documents has been breached or is inaccurate in
any respect; and
(xvi) such Receivable is not determined by the Bank to be ineligible
for any other reason generally accepted in the commercial finance business as a
reason for ineligibility.
"ERISA" means the Employee Retirement Income Security Act of 1974.
-----
"ERISA Affiliate" means, with respect to any Person, any other Person,
---------------
including a Subsidiary or other Affiliate of such first Person, that is a member
of any group of organizations within the meaning of Code Sections 414(b), (c),
(m) or (o) of which such first Person is a member.
"Escrow Agreement" means an amendment to, or replacement of, the Escrow
----------------
Agreement dated as of August 17, 1992 by and among the Borrower, The First
National Bank of Boston and State Street Bank and Trust Company of Connecticut,
N.A., in form and substance satisfactory to the Bank.
"Event of Default" means any of the events specified in Section 6.1.
----------------
"Existing Benefit Plan" means any Benefit Plan listed on Schedule 4.10.
---------------------
"Existing Guaranty" means (i) any Guaranty outstanding on the Agreement
-----------------
Date, to the extent set forth on Schedule 4.4, and (ii) any Guaranty that
------------
constitutes a renewal, extension or replacement of an Existing Guaranty, but
only if (A) at the time
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such Guaranty is entered into and immediately after giving effect thereto, no
Default would exist, (B) such Guaranty is binding only on the obligor or
obligors under the Guaranty so renewed, extended or replaced, (C) the principal
amount of the obligations Guaranteed by such Guaranty does not exceed the
principal amount of the obligations Guaranteed by the Guaranty so renewed,
extended or replaced and (D) the obligations Guaranteed by such Guaranty bear
interest at a rate per annum not exceeding the rate borne by the obligations
Guaranteed by the Guaranty so renewed, extended or replaced except for any
increase that is commercially reasonable at the time of such increase.
"Existing Lien" means a Lien set forth on Schedule 4.5 hereof.
------------- ------------
"Federal Funds Rate" means, for any day, the weighted average of the
------------------
rates on overnight Federal funds transactions with members of the Federal
Reserve System arranged by Federal funds brokers, as published for such day (or,
if such day is not a Business Day, for the next preceding Business Day) by the
Federal Reserve Bank of New York or, if such rate is not so published for any
day that is a Business Day, the average of quotations for such day on such
transactions received by the Bank from three (3) Federal funds brokers of
recognized standing selected by such bank.
"Fixed Charge Coverage Ratio" means, at any time, (a) the sum of
---------------------------
(i) EBITDA minus (u) Capital Expenditures and (v) purchased software and
capitalized product development costs plus (ii) Fixed Charges, divided by (b)
the sum of (x) Fixed Charges, (y) interest payments plus (z) the total amount of
principal due within one year on long-term debt, in each case as of such time.
"Fixed Charges" means the sum of rent, capitalized lease payments and
-------------
operating lease payments.
"Funded Current Liability Percentage" has the meaning ascribed to that
-----------------------------------
term in Code Section 401(a)(29).
"Generally Accepted Accounting Principles" means (i) in the case of the
----------------------------------------
Base Financial Statements, generally accepted accounting principles at the time
of the issuance of the Base Financial Statements and (ii) in all other cases,
the accounting principles followed in the preparation of the Base Financial
Statements.
"Governmental Approval" means any authorization, consent, approval,
---------------------
license or exemption of, registration or filing with, or report or notice to,
any governmental unit.
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<PAGE>
"Guaranty" of any Person means any obligation, contingent or otherwise,
--------
of such Person (i) to pay any Liability of any other Person or to otherwise
protect, or having the practical effect of protecting, the holder of any such
Liability against loss (whether such obligation arises by virtue of such Person
being a partner of a partnership or participant in a joint venture or by
agreement to pay, to keep well, to purchase assets, goods, securities or
services or to take or pay, or otherwise) or (ii) incurred in connection with
the issuance by a third Person of a Guaranty of any Liability of any other
Person (whether such obligation arises by agreement to reimburse or indemnify
such third Person or otherwise). The word "Guarantee" when used as a verb has
---------
the correlative meaning.
"Guaranty Agreement" means any Guaranty Agreement between any Subsidiary
------------------
of the Borrower and the Bank.
"Indebtedness" of any Person means (in each case, whether such
------------
obligation is with full or limited recourse) (i) any obligation of such Person
for borrowed money, (ii) any obligation of such Person evidenced by a bond,
debenture, note or other similar instrument, (iii) any obligation of such Person
to pay the deferred purchase price of property or services, except a trade
account payable that arises in the ordinary course of business but only if and
so long as the same is payable on customary trade terms, (iv) any obligation of
such Person as lessee under a capital lease, (v) any obligation of such Person
to purchase securities or other property that arises out of or in connection
with the sale of the same or substantially similar securities or property, (vi)
any non-contingent obligation of such Person to reimburse any other Person in
respect of amounts paid under a letter of credit or other Guaranty issued by
such other Person to the extent that such reimbursement obligation remains
outstanding after it becomes non-contingent, (vii) any obligation with respect
to an interest rate or currency swap or similar obligation obligating such
Person to make payments, whether periodically or upon the happening of a
contingency, except that if any agreement relating to such obligation provides
for the netting of amounts payable by and to such Person thereunder or if any
such agreement provides for the simultaneous payment of amounts by and to such
Person, then in each such case, the amount of such obligation shall be the net
amount thereof, (viii) any Indebtedness of others secured by (or for which the
holder of such Indebtedness has an existing right, contingent or otherwise, to
be secured by) a Lien on any asset of such Person, (ix) any Indebtedness of
others Guaranteed by such Person and (x) all Contingent Obligations of such
Person.
"Indemnified Person" means any Person that is, or at any time was, the
------------------
Bank, an Affiliate of the Bank or a director, officer, employee or agent of any
such Person.
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"Information" means data, certificates, reports, statements (including
-----------
financial statements), opinions of counsel, documents and other information.
"Intellectual Property" has the meaning ascribed to such term in the
---------------------
Security Agreement.
"Interest Coverage Ratio" means, at any time, the ratio of EBIT to total
-----------------------
interest payment liabilities on all Indebtedness of the Borrower and the
Subsidiaries as of such time.
"Interest Payment Date" means the first day of each month.
---------------------
"Key Master Software" means the object and applications code comprising
-------------------
the product or products marketed under the trademark "Key Master."
"Key Master Software Agreements" means all of the Borrower's leases and
------------------------------
maintenance agreements relating to the Key Master Software.
"Lending Office" means 123 Main Street, White Plains, New York 10602, or
--------------
such other branch or office of the Bank designated by the Bank from time to time
as the branch or office at which Alternative Base Rate Loans are to be made or
maintained. The Bank may from time to time designate separate Lending Offices
for its Alternative Base Rate Loans and CD Rate Loans, in which case all
references to the Lending Office shall be deemed to refer to either or both of
such Offices, as the context may require.
"Letter of Credit" means a standby letter of credit issued by the Bank
----------------
for the account of the Borrower pursuant to the terms of this Agreement and an
Application and Agreement for Standby Letter of Credit.
"Liability" of any Person means (in each case, whether with full or
---------
limited recourse) any indebtedness, liability, obligation, covenant or duty of
or binding upon, or any term or condition to be observed by or binding upon,
such Person or any of its assets, of any kind, nature or description, direct or
indirect, absolute or contingent, due or not due, contractual or tortious,
liquidated or unliquidated, whether arising under Contract, Applicable Law, or
otherwise, whether now existing or hereafter arising, and whether for the
payment of money or the performance or non-performance of any act.
"Lien" means, with respect to any property or asset (or any income or
----
profits therefrom) of any Person (in each case whether the same is consensual or
nonconsensual or arises by Contract, operation of law, legal process or
otherwise) (i) any
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mortgage, lien, pledge, attachment, levy or other security interest of any kind
thereupon or in respect thereof or (ii) any other arrangement, express or
implied, under which the same is subordinated, transferred, sequestered or
otherwise identified so as to subject the same to, or make the same available
for, the payment or performance of any Liability in priority to the payment of
the ordinary, unsecured creditors of such Person. For the purposes of this
Agreement, a Person shall be deemed to own subject to a Lien any asset that it
has acquired or holds subject to the interest of a vendor or lessor under any
conditional sale agreement, capital lease or other title retention agreement
relating to such asset.
"Loan" means any amount advanced by the Bank pursuant to Section 1.1,
----
and shall include the reimbursement obligations under any amount of any
outstanding Letter of Credit.
"Loan Document Related Claim" means any claim (whether civil, criminal
---------------------------
or administrative and whether sounding in tort, contract or otherwise) in any
way arising out of, related to, or connected with, the Loan Documents or the
relationships established thereunder, whether such claim arises or is asserted
before or after the Agreement Date or before or after the Repayment Date.
"Loan Document Representation and Warranty" means any "Representation
-----------------------------------------
and Warranty" as defined in any Loan Document and any other representation or
warranty made or deemed made under any Loan Document.
"Loan Documents" means (i) this Agreement, the Note, the Security
--------------
Agreement, the CDA Guaranty, the Application and Agreement for Standby Letter of
Credit and (ii) all other agreements, documents and instruments relating to,
arising out of, or in any way connected with (A) any agreement, document or
instrument referred to in clause (i), (B) any other agreement, document or
instrument referred to in this clause (ii) or (C) any of the transactions
contemplated by any agreement, document or instrument referred to in clause (i)
or in this clause (ii).
"Loan Party" means any Person (other than the Bank) that is a party to
----------
Loan Document.
"Long-term Key Master Receivables" means those portions of term contract
--------------------------------
receivables arising from sales, leases or maintenance contracts by the Borrower
relating to Key Master Software, normally appearing on the Borrower's balance
sheet as "Investment in licensing contracts receivable," which, pursuant to the
original terms of such contracts and not as a result of any renegotiation
thereof, will become due and payable more than one (1) year hence.
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"Materially Adverse Effect" means, (i) with respect to any Person, any
-------------------------
materially adverse effect on such Person's business, assets, Liabilities,
financial condition, results of operations or business prospects, (ii) with
respect to a group of Persons "taken as a whole", any materially adverse effect
on such Persons' business, assets, Liabilities, financial conditions, results of
operations or business prospects taken as a whole on, where appropriate, a
consolidated basis in accordance with Generally Accepted Accounting Principles,
(iii) with respect to any Loan Document, any adverse effect, WHETHER OR NOT
MATERIAL, on the binding nature, validity or enforceability thereof as an
obligation of the Borrower and (iv) with respect to any Collateral pledged by
the Borrower, a materially adverse effect on its value as Collateral or its
utility in the Borrower's business or an adverse effect, WHETHER OR NOT
MATERIAL, on the validity, perfection, priority or enforceability of the
Security Interest therein.
"Maximum Permissible Rate" means, with respect to interest payable on
------------------------
any amount, the rate of interest on such amount that, if exceeded, could, under
Applicable Law, result in (i) civil or criminal penalties being imposed on the
payee or (ii) the payee's being unable to enforce payment of (or, if collected,
to retain) all or any part of such amount or the interest payable thereon.
"Multiemployer Benefit Plan" means any Benefit Plan that is a
--------------------------
multiemployer plan as defined in Section 4001(a)(3) of ERISA.
"Note" means the promissory note in the form of Exhibit A.
---- ---------
"PBGC" means the Pension Benefit Guaranty Corporation.
----
"Permitted Guaranty" means any Guaranty that is (i) an endorsement of a
------------------
check for collection in the ordinary course of business or (ii) a Guaranty of
and only of the obligations of the Borrower under the Loan Documents.
"Permitted Lien" means (i) an Existing Lien, (ii) a Lien created in
--------------
favor of the Secured Party under the Collateral Documents, (iii) a Lien
consented to in writing by the Secured Party and (iv) a Lien created in
connection with the Indebtedness permitted by Section 4.15(ii) hereof.
"Permitted Restrictive Covenant" means (i) any covenant or restriction
------------------------------
contained in any Loan Document, (ii) any covenant or restriction binding upon
any Person at the time such Person becomes a Subsidiary of the Borrower if the
same is not created in contemplation thereof, (iii) any covenant or restriction
of the type contained in Section 4.5 that is contained in any
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<PAGE>
Contract evidencing or providing for the creation of or concerning Purchase
Money Indebtedness, (iv) any covenant or restriction described in Schedule 4.12,
-------------
but only to the extent such covenant or restriction is there identified by
specific reference to the provision of the Contract in which such covenant or
restriction is contained, or (v) any covenant or restriction that (A) is not
more burdensome than an existing Permitted Restrictive Covenant that is such by
virtue of clause (ii), (iii), (iv) or (v), (B) is contained in a Contract
constituting a renewal, extension or replacement of the Contract in which such
existing Permitted Restrictive Covenant is contained and (C) is binding only on
the Person or Persons bound by such existing Permitted Restrictive Covenant.
"Person" means any individual, sole proprietorship, corporation,
------
partnership, trust, unincorporated organization, mutual company, joint stock
company, estate, union, employee organization, government or any agency or
political subdivision thereof or, for the purpose of the definition of "ERISA
Affiliate", any trade or business.
"Post-Default Rate" means the rate otherwise applicable under Section
-----------------
1.3(a) plus 3%.
"Prime Rate" means the prime commercial lending rate of The Bank of New
----------
York, as publicly announced to be in effect from time to time. The Prime Rate
shall be adjusted automatically, without notice, on the effective date of any
change in such prime commercial lending rate. The Prime Rate is not necessarily
The Bank of New York's lowest rate of interest.
"Prohibited Transaction" means any transaction that is prohibited under
----------------------
Code Section 4975 or ERISA Section 406 and not exempt under Code Section 4975 or
ERISA Section 408.
"Purchase Money Indebtedness" means (i) Indebtedness of the Borrower
---------------------------
that is incurred to finance part or all of (but not more than) the purchase
price of a tangible asset, provided that (A) neither the Borrower nor any
--------
Subsidiary had at any time prior to such purchase any interest in such asset
other than a security interest or an interest as lessee under an operating lease
and (B) such Indebtedness is incurred within thirty (30) days after such
purchase, or (ii) Indebtedness that (A) constitutes a renewal, extension or
refunding of, but not an increase in the principal amount of, Purchase Money
Indebtedness that is such by virtue of clause (i) or (ii) and (B) bears interest
at a rate per annum that is commercially reasonable at the time such
Indebtedness is incurred.
"Receivable" has the meaning ascribed to such term in the Security
----------
Agreement.
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"Regulation D" means Regulation D of the Board of Governors of the
------------
Federal Reserve System.
"Regulatory Change" means any Applicable Law, interpretation, directive,
-----------------
request or guideline (whether or not having the force of law), or any change
therein or in the administration or enforcement thereof, that becomes effective
or is implemented or first required or expected to be complied with after the
Agreement Date, whether the same is (i) the result of an enactment by a
government or any agency or political subdivision thereof, a determination of a
court or regulatory authority, or otherwise or (ii) enacted, adopted, issued or
proposed before or after the Agreement Date, including any such that imposes,
increases or modifies any Tax, reserve requirement, insurance charge, special
deposit requirement, reporting or other requirement based on highly leveraged
transactions, assessment or capital adequacy requirement, but excluding any such
that imposes, increases or modifies any income or franchise tax imposed upon the
Bank by any jurisdiction (or any political subdivision thereof) in which the
Bank or any Lending Office is located.
"Repayment Date" means the later of (i) the termination of the
--------------
Commitment (whether as a result of the occurrence of the Termination Date,
reduction to zero pursuant to Section 1.6 or termination pursuant to Section
6.2) and (ii) the payment in full of the Loans and all other amounts payable or
accrued hereunder.
"Reportable Event" means, with respect to any Benefit Plan of any
----------------
Person, (i) the occurrence of any of the events set forth in ERISA Sections
4043(b) (other than a Reportable Event as to which the provision of 30 days'
notice to the PBGC is waived under applicable regulations), 4068(f) or 4063(a)
or the regulations thereunder with respect to such Benefit Plan, (ii) any event
requiring such Person or any of its ERISA Affiliates to provide security to such
Benefit Plan under Code Section 401(a)(29) or (iii) any failure to make a
payment required by Code Section 412(m) with respect to such Benefit Plan.
"Representation and Warranty" means any representation or warranty made
---------------------------
pursuant to or under (i) Section 2.2, Article 3, Section 5.2 or any other
provision of this Agreement or (ii) any amendment to, or waiver of rights under,
this Agreement, WHETHER OR NOT, IN THE CASE OF ANY REPRESENTATION OR WARRANTY
REFERRED TO IN CLAUSE (i) OR (ii) OF THIS DEFINITION (EXCEPT, IN EACH CASE, TO
THE EXTENT OTHERWISE EXPRESSLY PROVIDED), THE INFORMATION THAT IS THE SUBJECT
MATTER THEREOF IS WITHIN THE KNOWLEDGE OF THE BORROWER.
"Restricted Payment" means (i) any dividend or other distribution on
------------------
account of any shares of the Borrower's capital stock, (ii) any payment on
account of the principal of or
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<PAGE>
premium, if any, on any Indebtedness convertible into shares of the Borrower's
capital stock or (iii) any payment on account of any purchase, redemption,
retirement, exchange or conversion of any of the Borrower's Capital Stock. For
the purposes of this definition a "payment" shall include the transfer of any
asset or the issuance of any Indebtedness or other obligation (the amount of any
such payment to be the fair market value of such asset or the amount of such
obligation, respectively).
"Secured Party" has the meaning ascribed to such term in the Security
-------------
Agreement.
"Security Agreement" means the Security Agreement, dated as of the date
------------------
hereof, between TSI International Software Ltd. and The Bank of New York.
"Security Interest" means the Liens created, or purported to be created,
-----------------
by the Loan Documents.
"Subsidiary" means, with respect to any Person, any other Person (i)
----------
securities of which having ordinary voting power to elect a majority of the
board of directors (or other persons having similar functions) or (ii) other
ownership interests of which ordinarily constituting a majority voting interest,
are at the time, directly or indirectly, owned or controlled by such first
Person, or by one or more of its Subsidiaries, or by such first Person and one
or more of its Subsidiaries; unless otherwise specified, "Subsidiary" means a
Subsidiary of the Borrower.
"Tax" means any Federal, State or foreign tax, assessment or other
---
governmental charge or levy (including any withholding tax) upon a Person or
upon its assets, revenues, income or profits.
"Termination Date" means the second anniversary of the Agreement Date.
----------------
"Termination Event" means, with respect to any Benefit Plan, (i) any
-----------------
Reportable Event with respect to such Benefit Plan, (ii) the termination of such
Benefit Plan, or the filing of a notice of intent to terminate such Benefit
Plan, or the treatment of any amendment to such Benefit Plan as a termination
under ERISA Section 4041(c), (iii) the institution of proceedings to terminate
such Benefit Plan under ERISA Section 4042 or (iv) the appointment of a trustee
to administer such Benefit Plan under ERISA Section 4042.
"Unfunded Benefit Liabilities" means, with respect to any Benefit Plan
----------------------------
at any time, the amount of unfunded benefit liabilities of such Benefit Plan at
such time as determined under ERISA Section 4001(a)(18).
#90068563.
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<PAGE>
"Wholly-Owned Subsidiary" means, with respect to any Person, any
-----------------------
Subsidiary of such Person all of the Capital Stock and all other ownership
interests and rights to acquire ownership interests of which (except directors'
qualifying shares) are, directly or indirectly, owned or controlled by such
Person or one or more Wholly-Owned Subsidiaries of such Person or by such Person
and one or more of such Subsidiaries; unless otherwise specified, "Wholly-Owned
Subsidiary" means a Wholly-Owned Subsidiary of the Borrower.
(b) Other Definitional Provisions. (i) Except as otherwise
-----------------------------
specified herein, all references herein (A) to any Person shall be deemed to
include such Person's successors and assigns, (B) to any Applicable Law defined
or referred to herein shall be deemed references to such Applicable Law or any
successor Applicable Law as the same may have been or may be amended or
supplemented from time to time and (C) to any Loan Document or Contract defined
or referred to herein shall be deemed references to such Loan Document or
Contract (and, in the case of any Note or other instrument, any instrument
issued in substitution therefor) as the terms thereof may have been or may be
amended, supplemented, waived or otherwise modified from time to time.
(ii) When used in this Agreement, the words "herein",
"hereof" and "hereunder" and words of similar import shall refer
to this Agreement as a whole and not to any provision of this
Agreement, and the words "Article", "Section", "Annex",
"Schedule" and "Exhibit" shall refer to Articles and Sections
of, and Annexes, Schedules and Exhibits to, this Agreement
unless otherwise specified.
#90068563.
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<PAGE>
(iii) Whenever the context so requires, the neuter
gender includes the masculine or feminine, the masculine gender
includes the feminine, and the singular number includes the
lural, and vice versa.
(iv) Any item or list of items set forth following
the word "including", "include" or "includes" is set forth only
for the purpose of indicating that, regardless of whatever other
items are in the category in which such item or items are
"included", such item or items are in such category, and shall
not be construed as indicating that the items in the category in
which such item or items are "included" are limited to such
items or to items similar to such items.
(v) Each authorization in favor of the Bank or any
other Person granted by or pursuant to this Agreement shall be
deemed to be irrevocable and coupled with an interest.
(vi) Except as otherwise specified herein, all
references herein to the Bank or any Loan Party shall be deemed
to refer to such Person however designated in Loan Documents, so
that (A) a reference to rights of the Bank under the Loan
Documents shall be deemed to include the rights of such Person
as the Guaranteed Party under the Guaranty Agreement, as the
Secured Party under the Security Agreement and (B) a reference
to costs incurred by the Bank in connection with the Loan
Documents shall be deemed to
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<PAGE>
include costs incurred by such Person as the Guaranteed Party
under the Guaranty Agreement or as the Secured Party under the
Security Agreement.
(vii) Except as otherwise specified therein, all terms
defined in this Agreement shall have the meanings herein
ascribed to them when used in the Notes or any certificate,
opinion or other document delivered pursuant hereto or thereto.
Section 9.2 Accounting Matters. Unless otherwise specified herein,
------------------
all accounting determinations hereunder and all computations utilized by the
Borrower in complying with the covenants contained herein shall be made, all
accounting terms used herein shall be interpreted, and all financial statements
required to be delivered hereunder shall be prepared, in accordance with
Generally Accepted Accounting Principles, except, in the case of such financial
statements, for departures from Generally Accepted Accounting Principles that
may from time to time be approved in writing by the independent certified public
accountants who are at the time, in accordance with Section 5.1(c), reporting on
the Borrower's financial statements.
Section 9.3 Representations and Warranties. All Representations and
------------------------------
Warranties shall be deemed made (a) in the case of any Representation and
Warranty contained in this Agreement at the time of its initial execution and
delivery, at and as of the Agreement Date, (b) in the case of any Representation
and Warranty contained in this Agreement or any
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<PAGE>
other document at the time any Loan is made, at and as of such time and (c) in
the case of any particular Representation and Warranty, wherever contained, at
such other time or times as such Representation and Warranty is made or deemed
made in accordance with the provisions of this Agreement or the document
pursuant to, under or in connection with which such Representation and Warranty
is made or deemed made.
Section 9.4 Captions. Captions to Articles, Sections and
--------
subsections of, and Annexes, Schedules and Exhibits to, this Agreement are
included for convenience of reference only and shall not constitute a part of
this Agreement for any other purpose or in any way affect the meaning or
construction of any provision of this Agreement.
#90068563.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized officers all as of the Agreement Date.
TSI INTERNATIONAL SOFTWARE LTD.
By /s/ Richard Bankosky
------------------------------
Name: Richard Bankosky
Title: Vice President, Finance &
Administration,
Chief Financial Officer
THE BANK OF NEW YORK
By /s/ David M Duffy
-----------------------------
Name:
Title: Vice President
Agreement Date: August 22, 1994
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<PAGE>
AMENDMENT NO. 1 TO
CREDIT AGREEMENT
----------------
This AMENDMENT NO. 1 (this "Amendment") to the Credit Agreement Dated as
of July 31, 1994 (the "Credit Agreement") between TSI INTERNATIONAL SOFTWARE
LTD., a Delaware corporation (the "Borrower"), and THE BANK OF NEW YORK (the
"Bank") is made and entered into as of the 27th day of April, 1995.
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, the Borrower and the Bank wish to amend certain provisions of
the Credit Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Borrower and the Bank agree as
follows:
1. Section 4.17 of the Credit Agreement is hereby amended to read
in its entirety as follows:
The Borrower shall not, directly or indirectly, cease to employ
either Constance Galley or Richard Bankosky; provided, however,
-------- -------
that the Borrower may cease to employ Richard Bankosky if the
Borrower within one hundred and eighty (180) days after any such
cessation of employment appoints a chief financial officer that
is acceptable to the Bank to replace Mr. Bankosky.
2. Section 8.1(a)(ii)(A) of the Credit Agreement is hereby amended
to read in its entirety as follows:
if to the Borrower, to it at:
TSI International Software Ltd.
45 Danbury Road
Wilton, CT 06897
Telecopier No.: 203-762-9677
-1-
<PAGE>
Telephone No.: 203-761-8600
Attention: Chief Financial Officer
3. All references in the Credit Agreement to "this Agreement,"
"herein," "hereof" and "hereunder" shall mean the Credit Agreement as amended by
this Amendment.
4. This Amendment shall be construed in accordance with and
governed by the laws of the State of New York (without giving effect to its
choice of law principles).
5. This Amendment may be executed in one or more counterparts, each
of which shall be deemed an original instrument, and all such counterparts
together shall constitute but one agreement.
-2-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their duly authorized officers as of the date first above written.
TSI INTERNATIONAL SOFTWARE LTD.
By: /s/ Constance Galley
---------------------------
Name:
Title:
THE BANK OF NEW YORK
By: /s/ Edward Moriarty
---------------------------
Name:
Title:
Acknowledged and consented to as
of the 27th day of April, 1995:
CONNECTICUT DEVELOPMENT AUTHORITY
By: /s/ Richard Graff
----------------------------
Name:
Title:
-3-
<PAGE>
AMENDMENT NO. 2 TO
CREDIT AGREEMENT
----------------
This AMENDMENT NO. 2 (this "Amendment") to the Credit Agreement Dated as
of July 31, 1994 between TSI INTERNATIONAL SOFTWARE LTD., a Delaware corporation
(the "Borrower"), and THE BANK OF NEW YORK (the "Bank"), as amended by Amendment
No. 1 thereto dated as of April 27, 1995 (as so amended, the "Credit
Agreement"), is made and entered into as of the 30th day of January, 1996.
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, the Borrower and the Bank wish to amend certain provisions of
the Credit Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Borrower and the Bank agree as
follows:
1. Section 4.18 of the Credit Agreement is hereby amended to read
in its entirety as follows:
The Borrower shall not permit Consolidated Tangible Net Worth at
any time during the periods set forth below to be less than the
amounts set forth below:
Period Amount
------ ------
July 31, 1994 - October 30, 1994 $1,800,000
October 31, 1994 - January 30, 1995 $1,800,000
January 31, 1995 - April 29, 1995 $1,800,000
April 30, 1995 - July 30, 1995 $1,800,000
July 31, 1995 - October 30, 1995 $2,000,000
October 31, 1995 - January 30, 1996 $2,300,000
January 31, 1996 - April 29, 1996 $3,500,000
April 30, 1996 - July 31, 1996 $3,800,000
-1-
<PAGE>
July 31, 1996 - Termination Date $3,800,000
2. Section 4.19 of the Credit Agreement is hereby amended to read
in its entirety as follows:
The Borrower shall not permit the ratio of Consolidated Total
Liabilities to Consolidated Tangible Net Worth at any time
during the periods set forth below to exceed the ratio set forth
below:
Period Ratio
------ -----
July 31, 1994 - October 30, 1994 3.50:1
October 31, 1994 - January 30, 1995 3.50:1
January 31, 1995 - April 29, 1995 3.50:1
April 30, 1995 - July 30, 1995 3.50:1
July 31, 1995 - October 30, 1995 3.00:1
October 31, 1995 - January 30, 1996 2.50:1
January 31, 1996 - April 29, 1996 1.75:1
April 30, 1996 - July 31, 1996 1.75:1
July 31, 1996 - Termination Date 1.75:1
3. Section 4.22 of the Credit Agreement is hereby amended to read
in its entirety as follows:
The Borrower shall not permit the Fixed Charge Coverage Ratio
for any period of four (4) consecutive fiscal quarters (taken as
one accounting period) ended as of the date set forth below to
be less than the ratio set forth opposite such date below:
Date Ratio
---- -----
July 31, 1994 .80:1
October 31, 1994 .80:1
January 31, 1995 .80:1
April 30, 1995 .80:1
July 31, 1995 1.00:1
October 31, 1995 1.15:1
January 31, 1996 1.25:1
April 30, 1996 1.40:1
July 31, 1996 1.40:1
4. Section 4.23 of the Credit Agreement is hereby amended to read
in its entirety as follows:
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<PAGE>
The Borrower shall not permit the Interest Coverage Ratio for
any period of four (4) consecutive fiscal quarters (taken as one
accounting period) ended as of the date set forth below to be
less than the ratio set forth opposite such date below:
Date Ratio
---- -----
July 31, 1994 1.00:1
October 31, 1994 1.00:1
January 31, 1995 1.00:1
April 30, 1995 1.50:1
July 31, 1995 2.50:1
October 31, 1995 3.00:1
January 31, 1996 3.50:1
April 30, 1996 3.50:1
July 31, 1996 3.50:1
5. All references in the Credit Agreement to "this Agreement,"
"herein," "hereof" and "hereunder" shall mean the Credit Agreement as amended by
this Amendment.
6. This Amendment shall be construed in accordance with and
governed by the laws of the State of New York (without giving effect to its
choice of law principles).
7. This Amendment may be executed in one or more counterparts, each
of which shall be deemed an original instrument, and all such counterparts
together shall constitute but one agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their duly authorized officers as of the date first above written.
TSI INTERNATIONAL SOFTWARE LTD.
By: /s/ Ira Gerard
---------------------------
-3-
<PAGE>
Name:
Title:
THE BANK OF NEW YORK
By: /s/ Donald Craig
------------------------
Name:
Title:
Acknowledged and consented to as
of the 30th day of January, 1996:
CONNECTICUT DEVELOPMENT AUTHORITY
By: /s/ Richard Graff
-----------------------------
Name:
Title:
-4-
<PAGE>
AMENDMENT NO. 3 TO
CREDIT AGREEMENT
----------------
This AMENDMENT NO. 3 (this "Amendment") to the Credit Agreement Dated as
of July 31, 1994 between TSI INTERNATIONAL SOFTWARE LTD., a Delaware corporation
(the "Borrower"), and THE BANK OF NEW YORK (the "Bank"), as amended by Amendment
No. 1 thereto dated as of April 27, 1995 and Amendment No. 2 thereto dated as of
January 30, 1996 (as so amended, the "Credit Agreement"), is made and entered
into as of the 21st day of August, 1996.
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, the Borrower and the Bank wish to amend certain provisions of
the Credit Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Borrower and the Bank agree as
follows:
1. The definition of the term "Termination Date" in Section 9.1(a)
of the Agreement is hereby amended to read in its entirety as follows:
"Termination Date" means the date that is forty-five (45) days
----------------
after the second anniversary of the Agreement Date.
-1-
<PAGE>
2. All references in the Credit Agreement to "this Agreement,"
"herein," "hereof" and "hereunder" shall mean the Credit Agreement as amended by
this Amendment.
3. This Amendment shall be construed in accordance with and
governed by the laws of the State of New York (without giving effect to its
choice of law principles).
4. This Amendment may be executed in one or more counterparts, each
of which shall be deemed an original instrument, and all such counterparts
together shall constitute but one agreement.
-2-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their duly authorized officers as of the date first above written.
TSI INTERNATIONAL SOFTWARE LTD.
By: /s/ Ira Gerard
--------------------------
Name:
Title:
THE BANK OF NEW YORK
By: /s/ David Duffy
--------------------------
Name:
Title:
Acknowledged and consented to as
of the 21st day of August, 1996:
CONNECTICUT DEVELOPMENT AUTHORITY
By: /s/ Richard Graff
----------------------------
Name:
Title:
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<PAGE>
AMENDMENT NO. 4 TO
CREDIT AGREEMENT
----------------
This AMENDMENT NO. 4 (this "Amendment") to the Credit Agreement dated as
of July 31, 1994 between TSI INTERNATIONAL SOFTWARE LTD., a Delaware corporation
(the "Borrower"), and THE BANK OF NEW YORK (the "Bank"), as amended by Amendment
No. 1 thereto dated as of April 27, 1995, Amendment No. 2 thereto dated as of
January 30, 1996 and Amendment No. 3 thereto dated as of August 21, 1996 (as so
amended, the "Credit Agreement"), is made and entered into as of the 4th day of
October, 1996.
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, the Borrower and the Bank wish to amend certain provisions of
the Credit Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Borrower and the
Bank agree as follows:
1. The definition of the term "Termination Date" in Section 9.1(a)
of the Credit Agreement is hereby deleted in its entirety and replaced with the
following:
"Termination Date" means the date that is ninety (90) days after
the second anniversary of the Agreement Date.
2. All references in the Credit Agreement to "this Agreement,"
"herein," "hereof" and "hereunder" shall mean the Credit Agreement as amended by
this Amendment.
3. This Amendment shall be construed in accordance with and
governed by the laws of the State of New York (without giving effect to its
choice of law principles).
4. This Amendment may be executed in one or more counterparts, each
of which shall be deemed an original instrument, and all such counterparts
together shall constitute but one agreement.
-1-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their duly authorized officers as of the date first above written.
TSI INTERNATIONAL SOFTWARE LTD.
By: /s/ Ira Gerard
---------------------------
Name:
Title:
THE BANK OF NEW YORK
By: /s/ David Duffy
---------------------------
Name:
Title:
Acknowledged and consented to as
of the 4th day of October, 1996:
CONNECTICUT DEVELOPMENT AUTHORITY
By: /s/ Richard Graff
----------------------------
Name:
Title:
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<PAGE>
AMENDMENT NO. 5 TO
CREDIT AGREEMENT
----------------
This AMENDMENT NO. 5 (this "Amendment") to the Credit Agreement
dated as of July 31, 1994 between TSI INTERNATIONAL SOFTWARE LTD., a Delaware
corporation (the "Borrower"), and THE BANK OF NEW YORK (the "Bank"), as amended
by Amendment No. 1 thereto dated as of April 27, 1995, Amendment No. 2 thereto
dated as of January 30, 1996, Amendment No. 3 thereto dated as of August 21,
1996 and Amendment No. 4 thereto dated as of October 4, 1996 (as so amended, the
"Credit Agreement"), is made and entered into as of the 18th day of November,
1996.
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Borrower and the Bank wish to amend certain
provisions of the Credit Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the Borrower and the Bank
agree as follows:
1. Section 1.1 of the Credit Agreement is hereby deleted in
its entirety and replaced with the following:
Section 1.1 Commitment to Lend. Upon the terms and subject
------------------
to the conditions of this Agreement, the Bank agrees to make, from time
to time during the period from the Agreement Date through the
Termination Date, one or more Loans to the Borrower in an aggregate
unpaid principal amount not exceeding at any time the lesser of (a) the
Commitment at such time (which amount includes the aggregate stated
amount of Letters of Credit issued for the account of the Borrower) and
(b) the Borrowing Base at such time. Subject to Section 1.11 and the
other terms and conditions of this Agreement, the Loans may, at the
option of the Borrower, be made as, and from time to time continued as
or converted into, Prime Rate Loans or LIBOR Rate Loans of any permitted
Type, or any combination thereof. The Loans will be made at the rate of
interest established pursuant to the terms of Section 1.4 below. The
amount of the Commitment on the Agreement Date is $4,000,000.
2. Section 1.2 of the Credit Agreement is hereby deleted in
its entirety and replaced with the following:
Section 1.2 Manner of Borrowing. (a) The Borrower shall
-------------------
give the Bank notice (which shall be irrevocable) no later than 10:00
a.m. (New York time) on, in the case of Prime Rate Loans, the Business
Day, and, in the case of LIBOR Rate Loans, the second Business Day,
before the requested date for the making of a Loan. Each such notice
-1-
<PAGE>
shall be in the form of Schedule 1.2 and shall specify (i) the requested
------------
date for the making of the requested Loan, which shall be a Business
Day,(ii) the Type or Types of Loans requested and (iii) the amount of
each such Type of Loan, which amount shall be, in the case of each such
Type of Loan, not less than $50,000 and in multiples of $50,000, or, if
less, the maximum amount that can then be borrowed hereunder. Each Loan
so requested shall be disbursed by the Bank not later than 12:00 noon
(New York time) on the requested date therefor in Dollars in funds
immediately available to the Borrower by credit to an account of the
Borrower at the Bank's Office or in such other manner as may have been
specified in the applicable notice and as shall be acceptable to the
Bank.
(b) At the time of any drawing under a Letter of Credit, the
resulting reimbursement obligation of the Borrower (regardless of
whether the amount complies with the requirements of Section 1.2(a)
(iii)) shall immediately become a Prime Rate Loan and no notice of
borrowing as described in Section 1.2(a) shall be required.
3. Section 1.4 of the Credit Agreement is hereby amended by
deleting sections (a) and (b) in their entirety and replacing them with sections
(a) and (b) below, and by adding a new section (d), as set forth below:
(a) Rates. Each Loan shall bear interest on the outstanding
-----
principal amount thereof until due at a rate per annum equal to, (i) so
long as it is a Prime Rate Loan, the Alternative Base Rate as in effect
from time to time plus 1.00%, and (ii) so long as it is a LIBOR Rate
Loan, the LIBOR Rate applicable thereto plus 3.00%. During an Event of
Default (and whether before or after judgment), each Loan (whether or
not due) and to the maximum extent permitted by Applicable Law, each
other amount due and payable under the Borrower Loan Documents, shall
bear interest at a rate per annum equal to the applicable Post-Default
Rate.
(b) Payment. Interest shall be payable in arrears, (i) in
-------
the case of Prime Rate Loans, on each Interest Payment Date, and (ii) in
the case of LIBOR Rate Loans, on the last day of each applicable
Interest Period (and, if an Interest Period is longer than 90 days, at
intervals of 90 days after the first day of such Interest Period) and
(iii) in the case of any Loan, when such Loan shall be due (whether at
maturity, by reason of notice of prepayment or acceleration or
otherwise). Notwithstanding the foregoing, interest at the Post-Default
Rate shall be payable on demand.
(d) Conversion and Continuation. (i) All or any part of the
---------------------------
principal amount of Loans of any Type may, on any
-2-
<PAGE>
Business Day, be converted into any other Type or Types of Loans,
subject to the provisions of this Section 1.4(d).
(ii) Each Prime Rate Loan shall continue as a Prime Rate Loan
unless and until such Loan is converted into a Loan of another Type.
Each LIBOR Rate Loan of any Type shall continue as a Loan of such Type
until the end of the then current Interest Period therefor, at which
time it shall be automatically converted into a Prime Rate Loan unless
the Borrower shall have given the Bank notice in accordance with Section
1.4(d)(iv) requesting either that such Loan continue as a Loan of such
Type for another Interest Period or that such Loan be converted into a
Loan of another Type at the end of such Interest Period.
(iii) Notwithstanding anything to the contrary contained in
Section 1.4(d)(i) or (ii), during a Default, the Bank may notify the
Borrower that Loans may only be converted into or continued as Loans of
certain specified Types and, thereafter, until no Default shall continue
to exist, Loans may not be converted into or continued as Loans of any
Type other than one or more of such specified Types.
(iv) The Borrower shall give the Bank notice (which shall be
irrevocable) of each conversion of a Loan or continuation of a LIBOR
Rate Loan no later than 10:00 a.m. (New York time) on, in the case of a
conversion into or a continuation of a Prime Rate Loan, the Business
Day, and, in the case of a conversion into or continuation of a LIBOR
Rate Loan, the second Business Day, before the requested date of such
conversion or continuation. Each notice of conversion or continuation
shall be in the form of Schedule 1.4(d) (iv) and shall specify (A) the
--------------------
requested date of such conversion or continuation, (B) the amount and
Type and, in the case of LIBOR Rate Loans, the last day of the
applicable Interest Period, of the Loan to be converted or continued and
(C) the amount and Type or Types of Loans into which such Loan is to be
converted or as which such Loan is to be continued.
(v) Notwithstanding the terms of Section 1.4(d)(ii), a LIBOR
Rate Loan may be converted into another Type or other Types of Loans
prior to the end of the Interest Period applicable thereto (a
"Breakfunding Conversion"); provided, however, that, in the case of a
-------- -------
Breakfunding Conversion, at the written demand of the Lender the
Borrower will be pay to the Lender an amount as determined in accordance
with Section 7.6.
4. Section 1.6 of the Credit Agreement is hereby deleted in
its entirety and replaced with the following:
-3-
<PAGE>
Section 1.6 Prepayments. (a) Optional Prepayments.
----------- --------------------
The Borrower may, at any time and from time to time, prepay the Loans in
whole or in part, without premium or penalty, except that any partial
prepayment shall be in an aggregate principal amount of at least $50,000
and in integral multiples of $50,000 in excess thereof, and any
prepayment of a LIBOR Rate Loan shall be made only on the last day of
the applicable Interest Period. The Borrower shall give the Bank notice
of each prepayment pursuant to this Section 1.6(a) no later than 10:00
a.m. (New York time) on, in the case of a prepayment of a Prime Rate
Loan, the Business Day, and, in the case of a prepayment of a LIBOR Rate
Loan, the second Business Day, before the date of such prepayment. Each
such notice of prepayment shall be in the form of Schedule 1.6(a) and
---------------
shall specify (i) the date such prepayment is to be made and (ii) the
amount and Type and, in the case of LIBOR Rate Loans, the last day of
the applicable Interest Period of each Loan to be prepaid. Amounts to
be prepaid pursuant to this Section 1.6(a) shall irrevocably be due and
payable on the date specified in the applicable notice of prepayment,
together with interest thereon as provided in Section 1.4(b).
(b) Mandatory Prepayments. If at any time the aggregate
---------------------
unpaid principal amount of the Loans exceeds the Borrowing Base, the
Borrower shall immediately prepay the Loans in an amount not less than
the amount of such excess. Amounts prepaid pursuant to this Section
1.6(b) shall be applied first to prepay Prime Rate Loans and then to
prepay LIBOR Rate Loans in the order that the Interest Periods for such
Loans end. Amounts to be prepaid pursuant to this Section 1.6(b) shall
be paid within the time period specified therefor, whether or not such
payment would require a prepayment of a LIBOR Rate Loan prior to the
last day of an applicable Interest Period or would result in losses,
costs or expenses compensable under Section 7.6.
5. Section 1.10 of the Credit Agreement is hereby amended
by deleting the words "a single note" at the end of the first sentence thereof,
and inserting in lieu thereof ", in the case of Prime Rate Loans, a single Prime
Rate Note and, in the case of LIBOR Rate Loans, a single LIBOR Rate Note".
6. A new section 1.11 of the Credit Agreement is hereby
inserted following Section 1.10 of the Credit Agreement as set forth below:
Section 1.11 Limitation on Types of Loans. Notwithstanding
----------------------------
anything to the contrary contained in this Agreement, the Borrower shall
borrow, prepay, convert and continue Loans in a manner such that (a) the
aggregate principal amount of LIBOR Rate Loans having the same Interest
Period shall at all times be not less than
-4-
<PAGE>
$500,000, and (b) there shall not be, at any one time, more than two
Interest Periods in effect with respect to LIBOR Rate Loans.
7. Section 4.14 of the Credit Agreement is hereby deleted
in its entirety and replaced with the following:
Section 4.14 Capital Expenditures. The Borrower shall not,
--------------------
and shall not permit any subsidiary to, directly or indirectly, make
Capital Expenditures in excess of $400,000 during any fiscal quarter
ending on or before December 31, 1998; provided, however, that to the
-------- -------
extent that the amount of Capital Expenditures made during any fiscal
quarter ending on or before September 30, 1998 is less than $400,000,
such amount may be carried forward for one fiscal quarter and utilized
to make Capital Expenditures in excess of $400,000 in the next fiscal
quarter.
8. Section 4.17 of the Credit Agreement is hereby deleted
in its entirety and replaced with the following:
Section 4.17 Changes in Key Management. The Borrower shall
-------------------------
not, directly or indirectly, cease to employ Constance Galley.
9. Section 4.18 of the Credit Agreement is hereby deleted
in its entirety and replaced with the following:
Section 4.18 Minimum Consolidated Tangible Net Worth. The
---------------------------------------
Borrower shall not permit Consolidated Tangible Net Worth at any time
during any period set forth below to be less than the amount set forth
opposite such period below:
Period Amount
------ ------
September 30, 1996 - December 30, 1996 $3,900,000 plus
the Net Equity
Proceeds
Amount, if any
December 31, 1996 - March 30, 1997 $4,200,000 plus
the Net Equity
Proceeds
Amount, if any
March 31, 1997 - June 29, 1997 $4,600,000 plus
the Net Equity
Proceeds
Amount, if any
June 30, 1997 - September 29, 1997 $5,400,000 plus
the Net Equity
Proceeds
Amount, if any
-5-
<PAGE>
September 30, 1997 - December 30, 1997 $6,000,000 plus
the Net Equity
Proceeds
Amount, if any
December 31, 1997 - March 30, 1998 $7,000,000 plus
the Net Equity
Proceeds
Amount, if any
March 31, 1998 - June 29, 1998 $7,000,000 plus
the Net Equity
Proceeds
Amount, if any
June 30, 1998 - September 29, 1998 $7,500,000 plus
the Net Equity
Proceeds
Amount, if any
September 30, 1998 - Termination Date $7,500,000 plus
the Net Equity
Proceeds
Amount, if any
10. Section 4.19 of the Credit Agreement is hereby deleted
in its entirety and replaced with the following:
Section 4.19 Ratio of Consolidated Total Liabilities to
------------------------------------------
Consolidated Tangible Net Worth. The Borrower shall not permit the
-------------------------------
ratio of Consolidated Total Liabilities to Consolidated Tangible Net
Worth at any time during any period set forth below to be greater than
the ratio set forth opposite such period below:
Period Ratio
------ -----
September 30, 1996 - December 30, 1996 1.50:1
December 31, 1996 - March 30, 1997 1.25:1
March 31, 1997 - June 29, 1997 1.00:1
June 30, 1997 - September 29, 1997 1.00:1
September 30, 1997 - December 30, 1997 1.00:1
December 31, 1997 - March 30, 1998 1.00:1
March 31, 1998 - June 29, 1998 1.00:1
June 30, 1998 - September 29, 1998 1.00:1
September 30, 1998 - Termination Date 1.00:1
11. Section 4.20 of the Credit Agreement is hereby deleted
in its entirety and replaced with the following:
Section 4.20 Working Capital Ratio. The Borrower shall not
---------------------
permit the ratio of Consolidated Current Assets to Consolidated Current
Liabilities for any fiscal quarter beginning with the fiscal quarter
ended September 30, 1996 and ending with the fiscal quarter ended
September 30, 1998 to be less than 1.50:1; provided, however that the
-------- -------
covenant
-6-
<PAGE>
in this Section 4.20 shall become void and of no further force or effect
if, and at such time, as Borrower completes one or more Registered
Common Stock Offerings raising an aggregate Net Equity Proceeds Amount
of at least Twenty Million Dollars ($20,000,000).
12. Section 4.22 of the Credit Agreement is hereby deleted
in its entirety and replaced with the following:
Section 4.22 Fixed Charge Coverage Ratio. The Borrower shall
---------------------------
not permit the Fixed Charge Coverage Ratio for any period of four (4)
consecutive fiscal quarters (taken as one accounting period) ended on
each of the dates set forth below to be less than the ratio set forth
opposite each such date below:
Date Ratio
---- -----
December 31, 1996 1.40:1
March 31, 1997 1.40:1
June 30, 1997 1.75:1
September 30, 1997 1.75:1
December 31, 1997 2.00:1
March 31, 1998 2.00:1
June 30, 1998 2.00:1
September 30, 1998 2.00:1
December 31, 1998 2.00:1
13. Section 4.23 of the Credit Agreement is hereby deleted
in its entirety and replaced with the following:
Section 4.23 Interest Coverage Ratio. The Borrower shall not
-----------------------
permit the Interest Coverage Ratio for any period of four (4)
consecutive fiscal quarters (taken as one accounting period) beginning
with the period of four (4) consecutive fiscal quarters ended September
30, 1996 and ending with the period of four (4) consecutive fiscal
quarters ended December 31, 1998, to be less than 3.50:1.
14. A new section 4.29 of the Credit Agreement is hereby
inserted following Section 4.28 of the Credit Agreement as set forth below:
Section 4.29 Indebtedness to EBITDA Ratio. The Borrower
----------------------------
shall not permit the ratio of the Indebtedness of the Borrower to EBITDA
for any period of four (4) consecutive fiscal quarters (taken as one
accounting period) beginning with the period of four (4) consecutive
fiscal quarters ended September 30, 1996 and ending with the period of
four (4) consecutive fiscal quarters ended December 31, 1998, to be
greater than 1.5:1.
-7-
<PAGE>
15. Section 5.3(b) of the Credit Agreement is hereby amended
by inserting the following proviso at the end thereof:
; provided, however, that, on or before November 20, 1996 the
-------- -------
Borrower shall, and shall cause each of its Subsidiaries to, change the
opening and closing dates of its fiscal year to January 1 and December
31, respectively.
16. Section 7.3 of the Credit Agreement is hereby amended by
deleting the references therein to "Sections 7.1 and 7.2" and inserting in lieu
thereof "Sections 7.1, 7.2, 7.5 and 7.6".
17. Section 7.4 of the Credit Agreement is hereby deleted in
its entirety and replaced with the following:
Section 7.4 Change of Lending Office. If an event occurs
------------------------
with respect to a Lending Office that makes operable the provisions of
clause (b) or (c) of Section 7.5 or entitles the Bank to make a claim
under Section 7.1 or 7.2, the Bank shall, if requested by the Borrower,
use reasonable efforts to designate another Lending Office or Offices
the designation of which will eliminate such operability or reduce the
amount the Bank is so entitled to claim, provided that such designation
would not, in the sole and absolute discretion of the Bank, be
disadvantageous to the Bank in any manner or contrary to Bank policy.
The Bank may at any time and from time to time change any Lending Office
and shall give notice of any such change to the Borrower. Except in the
case of a change in Lending Offices made at the request of the Borrower,
the designation of a new Lending Office by the Bank shall not make
operable the provisions of clause (b) or (c) of Section 7.5 or entitle
the Bank to make a claim under Section 7.1 or 7.2 if the operability of
such clause or such claim results solely from such designation and not
from a subsequent Regulatory Change.
18. Two new sections of the Credit Agreement, Sections 7.5
and 7.6, are hereby inserted following Section 7.4 of the Credit Agreement as
set forth below:
Section 7.5 Mandatory Suspension and Conversion of Fixed
--------------------------------------------
Rate Loans. The Bank's obligations to make, continue or convert into
----------
LIBOR Rate Loans of any Type shall be suspended, all outstanding Loans
of that Type shall be converted on the last day of their applicable
Interest Periods (or, if earlier, in the case of clause (b) below, on
the last day the Bank may lawfully continue to maintain Loans of that
Type or, in the case of clause (c) below, on the day determined by the
Bank to be the last Business Day before the effective date of the
applicable restriction) into, and all pending requests for the making
or
-8-
<PAGE>
continuation of or conversion into Loans of such Type shall be deemed
requests for, Prime Rate Loans, if:
(a) on or prior to the determination of an interest rate for a
LIBOR Rate Loan of that Type, the Bank determines that for any reason
such LIBOR Rate would not accurately reflect the cost to the Bank of
making, continuing or converting into a LIBOR Rate Loan for such
Interest Period;
(b) at any time the Bank determines that any Regulatory Change
makes it unlawful or impracticable for the Bank or a Lending Office to
make, continue or convert into any LIBOR Rate Loan of that Type, or to
comply with its obligations hereunder in respect thereof; or
(c) the Bank determines that, by reason of any Regulatory
Change, the Bank or a Lending Office is restricted, directly or
indirectly, in the amount that it may hold of (i) a category of
liabilities that includes deposits by reference to which, or on the
basis of which, the interest rate applicable to LIBOR Rate Loans of that
Type is directly or indirectly determined or (ii) the category of assets
that includes LIBOR Rate Loans of that Type.
The Bank shall promptly notify the Borrower of any circumstance that
would make the provisions of this Section 7.5 applicable, but the
failure to give any such notice shall not affect the Bank's rights
hereunder.
Section 7.6 Funding Losses. The Borrower shall pay to the
--------------
Bank, upon the Bank's written request, such amount or amounts as the
Bank determines are necessary to compensate it for any loss, cost or
expense incurred by it as a result of (a) any payment, prepayment or
conversion of a LIBOR Rate Loan on a date other than the last day of
an Interest Period for such LIBOR Rate Loan or (b) a LIBOR Rate Loan
for any reason not being made or converted, or any payment of principal
thereof or interest thereon not being made, on the date therefor
determined in accordance with the applicable provisions of this
Agreement. At the election of the Bank, and without limiting the
generality of the foregoing, but without duplication, such compensation
on account of losses may include an amount equal to the excess of (i)
the interest that would have been received from the Borrower under this
Agreement on any amounts to be reemployed during an Interest Period or
its remaining portion over (ii) the interest component of the return
that the Bank determines it could have obtained had it placed such
amount on deposit in the interbank Dollar market selected by it for a
period equal to such Interest Period or its remaining portion.
-9-
<PAGE>
19. Section 8.1(a)(i) of the Credit Agreement is hereby
amended by deleting the reference therein to "Sections 1.2, 1.5, 1.6 and 6.2"
and inserting in lieu thereof "Sections 1.2, 1.4(d), 1.6, 1.7 and 6.2".
20. Sections 8.1(a)(ii)(A) and 8.1(a)(ii)(B) of the Credit
Agreement are hereby deleted in their entirety and replaced with the following:
(A) if to the Borrower, to it at:
TSI International Software Ltd.
45 Danbury Road
Wilton, CT 06897
Telecopier No.: 203-762-9677
Telephone No.: 203-761-8600
Attention: Mr. Ira A. Gerard, Vice
President, Finance and Administration,
Chief Financial Officer
(B) if to the Bank, to it at:
The Bank of New York
530 Fifth Avenue
New York, New York 10036
Telecopier No.: 212-852-4055
Telephone No.: 212-852-4056
Attention: Mr. David Duffy, Vice President
-10-
<PAGE>
with a copy to:
BNY Business Center, Inc.
10 Mason Street, 3rd Floor
Greenwich, CT 06830
Telecopier No.: 203-863-2610
Telephone No.: 203-863-2681
Attention: Mr. Joseph Markey, Vice President
and
Winthrop, Stimson, Putnam & Roberts
Financial Centre
695 East Main Street
P.O. Box 6760
Stamford, CT 06904-6760
Telecopier No.: 203-965-8226
Telephone No.: 203-348-2300
Attention: Frode Jensen, III, Esq.
or at such other address or telex, telecopier or telephone number or to the
attention of such other individual or department as the party to which such
information pertains may hereafter specify for the purpose in a notice to the
other specifically captioned "Notice of Change of Address".
21. The definition of the term "CDA Guaranty" in Section
------------
9.1(a) of the Credit Agreement is hereby amended by deleting the reference
therein to "$1,200,000" and inserting "$600,000" in lieu thereof.
22. The following definitions in Section 9.1(a) of the
Credit Agreement are hereby deleted in their entirety and replaced with the
following:
"Agreement" means this Agreement, including all schedules,
---------
annexes and exhibits hereto, as modified, renewed, supplemented or
amended from time to time.
"Agreement Date" means August 22, 1994.
--------------
"Lending Office" means 530 5th Avenue, New York, New York 10036,
--------------
or such other branch or office of the Bank designated by the Bank from
time to time as the branch or office at which the Loans are to be made
or maintained. The Bank may from time to time designate separate of its
branches or offices at which the Prime Rate Loans and LIBOR Rate Loans
are to be made or maintained, in which case "Lending Office" shall mean
either or both of such offices, as the context may require.
-11-
<PAGE>
"Note" means any LIBOR Rate Note and any Prime Rate Note.
----
"Termination Date" means November 18, 1998.
----------------
23. Section 9.1(a) of the Credit Agreement is hereby further
amended by inserting in the appropriate alphabetical order the following new
definitions:
"Breakfunding Conversion" has the meaning ascribed to such term
-----------------------
in Section 1.4(d)(v) of this Agreement.
"Interest Period" means a period commencing, in the case of the
---------------
first Interest Period applicable to a LIBOR Rate Loan, on the date of
the making of, or conversion into, such Loan, and, in the case of each
subsequent, successive Interest Period applicable thereto, on the last
day of the immediately preceding Interest Period, and ending on the day
30, 60, 90 or 180 days thereafter, except that any Interest Period that
would otherwise end on a day that is not a Business Day shall be
extended to the next succeeding Business Day, unless such Business Day
falls in another calendar month, in which case such Interest Period
shall end on the next preceding Business Day.
"LIBOR Rate" means the rate at which deposits in Dollars for the
----------
relevant Interest Period and in the amount of the Loan relevant thereto
are offered to the Bank by prime banks in the London interbank market
(adjusted upward, if not already a multiple of 1/100 of one percent, to
the nearest 1/100 of one percent) as at 11:00 a.m. two Business Days
prior to the commencement of the relevant Interest Period.
"LIBOR Rate Loan" means any Loan the interest on which is, or is
---------------
to be, as the context may require, computed on the basis of the LIBOR
Rate.
"LIBOR Rate Note" means any promissory note in the form of
---------------
Exhibit A-2.
-----------
"Net Equity Proceeds Amount" means (a) the gross proceeds
--------------------------
received by the Borrower from any one or more Registered Common Stock
Offerings, less (b) all reasonable expenses incurred in connection with
such Registered Common Stock Offerings including, but not limited to,
(i) all Securities and Exchange Commission, stock exchange or National
Association of Securities Dealers, Inc. registration and filing fees,
(ii) all fees and expenses incurred in connection with compliance with
state securities or blue sky laws (including reasonable fees and
disbursements of counsel for any underwriters in connection with blue
sky qualification), (iii) all expenses of any
-12-
<PAGE>
persons in preparing or assisting in preparing, word processing,
printing and distributing any registration statement, any prospectus,
any amendments or supplements thereto, any underwriting agreements,
securities sales agreements and other documents relating to a Registered
Common Stock Offering, (iv) the fees and disbursements of counsel for
the Borrower and (v) the fees and disbursements of the independent
public accountants of the Borrower, including the expenses related to
any special audits or "cold comfort" letters.
"Prime Rate Loan" means any Loan the interest on which is, or is
---------------
to be, as the context may require, computed on the basis of the
Alternative Base Rate.
"Prime Rate Note" means any promissory note in the form of
---------------
Exhibit A-1.
-----------
"Registered Common Stock Offering" means a registered public
-------------------------------
offering of common stock of the Borrower pursuant to an effective
registration statement under the Securities Act of 1933, as amended.
"Type" means, with respect to Loans, any of the following, each
----
of which shall be deemed to be a different "Type" of Loan: Prime Rate
Loans, LIBOR Rate Loans having a 30-day Interest Period, LIBOR Rate
Loans having a 60-day Interest Period, LIBOR Rate Loans having a 90-day
Interest Period and LIBOR Rate Loans having a 180-day Interest Period.
Any LIBOR Rate Loan having an Interest Period with a duration that
differs from the duration specified for a Type of LIBOR Rate Loan listed
above solely because, absent such difference in duration such Interest
Period would have ended on a day other than a Business Day, shall be
deemed to be a Loan of such above-listed Type notwithstanding such
difference in the duration of such Interest Period.
24. Exhibit A to the Credit Agreement is hereby deleted in
its entirety and replaced with Exhibits A-1 and A-2 to the Credit Agreement, in
the form attached as Exhibits A-1 and A-2 to this Amendment.
25. Exhibit B and Schedules 1.2 and 1.6(a) to the Credit
Agreement are hereby deleted in their entirety and replaced with Exhibit B and
Schedules 1.2 and 1.6(a) attached to this Amendment.
26. A new Schedule 1.4(d)(iv), in the form of Schedule
1.4(d)(iv) to this Amendment, is hereby added to the Credit Agreement.
27. Schedule 5.1(b) to the Credit Agreement is hereby
amended by inserting "(f) Section 4.29." below Section 3(e).
----
-13-
<PAGE>
28. Schedule 5.1(c) to the Credit Agreement is hereby
amended by inserting "(f) Section 4.29." below Section 3(e).
----
29. Schedule 5.1(d) to the Credit Agreement is hereby
amended by deleting the parenthetical "(item 7 x 30%)" from item number five
therein and replacing it with the parenthetical "(the lesser of (1) item 7 x 30%
and (2) $600,000)".
30. As of the effective date of this Amendment, all Loans
(as defined in the Credit Agreement) outstanding under the Credit Agreement
shall become Prime Rate Loans (as defined in the Credit Agreement as amended by
this Amendment (the "Amended Credit Agreement")) outstanding under the Amended
Credit Agreement.
31. All references in the Credit Agreement to "this
Agreement," "herein," "hereof" and "hereunder" shall mean the Credit Agreement
as amended by this Amendment.
32. This Amendment shall be construed in accordance with and
governed by the laws of the State of New York (without giving effect to its
choice of law principles).
33. This Amendment may be executed in one or more
counterparts, each of which shall be deemed an original instrument, and all such
counterparts together shall constitute but one agreement.
-14-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed by their duly authorized officers as of the date first
above written.
TSI INTERNATIONAL SOFTWARE LTD.
By: /s/ Ira Gerard
---------------------------
Name:
Title:
THE BANK OF NEW YORK
By: /s/ David Duffy
---------------------------
Name:
Title:
Acknowledged and consented to as
of the 18 day of November, 1996:
CONNECTICUT DEVELOPMENT AUTHORITY
By: /s/ Nancy Watt
----------------------------
Name:
Title:
-15-
<PAGE>
GRID
Prime Rate Note
<TABLE>
<CAPTION>
Amount of
Amount of Principal Paid, Unpaid Principal
Prime Rate Prepaid or Amount of Notation
Date Loan Converted Note Made By
---- ----------- -------------- ---------------- ---------
<S> <C> <C> <C> <C>
</TABLE>
-1-
<PAGE>
EXHIBIT A-2
TSI INTERNATIONAL SOFTWARE LTD.
LIBOR RATE NOTE
November 18, 1996
FOR VALUE RECEIVED, TSI INTERNATIONAL SOFTWARE LTD. (the
"Borrower") hereby promises to pay to the order of THE BANK OF NEW YORK (the
"Bank") the principal amount of Four Million Dollars ($4,000,000), or, if less,
the principal amount of the LIBOR Rate Loans outstanding, on the dates and in
the amounts specified in Section 1.5 of the Credit Agreement (as defined
herein), and to pay interest on such principal amount on the dates and at the
rates specified in Section 1.4 of the Credit Agreement. All payments due the
Bank hereunder shall be made to the Bank at the place, in the type of money and
funds and in the manner specified in Section 1.9 of the Credit Agreement.
Each holder hereof is authorized to endorse on the grid attached
hereto, or on a continuation thereof, each LIBOR Rate Loan and each payment,
prepayment or conversion with respect thereto.
Presentment, demand, protest, notice of dishonor and notice of
intent to accelerate are hereby waived by the undersigned.
This LIBOR Rate Note evidences Loans made under, and is entitled
to the benefits of, the Credit Agreement, dated as of July 31, 1994, between the
Borrower and the Bank, as the same may be amended from time to time (the "Credit
Agreement"). Reference is made to the Credit Agreement, as so amended, for
provisions relating to the prepayment and the acceleration of the maturity
hereof. This LIBOR Rate Note is also entitled to the benefits of the Security
Agreement.
This LIBOR Rate Note shall be construed in accordance with and
governed by the law of the State of New York (without giving effect to its
choice of law principles).
TSI INTERNATIONAL SOFTWARE LTD.
By_____________________________
Name:
Title:
-2-
<PAGE>
GRID
LIBOR Rate Note
<TABLE>
<CAPTION>
Amount of
Amount of Principal Paid, Unpaid Principal
LIBOR Rate Prepaid or Amount of Notation
Date Loan Converted Note Made By
---- ---------- -------------- ---------------- ---------
<S> <C> <C> <C> <C>
</TABLE>
-3-
<PAGE>
Schedule 1.2
------------
NOTICE OF BORROWING
The Bank of New York
10 Mason Street
Greenwich, CT 06830
Attention: Mr. Joseph F. Markey
Vice President
Date:
Ladies and Gentlemen:
Reference is made to the Credit Agreement, dated as of July 31,
1994, between TSI International Software Ltd. and The Bank of New York, as
amended from time to time (the "Credit Agreement"). The undersigned hereby
gives notice pursuant to Section 1.2 of the Credit Agreement of its request to
have the following Loans made to it on [insert requested date of borrowing]:
Type of Loan Amount
------------ ------
- ---------------------------------------- -----------------------------------
- ---------------------------------------- -----------------------------------
- ---------------------------------------- -----------------------------------
The undersigned represents and warrants that (a) the borrowing
requested hereby complies with the requirements of Section 1.2 of the Credit
Agreement and (b) [except to the extent set forth on Annex A hereto,]/1/ (i)
each Loan Document Representation and Warranty is true and correct at and as of
the date hereof and (except to the extent the undersigned gives notice to the
Bank to the contrary prior to 5:00 p.m. (New York time) on the Business Day
before the requested date for the making of the Loans) will be true and correct
at and as of the time the Loans are made, in each case both with and without
giving effect to the Loans and the application of the proceeds thereof, and (ii)
no Default has occurred and is continuing as of the date hereof or would result
from the making of the Loans or from the application of the proceeds thereof if
the Loans were made on the date hereof, and (except to the extent the
undersigned gives notice to the Bank to
- -------------------
/1/ If the representation and warranty in either clause (b) (i) or (b) (ii)
would be incorrect, include the material in brackets and set forth the
reasons such representation and warranty would be incorrect on an
attachment labeled Annex A.
-4-
<PAGE>
the contrary prior to 5:00 p.m. (New York time) on the Business Day before the
requested date for the making of the Loans) no Default will have occurred and be
continuing at the time the Loans are to be made or would result from the making
of the Loans or from the application of the proceeds thereof.
TSI INTERNATIONAL SOFTWARE LTD.
By_____________________________
Name:
Title:
-5-
<PAGE>
Schedule 1.4(d)(iv)
-------------------
NOTICE OF CONVERSION OR CONTINUATION
The Bank of New York
10 Mason Street
Greenwich, CT 06830
Attention: Mr. Joseph F. Markey
Vice President
Date:
Gentlemen:
Reference is made to the Credit Agreement, dated as of July 31,
1994, between TSI International Software Ltd. and The Bank of New York, as
amended from time to time (the "Credit Agreement"). The undersigned hereby
gives notice pursuant to Section 1.4(d)(iv) of the Credit Agreement of its
desire to convert or continue the Loans specified below into or as Loans of the
types and in the amounts specified below on [insert date of conversion or
continuation]:
<TABLE>
<CAPTION>
Converted or
Loans to be Converted or Continued Continued Loans
---------------------------------- ---------------
Type Last Day of Amount Type of Amount
of Loan/1/ Current Interest ------ ------- ------
------ Period Loan
------ -----
<S> <C> <C> <C> <C>
- ------------------------------------------- ------------------------
- ------------------------------------------- ------------------------
- ------------------------------------------- ------------------------
- ------------------------------------------- ------------------------
</TABLE>
The undersigned represents and warrants that conversions and
continuations requested hereby comply with the requirements of Section 1.4(d)
of the Credit Agreement
TSI INTERNATIONAL SOFTWARE LTD.
By_____________________________
Name:
Title:
- ------------------------
/1/ Be sure to specify the duration of the Interest Period in the case of LIBOR
Rate Loans (e.g., 90-day LIBOR Rate).
----
-6-
<PAGE>
Schedule 1.6(a)
---------------
NOTICE OF PREPAYMENT
The Bank of New York
10 Mason Street
Greenwich, CT 06830
Attention: Mr. Joseph F. Markey
Vice President
Date:
Ladies and Gentlemen:
Reference is made to the Credit Agreement, dated as of July 31,
1994, between TSI International Software Ltd. and The Bank of New York, as
amended from time to time (the "Credit Agreement"). The undersigned hereby
gives notice pursuant to Section 1.5(a) of the Credit Agreement that it will
prepay the Loans specified below on [insert date of prepayment]:
<TABLE>
<CAPTION>
Type Last Day of Amount
of Loan/1/ Current Interest ------
--------- --------
Period
-------
<S> <C> <C>
- ---------------------------------- -------------------- -----------------
- ---------------------------------- -------------------- -----------------
- ---------------------------------- -------------------- -----------------
- ---------------------------------- -------------------- -----------------
</TABLE>
The undersigned represents and warrants that the prepayment
requested hereby complies with the requirements of Section 1.5(a) of the Credit
Agreement.
TSI INTERNATIONAL SOFTWARE LTD.
By_____________________________
Name:
Title:
- ------------------------
/1/ Be sure to specify the duration of the Interest Period in the case of LIBOR
Rate Loans (e.g., 90-day LIBOR Rate).
----
-7-
<PAGE>
EXHIBIT A-1
TSI INTERNATIONAL SOFTWARE LTD.
PRIME RATE NOTE
November 18, 1996
FOR VALUE RECEIVED, TSI INTERNATIONAL SOFTWARE LTD. (the
"Borrower") hereby promises to pay to the order of THE BANK OF NEW YORK (the
"Bank") the principal amount of Four Million Dollars ($4,000,000), or, if less,
the principal amount of the Prime Rate Loans outstanding, on the dates and in
the amounts specified in Section 1.5 of the Credit Agreement (as defined
herein), and to pay interest on such principal amount on the dates and at the
rates specified in Section 1.4 of the Credit Agreement. All payments due the
Bank hereunder shall be made to the Bank at the place, in the type of money and
funds and in the manner specified in Section 1.9 of the Credit Agreement.
Each holder hereof is authorized to endorse on the grid attached
hereto, or on a continuation thereof, each Prime Rate Loan and each payment,
prepayment or conversion with respect thereto.
Presentment, demand, protest, notice of dishonor and notice of
intent to accelerate are hereby waived by the undersigned.
This Prime Rate Note evidences Loans made under, and is entitled
to the benefits of, the Credit Agreement, dated as of July 31, 1994, between the
Borrower and the Bank, as the same may be amended from time to time (the "Credit
Agreement"). Reference is made to the Credit Agreement, as so amended, for
provisions relating to the prepayment and the acceleration of the maturity
hereof. This Prime Rate Note is also entitled to the benefits of the Security
Agreement.
This Prime Rate Note shall be construed in accordance with and
governed by the law of the State of New York (without giving effect to its
choice of law principles).
TSI INTERNATIONAL SOFTWARE LTD.
By_____________________________
Name :
Title:
-1-
<PAGE>
AMENDMENT NO. 6 TO
CREDIT AGREEMENT
----------------------
This AMENDMENT NO. 6 (this "Amendment") to the Credit Agreement dated
as of July 31, 1994 between TSI INTERNATIONAL SOFTWARE LTD., a Delaware
corporation (the "Borrower"), and THE BANK OF NEW YORK (the "Bank"), as amended
by Amendment No. 1 thereto dated as of April 27, 1995, Amendment No. 2 thereto
dated as of January 30, 1996, Amendment No. 3 thereto dated as of
August 21, 1996, Amendment No. 4 thereto dated as of October 4, 1996 and
Amendment No. 5 thereto dated as of November 18, 1996 (as so amended, the
"Credit Agreement"), is made and entered into as of the 24th day of June, 1997.
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Borrower and the Bank wish to amend certain provisions of
the Credit Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Borrower and the Bank agree as
follows:
1. Section 4.13 of the Credit Agreement is hereby deleted in its
entirety and replaced with the following:
Section 4.13 Issuance or Disposition of Capital Stock.
----------------------------------------
(a) Except as set forth in subsection (b) of this Section 4.13, the
Borrower shall not, and shall not permit any Subsidiary to, directly or
indirectly issue any of its Capital Stock or sell, transfer or otherwise dispose
of any Capital Stock of any Subsidiary.
(b)(i) The Borrower is permitted to issue any number of shares of Common
Stock in one or more Registered Common Stock Offerings, provided that the
-------- ----
Borrower uses all of the Net Equity Proceeds Amount (up to the amount of the
Loans then outstanding) from each such Registered Common Stock offering to
prepay Loans in accordance with the terms of this Agreement.
(ii) The Borrower is permitted to effect any number of stock splits of
its outstanding Capital Stock and to issue additional shares of its Capital
Stock in connection with any such stock split.
(iii) The Borrower is permitted to issue shares of Common Stock upon
the conversion of shares of preferred stock of the Borrower which were
outstanding as of the date of Amendment No. 6 to this Credit Agreement.
<PAGE>
(iv) The Borrower is permitted to issue shares of Common Stock upon
the exercise of warrants which were outstanding as of the date of Amendment No.
6 to this Credit Agreement.
(v) The Borrower is permitted to issue shares of Common Stock under
any stock option plan, stock purchase plan or other equity incentive plan
(including the 1997 Directors Stock Option Plan, the 1997 Equity Incentive Plan,
the 1993 Stock Option Plan and the 1997 Employee Stock Purchase Plan) designed
to attract and retain directors, officers and/or other key personnel; provided
that such plan was duly authorized and approved by the Board of Directors of the
Borrower.
2. Section 4.18 of the Credit Agreement is hereby deleted in its
entirety and replaced with the following:
Section 4.18 Minimum Consolidated Tangible Net Worth. The Borrower
---------------------------------------
shall not permit Consolidated Tangible Net Worth at any time during any period
set forth below to be less than the amount set forth opposite such period below:
<TABLE>
<CAPTION>
AMOUNT
PERIOD ------
------
<S> <C>
March 31, 1997 - June 29, 1997 $2,000,000 plus the Net Equity Proceeds
Amount, if any
June 30, 1997 - September 29, 1997 $2,500,000 plus the Net Equity Proceeds
Amount, if any
September 30, 1997 - December 30, 1997 $3,000,000 plus the Net Equity Proceeds
Amount, if any
December 31, 1997 - March 30, 1998 $3,500,000 plus the Net Equity Proceeds
Amount, if any
March 31, 1998 - June 29, 1998 $4,000,000 plus the Net Equity Proceeds
Amount, if any
June 30, 1998 - Termination Date $4,500,000 plus the Net Equity Proceeds
Amount, if any
</TABLE>
3. Section 4.19 of the Credit Agreement is hereby deleted in its
entirety and replaced with the following:
Section 4.19 Ratio of Consolidated Total Liabilities to Consolidated
-------------------------------------------------------
Tangible Net Worth. The Borrower shall not permit the ratio of Consolidated
- ------------------
Total Liabilities to Consolidated Tangible Net Worth at any time during any
period set forth below to be greater than the ratio set forth opposite such
period below:
2
<PAGE>
PERIOD RATIO
------ ------
March 31, 1997 - June 29, 1997 2.75:1
June 30, 1997 - September 29, 1997 2.25:1
September 30, 1997 - December 30, 1997 1.75:1
December 31, 1997 - March 30, 1998 1.25:1
March 31, 1998 - Termination Date 1.00:1
4. Section 4.22 of the Credit Agreement is hereby deleted in its
entirety and replaced with the following:
Section 4.22 Fixed Charge Coverage Ratio. The Borrower shall not
---------------------------
permit the Fixed Charge Coverage Ratio for any period of four (4) consecutive
fiscal quarters (taken as one accounting period) ended on each of the dates set
forth below to be less than the ratio set forth opposite each such date below:
<TABLE>
<CAPTION>
PERIOD AMOUNT
------ ------
<S> <C>
June 30, 1997 1.40:1
September 30, 1997 1.40:1
December 31, 1997 1.40:1
March 31, 1998 1.50:1
June 30, 1998 1.50:1
September 30, 1998 1.75:1
December 31, 1998 1.75:1
</TABLE>
5. Section 4.29 of the Credit Agreement is hereby deleted in its
entirety and replaced with the following:
Section 4.29 Indebtedness to EBITDA Ratio. The Borrower shall not
----------------------------
permit the ratio of the Indebtedness of the Borrower to EBITDA for any period of
four (4) consecutive fiscal quarters (taken as one accounting period) beginning
with the period of four (4) consecutive fiscal quarters ended June 30, 1997 and
ending with the period of four (4) consecutive fiscal quarters ending
December 31, 1998, to be greater than 1.75:1.
6. The following definitions in Section 9.1(a) of the Credit
Agreement are hereby deleted in their entirety and replaced with the following:
"Consolidated Tangible Net Worth" means, at any time, the consolidated
-------------------------------
stockholders' equity of the Borrower and the Subsidiaries plus deferred income-
3
<PAGE>
maintenance revenue (as such term is used under Generally Accepted Accounting
Principles) as of such time; provided, however, that product development costs
-------- -------
shall be excluded from the calculation of Consolidated Tangible Net Worth.
"EBITDA" means, with respect to any period, EBIT before deductions
------
have been made for depreciation and amortization except for deductions, if any,
------
for the amortization of capitalized product development costs, which will be
deemed to have been made for purposes of computing EBITDA.
"Fixed Charge Coverage Ratio" means, at any time, (a) the sum of (i)
---------------------------
EBITDA minus Capital Expenditures plus (ii) Fixed Charges, divided by (b) the
sum of (x) Fixed Charges, (y) interest payments plus (z) the total amount of
principal due within one year on long-term debt (but excluding capitalized lease
---------
obligations due within one year), in each case as of such time.
7. Section 9.1(a) of the Credit Agreement is hereby further amended
by inserting in the appropriate alphabetical order the following new definition:
"Common Stock" means the common stock, par value $.01 per share, of
------------
the Borrower.
8. All references in the Credit Agreement to "this Agreement,"
"herein," "hereof," and "hereunder" shall mean the Credit Agreement as amended
by this Amendment.
9. This Amendment shall be construed in accordance with and governed
by the laws of the State of New York (without giving effect to its choice of law
principles).
10. This Amendment may be executed in one or more counterparts, each
of which shall be deemed an original instrument, and all such counterparts
together shall constitute but one agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed by their duly authorized officers as of the date first above
written.
TSI INTERNATIONAL SOFTWARE LTD.
By: /s/ Ira Gerard
--------------
Name: Ira A. Gerard
Title: VP Finance & Admin., CFO
THE BANK OF NEW YORK
By: /s/ Edward J. Moriarty
----------------------
Name: Edward J. Moriarty
Title: Vice President
Acknowledged and consented to as
of the 24th day of June, 1997:
CONNECTICUT DEVELOPMENT AUTHORITY
By: ---------------------------
Name:
Title:
5
<PAGE>
EXHIBIT 23.02
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
TSI International Software Ltd.
We consent to the use of our reports included herein and to the reference to
our firm under "Experts" and "Selected Financial Data" in the Prospectus.
KPMG Peat Marwick LLP
Stamford, Connecticut
June 27, 1997
