<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 26, 1997
REGISTRATION NO. 333-37411
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PAYSYS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
FLORIDA 7371 59-2061461
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
------------------------
<TABLE>
<S> <C>
ONE MECA WAY WILLIAM J. PEARSON
NORCROSS, GEORGIA 30093 CHIEF FINANCIAL OFFICER
(770) 564-5665 ONE MECA WAY
NORCROSS, GEORGIA 30093
(770) 564-5665
(Address, including zip code, and telephone number, (Name, address, including zip code, and telephone
including area code, of registrant's principal number,
executive offices) including area code, of agent for service)
</TABLE>
------------------------
COPIES TO:
<TABLE>
<S> <C>
WILLIAM H. AVERY, ESQ.
DENNIS J. STOCKWELL, ESQ. ALSTON & BIRD LLP
KILPATRICK STOCKTON LLP ONE ATLANTIC CENTER
1100 PEACHTREE STREET 1201 WEST PEACHTREE STREET
ATLANTA, GEORGIA 30309 ATLANTA, GEORGIA 30309-3424
(404) 815-6500 (404) 881-7000
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities on this Form are being offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, as
amended (the "Securities Act") check the following box: / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box. / /
THE COMPANY HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE COMPANY 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, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED NOVEMBER 26, 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY, NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES, IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY
SUCH STATE.
<PAGE>
3,333,333 SHARES
[LOGO]
COMMON STOCK
OF THE 3,333,333 SHARES OF COMMON STOCK OFFERED HEREBY, 2,083,333 SHARES ARE
BEING SOLD BY PAYSYS INTERNATIONAL, INC. (THE "COMPANY") AND 1,250,000 SHARES
ARE BEING SOLD BY THE SELLING SHAREHOLDERS. SEE "PRINCIPAL AND SELLING
SHAREHOLDERS." THE COMPANY WILL NOT RECEIVE ANY PROCEEDS FROM THE SALE OF SHARES
BY THE SELLING SHAREHOLDERS.
PRIOR TO THE OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR THE COMMON STOCK
OF THE COMPANY. IT IS CURRENTLY ESTIMATED THAT THE INITIAL PUBLIC OFFERING PRICE
WILL BE BETWEEN $11.00 AND $13.00 PER SHARE. SEE "UNDERWRITING" FOR A DISCUSSION
OF THE FACTORS CONSIDERED IN DETERMINING THE INITIAL PUBLIC OFFERING PRICE.
APPLICATION HAS BEEN MADE FOR THE LISTING OF THE COMMON STOCK ON THE NASDAQ
NATIONAL MARKET UNDER THE SYMBOL "PAYS."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE
CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNT AND PROCEEDS TO PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2) SELLING SHAREHOLDERS
<S> <C> <C> <C> <C>
PER SHARE................................. $ $ $ $
TOTAL (3)................................. $ $ $ $
</TABLE>
(1) THE COMPANY AND THE SELLING SHAREHOLDERS HAVE AGREED TO INDEMNIFY THE
UNDERWRITERS AS STATED HEREIN (THE "UNDERWRITERS") AGAINST CERTAIN
LIABILITIES, INCLUDING LIABILITIES UNDER THE SECURITIES ACT. SEE
"UNDERWRITING."
(2) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY, ESTIMATED AT $825,000.
(3) THE COMPANY AND ONE OF THE SELLING SHAREHOLDERS HAVE GRANTED TO THE
UNDERWRITERS A THIRTY-DAY OPTION TO PURCHASE UP TO 500,000 ADDITIONAL SHARES
OF COMMON STOCK SOLELY TO COVER OVER-ALLOTMENTS, IF ANY. IF SUCH OPTION IS
EXERCISED IN FULL, THE TOTAL PRICE TO PUBLIC, UNDERWRITING DISCOUNTS AND
COMMISSIONS, PROCEEDS TO COMPANY AND PROCEEDS TO SELLING SHAREHOLDERS WILL
BE $ , $ , $ AND $ , RESPECTIVELY. SEE
"UNDERWRITING."
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 DELIVERY OF THE SHARES WILL BE MADE
THROUGH THE OFFICES OF NATIONSBANC MONTGOMERY SECURITIES, INC., SAN FRANCISCO,
CALIFORNIA, ON OR ABOUT , 1997.
NATIONSBANC MONTGOMERY SECURITIES, INC.
RAYMOND JAMES & ASSOCIATES, INC.
, 1997
<PAGE>
[INSIDE FRONT COVER]
Illustration of a map of the world having 28 pins indicating customer
locations.
PAYSYS INTERNATIONAL, INC. SUPPORTS LICENSEES
OF ITS PRODUCTS IN 28 COUNTRIES
The Company intends to furnish shareholders with annual reports containing
consolidated financial statements audited by its independent certified public
accountants.
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE>
[INSIDE FRONT COVER GATEFOLD]
Front cover gatefold opens to show a presentation of graphics and text in three
vertical sections with the following caption across the top: PROVIDING SOFTWARE
SOLUTIONS FOR THE CREDIT CARD INDUSTRY
Left vertical section, the text:
INDUSTRY DYNAMICS
WORLDWIDE GROWTH OF BANK AND RETAIL CREDIT CARD USAGE
Down arrow
INCREASED DEMAND FOR CREDIT CARD TRANSACTION PROCESSING SOFTWARE
Center vertical section, a graphic with a center disk displaying the words:
ACCOUNTING BILLING surrounded by a fragmented ring with each piece connected to
the center disk by a radial line and each respective piece displaying one of
each of the following word sets:
AUTHORIZATION, TRANSACTION MANAGEMENT, NEW ACCOUNTS, MERCHANT ACQUIRING,
CUSTOMER SERVICE, DISPUTES, COLLECTIONS, FRAUD MANAGEMENT*, DATA WAREHOUSE*.
*UNDER DEVELOPMENT
The entire graphic is encircled by repetitive renditions of the text: PAYSYS
VISIONPLUS
Right vertical section, the text:
THE PAYSYS "VISIONPLUS" SOLUTION
- LEVERAGE PROVEN TRACK RECORD
- OPERATE ON MULTIPLE PLATFORMS
- CREATE INTEGRATED PRODUCT SUITE
- MOVE TO FLEXIBLE, OBJECT-ORIENTED COMPONENT ARCHITECTURE
REDUCE CUSTOMERS' COST WHILE MAINTAINING THEIR CONTROL
THE PAYSYS STRATEGY
- MAINTAIN PRODUCT LEADERSHIP
- EXPAND PRODUCT OFFERINGS
- PENETRATE INTERNATIONAL MARKETS
- BROADEN STRATEGIC RELATIONSHIPS
- INCREASE RECURRING REVENUES
- DEVELOP APPLICATIONS THROUGH NEW SOFTWARE SYSTEM
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING "RISK FACTORS" AND CONSOLIDATED FINANCIAL STATEMENTS AND
THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. ALL REFERENCES IN
THIS PROSPECTUS TO SHARE AND PER SHARE DATA HAVE BEEN ADJUSTED TO REFLECT A
FIVE-FOR-ONE STOCK SPLIT EFFECTED IN THE FORM OF A STOCK DIVIDEND IN OCTOBER
1997. UNLESS OTHERWISE INDICATED, THE INFORMATION CONTAINED IN THIS PROSPECTUS
ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. UNLESS THE
CONTEXT REQUIRES OTHERWISE, AS USED IN THIS PROSPECTUS, "THE COMPANY" MEANS
PAYSYS INTERNATIONAL, INC. AND ITS SUBSIDIARIES, COLLECTIVELY.
The Company is the world's leading supplier of software that performs
mission-critical credit card transaction processing functions. The Company's
current software product, VisionPLUS, is a customizable software system
consisting of a range of integrated application modules for processing both bank
and retail credit card transactions. The Company licenses its software to banks,
finance companies and retailers that process their own credit card transactions
as well as to third-party processors that process such transactions for others.
The services offered by the Company to its customers include product
customization, installation, training, product maintenance and support and
ongoing compliance with bank card association (Visa, MasterCard and Europay)
standards. As of October 31, 1997, the Company was supporting 105 licensees of
VisionPLUS and its other products in 28 countries which, the Company believes,
were collectively processing more than 100 million accounts. The Company's
customers include leading domestic and international banks, finance companies,
retailers and third-party processors such as Citicorp, GE Global Consumer
Finance, Electronic Data Systems, Spiegel's, Neiman Marcus, Toronto Dominion
Bank, Bank of Nova Scotia, ABN Amro Bank, Household International, Beneficial
Finance, The Associates Financial Services and Whirlpool Financial.
The Company believes that its original product, CardPac, is currently the
most widely used product worldwide for processing bank credit card transactions
and that its Vision21 product is the most widely used product worldwide for
processing retail credit card transactions. In 1995, the Company discontinued
granting new licenses for CardPac and Vision21 and introduced VisionPLUS, which
combines the functionality of CardPac and Vision21 for processing both bank
credit card and retail credit card transactions, including transactions
generated by co-branded bank credit cards offering features and benefits similar
to those offered by retail credit cards. VisionPLUS consists of modules for new
account processing, financial transactions and billing, customer service,
transaction authorizations, collection of delinquent accounts, dispute handling,
transaction formatting and mapping, and authorizing transactions from merchants
accepting credit cards.
VisionPLUS is designed to operate on multiple platforms (mainframe, AS/400
and UNIX), which will facilitate customers' migration to other platforms as
their processing needs change. The Company is currently developing a data
warehouse module, fraud management module and a universal message processor for
VisionPLUS to run on all currently supported platforms and on Windows NT. These
new modules are expected to be generally available in 1998.
Worldwide spending in 1995 for software for processing credit card
transactions was estimated to be $1.2 billion according to the Tower Group. In
addition to these software expenditures, $1.9 billion was spent for hardware and
$2.5 billion for information technology services, including outsourcing
contracts, for a total of $5.6 billion in expenditures in 1995 for credit card
processing information technology, which are expected to grow at a compound
annual rate of 9% from 1995 through 2000 according to the same source.
A majority of the spending on software for processing credit card
transactions is for software developed "in-house" by credit card issuers and
third-party processors. In 1995, spending for software and related services for
credit and debit card transaction processing purchased from "outside" vendors,
such as the Company, was estimated by published reports to be $90 million. The
Nilson Report estimates that there were approximately 9,100 issuers of
MasterCard and Visa credit and debit cards worldwide in 1995.
3
<PAGE>
Based on discussions with existing and potential customers, the Company
believes that several factors, including costs and overhead, issuers' desire to
offer a variety of products to maintain and expand their customer base, the
complexity of and frequent change to the interchange standards, emerging new
requirements (e.g., year 2000 compliance) and the sheer volume of transactions,
have resulted in many issuers and third-party processors moving away from
internal software development to purchasing software from outside vendors.
The Company's objective is to leverage its position by building on its
experience as the leading supplier of software for processing credit card
transactions to further strengthen its market position and to expand into
software for other payment transactions and related functions. The Company's
strategy to achieve this objective includes maintaining market-leading products,
expanding product offerings to broaden customer relationships, aggressively
pursuing international markets, developing additional strategic alliances to
help generate sales referrals and for joint marketing programs, increasing the
use of pricing methods that produce recurring revenues, and developing a new
software platform to facilitate the introduction of new products and functions.
The Company has experienced rapid growth in the last three years due to the
introduction of VisionPLUS. The Company's total revenues from licenses and
services were $16.5 million, $21.7 million and $26.9 million in 1994, 1995 and
1996, respectively, representing a compound annual growth rate of 27%. License
revenues during these years were $5.7 million, $8.7 million, and $13.4 million,
respectively, representing a compound annual growth rate of 53%.
The Company was incorporated in Florida in 1981. In October 1997 the Company
relocated its executive offices from its Maitland Florida facility to One Meca
Way, Norcross, Georgia 30093. The Company's telephone number is (770) 564-5665.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company.......... 2,083,333 shares
Common Stock offered by the Selling
Shareholders............................... 1,250,000 shares
Common Stock to be outstanding after the
offering................................... 9,213,408 shares (1)
Use of proceeds.............................. Settlement of royalty obligations, repayment
of indebtedness, general corporate purposes,
including capital expenditures and working
capital, and potential acquisitions. See "Use
of Proceeds."
Proposed Nasdaq National Market symbol....... PAYS
</TABLE>
- ------------------------
(1) Does not include (i) an aggregate of 1,500,000 shares of Common Stock
available for future issuance pursuant to the Company's 1995 Stock Incentive
Plan and 1997 Stock Incentive Plan, pursuant to which options to purchase an
aggregate of 1,080,500 shares of Common Stock (having a weighted average
exercise price of $1.34 per share) are presently outstanding and options to
purchase an aggregate of 70,500 shares of Common Stock (having an exercise
price equal to the initial public offering price of the Common Stock) that
will be granted to two executive officers and the Company's four
non-employee directors upon the completion of the offering, (ii) an option
to purchase 1,750 shares of Common Stock (having an exercise price of $.002
per share) which is presently outstanding and (iii) 1,194,445 shares of
Common Stock reserved for issuance pursuant to presently outstanding
warrants (having a weighted average exercise price of $4.46 per share). See
"Management--Executive Compensation," "--Stock Incentive Plans" and Note 7
of Notes to Consolidated Financial Statements.
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The summary consolidated financial data of the Company set forth below for
each of the years ended December 31, 1994, 1995 and 1996 and for the nine months
ended September 30, 1997 are derived from the audited Consolidated Financial
Statements of the Company for such periods included elsewhere in this
Prospectus. The summary consolidated financial data for the nine months ended
September 30, 1996 are derived from unaudited financial statements included
elsewhere in this Prospectus, which, in the opinion of the Company reflect all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the financial condition and results of operations. These
historical results are not necessarily indicative of the results that may be
expected in the future. The summary consolidated 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," the Consolidated
Financial Statements and Notes thereto and other financial data included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- ----------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1996 1997
--------- --------- --------- ----------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA
Revenues
License............................................... $ 5,749 $ 8,668 $ 13,366 $ 7,842 $ 10,123
Services.............................................. 10,720 13,060 13,558 9,880 14,328
--------- --------- --------- ----------- ---------
Total revenues...................................... 16,469 21,728 26,924 17,722 24,451
Cost of revenues
License............................................... 940 1,324 2,935 1,808 3,072
Services.............................................. 7,640 9,503 8,956 6,340 10,902
--------- --------- --------- ----------- ---------
Total cost of revenues.............................. 8,580 10,827 11,891 8,148 13,974
Gross margin............................................ 7,889 10,901 15,033 9,574 10,477
Total operating expenses................................ 7,133 10,679 14,441 9,256 19,609
--------- --------- --------- ----------- ---------
Income (loss) from operations........................... 756 222 592 318 (9,132)
Interest expense, net................................... 240 338 150 102 77
--------- --------- --------- ----------- ---------
Income (loss) before income taxes....................... 516 (116) 442 216 (9,209)
Income tax expense...................................... 367 356 303 148 277
--------- --------- --------- ----------- ---------
Income (loss) from continuing operations................ $ 149 $ (472) $ 139 $ 68 $ (9,486)
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
Income (loss) per share from continuing operations...... $ 0.02 $ (0.07) $ 0.02 $ 0.01 $ (1.25)
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
Shares used in per share calculations................... 5,972 6,620 8,570 8,537 7,615
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
--------------------
PRO FORMA
AS ADJUSTED
ACTUAL (1)
--------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA
Cash and cash equivalents.............................................................. $ 1,522 $ 15,547
Working capital (deficit).............................................................. (5,137) 10,788
Total assets........................................................................... 15,304 29,236
Long-term obligations, less current portion............................................ 5,076 1,383
Shareholders' equity (deficit)(2)...................................................... (5,301) 14,224
</TABLE>
- ------------------------
(1) Gives effect to the sale of the 2,083,333 shares of Common Stock offered
hereby by the Company at an assumed initial public offering price of $12.00
per share and the application of the net proceeds therefrom.
(2) Pro forma as adjusted includes the effect of expenses which will be recorded
upon completion of the offering of (i) $2.5 million estimated expense
related to the settlement of royalty obligations to Household International,
Inc. and (ii) $400,000 debt issuance costs (including the value of a
warrant) related to indebtedness to Sirrom Capital Corporation. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview."
RISK FACTORS
See "Risk Factors" beginning on page 7 for a discussion of certain factors
that should be considered by prospective purchasers of the shares of Common
Stock offered hereby.
------------------------
PaySys and VisionPLUS are trademarks of the Company. The Company has applied
for federal registration of these marks. All other trademarks and trade names
referred to in this Prospectus are the property of their respective owners.
6
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, THE
FOLLOWING RISK FACTORS SHOULD BE CAREFULLY CONSIDERED IN EVALUATING THE COMPANY
AND ITS BUSINESS BEFORE PURCHASING THE COMMON STOCK OFFERED HEREBY. THIS
PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS, INCLUDING STATEMENTS REGARDING,
AMONG OTHER ITEMS, THE COMPANY'S ANTICIPATED GROWTH STRATEGIES, PRODUCT
DEVELOPMENT AND ADAPTATION, PRODUCT INTRODUCTIONS, MARKET POSITION, DEVELOPMENTS
IN THE CREDIT CARD TRANSACTION PROCESSING INDUSTRY, NEW ALLIANCES, INTERNATIONAL
MARKETING EFFORTS, CAPABILITIES OF THE COMPANY'S SOFTWARE, EXPENDITURES AND CASH
REQUIREMENTS. THESE FORWARD-LOOKING STATEMENTS ARE BASED LARGELY ON THE
COMPANY'S EXPECTATIONS AND ARE SUBJECT TO A NUMBER OF RISKS AND UNCERTAINTIES,
MANY OF WHICH ARE BEYOND THE COMPANY'S CONTROL. ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF, AMONG OTHERS,
THE FACTORS DISCUSSED BELOW AND IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS." THERE CAN BE NO ASSURANCE THAT
THE COMPANY'S RESULTS OF OPERATIONS WILL NOT BE ADVERSELY AFFECTED BY ONE OR
MORE OF THESE FACTORS. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY UPDATE
OR REVISE ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW
INFORMATION, FUTURE EVENTS OR OTHERWISE. IN LIGHT OF THESE RISKS AND
UNCERTAINTIES, THERE CAN BE NO ASSURANCE THAT THE FORWARD-LOOKING INFORMATION
CONTAINED IN THIS PROSPECTUS WILL IN FACT TRANSPIRE.
FLUCTUATIONS IN QUARTERLY RESULTS
The Company has experienced significant fluctuations in its quarterly
operating results and anticipates that such fluctuations will continue for the
foreseeable future. The Company's revenues in any quarter are typically derived
from non-recurring, large license fees and related service fees received from a
relatively small number of customers. In 1996 and for the nine months ended
September 30, 1997, the Company's five largest customers accounted for 38% and
40%, respectively, of the Company's total revenues. The Company's most
significant customers generally vary from quarter to quarter. The Company
expects that sales to a limited number of customers will continue to account for
a significant percentage of its revenue in any quarter for the foreseeable
future. See "--Dependence on Single Product; Conversion Risk; Dependence on
Financial Institutions Industry; Customer Concentration" and
"Business--Customers." As a result, at the Company's current revenue level, each
sale or failure to make a sale can have a material effect on the Company. The
loss, deferral or cancellation of a single sale could adversely effect the
Company's operating results in a particular quarter. Conversely, to the extent
that a significant sale occurs earlier than expected, operating results for
subsequent quarters may be adversely affected. The timing of the recognition of
license revenues can also be difficult to predict. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Fees and Revenue
Recognition." Other factors which may lead to fluctuations in the Company's
quarterly results include the demand for the Company's product, the size and
timing of projects, the mix of revenues between those generated from license
fees and those generated from service fees, lengthy sales cycles budgeting
cycles and competing capital budget considerations of potential customers,
nonrenewals of maintenance agreements, timing of new product introductions,
customer purchase deferrals in anticipation of enhancements of new products,
customer acceptance of new products, changes in competition, changes in
operating expenses, changes in Company strategy, financial performance of
customers, changes in regulations that affect the competitive environment for
the Company's products and services, extraordinary events such as acquisitions
or litigation, changes in foreign currency exchange rates, the occurrence of
unexpected events and general economic factors. Many of the factors listed above
are beyond the control of the Company. The impact of these and other factors on
the Company's operating results in any future period cannot be forecast with any
degree of certainty. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business--Industry Background."
There can be no assurance that the Company will be able to achieve a level
of revenues or rate of growth in any future period commensurate with its level
of expenses The Company's expense levels are based in part on expectations of
future revenue levels and demands for its software and services and are fixed to
a large extent in the short term. The Company has significantly increased its
expense levels to
7
<PAGE>
support its recent growth. For example, the Company has hired, among others, a
significant number of technical employees who are customizing or installing
systems or training customers. In addition, since the beginning of 1996, the
Company has significantly increased its research and development expenditures
and expects to continue to incur significant research and development expenses.
Further, the Company intends to expand its international sales and marketing
efforts and support capabilities. The Company may be limited in its ability to
reduce spending in a quarter to compensate for an unexpected revenue shortfall
in such a short-term time period. As a result, any significant downward
fluctuation in the Company's revenues could have a material adverse effect on
the Company's business, financial condition and results of operations.
Due to the foregoing factors, the Company believes that period-to-period
comparisons of its results of operations are not necessarily meaningful and
should not be relied upon as indications of future performance. In the event
that the Company's results of operations for a given quarter are below the
expectations of public market analysts and investors, the price of the Common
Stock would likely be materially adversely affected. No assurance can be given
that the Company will be able to achieve or maintain profitability on a
quarterly or annual basis in the future. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Quarterly Results"
and "--Possible Volatility of Market Price."
MANAGEMENT OF GROWTH
The Company has expanded its operations rapidly over the past two years,
placing significant demands on its administrative, operational and financial
personnel and systems. The Company has also experienced rapid growth in its
management and staff, including the addition of three executive officers since
May 1997 (including the Chief Financial Officer and the Executive Vice
President, Operations) and two other executive officers in 1996. As of October
31, 1997, the number of the Company's employees had increased to 362 from 249 as
of October 31, 1996 and the Company expects this growth to continue. The growth
in the size and scope of the Company's business activities and the expansion of
its customer base have placed, and are expected to continue to place, a
significant strain on the Company's management, operations and capital needs and
the Company's ability to maintain customer satisfaction throughout the process
of customizing and installing its software. As of October 31, 1997, the Company
was in the process of customizing or installing VisionPLUS for 40 customers. See
"Business--Products." In order to fulfill these license agreements, related
maintenance and compliance agreements and other such agreements that the Company
must obtain in order to meet its growth objectives, management has been and in
the future will be required to recruit, organize, train and manage substantial
additional technical, administrative and management personnel. The addition and
integration of qualified staff sufficient to fulfill successfully such
agreements must also be timed to coincide with the execution of new agreements
and customer requirements thereunder, the timing of which is often difficult to
predict. Customer dissatisfaction with the Company's customization,
installation, maintenance, compliance or training efforts, particularly by a
major customer, could adversely affect the Company's reputation and the
Company's ability to market its product and, as a result, could have a material
adverse effect on the Company's business, financial condition and results of
operations. The failure of the Company to effectively manage the growth in its
business and to develop the additional personnel, systems, resources, procedures
and controls necessary to support that growth in a timely manner would have a
material adverse effect on the Company's business, financial condition and
results of operations.
HISTORY OF OPERATING LOSSES
As a result of net losses in 1995 and for the nine months ended September
30, 1997 of $0.5 million and $9.5 million, respectively, as well as net losses
in prior years, at September 30, 1997, the Company had a negative net worth of
$5.3 million and a working capital deficit of $5.1 million. The Company expects
to incur a net loss in 1997. There can be no assurance that the Company will be
able to achieve profitability
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for 1998 and beyond. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "--Fluctuations in Quarterly Results."
APPLICATION OF PRODUCTS TO NEW PLATFORMS
The Company has historically derived substantially all of its revenues from
mainframe applications of its software products. Currently, all installations of
VisionPLUS software in production use are in mainframe environments. The Company
believes that its products must be adapted to other platforms to achieve growth,
and it has developed versions of VisionPLUS that are being tested both on an
AS/400 platform and on Sun Microsystems' UNIX platform. The Company also plans
to port VisionPLUS to Hewlett-Packard's UNIX platform. However, the Company has
not historically marketed its products for operation on platforms other than
mainframes, and there can be no assurance that the Company's products will be
accepted for operation in open network computing environments. In addition, as
the Company's potential customer base utilizes other platforms, such as Windows
NT or UNIX-based PCs and servers, due to the need to replace obsolete hardware
or due to expansion of the Company's products and services to other financial
transaction and client management applications, and as new platforms are
developed, the Company must adapt its products and services to such platforms
and environments. There can be no assurance that the Company will be able to
successfully adapt its products and services to any of such foregoing platforms
and environments. Additional development costs and delays that may occur as a
result of the need for the Company to adapt its products and services to such
platforms and environments, and inability of the Company to successfully achieve
such adaptations, would have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business--Products."
TECHNOLOGICAL CHANGE; DEPENDENCE UPON NEW PRODUCTS
The computer software industry and the credit card transaction processing
industry both are characterized by rapid change in computer hardware and
software technology, frequent product introductions, evolving industry standards
and changing customer requirements, and are highly competitive with respect to
timely product innovation. To remain competitive, the Company may be required,
for example, to change and improve its products and services in response to
industry changes in programming tools and computer language technology and to
customer changes in operating systems, application and networking software, and
computer and communications hardware. Accordingly, the Company's future success
will depend in part on its ability to respond to these changes by enhancing its
existing products and services, developing or acquiring new products and
services that address the increasingly sophisticated needs of customers, and
keeping pace with new, competitive product offerings and emerging industry
standards. As a result, the life cycles of the Company's products are difficult
to estimate.
The introduction of products and services embodying new or improved
technologies and the emergence of new industry standards can render existing
products and services obsolete or unmarketable. In addition, potential new
customers may defer purchases of the Company's current products and services
pending the release of new products and services of the Company or others. There
can be no assurance that the Company's product and service developments and
marketing will keep pace with the demands of the marketplace.
The timeliness of product introductions can have a material impact on market
acceptance of the product. Because it is generally not possible to predict the
time required and costs involved in reaching certain research, development and
engineering objectives, estimated product development schedules could require
extensions and actual development costs could exceed budgeted amounts. Further,
there can be no assurance that the Company will not experience difficulties that
could delay or prevent the successful development, introduction and marketing of
such new products and services. If the Company is unable to develop and
introduce new products and services in a timely manner, or if a new release of a
product or service does not achieve market acceptance, the Company's business,
financial condition and results of operations could be materially adversely
affected.
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Acceptable performance upon introduction of a new software product is
materially important to its success in the marketplace. Software products as
complex as those offered by the Company often contain undetected errors or
failures when first introduced or as new versions are released. VisionPLUS, for
example, is a relatively new product, and certain performance criteria with
respect to that product have not yet been demonstrated in the marketplace. There
can be no assurance that, despite pre-release testing by the Company and by
current and potential customers, errors will not be found in new products after
commencement of commercial shipments. The occurrence of such errors could result
in damages or product liability claims by existing customers, cancellation of
product orders and loss of, or delay in, market acceptance of the Company's
products and services, which could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Product Development."
DEPENDENCE ON SINGLE PRODUCT; CONVERSION RISK; DEPENDENCE ON FINANCIAL
INSTITUTIONS INDUSTRY;
CUSTOMER CONCENTRATION
The Company has derived substantially all of its revenues during the past
two years from the licensing of its VisionPLUS product and the provision of
related services, and the Company expects that revenues from such product and
related services sold both to new and to existing customers will continue to
account for a majority of revenues for the foreseeable future. As a result, the
Company's future financial performance will depend in large part on the
continued market acceptance of its VisionPLUS software and services, as well as
the Company's ability to adapt and modify VisionPLUS to meet the evolving needs
of its customers. A significant portion of the Company's future revenues are
expected to result from the conversion to VisionPLUS of existing customers using
the CardPac product. If these customers do not migrate to VisionPLUS to the
extent anticipated by the Company, its growth and financial performance could be
adversely affected to a significant extent. The life cycles of the Company's
products and services are difficult to estimate, due in large measure to
competition and the future effect of product enhancements, including
developments in the hardware and software environments in which the VisionPLUS
product operates. Declines in demand for the Company's products and services or
the failure of VisionPLUS to gain widespread acceptance, whether as a result of
competition, technological change or otherwise, would have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Products."
Approximately 64% and 63% of the Company's total revenues in 1995 and 1996,
respectively, were derived from licenses and services to financial institutions.
The health of that market is affected by the domestic and international economy
generally, and by a variety of specific factors, including global and regional
instability, government policy and regulation, consumer habits and consolidation
in the industry. Adverse developments in the financial institutions industry
could have a material adverse effect on the Company's business, financial
condition and results of operations. The financial institutions industry tends
to be cyclical in nature, which may result in variations in demand for the
Company's products and services. In addition, there has been and continues to be
consolidation in the financial institutions industry, which in some cases has
lengthened the sales cycle and may lead to a smaller number of potential
customers for, and reduced demand for, the Company's products and services,
which would have a material adverse effect on the Company's business, financial
condition and results of operations. As a result, demand for the Company's
products and services could be disproportionately affected by instability or
downturns in the financial institutions market which may cause customers to exit
the industry or delay, cancel or reduce planned expenditures for information
management systems and software products.
The Company's revenues are typically derived from non-recurring license fees
and related service fees from a relatively small number of customers. In 1996
and for the nine months ended September 30, 1997, the Company's five largest
customers accounted for 38%, and 40%, respectively, of the Company's total
revenues. The Company's most significant customers generally vary from period to
period. Only one of the
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Company's five largest customers in 1996 was among the Company's five largest
customers in the nine months ended September 30, 1997. The Company expects that
sales to a limited number of customers will continue to account for a
significant percentage of its revenues in any period for the foreseeable future
and that its significant customers in future periods will generally be different
from its significant customers in prior periods. There can be no assurance that
the Company will be able to replace revenues generated from former significant
customers in prior periods with revenues generated from new customers in future
periods. Any failure by the Company to develop relationships with significant
new customers would have a material adverse effect on the Company's business,
financial condition and results of operation. See "-- Fluctuations in Quarterly
Results and "Business--Customers."
DEPENDENCE UPON THIRD-PARTY RELATIONSHIPS AND CERTAIN LICENSES
The Company historically has developed some of its software jointly with
other parties, incorporated other parties' software into its products and
marketed other parties' products to increase the range of features included in
the Company's product offerings. The Company's VisionPLUS product was developed
on a joint venture basis with Household International, Inc. who has historically
provided financial support, jointly owns the product and shares in the Company's
license fees from sales of VisionPLUS to third parties. The Company and
Household have agreed that the Company will pay to Household, from the net
proceeds of the sale of shares of Common Stock offered hereby by the Company,
approximately $4.5 million in settlement of all current and future obligations
of the Company to Household pursuant to the Company's agreement with Household
relating to such development of VisionPLUS, following which payment the Company
may acquire Household's interest in VisionPLUS for a nominal amount. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview." The Company is currently developing a fraud management
module for its VisionPLUS product in cooperation with Fair, Isaac and Company,
Incorporated. This module will be jointly owned by the Company and Fair, Isaac.
If material problems develop with such relationships or with respect to the
rights of the Company and the other owners of jointly owned software, they could
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company licenses and incorporates into VisionPLUS
a third-party licensed transaction management system, "TRAMS," which performs
key functions in the Company's product. In the future, the Company may license
or acquire other software products that perform such functions or that perform
additional functions for the Company's products where the Company considers such
an acquisition preferable to the cost and time required to develop the
functionality internally. If any current or future third-party licensor were to
terminate its relationship with the Company or to materially increase the cost
to the Company for its products, or if a material problem were to arise in
connection with any of the software products licensed from such licensors, the
Company would be required to license an alternative product from another third
party or attempt to internally develop a replacement for the function of the
licensed software. The loss of or inability to maintain any of these technology
licenses could result in interruptions in the availability of the Company's
existing products and delays in the introduction of new products and services
until equivalent technology, if available, is identified, licensed or developed,
and integrated. There can be no assurance that an alternative source of a
suitable product would be available or that the Company would be able to develop
an alternative product in sufficient time and at a reasonable cost. The failure
of the Company to obtain or develop an alternative product on a timely basis and
at a reasonable cost would have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business-- Product
Development" and "--Proprietary Rights."
INTERNATIONAL SALES
The international market for the Company's products is growing rapidly, and
the Company expects an increasing percentage of its revenues to be derived from
export sales. The Company has offices in Dublin, Ireland, Singapore, and
Melbourne, Australia, and intends to add sales and support capabilities in Asia
and Europe which will require significant management attention and financial
resources. The Company
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expects that a significant portion of future international sales will be
generated by sales agents who will act as independent contractors. Such agents
will license the Company's software and pay the Company royalties equal to a
percentage of the sublicense fees received by the agents from their sales of the
Company's software. In order to achieve its targeted international growth, the
Company will have to locate and establish relationships with a number of agents
in international markets. As a result of reliance upon such local sales agents,
the Company's growth will depend to a material degree upon the Company's ability
to recruit, manage, and maintain satisfactory relationships with these agents
and the level of performance achieved by them. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Overview."
The Company's business outside of North America may be subject to unexpected
changes in regulatory requirements and policy, tariff and other trade barriers,
costs of localizing products for other countries, lack of acceptance of
localized products in other countries, longer accounts receivable payment
cycles, difficulties in accounts receivable collections, difficulties in
managing international operations, availability of trained personnel to install
and implement the Company's systems, political instability, potentially adverse
tax obligations, restrictions on the repatriation of earnings and the burdens of
complying with a wide variety of other laws and regulations. In addition, the
laws of some other countries do not protect the Company's intellectual property
rights to the same extent as do the laws of United States. There can be no
assurance that such factors will not have a material adverse effect on the
Company's business, financial condition or results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business--Sales and Marketing" and Note 9 of Notes to Consolidated
Financial Statements.
The Company's international sales are typically denominated in U.S. dollars.
An increase in the value of the United States dollar relative to foreign
currencies would make the Company's products more expensive and may adversely
affect the Company's future sales to international customers. In addition, the
Company's expenses for its foreign offices and operations are generally paid in
the local currencies. If the U.S. dollar weakens in relation to the applicable
international currencies, the Company's expenses may rise and the Company's
revenues may be adversely affected. The impact of future exchange rate
fluctuations on the Company's results of operations cannot be accurately
predicted. To date, the Company has not sought to hedge the risks associated
with fluctuations in exchange rates, but may undertake such transactions in the
future. There can be no assurance that any hedging techniques implemented by the
Company in the future would be successful or that exchange rate fluctuations
would not have a material adverse effect on the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Overview" and "Business--Sales
and Marketing."
LENGTHY SALES CYCLE
Successful operation of software applications such as those licensed by the
Company are critical to the user's business and potential customers may perceive
high risk in connection with adoption of such software. For these and other
reasons, the sales cycles associated with the purchase of the Company's products
and services are typically six to twelve months, but vary significantly, and are
subject to a number of factors, including customers' budgetary constraints and
internal acceptance reviews, over which the Company has little or no control.
The Company has experienced higher revenues historically in the fourth quarter
due to customer buying patterns. The Company believes that these buying patterns
are due to the annual budgeting cycles of many large financial institutions and
the desire by many of its customers to commence the lengthy process of
implementing the Company's software during the first quarter of the year. See
"Business--Sales and Marketing."
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YEAR 2000 RISK
It is possible that some of the Company's products, whether working alone or
in conjunction with other computer systems or software, will not always accept
input of, or store, manipulate and output dates in the year 2000 or thereafter
without error or interruption. Generally, customers now require that the Company
warrant that its products will process dates in 2000 and beyond. Although the
Company believes that its installed and currently-marketed products will
correctly handle date information at all times, there can be no assurance that
unknown problems will not be encountered. The expense of the Company's efforts
to identify and address such problems, or the warranty liability to which the
Company may become subject as a result of such problems, could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "--Product Liability."
DEPENDENCE ON KEY EMPLOYEES; NEED FOR QUALIFIED EMPLOYEES
The future success of the Company is dependent in large part on a number of
key senior management, research and development, and sales and marketing
employees, particularly Stephen B. Grubb, its President and Chief Executive
Officer, and David B. Black, its Chief Technology Officer. The Company does not
have written employment agreements with any key employee nor does the Company
maintain key man life insurance on any of its employees. The loss of one or more
key employees could have a material adverse effect on the business, financial
condition and results of operations of the Company.
The future success of the Company also will depend to a significant extent
on its ability to attract, train, motivate and retain highly qualified
employees. These employees include managerial and sales and marketing personnel,
as well as highly-skilled software development professionals (particularly
project managers), software engineers and other senior technical personnel with
experience in mission-critical software. Customization and other services with
respect to existing software packages require the Company's employment of an
adequate number of employees skilled in COBOL, the programming language used in
the Company's current software products. The availability of skilled personnel
with knowledge and experience in this specific programming language is not high
in the industry, partly because more modern programming languages are the focus
of the younger programming work force and partly because the so-called "year
2000" problem has created an unusual opportunity for such programmers that has
cut significantly into their general availability. The Company believes that
there is a shortage of, and significant competition for, software development
professionals with the advanced technological skills necessary to perform the
services offered by the Company. The Company's ability to maintain and renew
existing customer relationships and to obtain new business depends, in large
part, on its ability to hire and retain technical personnel with the skills
necessary to keep pace with continual changes in information processing
technology, evolving industry standards and changing client preferences. The
Company expects that it will become increasingly difficult to hire additional
personnel with such expertise and experience, because of the limited pool
available and competition from other businesses for those employees. The
inability to hire and retain qualified personnel or the loss of the services of
key personnel could have a material adverse effect upon the Company's business,
financial condition and results of operations. See "Business--Employees" and
"Management."
DEPENDENCE ON PROPRIETARY TECHNOLOGY; RISK OF INFRINGEMENT CLAIMS
The Company relies primarily on a combination of copyright and trademark
laws, trade secrets, confidentiality procedures and contractual provisions to
protect its proprietary technology. For example, the Company licenses, rather
than sells, its software, and generally requires licensees to execute license
agreements that impose certain restrictions on the licensees' rights to use the
software. In addition, the Company seeks to avoid disclosure of its trade
secrets generally by requiring those persons with access to the Company's
proprietary information to execute confidentiality agreements with the Company
and by
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restricting access to the Company's source code. The Company seeks to protect
its software, documentation and other written materials under trade secret and
copyright laws, which afford only limited protection.
Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products or to
obtain and use information that the Company regards as proprietary. Policing
unauthorized use of the Company's products is difficult, and, while the Company
is unable to determine the extent to which piracy of its software products
exists, software piracy can be expected to be a persistent problem. There can be
no assurance that the Company's means of protecting its proprietary rights will
be adequate or that the Company's competitors will not independently develop
similar technology. In addition, the laws of some other countries do not protect
the Company's proprietary rights to the same extent as do the laws of the United
States.
There can be no assurance that third parties will not claim that the
Company's current or future products infringe upon such third party's'
intellectual property rights. The Company expects that software product
developers will increasingly be subject to infringement claims as the number of
products and competitors in the financial transaction processing industry grows
and the functionality of products in different industry segments overlaps. Any
such claims, with or without merit, could be time-consuming, result in costly
litigation, cause product shipment delays or require the Company to enter into
royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company or available
at all, which could have a material adverse effect upon the Company's business,
financial condition and results of operations. See "Business--Proprietary
Rights."
COMPETITION
The market for financial transaction processing solutions is highly
competitive, highly fragmented and characterized by rapidly changing technology
and evolving standards. The Company faces direct competition from a number of
companies that market software for financial transaction processing and that
target the credit card processing segment of that market. Such competitors vary
in size and in the scope and breadth of the products and services they offer.
The Company's products also compete against software developed in-house by
companies in the financial transaction processing industry and against services
offered by third-party processors, which provide credit card transaction
processing services, although such processors are themselves potential customers
for the Company's products and services. There can be no assurance that
competitors will not develop products and services that are superior to the
Company's products and services or that achieve greater market acceptance than
the Company's products and services. As the Company offers new products and
services, it expects to face competition from both existing and new competitors.
Many of the Company's current competitors are broadening the functionality of
their product and service offerings. Because there are relatively low barriers
to entry in the software market, the Company also expects additional competition
from other established, as well as emerging, companies. Increased competition is
likely to result in price reductions, reduced gross margins and loss of market
share, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company believes that competition will continue to intensify as the
market for its products and services develops and competitors focus more clearly
on that market's specific requirements. Many of the Company's current and
potential competitors have significantly greater financial, technical, marketing
and other resources than the Company. As a result, such competitors may be able
to respond more quickly to new or emerging technologies and changes in customer
requirements, or devote greater resources to the development, promotion, sale
and support of their products and services than the Company. In addition,
current and potential competitors have established or may establish in the
future cooperative relations among themselves or with third parties to increase
the ability of their products and services to address the needs of the Company's
prospective customers. Accordingly, it is possible that new competitors,
alliances among competitors or alliances between competitors and third parties
may emerge and rapidly acquire
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significant market share. There can be no assurance that the Company can
maintain its competitive position against current and potential competitors,
especially those with significantly greater financial, marketing, service,
support, technical and other competitive resources, or that competitive
pressures faced by the Company would not have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Competition."
RESTRICTIONS ON COMPETITION
In October 1988, the Company licensed its CardPac software product to The
SEMA Group S.A. in France under an agreement which grants SEMA the exclusive
rights to market that software product, including any derivatives therefrom, in
Western Europe and portions of Asia. Under this Agreement, the Company agreed
not to license CardPac or any product derived from CardPac in such territories
through October 31, 1998. Although the Company no longer sells its CardPac
product, it competes with SEMA for bank card processing customers in those areas
with its VisionPLUS product. The Company believes that offering VisionPLUS in
such territories does not infringe upon SEMA's exclusivity in such territories,
but if the Company were to develop or market a software application or module
that was determined to be a derivative of the CardPac software, then the Company
could be restricted from marketing that application or module in SEMA's
territories through October 1998. In that case, the Company would not be able to
offer its customers in such territories the full range of software applications
that it might otherwise be able to offer, or it would have to develop or find
third-party software to provide the missing functionality. Either such event
could have a material adverse effect on the Company's business, financial
condition and results of operations.
PRODUCT LIABILITY
The software developed and utilized by the Company in providing its products
and services may contain undetected errors. Although the Company engages in
extensive testing of its software prior to introducing the software onto a
customer's system, there can be no assurance that errors will not be found in
such software after the commencement of its use. The Company's license,
maintenance and support, and compliance agreements with its customers, generally
contain provisions designed to limit the Company's exposure to potential product
liability claims, such as disclaimers of warranties and exclusions of liability
for special, consequential and incidental damages. In addition, these agreements
generally limit the amounts recoverable for damages to the amounts paid by the
licensee to the Company for the product or service giving rise to the damages
claims. Although the Company has not experienced any product liability claims to
date, the sale and support of products and services by the Company may result in
the Company being subject to such claims. A successful product liability claim
brought against the Company could have a material adverse effect upon the
Company's business, financial condition and results of operations. See "--Year
2000 Risk."
POTENTIAL FUTURE ACQUISITIONS
The Company may in the future undertake acquisitions that could present
challenges to the Company's management. Acquisitions involve numerous risks,
including difficulties in assimilating new operations and personnel and
implementing new business processes, the need to manage geographically-remote
business units and the diversion of management attention from other business
concerns. Any acquisition, depending upon its size, could result in the use of a
significant portion of the Company's cash, or, if such acquisition is made
utilizing the Company's securities, could result in significant dilution to the
Company's shareholders. Furthermore, there can be no assurance that any acquired
product or service capacity will gain acceptance in the Company's markets.
Should the Company's management fail to respond effectively to such challenges,
it is possible that a future acquisition could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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CHANGING REGULATORY ENVIRONMENT
The Company's customers are subject to a number of government regulations
and industry standards with which the Company's products must comply. For
example, the Company's products are affected by Visa and MasterCard electronic
payment standards. Changes to such regulations or standards or the adoption of
new regulations or standards in the credit card processing industry could
require the Company to make changes in its products and services, and could
affect the timing of purchases and acceptance of the Company's products and
services by the marketplace. There can be no assurance that the Company can
respond to such changes in a timely and adequate manner. The dramatic growth in
the availability of credit cards and the expansion of available credit under
such cards to the consuming public has been a matter of concern to U.S. federal
banking regulators and other governmental regulatory authorities. Action by
regulatory authorities to substantially restrict the availability of credit card
credit or other related regulatory developments could materially adversely
affect the Company's customers and the market in general and therefore could
have a material adverse effect on the Company's business, financial condition
and results of operations.
NO PRIOR MARKET FOR COMMON STOCK
Prior to the offering, there has been no public market for the Common Stock,
and there can be no assurance that an active trading market will develop or be
sustained after the offering or that the market price of the Common Stock will
not decline below the initial public offering price. The initial public offering
price has been determined by negotiations between the Company, the Selling
Shareholders and the representatives of the Underwriters, and may not be
indicative of the market price of the Common Stock after the offering. See
"Underwriting."
POSSIBLE VOLATILITY OF MARKET PRICE
From time to time after the offering, there may be significant volatility in
the market price of the Common Stock. The stock market has from time to time
experienced significant price and volume fluctuations, which have particularly
affected the market prices of the stocks of high technology and
telecommunications companies and which may be unrelated to the operating
performance of such companies. Factors such as actual or anticipated operating
results, growth rates, changes in estimates by analysts, market conditions in
the industry, announcements by competitors, regulatory actions and general
economic conditions will vary from period to period. As a result of these
factors, the Company's operating results from time to time may be below the
expectations of public market analysts and investors. Any such event would
likely have a material adverse effect on the market price of the Common Stock.
SUBSTANTIAL CONTROL BY OFFICERS, DIRECTORS AND PRINCIPAL SHAREHOLDERS
After the sale of the shares of Common Stock offered hereby, the Company's
officers and directors (including their affiliates) will retain voting control
of approximately 45% of the Company's outstanding Common Stock (and would hold a
majority of the outstanding Common Stock if outstanding options and warrants
were exercised) and therefore will be able to exercise substantial control over
the Company's affairs. Accordingly, if such persons act together, they may be
able to elect all directors and exercise control over the business policies and
affairs of the Company. See "Management--Directors and Executive Officers" and
"Principal and Selling Shareholders."
BENEFITS OF THE OFFERING TO CURRENT SHAREHOLDERS
The existing shareholders of the Company will realize significant benefits
from the completion of the offering, including the creation of a public market
for the Common Stock, a substantial increase in the market value of the Common
Stock (based on the public offering price) over the amount paid by existing
shareholders for their shares, and, in the case of the Selling Shareholders, the
opportunity to sell a portion
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of their shares at the public offering price. The average price paid to the
Company for shares held by existing shareholders was $ per share. See
"Dilution." Executive officers and directors of the Company and their
affiliates, as a group, beneficially own 7,671,625 shares (including shares
subject to presently exercisable options and warrants) which, based on an
assumed offering price of $ per share, would have a value of $ upon
completion of the offering. Intelligent Systems Corporation, Grubb & Williams,
Ltd., and GW Investments, Ltd. will realize net proceeds from the sale of shares
in the offering of $ ($ if the Underwriters' overallotment option is
exercised), $ , and $ , respectively. J. Leland Strange, a director of the
Company, is the President and Chairman of the Board of Intelligent Systems
Corporation. Stephen B. Grubb, the President, Chief Executive Officer and
Chairman of the Board of the Company, is a managing director of Grubb &
Williams, Ltd. and GW Investments, Ltd. See "Principal and Selling
Shareholders." Messrs. Strange and Grubb have participated in all deliberations
and decisions of the Company with respect to undertaking the offering and the
terms of the offering.
IMMEDIATE AND SUBSTANTIAL DILUTION
The purchasers of the shares of Common Stock offered hereby will experience
immediate and substantial dilution in the net tangible book value per share of
Common Stock from the initial public offering price. Based on an assumed initial
offering price of $12.00 per share, as of September 30, 1997, such dilution, on
a pro forma basis, would have been equal to $10.68 per share with respect to
shares purchased pursuant to the offering. To the extent that some or all
outstanding options and warrants to purchase Common Stock are exercised, there
will be further dilution. See "Dilution."
ANTI-TAKEOVER MATTERS
The Company's Articles and Bylaws contain certain provisions that could have
the effect of delaying, deferring or preventing a change in control of the
Company. The Board of Directors is authorized to issue one or more series of
Preferred Stock with respect to which the Board, without shareholder approval,
may determine voting, conversion or other rights which could adversely affect
the rights of holders of Common Stock. Only shareholders holding at least 50% of
the outstanding Common Stock have the power to call a special meeting. Directors
of the Company are divided into three classes and are elected to serve staggered
three-year terms. Under the Articles and Bylaws, directors serving staggered
terms can be removed from office only for cause and only upon an affirmative
vote of at least two-thirds of the outstanding voting stock. The Company's
Bylaws require advance notice for shareholder proposals and director
nominations. In addition, the Company has eliminated the right of a majority of
its shareholders to act by unanimous written consent in lieu of a meeting. See
"Description of Capital Stock." One effect of the foregoing provisions would be
to make an acquisition of the Company significantly more difficult to achieve if
not approved by the Board of Directors, even though a majority of shareholders
may favor such action. Potential acquirors may be deterred due to the
anti-takeover provisions implemented by the Company. Such factors could limit
the price that certain acquirors might be willing to pay in the future for
shares of the Company's Common Stock, and there can be no assurance that such
provisions will not have an adverse effect on the market value of the Company's
Common Stock in the future. See "Description of Capital Stock--Certain
Provisions."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Sales of substantial amounts of shares of Common Stock in the public market
following the offering, or the perception that such sales could occur, could
adversely affect the market price of the Common Stock prevailing from time to
time and could impair the Company's ability to raise capital in the future
through sales of its equity securities. Immediately after completion of the
offering, assuming no exercise of outstanding options or warrants, the Company
will have 9,213,408 shares of Common Stock outstanding, of which the 3,333,333
shares offered hereby will be freely tradeable without restriction or further
registration under the Securities Act, except those shares acquired by
"affiliates" of the Company as that term is
17
<PAGE>
defined under the Securities Act which will be subject to the resale limitations
(excluding the holding period requirement of Rule 144 ("Rule 144")) under the
Securities Act. The remaining 5,880,075 shares of Common Stock are restricted
securities as defined in Rule 144 and may be sold in the public market only if
registered under the Securities Act or if an exemption from registration is
available, including the exemptions contained in Rules 144, 144(k) or 701 under
the Securities Act. The Company, its officers, directors and certain other
shareholders, including the Selling Shareholders, who collectively are the
beneficial owners of an aggregate of 5,774,875 shares of Common Stock have
agreed with the Underwriters, except with the prior written consent of
NationsBanc Montgomery Securities, Inc., not to offer, sell, pledge, contract to
sell, grant any option, right or warrant to purchase, or otherwise transfer or
dispose of, directly or indirectly, any shares of Common Stock of the Company or
any securities convertible into or exercisable or exchangeable for Common Stock
for a period of 180 days after the effective date of the Registration Statement
of which this Prospectus forms a part. Upon the expiration of such 180-day
period, such holders will, in general, be entitled to dispose of their shares,
although the shares of Common Stock held by affiliates of the Company will
continue to be subject to the restrictions of Rule 144. In addition, options to
purchase an aggregate of 1,082,250 shares of Common Stock, having a weighted
average exercise price of $1.34 per share, are outstanding and warrants to
purchase an aggregate of 1,194,445 shares of Common Stock, having a weighted
average exercise price of $4.46 per share, are currently outstanding (of which
263,410 shares are subject to options and warrants held by persons not subject
to lock-up agreements). See "Description of Capital Stock" and "Shares Eligible
for Future Sale."
The Company has agreed, subject to certain limitations, to permit Sirrom
Capital Corporation (formerly Sirrom Capital, L.P.), which will own 75,000
shares of Common Stock following the offering, and has a warrant to purchase, at
a minimum, 37,660 additional shares of Common Stock, to sell its shares of
Common Stock, pursuant to a registration statement filed by the Company under
the Securities Act, provided that the registration statement form permits such
secondary sale. If the Company were required to include in a Company-initiated
registration shares held by such holder pursuant to the exercise of such
registration rights, the inclusion of such shares might have an adverse effect
on the Company's ability to raise needed capital in the capital markets at a
time and price favorable to the Company. In addition, the Company has agreed to
register an aggregate of 1,456,280 shares of Common Stock subject to options and
warrants held by affiliates of the Company pursuant to a registration statement
on Form S-8, if such form is available. See "Shares Eligible for Future Sale"
and "Principal and Selling Shareholders."
USE OF PROCEEDS
A substantial portion of the net proceeds to be received by the Company in
connection with the offering is not allocated for any specific purpose, but will
be allocated to general corporate purposes, including capital expenditures and
working capital. A portion of the net proceeds of the offering also may be used
for the acquisitions of companies or technology complementary to those of the
Company; however, the Company is not currently a party to any commitments or
agreements, and is not currently involved in any negotiations, with respect to
any material acquisitions. Accordingly, management will have broad discretion
with respect to the expenditure of such proceeds. Purchasers of shares of Common
Stock offered hereby will be entrusting their funds to the Company's management,
upon whose judgment they must depend, with limited information concerning the
specific purposes to which the funds will ultimately be applied. See "Use of
Proceeds."
18
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the offering are estimated to be
approximately $22.4 million ($25.2 million if the Underwriters' over-allotment
option is exercised in full), at an assumed initial offering price of $12.00 per
share, after deducting underwriting discounts and commissions and estimated
offering expenses payable by the Company. Of such net proceeds, the Company
intends to use (i) up to $5.1 million to pay to Household International, Inc. in
settlement of all current and future obligations of the Company pursuant to a
Software Development Agreement between the Company and Household International,
Inc., and (ii) $4.0 million to prepay outstanding indebtedness to Sirrom Capital
Corporation ("Sirrom") under a term loan agreement dated September 1997,
accruing interest at a rate of 13.5% per annum and maturing in September 2002.
The proceeds of such term loan were used to repay $900,000 outstanding under a
previous loan agreement with Sirrom and $430,000 borrowed from a shareholder in
August 1997 and for working capital purposes. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Certain
Transactions."
The remainder of the net proceeds to the Company from the offering,
approximately $13.2 million, will be used for general corporate purposes,
including capital expenditures and working capital. The Company may also use a
portion of the net proceeds for the acquisition of other companies, technology
or services that complement the business of the Company, although no such
transactions are being planned or negotiated as of the date hereof. See "Risk
Factors--Use of Proceeds." Pending application of the net proceeds as described
above, the Company intends to invest the net proceeds in short-term, investment-
grade securities and interest-bearing securities. The Company will not receive
any of the proceeds from the sale of shares of Common Stock by the Selling
Shareholders.
DIVIDEND POLICY
The Company has not declared or paid any cash dividends on its Common Stock,
and the Board of Directors intends to continue a policy of retaining future
earnings to finance the Company's growth and for general corporate purposes,
and, therefore, it does not anticipate paying any cash dividends in the
foreseeable future. The Company's loan agreement with Sirrom Capital Corporation
prohibits the Company from paying any dividend or making any other distribution
to shareholders without the consent of the lender.
19
<PAGE>
CAPITALIZATION
The following table sets forth the long-term obligations and capitalization
of the Company as of September 30, 1997, and pro forma as adjusted to reflect
the sale by the Company of 2,083,333 of the shares of Common Stock offered
hereby at an assumed initial public offering price of $12.00 per share, the
application of the net proceeds therefrom as described under the "Use of
Proceeds," and certain transactions to occur upon completion of the offering.
This table should be read in conjunction with the Consolidated Financial
Statements of the Company and the related Notes thereto contained elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-----------------------
<S> <C> <C>
PRO FORMA
ACTUAL AS ADJUSTED
---------- -----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Current portion of long-term obligations(1)........................................... $ 425 $ 425
---------- -----------
---------- -----------
Long-term obligations, less current portion(1)........................................ 5,076 1,383
Shareholders' equity(2):
Preferred Stock, par value $0.01 per share, 10,000,000 shares authorized; no shares
issued and outstanding.............................................................. -- --
Common Stock, par value $0.01 per share, 30,000,000 shares authorized; 7,289,125
shares issued; 9,372,458 shares issued, as adjusted................................. 73 94
Additional paid-in capital............................................................ 6,193 28,597
Deferred compensation................................................................. (70) (70)
Deficit earnings(3)................................................................... (10,925) (13,825)
Cumulative translation adjustments.................................................... (81) (81)
Less 159,050 shares held in treasury, at cost......................................... (491) (491)
---------- -----------
Total shareholders' equity (deficiency)............................................... (5,301) 14,224
---------- -----------
Total capitalization.................................................................. $ (225) $ 15,607
---------- -----------
---------- -----------
</TABLE>
- ------------------------
(1) Long term obligations include long-term debt, capital lease obligations and
deferred rent expense. See Note 4 of Notes to Consolidated Financial
Statements for additional information relating to the Company's debt.
(2) Does not include (i) an aggregate of 1,500,000 shares of Common Stock
available for future issuance pursuant to the Company's 1995 Stock Incentive
Plan and 1997 Stock Incentive Plan, pursuant to which options to purchase an
aggregate of 1,080,500 shares of Common Stock (having a weighted average
exercise price of $1.34 per share) are presently outstanding and options to
purchase an aggregate of 70,500 shares of Common Stock (having an exercise
price equal to the initial public offering price of the Common Stock) that
will be granted to two executive officers and the Company's four
non-employee directors upon the completion of the offering, (ii) an option
to purchase 1,750 shares of Common Stock (having an exercise price of $.002
per share) which is presently outstanding and (iii) 1,194,445 shares of
Common Stock reserved for issuance pursuant to presently outstanding
warrants (having a weighted average exercise price of $4.46 per share). See
"Management--Executive Compensation," "--Stock Incentive Plans" and Note 7
of Notes to Consolidated Financial Statements.
(3) Pro forma as adjusted includes the effect of expenses which will be recorded
upon completion of the offering of (i) $2.5 million estimated expense
related to the settlement of obligations to Household International, Inc.
and (ii) $400,000 debt issuance costs (including the value of a warrant)
related to indebtedness to Sirrom Capital Corporation. See "Use of Proceeds"
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Overview."
20
<PAGE>
DILUTION
As of September 30, 1997, the historical net tangible book deficit of the
Company was approximately $(7,300,000), or $(1.02) per share of Common Stock.
The pro forma net tangible book deficit of the Company at September 30, 1997 was
$(10,200,000) or $(1.43) per share. Pro forma net tangible book deficit per
share represents the amount of tangible assets of the Company, less all
liabilities, divided by the number of issued and outstanding shares of Common
Stock as of September 30, 1997 (on a pro forma basis after giving effect to
certain transactions to occur upon the completion of the offering). After giving
effect to the sale by the Company of 2,083,333 of the shares of Common Stock
offered hereby at an assumed initial public offering price of $12.00 per share
and after deducting estimated offering expenses payable by the Company and the
underwriting discount and commissions, the pro forma net tangible book value of
the Company as of September 30, 1997, would have been approximately $12,225,000,
or $1.33 per share. This represents an immediate increase in net tangible book
value of $2.76 per share to existing shareholders and an immediate dilution in
net tangible book value of $10.67 per share to purchasers of shares of Common
Stock in the offering. The following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............................. $ 12.00
---------
Historical net tangible book deficit before the offering.................. $ (1.02)
Decrease per share related to pro forma adjustments....................... $ (0.41)
Increase per share attributable to new shareholders....................... $ 2.76
---------
Pro forma net tangible book value per share after giving effect to the
offering.................................................................. $ 1.33
---------
Dilution per share to new shareholders...................................... $ 10.67
---------
</TABLE>
The following table sets forth, on a pro forma basis as of September 30,
1997, with respect to the existing shareholders and the new shareholders in the
offering, a comparison of the number of shares of Common Stock acquired from the
Company, the percentage ownership of such shares, the total consideration paid,
the percentage of total cash consideration paid and the average price per share:
<TABLE>
<CAPTION>
SHARES PURCHASED(1) TOTAL CONSIDERATION
----------------------- -------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders.............................. 7,130,075 77% $ 1,676,000 6% $ 0.24
New shareholders................................... 2,083,333 23 25,000,000 94 12.00
---------- --- ------------- ---
Total.......................................... 9,213,408 100% $ 26,676,000 100%
---------- --- ------------- ---
---------- --- ------------- ---
</TABLE>
- ------------------------
(1) Sales by the Selling Shareholders in the offering will reduce the number of
shares held by existing shareholders to 5,880,705, or 64%, and will increase
the number of shares held by new shareholders to 3,333,333, or 36%, of the
total shares of Common Stock to be outstanding after the offering. See
"Principal and Selling Shareholders."
The foregoing table does not take into account the exercise of outstanding
options or warrants to acquire shares of Common Stock. Assuming that all such
options and warrants were exercised and proceeds received therefrom, dilution
per share to new shareholders would be $10.35. See Note 7 of Notes to
Consolidated Financial Statements and "Management--Stock Incentive Plans."
21
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected consolidated financial data of the Company set forth below as
of and for the years ended December 1994, 1995 and 1996 and for the nine months
ended September 30, 1997 are derived from the audited Consolidated Financial
Statements of the Company for such periods included elsewhere in this
Prospectus. The selected consolidated data as of and for the year ended January
31, 1993 and the eleven months ended December 31, 1993 are derived from the
audited consolidated financial statements of the Company which are not included
herein. The selected consolidated financial data as of and for the nine months
ended September 30, 1996 are derived from unaudited financial statements
included elsewhere in this Prospectus, which, in the opinion of the Company
reflect all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the financial condition and results of
operations. These historical results are not necessarily indicative of the
results that may be expected in the future. The selected consolidated 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," the Consolidated Financial Statements and Notes thereto and other
financial data included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR 11 MONTHS
ENDED ENDED NINE MONTHS ENDED
JANUARY 31, DECEMBER 31, YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------- ------------- ------------------------------- ------------------------
1993 1993 1994 1995 1996 1996 1997
----------- ------------- --------- --------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
CONSOLIDATED STATEMENT OF OPERATIONS DATA
Revenues
License................................. $ 7,502 $ 5,047 $ 5,749 $ 8,668 $ 13,366 $ 7,842 $ 10,123
Services................................ 11,738 10,703 10,720 13,060 13,558 9,880 14,328
----------- ------------- --------- --------- --------- ------------- ---------
Total revenues........................ 19,240 15,750 16,469 21,728 26,924 17,722 24,451
Cost of revenues
License................................. 1,273 1,067 940 1,324 2,935 1,808 3,072
Services................................ 10,213 7,975 7,640 9,503 8,956 6,340 10,902
----------- ------------- --------- --------- --------- ------------- ---------
Total cost of revenues................ 11,486 9,042 8,580 10,827 11,891 8,148 13,974
Gross margin.......................... 7,754 6,708 7,889 10,901 15,033 9,574 10,477
Operating expenses
Sales and marketing..................... 2,678 2,172 2,481 2,298 3,270 2,191 3,420
Research and development................ 2,625 2,475 1,612 2,133 6,944 4,619 7,953
General and administrative.............. 2,915 3,618 3,040 4,105 4,227 2,446 4,514
Non Cash Compensation................... -- -- -- -- -- -- 3,722
Write-off of capitalized software....... -- -- -- 2,143 -- -- --
----------- ------------- --------- --------- --------- ------------- ---------
Total operating expenses.................. 8,218 8,265 7,133 10,679 14,441 9,256 19,609
----------- ------------- --------- --------- --------- ------------- ---------
Income (loss) from operations............. (464) (1,557) 756 222 592 318 (9,132)
Interest expense, net..................... 464 123 240 338 150 102 77
----------- ------------- --------- --------- --------- ------------- ---------
Income (loss) before income taxes......... (928) (1,680) 516 (116) 442 216 (9,209)
Income tax expense (benefit).............. (183) (698) 367 356 303 148 277
----------- ------------- --------- --------- --------- ------------- ---------
Income (loss) from continuing
operations.............................. $ (745) $ (982) $ 149 $ (472) $ 139 $ 68 $ (9,486)
----------- ------------- --------- --------- --------- ------------- ---------
----------- ------------- --------- --------- --------- ------------- ---------
Income (loss) per share from continuing
operations.............................. $ (0.12) $ (0.16) $ 0.02 $ (0.07) $ 0.02 $ 0.01 $ (1.25)
----------- ------------- --------- --------- --------- ------------- ---------
----------- ------------- --------- --------- --------- ------------- ---------
Shares used in per share calculations..... 5,972 5,972 5,972 6,620 8,570 8,537 7,615
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
JANUARY 31, DECEMBER 31, --------------------------
----------- ------------------------------------------ PRO FORMA
1993 1993 1994 1995 1996 ACTUAL AS ADJUSTED(1)
----------- --------- --------- --------- --------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
BALANCE SHEET DATA
Cash and cash equivalents.................... $ 2,463 $ 2,321 $ 432 $ 1,222 $ 2,037 $ 1,522 $ 15,547
Working capital (deficit).................... (1,239) (1,102) (3,280) (1,550) (2,571) (5,137) 10,788
Total assets................................. 11,873 10,499 10,350 11,507 16,194 15,304 29,236
Long-term obligations........................ 3,252 3,341 2,899 2,582 1,761 5,076 1,383
Shareholder's equity (deficit) (2)........... 246 (859) (760) 12 162 (5,301) 14,224
</TABLE>
- ------------------------------
(1) Gives effect to the sale of the 2,083,333 shares of Common Stock offered
hereby by the Company at an assumed initial public offering price of $12.00
per share and the application of the net proceeds therefrom.
(2) Pro forma as adjusted includes the effect of expenses which will be recorded
upon completion of the offering of (i) $2.5 million estimated expense
related to settlement of obligations to Household International, Inc. and
(ii) $400,000 debt issuance costs (including the value of a warrant) related
to indebtedness to Sirrom Capital Corporation. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Overview."
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL
STATEMENTS AND NOTES THERETO AND THE OTHER FINANCIAL INFORMATION INCLUDED
ELSEWHERE IN THIS PROSPECTUS. HISTORICAL RESULTS ARE NOT NECESSARILY INDICATIVE
OF TRENDS IN OPERATING RESULTS FOR ANY FUTURE PERIOD.
OVERVIEW
The Company is the world's leading supplier of software that performs
mission-critical credit card transaction processing functions. The Company's
current software product, VisionPLUS, is a customizable software system
consisting of a range of integrated application modules for processing both bank
and retail credit card transactions. VisionPLUS provides the necessary
functionality for processing credit card transactions from application
processing and transaction authorization requests through billing and
collection. The Company licenses its software to banks, finance companies and
retailers that process their own credit card transactions as well as to
third-party processors that process such transactions for others.
The Company released its original product, CardPac, used to process
traditional bank credit card transactions, in 1983 and its Vision21 product,
used to process retail credit card transactions, in 1987. In 1995, the Company
introduced its current product, VisionPLUS, which combines the functionality of
CardPac and Vision21 for processing both retail credit card and bank credit card
transactions, and discontinued selling new licenses of CardPac and Vision21. The
Company intends to discontinue provision of maintenance and support for CardPac
after 1998 and for Vision21 when the next release of VisionPLUS is delivered in
1998. As of October 31, 1997, the Company had licensed VisionPLUS to 50
customers, 40 of which were in the process of customizing or installing the
software or were in various stages of implementing it for use in live production
and ten of which were using the product in live production. As of October 31,
1997, the Company was continuing to support 25 customers using CardPac and 19
customers using Vision21. The Company is offering its current CardPac users
incentives to encourage them to purchase VisionPLUS and, as of October 31, 1997,
21 CardPac users had migrated or agreed to migrate to VisionPLUS. Vision21
licensees who are receiving maintenance and support from the Company will be
entitled to receive, for no additional license fee, those modules of the next
release of VisionPLUS affording equivalent functionality to that of the
licensee's current Vision21 software. Through October 31, 1997, 13 Vision21
customers had migrated or agreed to migrate to VisionPLUS. See
"Business--Products."
The Company derives a substantial portion of its revenues from sales outside
the United States. The Company's export sales were $1.0 million, $8.4 million
and $8.8 million for 1994, 1995 and 1996, respectively, and $6.1 million and
$11.3 million for the nine months ended September 30, 1996 and 1997,
respectively. Export sales as a percentage of total revenues were 6%, 39% and
33% for 1994, 1995 and 1996, respectively, and 34% and 46% for the nine months
ended September 30, 1996 and 1997, respectively. See Note 9 of Notes to
Consolidated Financial Statements for additional financial information
concerning the Company's foreign operations. The Company anticipates that
international sales will continue to account for a significant portion, and may
increase as a percentage, of the Company's total revenues. License and service
fees typically are invoiced and paid by the licensee in U.S. currency. See "Risk
Factors--International Sales." The Company anticipates that it will incur
increased costs in connection with the expansion of its international sales and
marketing efforts, as well as its support capabilities, during the remainder of
1997 and 1998. The Company intends to increase its use of agents in connection
with sales of the Company's software and related services in certain areas
outside of the United States. Such agents will license the Company's software
and pay the Company royalties equal to a percentage of the sublicense fees
received by such agents from their sales of the Company's software.
In accordance with generally accepted accounting principles, the Company
capitalizes certain software development costs. Software development costs that
are not capitalized are charged to research and
23
<PAGE>
development expenses. The Company capitalized $2.6 million, $2.3 million and
$1.1 million of software development costs for 1994, 1995 and 1996,
respectively, and $0.8 million and $0.2 million of such costs for the nine
months ended September 30, 1996 and 1997, respectively. As of September 30,
1997, the Company had a $2.0 million net unamortized balance of capitalized
software development costs. The Company records amortization of capitalized
software development costs in an amount equal to the greater of the amount
computed using (i) the ratio that current gross revenues for a product bears to
the total of current and anticipated revenues for that product or (ii) straight
line basis over the estimated useful life of the released product (currently
three years). Amortization expense was $0.9 million, $1.1 million, $1.2 million
for 1994, 1995 and 1996, respectively, and $0.9 million and $0.9 million for the
nine months ended September 30, 1996 and 1997, respectively. In 1995, the
Company also recorded an expense of $2.1 million due to the write-off of
capitalized software costs related principally to CardPac as a result of the
Company's determination to discontinue licensing such product. The Company
anticipates that it will continue to incur significant research and development
expenses, but does not expect that the amount of such expenses will increase
significantly from current levels.
Pursuant to an agreement dated June 1993, Household International, Inc. paid
the Company an aggregate of $4.6 million ($1.4 million, $3.0 million and $0.2
million in 1994, 1995 and 1996, respectively), which the Company recognized as
revenue, to fund the development of VisionPLUS. In exchange for such payments,
Household acquired joint ownership with the Company in VisionPLUS and a right to
royalties on the sale of any of the VisionPLUS modules, subject to a specified
maximum. Following the payment of the maximum royalties, the Company has the
right to acquire, for a nominal amount, Household's interest in VisionPLUS. Such
royalties are due to Household at the time the Company receives payment of the
license fee. As of September 30, 1997, the Company had paid approximately $5,000
in royalties to Household in cash and provided $663,000 of professional services
which amount has been credited against accrued royalties. As of September 30,
1997, the Company had accrued royalties of $2.0 million to Household. The
Company commenced paying Household royalties in accordance with the terms of
such agreement in July 1997. In October 1997, the Company and Household agreed
that the Company would pay to Household, from the net proceeds of the sale of
shares of Common Stock offered hereby by the Company, $5.1 million in settlement
of all current and future royalty obligations of the Company to Household
pursuant to such agreement less the amount of royalties paid by the Company to
Household pursuant to such agreement prior to such settlement payment. Following
such payment, the Company will retain its right to acquire Household's interest
in VisionPLUS for a nominal amount. The settlement payment will result in an
expense of up to $2.5 million when paid. In addition, in October 1997, the
Company and Household agreed to the settlement of certain obligations of the
Company to Household related to the development of VisionPLUS. Pursuant to such
settlement, the Company agreed to waive the future payment by Household of fees
for services to be provided by the Company or additional license fees due to the
Company up to a maximum aggregate amount. Such settlement resulted in an expense
of $0.3 million related principally to the Company's estimated cost of providing
such services. See Note 12 of Notes to Consolidated Financial Statements.
The Company obtained a second term loan in the principal amount of $4.0
million from Sirrom Capital Corporation in September 1997 in connection with
which the Company paid Sirrom a fee of $80,000 and issued Sirrom a warrant to
purchase 37,660 shares of Common Stock for $.002 per share which was valued at
$0.3 million. The Company intends to prepay such loan from the net proceeds of
the sale of shares of Common Stock offered hereby by the Company which
prepayment will result in an expense of approximately $0.4 million related to
such fee payment and warrant issuance.
The Company entered into an agreement with Ferntree Computer Corporation
Pty. Limited ("Ferntree") dated June 1997, relating to the termination of
Ferntree's status as a sales agent for the Company in Australia, New Zealand and
certain other countries located in the South Pacific. Pursuant to the agreement,
the Company has agreed to pay to Ferntree a commission of 30% of each license
fee resulting from the Company's sales of the existing modules of VisionPLUS in
such areas, up to a maximum
24
<PAGE>
aggregate amount of $1.0 million. Such payments are due following the Company's
receipt of such license fees.
Cost of license revenues consists principally of royalties due to third
parties and the amortization of capitalized software costs. Gross margins on
license revenues have been and will continue to be affected principally by the
level of license revenues, the mix of modules sold, related royalty payments to
third parties and the amortization of capitalized software costs. Cost of
service revenues consists primarily of salaries and benefits of employees and
have been affected primarily by the Company's efficiencies in its use of labor
and the Company's ability to utilize employees on billable projects.
FEES AND REVENUE RECOGNITION
The Company generates revenue from two principal sources: (i) license fees
for its software and (ii) services fees for customization, installation and
training services (professional services) and fees for maintenance and support
and compliance services. The Company's total revenues from license and service
fees were $16.5 million, $21.7 million and $26.9 million in 1994, 1995 and 1996,
respectively, representing a compound annual growth rate of 28%. License
revenues for these years were $5.7 million, $8.7 million and $13.4 million,
respectively, representing a compound annual growth rate of 53%.
The Company's typical license is perpetual, non-exclusive and
non-refundable. VisionPLUS consists of a number of application modules and
interface suites that are priced and can be licensed separately. License fees
for VisionPLUS are based principally upon the application modules and interface
suites included in the system delivered and the number of accounts that the
customer maintains with the system. See "Business--Products" for a discussion of
license fees for VisionPLUS. A significant portion of a license fee typically is
paid upon the execution of the license agreement and the remainder is paid in
periodic payments, usually within one year from such execution. Generally,
additional license fees are due as the number of accounts processed using the
software crosses certain tiers.
The Company recognizes license revenues, less deferrals for maintenance and
support and compliance services during an agreed-upon initial warranty period
(which is generally one year from the execution of the license agreement), upon
delivery of the software and related documentation when the (i) Company does not
have any significant remaining obligations under the related license agreement
and (ii) collectibility of the license fee is assessed as probable. If the
Company has significant post-delivery obligations, recognition of the license
fee is deferred until such obligations are considered insignificant. The
deferrals for maintenance and support and compliance services, which are
typically 15% of the license fees, are recognized over such warranty period.
Revenues from additional license fees for increased account processing are
recognized when such amounts become due. License fees paid in advance of
recognizing such fees as revenue are recorded as deferred revenue. License fees
which have been recognized as revenue but payment of which is not yet due
according to the terms of the license agreement are recorded as unbilled
accounts receivable until invoiced, generally 30 days prior to the due date.
Customers may purchase professional services in hourly blocks or on a per
hour basis. Hourly blocks are generally paid in advance and per hour sales are
invoiced monthly in arrears. The Company typically charges an annual fee for
maintenance services equal to a percentage of the license fee, after the
expiration of the initial warranty period. In addition, with respect to
VisionPLUS, the Company currently charges a separate annual fee for compliance
services. The Company generally seeks to obtain a three-to-five year commitment
from the customer for such maintenance and support and compliance services.
After this three-to-five year period, such services are provided, at the request
of the customer, on a year-to-year basis. Historically, maintenance and support
and compliance services were sold as one service; however, for VisionPLUS, the
Company offers compliance as a separately-priced service. Generally, fees for
maintenance and support and compliance services are paid annually in advance.
Revenues from professional services are recognized as the services are
performed. Maintenance and support and compliance service revenues are
recognized over the term of the agreement for such services. Amounts received
for
25
<PAGE>
professional services and maintenance and compliance services in advance of
recognizing the related revenue are recorded as deferred revenue.
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's consolidated
statements of operations as a percentage of total revenues of the Company for
the periods indicated.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
Revenues
License.................................................... 34.9% 39.9% 49.6% 44.3% 41.4%
Services................................................... 65.1 60.1 50.4 55.7 58.6
--------- --------- --------- --------- ---------
Total revenues........................................... 100.0 100.0 100.0 100.0 100.0
Cost of revenues
License.................................................... 5.7 6.1 10.9 10.2 12.6
Services................................................... 46.4 43.7 33.3 35.8 44.6
--------- --------- --------- --------- ---------
Total cost of revenues................................... 52.1 49.8 44.2 46.0 57.2
Gross margin............................................. 47.9 50.2 55.8 54.0 42.8
Operating expenses
Sales and marketing........................................ 15.1 10.6 12.1 12.4 14.0
Research and development................................... 9.8 9.8 25.8 26.0 32.5
General and administrative................................. 18.5 18.9 15.7 13.8 18.5
Non cash compensation...................................... 0.0 0.0 0.0 0.0 15.2
Write-off of capitalized software.......................... 0.0 9.9 0.0 0.0 0.0
--------- --------- --------- --------- ---------
Total operating expenses..................................... 43.4 49.2 53.6 52.2 80.2
Income (loss) before interest and taxes.................. 4.5 1.0 2.2 1.8 (37.4)
Interest expense, net........................................ 1.4 1.6 0.6 0.6 0.3
--------- --------- --------- --------- ---------
Income (loss) before income taxes........................ 3.1 (0.6) 1.6 1.2 (37.7)
Income taxes................................................. 2.2 1.6 1.1 0.8 1.1
--------- --------- --------- --------- ---------
Income (loss) from continuing operations................. 0.9% (2.2)% 0.5% 0.4% (38.8)%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1996
REVENUES. Total revenues increased 38% to $24.5 million for the nine months
ended September 30, 1997 from $17.7 million for the nine months ended September
30, 1996, primarily due to increased fees from services and, to a lesser extent,
increased fees from licenses. License revenues increased to $10.1 million, or
54% of total revenues, for the nine months ended September 30, 1997, compared to
$7.8 million, or 44% of total revenues, for the nine months ended September 30,
1996. This increase was principally due to the timing of revenue recognition on
one large project undertaken during the nine months ended September 30, 1997.
Service revenues increased 45% to $14.3 million, or 46% of total revenues, for
the nine months ended September 30, 1997, as compared to $9.9 million, or 56% of
total revenues, for the nine months ended September 30, 1996. This increase
reflects increased demand for professional services (particularly related to the
large number of new licenses agreements in the last quarter of 1996) as well as
an increase in maintenance and support and compliance fees.
26
<PAGE>
COST OF REVENUES. Total cost of revenues increased 73% to $14 million for
the nine months ended September 30, 1997 from $8.1 million for the nine months
ended September 30, 1996. Cost of license revenues increased 70% to $3.1 million
for the nine months ended September 30, 1997 from $1.8 million for the nine
months ended September 30, 1996 and as a percentage of license revenues
increased to 30% for the nine months ended September 30, 1997 from 23% for the
nine months ended September 30, 1996. These increases are due principally to the
effect of fixed third-party royalties payable with respect to each license sold
on lower average license fees and to a lesser extent the effect of lower license
revenues and a comparable level of software amortization expense. Cost of
service revenues increased 73% to $10.9 million for the nine months ended
September 30, 1997 from $6.3 million for the nine months ended September 30,
1996 and as a percentage of service revenues increased to 76% for the nine
months ended September 30, 1997 from 64% for the nine months ended September 30,
1996. These increases reflect a substantial increase in the number of employees
and independent contractors as well as the opening of foreign offices in
anticipation of higher future service revenues.
SALES AND MARKETING. Sales and marketing expenses increased 56% to $3.4
million for the nine months ended September 30, 1997 from $2.2 million for the
nine months ended September 30, 1996. Sales and marketing expenses represented
14% and 12% of total revenues for the nine months ended September 30, 1997 and
1996, respectively. These increases are due principally to the addition of
personnel (and related travel costs) to support increased marketing and sales
efforts.
RESEARCH AND DEVELOPMENT. Research and development expenses increased 74%
to $8 million for the nine months ended September 30, 1997 from $4.6 million for
the nine months ended September 30, 1996. Research and development expenses
represented 33% and 26% of total revenues for the nine months ended September
30, 1997 and 1996, respectively. These increases are due principally to a
significant increase in the number of personnel involved in developing a new
software platform and application modules. See "Business--Strategy" and
"--Product Development."
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
85% to $4.5 million for the nine months ended September 30, 1997 from $2.4
million for the nine months ended September 30, 1996. General and administrative
expenses represented 18% and 14% of total revenues for the nine months ended
September 30, 1997 and 1996, respectively. These increases are due principally
to the addition of management personnel and the expansion of the Company's
facilities in Maitland, Florida and Atlanta, Georgia and, to a lesser extent, a
charge resulting from the settlement of a lawsuit.
NON CASH COMPENSATION. In August 1997, the Company amended warrants to
purchase 1,104,110 shares of common stock which were issued to employees in
1996. As a result of amending the warrants, the Company recorded compensation
expense of $3,708,000 for the difference between the exercise price and
estimated fair value per share at the amendment date. See Note 7 of the
Consolidated Financial Statements. Also, the Company recorded stock compensation
expense of $14,000 for certain stock option grants in 1997.
INTEREST EXPENSE, NET. Interest expense, net decreased by 24% to $77,000
for the nine months ended September 30, 1997 from $102,000 for the nine months
ended September 30, 1996 due to higher interest income resulting from increases
in the average cash and cash equivalents balances.
INCOME TAXES. Income tax expense was $0.3 million for the nine months ended
September 30, 1997 and $0.1 million for the nine months ended September 30,
1996. The provisions for income taxes for 1997 and 1996 were based upon the
estimated annual effective tax rate for the year. The difference between the
effective income tax rate for the nine months ended September 30, 1997 and the
amounts calculated at the statutory rate was due primarily to an increase in the
valuation allowance provided against deferred tax assets. The difference between
the effective income tax rate for the nine months ended September 30, 1996 and
the amount calculated at the statutory rate was due primarily to an increase in
the valuation allowance provided against deferred tax assets, the current
generation of research and development credits and the
27
<PAGE>
benefit of foreign tax credits not previously recognized. See Note 6 of Notes to
Consolidated Financial Statements.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
REVENUES. Total revenues increased 24% to $26.9 million for 1996 from $21.7
million for 1995. The increase is principally due to increased license revenues,
which increased 54% to $13.4 million in 1996 from $8.7 million in 1995. The
increase in license revenues reflects delivery of VisionPLUS for the entire year
of 1996 as compared to only one-half of 1995 (VisionPLUS was released in the
second half of 1995) and a 44% increase in average license revenues per sale to
$0.5 million in 1996 from $0.3 million in 1995. The 4% increase in service
revenues to $13.6 million in 1996 from $13.1 million in 1995 is attributable to
an increase in professional service revenues of 10% while maintenance and
support and compliance services were virtually unchanged. Professional service
revenues increased due to increased professional services as a result of
increased license sales in 1996 as compared to 1995.
COST OF REVENUES. Total cost of revenues increased 10% to $11.9 million for
1996 from $10.8 million for 1995. The cost of license revenues increased 122% to
$2.9 million for 1996 from $1.3 million for 1995, and as a percentage of license
revenues increased to 22% for 1996 from 15% for 1995. The increase for 1996 in
the cost of license revenues as a percentage of license revenues is due to
additional third-party royalties resulting from increasing sales of VisionPLUS
modules subject to royalties. The cost of service revenues declined 6% to $9.0
million for 1996 from $9.5 million for 1995, and as a percentage of service
revenues to 66% for 1996 from 73% for 1995. The decline in cost of service
revenues for 1996 as a percent of service revenues is due to increased
utilization of employees on billable projects in 1996.
SALES AND MARKETING. Sales and marketing expenses increased 42% to $3.3
million for 1996 from $2.3 million for 1995 reflecting the addition of personnel
and related travel costs. Sales and marketing expenses represented 12% and 11%
of revenue for 1996 and 1995, respectively.
RESEARCH AND DEVELOPMENT. Research and development expenses increased 226%
to $6.9 million for 1996 from $2.1 million for 1995. As a percentage of total
revenues, research and development expenses increased to 26% for 1996 from 10%
for 1995. In 1996, the Company undertook a new product development initiative
which resulted in a significant increase in the number of development personnel
and related occupancy and support costs.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
3% to $4.2 million for 1996 from $4.1 million for 1995. As a percentage of total
revenues, general and administrative expenses represented 16% and 19% for 1996
and 1995, respectively. The decline in general and administrative expense as a
percentage of total revenues resulted primarily from essentially unchanged
dollar amounts of expense for 1996 as compared to 1995, while total revenues
increased for 1996 as compared to 1995.
INTEREST EXPENSE, NET. Interest expense, net declined by 56% to $0.2
million for 1996 from $0.3 million for 1995 because the average amount of
borrowings was lower in 1996 and because interest income was slightly higher in
1996 as a result of higher average cash balances during that year.
INCOME TAXES. The provision for income taxes was $0.3 million for 1996 as
compared to $0.4 million for 1995. The difference between the 1996 tax expense
calculated at the statutory rate and the amounts recorded in the financial
statements was primarily related to benefits recognized from research and
development and foreign tax credits offset by an increase in the valuation
allowance against deferred tax assets. The difference between the 1995 tax
expense calculated at the statutory rate and the amounts recorded in the
financial statements was related primarily to foreign withholding taxes and
expiring foreign tax credits. See Note 6 of Notes to Consolidated Financial
Statements.
28
<PAGE>
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
REVENUES. Total revenues for 1995 increased 32% to $21.7 million from $16.5
million for 1994. The increase was due both to increased license revenues and an
increase in service revenues. License revenues increased 51% to $8.7 million for
1995 from $5.7 million for 1994, while service revenues increased 22% to $13.1
million for 1995 from $10.7 million for 1994. License revenues represented 40%
and 35% of total revenues for 1995 and 1994, respectively. The increase in
license revenues resulted primarily from increased number of licenses sold due
to the release of VisionPLUS in the second half of 1995 and, to a lesser extent,
an increase in the average license fee per sale. The increase in service
revenues resulted primarily from an increase in professional service revenues
and to a lesser extent, from an increase in maintenance revenues. Professional
service revenues increased due to increased professional services as a result of
increased license sales in 1995 as compared to 1994.
COST OF REVENUES. Total cost of revenues increased 26% to $10.8 million for
1995 from $8.6 million for 1994. The cost of license revenues increased 41% to
$1.3 million for 1995 from $0.9 million for 1994, but as a percentage of license
revenues decreased to 15% for 1995 as compared to 16% for 1994. The cost of
license revenues increased due to an increase in the amortization of capitalized
software and to an increase in royalties to third parties. The cost of service
revenues increased 24% to $9.5 million for 1995 from $7.6 million for 1994 and
as a percentage of service revenues to 73% for 1995 as compared to 71% for 1994.
The cost of service revenues increased in absolute dollars due to the increase
in service revenues. The increase in cost of service revenues as a percentage of
service revenues resulted from a decrease in average billing rates and in the
utilization of employees on billable projects.
SALES AND MARKETING. Sales and marketing expenses decreased 7% to $2.3
million for 1995 from $2.5 million for 1994. The decrease was due principally to
a decrease in sales commissions, which occurred because $2.9 million of total
revenues for 1995, as compared to none for 1994, was received as funding from
Household International, Inc. in connection with the development of VisionPLUS
and not subject to such commissions. Sales and marketing expenses represented
11% and 15% of total revenues for 1995 and 1994, respectively.
RESEARCH AND DEVELOPMENT. Research and development expenses increased 32%
to $2.1 million for 1995 as compared to $1.6 million for 1994 as a result of
additional personnel engaged in software development activities. As a percentage
of total revenues, research and development expenses were 10% for both 1995 and
1994.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
35% to $4.1 million for 1995 from $3.0 million for 1994. As a percentage of
total revenues, general and administrative expenses represented 19% and 19% for
1995 and 1994, respectively. The increase in dollars resulted primarily from
salary expense relating to additional personnel as a result of a higher level of
operations.
WRITE-OFF OF CAPITALIZED SOFTWARE. The $2.1 million write-off in 1995 was
due principally to the determination that capitalized software costs related to
the Company's CardPac product were no longer of value. In 1995, the Company
ceased licensing CardPac.
INTEREST EXPENSE, NET. Interest expense, net increased 41% to $0.3 million
for 1995 compared to $0.2 million for 1994 primarily because interest income
decreased $78,000 as a result of lower average cash balances during 1995
compared to 1994.
INCOME TAXES. The provision for income taxes was $0.4 million in both 1995
and 1994. The difference between the 1995 tax expense calculated at the
statutory rate and the amounts recorded in the financial statements was
primarily related to foreign withholding taxes and expiring foreign tax credits.
The difference between the 1994 tax expense calculated at the statutory rate and
the amounts recorded in the financial statements was primarily related to the
tax effect of losses incurred at a foreign subsidiary with no tax benefit.
QUARTERLY RESULTS OF OPERATIONS
The following tables present unaudited quarterly consolidated statements of
operations data for each of the seven quarters ended September 30, 1997. This
information has been prepared on the same basis as the audited financial
statements appearing elsewhere in this Prospectus and includes all adjustments,
consisting only of normal recurring adjustments that the Company considers
necessary for a fair presentation of the information when read in conjunction
with the Consolidated Financial Statements and Notes thereto appearing elsewhere
in this Prospectus.
29
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1996 1996 1996 1996 1997 1997 1997
----------- ----------- ----------- ----------- ----------- --------- ---------
<CAPTION>
(IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA
Revenues
License............................... $ 1,101 $ 4,395 $ 2,346 $ 5,524 $ 948 $ 2,758 $ 6,417
Services.............................. 2,723 3,537 3,620 3,678 4,323 5,009 4,996
----------- ----------- ----------- ----------- ----------- --------- ---------
Total revenues.......................... 3,824 7,932 5,966 9,202 5,271 7,767 11,413
Cost of revenues
License............................... 254 834 720 1,127 613 1,135 1,324
Services.............................. 2,414 1,734 2,192 2,616 2,992 3,947 3,963
----------- ----------- ----------- ----------- ----------- --------- ---------
Total cost of revenues.................. 2,668 2,568 2,912 3,743 3,605 5,082 5,287
Gross margin............................ 1,156 5,364 3,054 5,459 1,666 2,685 6,126
Operating expenses
Sales and marketing................... 489 862 840 1,079 872 968 1,580
Research and development.............. 1,120 1,638 1,861 2,325 2,483 2,474 2,996
General and administrative............ 680 903 863 1,781 1,271 1,606 1,637
Non cash compensation................. -- -- -- -- 1 2 3,719
----------- ----------- ----------- ----------- ----------- --------- ---------
Total operating expenses................ 2,289 3,403 3,564 5,185 4,627 (5,050) 9,932
----------- ----------- ----------- ----------- ----------- --------- ---------
Income (loss) from operations........... (1,133) 1,961 (510) 274 (2,961) (2,365) (3,806)
Interest expense, net................... 51 29 22 48 15 20 42
----------- ----------- ----------- ----------- ----------- --------- ---------
Income (loss) before income taxes....... (1,184) 1,932 (532) 226 (2,976) (2,385) (3,848)
Income tax expense (benefit)............ (812) 1,325 (365) 155 -- 277 --
----------- ----------- ----------- ----------- ----------- --------- ---------
Net income (loss)....................... $ (372) $ 607 $ (167) $ 71 $ (2,976) $ (2,662) $ (3,848)
----------- ----------- ----------- ----------- ----------- --------- ---------
----------- ----------- ----------- ----------- ----------- --------- ---------
PERCENT OF TOTAL REVENUES
Revenues
License............................... 28.8% 55.4% 39.3% 60.0% 18.0% 35.5% 56.2%
Services.............................. 71.2 44.6 60.7 40.0 82.0 64.5 43.8
----------- ----------- ----------- ----------- ----------- --------- ---------
Total revenues.......................... 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of Revenues
License............................... 6.6 10.5 12.1 12.3 11.6 14.6 11.6
Services.............................. 63.2 21.9 36.7 28.4 56.8 50.8 34.7
----------- ----------- ----------- ----------- ----------- --------- ---------
Total cost of revenues.................. 69.8 32.4 48.8 40.7 68.4 65.4 46.3
Gross margin............................ 30.2 67.6 51.2 59.3 31.6 34.6 53.7
Operating expenses
Sales and marketing................... 12.8 10.9 14.1 11.7 16.5 12.4 13.9
Research and development.............. 29.3 20.6 31.2 25.3 47.1 31.9 26.2
General and administrative............ 17.8 11.4 14.5 19.3 24.1 20.7 14.3
Non cash compensation................. -- -- -- -- -- -- 32.6
----------- ----------- ----------- ----------- ----------- --------- ---------
Total operating expenses................ 59.9 42.9 59.8 56.3 87.7 65.0 87.0
----------- ----------- ----------- ----------- ----------- --------- ---------
Income (loss) from operations........... (29.7) 24.7 (8.6) 3.0 (56.1) (30.4) (33.3)
Interest expense, net................... 1.3 0.4 0.4 0.5 0.3 0.3 0.4
----------- ----------- ----------- ----------- ----------- --------- ---------
Income (loss) before income taxes....... (31.0) 24.3 (9.0) 2.5 (56.4) (30.7) (33.7)
Income tax expense (benefit)............ (21.3) 16.6 (6.2) 1.7 0.0 3.5 0.0
----------- ----------- ----------- ----------- ----------- --------- ---------
Net income (loss)....................... (9.7)% 7.7% (2.8 )% 0.8% (56.4 )% (34.2)% (33.7)%
----------- ----------- ----------- ----------- ----------- --------- ---------
----------- ----------- ----------- ----------- ----------- --------- ---------
</TABLE>
The Company has experienced significant fluctuations in its quarterly
operating results and anticipates that such fluctuations will continue for the
foreseeable future. The Company's revenues in any quarter are typically derived
from non-recurring, large license fees and related service fees received from a
relatively small number of customers. The Company's most significant customers
generally vary from quarter to quarter. The Company expects that sales to a
limited number of customers will continue to account for a
30
<PAGE>
significant percentage of its revenue in any quarter for the foreseeable future.
See "Risk Factors-- Fluctuations in Quarterly Results," "--Dependence on Single
Product; Conversion Risk; Dependence on Financial Institution Industry; Customer
Concentration" and "Business--Customers." As a result, at the Company's current
revenue level, each sale or failure to make a sale can have a material effect on
the Company. There can be no assurance that the Company will be able to achieve
a level of revenues or rate of growth in any future period commensurate with its
level of expenses. The Company's expense levels are based in part on
expectations of future revenue levels and demands for its software and services
and are fixed to a large extent in the short term. As a result, the Company may
be limited in its ability to reduce spending in a quarter to compensate for an
unexpected revenue shortfall in such a short-term time period. See "Risk
Factors--Fluctuations in Quarterly Results" and "--Possible Volatility of Market
Price."
LIQUIDITY AND CAPITAL RESOURCES
Since January 1, 1994, the Company has satisfied its cash requirements
principally through cash flows from operations and borrowings from an investment
fund and from an affiliate, Intelligent Systems Corporation ("ISC"). In
addition, the Company issued shares of Common Stock to ISC in exchange for the
cancellation of certain long-term indebtedness and accrued interest and accounts
payable. See "Certain Transactions."
Net cash provided by (used in) operating activities was $0.7 million, $3.4
million and $3.5 million for 1994, 1995 and 1996, respectively, and $1.9 million
and $(1.5) million for the nine months ended September 30, 1996 and 1997,
respectively. The $3.4 million decline in net cash provided by operating
activities for the nine months ended September 30, 1997 as compared to the nine
months ended September 30, 1996 resulted primarily from a decline of $9.6
million in operating results partially offset by an increase of $3.7 million in
non cash compensation and by an increase in accounts payable of $1.3 and an
increase in other liabilities of $2.1 million. The $2.7 million increase in net
cash provided by operating activities for 1995 as compared to 1994 resulted
principally from an increase in earnings which included $2.4 million in non-cash
amortization of software development costs due principally to the write-off of
amounts previously capitalized related to CardPac.
Net cash used in investing activities was $3.3 million, $2.6 million and
$1.8 million for 1994, 1995 and 1996, respectively, and $1.0 million and $1.6
million for the nine months ended September 30, 1996 and 1997, respectively. The
net cash used in investing activities in all such periods was used principally
for capitalized software development costs and purchases of furniture and
equipment to support the Company's growing employee base. Net cash provided by
financing activities was $0.6 million for 1994 and net cash used in financing
activity was $44,000, $0.9 million and $0.8 million for 1995, 1996 and the nine
months ended September 30, 1996. Net cash provided by financing activity for the
nine months ended September 30, 1997, was $2.7 million. In 1994 and 1995, the
Company borrowed $1.0 million and $0.4 million, respectively, from ISC. The $0.8
million increase in net cash used in financing activities from 1995 to 1996
resulted from decreased borrowings and from the repayment of $0.4 million of
indebtedness to ISC. See "Certain Transactions."
The Company's capital commitments consist primarily of capital leases and
noncancelable operating leases for office space, furnishings and equipment. At
September 30, 1997, the Company's commitments under capital leases and
noncancelable operating leases with terms in excess of one year totaled $0.5
million for the three months ended December 31, 1997 and $2.2 million, $2.0
million, $1.0 million and $0.6 million for 1998, 1999, 2000 and 2001,
respectively. In connection with the Company's expansion of its international
sales efforts, in 1997 it has leased office space and hired 11 technical support
personnel in Costa Rica, Singapore and Australia as of October 31, 1997. The
Company may lease office space and hire technical support personnel in South
Africa prior to the end of 1998. The capital costs associated with the existing
international locations and possible South African site are not expected to
exceed $500,000. The technical support personnel acquired are expected to
increase labor, travel and related costs in 1997 and subsequent periods.
31
<PAGE>
The Company is also committed to pay certain royalties to Household
International, Inc. See Note 5 of Notes to Consolidated Financial Statements.
Upon the completion of the offering, the Company intends to make a payment to
Household from the net proceeds of the sale of shares of Common Stock offered
hereby by the Company of $5.1 million less the amount of royalties paid by the
Company to Household prior to such settlement payment, in settlement of all
current and future royalty obligations to Household pursuant to the agreement
providing for such royalty payments.
The Company has $4.0 million outstanding at September 30, 1997 under a term
loan agreement, which matures September 2002, with Sirrom Capital Corporation,
the payment of which is secured by the Company's assets, which accrues interest
at an annual rate of 13.5%. The principal balance of the loan is due on the
maturity date and interest is due monthly in arrears. The Company intends to
prepay such principal amount and any accrued interest from the net proceeds of
the sale of shares of Common Stock offered hereby by the Company. See "Use of
Proceeds." If the loan is not paid within thirty days of the completion of the
offering, then the warrant issued to Sirrom Capital Corporation in connection
with this loan becomes exercisable for an increasingly higher number of shares
of Common Stock until the loan is paid in full.
As of September 30, 1997, the Company's total liabilities exceeded its total
assets by $5.2 million and current liabilities exceeded current assets by $5.1
million. The Company expects to incur a net loss for 1997. See "Risk
Factors--History of Operating Losses." The Company intends to use a substantial
portion of the net proceeds from the sale of shares of Common Stock offered
hereby by the Company for general corporate purposes, including, among other
things, working capital. See "Use of Proceeds." Included in the Company's
current liabilities was $7.1 million of deferred revenue resulting from customer
prepayments of service fees of $5.5 million and customer payments of license
fees of $1.6 million. The Company had not recognized such deferred revenue as of
September 30, 1997 because certain contingencies to such recognition (including,
in one instance, the customer's acceptance of the software) had not occurred. If
certain services are not performed and such contingencies are not satisfied,
customers may be entitled to, or the Company may be obligated to make, a refund
of some or all of such deferred revenue.
The Company believes the net proceeds of the offering, together with cash
flows from operations, will provide sufficient cash to meet the Company's
anticipated cash requirements for at least the next twelve months.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued a new
accounting pronouncement, SFAS No. 128, "Earnings per Share," which will change
the current method of computing earnings per share. The new standard requires
presentation of "basic earnings per share" and "diluted earnings per share"
amounts, as defined. SFAS No. 128 will be effective for the Company's quarter
and year ending December 31, 1997, and, upon adoption, all prior-period earnings
per share data presented shall be restated to conform with the provisions of the
new pronouncement. Application earlier than the Company's quarter ending
December 31, 1997 is not permitted. The Company has evaluated the impact of
adopting SFAS No. 128 and does not expect restated basic and diluted earnings or
loss per share to be reported upon adoption of SFAS No. 128 to differ from
amounts reported under existing accounting rules for all periods reported by the
Company through June 30, 1997.
On October 27, 1997 the AICPA issued Statement of Position 97-2, "Software
Revenue Recognition" (SOP 97-2). SOP 97-2 clarifies and changes some software
revenue recognition practices and supersedes the existing guidance of SOP 91-1.
SOP 97-2 must be adopted for transactions entered into by the Company beginning
January 1, 1998. The Company has not formally evaluated the impact, if any, of
adopting SOP 97-2.
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<PAGE>
BACKLOG
Backlog, defined as the contract value of executed license and service
agreements minus revenue recognized from those contracts, totaled $10.7 million
as of September 30, 1997. The September 30, 1997 backlog was comprised of $3
million in license fees and $7.7 million in service fees. As of September 30,
1996, the Company's backlog was $9.2 million, comprised of $1.2 million in
license fees and $8 million in service fees. Backlog of license and service fees
is expected to be realized within a period of one year. There can be no
assurance that the contracts included in backlog will actually generate the
specified revenues or that such revenues will be generated within such one-year
period.
33
<PAGE>
BUSINESS
The Company is the world's leading supplier of software that performs
mission-critical credit card transaction processing functions. The Company's
current software product, VisionPLUS, is a customizable software system
consisting of a range of integrated application modules for processing both bank
and retail credit card transactions. VisionPLUS provides the necessary
functionality for processing credit card transactions from application
processing and transaction authorization requests through billing and
collection. The Company licenses its software to banks, finance companies and
retailers that process their own credit card transactions as well as to
third-party processors that process such transactions for others. The services
offered by the Company to its customers include product customization,
installation, training, product maintenance and support and ongoing compliance
with bank card association (Visa, MasterCard and Europay) standards. As of
October 31, 1997, the Company was supporting 105 licensees of VisionPLUS and its
other products in 28 countries which, the Company believes, were processing more
than 100 million accounts. The Company's customers include leading domestic and
international banks, finance companies, retailers and third-party processors
such as Citicorp, GE Global Consumer Finance, Electronic Data Systems,
Spiegel's, Neiman Marcus, Toronto Dominion Bank, Bank of Nova Scotia, ABN Amro
Bank, Household International, Beneficial Finance, The Associates Financial
Services and Whirlpool Financial.
The Company's objective is to leverage its position by building on its
experience as the leading supplier of software for processing credit card
transactions to further strengthen its market position and to expand into
software for other payment transactions and related functions. The Company's
strategy to achieve this objective includes maintaining market-leading products,
expanding product offerings to broaden customer relationships, aggressively
pursuing international markets, developing additional strategic alliances to
help generate sales referrals and for joint marketing programs, increasing the
use of pricing methods that produce recurring revenues, and developing a new
software platform to facilitate the introduction of new products and functions.
INDUSTRY BACKGROUND
Worldwide spending in 1995 for software for processing credit card
transactions was estimated to be $1.2 billion according to the Tower Group. In
addition to these software expenditures, $1.9 billion was spent for hardware and
$2.5 billion for information technology services, including outsourcing
contracts, for a total of $5.6 billion in expenditures in 1995 for credit card
processing information technology, which is expected to grow at a compound
annual rate of 9% from 1995 through 2000, according to the same source.
A majority of the spending on software for processing credit card
transactions is for software developed "in-house" by credit card issuers and
third-party processors who process transactions on behalf of credit card
issuers. In 1995, spending for software and related services for credit and
debit card transaction processing purchased from "outside" vendors, such as the
Company, was estimated by published reports to be $90 million. The Nilson Report
estimates that there were approximately 9,100 issuers of MasterCard and Visa
credit and debit cards worldwide in 1995.
Software for processing credit card transactions on the customer side of the
transaction typically supports functions like application processing, credit
policy implementation, account set-up and maintenance, authorization, customer
service and statement rendering. On the merchant side of the transaction
functions such as account acquisition, risk management, merchant accounting and
settlement, and exceptions and inventory management are supported. This software
is essential to the business of the financial institutions and retailers who are
the principal issuers of credit cards and for third-party processors. In order
to remain competitive and to maintain and expand their customer base, credit
card issuers are increasingly offering a variety of interest rate structures,
credit limits, fee arrangements, and ancillary
34
<PAGE>
features such as co-branding and other promotional programs. These requirements
have significantly increased the demands placed on software for processing
credit card transactions.
Credit card transaction processing is conducted by banks and retailers
either on systems developed internally or acquired from vendors such as the
Company or is provided as a service by third-party processors. The Tower Group
estimates that 54% of credit card transactions in the United States are
processed by third-parties with the balance being processed in-house. Based on
its experience in the marketplace and, a research report from the Tower Group,
the Company believes that outside of the United States, the majority of
processing occurs in-house. Among the factors influencing the decision to
utilize the services of a third-party processor as opposed to processing
in-house are the following:
- COSTS: Economies of scale are important in the credit card processing
business. Therefore, a financial institution or a retailer should have, or
plan to have, a sizable portfolio of accounts to warrant the costs of
staffing and the infrastructure for in-house processing.
- CURRENT INFORMATION TECHNOLOGY INFRASTRUCTURE: If its existing system does
not adequately support its current credit card business, an issuer may
consider outsourcing a reasonable alternative to acquiring the necessary
technology. The experience and abilities of the issuer's system support
staff may also influence a decision to outsource.
- CONTROL: Many credit card issuers prefer to ensure their data integrity
and service levels by processing in-house. This is particularly true
outside of the United States, where most issuers prefer to have complete
control over the direction of their credit card business, the data
captured in their credit card data bases, and the technology that supports
it.
The volume of credit card transactions now occurring worldwide has been made
possible by an electronic transaction processing infrastructure of which
software programs such as those offered by the Company are a mission-critical
component. Historically, financial institutions and third-party processors have
used software developed internally. Today credit card transactions are primarily
electronic and require software protocols that can support huge volumes of
diverse, complex transactions. Furthermore, the interchange associations (Visa,
MasterCard and Europay) update the communications and other interface standards
several times a year and require compliance in order to continue interacting
with their networks. The complexity of the interchange standards, the frequency
of change to them, emerging new requirements (e.g., year 2000 compliance), and
the sheer volume of transactions make it increasingly difficult to continue to
develop software solutions internally. The trend of moving away from internal
development to buying software solutions from outside vendors is already evident
with major credit card issuers such as Citibank.
Software products that serve the credit card processing industry today tend
to be:
- Confined to run on a single platform, in most cases mainframe (e.g. IBM
mainframe)
- Dedicated to a single task (e.g. bank card only, retail card only)
- Designed to handle common tasks in non-integrated ways (e.g. unable to
create reports from multiple modules)
- Difficult and expensive to maintain and upgrade
- Difficult and expensive to operate, requiring large amounts of detailed
training
Based on its marketing discussions with potential customers and management's
analysis of the marketplace, the Company believes that a strong worldwide market
opportunity exists, particularly in the non-U.S. markets, for software solutions
that address the above issues among credit card issuers and third-party
processors.
35
<PAGE>
THE PAYSYS SOLUTION
The Company offers a single, comprehensive, integrated software solution
that can process both bank and retail credit card and consumer loan
transactions. Use of the Company's software and services allows the Company's
customers to conduct transaction processing activities while avoiding the time,
expense and difficulty of developing, maintaining and supporting their own
processing software. The Company's approach to addressing the above issues
related to providing effective payment transaction processing solutions for the
evolving marketplace is as follows:
<TABLE>
<CAPTION>
ISSUE PAYSYS SOLUTION CUSTOMER BENEFIT
- ----------------------------- ----------------------------- -----------------------------
<S> <C> <C>
Multiple Platforms Produce a single-source Customers have the
software product which can flexibility to run the
run equally well on major software on the best-
platforms, from mainframes to available or most
AS/400 to UNIX-based cost-effective platform.
machines.
Lack of Multi-Function Create an integrated product Customers can run more of
Software suite which can be adapted to their operations on a single
meet increasing processing system, reducing acquisition,
requirements. operation and training costs.
Disparate Solutions to Common Build a new component-based Customers can reduce a
Tasks system that constructs variety of internal costs,
specific solutions (e.g. enhance reporting flexibility
fraud management, and offer innovative products
collections) from a set of more quickly and with less
shared building blocks. difficulty.
Difficult and Expensive to Transition to a new software Customers can reduce costs
Maintain and Upgrade system that uses and improve the speed and
object-oriented programming quality with which they can
and repository technology. respond to new market
conditions.
Difficult and Expensive to Develop a software system Customers can operate their
Operate that embodies workflow and software with fewer people
process automation and who can perform multiple
provides a common user functions with less training
interface. and produce more consistent,
higher quality results.
</TABLE>
STRATEGY
The Company's objective is to leverage its position by building on its
experience as the leading supplier of software for processing credit card
transactions to further strengthen its market position and to expand into
software for other payment transactions and related functions. The Company's
strategy to achieve this objective includes the following key elements:
- MAINTAIN PRODUCT LEADERSHIP -- The Company's depth of knowledge and
ongoing development efforts responsive to the requirements of the bank and
retail credit card markets have enabled it to develop market-leading
products. This expertise has also resulted in the development of
VisionPLUS, which, based on sales levels since its introduction, the
Company believes is rapidly becoming the leading solution for processing
both bank and retail credit card transactions. The Company intends to
continue its efforts to increase its depth of knowledge of credit card
transaction processing and to reflect that knowledge in product
enhancements and to leverage such knowledge to develop software for other
types of financial transactions.
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<PAGE>
- EXPAND PRODUCT OFFERINGS TO BROADEN CUSTOMER RELATIONSHIPS -- The Company
intends to continually expand its product and service offerings to its
existing and prospective customers. Currently, the Company is developing
three new application modules to complement and extend the functionality
of VisionPLUS. These new modules, data warehousing, fraud management and
universal message processor, are being designed to provide a significant
benefit over similar products offered by other software vendors and
systems developed internally by users.
- AGGRESSIVELY PURSUE INTERNATIONAL MARKETS -- As a result of continuing
expansion of credit card use, the international financial transaction
processing market is growing rapidly. Therefore, the Company intends to
expand its international marketing efforts in Europe, Asia and South
America, through additional direct sales personnel, sales agents, and
alliance partners.
- FURTHER DEVELOP STRATEGIC RELATIONSHIPS -- The Company has established
strategic relationships for the purpose of generating sales referral and
joint marketing opportunities, obtaining hardware software certification
from appropriate hardware vendors and for specific software development
projects. The Company currently has relationships with Hewlett-Packard
Company, Sun Microsystems, Inc., Fair, Isaac and Company, Incorporated and
Alltel Information Services, Inc. The Company intends to maintain and
expand its existing relationships and to develop new ones.
- INCREASE RECURRING REVENUES -- In order to make its revenues more
predictable, the Company has begun to pursue strategies to increase the
percentage of revenues represented by recurring fees (as opposed to
one-time large license fees). Recently, the Company has begun to license
its software to third-party processors on a monthly usage fee basis and,
to date, there are five agreements structured in this fashion. In
addition, the Company has begun charging annual fees for providing bank
card association compliance services for its customers separately from
maintenance and support fees.
- DEVELOP NEW APPLICATIONS THROUGH NEW SOFTWARE SYSTEM -- The Company
believes that its competitive position in current and future markets will
be enhanced by the use of object oriented technology to facilitate rapid
development, implementation and customization of its software products to
meet customer demands. The Company is developing a new software system
designed to allow the development of payment transaction applications
utilizing a common body of code (a transaction engine) and a set of
business object components without requiring substantial additional code
for each application. The new universal message processor and fraud
management modules currently being developed by the Company are being
developed using this software system and the data warehouse module now
under development incorporates portions of such system.
PRODUCTS
The Company's current product is VisionPLUS, which is used for processing
both bank and retail credit card transactions. The Company's earlier products
were CardPac, for processing bank credit card transactions, and Vision21, for
processing retail credit card transactions.
CARDPAC. The Company believes that its original product, CardPac, which was
introduced in 1983, is currently the most widely-used product worldwide for
processing bank credit card transactions. The Company has licensed CardPac to
customers in North and South America, and it sold to The SEMA Group, S.A. the
right to license CardPac in Western Europe and certain areas in Asia. In 1995,
the Company discontinued granting new licenses for CardPac and it intends to
discontinue the provision of maintenance and support for CardPac after 1998. As
of October 31, 1997, the Company was continuing to support 25 customers using
CardPac. The Company is offering its current CardPac users incentives to
encourage them to purchase VisionPLUS for their processing activities. Through
October 31, 1997, 21 CardPac users (including the ten largest users based on
account volume at the time that VisionPLUS was introduced) have migrated or
agreed to migrate to VisionPLUS.
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<PAGE>
VISION21. The Company believes that its Vision21 product, which was
introduced in 1987, is currently the most widely-used product worldwide for
processing retail credit card transactions. In 1995, the Company discontinued
granting new licenses for Vision21. The Company intends to discontinue
maintenance and support of Vision21 upon distribution of the next release of
VisionPLUS in 1998. Vision21 licensees who are receiving maintenance and support
from the Company will be entitled to receive, for no additional license fee,
those modules of the next release of VisionPLUS affording equivalent
functionality to that of the customer's current Vision21 software. As of October
31, 1997, the Company was continuing to support 19 customers using Vision21.
Through October 31, 1997, 13 Vision21 customers had migrated or agreed to
migrate to VisionPLUS.
VISIONPLUS. The Company's current product, VisionPLUS, combines the
functionality of CardPac and Vision21 for processing both retail credit card and
bank credit card transactions, including transactions generated by co-branded
bank credit cards offering features and benefits similar to those offered by
retail credit cards. As of October 31, 1997, the Company had licensed VisionPLUS
to 50 customers, ten of which were using the product in live production.
The complete VisionPLUS product consists of the following modules:
<TABLE>
<CAPTION>
MODULE FUNCTION
- ------------------------------ -------------------------------------
<S> <C>
Credit Decision Management New account processing
Credit Management System Account financial transactions and
billing
Account Service Management Customer service
Financial Authorization Transaction authorizations
Services
Collection, Tracking and Collection of delinquent accounts
Analysis
Interchange Tracking System Dispute handling
Transaction Management System Transaction formatting and mapping
("TRAMS")
Merchant Banking System Acquisition of transactions from
merchants honoring credit cards
</TABLE>
In addition, VisionPLUS includes four interface suites providing interfaces
to certain third-party products that provide risk management, credit bureau
access, statement formatting and autodial equipment access functions.
The modular structure of VisionPLUS facilitates upgrading by existing
customers without replacement of the entire system. The Company expects to
continually upgrade the VisionPLUS system, and presently three new modules, data
warehousing, fraud management, and universal message processor, are under
development. See "-- Product Development."
The current VisionPLUS modules are written in COBOL. VisionPLUS operates in
IBM mainframe MVS and VSE environments; however, the Company is developing
versions of the product for operation in IBM AS/400 and the Hewlett-Packard and
Sun Microsystems UNIX operating environments. In August 1997, the Company
installed its first AS/400 version and its first Sun Microsytems UNIX version of
VisionPLUS at beta test sites. The Hewlett-Packard version of VisionPLUS is
expected to be generally available in mid-1998.
License fees for VisionPLUS are based upon the product modules and interface
suites included in the system delivered and the number of accounts that the
customer maintains with the product. Each module is separately priced.
Generally, additional license fees are due as the number of accounts processed
using the software crosses certain tiers. The Company does not charge its
customers for maintenance services during the initial agreed-upon warranty
period, which is generally one year. The list initial license fee for a license
of VisionPLUS, including each of the currently available modules and interface
suites, ranges from $800,000 for an installation processing up to 100,000
accounts to $4,000,000 for an installation processing
38
<PAGE>
up to 20 million accounts. While the Company has licensed certain of its modules
on an individual basis, generally a license is for a complete system, including
five or more modules.
SERVICES
To provide its customers with the benefit of the Company's in-depth
knowledge of credit card transaction processing and the credit card industry,
the Company provides services in connection with the customization,
installation, use and maintenance of the Company's software. The services
provided by the Company are:
<TABLE>
<CAPTION>
CUSTOMIZATION In connection with installation, customers generally require adaptations
of the Company's software to integrate it with other software used by
those customers or to add additional features. The Company also offers
consulting that involves an analysis of customers' existing systems and
requirements and the determination of the extent and nature of required or
desirable customizations. The extent to which a particular customer
utilizes customization services varies according to the needs of the
customer.
<S> <C>
INSTALLATION The Company offers assistance with the installation of the software, which
generally involves project management, on-site installation services,
assistance with conversion from existing systems and assistance with
testing and quality assurance.
TRAINING The Company provides training services, both at its offices and at
customer sites, including the provision of trainers, training materials,
test systems and various other forms of educational support to customer
employees.
MAINTENANCE AND The Company offers maintenance and support services for each of its
SUPPORT installed products, although the Company intends to discontinue
maintenance and support for CardPac and Vision21 after 1998. Support is
provided by means of a telephone service center through which the Company
provides response to problem reports, as well as various forms of training
assistance. Maintenance services also include periodic enhancements and
upgrades to licensed products. The Company currently provides maintenance
and support services from its Maitland, Florida and Dublin, Ireland
offices. The Company is in the process of establishing maintenance and
support facilities in Melbourne, Australia and Singapore.
COMPLIANCE The provision of compliance services is unique to the bank credit card
industry. These services consist of periodic upgrades to the Company's
software to maintain compliance with interchange association (Visa,
MasterCard and Europay) standards. The standards are revised several times
each year, differ among major associations and may differ on a regional
basis within a given association. Substantially all the Company's
customers involved in processing bank credit cards purchase compliance
services.
</TABLE>
After the expiration of an agreed-upon initial warranty period, which is
generally one year, the Company typically charges an annual fee for maintenance
services equal to a percentage of the license fee, and, with respect to
VisionPLUS, a separate annual fee for compliance services. The Company generally
seeks to obtain a three-to-five year commitment from the customer for such
maintenance and support and compliance services. After this three-to-five year
period, such services are provided, at the request of the customer, on a
year-to-year basis. With regard to professional services, customers may purchase
such services in hourly blocks or on a per hour basis.
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<PAGE>
PRODUCT DEVELOPMENT
The Company's product development efforts are focused on completion of the
Hewlett-Packard and Sun Microsystems UNIX versions of VisionPLUS, the next
release of VisionPLUS, new application modules for VisionPLUS consisting of data
warehouse, fraud management and universal message processor, and a new software
platform for use in developing future products. Product development is conducted
by the Company's software development and customer support staff. As of October
31, 1997, the Company's software development and customer support staff
consisted of 265 full-time employees and 64 independent contractors. The
Company's total product development expenditures were $1.6 million, $2.1 million
and $6.9 million in 1994, 1995 and 1996, respectively and $4.6 million and $8.2
million for the nine months ended September 30, 1996 and 1997, respectively.
In August 1997, the Company installed at two customer sites for beta testing
versions of VisionPLUS for operation on the Sun Microsystems UNIX and the IBM
AS/400 platforms. The Company believes that these versions of VisionPLUS will be
generally available in 1998. The Company is continuing the development of a
version of this product for operation in the Hewlett-Packard UNIX environment.
A release of VisionPLUS is being developed to provide enhanced
functionality, including certain additional international capabilities. This
release is currently scheduled for delivery in mid-1998.
The three application modules currently under development are:
DATA WAREHOUSE MODULE. The data warehouse module is being designed to
permit a customer to extract customer and account data from VisionPLUS,
normalize and manipulate the data to the customer's individual needs and
facilitate portfolio and demographic analysis and reporting. The module is
being designed to enable customers to perform data mining, scheduled
reporting and ad hoc queries utilizing relational database technology and
data manipulation facilities. This module has not been installed for beta
testing, but general release is currently scheduled for early 1998.
FRAUD MANAGEMENT MODULE. In cooperation with Fair, Isaac and Company,
Incorporated, the Company is developing a fraud management module for
VisionPLUS, which includes interface software to support operation with
Fair, Isaac's fraud detection software. This module is being designed to
support automated workflow case management to allow users to monitor and
manage suspicious and fraudulent activity and to provide configurable
routing schemes, dynamic queuing, and management reporting delivered on a
scalable, flexible operating platform. This module has not been installed
for beta testing, but general release is currently scheduled for early 1998.
UNIVERSAL MESSAGE PROCESSOR MODULE. The Company is in an early stage of
developing a module for transaction mapping and formatting to replace the
VisionPLUS TRAMS module which the Company markets pursuant to a license
agreement with a third party that requires the payment of royalties. This
new module is being designed to provide high-volume, real-time processing
for financial and non-financial data.
The three new modules under development share a common set of components and
core modules, which are being designed to meet the goals of the Company's
product strategy. This approach is intended to enable new modules to run on all
currently supported platforms with the addition of Windows NT. A major objective
of the new system is to enable customers to enjoy the benefits of modern
computing elements (GUI, Web, DBMS, etc.), while avoiding technical
obsolescence. The system under development is being designed with the intention
of incorporating the following structural components:
<TABLE>
<CAPTION>
<S> <C>
</TABLE>
40
<PAGE>
<TABLE>
<S> <C>
DBB ENGINE New modules under development are being built using a software
"engine" that the Company calls dbb. Dbb will provide services to
applications while they run, which will allow applications to
benefit from advanced workflow process automation and the
up-to-date versions of database management systems, networked
parallel computers, graphical user interfaces, etc., without
having to be re-written specifically for those systems. Dbb will
enable an application to be delivered for a small, inexpensive
computer running Windows NT and, with changes in configuration
parameters, it will run the same application on a large,
distributed network of powerful machines serving thousands of
directly connected users, or millions of users via the Internet.
COMMON APPLICATION All the new modules will be based on common application components
COMPONENTS ("CAC"). CAC's are collections of object components built using
the dbb engine. Each will define functionality that is required by
more than one application. Any one or more components will not by
themselves constitute a complete application. Examples are
interchange message definitions, account management, work
management, etc. The use of CAC's will enable applications to
cross normal departmental boundaries, enhancing quality and
uniformity while reducing costs. Enhancements made to dbb or to
CAC's benefit all dbb applications.
DBB APPLICATIONS Dbb applications will be complete, useable applications defined by
dbb entries, optionally also incorporating one or more CAC's or
custom code written in a standard computer language such as C++.
Examples are authorization processing, new application processing,
fraud detection and resolution, etc. Dbb applications can support
large numbers of users and large transaction volumes with
collections of inexpensive computers. They are less expensive to
purchase and install, less expensive to upgrade, easier to change,
and more efficient to operate than systems built using other
technology.
</TABLE>
Because of the complexity of credit card processing software in general and
the difficulty of accurately predicting the effort required to accomplish the
Company's product development objectives, the Company's product versions for new
hardware platforms, new release and new module development efforts are subject
to significant technical risk. Furthermore, complex software products such as
those currently being developed by the Company may be subject to delays,
undetected errors or compatibility problems upon their introduction or
thereafter. There can be no assurance that the Company will not encounter
difficulties in the completion of versions of VisionPLUS for operation in
environments other than mainframes, development of the next release of
VisionPLUS or the development of new software modules. These difficulties could
delay or prevent the successful and timely development, introduction and
marketing of these planned products. Moreover, even if such planned products are
developed and introduced, there can be no assurance that there will be a
significant market for such products or that the products will achieve any
significant degree of market acceptance. Failure to release these planned
products on a timely basis or failure of these products, when released, to
achieve significant market acceptance would have a material adverse effect upon
the Company's business, financial condition and results of operations. See "Risk
Factors--Technological Change; Evolving Industry Standards; Dependence on New
Products" and "--Application of Products to New Platforms."
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<PAGE>
Several software programs incorporated, or to be incorporated, in the
Company's products are owned by third parties and licensed to the Company.
Currently, the Company markets TRAMS, the transaction mapping and formatting
module of VisionPLUS, pursuant to a worldwide non-exclusive license from CCN,
Inc. Pursuant to licenses with suppliers, the Company will incorporate
third-party software programs into its AS/400 and Sun Microsystems and
Hewlett-Packard UNIX versions of VisionPLUS that will enable the Company's
software to function in those environments. The data warehouse module now under
development will incorporate certain credit scoring and mapping software
programs pursuant to value-added reseller agreements with the owners of such
programs. In the future, the Company may license or acquire other such products
or products that expand or improve the functionality of the Company's existing
or future products. If one or more of these current or future third-party
vendors were to terminate its relationship with the Company or to materially
increase the cost to the Company of its products, or if a material problem were
to arise in connection with any of the software products licensed from such
third-party, the Company would be required to license an alternative product
from another third-party or attempt to develop a replacement for the function of
the licensed software. The failure of the Company to obtain or develop such
alternative products on a timely basis and at reasonable cost would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Risk Factors--Dependence Upon Third Party
Relationships and Certain Licenses."
CUSTOMERS
As of October 31, 1997, the Company was supporting 65 customers using its
products in live production in 28 countries and had 40 customers in the process
of implementing the Company's software for use in live production. Customers
consist principally of banks, finance companies and retailers that process their
own credit card transactions and third-party processors that process
transactions on behalf of their financial customers. The following table
describes the Company's customers by category and the typical use of the
Company's products by customers in each category, and identifies certain current
licensees of the Company's software in each category.
<TABLE>
<CAPTION>
TYPE OF CUSTOMER EXAMPLES OF LICENSEES TYPICAL USE
- ------------------------------------ ------------------------------------ ------------------------------------
<S> <C> <C>
Banks Citicorp Issuing bank credit cards and
Toronto Dominion servicing merchants that wish to
ABN Amro accept credit card charges
SouthTrust
Banco Santander
Finance Companies GE Global Consumer Finance Issuing bank credit cards and
Household International private label credit cards in
The Associates support of their general lending
Whirlpool Financial programs
Beneficial Finance
Retailers Spiegel's Issuing retail credit cards to
Talbots promote customer loyalty and
Hudson's Bay merchandise sales through creative
Carson Pirie Scott credit plans
Neiman Marcus
Third-Party Processors Electronic Data Systems Processing various aspects of card
Unnisa programs that bank and retail
issuers elect not to process
in-house
</TABLE>
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<PAGE>
In 1996, license, services and maintenance fees paid by Beneficial Finance
accounted for 11% of the Company's revenues. In 1995, such fees paid to the
Company by Household International and The Associates accounted for 15% and 13%,
respectively, of the Company's revenues. In 1994, such fees paid to the Company
by Bell Atlantic Network Services and The Associates accounted for 9% and 16%,
respectively, of the Company's revenues. Generally, the customers contributing
most significantly to the Company's revenues vary from year to year.
Nevertheless, the Company believes that the loss of any principal customer could
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company's five largest customers during the first
nine months of 1997, ABN Amro Bank, Edgar's, Alphacard, Hudson's Bay and Neiman
Marcus, accounted for 41% of the Company's revenues.
COMPETITION
The market for credit card transaction processing solutions is highly
competitive. The Company competes with a number of other providers of credit
card transaction processing software and services, with in-house software
development by potential customers, and with third-party processors that process
credit card transactions for retailers, banks and finance companies. The Company
believes that the principal competitive factors in the market for credit card
transaction processing solutions are (i) provision of a modifiable, high
capacity reliable system, (ii) an established presence in the industry, (iii)
price and potential cost savings, and (iv) control of the process by the issuer.
Processing of credit card transactions is either handled in-house by the
card issuer or is outsourced to a third-party processor. In marketing its
products and services, the Company competes with other vendors of software
solutions and with third-party processors.
The Company's principal competitors offering software in the industry
include Computer Sciences Corporation (Hogan Systems) and FBS Software, a
wholly-owned subsidiary of Equifax, Inc. Both Computer Sciences Corporation and
FBS offer bank credit card processing products. In Western Europe and certain
areas in Asia, the Company competes with The SEMA Group, S.A., one of the
Company's licensees of CardPac software, which markets and supports versions of
CardPac modified for use in Europe and Asia. In addition, there are a number of
other companies that offer products with credit card transaction processing
applications.
In marketing its software, the Company also competes with companies that
offer third-party processing services. To the extent that such third-party
processors do not use the Company's software in their operations, they compete
for the same business as the Company by offering an alternative to current and
potential customers that the Company does not currently offer. Outside
processors offering service alternatives to the Company's products include First
Data Corporation, Total Systems Services, Inc., Electronic Data Systems
Corporation and a number of others. The Company also competes against in-house
development by a potential customer of its own software solution. The Company
also faces competition from vendors of specialized software that addresses only
the functions desired by certain customers. There are many vendors of such
applications.
Many of the Company's current and potential competitors have significantly
greater financial, technical, marketing and other resources than the Company. As
a result, they may be able to respond more quickly to new or emerging
technologies and changes in customer requirements, or to devote greater
resources to the development, promotion, sale and support of their products than
the Company. Accordingly, it is possible that new or existing competitors may
emerge and rapidly acquire significant market share. If this were to occur, it
would have a material adverse effect on the Company's business, financial
condition and results of operations.
As the Company offers new products in the future, it expects that, in
addition to its current competitors, it will face competition from additional
competitors. See "Risk Factors--Competition."
43
<PAGE>
ALLIANCES
The Company seeks alliances with other vendors of software, hardware or
services to the credit card industry. Such alliances may take various forms,
from coordinated marketing efforts to cooperation with respect to product
development and cross marketing of products by the Company and its alliance
partner. The Company currently maintains alliances with the following:
SUN MICROSYSTEMS, INC. AND HEWLETT-PACKARD COMPANY. The Company has
entered into independent software vendor agreements with Sun Microsystems
and Hewlett-Packard, which provide for working relationships in supporting
VisionPLUS on the computing platforms of these vendors, as well as some
cooperative marketing and lead generation efforts from time to time. The
Company is in the process of porting of VisionPLUS to both the Sun and
Hewlett-Packard UNIX platforms. See "-- Product Development."
FAIR, ISAAC AND COMPANY, INCORPORATED. Fair, Isaac is the leading
provider of risk management software for the financial services industry.
VisionPLUS integrates with Fair, Isaac's credit scoring and bureau access
software and the Company maintains the interface between these products to
ensure that VisionPLUS remains compatible with new releases of these
products. Additionally, Fair, Isaac has funded a portion of the cost of
developing a fraud management module for VisionPLUS plus an interface
designed to permit the module to communicate with Fair, Isaac's fraud
detection product. The Company and Fair, Isaac have agreed to share in the
ownership of and revenues from the sale of the fraud management module and
the interface software which will be marketed by both companies.
ALLTEL FINANCIAL SERVICES. Alltel is a leading provider of core banking
application software and processing services to banks worldwide. The Company
and Alltel have entered into a cooperative marketing agreement to provide
each other with leads and sales referrals.
The Company believes that alliances such as these are necessary to support
its growth and industry penetration plans. The Company intends to seek
additional such alliances as appropriate alliance partners are identified, but
there can be no assurance that the Company will be successful in consummating
any of such alliances or, if any such alliances are consummated, that they or
any existing alliances will be successful in supporting the Company's growth.
SALES AND MARKETING
At October 31, 1997, the Company's sales and marketing organization
consisted of 65 persons. Historically, the Company has licensed its software
through its direct sales force. However, the Company is in the process of
negotiating agreements with potential sales agents in Southeast Asia for the
marketing and sale of its software and services and has entered into several
memoranda of agreement with such agents that provide that such agents will
license the Company's software and pay the Company royalties equal to a
percentage of the sublicense fees received by the agent from their sales of the
Company's software. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations-- Overview" and "Risk Factors--International
Sales."
For 1994, 1995, 1996 and the first nine months of 1997, export sales
represented approximately 6%, 39%, 33% and 46% of the Company's revenues,
respectively. See Note 8 of Notes to Consolidated Financial Statements for
certain financial information concerning the Company's export sales in 1994,
1995 and 1996 and the first nine months of 1997.
The sales cycle begins with the generation of a sales lead or the receipt of
a request for proposal from a prospect. After the lead is qualified, the Company
typically makes a presentation to the buying group, executes a mutual
confidentiality agreement, determines the customer's operating environment,
prepares and presents a sales proposal, conducts one or more
presentations/demonstrations, and, if successful, negotiates a contract and
obtains a commitment from the customer. While the sales cycle varies
substantially from customer to customer, it is typically six to twelve months in
duration.
44
<PAGE>
PROPRIETARY RIGHTS
The Company believes that because of the rapid pace of technological change
in the credit card and software industries, legal protections for its products
are less important to the Company's success than are the knowledge, ability and
experience of the Company's employees and the timeliness and quality of support
services provided by the Company. Nonetheless, the Company regards its software
technology as proprietary and attempts to protect it with a combination of
copyright and trade secret laws, non-disclosure agreements with employees,
consultants, systems integrators and prospective customers, licensing agreements
and other methods of protection. The Company holds no patents on its software
technology. The Company has filed applications to register its marks, PaySys and
VisionPLUS, in the United States and may apply to register those marks in other
jurisdictions or other marks in the future, but there can be no assurance that
it will be able to secure significant trademark or service mark protection for
any mark in any jurisdiction. It may be possible for unauthorized third parties
to copy portions of the Company's products, to reverse engineer the Company's
products, to acquire the Company's know-how regarding the financial transaction
processing industry or software technology or to obtain and use information that
the Company regards as proprietary. There can be no assurance that the Company's
means of protecting its proprietary rights, software technology, know-how or
information will be adequate or that the Company's competitors will not
independently develop similar technology or know-how. The Company's competitive
position may be adversely affected by its inability to protect its proprietary
rights, software technology, know-how or information.
Enforcement of the Company's proprietary rights may be difficult. The laws
of some countries where the Company's software is or may be used may afford the
Company little or no effective protection of its intellectual property. There
can be no assurance that the steps taken by the Company will prevent
misappropriation of its technology or that agreements entered into for that
purpose will be enforceable under the laws of the jurisdictions in which the
software is used. In addition, litigation may be necessary in the future to
enforce the Company's intellectual property rights, to protect the Company's
trade secrets, to determine the validity and scope of the proprietary rights of
others or to defend against claims of infringement or invalidity. Such
litigation, whether successful or unsuccessful, could result in substantial
costs and diversions of resources, either of which could have a material adverse
effect on the Company's business, financial condition and results of operations.
Although the Company believes that its products do not infringe the
proprietary rights of third parties, there can be no assurance that infringement
claims will not be asserted against the Company. Any infringement claims, with
or without merit, could be time-consuming to defend, could result in costly
litigation, could divert management's attention and resources or could require
the Company to enter into royalty or license agreements. There can be no
assurance that such licenses would be available on reasonable terms, if at all,
and the assertion or prosecution of any such claims could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Risk Factors--Dependence on Proprietary Technology; Risk of
Infringement Claims."
EMPLOYEES
As of October 31, 1997, the Company employed 362 persons, including 265 in
software development and customer support, 65 in sales and marketing and 32 in
management, administration and finance. Of the total employees, 346 are employed
in the United States (285 in Maitland, Florida, 54 in Atlanta, Georgia, and 7 in
Westerville, Ohio) and 16 outside of the United States. In addition, the Company
at that date had 68 independent contractors, most of whom were engaged in
product development. None of the Company's employees is represented by a labor
union. The Company has never experienced a work stoppage, and believes that its
employee relations are good.
The Company's success depends to a significant extent upon the continued
service of members of its senior management and other key research, development,
sales and marketing personnel. Accordingly, any
45
<PAGE>
loss of members of its senior management or key research, development, sales and
marketing personnel could have a material adverse effect on the Company's
business, financial condition and results of operations. None of the Company's
employees is subject to an employment agreement with the Company. The Company
believes that its future success will depend upon its ability to attract, train,
motivate and retain highly skilled managerial, research, development sales and
marketing personnel, for whom the competition is intense. In addition,
competitors may attempt to recruit the Company's key employees. There can be no
assurance that the Company will be successful in attracting, training,
motivating and retaining such personnel, and any failure in this regard could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Risk Factors--Dependence on Key Employees; Need
for Qualified Employees."
PROPERTIES
The Company's current sales, administrative, development and service offices
are as follows:
<TABLE>
<CAPTION>
LOCATION LEASE/OWN SQUARE FT. PURPOSE
- ------------------------ ----------- ----------- ---------------------------------------------
<S> <C> <C> <C>
Maitland, Florida Lease 61,659 Sales/Service/Development/Headquarters
Norcross, Georgia Lease 25,000 Development/Service
Melbourne, Australia Lease 3,000 Sales/Service
Westerville, Ohio Lease 2,264 Development
Singapore Lease 1,938 Sales/Service
Dublin, Ireland Lease 1,800 Sales/Service
</TABLE>
The Company's corporate headquarters are located in Maitland, Florida, in a
leased facility occupied under a lease expiring June 30, 2002. The Company
believes its existing facilities and offices and additional space available to
it are adequate to meet its requirements through 1998, but, if necessary,
additional or alternative space will be available on commercially reasonable
terms.
LEGAL PROCEEDINGS
The Company is not a party to any legal proceeding that it believes would
have a material adverse effect on its business, financial condition or results
of operations.
46
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The directors and executive officers of the Company and their ages as of
September 30, 1997 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------------- ----------- -------------------------------------------------
<S> <C> <C>
Stephen B. Grubb................................. 52 President, Chief Executive Officer, Chairman of
the Board
David B. Black................................... 47 Chief Technology Officer
William J. Pearson............................... 50 Chief Financial Officer, Senior Vice President,
Administration, Treasurer and Secretary
Carl E. Caruso................................... 44 Executive Vice President, Operations
Daniel F. Cone................................... 35 Senior Vice President, Sales
Daniel P. Stavros................................ 46 Senior Vice President, Development
Mark A. Thompson................................. 45 Senior Vice President, Business Development
Daniel M. DiDomenico............................. 42 Senior Vice President, Customer Services
Rosalind L. Fisher............................... 50 Director
Edward F. Glassmeyer............................. 56 Director
Patricia M. Helbig............................... 48 Director
J. Leland Strange................................ 56 Director and Vice Chairman
</TABLE>
STEPHEN B. GRUBB has served as Chief Executive Officer and President of the
Company since April 1994, as a director of the Company since 1987 and as
Chairman of the Board of Directors since August 1993. Mr. Grubb has served as a
managing director of Grubb & Williams, Ltd. and GW Investments, Ltd., both
venture capital firms, since 1987. Mr. Grubb holds a B.A. from The Citadel, an
M.B.A. from Emory University and a J.D. from the University of South Carolina.
DAVID B. BLACK has served as the Company's Chief Technology Officer since
March 1996. Mr. Black is also the sole principal of Mentis Research, Inc., a
technology consulting firm that he founded in August 1992. Through Mentis
Research, Inc., Mr. Black served as a consultant to the Company from October
1993 to March 1996. Mr. Black, through Mentis Research, Inc., has also served as
a technology consultant to Oak Investment Partners, a venture capital firm,
since March 1992. Mr. Black holds an A.B. from Harvard University.
WILLIAM J. PEARSON has served as the Company's Chief Financial Officer,
Senior Vice President, Finance and Administration, Treasurer and Secretary since
June 1997. From May 1995 to June 1997, Mr. Pearson was a principal of Chancellor
Management, an investment banking and consulting services firm. From 1989 to
April 1995, Mr. Pearson served as President of Air Quality Sciences, Inc., an
indoor air quality firm co-founded by him. From 1986 to 1989, Mr. Pearson was a
private investor. Mr. Pearson served as the Chief Financial Officer of VideoStar
Connections, Inc., a satellite communications company, from 1982 to 1986, and as
an investment banker with Lehman Brothers, Inc. from 1977 to 1982. Mr. Pearson
holds a B.S. from the University of Kentucky and a M.B.A. from the Harvard
University Graduate School of Business.
CARL E. CARUSO has served as the Company's Executive Vice President,
Operations since September 1997. From March 1995 to August 1997, Mr. Caruso
served as Development Director of the Application Solution Division of Sybase,
Inc., a software development company. From December 1992 to February 1995, Mr.
Caruso served as Development Director of Dun & Bradstreet Software. Mr. Caruso
served as Marketing Manager of Digital Equipment Corporation from 1987 to
November 1992. Mr. Caruso holds a B.S. from the University of Massachusetts at
Lowell.
47
<PAGE>
DANIEL F. CONE has served as the Company's Senior Vice President, Sales
since July 1994. Mr. Cone joined the Company in January 1987 as a sales
representative and served in various sales management capacities from such date
to June 1994. Mr. Cone holds a B.A. from Florida State University.
DANIEL P. STAVROS has served as the Company's Senior Vice President,
Development since June 1997. Mr. Stavros joined the Company in June 1994 upon
the Company's acquisition of the assets of TranSys Corporation, a company owned
by Mr. Stavros and his wife (see "Certain Transactions"), and served as the
Company's Senior Vice President of International Operations/CIO from such date
to May 1997. From December 1992 to May 1994, Mr. Stavros served as President of
TranSys Corporation and from 1989 to November 1992, Mr. Stavros served as
President of CNN Management Systems, Inc. See "Certain Transactions." Mr.
Stavros holds a B.B.A. from Bradley University and a Masters in Accounting and
Finance from Northwestern University.
MARK A. THOMPSON has served as the Company's Senior Vice President, Business
Development since May 1997. From August 1993 to May 1997, Mr. Thompson served as
a Regional Vice President for Product Marketing of Computer Sciences
Corporation, a supplier of core banking software. From 1982 to June 1993, Mr.
Thompson was employed by BankOne Texas Holding Co., Inc., a commercial bank, and
served in various capacities, including as a Senior Vice President from 1985 to
June 1993. Mr. Thompson holds a B.B.A. from the University of Texas at
Arlington.
DANIEL M. DIDOMENICO has served as the Company's Senior Vice President,
Customer Service since June 1997. From December 1996 to May 1997, Mr. DiDomenico
served as the Company's Director of Customer Service. During October and
November, 1996, Mr. DiDomenico served as a consultant for Technical Aid
Corporation, an employee placement firm in the engineering and data processing
industries. From September 1992 to September 1996, Mr. DiDomenico served as
Customer Relations Manager for the petroleum software division of Electronic
Data Systems, and as such was responsible for customer support, implementation
and training. Mr. DiDomenico holds a B.S. from St. John Fisher College and an
M.B.A. from Nova Southeastern University.
ROSALIND L. FISHER has served as a director of the Company since September
1997. Ms. Fisher is presently a private investor and was employed by Visa
U.S.A., Inc. and Visa International, Inc. from 1981 to September 1997 and served
in various capacities, including as Executive Vice President of Visa U.S.A.,
Inc., from 1989 to September 1997, in which capacity she was responsible for the
delivery of system-based services for Visa members in the United States. From
March 1992 to December 1995, Ms. Fisher also served as President of Merchant
Bank Services, a subsidiary of Visa U.S.A., Inc., that provided processing
services to Visa members' merchant customers. From January 1996 to March 1997,
Ms. Fisher served on the board of directors of Vital Processing Services LLC, a
privately-held joint venture owned by Visa U.S.A., Inc. and Total System
Services, Inc. Ms. Fisher holds a B.A. from Smith College.
EDWARD F. GLASSMEYER has served as a director of the Company since October
1997. Since 1978, Mr. Glassmeyer has served as a general partner of Oak
Investment Partners, a venture capital firm that he co-founded in that year. Mr.
Glassmeyer is a director of Aavid Thermal Technologies, Inc., a provider of
thermal management products that dissipate heat from electronic components or
systems, and several privately-held companies in which one of the investment
partnerships managed by Oak Investment Partners is an investor. Mr. Glassmeyer
holds a B.A. from Princeton University and an M.B.A. from Tuck School at
Dartmouth College.
PATRICIA M. HELBIG has served as a director of the Company since September
1997. Ms. Helbig has served as the managing partner of Briarleigh Partners, a
consulting firm focused on strategic, marketing and organizational planning
since April 1997. From 1983 to September 1996, Ms. Helbig was employed by
American Express Company, Inc. and served in various capacities, including as
the Senior Vice President and General Manager of its Retail Industry/Merchant
Division from 1991 to September 1996, in which capacity she was responsible for,
among other things, marketing, sales and relationship development
48
<PAGE>
activities with regard to the American Express credit card. Ms. Helbig holds a
B.S. from New York University and a M.B.A. from the University of Chicago.
J. LELAND STRANGE has served as a director of the Company since August 1993
and as Vice Chairman of the Board of Directors since August 1996. Mr. Strange
has served as President of Intelligent Systems Corporation ("ISC") since 1982
and as its Chairman in 1985. ISC is a publicly-held company with various
operations and investments in technology and healthcare-related companies. Mr.
Strange also serves on the boards of directors of IQ Software Corporation and
Healthdyne Technologies, Inc., as well as several privately-held companies. Mr.
Strange holds a B.S. from Georgia Institute of Technology and an M.B.A. from
Georgia State University.
The Company's Bylaws provide that the number of the Company's directors
shall be between five and nine and that the Board of Directors has the authority
to determine the number of directors and to fill vacancies on the Board of
Directors. The number of directors is presently fixed at five. The directors of
the Company are divided into three classes, as nearly equal in number as
possible, serving staggered terms of three years each. Mr. Glassmeyer and Ms.
Helbig serve in the class whose term expires in 1998, Mr. Grubb and Mr. Strange
both serve in the class whose term expires in 1999 and Ms. Fisher serves in the
class whose term expires in 2000. Upon the expiration of the term of a class of
directors, directors within such class are elected for a three-year term at the
annual meeting of shareholders in the year in which such term expires.
The Board of Directors intends to establish an Audit Committee and a
Compensation and Stock Option Committee by the completion of the offering or as
soon thereafter as is practicable. The Audit Committee will be responsible for
recommending to the Board of Directors the appointment of independent auditors,
reviewing with the auditors the plans and results of the audit engagement,
approving professional services provided by the auditors, reviewing the
independence of the independent public accountants, considering the range of
audit and non-audit fees and reviewing the adequacy of the Company's internal
accounting controls. The Compensation and Stock Option Committee will be
responsible for reviewing the performance of all executive officers, determining
all compensation for such officers and administering the Company's 1995 Stock
Incentive Plan and 1997 Stock Incentive Plan. The Company's Amended and Restated
Bylaws provide that at least two members of each of the Audit Committee and the
Compensation and Stock Option Committee shall be persons who are not officers or
employees of the Company and who do not have a relationship with the Company
that, in the opinion of the Board of Directors, would interfere with the
exercise of independent judgment. The Board of Directors may from time to time
establish such other committees as circumstances warrant. Such committees will
have such authority and responsibility as is delegated by the Board of
Directors.
Executive officers of the Company are appointed by and serve at the
discretion of the Board of Directors. There are no family relationships between
any of the directors or executive officers of the Company.
LIMITATIONS OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Amended and Restated Articles of Incorporation and Amended and
Restated Bylaws provide that the Company shall indemnify its directors and
officers to the fullest extent permitted by Florida law, including circumstances
in which indemnification is otherwise discretionary under Florida law. See
"Description of Capital Stock." At present, there is no pending litigation or
proceeding involving a director, officer, employee or agent of the Company where
indemnification will be required or permitted. The Company is not aware of any
threatened litigation or proceeding which may result in a claim for such
indemnification.
Under the Florida Business Corporations Act, a director is not personally
liable for monetary damages to the Company or any other person for acts or
omissions in his or her capacity as a director except in certain limited
circumstances such as certain violations of criminal law and transactions in
which the director derived an improper personal benefit. As a result,
shareholders may be unable to recover
49
<PAGE>
monetary damages against directors for actions that directors take which
constitute negligence or gross negligence or which are in violation of the
fiduciary duties of the directors, although injunctive or other equitable relief
may be available to shareholders.
The Company currently intends to obtain insurance covering its executive
officers and directors for claims against them for wrongful acts including those
for which the Company may be required to indemnify them.
COMPENSATION OF DIRECTORS
Prior to the completion of the offering, no director of the Company has
received any compensation for serving in such capacity. Following the completion
of the offering, the Company's Board of Directors intends to begin paying each
director who is not an employee of the Company a quarterly payment of $2,000 and
fees of $1,000 and $500 for each meeting of the Board of Directors and committee
thereof, respectively, attended in person. Directors are reimbursed for their
out-of-pocket expenses incurred in connection with their service on the Board of
Directors. In addition, the Company has agreed to grant an option to purchase
12,000 shares of Common Stock to each of Ms. Fisher, Ms. Helbig, Mr. Glassmeyer
and Mr. Strange. Each such option will be granted upon the completion of the
offering, will become exercisable in three equal annual increments commencing on
the first anniversary of the date of grant and will have an exercise price equal
to the initial public offering price of the Common Stock. Following the
completion of the offering, directors may receive additional discretionary
grants of options to purchase shares of Common Stock under the Company's 1997
Stock Incentive Plan. See "--Stock Incentive Plans."
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION
The following table sets forth certain information regarding the annual
compensation for services in all capacities to the Company for the year ended
December 31, 1996, with respect to the Company's Chief Executive Officer and the
Company's other executive officers whose total salary and bonus for 1996
exceeded $100,000 (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
-------------------
AWARDS
-------------------
ANNUAL COMPENSATION SECURITIES
NAME AND ------------------------ UNDERLYING ALL OTHER
PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS(#) COMPENSATION ($)(1)
------------------ ----------- ----------- ------------------- -------------------
<S> <C> <C> <C> <C>
Stephen B. Grubb
President, Chief Executive
Officer and Director........................... $ 150,000 $ 150,000(2) 633,025(3) $ 1,668
David B. Black (4)
Chief Technology Officer....................... $ 112,500 $ 25,000 823,255(3) $ 1,061
Daniel F. Cone
Senior Vice President, Sales................... $ 100,000 $ 87,952(5) 65,000 $ 1,335
Daniel P. Stavros
Senior Vice President, Development............. $ 100,000 -- -- $ 1,112
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
50
<PAGE>
(FOOTNOTES FOR PRECEDING PAGE)
- ------------------------------
(1) Represents contributions by the Company under its 401(k) Profit Sharing Plan
on behalf of the Named Executive Officers.
(2) Consists of discretionary cash bonuses paid to Mr. Grubb of $50,000 in 1996
that was earned in 1995 and of $100,000 in 1997 that was earned in 1996.
(3) Includes a warrant to purchase 552,055 shares of Common Stock granted to
each of Mr. Grubb and Mr. Black in March 1996. In August 1997, the Company
and each of Mr. Grubb and Mr. Black agreed to amend each such person's
warrant to fix the exercise price at $4.80 per share, to provide that such
warrants were immediately exercisable and to restrict the transfer of shares
of Common Stock acquired upon exercise until the earlier of the achievement
of certain product-related milestones or February 2003. See Note 12 of Notes
to Consolidated Financial Statements.
(4) Mr. Black's employment by the Company commenced in March 1996, prior to
which date he provided consulting services to the Company. The compensation
shown does not include amounts paid by the Company to Mr. Black for such
services. See "Certain Transactions."
(5) Consists of sales commissions paid to Mr. Cone of $34,329 in 1996 that were
earned in such year and of $17,011 in 1996 that were earned in 1995, as well
as a discretionary cash bonus paid to Mr. Cone of $36,612 in 1997 that was
earned in 1996.
STOCK OPTIONS AND WARRANTS
The following table summarizes certain information regarding options and
warrants to purchase Common Stock granted to the Named Executive Officers during
the year ended December 31, 1996. The Company did not grant any stock
appreciation rights in 1996.
51
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE
AT ASSUMED ANNUAL
RATES
OF STOCK PRICE
APPRECIATION FOR
OPTION
INDIVIDUAL GRANTS TERM (2)
------------------------------------------------------------ ---------------------
<S> <C> <C> <C> <C> <C> <C>
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS/
UNDERLYING WARRANTS
OPTIONS/ GRANTED TO
WARRANTS EMPLOYEES EXERCISE OR EXPIRATION
NAME GRANTED IN FISCAL YEAR BASE PRICE(1) DATE 5% 10%
- -------------------------- ----------- ----------------- --------------- ----------- --------- ----------
Stephen B. Grubb.......... 552,055(3) 34.32% (3) 2/28/03 -- --
80,970(4) 5.03 $ 0.80 3/1/06 $ 40,737 $ 103,236
David B. Black............ 552,055(3) 34.32 (3) 2/28/03 -- --
80,970(4) 5.03 0.80 3/1/06 40,737 103,236
190,230(4) 11.82 0.80 3/1/06 95,707 242,542
Daniel F. Cone............ 65,000(4) 4.04 0.80 11/1/06 32,703 82,875
</TABLE>
- ------------------------
(1) The exercise price of the options granted was the fair market value of the
Common Stock on the date of grant as determined by the Board of Directors.
(2) The dollar amounts shown as potential realizable values assumes that the
market price of the Common Stock appreciates at cumulative annual rates of
5% and 10% over the term of the option or warrant from the date of grant.
The assumed rates of 5% and 10% were established by the Securities and
Exchange Commission and are not intended to forecast possible future
appreciation of the Common Stock.
(3) Each warrant originally became exercisable, subject to continued employment,
upon the occurrence of certain product-related milestones at an exercise
price per share equal to $50.0 million divided by the number of shares of
Common Stock then outstanding on a fully diluted basis. In August 1997, each
of Mr. Grubb and Mr. Black agreed to amend each such person's warrant to fix
the exercise price at $4.80 per share, to provide that such warrants were
immediately exercisable and to restrict the transfer of shares of Common
Stock acquired upon exercise until the earlier of the achievement of certain
product-related milestones or February 2003. See Note 12 of Notes to
Consolidated Financial Statements.
(4) Granted pursuant to the Company's 1995 Stock Option Plan and intended to
qualify as incentive stock options under Section 422 of the Internal Revenue
Code of 1986, as amended (the "IRC"). Mr. Cone's option becomes exercisable,
subject to continued employment, in equal annual increments on the first,
second and third anniversaries of the date of grant, January 1996. Mr.
Black's option to purchase 190,230 shares of Common Stock is currently
exercisable with respect to 126,820 such shares and becomes exercisable,
subject to continued employment, with respect to the remaining 63,410 such
shares in January 1998. The option of each of Mr. Grubb and Mr. Black to
purchase 80,970 shares of Common Stock will become exercisable upon the
completion of the offering in accordance with the terms of the related stock
option agreement.
52
<PAGE>
The following table summarizes the number and value of unexercised options
held by Named Executive Officers as of December 31, 1996. No Named Executive
Officers exercised any options in the year ended December 31, 1996.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING
UNEXERCISED OPTIONS VALUE OF UNEXERCISED IN-THE-MONEY
AS OF DECEMBER 31, 1996 OPTIONS AS OF DECEMBER 31, 1996(1)
-------------------------------------- --------------------------------------
<S> <C> <C> <C> <C>
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------ ------------------ ------------------ ------------------ ------------------
Stephen B. Grubb.................... 250,000 793,105 $ 575,000 $ 554,415
David B. Black...................... 126,820 696,435 291,686 332,074
Daniel F. Cone...................... 21,670 43,360 49,841 99,659
</TABLE>
- ------------------------
(1) There was no public trading market for the Common Stock as of December 31,
1996. These values have been calculated based on a fair market value of
$3.10 per share on December 31, 1996, as determined by the Board of
Directors, less the per share exercise price. The exercise price of a
warrant to purchase 552,055 shares of Common Stock granted to each of Mr.
Grubb and Mr. Black in 1996 was not fixed as of December 31, 1996 and, as a
result, any value of such warrants is not reflected in the calculation. In
August 1997, the Company and Mr. Grubb and Mr. Black agreed to amend each
such person's warrant to, among other things, fix the exercise price at
$4.80 per share. See Note 12 of Notes to Consolidated Financial Statement.
EMPLOYMENT ARRANGEMENTS
The Company does not have employment agreements with any of its executive
officers. Daniel M. DiDomenico, Mark A. Thompson, William J. Pearson and Carl E.
Caruso were employed by the Company in December 1996, May 1997, July 1997 and
September 1997, respectively. The current base annual salaries of the executive
officers are as follows: Mr. Grubb-$250,000, Mr. Caruso-$165,000, Mr. Black-
$150,000, each of Mr. Pearson, Mr. Cone, Mr. Thompson and Mr. Stavros-$120,000
and Mr. DiDomenico-$100,000. The Company does not have any formal bonus plan for
its executive officers. The Company's executive officers are not entitled to any
payments in connection with a termination of employment or a change in control
of the Company. Pursuant to the Company's 1995 Stock Incentive Plan, the
exercisability of options granted under such plan may be accelerated in the
event of certain changes in control of the Company.
David B. Black is a party to a confidentiality and non-compete agreement
with the Company, dated March 1996, pursuant to which Mr. Black has agreed not
to disclose or use any trade secrets of the Company and not to compete with the
Company during the term of his employment and for two years thereafter within
the geographic areas served by the Company.
STOCK INCENTIVE PLANS
The Company has two plans pursuant to which it may grant options to purchase
shares of Common Stock and other equity-based awards to its employees,
directors, consultants and other individuals providing services to the Company.
1995 STOCK INCENTIVE PLAN
Under the Company's 1995 Stock Incentive Plan (the "1995 Plan"), options to
purchase up to 1,088,750 shares of Common Stock may be granted to employees and
directors of the Company. The 1995 Plan is presently administered by the Board
of Directors. Options intended to qualify as incentive stock options under
Section 422 of the IRC, as well as nonqualified stock options, may be granted
under the 1995 Plan from time to time to purchase such number of shares of
Common Stock as may be determined
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by the Board of Directors. Options are exercisable at such times and subject to
such conditions as the Board of Directors may determine. Any shares as to which
an option expires, lapses or is forfeited, terminated or canceled may become
subject to a new option. The 1995 Plan terminates on February 2005, but the
exercise date of options granted prior to such date may extend beyond such date.
However, in the case of an incentive stock option, the term will be no more than
ten years after the date of grant. The exercise price for an incentive stock
option will not be less than 100% of the fair market value of the Common Stock
on the date of grant and may be less than such fair market value for a
nonqualified option.
As of September 1997, options to purchase an aggregate of 1,080,500 shares
of Common Stock (having a weighted average exercise price of $1.34 per share)
were outstanding under the 1995 Plan. In addition, an option to purchase 1,750
shares of Common Stock, having an exercise price of $.002 per share, was
outstanding under a prior employee benefit plan. See Note 7 of Notes to
Consolidated Financial Statements.
In October 1997, the Board of Directors amended the 1995 Plan to provide
for, among other things, its administration by the Compensation and Stock Option
Committee at such time as such committee is established.
1997 STOCK INCENTIVE PLAN
The Company adopted its 1997 Stock Incentive Plan (the "1997 Plan") in
October 1997, under which a maximum of 411,250 shares of Common Stock may be
issued pursuant to awards granted under the 1997 Plan to provide employees
(including officers and directors), non-employee directors and consultants and
other individuals providing services to the Company an opportunity to own Common
Stock of the Company and to provide incentives for such persons to promote the
financial success of the Company. Awards under the 1997 Plan may be structured
in a variety of ways, including as "incentive stock options," as defined in
Section 422 of the Internal Revenue Code, as amended (the "IRC"), "non-qualified
stock options," shares of Common Stock subject to terms and conditions set by
the Board of Directors ("restricted stock awards"), performance share awards and
stock appreciation rights ("SARs"). Incentive stock options may be granted only
to employees (including officers) of the Company. Nonqualified options,
restricted stock awards, SARs and other permitted forms of awards may be granted
to any person employed by or performing services for the Company, including
non-employee directors and independent contractors. The 1997 Plan terminates in
October 2007.
The 1997 Plan will be administered by the Compensation and Stock Option
Committee of the Board of Directors at such time as such committee is
established, which is authorized, subject to the provisions of the 1997 Plan, to
select the persons to receive awards and to determine the number of shares of
Common Stock subject to an award and the form, terms, condition and duration of
each award. The Compensation and Stock Option Committee is given broad
discretion under the 1997 Plan to accelerate the vesting of options or
restricted stock awards in the event of certain changes in control of the
Company. The Compensation and Stock Option Committee may provide for the
transferability of options to certain immediate family members of an optionee as
provided in the 1997 Plan. The decisions of the Compensation and Stock Option
Committee shall be final and binding upon all parties. As of October 1997, no
awards were outstanding under the 1997 Plan, however, the Company has agreed to
grant an option to purchase 12,000 shares of Common Stock to each of Rosalind L.
Fisher, Patricia M. Helbig, Edward F. Glassmeyer and J. Leland Strange. Each
such option will be granted upon the completion of the offering, will become
exercisable in three equal annual increments commencing on the first anniversary
of the date of grant and will have an exercise price equal to the initial public
offering price.
The exercise price of options granted under the 1997 Plan may not be less
than 100% of the fair market value of the Common Stock on the date of grant (or,
in the case of incentive stock options granted to any person who controls 10% or
more of the Common Stock on such date, 110% of such value) and must be exercised
within 10 years from the date of grant (or, in the case of incentive stock
options granted
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to any person who controls 10% or more of the Common Stock on such date, within
five years from such date). The Compensation and Stock Option Committee may
allow cashless exercises and may allow the exercise price of an option to be
paid in shares of Common Stock owned by the optionee at the time of exercise
having an aggregate fair market value equal to the exercise price of the option.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In 1996, decisions concerning the compensation of the Company's executive
officers were made by the Company's Board of Directors which included Mr. Grubb,
President and Chief Executive Officer of the Company.
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PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of Common Stock as of September 30, 1997, and as adjusted to reflect
the sale of shares of Common Stock offered hereby by (i) each director of the
Company who beneficially owns Common Stock, (ii) each Named Executive Officer of
the Company who beneficially owns Common Stock, (iii) all directors and
executive officers of the Company as a group, (iv) each person known to the
Company to beneficially own more than 5% of the outstanding Common Stock and (v)
the Selling Shareholders. Unless otherwise indicated, shares of Common Stock all
are owned directly and the indicated person has sole voting and investment
power.
<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY BENEFICIALLY
OWNED OWNED AFTER
PRIOR TO OFFERING NUMBER OF OFFERING
------------------ SHARES TO BE ------------------
NAME NUMBER PERCENT OFFERED NUMBER PERCENT
- --------------------------------------------------------------------------- --------- ------- ------------ --------- -------
<S> <C> <C> <C> <C> <C>
Intelligent Systems Corporation(1)......................................... 4,135,330 58.0% 712,500 3,422,830 37.2%
Grubb & Williams, Ltd...................................................... 546,895 7.7 272,270 274,625 3.0
GW Investments, Ltd........................................................ 382,105 5.4 190,230 191,875 2.1
Oak Investment Partners V, Limited Partnership(2).......................... 551,430 7.7 -- 551,430 6.0
Stephen B. Grubb(3)........................................................ 1,938,265 24.2 462,500 1,475,765 14.6
J. Leland Strange(4)....................................................... 4,255,780 59.7 712,500 3,543,280 38.5
Edward F. Glassmeyer(2).................................................... 551,430 7.7 -- 551,430 6.0
David B. Black(5).......................................................... 875,930 10.9 -- 875,930 8.7
Daniel F. Cone(6).......................................................... 50,220 * -- 50,220 *
All directors and executive officers as a group (12 persons)(7)............ 7,671,625 86.1 1,175,000 6,496,625 60.3
Sirrom Investments, Inc.(8)................................................ 187,660 2.6 75,000 112,660 1.2
</TABLE>
- ------------------------
* Less than 1%.
(1) If the Underwriters exercise the over-allotment option in full, Intelligent
Systems Corporation will sell an additional 250,000 shares of Common Stock
in the offering and, in such event, will own 3,172,830 shares of Common
Stock (34% of the outstanding Common Stock) following the offering.
(2) Represents 539,295 and 12,135 shares of Common Stock owned by Oak Investment
Partners V, Limited Partnership and Oak V Affiliates Fund, Limted
Partnership, respectively. Mr. Glassmeyer is a managing member of the
general partner of Oak Investment Partners V, Limited Partnership and a
general partner of Oak V Affiliates Fund, Limited Partnership and disclaims
beneficial ownership of shares of Common Stock owned by such entities except
to the extent of his pecuniary interest therein.
(3) Represents 546,895 and 382,105 shares of Common Stock owned by Grubb &
Williams, Ltd. and GW Investments, Ltd., respectively, of each of which Mr.
Grubb is a managing director, 100,000 shares of Common Stock owned by SBG,
Inc. of which Mr. Grubb is the President and sole shareholder, 11,215 shares
of Common Stock owned by the Steven B. Grubb Issue Trust II of which Mr.
Grubb is sole trustee, an aggregate of 15,025 shares of Common Stock owned
by Mr. Grubb's family members and an aggregate of 883,025 shares of Common
Stock subject to options and warrants that are presently exercisable or will
become exercisable upon the completion of the offering.
(4) Includes 4,135,330 shares of Common Stock owned by Intelligent Systems
Corporation of which Mr. Strange is the President and Chairman of the Board
of Directors.
(5) Includes an aggregate of 875,930 shares of Common Stock subject to options
and warrants that are presently exercisable or will become exercisable upon
the completion of the offering.
(6) Represents 21,670 shares of Common Stock subject to a presently exercisable
option.
(7) Includes an aggregate of 1,780,625 shares of Common Stock subject to options
and warrants that are presently exercisable or will become exercisable upon
the completion of the offering.
(8) Includes 37,660 shares of Common Stock subject to a presently exercisable
warrant held by the parent of Sirrom Investments, Inc.
The business address of Intelligent Systems Corporation and Mr. J. Leland
Strange is 4355 Shackleford Road, Norcross, Georgia 30094, Grubb & Williams,
Ltd. and GW Investments, Ltd. is The Lenox Building, Suite 1790, Atlanta,
Georgia 30326, Mr. Stephen B. Grubb is One Meca Way, Norcross, Georgia 30093 and
Oak Investment Partners V, Limited Partnership and Mr. Edward F. Glassmeyer is
One Gorham Island, Westport, Connecticut 06880.
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CERTAIN TRANSACTIONS
The Company and Intelligent Systems Corporation ("ISC") entered into a loan
agreement dated January 1994, pursuant to which ISC agreed to lend the Company,
from time to time as provided therein, up to $1.0 million and the Company issued
to ISC its promissory note, also dated January 1994, in the principal amount of
$1.0 million. Pursuant to such loan agreement, the Company borrowed $1.0 million
from ISC which amount accrued interest at the prime rate (as defined in such
note) plus 4%. The principal balance of such loan was due July 1995 and accrued
interest was due monthly. In consideration for the loan, the Company granted to
ISC a warrant to purchase 277,605 shares of Common Stock at an exercise price of
$.01 per share, which warrant ISC exercised in August 1997. In addition to
amounts borrowed by the Company pursuant to the loan agreement and related
promissory note, in May 1995, the Company borrowed $300,000 from ISC evidenced
by a promissory note in such amount providing for the accrual of interest on
amounts borrowed at the prime rate (as defined in therein) plus 5%. The
principal balance of such note was payable on demand and accrued interest was
payable monthly. In August 1995, the Company issued 1,552,010 shares of Common
Stock to ISC in exchange for ISC's cancellation of the following indebtedness of
the Company to it or its subsidiaries: $675,000 ($600,000 principal amount and
$75,000 accrued interest) outstanding pursuant to the January 1994 loan
agreement and related promissory note, $308,000 ($300,000 principal amount and
$8,000 accrued interest) outstanding under the May 1995 promissory note and
$259,000 owed to Kase Systems, Inc. a wholly-owned subsidiary of ISC, for the
provision of certain services as discussed below. In addition, in August 1995,
ISC canceled the Company's January 1994 promissory note and the Company issued
to ISC its promissory note in the principal amount of $400,000, representing the
remaining principal balance of the January 1994 note. Amounts outstanding under
such note accrued interest at the prime rate (as defined therein) plus 4%. The
principal balance of such note was due in July 1996 and interest was due
monthly. The Company paid ISC, pursuant to such note, an aggregate of $42,450 in
accrued interest and, in January 1996, the principal amount of $400,000.
From March 1995 to September 1996, Kase Systems, Inc. a wholly-owned
subsidiary of ISC, provided certain software programming services to the Company
pursuant to a verbal arrangement. Pursuant to this arrangement, the Company
incurred an aggregate obligation of $564,700 to Kase Systems. The Company paid
$305,700 of this obligation in cash and Kase Systems canceled the remaining
$259,000 of this obligation in exchange for the Company's issuance of shares of
Common Stock to ISC as discussed above. The fees charged by Kase Systems to the
Company pursuant to this arrangement were based principally upon the cost to
Kase Systems of providing of such programming services. Upon the termination of
this arrangement in September 1996, the Company employed several of the
programmers who had been performing such services.
In August 1997 the Company borrowed $426,999 from ISC, which amount accrued
interest at 14.0% and matured on September 15, 1997. The Company paid ISC the
amount owed under this loan, including $4,575 in interest, on September 29, 1997
from the proceeds of a term loan from Sirrom Capital Corporation. See "Use of
Proceeds."
The Company leases office space located in Norcross, Georgia from Quadram
Corporation ("Quadram"), a wholly-owned subsidiary of ISC, in the same facility
in which ISC's headquarters are located. The Company entered into a sublease
agreement with Quadram dated June 1996 for a term ending May 1997, pursuant to
which the Company agreed to lease certain office space, modular furnishings and
communications services as specified therein for monthly rent (including
utilities, taxes, insurance and maintenance) of $7,969. The sublease agreement
was amended on four occasions during its term to provide for the Company's lease
of additional space, furnishings and services from, and payment of increased
rent to, Quadram. From June 1996 through September 1997, the Company paid
$271,000 in rent to Quadram. The Company and Quadram entered into a new sublease
agreement dated July 1997 for a term ending November 2002 (subject to earlier
termination if Quadram's lease is terminated), pursuant to which the Company
agreed to lease certain office space (19,000 square feet until November 1997 and
25,000 square feet thereafter during the remaining term), as well as certain
modular furnishings and
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communications services as specified therein. The lease provides for monthly
rent (including utilities, taxes, insurance and maintenance) of $23,921 from
July 1997 through November 1997, $25,838 from December 1997 through November
2000 and $26,359 from December 2000 through November 2002, all of which amounts
are subject to adjustment annually to reflect the Company's share of Quadram's
actual costs of certain maintenance and other services provided to the Company
(based on the square feet subleased by the Company). The amount of rent charged
by Quadram to the Company is based principally on the amount of rent paid by
Quadram under the primary lease and the cost to Quadram of providing the
furnishings and services to the Company. J. Leland Strange, a director of the
Company, is an officer, director and holder of more than five percent of the
outstanding capital stock of ISC. Prior to the completion of the offering, ISC
beneficially owned 59.7% of the outstanding Common Stock of the Company. See
"Principal and Selling Shareholders."
Pursuant to an asset purchase agreement dated January 1994, the Company
purchased the assets of TranSys Corporation, a company owned by Daniel J.
Stavros and his wife, that distributed and supported the TRAMS system (included
in VisionPLUS) pursuant to an agreement with CCN Management Systems, Inc. , the
owner of the system. The purchase price for the assets was $350,000, $50,000 of
which was paid in cash and $300,000 of which was paid in the form of a
non-interest-bearing promissory note which was subsequently paid in full. Upon
the completion of the asset purchase, Mr. Stavros became an executive officer of
the Company. In addition, pursuant to a license and distribution agreement also
dated January 1994, the Company acquired from CCN Management Systems, Inc. a
non-exclusive, transferable and perpetual license to sublicense and distribute
the TRAMS software.
In March 1996, David Black transferred and assigned to the Company certain
software and software designs, together with all intellectual property rights
associated therewith, owned by him in consideration of his employment by the
Company. In connection with such transfer, in March 1996, the Company issued to
Mr. Black a warrant to purchase up to 552,055 shares of Common Stock and Mr.
Black entered into a confidentiality and non-compete agreement with the Company.
See "Management--Executive Compensation." Prior to his employment by the
Company, from October 1993 to February 1996, Mr. Black, through his company,
Mentis Research, Inc., provided certain consulting services to the Company.
During this period, the Company paid Mentis Research, Inc. an aggregate of
approximately $148,000 in fees and, in October 1995, issued to Mr. Black a
warrant to purchase 52,675 shares of Common Stock at an exercise price of $0.60
per share. The warrant became exercisable in full over a 24 month period that
ended June 1996.
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DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 30,000,000 shares of
Common Stock, par value $0.01 per share, and 10,000,000 shares of Preferred
Stock, par value $0.01 per share (the "Preferred Stock"). As of September 30,
1997, 7,130,075 shares of Common Stock were issued and outstanding and were held
of record by 84 shareholders and 2,284,945 shares of Common Stock subject to
options and warrants to acquire Common Stock were held by 79 option and warrant
holders. At that date there were no outstanding shares of Preferred Stock or
options or other rights to acquire shares of Preferred Stock.
COMMON STOCK
The Company is authorized to issue up to 30,000,000 shares of Common Stock.
Holders of Common Stock are entitled to receive ratably such dividends as may
from time to time be declared by the Board of Directors of the Company out of
funds legally available therefor. Holders of Common Stock are entitled to one
vote per share on all matters on which the holders of Common Stock are entitled
to vote, and do not have any cumulative voting rights. Holders of Common Stock
have no preemptive, conversion, redemption or sinking fund rights. In the event
of a liquidation, dissolution or winding up of the Company, holders of the
Common Stock are entitled to share ratably in the assets of the Company, if any,
remaining after the payment of all debts and liabilities of the Company and the
liquidation preference of any outstanding class or series of Preferred Stock.
The outstanding shares of Common Stock are, and the shares of Common Stock
offered by the Company hereby when issued will be, fully paid and nonassessable.
The rights, preferences and privileges of holders of Common Stock are subject to
any series of Preferred Stock which the Company may issue in the future as
described below.
PREFERRED STOCK
The Company is authorized to issue up to 10,000,000 shares of Preferred
Stock. The Board of Directors has the authority to issue Preferred Stock in one
or more series and to fix the number of shares constituting any such series, the
voting powers, designations, preferences and other rights and qualifications,
limitations or restrictions thereof, including the dividend rights, dividend
rate, terms of redemption, redemption price or prices, conversion and voting
rights and liquidation preferences of the shares constituting any series,
without any further vote or action by the shareholders of the Company. The
issuance of Preferred Stock by the Board of Directors could adversely affect the
rights of holders of Common Stock. For example, issuance of Preferred Stock
could result in a series of securities outstanding that would have preferences
over the Common Stock with respect to dividends and in liquidation and that
could (upon conversion or otherwise) enjoy all the rights appurtenant to Common
Stock.
The authority possessed by the Board of Directors to issue Preferred Stock
could potentially be used to discourage attempts by others to obtain control of
the Company through merger, tender offer, proxy or consent solicitation or
otherwise by making such attempts more difficult to achieve or more costly. The
Board of Directors may issue Preferred Stock without stockholder approval and
with voting rights that could adversely affect the voting power of holders of
Common Stock. There are currently no agreements or understandings regarding the
issuance of Preferred Stock, and the Board of Directors has no present intention
of issuing any shares of Preferred Stock.
CERTAIN PROVISIONS OF THE ARTICLES AND BYLAWS
The Company's Amended and Restated Articles of Incorporation ("Articles")
and Amended and Restated Bylaws ("Bylaws") contain certain provisions, described
below, that could delay, defer or prevent a change in control of the Company if
the Board determines that such a change in control is not in the best interests
of the Company and its shareholders, and could have the effect of making it more
difficult to acquire the Company or remove incumbent management.
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CLASSIFIED BOARD. Under the Company's Articles and Bylaws, the Board of
Directors of the Company is divided into three classes, with staggered terms of
three years each. Each year the term of one class expires. The Articles provide
that any director may be removed from office, but only for cause by an
affirmative vote of at least two-thirds of the outstanding capital stock
entitled to vote in the election of directors. The Articles also provide that
any vacancies on the Board of Directors shall be filled only by the affirmative
vote of a majority of the directors then in office, even if less than a quorum.
SPECIAL VOTING REQUIREMENTS. The Company's Articles provide that all
actions taken by the shareholders must be taken at an annual or special meeting
of the shareholders or by unanimous written consent. The Articles provide that
special meetings of the shareholders may be called by only a majority of the
directors, the Chairman of the Board of Directors or the holders of not less
than 50% of the Company's outstanding voting shares. Under the Company's Bylaws,
shareholders will be required to comply with advance notice provisions with
respect to any proposal submitted for shareholder vote, including nominations
for elections to the Board of Directors. The Articles and Bylaws of the Company
contain provisions requiring the affirmative vote of the holders of at least
two-thirds of the Common Stock to amend certain provisions thereof.
INDEMNIFICATION AND LIMITATION OF LIABILITY. The Florida Business
Corporations Act (the "Florida Act") authorizes Florida corporations to
indemnify any person who was or is a party to any proceeding (other than an
action by, or in the right of, the corporation), by reason of the fact that he
or she is or was a director, officer, employee or agent of the corporation or is
or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation or other entity, against liability
incurred in connection with such proceeding, including any appeal thereof, if he
or she acted in good faith and in a manner he or she reasonably believed to be
in, or not opposed to, the best interests of the corporation and, with respect
to any criminal action or proceeding, had no reasonable cause to believe his or
her conduct was unlawful. In the case of an action by or on behalf of a
corporation, indemnification may not be made if the person seeking
indemnification is adjudged liable, unless the court in which such action was
brought determines such person is fairly and reasonably entitled to
indemnification. The indemnification provisions of the Florida Act require
indemnification if a director or officer has been successful on the merits or
otherwise in defense of any action, suit or proceeding to which he or she was a
party by reason of the fact that he or she is or was a director or officer of
the corporation. The indemnification authorized under Florida law is not
exclusive, and is in addition to any other rights granted to officers and
directors under the Articles of Incorporation or Bylaws of the corporation or
any agreement between officers and directors and the corporation. A corporation
may purchase and maintain insurance or furnish similar protection on behalf of
any officer or director against any liability asserted against the officer or
director and incurred by the officer or director in such capacity, or arising
out of the status, as an officer or director, whether or not the corporation
would have the power to indemnify him or her against such liability under the
Florida Act. The Company's Articles of Incorporation provide for the
indemnification of directors and executive officers of the Company to the
maximum extent permitted by Florida law and for the advancement of expenses
incurred in connection with the defense of any action, suit or proceeding that
the director or executive officer was a party to by reason of the fact that he
or she is or was a director or executive officer of the Company upon the receipt
of an undertaking to repay such amount, unless it is ultimately determined that
such person is not entitled to indemnification. Under the Florida Act, a
director is not personally liable for monetary damages to the Company or any
other person for acts or omissions in his or her capacity as a director except
in certain limited circumstances such as certain violations of criminal law and
transactions in which the director derived an improper person benefit. As a
result, shareholders may be unable to recover monetary damages against directors
for actions taken by them which constitute negligence or gross negligence or
which are in violation of their fiduciary duties, although injunctive or other
equitable relief may be available. The foregoing provisions of the Florida Act
and the Articles and Bylaws could have the effect of preventing or delaying a
person from acquiring or seeking to acquire a substantial equity interest in, or
control of, the Company.
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AMENDMENTS OF THE ARTICLES AND BYLAWS. Certain provision of the Articles
and Bylaws, including those pertaining to a classified board, special meetings
of shareholders, removal of directors and director liability and
indemnification, may be amended only by the affirmative vote of two-thirds of
the shares of the capital stock of the Company entitled to vote in the election
of directors.
ADVANCE NOTICE PROVISIONS. The Company's Bylaws require advance notice for
shareholder proposals and director nominations.
CERTAIN STATUTORY PROVISIONS
The Florida Act provides for special voting requirements to approve
affiliated transactions unless the transaction falls under one or more
enumerated exceptions (the "Affiliated Transaction Provision"). In September
1997, the Company elected, as permitted by the Florida Act, not to be covered by
either the Affiliated Transaction Provision, which election will become
effective 18 months following such election.
TRANSFER AGENT
The Transfer Agent and Registrar for the Common Stock is American Stock
Transfer & Trust Company, New York, New York.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the offering, there has been no public market for the Common Stock
of the Company. Sales of substantial amounts of shares of the Company's Common
Stock in the public market following the offering, or the perception that such
sales could occur could adversely affect the market price of the Common Stock
prevailing from time to time and could impair the Company's ability to raise
capital in the future through sales of its equity securities at a time and price
which it deems appropriate.
Upon completion of the offering, assuming no exercise of outstanding options
or warrants, the Company will have 9,213,408 shares of Common Stock outstanding.
Of these shares, the 3,333,333 shares of Common Stock sold in the offering will
be freely tradeable without restriction or further registration under the
Securities Act, except that any shares purchased by "affiliates" of the Company,
as that term is defined in Rule 144 ("Rule 144") under the Securities Act
("Affiliates"), may generally only be sold in compliance with Rule 144 described
below. The remaining 5,880,075 shares of Common Stock are "Restricted
Securities" as defined in Rule 144. Restricted Securities may be sold in the
public market only if registered or if they qualify for an exemption from
registration under Rules 144, 144(k) or 701 under the Securities Act, which
rules are summarized below.
SALES OF RESTRICTED SECURITIES
Subject to the provisions of Rule 144(k) under the Securities Act, 91,140
shares will be eligible for immediate sale in the public market that are not
otherwise subject to certain lock-up agreements among certain shareholders of
the Company, including directors, officers and Selling Shareholders and the
Underwriters (the "Lock-Up Agreements"). Beginning 90 days after the offering,
an additional 14,060 shares will become eligible for sale subject to the
provisions of Rule 701 and Rule 144. Beginning 180 days after the offering (or
earlier with the written consent of NationsBanc Montgomery Securities, Inc. in
its discretion), an aggregate of 5,774,875 shares additionally will be available
for sale in the public market upon expiration of Lock-Up Agreements and subject
to the provisions of Rule 144.
In general, under Rule 144 as currently in effect, beginning 90 days after
the effective date of this Prospectus, a person (or persons whose shares are
aggregated) who has beneficially owned Restricted Securities for at least one
year, including a person who may be deemed an Affiliate of the Company, is
entitled to sell, within any three-month period, a number of shares of Common
Stock of the Company that
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does not exceed the greater of one percent of the then-outstanding shares of
Common Stock (approximately 92,134 shares after giving effect to the offering)
and the average weekly reported trading volume of the Company's Common Stock
during the four calendar weeks preceding such sale. Sales under Rule 144 are
subject to certain restrictions relating to manner of sale, notice and
availability of current public information about the Company. In addition, under
Rule 144(k), a person who is not an Affiliate and has not been an Affiliate at
any time during the 90 days preceding a sale, and who has beneficially owned
shares for at least two years, would be entitled to sell such shares immediately
following the offering without regard to the volume limitations, manner of sale
provisions or notice or other requirements of Rule 144. After the 180-day
lock-up period 1,344,320 shares held by non-Affiliates will be available for
sale in the public market under Rule 144(k). In meeting the one- and two-year
holding periods described above, a holder of Restricted Securities can include
the holding periods of a prior owner who was not an Affiliate. The one- and
two-year holding periods described above do not begin to run until the full
purchase price or other consideration is paid by the person acquiring the
Restricted Securities from the issuer or an Affiliate.
OPTIONS
As of September 30, 1997, options and warrants to purchase an aggregate of
2,284,945 shares of Common Stock were outstanding. See "Management--Executive
Compensation." Of the shares issuable upon exercise of such options and
warrants, 263,410 are not subject to the Lock-Up Agreements.
Rule 701 under the Securities Act provides that shares of Common Stock
acquired on the exercise of outstanding options may be resold by persons other
than Affiliates, beginning 90 days after the date of this Prospectus, subject
only to the manner of sale provisions of Rule 144, and by Affiliates under Rule
144 without compliance with its one-year minimum holding period, subject to
certain limitations.
The Company may file one or more registration statements on Form S-8 under
the Securities Act to register all shares of Common Stock issuable pursuant to
the 1995 Plan and the 1997 Plan. Shares of Common Stock covered by these
registration statements will thereupon be eligible for sale in the public
markets subject to Lock-Up Agreements, if applicable.
LOCK-UP AGREEMENTS
The Company, certain shareholders, including the Selling Shareholders, and
all executive officers and directors of the Company have agreed, pursuant to
Lock-Up Agreements, not to directly or indirectly, without the prior written
consent of NationsBanc Montgomery Securities, Inc. offer to sell, contract to
sell, or otherwise sell, dispose of, loan, pledge, or grant any rights with
respect to an aggregate of 5,774,875 shares of Common Stock, options and
warrants to purchase an aggregate of 2,021,535 shares of Common Stock and any
securities convertible or exchangeable for shares of Common Stock beneficially
owned by them or any such securities hereafter acquired by them for a period of
180 days after the date of this Prospectus other than (i) bona fide gift or (ii)
certain distributions to such holder's partners or shareholders, as the case may
be, provided any such transferee agrees to be bound by the terms of the Lock-Up
Agreement.
REGISTRATION RIGHTS
In consideration of Sirrom making a five-year secured loan of $4.0 million
to the Company on September 26, 1997, the Company issued to Sirrom a warrant to
purchase up to 37,660 shares of Common Stock having an exercise price of $.002
per share (and conditionally and progressively up to an additional 848,690
shares at the same price if the loan remains unpaid until its maturity date).
Sirrom has purchased 150,000 shares of Common Stock pursuant to the exercise of
a warrant granted in May 1992 in connection with an earlier loan, 75,000 of
which shares are being offered by Sirrom in the offering. Under both of these
warrants, the Company has agreed to provide Sirrom (and its permitted
transferees) written notice of
62
<PAGE>
any proposed secondary registration by the Company of shares of Common Stock
pursuant to a registration statement to be filed under the Securities Act and to
permit Sirrom and its permitted transferees (subject to certain limitations in
the event of an underwritten offering by the Company) to sell shares of Common
Stock acquired pursuant to the exercise of the warrant pursuant to any such
registration statement provided that the registration statement form permits
such secondary sale. The Company also agreed to bear the expenses of such
registration, other than fees and expenses of counsel to the selling holders and
underwriting discounts, commissions and filing fees attributable to those shares
of Common Stock included in the registration statement. In addition, the Company
has agreed to indemnify the selling holders for certain liabilities, including
liabilities under the Securities Act, that arise out of any registration of
their shares of Common Stock. Sirrom's registration rights under its earlier
warrant are still effective for 75,000 shares of Common Stock purchased under
that warrant. The Company also has granted certain affiliates of the Company
holding options to purchase up to 352,170 shares of Common Stock and warrants to
purchase up to 1,104,110 shares of Common Stock, the right to have those shares
registered by the Company on Form S-8, if that form is available for those
shares, prior to their exercise of those options and warrants.
UNDERWRITING
The Underwriters named below (the "Underwriters"), acting through their
representatives, NationsBanc Montgomery Securities, Inc. and Raymond James &
Associates, Inc. (the "Representatives"), have severally agreed, subject to the
terms and conditions of the Underwriting Agreement, to purchase from the Company
and the Selling Shareholders the number of shares of Common Stock set forth
opposite their respective names below. The Underwriters are committed to
purchase and pay for all such shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- ------------------------------------------------------------------------------------------------------- -----------
<S> <C>
NationsBanc Montgomery Securities, Inc.................................................................
Raymond James & Associates, Inc........................................................................
-----------
Total..............................................................................................
-----------
-----------
</TABLE>
The Representatives have advised the Company and the Selling Shareholders
that the Underwriters propose to offer the shares of Common Stock to the public
at the initial public offering price set forth on the cover page of this
Prospectus, and to certain dealers at such price less a concession not in excess
of $ per share. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $ per share to certain other
dealers. After the initial public offering, the public offering price,
concessions and reallowances to dealers may be reduced by the Representatives.
No such reduction shall change the amount of proceeds to be received by the
Company as set forth on the cover of this Prospectus.
The Company and one of the Selling Shareholders has granted to the
Underwriters an option, exercisable not later than 30 days from the date of this
Prospectus, to purchase up to 500,000 additional shares of Common Stock at the
initial public offering price less the underwriting discounts and commissions
set forth on the cover page of this Prospectus. To the extent that the
Underwriters exercise such option, each of the Underwriters will have a firm
commitment to purchase approximately the same percentage thereof that the number
of shares of Common Stock to be purchased by it shown in the above table bears
to the total shares of Common Stock listed in such table, and the Company and
the Selling Shareholder will be obligated, pursuant to such option, to sell such
shares to the Underwriters. The Underwriters may exercise such option only to
cover over-allotments made in connection with the sale of Common Stock offered
hereby. If purchased, the Underwriters will offer such additional shares on the
same terms as those on which the initial shares are being offered.
63
<PAGE>
The Company and the Selling Shareholders on the one hand, and the
Underwriters on the other hand, have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act.
The Company, certain security holders, including the Selling Shareholders,
and all executive officers and directors of the Company, have agreed, pursuant
to the Lock-Up Agreements, not to direct or indirectly, without the prior
written consent of NationsBanc Montgomery Securities, Inc., offer to sell,
contract to sell, or otherwise sell, dispose of, loan, pledge, or grant any
rights with respect to an aggregate of shares of Common Stock, options to
purchase an aggregate of shares of Common Stock and any securities
convertible or exchangeable for shares of Common Stock beneficially owned by
them or any such securities hereafter acquired by them for a period of 180 days
after the date of this Prospectus otherwise than (i) transfers by bona fide
gift, or (ii) as a distribution to such holder's partners or shareholders, as
the case may be, provided any such transferee agrees to be bound by the Lock-Up
Agreement. See "Shares Eligible for Future Sale."
The Representatives have advised the Company that they do not intend to
confirm sales to any accounts over which they exercise discretionary authority.
Prior to the offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price for the Common
Stock was determined by negotiation between the Company and the Representatives.
Among the factors considered in such negotiations were the prevailing market
conditions, the results of operations of the Company in recent periods, the
market capitalization and stages of development of other companies which the
Company and the Representatives believe to be comparable to the Company,
estimates of the business potential of the Company, the present state of the
Company's development and other factors deemed relevant.
LEGAL MATTERS
The validity of the Common Stock being offered hereby is being passed upon
for the Company by Kilpatrick Stockton LLP, Atlanta, Georgia. Certain legal
matters in connection with the offering will be passed upon for the Underwriters
by Alston & Bird LLP, Atlanta, Georgia.
EXPERTS
The consolidated financial statements of the Company at December 31, 1995
and 1996 and September 30, 1997 and for each of the three years in the period
ended December 31, 1996 and the nine months ended September 30, 1997 appearing
in this Prospectus and the Registration Statement have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report thereon appearing
herein and in the Registration Statement, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission in Washington, D.C. a Registration
Statement on Form S-1 (the "Registration Statement") under the Securities Act
with respect to the Common Stock offered hereby. As used herein, the term
"Registration Statement" means the initial Registration Statement and any and
all amendments thereto. This Prospectus omits certain information contained in
said Registration Statement as permitted by the rules and regulations of the
Commission. For further information with respect to the Company and the Common
Stock offered hereby, reference is made to the Registration Statement, including
the exhibits thereto. Statements herein concerning the contents of any contract
or other document are not necessarily complete and in each instance reference is
made to such contract or other document filed with the Commission as an exhibit
to the Registration Statement. Each such statement is qualified in its entirety
by such reference.
64
<PAGE>
As a result of the offering, the Company will become subject to the
informational requirements of the Securities Exchange Act of 1934, as amended,
and in accordance therewith will file reports and other information with the
Commission, most of which it will file electronically under the Commission's
EDGAR system. Reports, registration statements, proxy statements and other
information filed by the Company with the Commission can be inspected and copied
at the public reference facilities maintained by the Commission at Judiciary
Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the
following regional offices of the Commission: 500 West Madison Street, Suite
1400, Chicago, Illinois 60661 and Seven World Trade Center, New York, New York
10048. Copies of such materials can be obtained at prescribed rates from the
Public Reference Section of the Commission, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, or at the Commission's web site at http://www.sec.gov.
65
<PAGE>
PAYSYS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
CONTENTS
Report of Independent Auditors................................................................................................. F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996 and September 30, 1997............................................ F-3
Consolidated Statements of Operations for the Years Ended December 31, 1994, 1995 and 1996 and the Nine Months Ended September
30, 1996 (unaudited) and 1997................................................................................................ F-4
Consolidated Statements of Shareholder's Equity (Deficit) for the Years Ended December 31, 1994, 1995 and 1996 and the Nine
Months Ended September 30, 1996 (unaudited) and 1997......................................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1994, 1995 and 1996 and the Nine Months Ended September
30, 1996 (unaudited) and 1997................................................................................................ F-6
Notes to Consolidated Financial Statements for the Years Ended December 31, 1994, 1995 and 1996 and the Nine Months Ended
September 30, 1996 (unaudited) and 1997...................................................................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
PaySys International, Inc.
We have audited the accompanying consolidated balance sheets of PaySys
International, Inc. and subsidiaries as of December 31, 1995 and 1996 and
September 30, 1997, and the related consolidated statements of operations,
shareholders' equity, and cash flows for the three years in the period ended
December 31, 1996 and the nine months ended September 30, 1997. These
consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of PaySys
International, Inc. and subsidiaries at December 31, 1995 and 1996 and September
30, 1997, and the consolidated results of their operations and their cash flows
for the three years in the period ended December 31, 1996 and the nine months
ended September 30, 1997, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Orlando, Florida
November 6, 1997
F-2
<PAGE>
PAYSYS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT SHARE
DATA)
ASSETS
Current assets:
Cash and cash equivalents....................................................................... $ 1,222 $ 2,037 $ 1,522
Accounts receivable, less allowance for bad debts of $119, $143, $315 at December 31, 1995 and
1996 and September 30, 1997, respectively..................................................... 4,808 4,055 4,632
Unbilled receivables............................................................................ 1,076 5,094 3,739
Prepaid expenses and other current assets....................................................... 166 237 499
Deferred income taxes........................................................................... 92 277 --
------- ------- -------------
Total current assets.............................................................................. 7,364 11,700 10,392
Furniture and equipment, net...................................................................... 1,053 1,705 2,766
Computer software costs, net of accumulated amortization of $1,529, $2,914 and $2,445 at December
31, 1995 and 1996 and September 30, 1997, respectively.......................................... 2,662 2,733 1,999
Deposits and other assets......................................................................... 14 56 147
Deferred income taxes............................................................................. 414 -- --
------- ------- -------------
$11,507 $16,194 $15,304
------- ------- -------------
------- ------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................................ $ 1,934 $ 1,859 $ 3,124
Accrued employee compensation................................................................... 1,223 1,319 1,280
Deferred revenues............................................................................... 4,833 8,374 7,014
Current portion of long-term debt and capital lease obligations................................. 302 1,393 425
Accrued royalties............................................................................... -- 1,039 2,483
Other current liabilities....................................................................... 254 287 1,203
Line of credit.................................................................................. 368 -- --
------- ------- -------------
Total current liabilities......................................................................... 8,914 14,271 15,529
Long-term debt and capital lease obligations, less current portion................................ 1,088 482 4,172
Deferred rent expense............................................................................. 1,355 1,122 904
Other noncurrent liabilities...................................................................... 138 157 --
------- ------- -------------
11,495 16,032 20,605
Shareholders' equity (deficit):
Preferred stock, no par value; 2,000,000 shares authorized; no shares issued or outstanding -- -- --
Common stock, $.01 par value; 20,000,000 shares authorized; 6,822,520, 6,826,520 and 7,289,125
shares issued at December 31, 1995 and 1996 and September 30, 1997............................ 68 68 73
Additional paid-in capital...................................................................... 2,074 2,079 6,193
Deferred stock compensation..................................................................... -- -- (70)
Deficit in earnings............................................................................. (1,578) (1,439) (10,925)
Cumulative translation adjustments.............................................................. (61) (55) (81)
------- ------- -------------
503 653 (4,810)
Less 159,050 shares held in treasury, at cost................................................... (491) (491) (491)
------- ------- -------------
Total shareholders' equity (deficit).............................................................. 12 162 (5,301)
------- ------- -------------
$11,507 $16,194 $15,304
------- ------- -------------
------- ------- -------------
</TABLE>
See accompanying notes.
F-3
<PAGE>
PAYSYS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- ---------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1996 1997
------- ------- ------- ----------- -------
<CAPTION>
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues:
License............................................................. $ 5,749 $ 8,668 $13,366 $ 7,842 $10,123
Services............................................................ 10,720 13,060 13,558 9,880 14,328
------- ------- ------- ----------- -------
Total revenues........................................................ 16,469 21,728 26,924 17,722 24,451
Cost of revenues:
License............................................................. 940 1,324 2,935 1,808 3,072
Services............................................................ 7,640 9,503 8,956 6,340 10,902
------- ------- ------- ----------- -------
Total cost of revenues................................................ 8,580 10,827 11,891 8,148 13,974
Gross margin.......................................................... 7,889 10,901 15,033 9,574 10,477
Operating expenses:
Sales and marketing................................................. 2,481 2,298 3,270 2,191 3,420
Research and development............................................ 1,612 2,133 6,944 4,619 7,953
General and administrative.......................................... 3,040 4,105 4,227 2,446 4,514
Non cash compensation............................................... -- -- -- -- 3,722
Write off of capitalized software................................... -- 2,143 -- -- --
------- ------- ------- ----------- -------
Total operating expenses.............................................. 7,133 10,679 14,441 9,256 19,609
------- ------- ------- ----------- -------
Income (loss) from operations......................................... 756 222 592 318 (9,132)
Interest income (expense):
Interest income..................................................... 105 27 83 54 77
Interest expense.................................................... (345) (365) (233) (156) (154)
------- ------- ------- ----------- -------
(240) (338) (150) (102) (77)
------- ------- ------- ----------- -------
Income (loss) before income taxes..................................... 516 (116) 442 216 (9,209)
Income tax expense.................................................... 367 356 303 148 277
------- ------- ------- ----------- -------
Income (loss) from continuing operations.............................. 149 (472) 139 68 (9,486)
Discontinued operations:
Loss from operations of discontinued subsidiary net of income tax
benefit of $32.................................................... (172) -- -- -- --
------- ------- ------- ----------- -------
Net income (loss)..................................................... $ (23) $ (472) $ 139 $ 68 $(9,486)
------- ------- ------- ----------- -------
------- ------- ------- ----------- -------
Income (loss) per share from continuing operations.................... $ 0.02 $ (0.07) $ 0.02 $ 0.01 $ (1.25)
------- ------- ------- ----------- -------
------- ------- ------- ----------- -------
Net income (loss) per share........................................... $ 0.00 $ (0.07) $ 0.02 $ 0.01 $ (1.25)
------- ------- ------- ----------- -------
------- ------- ------- ----------- -------
Shares used in per share calculations................................. 5,972 6,620 8,570 8,537 7,615
</TABLE>
See accompanying notes.
F-4
<PAGE>
PAYSYS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK
----------------- ------------------
NUMBER NUMBER
OF SHARES AMOUNT OF SHARES AMOUNT
--------- ------ --------- ------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT SHARE DATA)
Balance at January 1, 1994................ 5,269,010 $53 172,800 $(533)
Net loss................................ -- -- -- --
Foreign currency translation
adjustments........................... -- -- -- --
Issuance of common stock warrant........ -- -- -- --
--------- ------ --------- ------
Balance at December 31, 1994.............. 5,269,010 53 172,800 (533)
Net loss................................ -- -- -- --
Foreign currency translation
adjustments........................... -- -- -- --
Issuance of stock purchase warrants..... -- -- -- --
Issuance of employee stock options...... 1,500 -- -- --
Treasury shares issued pursuant to
exercise of employee stock options.... -- -- (13,750) 42
Conversion of debt to equity............ 1,552,010 15 -- --
--------- ------ --------- ------
Balance at December 31, 1995.............. 6,822,520 68 159,050 (491)
Net income.............................. -- -- -- --
Foreign currency translation
adjustments........................... -- -- -- --
Exercise of employee stock options...... 4,000 -- -- --
Issuance of stock purchase warrants..... -- -- -- --
--------- ------ --------- ------
Balance at December 31, 1996.............. 6,826,520 68 159,050 (491)
Net loss................................ -- -- -- --
Foreign currency translation
adjustment............................ -- -- -- --
Non cash compensation from stock
purchase warrants and stock options... -- -- -- --
Issuance of warrants.................... -- -- -- --
Exercise of stock purchase warrants..... 462,605 5 -- --
--------- ------ --------- ------
Balance at September 30, 1997............. 7,289,125 $73 159,050 $(491)
--------- ------ --------- ------
--------- ------ --------- ------
<CAPTION>
RETAINED
ADDITIONAL DEFERRED EARNINGS CUMULATIVE
PAID-IN STOCK (DEFICIT IN TRANSLATION
CAPITAL COMPENSATION EARNINGS) ADJUSTMENTS TOTAL
---------- ---------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994................ $ 760 $ -- $ (1,083) $(55) $ (858)
Net loss................................ -- -- (23) -- (23)
Foreign currency translation
adjustments........................... -- -- -- 10 10
Issuance of common stock warrant........ 111 -- -- -- 111
---------- ---------- ----------- --- -------
Balance at December 31, 1994.............. 871 -- (1,106) (45) (760)
Net loss................................ -- -- (472) -- (472)
Foreign currency translation
adjustments........................... -- -- -- (16) (16)
Issuance of stock purchase warrants..... 9 -- -- -- 9
Issuance of employee stock options...... 9 -- -- -- 9
Treasury shares issued pursuant to
exercise of employee stock options.... (42) -- -- -- --
Conversion of debt to equity............ 1,227 -- -- -- 1,242
---------- ---------- ----------- --- -------
Balance at December 31, 1995.............. 2,074 -- (1,578) (61) 12
Net income.............................. -- -- 139 -- 139
Foreign currency translation
adjustments........................... -- -- -- 6 6
Exercise of employee stock options...... -- -- -- -- --
Issuance of stock purchase warrants..... 5 -- -- -- 5
---------- ---------- ----------- --- -------
Balance at December 31, 1996.............. 2,079 -- (1,439) (55) 162
Net loss................................ -- -- (9,486) -- (9,486)
Foreign currency translation
adjustment............................ -- -- -- (26) (26)
Non cash compensation from stock
purchase warrants and stock options... 3,792 (70) -- -- 3,722
Issuance of warrants.................... 307 -- -- -- 307
Exercise of stock purchase warrants..... 15 -- -- -- 20
---------- ---------- ----------- --- -------
Balance at September 30, 1997............. $6,193 (70) $(10,925) $(81) $(5,301)
---------- ---------- ----------- --- -------
---------- ---------- ----------- --- -------
</TABLE>
See accompanying notes.
F-5
<PAGE>
PAYSYS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE
MONTHS
ENDED
YEAR ENDED DECEMBER SEPTEMBER
31, 30,
---------------------- ------
<S> <C> <C> <C> <C>
1994 1995 1996 1996
------ ------ ------ ------
<CAPTION>
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).......................................................................... $ (23) $ (472) $ 139 $ 149
Add (deduct) adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation........................................................................... 553 580 624 635
Amortization of computer software...................................................... 1,043 3,437 1,383 1,051
Amortization of discounts on debt...................................................... 13 90 45 40
Accrued rent expense................................................................... 30 (135) (233) (168)
Deferred income taxes.................................................................. 252 37 228 (338)
Non cash compensation.................................................................. -- -- 5 5
Changes in operating assets and liabilities:
Accounts receivable and unbilled receivables......................................... (94) (1,760) (3,265) (712)
Recoverable income taxes............................................................. 156 -- -- --
Other assets......................................................................... (32) 19 (113) (85)
Accounts payable..................................................................... (333) 1,113 (75) (677)
Income taxes payable................................................................. (7) 6 (6) --
Deferred revenues.................................................................... (468) 823 3,541 1,437
Accrued employee compensation........................................................ (546) (37) 96 (75)
Other liabilities.................................................................... 170 (293) 1,098 627
------ ------ ------ ------
Net cash provided by (used in) operating activities........................................ 714 3,408 3,467 1,889
INVESTING ACTIVITIES
Purchases of furniture and equipment....................................................... (606) (215) (665) (268)
Computer software development.............................................................. (2,643) (2,343) (1,132) (777)
Other...................................................................................... (4) -- -- --
------ ------ ------ ------
Net cash used in investing activities...................................................... (3,253) (2,558) (1,797) (1,045)
FINANCING ACTIVITIES
Exercise of options and warrants........................................................... -- 18 -- --
Proceeds from borrowings................................................................... 1,000 300 23 23
Principal payments on long-term debt, capital lease obligations, and line of credit........ (360) (362) (884) (798)
------ ------ ------ ------
Net cash provided by (used in) financing activities........................................ 640 (44) (861) (775)
------ ------ ------ ------
Effect of foreign currency translation on cash and cash equivalents........................ 10 (16) 6 7
------ ------ ------ ------
Increase (decrease) in cash and cash equivalents........................................... (1,889) 790 815 76
Cash and cash equivalents at beginning of period........................................... 2,321 432 1,222 1,222
------ ------ ------ ------
Cash and cash equivalents at end of period................................................. $ 432 $1,222 $2,037 $1,298
------ ------ ------ ------
------ ------ ------ ------
<CAPTION>
<S> <C>
1997
-------
<S> <C>
OPERATING ACTIVITIES
Net income (loss).......................................................................... $(9,486)
Add (deduct) adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation........................................................................... 722
Amortization of computer software...................................................... 939
Amortization of discounts on debt...................................................... 4
Accrued rent expense................................................................... (218 )
Deferred income taxes.................................................................. 277
Non cash compensation.................................................................. 3,722
Changes in operating assets and liabilities:
Accounts receivable and unbilled receivables......................................... 778
Recoverable income taxes............................................................. --
Other assets......................................................................... (353 )
Accounts payable..................................................................... 1,265
Income taxes payable................................................................. --
Deferred revenues.................................................................... (1,360 )
Accrued employee compensation........................................................ (39 )
Other liabilities.................................................................... 2,205
-------
Net cash provided by (used in) operating activities........................................ (1,544 )
INVESTING ACTIVITIES
Purchases of furniture and equipment....................................................... (1,443 )
Computer software development.............................................................. (205 )
Other...................................................................................... --
-------
Net cash used in investing activities...................................................... (1,648 )
FINANCING ACTIVITIES
Exercise of options and warrants........................................................... 21
Proceeds from borrowings................................................................... 4,426
Principal payments on long-term debt, capital lease obligations, and line of credit........ (1,743 )
-------
Net cash provided by (used in) financing activities........................................ 2,704
-------
Effect of foreign currency translation on cash and cash equivalents........................ (27 )
-------
Increase (decrease) in cash and cash equivalents........................................... (515 )
Cash and cash equivalents at beginning of period........................................... 2,037
-------
Cash and cash equivalents at end of period................................................. $1,522
-------
-------
</TABLE>
See accompanying notes.
F-6
<PAGE>
PAYSYS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(INFORMATION FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies used in
preparation of these consolidated financial statements.
OPERATIONS
PaySys International, Inc. (the Company) was incorporated on January 27,
1981. The Company develops, licenses and supports computer software for use by
financial institutions, retailers and third party processors to process credit
card transactions. The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant intercompany
balances, transactions, and profits and losses have been eliminated.
INTERIM FINANCIAL INFORMATION
In the opinion of management, the interim financial statements have been
prepared on the same basis as the annual financial statements and include all
adjustments (consisting only of normal recurring adjustments) necessary to state
fairly the financial information set forth herein, in accordance with generally
accepted accounting principles.
The results of operations for the nine months ended September 30, 1997 are
not necessarily indicative of results to be expected for the full fiscal year.
REVENUE RECOGNITION
Revenues are derived from sales of software licenses and related services.
Revenue recognition practices are in accordance with Statement of Position 91-1
"Software Revenue Recognition." The Company recognizes software license revenue
upon delivery of the software and related documentation when there are no
significant remaining obligations and collectibility is assessed as probable.
The Company accrues the costs of any insignificant obligations remaining when
software license revenue is recognized. Service fees received from the sale of
software maintenance and support contracts provide customers access to technical
support and minor upgrades to licensed releases and are recognized as services
are provided over the life of such contracts. Revenue from professional services
is recognized as services are performed or over the term of the related
agreement. Revenue related to research and development agreements is recognized
as services are performed over the related funding period for each contract.
Such revenue is included in license revenue.
Deferred revenue primarily represents advance payments from customers for
service agreements and license fees.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is based on the weighted average number of
common shares outstanding and dilutive common stock equivalents during the
periods presented. Pursuant to Securities and Exchange
F-7
<PAGE>
PAYSYS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 (CONTINUED)
(INFORMATION FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Commission Staff Accounting Bulletin No. 83, Common Stock issued for
consideration below the assumed initial public offering (the "IPO") price and
stock options and warrants issued with exercise prices below the IPO price
during the twelve-month period preceding the initial filing of the Registration
Statement, have been included in the calculation of common shares, using the
treasury stock method, as if they were outstanding for all periods presented.
CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
The Company's revenues consist primarily of license and service revenues
from large companies in the United States, Canada, South America, Australia, New
Zealand, and South Africa. The Company does not obtain collateral against its
outstanding receivables. The Company maintains reserves for potential credit
losses for both billed and unbilled receivables. Bad debt expense was $200,000,
$121,000 and $133,000 during the years ended 1994, 1995 and 1996, respectively,
and $120,000 and $499,000 during the nine months ended September 30, 1996 and
1997, respectively. One customer accounted for 20% of revenues during the nine
months ended September 30, 1997. Two customers accounted for 16% and 10% of
revenues during the nine months ended September 30, 1996. During fiscal 1996,
one customer accounted for 11% of revenues; during fiscal 1995, two customers
accounted for 15% and 13% of revenues; and during fiscal 1994, one customer
accounted for 16% of revenues.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of three
months or less when purchased to be cash equivalents. The Company maintains
deposits with a bank and invests its excess cash in overnight funds which bear
minimal risk.
FURNITURE AND EQUIPMENT
Furniture and equipment are carried at cost less accumulated depreciation.
Depreciation is computed using straight-line method over the estimated useful
lives (generally 3 to 5 years). Amortization of computer equipment under capital
lease is being recorded over the five-year term of the lease and is included in
depreciation expense. Expenditures for repairs and maintenance are charged to
operations as incurred.
COMPUTER SOFTWARE COSTS
The Company conforms with the requirements of Statement of Financial
Accounting Standards (SFAS) No. 86, "Accounting for the costs of Computer
Software to Be Sold, Leased or Otherwise Marketed", which requires
capitalization of costs incurred in developing new software products once
technological feasibility, as defined, has been reached. Costs of maintaining
existing software and research and development are expensed as incurred. The
Company has capitalized software development costs of $2,643,000, $2,343,000 and
$1,132,000 during the years ended 1994, 1995, and 1996, respectively, and
F-8
<PAGE>
PAYSYS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 (CONTINUED)
(INFORMATION FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
$781,000 and $210,000 during the nine months ended September 30, 1996 and 1997,
respectively. The Company records amortization of software development costs
capitalized in an amount equal to the greater of the amount computed using (i)
the ratio that current gross revenues for a product bear to the total of current
and anticipated revenues for that product or (ii) the straight-line method over
the estimated useful life of the released product (currently three years).
Amortization of internally-developed software costs totaled $886,000, $3,247,000
and $1,168,000 for the years ended December 31, 1994, 1995 and 1996,
respectively, and $858,000 and $939,000 for the nine months ended September 30,
1996 and 1997, respectively. The higher amortization of capitalized software
costs for 1995 is due to the write-off of $2.1 million of capitalized software
costs for two projects deemed to have no net realizable value.
INCOME TAXES
The Company follows the liability method of accounting for income taxes.
Deferred income taxes relate to the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
STOCK-BASED COMPENSATION
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation", which provides an alternative to Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), in
accounting for stock-based compensation issued to employees. As permitted by
SFAS No. 123, the Company continues to account for stock option grants in
accordance with APB 25 and has elected the pro forma disclosure alternative of
the effect of SFAS No. 123. Accordingly, adoption of the standard in 1996 did
not affect the Companies' results of operations.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued a new
accounting pronouncement, SFAS No. 128, "Earnings per Share," which will change
the current method of computing earnings per share. The new standard requires
presentation of "basic earnings per share" and "diluted earnings per share"
amounts, as defined. SFAS No. 128 will be effective for the Company's quarter
and year ending December 31, 1997, and, upon adoption, all prior-period earnings
per share data presented shall be restated to conform with the provisions of the
new pronouncement. Application earlier than the Company's quarter ending
December 31, 1997 is not permitted. The Company has evaluated the impact of
adopting SFAS No. 128 and does not expect restated basic and diluted earnings or
loss per share to be
F-9
<PAGE>
PAYSYS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 (CONTINUED)
(INFORMATION FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
reported upon adoption of SFAS No. 128 to differ from amounts reported under
existing accounting rules for all periods reported by the Company through
September 30, 1997.
On October 27, 1997 the AICPA issued Statement of Position 97-2, "Software
Revenue Recognition" (SOP 97-2). SOP 97-2 clarifies and changes some software
revenue recognition practices and supersedes the existing guidance of SOP 91-1.
SOP 97-2 must be adopted for transactions entered into by the Company beginning
January 1, 1998. The Company has not formally evaluated the impact, if any, of
adopting SOP 97-2.
RECLASSIFICATION
Certain amounts reported in the 1994, 1995, and 1996 financial statements
have been reclassified to conform to the September 30, 1997 financial statement
presentation.
2. FURNITURE AND EQUIPMENT
Furniture and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1995 1996 1997
--------- --------- -------------
<S> <C> <C> <C>
Furniture and equipment:
Office furniture and equipment............................................. $ 1,083 $ 1,158 $ 799
Computer equipment and purchased software.................................. 2,388 2,629 2,306
Computer equipment under capital lease..................................... 1,690 2,569 1,389
--------- --------- ------
5,161 6,356 4,494
Less allowances for depreciation and amortization.......................... (4,108) (4,651) (1,728)
--------- --------- ------
$ 1,053 $ 1,705 $ 2,766
--------- --------- ------
--------- --------- ------
</TABLE>
3. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company considers its cash and cash equivalents, accounts receivable,
line of credit and long-term debt and capital lease obligations to be its only
significant financial instruments and believes that the carrying amounts of
these instruments approximates their fair value. The carrying amount of
long-term debt approximates fair value based on current interest rates available
to the Company for debt instruments with similar terms, degree of risk and
remaining maturities. The remaining financial instruments approximate fair value
based on the short-term nature of these instruments.
F-10
<PAGE>
PAYSYS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 (CONTINUED)
(INFORMATION FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
4. LONG-TERM DEBT AND LEASES
Long-term debt and capital lease obligations consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1995 1996 1997
--------- --------- -----------------
<S> <C> <C> <C>
Note payable with finance company due September 1, 1997,
interest at 13%, secured by
equipment, accounts receivable,
software and related materials............................................. $ 1,000 $ 1,000 $ --
Less discount................................................................ 17 4 --
--------- --------- ------
983 996 --
Note payable with finance company due September 26, 2002,
interest at 13.5%, secured by
equipment, accounts receivable,
software and related materials............................................. -- -- 4,000
Less discount................................................................ -- -- (307)
--------- --------- ------
3,693
Notes payable for computer equipment, interest at 10%, payable through
January 1997............................................................... 6 -- --
Other note payable........................................................... 64 21 29
Capital lease obligations, various imputed interest rates
and monthly payments....................................................... 337 858 875
--------- --------- ------
1,390 1,875 4,597
Less current portion......................................................... (302) (1,393) (425)
--------- --------- ------
$ 1,088 $ 482 $ 4,172
--------- --------- ------
--------- --------- ------
</TABLE>
The Company entered into a lease agreement to secure premises for a period
of ten years commencing July 1, 1990. The lease provides for increasing rental
payments over the ten year period. Rent expense is being amortized on a
straight-line basis over the ten year term of the lease.
Under a sublease agreement, the Company leases office space from Quadram
Corporation ("Quadram"), a wholly-owned subsidiary of Intelligent Systems
Corporation (ISC). ISC and the chairman of ISC are shareholders' of the Company.
The lease began in 1996 and ends November 2002 (subject to earlier termination
if Quadram's lease is terminated). Rental expense under this agreement was
$86,000 for the year ended December 31, 1996 and $185,000 for the nine months
ended September 30, 1997.
Rental expense was $1,141,000, $1,171,000 and $1,108,000 for the years ended
December 31, 1994, 1995, and 1996, respectively, and $787,000 and $1,121,000 for
the nine months ended September 30, 1996 and 1997, respectively.
F-11
<PAGE>
PAYSYS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 (CONTINUED)
(INFORMATION FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
4. LONG-TERM DEBT AND LEASES (CONTINUED)
Required payments by fiscal year for long-term debt, capital leases and
noncancelable operating leases with initial or remaining terms in excess of one
year at September 30, 1997, were as follows (in thousands):
<TABLE>
<CAPTION>
LONG-TERM CAPITAL OPERATING
THREE MONTHS ENDING DECEMBER 31, DEBT LEASES LEASES
- --------------------------------------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
1997............................................................................. $ 29 $ 125 $ 386
<CAPTION>
YEAR ENDING DECEMBER 31,
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
1998............................................................................. -- 452 1,735
1999............................................................................. -- 298 1,731
2000............................................................................. -- 70 954
2001............................................................................. -- -- 606
2002............................................................................. 4,029 -- --
----------- ----- -----------
4,029 945 5,412
Less amount representing interest................................................ -- (70) --
----------- ----- -----------
$ 4,029 $ 875 $ 5,412
----------- ----- -----------
----------- ----- -----------
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
ROYALTY AGREEMENT
In connection with a software development agreement entered into by the
Company and a customer, the Company is required to pay royalties to the customer
for sales of the product developed under the agreement. The Company is required
to pay 10% of any sale, license or other grant of right to use the product which
total less than $1,000,000 and 15% of any sale, license or other grant of right
to use product which total more than $1,000,000. Further the Company is required
to pay the following incremental royalty fees on the sale, license, or other
grant of right to use the product:
<TABLE>
<S> <C>
1996..................................................... 2.5%
1997..................................................... 5.0%
1998..................................................... 7.5%
1999 and beyond.......................................... 10.0%
</TABLE>
Total amounts to be paid under this agreement are capped at $6,027,000. As
of December 31, 1996 and September 30, 1997, amounts accrued under this
agreement are approximately $0.7 million and $1.9 million respectively. See Note
12.
LEGAL MATTERS
In August 1997, the Company settled a copyright infringement lawsuit for
$550,000. The Company has paid $100,000 at September 30, 1997 and will pay an
additional $450,000 in quarterly installments of
F-12
<PAGE>
PAYSYS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 (CONTINUED)
(INFORMATION FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
$50,000 beginning in November 1997. The Company accrued an estimated reserve of
$325,000 for this lawsuit at December 31, 1996 and accrued $225,000 in 1997 when
additional information was available for a total of $550,000.
The Company is involved in various other claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not be material to the Company's consolidated
financial position and operations.
6. INCOME TAXES
The provision for income taxes for the years ended December 31, 1994, 1995
and 1996 and for the nine months ended September 30, 1997 are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, NINE MONTHS
------------------------------- ENDED SEPTEMBER 30,
1994 1995 1996 1997
--------- --------- --------- ---------------------
<S> <C> <C> <C> <C>
Current tax expense:
Federal............................................................ $ -- $ 6 $ 21 $ --
Foreign............................................................ 81 313 54 --
State.............................................................. 2 -- -- --
--------- --------- --------- -----
Total current........................................................ 83 319 75 --
Deferred tax expense
(benefit):
Federal.......................................................... 226 48 181 277
Foreign.......................................................... -- -- -- --
State............................................................ 58 (11) 47 --
--------- --------- --------- -----
Total deferred....................................................... 284 37 228 277
--------- --------- --------- -----
$ 367 $ 356 $ 303 $ 277
--------- --------- --------- -----
--------- --------- --------- -----
</TABLE>
Income tax expense for the nine months ended September 30, 1997 relates to
an increase in the valuation allowance to reduce the net deferred tax asset
balance to zero. No additional income tax expense has been recorded for the nine
months ended September 30, 1997 due to the Company's loss for the period and the
net operating loss carryforward position from prior periods.
F-13
<PAGE>
PAYSYS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 (CONTINUED)
(INFORMATION FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
6. INCOME TAXES (CONTINUED)
A reconciliation of the statutory U.S. income tax rate to the effective
income tax rate is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------------- NINE MONTHS ENDED
1994 1995 1996 SEPTEMBER 30, 1997
--------- --------- --------- ------------------
<S> <C> <C> <C> <C>
Tax (benefit) at statutory federal rate............................. $ 176 $ (39) $ 150 $ (3,131)
State taxes net of federal benefit.................................. 39 (7) 31 (314)
Research and development credit..................................... -- (51) (490) (534)
Foreign tax credits................................................. -- -- (205) --
International withholding taxes..................................... -- 210 1 --
Foreign operations not subject to U.S. tax.......................... 143 43 58 173
Expiring foreign tax credits........................................ 14 161 -- --
Meals and entertainment............................................. 19 29 34 17
Other--net.......................................................... (24) 10 (16) --
Change in valuation allowance....................................... -- -- 740 4,066
--------- --------- --------- -------
Total income tax expense............................................ $ 367 $ 356 $ 303 $ 277
--------- --------- --------- -------
--------- --------- --------- -------
</TABLE>
Components of U.S. deferred tax assets (liabilities) are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1995 1996 1997
--------- --------- -------------
<S> <C> <C> <C>
Deferred tax assets:
Federal and state net operating losses...................................... $ 248 $ 86 $ 1,364
Accruals not deductible for tax purposes.................................... 135 445 2,106
General business credit carryforwards....................................... 1,280 1,771 2,305
Foreign tax credit carryforwards............................................ 271 69 69
Minimum tax credit carryforwards............................................ 163 207 207
Other....................................................................... 1 -- --
--------- --------- -------------
Total gross deferred tax assets............................................... 2,098 2,578 6,051
Deferred tax liability:
Property and equipment, principally due to depreciation....................... (65) (40) (22)
Amortization of intangibles................................................... (918) (912) (614)
--------- --------- -------------
Total gross deferred tax liabilities.......................................... (983) (952) (636)
Less valuation allowance...................................................... (609) (1,349) (5,415)
--------- --------- -------------
Net deferred tax asset........................................................ $ 506 $ 277 $ --
--------- --------- -------------
--------- --------- -------------
</TABLE>
At September 30, 1997, the Company had general business, foreign tax and AMT
credit carryforwards available to offset future federal income tax liabilities
totalling approximately $2,600,000 which expire in
F-14
<PAGE>
PAYSYS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 (CONTINUED)
(INFORMATION FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
6. INCOME TAXES (CONTINUED)
1997 through 2011. In addition, the Company has approximately $3,200,000 of net
operating losses for federal income tax purposes at September 30, 1997, which
may be carried forward principally through 2012. The tax benefits of these
credit carryforwards can be realized only through their application to taxable
income arising from future successful operations of the Company. These credit
and net operating loss carryforwards may be subject to certain limitations under
Section 382 in the event of an ownership change. Due to the uncertainty of the
Company's ability to fully realize the benefits of the carryforwards, a
valuation allowance has been recorded against net deferred tax assets. When
recognized, the tax benefit of those items will be applied to reduce future
income tax amounts.
The Company's foreign subsidiaries had cumulative losses of $3,834,000 at
September 30, 1997 which have been fully reserved by a valuation allowance.
7. SHAREHOLDERS' EQUITY
COMMON STOCK
Effective August 1, 1995, the Company issued 1,552,010 shares of common
stock to ISC for the cancellation of $900,000 in line of credit borrowings,
$83,000 in accrued interest and $259,000 in accounts payable to a subsidiary of
ISC. The original line of credit was also amended to $400,000 and was available
through July 31, 1996. Accrued interest on this line of credit was $4,000 at
December 31, 1995.
WARRANTS
Pursuant to a loan agreement between the Company and Sirrom Capital, L.P.
(Sirrom), the Company granted Sirrom the right to purchase 75,000 shares of the
Company's common stock plus an additional 5,000 shares of common stock for each
full calendar month the note payable remains outstanding up to 75,000 additional
shares. The warrant is exercisable at an exercise price of $.002 per share. The
warrant was exercised in September 1997.
Pursuant to a loan agreement dated January 24, 1994 between the Company and
ISC, ISC has been granted a warrant to purchase 277,605 shares of the Company's
common stock $.002 per share in consideration for making the loan. The warrant
was exercised in August 1997.
During 1995, the Company issued to two individuals warrants to purchase
105,350 shares of common stock at an exercise price of $.60 per share. These
warrants, which expire in December 2005, become exercisable equally over a two
year and three year vesting period. In April and June 1997, 35,000 shares of
common stock were issued under these warrants. In June 1997, a warrant to
purchase 17,675 shares of common stock was canceled.
During 1996, the Company issued warrants to employees to purchase 1,104,110
shares of common stock exercisable at a price per share based on $50,000,000
divided by the number of shares outstanding at the exercise date. These warrants
were exercisable upon achievement of certain milestones and expire in February
2003. Effective August 5, 1997, the Company amended these warrants. The
amendment fixed the
F-15
<PAGE>
PAYSYS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 (CONTINUED)
(INFORMATION FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
7. SHAREHOLDERS' EQUITY (CONTINUED)
exercise price of the warrants at $4.80 per share, and the warrants became fully
exercisable as of the amendment date. In addition, the amendment added
provisions (i) restricting transfer of any shares obtained from exercise of the
warrants until the earlier of achievement of certain milestones or February 2003
and (ii) withholding certain registration rights until achievement of the
milestones. As a result of amending the warrants, the Company recorded in the
quarter ended September 30, 1997 compensation expense of $3,708,000 for the
difference between the exercise price and estimated fair value per share at the
amendment date.
In connection with a financing agreement entered into with a finance company
on September 26, 1997, the Company issued a warrant to purchase 37,660 shares of
the Company's common stock at an exercise price of $.002 per share. The warrants
were valued at approximately $300,000. If the debt remains outstanding for
certain periods during the term of the financing arrangement the Company will be
required to issue additional shares under the warrant.
The weighted average grant date fair value of warrants issued during the
years ended December 31, 1995 and 1996 and the nine months ended September 30,
1997 was $.40, $0 and $8.16, respectively. Warrants for the purchase of 470,150
and 496,490 shares of common stock have been earned and are available for
exercise at December 31, 1995 and 1996, respectively.
STOCK OPTIONS
The Company has elected to follow APB 25 and related interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under SFAS No. 123 requires use
of option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, no compensation expense is recognized for options
with an exercise price equal to the fair value of the underlying stock on date
of grant.
The 1995 Stock Incentive Plan (the "1995 Plan") allows for the granting of
options for up to 1,500,000 shares of common stock to employees and directors.
Stock options granted under the Plan may be either incentive stock options or
nonqualified stock options. Incentive stock options may be granted with exercise
prices of no less than the fair market value. The options expire 10 years from
the date of grant. Options may be granted with different vesting terms but
generally provide for vesting equally over a four year period.
Proforma information regarding net income (loss) and net income (loss) per
share is required by SFAS No. 123, which also requires that the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method prescribed
by that statement. The fair value for these options were estimated at the date
of grant using the minimum value method with the following weighted-average
assumptions for December 31, 1995 and 1996 and September 30, 1997; risk-free
interest rate of 6%; dividend yields of 0%; and a weighted-average expected life
of the options of 8 years, 8 years and 4 years, respectively. The weighted
average fair value of
F-16
<PAGE>
PAYSYS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 (CONTINUED)
(INFORMATION FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
7. SHAREHOLDERS' EQUITY (CONTINUED)
options granted during the years ended December 31, 1995 and 1996 and for the
nine months ended September 30, 1997 was $.26, $.26 and $.66 per share,
respectively.
In addition, the option valuation models require the input of highly
subjective assumptions. Because the Company's employee stock options have
characteristics different from these of traded options, and because changes in
the subjective input assumptions can materially affect the fair value estimate,
in management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options.
For purposes of proforma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information is as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1995 1996 1997
--------- --------- -------------
<S> <C> <C> <C>
Net income (loss)....................... $ (474) $ 89 $ (10,705)
Net income (loss) per share............. $ (0.07) $ 0.01 $ (1.41)
</TABLE>
Because SFAS No. 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until 1999.
The following table summarizes option activity for the years ended December
31, 1995 and 1996 and the nine months ended September 30, 1997.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE EXERCISE
SHARES PRICE RANGE PRICE
---------- ------------- -----------
<S> <C> <C> <C>
Outstanding at January 1, 1995............................................. 32,750 $ 0 $ 0
Granted.................................................................. 410,080 $ .80 $ .80
Exercised................................................................ (15,250) $ 0 $ 0
Expired.................................................................. (11,750) $ 0 $ 0
---------- ------------- -----------
Outstanding at December 31, 1995........................................... 415,830 $ 0 - $.80 $ .79
Granted.................................................................. 504,670 $ .80 - $3.10 $ 1.20
Exercised................................................................ (4,000) $ 0 $ 0
---------- ------------- -----------
Outstanding at December 31, 1996........................................... 916,500 $ 0 - $3.10 $ 1.02
Granted.................................................................. 297,075 $ 3.10 $ 3.10
Expired.................................................................. (131,325) $ 3.10 $ 3.10
---------- ------------- -----------
Outstanding at September 30, 1997.......................................... 1,082,250 $ 0 - $3.10 $ 1.34
---------- ------------- -----------
---------- ------------- -----------
Exercisable at September 30, 1997.......................................... 400,240 $ 0 - $.80 $ .80
---------- ------------- -----------
---------- ------------- -----------
</TABLE>
F-17
<PAGE>
PAYSYS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 (CONTINUED)
(INFORMATION FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
7. SHAREHOLDERS' EQUITY (CONTINUED)
Options outstanding at $.80 per share totaled 827,250 of which 398,490 were
exercisable at September 30, 1997. The weighted average remaining contractual
life of options exercisable at $.80 per share was 8.3 years at September 30,
1997. Options exercisable at $3.10 per share totaled 253,250 of which none were
exercisable at September 30, 1997. The weighted average remaining contractual
life of options exercisable at $3.10 per share was 9.3 years at September 30,
1997. Options exercisable at $0.002 per share totaled 1,750, of which all were
exercisable at September 30, 1997. The weighted average remaining contractual
life of options exercisable at $0.002 per share was 4.3 years at September 30,
1997.
At September 30, 1997, a total of 2,694,445 shares of the Company's common
stock were reserved for the exercise of stock warrants and options.
8. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) Profit Sharing Plan for the benefit of eligible
employees and their beneficiaries. All employees who have completed three months
of service are eligible to participate in the Plan and are fully vested. The
Company's contributions to the Plan are discretionary. The Company contributions
are allocated among participants at a rate of $.25 to $.50 per dollar of
participant contributions depending on Company profit levels. Contribution
expense related to the Plan during the years ended December 31, 1994, 1995, and
1996 and the nine months ended September 30, 1997 were $0, $0, $100,000 and
$187,000, respectively.
9. FOREIGN OPERATIONS
Export sales were $1,026,000, $8,411,000 and $8,803,000 for the years ended
December 31, 1994, 1995 and 1996, respectively, and $6,065,000 and $11,284,000
for the nine months ended September 30, 1996 and 1997, respectively. Such
revenues were derived principally from Australia, New Zealand, Canada, West
Indies, South Africa and South America. Accounts receivable arising from foreign
revenues total $4,198,000, $3,691,000 and $5,147,000 as of December 31, 1995 and
1996 and September 30, 1997, respectively.
F-18
<PAGE>
PAYSYS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 (CONTINUED)
(INFORMATION FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
9. FOREIGN OPERATIONS (CONTINUED)
Information about the Company's operations by geographic area is as follows
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------- SEPTEMBER 30,
1994 1995 1996 1997
--------- --------- --------- ----------------
<S> <C> <C> <C> <C>
UNITED STATES:
Revenues..................................................... $ 16,106 $ 21,106 $ 26,445 $ 24,277
Income (loss) from continuing operations..................... $ 679 $ (344) $ 301 $ (8,976)
Identifiable Assets.......................................... $ 10,082 $ 11,265 $ 16,086 $ 14,996
EUROPE/FAR EAST:
Revenues..................................................... $ 363 $ 622 $ 479 $ 174
(Loss) from continuing operations............................ $ (530) $ (128) $ (162) $ (510)
Identifiable Assets.......................................... $ 268 $ 242 $ 108 $ 308
</TABLE>
10. SUPPLEMENTAL CASH FLOW INFORMATION
The following is a summary of non cash transactions and additional cash flow
information:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FOR THE YEAR ENDED DECEMBER 31,
SEPTEMBER 30,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION
Stock issued for the cancellation of accounts payable, line of credit
borrowings and related accrued interest................................ $ -- $ 1,242 $ -- $ -- $ --
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Furniture and equipment acquired under capital lease obligations......... $ 2 $ 6 $ 933 $ 446 $ 340
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Note payable issued to seller of Transys Corporation..................... $ 300 $ -- $ -- $ -- $ --
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Cash paid for interest................................................... $ 249 $ 278 $ 204 $ 156 $ 154
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Cash paid for income taxes............................................... $ 5 $ -- $ 65 $ -- $ --
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
11. DISCONTINUED OPERATIONS
During the fiscal year ended January 31, 1993, the Company adopted a plan to
discontinue the operations of its Cuso Management Group, Inc. ("Cuso")
subsidiary. Effective September 4, 1992, the stock of Cuso was sold for $35,000
cash and the balance of approximately $305,000 on the original note payable was
assigned to the purchaser.
The operating results for Cuso are included in the accompanying consolidated
statements of operations for the year ended December 31, 1994 under the caption
"Discontinued Operations." The pre-tax Cuso loss amounted to $204,000 for the
year ended December 31, 1994 and has been reduced for resultant
F-19
<PAGE>
PAYSYS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 (CONTINUED)
(INFORMATION FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
11. DISCONTINUED OPERATIONS (CONTINUED)
income tax benefits of $32,000. Revenues associated with the discontinued
operations were $0 for the year ended December 31, 1994.
12. SUBSEQUENT EVENTS
In October 1997 the Company's Board of Directors approved a five-for-one
stock split effected as a stock dividend. Accordingly, all the share and per
share data have been retroactively adjusted to reflect these changes.
Pursuant to an agreement dated June 1993, Household International, Inc. paid
the Company an aggregate of $4.6 million ($1.4 million, $3.0 million and $0.2
million in 1993, 1994 and 1995, respectively), to fund the development of
VisionPLUS. In exchange for such payments, Household acquired a 50% ownership in
VisionPLUS and a right to royalties on the sale of any of the VisionPLUS
modules, subject to specific maximum. Following the payment of the maximum
royalties, the Company has the right to acquire, for a nominal amount,
Household's interest in VisionPLUS. In October 1997, the Company and Household
agreed that the Company would pay to Household, from the net proceeds of the
sale of shares of Common Stock offered hereby by the Company, up to $5.1 million
in settlement of all current and future obligations of the Company to Household
pursuant to such agreement. Following such payment, the Company will retain its
right to acquire Household's interest in VisionPLUS for a nominal amount.
In October 1997, the Company adopted the 1997 Stock Incentive Plan (the
"1997 Plan"). The 1997 Plan allows for the granting of options for up to 411,250
shares of common stock to employees, non-employee directors, consultants and
other vendors.
F-20
<PAGE>
[INSIDE BACK COVER]
Dual graphical presentation of three parts of credit card processing
relationship and flow (upper half of page) and the application of the Company's
product to those parts (lower half of page)
Upper half:
to left, graphic of bank labelled: MERCHANT'S BANK (ACQUIRER) and MERCHANT and
the numeral 1
to center, VISA and Mastercard logos and text: ASSOCIATION NETWORK (BANK CARD)
and CARDHOLDER PURCHASE and the numeral 2
to right, graphic of bank labelled: CARDHOLDER'S BANK (ISSUER), graphic of
people labelled: CARDHOLDER, and the numeral 3
Lower half
Graphical text in three columns labeled left to right 1, 2, and 3 with the
overall caption: PAYSYS VISIONPLUS
Left column, the text:
* MERCHANT ACCOUNT SET UP
* AUTHORIZATION REQUEST RESPONSE ROUTING
* DEPOSIT PROCESSING & SETTLEMENT
* NET OF PROCESSING DISCOUNT/FEES & INTERCHANGE FEES
* DEPOSIT FRAUD MONITORING
* EXCEPTION PROCESSING
Middle column, the text:
* INTERCHANGE COMPLIANCE
* AUTHORIZATIONS
* CLEARING & SETTLEMENT
* EXCEPTIONS
Right column, the text:
* CARDHOLDER APPLICATION SCORING APPROVAL & ACCOUNT SET UP
* AUTHORIZATION DECISION CRITERIA
* TRANSACTION POSTING/PAYMENT APPLICATION
* CARDHOLDER BILLING & COLLECTION
* INTEREST/FEES ACCRUED
* MINIMUM DUE
* BONUS POINTS
* CARDHOLDER DISPUTES/EXCEPTION PROCESSING
* FRAUD MONITORING
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE
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, ANY SELLING SHAREHOLDER OR 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 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 ANY
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........................................
SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS...................................
RISK FACTORS...................................
USE OF PROCEEDS................................
DIVIDEND POLICY................................
CAPITALIZATION.................................
DILUTION.......................................
SELECTED CONSOLIDATED FINANCIAL DATA...........
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS...................................
BUSINESS.......................................
MANAGEMENT.....................................
PRINCIPAL AND SELLING SHAREHOLDERS.............
CERTAIN TRANSACTIONS...........................
DESCRIPTION OF CAPITAL STOCK...................
SHARES ELIGIBLE FOR FUTURE SALE................
UNDERWRITING...................................
LEGAL MATTERS..................................
EXPERTS........................................
ADDITIONAL INFORMATION.........................
</TABLE>
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES OF THE COMPANY,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
3,333,333 SHARES
[LOGO]
COMMON STOCK
----------------
PROSPECTUS
------------------------
NATIONSBANC MONTGOMERY
SECURITIES, INC.
RAYMOND JAMES
& ASSOCIATES, INC.
NOVEMBER , 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
** 1.1 Form of Underwriting Agreement.
* 1.2 Form of Lock-Up Agreement.
* 3.1 Amended and Restated Articles of Incorporation of the PaySys International, Inc. (the "Company").
* 3.2 Bylaws, as amended, of the Company.
** 4.1 Form of Common Stock Certificate of the Company.
** 5.1 Opinion of Kilpatrick Stockton LLP.
** 10.1 1995 Stock Incentive Plan.
** 10.2 1997 Stock Incentive Plan.
*10.3 Stock Purchase Warrant issued to Sirrom Capital, L.P., dated May 29, 1992.
*10.4 Loan and Security Agreement between the Company and Sirrom Capital, L.P. (assigned to Sirrom
Investments, Inc.), dated May 29, 1992.
*10.5 Secured Promissory Note of the Company payable to Sirrom Capital, L.P. (assigned to Sirrom
Investments, Inc.), dated May 29, 1992.
*10.6 Amended and Restated Warrant Certificate issued to Stephen B. Grubb, dated March 1, 1996.
*10.7 Amended and Restated Warrant Certificate issued to David Black, dated March 1, 1996.
*10.8 Incentive Stock Option Agreement between the Company and David Black, dated March 1, 1996.
*10.9 Incentive Stock Option Agreement between the Company and David Black, dated March 1, 1996.
*10.10 Incentive Stock Option Agreement between the Company and Steven Grubb, dated March 1, 1996.
*10.11 Asset Purchase Agreement among CCS Commercial Credit Systems, Inc. and TranSys Corporation and its
Shareholders, dated January 1, 1994.
*10.12 Software License and Distribution Agreement between the Company and CCN Management Systems, Inc.,
dated January 1, 1994.
*10.13 Agreement for Professional Services between the Company and Bull HN Information Systems, Inc., dated
December 13, 1995.
*10.14 License Agreement between the Company and Access to Information, Inc., dated October 1, 1996.
*10.15 Termination Agreement between the Company and Ferntree Computer Corporation Pty. Limited, dated June
20, 1997.
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
**10.16 Software Development Agreement between the Company and Household International, Inc., dated June 30,
1993, as amended.
*10.17 Standard Commercial Lease between the Company and Spectrum Development, Inc., dated July 1, 1990.
*10.18 Sublease Agreement between the Company and Quadram Corporation, dated July 1, 1997.
*10.19 Loan Agreement between the Company and Sirrom Capital Corporation, dated September 26, 1997.
*10.20 Secured Promissory Note of the Company payable to Sirrom Capital Corporation, dated September 26,
1997, in the principal amount of $4,000,000.
*10.21 Security Agreement between the Company and Sirrom Capital Corporation, dated September 26, 1997.
*10.22 Stock Purchase Warrant issued to Sirrom Capital Corporation, dated September 26, 1997.
*10.23 Term Note of the Company payable to Intelligent Systems Corporation, dated August 29, 1997.
11.1 Computation of Per Share Earnings (Loss).
**23.1 Consent of Kilpatrick Stockton LLP (See Exhibit 5.1).
23.2 Consent of Ernst & Young LLP.
24.1 Powers of Attorney (included on Signature Page).
27.1 Financial Data Schedules.
</TABLE>
- ------------------------
* Previously filed
** To be filed by amendment
(b) Financial Statement Schedules
The financial statement schedules for which provision is made in the
applicable accounting regulations of the Commission are either not required
under the related instructions and have therefore been omitted or the required
information is included in the Company's financial statements.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this Amendment No. 1 to Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Atlanta,
State of Georgia, on the 25th day of November, 1997.
<TABLE>
<S> <C> <C>
PAYSYS INTERNATIONAL, INC.
By: /s/ STEPHEN B. GRUBB
-----------------------------------------
Stephen B. Grubb
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
POWER OF ATTORNEY
Edward F. Glassmeyer hereby constitutes and appoints Stephen B. Grubb and
William J. Pearson and either of them, his true and lawful attorneys-in-fact
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement as well as
any new registration statement filed to register additional securities pursuant
to Rule 462(b) under the Securities Act of 1933, as amended, and to cause the
same to be filed, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby granting to said
attorneys-in-fact and agent, full power and authority to do and perform each and
every act and thing whatsoever requisite or desirable to be done in and about
the premises, as fully to all intents and purposes as the undersigned might or
could do in person, hereby ratifying and confirming all acts and things that
said attorneys-in-fact and agents, or their substitutes or substitute, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement has been signed by the following persons on the
25th day of November, 1997, in the capacities indicated.
SIGNATURE POSITION
- ------------------------------ --------------------------
President and Chief
/s/ STEPHEN B. GRUBB Executive Officer and
- ------------------------------ Director (Principal
Stephen B. Grubb Executive Officer)
Chief Financial Officer,
Senior Vice President,
/s/ WILLIAM J. PEARSON Finance and
- ------------------------------ Administration and
William J. Pearson Treasurer and Secretary
(Principal Financial and
Accounting Officer)
/s/ J. LELAND STRANGE
- ------------------------------ Director
J. Leland Strange*
/s/ ROSALIND L. FISHER
- ------------------------------ Director
Rosalind L. Fisher*
/s/ PATRICIA M. HELBIG
- ------------------------------ Director
Patricia M. Helbig*
/s/ EDWARD F. GLASSMEYER
- ------------------------------ Director
Edward F. Glassmeyer
*Pursuant to power of attorney previously filed.
II-3
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
** 1.1 Form of Underwriting Agreement.
* 1.2 Form of Lock-Up Agreement.
* 3.1 Amended and Restated Articles of Incorporation of the PaySys International, Inc. (the "Company").
* 3.2 Bylaws, as amended, of the Company.
** 4.1 Form of Common Stock Certificate of the Company.
** 5.1 Opinion of Kilpatrick Stockton LLP.
** 10.1 1995 Stock Incentive Plan.
** 10.2 1997 Stock Incentive Plan.
*10.3 Stock Purchase Warrant issued to Sirrom Capital, L.P., dated May 29, 1992.
*10.4 Loan and Security Agreement between the Company and Sirrom Capital, L.P. (assigned to Sirrom
Investments, Inc.), dated May 29, 1992.
*10.5 Secured Promissory Note of the Company payable to Sirrom Capital, L.P. (assigned to Sirrom
Investments, Inc.), dated May 29, 1992.
*10.6 Amended and Restated Warrant Certificate issued to Stephen B. Grubb, dated March 1, 1996.
*10.7 Amended and Restated Warrant Certificate issued to David Black, dated March 1, 1996.
*10.8 Incentive Stock Option Agreement between the Company and David Black, dated March 1, 1996.
*10.9 Incentive Stock Option Agreement between the Company and David Black, dated March 1, 1996.
*10.10 Incentive Stock Option Agreement between the Company and Steven Grubb, dated March 1, 1996.
*10.11 Asset Purchase Agreement among CCS Commercial Credit Systems, Inc. and TranSys Corporation and its
Shareholders, dated January 1, 1994.
*10.12 Software License and Distribution Agreement between the Company and CCN Management Systems, Inc.,
dated January 1, 1994.
*10.13 Agreement for Professional Services between the Company and Bull HN Information Systems, Inc., dated
December 13, 1995.
*10.14 License Agreement between the Company and Access to Information, Inc., dated October 1, 1996.
*10.15 Termination Agreement between the Company and Ferntree Computer Corporation Pty. Limited, dated June
20, 1997.
**10.16 Software Development Agreement between the Company and Household International, Inc., dated June 30,
1993, as amended.
*10.17 Standard Commercial Lease between the Company and Spectrum Development, Inc., dated July 1, 1990.
*10.18 Sublease Agreement between the Company and Quadram Corporation, dated July 1, 1997.
*10.19 Loan Agreement between the Company and Sirrom Capital Corporation, dated September 26, 1997.
*10.20 Secured Promissory Note of the Company payable to Sirrom Capital Corporation, dated September 26,
1997, in the principal amount of $4,000,000.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
*10.21 Security Agreement between the Company and Sirrom Capital Corporation, dated September 26, 1997.
*10.22 Stock Purchase Warrant issued to Sirrom Capital Corporation, dated September 26, 1997.
*10.23 Term Note of the Company payable to Intelligent Systems Corporation, dated August 29, 1997.
11.1 Computation of Per Share Earnings (Loss).
**23.1 Consent of Kilpatrick Stockton LLP (See Exhibit 5.1).
23.2 Consent of Ernst & Young LLP.
24.1 Powers of Attorney (included on Signature Page).
27.1 Financial Data Schedules.
</TABLE>
- ------------------------
* Previously filed
** To be filed by amendment
<PAGE>
EXHIBIT 11.1
PAYSIS INTERNATIONAL, INC.
COMPUTATION OF EARNINGS PER SHARE (1)
<TABLE>
<CAPTION>
YEAR 11 MONTHS
ENDED ENDED NINE MONTH PERIOD
JANUARY 31, DECEMBER 31, YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
----------- ------------ ---------------------------------- ----------------------
1993 1993 1994 1995 1996 1996 1997
----------- ------------ -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Weighted average common and
common equivalent shares
outstanding during the
period ............................. 5,096 5,096 5,096 5,744 6,666 6,667 6,739
Net effect of dilutive stock
options and stock warrants
based on the treasury stock
method............................... -- -- -- -- 1,028 994 --
Effect of common stock issued
and stock options and warrants
granted subsequent to October 7,
1996 computed in accordance with
the treasury stock method as
required by the SEC (2).............. 876 876 876 876 876 876 876
------- ------- ------- ------- ------- ------- -------
Total common and common
equivalent shares................. 5,972 5,972 5,972 6,620 8,570 8,537 7,615
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
Income (loss) from continuing
operations........................... $ (745) $ (982) $ 149 $ (472) $ 139 $ 68 $(9,486)
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
Income (loss) per share from
continuing operations................ $ (0.12) $ (0.16) $ 0.02 $ (0.07) $ 0.02 $ 0.01 $ (1.25)
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
Net income (loss) .................... $(1,829) $(1,026) $ (23) $ (472) $ 139 $ 68 $(9,486)
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
Net income (loss) per share........... $ (0.31) $ (0.17) $ 0.00 $ (0.07) $ 0.02 $ 0.01 $ (1.25)
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
</TABLE>
- -----------------------------
(1) All share information has been adjusted to reflect a five-for-one
stock split.
(2) Pursuant to Securities and Exchange Commission Staff Accounting
Bulletin No. 83, Common and Preferred Stock issued and stock
options and warrants grants at prices below the assumed initial public
offering price of $12.00 per share during the 12-month period
immediately preceding the initial filing date of the Company's
Registration Statement for its initial public offering have been
included as outstanding for all periods presented using the treasury
stock method.
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated November 7, 1997, in Amendment No. 1 to the
Registration Statement (Form S-1 No. 333-37411) and related Prospectus of PaySys
International, Inc. for the registration of 3,333,333 shares of its common
stock.
/s/ Ernst & Young LLP
Orlando, Florida
November 20, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1997
<CASH> 1522
<SECURITIES> 0
<RECEIVABLES> 8686
<ALLOWANCES> 365
<INVENTORY> 0
<CURRENT-ASSETS> 10392
<PP&E> 4494
<DEPRECIATION> 1728
<TOTAL-ASSETS> 18304
<CURRENT-LIABILITIES> 15529
<BONDS> 4172
0
0
<COMMON> 73
<OTHER-SE> (5374)
<TOTAL-LIABILITY-AND-EQUITY> 15304
<SALES> 24451
<TOTAL-REVENUES> 24451
<CGS> 0
<TOTAL-COSTS> 13704
<OTHER-EXPENSES> 19879
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 77
<INCOME-PRETAX> (9209)
<INCOME-TAX> 277
<INCOME-CONTINUING> (9486)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9486)
<EPS-PRIMARY> (1.25)
<EPS-DILUTED> (1.25)
</TABLE>
