<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 7, 1998
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------
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
(PRIMARY STANDARD (I.R.S. EMPLOYER
(STATE OR OTHER INDUSTRIAL CLASSIFICATION IDENTIFICATION NO.)
JURISDICTION OF CODE NUMBER)
INCORPORATION OR
ORGANIZATION)
---------------
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. MICHAEL A. CONZA, ESQ.
SCOTT J. LEICHTNER, ESQ. SHANE K. COBB, ESQ.
FENWICK & WEST LLP TESTA, HURWITZ & THIBEAULT, LLP
TWO PALO ALTO SQUARE HIGH STREET TOWER
PALO ALTO, CA 94306 125 HIGH STREET
(650) 494-0600 BOSTON, MA 02110
(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. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
<CAPTION>
PROPOSED
MAXIMUM PROPOSED MAXIMUM
AMOUNT AGGREGATE AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PRICE(2) PRICE(1)(2) FEE
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.01 par value
per share ..................... 4,037,650 shares $23.125 $93,370,656.25 $27,544.34
- -------------------------------------------------------------------------------------------
</TABLE>
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(1) Includes up to 526,650 shares of Common Stock which may be purchased by
the Underwriters to cover over-allotments, if any.
(2) Estimated pursuant to Rule 457(c) solely for the purpose of calculating
the registration fee based on the average high and low trading prices for
the Common Stock as reported by the Nasdaq National Market on May 4, 1998.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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 STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION DATED MAY 7, 1998
Filed pursuant to 424(b)(3)
File Registration No. 333-27293
LOGO
3,511,000 SHARES
COMMON STOCK
-------------
Of the 3,511,000 shares of Common Stock offered hereby, 1,200,000 shares are
being sold by TSI International Software Ltd. ("TSI Software" or the
"Company"), 1,928,719 shares are being sold by the Selling Stockholders and
382,281 shares are being sold upon exercise of a warrant to be sold to the
Underwriters by a Selling Stockholder (the "Selling Stockholder Warrant"). See
"Principal and Selling Stockholders." The Company will not receive any of the
proceeds from the sale of shares or the Selling Stockholder Warrant by the
Selling Stockholders. The Common Stock is traded on the Nasdaq National Market
under the symbol "TSFW." On May 4, 1998, the last sale price of the Common
Stock as reported by the Nasdaq National Market was $23.625 per share. See
"Price Range of Common Stock."
-------------
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS
PRICE TO DISCOUNTS AND PROCEEDS TO TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2)(3) STOCKHOLDERS(3)
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share.......... $ $ $ $
- -------------------------------------------------------------------------
Total(3)........... $ $ $ $
</TABLE>
- --------------------------------------------------------------------------------
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(1) The Company and the Selling Stockholders have agreed to idemnify the
several Underwriters as stated herein (the "Underwriters") against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(2) Before deducting expenses payable by the Company, estimated at $500,000.
Excludes $764,562 to be paid to the Company by the Underwriters upon
exercise of the Selling Stockholder Warrant.
(3) The Company and certain Selling Stockholders have granted to the
Underwriters a 30-day option to purchase up to an additional 226,650 and
300,000 shares of Common Stock, respectively, 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,
Proceeds to Company 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 BancAmerica Robertson Stephens, San Francisco,
California, on or about , 1998.
BANCAMERICA ROBERTSON STEPHENS
BEAR, STEARNS & CO. INC.
DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER INCORPORATED
SOUNDVIEW FINANCIAL GROUP, INC.
The date of this Prospectus is , 1998.
<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."
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVER ALLOT IN CONNECTION WITH THE OFFERING,
MAY BID FOR, AND PURCHASE, SHARES OF THE COMMON STOCK IN THE OPEN MARKET AND
MAY IMPOSE PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 103 OF REGULATION M UNDER THE SECURITIES EXCHANGE ACT OF
1934, AS AMENDED. SEE "UNDERWRITING."
<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.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary................................................................... 4
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 16
Price Range of Common Stock............................................... 16
Dividend Policy........................................................... 16
Capitalization............................................................ 17
Selected Financial Data................................................... 18
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 19
Business.................................................................. 30
Management................................................................ 41
Certain Transactions...................................................... 49
Principal and Selling Stockholders........................................ 50
Description of Capital Stock.............................................. 52
Shares Eligible for Future Sale........................................... 54
Underwriting.............................................................. 55
Legal Matters............................................................. 56
Experts................................................................... 56
Available Information..................................................... 57
Additional Information.................................................... 57
Index to Financial Statements............................................. F-1
</TABLE>
---------------------
TSI, the TSI logo, Mercator, Trading Partner, OnCall and KEY/MASTER are
registered trademarks, and TSI Software, Mercator for EC, 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. Unless otherwise
indicated, all information in this Prospectus assumes no exercise of the
Underwriters' over-allotment option. See "Underwriting."
THE COMPANY
TSI International Software Ltd. ("TSI Software" or the "Company") is a
leading provider of software and related services that enable organizations to
integrate their enterprise applications both internally and with external
business partners. The Company's flagship product, Mercator, is an applications
integration solution 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 for R/3 was the first product 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
for R/3 was also the first product certified for SAP's DMI (data migration
interface). 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 products permit customers to
integrate business processes across their supply and demand chains by
leveraging the Internet and other transport mechanisms for electronic commerce.
The Company's strategy is to be the market leader in providing solutions that
integrate 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 solutions for 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 8,700 customers worldwide, representing
a broad range of industries. The Company's customers include Allegiance
Corporation, American Express Travel Related Services, Inc., Bell Atlantic,
CIGNA Corporation, Citibank, N.A., Federal Express Corporation, Hewlett-Packard
Company, Hoechst AG, IBM, Lucent Technologies, Inc., Prudential Insurance
Company of America and Texas Instruments.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company............ 1,200,000 shares
Common Stock offered by the Selling
Stockholders.................................. 2,311,000 shares(1)
Common Stock to be outstanding after the
Offering...................................... 10,691,483 shares(1)(2).
Use of Proceeds................................ For working capital and general
corporate purposes. See "Use of
Proceeds."
Nasdaq National Market symbol.................. TSFW
</TABLE>
SUMMARY FINANCIAL INFORMATION
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
----------------------------------------- --------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- ------- ------ -------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Total revenues.......... $12,843 $13,934 $16,061 $19,004 $26,670 $5,508 $ 8,187
Operating income (loss). (1,002) 95 907 1,414 2,053 352 653
Net income (loss)....... (1,228) (113) 823 1,228 2,480 313 871
======= ======= ======= ======= ======= ====== =======
Net income (loss) per
share(3):
Basic.................. $ (0.44) $ (0.04) $ 0.29 $ 0.43 $ 0.42 $ 0.11 $ 0.10
Diluted................ (0.23) (0.02) 0.15 0.21 0.29 0.05 0.08
======= ======= ======= ======= ======= ====== =======
Weighted average number
of common and common
equivalent shares
outstanding(3):
Basic.................. 2,815 2,815 2,846 2,887 5,917 2,887 9,044
Diluted................ 5,424 5,425 5,455 5,811 8,567 6,369 10,827
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
-------------------
AS
ACTUAL ADJUSTED(4)
------- -----------
(unaudited)
<S> <C> <C>
BALANCE SHEET DATA:
Cash........................................................ $14,206 $40,837
Working capital............................................. 24,782 51,413
Total assets................................................ 35,256 61,887
Total stockholders' equity.................................. 26,913 53,544
</TABLE>
- --------
(1) Includes 382,281 shares issuable upon exercise of the Selling Stockholder
Warrant. See "Principal and Selling Stockholders."
(2) Based on shares outstanding as of March 31, 1998. Excludes (i) an aggregate
of 1,650,781 shares of Common Stock issuable upon the exercise of options
outstanding as of March 31, 1998 at a weighted average exercise price of
$4.39 per share, (ii) 269,490 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, (iii)
an aggregate of 1,852,812 additional shares of Common Stock reserved for
issuance under the Company's 1997 Equity Incentive Plan, 1997 Directors
Stock Option Plan and 1997 Employee Stock Purchase Plan and (iv) 51,390
shares issued subsequent to March 31, 1998 upon exercise of a warrant on a
net exercise basis.
(3) For an explanation of the determination of the number of shares used in
computing basic and diluted net income (loss) per share, see Note 1 of
Notes to Financial Statements.
(4) Adjusted to reflect (i) the sale of the 1,200,000 shares offered by the
Company hereby at an assumed public offering price of $23.125 per share and
the application of the net proceeds therefrom, after deducting the
estimated underwriting discounts and commissions and after deducting
estimated offering expenses, (ii) the exercise of outstanding warrants to
purchase 382,281 shares of Common Stock upon exercise of the Selling
Stockholder Warrant and the application of the proceeds therefrom and (iii)
the exercise of outstanding stock options to purchase 11,000 shares of
Common Stock upon exercise of such stock options by two of the Selling
Stockholders immediately prior to the completion of this Offering and the
application of the proceeds therefrom. See "Capitalization" and "Use of
Proceeds."
--------------------
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, Landover, Maryland, Cobham, England, and Paris, France.
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.
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 and other ERP applications, as well as the
number of such businesses requiring third party enterprise 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.
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
6
<PAGE>
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 sales and
marketing and professional services 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 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,
7
<PAGE>
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 enterprise 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 Mercator for R/3's certification for ALE, DMI and EDI. In order to
maintain such certifications, 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 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
8
<PAGE>
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
The Company has recently expanded, and intends to continue to expand its
direct sales force. The Company's future success will depend in large 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 to date or in the future 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.
An integral part of the Company's strategy is to also expand 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. 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.
9
<PAGE>
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.
DEPENDENCE ON KEY PERSONNEL; NEED TO ATTRACT AND RETAIN SALES, PROFESSIONAL
SERVICES AND RESEARCH AND DEVELOPMENT PERSONNEL
The Company's future success depends in large part on the continued service
of its key sales, professional services and research and development
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,
research and development, professional services and managerial personnel,
particularly sales, professional services and research and development
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 research and development 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 sales, professional
services and research and development 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.
MANAGEMENT OF GROWTH
The Company's business has grown in recent periods, with total revenues
increasing from $16.1 million in 1995 to $26.7 million in 1997 and increasing
from $5.5 million for the first quarter of 1997 to $8.2 million for the
comparable period of 1998. 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 quarterly days sales outstanding from March 31, 1997 to March 31,
1998 from approximately 87 days to approximately 99 days, and an increase in
total accounts receivable from $5.3 million to $9.0 million. This increase in
quarterly days sales outstanding is the result of an increase in the amount of
sales occurring at the end of the quarter ended March 31, 1998 as compared
with the quarter ended March 31, 1997 and an extension of payment terms for
certain customers.
To deal with these concerns, the Company has recently 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 and
to successfully integrate 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
10
<PAGE>
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 enterprise 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 enterprise application integration market, the Company's Mercator
products and related services compete primarily against solutions developed
internally by individual businesses to meet their specific enterprise
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
addition, the Company is facing increasing competition in the enterprise
application integration market from other third-party software vendors. 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
11
<PAGE>
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 operating 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 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 9.4% and 6.8% of
the Company's total revenues for 1997 and the three months ended March 31,
1998, respectively, the Company intends to expand its sales and marketing
resources outside of the United States, which will require significant
management
12
<PAGE>
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 is currently developing double
byte versions of its Mercator products and believes that in the future it will
be required to 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. 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
13
<PAGE>
being pursued. There can be no assurance that the Company will be able to
identify, negotiate or finance such acquisitions successfully, 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.
YEAR 2000 IMPLICATIONS
Many currently installed computer systems and software products are unable
to distinguish 21st century dates from 20th century dates. Beginning in the
year 2000, these date code fields will need to distinguish 21st century dates
from 20th century dates, and, as a result, many companies' software and
computer systems may need to be upgraded or replaced in order to comply with
such "Year 2000" requirements. The Company has on occasion warranted, and
generally represents to its customers, that its products are free from Year
2000 defects. There can be no assurance that the Company's products are Year
2000 compliant, or that the Company's products will not be integrated with, or
otherwise interact with, non-compliant software. The foregoing could expose
the Company to claims from its customers and result in the loss of or delay in
market acceptance of the Company's products, increased service and warranty
costs to the Company and payment by the Company of compensatory or other
damages, any of which events could have a material adverse effect on the
Company's business, operating results and financial condition. Although the
Company believes that its internal systems are Year 2000 compliant, the
failure of any third-party systems to operate properly with regard to the Year
2000 and thereafter could have a material adverse effect on the Company's
business, results of operations and financial condition. Furthermore, the
purchasing patterns of potential customers may be affected by Year 2000 issues
as companies expend significant resources to correct their current systems for
Year 2000 compliance.
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Common Stock has risen substantially since the
Company's initial public offering. The trading price of the Common Stock has
fluctuated in the past 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.
FACTORS INHIBITING TAKEOVER
The Company's Certificate of Incorporation includes 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
14
<PAGE>
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."
UNCERTAINTY AS TO USE OF PROCEEDS
The Company has no specific plans as to the use of substantially all of the
net proceeds from this offering, other than for 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
Upon completion of this offering, there will be 10,742,873 shares of Common
Stock of the Company outstanding, of which 8,122,000 shares 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 and
144(k), the number of shares that will be available for sale in the public
market will be as follows: (i) approximately 241,930 shares will be eligible
for immediate sale on the effective date, (ii) 150,000 shares are eligible for
sale subject to certain volume and other resale restrictions under Rule 144,
(iii) approximately 2,074,105 shares will become eligible for sale 90 days
after the effective date upon the expiration of certain lock-up agreements,
subject to certain volume and other resale restrictions pursuant to Rule 144.
The Company has registered 3,616,671 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 269,490 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 1,736,259 shares of the Company's
Common Stock and holders of Warrants to purchase 269,490 shares of Common
Stock will have certain rights to register those shares of Common Stock under
the Securities Act. See "Description of Capital Stock" and "Shares Eligible
for Future Sale."
15
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,200,000 shares of
Common Stock offered by the Company hereby at an assumed public offering price
of $23.125 per share are estimated to be approximately $25.9 million after
deducting estimated underwriting discounts and commissions and estimated
offering expenses. In addition, the Company will receive $764,562 upon
exercise of the Selling Stockholder Warrant. The Company will not receive any
proceeds from the sale of Common Stock by the Selling Stockholders.
The Company has no current specific plans for 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 material 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.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has been traded on the Nasdaq National Market
under the symbol "TSFW" since July 2, 1997. Prior to that time, there was no
public market for the Company's Common Stock. The following table sets forth
for the periods indicated the high and low reported sale prices for the
Company's Common Stock as reported by the Nasdaq National Market.
<TABLE>
<CAPTION>
1997 HIGH LOW
---- ------- -------
<S> <C> <C>
Third Quarter (from July 2, 1997)......................... $15.125 $ 9.750
Fourth Quarter............................................ 14.875 9.125
<CAPTION>
1998 HIGH LOW
---- ------- -------
<S> <C> <C>
First Quarter............................................. $18.625 $ 9.500
Second Quarter (through May 4, 1998)...................... 24.000 17.500
</TABLE>
On May 4, 1998 the last reported sale price for the Common Stock on the
Nasdaq National Market was $23.625 per share.
As of April 30, 1998, there were approximately 50 holders of record of the
Common Stock although the Company believes that there were approximately 1,600
beneficial owners of its Common Stock.
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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<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company, as of
March 31, 1998, (i) on an actual basis and (ii) as adjusted to give effect to
the sale of the 1,200,000 shares of Common Stock offered by the Company hereby
at an assumed public offering price of $23.125 per share and the application
of the estimated net proceeds therefrom and the exercise of the Selling
Stockholder Warrant and the application of the proceeds therefrom.
<TABLE>
<CAPTION>
MARCH 31, 1998
-------------------------------------
ACTUAL AS ADJUSTED
---------------- -------------------
(In thousands, except share data)
<S> <C> <C>
Stockholders' equity (1):
Preferred stock, $0.01 par value per
share; 5,000,000 shares authorized, no
shares issued or outstanding, actual
and as adjusted....................... $ -- $ --
Common stock, $0.01 par value per
share; 20,000,000 shares authorized,
9,098,202 shares issued and
outstanding, actual; 10,691,483 shares
issued and outstanding, as
adjusted(2)........................... 91 107
Additional paid-in capital............. 33,662 60,277
Accumulated deficit.................... (6,686) (6,686)
Cumulative foreign currency translation
adjustment............................ (154) (154)
---------------- ----------------
Total stockholders' equity............ 26,913 53,544
---------------- ----------------
Total capitalization................. $ 26,913 $ 53,544
================ ================
</TABLE>
- --------
(1) See Note 6 of Notes to Financial Statements.
(2) Excludes (i) 1,650,781 shares of Common Stock issuable upon exercise of
stock options outstanding as of March 31, 1998 at a weighted average
exercise price of $4.39 per share, (ii) 269,490 shares of Common Stock
issuable upon exercise of Warrants which will remain outstanding after the
consummation of this offering, (iii) an aggregate of 1,852,812 additional
shares of Common Stock reserved for issuance under the Company's 1997
Equity Incentive Plan, 1997 Directors Stock Option Plan and 1997 Employee
Stock Purchase Plan and (iv) 51,390 shares issued subsequent to March 31,
1998 upon exercise of a warrant. Actual excludes, and as adjusted
includes, 382,281 shares of Common Stock issuable upon exercise of the
Selling Stockholder Warrant and 11,000 shares of Common Stock issuable
upon exercise of stock options by two of the Selling Stockholders
immediately prior to the completion of this Offering.
17
<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, 1997 and the balance sheet data as of December 31, 1996 and
1997 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 years ended December 31, 1993 and
1994, and the balance sheet data as of December 31, 1993, 1994 and 1995 are
derived from audited financial statements not included in this Prospectus. The
statements of operations data presented below for the three months ended
March 31, 1997 and 1998 and the balance sheet data as of March 31, 1998 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, 1998
are not necessarily indicative of the results that may be expected for the
year ending December 31, 1998 or any other future period.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------------- --------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- ------- ------ ------
(unaudited)
STATEMENTS OF OPERATIONS
DATA: (In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Software licensing..... $ 5,242 $ 6,275 $ 7,553 $ 9,310 $14,603 $2,731 $5,203
Service, maintenance
and other............. 7,601 7,659 8,508 9,694 12,067 2,777 2,984
------- ------- ------- ------- ------- ------ ------
Total revenues........ 12,843 13,934 16,061 19,004 26,670 5,508 8,187
------- ------- ------- ------- ------- ------ ------
Cost of revenues:
Software licensing..... 934 1,035 725 495 778 174 239
Service, maintenance
and other............. 2,276 2,522 2,200 2,006 2,490 548 755
------- ------- ------- ------- ------- ------ ------
Total cost of
revenues............. 3,210 3,557 2,925 2,501 3,268 722 994
------- ------- ------- ------- ------- ------ ------
Gross profit............ 9,633 10,377 13,136 16,503 23,402 4,786 7,193
------- ------- ------- ------- ------- ------ ------
Operating expenses:
Product development.... 2,498 2,231 3,068 3,452 4,462 1,073 1,224
Selling and marketing.. 6,218 6,124 7,160 8,715 13,095 2,584 4,088
General and
administrative........ 1,919 1,927 2,001 2,922 3,792 777 1,228
------- ------- ------- ------- ------- ------ ------
Total operating
expenses............. 10,635 10,282 12,229 15,089 21,349 4,434 6,540
------- ------- ------- ------- ------- ------ ------
Operating income (loss). (1,002) 95 907 1,414 2,053 352 653
Other income (expense),
net.................... (226) (199) (49) (150) 503 (32) 323
------- ------- ------- ------- ------- ------ ------
Income before income
taxes.................. (1,228) (104) 858 1,264 2,556 320 976
Provision for income
taxes.................. -- (9) (35) (36) (76) (7) (105)
------- ------- ------- ------- ------- ------ ------
Net income (loss)....... $(1,228) $ (113) $ 823 $ 1,228 $ 2,480 $ 313 $ 871
======= ======= ======= ======= ======= ====== ======
Net income (loss) per
share(1):
Basic.................. $ (0.44) $ (0.04) $ 0.29 $ 0.43 $ 0.42 $ 0.11 $ 0.10
Diluted................ $ (0.23) $ (0.02) $ 0.15 $ 0.21 $ 0.29 $ 0.05 $ 0.08
======= ======= ======= ======= ======= ====== ======
Weighted average number
of common and common
equivalent shares
outstanding(1):
Basic.................. 2,815 2,815 2,846 2,887 5,917 2,887 9,044
Diluted................ 5,424 5,425 5,455 5,811 8,567 6,369 10,827
======= ======= ======= ======= ======= ====== ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------- MARCH 31,
1993 1994 1995 1996 1997 1998
------ ------ ------ ------- ------- -----------
(unaudited)
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash.................... $ 178 $ 450 $ 143 $ 41 $10,913 $14,206
Working capital......... (2,195) (2,630) (2,128) (1,220) 23,371 24,782
Total assets............ 7,218 6,387 6,237 7,521 32,942 35,256
Total stockholders'
equity (deficiency).... (4,306) (4,393) (3,570) (2,294) 25,416 26,913
</TABLE>
- -------
(1) For an explanation of the determination of the number of shares used in
computing basic and diluted net income (loss) per share, see Note 1 of
Notes to Financial Statements.
18
<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 August 1997 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 four 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 mainframe EDI product licenses typically include one
year of annual maintenance, the fee for which typically represents
approximately 15% of the total amount paid by the customer for the product.
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 insofar as it supports the sale of its
products. The Company believes that software licensing will continue to
account for a larger portion of its total revenues than service, maintenance
and other revenues.
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,
19
<PAGE>
resellers and direct sales. International revenue accounted for 10.4%, 9.4%
and 6.8% of total revenues for 1996, 1997 and the three months ended March 31,
1998, respectively. The Company maintains an international sales and support
office in the United Kingdom. The Company intends to increase its
international direct sales force and focus on establishing additional
international distributor and reseller relationships, such as its recent
distribution agreement with Mitsui. 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. Because the Company's operating expenses are
relatively fixed, a delay in the recognition 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.
At December 31, 1997, the Company had federal tax net operating loss
carryforwards of $6,849,000 expiring between the years 2000 and 2009 and
research and experimentation credits of $655,900 expiring between 2003 and
2008. 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 will be subject to this
limitation as a result of this offering, however the Company does not
currently anticipate that this limitation will have a material adverse effect
on the Company's ability to utilize these loss carryforwards.
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.
20
<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 ENDED
DECEMBER 31, MARCH 31,
------------------- --------------
1995 1996 1997 1997 1998
----- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C>
Revenues:
Software licensing....................... 47.0% 49.0% 54.7% 49.6% 63.6%
Service, maintenance and other........... 53.0 51.0 45.3 50.4 36.4
----- ----- ----- ------ ------
Total revenues......................... 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ------ ------
Cost of revenues:
Software licensing....................... 4.5 2.6 2.9 3.2 2.9
Service, maintenance and other........... 13.7 10.6 9.3 9.9 9.2
----- ----- ----- ------ ------
Total cost of revenues................. 18.2 13.2 12.2 13.1 12.1
----- ----- ----- ------ ------
Gross profit............................... 81.8 86.8 87.8 86.9 87.9
----- ----- ----- ------ ------
Operating expenses:
Product development...................... 19.1 18.2 16.7 19.5 14.9
Selling and marketing.................... 44.6 45.9 49.1 46.9 50.0
General and administrative............... 12.5 15.3 14.2 14.1 15.0
----- ----- ----- ------ ------
Total operating expenses............... 76.2 79.4 80.0 80.5 79.9
----- ----- ----- ------ ------
Operating income........................... 5.6 7.4 7.8 6.4 8.0
Other income (expense), net................ (0.3) (0.7) 1.8 (0.5) 3.9
----- ----- ----- ------ ------
Income before income taxes................. 5.3 6.7 9.6 5.9 11.9
Provision for income taxes................. (.2) (.2) (.3) (.1) (1.3)
----- ----- ----- ------ ------
Net income................................. 5.1% 6.5% 9.3% 5.8% 10.6%
===== ===== ===== ====== ======
Gross profit:
Software licensing....................... 90.4% 94.7% 94.8% 93.6% 95.4%
Service, maintenance and other........... 74.1% 79.3% 81.3% 80.3% 74.7%
</TABLE>
THREE MONTHS ENDED MARCH 31, 1998 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1997
Revenues
Total Revenues. The Company's total revenues increased 49% from $5.5 million
in the first three months of 1997 to $8.2 million in the comparable period of
1998.
Software Licensing. Software licensing revenues increased 91% from $2.7
million in the first three months of 1997 to $5.2 million in the comparable
period of 1998, primarily as a result of a substantial increase in Mercator
license revenues.
Service, Maintenance and Other. Service, maintenance and other revenues
increased 7% from $2.8 million in the first three months of 1997 to $3.0
million in the comparable period of 1998, primarily as a result of an 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 $1.1 million and $1.0
million for the first three months of 1997 and 1998, 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
21
<PAGE>
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 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
37% from $174,000 in the first three months of 1997 to $239,000 in the
comparable period of 1998, primarily due to increased sales of software
licenses. Software licensing gross margin remained relatively constant at 94%
and 95% in the first three months of 1997 and 1998, respectively.
Cost of Service, Maintenance and Other. Cost of service, maintenance and
other revenues increased 38% from $548,000 in the first three months of 1997
to $755,000 in the comparable period of 1998, primarily due to increased
professional services personnel. Service, maintenance and other gross margin
decreased from 80% to 75% in the first three months of 1997 and 1998,
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 14% from $1.1 million in the first three months of 1997 to $1.2
million in the comparable period of 1998, primarily due to increased product
development activities relating to the Company's Mercator product line.
Product development expenses as a percentage of total revenue decreased from
20% of total revenues in the first three months of 1997 as compared to 15% of
total revenues in the comparable period of 1998. 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 1998. 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 58% from $2.6 million in the first three months
of 1997 to $4.1 million in the comparable period of 1998, primarily due to the
increased number of sales and marketing personnel to focus on the Mercator
product line and increased expenditures for Mercator-related marketing
programs. Selling and marketing expenses as a percentage of total revenues
increased from 47% of total revenues in the first three months of 1997 as
compared to 50% of total revenues in the comparable period of 1998. The
Company expects to continue hiring additional sales and marketing personnel
and to increase promotional expenses through at least the remainder of 1998 to
focus on the Mercator product line 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 58% from
$777,000 in the first three months of 1997 to $1.2 million in the comparable
period of 1998, primarily due to increased administrative expenses associated
with new systems to support the Company's growth and as a result of additional
costs related to being a public company. General and administrative expenses
as a percentage of total revenue increased from 14% of total revenues in the
first three months of 1997 to 15% of total revenues for the comparable period
of 1998. The Company believes that the dollar amount of its general and
administrative expenses will increase as the Company expands its
administrative staff to support the Company's growth.
22
<PAGE>
Other Income (Expense), Net
Interest income represents income earned on the Company's cash balances as
well as on its term-use contracts. Interest income increased from $(32,000) in
the first three months of 1997 to $323,000 in the comparable period of 1998,
due to higher cash balances resulting from the Company's initial public
offering. The Company had minimal borrowing expenses in the three months ended
March 31, 1998 as compared to $63,000 for the three months ended March 31,
1997.
Provision for Income Taxes
The Company recorded provision for income taxes of $7,000 and $105,000 in
the three months ended March 31, 1997 and 1998, respectively, reflecting a
higher effective tax rate estimated for 1998.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
Revenues
Total Revenues. Total revenues increased 40% from $19.0 million in 1996 to
$26.7 million in 1997.
Software Licensing. Software licensing revenues increased 57% from $9.3
million in 1996 to $14.6 million in 1997, primarily due to a 97% 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 25% from $9.7 million in 1996 to $12.1 million in 1997, primarily
due to a 125% 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
$4.6 million and $4.2 million for 1996 and 1997, respectively.
Cost of Revenues
Cost of Software Licensing. Cost of software licensing revenues increased
57% from $495,000 in 1996 to $778,000 in 1997. This increase was due to an
increase in product sales of Mercator. Software licensing gross margin
remained constant at 95% in 1996 and 1997.
Cost of Service, Maintenance and Other. Cost of service, maintenance and
other revenues increased 25% from $2.0 million in 1996 to $2.5 million in
1997. The increase was primarily due to an increase in the number of support
personnel related to the Company's Mercator product. Service, maintenance and
other gross margin remained constant at 79% in 1996 and 1997.
Operating Expenses
Product Development. Product development expenses increased 29% from $3.5
million in 1996 to $4.5 million in 1997, primarily due to increased headcount
associated with the development of new Mercator-based products. Product
development expenses represented 18% and 17% of total revenues for 1996 and
1997, respectively.
Selling and Marketing. Selling and marketing expenses increased 50% from
$8.7 million in 1996 to $13.1 million in 1997. This increase was primarily due
to the increased number of sales and marketing personnel required to focus on
the Mercator product line and increased spending on Mercator-related marketing
programs. Selling and marketing expenses represented 47% and 50% of total
revenues for 1996 and 1997, respectively.
23
<PAGE>
General and Administrative. General and administrative expenses increased
31% from $2.9 million in 1996 to $3.8 million in 1997. The increase was
primarily due to increased management and management information system staff
and increased depreciation expenses for computer equipment and system
upgrades. General and administrative expenses represented 15% and 14% of total
revenues for 1996 and 1997, respectively.
Other Income (Expense), Net
Interest income increased from $135,000 in 1996 to $688,000 in 1997 due to
investment income earned on proceeds from the Company's initial public
offering. Borrowing expenses decreased from $286,000 in 1996 to $186,000 in
1997 due to the repayment of the Company's bank debt with the proceeds of the
Company's initial public offering.
Provision for Income Taxes
The Company recorded provision for income taxes of $36,000 and $76,000 in
1996 and 1997, respectively. Due to the utilization of net operating loss
carryforwards the provision for income taxes for 1996 and 1997 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 focus on
the Mercator product line and increased spending on Mercator-related marketing
programs. Selling and marketing expenses represented 44% and 46% of total
revenues for 1995 and 1996, respectively.
24
<PAGE>
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.
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.
Provision for Income Taxes
The Company recorded provision for income taxes of $34,000 and $36,000 in
1995 and 1996, respectively. Due to the utilization of net operating loss
carryforwards, the provisions for income taxes for 1995 and 1996 were not
significant.
25
<PAGE>
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,
1998, 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,
1996 1996 1996 1996 1997 1997 1997 1997 1998
-------- -------- --------- -------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Software licensing..... $1,783 $1,878 $2,597 $3,052 $2,731 $3,175 $3,940 $4,756 $5,203
Service, maintenance
and other............. 2,306 2,358 2,449 2,581 2,777 2,980 3,060 3,251 2,984
------ ------ ------ ------ ------ ------ ------ ------ ------
Total revenues......... 4,089 4,236 5,046 5,633 5,508 6,155 7,000 8,007 8,187
------ ------ ------ ------ ------ ------ ------ ------ ------
Cost of revenues:
Software licensing..... 93 88 128 186 174 133 257 214 239
Service, maintenance
and other............. 432 467 505 602 548 531 711 700 755
------ ------ ------ ------ ------ ------ ------ ------ ------
Total cost of revenues. 525 555 633 788 722 664 968 914 994
------ ------ ------ ------ ------ ------ ------ ------ ------
Gross profit............ 3,564 3,681 4,413 4,845 4,786 5,491 6,032 7,093 7,193
------ ------ ------ ------ ------ ------ ------ ------ ------
Operating expenses:
Product development.... 779 831 882 960 1,073 1,057 1,183 1,149 1,224
Selling and marketing.. 1,894 2,001 2,194 2,626 2,584 3,088 3,314 4,109 4,088
General and administra-
tive.................. 729 628 761 804 777 1,009 1,011 995 1,228
------ ------ ------ ------ ------ ------ ------ ------ ------
Total operating ex-
penses................ 3,402 3,460 3,837 4,390 4,434 5,154 5,508 6,253 6,540
------ ------ ------ ------ ------ ------ ------ ------ ------
Operating income (loss). 162 221 576 455 352 338 524 840 653
Other income (expense),
net.................... (41) (35) (58) (52) (39) (71) 261 275 218
------ ------ ------ ------ ------ ------ ------ ------ ------
Net income (loss)....... $ 121 $ 186 $ 518 $ 403 $ 313 $ 267 $ 785 $1,115 $ 871
====== ====== ====== ====== ====== ====== ====== ====== ======
<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,
1996 1996 1996 1996 1997 1997 1997 1997 1998
-------- -------- --------- -------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Software licensing..... 43.6% 44.3% 51.5% 54.2% 49.6% 51.6% 56.3% 59.4% 63.6%
Service, maintenance
and other............. 56.4 55.7 48.5 45.8 50.4 48.4 43.7 40.6 36.4
------ ------ ------ ------ ------ ------ ------ ------ ------
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..... 2.3 2.1 2.5 3.3 3.2 2.2 3.7 2.7 2.9
Service, maintenance
and other............. 10.5 11.0 10.0 10.7 9.9 8.6 10.1 8.7 9.2
------ ------ ------ ------ ------ ------ ------ ------ ------
Total cost of revenues. 12.8 13.1 12.5 14.0 13.1 10.8 13.8 11.4 12.1
------ ------ ------ ------ ------ ------ ------ ------ ------
Gross profit............ 87.2 86.9 87.5 86.0 86.9 89.2 86.2 88.6 87.9
------ ------ ------ ------ ------ ------ ------ ------ ------
Operating expenses:
Product development.... 19.1 19.6 17.5 17.0 19.5 17.2 16.9 14.4 14.9
Selling and marketing.. 46.3 47.2 43.5 46.6 46.9 50.2 47.3 51.3 50.0
General and administra-
tive.................. 17.8 14.9 15.1 14.3 14.1 16.4 14.5 12.4 15.0
------ ------ ------ ------ ------ ------ ------ ------ ------
Total operating ex-
penses................ 83.2 81.7 76.1 77.9 80.5 82.8 78.7 78.1 79.9
------ ------ ------ ------ ------ ------ ------ ------ ------
Operating income (loss). 4.0 5.2 11.4 8.1 6.4 5.5 7.5 10.5 8.0
Other income (expense),
net.................... (1.0) (0.8) (1.1) (0.9) (0.6) (1.2) 3.7 3.4 2.6
------ ------ ------ ------ ------ ------ ------ ------ ------
Net income (loss)....... 3.0% 4.4% 10.3% 7.2% 5.8% 4.3% 11.2% 13.9% 10.6%
====== ====== ====== ====== ====== ====== ====== ====== ======
Gross profit:
Software licensing..... 94.8% 95.3% 95.1% 93.9% 93.6% 95.8% 93.5% 95.5% 95.4%
Service, maintenance
and other............. 81.3% 80.2% 79.4% 76.7% 80.3% 82.2% 76.7% 78.5% 74.7%
</TABLE>
26
<PAGE>
The Company's revenues and operating expenses increased sequentially in each
quarter of 1996, 1997 and the first quarter of 1998, except that software
licensing revenues decreased in the first quarter of 1997 and service,
maintenance and other revenue decreased in the first quarter of 1998. 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 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 and other ERP applications, as well as the number of such businesses
requiring third party enterprise 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; 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.
27
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
In July 1997, the Company sold 3,000,000 shares of its Common Stock in its
initial public offering. The total net proceeds to the Company from the
initial public offering were $24.3 million, $3.4 million of which were used to
repay indebtedness under the Company's bank line of credit. Prior to its
initial public offering, the Company funded its operations through private
sales of equity securities, its bank line of credit and cash from operations.
At March 31, 1998, the Company had net working capital of $24.8 million, which
included cash and marketable securities of $22.4 million.
Operating activities provided (used) net cash of $1.3 million, $730,000,
$(196,000) and $890,000 during 1995, 1996, 1997 and the three months ended
March 31, 1998, respectively. The Company generated net cash in 1995 and 1996
primarily as a result of its improved profitability during these periods. The
cash used in 1997 is due to increased accounts receivable and to the increase
in the proportion of sales billed during the last month of 1997 as compared to
1996. The cash used in the three months ended March 31, 1998 was due to
increased accounts receivable.
Investing activities (used) net cash of $(354,000), $(828,000) and $(11.4
million) during 1995, 1996, and 1997, respectively, primarily to fund capital
expenditures needed to support expansion of the Company's business in 1995 and
1996 and, in 1997, primarily related to purchases of short-term securities.
Investing activities provided cash of $1.8 million during the three months
ended March 31, 1998 due primarily to the sale of marketable securities during
the quarter.
Financing activities provided (used) net cash of $(1.3 million), $(102,000),
$22.4 million and $554,000, for 1995, 1996, 1997 and the three months ended
March 31, 1998, respectively, from repayments of debt in 1995 and 1996 and net
proceeds received from the Company's initial public offering in 1997,
partially offset in 1997 by repayments of debt.
The Company has a line of credit facility with the Bank of New York which
provides for borrowings equal to the lesser of $4.0 million or 80% of the sum
of eligible accounts receivable and certain other receivables contracts.
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%). 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 had no borrowings outstanding
as of March 31, 1998 and does not anticipate any borrowings in the foreseeable
future.
Net accounts receivable were $9.0 million at March 31, 1998 compared to $5.3
million at March 31, 1997. The number of days of average revenues in accounts
receivables was 99 at March 31, 1998 compared to 87 at March 31, 1997. This
increase in quarterly days sales outstanding is the result of an increase in
the amount of sales occurring at the end of the quarter ended March 31, 1998
as compared with the quarter ended March 31, 1997 and an extension of payment
terms for certain customers. 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, 1998, 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. As of December 31, 1997, the
Company had $44,000 of capital lease obligations and commitments under
operating lease agreements totalling $6.0 million through 2011, including $1.2
million for 1998. See Note 11 of Notes to Financial Statements.
The Company believes that the net proceeds from this offering, together with
its current cash and cash equivalent balances and any 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. A
portion of the Company's cash could also be used to
28
<PAGE>
acquire or invest in complementary businesses or products or otherwise to
obtain the right to use complementary technologies. From time to time, in the
ordinary course of business, the Company evaluates potential acquisitions of
such businesses, products or technologies. The Company has no present
understandings, commitments or agreements with respect to any material
acquisitions of other businesses, products or technologies.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are unable
to distinguish 21st century dates from 20th century dates. Beginning in the
year 2000, these date code fields will need to distinguish 21st century dates
from 20th century dates. The Company has completed an assessment of the "Year
2000" issue with respect to its computer systems. The Company has replaced or
upgraded its internal systems within the past 18 months and the Company
believes they are Year 2000 compliant. The Company is also in the process of
communicating with its suppliers and customers to determine the extent to
which it may be affected by any third party's Year 2000 issues. The Company
also believes that all of its products are Year 2000 compliant. Therefore, the
Company believes that the Year 2000 will not have a material adverse effect on
the Company's business, operating results and financial condition. See "Risk
Factors--Year 2000 Issues."
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, Statement of Financial Accounting Standard ("SFAS") No. 131,
"Disclosures about Segments of an Enterprise and Related Information," was
issued. SFAS No. 131 establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information
about operating segments in interim financial reports issued to shareholders
which is currently not required. It also establishes standards for related
disclosures about products and services, geographic areas, and major
customers. The Company is required to adopt this standard as of December 31,
1998.
In June 1997, Statement of Financial Accounting Standard ("SFAS") No. 130
"Reporting Comprehensive Income," was issued. SFAS No. 130 establishes
standards for reporting and disclosure of comprehensive income and its
components in a full set of general-purpose financial statements. This
statement requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported. Other
comprehensive income for the three months ended March 31, 1998 was $44,700 and
is comprised of the change in the foreign currency translation.
In October 1997 the AICPA issued SOP 97-2, "Software Revenue Recognition,"
which supersedes SOP 91-1. SOP 97 -2 generally requires revenue earned on
software arrangements involving multiple elements, such as additional software
products, upgrades or enhancements, rights to exchange or return software,
postcontract customer support, or services, including elements deliverable
only on a when-and-if-available basis, to be allocated to the various elements
of such sale based on "vendor-specific objective evidence of fair values"
allocable to each such element.
The Company adopted SOP 97-2 for software transactions entered into
beginning January 1, 1998. Such adoption did not have a material effect on the
timing of the Company's revenue recognition and the Company believes that it
will not have a material impact on its results of operations for the year
ended December 31, 1998.
29
<PAGE>
BUSINESS
INTRODUCTION
The Company is a leading provider of software and related services that
enable organizations to integrate their enterprise applications both
internally and with external business partners. The Company's flagship
product, Mercator, is an enterprise application integration solution which
permits enterprises to exchange information between internal systems,
implement and integrate advanced client/server applications such as SAP's R/3
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 8,700 customers worldwide, representing a broad range of industries. The
Company's customers include Allegiance Corporation, American Express Travel
Related Services, Inc., Bell Atlantic, CIGNA Corporation, Citibank, N.A.,
Federal Express Corporation, Hewlett-Packard Company, Hoechst AG, IBM, Lucent
Technologies, Inc., Mitsui & Co. Ltd., Prudential Insurance Company of America
and Texas Instruments.
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 enterprise resource
planning systems ("ERP"), 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 a 1996 study by Sentry Market
Research, a typical large organization has an average of 10 different
operating systems and 8 different Database Management Systems ("DBMSs") as
compared with 4 different operating systems and 3 different DBMSs in 1991.
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.
30
<PAGE>
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 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 SOFTWARE'S SOLUTION
TSI Software develops and markets software products and related services
that allow organizations to facilitate the integration of information between
enterprise applications as well as with external business partners. Key
benefits of the TSI Software enterprise application integration solution
include:
Comprehensive Internal and External Solution. TSI Software delivers
comprehensive solutions for integrating enterprise 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 Software'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, Windows NT 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
formats, proprietary formats, such as IDocs (SAP R/3 data definitions) and
DXOB (SAP R/3 initial data conversion) and industry standard formats such as
HL7 (healthcare standard for clinical information) and S.W.I.F.T.
(international banking transactions), 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 ALE and DMI and is also
certified for SAP's EDI interface. Mercator for R/3 extends the Company's core
Mercator product by providing functionality 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.
31
<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 enterprise 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 enterprise 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 enterprise application integration products, such as
those for SAP's R/3 System. The Company continually seeks to leverage its core
Mercator technology by developing pre-packaged solutions for additional
enterprise applications, data formats, DBMSs, messaging systems and computing
platforms. For example, the Company recently introduced Mercator for EC, an
enterprise-wide client/server application for distributed electronic commerce.
The Company is the leading provider of Windows-based EDI software and has
developed Trading Partner PC/32, the first desktop 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. 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 expanding its direct sales
force, the Company is focusing its sales and marketing efforts 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. For example, in January 1998, the Company
entered into a Pan-Asian distribution agreement with Mitsui & Co. Ltd.
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 customers as ERP systems continue to be
rolled out within their organizations. 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 intends to
augment its own service offerings by seeking strategic relationships with
major systems integrators and other service providers. For example, to promote
Mercator for R/3, the Company has developed education programs which are
marketed directly by SAP and offered by the Company's personnel at SAP
training centers.
32
<PAGE>
PRODUCTS AND SERVICES
The Company's enterprise application integration products include two
software product lines, the Mercator family and the Trading Partner family.
The following table depicts the Company's current enterprise 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 8/97 $7,500/seat
Server Engines.................... 12/93 8/97 from $600 for
Windows/DOS to
$158,400 mainframe
Mercator for R/3..................... 6/96 6/96 from $72,000 to
$182,500/system
Mercator for EC(2)................... 3/98 3/98 $91,800 to $182,500
TRADING PARTNER PRODUCTS:
Trading Partner PC................... 11/90 2/97 $1,495
Trading Partner PC/32................ 10/96 3/98 $1,995
Trading Partner Kits................. 10/92 various from $295
Trading Partner EC................... 11/90 10/95 $80,000
</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.
(2) Mercator for EC is currently in controlled release.
Mercator Products
The Company's flagship Mercator family of products is used by IT
professionals to integrate data between different enterprise applications.
Mercator was initially released in December 1993 and, as of March 31, 1998,
had been licensed to more than 1,300 customers worldwide.
Mercator. Mercator enables application integration by transforming or
mapping data between and among multiple 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 Server 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 a Server
Engine for each platform. The Company currently offers Server Engines for
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, VOS and
Continuum, MVS, and MVS/CICS. Mercator is complementary with most of the major
tools and protocols for messaging and data transport. Resource adapters are
provided for IBM MQSeries, Microsoft MQ, and TIBCO Rendezvous, as well as the
major tools for database access including DB2, Oracle, SQL Server, Sybase and
the databases supported by ODBC. In addition, the Company has recently
developed a resource adapter for Oracle AQ.
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
integration of data with SAP's R/3 system. Mercator for R/3 was the first
software product to be certified by SAP for use with ALE and DMI. Mercator for
R/3 has also been certified for the SAP EDI interface. This makes TSI Software
the first company to be certified by SAP for all
33
<PAGE>
three R/3 interfaces (ALE, EDI and DMI). Mercator for R/3 extends the core
Mercator product by providing functionality 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.
Mercator for EC. Mercator for EC, which is currently in controlled release,
is an enterprise-wide client/server solution for distributed electronic
commerce based on the Windows NT platform. It supports distributed management
and maintenance of the EC environment as well as distributed processing of EC
transactions. With Mercator for EC, numerous business units within an
enterprise can be supported and each business unit can create its own
customizable job streams for transaction processing. Transaction workflows can
be tailored to match the processing requirements of each area of the business.
Mercator for EC extends Mercator to electronic commerce by providing a
flexible, open architecture for creating robust, event-driven electronic
commerce solutions.
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. 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 1990, 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, the Company 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 General Motors, Ford Motor Company, J.C. Penney Company, Inc.,
Sears, Roebuck and Company, Target Stores and Wal-Mart Stores, Inc. The
Company also provides comprehensive EDI rollout programs for large
corporations such as Compaq, Hewlett-Packard, IBM, Kohler Company and Kaiser
Permanente. The Company's OnCall*EDI products are a series of EDI kits for
electronic purchasing for the health care provider market and as of March 31,
1998 had been licensed to more than 1,300 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. As of March 31, 1998, Trading
Partner EC and its predecessor product have been licensed to more than 200
businesses worldwide.
KEY/MASTER
In addition to the Company's enterprise application 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.
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Services
Professional Services. The Company offers consulting and professional
services to customers who wish to have the Company's professionals plan,
design or implement their enterprise 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, the Company 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. In
order to promote Mercator for R/3, the Company has developed education
programs which are marketed directly by SAP and offered by the Company's
personnel at SAP training centers.
CUSTOMERS
As of March 31, 1998, the Company had directly licensed its software to more
than 8,700 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.
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:
END USER CUSTOMERS
_________________________________ VARS, ISVS AND SIS
_________________________________
Abbott Labs Allegiance Corporation
Bell Atlantic American Express Travel Related
Blue Cross Blue Shield of Services, Inc.
Massachusetts American Software, Inc.
Brooks Brothers ARI Services Network, Inc.
Canadian National Railway Company Axolotl Corp.
CIGNA Corporation CEBRA Inc.
Deere & Company Citibank, N.A.
Dow Corning Compaq
Dun & Bradstreet Connect, Inc.
Eastman Kodak Company Federal Express
First Chicago NBD Corporation GTE Data Services Incorporated
General Mills, Inc. HBO & Company
Georgia-Pacific Corporation Hewlett-Packard Company
Hershey Foods IBM
Hoechst AG Mitsui & Co. Ltd.
Home Savings of America Netscape Communications Corp.
IBM Pivotpoint, Inc.
LitleNet, Inc. Power Crew
Lucent Technologies, Inc. Price Waterhouse LLC
MCI RS Information Systems, Inc.
Nestle Canada, Inc. S2 Systems, Inc.
Petroleos de Venezuela, S.A. Saratoga
Prudential Insurance Company of Software Consulting Partners, Inc.
America
Royal Canadian Mounted Police
Sara Lee Hosiery, Inc.
Texas Instruments
The Toronto Dominion Bank
U.S. Surgical
Whirlpool Corporation
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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, 1998, the Company's sales organization consisted of 59
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, 1998, over 100 third parties had agreements with the Company
to resell, embed or otherwise bundle the Company's products with their
offerings in the United States. In February 1998, the Company announced a Pan-
Asian distribution agreement with Mitsui. Under the terms of the agreement,
Mitsui can distribute Mercator for integration of ERP software, such as SAP
R/3 and electronic commerce, worldwide and can appoint resellers in various
Asian countries, including Japan, China, Indonesia and Taiwan. See "Risk
Factors -- Dependence Upon Development of Distribution Channels."
The Company markets its products and services outside of North America
through sales offices located in the United Kingdom and France as well as
through indirect channels. Revenues from international customers were 9.4% and
6.8% of the Company's total revenues during 1997 and the three months ended
March 31, 1998, respectively. The international market is important to the
Company, and it intends to continue to expand its sales and marketing efforts
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 provides an Alliance Program to support its channel partners with a
variety of programs, incentives, support plans and an annual conference. As of
March 31, 1998, 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 Server Engines for map execution. A map is an executable module that
describes the required transformation and re-ordering of data between source
and
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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 21
different execution environments. Graphical Transaction Workflow facilities
are also available for defining and managing entire systems of maps, including
the ability to trigger map executions based on time, events, commands or
through an API.
[FLOWCHART OF THE MERCATOR PLATFORM APPEARS HERE]
In the upper left corner of the chart is the heading "Data Objects" which
includes the following subheadings: R/3; X12 EDI; EDIFACT; S.W.I.F.T; HL7; and
COBOL. In the lower left corner of the chart is the heading "Resource Adapters"
which includes the following subheadings: Databases; Messaging systems;
Transaction monitors; File transfer software; Mail systems; and Value added
networks (VANs). In the lower right corner of the chart is the heading
"Execution Triggers" which includes the following subheadings: Messaging; Files;
Databases; Time; Commands; and APIs.
To simplify data definition, the Company provides pre-packaged objects for a
number of commonly used data standards. The Company also provides importers
for creating objects from higher level (meta) data definitions. Descriptions
of source and destination objects can also be entered by the user through
Mercator's graphical interface. 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 are available, 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 Server Engine appropriate to the target platform. Target platforms
currently supported include Windows 3.1, Windows 95, Windows NT, PC DOS, SCO
UNIX, open server, Sun Solaris/OS, IBM AIX, Digital Alpha NT, Alpha UNIX, VAX
VMS, Open VMS, OS/400, OS/390 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. The Company currently offers Server Engines for Windows
3.1, Windows 95,
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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 is complementary with most of the major tools and protocols
for messaging and data transport. Resource adapters are provided for IBM
MQSeries, Microsoft MQ, and TIBCO Rendezvous, as well as the major tools for
database access including DB2, Oracle, SQL Server, Sybase and the databases
supported by ODBC. In addition, the Company has recently developed a resource
adapter for Oracle AQ. In addition, the Company provides pre-packaged data
objects for national and international standards for EDI, S.W.I.F.T. and data
definitions for specific industries such as healthcare and transportation.
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
Server Engines by providing adapters for communicating with SAP ALE
architecture and importers for SAP R/3 IDocs and DXOB. 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, the Company 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 added
graphical transaction workflow management functionality to the core set of
Mercator capabilities. During the first quarter of 1998, the Company developed
messaging system adapters for Microsoft MQ, TIBCO Rendezvous and Oracle AQ and
added database connectivity for Sybase, DB2 and SQL server databases. This
functionality was designed to support graphical design and specification of
transaction workflows, sources and destinations for maps, triggering events,
and options for map execution.
As of March 31, 1998, there were 47 employees in the Company's research and
development organization, more than half of which were dedicated to Mercator.
The Company's product development expenditures for 1995, 1996, 1997 and the
three months ended March 31, 1998 were $3.1 million, $3.5 million, $4.5
million and $1.2 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
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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 has
also implemented an automated Company-wide help desk system to augment its
customer support efforts. This system allows for the optimization of the
Company's resources and knowledge base at all locations and offers the
customer improved service through one point of contact.
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 enterprise application integration market, the Company's Mercator
products and related services compete primarily against solutions developed
internally by individual businesses to meet their specific enterprise
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
addition, the Company is facing increasing competition in the enterprise
application integration market from other third-party vendors. 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
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<PAGE>
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 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. The Company is not aware of any
currently 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, 1998, the Company had 192 full-time employees, including 47
in research and development, 54 in professional services and customer support,
69 in sales and marketing and 22 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
Research and Development 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 11,000 square feet of office space in Boca Raton, Florida, which
is used primarily for research and development activities, approximately 3,600
square feet of office space in the United Kingdom, and small offices in France
and Landover, Maryland. All of the Company's offices have fully-equipped
training centers. The Company is currently negotiating for additional leased
space at its executive offices. The Company believes its facilities are
adequate to support its current needs and, if required, the Company can obtain
additional space on a timely basis and on commercially reasonable terms.
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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).......... 56 President and Chief Executive Officer
and Director
Eric A. Amster.................. 44 Vice President, Sales
Patricia T. Boggs............... 46 Vice President, Professional Services
Robert H. Bouton................ 57 Vice President, Marketing
Ira A. Gerard................... 50 Vice President, Finance and
Administration, Chief Financial Officer
and Secretary
James Monks..................... 42 Vice President, International Operations
David Raye...................... 37 Vice President, Operations
Edward J. Watson................ 60 Executive Vice President, Business
Development
Saydean Zeldin.................. 57 Vice President, Research and Development
Stewart K.P. Gross(1)(2)........ 38 Director
Ernest E. Keet(1)(2)............ 57 Director
John J. Pendray(1)(2)........... 58 Director
Dennis G. Sisco(1)(2)........... 51 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.
Patricia T. Boggs has been Vice President, Professional Services since
joining the Company in June 1997. From February 1991 to 1997, Ms. Boggs was
employed by Datalogix International Inc., where she served most recently as
Vice President, Client Services. Prior to 1991, Ms. Boggs was an Assistant
Professor at both John Carroll University in University Heights, Ohio and
Wright State University in Dayton, Ohio. Ms. Boggs holds a Masters degree in
Economics and a Doctorate in Operations Research/Statistics from Kent State
University.
Robert H. 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.
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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.
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 Loughborough
University, 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. Edward J. 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, IA Corporation and several privately-held companies.
Ernest E. Keet has served as a director of the Company since April 1985. Mr.
Keet has been the President and a member of the Board of Directors of Vanguard
Atlantic Ltd. since April 1984. 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 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
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<PAGE>
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.
Dennis G. Sisco has served as a director of the Company since January 1990.
Mr. Sisco is a partner with Behrman Capital. 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
terminated in July 1997, upon the closing of the Company's initial public
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 Board 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, in May 1997, each of Messrs. Gross, Keet, Pendray and
Sisco received options to purchase 15,000 shares of Common Stock at an
exercise price of $6.67 per share. 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. The per share exercise
price of each option granted under the Directors Plan prior to the Company's
initial public offering was the fair market value of a share of the Company's
Common Stock as determined by the Board. The per share exercise price of each
option granted after the Company's initial public offering will be 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 Directors 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 such options will 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.
43
<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 1995, 1996
and 1997 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 1997
(together, the "Named Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
AWARDS
------------
SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS(2) COMPENSATION OPTIONS
- --------------------------- ---- --------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Constance F. Galley.......... 1997 $203,538 $50,000 $ 4,952(3) 112,500
President, Chief Executive
Officer and Director 1996 $165,000 $50,000 $ 5,031(3) 18,000
1995 $161,133 $35,107 $ 144(3) --
Robert H. Bouton............. 1997 $164,000 $20,000 $ 4,952(3) --
Vice President, Marketing 1996 $158,704 $20,000 $ 4,900(3) --
1995 $142,795 $10,000 $ 225(3) --
Ira A. Gerard(4)............. 1997 $159,892 $26,667 $ 6,417(3) --
Vice President, Finance and
Administration, 1996 $146,000 $20,000 $ 6,516(3) --
Chief Financial Officer and
Secretary 1995 $ 34,442 -- $ 22(3) 144,000
Saydean Zeldin............... 1997 $154,808 $26,667 $ 2,889(3) --
Vice President, Research and
Development 1996 $130,000 $20,000 $ 2,922(3) 36,000
1995 $129,703 $15,000 $ 225(3) 45,000
Eric A. Amster............... 1997 $125,000 -- $184,918(5) --
Vice President, Sales 1996 $125,000 -- $ 85,951(5) 36,000
1995 $ 9,611 -- $ 3,920(5) 72,000
</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) Mr. Gerard joined the Company in October 1995.
(5) Includes sales commissions paid to Mr. Amster by the Company in the amount
of $3,916, $80,982 and $178,501 in 1995, 1996 and 1997, respectively, and
also includes $4, $4,918 and $6,417 for the portion of health, life and
disability insurance premiums paid by the Company in 1995, 1996 and 1997,
respectively. Mr. Amster joined the Company in December 1995.
The following table sets forth information regarding option grants during
1997 to each of the Named Officers.
OPTION GRANTS IN 1997
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF PERCENTAGE OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM(4)
OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION -----------------------
NAME GRANTED(1) 1997(2) PER SHARE(3) DATE 5% 10%
- ---- ---------- ------------- -------------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Constance F. Galley..... 112,500 21.4% $6.67 5/8/2007 $1,222,282 $1,946,279
Robert H. Bouton........ -- -- -- -- -- --
Ira A. Gerard........... -- -- -- -- -- --
Saydean Zeldin.......... -- -- -- -- -- --
Eric A. Amster.......... -- -- -- -- -- --
</TABLE>
44
<PAGE>
- --------
(1) Unless otherwise indicated below, all options granted in 1993 were granted
pursuant to the Company's 1993 Stock Option Plan (the "1993 Plan"), and
vest as to 25% of the shares covered by such option each year following
the date of grant, subject to acceleration under certain circumstances.
Under the 1997 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."
(2) Based on a total of 525,700 options granted to all employees during 1997.
(3) All options were granted at an exercise price equal to the fair market
value of the Company's Common Stock.
(4) Potential realizable values are calculated based on the fair market value
of the Common Stock at the date of grant 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.
The following table includes information concerning unexercised stock
options held by the Named Officers at December 31, 1997. No options were
exercised by the Named Officers during 1997.
AGGREGATE OPTION EXERCISES IN 1997 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......... 161,961 121,500 $1,538,630 $1,344,250
Robert H. Bouton............ 63,000 -- $ -- $ --
Ira A. Gerard............... 72,000 72,000 $ 660,240 $ 660,240
Saydean Zeldin.............. 75,000 49,000 $ 675,780 $ 418,005
Eric A. Amster.............. 45,000 63,000 $ 400,680 $ 541,800
</TABLE>
- --------
(1) These values have not been, and may never be, realized and are based on
the positive spread between the respective exercise prices of outstanding
options and $9.50, which was the closing price of the Company's Common
Stock on December 31, 1997.
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; Saydean Zeldin, the Company's Vice President, Research
and Development and Robert H. Bouton, Vice President Marketing.
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.
45
<PAGE>
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 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.
Mr. Bouton's agreement provides for an initial base salary of $135,000 and
an option to purchase an aggregate of 45,000 shares of Common Stock. Mr.
Bouton currently receives a base salary of $164,000. This agreement may be
terminated by the Company at any time for any reason.
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 Company's 1993 Stock Option Plan (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. The 1997 Plan became
effective in July 1997 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.
As of March 31, 1998, 396,200 shares of Common Stock were subject to
options outstanding under the 1997 Plan and 1,023,474 shares of Common Stock
were available for future distribution pursuant to the 1997 Plan, including
shares originally reserved for issuance under the 1993 Plan that have become
available for distribution under the 1997 Plan. Since the effectiveness of the
1997 Plan, the Company has issued 400 shares of Common Stock as Stock Bonuses.
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
46
<PAGE>
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 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 change 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. As of March 31, 1998, 1,194,581 shares of Common
Stock were subject to options outstanding under the 1993 Plan. No further
options will be granted under the 1993 Plan. 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 1993 Plan are substantially the same as those
that pertain to the 1997 Plan.
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. As of April 30, 1998, 70,662 shares of
Common Stock had been issued pursuant to the Purchase Plan and 679,338 shares
remained available for future issuance under the Purchase Plan. The Purchase
Plan became effective in July 1997 and permits 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 is for a period of
12 months (the "Offering Period") and consists 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. The first
Offering Period began on July 1, 1997 and will end on July 31, 1998. The Board
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.
47
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
Until May 1997, 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 has entered 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, has obtained 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.
48
<PAGE>
CERTAIN TRANSACTIONS
Since January 1, 1995, 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 the compensation
agreements which are described in "Management."
49
<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 April 30,
1998, and as adjusted to reflect the sale of shares offered hereby, by (i)
each stockholder 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
EXECUTIVE OFFICERS, DIRECTORS PRIOR TO OFFERING(1) AFTER OFFERING(1) (3)
5% STOCKHOLDERS AND OTHER -------------------- NUMBER OF --------------------------
SELLING STOCKHOLDERS NUMBER PERCENT(2) SHARES OFFERED NUMBER PERCENT(2)
- ----------------------------- --------- ---------- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Stewart K.P. Gross ..... 2,288,655 25.0% 1,700,000 588,655 5.5%
Warburg, Pincus Capital
Company, L.P. (4)
Ernest E. Keet ......... 1,709,177 17.9 600,000 1,109,177 10.3%
Vanguard Atlantic Ltd.
(5)
Amerindo Investment Ad- 1,168,000 12.2 -- 1,168,000 10.9
visors Inc. (6)........
Richard L. Chilton, Jr. 500,000 5.2 -- 500,000 4.7
(7)....................
Constance F. Galley (8). 518,832 5.3 -- 518,832 4.7
Ira A. Gerard (9)....... 72,723 * -- 72,723 *
Eric A. Amster (10)..... 46,958 * 3,000 43,958 *
Robert H. Bouton (11)... 65,694 * -- 65,694 *
Saydean Zeldin (12)(15). 241,750 2.5 -- 233,750 2.1
John J. Pendray (13).... 114,807 1.2 -- 114,807 1.1
Dennis G. Sisco (14).... 5,750 * -- 5,750 *
Edward J. Watson
(12)(15)............... 241,750 2.5 8,000 233,750 2.1
All executive officers
and directors as a
group
(13 persons) (16)...... 5,178,896 50.1 2,311,000 2,867,896 25.1
Other Selling Stockhold-
ers....................
</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
April 30, 1998, 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 April 30,
1998 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) Applicable percentage of ownership is based upon 9,542,873 shares of
Common Stock outstanding on April 30, 1998 (giving effect to (i) 382,281
shares of Common Stock issuable upon exercise of the Selling Stockholder
Warrant and (ii) 11,000 shares of Common Stock issuable upon exercise of
stock options by two of the Selling Stockholders immediately prior to the
closing of this Offering) and 10,742,873 shares of Common Stock
outstanding upon completion of the Offering.
(3) Assumes that the Underwriters' over-allotment option to purchase up to
526,650 shares from the Company and two Selling Stockholders is not
exercised. If the Underwriters' over-allotment option is exercised in
full, the Company, Warburg, Pincus Capital & Company, L.P. and Vanguard
Atlantic Ltd. will sell an additional 226,650, 200,000 and 100,000
shares, respectively.
(4) Includes 382,281 shares of Common Stock issuable to Warburg, Pincus
Capital Company, L.P. ("Warburg") upon exercise of the Selling
Stockholder Warrant, which shares will be purchased by the Underwriters
upon exercise of the Selling Stockholder Warrant and offered hereby.
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
50
<PAGE>
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 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
Exchange Act. Also includes 3,750 shares of Common Stock subject to
options exercisable within 60 days of April 30, 1998. The address of Mr.
Gross and Warburg is 466 Lexington Avenue, New York, N.Y. 10017.
(5) Based on Schedules 13G dated February 2, 1998. 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. 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. Also includes 3,750 shares of Common Stock
subject to options exercisable within 60 days of April 30, 1998. 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.
(6) Based on a Schedule 13D, as amended through April 17, 1998. Amerindo
Investment Advisors Inc., a California corporation ("Amerindo"), and
Amerindo Investment Advisors, Inc., a Panama corporation ("Amerindo
Panama" and together with Amerindo, the "Amerindo Companies"), are
registered investment advisors, and in this capacity may be deemed to be
the beneficial owners of the securities listed. Clients of the Amerindo
Companies have the right to receive and direct the receipt of dividends
and proceeds from sales of shares disposed of by the Amerindo Companies.
No single client of the Amerindo Companies owns more than 5% of these
shares. Amerindo has shared voting and dispositive power over 815,500
shares of Common Stock, and Amerindo Panama has shared voting and
dispositive power over 342,500 shares of Common Stock. Messrs. Alberto
Vilar and Gary Tanaka, who are the sole stockholders and directors of the
Amerindo Companies, have shared voting and dispositive power over all of
the shares shown. The Amerindo Investment Advisors Inc. Profit Sharing
Trust (the "Trust") has sole voting and dispositive power as to 10,000
shares of Common Stock. Each of the Amerindo Companies, the Trust and
Messrs. Vilar and Tanaka disclaim beneficial ownership of all of the
shares reported.
(7) Based on a Schedule 13G dated April 13, 1998. Mr. Chilton reported sole
voting and dispositive power with respect to these shares. The address of
Mr. Chilton is c/o Chilton Investment Co., Inc., 320 Park Avenue, 22nd
Floor, New York, NY 10022.
(8) Includes 194,586 shares of Common Stock subject to options exercisable
within 60 days of April 30, 1998 and 25,005 shares of Common Stock
issuable upon exercise of Warrants. This also includes 60,000 shares of
Common Stock owned by Saugatuck Partners ("Saugatuck"), the investment
advisor of which is the husband of Ms. Galley. Ms. Galley disclaims
beneficial ownership of the 60,000 shares owned by Saugatuck.
(9) Includes 72,000 shares of Common Stock subject to options exercisable
within 60 days of April 30, 1998.
(10) Includes 40,000 shares of Common Stock subject to options exercisable
within 60 days of April 30, 1998.
(11) Includes 63,000 shares of Common Stock subject to options exercisable
within 60 days of April 30, 1998.
(12) Represents 78,250 shares of Common Stock subject to options exercisable
within 60 days of April 30, 1998. Also includes 6,000 shares of Common
Stock, 151,500 shares of Common Stock subject to options exercisable
within 60 days of April 30, 1998 and 6,000 shares of Common Stock
issuable upon exercise of warrants held by Ms. Zeldin's husband, Edward
J. Watson. Ms. Zeldin disclaims beneficial ownership of the shares,
options and warrants owned by Mr. Watson.
(13) Includes 4,950 shares of Common Stock subject to options exercisable
within 60 days of April 30, 1998, 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 his son Michael D. Pendray. Mr. Pendray disclaims beneficial
ownership of the shares held by his son.
(14) Includes 3,750 shares subject to options exercisable within 60 days of
April 30, 1998.
(15) Mr. Watson is the Executive Vice President, Business Development of the
Company. Includes 151,500 shares of Common Stock subject to options
exercisable within 60 days of April 30, 1998, and 6,000 shares of Common
Stock issuable upon exercise of warrants. Also includes 78,250 shares of
Common Stock subject to options exercisable within 60 days of April 30,
1998 held by Mr. Watson's wife, Saydean Zeldin. Mr. Watson disclaims
ownership of the options held by Ms. Zeldin.
(16) Includes an aggregate of 704,786 shares of Common Stock subject to
options exercisable within 60 days of April 30, 1998 and 413,286 shares
of Common Stock issuable upon exercise of warrants, including the options
and warrants described in footnotes (3), (4) and (7) through (13).
51
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists 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. As of March 31, 1998, there were outstanding
9,098,202 shares of Common Stock, options to purchase 1,650,781 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
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, 1998, the Company had outstanding seven warrants to purchase
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.
Following the consummation of this offering, there will be outstanding 269,490
shares of Common Stock issuable upon exercise of warrants.
REGISTRATION RIGHTS
Following this offering, the holders of approximately 1,736,259 shares of
Common Stock and Warrants to purchase 269,490 shares of Common Stock of the
Company have certain "demand" rights to register those shares of Common Stock
and the shares of Common Stock issuable upon exercise of such Warrants (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 in July 2000.
52
<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 Common Stock is listed on the Nasdaq National Market under the trading
symbol "TSFW."
53
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
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, 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 107,429 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.
Upon completion of this offering, the Company will have outstanding
approximately 10,742,873 shares of Common Stock. Of these shares, 8,122,000
will be eligible for immediate sale in the public market without restriction
as of the effective date of the Registration Statement of which this
Prospectus forms a part (the "Effective Date"). On the Effective Date there
will be an additional 2,466,035 shares of Common Stock outstanding, all of
which additional shares 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 90 days after the
date of this Prospectus without the prior written consent of BancAmerica
Robertson Stephens. Taking into account the lock-up agreements and
notwithstanding possible earlier eligibility for sale under the provisions of
Rules 144 and 144(k), the numbers of shares that will be available for sale in
the public market will be as follows: (i) 241,930 Restricted Shares will be
eligible for sale in the public market without restriction as of the Effective
Date, (ii) 150,000 Restricted Shares will be eligible for sale subject to
certain volume and other resale restrictions under Rule 144 and (iii)
approximately 2,074,105 Restricted Shares will become eligible for sale 90
days after the Effective Date upon expiration of certain lock-up agreements
and, as of that date, all of such shares will be 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 269,490
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.
At March 31, 1998, options to purchase 1,650,781 shares of Common Stock were
outstanding, of which options approximately 710,831 shares were then
exercisable. The Company has registered under the Securities Act a total of
3,616,671 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. Also, certain holders of shares of Common Stock
and Warrants to purchase Common Stock are entitled to certain rights to
register such shares of Common Stock for offer and sale to the public. See
"Description of Capital Stock--Registration Rights."
54
<PAGE>
UNDERWRITING
The Underwriters named below, acting through their representatives,
BancAmerica Robertson Stephens, Bear, Stearns & Co. Inc., Dain Rauscher
Wessels, a division of Dain Rauscher Incorporated ("Dain Rauscher Wessels"),
and SoundView Financial Group, Inc. (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. Such shares
include 382,281 shares to be sold to the Underwriters pursuant to the exercise
of the Selling Stockholder Warrant. The Underwriters are committed to purchase
and pay for all such shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
BancAmerica Robertson Stephens...........................................
Bear, Stearns & Co. Inc. ................................................
Dain Rauscher Wessels....................................................
SoundView Financial Group, Inc...........................................
---------
Total.................................................................. 3,511,000
=========
</TABLE>
The Representatives have advised the Company and the Selling Stockholders
that the Underwriters propose to offer the shares of Common Stock to the
public at the 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 completion of this 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
and the Selling Stockholders as set forth on the cover page of this
Prospectus.
In connection with this offering, the Underwriters have agreed to purchase a
warrant to purchase 382,281 shares of Common Stock from a Selling Stockholder
at a per share price equal to the initial public offering price less the
underwriting discounts and commissions and the per share exercise price of
such warrant. Such warrant has an exercise price of $2.00 per share, which
will be paid to the Company by the Underwriters upon exercise at the
consummation of the offering.
The Company and 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 an aggregate of 526,650 additional shares
of Common Stock, at the same price per share as the Company and the Selling
Stockholders will receive for the 3,511,000 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 3,511,000 shares offered hereby. If purchased, such
additional shares will be sold by the Underwriters on the same terms as those
on which the 3,511,000 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 90 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
55
<PAGE>
they have the power of disposition, without the prior written consent of
BancAmerica Robertson Stephens, 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 90 days following the effective date
of this Prospectus the Company will not, without the prior written consent of
BancAmerica Robertson Stephens, 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.
The Underwriters do not intend to confirm sales of the Common Stock offered
hereby to any accounts over which they exercise discretionary authority.
The Representatives have advised the Company that, pursuant to Regulation M
under the Exchange Act, certain persons participating in the offering may
engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids which may have the effect of
stabilizing or maintaining the market price of the Common Stock at a level
above that which might otherwise prevail in the open market. A "stabilizing
bid" is a bid for or the purchase of the Common Stock on behalf of the
Underwriters for the purpose of fixing or maintaining the price of the Common
Stock. A "syndicate covering transaction" is the bid for or the purchase of
the Common Stock on behalf of the Underwriters to reduce a short position
incurred by the Underwriters in connection with the offering. A "penalty bid"
is an arrangement permitting the Representatives to reclaim the selling
concession otherwise accruing to an Underwriter or syndicate member in
connection with the offering if the Common Stock originally sold by such
Underwriter or syndicate member is purchased by the Representatives in a
syndicate covering transaction and has therefore not been effectively placed
by such Underwriter or syndicate member. The Representatives have advised the
Company that such transactions may be effected on the Nasdaq National Market
or otherwise and, if commenced, may be discontinued at any time.
In connection with this offering, certain Underwriters and selling group
members (if any) who are qualified market makers on the Nasdaq National Market
may engage in passive market making transactions in the Common Stock on the
Nasdaq National Market in accordance with Rule 103 of Regulation M under the
Exchange Act, during the business day prior to the pricing of the offering,
before the commencement of offers or sales of the Common Stock. Passive market
makers must comply with applicable volume and price limitations and must be
identified as such. In general, a passive market maker must display its bid at
a price not in excess of the highest independent bid for such security; if all
independent bids are lowered below the passive market maker's bid, however,
such bid must then be lowered when certain purchase limits are exceeded.
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, 1996
and 1997, and for each of the years in the three-year period ended December
31, 1997 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.
56
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the reporting requirements of the Exchange Act
and, in accordance therewith, files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Judiciary
Plaza, Washington, D.C. 20549, and at the Commission's following Regional
Offices: 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and
Seven World Trade Center, 13th Floor, New York, New York 10048. Copies of such
material can be obtained at prescribed rates from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C.
20549. The Commission maintains a World Wide Web site that contains reports,
proxy statements and other information regarding registrants that file
electronically with the Commission. The address of the site is
http://www.sec.gov. The Company's Common Stock is quoted on the Nasdaq
National Market and reports, proxy statements and other information concerning
the Company also may be inspected at the offices of Nasdaq Operations, 1735 K
Street, N.W., Washington, D.C. 20006.
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.
57
<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, 1996 and 1997 and (unaudited) March 31,
1998..................................................................... F-3
Statements of Income for the years ended December 31, 1995, 1996 and 1997
and (unaudited) for the three months ended March 31, 1997 and 1998....... F-4
Statements of Stockholders' Equity (Deficit) as of December 31, 1995, 1996
and 1997 and (unaudited) for the three months ended March 31, 1998 ...... F-5
Statements of Cash Flows for the years ended December 31, 1995, 1996 and
1997 and (unaudited) for the three months ended March 31, 1997 and 1998.. 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 1997, and the
related statements of income, stockholders' equity (deficit) and cash flows
for each of the years in the three year period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 1997, and the results of its operations and
its cash flows for each of the years in the three year period ended December
31, 1997 in conformity with generally accepted accounting principles.
KPMG Peat Marwick llp
New York, New York
February 4, 1998
F-2
<PAGE>
TSI INTERNATIONAL SOFTWARE LTD.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- MARCH 31,
1996 1997 1998
------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash.................................. $ 41,300 $10,912,500 $14,205,900
Investments in marketable securities.. -- 10,490,500 8,213,000
Accounts receivable, less allowances
of $319,900, $471,300, and
(unaudited) $584,200................. 4,380,900 7,864,100 8,996,200
Current portion of investment in
licensing contracts receivable, net
of unearned finance income of $84,200
$60,000, and (unaudited) $60,500
(note 3)............................. 742,000 678,100 701,200
Prepaid expenses and other current
assets............................... 388,000 745,000 805,200
------------ ----------- -----------
Total current assets................ 5,552,200 30,690,200 32,921,500
Furniture, fixtures and equipment, net
(note 4)............................... 1,304,400 1,587,300 1,870,400
Investment in licensing contracts
receivable, net of unearned finance
income of $50,100, $38,700, and
(unaudited) $24,600 (note 3)........... 551,600 421,800 220,800
Other assets............................ 113,100 242,400 243,700
------------ ----------- -----------
$ 7,521,300 $32,941,700 $35,256,400
============ =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable...................... $ 694,800 $ 600,200 $ 756,900
Accrued expenses (note 10)............ 1,486,500 2,207,900 1,661,400
Current portion of deferred revenue... 4,591,200 4,511,000 5,720,900
------------ ----------- -----------
Total current liabilities........... 6,772,500 7,319,100 8,139,200
Long-term debt (note 5)................. 2,790,100 -- --
Other long-term liabilities............. 27,400 17,800 23,300
Deferred revenue, less current portion.. 225,000 188,400 181,100
------------ ----------- -----------
Total liabilities................... 9,815,000 7,525,300 8,343,600
------------ ----------- -----------
Stockholders' equity (deficit) (note 6)
Convertible preferred stock
(authorized 5,000,000 shares;
$8,219,000 aggregate liquidation
preference in 1996).................. 8,600 -- --
Common stock ($.01 par value;
authorized 20,000,000 shares; issued
3,000,000, 9,056,542, and (unaudited)
9,098,202 shares, respectively)...... 30,000 90,600 91,000
Additional paid-in capital............ 7,888,800 33,134,200 33,662,200
Accumulated deficit................... (10,036,600) (7,557,000) (6,685,800)
Cumulative foreign currency
translation adjustment............... (119,500) (199,300) (154,600)
Treasury stock, at cost (113,428,
102,478, and (unaudited) 0 shares,
respectively)........................ (65,000) (52,100) --
------------ ----------- -----------
Total stockholders' equity
(deficit).......................... (2,293,700) 25,416,400 26,912,800
------------ ----------- -----------
Total liabilities and
stockholders' equity (deficit)... $ 7,521,300 $32,941,700 $35,256,400
============ =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
TSI INTERNATIONAL SOFTWARE LTD.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------- ----------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Software licensing.... $ 7,552,900 $ 9,309,500 $14,602,400 $2,731,100 $5,203,300
Service, maintenance
and other............ 8,508,500 9,694,400 12,067,300 2,776,800 2,984,000
----------- ----------- ----------- ---------- ----------
Total revenues...... 16,061,400 19,003,900 26,669,700 5,507,900 8,187,300
----------- ----------- ----------- ---------- ----------
Cost of revenues:
Software licensing.... 724,900 494,800 778,100 173,500 239,200
Service, maintenance
and other............ 2,200,800 2,005,700 2,490,000 548,200 755,100
----------- ----------- ----------- ---------- ----------
Total cost of
revenues........... 2,925,700 2,500,500 3,268,100 721,700 994,300
----------- ----------- ----------- ---------- ----------
Gross profit............ 13,135,700 16,503,400 23,401,600 4,786,200 7,193,000
----------- ----------- ----------- ---------- ----------
Operating expenses:
Product development... 3,067,600 3,452,300 4,461,800 1,073,400 1,223,800
Selling and marketing. 7,159,800 8,715,200 13,095,100 2,583,700 4,088,100
General and
administrative....... 2,001,200 2,921,500 3,791,600 777,200 1,228,100
----------- ----------- ----------- ---------- ----------
Total operating
expenses........... 12,228,600 15,089,000 21,348,500 4,434,300 6,540,000
----------- ----------- ----------- ---------- ----------
Operating income.... 907,100 1,414,400 2,053,100 351,900 653,000
Other income/(expense),
net ...................
Borrowing expenses
(note 5)............. (419,800) (285,500) (185,800) (63,100) (4,200)
Interest income....... 193,200 135,200 688,300 30,500 327,400
Other income (note
12).................. 176,900 -- -- -- --
----------- ----------- ----------- ---------- ----------
Total other
income/(expense),
net ............... (49,700) (150,300) 502,500 (32,600) 323,200
----------- ----------- ----------- ---------- ----------
Income before income
taxes.............. 857,400 1,264,100 2,555,600 319,300 976,200
Provision for income
taxes (note 9)......... 34,600 36,200 76,000 6,600 105,000
----------- ----------- ----------- ---------- ----------
Net income.......... $ 822,800 $ 1,227,900 $ 2,479,600 $ 312,700 $ 871,200
=========== =========== =========== ========== ==========
Net income per share--
Basic.................. $ .29 $ .43 $ .42 $ .11 $ .10
=========== =========== =========== ========== ==========
- --Diluted............... $ .15 $ .21 $ .29 $ .05 $ .08
=========== =========== =========== ========== ==========
Average shares
outstanding--Basic..... 2,845,630 2,886,822 5,916,993 2,886,822 9,044,404
=========== =========== =========== ========== ==========
- --Diluted............... 5,455,045 5,811,210 8,566,761 6,368,545 10,827,636
=========== =========== =========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
TSI INTERNATIONAL SOFTWARE LTD.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
SERIES A, B, C
AND E
CONVERTIBLE CUMULATIVE
PREFERRED STOCK COMMON STOCK FOREIGN TREASURY STOCK
----------------- ----------------- ADDITIONAL ACCUMULATED CURRENCY -------------------
PAR PAR PAID-IN DEFICIT TRANSLATION
SHARES VALUE SHARES VALUE CAPITAL VALUE ADJUSTMENT SHARES VALUE TOTAL
-------- ------- --------- ------- ----------- ------------ ----------- -------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
Currency
translation
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
Currency
translation
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)
Issuance of
Series E
Preferred
Stock, net..... 50,000 500 -- -- 992,900 -- -- -- -- 993,400
Net proceeds
from initial
public
offering....... -- -- 3,000,000 30,000 24,242,300 -- -- -- -- 24,272,300
Conversion of
Preferred
Stock.......... (910,969) (9,100) 2,759,715 27,600 (18,500) -- -- -- -- --
Exercise of
warrants on a
net exercise
basis.......... 296,827 3,000 (3,000) -- -- -- -- --
Stock options
exercised...... -- -- -- -- (4,200) -- -- 11,000 12,900 8,700
Net income...... -- -- -- -- -- 2,479,600 -- -- -- 2,479,600
Currency
translation
adjustment..... -- -- -- -- -- -- (79,800) -- -- (79,800)
Amortization of
deferred
compensation... -- -- -- -- 35,900 -- -- -- -- 35,900
-------- ------- --------- ------- ----------- ------------ ---------- -------- --------- -----------
Balance at
December 31,
1997........... -- -- 9,056,542 $90,600 $33,134,200 $ (7,557,000) $(199,300) (102,478) $ (52,100) $25,416,400
======== ======= ========= ======= =========== ============ ========== ======== ========= ===========
Stock options
exercised
(unaudited).... -- -- -- -- (13,200) -- -- 73,476 37,400 24,200
Net income
(unaudited) ... -- -- -- -- -- 871,200 -- -- -- 871,200
Currency
translation
adjustment
(unaudited) ... -- -- -- -- -- -- 44,700 -- -- 44,700
Stock issued
under ESPP
(unaudited) ... -- -- 41,660 400 524,900 -- -- 29,002 14,700 540,000
Amortization of
deferred
compensation
(unaudited).... -- -- -- -- 16,300 -- -- -- -- 16,300
-------- ------- --------- ------- ----------- ------------ ---------- -------- --------- -----------
Balance at March
31, 1998
(unaudited).... -- -- 9,098,202 $91,000 $33,662,200 $ (6,685,800) $(154,600) -- $ -- $26,912,800
======== ======= ========= ======= =========== ============ ========== ======== ========= ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
TSI INTERNATIONAL SOFTWARE LTD.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
-------------------------------------- ----------------------
1995 1996 1997 1997 1998
----------- ----------- ------------ --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income............ $ 822,800 $ 1,227,900 $ 2,479,600 $ 312,700 $ 871,200
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Depreciation of
fixed assets....... 351,000 436,100 623,300 150,900 170,400
Amortization of
deferred
compensation....... -- -- 35,900 -- 16,300
Amortization of
licenses and
purchased software
(note 4)........... 291,300 -- -- -- --
Provision for losses
on accounts
receivable......... 65,000 431,700 281,400 19,900 124,100
Changes in operating
assets and
liabilities:
Accounts
receivable....... (977,200) (1,930,500) (3,848,600) (981,600) (1,256,200)
Investment in
licensing
contracts
receivable....... 502,900 585,300 193,700 (80,400) 177,900
Prepaid expenses
and other current
assets........... 69,800 (87,200) (357,000) (111,200) (60,200)
Other assets...... (18,400) (43,500) (129,300) (7,400) (1,300)
Accounts payable.. 133,500 255,700 (94,600) (83,800) 156,700
Accrued expenses.. 155,000 220,000 736,900 123,700 (517,300)
Other long term
liabilities...... (57,400) -- -- 28,200 5,500
Deferred
maintenance
revenue.......... (16,100) (365,600) (116,800) 82,600 1,202,600
----------- ----------- ------------ --------- -----------
Net cash
provided (used)
by operating
activities..... 1,322,200 729,900 (195,500) (546,400) 889,700
----------- ----------- ------------ --------- -----------
Cash flow from investing
activities:
Purchase of furniture,
fixtures and
equipment............ (354,300) (827,500) (876,200) (197,800) (453,500)
(Purchases) sales of
marketable
securities........... -- -- (10,490,500) -- 2,277,500
----------- ----------- ------------ --------- -----------
Net cash (used)
provided by
investing
activities..... (354,300) (827,500) (11,366,700) (197,800) 1,824,000
----------- ----------- ------------ --------- -----------
Cash flows from
financing activities:
Net proceeds from
initial public
offering............. -- -- 24,272,300 -- --
Issuance of Preferred
Stock................ -- -- 993,400 -- --
Net borrowings
(repayments) under
revolving line of
credit............... (1,150,000) (50,000) (2,790,100) 800,000 --
Payments under capital
leases............... (143,500) (51,900) (55,100) (13,000) (10,500)
Stock options
exercised............ 23,700 -- 8,700 -- 24,200
Stock issued under
ESPP................. -- -- -- -- 540,000
----------- ----------- ------------ --------- -----------
Net cash (used)
provided by
financing
activities..... (1,269,800) (101,900) 22,429,200 787,000 553,700
----------- ----------- ------------ --------- -----------
Effect of exchange rate
changes on cash........ (5,600) 98,300 4,200 (4,700) 26,000
----------- ----------- ------------ --------- -----------
Net change in
cash........... (307,500) (101,200) 10,871,200 38,100 3,293,400
Cash at beginning of
period................. 450,000 142,500 41,300 41,300 10,912,500
----------- ----------- ------------ --------- -----------
Cash at end of period... $ 142,500 $ 41,300 $ 10,912,500 $ 79,400 $14,205,900
=========== =========== ============ ========= ===========
Supplemental
information:
Cash paid for:
Interest.............. $ 352,200 $ 278,900 $ 171,500 $ 65,400 $ 4,900
Income taxes.......... 21,000 27,100 42,200 20,000 130,000
Non-cash investing and
financing activities:
Acquisition of
equipment under
capital leases....... $ 104,600 $ -- $ 30,000 $ 30,000 $ --
Conversion of
preferred stock to
common stock......... -- -- 9,100 -- --
Net exercise of
warrants............. -- -- 3,000 -- --
=========== =========== ============ ========= ===========
</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 revenue
in the accompanying balance sheets which also includes software license
revenues related to customer prepayment that are not yet earned. 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 is 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 more likely
than not to be realized.
F-7
<PAGE>
TSI INTERNATIONAL SOFTWARE LTD.
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(e) Earnings per Share
In December 1997, the Company adopted Statement of Financial Accounting
Standard ("SFAS") No. 128, "Earnings Per Share." SFAS No. 128 replaced the
calculation of primary and fully diluted net income per share with basic and
diluted net income per share. Basic earnings per share is computed based upon
the weighted average number of common shares outstanding. Diluted earnings per
share is computed based upon the weighted average number of common shares
outstanding increased for any dilutive effects of options, warrants, and
convertible securities. All net income per share data for prior years has been
restated to conform with the provisions of SFAS No. 128
(f) Cash Equivalents
The Company considers securities with maturities of three months or less,
when purchased, to be cash equivalents.
(g) Marketable Securities
All marketable securities are classified as trading securities under the
provision of Statement of Financial Accounting Standard ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" and
unrealized holding gains and losses are reflected in earnings.
(h) Long-Lived Assets
During 1996, the Company adopted Statement of Financial Accounting Standard
("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.
(i) Stock Options
Also during 1996, the Company adopted Statement of Financial Accounting
Standard ("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).
(j) 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.
(k) Recently Issued Accounting Standards
In June 1997, Statement of Financial Accounting Standard ("SFAS") No. 131,
"Disclosures about Segments of an Enterprise and Related Information," was
issued. SFAS No. 131 establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information
about operating segments in interim financial reports issued to shareholders
which is currently not required. It also establishes standards for related
disclosures about products and services, geographic areas, and major
customers. The Company is required to adopt this standard as of December 31,
1998.
F-8
<PAGE>
TSI INTERNATIONAL SOFTWARE LTD.
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(1) Newly Adopted Accounting Standards (unaudited)
In June 1997, Statement of Financial Accounting Standard ("SFAS") No. 130
"Reporting Comprehensive Income," was issued. SFAS No. 130 establishes
standards for reporting and disclosure of comprehensive income and its
components in a full set of general-purpose financial statements. This
statement requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported. Other
comprehensive income for the three months ended March 31, 1997 and 1998 was
$(79,800) and $44,700, respectively, and is comprised of the change in the
foreign currency translation.
In October 1997 the AICPA issued SOP 97-2, "Software Revenue Recognition",
which supersedes SOP 91-1. The Company adopted SOP 97-2 for software
transactions entered into beginning January 1, 1998. SOP 97-2 generally
requires revenue earned on software arrangements involving multiple elements,
such as additional software products, upgrades or enhancements, rights to
exchange or return software, postcontract customer support, or services,
including elements deliverable only on a when-and-if-available basis, to be
allocated to the various elements of such sale based on "vendor-specific
objective evidence of fair values" allocable to each such element.
The Company has reviewed and accounted for its license agreements under the
requirements of SOP 97-2 and did not have a material effect on its results of
operations.
Other pronouncements issued by the FASB or other authoritative accounting
standard groups with future effective dates are either not applicable or are
not significant to the financial statements of the Company.
(2) FOREIGN OPERATIONS
The Company's balance sheets include foreign branch assets of $2,574,400,
$3,867,200 and $2,390,526 and liabilities of $282,200, $406,600 and $335,262
at December 31, 1996 and 1997 and (unaudited) March 31, 1998, respectively.
The foreign net income for the years ended December 31, 1995, 1996, 1997 and
(unaudited) the three months ended March 31, 1997 and 1998, after allocation
of corporate charges, was $133,700, $345,400, $45,300, $(115,600) and
$(110,900), 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 $147,100, $288,700 $125,400, $35,700 and $21,200 for the years
ended December 31, 1995, 1996, 1997 and (unaudited) the three months ended
March 31, 1997 and 1998, respectively.
F-9
<PAGE>
TSI INTERNATIONAL SOFTWARE LTD.
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(3) INVESTMENT IN LICENSING CONTRACTS
The net investment in licensing contracts at December 31, 1997, 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 1996 and 1997. Total minimum
contract payments receivable at December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998........................................................... $ 738,100
1999........................................................... 368,600
2000........................................................... 81,000
2001........................................................... 10,900
----------
1,198,600
Less unearned interest income.................................. (98,700)
----------
1,099,900
Less current portion........................................... (678,100)
----------
Non current portion............................................ $ 421,800
==========
</TABLE>
There were no transactions during the three months ended March 31, 1998
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
1996 1997 1998 LIFE RANGE
----------- ----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Computer systems.......... $ 2,421,700 $ 3,175,900 3,354,700 3-7 years
Furniture and fixtures.... 545,500 607,200 621,400 3-7 years
Office equipment.......... 325,800 335,900 589,900 3-7 years
Leasehold improvements.... 328,500 443,700 449,400 3-10 years
Automobiles............... 99,900 64,900 65,700 5 years
----------- ----------- -----------
3,721,400 4,627,600 5,081,100
Less accumulated
depreciation and
amortization............. (2,417,000) (3,040,300) (3,210,700)
----------- ----------- -----------
$ 1,304,400 $ 1,587,300 $ 1,870,400
=========== =========== ===========
</TABLE>
Computer systems and equipment under capital leases included in the above
totals, net of accumulated depreciation, was $56,200, $30,800 and $23,300 as
of December 31, 1996 and 1997 and (unaudited) March 31, 1998, 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 1995 was $272,100.
(5) LONG-TERM DEBT
The Company has a line of credit facility with The Bank of New York which
provides for Company borrowings equal to the lesser of $4,000,000 or the sum
of 80% of eligible accounts receivable, and a lesser percentage of certain
other receivables. Borrowings may take the form of prime rate loans (which
bear interest
F-10
<PAGE>
TSI INTERNATIONAL SOFTWARE LTD.
NOTES TO FINANCIAL STATEMENTS--CONTINUED
on borrowings at either the bank's prime rate plus 1.0%) or LIBOR rate loans
(which bear interest at the LIBOR rate plus 3.0%). The Company's obligations
under this credit line are secured by substantially all of the Company's
assets. At December 31, 1997, the Company was in compliance with all financial
covenants. All amounts outstanding under this line of credit were paid off in
July 1997 with proceeds from the Company's initial public offering. The
Company had no borrowings outstanding at December 31, 1997. Borrowing costs
and effective interest rates under this agreement were as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH
YEARS ENDED DECEMBER 31, 31,
---------------------------- --------------
1995 1996 1997 1998 1997
-------- -------- -------- ------ -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest expense............... $368,300 $250,200 $181,500 -- $60,000
Guarantee fees................. 31,500 23,600 1,400 -- 3,100
Commitment fees................ 20,000 11,700 12,900 $4,900 --
-------- -------- -------- ------ -------
$419,800 $285,500 $195,800 $4,900 $63,100
======== ======== ======== ====== =======
Effective interest rate........ 11.41% 9.51% 13.26% -- 8.41%
======== ======== ======== ====== =======
</TABLE>
(6) STOCKHOLDERS' EQUITY (DEFICIT)
(a) Initial Public Offering
On July 1, 1997, the Company sold 3,000,000 shares of common stock in an
initial public offering ("IPO") which resulted in proceeds of approximately
$24,272,300, net of offering expenses of $837,700. In connection with the
completion of the IPO, the following transactions were completed: (i) The
Company increased the number of authorized shares of common stock and
preferred stock to 20,000,000 shares and 5,000,000 shares, respectively; (ii)
the Company completed a three-for-one common stock split; (iii) all
outstanding preferred shares were converted into 2,759,715 shares of common
stock; and, (iv) certain shareholders of the Company registered and sold
1,600,000 of common stock with net proceeds to these shareholders of
$13,392,000. The accompanying financial statements have been retroactively
adjusted to reflect the common stock split.
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, which at
closing of the IPO converted into 150,000 shares of common stock.
At December 31, 1996, certain owners of preferred and common stock held an
aggregate of nine warrants to purchase common stock at $2.00 a share. During
1997, two warrants were exercised into an aggregate of 296,827 shares. As the
warrants were exercised on a net exercise basis, no proceeds were received by
the Company. At December 31, 1997, there are seven warrants remaining which
are exercisable for 711,711 shares of common stock and expire in 2002.
F-11
<PAGE>
INTERNATIONAL SOFTWARE LTD.
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(b) Preferred Stock
The Company has authorized 5,000,000 shares of preferred stock which may be
issued by the Board of Directors on such terms and with such rights,
preferences, and designations as the Board may determine without any vote of
the stockholders. 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>
On July 1, 1997, in conjunction with the Company's initial public offering,
all preferred shares outstanding were converted into 2,759,715 shares of stock
based on the three-to-one stock split. No preferred shares were issued or
outstanding at December 31, 1997.
(c) Stock Option Plans
The Company maintains a 1993 Stock Option Plan ("1993 Plan") which provided
that the Company may grant options for employees to purchase up to 1,558,431
shares of the Company's common stock. In May 1997, the Board resolved that no
further options would be granted under the 1993 plan following the closing of
the Company's Initial Public Offering ("IPO"). There were 215,100 options
granted under the 1993 Plan at exercise prices ranging from $1.67 to $9.00 in
the year ended December 31, 1997 prior to the IPO. Any shares reserved for
issuance under the 1993 Plan that are not subject to outstanding options or
that are subject to outstanding options which either terminate without being
exercised or that are repurchased by the Company are available for issuance
under the 1997 Equity Incentive Stock Option Plan.
The Company established the 1997 Equity Incentive Stock Option Plan ("Equity
Plan") in May 1997. The Equity Plan provides that the Company may grant
options to employees to purchase up to 1,405,074 shares of the Company's
common stock. The Company granted 35,500 options under the Plan in 1997 at
exercise prices from $6.67 to $14.375 per share. Options have been granted at
fair market value. No options may be granted for a term greater than 10 years.
In addition, the Company established a Directors Stock Option Plan in May
1997 which authorizes the issuance of options to directors to purchase 225,000
shares of the Company. During 1997, 60,000 options were granted at $6.67 a
share. No options were issued during the first quarter of 1998.
In addition, the Company established an Employee Stock Purchase Plan which
reserves a total of 750,000 shares of the Company's common stock for issuance
thereunder. The plan permits eligible employees to acquire shares of the
Company's common stock through payroll deductions. Eligible employees may
select a deduction of 2 to 15% of their compensation subject to certain
maximum limitations as described in the plan. The offering period began on the
date of offering and will end on July 31, 1998. As of March 31, 1998,
(unaudited) 70,662 shares had been purchased under the plan at $7.65 per share
totalling $539,900. Purchases of shares take place at six-month intervals from
the beginning date of each offering period.
F-12
<PAGE>
TSI INTERNATIONAL SOFTWARE LTD.
NOTES TO FINANCIAL STATEMENTS--CONTINUED
Transactions under all Plans are summarized below:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED
SHARES AVERAGE PRICE
--------- -------------
<S> <C> <C>
Shares under option at December 31, 1994............ 739,767 $ 0.33
Exercised......................................... (71,160) $ 0.33
Granted........................................... 367,500 $ 0.33
Cancelled......................................... (116,250) $ 0.33
--------- ------
Shares under option at December 31, 1995............ 919,857 $ 0.33
Exercised......................................... -- $ 0.00
Granted........................................... 150,000 $ 1.40
Cancelled......................................... (6,000) $ 0.33
--------- ------
Shares under option at December 31, 1996............ 1,063,857 $ 0.48
Exercised......................................... (10,700) $ 0.82
Granted........................................... 310,600 $ 6.41
Cancelled......................................... -- $ 0.00
--------- ------
Shares under option at December 31, 1997............ 1,363,757 $ 1.83
Exercised (unaudited) ............................ (73,476) $ .33
Granted (unaudited) .............................. 360,700 $13.22
Cancelled (unaudited) ............................ -- $ 0.00
--------- ------
Shares under option at March 31, 1998............... 1,650,981 4.39
========= ======
Options exercisable were as follows:
December 31, 1995................................. 409,107 $ 0.33
December 31, 1996................................. 576,357 $ 0.33
December 31, 1997................................. 771,907 $ 0.42
March 31, 1998 (unaudited) ....................... 710,831 $ 0.45
</TABLE>
Options were granted in 1995 and prior years at an exercise price of $0.33 a
share, options were granted during 1996 at exercise prices of $0.67 and $1.67
a share, options were granted during 1997 at exercise prices between $1.66 to
$14.375 and (unaudited) options were granted for the three months ended March
31, 1998 at exercise prices of $11.91 and $13.70 per share. Substantially all
options vest ratably over a four-year period from the date of grant. There
were (unaudited) 1,804,764 shares available for grant at March 31, 1998.
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 prior to July 1, 1997, for the years 1995 and 1996 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 1997
-------- ---------- ----------
<S> <C> <C> <C>
Net income--as reported....................... $822,800 $1,227,900 $2,479,600
Net income--pro forma......................... $819,500 $1,216,600 $2,023,600
Earnings per share--as reported--Basic........ $ .29 $ .43 $ .42
--Diluted..................................... $ .15 $ .21 $ .29
Earnings per share--pro forma--Basic.......... $ .29 $ .42 $ .34
--Diluted..................................... $ .15 $ .21 $ .24
</TABLE>
F-13
<PAGE>
TSI INTERNATIONAL SOFTWARE LTD.
NOTES TO FINANCIAL STATEMENTS--CONTINUED
The weighted average fair value of each option granted in 1995, 1996 and
1997 was $0.22, $0.92 and $4.24, respectively. These values are based on
estimates on the date of grant using the modified Black-Scholes option pricing
model using the following weighted average assumptions:
<TABLE>
<CAPTION>
1997 1996 AND 1995
------------- -------------
<S> <C> <C>
Risk-free interest rate......................... 5.37% to 7.07% 6.27%
Expected life in years.......................... 6 6
Expected volatility............................. 59.8% 0%
Expected dividend yield......................... 0% 0%
</TABLE>
(7) EARNINGS PER SHARE
In February 1997, Statement of Financial Accounting Standard ("SFAS") No.
128, "Earnings per Share" was issued. The statement sets forth guidance on the
presentation of earnings per share and requires dual presentation of Basic and
Diluted earnings per share on the face of the income statement. The
computation of basic earnings per share is based on income available to common
stockholders and the weighted average number of common shares outstanding
during each period. Diluted earnings per share reflect the potential dilution
that could occur if dilutive stock options were exercised resulting in the
issuance of common stock that then shared in the earnings of the Company. In
connection with the IPO, all outstanding preferred stock was converted into
common stock on the basis described in note 6 and, accordingly, are shown as
outstanding for the diluted earnings per share calculation for all periods
presented. Following are the components of common stock used to calculate
Basic and Diluted earnings per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
----------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Weighted average common
shares outstanding
(basic shares)......... 2,845,630 2,886,822 5,916,993 2,886,822 9,044,404
Common shares issued for
conversion of preferred
stock.................. 2,609,415 2,609,415 1,304,632 2,609,415 --
Dilutive effect of stock
options and warrants... -- 314,973 1,345,136 872,308 1,783,232
--------- --------- --------- --------- ----------
Total diluted shares.. 5,455,045 5,811,210 8,566,761 6,368,545 10,827,636
========= ========= ========= ========= ==========
</TABLE>
(8) 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
were $100,000, $200,000, and $200,000 in 1995, 1996 and 1997, respectively.
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. As of January 1, 1998
the Company amended the plan to include an employer match of 2% of
participants' contributions up to 4%.
F-14
<PAGE>
TSI INTERNATIONAL SOFTWARE LTD.
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(9) INCOME TAXES
The provision for income taxes is comprised of the following for the years
ended December 31, 1995, 1996 and 1997:
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Federal alternative minimum taxes (AMT).............. $34,600 $36,200 $46,000
State taxes.......................................... -- -- 30,000
------- ------- -------
Provision for income taxes......................... $34,600 $36,200 $76,000
======= ======= =======
</TABLE>
At December 31, 1997, the Company had federal tax net operating loss
carryforwards of $6,849,000 expiring between the years 2000 and 2009 and
research and experimentation credits of $655,900 expiring between 2003 and
2008. 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, 1996 and 1997, the components of net deferred taxes
(utilizing a 41.4% combined tax rate) were:
<TABLE>
<CAPTION>
1996 1997
---------- --------
<S> <C> <C>
Deferred tax liabilities................................ $1,024,900 $928,200
Deferred tax assets, net of valuation allowances of
$5,294,900 and $4,441,500 in 1996 and 1997............. $1,024,900 $928,200
---------- --------
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 $853,400 in 1997 is the result of
the utilization of net operating loss carryforwards.
The following table summarizes the significant differences between the U.S.
Federal statutory tax rate and the Company's effective tax rate for financial
statement purposes:
<TABLE>
<CAPTION>
1996 1997
----- -----
<S> <C> <C>
U.S. Federal Statutory Rate.................................. 34.0% 34.0%
Non-deductible expenses...................................... 7.5% 1.6%
State income taxes, net of U.S. federal tax benefit.......... 1.2% 0.8%
Change in valuation allowance................................ (39.8)% (33.4)%
----- -----
Effective tax rate......................................... 2.9% 3.0%
===== =====
</TABLE>
(10) ACCRUED EXPENSES
Included in accrued expenses as of December 31, 1996, and 1997 and
(unaudited) the three months ended March 31, 1998 are compensation costs
(regular payroll, commissions, bonus, profit sharing, and other withholdings)
of $548,300, $1,473,500, and $970,000, respectively.
F-15
<PAGE>
TSI INTERNATIONAL SOFTWARE LTD.
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(11) COMMITMENTS AND CONTINGENCIES
The Company rents premises and furniture, fixtures, and equipment under
operating leases which expire at various dates through 2011.
Future minimum payments, by year and in the aggregate, under operating and
capital leases at December 31, 1997 are:
<TABLE>
<CAPTION>
YEAR CAPITAL OPERATING
---- -------- ----------
<S> <C> <C>
1998................................................... $ 20,700 $1,172,700
1999................................................... 10,500 1,097,700
2000................................................... 10,500 1,080,900
2001................................................... 1,800 594,100
2002................................................... -- 144,000
Thereafter............................................. -- 1,872,000
-------- ----------
Total................................................ $ 43,500 $5,961,400
==========
Less amount representing interest...................... (17,400)
--------
Present value of minimum capital lease payments...... $ 26,100
========
</TABLE>
There were no significant modifications to the Company's portfolio of leases
during the three months ended March 31, 1998.
Certain of the aforementioned leases provide for additional payments
relating to taxes and other operating expenses. Rental expense for the years
ended December 31, 1995, 1996, and 1997 and (unaudited) three months ended
March 31, 1997 and 1998, under all operating leases aggregated approximately
$820,900, $717,300, $840,428, $193,100 and $210,107, respectively.
(12) 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-16
<PAGE>
TSI INTERNATIONAL SOFTWARE LTD.
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(13) 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>
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--Basic................. .04 .06 .18 .14
--Diluted................................... .02 .03 .09 .07
Weighted average number of common and common
equivalent shares outstanding--Basic....... 2,887 2,887 2,887 2,887
--Diluted................................... 5,496 5,648 5,989 6,111
<CAPTION>
1997
-------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total revenues.............................. $5,508 $6,155 $7,000 $8,007
Gross profit................................ 4,786 5,491 6,032 7,093
Net income.................................. 313 267 789 1,115
Net income per share--Basic................. .11 .09 .09 .12
--Diluted................................... .05 .04 .07 .10
Weighted average number of common and common
equivalent shares outstanding--Basic....... 2,887 2,887 8,944 8,950
--Diluted................................... 6,369 6,493 10,724 10,682
</TABLE>
The sum of the quarterly per share amounts does not agree to the respective
annual amounts due to rounding.
F-17
<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 Data Transformation Solution
for Integrating Applications
. Concurrent transformation between multiple application sources and
destimations
. 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 TSI 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.............. $27,544
NASD filing fee.................................................. 9,837
Nasdaq National Market filing fee................................ 17,500
Accounting fees and expenses..................................... *
Legal fees and expenses.......................................... *
Printing and engraving expenses.................................. *
Blue sky fees and expenses....................................... 15,000
Transfer agent and registrar fees and expenses................... 12,500
Miscellaneous.................................................... *
-------
Total.......................................................... $ *
=======
</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 has entered 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
II-1
<PAGE>
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 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.
The Registrant maintains directors and officers liability insurance with a
per claim and annual aggregate coverate limit of $10.0 million.
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........................................ 3.02
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 05/94-06/97 Options to Purchase 783,100 -- --
employees Shares of Common Stock
granted under the
Company's 1993 Stock
Option Plan (1)
Officers, directors and 05/94-06/97 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.
The sales on May 15, 1997 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 --Amended and Restated Certificate of Incorporation.(1)
3.02 --Registrant's Bylaws.(1)
4.01 --Form of Specimen Certificate for Registrant's Common Stock.(1)
4.02 --Stockholders Agreement dated as of June 1, 1989, as amended.(1)
4.03 --1989 Stock Purchase Agreement dated as of June 1, 1989, as
amended.(1)
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.(1)
10.02 --Registrant's 1997 Equity Incentive Plan.(1)
10.03 --Registrant's 1997 Directors Stock Option Plan.(1)
10.04 --Registrant's 1997 Employee Stock Purchase Plan.(1)
10.05 --Registrant's Profit Participation Plan.(1)
10.06 --Form of Indemnification Agreement entered into by Registrant with
each of its directors and executive officers.(1)
10.07 --Lease Agreement dated as of January 2, 1990 between Registrant and
Robert D. Scinto, as amended.(1)
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.(1)
10.09 --Lease Agreement dated as of July 1, 1996 between Registrant and
Boca Corners, L.P., Ltd., as amended.(1)
10.10 --Credit Agreement dated as of July 31, 1994 between Registrant and
The Bank of New York, as amended.(1)
10.11 --Security Agreement dated as of July 31, 1994 between Registrant
and The Bank of New York.(1)
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.(1)
10.13 --Letter Agreement, between Registrant and Constance Galley.(1)
</TABLE>
II- 3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<C> <S>
10.14 --Letter Agreement dated as of December 5, 1995 between Registrant
and Eric Amster.(1)
10.15 --Letter Agreement dated as of October 5, 1995, between Registrant
and Ira Gerard.(1)
10.16 --Letter Agreement dated as of January 1, 1994 between Registrant
and Edward Watson.(1)
10.17 --Letter Agreement dated as of October 1, 1994, between Registrant
and Saydean Zeldin.(1)
10.18 --Series E Preferred Stock Purchase Agreement dated as of May 15,
1997 between the Company and the Purchasers named therein.(1)
11.01 --Statement of Earnings Per Share.*
23.01 --Consent of Fenwick & West LLP (included in Exhibit 5.01).*
23.02 --Consent of KPMG Peat Marwick LLP, Independent Accountants.
24.01 --Power of Attorney (see Page II-5 of this Registration Statement).
27.01 --Financial Data Schedule (EDGAR version only).
</TABLE>
- --------
* To be filed by amendment.
(1) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (File No. 333-27293) and incorporated herein by reference.
(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
5th day of May, 1998.
TSI INTERNATIONAL SOFTWARE LTD.
/s/ Constance F. Galley
By: _________________________________
CONSTANCE F. GALLEY
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each individual whose signature
appears below constitutes and appoints Constance F. Galley and Ira A. Gerard
and each of them, his true and lawful attorneys-in-fact and agents, with full
power of substitution, for him and in his or her name, place and stead, in any
and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to sign any registration
statement for the same offering covered by this Registration Statement that is
to be effective upon filing pursuant to Rule 462 promulgated under the
Securities Act, and all post-effective amendments thereto, and to file the
same, with all exhibits thereto and all documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorneys-in-
fact and agents, and each of them, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about
the premises, as fully to all intents and purposes as he or she might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or any of them, or his, her or their substitute or substitutes, may
lawfully do or cause to be done or by virtue hereof.
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>
<S> <C>
NAME TITLE DATE
PRINCIPAL EXECUTIVE OFFICER:
/s/ Constance F. Galley President, Chief May 5, 1998
_____________________________________ Executive Officer
CONSTANCE F. GALLEY and a Director
PRINCIPAL FINANCIAL AND
PRINCIPAL ACCOUNTING OFFICER:
/s/ Ira A. Gerard Vice President, May 5, 1998
_____________________________________ Finance and
IRA A. GERARD Administration and
Chief Financial
Officer
</TABLE>
II-5
<PAGE>
<TABLE>
<S> <C>
NAME TITLE DATE
DIRECTORS:
/s/ Stewart K.P. Gross Director May 5, 1998
_____________________________________
STEWART K.P. GROSS
/s/ Ernest E. Keet Director May 5, 1998
_____________________________________
ERNEST E. KEET
/s/ John J. Pendray Director May 5, 1998
_____________________________________
JOHN J. PENDRAY
/s/ Dennis G. Sisco Director May 5, 1998
_____________________________________
DENNIS G. SISCO
</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 February 4, 1998 included the
related financial statement schedule for the years ended December 31, 1995,
1996, and 1997, 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
New York, New York
February 4, 1998
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,
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
Year ended December 31,
1997................... 319,900 431,600 100,000 (380,200) 471,300
Three months ended March
31, 1998
(unaudited) ........... 471,300 33,100 91,000 (11,200) 584,200
</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 PAGE
------- ------------- ----
<C> <S> <C>
1.01 --Form of Underwriting Agreement.
3.01 --Amended and Restated Certificate of Incorporation.(1)
3.02 --Registrant's Bylaws.(1)
4.01 --Form of Specimen Certificate for Registrant's Common
Stock.(1)
4.02 --Stockholders Agreement dated as of June 1, 1989, as
amended.(1)
4.03 --1989 Stock Purchase Agreement dated as of June 1, 1989, as
amended.(1)
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.(1)
10.02 --Registrant's 1997 Equity Incentive Plan.(1)
10.03 --Registrant's 1997 Directors Stock Option Plan.(1)
10.04 --Registrant's 1997 Employee Stock Purchase Plan.(1)
10.05 --Registrant's Profit Participation Plan.(1)
10.06 --Form of Indemnification Agreement entered into by
Registrant with each of its directors and executive
officers.(1)
10.07 --Lease Agreement dated as of January 2, 1990 between
Registrant and Robert D. Scinto, as amended.(1)
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.(1)
10.09 --Lease Agreement dated as of July 1, 1996 between Registrant
and Boca Corners, L.P., Ltd., as amended.(1)
10.10 --Credit Agreement dated as of July 31, 1994 between
Registrant and The Bank of New York, as amended.(1)
10.11 --Security Agreement dated as of July 31, 1994 between
Registrant and The Bank of New York.(1)
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.(1)
10.13 --Letter Agreement, between Registrant and Constance
Galley.(1)
10.14 --Letter Agreement dated as of December 5, 1995 between
Registrant and Eric Amster.(1)
10.15 --Letter Agreement dated as of October 5, 1995, between
Registrant and Ira Gerard.(1)
10.16 --Letter Agreement dated as of January 1, 1994 between
Registrant and Edward Watson.(1)
10.17 --Letter Agreement dated as of October 1, 1994, between
Registrant and Saydean Zeldin.(1)
10.18 --Series E Preferred Stock Purchase Agreement dated as of May
15, 1997 between the Company and the Purchasers named
therein.(1)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE PAGE
------- ------------- ----
<C> <S> <C>
11.01 --Statement of Earnings Per Share.
23.01 --Consent of Fenwick & West LLP (included in Exhibit 5.01).*
23.02 --Consent of KPMG Peat Marwick LLP, Independent Accountants.
24.01 --Power of Attorney (see Page II-5 of this Registration
Statement).
27.01 --Financial Data Schedule (EDGAR version only).
</TABLE>
- --------
* To be filed by amendment.
(1) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (File No. 333-27293) and incorporated herein by reference.
<PAGE>
EXHIBIT 1.01
[________] SHARES/1/
TSI INTERNATIONAL SOFTWARE LTD.
COMMON STOCK
UNDERWRITING AGREEMENT
----------------------
June [__], 1998
BANCAMERICA ROBERTSON STEPHENS
Bear, Stearns & Co. Inc.
Dain Rauscher Wessels
SoundView Financial Group, Inc.
As Representatives of the several Underwriters
c/o BancAmerica Robertson Stephens
555 California Street
Suite 2600
San Francisco, California 94104
Ladies/Gentlemen:
TSI International Software Ltd., a Delaware corporation (the "Company"),
and certain stockholders of the Company named in Schedule B hereto (hereafter
called the "Selling Stockholders") address you as the Representatives of each of
the persons, firms and corporations listed in Schedule A hereto (herein
collectively called the "Underwriters") and hereby confirm their respective
agreements with the several Underwriters as follows:
1. Description of Shares. The Company proposes to issue and sell [______]
-- ---------------------
shares of its authorized and unissued Common Stock, par value $.01 per share, to
the several Underwriters. The Selling Stockholders, acting severally and not
jointly, propose to sell an aggregate of [___________] shares of the Company's
authorized and outstanding Common Stock, par value $.01 per share, to the
several Underwriters; in addition Warburg, Pincus Capital Company, L.P.
("Warburg") proposes to sell a stock purchase warrant (the "Stock Purchase
Warrant") exercisable for an aggregate of 382,281 shares of the Company's
authorized and unissued Common Stock, par value $.01 per share, to the several
Underwriters. The [_________] shares of Common Stock, par value $.01 per share,
of the Company to be sold by the Company are hereinafter called the "Company
Shares," the [__________] shares of Common Stock, par value
___________________
/1/ Plus an option to purchase up to 600,000 additional shares from certain
stockholders of the Company to cover over-allotments.
<PAGE>
-2-
$.01 per share, to be sold by the Selling Stockholders are hereinafter called
the "Selling Stockholder Shares" and the 382,281 shares of Common Stock, par
value $.01 per share, of the Company to be sold by the Company upon exercise of
the Stock Purchase Warrant hereunder are hereinafter called the "Warrant
Shares." The Company Shares, the Selling Stockholder Shares and the Warrant
Shares are hereinafter collectively referred to as the "Firm Shares." The
Company also proposes to grant to the Underwriters an option to purchase up to
[________] additional shares of the Company's Common Stock, par value $.01 per
share (the "Option Shares"), as provided in Section 8 hereof. As used in this
Agreement, the term "Shares" shall include the Firm Shares and the Option
Shares. All shares of Common Stock, par value $.01 per share, of the Company to
be outstanding after giving effect to the sales contemplated hereby, including
the Shares, are hereinafter referred to as "Common Stock."
2. Representations, Warranties and Agreements of the Company. The Company
-- ---------------------------------------------------------
represents and warrants to and agrees with each Underwriter that:
(a) A registration statement on Form S-1 (File No. 333-[_______]) with
respect to the Shares, including a prospectus subject to completion, has been
prepared by the Company in conformity with the requirements of the Securities
Act of 1933, as amended (the "Act"), and the applicable rules and regulations
(the "Rules and Regulations") of the Securities and Exchange Commission (the
"Commission") under the Act and has been filed with the Commission; such
amendments to such registration statement, such amended prospectuses subject to
completion and such abbreviated registration statements pursuant to Rule 462(b)
of the Rules and Regulations as may have been required prior to the date hereof
have been similarly prepared and filed with the Commission; and the Company will
file such additional amendments to such registration statement, such amended
prospectuses subject to completion and such abbreviated registration statements
as may hereafter be required. Copies of such registration statement and
amendments, of each related prospectus subject to completion (the "Preliminary
Prospectuses") and of any abbreviated registration statement pursuant to Rule
462(b) of the Rules and Regulations have been delivered to you.
If the registration statement relating to the Shares has been declared
effective under the Act by the Commission, the Company will prepare and promptly
file with the Commission the information omitted from the registration statement
pursuant to Rule 430A(a) or, if BancAmerica Robertson Stephens, on behalf of the
several Underwriters, shall agree to the utilization of Rule 434 of the Rules
and Regulations, the information required to be included in any term sheet filed
pursuant to Rule 434(b) or (c), as applicable, of the Rules and Regulations
pursuant to subparagraph (1), (4) or (7) of Rule 424(b) of the Rules and
Regulations or as part of a post-effective amendment to the registration
statement (including a final form of prospectus). If the registration statement
relating to the Shares has not been declared effective under the Act by the
Commission, the Company will prepare and promptly file an amendment to the
registration statement, including a final form of prospectus, or, if BancAmerica
Robertson Stephens, on behalf of the several Underwriters, shall agree to the
utilization of Rule 434 of the Rules and Regulations, the information required
to be included in any term sheet filed pursuant to Rule 434(b) or (c), as
applicable, of the Rules and Regulations. The term "Registration Statement" as
used in this Agreement shall mean such registration statement, including
financial statements, schedules and
<PAGE>
-3-
exhibits, in the form in which it became or becomes, as the case may be,
effective (including, if the Company omitted information from the registration
statement pursuant to Rule 430A(a) or files a term sheet pursuant to Rule 434 of
the Rules and Regulations, the information deemed to be a part of the
registration statement at the time it became effective pursuant to Rule 430A(b)
or Rule 434(d) of the Rules and Regulations) and, in the event of any amendment
thereto or the filing of any abbreviated registration statement pursuant to Rule
462(b) of the Rules and Regulations relating thereto after the effective date of
such registration statement, shall also mean (from and after the effectiveness
of such amendment or the filing of such abbreviated registration statement) such
registration statement as so amended, together with any such abbreviated
registration statement. The term "Prospectus" as used in this Agreement shall
mean the prospectus relating to the Shares as included in such Registration
Statement at the time it becomes effective (including, if the Company omitted
information from the Registration Statement pursuant to Rule 430A(a) of the
Rules and Regulations, the information deemed to be a part of the Registration
Statement at the time it became effective pursuant to Rule 430A(b) of the Rules
and Regulations); provided, however, that if in reliance on Rule 434 of the
-------- -------
Rules and Regulations and with the consent of BancAmerica Robertson Stephens, on
behalf of the several Underwriters, the Company shall have provided to the
Underwriters a term sheet pursuant to Rule 434(b) or (c), as applicable, prior
to the time that a confirmation is sent or given for purposes of Section
2(10)(a) of the Act, the term "Prospectus" shall mean the "prospectus subject to
completion" (as defined in Rule 434(g) of the Rules and Regulations) last
provided to the Underwriters by the Company and circulated by the Underwriters
to all prospective purchasers of the Shares (including the information deemed to
be a part of the Registration Statement at the time it became effective pursuant
to Rule 434(d) of the Rules and Regulations). Notwithstanding the foregoing, if
any revised prospectus shall be provided to the Underwriters by the Company for
use in connection with the offering of the Shares that differs from the
prospectus referred to in the immediately preceding sentence (whether or not
such revised prospectus is required to be filed with the Commission pursuant to
Rule 424(b) of the Rules and Regulations), the term "Prospectus" shall refer to
such revised prospectus from and after the time it is first provided to the
Underwriters for such use. If in reliance on Rule 434 of the Rules and
Regulations and with the consent of BancAmerica Robertson Stephens, on behalf of
the several Underwriters, the Company shall have provided to the Underwriters a
term sheet pursuant to Rule 434(b) or (c), as applicable, prior to the time that
a confirmation is sent or given for purposes of Section 2(10)(a) of the Act, the
Prospectus and the term sheet, together, will not be materially different from
the prospectus in the Registration Statement.
(b) The Commission has not issued any order preventing or suspending
the use of any Preliminary Prospectus or instituted proceedings for that
purpose, and each such Preliminary Prospectus has conformed in all material
respects to the requirements of the Act and the Rules and Regulations and, as of
its date, has not included any untrue statement of a material fact or omitted to
state a material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading; and at the time
the Registration Statement became or becomes, as the case may be, effective and
at all times subsequent thereto up to and on the Closing Date (hereinafter
defined) and on any later date on which Option Shares are to be purchased, (i)
the Registration Statement and the Prospectus, and any amendments or supplements
thereto, contained and will contain all material information required to be
included therein by the Act and the Rules and Regulations and will in all
material respects conform to the requirements of the Act and the
<PAGE>
-4-
Rules and Regulations, (ii) the Registration Statement, and any amendments or
supplements thereto, did not and will not include any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, and (iii) the
Prospectus, and any amendments or supplements thereto, did not and will not
include any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; provided, however, that none of the
representations and warranties contained in this subparagraph (b) shall apply to
information contained in or omitted from the Registration Statement or
Prospectus, or any amendment or supplement thereto, in reliance upon, and in
conformity with, written information relating to any Underwriter furnished to
the Company by such Underwriter specifically for use in the preparation thereof.
(c) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the jurisdiction of its
incorporation with full power and authority (corporate and other) to own, lease
and operate its properties and conduct its business as described in the
Prospectus; the Company owns all of the outstanding capital stock of its
subsidiaries free and clear of any pledge, lien, security interest, encumbrance,
claim or equitable interest; each of the Company and its subsidiaries is duly
qualified to do business as a foreign corporation and is in good standing in
each jurisdiction in which the ownership or leasing of its properties or the
conduct of its business requires such qualification, except where the failure to
be so qualified or be in good standing would not have a material adverse effect
on the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company; no proceeding has been instituted in any such
jurisdiction, revoking, limiting or curtailing, or seeking to revoke, limit or
curtail, such power and authority or qualification; the Company is in possession
of and operating in compliance with all authorizations, licenses, certificates,
consents, orders and permits from state, federal and other regulatory
authorities which are material to the conduct of its business, all of which are
valid and in full force and effect; the Company is not in violation of its
respective charter or bylaws or in default in the performance or observance of
any material obligation, agreement, covenant or condition contained in any
material bond, debenture, note or other evidence of indebtedness, or in any
material lease, contract, indenture, mortgage, deed of trust, loan agreement,
joint venture or other agreement or instrument to which the Company is a party
or by which it or its properties may be bound; and the Company is not in
material violation of any law, order, rule, regulation, writ, injunction,
judgment or decree of any court, government or governmental agency or body,
domestic or foreign, having jurisdiction over the Company or over its properties
of which it has knowledge. The Company does not own or control, directly or
indirectly, any corporation, association or other entity.
(d) The Company has full legal right, power and authority to enter
into this Agreement and perform the transactions contemplated hereby. This
Agreement has been duly authorized, executed and delivered by the Company and is
a valid and binding agreement on the part of the Company, enforceable in
accordance with its terms, except as rights to indemnification hereunder may be
limited by applicable law and except as the enforcement hereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws relating to or affecting creditors' rights generally or by general
equitable principles; the performance of this Agreement and the consummation of
the transactions herein contemplated will not result in a
<PAGE>
-5-
material breach or violation of any of the terms and provisions of, or
constitute a default under, (i) any bond, debenture, note or other evidence of
indebtedness, or under any lease, contract, indenture, mortgage, deed of trust,
loan agreement, joint venture or other agreement or instrument to which the
Company is a party or by which it or any of its properties may be bound, (ii)
the charter or bylaws of the Company, or (iii) any law, order, rule, regulation,
writ, injunction, judgment or decree of any court, government or governmental
agency or body, domestic or foreign, having jurisdiction over the Company or
over its properties. No consent, approval, authorization or order of or
qualification with any court, government or governmental agency or body,
domestic or foreign, having jurisdiction over the Company or over its properties
is required for the execution and delivery of this Agreement and the
consummation by the Company of the transactions herein contemplated, except such
as may be required under the Act, the Securities Exchange Act of 1934, as
amended (the "Exchange Act") or under state or other securities or Blue Sky
laws, all of which requirements have been satisfied in all material respects.
(e) There is not any pending or, to the best of the Company's
knowledge, threatened action, suit, claim or proceeding against the Company, or
any of its officers or any of its properties, assets or rights before any court,
government or governmental agency or body, domestic or foreign, having
jurisdiction over the Company or any of its subsidiaries or over their
respective officers or properties or otherwise which (i) might result in any
material adverse change in the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company or might materially
and adversely affect its properties, assets or rights, (ii) might prevent
consummation of the transactions contemplated hereby or (iii) is required to be
disclosed in the Registration Statement or Prospectus and is not so disclosed;
and there are no agreements, contracts, leases or documents of the Company or
any of its subsidiaries of a character required to be described or referred to
in the Registration Statement or Prospectus or to be filed as an exhibit to the
Registration Statement by the Act or the Rules and Regulations which have not
been accurately described in all material respects in the Registration Statement
or Prospectus or filed as exhibits to the Registration Statement.
(f) All outstanding shares of capital stock of the Company (including
the Selling Stockholder Shares) have been duly authorized and validly issued and
are fully paid and nonassessable, have been issued in compliance with all
federal and state securities laws, were not issued in violation of or subject to
any preemptive rights or other rights to subscribe for or purchase securities,
and the authorized and outstanding capital stock of the Company is as set forth
in the Prospectus under the caption "Capitalization" and conforms in all
material respects to the statements relating thereto contained in the
Registration Statement and the Prospectus (and such statements correctly state
the substance of the instruments defining the capitalization of the Company);
upon the purchase and exercise by the Underwriters of the Stock Purchase Warrant
as contemplated by this Agreement, the Underwriters shall receive an aggregate
of 382,281 Shares; the Shares to be purchased from the Company hereunder
(including the Warrant Shares) have been duly authorized for issuance and sale
to the Underwriters pursuant to this Agreement and, when issued and delivered by
the Company against payment therefor in accordance with the terms of this
Agreement, will be duly and validly issued and fully paid and nonassessable, and
will be sold free and clear of any pledge, lien, security interest, encumbrance,
claim or equitable interest; and no preemptive right, co-sale right,
registration right, right of first refusal or other similar right of
<PAGE>
-6-
stockholders exists with respect to any of the Shares to be purchased from the
Company hereunder or the issuance and sale thereof other than those that have
been expressly waived prior to the date hereof and those that will automatically
expire upon and will not apply to the consummation of the transactions
contemplated on the Closing Date. No further approval or authorization of any
stockholder, the Board of Directors of the Company or others is required for the
issuance and sale or transfer of the Shares except as may be required under the
Act, the Exchange Act or under state or other securities or Blue Sky laws.
Except as disclosed in the Prospectus and the financial statements of the
Company, and the related notes thereto, included in the Prospectus, the Company
has no outstanding options to purchase, or any preemptive rights or other rights
to subscribe for or to purchase, any securities or obligations convertible into,
or any contracts or commitments to issue or sell, shares of its capital stock or
any such options, rights, convertible securities or obligations. The description
of the Company's stock option, stock bonus and other stock plans or
arrangements, and the options or other rights granted and exercised thereunder,
set forth in the Prospectus accurately and fairly presents the information
required to be shown with respect to such plans, arrangements, options and
rights.
(g) KPMG Peat Marwick LLP, which has examined the financial statements
of the Company, together with the related schedules and notes, as of December
31, 1997 and 1996 and for each of the years in the three (3) years ended
December 31, 1997 filed with the Commission as a part of the Registration
Statement, which are included in the Prospectus, are independent accountants
within the meaning of the Act and the Rules and Regulations; the audited
financial statements of the Company, together with the related schedules and
notes, and the unaudited financial information, forming part of the Registration
Statement and Prospectus, fairly present the financial position and the results
of operations of the Company at the respective dates and for the respective
periods to which they apply; and all audited financial statements of the
Company, together with the related schedules and notes, and the unaudited
financial information, filed with the Commission as part of the Registration
Statement, have been prepared in accordance with generally accepted accounting
principles consistently applied throughout the periods involved except as may be
otherwise stated therein. The selected and summary financial and statistical
data included in the Registration Statement present fairly the information shown
therein and have been compiled on a basis consistent with the audited financial
statements presented therein. No other financial statements or schedules are
required to be included in the Registration Statement.
(h) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus, there has not been (i) any
material adverse change in the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company, (ii) any transaction
that is material to the Company, except transactions entered into in the
ordinary course of business, (iii) any obligation, direct or contingent, that is
material to the Company, incurred by the Company, except obligations incurred in
the ordinary course of business, (iv) any change in the capital stock or
outstanding indebtedness of the Company that is material to the Company, (v) any
dividend or distribution of any kind declared, paid or made on the capital stock
of the Company, or (vi) any loss or damage (whether or not insured) to the
property of the Company which has been sustained or will have been sustained
which has a material adverse effect on the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company.
<PAGE>
-7-
(i) Except as set forth in the Registration Statement and Prospectus,
(i) the Company has good and marketable title to all properties and assets
described in the Registration Statement and Prospectus as owned by it, free and
clear of any pledge, lien, security interest, encumbrance, claim or equitable
interest, other than such as would not have a material adverse effect on the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company, (ii) the agreements to which the Company is a party
described in the Registration Statement and Prospectus are valid agreements,
enforceable by the Company, except as the enforcement thereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws relating to or affecting creditors' rights generally or by general
equitable principles and, to the best of the Company's knowledge, the other
contracting party or parties thereto are not in material breach or material
default under any of such agreements, and (iii) the Company has valid and
enforceable leases for all properties described in the Registration Statement
and Prospectus as leased by it, except as the enforcement thereof may be limited
by applicable bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to or affecting creditors' rights generally or by general
equitable principles. Except as set forth in the Registration Statement and
Prospectus, the Company owns or leases all such properties as are necessary to
its operations as now conducted or as proposed to be conducted.
(j) The Company has timely filed all necessary federal, state and
foreign income and franchise tax returns and has paid all taxes shown thereon as
due, and there is no tax deficiency that has been or, to the best of the
Company's knowledge, might be asserted against the Company that might have a
material adverse effect on the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company; and all tax
liabilities are adequately provided for on the books of the Company.
(k) The Company maintains insurance with insurers of recognized
financial responsibility of the types and in the amounts generally deemed
adequate for its business and consistent with insurance coverage maintained by
similar companies in similar businesses, including, but not limited to,
insurance covering real and personal property owned or leased by the Company
against theft, damage, destruction, acts of vandalism and all other risks
customarily insured against, all of which insurance is in full force and effect;
the Company has not been refused any insurance coverage sought or applied for;
and the Company has no reason to believe that it will not be able to renew its
existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business at a cost that would not materially and adversely affect the condition
(financial or otherwise), earnings, operations, business or business prospects
of the Company.
(l) To the best of Company's knowledge, no labor disturbance by the
employees of the Company or any of its subsidiaries exists or is imminent; and
the Company is not aware of any existing or imminent labor disturbance by the
employees of any of its principal suppliers, subassemblers, value added
resellers, subcontractors, original equipment manufacturers, authorized dealers
or international distributors that might be expected to result in a material
adverse change in the condition (financial or otherwise), earnings, operations,
business or business
<PAGE>
-8-
prospects of the Company. No collective bargaining agreement exists with any of
the Company's employees and, to the best of the Company's knowledge, no such
agreement is imminent.
(m) The Company owns or possesses adequate rights to use all patents,
patent rights, inventions, trade secrets, know-how, trademarks, service marks,
trade names and copyrights which are necessary to conduct its businesses as
described in the Registration Statement and Prospectus; the expiration of any
patents, patent rights, trade secrets, trademarks, service marks, trade names or
copyrights would not have a material adverse effect on the condition (financial
or otherwise), earnings, operations, business or business prospects of the
Company; the Company has not received any written notice of, and has no
knowledge of, any infringement of or conflict with asserted rights of the
Company by others with respect to any patent, patent rights, inventions, trade
secrets, know-how, trademarks, service marks, trade names or copyrights; and the
Company has not received any written notice of, and has no knowledge of, any
infringement of or conflict with asserted rights of others with respect to any
patent, patent rights, inventions, trade secrets, know-how, trademarks, service
marks, trade names or copyrights which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, might have a material
adverse effect on the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company.
(n) The Common Stock is registered pursuant to Section 12(g) of the
Exchange Act and is listed on The Nasdaq National Market, and the Company has
taken no action designed to, or likely to have the effect of, terminating the
registration of the Common Stock under the Exchange Act or delisting the Common
Stock from The Nasdaq National Market, nor has the Company received any
notification that the Commission or the National Association of Securities
Dealers, Inc. ("NASD") is contemplating terminating such registration or
listing.
(o) The Company has been advised concerning the Investment Company Act
of 1940, as amended (the "1940 Act"), and the rules and regulations thereunder,
and has in the past conducted, and intends in the future to conduct, its affairs
in such a manner as to ensure that it will not become an "investment company" or
a company "controlled" by an "investment company" within the meaning of the 1940
Act and such rules and regulations.
(p) The Company has not distributed and will not distribute prior to
the later of (i) the Closing Date, or any date on which Option Shares are to be
purchased, as the case may be, and (ii) completion of the distribution of the
Shares, any offering material in connection with the offering and sale of the
Shares other than any Preliminary Prospectuses, the Prospectus, the Registration
Statement and other materials, if any, permitted by the Act.
(q) The Company has not at any time during the last five (5) years (i)
made any unlawful contribution to any candidate for foreign office or failed to
disclose fully any contribution in violation of law, or (ii) made any payment to
any federal or state governmental officer or official, or other person charged
with similar public or quasi-public duties, other than payments required or
permitted by the laws of the United States or any jurisdiction thereof.
<PAGE>
-9-
(r) The Company has not taken and will not take, directly or
indirectly, any action designed to or that might reasonably be expected to cause
or result in stabilization or manipulation of the price of the Common Stock to
facilitate the sale or resale of the Shares.
(s) Each officer and director of the Company, each Selling Stockholder
and each beneficial owner of more than five percent (5%) of the outstanding
shares of Common Stock has agreed in writing that such person will not, for a
period of 90 days from the date appearing on the final prospectus related to the
offering of the Shares (the "Lock-up Period"), offer to sell, contract to sell,
or otherwise sell, dispose of, loan, pledge or grant any rights with respect to
(collectively, a "Disposition") 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 (collectively, "Securities") now
owned or hereafter acquired directly by such person or with respect to which
such person has or hereafter acquires the power of disposition, otherwise than
(i) as a bona fide gift or gifts, provided the donee or donees thereof agree in
writing to be bound by this restriction, (ii) as a distribution to partners or
shareholders of such person, provided that the distributees thereof agree in
writing to be bound by the terms of this restriction, or (iii) with the prior
written consent of BancAmerica Robertson Stephens. The foregoing restriction has
been expressly agreed to preclude the holder of the Securities from engaging in
any hedging or other transaction which is designed to or reasonably expected to
lead to or result in a Disposition of Securities during the Lock-up Period, even
if such Securities would be disposed of by someone other than such holder. Such
prohibited hedging or other transactions would include, without limitation, any
short sale (whether or not against the box) or any purchase, sale or grant of
any right (including, without limitation, any put or call option) with respect
to any Securities or with respect to any security (other than a broad-based
market basket or index) that includes, relates to or derives any significant
part of its value from Securities. Furthermore, such person has also agreed and
consented to the entry of stop transfer instructions with the Company's transfer
agent against the transfer of the Securities held by such person except in
compliance with this restriction. The Company has provided to counsel for the
Underwriters a complete and accurate list of all securityholders of the Company
and the number and type of securities held by each securityholder. The Company
has provided to counsel for the Underwriters true, accurate and complete copies
of all of the agreements pursuant to which its officers, directors and such five
percent (5%) or greater stockholders have agreed to such or similar restrictions
(the "Lock-up Agreements") presently in effect or effected hereby. The Company
hereby represents and warrants that it will not release any of its officers,
directors or other such five percent (5%) or greater stockholders from any Lock-
up Agreements currently existing or hereafter effected without the prior written
consent of BancAmerica Robertson Stephens.
(t) Except as set forth in the Registration Statement and Prospectus,
(i) the Company is in compliance with all rules, laws and regulations relating
to the use, treatment, storage and disposal of toxic substances and protection
of health or the environment ("Environmental Laws") which are applicable to its
business, (ii) the Company has received no notice from any governmental
authority or third party of an asserted claim under Environmental Laws, which
claim is required to be disclosed in the Registration Statement and the
Prospectus, (iii) the Company will not be required to make future material
capital expenditures to comply with Environmental Laws and (iv) to the best of
the Company's knowledge, no property which is owned, leased or occupied
<PAGE>
-10-
by the Company has been designated as a Superfund site pursuant to the
Comprehensive Response, Compensation, and Liability Act of 1980, as amended (42
U.S.C. (S) 9601, et seq.), or otherwise designated as a contaminated site under
-- ---
applicable state or local law.
(u) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are executed
in accordance with management's general or specific authorizations, (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets, (iii) access to assets is permitted only in
accordance with management's general or specific authorization, and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(v) There are no outstanding loans, advances (except normal advances
for business expenses in the ordinary course of business) or guarantees of
indebtedness by the Company to or for the benefit of any of the officers or
directors of the Company or any of the members of the families of any of them,
except as disclosed in the Registration Statement and the Prospectus.
(w) The Company has complied with all provisions of Section 517.075,
Florida Statutes relating to doing business with the Government of Cuba or with
any person or affiliate located in Cuba.
3. Representations, Warranties and Agreements of the Selling Stockholders.
-- ----------------------------------------------------------------------
Each Selling Stockholder, severally and not jointly, represents and warrants to
and agrees with each Underwriter and the Company that:
(a) Such Selling Stockholder now has, and on the Closing Date will
have, valid marketable title to the Shares, and in the case of Warburg, to the
Stock Purchase Warrant, to be sold by such Selling Stockholder, free and clear
of any pledge, lien, security interest, encumbrance, claim or equitable interest
other than pursuant to this Agreement; and upon delivery of such Shares, and in
the case of Warburg, the Stock Purchase Warrant, hereunder and payment of the
purchase price as herein contemplated, each of the Underwriters will obtain
valid marketable title to the securities purchased by it from such Selling
Stockholder, free and clear of any pledge, lien, security interest pertaining to
such Selling Stockholder or such Selling Stockholder's property, encumbrance,
claim or equitable interest, including any liability for estate or inheritance
taxes, or any liability to or claims of any creditor, devisee, legatee or
beneficiary of such Selling Stockholder.
(b) Such Selling Stockholder has duly authorized (if applicable),
executed and delivered, in the form heretofore furnished to the Representatives,
a Selling Stockholde's Irrevocable Power of Attorney (the "Power of Attorney")
appointing Constance Galley and Ira Gerard as attorneys-in-fact (collectively,
the "Attorneys" and individually, an "Attorney") and a Letter of Transmittal and
Custody Agreement (the "Custody Agreement") with The Bank of New York, as
custodian (the "Custodian"); each of the Power of Attorney and the Custody
Agreement
<PAGE>
-11-
constitutes a valid and binding agreement on the part of such Selling
Stockholder, enforceable in accordance with its terms, except as the enforcement
thereof may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting creditors' rights
generally or by general equitable principles; and each of such Selling
Stockholder's Attorneys, acting alone, is authorized to execute and deliver this
Agreement and the certificate referred to in Section 7(h) hereof on behalf of
such Selling Stockholder, to determine the purchase price to be paid by the
several Underwriters to such Selling Stockholder as provided in Section 3
hereof, to authorize the delivery of the Selling Stockholder Shares, and in the
case of Warburg, the Stock Purchase Warrant, under this Agreement and to duly
endorse (in blank or otherwise) the certificate or certificates representing
such Shares, and in the case of Warburg, the Stock Purchase Warrant, or a stock
or warrant power or powers, as applicable, with respect thereto, to accept
payment therefor, and otherwise to act on behalf of such Selling Stockholder in
connection with this Agreement.
(c) All consents, approvals, authorizations and orders required for
the execution and delivery by such Selling Stockholder of the Power of Attorney
and the Custody Agreement, the execution and delivery by or on behalf of such
Selling Stockholder of this Agreement and the sale and delivery of the Selling
Stockholder Shares, and in the case of Warburg, the Stock Purchase Warrant,
under this Agreement (other than, at the time of the execution hereof (if the
Registration Statement has not yet been declared effective by the Commission),
the issuance of the order of the Commission declaring the Registration Statement
effective and such consents, approvals, authorizations or orders as may be
necessary under state or other securities or Blue Sky laws) have been obtained
and are in full force and effect; such Selling Stockholder, if other than a
natural person, has been duly organized and is validly existing in good standing
under the laws of the jurisdiction of its organization as the type of entity
that it purports to be; and such Selling Stockholder has full legal right, power
and authority to enter into and perform its obligations under this Agreement and
such Power of Attorney and Custody Agreement, and to sell, assign, transfer and
deliver the Shares, and in the case of Warburg, the Stock Purchase Warrant, to
be sold by such Selling Stockholder under this Agreement.
(d) Except for the Selling Stockholder Shares and the Stock Purchase
Warrant, such Selling Stockholder will not, during the Lock-up Period, effect
the Disposition of any Securities now owned or hereafter acquired directly by
such Selling Stockholder or with respect to which such Selling Stockholder has
or hereafter acquires the power of disposition, otherwise than (i) as a bona
fide gift or gifts, provided the donee or donees thereof agree in writing to be
bound by this restriction, (ii) as a distribution to partners or shareholders of
such Selling Stockholder, provided that the distributees thereof agree in
writing to be bound by the terms of this restriction, or (iii) with the prior
written consent of BancAmerica Robertson Stephens. The foregoing restriction is
expressly agreed to preclude the holder of the Securities from engaging in any
hedging or other transaction which is designed to or reasonably expected to lead
to or result in a Disposition of Securities during the Lock-up Period, even if
such Securities would be disposed of by someone other than the Selling
Stockholder. Such prohibited hedging or other transactions would including,
without limitation, any short sale (whether or not against the box) or any
purchase, sale or grant of any right (including, without limitation, any put or
call option) with respect to any Securities or with respect to any security
(other than a broad-based market basket or index) that includes, relates
<PAGE>
-12-
to or derives any significant part of its value from Securities. Such Selling
Stockholder also agrees and consents to the entry of stop transfer instructions
with the Company's transfer agent against the transfer of the securities held by
such Selling Stockholder except in compliance with this restriction.
(e) Certificates in negotiable form for all Shares (or certificates in
negotiable form for all securities which are convertible or exercisable into
Shares) to be sold by such Selling Stockholder under this Agreement, together
with a stock or warrant power or powers duly endorsed in blank by such Selling
Stockholder, have been placed in custody with the Custodian for the purpose of
effecting delivery hereunder.
(f) This Agreement has been duly authorized by each Selling
Stockholder that is not a natural person and has been duly executed and
delivered by or on behalf of such Selling Stockholder and is a valid and binding
agreement of such Selling Stockholder, enforceable in accordance with its terms,
except as rights to indemnification hereunder may be limited by applicable law
and except as the enforcement hereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles; and the
performance of this Agreement and the consummation of the transactions herein
contemplated will not result in a breach or violation of any of the terms and
provisions of or constitute a default under any bond, debenture, note or other
evidence of indebtedness, or under any lease, contract, indenture, mortgage,
deed of trust, loan agreement, joint venture or other agreement or instrument to
which such Selling Stockholder is a party or by which such Selling Stockholder,
or any Selling Stockholder Shares or the Stock Purchase Warrant, may be bound
or, to the best of such Selling Stockholders' knowledge, result in any violation
of any law, order, rule, regulation, writ, injunction, judgment or decree of any
court, government or governmental agency or body, domestic or foreign, having
jurisdiction over such Selling Stockholder or over the properties of such
Selling Stockholder, or, if such Selling Stockholder is other than a natural
person, result in any violation of any provisions of the charter, bylaws or
other organizational documents of such Selling Stockholder.
(g) Such Selling Stockholder has not taken and will not take, directly
or indirectly, any action designed to or that might reasonably be expected to
cause or result in stabilization or manipulation of the price of the Common
Stock to facilitate the sale or resale of the Shares.
(h) Such Selling Stockholder has not distributed and will not
distribute any prospectus or other offering material in connection with the
offering and sale of the Shares.
(i) All information furnished by or on behalf of such Selling
Stockholder relating to such Selling Stockholder, the Selling Stockholder Shares
and the Stock Purchase Warrant that is contained in the representations and
warranties of such Selling Stockholder in such Selling Stockholder's Power of
Attorney or set forth in the Registration Statement or the Prospectus is, and at
the time the Registration Statement became or becomes, as the case may be,
effective and at all times subsequent thereto up to and on the Closing Date was
or will be, true, correct and complete, and does not, and at the time the
Registration Statement became or becomes, as the case
<PAGE>
-13-
may be, effective and at all times subsequent thereto up to and on the Closing
Date (hereinafter defined) will not, contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make such information not misleading.
(j) Such Selling Stockholder will review the Prospectus and will
comply with all agreements and satisfy all conditions on its part to be complied
with or satisfied pursuant to this Agreement on or prior to the Closing Date,
and will advise one of its Attorneys and BancAmerica Robertson Stephens prior to
the Closing Date if any statement to be made on behalf of such Selling
Stockholder in the certificate contemplated by Section 6(h) would be inaccurate
if made as of the Closing Date.
(k) Such Selling Stockholder does not have, or has waived prior to the
date hereof, any preemptive right, co-sale right or right of first refusal or
other similar right to purchase any of the Shares that are to be sold by the
Company or any of the Shares or the Stock Purchase Warrant to be sold by the
other Selling Stockholders to the Underwriters pursuant to this Agreement; such
Selling Stockholder does not have, or has waived prior to the date hereof, any
registration right or other similar right to participate in the offering made by
the Prospectus, other than such rights of participation as have been satisfied
by the participation of such Selling Stockholder in the transactions to which
this Agreement relates in accordance with the terms of this Agreement; and such
Selling Stockholder does not own any warrants, options or similar rights to
acquire, and does not have any right or arrangement to acquire, any capital
stock, rights, warrants, options or other securities from the Company, other
than those described in the Registration Statement and the Prospectus.
(l) Such Selling Stockholder is not aware (without having conducted
any investigation or inquiry) that any of the representations and warranties of
the Company set forth in Section 2 above is untrue or inaccurate in any material
respect.
4. Purchase, Sale and Delivery of Shares. On the basis of the
-- -------------------------------------
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, (i) the Company and the Selling
Stockholders agree, severally and not jointly, to sell to the Underwriters, and
each Underwriter agrees, severally and not jointly, to purchase from the Company
and the Selling Stockholders, respectively, at a purchase price of $[____] per
share, the respective number of Company Shares and Selling Stockholder Shares
set forth opposite the names of the Company and the Selling Stockholders in
Schedule B hereto, (ii) Warburg agrees to sell to the Underwriters, and each
Underwriter agrees, severally and not jointly, to purchase from Warburg, the
Stock Purchase Warrant, at a purchase price of $[____] per each right to
purchase a Share upon exercise of the Stock Purchase Warrant and (iii) the
Company agrees to sell to the Underwriters, and each Underwriter agrees,
severally and not jointly, to purchase from the Company, an aggregate of 382,281
Shares upon exercise of the Stock Purchase Warrant, at a purchase price of $2.00
per Share. The obligation of each Underwriter to the Company and to each Selling
Stockholder shall be to purchase from the Company or such Selling Stockholder
that portion of the number of Firm Shares set forth opposite the name of the
Company or such Selling Stockholder in Schedule B hereto and that portion of the
Stock Purchase Warrant which (as nearly as practicable, as determined by you) is
in the same proportion as the number of Firm Shares which
<PAGE>
-14-
is set forth opposite the name of such Underwriter in Schedule A hereto (subject
to adjustment as provided in Section 10) is to the total number of Firm Shares
to be purchased by all the Underwriters under this Agreement.
The certificates in negotiable form for the Selling Stockholder Shares
and the Stock Purchase Warrant (or for securities convertible or exercisable
into the Selling Stockholder Shares or Warrant Shares) have been placed in
custody (for delivery under this Agreement) under the Custody Agreement. Each
Selling Stockholder agrees that the certificates for the Selling Stockholder
Shares, and in the case of Warburg, the Stock Purchase Warrant, of such Selling
Stockholder so held in custody are subject to the interests of the Underwriters
hereunder, that the arrangements made by such Selling Stockholder for such
custody, including the Power of Attorney is to that extent irrevocable and that
the obligations of such Selling Stockholder hereunder shall not be terminated by
the act of such Selling Stockholder or by operation of law, whether by the death
or incapacity of such Selling Stockholder or the occurrence of any other event,
except as specifically provided herein or in the Custody Agreement. If any
Selling Stockholder should die or be incapacitated, or if any other such event
should occur, before the delivery of the certificates for the Selling
Stockholder Shares, and in the case of Warburg, the Stock Purchase Warrant
hereunder, the Selling Stockholder Shares, and in the case of Warburg, the Stock
Purchase Warrant to be sold by such Selling Stockholder shall, except as
specifically provided herein or in the Custody Agreement, be delivered by the
Custodian in accordance with the terms and conditions of this Agreement as if
such death, incapacity or other event had not occurred, regardless of whether
the Custodian shall have received notice of such death or other event.
Delivery of definitive certificates for the Firm Shares and the Stock
Purchase Warrant to be purchased by the Underwriters pursuant to this Section 4
shall be made against payment of the purchase price therefor by the several
Underwriters by certified or official bank check or checks drawn in same-day
funds or by wire transfer, payable to the order of the Company with regard to
the Shares being purchased from the Company, and to the order of the Custodian
for the respective accounts of the Selling Stockholders with regard to the
Shares and the Stock Purchase Warrant being purchased from such Selling
Stockholders, at the offices of Testa, Hurwitz & Thibeault, LLP, High Street
Tower, 125 High Street, Boston, MA 02110 (or at such other place as may be
agreed upon among the Representatives and the Company and the Attorneys), at
7:00 A.M., San Francisco time (a) on the third (3rd) full business day following
the first day that Shares are traded, (b) if this Agreement is executed and
delivered after 1:30 P.M., San Francisco time, the fourth (4th) full business
day following the day that this Agreement is executed and delivered or (c) at
such other time and date not later than seven (7) full business days following
the first day that Shares are traded as the Representatives and the Company and
the Attorneys may determine (or at such time and date to which payment and
delivery shall have been postponed pursuant to Section 11 hereof), such time and
date of payment and delivery being herein called the "Closing Date;" provided,
--------
however, that if the Company has not made available to the Representatives
- -------
copies of the Prospectus within the time provided in Section 5(d) hereof, the
Representatives may, in their sole discretion, postpone the Closing Date until
no later than two (2) full business days following delivery of copies of the
Prospectus to the Representatives. The certificates for the Firm Shares and the
Stock Purchase Warrant to be so delivered will be made available to you at such
office or such other location including, without limitation, in New York
<PAGE>
-15-
City, as you may reasonably request for checking at least one (1) full business
day prior to the Closing Date and will be in such names and denominations as you
may request, such request to be made at least two (2) full business days prior
to the Closing Date. If the Representatives so elect, delivery of the Firm
Shares may be made by credit through full fast transfer to the accounts at The
Depository Trust Company designated by the Representatives.
It is understood that you, individually, and not as the Representatives
of the several Underwriters, may (but shall not be obligated to) make payment of
the purchase price on behalf of any Underwriter or Underwriters whose check or
checks or wire transfer or wire transfers shall not have been received by you
prior to the Closing Date for the Firm Shares to be purchased by such
Underwriter or Underwriters. Any such payment by you shall not relieve any such
Underwriter or Underwriters of any of its or their obligations hereunder.
After the Registration Statement becomes effective, the several
Underwriters intend to make a public offering (as such term is described in
Section 12 hereof) of the Firm Shares at a public offering price of $[____] per
share. After the public offering, the several Underwriters may, in their
discretion, vary the offering price.
The information set forth in the last paragraph on the front cover page
(insofar as such information relates to the Underwriters), on the inside front
cover concerning stabilization and over-allotment by the Underwriters, and under
the [first, second, seventh and eighth] paragraphs under the caption
"Underwriting" in any Preliminary Prospectus and in the Prospectus constitutes
the only information furnished by the Underwriters to the Company for inclusion
in any Preliminary Prospectus, the Prospectus or the Registration Statement, and
you, on behalf of the respective Underwriters, represent and warrant to the
Company and the Selling Stockholders that the statements made therein do not
include any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
5. Further Agreements of the Company. The Company agrees with the several
-- ---------------------------------
Underwriters that:
(a) The Company will use its best efforts to cause the Registration
Statement and any amendment thereof, if not effective at the time and date that
this Agreement is executed and delivered by the parties hereto, to become
effective as promptly as possible; the Company will use its best efforts to
cause any abbreviated registration statement pursuant to Rule 462(b) of the
Rules and Regulations as may be required subsequent to the date the Registration
Statement is declared effective to become effective as promptly as possible; the
Company will notify you, promptly after it shall receive notice thereof, of the
time when the Registration Statement, any subsequent amendment to the
Registration Statement or any abbreviated registration statement has become
effective or any supplement to the Prospectus has been filed; if the Company
omitted information from the Registration Statement at the time it was
originally declared effective in reliance upon Rule 430A(a) of the Rules and
Regulations, the Company will provide evidence satisfactory to you that the
Prospectus contains such information and has been filed, within the time period
prescribed, with the Commission pursuant to subparagraph (1) or (4) of Rule
424(b) of the
<PAGE>
-16-
Rules and Regulations or as part of a post-effective amendment to such
Registration Statement as originally declared effective which is declared
effective by the Commission; if the Company files a term sheet pursuant to Rule
434 of the Rules and Regulations, the Company will provide evidence satisfactory
to you that the Prospectus and term sheet meeting the requirements of Rule
434(b) or (c), as applicable, of the Rules and Regulations, have been filed,
within the time period prescribed, with the Commission pursuant to subparagraph
(7) of Rule 424(b) of the Rules and Regulations; if for any reason the filing of
the final form of Prospectus is required under Rule 424(b)(3) of the Rules and
Regulations, it will provide evidence satisfactory to you that the Prospectus
contains such information and has been filed with the Commission within the time
period prescribed; it will notify you promptly of any request by the Commission
for the amending or supplementing of the Registration Statement or the
Prospectus or for additional information; promptly upon your request, it will
prepare and file with the Commission any amendments or supplements to the
Registration Statement or Prospectus which, in the opinion of counsel for the
several Underwriters ("Underwriters' Counsel"), may be necessary or advisable in
connection with the distribution of the Shares by the Underwriters; it will
promptly prepare and file with the Commission, and promptly notify you of the
filing of, any amendments or supplements to the Registration Statement or
Prospectus which may be necessary to correct any statements or omissions, if, at
any time when a prospectus relating to the Shares is required to be delivered
under the Act, any event shall have occurred as a result of which the Prospectus
or any other prospectus relating to the Shares as then in effect would include
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; in case any Underwriter is required
to deliver a prospectus nine (9) months or more after the effective date of the
Registration Statement in connection with the sale of the Shares, it will
prepare promptly upon request, but at the expense of such Underwriter, such
amendment or amendments to the Registration Statement and such prospectus or
prospectuses as may be necessary to permit compliance with the requirements of
Section 10(a)(3) of the Act; and it will file no amendment or supplement to the
Registration Statement or Prospectus which shall not previously have been
submitted to you a reasonable time prior to the proposed filing thereof or to
which you shall reasonably object in writing, subject, however, to compliance
with the Act and the Rules and Regulations and the provisions of this Agreement.
(b) The Company will advise you, promptly after it shall receive
notice or obtain knowledge, of the issuance of any stop order by the Commission
suspending the effectiveness of the Registration Statement or of the initiation
or threat of any proceeding for that purpose; and it will promptly use its best
efforts to prevent the issuance of any stop order or to obtain its withdrawal at
the earliest possible moment if such stop order should be issued.
(c) The Company will use its best efforts to qualify the Shares for
offering and sale under the securities laws of such jurisdictions as you may
designate and to continue such qualifications in effect for so long as may be
required for purposes of the distribution of the Shares, except that the Company
shall not be required in connection therewith or as a condition thereof to
qualify as a foreign corporation or to execute a general consent to service of
process in any jurisdiction in which it is not otherwise required to be so
qualified or to so execute a general consent to service of process. In each
jurisdiction in which the Shares shall have been qualified as
<PAGE>
-17-
above provided, the Company will make and file such statements and reports in
each year as are or may be required by the laws of such jurisdiction.
(d) The Company will furnish to you, as soon as available, and, in the
case of the Prospectus and any term sheet or abbreviated term sheet under Rule
434, in no event later than the first (1st) full business day following the
first day that Shares are traded, copies of the Registration Statement (three of
which will be signed and which will include all exhibits), each Preliminary
Prospectus, the Prospectus and any amendments or supplements to such documents,
including any prospectus prepared to permit compliance with Section 10(a)(3) of
the Act, all in such quantities as you may from time to time reasonably request.
Notwithstanding the foregoing, if BancAmerica Robertson Stephens, on behalf of
the several Underwriters, shall agree to the utilization of Rule 434 of the
Rules and Regulations, the Company shall provide to you copies of a Preliminary
Prospectus updated in all respects through the date specified by you in such
quantities as you may from time to time reasonably request.
(e) The Company will make generally available to its securityholders
as soon as practicable, but in any event not later than the forty-fifth (45th)
day following the end of the fiscal quarter first occurring after the first
anniversary of the effective date of the Registration Statement, an earnings
statement (which will be in reasonable detail but need not be audited) complying
with the provisions of Section 11(a) of the Act and covering a twelve (12) month
period beginning after the effective date of the Registration Statement.
(f) During a period of five (5) years after the date hereof, the
Company will furnish to its shareholders as soon as practicable after the end of
each respective period, annual reports (including financial statements audited
by independent certified public accountants) and unaudited quarterly reports of
operations for each of the first three quarters of the fiscal year, and will
furnish to you and the other several Underwriters hereunder, upon request (i)
concurrently with furnishing such reports to its stockholders, statements of
operations of the Company for each of the first three (3) quarters in the form
furnished to the Company's stockholders, (ii) concurrently with furnishing to
its stockholders, a balance sheet of the Company as of the end of such fiscal
year, together with statements of operations, of stockholders' equity, and of
cash flows of the Company for such fiscal year, accompanied by a copy of the
certificate or report thereon of independent certified public accountants, (iii)
as soon as they are available, copies of all reports (financial or other) mailed
to stockholders, (iv) as soon as they are available, copies of all reports and
financial statements furnished to or filed with the Commission, any securities
exchange or the NASD, (v) every material press release and every material news
item or article in respect of the Company or its affairs which was generally
released to stockholders or prepared by the Company or any of its subsidiaries,
and (vi) any additional information of a public nature concerning the Company or
its subsidiaries, or its business which you may reasonably request. During such
five (5) year period, if the Company shall have active subsidiaries, the
foregoing financial statements shall be on a consolidated basis to the extent
that the accounts of the Company and its subsidiaries are consolidated, and
shall be accompanied by similar financial statements for any significant
subsidiary which is not so consolidated.
<PAGE>
-18-
(g) The Company will apply the net proceeds from the sale of the
Shares being sold by it in the manner set forth under the caption "Use of
Proceeds" in the Prospectus.
(h) The Company will maintain a transfer agent and, if necessary under
the jurisdiction of incorporation of the Company, a registrar (which may be the
same entity as the transfer agent) for its Common Stock.
(i) If the transactions contemplated hereby are not consummated by
reason of any failure, refusal or inability on the part of the Company or any
Selling Stockholder to perform any agreement on their respective parts to be
performed hereunder or to fulfill any condition of the Underwriters' obligations
hereunder, or if the Company shall terminate this Agreement pursuant to Section
12(a) hereof, or if the Underwriters shall terminate this Agreement pursuant to
Section 12(b)(i), the Company will reimburse the several Underwriters for all
out-of-pocket expenses (including fees and disbursements of Underwriters'
Counsel) incurred by the Underwriters in investigating or preparing to market or
marketing the Shares.
(j) If at any time during the ninety (90) day period after the
Registration Statement becomes effective, any rumor, publication or event
relating to or affecting the Company shall occur as a result of which in your
opinion the market price of the Common Stock has been or is likely to be
materially affected (regardless of whether such rumor, publication or event
necessitates a supplement to or amendment of the Prospectus), the Company will,
after written notice from you advising the Company to the effect set forth
above, forthwith prepare, consult with you concerning the substance of and
disseminate a press release or other public statement, reasonably satisfactory
to you, responding to or commenting on such rumor, publication or event.
(k) During the Lock-up Period, the Company will not, without the prior
written consent of BancAmerica Robertson Stephens, effect the Disposition of,
directly or indirectly, any Securities other than (i) the sale of the Shares to
be sold by the Company hereunder, (ii) the issuance of options or Common Stock
under the Company's presently authorized 1993 Stock Option Plan, 1997 Stock
Option Plan, 1997 Directors Stock Option Plan and the 1997 Employee Stock
Purchase Plan (the "Plans"), (iii) the issuance of Common Stock upon exercise of
warrants outstanding on the date hereof, and (iv) the issuance of Securities to
sellers of businesses acquired by the Company so long as such sellers agree in
writing not to effect any Disposition of Securities at any time during the
Lock-up Period and so long as the Company gives BancAmerica Robertson Stephens
15 days prior written notice of such issuances.
(l) During a period of ninety (90) days from the effective date of the
Registration Statement, the Company will not file a registration statement
registering shares under the Plans or other employee benefit plan; provided,
--------
however, that the Company may, within such ninety day period, file a
- -------
registration statement registering shares under its 1997 Employee Stock Purchase
Plan.
<PAGE>
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6. Expenses.
-- --------
(a) The Company and the Selling Stockholders agree with each
Underwriter that:
(i) The Company will pay and bear all costs and expenses in
connection with the preparation, printing and filing of the Registration
Statement (including financial statements, schedules and exhibits),
Preliminary Prospectuses and the Prospectus and any amendments or
supplements thereto; the printing of this Agreement, the Agreement Among
Underwriters, the Selected Dealer Agreement, the Preliminary Blue Sky
Survey and any Supplemental Blue Sky Survey, the Underwriters'
Questionnaire and Power of Attorney, and any instruments related to any of
the foregoing; the issuance and delivery of the Shares hereunder to the
several Underwriters, including transfer taxes, if any, the cost of all
certificates representing the Shares and transfer agents' and registrars'
fees; the fees and disbursements of counsel for the Company; all fees and
other charges of the Company's independent certified public accountants;
the cost of furnishing to the several Underwriters copies of the
Registration Statement (including appropriate exhibits), Preliminary
Prospectus and the Prospectus, and any amendments or supplements to any of
the foregoing; NASD filing fees and the cost of qualifying the Shares under
the laws of such jurisdictions as you may designate (including filing fees
and fees and disbursements of Underwriters' Counsel in connection with such
NASD filings and Blue Sky qualifications); and all other expenses directly
incurred by the Company and the Selling Stockholders in connection with the
performance of their obligations hereunder. Any additional expenses
incurred as a result of the sale of the Shares or the Stock Purchase
Warrant by the Selling Stockholders will be borne collectively by the
Company and the Selling Stockholders. The provisions of this Section
6(a)(i) are intended to relieve the Underwriters from the payment of the
expenses and costs which the Selling Stockholders and the Company hereby
agree to pay, but shall not affect any agreement which the Selling
Stockholders and the Company may make, or may have made, for the sharing of
any of such expenses and costs. Such agreements shall not impair the
obligations of the Company and the Selling Stockholders hereunder to the
several Underwriters.
(ii) In addition to its other obligations under Section 9(a)
hereof, the Company agrees that, as an interim measure during the pendency
of any claim, action, investigation, inquiry or other proceeding described
in Section 9(a) hereof, it will reimburse the Underwriters on a monthly
basis for all reasonable legal or other expenses incurred in connection
with investigating or defending any such claim, action, investigation,
inquiry or other proceeding, notwithstanding the absence of a judicial
determination as to the propriety and enforceability of the Company's
obligation to reimburse the Underwriters for such expenses and the
possibility that such payments might later be held to have been improper by
a court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the Underwriters
shall promptly return such payment to the Company together with interest,
compounded daily, determined on the basis of the prime rate (or other
commercial lending rate for borrowers of the highest credit standing)
listed from time to time in The Wall Street Journal which represents the
base rate
<PAGE>
-20-
on corporate loans posted by a substantial majority of the nation's thirty
(30) largest banks (the "Prime Rate"). Any such interim reimbursement
payments which are not made to the Underwriters within thirty (30) days of
a request for reimbursement shall bear interest at the Prime Rate from the
date of such request.
(iii) In addition to their other obligations under Section 9(b)
hereof, each Selling Stockholder agrees that, as an interim measure during
the pendency of any claim, action, investigation, inquiry or other
proceeding described in Section 9(b) hereof relating to such Selling
Stockholder, it will reimburse the Underwriters on a monthly basis for all
reasonable legal or other expenses incurred in connection with
investigating or defending any such claim, action, investigation, inquiry
or other proceeding, notwithstanding the absence of a judicial
determination as to the propriety and enforceability of such Selling
Stockholder's obligation to reimburse the Underwriters for such expenses
and the possibility that such payments might later be held to have been
improper by a court of competent jurisdiction. To the extent that any such
interim reimbursement payment is so held to have been improper, the
Underwriters shall promptly return such payment to the Selling
Stockholders, together with interest, compounded daily, determined on the
basis of the Prime Rate. Any such interim reimbursement payments which are
not made to the Underwriters within thirty (30) days of a request for
reimbursement shall bear interest at the Prime Rate from the date of such
request.
(b) In addition to their other obligations under Section 9(c) hereof,
the Underwriters severally and not jointly agree that, as an interim measure
during the pendency of any claim, action, investigation, inquiry or other
proceeding described in Section 9(c) hereof, they will reimburse the Company and
each Selling Stockholder on a monthly basis for all reasonable legal or other
expenses incurred in connection with investigating or defending any such claim,
action, investigation, inquiry or other proceeding, notwithstanding the absence
of a judicial determination as to the propriety and enforceability of the
Underwriters' obligation to reimburse the Company and each such Selling
Stockholder for such expenses and the possibility that such payments might later
be held to have been improper by a court of competent jurisdiction. To the
extent that any such interim reimbursement payment is so held to have been
improper, the Company and each such Selling Stockholder shall promptly return
such payment to the Underwriters together with interest, compounded daily,
determined on the basis of the Prime Rate. Any such interim reimbursement
payments which are not made to the Company and each such Selling Stockholder
within thirty (30) days of a request for reimbursement shall bear interest at
the Prime Rate from the date of such request.
(c) It is agreed that any controversy arising out of the operation of
the interim reimbursement arrangements set forth in Sections 6(a)(ii), 6(a)(iii)
and 6(b) hereof, including the amounts of any requested reimbursement payments,
the method of determining such amounts and the basis on which such amounts shall
be apportioned among the reimbursing parties, shall be settled by arbitration
conducted under the provisions of the Constitution and Rules of the Board of
Governors of the New York Stock Exchange, Inc. or pursuant to the Code of
Arbitration Procedure of the NASD. Any such arbitration must be commenced by
service of a written demand for arbitration or a written notice of intention to
arbitrate, therein electing the arbitration tribunal. In
<PAGE>
-21-
the event the party demanding arbitration does not make such designation of an
arbitration tribunal in such demand or notice, then the party responding to said
demand or notice is authorized to do so. Any such arbitration will be limited to
the operation of the interim reimbursement provisions contained in Sections
6(a)(ii), 6(a)(iii) and 6(b) hereof and will not resolve the ultimate propriety
or enforceability of the obligation to indemnify for expenses which is created
by the provisions of Sections 9(a), 9(b) and 9(c) hereof or the obligation to
contribute to expenses which is created by the provisions of Section 9(e)
hereof.
7. Conditions of Underwriters' Obligations. The obligations of the
-- ---------------------------------------
several Underwriters to purchase and pay for the Shares and the Stock Purchase
Warrant as provided herein shall be subject to the accuracy, as of the date
hereof and the Closing Date and any later date on which Option Shares are to be
purchased, as the case may be, of the representations and warranties of the
Company and the Selling Stockholders herein, to the performance by the Company
and the Selling Stockholders of their respective obligations hereunder and to
the following additional conditions:
(a) The Registration Statement shall have become effective not later
than 2:00 P.M., San Francisco time, on the date following the date of this
Agreement, or such later date as shall be consented to in writing by you; and no
stop order suspending the effectiveness thereof shall have been issued and no
proceedings for that purpose shall have been initiated or, to the knowledge of
the Company, any Selling Stockholder or any Underwriter, threatened by the
Commission, and any request of the Commission for additional information (to be
included in the Registration Statement or the Prospectus or otherwise) shall
have been complied with to the satisfaction of Underwriters' Counsel.
(b) All corporate proceedings and other legal matters in connection
with this Agreement, the form of Registration Statement and the Prospectus, and
the registration, authorization, issue, sale and delivery of the Shares, shall
have been reasonably satisfactory to Underwriters' Counsel, and such counsel
shall have been furnished with such papers and information as they may
reasonably have requested to enable them to pass upon the matters referred to in
this Section.
(c) Subsequent to the execution and delivery of this Agreement and
prior to the Closing Date, or any later date on which Option Shares are to be
purchased, as the case may be, there shall not have been any change in the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company from that set forth in the Registration Statement or
Prospectus, which, in your sole judgment, is material and adverse and that makes
it, in your sole judgment, impracticable or inadvisable to proceed with the
public offering of the Shares as contemplated by the Prospectus.
(d) You shall have received on the Closing Date and on any later date
on which Option Shares are to be purchased, as the case may be, the following
opinion of counsel for the Company and the Selling Stockholders, dated the
Closing Date or such later date on which Option Shares are to be purchased
addressed to the Underwriters and with reproduced copies or signed counterparts
thereof for each of the Underwriters, to the effect that:
<PAGE>
-22-
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation;
(ii) The Company has the corporate power and authority to own,
lease and operate its properties and to conduct its business as described
in the Prospectus;
(iii) The Company is duly qualified to do business as a foreign
corporation and is in good standing in each jurisdiction, if any, in which
the ownership or leasing of its properties or the conduct of its business
requires such qualification, except where the failure to be so qualified or
be in good standing would not have a material adverse effect on the
condition (financial or otherwise), earnings, operations or business of the
Company. To such counsel's knowledge, the Company does not own or control,
directly or indirectly, any corporation, association or other entity;
(iv) The authorized, issued and outstanding capital stock of the
Company is as set forth in the Prospectus under the caption
"Capitalization" as of the dates stated therein, the issued and outstanding
shares of capital stock of the Company (including the Selling Stockholder
Shares) and the Stock Purchase Warrant have been duly and validly issued
and nonassessable and, to such counsel's knowledge, are fully paid, and, to
such counsel's knowledge, will not have been issued in violation of or
subject to any preemptive right, co-sale right, registration right, right
of first refusal or other similar right;
(v) The Shares to be issued by the Company pursuant to the terms
of this Agreement (including the Warrant Shares) have been duly authorized
and, upon issuance and delivery against payment therefor in accordance with
the terms hereof, will be duly and validly issued and fully paid and
nonassessable, and will not have been issued in violation of or subject to
any preemptive right, co-sale right, registration right, right of first
refusal or other similar right known to such counsel.
(vi) The Company has the corporate power and authority to enter
into this Agreement and to issue, sell and deliver to the Underwriters the
Shares (including the Warrant Shares) to be issued and sold by it
hereunder;
(vii) This Agreement has been duly authorized by all necessary
corporate action on the part of the Company and has been duly executed and
delivered by the Company and, assuming due authorization, execution and
delivery by you, is a valid and binding agreement of the Company,
enforceable in accordance with its terms, except insofar as indemnification
provisions may be limited by applicable law and except as enforceability
may be limited by bankruptcy, insolvency, reorganization, moratorium or
similar laws relating to or affecting creditors' rights generally or by
general equitable principles;
(viii) The Registration Statement has become effective under the
Act and, to such counsel's knowledge, no stop order suspending the
effectiveness of the Registration
<PAGE>
-23-
Statement has been issued and no proceedings for that purpose have been
instituted or are pending or threatened under the Act;
(ix) The Registration Statement and the Prospectus, and each
amendment or supplement thereto (other than the financial statements
(including supporting schedules) and financial data derived therefrom as to
which such counsel need express no opinion), as of the effective date of
the Registration Statement, complied as to form in all material respects
with the requirements of the Act and the applicable Rules and Regulations;
(x) The information in the Prospectus under the caption
"Description of Capital Stock," to the extent that it constitutes matters
of law or legal conclusions, has been reviewed by such counsel and is a
fair summary of such matters and conclusions; and the forms of certificates
evidencing the Common Stock and filed as exhibits to the Registration
Statement comply with Delaware law;
(xi) The description in the Registration Statement and the
Prospectus of the Certificate of Incorporation and bylaws of the Company
and of statutes are accurate and fairly present the information required to
be presented by the Act and the applicable Rules and Regulations;
(xii) To such counsel's knowledge, there are no agreements,
contracts, leases or documents to which the Company is a party of a
character required to be described or referred to in the Registration
Statement or Prospectus or to be filed as an exhibit to the Registration
Statement which are not described or referred to therein or filed as
required;
(xiii) The performance of this Agreement and the consummation of
the transactions herein contemplated (other than performance of the
Company's indemnification obligations hereunder, concerning which no
opinion need be expressed) will not (a) result in any violation of the
Company's charter or bylaws or (b) to such counsel's knowledge, result in a
material breach or violation of any of the terms and provisions of, or
constitute a default under, any bond, debenture, note or other evidence of
indebtedness, or any lease, contract, indenture, mortgage, deed of trust,
loan agreement, joint venture or other agreement or instrument known to
such counsel to which the Company is a party or by which its properties are
bound, or any applicable statute, rule or regulation known to such counsel
or, to such counsel's knowledge, any order, writ or decree of any court,
government or governmental agency or body having jurisdiction over the
Company, or over any of its properties or operations;
(xiv) No consent, approval, authorization or order of or
qualification with any court, government or governmental agency or body
having jurisdiction over the Company, or over any of its properties or
operations is necessary in connection with the consummation by the Company
of the transactions herein contemplated, except such as have been obtained
under the Act or such as may be required under state or other securities or
Blue Sky laws in connection with the purchase and the distribution of the
Shares by the Underwriters;
<PAGE>
-24-
(xv) To such counsel's knowledge, there are no legal or
governmental proceedings pending or threatened against the Company of a
character required to be disclosed in the Registration Statement or the
Prospectus by the Act or the Rules and Regulations, other than those
described therein;
(xvi) To such counsel's knowledge, the Company is not presently
(a) in material violation of its Certificate of Incorporation or bylaws, or
(b) in material breach of any applicable statute, rule or regulation known
to such counsel or, to such counsel's knowledge, any order, writ or decree
of any court or governmental agency or body having jurisdiction over the
Company or over any of its properties or operations;
(xvii) To such counsel's knowledge, except as set forth in the
Registration Statement and Prospectus, no holders of Common Stock or other
securities of the Company have registration rights with respect to
securities of the Company and, except as set forth in the Registration
Statement and Prospectus, all holders of securities of the Company having
rights known to such counsel to registration of such shares of Common Stock
or other securities, because of the filing of the Registration Statement by
the Company have, with respect to the offering contemplated thereby, waived
such rights or such rights have expired by reason of lapse of time
following notification of the Company's intent to file the Registration
Statement or have included securities in the Registration Statement
pursuant to the exercise of and in full satisfaction of such rights;
(xviii) Each Selling Stockholder which is not a natural person has
full right, power and authority to enter into and to perform its
obligations under the Power of Attorney and Custody Agreement to be
executed and delivered by it in connection with the transactions
contemplated herein; the Power of Attorney and Custody Agreement of each
Selling Stockholder that is not a natural person has been duly authorized
by such Selling Stockholder; the Power of Attorney and Custody Agreement of
each Selling Stockholder has been duly executed and delivered by or on
behalf of such Selling Stockholder; and the Power of Attorney and Custody
Agreement of each Selling Stockholder constitutes a valid and binding
agreement of such Selling Stockholder, enforceable in accordance with its
terms, except as the enforcement thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally or by general equitable principles;
(xix) Each of the Selling Stockholders has full right, power and
authority to enter into and to perform its obligations under this Agreement
and to sell, transfer, assign and deliver the Shares, and in the case of
Warburg, the Stock Purchase Warrant, to be sold by such Selling Stockholder
hereunder;
(xx) This Agreement has been duly authorized by each Selling
Stockholder that is not a natural person and has been duly executed and
delivered by or on behalf of each Selling Stockholder; and
<PAGE>
-25-
(xxi) Upon the delivery of and payment for the Shares as
contemplated in this Agreement, to the best of our knowledge, each of the
Underwriters will receive valid marketable title to the Shares purchased by
it from such Selling Stockholder, free and clear of any pledge, lien,
security interest, encumbrance, claim or equitable interest. In rendering
such opinion, such counsel may assume that the Underwriters are without
notice of any defect in the title of the Shares being purchased from the
Selling Stockholders.
In addition, such counsel shall state that such counsel has
participated in conferences with officials and other representatives of the
Company, the Representatives, Underwriters' Counsel and the independent
certified public accountants of the Company, at which such conferences the
contents of the Registration Statement and Prospectus and related matters were
discussed, and although they have not verified the accuracy or completeness of
the statements contained in the Registration Statement or the Prospectus,
nothing has come to the attention of such counsel which leads them to believe
that, at the time the Registration Statement became effective and at all times
subsequent thereto up to and on the Closing Date and on any later date on which
Option Shares are to be purchased, the Registration Statement and any amendment
or supplement thereto (other than the financial statements including supporting
schedules and other financial and statistical information derived therefrom, as
to which such counsel need express no comment) contained any untrue statement of
a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, or at the
Closing Date or any later date on which the Option Shares are to be purchased,
as the case may be, the Registration Statement, the Prospectus and any amendment
or supplement thereto (except as aforesaid) contained any untrue statement of a
material fact or omitted to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
Counsel rendering the foregoing opinion may rely as to questions of law
not involving the laws of the United States or the States of California and
Delaware upon opinions of local counsel, and as to questions of fact upon
representations or certificates of officers of the Company, the Selling
Stockholders or officers of the Selling Stockholders (when the Selling
Stockholder is not a natural person), and of government officials, in which case
their opinion is to state that they are so relying and that they have no
knowledge of any material misstatement or inaccuracy in any such opinion,
representation or certificate. Copies of any opinion, representation or
certificate so relied upon shall be delivered to you, as Representatives of the
Underwriters, and to Underwriters' Counsel.
(e) You shall have received on the Closing Date and on any later date
on which Option Shares are to be purchased, as the case may be, an opinion of
Testa, Hurwitz & Thibeault, LLP, in form and substance satisfactory to you, with
respect to the sufficiency of all such corporate proceedings and other legal
matters relating to this Agreement and the transactions contemplated hereby as
you may reasonably require, and the Company shall have furnished to such counsel
such documents as they may have requested for the purpose of enabling them to
pass upon such matters.
(f) You shall have received on the Closing Date and on any later date
on which Option Shares are to be purchased, as the case may be, a letter from
KPMG Peat Marwick LLP
<PAGE>
-26-
addressed to the Underwriters, dated the Closing Date or such later date on
which Option Shares are to be purchased, as the case may be, confirming that
they are independent certified public accountants with respect to the Company
within the meaning of the Act and the applicable published Rules and Regulations
and based upon the procedures described in such letter delivered to you
concurrently with the execution of this Agreement (herein called the "Original
Letter"), but carried out to a date not more than five (5) business days prior
to the Closing Date or such later date on which Option Shares are to be
purchased, as the case may be, (i) confirming, to the extent true, that the
statements and conclusions set forth in the Original Letter are accurate as of
the Closing Date or such later date on which Option Shares are to be purchased,
as the case may be, and (ii) setting forth any revisions and additions to the
statements and conclusions set forth in the Original Letter which are necessary
to reflect any changes in the facts described in the Original Letter since the
date of such letter, or to reflect the availability of more recent financial
statements, data or information. The letter shall not disclose any change in the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company from that set forth in the Registration Statement or
Prospectus, which, in your sole judgment, is material and adverse and that makes
it, in your sole judgment, impracticable or inadvisable to proceed with the
public offering of the Shares as contemplated by the Prospectus. The Original
Letter from KPMG Peat Marwick, LLP shall be addressed to or for the use of the
Underwriters in form and substance satisfactory to the Underwriters and shall
(i) represent, to the extent true, that they are independent certified public
accountants with respect to the Company within the meaning of the Act and the
applicable published Rules and Regulations, (ii) set forth their opinion with
respect to their examination of the consolidated balance sheet of the Company as
of December 31, 1997 and related consolidated statements of operations,
stockholders' deficiency, and cash flows for the twelve (12) months ended
December 31, 1997, (iii) state that KPMG Peat Marwick, LLP has performed the
procedures set out in Statement on Auditing Standards No. 71 ("SAS 71") for a
review of interim financial information and providing the report of KPMG Peat
Marwick, LLP as described in SAS 71 on the financial statements for each of the
quarters in the one-quarter period ended March 31, 1998 (the "Quarterly
Financial Statements"), (iv) state that in the course of such review, nothing
came to their attention that leads them to believe that any material
modifications need to be made to any of the Quarterly Financial Statements in
order for them to be in compliance with generally accepted accounting principles
consistently applied across the periods presented, and (v) address other matters
agreed upon by KPMG Peat Marwick, LLP and you. In addition, you shall have
received from KPMG Peat Marwick, LLP a letter addressed to the Company and made
available to you for the use of the Underwriters stating that their review of
the Company's system of internal accounting controls, to the extent they deemed
necessary in establishing the scope of their examination of the Company's
consolidated financial statements as of December 31, 1997, did not disclose any
weaknesses in internal controls that they considered to be material weaknesses.
(g) You shall have received on the Closing Date and on any later date
on which Option Shares are to be purchased, as the case may be, a certificate of
the Company, dated the Closing Date or such later date on which Option Shares
are to be purchased, as the case may be, signed by the Chief Executive Officer
and Chief Financial Officer of the Company, to the effect that, and you shall be
satisfied that:
<PAGE>
-27-
(i) The representations and warranties of the Company in this
Agreement are true and correct, as if made on and as of the Closing Date or
any later date on which Option Shares are to be purchased, as the case may
be, and the Company has complied with all the agreements and satisfied all
the conditions on its part to be performed or satisfied at or prior to the
Closing Date or any later date on which Option Shares are to be purchased,
as the case may be;
(ii) No stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that purpose
have been instituted or are pending or to the best of such officers'
knowledge, threatened under the Act;
(iii) When the Registration Statement became effective and at all
times subsequent thereto up to the delivery of such certificate, the
Registration Statement and the Prospectus, and any amendments or
supplements thereto, contained all material information required to be
included therein by the Act and the Rules and Regulations and in all
material respects conformed to the requirements of the Act and the Rules
and Regulations, the Registration Statement, and any amendment or
supplement thereto, did not and does not include any untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, the
Prospectus, and any amendment or supplement thereto, did not and does not
include any untrue statement of a material fact or omit to state a material
fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, and, since the
effective date of the Registration Statement, there has occurred no event
required to be set forth in an amended or supplemented Prospectus which has
not been so set forth; and
(iv) Subsequent to the respective dates as of which information
is given in the Registration Statement and Prospectus, there has not been
(a) any material adverse change in the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company, (b)
any transaction that is material to the Company, except transactions
entered into in the ordinary course of business, (c) any obligation, direct
or contingent, that is material to the Company, incurred by the Company,
except obligations incurred in the ordinary course of business, (d) any
change in the capital stock or outstanding indebtedness of the Company that
is material to the Company, (e) any dividend or distribution of any kind
declared, paid or made on the capital stock of the Company, or (f) any loss
or damage (whether or not insured) to the property of the Company which has
been sustained or will have been sustained which has a material adverse
effect on the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company.
(h) You shall be satisfied that, and you shall have received a
certificate, dated the Closing Date, from the Attorneys for each Selling
Stockholder to the effect that, as of the Closing Date, they have not been
informed that:
<PAGE>
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(i) The representations and warranties made by such Selling
Stockholder herein are not true or correct in any material respect on the
Closing Date; or
(ii) Such Selling Stockholder has not complied with any obligation
or satisfied any condition which is required to be performed or satisfied
on the part of such Selling Stockholder at or prior to the Closing Date.
(i) The Company shall have obtained and delivered to you an agreement
from each officer and director of the Company, each Selling Stockholder and each
beneficial owner of five percent (5%) or more of the outstanding shares of
Common Stock in writing prior to the date hereof that such person will not,
during the Lock-up Period, effect the Disposition of any Securities now owned or
hereafter acquired directly by such person or with respect to which such person
has or hereafter acquires the power of disposition, otherwise than (i) as a bona
fide gift or gifts, provided the donee or donees thereof agree in writing to be
bound by this restriction, (ii) as a distribution to partners or shareholders of
such person, provided that the distributees thereof agree in writing to be bound
by the terms of this restriction, or (iii) with the prior written consent of
BancAmerica Robertson Stephens. The foregoing restriction shall have been
expressly agreed to preclude the holder of the Securities from engaging in any
hedging or other transaction which is designed to or reasonably expected to lead
to or result in a Disposition of Securities during the Lock-up Period, even if
such Securities would be disposed of by someone other than the such holder. Such
prohibited hedging or other transactions would including, without limitation,
any short sale (whether or not against the box) or any purchase, sale or grant
of any right (including, without limitation, any put or call option) with
respect to any Securities or with respect to any security (other than a broad-
based market basket or index) that includes, relates to or derives any
significant part of its value from Securities. Furthermore, such person will
have also agreed and consented to the entry of stop transfer instructions with
the Company's transfer agent against the transfer of the Securities held by such
person except in compliance with this restriction.
(j) The Company and the Selling Stockholders shall have furnished to
you such further certificates and documents as you shall reasonably request
(including certificates of officers of the Company, the Selling Stockholders or
officers of the Selling Stockholders (when the Selling Stockholder is not a
natural person) as to the accuracy of the representations and warranties of the
Company and the Selling Stockholders herein, as to the performance by the
Company and the Selling Stockholders of their respective obligations hereunder
and as to the other conditions concurrent and precedent to the obligations of
the Underwriters hereunder.
All such opinions, certificates, letters and documents will be in
compliance with the provisions hereof only if they are reasonably satisfactory
to Underwriters' Counsel. The Company and the Selling Stockholders will furnish
you with such number of conformed copies of such opinions, certificates, letters
and documents as you shall reasonably request.
8. Option Shares.
-- -------------
(a) On the basis of the representations, warranties and agreements
herein contained, but subject to the terms and conditions herein set forth, the
Company hereby grants to
<PAGE>
-29-
the several Underwriters, for the purpose of covering over-allotments in
connection with the distribution and sale of the Firm Shares only, a
nontransferable option to purchase up to an aggregate of [________] Option
Shares at the purchase price per share for the Firm Shares set forth in Section
4 hereof. Such option may be exercised by the Representatives on behalf of the
several Underwriters on one (1) or more occasions in whole or in part during the
period of thirty (30) days after the date on which the Firm Shares are initially
offered to the public, by giving written notice to the Company. The number of
Option Shares to be purchased by each Underwriter upon the exercise of such
option shall be the same proportion of the total number of Option Shares to be
purchased by the several Underwriters pursuant to the exercise of such option as
the number of Firm Shares purchased by such Underwriter (set forth in Schedule A
hereto) bears to the total number of Firm Shares purchased by the several
Underwriters (set forth in Schedule A hereto), adjusted by the Representatives
in such manner as to avoid fractional shares.
Delivery of definitive certificates for the Option Shares to be
purchased by the several Underwriters pursuant to the exercise of the option
granted by this Section 8 shall be made against payment of the purchase price
therefor by the several Underwriters by certified or official bank check or
checks drawn in same-day funds or by wire transfer, payable to the order of the
Company. Such delivery and payment shall take place at the offices of Testa,
Hurwitz & Thibeault, LLP, High Street Tower, 125 High Street, Boston, MA 02110
or at such other place as may be agreed upon among the Representatives and the
Company (i) on the Closing Date, if written notice of the exercise of such
option is received by the Company at least two (2) full business days prior to
the Closing Date, or (ii) on a date which shall not be later than the third
(3rd) full business day following the date the Company receives written notice
of the exercise of such option, if such notice is received by the Company less
than two (2) full business days prior to the Closing Date.
The certificates for the Option Shares to be so delivered will be made
available to you at such office or such other location including, without
limitation, in New York City, as you may reasonably request for checking at
least one (1) full business day prior to the date of payment and delivery and
will be in such names and denominations as you may request, such request to be
made at least two (2) full business days prior to such date of payment and
delivery. If the Representatives so elect, delivery of the Option Shares may be
made by credit through full fast transfer to the accounts at The Depository
Trust Company designated by the Representatives.
It is understood that you, individually, and not as the Representatives
of the several Underwriters, may (but shall not be obligated to) make payment of
the purchase price on behalf of any Underwriter or Underwriters whose check or
checks or wire transfer or wire transfers shall not have been received by you
prior to the date of payment and delivery for the Option Shares to be purchased
by such Underwriter or Underwriters. Any such payment by you shall not relieve
any such Underwriter or Underwriters of any of its or their obligations
hereunder.
(b) Upon exercise of any option provided for in Section 8(a) hereof,
the obligations of the several Underwriters to purchase such Option Shares will
be subject (as of the date hereof and as of the date of payment and delivery for
such Option Shares) to the accuracy of and compliance with the representations,
warranties and agreements of the Company herein, to the accuracy of the
statements of the Company and officers of the Company made pursuant to the
<PAGE>
-30-
provisions hereof, to the performance by the Company of its obligations
hereunder, to the conditions set forth in Section 7 hereof, and to the condition
that all proceedings taken at or prior to the payment date in connection with
the sale and transfer of such Option Shares shall be satisfactory in form and
substance to you and to Underwriters' Counsel, and you shall have been furnished
with all such documents, certificates and opinions as you may request in order
to evidence the accuracy and completeness of any of the representations,
warranties or statements, the performance of any of the covenants or agreements
of the Company or the satisfaction of any of the conditions herein contained.
9. Indemnification and Contribution.
-- --------------------------------
(a) The Company agrees to indemnify and hold harmless each Underwriter
against any losses, claims, damages or liabilities, joint or several, to which
such Underwriter may become subject (including, without limitation, in its
capacity as an Underwriter or as a "qualified independent underwriter" within
the meaning of Schedule E of the Bylaws of the NASD), under the Act, the
Exchange Act or otherwise, specifically including, but not limited to, losses,
claims, damages or liabilities (or actions in respect thereof) arising out of or
based upon (i) any breach of any representation, warranty, agreement or covenant
of the Company herein contained, (ii) any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement or any
amendment or supplement thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, or (iii) any untrue statement or alleged
untrue statement of any material fact contained in any Preliminary Prospectus or
the Prospectus or any amendment or supplement thereto, or the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, and agrees to reimburse each
Underwriter for any legal or other expenses reasonably incurred by it in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the Company shall not be
-------- -------
liable in any such case to the extent that any such loss, claim, damage,
liability or action arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in the
Registration Statement, such Preliminary Prospectus or the Prospectus, or any
such amendment or supplement thereto, in reliance upon, and in conformity with,
written information relating to any Underwriter furnished to the Company by such
Underwriter, directly or through you, specifically for use in the preparation
thereof and, provided further, that the indemnity agreement provided in this
-------- -------
Section 9(a) with respect to any Preliminary Prospectus shall not inure to the
benefit of any Underwriter from whom the person asserting any losses, claims,
damages, liabilities or actions based upon any untrue statement or alleged
untrue statement of material fact or omission or alleged omission to state
therein a material fact purchased Shares, if a copy of the Prospectus in which
such untrue statement or alleged untrue statement or omission or alleged
omission was corrected had not been sent or given to such person within the time
required by the Act and the Rules and Regulations, unless such failure is the
result of noncompliance by the Company with Section 5(d) hereof.
The indemnity agreement in this Section 9(a) shall extend upon the same
terms and conditions to, and shall inure to the benefit of, each person, if any,
who controls any Underwriter
<PAGE>
-31-
within the meaning of the Act or the Exchange Act. This indemnity agreement
shall be in addition to any liabilities which the Company may otherwise have.
(b) Each Selling Stockholder, severally and not jointly, agrees to
indemnify and hold harmless each Underwriter against any losses, claims, damages
or liabilities, joint or several, to which such Underwriter may become subject
(including, without limitation, in its capacity as an Underwriter or as a
"qualified independent underwriter" within the meaning of Schedule E or the
Bylaws of the NASD) under the Act, the Exchange Act or otherwise, specifically
including, but not limited to, losses, claims, damages or liabilities (or
actions in respect thereof) arising out of or based upon (i) any breach of any
representation, warranty, agreement or covenant of such Selling Stockholder
herein contained, (ii) any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement or any amendment or
supplement thereto, or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or (iii) any untrue statement or alleged untrue
statement of any material fact contained in any Preliminary Prospectus or the
Prospectus or any amendment or supplement thereto, or the omission or alleged
omission to state therein a material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, in the case of subparagraphs (ii) and (iii) of this Section 9(b) to
the extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Company or such Underwriter
by such Selling Stockholder, directly or through such Selling Stockholder's
representatives, specifically for use in the preparation thereof, and agrees to
reimburse each Underwriter for any legal or other expenses reasonably incurred
by it in connection with investigating or defending any such loss, claim,
damage, liability or action; provided, however, that the indemnity agreement
-------- -------
provided in this Section 9(b) with respect to any Preliminary Prospectus shall
not inure to the benefit of any Underwriter from whom the person asserting any
losses, claims, damages, liabilities or actions based upon any untrue statement
or alleged untrue statement of a material fact or omission or alleged omission
to state therein a material fact purchased Shares, if a copy of the Prospectus
in which such untrue statement or alleged untrue statement or omission or
alleged omission was corrected had not been sent or given to such person within
the time required by the Act and the Rules and Regulations, unless such failure
is the result of noncompliance by the Company with Section 5(d) hereof.
The indemnity agreement in this Section 9(b) shall extend upon the same
terms and conditions to, and shall inure to the benefit of, each person, if any,
who controls any Underwriter within the meaning of the Act or the Exchange Act.
This indemnity agreement shall be in addition to any liabilities which such
Selling Stockholder may otherwise have.
(c) Each Underwriter, severally and not jointly, agrees to indemnify
and hold harmless the Company and each Selling Stockholder against any losses,
claims, damages or liabilities, joint or several, to which the Company or such
Selling Stockholder may become subject under the Act or otherwise, specifically
including, but not limited to, losses, claims, damages or liabilities (or
actions in respect thereof) arising out of or based upon (i) any breach of any
representation, warranty, agreement or covenant of such Underwriter herein
contained, (ii) any
<PAGE>
-32-
untrue statement or alleged untrue statement of any material fact contained in
the Registration Statement or any amendment or supplement thereto, or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, or
(iii) any untrue statement or alleged untrue statement of any material fact
contained in any Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto, or the omission or alleged omission to state therein a
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, in the case of
subparagraphs (ii) and (iii) of this Section 9(c) to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or omission or
alleged omission was made in reliance upon and in conformity with written
information furnished to the Company by such Underwriter, directly or through
you, specifically for use in the preparation thereof, and agrees to reimburse
the Company and each such Selling Stockholder for any legal or other expenses
reasonably incurred by the Company and each such Selling Stockholder in
connection with investigating or defending any such loss, claim, damage,
liability or action.
The indemnity agreement in this Section 9(c) shall extend upon the same
terms and conditions to, and shall inure to the benefit of, each officer of the
Company who signed the Registration Statement and each director of the Company,
each Selling Stockholder and each person, if any, who controls the Company or
any Selling Stockholder within the meaning of the Act or the Exchange Act. This
indemnity agreement shall be in addition to any liabilities which each
Underwriter may otherwise have.
(d) Promptly after receipt by an indemnified party under this Section
9 of notice of the commencement of any action, such indemnified party shall, if
a claim in respect thereof is to be made against any indemnifying party under
this Section 9, notify the indemnifying party in writing of the commencement
thereof but the omission so to notify the indemnifying party will not relieve it
from any liability which it may have to any indemnified party otherwise than
under this Section 9. In case any such action is brought against any indemnified
party, and it notified the indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate therein and, to the extent
that it shall elect by written notice delivered to the indemnified party
promptly after receiving the aforesaid notice from such indemnified party, to
assume the defense thereof, with counsel reasonably satisfactory to such
indemnified party; provided, however, that if the defendants in any such action
-------- -------
include both the indemnified party and the indemnifying party and the counsel
for the indemnified party shall have reasonably concluded that there may be
legal defenses available to it and/or other indemnified parties which are
different from or additional to those available to the indemnifying party, the
indemnified party or parties shall have the right to select separate counsel to
assume such legal defenses and to otherwise participate in the defense of such
action on behalf of such indemnified party or parties. Upon receipt of notice
from the indemnifying party to such indemnified party of the indemnifying
party's election so to assume the defense of such action and approval by the
indemnified party of counsel, the indemnifying party will not be liable to such
indemnified party under this Section 9 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof unless (i) the indemnified party shall have employed separate counsel in
accordance with the proviso to the next preceding sentence (it being understood,
however, that the indemnifying party shall not be liable for the expenses of
more than one separate counsel (together with appropriate local counsel)
<PAGE>
-33-
approved by the indemnifying party representing all the indemnified parties
under Section 9(a), 9(b) or 9(c) hereof who are parties to such action), (ii)
the indemnifying party shall not have employed counsel reasonably satisfactory
to the indemnified party to represent the indemnified party within a reasonable
time after notice of commencement of the action or (iii) the indemnifying party
has authorized the employment of counsel for the indemnified party at the
expense of the indemnifying party. In no event shall any indemnifying party be
liable in respect of any amounts paid in settlement of any action unless the
indemnifying party shall have approved the terms of such settlement; provided
--------
that such consent shall not be unreasonably withheld. No indemnifying party
shall, without the prior written consent of the indemnified party, effect any
settlement of any pending or threatened proceeding in respect of which any
indemnified party is or could have been a party and indemnification could have
been sought hereunder by such indemnified party, unless such settlement includes
an unconditional release of such indemnified party from all liability on all
claims that are the subject matter of such proceeding.
(e) In order to provide for just and equitable contribution in any
action in which a claim for indemnification is made pursuant to this Section 9
but it is judicially determined (by the entry of a final judgment or decree by a
court of competent jurisdiction and the expiration of time to appeal or the
denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 9 provides for
indemnification in such case, all the parties hereto shall contribute to the
aggregate losses, claims, damages or liabilities to which they may be subject
(after contribution from others) in such proportion so that the Underwriters
severally and not jointly are responsible pro rata for the portion represented
by the percentage that the underwriting discount bears to the public offering
price, and the Company and the Selling Stockholders are responsible for the
remaining portion, provided, however, that (i) no Underwriter shall be required
-------- -------
to contribute any amount in excess of the amount by which the underwriting
discount applicable to the Shares purchased by such Underwriter exceeds the
amount of damages which such Underwriter has otherwise required to pay and (ii)
no person guilty of a fraudulent misrepresentation (within the meaning of
Section 11(f) of the Act) shall be entitled to contribution from any person who
is not guilty of such fraudulent misrepresentation. The contribution agreement
in this Section 9(e) shall extend upon the same terms and conditions to, and
shall inure to the benefit of, each person, if any, who controls any
Underwriter, the Company or any Selling Stockholder within the meaning of the
Act or the Exchange Act and each officer of the Company who signed the
Registration Statement and each director of the Company.
(f) The liability of each Selling Stockholder under the
representations, warranties and agreements contained herein and under the
indemnity and contribution agreements contained in the provisions of this
Section 9 shall be limited to an amount equal to the public offering price of
the Selling Stockholder Shares sold by such Selling Stockholder to the
Underwriters minus the amount of the underwriting discount paid thereon to the
Underwriters by such Selling Stockholder (plus, in the case of Warburg, the
aggregate purchase price paid by the Underwriters for the Stock Purchase
Warrant). The Company and such Selling Stockholders may agree, as among
themselves and without limiting the rights of the Underwriters under this
Agreement, as to the respective amounts of such liability for which they each
shall be responsible.
<PAGE>
-34-
(g) The parties to this Agreement hereby acknowledge that they are
sophisticated business persons who were represented by counsel during the
negotiations regarding the provisions hereof including, without limitation, the
provisions of this Section 9, and are fully informed regarding said provisions.
They further acknowledge that the provisions of this Section 9 fairly allocate
the risks in light of the ability of the parties to investigate the Company and
its business in order to assure that adequate disclosure is made in the
Registration Statement and Prospectus as required by the Act and the Exchange
Act.
10. Representations, Warranties, Covenants and Agreements to Survive
--- ----------------------------------------------------------------
Delivery. All representations, warranties, covenants and agreements of the
- --------
Company, the Selling Stockholders and the Underwriters herein or in certificates
delivered pursuant hereto, and the indemnity and contribution agreements
contained in Section 9 hereof shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of any Underwriter
or any person controlling any Underwriter within the meaning of the Act or the
Exchange Act, or by or on behalf of the Company or any Selling Stockholder, or
any of their officers, directors or controlling persons within the meaning of
the Act or the Exchange Act, and shall survive the delivery of the Shares and
the Stock Purchase Warrant to the several Underwriters hereunder or termination
of this Agreement.
11. Substitution of Underwriters. If any Underwriter or Underwriters
--- ----------------------------
shall fail to take up and pay for the number of Firm Shares agreed by such
Underwriter or Underwriters to be purchased hereunder upon tender of such Firm
Shares in accordance with the terms hereof, and if the aggregate number of Firm
Shares which such defaulting Underwriter or Underwriters so agreed but failed to
purchase does not exceed 10% of the Firm Shares, the remaining Underwriters
shall be obligated, severally in proportion to their respective commitments
hereunder, to take up and pay for the Firm Shares of such defaulting Underwriter
or Underwriters.
If any Underwriter or Underwriters so defaults and the aggregate number
of Firm Shares which such defaulting Underwriter or Underwriters agreed but
failed to take up and pay for exceeds 10% of the Firm Shares, the remaining
Underwriters shall have the right, but shall not be obligated, to take up and
pay for (in such proportions as may be agreed upon among them) the Firm Shares
which the defaulting Underwriter or Underwriters so agreed but failed to
purchase. If such remaining Underwriters do not, at the Closing Date, take up
and pay for the Firm Shares which the defaulting Underwriter or Underwriters so
agreed but failed to purchase, the Closing Date shall be postponed for twenty-
four (24) hours to allow the several Underwriters the privilege of substituting
within twenty-four (24) hours (including non-business hours) another underwriter
or underwriters (which may include any nondefaulting Underwriter) satisfactory
to the Company. If no such underwriter or underwriters shall have been
substituted as aforesaid by such postponed Closing Date, the Closing Date may,
at the option of the Company, be postponed for a further twenty-four (24) hours,
if necessary, to allow the Company the privilege of finding another underwriter
or underwriters, satisfactory to you, to purchase the Firm Shares which the
defaulting Underwriter or Underwriters so agreed but failed to purchase. If it
shall be arranged for the remaining Underwriters or substituted underwriter or
underwriters to take up the Firm Shares of the defaulting Underwriter or
Underwriters as provided in this Section 11, (i) the Company shall have the
right to postpone the time of delivery for a period of not more than seven (7)
full business days, in order to
<PAGE>
-35-
effect whatever changes may thereby be made necessary in the Registration
Statement or the Prospectus, or in any other documents or arrangements, and the
Company agrees promptly to file any amendments to the Registration Statement,
supplements to the Prospectus or other such documents which may thereby be made
necessary, and (ii) the respective number of Firm Shares to be purchased by the
remaining Underwriters and substituted underwriter or underwriters shall be
taken as the basis of their underwriting obligation. If the remaining
Underwriters shall not take up and pay for all such Firm Shares so agreed to be
purchased by the defaulting Underwriter or Underwriters or substitute another
underwriter or underwriters as aforesaid and the Company shall not find or shall
not elect to seek another underwriter or underwriters for such Firm Shares as
aforesaid, then this Agreement shall terminate.
In the event of any termination of this Agreement pursuant to the
preceding paragraph of this Section 11, neither the Company nor any Selling
Stockholder shall be liable to any Underwriter (except as provided in Sections 6
and 9 hereof) nor shall any Underwriter (other than an Underwriter who shall
have failed, otherwise than for some reason permitted under this Agreement, to
purchase the number of Firm Shares agreed by such Underwriter to be purchased
hereunder, which Underwriter shall remain liable to the Company, the Selling
Stockholders and the other Underwriters for damages, if any, resulting from such
default) be liable to the Company or any Selling Stockholder (except to the
extent provided in Sections 6 and 9 hereof).
The term "Underwriter" in this Agreement shall include any person
substituted for an Underwriter under this Section 11.
12. Effective Date of this Agreement and Termination.
--- ------------------------------------------------
(a) This Agreement shall become effective at the earlier of (i) 6:30
A.M., San Francisco time, on the first full business day following the effective
date of the Registration Statement, or (ii) the time of the public offering of
any of the Shares by the Underwriters after the Registration Statement becomes
effective. The time of the public offering shall mean the time of the release by
you, for publication, of the first newspaper advertisement relating to the
Shares, or the time at which the Shares are first generally offered by the
Underwriters to the public by letter, telephone, telegram or telecopy, whichever
shall first occur. By giving notice as set forth in Section 13 before the time
this Agreement becomes effective, you, as Representatives of the several
Underwriters, or the Company, may prevent this Agreement from becoming effective
without liability of any party to any other party, except as provided in
Sections 5(j), 6 and 9 hereof.
(b) You, as Representatives of the several Underwriters, shall have
the right to terminate this Agreement by giving notice as hereinafter specified
at any time on or prior to the Closing Date or on or prior to any later date on
which Option Shares are to be purchased, as the case may be, (i) if the Company
or any Selling Stockholder shall have failed, refused or been unable to perform
any agreement on its part to be performed, or because any other condition of the
Underwriters' obligations hereunder required to be fulfilled is not fulfilled,
including, without limitation, any change in the condition (financial or
otherwise), earnings, operations, business or business prospects of the Company
from that set forth in the Registration Statement or Prospectus, which, in your
sole judgment, is material and adverse, or (ii) if additional material
governmental
<PAGE>
-36-
restrictions, not in force and effect on the date hereof, shall have been
imposed upon trading in securities generally or minimum or maximum prices shall
have been generally established on the New York Stock Exchange or on the
American Stock Exchange or in the over the counter market by the NASD, or
trading in securities generally shall have been suspended on either such
exchange or in the over the counter market by the NASD, or if a banking
moratorium shall have been declared by federal, New York or California
authorities, or (iii) if the Company shall have sustained a loss by strike,
fire, flood, earthquake, accident or other calamity of such character as to
interfere materially with the conduct of the business and operations of the
Company regardless of whether or not such loss shall have been insured, or (iv)
if there shall have been a material adverse change in the general political or
economic conditions or financial markets as in your reasonable judgment makes it
inadvisable or impracticable to proceed with the offering, sale and delivery of
the Shares, or (v) if there shall have been an outbreak or escalation of
hostilities or of any other insurrection or armed conflict or the declaration by
the United States of a national emergency which, in the reasonable opinion of
the Representatives, makes it impracticable or inadvisable to proceed with the
public offering of the Shares as contemplated by the Prospectus. In the event of
termination pursuant to subparagraph (i) above, the Company shall remain
obligated to pay costs and expenses pursuant to Sections 5(j), 6 and 9 hereof.
Any termination pursuant to any of subparagraphs (ii) through (v) above shall be
without liability of any party to any other party except as provided in Sections
6 and 9 hereof.
If you elect to prevent this Agreement from becoming effective or to
terminate this Agreement as provided in this Section 12, you shall promptly
notify the Company by telephone, telecopy or telegram, in each case confirmed by
letter. If the Company shall elect to prevent this Agreement from becoming
effective, the Company shall promptly notify you by telephone, telecopy or
telegram, in each case, confirmed by letter.
13. Notices. All notices or communications hereunder, except as herein
--- -------
otherwise specifically provided, shall be in writing and if sent to you shall be
mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and
confirmed by letter) to you c/o BancAmerica Robertson Stephens, 555 California
Street, Suite 2600, San Francisco, California 94104, telecopier number (415)
781-0278, Attention: General Counsel; if sent to the Company, such notice shall
be mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and
confirmed by letter) to 45 Danbury Road, Wilton, Connecticut 06897, telecopier
number (203) 762-9677, Attention: Constance Galley, Chief Executive Officer; if
sent to one or more of the Selling Stockholders, such notice shall be sent
mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and
confirmed by letter) to Constance Galley and Ira Gerard, as Attorneys-in-Fact
for the Selling Stockholders, at TSI International Software Ltd., 45 Danbury
Road, Wilton, CT 06897, telecopier number (203) 762-9677.
14. Parties. This Agreement shall inure to the benefit of and be binding
--- -------
upon the several Underwriters and the Company and the Selling Stockholders and
their respective executors, administrators, successors and assigns. Nothing
expressed or mentioned in this Agreement is intended or shall be construed to
give any person or entity, other than the parties hereto and their respective
executors, administrators, successors and assigns, and the controlling persons
within the meaning of the Act or the Exchange Act, officers and directors
referred to in Section 9 hereof, any
<PAGE>
-37-
legal or equitable right, remedy or claim in respect of this Agreement or any
provisions herein contained, this Agreement and all conditions and provisions
hereof being intended to be and being for the sole and exclusive benefit of the
parties hereto and their respective executors, administrators, successors and
assigns and said controlling persons and said officers and directors, and for
the benefit of no other person or entity. No purchaser of any of the Shares from
any Underwriter shall be construed a successor or assign by reason merely of
such purchase.
In all dealings with the Company and the Selling Stockholders under
this Agreement, you shall act on behalf of each of the several Underwriters, and
the Company and the Selling Stockholders shall be entitled to act and rely upon
any statement, request, notice or agreement made or given by you jointly or by
BancAmerica Robertson Stephens on behalf of you.
15. Applicable Law. This Agreement shall be governed by, and construed in
--- --------------
accordance with, the laws of the State of California.
16. Counterparts. This Agreement may be signed in several counterparts,
--- ------------
each of which will constitute an original.
If the foregoing correctly sets forth the understanding among the
Company, the Selling Stockholders and the several Underwriters, please so
indicate in the space provided below for that purpose, whereupon this letter
shall constitute a binding agreement among the Company, the Selling Stockholders
and the several Underwriters.
<PAGE>
-38-
Very truly yours,
TSI INTERNATIONAL SOFTWARE LTD.
By:
----------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
SELLING STOCKHOLDERS
By:
----------------------------------------
Attorney-in-Fact for the Selling
Stockholders named in Schedule B hereto
By:
Attorney-in-Fact for the Selling
Stockholders named in Schedule B hereto
Accepted as of the date first above written:
BANCAMERICA ROBERTSON STEPHENS
BEAR, STEARNS & CO. INC.
DAIN RAUSCHER WESSELS
SOUNDVIEW FINANCIAL GROUP, INC.
On their behalf and on behalf of each of the
several Underwriters named in Schedule A hereto.
By BANCAMERICA ROBERTSON STEPHENS
By:
----------------------------------------
Authorized Signatory
<PAGE>
SCHEDULE A
Number of
Firm Shares
Underwriters To Be Purchased
- --------------------------------------------------------------------------------
BancAmerica Robertson Stephens.........
SoundView Financial Group, Inc.........
Dain Rauscher Wessels..................
-------
Total............................. [________]
<PAGE>
SCHEDULE B
<TABLE>
<CAPTION>
Number of Company Number of Warrant
Company Shares To Be Sold Shares To Be Sold
- --------------------------------------------------------------------------------------------
<S> <C> <C>
TSI International Software, Ltd.................. 382,281
</TABLE>
<TABLE>
<CAPTION>
Number of
Selling Stockholder
Name of Selling Stockholder Shares to be Sold
- ---------------------------------------------------------------------------------------------
<S> <C>
Warburg, Pincus Capital Company, L.P... [_________]/2/
.......................................
.......................................
.......................................
.......................................
.......................................
Total --------
</TABLE>
- ----------------------
/2/ This number does not include the 382,281 Warrant Shares issuable upon
exercise of the Stock Purchase Warrant. The unexercised Stock Purchase Warrant
shall be sold by Warburg, Pincus Capital Company, L.P. to the Underwriters, and
the Underwriters shall exercise the Stock Purchase Warrant, in accordance with
the terms of this Agreement.
<PAGE>
Exhibit 23.02
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
TSI International Software Ltd.:
We consent to the use of our report included herein and to the reference to our
firm under the headings "Selected Financial Data" and "Experts" in the
prospectus.
KPMG Peat Marwick LLP
New York, New York
May 6, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> MAR-31-1997 MAR-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> MAR-31-1997 DEC-31-1998
<CASH> 79,400 14,205,900
<SECURITIES> 0 8,213,000
<RECEIVABLES> 5,296,500 8,996,200
<ALLOWANCES> 288,800 584,200
<INVENTORY> 0 0
<CURRENT-ASSETS> 499,200 805,200
<PP&E> 1,351,300 1,870,400
<DEPRECIATION> (2,567,900) (3,210,700)
<TOTAL-ASSETS> 8,720,900 35,256,400
<CURRENT-LIABILITIES> 6,806,600 8,139,200
<BONDS> 0 0
0 0
8,600 0
<COMMON> 30,000 91,000
<OTHER-SE> (2,070,400) 26,821,800
<TOTAL-LIABILITY-AND-EQUITY> 8,720,900 35,256,400
<SALES> 5,507,900 8,187,300
<TOTAL-REVENUES> 5,507,900 8,187,300
<CGS> 721,700 994,300
<TOTAL-COSTS> 5,156,000 7,534,300
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 30,500<F1> 327,400<F1>
<INTEREST-EXPENSE> 63,100 4,200
<INCOME-PRETAX> 0 0
<INCOME-TAX> 6,600 105,000
<INCOME-CONTINUING> 312,700 871,200
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 312,700 871,200
<EPS-PRIMARY> .11 .10
<EPS-DILUTED> .05 .08
<FN>
<F1>Represents Income on Investments
</FN>
</TABLE>
